1. Choosing the Form of Business Vehicle 5 A. Types of Business Vehicles..................................................5 i. Forms of Business Organization............................................5 Sole Proprietorship:............................................................................................................................................... 6 Corporation:............................................................................................................................................................ 6 Unlimited Liability Corporations:......................................................................................................................... 6 Partnership:............................................................................................................................................................ 7 Limited Partnership **different from Limited Liability Partnership:...............................................................7 Limited Liability Partnership:................................................................................................................................ 8 Joint Ventures:......................................................................................................................................................... 8 ii. Choosing a Form of Business Organization.................................8 iii. Pros and Cons of the Corporation........................................9 iv. Major Forms of Business Organization.....................................9 B. Fiduciaries.................................................................9 C. Agency.....................................................................10 i. Overview: Agency and Business Law........................................10 ii. Partnership.............................................................10 Volzke Construction v Westlock Foods Ltd 1986 ABCA..................................................................................... 11 McDonic Estate v Hetherington 1997 ONCA.....................................................................................................12 “Am I My Partner’s Keeper”................................................................................................................................. 12 D. Business Arrangements......................................................12 2. A BACKGROUNDER TO CORPORATIONS.............................................. 13 A. Introduction...............................................................13 B. Corporate Constitution.....................................................14 Methods of Creating Corporate Constitutions.................................14 Canadian Jorex v 477749 Alberta Ltd 1991 ABCA............................................................................................15 c. Corporate Structures.......................................................16 3. THE PROCESS OF INCORPORATION................................................ 16 A. Procedures.................................................................17 Steps to Incorporating......................................................................................................................................... 19 i. Loss Prevention..........................................................19 1
Transcript
1. Choosing the Form of Business Vehicle 5
A. Types of Business Vehicles....................................................................................................................................5
i. Forms of Business Organization..................................................................................................................................5
Sole Proprietorship:...................................................................................................................................................6
ii. Choosing a Form of Business Organization................................................................................................................8
iii. Pros and Cons of the Corporation.............................................................................................................................9
iv. Major Forms of Business Organization.....................................................................................................................9
B. Fiduciaries............................................................................................................................................................9
C. Agency................................................................................................................................................................10
i. Overview: Agency and Business Law........................................................................................................................10
ii. Partnership..............................................................................................................................................................10
Volzke Construction v Westlock Foods Ltd 1986 ABCA............................................................................................11
McDonic Estate v Hetherington 1997 ONCA...........................................................................................................12
“Am I My Partner’s Keeper”....................................................................................................................................12
D. Business Arrangements......................................................................................................................................12
2. A BACKGROUNDER TO CORPORATIONS..................................................................................................................13
A. Introduction.......................................................................................................................................................13
B. Corporate Constitution.......................................................................................................................................14
Methods of Creating Corporate Constitutions............................................................................................................14
Canadian Jorex v 477749 Alberta Ltd 1991 ABCA...................................................................................................15
c. Corporate Structures...........................................................................................................................................16
3. THE PROCESS OF INCORPORATION.........................................................................................................................16
A. Procedures.........................................................................................................................................................17
Steps to Incorporating.............................................................................................................................................19
i. Loss Prevention........................................................................................................................................................19
ii. Unanimous Shareholder Agreements......................................................................................................................20
Cicco v 609940 Ontario Inc (Trustee of)..................................................................................................................21
B. Corporate Names................................................................................................................................................22
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i. Common Law and Statutory Requirements..............................................................................................................22
Paws Pet Food and Accessories Ltd v Paws and Shop Inc 1992 ABQB.....................................................................23
Stenner v ScotiaMcLeod 2007 BCSC.....................................................................................................................23
ii. Loss Prevention........................................................................................................................................................24
C. Share Capital.......................................................................................................................................................24
i. Equity Financing.......................................................................................................................................................24
ii. Classification of Shares............................................................................................................................................25
iii. Overview of Canadian Securities Regulation..........................................................................................................26
D. Pre-Incorporation Contracts...............................................................................................................................26
i. Introduction..............................................................................................................................................................26
ii. Measure of Damages...............................................................................................................................................27
Wickberg v Shatsky et al 1969 BCSC........................................................................................................................27
Article on Pre-incorporation Contracts – pg 82 of textbook........................................................................................28
Szecket v. Huang 1998 ONCA..................................................................................................................................29
4. THE CORPORATION AS A LEGAL PERSON.................................................................................................................29
Salomon v Salomon & Co Ltd 1897 HL.....................................................................................................................29
B. Grounds for Liability of Those Behind the Corporation........................................................................................30
i. Liability Based on Fraud/Improper Conduct.............................................................................................................30
Kosmopoulos v Constitution Insurance Co of Canada 1987 SCC..............................................................................31
Yaiguaje v Chevron Corporation 2018 ONCA...........................................................................................................31
Big Bend Hotel Ltd v Security Mutual Casualty Co 1980 BCSC.................................................................................32
Performance Industries Ltd v Sylvan Lake Golf & Tennis Club Ltd 2000 ABCA.........................................................32
Jin v Ren 2015 ABQB...............................................................................................................................................33
Wildman v Wildman 2006 ONCA............................................................................................................................33
Rockwell Developments Ltd v Newtonbrook Plaza Ltd 1972 ONCA.........................................................................34
ii. Liability Based on Thin Capitalization......................................................................................................................35
Walkoyszky v Carlton 1966 NYCA............................................................................................................................35
iii. Liability Based on Total Disregard of Formality.......................................................................................................36
Wolfe v Moir 1969 ABSC.........................................................................................................................................36
Vallis v Prairie Alternative Energy Solutions Ltd 2013 SKPC....................................................................................36
iv. Liability in the Area of Trust Law.............................................................................................................................36
Citadel Assurance Co v Lloyds Bank Canada 1997 SCC............................................................................................37
Air Canada v M & L Travel Ltd 1993 SCC.................................................................................................................37
5. TORTIOUS, CRIMINAL, REGULATORY & CONTRACTUAL LIABILITY OF THE CORPORATION........................................38
Criminal and Tortious Liability.................................................................................................................................39
The Rhone v The Peter AB Widener 1993 SCC.........................................................................................................39
Corporate Defence to Liability.....................................................................................................................................40
Deloitte & Touche v Livent (Reciever of) 2017 SCC..................................................................................................40
R v Bata Industries Ltd 1992 ONCA.........................................................................................................................43
R v Syncrude Canada Ltd 2010 ABPC.......................................................................................................................43
Doctrine of Ultra Vires.................................................................................................................................................45
Jon Beauforte (London) Ltd Re 1953 Eng.................................................................................................................45
Communities Economic Development Fund v Canadian Pickles Corp 1991 SCC......................................................46
Contracting With Agents of the Corporation...........................................................................................................46
Common Law - Actual Authority and Apparent Authority...........................................................................................46
Freeman and Lockyer v Buckhurst Park Properties (Mangal), Ltd 1964 Engl..........................................................47
Doiron v Manufacturers Life Insurance Co (cob Manulife Financial) 2002 ABQB....................................................47
Doiron v Manufacturers Life Insurance Co (cob Manulife Financial) 2003 ABCA.....................................................48
Canadian Laboratory Supplies Ltd v Engelhard Industries of Canada Ltd 1979 SCC................................................49
6. CORPORATE SOCIAL RESPONSIBILITY......................................................................................................................49
Case Study: Talismen Energy.......................................................................................................................................50
The Body Shop: Our Values Approach.........................................................................................................................51
Canadian Ombudsperson for Responsible Development............................................................................................52
Northern Oil Case Study..............................................................................................................................................52
Re Varity and Jesuity Father of Upper Canada et al 1987 ONCA.............................................................................53
Dodge v Ford Motor Company 1919 Michigan Sup Ct.............................................................................................54
Principles of Corporate Governance............................................................................................................................55
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Comparison of Public Companies and Closely Held Corporations...............................................................................56
Statutory Duties of Directors and Officers...............................................................................................................56
Directors’ Duties and the Business Judgment Rule.....................................................................................................56
Peoples Department Stores Inc (Trustee of) v Wise 2004 SCC.................................................................................56
BCE Inc v 1976 Debentureholders 2008 SCC............................................................................................................57
Smith v Van Gorkom 1985 US application of business judgement rule..............................................................58
Cooks v Deeks 1916 PC............................................................................................................................................59
Canadian Aero Service Ltd v O’Malley 1972 SCC.....................................................................................................60
Matic et al v Waldner et al 2017 MBCA..................................................................................................................61
Aberdeen Railway Co v Blaikie Bros 1843 Engl........................................................................................................62
North-West Transportation Company Ltd v Beatty 1887 PC...................................................................................62
Dimo Holdings Ltd v H Jager Developments Inc 1998 ABQB....................................................................................63
Zysko v Thorarinson 2003 ABQB..............................................................................................................................64
London and Mashonaland Exploration Company, Limited v New Mashonaland Exploration Company, Limited 1891 Engl................................................................................................................................................................65
Maple Leaf Foods Inc et al v Schneider Corporation et al 1998 ONCA.....................................................................66
Tongue v Vencap Equities Alberta Ltd 1994 ABCA...................................................................................................67
Other Statutory Duties................................................................................................................................................69
Zwierschke v MNR 1991 CTC...................................................................................................................................69
Director PERSONAL Liability in Tort.............................................................................................................................70
Montreal Trust Co of Canada v ScotiaMcLeod Inc (1995) ONCA.............................................................................74
ADGA Systems International Ltd v Valcom Ltd 1999 ONCA.....................................................................................75
NBD Bank, Canada v Dofasco Inc 1999 ONCA.........................................................................................................75
Hogarth v Rocky Mountain Slate Inc 2013 ABCA.....................................................................................................76
Deloitte & Touche v Livent Inc (Reciever Of) 2017 SCC............................................................................................78
McFadden v 481782 Ontario Ltd.............................................................................................................................78
Indemnification by the Corporation............................................................................................................................79
Blair v Consolidated Enfield Corp 1993 ONCA.........................................................................................................79
R v Bata Industries Ltd (Ont CA) 1995 ONCA...........................................................................................................79
8. SHAREHOLDER RIGHTS AND REMEDIES...................................................................................................................81
Intro to Shareholder RIGHTS...................................................................................................................................81
Intro to Shareholder Remedies...............................................................................................................................81
Relief from Oppression or Unfairness......................................................................................................................82
BCE Inc v 1979 Debentureholders............................................................................................................................85
Re Ferguson and Imax Systems Corp 1983 ONCA....................................................................................................86
Downtown Eatery (1993) Ltd v Ontario 2001 ONCA...............................................................................................87
Shefsky v California Gold Mining Inc 2016 ABCA.....................................................................................................88
Pappas v Acan Windows Inc Nfld SC 1991...............................................................................................................90
Rea v Wildeboer 2015 ONCA...................................................................................................................................91
Brunette v. Legault Joly Thiffault 2018 SCC.............................................................................................................92
Scope of Relief Available.............................................................................................................................................93
Wilson v Alharayeri 2017 SCC extension of oppression and derivative action to include non-corporate parties 93
Naneff v Con-Crete Holdings Ltd 1993 ONSC...........................................................................................................94
Naneff v Con-Crete Holdings Ltd 1995 ONCA..........................................................................................................95
Commencing an Action...............................................................................................................................................96
Pathak v Moloo 2008 ABQB....................................................................................................................................96
Other Statutory Remedies......................................................................................................................................96
Compliance and Restraining Orders – s 248................................................................................................................97
Caleron Properties Ltd v 510207 Alberta Ltd 2000 ABQB........................................................................................97
Scozzafava v Prosperi 2003 ABQB.........................................................................................................................100
1. CHOOSING THE FORM OF BUSINESS VEHICLEA. TYPES OF BUSINESS VEHICLESSP – the simplest form of business that is carried out
Partnership – a unique animal; there is a statutory regime called the Partnership Act that governs the law of partnership it is a highly technical area of law; know the basics of the concepts on page 4
Agency – be able to have a rough grasp of the distinction between actual and implied authority in an agency relationship; and the difference between implied and apparent (and the idea of estoppel and someone being estopped from denying an agency relationship exists)
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i. Forms of Business OrganizationA business undertaking or venture can be structured in different ways: sole proprietorship, partnership, joint venture, limited partnership, corporation, or cooperative
Joint liability: A shared liability such that each defendant is liable to the full extent of the obligation in question. See, for example, s. 11(2) of the Partnership Act.
Several liability: A separate or distinct liability based on apportionment according to fault or responsibility
Joint and several liability: A form of liability such that, for example, the plaintiff can collect 100% on its judgment from any of the defendants but facilitates apportionment as between defendants according to fault or responsibility
Sole Proprietorship: it comes into existence when an individual carries out business w/o steps to form an organization like corporation.
Not a separate legal existence from the proprietor himself No document need be filed with any governmental authority to come into existence – but must get a business
license like any other business o May also need to file a declaration of trade name (If you operate a business under a different name than
your own register that name) Profits are taxed as personal income. Benefits : simple and cheap! easy to set up/not as costly and the individual only has to file one tax return.
o Income from business is taxed directly from proprietor and therefore may be most tax-effective method for small businesses to be structured
Drawbacks : the proprietor has full/unlimited PERSONAL liability (even his own personal assets), it’s hard to raise money (no equity financing), and you are responsible for employee’s actions.
Corporation: a creature of statute that has a separate corporate personality from its owners – hence the corporate veil; owners therefore have limited personal liability (if it’s an LLC corporation) and the entity has perpetual existence so does not end when owner dies
Preferred form if there’s many owners Must file with the appropriate government authority in order to become incorporated Profits are taxed separately from their individual income – therefore requires more administration They can use the profits to pay out shareholders in the form of a dividend, or keep the cash. Benefits : very well known in legal profession so relatively easy/cheap to set up; ease of raising capital and the
shares are easily transferable. For the shareholders, their liability is limited by their shares (aka what they put in) and thus they are protected from risks of bankruptcy
Drawbacks : Cost of incorporating, ongoing filing and expenses with the Corporate Registry, and more complicated taxes.
Kinds of Corporations 1. Business corporations under the ABCA/CBCA2. Professional corporations under the ABCA and the Legal Profession Act (for example)3. Unlimited liability corporations under the ABCA
Exam:***There are exceptions to the principle of limited liability such as: 1. A shareholder signs a personal guarantee for the corporation’s debt. 2. Shareholder contracted personally without adequate notice given to 3 rd party that he was acting as agent for
the Corp3. A loss occurs as a result of a shareholder’s personal act or negligence. 4. A shareholder has not fully paid for their shares, to the extent of the unpaid amount5. Personal liability provided for in statute (s 38 of BCA). 6. Shareholder assumed powers of director under unanimous shareholder agreement (BCA s 146)
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7. Shareholder received overpayment @ liquidation (BCA s 277)8. Court lifted the corporate veil
Unlimited Liability Corporations: exception to the limited liability of corporations to shareholders
Procedure almost identical to regular Corp, except name must say ULC in it and articles must state that the liability of shareholders is unlimited and joint and several in nature (BCA ss 15.3 and 15.4)
AB generally has greater unlimited liability
Partnership: the relationship that subsists between persons carrying on a business in common with a VIEW to profit [even if no profit actually made] (s 1(g) Partnership Act)
NOT a separate legal entity Profits are taxed as personal income. The property of the partnership is NOT owned by the parties and cannot be used for private usage – property
belongs to partnership and not divisible between partners in specie and cannot assign your interest Benefits : easy to set up and not as costly. Drawback : full personal liability, meaning that each partner who has personal/business assets can have those
assets satisfy debts, not always clear where a partnership exists Kinds of P/ships:
1. Ordinary p/ship: unlimited personal liability per the P/ship Act (Volzke and McDonic)2. LLP: unlimited personal liability subject to s. 12 of the P/ship Act (many law firms operate as LLPs)3. Limited P/ships: the general partner has unlimited liability; the limited partner has liability limited to the
amount of its investment, subject to s. 64 of the P/ship Act. ***PA s 4: Factors to consider in determining if it’s a partnership:
1. Common ownership itself not enough; evidence by express declaration (such as partnership agreement) or conduct signifying such
2. Sharing of gross returns also not enough to create partnership3. Receipt by person of share of profits is prima facie proof that person is partner in business, BUT:
a. Receipt of debt out of profits does not make them a partnerb. Renumeration of employee out of profits does not make a partnerc. Receipt by spouse/child of dead partner’s profits does not make the spouse/child partnerd. Loan with participation interest does not make lender partner
4. Note: if there is profit sharing, it will be HIGHLY unlikely that a partnership isn’t found – it’s a strong indicator
Characteristics of a partnership ( Partnership Act ): o Each partner is agent of the firm and of the other partners (s 6)o Each partner jointly liable for debts and obligations of the firm incurred while he is partner (s 11)o Partners have joint/several liability for loss/injury/penalty caused to non-partner by wrongful
act/omission or partner acting in course of business or with authority of other partners (ss 14 and 15) o New partner not liable for anything done before him – but retirement does not protect you from
happenings incurred while partner (s 20) Characteristics of a partnership (common law):
o Each partner has reciprocal duty of good faith and loyalty to other partners (Hitchcock v Sykes)o Each partner prima facie has right to manage/control partnership but is not essential characteristic
(Volzke Construction v Westlock Foods)o Property not owned by partners in usual sense, and cannot be divided among partners in specie – any
assignment of shares or subst. of new partner must be with consent of all partners (PS s 28(g))
Limited Partnership **different from Limited Liability Partnership: creature of statute and governed by the Act – consists of 1 or more general partners and 1 or more limited partners (PA s 51)
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General partner has unlimited liability while limited partner has liability only to extent of money he contributes to the limited partnership (PA s 56, 57)
Investment vehicle used when investors want tax treatment afforded to partnership but willing to give up right -to control/manage
Benefits : offers shareholders some of limited liability that a Corp has but with flow through of losses/tax implications of partnerships
Drawbacks : Limited Partner has no right to control/manage and if they do, they LOSE status/protection of their limited liability and become a general partner
Requirements: must file certificate setting out essential terms (PA s 52(2)):o Surname of limited partner cannot be in firm name – would make them liable as a general partner (PA s
54)o A GP is subject to all liabilities of a partner as in non-limited partnership (PA s 56)o LP not liable for obligations of the limited partnership except for in amount they contributed (PA s 57)o LP’s interest in partnership is personal (PA s 55(2))o LP’s interest is assignable and ends at death (PA ss 66, 68) – note difference from a Corpo Retirement/death/incapacity of a GP ends the partnership unless right to continue is set out in
certificate (PA s 67)o Only GP may be shown on title for real property owned by the LP (PA s 55(3))
Limited Liability Partnership: open only to certain professions in pursuit of their profession (eg. Lawyers, accountants) can be LLPs so if one partner negligent, the others are shielded beyond their contribution while the negligent partner is personally liable PA Part 3
Counteracts rise in professional responsibility LLP must be in the name (Partnership Regulation s 5) Must inform clients of registration as an Alberta LLP and explain change in partner liability (PA s 85) Partners are personally responsible for their own negligence, the negligence of someone under their
supervision, and for failing to act when they know of another’s negligence Benefits : protects innocent professional partners from personal liability of acts of other partners up to the
extent of their interest in the partnership o allows claimant judgement/settlement from firm’s assets/insurance plus assets of partners actually
involved in negligent act without being personally liable (PA s 12)o To be ‘involved’ in negligent act such that they are liable, the partner must have personal involvement,
direct supervision, or knowledge in connection with the act
Joint Ventures: unincorporated ownership arrangement where each participant would be owner of undivided percentage interest in each of the project assets and entitled to respective share of production.
