The Corporate Constitution

Notes from Class

- Rights and remedies are often designated in the corporations constitution- Corporate Constitution- What can it do and what can it not do: it was not until about 100 years ago that the courts

resolved that a corporation was separate from its shareholders. Since 1887 this has been a well-recognized principle, that a corporation is separate and apart from any liability of the shareholders

- Corporate constitutions also allocate decision making roles, rights and responsibilities along with remedies. There is generally a notion that the board of directors run the corporation and make strategic decisions however in practice they don’t do nearly as much. They are generally lead by executives, president and VP who dictate to the board, rather than the other way around which is the more traditional corporate theory. These higher end executives also often tend to be the very people that pick who will be on the board of directors

- While directors have a fiduciary responsibility to a company, shareholders do not. So if you are a director and a shareholder, there is a potential to use your votes as a shareholder to protect yourself from your actions as a director – which can be problematic

- Executives used to be treated just like any other employee, however now the law includes a fiduciary responsibility for senior executives as well

- Corporate law functions as if the world outside the corporation doesn’t matter even though they do have a major impact on the corporation itself – ex: external constituencies (foreign investment, fiscal responsibility etc)

- Creditors until very recently played no role in corporation law and their rights were limited to rights under contract law – unless a corporation was close to insolvency in which case they can seek approval from the court to get a trustee to protect their interests – they have recently been added to the list of people who can use statutory remedies to complain about the corporation (the CBCA is more extensive then BCBCA for creditors inclusion)

- There is not a huge amount of scope for shareholders to complain because like in a parliamentary democracy, the directors are elected and then are generally free to do what they want unless they are purposing a major change (ex: merger) – otherwise they are held accountable by simply not being elected again

- Shareholders are not owners, even though they may be the closest – in fact, nobody owns the corporation, the corporation just owns stuff

- What shareholders purchase is essentially the right to receive notice of shareholder meetings, information about agenda in shareholders meetings, the right to elect directors, the right to call a meeting, the right to add a matter to the agenda and the right to share in profits – but even then, only if the directors elect to send out dividends

- The majority runs the corporation, however there are also protections in place for the minority

- Most legislation (CBCA and BCBCA) says that directors simply manage or supervise – they have to fulfil their duties with a view to the best interests of the corporation (note: this wording seems to be less onerous than saying fiduciary duty)

Notes from Readings:

Introduction

- The study of business organization is largely about answering – 1) who is in control, 2) who gets profits, 3) who is liable – a corporate constitution gives answers to the first two and partial answers to the third – the other part of the answer to the third comes from the principle of corporate personality and the general laws governing personal and vicarious liability

- The primary function of any organization’s constitution is to prescribe how the internal government of the organization is to operate – includes allocating rights, duties, obligations and access to grievance procedures among the membership (shareholders included) and their elected or appointed officials

- Corporate law in Canada is now built on four major principles – 1) corporate personality – the principle that a corporation’s behavior is to be legally analyzed to the behavior of human beings, 2) managerial power – the principle that the daily operation of corporate business is to be done by a relatively independent management group, 3) majority rule – internal corporate decisions are to be made by a democratic process among those constitutionally enfranchised on any particular issue, 4) minority protection – certain corporate managerial or majority shareholder inclination ought to be retrained from injuring minority members of any group created by the corporate constitution

- The main issue in corporate law is what happens when these principles come into conflict

The General Public

- The general public interest in corporate activity is addressed in many federal and provincial statues – but corporate statues do at least in a limited way include features that reflect the public interest in what corporations do – ex: mandatory rules creating offences for violations of corporate law and rules about the investigations of corporations

- Corporate social responsibility – the idea that management of a corporation needs to be constructed with a broader view to the interests of society

- Members of the public may also interact with the corporation as trade suppliers or as customers – this may turn them into creditors and will generally bring in other legal issues outside of the corporate constitution (contracts, torts etc)

The Crown, Legislatures and Civil Servants

- Government personnel relate to corporation in three difference ways – 1) provision of legislative regimes that allow for the creation of corporations and the regulation of their business activities, 2) creation and administration of various anti-monopoly, tax incentives, foreign investment review and other political-economic statutory control (outside corporate law), 3)

involvement as a shareholder in a particular corporation – ex: Crown corporation would be 100 percent minority shareholder as well

Employees

- Traditionally dealt with elsewhere – labor or employment law – however there is one importance exception: corporate personality dictates that when directors of a corporation are acting as such, their acts are corporate and not individual acts – hence they are not liable as individuals

Creditors

- A creditor of a corporation is someone to whom the corporation owes money – a person might buy a corporate bond or a bank might lend a large sum to make credit available for example – in either event it will become a secured creditor under Personal Property Security Act

- Supplies of inventory, office supplies, equipment or services are likely to extend credit to the corporation – some as secured while others not

- Traditionally – creditors have been considered outside a corporate constitution – however modern Canadian statues provide access to grievance procedures for complaints including for a holder of security and debt security – some grievance procedures are open to creditors as well

- If a corporation is in financial difficulties, a secured creditor may have appointed a receiver or receiver-manager to take control of the property for the benefit of the creditor – where this occurs they may be the subject of some slight regulation under CBCA or Bankruptcy and Insolvency Act

Internal Groups

- Even in relation to the internal groups, the corporation is a separate person from any member of one of those groups

- The difference between internal and external groups is just that the internal groups determine how the corporation behaves

- A principle function of the corporation structure is to allocate the power to decide what the corporation will do in a given situation – ex: constitution can determine who has the power to decide whether the corporation will accept an offer

Shareholders

- Many say that the shareholders are in control – while others go so far as to say shareholders shouldn’t own the corporation. There are two obvious problems with both propositions: shareholder power is usually indirect (not through day to day decisions but through their power to elect directors) and if a corporation is a person at law they how is it possible to have owners

- The Governing Principles- Shareholders are a source of capital and a constituency to which management must report –

corporate law however deprives shareholders of any legal status as proprietors but they are far

more than creditors – corporate statues are designed to give the collective group of shareholders a major say, however indirectly, in how the business is run

- Who gets the profits – generally shareholders do but the full answer is that the profits go to the corporation and the directors have the power to declare dividends

- Different considerations arise upon corporate death – if it’s to be wound up or terminated then the first step is to pay their debts – once that is done the remaining property is distributed to the shareholders

- As the economic, though not legal, proprietors of the corporation – shareholders are entitled to information including a list of shareholders, disclosures of any management conflicts of interests and financial reporting by management

- Shareholders also have remedies available to them to enforce compliance with the corporate constitutions

- Shareholders are generally not found liable – however it is possible to hold a person vicariously liable for the actions of another – this can happen when two people are in a partnership or where one is acting as the agent for another

- General corporations statues make it clear that shareholders are not liable as shareholders for corporate debts

Directors and Officers

- Corporate management comprises two inter-dependent groups – directors who oversee corporate strategy and officers who function as tacticians, supervising other functionaries in the corporation’s daily business life

- Legal analysis has traditionally focussed on directors, which in the modern world are actually the less important of the two groups

Directors in Theory and Practice

- Canadian corporate statues typically create a board of directors to manage or supervise the management of a corporation – elected by shareholders

- The directors, once elected, are collectively given the power to determine the direction of corporate business and have imposed statutory obligations to exercise their powers in the best interest of the corporation

- Their power and duty is to run the business independently as they see fit and they may be democratically thrown out of office if shareholders don’t like it

- They must exercise their powers for the benefit of the corporation but it is they who determine what the corporation wishes to be done

- In practice, its much less dramatic – they operate as review bodies and sounding boards

Officers in Theory and Practice

- Officers are employees, they run the day to day operations within the long range policies set by the directors

- Practically speaking they do more – they determine the corporate destiny and CEO’s effectively appoint the board of directors

- Corporate Constitutions in Action

The Division of Powers

- One of the most important functions of the constitution is to divide power among internal groups

Canadian Jorex Ltd v 477749 Alberta

Class: case is about the power of directors to cancel a meeting under their residual powers. Shareholders argued that it was a meeting for shareholders and that directors couldn’t cancel it because it didn’t say they could in the constitution. The Court says that the residual managerial powers vests with the board of directors in the CBCA model. Rules that directors can really do whatever they want within their powers but it has to be for the best interests of the corporation – in this case it was and therefore could not be challenged. The obligation of the directors to act in the best interest of the corporation, is to the corporation and not to the shareholders – so they are not going to want to sue themselves for a breach of fiduciary duty and the only time directors are really at risk is during a takeover.

Readings: Court on appeal says that the directors of a federal corporation have the power to cancel a special meeting called in advance of its scheduled date. Under the corporate model adopted by the CBCA, the residual power to manage a corporations affairs rests with the directors – this power is given by statue and not derived from the delegation of power by shareholders.

Grievance Procedures

- Another important function of the Constitution is to provide procedures that offer redress for violations of the constitution

Roles v 306972 Saskatchewan Ltd

Class: Case is about grievance procedures and who can do what to keep a corporation in line. Involved a difference of opinion with the majority of the corporation and what you can do about it. S. 240 of the CBCA provides a number of people who are able to seek an opportunity from the court to require the corporation to comply with the law or stop the corporation from not complying with the law. This is what Roles was seeking. Roles was the director of a corporation, it was taken over and he was unhappy with the takeover, believing that the corporation was paying too much. He sought the opportunity to inspect the books and argued that he needed to do so before an upcoming general meeting. Roles tries to rely on s.20(2) that states that a corporation is required to maintain various kinds of information, in this case adequate accounting records – s.20(4) says this information should be available to the directors, which Roles is. The court basically tells him to chill, that he’s about to get all that information in four days at the AGM. Then at the AGM he is not re-elected, so he appeals. The reasoning behind not wanting to share that accounting information is about not wanting to make that info public, some of the

people with large shares might be competitors trying to get that info. Now that Roles is not a director, court says his intention is unclear and s.20(4) doesn’t apply. CBCA says no access for former directors in this case – while BCBCA allows for it (in favor of more information).

Readings: Director applied to the court for the production of accounting records and was denied. He is appealing that decision however since that time he was not re-elected as a director of the company. Whether or not a statutory right exists after removal, it is at least incumbent to demonstrate the reason for wanting access is for the benefit of the corporation. In this case, the courts were unable to see how access would have helped him fulfil any obligation as a past director.

Types of Corporate Constitution

Charter Corporations

- Corporation created by an executive act – created by royal prerogative, it’s a discretionary power of the crown

- Over time practical control has passed from the monarch to the executive branch of the government and its scope has diminished in favor of legislative or parliamentary power

- In Canada, there are no more businesses that are charter corporations- Constitutional document of a charter corporation is its charter – document bearing the royal

seal by which the corporation is created- This Charter is sometimes called letters patent

Special Act Corporations

- A special act corporation is created by a particular act of the legislature – it was common in the 19th century but less so now – the main difference from a charter corporation is the source of its power is legislative rather than executive

- The constitutional document in this case is the act by which it is created

Letters Patent Corporations

- A “letters patent” corporation is one incorporated under a registration statue that adopts the charter corporation as its model – until 1970’s, the federal jurisdiction and five provinces followed this method

- One characteristic that distinguished this type of corporation is the retention of a discretionary element in the creation of the corporation – letters patent always provide that the relevant government official “may” issue incorporating documents rather than “shall”

- Its constitutional documents are its letters patent and also the statue they are granted under- The letters patent will set out the name, capital structure and other basic facts – and will

provide for the creation of by-laws- The division of constitutional powers is set out in the statue – generally managerial power goes

to a board of directors and the shareholders are given power to elect the directors and also power in special situation

- In general, they do not provide for grievance procedures

Contractarian Companies

- Generally are known as English model companies or memorandum and articles companies – this type of body is very different from charter and letters patent corporations

- Legislation beginning in 1844 regularized companies by requiring registration as a way of guarding against fraudulent promotions – provided registration as a right

- The basic constitutional documents are a “memorandum of association” and “articles of association”. The memorandum is the shorter document containing the name of the company, tis objects, its share capital etc – in BC the memorandum is now called the “notice of articles” – the articles of association is much longer setting out all the details of the corporate constitution, including anything that would be a by-law in another type of corporation

- The memorandum can be seen to correspond to the charter and the articles to the by-laws- The constitution of this type of corporation is treated as a contract among all shareholders and

the company itself – directors not usually given any managerial powers and shareholders ar the theoretical source of all power – any power the directors have they get from the shareholders

- The articles of association can be changed with a majority vote – in this way the terms of the corporate constitution can be changed

- Although BC and Nova Scotia retained this contractarian model – they have followed the division of powers jurisdictions by adding a range of grievance procedures

Division of Powers Corporations

- This is now the dominant model in Canada – it was created to try to rationalize corporate law and remove some of the difficulties that had developed in cases trying to interpret the contractatian model

- The statue expressly divides powers within the corporate constitution between shareholders and management – had a lot in common with letters patent in this way

- The basic constitution is called the Articles of Incorporation – similar to the letters patent and memorandum of association in substance

- It must set out the name, capital structure and a few other basic features and it can set out other things like by-laws – it is difficult to change as it requires 2/3 majority of shareholders

- The directors are given the power to manage or to supervise management, while the shareholders are given the power to elect the directors and powers in particular situations (again similar to letters patent)

- Division of powers corporations may have a constitutional document that is unique to this model called a “unanimous shareholder agreement”

- This model is more thorough for providing grievance procedures – includes discretionary oppression remedies, mechanism for shareholders to ask a judge to allow them to enforce a right

Practical Differences

- Some corporate law issues can be resolved independently of the type of corporate constitution under which they arise – ex: directors owe a fiduciary duty no matter what – however solutions will largely depend on the constitution

- Difference between bylaws (through CBCA Act) and Articles of Association (through Companies Act)

- Public Record – unlike Articles of Association, the Bylaws are not an incorporating document – there is no requirement that there be bylaws at all – hence they are not filed with the register and not available to the public

- Execution – Articles of Association have to be signed by all incorporating shareholders and witnessed – thus unanimous – bylaws never need to be signed

- Enactment and Amendment – amendments can be made to articles of association by a special shareholders resolution requiring 75 percent majority – bylaws can be amended by ordinary resolution by directors and be binding until the next shareholders meeting when they get an opportunity to accept or reject

- The Articles of a Contract – articles of association are a contract between the corporation and the shareholders – bylaws are not

- Pre-Emptive Rights – a common provision of articles of association is that shares cannot be issued to a non-shareholder without first offering them to the existing shareholders – pre-emptive rights are not provided for in the bylaws

- Rights of First Refusal – a restriction on transfer, while permissible in the articles of incorporation or a unanimous shareholder agreement ought not to be placed in the bylaws

- Casting Vote – for articles of association a common provision is that the chairman gets an extra vote in the event of a tie – this type of provision cannot be placed in bylaws

- Limitation on Numbers – CBCA distinguished between distribution of corporation shares – distinguishes between corporations with more than 15 shareholders and those with less

Constitution Shopping

- The contractarian model tends to be more flexible than other models since it is founded on a contract, a more flexible legal institution – such flexibility can be utilized to remove directors from office

The Corporation as a Legal Person

Notes from Class

- Critical issues in corporate law are what is means to be a corporation, what rights a corporation has and how the law is going to treat a corporation.

- The idea of the corporation as a separate person is a legal fiction – this can cause difficulties because the result of thinking of a corporation as if it’s a person is that it can lead to results that people don’t like – sometimes the court will as a result decide to ignore the corporation as a person idea and pierce the corporate veil

- After 1877 – the court finally decides that a corporation is a legal person in Saloman – this occurred was after widespread corporation activity so it didn’t emerge as an economic prerequisite

- The idea is driven by investors wanting to 1) separate the investors personal assets from that of the corporation and 2) get limited liability to ensure that an liability they are responsible for was limited to the investment they had in the corporation – much more important at a time when you could buy a share for pennies and agree to pay the rest later (deposit)

Notes from Readings:

What is a Corporation?

- A corporation is an artificial person – within the legal system it can hold property, contract with others commit torts etc

- As the common law developed it recognized the creation of corporations by royal charter or letters patent – both were signed by the crown and used to grant power or privilege

- Later, as power passed from the crown to legislatures, corporations were created by special statues – statues which created a single corporation and governed its powers, purposes and so on

- Finally, the late 19th century saw the adoption of registration statues which granted civil servants the authority to create corporations – these registration statues provide a general set of rules governing all corporations created under them

The Governing Principles

- Indian idol case of 1925 – provides an example of traditional technique – case involved the interpretation of a will and the courts found that what was being passed down was a legal person and could not be the subject of a property claim – if it’s a legal person then legal rights had to be protected. Case illustrates how silly legal fictions can get.

