BUSINESS ASSOCIATIONS Prof. Miller – Fall...

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BUSINESSASSOCIATIONSProf.Miller–Fall2016

FormsofBusinessOrganizations

10questionstoconsider

1. Whatarethedefiningcharacteristicsoftheorganization?2. Howistheorganizationestablished/broughtintoexistence?3. Howarethetermsunderwhichtheorganizationistobecarriedoutdefined?(Governance)4. Whoaretheconstituents(ormembers)oftheorganization?Whoaretheoutsiderswithwhom

theorganizationprincipallyinteracts?(Membership,bounds)5. Whomanagestheorganization?6. Forwhosebenefitistheorganizationmanaged?7. Howaretheinterestsofthebeneficiariesoftheorganizationdefined?8. Howaretheresponsibilitiesofmanagementdefined?9. Howaretheresponsibilitiesofnon-managementconstituents(memberswhoarenot

managers)defined(whereapplicable)?10. Howaretheresponsibilitiesoftheassociationand/oritsconstituentsvis-à-visoutsiders

defined?

I. PARTNERSHIPSA)COMMONLAWPARTNERSHIPSPartnershipsAct,ss.2-5;6-13;15-17;20-22;24-30;32-36SoleProprietorship

• Characteristicso It’snotanorganization,alegalentity.Thereisnoformalorganizationallawthatdealswith

soleproprietorship.Theyarenon-organizations.o Theoldest,simplestwaytoestablishandrunabusiness.o Abusinessownedandoperatedbyoneperson.

• Establishmento Nostepstakentoformallyorganizethebusiness,noformalprocesstoestablishone.Setup

shop.• TermsofAssociation

o Nothingformal• ConstituentsandOutsiders

o Mostbusinessrelationshipsgovernedbycontract• Management

o Thesoleproprietormanagesthebusinessunlesstheychoosetohireamanager.Candelegatemanagerialauthoritybycontract.

• Benefitso Benefitstothesoleproprietor,generallygovernedbypropertylaw.Assetsownedbysole

proprietor.

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o Incomeorlossconsideredpersonalincome/lossofthesoleproprietorinpersonalcapacity.

• InterestsofBeneficiaries• ResponsibilitiesofManagement

o Soleproprietorisaccountabletoherselfo Hiredmanagementisresponsibletosoleproprietorthroughcontract

• ResponsibilitiesofNon-ManagementConstituentso Notapplicable,therearenonon-managementconstituents

• ResponsibilitiestoOutsiderso Soleproprietorbearsfullpersonalresponsibilityforanyandallliabilitiesincurredbythe

businessintheordinarycourseofbusinesso Willhavetodrawonanypersonalassetstomakegoodonanydebtsfromo Thismakessoleproprietorshipthemostriskywaytoconductabusiness.o Canmitigaterisk,however,bypurchasinginsurance.o But,therearealsoupshots–youhaveunlimitedfreedomtomakewhateverdecisionsyou

want,noredtape.But,thisfreedom/flexibilitycomesatacostwithrisk…Youarereallyriskingeverything,ifyouhaveafamily,etc…

PartnershipsActTheNatureofPartnershipPartnership2.Partnershipistherelationthatsubsistsbetweenpersonscarryingonabusinessincommonwithaviewtoprofit,buttherelationbetweenthemembersofacompanyorassociationthatisincorporatedbyorundertheauthorityofanyspecialorgeneralActinforceinOntarioorelsewhere,orregisteredasacorporationunderanysuchAct,isnotapartnershipwithinthemeaningofthisAct.Rulesfordeterminingexistenceofpartnership3.Indeterminingwhetherapartnershipdoesordoesnotexist,regardshallbehadtothefollowingrules:

1.Jointtenancy,tenancyincommon,jointproperty,commonproperty,orpartownershipdoesnotofitselfcreateapartnershipastoanythingsoheldorowned,whetherthetenantsorownersdoordonotshareanyprofitsmadebytheusethereof.2.Thesharingofgrossreturnsdoesnotofitselfcreateapartnership,whetherthepersonssharingsuchreturnshaveorhavenotajointorcommonrightorinterestinanypropertyfromwhichorfromtheuseofwhichthereturnsarederived.3.Thereceiptbyapersonofashareoftheprofitsofabusinessisproof,intheabsenceofevidencetothecontrary,thatthepersonisapartnerinthebusiness,butthereceiptofsuchashareorpayment,contingentonorvaryingwiththeprofitsofabusiness,doesnotofitselfmakehimorherapartnerinthebusiness,andinparticular,

(a)thereceiptbyapersonofadebtorotherliquidatedamountbyinstalmentsorotherwiseoutoftheaccruingprofitsofabusinessdoesnotofitselfmakehimorherapartnerinthebusinessorliableassuch;(b)acontractfortheremunerationofaservantoragentorapersonengagedinabusinessbyashareoftheprofitsofthebusinessdoesnotofitselfmaketheservantoragentapartnerinthebusinessorliableassuch;(c)apersonwho,

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(i)wasmarriedtoadeceasedpartnerimmediatelybeforethedeceasedpartnerdied,(ii)waslivingwithadeceasedpartnerinaconjugalrelationshipoutsidemarriageimmediatelybeforethedeceasedpartnerdied,or(iii)isachildofadeceasedpartner,andwhoreceivesbywayofannuityaportionoftheprofitsmadeinthebusinessinwhichthedeceasedpartnerwasapartnerisnotbyreasononlyofsuchreceiptapartnerinthebusinessorliableassuch;

(d)theadvanceofmoneybywayofloantoapersonengagedorabouttoengageinabusinessonacontractwiththatpersonthatthelenderistoreceivearateofinterestvaryingwiththeprofits,oristoreceiveashareoftheprofitsarisingfromcarryingonthebusiness,doesnotofitselfmakethelenderapartnerwiththepersonorpersonscarryingonthebusinessorliableassuch,providedthatthecontractisinwritingandsignedbyoronbehalfofallpartiesthereto;(e)apersonreceivingbywayofannuityorotherwiseaportionoftheprofitsofabusinessinconsiderationofthesalebyhimorherofthegoodwillofthebusiness,isnotbyreasononlyofsuchreceiptapartnerinthebusinessorliableassuch.

Insolvency4.Intheeventofapersontowhommoneyhasbeenadvancedbywayofloanuponsuchacontractasismentionedinsection3,orofabuyerofthegoodwillinconsiderationofashareoftheprofitsofthebusiness,becominginsolventorenteringintoanarrangementtopayhisorhercreditorslessthan100centsonthedollarordyingininsolventcircumstances,thelenderoftheloanisnotentitledtorecoveranythinginrespectoftheloan,andthesellerofthegoodwillisnotentitledtorecoveranythinginrespectoftheshareofprofitscontractedfor,untiltheclaimsoftheothercreditorsoftheborrowerorbuyer,forvaluableconsiderationinmoneyormoney’sworth,aresatisfied.Meaningof“firm”5.Personswhohaveenteredintopartnershipwithoneanotherare,forthepurposesofthisAct,calledcollectivelyafirm,andthenameunderwhichtheirbusinessiscarriedoniscalledthefirmname.Powerofpartnertobindfirm6.Everypartnerisanagentofthefirmandoftheotherpartnersforthepurposeofthebusinessofthepartnership,andtheactsofeverypartnerwhodoesanyactforcarryingonintheusualwaybusinessofthekindcarriedonbythefirmofwhichheorsheisamember,bindthefirmandtheotherpartnersunlessthepartnersoactinghasinfactnoauthoritytoactforthefirmintheparticularmatterandthepersonwithwhomthepartnerisdealingeitherknowsthatthepartnerhasnoauthority,ordoesnotknoworbelievehimorhertobeapartner.Partnersboundbyactsonbehalfoffirm7.Anactorinstrumentrelatingtothebusinessofthefirmanddoneorexecutedinthefirmname,orinanyothermannershowinganintentiontobindthefirmbyapersontheretoauthorized,whetherapartnerornot,isbindingonthefirmandallthepartners,butthissectiondoesnotaffectanygeneralruleoflawrelatingtotheexecutionofdeedsornegotiableinstruments.Partnerusingcreditoffirmforprivatepurposes8.Whereonepartnerpledgesthecreditofthefirmforapurposeapparentlynotconnectedwiththefirm’sordinarycourseofbusiness,thefirmisnotbound,unlessheorsheisinfactspeciallyauthorizedbytheotherpartners,butthissectiondoesnotaffectanypersonalliabilityincurredbyanindividualpartner.Effectofnoticethatfirmnotboundbyactofpartner

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9.Ifitisagreedbetweenthepartnerstorestrictthepowerofanyoneormoreofthemtobindthefirm,noactdoneincontraventionoftheagreementisbindingonthefirmwithrespecttopersonshavingnoticeoftheagreement.Liabilityofpartners10.(1)Exceptasprovidedinsubsection(2),everypartnerinafirmisliablejointlywiththeotherpartnersforalldebtsandobligationsofthefirmincurredwhilethepersonisapartner,andafterthepartner’sdeaththepartner’sestateisalsoseverallyliableinaduecourseofadministrationforsuchdebtsandobligationssofarastheyremainunsatisfied,butsubjecttothepriorpaymentofhisorherseparatedebts.Limitedliabilitypartnerships(2)Subjecttosubsections(3)and(3.1),apartnerinalimitedliabilitypartnershipisnotliable,bymeansofindemnification,contributionorotherwise,for,(a)thedebts,liabilitiesorobligationsofthepartnershiporanypartnerarisingfromthenegligentorwrongfulactsoromissionsthatanotherpartneroranemployee,agentorrepresentativeofthepartnershipcommitsinthecourseofthepartnershipbusinesswhilethepartnershipisalimitedliabilitypartnership;or(b)anyotherdebtsorobligationsofthepartnershipthatareincurredwhilethepartnershipisalimitedliabilitypartnership.Limitations(3)Subsection(2)doesnotrelieveapartnerinalimitedliabilitypartnershipfromliabilityfor,(a)thepartner’sownnegligentorwrongfulactoromission;(b)thenegligentorwrongfulactoromissionofapersonunderthepartner’sdirectsupervision;or(c)thenegligentorwrongfulactoromissionofanotherpartneroranemployeeofthepartnershipnotunderthepartner’sdirectsupervision,if,(i)theactoromissionwascriminalorconstitutedfraud,eveniftherewasnocriminalactoromission,or(ii)thepartnerkneworoughttohaveknownoftheactoromissionanddidnottaketheactionsthatareasonablepersonwouldhavetakentopreventit.Same(3.1)Subsection(2)doesnotprotectapartner’sinterestinthepartnershippropertyfromclaimsagainstthepartnershiprespectingapartnershipobligation.Partnernotproperpartytoaction(4)Apartnerinalimitedliabilitypartnershipisnotaproperpartytoaproceedingbyoragainstthelimitedliabilitypartnershipforthepurposeofrecoveringdamagesorenforcingobligationsarisingoutofthenegligentactsoromissionsdescribedinsubsection(2).Extra-provinciallimitedliabilitypartnerships(5)Thissectiondoesnotapplytoanextra-provinciallimitedliabilitypartnership.Liabilityoffirmforwrongs11.Wherebyanywrongfulactoromissionofapartneractingintheordinarycourseofthebusinessofthefirm,orwiththeauthorityoftheco-partners,lossorinjuryiscausedtoapersonnotbeingapartnerofthefirm,oranypenaltyisincurred,thefirmisliabletherefortothesameextentasthepartnersoactingoromittingtoact.Misapplicationofmoneyorpropertyreceivedfororincustodyofthefirm12.Inthefollowingcases,namely,

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(a)whereonepartner,actingwithinthescopeofthepartner’sapparentauthority,receivesthemoneyorpropertyofathirdpersonandmisappliesit;and(b)whereafirminthecourseofitsbusinessreceivesmoneyorpropertyofathirdperson,andthemoneyorpropertysoreceivedismisappliedbyoneormoreofthepartnerswhileitisinthecustodyofthefirm,thefirmisliabletomakegoodtheloss.Liabilityforwrongsjointandseveral13.Exceptasprovidedinsubsection10(2),everypartnerisliablejointlywiththeco-partnersandalsoseverallyforeverythingforwhichthefirm,whilethepersonisapartnertherein,becomesliableundersection11or12.Personsliableby“holdingout”15.(1)Everyperson,whobywordsspokenorwrittenorbyconductrepresentshimselforherselforwhoknowinglysuffershimselforherselftoberepresentedasapartnerinaparticularfirm,isliableasapartnertoanypersonwhohasonthefaithofanysuchrepresentationgivencredittothefirm,whethertherepresentationhasorhasnotbeenmadeorcommunicatedtothepersonssogivingcreditbyorwiththeknowledgeoftheapparentpartnermakingtherepresentationorsufferingittobemade.Continuingbusinessafterdeathofpartner(2)Whereafterapartner’sdeaththepartnershipbusinessiscontinuedintheoldfirmname,thecontinueduseofthatnameorofthedeceasedpartner’snameaspartthereofdoesnotofitselfmakehisorherexecutor’soradministrator’sestateoreffectsliableforanypartnershipdebtscontractedafterhisorherdeath.Admissionsandrepresentationsofpartners16.Anadmissionorrepresentationmadebyapartnerconcerningthepartnershipaffairsandintheordinarycourseofitsbusinessisevidenceagainstthefirm.Noticetoactingpartnertobenoticetothefirm17.Noticetoapartnerwhohabituallyactsinthepartnershipbusinessofanymatterrelatingtopartnershipaffairsoperatesasnoticetothefirm,exceptinthecaseofafraudonthefirmcommittedbyorwiththeconsentofthatpartner.Variationbyconsentoftermsofpartnership20.Themutualrightsanddutiesofpartners,whetherascertainedbyagreementordefinedbythisAct,maybevariedbytheconsentofallthepartners,andsuchconsentmaybeeitherexpressedorinferredfromacourseofdealing.Partnershipproperty21.(1)Allpropertyandrightsandinterestsinpropertyoriginallybroughtintothepartnershipstockoracquired,whetherbypurchaseorotherwise,onaccountofthefirm,orforthepurposesandinthecourseofthepartnershipbusiness,arecalledinthisAct“partnershipproperty”,andmustbeheldandappliedbythepartnersexclusivelyforthepurposesofthepartnershipandinaccordancewiththepartnershipagreement.Devolutionofland(2)Thelegalestateorinterestinlandthatbelongstoapartnershipdevolvesaccordingtothenatureandtenurethereofandthegeneralrulesoflawtheretoapplicable,butintrust,sofarasnecessary,forthepersonsbeneficiallyinterestedinthelandunderthissection.Co-ownersofland

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(3)Whereco-ownersofanestateorinterestinland,notbeingitselfpartnershipproperty,arepartnersastoprofitsmadebytheuseofthatlandorestate,andpurchaseotherlandorestateoutoftheprofitstobeusedinlikemanner,thelandorestatesopurchasedbelongstothem,intheabsenceofanagreementtothecontrary,notaspartners,butasco-ownersforthesamerespectiveestatesandinterestsasareheldbytheminthelandorestatefirstmentionedatthedateofpurchase.Propertyboughtwithpartnershipmoney22.Unlessthecontraryintentionappears,propertyboughtwithmoneybelongingtothefirmshallbedeemedtohavebeenboughtontheaccountofthefirm.Rulesastointerestsanddutiesofpartners24.Theinterestsofpartnersinthepartnershippropertyandtheirrightsanddutiesinrelationtothepartnershipshallbedetermined,subjecttoanyagreementexpressorimpliedbetweenthepartners,bythefollowingrules:

1.Allthepartnersareentitledtoshareequallyinthecapitalandprofitsofthebusiness,andmustcontributeequallytowardsthelosses,whetherofcapitalorotherwise,sustainedbythefirm,butapartnershallnotbeliabletocontributetowardlossesarisingfromaliabilityforwhichthepartnerisnotliableundersubsection10(2).2.Thefirmmustindemnifyeverypartnerinrespectofpaymentsmadeandpersonalliabilitiesincurredbyhimorher,

(a)intheordinaryandproperconductofthebusinessofthefirm;or(b)inoraboutanythingnecessarilydoneforthepreservationofthebusinessorpropertyofthefirm.

2.1Apartnerisnotrequiredtoindemnifythefirmorotherpartnersinrespectofdebtsorobligationsofthepartnershipforwhichapartnerisnotliableundersubsection10(2).3.Apartnermaking,forthepurposeofthepartnership,anyactualpaymentoradvancebeyondtheamountofcapitalthatheorshehasagreedtosubscribeisentitledtointerestattherateof5percentperannumfromthedateofthepaymentoradvance.4.Apartnerisnotentitled,beforetheascertainmentofprofits,tointerestonthecapitalsubscribedbythepartner.5.Everypartnermaytakepartinthemanagementofthepartnershipbusiness.6.Nopartnerisentitledtoremunerationforactinginthepartnershipbusiness.7.Nopersonmaybeintroducedasapartnerwithouttheconsentofallexistingpartners.8.Anydifferencearisingastoordinarymattersconnectedwiththepartnershipbusinessmaybedecidedbyamajorityofthepartners,butnochangemaybemadeinthenatureofthepartnershipbusinesswithouttheconsentofallexistingpartners.9.Thepartnershipbooksaretobekeptattheplaceofbusinessofthepartnership,ortheprincipalplace,ifthereismorethanone,andeverypartnermay,whenheorshethinksfit,haveaccesstoandinspectandcopyanyofthem.

Expulsionofpartner25.Nomajorityofthepartnerscanexpelanypartnerunlessapowertodosohasbeenconferredbyexpressagreementbetweenthepartners.Retirementfrompartnershipatwill26.(1)Wherenofixedtermisagreeduponforthedurationofthepartnership,anypartnermaydeterminethepartnershipatanytimeongivingnoticeofhisorherintentiontodosotoalltheotherpartners.Noticeofretirement(2)Wherethepartnershipwasoriginallyconstitutedbydeed,anoticeinwriting,signedbythepartnergivingit,issufficientforthatpurpose.

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Presumptionofcontinuanceafterexpiryofterm27.(1)Whereapartnershipenteredintoforafixedtermiscontinuedafterthetermhasexpiredandwithoutanyexpressnewagreement,therightsanddutiesofthepartnersremainthesameastheywereattheexpirationoftheterm,sofarasisconsistentwiththeincidentsofapartnershipatwill.Arisesfromcontinuanceofbusiness(2)Acontinuanceofthebusinessbythepartnersorsuchofthemashabituallyactedthereinduringthetermwithoutanysettlementorliquidationofthepartnershipaffairsshallbepresumedtobeacontinuanceofthepartnership.Dutyastorenderingaccounts28.Partnersareboundtorendertrueaccountsandfullinformationofallthingsaffectingthepartnershiptoanypartnerorthepartner’slegalrepresentatives.Accountabilityforprivateprofits29.(1)Everypartnermustaccounttothefirmforanybenefitderivedbythepartnerwithouttheconsentoftheotherpartnersfromanytransactionconcerningthepartnershiporfromanyusebythepartnerofthepartnershipproperty,nameorbusinessconnection.Extendstosurvivorsandrepresentativesofdeceased(2)Thissectionappliesalsototransactionsundertakenafterapartnershiphasbeendissolvedbythedeathofapartnerandbeforeitsaffairshavebeencompletelywoundup,eitherbyasurvivingpartnerorbytherepresentativesofthedeceasedpartner.Dutyofpartnernottocompetewithfirm30.Ifapartner,withouttheconsentoftheotherpartners,carriesonabusinessofthesamenatureasandcompetingwiththatofthefirm,thepartnermustaccountforandpayovertothefirmallprofitsmadebythepartnerinthatbusiness.Dissolutionbyexpiryoftermornotice32.Subjecttoanyagreementbetweenthepartners,apartnershipisdissolved,

(a)ifenteredintoforafixedterm,bytheexpirationofthatterm;(b)ifenteredintoforasingleadventureorundertaking,bytheterminationofthatadventureorundertaking;or(c)ifenteredintoforanundefinedtime,byapartnergivingnoticetotheotherorothersofhisorherintentiontodissolvethepartnership,inwhichcasethepartnershipisdissolvedasfromthedatementionedinthenoticeasthedateofdissolution,or,ifnodateissomentioned,asfromthedateofthecommunicationofthenotice.

Dissolutionbydeathorinsolvencyofpartner33.(1)Subjecttoanyagreementbetweenthepartners,everypartnershipisdissolvedasregardsallthepartnersbythedeathorinsolvencyofapartner.Wherepartner’ssharechargedforseparatedebt(2)Apartnershipmay,attheoptionoftheotherpartners,bedissolvedifanypartnersuffersthatpartner’sshareofthepartnershippropertytobechargedunderthisActforthatpartner’sseparatedebt.Byillegalityofbusiness34.Apartnershipisineverycasedissolvedbythehappeningofanyeventthatmakesitunlawfulforthebusinessofthefirmtobecarriedonorforthemembersofthefirmtocarryitoninpartnership.

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Bythecourt35.(1)Onapplicationbyapartner,thecourtmayorderadissolutionofthepartnership,

(a)whenapartnerisfoundtobeincapableasdefinedintheSubstituteDecisionsAct,1992;(b)whenapartner,otherthanthepartnersuing,becomesinanyotherwaypermanentlyincapableofperformingthepartner’spartofthepartnershipcontract;(c)whenapartner,otherthanthepartnersuing,hasbeenguiltyofsuchconductas,intheopinionofthecourt,regardbeinghadtothenatureofthebusiness,iscalculatedtoprejudiciallyaffectthecarryingonofthebusiness;(d)whenapartner,otherthanthepartnersuing,wilfullyorpersistentlycommitsabreachofthepartnershipagreement,orotherwisesoconductshimselforherselfinmattersrelatingtothepartnershipbusinessthatitisnotreasonablypracticablefortheotherpartnerorpartnerstocarryonthebusinessinpartnershipwiththepartner;(e)whenthebusinessofthepartnershipcanonlybecarriedonataloss;or(f)wheninanycasecircumstanceshavearisenthatintheopinionofthecourtrenderitjustandequitablethatthepartnershipbedissolved.

Applicationwhereincapacity(2)Inthecaseofanapplicationunderclause(1)(a),theapplicationmaybemadebythelitigationguardianofthepartnerfoundtobeincapable,onthepartner’sbehalf.Rightsofpersonsdealingwithfirmagainstapparentmembers36.(1)Whereapersondealswithafirmafterachangeinitsconstitution,thepersonisentitledtotreatallapparentmembersoftheoldfirmasstillbeingmembersofthefirmuntilthepersonhasnoticeofthechange.

• Thepartnershipisthemostprimitive(simple,flexible)formoforganization.Verymalleable.• Defaultorganizationalformforcollectiveenterprise.

o Statutoryruleswillapplyevenifyou’vedonenothingtosetupanagreementortakenstepstostructurethebusinessdifferently.

o Lawwillassumetwopeoplecarryingonabusinesstobeapartnershipunlessprovenotherwise.

• Regulatedbyprovincialandterritorialstatutes(nofederalpartnerships).• Usuallywrittenagreement,butdoesn’tneedtobe.• Statutesetsoutdefaultrules.

1)Whendopartnershipsexist?

• Testforexistenceo Governedbyprovincialstatute,s.2ofPartnershipsActofOntario.

§ “Partnershipistherelationthatsubsistsbetweenpersonscarryingonabusinessincommonwithaviewtoaprofit.”

o Don’tneedtopointtopartnershipagreement–don’tneedtohaveonebecauseofpresumptionofpartnership.

o Twoormorepersons,engagedinabusinessincommon,goaltomakeprofit.§ Relationbetweenpersons

• Needtwoormorepeopletohaveapartnership§ Business

• PA,s.1(1):business=everytrade,occupationandprofession§ Viewtoaprofit

• Profitmakingasagoal,mustmakereasonableeffortstoachievethis.§ Carryingonbusinessincommon

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• Partiesactinginconcertbasedonanagreementbetweenthem(express,implied,presumedfromconduct).

• Meaning,however,iscomplicated–it’slessclearwhat“businessincommon”meansthantheothercriteriabecausethereareotherrelationshipsbetweenpeoplewheretheymaybeseekingtomakeprofits(e.g.jointownership).

• Mostcasesre:whetherapartnershipexistsrevolvearoundthisissue.

• àNoteasytodistinguishco-ownershipfrompartnershipso Courtswillbemorelikelytofindthataco-ownershipisnotapartnershipwhenthe

evidenceshowsthatlikeinKamex,thereisashort-termintentiontosell.Volzkelookedmorelikeapartnershipbecausetheyownedashoppingmallandwereinvolvedinactivemanagement,etc…tendtopartnership(Volzek).

o Mainlyaboutiftheyarefreetodealwiththeirinterestsindependently.Or,iftheyareacceptingconstraintsontheirinterests,puttingmoneybackintothepartnershiptorunthebusiness,thenlookslikepartnership.

• Threecases:Kamex,Volzke,andPooleyo Intentionisimportantindeterminingifthereisapartnership.Looktoanyandall

agreementandbehaviourofparties.o Considerindiciaofpartnership(Volzke–jointbankaccount,holdingeachotherout,

referringtoaspartners,sharingincosts,profits,etc…)o Pooley–self-servingindiciawillnotplayanimportantroleindetermining.Evenifyousay

thatit’snotapartnershipbutitreallylooksandfeelslikeapartnership,thelawwillrecognizeitasapartnership,particularlyifthereasonyoudon’twantittobecalledapartnershipistoavoidtheliabilitythatcomeswithapartnership.

o Thoughthedefinitionofapartnershipmayappearsimplere:carryingonabusinessincommon,itisnotinpractice.

A.E.LePageLtd.v.KamexDevelopmentsLtd.(1977,ONCA;1979SCC)Facts

• Twopeopleboughtapartmentbuildingtogether(separateownershipinterests)withintentionofflippingit.

• Hadanagreementthatcostsandprofitswouldbedividedbetweentheco-ownersinproportiontotheirinterests;rightoffirstrefusaltobuytheotherout;majorityvoterequiredtosellbuilding.

• Metmonthly,discussedmanagement/upkeepofproperty,whetherwasrighttimetosellbuilding.• Eventuallydecidedtosell,oneownercontactedrealestateagentandexecutedanexecutivelisting

agreement,purportingtoactforallofthebuilding’sco-owners.• Otherco-ownerclaimshedidnothavetheauthoritytodothisandsoviolateslistingagreement.• Agentsuesforcommissionofproperty.

Issue• Whatconstitutesapartnership?Carryingon(a)abusiness;(b)incommon;(c)withaviewto

aprofit.• Doesbeingco-ownersofapropertymakeyoupartners?No.Mustcarryonbusinessincommon.

Needintentiontoholdpropertyjointly,ratherthanmaintainrightstodealwithrespectiveinterestsinproperty.

• Isthisapartnership?No.Reasoning

• PAs.3(3)–proofthatthereisaprofitsharingarrangementgeneratesarebuttablepresumptionthatthereisapartnership.

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• PAs.3(1)–incertainkindsofrelationshipsthereissharingofprofitsandlossesthatarenotnecessarilypartnerships.e.g.jointownership,etc…

o Rebuttablepresumptionof3(3)thereforedoesnotapplyincasesofco-ownershipthanksto3(1).

• PartnershipsAct,s.2:“Partnershipistherelationthatsubsistsbetweenpersonscarryingonbusinessincommonwithaviewtoprofit…”

o Thefactthattwopeopleco-ownpropertyandmakeaprofitfromitisnotenough.Mustbecarryingonthebusinessincommon.

• Whetherornotthereisapartnershipdependsontheintentionoftheparties.Didtheyintendtocarryonabusiness,orjusthaveanagreementtoregulatetheirrightsandobligationsasco-ownersofaproperty?

o Looktocircumstances,howthepartiesconductedthemselves,howtheyarticulatedtheirrelationship,termsofanyagreementsbetweenthem.

o Considerifthereisevidentofpropertybeingheldjointly,ifthereareconstraintsontheabilityofpartnerstodealwiththeirinterestsfreely.

o Seewhetherprofitshadtobeappliedtothepartnership,orifco-ownerswerefreetotaketheirshareofprofits.

• Needtointendtobecomepartnersinajointventure,notmerelybeco-ownersofproperty(Thrushv.Read,1950).

• Thereisnosuchintentionhere-intendingtoacquire,hold,andsellpropertyforprofitdoesn’tmakeyoupartners.

• Propertyinpartnershipisjointproperty–can’tdealwithyourundividedinterestinthelandasyourown.

o Here,intentionofpartiestomaintainrightsasco-ownersisclear–wantedtomaintainrightstodealwiththeirrespectiveinterestsintheproperty.

VolzkeConstructionLtd.v.WestlockFoodsLtd.(1986,ABCA)Facts

• BonnellandWestlockeachhaveaninterestinamallthatwasbeingdeveloped(80%/20%,respectively).

• Constructioncompany,V,approachesC(agentofW),whoreferstoBashispartner.Cdiesandtherelationshipbetweenthepartiessours.VbringsaclaimagainstW.

Issue• Isthisapartnership?Yes.

JudicialHistory• TrialcourtsaidtherewasnopartnershipherebecauseBonnellwasincontrol.Saidlackofcontrol

ofWestlocknegatedpossibilityoftherebeingapartnership.Reasoning

• Controlisnotlegallyrelevantandhasnothingtodowithwhetherornotthereisapartnership.Thereareoftenactiveanddormantpartnersinapartnership.

o Sharedcontrolisnotanessentialcharacteristicofpartnerships.Canhavesilentpartners.Sharedcontrol,wherepresent,isnotsufficienttofindthatthereisapartnership.

• Again,it’saboutintent–intentionrevealedbytermsofagreementbetweenthemandtheirconduct.

o Clearonthefactsofthiscasethattheywerepartnersinabusinessoperatingtheshoppingcentre.Spokeofeachotheraspartners.

o Intendedtosharethecostsofdevelopingthebusiness,aswellastheprofits,80-20.o Jointbankaccount;sharecostsofdevelopment;sharecosts,profitsandlosses;spokeof

eachotheraspartners;sentclientstoeachother;jointlymanagedtheproperty.Pooleyv.Driver(1876,UK)

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Facts

• TheDriversenteredintoaloanagreementwithapartnership.ThedeeddescribedtheDriversasco-partners,anduntiltheywererepaidtheyheld5partsofthepartnershipandsharedinprofitsaccordingly.

• Thepartnershipwentintobankruptcy,andPooley(plaintiff)seekspaymentonthemoneyfromtheDrivers(defendant),allegingthattheywerenotcreditorsofthepartnershipbutpartnersinthepartnership.

Issue• AretheDriverspartnersofthepartnershiporcreditorsofthepartnership?Partners.

Reasoning• Seekingtodifferentiatebetweenpartnershiprelationshipanddebtor/creditorrelationship.• Again,alwayslooktosurroundingcircumstancesandintentionsofparties.

o Termsoftheloanwereunsual…o Drivershadthesamerightsaswouldbeenjoyedbydormantpartners.o Theyenjoyedcontroloverhowthecapitaltheyprovidedwouldbeused–notthe

ordinarypositionoflenders.Normallylendersarenotinterestedinhowcapitalisusedexceptforwhenitcomestimesforrepayment.

o Loanwasforthedurationofthepartnership–reallyintendedtobeanadvanceofcapitaltothepartnershipforthepurposeofcarryingiton,notanordinaryloan.

o Inanormalloanthebankruptcyofthecreditorwouldn’thaveanythingtodowithanything…Wouldberemarkableforaregularloantobeimpactedbybankruptcyofcreditor.Here,factthatagreementcomestoanendshouldthecreditorgobankruptissignificantinthatitmakesitlookmorelikeapartnershipagreement.

o Lendersagreedtorepayinterestthey’dreceivedifthepartnershipdidn’tturnaprofit.Whatcreditorwouldagreetothat?!None.Lookslikepartnership.

o Arbitrationclausepresent–commoninpartnerships,notcommoninloans.o Hadrightstoaccounting–unusualforlender,standardforpartnersbecauseyouare

concernedaboutwhatothersaredoingwithyourmoney.o Lotsofotherexamples…

• Courtswilllookthroughtoseeinsubstance,whatisthis.Willignoresuperficial,self-servingrepresentations.

o Importantherebecauseloanerswerelookingtomakeitlookliketheyweremorelikecreditorsthanpartners,becausetheydidn’twanttheadditionalliability.

• Therefore,truerelationshiphereoneofdormant/activepartnersandnotofcreditors/debtors.

Holding• Basedonthedocumentsandlookingatthetransactionasawhole,thisisnotaloan–true

relationshipbetweenthepartieswasactiveanddormantpartners,notcreditorsanddebtors.Notes

• Today,thisissuedealtwithbyPartnershipsAct,s.3(3)(d).2)NatureandCharacteristicsoftheCMLPartnership(LegalPersonality)

• Howisapartnershipdistinctfromtheindividuals/entitiesthatmakeupapartnership?o Isisn’t–apartnershipdoesn’tenjoyadistinctlegalpersonality.o Thebusinessiscarriedoutbyallofthepartnersandthepropertyisheldbyallofthe

partnersastenantsincommon.o Profitsandliabilitiesflowdirectlytothepartnersaccordingtothetermsofthe

partnershipagreement.o Liabilityofpartnersissameassoleproprietorship–unlimitedpersonalliability.

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§ Neitherhavelegalstatus,arenotlegalactors.Partnersthroughtheirindividualagencyallowthepartnershiptofunction,inthesamewayasindividualsdoinsoleproprietorship.

o Partnershipscansometimesberecognizedaslegalentitiesforpracticalpurposes(e.g.inalawsuitoftwopartners).

Thornev.NewBrunswick(Workmen’sCompensationBoard)(1962,NBSCAppealDivision)Facts

• Partnerinloggingfirminjuredwhilecarryingoutloggingactivities.Toobtainworkers’compensation,needtobeinjuredasaworkman,asanemployee.

• So,toreceivecompensation,Tneedstobefoundtobeanemployeeofthepartnershipofwhichheisamember.

Issue• Arepartnershipslegalentities/personsdistinctfromtheircomponentmembers?No.• IsitpossibleforTtoenterintoanemploymentagreementwiththepartnershipofwhichheisa

member,therebyallowinghimtoreceiveworkmen’scompensation?No.Reasoning

• Apartnershipisalegalorganization,butintermsofitsstatus,ithasnolegalcapacitytodoanythingofitsownright.

o Itdoesn’tenjoytheattributesofaseparatelegalpersonality.Apartnershipisthereforenotadistinctlegalentityfromitsmembers.

• Asaresult,apartnershipdoesnothavethelegalstatusrequiredtoallowittocontractwithoneofitsmembers.Partnerscannotthereforebeemployeesofthepartnership–youcan’tcontractwithyourselftowork.Thereisnosuchthingas“self-employment”inapartnership.

Ratio• Apartnership,unlikeacorporation,isnotalegalperson.Nolegalagencycanbeattributedtoit,

includingthecapacitytoenterintoacontractwithanyone,letalonethecapacitytoenterintoacontractwithapartnerinthepartnership.

3)RelationshipBetweenPartners

• Thereareanumberofimportantrelationalqualitiesthataresignificanttotheorganizationalformaswellastothepowers,rights,andobligationsofpartners.

• Partner–partnerrelationshipsare:personal,alterelementsofpartneraffairsconsensually,presumptiveequality,reciprocalagency,fiduciary.

• (i)Partnershipsarepersonalinnatureo Createdthroughexpress/impliedagreementorthroughjointconductofpartners.o Personal=tiedspecificallytoindividuals,rightscannotbefullyassignedtothird

parties.o Section31,PA–sharesthathavebeenassignedtoanotherarestrippedofcertainrights

(rightstomanagement,accounting,inspectionoffinancialrecords).Assigneeremainsentitledtoprofitshare.Theymustremainpassive.

§ Why?Becausetheserelationshipsrequireahighleveloftrustbetweenpartners–notjustanyonecanstepinandfillthatrole.

o Becausepartnershipsarepersonal,theydissolveuponthedeathorinsolvencyofapartner(s.33,PA).

• (ii)Partnershipsareconsensualinnatureo It’sallaboutthewilloftheparties,ajointandcommonwill,tobeinbusinesstogether.

Mutualconsent.

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o Canbefoundinsignaturestoapartnershipcontractorinbehaviourofactors.o Termsofthepartnershipwillbeintheagreement,ifthereisone.Ifnot,defaultrulesin

statutewillapply.§ Section20–mutualrightsanddutiesofpartners(defaultrulessetoutin

statute)canbevariedbytheagreementofallpartners,canbeexpressorinferredincourseofdealing.

§ However,youcannevercontractoutoffiduciaryobligationstooneanotherandthepartnership.

• Thisisahardlimitonconsensualism–exceptiontosection20.• Why?Fiduciaryobligationsareatthecoreofpartnerships–it’sabout

thecommonjointinterestofthepartners.Can’thavepeopleactinginself-interest.Ifyouallowedpeopletooptoutofthis,youwouldn’treallyhaveapartnershipanyway.

o Unanimityisrequiredforconsensuality–majorityvotesareinsufficientforanythingotherthan“ordinarymatters”(s.28,PA).

• (iii)Partnersenjoypresumptiveequalityo Inwhatformdopartnersenjoypresumptiveequality?Liability,entitlementtosharesof

profit,managementofpartnership.o Section24.1–equalshareofprofits,losses,liability.o Section24.5–equalrighttoparticipateinmanagementofpartnership.Notmandatoryto

assertthatright,canbepassive.o Partnershipagreementscan,however,modifythesepresumptionsofequality.

• (iv)Partnersareequalinreciprocalagency(onecanactforall)

o Eachpartnerisconsideredinlawtobeanagentoftheotherinconductingthebusinessofthepartnership.

o It’sreciprocalbecauseeachpartnerisboundbytheactsoftheotherandcanbindtheothersthroughhis/heractionsonbehalfofthepartnership.

o Agents=peoplewhohavelegalauthoritytomakebindingdecisions(e.g.contracts)onbehalfoftheprincipal.

o Principalscanalsobeliableforthetortsoftheiragents.§ Itisforthisreasonthatitisintheinterestofpartnerstobeactiveratherthan

passivepartners–shouldtakeanactiveroleinmanagementofpartnershiptoensureavoidingliability.

o Agencycanbelimitedorunlimited.§ Ifthereareanylimitations,theystemfromthepartnershipagreement.§ Limitationstoagencywillonlyapplyifthirdpartyisawareofthem(s.9,PA).

o Whathappensifanagent,lackingauthority,makesarepresentationthattheydidn’thavetheauthoritytomake?

§ Partnerswillstillbeliable–so,what’sthepointofhavinganylimitationsthen?• Well,stillvalueinsettingouttherules,knowingwhereothersstand,etc…

• (v)Partnershavefiduciarydutiestowardeachotherandthepartnership

o Byvirtueoftheiragencyrelationships,partnersarefiduciariestoeachother.o Agency=relationshipsofhightrustandconfidence.Fiduciaryprinciplesprotectthese

kindsofrelationships.§ Fiduciarylawmakesitmorerationaltoplacetrustinanotherbecauseitplaces

constraintsonwhatotherpartnerscando,restrictstheirabilitytoactinself-interest.

o Can’tcontractoutoffiduciaryobligationsbecauseit’ssofundamentaltopartnerships(exceptiontos.20,PA).

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• Involvesadutyofloyalty,goodfaith,avoidanceofconflictofinterestandconflictofinterest.o Generaldutyofloyaltyexpressedthroughtworules:

§ Conflictofinterestrule–partnercan’tallowpersonal/self-interesttocomeintoconflictwiththebeneficiaryofthefiduciaryrelationship.

§ Conflictofdutyrule–can’tundertakeconflictingmandates/obligations.o Partnersmustsubordinatetheirpersonalinterestsandthoseofthirdpartiestothose

ofthepartnership.Mustactinbestinterestofpartnership.§ But,outsideareainwhichfiduciaryobligationsareowed,partnersmaintain

personaleconomicliberty.• Thebeneficiaryofthefiduciaryobligationsisallpartnerscollectively,thepartnership.• Fiduciarydutiesillustratedinss.28-30ofPartnershipsAct.

o 28:Dutytorendertrueaccountsandfullinformationofallthingsaffectingpartnershipo 29(1):Dutytodiscloseallbenefits/profitsderivedwithoutconsentofpartners.o 29(2):29(1)appliestotransactionsafterthedissolutionofthepartnershipduetodeathof

apartnerbutbeforetheaffairsofthepartnershiphavebeenwoundup.o 30:Dutynottocarryonbusinessincompetitionwithpartnership–ifyoudo,haveto

payprofitstopartnership.Olsonv.Gullo(ONCA,1994)àImplicationsofpartners’fiduciarydutiesFacts

• Twoguysinapartnershipre:landdevelopment.Insecret,Gbuysapieceoflandtheyhaddiscussed,sellsit,andturnsahugeprofit.OfoundoutandsuedGfortheprofithemade.

Issue• Doesapartnerwhohasobtainedsecretprofitshaveanobligationtodisclosethemandturnthem

overtothepartnership?Yes–s.29(1)ofPartnershipsAct.• Doesthesneakypartnerhavearighttohisshareofthedisclosedprofitasapartner?Yes–

nothingtosaythathewouldbestrippedofshare.Obtaininghisshareisnotbenefittingfromhisownwrongdoing,justgettinghisshareofprofitsthatshouldhavebeenthepartnership’sanyway.

JudicialHistory• Gfoundliableforbreachoffiduciarydutyandmadetodisgorgeentireprofitmade(didn’tgetto

keephalf).Reasoning

• Threestepsinfiduciaryanalysis:o (1)Showtherewasafiduciaryrelationshipbetweenparties–incontextofpartnership,

meansshowingthereisapartnership.Partnershipsareinherentlyfiduciary.o (2)Dutyofloyalty–seeiftherewasabreachofthedutyofloyalty.o (3)Disgorgementremedy–noquestionthatguiltypartywasliabletodisgorgeprofit,

butquestionwasabouthowmuch.• JudgeagreedthatGandOwereinapartnership(eventhoughonlyagreedtoorally),hadintended

tocarryonabusinesstogether,andthatpurchasingthelandhadbeenpartoftheirbusinessplan.Therefore,purchaseandsaleoflandwassomethingthatconcernedthepartnershipandthe$$shouldbegiventothepartnership,notkeptbyG.

o Section29(1)ofPartnershipsAct–secretprofitsaretobepaidtopartnershipandtermsgoverningpartnershipdeterminewhathappenstothemoney.

• SomethoughtGshouldn’tgethisshare(half)ofthe$$nowtransferredtothepartnershipbecausehewasasneakysonofabitchandstabbedOintheback.

o Thisiswhattheplaintiffargued(withlotsofauthoritytobackhimup):thatdisgorgementremedyistotal–wouldrequirethedisgorgementofalloftheprofits.Thiswouldbetodisincentivizethepartiesfromengagingindisloyalbehaviour.

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• But,judgesaidthere’snothinginthelegislationsayingthatthewrongdoershouldn’tgettheirshareofthepartnership’snewfundsbecauseafterall,theyareapartnerandit’snotexactlyprofitingfromhisdeceit.

o Judgesaiditwouldbecontrarytoprincipleandauthoritytodeprivethedefaultingpartyoftheirportionoftheprofitasamemberofthepartnership.

o àDoesthismakesense,though?Ifthiscanbethecase,whatistheretodiscouragepartnersfrombeingsnakesandbreachingtheirfiduciarydutiesif,atworst,theywillstillgettokeeptheirshareoftheprofit?

• Judgesaidthatpartnershipsareunique–notjustabilateralrelationship,butreciprocalagency.Eachisbothabeneficiaryandaduty-boundparty.

4)RelationshipBetweenPartnership,Partners,andOutsiders

• Therelationshipsbetweenpartnersandthirdpartiesaremainlyaboutliability.• Asageneralrule,eachpartnerissubjecttoliabilitiesincurredbyotherpartnersincurred

duringtheordinarycourseofthepartnership(s.7).Includesliabilityforcontracts,debts,andtorts.

o Theyarepersonallyliableforbusinessliabilitiesofthepartnershiptooutsiders.o Partnersareabletorestricttheabilityofcertainpartnerstobindthepartnership,but

thisisonlyeffectiveifthethirdpartyisawareoftherestriction(s.6).• Jointliability–eachliableforfullextentofthedebt.Creditormustsueallpartnersandif

successful,liabilitywillbeapportioned.• Jointandseveralliability–eachliableforfullextentofdebt.Creditorpermittedtosueany

individualpartnerandsuethemalone.Ifsuccessful,thatpartnerwillbearfullextentofliabilityandwillhavetoseparatelysuetheotherpartnersfortheirshareofthedebtthathe’sbeenforcedtopay.

• Ifthedebtscan’tbepaidoutoftheassetsofthepartnership,havetogoafterthepersonalassetsofthepartnership(becausepartnershipsarepersonal).

• Section6–termsunderwhichpartnershavepowertobindco-partners.• Section7–makespartnersliableforauthorizedactsofagents/partners.• Pre-partnershipliability

o Section18(1)–partnersnotliableforliabilityincurredbythepartnershipbeforetheybecameapartner.

• (a)Liabilityaspartnero Section7–Partnersaregenerallyjointlyliablefordebtsofpartnership.o Section6and9–Defencestojointliability

§ (6)Arguethepartnerhadnoauthoritytoengageintheactionsandthatthethirdpartywasawareofthislackofauthorityorthatthethirdpartydidn’tknowthispersonwasapartner.

§ (9)Ifpartneractedinbreachofagreementandthirdpartyknewtheywerebreaching.

o Section10–Liabilityisheldjointlywithotherpartners.o Section13–Generally,liabilityisjointlyheldforlosses/injuriescausedtothirdparties

duetoactionsofpartnerinordinarycourseofbusinessaswellasformisapplicationofthirdparty’smoney/propertyreceivedincustodyoffirm.Jointandseveralliabilityispossibleincertaincircumstancesandismorefavourabletocreditor.

o Section18(2)–Liabilityisn’tshedwhenyouleaveapartnership.§ Section10(1)–Evenifyoudie,yourestateisheldliableforstufffromwhenyou

wereapartner.• (b)Holdingoutliability

o Section15(1)–anindividualwhoisn’tapartnercanbeheldliableasapartnerifthey’veheldthemselvesoutasapartnerorsufferedthemselvestobeheldoutasapartner

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andthattherepresentationwasrelieduponbyathirdpartyinextendingcredittothepartnership.

o Non-partner(e.g.employees)canbindpartnerships(s.7).o Candosoby“holdingout”liability(s.15).

§ Kindoflikeestoppel–ifyouholdyourselfoutasapartnerandshitgoessouthlater,youcan’tthenturnaroundandsayno,noI’mnotactuallyapartner,dude!Noliabilityformeee!Nah.Youliable,bro.

• (c)Liabilityonwithdrawalo Whataboutliabilityincurredafterapartnerwithdraws?o Section36:Havetobecarefulhowyouwithdraw–willbeheldliableunlessyoutake

caretogivenoticetothirdpartiestostatethatyouareleavingthefirm,makesuretheyunderstand.

Clarkev.Burton(1958,UK)àre:whatconstitutesadequatenoticeofwithdrawalofpartnerforthemtoavoidcontinuingliabilityFacts

• CharlesBurtonworkedforhisfatherWilliamBurton'sinsulationbusiness,Burton'sInsulation&Roofing.

• ThetwohadafallingoutandCharleslefttoworkonhisown,butcontinuedworkingunderthefirmname,Burton'sInsulation.

• Clarke(thirdparty)bringsactionagainstCharlesaspartnerofBurtonInsulationandRoofing.Issue

• Canapartnerwhohasleftthepartnershipandprovidednoticetoathirdpartybeheldliablebythatthirdpartyasapartnerofthepartnershiptheyhaveleft?No.

Reasoning• Noticeisnotneededwhentheindividualwasnotthoughttobeapartnerbythethirdparty.• Noticeisneededwhenindividualknowntobeapartnerbythirdparty–allowscreditorsto

relyonthefactthatthepartnershipremainsunchanged.o Onusisontheretiredpartnertoprovethatthirdpartiesweregivennoticeor

constructivenotice(oughttohaveknown).o Givingnoticedoesn’tneedtobeformal.

• Clarke’sclaimfailsbecauseCharlesinformedClarkehewasnolongerworkingwithhisfather.

o Clarkehadreceivedsufficientnotice–hadfullknowledgethatCharleshadseveredconnectionwithhisfatherandwasinbusinessforhimself.

o Couldn'trecoveragainstCharlesasapartnerofthefirmasaresult.• Whatconstitutes“notice”willdifferdependingonwhetherthethirdpartyhaddealingswith

thefirmbeforethechangeornot.o Iftheyhaddealings,liabilitywillcontinueunless:

§ Noticegivenlikeitwashere.§ Thirdpartydidn’tknowpartnerwasapartner.§ Partnerretiredfrompartnershipbecauseofdeathorinsolvency(s.36(3)).

o Iftheydidn’thavedealings:§ Cantreatany“apparentmember”ofthefirmasacontinuingmemberofthefirm

forliabilitypurposesabsentnotice.NoticeheremustbethroughOntarioGazette.§ Noliabilityifthirdpartydidn’tknowpersonwasapartner.

• (d)Posthumousliability

o Section10(1):Evenifyoudie,yourestateisheldliableforstufffromwhenyouwereapartner.

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§ “…afterthepartner’sdeaththepartner’sestateisalsoseverallyliableinaduecourseofadministrationforsuchdebtsandobligationssofarastheyremainunsatisfied,butsubjecttothepriorpaymentofhisorherseparatedebts.”

o Sections15(2)and36(3):Estateisnotliableforstuffincurredafteryouwereapartner.

§ 15(2):Evenifthedeceasedpartner’snameisstillusedaspartofthepartnershipname,estatenotliableforliabilityincurredafterdeathofpartner.

§ 36(3):“Theestateofapartnerwhodies,orwhobecomesinsolvent,orofapartnerwho,nothavingbeenknowntothepersondealingwiththefirmtobeapartner,retiresfromthefirm,isnotliableforpartnershipdebtscontractedafterthedateofthedeath,insolvency,orretirement.”

5)DissolutionofPartnerships

• Whenwillapartnershipdissolve?o Unlesspartiescontractedotherwise,willdissolveuponexpiryofthetermofthe

partnership.o Willdissolvewhenpartnershaveconcludedtheirundertaking.o Becausepartnershipsarepersonalinnatureifanypartnerdiesorbecomesinsolvent,

thepartnershipwillbedissolvedunlessthepartiescontemplatedthisandmadeotherprovisions.

o Ifitbecomesillegalforpartnershiptocontinue.• Section35:Apartnershipcanalsobedissolveduponapplicationtothecourt–canbedone

unilaterallyincertaincircumstances.o Partnerbecomesincapableo Partnerguiltyofconductfoundtoprejudicethecarryingonofthebusinesso Partnerwilfullyorpersistentlybreachespartnershipagreemento Businesscanonlybecarriedonatalosso Anyothercircumstancesthecourtthinksarevalidreasonsfordissolution.

• Whathappensupondissolution?o Section44:First,payforlossesoutofprofitsofpartnership,thenpartnership’s

capital,thenpersonalassetsofpartners.§ Assetsfirsttocreditorstosatisfyclaims,thentopartnersforadvancecapital

providedtopartnership,thenpartnersreceiveanyremainingassetsaccordingtotheirshares.

B)CIVILLAWPARTNERSHIPSBouchard,“ReportontheLegalNatureofPartnerships:ComparativeLawStudy”CCQ,arts.2186,2189,2215,2219,2204,298-300,2221CCLAarts.352,387,399(cfCCQ298-300)CivilCodeofQuebec298.Legalpersonsareendowedwithjuridicalpersonality.Legalpersonsareestablishedinthepublicinterestorforaprivateinterest.299.Legalpersonsareconstitutedinaccordancewiththejuridicalformsprovidedbylaw,andsometimesdirectlybylaw.

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LegalpersonsexistfromthecomingintoforceoftheActorfromthetimeprovidedtherebyiftheyareestablishedinthepublicinterestorareconstituteddirectlybylaworbyoperationoflaw;otherwise,theyexistfromthetimeprovidedbytheActsthatareapplicabletothem.300.LegalpersonsestablishedinthepublicinterestareprimarilygovernedbythespecialActsbywhichtheyareconstitutedandbythosewhichareapplicabletothem;legalpersonsestablishedforaprivateinterestareprimarilygovernedbytheActsapplicabletotheirparticulartype.BothkindsoflegalpersonsarealsogovernedbythisCodewheretheprovisionsofsuchActsrequiretobecomplemented,particularlywithregardtotheirstatusaslegalpersons,theirpropertyortheirrelationswithotherpersons.2186.Acontractofpartnershipisacontractbywhichtheparties,inaspiritofcooperation,agreetocarryonanactivity,includingtheoperationofanenterprise,tocontributetheretobycombiningproperty,knowledgeoractivitiesandtoshareamongthemselvesanyresultingpecuniaryprofits.Acontractofassociationisacontractbywhichthepartiesagreetopursueacommongoalotherthanthemakingofpecuniaryprofitstobesharedamongthemembersoftheassociation.2189.Ageneralorlimitedpartnershipisformedunderanamethatiscommontothepartners.ItshallfilearegistrationdeclarationinaccordancewiththeActrespectingthelegalpublicityofenterprises(chapterP-44.1);otherwise,itisdeemedtobeanundeclaredpartnership,subjecttotherightsofthirdpersonsingoodfaith.2204.Apartnermaynotcompetewiththepartnershiponhisownaccountoronbehalfofathirdperson,ortakepartinanactivitywhichdeprivesthepartnershipoftheproperty,knowledgeoractivityheisboundtocontributetoit;anyprofitsarisingtherefrombelongtothepartnership,withoutprejudicetotheremediesitmaypursue.2215.Failinganystipulationastothemodeofmanagement,thepartnersaredeemedtohaveconferredthepowertomanagetheaffairsofthepartnershipononeanother.Anyactperformedbyapartnerwithrespecttothecommonactivitiesbindstheotherpartners,withoutprejudicetotheirrighttoobject,jointlyorseparately,totheactbeforeitisperformed.Inaddition,eachpartnermaycompelhispartnerstoincuranyexpensesnecessarytopreservethecommonproperty,butapartnermaynotchangetheconditionofthatpropertywithouttheconsentoftheothers,regardlessofhowadvantageoussuchchangemaybe.§2.—Relationsofthepartnershipandthepartnerswiththirdpersons2219.Eachpartnerisamandataryofthepartnershipwithrespecttothirdpersonsingoodfaithandbindsthepartnershipforeveryactconcludedinitsnameintheordinarycourseofitsactivities.Nostipulationtothecontrarymaybesetupagainstthirdpersonsingoodfaith.2221.Withrespecttothirdpersons,thepartnersarejointlyliablefortheobligationscontractedbythepartnershipbuttheyaresolidarilyliableiftheobligationshavebeencontractedfortheserviceoroperationofanenterpriseofthepartnership.Thecreditorsmaybringanactionagainstapartnerforpaymentonlyaftertheyhavediscussedthepropertyofthepartnership;eventhen,thepropertyofthepartnerisappliedtothepaymentofthecreditorsofthepartnershiponlyafterhisowncreditorshavebeenpaid.

• (1)Contracto CMLemphasisestheconsentbetweentheparties,whiletheCVLemphasizesthattherebe

acontractbetweentheparties.

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o CVLseesapartnershipasadistinctivetypeofcontract–CMLseesitasadistinctiveformoforganization.

