Sole Proprietorship_______________________________________________________6General Info_________________________________________________________________6

Funding & Restrictions______________________________________________________________6

Advantages__________________________________________________________________6

Disadvantages_______________________________________________________________6

Formation___________________________________________________________________6Partnership Act Part 4:_______________________________________________________________7

Agency_________________________________________________________________7General Info_________________________________________________________________7

Agent vs. Employee__________________________________________________________8Agent vs. Trustee____________________________________________________________8

Grant of Authority from Principal to Agent_______________________________________8Express Actual Authority_____________________________________________________________8Implied Actual Authority_____________________________________________________________8

Usual Authority__________________________________________________________________8Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd., [1964, Eng. QB]________8

Customary Authority______________________________________________________________9Ostensible Authority________________________________________________________________9

Test for Ostensible Authority_______________________________________________________9Purpose of Ostensible Authority_____________________________________________________9

Lloyd v. Grace, Smith & Company______________________________________________9

Duties in an Agency Situation_________________________________________________10Duties of Agent to Principal_________________________________________________________10

General Duties__________________________________________________________________10Duty to Perform Obligations (per terms of agreement, instructions, best interests)__________10Duty to Perform with Reasonable Care____________________________________________10

Fiduciary Duties________________________________________________________________10Duty of Loyalty (Duty to Act in Best Interests of Principal)____________________________10Duty not to Delegate__________________________________________________________11Duty to Keep Proper Accounts___________________________________________________11

Duties of Principal to Agent_________________________________________________________11Duty to Pay Remuneration________________________________________________________11Duty to Pay Agent’s Expenses and Indemnify Against Losses____________________________11

Duty to 3rd Parties: Breach of Warranty of Authority______________________________________12

Ratification_________________________________________________________________12Circumstances in Which Ratification can Occur__________________________________________12Requirements for Ratification________________________________________________________12Consequences of Ratification________________________________________________________12Policy Reasons for Ratification_______________________________________________________13

Undisclosed Principal________________________________________________________13Undisclosed Principal Can Sue the 3rd Party_____________________________________________13Rights of 3rd Party_________________________________________________________________13Possible Policy Reasons_____________________________________________________________14

Termination________________________________________________________________14

Partnership_____________________________________________________________14General Partnership Info_____________________________________________________14

Definition________________________________________________________________________14

1

Relationship Between the Partners____________________________________________________15It may be necessary to determine whether a P/P exists_____________________________________15

Backman v. Canada [2001, SCC]______________________________________________15A.E. LePage Ltd. v. Kamex Developments Ltd. [1977, ONCA; aff’d SCC]_____________16Volzke Construction Ltd. v. Westlock Foods Ltd. [1986, ABCA]_____________________16

Indicia of Partnership_______________________________________________________________16Underlying Values Policy Reasons for Finding a P/P___________________________________17Section 3 – Entities that are Not P/Ps__________________________________________________18The Legal Status of P/P and Consequences Thereof_______________________________________19Name and Registration and Actions Against Partnerships__________________________________19Governance – The Partnership Agreement______________________________________________19

The Default Provisions___________________________________________________________20Partnership property___________________________________________________________20Capital, Profits, Losses, Management, Admission of New Partners and Record Keeping_____20Removal of Partners___________________________________________________________21Fiduciary Duties______________________________________________________________21

Rochwerg v. Truster [2002, ONCA]____________________________________________21McNight v. Hutchinson [2002, BCSC]__________________________________________22Dockrill v. Coopers and Lybrand Chartered Accountants [1994, NSCA]_______________22

Assignment of Partnership Interests_______________________________________________22Liability and Indemnification________________________________________________________22

Provisions on General Liability____________________________________________________22Liability of Partners in Contract and Tort_____________________________________________23

Ernst & Young v. Falconi et al [1994, ON]______________________________________24Indemnification_________________________________________________________________24

Retirement of Partners______________________________________________________________24Dissolution of Partnership___________________________________________________________25

By Act of the Partners____________________________________________________________26By Act of Law: Death, Bankruptcy or Dissolution of a Partner – s. 36______________________26By Act of Court_________________________________________________________________26

Why Use Partnership?______________________________________________________________26

Limited Partnership_________________________________________________________27Defining Limited Partnership________________________________________________________27The Relationship Between the Partners_________________________________________________28Why Use Limited Partnership?_______________________________________________________29

Robinson (Trustee of) v. R. [1998, FCA]________________________________________30

Limited Liability Partnership_________________________________________________30LLPs in Other Provinces____________________________________________________________30LLPs in BC______________________________________________________________________30Other Statutory Provisions___________________________________________________________31

Corporations: The Basics_________________________________________________32Intro to Corporations________________________________________________________32

The General Structure of a Corporation_________________________________________________32Key Features of the Corporate Form___________________________________________________32The Constitutional Position__________________________________________________________33

The Basis of Provincial and Federal Powers__________________________________________33Scope of the Provincial Power_____________________________________________________33Scope of the Federal Power_______________________________________________________33Implications of the Constitutional Position____________________________________________34

The Incorporation Process____________________________________________________35BCBCA Provisions________________________________________________________________35CBCA Provisions__________________________________________________________________37

2

Steps in the CBCA Incorporation Process_______________________________________________37Issuance of a Certificate of Incorporation_____________________________________________38The Articles____________________________________________________________________38

Post-Incorporation Steps Under the CBCA______________________________________________39

Subsidiaries and Affiliates____________________________________________________392(2) Affiliates_____________________________________________________________402(3) “Control”_____________________________________________________________402(4) Holding Body Corporate_________________________________________________402(5) Subsidiary Body Corporate_______________________________________________40

Why Use the Corporate Form?________________________________________________40

Corporate Personality and the Corporate Veil____________________________________41The Legal Status of Corporations_____________________________________________________41

Salomon v. A. Salomon & Company, Limited [1897, HL]__________________________41A Shareholder Can Hold Multiple Roles in Relation to a Corporation______________________42The Corporation Owns the Assets – Not the Shareholder________________________________42

Kosmopolous v. Constitution Insurance [1987, SCC]______________________________42Potential Problems:________________________________________________________________43Lifting the Corporate Veil___________________________________________________________43

With a few exceptions, the courts have affirmed the Salomon principle_____________________43BG Preeco I. v. Bon Street Holdings Ltd. [1989, BCCA]____________________________43De Salaberry Realties [1974]__________________________________________________44Westbank Property Management Ltd. v. BC [1991, BCSC]__________________________44Steven G. Meredith v. Her Majesty the Queen [2002, FCA]_________________________44

Exceptions: courts are willing to impose liability on controlling shareholder or otherwise disregard the corporate veil where:__________________________________________________________45

Requirement to Display Corporate Name_______________________________________________46H & D Hobby Distributing Ltd. v. Svatos (1998, ABQB)___________________________46

Jurisdiction of Incorporation – Issues to Consider________________________________________47The Choice Between the CBCA and BCBCA_________________________________________47

Why the CBCA?______________________________________________________________47Why the BCBCA?____________________________________________________________47

Change of Jurisdiction of Incorporation______________________________________________47Reincorporation______________________________________________________________47Continuance_________________________________________________________________47Import – Process for Continuing under CBCA: s. 187________________________________48Export – Continuing CBCA into Another Jurisdiction: s. 188__________________________48

Pre-Incorporation Contracts__________________________________________________________49Background____________________________________________________________________49The Common Law Position_______________________________________________________49Statutes_______________________________________________________________________50Pre-incorporation contracts - In this section:__________________________________________51

Cases Applying Provisions Equivalent to CBCA s. 14________________________________52Landmark Inns v. Horeak [1982]______________________________________________52Bank of Nova Scotia v. Williams [1976, ONHC]__________________________________52

Ultra Vires Acts of Certain Corporations_______________________________________________52Communities Economic Development Fund v. Canadian Pickles Corp. [1991, SCC]______53

Shares and Shareholders____________________________________________________________53The Nature of Shares and the Share Register__________________________________________53Issuing and Paying for Shares______________________________________________________54Share Rights and Restrictions______________________________________________________55

Preferred Shares______________________________________________________________56Typical Preferred Share Features______________________________________________56

Voting Rights__________________________________________________________________57Jacobsen v. United Canso Oil & Gas Ltd. [1980, ABQB]___________________________57

3

Bowater Canadian Ltd. v. R. L. Crain Inc. & Craisec Ltd. (1987, ON)_________________58Dividends_____________________________________________________________________58Stated Capital__________________________________________________________________58Redemption____________________________________________________________________59Rights on Liquidation/Winding Up__________________________________________________60

Westfair Foods v. Watt [1984]________________________________________________60

Corporations: Corporate Governance________________________________________61Provisions of CBCA that permit less formal decision-making_______________________61

Directors and Officers: General Structure_______________________________________61The Role of Directors:______________________________________________________________61Qualification/Requirements for Directors_______________________________________________61Election, Removal and Replacement of Directors_________________________________________62

First Directors__________________________________________________________________62Subsequent Election_____________________________________________________________62Term of Office_________________________________________________________________62Ceasing to Hold Office___________________________________________________________63Removal of Directors____________________________________________________________63Removal of Officers Long Term Contracts_________________________________________63

Golden Parachutes and Tin Parachutes____________________________________________63Filling Vacancies________________________________________________________________64

Authority and Powers of Directors____________________________________________________64Directors’ Meetings________________________________________________________________65

Duties of Directors and Officers________________________________________________67Codification of the Duty of Care in CBCA______________________________________________67Transacting with the Corporation_____________________________________________________67

Common Law__________________________________________________________________67Aberdeen Railway v. Bleakie Bros.____________________________________________67Transvaal Lands v. New Belgium Development Ltd._______________________________67

The Statutory Test_______________________________________________________________68Shareholder Ratification of Breach of Fiduciary Duty___________________________________69

Taking Corporate Opportunities / Competing with Corp___________________________________70The Initial Strict Rule Approach____________________________________________________70

Cook v. Deeks [1916, PC]____________________________________________________70Regal (Hastings) Ltd. v. Gulliver [1943, HL]_____________________________________71

Relaxing the Strict Rule: The Modern Canadian Approach_______________________________72Peso Silver Mines v. Cropper [1965, BCCA, aff’d 1966, SCC]_______________________72Canadian Aero Service v. O’Malley (Canaero) [1974, SCC]_________________________72

The Director’s Duty of Care, Diligence & Skill__________________________________________73Defences_________________________________________________________________73Repap [2002, ON]__________________________________________________________73People’s Department Stores v. Wise [2004, SCC]_________________________________74

The Oppression Remedy______________________________________________________75TEST for Oppression (per BCE)____________________________________________________77

Other CBCA Duties of Directors______________________________________________________78Barette v. Crabtree Estate [1993, SCC]__________________________________________79Proulx v. Sahelian Goldfields [2001, ONCA]_____________________________________79

Obligations under Other Legislation___________________________________________________79BC Employment Standards Act____________________________________________________79BC Interpretation Act____________________________________________________________80Interactions with CBCA__________________________________________________________80

R. v. Bata Industries________________________________________________________81Tort Liability of Directors and Officers_________________________________________________81

4

Said v. Butt [1920, Eng. KB]_________________________________________________81ADGA Systems v. Valcom Ltd._______________________________________________82

Indemnification and Insurance________________________________________________82Consolidated Enfield Corp v. Blair [1995, SCC]__________________________________83

Corporate Governance: Shareholders_______________________________________85General Powers of Shareholders_______________________________________________85

No Usual Management Powers_______________________________________________________85Automatic Self-Cleansing Filter Syndicate v. Cuninghame__________________________85

Access to Information About the Corporation____________________________________________85

Shareholder Meetings________________________________________________________86Basics___________________________________________________________________________86Notice Requirements_______________________________________________________________86Resolutions_______________________________________________________________________87S. 139 – Quorum__________________________________________________________________87Voting__________________________________________________________________________87Requisition of Meeting by Shareholders________________________________________________88Meeting Ordered by Court___________________________________________________________89Election and Removal of Directors____________________________________________________89

Court Review of Elections________________________________________________________89Shareholder Powers at Meetings______________________________________________________89

Amendment of Bylaws___________________________________________________________90Review Financial Statements______________________________________________________90Appointing an Auditor___________________________________________________________90

Shareholder Control of Fundamental Changes___________________________________91Amendment of the Articles of Incorporation_____________________________________________91“Export” or Continuation of a CBCA Corporation to another Jurisdiction______________________93Extraordinary Sale, Lease or Exchange of All or Substantially All of a Corporation’s Assets______94Voluntary Liquidation and Dissolution_________________________________________________95

Shareholder Initiatives_______________________________________________________95Shareholder Proposals______________________________________________________________95Proxy Solicitation and Proxy Circulars_________________________________________________97

Brown v. Duby [1980, SC]___________________________________________________99

The Closely-Held Corp: Vote Pooling and Other Shareholder Agreements____________99Vote Pooling_____________________________________________________________________99Unanimous Shareholder Agreements_________________________________________________100

Duha Printers (Western) Ltd. v. The Queen [SCC]________________________________101

Compliance and Restraining Orders___________________________________________101

Rectification of Corp Records________________________________________________101

5

Sole Proprietorship

General Info No legal structure – anyone who wants to can form, and nothing req’d except carrying on a

commercial (i.e. for-profit) enterprise on their owno Unincorporated business “owned” by a single individualo May have employees, but the employees aren’t owners/operators of the business.

Typically used by farmers, fishers, other small, informal family enterprises, professionals, “consultants”, “self-employed”

SP is not a separate entity: o Income or loss generated by the business is the income or loss, for tax purposes, of the

SP (file one tax return) o Legal ownership of business assets (equipment, goodwill) is not separate from

individual’s personal assets – the individual owns both, and both are equally available to satisfy the claims of business and personal creditors

Contractual liability: individual SP is exclusively responsible for performing all K obligations for the bus (e.g. sales, lease payments, insurance, etc.)

Personal non-contractual liability: individual SP is personally liable for tort committed in the course of carrying on the business, either because of direct involvement or vicarious liability for employees

GST: individual SP has to register for, charge and collect GST on the goods and services they provide (if meet threshold of $30k global gross income/yr)

Funding & Restrictions Typical sources: investment by SP; funds borrowed from bank/other lenders; trade credit

(which allows SP to have benefit of goods/services immediately w/o paying immediately) Lenders may have concerns about risk-level of business ventures entered into by SP

significant lenders will often put restrictions on the business to attempt to ctrl degree of risk to their investment

Advantages Small local enterprises cost of incorporation is prohibitive – corp reporting and taxes

o Note, though that one can incorporate very easily (with a credit card, overnight) If don’t need to raise capital (i.e. if self-financing business), then no real reason to incorporate

(b/c no need to protect self from business’ creditors) Easy to form/dissolve – no formal process Tax: can deduct personal losses from business income and vice versa

Disadvantages difficult to grow; difficult to raise capital (banks like to deal w/ corps, which are separate

business entities). As a corp it’s easier to protect personal assets, and could issue shares in order to raise capital.

Formation Just start carrying on a business. Some SPs must register business name in accordance with the Partnership Act s. 88-90, 90.3,

6

90.4, 90.5.o May use a business name that is not the entrepreneur’s legal name, in which case the

name must be registered.o Purposes of registration:

Can track down owner/operator where business ≠ named for SP To identify for credit check purposes To identify in order to start an action

Avoid deception of a name indicating a plurality of persons E.g. misrepresenting SP as P/P by using a phrase like “and Company”

in the name Avoid passing off

i.e. so that SPs don’t unintentionally pass themselves off as other businesses can check registry to ensure no same/similar name already in use.

o Interestingly, the registrar only has the authority to refuse registration when business name conflicts with the name of a corp registered in BC

This leaves open the possibility that two similar or identical business names could be registered, so long as neither is a corporation

o Offence Act s. 5 makes it an offence not to register.

Partnership Act Part 4: 88(1) SP req’d to register if operating under a business name other than their own name, or a name

that implies they aren’t an SP, w/in 3 months after day the name is first used.*req’d to register b/c name doesn’t indicate who owner is, or is misleading in indicating a plurality of ownership*register is used to find out who is the entity behind the name

89(1) SP cannot register or use a name that belongs to another corp, or that is so close that it may be confused*applies to corps and their depts – including trade name used by corp (e.g. McDonald’s)*exceptions: if corp consents, or if bus name was used by applicant prior to corp

90

90(2)

90(4)

Registrar to keep two indices – enables you to search under either firm or personal name

firm index – styles of registered firms

indiv index – names of mems of each firm90.3 Anyone can search the register – (a) search name, (b) inspect records, (c) obtain copies90.4(1)

90.4(2)

90.4(3)

It is an offence to file a misleading statement w/registrar that is: (a) false or misleading statement that relates to material fact, or(b) omits any material fact that makes the statement false or misleading

director or officer of the corp who knowingly authorized, permitted or acquiesced in the commission of the offence under (1) is guilty

person not guilty if they didn’t know the statement was false or misleading, and could not have known that w/exercise of due diligence

90.5 Person who commits offence under 90.4 is liable to a fine, if an indiv of not more that $2000, and if a non-person, not more than $5000

Agency

General Info

7

An agent acts on behalf of a principal, in such a way that the agent can affect the principal’s legal interests.

o The agent does this by dealing with the principal’s property/money, and making Ks that bind the principal

A principal can be vicariously liable for the torts of their agent. The agent-principal rel’ship is a legally recognized consensual relationship

o It may be (and often is) contractualo But can have a gratuitous agency, where there is no consideration and thus no K.

In addition to any contractual obligations, agents owe fiduciary obligations Can be individual, corp, or any other person at law

o Partners can be agents of each other; directors/officers can act as agents of corp It is a question of fact, not law, whether an agency exists. Need evidentiary basis to determine

whether/what kind of agency rel’ship exists

Agent vs. Employee Often overlap; the more responsibility an employee gets, the more likely they are also an agent. Termination of AP rel’ship can be done by either side; employees = more complicated Can be an agent w/o being an employee, and vice versa though can be both.

Agent vs. Trustee Often an agent will hold their principal’s property in a way that looks like a trust The acts of an agent bind a principal, but the acts of a trustee do not bind either settlor or

beneficiaries Personal creditors of the trustee do not have access to trust assets to satisfy their claims.

However, an agent’s personal creditors have access to any property held by the agent, even if it is being held on principal’s behalf or if agent owes money to principal.

Grant of Authority from Principal to Agent Principal grants agent authority to affect P’s legal rel’ships Two types of authority: actual and ostensible.

o If the agent has actual authority to enter into a particular K with another person on behalf of the principal, and if it is clear that the agent is acting as agent in its dealings with that other person, then the K (if otherwise valid) will be binding between the principal and the third party.

Express Actual Authority The authority that is expressly stated b/w principal and agent (written or oral) This can be written down or oral

Implied Actual Authority Anything that would reasonably be expected by agent and principal to be authorized Perhaps immediate steps/tasks surrounding a greater task expressly assigned. To determine implied authority, courts look to the usual or customary authority of such agents

Usual Authority What that agent has usually been allowed to do in the past. Concern: fairness to agent.

8

Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd., [1964, Eng. QB] Example of usual authority, and of ostensible authority Facts: architecture firm engaged by one Kapoor on behalf of ∆, not paid for work. Kapoor

was acting as though he was the managing director of ∆ (Though the board had never actually appointed him to that pos’n, so no written or oral grant of authority.) However, the board was aware that Kapoor was acting as mging director and allowed him to continue.

Issue: A principal is liable to a third party who enters into a K w/ principal through an agent who has actual authority to act on behalf of that principal – so did agent have authority?

Held:. (1) Implied actual authority, because Kapoor’s acts had been ratified by board – he was usually allowed to behave this way, so he has that authority now. (2) Principal knowingly permitted Kapoor to hold himself out as someone with power to K w/ architecture firms so he had usual and customary authority.

Customary Authority What agents of that type customarily have the authority to do Arises in a particular commercial context, and typically a matter of evidence For example, Wiltshire v. Sims [1808] held that stockbrokers don’t customarily have authority

to sell clients’ shares on credit.

Ostensible Authority

Test for Ostensible Authority (i) the alleged principal must have made a representation (express or implied from words,

conduct or the circumstances), or permitted a representation, that the alleged agent had authority to act on behalf of the alleged principal; and

(ii) the third party reasonably relies on the representation to his or her detriment

Purpose of Ostensible Authority 1. Protection of Reliance by Third Party

o Recall Freeman & Lockyer v. Buckhurst, above (under Usual Authority) Principal knowingly permitted Kapoor to hold himself out as someone with

power to K w/ architecture firms so he had usual and customary authority. o Court favours 3rd party because principal is in best pos’n to forestall the situation

they know agent is professing to be something he isn’t, whereas 3rd party won’t know that he doesn’t have actual authority to behave as such

o Competing interest: unfair surprise – but ≠ issue where principal could have readily avoided potential reliance by 3rd parties on perceived authority of agent.

Lloyd v. Grace, Smith & Company Court protected 3rd party over principal – if agent is presented as a conveyancing clerk, for

example, and then does something fraudulent, the principal is liable b/c held him out as someone who could be trusted.

2. Least Cost Avoidanceo Where principal can:

Check agent’s trustworthiness before engaging the agent Monitor the agent’s behaviour

9

Dismiss an agent who acts beyond his/her authorityIt will be less costly for principal to avoid the loss than it is for 3rd party, who would have to contact principal to confirm agent’s authority which would largely defeat the purpose of the agency rel’ship since principal would have to be in contact with every 3rd party

o However, where agent is a complete fraud (i.e. principal has never had contact/has no idea this person is representing himself as an agent), then 3rd party (who has at least had some contact w/ fraudulent agent) will likely be in the best pos’n to avoid the loss

o More convoluted where something should have made 3rd party suspicious (put on notice of agent’s lack of authority)

Duties in an Agency Situation

Duties of Agent to Principal Once an agency rel’ship exists, some terms are assumed to apply, unless proven otherwise.

o Can be varied by express agreement, or by implication from the circumstances

General Duties

Duty to Perform Obligations (per terms of agreement, instructions, best interests) If an agent failed because he forgot, e.g., he would be liable in damages for breach of duty to

perform Where agency is for sthg impossible/sthg that doesn’t exist, if agent made best efforts to carry

out, ≠ a failure to perform In addition to actively performing obligations, must also not exceed authority An agent isn’t liable for failure to perform an illegal act

Duty to Perform with Reasonable Care The standard of care is the degree of skill/diligence that an agent in that pos’n would normally

possess/exercise A professional is held to the degree of skill of a reasonably competent member of that

profession Principal would have action for damages against an agent who failed to meet requisite duty of

care

Fiduciary Duties

Duty of Loyalty (Duty to Act in Best Interests of Principal) Duty always to act in best interests of principal, and to put principal’s interests ahead of those

of the agent. (i) Conflict of Interest Duty not to put oneself in a pos’n where one’s interest conflicts w/

interests of principalo Normal remedy for conflict of interest: transaction void and agent must account to

principal for any profits made in transactiono If principal engages agent to purchase a particular item, agent can’t just sell principal

his own personal property in the transactiono Remedy: damages available for losses caused by conflict of interest (e.g. loss of

different/better transaction which would have been enforceable/more advantageous to the principal)

10

o An injunction against further conflict of interest may also be available, but more likely the agency rel’ship would just be over at this point.

(ii) Accounting Duty not to make secret profitso See Thompson v. Meade1 o Agent can’t make profits from principal and another party at the same timeo Remedy: an accounting for the secret profit, compensatory damages for loss of profit to

principalo Most likely would result in termination of the agency rel’ship

Duty not to Delegate Delegation of an agent’s tasks essentially takes away principal’s power to ensure they have

trust/confidence in the person carrying out tasks on their behalf The delegate of the agent ≠ authority to bind principal Exception available where express term of agency rel’ship or implied in circumstances.

o Typically an element of necessity where it could be reasonably expected that principal would consent to delegation

o E.g. ship carrying perishable goods, rotting in hold before destination. Captain put into shore and engaged an agent there to sell goods. Held: he had authority to delegate in those circumstances

o E.g. ship damaged, captain engaged an agent in port in Japan to arrange for repairs. Held: authority to delegate. Since it would have been difficult to arrange repairs given language barrier, reasonable to delegate in circumstances.

Remedy: damages for loss, probably will result in termination of agency rel’ship

Duty to Keep Proper Accounts Important so as to identify principal’s property as opposed to that of the agent or of other

principals Must be prepared to return any unused property to the principal Failure to keep such accounts is a breach of agent’s obligations If agent can’t produce accounts that were clearly kept carefully and correctly, then, in case of

any discrepancy/uncertainty, presumption that money belongs to principal

Duties of Principal to Agent

Duty to Pay Remuneration If agent performs, entitled to remuneration (K based on consideration) Where there was reasonable understanding that agent would be remunerated (i.e. wouldn’t

have performed for free), court will sometimes award compensation on quantum meruit basis

Duty to Pay Agent’s Expenses and Indemnify Against Losses Principal is obligated to reimburse agent for reasonable expenses incurred on behalf of

principal, and to indemnify agent against loss for acting on principal’s instructions For agent to insist on such payment:

o (1) Must have been acting w/in scope of actual authorityo (2) Expenses must have been necessary and reasonable

if negligence of agent causes extra cost, principal can refuse to compensate (b/c

1 Thompson v. Meade: Stockbroker asked to sell shares for $10, sold for $12 and kept the extra $. Held: breach of duty not to make secret profits.

11

it’s a breach of agent’s duty of care) An agent may not obtain compensation for expenses incurred that are illegal (e.g. bribes)

Duty to 3rd Parties: Breach of Warranty of Authority Elements of a breach of warranty of authority:

o (i) Agent represents that he has authority;o (ii) Representation is false; ando (iii) 3rd party acts to his/her detriment

3rd party has two potential claims: o Against alleged principal on basis that agent had actual or ostensible authorityo Against alleged agent on basis of breach of warranty of authority

Measure of damages:o When you sue for negligent misrepresentation under Hedley Byrne, you get different

damages than for breach of warranty. o Breach of warranty could include expectation damages, which might be more

advantageous to

Ratification When agent acts beyond scope of authority, principal may nonetheless choose to accept what

the agent has done by ratifying the act.

Circumstances in Which Ratification can Occur (i) A person purported to act on behalf of another person, who later seeks to ratify (ii) The person who seeks to ratify was in existence and ascertainable at the time the other

person purported to act as agent on his behalf, ando “in existence” relevant to corporations: must have had legal existence at time agent

was acting. o “Ascertainable” – no case dealing with this wording issue, but basically same as the

existence issue; and have to be able to say that the particular corporation which existed was the one the agent was purporting to act on behalf of.

(iii) The person who seeks to ratify must have had the legal capacity to do the act both at the time the other person acted and at the time of the ratification

o Any actions that took place within this time frame for the relevant purpose are taken to be ratified

Requirements for Ratification Can be express, by conduct or by acquiescence

o Accepting third party’s compliance with agreement can be seen as binding a purported principal

o Once purported principal has learned of agreement made by someone purporting to be their agent, must either notify 3rd party of invalidity of agreement or will, after a reasonable amount of time since learning of it, be held to have ratified

Must be based on knowledge of all relevant factso Principal could argue that lack of action didn’t amount to acquiescence, due to having

insufficient knowledge to be bound. E.g. didn’t know who the other party was, or what the terms were, or when

performance was req’d, or what the cost would be

12

Consequences of Ratification Ratification relates back to the time of the offer and acceptance between the agent and the third

party Principal can sue the third party and can be sued by the third party

o Ratification causes the K to come into existence, even though there was no agency at the time

Agent is no longer liable for a breach of warranty of authorityo Principal has, in effect, clothed the agent with retroactive authority

Agent is no longer liable to the principal for exceeding his or her authority.o If principal ratifies the agent’s act, can’t take action against agent for the transactiono If the principal lets an agent exceed authority on multiple occasions, opens up to an

argument for usual authority. Principal will be liable to the agent for reasonable remuneration and to indemnify the agent for

expenses reasonably incurred by the agent in effecting the contract.

Policy Reasons for Ratification Mutual Benefit

o If all parties want the transaction, it can be upheldo Principal may not have known, but has the option to uphold the agreement if they want

the transaction to continue. Unjust Enrichment of the Principal at the Expense of the Agent

o Once there has been an act of ratification, the principal must be bound, so as to forestall opportunistic cancellation of deals.

Unjust Enrichment of the Principal at the Expense of the Third Party (Due to Speculation by the Principal)

Unjust Enrichment of the Third Party at the Expense of the Principal (Due to Speculation by the Third Party)

Cures Minor Defects in the Grant of Authority

Undisclosed Principal

Undisclosed Principal Can Sue the 3rd Party General principle: undisclosed principal can disclose the agency relationship and sue the 3rd

party on a K entered into by the agent with the 3rd partyo However, this doesn’t apply if 3rd party was looking to agent alone to perform the K

Objective Test: 3rd party will be considered to be looking to the agent alone to perform if:o (1) Terms of K require that only agent perform the terms of the K agreed to by the

agent, ORo (2) Circumstances indicate that the 3rd party clearly intended to K with the agent alone

e.g. K is for services of agent, or there is some personal aspect to K, or where 3rd party would not have K’d w/ principal if identity were known

3rd party can’t just say they wouldn’t have K’d w/ principal need corroborating circumstances such as previous rel’ship b/w principal and 3rd party [see Said v. Butt]2

2 Said v. Butt: principal wanted to go to a play, but had said bad things about the theatre company so he got a friend to buy ticket for him. Mgr of theatre company saw him there, kicked out. Held: 3rd party successfully resisted binding nature of K on basis that if had known ticket was for , would never have allowed agent to purchase.

13

Rights of 3rd Party Can sue principal upon learning of agency rel’ship Can sue agent (as party to K)

o J&S liability b/w principal and agento But principal will indemnify the agent, since the action was either condoned or ratified

In an action by principal against 3rd party, the 3rd party can set off any rights he would have had against the agent, and can use any defence he would have used against the agent.