- This is how we treat corporations using the concept of fiduciary duty – a corporate manager can be relied on to protect the interests of the legally personified company in most circumstances – however if the manager’s self-interest conflicts with the corporation, equitable rules are imposed to protect the corporations legal rights and liberties

- The form of property actually being acquired by a shareholder is a corporate share – they don’t actually own anything – a corporate share like other forms of property is a legal relationship

Salomon v Salomon

Class: Courts at the trial level basically say that he is just using the corporate form as an alter-ego as almost all the shares are his. House of Lords overturns this and says that all that the statue requires is basic compliance with the statue, the shares don’t necessarily need to be valuable and it doesn’t matter how its set up as long as it’s done properly under the statue – we don’t care about the motive, if you fulfill the regulation then you’re a separate entity. The practical implication is that the investor’s assets are safe if the corporation does belly up since individual assets are found to be separate from the corporation. The loser in this decision is unsecured creditors, secured creditors are still okay because if the corporation fails then the bank will take the assets, liquidate them and pay off the debts. But unsecured creditors have no remedy when it comes to collection. Decision transfers risk to these unsecured creditors because they are the weakest and essentially says that the economic benefit is more important than protecting them.

Readings: Case explains the legal consequences of incorporation and lays the cornerstone of modern corporate law. A corporation’s legal personality is separate and independent from its shareholders. As long as you comply with legal obligations, the company is a separate legal person and not an agent or trustee. The most significant feature of incorporation is the segregation of business profits and losses from the personal accounts of the individual participants. The result is that it limits a shareholder’s liability to pay corporate debts to the amount paid for their shares (reinforced not in sections like CBCA 15(1) and 45(1). Saloman also confirms that corporate registration statues mean what they say, so seven shareholders has to mean seven substantial shareholders, not 6 people with 1 percent each.

Practical Consequences

- Some physical acts and transactional details that we think we see performed by individuals can be legally attributed to a corporation – ex: the acts of directors, managers etc

Macaura v Northern Assurance Co

Readings: Timber is burned and majority shareholder in the corporation wants an insurable interest. It was the majority shareholder that took out the insurance and then established the corporation – he didn’t own every share but most. He transferred his interests, the timber, to the corporation that he started and then there was a fire. He sues on the insurance policy on which he is listed as an individual. The insurance company refuses to pay because it was the corporation that suffered the loss and not him as an individual. Court holds that there is no insurable interest as a shareholder. Even if the person owned all the shares, he is not the corporation and therefor he has no legal or equitable in the assets of the corporation. As a creditor he could not be insured, and as a shareholder he couldn’t either because no shareholder is entitled to any right to any item of property owned by the company. Neither a simple creditor nor a shareholder in a company has any insurable interest in a particular asset which a company

holds. A parent corporation holding a controlling interest in the shares of a subsidiary corporation has a business interest in the subsidiaries assets but not an insurance interest.

Kosmopoulous v Constitution Co of Canada (Ont C.A.)

Kosmopoulous v Constitution Co of Canada (SCC)

Readings: A business was being carried on in the name of Spring Leather Goods, rather than by the sole shareholder himself. The issue is again whether a sole shareholder has an insurable interest in the company’s assets. The court looks at the rule in Macaura and the trial judge says that the difference is that in Macaura the plaintiff was not the sole shareholder and that the sole shareholder should have an insurable interest. On appeal to the SCC Wilson says that this is not an appropriate place to lift the corporate veil and that since the plaintiff took the benefits of being an incorporated business, they will also have to suffer the detriments. However as the sole shareholder the risk was huge, so much so that he had a insurable interest. McIntyre holds that it is sufficient to hold that the shareholder in a one person corporation has a sufficient interest to take himself out of the Macaura rule. Case stands for the proposition that a sole shareholder, though lacking any proprietary interest in the corporations assets, can have an insurable interest in them. Decision broadens insurance law but not corporate, as they don’t dispense with Saloman like Wilson was suggesting.

Lee v Lee’s Air Farming

Readings: Lee is acting as sole shareholder and director for the corporation, which then hires himself as pilot. But it’s technically not Lee that hires himself it’s the corporation. When he’s flying the plane he is not acting as the corporation, he’s acting as an employee. Case says you can’t be both at once. Case affirms Saloman that a company is its own legal entity and not the identity of directors/shareholders. In a one person corporation, even if you are the sole employee, you are still an employee of the company because it’s a separate legal entity – so you can be employed by your own company. This case was a claim for worker’s compensation in which the trial judge held that since the deceased was the governing director in whim was invested the full control of the company, he could also not be an employee. The court on appeal held that he was paid wages for performing his duties as a pilot and when engaged in those duties he was not discharging duties as governing director. The deceased was a legal person who was willing to contract with the company, which was another separate legal entity. Just because someone is a director or shareholder doesn’t mean that person can’t also enter into a contractual relationship with the company, they are two separate legal entities. The theory of corporate personality cuts two ways – on its face, it says that certain acts are acts of the corporate person, what this implies though is that such acts are not the acts of any other individual. Lee shows that just because an individual is a shareholder and a director of a company, he does not forfeit his individual status – he can act in dual capacities within the corporation. Lee demonstrates that what needs to be ascertained is the capacity in which the individual in question is acting at the relevant time, to determine liability.

The Corporate Veil Theory

- Commonly used to describe situations in which judges have presumed to simply ignore the existence of the corporate person and fix liability on the manger or shareholders

- They represent a refusal to apply Saloman and the exceptions seem to occur when to apply Saloman would be flagrantly opposed to justice

- The general principle is that a corporation is to be analyzed by analogy to the individual human being

- The authority to do this is not authorized by statue, in fact statues indicate that there is no corporate veil that can be drawn aside

- Examples include where it may have to be used include intentional undercapitalizing of a corporation or the use of corporations to commit fraud – judicial reactions to these situations has led to the piercing of the corporate veil

- It is also sometimes done to get to the deep pockets needed to satisfy a judgement where the corporation is insufficiently capitalized – it may be necessary to establish that a corporation’s investors are directly responsible for the corporations actions. To do this, judges have sometimes sought to disregard the corporate entity in order to consider the economic realities behind the legal façade

- It has been suggested that the corporate form may be stripped away where it “would be flagrantly opposed to justice”, where “a company is formed for the express purpose of doing a wrongful act” or “where the company is a mere agent of a controlling corporator”

- Absent situations of fraud however, reliance is often placed on the perceived inequalities of the situation in order to justify piercing the corporate veil – but the conduct must be inextricably linked with corporate activity – it’s a high threshold that is not just met by something being unfair

- Judges have claimed the power to pierce the corporate veil in three situations – 1) its not fair – problem is there are no broadly enforceable standards, 2) when a corporate entity was created or managed for nefarious purposes – judicial view in this category tends to be self-contradictory, 3) cases in which judges after reaching a conclusion, go on to “let off steam: -obiter dicta – the author of the text is pretty critical of all three

- More recent Ontario approach – “the courts will disregard the separate legal entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct” – must be complete domination by an individual and must be conduct akin to fraud

Corporate Personality in Practice – Some Problem Areas

- The principle that a corporation is a separate legal entity does not mean that one is expected to ignore the individual shareholders and managers – their character and behavior patterns are key factors in constructing a unique personality for them

Big Bend Hotel Ltd v Security Mutual Casualty Co

Readings: The president is the sole shareholder and contracts for insurance against fire. The insurance company denies coverage because three years before he was the controlling shareholder of another corporation whose hotel also burned down and he failed to reveal that information when entering into

contract and that a fire insurance policy issued to him previously had been cancelled. In denying the plaintiff’s claim, Callaghan J reasoned that had the insurers known of the prior fire loss, they would have declined to have accepted the risk. This case is an example of the court lifting the corporate veil to take into account the actions of individual members involved in improper conduct or fraud. Example of the court not applying Saloman on the basis that if the plaintiff had revealed what had happened previously, he would not have received coverage – in this case it didn’t even have to be fraud, just the fact that the insurance company would not have accepted the risk. In general there is not much of a positive duty to disclose, insurance policies are one exception where failure to do so can constitute fraud. It takes a lot to pierce the corporate veil but they do it here because of an insurance law principle which allows them to go around it.

Hercules Managements Ltd v Ernst & Young

Readings: The issue here is whether and when accountants who perform an audit of a corporations financials owe a duty of care to the shareholders who claim to have suffered losses due to the negligently performed audit. Case stands as another example of the impact between the separation of the corporation and individuals – even though the result would hurt shareholders the court was not prepared to lift the veil. Shareholders essentially supervise management for supposedly the best interests of the company, it doing so they assume a managerial role and cannot be seen to be acting as individuals. Any duty by auditors is therefore owed not to the shareholders as individuals but to the shareholders as a group. Therefore a negligent audit will result in a wrong to the corporation, to which the shareholders as individuals cannot recover. The point is that the auditors duty of care relates to the shareholders as a group and not as individuals. If the shareholders had been able to craft their argument as it being about the interests of the corporation they would have gotten further rather than focussing on individual shareholders losses.

Corporations as Agents and Partners

- Corporations can act as agents – this may arise by express agreement or by implication- As an agent, you can bound your principle to a contract or make a person liable- Saloman stands for the proposition that the relationship of controlling shareholder and

corporation does not in general constitute a relationship of principle and agent – but it depends on the capacity in which the shareholder is acting – if the shareholder acted in a personal capacity then there will only be the corporation involved in the business

Smith, Stone and Knight Ltd v Birmingham Corporation

Readings: Case is about trying to distinguish between parent and subsidiary companies. It is an attempt to identify the criteria which would indicate an agency arrangement between the corporation and a subsidiary. Criteria includes: where the profits are treated as profits of the company, where the persons conducting the business are appointed by the parent company, whether the company was the head and brain of the trading venture and whether the company governed the venture. Also you can ask whether the company was in effectual and constant control.

Class: This case represents a decision to treat a group of corporations as one, at least for the purpose at hand. In Smith, the issue was whether the parent corporation was entitled to the kind of compensation which flowed from a business being carried on in that property – expropriation act says that if you carry on a business on the land then you can get more money, so the parent company wants to be included. In this case, in the context of expropriation, the court looks at the criteria set out and decides to ignore the separateness of the corporations rule and treat them as one. In Sun Sudan Oil Company case – the court concluded that even though the subsidiary was set up to avoid liability they are still separate and there is no reason to treat them as a group unlike cases where there is a reason (concern over expropriation) where they will sometimes ignore the difference between parent and subsidiary like in Stone. Courts seem more likely to see the corporations as a group when to not do so would be to deprive them of a benefit (expropriation) or where tax issues are involved.

Corporate Personality – Some Innovative Approaches

Inducing Breach of Contract

- A contractor who violates a term can be sued for breach – anyone who knowingly induced the breach of contract can be sued for tort – complications arise when a corporation is alleged to have done either

- Corporations can be trustees, in which case it is an equitable wrong to breach a trust. This wrong can be committed innocently, in the sense that the trustee is liable to the beneficiary for breach even if it thought it was acting lawfully. When a trust is breached, two kinds of accessory liability can arise (liability of strangers) –

- 1) “knowing receipt of trust property” – of a third party acquires property from a trustee in connection with a breach of trust then the property must be returned unless the third party was a bona fide purchaser for value and had no knowledge of the plaintiff’s equitable rights. If the third party no longer holds property, it will still be liable if it knew that the property was transferred in breach.

- 2) “knowing assistance in a fraudulent or dishonest breach of trust” – third party liability cannot arise unless a) the trustee’s breach was fraudulent or dishonest and b) the third party whose liability is in issue must have had knowledge of the trustee’s dishonest scheme – so the state of mind of two separate people are at issue

Garbutt Business College Ltd v Henderson Secretarial School Ltd

Readings: The defendant as an individual agrees to a non-compete clause and then goes and breaks it but breaks it as a formed corporation. Court says that the company, however much of a cloak may still be a separate legal entity and therefore cannot be held liable in damages on the same ground as an individual. It can however be found liable in tort as a corporation for inducing breach. In this case, the employment of the defendant by the corporation (which is really just him) counts as inducement.

Class: Court decides not to go head to head against Saloman but to get around it by using inducement. In this case it didn’t require anything really active of the corporation but the court still found inducement. Court says it’s enough to find inducement if the corporation paid the employee, aided him

and encouraged him, even though it technically didn’t do anything to induce. Case is worried that they can’t find him liable for breaching fiduciary duty because it may be in the best interests of the corporation to induce a breach of contract.

Einhorn v Westmount Investments Ltd

Readings: Was the application to strike out a statement of claim because it contains no grounds to proceed individually however the defendants were “at all material times in complete control” of the corporate defendant. Case involved an agreement between corporate defendant and plaintiff to help the real estate plaintiff acquire property and to pay the plaintiff a commission. The defendant corporation acquires the property with the plaintiff’s help but refuses to help to pay the commission. Case involved individuals carrying out tortious acts through the medium of a puppet corporation whose every action they control. Here the performance by one of the contracting parties consists of making a money payment – “I am unable to think of a more effective method of rendering performance impossible than that of emptying the till by transferring the contracting party’s assets to other persons”. Court finds no reasonable cause of action but does hold that defendants can be liable for inducing a breach of contract by a company of which they are shareholders. This case is typical of the terminology that appears when placing liability by piercing the corporate veil (“puppet company”).

Class: Corporation is completely controlled by the defendants, who in order to avoid paying the real estate corporation, they take all the money out of the corporation and transfer it to another that they control. Court says this is a ideal example of inducing breach – you are not allowing the contract to be performed and by generating a situation where it is practically impossible for the corporation to fulfill their obligation because you took away all the money.

McFadden v 481782 Ontario Ltd

Readings: The plaintiff had a contract of employment with a corporation held by two sole shareholders, and from which the plaintiff was fired. The issue is whether the individual defendants are personally liable, the plaintiff argues that they induced the breach. Court says that the tort of inducing breach is committed when the defendant, knowing of a contract between a plaintiff and a third party and intending to procure a breach of that contract to the injury of the plaintiff, induces the third party without justification to break that contract. As a general rule, an agent is always personally liable for his tortious acts, notwithstanding that his acts and hence his liability may also in law be those of the corporation. Acts of inducement are justified where they are taken as a duty to the corporation (similar to fiduciary duty concept). If an officer or director of a corporation is to be relieved as an agent of the consequences of his otherwise tortious act of inducement, it is not because he is the company’s alter ego but because he is acting under a duty to the company. Thus, if directors are acting within the scope of their duty in inducement, they won’t be held liable. In this case the court concluded that they were not acting within the scope of their duties and therefore the defendants were found liable as individuals.

369413 Alberta Ltd v Pocklington

Readings: The corporation in question is in trouble and the day before Alberta is about to call in loans, the owner and sole shareholder transferred assets to another company he owned, putting it out of the reach of the government. Court says that in order to find liability, the plaintiff must demonstrate that the defendant had an intent to induce breach of contract. Liability can attach if the defendant’s conduct resulted in the breach of contract, which it was or ought to have been aware. The intention to bring about the breach does not need to be the primary objective. Intention can also be established when the defendant was reckless or willfully blind to a breach. If the defendant acted under a bona fide belief that contractual rights would not be infringed, liability would not be found even if the belief turned out to be mistaken – but reasonable efforts need to be made to acquire the truth. In this case the defendant had an obligation to obtain legal advice about the transaction and by not doing so he was wilfully blind. The defendant in this case could not demonstrate any legitimate business interest that could have been served by the share transfer, court found instead that he was simply acting in his own interests and not those of the corporation, not fulfilling his fiduciary duty.

Class: Intent does not need to be willful, deliberate or direct and can also be inferred from the consequences of the actions because people are intended to know the reasonable result of their actions.

Adga Systems International Inc v Calcom

Readings: The issue is the liability of officers and directors of a corporation for acts done in pursuance of a corporate purpose. The plaintiff claims that a competitor raided its employees causing economic damage and claims a breach of fiduciary duty against three of its own employees for revealing information to the competitor. The question is whether they can sue the senior executives of the defendant corporation directly as individuals, and the court says you can. In this case, the plaintiff relied upon establishing an independent cause of action against the defendants, so it is not exactly lifting the veil but a new cause that does not technically overturn Saloman. Court holds that employees, officers and directors will be held personally liable for tortious conduct causing physical injury, property damage or a nuisance, even then their actions are pursuant to their duties to the corporation.

Class: Directors were essentially saying that what we are doing by raiding our competitors is in the best interests of the company. The court sides against them based on policy – says that normally if you act in the best interests of the corporation it is an exception but in this case the court is not going to protect the competitors. Case stands for the proposition that when the actions of directors are unreasonably directed at inducing others to breach contract, the court will find them liable.