• (2)Contributiono Havetomakecontributions–notjustmoneybutproperty,expertise,knowledge…

anythingofvalue.TheCMLdoesnotfocusoncontributions–instead,itfocusesonjointactivitiesofthepartners.Whathaveyoudone?Howhaveyourepresentedyourself?

• (3)Profito Commonventureforsharedprofit.SimilartoCML–bothhavegoaltomakeprofitsand

theysharetheseprofits.• (4)Cooperation

o Theremustbeaspiritofcooperation–similartoCMLrequirementofcarryingonabusinessincommon.Purposeistoenablelegalactorstodifferentiatethepartnershipfromothergroupingsofpeoplewhoareinvolvedtogetherinpursuitofprofit.

• ScopeofEnterpriseo CVLpartnershipsareabitbroader.o Theycanbefunds,vehiclesforpooledinvestment.Doesn’thavetobedirectlyoperatinga

business.o CMLpartnershipshavenottraditionallybeusedinthisway.Why?Becausethereareother

vehicles,suchastrusts.Whichis,remember,notatraditionalCVLtool/vehicle.

• PointsofComparisono Establishment(2186,2189)

§ TheremustbeacontractinCVL,expressorimplied.§ CML–moreaboutintention.

o Authority(2215,2219)§ CMLandCVLsame:partnershavepresumptiveauthoritytomanagethefirmand

enterintorelationshipsonbehalfofthepartnership.Partiesmayvarythisbycontract,stipulateonlyonehastheauthoritytomanage.

o Responsibility(2204)§ CML:fiduciaryobligationsarekeytoitsregulationofpartnersintheirmanagerial

roles.Loyalty,candour,care.Wepaymostattentiontoloyalty.§ CVL:Nounifiedtraditionthinkingaboutfiduciaryrelationships…But,thereisstill

inCVLcode,obligationswhicharethefunctionalequivalenttotheCMLfiduciaryobligations.

§ 2204–partnermaynotcompetewithapartnershiponownaccountoronaccountofthirdperson.

o Entitystatus(352,387,399CCLC;298,299,300CCQ)§ CVL:DifferentfromCMLinabigway.§ Bouchardarticle–historicalviewisthatpartnershipsareconsideredlegalpersons

(notanylongernowthough).§ CCLC–sawpartnershipsasaperson.

• Philosophicalandjuridical/doctrinalreasons• Philosophically–organizationsorassociations,whatevertheirpurpose,

theyhaveorcancometohaveandfrequentlydohaveakindofreal,organicpersonality,socialormoralidentity,theyhaveagency.Theybehaveaspersonssoweshouldtreatthemandholdthemaccountableaspersons.

• Juridical/doctrinal–Traditionally,CVLpartnershipsseenasholdingpropertyinaseparatepatrimony.Recognizingthemasseparatepatrimoniesnecessitatedrecognizingthemasseparatelegalentities.

§ CCQ–Partnershipslackpersonality.BigchangefromtraditionalthinkinginCCLC.

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• Why?Philosophically–recognitionthattherewasprecedentincontinentaltheorythatpersonalityrecognition/attributionisamatterofchoice–it’suptopeopletodecidewhethertherearegoodreasonsforrecognizingpersonality.

• Courtsthereforebegantoquestionthelongstandinglineofauthority.• Riseofanewconcept–riseofapatrimonyappropriatedtoapurpose.

Thereforelinkbetweenseparatepatrimonyandseparatepurposewasseveredand

• Boucharddoesn’tthinkthatcourtshavesufficientlyexplainedhowapartnership,withoutaseparatepersonality,canholdproperty.

• Someseethisasanoverextensionoftheconceptofthepatrimonyappropriatedforapurposewhichwasbroughtabouttoaccommodateforthetrust.

o Liability(2221)§ Partnershipsareaninherentlyriskywayofstructuringanenterprise–bothCML

andCVLpartnersarepersonallyliablefordebtsandliabilitiesofpartnerships.

• LimitedLiabilityandOrganizationalFormo Thereisunlimitedliabilityinpartnerships–makesitveryflexiblebutveryrisky.

§ Personalliability,makestrustandconfidenceessential.Needtodoyourduediligence.

§ Someeconomistsandpolicypeopleseethisliabilityasabarriertobusinessgrowth,etc…Theybelievethateconomicgrowthsuffersasaresultandthatpeopleshouldbeshieldedfrombusinessliability.

o Limitedliability–argumentsinfavour§ (1)InvestorLimitedLiability:Tostimulateinvestmentandproductive

enterprise,thelawshouldaffordlimitedliabilitytopersonswhosupplycapital,toinvestors.

• Theyshouldonlybeexposedtoriskoflosingthecapitalthey’veinvested,shouldn’tgofurtherthanthat.Otherwise,investmentinbusinessenterprisewillsuffer.

§ (2)ManagerialLimitedLiability:Affordlimitedliabilitytomanagers,executives,directors.

• Managementshouldbeexposedtomarketrisk–iftheydoabadjob,theywillbefiredandthemarketwillpunishthemappropriately.

• Don’tthinktheyshouldbeheldpersonallyliableandexpertmanagementwilldeclinebecausetheriskistoogreat.

• Isthisfairtoothers–workers–whoareleftwithoutprotection?§ Availabilityoflimitedliabilityformanagersandinvestorsisthebiggest

advantageofcorporations.§ But,limitedliabilityisnotwithoutitscosts–foreverypersonwhoisshielded,that

liabilityhastobebornebysomeone/somethingelse.• Theorganization?Iftheycan’tpay,it’sexternalizedandimposedonthe

creditor.

II. THENATUREOFTHECORPORATIONA)TheConstitutionoftheCorporationCanadaBusinessCorporationsAct,ss.146and247

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QuebecBusinessCorporationsAct,ss.213-220and460CCQ,arts.301-303CanadaBusinessCorporationsActUnanimousshareholderagreement146(1)Anotherwiselawfulwrittenagreementamongalltheshareholdersofacorporation,oramongalltheshareholdersandoneormorepersonswhoarenotshareholders,thatrestricts,inwholeorinpart,thepowersofthedirectorstomanage,orsupervisethemanagementof,thebusinessandaffairsofthecorporationisvalid.Declarationbysingleshareholder(2)Ifapersonwhoisthebeneficialownerofalltheissuedsharesofacorporationmakesawrittendeclarationthatrestrictsinwholeorinpartthepowersofthedirectorstomanage,orsupervisethemanagementof,thebusinessandaffairsofthecorporation,thedeclarationisdeemedtobeaunanimousshareholderagreement.Constructiveparty(3)Apurchaserortransfereeofsharessubjecttoaunanimousshareholderagreementisdeemedtobeapartytotheagreement.Whennonoticegiven(4)Ifnoticeisnotgiventoapurchaserortransfereeoftheexistenceofaunanimousshareholderagreement,inthemannerreferredtoinsubsection49(8)orotherwise,thepurchaserortransfereemay,nolaterthan30daysaftertheybecomeawareoftheexistenceoftheunanimousshareholderagreement,rescindthetransactionbywhichtheyacquiredtheshares.Rightsofshareholder(5)Totheextentthataunanimousshareholderagreementrestrictsthepowersofthedirectorstomanage,orsupervisethemanagementof,thebusinessandaffairsofthecorporation,partiestotheunanimousshareholderagreementwhoaregiventhatpowertomanageorsupervisethemanagementofthebusinessandaffairsofthecorporationhavealltherights,powers,dutiesandliabilitiesofadirectorofthecorporation,whethertheyariseunderthisActorotherwise,includinganydefencesavailabletothedirectors,andthedirectorsarerelievedoftheirrights,powers,dutiesandliabilities,includingtheirliabilitiesundersection119,tothesameextent.Discretionofshareholders(6)Nothinginthissectionpreventsshareholdersfromfetteringtheirdiscretionwhenexercisingthepowersofdirectorsunderaunanimousshareholderagreement.Restrainingorcomplianceorder247Ifacorporationoranydirector,officer,employee,agentormandatary,auditor,trustee,receiver,receiver-manager,sequestratororliquidatorofacorporationdoesnotcomplywiththisAct,theregulations,articlesorby-laws,oraunanimousshareholderagreement,acomplainantoracreditorofthecorporationmay,inadditiontoanyotherrighttheyhave,applytoacourtforanorderdirectinganysuch

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persontocomplywith,orrestraininganysuchpersonfromactinginbreachof,anyprovisionsofthisAct,theregulations,articlesorby-laws,oraunanimousshareholderagreement,andonsuchapplicationthecourtmaysoorderandmakeanyfurtherorderitthinksfit.QuebecBusinessCorporationsActUNANIMOUSSHAREHOLDERAGREEMENT213.Alltheshareholdersofacorporation,whetherornottheirsharescarryvotingrights,mayagreeinwritingamongthemselvesoramongthemselvesandoneormorethirdpersonstorestrictthepowersoftheboardofdirectorstomanage,orsupervisethemanagementof,thebusinessandaffairsofthecorporation,ortowithdrawallsuchpowersfromtheboard.Asoleshareholdermaymakeawrittendeclarationthatrestrictsthepowersoftheboardofdirectorsorwithdrawsallpowersfromtheboard.Thedeclarationisequivalenttoaunanimousshareholderagreement.214.Totheextentthataunanimousshareholderagreementrestrictsthepowersoftheboardofdirectorstomanage,orsupervisethemanagementof,thebusinessandaffairsofthecorporation,orwithdrawsallsuchpowersfromtheboard,partiestotheunanimousshareholderagreementwhoaregiventhosepowershavealltherights,powers,duties,obligationsandliabilitiesofdirectorsofthecorporation,whethertheyariseunderthisActorotherwise,includinganydefencesavailabletothedirectors,andthedirectorsarerelievedoftheirrights,powers,dutiesandliabilities,includingtheirliabilityforthewagesofthecorporation’semployees,tothesameextent.215.Thecorporationmust,inaccordancewiththeActrespectingthelegalpublicityofenterprises(chapterP-44.1),declaretotheenterpriseregistrar,forentryintheenterpriseregister,theexistenceorthetermination,includingonthecorporationbecomingareportingissuer,ofaunanimousshareholderagreementthatrestricts,inwholeorinpart,thepowersofthedirectors.216.Ifaunanimousshareholderagreementwithdrawsallpowersfromtheboardofdirectorsandconfersthemonshareholdersorthirdpersons,thecorporationmustdeclaretotheenterpriseregistrarthenameanddomicileofthosewhohaveassumedthosepowers.TheshareholdersareinsuchacasesubjecttotherulesofDivisionsIandII,unlessotherwiseprovidedintheunanimousshareholderagreementortheby-laws.Theshareholdersmaychoosenottoestablishaboardofdirectors.217.Decisionsofasoleshareholderonwhomallofthepowersoftheboardofdirectorshavebeenconferredmaybemadebywrittenresolution.Anyactbysuchasoleshareholderonbehalfofthecorporationisdeemedtobeauthorized.Suchasoleshareholdermaychoosenottoestablishaboardofdirectorsandnottoappointanauditor,andisnotrequiredtocomplywiththerequirementsofthisActrelatingtotheby-laws,shareholdersmeetingsandmeetingsoftheboardofdirectors.218.Apersonwhobecomesashareholdersubsequenttothesigningofaunanimousshareholderagreementisdeemedtobeapartytotheagreement.However,apersonwho,onbecomingashareholder,isnotgivennoticeoftheexistenceoftheunanimousshareholderagreement,may,nolaterthan30daysafterbecomingawareoftheexistenceoftheunanimousshareholderagreement,havethetransactionbyoneroustitlebywhichthepersonbecameashareholderannulled.Thepersonispresumednottohavebeenawareoftheunanimousshareholderagreementifitsexistenceisnotstatedonthesharecertificateor,inthecaseofuncertificatedshares,ifthepersonwasnotgivennoticeofitsexistence.

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219.Aunanimousshareholderagreementterminateswhenthecorporationbecomesareportingissueror,subjecttotheprovisionsoftheamalgamationagreement,whenthecorporationamalgamatesbythelong-formprocess.220.Nothinginthissubdivisionpreventsshareholdersorthirdpersonsfromfetteringtheirdiscretionwhenexercisingthepowersconferredonthemunderaunanimousshareholderagreement.Non-compliance460.Ifacorporationoradirector,officer,employee,mandataryorauditorofacorporationdoesnotcomplywiththisAct,thearticles,theby-lawsoraunanimousshareholderagreement,anyinterestedpersonmay,withoutprejudicetoanyotherrightthatpersonhas,applytothecourtforanorderdirectingthecorporationoranypersonconcernedtocomply.Thecourtmay,tothatend,makeanyfurtherorderitthinksfit.CivilCodeofQuebecEFFECTSOFJURIDICALPERSONALITY301.Legalpersonshavefullenjoymentofcivilrights.302.Everylegalpersonhasapatrimonywhichmay,totheextentprovidedbylaw,bedividedorappropriatedtoapurpose.Italsohastheextra-patrimonialrightsandobligationsflowingfromitsnature.303.Legalpersonshavecapacitytoexercisealltheirrights,andtheprovisionsofthisCodeconcerningtheexerciseofcivilrightsbynaturalpersonsareapplicabletothem,adaptedasrequired.Theyhavenoincapacitiesotherthanthosewhichmayresultfromtheirnatureorfromanexpressprovisionoflaw.SourcesofCorporateConstitutionalLaw

• Firstsourceisprovincial/federalstatues.o Iffederal,looktoCBCA–ifprovincial,looktoprovincialstatute(e.g.QuebecisQBCA).

• Lookforarticlesofincorporation–documentpreparedbylawyers.o Thesecanbequitebrief–oftennotawholelotinthere.If,however,incorporatorsare

nervousaboutsomethingtheymaybemoredetailed.• Otherrelevantdocuments

o Documentsthatmaysupplementthestatueorthearticlesofincorporation,mayalsoinforminterpretationofthesedocuments.

o Havetoberatifiedbyshareholders.• Unanimousshareholderagreement

o Stipulatedtermsforshareholders,typicallyrelatedtosaleofassets,etc…o Notseenofteninlargecorporations,usuallyinsmallerones.

• Internalgovernancerecordso Minutesfromboardmeetingso Financialrecordsproducedwithinthecorporation,havebeenverifiedbyanoutside

accountant.FunctionofCorporateConstitutions

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• Corporateconstitutionsservetwokeyfunctions:o (1)Primaryfunction–toestablishaframeworkforthegovernanceofthecorporation.

Setouthowdecisionsgetmade.o (2)Conflictresolution–thereisalwayspotentialforconflict,andthisisheightenedin

corporationswherepeoplehavecompetingeconomicinterests.§ Establishesstrongdecisionmakingnorm–thatofmajorityrule.§ Provisionstoprotectminorities,particularlyminorityshareholdersbutalso

dissentingdirectors.Grievanceprocedures,setouttochannelconflictandgetcourtsinvolvedtoresolveconflicts.

§ Resolvesconflictbysettingoutthegovernanceofthecorporation.Setsoutwhohastherighttodecide.

àCorporateconstitutionssetbaselinerulesforthegovernanceofcorporations–setsoutpowers,rights,andobligationsofvariousconstituents,variouscategoriesofmemberswithinacorporation.Corporateconstitutionsflagthreeimportantissues:

• Whoisincontrol?(Whohaspower?)• Whogetstheprofit?(Whogetsthemoney?)• Whoisliable?(Whowillpaymoney?)

Corporateconstitutionsdemonstratebroadissuesofpowerandaccountability:

• Whohaspoweroverthecorporationandisthepowerthatthatpersonhas,isitrootedinthecorporateconstitutionorisitakindofpracticaloreconomicpower?

o Howisthatpowerexercisedandwithrespecttowhomandtowhat?• Whoisaccountable?Howaretheymadeaccountable?Inlaw?Insomeotherway?Throughsocial

ormoralnorms?o Towhomaretheyaccountable?o Forwhataretheyaccountable?Howisthescopeoftheiraccountabilitydefined?

• Legalpoweristhoughttojustifylegalaccountabilitywithinthecorporation.• Corporateconstitutionsaregenerallynotveryhelpfulregardingaccountabilitytooutsiders.

Instead,itisgeneralprinciplesofcontractandtortlawthatgoverncorporateaccountabilitytooutsiders.

ConstituentsandOutsiders

• Corporateconstitutionsarefocusedoninternalmattersandinternalgovernance.o So,importanttoknowwhoaretheinternalconstituents,whoaremembersofthe

corporation.• Outsiders=personsorgroupsbeyondtheambitoftheassociationwithwhomitinteracts

o Theylackstandingtoparticipateintheaffairsofthecorporationasperthecorporateconstitution.

o Thosewithwhomthecorporationhasfrequentdealings/relationships.o Mostoftheserelationshipsaremediatedmostly(notexclusively)bycontract.o Keytermsgoverningtherelationshipbetweenthecorporationandtheoutsiderwillbe

foundintheapplicablecontract.o (1)Generalpublic

§ Anamorphouswhole–notpossibletotalkaboutthisrelationshipinaveryspecificway.

§ Lookatconsequencesofcorporateconductonsocialwelfare.§ Poserisksandconferbenefitstothepublic.

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• Theyarethebiggestenginesofeconomicgrowth,sopublicbenefitsthisway.

• Buttheyalsosufferasaresultofcorporationdecisions–cutjobs,closeplants,reduceemployeehours,etc…

§ Generalpublichasprettyweakleverageoverthecorporation.Evenindividually,whileyoucansue,youareoftenout-resourcedbythecorporation.

o (2)Government§ Governmentsupposedtobepromotingindustryandprotectingusfromharmful

decisionsmadebycorporations.§ Saveforthoseoperatinginheavilyregulatedsectors,typicallycorporationsdon’t

interactonadailybasiswiththegovernment.§ But,thegovernmentisverypowerfulandcanhaveasignificantimpacton

corporations.Thispoweriswieldedinafewways:• Fromoutside–actingonitspowerstomakelaw,regulations,and

enforcementactivity.Providesandrevisescorporatelaw.• Frominside–takeashareholdingposition(didthisinwakeof2008–

e.g.GeneralMotors).Canestablishapubliccorporationtocarryoutgovernmentfunctions(e.g.ViaRail,CanadaPost).

o (3)Employees§ Debateaboutemployees–aretheyactuallyoutsiders?Oraretheybetterclassified

asoutsiders?• Productionkeytoprofits–reliesonemployeestocarryoutproduction,so

centraltowhatcorporationsdo.Therefore,somethinkofthemasquintessentialinsiders.

• Also,vulnerabilityofemployees–theyarefarmorevulnerablethanshareholdersinlotsofways(haveall$$tiedupincompany,versusshareholderswhohavediversifiedrisk,etc…).

§ Complicationswithdominantviewofemployeesasoutsiders:• Employeescanbegivenparticipatoryrightsincorporations–e.g.

Alberta,seatontheboardreservedforemployees;Germany,employeerepresentationonboardismandatory.

• Section119,CBCA–smallprovisionmadeforemployeeprotection.Directorsareliableforunpaidwagestoemployees.

o (4)Creditors§ Severalkindsofcreditors(suppliers,banks/lendingcompanies,holdersof

bonds/debtsecurities).§ Dominantview–allconsideredtobeoutsidersdealingwithcorporationon

footingofcontract.Extendcreditandfixedtermsofrepayment.§ Complications–somegrievancemechanismsareopentothem:

• Section247,CBCA–allowscomplainantstogotocourtaskingcorporationtocomplywithtermsofcorporateconstitution.Creditorshavestandingtobringapplicationforreliefhere.

• Constituents=membersofanassociationo Questiontoask–doesthispersonhavestandingtoparticipateintheaffairsofthe

corporationunderthecorporateconstitution?o Personswhobelongtocertaingroupsthathavestandingaspertheconstitutionofthe

corporate.o Importantincorporatelawbecausecorporationsarelegalpersonsandtheyincurliability

asaseparateentity.o Someoneneedstomakedecisionsandrenderthecorporationanimate.Theyarethe

bodieswithinthecorporationwhichenableittomove,tofunction,todowhatitneedstodo.

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o (1)Shareholders§ Supplyequitycapital(money,cash)intothecorporationinreturnfortheirshare.§ Investmentofmoneyincorporationandtheyget,inreturn,nofixedlegalinterest

orrighttore-payment.Theyinvestwithhopeandexpectationthattheywillmakemoney,thatitwillprovetobeagoodinvestment.

§ Whencorporationdoingwell,shareholdershopefordividendpaymentstobemadebyboard–i.e.profitspaidouttoshareholders.

§ Hopethattheirsharepricewillgoupovertimeandthatthevaluewillincreaseandtheycanreceiveavaluewhentheysale.

§ Interestsofshareholders:• Wealthmaximization–theywantasmuchmoneyaspossibleandwant

directorsandofficerstodowhatevertheycansotheycangetthemostmoneyoutoftheirinvestment.

• Thereareotherintereststoo(e.g.moralandethicalinterests).§ Interestingthatshareholdershavenoentitlementinanyformtoanyreturnon

theirinvestment.Theyhavenorighttodividends.Corporateprofitsareownedbythecorporation.

§ Directors,asagentsofthecorporation,havetodecidewhetherit’sthebestthingforthecompanytopayoutsomeoralloftheprofitstotheshareholders.Theirinterestsaresubjecttothediscretionofthedirectors.

§ Shareholdersarenotinpositionakintocreditors–shareholdershaverightsinthecorporation(participateincorporategovernance).Creditorshaverightsagainstthecorporation,tobeassertedprimarilythroughcontract.Theyalsohaveuniqueinterests–theirinterestin$isresidual,onlyhaverighttowhatcorporationpaysoutfromtimetotimeandtovalueoftheirshares.Noclaimthoughovercorporatepropertyorprofits.Creditors,ontheotherhand,havearighttorepayment.

§ Shareholdershavenosignificantday-to-daypoweroverthecorporation.Instead,havepowerbyactingonvotingrightsattachedtotheirshares.

• Righttoelectdirectors,canalsobootthemout.• Righttodecidespecialmattersbyvotethatarereservedforthembythe

corporateconstitute(e.g.saleofsignificantvalueasset).• Righttobeinformed,righttoinformation.Corporationhastomake

financialdisclosurestoshareholders.• Havepriorityofplacere:corporatelawremedies.Theirinterestsare

protectedbythelaw(oppressionremedy,fiduciaryobligations,etc…).• But,canhavedifferentclassesofshares,someofwhichcanbenon-

voting.Oftenhowfamilieswillmaintaincontroloftheircorporations.o (2)Directors

§ Votedin/outbyshareholders.Representativesofshareholders.§ Bearprimaryresponsibilityinlawforensuringcorporationisproperlymanaged.§ Notjustrepresentativesofshareholders–alsoinsupervisoryroleoverofficers

(CEOs,CFOs,etc…).Hireofficersonbehalfofshareholdersandsupervisethem.§ Importantintermediarybetweenshareholdersandofficers.§ Mustreportandaccounttoshareholders.Mostimportantwayisthroughannual

generalmeeting.§ Section102,CBCA–givesdirectorsbroadresidualpowersoverthecorporation.§ Inexercisingtheseveralpowerstheyhave,membersoftheboardaresupposedto

showindependentjudgmentinthebestinterestsofthecorporation.Beingindependent,theyarenotanswerabletoshareholdersonaday-to-daybasis(similartorelationshipbetweenMPstocitizens).Theyareanswerabletoshareholdersthroughelections.

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§ Heldaccountableprimarilythroughdutyofcare(exercisepowersreasonablyandinthebestinterestofthecorporation)andthroughdutyofloyalty(notinself-interestandnotininterestofothercorporation).

§ Havepowertocreateofficestobefilledbyofficers–hireseniormanagerialprofessionals.

§ Havethemostsignificantpositionofpowerinthelegalsense.o (3)Officers

§ Responsibleforday-to-daymanagementofcorporation.§ Havethemostsignificantpositionofpowerinthecorporationinpracticalterms.§ Thesepeoplewilloftennominatepeopletobeontheboardofdirectors.§ Fiduciariesofthecorporation,carryouttheirfunctionsasfiduciaries–abideby

dutiesofcareandloyalty.

• Themanyhatsphenomenono Youdon’thavetobelongtojustonegroup–ashareholderisnotpreventedfrom

becomingadirectororofficerofacorporation.o Verycommonforsomeonetobeallthree.

B)TheCorporationasaLegalPersonCanadaBusinessCorporationsAct,ss.15(1)and45(1)QuebecBusinessCorporationsAct,ss.10and224CCQ301-303CanadaBusinessCorporationsAct15(1)Acorporationhasthecapacityand,subjecttothisAct,therights,powersandprivilegesofanaturalperson.45(1)Theshareholdersofacorporationarenot,asshareholders,liableforanyliability,actordefaultofthecorporationexceptundersubsection38(4),118(4)or(5),146(5)or226(4)or(5).QuebecBusinessCorporationsAct10.Acorporationisconstitutedasofthedateand,ifapplicable,thetimeshownonthecertificateofconstitutionissuedbytheenterpriseregistrarinaccordancewithChapterXVIII.Thecorporationisalegalpersonasofthattime.224.Shareholdersarenot,asshareholders,liableforanyactofthecorporation.However,theyaredebtorstothecorporationforanyunpaidamountonsharestheyholdinitssharecapital.CivilCodeofQuebec301.Legalpersonshavefullenjoymentofcivilrights.302.Everylegalpersonhasapatrimonywhichmay,totheextentprovidedbylaw,bedividedorappropriatedtoapurpose.Italsohastheextra-patrimonialrightsandobligationsflowingfromitsnature.

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303.Legalpersonshavecapacitytoexercisealltheirrights,andtheprovisionsofthisCodeconcerningtheexerciseofcivilrightsbynaturalpersonsareapplicabletothem,adaptedasrequired.Theyhavenoincapacitiesotherthanthosewhichmayresultfromtheirnatureorfromanexpressprovisionoflaw.

• Boltono Directorsandmanagersarethedirectingmindofthecorporation.

• Macaurav.NortherAssuranceCo.o "[T]hecorporatorevenifheholdsall thesharesisnotthecorporation,and…neitherhe

norany creditorof the companyhasanyproperty legalorequitable in theassetsof thecorporation."

§ i.e. the sole owner of a single-shareholder, single-director company has noinsurableinterestintheassetsofthatcompany.

§ Thecompanyhasaseparatelegalexistence.§ àThisrulewaslaterrejectedinKosmopoulos.

• Kosmopouloso Theseparateentitiesprincipleisnotenforcedwhenitwouldyieldaresulttooflagrantly

opposedtojustice.o K,assoleshareholderofthecompany,wassoplacedwithrespecttotheassetsofthe

businessastohavebenefitfromtheirexistenceandprejudicefromtheirdestruction.Hethereforehadaninsurableinterestinthemcapableofsupportingtheinsurancepolicy.

o Moderncompanylawnowpermitsthecreationofcompanieswithoneshareholder,sothattheidentitybetweenthecompanyandthesoleshareholderanddirectorissuchthataninsurableinterestinthecompany’sassetsmaybefoundinthesoleshareholder.

o RejectsMacaura—soleownerofsingle-shareholder,single-ownercompanyhasinsurableinterestincompany’sassets.

o "Thelawonwhenacourtmaydisregard[theprinciplethatacorporationisaseparatelegalentity]by'liftingthecorporateveil'andregardingthecompanyasamere'agent'or'puppet'ofitscontrollingshareholderorparentcorporationfollowsnoconsistentprinciple."

o "Theidentity…betweentheCompanyand[a]soleshareholderanddirectorissuchthataninsurableinterestintheCompany'sassetsmaybefoundinthesoleshareholder."

o Asoleshareholder,thoughlackinganyproprietaryinterestinthecorporation’sassets,hasan“insurableinterest”inthem.

§ CorporatepersonalitypointfromMacaurawasupheldbuttheinsurancelawpointwasbroadened.

September28,2016CorporatePersonality:GeneralPropositions

• Corporationsarelegalpersons.o Theyaretreatedseparatelyfromtheirmembers.o Havethelegalcapacitiesofotherpersons,includingnaturalpersons.o Canattract,alienate,hold,orexerciselegalrights,legalpowers,andliabilities.o Corporationscanintheirownright,asindividuatedpersons,canacquireproperty,can

own/administerproperty,canacquirelesserinterestsinproperty(lease,licensing),canalienatetheirpropertyinterests.

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o Canformcontracts,canbepartytoacontract,canperformormakegoodoncontractualobligations,canbreachcontractsandthereforebesuedforthesebreaches,canavailthemselvesofcontractualremedies.

o Canbetortfeasors–cancommitcivilwrongs,canbeheldliablebytheirvictims.o Corporationscancommitcriminalwrongs,canbeheldcriminallyaccountable.

• Asartificial(legalpersons),howdocorporationsact?o Corporations,asartificialpersons,can’tdoanythingontheirown.o Theyhavetobemadetoactontheirlegalpersonalityandtheycanonlybemadetoact

throughrepresentatives–personswhoareauthorizedtoactonbehalfofthecorporation(eitheringeneral,orinrespectofcertainfunctions).

o Whoarethesepeople?§ Directorsandofficers–thesearethedirectingmindswhohavetheauthorityto

actonbehalfofthecorporation.§ Officers’authorityisdelegatedfromtheboard.

• Legalpersonalityisaprivilege.o It’saprivilegeaffordedbythestate,affordingabenefitthatisnotconferreduponthose

peopleasamatterofright.o Privateindividualscan’tassertlegalpersonalityontheirown.o It’sartificial,it’snotanunderlyingnaturalphenomenon.o Evenwhenlawtreatscorporationsaspersons,itdoessoinaboundariedway.o Wehavedecidedthatitwouldbeuseful,convenient,beneficial,toalloworganizationsto

existontheseterms.• So,thereisalotofdebateaboutwhetherincorporationisagoodthing…

LegalSourcesofCorporatePersonality

• LegalpersonalityisprovidedforundertheCBCAandQBCA.o CanadaBusinessCorporationsAct

§ 15(1)Acorporationhasthecapacityand,subjecttothisAct,therights,powersandprivilegesofanaturalperson.

o QuebecBusinessCorporationsAct§ 10.Acorporationisconstitutedasofthedateand,ifapplicable,thetimeshownon

thecertificateofconstitutionissuedbytheenterpriseregistrarinaccordancewithChapterXVIII.Thecorporationisalegalpersonasofthattime.

• TherearealsomentionsintheCCQ:o 301.Legalpersonshavefullenjoymentofcivilrights.o 302.Everylegalpersonhasapatrimonywhichmay,totheextentprovidedbylaw,be

dividedorappropriatedtoapurpose.Italsohastheextra-patrimonialrightsandobligationsflowingfromitsnature.

o 303.Legalpersonshavecapacitytoexercisealltheirrights,andtheprovisionsofthisCodeconcerningtheexerciseofcivilrightsbynaturalpersonsareapplicabletothem,adaptedasrequired.Theyhavenoincapacitiesotherthanthosewhichmayresultfromtheirnatureorfromanexpressprovisionoflaw.

ScopeofCorporatePersonality

• Corporationsrecognizedforthepurposeofprivatelaw–toenablethemtoownproperty,dealwithlesserinterestsinproperty,andtoengageincontractualrelations,tobeabletobethesubjectofprinciplesofcivilliability.

• ShouldtheybeprotectedbytheCharter?o UnitedStates–CitizensUnitedestablishesthatcorporationshaveconstitutionalrights.o Canada–wealsorecognizeconstitutionalrightsforcorporations.

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§ FederalInterpretationAct,s.29• Verybroadprovisionforcorporatepersonality.Everylegislative

referencedto“persons”–corporationsaretoberecognizedaspersonsunlessexplicitlystatedotherwise.

§ Yes,theyarecapableofenjoyingCharterrights.But,thatdoesn’tmeantheyenjoyalltherightsofnaturalpersons.

§ ThequestionofwhetheragivenCharterrightappliestoacorporationturnsonlegislativeintent,whetherParliamentintendedforthecorporationtoenjoyagivenright.

§ Courtshavesaidthatwhereagivenrightcouldnotprotectacorporateinterest,thatrightcannotbeheldbyacorporation.

• Sections7(life,liberty,securityoftheperson),2(a)(religion),9(arbitrarydetention),etc…

• Whenarightcouldapplytocorporations,courtshavetolooktotheintentionofthedrafters.

o e.g.Sections2(b)(freedomofexpression),11(b)(righttobetriedwithinareasonabletime).

o Corporationshavenofeelings,thoughts,consciences,desires…(CitizensUniteddissent,JusticeStevens).

§ Theyhelpstructuretheactivitiesofhumanbeingsandtheirpersonhoodcanserveasausefullegalfictionhood.

Salomonv.Salomon(HouseofLords,1897)

• BasicprincipleofcorporatepersonalitysettledinSalomon.Explainedlegalconsequencesofincorporationandlaidcornerstoneofmoderncorporatelaw.

o Havetohaveshareholders.o Onceincorporated,mustbetreatedlikeanyotherindependentpersonwithrightsand

liabilities.o Shareholdersnotliabletothecreditorsofthecorporation.

• Factso Incorporatedcompany–shareholders,therewere7(whichhappenstobestatutory

minimumnumberofshareholders).o Salomonhad20,001sharesandthen1shareeachtowifeandchildren.o Therewasalsoadebentureatissueinthiscase($10,000)–promissorynote,apromiseto

pay.CorporationmakingpromisetopaySonhisdebenture.Wassecuredbycorporateassets.

§ WasmadeouttoSinexchangeforthepersonalassetsthatheinvestedintothecompany.

o Creditorsgotfuckedwhencompanygotbankrupted.SoughttorecoverdirectlyfromSbecausehewasreallythesoleowner/incontrol.

• Issueo WasMr.Solomanliablepersonallyforthedebtsofhiscorporation?

§ Lowercourtsaidyes,thattrueownerofcorporationwasnooneotherthanMr.Saloman.

§ HouseofLordsdisagreed.• Reasoning(LordHalsbury)

o Implicationsofregistration§ Corporationcomesintoexistenceasofthemomentofregistration,whichcreates

aseparatelegalperson.o Implicationsofconcentrationinshareholding

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§ Plaintiffssoughttoarguethatpersonwithsuchaconcentrationoftheownershipshouldmakethatpersonpersonallyliablebecausetheyaretheoneincontrol,theyarethetrueowner.

§ HouseofLordssaidno–acorporationisnotdisqualifiedfromlegalpersonalitybecausethebulkofthecompanyisconcentratedinoneperson.Aslongattheminimumstatutoryrequirementsaremet,thedistributiondoesn’tmatter.

o Legalpersonalityandpre-incorporationenterprise§ Legalpersonalitymeansthatacorporationisatlawadifferentpersonfromits

constituents(directors,shareholders,officers),evenifthebusinessitselfissubstantiallyasitwasbeforeincorporation(aswasthecasehere).

o Corporationasindependentlegalperson§ LowercourtsawcorporationlikethisasanagentofS.§ HouseofLordsrejectedthis–corporationisnotanagentoratrustee.Thisisnot

therelationshipbetweentheconstituentsandthecorporation.It’salegalpersoninitsownrightandmustalwaysbeanalyzedassuch.

o Implicationsofpersonality§ Onceitwasacceptedthatacorporationisanindependentlegalperson,thenitjust

followsthatallliabilitiesincurredbythecorporationarethecorporation’sown.§ àThisistowherewetracethebeginningsoflimitedliability.

• Noteso It’snowpossibletoformone-personcorporations(don’tneed7shareholdersanymore).

§ SeeCBCA,section5.o Corporatepersonalityandlimitedliability–thesetwogotogetherinlockstep,butit’snot

normativelyinevitable.Thecorporationisaconstructsowecanpackagetheattributesinanywaywewant.

o Limitedliabilityisarisk-shiftingdevice–theydon’tgoaway,theygetshifted.Here,theywerebornebythecreditors.

IsCorporatePersonalityReal?

• Fictionaliststhinkit’safiction,createdforfunctionalpurposes.• Realiststhingthere’ssomethingrealthere–corporationshaveasocialagencyinthewaythey

deliberateandbehave.Somethingunderlyingthatgivesthempersonality.Macaurav.NorthernAssurances(HouseofLords,1925)

• Factso Timberyardownedbycorporation.Timberburnedinyard,catastrophicbecausemost

significantasset.Therewereinsurancepolicies,weremadeouttocontrollingshareholderofcorporation.Whenincorporated,transferredassetstocorporationbutforgottoassignpolicytocorporation.

o Companyrefusedtopayoutbecausepropertywasnotthepropertyoftheindividualholdingthepolicy–waspropertyofcorporation.Evenasshareholderhavenoinsurableinterestintheproperty.

• Issueo Whoownscorporateproperty?Thecorporation.

• Reasons(LordBuckmaster)o Inacaselikethis,smallbusinessesespecially,thereisnootherpersonbuttheplaintiff

whoisinterestedintheproperty.o Incircumstanceswhereassetsaretransferredtoacorporation,thecorporationisthe

ownerofthoseassets.

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o Shareholders,whileeconomicallyinterestedintheassets,theyhavenoownership/propertyinterestintheasset.

o Howdowethuscharacterizetheinterestsofshareholders?§ Theyareinterestedinreceivingashareofprofitfromtimetotime(dividends).§ Theyhavearesidualinterestincorporateassets,receivingashareofthatproperty

whenthecorporationiswoundupifthereisanyleft(creditorscomefirst).o Thecontrollingshareholder,thougheconomicallyinterestedintheproperty,hadno

insurableinterestintheproperty.• Notes

o Corporatepersonalitycutsbothways–ifyou’renotcarefulinincorporation,youcangetfuckkkkked.

o WasgoodauthorityinCanadauntil…Kosmopoulos.Kosmopoulosv.ConstitutionInsurance(1987,SCC)

• Factso Smallbusinessownernotwelladvisedbyhislawyer…o Kwassoleshareholderofincorporatedbusiness.Wasn’treallyawareofconsequencesof

incorporation.o Hadinsurancere:material/merchandiseinhisstore.Waspurchasedinhisname,notin

nameofcorporation.Firedamageresultinginlosstocorporateassets,seekstorecover.o InsurancecompanyreliesonMacauraandseekstoescapeobligationtopay.

• Issueo Canashareholderhaveaninsurableinterestincorporateproperty?

• Reasoningo CourtofAppealmovedbytheequitiesofthecase,feltinsurancecompanywasn’tactingin

goodfaithbyrefusingtopayouttoK.Wasatechnicaldifference,thelosswaspreciselythe§ So,heldKhadaninsurableinterestintheassetsofhiscorporation.§ DistinguishedfromMacaurabecauseheretherewasasingleshareholder–there

wereseveralshareholdersinMacaura.§ So,whenyouhaveaone-personcorporation,thedistinctionbetweenthesole

shareholderandthecorporationisartificialtosaytheleast,it’spaperthin.§ Incaseslikethisweshouldthereforebepreparedtorecognizedthatthe

corporationisafiction.o SCC–wasthisavalidbasisonwhichtodistinguishMacaura?

§ UpheldthedecisionthatKhadaninsurableinterest.§ But,anxiousabouttheCourtofAppeal’scommentsaboutveilpiercing.§ WilsonJ

§ Veilpiercingisapartofcorporatelawthatfollows“noconsistentprinciple.”Veilpiercing=disregardingcorporatepersonality

§ Thereisapersuasiveargumentthatthosewhohavechosen§ IFtheveilistobeliftedatall,itshouldonlybedoneintheinterestof

thirdparties,notincorporatorswhohavemadeabaddecision.§ Here,wasanincorporatorseekingadisregardingofcorporatepersonality

–courtdidn’tthinkthisshouldbeallowed.§ So,allowedtheCourtofAppeal’sdecisiontostandontheinsurableinterest

question–blindlyobviousthatwhereallsharesareconcentratedinoneperson,thatpersonhasarealandrobusteconomicinterestinrecoveryfromtheinsurancecompany.

§ Test:Indeterminingwhetherashareholderhasaninsurableinterestincorporatepropertyhavetoaskwhetherthatindividualshareholderhadbenefitoftheexistenceofthepropertyandwhetherthey…

Humphrey|33

§ Courtwasveryreluctanttodisregardcorporatepersonality,evenwhenthereisoneshareholder.So,upheldcorporatepersonality.

Leev.Lee’sAirFarming(1961,NZ)

• Factso Ldiedincourseofemployeedutiesbutwasalsoshareholder,director.

• Issueo Canyoubeanemployee,shareholder,director,officerofacorporationallatonce?Yes–

youcanwearmanyhats.• Reasoning

o Hewasanemployeebecauseemployingorganizationwasacorporation,eventhoughhewastheonemakingthecorporationenterintoacontractwithhimself.

o Thefactthathewasdirector“isnoimpedimenttohisenteringintoacontracttoservethecompany.”Mr.Leewasn’temployinghimself–thecompanywasemployinghim.Itdoesn’tmatterthatMr.LeewasgivingorderstohimselfbecauseMr.Leeandthecompanyaren’tthesameperson.

o Corporationisseparatelegalpersonandcanenterintolegalcontractsoftheirownright.• Notes

o ThisisalogicalconsequenceofSalomon.o Corporationsareindependentpeopledistinctfromthosethatmakethemup.Majority

shareholder/director/employeecanwearmanyhatswithoutconflict.October3,2016PiercingtheCorporateVeil

• Thecourtswillgotogreatlengthstogiveeffecttocorporatepersonality.• But,corporatelaw’sregardforcorporatepersonalitydoeshavelimits–wewillrarelyencounter

situationswhererecognizingcorporatepersonality(especiallylimitedliability)wouldyieldanaffronttojustice.

• Piercingthecorporateveil:attributingtheliabilitiesofthecorporationtotheindividualsbehindtheveil.

• Textbookauthorsarecriticalofthispractice,eventhoughithappensrarely.Criticalbecausenounderlyingtheorytoanswerquestionsofwhereandwhycorporateveilpiercingshouldhappen.Bigdealbecausecorporatepersonalityisanunderlyingcorecomponentofcorporatelaw.

• Thereare,however,trends–kindsofcaseswherethecourtsaremorelikelytopiercetheveilandattributedebtsofcorporationtoindividuals.

o Allegationsoffraudulentconductonpartofprincipalsofcompany–usingcompanytofurtherfraudulentactivities.

o Corporationwasundercapitalized–notenoughmoneyinthetilltosatisfyreasonablyforeseeabledebts.Thisisusuallyintentional.

o Wherecorporationsweresetupfromthegetgoforanillegal/questionablepurpose.o Wheretherearenon-armslengthtransactionsbetweenparentandsubsidiary

corporationsifsubsidiarycompletelycontrolledbyparentcorporation.• Wheredoesthispowerofthecourtcomefrom?

o Casebookseemstosuggestitfallsoutofthesky–judgesjustassertthispower,they’remakingitup.

o Otherpotentialsourcesofthecourt’spowertopiercethecorporateveil:§ Courtshaveinherentjurisdictiontopreventmiscarriageofjusticeorabuseof

right.

Humphrey|34

§ Becausestategrantsprivilegeofincorporation,thenargumentthatthestateretainspowertodefinetheoutsidelimitsofthisprivilege–referredtoastheconcessiontheory.

InducingBreachofContract

• Runsparalleltoveilpiercingbutdoesn’tactuallyinvolveveilpiercing.• Caseswhereaconstituentoremployeeofcorporationhascommittedanintentionaltort–here,

theCMLtortofinducingbreachofcontract.• (1)Whencanacorporationbefoundliableforinducingbreachofcontract?• (2)Whenmaylimitedliabilitybebracketed/circumventedforliabilitytobeplacedona

constituentwhowouldnormallybeprotectedviaprincipleoflimitedliability?• Whencananindividualbedeemedtohaveactedinarepresentationalcapacity?• Whomightthoseindividualsbe?Whocanbeheldtohaveactedinarepresentationalcapacity?

• CMLtortofinducingbreachofcontractstemsfromHouseofLordcase,Quinnv.Leathem.

o Nooneshouldinterfereincontractualrelationshipswithoutgoodreason.Ifyoudo,youareguiltyofatort.

o It’snotjustaboutinducinganactualbreach,butanythingbroader,accordingtothiscase.Anyinterferencewithoutjustification=tort.

• Whereacorporationhasbreachacontractofitsown,thecorporationwillofcoursebedirectlyliableundercontractlawforthebreach.

o Thereisaquestionofwhetherandwhen,inadditiontothiscontractualliability,wemightfindsomeoneelseliable(adirectingmind,officer).Whencouldtheybefoundliableforhavingmadethecorporationbreachitscontract?

o Whooughttobearthetortiousliabilityforinducingthebreach?Thecorporation?Thedirectingmindswhomadethecorporationbreachthecontract?Both?

GarbuttBusinessCollegeLtd.v.HendersonSecretarialSchoolLtd.(1939,ABCA)Facts

• FamousteacherHendersonworkedfortheplaintiffGarbuttCollege.Restrictivecovenantinhiscontractsaidhecouldn'topenarivalschool–non-competeclause.

• Hendersonincorporatedanewrivalschool.Hendersonheldallsharesofthenewcompanyexcept3heldbyhiswifeanddaughter.

• EnrolmentatGarbuttdeclined"asstudentsflockedtotheHendersonname.”• GsuesHforhisbreachofthenon-competeaswellasthenewschoolasacorporationforhaving

inducedHtobreachhiscontractwithG.Issue

• Didthecorporation,throughtheagencyofHenderson,inducebreachofcovenantbyHenderson?Yes.

Reasoning• Courtupheldtherestrictivecovenant–Hliablefordamagesfrombreachofcontract.• Theschool,however,hadnocontractwithGarbuttandthusisnotliableforbreachofcontract.If

theHendersonschoolisliable,wouldbeliableintort.o "[T]hecompanyandallitsofficerswellknewthatwhatitwasdoinginemploying

Hendersonwasinbreachofhisagreementwiththeplaintiff."o [Thecorporation]"aidedandencouragedandpaid"Hendersontobreakhiscontract(re:

Quinnv.Leathem).• Testforinducingbreach(fromQuinnv.Leathem):

Humphrey|35

o Interferencewithcontractualrelationshipswithoutjustification.Needstobewillfulordeliberate–intentionaltort.Butthisdeliberatecriteriacanbesatisfiedbyknowledge.

o Notablybroad–embracesanykindofinterferencewithacontract.Evenifyourmeddlingdoesnotleadtoabreach,youareliable.

• Herethecorporation,throughHenderson,knewthatbyemployingHenderson,itwasinterferingwithHenderson’scontractwiththeotherschool.

o Thisdemonstratestheartificialityofcorporatepersonality.Ratio

• Anycorporationisaseparatelegalpersonthatactsthroughtheagencyofadirectingmind.Ifthroughthisagency,itinterfereswithacontracttowhichitisnotaparty,itshouldbeheldliable.

Einhornv.WestmountInvestmentsLtd.(1969,SKQB)Facts

• BelzbergsincontrolofWestmountcorporation–induceWtobreachcontractwithrealestateagent,Einhorn.

• Asaresultofbreach,Esoughttorecoverlossinrealestatecommissions.KnowingthatEwasabouttoseekrecoveryfromW,theBssiphonedmoneyawayfromWcorporation.MeantWwasincapableofsatisfyingitscorporateliabilities.

• EsuedWcorporationforbreachofcontractbutit’sbroke…soalsosuestheBsforinducingbreachofcontract.

Issue• Whencanadirectingmindbeheldliableforinducingbreachofcontractbetweenacreditorand

acorporation?Whentherehasbeendeliberateinterferenceintheexecutionofthecontract.o Bigquestionsaboutlimitedliabilityandcorporatepersonality.Normallywewouldsay

thattheofficerswereprotectedfromliability.Reasoning

• Moderntest–elaborationofQuinnv.Leathem.ThistestwasthemostcitedinCanadianlawuntilPocklington.

o Toestablishliabilityforinducingabreachofcontracttheremustbe:§ (1)Interferenceinexecutionofthecontract

• Executionisnotconfinedtoprocurementofabreach,itextendstocaseswhereathirdpersonpreventsorhindersathirdpartytoperformtheircontracteventhoughitmightnotyieldabreach.

§ (2)Interferencemustbedeliberate• Personmustknowofcontractorturnablindeyetoitandintendto

interferewithit.Interferencemustalsobedirect.• Courtliftsthecorporateveil.Thedefendants’conductunjustlydeprivedtheplaintiffofhisrights.

o Interferedwiththecontractbymakingitimpossibleforthecorporationtomakegoodonitscommitment.Forthatreason,theBsshouldbepersonallyliableforinterferingwiththatcontract.

• Whilecompanydirectorsarereferredtoasagents,thecoldfactisthattheyhavecontrolofthecompany.Therealityofthesituationisthatindividualscancarryoutintentionaltortiousactsthroughthemediumofapuppetcorporation.Thereforetheycan’tavoidliabilitybypointingtotheveiloftheirownspinning.

Ratio• Directingmindsareagentsofthecorporation.Agentswhoactforcorporationsshouldnot

beallowedtousecorporatepersonalityasashieldtoescapeliabilityforcausingcorporationstobreachcontracts.

Note

Humphrey|36

• Sometimes,however,itwillbeintheinterestofthecorporationtobreachcontractsforbusinessreasons.So,thereareexceptions–ifthedirector/officerisactinginthebestinterestofthecorporation,therewon’tbeliability.Seenextcase,McFadden.

McFaddenv.481782OntarioLtd.(1984,ONtrialcourt)Facts

• Principalsinducedbreachofcontractbyfraudulentlyconveyingmoneytothemselvesasshareholders.

• NandMTaylorweresoleshareholdersofcompanycalledPAMC.Theywerealsodirectorsandofficers.

• Plaintinffhere,employee,hiredbyanothercompanyPAMI.PAMIsoldbusinesstoPAMC.• TermsofemploymentcontractbetweenplaintiffandPAMIextendedbeyondthedateofthesaleof

thecompany.PlaintiffcontinuedtoworkthePAMC,theacquirer,underimpliedcontractonthesameterms.

• AyearlaterPAMIwantstobuyitsbusinessbackfromPAMC.Termoforiginalcontractwithemployeestillnotexpired.ButTaylors,actingatbehestofPAMI,fireemployeewithindaysofthesaleofthecompanybacktoPAMI.

• TaylorsthensiphonmoneyawayfromPAMCsothattheywouldn’thavemoneyinthetilltopayforthewrongfuldismissal

• EmployeesuesTaylorspersonallyintortforinducingPAMCtobreachitscontactwithhim/her.Reasoning

• ReiterationofthetestfromEinhorn.• Directororofficerisunderadutytoactwithaviewtothebestinterestofthecompany.Asa

result,thereisprotectionfortheseofficers/directorsifactingwithinthescopeoftheirduties.Inducementtobreachcontractisjustifiedwheretakenassuchaduty.

o StemsfromBritishcaseSaid&Buttwhichdealtwithsuchprotectionsforemployees–here,thisprotectionextendedtodirectorsandofficers.

• Thedefendantsinthiscasewerenotactinginthebestinterestofthecompany–wereactingstrictlyintheirownself-interest.Thepaymentsweremadespecificallytodefeattheplaintiff’sclaim.

• Taylorsarefoundliablepersonallyasagentsofcorporation.Actingintheirownself-interest,“onafrolicoftheirown”;corporationnotliable.

• Thedefenceof“actingwithinthescopeoftheirduties”doesnotapplyherebecausetheywereactingintheirownself-interest.

369413AlbertaLtd.v.Pocklington(2000,ABCA)

• GainersLtd.wasameatpackingcompanycontrolledbyP–soledirectorandshareholder.• WhenGainersgotintotrouble,itgotabailoutfromtheABgovernment.ABagreedtogivean

extensionforGainerstopayback$5millionowing.• ThedaybeforeABwasgoingtotakeactiononthedebtitwasowed(becauseGainersdefaultedon

theirloan)ownershipofveryvaluablelandheldbyGainerswastransferredtoanothercompanyheowned(soldfornominalconsiderationof$100).

• TheABgovernmentsuedGainersandP.Reasoning

• Newtestforinducingbreachofcontract–hasbeenmoderatelyinfluentialinCanadianlaw.o It’saseven-parttest.o It’sframedintermsofatortofinducingabreachofcontract.Seemsnarrowerthan

“knowinginterference”understanding,butnotclearifthat’swhattheABCAmeanttodo.• Courtalsocommentsontheintentrequirement.

Humphrey|37

o Wilfulordeliberateconductisnotrequired–itdoesn’thavetohavebeenyourprimarypurposeinacting(tocauseorinduceabreach).Intentcanbeinferredwherebreachofcontractwouldbeaforeseeableresultofyourbehaviour.

o Alsosaidthatintentmayalsobeestablishedincasesofwilfulblindness.o Toavoidanaccusationofwilfulblindnessadirector/officerneedstoseeklegaladviceon

theproprietyofwhattheywanttodobeforetheydoit(ifthey’reunsureiftheyareallowed/able).

• Courtalsocommentsondefenceofjustification.o Explainswhyit’simportantinacorporatecontext–extendedfromemployeesto

directors/officers.o It’sallgoodtocausebeachwhenactingunderadutyimposedbylaw.Whentheinterestof

thecompanyarebestservedbybreakingcontractualagreementstheinducementtobreachisjustified.

o àDoesn’texistherebecausehewasn’tactinginthebestinterestofthecompany.• TherewasevidencethatPdeliberatelysoughttoinducebreachofcontractbetweenGainers,

whichheheld,andtheABgovernment.• Pdidn’tmakeanyeffortstoinquirewhetherwhathewasgoingtodo(transferofassets)waslegal.

Didn’tseeklegaladvice.Knewitwasn’ttherightthingtodo.• Whereacorporationlikethisisonthebrinkofinsolvency,anyactbyadirectorthatwould

diminishtheassetsonhandtopaycreditors,thenthatisnotinthebestinterestofthecorporationbecauseatthispointit’saboutthebestinterestsofthecreditors–there’snohopeforshareholdersatthisstageinthegame.

o àSupremeCourthassincerejectedthispremise.• PfoundguiltyofinducingGainerstobreachitscontractwiththeABgovernment.Didn’twantAB

tobeabletorecoverasacreditor–wantedinsteadtheassetstobeavailabletohimassoleshareholder.

Notes• BecauseSaid&Buttrulere:defenceofjustificationextendedfromemployeestodirectors/officers,

directorsandofficersareprettywellprotectednowiftheyareactingwellandmakinggoodstrategicdecisionsaboutwhethertorespectcorporation’sobligations.

ADGASystemsInternationalInc.v.ValtomLtd.(1999,ONCA)Facts

• ADGAandVwerecompetingforacontractwithCorrectionalServicesCanada.Vdidn’tactuallyhavetheemployeesrequiredtocompletethejobsothesoledirectorandtwosenioremployeespersuadedtheemployeesofADGAtocometoV.

• ActionagainstthesoledirectorandtwosenioremployeesofVinpersonalcapacityforinducingbreachofcontractandbreachoffiduciaryduty(betweenADGAemployeesandtheiremployer).

• Vsaidthisactionwasinthebestinterestoftheircompany–defenceofjustification.Issue

• ArethesepeoplepersonallyliableassumingtheactionsweretakeninthebestinterestsofV?Aretheyabletoraisethedefenceofjustification?

Reasoning• Courtheldthatyes,therewasatriableissuehere.• Courtexplainedpolicyreasonsfordefenceofjustification,explainedwhydirectorsandofficers

shouldbeabletoseekprotectionbehindthisjustification.• Thiscase,however,isdifferent.Therearedifferentpolicyconsiderationsraised.

o Wouldbecontrarytopublicpolicytoallowdefenceofjustification.Shouldn’tbeinterpretedsobroadlyastoprotectofficers/directorsfromallliabilitywhencommittingcivilwrongs.