So if agent absconds with half the payment, principal can’t go after 3rd party for whole payment – only what remains to be paid (and that only if K is enforceable)

Possible Policy Reasons Mutual Benefit

o If 3rd party wasn’t looking particularly to agent to fulfill, then arguably still getting the expected benefit even if principal performs K.

o Since there was mutual benefit in K’ing w/ agent, enforcing the K will facilitate mutually beneficial transaction.

Potential unjust enrichment of 3rd partyo If principal believes self bound, may act in reliance o More efficient to just enforce rather than principal having to find and join agent to

action to get payment. Potential unjust enrichment of principal

o Same issue in reverse. o Might open door to fraudulent schemes where principal and agent cause 3rd party to

enter a K w/ an agent who cannot actually pay for goods, or some such.

Termination By act of the parties

o Either side can essentially declare an end to the rel’shipo May be a period of notice, or there may just be a specified time period for the agency

When the tasks are complete the agency rel’ship is over Though agent retains right to remuneration etc., agent’s power ends on

terminationo When an agent is also an employee, statutory notice periods may apply

By operation of law rel’ship automatically terminated if:o 1. Principal or agent becomes bankrupto 2. Frustration (impossible to fulfil K)o 3. Death or incapacity (incl. insanity) of either the agent or the principal

Partnership

General Partnership Info

Definition Partnership Act s. 2: Partnership is the relation which subsists between persons carrying on

business in common with a view of profito Person since the legal definition of “person” includes a corporation, corps can form

P/Ps

14

o Carrying on business ‘business’ is presumed to take ordinary meaning; typically not difficult to prove

o In common usually the most difficult part to establisho View of profit ≠ non-profits. Profit = revenue – expenses. Actual profit ≠ req’d.

P/Ps have a registration req’mt, but can exist w/o ever complying with this.o Failure to register a general P/P doesn’t mean it doesn’t exist – it just meant it may be

subject to consequences (e.g. a fine)

Relationship Between the Partners Since there is no formal process to P/P formation, someone may be in a P/P without realizing

o Two people may start business together without considering other options, or realizing that their rel’ship will be treated in law as a P/P

A P/P is not a separate legal entity Partners are treated as agents for each other.

o So, the acts of one partner in carrying on the business can bind all partners, and partners owe each other fiduciary duties.

It may be necessary to determine whether a P/P exists Potential Reasons:

o A 3rd party may claim that P/P exists so that all members are liable to 3rd party (i.e. in K or tort, for conduct arising out of the business)

o Partnership Act as Default K for the Partners The Act sets out a default K b/w partners the Act sets out how things will be

unless the parties say otherwise. o Tax consequences of the partnership model

Potential advantages for SPs also apply to P/Ps, since they are also not a separate legal entity

Each individual partner uses own share in calculating personal taxable income Losses from P/P can be used to set off partners’ personal income.

This can be especially useful where more than one equity investor and where some losses in start-up phase are expected.

To determine the existence of a P/P, must determine nature of agreement/understandingo May be relevant if hold selves out as P/P, but not necessary or decisive. o The two most important indicators of P/P are sharing of net profits and mutual agency

Backman v. Canada [2001, SCC] Facts: group of Canadians bought a property in Texas then resold to original owners at lower

price so they could claim the capital loss. Issue: Needed to prove they were a P/P, so they could claim the business loss against personal

income on taxes. Held: ≠ P/P, b/c never had a view of profit – only of loss.

o Though note that even though the primary purpose was loss, if there were an ancillary intention to make profit this would satisfy the definition [Continental Bank]

Describes some characteristics of a P/P:o Doesn’t have to be a new business to become a P/Po Don’t have to carry on business for a long time – can be formed for single transactiono Don’t have to hold P/P meetings or enter into new transactionso Not a lot of effort/activity is necessary, but must have some assets with at least

15

potential to generate income, and the intention of eventually gaining profit from P/P endeavours

o P/P exists by consent of partners, who must have common purpose. Many P/Ps set out req’mts for partners, but can agree that not all partners will have same req’mts.

E.g. Silent partners don’t go to mtgs etc., but can still be member so long as partners have agreed to this.

All partners must contribute something, though, to be part of the P/Po Characteristics of carrying on a business [Per Gordon v. the Queen]

(1) Occupation of time, attention, and labour (2) Incurring of liabilities to other persons (3) Purpose of livelihood and profit

A.E. LePage Ltd. v. Kamex Developments Ltd. [1977, ONCA; aff’d SCC] Facts:

o ∆ titleholder of apartment bldgo approached M, one of the beneficial owners of bldg, who signed a K w/ to be

exclusive listing agent for property, for which ∆ claimed realtor’s fee. Issue: ∆ co-owners argued M wasn’t a partner and ≠ authority to bind them.

Under s. 11 if partners would be jointly liable. Held: Not partners. M and ∆ not carrying on business in common w/ a view of profit, but rather

co-owners who acted collaboratively to make the best of each of their investments. o B/c each co-owner had right to sell his share to a stranger w/o approval of others,

couldn’t be a P/P that would mean the person buying would be a partner, and it is very uncommon to allow a retiring partner to select a replacement and force him on the other partners.

Volzke Construction Ltd. v. Westlock Foods Ltd. [1986, ABCA] A partner does not have to be involved in management – can be silent partner. Facts

o Bonel couldn’t pay K w/ , so sues B and ∆ as partners, hoping to collect from ∆o ∆ rel’ship w/ B:

∆ has rights to IGA, which they agree to bring in as tenant if B gives them stake in mall ownership.

Shefsky = mgr of ∆. When wanted to secure the K w/ B, approached S who said “I’ll introduce

you to my partners” and intro’d to B. ∆ and B had joint bank account, but only B had signing authority and all

accounting info was submitted to B S died, and then there was conflict over the ownership stake, and ∆ and B went

to trial. Held: Partners, could recover against B.

o Note: no req’mt to be part of mgmt – can be silent partner. o ∆ and B agreed to share profits and expenses of entire mall 80-20. Joint bank acct,

jointly liable for mortgage. CA finds all of these indicate carrying on business in common with a view of profit

o AB provision equivalent to 4(c) raises presumption of P/P, which court finds ≠ rebutted.

Indicia of Partnership

16

1. Section 4(a)o Co-ownership is not sufficient of itself to create a partnership

Whether or not profits are shared by tenants/owners See also LePage v. Camex

o Co-ownership vs. Partnership Co-ownership

(i) Co-owners are not agents for each other (ii) Co-owners can deal with their own interests in the property without

the consent of the other co-ownerso Partnership

(i) Partners are agents for each other (ii) Unless agreed otherwise a partner cannot transfer his or her interest in the

partnership without the consent of the other partners (iii) Normally no partner can deal with an interest in the property itself since

the property is held by the partners jointly as an asset of the business itself. Where co-owners share profits and perhaps have some involvement in

the mgmt of the property, greater potential for the rel’ship to be considered a p/p.

2. Section 4(b) o The sharing of gross returns does not of itself create a p/po Have to separate the idea of gross returns from net profits

i.e. profit after all expenses of earning it are deducted (revenue less expenses) 3. The Opening Words of Section 4(c)

o Receipt by a person of a share of profits of business is proof in absence of evidence to contrary, that he is a member of p/p business Rebuttable presumption.

o But…Receipt of a share, or of a payment contingent on/varying with profits of business, does not of itself make the person a partner. What?

4. Section 4(c)(i)o indefinite profit sharing = presumption of P/P, but if a set repayment scheme paid out

of profits, ≠ P/P 5. Section 4(c)(ii)

o K for remuneration as share of gross profits does not in itself make the person a partner More like a bonus of salary calculated in rel’n to profits.

6. Section 4(c)(iii)o Some p/p agreements stipulate that surviving spouse/children will be entitled to

deceased’s share of profits for a set period. o This doesn’t make these entities partners, just an agreement amongst surviving partners

w/ deceased’s estate that they will support the surviving spouse/children for a period of time.

Lenders vs. Partnerso A person who contributes $ as a partner doesn’t really get their money back, but

someone who loans money with a repayment scheme is different (a lender) – just because you put in money and are receiving a share of profits doesn’t make you a partner.

Important to put things in writing, not engage in any other aspects of P/P business, so ≠ confusion.

Underlying Values Policy Reasons for Finding a P/P 1. Reliance

17

o a. Reliance on a Known Participant in the Business Someone dealing w/ a business may perceive ppl as being in business together,

often b/c both are involved in mgmt of the business and thus the person assumes them to be jointly responsible for the liabilities of the business. (i.e. may reasonably assume that person dealt w/ was acting as an agent for others involved in mgmt of business)

Such a person may rely on those ppl to satisfy obligations undertaken in connection w/ the business.

This is not the only basis for finding p/p, b/c ppl can be partners even w/o direct involvement in mgmt, and where ppl dealing w/ firm had no knowledge of person’s connection to business. (Sthg more than reliance would be needed, here.)

o b. Reliance on a Person not Known to the Third Party Someone dealing w/ a business may rely on a person not involved in the

business, and whose connection to the business they are unaware of. (i.e. on the belief that they are relying on the business)

E.g. A person may advance credit to a business that appears to have substantial assets, on the reasonable assumption that there is someone involved who has the funds to pay the debt. However, if the business was solely debt financed (an uncommon situation), then when they later seek payment, it would turn out that no one in p/p can be held personally liable, and the only funds in the business are from lenders, at fixed rates of return.

2. Unjust Enrichmento A person sharing in business’ profits is getting the benefit of credit advanced. o If only one person is liable to a creditor, but both share profits equally, and the one who

is liable turns out to be insolvent, reasoning is that the creditor should have recourse against the other, so that he can’t just avoid paying for the goods/services/etc.

o Grace v. Smith – early P/P case, sometimes said to have held that a share of profits meant the existence of P/P. In that case, ct referred to req’mt that those who share in benefit should also bear burdens.

o Criticism: if one person is receiving a share of the profits because he lent the P/P funds, and is simply being repaid, it is arguably an unjust enrichment to make him liable to a creditor of the P/P, since creditor would have priced the goods based on the members of P/P, not on this profit-making lender.

o Unjust enrichment ≠ sole basis for the p/p Act provisions, since s. 4 sets out several situations in which ppl can share in profits and not be partners.

3. Least Cost Avoidanceo Partners are in best position to assess the risk and control for ito Ppl involved in the business b/c of some investment w/ a share of profits are usually in

a better pos’n to assess and control for the risk of business failure. o Probably assessed before making investment, and probably have some ability to assert

control over the business and thus over the risk of business failure. o Likely better pos’n than most third party creditors, who have much less incentive to

spend $$ investigating such risks. Also have less ctrl (if any) over mgmt of business. 4. Lowers Overall Cost of Credit

o Putting burden of risk of business failure on the ppl in best pos’n to ctrl risk lowers the overall cost of credit, because the charge for taking on the risk will be lower.

Note: some p/p cases may be explained by distributional concerns, which may be inconsistent with/override the above listed concerns.

18

Section 3 – Entities that are Not P/Ps 3  The relation between members of a company or association that is

o (a) incorporated under an Act for the time being in force and relating to the incorporation of joint stock companies, or licensed or registered under an Act relating to the licensing or registration of extraprovincial companies, or

o (b) formed or incorporated by or under any other statute or letters patent or Royal Charter

is not a partnership within the meaning of this Act. NB: while a corporation can’t be a partnership, a corporation can be a member of a partnership.

The Legal Status of P/P and Consequences Thereof P/Ps are not separate legal entities. Partners are owners-in-common of any P/P assets. Partners

are in business, not employees of the business. [Re Thorne]3

o Partners are equity investors typically (per s. 27(a)) share profits in proportion to relative contributions, but can agree on different shares

Partners are personally and wholly liable for debts of the firm so w/o limited liability partners’ personal assets are also on the line for firm liability.

A partner can’t be a creditor of the P/P (except in specific circumstances under the Act) For tax purposes, income is calculated for P/P firm, then allocated among partners, who are

taxed individually on their share of P/P income Actions agst P/Ps can be commenced/defended in the P/P name [BC Supreme Court Civil

Rules R. 20-1(1)]o Exists for convenience, ≠ indicate P/P = separate entity [See equiv statute in Thorne]

Name and Registration and Actions Against Partnerships The Registration Requirement

o S. 81/82: persons associated in P/P for trading, manufacturing or mining must file registration statement with the Registrar w/in 3 months after formation of the firm

o Registration statement shows name of firm and partnerso Registration makes partners J&S liable for debts of firm (see s. 11, 14 re contractual

and non-contractual liability)o Note: a person can be liable as a partner even if they aren’t named. A faulty registration

statement doesn’t protect a hidden partner from action, even if has already begun action against named partners.

The Indexo S. 90: the registrar keeps an index showing name of P/P and names of partners.o Easy place for 3rd parties to check who is a partner in the firm

Registration statements for changes in the P/Po S. 83: when changes are made to the membership or name of the firm, a new

registration statement must be filed Failure to file Registration Statement or Registration Statement for Changes

o Potential fine under Offence Act (up to $2000). o s. 85(2): Nothing in this section exempts from liability any person who, although a

partner, has not been identified as a partner of that firm in a registration statement.

3 Re Thorne: P/P formed, paid premiums to protect employees injured on the job, but didn’t pay premiums for owners. Thorne injured on job, and claimed as workman. Argued P/P had separate legal existence and thus he was an employee of P/P. Held: Not separate; ≠ employee – money earned was distribution of profits to owner. ≠ compensate.

19

o S. 84(b) if change not registered, retiring partner will be deemed to continue to be a partner and will therefore remain liable.

o S. 87 – even if unregistered, someone can bring suit against one or more members of a firm prove that they are a P/P, then J&S liable; can execute against any one.

Governance – The Partnership Agreement Partnership Act as Default Rules for the Partners

o ss. 21-34 govern the rel’ship b/w partners (to the extent that they have not explicitly or implicitly agreed otherwise, as laid out in s. 21, and also mentioned in several specific provisions) – like a std form K.

o Partnerships are thus very flexible. o S. 21: “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.”

Default Rules Based on Assumption of Equalityo Basis is assumption of equality among partners in terms of capital contributions, rights

to participate in mgmt of business, share profits. o However, most partnerships don’t actually work in perfect equality like that. o Assumption of consensualism – policy that everyone will agree and go forward by

consensus The Need for a Written Agreement to Override the Default Rules

o The flexibility in delineating a partnership agreement is important because of these disparities – a comprehensive written agreement is useful so that partners can clearly adhere to or override the default rules, as desired.

The Default Provisions

Partnership property S. 6: “partnership property” = property brought into the partnership, acquired on account of the

firm, or acquired for the purposes of and in the course of the partnership business. S. 23(s): partnership property must be held and applied for the purposes of the partnership in

accordance w/ the partnership agreement.o Land held in name of an individual partner is held in trust for the partnership.

S. 24: property bought w/ firm $ is deemed to be partnership property.

Capital, Profits, Losses, Management, Admission of New Partners and Record Keeping s. 27 sets out default rules on day-to-day running of partnership business, all of which are

specified as subject to agreement of the partners. o 27 (a) Partners share equally in capital, profits and losses

e.g. It’s assumed that 5 partners each have 20% interest. o 27 (b) The firm must indemnify every partner for payments/liabilities in the ordinary

and proper conduct of the business or for the preservation of the business or property of the firm.

Similar to the agency law req’mt that the principal indemnify the agent. o 27 (c) A partner who makes an advance of capital over and above the contribution of

capital he or she agreed to make is entitled to receive a payment of interest at a fair rate.

i.e. If partner doesn’t want to increase his stake in the p/p, just wants to make an advance, and get repaid according to a loan agreement.

20

o 27 (d) A partner is not entitled to interest on the capital subscribed by the partner (i.e. the return on contributed capital is in the form of profits and not payment of interest)

o 27 (e) Every partner may take part in mgmt of the business See Thorne. Presumption is that partners are mgrs as well as owners, but frequently they

divide up ownership and mgmt of different parts of firm. o 27 (f) Partners are not entitled to remuneration for working in the partnership business.

See Thorne. Entitled to share of profits, not technically wages. (In Thorne, there is some confusion arising from owners paying

themselves wages.)o 27 (g) No new partner can be admitted to partnership w/o consent of each of the

partners rel’ship of utmost honesty & good faith – have to want the new person. Practically: on most large p/ps, this is delegated to a committee

o 27 (h) decisions on ordinary business matters are to be decided by a majority of the partners. However, no change in the nature of the p/p business is permitted w/o consent of all existing partners (i.e. need unanimity).

o 27 (i) Partnership books are to be kept at the principal place of business of the partnership and every partner must have access to the books to inspect them or copy them.

Fiduciary obligation of disclosure Each partner has right of review

o 27(j) A partner may refer a difference concerning the interpretation or application of the p/p agreement to arbitration for a final and binding decision under the Commercial Arbitration Act.

Removal of Partners s. 28: no majority of partners can expel any partner, “unless a power to do so has been

conferred by express agreement by the partners and the power is exercised in good faith.” o So, default rule can’t be altered by implication, in this case – only express agreement.

Fiduciary Duties Subject to restrictions on their authority, partners are treated as agents for each other in terms

of the business. Thus, fiduciary obligations arise. S. 22: “a partner must act with the utmost fairness and good faith towards the other members of

the firm in the business of the firm.” S. 31-33 set out specific fiduciary duties

o S. 31: obligation to render true accts/infoo S. 32: partners must account for all benefits derived from any transaction concerning

p/p or any use by partner of p/p property, name, or business connection.

Rochwerg v. Truster [2002, ONCA] Facts

o R formed P/P w/ T and Z. o R brought a client with him, which later decided to move their audit files to another

firm but wanted to keep R on as an advisor so offered him a spot on BoD.o R disclosed this rel’ship, per req’mts. However, he didn’t disclose that in this new

pos’n he had access to a lucrative employee stock plan.

21

o Firm discovered this, and sought their share.o No written P/P agreement, so court went solely by the Act.

Issues: Did R owe partners a share of the stock profits? Held: R owed T and Z a share.

o Emphasis on partners’ duty of full disclosure, duty not to make secret profits etc.o Note: s. 32(1) of BC Act is the most relevant to this caseo R’s activities in serving on BoD of client were outside scope of P/P accounting

business. However, by taking a directorship with a client, even though outside scope of P/P business, it still concerns the P/P.

o R knew he had to disclose the directorship, but argued the stock plan was a separate, personal transaction, since he had to use personal funds to buy the first 8000 shares, and then got 120,000 more for 1 cent each. But he wouldn’t have had the opportunity to make that transaction without the P/P connection.

McNight v. Hutchinson [2002, BCSC] Fiduciary obligations amongst partners

Dockrill v. Coopers and Lybrand Chartered Accountants [1994, NSCA] Common Property Principle : documents relating to a P/P and one of its partners which are

prepared by or for the P/P cannot be privileged as against that partner – at least until the dispute is known to both parties (not clear whether it would continue after this point as well)

Factso was a partner in ∆ firm. Two firms merged in 1991, and mgrs determined they

needed to downsize a partner, and chose . Informed they were seeking his resignation, and sued for wrongful dismissal.

o ∆ claimed privilege on certain documents containing communications b/w P/P and lawyers

Held: ≠ privileged, since generated at a time when was still a member of P/P that had ordered them, and open conflict was not yet known to all parties.

o Can’t consider the P/P to Partner rel’ship in the same context as employer-employee In P/P, fiduciary duties of disclosure of everything pertaining to P/P, and right

of full access to infoo Note: knowledge of one partner is presumed to be knowledge of others.

Assignment of Partnership Interests Partnership interests can be assigned to 3rd party assignees (who do not become partners). S. 34: an assignee of a partner is entitled to a share of the profits and a share of p/p assets on

dissolution. However, assignee is not entitled to participate in administration/mgmt of the business.

Default rule: partners can’t be forced to accept a new partner just because a fellow partner has sold his/her interest.

Liability and Indemnification

Provisions on General Liability S. 16

o (1) A person who represents or knowingly allows himself to be represented as a partner will be liable to anyone who has given credit on the faith of the representation.

This could apply even where no partnership exists

22

E.g. one person might lend their name to a sole proprietor to help that person obtain credit. However, if credit is advanced on the faith of such a use of the person’s name, the person would be liable to the sole proprietor’s creditor.

o (2): don’t have to know of a particular representation to a particular person. Just has to allow himself to be represented as a partner.

S. 17: an admission/representation made by any partner concerning P/P affairs, if made in ordinary course of business, is evidence against firm

S. 18: notice to any partner who habitually acts in P/P business of any matter rel’ing to P/P affairs operates as notice to the firm, except in the case of a fraud on the firm committed by or with the consent of that partner.

Section 19 – Liability of New Partners and Retired Partnerso New partners ≠ liable for debts before joined p/po Retired – stay liable unless observe certain procedures.

Liability of Partners in Contract and Tort Person representing himself or herself as partner

o S. 16(1) A person who represents self as a partner will be liable as a partner (i.e. for debts/obligations of the firm)

Liability in Contract – ss. 7-11o Section 7 – Apparent Authority of Partners

(1) Every partner is an agent of the firm and other partners for the purposes of the P/P business.

(2) Where a partner does an act for “carrying on in the usual way business of the kind carried on by the firm”, it binds the firm and partners unless:

(a) the partner had no authority to act for the firm in the particular matter, AND

(b) the 3rd party either knew the person he dealt with had no authority, or did not know/believe the person to be a partner.

o Parallels ostensible authority in agency law. o Section 9 – No pledge of credit for non-firm business

Where one partner pledges credit of the firm, for a purpose apparently not connected with the firm’s ordinary course of business, then the firm is not bound unless the person was specifically authorized by the other partners.

Since the act is not connected to firm’s ordinary course of business, third party has no reason to believe partner has authority (i.e. no ostensible authority). Thus, only way to bind the firm is if partner has actual authority.

o Section 10 – Third Party Notice of Restriction on Authority of Partner If a 3rd party has notice of a restriction on the power of a partner, then the

partner’s actions in contravention of the restriction don’t bind the firm. Some overlap w/ s. 7, but s. 10 is different in that it specifies “notice”

o Section 11 – Joint Liability for Debts of Partnership Every partner is jointly liable for all debts/obligations of the firm so long as he

is a partner. After death, partner’s estate is also severally liable, subject to prior payment of

his separate debts. Also allows for an action against the estate of a deceased partner while the

estate is being administered, w/o barring actions agst other partnerso 19

23

(1): a person who joins an existing P/P ≠ liable to creditors for debts of the P/P that arose before he joined.

(2): a partner doesn’t cease to be a party to Ks just b/c he leaves the partnership.

See more on retirement below. Liability in Tort

o s. 12: firm is liable for wrongful acts/omissions where a partner: (i) Acted w/ authority of co-partners, or (ii) Acted in the ordinary course of business of the firm

o s. 13 specifies situations in which firm must compensate for losso s. 14: liability under s. 12 & 13 = J&S

Note that s. 53 of the Law and Equity Act means there’s ultimately no difference b/w joint liability and J&S liability

Ernst & Young v. Falconi et al [1994, ON] P/P can be J&S liable for tortious actions of partners if they used facilities of the P/P to

perform improper acts that are otherwise in the nature of P/P’s usual business. Facts

o F = lawyer in a P/P; pleaded guilty to assisting ppl who were adjudged bankrupt in making fraudulent dispositions of their property.

o Klein, another lawyer in P/P, had no personal involvement w/ transactions, but the transactions had used the legal services of the P/P.

o Unfortunately, the clients were bankrupt & assets couldn’t be found, so creditors sued law firm, including K.

K dies, but his heirs have to defend against this action. Legal Issues: K’s estate argued that Falconi’s fraudulent acts could not be considered as w/in

the ordinary scope of business of the law firm, and thus that K was not J&S liable for the tortious acts.

Held: K = liable. o “The court need not find that it is within the ordinary course of business of a law firm

for a partner of that firm to conspire with others to defeat creditors of the firm’s clients. It is sufficient if the partner used the facilities of the law firm to perform services normally performed by a law firm in carrying out the transactions as a result of which the creditors of the firm’s clients suffered loss.”

o F’s actions “were of the nature of the normal legal services provided by a lawyer…and that throughout these services were performed through the facilities of KFA making use of its support staff, trust account, letterhead and documents…the fact that the various actions of Falconi were for improper purposes…does not take the acts themselves out of the ordinary course of business of the law firm if they are in the nature of the acts normally performed by the law firm in carrying on its usual business.”

Indemnification When a partner is found liable, the partner is liable for the full amount.

o Tort victims or ppl K’ing w/ P/P business can claim full compensation from any one or more of the partners

This liability is separate from any right of the partner to seek indemnification/contribution from other partners

o S. 27(b) A partner req’d to satisfy such an obligation may seek such support from fellow partners, according to their P/P agreement, if

24

(i) In OCB (ii) Or if necessarily done for P/P business

Retirement of Partners Sections 39 and 84(b)

o S. 39(1): persons dealing w/ a firm after retirement of a partner can treat all “apparent” members of the pre-retirement firm as partners until they have notice of change in p/p.

o S. 39(2): for ppl who have not had prior dealings w/ the firm, notice can be effected by publishing in the Gazette.

o Suggests that sthg more is req’d for ppl who have had prior dealings.o “actual” notice (see Tower Cabinet v. Ingram, 1949 KB)o S. 39(3): a retired partner will not be liable to those who can be shown not to have

known that he was a partner.o S. 84(b): if one fails to file a new registration statement on the retirement of a partner,

that person will continue to be considered a partner.o Someone can be an “apparent” partner:

For instance, the notoriety of person as partner in the particular town/region may make them an “apparent” partner.

E.g. due to use of person’s name on letterhead or sign outside door E.g. due to particular third party’s dealings w/ firm (see Dominion

Sugar v. Warrell, 1927, ONCA; Tower Cabinet v. Ingram) “Apparent partner” in s. 39(1) has been held to mean that it is apparent to those

dealing w/ the firm – not what was apparent to the whole world/community at large (see, e.g., Tower Cabinet)

Policy Reasons for Sections 39 and 84(b)o People who had prior dealings w/ firm may have relied on the particular retired partner

as being a partner. Thus, unless given proper notice, they will be allowed to continue treating him as a partner, to protect that reliance.

o Notice to registry was held to be sufficient notice to persons who have not had prior dealings with the firm (Dominion Sugar v. Warrell)

Steps that can be Taken When a Partner Retireso Per ss. 39 and 84(b), onus is on retiring partner to protect against reliance on him

remaining a partner by ppl dealing w/ firm after his retirement. o The Act suggests that the following steps should be taken (satisfaction of which will

shift the onus to the persons dealing with the firm): (i) Provide actual notice to all those with whom the firm has had prior dealings

May have practical difficulties with this, but could find current and former creditors by examining financial records for existing accts payable/loans..

If it has been several years since the person dealt with the firm, there is likely at least an argument that he should check the registry again to determine who is still a partner.

(ii) Put a notice of the retirement in the Gazette (iii) File a revised registration statement removing the name of the retired

partner from the list of partners in the firm.o Section 19 – Liability of New Partners and Retired Partners

19(2): a partner doesn’t cease to be a party to Ks just b/c he leaves the partnership.

25

Subject to agreement of creditors, etc, to relieve retiring partners from liability.

s. 19(3) allows for an agreement b/w retiring partner and p/p & creditors, relieving him from liability.

Practically, would have to be under the credit K. For large p/ps w/ frequent changes to membership, may be a good idea to make such arrangements with major creditors

Could also have p/p agreement provide a right to retiring partner to require certain steps (i.e. those in ss. 39 and 84(b))be taken to reduce his risk of continuing liability.

Dissolution of Partnership S. 86: when p/p dissolves, someone has to file a notice of dissolution

By Act of the Partners S. 35(1)(a): can set a fixed term for a P/P, at expiry of which, p/p will be dissolved unless

partners agree otherwise. S. 35(1)(b): can agree to dissolve P/P at end of specific venture for which it was created. S. 29 and s. 35(1)(c): If no fixed term and P/P not formed for particular venture, then p/p may

be dissolved by notice of intention to dissolve. Dissolution will take effect from date of notice or date specified in notice.

S. 30(1) – presumed continuance: if a P/P entered into for a set term is cont’d after term has expired, and w/o any express new agreement, the rights and duties of partners remain the same as they were at the expiration of the term, so far as is consistent w/ incidents of p/p at will

S. 30(2) – if P/P continues acting like a P/P, will presume to still be a P/P

By Act of Law: Death, Bankruptcy or Dissolution of a Partner – s. 36 In most provinces, a p/p is automatically dissolved on any of these eventualities.

o Consistent w/ legal nature of p/p – no more than the collection of individuals who form it, so when one individual is removed, p/p either disappears, or an entirely new p/p exists among the remaining partners.

o Issues of loss-sharing – can’t share loss with a partner who is bankrupt, e.g., or a corporation that has dissolved.

o Issues of trust – may not want to be in business w/ the executors/administrators of the estate of a deceased partner.

If the whole p/p is dissolved, need a new p/p agreement b/w remaining partners to continue – can be problematic/frustrating.

o Thus, this provision is frequently altered by express agreement b/w partners, such that these eventualities do not result in the dissolution of the p/p as b/w the remaining partners.

BC Partnership Act has dealt with this issue by including a default provision that where there are 2+ partners, the death, bankruptcy or dissolution of a partner only dissolves the p/p as b/w the deceased, bankrupt or dissolved partner and the remaining partners (i.e. p/p agreement continues to apply w/ respect to the remaining partners) – s. 36(1)(b)

o Presumption that remaining partners continue on as same partnership.

By Act of Court S. 38(1) Court may order dissolution if:

o (a) partner incapable of managing his/her affairs b/c of mental infirmity

26

o (b) partner permanently incapable of managing affairs in any other way o (c) partner tried to defraud the firmo (d) willful/persistent breach of P/P agreemento (e) P/P can only be carried on at a losso (f) otherwise just or equitable

(2) P/P may be dissolved just between the remaining partners and the partner whose condition gave rise to the application.