Provides for joint management and control Usually limited to a SINGLE project/undertaking An economic activity resulting from contractual arrangement where 2 or more venturers jointly control
economic activity More than co-ownership – actually pursuing a common project together Unlike partnership, they aren’t agents of each other Liability is several, not joint – another way that this is differentiated from a partnership
o To be liable, you’d have to sue each corporation involved in the joint venture May dispose of their interest
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ii. Choosing a Form of Business OrganizationConsider: the creation of the business and formalities involved, risk of loss, power/control desired, who participates in profits/distribution of assets, and dissolution of the business/desirability of perpetual existence
Other Considerations: # of ppl involved, borrowing requirements, availability of government grants to particular business types, estate planning, costs of startup/operation (corps are expensive), and flexibility (eg. Partnership or corp gives flexibility in structuring arrangement around the parties)
iii. Pros and Cons of the Corporation
Pros ConsLimited lability: separate entity so corp assumes own liability – shareholder only loses amount invested and no more
Higher cost: creating corp means legal and filing costs
Flexibility: allows differing degrees of ownership and sharing profits
Public disclosure: when offering shares to public, corp must comply with strict disclosure and reporting requirements
Greater access to capital: limited liability makes corp suitable vehicle for raising capital
Greater regulation: statute governs many decisions so limits management options and requires specific record keeping
Continuous existence: life span not tied to shareholders Dissolution: ending a Corp can be complicatedTax benefits: can facilitate greater tax planning (eg. income splitting)
Tax disadvantages: maybe subject to double-taxation
Transferability: ownership more easily transferable through shares
Possible loss of control: diminished control due to issuing shares with voting rights
Potentially broad management base: managed by directors and officers, who can provide level of specialized expertise
Potential beauracracy: many levels of authority may impede decision making
iv. Major Forms of Business Organization
CHARACTERISTIC
SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION
CREATION At the will of the owner. No documents need to be filed with any government authority.
By agreement or conduct of the parties. A partnership agreement is optional.
The corporate registry issues certificate of incorporation after incorporating documents filed.
RISK OF LOSS
Unlimited/full personal liability.
Unlimited/full personal liability (but see the LLP for lawyers) This can be jointly or severally.
Limited liability.
POWER OF CONTROL
Sole Proprietor. Partners manage equally, unless altered by an agreement.
Shareholders elect Directors. Directors manage the business and can appoint Officers.
DISTRIBUTION OF ASSETS
Sole Proprietor. Partners receive equal profits, unless altered by an agreement.
B. FIDUCIARIESFiduciary: where one person places complete confidence in another in regard to a particular transaction or one’s general affairs or business. The relationship is not necessarily formally or legally established, as in a declaration of trust, but can
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be one of moral or personal responsibility due to the superior knowledge and training of the fiduciary as compared to the one who’s affairs the fiduciary is handling. Eg. Lawyer-client relationship
Hallmarks of the fiduciary lawyer-client relationship: keep affairs confidential, do not be in conflict of affairs, exercise all skill and judgement you acquire in school and practice for the benefit of your client
Partnerships: you have a fiduciary duty to each of your partners if you are in a partnership – they owe that corresponding duty to you and each other there is a notion of good faith here
Eg. partner in law firm cannot be practicing law for profit on the side
Agency: note in pure partnership law, each partner is an agent of the other (refer to Partnership Act)
C. AGENCYi. Overview: Agency and Business Law
Agency and Authority: agency is fiduciary relationship between one who expressly/impliedly consents that the other should act on his behalf to affect his relations with 3rd parties
Relationship is governed by CONTRACT Agent has ‘authority’ to act and the authority constitutes a power to affect the principal’s legal relations with
others To be an agent, need not have any power to affect principal’s relations with 3rd parties – only that there is
fiduciary relation o As the Principal, your only duty is to pay the agento As the Agent, you have a fiduciary duty to your client, the Principal
Types of Authority: what is the SCOPE of the authority that an agent gets?
Actual Authority : manifestation of consent made by the principal to the agent himself – existence must be proved by party alleging the agent acted under it
o Actual Express Authority : principal expressly gave it to the agent himself in the terms of written/oral agreement
When authority contained in a document not under seal or is via parol, use ordinary rules of construction to determine the scope; construe authority with regard to surrounding circumstances and usual course of business in which agent is concerned
If ambiguous, as long as agent acted in good faith and in accordance with REASONABLE construction of authority, then considered to have acted within authority whether or not principal intended it
o Actual Implied Authority : authority in which agent in particular position normally possesses May need to imply it if the particular act required is not covered in the actual express authority
– may imply in order to give effect to the intentions of the parties Still considered ACTUAL authority because principal consented to agent having it, albeit
impliedly Every agent will have SOME implied authority to do what’s necessary for/incidental to, carrying
out the express authority Usual authority: authority for an agent in the trade/business/profession/place in which
particular agent is employed would usually possess – unless expressly contradicted by the principal; hence this authority is implied because it exists usually in that position
“if a person employs another as an agent in a character which involves a particular authority he cannot by a secret reservation deprive him of that authority”
Apparent Authority : authority arises from manifestation made BY PRINCIPAL to 3rd partyo Based on estoppel and creates legal relationship between principal and 3rd party by means of
representation made by the principal to the 3rd party – therefore, unlike above, it is not expressly 10
consented to but rather it arises via principal’s CONDUCT in representing that the agent has authority to act on his behalf
o EXAM Note: distinction between actual implied vs apparent authority can be fuzzy – key point is the representations of the principal makes it apparent authority whereas the key for implied is the representations of an external factor but not the principal himself
ii. PartnershipPartnership Act:
S 1(g): “partnership” means the relationship that subsists between persons carrying on a business in common with a view to profit
S 3: A corporation is not a partnership.
S 4: Sets out determining whether a partnership does/does not exist based on rules. A partnership is formed depending on:
S 4(c) The sharing of profits prima facie evidence of partnership and ALMOST definitive (an agreement stating that they are not a partnership might counteract the prima facie evidence)
o What is the distinction between profits and revenue : Revenue is the gross amount you are getting in and profits are what is left over after paying out expenses. If both individuals are invested in the expenses, then this looks more like a partnership.
Sharing in returns (revenue is NOT profit) does not give rise to partnerships w/o more. Common/joint ownership does not give rise to partnerships w/o more.
S 6: Each partner is an agent of the firm and of the partner's other partners for the purposes of the business of the partnership.S 13: liability of the firm for wrongs by a partner
S 22: The mutual rights and duties of partners, whether ascertained by agreement, may be varied by the consent of the partners.
S 28: The interests of the partners in the partnership property/their rights and duties in relationship to the partnership:
All parties are entitled to share equally in the capital/profits and contribute equally towards losses (unless otherwise stated in the Partnership Agreement)
Each partner may take part in the management of the partnership business. No person shall be introduced into the firm as a partner w/o consent of all existing partners.
S 29: No majority of the partners has any power to expel a partner unless a power to do so has been previously conferred
S 34: If a partner w/o consent carries on a business of the same nature/competing with the firm, the partner shall account and pay over to the firm the profits made by the partner in that business. ( if you want to let a partner do other business, must include this in the partnership agreement)
S 36-38: Dissolution of a partnership
Sample Partnership Agreement
Volzke Construction v Westlock Foods Ltd 1986 ABCAF V was building addition to mall for B (80% owner), but not paid. V sued W (20% owner) alleging partnership with B,
a limited company, and was liable for debts.I Were B and W in a partnership, such that W is liable for B’s non-payment?R Prima facie, each partner has a right to manage and control the partnership, but this is not an essential
characteristic of a partnership. Definition of “partnership” in the PA does not mention control and therefore has
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nothing to do with the existence or non-existence of a partnership.DO consider: whether there was receipt of share of profits as prima facie proof of partnership; guaranteeing the partnership debt, joint ownership of property, what the control in the business is, participating in management, and whether there was a stated intention to form a partnership in contract
A TJ stated that Westlock had no control over the business and thus could not be a partnership. But the CA says this is an error of law as control is not mentioned in the definition of ‘partnership’ and there can even be silent partnersParties agreed to share costs at 80-20 AND spoke of eachother as partners Other factors/activities of parties indicating partnership: letter stating interest of buying 20% share; bank account and printed cheques with both B and W names; right to be consulted about new tenants; admission about costs AND profit sharing 80-20 and previous actions by parties indicates that W and B were partners; parties stated they were partners
H W liable to V for B’s non-payment because as partners, they are liable for each other
McDonic Estate v Hetherington 1997 ONCA F W is a partner in D’s law firm and held negligent for poor investments (unsecured or under-secured) of M’s money.
Money was deposited in the FIRM’S trust account. W used firm letter head when reporting to clients, and held himself as partner of the firm. M suing W AND the other partners, claiming they were negligent and breached fiduciary duty to clients when loans were made with M’s money
I Did W have express/implied actual authority, or apparent authority, such that the other partners are liable for W being a twat?
R The PA ss 13 and 14 states partners are agents of each other, so if one partner is liable for misconduct, then the other partners are also liable IF the partner was authorized, actually or apparently, to act on behalf of the other partners must perform authority analysis Express actual = where the authority flows from the other partnersImplied actual = where the act was done in the ordinary course of the business factual determination and must assess that particular business and not based on ‘rules’
The NATURE of activity (using firm’s facilities to invest money), not the MANNER it was done (aka improperly/negligently) determine whether something was in the scope of ordinary business
Apparent = where the person dealing with the impugned individual reasonably regarded the partner as acting on behalf of the partnership because of a representation of the principal
A Obviously not express since partners were not aware of W’s transactions – but W’s actions were within scope of implied authority because funds were put into a partnership account where W exercised no control over them except in his capacity as partner transactions being in the books of the firm is STRONG evidence that it is part of ordinary course of business of firm
CA overturns trial judgement because TJ misapprehended evidence of the accounts in saying that W had exclusive control over the funds:
o being in the firm partnership account meant that they DID have control of the funds and even issued cheques from it - IF W deposited them in a private account, there would not have been authority of W acting as an agent for the other partners
o Further, investment activities are within the usual business of this particular law firm Even if implied argument fails, W acted within apparent authority because 1) P were clients OF THE FIRM and
W was a partner there and 2) worked within that firm premises and using its facilities 3) with firm name on the letterhead 4) P’s received cheques from the firm account 5) records of all investments kept by employees of the firm and therefore no evidence indicating to the clients that W was acting in any capacity other than as partner in the firm
H W had authority – either implied actual, or apparent – to act on behalf of the partners and therefore partners liable
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“Am I My Partner’s Keeper” Korz v St. Pierre: Partner liable for wrongful acts of another partner committed in ordinary course of
partnership’s business even if he had no direct participation in the events or was even aware of them – so partners advised to be well aware of what their partners are up to!
New LLP provisions may help you now
D. BUSINESS ARRANGEMENTSOne of the above forms will be used by every business; but there are more ways of carrying on business activity itself and these are not distinct organizations, but rather, arrangements
Franchise: contractual arrangement between franchisor and an independent business (franchisee) who buys rights to own/operate unit of franchise system
o Based on product, services, trade name, etc o Based on contract, and therefore contract law, and contract usually covers how business is to be run,
royalties, where supplies are purchased etc usually NOT fiduciary, but usually duty of good faith and fair dealing
Joint venture: association of business entities (corp, individuals, or partnerships) – united for purpose of carrying on business venture
o Key feature is it is usually limited to a specific project or time period o May give rise to fiduciary duties
Strategic alliance: cooperative arrangement among businesses – eg. joint research, technology sharing, joint use of production etc
o Normally contract as the underlying relationship o Generally not fiduciary relationship
Distributorship or dealership: similar to franchise in that contract entered into where manufacturer agrees to provide products and the distributor agrees to carry the products (instead of distributor selling the products themselves)
o No fiduciary obligations and not usually involving agency relationship Sales agency: manufacturer/distributor contracts with agent to sell goods on principal/agent basis (agent is not
the actual vendor)o Since its an agency, fiduciary obligations are owed
Product licensing: license granted for right to manufacture and distribute products associated with licensor’s trademarks or other proprietary rights
o Relationship is contractual
2. A BACKGROUNDER TO CORPORATIONSA. INTRODUCTIONShareholders: own the Corporation and responsible for electing directors. They do NOT have direct managerial power.
Directors: oversee the management of the Corporation and appoint Officers. They are elected and represent the shareholders.
Officers: supervise the daily operation of the Corporation
Corporations Law operates on the basis of four basic principles:
(a) corporate personality: the principle that a corporation's behaviour is to be legally analyzed by analogy to the behaviour of human beings;
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(b) managerial power: the principle that the daily operation of corporate business is to be done by a relatively independent managerial group;
(c) majority rule: the principle that internal corporate decisions are to be made by a democratic process among those constitutionally enfranchised on any particular issue; and
(d) minority protection: the principle that certain corporate, managerial or majority shareholder inclinations ought to be restrained from injuring the minority members of any voting group created by the corporate constitution.
Capacity of a corporation s 16(1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.
(2) A corporation has the capacity to carry on its business, conduct its affairs and exercise its powers in any jurisdiction outside Alberta to the extent that the laws of that jurisdiction permit.
Shareholder immunity s 46(1) The shareholders of a corporation are not, as shareholders, liable for any liability, act or default of the corporation except under section 38(4), 146(7) or 227(4) or Part 2.1.
(2) The articles may provide that the corporation has a lien on a share registered in the name of a shareholder or the shareholder’s legal representative for a debt of that shareholder to the corporation, including an amount unpaid in respect of a share issued by a body corporate on the date that it was continued under this Act.
(3) A corporation may enforce a lien referred to in subsection (2) in accordance with its bylaws
refer to section on “lifting the corporate veil” and the Salomon case
B. CORPORATE CONSTITUTIONConstitution S 91: Federal Government can make Laws for the Peace, Order, and good Government of Canada, in relation to all Matters not coming within the Classes of Subjects by this Act assigned exclusively to the Legislatures of the Province [and]
S 91(15): Banking, Incorporation of Banks, and the Issues of Paper Money.
S 92(11): Incorporation of companies with Provincial Objects
The core of the “corporate constitution” is comprised of “basic charter documents that constitute the fundamental terms of the corporation concerned.” (Note that these documents are key, inter alia, to measuring the permissibility of corporate conduct and how conflicts are to be resolved.)
In Alberta, the corporate constitution includes:
1. Articles of incorporation. These “contains only the most basic provisions concerning the corporation: its name, the structure of its share capital, the place of its registered office, the size of the board of directors, and any restriction on the business in which it may engage.”
2. Bylaws. These are rules “adopted by a company for the regulation of its own actions and concerns, and of the rights and duties of members among themselves.”
3. USAs under 146 of the ABCA
Methods of Creating Corporate Constitutions special acts of incorporation : used by fed/prov gov to create corporations for specific purposes (eg. creation of CNR
via Canadian National Railways Act)o have only the powers granted under the special act – therefore cannot diversify the business (important for
the discussion of contractual liability of the corporation) general acts of incorporation : generic and the corporation can engage in business of all kinds – must only abide by
global set of rules imposed by that legislation – fed/prov gov have both passed general acts 14
o 3 models of general acts: letters of patent (PEI/Quebec) : application to the Crown rep, who can issue the incorporating
document (the letter of patent) – direct descendant of the former royal charter form in house rules contained in: bylaws
memorandum of association company (NS): incorporation achieved by registering a memorandum of association and articles of association with registrar setting out constitution of company, and its name/share capital/restriction on power of the company
in house rules contained in: articles of association **articles of incorporation company (AB and most others, and Fed Corps)**: articles of
incorporation are filed with appropriate government, which issues certificate of incorporation (articles serve same function as memorandum of association and letters of patent)
notion of complete powers of a natural person are very evident and different that the other models
in house rules contained in: bylawso differences between models: relates to how internal governance operates so they have different
constitutions o all methods allow creation of an entity which is recognized as a natural person – shareholders are owners of
the company who enjoy limited liability but as a shareholder, you do not owe a fiduciary duty to the company in which you own shares companies are run by Directors, and Directors can be shareholders – they owe a fiduciary duty to
the company who is considered a natural person – what the director does must be in the best interests of the company; shareholders have cloaked them with the authority to manage the corporation
Canadian Jorex v 477749 Alberta Ltd 1991 ABCAF Special meeting of CJ called, but board of directors cancelled it. The # company, a shareholder, applied for order
confirming the cancellation was of no force or effect. CJ says nothing in bylaw or BCA restricting them and they enjoy power to cancel via the corporate model embrace by BCA
I Do directors of a federal corporation have power to cancel a meeting called by them in advance of scheduled date?R Directors have a fiduciary duty to the corporation – if they think it is in the best interests of the company, then
they could probably cancel a meeting even if the statute did not say the following:
ABCA s 101(1); Subject to any unanimous shareholder agreement, the directors shall manage or supervise the management of the business and affairs of a corporation this creates the basket clause because powers are unlimited unless circumscribed in bylaws or unanimous
shareholder agreement Under the corporate model adopted by the BCA, all the RESIDUAL power to manage the corporation’s affairs rests with the directors and therefore the statute need not expressly state the power to cancel is granted
o this power is given by the statute and NOT delegated by shareholders A Reasons for rejecting an unduly restrictive approach to directors’ powers:
1. reading the statute indicates all residual power, including to cancel meetings, is granted to the directors2. restricting directors in cancellation would lead to unreasonable results3. interpreting this way does not affect shareholders’ rights to requisition a special meeting because reading s
101(1) does NOT extend to give directors power to cancel special meetings properly convened on shareholders’ request
4. shareholders have other means if they lose an opportunity by cancelled meeting – eg. oppression remedies under the Act, shareholders can requisition calling of meeting, and can apply to courts for order directing meeting
5. the power of directors to cancel can just be eliminated in a unanimous shareholder agreement!
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**things to take away from this case: powers of directors, and the fact that they owe a fiduciary duty, and when they make a decision that a shareholder doesn’t agree with the shareholder is not without certain remedies (see the section on oppression remedies)
C. CORPORATE STRUCTURES
Corporation: o Separate legal entity with its own personality as a natural persono Has the potential to exist in perpetuity – if shareholders die, the corporation is unaffected (compare with
partnerships) Shareholders:
o rights as a shareholder, including voteso An owner of the companyo Invest for a return
Rights to particular dividends – Directors may deem it is in the best interests of the corporation that shareholders share in what the corporation has done
This of course makes it more attractive to investors, because they see shareholders that have invested are getting something out of it
o Only liability is to the amount that you invested in there INITIALLY o Shareholders do not owe a fiduciary duty to the corporation
Directors: o Direct the corporation and make the major decisions on behalf of the corporation o Appoint the officers, which manage the day-to-day o Make major decisions on corporate policy o Directors owe a fiduciary duty to the corporation
Officers o Eg. president, vice president, secretary, treasurero Manage the corporation – hire others to assist in management/carry on business of the Corp
3. THE PROCESS OF INCORPORATIONCorporations are creatures of statute and have to be incorporated in order to come into existence
Important sections:
1. Articles of incorporation 2. Notice of address3. Notice of directors4. NUANS search
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Corporation
Management
Directors
Officers
Owners
Shareholders
Important Statutory Sections
ABCA – ss 1, 5-15, 20, 146, 163, 246-249
CBCA – s 14
PA – ss 110-115
A. PROCEDURESFor-Profit Incorporation:
WHERE?o In Canada, generally incorporate provincially unless significant business across jurisdictions (or could
simply get an extra provincial registration without needing federal incorporation) WHO?
o S. 5 – 1 or more “persons” (a corporation is a person) Even a single person can incorporate
WHAT KINDS? BCA Part 5o Classification dictates degree of compliance with disclosure requirements and other provisions and is
based on 2 criteria: 1. Are there more than 15 shareholders? And 2. Is the corp a ‘distributing corporation’ (corp that is a reporting issuer of the Securities Act)?
o 3 types of corps in AB under the BCA :1. Corporations with 15 or less shareholders
a. Not a distributing corp (aka not a public corporation where shares saleable to public)b. Least regulated – must still comply with disclosure requirements (annual returns,
change of directors, change of office etc)c. Generally smaller, mom and pop businesses
2. Non-distributing corp: Corporations with 16 or more shareholders but do not let public have shares
a. Must comply with same disclosure requirements above + proxy solicitation requirements + prepare list of shareholders for shareholder meeting
3. Distributing corp: Corporations with 16 or more shareholders and distribute/sell shares to public
a. the MOST regulated type because shares are offered to the public b. must comply with above requirements + a bunch more in order to be this type (eg.