Humphrey|38

• Tryingtodrawboundariesaroundjustificationdefence.o Distinguishesbetweendifferentcategoriesofcreditors.

§ Lineisdrawnbetweenvoluntaryandinvoluntarycreditorsbasedonwhatwecanassumeaboutthetermsonwhichtheyengagedinarelationship.

§ Voluntarycreditor–assumptionthattheyareonnoticethattheyaredealingwithacorporateentityandhaverecoveryonlyagainstacorporation.So,limitedliabilityisproperlyassertedagainstavoluntarycreditor.Wanttopreventvoluntarycreditorsfromtryingtogetmorethantheybargainedforbytryingtoholddirectingmindsliable.

§ Involuntarycreditors–theyareinnocentvictims,didn’thaveknowledgeofexistenceofcorporation,didn’tconsenttobethesubjectofatort.Interestinthereforeinrecoveringfromthespecificindividualswhocommittedthetortandwrongedthem.

• àTherefore,wouldbewrongtoallowdirectingmindstoprotectthemselvesbehindthejustificationdefencewhendealingwithinvoluntarycreditors.

• Here,wehadindividualsactingonbehalfofV.ThoughtitwasbestforVtomeddlewithcompetitor’scontractualrelationshipswithitsemployees.

o ADGAcoulddonothingtoprotectitselffromthis,hadnotconsentedtothisbehaviouroranyrelationshipwithVortheindividualsinquestion.

o So,ADGAisinthepositionofaninvoluntarycreditor–sufferedalossandfoundthattheyshouldbeabletosueandrecoveragainsttheindividualswhowrongedthem,irrespectiveofthefactthattheindividualsbelievedtheywereactinginthebestinterestsoftheircompany,V.

October5,2016

• Continuingtothinkaboutwhendirectingmindscanbepersonallyliableforactsofthecorporationdespitetheprinciplesofcorporatepersonality.

• (1)Knowingassistanceinabreachoftrusto Whenmayacorporationbedeemedliableasanaccessorytoabreachoftrust?o Whenmayadirectingmindinsteadofinadditionbefoundliableasanaccessorytobreach

oftrust?• (2)Thincapitalization

o Important,unresolvedsetofcases–raisedifficultpolicy/moralquestions.o Thincapitalization=corporationshaveinsufficientassetsonhandtomeet

existing/reasonableforeseeableobligations.o Whenthecorporationisinsolvent,shouldthedirectingmindsbeheldpersonallyliablefor

nothavingsufficientcapitalonhandtopaytheexpensesitisreasonabletoexpecttoincur?

KnowingAssistanceinaBreachofTrust

• Today’scasesdealwillsecondary,accessoryliability.Whenathirdparty(otherthantrustee/fiduciary)isallegedtobeliablefortheirinvolvement/participationinthebreachoftrust.

• Whenatrustisbreached,twokindsofaccessoryliabilitycanarise–liabilityofso-calledstrangerstothetrust.

o (1)Knowingreceiptoftrustproperty§ Ifathirdpartyacquirestrustpropertyfromthetrusteeinconnectionwitha

breachoftrust,thepropertymustbereturnedunlessthethirdpartywasabonafidepurchaserforvalueandhadnoknowledgeoftheplaintiff’sequitablerights.

Humphrey|39

• Evenifthirdpartydoesn’tholdpropertyanymore,stillliabletothebeneficiary(for$$equivalent)ifitknewthatthepropertywastransferredinbreachoftrust.

o (2)Knowingassistanceinafraudulentordishonestbreachoftrust§ Whatwewillbedealingwithtoday.§ Doesn’tdependonacquisitionofanypropertybythethirdparty.Anactiverole

playedbythethirdpartyinthebreachoftrust–implicatedinsomeway,consideredinequitytobewrongful.

§ Thirdpartyliabilitycannotariseunless:• (a)thetrustee’sbreachwasfraudulentordishonest;and• (b)thethirdpartywhoseliabilityisinissuemusthavehadknowledgeof

thetrustee’sdishonestscheme.§ àThus,thestateofmindoftwodifferentpeopleareatissue.

• Fewquestionstoaskwhenthinkingaboutsecondaryliabilityforknowingassistanceinabreach

oftrust:o Whatstatofmindistheaccessoryrequiredtohaveinordertobefoundliableforknowing

assistanceinthebreachoftrust?Whatisthefaultelement?o Howisfault/thestateofmindestablished?Howdoyouproveitinacasewherethe

corporationissaidtobetheaccessory?o Doesthestateofmindofthefiduciarymattertodeterminingaccessoryliability?Shouldit?

AirCanadav.M&LTravelLtd.(1993,SCC)Facts

• M&Lwasatravelagency.PeranagreementwithAC,M&LwastoholdtheproceedsfromticketsalesinatrustaccountforAC.

• Instead,M&Lfailedtosegregatethefundsandinsteadplacedthefundsinageneralaccount,whichtheypaidcompanyexpensesoutof.Duetofinancialdifficulties,creditoroftravelagencyseizedfundsingeneralaccount,whichincludedmoneyM&LowedtoAC.ACsueddirectorsinpersonalcapacitybecausecorporation’smoneywaspaidouttosatisfycreditorsofM&L.Allegebreachoftrust,directorswereaccessoriestoitallegedy.

Issue• DidM&LandAChaveatrustrelationship?Yes.• Ifyes,arethedirectorsoftheM&Lcorporationpersonallyliableforthecorporation’sbreachof

trust?Yes.Reasoning

• Thislookssimilartobasisforliabilitywesawlastclassre:breachofcontract.• Again,thisisnotaveilpiercingsituation–we’renotshiftingtheliability,we’resayingthatthereis

independenttortiousactionatplayonthepartoftheindividualsincontrolofthecorporation.• First,havetoestablishthattherewasatrust/fiduciaryrelationship.

o Foundfiduciaryrelationshiphere,expresstrustbetweenACandtravelagency.o Testappliedtodeterminewhethertherewasatrustwasthe“threecertaintiestest”:

§ Certaintyofintention• Mustbeclearthatpartiesintendedtoestablishatrust.

§ Certaintyofsubjectmatter• Propertythatwassetintrustmustbeascertainable–thatparticular

propertywassubjectoftrust.§ Certaintyofobject

• Beneficiariesofatrustmustbeascertainable–mustbeabletopointtowhostoodtobenefitfromtheestablishmentofthetrust.

Humphrey|40

• Second,youhavetoshowthattherewasabreachofthetrust.o Dutyofloyalty,dutytoaccount,dutytoprudentmanagement…o Courtfoundthatthedutyofloyaltyanddutytoaccountwereimplicated.o Loyalty–havetokeepself-interestoutofitbykeepingseparatetrustaccount.Thatwasn’t

donehere.Thatthenmeantthatthedefendantcouldn’trenderaproperaccount.• Third,thenneedtoprovetheknowingassistanceoftheaccessory.Borrowedatestfromthe

BritishCML.o TestfromBarnes&Abbeycase:

§ Personswhoassistwithknowledge(subjective)inadishonestandfraudulentdeseingonthepartoftrustees,willbeliableasthoughtheywerethemselvestrustee.

o Whatdegreeofknowledgeisrequiredbyaccessory?§ Actualknowledge,recklessness,wilfulblindnessthattherewasadishonestor

fraudulentbreach.§ Carelessnessisnotenough.

o Whatdoestheaccessoryactuallyneedtoknowabout?§ Needtoknowofexistenceoftrust,andneedtoknowthatconductinquestionis

possiblyabreachofduty/involvesbreachofduty.§ Manytimesdifficulttoshowthataccessoryknewaboutthetrust.§ If,however,trustwasestablishedbystatute,theneveryoneandanyoneisassumed

toknowoftheexistenceofthetrust.Thisisrare,becausemosttrustsareofaprivatenature.

o Shouldthenatureofthebreachberelevanttotheaccessory’sliability?§ Thisisimportantbecauseatrusteecaninnocentlyfindthemselvesinbreachofa

trust–conflictofduty,conflictofinterest.§ Thismattersalottothedegreeofliability–whetherthebreachwasinnocentor

not.§ Authoritiesbeforethecourtwassplitonthisissue.

• Englishcasessaiditdidmatter–shouldhavetobebadfaithbehaviourbythefiduciary.

• Therewereothercases,however,thatsaidthatthefocusshouldbeonthestateofmindoftheaccessory.Didtheyknowthisbehaviourwaslikelytobebreachoftrust?Particularlyrelevantifaccessoryisofgreatersophistication(e.g.lawyer)…

§ SCC–JacobbuciJresolvedinfavourofthetraditionalEnglishview.Thestateofmindofthefiduciaryismaterial,theunderlyingbreachmustbedishonest/fraudulentinnaturebeforetherecanbeliabilityimposedonanaccessory.

§ Howdowefigurethisout/proveit?Canbedifficulttoattributemotivestocorporatepersons.Forthisreason,thoughhewantedtoretainthetraditionalEnglishposition,needtodealwithabroaderdescriptionoffraud:

• “Thetakingofarisktotheprejudiceofanother’srights,whichriskisknowntobeonewhichthereisnorighttotake.”

• Aprimarybreachbyacorporatetrusteewillthereforebeconsideredtobefraudulentifthecorporationisknowinglytakingarisktothebeneficiary’sinterests.

§ So,therewillbenoaccessoryfaultwherethebreachoftrustbythetrusteewasinnocent.

• Here,everyoneknewthatmoneywastobeheldintrust;kneworshouldhaveknownthatmoneywouldbesubjecttoseizure,placedatrisk;byputtingmoneyingeneralaccount,theaccessoriescausedthecorporationtoknowinglytakeariskre:moneyowedtoAC.So,thereisfraudonthe

Humphrey|41

partofthecorporationbecausethroughthedirectingmindsthecorporationtookarisktothemoneyforAC.

• Intheirpersonalcapacity,theyknewaboutthetrust;knewthebehaviourwasabreach;weredirectlyimplicatedinthefraud.

Notes• DoyouthinkthatJacobbuciJ’swayofdealingwithdifficultiesofcorporationsandfraud(by

workingwithanexpandeddefinitionoffraud)waslegit?Isthisfraudtrulydefined?o Somehavesaidthatitseemsthatinacaselikethis,whatthetrusteesweredoingwasjust

careless…Weren’tbeingascarefulastheyshouldhavebeen.Notobviousthattheirbehaviourwasfraudulentinthetypicalway.

• Whataboutthesignificanceofthenatureofthebreach?o Englishlawhasmovedinadifferentdirection(RoyalBruneiAirlines)–it’sallaboutthe

stateofmindoftheaccessory,notaboutthetypeofbreachoftrust.Ifwe’refocusedonliabilityfortheaccessory,weshouldkeepfocusedonthestateofmindoftheaccessoryandnotworryaboutwhetherthebreachwasinnocentornot.

TransAmericaLifeInsuranceCo.ofCanadav.CanadaLifeAssuranceCo.(1996,ON)Facts

• ParentcorporationallegedtohavebeenaccessorytoitssubsidiarybreachingatrustwithT.• TmadeloansarrangedbyCLMS,manyofwhichfellintodefault.TallegesthatCLMSowedthema

dutytounderwritetheloans(duediligence,riskassessment,analysis)andthattheyfailedincarryingoutthatduty,whichresultedinlossestoT.

• ThecontractsenteredintobetweenTandCLMSdidnotspecifythatCLMSwouldoweTadutytounderwrite.

• CLMSisawhollyownedsubsidiaryofCLAS,andTallegesthatCLASisliableforthewrongsofCLMSbecauseCLASistheparentcorporation,eitherviaequity(veilpiercing)orasanaccessory.

• CLMShasitsownofficesandbankaccounts,andismanagedseparatelyfromCLAS.JudicialHistory

• Trialjudgemadeseveralfindingsoffact:o NoevidencethatCLASofficerswereinvolvedinanyway.RelationshipbetweenCLMSand

TwasneverdiscussedbyCLASboardofdirectors.Issue

• CanthecorporateveilbepiercedtoholdCLAS(thesoleshareholder)liablefortheactsofCLMS?No.

• CanCLASbeheldliableasanaccessorytoabreachoffiduciarydutybyCLMS?No.Reasoning

• Veilpiercingo Clearexpressionofjudicialscepticismonthepartofthejudge.Reaffirmsimportanceof

corporatepersonality.Veilwillnotbedisregardedwillynillyonthebasisofbroadprinciplesoffairness,justice,blahblahblah.

o Threecircumstanceswhereitmightbeokay(notafinitelist):§ (1)Wherecourtisrequiredtodisregardcorporatepersonalityduetotheexpress

provisionsofastatue(e.g.inIncomeTaxAct).§ (2)Caseswherethecourtisconcernedthatthecompanyinquestionisjusta

façade,puppet,orsham,setuptoenableindividualtoadvancetheirowninterestsandperpetrateafraudorsomethingdishonestuponcreditors.

§ (3)Situationswherethecompanyisanauthorizedagentofitscontrollers/members.Inthosecases,fromlogicofagency,thatcompanyshouldnotbetreatedasaseparateperson.Becauseit’sjustactingasanagentofanotherentity,theliabilitiescanbeattributedtotheprincipal.

Humphrey|42

o #3isatissuehere–whencanasubsidiarybeseenasmerelyanagentoftheparentcompany?

§ Thiswouldrarelybethecase–wouldrarelydisregarddistinctlegalpersonalityofparentandsubsidiarycompanies.

§ LaskininGregorius(sp??)case–subsidiarywillnotbefoundtobealteregounlessundercompletecontrolofparentcorporationandisnothingmorethanaconduitforittoavoidliability.

§ JusticeSharpinthiscaseinterpretsLaskin’swordsasmeaningthatcompletecontrolmustmeanthatparentcompanycompletelydominatesthesubsidiaryanditdoesnotoperateindependently.

§ Didnotfindthattherewasthiskindofrelationshiphere,thereforenogroundsforveilpiercing.

• Accessorytobreacho ReliesonAirCanada,noevidencehere.Wasthereevenatrusthere?Wasthereabreachof

trusthere?Lessofthefocusofthedecision…o Mainfocusisonbehaviourofallegedaccessory,theparentcompany.Noevidencethatit

wasinvolvedinanywayinwhatcouldbeconstruedasabreachoftrust.o Allweknowwasthattheparentcompanyownedthesubsidiary–thisisn’tenough.

Notes• WhatdoesthisaddtoAirCanada?Notmuch…it’sanextensionofthetesttoauniquerelationship

ofparentandsubsidiaryrelationship.• Also,noteworthytoseehowvehementlythecourtrejectstheveilpiercingargument.Creativity

canonlytakeyousofar.

TheProblemofThinCapitalization

• Somecountrieshavesubstantialminimumcapitalizationrequirementsforsettingupnewcorporations.Requirespecificamountofcashorpropertyvaluedatthatamountbegiventothecorporationinexchangeforsharesasaconditionofthestatecreatingthenewcorporateentity.

• NosuchrequirementsinCanada–corporationcanbecreatedwithonesharebeingissuedforonedollar.Cancauseproblems,referredtoasthincapitalization.

• Thincapitalizationoccurswheneveracorporationisinitiallysetupwithanabnormallyhighdebttoequityratio.

o Usuallymeansthatmostcapitalthecorporationhastodealwithisborrowedratherthanbeinginvestedbyshareholders.Thisborrowedcapitalissecureddebt.

• Thispresentsapolicyproblembecausethesecorporationsareinapoorpositiontosatisfyunsecuredcreditors.

o Theseconcernsareheightenedwhenyourealizethatsomeofthesecreditorsareinvoluntary.

• Shouldundercapitalizationlenditselfasagroundfordisregardingthecorporateentityandpiercingthecorporateveil,holdingthedirectors/officerspersonallyliableforthecorporation’sdebts?

• Lookslikeanabuseofincorporation.Valuesthatunderliecorporatelawarebeingperverted.Walkovszkyv.Carlton(1966,NY)Facts

• WwasapedestrianseverelyinjuredbyacabownedbySeonCabCorpwhichwasbeingdrivennegligentlybyadriverM.

• Cisanindividualwhoisashareholderof10corporations,includingSeon.Eachofthosecorporationshasonly2cabsregisteredinitsname(virtuallynoassets).Eachcarryminimumliabilityinsurance($10,000).Intentwasclearlytolimitliabilityandrecoveryagainstthecompany.

Humphrey|43

• Allofthecorporationsareallegedtooperatetogetherasasingleentitywithregardstofinancing,repairs,employees,etc…Thisiswhattheplaintiffalleges.

• Wsuesall10corporationsandarguesthatstockholdersshouldbeheldpersonallyliableforhisinjuriessincethecorporatestructureservesasanunlawfulattempttodefraudmembersofthepublicwhomightbeinjuredinthecabs.

Issue• CanC,asashareholderofSeon,beheldpersonallyliablefortheinjuriessufferedbyW?No.

Reasoning• NocauseofactionherethatcouldbeassertedagainstC.• Majority

o Talksaboutveilpiercing:§ Sayscorporatepersonalityisaprivilegeandthatitshouldbedisregardedin

instancesoffraud,wheredirectingmindusescorporationtofurtherowninterestsratherthancorporation’sinterests.Lookskindagoodfortheplaintiff…Talkingaboutequityandfraud…

§ But,nobasisforveilpiercinghere.StatementofclaimrevealsnoallegationsthatCwasconducingbusinessonhisownpersonalaccount.

o Talksaboutthincapitalization.§ Evenintentionalthincapitalizationisnotenoughforpiercingthecorporate

veil.Can’tdoitmerelybecausetheassets/insurancecoverageareinsufficienttocovertheliabilitiesofthecorporation.

§ Saysit’suptothelegislature…puntsitoverforthemtodealwith.Shouldacttorequirehigherlevelsofinsurancecoveragefortaxisifthey’reconcernedwiththis.

• Dissent(Keating)o Talksaboutthincapitalization:

§ Saidwasintentionaltoavoiddealingwithissuesthatwereboundtohappenwhenoperatingalargetaxienterprise.

§ Givinglimitedliabilityseemstorewardabuseofcorporateform.o Thinksplaintiffshouldbeabletorecoverpersonallybecausecompanieswereintentionally

setuptoavoidliabilityforpreciselythiskindofthing.Notes

• Muchhasbeenmadeofthiscasebecausethecompaniesweresetupthiswayintentionally.Also,becausethecreditorinthiscasewasinvoluntary.Thevictimherewasnotwantingtogetinvolvedwiththecompany,didn’twanttoacceptlimitedliability.

HenryBrowne&SonsLtd.v.SmithFacts

• Voluntarycreditorseekingrecoveryagainstsoledirectorofsmallcorporationonbasisthatcorporationwaspuppetofdirectorandveilshouldbepiercedinthecreditor’sfavour.

• Corporationwasnotadequatelycapitalized.Twoshareholdersandonlyputin2GBP.Reasoning

• Courtwasnotsympathetic,particularlyascreditorwasvoluntary.Hadbeenplacedonnoticethattheyweredealingwithacorporation.It’sonthevoluntarycreditortodotheirduediligencetoseeifcorporationisabletomakegoodonthedebt.Totheextentthatthey’reworried,theyneedtosecureadditionalprotectionsornotlend,etc…

CorporatePurpose(1)Whatisthepurposeofthecorporations?Whoseinterestsmatterforthepurposesofcorporatelaw?

Humphrey|44

• Seemstobetofacilitatebusinessandearnprofitsduetocorporationsbeingvehiclesforinvestmentthatinsulateinvestorsfromliability.

• Whatremainscontentious,however,aretheprocessesbywhichcorporationsseekoutprofits,forwhosebenefitthoseprofitsaresought,andtowhomcorporationsmaybefoundliable.

o Whoshouldbenefitfromcorporateendeavours?• Thequestionofthepurposeofthecorporatepurposearisesinthecontextofconflict.

o Internal–betweenoramongstconstituentso External–betweenthecorporation(asdirectedintheinterestsofshareholders)and

outsider• Shareholderprimacy/shareholdermaximization(Berle–Columbia)

o Shareholdersasthebeneficiariesofcorporations.o Corporatepurposeisequatedwiththeinterestsofshareholders.o Whendeterminingshareholderinterests,lookatshareholdersasagroup,asanaggregate

class(notindividualshareholders).o Interestsofshareholdersasagroupareseekingthegreatestpossiblereturnontheir

investmentthroughincreasedsharevalueandthroughdividendpayments.o Becauseweknowwhereshareholderinterestslie,wehaveaclearandstrongdecision

makingnormthatcomesoutofthisapproachformanagers–wheneveramanageristorn,facingcompetingdemands,themanagermustactasisbestfortheshareholders,dowhatwouldbemostprofitableforshareholders.

o Someobjecttothisbecausethisapproachwillleadmanagerstoignoretheinterestsofallkindsofothergroupsofpeoplewhoseinterestsarealsoatstake(e.g.membersofpublic,etc…)

o Managersarenotallowedtosacrificeprofitsforotherpurposes.• Broaderconstituency(Dodd–Harvard)

o Muchlargerconstituency,includesshareholders,corporateemployees,broadersocialgoals,corporatesocialresponsibility.

o Corporatemanagers“areguardiansofalltheinterestswhichthecorporationaffectsandnotmerelyservantsofitsabsenteeowners.”(--Dodd)

o It’saboutbalancing–rejectnotionthatthere’sacleardecision-makingnormtobeappliedinanysituationofconflict.

o Corporateinterestsareinherentlyindeterminate–itsupforcorporatedirectorstodeterminetheinterestsonacasebycasebasisbybalancingtheinterestsofvariousstakeholdergroupsandcomingupwiththeirownindependentjudgmentaboutwhatwouldbebestforthecompany.

o Whiledirectorsshouldhaveshort-termprofitsintheirmind,thereisnolegalobligationformanagementtomaximizeshort(orlong)termprofits.

o PolicymakersinmostcountriesapartfromtheUStendtofavourthisapproach.• àThisdivisiontendstomimicthedivisionbetweencontractariansandanti-contractarians…

(2)Whatisthecorporation?

• Howshouldthecorporationbeconceptualized?• Isacorporationproperlyunderstoodasonekindofprivateinstitutionthatismoreorlesslike

othersocialorlegalinstitutions?• Or,isitinsteadtobeunderstoodasaproductofprivateordering?Somethingthatdrawson

privatelawconcepts?• Twodominanttheoriestoconsider…

Contractarianvs.Anti-ContractarianTheoriesoftheCorporation

• Contractariantheory

Humphrey|45

o Corporateformasnexusofcontractsbetweeninterestedactors(directors,officers,managers,shareholders,creditors,employees).

o Thereiscontracteverywhere,therewouldbenocorporationiftherewerenocontracts.Whenacorporationisupandrunning,itisdoingeverythingitisdoingviacontract.

o Corporationcomesintoexistenceandachievesviabilitythroughcontract.So,onlyrealistic,inconcreteterms,toseeacorporationasthenexusofcontracts.Theyarethemostimportantlegalrelationships.

o Asaresultofthisperspectiveoncorporations,weshouldthereforeseecorporationsastheproductofprivateordering,privatechoice.Privatelawisprimaryinthinkingaboutwhatacorporationis.

o Shareholdersregardedashavingprimacyamongthecorporatestakeholders.Viewofshareholdersasownersofthefirm.

• Entitytheory(anti-contractarian)o Corporatenotjustaproductofprivatelawbutpubliclawtoo.o Concessiontheory–statehasmadeconcessiontoallowforcorporationstoincorporate.o Corporationscouldn’tdoanyoftheirdoingwithoutthestate–theyaredependentonthe

statemakingthecorporationavailablewiththosefeatures.o Corporateformasmeanstoensuredirectors’andofficers’fidelitytocorporations’

interests.Theseinterestsincludethoseofvariousstakeholders,notjustshareholders.o Rejectshareholderprimacynorm,particularlyshareholdercharacterizationasownersof

thefirm.

• Judgeshaveshownlittleinterestsinthetheoreticaldebate.• Theydo,however,sayalotaboutcorporatepurpose…

Dodgev.FordMotorCo.(1919,USA)àConsideredasprofoundillustrationofcontractariananalysisandshareholderprimacyFacts

• Fordaccumulatedacapitalsurplusof$112million.HenryFord(majorityshareholderandchairofboardofdirectors)wantedtoendspecialdividendsforshareholdersinfavourofmassivere-investmentsthatwouldenableFordtodramaticallyincreaseproductionandnumberofemployees,aswellascutcostsandpricesofcars(sociallymindedobjective).Fordmadeitclearthatthisdecisionwasnotbeingmadeintheinterestofshareholderreturn–shareholdershadhadmorethantheirfairshare.

• Wantedtocreatemorejobs,payhigherwages,makecarsofhigherqualityathighercosttoFordandthenmakingtheseimprovedcarsavailabletothepublicatalowercost.Wantstoexpandbenefitsofindustrialsystemtoasmanyaspossible.

• Hebelievedthiswouldprovidelong-termbenefittoFord,butminorityshareholders(andplaintiffs),theDodgebrothers,claimedFordhadadutytodistributeaccumulatedprofitstoshareholdersandthatitspurposewasnottopursuecharitableends.

• Dodgebrothersseekcourtordertorestorespecialdividendpayments.Issue

• DoesFordhaveadutytodistributeaccumulatedprofitstoshareholders?Yes.Reasoning

• Corporatepurposeo Whenacorporationmakesalotof$,theyaretodeclarelargerdividends.Arefusaltopay

anydividendsisanarbitraryrefusaltodohatshouldbedone–thisisnotanexerciseindiscretionofthedirectors.

§ Thecorporatepurposetherebylimitsthedirectionalauthorityofdirectors.Thecorporatepurposeistocreateprofitforshareholdersanddirectorsonlyhavediscretionre:themeansofattainingthispurpose.

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• Charitablepurposeo Fordadmittedoneofreasonshedidn’twanttodistributedividendswasbecausehe

wantedtosharetheprofitswiththepublicbymakingcarslessexpensive.Wouldhaveimmediateeffectofdiminishingvalueofsharesandreturnstoshareholders.

§ Arguesthatcorporationscanengageinhumanitarianworksthatareincidentaltothemainbusinessofacorporation.

o Courtfoundthatabusinesscouldonlyengageincharitableactivitiesiftherewasabusinessrationaleforit.

o Courtfindsthatthisisnotthecasebecause“abusinesscorporationisorganizedandcarriedonprimarilyfortheprofitofthestockholders…thisdoesnotextendto…areductionofprofitsortothenon-distributionofprofitsamongstockholdersinordertodevotethemtootherpurposes.”

o “Itisnotwithinthelawfulpowersofaboardofdirectorstoshapeandconducttheaffairsofacorporationforthemerelyincidentalbenefitofshareholdersandfortheprimarypurposeofbenefittingothers.”

§ Directorsmaynotchangethepurposeofthecorporation.Ratio

• Thepurposeoffor-profitcorporationsistomaximizeprofitforshareholdersandcourtsmayinterferewithbusinessdecisionswhereprofitmaximizationisnottheprimarymotivationofdirectors.

• “Abusinesscorporationisorganizedandcarriedonprimarilyfortheprofitofthestockholders.Thepowersofthedirectorsaretobeemployedforthatend.Thediscretionofthedirectorsistobeexercisedinthechoiceofmeanstoattainthatendanddoesnotextendtoachangeintheenditself,tothereductionofprofitsorthenon-distributionofprofitsamongstockholdersinordertodevotethemtootherpurposes.”

• Abusinesscanonlyengageincharitableactivitiesifthereisabusinessrationaleforit.Notes

• ThiscasewasdecidedonthebasisthatFord’smotivationswereashesaidtheywere.ButitturnsoutthathewasmostlikelymotivatedbyreducingshareholderprofitssothattheDodgebrothers,asshareholders,wouldreceivelessmoney,whichtheywerebankingontofundtheirstartupautomobilecompany.Theyallthesame…

• Whiletheydidorderthespecialdividendpayments,thecourtdoesnotactuallyinterferewithFord’sinfrastructureimprovementplans,largelyduetothebusinessjudgmentrule.

o BynotrequiringFordtocompletelyabandonitsplan,eventhoughitdidnotservethegoalofprofitmaximizationforshareholders,thecourtdiddefer,atleastinpart,tothebusinessjudgmentexercisedbyFord’sboard.

o Courtswilldefertothebusinessjudgmentrule.Theyarenotexpertsinbusinessdecisions.• Whilethiscaseisseenasanexampleofshareholderprimacy,itdoesn’tentirelydiscounttheneed

forlong-termplanninginorderforacompanytoprosper.o Whenengaginginsuchplanning,benefitsmaybeconferreduponnon-shareholders.It’s

okayforshort-termprofitmaximizationtobesubordinatedtolongerrangeideasthatdiminishimmediateshareholderbenefitssolongasthelong-termideascanbeshowntoultimatelybenefitshareholders.

àShareholderprimacyisconsistentwithwhatweknowandwhatwewouldexpectaboutshareholdermotivation.àGivesusaclearruleincorporatedecision-making.Claritymakesiteasiertoholdcorporatedirectorstoaccount.àRuleis,however,inflexible–doesn’tgiveofficersordirectorsmuchdiscretion.Failstoaccountforbroadersocial/economicrealitiesthatcorporationsworkin.àThisapproachtomanagementinvolvesexcessiverisktakingandsocialcostsarethereforehigher.

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Shlenskyv.Wrigley(1968,USA)àDictumofDodgecaseinfavourofshareholderprimacynotbeenuniversallyaccepted–thiscaseisclearexampleofanti-DodgesentimentandemphasizescommunitarianinterestsFacts

• SisminorityshareholderinChicagoNationalLeagueBallClub.Wispresidentofcorporationandowns80%ofshares.

• SseekingdamagesandanorderforcingclubtoinstalllightssonightgamescanbeplayedbecausetheCubssustainedlossesfor4yearswhichSattributestolowattendanceatgames.

• Sallegesthatwithoutlightsandnightnames,Cubswillcontinuetosustainlosses.• Whasrefusedtoinstalllightsbecausehebelieves“baseballisadaytimesport”andworriesabout

theneighbourhood.Sallegesthatthecorporationisthereforeactingforreasonscontraryandwhollyunrelatedtothebusinessinterestsofthecorporation.

Issue• CanaminorityshareholderforcethemajorityshareholdertoputlightsonWrigleyFieldto

increaseprofitsoftheclub?(Canacourtintervenewiththebusinessjudgmentofdirectorsevenifthereisnofraud,illegality,orconflictofinterest?)No,courtnotwillingtointerfere.

Reasoning• CourtnotsatisfiedthatW’smotivesarecontrarytothebestinterestsofthecorporation.The

decisiontoinstallornotinstalllightsisonethatisproperlybeforethedirectorsandthemotivesallegedinthecomplaintshownofraud,illegality,orconflictofinterestintheirmakingofthatdecision.Thereisnolegalbasistointerfere.

• Theeffectonthesurroundingneighbourhoodandonfutureticketsalesisalegitimateconcernofthedirectors.

• Also,noevidencethatnightgameswouldimprovecorporation’spositionandtherewereotherfactorsaffectingtheclub’searnings/losses.

Ratio• Theremustbefraud,illegality,orabreachofgoodfaithwhichdirectorsareboundtoexercise

towardshareholdersinordertojustifyacourtinterveningintheinternalaffairsofcorporations.Courtswilldefertothebusinessjudgmentrule.

• Judgesarenotbusinessexpertsandwilldefertomanagerialdecisions.Presumptionofgoodfaith.Notes

• Thiscaseisanearlyexampleofthebusinessjudgmentrule.UnderUSlaw,startingwiththisdecision,thecourtsshowextremedeferencetoboardofdirectorsre:decisionsthatcourtsproperlyfeelarebusinessdecisions,matterofjudgment.Thisisonthebasisthatitwouldbeillegitimateforthecourtstoreviewthesedecisionswhicharewithinthepurviewoftheboard,andthatcourtslacktheexpertisetoweighinonthis.

• WhataboutDodge?Doesn’tthislooklikethis?PersonalviewsofWinfluencingboarddecisions?o Courtrefusedtoseethesecasesassimilar.Dodge,purposeswereclearlycharitable,

decisionwastotallycountertolegaldutyofcorporationtoreturnprofits.o Here,therewasadifferenceofopinionre:businessmodel.

PeoplesDepartmentStoresInc.(TrusteeOf)v.Wise(2004,SCC)àSCCmakespertinentcommentsonbusinessjudgmentruleandtheassociateddutiesofdirectorsinCanadaFacts

• WandPsupposedtoengageinamergertobringaboutbenefits–buttheWisebrothersfailedspectacularly.

Humphrey|48

• WacquiredsharesofP,whichthenbecameawholly-ownedsubsidiaryofW.WandPamalgamatedtheiroperations,whichwasintendedtoprovidetaxbenefits,butthisconsolidationledtomoreproblemsandeventuallybankruptcyofbothcompanies.

• TrusteeclaimsthatWisebrotherswerefavouringtheinterestsofWovertheinterestsofPtothedetrimentofP’screditorsinthebankruptcyproceedings.

• Trusteebroughtclaimsforbreachofdutyofcare,dutyofloyalty,oppressionofinterestsofcreditors.Here,focusonportionofreasonsdealingwithcorporatepurpose.

Issue• Whoseinterestsshouldbeconsideredwhenconsideringthebestinterestsofthecorporation?

Stakeholders(notjustshareholders)!Reasoning

• Courtacceptsasaccuratestatementoflawthatitmaybelegitimatefortheboardtoconsidertheinterestsofshareholders,employees,suppliers,creditors,consumers,governments,andtheenvironment–i.e.allstakeholders!

• EmergenceofdistinctlyCanadianapproachtoquestionofcorporatepurpose.• Managersanddirectorshaveobligationnottoshareholdersbuttothecorporation.• Courtrejectsshareholderprimacyoutofhand–itisclearthatthephrase“bestinterestsofthe

corporation”shouldnotbereadas“bestinterestsoftheshareholders”.o Itshouldbeaboutthemaximizationofthevalueofthecorporation,butvariousother

factorsshouldberelevantinmakingdecisionswithaviewtothebestinterestsofthecorporation.

• Directorsaretheonestomakecorporateinterestsdeterminateonanongoingbasisbybalancingtheinterestsofvariousgroups.

o Suchdecisionsarereviewablebycourts.Ratio

• Thereisnofiduciarydutyowedbydirectorstocreditorswhenacorporationisinthe“vicinityofinsolvency”–thedutiesofdirectorswillalwaysstaythesame.Directorsandofficersjusthavetodotheirbestforthecompany,balancingcompetinginterestsatalltimes,nomatterthecircumstances.

• Shareholdersdonothaveprimacy.DirectorsmakecorporateinterestsdeterminateBCEInc.v.1976Debentureholders(2008,SCC)àClarificationandamplificationofprinciplesexpressedinPeoplesFacts

• Bell(subsidiaryofBCE)wastoassume$30billionindebtaspartofabuyoutdeal.Somedebentureholdersobjectedtotheplan,arguingitwouldsignificantlydecreasethevalueoftheirbondsandlowerthegradeoftheirinvestment.

• Soughtanoppressionremedyandarguedplanwasnotfairandreasonablebecauseofitseffectsontheirinterests.

Issue• Didtheboardactproperlyre:debentureholders’interests?Yes.

Reasoning• Directorsmustlooktothelong-terminterestsofthecorporation.• AsperPeoples,whiledirectorsmustconsiderthebestinterestsofthecorporation,theymayalso

considertheimpactoftheirdecisionsonshareholdersorparticularstakeholders.o However,iftheseconflict,theinterestsofthecorporationcomefirst.

• Whenconsideringtheseancillaryinterests,courtsshoulddefertothedirectors’decisionsunderthebusinessjudgmentrule,providedthedecisionfalls“withintherangeofreasonablechoicestheycouldhavemadeinweighingconflictinginterests.”

Humphrey|49

• “Thedutyofthedirectorscannotbeconfinedtoparticularpriorityrules,butisratherafunctionofbusinessjudgmentofwhatisinthebestinterestsofthecorporationintheparticularsituationitfaces.”

• Here,thebestinterestsofthecompanywerearguablyservedbyacceptingthedeal.Itcertainlyfellwithinarangeofreasonableoptions,sothecourtwillnotintervene.

Ratio• Thebestinterestofthecorporationmustmotivatedirectors’decisions.Indeterminingthebest

interestsofthecorporation,thedirectorsmayweightheinterestsofcompetingstakeholders.• StakeholderbalancinghastheupperhandinCanada.

III. CORPORATELIABILITY

A)CORPORATELIABILITYINTORTANDCRIMINALLAWCriminalCode,ss.22.1&22.2CriminalCoderepresentative,inrespectofanorganization,meansadirector,partner,employee,member,agentorcontractoroftheorganization;(agent)seniorofficermeansarepresentativewhoplaysanimportantroleintheestablishmentofanorganization’spoliciesorisresponsibleformanaginganimportantaspectoftheorganization’sactivitiesand,inthecaseofabodycorporate,includesadirector,itschiefexecutiveofficeranditschieffinancialofficer;(cadresupérieur)Offencesofnegligence—organizations22.1Inrespectofanoffencethatrequirestheprosecutiontoprovenegligence,anorganizationisapartytotheoffenceif

(a)actingwithinthescopeoftheirauthorityo (i)oneofitsrepresentativesisapartytotheoffence,oro (ii)twoormoreofitsrepresentativesengageinconduct,whetherbyactoromission,such

that,ifithadbeentheconductofonlyonerepresentative,thatrepresentativewouldhavebeenapartytotheoffence;and

(b)theseniorofficerwhoisresponsiblefortheaspectoftheorganization’sactivitiesthatisrelevanttotheoffencedeparts—ortheseniorofficers,collectively,depart—markedlyfromthestandardofcarethat,inthecircumstances,couldreasonablybeexpectedtopreventarepresentativeoftheorganizationfrombeingapartytotheoffence.

Otheroffences—organizations22.2Inrespectofanoffencethatrequirestheprosecutiontoprovefault—otherthannegligence—anorganizationisapartytotheoffenceif,withtheintentatleastinparttobenefittheorganization,oneofitsseniorofficers

(a)actingwithinthescopeoftheirauthority,isapartytotheoffence;(b)havingthementalstaterequiredtobeapartytotheoffenceandactingwithinthescopeoftheirauthority,directstheworkofotherrepresentativesoftheorganizationsothattheydotheactormaketheomissionspecifiedintheoffence;or(c)knowingthatarepresentativeoftheorganizationisorisabouttobeapartytotheoffence,doesnottakeallreasonablemeasurestostopthemfrombeingapartytotheoffence.

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• Howdoescorporatepersonalityworkintermsofprinciplesofliabilityandaccountabilityinprivateandpubliclaw?

• Corporationisanartificiallegalperson–therefore,inertasanabstraction.Can’tdoanythingonitsownright.Noinherentlegalcapacity.

o Tobecomeanimatethroughthebehaviourofactualpeople(naturalpersons),whoarerepresentativesofthecorporation.

• Today,focusingontort/criminallawandnextclass,contractlaw.

Personalversuscorporateliabilityforcivilwrongs

• Corporateliabilityintort/criminallawturnsnotjustonactionsbutonintention.• Whenandhowisliabilityfixedonacorporationby/throughtheconductofitsrepresentatives?• Doesand/oroughtcorporateliabilityturnonthequestionofwhetherapurportedmemberofthe

organizationhadtheauthoritytoact?• Doesthelawgiveusacoherentbasistoascribeintenttocorporation?

o Wehavestruggleswithhowtoascribeintentiontoacorporation…theyarequitecomplex,notobvioushowtodothis.

Twotheoriesofcorporateliability

• TherearetwotheoriesofliabilityinCanadianlaw.Inotherjurisdictionstheytendtofavouroneortheother,butCanadaismoreofamélange.

• (1)Personalliabilitytheoryo Otherwisereferredtoaspersonificationdoctrine.o Thecorporationisunderstoodtoattractliabilitydirectlyasalegalpersonthroughthe

conductandmentalstate(s)ofitsdirectingminds(thosewhoare,intheeyesofthelaw,corporatebrains).

o ThisstemsfromtheBrits,whostillespouseandlovethisshit.o Howdoesitwork?Throughthecorporatebrain/directingmind,thecorporationattracts

liability.§ Contract–corporationpersonallybindsitselfwhensignedbyadirectingmind.§ Tort/criminallaw–corporationpersonallyattractsliabilitythrough

conduct/intentionofdirectingmind,whopersonifiesthecorporationinhis/herbehaviour.

• (2)Agencyliabilityo ThisisdominantintheUS.o Corporationisnotitselfaperson,sohavetounderstandliabilitythroughagency.o Corporationisprincipalandrepresentativesareagentsandsoliabilitywillalwaysbe

vicariousthroughagencylaw.o Corporationattractsliabilityindirectlybystandinginrelationshipwithagents,andthere

maybemanyagentsauthorizedtoactonbehalfofthecorporation.o Thinksitmakesnosensetothinkaboutacorporationasanactualperson.o Corporationwillbeliablevicariouslyforactsofagents.

Crimeandtort:establishingintent

• Tortsituations–thinkthatvicariousliabilityisenoughtoestablishcorporateliability.o But,thereareafewtortswhereamentalelementisneeded.

§ e.g.Tortofdisparagementofacompetitor’sgoods• Requiresfalsestatementsthatreflectmalice.

§ e.g.Tortofdefamation

Humphrey|51

• Defencetodefamationrequiresthattortfeasorhonestlybelievedthestatementsaidtobedefamatoryandthattherenotbeanymalice.

o Thesemakethecourtsgetinvolvedinthestateofmindoftheaccused.• Criminalsituations–agencyliabilityisanuncomfortablefit.Needtolookforbasistoestablish

personalliabilityforthecorporation.o WedothatinCanadaandEnglishlaw,throughthepersonificationdoctrine.

§ Identifythecorporatestateofmindbylocatingthecorporatebrain.o Raisesalotofquestions:

§ Whosemindpersonifiesthecorporation?Whohasthecorporatebrain?§ Onwhatbasisispersonificationestablished?Howdowedistinguishbetween

corporatebrainsandnon-corporatebrains?§ Isthecorporateconstitutionrelevant?Doesittelluswhoisadirecting

mind/corporatebrain?The“Rhone”v.The“PeterA.B.Widener”Facts

• DefendantcorporationownedashipcalledThePeterA.B.Widener–itcausedashippingaccident.• Atthetimeoftheaccidentitwasunderthecommandofthecaptain,whoworkedforthe

corporationthatownedtheship.• CorporationwantedtolimititsliabilityundertheCanadaShippingAct,whichhadaprovision

allowingashipownertolimitthetortliabilitythatwouldnormallyattachtoitundervicariousliability.Provisiononlyappliesifthedamagewascausedwithouttheactualfaultoftheowneroftheship.Soiftheowneroftheshipwasatactualfaultthenitbearsunlimitedliability.

Issue• Canfaultbeattributedtothedefendantcorporationthroughthecaptain’sconduct?No.

Reasoning• Theonusisontheshipownertoestablishacompleteabsenceoffaultinordertobenefitfromthe

protectionofthelimitedliabilityprovision.• Thequestionisatwhatpointinthehierarchyofacompanyisthefaultofapersonemployedin

theorganizationtobetreatedasthefaultofthecompanyitself.• CanadianDredge&Dock

o Foracorporationtobeheldliable,theemployeewhophysicallycommittedtheoffencemustbethe“directingmind”ofthecorporation.

o Therecanbe,however,morethanonedirectingmind–thisisparticularlytrueinCanadawherecorporateoperationsarefrequentlywidespreadingeographicterms.

o Courtsmustthereforeconsiderwhohasbeenleftwiththedecision-makingpower(notmerelycarryingoutcompanypolicy)intherelevantsphereofcorporateactivity.

• Here,thecaptainwaspartofthemanagementanda“troubleshooter”forthecorporation,butwehavetolookbeyondtheselabelsandconsidertheresponsibilitiesandfunctionsheperformedinthecorporatehierarchy.

• Keyfactorthatdistinguishesdirectingmindsfromnormalemployeesisthecapacitytoexercisedecision-makingauthorityonmattersofcorporatepolicy,ratherthanmerelygiveeffecttosuchpolicyonanoperationalbasis.

o Cometoseethatwhilehehaddecision-makingauthorityre:navigationalmatters,hedidnothavegoverningauthorityovermanagementandoperationofthecorporation.

• Therefore,nofaultonthepartofthecorporation,protectedbylimitedliabilityclause.Ratio

• Thetestfordirectingminds:thecourtwillnotlookatformalhierarchybutatsubstance,askingwhatdiscretiontheindividualwasgivenandwhatdecisionstheywereallowedtomake.

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• Keyfactorthatdistinguishesdirectingmindsfromnormalemployeesisthecapacitytoexercisedecision-makingauthorityonmattersofcorporatepolicy,ratherthanmerelygiveeffecttosuchpolicyonanoperationalbasis.

Notes• Iacobuccifindspersonificationtoorigid/formalistic–unrealisticviewofhowdecisionmaking

workswithinhierarchiesincorporations.Wouldyieldsituationswherewewouldn’tconsidersomeone

o Needasubstantiveapproach,emphasisesubstanceoverform.o Whatmattersforpurposeofpersonificationisnottheofficeheld,butthefunction

performed–nottheirstatus,butwhattheydoasanagentofthecorporation.§ Managerwillnotbeheldtobeadirectingmindwheretheyhaveafancytitlebut

littlediscretion.§ Non-manager,whooccupieslowerposition,maybeadirectingmindwherethey

havemanagerialauthority/discretion.o Chooseanuancedapproach,nottheartificialviewformLordDenning.

• It’saboutdeterminingwhetherthediscretionconferredonanemployeeisadelegationofgoverningauthoritytodesigncorporatepolicyratherthanjustcarryitout.

• ThisisbroaderthantheBritishapproach.• But,stillcriticized…

o Stilltoorestrictivebecausewillbehardtolinkcorporationtobehavioursofseniorexecutivestoinjuriessufferedbyindividuals.Isthisfair?Thatsomeoneshouldn’tbeabletorecoverbecauseit’shardtomakethelinks?

o Concernwiththemethodologyofthepersonificationdoctrine–weshouldbelookingatwhatindividualswithinthecompanyhavedone.

§ Thinkthatthisisaconstrainedwayofthinkingaboutcorporatedecisionmaking.Weshouldtakeamoreorganicperspective,andlookforgenuinecollectivebasisforfault,notjustoneperson.Lookatindiciaoforganizationalculture,organizationalpriorities,implicitnormswithintheorganization,whethertherewassomethingwronginthecompany.Notjustaboutactionsofoneperson.

Defencestocorporateliability

• Supposingthatadirectingmindhasbeenfoundresponsible–aretherecircumstanceswhereacorporationcanpointtoadefenceandavoidliability?

CanadianDredge&DockCo.v.TheQueen

• InCanadianDredge&Dock,theSCCacceptedtheuseofthe“directingmindandwill”test.o However,moreflexibleapproachthanUKcase,Tesco.o SCCsaidthatevenmorejuniorindividualscouldcountasdirectingmindandwillsolong

asthepersonhas“governingexecutiveauthority”,i.e.(asperRhone),“whohasbeenleftwiththedecision-makingpowerinarelevantsphereofcorporateactivity.”

• AnotherissueatplayinCanadianDredge&Dockwasthatthecorporationswereaccusedofbidrigging.

o Corporations’defencewasthattheemployeeswereactingfortheirownbenefitandcontrarytoinstructionsformthecorporationandthatitwouldthereforebewrongtoconvictthecorporations.

§ SCCrejectedtheideathattherecouldbeanydefenceonthebasisthattheconductinquestionwascarriedoutcontrarytoexpressinstructionsfromthecorporation.

o TheSCCaccepted,however,thattherecouldbeadefencethattherelevantindividualwasactingentirelyforhisownaccountandagainsttheinterestsofthecorporation.

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§ Limitedtosituationswherethecorporationwasnotintendedbytheindividualtoderiveanybenefitfromtheindividual’sactionsanddidnotactuallyderiveanybenefitfromtheindividual’sactions.

• Shouldcorporationsbesubjecttocriminalliability?Doesitmakesense?o Criticsfindholdingcorporationsliableinadditiontoindividualssillybecauseit’s

inconsistentwithtraditionalvaluesre:punishment.Won’tservethesevalues:§ Retribution–normallythinkrelationshipbetweenconviction/sanctiononone

handandwrongdoingonanother.But,acorporationdoesn’tdoanything.Doesn’tenablevictimstofeelliketheirinterestsinretributionhavebeensatisfied.

§ Importanceofdeterrence–deterrencesupposesthattheprospectofconviction/punishmentwouldhavebehaviouralconsequences,makeyoulesslikelytocommitcrime.Unclearfromempiricalstudieswhetherprospectofcriminalsanctionhasanyimpactoncorporatebehaviour.Why?Becausetheburdenofcriminalpunishment(usuallyafine)isbornenotbyindividualsbutbyanorganizationinatrickledownway.

§ Reducingrecidivism• Corporationsnotabletofeelanyemotions–noguilt,shame,regret,doesn’t

haveastablelong-termmemory.Strictliabilityoffences

• Personificationdoctrinetakesabitofatwist.• Tryingtodeterminecorporatebraindoesn’toccurwhentryingtodetermineliability.• Forstrictliabilityoffences,alltheCrownneedstoproveisactusreus–corporationwillbefound

liableunlessitcanshowduediligenceorreasonablecare.Rv.Fitzpatrick’sFuelLtd.Facts

• Corporationwaschargedwithsellingbeertoaminor.PeterFitzpatrickwassoleshareholder,director,officerofcorporation.

• Thereweretwoemployeeswhoworkedalternateshifts,aloneandunsupervised.OneofthemsoldbeertotheminoreventhoughPFhadputupsignsinstructingemployeesnottosellalcoholtominor.Arguedthathehaddoneallhecouldtopreventthisfromhappening,instructedemployeesnottoselltominors.

Issue• Shouldthecorporationbeheldliableforthewrongfulactionsoftheemployee?Yes.Due

diligencedefencedoesnotapplybecauseemployeeisconsideredadirectingmind.Reasoning

• TheoffenceisastrictliabilityoffenceundertheLiquorControlAct.Theonlydefenceisshowingreasonablecareorduediligencetoavoidthecommissionoftheoffence(don’thavetoprovemensrea).

o Differentfromabsoluteliability,wheredefenceofreasonablecare/duediligenceisnotpossible–automaticliability.

• Functionofemployeewastosellthingstocustomers.But,whentheownerwasnotpresent,itwasthegasattendantalonewhorepresentedthecorporationtothepublic.Theattendantwaspersonifyingthecompanyandthat’senoughtomaketheemployeeadirectingmindofthecompany.

• Basedonthis,theemployeewasadirectingmindandsoinfiguringoutwhetherduediligencewasestablishedwelooktotheactionsoftheemployee.And,nohedidnotengageinduediligence.

Notes• Acuriouscase…isitconsistentwithprecedent?No…precedentisnotappliedwell.

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• Nothinginprecedenttosuggestthatsomeonebeingthefaceofthecompanyortheonlypersonasthefaceofthecompanyisenoughtomakethemadirectingmind.ThetestisfromDredge&Dockandit’saboutthedecision-makingauthorityandcontroloftheperson.

• Also,itisrelevantwhethercorporationmadeinstructionstotheemployee–wouldbeappropriatetoconsiderwhetherPFhaddoneallhecouldtoensurehisemployeesbehavedappropriately.

• Millerthinksthiscaseisutterlybaffling.Statutoryreforms

• AmendmentstoCriminalCodein2004havealteredtreatmentofcorporatecriminalmind,particularlyinrelationtooffenceswherethemensreaelementisoneofrecklessnessorcriminalnegligence.

o OftendifficulttoprosecutethesekindsofoffencesunderCMLrulebecauseinalargeorganizationitmaybeimpossibletofindasingleindividualwhowasnegligentintherelevantway.Morelikelyitisonlytheorganizationasawholethatkneworoughttohaveknownoftherisk,anddidnotreacttoit.CMLruledoesn’tallowforaggregationofmultipleminds.

o Section22.1–criminalliabilityforcorporationsguiltyofoffencesrequiringnegligenceo Section22.2–criminalliabilityforcorporationsguiltyofoffencesrequiringfaultother

thannegligence• Doctoralstudentresearchdeterminedthat12yearssincethesereforms,therestillhasn’tbeena

corporationconvictedundertheseprovisions.Theyhavenothadtheimpacttheywerehopedto.Bigissueis$$requiredbyCrownprosecutorstogoaftertheseguys.

representative,inrespectofanorganization,meansadirector,partner,employee,member,agentorcontractoroftheorganization;(agent)seniorofficermeansarepresentativewhoplaysanimportantroleintheestablishmentofanorganization’spoliciesorisresponsibleformanaginganimportantaspectoftheorganization’sactivitiesand,inthecaseofabodycorporate,includesadirector,itschiefexecutiveofficeranditschieffinancialofficer;(cadresupérieur)Offencesofnegligence—organizations22.1Inrespectofanoffencethatrequirestheprosecutiontoprovenegligence,anorganizationisapartytotheoffenceif

• (a)actingwithinthescopeoftheirauthorityo (i)oneofitsrepresentativesisapartytotheoffence,oro (ii)twoormoreofitsrepresentativesengageinconduct,whetherbyactoromission,such

that,ifithadbeentheconductofonlyonerepresentative,thatrepresentativewouldhavebeenapartytotheoffence;and

• (b)theseniorofficerwhoisresponsiblefortheaspectoftheorganization’sactivitiesthatisrelevanttotheoffencedeparts—ortheseniorofficers,collectively,depart—markedlyfromthestandardofcarethat,inthecircumstances,couldreasonablybeexpectedtopreventarepresentativeoftheorganizationfrombeingapartytotheoffence.

Otheroffences—organizations22.2Inrespectofanoffencethatrequirestheprosecutiontoprovefault—otherthannegligence—anorganizationisapartytotheoffenceif,withtheintentatleastinparttobenefittheorganization,oneofitsseniorofficers

• (a)actingwithinthescopeoftheirauthority,isapartytotheoffence;• (b)havingthementalstaterequiredtobeapartytotheoffenceandactingwithinthescopeof

theirauthority,directstheworkofotherrepresentativesoftheorganizationsothattheydotheactormaketheomissionspecifiedintheoffence;or

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• (c)knowingthatarepresentativeoftheorganizationisorisabouttobeapartytotheoffence,doesnottakeallreasonablemeasurestostopthemfrombeingapartytotheoffence.