Why Use Partnership? The corporate form of association has not always been available for several professional

businesses P/P is easy to form (minimal req’mts), and is very flexible Lots of statutory req’mts for corporations, leading to significant constraints in some situations. P/P shares disadvantage of sole proprietorship: personal liability for business Ks/torts

o Limitation on liability might lend weight to LP or Corporation – but, where the number of equity investors is relatively low, this advantage may not be as significant as it originally seems.

Tax purposes – losses can be passed through partners, used to offset gains from other sources.

Limited Partnership The limited partnership form of business association allows for some of the partners (investors)

to have limited liability, while fully advertising this to 3rd parties by requiring that the p/p does business under a name that adds the words “Limited Partnership” as a “cautionary suffix” to the name.

S. 49: Parts 1 and 2 apply to LPs unless inconsistent w/ Part 3

Defining Limited Partnership A limited liability partnership consists of one or more general partners and one or more limited

partners. Liability of limited partners is limited to amt that he/she contributes or agrees to contribute to

the LPo This amount becomes a p/p asset, and creditors are allowed to look to p/p property

Liability of general partners ≠ limited (i.e. all personal and business assets of general partner are available to creditors)

o So general partner has different interests and will likely be the one to decide when to cut losses on the p/p and end the business, if losses are too severe.

Formed by the Filing of a Certificateo S. 51(1): filing a certificate is essential to the formation of a LP. if ≠ certificate filed, ≠

LP. No clarity of intention/situation will be sufficient. o All general partners must sign the certificateo (2)(a-c) Must have business name, general nature of business, full name and residential

address of each general human partner and/or name/address of each general corporate partner in BC.

o (2)(d) Term for which LP is to exist (must set date for dissolution)o (2)(e) Aggregate amt of cash, nature & fair value of all property to be contributed by

each partner (incl. limited partners). o (3) Certificate may – but doesn’t have to (and usually doesn’t) – list the name of

limited partners.

27

o Some litigation on the question of whether filing a certificate is sufficient to form a LP – is anything else necessary? i.e. a partnership per se?

Martha had a case in which this issue came to court, and it was decided on Backman principle, w/ certificate being insufficient.

Certificate must state who general partners are, to allow 3rd parties to assess creditworthiness of partners w/o limited liability

Part 3 of the Partnership Act deals w/ limited partnership – some provisions are presumably intended to protect against 3rd parties being deceived into believing that one or more limited partners do not have limited liability.

s. 50o (1) Can form LP to carry on any business a general P/P can carry on. o (2) LP consists of (a) one or more general partners, and (b) one or more limited

partners s. 49: where the other rules in the Act conflict with this Part, then this Part takes primacy with

respect to LPso But all rules in Part 1 & 2, unless K’d out of or in conflict w/ Part 3, continue to apply

to LPs. S. 53: calls for add’n of cautionary suffix (as discussed above), and requires (w/ some

exceptions) that the name of a limited partner must not appear in the name of the LP.o If such a name does appear in the LP name (and isn’t covered by an exception in (2)),

then that limited partner will ≠ have limited liability. S. 55: limited partner ≠ contribute services to P/P business

o Concern that this might lead 3rd parties to believe this partner is a general partner in the business

S. 64: “a limited partner is not liable as a general partner unless he or she or it takes part in the management of the business”

o limited partner ≠ take part in mgmt of P/Po Same concern about deceiving 3rd parties as to status.o So, this is in conflict with ss. 11 and 14 (making all partners J&S liable for all debts of

firm) – s. 64 takes precedence over 11 and 14 (per s. 49) S. 59: no return of capital to partners is permitted if after the return of capital the P/P would be

insolvento Concern addressed: the parties to the p/p will have the best access to info about any

looming insolvency of the business, and may at such time begin to withdraw funds from the business, reducing assets which may be the only recourse for 3rd party creditors

o “no abandoning ship” provisions s. 51: certificate must state the contribution provided/to be provided by limited partners

o Might help 3rd party creditors determine amt of capital (and thus amt of cushion) available in terms of value of assets of business over amt of liabilities of business

o However, knowing the contributed capital may not be relevant to the net capital once business has been in operation for some time. If business has done poorly, e.g., net capital may have decreased, and assets of business could potentially be worth less than liabilities.

The Relationship Between the Partners The Separation of Ownership and Control

28

o Limited liability facilitates having a large number of investors, many of whom may have small stakes in the business, and may thus have limited incentive to carefully monitor the mgmt thereof.

The ability of limited partners to monitor mgmt is further constrained in LP by provisions making them potentially liable as general partners if they take part in mgmt of business.

o Thus, LP tends to create a “separation of ownership and control” Limited partners are usually the major contributors of capital to business, and

are thus referred to as owners, but they do not control the business. o Potentially leaves partners vulnerable to the managers

Although it might be expected, L/P acts don’t tend to have provisions protecting limited partners from being taken advantage of by mgrs.

Can write into l/p agreements – extent will depend on market forces Some regulation in s. 56 – w/o unanimous ratification or written consent of

limited partners, general partners have some restrictions: (a) general partners can’t do sthg that makes it impossible to carry on

P/P business, (b) can’t consent to a judgment against the P/P. (c) They also can’t possess P/P property or dispose of it for other than a

P/P purpose. NB: These three constraints are not subject to alteration in P/P

certificate – varying these provisions req’s consent of all limited partners

(d) Can’t admit someone as a general or limited partner unless the right to do so is given in the certificate

(e) can’t continue business of LP on bankruptcy, death, retirement, etc., of a general partner, unless the right to do so is given in the certificate.

S. 58(1)(c): a limited partner may also seek a court order for the dissolution and winding up of the p/p. Under this section, limited partners have the same rights as those of general partners set out in s. 38.

o This is a mandatory right, not a default – probably cannot be waived. Right to Inspect Books and Right to Disclosure

o s. 58(1)(a): right to inspect, make copies of or take extracts from LP bookso s. 58(1)(b): right, on demand, to “true and full information of all things affecting the

limited partnership and to be given a formal account of partnership affairs whenever the circumstances render it just and reasonable.”

o Both of these are arguably default rights, not mandatory – based on the equivalent provisions covering general partners.

Assignment of Limited Partnership Interestso s. 66: default rule of general partnerships that a partner cannot assign his interest w/o

consent of other partners – still true for LP.o s. 51(4)(b): where assignment is permitted in the partnership agreement, the certificate

must set out provisions concerning right to make such an assignment, and the terms and cond’ns thereof.

o It is common in LPs to allow assignment w/o consent of all partnerso Also, where LP interests are to be sold broadly to investing public, making interests

freely transferable will help promote their sale. Restriction on the Admission of Additional Partners

o s. 56(d): a general partner ≠ authority to admit a person as a general partner or a limited partner unless such a right has been given in the certificate.

29

o S. 51(4)(c): right to admit add’l limited partners must be set out in LP certificateo S. 65: add’l limited partner ≠ admitted to LP except in accordance w/ P/P agreement

and by entry into the register of limited partners (which must be kept pursuant to s. 54(2))

o The usual practice would be to allow for admission of add’l limited partners to facilitate future financing needs of the business.

Share of Profitso s. 61: limited partners share in profits and any return of capital in proportion to their

contributions, unless the l/p agreement states otherwise

Why Use Limited Partnership? LPs are relatively common for start-up operations.

o Taxation of P/Ps is such that any losses (which are most likely to accrue in start-up phase) can be passed on to limited partners, who can make use of the losses against their other sources of income.

o Such losses can be esp. high in early years where there is some gov’t incentive scheme allowing for quick write-off of initial capital investments (i.e. an accelerated depreciation)

While limited liability may be appealing, there are other ways to limit investors’ liability – such as incorporation.

Tax reasons are the dominant reason for LP, but might also choose LP over corporation because of the greater degree of flexibility LP may provide

Robinson (Trustee of) v. R. [1998, FCA] Even if a partner in an LP is not engaged in the mgmt of the business, it still counts as carrying

on business. LPs are by nature partnerships, and limited partners, as owners, are considered partners even if

they are passive. Contributing by agreement to the carrying on of the business, even if they aren’t devoting labour/time/expertise.

Factso trust and other parties formed LP in Manitoba, for purpose of constructing and

operating a nursing home. General partner, Shaker Investments Ltd., oversaw construction and mgmt of the nursing home.

o derived income, but tax issue arose regarding whether was carrying on active business.

Held: Carrying on business as member of the LP, even though not involved in mgmt.o All partners of LP, general or limited, are carrying on business. Roles are divided but

all contributing.

Limited Liability Partnership

LLPs in Other Provinces In ON, only professional P/Ps can register as LLPs Partial Liability Shield

o ON Limited Liability Partnership Act: partners ≠ liable for malpractice of fellow partners/employees unless they were directly supervising the activity

Also, partners are not liable to indemnify fellow partners who have been found liable for malpractice.

“Partial shield” protection

30

o Otherwise, partners are personally liable for K debts of firm. Business Name Registration

o ON LLP Act: LLP ≠ carry on business unless registered business name contains the words “limited liability partnership”, or “LLP” (or their French equivalents). No other name can be used to carry on the business.

LLPs in BC The Partnership Amendment Act, 2004, c. 38 added Part 6 to the Partnership Act (ss. 94-129)

o In BC any business can register as an LLP Full Shield Liability

o S. 104(1): A partner in an LLP is not personally liable for a P/P obligation merely b/c person is a partner.

Reflects the full shield liability adopted by BC Partners thus have limited liability on K debts such as bank loan or trade credit

(subject to any personal guarantees given by a partner) Allows partners to opt out of full shield liability protection

May want to opt out for tax reasons – different treatment if have full vs. partial liability

Partners can also enter into personal guarantees w/ particular creditors, thereby effectively waiting limited liability w/ respect to those creditors

o S. 104(2): Furthermore, a partner in an LLP is not relieved of liability for his own negligent/wrongful act/omission, or where he knew of the negligent act/omission of a fellow partner and didn’t take the actions a reasonable person would have taken to prevent it.

LLP vs. LPo Full shield liability protection gives partners equivalent protection of limited partners in

an LP, but allows them to still take part in mgmt of P/P business (i.e. w/o becoming personally liable for P/P debts)

S. 94 – definitions: LLP is defined as “a partnership registered as a limited liability partnership under this Part” – if ≠ registered, will be treated as general P/P and will be liable for all debts of P/P per that model.

S. 100: An LLP must have the words/acronym (or French version) as part of business nameo Must indicate status in the name of the business.

Registration of Extra-provincial or Foreign Limited Liability Partnershipso Part 6 also deals with this issue. o S. 114: partners of an extra-provincial or foreign LLP that carries on business in BC

and isn’t registered as an extra-provincial LLP will be liable as though they were partners in a general p/p (i.e. full personal liability)

o Thus, important to register in BC if LLP intends to carry on business here.

Other Statutory Provisions s. 94 – definitions

References to “any Acts” (w/ capital A) are BC Acts s. 95 – Application of Part

Parts 1, 2, 4 and 5 apply to LLPs ss. 11 & 14 do not apply to LLPs

So no J&S liability of partners for firm debts No indemnification either.

S. 96 – Application for Registration

31

o (1) partners may apply to register as LLPo (2) must submit registration o (4) registration statement req’mts

S. 97 – Professional P/Pso Professional governing legislation must allow professionals to form P/P

S. 104 – Key Provision – Limited Liability for partnerso Significant diversion from general p/p law. o (2)

(a) No relief of partner’s liability for own personal negligence/wrongdoing (b) No relief for act/omission of another partner if you knew and didn’t act to

remedy ito (3) Partnership property is still available to meet P/P obligations

s. 105o (1) Partners in LLP are personally liable for P/P obligations if and to the same extent

that they would be liable for the obligation if (a) the obligation was an obligation of a corp, and (b) they were directors of the corp

o (2) nothing in (1) imposes on partners the duties imposed on directors of corps at CL or under s. 142 of BCBCA

S. 129 – Cancellation of Registration S. 129 (4) and (5)(a) Cancellation of the registration of an LLP doesn’t dissolve it, just renders

it a general P/P

Corporations: The Basics

Intro to Corporations

The General Structure of a Corporation Comes into existence through a Certificate of Incorporation

o Like a Birth Certificate – makes it a legal entity Equity interests are divided into shares, which are owned by shareholders.

o Note: shareholders don’t own the assets of the corporation – they own the shareso Shares are intangible personal property o A bundle of rights (which rights are specified in corporate documents)

Types of (and rights attached to) shares can vary, but there are three basic rights which must always be provided somewhere in the various sets of share rights (but they don’t all have to be present in any one of the different sets of shares)

o Voting Rights Most important such right is the right to elect directors who will

manage/supervise mgmt of the corporation (sole prop. Corp. would be informal, but bigger would have process) Any group of shareholders w/ 51% of vote or more can elect the board they

want may elect themselves, or a slate of preferred people.

o Dividend Rights Right to receive distributions out of corporation’s profits when directors choose

to provide such distribution (by declaring a dividend) Pro rata share of profits (i.e. based on number of shares held)

32

(someone has to be entitled to the profits – these are they.)o Liquidation Rights

Right to receive what remains when corporation’s assets are sold and liabilities paid off.

Key Features of the Corporate Form Limited Liability

o Liability of shareholders is limited to the amount that they have invested in the corporation

Separate Personalityo At law, corporations are treated as a separate legal entity, or “person” – thus,

corporations can own property, enter into Ks, and commit torts and crimes Perpetual Existence

o Unlike a P/P, in which the death of a partner or transfer of partner’s interest to another will end the P/P (at least in principle), a corporation can potentially carry on indefinitely, since it will not come to an end with the departure of a shareholder.

o Corporations can be brought to an end by dissolution.

The Constitutional Position

The Basis of Provincial and Federal Powers S. 92(11) – only reference in Constitution to a power to incorporate companies.

o The legislatures in each province may make laws in relation to “The Incorporation of Companies with Provincial Objects”

S. 91 gives federal gov’t residual power, which means that federal government would have jurisdiction to make laws for incorporation of companies with objects other than “provincial objects”

Scope of the Provincial Power To be ultra vires, a provincial law really has to seek to change the structure of a federal corp A company can be inc’d under a provincial statute and still carry on business in any other

jurisdiction (nationally or internationally), so long as the other jurisdiction grants that right. [Bonanza Creek Gold Mining v. The King]4

Scope of the Federal Power Fed gov’t has specifically enumerated power to regulate banking, and specific pwrs concerning

the incorporation of banks (s. 91(15)) o Federal powers of inc’n are not limited to companies inc’d for purposes falling under s.

91 enumerated powers. (Several cases have upheld provisions of fed corp law that might fall w/in 92(13), e.g.)

The federal gov’t holds a broader power than provinces to incorporate companies under the residual power. [Citizens Insurance Co. v. Parsons (1881, PC)]

o But there must be more to the meaning than just having the power to incorporate companies with ability to operate outside of home province [see Bonanza]

4 Bonanza Creek Gold Mining v. The King (1916, PC): Fed gov’t granted licenses for mining in YK, but refused to grand additional licences. action to enforce right to add’l licences. ∆ argued inc’d in ON, no right to operate in YK. Held: Gov’t of YK had authority to (and did) grant license to carry on business in YK. Not ultra vires.

33

It is not necessary for validity of federal inc’n that the company carry on business in more than one province [see Colonial Building and Investment Association v. AG Quebec (1883, PC)]

Federally inc’d companies have the power and the right to operate throughout the country. o Provincial registrars are not empowered to refuse registration to CBCA corps on basis

of name conflict, since this would prevent a federal corp from carrying on business in the province. [John Deere Plow Co. v. Wharton; John Deere v. Duck]

Provincial laws can’t affect the nature of fed inc’d corps [Great West] The ability to maintain an action in a province is a necessary component to carrying on

business in the province [Great West Saddlery Co. Ltd. v. The King (1921, ONPC)]o Legislation prohibiting a company from maintaining an action in a province unless it

had obtained licence to operate in the province cannot be applied to a federal company. o It has been suggested that federal companies inc’d for purpose of holding land would

be unable to successfully attack application of provincial legislation that prohibited corps from owning land (regardless of where inc’d) [Viscount Haldane in Great West Saddlery Co. Ltd.]

Prov laws of general application can affect business so long as not affecting core of business [Canadian Indemnity Co. v. AGBC (1977, SCC)]

o Federal incorporation does not confer general immunity from provincial regulatory laws. [John Deere]

o The Great West approach was followed in Canadian Indemnity, which upheld the operation against federally inc’d companies of provincial legislation prohibiting sale of auto insurance by anyone except ICBC. Rationale: not restricted to federal corps in application, but all corps/legal persons, regardless of where inc’d.

o A federally inc’d company can’t be refused a licence to sell shares in a province shares are necessary to finance a corp and w/o financing from a sale of shares a corp couldn’t even begin to carry on a business. [AG Can. v. AG Man. (1929)]

Note: Securities regulation is a provincial matter, and a key feature thereof is the regulation of an initial sale of shares by a company to the public. This position could limit the effectiveness of provincial securities regulation, at least of the type dealt with in the relevant Manitoba legislation – could one avoid adherence just be inc’ing federally?

o An AB statute prohibiting the sale of securities except through licensed broker could be applied to a federally inc’d company, because req’ing company to sell shares through a licensed broker wouldn’t prevent them from selling shares and thus raising the funds necessary to carry on business in the province [Lymburn v. Mayland (1932, PC)]

o Courts have upheld provincial legislation requiring federal corps to register corp name and any names under which it carries on business [see e.g. Reference Re the Constitution Act (1991, Man CA)]

Provincial and Federal laws can both apply, so long as not in conflicto Provincial insider trading legislation can still apply to federally inc’d companies,

regardless of overlap w/ federal Act – so long as fed not ‘occupying the field’. [Multiple Access v. McCutcheon (1982, SCC)]

Provinces can impose penalties on federal corps for non-compliance w/ prov lawso Provincial legislation imposing penalties for failure to comply w/ req’mt to obtain an

extra-provincial license before commencing operating in the province. [see Re Royalite Oil Co. (1931, AB App. Div)]

Implications of the Constitutional Position Provinces and federal gov’t can pass valid legislation for inc’n of companies.

34

A corp inc’d under a provincial statute can carry on business throughout the rest of the country and the world, so long as the oher jurisdictions permit it to do so (which they typically do)

o Incorporate locally and then register in each province/jurisdiction in which operate A federally inc’d company can operate throughout the country, or in one or any number of

provinces. A corp can choose to incorporate under either federal or provincial statute (or territorial

company ordinance), and still practically carry on business anywhere.o Raises the possibility of competition for corps and their commensurate fees.

Since corps must pay registration fees to operate in each extra province, a federally inc’d corp will always pay slightly more to operate (since a provincially inc’d corp would not pay fees for home province)

Fed inc’n is sometimes suggested to provide the protection for the corporate name. o Some protection in that prov registrar can’t reject registrationo Doesn’t mean the corp can’t be sued for passing itself off as an existing business w/

same name in a province.

The Incorporation Process A corporation is incorporated by way of a process under the CBCA; there are also some steps

to be taken after incorporation, as required by the CBCA. A corporation can also be incorporated under the CBCA by “continuance” of an existing

corporation (i.e. one incorporated under a different – perhaps a provincial – statute), that wishes to change its statute of incorporation to the CBCA.

o Recall that CBCA corps must pay an extra-provincial registration fee for every province in which it carries on business, and thus one more fee than a corp. that is provincially incorporated (which has to pay a fee for each province other than that in which it was incorporated)

NB: the corporate law governing a company is that of the jurisdiction of incorporation – follows to wherever it carries on business.

BCBCA Provisions S. 375 – foreign corporations required to be registered

o (1) A foreign entity must register as an extraprovincial company in accordance with this Act within 2 months after the foreign entity begins to carry on business in British Columbia.

o (2) For the purposes of this Act and subject to subsection (3), a foreign entity is deemed to carry on business in British Columbia if

(a) its name, or any name under which it carries on business, is listed in a telephone directory

(i) for any part of British Columbia, and (ii) in which an address or telephone number in British Columbia is

given for the foreign entity, (b) its name, or any name under which it carries on business, appears or is

announced in any advertisement in which an address or telephone number in British Columbia is given for the foreign entity,

(c) it has, in British Columbia, (i) a resident agent, or (ii) a warehouse, office or place of business, or

(d) it otherwise carries on business in British Columbia.o (3) A foreign entity does not carry on business in British Columbia

35

(a) if it is a bank, (b) if its only business in British Columbia is constructing and operating a

railway, or (c) merely because it has an interest as a limited partner in a limited partnership

carrying on business in British Columbia.o (4) A foreign entity need not be registered under this Act or comply with this Part

other than subsection (5) of this section, and may carry on business in British Columbia as if it were registered under this Act, if

(a) the principal business of the foreign entity consists of the operation of one or more ships, and

(b) the foreign entity does not maintain in British Columbia a warehouse, office or place of business under its own control or under the control of a person on behalf of the foreign entity.

o (6) Sections 384 and 385 apply to a foreign entity referred to in subsection (4) as if it were an extraprovincial company.

S. 384 imposes personal liability on directors if non-compliance w/ s.. 27 (req’mts to display extra-provincial name)

S. 385 allows ppl to apply to court for remedy for non-compliance w/ name display req’mts.

S. 376 – Application for registrationo (1) To apply to register as an extraprovincial company under this Act, a foreign entity

must provide to the registrar the records and information the registrar may require and must

(a) reserve its name or an assumed name under section 22 or 26, as the case may be,

(b) appoint one or more attorneys if required under section 386, and (c) submit to the registrar for filing

(i) a registration statement, and (ii) any other records the registrar may require.

o (2) req’mt to reserve name doesn’t apply to a federal corporation (upholding John Deere)

s. 377 (1) – once foreign entity complies w/ s. 376, registrar must (federal) or may (any other kind of corp):

o (a) file the registration statement ando (b) register the entity as an extra-prov company.

S. 378o (1) Whether or not the requirements precedent and incidental to registration of a

foreign entity as an extraprovincial company have been complied with, a notation in the corporate register that a foreign entity has been registered as an extraprovincial company is conclusive evidence for the purposes of this Act and for all other purposes that the foreign entity has been duly registered as an extraprovincial company under this Part on the date and time shown in the corporate register.

o (2) once registered, licenced to carry on business under corp’s charter in BCo (3) Registering as extra-prov corp in BC doesn’t expand the powers of the corp i.e.

if home jurisdiction restrictions exist, they continue to apply even if not in the BC Act (4) No act of a foreign entity that carries on business in British Columbia, including a transfer

of property, rights or interests to it or by it, is invalid merely because o (a) the act contravenes subsection (3), oro (b) the foreign entity was not, at the time of that act, registered as an extraprovincial

company.

36

s. 398 – LG can cancel registration, or restore, but this section doesn’t apply to federal corps Note Offence Act – s. 426: failure to register corp is an offence. But…punishment probably

never pursued. S. 30 – a company has all rights, privileges and powers of a natural person S. 32 – Unless restricted by its charter or by an Act, each British Columbia corporation has the

capacity o (a) to carry on its business, conduct its affairs and exercise its powers in any

jurisdiction outside British Columbia to the extent that the laws of that jurisdiction permit, and

o (b) to accept from any lawful authority outside British Columbia powers and rights concerning the corporation's business and powers.

S. 34 – must have registered office in BC S. 124

o (1) A person must not become or act as a director of a company unless that person is an individual who is qualified to do so.

o (2) An individual is not qualified to become or act as a director of a company if that individual is

(a) under the age of 18 years, (b) found by a court, in Canada or elsewhere, to be incapable of managing the

individual's own affairs, (c) an undischarged bankrupt, or (d) convicted in or out of British Columbia of an offence in connection with the

promotion, formation or management of a corporation or unincorporated business, or of an offence involving fraud, unless

(i) the court orders otherwise, (ii) 5 years have elapsed since the last to occur of

o (A) the expiration of the period set for suspension of the passing of sentence without a sentence having been passed,

o (B) the imposition of a fine, o (C) the conclusion of the term of any imprisonment, and o (D) the conclusion of the term of any probation imposed, or

(iii) a pardon was granted or issued under the Criminal Records Act (Canada).

o So, e.g., Conrad Black couldn’t incorporate under the BCBCA o (3) A director who ceases to be qualified to act as a director of a company must

promptly resign. 106 – directors must manage affairs of corp

CBCA Provisions S. 2(1) Definitions

o “Corporation” means a body corporate incorporated or continued under this Act and not discontinued under this Act

o “Body Corporate” includes a company or other body corporate wherever or however incorporated

o NB: The following definitions are not relevant to the material covered in this course: “call”, “going private transaction”, “put”, “squeeze-out transaction”

S. 10 – name of corporationo Have to declare corporate statuso Can carry on

37

s. 265 Part III – Capacity and Powers

o S. 15 – (1) corps have capacity, and subject to this Act, the rights, powers and privileges of a natural person

S. 102 – Who’s in Charge?o The directors shall manage/supervise mgmt of affairs of corporationo They have ultimate authority over business affairs/decisions

S. 103 – by-laws

Steps in the CBCA Incorporation Process S. 5: one or more individuals or “bodies corporate” may incorporate a corporation.

o (1) individuals must all be 18 years or over, and can’t be bankrupt or found by a court (Canadian or elsewhere) to be of unsound mind.

o Parties must sign articles of incorporationo (2) one or more bodies corporate can incorporate a new corporation by the same

process. S. 6

o (1) Articles of Incorporation Must include (a) the name, (b) the province in Canada where the registered

office will be, (c) the classes and max number of shares, (d), (e), (f)o (3) and (4) – allows for req’mt of special majorities (except for removal of directors in

s. 109) s. 7: articles of incorporation must be sent to Director (administrator of CBCA per s. 2(1)),

along w/ documents req’d by ss. 19 and 106. S. 19(2): notice of registered office of corporation must be sent to Director

o Often a corporation’s law firm’s corporate records office S. 106(1): notice of directors of corporation must be sent to Director

o Note: references to lower case “directors” in CBCA are to directors of corporations; capital “Director” is the administrator of the CBCA

o Directors have to be humans – can’t be other corporations. S. 6: follow Form 1, some other requirements to be complied with. Also: must pay a filing fee. S. 8 – If all is in order, Director shall issue certificate of incorporation S. 12(1) Corporation must have a name that isn’t same as/confusingly similar to name of

another corp/business.o To ensure difference, CBCA allows for granting of a numbered name in which Director

gives corp a designation of an assigned number (next in sequence) followed by “Canada Ltd.”

o If ≠ numbered name, incorporators must file a “Newly Updated Automated Name Search” (NUANS) – name search report.

NUANS database lists names of Canadian-incorp’d corps, businesses registered in Canada and registered trade names.

S. 9 – corp comes into existence on date certificate issued S. 15 – corps has rights etc. of natural person. So the required steps to incorporate, then, are as follows:

o (i) file articles of incorporation (ss. 5, 6 and Form 1)o (ii) file notice of registered office (ss. 7, 19, and Form 3)o (iii) file notice of directors (ss. 7, 106 and Form 6)o (iv) pay prescribed fee (Reg. s. 97 and Sched. 5), and

38

o (v) (if name other than numbered name), file NUANS Name Status Reporto (vi) Director shall incorporate, unless non-compliant (s. 8)o (vii) Corp comes into existence on date certificate is issued (s. 9)

Issuance of a Certificate of Incorporation Ss. 8 and 12(1): Director shall, upon receipt of req’d documents and assessment that they meet

the req’mts of the Act (incl. acceptability of corporate name), issue a certificate of incorporation.

o NB “shall” – some earlier incorporation methods made the process an exercise of Crown prerogative.

S. 9: Corporation comes into existence on date shown in certificate of incorporation

The Articles Section 6 of the CBCA provides that the articles must set out:

o (i) the corporate name;o (ii) any restrictions on the business of the corporation;o (iii) the classes of shares and any maximum number of shares that theo corporation is authorized to issue;o (iv) if there will be two or more classes of shares, the rights, privileges,o restrictions and conditions attaching to each class of shares;o (v) the province in Canada where the registered offices of the corporation will be

situated;o (vi) any restrictions on the transfer of shares;o (vii) the number of directors the corporation is to have, or the minimum and maximum

number of directors the corporation is to have;o (viii) and any other matters that one chooses to put in the articles of the corporation.

Provisions generally only amendable by supermajority vote of shareholders. Can include things beyond req’d, but this isn’t common practice because it is difficult to

change provisions of the articles.

Post-Incorporation Steps Under the CBCA S. 104(1): after issue of certificate of incorporation, a meeting of directors shall be held (w/ 5

days notice by mail, per req’mts in (3)), at which they mayo (a) make by-laws

important constitutional document of corp, governing internal procedures. Normally at the first mtg directors will pass general by-laws that will deal with

matters like: (i) procedures at directors' meetings; (ii) notice for and procedures with respect to shareholder meetings; (iii) procedures for the allotment and issuance of shares; (iv) procedures for the declaration and payment of dividends; and (v) procedures for the appointment of officers.

o (b) adopt forms of security certificates and corporate records incl. certificates for shares and debentures

o (c) authorize the issuance of shares; common to pass resolution allotting & issuing shares to ppl they intend to be

shareholders.o (d) appoint officers;

39

i.e. to carry out specific tasks of carrying on business. Directors act as a group – have no power to act individually until the directors

as a group grant such power. May designate particular tasks to particular officers

o (e) appoint an auditor to hold office until the first meeting of shareholders; May not have to appoint an auditor: corps that don’t issue shares to the public

don’t have to appoint an auditor, and shareholders of such corps can waive the appointment of an auditor

Corps whose shares are distributed to the public must appoint an auditoro (f) make banking arrangements; and

e.g. choosing bank, indicating who will have signing authorityo (g) transact any other business.