Cannot restrict share transfer, cannot have < 3 directors, must have auditor, must file with the Alberta Securities Commission, etc)
i. must comply with the Securities Act (watchdog for distributing corporations) and therefore in a whole other ball game than the other 2 kinds of corps
o unlimited liability corp : unlike above, each shareholder is liable for any liability/act/default of the unlimited liability corp in extent AND joint and several in nature
relatively new concept same incorporating procedures as other corps, but with distinct rules:
articles of incorporation must state it is a ULC (s 15.3) name must include ULC (s 15.4(1)) share certificates must display statement that liability of each shareholder is unlimited (s
15.9(1)) Refer to BCA Part 2.1 This corp is attractive to US firms seeking to do business in Canada based on US tax system
HOW?o S. 6 - must have articles of incorporation, and lists what they must contain
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o S. 7 – must send in the documents required by s 12(3) – corporate names, s 20 – notice of registered office, s 106 – notice of directors, along with the articles of agreement
o Statements restricting the transfer of shares – p 48 o S. 8 - Once documents received and requirements met, certificate of incorporation issues (see s 9)o S. 10 – naming requirements for the Corp (eg. Ltd., Inc. must be included)o S. 12 – prohibited names
Registration requirements Articles of Incorporation (BCA s 6(1))
o Name of the Corporation (approved by NUANS report; pg 53) and must be: Descriptive (‘building supplies’ in the name ABC Building Supplies Ltd.) Distinctive (‘ABC” in the name ABC Building Supplies Ltd.) Proper legal element (eg. Ltd., Inc., Corp., or the professional corporation element) Note: if also separate trade name, always use in conjunction with corp’s full name Note: even with a NUANS report it is not a guarantee that the Registrar will approve your name
because they have the final say o Classes of Shares the corporation can issue, and any maximum number
Can have one or more classes. Different rights can attach to each class. There must be at least one class that can exercise each of the three basic rights of shareholders:
1. Right to vote2. Right to receive dividends 3. Right to receive remaining property of the corporation on dissolution
o Restrictions on Share Transfers, if any Example: Other shareholders might be given a right of first refusal. Almost invariably, a small incorporated business will wish to have some form of restriction on
the transfer of its shares, which may vary from simple approval of the directors to a complex right of first refusal
Refer to page 39 at Item 3 for an important section!!o Number of Directors
Non-distributing must have at least 1 Distributing must have at least 3 (BCA s 101(2))
o Restrictions on Business (usually none because corporations have capacity/power of a natural person per BCA s 16(1))
o Other provisions (see pg 49-50): eg. Restriction on transfer of shares other than securities, borrowing powers (BCA allows directors to borrow without shareholder authorization, but this can be restricted by the articles), changing what a majority vote requires etc
Articles must be submitted with following (BCA s 7):o NUANS name search reserving proposed name o Notice of directors (who Directors are) s 106o Notice of address (must have a registered business address – where the corp gets served) s 20(1)
Then issued a certificate of incorporation
After incorporation: Other considerations
o Getting a USAo Any provincial or municipal licenses needed to operate (eg. Funeral services) o Insurance coverage
Ongoing reporting requirements:o Must keep records; s 21o Filing annual return in prescribed form
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o Preparing financial statements o Filing corporate tax returno Notification if change of directors/addresses
Bylaws – s. 131(3), 102(2)(4)o In house rules, respond to provisions of the USA o Must be submitted by director & bring to meeting to approve or reject
Director organizational meeting – s 104(1) o Directors must form organizational meeting (or a resolution in lieu) covering such things as:
adoption of bylaws (s 102(2)), adoption for form of share certificate (s 48); adoption of corporate seal- which may ensure clients understand the corp is separate legal entity (s 25(2)); designation/appointment of officers; issuance of shares – which have to be payed fully paid for before issue (s 27); banking (BCA s 103 gives directors power to borrow money on corporate credit, unless otherwise stated in USA); whether to have auditors and accountants (s 163)
o Then, shareholders’ organizational resolutions can be passed, covering: confirmation of bylaws adopted by the directors (s 102(2)), election of directors (s 106), and
whether or not to have an auditor Note: directors listed in Notice of Directors in registration package hold office only until this
first shareholder meeting (BCA s 106(2))Not-for-profit Corporations
BCA does not apply so must be incorporated under Companies Act or Societies Act in AB or federal Canada Not-for-profit Corporations Act
Special Corporations Professional corporations incorporated under the BCA and subject to compliance with legislation governing the
profession eg. Cemetery Companies Act
Steps to Incorporating 1. Deciding what you want to name the corp
a. Must not be used by another, or likely to confuse – if you want a number name, go to step 2b. First, do a nuans name search for the name and include the report
2. Completing articles of incorporation – establishing your corporate structurea. File the articles with the required information listed above
3. Establishing the initial registered office address and first board of directors a. Corporate records must be kept at registered office address and where the corp can be served by docs
4. Filing the appropriate forms and paying the fee 5. Processing your application
a. If all necessary documents sent + forms completed and signed + fee paid = certificate of incorporation b. May have to register the corp in the desired jurisdictions where doing business c. Get your Business Number from feds (used by the CRA)
6. Othera. Get any municipal permits that might be required
i. Loss PreventionCode of Professional Conduct
Joint retainer: the Alberta Law Society Code of Professional Conduct outlines what is required of a lawyer before he can act for more than one client, such as:
o INFORMED consent of both clients, ensuring that a joint retainer is in best interests of both parties, and advising them of loss of confidentiality between them
The lawyer must assess the likelihood of being able to demonstrate that each client received representation equal to that which would have been rendered by independent counsel
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A lawyer can refuse a joint retainer, even if all parties consent, if a dispute is likely to arise or that interests/rights/obligations will diverge as the matter progresses
Caution for lawyers in situations involving conflicting interests (eg. representing both a vendor and purchaser; or corporation and shareholder, with or without actual dispute but the possibility of differences arising) as opposed to potential conflict
o If you fail to act for one party, you are liable, regardless of whether it was because of the joint retainer; therefore, assess the situation before taking on joint retainer
Factors in assessing whether joint retainer is in both best interests:o Complexity of matter; whether terms not yet negotiated; whether extras cost/delay/inconvenience results
from more lawyers; availability of another lawyer of comparable skill; degree of lawyer familiarity with affairs; whether lawyer might favour one party etc
o This assessment is done by the lawyer independently, not by the clients
Preventing Malpractice Claims
Deal with conflict of interest ASAP and avoid representing multiple clients with differing interests Collect fees from clients at the beginning to ensure payment and avoid getting malpractice claims in retaliation of
you suing for payment Screen new clients before accepting them Avoid being a business partner with your client Don’t practice outside your area of expertise Don’t overextend with new offices and branches Track your partners’ business performance Deal with claims against you and seek independent advice from another lawyer Document authority given by client for any settlements you take for a client Keep clients well informed and regularly report
ii. Unanimous Shareholder AgreementsWhat is a USA?
Aside from the BCA, articles of incorporation, and bylaws, there may be instances where shareholders will want to agree on matters beyond the scope of the legislation and constating documents of the corporation. A shareholder agreement will allow shareholders to do this – it is an agreement in which the shareholders define their obligations between themselves and it governs shareholders' behavior in certain circumstances.
USA is a specific type of shareholder agreement that (i) is signed by all shareholders at the time it is first signed; (ii) binds future shareholders whether or not they sign; and (iii) removes, in whole or in part, the duties and powers from the directors of the corporation to the extent shareholders assume them
Creating a USA can be useful in preventing disputes between shareholders
the introduction of USAs for is only relevant for small closely held corporations – it is a device whereby a small closely held corporation gets all the benefits of a corporation, yet somehow appears to be almost more of a partnership. If you are a small company, you will want to know what you’re dealing with and will need to ensure smooth. Using a USA means the relationship between the shareholders can be customized. This restricts what each can or cannot do with respect to their shares. The BCA s 146 reflects what Iacobucci is saying in this article USAs are extremely powerful documents and have constitutional effects with regard to the corporation
S 146(2) if someone buys shares, they take these shares subject to the USA – they are deemed a party to it S 248 also important: compliance or restraining order
Canada BCA s 14620
Unanimous shareholder agreement (1) An otherwise lawful written agreement among all the shareholders of a corporation, or among all the shareholders and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation is valid.
Declaration by single shareholder (2) If a person who is the beneficial owner of ALL the issued shares of a corporation makes a written declaration that restricts in whole or in part the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation, the declaration is deemed to be a unanimous shareholder agreement.
Constructive party (3) A purchaser or transferee of shares subject to a unanimous shareholder agreement is deemed to be a party to the agreement.
When no notice given (4) If notice is not given to a purchaser or transferee of the existence of a unanimous shareholder agreement, in the manner referred to in subsection 49(8) or otherwise, the purchaser or transferee may, no later than 30 days after they become aware of the existence of the unanimous shareholder agreement, rescind the transaction by which they acquired the shares.
Rights of shareholder (5) To the extent that a unanimous shareholder agreement restricts the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation, parties to the unanimous shareholder agreement who are given that power to manage or supervise the management of the business and affairs of the corporation have all the rights, powers, duties and liabilities of a director of the corporation, whether they arise under this Act or otherwise, including any defences available to the directors, and the directors are relieved of their rights, powers, duties and liabilities, including their liabilities under section 119, to the same extent.
Discretion of shareholders (6) Nothing in this section prevents shareholders from fettering their discretion when exercising the powers of directors under a unanimous shareholder agreement
Notes on Unanimous Shareholders’ Agreements
Consider a USA anytime there’s > 1 shareholder but < 5-10?o Each shareholder also needs their own independent legal advice
USA predicated on assumption that dominant interests to be served by decision-making in the private or closely-held corporation are the expectations and needs of its shareholders – allowing shareholders to arrange the organization as they choose arguably promotes economic efficiency
USA is a constitutional document akin to company’s articles of incorporation/by-laws YET contractual in nature so they govern shareholders’ personal/individual rights too
o CBCA has remedial provision for court to force compliance with USA – hence constitutional since Director need not be party to the USA but still USA can be enforced against them
Alberta BCA
Adopts and extends the USA concept in the Canada BCA – reflects desire to have shareholders, rather than directors, manage a closely-held company
USA definition includes agreements that:o Regulate rights/liabilities of shareholders among themselves/between themselves and another partyo Regulates election of directorso Provides for management of business and affairs of corp, including restriction of director powerso Any other matter that may be contained in USA pursuant to other provisions of the Alberta BCA
USA may affect various rights and abilities, such as removal of directors by shareholders – see pg 61
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Cicco v 609940 Ontario Inc (Trustee of)F 2 shareholders: B and C each have 50% shares and are the only directors/officers. They entered into USA. C decided
to withdraw as Director. B became sole director. B made Director resolution for assignment in bankruptcy. C, still a shareholder, moves for order declaring assignment a nullity in contravention of USA because C did not give his consent
I Whether resolution contravenes a USA made under the BCA?R Rule of internal management: a USA may restrict the powers of directors and they are subject to the agreement
in managing the affairs of the corporation, but that is an entirely INTERNAL matter Whereas a trustee in bankruptcy is an EXTERNAL 3rd party with no notice of the restrictive authority of its
directors, and who acts for the benefit of creditors. Therefore, the effect of USA is to limit authority in internal matters between directors and shareholders but not to external matters with a trustee
If an assignment in bankruptcy is made by the Director, then the assignment is not void for a failure to comply with the USA – otherwise a trustee could never safely act without inquiring into internal and unpublished fetters on authority
Shareholders may have remedies against the other shareholders for breach of the USA, but with regard to the Trustee, the Director’s decision is not void – C can claim against B, but not the Trustee
The Director is still allowed to manage the incorporation because they have a fiduciary obligation to act in the best interests of the corporation
B. CORPORATE NAMESi. Common Law and Statutory Requirements
s 11: can incorporate under numerical name designated by the registrar
But name reservation required where word name is desired – NUANS report will confirm availability of the name and hold it for 90 days
s 10: general considerations**** important section!
10(1): Last word must be legal element Ltd., Inc., 10(2): Professional Corporation etc Distinguishing element – not a statutory requirement though highly recommended Descriptive element (but cannot be only descriptive of goods and services)
s 12(1)(b) and (1)(c)
Prohibited names in the regulations: Even if name available, cannot be confusing or misleading RE another corp name must get consent from the other corp (BCA Regulation s 4(1))
s 10(8)
Name must be legibly disclosed on all contracts/invoices/negotiable instruments to avoid personal liability
Other requirements and restrictions under the REGULATIONS: see pg 65
Cannot denote government sponsorship/control; cannot connote affiliation with existing university or association; cannot connote carrying on the business of a bank/loan company/insurance company unless necessary regulator consents; consent of individual if using his/her name; special considerations if there’s confusion with a trade-mark
Paws Pet Food and Accessories Ltd v Paws and Shop Inc 1992 ABQBF P requested registrar to require D to change its name to eliminate the word “Paws” because P argues it has used
the name so extensively, it has established goodwill in the nameR S 12(1)(c)(i) prohibits a corporation from having a name that is similar to the name of a body corporate
incorporated in Alberta …if the use of the name is confusing or misleading Regulation s 4(1) A corporation or an extra-provincial corporation registered in Alberta may not have a name that is similar to the name of a corporate person unless that person consents in writing to the use of the name in whole or in part
(5) For the purposes of subsections (1), (2) and (4), a name is similar if it is:(a) a name that would reasonably lead to the inference that the corporation or extra-provincial corporation bearing the name is or would be associated or affiliated with the corporate person, dissolved body corporate or person proposing the name if the corporation or extra-provincial corporation and the corporate person, dissolved body corporate or person proposing the name are not or will not be associated or affiliated
Some evidence of actual confusion is sufficient to meet this testA Some customers had asked P if he had opened a new shop – clearly this indicates that some were misled and
confused by D’s name, leading to reasonable inference that D is or wold be associated with PThe affidavit was not given the weight it should have been given by the Registrar. Registrar thought it was not enough, but the court thought it was plenty based on the affidavit evidence Therefore, the name is similar in FACT, but also pursuant to 4(5) of the regulations
Note: even if you get the NUANS report and the registrar is allowing you to incorporate in that name, that does not protect you from getting sued for passing-off, or even for having someone apply to get your name cancelled from the registrar Therefore, attempt to have a name as distinct as possible
Stenner v ScotiaMcLeod 2007 BCSCF Father and daughter worked together under name Mr. Stenner Team. Daughter left. Father accusing daughter of
passing herself off as still being part of father’s team. At new company, D, daughter was told by compliance to desist in use of the “Stenner/Campbell” designation, but she continued use in advertising. D did not check if she appropriated the old company’s domain name. P registered his name as a trademark in conjunction with financial services
I Whether father has a claim for passing-off?R A person operating a business has a proprietary right to an established name – and the common law action for
passing-off protects the goodwill associated with a trademark/tradename Goodwill=benefit and advantage of a good name/reputation/connection with a business Passing off=representation of D’s goods as being those of P (eg. using a name which resembles that of P; or
giving impression that P is involved in the business of D) a. For passing-off claim P must prove :
i. Existence of good willii. Deception of the public due to misrepresentation (eg. conduct a public survey)
iii. Actual or potential damage to P Passing off is different than trademark infringement, which allows exclusive use and does not require proof
that registered trademark was known to the market. To get a trademark you have to show existence of goodwill, so existence of trademark assumes first requirement above
a. BUT, grant of trademark provides proof that P had the reputation and goodwill associated with a
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name for the purposes of the 1st requirement in passing off test, aboveA The name Stenner/Campbell and Stenner-Campbell, considering the same field of work, small geographical area,
and extensive use by both of the same advertising media, could give rise to confusion – D was aware of the potential for confusion, knew of the significant association in this industry and community of the “Stenner” name and appreciated that a benefit would be derived from it – D used it for this very reason!D represented a connection with P because of: using the domain stennerteam for the website and advertising; by using the name Stenner in radio and on the same station as P’s radio program; using name in same print media used by PFurther, using Campbell in Stenner-Campbell does not make it permissible because it is not full/distinctive identification of a person which has been held to require us of the FULL Christian name
If someone has the last name with good will established with it, you must use your first name too in order to avoid passing-off (if she had used “Vanessa Stenner” it would have been okay)
Damages: granted 10% of the loss the father suffered (not all of the D’s business was a result of the passin-off)
“Court Doesn’t Take a Pass on Domain Name Confusion”
The likelihood of confusion should be measured: from the perspective of the ordinary average customer; the strength of the name in the market place; and the nature of the products and the trade
There are further principles for domain names
The greatest likelihood of confusion will exist where the defendant registers a secondary level domain name exactly matching the plaintiff's, such that, in appropriate cases, using the plaintiff's exact business name "may itself amount to passing off"
Passing off in the domain name context can arise from "initial interest confusion," which occurs when Internet users seeking the plaintiff's website may be misled by a similar domain name to the defendant's even if, upon arriving there, they discover their error;
If the defendant intended to redirect Internet traffic by using a similar domain name to the plaintiff's, the court should be more inclined to find a likelihood of confusion
**Registration of the domain name in the Stenner case was very helpful to the plaintiff – therefore highly recommended that your clients do this in the event of a claim for passing off
ii. Loss Prevention Care should be taken in selecting a name in case a lot is invested in it (emotionally, or in ads, signs etc) and they
end up getting a cease and desist for trademark infringement Therefore, consider choosing name that can be registered as trademark
C. SHARE CAPITALi. Equity Financing 2 main ways that a corporation can be funded:
o Debt financing : borrowing of money where corporation issues bonds (basically you are loaning the corporation money); bond holder therefore loaning money in the corporation and is paid a rate of interest later
Debentureholders Eg. Loan the money to the business. They would be obligated to repay the principal amount you
loaned to them (i.e., $10,000) + interest at an agreed to amount (e.g., 5% per annum). o Equity financing : shareholders that invest money into the corporation
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You’re basically purchasing an ownership stake in the corporation and acquire a right to share in any profits that the business makes.