B)CORPORATELIABILITYINCONTRACTLAWCanadaBusinessCorporationsAct,ss.16(3),17,18QuebecBusinessCorporationsAct,ss.12-15CanadaBusinessCorporationsActRightspreserved16(3)Noactofacorporation,includinganytransferofpropertytoorbyacorporation,isinvalidbyreasononlythattheactortransferiscontrarytoitsarticlesorthisAct.Noconstructivenotice17NopersonisaffectedbyorisdeemedtohavenoticeorknowledgeofthecontentsofadocumentconcerningacorporationbyreasononlythatthedocumenthasbeenfiledbytheDirectororisavailableforinspectionatanofficeofthecorporation.Authorityofdirectors,officersandagents18(1)Nocorporationandnoguarantorofanobligationofacorporationmayassertagainstapersondealingwiththecorporationoragainstapersonwhoacquiredrightsfromthecorporationthat

• (a)thearticles,by-lawsandanyunanimousshareholderagreementhavenotbeencompliedwith;• (b)thepersonsnamedinthemostrecentnoticesenttotheDirectorundersection106or113are

notthedirectorsofthecorporation;• (c)theplacenamedinthemostrecentnoticesenttotheDirectorundersection19isnotthe

registeredofficeofthecorporation;• (d)apersonheldoutbyacorporationasadirector,officer,agentormandataryofthecorporation

hasnotbeendulyappointedorhasnoauthoritytoexercisethepowersandperformthedutiesthatarecustomaryinthebusinessofthecorporationorusualforadirector,officer,agentormandatary;

• (e)adocumentissuedbyanydirector,officer,agentormandataryofacorporationwithactualorusualauthoritytoissuethedocumentisnotvalidorgenuine;or

• (f)asale,leaseorexchangeofpropertyreferredtoinsubsection189(3)wasnotauthorized.Exception(2)Subsection(1)doesnotapplyinrespectofapersonwhohas,oroughttohave,knowledgeofasituationdescribedinthatsubsectionbyvirtueoftheirrelationshiptothecorporation.QuebecBusinessCorporationsActPRESUMPTIONS12.Thirdpersonsarenotpresumedtohaveknowledgeoftheinformationcontainedinadocumentconcerningacorporation,otherthantheinformationspecifiedinsection98oftheActrespectingthelegalpublicityofenterprises(chapterP-44.1),solelybecausethedocumenthasbeendepositedintheenterpriseregisterormaybeinspectedintheofficesofthecorporation.13.Thirdpersonsmaypresume(1)thatacorporationisexercisingitspowersinaccordancewithitsarticlesandby-lawsandanyunanimousshareholderagreement;

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(2)thatthedocumentsrelatingtothecorporationthataredepositedintheenterpriseregistercontainaccurateinformation;(3)thatthedirectorsandofficersofthecorporationvalidlyholdofficeandlawfullyexercisethepowersoftheiroffice;and(4)thatthedocumentsofthecorporationissuedbyadirector,officerorothermandataryofthecorporationarevalid.14.Sections12and13donotapplytothirdpersonsinbadfaithortopersonswhooughttohaveknowledgetothecontrarybecauseoftheirpositionwithorrelationshiptoacorporation.15.Withrespecttothirdpersons,acorporationisdeemedtobeoperatingincompliancewithanyrestrictionsonitsbusinessactivityimposedbyitsarticles.

• Theoryofliabilityisthroughagencytheory.o Corporationneverdirectlyconcludescontractwithoutsider–contractingalwayshappens

throughagents.• Authorityofagentstobindcorporationsislimitedinsomeway.

o Principalshavepowertosupervisetheiragents.o Astheiroverseeingtheiragents,principalscanissueex-postdirections–cancorrectthe

coursebygivingthemnewdirections.• Wheredodirectorsgettheiragencyauthority?

o Foundincorporateconstitution,statute(CBCA,QBCA).• Officersandseniorexecutivemanagers,whatabouttheiragencyauthority?

o Throughcontract,willgiveusbasisandscopeofthisauthority.• (1)Whethercapacitytohaveanagenttobindacorporationisorshouldbelimitedbythe

constitutionalcapacityofthecorporationitself?Shoulditbelimitedbythecorporation’sownlimitedcapacity?

• (2)Whetherthecapacityofanagenttobindacorporationislimitedbythetermsunderwhichtheyhavebeengivenauthority?

Theoriesre:corporationsgettingoutofcontracts

• (1)Positsthatthecorporationdidnothavethecapacitytoenterintoacontractandthereforethatthecontractneverexisted–ultravires.

o Forsomethingtobeultraviresitmeansthatitwasimpossibleforittohavehappened–i.e.it’snotpossibletocontractformurder.

• (2)Or,authoritytheory–corporationhadcapacitytoenterintothecontractbutitwasunauthorized.Subjectmatterfellbeyondmandateofagent,orarguethatthepersonwasn’tanagentatall.

• àWhoshouldbearthisrisk?Thatcorporationisactingbeyonditscapacityorthatitsagentsareoutsidetheirscope?Whoshouldbemostvigilantaboutthis?Creditors?Shareholders/othercorporateconstituents?

• Lawhasrespondedindifferentwayso CML–lookstocorporateconstitutiono Also,significantlegislativechangethatisfarmorefriendlytocreditorsandtheirreliances

onappearancesinthemarket.RestrictionsintheCorporateConstitutiononCorporateCapacityCommunitiesEconomicDevelopmentFundv.CanadianPicklesCorp.(1991,SCC)Facts

Humphrey|57

• SpecialActcorporation(CEDF)–objectsandcapacitiessetoutinspecialactenactedtobringcorporationintobeing.

• Wasbroughtintoexistencetosupporteconomicdevelopmentinremoteandruralcommunities.o Offeredloansthatmightnototherwisebeattainable.

• CEDFmadeloanscontrarytothecorporation’spowertolendundertheSpecialAct.• Thosewhoreceivedloanswhodidn’twanttopaybacksaidwell…youshouldn’thaveloanedtous

inthefirstplace!YourcontractswithuswereUV.Issue

• Istheloanvoidforreasonsofbeingultravires?Yes.Reasoning

• TheloanwascontrarytocorporateobjectsasstatedintheAct(townwhereCPislocatedisnotremote/isolated).

o Thisisaviolationofs.9(7)oftheAct–butdoesthismeantheloanmustbeultraviresorcouldsomelessdramaticresultbepossible?

• CMLcorporations–UVdoctrinenotbeenappliedtothesebecauseCMLcorporations(establishedbyRoyalprerogative)aretakentohaveallthepowersofanaturalperson.

o IfaCMLcorporationactsoutsidestatedobjects,legalactioncanbetakenbutactsarenotinvalid.

• Corporationscreatedunderstatutes–presumptionthatthesecorporationsonlyhavethosepowersthatareexpresslyorimpliedlygrantedtothem.

o Ifsuchacorporationactsbeyonditspowers,theactionsareUV.o Memorandumcorporations–AshburyRailway:willbeUVifgoesbeyondscopeof

memorandum,contractwillbenullandvoid.o CorporationscreatedbySpecialAct–GreatEasternRailway:Principlearticulatedin

AshburyRailwayappliestothesekindsofcorporations.Legislaturewillhavespecificpurposeinmindandthesecorporationsshouldthereforebeheldtothem.Anythingthat’soutsidethiswillnotbevalid.

o AffirmedbyHoLinBaronessWenlock:powersofastatutorycorporationarelimitedbythepurposeofthecorporationassetoutinthespecialact.

• Corporationsestablishedbybusinessstatutes(CBCA,QBCA)o TODAY–UVdoctrineabolishedforcompaniesincorporatedunderbusinesslawstatutes.

§ Trueinmostjurisdictions–maybeUVdoctrinestillatplayinNSandNWT.o Why?

§ (1)Incorporatorshaveexpresspreferenceforbroadscopeofbusinessinterests.Theydon’twantconstitutionalconstraintsonwhattheycanpursuewiththeirbusinesses.

§ (2)Concernforcreditors–UVdoctrinecreatedatrapfortheunaware,thecreditorswhoarenotawareofconstraintsoncapacity.

• Here,wearedealingwithaSpecialActcorporationsotheUVdoctrineapplies–loanwasUV.o Therearelegitimatereasonsforlegislatorstoimposeobjectclausesandforthemtobe

enforced.Mustpursueonlyobjectivesthattheyweresetouttopursue.Notes

• AshburydecisioncommonlyunderstoodtohaveestablishedUVdoctrineforcompaniesunderEnglishmodelstatute.Rationalewastheprotectionofshareholders.

Re:JohnBeauforte(London)Ltd.(1953,UK)Facts

• Companywassetuptomanufacturewomen’sgownsbuteventuallyswitchedtomakingveneeredpanels.Thiswasnotwithintheobjectsclausebutwasreflectedonnewletterhead(constructivenotice?).

Humphrey|58

• Letterheadusedtoplaceanorderforsupplyoffuel.Companygoesintoliquidationandrefusestopayfuelbill.

Issue• WasthecontractUV?Yes.

Reasoning• Fuelcompanyhadconstructivenotice(correspondence/letterhead),soconstructivenoticethat

thetransactionwasUV.• ConstructivenoticesupportsUV,buttheyarenotthesamething.Distinctivenessofthetwo

explainwhybothhavebeenabolished.Notes

• DemonstrateshowcreditorscangetscrewedbytheUVdoctrine.Exampleofwhywehavemovedawayfromthis.Unfairtocreditors/investors.

StatutoryReformofCorporateCapacity/Incapacity

• StatutorychangesduetoconcernswithUVdoctrine.• RuleshavechangedinmostCanadianjurisdictionssince1970.

o Seess.6(1)(f),15(1),16(2)and(3),17,18(1)(a)and(2)o 15(1)–Corporationhascapacityofnaturalpersono 6(1)(f)and16(2)–Articlesofcorporationcansetoutrestrictionsonbusiness

objects/purposestobepursuedbythecorporationandtheserestrictionsmustberespected/compliedwith.

§ Theserestrictionsfunctionasarestrictiononmanagement,buttheydon’tlimitthecorporationasalegalpersonintermsoftheircapacity.See16(3).

o 16(3)–However,noactisinvalidbyreasonofitonlybeingcontrarytoarticles.§ Sees.247fordifferentremedies.

o 17–Noconstructivenoticeimpliedagainstthirdpartiesforreasonsofcorporatecapacityo 18(1)and(2)–Corporationcan’tassertlackofcorporatecapacityagainstanoutsiderin

ordertovitiateacontractwhentheoutsiderknoworoughttohaveknown.Veryrare.• Thirdpartiesprotectedunderss.12-15ofQuebecBusinessCorporationsAct.

o 13–Thirdpartiescanpresumethatacorporationisactinginaccordancewiththeirrules.Canrelyonappearances,don’tneedtomakeinquiries.

o 14–Creditorsactinginbadfaithorwhooughttohaveknowledgecan’tpointtoviolationsofconstraintsbecausetheykneworshouldhaveknownabouttheseconstraints.

• Legislatorshaveshiftedtheburdenofriskassociatedwithcorporatecapacityfromcreditors(atCML)toshareholdersandincorporators(thankstostatute).

ContractingThroughCorporateAgents

• Corporatecontractsanalyzedthroughagencyprinciples.o Seeindividualasagentofcorporationandaskwhattheagent’sauthoritywas,determineif

theyweretheappropriatetypeofagentthroughwhomtoarrangethesortofcontractthatwasnegotiated.

• Corporationhasrelationshipwithagent;outsidernegotiateswithagent;outsiderclaimsthatnegotiationscreatedacontractwiththecorporation.

• Threedifferenttheories:o (1)Beginningof20thcentury(“actualauthority”theory),plaintiffneededtoproduce

clearevidenceofacorporateagent’sscopeofauthority.o (2)Mid-century(“ostensibleauthority”theory),corporationstreatedalmostlikehuman

principals.o (3)21stcentury,corporateprincipalsdiscriminatedagainstinfavourofoutsidersin

agencymatters.

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(1)ActualAuthority

• Didthepersonwhomadethecontractonbehalfofthecorporationactuallyhavetheauthoritytodoso?

o Abouttherelationshipbetweentheagentandtheirprincipal.It’snotaboutanykindofrelationshipbetweentheagentandathirdparty.It’sabouttheprincipalgrantingauthoritytotheagent.

• Threewaysforanagenttogetactualauthority:o Expressactualauthorityo Impliedactualauthorityo Actualauthorityretroactively(ratificationbyprincipalofwhattheagentalreadydidthat

wasbeyondtheirauthorityatthetime)• Towhatextentisacorporationabletoprejudicethirdpartiesbycitingafailuretocomplywith

internalcorporateprocedures?

(2)OstensibleAuthority• Creditorsarenottypicallyinapositiontoknowaboutrelationshipsofactualauthoritybetween

agentsandprincipals.• Creditorwillbeclaimingthatagenthadapparentorseemingauthoritytoactonbehalfof

corporation.• Notconcernedabouttheactualrelationshipbetweenprincipalandagent.

o Instead,it’sabouttherelationshipbetweentheprincipalandcreditors.o Inparticular,concernedwithwhatthecorporationenabledorencouragedthecreditorto

believeabouttheagenttheyweredealingwith.Didthecorporationacttogenerateanappearanceofauthority?

• LeadingtestfromFreeman&Lockyer(mostfamouscase,1974UKCourtofAppeal)o Legalrelationshipbetweenprincipalandcontractor.o Ostensibleauthorityexistswhentheprincipalhasmadesomerepresentationthatan

individualhadtheauthoritytoactonbehalfoftheprincipal.o Test:

§ (1)Representationbythecorporationtoanoutsiderthattheagenthastheauthoritytoentreintoacontractofthatkindonthecorporation’sbehalf.

§ (2)Representationwasmadebysomeonewhohadtheactualauthoritytomanagethebusinessingeneralorwithrespecttothesubjectmatterofthetransaction.

§ (3)Outsidermustshowthattheyreliedontherepresentationandthattheywereinducedbytherepresentationtoenterintothecontract.

Schwartzv.MaritimeLifeAssuranceCo.(1997,NFLD)Facts

• SplacedmanyinvestmentswithML,usingRideoutasabroker.• RhadarelationshipwithML,butnoauthoritytobindMLtoanyone.• SgaveR$100,000toplacewithML,Rfuckedofffraudulently.Evenissuedaforgedreceiptfrom

ML.SinquiredwithMLandfoundoutthatRnevergavethemthemoney.• ShouldSorMLbearthelossassociatedwithR’sfraud?WasRanagentofML?

Issue• WasRanagentofMLwhenhereceivedthemoneyfromS?Yes–RappearedtobeagentofML

toSsothelossesshouldliewithML.JudicialHistory

• TJheldthatRhadnoauthoritytobindorcommitMLinanyway.NorepresentationsweremadebyMLthatRwasitsagent.

Reasoning(Majority)

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• Whetheraprincipal/agentrelationshipexistsdependsonthenatureoftheauthoritygrantedordeemedtohavebeengranted,bytheprincipaltotheagent.Thus,whetheranagencyrelationshipexistswilldependontheexactcircumstancesoftherelationshipbetweentheallegedprincipalanddefendant.

• Inmostcaseswherethereisactualauthoritythereisacontractsettingitout.• Ostensibleauthority–Whereapersonbyhiswordsorconducthasallowedanothertoappearto

theoutsideworldashisagent,withtheresultthatthirdpartiesdealwithhiminthiscapacity.Thispersoncannotrepudiatethisapparentagencyifsodoingwouldprejudicethirdparties.

o Focusisonrepresentationsmadebyprincipaltothirdpartiesastotheauthorityoftheagentthethirdpartyisdealingwith.

• àNothingnewhereinadditiontoorchangingthetestfromFreeman&Lockyer.• ActualAuthority

o Importanttopayattentiontoanycontractsthatexistbetweenpurportedagentandprincipal.

o FindsthatthereisnobasisforanyrelationshipofactualauthorityinthecontractbetweenMLandR.

o RhadhadacontractwithML,Rwasgeneralagentandemployee.Termsofthesecontractsspecificallyexcludeagencyauthority.R’sauthoritywaslimitedtosalesanddrawupbusinessforMLonitsbehalf.

o CourtfindsthereisnorelationshipofactualauthoritybetweenMLandR.• OstensibleAuthority

o IfSistosucceed,hastoestablishthatMLhasdonesomethingwhichwouldleadhimtobelievethatRhadtheauthoritytobindMLandthattherewasreliancetoS’sdetriment.(LanguagefromFreeman&Lockyer).

o LookstoughbecausetherewasnocommunicationbetweenMLandS.So,wheredidrepresentationcomeupwithoutcommunication?

o Oddly,courtpassesoverthisandasks,weshouldaswhetherRdidinanywayholdhimselfouttoSasbeingauthorizedtoenterintoarelationshipwithSonbehalfofML?

§ àThisisashift–lookstowhetheragentdidanythingtoholdhimselfoutasagentofMLversuswhatprincipaldidtoconveyagencytothirdparty.

o FoundtherewasnoholdingoutonthepartofR,savethereceiptfrom1978fromMLhegavetoSwhenhewasregionalsuperintendant.SaidthatwasenoughtoshowRasanagentofML.

§ IfhecouldusethisstationaryfromMLthenpeoplecould§ Thiswas,however,6yearsbeforethe$100,000inquestion.§ Courtdidn’tcareaboutthepassageoftime–nowayforStoknowaboutthe

changeinstatusofRinrelationtoML.Couldn’thaveknownhewasnolongerregionalsuperintendantandjustanindependentbrokernow.

• Corporationthereforeheldliableforthe$100,000Dissent(Marshall)

• Agreeswithmajorityonthelawbutdisagreeswithapplication.• ActualAuthority

o RwasagentofS,hisclient.SecondagencyrelationshipbetweenRandMLwasnotyetformedbecausemoneywasnevertransferred.So,wrongwasdonebyRasS’sagentandsoScanseekrecourseagainstRforR’sfaultashisagent.NorelationshipwithML.

• OstensibleAuthorityo Focusesonrelianceelementoftest–noreliancehere.NoproofthatSgavemoneytoR

relyingonsixyearoldreceiptfromML.o SadvancedmoneytoRbecausehetrustedhim–that’swhathereliedon,notsometoken

ofauthoritygivensixyearsago.Notes

Humphrey|61

• Ostensibleauthoritymostsignificantforcreditorsbecausecreditorslargelyrelyingonappearances.Don’thavebasistoknowanythingaboutactualauthority.

o Companieswillalsooftengiveagentstokensofauthority(businesscards,letterheads,e-mailsignatures).

o àCorporationsneedtobecarefulabouttokensofauthorityextendedtoagentsandhowtheyareused.

§ Corporationscan’treallydothatmuchtoprotectagainstmisuseoftokensofauthority.Theyarerunningtheriskthatcreditorswillrelyonthesetokenseventhoughtherewasnorelationshipofagencybetweenagentandprincipal.

• Weseethishere–sixyearoldletterheadwasconsideredthekey.Prettythintokenbutstill,thatwasenough.

• Areyouconvincedbythis?StatutoryReformre:AuthorityofAgents

• CBCA18(1)and(2)• QBCA12-14

IV.INCORPORATION

A)INCORPORATIONCanadaBusinessCorporationsAct,ss.5,6(1),8,9,10(1)and(5),14(1)QuebecBusinessCorporationsAct,ss.3-5,8-10,16,19,20,38CCQ,arts.319-320CanadaBusinessCorporationsActIncorporators5(1)Oneormoreindividualsnotoneofwhom(a)islessthaneighteenyearsofage,(b)isofunsoundmindandhasbeensofoundbyacourtinCanadaorelsewhere,or(c)hasthestatusofbankrupt,mayincorporateacorporationbysigningarticlesofincorporationandcomplyingwithsection7.Bodiescorporate(2)Oneormorebodiescorporatemayincorporateacorporationbysigningarticlesofincorporationandcomplyingwithsection7.Articlesofincorporation6(1)ArticlesofincorporationshallfollowtheformthattheDirectorfixesandshallsetout,inrespectoftheproposedcorporation,(a)thenameofthecorporation;(b)theprovinceinCanadawheretheregisteredofficeistobesituated;(c)theclassesandanymaximumnumberofsharesthatthecorporationisauthorizedtoissue,and

(i)iftherewillbetwoormoreclassesofshares,therights,privileges,restrictionsandconditionsattachingtoeachclassofshares,and

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(ii)ifaclassofsharesmaybeissuedinseries,theauthoritygiventothedirectorstofixthenumberofsharesin,andtodeterminethedesignationof,andtherights,privileges,restrictionsandconditionsattachingto,thesharesofeachseries;

(d)iftheissue,transferorownershipofsharesofthecorporationistoberestricted,astatementtothateffectandastatementastothenatureofsuchrestrictions;(e)thenumberofdirectorsor,subjecttoparagraph107(a),theminimumandmaximumnumberofdirectorsofthecorporation;and(f)anyrestrictionsonthebusinessesthatthecorporationmaycarryon.Certificateofincorporation8(1)Subjecttosubsection(2),onreceiptofarticlesofincorporation,theDirectorshallissueacertificateofincorporationinaccordancewithsection262.Exception—failuretocomplywithAct(2)TheDirectormayrefusetoissuethecertificateifanoticethatisrequiredtobesentundersubsection19(2)or106(1)indicatesthatthecorporation,ifitcameintoexistence,wouldnotbeincompliancewiththisAct.Effectofcertificate9Acorporationcomesintoexistenceonthedateshowninthecertificateofincorporation.Nameofcorporation10(1)Thewordorexpression“Limited”,“Limitée”,“Incorporated”,“Incorporée”,“Corporation”or“Sociétéparactionsderégimefédéral”orthecorrespondingabbreviation“Ltd.”,“Ltée”,“Inc.”,“Corp.”or“S.A.R.F.”shallbepart,otherthanonlyinafigurativeordescriptivesense,ofthenameofeverycorporation,butacorporationmayuseandbelegallydesignatedbyeitherthefullorthecorrespondingabbreviatedform.Publicationofname(5)Acorporationshallsetoutitsnameinlegiblecharactersinallcontracts,invoices,negotiableinstrumentsandordersforgoodsorservicesissuedormadebyoronbehalfofthecorporation.Personalliability14(1)Subjecttothissection,apersonwhoentersinto,orpurportstoenterinto,awrittencontractinthenameoforonbehalfofacorporationbeforeitcomesintoexistenceispersonallyboundbythecontractandisentitledtoitsbenefits.QuébecBusinessCorporationsActCONSTITUTION3.Acorporationmaybeconstitutedbyoneormorefounders.4.Anynaturalpersonqualifiedtobeadirectorofacorporationmaybethefounderofacorporation.Alegalpersonmayalsobethefounderofacorporation.5.Thearticlesofconstitutionmustsetout(1)thenameofthecorporation,unlessadesignatingnumberinlieuofanamehasbeenrequestedfromtheenterpriseregistrar;(2)thenameandaddressofeachfounder,orthenameofthefoundinglegalperson,theaddressofitsheadofficeandanexactreferencetotheActunderwhichitisconstituted;(3)theamounttowhichitssharecapitalislimited,ifapplicable;(4)theparvalueofitsshares,ifany;

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(5)iftherewillbetwoormoreclassesofshares,therightsandrestrictionsattachingtothesharesofeachclass;(6)ifaclassofsharesmaybeissuedinseries,theauthoritygiventotheboardofdirectorstodetermine,beforeissue,thenumberofsharesin,thedesignationofthesharesof,andtherightsandrestrictionsattachingtothesharesof,eachseries;(7)anyrestrictionsonthetransferofitsinstrumentsorshares;(8)thefixednumberortheminimumandmaximumnumberofdirectors;and(9)anyrestrictionsonitsbusinessactivity.8.Thefollowingmustbefiledwiththearticles:(1)alistofthedirectorsofthecorporation,containingtheirnamesanddomiciles;(2)anoticeoftheaddressofthecorporation’sheadoffice;(3)unlessadesignatingnumberhasbeenrequested,adeclarationstatingthatreasonablemeanshavebeentakentoensurethatthenamechosenisincompliancewiththelaw;and(4)anyotherdocumenttheMinistermayrequire.However,thelistofdirectorsandthenoticeoftheaddressoftheheadofficearenotrequiredtobefilediftheinitialdeclarationrequiredundertheActrespectingthelegalpublicityofenterprises(chapterP-44.1)isfiledwiththearticles.9.Thearticlesofacorporation,signedbythefounders,thedocumentsrequiredtobefiledwiththem,andthefeesetoutintheActrespectingthelegalpublicityofenterprises(chapterP-44.1)mustbesenttotheenterpriseregistrar.10.Acorporationisconstitutedasofthedateand,ifapplicable,thetimeshownonthecertificateofconstitutionissuedbytheenterpriseregistrarinaccordancewithChapterXVIII.Thecorporationisalegalpersonasofthattime.NAME16.Acorporation’snamemustnot(1)contravenetheCharteroftheFrenchlanguage(chapterC-11);(2)includeanexpressionwhichthelawreservesforanotherpersonorprohibitsthecorporationfromusing;(3)includeanexpressionthatevokesanimmoral,obsceneorscandalousnotion;(4)incorrectlyindicatethecorporation’sjuridicalformorfailtoindicatethatformwhenrequiredbylaw;(5)falselysuggestthatthecorporationisanon-profitgroup;(6)falselysuggestthatthecorporationis,orisrelatedto,apublicauthoritydeterminedbygovernmentregulation;(7)falselysuggestthatthecorporationisrelatedtoanotherpersonorgroupofpersons,particularlyinthecasesandinviewofthecriteriadeterminedbygovernmentregulation;(8)beidenticaltoanamereservedfororusedbyanotherpersonorgroupofpersonsinQuébec,particularlyinviewofthecriteriadeterminedbygovernmentregulation;(9)beconfusinglysimilartoanamereservedfororusedbyanotherpersonorgroupofpersonsinQuébec,particularlyinviewofthecriteriadeterminedbygovernmentregulation;or(10)bemisleadinginanyothermanner.19.Thenameofacorporationmustappearonallofitsnegotiableinstruments,contracts,invoicesandpurchaseordersforgoodsorservices.20.Ifacorporation’snamedoesnotincludetheterm“sociétéparactions”or“compagnie”,itmustcomprisetheabbreviation“s.a.”,“ltée”or“inc.”attheendtoindicatethatthecorporationisalimited-liabilitycorporation.

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RECORDSANDDOCUMENTS38.Inanyactionorproceedingagainstacorporationoranyshareholder,therecordsofthecorporationareproofoftheircontentsintheabsenceofanyevidencetothecontrary.CivilCodeofQuebec319.Alegalpersonmayratifyanactperformedforitbeforeitwasconstituted;itisthensubstitutedforthepersonwhoactedforit.Theratificationdoesnoteffectnovation;thepersonwhoactedhasthenceforththesamerightsandissubjecttothesameobligationsasamandatarywithrespecttothelegalperson.320.Apersonwhoactsforalegalpersonbeforeitisconstitutedisboundbytheobligationssocontracted,unlessthecontractstipulatesotherwiseandincludesastatementtotheeffectthatthelegalpersonmightnotbeconstitutedormightnotassumetheobligationssubscribedinthecontract.àOverarchingquestion–whataretheformalitiesrequiredtobringacorporationintoexistenceunderthestatute?1)Registration

• Acorporationcomestobeonlythroughalegalprocess:processofregistrationforthatparticularcorporation.

• Itisinitiatedbyincorporators–privateindividualsactingasagrouporindividual.• ProcessofincorporationisconcludedwithacertificateofregistrationissuedbytheCBCA

Director.o ExpresstermsofCBCAprovideofficeofDirectormustissuecertificateofregistration

whentheyreceivedanapplicationthatmeetsallthestatutoryrequirements.Iftherequirementsareallmet,thereisnodiscretiongrantedtorefuseincorporation(s.8).

• CBCA:o Section8:Issuanceofthecertificate.Thepersonissuingthecertificatehasnodiscretion

(onlycanrefuseifapplicationnotinorder).o Section9:Acorporationisbornwhentheapplicationsubmittedbyincorporatorsis

approvedandacertificateofincorporationisissued.• Problemscanarisewhenthedocumentallegedtobeacertificateofincorporationbearsadate

otherthanthedateitwasissued.o Section262(3):Dateshownonthebirthcertificateofthecorporationwilleitherbethe

datetheCBCADirectorreceivesthearticlesofincorporationorthedatecouldbeadatespecifiedbytheincorporators.

§ Iftheincorporatorsdonotspecifyadate,bydefaultitwouldbethedatethearticleswerereceivedbytheofficeoftheCBCADirector.

§ However,sometimesittakestimetoprocessarticlesofincorporationsobecauseofthis(processingdelays),itcouldwellbethattheincorporatorsreceiveabackdatedcertificate.Thisraisessomecomplications.

§ Whenthedateofincorporationisindispute,thereisaproblembecauseitisunclearwhenthecorporationgotcorporatepersonality.

§ Shoulditbethedateshownonthecertificateorshoulditbethedateonwhichthecertificatewasissued?

o Section256(2):Certificateasconclusiveproofofincorportion.§ ThisprovisionstatesthatacertificateissuedbyCBCADirectorisafactualproofof

theincorporation.C.P.W.ValveandInstrumentsLtd.v.Scott(1978,ABCA)

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Facts

• SmadecontractualagreementtopurchaseproductfromCPWandmaderequestfordeliveryofproductinnameofcorporation(aspresident)onJune15.

• CertificateofincorporationwasissuedonJune16butwasdatedJune15.• CPWclaimedthatcorporationdidn’texistonJune15becausecertificatewasn’tissueduntilJune

16.Therefore,claimedcorporationdidn’texistwhenorderwasmadeandthatSwasinbreachofcontract.

Issue• Whenwasthecorporationborn?CorporationwasbornonJune16whencertificatewas

issued,notwhendated.Reasoning

• Majority(ClementJA)o Dateofincorporationintegraltopersonality–corporationdoesnotexistasapersonwith

capacitytocontractwithouttheformalitiesbywhichthestaterecognizesitasaperson.o Threepossibledatesofincorporation:

§ (1)DatematerialssubmittedtoCBCADirectorandallrequirementsmetbecauseifallrequirementsaremet,theprocessingoftheapplicationismerelyaformality(CBCADirectorhasnodiscretion).

§ (2)Dateshownoncertificate§ (3)Datecertificateissued

• Thiswillbethedateforthepurposesofcontractlaw.• àIsn’tthisisincontradictionwiths.256(2)?

o Judgesaysnotclearthatlegislatorsmeantforthisarticletoextendbeyondthestatuteandapplytocontractualdisputes.

o Thecertificatedoesnotconclusivelyestablishthedateofincorporation–havetoconsidertheissueofdatingofacorporationinlightoftheentireprocessofincorporation.

o Itisimpossibleforanon-existentpersontoperformalegalactandthecorporationonlyexistedasanideaonJune15.

o Here,therewasevidencethattheregistrardidnotactuallysignthecertificateuntilJune16.Therefore,thecorporationdidnotexistonJune15.

Ratio• Theactualdateofincorporation(notjustthedateonthecertificate)isdecisiveinthecontextofa

contractualissue.Notes

• Thejurisprudenceisunsettledonthisissueandtheauthorityofthisjudgmentisquestioned.• TherehasnotbeenanothercasesincethisoneattheABCA.

2)MinimumRequirementsofCorporateConstitution

• Section5(1):Incorporatorsmustbe…o Naturalperson,ageofmajority,solvent(notbankrupt),ofsoundmind.o Corporationscanalsofileforincorporationofanothercorporation.

• Section6:Applicationtocreatecorporationmustcontaindraftarticlesforthecorporation.o Whileincorporatorshavelotsoffreedominstructuringthecorporateconstitution,there

aresomerequirements/restrictions:§ Neednameofcorporation,locationofheadoffice,numberofdirectors,detailsof

sharestructure(howmanydifferentclasses,whichrightsattachtowhich,andvalueofshares),anyrestrictionsonthepurposeandobjectofthecorporation.

• Section7:Delivery–draftarticlesmustbesignedanddeliveredtofederalbureaucracy(CBCADirector).

o Needtoincludenamesandaddressesofalldirectors

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o Mustalsopayapplicationfee(fewhundred$$)2)Continuance:CorporateEmigrationandImmigration

• Continuance:processbywhichacorporationincorporatedinonejurisdictionemigratesandestablishesanewhomeinanotherjurisdiction.

o Effectissameasifcorporationwasdissolvedinoriginaljurisdictionandsimultaneouslyreincorporatedinnewjurisdiction.

• Generalrequirementisthatthecorporationmustbeauthorizedbythelawsofthejurisdictionwhereitisincorporated.(CBCA,s.187(1)).

3)Amalgamation:CorporateCombination

• CBCA181-186:twoormorecorporationscanamalgamateandcontinueasonecorporation.o Effectisthatoldcorporationsceasetoexistasseparateentities–onlyone

corporationremainsandisgovernedbyownsetofarticleswhichmustbesenttoDirector/Registraraspartofprocess.

o Certificateofamalgamationisissued.• Thefollowingscenariosarenotamalgamations:

o AbuysallofB’sbusinessassetso AbuysallofB’sshareso CbuysallofAandB’sshareso CbuysallofassetsofAandB

4)TheCorporateName

• Therearecertainrequirementsfornamesofcorporations.o Section10(1):Signifiers–corporatenamemustincludewordindicatinghowthe

corporationisbeingdescribed(e.g.LTD.,INC.)§ Why?Creditorshavetoprotecttheirinterestssotheyhavetoknowthatthey

aredealingwithacorporation.Theuseofsignifiersistheprotectionofcreditors.o Section12(1):Namemustbedistinctiveandnotdeceptive.

§ Alsoseeregulations25,256,27,30–namecan’tbeprescribed,reserved,orprohibitedbyanothercorporation.

§ Reg.25:Namemustnotuseprohibitedwordsorphrases• e.g.AirCanada,RCMP,ParliamentHill

§ Reg.26:Namemustnotsuggestanygovernmentalassociation• Furtherprovidesthenamecannotbeobscene

§ Reg.30:Namemustbedistinctiveandnottoogeneralorcannotbemerelydescriptiveofgoodsandservicesprovided

• e.g.Wanttosellshirtsandwanttocallit“WhiteShirtCompany”–CBCAsuggestsyoucan’tdothat

• Whyarealltheselimitationssetoutinthestatute?o Ifnamesarerejected,holdsthingsupandcostsmoremoney.o Iftwosimilarnames,couldbeconfusingwithexistingcorporation’sname.

5)Pre-IncorporationContracts

• Becauseacorporationdoesn’tcomeintoexistenceuntilthedateonthecertificateofincorporation,willbeimpossibletocontractwithcorporationbeforethattime.

• But,incorporatorstendtodothisinordertohavegoods/servicesreadyforwhentheybecomeincorporated–wanttogetthingsgoingandgetofftheground.

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• Whatarelegalimplicationsofthesepre-incorporationtransactionsarrangedonbehalfofacorporation?

o Theyarenotlegallybindingcontracts(Kelnerv.Baxter).o Helpfultothinkofthesemoreastransactionsthancontractsbecausecontractsare

legallybinding.• UsuallyhaveA(personinvolvedinincorporationprocess,purportingtoactonbehalfoffuture

corporation)andO(outsiderwhointendstobuy/sellfromfuturecorporation).Thirdparty–futurecorporation–onlyexistsasafigmentofimagination.

• CMLpositiono Needtwopartiesforcontractàcorporationdoesn’texistyetànon-existentcorporation

can’tbepartytocontract§ EvenifAandOagreethatcontractwillbebetweenOandcorporation,

attempttocreatecontractwillfail.o Alsoneedfundamentaltermsofcontractàpartiesarefundamental.o Result:contractmustbebetweenAandO–can’tbindunborncorporation,mustbe

commonintentionthatAispersonallyliableonthecontract.• ThoughpeopleunderstandthelogicoftheCMLposition,theyfinditinconvenientandunfairto

creditorswhoengageinthesecontractbehaviourbecausetheyrelyontherepresentationofthecorporationactuallyexisting.

o Alsounfairbecausecorporationcannotlaterratifypre-incorporationcontracts.• TheCMLpositionraisesseveralquestions

o Cantheagentwhocommittedthepre-existentcorporationtoacontractbeheldpersonallyliable?

§ Yes–Kelnerv.Baxter§ But…needstobecommonintentionofthepartiesthattheagentwouldbe

personallyliable–Blackv.Smallwood• Again,makesitdifficultforcreditorsbecausewillalmostalwaysbe

possibleforagenttoarguethatheintendedtosignascorporationandnotpersonally.

o Canacorporationratifyanobligationstemmingfromacontractthatwasmadepriortoincorporation?

§ No–Kelnerv.BaxterKelnerv.Baxter(1866,UK)àPre-existentcorporationcannotenterintolegallybindingcontracts.àCorporation,onceborn,cannotsubsequentlyratifypre-incorporationcontracts.Facts

• Bsignedcontractas“Baxter,onbehalfofproposedcorporation”Issue

• IsBliableforbreachofcontractpersonally?Oristhecorporation?Baxterpersonally–attimecontractwasenteredinto,corporationdidn’texistandthereforecan’tbeheldliable.

Reasoning• Ifthecorporationhadexistedatthetimeofthecontractsigning,Bcouldhavesignedasagentof

thecompany.However,nocorporationhere.• Therefore,wherethereisanagentbutnoprincipal,thecontractbindsthepersonthatsignsit

personally.Subsequentratificationofthecontractbythecorporationthatcomesintoexistencecannotrelievethisresponsibility.

Ratio• Iftheprincipaldoesn’texistatthetimeofthecontract,theagentactingonbehalfofthefuture

corporationispersonallyliable.

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• Thecorporationthatcomesintoexistencecannotlaterratifythecontract–liabilityremainswithagent.

Notes• Thiscasehasbeeninterpretedassayingthatanagentisliableforapre-incorporationcontract

onlyifthecontractualcounterpartintendedthattheagentbepersonallyliable/entitled.Millerdoesn’tthinkthisisagreatinterpretation.

Blackv.Smallwood(1966,Australia)àSpinningofKelner–needcommonintentionofpartiestomakeagentpersonallyliableforpre-incorporationcontracts.Facts

• Scontractstobuylandinnameofcorporationthathasnotcomeintoexistenceyet.However,bothSandBthoughtthatthecorporationexistedatthetime.

• BbringsactionagainstSpersonally,tryingtoforcehimtobuythelandhecontractedtobuyasthecorporation.

Issue• IsSpersonallyliabletobuytheland?No–insigningasdirector,clearthatSdidn’tintendto

bindhimselfpersonally.Reasoning

• Generalruleisthatwhereanagentcontractsonbehalfofaprincipalthatdoesn’texist,theagentispersonallyliable(Kelner).

• However,liabilityrequirescommonintention(spinningKelner).o InKelner,wasclearthattherewasnocompanyandsotherewascommonintentionasto

thepersonalliabilityoftheagent.o Here,bothpartiesthoughtthecompanyexistedandwerecontractingassuch.

ImpossibletodemonstratecommonintentiontobindSpersonally.Ratio

• ReinterpretationofKelnerrequiringcommonintentionofpartiesre:personalliabilitypre-incorporation.

6)AttemptsatStatutoryReformre:Pre-IncorporationContracts

• BecauseoftheperceivedunfairnessofCMLpositiononpre-incorporationcontracts,especiallyforcreditors,haveattemptedstatutoryreform.

• Reformershaveattemptedtomaketwochanges:o (1)Triedtoimposecontractualliabilityonagentforpre-incorporationcontracts.

§ e.g.Section21(2)OBCA.o (2)Triedtoenablecorporationto“adopt”pre-incorporationtransactions,makingthe

corporationapartytothecontractandexcusingtheagent.• Section14(1),CBCA:Agentwhoentersintocontractonbehalfofpre-existentcorporationis

personallyboundbythepre-incorporationcontract.• Section14(2):Corporationcanratifycontractsmadepre-incorporation,letagentoffthehook.• Section14(3):Enablescourttoapportionliabilityofagentbetweenagentandcorporation

oncecorporationcomesintoexistence.• Section14(4):Allowsagenttocontractoutofpersonalliabilityviaexclusionaryclausein

pre-incorporationcontracts.7)Pre-IncorporationContractsinCVL

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• Civiliansalreadyhadresponsetotheproblemofpre-incorporationcontractsbeforestatutoryreformsattemptedinCML.

o MillerlovestheCCQarticles–thinkstheyareveryclearonhowtodealwiththisissue.• CCQ320:Liabilityofagents

o Asanagent,havetomakeitpainfullycleartotheotherpartythatyouwillnotbepersonallyliableforthiscontract.

• CCQ319:Ex-postratificationo Ratificationofthepre-incorporationcontractdisplacesliabilityofagents.o ThiscanhappenundertheCBCA,butundertheCBCAliabilitycanalsobeapportioned.

§ Sees.14(3),whichstatesthatcourtcanapportionliabilitybetweenagentandcorporationpost-ratification.

V.CORPORATEMANAGEMENT

A)TheRoleofManagementCanadaBusinessCorporationsAct,ss.102(1)&(2),103,105(1),106,109(1),111(4),115,121,124-125QuebecBusinessCorporationsAct,ss.106-108,110-113,116-118,144,147-148,153,159-162,198CCQ,arts.327-328CanadaBusinessCorporationActDutytomanageorsupervisemanagement102(1)Subjecttoanyunanimousshareholderagreement,thedirectorsshallmanage,orsupervisethemanagementof,thebusinessandaffairsofacorporation.Numberofdirectors(2)Acorporationshallhaveoneormoredirectorsbutadistributingcorporation,anyoftheissuedsecuritiesofwhichremainoutstandingandareheldbymorethanoneperson,shallhavenotfewerthanthreedirectors,atleasttwoofwhomarenotofficersoremployeesofthecorporationoritsaffiliates.By-laws103(1)Unlessthearticles,by-lawsoraunanimousshareholderagreementotherwiseprovide,thedirectorsmay,byresolution,make,amendorrepealanyby-lawsthatregulatethebusinessoraffairsofthecorporation.Shareholderapproval(2)Thedirectorsshallsubmitaby-law,oranamendmentorarepealofaby-law,madeundersubsection(1)totheshareholdersatthenextmeetingofshareholders,andtheshareholdersmay,byordinaryresolution,confirm,rejectoramendtheby-law,amendmentorrepeal.Effectivedate(3)Aby-law,oranamendmentorarepealofaby-law,iseffectivefromthedateoftheresolutionofthedirectorsundersubsection(1)untilitisconfirmed,confirmedasamendedorrejectedbytheshareholdersundersubsection(2)oruntilitceasestobeeffectiveundersubsection(4)and,wheretheby-lawisconfirmedorconfirmedasamended,itcontinuesineffectintheforminwhichitwassoconfirmed.Idem

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(4)Ifaby-law,anamendmentorarepealisrejectedbytheshareholders,orifthedirectorsdonotsubmitaby-law,anamendmentorarepealtotheshareholdersasrequiredundersubsection(2),theby-law,amendmentorrepealceasestobeeffectiveandnosubsequentresolutionofthedirectorstomake,amendorrepealaby-lawhavingsubstantiallythesamepurposeoreffectiseffectiveuntilitisconfirmedorconfirmedasamendedbytheshareholders.Shareholderproposal(5)Ashareholderentitledtovoteatanannualmeetingofshareholdersmay,inaccordancewithsection137,makeaproposaltomake,amendorrepealaby-law.Qualificationsofdirectors105(1)Thefollowingpersonsaredisqualifiedfrombeingadirectorofacorporation:(a)anyonewhoislessthaneighteenyearsofage;(b)anyonewhoisofunsoundmindandhasbeensofoundbyacourtinCanadaorelsewhere;(c)apersonwhoisnotanindividual;or(d)apersonwhohasthestatusofbankrupt.Noticeofdirectors106(1)Atthetimeofsendingarticlesofincorporation,theincorporatorsshallsendtotheDirectoranoticeofdirectorsintheformthattheDirectorfixes,andtheDirectorshallfilethenotice.Termofoffice(2)Eachdirectornamedinthenoticereferredtoinsubsection(1)holdsofficefromtheissueofthecertificateofincorporationuntilthefirstmeetingofshareholders.Electionofdirectors(3)Subjecttoparagraph107(b),shareholdersofacorporationshall,byordinaryresolutionatthefirstmeetingofshareholdersandateachsucceedingannualmeetingatwhichanelectionofdirectorsisrequired,electdirectorstoholdofficeforatermexpiringnotlaterthanthecloseofthethirdannualmeetingofshareholdersfollowingtheelection.Staggeredterms(4)Itisnotnecessarythatalldirectorselectedatameetingofshareholdersholdofficeforthesameterm.Nostatedterms(5)Adirectornotelectedforanexpresslystatedtermceasestoholdofficeatthecloseofthefirstannualmeetingofshareholdersfollowingthedirector’selection.Incumbentdirectors(6)Notwithstandingsubsections(2),(3)and(5),ifdirectorsarenotelectedatameetingofshareholderstheincumbentdirectorscontinueinofficeuntiltheirsuccessorsareelected.Vacancyamongcandidates(7)Ifameetingofshareholdersfailstoelectthenumberortheminimumnumberofdirectorsrequiredbythearticlesbyreasonofthelackofconsent,disqualification,incapacityordeathofanycandidates,thedirectorselectedatthatmeetingmayexerciseallthepowersofthedirectorsifthenumberofdirectorssoelectedconstitutesaquorum.Appointmentofdirectors(8)Thedirectorsmay,ifthearticlesofthecorporationsoprovide,appointoneormoreadditionaldirectors,whoshallholdofficeforatermexpiringnotlaterthanthecloseofthenextannualmeetingof

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shareholders,butthetotalnumberofdirectorssoappointedmaynotexceedonethirdofthenumberofdirectorselectedatthepreviousannualmeetingofshareholders.Electionorappointmentasdirector(9)Anindividualwhoiselectedorappointedtoholdofficeasadirectorisnotadirectorandisdeemednottohavebeenelectedorappointedtoholdofficeasadirectorunless(a)heorshewaspresentatthemeetingwhentheelectionorappointmenttookplaceandheorshedidnotrefusetoholdofficeasadirector;or(b)heorshewasnotpresentatthemeetingwhentheelectionorappointmenttookplaceand (i)heorsheconsentedtoholdofficeasadirectorinwritingbeforetheelectionorappointmentor

withintendaysafterit,or (ii)heorshehasactedasadirectorpursuanttotheelectionorappointment.Removalofdirectors109(1)Subjecttoparagraph107(g),theshareholdersofacorporationmaybyordinaryresolutionataspecialmeetingremoveanydirectorordirectorsfromoffice.Shareholdersfillingvacancy111(4)Thearticlesmayprovidethatavacancyamongthedirectorsshallonlybefilledbyavoteoftheshareholders,orbyavoteoftheholdersofanyclassorseriesofshareshavinganexclusiverighttoelectoneormoredirectorsifthevacancyoccursamongthedirectorselectedbythatclassorseries.Delegation115(1)DirectorsofacorporationmayappointfromtheirnumberamanagingdirectorwhoisaresidentCanadianoracommitteeofdirectorsanddelegatetosuchmanagingdirectororcommitteeanyofthepowersofthedirectors.Limitsonauthority(3)Notwithstandingsubsection(1),nomanagingdirectorandnocommitteeofdirectorshasauthorityto(a)submittotheshareholdersanyquestionormatterrequiringtheapprovaloftheshareholders;(b)fillavacancyamongthedirectorsorintheofficeofauditor,orappointadditionaldirectors;(c)issuesecuritiesexceptasauthorizedbythedirectors;(c.1)issuesharesofaseriesundersection27exceptasauthorizedbythedirectors;(d)declaredividends;(e)purchase,redeemorotherwiseacquiresharesissuedbythecorporation;(f)payacommissionreferredtoinsection41exceptasauthorizedbythedirectors;(g)approveamanagementproxycircularreferredtoinPartXIII;(h)approveatake-overbidcircularordirectors’circularreferredtoinPartXVII;(i)approveanyfinancialstatementsreferredtoinsection155;or(j)adopt,amendorrepealby-laws.Officers121Subjecttothearticles,theby-lawsoranyunanimousshareholderagreement,(a)thedirectorsmaydesignatetheofficesofthecorporation,appointasofficerspersonsoffullcapacity,specifytheirdutiesanddelegatetothempowerstomanagethebusinessandaffairsofthecorporation,exceptpowerstodoanythingreferredtoinsubsection115(3);(b)adirectormaybeappointedtoanyofficeofthecorporation;and(c)twoormoreofficesofthecorporationmaybeheldbythesameperson.Indemnification124(1)Acorporationmayindemnifyadirectororofficerofthecorporation,aformerdirectororofficerofthecorporationoranotherindividualwhoactsoractedatthecorporation’srequestasadirectoror

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officer,oranindividualactinginasimilarcapacity,ofanotherentity,againstallcosts,chargesandexpenses,includinganamountpaidtosettleanactionorsatisfyajudgment,reasonablyincurredbytheindividualinrespectofanycivil,criminal,administrative,investigativeorotherproceedinginwhichtheindividualisinvolvedbecauseofthatassociationwiththecorporationorotherentity.Advanceofcosts(2)Acorporationmayadvancemoneystoadirector,officerorotherindividualforthecosts,chargesandexpensesofaproceedingreferredtoinsubsection(1).Theindividualshallrepaythemoneysiftheindividualdoesnotfulfiltheconditionsofsubsection(3).Limitation(3)Acorporationmaynotindemnifyanindividualundersubsection(1)unlesstheindividual(a)actedhonestlyandingoodfaithwithaviewtothebestinterestsofthecorporation,or,asthecasemaybe,tothebestinterestsoftheotherentityforwhichtheindividualactedasdirectororofficerorinasimilarcapacityatthecorporation’srequest;and(b)inthecaseofacriminaloradministrativeactionorproceedingthatisenforcedbyamonetarypenalty,theindividualhadreasonablegroundsforbelievingthattheindividual’sconductwaslawful.Indemnificationinderivativeactions(4)Acorporationmaywiththeapprovalofacourt,indemnifyanindividualreferredtoinsubsection(1),oradvancemoneysundersubsection(2),inrespectofanactionbyoronbehalfofthecorporationorotherentitytoprocureajudgmentinitsfavour,towhichtheindividualismadeapartybecauseoftheindividual’sassociationwiththecorporationorotherentityasdescribedinsubsection(1)againstallcosts,chargesandexpensesreasonablyincurredbytheindividualinconnectionwithsuchaction,iftheindividualfulfilstheconditionssetoutinsubsection(3).Righttoindemnity(5)Despitesubsection(1),anindividualreferredtointhatsubsectionisentitledtoindemnityfromthecorporationinrespectofallcosts,chargesandexpensesreasonablyincurredbytheindividualinconnectionwiththedefenceofanycivil,criminal,administrative,investigativeorotherproceedingtowhichtheindividualissubjectbecauseoftheindividual’sassociationwiththecorporationorotherentityasdescribedinsubsection(1),iftheindividualseekingindemnity(a)wasnotjudgedbythecourtorothercompetentauthoritytohavecommittedanyfaultoromittedtodoanythingthattheindividualoughttohavedone;and(b)fulfilstheconditionssetoutinsubsection(3).Insurance(6)Acorporationmaypurchaseandmaintaininsuranceforthebenefitofanindividualreferredtoinsubsection(1)againstanyliabilityincurredbytheindividual(a)intheindividual’scapacityasadirectororofficerofthecorporation;or(b)intheindividual’scapacityasadirectororofficer,orsimilarcapacity,ofanotherentity,iftheindividualactsoractedinthatcapacityatthecorporation’srequest.Applicationtocourt(7)Acorporation,anindividualoranentityreferredtoinsubsection(1)mayapplytoacourtforanorderapprovinganindemnityunderthissectionandthecourtmaysoorderandmakeanyfurtherorderthatitseesfit.NoticetoDirector(8)Anapplicantundersubsection(7)shallgivetheDirectornoticeoftheapplicationandtheDirectorisentitledtoappearandbeheardinpersonorbycounsel.

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Othernotice(9)Onanapplicationundersubsection(7)thecourtmayordernoticetobegiventoanyinterestedpersonandthepersonisentitledtoappearandbeheardinpersonorbycounsel.Remuneration125Subjecttothearticles,theby-lawsoranyunanimousshareholderagreement,thedirectorsofacorporationmayfixtheremunerationofthedirectors,officersandemployeesofthecorporation.QuébecBusinessCorporationsActBOARDOFDIRECTORS106.Theboardofdirectorsofacorporationiscomposedofoneormoredirectors.Ifthecorporationisareportingissuer,theboardofdirectorsiscomposedofnotfewerthanthreedirectors,atleasttwoofwhommustnotbeofficersoremployeesofthecorporationoranaffiliateofthecorporation.107.Thetermofofficeofthefirstdirectorsofacorporationdesignatedbythefoundersinthelistofdirectorsorintheinitialdeclarationfiledwiththearticlesofconstitutionbeginsonthedatethecorporationisconstitutedandendsatthecloseofthefirstshareholdersmeeting.108.Anynaturalpersonmaybeadirectorofacorporation,exceptpersonsdisqualifiedfortheofficeofdirectorundertheCivilCodeorpersonsdeclaredincapablebydecisionofacourtofanotherjurisdiction. 110.Thedirectorsareelectedbytheshareholders,inthemannerandfortheterm,notexceedingthreeyears,setoutintheby-laws.Itisnotnecessarythatallthedirectorselectedholdofficeforthesameterm.Adirectornotelectedforanexpresslystatedtermceasestoholdofficeatthecloseofthefirstannualshareholdersmeetingfollowingthedirector’selection.Ifcircumstancespreventashareholdersmeetingfromelectingthefixednumberorminimumnumberofdirectorsrequiredbythearticles,thedirectorselectedatthatmeetingmayexerciseallthepowersofthedirectorsifthenumberofdirectorssoelectedconstitutesaquorum.111.Thearticlesmayprovideforcumulativevotingfortheelectionofdirectors.Insuchacase,theshareholdersarecalledupontoelectafixednumberofdirectorsrequiredbythearticles,andeachelectorhastherighttocastanumberofvotesequaltothenumberofvotesattachedtothesharesheldbytheshareholdermultipliedbythenumberofdirectorstobeelected,andmaycastallofthosevotesinfavourofonecandidateordistributethemamongthecandidatesinanymanner.Thefollowingrulesapplytocumulativevoting:(1)aseparatevoteoftheshareholdersistobetakenwithrespecttoeachcandidateunlessaresolutionispassedunanimouslypermittingtwoormorepersonstobeelectedbyasingleresolution;(2)ifashareholderhasvotedformorethanonecandidatewithoutspecifyingthedistributionofvotes,theshareholderisdeemedtohavedistributedthevotesequallyamongthosecandidates;(3)ifthenumberofcandidatesexceedsthenumberofpositionstobefilled,thecandidateswhoreceivethelowestnumberofvotesareeliminateduntilthenumberofcandidatesremainingequalsthenumberofpositionstobefilled;(4)eachdirectorceasestoholdofficeatthecloseofthefirstannualshareholdersmeetingfollowingthedirector’selection;and(5)adirectormayberemovedfromofficeorthenumberofdirectorsmaybedecreasedonlyifthenumberofvotescastinfavouroftheremovalorthedecreaseisgreaterthantheproductofthenumberofdirectorsrequiredbythearticlesandthenumberofvotescastagainsttheremovalorthedecrease.FUNCTIONSANDPOWERSOFBOARDOFDIRECTORS

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112.Subjecttoaunanimousshareholderagreement,theboardofdirectorsexercisesallthepowersnecessarytomanage,orsupervisethemanagementof,thebusinessandaffairsofthecorporation.Excepttotheextentprovidedbylaw,suchpowersmaybeexercisedwithoutshareholderapprovalandmaybedelegatedtoadirector,anofficeroroneormorecommitteesoftheboard.113.Unlessotherwiseprovidedinthearticlesorinaunanimousshareholderagreement,theboardofdirectorsadoptsthecorporation’sby-laws.Theby-lawsareeffectiveasofthedateoftheresolutionoftheboard.Theby-lawsmustbesubmittedtotheshareholdersforapprovalatthenextshareholdersmeeting,andtheshareholdersmay,byordinaryresolution,ratify,rejectoramendthem.Theyceasetobeeffectiveatthecloseofthemeetingiftheyarerejectedbyornotsubmittedtotheshareholders.However,by-lawamendmentsrelatingtoproceduralmatterswithrespecttoshareholdersmeetingstakeeffectonlyoncetheyhavereceivedshareholderapproval.Aby-lawadoptedbytheshareholdersonashareholderproposalsubmittedinaccordancewithsubdivision6ofDivisionIofChapterVIIiseffectiveasofitsadoptionandrequiresnootherapproval.Itmayonlyberepealedwiththeapprovaloftheshareholders.Therulesofthissectionapply,withthenecessarymodificationsandsubjecttotheby-laws,totheamendmentorrepealofby-laws.116.Unlessotherwiseprovidedintheby-lawsorinaunanimousshareholderagreement,theboardofdirectorsmaydesignatetheofficesofthecorporation,appointdirectorsorotherpersonsasofficersandspecifytheirfunctions.Theofficersaremandatariesofthecorporation.Theboardofdirectorsmaycreateoneormorecommitteesmadeupofdirectors.117.Unlessotherwiseprovidedintheby-lawsorinaunanimousshareholderagreement,theboardofdirectorsdeterminestheremunerationofthecorporation’sdirectorsandofficers.118.Theboardofdirectorsmaynotdelegateitspower(1)tosubmittotheshareholdersanyquestionormatterrequiringtheirapproval;(2)tofillavacancyamongthedirectorsorintheofficeofauditorortoappointadditionaldirectors;(3)toappointthepresidentofthecorporation,thechairoftheboardofdirectors,thechiefexecutiveofficer,thechiefoperatingofficerorthechieffinancialofficerregardlessoftheirtitle,andtodeterminetheirremuneration;(4)toauthorizetheissueofshares;(5)toapprovethetransferofunpaidshares;(6)todeclaredividends;(7)toacquire,includingbypurchase,redemptionorexchange,sharesissuedbythecorporation;(8)tosplit,consolidateorconvertshares;(9)toauthorizethepaymentofacommissiontoapersonwhopurchasessharesorothersecuritiesofthecorporation,orprocuresoragreestoprocurepurchasersforthosesharesorsecurities;(10)toapprovethefinancialstatementspresentedattheannualmeetingsofshareholders;(11)toadopt,amendorrepealby-laws;(12)toauthorizecallsforpayment;(13)toauthorizetheconfiscationofshares;(14)toapproveanamendmenttothearticlesallowingaclassofunissuedsharestobedividedintoseries,andtodeterminethedesignationofandtherightsandrestrictionsattachingtothoseshares;or(15)toapproveashort-formamalgamation.CESSATIONOFOFFICEANDVACANCYONBOARDOFDIRECTORS144.Unlessthearticlesprovideforcumulativevoting,theshareholdersmaybyordinaryresolutionataspecialmeetingremoveanydirectorordirectors.