S. 20 requires corp to maintain certain records, so directors may pass resolution at first mtg adopting the forms in which these records will be kept.

s. 23 – common for corps to adopt corporate seal, to be used in executing certain docs binding corp (seal no longer specifically req’d)

Perhaps by-laws restricting pwrs of directors to borrow, or setting out procedures to be followed by those with borrowing power.

Subsidiaries and Affiliates

2(2) Affiliates For the purposes of this Act:

o (a) one body corporate is affiliated with another body corporate if: one of them is the subsidiary of the other; or both are subsidiaries of the same body corporate; or each of them is controlled by the same person

o (b) if two bodies corporate are affiliated with the same body corporate at the same time, they are deemed to be affiliated with each other

2(3) “Control” A body corporate is controlled by a person or two or more bodies corporate if:

o (1) you have more than 50% of the votes, ANDo (2) that is more than enough to elect the majority of the directors

2(4) Holding Body Corporate A body corporate is the holding body corporate of another if that other body corporate is its

subsidiary

2(5) Subsidiary Body Corporate

40

A body corporate is a subsidiary of another body corporate if:o (a) it is controlled by

(i) that other body corporate (ii) that other body corporate and one or more bodies corporate each of which

is controlled by that other body corporate (iii) two or more bodies corporate each of which is controlled by that other

body corporateo (b) it is a subsidiary of a body corporate that is a subsidiary of that other body

corporate

Why Use the Corporate Form? Gillen discusses seven commonly noted advantages of incorporation that may not be as

advantageous as they originally seem, or whose advantages may be overridden by other considerations (esp. tax considerations.)

A. Limited Liability - A corporation provides limited liability for its shareholders as compared the joint and several liability of partners.

o May not provide much benefit where, as is quite common, shareholders have to provide personal guarantees to lenders to secure a loan for significant portion of business’ capital.

If business’ operating space will be leased, also common for lessor to require a personal guarantee from shareholders if lessee is a corporation.

Major suppliers may also require personal guarantees from shareholders before advancing substantial amounts of credit.

o Would still have protection against personal liability for a relatively insignificant amount of trade credit, and for torts committed in carrying out the business of the corp.

However, there is a chance (though small) that a court may make shareholders personally liable – esp. in closely-held corps (e.g. perhaps five or fewer shareholders) for business torts.

Court might also find that one or more officers (who are often shareholders in closely-held corps) directly committed the tort.

o Insurance is key. B. Perpetual Succession – A corporation provides the perpetual succession of a body corporate

contrasting with indefinite tenure of partnerships.o Sole proprietors can assign their interests (though some difficulty can arise)o Partnerships can anticipate the problem of reconstituting after death, retirement or

bankruptcy, and include provisions in the P/P agreement covering these eventualities. C. Ease of Transfer of Shares – A corporation allows for ease of transfer of shares as against

difficulty and inconvenience of terminating partnerships to permit changes in personnel.o Securities laws do put some restrictions on distribution and transfer of shares, which

are particularly likely to constrain transfer of shares in closely-held corporations.o In closely-held corps, shareholders typically mging business; means they are careful

about who corp enters business with, and want to avoid added expense that can arise from req’d compliance w/ securities law if shares get publicly distributed.

Thus, common in closely-held corps to restrict transfer of shares in a way that is practically identical to restrictions on transfer of interests in a P/P.

D. Individual partners may bind the firm but a shareholder alone cannot obligate the body corporate.

o In a closely-held corp, shareholders are usually officers, and thus have authority delegated to them to bind corp in some capacities.

41

Must be careful not to clothe with ostensible authority for other actso Note also that in a closely-held corp there may be little difference b/w liability of

fellow partners for torts and vicarious liability of corp for torts E. A shareholder can contract with or sue a body corporate; a partner cannot sue or contract

with his firm.o Corporations are separate entities and can be K’d with or sued as such.

F. Facilities for a body corporate to secure additional capital are not possessed by a partnership.o i.e. shares and debentureso But really, a P/P can achieve similar function to shares. P/P gains funds by either

admitting new partners or having partners invest new sums. If desired, P/P could break up the investment interests into units and allocate rights (such as voting rights & rights to distributions) on a per-unit basis – making P/P units closely resemble shares.

o Debentures are simply evidence of debt, and can be sold by anyone, not just corporations.

o Plus, always have to comply w/ securities legislation when you want to sell shares or debentures, so they aren’t that great. (possibly this would also cover P/P interests.)

Corporate Personality and the Corporate Veil

The Legal Status of Corporations

Salomon v. A. Salomon & Company, Limited [1897, HL] A legally incorporated company has a separate legal personality from its shareholders, and

accordingly the shareholders are not personally liable for the liabilities, debts and obligations of the company.

Factso formed a corp and sold his business to the corp (for shares, debentures and credit to

be paid in cash as it came available). o In hard times, lent money to the corp and debentures were mortgaged to a third party

creditor, who put in a receiver when the corp defaulted. Both and 3rd party filed claims w/ liquidator to recoup their loans.

o Liquidator challenged claim on basis that: (i) debentures were fraudulently issued (i.e. issued to defeat the interests of

creditors) (ii) transfer of business was fraudulent and should be rescinded (iii) Mr. Salomon didn’t pay anything for the shares he rec’d (though he was

supposed to) and thus he owed £20,001 for the shareso TJ held corp was mere alias of , an undisclosed principal and thus he was personally

liable for debts or indemnification of corp.o CA held corp trustee for beneficiary, and thus entitled to indemnification from

Issue: Did corp owe repayment of his $? Held: Yes. The corp was a separate legal entity, distinct from Mr. Salomon, and as such he did

not owe any liability or indemnification.o Companies Act was fully complied with. Legitimate corp = separate from creditor.

Note that TJ opinion described a situation in which corporate veil may be lifted.

A Shareholder Can Hold Multiple Roles in Relation to a Corporation A shareholder can also be a creditor of a corp. [See Salomon]

42

o A shareholder who is a creditor can rank equally with other creditors for the amount of the debt, or even ahead of other creditors to the extent of any security held for the debt

An individual may be the sole shareholder, director, officer and employee of a corp at the same time. [Lee v. Lee’s Air Farming Ltd.]5

o The individual acts in a different capacity in each role, and as an employee has different, separate interests from the corp and from corp mgmt.

The Corporation Owns the Assets – Not the Shareholder A shareholder has no legal or equitable ownership of the corp’s assets. [Macaura v. Northern

Assurance Co. Ltd.]6

o Shareholder has a right to share in profits of the corp while it is carrying on business, and to share in the surplus when business is wound up and assets distributed.

o Shareholder has a K’ual claim against corp w/ respect to rights given in their shares, but does not have ownership of the assets of the company.

o A shareholder therefore has no insurable interest in the assets of corp. Shares are bundles of rights, and those rights don’t include ownership of corp’s assets

[Sparling v. Caisse de depot et Placement [1988, SCC)]

Kosmopolous v. Constitution Insurance [1987, SCC] The principle in Salomon should be respected; the corporate veil should not be lifted (i.e. the

separate legal personality of the corporation from its sole shareholder should not be disregarded) for the benefit of the shareholder.

o However, as a matter of insurance law, the sole shareholder of a company has an insurable interest in the assets of the company.

Wilson J.: “ The law on when a court may disregard this principle [separate legal personality of the company from its shareholders] by “lifting the corporate veil” and regarding the company as a mere “agent” or “puppet” of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the “separate entities” principle is not enforced when it would yield a result “too flagrantly opposed to justice, convenience or the interests of the Revenue”.

Note: Wilson J. was quoting from a textbook, LCB Gower, Modern Company Law. In BG Preeco, Seaton J.A. noted that the quotation goes on: “The most that can be said is that the courts’ policy is to lift the veil if they think that justice demands it and if they are not constrained by contrary binding authority. The results in individual cases may be commendable, but it smacks of palm-tree justice rather than the application of legal rules.”

Potential Problems: Limited liability and separate personality can lead to problems Shareholders may cause corp to become indebted to them when business is (or soon will be)

insolvent, and thus (at least partially) defeat interests of creditors/3rd party claimants by sharing in distribution of corp assets.

5 Lee v. Lee’s Air Farming Ltd. (1961, Eng.): Similar issue as in Thorne – except here is sole shareholder, sole director, president and sole employee of a corp. Lee died, wife sought compensation under workers’ comp leg, which was resisted on basis that ≠ an employee since employing himself. Held: employed by corp, not by himself. Corp is separate legal entity, which can employ a person. Didn’t matter that Lee was giving orders to himself – technically the corp giving orders to Lee through it’s agent, Lee.6 Macaura v. Northern Assurance Co. Ltd.: transferred timber interest to a corp. Personally signed all insurance Ks, then two wks later all timber destroyed by fire. Arbiter found insurance Ks invalid b/c didn’t have an insurable interest in the timber – it was corp’s. Held: Correct – corp has separate identity, and assets belong to corp not .

43

Company may make payouts to shareholders when it is insolvent – perhaps in the form of a return of capital, repurchase of shares, or distribution of dividend if all of these assets are distributed before assignment in bankruptcy, creditors may have little to claim.

Corp can enter Ks, and thus may K with some shareholders in a way that is unfavourable to other shareholders or creditors.

“Thin capitalization”: might set up corp w/ very little capital, thus defeating interests of creditors who act in reliance of some minimum amt of capital.

o May not be a concern for ppl who K w/ corp and can check on capitalization of company ahead of time, but it may defeat tort claimants and other third parties

3rd parties may be deceived into thinking they are dealing w/ an individual or p/p, when it is really a corp.

Might incorporate a company to avoid personal obligations/restrictions

Lifting the Corporate Veil “Equity will not allow a wrongdoer to use a company as a shield for improper conduct or

fraud” [Big Bend Hotel Ltd. v. Security Mutual Casualty Company (1980, BC)] Many arguments have been made in many different fact situations that the separate legal

personality of a corp should be disregarded, so that shareholder becomes liable to the creditors of the corp.

Statutory provisions specifically affirm the CL doctrine from Salomon and Kosmopolouso BCBCA s. 87(1) – no shareholder personally liable for debts, obligations, defaults or

acts of company.o CBCA 45 (1) – shareholders not liable for any liability, act or default of a corp (except

if it is to disgorge unlawful reduction of capital)

With a few exceptions, the courts have affirmed the Salomon principle

BG Preeco I. v. Bon Street Holdings Ltd. [1989, BCCA] Stands For:

o Strong affirmation of Salomon principle by BCCAo Rejection of US cases allowing lifting of veil to prevent unfairnesso Policy of limiting circumstances where corp veil may be lifted to decide cases

i.e. fraud or improper conduct cases limited to those where corp is used to effect a purpose or commit an act the shareholder couldn’t legally achieve himself (as in Gilford Motors).

o Group Enterprise theory does not extend to making other members of the corp group liable for breach of K of one member of the group.

o Note: corp directors held liable for fraud, but not liable in place of corp for breach of K Facts:

o agreed to sell property to a company, Bon Street Developments Ltd., but purchaser repudiated and offered lower amount.

o Purchaser told realtor they could repudiate because of a legal “angle” turned out the original company, BS Developments, with whom originally discussed agreement was a different corp than the one that entered into the K – and this new corp had no assets, and new corp had changed name to numbered name (at time of trial was BS Holdings Ltd., the ∆).

o ∆ individuals = directors and beneficial owners of shares in each company. Issue: Can the original BSD and individuals in charge be liable – for K? for fraud?

44

Held: Not liable for K – mistake of fact wasn’t as to identity of party making offer, but as to assets owned by company making offer. Liable for fraud – not lifting corporate veil, but imposing liability based on the fraud committed by the individuals and the company.

o Purpose of name change was to pass on the goodwill of the company by pretending new company was old one.

o Lifting corp veil doesn’t help the old company doesn’t own shares in the new one.

De Salaberry Realties [1974] Tax case Held: where there was a common intention of a group of companies, all controlled by the same

people, the common intention will be imputed to a member of the group; o However, the corporate veil was not lifted to impose the tax liability of one corporation

on other members of the group. Note that more recent tax cases tend to strongly affirm the separate identity of corporations

(see Stephen G. Meredith, below)

Westbank Property Management Ltd. v. BC [1991, BCSC] Tax case A corporation all of the shares of which are held by a status Indian (as defined in Indian Act) is

not exempt from tax under s. 87 of the Indian Act. Corporation itself isn’t an Indian, and shareholders are separate from corp.

Steven G. Meredith v. Her Majesty the Queen [2002, FCA] Current position of Federal Court of Appeal with respect to the corporate veil in tax cases. “Lifting the corporate veil is contrary to long-established principles of corporate law. Absent

an allegation that the corporation constitutes a "sham" or a vehicle for wrongdoing on the part of putative shareholders, or statutory authorization to do so, a court must respect the legal relationships created by a taxpayer.”

Closely held as well as widely held corporations are separate legal entities from their shareholders.

Facts: o Tax case. inc’d a company, and was refused an overseas employment tax credit

(OETC), which reduce tax liability of Canadians who work as employees of Canadian corps in foreign countries.

o Minister argued wasn’t an employee, but rather an independent contractor working for his own business.

o TCC found that didn’t distinguish b/w himself and corp, and that ≠ separate entities. Held: Separate entities. TCC should not have pierced corp veil.

o It was an error to disregard K’ual rel’ship b/w corp and US companies on basis that Ks were made to obtain ’s expertise. The fact that controlled corp and used it to carry on the business did not make the business = .

o Corp had K’d w/ US companies at arm’s length to provide the services. It was irrelevant that was sole shareholder and director – the legal rel’ships b/w , corp and US companies were bona fide and must be respected.

Exceptions: courts are willing to impose liability on controlling shareholder or otherwise disregard the corporate veil where: Agency, Alter Ego, Puppet, Instrumentality, Sham or Cloak

45

o In Salomon, TJ found unable to claim debentures and personally liable on basis that corporation was simply an agent of Salomon.

o The above terms are all variously used to refer to corporations acting as a shield for shareholders.

o See e.g. Gilford Motors v. Horne7

Disregard of Corporate Entity by the Shareholders or Directors Themselveso When piercing the corporate veil, courts also refer to failure of shareholders to maintain

the separate identity of the corp. o E.g. failure to keep separate books for corp., failure to maintain corp. records, hold

corp. meetings, make regular filings, etc. Conduct Akin to Fraud

o Courts sometimes pierce the corporate veil on the basis that the promoters of the corporation used the corporation to engage in “conduct akin to fraud”

o Used for fraud, or for purpose shareholder could not legally achieve personallyo See Gilford Motors v. Horne

Affiliated Enterpriseso Courts are apparently more willing to disregard corp. entity where the effect is to link a

parent company with its subsidiary, or to link a subsidiary with other subsidiaries through a parent corp.

i.e. court will look at the whole “corporate enterprise” or group of related corporations

o An exception to Salomon principle arises where subsidiary is simply an agent of the parent corp [Smith, Stone and Knight Ltd. v. Birmingham Corporation]8

o Factors to consider in linking companies w/in a corporate enterprise [Per Smith] (i) Were the profits treated as profits of the parent company? (ii) Were the persons conducting the business appointed by the parent

company? (iii) Was the parent company the head and brain of the trading venture? (iv) Did the parent company govern the trading venture, decide what should be

done and what capital should be embarked on the venture? (v) Did the parent company make profits by its skill and direction? (vi) Was the parent company in effectual and constant control?

o Considering these criteria in a vacuum is insufficient [Alberta Gas Ethylene Co. v. MNR]9

The six factors from Smith will often be satisfied in any parent-subsidiary rel’ship must also consider for what purpose and in what context the subsidiary is being ignored

7 Gilford Motors v. Horne: Company de facto ctrlled by ∆ was “the channel through which [he] carried on his business]” Company was formed as a device, a strategem in order to mask the carrying on of a business by ∆ in breach of K. Purpose was to enable him, under what is a cloak or sham, to engage in business contrary to his K’ual obligation.8 Smith, Stone and Knight Ltd. v. Birmingham Corp (1939, Eng. KB): City of Birmingham expropriated premises of subsidiary, and challenged right to compensation on basis that subsidiary = separate legal entity. Held: Subsidiary was simply an agent of the parent corp. Court disregarded separate corp identity.9 Alberta Gas Ethylene Co v. MNR: Corp wanted to finance from insurance companies in US at lower rate, so inc’d a subsidiary in Delaware. Took out loan through subsidiary, and CRA put withholding tax on corp’s interest payments back to subsidiary in Delaware. AGE tried to lift corp veil to show they were the same entity as their subsidiary. Held: separate entities.

46

o “Generally, a subsidiary, even a wholly owned subsidiary, will not be found to be the alter ego of its parent unless the subsidiary is under the complete control of the parent and is nothing more than a conduit used by the parent to avoid liability. The alter ego principle is applied to prevent conduct akin to fraud that would otherwise unjustly deprive claimants of their rights.” – Laskin JA in Gregorio v. Intrans-Corp

Requirement to Display Corporate Name CBCA s. 10

o (1) Name of Corporation – The word or expression “Limited”, “Limitée”, “Incorporated”, “Incorporée”, “Corporation”, or “Société par actions de régime federal” or the corresponding abbreviations…shall be part, other than only in a figurative or descriptive sense, of the name of every corporation, but a corporation may use and be legally designated by either the full or the corresponding abbreviated form

o (5) Publication of name – A corporation shall set out its name in legible characters in all contracts, invoices, negotiable instruments and orders for goods or services issued by or on behalf of the corporation.

o (6) Other name – Subject to subsections (5) and 12(1), a corporation may carry on business under or identify itself by a name other than its corporate name if that other name does not contain, other than only in a figurative or descriptive sense, either the word or expression “Limited”, “Limitée”, “Incorporated”, “Incorporée”, “Corporation”, or “Société par actions de régime federal” or the corresponding abbreviation.

BCBCAo S. 27 name display req’mtso S. 158 directors/officers can be personally liable for failure to comply w/ name-

display req’mtso S. 384 directors/officers of extra-provincial companies can be personally liable if

fail to comply w/ req’mts to display name.

H & D Hobby Distributing Ltd. v. Svatos (1998, ABQB) Facts: ∆ director of corp dealing w/ SP. ∆ had indicated he was acting in personal capacity,

rather than on behalf of corp. wasn’t paid. action against ∆ (b/c corp bankrupt), saying he wouldn’t have done business w/ ∆ if he knew he was acting on behalf of corp.

Held: ∆ personally liable Three factors considered in finding liability

o Failure to comply w/ AB equiv of 10(5)o The most important doc evidencing and ∆ w/ respect to purchase/payment didn’t

purport to be on behalf of the companyo ∆ had fraudulently preferred another creditor, to the prejudice of

Jurisdiction of Incorporation – Issues to Consider

The Choice Between the CBCA and BCBCA

Why the CBCA? Name protection

o Provincial registrar can’t refuse registration on basis of name similarity to existing co in province

No restriction on maintaining an action o This can be a concern re uncertainty w/ respect to “carrying on business”

47

Lawyers and shareholders in other provinces are familiar w/ CBCAo CBCA has been the model for statutes of incorporation in several provinces

Why the BCBCA? Lawyers here tend to be more familiar with it; It is easier to deal with Victoria than with Ottawa (one gets to know the Victoria people, and

there are only a few hours in a day when you can communicate with Ottawa); and It is cheaper (the CBCA has one more extra-provincial registration than incorporation in B.C.

does). BC allows cross-border and triangular amalgamations Residence and citizenship req’mts of directors are different (possibly lighter?) In BC shareholder votes, special majority is 75%, not 2/3 like CBCA.

Change of Jurisdiction of Incorporation See CBCA s. 187, s. 188, and s. 190(1)(d)

Reincorporation Switching to become incorporated under a different statute in another jurisdiction

o i.e changing the statute of incorporation Might start by incorporating a new corp under the destination statute, then have new corp issue

shares to the shareholders of the original corp in exchg for their shares of the original corp. thus, new jurisdiction corp will own all the shares of orig jurisdiction corp, which can then be wound up and its assets transferred to the new corp.

o Some other complexities surrounding creditors and customer Ks, of course.

Continuance A more convenient method of reincorporation The procedure for a continuance out of the CBCA (an “export” continuance) is as follows:

o (i) obtain a resolution from the shareholders permitting the continuance (CBCA s. 188(1), (5));

Continuance may result in significant changes to rights of shareholders under new inc’ing Act – req’ing approval can protect against adverse changes in their rights.

o (ii) obtain approval from the Director (CBCA s. 188(1));o (iii) register in the other jurisdiction making amendments to the incorporation

documents to make them conform to the requirements of the jurisdiction in which the company is being incorporated (note that one still has to satisfy the name requirements for registration).

Procedure for a continuance into the CBCA (an “import” continuance) is usually similar, since statute corp is shifting from will typically require permission of shareholders, and approval from registrar who administers that statute.

o Then the corp seeking to be continued under the CBCA would apply to the Director for a certificate of continuance (s. 187(1)) by sending the Director articles of continuance and a notice of the registered office and a notice of the directors of the corp. (s. 187(3)))

Import – Process for Continuing under CBCA: s. 187

48

187(1): body corporate applies to Director for certificate of continuance (if authorized by laws of jurisdiction in which incorporated)

187(2): at the time of the move, the corp can use its articles of continuance to amend its articles of incorporation, etc. w/o specifying that it is doing so

187(3): draft and send articles of continuance (Form 11), notice of office (19) and notice of directors (106) to Director

187(4): Director SHALL issue certificate of continuance (if all requirements met and fees paid) 187(5): Effect of certificate of continuance – foreign body corporate becomes CBCA corporation

o (a) body corporate becomes a corp to which CBCA applies as if it had been inc’d under CBCAo (b) articles of continuance are deemed to be articles of incorporation o (c) certificate of continuance treated like certificate of incorporation

187(6): Director SHALL send copy of cert of continuance as notice of continuance to official in orig juris

187(7)(a)-(e): rights preserved – can’t change ownership of corp property, or escape liability for any debts/causes of action, pending proceedings or convictions to be enforced by moving to another juris

187(8): nothing about SH changes either – shares are deemed to have been issued in compliance w/the Act; doesn’t relieve anyone of liabilities wrt shares, nor does it deprive anyone of their rights wrt shares

*now a CBCA corp, so have to register in former prov of incorp to carry on bus, and notify other juris of the change (BC BCA s.375-378)

Export – Continuing CBCA into Another Jurisdiction: s. 188 Fundamental change – special business, req’s special resolution. More onerous b/c it is a “fundamental change” – changing the statute and juris that

fundamentally governs the status and capacity of the corp 188(1): (a) as long as SH agree by spec res and (b) the change won’t adversely affect creditors

or SH, a CBCA corp can apply to official in another juris to be cont’d in that juris, unless prohib by (10)

188(3): notice of meeting must be provided to SH notice must be in compliance w/s.135(5) and (6) b/c this is spec bus, special notice provisions

apply (notice must provide sufficient info about the proposed resolution that the SH can form an opinion; text of the res; 190 rights of dissenting SH must be in the notice – failure re: dissent rights doesn’t invalidate the discontinuance)

188(4): ALL SH are entitled to vote re: continuance 188(5): application for continuance must be approved by special resolution (2/3rds maj) of SH;

by-laws or will set out quorum (or 139 –holders of maj of shares), special maj has to be of SH who attend and vote

188(6): can include a clause in the res allowing the directors to abandon the application w/o further approval

188(7): on receipt of notice satisfactory to Dir that the corp has been cont’d under the laws of another juris, the Dir SHALL file the notice and issue a cert of discontinuance

188(8): notice in (7) deemed to be arts 188(9): CBCA ceases to apply on date shown on cert of discont 188(10)(a) – (e): prohibits export unless rights are preserved **to leave the juris you must get SH approval by special majority

Pre-Incorporation Contracts

Background Promoters of companies often try to enter into Ks on behalf of proposed corps

o In order to secure a K before there is time for incorporationo To confirm the Ks before incurring the expense of incorporation

49

Typically promoter wouldn’t have any intention of personal liability Potentially problematic situations:

o Sometimes promoter is aware that company hasn’t been incorporated yet, but the person dealt with isn’t aware

o Sometimes neither promoter nor person dealt with is awareo In some cases the company is never actually incorporatedo Sometimes a company is incorporated and purports to ratify Ks entered into on its

behalf before incorporation Sometimes corp purporting to ratify K is insolvent

3rd party might be left to bear loss if promoter is relieved of personal liability and 3rd party’s claim is solely against insolvent corp

Issues typically arising:o Whether promoter can be personally liable on the Ko Whether corp can ratify K

Recall req’mts for ratification:o Since person who seeks to ratify must have been in existence/ascertainable at time of

formation, corps can’t ratify pre-incorporation Kso Also, corp itself wouldn’t have had the capacity to enter into Ks at the time the person

acted

The Common Law Position A company cannot ratify a K (or purported K) entered into on its behalf if the company wasn’t

in existence at the time that someone purported to enter into a K on its behalf [Kelner v. Baxter]10

o Note also the potential for promoters to be liable for Ks they purport to enter into on behalf of an as-yet unincorporated entity

Promoter can be liable on a pre-incorporation K, but only if it can be said that it was intended in the circumstances that the promoter be a party to the K. [Newborne v. Sensolid,11 Black v. Smallwood]12

o It was not clear from Kelner whether promoters would be automatically liable in these situations (“rule of law” approach) or whether promoters’ liability would depend on whether it was intended that promoter be a party to the K (“rule of construction”)

o Newborne and Black interpreted Kelner to go with the Rule of Construction approach If neither party knows that the corporations weren’t in existence at time K was made, then K is

a nullity. [Black v. Smallwood]

10 Kelner v. Baxter (1866, Common Pleas): and ∆ were promoters of a company. was to be mgr of hotel under new company, and before inc’n offered to sell a stock of wine to the new company, which offer was accepted by ∆ on company’s behalf. Directors ratified on Feb 1, then inc’d on Feb 20. Directors purported to ratify again on April 11, just before corp went bankrupt. Held: no valid ratification K invalid b/c company ≠ exist at time promoters purported to act on its behalf. Feb 1 couldn’t ratify b/c corp ≠ in existence. April 11 couldn’t ratify b/c didn’t have capacity at time K was entered into. 11 Newborne v. Sensolid (Great Britain) Ltd. (1953, Eng. CA): entered into K to supply tinned ham to ∆. Market price fell, and ∆ refused to take further deliveries from . K had been signed by Leopold Newborne underneath the company name. ≠ formally signed “on behalf of” the company, as in Kelner. Company hadn’t been inc’d at time of K – later inc’d and brought action agst ∆, which was dismissed on basis that ≠ inc’d at time of K, so individual brought action on basis that he was personally a party to K. Held???12 Black v. Smallwood and Cooper (1966, Aus HC): K for sale of land. Purchasers identified as company that was not yet incorporated (though neither party was aware of that). sought specific performance and sought to impose liability on ∆, but court held K was nullity b/c neither party knew corp wasn’t in existence.

50

Breach of warranty of authority: o Where agent is not personally liable, an action for breach of warranty of authority only

produces nominal damages when the company has no existence and no funds; any effective liability would have to be in deceit or negligence

o If you have an insolvent principal, breach of warranty of authority is valueless [Wickberg v. Shatsky]13

Statutes CBCA: 14(1)

A person who enters into, or purports to enter into a written K in the name of or on behalf of a corporation before it comes into existence is personally bound by the K and is entitled to its benefits*Starting point: promoter will be personally liable for written pre-inc’n K.

14(2) The corporation, within a reasonable time after it comes into existence, can adopt a K made before it came into existence by any action or conduct signifying intention to be bound, and on such adoption(a) corp becomes a party to the K, bound by its obligs and entitled to its benefits(b) promoter ceases to be bound to the K, or entitled to its benefits*Corp can adopt pre-inc’n Ks overrules CL pos’n;*Promoter no longer liable and ≠ entitled to benefits of K.*Corp is bound by K as if it was in existence and a party when K formed

14(3) Whether or not a pre-incorp K is adopted, a party may apply to court for an order deciding what the obligs and liabilities are btw the corp, the party and others*So promoter can’t escape pre-inc’n obligations by inc’ing company w/ no assets which then ratifies. just b/c corp adopted K doesn’t mean promoter is relieved of obligations.*If promoter rec’d some sort of deposit/benefit, likely req’d to return it.

14(4) If expressly provided In the written K, a person who purported to act on behalf corp before it came into existence is not in any even bound by the K or entitled to the benefits thereof*Can K out of personal liability must be express in written K (overrides ss. (3))

BCBCA: 20(1) Pre-incorporation contracts - In this section:

"facilitator" means a person referred to in subsection (2) who, before a company is incorporated, purports to enter into a contract in the name of or on behalf of the company;"new company" means a company incorporated after a pre-incorporation contract is entered into in the company's name or on the company's behalf;"pre-incorporation contract" means a purported contract referred to in subsection (2).

20(2) Promoter - Subject to subsections (4) (b) and (8), if, before a company is incorporated, a person purports to enter into a contract in the name of or on behalf of the company,

(a) the person is deemed to warrant to the other parties to the purported contract that the company will

(i) come into existence within a reasonable time, and

13 Wickberg v. Shatsky (1969, BCSC): hired as mgr, asked for written K which was provided on letterhead of company RD and signed by ∆. starts work and then told to stop using “Ltd.” on end of company name (which he doesn’t question). RD was never inc’d, and was actually employed by a different inc’d company owned by ∆. Business fails, dismissed in part b/c can’t pay him. brought action for unpaid wages against ∆ personally, relying on Kelner to seek personal liability, or seeking damages for breach of warranty of authority. Held: No intention on part of or ∆ that ∆ would be personally liable ( expected to be paid by the business though this is weak b/c didn’t know corp existed). ∆ liable for BWA (b/c he warranted that he had authority to act on behalf of company RD), but damages nominal: no causation b/w BWA and the loss even if RD had existed, and ∆ had authority, would still have lost his job (resulted from failure of business, now BWA); under BWA only entitled to recover agst agent that which you would recover from principal, but principal had no money so couldn’t have gotten anything.