When they dismantle the business, they would pay back the initial amount Upside in this is profitable interest
However, if a business tanks, under Canadian law, creditors get paid out before equity holders Corporate shares are therefore a type of corporate investment but also a form of personal property Corporate shareholders sometimes get cash distributions (dividends) from the corporation
o Occurs when the corporation is making a lot of money, and then dividends it out to shareholders The investment can be made by the shareholder herself, or the shareholder can acquire shares from another
shareholder – this money paid for the transfer is paid to the other shareholder, not the corporation Shares are part of the capital of the company – BUT shareholders do not have ownership of the corporate assets
because those belong to the corporation; if corporation is dissolved, shareholders only entitled to a proportionate distribution of the VALUE of those assets and not those specific assets (and only what remains after debt repayment and the money owed to bond holders, who technically lent money)
o Eg. Company X is dissolved and all assets liquidated, which includes shares in another company. Shareholders don’t just want the cash value of the assets in the other company after being sold, and would rather have the actual assets (the shares). But this is not allowed! They have no right to the assets (the other shares)
o Ex. Company X is dissolved and all assets liquidated, which includes real property. Shareholders have no right to the property – can only get the cash from the property being sold (value of the asset, not asset itself)
ii. Classification of Shares Not all shareholders are treated equally, because the shares they hold may be of different classes Under CBCA, all shares must be classified, and each can only have a single classification– all shares are
designated, identified and described o Only if there is one class of shares in a corporation are the shareholders treated equally o If corp has more than one class of shares, each is a distinct subdivision within the total share capital of
the corp if more than one, the rights, privileges, restrictions and conditions attaching to each class must be set out in the articles (generally annexed to the articles of incorporation)
o If there are two or more classes, the right to vote at all meetings of shareholders and the right to receive the remaining property of the corp upon dissolution must be attached to at least one class, but need not attach to the same one
Common shares (“equity shares”) = confer full right of participation in the Corp that issues them and therefore unrestricted rights to participate in dividends and in distribution of remaining property upon dissolution
o If no differentiation between shares in a corp, then they’re all considered common shares o Since holders of common shares only get paid dividends after satisfaction of other claims against corp,
ordinary shares are more risky than loans/other forms of debt investment/preference shares o Give investor who holds them unlimited right to share in the profits and growth of company – but more
risky if company gets dissolved? Are common share usually more or less expensive?o 3 main rights that attach to almost every common share: voting rights, rights to participate in dividends,
and rights in distribution of remaining property upon dissolution Preference shares = special shares with a preferential right which causes it to rank ahead of the common shares
o Eg. priority in the repayment of capital at windup; prior right to receive dividend; special class voting rights etc
o Different from common shares because they are often guaranteed a dividend – but directors have the final say of actually giving dividends
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o Generally do not have voting rights Non-preference special shares = subject to a limitation rather than a right
o Eg. deferred shares where right to receive income or capital comes after ordinary shares of the company; non-voting shares etc
iii. Overview of Canadian Securities Regulation NOTE: this relates to the distributing corporation only, which must file with the securities registry Securities are provincially regulated , per the Constitution – however, the federal government still has the
jurisdiction of criminal enforcement in those areas (though there will be a federal securities regulator at some point)
However, several provinces have signed a Memorandum of Understanding to establish co-operative Capital Markets Regulatory Authority in pursuit of co-operative federalism
o Some attempts to harmonize securities regulation across Canada
D. PRE-INCORPORATION CONTRACTSi. Introduction Pre-incorporation contracts = a contract that is entered into in the name of, on behalf of, or in trust for, a
corporation that is yet to be incorporated. Liability under pre-incorporation contracts involves the interaction of contract/agency law and corporation law
o Between the ‘promoter’ for the unincorporated company, and the ‘third party’o Entered into because parties are anxious to conclude the terms of the arrangement between them and
the promoter has not had the opportunity to incorporate the corporate vehicle on behalf of which he wishes to contract – wants to conclude the deal, but doesn’t want personal liability
o Promoter appears as acting as the agent on behalf of the principal, the unincorporated company o However, under CL, courts took a restrictive view of liability under these contracts, and they were
generally governed by 2 rules: Person who signed contract on behalf of yet-to-be-incorporated company was personally liable
for the contract; and once incorporated, the corporation could not ratify the contract and relieve the person from personal liability
o Statutory reform at the federal level and most other jurisdictions resulted in liability being determined by the statute instead of muddy CL rules:
Under the CBCA, promoter will be personally bound by a pre-incorporation contract unless the corp adopts the contract within a reasonable time after incorporation by an action signifying intention to be bound
Corp then becomes bound by the contract and promoter is released Regardless of whether corp adopts it, a party to the contract can apply to court for order fixing
obligations under the contract as joint or joint and several or apportioning liability between corp and promoter
If contract says so, promoter is neither bound by contract nor entitled to benefits under it – promoter can also contract out of personal liability if corp is not formed or does not adopt the contract
Note: the legislation refers to “contract” but does not mean it in the traditional sense of the word, which at CL would require that the parties ‘exist’ which technically cannot be true where the corporation has not yet come into existence – the statute overlooks this technical problem for the purpose of making the ‘contract’
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o The above rules on pre-incorporation contracts therefore mean that a promoter should be wary of making these types of contracts because of personal liability – if the parties do decide to contract, then both sides should have in mind these drafting considerations
In AB, the statute states that the promoter is “deemed to warrant” that the Corp will come into existence within reasonable amount of time and contract within reasonable time thereafter, meaning promoter is thus liable to 3rd party for damages for breach of those warranties
However, under the ABCA, this means that they are not deemed to be a PARTY to the contract, but only deemed to WARRANT the corporation will exist and/or will adopt the contract very important distinction!
The law in Alberta:
S 15(1): generally speaks to the notion that a company being incorporated outside of Alberta S 15(2) is key: if a person enters into a written contract, on behalf of a body incorporate before it comes into
existence, that person will be the promoter. That person is deemed to warrant to the other side that: the corporation will come into existence within a reasonable amount of time (which case law has not defined) AND that the contract will be adopted within a reasonable amount of time you’re not liable on the contract, but liable for the breach of the warranty
o the person will also be liable for the damages for a breach of that warrantyo Note: the damages for the breach of the warranty are the same as if the body corporate existed and the
corporation was saying to you “we don’t adopt your action” contrast with the Wickberg case (3): corporation may, within reasonable time of coming into existence, ratify the contract
o When it does so, the promoter gets released and the corporation is bound by the contract and is entitled to the benefits of the contract as if it had been in existence the whole time and had been a party to it
(4) A person can apply to the court for an order that the corporation return any benefit received under the contract if they ended up not ultimately adopting the contract
(5) can apply to the court for an order fixing obligations under the contract as joint/joint and several, OR apportioning liability between corp and the promoter
(6) person who enters, or purports to enter, a contract on behalf of a body corporate before it comes into existence is not liable for damages if the contract expressly states that the person is not liable
o You can therefore contract out of liable Important parts to know about Alberta’s law:
o 1) notion of deemed warrantyo 2) notion of reasonability o 3) damages and how they are calculated
What if there is an oral pre-incorporation contract, rather than a written one?
Academics argue that oral contracts aren’t practical in modern times Yet, a number of provinces have retained it, for an unknown reason So, if faced with this kind of contract, academics and practitioners don’t know what would happen! But courts
might read in and treat it as if it were a written contract
ii. Measure of Damages
Wickberg v Shatsky et al 1969 BCSCF S was director of a company. Hired W to be manager, with offer letter having letterhead stating it was Ltd when it
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wasn’t. S decided not to incorporate, and told W to drop the Ltd. Company failed, and W was laid off. W suing S, saying he is liable as party to the contract
R Wickberg is older and not from AB – stick with the AB statuteA Neither of the parties had the intention at the time of signing the contract that S should be personally liable –
therefore cannot be held personally liable under the contract However, S did act as to warrant that the company was a legal entity and that they had the power to represent it and speak for it when entering the employment contract – unfortunately, the fact that company was not incorporated did not cause W’s loss, and he also found out shortly after hire that the company was not incorporated W’s loss resulted from the company failing, not the warrant by S – hence only entitled to nominal damages for breach of warranty
Article on Pre-incorporation Contracts – pg 82 of textbook Confusion in the Application of Pre-Incorporation Statutory Provisions
Liability under pre-incorporation contracts has been messy and tortuous; they could not fit into traditional contract law or corporate law analysis and courts were never able to achieve satisfactory resolution
The issue of the liability of persons who contract “on behalf of a corporation to be incorporated” was first dealt with under the common law by a strict rule (promoter was personally liable on the contract + once incorporate the corporation could not ratify the contract to relieve the person of personal liability). That strict rule was softened by subsequent cases in the common law, but that softening led to uncertainty and confusion as to where liability may ultimately lie. Promoters often found themselves personally liable for large amounts
o In turn, that uncertainty and confusion led both in Ontario and federally to legislative reform. permitted a corporation to adopt a preincorporation contract made on its behalf and, if it did so,
it became entitled to the benefits and subject to the liabilities under the contract, and the promoter ceased to be bound thereby. IF corp didn’t adopt, promoter was personally liable
o BUT attempts at legislative reform were not particularly successful either, as the courts put a gloss on the legislative provisions that the legislators clearly did not intend!
Result of Westcom was contrary to common sense and completely undermined the legislative reforms
Westcom FACTS: Contract entered into by a promotor and third party who believe that the corporation exist. The
corporation does not exist (yet). ISSUE: Is the promotor liable? CONCLUSION: The Court finds the promotor is not personally liable because a “contract cannot be entered into
with a non-existent corporation” and there is no “contract” for the statutory provisions to apply. The sections allowing for a pre-incorporation “Contract” therefore don’t even apply. Since the statutory provisions do not govern, the CL says intention governs = this means no personal liability.
o At common law intention governs, intention = no personal liabilityo Statutory provision = personal liability unless expressly excluded, no such express language
COMMENT: conclusion here is ludicrous – the statutory code was intended to be free of the shackles of the common law rules; yet the court reintroduced the common law rules the statute was trying to get rid of! The court here made it seem like the common law rules were a gatekeeper to getting to the statute! In the end they frankensteined the old common law rules to the new statute and eviscerated the statutory rules
o when the provisions speak of a “contract”, they obviously do not mean that there must be a contract in the traditional common law sense - provisions refer to a form of statutorily created contract that immediately creates rights and obligations between the promoter and the third party
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Sherwood Design 1998 ONCA FACTS: P entered into a contract w/ D (promotor). D’s lawyer then says, “P, here is the #Corp we are going to be
using for this contract,” but the lawyer then takes the corporation and “puts it back on the shelf.” Another client comes in who wants a company to buy land, and the lawyer assigns the #Corp. The client buys land, but the #Corp is still liable under the pre-incorporation contract. Client #2 is therefore on the hook for the liabilities.
ISSUE: Did the D corporation “adopt” the pre-incorporation K w/n the meaning of CBCA? CONCLUSION: Court found that, through the lawyer assigning the #Corp to P, this was the #Corp “adopting” the
pre-incorporation contract. Therefore, #Corp is liable under the agreement with P. COMMENT: this too is contrary to common sense and standard commercial practice; merely giving the
NUMBER of the corporation that was intended to used in the transaction, together with DRAFT organizational documents to vendor’s solicitor, cannot mean that the solicitor for the purchasers had taken an act sufficient to constitute adoption BY THE CORP. What was required was an action or conduct by the corporation itself
Szecket v. Huang 1998 ONCA TJ adopts two step analysis: 1) is there a contract? 2) If so, apply pre-incorporation rules set out in the statutory
provision ONCA critiques: Two step analysis wrong. Apply statutory pre-incorporation rules to agreements whether or
not they’d be considered valid contracts at common law. Short answer statutory provision apply to contracts whether or not they would constitute as contracts under
common law analysis Rejected by ONCA simple rule is that the promoter is liable, unless the contract says that he or she is not.
Don’t have to look at intention, unless it was an oral contract COMMENT: court finally got it right – effectively overruled Westcom and Sherwood and gets back to
legislative intentionsSuggestions for future reforms: see pg 90 Suggestions for lawyer who are drafting these contracts: see pg 91
4. THE CORPORATION AS A LEGAL PERSONImportant Statutory Sections
ABCA – ss.1, 16, 46, 118-119, 252
Corporation is treated in law as a legal person with a personality separate from that of promoters and shareholders
corporation has the same rights and obligations as a natural person and founders or shareholders are not liable for the actions of the corporation
in rare situations, courts may choose to disregard the corporate veil and to impose liability on those behind the corporation (promoters and shareholders)
directors and officers of corp may also be personally liable for torts committed by them while they were ostensibly conducting business affairs in the name of the corp refer to section on tort
A corporation is a separate legal entity, different from its directors or shareholders; this is referred to as the corporate veil and is enshrined in s 46 Shareholder Immunity
Salomon v Salomon & Co Ltd 1897 HLF S had company and incorporated it with his sons – the transfer of business to the company was paid to S by way of
shares/debentures, meaning S had most of the shares. Company went under - it had 7 shareholders but liquidator (on behalf of company) argued that they were mere puppets in a sham to allow S to carry on his business as before but with limited liability by incorporating it. Therefore argues it was not a real company and S should have to pay for the remaining debts personally as the principal
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I whether, regardless of the separate legal identity of a company, a shareholder/controller could be held liable for its debt, over and above the capital contribution, so as to expose such member to unlimited personal liability?
R Doctrine of corporate personality: Once a company is legally incorporated, it must be treated like an independent person from the shareholders, with all the rights/liabilities of its own (can sue/be sued, enter contract, buy property etc) now enshrined in s 16 and s 46 of the BCA Motive of those in the company are irrelevant in discussing those rights and liabilities There is nothing in the
act stating shareholders should be held independent from a majority shareholder - hence, creditors of an insolvent company cannot sue the company's shareholders to pay up outstanding debts
This creates the ‘corporate veil’ between a company and its owners (shareholders)/controllers (directors)A Company makes 4 allegations towards S against the unpaid creditors, by way of misleading shareholders: 1)
Salomon Ltd. has not been properly constituted under the Act; 2) The formation of Salomon Ltd. was a “mere scheme” to enable Aron to carry on business in the name of the corp; 3) Salomon Ltd. was Aron’s agent; and 4) Aron defrauded the company.– but they were in full knowledge of the facts and they approved and adopted the agreement for incorporation The company was properly formed under the act and the motives for establishing it are irrelevant – The Act requires that there be at least one share held by a member in order to constitute a shareholder – it does not put a limitation on that shareholder that he must be an independent and beneficially interested person nor impose a maximum number of shares one can own therefore, the company has a separate corporate personality from the shareholders, including S, and so S
cannot be sued for the company’s debts regardless of the fact that he is the majority or even sole shareholder
nothing stopping S from selling his assets to the company and taking his security back – he therefore had priority over other unsecured creditors – hence he gets paid out first and there was nothing left in the company for the unsecured creditors
H S cannot be sued independently over and above his contribution as shareholder
B. GROUNDS FOR LIABILITY OF THOSE BEHIND THE CORPORATIONi. Liability Based on Fraud/Improper Conduct Now, the veil will be lifted when the court is satisfied that the company is “a mere façade, concealing the true
facts” This includes where the subsidiary was incorporated for a fraudulent purpose Transamerica case will be the test used for determining whether to lift the corporate veil******** for exam
Liability Here is Based on: fraud/improper conduct, thin capitalization, or failure to use a corporate name
Many corporations legitimately use the corporate structure to manage their operational risk by creating corporate subsidiaries to conduct their businesses, including contracting with customers and suppliers and incurring debt. This structure allows a parent corporation to shield itself from its subsidiary's liabilities and limit its exposure to its capital contribution to the subsidiary
However, plaintiffs asserting claims against a subsidiary sometimes seek to disregard the subsidiary's status as a separate legal entity and hold the parent corporation directly liable for the subsidiary's obligations. This type of claim is commonly referred to as "lifting the corporate veil"
The primary reason plaintiffs seek to lift the corporate veil of a subsidiary is to reach the deeper pockets of the parent corporation
o A parent corporation conducting business through its subsidiaries can limit the amount potentially recoverable in actions against them by ensuring that, for example, each subsidiary only holds those assets required for its operations. Because recovery against the subsidiary may be limited, a plaintiff may seek to lift the corporate veil to reach the parent corporation's assets
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In deciding whether to lift veil, courts will consider the structural relationship between the parent corporation and the subsidiary. To impute the subsidiary's actions to the parent corporation, a plaintiff must persuade the court that the parent and the subsidiary are not truly separate corporations. The primary arguments are:1. Complete domination or control (which is more than mere ownership) so that the subsidiary does not function
independently, coupled with an element of fraud or other improper activity First: was there domination/control? Second: the subsidiary was:
A. incorporated for a fraudulent or improper purpose; ORB. used by the parent as a shield for improper activity
2. That the subsidiary is the parent corporation's agent based on the concept that principals are liable for actions taken by their agents within the scope of their
authority agency can be:
1. actual; oro words, conduct or other actions by the parent corporation manifest an intent to grant
authority to a subsidiary to act on the parent corporation's behalfo can be: express or implied
2. apparent o when words, conduct or other actions by the parent corporation give a third party the
IMPRESSION that the subsidiary had authority to act, and the third party accepted and relied on this impression
3. That failure to lift the corporate veil is too flagrantly opposed to justice Kosmopoulos is authority for a residual category of cases in which courts will lift the corporate veil.
However, the strong language in Kosmopoulos and the subsequent case law indicates that, although not well-defined, the bar is high before the corporate veil may be pierced (Yaiguaje v. Chevron)
Other Avenues to Liability: Contract, trust, tort law, and oppression remedy
Veil-lifting claims can be brought for causes of action based in tort and breach of contract. However, the standards applied in breach of contract cases are more stringent than those applied in tort cases. This is based on the premise that, in a contract case, the plaintiff voluntarily enters into a contract with the subsidiary, with full knowledge of its corporate form and the limited liability associated with it
This is not the case with most tort claims where, except in negligent misstatement cases, the plaintiff does not choose to be the subject of tortious conduct by a corporate defendant or the individuals acting on the corporation's behalf.
o In tort cases, courts are also focused on the proper allocation of losses between an injured plaintiff and the various named defendants who are at fault
Kosmopoulos v Constitution Insurance Co of Canada 1987 SCCR The corporate veil may be lifted and separate entities principles is not enforced when it would yield a result too
flagrantly opposed to justice, convenience or the interests of the Revenue
Yaiguaje v Chevron Corporation 2018 ONCAF Y got judgement against Chevron US in Ecuador and sought to enforce it in Canada against its subsidiary, Chevron
Canada, pursuant to the Execution Act. I Can the corporate veil between a parent corp and a subsidiary corp be pierced?R 3 situations where corporate veil can be pierced:
1. when court is construing a statute, contract or other document 2. When company is a mere façade Transamerica 2 part test requires:
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a. where the company in question is completely dominated and controlled such that it is merely a ‘puppet’; and
b. being used as a shield/instrument for fraudulent or improper conduct i. Note: where subsidiary has not committed any wrongdoing, this is a complete bar to piercing
the veil under this test3. when it is established that company is an authorized agent of its controllers or its members, corporate or
human the law has evolved since the Kosmopoulos decision, and the courts no longer possess a residual discretion to pierce the corporate veil simply because it is in the interests of justice to do so**No equitable grounds for piercing the veil, even when flagrantly unjust **difference between economic reality and legal reality of corporate closeness, and it does not matter if operationally a group of related corps aren’t that separate if legally they are seperate
A Chevron Canada’s assets cannot be seized pursuant to the Act because Chevron US does not own shares in Chevron Canada. Those shares are held by Chevron Canada’s direct parent, CCCC. Unless Chevron Canada’s corporate veil could be pierced, Chevron Canada’s assets are unavailable under the Act because there is a corporate veil between the parent and the subsidiary as separate entities. Court declined to do so as there was no alleged wrongdoing by Chevron Canada, nor was it created as an instrument of wrongdoing
Big Bend Hotel Ltd v Security Mutual Casualty Co 1980 BCSC F P owned hotel that suffered fire damage. D issued fire insurance policy but denied coverage on basis that P had
fraudulently omitted to communicate circumstances known to be material to D in order to enable them to judge risk, because P’s sole shareholder had owned a hotel that had burned down. P had had 2 prior insurance policies for the hotel cancelled. P did not mention these facts to D nor was the info requested. D argues that the 2 hotel corporations were not separate entities and corporate veil should be lifted between them such that the circumstances of the shareholder of P were properly necessary info P should have released
A Within the Insurance Act, good faith is important and thus the insured must not only be honest and straightforward but make full disclosure of all material facts – not what the plaintiff feels is material, but rather what a reasonable INSURER would have reacted to the true facts, makes it material
P failed to disclose the prior loss of the other hotel because he knew, from the previous policy cancellations, that if he said so he would be unable to obtain insurance for the hotel therefore his failure to inform was to mislead/deceive the insurers, who would have declined the policy had they known
P argues that since application for policy was made by new company, which was not a company that had prior damage, even though he was the only shareholder of the company that had lost a hotel to fire, he should be protected because the 2 corporations are separate legal entities. The prior loss should be irrelevant
o P’s creation of the new company was therefore as a shield to not have to release the damaging information, and thus corporation used for a fraudulent purpose
o Since the failure to disclose was fraudulent, it is appropriate to lift the veil so that he cannot use his new company as a shield for improper conduct – policy will not be honoured because he still had to disclose the info about the other legal entity
o He was not entitled to sue through his company Note: even if there were other shareholders in a closely held company, if one of them was using the company as a sham, then the veil will be lifted therefore, know who you are doing business with and if they had prior claims against them that could affect your insurance
Performance Industries Ltd v Sylvan Lake Golf & Tennis Club Ltd 2000 ABCAF Shareholder of S had right of first refusal for buying some golf land, but couldn’t do so alone. Shareholder of P
stepped in to help, and they would be tenants in common. SS and SP verbally agreed on development plans, then wrote written contract. When SS went to develop, SP said he couldn’t do so under the contract. SS argued he signed the contract on mistake of fact since contract did not reflect verbal agreement. TJ found the owner of P to
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be jointly/severally liable with P corporation.I Whether P’s actions were fraudulent/dishonest such that TJ could have lifted the corporate veil between the Corp
and the owner?A Misconduct of D was so outrageous that punishment and deterrence was required.