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Ifcertainshareholdershaveanexclusiverighttoelectoneormoredirectors,adirectorsoelectedmayonlyberemovedbyordinaryresolutionofthoseshareholders.Avacancycreatedbytheremovalofadirectormaybefilledattheshareholdersmeetingatwhichthedirectorisremovedor,ifitisnot,atasubsequentmeetingoftheboardofdirectors.147.Unlessotherwiseprovidedinthearticles,iftheholdersofanyclassorseriesofshareshaveanexclusiverighttoelectoneormoredirectorsandavacancyoccursamongthosedirectors,thevacancymaybefilledbytheremainingdirectorselectedbytheholdersofthatclassorseriesofsharesor,iftherearenosuchremainingdirectors,bytheholdersofthatclassorseriesofsharesbyordinaryresolutionataspecialmeetingtheycallforthatpurpose.148.Thearticlesmayprovidethatavacancyontheboardofdirectorsmayonlybefilledbyavoteoftheshareholdersentitledtovote,orbyavoteoftheholdersofaclassorseriesofshareshavinganexclusiverighttodoso.INDEMNIFICATIONANDLIABILITYINSURANCE159.Subjecttosection160,acorporationmustindemnifyadirectororofficerofthecorporation,aformerdirectororofficerofthecorporation,amandatary,oranyotherpersonwhoactsoractedatthecorporation’srequestasadirectororofficerofanothergroupagainstallcosts,chargesandexpensesreasonablyincurredintheexerciseoftheirfunctions,includinganamountpaidtosettleanactionorsatisfyajudgment,orarisingfromanyinvestigativeorotherproceedinginwhichthepersonisinvolvedif(1)thepersonactedwithhonestyandloyaltyintheinterestofthecorporationor,asthecasemaybe,intheinterestoftheothergroupforwhichthepersonactedasdirectororofficerorinasimilarcapacityatthecorporation’srequest;and(2)inthecaseofaproceedingthatisenforcedbyamonetarypenalty,thepersonhadreasonablegroundsforbelievingthathisorherconductwaslawful.Thecorporationmustalsoadvancemoneystosuchapersonforthecosts,chargesandexpensesofaproceedingreferredtointhefirstparagraph.160.Intheeventthatacourtoranyothercompetentauthorityjudgesthattheconditionssetoutinsubparagraphs1and2ofthefirstparagraphofsection159arenotfulfilled,thecorporationmaynotindemnifythepersonandthepersonmustrepaytothecorporationanymoneysadvancedunderthatsection.Furthermore,thecorporationmaynotindemnifyapersonreferredtoinsection159ifthecourtdeterminesthatthepersonhascommittedanintentionalorgrossfault.Insuchacase,thepersonmustrepaytothecorporationanymoneysadvanced.161.Acorporationmay,withtheapprovalofthecourt,inrespectofanactionbyoronbehalfofthecorporationorothergroupreferredtoinsection159,againstapersonreferredtointhatsection,advancethenecessarymoniestothepersonorindemnifythepersonagainstallcosts,chargesandexpensesreasonablyincurredbythepersoninconnectionwiththeaction,ifthepersonfulfillstheconditionssetoutinthatsection.162.Acorporationmaypurchaseandmaintaininsuranceforthebenefitofitsdirectors,officersandothermandatariesagainstanyliabilitytheymayincurassuchorintheircapacityasdirectors,officersormandatariesofanothergroup,iftheyactoractedinthatcapacityatthecorporation’srequest.ANNUALSHAREHOLDERSMEETING198.Ashareholderproposalmayincludenominationsfortheelectionofdirectorsiftheproposalissignedbyoneormoreholdersofsharesrepresentingnotlessthan5%ofthesharesor5%ofthesharesof

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aclassofsharesofthecorporationthatcarrytherighttovoteattheshareholdersmeetingtowhichtheproposalistobepresented.Thissectiondoesnotprecludeothernominationsatthemeeting.CivilCodeofQuébec327.Minors,personsoffullageundertutorshiporcuratorship,bankruptsandpersonsprohibitedbythecourtfromholdingsuchofficearedisqualifiedforofficeasdirectors.However,minorsandpersonsoffullageundertutorshipmaybedirectorsofassociationsconstitutedaslegalpersonsthatdonotaimtomakepecuniaryprofitsandwhoseobjectsconcernthem.328.Theactsofadirectororseniorofficermaynotbeannulledonthesolegroundthathewasdisqualifiedorthathisdesignationwasirregular.àTheroleofmanagementàAssumingmanagementpositionsàManagementcompensation1)TheRoleofManagement

• Management=directorsandofficerswhooccupyboardcreatedoffices.• Wehavetraditionallybeenalmostexclusivelyfocusedontheroleofdirectors.• But,mostpracticalpowerovercorporationsisactuallywieldedbyprofessionalmanagers

(officers).Theyhavegainedalotofcontrolovertheboardofdirectors.• Directorprimacytheory(Bainbridge,UCLA)

o Ideathatdirectorsoccupythemostpowerfulrole.• Managerialprimacytheory

o Ideathatprofessionalmanagersarethebestonestooccupythemostpowerfulrole.• UndertheCBCAandQBCA,directorsaretheoneswhoarethelocusandpinnacleofmanagement

control.o Section102CBCA–directorsshallsupervisethemanagementofthebusinessandaffairs

ofthecorporation.o Section112QBCA,basicallysaysthesamething,directorsincharge.o Really,nomentionofofficersorshareholders.o So,directorsenjoyprimacybasedonthelegislation–theyhaveultimatecontroloverthe

affairsofthecorporationandtheywieldthatcontroloverotherparties.Broadestandsuperiorauthority.

• Managersenjoymanagerialpoweroverthecorporationthroughtheirofficesthathavebeencreatedbytheboardandpowersaredelegatedtotheseoffices/officers.

o Managersthereforeenjoyday-to-daypoweroverthecorporation.o CBCA121(a),QBCA112,116o CBCA115(3)–therearelimitstowhattheboardcandelegateawaytoofficers.Boardmust

retaincertainpowers.o QBCA118–similarrestrictionsondelegationofpower.

§ Differentones:• Mustretainpowertoapproveornotapprovetransferofunpaidshares.• Mustretainpowertohire,fire,setremunerationofseniorofficialswithin

corporation(president,chair,CEO,COO,CFO).o Boardmustretainpowertosuperviseofficers,makesuretheyareexercisingtheir

delegatedpowerswell.

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• Traditionalunderstandingofcorporategovernanceo Acorporationistraditionallyunderstoodtobemanagedforthebenefitofshareholders

alone,anditismanagedbydirectorswhoareputtherebyshareholdersandareresponsivetoshareholders.

o Directorselectedbyshareholderstooverseeoperations,hireprofessionalmanagers.o Coreproblem:emergenceofaseparationofownershipinterestsandcontrollinginterests.

§ Groupsofindividualsorganizedintoanykindofassociationhavethreefunctionstheyhavetoperform:

• Thosewhoinvestcapitalandget,inexchangeforinvestment,proprietaryinterest(ownershipinterests/stake)intheinterests

• Thosewhohavepowerovertheorganizationwhosetstrategicobjectives• Thosewhoact,whoenableittoachieveitsobjectives,withoutbeingthose

whoactuallysetthoseobjectives(e.g.employees).• Previously,corporationsweresmall,runbythosewhowerepersonallyacquaintedwithone

another,andfunctionstendedtobeunifiedwithinthissmallgroupwhohadpersonaltieswithoneanother.

• Then,cametoseeownershipandlegalcontroloverthecorporationasconcentratedintheowners.Thosethencarryingoutthebusinesswereemployees.

• 20thcentury,begantoseesomethingdifferenthappening.Inlargerindustrialcorporations,powerandproprietaryinterestsbecameseparated.Happenedasmembersofpublicbecameinterestedininvestingsmallamountsofcapitalincorporations.

o Thesecorporationsbecamewidelyheld,shareswerewidelydispersed.o Inthesecorporations,shareholderswerelosingallpracticalpoweroverthese

corporations.Theybecamepassiveinvestors.Thisisstillhowwethinkaboutshareholderstoday–theyarepassive,notactiveowners.

• Thisdivergenceandseparationofownersandcontrolwasreinforcedandenabledbymodernstatutesofincorporation.

o Directorsgivenprimarypowerovercorporationbutthereisnoobligationforthemtoinvestanycapital.Theydon’thavetohaveanownershipstakeinthecorporation.

o Shareholderscontributecapitalandhaveexpectationofreturninappreciationofshares,theyownthecorporationinthatsense,buttheyhavenocontroloverhowtheaffairsofthecorporationaremanaged.Onlyindirectcontrolthroughrighttovote.

• Thisisnormallyseentobeaproblem,butitisnotinvariablyso…• But,itcanbeaproblembecauseoftheinherentself-interestofindividuals–willagentsreallybut

theinterestsofshareholdersfirst?Onlywaytoavoidthisproblemisforownerstogetcontrolofthecorporationback.

o But,thereareeconomicbenefitstohiringagentstodothegoverningofcorporations.Therearealso,however,agencycoststhatcomewiththisdecisionandtheyareinherent.

o Ifyoucan’teliminatethesecosts,perhapsyoucanmakethemmorebearable…• Thisstoryhasbeensubsequentlywrinkledbythefactthatsincethistheorywasarticulatedby

BurlandMeen(1930s),professionalmanagers(officers)havecometobetheonestoexerciserealmanagerialpoweroverthecorporation.

2)Directors:MythandReality

• Theideaofdirectorprimacyisreallyjustamyth.• Generally,boardsofdirectorsoflarge/mediumcorporationsdon’tactuallysetobjectives,

strategies,andpolicies(whichiswhatthey’resupposedtodo).That’sgenerallylefttomanagement(officers).

o Boardssimplytendtoapprovedecisionsmadebymanagement,usuallybasedonscantevidence.Boardsaregenerallynotcapabletoengageinlong-termstrategicplanning–lackexpertise,don’thavetimeinbetweenoratboardmeetings,

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• Boardsclassicallythoughttoaskdiscerningquestions–doesn’treallyhappen.o Boardsnotseenasintendedtobedebatingsocieties.

• BoardsrarelyrejectchoiceofPresident,usuallysuggestedbyoutgoingPresident.• àThereisamajorpolicyconcernaboutwhatthismeans…

o Ifdirectorsarenotincontrol,notactinginbehalfofshareholders,thennooneisdoinganythingotherthantheself-perpetuatinggroupofprofessionalmanagers.

o Particularlypressingwhenyouthinkthatdirectorsarehandpickedbytheprofessionalmanagers.

o So,reallyprofessionalmanagershaveamassiveroleofpower–theycontroltheleversofpowerwithinthecorporation.

o Mostpeoplepointthefingeratshareholderpassivityasthesourceoftheproblem.Wehaveencouragedshareholderstobecomepassiveandnotgiventhemtheincentivetobecomemoreactive.

§ But,isn’tthisreallyjustinevitable?3)ControlsonManagement

• Controlfrommanagerialmarket–allprofessionalmanagershaveamarkettheyhavetorespondtofortheirskill.

o Ifyou’rereasonableresponsibletopersonalreputation,youwon’twanttodevelopareputationofincompetencebecauseyourownpersonalchancesinthemanagerialmarketwillbe

o Somethoughsaythatthismarketismute–can’tandwon’trespondunlessbehaviourparticularlyegregioustoattractpublicattention.

• Shareholderbehaviour–eveniftheydon’texertlegalpowerovercorporation,theycanasagroupexercisemarketdisciplinethroughtheirbehaviourswithinthatmarket.

o Willgetsignalfrommarketthatsomethingiswrong,willinfluencebehaviour.Iftheywillseetheirinvestmentssufferingtheywillwanttodosomethingaboutit.Mayactonthelegalcontrolstheyhave,makedirectorsandofficersrespondtothem.

o Canvotewiththeirfeet–canselltheirshares.• Corporateraiders–peoplelookingforunderperformingcompaniestoturnthemaroundand

yieldaprofit.Prospectofahostiletakeoveristhereforeasignificantmarketcontrolforshittymanagers.Theywilllosetheirpowerinahostiletakeoverbecausetheywillbefired.Wouldalsohaveimpactonprofessionalreputation.

4)AssumingManagementPositions

• Electionsandappointmentso Initialappointment–CBCA106(1)and(2),QBCA107o Subsequentelections–CBCA106(3)andQBCA110o Termlimits–CBCA106(3)(4)(5)andQBCA110

§ ThreeyearsisdefaultinQBCA§ OneyearisdefaultinCBCA

o Nomination–CBCA137(4),QBCA198§ Whocontrolswhoisontheslateforelections

o Classvoting–CBCA111(3)(4),QBCA147-148§ Directorsmaybeelectedtoservepositionsthatareassignedtoparticularclasses

ofsharesiftheconstitutionsetsoutclassesofshares.o Cumulativevoting–CBCA107,QBCA111

§ Notoftenused,cumulativevotingmaybeprovidedforinarticlesofcorporation.§ Allowsminorityshareholdersgreateropportunitytohavegreaterpossibilityof

havingtheirpreferredpersonelectedtotheboardofdirectors.

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§ Eachvoteattachedtoasharemultipliedbythenumberofpositionsopenforvote.§ Allowsthemtoconcentratevotesintoasinglecandidate.§ Evenwiththisprovision,stillprettydifficulttousesuccessfully.

o Casualvacancies–CBCA111,QBCA153§ Whendirectorsnotabletoservefullterm,casualvacancy,boardwillwanttohave

filled.§ Boarditselfcanfillthesevacancies,canappointsomeoneasstand-in/temporary

boardmember.o Removal–CBCA109,QBCA144

§ Directorscanberemovedthewaytheyarevotedin–byordinaryresolution.• Defectsinqualificationsofappointed/electeddirectors

o Youwouldthinktheactionsofapersonwhodoesn’tmeetthequalificationsshouldbeseenasinvalid…Notthecase.

§ CBCA18(d)and116• 18(d)–can’tassertthattheactionsofadirectorwhohasbeenheldoutasa

directorbutwhodoesnothavetherightqualificationsarenotbinding.• 116–actsarevalidnotwithstandingirregularityinelection/appointment

orproblemswithqualificationsofdirector.• àHowfarcanthisgo…?SeeMorrisv.KanssenandOliverv.Elliott.

§ QBCA13(3)andCCQ328Morrisv.Kanssen(1946,HoL)

• Acurativeprovisionlikes.116CBCAhasbroadeffectsbutitdoeshavelimitations.• Canbecalledupononlytocuretheactsofindividualswhoseappointmenthastechnicallybeen

defective,hasassumedofficeandcarriedoutactionswithsomeappearance/colourofright.• Roguedirectorimproperlyappointedtogetridofotherdirector.Courtdidn’tapplycurative

provisionbecausetherewerenoactsundertaken.Oliverv.Elliott(1960,ABSC)

• Acurativeprovisionlikes.116CBCAhasbroadeffectsbutitdoeshavelimitations.• Curativeprovisionappliestocureactsofdirectorsupuntilthepointthedefectwasrealized.But,

itdoesnotcuretheirappointments.Can’tbeconsideredtobeholdingagoodappointmentgoingforward.

5)ManagementCompensation

• Becameabigdebateinwakeof2008recession.• Thoughtthatbigsalariesàcorporategreed+shorttermperformance+riskydecisions• Itisn’ttruethatthereisacorrelationbetweenhighercorporatepayandbetterperformance.

o Thisisbecausecorporateofficershavecontrolofleversofpowerandsotheycanjustpaythemselvesmore.

o Solutions?§ Increaseshareholderpower,givethemmeaningfulcontroloverboardsof

directors,andthenboardswouldbeincentivizedtoclampdownonofficers.o BecameclearthattherewasaneedforreforminDC.

§ Proposedthatshareholdersshouldbegivennon-bindingvotere:executivecompensation(“sayonpay”).

§ Officersshouldberequiredtoholdsharestheyreceiveincompensationforaspecified,longerterm.

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• Iftheycouldholdthemonlyforashortterm,officerswouldmakeshort-term,riskydecisionswhichwouldyieldhighprofitsnow,theycouldsellsharesshort-term,makeabuck.

§ Executivesshouldn’tbeintheroomwheresalariesareo DoddFrankBill

§ Getnon-bindingshareholdervoteonceeverythreeyears§ Annualdisclosuremustbemadetoshareholders,explaininglinkbetween

compensationpackagesandcorporateperformance.§ Processwherebyfederalgovernmentwouldoverseecompensationpractices.

• Canadao Didn’thaveanyofthisupset/agitationinCanada.o CBCA125,QBCA117

§ Subjecttoprovisionstatingotherwiseinarticles/unanimousshareholderagreement.

§ Haven’tgoneasfarasUSwiththe“sayonpay”rule.

B)THEOBLIGATIONSOFMANAGEMENTi.TheDutyofCareCanadaBusinessCorporationsAct,s.122(1)(b)QuebecBusinessCorporationsAct,s.119CCQ,arts.322&1457CanadaBusinessCorporationsActDutyofcareofdirectorsandofficers122(1)Everydirectorandofficerofacorporationinexercisingtheirpowersanddischargingtheirdutiesshall(…)(b)exercisethecare,diligenceandskillthatareasonablyprudentpersonwouldexerciseincomparablecircumstances.QuébecBusinessCorporationsActDUTIESOFDIRECTORSANDOFFICERS119.Subjecttothisdivision,thedirectorsareboundbythesameobligationsasareimposedbytheCivilCodeonanydirectorofalegalperson.Consequently,intheexerciseoftheirfunctions,thedirectorsareduty-boundtowardthecorporationtoactwithprudenceanddiligence,honestyandloyaltyandintheinterestofthecorporation.Intheircapacityasmandatariesofthecorporation,theofficersarebound,amongotherthings,bythesameobligationsasareimposedonthedirectorsunderthesecondparagraph.CivilCodeofQuébec322.Adirectorshallactwithprudenceanddiligence.Heshallalsoactwithhonestyandloyaltyintheinterestofthelegalperson.1457.Everypersonhasadutytoabidebytherulesofconductincumbentonhim,accordingtothecircumstances,usageorlaw,soasnottocauseinjurytoanother.

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Whereheisendowedwithreasonandfailsinthisduty,heisliableforanyinjuryhecausestoanotherbysuchfaultandisboundtomakereparationfortheinjury,whetheritbebodily,moralormaterialinnature.Heisalsobound,incertaincases,tomakereparationforinjurycausedtoanotherbytheactorfaultofanotherpersonorbytheactofthingsinhiscustody.Summary

• Evolutionofdutyofcare,fromCMLtoCBCAo Hasbeenmarkedbygreatinconsistency–seemstoreflectunsettledviewaboutwhatwe

oughttomakeofthedutyofcare,whetheritsjustificationissolid.• Amandatorydutyofcarehaslongbeenrecognizedasbeingimportantincorporatelaw.

o But,it’snotalwaysbeentakenveryseriously.• CMLsettledonnon-existentstandardorlowstandard(basically,grossnegligence).• Overtime,policymakersandlawyersbegantoquestionwisdomofCMLapproach,whichwas

informedbyjudicialattitudeofdeferencetowardbusiness(businessjudgmentrule).Cametoquestionthisview.

• InPeoples,courtsaidthatCBCAprovisionsondutyofcarewereenactedtoraisethestandardsofthedutyofcare.InCanada,thestandardisobjectivebuthasacontextualelement.Assessobjectivelyavailableevidencere:circumstances.

• YellowflaginPeoplesre:whattomakeofbusinessjudgmentrule?FirsttimethatSCCacknowledgedbusinessjudgmentrule,butnotclearwhatitamountstoandhowitimpactsdutyofcare/corporatenegligence.WorrythatbusinessjudgmentrulemightunderminedutyofcarebecausethisiswhathappenedintheUS.Businessjudgmentrulemeantthatthedutyofcarewasloweredtogrossnegligencestandardwhichmadeitessentiallynon-existentandwouldtakeusbacktotheearlyoriginaldaysoftheCML.

• But,perhapsweshouldjustleaveriskcalibrationtothemarkets?Perspectivethatit’snotpossibletosetoutastandardofcaresoweshoulddoawaywithit.

• Seemsthatweasasocietythinkthere’ssomethingtothisduty–hasanimportantexpressivefunction.Admonishesdirectors/officerstotakecare.

• Wetendtothinkaboutnegligenceintermsoftortlawandcarelessness/inattentivenesstorisk.• But,whatwe’reconcernedaboutwithnegligenceclaimsagainstdirectorsandofficers(whichare

prettyrare–usuallybroughtunderdutyofloyalty),areallegationsofshirking–thisisonecategoryofagencycosts.Whenyouhireanagentanddelegatepower,shemakenottakeherobligationstoactonyourbehalfseriouslyifyou’renotwatchingcarefully.

o Examplesofshirkingfordirectors:§ Failuretoattendboardmeetings,failtoreviewdocuments(notproperlyinformed

atmeeting),failtoengageinmeaningfulthinking/discussionofmattersbeforetheboard.

o Examplesofshirkingforofficers:§ Failuretocapitalizeonbusinessopportunitiesbecausetoobusydoingsomething

else,failuretoengageinproperoversightofemployees,failuretoimplementbusinessstrategies/priorities.

• Policymakersandlawyershaverecognizedthatthecorporationissubjecttoriskofinjuryforwantofcarebydirectors/officers.So,thereisalegaldutyofcare.

o Wasfirstondirectors,andwithinlast30-40yearsthedutyofcarehasbeenextendedtoofficers.

• Thedutyofcareincorporatelawisnotlikethedutyofcareintortlaw.Notjustanextensionofwhatweseeintortlaw.

• (1)OriginofDutyofCareinCorporateLawo InCML,emergedfromfieldoffiduciaryadministration–extendedfromtrustlaw.

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§ Directorsandofficershavesignificantcontroloverpropertythatisnottheirs–belongstocorporationasalegalperson/theshareholders.

§ So,onlymakessensetoextenddutyofcaretodirectorsbecausetheyoccupyasimilarroletotrustees.

o InCVL,seeart.322–mustactwithprudenceanddiligence.

• (2)ScopeofDutyofCareinCorporateLawo Scopeofdutyappliesonlytodirector’sactionswithintheirofficialcapacity.o So,firstdetermineifbehaviourfallswithinambitofperson’sofficialcapacity.

• (3)BeneficiaryofDutyofCareinCorporateLaw

o It’sacorporatelawobligationintendedtoconstrainbehaviourofdirectorsandofficersincapacityofmanagerialfunction,whichisundertakenforthebenefitofthecorporation.

o But,canalsostandtobenefitshareholders.o But,traditionalviewisthatlegalbeneficiaryisthecorporation,whichwouldthenhave

standingtosueforbreachofdutyofcarebydirectors/officers.o àThishaschangedinCanadasinceSCCdecisioninPeople’s.

• (4)TheStandardofCare

o Includes:diligence,care,skill.§ Differentfromtortlaw–here,careisoneofthreeelements.Alsolooktodiligence

andskill.o Havetoexercisepowerswellandforthebenefitofthecorporation.

§ Mustdothiswithareasonablelevelofskill§ Mustbereasonablydiligent/attentivetodutytoact

o Careelementrequiresforesightofharmtocorporationthatmightreasonablybeexpectedtoariseasaresultofacourseofconduct.Engageinriskcalculus.

o Skillelement–manyofficers/directorsarehiredpreciselybecauseoftheskillsettheyaresupposedtobringtothetable.Therefore,reasonabletoexpecttheseindividualstodemonstratereasonablelevelofskillinmakingtheirdecisions.

• (5)StandardofCareatCMLàStandardofCareunderCBCAo Wassoweakthatsomesaiditwasnon-existentorthatifitdidexist,itwasfrequently

violatedanditwasexceedinglydifficulttoattachliability.o Reflectedpostureofjudicialdeferencetoexpertiseofbusinesspeople.Judgesfeltbusiness

peoplewerefarmorecompetenttomakebusinessdecisionsthantheywereandthereforetherewasariskofhindsightbiasonthepartofjudges.

o Courtrefusedtooutlinestandardofcaresoitcametobeoneofgrossnegligence.o Viewshavesincechanged.

§ Standardofcarehasbeenelevated.§ So,whenCBCAwasenacted,wasanefforttoupgradethestandardofcare.

• DescribedinPeoples.§ Wasthissuccessful?

o RelevantprovisionisCBCA122(1)(b),QBCAis119.Soperv.Canada(1997,FCA)Facts

• Bankruptcorporationfailedtodeductandremitincometaxfromemployees.Canavoidliabilityifexercisedreasonablecare?

Issue• Whatdoesthestandardofcarerequireofadirector?

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Reasoning• Isthestandardofcaremeanttobeanobjectiveorsubjectivestandard?

o Saiditwasahybridobjective-subjectivestandard.• Howmuchattentiondoyouneedtoshowinexercisingyourduties?

o Totalpassivityandirresponsibilityisnotpermitted.o But,hedidn’treallysaymuchmorethanthat.

§ Totalattentionisn’trequiredeither…So,somewherebetweendoingeverythinganddoingnothing.

Notes• Mostcommentatorssaidthatwhilehesaiditwashybrid,itwasreallysubjectivebecauseofits

referencepoints.• Feltthisdidn’treallymovethebaralongbecauseitwasstillessentiallyalowbar,stillsubjective.• Itis,however,atpeacewiththeCMLandreflectedthepreviouslydominantwayofthinkingabout

adutyofcare.Wasaworryofexpectingtoomuchofdirectors/officers.Thoughtitmadesenseforthoseinvolvedwiththerunningofthecorporationtogovernthemselvesorallowthemarkettoregulatethem.Courttotakehandsoffapproachre:regulatingrisk.

• Also,wasseenatthetimeintheCMLthatstandardshouldbeflexibleandnotfixedbecauseunlikeotherfiduciaryduties,directorshaveaverydiversesetofskills–theydon’thaveaunifiedsetoftraining,etc…andthecorporationsforwhichthey’reworkingarewildlydifferent.

o So,becauseofvarietyofqualificationsandvarietyofwork,thensawithazardoustocomeupwithfixedfloor.Besttoleavetomarkettodeterminewhatlevelofriskisappropriate.

Peoplesv.Wise(SCC,2004)Facts

• WiseboughtPeoplesfromM&S,couldn’tdofullamalgamationuntilfullpaymentmade.But,triedtointegrateaspectsofbusinessesandthingsfailedspectacularly.Implementedjointstrategyre:procurementtotryandsolveproblem.

• Jointstrategywentsouuuuuth–didn’thelpmakethingsbetter,madethingsworse.• EventuallyM&SfiledbankruptcyproceedingsagainstPeoples.• TrusteesfilesuitagainstWisebrothersasdirectors/officersofPeoples,sayingthatjointstrategy

wasnegligentandfavouredtheinterestsofthebrothersattheexpenseoftheunsecuredcreditors.• ArguedthattheunsecuredcreditorsenjoyeddutyofcarefromWisebrothersasdirectorsof

Peoples.Issue

• DidWisebrothersasdirectorsofPeoplesoweadutyofcaretotheircreditors?No/yes• Ifso,didtheybreachit?No.

Reasoning• Isthereadutyofcaretocreditors?

o Noandyes.o SCCsaidcreditorscannotsuedirectors/officersdirectlyunderCBCAforbreachof

122(1)(a).Nodirectremedy.o But,breachofstatutorydutyofcaremayfoundclaimofextra-contractualliabilityunder

1457CCQbecausedutyofcarewasarticulatedopenlyre:whoenjoysit.o However,thismakesitsothatoutsideQuebecdoesthisapply?Nosimilargroundtoseek

recovery(no1457).So,narrowlyappliestoCBCAcorporationsthatoperateinsideQuebec.o NotethatQBCAdutyunder119isadutythatisowedonlytothecorporation.

• Standardofcareo StandardofcareatCMLwasverylow.o ConcludedthatdutyofcarereinforcedwhenCBCAenactedandnowmoredemanding.

Howdemandingisitnow?

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o Standardisnotsubjective.It’sobjectivewithacontextualelement–payattentiontothecontextbutitdoesnotimplysubjectivity.Lookatobjectiveinformationre:relevantcontextualfeaturesincontextthatdirector/officermadedecisions.

o Whatevidencedowelookat?Welookatthatrelatedtoprimaryfacts:§ Thosethatrelatetocourseofconductitself(impugneddecision).

• Whatwasthedecisionandwhatarethereasonsgivenforthedecisionatthetime?

§ Also,lookatprevailingsocio-economicconditionsbecausecorporationsoperatingwithinamarketcontext.

• Businessjudgmentruleo Whatimpactdoesbusinessjudgmentrulehaveonthestandardofcare?o It’sanattitudeofdeference–defertoofficers/directorswhomakedecisionsthattheyare

authorizedtomake.Willbemoreorlessunwillingtosecondguessdecisionsmakeinclimateofuncertaintysolongasdecisionwaswithinarangeofreasonablealternatives.

o CourtcitesONCAinMapleLeafFoods–thereisabusinessjudgmentruleinCanada:§ Lookstoseeifareasonable,notperfectdecision,wasmade.Courtoughtnotto

substituteopinionforthatofdecisionsofboardsolongasoneofreasonableoptions.

§ Notclear,however,whatthisreallymeans…• Causation

o Thereisacausationrequirementforcorporatelawdutyofcare.o Eveniftherewasdutyofcarehere,wouldbequestionableaboutcausation–somany

otherfactorswereatplaywhichcouldhavemadethejointpolicysuchaspectacularfailure.

• Defenseso Section123(5)CBCA–argumentthatWisebrothersreliedingoodfaithonexpertiseand

adviceofseniorofficerre:jointpolicy.o Courtsaidno–it’smeanttoprotectadvicegivenbymembersofregulatedprofession.That

wasn’tthecasehere–wasjustthathehadsomebusinesstraining/expertise.Notenoughtocomewithinthisdefence.

• (6)BusinessJudgmentRule

o Suggestionthatit’sjustaruleofdeferenceandthatit’sjustthecourtacknowledgingitsinstitutionalauthority.

o ItstemsfromtheUS–so,questionastowhetherCanadiancourtswillbeinfluencedbytheUSinterpretationofthisrule.

o IntheUS,it’smuchmorerobustthaninCanada–basically,onlygrossnegligencewillbegroundsforliabilitybecauseofextremedeferencetobusinessjudgmentrule.Meansthatdutyofloyaltyanddutyofcarehavebeensignificantlydenuded.

o Isthiswherewe’regoinginCanada?§ Millerdoes’ntthinkit’slikelybecauseitwouldn’tsquarewithwhatwassaidin

Peoples.§ Stillwaiting,however,forCanadiancourtstoclarifywhattheCanadianversionof

thebusinessjudgmentrulelookslike.

ii.TheDutyofLoyaltyCanadaBusinessCorporationsAct,ss.122(1)(a),120,122(3)&242(1)QuebecBusinessCorporationsAct,ss.119,122-133,120&440CCQ,arts.322-326

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CanadaBusinessCorporationsActDisclosureofinterest120(1)Adirectororanofficerofacorporationshalldisclosetothecorporation,inwritingorbyrequestingtohaveitenteredintheminutesofmeetingsofdirectorsorofmeetingsofcommitteesofdirectors,thenatureandextentofanyinterestthatheorshehasinamaterialcontractormaterialtransaction,whethermadeorproposed,withthecorporation,ifthedirectororofficer

o (a)isapartytothecontractortransaction;o (b)isadirectororanofficer,oranindividualactinginasimilarcapacity,ofapartytothe

contractortransaction;oro (c)hasamaterialinterestinapartytothecontractortransaction.

Timeofdisclosurefordirector(2)Thedisclosurerequiredbysubsection(1)shallbemade,inthecaseofadirector,

o (a)atthemeetingatwhichaproposedcontractortransactionisfirstconsidered;o (b)ifthedirectorwasnot,atthetimeofthemeetingreferredtoinparagraph(a),

interestedinaproposedcontractortransaction,atthefirstmeetingafterheorshebecomessointerested;

o (c)ifthedirectorbecomesinterestedafteracontractortransactionismade,atthefirstmeetingafterheorshebecomessointerested;or

o (d)ifanindividualwhoisinterestedinacontractortransactionlaterbecomesadirector,atthefirstmeetingafterheorshebecomesadirector.

• àBasically,ASAP.Timeofdisclosureforofficer(3)Thedisclosurerequiredbysubsection(1)shallbemade,inthecaseofanofficerwhoisnotadirector,

o (a)immediatelyafterheorshebecomesawarethatthecontract,transaction,proposedcontractorproposedtransactionistobeconsideredorhasbeenconsideredatameeting;

o (b)iftheofficerbecomesinterestedafteracontractortransactionismade,immediatelyafterheorshebecomessointerested;or

o (c)ifanindividualwhoisinterestedinacontractlaterbecomesanofficer,immediatelyafterheorshebecomesanofficer.

• àAgain,basicallyASAP.Timeofdisclosurefordirectororofficer(4)Ifamaterialcontractormaterialtransaction,whetherenteredintoorproposed,isonethat,intheordinarycourseofthecorporation’sbusiness,wouldnotrequireapprovalbythedirectorsorshareholders,adirectororofficershalldisclose,inwritingtothecorporationorrequesttohaveitenteredintheminutesofmeetingsofdirectorsorofmeetingsofcommitteesofdirectors,thenatureandextentofhisorherinterestimmediatelyafterheorshebecomesawareofthecontractortransaction.Voting(5)Adirectorrequiredtomakeadisclosureundersubsection(1)shallnotvoteonanyresolutiontoapprovethecontractortransactionunlessthecontractortransactionunlessthecontractortransaction

o (a)relatesprimarilytohisorherremunerationasadirector,officer,employee,agentormandataryofthecorporationoranaffiliate;

o (b)isforindemnityorinsuranceundersection124;oro (c)iswithanaffiliate.

Continuingdisclosure

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(6)Forthepurposesofthissection,ageneralnoticetothedirectorsdeclaringthatadirectororanofficeristoberegardedasinterested,foranyofthefollowingreasons,inacontractortransactionmadewithaparty,isasufficientdeclarationofinterestinrelationtothecontractortransaction:

o (a)thedirectororofficerisadirectororofficer,oractinginasimilarcapacity,ofapartyreferredtoinparagraph(1)(b)or(c);

o (b)thedirectororofficerhasamaterialinterestintheparty;oro (c)therehasbeenamaterialchangeinthenatureofthedirector’sortheofficer’sinterest

intheparty.Accesstodisclosures(6.1)Theshareholdersofthecorporationmayexaminetheportionsofanyminutesofmeetingsofdirectorsorofcommitteesofdirectorsthatcontaindisclosuresunderthissection,andanyotherdocumentsthatcontainthosedisclosures,duringtheusualbusinesshoursofthecorporation.Avoidancestandards(7)Acontractortransactionforwhichdisclosureisrequiredundersubsection(1)isnotinvalid,andthedirectororofficerisnotaccountabletothecorporationoritsshareholdersforanyprofitrealizedfromthecontractortransaction,becauseofthedirector’sorofficer’sinterestinthecontractortransactionorbecausethedirectorwaspresentorwascountedtodeterminewhetheraquorumexistedatthemeetingofdirectorsorcommitteeofdirectorsthatconsideredthecontractortransaction,if

o (a)disclosureoftheinterestwasmadeinaccordancewithsubsections(1)to(6);o (b)thedirectorsapprovedthecontractortransaction;ando (c)thecontractortransactionwasreasonableandfairtothecorporationwhenit

wasapproved.Confirmationbyshareholders(7.1)Eveniftheconditionsofsubsection(7)arenotmet,adirectororofficer,actinghonestlyandingoodfaith,isnotaccountabletothecorporationortoitsshareholdersforanyprofitrealizedfromacontractortransactionforwhichdisclosureisrequiredundersubsection(1),andthecontractortransactionisnotinvalidbyreasononlyoftheinterestofthedirectororofficerinthecontractortransaction,if

o (a)thecontractortransactionisapprovedorconfirmedbyspecialresolutionatameetingoftheshareholders;

o (b)disclosureoftheinterestwasmadetotheshareholdersinamannersufficienttoindicateitsnaturebeforethecontractortransactionwasapprovedorconfirmed;and

o (c)thecontractortransactionwasreasonableandfairtothecorporationwhenitwasapprovedorconfirmed.

Applicationtocourt(8)Ifadirectororanofficerofacorporationfailstocomplywiththissection,acourtmay,onapplicationofthecorporationoranyofitsshareholders,setasidethecontractortransactiononanytermsthatitthinksfit,orrequirethedirectororofficertoaccounttothecorporationforanyprofitorgainrealizedonit,ordoboththosethings.Dutyofcareofdirectorsandofficers122(1)Everydirectorandofficerofacorporationinexercisingtheirpowersanddischargingtheirdutiesshall(a)acthonestlyandingoodfaithwithaviewtothebestinterestsofthecorporation;andNoexculpation

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122(3)Subjecttosubsection146(5),noprovisioninacontract,thearticles,theby-lawsoraresolutionrelievesadirectororofficerfromthedutytoactinaccordancewiththisActortheregulationsorrelievesthemfromliabilityforabreachthereof.Evidenceofshareholderapprovalnotdecisive242(1)AnapplicationmadeoranactionbroughtorintervenedinunderthisPartshallnotbestayedordismissedbyreasononlythatitisshownthatanallegedbreachofarightordutyowedtothecorporationoritssubsidiaryhasbeenormaybeapprovedbytheshareholdersofsuchbodycorporate,butevidenceofapprovalbytheshareholdersmaybetakenintoaccountbythecourtinmakinganorderundersection214,240or241.QuebecBusinessCorporationsActDUTIESOFDIRECTORSANDOFFICERS119.Subjecttothisdivision,thedirectorsareboundbythesameobligationsasareimposedbytheCivilCodeonanydirectorofalegalperson.Consequently,intheexerciseoftheirfunctions,thedirectorsareduty-boundtowardthecorporationtoactwithprudenceanddiligence,honestyandloyaltyandintheinterestofthecorporation.Intheircapacityasmandatariesofthecorporation,theofficersarebound,amongotherthings,bythesameobligationsasareimposedonthedirectorsunderthesecondparagraph.120.Subjecttotheprovisionsofsection214,noprovisionofthearticles,theby-laws,aresolutionoracontractmayrelievedirectorsfromtheirobligations,orfromliabilityforabreachoftheirobligations.122.Adirectororofficerofacorporationmustdisclosethenatureandvalueofanyinterestheorshehasinacontractortransactiontowhichthecorporationisaparty.Forthepurposesofthissubdivision,“interest”meansanyfinancialstakeinacontractortransactionthatmayreasonablybeconsideredlikelytoinfluencedecision-making.Furthermore,aproposedcontractoraproposedtransaction,includingrelatednegotiations,isconsideredacontractortransaction.123.Adirectororanofficermustdiscloseanycontractortransactiontowhichthecorporationandanyofthefollowingareaparty:(1)anassociateofthedirectororofficer;(2)agroupofwhichthedirectororofficerisadirectororofficer;(3)agroupinwhichthedirectororofficeroranassociateofthedirectororofficerhasaninterest.Thedirectororofficersatisfiestherequirementifheorshediscloses,inacasespecifiedinsubparagraph2,thedirectorshiporofficeheldwithinthegroupor,inacasespecifiedinsubparagraph3,thenatureandvalueoftheinterestheorsheorhisorherassociatehasinthegroup.124.Unlessitisrecordedintheminutesofthefirstmeetingoftheboardofdirectorsatwhichthecontractortransactionisdiscussed,thedisclosureofaninterest,contractortransactionmustbemadeinwritingtotheboardofdirectorsassoonasthedirectorbecomesawareoftheinterest,contractortransaction.125.Inthecaseofanofficerwhoisnotadirector,thedisclosurerequiredbysections122and123mustbemadeassoonas(1)theofficerbecomesanofficer;(2)theofficerbecomesawarethatthecontractortransactionistobediscussedorhasbeendiscussedatameetingoftheboard;or(3)theofficerortheofficer’sassociateacquiresaninterestinthecontractortransaction,ifitwasenteredintoearlier.

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126.Thedisclosurerequiredbysections122and123mustbemadeeveninthecaseofacontractortransactionthatdoesnotrequireapprovalbytheboardofdirectors.127.Nodirectormayvoteonaresolutiontoapprove,amendorterminatethecontractortransactiondescribedinsection122or123orbepresentduringdeliberationsconcerningtheapproval,amendmentorterminationofsuchacontractortransactionunlessthecontractortransaction(1)relatesprimarilytotheremunerationofthedirectororanassociateofthedirectorasadirectorofthecorporationoranaffiliateofthecorporation;(2)relatesprimarilytotheremunerationofthedirectororanassociateofthedirectorasanofficer,employeeormandataryofthecorporationoranaffiliateofthecorporation,ifthecorporationisnotareportingissuer;(3)isforindemnityorliabilityinsuranceunderDivisionVII;or(4)iswithanaffiliateofthecorporation,andthesoleinterestofthedirectorisasadirectororofficeroftheaffiliate.128.Ifnoquorumexistsforthepurposeofvotingonaresolutiontoapproveacontractortransactiononlybecauseadirectorisnotpermittedbysection127tobepresentduringdeliberations,theotherdirectorspresentaredeemedtoconstituteaquorumforthepurposeofvotingontheresolution.129.Ifallthedirectorsarerequiredbysection127toabstainfromvoting,thecontractortransactionmaybeapprovedsolelybytheshareholdersentitledtovote,byordinaryresolution.Thedisclosurerequiredbysections122and123mustbemadetotheshareholdersinasufficientlyclearmannerbeforethecontractortransactionisapproved.130.Theshareholdersofacorporationmay,duringtheusualofficehoursofthecorporation,examinetheportionsofanyminutesofthemeetingsoftheboardofdirectorsorofanyotherdocumentthatcontaindisclosuresbydirectorsorofficersundersections122and123.131.Ifadirectororofficerfailstocomplywiththissubdivision,thecorporationorashareholdermayaskthecourttodeclarethecontractortransactionnullandtorequirethedirectororofficertoaccounttothecorporationforanyprofitorgainrealizedonitbythedirectororofficerortheassociatesofthedirectororofficer,andtoremittheprofitorgaintothecorporation,accordingtotheconditionsthecourtconsidersappropriate.132.Acontractortransactionforwhichadisclosurerequiredbysection122or123wasmademaynotbedeclarednullifthecontractortransactionwasapprovedbytheboardofdirectorsandthecontractortransactionwasintheinterestofthecorporationwhenitwasapproved.Normaythedirectororofficerconcerned,insuchacase,berequiredtoaccountforanyprofitorgainrealizedortoremittheprofitorgaintothecorporation.133.Despitethissubdivision,acontractortransactionmaynotbedeclarednullonlybecauseadirectororofficerdidnotmakethedisclosurerequiredbysections122and123,if(1)thecontractortransactionwasapprovedbyordinaryresolutionbytheshareholdersentitledtovotewhodonothaveaninterestinthecontractortransaction;(2)thedisclosurerequiredbysections122and123wasmadetotheshareholdersinasufficientlyclearmannerbeforethecontractortransactionwasapproved;and(3)thecontractortransactionwasinthebestinterestsofthecorporationwhenitwasapproved.Ifthedirectororofficeractedhonestlyandingoodfaith,heorshemaynotberequiredtoaccountfortheprofitorgainrealizedandtoremittheprofitorgaintothecorporation.440.Anapplicationmadeundersubdivision2or3maynotbedismissedonthesolegroundthatitisshownthatanallegedbreachofarightoforanobligationowedtoacorporationoritssubsidiaryhas

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beenormaybeapprovedbythecorporation’sshareholders,butevidenceofapprovalbytheshareholdersmaybetakenintoaccountbyacourtinmakingadecisionundereitherofthosesubdivisions.CivilCodeofQuebec322.Adirectorshallactwithprudenceanddiligence.Heshallalsoactwithhonestyandloyaltyintheinterestofthelegalperson.323.Nodirectormayminglethepropertyofthelegalpersonwithhisownpropertynormayheuseforhisownprofitorthatofathirdpersonanypropertyofthelegalpersonoranyinformationheobtainsbyreasonofhisduties,unlessheisauthorizedtodosobythemembersofthelegalperson.324.Adirectorshallavoidplacinghimselfinanysituationwherehispersonalinterestwouldbeinconflictwithhisobligationsasadirector.Adirectorshalldeclaretothelegalpersonanyinteresthehasinanenterpriseorassociationthatmayplacehiminasituationofconflictofinterestandofanyrighthemaysetupagainstit,indicatingtheirnatureandvalue,whereapplicable.Thedeclarationofinterestisrecordedintheminutesoftheproceedingsoftheboardofdirectorsortheequivalent.325.Adirectormay,evenincarryingonhisduties,acquire,directlyorindirectly,rightsinthepropertyunderhisadministrationorenterintocontractswiththelegalperson.Thedirectorshallimmediatelyinformthelegalpersonofanyacquisitionorcontractdescribedinthefirstparagraph,indicatingthenatureandvalueoftherightsheisacquiring,andrequestthatthefactberecordedintheminutesofproceedingsoftheboardofdirectorsortheequivalent.Heshallabstain,exceptifrequired,fromthediscussionandvotingonthequestion.Thisruledoesnot,however,applytomattersconcerningtheremunerationorconditionsofemploymentofthedirector.326.Wherethedirectorofalegalpersonfailstogiveinformationcorrectlyandimmediatelyofanacquisitionoracontract,thecourt,ontheapplicationofthelegalpersonoramember,may,amongothermeasures,annultheactororderthedirectortorenderaccountandtoremittheprofitorbenefitrealizedtothelegalperson.Theactionmaybebroughtonlywithinoneyearafterknowledgeisgainedoftheacquisitionorcontract.

• Unlikedutyofcare,dutyofloyaltyiswidelyrecognizedasbeinganecessaryconstraintonpowerofofficers/directors.

• Debateisn’tre:whetherweshouldhavedutyofloyaltyorhowstrongthestandardsshouldbe.• Instead,it’sabouthowweunderstandthedutyanditsbasicparameters.

o Bywhatstandardisloyaltyassessed?Howdowemeasureloyalty?o Whoseinterestisthisdutysupposedtoprotect?Towhomshoulddirectors/officersbe

loyal?

• Introductiono Sealy’sviewofthecorporatefiduciaryrelationship:

§ Therearevarioustypesoffiduciaryrelationships–whatunifiesthem?Whyisaparticularrelationshipafiduciaryone?

§ Viewthatfiduciarylawstemmedfromsloppyanalogicalreasoning,takingwhatwesawfromtrustlawandapplyingittothecorporatesetting.

§ Asaresult,doesn’tthinkthereisafixedsetofrules/principlesatplayhere.It’sacategory,butit’sempty.

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o Anotherview:§ Certaincategorieshavebeenrecognizedashavinganinherentfiduciarynature.§ Keycharacteristicofallfiduciaryrelationshipsisthatthefiduciaryhaslegal

discretionarypowerovertheinterestsofsomeoneelse.• Directorsandofficershavethisdiscretionarypower–theycanonlyfulfill

theirrolebyhavingthesepowers.o FiduciarylawisreallystemmingfromequityintheCML.o NotmuchontheCVLside.o Whataretheimplicationsofarelationshipbeingfoundtobefiduciary?

§ Assumeadditionallegalburdens/obligations• Willvarybasedontheundertakingyou’veaccepted.• Butmanyareratheruniform:

o Dutyofcareo Dutyofcandour/disclosureo Dutyofloyalty

• Mayalsobefoundtohavetopaymoregenerousremediesiftheybreachtheirduties.

o Theextentoftheremedywillbedeterminedbyhowmuchthefiduciarygainedfromtheirbreach,ratherthanbyhowmuchthebeneficiarylostasaresultofthefiduciary’sbreach.

• Remediesincludes:o Disgorgementofprofitso Remedialconstructivetrust–canclaimconstructivetrustoverthe

propertytogetitback(1)DutyofLoyalty

• Camefromequityandtrustlaw• Impliesatveryleast,tworules(conflictrules):

o (1)Ruleagainstconflictsofinterests§ Fiduciarycan’tpermitherownactualorpossibleintereststoconflictwiththoseof

abeneficiary.§ It’sanoutwardlookingbar–can’ttakeonobligationtoserveanotherifyou’ve

alreadygotobligationstoserveanother.§ “Twomastersrule”–youcan’tundertaketoservetomastersiftheirinterests

conflict.o (2)Ruleagainstconflictsofduty/conflictingmandates

• Statutoryincarnationo CBCA,s.122(1)(a)

§ Dutytoacthonestlyandingoodfaithwithviewtobestinterestsofcorporation.§ àConflictrulesdon’tmakeanyappearanceinthisstatutorydefinition…Doesn’t

mentionanythingaboutavoidingconflicts… • Wassomethinglostintranslationhere…?

• Peoplesv.Wise(2004,SCC)o Foundnodisloyaltyonthefactshere.o Thecorporatefiduciaryrelationship

§ Directors/officersandrelationshipwithcorporationlongseenasbeingafiduciaryrelationship.So,SCCdidn’tneedtosaymuchaboutwhethertherewasafiduciaryrelationshiphere.It’sallaboutdiscretionarypower.

o Contentofthedutyofloyalty§ Mostimportantpartthecourttalksabout.§ Adoptsthe“supersoakerstandard”–includeslikeeverythingggg

• Acthonestlyandingoodfaith

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• Respecttrustandconfidenceputinthem• Avoidconflictsofinterestwithcorporation• Avoidabusingpositiontogainpersonalbenefit• Maintainconfidentialityofinformationtheyacquirebyvirtueoftheir

position• Servecorporationselflessly

§ Havingapluralityofstandardslikethiscanmakethingsprettydifficultwhenyou’retryingtoassessdisloyalty…

• Whatshouldwefocusourattentionon?o Establishingdisloyalty:conductormotive?

§ Saidtheywouldlooktomotive.§ Notrequiredthatdirectors/officersavoidpersonalgaininallinstancesasaresult

oftheirhonestandgoodfaithsupervisionofthecorporation.Sometimestheirinterestswillgenuinelycoincidewiththoseofthecorporation.

§ Lessaboutinvestigatingwhethertheywereinastructuralpositionofconflictofinterest.

§ Here,TJfoundnofraudordishonestyandthereforenobasisforfindingbreachoffiduciaryduty.

o Beneficiaryofthedutyofloyalty§ SCCrejectedviewthatdutyisowedtoshareholdersortocorporationandits

shareholders.§ It’sonlyowedtothecorporationasanentity.§ So,loyaltymeasuredbyofficers/directors’behaviourandthecorporateinterests.

• Howdoweknowwhatthecorporateinterestsare…?o Directors/officershavetodecideonacase-by-casebasiswhatthe

corporateinterestsareandbalancetheviewsofvariousstakeholders.

• Howdoweknowwhensomethingisn’tinthecorporateinterest…?

(2)QBCAandCCQre:dutyofloyalty

• QBCA:Dutyboundtoactininterestofcorporation,CCQsaysprettymuchthesamething.• re:motiveorconflict?

o Moretowardconflictovermotive.o CCQ323–notpermittedtocominglepersonalandcorporateproperty,notallowedto

makeprofit,notallowedtomakeuseofconfidentialinformationo CCQ324–conflictofinterestrule–havetodiscloseconflicts,avoidplacingthemselvesin

positionofpotentialconflict.• Beneficiary?

o Directorsshouldbefreetoconsiderinterestsofdifferentgroupsindetermininglong-terminterestsofcorporation.

(3)CorporateFiduciaryDuty:ImproperPurposes

• Allegationthatcorporatedirectors/officersusedtheirpowersforimproperpurposes.• Shareholderswilloftenbringthiskindofclaimbecausetheyfeelthattheywereinapositionofa

conflictofinterest.• Therehavebeentwodifferentwaystoframethesekindsofallegations:

o Oneisfiduciaryframeofreferenceo Theotherisnot

• Non-fiduciaryframe

Humphrey|92

o Focusonpurposeofspecificpowersinquestion–forwhatpurposewerethosepowersgiventodirectors/officers?

o Normallyaquestionofcorporateconstitutionallaw.o So,proprietyofpurposedependsonwhetherapowerwasexercisedfortherightkindof

purpose.o SeeHoggv.Cramphorn

• Overridingfiduciaryobligationo Notaboutconstructionofparticularpowers.Questioniswhetherpowerwasexercisedin

goodfaithefforttoadvanceinterestsofthecompany.o Seesfiduciaryframeasmostimportantframeofreference.o SeeTeckv.Millar

• Hoggv.Cramphorn(1967,UK)o Takeoversituation,directorschallengedforexercisingtheirpowersinappropriately.o Cwasdirector/officeofcompanyandthoughttakeoverwasbadforcorporationand

employees,sosoughttoissuesharestofriendlyinteresttoavoidtakeover,diluteshareholdersvotestryingtolaunchthetakeover.

o Argumentthatpowertoissueshareswasusedimproperly.o Articlesgivebroadpowertoboardtoissueshares.o Courtacceptedthattherewasnofiduciaryproblemhere.Wentontoconsiderwhetherthe

powerwasusedbyboardproperlyornot.o Saidthatboardissuedsharesforimproperpurposeandthereforedecisionofboardhadto

besetaside.o Conclusion

§ Despitefactthattherewasgoodfaithbeliefthatitwasnecessarytoissuesharesbecauseitwasbestforcompany,itwasnotpermittedbecauseitwasanimproperpurpose.Exercisedforthewrongreasons.