51

(ii) adopt, under subsection (3), the purported contract within a reasonable time after the company comes into existence,

(b) the person is liable to the other parties to the purported contract for damages for any breach of that warranty, and(c) the measure of damages for that breach of warranty is the same as if

(i) the company existed when the purported contract was entered into, (ii) the person who entered into the purported contract in the name of or on behalf of the company had no authority to do so, and (iii) the company refused to ratify the purported contract.

*Distinct from s. 14 doesn’t say that promoter will be liable for K; just that he warrants certain things will happen w/in a reasonable time – so action is for BWA

20(3) Adoption - if, after a pre-incorporation contract is entered into, the company in the name of which or on behalf of which the pre-incorporation contract was purportedly entered into by the facilitator is incorporated, the new company may, within a reasonable time after its incorporation, adopt that pre-incorporation contract by any act or conduct signifying its intention to be bound by it. *Overrules CL, allowing new corp to adopt pre-inc’n K

20(4) On the adoption of a pre-incorporation contract under subsection (3),(a) the new company is bound by and is entitled to the benefits of the pre-incorporation contract as if the new company had been incorporated at the date of the pre-incorporation contract and had been a party to it, and(b) the facilitator ceases, except as provided in subsections (6) and (7), to be liable under subsection (2) in respect of the pre-incorporation contract.

*If company adopts & is bound, facilitator ceases to be bound by warranty20(5) If the new company does not adopt the pre-incorporation contract under subsection (3) within

a reasonable time after the new company is incorporated, the facilitator or any party to that pre-incorporation contract may apply to the court for an order directing the new company to restore to the applicant any benefit received by the new company under the pre-incorporation contract.*i.e. can seek any benefit that was conferred on company on assumption they would adopt K

20(6) Whether or not the new company adopts the pre-incorporation contract under subsection (3), the new company, the facilitator or any party to the pre-incorporation contract may apply to the court for an order

(a) setting the obligations of the new company and the facilitator under the pre-incorporation contract as joint or joint and several, or(b) apportioning liability between the new company and the facilitator.

20(7) On an application under subsection (6), the court may, subject to subsection (8), make any order it considers appropriate.*i.e.. discretionary order to do justice

20(8) A facilitator is not liable under subsection (2) in respect of the pre-incorporation contract if the parties to the pre-incorporation contract have, in writing, expressly so agreed.*if there’s an express agreement to that effect in the written K, facilitator won’t be liable (see Landmark)

Cases Applying Provisions Equivalent to CBCA s. 14 Note: CBCA s. 14 refers to “written contract” so oral Ks are just governed by CL

Landmark Inns v. Horeak [1982] Considering Sask equiv to s.14 Facts:

o ∆ signed on behalf of corp not yet in existence (signed as chairman and affixed seal), accepting offer to lease space in shopping centre owned by . Part of deal was doing renovations.

o ∆ repudiated the lease; accepted repudiation and found another tenant;

52

o brought action against ∆ for lost rent and cost of renovationso To avoid personal liability, ∆ incorporated the corp (but it doesn’t have any assets), and

had corp adopt the lease Held: ∆ liable.

o At the time the corp purported to adopt the lease, K had been repudiated by ∆, repudiation accepted by – no longer a living K that corp could adopt

o Can’t escape liability under 14(4) either – merely signing on behalf of the corp is not sufficient expression in the written K that promoter isn’t intended to be liable (has to be an actual statement)

Bank of Nova Scotia v. Williams [1976, ONHC] While court has authority under 14(3) to apportion liability, it will not exercise this where the

party was not misled as to the fact that they were K’ing with the corporation Facts

o and ∆ were promoters of company. took out second mortgage on home, loaned proceeds to company. Company then inc’d and gave promissory note, and later became insolvent.

o claimed against ∆, asking that court exercise its discretion under ON BCA to apportion liability b/w promoters and corp.

Held: could not recover. o wasn’t misled as to who she was K’ing with – corporation was solely liable, but

unfortunately insolvent.

Ultra Vires Acts of Certain Corporations Historically:

o (1) people dealing w/ corps are deemed to have knowledge of what’s in corporate records (Doctrine of Constructive Notice)

o (2) corps couldn’t K to do things that were outside the authority in their articles Now

o Doctrine of Constructive Notice has been abolished (CBCA s. 17)o 18(1) Corp can’t assert against someone dealing w/ them that the articles/bylaws etc.

haven’t been complied with, and thus that K is nullity o Indoor Mgmt Rule can rely on presumption that corp isn’t contravening articles.

Unless (per 18(2)), person ought to have knowledge by virtue of role/rel’ship. Can always still prove that party had actual knowledge – only a presumption.

o 16(3): If a corp does sthg contrary to the Act/articles, the transaction isn’t invalid merely because of the non-compliance.

CBCA sections 15-18, 116; BC BCA sections 30, 32, 33, 143, 146, 421

Communities Economic Development Fund v. Canadian Pickles Corp. [1991, SCC] Exception to 16(3) for corps created statutorily (i.e. for a public purpose), old rule still

applies despite 16(3), such that an ultra vires transaction is presumed invalid. Facts

o Fund incorp’d in Manitoba, restricted to financing econ devt for projects in remote and isolated communities

o Fund loaned $150k to CPo Director of CP personally agrees to repay loano CP goes bankrupt and doesn’t repay

53

o Fund looked to Director to repay – he argued that loan is void and guarantee can’t be enforced b/c it was outside the mandate of the fund (CP was not in a remote or isolated community)

Held: K null and voido Act under which company incorporated only authorized loans to businesses in remote

and isolated communities Since this req’mt ≠ fulfilled, ∆ acted ultra vires. o Loan a nullity, therefore guarantee ≠ enforceableo Distinction b/w CL and Chartered corps:

CL: all pwrs of natural person, indoor mgmt rule applies Statutory: created for public purpose, can’t act outside their legal framework

A company created for a specific purpose by an Act of a legislature ought not to have the power to do things not in furtherance of that purpose.

Shares and Shareholders Like SPs and P/Ps, corps have debt and equity finance

o Equity investors of corps hold shareso Debt finance can be trade credit or bank loanso Some corps also borrow funds through distrib of debentures to broader group of lenders

The Nature of Shares and the Share Register A share is not a property right in the assets of a corp doesn’t represent a proportionate

ownership interest in corp itself. It is a bundle of rights (and to some degree may involve obligations – Sopinka J in Sparling v. Caisse de Dépôt et Placement [1988, SCC].

o There can be virtually infinite bundles of rights Certificates

o S. 49(1): each shareholder is entitled to a share certificate or a written acknowledgement of a right to a certificate.

Not the share itself – just a representation. o 49(13): certificate must either show on its face the rights, restrictions and conditions on

the share or a statement of the right of the shareholders to have a copy of the rights, privileges, restrictions and conditions of the share provided to them on request.

Shareholder registero S. 50: corp must maintain a register with the names and addresses of shareholders, the

number of shares held by each, and the date/particulars of the issue/transfer of each share.

For our purposes, 50(1) req’s a share register, showing who earns, when transferred etc.

o S. 20: register must be kept at registered office of corp or a separate records office of the corp.

Issuing and Paying for Shares Directors’ powers

o The power of directors to issue shares cannot be delegated to officers etc. s. 121: can’t delegate powers excluded in 115(3) s. 115(3)(c): power to issue securities so can’t delegate.

o Directors can’t issue more shares than are authorized in the articleso Directors may have to approve any transfer of shares can thus keep ctrl of corp

S. 6(1)(c) – authorized capital

54

o 6(1)(c): articles set out classes of shares, and may set out maximum number of shares that corp can issue

o Often will require 2/3 majority to amend articles to raise limit of authorized shares Subscriptions for shares

o People can apply to purchase shares. This application is referred to as a subscription normally an offer to buy shares which can be accepted by corp

o Sometimes subscriptions to purchase shares are made before a company is incorporated.

This is normally treated as an offer, which corp can’t accept until incorporation.

Thus, offeror can withdraw offer before acceptance, and corp is never bound to accept. [See Re Canadian Tractor Co (1914, SKSC)]

Pre-inc’n subscription issue has also been dealt with by: (i) treating subscription as a continuing offer, or (ii) regarding shareholder’s conduct after inc’n as constituting new offer CBCA s. 14 might also address these subscriptions in some cases.

o Directors will decide which subscriptions to accept and thus to whom the shares will be issued. This process is described as “allotment”

Consideration for an issue of shareso CBCA s. 25 gives the terms on which new shares can be issued

(1) Directors can issue shares for whatever consideration they determine (SABUS)

Can be money, property or past services BoD passes resolutions to authorize issuance of shares, and then

allocates who they will be issued to. (2) Shares aren’t assessable

Can’t seek further funding from shareholder later. Only liable for the amount they paid for their share.

(3) Shares can’t be issued until consideration is obtained (4) Directors may be issued shares in consideration of time/energy put into

corp, or a consultant may be issued shares in consideration for advising before corp was inc’d etc.

Value of services might be purchased in exchange for shares But note (2)

(5) A promissory note or promise to pay does not constitute property for which shares may be issued.

o The “Watered Stock” Problem Important to be careful in valuing property exchanged for shares must be

equivalent, otherwise shares aren’t worth their declared value, and misleading creditors as to value of corp.

Directors may choose not to allow corp to issue share to someone who hasn’t paid full value.

S. 118(1): if directors don’t receive full value when they sell shares, can be fully liable (J&S) for the value they didn’t receive.

S. 251: Directors may also be subject to penal sanctions for breaching provision of the Act

But see 118(6): directors can defend on basis that they didn’t know and couldn’t reasonably be expected to know that share was issued for insufficient consideration

55

S. 118(4): may still have action against shareholders who contributed money, property or services for an amount less than recorded price of shares.

Creditors may also be able to make such a claim in an oppression application

Non-reliance defence Corp could defend on basis that creditor didn’t rely on the

misrepresentation in the balance sheet. CBCA does not expressly provide for such a defence, and it’s unclear

whether courts would entertain a non-reliance claim in an action by creditors against directors or shareholders.

Share Rights and Restrictions S. 24(3): Three main rights that must appear somewhere

o (i) the right to vote on company matters requiring shareholder voting (especially voting for the directors of the company);

o (ii) the right to receive dividends when declared by the board of directors; and o (iii) on dissolution of the corporation, the right to receive the property of the

corporation remaining after creditors and any other persons with claims against the corporation are paid off.

o NB: Where just one class of shares exists, it will have to have all three rights, and shareholders’ rights are equal in all respects.

Classes of Shareso Different types of bundles of rights created by a corpo CBCA allows for different classes of shares with different rights/restrictions

See s. 6(1)(c)(i); 24(4): Where more than one class of shares exists for a corp, rights/restrictions must be set out in the articles.

Presumption of equality of shareso Differences b/w classes or series of shares is allowed

24(4): articles may provide for more than one class of shares, and if they do must set out rights, privileges, restrictions and conditions attached to shares of each class.

o To be a validly separate class, there must be a distinction in some right between that class and other classes [R. v. McClurg]14

Rights don’t have to be available solely to that class two classes can have the same right, there just has to be some distinction between all of the rights available to the two classes.

o International Power: if nothing stated, presumption that rights on winding up are equal.

Preferred Shares Common shares: shares that just have the 3 rights req’d by s. 24(3) Preferred shares have a preference with respect to some right – usually receiving dividends

and/or receiving a share of the proceeds on liquidation. o The right available to the preferred shareholder is given out before anything goes to

common shareholders E.g. preference w/ respect to dividends means pref shares get a specified

amount of dividend per share before any dividends are paid on common shares. Normal rule: shares are presumed to have equal rights unless articles clearly specify otherwise

14 R. v. McClurg (1990, SCC): Dickson J held that discretionary dividend clause sufficiently differentiated rights b/w two classes.

56

Typical Preferred Share Features Cumulative vs. Non-Cumulative

o Any dividend that is unpaid in a given year accumulates and is to be paid in a subsequent year.

Example: if preferred shares have a cumulative right to $5 dividend before any dividends can be paid on the common shares, and in year 1 no dividend is declared, then in year 2 the unpaid $5 dividend stacks, meaning preferred shares would be entitled to $10/share before any $ goes to common shares.

o There is a presumption that preferred dividend right is cumulative (Webb v. Earle, 1875)

o Non-cumulative preferred shares are not very common. Usually if they do appear, it’s in a situation where preferred shareholder has

significant voting rights to allow him to put in directors who are more likely to declare a dividend. Most likely to find this situation in a closely-held company.

o When shares are entitled on dissolution to a “priority as to dividends and capital”, presumption that shares are entitled to arrearages of dividends on a dissolution.

If the entitlement on liquidation is only “priority as to capital”, then (and only then) the presumption is that there is no entitlement as to arrearages.

Participating vs. Non-Participatingo Participation right allows preferred shareholder to participate in distribution of

dividends beyond the preferred dividend right E.g. in example above, if preferred shares were given a participation right,

could get more $ after the initial distribution of $5/share to preferred share. (i.e. add’l amt would be shared b/w common shareholders and preferred shareholders, according to participation rights provided)

o International Power v. McMaster: if ≠ specified that preferred shares are participating, they are presumed to be non-participating

See also Will v. United Lankat Plantations, Co (1914, HL), and Re Canadian Pacific Ltd. (1990, ABCA)

Convertible vs. Non-Convertibleo Pref shares may have a conversion right allows shares to be converted into common

shares at predetermined conversion ratio i.e. the pref shareholder can surrender a predetermined number of pref shares

for a predetermined number of common shares Retractable vs. Non-Retractable

o Retraction right allows shareholder to sell shares back to company at predetermined price

Redeemable vs. Non-Redeemable o Company may reserve the right to buy back preferred shares at predetermined price

This allows the corp to refinance at a future time at a predetermined price for repurchase of shares

o Also referred to as a “call” provision Predetermined price is usually set at a premium to the price for which the

shares were issued (a “call premium”)

Voting Rights A share may entitle the holder to vote at shareholder meetings Usually common shares get the voting rights – balancing risk with reward. S. 140(1): presumption of one share one vote (unless articles provide otherwise)

57

Jacobsen v. United Canso Oil & Gas Ltd. [1980, ABQB] Can’t give different voting rights to shares of the same class. Facts:

o Pre-CBCA federally inc’d companyo part of shareholders committee unhappy w/ board and officers, trying to gain ctrlo Corp has only one class of shares, and there is a provision in the articles saying no

shareholder may have more than 1000 votes, no matter how many shares they hold When corp was continued under CBCA, rule was brought fwd.

o So limited to 1000 votes despite having ~100,000 shares. Issue: Limiting of votes permissible under CBCA? Held: Not permissible. All shares of same class must have same number of votes. Reasons

o Invalid under old federal law, b/c differentiated b/w shareholders giving more votes depending on who held a share.

Continuing under CBCA doesn’t per se validate an invalid ruleo Under CBCA, can only attach different rights to different shares where more than one

class exists o BUT: because of the protection of 16(3), not automatically invalid.

16(3) No act of a corporation…is invalid by reason only that the act or transfer is contrary to its articles or this Act.

So there is an argument that actions previously taken under that rule are valid, though no longer allowed after this point.

would then have to go to s. 247 to say the provision is invalid b/c of conflict w/ Act and seek a compliance order to amend it.

Note: o By the time this judgement came down, ruling cabal had moved the corp to NS, where

court refused to decide whether the 1000-vote rule contravened Act. Held court shouldn’t interfere in absence of fraud, illegality or oppression No injunctive relief w/o serious harm

o 1000-vote rule was then approved by 2/3 majority on a one-share one-vote basis.o But at the next annual meeting, group won and made it into power anyway.

Bowater Canadian Ltd. v. R. L. Crain Inc. & Craisec Ltd. (1987, ON) Facts

o Special common shares: 10 votes/share while held by person to whom they were originally issued, but if transferred to new owner reverted to 1 vote/share.

o Craisec = original holder of shares purchased from them by . Holding the shares gave Craisec effective control of Crain.

knew about the step-down provision possibly bought them intending to challenge it.

Issue: Step-down provision valid? Held: Invalid but severable. Every share of class must have same rights

o Severable: means that even though transferred, shares retain their ten votes each.o Applied 24(3) and (4)

Dividends CBCA s. 43 expressly allows for cash, specie and stock dividends

o Dividends are usually paid in casho If paid in other forms of property, they are referred to as dividends in specie

58

Use of inventory for dividends is extremely rare, but might distribute shares owned in another company, for example.

o Stock dividends: more shares in same company Subject to a unanimous shareholder agreement, payment of dividends is a power of directors

(because it isn’t specifically allocated and thus falls under the residual mgmt power per s. 102)o Also recall s. 115(3)(d) & 121(a): directors can’t delegate power to declare dividends

Directors are not obligated to declare dividendso It’s a mgmt decision – directors declare if/when they think it is appropriate. o Must act in best interests of corp, and not in a way that is oppressive to one or more

shareholderso In rare cases, directors may be under obligation to pay dividends. [See Dodge v. Ford

Motor Co.15 and Fergusson v. Imax16] Dividends become debt of company when declared Dividends can only be paid out of profits S. 42: dividends can’t be paid if payment would leave company insolvent

o S. 118(2)(c): Directors may be liable if this happens. (but could use defence of reasonable diligence under s. 123(4)

Thus, before declaring dividend, will want to get a report from auditor or audit committee, to ensure corp is in pos’n to pay dividend w/o putting at risk

S. 45(1) indicates that shareholders may be liable to pay back the illegal dividend amount, per s. 118(4) and (5)

Stated Capital S. 26

o (1) Stated Capital Account – A corp shall maintain a separate stated capital account for each class and series of shares it issues.

o (2) Entries in Stated Capital Account – A corp shall add to the appropriate stated capital account the full amount of any consideration it receives for any shares it issues.

Stated capital account contains total amount for which shares of class/series have been issued.

Stated capital isn’t cash – it’s bookkeeping. o So the amount of stated capital doesn’t fluctuate w/ changes in the value of the assets.

Just a historical record of the amount of funds raised by the sale of shares. o Can’t rely on statement of share capital forever this is just the capital contributed

when shares were issued. If corp is losing money, then its stated capital will change Problem with the idea of minimum stated capital

Some countries require certain minimums, either in capital, number of shareholders etc. (see Salomon re 7 shareholder req’mt to incorporate)

Because of fluctuations, many jurisdictions have abandoned the minimum capital req’mts.

Accounting for changes in stated capital

15 Dodge v. Ford Motor Co. (1919, Michigan SC): Henry Ford refused to declare a dividend so company could use funds for plant expansion, but since his stated purpose wasn’t earning profits for company (but rather greater benefit of society), he was found to be in breach of his duty to act in best interests of company - i.e. by seeking profit.16 Fergusson v. Imax: Mr. Fergusson was a director and divorcing from Mrs. Fergusson, who held shares with a dividend right. Mr. F. convinced directors not to give dividend, and tried to restructure shares such that she couldn’t sell or do anything, but Mrs. F and other shareholders of her class got a court to make an order preventing him from restructuring (oppression remedy)

59

o Stated capital doesn’t usually changeo If you make a reduction (per CBCA 34, 36, 38), or if you issue a new class of shareso The value of the shares isn’t the same as the stated capital fair market value of share

will fluctuate, but a corporation’s stated capital is calculated from the (market) value of all shares at the time they were issued

If issue new class of shares, their value on issuance is added to the stated capital (and they’re issued at current market value)

o Stated capital has tax implications for individual shareholderso Stated capital recognizes what capital has been contributed to the equity of the corp

the value of each share when it was purchasedo Stated capital will average the sale price of all shares

Shareholder approval of reduction in stated capital:o May be a return of capital, e.g., which is a significant change that must be approved by

special resolution of the shareholders (CBCA s. 38(1))o S. 38(3): a return of capital cannot be made unless:

(i) the corporation is, or after the reduction would be, unable to pay its liabilities as they become due; or

(ii) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities.

Redemption s. 34: Repurchase

o (1) Subject to (2) and to articles, a corp may purchase or otherwise acquire shares issued by it.

o (2) Limitation – A corp can’t may any payment to acquire shares issued by it if there are reasonable grounds for believing that

(a) the corp is or would after payment be, unable to pay its liabilities as they come due

(b) less than aggregate of liabilities and stated capital of all classes

60

s. 30(1) – corp can’t own shares in itself. s. 36

o (1) Redemption of shares – Notwithstanding s. 34(2) or 35(3), but subj to (2) and articles, a corp may purchase or redeem any redeemable shares issued by it at prices not exceeding the redemption price thereof stated in the articles or calculated according to a formula in the articles

o (2) Limitation – A corp can’t purchase/redeem redeemable shares issued by it if there are reasonable grounds for believing that

(a) corp is or would after payment be unable to pay its liabilities as they become due, or

(b) realizable value of corp’s assets would after payment be less than aggregate of

(i) liabilities, and (ii) amount that would be req’d to pay the holders of shares that have a

right to be paid, on a redemption or in a liquidation, rateably with or before the holders of the shares to be purchased or redeemed, to the extent that the amount has not been included in its liabilities.

For contravening (2) in either of the above, directors can be J&S liable under s. 118(2)(a)o But if found liable can apply under 118(4) to make shareholders pay backo Per s. 118(5) court may order shareholders to pay back extra money, and corp return

shares.

Rights on Liquidation/Winding Up These rights must be attached to at least one class of shares. Dissolution is end point – when corp struck from register and ceases to exist

o On the way to dissolution: winding up or liquidation All creditors are paid, then leftover (surplus) assets are distributed to shareholders according to

rights attached to their shares Voluntary dissolution – s. 211 Involuntary:

o s. 212(1) Dissolution by Director, Where corp has failed to comply w/ certain sections of the Act E.g. failed to hold mtgs for 3 yrs etc.

o s. 213 court-ordered involuntary dissolution Perhaps a small family company and a divorce happens, or someone dies and

no one wants to work with the person’s replacement, etc.o S. 214: shareholder remedy where there has been oppressive conduct toward one group

of shareholders/one person w/ interest in corp court may find it most equitable to just wind up the corp.

On winding up, surplus gets distributed

Westfair Foods v. Watt [1984] Facts

o corp had dispute with some of its shareholders. o Class A shares get $2/share max preferred dividend and share of wind up. Class B

shares have unlimited share in surplus dividends and share of wind up. o decided to give its entire annual profit in dividends, which capped the retained

surplus at its level at the time of the decision.

61

o This policy favoured Class B (the common shareholders), who rec’d immediate benefit and left less for pref shareholders who had greater stake in liquidated assets of corp.

If every year all profits are paid out, A gets $2, B gets all the rest. Class A shares expected to go up every year b/c corp is so profitable, but since

100% of profits go out, surplus ≠ grow. Basically, Class B getting all the future surplus

Issue: Class A sought wind up of corp on basis of oppression. Held: Not sufficient oppression to order wind-up. Between preferred and common

shareholders, it is not unreasonable that common shareholders take all unneeded earnings as dividends after the preferred dividend is paid. Court ordered that Class A shares be bought out by corp at FMV

o Expectation of right to equal share of the surplus at wind-up, but no expectation of corp maintaining a particular surplus.

o Making a decision to distribute all profit was within pwr of directors, and ≠ oppression of Class A shareholders in failure to maintain a nice surplus for them to have at the end.

Corporations: Corporate Governance

Provisions of CBCA that permit less formal decision-making There are many provisions of the CBCA that only apply to corps other than distributing corps –

either specifically or effectively. 132(2) – place of shareholders meeting 136 – Waiver of notice of shareholders meeting 139(4) – single shareholder meeting; 142(1) – unanimous written resolution in lieu of meeting 163(3) – shareholders may unanimously dispense with auditor 102(2) – can have a single director; distributing corporation must have at least 3 117(1) – unanimous written resolution in lieu of directors’ meeting 114(6) – waiver of notice of directors’ meeting 114(8) – single director meeting 146 – unanimous shareholder agreements

Directors and Officers: General Structure

The Role of Directors: CBCA s. 102: the directors shall manage, or supervise the management of, the business and

affairs of the corporation. S. 121: directors also normally have power to appoint officers and delegate powers to them.

o Officer typically conduct day-to-day management of the corp. Election of directors is the primary method by which shareholders can exercise control over the

management of the corporation.

Qualification/Requirements for Directors CBCA s. 105(1): Directors must be

o (i) natural persons i.e. individuals, not corporations

o (ii) over 18 years of ageo (iii) not adjudicated mental incompetents or bankrupts

62

See CBCA s. 118 & 119 limitations on directors re ≠ bankruptcy req’mt Share qualification:

o Previously it was common to require that a person own shares of corp to be a director. Known as “director’s qualifying share”

No longer imposed under most Canadian statutes – no real point anymore. Presumably the goal was to align interests with those of the corp to cause

directors to act in interests of shareholders, but req’mt was nominal and likely didn’t serve intended purpose. (plus we have statutory req’mts instead)

o CBCA s. 105(2): director need not have qualifying share. (But does allow articles to provide for share qualification.)

S. 102(2) – Number of directors o Private corps must have at least 1 directoro Distributing corps (i.e. those that have publicly distributed their shares) must have at

least 3. At least two must be ≠ officers or affiliates (e.g. employees)

o No legislated maximum number of directors, though articles can provide for fixed # or set out min/max as desired

Residency requirementso S. 105(3): at least 25% of directors must be “resident Canadians”, and where corps

have <4 directors at least 1 must be resident Canadian.o S. 2(1) defines “resident Canadian” as including citizens of Canada ordinarily resident

in Canada; landed immigrants, except those eligible for Canadian citizenship who have chosen not to apply for it; and certain citizens of Canada ordinarily resident abroad. (see Reg. 13)

o S. 2(1) defines “director”: a “person occupying the position of director by whatever name called”

Thus, if responsibilities are transferred to someone else who is a non-resident (e.g. under a unanimous shareholder agreement under s. 146(2)), then this person would be a de facto director, potentially causing problems.

BCBCA s. 124(1) and (2) qualifications of directors

Election, Removal and Replacement of Directors

First Directors s. 106(1): to form a corp, must send Director a notice of the first directors of the corporation s. 106(2): these first directors will hold office until first annual meeting s. 133(1):

o (a) first meeting must be held w/in 18 mths of inc’no (b) thereafter, must have an annual mtg w/in 15 mths of previous mtg, and no more

than 6 months after financial year end. 133(2): directors can call special meetings at any time

Subsequent Election s. 106(3): directors are elected by an “ordinary resolution” of the shareholders

o s. 2(1) defines “ordinary resolution” as a resolution passed by a simple majority of the votes cast by shareholders who voted on the resolution

S. 106 ≠ default provision (not described as being subject to the articles, by-laws or a unanimous shareholder agreement) can’t be waived/altered.

106(9): must be present and not have refused to be elected

63

Term of Office S. 106(3) and (5): term begins at time of annual mtg when elected, and ends at next annual mtg

or articles can provide for a term of up to three years. Annual meetings can be spaced out by 15 months.

S. 106(6): if shareholders fail to elect directors at a mtg where directors should be elected, the incumbent directors remain in office until successors are chosen

S. 106(4): articles can provide that not all directors have to be elected at same mtg can stagger elections such that 1/3 of directors elected each year, rotating every three years.

S. 145: a corp, shareholder or director may apply to court to resolve any controversy re the election/appointment of a director

o Court may make “any order it thinks fit”, including restraining the person whose election/appointment is disputed from serving and ordering a new election subject to judicial supervision.

Ceasing to Hold Office s. 108

o Director ceases to hold office if he dies, resigns, becomes disqualified or is removed from office by resolution of the shareholders

o (2) directors resign by written notice – must be sent to corporation; can’t be retroactive

Removal of Directors s. 109(1) and (2)

o Shareholders can always remove a director before his/her term is up by ordinary resolution at a shareholder meeting (special)

S. 6(4): removing a director doesn’t require a special majority always a simple majorityo This is the only matter for which the articles of a CBCA corp cannot provide a greater

majority than that req’d in the Act.o 6(3) allows corps to require special majorities for some matters, but (4) says the articles

may not require a greater number of votes to remove a director than the number req’d in the Act.

Can find ways around this majority requirement, though See [Bushel v. Faith]17

Removal of Officers Long Term Contracts Directors may remove officers, but must be careful of long term Ks because may have action

for wrongful dismissal There is a trade-off between ability to replace mgmt and job security

o Long term mgmt Ks can benefit corp by encouraging more contribution of “human capital” if you pay someone well, give job security, then they will be more committed/do better work

o But it then becomes difficult/expensive to replace mgmt.o Courts have a tendency to uphold long term employment Ks

Golden Parachutes and Tin Parachutes

17 Bushel v. Faith: On resolutions to remove a director, the directors’ shares had more votes/share than others’ did. Held: Parliament didn’t intend to prevent the assignment of more than one vote per share in special situations. Note: problem of inequality within a class of shares, but easily solved by making a separate class. Note: this might not be allowed now. Probably not under CBCA, not sure about BCBCA.

64

Significant damages awards for wrongful dismissal of officers may deter incumbent mgmt from attempting to block a takeover that might be beneficial to corp’s investors

Golden parachute : a liquidated damages term in an em’ment K for corp execs, giving them extremely lucrative compensation on dismissal.

o Struck down in several cases in the US, and have been replaced with slightly less lucrative Ks that have been upheld, which have been dubbed “tin parachutes”

Parachute provisions reduce incentive to resist takeovers, which allows mgmt to be replaced when performing poorly

Of course, if the parachutes are excessive, this could deter takeover attempts b/c buyers won’t want to pay out.

Filling Vacancies S. 111(1): directors have power to fill vacancies on the board

o But may not fill a vacancy that results from failure of shareholders to elect the number/minimum number of directors req’d by articles

o Quorum of directors needed to fill vacancy per s. 114(2), quorum is a majority of the directors req’d by the articles (SABUS)

Recall s. 109: shareholders can remove a director by ordinary resolutiono (3): a vacancy that results from the removal of a director may be filled at the same

shareholders’ mtg that approved the removal Directors may fill the vacancy, but only if the shareholders don’t do so.

o (4): if all directors have resigned/been removed and aren’t replaced, then a person who manages or supervises mgmt of business/affairs of corp is deemed to be a director.