Knowing Assistance in a Breach of Trust

- The knowledge requirement for this type of liability is actual knowledge – recklessness or wilful blindness will also suffice. The actual knowledge required must be actual knowledge of the trust’s existence as well as actual knowledge of what is being done improperly. If the trust was imposed by statue, then the person will be deemed to have known about it. If the trust was contractually created then whether the stranger knew will depend on their involvement or familiarity with the contract

- If the stranger received a benefit as a result of the breach of trust, this may ground an inference that the stranger knew of the breach

- Constructive notice is insufficient to bind a stranger to a point that liability arises personally- The issue is whether the breach of trust was fraudulent and dishonest, not whether the

stranger’s actions were.- The stranger will be liable if he knowingly assisted the trustee in a fraudulent and dishonest

breach of trust – therefore the corporations actions must be examined – the stranger himself does not need to have acted in bad faith so long as he knowingly assisted the corporation in doing so

- The knowingly wrongful risk resulting in prejudice to the beneficiary is sufficient to ground personal liability

Air Canada v M&L Travel Ltd

Readings: Case deals with the concept of “knowing assistance”. Defendant corporation ran a travel agency, under a working agreement with the plaintiff the corporation was to hold the proceeds of ticket sales in trust. Instead, the corporation placed the proceeds into a general account from which its operating expenses were paid. The plaintiff commenced an action against the two shareholders individually. Case deals with two issues – 1) was the relationship between the corporation and the airline was of trust and 2) if so, can the director be held personally liable for a breach of trust. In order to be a trust an arrangement must possess three certainties – 1) the certainty of intent: agreement needs to be certain in its intent to create a trust, 2) certainty of subject matter: ex: the funds collected from sales of tickets and 3) certainty of object – the object can be a beneficiary. The nature of the relationship is a matter of intention, the court looks to the working of the agreement. In this case it used the word “trust” and had an exclusion clause prohibiting what the funds can be used for, therefore its concluded to be a trust. Whether personal liability is going to be imposed on a stranger to a trust (because trust was technically with the corporation not the director) will depend on whether the stranger’s conscience is sufficiently affected to justify the imposition of personal liability. There are two basis for a stranger to be held liable as a trustee for breach – 1) if a trustee takes it on themselves to act as such and to possess and administer trust property. This would require that the stranger acts personally to take possession of trust property or assume the office of function of a trustee. The key in this determination is that they are acting personally rather than as a corporation – “knowing receipt” 2) Strangers to a trust can also be held liable if they knowingly participate in a breach of trust – “knowing assistance”. This case involves the second type.

Transamerica Life Co of Canada v Canada Life Assurance Co

Readings: The plaintiff in this case was going after the corporate sole shareholder parent company. Court refuses to life the corporate veil on the grounds that the relationship was typical of a parent-subsidiary corporate relationship and that the parent company did not meet the test for being in “complete control” of the subsidiary. In other words the subsidiary was not just a puppet corporation. Case can be differentiated form Air Canada because in that case the directors were greatly and personally involved in the misappropriation of funds. Court says that in this case what the plaintiff is

really trying to do is to overcome the rule of separate legal entities by claiming a breach. Without proof of knowing involvement in the breach of trust, the law will not impose equitable liability simply on the basis that the targeted defendant is the owner of the corporate entity which committed the wrong.

The Particular Problem of Thin Capitalization

- Some countries have substantial minimum capitalization requirements for setting up new corporation but this is not the case in Canada.

- This is called thin capitalization when a corporation is set up with a high debt to equity ratio – it means that most of the capital is borrowed rather than put up by shareholders

- Capital advanced to a corporation by way of loan will normally be secured and that lender will rank ahead of trade creditors in an insolvency situation – shareholders will rank behind unsecured creditors

- Thus in order to determine a company’s credit reliability one has to research their structure- Larger firms, when dealing with corporation with low working capital will often demand

collateral contracts of guarantee with the majority shareholder – but smaller firms can’t really do this

- Question becomes whether thin capitalization will suffice to entitle a court to ignore corporate entity and strike at the incorporators (Walkovsky v Carlton for answer)

Walkovszky v Carlton

Reading: Majority: Plaintiff hit by a taxi cab owned by the defendant corporation and negligently operated by a different defendant. Carlton is a ten percent stockholder of 10 corporations, one of which is the named defendant corporation. Although seemingly independent of each other these corporations are alleged to be operated as a single entity, unit and enterprise. The plaintiff argues that he is entitled to hold the stockholders personally liable because the multiple corporate structure amounts to an unlawful attempt to defraud members of the general public. Court: whenever anyone uses control of the corporation to further his own rather than the corporation’s business, he will be liable for the corporation’s acts “upon the principle of respondent superior applicable even where the agent is a natural person”. Such liability extends not only to the corporations commercial dealings but also to its negligent acts. Either the stockholder is conducting business in his individual capacity or he is not. If he is, he will be liable; if he is not, then, it does not matter for personal liability that the enterprise is actually being carried on by a larger enterprise entity. The corporate form may not be disregarded merely because the assets of the corporation, together with the mandatory insurance coverage of the vehicle, are insufficient to assure him recovery sought. Claim is dismissed.

Dissent: These corporations were intentionally undercapitalized from the start for the purpose of avoiding responsibility for acts bound to arise. In these circumstances all the shareholders should be held individually liable to the plaintiff. What I would hold is that a participating shareholder of a corporation vested with public interest, organized with capital insufficient to meet liabilities which are certain to arise in the ordinary course of the corporation’s business, may be held personally liable for such liabilities.

Henry Browne & Sons Ltd v Smith

Readings: Plaintiffs are manufacturers and suppliers of a navigational device seeking to recover the cost from the defendant personally who placed the order for a limited company. The defendant is the sole director and his wife holds only two shares while he holds the rest. On the facts, the principals to the contract were the plaintiffs and the limited company, to who the plaintiffs was looking for payment, therefore the claim is dismissed.

Corporate Purpose

- A corporation is a vehicle to facilitate business – what remains in contention though are the processes by which corporations seek out profits, for whose benefits those profits are sought and to whom corporations will be liable

- Contemporary controversy between “shareholder primacy” or “shareholder wealth maximization” on the one hand and those championing a “broader constituency” theory which may include any or all of the shareholders, bondholders, general creditors, employees and social interests at large, as encapsulated by the notion of corporate social responsibility.

Contractarian v Anti-Contractarian Theories of the Corporation

- Contractarians regard the corporate form as a nexus of contracts between interested actors – directors, officers, managers, shareholders, creditors and employees

- Their vision is predicated upon the primacy of private ordering among these constituent groups – although generally shareholders are regarded as having primacy among the various others

- Anti-contractarians reject this shareholder primacy and particularly the characterizations of shareholders as “owners” of the firm

- They regard the fiduciary concept as a means to ensure directors and officers fidelity to corporations’ interests

Dodge v Ford Motors Co

Readings: Ford’s board of directors whose chairman owned 58% decided to cease paying large dividends and to invest the bulk of profits into expanding the business and keeping the price down for the public. The Dodge brothers, who owned 10 percent regarded this as a plan to operate the corporation as a semi-charity and commenced an action claiming that Ford had a duty to distribute profits to shareholders. Court says it was the duty of directors to distribute a very large sum on money to shareholders – case is illustrated as example of contractarian model and shareholder primacy.

Shlensky v Wrigley

Readings: Case example that is anti-dodge and emphasizes communitarian interests. Plaintiff is a minority stockholder in corporation that owns the Cubs and manages Wrigley. The defendants are individual directors of the Cubs, Wrigley defendant is 80% stock owner. Plaintiff is claiming that the Cubs should install night lights at Wrigley and schedule night games because it would maximize profits. Defendants refuse to do so based on personal opinion that baseball is a day game. Plaintiff argues that

the directors are acting for reasons unrelated to the financial interest and welfare of the Cubs. Court: we are not satisfied that the motives are contrary to the best interests of the corporation – takes the interests of the neighborhood under consideration as well as the people attending games maybe not wanting to come at night.

Peoples Department Stores (Trustee of) v Wise

Readings: Trade creditors were owed 21.5 million as a result of the bankruptcy of Peoples and Wise stores, Peoples’ trustee in bankruptcy brought an action against the Wise brothers in their capacities as directors of Peoples, on behalf of Peoples unsecured creditors. From an economic perspective the best interests of the corporation means the maximization of the value of the corporation – however courts have long recognized that various other factors may be relevant. Court: we accept as an accurate statement of law that in determining whether they are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment. The directors fiduciary duty does not change when a corporation is in the vicinity of insolvency. In assessing the actions of directors it is evidence that any honest and good faith attempt to redress the corporation’s financial problems will, if successful, both retain value for shareholders and improve the position of creditors. If unsuccessful, it will not qualify as a breach of the statutory fiduciary duty.

BCE Inc v 1976 Debenture holders

Readings: Purchase of all the shares of BCE, a part of the financing saw Bell, a subsidiary of BCE take on 30 billion in debt. This was opposed by Bell’s shareholders and the assumption this would devalue their shares. Claimed it was not fair and reasonable because of the adverse effect on their economic interests. The fiduciary duty of the directors is to act in the best interests of the corporation – often the interests of the shareholders and stakeholders are co-extensive with the interests of the corporation – however when they conflict the directors duty is to the corporation (Peoples). In Peoples the court found that although directors must consider the best interests of the corporation, it may also be appropriate to consider the impact of corporate decisions on shareholders etc. Courts should give appropriate deference to the business judgement of directors who take into account these ancillary interests. However the directors only owe a fiduciary duty to the corporation. The fundamental rule is that the duty of directors cannot be confined to particular priority rules but it rather a function of business judgement of what is in the best interests of the corporation in the particular situation it faces. In this case the director’s decision is found to be within the range of reasonable choices that they could have made when weighing conflicting interests.

Class Notes

- The importance of economic development is worth the price of in some circumstances damaging some unsecured creditors – the damage comes because they can’t go after the assets of the shareholders individually

- Because of this the bank won’t lend to a one person corporation without security

- So lenders will seek personal guarantees from the individual corporate shareholders of small corporations – the best method is usually to guarantee a piece of property – often your house

- There is always a concern about whether the contribution of the shareholders is actually worth anything – Lord Hershall talks about requiring a minimum investment that somehow reflects the value of the corporation

- There are two arguments against that – 1) why should we tell a person what the price of their assets are and how would we do that? And 2) what about if there is fluctuation in the value of the assets.

- Sometimes a tort committed by an employee if acting in the course of their employment can also generate a tort where the corporation can be held liable

- If the tort is the tort of the employee and the corporation then there is no problem and no need to go behind the corporate veil because they are both doing it

- Courts will essentially seek a way to get around Saloman and still affix personal liability but if the only option is to attack Saloman head on then they tend to back off

- One of the ways they skirt around the issue is using the notion of agency to provide the remedy- It would appear that if the director/officer makes the act his own based on facts they will look to

inducement of breach – usually where the actions are knowing, deliberate and have a willful quality to them, the court will go to inducement

Corporate Obligations

Reading Notes

Introduction to Two Theories

- If the corporation is disputing liability, it is probably because some corporate insider did something they were not supposed to – committed a tort or a crime or made an unauthorized contract

- When we decide whether liability should be attached to the corporation, the answer usually involves balancing – are we to thwart some outsider’s civil liabilities or transactional expectations or are we to ignore some failure to comply with the corporation’s internal regulations

- A person can incur obligations in three ways – 1) personally – ex: a person may incur obligations to other people based on duties recognized in tort law or contracts – the two other ways are through forms of agency – 2) if your agent contracts based on your instructions then you are bound, 3) non-consensual liabilities may occur through agency or if your agent commits a tort within the scope of the agency (vicarious liability)

- In this third type your agent is also liable but so are you- The first of the two theories is concerned with identifying a particular human brain that could be

said to have been operating as the corporate mind in particular circumstances - This theory led to the idea that the brain was the corporate brain and thus the corporation

incurred liability personally when this happened- The problem is that it is very difficult to find a single individual responsible and thus difficult to

find this corporate mind- The second theory sees individuals acting as corporate agents and is concerned with

corporations avoiding liability by pleading limitations on its agents powers

Crime and Tort: Establishing Corporate Mens Rea

- There are some situations where vicarious liability does not apply, for example you can never be vicariously liable for the criminal acts of another

The Common Law Test

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

Rhone (The) v Peter A.B. Widener

Readings: Case is an example of the common law test and the directing mind theory in operation. Case involved a shipping accident in which the corporation sought to limit its liability under a provision

limiting tort liability for vicarious liability. The particular statutory provision limits liability if the damage was caused without the actual fault or privity of the owner of the ship. In this case, the owner was technically the corporation. Question becomes whether the actions of the captain was also the actions of the corporation. One has to determine whether the discretion conferred on an employee amounts to an express or implied delegation of executive authority to design or supervise the implementation of corporate policy, rather than to simply carry out that policy. Court in these cases has to consider who has been left with the decision-making power in a relevant sphere of corporate activity. The court in this case determines that the captain did not have governing executive authority over the management and supervision of the fleet, that authority remained with someone else. The key factor distinguishing directing minds from normal employees is the capacity to exercise decision making authority on matters of corporate policy, rather than merely to give effect to such policy on an operational basis. Court finds that the captain was not part of the directing mind and will of the company and as a result the accident did not occur with the actual fault or privity of the corporation. This determination of the directing mind of the corporation will come down to a question of mixed law and fact. The court also rules that you can have more than one directing mind, which broadens liability.

Criminal Liability: Mens Rea Offences

- In Canadian Dredge and Dock Co, the SCC expressed the view that more junior individuals could count as the directing mind and will, so long as the person has “governing executive authority:. The way this is interpreted in Rhone means that the courts must consider who has been left with the decision making power in the relevant sphere of corporate activity.

- The SCC in Dredge also rejected the idea that there could be any defence on the basis that the conduct in question was carried out contrary to express instructions from the corporation

- The court however accepted that there could be a defence that the relevant individual was acting entirely for his own account and against the interests of the corporation – however this defence is limited to situations where the corporation was not intended to derive any benefit from the individual’s actions and did not in fact derive any benefit

- Aggravation notion – applies in situations where you can’t quite work out who is the directing mind but you can find one by adding up bits of a bunch of people in the corporation

- Tesco Store – one of the employees had wrongly marked prices – court said that the employee had discretion but that it was limited to an assigned role – Court rules that it would be hard pressed to say that he actually conducted a scheme that controlled actual policy. Criticism to this approach is that it makes it more difficult to attach criminal liability to a corporation because of how its run (this criticism would also apply to Rhone – both use a fairly heavy burden to find liability)

- People who automatically meet the definition of a directing mind include almost always directors, so if they say or do something then it’s the centre of the corporation – but this is not always easy to find especially when its illegal

- Amendments under the Criminal Code substantially altered the common law test for corporate mind – particularly in situations where the mens rea is recklessness or criminal negligence – these offences were difficult to prosecute under common law because in a large organization it

may be impossible to find a single individual who was negligent in a relevant way – who knew or ought to have known of the risk but did not react to it

- The idea developed in Rhone of directing mind was later added to s.22(2) of the Criminal Code – the changes were predicated by a mining disaster case where they couldn’t find anyone to prosecute

- The Criminal Code now stipulates in substantive provisions how an organization can be made criminally liable – it also allows for the ability to aggregate multiple directing minds and to aggregate the mind states of one or more persons with the actions of one or more persons

- Section is saying that you need a senior officer – someone who is responsible for something policy orientated – and if that senior officer is acting within their scope and is a party to the offence then the corporation will be responsible

- Directing mind notion – the amendments are also not straightforward despite what they attempted to achieve and the directing mind notion is still unclear

Criminal Liability: Non Mens Rea Offences

R v Fitzpatrick’s Fuel Ltd

Readings: Corporation was licenced to sell beer and was charged with selling to a minor – it is two unsupervised employees that commit the act. Court says that when the employee sold the beer it was 1) within the field of operation assigned to him, 2) not totally in fraud of the corporation and 3) by design or result partly for the benefit of the corporation (criteria from Dredge). This case applies the identification doctrine in a strict liability offence and seems to ignore the Rhone test for the directing mind and will. Lots of criticism over the decision in this case because what more could the owner have done to prevent the employees from selling to minors – hard to see how the owner would be a directing mind

Doctrine of Ultra Vires

- Same stuff as in constitutional law, you can’t act outside of your powers – in corporate law the idea was that it would protect shareholders because they will know that their investment won’t be used for certain purposes that are ultra vires

- Also designed to protect creditors who were not taken to know the exact powers of the corporation

- The doctrine of constructive notice essentially stands for the proposition that you are assumed to know the powers of a corporation and if you contract outside of that, too bad for you – but as mentioned creditors were not aware of the powers so this doctrine helps them

- Neither the doctrine of contrastive notice nor ultra vires are that important in Canadian corporate law anymore but there are some remnants (Pickles)

Contracts: Agents, Outsiders and Corporate Liability

- The extent to which a corporation approaches the status of a fully capable human being depends on the authority that created it – the constitutional documents whether crown patent,

special statue or articles filed under a general enabling statue may expressly or impliedly prohibit certain corporate endeavours

- Statues enact restrictions on the activities of corporations and permit further restrictions to be set out in the corporate constitution

Restrictions in the Corporate Constitution

- Memorandum corporations – transactions can be ultra vires a corporation’s memorandum setting them up

- Corporations created by special act- The doctrine of ultra vires has been abolished by statue for corporations incorporated under the

business corporations legislation in most Canadian jurisdictions- The limited aspects of the doctrine however may still be present with respect to corporations

created by a special act for public purposes- The decision in Ashbury Railway Carriage v Riche is commonly understood to have established

the doctrine of ultra vires for companies registered under the English model statue. They lacked the capacity to pursue activities outside their stated objects – the supposed rationale being to protect shareholders

- Despite this, the courts adopted certain rules of interpretation and permitted certain drafting techniques which greatly circumscribed the operation of the ultra vires rule to render most things incidental to the carrying out of the enumerate objects and to be intra vires

Communities Economic Development Fund v Canadian Pickles Corp

Readings: Company issues a load that is contrary to its statutory objectives (ultra vires) – the question is what are the consequences of this violation. For common law corporations, the doctrine of ultra vires remained applicable to chartered companies after Bonanza Creek in the limited sense that an action could still be ultra vires the company if the act were prohibited by statue – otherwise ultra vires had no application. Corporations created under or by statue – have only those powers expressly or impliedly granted to them, its acts beyond that are ultra vires. Assessing a corporations limits is a matter of interpretation, the question will largely turn on the language and documents.