The ultimate contract contained clause which limited the plans for development such that it could only have been 1/3 of the land S had intended to develop. This did not reflect the verbal agreement P and S had made after S had clearly explained his development plans. P’s solicitor had been the one to draw up the contract, and S apparently did not read it. P had known of S’s mistake and had intended to rely on it.
TJ held that the actions of SP, tantamount to fraud, and sharp practice were actions which demanded an award to deter others
P’s conduct was such that lifting the veil between him and his corp was okay, and he becomes personally liable The judgement that SS had sought was against SP personally, and court found SP had been using his company as a cloak for his fraudulent activities ABCA: decided that the findings of fact about SP being fraudulent require deference on appeal
Corporate veil cannot be used as a shield for conduct or fraud, liability may be extended to the principals where they have engaged in misconduct
In the event that the corporation is being used to effect a fraud, where there was an insertion into the contract that was not agreed upon, the veil will be lifted
Jin v Ren 2015 ABQBF R approached J for an investment to start a company. J later requested proof of his interest in the company, or
return of the money. R said he would return money, but only if J and his family never worked in a related company in Canada or China. J refused and sued both R personally, and his new company.
R Typically the veil is lifted where company is incorporated for an illegal, improper or fraudulent purposeCan also be pierced if, when incorporated, those in control expressly direct a wrongful thing to be done
Thus, veil can be lifted in several scenarios, particularly where improper conduct committed by corporation’s shareholders, or its controlling minds.
A On the facts, company was not set up as a mere shield in order to improperly attract J’s investment. BUT, R did entice J to invest for an improper purpose. By stubbornly retaining J’s money in his capacity as Director of the company, which did not belong to him, he expressly directed a wrongful thing to be done and therefore the veil is lifted between him and the company. One cannot go behind a legitimately incorporated company to reach the principal, and this includes where it is a one-man company. However, there are narrow circumstances where this will be allowedCase approves TransamericaWhile tempting to do so, evidence in this case falls short that the company was set up just to attract improper investment. However, Jin prevails in a different way – instead of being by fraud, J wins because of unjust enrichmentBasically, there is normally a veil between a person inside the corporation, and the corporation itself. If the corporation is liable for something, then the individual is safe and vice versa. However, where the person inside the company is doing something that supposedly was in the name of the corporation (as if the corporation, being an artificial person, were acting for itself through this vector), then this legal fiction dissolves and the person becomes personally liable as well. Thus, though Jin was supposedly acting through the corporation, as if the corporation was acting for itself, he is personally liable as well because of the misconduct so we reach around the corporation and say he is personally liable too
Wildman v Wildman 2006 ONCAF Divorce proceedings resulted in husband owing 800k to his wife. But, he was not paying and was ignoring court
orders and did not show up to trial. In order to enforce support payment, Court then ordered the support payments be owed by him personally AND his company. Husband argued he actually had no money and it was
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actually tied up in the corporation, and thus wife could not get at it without lifting the corporate veil I Should the exception to separate legal personality be applied to FAMILY LAW?R Transamerica test shows that one instance where courts will disregard the legal personality of a corporate entity is
where its completely dominated and controlled and being used as a shield for fraudulent or improper conduct Transamerica test is one way of lifting the veil, and requires the following must be present:
1. Individual exercises complete control of finances, policy and business practices of company 2. Control must have been used by individual to commit a fraud or wrong that would unjustly deprive a
claimant of his rights 3. Misconduct must be reason for 3rd party’s injury or loss
**these factors can be applied in the matrimonial context within family law where piercing the corporate veil is an essential mechanism for ensuring the spouse/children receive financial support they are entitled to under the law
A Usually the veil is pierced in order to look through a corporation and make the principal liable for the obligations of the corporation, but here, the claim is instead to look to the corporation to satisfy obligations of the principal/sole shareholder therefore, the usual concern regarding piercing the veil (unanticipated personal liability) is not present
Court decides to take the principles for piercing the veil and apply it to the specific situation of FAMILY LAW in order to meet the same purpose – where the corp is dominated and controlled and being used as a shield for fraudulent or improper conduct
o Husband arguing that he has no money, and it is all in the company. Therefore, since the company is a separate legal entity, the wife cannot claim this amount.
However, husband was director and sole shareholder, and he makes no distinction between his personal and business assets - thus had complete control of company
o Husband controlled his business enterprises/structured his corporate assets in a way to divert money from them to his own personal use
o The injured party is the wife and kids – have not received money that the court ordered them to receive
Usually the veil is pierced where company was incorporated for a fraudulent purpose. However, can also be pierced when, at time of incorporation, the person in charge is expressly directing a wrongful thing to be done. Here, by funnelling all his money into the corporation to keep it out of his wife’s reach, he was directing a wrongful thing to be done
o The husband exercises complete control of the corp. He also makes no distinction between personal and corporate assets. The corporation is his alter ego- he structured the corp in such a way to desert money away to his own personal use
o Thus, on the facts of this case, it would be flagrantly opposed to justice to allow the husband to argue then that the money is not his because it belongs to the company which is shielded by its own separate legal personality
Rockwell Developments Ltd v Newtonbrook Plaza Ltd 1972 ONCAF R had a deal with N that fell apart and ended up owing legal costs to N. N tried to get Kelner, a solicitor and one of
R’s shareholders/directors, to personally pay their costs of action brought about by R. TJ held that Kelner was driving the litigation and R was only a nominee to hold title, so that Kelner was only an agent or trustee for Rockwell – money had been coming from Kelner’s personal account, not R’s, and no appropriate corporate record keeping
I Who was the real party under the contract, and could Kelner be personally liable as a being the actual contracting party?
R Absent allegations of fraud, simply because a shareholder benefits from and carries out a corporate transaction doesn’t justify piercing the corporate veil
A Although Kelner would ultimately benefit from the contract, the contract was made with the company alone. Kelner couldn’t have sued upon it, nor could he himself have been sued. Court holds that a corporation must be run by human beings - Simply because he gave instructions to its
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solicitors doesn’t justify that he’s an actual litigant Also, there is no allegation of fraud by K – N knew it was dealing with a corporation the entire time and not
in K’s personal capacity No good reason to pierce the veil
There Still Is a Corporate Veil: if a person in a company intercepts or spends company funds freely/cavalierly, this can be a breach of trust or theft EVEN IF the person owns ALL the shares
Even if no shareholder of director ever complains, guarantors or other creditors might complain! Therefore, do no treat yourself and your company as the same thing – get authority of directors before paying
funds to someone else other than the company Further, if acting for your client personally, DO NOT send bills for your services to that person’s company – the
company is not your client for that purpose, even if your client is the only shareholder, officer, director and driving force in the company
o The veil will still exist in this scenario and you could be violating the code of conduct by assisting a client in committing fraud by using the company as a shield
ii. Liability Based on Thin Capitalization Thin capitalization: where corp has borrowed more money than the shareholders put into it
o Nothing wrong with the practice, BUT it is not very wise
Walkoyszky v Carlton 1966 NYCAF W hit by cab owned by D. D is stockholder in 10 corps, each of which operates only 1 or 2 cabs. Alleged that,
though independent, they are operated as a single entity and therefore all are named as defendants. Argument that multiple corporate structure constitutes unlawful attempt to defraud members of public injured by cabs
R General Rules: Though the incorporation of a company is intended to protect owners from personal liability, the protection
has limits, and therefore this veil can be pierced when necessary to prevent fraud. In determining whether liability should be extended to reach assets beyond those belonging to the Corp, must
look at whether anyone was using the corp for his own, rather than the corps, business such that he will be personally liable
Piercing the veil in this manner might be because a) the corp is a fragment of a larger corp which actually conducts the business (domination) or b) the corp is a dummy for its individual stockholders who are really carrying on the business in their personal capacities for purely personal ends
DISSENT: a participating shareholder of a corp vested with PUBLIC INTEREST, organized with insufficient capital to meet liabilities WHICH ARE CERTAIN TO ARISE in ordinary course of business, may be held personally liable
A P arguing that the corps are actually one, and therefore should not be artificially separated by the veil such that the P was limited to the small insurance taken out by each corp. Lift the veil between them, and between the corp and the person running them all, such that more money is available for grabs No evidence that D was actually doing business in his individual capacity, shuttling his personal funds in and out of the corps without regard to formality and to suit his immediate convenience therefore no perversion of the privilege to do business in a corporate form (no domination or control)Dissent: D had 20 corps with 2 cabs each and each cab had the minimum liability insurance covered required. Further, the only assets of each corp was its 2 cabs Therefore, from the beginning these corps were intentionally undercapitalized for purpose of avoiding
responsibility for acts which were bound to arise as result of operation for a large taxi fleet During the course of the corp’s existence all income was continually drained out of the Corp for the same
purpose Shareholders here should be personally liable for P’s injuries If a corp is organized and carries on business without substantial capital in such a way that the corp is likely
to have insufficient assets available to meet its debts, it is inequitable that shareholders should set up such a flimsy organization to escape personal liability
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o Attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity
o Shareholders should in good faith put at risk of business encumbered capital reasonably adequate for its prospective liabilities. And if capital is illusory/trifling compared with business being done/risks of loss, this is grounds for denying separate entity privilege
iii. Liability Based on Total Disregard of FormalityIllustrates the importance of s 10(8) naming requirement of the BCA
Wolfe v Moir 1969 ABSC F W injured while rollerblading at fun centre (Fort Whoop-Up) run by D’s company, which was created to run the
centre. D had advertised for the fun centre, but often referred to it Moir’s Sport Land in ads, rather than his company’s name (Chinook Ltd.).
R The BCA at s 10(8) requires that every company must set forth in all notices/ads/other official publications the company’s name – if you want to hold yourself out to the public without identifying the company with which you are associated, then you run the risk of being personally liable The corporate veil principle proceeds on the basis that these formalities in the BCA have already been
complied with Can’t claim the veil protection If you don’t comply with the requirements that create the veil in the first place
A In breach of the BCA formalities, no mention of the company’s name in the ads or on the ticket – therefore, cannot rely on the protections against personal liability in the BCA
Vallis v Prairie Alternative Energy Solutions Ltd 2013 SKPCF Karras was D’s President/shareholder/sole director. K entered into contract with P. P argues that K failed to
represent that his business was incorporated in emails and invoices, and therefore cannot rely on the personal liability protections.
R BCA s 10(1) requires that the word Limited/Incorporated/Ltd./Inc. be part of the name of every corporation BCA s 10(8) further requires that the corp’s name be set out in all contracts/invoices/negotiable instruments
A Nothing in their dealings that indicated K was anything more than a sole proprietor with a business name. No business name on K’s truck when he came, nor did he have business cards. And, the cheque paid to K for his services was made out to “Prairie Alternative Energy Solutions” and without the “Ltd.” at the end Therefore, P gets judgement against K in his personal capacity
Solicitors owe clients the duty to take reasonable care to avoid or minimize a foreseeable risk of harm to the client
o When a client is incorporating, the solicitor must provide advice in writing o Must therefore advise the client, in writing, of the requirement that the client has to use the
corporation’s full name on all legal documents/invoices etc and that the consequence of failing to do so is personal liability
iv. Liability in the Area of Trust LawKnowing Assistance: the defendant must have actual knowledge, recklessness, or be willfully blind to be held liable; constructive knowledge is not sufficient.
There must be a higher standard of culpability here because you are assisting and not receiving the benefit yourself. Actual knowledge is required, and thus, since the threshold to be met is harder, constructive knowledge is not enough.
o more serious charge = you need a higher threshold of knowledge required Eg. M&L were participating in the fraud too – higher charge – and so higher standard required to prove it
because the results are more damaging of finding liability court might even award punitive damages 36
Knowing Receipt: receipt of trust property for one’s own benefit. The Plaintiff must prove:
(1) Either of the following: (a) The trustee took the trust property for their own use and benefit; OR (b) The trustee had constructive knowledge that the subject of the trust was misappropriated; and
(2) An unjust enrichment.
The mental state requirement is lower than for knowing assistance because you are receiving the benefit of your wrongful actions, so there is a lower standard to find you guilty of the tort.
Constructive Knowledge: knowledge of facts sufficient to put a reasonable person on notice or inquiry.
Citadel Assurance Co v Lloyds Bank Canada 1997 SCCF DO was a trustee for P. DO deposited the trust funds at D, and DO’s parent corp instructed D to transfer money to
the parent corp to reduce its overdraft. D’s senior officers knew that trust money was held in the subsidiary’s account. But, DO failed to remit to P.
R Introduces into the idea of the corporate veil the concept of ‘knowing receipt’The degree of knowledge required of strangers to the trust should be different in assistance vs receipt cases
recipient’s liability will be recipient-based instead of fault-based, and hence is a lower standard to meet o The threshold is lower because the recipient is necessarily enriched at the plaintiff’s expense
Constructive knowledge (aka knowledge of the facts sufficient to put a reasonable person on notice or inquiry) will suffice as the basis for restitutionary liability
A stranger IN RECIEPT of trust property need not have actual knowledge of the equity in favour of the plaintiff, and notice will suffice
In these cases, relief flows from the breach of a legally recognized duty of inquiry – where a stranger to the trust, having received trust property for his or her own benefit and having knowledge of the facts which would put a reasonable person on inquiry, actually fails to inquire as to the possible misapplication of trust property again, need not have actual knowledge of the facts
A D is receiving the money, and therefore liability based on ‘knowing receipt’In light of D’s knowledge of the nature of the funds, daily emptying of the account was very suspicious, such that a reasonable person would have been put on inquiry as to the possible misapplication of trust funds o Therefore concerned with the receipt of trust property for the benefit of the D the threshold is lower for
what D knew, and thus easier to find them liable o This lower threshold of knowledge is sufficient to establish the unjust enrichment, thereby entitling P to a
restitutionary remedy (aka getting the money back)The bank should have taken steps to determine whether or not the money was being mis-appliedo No appropriate inquiries were made – the bank had constructive knowledge of the breach of the trust, and
therefore liable to P as a constructive trustee of the money Knowing receipt in order to find the fraud
Air Canada v M & L Travel Ltd 1993 SCC F D was closely held Corp, a small travel agency, which contracted with P to sell its airline tickets. Sale of P’s tickets
were to be held in trust by D on P’s behalf, then paid to P twice monthly. However, instead of using the trust account, the directors of D deposited the monies into a general operating account where funds from all sources were deposited. However, a number of bills to a bank loan were paid OUT OF this account too. D’s company went array, and P sued for payment of the balance owed by one of the director’s of D personally
I Was the director personally liable as a constructive trustee for the breach of trust by his corporation?R Corporate veil lifted between the corporation (trustee) and the corp’s director/shareholder in the case where
the corp is liable for breach of trust – the director too can be liable for the breach if they knowingly participated in a dishonest/fraudulent breach of trust
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This is again because the corporation while technically a separate entity has to to act through SOMEBODY, and if that somebody is going around committing fraud on trusts, then we are going to go after them too and not let them be protected by the veil
There are 2 types of knowledge that are used – where they know because they received trust funds, or where they know because they assisted in the breach somehow Knowing receipt : where a stranger to a trust is in receipt and chargeable with trust property and therefore
becomes personally liable to the beneficiaries as participant in a breach of trust (see previous case) Knowing assistance : where a stranger to a trust who knowingly assisted in a dishonest and fraudulent design
on the part of the trustees and therefore becomes personally liable to the beneficiaries as a participant in a breach of trust
o 2 elements: Nature of the breach of trust Degree of knowledge required of the stranger is actual knowledge, which includes recklessness
and willful blindness Note that this is a higher standard than for knowing receipt which requires only
constructive knowledge, not actual knowledgeA Question is whether the directors of D could be held personally liable as constructive trustees under the knowing
assistance head of liability for assisting ML in committing the fraud Was the breach dishonest/fraudulent?
o D was aware that the money was held in trust for P because they were parties to the contract, and therefore knew the money was not for general use of D
o D also set up a trust account but just never used it o D knew any money in its general account was subject to other bills/debts – by placing the trust money
in this general account, D took risk of its seizure to the prejudice of P, and they had no right to take this risk
o Therefore, the breach of trust by D was dishonest and fraudulent Was the breach caused by the directors?
o The Director’s stopping of payments on the general account caused P to stop receiving funds and also triggered the debt repayment to the bank loan which subsequently seized all the money available – therefore director liable for breach of trust as a constructive trustee
o Therefore directors personally liable as long as they had knowingly assisted their corporation in the breach of trust
Was there actual knowledge of the breach? o The director knew of the terms of the trust contract with P, knew the funds were being deposited in a
general account subject to other debts – they knowingly assisted in the fraudulent mixing of the fundso This is enough for actual knowledge of the breach of trust, and so the veil is lifted to find the directors
personally liable EXAM: know distinction between knowing receipt and knowing assistance, and the degree of knowledge
required H Director is personally liable for the corporation’s breach of trust, because he is a constructive trustee despite being
a stranger to the trust between the corp and the plaintiff
5. TORTIOUS, CRIMINAL, REGULATORY & CONTRACTUAL LIABILITY OF THE CORPORATIONINTROPrevious section was looking at liability based on: fault/improper conduct, thin capitalization, failure to meet the formalities in using a corporate name, and trust law
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This section will look at other avenues to liability: Contract, tort law, and oppression remedy
Corporation has all the natural powers of a natural person: can contract, be sued, and be criminally responsible – this section is about determining HOW that happens, considering that corporations are “persons” but obviously not physical tangible beings; corporations have to act THROUGH someone
o When can a corporation be found liable in CRIMINAL or TORT law for something that someone within the corporation did?
o The idea is based off the corporate ‘directing mind’ – the main case being Rhone
CRIMINAL AND TORTIOUS LIABILITYo the identification doctrine assigns primary liability in criminal and tort law — as opposed to vicarious liability — to a
corporation where the actor-employee who physically committed the crime or tort is the directing mind of it
The Rhone v The Peter AB Widener 1993 SCCF Ship was being towed by 4 tugs but collided with another vessel. Master of lead tow was found negligent. P tried
to sue the company too. Under the Shipping Act, owner of ship has limited liability in respect of act/omission in navigation where it occurs without owner’s ‘actual fault or privity’. But found company owning lead tow didn’t get this protection because Master had other duties in company and hence was ‘directing mind’, and thus acts of master were treated as acts of company, and therefore company was not ‘without actual fault or privity’
I at what point in the hierarchy of a company is the fault of a person employed in the organization to be treated as the fault of the company itself?