This can complicate things pretty badly, causing ppl to owe all kinds of duties they don’t expect

o (5) exception to (4): lawyers, other professionals who participate in mgmt, officers who manage under direction or control of a shareholder/other person – don’t become liable as directors simply by this rule.

Authority and Powers of Directors s. 110(1) entitles directors to notice of and attendance at shareholder meetings. s. 102: directors have authority to manage corp

o broad power residual authority catching anything not otherwise allocated. S. 115(3) highlights some powers for which directors’ ability to delegate is restricted (i.e these

must be under power of directors)o (i) submission to the shareholders of any question or matter requiring the approval of

the shareholders; o (ii) declaration of dividends; o (iii) purchase, redemption or other acquisition of shares issued by the corporation; o (iv) approval of a management proxy circular; o (v) approval of a takeover bid by the corporation or a directors’ circular (prepared in

connection with a bid to takeover the corporation);o (vi) approval of any financial statement put before the shareholders.

s. 103: Directors have the power to adopt, amend or repeal bylaws (SAB)o Any change must be put before shareholders at next annual mtgo Changes to bylaws made by directors are effective until the next annual shareholder

meeting, and thereafter only if approved/approved as amended. S. 189(1): Directors have power to borrow (SAB)

o May delegate borrowing power to a director, committee of directors, or an officer.

65

S. 25 Directors have power to issue shareso S. 27: directors may also have power to issue shares in series (if in articles)

S. 106(8): if articles so provide, directors may appoint one or more additional directorso New directors are limited to 1/3 of directors elected at previous annual shareholder

meeting. Recall s. 111 and 109(3) power to fill vacancies on BoD if ≠ filled by shareholders S. 166(1) Directors can replace an auditor if resigned during the year-term.

o Normally an auditor is appointed by shareholders at annual mtg. If resigns between mtgs, can replace (SAB per 166(3))

S. 133: Directors can call annual or special mtgs of shareholderso Shareholders may requisition a mtg in certain circumstances, but primarily directors’

powero Send out notice of mtg and thus determine agenda.

S. 121: directors designate offices of corp, appoint officers and delegate powers (SAB)o As fiduciaries, directors might otherwise be precluded from delegation

S. 125: Directors determine remuneration for directors, officers & employees (SAB)

Directors’ Meetings May discuss proposals by directors/officers

o Often senior officers are also directors – very common for CEO to also be a director Even if not, officers are often invited to attend/report to BoD

o Want directors who aren’t officers/employees to get reports from officers S. 115 empowers directors to delegate to either a managing director or a committee of directors

or officers.o To appoint from mging directors, must be Canadian resident

110(1) Attendance at meeting: director is entitled to receive notice of and to attend and be heard at every meeting of SH

114(1)

114(2)

114(3)

114(4)

114(5)

114(6)

Place – Unless articles or by-laws otherwise provide, the directors may meet at any place and on such notice as the by-laws require

Quorum – Subj to articles or by-laws, quorum = a majority of the # of directors, or min # of directors required by the articles (quorum may exercise all the powers of the directors)

Canadian directors present at meetings – directors, other than directors of a corp referred to in s. 105(4), shall not transact business at a mtg of directors unless,

(a) If the corp is subj to 105(3), at least 25% of the directors present must be resident Canadians, or, if the corp has less than 4 directors, at least one of the directors present is a resident Canadian.

*But shareholders can approve/alter this req’mt.

Despite ss. (3), directors may transact business at a meeting of directors where the # of resident Canadian directors req’d under that subsection is not present if,

(a) A resident Canadian director who is unable to be present approves in writing, or attends by telephone, electronic or other communication facility, the bus transacted at the meeting; and

(b) The required # of resident Canadians directors would have been present had the director been present at the meeting

Notice of meeting - A notice of a meeting of directors shall specify any matters referred to in s. 115(3) that is to be dealt with at the meeting but, unless the by-laws otherwise provide, need not specify the purpose of or the bus to be transacted at the meeting.

Waiver of notice - A directors may in any manner waive a notice of a meeting of directors; and attendance

66

114(7)

114(8)

114(9)

of a directors at a meeting of directors is a waiver of notice of the meeting, except where a directors attends a meeting for the express purpose of objecting to the transaction of any bus on the grounds that the meeting is not lawfully called

Adjournment – notice of an adjourned meeting of directors is not req’d to be given if the time and place of the adjourned meeting is announced at the original meeting.

One director meeting – where a corp only has one director, that director may constitute the meeting

Participation – subj to the by-laws, a director may, in accordance with the regs, if any, and if all the directors of the corp consent, participate in a meeting of directors or of a committee of directors by means of a telephonic, electronic or other communication facility that permits all participants to communicate adequately with each other during the meeting. A director participating in such a meeting by such means is deemed for the purposes of this Act to be present at that meeting.

116 Validity of acts of directors and officers - An act of a director or officer is valid, notwithstanding an irregularity in their election or appointment, or defect in their qualification

117(1)

117(2)

117(3)

Resolution in lieu of meeting – A resolution in writing, signed by all the directors entitled to vote on that resolution at a meeting of directors or committee of directors, is as valid as if it had been passed at a meeting of directors or committee of directors

Filing resolution – a copy of every resolution referred to in ss.(1) shall be kept w/the minutes of the proceedings of the directors or committee of directors

Evidence – unless a ballot is demanded, an entry in the minutes of a meeting to the effect that the chairperson of the meeting declared a resolution to be carried or defeated is, in the absence of evid to the contrary, proof of the fact w/o proof of the # or proportion of the votes recorded in favour of or against the resolution

123(1) Dissenting – a director who is present at a meeting of directors or committee of directors is deemed to have consented to any resolution passed or action taken at the meeting unless

(a) the director requests a dissent to be entered in the minutes of the meeting, or the dissent has been entered in the minutes;

(b) the director sends a written dissent to the secretary of the meeting before the meeting is adjourned; or

(c) the director sends a dissent by registered mail or delivers it to the registered office of the corp immediately after the meeting is adjourned

123(2) Loss of right to dissent – a director who votes for or consents to a resolution is not entitled to dissent under ss. (1)

123(3) Dissent of absent director – director who is not present at a meeting is deemed to have consented to resolutions or actions taken unless within 7 days after becoming aware of the resolution, the director

(a) causes a dissent to be placed w/the minutes of the meeting; or(b) sends a dissent by registered mail or delivers it to the registered office of the corp

102(1) Subj to USA, directors shall manage, or supervise the mgmt of the business and affairs of the corp20(1)

20(2)

Corp Records – a corp shall prepare and maintain, at its registered office or at any other place in Cad designated by the directors, records containing

(a) the articles and the by-laws, and all amendments thereto, and a copy of any unanimous SH agmt(b) minutes of meetings and resolutions of SH(c) copies of all notices required by s.106 or 113; and(d) a securities register that complies w/s.50

Directors records – in addition to the records described in ss.(1), a corp shall prepare and maintain adequate accounting records and records containing minutes of meetings and resolutions of the directors and any committee thereof

67

20(4)Place of directors records – records described in (2) shall be kept at the registered office of the corp or at such other place as the directors think fit and shall at all reas times be open to inspection by the directors (access to records ltd to directors – security, confidentiality issues)*Note: minutes and resolutions are kept private – not available to the public, but could get access if had ongoing lawsuit Not privileged.

Duties of Directors and Officers Duties of directors/officers is based on a theory of shareholder primacy directors operate

corp for benefit of shareholders Obligation of directors and officers to take into account all shareholders’ interests Typical breaches: transacting w/ corp, taking corporate opportunities and competing w/ corp

o ≠ closed categories - can evolve/expand.

Codification of the Duty of Care in CBCA S. 122

o (1) Duty of Care of Directors and Officers – Every director and officer of a corp in exercising their powers and discharging their duties shall

(a) act honestly and in good faith with a view to the best interests of the corporation; and

Fiduciary duty (b) exercise the care, diligence and skill that a reasonably prudent person

would exercise in comparable circumstances. Duty of care

o (2) Duty to comply – Every director and officer shall comply with this Act, the regulations, articles, by-laws and any unanimous shareholder agreement.

o (3) No exculpation – Subject to subsection 146(5), no provision in a contract, the articles, the by-laws or a resolution relieves a director or officer from the duty to act in accordance with this Act or the regulations or relieves them from liability for a breach thereof.

It was popular for a while to K out of adherence to the Act (e.g. by including a provision in the articles stating that a given behaviour ≠ breach of duty.

Transacting with the Corporation

Common Law CL rule: strict rule against transacting with corp

o Though could ratify, or could include provisions in articles dealing w/ conflict of interest transactions

Original CL rule has been modified by statue in CBCA s. 120

Aberdeen Railway v. Bleakie Bros. Facts:

o ∆ P/P K’d to sell chairs to . one of ∆s was also director in corpo ∆ company later repudiated K for sale.

Held: Not enforceable. K invalid due to director transacting with his corp. o Court enumerated fiduciary duties in context of director of corpo It is an actual or potential conflict of interest to K with your own corp court won’t

inquire into fairness of K, it’s just not enforceable.

68

o Doesn’t matter that other directors were unaffiliated.

Transvaal Lands v. New Belgium Development Ltd. Facts:

o 3 directors of : Y, H and S. o At a board mtg S suggested should buy some shares of a 3rd party company from ∆.

S owned 50% stake in 3rd party corp, and abstained from voting on this proposition on basis that he was a director of ∆.

o H held 1000 shares of ∆ corp as trustee for his father’s estate and 100 for his wife. H voted on resolution.

Held: K Voidable. could recover purchase price from ∆ in exchange for shares.o H was director of and shareholder of ∆. Even though held shares as trustee, fiduciary

duty as trustee was in conflict w/ fid duty as director of Duty as trustee to obtain highest price possible, and as director to obtain lowest

price possible.

The Statutory Test S. 120 provides limited statutory permission for director to transact w/ corp.

If there is:o (i) disclosureo (ii) approval by directors (with the interested director(s) not voting) or approval by the

shareholders; ando (iii) the transaction is reasonable and fairThen the transaction is not void or voidable, and the director/officer is not accountable to corp/shareholders for any profit made on transaction

120(1) Disclosure of interesto Must be clear about exactly what you own, and if it’s material to other directors’

judgement then director/officer must see to it that they have all info needed to make objective decision on whether they can continue to move toward the transaction in question.

o Porcupine Mines: duty of disclosure covers “the real state of things”, i.e. must disclose enough info that corp knows what’s actually going on.

120(2) Time of disclosure for director – Disclosure shall be made:o (a) at the meeting at which proposed transaction was first considered o (b) if the director was not, at the time of that meeting, interested in proposed

K/transaction, then at the first meeting after he or she becomes so interestedo (c) if the director becomes interested after a contract or transaction is made, at the first

meeting after he or she becomes so interested; oro (d) if an individual who is interested in a K/transaction later becomes a director, at the

first meeting after he or she becomes a director. 120(3) Time of disclosure for officer

o (a) immediately after he or she becomes aware that the K/transaction or proposed K/transaction is to be considered or has been considered at a meeting

o (b) if the officer becomes interested after a K/transaction is made, immediately after he or she becomes so interested

o (c) if an individual who is interested in a K later becomes an officer, immediately after he or she becomes an officer

69

(4) Time of disclosure for director or officer – If K/transaction is material but not requiring approval by directors/shareholders, then disclose in writing the nature/extent of interest immediately after becoming aware of the K/transaction.

o Somewhere between an immaterial transaction and one so serious that it requires directors’ approval, a corp can have a material transaction not req’ing approval, of which corp needs notification.

(5) Abstention from voting by interested directors. A director req’d to make disclosure under (1) shall not vote on any resolution to approve K/transaction unless it:

o (a) relates to his own remuneration as director, officer, employee or agent of the corp or an affiliate

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

(6) Continuing disclosure req’mt (6.1) Exception to records access

o Shareholders can have access to disclosures of directors re material interestso This came into statute in 2001o Can thus determine whether had properly disclosed conflict of interest (or interest in

transaction) before voting occurred.o This is useful if shareholders think a director didn’t comply with s. 120 and don’t like

the way a decision went. (7) Ratification by directors – meeting of directors can ratify so long as:

o (a) disclosure was eventually madeo (b) directors approve K/transactiono (c) K/transaction was reasonable and fair to the corporation when it was approved

(7.1) Ratification by shareholders – req’mts: o (a) K/transaction is approved/confirmed by special resolution at a meeting of the

shareholderso (b) disclosure of the interest was made to the shareholders in a manner sufficient to

indicate its nature before the K/transaction was approved or confirmed; ando (c) the K/transaction was reasonable and fair to the corp when it was

approved/confirmed Objective test. “Would an independent board, acting in good faith and with the best interests

of the corp in mind, have approved the transaction?” [Rooney v. Cree Lake (1996, ONHC)]

Look at circumstances surrounding K formation [Repap] Wienberger (1) was there fair procedure surrounding formation, and (2) was

substance of K fair. (8) Application to court preserves right of action for breach of s. 120, allowing court to set

aside K/transaction, or require director/officer to account for profit/gain, or both.

Shareholder Ratification of Breach of Fiduciary Duty S. 122(3): No exculpation – Subject to subsection 146(5) [unanimous shareholder agreement

transferring liability to shareholders], no provision in a contract, the articles, the by-laws or a resolution relieves a director or officer from the duty to act in accordance with this Act or the regulations or relieves them from liability for a breach thereof.

o So generally can’t ratify a breach by directors. Only exception: 120(7.1) S. 120(7.1): Confirmation by shareholders – Even if the conditions of subsection (7) are not

met, a director or officer, acting honestly and in good faith, is not accountable to the

70

corporation or to its shareholders for any profit realized from the contract or transaction, because of the director’s or officer’s interest in the contract or transaction or because the director was present or was counted to determine whether a quorum existed at the meeting of directors or committee of directors that considered the contract or transaction, if

o (a) the contract or transaction is approved or confirmed by special resolution at a meeting of the shareholders

o (b) disclosure of the interest was made to the shareholders in a manner sufficient to indicate its nature before the contract or transaction was approved or confirmed; and

o (c) the contract or transaction was reasonable and fair to the corporation when it was approved or confirmed.

S. 242(1) – Evidence of shareholder approval not decisive – an application made or an action brought or intervened in under this Part shall not be stayed or dismissed by reason only that it is shown that an alleged breach of a right or duty owed to the corporation or its subsidiary has been or may be approved by the shareholders of such body corporate, but evidence of approval by the shareholders may be taken into account by the court in making an order under section 214, 240 or 241.

Taking Corporate Opportunities / Competing with Corp A director or officer of a corp may become aware of opportunities arising in the conduct of the

business, and it may be tempting to pursue a venture separately from the corporation (i.e. through a separate business in which they hold a greater stake), so as to avoid having to share the profit with all the stakeholders of the corp.

Duty of loyalty as agents, directors/officers must act in best interests of their corporate principal

o If opportunity arose out of business of corp, and if it is particularly promising, then presumably in the best interests of the corp to have opportunity pursued through corp

o Plus, shareholders, as investors, may reasonably have expected that any business opportunities arising from the use of the funds they contributed would be taken advantage of for their benefit.

o So the rule would seem to be that directors and officers can’t take corporate opportunities for themselves, and if they do, they must account to the corp for any benefits they receive from those business opportunities

Potential issues, though:o What if corporation isn’t able to take the opportunity? o How far down the corporate hierarchy does the fiduciary duty extend?o What if opportunity is in a different line of business?o What if director/officer is also involved with different corp(s) in same line of business

– should investors be able to assume he will bring an opportunity to this corp? Which corp should he bring an opportunity to?

o What if corp has subsidiaries – which should opportunity go to?

The Initial Strict Rule Approach Early jurisprudence from UK and Canada suggests strict rule: if opportunity arose in course of

or in execution of the duties of a director/officer, thus making it a corporate opportunity, then court wouldn’t inquire into whether opportunity was rejected in good faith on basis that corp couldn’t/shouldn’t take the opportunity.

Cook v. Deeks [1916, PC] Facts:

71

o shareholder in Toronto Construction Company, Limited.o In 1906 and still at time of trial, and each of 3 ∆ individuals held ¼ of company’s

capital, and wanted to include from business. o ∆s negotiated w/ CPR as though acting for TCC, but signed in personal capacity

instead of for corp. o ∆s then used their votes to pass shareholder resolution saying the K had nothing to do

with the corp, and began another private corp to deal w/ CPR bid and left with a ¼ share in what was now an inactive company w/ no Ks to do anything.

o Note: oppression action didn’t exist then, so this was a derivative action: minority shareholder bringing action on behalf of corp, b/c majority won’t.

There are largely obsolete now. Held: ∆s behaved fraudulently, and were in breach of fiduciary duty. Remedy: accounting to

corp for profits. o So once TCC is wound up, surplus split 4 ways – gets his fair share and all separate.o ∆s negotiated w/ CPR on behalf of corp, then made effort to cut out corp and . While

entrusted w/ conducting affairs of corp, deliberately plotted to exclude company whose interests were supposed to be their first concern.

o Despite the fact that ∆s may have been justified in seeking to sever from , doesn’t justify their acts in rel’n to the corp in attempting to sever.

Should have had a vote to wind up before the next opportunity arose, or offered to buy out.

Note: held 75% of shares, so technically could have ratified ∆s act. But now, CBCA s. 122(3) says resolution can’t relieve director from duty to act in accordance w/ Act. Also recall s. 120(7.1) req’mts to get shareholders to ratify.

Regal (Hastings) Ltd. v. Gulliver [1943, HL] Facts:

o owned cinema, and formed a subsidiary to acquire two new cinemas.o Landlord wanted personal guarantees of rent from directors if paid-up capital was

under £5000, but directors didn’t want to give guarantees and the corp could only afford £2000, so directors decided to invest their own money to make up the difference.

o Later, theatre and subsidiary’s 2 leases were to be sold. It was an asset deal, but then instead of buying the cinema and leases, dual transaction: bought all shares of Regal and all shares of subsidiary (in separate transactions)

o Shares that directors had just subscribed for a month before were sold at 3 times their initial payment

o Directors changed and new directors brought action against directors on behalf of Issue: argued directors personally acquired shares of subsidiary – taking an opportunity that

was supposed to belong to Regal. ∆s argued bona fide action and took personal risk. Held: for - former directors were liable to account to corp for profits made on subsidiary

shareso Corporate opportunity – shares were acquired “by reason, and only by the reason of the

fact that they were directors of Regal and in the course of their execution of that office.”

o Applies established rule of trusts: once determined that a trustee had gotten some benefit that he only became aware of through the execution of duties as trustee, there is no question of whether he had acted in good faith

o Lord MacMillan: must show:

72

(1) That what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in the utilization of their opportunities and special knowledge as directors; and

(2) that what they did resulted in profit to themselves. o The test isn’t whether lost anything – the test is whether directors profited, which

they did. Note: Windfall for new purchasers, because they bought all the shares, and then got a chunk of

money back from their purchase price for the profits earned by directors on their shares. (though probably wouldn’t have known about the issue until taking over corp and seeing the books)

Relaxing the Strict Rule: The Modern Canadian Approach Broad fairness rule was later substituted, allowing for the consideration of a wide variety of

factors in the specific context. Note, though that Regal has never been rejected by SCC, and has at times been approved by

Canadian courts

Peso Silver Mines v. Cropper [1965, BCCA, aff’d 1966, SCC] Facts:

o publicly distributed company had silver mining claims in YK. promoters Cropper (∆), Verity and Walker were also directors, w/ significant influence on the board.

o was offered some adjacent groups of claims, but the 6 members of BoD (including C, V, and W) concluded that corp couldn’t afford it.

o Then, C V and W formed private corp to take over the claims. o later taken over by new company, which demanded C V and W turn over interests in

the private corp, interpreting them as held for benefit of Peso. V and W agreed to turn over their shares, but ∆ C refused

o fired ∆ as exec VP, action by for accounting from ∆o ∆ testified that got so many similar offers, he simply forgot about the initial offer to

Held: ∆ not liable. (CA and SCC)o CA:

made bona fide decision not to take claims, and thus had no interest in the claims

If directors bona fide decide not to invest corp funds in sthg, a director who thereafter embarks his own money is not accountable for any profits he derives therefrom.

At a certain point, the opportunity to take the claims belongs to the cop. But once bona fide decision to let them go was made, had no interest and it was open to C, V and W to form new corp and get them.

Distinguished from Regal, wherein transaction was conceived of and wanted by corp

Distinguished from established trusts rule noted in Regal Noting obiter in Regal re getting opportunity through role as director,

court said ∆ hadn’t obtained opportunity in course of execution of office, but it had come to him independently. Seems a little close to the line, but whatever.

o SCC: ∆ didn’t obtain interests in claims as a result of execution of office as director of .

73

Obiter: bona fide decision not to invest company’s funds in sthg, after which director embarked own money.

Significance: can see some backpedaling in Peso – concern that following duties imposed in Regal would be so strict as to make no one want to be a director.

Canadian Aero Service v. O’Malley (Canaero) [1974, SCC] Officers (not just directors) owe fiduciary duties to company Duty to account can extend beyond term of office/employment Facts

o looking to secure topographical mapping K in Guyanao ∆ president and the VP were concerned about limitations imposed by parent company

on bids they could submit for Ks, and were concerned about their jobs if failed to obtain K

o In prepping for bid, had made trips to Guyana and done prelim aerial surveys and other work. ∆s resigned from , formed new company and submitted a bid for surveying, which won out over bid.

Held: ∆s liable to .o Officers can owe fiduciary duties too, and the duty of good faith/loyalty etc. can extend

after you’ve left employment. o ∆s were supposed to be putting best bid forward for , and instead they decided to

resign and take opportunity for themselves. o No bona fide rejection of objective. o Didn’t matter that wouldn’t have won the bid – doesn’t mean fiduciaries have right to

go claim it. Rule: doesn’t have to prove they would have gotten K to get compensation, but rather fiduciaries must answer for their fault by accounting for their gain from breaching the duty.

The Director’s Duty of Care, Diligence & Skill Note: Repap and People’s v. Wise both concern oppression and breach of fiduciary duty S. 122(1)(a) and (b)

Defences S. 123(4) – Defence of Reasonable Diligence – A director is not liable under s. 118 or 119, and

has complied with his or her duties under 122(2), if the director exercised the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances, including reliance in good faith on

o (a) financial statements of the corporation represented to the director by an officer of the corporation or in a written report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or

o (b) a report of a person whose profession lends credibility to a statement made by the professional person

s. 123(5) Defence of Good Faith – A director has complied with his or her duties under 122(1) if the director relied in good faith on.

o (a) financial statements of the corporation represented to the director by an officer of the corporation or in a written report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or

o (b) a report of a person whose profession lends credibility to a statement made by the professional person

The Business Judgement Rule:

74

o Court looks to see that directors made a reasonable decision – not a perfect decision. Provided that the decision taken is w/in a range of reasonableness, the court ought not to substitute its opinion for that of the board, even though subsequent events may have cast doubt on the board’s determination. [Maple Leaf Foods]

S. 123(1) Directors won’t be liable if they dissent.

Repap [2002, ON] Example of breach of Fiduciary Duty, Duty of Care, and Oppression Corporation is struggling, Berg is major SH and brings in 3rd Ave Investments who becomes a

major shareholder, recommends Berg be made chairman of the board, and together they appoint several directors. Berg retained independent counsel without consulting Repap’s in-house counsel, and had ridiculous employment contract drafted (including extravagant bonus clause linked to market fluctuations). It was presented to the board over concerns. Chair of compensation committee resigns, board is filled with cronies. Berg gets memos expressing concern, does not disclose them to the board. Berg also does not inform board of last-minute changes to K. Board passes K without consulting compensation committee’s report, dissenting director resigns, Berg did not vote on K. Berg deposed at next shareholder meeting, sues for 27mil. TD asset mgmt (on behalf of dissenting shareholders) bring actions.

Held: Berg liable. Directors liable. o The Ultimate Question: what is reasonable and fair to the corporation?o Claim Against Berg

Breached FD of honesty and good faith (122(1)(a)) Contracted with the corporation Did not disclose information relevant to the judgment of the directors:

Concerns expressed to him Dispute between in-house and outside counsel Duty to disclose is a Fiduciary duty owed by all agents to their

principals Duty to Disclose is Absolute:

No defense that directors could have learned of it themselveso Claim Against Directors

Breached Standard of Care (122(1)(b)) Could not be saved by Business Judgment Rule

Court looks to see that the directors made a reasonable decision, not a perfect decision

In this case: Didn’t take steps to properly inform themselves Didn’t read the consultant’s report Could have discovered with minimal effort that Repap didn’t need and

couldn’t afford Berg Directors who disagreed had an obligation to dissent, and failed to do so

o Note availability of oppression remedy 241: court can act where conduct is oppressive, unfairly prejudicial or unfairly

disregards the interests of SH, even if the conduct is lawful In this case:

241(3)(h) – set aside the compensation K

People’s Department Stores v. Wise [2004, SCC]

75

Business Judgement Rule: courts are hesitant to second-guess bona fide business decisions. Perfection not req’d – just has to be shown that it was a reasonable business decision at the time it was made.

Elevates standard of care to objective standard, and makes that standard clear. Standard of care applies to everyone.

Obiter: directors may consider interests of other stakeholders incl. creditors, when making decisions – can take longer term/other interests into account.

o This obiter has been followed. Facts

o ∆ brothers were directors of chain of stores, which purchased from another corp. Prior to purchase, had high annual losses.

o Plan was to amalgamate, but there were logistical and administrative problems surrounding the reorganization in the merge, including a problematic procurement policy, and ultimately both corps went bankrupt due to a number of factors

o ’s bankruptcy trustee brought action under s. 122(1)(a) for breach of fiduciary duty to shareholders and creditors, and (b) for breach of duty of care, diligence and skill.

Note: claims being pursued were largely those of unsecured trade creditorso TJ found ∆s liable, finding that the problematic policy was a reviewable transaction.o Brothers appealed, CA found not liable, and trustee appealed to SCC

Held: ∆s not liable. Even though directors’ policy played part in corp’s bankruptcy, directors didn’t breach fiduciary duty. Note: oppression was not claimed, though court implies should have.

Reasonso Fiduciary duty isn’t owed to creditors – it’s limited to the corporation. However,

directors aren’t limited to looking only to corporation’s interests – can’t disregard corp, but not required to look only to immediate primacy/profit maximization. Can also consider shareholders, creditors et al.

o No breach of fiduciary duty No personal interest/illegal purpose of new policy, and directors had good faith

desire to make corp better business. Implementation of new policy was a reasonable business decision made in

order to remedy a serious and pressing commercial problem.

The Oppression Remedy CBCA s. 238 – definitions for part XX

o “action” means an action under this Acto “complainant” means

(a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates

(b) a director or an officer or a former director or officer of a corporation or any of its affiliates

(c) the Director though Martha has never seen him intervene (d) any other person who, in the discretion of a court, is a proper person to

make an application under this Part This gets expanded a fair amount – courts don’t feel themselves

restricted to security holders, directors and officers in opening up the oppression remedy.

S. 241

76

o (1): Application to court re oppression – a complainant may apply to a court for an order under this section.

o (2) Ground – if, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates

(a) any act or omission of the corporation or any of its affiliates effects a result, (b) the business or affairs of the corporation or any of its affiliates are or have

been carried on or conducted in a manner, or (c) the powers of the directors of the corporation or any of its affiliates are or

have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the

interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of.

o (3) Powers of court – in connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,

(a) an order restraining the conduct complained of (b) an order appointing a receiver or receiver-manager (c) an order to regulate a corporation’s affairs by amending the articles or by-

laws or creating or amending a unanimous shareholder agreement (d) an order directing an issue or exchange of securities (e) an order appointing directors in place of or in addition to all or any of the

directors then in office (f) an order directing a corporation, subject to subsection (6), or any other

person, to purchase securities of a security holder. (g) an order directing a corporation, subject to subsection (6), or any other

person, to pay to a security holder any part of the monies that the security holder paid for securities

(h) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract

(i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested person financial statements in the form required by section 155 or an accounting in such other form as the court may determine

(j) an order compensating an aggrieved person (k) an order directing rectification of the registers or other records of a

corporation under section 243 (l) an order liquidating and dissolving the corporation (m) an order directing an investigation under Part XIX to be made; and (n) an order requiring the trial of any issue

o (4) Duty of directors – if an order made under this section directs amendment of the articles or by-laws of a corporation,

(a) the directors shall forthwith comply with subsection 191(4); and (b) no other amendment to the articles or by-laws shall be made without the

consent of the court, until a court otherwise orders.o (5) Exclusion – a shareholder is not entitled to dissent under section 190 if an

amendment to the articles is effected under this section.o (6) Limitation – a corporation shall not make a payment to a shareholder under

paragraph 3(f) or (g) if there are reasonable grounds for believing that

77

(a) the corporation is or would after that payment be unable to pay its liabilities as they become due; or

(b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities.

o (7) Alternative order – an applicant under this section may apply in the alternative for an order under section 214.

Burdensome conducto Actions may fall short of actual illegality, but still constitute oppression.o Good faith not relevant

Elder v. Elder & Watson (1952) the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely

Scottish Co-operative Wholesale Society v. Meyer (1959) “actions that are burdensome, harsh and wrongful’” conduct, which may fall short of actual illegality or invasion of legal rights but can be described as “reprehensible”

Shareholders can apply to have their reasonable expectations met.

TEST for Oppression (per BCE ) 18 (1) Does the evidence show a breach of a reasonable expectation?

o Fair treatment is the theme it’s an equitable remedy, so we consider what’s fair, given all the interests at play.