Re Jon Beauforte (London) Ltd

Readings: Company is set up to do one thing in particular, then changes what they are doing and their new behavior is clearly not within the objects clause – the company went into liquidation and the liquidators refused to pay the bill on that basis. In this particular case, the liquidators had notice that people were switching objectives (was on the company’s letterhead) and they had constructive notice of the contents of memorandum of association, therefore the court found that they had notice that the transaction was ultra vires.

The Canadian Constitution: Some Residual Problems

- A corporation might be deprived of contractual capacity by a deficiency of legislative power in the incorporating jurisdiction – this residual application of the ultra vires rule evolves from the federal nature of the Canadian constitution

- Any matter beyond the legislative capacity of a parliamentary body cannot be pursued by a business corporation owing its existence and scope of activities to laws – whether general or particularly passed by that legislative body – but in practice is it actually more complicated

- Contracting through corporate agents: an analytical framework- Proving a civil transaction with a corporation is easier than proving a corporate crime – one

need not prove that a corporate mind was directly involved in the particular transaction- Lawyers analyze corporate contracts and other transactions creating civil obligations, on the

basis of agency principles- They see an individual as an agent of the corporation and ask what the agent’s authority was- The object is to ascertain whether the agent can be proved to have been the appropriate type of

agent through whom to arrange contracts of the sort negotiated- Terminology: the corporation, the agent and the outsider

Actual Authority at Common Law

- Most disputes about contracts with corporations turn on the question of whether the person who purported to make the contract on behalf of the corporation was authorized to do so

- Problems arise when somebody appears to be an agent of the corporation but may not be – in which case who is to be held responsible; the third party who is mistaken or the corporation who the person purports to act for – neither are really responsible

- Often the corporation will argue that the person was not acting as their agent, while the outsider will counter-argue that they relied on the fact that they were

- If the outsider can prove that the agent had actual authority – then the outsider may rely on what the agent has said as binding on the corporation. This question will depend on the arrangement between the principle and agent

- An agent may get actual authority from his principle in three ways: 1) the principle may have said, you can do X – only the company and the agent actually know what it says – it is usually a actual contract 2) the agent may have implied authority – the verbal or non-verbal exchanges between the two may be interpreted to mean that the agent is authorized to do X, 3) the agent may have been given actual authority retroactively by the principles adoption of what the agent did – this is a representation made by the corporation

- One reason that actual authority (1) doesn’t appear more often in cases is that it may be difficult for outsiders to gain that evidence, another may be the judicially created concept of ostensible authority or apparent authority (3) which is usually more useful for an outsider

Ostensible Authority at Common Law

- The test for apparent or ostensible authority: 1) has to be a representation of some kind (can be actual or implied), 2) has to be made by the principle (corporation) and has to be made to the 3 rd

party – what exactly is a representation is not exactly clear but the holding out has to be done

by someone with actual authority, so the corporation has to have the actual authority to do it, 3) has to be within the scope of the apparent authority (usual authority), so that the representation has to be that the agent has the kind of authority that an agent usually has in that situation, so as to render them liable

Schwartz v Maritime Life Assurance Co

Readings: Appellant gave $ to Rideout for an investment with an insurance company, the funds were misappropriated and the trial judge found that Rideout had no authority actual or ostensible to bind the respondent company. Under the contract Rideout had the right to solicit insurance business but the insurance company says that he did not have the right to bind them to a person because the defendant could accept or reject any offer. Whether a principle/agent relationship exists depends on the nature of the authority granted, by the principle to the agent – this depends on the true nature of the agreement or the exact circumstances of the relationship between the alleged principle and agent. This relationship may also arise or be created by the conduct of the parties – without anything being expressly agreed upon. Where a person who by his or her words or conduct has allowed another to appear to the outside world to be his agent, with the result that third parties deal with him in this capacity, that person cannot repudiate the apparent agency if, by doing so, injury would be caused to those third parties. In this case, the contract stipulated what Rideout could do as agent and it did not extend to binding the respondent. Turning to the notion of ostensible authority, the court found evidence that Rideout held himself out as being authorized to enter into a legal agreement on behalf of the insurance company when Rideout wrote with newly added letterhead calling himself the Regional Superintendent for Atlantic Canada. The court held that this constituted holding himself out as agent and that the company had agreed to let him since they were aware of his letterhead, regardless of what the actual contract said. This only occurred during the first transaction, but even after when using a different letterhead, the plaintiff was entitled to rely on it. Potential problems with this decision include that not all corporate agents will have familiar offices such as managing director, often it will be more difficult to assess what the actual authority of someone occupying “position X” is. Also, the powers typically attached to a particular position may evolve over time. Court focusses in this case on the relationship between Rideout and the plaintiff and not between Rideout and the corporation. Court also looks at the idea of estoppel in this case – means the court is estopping the corporation from going back on a promise or obligation – this arises in corporate law when a third party claims that the corporation can’t deny that there isn’t agency. Note that they do not have to show that there is agency, just that the corporation can’t show anything that would say that they are not an agent. Estoppel has to arise in circumstances in which you have done or said something so that you can’t deny that you did some contrary.

Statutory Reforms

- The reformed Canadian statues work by setting up a statutory rule that lists with clarity certain types of facts that corporations will not be able to assert against an outsider – essentially if the outsider alleges actual authority and the corporation presents no admissible evidence to refute it, then the case must proceed to judgement on the presented evidence alone

- CBCA s.17 – gets rid of any estoppel arising from public registration of corporate constitutional documents

- CBCA s.18 – the opening words in this section show that it is framed in terms of an estoppel: the provisions lists assertions that may not be made, that binds a corporation to these terms

- CBCA s.18(2) – represents an exception that narrows the application of s,18 by providing that some outsiders are not pure outsiders – and that in dealing with then, the corporation is not prevented from asserting any of the details covered in s.18(1). S.18(2) essentially means that there are some people who know better or ought to know better (ex: Rideout)

- CBCA s.146(1) and (2) essentially articulates the same provision although it is worded differently- S.18(1) may be viewed as a rather simple example of the statutory technique of precluding

certain evidence from being presented in litigation between corporations and outsiders- A Mark II outsider is described by CBCA s.18(2) as someone who “has or ought to have

knowledge of the situation… by virtue of their relationship to the corporation”. This statue appears to permit the corporation to present evidence against the Mark II outsider that it could not have presented against most people

- The category of Mark II outsiders can be subdivided in two: a MarkIIA outsider is one who has knowledge, a MarkIIB outsider is one who ought to have knowledge

- Whether one is a Mark IIA outsider – someone who knew about the limitation of authority and yet dealt with the agent anyway – is a question of fact. It is less clear how a corporation would go about proving that someone is a MarkIIB outsider

Corporate Management

Management’s Role: Theory and Practice

- Every corporation must have a board of directors and must have officers – the position of director tends to be defined in every corporate statue, whereas the statutory coverage of officers tends to be somewhat haphazard

- Understanding the roles and obligations of each is critical to understanding how a corporation works – not simply because common law tended to overestimate the directors role and ignore corporate officers

The Governing Principles

- Directors and officers are responsible for the funds contributed by shareholders and creditors without being directly responsible to the contributors as a matter of legal obligation

Myths and Reality

- The typical director does not have time to make the kinds of studies needed to establish company objectives and strategies. At most he can approve positions taken by management and the approval is base on scanty facts, not time consuming analysis

- Rise and mergers and acquisitions – if a corporation is being poorly managed, the market price of its shares may be at a level below what it would be if the same business and assets were better managed – leading to corporate raiders taking them over and either reselling the shares or assets at a profit

- Institutional shareholder – an entity that holds enough shares in a large corporation that its voting power cannot be ignored by management ex: pension and mutual funds

Managers’ Legal Obligations

The Governing Principles

- Directors and officers who make up corporate management are individually constrained by statutory standards of behavior. Some of the standards came from the common law: they have traditionally been known as “legal duties”, others were derived from general principles of equity and imposed by judges – we call these “equitable duties”

- Canadian corporate reforms during the last quarter of the 20th century swept all three kinds of rules into a more organized statue-based code of minimum standards. That made the labels legal duties and equitable duties no longer applicable

- Section 122(1)(b) of the CBCA read: every director and officer of a corporation in exercising their powers and discharging their duties shall (b) exercise the care, diligence and skill that a reasonable prudent person would exercise in comparable circumstances

- In practice and over time large corporations came to be run by senior management who told directors what to do as officers – and shareholders were ignored – even though technically they are the closes thing to owners

- The legal obligation of directors is to manage the corporation – however in practice they do not tend to question anything at a board meeting or to ever disagree with any nomination of a president – in practice they are much more of a figurehead

Soper v Canada

Peoples Department Stores Inc (Trustee of) v Wise

Readings: Case deals with the fiduciary obligations of corporate managers. The fiduciary obligation in this case is an obligation of loyalty or selflessness: the idea that the fiduciary must put the interests of his or her beneficiary ahead of the fiduciary’s own interests. As stated in the CBCA the fiduciary must act with a view to the best interests of the corporation. The court in this case begins by saying more or less exactly what the statue says, that the statutory duty requires directors and officers to act honestly and in good faith vis-à-vis the corporation. The court goes on to say that they must avoid conflicts of interests with the corporation. They must avoid abusing their position to gain personal benefit. They must maintain confidentiality of information they acquire by virtue of their position. These additional requirements are based on centuries of cases arising in the context of trusts. Case stands for the proposition that a fiduciary may not put himself in a position in which his or her own interests might conflict with the duty of loyalty to the beneficiary. This is often called the “no-conflict” rule. Furthermore, a fiduciary may not derive an unauthorized profit from his or her position. The two principles are sometimes call prophylactic rules because they are designed to prevent fiduciaries from being in situations where they might not act in the best interests of their beneficiaries. In corporate law, a problem emerges when a director purported to make a contract with the corporation to which he or she owes a fiduciary duty, because personally they want to be cheap but that conflicts with fiduciary duty. If as fiduciary violates one of these rules then a liability will arise, even if the fiduciary was acting in what he or she perceived to be the best interests of the beneficiary. The prophylactic rules can then be analyzed as protecting the beneficiary from the burden of proving an improper motive. People is part of a line of cases addressing the question of to whom managers owe their fiduciary duty to. The case rejected the argument that the duty is owed to creditors when the corporation is “in the vicinity of insolvency”, an argument that based on the assumption that the duty is owed to shareholders. The court held that the duty is to the corporation, whether solvent or not. The effect of this is that other parties (such as creditors) do not have the right to sue for breach of fiduciary duty (although they may be able to use the oppression remedy).

Insider Trading Rules

- In their modern form, they do not prohibit a manager from trading the shares of his or her own corporation, the prohibition is against trading with the benefit of non-public information

- The rules usually require insiders of a corporation to declare publicly all trading that they do in the corporation’s securities

- This prohibition extends beyond officers and directors – it can include employees, affiliates and associates of the corporation and those who have acquired non-public knowledge from them

- These prohibitions are backed up by civil and penal consequences – in provincial law the regulation is found in the Securities Act – at the federal level there is no Securities Act but some prohibitions are contained in CBCA Part XI

Miscellaneous Statutory Duties

- In addition to the foregoing categories of statutorily imposed “legal” obligations, the Canadian statues fix several particular obligation on corporate managers that deny categorization – ex: in some circumstances, a director who votes for or contents to a resolution contrary to certain sections in the statue will be personally liable to the corporation.

- Some of these sections prevent a corporation from purchasing or redeeming its own securities, paying out dividends or making certain kinds of loans or guarantees if there are reasonable grounds for believing that the requirements of various financial tests will not be satisfied

- Directors may also be liable where insufficient property is given as consideration for shares, excessive commissions are paid for the sale of shares or other corporate managers are improperly indemnified for legal costs, charges or expenses.

- As well, individual directors and officers have duties to furnish information to the corporation’s auditor

- There are other duties imposed upon the directors collectively rather than individually. These include duties to call a special meeting of the shareholders in some circumstances

- In sum, corporate directors and officers become subject to a myriad of legal obligation upon taking office in most Canadian jurisdictions

Managers Fiduciary Obligations

The Nature and Source of the Obligation

- The fiduciary duty evolved from trust law, which requires trustees to act in the best interests of trust beneficiaries – somewhat belatedly it has been recognized that corporate officers owe the same fiduciary duties

- This change began as a judicial development in Canadian Aero Services Ltd v O’Malley but it was since been legislated in most Canadian jurisdictions

- Essential quality of all fiduciary relationships – every remedy which can be sought against a fiduciary is one which might be sought against a trustee on the same grounds

- The word fiduciary is not definitive of a single class of relationships to which a fixed set of rules or remedy can be applied

- The content of the obligation was derived by analogy from the obligations of trustees

Peoples Department Stores Inc (Trustee of) v Wise

Judicial Review of the Exercise of Managerial Powers

- There are two ways to understand the fact that the exercise of a power is reviewable based on the purpose for which it was exercised – 1) the limitation within the power is seen as a matter of construction – essentially that there are uses that are understood to be permissible and ones that are not – 2) evaluation of purposes to find the limitation in the fiduciary obligation owed by corporate managers (as well as trustees and others, including agents holding power of attorney). On this view, whether or not power has been effectively exercised requires an examination of the motives for which it was used. If it was used in what the fiduciary thought was the best interest of the corporation, it is effective, otherwise, not.

Hogg v Cramphorn Ltd

Readings: Case deals with whether directors may issue shares in order to thwart a takeover bid by diluting the voting power of existing shareholders. Cramphorn was faced with a takeover bid, the chairman and director took the view that such a takeover was disadvantageous as the company’s business would be altered and the employees would be unsettled. An employee’s trust was set up and it was proposed to issue shares to the trustee in order to maintain corporate control in friendly hands. A minority shareholder sought to prevent the share issue scheme. The corporation’s articles said, “the shares shall be under the control of the directors, who may allot or otherwise dispose of the same to such persons, on such terms and conditions, and at such times as the directors think fit”. The issue becomes whether this manipulation of the voting position was a legitimate act on the part of the directors. Court concludes that unless the majority in a company is acting oppressively towards the minority, the court should not interfere into the merits of the views held by the majority or minority. Nor will the court permit directors to exercise powers, which have been delegated to them by the company in circumstances which pout the directors in a fiduciary position when exercising those powers, in such a way as to interfere with the exercise by the majority of its constitutional rights. A majority of shareholders in a general meeting is entitled to pursue what course it chooses with the company’s powers, so long as it doesn’t violate fiduciary duty or unfairly oppress other members of the company. In this case, the power to issue shares was a fiduciary power and if, as here, it is exercised for an improper motive, then the issue of these shares is liable to be set aside.

Class: The proper purpose for issuing shares is generally to raise money for the corporation but here they were issued to avoid a takeover bid and maintain control by the directors. Court in this case decides to adopt a strict approach – uses other English cases and says that if they issued the shares with the objective of creating favorable majority, they were acting improperly. Cramhorn tries to say he is doing this because he is concerned with the employees being unsettles and that he is exercising his responsibilities in the best interests of the corporation. Court says that this is difficult to rely on, an argument that they thought it was for the best interests of the corporation because is would be too easy of a test and too hard to disprove were the court to accept this. What route is available to free directors from liability – it can be endorsed by shareholders at a general meeting – so they can sanction a breach before or even after it happens at a general meeting (which can be called by a director). The result is that shareholders while not owing a fiduciary duty themselves can sanction the breach of one. This makes share issues voidable because shareholders could always choose to sanction it. In this case directors were required to hand over the shares from which they benefitted.