R Fault will be in the Corp if the person who committed the tort was a directing mind of the Corp ***EXAM: test for ‘directing mind’ of a corporation:
o The key factor which distinguishes directing minds from normal employees is the capacity to exercise decision-making authority on matters of corporate policy, rather than merely to give effect to such policy on an operational basis
o However, the doctrine will NOT extend to cases where the directing mind intentionally defrauds the corporation and when his wrongful actions form the substantial part of the regular activities of his office.
Summary: Canadian Dredge test: identification doctrine only operates where the Crown demonstrates that the action taken by the directing mind:
o was within the field of operation assigned to him,o was in fraud of the corporation, ando was by design or result partly for the benefit of the company
Note: Next section discusses Bill c-45, which removes this doctrine ONLY for CRIMINAL NEGLIGENCE within CCA Negligence on the part of a master of a ship in the performance of his or her navigational duties does not
amount to actual fault or privity on the part of a corporate shipowner must use the directing mind idea Courts have viewed masters as the “hands” of a shipping company
o That said, there exists an overall duty on a shipowner to supervise properly the navigation of its vesselso In such instances, the focus of inquiry is on whether a shipowner acted as an ordinary reasonable
shipowner in the management and control of its shipping operation (e.g., in the selection of its crew and supervision of the navigation of its vessels)
Use a “reasonable likelihood” test in determining whether the exercise of particular duty by a shipowner would have prevented the impugned damage
o While captain was part of management and a trouble shooter, one must look beyond label and consider responsibilities/functions performed by him within Corp’s hierarchy
While he had extra responsibilities over and above his usual tasks, this would be expected of someone of his tenure/experience, and did not mean he had governing executive authority over management and supervision of the Corp
He was not a directing mind, and therefore collision did not occur with actual fault/privity of
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the Corp Corp not liable
Corporate Defence to Liability Pursuant to Canadian Dredge and Dock, a corporation will not take on primary responsibility for a criminal offence in the following situations:
The individual who committed the act was not a directing mind, i.e. did not have the authority to devise or develop corporate policy, or make corporate decisions. Thus, the identification doctrine is confined to the company's executive ranks.
The directing mind acted wholly in fraud of the company, without the company benefiting from the action. This is a high standard for the defendant to meet, since it is not a sufficient defence to prove merely that the manager acted in disobedience to explicit instructions not to disregard the law.
If the court decides to not apply liability for public interest reasons (see Deloitte, below)
Since the mens rea of the directing mind will be attributable to the corporation itself, it would appear that corporate liability is contingent on the liability of at least one individual being established.
Deloitte & Touche v Livent (Reciever of) 2017 SCC F DT was hired by L to audit Corp books. DT did poor job by not detecting that L’s directors were fraudulently
falsifying books. New managers of L then found the frauds. L became insolvent afterwards. Receiver sued DT, arguing if they found the fraud, the company would have died earlier and lessened losses to shareholders. DT argues defence that L should be barred due to illegality of committing the fraud, and DT should only be liable for part due to L’s contributory fault. DT can only succeed if actions of L’s directors should be attributed to L such that L was committing the fraud
R Doctrine of corporate identification: means by which acts may be attributed to a corporation for the particular purpose or defence at issueIn order to trigger its operation and through it corporate criminal liability for the actions of the employee (who must generally be liable himself), the actor-employee who physically committed the offence must be the "directing mind"Test of corporate attribution, to attribute the fraudulent acts of an employee to its corporate employer:
1. the wrongdoer must be the directing mind of the corporation; and2. the wrongful actions of the directing mind must have been done within the scope of his or her authority;
that is, his or her actions must be performed within the sector of corporate operation assigned to himNote: test provides sufficient basis for attribution to the corporation, but does not require that liability be attributed just because the test was met – court retains discretion to not apply the doctrine where it would be in the public interest to refrain
If a professional undertakes to provide a service to detect wrongdoing, the existence of that wrongdoing will not normally weigh in favour of barring civil liability for negligence through the corporate identification doctrine
A The defence of illegality bars an otherwise valid action in tort on the basis that the plaintiff has engaged in illegal or immoral conduct and, therefore, should not recover
o Only illegal act was by directors of L in committing fraud, so in order to claim this defence against the corporation the tort must be attributed to L itself for Deloitte to get away free
o Directors were directing minds acting within sector of Corp operations assigned to them, and the fraud designed to assist L through artificial extension of its corporate life
o BUT, this is a civil suit, so court decided not to attribute to Corp – purpose of audit was to find this very fraud by the directors, so allowing D to avoid liability on the basis that individual in Corp was engaged in the action the auditor was supposed to find defeats the purpose of the audit (against public interest)
H Fault not attributed to Corp
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Statutory Criminal Liability Bill c-45 removed the identification theory – this was seen in the last section in the Livent decision. The concept
made prosecuting charges very difficult because you had to get the mens rea out of the directing mind of the corporation. The Crown would only be successful if they proved AR and MR beyond a reasonable doubt of the directing mind of the corporation
o Hence, in criminal cases, it was as if there was an extra hoop for prosecutors No longer the case; the bill expanded the means to establish liability because it axed the identification theory
and made it possible for crown to prove wanton and reckless disregard for the safety of others through the conduct of the corporate REPRESENTATIVE
o In Metron, it was the manager and a site supervisor (who wasn’t even an employee! And who was one of the victims)
o EXAM: know exactly how bill c-45 strengthened the law Metron able to be convicted because of these amendments: factors were considered cumulatively to establish
that Metron failed to take reasonable steps to prevent bodily harm, and thus had wanton and reckless disregard for the lives of others.
o The site supervisor and metron were treated as ONE for the purpose of finding Metron guilty of criminal negligence
o Suggests that not only can the senior officer impute criminal liability to a corp, if that senior officer is injured or death, that corporation can still be found negligent as a result of what he did
o Factors to consider when deciding whether the corp was guilty of crim neg. o Main principle: bill c-45 introduced much wider ambit to secure crim neg for corporation; particularly,
the identification theory is now gone o Pg 149: what crown must prove to secure conviction of a corp: that there has been wanton and reckless
disregard for the safety of others through the conduct of the corporate representative acting within the scope of their authority
Representative is defined: see back of case book: a director, partner, employee, member, agent, or contractor of an organization (therefore a very wide net); and that senior officer departed markedly from the reasonable standard of care
Senior officer defined in the criminal code: varying degrees of authority So, without bill c-45 amendments, many of the people could not meet the definition of the
‘directing mind’ of a corporation – scope largely expanded now Federal government passed Bill C-45 which significantly changed the manner in which corporate criminal negligence
could be proven under the criminal code o Most significantly, Bill C-45 amended the Criminal Code to broaden or expand the Crown’s ability to prove
criminal negligenceo Prior to the Bill C-45 amendments, in order to convict a corporation of criminal negligence, the Crown would
have to prove that the “directing mind” of the corporation showed wanton and reckless disregard for the lives or safety of other persons “identification theory”
made prosecuting charges of criminal negligence against a corporation a difficult task because it was challenging to prove that the conduct of the person or people constituting the directing mind of the corporation rose to the level necessary for criminal negligence
the Bill therefore abandoned the Identification Theory and made it possible for the Crown to prove the wanton and reckless disregard for lives or safety of others through the conduct of a corporate representative
in addition, Crown must prove a Senior Officer failed to acto the Crown now has to establish:
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1. That there has been a) wanton and reckless disregard for lives or the safety of others b) through the conduct of a corporate “representative”, c) acting within the scope of their authority, either alone or through the combined conduct of multiple representatives (“representative” is broadly defined to include a director, partner, employee, member, agent or contractor of an organization); and
2. That a “senior officer” of the organization departed markedly from the reasonable standard of care expected to prevent the representative from causing harm (“senior officer” includes an individual who plays an important role in the establishment of an organization’s policies or is responsible for managing an important aspect of the organization’s activities)
a. as exemplified by the Metron case, a “senior officer” includes management with localized authority that would likely have been insufficient for them to be the “directing mind” under the identification theory
After Metron: The Corporate Criminal Liability Landscape in Canadao Metron was found liable after a stage collapsed during construction, killing 4 workers – the Corp was found
liable in negligence for 200k fine, and the president of Metron fined 90k under the Health and Safety Acto Conduct was result of Site Manager, who was not employed by Metron directly as he had his own firm, but
hired by the Project Managero Establishing liability based on the conduct of a person like the Site Supervisor may not prove unique to
Metron It is common for organizations to have site supervisors, branch, store or plant managers, or some
equivalent position. Individuals in these roles are not typically in the upper echelons of the corporate hierarchy, but do have a high degree of responsibility and authority at a localized level.
the behaviour of people with a high degree of localized responsibility can attract criminal liability for an entire organization
o Further, Metron took some actions inconsistent with wanton and reckless disregard for lives of workerso The stage also had manufacturing problems, and but-for these problems, accident likely never would have
happenedo However, looking at the cumulative facts, conduct of site supervisor negated the positive steps Metron had
taken, and thus enough to render Metron criminally negligent Note: Criminal negligence is not established by the mere breach of a health and safety requirement
or industry standard. There must be wanton or reckless disregard for lives or safety before the departure from a legislated or industry standard becomes criminal.
o Criminal Code requires a court to consider factors that are specific to corporate defendants when determining damages, including:
any advantage realized by the organization as a result of the offence; the degree of planning involved in carrying out the offence and the duration and complexity of the
offence; whether the organization has attempted to conceal its assets, or convert them, in order to show
that it is not able to pay a fine or make restitution; the impact that the sentence would have on the economic viability of the organization and the
continued employment of its employees; the cost to public authorities of the investigation and prosecution of the offence; any regulatory penalty imposed on the organization or one of its representatives in respect of the
conduct that formed the basis of the offence; whether the organization was — or any of its representatives who were involved in the commission
of the offence were — convicted of a similar offence or sanctioned by a regulatory body for similar conduct; and
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any measures that the organization has taken to reduce the likelihood of it committing a subsequent offence
REGULATORY OFFENCESRegulatory offences do not require full mens rea – they are usually strict liability offences
In strict liability, once you establish the actus reus, there is an onus shift to the defendant to raise the defence of due diligence lest he be convicted of the offence
R v Bata Industries Ltd 1992 ONCAF Ministry of Environment went to Bata’s facility and found rusted barrels leaking toxic chemicals into the ground.
Corp AND its directors charged under the Environmental Protection Act and Water Resources Act, which create a duty on directors and officers to take all reasonable care to prevent Corp from doing activity that may result in contamination. Both the Corp itself and several directors were charged with regulatory offence
I Are the directors personally liable in addition to the corporation itself?R Both companies and directors can be found guilty
The legal standard by which personal liability of officers/directors is determined depends on the individual’s authority to control the activities giving rise to an offence, and individual’s specific responsibility for health and safety within the CorpThe 'element of control,' particularly by those in charge of business activities which may endanger the public, is vital to promote the observance of regulations designed to avoid that danger. This control may be exercised by 'supervision or inspection, by improvements of his business methods or by exhorting/encouraging those whom he may be expected to influence or control.'What is reasonable and foreseeable at a particular time and place must be measured in light of the particular industry or activity, and that determination will be made on the basis of the evidence at the trial.
The availability of the defence or due diligence to a corporation will depend on whether such due diligence was taken by those who are the Directing Mind and will of the corporation, whose acts are, therefore, in law the acts of the corporation itself. With the due diligence defence, the onus is on the accused to establish their due diligence because they have all of the knowledge
***Therefore the directing mind test goes both ways: it can establish direct liability of the corporation for an act done by its Directing Mind, or the directing mind test can establish a defence to direct liability of the corporation for acts of due diligence done by its Directing Mind
A Directors obligations under the regulatory statute: Directors have responsibility to the corporation, as well as under the legislationMr. Bata himself escapes liability. Bata took active steps to avoid this environmental catastrophe, he would make surprise visits to the factories to catch misfeasance, and he actively set up money to fight pollution. His actions were in stark contrast to the other two individuals (Marchant and Weston) who were found liable. Due diligence required them to exert a certain amount of control and to an expected standard of behaviour. see para 165Delay in cleanup showed a lack of due diligenceWeston was the on site director – had experience in these sites and was aware that toxic chemicals were being used. Failed to establish that he took reasonable careWeston knew that the toxic chemicals were being used and he should have been aware that there was a problem. As Marchant and Weston were the “Directing Minds” of the corporation, Bata Industries was also found to be liable
Page 165
R v Syncrude Canada Ltd 2010 ABPCF Syncrude had tailing ponds where birds landed and subsequently died, even though S had a bird deterrent
program. Charged for failing to properly store hazardous materials under the Environmental Protection Act and not doing enough to prevent birds landing.
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R When it comes to defending itself in a strict liability offence, the availability of the defence of due diligence to a corporation will depend on whether such due diligence was taken by those who are the directing mind and will of the corporation, whose acts are therefore in law the acts of the corporation itself
Need not show they took all steps imaginable, but just that there was a ‘proper system’ and ‘reasonable steps to ensure the effective operation of the system’
This conduct is assessed against that of a reasonable person in similar circumstances taking into account various steps such as:
o The nature and gravity of the adverse effect.o The complexities involved. o A preventative system. o The foreseeability of the effect, including abnormal sensitivities.o The alternative solutions available etc etc
A Court not saying that Syncrude must prevent ANY bird deaths to meet the onus of due diligence – not required to show they took ALL possible or ALL imaginable steps to avoid liability it need only establish it took all REASONABLE stepsDefence of DD would apply if Syncrude established on BoP that it could not reasonably have foreseen contravention of the Act and those actions must be judged on the basis of what information they had at the time The court discussed the factors that they considered with regard to whether S was duly diligent; and for the most part, S was not S had cutback substantially on the number of deterrents on the ponds. S did not have sound canons deployed on the perimeter AND they were placed their late. Court convinced BARD that cannons were not placed prior to April 20th. Due diligence does not require that S had foreseen every possible failure. This is a strict liability offence and therefore the crown must prove BARD that the defendant did the prohibited act, and the defence must then show due diligence by showing that they took reasonable care to avoid the contraventionsThey weighed what is considered reasonable steps by using the factors: Gravity of the effect: this will influence whether the efforts they took were what they reasonably were
expected to do - number of birds lost not likely to have heavy impact on the population Complexity: trying to deter birds from such a large pond under their migration path is complex – this requires
expertise and reasonable to expect that S would have access to expertise to manage the risk; yet, the team S had lacked expertise in wildlife management
Preventative system: S obliged to have a deterrent system in place and ensure its effective operation – the deterrents had been cut back on, the system wasn’t deployed in time and the team wasn’t prepared enough with equipment
Alternative solutions: compare what was done with what COULD have been done – no industry standard BUT there were some alternatives used by other companies, including earlier deployment of deterrents, more comprehensive written procedures, a team with appropriate training; S should have known about these, and they weren’t economically unreasonable
Foreseeability: only required to take steps to avoid that which is reasonably foreseeable - whether a reasonable person would have foreseen that “the circumstances that lead to the accident created a hazard requiring remedial intervention.” Yet the things stopping S from deploying sooner were reasonably foreseeable – no system for detecting the landings and no expert basis for predicting low numbers of birds would continue reasonable person would see S’s acts/omissions would cause unacceptable hazard
De minimis: used as a defence where the deviation from reasonable practice were a mere trifle, which, if continued in practice, would weigh little or nothing on the public interest, it might properly be overlooked. But, found that failure to take reasonable steps to deter birds was not trivial. 1600 birds had died after all – S’s conduct in relation to the offences was not minimal. Some birds may die, but many more will die without effective deterrence. Hence, it is not minimal
H S found guilty – fined maximum 3 million under Feds and 5 million under provincial statute
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CONTRACTUAL LIABILITYDoctrine of Ultra Vires
BCA S 16: Capacity of a corporation
(1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.
(2) A corporation has the capacity to carry on its business, conduct its affairs and exercise its powers in any jurisdiction outside Alberta to the extent that the laws of that jurisdiction permit
BCA s 17 Restriction on powers
(3) No act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only that the act or transfer is contrary to its articles or this Act.
**no longer have doctrine of ultra vires in AB as a result of s 16 and 17 of the BCA– a corp has the natural powers of a person and therefore something cannot be ultra vires just because its outside the articles
BCA s 18: No constructive notice
No person is affected by or is deemed to have notice or knowledge of the contents of a document concerning a corporation by reason only that the document has been filed by the Registrar or is available for inspection at an office of the corporation.
S 19: codifies the ‘indoor management’ rule:
A corporation may not assert against a person dealing with it that the articles have not been complied with, that a person named in the most recent filing as a director is not a director, that a person held out as a director has not been duly appointed etc etc UNLESS they have knowledge of that fact at the relevant time
o Thus, s 19 states that when you see a Corp, you can assume that its properly incorporated and has properly submitted the necessary files
Jon Beauforte (London) Ltd Re 1953 EngF The memo of association for the corporation stated that the object of the company was to carry on business as
gown makers/related activities. They started to make veneered panels w/o amending its object clause. One of the creditors supplied fuel to the company for this purpose. The company liquidates and the creditors file for proof of claim for debts owed. The liquidator rejects them on the basis that the agreement to supply fuel was ultra vires and unenforceable since it was provided for a purpose outside what the Corp was made for. The creditors appeal
R Doctrine of ultra Vires: corporation cannot do anything that is beyond their memoranda of association Note: in AB, there is no longer this restriction and thus this case is no longer good law here
Doctrine of Constructive Notice: states that all persons dealing with a corporation are deemed to have knowledge of the company’s internal incorporating documents such as their articles of incorporation, memorandum of association, or letters patent and therefore would have constructive notice that something was ultra vires the ability of the Corp
Note: this also is not a relevant doctrine anymore because of BCA s 18A The fuel supplier was deemed to know Corp’s MoA and hence that this contract was ultra vires; the fuel is going
towards making of veneered panels and making veneered panels is ultra vires because it is outside of the company’s memorandum (a public document). Thus, the company did not have to pay the fuel bill because fuel bill had constructive notice of the contract being ultra vires no longer good law because of our BCA
Communities Economic Development Fund v Canadian Pickles Corp 1991 SCCF The Communities Economic Development Fund (CEDF) is a lending institution created by statute (a statutory
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corporation) to encourage the economic development of “remote and isolated communities” in Manitoba. The Canadian Pickles Corporation, located 20KM outside Winnipeg (in Stony Mountain), was approved for a $150K loan w/ a personal guarantee by the directors. The CPC defaulted on the loan and the CEDF sued the company and the guarantor for repayment. CPC argued the CEDF could only get its power from the statute and, thus, the loan was ultra vires because Stony Mountain was neither remote nor isolated.