§ Improperpurposedoctrineisawaythatcorporateconstitutionallawlimitsscopeofcorporatefiduciarylaw.

• TeckCorp.v.Millar(1972,BCSC)o Juniorminingcompany(Afton)soughtmajorminingcompanyaspartnertodevelop

propertyithad.Twomajorminingcompaniesinterested.o Mwasdirectorofjuniorcompany(A).Believedbestinterestsofcompanywouldbebest

servedbyconcludingagreementwithKlassar,notTeck.o TeckendedupbuyingsharesinAftonandeventuallyheldmajoritystatus.o MillarandotherdirectorsworriedaboutwhatTeckmightto.o So,boardissuedsharestoafriendlysourcetoavoidanunwelcometakeoverbyTeck.o Teckseeksdeclarationthatdecisiontoissueshareswasimproperexerciseofpowers.o HoggandCramphornwouldseemtosaythiswasaclearimproperexerciseofpower…o However,notwhathappenshere:

§ Properpurposesandissuanceofshares§ TreatmentofHoggv.Cramphorn§ Alternativerule:

• Afiduciarystandard• Balanceofpower• Multiplemotives• Establishinggoodfaith• Onus

o Sosaythattheycan’tusetheirpowersinthiswaywouldmeanthattheycouldn’tdoanythingtopreventatakeover.

§ Thefiduciaryprincipleisofhigher/greaterimportance.So,whereyoucanshowfiduciaryproprietyinexerciseofapower,thenthatshouldbesufficient.

Humphrey|93

§ It’snotaboutthepurposesattachedtopowers,butthepurposesforwhichthepowerswereusedbydirectors/officers.It’saboutwhetherthepowerwasexercisedinviewtosatisfyingfiduciaryobligation.

o Shouldbeallowedtoconsiderwhoisseekingcontrolandwhy.Ifbelievesubstantialdamagewillresult,exercisingpowerstodefeattakeoverwillnotnecessarilybecharacterizedasimproper.

o Notjustaboutcorporateconstitution–mostimportantconsiderationiswhat’sbestforthecompanyanddirectorsaretheoneswhodeterminethis.There’salwaysgottobesomeoneinthecontrolroomdecidingwhat’sbestforthecompany.

o Notes§ Showsthatwehaveaconflictbetweenmajorityruleanddirectorial

control/accountability.§ Implicationsformajorityrule?Howfarcanthisgo?Howfarcantheytrenchonthe

rightsofshareholdersbecausetheythinkit’sthebestthingforthecompany?Cantheydoanythingsolongastheyhavethefiduciaryjustification?

§ Multiplemotives?(4)FourWaystoBreachDutyofLoyalty

• Today,focusingonbreachofdutyofloyaltyinparticularcontexts.o Fourtypesofcategoriescomeup:

§ Self-dealing• Thefiduciaryissaidtohaveenteredintoacontractorsomeotherkindof

transaction/arrangementwiththebeneficiaryandhasdonesoforpersonalgain.Fiduciaryinpositionofcontrolonbothsides.

§ Misappropriationofproperty/opportunitiesforprofit• Wherefiduciaryissaidtohavetakenpropertythatbelongstothe

corporation(kindofconversion)orwherefiduciaryisallegedtohavetakenabusinessopportunityforprofit.Insteadofpursuingbusinessopportunitythroughcorporation,hastakenthatopportunityherself.

§ Entrenchment/enrichmentcases• Wherefiduciaryusesposition/powerstoappeartoretainpositionwith

companywhenthecompanyistryingtogetridofhersoastoretaintheeconomicbenefitshegetsfromthecompany,ortomaintainenrichmentfromcompanytoself.Usepositionwithincompanytoenrichthemselves(e.g.involvedindecisionmakingre:remuneration).

§ Secretprofitscases• Fiduciaryusespositiontogainsecretprofit(kickbacks,bribes,otherkinds

ofsecretpayments).• Today,willfocusonself-dealingandmisappropriationofopportunities.

a)Self-Dealing

• Caseswherefiduciaryissaidtohaveengagedintransaction(usuallycontract)betweenthemselvesandthecorporation.

• Concernisthatfiduciariesarepeoplewhoaresupposedtobeactingonbehalfofthecorporation.So,problemisthatFisonbothsidesofthedeal.

• Raiseobviousconflictofinterestproblems:o Fwillhavepersonalinterestingettingbestdealforthem,andcorporationwillhave

interestineithernotenteringintoagreementortoenterintoitontermsthatareinitsbestinterest.

Humphrey|94

o Raisesthequestionofwhetherthemanagerwillbargaintothefullextentofhisabilitiesonthecorporation’sbehalf.

• So,self-dealingtransactionsareconsideredtobeinherentlysuspicious.• Thesearepotentiallythemostinnocentkindofcategory…becauseself-dealingisnotinherently

badforbeneficiaries.• Often,thesedealsaretheonlyorbestmeansthecorporationhastoadvanceitsinterests.

o e.g.Fiduciarymaybewillingtopartforgoods/servicesatbetterratethanavailableonthemarket,orwhatthefiduciaryisofferingisnotbeingofferedtothemarketatlarge.

• So,theeconomicbehavioursaremixed–thereisrisk,butinmanycasesaself-dealingtransactionmightbegoodforthecorporation.

• Historyo AtCML,traditionalapproachreflectscourt’sapproachtofiduciaryloyaltygenerally–a

strictone.o Strictruleagainstself-dealingcontractsbecausetheyinvolvedconflictofinterest.Feltthat

forpolicyreasonswasimportanttoholdastrictlineonconflictsofinterest.o SeethisinHoLdecisionAberdeenRailway:

§ Noonewithafiduciarydutycanenterintocontractsinwhichtheyhaveorcouldhaveapersonalinterestconflictingwiththeinterestsofwhoevertheyareboundtoprotect/actintheinterestof.

§ Verystrictlyapplied–don’tevenraisequestionofwhetherornotthecontractwasfairorunfair.Can’tevenhaveappearanceofconflict,noinquiryintosubjectpermitted.

§ Maymeanthatincertaincircumstancesthecorporationcouldn’tengageinatransactionthatmightactuallybegoodforit.

o “Inordertoprotectthedutytoactinthebeneficiary’sbestinterests,weforbidconflicts;andifthereisaconflict,thefiduciaryisnotevenallowedtotrytoprovethathewas,infact,actinginthebestinterestsofthebeneficiary.Theprophylacticruleisstricterthantheunderlyingdutythatitseekstoprotect.”(p.358)

o CVL,CCQart.324–directorshallavoidplacinghimselfinpositionwherethereisormaybeaconflict.Equallystronglanguage.

• Couldtheserulesberelaxed?Becausesometimesthesecontractsaregoodforcorporations…• So,shouldweeverforgivethesekindsofcontractsif:

o Conflictofinterestwasdiscloseorconsentedtobeforeorafterthedeal;ando Whethertherewasobjectivefairnesstothedealing?

• Somehavesuggestedthatindependentlyofconsent/disclosuresuchcontractsshouldbeforgivensolongastheyareobjectivelyfair.

North-WestTransportationCo.v.Beatty(1887,ON)Facts

• NWTneededashipandBhadashiptosell.• BadirectorofNWT.NWTbuysshipfromB,Bmakespersonalprofit.• Bdisclosedhisinterestsinthetransactiontotheboard.Transactionwasapprovedbytheboardof

directorsofNWT(ofwhichBwasamember)andthenbyshareholdervote.Shareholdervotepassed306-289(ofthose306votes,291werecastbyB,thedirectorofNWTwhosoldtheship).

• Evidencethattheshipwasawesomeanditwouldn’thavebeenpossibletofindsuchadamngoodship.AlsofoundthatpersonalprofitBmadewasnotexcessive–hecouldhavegottenabettersalepriceelsewhere.So,lookedlikethiswasagooddealforthecompany.

• ShareholderofNWTsuesBinnameofNWTonbehalfofallshareholders.Seekstohavesalesetasideongroundsofbreachofloyalty.

Issue

Humphrey|95

• Wasthereavilationoftheconflictofinterestrule?Yes–makingcontractprimafacievoidable.But…couldrulefromAberdeenRailwaybesurmountedbyratification?So…

• Isthecontractvalid?Yes–ratificationofthecontractvalidandcontractnolongervoidable.Reasoning

• Generalruleisthatadirectorcannotenterintoanagreementthatconflictsormightconflictwiththeinterestsofthecorporation.(AberdeenRailway)

• Here,theevidenceshowsthattheacquisitionitselfwasappropriate–pricewasn’texcessiveorunreasonable,forexample.

• Anyconcernabouttheboardofdirectorsratifyingthesalewasremediedbythefactthatitwasthenalsobythemajorityofshareholderssolongastherewasnoproceduralunfairnessorimpropriety.

• ThisistrueeventhoughBwasthemajorityshareholderbecausethecorporationwasconstructedinsuchawaythatBcouldacquirethevotingpowerthathedid–hehadarighttoacquireasmanysharesashewantedandhehadarighttovoteonthemall.RejectingthevotescastbyBwoulddisregardtherightsofthemajorityinfavourofthoseheldbytheminority.

Ratio• Whenadirectorpersonallyentersintoacontractwiththecompanyofwhichheisadirector,

apparentlybreachinghisfiduciarydutytothecompany,ifthecontractissubsequentlyapprovedbyamajorityofshareholders(absentunfair/impropermeans)thesalewillremainvalid.

• Thedirectorhastherighttocasthisownvote(s)asashareholderinsuchacircumstance.Notes

• Normallyboardwillapprovedealbeforehandandshareholderswillengageinratificationafterthedealinordertoavoid/forgivepotentialliability.

o Riskytoaskshareholdersforratificationbecausebylettingthemknowaboutthepotentialliabilityissuetheymaygetpissed,notratifyit,andthensuethecorporationfortheconflictofinterestandtheirallowingittotakeplace.

• Whywasthiscasecontroversial?o Thoughtresultwasperverseonthefacts–fiduciaryforgivinghimselfusinghispowersas

shareholder.o Reasoningdriveninlargepartbyuniquestateofthefacts.Here,theself-dealing

transactionwasclearlygoodforthecompanyandBdidn’toverreach.So,focusingonthefacts/equitiesofthecasethenthecourtwasparticularlywillingtoallowthetransactiontostand.

o WashighlyinfluentialinCanadaandCML–someCanadiancasesrecognizedthecontroversysurroundingthissituationrecognizedthattheratificationwouldonlybegoodifitwasunanimous(Bourbonv.EarlinON).

StatutoryRegimeforSelf-Dealing

• CMLhasbeensupplantedbyastatutoryregime.• CMLapproachwasastrictprohibitionofconflictofinterest.• Hasbeenmodifiedinrecognitionthatself-dealingtransactionsareoftengoodforthecompany,so

sawneedforschemethatallowsthesetransactionstoberegulated.• Canadianreformofthisunsatisfactorysituationbeganinthe1970s.Hasproceededonbasisthat

conflictofinterestsituationsareunavoidableandthatthequestioniswhattodoaboutthevoidablecontractsthatresultfromthem.

• Solutiongenerallytorequireadequatedisclosureand,inthecaseofdirectors,arecusalfromvoting,andthatthetransactionwasfoundtobeobjectivelyfair.

o SeeCBCAs.120,CCQ325-326,QBCAs.122-133.• CBCAs.120–director/officerpartytocontractmustdisclosenatureandextentofinterestASAP

andrefrainfromvotinginanyresolutiontoapprovecontract.

Humphrey|96

o Subsection7–suchcontractsbecomenon-voidableandconflicteddirectorisnotaccountablesolongasdisclosuremadeandnon-conflicteddirectors/officersapproveditandthedealwasreasonableandfair.

§ 7.1–Evenifthissectionisn’tsatisfiedanddisclosureisn’tmade,canhaveratificationafterthefactbyspecialresolutionofshareholders(againsubjecttoreasonable/fairnessrequirement)withsupermajority.

o Subsection5–conflicteddirectorcannotvote.o Subsection8–ifanypartofs.120notcompliedwith,courtcansetasidecontractupon

applicationofcorporationorshareholder.§ Minorityprotectionremedyspecifictoconflictofinteresttransactions.

o Ifcontractismadenon-voidable,fiduciarynotaccountableforanyprofitmadeonthecontract.

• Section120(1-6)CBCAdetailswhatdisclosuremustlooklike:o Disclosuremustbemadeinwritingorenteredintominutesofboardmeeting.o Whathastobedisclosed?Mustbespecificre:natureandextentofconflict.o Allowsongoingdisclosureofconflictsofinterestsinanexpeditedfashion–directorcan

filelistofallpositionswithothercorporationsandlistofpersonalrelationshipsthatmightpossiblygenerateaconflictbetweenherresponsibilitieswithcorporation.

§ Thisissub.6–ifthislistisfiledandiskeptupdated,thedirectordoesn’thavetodoanythingelsewhenaspecifictransactioncomesup.

§ Thisruleisoftenmadeuseofbycorporatedirectorswithinlargecorporations.§ àIsthisreallysufficient?Theinfoprovidedisprettycoarse,doesn’ttellyouthat

muchdetail.• QBCAs.133–incaseofimproperdisclosure,onlyanordinaryresolutionisrequiredbut

shareholderswithaninterestinthecontractmaynotvote.• QBCAs.132–QBCAwordingdifferentfromthatofCBCAre:contractneedingtobe“reasonable

andfairtothecorporation”–QBCAsays“intheinterest”ofthecorporation.o Notengagedinobjectivemarket-basedanalysisoffairnessoftransaction.Instead,courts

havetolookonmorefinegrainlevelatwhetherthetransactionwasgoodinthiscontext,basedonassessmentofcorporation’sowninterests.Morerobuststandard.

• QBCAs.127–conflicteddirectorsarenotonlyprohibitedfromvotingbuttheyareprohibitedfromattendingthemeetingwheretheconflictisbeingdiscussed.

b)CorporateOpportunities

• Whataboutwhenit’snotacontractthatcreatestheconflictofinterest?Say,whenadirectorsweepsinandinterceptsanopportunity/chanceforprofitthatwouldhavebeenavailabletothecorporation?

o Saidthatopportunityforprofitbelongedinsomesensetothecorporationandthatthefiduciaryshouldhavepursuedtheopportunityforthebenefitofthecorporation,notforherself.

• Thelawisjustassternwhenitcomestodisloyaltyforthebenefitofathirdparty.• Cookv.Deeks

o Directorsnotatlibertytosacrificetheopportunitiesavailabletothecorporation.o Oneofkeyrolesasdirectoristoidentifyandpursuecorporateopportunities.

• Thiskindofsituation–themisappropriationofopportunities–isnotspecificallyregulatedintheCBCA.

o See,however,CCQ324,para2.• Establishingliability:

o Ifcanshowbusinessopportunitywasopentothecorporation;wasinlinewithitsbusiness;thatopportunitywasingenuineinterestofthecorporation–then,easytoestablishbreachoffiduciaryduty.

Humphrey|97

• But,howtodetermineifopportunitywaswithinthescopeofthebusinessofthecorporation?o And,howtodetermineif

Regal(Hastings)Ltd.v.Gulliver(1942,HoL)Facts

• Regal(cinemacompany)wantedtoexpandbusinessbyacquiringnewtheatres.Didthisbyacquiringnewtheatreleasesanddidthisthroughasubsidiary(Amalgamated).

• Rrecognizedopportunitytoacquirenewleases,butwereunabletoseizeontheopportunitybecausedidn’thaveenoughcapitaltosecurelease.

• Awascapitalizedtoextentof2000GBPandlandlordwanted5000GBPtosecurelease.• So,directorsofRweretryingtofigureouthowtosolveproblem.Suggestedtheymightpersonally

guaranteerentobligationsofA.But,theyweren’twillingtodothis.• Theydid,however,decidetoriskmoneyandinvestmoneyinanotherway–buyingsharesinA

andasaresultraisecapitalofA.• So,fourdirectorsandthelawyereachinvested500GBPinAbybuyingshares.• Thechairoftheboarddidnot,however,invest,butheconvincedoutsidepeopletofinanceA.A

nowwasproperlycapitalizedandcouldsatisfylandlordtosecureleases.Thisiswhathappened.• DirectorsofRsoldinterestsinAandsoldsharesatsignificantprofit.• Rchangeshands,hasnewowneranddirectors.Theyclaimconflictofinterestofolddirectorsfor

investinginsubsidiary,A.Issue

• WereformerdirectorsofRguiltyofbreachoffiduciarydutyre:appropriationofopportunitiesforprofit?Yes.

• Weretheyobligedtoreturntheprofits?Yes.Reasoning

• Liabilityforappropriation/profito Fiduciariestakingopportunitywhereseemsthatopportunityisboundupincorporate

opportunitythatcouldnothavebeentakenupwithoutthedisloyalbehaviour.• Scopeofliability

o Constrainedbyambitofrolewithinthecompany.o HasthisopportunitycometoFthroughherfiduciarypositionorincontextofherfiduciary

relationship?§ Iffallsoutsidecurrentfiduciaryrelationship,noconflict.Ifoutside,anyonecould

havetakenuptheopportunity.o Here,opportunitycametoindividualsincourseoftheirfiduciaryrelationship–wouldnot

haveoccurredtothemtoinvestinAiftheyweren’ttryingtopuzzlethroughthecapitalissue.

• Liabilitytoaccounto Remedialliabilitytoaccountfollows–it’saknee-jerkreactionifyoucanshowconflictand

anyprofitthatstemsfromit,theywillhavetoaccountforit.o FormerdirectorsofRsaidthiswasadifferentkindofconflictofinterestcase–theywere

justdoingtheirbesttoadvancetheinterestsofthecompany.Knewtherewasanopportunityforthecompanyandcompanycouldn’trealizeitiftheydidn’tinvestandrisktheirpersonalcapital.Sotheydidn’tseeitfairthattheyshouldhavetopaytheirprofitsbacktothecompany.

o Courtjustflatlyrejectedthisargument–it’sasuperflat,strictrule.Ifthereisaconflict,yourliabilityautomaticallyfollowsfromthat.

• Significanceofimpossibilityofrealizationbybeneficiary• Significanceofapproval/ratification

Humphrey|98

o Directorscouldhaveavoidedthisproblemiftheyhadreceivedapprovalbytheboardbeforehand,orshareholderratificationafterthefact.

Notes• Manythinkthiscaseissuuuuperstrictre:whatitexpectsfromfiduciaries.• Nonetheless,hasbeenadoptedbySCCinCanadainZwicker.• Doyouthinkthisisunfairlystrict?

o Economycriticism–incentiveeffectsofstrictnessmeanitisself-defeating.Dutyofloyaltymeanttoincentivizedirectorstodobesttheycanforcompanyandiftheyonlywaytheycandothatisto,say,riskownmoney,thenhowcanthatbebad?Couldsaythattheseguyswerenotjustloyalbutextraordinarilyloyaltothecompanybybeingwillingtoputtheirmoneyup.Ifthisisgoingtobethedeal,thendirectorswillbelesswillingtobesoloyalbecauseitbecomesnotintheirinteresttodoso.

o Whathappenedtomotiverules??SeePeoples–therewasanobviousclaimforconflict,buttheylookedatthemotivesofthebrotherswhowerejusttryingtodotheirbestandactedingoodfaith.Isn’tfiduciary

PesoSilverMinesLtd.Cropper(1966,SCC)Facts

• PSMofferedopportunitytoinvestinspeculativeminingventure.PSMandCasdirectorconsideredproposalandfounditwasn’tinbestinterestofcompany,rejectedit.

• PSMreceivedoneortwoofferslikethisaweekandconsideredthemregularly.• CinvolvedingroupthatcametopurchasetheclaimthathadbeenpreviouslyofferedtoPSM.

o Claimcamebeveryprofitable.• PSMchangeshandsandnewboardfindsoutaboutthisandsuesCforbreachoffiduciarydutyand

topayoverprofitsre:claimthatPSMhadrejected.Issue

• WasthisopportunityforprofitwithinthescopeofC’sfiduciarydutiestoPSM?No.Reasoning

• No,itwasn’tbecausethecorporationhadbeengrantedtheopportunitytotaketheprofitforitselfandPSMdecidedtorefusetheopportunityafterproperdecision-makingprocess,eventhoughCparticipatedinit.

• So,afterhavingpassedonit,theopportunitybecamefairgame.Becauseithadbeenconsideredandrefused,theopportunitywasplacedoutsidetheambitoffiduciarydutyofC.

• CourtdistinguishesthiscasefromRegal–inRegal,theopportunitycametothedirectorsinthescopeoftheirduties.

CanadianAerov.O’Malley(SCC,1974)Facts

• DefendantsareseniorofficersforCA.Theyworkedoncontractfortenderonbehalfofcompany.Whentheyrealizedopportunitywasripe,theydidn’twanttopursueitonbehalfofthecompanybutinsteaddecidedtoleavecompany,formownenterprise,andbyvirtueofknowledgefromCAtheyenteredintothetenderprocess,wonandobtainedprofitsthatwouldhaveother

Issue• Whatdowemakeofresignationinordertogetoutofone’sfiduciaryobligations–canyougetout

ofthembyquitting?No.Reasoning

• SCCreferredtoRegalandsaidthatitshowedthatthereisastrictethicre:conflictofinterestandthatthisstrictethicdisqualifiesadirector/officerfromusurpingforhimselfamaturingbusinessopportunityevenafterresignation.

Humphrey|99

o Millerthinksthisiswrong.• Fiduciarydutydoesnotterminateuponresignationandcannotberenouncedatwill.• Courtgaveuslonglistoffactorstodetermineproximity–ifopportunityiscloseenoughto

constitutebreach:o Positionorofficeheldo Natureofcorporateopportunityo Ripeness,specificityofopportunityo Director/officer’srelationtotheopportunityo Amountofknowledgepossessedo Circumstancesinwhichknowledgewasobtainedo Whetherknowledgewasspecialorprivateo TimeincontinuationofFD,whenbreachhappenedafter(howlongafter)o Circumstancesunderwhichrelationshipterminated–wasterminationmadeforself-

interestedreasons?

Gravinov.Enerchem(2008,QCCA)Facts

• GravinoandCarsonweredirectors,officers,andshareholdersinEnerchem(ETI).Wereinpositionsbetween1990-1996.

• Eintransportationofpetrochemicals,notmanyplayersinthemarket.• GandCwereinvolvedinnegotiationswhileemployedinE.• GandCdecidedtheywantedoutofETI,soldshares,resignedpositions,setupnewcorporation

(PetroNav)anddidsowithacompetitorofETI.IssueReasoning

• Defendantsdeniedliabilityonthefollowinggrounds:o OpportunityinquestionwasnotmaturewhentheyleftETI.o OpportunitywasdifferentfromtheonebeingpursuedbyETI.o Ajointventurerwasinvolvedandthiswaskeyinthemsecuringthedeal,whichmakesit

differentfromwhattheyweretryingtodoforETI.• CCQprovisions

o SimilartothoseoftheCBCAre:directorsbeingfiduciariesofcorporation,dutyofloyalty,makingthemforbiddenfromusingvaluableinformationtheyobtainedintheirroles.

o Saidthatdutiescontinuedforareasonabletimeafterresignation.• Appropriationofopportunityasdisloyalty

o CanadianAeroacceptedaslawandtheircriteriaarethethingsweneedtolookattoconsiderwhetheranopportunityiswithintheFD.

• Countervailingpolicyconsiderationso Publicinterestandfreeandopencompetition–reasonableloyaltytoemployerduring

courseofemploymentbutshouldbefreeonceyouleavetopursueintereststhatmayhavebeenforbiddenwhenyouwereemployed.

o Forthisreason,neitheranon-competitionclauseshouldbeabletopreventapersonfromearningalivingbyusingskills/knowledgefromapreviouscompany.

• Applicationo JudgesaysthiscaseisnotlikeCanadianAero:

§ Noappropriationofpropertyorclients–theyjustusedinformationwhentheywerefiduciaries.

• àWellinmanycasesisn’ttheinformationtheopportunity?• Here,saidthatopportunitywasnotmatureinthehandsofETI,despite

Humphrey|100

• Also,opportunitywasnotexclusivetoETI–wassmallmarket,allplayersknewabouttheopportunitiesoutthere.Anyothercompetitorcouldhavepursuedit.

§ Theydidn’ttakeanyconfidentialorstrategicinformation(documents)withthemwhentheyleft.

§ Therewasnoactualconflictofinterestinanyevent(Millercan’tfigurethisoutatall).

§ Defendantsquitfirstanddidn’tpursueinformationonownaccountfirst–theyquitbeforeanyofthat.

§ Can’tseehowstartingnegotiationssoonafterdeparturewasbad–theywerejustactingascompetitors.

§ Werenotboundbynon-competeclause,werelegallyfreetocompetewithETI.§ OpportunitywasdifferentfromthatpursuedbyETIbecause…whoknows?

• Millerthinksthisisgarbage–samethreeships,sameparties,sameterms,etc…

• Sure,GandChadajointventurer,buttheycouldhavedonethiswithETIandeliminatedthismaterialdifference.

Notes• MillerthinksittakesthecorrectlawfromCanadianAerobutachievesthewrongresult.• Thinkstherearetoomanyfactors,hesays,andtheypointintoomanydifferentdirections.Too

muchdiscretionavailableforjudgestointerpretthemindifferentways.c)Entrenchment

• Entrenchment=whenthefiduciaryattemptstouseherpowertomaintainherpositionofpowerwithinthecompanyforherownbenefit.

• Corporatemanagers,directors,offices(usuallydirectors)areallegedtoviolatedutyofloyaltytocompanyindoingthis.Boardofdirectorssaidtobeexercisingpowersthattheyhave,buttheyareexercisingtheminthecontextofahostilebidtokeeptheirpositions,entrenchthemselves,tomaintaintheirpersonalinterestsintheirpositions(income,pecuniarybenefits).

• Hostiletakeoversthoughttobeimportantmechanismformarketstoexercisedisciplineovermanagers.Hostilebidderssaidtobedrawntounderperformingcompanies.

o Ifahostiletakeovergoesthrough,directorssufferpublichumiliation,suggestionthattheyhaven’tdonetheirjobswellandtheywillofcourselosetheirjobs.

o Therefore,understandablewhymanagementareresistanttohostiletakeoverattempts.• Managementhasdevelopedseveraltoolstoresisthostiletakeoverbids:

o Issuesharestoafriendlyparty,dilutethevotingpowerofincumbentshareholders,makeitlesslikelythatbiddercangaincontrol.

o Poisonpills–exercisepowerofconstitutionalamendmenttochangerightsattachedtosharesinthecorporationtomakeitunattractivetobidders.

o Recognizethatchangeisinevitablesotrytofindadifferent,friendlybidder(thatisfriendlytoincumbentmanager)–lookingforawhiteknighttosaveyourass.

• Ideathatweshouldforbidtheboardtoresistthetakeover,straightjacketthemandallowforapropertransitionofthecompany.

o That’sverydifficulttodo.o So,howdowecontroltheboard,recognizingthatwewillprobablyhavetotoleratethe

poweroftheboardandallowtheboardtorespondasitseesfit,exercisetheirjudgment?• Asaresult,takeoversaresubjecttorigorouscorporateregulationsandsecuritiesregulation.

o Aimedtoprotectmarkets,shareholders,thepublicatlarge.o Regulationsaremeanttostrikeabalancebetweeninterestsofofferor,targetcorporation,

andshareholdersoftargetcorporation.

Humphrey|101

o Takeoverdefinedbysecuritiesregulationasanythingthatwouldallowofferortohave20%ofaclassofshares.

• Resistingahostiletakeoverbidisnotalwaysunjustified–itcouldbejustifiedonthebasisofthedutyofloyalty.

o Couldbejustifiedbecauseyou’retryingtodoyourbestforthecompanybyresistingthetakeover.

• Hostiletakeoversplacetwofundamentalprinciplesofcorporatelawinstarkcontrasttooneanother.

o Courtsarereluctanttointerfereinbusinessdecisionsofcorporation’smanagers.o Atthesametime,theyhavetheauthoritytosupervisetheactionsofmanagementre:skill

andloyalty.§ Onesideisdirectors’skill,expertiseandknowledge.§ Othersideispotentialthattheymayusedthistofurthertheirowneconomic

interestattheexpenseofthecorporation,theshareholders,orboth.Olympia&Yorkv.HiramWalker(1986,OntHCJ)Facts

• HostilebidderproposingtakeoverofHW,willingtopay$32pershareandwouldgeta39%stake.DirectorsofHWresistedthebidthroughverycomplicatedscheme.

o Causedcorporationtosell40%oftheirvaluablebusinessassetstoafriendlybusinessinterest.

o Causednewcorporationtobeincorporatedandsold49%ofsharestothisnewcorporation.

o Takeoverbidwasdefeated.Issue

• Werethedirectors’actionsinbreachoftheirfiduciaryobligations?No.Reasoning

• Courthastoreviewallavailableevidencere:boarddecision-makingandifthere’sanyevidenceoftaintofconflictofinterest,thatconflictofinterestwasactualized,thenthepoweroftheboardshouldbefoundvoidandtheboardshouldbeheldliableforbreachofloyalty.

• AppliesrulefromTeck–directorsdonotbreachtheirfiduciarydutieswhentheyact“ingoodfaith,onwhattheybelievedonreasonableandprobablygrounds,tobeinthebestinterestsofthecompany.”

• Here,heldthatHWdirectorsweremotivatedbydesiretomaximizereturnsforallshareholdersandthattheyreasonablybelievedthattheinterestsofthecorporationasawholewouldbebestservedbyresistingthetakeoverbid.

• Ifthedirectorsactingoodfaithandinthebestinterestsofthecompany,itisirrelevantwhethertheyalsobenefit.Theywerenottryingtoentrenchthemselvesasmanagement,theyweretryingtodowhattheybelievedwasinthebestinterestofthecompany.

Ratio• Directorshavearightandobligationtotakestepsthattheyhonestlyandreasonablybelievearein

theinterestsofthecompanyanditsshareholdersinresponsetoatakeoverbid.• Itisthedirectors’dutytotakeallreasonablestepstomaximizethevalueofsharesforall

shareholders.• Seekingoutindependentadvicefromadvisorswilllendcredencetotheideathatresistingthebid

wasintheinterestofshareholders.• Intheabsenceofbadfaithordishonesty,thecourtwilldefer.

Notes• Theshareholderprimacyruleinsiststhattheinterestsofacorporationaretobeidentifiedasper

theshareholdersasawhole.Evenifyoudon’tagreewiththisviewmoregenerally,thereisagenerallyacceptedviewthatthisshouldbetherulewhendealingwithhostiletakeovers.

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o Why?Becausethisisamomentofexistentialcrisisforthecorporationwhereinvestorsmustdecidewhethertostayorsell.

• Isthereaneedforabrightlineruleonthisissue?o Revlonv.McAndrews(Delaware,1986)

§ HeldthatonceitbecameclearthatRevlonwasforsale,thedutyoftheboardchangedfromthepreservationofthecorporateentitytothemaximizationofRevlon’svalueatasalefortheshareholders’benefit.

o However,inMapleLeafFoodsatONCA–obligationistocompanyasawhole,nojustshort-terminterestorinterestsoftheshareholders.Rejectionofthis“auctioneer”dutyfromRevlon.

o SamekindofrejectionseeninPeoplesandinBCE,whichheldthatthedutyofloyaltyisowedtothecorporationasawholeandnottotheshareholders.

§ InBCEtheboardclearlythoughtitwasgovernedbyRevlonandcouldonlytakeinterestsofshareholdersintoconsideration.

§ SCCcomprehensivelyrejectedthisview,statingagainasitdidinPeoplesthatthedutyofloyaltyisowedtothecorporationasawhole.

o So,inCanada,rejectionofRevlon–it’suptodirectorstodecidewhethertotakelong-term/short-termvieworsomethinginbetween(Revlonstoodforshort-termperspectiveonly).

§ ThereforethereisnobrightlineRevlonstyleruleinCanada.• Possiblealternativestoabrightlinerule?

o Mandateorstronglyrecommendthatindependentcommitteesbeusedtohandleresponsestohostiletakeovers.Ifdecisionistoresistbid,mustprovidereasonswhyandperhapsseekanotherbidder.

d)MultipleLoyalties–ConflictsofDuty

• Recognitionthatbusinessthrivesoninterconnectionandthatdirectorsmightnotserveonjustoneboard.

• AsaresultthereisalaxityintheCMLanddirectorsareallowedtohavemultipleloyalties.• Toleratingthesemultipleloyaltieshingesoninformedconsenttotheconflictofinterest–aslong

asbothpartiestowhomloyaltyisowedisawareofthepotentialconflict,it’sallgood.o InCanada,directorsmustfileandmaintainalistofalloftheirconnectionsandpositions

onboards,etc…(5)IndependentDirectors

• Inanidealworldwewouldhaveindependentdirectorswhoarefocusedexclusivelyontheinterestsofthecorporationwithoutregardforherowninterestsortheinterestsofanyoneelse.Thisis,ofcourse,impossible!

• Inreality,boardsarenotactuallyconstitutedwithindependenceinmind.Directorsarenotindependentofofficers,theyoftenhaveprioremploymentorpersonalrelationshipswithofficers,afinancialstakeinthecompany,etc…

• Howcanweimprovethis?Perhapsbytakingawaydecisionsfromdirectorswhohavethegreatestinterestintheoutcome(e.g.inatakeoversituation)andcreatean“independentcommittee”.

o Wouldbeasubsetoftheboard,madeupofdirectorswhoare“independent”–i.e.havenootherrolesinthecorporation.

o Couldbeusedtorespondtotakeoverbids,dealwithpayofdirectors/officers.• Independentofcommitteemightbeenoughtoremoveanytaintofconflictofinterestandmakeits

recommendationsmorelikelytobeacceptedbyacourtasabusinessdecisionproperlymadeintheinterestsofthecompanybytheboard.

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BrantInvestmentsv.KeepriteInc.(1991,ON)Facts

• Plaintiffminorityshareholdersallegethatindependentcommitteewasnotindependentandthattheadvicetheygavetothecompany’sdirectorswasnotinthebestinterestsofthecompanyanditsshareholders.

Issue• Domajorityshareholdershaveafiduciaryobligationtowardminorityshareholders?No.• Isthereviewofthetransactionbytheindependentcommitteevalid?Yes.

Reasoning• Fiduciaryobligation

o IncertaincircumstancesAmericanlawrecognizesafiduciarydutyfromcontrollingshareholderstominorityshareholders.

§ e.g.Wheretheabusivecontrol/actisattheexpenseoftheminority,thisshouldnotbepermittedbecausetheycanusetheirpowertoinfluencetheinterestsoftheminority.

o ThereisnoprecedentforthisinCanada,however.So,courtrefusestorecognizefiduciarydutybetweenmajorityandminorityshareholders.

o Majoritiesaren’tliketruefiduciariesanyway–whiletheyhaveeconomiccontrolofthecorporationduetotheirshares,theydon’thavetheauthoritytobind/makedecisionsforminorities.

o Therefore,majorityshareholdersshouldbefreetoexercisetheirlegitimatepowerintheirownself-interest.

• Independentcommitteeo Trialjudgefoundthatthecommitteemembersweretrulyindependent–nothingindicates

thatthisfindingshouldbedisturbed.o Courtrulesthattheindependenceofthecommitteeliesintheabsenceofanaffiliation

withtheinterestsofthepartiesinthetransactionwheretheaffiliationwasofthesortwhereitwouldinterferewiththedirectors’capacitytoindependentlyevaluatethetransaction.

Ratio• Businessdecisionsmadehonestlybythedirectorsorindependentcommitteeofacorporation

shouldnotbesubjectedtomicroscopicexamination–thejudgeshouldnotsubstitutehisownbusinessjudgmentforthatofoneofthosebodies.

Notes• Thoughwerecognizeanddefertoindependentcommittees,ourcourtsdon’tactuallyestablish

robustindependentrequirementsorprobeverydeeplyintowhethertheindependentdirectorsaretrulyindependent.

• Thereseemstobealotofenthusiasmforindependentcommittees/directors–butdowereallythinkthatthisindependenceisreal?Canwetrustinitandrelyonit?Ifnot,thenit’sjustadifferentsetofconflictedactorsmakingdecisions.

o Questionsarefairparticularlyduetothefactthatwedon’thavecriteriatodeterminetheindependenceoftheseindependentdirectors/committees.

• Alsoquestionre:whethertheseindependentcommitteesareactuallygoodforshareholders.o Forexample,inthecontextofatakeoverbid,therecouldbeacompetenceprobleminthat

thepeoplewhoarebestpositionedtoknowwhat’sgoodforthecompanyaretheinsiderswhoaretechnically“conflicted”.Theyaretheoneswhoworkonafull-timebasis,knowthestrategies,decision-makingprocess,etc…

(6)ForgivingDisloyalty–Ratification,revisited

• SeeCBCAs.120–permits/regulatesself-dealingtransactions.

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• Ratificationcomesfromequity,effectivelymeansforgiveness.o Canforgiveabreachoffiduciarydutyafterthefact.o Onlyeffectivelydonewithfullinformation.o Canevenapplywhenfiduciarydidn’tpurporttoactonbehalfofbeneficiary.

• RatificationwillhappenfromtimetotimeduringAGMs,whereincumbentmanagerswillaskforforgivenessfromshareholdersforanybreachesoftheirobligationsinthelastyear.

o Questionsre:whetherthesevotesareactuallyeffective.• Canyouratify/forgivebreachesofduty,care,skill?Whatabouttortofbattery?Whatimpactdoes

ratification/forgivenesshaveonthevictim’srights?• CMLresponsehasbeenthatintheory,ratificationcanhappenbutinpractice,notreally.

o Willonlybeeffectiveifit’sfullyinformed–directorsseekingforgivenessneedtoensurethatshareholdersknowwhatthey’reratifying.

o Whenyouthinkaboutit,ifdirectorsaremakingproperdisclosurestoshareholders,whywouldtheyforgive/ratifythefailuresofdirectors?Notreallyintheirinterest,givingawaytheirrighttoholdthecorporationaccountable.

• Mostwouldacceptthataccordingtogenerallegalprincipleitshouldbepossibletoratifyandextinguishmanager’sbreachoffiduciaryduty–buthowcanthisbedone?

o Fiduciaryobligationisowedtothecorporation–howcanavoteofshareholdersontheissuerepresentacorporatedecisiontoforgive?Whoiscompetenttodecidethatthecorporationwillgiveupit’srightre:theclaimagainstthedisloyalfiduciary?

o Canthebreachingfiduciaryvote?• InmostCanadianjurisdictionsanindividualshareholderdoesn’thavearighttobringacorporate

action.Instead,anindividualshareholdermayapplyforspecificjudicialpermissiontobringastatutoryrepresentativeaction(CBCAs.239,seealsoCCQ316).

o Judgehascompletediscretiontograntpermissionornot.o Ifpermissiongranted,shareholdersuesinarepresentativecapacityonbehalfofthe

corporation.

VI.MAJORITYRULEA)MAJORITYRULECanadaBusinessCorporationsAct,ss.103(1)&(2),106(3),107,109(1),111(3),120(7.1),132,133(a)&(b),135(1)&(6),137,139(1)&(4),141-142,143(1)&(6),144,145.1,145(1)&(2),147-154,155(1),157(1)&(2),161,162(1),163,170(1)&(2),173(1),175(2),176,189(3),211(1)CanadaBusinessCorporationsRegulations,ss.44-47,54-69CanadaBusinessCorporationsActBy-laws103(1)Unlessthearticles,by-lawsoraunanimousshareholderagreementotherwiseprovide,thedirectorsmay,byresolution,make,amendorrepealanyby-lawsthatregulatethebusinessoraffairsofthecorporation.Shareholderapproval103(2)Thedirectorsshallsubmitaby-law,oranamendmentorarepealofaby-law,madeundersubsection(1)totheshareholdersatthenextmeetingofshareholders,andtheshareholdersmay,byordinaryresolution,confirm,rejectoramendtheby-law,amendmentorrepeal.Electionofdirectors

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106(3)Subjecttoparagraph107(b),shareholdersofacorporationshall,byordinaryresolutionatthefirstmeetingofshareholdersandateachsucceedingannualmeetingatwhichanelectionofdirectorsisrequired,electdirectorstoholdofficeforatermexpiringnotlaterthanthecloseofthethirdannualmeetingofshareholdersfollowingtheelection.Cumulativevoting107Wherethearticlesprovideforcumulativevoting,

• (a)thearticlesshallrequireafixednumberandnotaminimumandmaximumnumberofdirectors;

• (b)eachshareholderentitledtovoteatanelectionofdirectorshastherighttocastanumberofvotesequaltothenumberofvotesattachedtothesharesheldbytheshareholdermultipliedbythenumberofdirectorstobeelected,andmaycastallofthosevotesinfavourofonecandidateordistributethemamongthecandidatesinanymanner;

• (c)aseparatevoteofshareholdersshallbetakenwithrespecttoeachcandidatenominatedfordirectorunlessaresolutionispassedunanimouslypermittingtwoormorepersonstobeelectedbyasingleresolution;

• (d)ifashareholderhasvotedformorethanonecandidatewithoutspecifyingthedistributionofvotes,theshareholderisdeemedtohavedistributedthevotesequallyamongthosecandidates;

• (e)ifthenumberofcandidatesnominatedfordirectorexceedsthenumberofpositionstobefilled,thecandidateswhoreceivetheleastnumberofvotesshallbeeliminateduntilthenumberofcandidatesremainingequalsthenumberofpositionstobefilled;

• (f)eachdirectorceasestoholdofficeatthecloseofthefirstannualmeetingofshareholdersfollowingthedirector’selection;

• (g)adirectormayberemovedfromofficeonlyifthenumberofvotescastinfavourofthedirector’sremovalisgreaterthantheproductofthenumberofdirectorsrequiredbythearticlesandthenumberofvotescastagainstthemotion;and

• (h)thenumberofdirectorsrequiredbythearticlesmaybedecreasedonlyifthevotescastinfavourofthemotiontodecreasethenumberofdirectorsisgreaterthantheproductofthenumberofdirectorsrequiredbythearticlesandthenumberofvotescastagainstthemotion.

Removalofdirectors109(1)Subjecttoparagraph107(g),theshareholdersofacorporationmaybyordinaryresolutionataspecialmeetingremoveanydirectorordirectorsfromoffice.Classdirector111(3)Iftheholdersofanyclassorseriesofsharesofacorporationhaveanexclusiverighttoelectoneormoredirectorsandavacancyoccursamongthosedirectors,

• (a)subjecttosubsection(4),theremainingdirectorselectedbytheholdersofthatclassorseriesofsharesmayfillthevacancyexceptavacancyresultingfromanincreaseinthenumberortheminimumormaximumnumberofdirectorsforthatclassorseriesorfromafailuretoelectthenumberorminimumnumberofdirectorsprovidedforinthearticlesforthatclassorseries;or

• (b)iftherearenoremainingdirectorsanyholderofsharesofthatclassorseriesmaycallameetingoftheholdersofsharesofthatclassorseriesforthepurposeoffillingthevacancy.

Confirmationbyshareholders120(7.1)Eveniftheconditionsofsubsection(7)arenotmet,adirectororofficer,actinghonestlyandingoodfaith,isnotaccountabletothecorporationortoitsshareholdersforanyprofitrealizedfromacontractortransactionforwhichdisclosureisrequiredundersubsection(1),andthecontractortransactionisnotinvalidbyreasononlyoftheinterestofthedirectororofficerinthecontractortransaction,if

• (a)thecontractortransactionisapprovedorconfirmedbyspecialresolutionatameetingoftheshareholders;

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• (b)disclosureoftheinterestwasmadetotheshareholdersinamannersufficienttoindicateitsnaturebeforethecontractortransactionwasapprovedorconfirmed;and

• (c)thecontractortransactionwasreasonableandfairtothecorporationwhenitwasapprovedorconfirmed.

ShareholdersPlaceofmeetings132(1)MeetingsofshareholdersofacorporationshallbeheldattheplacewithinCanadaprovidedintheby-lawsor,intheabsenceofsuchprovision,attheplacewithinCanadathatthedirectorsdetermine.MeetingoutsideCanada132(2)Despitesubsection(1),ameetingofshareholdersofacorporationmaybeheldataplaceoutsideCanadaiftheplaceisspecifiedinthearticlesoralltheshareholdersentitledtovoteatthemeetingagreethatthemeetingistobeheldatthatplace.Exception132(3)AshareholderwhoattendsameetingofshareholdersheldoutsideCanadaisdeemedtohaveagreedtoitbeingheldoutsideCanadaexceptwhentheshareholderattendsthemeetingfortheexpresspurposeofobjectingtothetransactionofanybusinessonthegroundsthatthemeetingisnotlawfullyheld.Participationinmeetingbyelectronicmeans132(4)Unlesstheby-lawsotherwiseprovide,anypersonentitledtoattendameetingofshareholdersmayparticipateinthemeeting,inaccordancewiththeregulations,ifany,bymeansofatelephonic,electronicorothercommunicationfacilitythatpermitsallparticipantstocommunicateadequatelywitheachotherduringthemeeting,ifthecorporationmakesavailablesuchacommunicationfacility.ApersonparticipatinginameetingbysuchmeansisdeemedforthepurposesofthisActtobepresentatthemeeting.Meetingheldbyelectronicmeans132(5)IfthedirectorsortheshareholdersofacorporationcallameetingofshareholderspursuanttothisAct,thosedirectorsorshareholders,asthecasemaybe,maydeterminethatthemeetingshallbeheld,inaccordancewiththeregulations,ifany,entirelybymeansofatelephonic,electronicorothercommunicationfacilitythatpermitsallparticipantstocommunicateadequatelywitheachotherduringthemeeting,iftheby-lawssoprovide.Callingannualmeetings133(1)Thedirectorsofacorporationshallcallanannualmeetingofshareholders

• (a)notlaterthaneighteenmonthsafterthecorporationcomesintoexistence;and• (b)subsequently,notlaterthanfifteenmonthsafterholdingthelastprecedingannualmeetingbut

nolaterthansixmonthsaftertheendofthecorporation’sprecedingfinancialyear.Noticeofmeeting135(1)Noticeofthetimeandplaceofameetingofshareholdersshallbesentwithintheprescribedperiodto

• (a)eachshareholderentitledtovoteatthemeeting;• (b)eachdirector;and• (c)theauditorofthecorporation.

Noticeofbusiness135(6)Noticeofameetingofshareholdersatwhichspecialbusinessistobetransactedshallstate

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• (a)thenatureofthatbusinessinsufficientdetailtopermittheshareholdertoformareasonedjudgmentthereon;and

• (b)thetextofanyspecialresolutiontobesubmittedtothemeeting.Proposals137(1)Subjecttosubsections(1.1)and(1.2),aregisteredholderorbeneficialownerofsharesthatareentitledtobevotedatanannualmeetingofshareholdersmay

• (a)submittothecorporationnoticeofanymatterthatthepersonproposestoraiseatthemeeting(a“proposal”);and

• (b)discussatthemeetinganymatterinrespectofwhichthepersonwouldhavebeenentitledtosubmitaproposal.

Quorum139(1)Unlesstheby-lawsotherwiseprovide,aquorumofshareholdersispresentatameetingofshareholders,irrespectiveofthenumberofpersonsactuallypresentatthemeeting,iftheholdersofamajorityofthesharesentitledtovoteatthemeetingarepresentinpersonorrepresentedbyproxy.Oneshareholdermeeting139(4)Ifacorporationhasonlyoneshareholder,oronlyoneholderofanyclassorseriesofshares,theshareholderpresentinpersonorbyproxyconstitutesameeting.Voting141(1)Unlesstheby-lawsotherwiseprovide,votingatameetingofshareholdersshallbebyshowofhandsexceptwhereaballotisdemandedbyashareholderorproxyholderentitledtovoteatthemeeting.Ballot141(2)Ashareholderorproxyholdermaydemandaballoteitherbeforeorafteranyvotebyshowofhands.Electronicvoting141(3)Despitesubsection(1),unlesstheby-lawsotherwiseprovide,anyvotereferredtoinsubsection(1)maybeheld,inaccordancewiththeregulations,ifany,entirelybymeansofatelephonic,electronicorothercommunicationfacility,ifthecorporationmakesavailablesuchacommunicationfacility.Votingwhileparticipatingelectronically141(4)Unlesstheby-lawsotherwiseprovide,anypersonparticipatinginameetingofshareholdersundersubsection132(4)or(5)andentitledtovoteatthatmeetingmayvote,inaccordancewiththeregulations,ifany,bymeansofthetelephonic,electronicorothercommunicationfacilitythatthecorporationhasmadeavailableforthatpurpose.Resolutioninlieuofmeeting142(1)Exceptwhereawrittenstatementissubmittedbyadirectorundersubsection110(2)orbyanauditorundersubsection168(5),

• (a)aresolutioninwritingsignedbyalltheshareholdersentitledtovoteonthatresolutionatameetingofshareholdersisasvalidasifithadbeenpassedatameetingoftheshareholders;and

• (b)aresolutioninwritingdealingwithallmattersrequiredbythisActtobedealtwithatameetingofshareholders,andsignedbyalltheshareholdersentitledtovoteatthatmeeting,satisfiesalltherequirementsofthisActrelatingtomeetingsofshareholders.

Requisitionofmeeting

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143(1)Theholdersofnotlessthanfivepercentoftheissuedsharesofacorporationthatcarrytherighttovoteatameetingsoughttobeheldmayrequisitionthedirectorstocallameetingofshareholdersforthepurposesstatedintherequisition.Reimbursement143(6)Unlesstheshareholdersotherwiseresolveatameetingcalledundersubsection(4),thecorporationshallreimbursetheshareholderstheexpensesreasonablyincurredbytheminrequisitioning,callingandholdingthemeeting.Meetingcalledbycourt144(1)Acourt,ontheapplicationofadirector,ashareholderwhoisentitledtovoteatameetingofshareholdersortheDirector,mayorderameetingofacorporationtobecalled,heldandconductedinthemannerthatthecourtdirects,if

• (a)itisimpracticabletocallthemeetingwithinthetimeorinthemannerinwhichthosemeetingsaretobecalled;

• (b)itisimpracticabletoconductthemeetinginthemannerrequiredbythisActortheby-laws;or• (c)thecourtthinksthatthemeetingshouldbecalled,heldandconductedwithinthetimeorinthe

manneritdirectsforanyotherreason.Varyingquorum144(2)Withoutrestrictingthegeneralityofsubsection(1),thecourtmayorderthatthequorumrequiredbytheby-lawsorthisActbevariedordispensedwithatameetingcalled,heldandconductedpursuanttothissection.Validmeeting144(3)Ameetingcalled,heldandconductedpursuanttothissectionisforallpurposesameetingofshareholdersofthecorporationdulycalled,heldandconducted.Courtreviewofelection145(1)Acorporationorashareholderordirectormayapplytoacourttodetermineanycontroversywithrespecttoanelectionorappointmentofadirectororauditorofthecorporation.Powersofcourt145(2)Onanapplicationunderthissection,thecourtmaymakeanyorderitthinksfitincluding,withoutlimitingthegeneralityoftheforegoing,

• (a)anorderrestrainingadirectororauditorwhoseelectionorappointmentischallengedfromactingpendingdeterminationofthedispute;

• (b)anorderdeclaringtheresultofthedisputedelectionorappointment;• (c)anorderrequiringanewelectionorappointment,andincludingintheorderdirectionsforthe

managementofthebusinessandaffairsofthecorporationuntilanewelectionisheldorappointmentmade;and

• (d)anorderdeterminingthevotingrightsofshareholdersandofpersonsclaimingtoownshares.Poolingagreement145.1Awrittenagreementbetweentwoormoreshareholdersmayprovidethatinexercisingvotingrightsthesharesheldbythemshallbevotedasprovidedintheagreement.ProxiesDefinitions147InthisPart,formofproxymeansawrittenorprintedformthat,oncompletionandexecutionor,inQuebec,onsigningbyoronbehalfofashareholder,becomesaproxy;(formulairedeprocuration)

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intermediarymeansapersonwhoholdsasecurityonbehalfofanotherpersonwhoisnottheregisteredholderofthesecurity,andincludes

• (a)asecuritiesbrokerordealerrequiredtoberegisteredtotradeordealinsecuritiesunderthelawsofanyjurisdiction;

• (b)asecuritiesdepositary;• (c)afinancialinstitution;• (d)inrespectofaclearingagency,asecuritiesdealer,trustcompany,bankorotherperson,

includinganotherclearingagency,onwhosebehalftheclearingagencyoritsnomineesholdsecuritiesofanissuer;

• (e)atrusteeoradministratorofaself-administeredretirementsavingsplan,retirementincomefund,educationsavingsplanorothersimilarself-administeredsavingsorinvestmentplanregisteredundertheIncomeTaxAct;

• (f)anomineeofapersonreferredtoinanyofparagraphs(a)to(e);and• (g)apersonwhocarriesoutfunctionssimilartothosecarriedoutbyindividualsorentities

referredtoinanyofparagraphs(a)to(e)andthatholdsasecurityregisteredinitsname,orinthenameofitsnominee,onbehalfofanotherpersonwhoisnottheregisteredholderofthesecurity.(intermédiaire)

proxymeansacompletedandexecutedor,inQuebec,signedformofproxybymeansofwhichashareholderappointsaproxyholdertoattendandactontheshareholder’sbehalfatameetingofshareholders;(procuration)solicitorsolicitation

• (a)includeso (i)arequestforaproxywhetherornotaccompaniedbyorincludedinaformofproxy,o (ii)arequesttoexecuteornottoexecuteor,inQuebec,tosignornottosignaformof

proxyortorevokeaproxy,o (iii)thesendingofaformofproxyorothercommunicationtoashareholderunder

circumstancesreasonablycalculatedtoresultintheprocurement,withholdingorrevocationofaproxy,and

o (iv)thesendingofaformofproxytoashareholderundersection149;but• (b)doesnotinclude

o (i)thesendingofaformofproxyinresponsetoanunsolicitedrequestmadebyoronbehalfofashareholder,

o (ii)theperformanceofadministrativeactsorprofessionalservicesonbehalfofapersonsolicitingaproxy,

o (iii)thesendingbyanintermediaryofthedocumentsreferredtoinsection153,o (iv)asolicitationbyapersoninrespectofsharesofwhichthepersonisthebeneficial

owner,o (v)apublicannouncement,asprescribed,byashareholderofhowtheshareholder

intendstovoteandthereasonsforthatdecision,o (vi)acommunicationforthepurposesofobtainingthenumberofsharesrequiredfora

shareholderproposalundersubsection137(1.1),oro (vii)acommunication,otherthanasolicitationbyoronbehalfofthemanagementofthe

corporation,thatismadetoshareholders,inanycircumstancesthatmaybeprescribed;(sollicitation)

solicitationbyoronbehalfofthemanagementofacorporationmeansasolicitationbyanypersonpursuanttoaresolutionorinstructionsof,orwiththeacquiescenceof,thedirectorsoracommitteeofthedirectors.(sollicitationeffectuéeparladirectionoupoursoncompte)Appointingproxyholder148(1)Ashareholderentitledtovoteatameetingofshareholdersmaybymeansofaproxyappointaproxyholderoroneormorealternateproxyholderswhoarenotrequiredtobeshareholders,toattend

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andactatthemeetinginthemannerandtotheextentauthorizedbytheproxyandwiththeauthorityconferredbytheproxy.Executionorsigningofproxy(2)Aproxyshallbeexecutedor,inQuebec,signedbytheshareholderorbytheshareholder’spersonalrepresentativeauthorizedinwriting.Validityofproxy(3)Aproxyisvalidonlyatthemeetinginrespectofwhichitisgivenoranyadjournmentthereof.Revocationofproxy(4)Ashareholdermayrevokeaproxy

• (a)bydepositinganinstrumentoractinwritingexecutedor,inQuebec,signedbytheshareholderorbytheshareholder’spersonalrepresentativeauthorizedinwriting

o (i)attheregisteredofficeofthecorporationatanytimeuptoandincludingthelastbusinessdayprecedingthedayofthemeeting,oranadjournmentthereof,atwhichtheproxyistobeused,or

o (ii)withthechairmanofthemeetingonthedayofthemeetingoranadjournmentthereof;or

• (b)inanyothermannerpermittedbylaw.Depositofproxies(5)Thedirectorsmayspecifyinanoticecallingameetingofshareholdersatimenotmorethan48hours,excludingSaturdaysandholidays,beforethemeetingoradjournmentbeforewhichtimeproxiestobeusedatthemeetingmustbedepositedwiththecorporationoritsagentormandatary.Mandatorysolicitation149(1)Subjecttosubsection(2),themanagementofacorporationshall,concurrentlywithgivingnoticeofameetingofshareholders,sendaformofproxyinprescribedformtoeachshareholderwhoisentitledtoreceivenoticeofthemeeting.Exception(2)Themanagementofthecorporationisnotrequiredtosendaformofproxyundersubsection(1)ifit

• (a)isnotadistributingcorporation;and• (b)hasfiftyorfewershareholdersentitledtovoteatameeting,twoormorejointholdersbeing

countedasoneshareholder.Offence(3)Ifthemanagementofacorporationfailstocomply,withoutreasonablecause,withsubsection(1),thecorporationisguiltyofanoffenceandliableonsummaryconvictiontoafinenotexceedingfivethousanddollars.Officers,etc.,ofcorporations(4)Whereacorporationcommitsanoffenceundersubsection(3),anydirectororofficerofthecorporationwhoknowinglyauthorized,permittedoracquiescedinthecommissionoftheoffenceisapartytoandguiltyoftheoffenceandisliableonsummaryconvictiontoafinenotexceedingfivethousanddollarsortoimprisonmentforatermnotexceedingsixmonthsortoboth,whetherornotthecorporationhasbeenprosecutedorconvicted.Solicitingproxies150(1)Apersonshallnotsolicitproxiesunless

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• (a)inthecaseofsolicitationbyoronbehalfofthemanagementofacorporation,amanagementproxycircularinprescribedform,eitherasanappendixtoorasaseparatedocumentaccompanyingthenoticeofthemeeting,or

• (b)inthecaseofanyothersolicitation,adissident’sproxycircularinprescribedformstatingthepurposesofthesolicitationissenttotheauditorofthecorporation,toeachshareholderwhoseproxyissolicited,toeachdirectorand,ifparagraph(b)applies,tothecorporation.