Teck Corp Ltd v Millar

Readings: Afton Mines has several properties that larger corporations were interested in – the defendant and fellow directors thought that they would be best going with one corporation – however Teck had been buying shares and attained a majority position within the corporation. The defendants issued shares in order to frustrate this takeover and Teck sought a declaration that the directors had acted for an improper purpose and the shares could not be issued. Council for Teck wanted to rely on the reasoning in Hogg that directors may not use improper purpose and argue that if their purpose is merely to retain control then it’s improper. The court says: it’s my own view that the directors ought to be allowed to consider who is seeking control and why. If they believe that there will be substantial damage to the company’s interests if the corporation is taken over, then the exercise of their powers to defeat those seeking a majority will not necessarily be improper. Court concludes that the general rules should be that the directors must act in good faith and that there must be reasonable grounds for their belief. If they say that they believe there will be substantial damage to the company’s interest then there must be some reasonable grounds for this belief. Court says that the defendant directors were elected to exercise their best judgement but they are not agents that are bound to accede to the directions of the majority of the shareholders. Case rejects Hogg but also says that if they are wrong in rejecting it then its still not applicable because in Hogg the primary purpose of the directors was to make frustrate an attempt to obtain control but here it was for the directors to make the best contract they could – therefore it was in the best interests of the company. Court held that it is acceptable for directors to consider the interests of employees and of the community so long as they are not entirely disregarding the interests of the company’s shareholders. Considering other interests does not result in a director’s failure in their fiduciary duty to the company.

Conflict of Interest and Duty: Interests in Corporate Contracts

- In order to protect the duty to act in the beneficiary’s best interests, we forbid conflicts: and if there is a conflict, the fiduciary is not even allowed to try to prove that he was, in fact, acting in the best interests of the fiduciary – the prophylactic rule is stricter than the underlying duty it seeks to protect

- The no-conflict rule is inevitably triggered where a corporation’s manger is somehow involved, in his own personal interest, on the other side of a contract that the corporation has made

- The traditional solution for this is simple: such contracts are voidable by the corporation- Moreover the fiduciary is liable to hand over any profit they acquired from the contract and if

appropriate, to compensate the beneficiary for any loss from the contract- This means that according ot the general principles, no fiduciary can be involved in decisions

regarding how much compensation he or she should receive for carrying out his duties- Canadian Statutory reforms began in the 70’s to change the result in NW. - They proceeded on the basis that conflicts of interest are inevitable and that the real problem is

what to do about the voidable contracts that result- The usual solution has been to legislate a routine procedure by which the problem can generally

be addressed through adequate disclosure and in the case of conflicted directors, recuse themselves from voting

- CBCA S.120 requires a director or officer who is a party to a material or proposed contract or transaction to disclose the nature and extent of his interest as soon as possible and in the case of a director to refrain from voting on any resolution to approve the contract

- S.120 (7) provides that such contracts become non-voidable and the conflicted director is not accountable so long as the disclosure was made appropriately, the non-conflicted directors approved it and it was reasonable and fair

- Recently added subsection (7.1) allows a shareholder approval by a special resolution, again subject to fairness and reasonableness

- If any part of s.120 has not complied with then subsection (8) on an application by the corporation or a shareholder may set aside the contract on terms it thinks fit (ex: of minority protection)

Northwest Transportation Co v Beatty

Readings: Case illustrates the problem and facilities understanding Canadian statutory reforms. The plaintiff is a shareholder in NW and the defendants were the company’s directors (also shareholders). The claim is to set aside the sale made to the company by Beatty, who was also one of the directors, for the sale of a streamliner of which he was previously the owner. At the date of the purchase, the acquisition of another streamliner was essential and the ship was well-suited and the company did not pay an unreasonable price. However of the 306 votes in favor of the sale among shareholders, 291 were cast by Beatty. Court says that where in form and terms the contract is adopted by majority vote, it must prevail unless it was brought about by unfair or improper means. The court concluded that Beatty was not using his voting power in so oppressive a character as to invalidate the contract – the defendant was acting within his rights in voting this way. In this case, the Judicial Committee accepted that the breach of duty could be forgiven by majority vote of the shareholders.

Corporate Opportunities

- Bray v Ford – attempt to justify the rule that you can’t profit from conflict – “rule is based on construction that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty and thus prejudicing those he was bound to protect” – for this reason we lay down this positive rule, however it may be departed in cased where there is no wrong doing

Regal (Hastings) Ltd Gulliver

Readings: The shares of a subsidiary corporation were acquired by the directors of the parent company. The shares were found to have been obtained by the defendants by reason of their positions as directors of the parent company. “The legal proposition may, I think, be broadly stated by saying that one occupying a position of trust must not make a profit which he can acquire only by use of his fiduciary position or if he does, he must account for his profits”. Their liability does not depend on a breach of duty but upon the proposition that a director must not make a profit out of property acquired by reason of his relationship to the company of which he is a director.

Peso Silver Mines Ltd Cropper

Readings: The plaintiff was offered a mining property by Dickson – the defendant was the managing director of the plaintiff. The board of directors rejected Dickson’s offer, and the defendant then became involved with a separate group that purchased Dickson’s claims. The decision to reject in this case had at the time been done in good faith. The appellant argued that the shares were properly obtained only as a result of the defendant’s position as a director of the appellant, without the approval of the shareholders and that equity imposes an obligation to account to the appellant for that property and loss. The court says that the difference between this case and the result in Regal is that here it is impossible to say that the respondent obtained the interests he holds by reason of the fact that he was a director of the appellant and in the course of execution of that office. When Dickson offered his shares to the board, the defendant was in a fiduciary relationship, but there is no suggestion in the evidence that the offer was accompanied by any confidential information unavailable to anyone not in that position. When the defendant was later approached about the purchase, it was not as a director for the company but as his own person and therefore he is under no liability.

Industrial Development Consultants Ltd v Cooley

Readings: The defendant was an architect and managing director of the plaintiff’s company. He was unsuccessful in contract negotiations with a third party that disliked the way the plaintiff’s company was set up. The third party company made it clear that they were only interested in contracting with the defendant personally, so the defendant resigned his position and then contracted personally. The court said that the defendant became possessed of knowledge and information which was not possessed by his employers (the plaintiffs) and which they would have liked to have had – this created a conflict of interest. Information which came to the defendant during this time, came to him as managing director for the plaintiffs – it was therefore his fiduciary duty to pass this information on. However he instead embarked on a deliberate policy and course of conduct which put his personal interest in direct conflict with his pre-existing and continuing duty. It is an overriding principle of equity that a man must not be allowed to put himself in a position where his fiduciary duty and personal interests conflict.

Gravino v Enerchem Transport Inc

Readings: The defendants were directors and officers of ETI as well as shareholders. They led conversations seeking to get a sub-lease agreement between the corporation and a third party for vessels. The third party did not want to contract with the corporation without a second contract between the corporation and Shell ensuring that the vessels would get enough work. The defendants resigned and set up another corporation, which obtained the second contract with Shell and subsequently contracted with the third party corporation at issue. The potentially profitable business opportunity that they saw before and during their role as directors of ETI was much too vague to qualify as a maturing business opportunity. The appellants were not in a situation of conflict of interest when they left ETI and started a new company – further, the business that they obtained was too different in kind from the proposal proposition and too much time had passed between them (9 months). Court

basically says that they should have drafted a non-0competition clause had they not wanted to compete.

The Corporate Opportunity Doctrine

- The corporate opportunity doctrine proscribes a director from diverting to his own advantage a commercial opportunity that could have been exploited by the company

- Bhullar v Bhullar – there is no clear test to determine what constitutes c corporate opportunity particularly in an “ownership managed company…where the information is obtained on a private occasion and without the use of company property”

- Bhullar – two sides of a family had directors on the same board. One of the objects of the company was to acquire property for investment. The company decided to part ways but it took three years to dissolve their assets. In the meantime two of the directors persuaded a vendor to sell property to them.

- In deciding whether or not there was unfair prejudice the court had to determine if the opportunity to acquire the building was a corporate opportunity vested in the company.

- Prior to Bhullar there were two distinct tests for whether corporate opportunity had developed – 1) the maturing business opportunity test – provides that directors are disqualified from obtaining for themselves or diverting to another, a maturing business opportunity which the company is actively pursuing (Canadian Aero Service v O’Malley). This test is unsatisfactory in that it is the directors themselves who ultimately determine whether or not the company will actively pursue an opportunity and thus fails to provide adequate incentive for directors to further the company’s interests – 2) line of business test – provides that a director may come under a positive duty to make a business opportunity available to his company if it is in the company’s line of business or if the director has been given responsibility to seek out particular opportunities for the company and that opportunity falls within that scope (Industrial Developments Consultants v Cooley). Stricter test than the maturing business opportunities test.

- In Bhullar the court rejects maturing business opportunities test and held that the relevant consideration was whether by taking up the opportunity the director would be putting himself in a position where his duty and interest conflict. This includes not just actual conflict but also circumstances in which “the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict”.

- This approach is unconcerned with the issue of whether the director made a profit, although this may have a bearing on the remedy

- Rather, the breach of duty arises from the failure to pass relevant information to the company.

Possible Defences

- Bona fides – not normally a relevant consideration (Regal (Hastings) Ltd v Gulliver)- Source of Information – information in Bhullar was private in the sense that it did not come to

the directors in the discharge of their duty – court says doesn’t matter- Rejection

- 1) Bhullar: “whether the company could or would have taken that opportunity, had it been aware of it, is not the point”

- 2) Also, even where there is a disinterest from the company, other directors may be unduly influenced by the fact that the person who would otherwise take up the opportunity is a fellow director – so they can’t reject it and then it’s okay

- Commercial impossibility – if the company does not have the funds this is still not a defence (Regal)

- Third party unwillingness to deal – not a good defence since it is the directors that would have to persuade the third party to deal (Industrial Development Consultants v Cooley)

- Resignation – If a director exercises his fiduciary power to resign it cannot be to enable him to gain a business opportunity (CMS Dolphin v Simonet)

- Incompleteness of Bhullar – they reject maturing business opportunity test but don’t articulate a clear test – on the facts, the test is probably that the opportunity must be one that falls within the company’s line of business and this has been interpreted to cover not only the company’s current interests but also what it could be interested in. It would be in keeping with the approach in Bhullar to treat anything of economic value to the company as potentially within the company’s line of business and therefor a corporate opportunity.

Conflict of Duty and Duty

- In principle, the rule against a conflict of duty and duty is as strict as the rule against conflict of self-interest and duty

- In light of Bhullar a director simply could not carry on a competing business with his company unless there was consent (principle of informed consent – fiduciary allowed to be in consent if they obtain full consent unless provision of some information to one would be a breach to the other)

Ownership, Obligation and Opportunity

- The more recent evolution of fiduciary liability should have reduced the need to blur the line between ownership and obligation, or between property (rights that are held) and opportunity (possibilities of profit) – it is now clear that a breach of fiduciary obligation is not dependent on a misappropriation of property

- In other words, one can say that in relation to an opportunity, a fiduciary has obligations to his principal: one does not have to focus on any property held by the principal

Ratification: Red Tape or Red Herring?

- Corporate tradition for the annual general meeting of shareholders to approve a formalistic motion to forgive (ratify) any breaches of duty the corporate management may have accidentally committed in the past year

- Just as what would otherwise be a breach can be authorized in advance by the beneficiary of the fiduciary duty, so too it can be forgiven after the fact

- Ratification is only effective if done with full information

Change of Control Transactions and Director’s Fiduciary Obligations

- A takeover bid is an offer to purchase or otherwise acquire sufficient shares of the target corporation so as to gain control of it

- Where management is not in favor of such a bid it is usually called a hostile takeover- If the bidder is offering a price above recent market value, management may feel the need to

present some assurances to the shareholders that to hold onto their stock – one solution is for management to find another potential bidder perhaps willing to offer more (white knight)

- Takeover regulation is supposed to strike a balance among the interests of the offeror, the target and the shareholders of the target corporation, whose shares the offeror is trying to buy

- The board of the target corporation needs information to assess the bid and time to decide whether or not to recommend it to shareholders

- The shareholders also need information, both from the offeror and the board of the target corporation, to make an informed choice and time to make it

- All of this regulation (provincial security law) needs to be done without precluding the ability of the offerors to move quickly and respond to changing markets

- In the case of a hostile bid, two popular defensive responses are 1) the issuance of more shares (so as to make control more difficult to obtain) and the use of poison pill plans

- A poison pill is some policy designed to foil a takeover bid – ex: the directors may permit existing shareholders to obtain additional shares below market value, driving up the share price

Olympia & York Enterprises v Hiram Walker Res Ltd.

Readings: Gulf Canada sought to acquire a majority of the shares of Hiram Walker – directors of the company sought to adopt defensive strategy that involved a 40 percent deal with another company and the creation of a new corporation that issued shares to the directors of Hiram Walker and then used that share money to acquire Hiram Walker shares. Gulf argued that the directors were using corporate assets of Hiram Walker to entrench themselves in management and were thus breaching fiduciary duty. The directors acted in good faith and for what they believed was in the best interest of the corporation. What the directors are doing is simply maximizing value for all the shareholders, even though this includes them it doesn’t mean they can’t profit as well.

Majority Protection (Briefly)- Like society corporations are run by the majority- There are different types of shares – always has to be at least one class of voting shares- The structure of corporations whether BC or Canada – the constitution is flexible to address the

different investment desires of those involved- For example in a small corporation ma and pa might want to keep control even though they

don’t want to run it day to day so will just hang onto voting control without worrying about dividends etc – many different ways to invest

- The holders of shares will dictate based on majority rule- Shareholders are not the corporation – they have certain rights – but they are rather limited

- Some of the cases deal with when notice is not adequate from a content or time point of view- “If a corporation is required by statue or constitutional documents to have meetings in a certain

place, it has to do so in that place” – Upper Canada Case – location relevant- Proxy voting – in large corporations it is not likely that shareholders will travel to a AGM in

person – this is regulated through legislature CBCA s.147-154 – used to be a blanket sort of proxy but very open to abuse

- What arouse is a process by which if directors were seeking proxies they had to send out information beforehand about how they were going to vote etc – so the shareholder could choose whether to give their vote to them

- Shareholders do have the right to bring forward shareholder proposals at meeting and they have the right that these go on the agenda of the AGM

- In serious matters such as changing the main business of the corporation or mergers or deciding to sell assets – all these critical decisions require approval by the shareholders and a special resolution (often 2/3rd)

- Most telling feature of majority rule is that the majority can essentially do whatever they want in terms of pursuing shareholder interests as long as it doesn’t somehow abuse the minority – doesn’t fit that well with Saloman –

Minority Protection

Class Notes:

- Legislatures decided that it is important to allow shareholders to keep them on the straight and narrow if they don’t like what they are doing – theory starts in Ontario and then CBCA before spreading – legislation sets out a charter of rights for shareholders – a set of protections or remedies available to shareholders when they feel particularly aggrieved

- These remedies applied in different ways but they are in some sense still in transition, so it is important to keep in mind when the cases occur because they are brand new theory – unique way of dealing with dissenting shareholders

- Some of the early case struggle with the meaning and impact of the legislation and there is also early reticence to give these remedies too much scope – after 10-15 years this changes and they are recognized as much more broad

- Three essential remedies in CBCA –

- 1) action on behalf of and in the name of the corporation – derivative action – corporation should normally sue if there is an actionable right say breach – if they don’t sue for some reason – then the shareholders can seek leave of the court to bring an action on the corporations behalf (they can also do this to defend a corporation) – not a venue for dispute, just a prima facie action – dispute doesn’t resolve if there is a breach of duty, just whether there is enough to move forward in an action

- 2) s.241 of CBCA – oppression remedy – difference between oppression remedy and derivative is that an oppression remedy does not need leave they just need an order – nonetheless the court’s discretion is broad – involves range of behavior which is oppressive, so in bad faith or seeking to take advantage of or having your interests unfairly disregarded – of any creditor, shareholder, director or officer -

- 3) Injunction – order requiring the offending person to do a certain thing or act in a certain way – fairly broad – to require them to comply with the act or the constitution of the corporation – courts began using this more for slight things than for fiduciary duty, since director owes duty to corporation – however it has become more expansive over time as a breach would also violate the act

- Could an employee be a complainant – you’d have to apply under subsection (d) – “any other person who in the eyes of the court it is proper” – you don’t fall under any previous area

- S.227-S.249 BC Act – Print out BC Act – 227 talks about any other person who the court think is an appropriate person (don’t say properly like CBCA) – BC also refers to behavior that is repressive, person affected has to be adversely affected which means that you need to have had a particular interest – BC much narrower – BC also says “unfairly disregards interest” – much easier to enforce behavior you don’t like under CBCA

-- Remedies of shareholders to complain about and do something about corporate actions they

oppose – these remedies blend with broader fiduciary duties etc - Two primary ways in which people who disagree can approach a problem – 1) they can bring a

derivative action on behalf of the corporation – assert to bring an action as if the shareholders were the corporation – usually an action that it the corporation’s to make and not theirs – thus they need to apply to the court