I What is the applicability of the doctrine of ultra vires to a statutory corporation?What is the liability of a guarantor to repay a loan which is ultra vires the lender?
R Although doctrine of ultra vires has been abolished, it may still apply to corporations created by statute!!A As a statutory corporation created for a public purpose, the appellant has only those powers which are expressly or
impliedly granted to it by statute. Acts beyond those powers will be ultra vires Court found that the loan was ultra vires the CEDF because it contravened the Act which granted it its powers Court also found that the directors not liable to pay as guarantor
CONTRACTING WITH AGENTS OF THE CORPORATIONCommon Law - Actual Authority and Apparent Authority
RECAP: Agency (Freeman and Lockyer v Buckhurst Park Properties)
Actual authority is a legal relationship between a principal and an agent created by consensual agreement between only the agent and the principal– the scope of the authority is determined by ordinary principles of construction of contracts
If an agent enters a contract pursuant to actual authority, it creates contractual rights and liabilities between the principal and the third party contractor
The contractor is alien to this agreement and may be totally ignorant of the actual authority
Apparent authority is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the “apparent” authority, so as to render the principal liable to perform any obligations imposed on him by such contract.
Here, the agent need not be aware of the existence of the representation The representation, when acted on by the contractor by entering into a contract with the agent, operates as an
estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract
Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd 1973 EnglF B worked for F as their secretary. P hires out fancy cars. B lied and said he needed the cars for company business
and to charge it to his company. He gave referees on company paper and signed off as ‘company secretary’, all while F’s managing director was away. P is now suing F for the amounts owing for the car hires. F argues B never had any authority to hire the cars because he wasn’t an agent
I Whether B was acting as an agent for F such that F is bound by the contract?R A person working for a corporation can have implied actual authority by virtue of his position to enter into
contractual agreementsA B had always signed off in his own name and P actually prefers personal sign off for insurance purposes – can they
now go against their own practice and argue that B contracted with P on behalf of F? Court says yes – looking at everything in totality, cars were hired as a result of letters which described Fidelis as
the contracting party (on F’s paper and with B signing off as part of F) therefore agreement was with the COMPANY
o Further, the secretary is an officer of the company with extensive duties and responsibilities, and not just a mere clerk. He is also entitled to enter into contracts such as this because of the entirety of his
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position as, essentially, the chief administrator. Therefore, he had actual implied authority to enter into this agreement
o Director had also represented to F that B had apparent authority – he was entitled to sign contracts, employ staff, order cars etc, all of which come within the apparent authority of a company secretary. If you employ a company secretary, you have to take the risk that he will act honestly
o Therefore, company must pay for the contracts
Freeman and Lockyer v Buckhurst Park Properties (Mangal), Ltd 1964 EnglF K made a LTD company with H to buy an estate, with K and H on board of directors. K acted, to knowledge of the
board, as managing director even though never actually appointed to that position. Without express authority of board, K hired architect firm on behalf of company to prep for the estate. Firm did the work and now claiming their fees. K could not be found. Firm claiming against the corporation now, arguing K signed it as agent of the Corp. Corp arguing he did not have the authority and they should not be bound by it
I Whether liability for fees was with defendant company, or K as an agent having authority to contract?R When considering a corporation, two factors arising from the legal characteristics of a Corporation:
1. capacity of a corporation is limited by its constitution, i.e., by its memorandum and article of association;2. a corporation cannot do any act, and that includes making a representation, except through its agentFour conditions to entitle a contractor to enforce contract against a company entered into on behalf of the company by an agent who had no actual authority to do so : 1. a representation by principal to the contractor that the agent had authority to enter on behalf of the company
into a contract of the kind sought to be enforced (apparent authority); 2. this representation was made by a person or persons who had “actual” authority to manage the business of
the company either generally or in respect of those matters to which the contract relates; 3. contractor was induced by such representation to enter into the contract, i.e., he relied on it; and 4. memorandum or articles of association do not deprive company of the capacity either to enter into this kind of
contract or to delegate authority to enter into a contract of that kind to the agento NOTE: this last one only applies against statutory corps now since the previous case abolished ultra
vires???A The Court found K did not have actual or implied authority because he wasn’t ever properly appointed as
Managing Director and therefore had never made an agreement with the agent to act this way However, K did have apparent authority. The Board knew that K was acting as the Managing Director, even
though there was no resolution giving him such power, and this granted him apparent authority because allowing him to act this way amounted to representation to contractors.
o Also, he made the contract which is the type of contract which managing director would be authorised to enter on behalf of company. The delegation of authority for this contract not prohibited by the articles of the company
Note: Doiron cases follow from the Freeman case – know the law from Freeman but don’t worry about the facts because the Doiron cases are from AB and they apply the law from Freeman in a circumstance that is realistic in Alberta
Doiron v Manufacturers Life Insurance Co (cob Manulife Financial) 2002 ABQBF Wim Demmers was agent of M. Agency agreement stated W was not employee and could not contract on behalf of
M, yet they operated in very close proximity (same office, used M’s phone line/business cards/letterhead). W began offering an investment from a financial group that he was not authorized by M to sell. W offered it to Ps, who agreed, but later it became clear the investment was a sham. D wants to sue M to get the full damages so they must show that M is liable as principal to W
I Whether W was an agent of M such that they are liable for his actions?R Agency is relationship where agent represents the principal in such a way as to be able to affect the principal’s
legal position in respect of strangers to the relationship by the making of contracts or the disposition of property
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A Court found W was independent contractor: agreement stated such, relationship was non-exclusive, and W made his money by commission, W paid for his own office/staff, and success depended only on his work
W was not officially an agent either; agreement specifically prohibited him from entering into contracts – he could only solicit products but could not actually approve them no authority to bind M to the investment with Ps
o But, did M represent to Ps that W did had such authority?o According to the test in the previous case, Ps did BELIEVE their investment was with M even though W
had no actual authority to bind M o Hence, W had apparent authority - Ps had every reason to believe that M had granted W the authority
because of business cards, contacting him by calling M, visiting him on same floor as M’s office, use of M’s letterhead this is a representation by M to the world that W was contracting on their behalf
o Though W had no actual authority to bind M, M knew of the way W represented himself as an agent of M and permitted it to create this impression. This is enough for apparent authority
compare this with the previous case. Here, the corporation represented to the 3rd party by way of having W so integrated into their business that the 3rd party reasonably believed the corporation was representing to them that W had authority even if in reality he did not
Therefore, M bound by the investment contract and thus liable for W’s actions
Doiron v Manufacturers Life Insurance Co (cob Manulife Financial) 2003 ABCAI Whether facts are sufficient for TJ to have found liability under apparent authority?R The law of apparent authority does not require an explicit representation of authority: It is found where the
principal has created a situation such that it is reasonable to infer and rely upon the apparent authority of the person Per the 4 requirements in Freeman, a mere belief on the part of a third party that he or she is contracting with
the principal, absent some representation to that effect, express or implied, cannot support a claim of apparent authority so as to bind a principal.
A M arguing that the fact that the Ps believed that they were contracting with Manulife is insufficient to bind Manulife to an agreement entered into between the Ps and an entirely different entity. Mere belief not enough
BUT, court says Ps instructed W to invest their $60,000 in a low-risk, Manulife investment product. The trial judge found that W offered them two Manulife products which they rejected because the interest rate was too low. He then suggested another investment which they accepted. They assumed wrongly it was a product of M
While W did not say it was an M investment, he didn’t say it WASN’T either – his failure is a misrepresentation that Ps were contracting with M in light of the situation created by M with the business cards/office/phone number etc and so it was reasonable for Ps to believe that W had authority based on this representation
o Even though Manulife did not make a direct representation to the Ds, the surrounding circumstances was enough provided enough of a representation to bind M***
o Given the misrepresentation as to who the principal really was and the apparent authority conveyed by M to W, TJ’s finding that M was bound by virtue of apparent authority is supportable.
o ABCA did not reverse the case because no overriding and palpable erroro **Freeman is the law and the ABQB and ABCA both approve it
Canadian Laboratory Supplies Ltd v Engelhard Industries of Canada Ltd 1979 SCCF Canlab bought platinum from Engelhard and would sell the scrap metal back to them. Cook contacted Engelhard
and said that Canlab was doing “secret experiments” to be carried out by Giles. Giles is purportedly a secret scientist working with platinum; in actuality, he is just Cook. Engelhard agreed to ship the platinum ordered by Canlab, then accept scrap returns directly from Giles, and then also pay Giles directly for those scraps. Eventually, Engelhard spoke to a purchasing agent, Snook, who held out that Cook was an agent for Canlab and who should be dealt with when addressing the ‘Giles’ customer. Canlab sued Engelhard, claiming the platinum returned by Cook still belongs to them since they bought it and never got paid for the scraps
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I Did CanLab represent to E that Cook had authority to set up the arrangement?A Essentially, Cook had stolen the scraps from Canlab, so they were out a bunch of money. They sue Engelhard for
their losses, saying they owed them for the lost platinum that Engelhard had taken back.However, Engelhard can only be liable for the sales of scrap that Canlab was not bound by – aka Engelhard will be responsible for conversion of the scrap that they got from Cook where Cook did not have the authority to give it to themEngelhard was held liable for conversion up until 1966, when Cook was held out as having authorization to purchase by another employee. The other employee kept referring Engelhard back to Cook, representing that Cook was the one to deal with the matter. Thus, this meant that Cook had been given the apparent authority to carry out the transaction. Canlab is therefore bound by the transactions and cannot sue Canlab was successful . However, the dissent is important (Laskim) because it answer some important questions
6. CORPORATE SOCIAL RESPONSIBILITY INTRO
Enlightened Self Interest o Is there really a conflict? Enlightened self interest is the belief that a person can advance their own
interests by taking steps that advance the interests of others/the community. o Enlightened self interest = you help other people because you know at the end of the day that it will be
good for yourself No formal definition of corporate social responsibility; it CONSTANTLY evolves and is situated in contemporary
needs and concerns should therefore NEVER have a strict unchanging definition o CSR is generally understood to be the way a company achieves balance or integration of economic,
environmental and social imperatives while at the same time addressing shareholder and stakeholder expectations
Synonymous with concepts such as accountability, corporate sustainability, corporate citizenship, corporate stewardship etc.
There are 2 main themes: Look to how it is defined by a range of sources of varying degrees of authority to identify common points of understanding
o Economic, social and environmental integration: what these require might depend on the type of corp (eg. Pharmaceutical vs energy) and also the geographical location (Canada vs Africa)
Small, local company will have different environment or social foci than perhaps a multinational corporation with thousands and employees and diverse operations – see pg 192
This large corporation will have a much larger sphere of influence Onus falls on the corporation to examine its “sphere of influence” in order to identify the
environmental and social issues most relevant to it The UN’s Global Impact is an initiative that asks corps to embrace, support and enact, within
their sphere of influence, a set of core values in the areas of human right, labour standard, the environment and anti-corruption
Attempts to define a corporation’s sphere of influence primarily focus on the people and situations that are in contractual economic, geographic and political proximity with the corporate enterprise
growing acceptance of the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines as the world’s benchmark for CSR/sustainability reporting. Apart from their value as a reporting tool, the Guidelines serve the useful secondary function of identifying the range of environmental and social issues that are now commonly associated with the concept of CSR.
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o Addressing and balancing stakeholder concerns: focus on stakeholders reflects idea that corps should address concerns of a broader range of persons than merely company shareholders
Shareholders, in recognition of the fact they have a direct equity interest in the company and thus have assumed a high degree of financial risk;
Other Financial Investors (e.g. creditors and financers), again because of the assumption of financial risk;
Directors and Officers, who are bound to a company via legal and contractual obligations; Employees (and their representatives, e.g. trade unions), who are inextricably linked to the
success of the company and often constitute the group that corporate policies and practices affect most immediately;
Customers, vital to a company’s wealth creation but again vulnerable to the effects of a company’s policies and practices;
Business Partners and Suppliers, groups with a commercial and legal relation to the company; The Community at Large, which stands to benefit from a company’s contribution to a local or
regional economy but, conversely, can be at risk because of its vulnerability to the negative social and environmental impacts of corporate conduct;
Eg. A company can be the main or even ONLY source of employment in a region Discretely Affected Communities, Minorities, and Individuals, such as indigenous peoples or
minorities, which may have specific vulnerability to corporate activities; Eg. In western Canada indigenous people have certain rights
Nongovernmental Organizations (“NGOs”), which are often formed to act as a voice for the community or individuals; and
Governments/Regulators, in recognition of their role as supervisory bodies of corporate conduct and as the source of subsidies and favourable tax treatment in order to encourage corporate activity within their jurisdictions and in turn to stimulate the local economy.
o CSR as a set of practices: not just about integration and addressing stakeholder concerns, but also should be viewed as a comprehensive set of practices
o Law and ethics: look both to how the law formulates the social licence that companies have been given as well as at how companies themselves formulate their voluntary ethic
**EXAM: 4 core principles define the essence of corporate citizenship:
1. Minimizing harm2. Maximizing benefit 3. Being accountable and responsive to key stakeholders4. Support strong financial results
Case Study: Talismen Energy Talismen was operating oil exploration in Sudan, and paying royalties to the government for their operations
o However, during this time there was a violent civil war going on, with the government aggressively displacing its citizens, especially where near the oil operations
Talismen was a publicly held company and therefore held annual meeting in 2000 had accusations that its Sudan project was fueling the civil war there
A shareholder proposal sought an independent audited report on Talismen’s compliance with International Code of Ethics for Canadian Business
o Alternative resolution passed instead: company had to conduct in-house, but independently audited report on compliance with the code
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o Amnesty International report in 2000 also criticized mass displacement of people from the oilfields by the government – the government was actively clearing local populations from oil-rich areas
o Talismen agreed to raise the displacement issue with Sudanese government – Amnesty later said they failed to meet their commitments and were being complicit in human rights violations
o Talismen began to argue that its influence was limited
BAD COMMUNICATION/PR TEAM; CSR; CORPS WILL BE READILY HELD ACCOUNTABLE DUE TO THE INTERNET*
Talisman was subject to strong international criticism because it was drilling oil in Sudan; public perception was that this was fueling the civil war
o Through royalties paid to the Sudan government on extracted oil and gas, it was functionally fueling the civil war (allowing the military government to keep fighting with rebel forces)
o Talismen was contributing to corporate citizenship by donating a lot to the locals; but it wasn’t enougho Various groups assert Talisman was involved with the regime, alleging that they had turned a blind eye
to a regime that violated human rights. o People in Sudan were being mistreated by the government and reportedly being displaced by oil and gas
activity o The case study indicates that in fact Talismen had become a government publicist for the Sudan and
indeed was making intentionally inadequate measures to fight human rights violations o Either they weren’t corporately responsible, OR they didn’t communicate their CSR well. Either way, it
was hurting their share prices o Both public and shareholders were angry
Talisman couldn’t recover from the criticism of its activities in Sudan and so it pulled out of Sudan altogether in 2002
o It’s the power of public opinion/public interest that precipitated this movement Talisman was sued in US under Alien Tort Statute (this allows foreigners to sue in the US for overseas violations
of human rights). It was an unsuccessful lawsuit, but public pressure mounted against Talisman operating in Sudan
NOTE: Especially with social media and the internet, corporations are going to be much more readily held to account for actions perceived to be contrary to public interest and human rights. Concern: pulling out of the consortium does little to lead the consortium to be more responsible in their operations in Sudan
This tells us a couple of thingso The use of shareholder proposals to raise corporate responsibility issues – pressure can be effective o It is extra difficult to use other mechanisms to enforce regulations on corporations when they are
international
The Body Shop: Our Values Approach Dedicated to sustainability and corporate responsibility The Body Shop was known for being very socially responsible Sustainable governance: committed to integrity and accountability in corporate affairs, including social and
environmental performance and especially animal welfare o Ongoing monitoring on policy against testing on animals
The Body Shop made a large amount of profits because of its branding and corporate social responsibility o They were selling corporate social responsibility as its product; this distinguished them in the market
But Body Shop eventually hit the skids in the mid 2000s and experienced significant losses o There were copycat stores promoting the same kind of social responsibility brand o Eventually Body Shop was bought out by L’oreal and things went downhill from thereo The decision was obviously made for profit
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o So, even though CSR is great, at the end of the day there is the business case
Canadian Ombudsperson for Responsible DevelopmentIn 2018, Global Affairs Canada, a branch of the Canadian government, announced two initiatives intended to “strengthen Canada’s approach to responsible business conduct for Canadian companies doing business and operating abroad.” The Canadian government therefore is taking CSR very seriously
Exam: know what efforts Canadian government has recently made in regards to setting up the ombudsmen for Canadian companies operating abroad in terms of their CSR and responsible development
2 tactics taken by the Canadian Government involved in international business:
1. Independent ombudsmena. Powers:
i. Sanctions (even up to getting the RCMP involved) ii. Investigation
iii. Surveillance 2. Multi stakeholder advisory government to advise the ombudsmen and the government for enterprises occurring
abroad
Canadian government therefore wanting to police Canadian businesses doing business overseas
Northern Oil Case Study By the end of this case study, students should be able to:
o Apply corporate law principles, such as directors’ and officers’ fiduciary duties;o Think like future shareholders, directors and officers of a corporation;o Develop critical thinking and problem-solving skills as they discuss whether corporate directors and
officers may consider corporate social responsibility issues such as good corporate citizenship and social license;
o Contrast the Canadian, UK and American approach to corporate fiduciary duties;o Develop clear and effective communication skills by working through these various issues in a
collaborative setting CBCA 122(1) Every director and officer of a corporation in exercising their powers and discharging their duties
shallo (a) Act honestly and in good faith with a view to the best interests of the corporation; ando (b) Exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable
circumstances. The CBCA does not define in precise terms what is meant by “the best interest of the corporation.” This has
been left to judicial interpretation. On the international level, corporate directors in the UK are required by law to “promote the success of the company for the benefit of its members as a whole” by taking into account the long-term considerations of employees, suppliers, customers, the community and the environment, among others (Companies Act, 2006, s. 172(1)). This accords with Canadian law under the CBCA.
The SCC stated in BCE Inc v 1976 Debenturholders: The court held that the directors and officers have a fiduciary obligation toward the corporation itself. BUT the “interests of the corporation” MAY include the considerations of several corporate stakeholders such as shareholders, creditors, suppliers, governments, consumers, employees and the environment
o Best interests interpreted to mean “long term interests”o If there is a conflict between the corporation, shareholders and other stakeholders, the directors’ duty is
to the corporation
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Northern Oil
Has developed a very effective technology for much more rapid reclamation of land after tailings pondso It is environmentally responsible, but also very expensiveo AB energy regulator has jurisdiction over this matter. They developed an even tougher standard than
what Northern could meet. The regulator did not enforce the standard though. The AER has been exceedingly flexible in approving the sands of Northern Oil competitors (who even blatantly admitted they would not be compliant)
Northern Oil has a sustainability committee (good CSR) and set up a working group to look at the reclamation program
o They are to consider: the cost of this expensive technology; whether there was a way to speed it up; cost cutting is a priority in the business etc
o In house corporate counsel for Northern Oil asked by a director to prepare a legal memo as to what Northern Oil should do:
Note s 122 of the CBCA regarding duties of officers Alternatively, compare with Delaware, which has an important corporate statute (Delaware has
over 60% of fortune 500 companies) – but directors of Delaware corporations had a fiduciary duties to the corporation and as trustees (but no mention of stakeholders!)