Exception—solicitationtofifteenorfewershareholders(1.1)Despitesubsection(1),apersonmaysolicitproxies,otherthanbyoronbehalfofthemanagementofthecorporation,withoutsendingadissident’sproxycircular,ifthetotalnumberofshareholderswhoseproxiesaresolicitedisfifteenorfewer,twoormorejointholdersbeingcountedasoneshareholder.Exception—solicitationbypublicbroadcast(1.2)Despitesubsection(1),apersonmaysolicitproxies,otherthanbyoronbehalfofthemanagementofthecorporation,withoutsendingadissident’sproxycircularifthesolicitationis,intheprescribedcircumstances,conveyedbypublicbroadcast,speechorpublication.CopytoDirector(2)Apersonrequiredtosendamanagementproxycircularordissident’sproxycircularshallsendconcurrentlyacopyofittotheDirectortogetherwithastatementinprescribedform,theformofproxy,anyotherdocumentsforuseinconnectionwiththemeetingand,inthecaseofamanagementproxycircular,acopyofthenoticeofmeeting.Offence(3)Apersonwhofailstocomplywithsubsections(1)and(2)isguiltyofanoffenceandliableonsummaryconvictiontoafinenotexceedingfivethousanddollarsortoimprisonmentforatermnotexceedingsixmonthsortoboth,whetherornotthebodycorporatehasbeenprosecutedorconvicted.Officers,etc.,ofbodiescorporate(4)Whereabodycorporatecommitsanoffenceundersubsection(3),anydirectororofficerofthebodycorporatewhoknowinglyauthorized,permittedoracquiescedinthecommissionoftheoffenceisapartytoandguiltyoftheoffenceandisliableonsummaryconvictiontoafinenotexceedingfivethousanddollarsortoimprisonmentforatermnotexceedingsixmonthsortoboth,whetherornotthebodycorporatehasbeenprosecutedorconvicted.Exemption151(1)Ontheapplicationofaninterestedperson,theDirectormayexempttheperson,onanytermsthattheDirectorthinksfit,fromanyoftherequirementsofsection149orsubsection150(1),whichexemptionmayhaveretrospectiveeffect.Publication(2)TheDirectorshallsetoutinapublicationgenerallyavailabletothepublictheparticularsofexemptionsgrantedunderthissectiontogetherwiththereasonsfortheexemptions.Attendanceatmeeting152(1)Apersonwhosolicitsaproxyandisappointedproxyholdershallattendinpersonorcauseanalternateproxyholdertoattendthemeetinginrespectofwhichtheproxyisgivenandcomplywiththedirectionsoftheshareholderwhoappointedhim.Rightofaproxyholder(2)Aproxyholderoranalternateproxyholderhasthesamerightsastheshareholderbywhomtheywereappointedtospeakatameetingofshareholdersinrespectofanymatter,tovotebywayofballotatthe

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meetingand,exceptwhereaproxyholderoranalternateproxyholderhasconflictinginstructionsfrommorethanoneshareholder,tovoteatsuchameetinginrespectofanymatterbywayofanyshowofhands.Showofhands(3)Despitesubsections(1)and(2),ifthechairpersonofameetingofshareholdersdeclarestothemeetingthat,ifaballotisconducted,thetotalnumberofvotesattachedtosharesrepresentedatthemeetingbyproxyrequiredtobevotedagainstwhattotheknowledgeofthechairpersonwillbethedecisionofthemeetinginrelationtoanymatterorgroupofmattersislessthanfivepercentofallthevotesthatmightbecastbyshareholderspersonallyorthroughproxyatthemeetingontheballot,unlessashareholderorproxyholderdemandsaballot,

• (a)thechairpersonmayconductthevoteinrespectofthatmatterorgroupofmattersbyashowofhands;and

• (b)aproxyholderoralternateproxyholdermayvoteinrespectofthatmatterorgroupofmattersbyashowofhands.

Offence(4)Aproxyholderoralternateproxyholderwhowithoutreasonablecausefailstocomplywiththedirectionsofashareholderunderthissectionisguiltyofanoffenceandliableonsummaryconvictiontoafinenotexceedingfivethousanddollarsortoimprisonmentforatermnotexceedingsixmonthsortoboth.Dutyofintermediary153(1)Sharesofacorporationthatareregisteredinthenameofanintermediaryortheirnomineeandnotbeneficiallyownedbytheintermediarymustnotbevotedunlesstheintermediary,withoutdelayafterreceiptofthenoticeofthemeeting,financialstatements,managementproxycircular,dissident’sproxycircularandanyotherdocumentsotherthantheformofproxysenttoshareholdersbyoronbehalfofanypersonforuseinconnectionwiththemeeting,sendsacopyofthedocumenttothebeneficialownerand,exceptwhentheintermediaryhasreceivedwrittenvotinginstructionsfromthebeneficialowner,awrittenrequestforsuchinstructions.Restrictiononvoting(2)Anintermediary,oraproxyholderappointedbyanintermediary,maynotvotesharesthattheintermediarydoesnotbeneficiallyownandthatareregisteredinthenameoftheintermediaryorinthenameofanomineeoftheintermediaryunlesstheintermediaryorproxyholder,asthecasemaybe,receiveswrittenvotinginstructionsfromthebeneficialowner.Copies(3)Apersonbyoronbehalfofwhomasolicitationismadeshallprovide,attherequestofanintermediary,withoutdelay,totheintermediaryattheperson’sexpensethenecessarynumberofcopiesofthedocumentsreferredtoinsubsection(1),otherthancopiesofthedocumentrequestingvotinginstructions.Instructionstointermediary(4)Anintermediaryshallvoteorappointaproxyholdertovoteanysharesreferredtoinsubsection(1)inaccordancewithanywrittenvotinginstructionsreceivedfromthebeneficialowner.Beneficialownerasproxyholder(5)Ifabeneficialownersorequestsandprovidesanintermediarywithappropriatedocumentation,theintermediarymustappointthebeneficialowneroranomineeofthebeneficialownerasproxyholder.Validity

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(6)Thefailureofanintermediarytocomplywiththissectiondoesnotrendervoidanymeetingofshareholdersoranyactiontakenatthemeeting.Limitation(7)Nothinginthissectiongivesanintermediarytherighttovotesharesthattheintermediaryisotherwiseprohibitedfromvoting.Offence(8)Anintermediarywhoknowinglyfailstocomplywiththissectionisguiltyofanoffenceandliableonsummaryconvictiontoafinenotexceedingfivethousanddollarsortoimprisonmentforatermnotexceedingsixmonthsortoboth.Officers,etc.,ofbodiescorporate(9)Ifanintermediarythatisabodycorporatecommitsanoffenceundersubsection(8),anydirectororofficerofthebodycorporatewhoknowinglyauthorized,permittedoracquiescedinthecommissionoftheoffenceisapartytoandguiltyoftheoffenceandisliableonsummaryconvictiontoafinenotexceedingfivethousanddollarsortoimprisonmentforatermnotexceedingsixmonthsortoboth,whetherornotthebodycorporatehasbeenprosecutedorconvicted.Restrainingorder154(1)Ifaformofproxy,managementproxycircularordissident’sproxycircularcontainsanuntruestatementofamaterialfactoromitstostateamaterialfactrequiredthereinornecessarytomakeastatementcontainedthereinnotmisleadinginthelightofthecircumstancesinwhichitwasmade,aninterestedpersonortheDirectormayapplytoacourtandthecourtmaymakeanyorderitthinksfitincluding,withoutlimitingthegeneralityoftheforegoing,

• (a)anorderrestrainingthesolicitation,theholdingofthemeeting,oranypersonfromimplementingoractingonanyresolutionpassedatthemeetingtowhichtheformofproxy,managementproxycircularordissident’sproxycircularrelates;

• (b)anorderrequiringcorrectionofanyformofproxyorproxycircularandafurthersolicitation;and

• (c)anorderadjourningthemeeting.NoticetoDirector(2)AnapplicantunderthissectionshallgivetotheDirectornoticeoftheapplicationandtheDirectorisentitledtoappearandtobeheardinpersonorbycounsel.FinancialDisclosureAnnualfinancialstatements155(1)Subjecttosection156,thedirectorsofacorporationshallplacebeforetheshareholdersateveryannualmeeting

• (a)comparativefinancialstatementsasprescribedrelatingseparatelytoo (i)theperiodthatbeganonthedatethecorporationcameintoexistenceandendednot

morethansixmonthsbeforetheannualmeetingor,ifthecorporationhascompletedafinancialyear,theperiodthatbeganimmediatelyaftertheendofthelastcompletedfinancialyearandendednotmorethansixmonthsbeforetheannualmeeting,and

o (ii)theimmediatelyprecedingfinancialyear;• (b)thereportoftheauditor,ifany;and• (c)anyfurtherinformationrespectingthefinancialpositionofthecorporationandtheresultsof

itsoperationsrequiredbythearticles,theby-lawsoranyunanimousshareholderagreement.Consolidatedstatements

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157(1)Acorporationshallkeepatitsregisteredofficeacopyofthefinancialstatementsofeachofitssubsidiarybodiescorporateandofeachbodycorporatetheaccountsofwhichareconsolidatedinthefinancialstatementsofthecorporation.Examination157(2)Shareholdersofacorporationandtheirpersonalrepresentativesmayonrequestexaminethestatementsreferredtoinsubsection(1)duringtheusualbusinesshoursofthecorporationandmaymakeextractsfreeofcharge.Qualificationofauditor161(1)Subjecttosubsection(5),apersonisdisqualifiedfrombeinganauditorofacorporationifthepersonisnotindependentofthecorporation,anyofitsaffiliates,orthedirectorsorofficersofanysuchcorporationoritsaffiliates.Appointmentofauditor162(1)Subjecttosection163,shareholdersofacorporationshall,byordinaryresolution,atthefirstannualmeetingofshareholdersandateachsucceedingannualmeeting,appointanauditortoholdofficeuntilthecloseofthenextannualmeeting.Dispensingwithauditor163(1)Theshareholdersofacorporationthatisnotadistributingcorporationmayresolvenottoappointanauditor.Limitation163(2)Aresolutionundersubsection(1)isvalidonlyuntilthenextsucceedingannualmeetingofshareholders.Unanimousconsent163(3)Aresolutionundersubsection(1)isnotvalidunlessitisconsentedtobyalltheshareholders,includingshareholdersnototherwiseentitledtovote.Righttoinformation170(1)Onthedemandofanauditorofacorporation,thepresentorformerdirectors,officers,employees,agentsormandatariesofthecorporationshallprovideany

• (a)informationandexplanations,and• (b)accesstorecords,documents,books,accountsandvouchersofthecorporationoranyofits

subsidiariesthatare,intheopinionoftheauditor,necessarytoenabletheauditortomaketheexaminationandreportrequiredundersection169andthatthedirectors,officers,employees,agentsormandatariesarereasonablyabletoprovide.

Idem(2)Onthedemandoftheauditorofacorporation,thedirectorsofthecorporationshall

• (a)obtainfromthepresentorformerdirectors,officers,employeesandagentsormandatariesofanysubsidiaryofthecorporationtheinformationandexplanationsthatthepresentorformerdirectors,officers,employeesandagentsormandatariesarereasonablyabletoprovideandthatare,intheopinionoftheauditor,necessarytoenabletheauditortomaketheexaminationandreportrequiredundersection169;and

• (b)furnishtheauditorwiththeinformationandexplanationssoobtained.FundamentalChangesAmendmentofarticles173(1)Subjecttosections176and177,thearticlesofacorporationmaybyspecialresolutionbeamendedto

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• (a)changeitsname;• (b)changetheprovinceinwhichitsregisteredofficeissituated;• (c)add,changeorremoveanyrestrictiononthebusinessorbusinessesthatthecorporationmay

carryon;• (d)changeanymaximumnumberofsharesthatthecorporationisauthorizedtoissue;• (e)createnewclassesofshares;• (f)reduceorincreaseitsstatedcapital,ifitsstatedcapitalissetoutinthearticles;• (g)changethedesignationofalloranyofitsshares,andadd,changeorremoveanyrights,

privileges,restrictionsandconditions,includingrightstoaccrueddividends,inrespectofalloranyofitsshares,whetherissuedorunissued;

• (h)changethesharesofanyclassorseries,whetherissuedorunissued,intoadifferentnumberofsharesofthesameclassorseriesorintothesameoradifferentnumberofsharesofotherclassesorseries;

• (i)divideaclassofshares,whetherissuedorunissued,intoseriesandfixthenumberofsharesineachseriesandtherights,privileges,restrictionsandconditionsthereof;

• (j)authorizethedirectorstodivideanyclassofunissuedsharesintoseriesandfixthenumberofsharesineachseriesandtherights,privileges,restrictionsandconditionsthereof;

• (k)authorizethedirectorstochangetherights,privileges,restrictionsandconditionsattachedtounissuedsharesofanyseries;

• (l)revoke,diminishorenlargeanyauthorityconferredunderparagraphs(j)and(k);• (m)increaseordecreasethenumberofdirectorsortheminimumormaximumnumberof

directors,subjecttosections107and112;• (n)add,changeorremoverestrictionsontheissue,transferorownershipofshares;or• (o)add,changeorremoveanyotherprovisionthatispermittedbythisActtobesetoutinthe

articles.Noticeofamendment175(2)Noticeofameetingofshareholdersatwhichaproposaltoamendthearticlesistobeconsideredshallsetouttheproposedamendmentand,whereapplicable,shallstatethatadissentingshareholderisentitledtobepaidthefairvalueoftheirsharesinaccordancewithsection190,butfailuretomakethatstatementdoesnotinvalidateanamendment.Classvote176(1)Theholdersofsharesofaclassor,subjecttosubsection(4),ofaseriesare,unlessthearticlesotherwiseprovideinthecaseofanamendmentreferredtoinparagraphs(a),(b)and(e),entitledtovoteseparatelyasaclassorseriesonaproposaltoamendthearticlesto

• (a)increaseordecreaseanymaximumnumberofauthorizedsharesofsuchclass,orincreaseanymaximumnumberofauthorizedsharesofaclasshavingrightsorprivilegesequalorsuperiortothesharesofsuchclass;

• (b)effectanexchange,reclassificationorcancellationofallorpartofthesharesofsuchclass;• (c)add,changeorremovetherights,privileges,restrictionsorconditionsattachedtothesharesof

suchclassand,withoutlimitingthegeneralityoftheforegoing,o (i)removeorchangeprejudiciallyrightstoaccrueddividendsorrightstocumulative

dividends,o (ii)add,removeorchangeprejudiciallyredemptionrights,o (iii)reduceorremoveadividendpreferenceoraliquidationpreference,oro (iv)add,removeorchangeprejudiciallyconversionprivileges,options,voting,transferor

pre-emptiverights,orrightstoacquiresecuritiesofacorporation,orsinkingfundprovisions;

• (d)increasetherightsorprivilegesofanyclassofshareshavingrightsorprivilegesequalorsuperiortothesharesofsuchclass;

• (e)createanewclassofsharesequalorsuperiortothesharesofsuchclass;

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• (f)makeanyclassofshareshavingrightsorprivilegesinferiortothesharesofsuchclassequalorsuperiortothesharesofsuchclass;

• (g)effectanexchangeorcreatearightofexchangeofallorpartofthesharesofanotherclassintothesharesofsuchclass;or

• (h)constraintheissue,transferorownershipofthesharesofsuchclassorchangeorremovesuchconstraint.

Extraordinarysale,leaseorexchange189(3)Asale,leaseorexchangeofallorsubstantiallyallthepropertyofacorporationotherthanintheordinarycourseofbusinessofthecorporationrequirestheapprovaloftheshareholdersinaccordancewithsubsections(4)to(8).Proposingliquidationanddissolution211(1)Thedirectorsmaypropose,orashareholderwhoisentitledtovoteatanannualmeetingofshareholdersmay,inaccordancewithsection137,makeaproposalfor,thevoluntaryliquidationanddissolutionofacorporation.CanadaBusinessCorporationsRegulationsNoticeofMeetings44Forthepurposeofsubsection135(1)oftheAct,theprescribedperiodforthedirectorstoprovidenoticeofthetimeandplaceofameetingofshareholdersisnotlessthan21daysandnotmorethan60daysbeforethemeeting.CommunicationFacilities45(1)Forthepurposeofsubsection141(3)oftheAct,whenavoteistobetakenatameetingofshareholders,thevotingmaybecarriedoutbymeansofatelephonic,electronicorothercommunicationfacility,ifthefacility

• (a)enablesthevotestobegatheredinamannerthatpermitstheirsubsequentverification;and• (b)permitsthetalliedvotestobepresentedtothecorporationwithoutitbeingpossibleforthe

corporationtoidentifyhoweachshareholderorgroupofshareholdersvoted.(2)Forthepurposeofsubsection141(4)oftheAct,apersonwhoisentitledtovoteatameetingofshareholdersmayvotebymeansofatelephonic,electronicorothercommunicationfacility,ifthefacility

• (a)enablesthevotetobegatheredinamannerthatpermitsitssubsequentverification;and• (b)permitsthetalliedvotetobepresentedtothecorporationwithoutitbeingpossibleforthe

corporationtoidentifyhowthepersonvoted.PART6ShareholderProposals46Forthepurposeofsubsection137(1.1)oftheAct,

• (a)theprescribednumberofsharesisthenumberofvotingshareso (i)thatisequalto1%ofthetotalnumberoftheoutstandingvotingsharesofthe

corporation,asofthedayonwhichtheshareholdersubmitsaproposal,oro (ii)whosefairmarketvalue,asdeterminedatthecloseofbusinessonthedaybeforethe

shareholdersubmitstheproposaltothecorporation,isatleast$2,000;and• (b)theprescribedperiodisthesix-monthperiodimmediatelybeforethedayonwhichthe

shareholdersubmitstheproposal.

47Forthepurposeofsubsection137(1.4)oftheAct,• (a)acorporationmayrequestthatashareholderprovidetheproofreferredtointhatsubsection

within14daysafterthecorporationreceivestheshareholder’sproposal;and

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• (b)theshareholdershallprovidetheproofwithin21daysafterthedayonwhichtheshareholderreceivesthecorporation’srequestor,iftherequestwasmailedtotheshareholder,within21daysafterthepostmarkdatestampedontheenvelopecontainingtherequest.

ProxiesandProxySolicitationFormofProxy54Forthepurposeofsubsection149(1)oftheAct,aformofproxyshallbeintheformprovidedforinsection9.4(ContentofFormofProxy)ofNI51-102.ManagementProxyCircular55(1)Subjecttosubsection(3),amanagementproxycircularshallbeintheformprovidedforinForm51-102F5(InformationCircular)ofNI51-102,whichform,inthecircumstancesdescribedinItem8ofPart2ofthatForm,includesthestatementreferredtointhatItem.(2)Amanagementproxycircularshallalsosetoutthefollowing:

• (a)thepercentageofvotesrequiredfortheapprovalofanymatterthatistobesubmittedtoavoteofshareholdersatthemeeting,otherthantheelectionofdirectors;

• (b)astatementoftherightofashareholdertodissentundersection190oftheActwithrespecttoanymattertobeactedonatthemeetingandabriefsummaryoftheproceduretobefollowedtoexercisethatright;

• (c)astatement,signedbyadirectororanofficerofthecorporation,thatthecontentsandthesendingofthecircularhavebeenapprovedbythedirectors;and

• (d)astatementindicatingthefinaldatebywhichthecorporationmustreceiveaproposalforthepurposeofparagraph137(5)(a)oftheAct.

(3)Amanagementproxycircularforanon-distributingcorporationisnotrequiredtosetouttheinformationprovidedforinPart1(c)orItem9,10or16ofPart2ofForm51-102F5(InformationCircular)ofNI51-102,orthestatementreferredtoinItem8ofPart2ofthatForm.56Forthepurposeofsubsection150(2)oftheAct,theprescribedformofstatementthatshallaccompanythecopyofthemanagementproxycirculartobesenttotheDirectorunderthatsubsectionisastatementsignedbyadirectororanofficerofthecorporation,totheeffectthatacopyofthecircularhasbeensenttoeachdirector,toeachshareholderwhoseproxyhasbeensolicitedandtotheauditorofthecorporation.Dissident’sProxyCircular57(1)Adissident’sproxycircularshallbeintheformprovidedforinForm51-102F5(InformationCircular)ofNI51-102,whichform,inthecircumstancesdescribedinItem8ofPart2ofthatForm,includesthestatementreferredtointhatItem.(2)Adissident’sproxycircularforanon-distributingcorporationisnotrequiredtosetouttheinformationprovidedforinPart1(c)orItem9,10or16ofPart2ofForm51-102F5(InformationCircular)ofNI51-102,orthestatementreferredtoinItem8ofPart2ofthatForm.63Informationthatisnotknowntoadissidentandthatcannotbeascertainedbythemonreasonableinquirymaybeomittedfromadissident’sproxycircular,butthecircumstancesthatrendertheinformationunavailableshallbedisclosedintheproxycircular.64(1)Adissident’sproxycircularshallcontainastatementsignedbythedissidentorapersonauthorizedbythemthatthecontentsandthesendingofthecircularhavebeenapprovedbythedissident.(2)Forthepurposeofsubsection150(2)oftheAct,theprescribedformofstatementthatshallaccompanythecopyofthedissident’sproxycirculartobesenttotheDirectorunderthatsubsectionisastatementsignedbythedissidentorapersonauthorizedbythem,totheeffectthatacopyofthecircularhasbeensenttoeachdirector,toeachshareholderwhoseproxyhasbeensolicited,totheauditorofthecorporationandtothecorporation.

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FinancialStatementsinProxyCircular66(1)Iffinancialstatementsaccompanyorformpartofamanagementproxycircular,thestatementsshallbepreparedinthemannerdescribedinPart8.(2)Thefinancialstatementsreferredtoinsubsection(1),ifnotreportedonbytheauditorofthecorporation,shallbeaccompaniedbyareportofthechieffinancialofficerofthecorporationstatingthatthefinancialstatementshavenotbeenauditedbuthavebeenpreparedinthemannerdescribedinPart8.ProxyCircularExemptions67Forthepurposeofsubparagraph(b)(v)ofthedefinitionsolicitorsolicitationinsection147oftheAct,asolicitationdoesnotincludeapublicannouncementthatismadeby

• (a)aspeechinapublicforum;or• (b)apressrelease,anopinion,astatementoranadvertisementprovidedthroughabroadcast

mediumorbyatelephonic,electronicorothercommunicationfacility,orappearinginanewspaper,amagazineorotherpublicationgenerallyavailabletothepublic.

68(1)Forthepurposeofsubparagraph(b)(vii)ofthedefinitionsolicitorsolicitationinsection147oftheAct,theprescribedcircumstancesarecircumstancesinwhichthecommunicationismadetoshareholders

• (a)byoneormoreshareholdersandconcernsthebusinessandaffairsofacorporation—includingitsmanagementorproposalscontainedinamanagementproxycircular—andnoformofproxyissenttothoseshareholdersbytheshareholderorshareholdersmakingthecommunicationorbyapersonactingontheirbehalf;

• (b)byoneormoreshareholdersandconcernstheorganizationofadissident’sproxysolicitation,andnoformofproxyissenttothoseshareholdersbytheshareholderorshareholdersmakingthecommunicationorbyapersonactingontheirbehalf;

• (c)asclients,byapersonwhogivesfinancial,corporategovernanceorproxyvotingadviceintheordinarycourseofbusinessandconcernsproxyvotingadviceif

o (i)thepersondisclosestotheshareholderanysignificantrelationshipwiththecorporationandanyofitsaffiliatesorwithashareholderwhohassubmittedaproposalpursuanttosubsection137(1)oftheActandanymaterialintereststhepersonhasinrelationtoamatteronwhichadviceisgiven,

o (ii)thepersonreceivesanyspecialcommissionorremunerationforgivingtheproxyvotingadviceonlyfromtheshareholderorshareholdersreceivingtheadvice,and

o (iii)theproxyvotingadviceisnotgivenonbehalfofanypersonsolicitingproxiesoronbehalfofanomineeforelectionasadirector;or

• (d)byapersonwhodoesnotseekdirectlyorindirectly,thepowertoactasproxyforashareholder.

(2)Thecircumstancesdescribedinparagraph(1)(a)arenotprescribedcircumstancesifthecommunicationismadeby

• (a)ashareholderwhoisanofficerordirectorofthecorporation,orwhoservesinasimilarcapacity,ifthecommunicationisfinanceddirectlyorindirectlybythecorporation;

• (b)ashareholderwhoisanomineeorwhoproposesanomineeforelectionasadirector,ifthecommunicationrelatestotheelectionofdirectors;

• (c)ashareholderwhosecommunicationisinoppositiontoanamalgamation,arrangement,consolidationorothertransactionrecommendedorapprovedbytheboardofdirectorsofthecorporationandwhoisproposingorintendstoproposeanalternativetransactiontowhichtheshareholderoranaffiliateorassociateoftheshareholderisaparty;

• (d)ashareholderwho,becauseofamaterialinterestinthesubject-mattertobevotedonatashareholdersmeeting,islikelytoreceiveabenefitfromitsapprovalornon-approval,whichbenefitwouldnotbesharedproratabyallotherholdersofthesameclassofshares,unlessthebenefitarisesfromtheshareholder’semploymentwiththecorporation;or

• (e)anypersonactingonbehalfofashareholderdescribedinanyofparagraphs(a)to(d).

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69(1)Forthepurposeofsubsection150(1.2)oftheAct,theprescribedcircumstancesarethoseinwhichthesolicitationconveyedbypublicbroadcast,speechorpublicationsetsouttheinformationprovidedforinItems3.2,3.4,5(b)and11ofPart2ofForm51-102F5(InformationCircular)ofNI51-102.(2)Apersonmakingasolicitationreferredtoinsubsection(1)shallsendtherequiredinformationandacopyofanyrelatedwrittencommunicationtotheDirectorandtothecorporationbeforesolicitingproxies.Introduction

• Shareholdershavesignificantlegalpowerandtheywielditlargelythroughtherighttovote.• Shareholdervotingisthesolutiontotheproblemofhowtodecideoncollectivecourseofaction.• Theyhavevotingrightsattachedtoshares.Makedecisionsindividuallyandasagroup.• Usuallyseenwithbothboardsofdirectorsandshareholders.

o Butnote,directorseachgetonevotewhileshareholdersgetonevoteforeverysharetheyown.

• Howpracticallysignificantisit?o Willdependonnatureofcorporationandhowsharesareheldinthecorporation.

• Shareholdercontrolisindirectanditishighlyspecific/particularized.o Indirect–evenifshareholdersareinthemajority,theydon’thaveinputontheday-to-day

operationsofthecompany.o Particularized–it’snotbroadlikethepowersofdirectors.It’snarrower.Thematters

reservedtotheirdecision-makingarenarrowandspecifiedbythecorporateconstitution.§ Righttovoteinandvoteoutdirectors§ Improveamendmentstocorporateconstitution§ Votetoelectionofindependentauditor

• Votingpowerisexercisedgenerallythroughmajorityrule.o Specialmajorityandunanimitywillapplyinrarecases.

• Shareholderscanalsomakedecisionsthroughunanimousshareholderagreements–don’tneedtodecidethroughvotingatmeetings.

o Importantcost-savingdevice,especiallyforsmallercorporations.• Thosewhoareentitledtoparticipateindecisionsbymajorityruleareprotectedbycertain

safeguards:o Requirementthatthedecisionbemadeatameeting.

§ Righttobenotifiedofallmeetings.§ Barronv.Potter(1914)

• Wasn’tameetingjustbecausePottersaiditwas(BarronwasinataxiandPotterwasrunningalongbesideit).

§ So,requirementthatmeetinghasatleasttwopeopleinattendance(unlessauthorizedbystatuteorcorporateconstitution).

§ Alsoneedtohavecommonpurposeforthemeeting–notjustsomethingthathappensbychance.

(1)PerennialProblemsofShareholderControl

• Conflictre:howcorporationshouldbegoverned.• Conflictre:minorityshareholdersfeelinglikethemajorityistryingtoappropriatevalueat

expenseofminorityshareholders.• Conflictre:feelinglikemajorityshareholdersareoverreaching,tryingtopissoff/abuseminority

shareholders.

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(2)Directors

• Generallyboardmustactinthesettingofameeting,withaquorumpresent,followingnoticeofthemeetingbeingprovidedtodirectors.

• Adecisioncanbemadewithoutameeting,butonlyifthedecisionisinwritinganditisunanimous(CBCA117).

• Ifthereisonlyonedirector,theycanactunilaterallyonthebasisofunanimity(CBCA117)orthatthey“mayconstituteameeting”(CBCA114(8)).

(3)Shareholders

• Inanidealizedcontext,shareholderpowerasagroupseemsprettysignificant.Inreality,however,large,widelyheldcorporationshaveahugenumberofsharesthatmakesshareholdercontrolmythical.

o Shareholdershaverightsbutdonotexercisetheminawaythatwillmateriallyinfluencethewayinwhichbusinessisdone.

o Why?Apathy,ignorance,lackofincentive,etc…o Ifyou’readiversifiedshareholder,youholdalittleinalotofdifferentcorporations,you

willtendtobepassiveinalargepubliclytradedcorporation.o Thisisnottrueofshareholdersinsmallcorporations–willbeveryengaged.

• Certainshareholderrightsareancillarytovoting:righttocallmeetings,topresentnon-bindingshareholderproposalsforvote,toinformation,etc…

(4)ResponsestoProblemsre:shareholders

• Abuseandapathyaremainproblemsre:shareholdercontrol.• Lawreformershavebeenveryconcernedaboutthisandhavetakenpolicyaction.• Introductionofstatutoryoppressionremedy.

(5)SHAREHOLDERMEETINGS

• CBCAprovidesthattheycancall“annualmeetings”(CBCA133(a)).• Mainitemsofordinarybusiness:

o Electionofdirectorso Approvalofbylaws(CBCA103(2))o Disclosurebydirectorstoshareholdersre:corporation’sfinancialposition(CBCA155)o Appointmentoftheauditor(CBCA162)

a)Noticerequirements

• SeeCBCA132-138• Issuesre:notice–who,howmuch,when,whatkindofinfointhenotice?• Shareholderswhowillhaveavoteonthematterstobediscussedatthemeetingmustbegiven

noticeandsotoomustdirectorsandtheauditor(CBCA135(1)).SeeGarvie.o Whataboutnon-votingshareholders?Dotheyneednotice?

• Timing–CBCAsetsoutminimumandmaximumnumberofdaysofnoticerequired(seeCBCA135(1)re:regulations,s.44whichstatesminimum21days,maximum60days).

• Noticeisadequateonlywherenoticeissuchthatitprovidesshareholderswithsufficient,detailed,andcomprehensibleknowledgetoenablethemtodecidethematterfordecisionandtoenablethemtoactuallyreachadecision.

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Garviev.Axmith(1961)Facts

• SomeshareholdersofAdidn’treceivenoticere:shareholdermeetingandapplyforinjunctiontostoptheresolutionsadoptedatthemeetingonthegroundsthattherewasnoproper/adequatenotice.

Issue• Wasthereadequatenotice?No.

Reasoning• Noticeshouldbeshareholdersinapositionwhereeachcanjudgeforthemselveswhetherthey

wouldconsenttothedecisionsproposed.• Enoughmaterialneedstobeprovidedalongwiththenotice,namelyenoughtogivethecommon

shareholdertheabilitytoappreciatethefullandcompleteresultoftheadoptionoftheplan.• Here,withoutadequateexplanation,wasn’tpossibleforshareholderstocometointelligent

conclusionre:whethertheyshouldfavouroropposethetransaction.Thatistherightoftheshareholderandthismustbeaccordedtohiminthenoticeofthemeetingsenttohim.

Ratio• Giveadequatenotice,fool.Gottabeabletoknowwhat’supatthemeeting.

Notes• Requirementthateverymattertobeacteduponinthemeetingbeproperlyidentified.• Requirementthatallmatterstobeacteduponmustbesufficientlydescribedtopermit

shareholderstoformareasonedjudgment.b)Locationofmeetings

• Generalrulethattheymustbeheldwithinthejurisdictionofincorporation,buttherecanbeexceptionsinthearticlesorifthereisunanimousconsent(CBCA132).

o So,CBCAcorporationsmustholdmeetingsinCanada.• Ifbylawsspecifyspecificplace(e.g.city,usuallywhereheadquartersare)thenitmustbeheld

there.ReCanadaResourcesLtd.andMinisterofConsumerandCommercialRelations(1978)Facts

• SchemeadoptedatmeetingofcompanythathappenedinCalgary,buttheletterspatentofthecorporationsaytheheadquartersareinToronto.

Issue• Istheschemeinvalidbecauseofthelocationofthemeeting?Yes.

Reasoning• Section194(2)statesthatthecorporationmustsubmittheschemetoshareholdersatameeting

dulycalledbythecorporationforthepurposeofconsideringthescheme.o “Duly”isimportanthere–denotesthatlegislatureintendedcorporationstostrictlyfollow

theprovisionsofthestatute.• Lotsofevidencethattheoutcomewouldhavebeenthesameirrespectiveoflocationofmeeting.

o But,doesn’tmatter–nowaytobesure.• Can’tacceptthisargumentbecauseifwediditwouldimplythattheproceedingsatmeetingsare

reallyjustaformality.o “Afundamentalunderlyingassumptionofourcorporatelawisthatmeetingsof

shareholdersmaybeofsignificance,evenwhereoneshareholdersoragroupownsapredominantportionoftheshares.”

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c)Votingatameeting

• Quorumo CBCA139(1)and(4)o Unlessbylawsprovideotherwise,quorumisestablishedwheremajorityofshareholders

withrighttovotearepresentinpersonorthroughproxy.• Methodofvoting

o CBCA141o Unlessbylawsspecifyotherwise,shareholdersusuallyvotebyraisingtheirhands(CBCA

141(1))orbyballot.Thisispershareholder,notpershare.o Votingcanalsobeelectronic.

• Importanceofprocedureo Complaintaboutameetingre:improprietyofprocedure–whatisacourtsupposedtodo?

Orderanewmeetingtobeheld?o MacDougallv.Gardner–handsoffapproacho Penderv.Lushington–moreactiveapproachtodealingwithprocedural

MacDougallv.Gardner(1875,UK)

• Handsoff,deferentialapproachunderUKCMLeventhoughtherewasclearabuseofoutcome.• Madedecisionbecausetherewasnopointinseizingupontheprocedural• Courtwasassuredthatimproprietyhadnopracticaleffect,sogaveitallapass.

Penderv.Lushington(1877,UK)Facts

• Wasanotherclearinstanceofproceduralimpropriety.Reasoning

• Importantthatcourtsresolveandtakeseriouslyissuesofproceduralimproprietyeveniftheoutcomewon’tchangeasaresultoftheproceduralimpropriety.Ifwedisregardit(evenifitwon’thaveanimpact)what’sthewholepointofprocedureandthesafeguardsitoffers?

Notes• Thisistheapproachthatreflectsmodernlaw–courtsareveryconcernedwithprocedural

impropriety.d)Proxyvoting

• Shareholdersinlargecorporationsarerationallyapatheticbecausetheyhavesuchasmallstakeinthecorporation.

o So,becauseofthat,we’veseenthatonlyasmallproportionofshareholdersshowuptolargecorporationmeetings.

• Policymakersthenbecameveryconcerned.o So,triedtomakeiteasierandcheaperforshareholderstomaketheirvoicesheard.Don’t

makethemshowupinpersonandtravel.Instead,canappointanagent,aproxy.• Proxyvotingallowsashareholdertoauthorizesomeoneelsetocasthis/hervote(s).• SeeCBCA147-154

o 148(1)–Shareholdershavearighttoappointproxy.Authorizedbystatute.o 148(4)–Ifshareholderchangesmind,shecancancelproxyauthorizationinwritingor

justshowup.o 149(1)–Corporationhasobligationtosolicitproxyvotesandmustprovideproxyforms

whensendingnoticeofupcomingmeeting(unlesscorporationhaslessthan50shareholders).

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§ Designedtofurthersecureshareholderfranchise,makeiteasierforshareholderstonominateproxyassuggestedbythecorporation.

• Whoareproxies?o Youcanappointwhomeveryouwish.o But,theywilloftenbeproposedbycorporationsandtheywillaskforfulldiscretion.

§ So,youcanseethatifyou’reasavvycorporationandyouwantmorepowerfromshareholders,youcangetthisthroughproxies.

o Canhaveitsothatamanageristhedefaultproxybutmustbeclearthattheshareholderisatlibertytonamesomeoneelse.

e)ShareholderInitiatives

• Oncemanagerialpowersarevestedintheboardofdirectors,shareholderscannotdirectlydictatemanagementpolicy.But,theycansubmitpetitionstotheboard.

o Probablybeignorediffromminorityshareholdersandproposalsfrommajorityarehardtocoordinate.

• Modernstatutesallowshareholderstoputitemsontheagendaofshareholdersmeetings.o CBCA137–hasmadethispowerlessavailabletoshareholdersbyrequiringminimum

numberofsharesheldforaminimumperiodoftime,etc…o Atsametime,s.137hasmadeiteasierforshareholders–itlimitedthereasonswhy

directorscouldrefusetocirculateproposalandsupportingdocuments.• Evenso,doesthismeanthatthereisarightforshareholderstohavetheirproposalsactuallyput

toavote?Ifitwasaccepted,whatwouldhappenthen?f)TYPESOFMEETINGS:(1)OrdinaryBusiness/AnnualMeetings

• StatuterequiresthatdirectorscallAGMswithsomeflexibilityre:timing(CBCA133).• Thereisaquorumrequirement(CBCA139)whichisroutinelyloweredbybylaws.• AnAGMcanbeavoidedinfavourofawrittenresolution,butonlyifit’sunanimous(CBCA142).• Ifthereisonlyoneshareholderheconstitutesameeting(CBCA139(4)).• Meetingsmaybeelectronic(CBCA132(5)).

• Electionofdirectors

o Iftherearedifferentclassesofsharesanddirectorsforthoseclasses,votingwillhappenbyclass.

o Shareholdershavepowertoelectdirectorsbysimplemajority(CBCA106(3)).o Thiscanbemodified–threecommonmodificationstostrictmajorityrule:

§ Cumulativevoting• Optional,rarelyadopted.• Shareholdergetsnumberofvotesequaltoproductof(i)thenumberof

votingsharesheholdsand(ii)thenumberofvacanciesontheboardthatmustbefilled.Shareholdercanthendividevotesorcumulatethemforallonecandidate.

• Requiresthattherebefixednumberofdirectorselectedforoneyearterms.• Requiresallcandidatesbevotedontogetherandcandidateswithfewest

votesdropoffuntilpositionsarefilled.• AuthorizedbyCBCA107.

§ Classdirectors• Directorswhoareelectedbythevotesofonlyoneclassofshares.

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• Theorythatdifferentclassesofshareswillappealtoandbeacquiredbydifferentkindofpeoplewhoseviewswillbeunderrepresentedonamajorityelectedboardwithoutclassvoting.

• AuthorizedbyCBCA111(3).§ Votingcontracts

• Votingcontractsamongshareholders,commoninsmallcorporations.Constituteswrittenagreementre:howtheywillexercisetheirvotingrights.

• Can’thavethisarrangementbetweendirectorswhoarealsoshareholdersbecauseit’sanattempttoaffectthecastingofvotesontheboardofdirectorsandtheboardhasafiduciarydutytomakedecisionsinbestinterestofcorporation.Can’tfetterdirectors’discretion.

• AuthorizedbyCBCA145(1).

• Approvalofby-lawso Mosteasilymodifiedthinginthecorporateconstitution.o Directorshavepowertocreateandamendby-lawsbuttheymustbeapprovedby

shareholdersatnextmeetingtocontinuetobeineffect(CBCA103).o Shareholderscanproposetheirownbylaws(CBCA103(5)and137).

• Financialdisclosure

o DirectorsmustreporttoshareholdersatAGMre:corporation’sfinancialposition(CBCA155).

o Mustcirculateandpresentfinancialstatementandincludeauditor’sreportverifyingthisstatement.

o Ifshareholdersreadanythingforameeting,itwillbethefinancialreport.o Therecordsthatmakeupthereportmustbemaintainedanddisclosedandmadeavailable

toshareholdersatanytime(CBCA157(1)and(2)).

• Appointmentofauditoro Auditorscertifythatthefinancialrecordsareaccurate(CBCA161).o Anotherprotectionforshareholders,allowingtheauditortobedirectlyappointedby

shareholders(CBCA162(1)).o Expenseofhavinganauditorcanbewaivedbutonlywithunanimousconsent,including

thosenotnormallyentitledtovote(CBCA163(3)).§ Thisrareneedforunanimousconsentshowsprotectiveroleofauditor.§ **Note–auditcannotbewaivedifsharesofcorporationarepubliclytraded.

o Inlargecorporations,though,approvalofauditorisusuallyjustarubberstamptoproposalfromboard.

o ProvisionslikeCBCA161re:auditorstrytomaintainindependence.§ But,usuallyauditorsaremoreloyaltomanagement.§ InAmerica,Sarbanes-OxleyActpassedin2002todealwithcorporatecollapsesdue

toauditorswhowerenotsufficientlyindependentfrommanagement.§ InCanada,newCanadianPublicAccountabilityBoardcreatedtooverseeauditors

ofpubliclytradedcorporations.o HerculesManagement

§ HighlightslackofprotectionfromauditrequirementbecauseSCCfoundthatauditordoesnotoweadutyofcarere:auditdirectlytoanyshareholdersbutratheronlytothecorporation.

§ Lotofcriticismfromshareholderrightsactivists.o Therehavebeen,however,situationswheretheauditorswereheldliabletoinvestors.

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§ CBCA237.1-9addedin2007changesthisrule(237.7)inmanycasesforCBCAcorporations.

g)TYPESOFMEETINGS:(2)ExtraordinaryBusiness/SpecialMeetings

• Directorscancallspecialmeetings(CBCA133(2)).• Socanshareholders(requisitionedmeetings),butonlythosewhomeetaminimumthreshold(i.e.

holdatleast5%ofshares(CBCA143(1)or10%ofshares(QBCA99)).• Somethings,likeremovingadirector,canonlybediscussedataspecialmeeting.• Removalofdirectors

o Ifshareholdersareunhappywithdirectors,canvoteforremovalatarequisitionedmeeting.

• Shareholderapprovalofconflict-of-interestcontractso Shareholderscanapproveself-dealingcontractso CBCA120

• Constitutionalamendmentso Detailedschemeforconstitutionalamendments,ensuresthatanyconstitutional

amendmentsmadereflectaclearanddeliberatechoicebyshareholders.o CBCA173(1)–Articlescanbeamendedthroughspecialmajority(2/3).o CBCA175(2)–Specialnoticemustbegiventoshareholdersre:anyproposaltoamend

articlesofincorporation.Regularnoticeisnotenough.o CBCA176–Ifanamendmenttargetsaparticularclassofshares,thatamendmentmustbe

approvedbyspecialresolution(2/3)ofthatclass,eveniftheclassofsharesisnon-voting.§ Meanttoprotecttheproperty,rights,andsharesofnon-votingshareholders.

• Fundamentalchangewithoutconstitutionalamendmento CBCA189(3)–ifincumbentmanagementwishtosellallormostpropertyofthe

corporation,theyhavetoobtainapprovalofshareholders.Mustbegivenbyspecialmajorityvote(2/3)andnon-votingclassesofsharesareentitledtovoteexceptionallyinthiscontext.

• Corporatesuicideo Ultimatepowerofthemajorityistocompelthecorporation’ssuicide(windingup,

dissolution).o CBCA211–requiresspecialresolutionofeachclassofsharesandallowsnon-voting

shareholderstovote(211(3)).o ProposalcanbemadebydirectorsorbyanyshareholderwhoisentitledtovoteatanAGM

(137).h)ShareholderAccountability

• Howandtowhomareshareholdersaccountableinexercisingcontrolrightsthroughvoting?• Howshouldthelawconstrainthepowersofshareholders?• Inbothcasesbelow,courtseemedtosuggestthatwhenallshareholdersareexercisingtheir

controlrights,theyhavetoactinaquasi-fiduciaryway.Supposedtoexercisepoweringoodfaithandintheinterestsofthecompanyasawhole.

• Difficulty–courtsneverreallyenforcedthisideathatthecourtsarticulatedinthesetwocases.Wouldinterveneveryrarelywheretherewasegregiousbadfaith.

Allenv.GolfReefsofWestAfrica(1990,UK)

• Powerofshareholdersmust,likeany,beexercisedforthebestinterestofthecompanyasawhole,notsimplyinthebestinterestofthemajorityshareholders.

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Greenhalghv.ArdeneCinemas(1951,UK)

• Shareholdersmustproceedwithwhatis,intheirhonestopinion,forthebenefitofthecompanyasawhole(subjectivetest).

VII.MINORTYPROTECTION

A)STANDINGANDTHEREPRESENTATIVEACTIONCanadaBusinessCorporationsAct,ss.238-240QuebecBusinessCorporationsAct,ss.439-440,445-447,449CanadaBusinessCorporationsActRemedies,OffencesandPunishmentDefinitions238InthisPart,actionmeansanactionunderthisAct;(action)complainantmeans

• (a)aregisteredholderorbeneficialowner,andaformerregisteredholderorbeneficialowner,ofasecurityofacorporationoranyofitsaffiliates,

• (b)adirectororanofficeroraformerdirectororofficerofacorporationoranyofitsaffiliates,• (c)theDirector,or• (d)anyotherpersonwho,inthediscretionofacourt,isaproperpersontomakeanapplication

underthisPart.(plaignant)Commencingderivativeaction239(1)Subjecttosubsection(2),acomplainantmayapplytoacourtforleavetobringanactioninthenameandonbehalfofacorporationoranyofitssubsidiaries,orinterveneinanactiontowhichanysuchbodycorporateisaparty,forthepurposeofprosecuting,defendingordiscontinuingtheactiononbehalfofthebodycorporate.Conditionsprecedent(2)Noactionmaybebroughtandnointerventioninanactionmaybemadeundersubsection(1)unlessthecourtissatisfiedthat

• (a)thecomplainanthasgivennoticetothedirectorsofthecorporationoritssubsidiaryofthecomplainant’sintentiontoapplytothecourtundersubsection(1)notlessthanfourteendaysbeforebringingtheapplication,orasotherwiseorderedbythecourt,ifthedirectorsofthecorporationoritssubsidiarydonotbring,diligentlyprosecuteordefendordiscontinuetheaction;

• (b)thecomplainantisactingingoodfaith;and• (c)itappearstobeintheinterestsofthecorporationoritssubsidiarythattheactionbebrought,

prosecuted,defendedordiscontinued.Powersofcourt240Inconnectionwithanactionbroughtorintervenedinundersection239,thecourtmayatanytimemakeanyorderitthinksfitincluding,withoutlimitingthegeneralityoftheforegoing,

• (a)anorderauthorizingthecomplainantoranyotherpersontocontroltheconductoftheaction;• (b)anordergivingdirectionsfortheconductoftheaction;

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• (c)anorderdirectingthatanyamountadjudgedpayablebyadefendantintheactionshallbepaid,inwholeorinpart,directlytoformerandpresentsecurityholdersofthecorporationoritssubsidiaryinsteadoftothecorporationoritssubsidiary;and

• (d)anorderrequiringthecorporationoritssubsidiarytopayreasonablelegalfeesincurredbythecomplainantinconnectionwiththeaction.

QuebecBusinessCorporationsAct439.Applicationsundersubdivisions2and3maybemadebyanyofthefollowing:(1)aregisteredholderorbeneficiary,andaformerholderorbeneficiary,ofasecurityofacorporationoranyofitsaffiliates;(2)adirectororanofficeroraformerdirectororofficerofacorporationoranyofitsaffiliates;(3)anyotherpersonwho,inthediscretionofthecourt,hastheinterestrequiredtomakeanapplicationunderthisdivision.440.Anapplicationmadeundersubdivision2or3maynotbedismissedonthesolegroundthatitisshownthatanallegedbreachofarightoforanobligationowedtoacorporationoritssubsidiaryhasbeenormaybeapprovedbythecorporation’sshareholders,butevidenceofapprovalbytheshareholdersmaybetakenintoaccountbyacourtinmakingadecisionundereitherofthosesubdivisions.§2.—Authorizationtoactonbehalfofacorporation445.Anapplicantmayapplytothecourtforleavetobringanactioninthenameandonbehalfofacorporationoracorporationthatisoneofitssubsidiaries,orinterveneinanactiontowhichthecorporationorsubsidiaryisaparty,forthepurposeofprosecuting,defendingordiscontinuingtheactiononbehalfofthecorporationorsubsidiary.446.Noapplicationforauthorizationmaybemadeunlesstheapplicanthasgiventhedirectorsofacorporationoritssubsidiary14days’priornoticeoftheapplicant’sintentiontoapplytothecourt.Authorizationmaybegrantedifthecourtissatisfiedthattheboardofdirectorsofthecorporationoritssubsidiaryhasnotbrought,diligentlyprosecutedordefendedordiscontinuedtheaction,andifthecourtconsidersthattheapplicantisactingingoodfaithandthatitappearstobeintheinterestsofthecorporationoritssubsidiarythattheactionbebrought,prosecuted,defendedordiscontinued.Whenallthedirectorsofthecorporationoritssubsidiaryhavebeennamedasdefendants,priornoticetothedirectorsoftheapplicant’sintentiontoapplytothecourtisnotrequired.447.Inconnectionwithanactionbroughtorintervenedinunderthissubdivision,thecourtmaymakeanyorderitthinksfit,including(1)anorderauthorizingtheapplicantoranyotherpersontocontroltheconductoftheaction;(2)anordergivingdirectionsfortheconductoftheaction;(3)anorderrevisingthefunctioningofthecorporationoritssubsidiarybyamendingthearticlesortheby-lawsorbyestablishingoramendingaunanimousshareholderagreement;(4)anordermakingappointmentstotheboardofdirectorsofthecorporationoritssubsidiary,eithertoreplaceallorsomeofthedirectorsortoincreasethenumberofdirectors;(5)anorderdirectinganinvestigationtobemadeunderDivisionI;(6)anorderdirectingthatanyamountawardedagainstadefendantbepaid,inwholeorinpart,directlytoformerandpresentsecurityholdersofthecorporationoritssubsidiaryinsteadoftothecorporationoritssubsidiary;and(7)anorderrequiringthecorporationoritssubsidiarytopay,inwholeorinpart,theprofessionalfeesandotherreasonablecostsincurredbytheapplicantinconnectionwiththeactionorintervention.449.Ifauthorizedbythecourtundersection445toactonbehalfofthecorporation,theapplicantisdeemedtobetherepresentativeofthecorporationforthepurposesoftheproceedingand,tothatend,

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theapplicanthasarightofaccesstoallrelevantinformationanddocumentsheldbythecorporationandtoanydocumentwhichisheldorwaspreparedforthecorporationbyanyperson,includingamandataryoraproviderofgoodsorservices,whorenderedaservicetothecorporationinconnectionwiththeactionorinterventionauthorizedbythecourtorwhichrelatestothefactsatissue.Thecourtmay,onapplication,orderapersonwhoholdsanyinformationordocumentreferredtointhefirstparagraphtocommunicateittotheapplicantifcommunicationoftheinformationordocumentappearstobenecessaryforthepurposesoftheproceedingorinterventionauthorizedbythecourt.Beforegrantingtheapplication,thecourtmustgiveinterestedpersonstheopportunitytobeheard.However,anyinformationordocumentobtainedbytheapplicantunderthissectionispresumedtobeconfidentialandmayonlybeusedinconnectionwiththeactionorinterventionauthorizedbythecourtandsubjecttotheconditionsdeterminedbythecourt,ifany.