- Broad brush painted used by the courts- Pg. 459 – security holder held in at least one case to be a prospective shareholder, if they have a

reasonable expectation to become a shareholder- Richardson v Greenshield (?)– concerned about how the corporation was being run – then

aware of that, the person bought shares and then brought an action – so bought shares with the knowledge that bad things were going on – court permits this even though they didn’t have an interest originally

- You see the newer cases being much more flexible and open to intervention then previously - When there is an action against directors it is about what did they do – did they breach their

fiduciary duty – in an oppression remedy – the focus is on what is the result – were they “oppressed”

- The oppression part of the remedy is not really perused anymore because its difficult to show that your interests have been unfairly prejudiced

- Early cases (restraining order cases) argued that the oppression remedy should not be used with mix of fact and law – should just be straightforward stuff like was a notice not given – but over time this is significantly broadened

- If the court can make any order they see fit under oppression remedy – then they could award damages for breach of fiduciary duty – but if that claim was brought in equity you could not get damages – wide options which makes this very appealing

- Leave requirements in derivative cases – complainant has to apply (not so for oppression remedy: just have to show that you were affected) – requirements include: has to give notice to the directors of the corporation to give them a chance to use their role to bring an action, complainant has to be acted in good faith, and it has to be in the interests of the corporation or the subsidiary – when leave is given the legislation in both BC and Fed allow the courts to supervise and thus not allow someone to drop an action if they don’t think its right

- Oppression Remedy- Court can make any order it sees fit – although there is a list that sets out options- Focus of remedy is on the effect of decisions – in a lot of situations merely about whether that

effect is fair and just or not- Not about legal rights, but about the reasonable expectations of the parties- Pg. 493 – discussion about reasonable expectations – court recognizes that there is something in

addition to legal rights that they will protect – reasonable expectations of the shareholders (in their capacity as shareholders)

- Remedies- Court has the primary power to rectify the effects of the unacceptable behavior that is unfairly

prejudicial to the interests of the plaintiff –what arises from time to time is whether the court has rectified or gone overborne – Naneff – decide to kick him out of corporation, brings an action – remedy most questioned was that there should be an auction of the corporation and that the owners could bid on it including the wronged son – however in reality that son would never have reasonable expected to have had an opportunity to gain control of the company – goes of appeal says its going beyond what would rectify the oppression and court orders instead to put the son in the same position but not in any better shape then if he had not been punted

- Remedy has to be one that rectifies and not overcompensates – and it has to be one that addresses the needs of the complainant in the capacity they are complaining – so if they are complaining as a shareholder then the remedy needs to be for a shareholder – not like in Naneff a remedy as a family member

- Think: what opportunities does a minority shareholder have to shape the direction of the company

The Reformed Statue Response

- Each of the reformed Canadian statues has enacted what amounts to a bill of rights for minority shareholders – these are causing major divergence of Canadian corporate law from US and UK

- Reforms began in the 1970s and much if it has been directed towards codifying procedural remedies designed to protect the individual shareholder from the twin oppressors of managerial power and majority rule

- A person cannot sue on the basis of an injury suffered by someone else. Only the injured party has the standing to complain - CBCA s. 238 (BCBCA ss.228(1), 232) says compliant includes a registered holder or beneficial owner of a security of a corporation or any of its affiliates

- Any compliant has standing to seek leave to commence a statutory reprehensive action under the CBCA – minority shareholders are clearly the primary objects of these statutory provisions

Statutory Representative Actions

- Several Canadian jurisdiction have enacted sections authorizing various individuals to bring representative actions on behalf of corporations – under most such sections the right given is to appear in court and to invoke the discretion of a judge –s. 239, 240 CBCA

- Derivative action: under section 239 of the CBCA looks like a litigious right vested in a statutorily created guardian ad litem (different than US and UK meaning)

- The derivative action exists to cure one of the negative effects arising out of the notion of corporate legal personality – enforcing fiduciary duties is difficult if the only actors who can represent the corporation are the very managers who violated the duty

Farnham v Fingold

Readings: Motion to strike because there is no standing for a class action. Court finds that some of the claims set out in the SOC properly belong in a derivative action and not a class action and thus tosses the case with the option to re-file as a derivative action.

Prerequisite Steps

- No compliant will have standing to bring a statutory representative action unless four prerequisites are met – they are set out in CBCA s.239(2) and s.240.

- 1) The compliant has given notice to the directors of the corporation or its subsidiary of the complaint’s intention to apply to the court under subsection (1) not less than fourteen days before bringing the application or as otherwise ordered by the court

- 2) The compliant is acting in good faith- 3) It appears to be in the best interests of the corporation that the action be brought- 4) An order authorizing the compliant or any other person to control the conduct of the action- Failure to give notice to directors so as to permit them to take action in the corporate name will

be fatal to the application

Bellman v Western Approaches Ltd

Readings: Minority shareholders alleged that some of the directors had breached their fiduciary duty. Court says that the statues do not say that the court must be satisfied that it is in the interests of the corporation – it says that no action may be brought unless the court is satisfied that it appears to be in the interests of the corporation to bring the suit. In determining this, one must first look the decision of the directors who, having been given reasonable notice by a compliant in good faith, decide not to assert a corporate right of action. While it is true that a quantifiable was not proven, nonetheless, it was sufficient to have shown a potential loss and the potential for the board to be in a position of conflict.

Compliance and Restraining Orders

- S. 247 of the CBCA offers a new approach to enforcing compliance with corporate rules. - It states that in the event of non-compliance, a complainant or a creditor of the corporation may

apply to the court for an order directing any such person to comply with, or restraining any such person from acting in breach od, any provisions thereof, and upon such application the court may so order and make any further order it thinks fit.

Caleron Properties Ltd v 510207 Alberta Ltd

Readings: Majority of the management wants to donate the corporations last land asset to a church of which they are apart – other minority shareholders object. At a meeting, the majority enacted by-laws that essentially went against the corporate statue. Minority shareholders applied for court order for compliance with the by-laws of the corporation. Court severs the by-laws that don’t contradict. “With respect to the other amendments passed by the shareholders at the meeting, I am guided by two considerations. First, by-laws are void only to the extent that they are inconsistent with the articles or are in violation of the ABCA (statues). Second, the legitimate exercise of shareholder power under the ABCA to amend by-laws is to be respected and endorsed”. Court directs that they must comply with the bylaws of the Corporation and that the other by-laws that don’t contradict are in effect.

The Oppression Remedy

- Most Canadian jurisdictions have followed the CBCA lead and enacted an oppression remedy. - The remedy is invoked in a wide variety of circumstances, making precedent fairly unhelpful,

despite the fact that because it is relatively new in Canada there is a large volume of cases on the topic.

- The provisions of the CBCA are indicative of the scope of the oppression remedy and are thus very broad.

- The oppression remedy is most often invoked when the complainant has all of the equities and few, if any legalities, on his side.

The Meaning of Oppression

- The statutory remedy of oppression has been entrenched in various Canadian corporate law statues

It has been left to the courts to determine the indicia of oppression including who must be oppressed to trigger the remedy. The below cases are about defining this standard:

Westfair Foods Ltd v Watt

Readings: The appellant corporation had two classes of shares, for many years the corporation paid a fixed dividend and retained a substantial part of its earnings. It then changed its policy and after paying the fixed dividend, it paid all its net annual earnings to the single common shareholder. Trial judge concluded that the new policy was oppressive in that it disregarded the interests of the other class of shareholders to share in future expansion. Court says that the rights conferred upon the shareholders through equity are that they, at any time and in any way during their relationship with the company, are to be insulated from anything oppressive, unfairly prejudicial or that unfairly disregards their interests. For the relations among shareholders, this is a major modification of majority rule. In very general terms, one clear principle that emerges is that we regulate voluntary relationships by regard to the expectations raided in the mind of a party by the word or deed of the other, and which the first party ordinarily would realize it was encouraging by its words and deeds. This is what we call reasonable expectations or expectations deserving of protection. All of the words and deeds of the parties are relevant to an assessment of reasonable expectations, not necessarily only those consigned to paper and not necessarily only those made when the relationship fist arouse. Court says that while this is not the only circumstance where oppression will apply, it is a proper starting point in an analysis.

Deluce Holdings Inc v Air Canada

Readings: Case deals with questions of interplay between the broad oppression remedy made available to minority shareholders by statue and the very clear “arbitration” direction in the Arbitration Act - particularly in what circumstances may oppressive conduct operate to undermine what would otherwise be a contractually arbitrable issue. Air Canada decided to acquire 100% of Air Ontario, which they already owned 75% of and Deluce owned 25%. A provision in the shareholders agreement gave Air Canada the option to acquire the Deluce interest upon the termination to the Deluce directors by Air Ontario. Deluce alleges that Air Canada improperly exercised its majority control of the board of directors to terminate their employment with the sole purpose of enabling it to buy up the interest and allege that this is oppression. While the conduct may not constitute “oppression” in the classic sense of conduct which is “lacking in probity or burdensome, harsh and wrongful” – it may none the less be conduct which is “unfairly prejudicial” to or which “unfairly disregards” the interests of the minority shareholders contract to s. 241 of the CBCA. Having regard to the terms of the agreement, Deluce had a reasonable expectation as shareholder that in the absence of of the termination of employment for reasons in the best interests of Air Ontario, the management agreement between Air Canada and Duluce would remain the same. In this case, they were acting for an Air Canada agenda and not in the best interests of Air Ontario.

Partnerships

Introduction

- Notes from class/readings - Three organizational structures – 1) sole proprietorship – provides no protection for losses or

liability but easy to set up, 2) business corporation (for profit) – majority structure used for businesses and 3) partnerships – professionals are required to set up partnerships (accountants, lawyers etc.) but they are not as common now as they once were

- For it to be a partnership is needs – 1) to carry on a business, 2) with a view of making a profit and 3) has to be an activity carried on in common (has to be more than one person)

- S.10 of the BCCA allows you to set up a corporation as an individual but that is not possible with a corporation – see point 3 above

- Professionals are prohibited from forming traditional business corporations and are thus prohibited from the advantages that go along with that

- There is no federal partnership legislation – it is governed provincially- The legislation essentially acts as a set of default rules – so if people form a partnership and

leave parts blank or hold themselves out as a partnership, then you and your activities are governed by the provincial partnership act – if you don’t like provisions in that act (ex: presumption of equality) then you have to specify that you are opting out

- The key issues addressed in the legislation are – 1) the relationship of the partners to each other, 2) the impact of the partnership on third parties and 3) the relationship of the partners to the partnership, to the firm

- A partnership does not exist on its own – it does not have a separate legal entity that has assets or rights or liability apart from the partners. Therefore until recently if you had a claim against them you would have to name every partners because it didn’t exists separate from them (different than suing a corp. where you just say Ford for example

- Liability in partnerships will fall on the general partner whereas liability in sole proprietorships will be on the proprietor and in corporate liability it will be an issue of determining who satisfies liability

- Partnerships – they are agents and principles to all other partners and can’t get out of that collective – they are responsible to all other partners and vis versa – this is a sharp contrast to a corporation and it creates a lot of risk

- LLP’s arise in reaction to this to reduce the amount of that risk and try to limit liability like a corporation

- The consequence of a partnership not having a separate legal identity is that the liability of the partners is unlimited. This is a major disadvantage if you don’t know or trust your partners that much

- When one of the partners wants to leave or dies, the whole partnership comes down unless specific provisions are added, which would require unanimous consent from all the other

parties. Makes a partnership very fragile in that sense, but the benefit of this is that its easy to get out of the partnership easily if they don’t like what’s going on

- Partners also can’t change the fiduciary nature of the relationship they have with each other, which is one of utmost good faith and loyalty. Means that partnership interests need to come before personal or that of a 3rd party – so for example you can’t practice law for yourself outside of a partnership

- Partners Relationships with Third Parties- Partner to partner relationships include a fiduciary relationship and a reciprocal agency

relationship – meaning that anything your partner does can bind you)- Also includes the presumption of equality and a requirement for unanimous consent for their to

be a change- Partner also can’t just sell his share of the partnership to another party (means that your share

is not marketable) BUT what you can do is sell the cash value of your partnership to another person but only if there is a unanimous agreement and you can’t assume that they will have the same rights etc that you did as a partner – for example, you can’t sell them the right to inspect the books or management rights)

- It is possible to be a passive partner in a partnership but it is very undesirable because you don’t know what’s going on

- It’s important in a partnership to determine when a strict fiduciary duty will apply and when it won’t – it always applies in a partner’s relationship with each other but some things are outside that partnership – for example if you bought an apartment, you can have that business interest outside of the partnership

- Fiduciary duty is not usually listed in statues but it is in BC, s.22 of BCA- Agency Aspect of Partnerships- Each partners is an agent of the other – a restriction on the activities of other partners only

works in relations to 3rd parties if the 3rd parties are aware that there are restrictions on the partner. So you can change the relationship contractually but 3rd parties can assumed equal powers and unless they know otherwise, the partnership is liable

- In these cases, the law seems to require actual notice, as opposed to constructive notice- There are two ways that this failure of notice can occur – 1) someone is acting outside the scope

of their responsibilities – the law generally says that unless it is clear that the partnership has made it clear that he is not a partner, he will have been found to have been “held out” in that respect and the partnership will be found liable unless the third party is aware. In other words a partnership is a misrepresentation if they do nothing to actively stop it. 2) if they leave the partnership and nothing is done to tell third parties

- What happens when somebody leaves a partnership – once you leave and have provided adequate notice to third parties or the other partners have – you are essentially liability free for new actions but still carry liability for actions incurred while they were there.

- Notes from Readings - Partnerships are regulated by statue in all provincial and territorial jurisdictions (can’t be

federal)

- Usually they are governed by a written agreement that establishes how the partners will manage the business and resolve disputes, how new partners can join, how income will be divided and how a partner’s share is calculated if they leave – partnership legislation serves as a default set of rules for these issues

- Partnership: is defined as a legal institution which arises where two or more persons carry on a business in common together with a view to profit

- Most cases revolve around the definition of “in common”- How Partnerships Conduct Business - Usually through partnership agreements but where it is absent or silent, provincial legislation

steps in to provide default rules- The relationships of partners to each other: characterized by its personal nature, fiduciary

character, reciprocal agency, the principle of presumptive equality and the ability of the partners to consensually alter certain elements of partnership affairs

- The Personal Nature of Partnerships- Partnership legislation does not allow for third parties to gain the full rights of partners on the

assignment of one partner’s rights to a third party- Since the partnership is considered personal, it is dissolved upon death or insolvency- Fiduciary Character:- Relationship is one of high trust and confidence – characterized as one of reciprocal fiduciary

duties among partners- The fiduciary character of partnerships requires that partners subordinate their personal

interests to those of the partnership collective. Partners must also subordinate the interests of third parties to those of their partners – in short must act in the best interests of the partnership collective

- Agency- In general, each partner is the agent of all others in matters relating to the business of the

partnership- An agent is a voluntary arrangement whereby a person, called the principal, may appoint

another, called the agent, to engage in certain activities on the principle’s behalf- The scope of the agent’s authority is prescribed by the principle – it may be limited or unlimited- By appointing an agent, the principle is liable to be bound to a contract by the agent, and is

liable for the torts of the agent committed within the scope of the agency- A partnership is a form of reciprocal agency – since each party may both bind and be bound by

the actions of other partners- The risk is reduced somewhat through the formation of a limited liability partnership- Presumptive Equality- When no otherwise specified – one of the default presumptions is the presumption of equality

among partners in respect to their sharing of profits and losses- In addition, partner legislation permits each partner to be entitled to participate in the

management of the firm should they choose to do so- Consensual Nature

- The ability to ability to contract out of partners rights and duties demonstrates the importance of consenualism to the partnership – it requires unanimity, a majority is not good enough

- The Relationship of Partners to Third Parties- These resolve around liability issues – the general rule is that a partner is liable for all

partnership contracts, debts and torts during the course of his partnership business- It is possible to restrict this ability bit it is only effective when the third party is aware of these

restrictions- There are five basic scenarios posited by partnerships legislation regarding partners liability to

third parties – i) liability incurred by a partnership before one becomes a partner, ii) liability incurred by a partnership while one is a partner, iii) liability incurred by a partnership while one holds himself or herself out as a partner or allows themselves to be held out as such (holding out liability), iv) liability incurred by a partnership after a partner withdraws from the partnership and v) posthumous liability of a partner

- Pre-Partnership Liability- The general rule is that partners are not liable for debts incurred by the partnership before

becoming a partner – although an exception can exist where a person’s assets are legally seized after joining the partnership in satisfaction for debts incurred from before

- Liability as a Partner- A person who is a partner is liable jointly and liability for this time is not shed once the partner

leaves- Partnership liability is not always held jointly, there are exceptions – partners will be jointly and

severally liable for i) losses or injuries cause to third parties by wrongful acts or omissions acting in the ordinary course of business of the firm and ii) the misapplication of money or property of a third party received for or in custody of the firm