Objective test: was expectation reasonable; Balancing interests.

o (i) Claimant must identify the reasonable expectationo (ii) It must be reasonably held

Consider specific facts, rel’ships at issue, and the entire context, recognizing that there may be conflicting claims/expectations among shareholders

Commercial practice, nature of corp, rel’ship of parties, past practice, steps that could have been taken

o If found that stakeholders’ reasonable expectations were not met, proceed to step (2). (2) Does conduct amount to “oppression”, “unfair prejudice”, or “unfair disregard”?

o Not “watertight compartments”o “oppression” (coercive and abusive conduct, suggesting bad faith), “unfair prejudice”

(less culpable state of mind, but unfair consequences), or “unfair disregard” (ignoring an interest of a stakeholder, contrary to reasonable expectations).

o Note that it may be impossible to meet all expectations, especially where there is a conflict. Directors owe duty to corp, not to any one particular group.

If there is no benefit to corp shareholders/corp, likely oppressiveo Note s. 242(1) – Court can consider whether shareholders ratified the acts, but not

determinative. If there is oppression, the court can make any order it sees fit.

18 BCE Inc. v. 1976 Debentureholders (2008, SCC): Leveraged buyout by ON Teachers’ Pension Plan. Debentureholders lost value in their debentures, but court held no reasonable expectation that investment grade of debentures would be maintained, and directors had fulfilled reasonable expectation of considering DHs interests.

78

o But Naneff:19 won’t give punitive remedies; remedies shouldn’t exceed reasonable expectation of the parties.

o Sidaplex:20 won’t harm innocent third parties; can target directors directly (also Downtown Eatery)

o Brant v. KeepRite:21 don’t second-guess directors’ judgment; can be oppressive w/o being evil, dishonest or disloyal (no req’mt of bad faith);

o Recall Westfair Foods: court ordered that Class A shares be purchased at a set price.o Recall Repap: UPM made alternate claim that the interests of TDAM and other SHs

were unfairly disregarded as a consequence of Berg’s and BoD’s actions. This saddled Repap w/ huge liability and no corresponding benefit, so court set aside the agreement.

o Recall Ferguson v. Imax: Mrs. F applied for restraining order under now s. 247, alleging oppression. CA found in her favour and company was prohibited from devaluing and redeeming her shares at a bad rate.

o S. 241(3) gives the list of what can be done – basically anything you want, except issuing and paying back securities if it would leave corp insolvent.

Other CBCA Duties of Directors S. 42: Dividends – A corporation shall not declare or pay a dividend if there are reasonable

grounds for believing that o (a) the corporation is, or would after the payment be, unable to pay its liabilities as they

become dueo (b) the realizable value of the corporation’s assets would thereby be less than the

aggregate of its liabilities and stated capital of all classeso Note: can also go after shareholder that rec’d illegal dividend (118(4) and (5))

S. 118 o (1) Directors’ liability – Directors of a corp who vote for or consent to a resolution

authorizing the issue of a share under section 25 for consideration other than money are jointly and severally, or solidarily, liable to the corp to make good any amount by which the consideration rec’d is less than the fair equivalent of the money that the corp would have rec’d if the share had been issued for money on the date of the resolution.

o (2) Further directors’ liabilities – Directors of a corporation who vote for or consent to a resolution authorizing any of the following are jointly and severally, or solidarily, liable to restore to the corporation any amounts so distributed or paid and not otherwise recovered by the corporation:

(a) a purchase, redemption or other acquisition of shares contrary to section 34, 35 or 36; redemption, repurchase where would make insolvent

(b) a commission contrary to s. 41 (c) a payment of dividend contrary to s. 42 where would make insolvent (d) a payment of an indemnity contrary to s. 124 where indemnified party

was at fault (e) a payment of a shareholder contrary to section 190 or 241

S. 119

19 Naneff v. Con-Crete Holdings Ltd. (1995, ONCA): Family business, falling out w/ son and he was ejected from business. Court found oppression and ordered public sale of corp w/ proceeds to , but CA overturned the remedy because it went beyond what could have reasonably expected. Just remedy was to order business to purchase shares at FMV. Notably, entitled to discount under s. 241(3)(j) (order compensating an aggrieved person) because his dismissal from employment was part of the overall pattern of oppression.

79

o (1) Directors are J&S liable to employees for all debts not exceeding 6 months wages, for services performed for corp while they are directors.

o (2) Conditions precedent to liability Employees have to sue corp first and be unable to collect, or if corp in

liquidation make a claim in liquidation w/in 6 months, or if bankrupt make a claim w/in 6 months

o (3) Limitation – Have to sue directors w/in 2 years of ceasing to be directoro (4) Amount due after execution – directors are only liable to extent that corp can’t payo (5) Subrogation – bankruptcy doesn’t bar director from liability. Can reassign rights

to claim to director to claim against corp.o (6) Contribution – a director who satisfies a claim under this section is entitled to

contribution from the other directors who were liable S. 122(2): Duty to comply – Every director and officer of a corporation shall comply with this

Act, the regulations, articles, by-laws and any unanimous shareholder agreement. S. 190(26) Limitation – A corporation shall not make a payment to a dissenting shareholder

under this section if there are reasonable grounds for believing thato (a) the corp is or would after payment be unable to pay its liabilities as they become

due; oro (b) the realizable value of the corp’s assets would thereby be less than the aggregate of

its liabilities

Barette v. Crabtree Estate [1993, SCC] Facts

o Closure of textile plant at Trois-Rivieres – corp in financial difficulties, em’ees laid off w/o notice or severance pay

o Employees sued, awarded compensation, Decision – L’Heureux-Dube

o Directors know how company is doing financially, and if they allow em’ees to continue working while likelihood of payment is low, they should be accountable for that.

o Court says that s. 114(as it then was – now 119) doesn’t contain an exculpatory clause but it does now. 123(4) applies to s. 119

o Employees in this case don’t fall under what’s covered in 119. So they’re left to claim in bankruptcy, and after all creditors etc., they’ll get a bit of money, but not enough.

o So 119 looks like it protects completely, but really just covers amts owed in return for services performed, and thus not wrongful dismissal damages

o Martha thinks this is still correct, b/c it’s a payment for not working -

Proulx v. Sahelian Goldfields [2001, ONCA] Directors can be liable for expenses incurred for services performed for the corporation – even

if they are not wages

20 Sidaplex-Plastic Suppliers, Inc. v. The Elta Group Inc (1998, ONCA): L = sole SH/D/O of EG. Letter of credit was accidentally allowed to lapse and thus when EG sold all assets to a 3rd party, SPS couldn’t claim their payment. Some of EG’s loans were personally guaranteed by L, but SPS’ wasn’t so brought oppression action. Court ordered L to personally pay , despite there being no bad faith. 21 Brant Investments v. KeepRite Inc.: Asset purchase agreement; minority shareholders brought oppression action. Held: directors owe fiduciary duty to the corp, but shareholders are entitled to vote their own interests. Minority shareholders knew the balance of power, knew they couldn’t overcome a majority vote when they bought in.

80

Employees working in Africa for corporation; employer K provides for salaries, vacation pay and reimbursement of expenses. Corporation goes under, and employees bring action against corporation and its directors for back wages, vacation pay and reimbursement.

Held:o Directors were liable for the wages, vacation pay, and reimbursementso Not wages, but is a debt in relation to services performed in the duties of their

employment to the corporation The maximum is the equivalent of 6 month’s wages

Obligations under Other Legislation

BC Employment Standards Act S. 96

o (1) A person who was a director or officer of a corporation at the time wages of an employee of the corporation were earned or should have been paid is personally liable for up to 2   months' unpaid wages for each employee.

Note: includes officers, where CBCA s. 119 doesn’t. o (2) Despite subsection (1), a person who was a director or an officer of a corporation is

not personally liable for (a) any liability to an employee under section 63, termination pay or money

payable in respect of individual or group terminations, if the corporation is in receivership,

(b) any liability to an employee for wages, if the corporation is subject to action under section 427 of the Bank Act (Canada) or to a proceeding under an insolvency Act,

(c) vacation pay that becomes payable after the director or officer ceases to hold office, or

(d) money that remains in an employee’s time bank after the director or officer ceases to hold office.

o Note: exclusion where corp is bankrupt, but not an exclusion where corp just hasn’t paid.

95 If the director considers that businesses, trades or undertakings are carried on by or through more than one corporation, individual, firm, syndicate or association, or any combination of them under common control or direction,

o (a) the director may treat the corporations, individuals, firms, syndicates or associations, or any combination of them, as one employer for the purposes of this Act, and

o (b) if so, they are jointly and separately liable for payment of the amount stated in a determination, a settlement agreement or an order of the tribunal, and this Act applies to the recovery of that amount from any or all of them.

96(4) In this section, "director or officer of a corporation" includes a director or officer of a corporation, firm, syndicate or association that the director treats as one employer under section 95.

BC Interpretation Act "corporation" means an incorporated association, company, society, municipality or other

incorporated body, where and however incorporated, and includes a corporation sole other than Her Majesty or the Lieutenant Governor;

o So BC ESA applies to CBCA Corps

81

Interactions with CBCA So, a CBCA corp could potentially be liable under s. 119 and also under ESA, as the general

law of province applicable to employers in the province. But they aren’t the same

o Directors of bankrupt CBCA corps aren’t liable under ESA, but are under CBCA Say a parent corp is CBCA, with subsidiary (also inc’d under CBCA) which is

registered/carrying on bus in BCo If sub goes bankrupt, parent corp could be liable for BC employees even though under

CBCA they wouldn’t be. o Under 96(2)(b) directors ≠ liable if Sub is bankrupto But ESA could say all one employer under s. 95, employees can look to parent’s

directors for paymento But isn’t this the province intruding on federal authority of fed inc’d corps?

Interesting… A corporate member of a partnership might also be liable:

o S. 105(2) of P/P Act says the rules in s. 142 of BCBCA (fiduciary duties) don’t apply to partners, but other duties still apply (e.g. wages owed)

o So since (a) directors are personally liable under ESA for unpaid wages (s. 96(1)), and (b) s. 95 allows piercing the veil and treating an affiliate as an employer can

thus find liable for acts of subsidiary. (c) s. 96(4) allows targeting a director/officer in a group of affiliates (i.e. the

parent holding corps) that a director/officer (i.e. of the initially liable subsidiary) treats as one employer.

o Then s. 105 of P/P Act can probably incorporate the ESA obligations and impose liability on directors of the corporate partner.

o Therefore, s. 104(1) of P/P Act won’t shield, and a director of a corp would probably be liable if corp were a partner.

R. v. Bata Industries Facts

o ∆ is Canadian arm of Bata Shoes empire. Manufacturing centre in Ontario was disposing materials in waste chemical storage drums.

o Westin (manager of manufacturing division – VP and director) oversaw improper disposal of waste.

o Corp was found liable under Environmental Standards Act, and prosecution sought to find directors personally liable.

Held: Directors liable. Someone in management structure had to ensure appropriate system was in place to stop an offence from being committed, and ensure that the system was operating effectively.

o Once corp liable, up to directors to establish due diligence etc.o Consider

Personal responsibility Directors’ awareness of industry standards Review environmental reports Ensure appropriate systems React when know things have gone wrong

o Example of due diligence defence not 122(1)(b) duty to corp, but related principleo Bata

82

Not liable. Did what was appropriate for his level of awareness.o Marchand

Liable. Problem was brought to his personal attn and did nothing for 6 monthso Westin

Liable Onsite director – more responsibility as such Was aware of chemicals used and environmental hazard, went with cheaper

quote despite awareness of danger.

Tort Liability of Directors and Officers

Said v. Butt [1920, Eng. KB] In terms of breach of contract, where a director or officer acts w/in authority, bona fide, in best

interests of corp and not on own account, acts are those of the corp. Recall from agency – undisclosed principal issue. argued that ∆ had induced corp to breach K (tort, which can lead to damages)

o But if there was no K, as court found, can’t have been inducement to breach so this is all obiter, but it has been accepted as stating the law.

Court found that ∆ had powers to act on behalf of corp, and acted w/in them in refusing admission (acted in interests of corp) so act of corp, which can’t breach its own K

ADGA Systems v. Valcom Ltd. Approves rule from Said v. Butt in the context of breach of contract Have to make sure that pleadings will sustain an action against officers/employees Facts

o Both bidding on K – had K in the past, and had 45 technicians already performing. Allegation that ∆ had none and thus couldn’t meet tender req’mts.

o claims ∆ induced breach of K. Allegation that two senior employees were really senior mgmt and thus had same obligations as directors/officers properly appointed.

o Argued directors/officers should be held liable. Held: Case never judged on merits – don’t know if directors/officers would have been liable,

but the principles to approach are set out.o In this case, the individuals weren’t causing their corp to breach K, but were inducing

employees of ADGA to breach K so Said v. Butt doesn’t apply, but it is adoptedo Policy concerns

If every time a dispute arises, people claim that corporate officers/directors are liable, this will alter behaviour

In principle, as director owe duty to your corp, and if you believe corp should breach K (i.e. that it’s in best interests of corp to breach and pay damages), then holding directors personally liable if court disagrees would make them less likely to honestly act in best interests of corp.

If wronged parties always sue directors will have proliferation of litigation where it should just be b/w the corp and the

Concern that people will refuse to become directors if they’ll be on the line every time a business deal goes wrong

Also concern against unduly protecting people solely on basis that they were acting for corp.

No principal basis for protecting them just b/c conduct was in pursuing corp’s interests

83

o Note: just because an employer can be vicariously liable for employee/agent conduct (per London Drugs v. Kuehne and Nagel], doesn’t mean an agent can’t be personally liable for tortious conduct as well.

o So, if directors/officers had independently committed torts by their personal actions, can be held personally liable. But if acting on behalf of corp in the same way as Mr. Butt, then ≠ personally liable for inducing breach of K b/w their corp and 3rd party.

Indemnification and Insurance CBCA s. 124

o (1) Indemnification – A corporation may indemnify a director/officer of corp, a former director/officer of corp or another individual who acts or acted at corp’s request as a director/officer, or an individual acting in similar capacity, or another entity, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred b the individual in respect of any civil, criminal, investigative or other proceeding in which the individual is involved because of that association with the corp or other entity.

o (2) Advance of costs – a corp may advance moneys to a director, officer or other individual for the costs, charges and expenses of a proceeding referred to in (1). The individual shall repay the moneys if the individual doesn’t fulfill the conditions of (3)

o (3) Limitation – a corp may not indemnify an individual under (1) unless the individual (a) acted honestly, and in good faith with a view to the best interests of the

corp, or, as the case may be, to the best interests of the other entity for which the individual acted as director or officer or in a similar capacity at the corp’s request; or

(b) in case of crim/administrative action or proceeding that is enforced by a monetary penalty, individual had reasonable grounds for believing their conduct was lawful.

o (5) Right to indemnity – despite (1), an individual referred to in that section is entitled to indemnity in respect of all costs etc. reasonably incurred in connection w/ defence of…proceeding to which individual is subject b/c of association w/ corp or other entity as described in (1)), if individual is seeking indemnity:

(a) was not judged by court/competent authority to have committed any fault or omitted to do anything

(b) fulfils the conditions in ss (3) *note that fulfilling duty of care is NOT a req’mt for indemnity nothing in

the Act says you can’t indemnify a director for not meeting std of care, diligence and skill

o (6) Insurance – a corp may purchase and maintain insurance for the benefit of an individual referred to in ss(1) agst any liability incurred by the individual

(a) in the indiv’s capacity as director/officer of corp; or (b) in the indiv’s capacity as director or officer, or similar capacity, or another

entity, if the indiv acts or acted in that capacity at the corp’s requesto (7) corp, indiv or entity may apply to court for an order approving an indemnity under

this section Corps might want to get approval first b/c of 118(2)

o *it is up to a company to decide that they will indemnify as a matter of right where not req’d by the act, but where forbidden under 124(3) couldn’t indemnify contrary to that.

o *in BC, used to have to get ct to approve every indemnification

84

S. 118(2)(d)o Directors who vote for or consent to resolutions may be personally liable to repay

amounts, one of which listed amts are payments of indemnity contrary to s. 124o So they’ll want to make sure they know if they’re making the right choice under s.

124(3) get court to say ahead of time that individual acted in good faith etc, so directors will be safe voting for indemnity

o Also an individual might think has right to indemnity and corp doesn’t want to pay – perhaps someone who’s been ousted and new mgmt doesn’t like them anymore.

Insurance also came up in Bata – TJ tried to bar corp from indemnifying, but it’s corp’s right to choose.

Consolidated Enfield Corp v. Blair [1995, SCC] Assessing whether ∆ should be indemnified:

o (1) Was it in good faith/w/ view to best interests of corp? Presumed to act in good faith unless found otherwise (General Motors of

Canada v. Brunet) Corp must establish that ∆ wasn’t acting in good faith. I) Was it in best interests of corp?

Look to all context. Actual conduct of ∆. Not req’d to be fully impartial, but to aim for impartiality.

II) Was there reliance on counsel? Doesn’t guarantee indemnification but weighs against breach of duty

and bad faith (Rafuse) – but must be reasonable, honest and in good faith (i.e. didn’t try to influence counsel, participated in deliberations, reason to believe that counsel was relying on hasty decision etc.)

o (2) Were costs reasonably incurred under s. 124(1)?o (3) Was ∆ acting in his capacity as director?o *These are the req’mts from s. 124(3)(a) o *Would still need to prove not at fault to be entitled to indemnity under CBCA s.

124(5) Facts:

o ∆ chairman, director. Warring factions at a shareholders mtg. Lots of proxies. One faction brought a surprise nominee, who was voted in instead of ∆.

o ∆ consulted legal counsel who told him he couldn’t count the votes for the surprise nominee, so ∆ rejected those votes which meant ∆ was still elected.

o ∆ immediately called a new mtg so proper procedure could be followed. Opposing faction didn’t accept; challenged decision on validity of votes cast for their guy – went to CA and opposing faction won.

o So now opposing faction is in charge, and ∆ has all kinds of legal expenses for the costs of his challenge at the mtg and the court battle. Opposing faction had been suing ∆ and Enfield, but since they now control Enfield don’t want to indemnify ∆ legal expenses

o Under bylaws and ON Act, ∆ had right to indemnity if acting on behalf and in best interests of corp when he made decision to reject the votes.

Held: ∆ gets indemnificationo Req’mts:

Must have been acting honestly, costs must have been reasonably incurred, and must have been acting on behalf of corp.

Must have been party to litigation b/c of role as director/officer, and cost must have been reasonably incurred.

85

The issue of fault is different in ON legislation: same as federal act except to be entitled didn’t have to show that weren’t at fault. But Enfield’s bylaws essentially entitled Blair to indemnification provided he was acting honestly/in good faith etc.

o At all levels costs found to have been reasonably incurred. Enfield and ∆ interests were rep’d by same lawyers, and Enfield authorized

covering ∆ didn’t cost any more to defend ∆ personally than to defend E and ∆ together.

o SCC will presume good faith unless proven otherwise.o He was involved in his pos’n as an officer. o Can’t expect a quasi-judicial impartiality, b/c of putting officers in pos’n of chair –but

must strive to make fair decisions/remain as impartial as possible. Potential conflict didn’t req’ chair to step down in this case, though there may be situations where should have option to appt someone w/o standing – e.g. corp counsel or independent lawyer.

o ∆ actions and intentions were correct in the situation. Satisfied test of honest/good faith action in best interests of corp Although legally his decision was wrong, not in bad faith.

Asked for legal advice in advance – not his fault lawyers were wrong Plus he even set up a new mtg to give the guy a proper election.

Corporate Governance: Shareholders

General Powers of Shareholders

No Usual Management Powerso Everything generally defaults to directors (per s. 102), who delegate to officers; and

there are employees for day-to-day taskso Can have shareholders who are also directors/officers, but must keep roles separate.

May have to consider what role a person is acting in when they do something (Recall Peoples v. Wise – brothers acted for both parent and subsidiary)

Automatic Self-Cleansing Filter Syndicate v. Cuninghame Shareholders, like directors, must abide by articles, and if a process is set out then they must

follow that process. Can’t assume that a majority of shareholders can take over from directors as managers – must

elect new board if want the old ones’ power. Facts

o Articles gave directors power to negotiate on behalf of corp (typical under CBCA), and also to sell all assets/undertakings of corp.

o McDermid (not a director), went out and negotiated a K, organized shareholder meeting and got support for K

o Directors didn’t think this was the best K for the corp and refused to carry out the saleo McDermid sought a court order overriding directors.

Held: No such order. Shareholders can’t force directors to do sthg they don’t think is in best interests of corp.

o Can elect a new BoD who will do what they want, but shareholders can’t just appropriate mgmt power

o Can amend articles – need 75% majority, though, which didn’t have in this case

86

Access to Information About the Corporation s. 20

o (1) Corporate Records – Corp must maintain records at its registered office or another place designated by directors

(a) articles and bylaws, all amendments and copies of any unanimous shareholder agreement

o (2) Directors Records – in addition to the records described in (1), corp must keep accounting records, minutes of mtgs and resolutions of directors and any committee thereof.

o (4) Place of directors records – must keep at registered office or another place designated by directors, and shall at all reasonable times be open to inspection by the directors

s. 21o (1) Access to corp records – subject to (1.1), shareholder and creditors of a corp, their

personal representatives and the Director may examine the records described in subsection 20(1) during the usual business hours of the corporation, and may take extracts from the records, free of charge, and, if the corp is a distributing corp, any other person may do so on payment of a reasonable fee.

o (1.1) Requirement for Affidavit – Securities Register – Any person described in subsection (1) who wishes to examine the securities register of a distributing corp must first make a request to the corp or its agent, accompanied by an affidavit referred to in (7). On receipt of the affidavit, the corp or its agent shall allow the applicant access to the securities register during the corp’s usual business hours, and, on payment of a reasonable fee, provide the applicant with an extract from the securities register.

o (2) Copies of Corporate Records – A shareholder of a corp is entitled on request and without charge to one copy of the articles and bylaws and of any unanimous shareholder agreement.

Shareholder Meetings

Basics s. 133 – directors must call mtg w/in 18 months of corp’s formation, and then no more than 15

months apart. S. 132 – place

o (1) Meetings of shareholders shall be held at the place w/in Canada provided by the bylaws or, in the absence of such provision, at the place w/in Canada that the directors determine

Concern: otherwise majority might hold mtg somewhere exotic so no one could come and vote them out.

o (2) Meeting outside Canada – Despite (1), a shareholders mtg may be held outside Canada if the place is specified in the articles or all the shareholders entitled to vote at the mtg agree that the mtg is to be held at that place.

Articles might allow to hold it outside Canada if corp is a wholly owned subsidiary of a non-Canadian corp, and just holding the mtg at same time/place as parent corp

o (4) Participation by electronic means – Unless the bylaws otherwise provide, any person entitled to attend a shareholders mtg may participate…by means of a telephonic, electronic or other communication facility that permits all participants to communicate adequately with each other during the mtg, if the corp makes available such a

87

communication facility. A person participating in a mtg by such means is deemed for purposes of this Act to be present at the mtg.

o (5) Meeting held by electronic means – If the directors or shareholders of a corp call a mtg of shareholders pursuant to this Act, those directors or shareholders, as the case may be, may determine that the mtg shall be held…by means of a telephonic, electronic or other communication facility that permits all participants to communicate adequately with each other in the mtg if the bylaws so provide.

Notice Requirements S. 135(1) Notice of Meeting – Notice of the time and pace of a meeting of shareholder shall be

sent within the prescribed period [per Reg. 44: 21-60 days] to o (a) each shareholder entitled to vote at the meetingo (b) each director; ando (c) the auditor of the corp

(1.1) If ≠ distributing corp, articles may provide that notice may be sent w/in shorter period (5) Business – all business transacted at a special mtg of shareholders and all business

transacted at an annual mtg of shareholders, except consideration and the financial statements, auditor’s report, election of directors and re-appointment of the incumbent auditor, is deemed to be special business.

(6) Notice of business – notice of a meeting of shareholders at which special business is to be transacted shall state

o (a) the nature of that business in sufficient detail to permit the shareholder to form a reasoned judgment thereon; and

o (b) the text of any special resolution to be submitted at the meeting. S. 136 Waiver of Notice – A shareholder or any other person entitled to attend a meeting of

shareholders may in any manner waive notice of a mtg of shareholders, and their attendance at a mtg is a waiver of notice of the mtg, except where they attend a mtg for the express purpose of objecting to the transaction of any business on the grounds that the mtg is not lawfully cited.

Resolutions “Ordinary resolution”

o Requires a majority of shareholder votes at mtg “Special Resolution”

o Requires 2/3 majority of shareholder votes at mtg S. 142:

o (1) Resolution in lieu of a meeting – Except where a written statement is submitted by a director under subsection 110(2) or by an auditor under s. 168(5),

(a) a resolution in writing signed by all the shareholders entitled to vote on that resolution at a meeting of shareholders is as valid as if it had been passed at a meeting of the shareholders; and

(b) a resolution in writing dealing with all matters required by this Act to be dealt with at a meeting of shareholders, and signed by all the shareholders entitled to vote at that meeting, satisfies all the rew’mts of this Act relating to meetings of shareholders.

S. 139 – Quorum (1) Need a majority of votes present at meeting – so quorum is 51%

o Note: to pass a resolution, need only have a majority of quorum – so could pass an ordinary resolution with 51% of 51%

88

(2) Opening quorum is sufficient – even if people leave during the mtg, so long as quorum present at beginning, can go ahead with business.

(4) One shareholder mtg – if a corp has only one shareholder, or only one holder of any class or series of shares, the shareholder present in person or by proxy constitutes a mtg.

Voting s. 140 Corporations

o (1) Right to vote – Unless the articles otherwise provide, each share of a corp entitles the holder thereof to one vote at a mtg of shareholders

o (2) Representative – if a body corporate or association is a shareholder of a corp, the corp shall recognize any individual authorized by a resolution of the directors or governing body of the body corporate or association to represent it at mtgs of shareholders of the corp.

o (3) Powers of Representative – an individual authorized under (2) may exercise on behalf of the body corporate or association all the powers it could exercise if it were an individual shareholder.

S. 141o (1) Presumption of one share one voteo (2) Ballot – a shareholder or proxyholder may demand a ballot either before or after

any vote by show of hands In large corps contentious issues will often be balloted. Note that it’s the number of votes, not necessarily the number of shareholders.

o (3) Electronic voting – despite (1), unless the bylaws otherwise provide, any vote referred to in (1) may be held…entirely by means of a telephonic, electronic or other communication facility, if the corp makes available such a communication facility.

o (4) Voting while participating electronically – Unless the bylaws otherwise provide, any person participating in a mtg under s. 132(4) or (5) and entitled to vote at that mtg may vote…by means of the telephonic, electronic or other communication facility that the corp has made available for that purpose.

See Regs 44 and 45 (“…” refers to regulations if any)o 45: results of computerized voting must be verifiable, protect anonymity

Requisition of Meeting by Shareholders s. 143

o (1) requisition of mtg by shareholder holding 5% or more Note: this is what Blair did in the case above – he held enough votes to call a

new mtg to vote on proper nominees. o (2) Form – the requisition referred to in (1)…shall state the business to be transacted at

the mtg and shall be sent to each director and to the registered office of the corp.o (3) On receiving the requisition referred to in (1), Directors call a mtg, unless:

(a) a record date has already been fixed under 134(1)(c) and notice given under 134(3)

(b) directors have already called mtg of shareholders and given notice under s. 135, or

(c) business of mtg includes matters listed in 137(5)(b) to (e) 137(5) (b) to (e):

o (b) it clearly appears that the primary purpose of shareholder proposal is to enforce a personal claims/redress personal grievance agst corp or directors, officers or security holders

89

o (b.1) clearly appears proposal doesn’t relate in a significant way to the business or affairs of the corp

Note: used to keep things out for being social/political, but courts have held that if it has to do with business of corp, it’s ok.

E.g. proposal for corp to divest from investments in S Africa (during apartheid) – kept out as political then, but now would be allowed b/c there’s a connection to the corp’s business

o (c) not more than the prescribed period before the receipt of a proposal, a person failed to present, in person or by proxy, at a mtg of shareholders, a proposal that at the person’s request, had been included in a management proxy circular relating to the meeting

So, shareholders can’t just keep bringing back the same failed proposal. o (d) substantially the same proposal was submitted to shareholders in a mgmt proxy

circular or dissident proxy circular relating to a mtg of shareholders held not more than the prescribed period before the receipt of the proposal and did not receive the prescribed minimum amount of support at the mtg; or

o (e) the rights conferred by this section are being abused to secure publicity

Meeting Ordered by Court In cases of deadlock, etc. situations arise where two directors aren’t speaking and won’t call

a mtgo Often family companies

Court can allow one director or one shareholder to get a court order to have a mtg held, and thus break a deadlock

o People can still find many ways to avoid this, so court has broad powers to get things moving.

E.g. if ≠ quorum, can order that any one shareholder can constitute quorum Generally this mtg will be for the purpose of winding up, if things have gotten this bad. s. 144

o (1) Meeting called by court – A court, on the application of a director, a shareholder who is entitled to vote at a mtg of shareholders or the Director, may order a mtg of a corp to be called, held and conducted in the manner that the court directs, if

(a) it is impracticable to call the mtg w/in the time or in the manner in which those mtgs are to be called

(b) it is impracticable to conduct the mtg in the manner req’d by this Act or the bylaws, or

(c) the court thinks that the mtg should be called, held and conducted w/in the time or in the manner it directs for any other reason

o (2) Varying quorum – Without restricting the generality of (1), the court may order that the quorum req’d by the bylaws or this Act be varied or dispensed with at a mtg called, held and conducted pursuant to this section.

o (3) Valid Meeting – A mtg called, held and conducted pursuant to this section is for all purposes mtg of shareholders of the corp duly called, held and conducted.

Election and Removal of Directors Typically elections are held at annual mtgs Directors terms can be staggered, but never more than 3 years long. See s. 106 S. 109 – can remove by ordinary resolution at a special mtg.