• Majorityshareholderscanexercisetheirpowerinawaythatinjurestheinterestsoftheminorityshareholders.

o Concernthatmajorityshareholderswilloverreachandputtheirinterestsaheadofthoseoftheminorityshareholders.

• Willdealwithabuseofpowerandcontrolbymajorityshareholders.• CMLfailedtocomeupwithanswerthatbalancedneedforflexibleminorityprotectionand

recognitionthatshareholdershavetheirrightsbyvirtueofproperty(shares)andtheyshouldbeabletoexercisethoserightsintheirownself-interest.

• Remediesavailabletominorityshareholders:o Complianceandrestrainingordero Representativeactiono Oppressionremedy

• Allofthesehaveabroadscope,weremotivatedbyconcerntoprovidemeaningfulprotectiontominorityshareholdersandalsoservetoprotecttheinterestsofanumberofotherparties:interestsofcorporation,interestsofoutsiders(includingcreditors),whichhassurprisedmanycommentators.

1)ShareholderAccountability:Introduction

• Shareholdershavesignificantcontrolinpracticeandexercisetheirpowerlargelythroughvoting.• Powercomeswithriskofabuse,soquestionatCMLofhowweshoulddealwithabuseofpowerof

oneshareholderrelativetoanother?• CMLresponsehasbeeninconsistentandhaphazard.

o Wouldtendnottointerveneunlesstherewasegregiousandclearabuseofpower.SeeAllenv.GoldReefs.

Allenv.GoldReefs(1900,UK)Facts

• Inthe1800s,corporationshareswereoftenissuedforlessthantheirfullprice.Inthesecases,thecompanycouldmakea“call”onshareholdersforanypartoftheunpaidcapital.

• Theregisteredarticlesofassociationsaid“theCompanyshallhaveafirstandparamountlienforalldebts,obligations,andliabilitiesofanymembertoortowardsthecompanyuponallshares(notbeingfullypaid)heldbysuchamember.”

• Zuccaniheldbothfullypaidandpartlypaidshares.Hehadahabitoffullypayingupsomeoftheshares,andthentransferringthemtoothers,whileleavingothersharesinarrears.Whenhediedhewasinarrearsofcallandinterestoncallsforbothtypesofshares.

• Anextraordinarymeetingofshareholderswascalledforthepurposeofpassingaspecialresolutiontoalterthelienarticle(above)byomittingthewords“notbeingfullypaid”,thereby

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extendingthecompany’slientofullypaidsharesaswell.Zuccani’sexecutor’sseekadeclarationtocounterthis.

Issue• Cantheshareholdersdothis?Yes.

Reasoning• Courtheldthatitwasokayeventhoughithadprejudicetominorityshareholders.Surprisingfrom

amodernpointofview.• Allshareholderswhentheyexercisetheircontrolofrightsarelimitedbyasetoffiduciary

obligationstothecompanyasawhole.Youshouldalwaysbethinkingaboutwhat’sbestforthecompanythatyou’reinvestedin,notnecessarilywhat’sbestforyourbottomlineasashareholder.

• Here,actionsofmajorityshareholderswereconsistentwithactinginthebestinterestsofthecorporation.

Notes• Foratime,thisapproachwasreferredto(butnotstrictlyenforced)insubsequentcases.• Notclearwherethefiduciaryframeofreferencecomesfrom…Howcanthisbereconciledwiththe

ideathatshareholdersareordinarylegalownersofpropertywhoarefreetodowhattheywantwiththeirproperty?

Greenhalghv.ArderneCinemas(1951,UK)Facts

• Aspecialresolutionwaspassedthatpermittransfersofsharestooutsidersifapprovedbyasimplemajorityofshareholders(itusedtobethattheycouldnotbesoldtooutsiderssolongasanexistingshareholderwaswillingtobuythesharesatafairprice.).ThePlaintiffseeksjudicialdisapprovaloftheamendmenttothearticles.

Issue• Istheexerciseofpowerofmajorityshareholdersvalid?Yes.

Reasoning• Againsurprisingbycontemporaryview,courtheldthatthiswasavalidthingtodo.• Thereisaconstraint,shareholder’saren’tjustfreetodowhatevertheywanttodo.• Heldthatthetestshouldbewhethertheshareholdershonestlybelievethatthedecisionthey’re

takingisinthebestinterestofthecompanyasawhole.• Furtherclarified“interestofcompanyasawhole”asbeingtheinterestsof“shareholdersasa

collective”.• Foundthatthisactionwasconsistentwiththistestbecauseeveryshareholdershouldbefreeto

tryandgetasmuchmoneyastheycanfortheirsharesinasale.Notes

• Again,whyisafiduciarytypeobligationappropriateforshareholders?Mostwouldconcludethatthisisnotanappropriatewaytoframeshareholderaccountability?

• Whatelsecouldwedotoregulateshareholderactions…?NevercamearoundintheCML,solefttolegislaturestostepintothebreachandprovideasolution.WeseethisinCBCA.

2)CorporateLawRemedies:Standing

• CBCAs.238/QBCAs.439o Governaccesstonewremediessetoutbystateviastatute.o Gatekeepingfunctionperformedbycourts.o Bothprovisionsdictatewhogetsstanding.

§ Namepersonswhohaveautomaticrighttobringanaction–namedashavingstanding.

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§ Alsogivesjudgesdiscretiontoindividualswhoarenotnamed,don’thavestandingasofright,butwhothecourtsfeeloughttobegrantedstandingtobringanaction.

o Complainantisdefinedasa:§ Namedperson

• Registeredholdersorbeneficiariesorformerholders/beneficiariesofasecurity(includesshareholdersandalsoincludesthosewhoholddebtsecurities).

• Currentorformerdirectorofthecorporation§ Anyother“properperson”

o QBCAissimilartotheCBCAprovisionsabove.§ But,holdersofdebtsecuritiesdonothavestandingasofright.§ Also,judicialdiscretionisdifferent–noreferenceto“properperson”,uses

narrowerlanguage.• “Personwhohastheinterestrequired”

FirstEdmontonPlacev.315888AlbertaLtd.(1988,ABQB)Facts

• FEPsignedaleasewiththenumberedcorporationnamedabove.Thesoleshareholdersanddirectorsofthenumberedcorporationwere3lawyerswhopracticedinassociationwitheachother.Thenumberedcorporationwasa“shelf”company(incorporatedfornopurposeandhadnoassets).

• Asinducementtosignaten-yearlease,FEPgrantedthenumberedcorporationwith18monthsrentfreeperiod,aleaseholdimprovementallowanceof115Kandcashpaymentof140K.

• Thelawyersoccupiedpremiseswithoutenteringaleasewiththenumberedcorporation.Theystayedfortherent-freeperiod,paid3monthsrentandthenleftwithnomorerentpayments.

• FEPsubmitsthatthedirectorsconducteddeliberatebreachesoftheirobligationsasdirectorsofthecorporation.Theywantedtofindsomewaytosuethedirectorsonbehalfofthecorporation.

• FEPisthecorporation’sonlycreditorandseeksalternativeformsofreliefundertheAlbertaBusinessCorporationsAct:representativeactionandoppressionremedy.

Issue• ShouldthelandlordofFEPbegrantedstandinghere?

Reasoning• Thecourtshaveverybroaddiscretiontograntstandingtoindividualswhoshouldhaveaccessto

oneoftheremedies.• But,thisdiscretionisstillvestedforaparticularpurposeandjudgesmustbearthispurposein

mind.Mustseektodojusticeandequitywhereapersonwhowouldotherwisenotbeacomplainantandrightawrongthatwouldotherwisenotberighted.

o So,shouldgrantstandingwherejusticeandequityrequireit.• Havetoshowafewthings:

o Thatyouasanindividualorthecorporationhassufferedawrong.o Thatthereisnootherremedytorectifythewrong.o Thatapplicantisapersonwhocanreasonablybetrustedwithresponsiblypursuing

litigationintheinterestsofthecompany.o Applicantmustshowthatthereissomeevidenceofoppressionforunfairprejudiceor

unfairdisregardforthosewhoareprotectedbytheoppressionremedy.§ Basically,havetoshowthatyouhaveaprimafaciecase.

• Re:givingaccesstoremediestocreditorso Concernthatwemaybegivingcreditorstoomuch.o Mostpeoplethinkthatcourtshouldbeprettyrestrictivere:standingforcreditors.

Creditorsshouldbecarefulintheircontractsandshouldnotnecessarilybeallowedto

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o Here,wehadcreditorseekingstanding.Howcantheyshowthattheyshouldbegrantedexceptionalstanding?

o Twocircumstances:§ Wherecreditoralleging(andhassomeevidencetodemonstrate)thatdirectors

andofficershaveusedcorporationtocommitfraudagainstthemandtheycan’tremedythatfraudotherwise.

§ Wheredirectors/officershavebreachedextra-contractualexpectationsandthecreditorcanthereforenotseekremedyundercontract.

• àButisn’tFEPasophisticatedcreditor?Shouldn’ttheyknowtheirshit?Howmuchsympathyshouldwehaveforthemandthepositionthey’rein?

• Courtfeltitwasrighttograntstandingforthederivativeactiontothelandlord.• Re:oppressionclaim,standingwasdeniedbecausenoevidenceoffraudagainstFEP.Noevidence

apartfromfraudofbreachofextra-contractualexpectations.o Applicantknewdealingwithcorporation,shouldhaveengagedinduediligence,engaged

inmorecautiouslendingpractices.

3)RepresentativeActions:General

• Alsosometimesreferredtoasaderivativeaction.• Aclaimthatisbroughtonbehalfofthecorporation,notbroughtbytheclaimantpersonally.• Individualbringingtheclaim,seekingredressofawrongsufferedbythecorporation.Canbeany

kindofcivilwrong.• Whenleaveisgivenforderivativeaction,therepresentativeisactinginafiduciarycapacityforthe

corporation.• Anyremediespaidifclaimissuccessful,remediespaidintocorporationbecausetheyweretheone

whosufferedthewrong,nottheactualclaimant.• Whydowehaverepresentativeactions?

o Conceptappliesbeyondcorporatelaw,wheneverthereisalegalornaturalpersonwhocannotbringactionontheirownbehalfthereneedstobeaguardiantobringactionontheirbehalf(e.g.children).

o Especiallyobviousre:corporationsbecausecorporationsareartificialpersonsandcan’t• Normallywhenacorporationiswrongedwedon’tgodirectlytorepresentativeactionsbecause

usuallytheboardhiresalawyertobringaclaimtoprotectcompany’sinterests.• Butsometimestheboardwon’ttakeactionandsometimestheythemselvesareimplicatedinthe

wrongdoingagainstthecorporationandtheyobviouslywon’tsuethemselves.• Sothisraisesanobviousproblemofwhowillprotecttheinterestsofthecorporationwhenthe

agentsofthecorporationrefusetotakeaction?• Statutoryschemesdesignedtofixthisproblem.Allowforredressofwrongsevenwhenagentsof

corporationwon’ttakeanyactiononbehalfofthecorporation.• Concernthatpeoplewillusethisremedyopportunistically.So,you’llseethatwiththisandthe

oppressionremedy,thecourtshaveadelicatebalancetomaintain.Theyarethereforegivenalotofdiscretioniffashioningremedies.

• Statutoryframeworko CBCA

§ 239(1)–Entitlementtobringarepresentativeaction• Acomplainantmayapplyforarepresentativeaction.

o May=deferencetothecourts§ 239(2)–Limitsonbringingarepresentativeaction

• Noactionmaybebroughtunlesscourtsatisfiedthat:o Complainanthasgivennoticetodirectors(notlessthan14days)

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o Havetogiveopportunitytodirectorstoknowaboutgrievanceinquestionandthentodosomethingaboutit–iftheydon’ttakeactionwithinthe14days.

o Complainantmustbeactingingoodfaitho Actionmustappeartobeininterestofcorporation.

• Ifallconditionssatisfied,willallowclaimtoproceed.Eventhen,notallhandsoffthen.

§ 240–Powerforcourtstocontrolhowtheactionisbroughtandcontrolledovertime.

• Allowscourttocontrolinaprettyintrusivewayhowaderivativeactionisbrought.Courtmaymakeanyorderthatitseesfit.

o QBCA§ 445–Entitlement§ 446–Limits§ 447–Powersofthecourt

• Minorityprotectionandrepresentativeactionso Representativeactionsarenotreallyaboutprotectingshareholders.Theyareabout

redressinginjurytocorporation.o But,representativeactionsdohavedirectandindirectbenefitstoshareholders:

§ Shareholdersmayindirectlybenefitbecauseactionorthreatofactionwillkeepdirectorsinline.

§ Candirectlybenefitshareholdersifcourtdecidestomakepartofpayouttoshareholdersdirectly.

4)RepresentativeActionsvs.PersonalActions

• Noonewhobringstheactionreallycaresabouttheinterestsofthecorporation…it’sreallyabouthavingapersonalinterestintheissue.

• Alltheseactionsonlygetoffthegroundbecausearealpersontakethisupandpaysfortheproceedings.

• Courtinsiststhatderivativeactionsarekeptseparatefromanypersonalwrongs/claimstheclaimanthassuffered/couldbring.

• Counselareoftennotverygoodatseparatingourpersonalclaimsfromderivativeclaims.• Sowhatdocourtsdowhentheygetastatementofclaimthatmixesthetwo?

o Theycanbeprettycrankyifit’shardtodistinguishthepersonalfromtherepresentativenature.

Farnhamv.Fingold(1973,ONCA)Facts

• Minorityshareholderbringsstatementofclaimthat’sabloodymess,mixingpersonalclaimsandclassactionclaims.

• Sothereisarequestfromthedefendanttostriketheclaimbecausethereisnocauseofactionorinthealternativethattheclaimantdoesn’thavetherequiredstanding.

Issue• Istheclaimallowed?No–shouldbebroughtasderivativeclaim.

Reasoning• Judgecanstrikepartsofclaimtosortoutpersonalfromrepresentative.• Judgecansendclaimbacktolawyertofixtheclaim.• Judgecanthrowthewholethingout.

Ratio

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• It’simportantthatastatementofclaimbewelldraftedandthatthepersonalclaimsbekeptoutofanyrepresentativeaction.

GoldexMinesv.Revill(1974,ONCA)Facts

• WarringfactionsofshareholdersofProbeMinesareincourtforthe5thtime.Allegemisdeedsofdirectorsandshareholders,butdonotspecifyinthewritwhetherdutiesallegedwereowedtoSHortocorp.Plaintiffsdidnotseektobringrepresentativeactiononbehalfofthecorporation.

Reasoning• Therewasapersonalsetofclaimsthatcouldbedistinguishedfromtherepresentativeclaimsand

theactioncouldthenproceedonthebasisofthepersonalclaims.Therepresentativeclaimshavetobepursuedthroughthelegislativescheme.

Ratio• Keepyo’shitseparate.

5)RepresentativeActions:ThePrerequisites

• Supposethatstandinghurdlehasbeencleared–therearemore!• Courtswillnotallowactiontoproceedunlessconvincedofthreethings:

o CBCA239(3)andQBCA446§ Boardofdirectorsgivenadequatenoticesogivenadequateopportunitytorespond

totheclaim.§ NoticeunderCBCAis14days.§ Howmuchdetaildoesthecomplainantneedtogivetotheboardofdirectorswhen

theyprovidethemwithnotice?• Courtshavebeenprettyflexible:

o Enoughthatcauseforconcernisstated.Don’tneedtobeprecisere:causeofactionorallegedfacts.

o Enoughthatboardisputonnotice,theboardthenhasenoughtoinvestigateandfigureoutwhat’sgoingon.

o CBCA239(2)(b)andQBCA446§ Thereisagoodfaithrequirement–hastobesureactionnotbeingbroughtmerely

becausecomplainanthasapersonalgrudge.§ Whatisgoodfaith?

• Goestomotiveoftheaction.Shouldn’tbebroughtjusttosettlegrudge.o CBCA239(2)(c)andQBCA446

§ Courthastobeconvincedthatactionisintheinterestsofthecompany.Won’tallowrepresentativeclaimtoproceedjustbecauseitwouldbegoodforthecomplainant.

§ Ifyoucanprovethattherehasbeenaprimafaciewrongagainstthecorporationbecauseit’sthenlogicaltoextendthatthecorporationhasaninterestintheredressofthatwrong.

B)THEOPPRESSIONREMEDYCanadaBusinessCorporationsAct,s.241QuebecBusinessCorporationsAct,ss.450-451CanadaBusinessCorporationsAct

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Applicationtocourtreoppression241(1)Acomplainantmayapplytoacourtforanorderunderthissection.Grounds(2)If,onanapplicationundersubsection(1),thecourtissatisfiedthatinrespectofacorporationoranyofitsaffiliates

• (a)anyactoromissionofthecorporationoranyofitsaffiliateseffectsaresult,• (b)thebusinessoraffairsofthecorporationoranyofitsaffiliatesareorhavebeencarriedonor

conductedinamanner,or• (c)thepowersofthedirectorsofthecorporationoranyofitsaffiliatesareorhavebeenexercised

inamannerthatisoppressiveorunfairlyprejudicialtoorthatunfairlydisregardstheinterestsofanysecurityholder,creditor,directororofficer,thecourtmaymakeanordertorectifythematterscomplainedof.Powersofcourt(3)Inconnectionwithanapplicationunderthissection,thecourtmaymakeanyinterimorfinalorderitthinksfitincluding,withoutlimitingthegeneralityoftheforegoing,

• (a)anorderrestrainingtheconductcomplainedof;• (b)anorderappointingareceiverorreceiver-manager;• (c)anordertoregulateacorporation’saffairsbyamendingthearticlesorby-lawsorcreatingor

amendingaunanimousshareholderagreement;• (d)anorderdirectinganissueorexchangeofsecurities;• (e)anorderappointingdirectorsinplaceoforinadditiontoalloranyofthedirectorsthenin

office;• (f)anorderdirectingacorporation,subjecttosubsection(6),oranyotherperson,topurchase

securitiesofasecurityholder;• (g)anorderdirectingacorporation,subjecttosubsection(6),oranyotherperson,topaya

securityholderanypartofthemoniesthatthesecurityholderpaidforsecurities;• (h)anordervaryingorsettingasideatransactionorcontracttowhichacorporationisaparty

andcompensatingthecorporationoranyotherpartytothetransactionorcontract;• (i)anorderrequiringacorporation,withinatimespecifiedbythecourt,toproducetothecourt

oraninterestedpersonfinancialstatementsintheformrequiredbysection155oranaccountinginsuchotherformasthecourtmaydetermine;

• (j)anordercompensatinganaggrievedperson;• (k)anorderdirectingrectificationoftheregistersorotherrecordsofacorporationundersection

243;• (l)anorderliquidatinganddissolvingthecorporation;• (m)anorderdirectinganinvestigationunderPartXIXtobemade;and• (n)anorderrequiringthetrialofanyissue.

Dutyofdirectors(4)Ifanordermadeunderthissectiondirectsamendmentofthearticlesorby-lawsofacorporation,

• (a)thedirectorsshallforthwithcomplywithsubsection191(4);and• (b)nootheramendmenttothearticlesorby-lawsshallbemadewithouttheconsentofthecourt,

untilacourtotherwiseorders.Exclusion(5)Ashareholderisnotentitledtodissentundersection190ifanamendmenttothearticlesiseffectedunderthissection.Limitation

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(6)Acorporationshallnotmakeapaymenttoashareholderunderparagraph(3)(f)or(g)iftherearereasonablegroundsforbelievingthat

• (a)thecorporationisorwouldafterthatpaymentbeunabletopayitsliabilitiesastheybecomedue;or

• (b)therealizablevalueofthecorporation’sassetswouldtherebybelessthantheaggregateofitsliabilities.

Alternativeorder(7)Anapplicantunderthissectionmayapplyinthealternativeforanorderundersection214.QuebecBusinessCorporationsAct§3.—Rectificationofabuseofpoweroriniquity450.Anapplicantmayobtainanorderfromthecourttorectifyasituationifthecourtissatisfiedthat(1)anyactoromissionofthecorporationoranyofitsaffiliateseffectsorthreatenstoeffectaresult,(2)thebusinessoraffairsofthecorporationoranyofitsaffiliateshavebeen,areorarethreatenedtobeconductedinamanner,or(3)thepowerstheboardofdirectorsofthecorporationoranyofitsaffiliateshavebeen,areorarethreatenedtobeexercisedinamannerthatisorcouldbeoppressiveorunfairlyprejudicialtoanysecurityholder,directororofficerofthecorporation.451.Inconnectionwithanapplicationunderthissubdivision,thecourtmaymakeanyorderitthinksfit,including(1)anorderrestrainingtheconductcomplainedof;(2)anorderappointingareceiver;(3)anorderrevisingthefunctioningofthecorporationbyamendingthearticlesortheby-lawsorestablishingoramendingaunanimousshareholderagreement;(4)anorderdirectinganissueorexchangeofsecurities;(5)anordermakingappointmentstotheboardofdirectors,eithertoreplaceallorsomeofthedirectorsortoincreasethenumberofdirectors;(6)anorderdirectingthecorporationoranyotherpersontopurchasesecuritiesofasecurityholder;(7)anorderdirectingthecorporationoranyotherpersontopayasecurityholderalloranypartofthemoniesthatthesecurityholderpaidforsecurities;(8)anordervarying,settingasideorannullingacontractoratransactiontowhichthecorporationisapartyandcompensatingthecorporationoranyotherpartytothecontractortransaction;(9)anorderrequiringacorporation,withinatimespecifiedbythecourt,tomakeavailabletothecourtoraninterestedpersonthefinancialstatementsreferredtoinsections225and226,oranaccountingofthemintheformdeterminedbythecourt;(10)anordercompensatingapersonwhohassufferedprejudice;(11)anorderdirectingrectificationoftherecordsofacorporationinaccordancewithsections456and457;(12)anorderdissolvingthecorporationandwindingitupifithaspropertyorobligations;(13)anorderdirectinganinvestigationtobemadeunderDivisionI;and(14)anordercondemning,notonlyinthecaseofimproperuseofprocedurebutalsowheneverthecourtthinksfit,anypartytotheproceedingstopay,inwholeorinpart,theprofessionalfeesandothercostsofanyotherparty.Thecorporationmaynotmakeanypaymenttoashareholderundersubparagraph6or7ofthefirstparagraphiftherearegroundsforbelievingthatitwouldorcouldcausethecorporationtobeunabletopayitsliabilitiesastheybecomedue.

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Background

• CMLoppressionremedyo Usedwherevershareholdershaveegregiouslyabusedtheirpowershowinglackofgood

faithanddidsoatclearprejudicetominorityshareholder.o Wasanarrowlimitavailabletominorityshareholderstoensurethatmajorityrulewasn’t

beingusedtoinjurethem.o Wasrarelyinvokedwithanysuccess,soconsideredtobeconsistentwithprincipleof

judicialnon-intervention.Courtswouldtendtodefertothecorporateconstitution(majorityrule)andthebasicprinciplesofgoverningcorporatepowerinmanycases.

o However,asaresult,alotofgrosslyunfairconductwentun-remedied.• Legislativeintenttoprovideastatutoryremedy

o WhentheCBCAwasbeingputtogether,wasdecidedthatthereneededtobelegislativereformstodosomethingaboutprotectingminorityshareholders,aswellassomeprotectionsforcreditors.

o Asaresult,theoppressionremedyisbroadandamorphousbydesign.§ TheQBCA,however,ismuchmorenarrowthantheCBCA.

(1)OppressionI:StatutoryFramework

• CBCAs.241andQBCAs.450-451• Highlights:

o Standing§ CBCA,ss.241(1)and238

• Complainantcanbringaclaiminoppressionsolongastheyaresomeonenamedins.238.

o Formerorcurrentholderorbeneficialownerofsecurityofcorporationoritsaffiliates.

o Formerorcurrentdirectororofficerofcorporationoritsaffiliates.o Anyotherpersonwhoisa“properperson”(asperthetestinWest

EdmontonPlace).• ài.e.Thecomplainantmustbeanamedapplicant,orapersondeemedby

thecourttohavetherequiredinterest.§ QBCA,s.439

• Currentorformerholderorbeneficiaryofasecurityofacorporationoritsaffiliates.

• Currentorformerdirectororofficerofacorporationoritsaffiliates.• Anyotherpersonwhohastherequiredinterest.

o Groundsforremedy§ CBCAs.241(2)

• Ifcourtissatisfiedthat:o (a)anyactoromissionofthecorporationeffectsaresult,o (b)businessoraffairsofthecorporationareorhavebeencarried

outorconductedinamanner,o (c)powersofdirectorsareorhavebeenexercisedinamanner,o …thatisoppressiveorunfairlyprejudicialtoorthatunfairly

disregardstheinterestsofanysecurityholder,creditor,directororofficer.

• Whoseconductarewelookingat?o Directors,butseealso(b),whichstates“businessoraffairsofthe

corporation”–suggeststhattheconductofanyonecanbelookedat(directors,shareholders,etc…)

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• Whoseinterestsareprotected?o Directors,creditors,securityholders(equityholderslike

shareholders,butalsobondholdersanddebentureholders).§ QBCAs.450

• Sameasabovebutomitsthe“unfairlydisregards”aspectofthearticle.o Whywasthisremoved?

§ Commentatorsthinkthat“unfairdisregard”wasthebroadestbasisforinterventionandQCwantedtonarrowtheoppressionremedybecausetheseremedieswereopeningthedoortotoomuchlitigation.

• Whoseinterestsareprotected?o Creditorsareomitted–again,tolimitthelitigationvolume.

o Powersofthecourt–whatcantheydoaboutoppression/unfairdisregard,etc…?§ CBCAs.241(3)andQBCAs.451

• Underbothschemes,courtshaveuncheckeddiscretiontofashionwhateverrelieftheydeemtobeappropriate.

• It’snotevenanactualremedy–it’sabasisonwhichtofashionaremedyinwhateverthecourtwants.

• Examplesgivenasaformofguidancetothecourts:o Issuearestrainingordero Mandatory____o ____unanimousshareholderagreemento Requireissuanceofsecuritieso Requirethepurchase/exchangeofsecuritieso Fireandreplacedirectorso Ordervarianceofacontractorrescissionofacontracto Ordercompensationorothermoneyremedy

• LookingatBCE,openquestionofwhetherwewillseemorenarrowdefinitiongiventothesegrounds.

o SinceBCE,itisnotobviousfromthecaselawthatthecourtsaremovingtogiveclearguidanceforeachofthesebasesofintervention.

• Breadthoftheoppressionremedyo Standards

§ Broadscopeofanalysistofigureoutifaremedyiswarranted.Thestandardsarenotclearlydefinedinlawandthecourtsarereluctanttogivemeaningtothegrounds.

§ But,thisisnotintendedtoserveasasetofrulesre:liability.Notsupposedtoprovideex-anteguidance.

§ Theydon’thavethedefinitivecontentthatalegalright/dutywouldhave.Instead,theyarebroadremedialstandardsthatinvitejudicialdiscretion.

o Remedialdiscretion§ Courtshavevirtuallyuncheckedpower–theycanrespondtocircumstancesas

theywish.§ Courtscanstandintheshoesofdirectorstotakethepowerthatdirectorshaveand

dothinkslikedemandtheissuanceofshares,replacementofdirectors,orchangingofbylaws.

§ Courtshaven’tgonecrazywiththis,though.(2)OppressionII:Meaning

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àTheoppressionremedyisaninherentlyflexibletoolenablingcourtstointerveneinlightofconductthatislawfulbutinequitable.àCBCAs.241:Courtscanstructureremedieswhentheacts/omissionsofacorporation,orthebusinessofacorporationhasbeenconductedinamatter,orthedirectorsofthecorporationhaveexercisedtheirpowerinamanner“thatisoppressiveorunfairlyprejudicialtoorthatunfairlydisregardstheinterestsofanysecurityholder,creditor,director,orofficer.”

• Oppressiono OldCML:Oneindividualcomplainanthassufferedaprejudicialeffectasaresultofthebad

faithbehaviourofanother.(It’snotthatanindividualcomplainanthasbeensingledoutinparticular,butthattheirinterestshavesuffered.)

o Modern:It’sabouttheconsequencesofadecision–iftheconsequenceswereharshorburdensome,bearinganoutcomethatisharsh/heavy/unfair.

• Unfairprejudiceo Casesinwhichthecomplainantfeelsthattheirinterestsinthecorporationhavebeen

unfairlysingledoutforharshtreatment.• Unfairdisregard(remember,onlyinCBCA)

o Ifthecomplainant’sinterestshavebeenunfairlyoverlooked,ignored,treatedasunimportant.

• àCourtstendtoignorethemeaningoftheseconceptsthemselvesandspeakinbroadtermsaboutfairness,probityofconduct,importanceofpersonsinvolvedshowingdueregardforthereasonableexpectationsofothers,etc…

• Factorsindicatingoppressiveconduct(Arthurv.SignumCommunicationsLtd.)o Lackofvalidcorporatepurposeforthetransactiono Failureofcorporationtotakereasonablestepstosimulateanarm’slengthtransactiono Lackofgoodfaithonthepartofthedirectorsofthecorporationo Discriminationbetweenshareholderswiththeeffectofbenefitingthemajoritytothe

exclusionordetrimentoftheminority.o Lackofadequateandappropriatedisclosureofmaterialinformationtominority

shareholderso Planordesigntoeliminatetheminorityshareholder

• Summaryofprinciplesre:oppressionremedy(Krynenv.Bugg)

o Overridingprinciple:“Whendeterminingwhethertherehasbeenoppressionofashareholder,thecourtmustdeterminewhatthereasonableexpectationsofthatperonwereaccordingtothearrangementswhichexistedbetweentheprincipals.”

o “Unfairprejudiceto”and“unfairdisregardoftheinterestsof”havealessdemandingtestthatoppression.

o Conductcomplainedofmustgobeyondmereinconvenienceandlackofinformation–it’sthatthecomplainant’sinterestshavebeenunfairlydisregarded.

o Norequirementtoshowbadfaith.o Reasonableexpectationscanchangeovertime.o The“businessjudgmentrule”canbeadefencetoanoppressionclaim–havetoshowthat

thebusinessdecisionsweremadehonestly,prudently,ingoodfaith,andonreasonablegrounds.

o Don’tneedtoshowactuallossinordertoraiseanoppressionclaim.WestfairFoodsv.Watt(1991,ABCA)Facts

• WFhadtwoclassesofshares:(1)votingsharesand(2)non-votingpreferredshares(NVPS).

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o NVPSgot$2/year/sharebutwereentitledtoasliceofthecorporateassetsoncethecorporationweretobewoundup.

o NVPSHsalsohadaninterestinthecurrentvalueoftheirshares.• Historically,thecorporationretainedmostofitsearningsandonlypaidlowdividendstoitsvoting

(common)shareholders.NVPSHsonlygottherequired$2/year.• In1985,thepolicychangedandallthenetannualearningswerepaidtoasinglevoting(common)

shareholder.Thissingleshareholderwasbasicallypayinghimselfandthenloaningthismoneybacktothecompanyinsecureddebt,whichmeantthathewaschangingthemoneyofthecompanyfromequityintosecureddebt.

• Thismeantthatthecorporationwasworthless,whichtherebydiminishedthevalueoftheNVPS(becauseoftheirresidualinterestintheassetsofthecorporation).

• NVPSHsthereforesoughtoppressionremedy.JudicialHistory

• TJconcludedthatnewpolicywasoppressivebecauseitdisregardedtheinterestsoftheNVPSHstoshareinfutureexpansionofthecompany.

Issue• WasthenewpolicyoppressivetowardtheNVPSHs?Yes.

Reasoning• Intentvs.outcomes

o It’snotaboutintent–it’saboutoutcomes.§ Doesn’tmatteriftherewasbadfaithorwhattheintentionwas–it’saboutinjuries

totheplaintiff.• Scopeofremedyandimpactonmajorityrule

o Thescopeoftheremedyisexpansive–itgovernsorrelatestoalloftheactivitiesofthecorporation.

o Shareholdershavearighttobe“insulatedfromanythingoppressive,unfairlyprejudicial,orthatunfairlydisregardstheirinterests”vis-à-vistheirrelationshipwiththecompany.

o Courtrecognizesthatthisremedyisamajormodificationoftheprincipleofmajorityrule.

o Theproblemwiththis,ofcourse,isthatit’sdifficulttodeterminewhatitmeanstobetreatedunfairly,orinanoppressiveorprejudicialmanner.

• Meaningofoppressiono Thesewordscommandthecourtstoexercisetheirdutybroadlyandliberallyand

theychargethecourtstoimposetheobligationoffairnessontheparties.o It’saboutadutytoactintheinterestsofshareholdersasagroup,topayheedtothe

interestsofall.o Alsostandsforthepropositionthatthemajorityshareholderscannotprofitattheexpense

oftheminorityshareholders.• Reasonableexpectations

o Therelationshipbetweenthecompanyandshareholdersisregulatedbyregardtothereasonableexpectationsoftheparties,whicharedeservingofprotection.

o Courtindicatedthatunderanoppressionanalysis,theywillbefocusedonprotectingthereasonableexpectationsoftheparties,whicharenototherwiseprotectedbylaw.

o Indeterminingwhatthesereasonableexpectationsare,allofthewordsanddeedsofthepartiesshouldbeconsidered.It’snotjustaboutwhat’swrittendown,theformalelements–it’sabouttheactualrelationship.

• Thetestfortheoppressionremedyisveryfactspecificandprecedentisoflimiteduse.• Here,oppressionwasfound.

Ratio• Thereasonableexpectationsofthepartiesgroundtheanalysisofwhetherornotaninterest

deservedprotectioninanoppressionclaim.Expectationsdeservingofprotectionaresubjecttoastandardoffairness.

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DeluceHoldingsv.AirCanada(1992,ON)Facts

• ACowns75%ofAirOntario,whichitacquiredfromtheDfamilyin1986;Dstillowns25%ofthatcompany.Initially,DwastocontinuemanagingtheairlinerelativelyindependentlyfromAC.

• InApril1991,ACdecideditwantedtoobtain100%ownershipofAirOntario.AprovisionoftheunanimousshareholderagreementgivesACtheoptiontoacquireD’sinterestinAirOntarioupontheterminationofemploymentofStanleyDeluceandWilliamDeluce,whileanotherprovisionsmandatesarbitrationincaseofdisputeoverthevalueoftheshares.

• In1989,SD’sKwiththeairlineswasnotrenewed,whilein1991WDwasterminated.DallegesthatACimproperlyexerciseditscontroltoterminateWD’semployment,anddidsoforthesolepurposeofacquiringD’ssharesintheairline.Dclaimsthebehaviorisoppressive,andthattheexerciseofthearbitrationclauseisthereforeofnoforceandeffect,as“theactioncallsintoquestiontheveryunderpinningofthearbitrationproceeding.”

• ACarguesthatthetermsoftheagreementwereclear,thattheyaresimplyabidingbythem,andthatarbitrationshouldgoaheadascalledforintheagreement.

Issue• WeretheactionsofACinterminatingWD’semploymentwithAirOntariooppressive?Yes.• Ifso,doesthatpreventthecommencementofarbitrationproceedings?Yes.

Reasoning• ThetruereasonforfiringWDcanbefoundintheinternaldocumentsofA–theywereengagedin

anongoingplantotakecontroloftheirregionalcarriers.o TheirprimaryreasonforwantingtoterminateWDwastotriggerthebuyoutclauseso

theycouldobtain100%ownershipofAirOntario.• Whilethecorporateobjectiveofobtaining100%ownershipofAirOntariowasperfectly

legitimate,itraisesaquestion:o CouldACuseitspositionasamajorityshareholderinAirOntariotocarryoutsuchan

objective,orwasthisconductoppressivetotheminorityshareholders?• àAC’sconductconstitutedoppressionofD’sinterestsasminorityshareholdersinceitwas

unfairlyprejudicialorunfairlydisregardedD’sinterestsasaminorityshareholderinviolationofs.241oftheCBCA.

• Reasonableexpectationso Mustlookattheactualrelationshipsbetweenkeyindividualsandgroupstodetermine

whatexpectationsaroseoutofthoserelationships.o ACcharacterizesitsrelationshipwithDasanemploymentrelationshipandthattheyhad

therighttoterminatehimwithoutcause.o DcharacterizesitsrelationshipwithACinlightofthembeingminorityandmajority

shareholders,arguethatitissomethingakintoapartnership(i.e.involvingmutualtrust,confidence,expectationsofgoodfaith,etc…)

o àCourtfocusesonrelationshipbetweenACandDasshareholdersbutdoesn’tdescribeitasapartnership.

o àCourtexaminedtheagreementandfoundthatthepartieshadboundthemselvestoactingoodfaithandinthebestinterestofAirOntario.

o àCourtthenlookedattheintentionsofthepartiesinlightoftheagreementandfoundthatitwasn’ttheintentionofthepartiestoallowACtotriggerthebuyoutclauseatwillbygettingitsnomineesontheboardofAirOntariototerminateWD’semploymentforthatpurpose.WastheintentionofthepartiesthatWD’semploymentshouldonlybeterminated(aninturntriggerthebuyoutclause)ifitwasinthebestinterestsofAirOntario.

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§ Therefore,DhadareasonableexpectationasashareholderthatWDwouldonlybeterminatedintheinterestsofAirOntarioratherthantofacilitatethetakeoverbyAC.

• NatureofOppressiono Evenactionstakeningoodfaithcanstilloppressminorityshareholderinterestsandbring

theoppressionremedyintoplay.o Theoppressionremedyisnotconcernedwithlawfulconductbutwiththeinterests

engagedbyexpectationsgeneratedbytherelationshipsbetweentheparties.o àEvidenceshowedthatdirectorswereactingtocarryouttheagendaofAC,ratherthan

actinginthebestinterestsofAirOntario.SuchconductwasunfairlyprejudicialtoD’sinterestsasaminorityshareholder.

• Remedyo Thecourthassignificantdiscretioninorderingaremedyinanoppressionclaim.o AllowingACtocontinuewithitsplanandtakeadvantageofitsoppressiveactionwouldbe

unjust.Ratio

• Acourtwillassessthereasonableexpectationsarisingoutoftherelationshipofthepartiesindeterminingwhetherornotconductwasunfairlyprejudicialtoaminorityshareholder’sinterestsandthussubjecttoanoppressionclaim.

BCEv.1976Debentureholders(2008,SCC)àCourtseemedintentonmakingtheremedymorestructured,perhapsmoredifficulttoestablish.àBeforethiscase,wasabroadandamorphousremedy.Facts

• DebentureholdersbecameconcernedaboutamountofdebtthebidderswouldhavetotakeoutinordertosuccessfullybuyoutBCE.Theyworriedaboutlosingvalueofthecompanyasaresultofthis.

• Thisisindeedwhathappened–whileshareholdersgota40%premiumthankstothetakeover,thedebtofBCEwentupandsovalueofdebentureswentdown20%.

• DebentureholderssoughtoppressionremedyagainstBCEunders.241ofCBCA.JudicialHistory

• TJ:Nooppressionhere.FiduciaryobligationsrequireBCEtoactinbestinterestofcorporation.• CoA:Didn’tdecide

Issue• Werethedebentureholdersentitledtoreliefunders.241oftheCBCA?No.

Reasoning• Boardofdirectorshadadutytoconsidertheinterestsofthedebentureholders.• However,reasonableexpectationsweredefinedintermsofthedebentures,andtherewereno

reasonableexpectationstogobeyondthecovenantssetoutinthedebentures.• So,thecourtsawthattheBoarddidwhatithadpromisedtodo–madesuredebentureholders

wereawareofwhatwashappening.(3)OppressionIII:Relationshipwithrepresentativeaction

• Howtounderstandtherelationshipbetweentheoppressionremedyandrepresentativeaction?• Basisforconfusionisbecauseoppressionremedyissobroad–so,whythenbothertobringa

representativeaction?• Concernthatoppressionremedysobroadthatitextendsintoderivativesuitsforbreachof

fiduciaryduty.Asaresult,courtshavecometogivemoredefinitiontotheoppressionremedy.

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• Thinkaboutdifferenceintermsofharmtothecorporation(whichisproperlythesubjectofarepresentativeaction)andharmtotheshareholdersorothercomplainants(whichmayamounttooppressiveconductandwarrantanoppressionremedy).

o SeeFarnhamv.FingoldandGoldexMines.FirstEdmontonPlacev.315888AlbertaLtd.(1988,AB)àNotefocusonimpactoftheimpugnedactions,whethertheycreatedharm,andtowhomFacts

• Issue

• Isthelandlordentitledtostandingtobringaclaiminoppression?No.• Ifso,isthelandlordentitledtoreliefundertheoppressionremedy?

Reasoning• Courtdeterminedthattherewasnobasistoawardaclaiminoppression.• Historyofcorporatelawremedies

o Remediesweretheproductofdeliberatepolicychoicesbythegovernment,wereentitledtobringaboutsignificantchangetocorporatelawinCanada.

o Therewasadesiretoachieveabalancebetweenthosewithcompetinginterestsinthecorporatestructure.Particularconcernforcreditors,minorityshareholders,memberofthegeneralpublic.

o Whatweseeisasetofremediesthatareincrediblybroadandthatgivethecourtsgreatdiscretiontogetatthebalancingproblemandrectifyinginjusticewithinthecorporatestructure.

o Wasn’tjustachangeinblackletterlaw,butachangeinjudicialapproach.Theoldviewthatthemanagementofthecompanywasthesolepurviewofthedirectorsandshareholders.Instead,expansiveviewofcourt’sroleinbalancinginterests.

o Newpublicmindedethic–judgestoplayacentralroleinpolicinginequitablebehaviourthatwouldpreviouslyhavegoneunchecked.

o Thisisadeliberatedeparturefromtheprevioustrendofjudicialnon-interference.o Commonthreadbetweenallofthemajorremedies–commonconcernre:abuseofpower.

§ Millerthinksthisisalittlesimplistic.Doesn’tthinkthatrepresentativeaction,forexample,isalwaysaboutanabuseofpower.Sometimesthedirectorwillbegoingaboveandbeyondtheirdutiesandwillstillfindthemselvesthetargetofarepresentativeaction.Itisindeedawaytogetatproblemswithabuseofpower,butit’snottheonlythingarepresentativeactiondoes.

• Scopeofoppressionremedyandfunctiono Function–oppressionremedygivesthecourtwidediscretiontoremedyvirtuallyany

corporateconductthatisunfair.o Scope–providebroadbasisforintervention.o Onthewhole,courtsarepleasedwiththisbecausetheyseeitasconsistentwithlegislative

intent.o Still,somedefinitionshouldbegiventotheoppressionremedyandtothejudicial

discretionthatfollows.o GivespreviewofwhatistocomeinBCE.Weshouldlooktotheindividualgroundsfor

bringingaclaiminoppression.Notjustaboutrectifyingunfairness,therearethreegroundsforbringingaclaim:oppression,unfairprejudice,unfairdisregard(butnotinQBCA).

o But,becausethesethreegroundsareverybroad,theylendthemselvestoageneralfairnesstest,focusedonreasonableexpectationsofparties,andreasonableexpectationsthatarenototherwiseprotectedthroughlaw.

o Evidencetoexamineincontextofoppressionclaim?Everythingisrelevant.

Humphrey|143

o There’snotestforfairness–it’sanequitableremedy.Havetoconsideranothersetofthings:looktounderlyingexpectationsofbothparties,whetherornotcomplainantwouldhavebeenabletoprotectherinterestsinsomeotherway(e.g.bycontract),andwhetherornocomplainant’sinterestshavebeeninjured.

• Creditors’interestso Makesjudgesabitqueasywhencreditorsbringclaimforoppressionremedybecause

usuallytheserelationshipsaregovernedbycontractandshouldbelefttobedealtwithbythetermsofthatcontract.

o Needtobalancetheinterestsofcreditorsre:extra-contractualprotectionandfreedomofcorporatemanagementtomakedecisionsinbestinterestofcorporationthatwillsometimesbetothedetrimentofcreditors.Sometimesit’sthebestdecisionforthecorporationtobreachacontractandpaydamagesthantonot.

o Soapproachistosuggestthatacreditorwillusuallyhavetoshowthattheexpectationtheyhadisanon-contractualonethatwillnormallyhavearisenafterthecontractwasformed.Thereshouldalsobesomerepresentationmadebythecorporationoritsagentstothecreditorthattheyneednotengageinthenormalself-protectivebehaviour.

o àInlightofthistoughloveapproachtocreditorsashavingstandingre:oppression,heresaidtherewasnostandingforFEPasacreditor.NoproofthatFEPhadbeendefraudedorthattheirreasonableexpectationshadbeenviolated.

o àTheywere,however,foundtobea“properperson”tobringaclaim.(4)OppressionIV:Relationshipwithfiduciaryduty

• CasebookauthorsthinkoppressionandFDaresimilarbecausethey’rebothunclearandbecausetheyarebothconcernedwithgeneralfairness.Millerthinksthisisoversimplified.

• Pointsofoverlapo Inmanycaseswillfindthatsetoffactsgivesrisetoclaiminoppressionandclaimre:

fiduciaryduty.(e.g.AirOntariocase)• Pointsofdistinction

o Fiduciaryobligationsarelegaldutiesofofficers/managersaloneandtheyareownedonlytothecorporation.

§ Havefixedstandards,content.Standardsofcare,standardsofloyalty.§ Veryclear,definite,narrowfunction–designedtoensurethatcorporatemanagers

(directors/officers)exercisetheirlegalpowersreasonablyandfaithfullyintheinterestofthecompany.Thattheytakegoodcareandactingoodfaith.

§ Meanttoensurethemanagerswon’tbeswayedbyself-interest.o Oppressionremedyisnotalegalduty–doesn’tprovidesetofex-anteliabilityrules.

§ Notpossibleforofficers/directorstoknowwheretheymightbeexposedtoaclaiminoppression.

§ It’snotjustaboutcorporateinterests–it’saboutanumberofdifferentparties’interests.

§ Oppressionremedyisnotaboutsecuringbasicfunctionofmanagers.Instead,meanttoenablejudgestoexamineex-postthatthereasonableexpectationsofanynumberofindividualsaresecureagainstunfairtreatmentofanysort,recognizingthattheseexpectationswouldnototherwisehavebeenprotectedbythelaw.

§ Oppressionremedyconcernedaboutalotmorethanself-interest.It’saboutmakingsurecorporatestructuredoesnotconcealunfairconduct.

(5)OppressionV:Remedies

• ScopeofremedialpowerunderCBCA241(3)andQBCA451.• Notexpresslysubjecttoanylimitation–courtscandowhatevertheyseefit.

Humphrey|144

• Thisraisesquestions–howdowemakethisdiscretiontractable?Howtoweunderstandanypotentiallimitations?

• Courtshavebecomesensitivetodefiningthescopeoftheirdiscretion.• Remedialordersmadebycourtsmustbesensitivetobothsides–mustlookatitinaholisticway,

bearinmindwhatisequitableallaround.• Wouldbeunfairforcourtstomakeanorderandexercisetheirdiscretiontoissueanremedythat

ispunitiveinnature.o Remediesordered,whatevertheyare,oughttobecorrective.o Outrageousbehaviourshouldnotbesanctioned/condemnedinamoralway.

Naneffv.ConcreteHoldingsLtd.(1995,ONCA)Facts

• Familyownedandoperatedcorporationinvolvedinconcrete.Disputeinvolvedthreefamilymembers.

• Mr.Nbuiltupcompanyanddecidedtogivehissons,AandB,a50-50stakeincompanybyissuingnon-votingcommonsharesbecauseMr.Nwantedtoretaincompletecontrolofcompany.So,hehadpreferredsharesthatallowedhimtocontrolcompanythroughrighttovoteandpowertoissuedividends.

• FallingoutwithAandMr.N,whodecidedtopushAoutofthecompany.Issue

• WasbehaviourofMr.Noppressive?Yes.• Andwhat’stheappropriateremedy,particularlyinlightofthefactthatthisisacloselyheldfamily

company?BuyoutofA’sshares.Remedycanonlyrectifyoppression,redressimbalance–cannotbepunitiveinnature.

JudicialHistory• TJfoundbehaviourwasoppressiveandremedywasthatbusinesswouldbesoldandanyofthe

partieswouldhaveopportunitytopayforthebusinessandtheproceedswouldbesplit.o Mr.NwasunhappybecausethisgaveAopportunitytoacquirebusiness,whichwasnever

whathewanted.Reasoning

• Appealallowed–foundoppressionbutremedywaspurchaseofA’sshares.Thatheshouldbepaidoutandgivenanappropriatepriceforhisshares.

• Poweroftrialcourtcandoalmostanythingtorectifyoppression.But,appealcourtcangetinvolvedwherethereisanerror.Here,errorinprinciple(inlaw)inorderingthatbusinessbesold.

• Broad,thoughremedialdiscretionis,canonlybeexercisedonlytorectifyoppression,toredressanimbalance.Theremedialorderscannotbepunitiveinnatureoreffect.

• Importanttoconsider,indevisingremedy,toremindoneselfoftherelationshipofthepartiesandtheirreasonableexpectations.Awasnotjustasonbuta50%shareholder.Whatdidhereasonablyexpectre:hispositionwithinthecompany?Thathisfatherwouldmaintaincontrolofthecompany.Therefore,theremedycan’tgivehimmorethanhereasonablyexpectedasaresultofhisrelationshipwithhisfatherandthecompany.RemedyofTJwasthereforepunitivetoMr.N.

(6)OppressionVI:BCE

• Themostimportantcasere:oppression.Setsoutthetestforoppressionremedy.BCEInc.v.1976DebentureholdersàLast,greatestwordonoppression.FocusontheBCEtestforthepurposesofafactpattern.Facts

Humphrey|145

• BellCanada(subofBCE)wastoassumea$30Bdebtaspartofaleveragedbuyoutdeal.• Somedebentureholdersobjectedtotheplan,arguingthatitwouldsignificantlydecreasethe

valueoftheirbondsandlowerthegradeoftheirinvestment.TheyclaimedthattheBCEdirectors,inapprovingthisbid,actedinawaythatwasoppressivetotheirinterests.

• Theysoughtanoppressionremedyunders.241oftheCBCA,andalsoarguedthattheplanwasnot“fairandreasonable”becauseofitseffectsontheirinterests.

JudicialHistory• TJfoundtherewasoppression.• SCCsaidthattherewasnone,thatboardofBCEhadobligationtoconsiderinterestof

debentureholders,thattheirexpectationsweredefinedbythedebentures.Therefore,BCEhadconsideredtheexpectationsofthedebentureholders.

Issue• DidBCE’sactionsgroundaclaimforoppressionunders.241?No.

Reasoning• Lowercourtdecisionsrevealedconfusion/conflictinstateofjurisprudence.

o àMillerthinksthisisbaloney.Didn’tseeanunderlyingconflict.Instead,hethinkscourtjustwantedtodispensewithmushinessofoppressionanalysis,thisamorphousideaof“reasonableexpectations”.Courtthoughtittooamorphous,toomuchlitigation,etc…Wantedtogivegreaterstructure,tomakerecoursemoreburdensome.

• Saidthatthereweretwoapproachesinthejurisprudence:o (1)Emphasizestrictreadingofstatedgroundsforoppressioninthestatute(thethree

grounds)o (2)Focusedonbroaderprinciples,offairness,concernforreasonableexpectationsof

parties.• Courtdecidestodobothallatonce–favouredapproachisonethatcombinesthetwoapproaches.• First,looktoprinciplesunderlyingtheoppressionremedy,inparticularreasonableexpectations.

o Iftherewasabreachofreasonableexpectations,thengotothestatuteandseeiftherewasabreachofanyofthethreeprinciples.

• (1)Determinereasonableexpectationsofcomplainantandwhethertheywereviolated.o (a)Identifyexpectationsoftheparties.o (b)Showwhethertheexpectationswerereasonable.

§ Howtoshowifanexpectationisreasonable?• Objectiveandcontextualanalysis.Expectationmustbereasonable

regardingfactsofspecificcase,therelationshipsatissue,theentirecontext(includingconflictingclaimsre:expectations).

• Listoffactorsthatgotoreasonableness:o Commercialpractice(e.g.departurefromnormalbusiness

practice)o Natureofthecorporation(e.g.size,nature,andstructure)o Pastpractice(e.g.divergencefromsettledpastpractice,past

practicesmaycreatereasonableexpectationthatthispracticewillcontinue)

o Preventativesteps(couldcomplainanthavedonesomethingtoavoidsetback?)

o Representationsandagreementsmadebetweenthepartieso Conflictinginterestsofstakeholders

o (c)Showthatreasonableexpectationwasviolated.• (2)Determinewhetherreasonableexpectations,havingbeenviolatedandhavingbeen

showntobereasonable,iftheyhavebeenshowntobeactionablyviolated.o Expectationsareactionablyviolatedwhenthereis(a)oppression,(b)unfair

prejudice,or(c)unfairdisregard.o (a)Oppression

Humphrey|146

§ Oppressiveconductisconductthatiscoerciveandabusiveandsuggestsbadfaith.(LookslikerollingbacktooldCMLremedyofoppression.)

§ Involvesvisibledeparturefromstandardsoffairdealingandanabuseofpower.

o (b)Unfairprejudice§ Entailslessculpablestateofmindthanoppression.Stateofmindthatisbad,

butnotasbadasbadfaith.§ Stateofmindthathasconsequencesthatareunfair.§ Conductthatislessoppressiveandoppression.Prettybadconduct,butnot

asbadasoppression.o (c)Unfairdisregard

§ Involvesignoringaknowninterest.§ Theleastbadofthethree.

• Applicationo Twoexpectationsclaimedbydebentureholders:

§ (1)ThatBCEwouldactpositivelytoprotectvalueofratedvalueofdebentures.• Courtfoundthiswasnotreasonablebecausetheyweregivenwarningsto

thecontrarybyBCE.• Alsonotreasonablegiventhecontextbecauseallthebidswereleveraged,

thiswasverycommon,thereforenotmuchadebentureholdercanbemadaboutbecausetheseleveragedbidsarejustthewaythingsaredoneinbusinessnowadays.

• Courtalsosaysdebentureholderscouldhavenegotiatedprotectedcovenants.

• Also,BCEhadcompetingintereststoconsider,suchasshareholders,andtheboardwillalwayshaveabalancetostrikeinthebestinterestofthecorporation.

§ (2)ThatBCEwouldconsidertheinterestofthedebentureholdersinmaintainingthevalueoftheirdebentures.

• Courtsaiditwasareasonableexpectationbutthisexpectationwasnotviolated.

• BoardofBCEabidedbythetermsofthedebenturesandthatwasallitwasrequiredtodo.

Notes• Wenowhaveastructuredtestforoppressionremedy.• Millerthinksthiswasintendedtobeandhasbeenmoreburdensomeforlitigants.It’slessuseful,

lesspronetoopportunisticlitigation.• Generalconsensus–moredemandingapproachtooppressioninCanada.Meansthatcourtshave

potentiallylostsightofwhatlegislatureintendedre:oppression,thattheyintendedittobeabroadandamorphousremedytodealwithinequitablebehaviour.

EXAMINATION

• Dealwithsimplerissuesfirstinfactpattern.• Don’tgivehimlegalhistoryinfactpattern.• Payattentiontostatutoryprovisionsespeciallywheretheyhavesupplementedorsupplantedthe

CML.• IRAC–spendmostofyourtimeonanalysis• Don’taddresstoomanyissuesinfactpattern.• Sticktotimere:shortanswerquestions(10minseach)• Don’tworryaboutQBCAprovisions

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