- Potential defences to partnership liability include: 1) that a partner acting on behalf of the firm had no authority to engage in the impugned actions and that the third party knew that ii) the third party did not believe that the partner in question was a partner of the firm

- Holding Out Liability- It is possible for non-partners to bind themselves to liability by holding themselves out – the

knowledge aspect is key here – the person has to know what they are doing to be holding themselves out

- The third party must also rely on this representation- Liability after Withdrawal from Partnership- Partner will retain liability absent adequate notice to third parties- A retiring partner will retain liability to third parties that had previous dealings unless – i) actual

notice is given (Clarke), ii) the third party never knew the retiring partner was a partner or iii) the partner retired because of insolvency or death

- Posthumous Partner Liability- Partners and their estates are not liable for partnership liabilities after death – even if their

name is still used in the firm- Dissolution of Partnerships

- Unless otherwise provided for – certain events can automatically dissolve a partnership – ex: if the partnership is established for a fixed term, if notice is given by one of the partners of the intention to dissolve, if a partnership is formed for a single undertaking or event and it is completed, if it becomes illegal to be continued – the death of a partner will also conclude it absent another agreement

- Additionally, a partnership may be dissolved by the court if – a partner is found mentally incompetence or permanently incapable of performing their part of the partnership contract or if a partner is guilty of conduct that would prejudicially affect the partnership or a partner commits a breach of the partnership agreement

- What is a Limited Liability Partnership- Under an LLP individual partners are liable for their own negligent or wrongful actions as well as

those directly under their supervision and other partners or employees not under direct supervision when their actions are criminal, fraudulent or where the partner knew or ought to have known about it and failed to take reasonable action to prevent it

- It is essentially a tool for limiting the liability of partners for professional negligence - When Does a Limited Partnership Exist- A limited partnership must be created by express action – namely the filing of a declaration of

limited partnership- Unlike in an ordinary partnership, where all partners have unlimited personal liability – a limited

partnership requires only one partner to have unlimited personal liability (the general partner – may be more than one)

- Limited Partnerships and the Issue of Control- In exchange for limited liability, only the general partner is entitled to actively take part in the

control and management of the partnership- Should a limited partner engage in this behavior, they will be held liable as a general partner –

but it is not always clear where to draw this line- Notes from CAN - Partnerships involve more than one equity investor, each a partner. - Normally, each of the partners has some say in how the business is managed. - Creditors have a stake in the business and may impose constraints on the way the partners

manage the business- Partnerships are generally not recognized as separate legal entities and therefor the partnership

cannot enter into contracts with third parties – also if a tort arises, the partners themselves will be responsible either directly or vicariously

- The assets of the business are owned by the partners individually and not the partnership - The rules governing the relationships between partners are default rules- Default rules are rules that apply where the parties have not made their own rules by express or

implied agreement. In the partnership context, they are rules that apply where the partners have not expressly or by implication specified their own rules that govern their relationship

- Simplicity, tax treatment and the lack of formality make partnerships an attractive option- The idea of legal partnerships developed under the common law but the rules governing

partnerships are now codified in statues

- Structure, management, rights and obligations of the partners and the partnership are all a matter for agreement as between the partner

- In the absence of any agreement the terms of the provincial partnership statue will govern- You can contract out of any statutory rule with the exception of the existence of the partnership- A person may be in a partnership without actually knowing that is how the law is treating their

business relationship – so how do we determine that?--

When Does a Partnership Exist

A.E. LePage Ltd v Kamex Developments Ltd

Class: dispute because a realtor wasn’t paid and was looking to get paid by somebody. Realtor argued that the development had been formed into a partnership and all the partners should have unlimited liability. Court looks at the parties intentions and asks what would a reasonable person think that they intended. Court goes through the words used in the documents, actions of the parties, balancing many factors in assessing the intention to form a partnership. Trial judge says that they had signed on together and thus formed a partnership. Court of appeal says this is a mistake – they call it a mistake of law and of fact in order to overturn it although its mostly a mistake of fact in reality. Court rejects the notion of partnership. Court in this case was unsympathetic because they could have claimed against the individual but chose to plead against the partnership. Court: partnership property is exactly that, if it is owned by the partners then it is owned by them collectively and they cannot sell individually on their own.

Readings: Case focusses on the definition of “persons carrying on a business in common with a view to profit” to determine if a partnership exists. Case involved a determination of whether co-owners had become partners – asks whether it was the intention of the co-owners to carry on a business or simply to provide by an agreement for the regulation of their rights and obligations as co-owners of a property. Owners of the building maintained completely separate interest which they could alienate – this is inconsistent with partnership property which is jointly held. Court held that the mere fact that co-owners intend to acquire, hold and sell a building for profit does not make them partners (ex: the mere buying of an apartment building for resale does not constitute carrying on a business – not all cooperative business ventures where profits are share are partnerships).

Facts: Respondent, a real estate agent under an exclusive listing agreement sued for commission on a building that was sold through another agent. The property was held by the defendant corporation in trust for the appellants. At one point, the property was listed for sale in an open listing. Appellants decided against an exclusive listing. An employee of the respondent approached one of the appellants and executed the exclusive listing agreement, having signed it on behalf of the other appellants. He was not authorized to do so. The appellants had not approved.

Issue: Were the appellants a partnership? Are co-owners of a property thereby partners?

Ratio: The mere fact that property is owned in common and that profits are derived there from does not itself make the co-owners partners. Partnership depends on the intention of the parties.

Reasoning: The mere fact that co-owners intend to acquire, hold and sell a building for profit does not make them partners. If have intention to maintain their rights as co-owners of the property, then not partners.

Held: Appeal allowed.

Volzke Construction v Westlock Foods

Class: Joint agreement to make improvements to a mall between two companies – construction company didn’t get paid and went after them as a partnership. Court looked at the agreement to share profits, the sending of clients to each other and the speaking of each other as partners in their assessment.

Readings: Court held that nothing is said in the definition of partnership that involves control. You can have silent or managing partners and control was found to have nothing to do with the existence or non-existence of a partnership (just because only a 20 percent stake was owned doesn’t mean it is not a partnership). What was more significant to the court than control was – i) a joint checking account was established, ii) the two companies agreed to share the costs of developing the mall, iii) the companies agreed to share profits and losses, iv) the companies spoke of each other as partners and sent clients to each other and v) the companies jointly managed the property in question (major difference from Kamex). Court looks at actual agreement, past conduct, mutual involvement in financing, costs and profits and mutual involvement in running of the business to determine a partnership – simply saying you are not in a partnership will be a factor to consider but it isn’t determinative.

Appeal judge considered numbers factors in decided that there was in fact a partnership in the business of operating Westlock Shopping Centre

Pooley v Driver (common law case)

Class: Someone had done work, wasn’t paid and wanted to have the debt satisfied by the person who loans the money to the partnership that didn’t pay. Lenders were arguing that it was just a loan and that they never actually became partners. The court concludes that the lenders were dormant partners for a variety of factual reasons. Case is an example of the courts being very unsympathetic to the lenders, the court saw them as trying to get the benefits of the partnership without unlimited liability.

Readings: Case deals with whether when one party loans money to a partnership and is repaid out of partnership profits whether because the lender is deriving a benefit from the profits it means they are in a partnership. Financiers supplied money to a partnership receiving a share of profits in return, the agreement described them as lenders but gave them power to determine how the firm’s capital was to be used and also contained provisions which were common in partnership deeds such as an arbitration clause, that would have been remarkable to have included in a simple loan agreement. In looking at the whole relationship between the lenders and the partnership as described in the agreement, the court

concluded that the lenders were partners because they had interest in the capital and a large degree of participation and control that would have been unusual for lenders. The court concludes that it is a partnership even though the parties clearly attempted to exclude the adverse features of a partnership when coming to an agreement.

Facts: Borrett and Hagen entered into a partnership which provided for a division of capital into 60 parts. B got 17, H got 23, and the rest went to persons who had provided them the capital to start the business. The Driver’s loaned B and H money in a separate agreement, which included detailed terms of the partnership agreement between B and H. Pooler, the liquidation company, sued Driver for the money he had loaned and claimed that Driver was a partner with B and H.

Issues: Can a party be liable to a dormant partner?

Ratio: A partnership is a contract, involving mutual consent, for the purpose of carrying on business bringing a profit and dividing the profit in some shape between the partners. This general rules requires that each partner contributes something: property, skill etc. If however two or more agree that they should carry on a trade and share the profits of it, then each is the principle and agent for each other, and each is bound by the other’s contract in carrying on the trade. He who partakes in the advantage (profit) ought to bear the loss (liability). This is the general rules that establishes a partnership prima facie, however the question being of substance and not mere form, other things can be taken into consideration that might disprove a partnership. Partnership is a question of fact and liability to creditors is a mere incident flowing from the establishment of that fact. Participation in the profits is sufficient proof of partnership if there is nothing to dispute it – ex: if you can’t show from the surrounding circumstances a different intention. You need to look at the parties real intentions and the contract of the parties. In this case, there was a relationship between dormant and active partners, not creditors and debtors – therefore the partners are liable to the consequences of being partners and liable for the debts. Intent is important and it should be determined from the whole character of the transaction. Case establishes that although a right to participate in the profits of trade is a strong test of partnership, and there can be cases that from such a perception alone it may, as a presumption of fact not law, be inferred – whether that relation actually does or does not exist depends on the real intention and contract of the parties. You need to look at the whole character of the transaction to find whether the true relation between the parties was that of partners, or mere creditors and debtors.

The Legal Nature and Characteristics of Partnerships

Thorne v New Brunswick

Class: Question addressed was whether an injured partner was covered by workers compensation act – or whether he was separate as a partner. Court dealing with whether a partnership is a separate legal entity to the point where partners could be hired as employees. If a partnership is separate and apart then the partnership could hire partners as employees and be covered by the act. Partnership is concluded to not be a separate entity, rather it is a collection of partners and they could not be employees as well. Court says that whether they are working under the partnership as well as being a partner doesn’t matter, there was no other legal entity they could join. As a consequence, a partnership

could not sue in an individual’s name – it would have to sue all together and vis versa – if an individual were to sue, they would have to sue every partner (now you can get leave of the court not to have to name every partner). Limited liability partnerships arouse in reaction to decisions like this one, which were generally disliked.

Readings: Case deals with to what extend is a partnership distinct from the individuals or entities that have joined together to create it. Court holds that partnerships are not distinct legal entities, a person cannot occupy the position of being both an employer and employee. The rationale for this is that unincorporated associations do not enjoy the attributes of separate legal personality that would enable a partner to be an employee of a partnership. In this sense, a partnership is no different than a sole proprietorship, where the proprietor may not serve as an employee because they have no separate legal personality. Since a partnership is not a legal entity, when we talk about a partnership, we mean all the partners. Because of this partnership profits and liabilities flow directly to the partners according to the terms of their agreement or default provisions. The liability of partners is unlimited personal liability, just like a sole proprietor.

Facts: Thorne and Robichaud started a lumbering/sawmill partnership. Thorne got injured on the job, and applied as a workman to the Compensation Board.

Issues: Was Thorne a workman employed by the partnership?

Ratio: No person can enter into a contract with himself or be his own employer. A partnership does not have a separate legal existence from the individuals composing it, therefore not person can be an employee of a partnership of which he is a member.

Reasoning: A firm as such has no existence; partners carry on business both as principals and agents for each other within the scope of the partnership business; the firm name is a mere expression, not a legal entity, although for convenience it may be used for the sake of suing and being sued... It is not correct to say that a firm carries on business; the members of a firm carry on business in partnership under the name of the firm.

Can’t simultaneously be an employer and an employee.

Held: Question answered in the negative.

How Partnerships Conduct Business

The Relationship of Partners to Each Other

The Personal Nature of Partnerships

Fiduciary Character

Olson v Gullo

Class: The remedy for a breach of a fiduciary duty is that you have to give up what you gained for your breach – generally your profit. In this case, the person didn’t lose anything by breaching fiduciary duty, Gullo kept his partnership share in this case so he faced no real risk. The profits obtained by the breach in this case goes to all the partners, including the one who committed the breach. S. 32 of the BC Act also provides for this, stating: profits will be disgorged between the partners.

Readings: Case deals with the implications of partners’ fiduciary duties – begins with the presumption that the defendant must not be allowed to profit from his own wrongdoing. The obligation is concluded to be that the partner pay the profits to the firm – if he is part of the firm then this includes him. So the partner that was excluded would not get 100% of the profit but a portion according to the partnership agreement. The court concluded that the defaulting partner does not necessarily profit from the wrong just because he receives his pre-ordained share. It was unquestioned that a fiduciary who accepts a secret profit must disgorge it, however the question that remained was whether partners who breached fiduciary duties could take their normal share as partners. The court’s judgement would suggest that a profit would require something more than what was agreed upon in the partnership agreement – this could however create problems as it removes the incentive to not defraud, since you get to keep your original shares regardless.

Agency ,

Presumptive Equality

Consensus Nature

The Relationship of Partners to Third Parties

Pre-Partnership Liability

Liability as a Partner

Holding Out Liability

Liability After Withdrawal from Partnership

Clarke v Burton

Readings: This case discusses the concept of adequate notice and establishes that a creditor who continues to deal with the partnership with full notice of the dissolution cannot claim against a retired partner. Case establishes that actual notice of a partner departing trumps a technical reliance on the provisions of partnership legislation, because there is no reliance. In considering adequate notice – separate considerations apply to third parties that had dealings prior to the change then to those that did not.

Posthumous Partner Liability

Dissolution of Partnerships

- Under common law and statue, the relationship ends with the death or bankruptcy of one of the partners

- A partnership may be reconstituted thereafter, but the specific partnership that existed before death or bankruptcy of a partner, no long exists

What is a Limited Liability Partnership

- Limited liability often increases the cost of credit – creditors therefore raise their rates to compensate for the limits placed on investors’ liability

- Limited liability is a creature of statue that permits some partners to have limited liability but only if the partnership conducts business under the name “Limited Partnership” and must be registered pursuant to statutory requirements

- Limited partners may not take part in the management or control of the business- Tax Considerations: any losses can be passed on to the limited partners and can be used to

offset other sources of income (benefit over incorporating, which also offers limited liability)- A type of partnership (more than one equity investor) that has one or more partners whose

liability is limited to the amount of their investment and one or more “general partners” whose liability is not so limited.

- Provided for by statue – can only be created by registration pursuant to the statue of the jurisdiction in which one wishes to register

- Often there are restrictions on the involvement in the control or management of the business by the limited partner

- The limited partnership is NOT a legally recognized separate entity – both the general and limited partner collectively own the assets of the partnership business

- Limited partners may not be directly liable for torts committed in carrying on the business, but may be vicariously liable for the acts of agents and employees engages in the carrying on of the business – but liability limited to the amount of their investment

- A Limited Liability Partnership allows professionals to not be liable for acts of their fellow partners or employees unless they were directly supervising the activity that caused the loss – otherwise it functions like an ordinary partnership

- The LLP would also not be recognized as a separate legal entity- Statutory Provisions and Features- 1) Must be one of more limited partners and one or more general partners. The liability of

limited partners is restricted to the amount that they contribute. The liability of genral partners is not limited

- 2) Formation by filing a certificate or declaration and this is required for the formation of limited partnerships

- 3) Protection of third parties – includes restrictions on the involvement of a limited partner, that the names of a general partners must be set out so creditors have access to that information to assess the creditworthiness of the partnership. Also a declaration must set out the amount contributed by limited partners

When Does a Limited Partnership Exist

The Legal Nature of a Limited Partnership

Kucor Construction v Canada Life Ass

Readings: In a limited partnership, the limited partners are restricted from active participation in the business affairs of the partnership and in return get limited liability. Case demonstrates that, at least in terms of their legal personalities, partnerships and limited partnerships are the same. Where legal personality becomes a more complex issue is with corporate entity.

Limited Partnerships and the Issue of Control

Haughton Graphic v Zivot

Haughton Graphic Ltd. v. Zivot

Readings: Court states that if a limited partner takes part in the control of the business, he becomes liable as a general partner (unlimited liability to the extent of his assets). Court says that there is no requirement of reliance on the creditor that he believe that the limited partner was a general partner. The degree of control necessary is to be determined on a case-by-case basie.

Facts: Plaintiff suing two limited partners for debts owed on the basis ground that in addition to exercising their rights and powers as limited partners of Printcast, each took part in the control of the business. A corporation (Lifestyle) was the general partner of the partnership, incorporated by Zivot who was also a limited partner in the partnership. Zivot represented himself as the ‘president’ of Printcast and Marshall was the VP. A deal was struck w/ the plaintiff for the printing of the magazine in Toronto. Printcast went into bankruptcy shortly thereafter. The plaintiff was aware he was dealing with a limited partnership, though did not know its structure.