90

Court Review of Elections s. 145

o (1) Court review of election – A corp or shareholder or director may apply to a court to determine any controversy w/ respect to an election or appointment or a director or auditor of the corp

o (2) Powers of court – On the application under this section, the court may make any order it thinks fit, including, without limiting the foregoing,

(a) order restraining challenged electee from acting pending determination of dispute

(b) order declaring result of disputed election (c) order for new election (d) determining voting rights Recall Consolidated Enfield v. Blair – sought court input.

Duty of Chairman is to act in good faith and in an impartial manner [Wall v. London]

Shareholder Powers at Meetings

Amendment of Bylaws s. 103(2) Shareholder approval – the directors shall submit a bylaw, or an amendment or a

repeal of a bylaw, made under (1) to the shareholders at the next mtg of shareholders, and the shareholders may, by ordinary resolution, confirm, reject or amend the bylaw, amendment or repeal.

Review Financial Statements s. 155

o (1) Annual financial statements – subject to s. 156, the directors of a corp shall place before the shareholders at every annual meeting

(a) comparative financial statements as prescribed relating separately to (i) the period that began on the date the corp came into existence and

ended not more than ix months before the annual mtg or, if the corp has completed a financial year, the period that began immediately after the end of the last completed financial year and ended not more than six months before the annual mtg, and

(ii) the immediately preceding financial year (b) the report of the auditor, if any; and (c) any further info respecting the financial pos’n of the cop and the results of

its operations req’d by the articles, bylaws or any unanimous shareholder agreement.

o (2) Exception – Notwithstanding (1)(a), the financial statements referred to in (1)(a)(ii) may be omitted if the reason for the omission is set out in the financial statements, or in a note thereto, to be placed before the shareholders at an annual meeting.

o Note: failure to comply w/ s. 155 is an offence. S. 159

o (1) Copies to shareholders – A corp shall, not less than twenty-one days before each annual mtg of shareholders or before signing a resolution under para 142(1)(b) in lieu of the annual mtg, send a copy of the docs referred to in s. 155 to each shareholder, except to a shareholder who has informed the corp in writing that he or she does not want a copy of those documents.

91

o (2) Offence – a corp that, w/o reasonable cause, fails to comply with (1) is guilty of an offence and liable on summary conviction to a fine not exceeding five thousand dollars.

Appointing an Auditor s. 162

o Shareholders at first annual mtg and each succeeding mtg appoint an auditor to hold office until close of next mtg

o If for some reason an auditor isn’t appointed at a mtg, then incumbent auditor stays in place until next mtg

S. 163: exception to s. 162o Shareholders of closely-held corp may resolve not to appoint an auditoro But such a resolution is only valid for one year at a time, and must be unanimous.

If any one shareholder wants an audit, they can have one. S. 161

o (1) Qualification of Auditor – subject to (5), a person is disqualified from being an auditor of a corp if the person is not independent of the corp, any of its affiliates, or the directors or officers of any such corp or its affiliates.

o (2) Independence – For the purposes of this section, (a) independence is a question of fact; and (b) a person is deemed not to be independent if he or his business partner

(i) is a business partner, a director, an officer or an employee of the corp or any of its affiliates, or a business partner of any director, officer or employee of any such corporation or any of its affiliates.

(ii) beneficially owns or controls, directly or indirectly, a material interests in the securities of the corp or any of its affiliates,

(iii) has been a receiver, receiver-manager, liquidator or trustee in bankruptcy of the corp or any of its affiliates within two years of his proposed appointment as auditor of the corp.

s. 169(1) Examination – an auditor of a corp shall make the examination that is in their opinion necessary to enable them to report in the prescribed manner on the financial statements req’d by this Act to be placed before the shareholders, except such financial statements or part thereof that relate to the period referred to in 155(1)(a)(ii).

Shareholder Control of Fundamental Changes Purpose of statutory scheme: balance right of majority shareholders to control over

fundamental changes against reasonable expectations of minority that corp they originally invested in will continue to be governed by the same rules (statutory and in the articles) and will continue to carry on the same or a similar business to the one carried on when the shareholder purchased his or her shares.

o Accordingly, except in the case of a voluntary liquidation and dissolution, dissenting shareholders have the right to have their shares purchased at fair market value under the dissent and appraisal remedy in s. 190.

When fundamental changes are proposed, they must be approved by special resolution of shareholders.

o Because these changes require a special resolution, and are “special business” (per s. 135(5), so subs. 135(6) notice req’mts apply sufficient detail; text of any resolution.

o If there are more than 50 shareholders, or the corporation is a “distributing corporation” the mandatory proxy solicitation rules will apply: s. 149

92

Amendment of the Articles of Incorporation Once directors have approved or adopted a resolution to make a change, they take it to

shareholders at a special mtg.o For convenience, special mtgs are often timed to coincide with general mtgso Recall all the special rules about notice, and if corp has more than 50 shareholders then

particular info req’mts must be met Order of operations:

o S. 173(1) – What is being amended? amendments req’ special resolution (defined in 2(1) – req’s 2/3 majority) –

o S. 176(1) – does it require a separate class vote? In the case of (a), (b) or (e), is this forestalled by the articles?

o If it is a separate class vote: s. 176(3) everyone votes regardless of voting rights; and must pass by 2/3 in every class.

o s. 173(2): directors can get prior authorization to terminate. o Once approved, go to s. 177, 178, 179 to effect the changes.

S. 173o (1) Amendment of Articles – Subject to s. 176 and 177, the articles of a corp may by

special resolution be amended to (a) change its name (b) change the province in which its registered office is situated (c) add, change or remove any restriction on the business or businesses that the

corp may carry on (d) change any max number of shares that the corp is authorized to issue (e) create new classes of shares (f) reduce or increase its stated capital, if its stated capital is set out in the

articles This is rarely done

(g) change the designation of all or any of its shares, and add, change or remove any rights, privileges, restrictions and conditions, including rights to accrued dividends, in respect of all or any of its shares, whether issued or unissued

Important section – commonly used. (h) change the shares of any class or series, whether issued or unissued, into a

differed number of shares of the same class or series or into the same or a different number of shares of other classes or series

share consolidations, stock splits etc. (m) increase or decrease the number of directors or the minimum or maximum

number of directors, subject to s. 107 and 112 (n) add, change or remove restrictions on the issue, transfer or ownership of

shares, or (o) add, change or remove any other provision that is permitted by this Act to

be set out in the articleso (2) Termination – The directors of a corp may, if authorized by shareholders in the

special resolution effecting an amendment under this section, revoke the resolution before it is acted on without further approval of the shareholders.

o (3) Amendment of number name – Notwithstanding (1), where a corp has a designating number as a name, the directors may amend its articles to change that name to a verbal name.

Don’t need shareholder approval. Note: can’t change verbal to number, or verbal to verbal w/o approval though.

93

S. 175o (1) Proposal to amend – subject to (2), a director or shareholder who is entitled to vote

at an annual mtg of shareholders may, in accordance w/ s. 137, make a proposal to amend the articles.

o (2) Notice of amendment – Notice of a mtg at which a proposal to amend the articles is oto be considered shall set out the proposed amendment and, where applicable, shall state that a dissenting shareholder is entitled to be paid the fair value of their shares in accordance w/ s. 190, but failure to make that statement does not invalidate an amendment.

S. 176 [*Note that we don’t deal w/ series – just holders of class shares]o (1) Class vote – The holders of shares of a class…are, unless the articles otherwise

provide in the case of an amendment referred to in paragraphs (a), (b) and (e), entitled to vote separately as a class…on a proposal to amend the articles to

(a) increase or decrease any max number of authorized shares of such class, or increase any max number of authorized shares of a class having rights or privileges equal or superior to the shares of such class

Articles can deny separate class votes on these amendments note, though, that this would probably need to be in the articles from the beginning, since most shareholders would want to keep right to a separate class vote if their rights/restrictions are being changed and are thus unlikely to pass a resolution giving up a right to class vote.

(b) effect an exchange, reclassification or cancellation of all or part of the shares of such class

Articles can deny separate class votes on these amendments (c) add, change or remove the rights, privileges, restrictions or conditions

attached to the shares of such class and, without limiting the generality of the foregoing,

(i) remove or change prejudicially rights to accrued dividends or rights to cumulative dividends

(ii) add, remove or change prejudicially redemption rights (iii) reduce or remove a dividend preference or a liquidation preference,

or (iv) add, remove or change prejudicially conversion privileges, options,

voting, transfer or pre-emptive rights, or rights to acquire securities of a corp, or sinking fund provisions

(d) increase the rights or privileges of any class of shares having rights or privileges equal or superior to the shares of such class

(e) create a new class of shares equal or superior to the shares of such class Articles can deny separate class votes on these amendments

(f) make any class of shares having rights or privileges inferior to the shares of such class equal or superior to the shares of such class

(g) effect an exchange or create a right of exchange of all or part of the shares of another class into the shares of such class, or

e.g. change pref shares into common, etc. (h) constrain the issue, transfer or ownership of the shares of such class or

change or remove such constrainto (5) Right to vote – (1) applies whether or not shares or a class…otherwise carry the

right to vote. o (6) Where a separate class vote is held, amendment must be approved by special

resolution of each class entitled to vote (by 2/3 majority b/c special vote)

94

Administrative procedures to effect changes once approved:o S. 177

(1) Delivery of articles – subject to any revocation under 173(2) or 174(5), after an amendment has been adopted under s. 173, 174 or 176 articles of amendment in the form that the Director fixes shall be sent to the Director

(2) reduction of stated capital – if an amendment effects or requires a reduction of stated capital, subsections 38(3) and (4) apply

o s. 178 Certificate of amendment – On receipt of articles of amendment, the Director shall issue a certificate of amendment in accordance w/ s. 262

o s. 179 (1) Effect of certificate – An amendment becomes effective on the date shown

in the certificate of amendment and the articles are amended accordingly. (2) Rights preserved – No amendment of the articles affects an existing cause

of action or claim or liability to prosecution in favour of or against the corp or its directors or officers, or any civil, criminal or administrative action or proceeding to which a corp or its directors or officers is a party.

“Export” or Continuation of a CBCA Corporation to another Jurisdiction Recall from previous discussion S. 188

o (1) corp can apply to continue under another jurisdiction if (a) authorized by shareholders (b) establishes that proposed continuance won’t adversely affect corp’s

creditors or shareholderso (3) notice of mtg must comply w/ s. 135o (4) each share carries right to vote on this even if it doesn’t otherwise.o (5) Shareholder approval must be given by special resolutiono (6) directors can get prior authority to terminate w/o further consultation w/

shareholderso (7) Once continued elsewhere, directors must give notice and discontinue corp under

CBCAo (8) Notice referred to in (7) is deemed to be articles in the form that the Director fixeso (9) CBCA ceases to apply to corp as of date shown in certificate of discontinuanceo (10) Corp can’t be continued in another jurisdiction unless the laws of that jurisdiction

allow that: (a) property of corp continues to be property of the body corporate (b) body corp is still liable for obligations of corp (c) an existing cause of action, claim or liability to prosecution is unaffected (d) a civil, criminal or administrative action or proceeding pending by or

against the corp may be continued to be prosecuted by or against the body corporate, and

(e) a conviction against, or ruling, order or judgement in favour of or against, the corp may be enforced by or against the body corporate.

Extraordinary Sale, Lease or Exchange of All or Substantially All of a Corporation’s Assets s. 189

95

o (3): A sale, lease or exchange of all or substantially all of the property of a corporation other than in the ordinary course of business of the corp requires the approval of the shareholders in accordance w/ ss. (4)-(8)

“all or substantially all” consider what’s really going on “in ordinary course of business” it’s pretty hard to satisfy this while still

divesting all or substantially all assets. Unlikely to be a big issue.o (4) Notice of meeting – a notice of a mtg of shareholders complying w/ s. 135 shall be

sent in accordance w/ that section to each shareholder and shall (a) include or be accompanied by a copy or summary of the agreement of sale,

lease or exchange; and (b) state that a dissenting shareholder is entitled to be paid the fair value of

their shares in accordance w/ s. 190, but failure to make that statement does not invalidate a sale, lease or exchange referred to in (3)

o (5) Shareholder approval – at the mtg referred to in (4), the shareholders may authorize the sale, lease or exchange and may fix or authorize the directors to fix any of the terms and conditions thereof

o (6) Right to vote – Each share of the corp carries the right to vote in respect of a sale, lease or exchange referred to in (3) whether or not it otherwise carries right to vote.

o (7) Class vote – the holders of shares of a class or series of shares of the corp are entitled to vote separately as a class or series in respect of a sale, lease or exchange referred to in (3) only if such a class or series is affected by the sale, lease or exchange in a manner different from the shares of another class or series.

o (8) Shareholder approval is by special resolutiono (9) Directors can get prior authorization from shareholders to abandon the sale, lease or

exchange w/o getting further approval from shareholders.

Voluntary Liquidation and Dissolution A voluntary liquidation and dissolution is to be distinguished from an “involuntary” court-

ordered one under ss. 213-214. We cover only the process of approval – none of the substantive details. 211

o (1) Proposing liquidation and dissolution – The directors may propose, or a shareholder who is entitled to vote at an annual mtg of shareholders may, in accordance w/ s. 137, make a proposal for, the voluntary liquidation and dissolution of the corp

o (2) Notice of meeting – notice of any mtg of shareholders at which voluntary liquidation and dissolution is to be proposed shall be set out in the terms thereof

o (3) Shareholders resolution – A corp may liquidate and dissolve by special resolution of the shareholders, or, where the corp has issued more than one class of shares, by special resolutions of the holders of each class whether or not they are otherwise entitled to vote.

Note that dissent and appraisal remedy under s. 190 is not available in respect of a voluntary liquidation and dissolution.

Shareholder Initiatives

Shareholder Proposals S. 103(5) Shareholder proposal – A shareholder entitled to vote at an annual mtg of

shareholders may, in accordance w/ s. 137, make a proposal to make, amend or repeal a bylaw.o S. 175(1) w/ same restrictions, shareholders may propose changes to articles

96

o S. 211(1) w/ same restrictions, shareholders may propose dissolution S. 137

o (1) Proposals – subject to (1.1) and (2), a registered holder or beneficial owner of shares that are entitled to be voted at an annual mtg of shareholders may

(a) submit to the corp notice of any matter that the person proposes to raise at the mtg (a “proposal”); and

(b) discuss at the mtg any matter in respect of which the person would have been entitled to submit a proposal

Note: in general, once a proposal complies w/ CBCA process, shareholder’s right to make it is strongly supported by the Act

o (1.1) Persons eligible to make proposals – To be eligible to submit a proposal, a person (a) must be, for at least the prescribed period, the registered holder or the

beneficial owner of at least the prescribed number of outstanding shares of the corp; or

must have min investment in corp, hold for a time to demonstrate genuine interest in governance of corp

(b) must have the support of persons who, in the aggregate, and including or not including the person who submits the proposal, have been, for at least the prescribed period, the registered holders, or the beneficial owners of, at least the prescribed number of outstanding shares of the corp.

parties can get together to meet $/% req’mts Prescribed numbers and period set out in Reg. 46

o (1.2) Info to be provided – a proposal submitted under (1)(a) must be accompanied by the following info:

(a) name and address of person and of supporters, if applicable, and (b) number of shares held or owned by the person and supporters, if applicable,

and the date the shares were acquiredo (1.3) Info not part of proposal – info provided under (1.2) doesn’t form part of the

proposal, and doesn’t count toward the max word limito (3) If so requested by the person who submits proposal, corp shall include in mgmt

proxy circular a statement in support of the proposal by the person. No more than 500 words (per reg. 48)

o (4) Nomination for director – A proposal may include nominations for the election of directors if the proposal is signed by one or more holders of shares representing in the aggregate not less than five % of shares or 5% of shares of a class entitled to vote at the mtg to which the proposal is to be presented, but this subsection does not preclude nominations made at a mtg of shareholders.

o (5) Exemptions – A corp is req’d to comply w/ (2) and (3) if (a) the proposal is not submitted to the corp at least the prescribed number of

days before the anniversary date of the notice of mtg that was sent to shareholders in connection w/ previous annual mtg

(b) it clearly appears that the primary purpose of shareholder proposal is to enforce a personal claims/redress personal grievance agst corp or directors, officers or security holders

(b.1) clearly appears proposal doesn’t relate in a significant way to the business or affairs of the corp

(c) not more than the prescribed period before the receipt of a proposal, a person failed to present, in person or by proxy, at a mtg of shareholders, a proposal that at the person’s request, had been included in a management proxy circular relating to the meeting

97

So, shareholders can’t just keep bringing back the same failed proposal. Reg. 50 applies – 2 yrs.

(d) substantially the same proposal was submitted to shareholders in a mgmt proxy circular or dissident proxy circular relating to a mtg of shareholders held not more than the prescribed period before the receipt of the proposal and did not receive the prescribed minimum amount of support at the mtg; or

Reg. 51 applies (e) the rights conferred by this section are being abused to secure publicity

See generally reg. 46-53 Recall Automatic Self-Cleaning Filter v. Cuninhame

o Effect of shareholder proposal Due to the powers held by directors/officers, Martha thinks shareholders would likely need to change bylaws to get something like Say on Pay through.

So passing proposal doesn’t necessarily mean implementation Some prominent cases under old test of s. 137(5)(b.1) (wherein mgmt could refuse proposal

where primarily intended to further a racial/social/etc. goal)o Varity Corp refused to consider proposal to pull out of S Africa during Apartheid

Although motivation was political/social, it did concern the affairs of the corp. So now this would have to be allowed.

o Medical Committee for Human Rights v. SEC MCHR held shares in Dow Chemical, which was selling napalm, and sought to

bring proposal so corp would no longer produce napalm. Held: corp couldn’t refuse proposal since despite being motivated by a social

cause, it was for sthg that was w/in powers of shareholders to do.

Proxy Solicitation and Proxy Circulars The right to hold proxy applies to all corporations (even closely held ones), but it most often

comes up in rel’n to widely-held corps, where so many shares and shareholders that many can’t possibly travel to every meeting.

S. 148o (1) proxy-holders don’t have to be shareholders – can be anyone.

Might see bylaws describing form of acceptable proxy or req’mts for proxyo (3) Proxy valid only at mtg in respect of which is it given, or any adjournment thereofo (4) Revocation of proxy – A shareholder may revoke a proxy

(a) by depositing an instrument in writing executed by the shareholder or by the shareholder’s attorney authorized in writing

(i) at the registered office of the corp at any time up to and including the last business day preceding the day of the mtg, or an adjournment thereof, at which the proxy is to be used, or

(ii) with the chairman of the mtg on the day of the mtg or an adjournment thereof; or

(b) in any other manner permitted by law *Note: this was in issue in Consolidated Enfield v. Blair – unclear whose votes

were properly countable.o (5) Deposit of proxies – The directors may specify in a notice calling a mtg of

shareholders a time not exceeding 48 hrs, excluding Saturdays and holidays, preceding the mtg or an adjournment thereof before which time proxies to be used at the mtg must be deposited w/ the corp or its agent.

98

This allows corp to know in advance how many votes are proxy-holders, determine if quorum is present, speeds up counting of ballots, and might give directors some tactical advantage

There are two main types of proxy solicitation: general management solicitation and dissidents seeking to remove directors

o Management proxy: basically just vote w/ mgmt on all proposals. Can avoid all the bogus proposals this way, but also empowering mgmt.

o Generally, proxy solicitation/proxy circulars only at issue during factional infighting S. 149: Every year, large corps have to solicit proxies:

o (1) Mandatory solicitation – when mgmt gives notice of mtg, must also send form of proxy in prescribed form to each shareholder entitled to receive notice of the mtg.

o (2) Mgmt ≠ req’d to send form of proxy if (a) not a distributing corp, and (b) has 50 or fewer shareholders entitled to vote at a mtg (two or more joint

shareholders count as one shareholder)o (3) Offence – If the mgmt of a corp fails to comply, w/o reasonable cause, w/ (1), corp

is guilty of an offence and liable on summary conviction to a fine not exceeding five thousand dollars.

o (4) Officers, etc., of corporations – Where a corp commits an offence under (3), any director or officer of the corp who knowingly authorized, permitted or acquiesced in the commission of any offence is a party to and guilty of the offence and is liable on summary conviction to a fine not exceeding five thousand dollars or to imprisonment for a term not exceeding six months or to both, whether or not the corp has been prosecuted or convicted.

Regs 54-56 set out form of proxy, what has to be included in it. o Essentially refer to National Instrument 51102 National Association of Securities

Regulators s. 147 – Definition of “solicit” or “solicitation”

o (a) includes (i) a request for a proxy whether or not accompanied by or included in a form

of proxy (ii) a request to execute or not execute a form of proxy or to revoke a proxy. (iii) the sending of a form of proxy or other communication to a shareholder

under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy, and

(iv) the sending of a form of proxy to a shareholder under s. 149, buto (b) does not include

(i) the sending of a form of proxy in response to an unsolicited request made by or on behalf of a shareholder

(ii) the performance of administrative acts or professional services on behalf of a person soliciting a proxy

(iii) the sending by an intermediary of the documents referred to in s. 153 (iv) a solicitation by a person in respect of shares of which the person is the

beneficial owner (v) a public announcement, as prescribed, by a shareholder of how the

shareholder intends to vote and the reasons for that decision See reg. 67

(vi) a communication for the purposes of obtaining the number of shares req’d for a shareholder proposal under 137(1.1), or

99

(vii) a communication, other than a solicitation by or on behalf of mgmt of corp, that is made to shareholders, in any circumstances that may be prescribed.

See reg. 68 communications to organize & provide info S. 150: If you solicit proxies, must provide mgmt or dissident proxy circular, as applicable::

o (1) Soliciting Proxies – A person shall not solicit proxies unless (a) in the case of solicitation by or on behalf of the mgmt of a corp, a mgmt

proxy circular in prescribed form, either as an appendix to or as a separate document accompanying the notice of the mtg.

(b) in the case of any other solicitation, a dissident’s proxy circular in prescribed form stating the purposes of solicitation

Is sent to the auditor of the corp, to each shareholder whose proxy is solicited, to each director and, if (b) applies, to the corp.

o (1.1) Exception – Solicitation of fifteen or fewer shareholders – Despite (1), a person may solicit proxies, other than by or on behalf of mgmt, w/o sending a dissident’s proxy circular, if the total number of shareholders whose proxies are solicited is fifteen or fewer, two or more joint holders being counted as one shareholder.

This can be useful in small corps, and also in large corps where a few shareholders might hold significant portion of shares

S. 154: If the proxy circular doesn’t contain the proper info, or contains an untrue fact, an interested person or the Director may apply to court for:

o (a) an order restraining the solicitation, the holding of the mtg, or any person from implementing or acting on any resolution passed at the mtg to which the form of proxy, mgmt proxy circular or dissident’s proxy circular relates.

o (b) an order req’ing correction of any form of proxy or proxy circular and a further solicitation, and

o (c) an order adjourning the mtg s. 152

o (1) Attendance at meeting – A person who solicits a proxy and is an appointed proxyholder shall attend in person or cause an alternate proxyholder to attend the mtg in respect of which the proxy is given and comply w/ the directions of the shareholder who appointed him.

o (2) Right of a proxyholder – A proxyholder or an alternate proxyholder has the same rights as the shareholder by whom they were appointed to speak at a mtg of shareholders in respect of any matter, to vote by way of ballot at the mtg and, except where a proxyholder or an alternate proxyholder has conflicting instructions from more than one shareholder, to vote at such a mtg in respect of any matter by way of any show of hands.

Brown v. Duby [1980, SC] Facts

o Corp had head office in AB, also operated in US.o Mgmt alleged that dissident group sent out proxy solicitations w/o appropriate info.o 2 letters: 1st March 7th, to only US shareholders. 2nd March 30th, to all shareholders.

Held: March 7th letter was a proxy solicitation, but refused to grant injunction on basis that it isn’t in the best interests of the corp to either cancel mtg or forcibly silence the dissidents

o Stated that committee had been formed to oppose existing mgmt so relates to business/affairs of corp

o Stated their intention to solicit proxies for the next mtg of shareholders

100

Introduced committee members and said they weren’t requesting proxies now, but would later on, and thus asked shareholders who rec’d letter not to sign mgmt proxy form

o Note: Letter was sent from US to only US shareholders, so argued Canadian court shouldn’t interfere since it complied w/ US law But: corp’s activities in US still have to comply w/ its incorporating statute, so the CBCA follows.

NB: this would now be exempt from information circular obligations, per s. 147(b)(vii)o See reg. 68: exempts solicitation by 1+ shareholders concerning business of corp,

where no form of proxy is sent.o The old rules made it very difficult to be in contact w/ other shareholders about

dissatisfaction w/ mgmt w/o having to distribute full information circulars.

The Closely-Held Corp: Vote Pooling and Other Shareholder Agreements

Vote Pooling S. 145.1 Pooling agreement – A written agreement b/w two or more shareholders may provide

that in exercising voting rights the shares held between them shall be voted as provided in the agreement.

o There are limits to what shareholders can agree to in a vote-pooling or shareholders agreement. [Ringuet v. Bergeron]22

Shareholders can agree to fetter their voting rights – but cannot fetter their rights as directors.

Unanimous Shareholder Agreements Primarily used in small, closely held corps where shareholders are directors/officers.

o Where interests of shareholders are closely aligned, makes sense to have the group of shareholders make the decision as a group, rather than having a directors mtg then a shareholders mtg.

o Line re fettering discretion of directors doesn’t matter in USAs, since shareholders are taking over the mgmt role.

S. 146o (1) Unanimous shareholder agreement – An otherwise lawful written agreement among

all the shareholders of a corp, or among all the shareholders and one or more persons who are non-shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the mgmt of, the business and affairs of the corp.

So, must be in writing. Allows a non-shareholder Restricting in some way the directors’ mgmt powers valid.

o (2) Declaration by single shareholder – If a person who is the beneficial owner of all the issued shares of a corp makes a written declaration that restricts in whole or in part

22 Ringuet v. Bergeron (1960, SCC): R P and B agree to pool votes, and work to acquire greater % of shares. Take majority, pos’n selves as president, VP and secretary/treasurer, respectively, and then keep increasing. Bring on 4th to get to supermajority, add new agreement to continuing old agreement. Then R & P start to push B out. Held mtg w/o giving notice to B and elected selves and not B. Action by B. ∆ argued original agreement invalid since fettered acts of directors. Court rejected this. Held: Agreement only determined how would vote as shareholders – can agree in advance to vote shares in particular ways, and enforce. Court found agreement was only to get them onto the BoD, but leaving discretion once directors. As shareholders, can fetter discretion, but ≠ as directors.

101

the powers of the directors to manage, or supervise mgmt of, the business and affairs of the corp, the declaration is deemed to be a USA

Could happen with a wholly-owned subsidiary, or an individual owning all shares

Parent-subsidiary may appoint parent’s officers to be officers of subsidiary as well.

o (3) Constructive party – A purchaser or transferee of shares subject to a USA is deemed to be party to the agreement

e.g. if you inherit the shares from someone o (4) When no notice given – If notice is not given to a purchaser or transferee of the

existence of a USA, in the manner referred to in 49(8) or otherwise, the purchaser or transferee may, no later than 30 days after they become aware of the existence of the USA, rescind the transaction by which they acquired the shares.

This would be more difficult if it was a testatory gift. Might be able to demand that corp acquire your shares at FMV

o (5) Rights of shareholder – To the extent that a USA restricts the powers of directors to manage…business/affairs of corp, parties to the USA who are given the power to manage or supervise mgmt of business/affairs of corp have all the rights, powers, duties and liabilities of a director of the corp, whether they arise under this Act or otherwise, including any defences available to the directors, and the directors are relieved of their rights, powers, duties and liabilities, including their liabilities under s. 119, to the same extent.

This is important transfers powers/duties to shareholders, and relieves directors of rights/powers liabilities in that respect.

o (6) Discretion of shareholders – Nothing in this section prevents shareholders from fettering their discretion when exercising the powers of directors under a USA.

When shareholders are acting as directors per the USA, the can fetter their discretion in advance through the USA

So a USA is a fundamental change to the normal governance structure of a corpo It is a private contract, but also recognized by CBCA as shifting managerial

responsibility and liability, and so in many instances it overrides the normal CBCA rules

To be a USA, must in some respect transfer mgmt powers of directors to the shareholders o Can be all powers of mgmt, or just some. o Power transfer will generally be of those powers that BoD generally can’t delegate

things that are Always directors’ decisions.

Duha Printers (Western) Ltd. v. The Queen [SCC] Tax case – issue of what constitutes control of corp/change of control for tax purposes. First time SCC looked at what constitutes a USA In this case, USA took power to issue new shares away from directors, transferred to

shareholders acting unanimously.o The issue was whether the transfer of what was traditionally directors’ power to the

shareholders made this agreement a USA, and whether this changed the control of the corp. Held: yes to both questions.

Iacobucci affirms the distinction b/w ordinary and unanimous shareholder agreementso Has there been a transfer of power to shareholders? If not, ≠ a USA.

USAs are a combination of corporate-constitutional and contracto A K that adjusts the constitutional foundation of the corp.

Must be a written agreement

102

Rationale for USAs: need to empower shareholders as a group to take control of corp in some situations, but this would involve fettering them as directors, so have to legislate an avenue so shareholders can take over mgmt w/o running into this.

Provisions of USA can be enforced against corp and directors/officers even though they need not be parties to the USA (see s. 122(2)).

Compliance and Restraining Orders S. 247. Restraining or compliance order – If a corp or any director/officer/employee/agent etc.

of a corp does not comply w/ the Act, regulations, articles bylaws or USA, a complainant or creditor may apply to court for an order directing them to comply or restraining them from acting in breach.

S. 248 Summary application to court an application under s. 247 is a summary application to the court.

Rectification of Corp Records S. 243

103