Zivot and Marshall made the managerial decisions for the partnership. They were in complete control of Printcast.

Issue: (see above)

Ratio: If a limited partner takes part in the control of the business, he becomes liable under the statute as a general partner, i.e. unlimited liability to the extent of his assets.

Reliance is note a necessary precondition to unlimited liability for a limited partner. What engages the liability of the limited partner is his taking part in the control of the business.

Reasoning: Not much case law to help determine where the line is to be drawn beyond which a limited partner is deemed to be taking part in the control of the business and each case will have to be decided on its facts. Transaction of business by a limited partner on behalf of the limited partnership is not permitted.

Held: Judgment for the plaintiff.

Nordile Holdings v Breckenridge

Nordic Holdings Ltd. v. Breckenridge

Readings: Court says its okay because of a specific exclusionary provision supplied before the transaction took place. The court says that if the director/officers participates in limited partnership management solely in their recognized capacity then it’s fine. Acting solely in one capacity is okay according to this case – in other words they were only acting as directors and not in any other way.

Facts: Appellant sold land to the defendant, a limited partnership. The defendant fell into default on the mortgages used to purchase the land. Appellant sued two limited partners for the mortgages owed to it by the partnership. The limited partners were also officers and directors of the general partner.

Reasoning: The limited partners participated in the management as directors “solely in their capacities as directors and officers of the general partner” and not in the capacities of limited partners. There was also a sales agreement that specifically excluded the personal liability of the limited partners.

Held: Appeal dismissed.

The Canadian Constitution

Notes from Readings

- The Constitutional Framework - Each provincial legislature is assigned certain, specific powers relating to the creation of

corporations and other general powers to regulate the activity of corporations, wherever incorporated

- Similarly, the federal Parliament has the power to incorporate and a broad range of legislative powers affecting corporate activity

- Both the federal parliament and the provincial legislatures remain restricted in making laws in relation to the listed subjects under s.91 and s.91 of the Constitution Act

- It is usually clear that if a statue is directed primarily at the creation of a corporation, the primary aspect of legislation is usually sufficient to establish legislative competence even if the stature incidentally affects matters outside that legislature’s competence

- Federal and provincial legislative powers in relation to corporate law are usually divided into 1) legislative power to create new corporations and 2) legislative power to regulate the activities of existing corporations

- Legislative Power to Create Corporations- Little practical difference between provincial and federal incorporation anymore except that the

structure for particular provinces differs from the federal structure- Bonanza Creek Gold, “a provincial Crown corporation, once validly established, can attract rights

including immunity status, from other legislature, whether they be federal or provincial” (ex: by entering into interprovincial agreements).

- The Federal Power

- S.91(15) deals with the federal creation of corporations – it is also agreed that so does the general residual clause in the preamble to s.91 (POGG)

- Regulating Corporate Activity- Any legislature can restrict the behavior of a corporation it has created – but what about the

ability to regulate the corporate creations of another legislature- Regulation can mean anything from a legislative pronouncement directed at a single corporation

to a scheme which affects all persons and therefore affects corporations- Most disputes come down to pith and substance – what is its dominant matter or feature- Paramountcy – applies where a) the federal parliament and provincial legislature enact statues

pertaining to matter and b) the two statues conflict (otherwise double aspect would be fine). If paramountcy is invoked, fed trumps the province.

- Some forms of regulation affect corporations so seriously that they constitute rules of corporate law and therefore belong to whatever legislature created the corporations in question – ex: federal legislation governing takeovers of dominion corporations because federal authority allows legislation of statue and corporate structure

- If you are supporting provincial legislation that regulates federal corporations – you can argue that in p&s the legislation is aimed at regulating property and civil rights as a way to get around it – then it would succeed unless paramountcy had to be applied

- The Provincial Powers- Common areas of provincial regulatory control – taxation within the province, local works,

incorporation of companies with provincial object (11), property and civil rights, administration of justice and all matters of a merely local or private nature

- Reference Re ss. 91 and ss.92 of the Constitution Act suggested a turning of the tide – case was on the issue of the applicability to federal corporations of provincial legislation regarding business names – majority held that a) a federal corporation could be required to register if it used a business name in the province and b) a federal corporation could be ordered to use a different business name if it used its business name only in inra-provincial business in the province – if however the business was inter=provincial then this negated the federal trade and commerce power – c) that a federal corporation could not be ordered to change its corporate name or even to use a business name instead of a a corporate one for business iwthin a province

- The end result of the case is that provinces can regulate the corporations of other provinces to an unlimited degree but can regulate federal corporations to a limited and difficult to define degree

- Practical outcome is that there is not much difference between a federal and a provincial corporation – a BC corporation can carry on business in any province so long as it complies with the license regulations and a federal corporation may be exempt from some of the requirements but the cost of establishing might not be worth the benefit

- The Federal Powers- Corporations, wherever incorporated, will be affected by federal legislation – ex: the Income Tax

Act – however in general it is more affected by provincial legislation. Why: 1) the broad range of provincial control over local matters, including property and civil rights, 2) the judicial

emasculation of what might otherwise have been a broad federal regulation of trade and commerce (Canada (AG) v Alberta (AG) (The Insurance Reference) – regulation of trade and commerce is found not to extent to the regulation of a licensing system of a particular provincial trade where otherwise they would be free to participate

-

The Constitutional Framework

Legislative Power to Create Corporations

The Provincial Power

Reference in the Matter of the Incorporation of Companies in Canada

Readings: Case concerns the meaning of the clause “with Provincial Objects” as contemplated in s.92(11) of the BNA. According to s.92(11) the provincial power to create corporations does not extend to the creation of corporations that do not have provincial objects, the key then becomes defining provincial in this context and what is provincial in nature. Case says that “objects” means the business which the company is authorized by its constitution to carry on with a view to profit that is the ultimate purpose of its members. “Provincial” can confer upon its companies the capacity to acquire rights and exercise their powers, outside the provinces, so long as the business, when looked at as a whole as an incorporated company is still a provincial business. This will have to be determined on a case-by-case basis. The test for whether a particular corporation could be created by a province seems to be whether the corporation’s objects could accurately be described as provincial.

The Federal Power

Citizens Insurance Co of Canada v Parsons

Readings: the federal power is essentially defined as anything for POGG that falls outside the provincial power.

Regulating Corporate Activity

The Provincial Powers

John Deere Plow Co v Wharton

Readings: BC required extra-provincial corporations to acquire provincial licenses to carry on a business. The statue made it an offence to do business without a BC license and said any contract made by a non-licensed extra-provincial corporation was unenforceable in court. The company in this case was incorporated federally for business throughout Canada. Case says that “civil rights in the province” as an expression of s.92 cannot be interpreted so liberally as to cover everything and that companies with other than provincial objects must belong exclusively to the federal field. The expression of civil rights within a province must be construed consistently with the various other powers already established in s.91 and s.92 – in this case it conflicts with the federal power over trade.

Bonanza Creek Gold Mining Co v The King

Readings: An Ontario corporation had been set up and the question arouse whether it had the legal capacity to mine gold in the Yukon – to carry on a business in another province. Courts says that what the words “legislation in relation to the incorporation of companies with provincial objects” does is preclude the grant to such a corporation of power and rights in respect to objects outside the provinces – but it leaves untouched the ability of the corporation if otherwise adequately called into existence to accept other rights and powers granted upon it by its virtue of being an established corporation. A federal corporation is entitled to some extent greater than an Ontario corporation to exercise its powers in a separate province.

Multiple Access v McCutcheon

Readings: Insider trading case – crime is prohibited both federally and provincially in Ontario with very similar statues. Court found that both could be applicable to a federal corporation and they could operate at the same time because they don’t conflict. “The provincial legislation merely duplicates the federal, it does not contradict it. The fact that a plaintiff may have a choice of remedies does not mean that the provisions of both levels of government cannot live together and operate concurrently” – “duplication is the ultimate in harmony”. Multiple Access showed a judicial reluctance to find that federal and provincial legislation are in conflict unless the conclusion is inescapable.

The Federal Powers

Multiple Access v McCutcheon

The Canadian Charter of Rights and Freedoms

R v Agat Laboratories Ltd

Readings: Case is an example of the type of analysis the courts have gone through when determining whether a corporation is able to invoke a given right. The corporation was charged with environmental offences and the accused submitted that the Crown’s failure to disclose was a violation of s.7 of the charter. Question becomes s.7’s applicability to corporations. Court says that one can conclude that 1) section 7 protects among other things, the right to make full answer and defence being one of the principles of justice, 2) all accused (humans or corporations) have an identical interest in being able to make full answer and defence when charged with an offence and 3) it follows that a corporate accused has an interest which falls within section 7 of the charter and may therefore invoke section 7 to protect that interest. The current judicial approach is to ask – 1) what constitutional value a given provision protects and 2) whether this value requires that the right be available to corporations

Incorporation and Pre-incorporation

Class Notes

- Doctrine of privity – a person who is not in existence at the time that an agent makes a contract, cannot ratify that contract – so if the corporation doesn’t exist at the time, it can’t come along later and claim the contract. The notion flows from privity notion that you can’t take the seller out and replace them with someone else unless the buyer agrees.

- CBCA – area of focus in the legislative changes is to allow the corporation to adopt the contract, this changing the common law

- Statutory changes allow corporation to adopt the contract – technical problem is that there is not really a “contract” even in existence if the corporation didn’t exist at the time (courts have ignored this)

- CBCA also allows for a third party to seek an order proportioning liability between the promoter and the corporation, regardless of whether the corporation adopts the contract. They do this in situations where the promoter is responsible but the corporation doesn’t have any money, this prevents them from avoiding liability

- Legislation also allows the parties to agree that the agent will not be liable in any circumstance, as a clause

Readings

- If the application is in order, the official must issue a certificate of incorporation and the corporation is born

- The CBCA official is “the director” and her duties in this regard are set out in CBCA s.8 and 262- In other jurisdictions, the equivalent public official is sometimes called the “registrar” but the

duties are the same so far as the creation of new corporations is concerned- The corporate birth date as set in CBCA s.9 – “a corporation comes into existence on the date

shown in the certificate of incorporation” = when the date on the certificate is the date it was issued, s.9 causes no problems – however when a document alleged to be a certificate bears a date other than the date it was issued, there are complications that can arise

- The Corporate Constitution: Minimum Requirements- An application to create a corporation must contain draft articles for that corporation. While

incorporators have substantial freedom in structuring the corporate constitution, there are for restrictions

- The CBCA is typical of the articles of incorporation jurisdictions – CBCA s.6 requires that the name of the corporation, location of the head office, number of directors, details of the share structure and any restrictions on the business of the corporation must be set out in the articles

- Continuance: Corporate Emigration and Immigration- Continuance is a procedure whereby a corporation in one jurisdiction emigrates and establishes

a new home. It is not the same as simply doing business in another jurisdiction. The effect of continuance is the same as if the corporation had been dissolved in its home jurisdiction and reincorporated in another

- A typical requirement (CBCA s.187(1)) is that a corporation seeking to immigrate be so authorized by the laws of the jurisdiction in which it is incorporated

- Amalgamation: Corporate Constitution- Under CBCA s.181 to 186 – two or more corporations may amalgamate and continue as one

corporation – the old corporation ceases to exist and only one corporation remains- The Corporate Name- The use of corporate names is regulated by the general law of trademarks and also by the

common law of “passing off” – there are also provisions in the incorporating statues imposing certain requirements for the names of corporations – ex: can’t incorporate obscene names or ones that could be confused for other companies

- Pre-Incorporation Transactions- Introductions- When two parties agree what will happen following the creation of a third party – the

corporation – the first thing to do is analyze whether those two parties or the corporation were intended to incur legal obligations. This analysis involves elementary points of contract law

- In any pre-incorporation transaction there will be two active parties – A: usually an individual involved in the incorporation process who purports to act for the future corporation and O: an outsider who intends to transact with the future corporation

- The third party, the corporation, is at this point only a figment of imagination- Common Law Position- Even if A and O are in agreement that the contract is to be between O and the corporation – the

attempt to create a contract will fail- The result is that is a contract is to be created between A and O – it is they who must be the

parties- A more difficult situation arises when both parties know the corporation doesn’t exist – it will

again depend on the intention to contract with A which can be a difficult factual determination- Attempts at Statutory Reform- Statutory reforms in this area have attempted to make two changes – 1) the reformers tried to

impose contractual liability on A in situations where there would be no contract at common law and 2) they tried to enable a corporation to adopt a pre-incorporated transaction, making the corporation a party to the contract and excusing A

- Shelf Corporations- Incorporation procedures under the CBCA- Section 10(1) of the Business Corporations Act provides: one or more persons may form a

company by: a) entering into an incorporation agreement, b) filing with the registrar an incorporation application and c) complying with this Part (Part 2)

- Incorporation Agreement- An incorporation agreement is a short agreement in which the incorporators agree to take

shares of the company- The effect of the incorporation of a company, the incorporation application must be filed with

the office of the registrar (s.10(1)(b)). The incorporation application must be submitted for filing electronically using the Corporate Online system.

- Upon submission to the registrar and payment of the prescribed fees, the company will be incorporated on the date and time that its incorporation application is filed with the registrar or

on such later date as may be specified in the incorporation application (s.13(2)). The incorporation date is the first date that the company is recognized under the Act (s.3(1)(a)).

- A CBCA corporation may have the benefit of, and be bound by, a pre-incorporation contract entered into on its behalf before it came into existence although, in order to do so, it must, by action or conduct signifying its intention to be bound by it, adopt it within a reasonable time after the corporation comes into existence (s.14(2))

-

The Details of Incorporation

Registration

C.P.W. Valve & Instrument Ltd. V Scott

Readings: In the case at bar, the question is whether the terms of the distributorship contract were fulfilled in respect to an order for gauges. On June 15th, there were orders handed to the appellant and signed by the proposed company; undoubtedly the company was bound by those orders even if it were not placed in the register until June 16th. Even if the company had not placed on the registrar until June 16th, it was bound by the terms of the order to take the gauges. (This is a dissent I believe, look up)

The Corporation Constitution: Minimum Requirements

Continuance: Corporate Emigration and Immigration

Amalgamation: Corporate Combination

The Corporate Name

Pre-Incorporations Transactions

Introduction

Common Law Position

Kelner v Baxter

Class: The whole case essentially turns on the wording “on behalf of”. Case is an analysis of who the contract was made with, if the court concluded that the contract was made with the proposed corporation then there is nobody to make a contract with (because it’s not yet incorporated). Court concludes that the defendant was personally bound by the contract because they looked at the intention of the agreement. Court says if there is ambiguity on the contract then you can explain that away, but if there is not and one of the parties claims that its not their intention, you can’t bring evidence to rebut the written document. In other words if there is a written contract it will trump oral evidence. If a corporation doesn’t exist and there is a purported contract between the corporation and an outsider, what underlies the issue is that both parties knew that the corporation was not in existence, because it was described in the agreement as a proposed corporation. If a person enters into a

corporation that doesn’t exists and both know the corporation doesn’t exist, the agent should be responsible based on some notion of intention. He court concluded that the objective intention of the parties was that someone should pay – and if there was no corporation, then only the agent could pay. So that was how intention was used in this case. What was being supplied was already gone so if you can’t find another remedy, then the court is going to by sympathetic to the outsider.

Readings: Company becomes insolvent before the plaintiff was paid for goods. “I come therefore to the conclusion that the defendants, having no principle who was bound originally or who could become so by a subsequent ratification – were themselves bound and that the oral evidence offered is not enough to refute the written”.

Black v Smallwood

Class: Court finds no intention for the parties to incur liability, says that the whole transaction was done on the basis that the corporation existed when it actually didn’t. In this case, the courts interpret it as a mutual mistake and find no other contracting party. It stands as an example of how unreliable this objective intention test can be, really it is often just a judge’s interpretation.

Readings: Contract for the sale of land – subsequently discovered that the corporation had not been incorporated but both the parties believed that it had been and one of the parties was the Director of the corporation. Court decides against Kelner v Baxter being a firm rule, says instead that it’s all about intention. In this case the document that the respondent signed does not purport to be a contract making them agents for the supposed company – rather they both thought that the company existed at the time. Court concludes that it is therefore impossible to regard them as having used their name of the company as a mere pseudonym or of having intended to incur personal liability (because they both thought they were incurring liability of the corporation). The difference between this case and Kelner is that here, rather than both parties knowing that the company was not in existence – they both though it was here.

Attempts at Statutory Reform

Szecket v Huang

Readings: All the evidence pointed indicated that the respondents knew and indeed intended that they were contracting on behalf of a company yet to be incorporated. Liability thus depends on the statues to replace the common law – case illustrates that we should apply statue before even looking to intention

1394918 Ontario Ltd v 1310210 Ontario Ltd

Readings: Another example of using statues to override the common law. Statues were clearly directed at meeting the needs of a party who wished and negotiated for liability to be assumed by an as-yet unincorporated corporation.