With regard to BCE Inc case, the SCC said that directors have a fiduciary obligation to the corporation, and interests of the corporation include considerations of interests of several other stakeholders. In the event of conflict, they must consider the corp first
The concept of social licenseo As part of the working group, there are 3 options:
Increase the spending on the technology – shows company as good corp citizen and a champion of environmental reclamation (great for corp image); but this will be very costly
Scale back the technology – regulator is flexible and won’t enforce high standards; corp profits will go up
Leave the technology program as it is o So what should NO do?
Look at each of the 3 options in light of CSR concepts
Re Varity and Jesuity Father of Upper Canada et al 1987 ONCAF 2 shareholders of Varity, a Canadian federal company, proposed that the company end its investments in South
Africa in order to compel the gov to end apartheid (which was hugely controversial in the ‘80s), and to end the participation of Canada (Canadian gov is shareholder) in supporting SA’s government. Varity requested to omit this proposal in mailings to shareholders.
R S 136 of BCA provides that the shareholders may require the company to circulate proposals and supportingStatements; but S 136(5)(b) provides that a corporation is NOT required to comply with a shareholder’s request if:it clearly appears that the proposal is submitted by the shareholder primarily for the purpose of enforcing a personal claim or redressing a personal grievance against the corporation or primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes
A Shareholders argue corp is statutorily required to circulate their proposal, which stated that corp should pull out; and should publicly announce to SA government that they planned to leave South Africa ASAP
o Tried to frame it as being only specific to Varity in SA; that most shareholders don’t attend meetings so obstacles in reaching shareholders; and apartheid contributes to unstable and undesirable business climate
Varity applies for the exemption and argues that the proposal is primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes and in particular the abolition of apartheid in SA
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Reading the proposal, the court finds that its specific purpose is to eliminate apartheid in South Africa The legislation makes it clear that if the primary purpose is one of those listed, however commendable either
the specific or the general purpose may be, the company cannot be compelled to pay for taking the first step towards achieving it. The primary purpose of the proposal is abolition of apartheid in SA. In other words, the company cannot be compelled to distribute the proposal
Stam: argues court misread and that really the shareholders were only wanting to have Varity withdraw, and NOT to end apartheid in SA. Decision was incorrect, and likely would not be decision of court today given amendments and the notion that Directors owe the duty to the corp but that there are other stakeholders (which could mean the people in SA living under apartheid). The shareholders never even got a chance to LOOK at the proposal – they might have voted it down, but who knows since they couldn’t see it
Tarnopolsky J.A., dissenting, is of the view that the issue of apartheid in South Africa and its nefarious effect on investment in that country by the respondent cannot be a “general” economic, political, racial, religious, social or similar causes; it must be considered “specific” in the sense of being “exact” or “particular” as opposed to “general” in the sense of “universal” or “unbounded”
Dodge v Ford Motor Company 1919 Michigan Sup CtF Henry Ford was founder and ran the Board of Directors. Directors regularly declared cash dividends to
shareholders, and special dividends for 4 years. F wanted to end special dividends (but keep regular ones) and reinvest in company instead to increase employment + lower price of cars so all citizens could afford them. Ford had huge surplus
R The difference between an incidental humanitarian expenditures of corporate funds to employees like the building of a hospital for their use and the employment of agencies for the betterment of their condition, and a general purpose and plan to benefit mankind at the expense of others, is obvious.
A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes.
A Ford lost and was directed to pay the special dividend ***this case is saying that it is the profit that the corporation must devote itself to – that is the one real objective of the corporation; money making is the goal and ultimately delivering a profit to the shareholders. *In today’s world: likely would not be decided the same way in light of CSR – there are 2 conceptions of CSR (social entity corporation vs property conception)
7. CORPORATE GOVERNANCE directors are given the task of operating the business and affairs of the corporation by the BCA and are elected
by the shareholders. BCA imposes certain qualifications on directors before they are eligible to take office. directors owe a duty of care, skill and diligence and hold a fiduciary position with respect to the corporation directors may also be personally liable for torts committed while conducting the affairs of the corporation
Key Provisions
s 6(1)(d) 101(a) and (b) basket clause and required number of directors 105 Qualifications of Directors
o A Director cannot be a corporation, a minor, a bankrupt, of unsound mind, etc o A Director must be a “Individual” – a flesh and blood person.
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o 25% of the Directors must be Canadian residents (section 105(3)). o Must consent to be a Director. o Note: A similar “Qualification” section isn’t applicable to SH; it’s a lot easier to be a SH than a Director.
This is because Directors are actively engaged in managing the corporation 106 Election and appointment 108 ceasing to hold office (removal) 109 removing a director 111 directors can fill vacancies with another director 115 directors can appoint one of them to be a managing director 118: director liability 119: liability for wages 122: statutory duties of directors
o (a) act honestly and in good faith with a view to the best interests of the corporation, o (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances
INTROPrinciples of Corporate Governance Pgs 221-222 where there is a list of guiding principles
Comparison of Public Companies and Closely Held Corporations
Note: restriction on share transfers = what the USA is meant to outline
Note: partnerships and small closely held corporations often look like, hence why their shareholders might consider themselves partners
STATUTORY DUTIES OF DIRECTORS AND OFFICERS Directors’ Duties and the Business Judgment Rule
Two distinct duties established by s 122(1):
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Fiduciary duty: act honestly and in good faith with a view to the best interests of the corporation Duty of Care: exercise the care, diligence, and skill of a reasonably prudent person in the circumstances
Peoples Department Stores Inc (Trustee of) v Wise 2004 SCCF P and W were department stores. W acquired P from its parent; formal share purchase agreement drawn up and
executed. P was then a subsidiary of W, and created strategy to address inefficiencies arising from consolidation [tough economic era when Walmart came to Canada]. Directors of P had inventory procurement policy where P made all purchases from North America and W from overseas; except 82% of total inventory was purchased from North American suppliers, resulting in P extending a trade credit to W. W and P went bankrupt as a result and bankruptcy trustee argued the strategy had favoured W to detriment of P’s creditors in breach of Director duties under CBCA
I Whether directors owe a duty to creditors under CBCA/ABCA s 122?R Under s 101 ABCA (the basket clause), considerable power over deployment and management of financial, human
and material resources is vested in directors and therefore, they are imposed with 2 duties 122 (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall(a) act honestly and in good faith with a view to the best interests of the corporation This is the statutory fiduciary duty/duty of loyalty this duty imposes STRICT obligations
Note: best interests of the corporation does not include interests of creditors although directors must consider the best interests of the corporation, it MAY also be appropriate, although not mandatory, to consider the impact of corporate decisions on shareholders or particular groups of stakeholders
Directors are obligated to: 1. avoid conflicts of interest, 2. not ABUSE their position for personal gain,
a. NOTE – directors may also be liable for gains as a result of their position EVEN IF its not at the corporation’s expense
b. NOTE – in some cases, directors may innocently benefit from gains made by the corporation (for example, if they’re shareholders, or compensation for being directors)
3. must maintain confidentiality of info they acquire due to their position; and 4. must serve the corporation selflessly, honestly, and loyally
Note: there are alternative actions that shareholders can take against directors: s 240 (derivative action) or an oppression action where they can sue directors for conduct that is oppressive or unfairly disregards their interests. In light of the availability of the oppression remedy, stakeholders have other remedies and there is no need to read the interests of creditors into the duty contained in s 122 (1)(a).
and(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances this is the duty of care
imposes a legal obligation upon directors and officers to be diligent in supervising and managing the corporation’s affairsNote: the 2 duties are distinct and designed to secure difference ends
Does not specifically refer to an identifiable party as the beneficiary of the duty (as s. 122(a) does in stating that the duty is owed to the corporation)
Court says that since its more open-ended, appears obvious that this duty of care includes creditors
Business Judgement Rule: Because of risk of hindsight bias, rule of deference to business decisions; As long as the directors have selected one of several reasonable alternatives, deference is accorded by the courts to the decision – act reasonably + prudently and need not have acted PERFECTLY
A While some mistakes may have been made, W had made honest, good faith efforts to redress corporation’s financial difficulty and had acted prudently and on a reasonably informed basis in exercising judgement – thus
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directors not in breach of s 122 Even though they derived an indirect benefit, that lack of and dishonesty or fraud on their part means that they did not breach the fiduciary duty Note: only the beneficiary of a fiduciary duty can enforce the duty – ie. The corporation is the one who has to enforce the s 122 duty against directors, NOT stakeholders remedies should have therefore been sought under derivative or oppression instead of bringing an action based on s 122(1)(a) and (b) use derivative action to enforce s 122 and oppression where there is some prejudicial effect on the shareholder
H In the absence of evidence of a personal interest or improper purpose in the new policy, and in light of the evidence of a desire to make both W and P “better” corporations, the directors did not breach their fiduciary duty under s. 122 and their decisions are protected by the Business Judgement Rule
BCE Inc v 1976 Debentureholders 2008 SCCF There was a proposed leveraged buyout of all BCE shares (leveraged buyout = borrowing money for the purchase).
Bell Canada, a wholly-owned subsidiary of BCE, agreed to guarantee the $30B of the debt BCE would incur to support the purchase. Bell’s debentureholders (D) resisted because, they argued, Bell Canada’s increased liability would downgrade the value of their debentures, while conferring a benefit on the shareholders by way of an increased premium. The debentureholders claim that the Director’s breached their fiduciary duty to Bell Canada by approving the sale. They sought relief under the oppression section
I Did the Directors breach their fiduciary duty, in particular the ‘fair treatment’ component?R Under s 122(1)(a): In considering what is in the best interests of the corporation, directors not required to but MAY
look to the interests of other stakeholders such as shareholders, employees, creditors, consumers, governments and the environment
Remedies for shareholders and stakeholders:1. Derivative action: If you think the directors are not acting within corp’s best interests, you can sue them
via derivative action in the name and on behalf of the corp 2. Normal lawsuit under s 122(1)(b) – civil suit for a breach of duty to care (must still establish a DoC tho)3. Oppression action under s 242: grounded in the common law and endorsed by the BCA, is a s. 242 action
for oppression. Unlike the derivative action, which is aimed at enforcing a right of the corporation itself, the oppression remedy focuses on harm to the legal and equitable interests of stakeholders affected by oppressive acts of a corporation or its directors. This remedy is available to a wide range of stakeholders – security holders, creditors, directors and officers
4. Note: s 192 (not in ABCA?) and not a remedy per se buuut see page 242/235 for the elements of this as well
Business judgement rule: the duty of the directors cannot be confined to particular priority rules, but is rather a function of business judgment of what is in the best interests of the corporation, in the particular situation it faces. Under the business judgment rule, deference should be accorded to business decisions of directors taken in
good faith and in the performance of the functions they were elected to perform by the shareholders If directors take due consideration to competing views of multiple stakeholders, they will not be held liable for
decisions that prejudice some stakeholders’ interests at the expense of others A the fact that the shareholders stood to benefit from the transaction and that the debentureholders were
prejudiced did not in itself give rise to a conclusion that the directors had breached their fiduciary duty to the corporationdebentureholders failed to establish oppression – the directors made an informed decision after weighing optionsUnder the BJR, deference was given to the directors
Smith v Van Gorkom 1985 US application of business judgement rule F Van Gorkom is CEO of Transunion and called a meeting of its Directors to discuss a cash-out merge of T with
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another company. The offer was tie limited. The Board voted to put the offer to SH w/o: asking about how the price was reached ($55/share or investing value of TransUnion) OR reading the merger agreement. The majority of SH vote in favor of accepting the offer. Other SH sue to rescind the agreement
R The business judgement rule is the offspring of the fundamental principle in the basket clause (s 101) that the business and affairs of a corporation are managed by or under its directors. In carrying out their managerial roles, directors are charged with an unyielding fiduciary duty to the corporation (though the duty is owed ONLY to the corporation, the directors CAN CONSIDER the shareholders, though the duty not ultimately owed to them) – this BJR exists to protect and promote the full and free exercise of managerial power granted to directors
The rule is a presumption that the corp acted on informed basis and in the good faith and honest belief that the action taken was in best interest of the corp
To rebut this presumption, the party attacking the board decision must show that the judgment was not informed
o Directors must show the care/diligence/skill of a reasonably prudent person - Business Judgment Rule does not protect against those who have failed to inform themselves
A On the basis of the info reasonably available to the Directors at the time of the judgement, the directors did not make informed decisions in agreeing to the merger; they were grossly negligent for failure to inform themselves
The directors (1) did not adequately inform themselves as to Van Gorkom’s role in forcing the “sale” of the Company and in establishing the per share purchase price; (2) were uninformed as to the intrinsic value of the Company; and (3) given these circumstances, at a minimum, were grossly negligent in approving the “sale” of the Company upon two hours’ consideration, without prior notice, and without the exigency of a crisis or emergency
o They based their decision primarily on the representations by Van Gorkom – they had no documentation before them to support those representations, not even the merger agreement
o Considering all of the surrounding circumstances–hastily calling the meeting without prior notice of its subject matter, the proposed sale of the Company without any prior consideration of the issue or necessity of it, the urgent time constraints imposed on signing, and the total absence of any documentation whatsoever–the directors were duty bound to make reasonable inquiry of Van Gorkom
Directors' Duty of Care after Peoples: Would it be Wise to Start Worrying about Liability?
The Peoples case proposed a more robust role for the duty of care in corporate governance, while also reaffirming the importance of deference to directors’ decisions through the business judgement rule
Scope of the duty of care: o With respect to fiduciary duties, the Supreme Court set aside the traditional interpretation of the "best
interests of the corporation", which gave primacy to shareholders' interests Although directors are allowed to consider the interests of shareholders and stakeholders in
pursuing this objective, the Supreme Court ruled that it is not appropriate to permit directors to favour one group of stakeholders
directors continue to owe their fiduciary duties to the corporation whose interests "are not to be confused with the interests of the creditors or those of any other stakeholders"
Court recognized nonetheless that directors could be held accountable to creditors. The proper accountability mechanisms are however the oppression remedy and the statutory duty of care, NOT the fiduciary duty.
Fiduciary Duties Taking Corporate Opportunities
Cooks v Deeks 1916 PCF There are 4 Directors of TCC. They were trying to get rid of Cook (1/4 of the Directors). They prevent TCC from
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bidding for a contract and, instead, they bid successfully for the contract themselves. Cook finds out and sues for a declaration that any benefit the Directors receive should be held in trust for TCC, aka that it was also held in trust for him. Directors who did this were the major SH, and held a SH meeting saying it was OK.
I Were the Directors’ actions wrong? Did the SH meeting insulate them from liability? R illegitimate diversion of a corporate opportunity: If you assume the complete control of a company’s business,
you are not at liberty to sacrifice the interests which you are bound to protect. Also cannot divert business that should belong to the company to your own benefit, while ostensibly acting for the companyDirectors cannot pursue interests of their own at the expense of the corporation. Subsequent ratification by a vote of the SH will NOT validate a breach of this fiduciary duty. Directors must disclose their interest and receive proper approval from the Board in order to take a maturing corporate opportunity.
A The profits were to be turned over – the directors were in breach of their fiduciary duty to the corporation by giving a business opportunity that belonged to the corporation to their new companyThe “vote” they conducted was a fraud on the minority – it cannot save them because it was oppressing Cook and was a gift to themselves
Canadian Aero Service Ltd v O’Malley 1972 SCCF Can Aero does a mapping project. O’Malley and Zarzycki are Directors and Officers of CA. CA sends Z to Guyana to
do background work in preparation for the bid. OM and Z resign from CA and set up Terra Developments. TD and CA both bid for the mapping contract and TD wins. CA sues OM and Z for breach of fiduciary obligation
I What was the relationship of Ds to C, did they owe C any duties, did they breach these duties, and what is the liability for the breach?
R directors owe their corporations fiduciary duties; but these duties, except in so far as they depend on statutory provisions expressly limited to directors, also apply equally to any officials of the company who are authorized to act on its behalf, and in particular to those acting in a managerial capacity
STRICT AND RIGOROUS APPLICATION of these rules in recognition of the degree of control these individuals have
“corporate opportunity doctrine”: a director or a senior officer is precluded from obtaining for himself, either secretly or without the approval of the company, any property or business advantage either belonging to the company or for which it has been negotiating; ESPECIALLY if director or officer participated in the negotiations on behalf of the company.
o Though reaping profit at company’s expense is adequate to hold them accountable, liability to account does not depend on proof of an actual conflict of duty and self-interest: may be situations where a profit must be disgorged even if it wasn’t at the expense of the company, on the ground that a director must not be allowed to use his position to make a profit even if it was not open to the company to participate in transaction (example; by reason of legal disability)
ALSO need not show that corp would have actually gotten the contract but-for director’s breach because the corp is entitled to compel the faithless fiduciaries to answer for their default according to their gain
Test: Does the opportunity belong to the corporation:1. Nature or Strength of Corporation’s Interest:
Maturity – how much did the corporation invest into the opportunity? Specificity – was this something the corporation was going after, or was it a general opportunity? Significance of the Opportunity – not a big project, less likely to find a breach. Public or Private Opportunity – is the opportunity publicly available? If yes, then it is less likely that
there was a breach of duty Rejection – was their bid already rejected?
2. Relationship of Fiduciary to the Opportunity: Position of Fiduciary – the higher up the corporate chain you are, the more likely the court will find
you breached your FD.
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Relationship between Fiduciary and Opportunity – was this in an area they were responsible for? Knowledge as a Fiduciary – how much did they learn from the opportunity because of their role w/
the company? Use of Position – did they build a knowledge base and transfer it over? Time After and Circumstances of Termination – why did they leave and how long ago? Years ago
less likely to find breach of FD. Retired less likely to find breach of FD vs resignation
Cannot renounce your fiduciary duty at will by termination of employment: Precluded from diverting business for himself even after his resignation where the resignation was prompted/influenced by a wish to acquire for himself the opportunity sought by the company, or where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired
DAMAGES: claim for damages related only to the loss of the contract for the project; also suggested holding the directors’ side corporation as a trustee for Plaintiff Corporation in respect of the execution of the contract
NOT a condition of recovery of damages that Plaintiff Corp establish what its profit would have been or what it has lost by failing to realize the corporate opportunity in question – even if it could not have gotten the opportunity anyway. It is entitled to compel the faithless fiduciaries to answer for their default according to their gain. The damages awarded may be viewed as an accounting of profits or, what amounts to the same thing, as based on unjust enrichment
A TJ found Ds to be mere servants but erred - Although they were subject to supervision of the officers of the controlling company, their positions as senior officers of a subsidiary, which was a working organization, charged them with initiatives and with responsibilities far removed from the obedient role of servants
Thus, they were in a fiduciary relationship with the corp, which required of them loyalty, good faith and avoidance of a conflict of duty and self-interest
Court decides that it is unnecessary for them to look at substantial resemblances between reports made pre- and post- termination – what matters is that the project pursued in personal capacity was the same pursued by the corp
Further, it does not matter what Ds new company was incorporated for as honesty of purpose is no more a defence in that respect than it would be in respect of personal interception of the contract by Ds
They took an improper opportunity of their positions within the corporation and thus breached their fiduciary duty to the corp
Damages: entitled to compel the faithless fiduciaries to answer for their default according to their gain
Matic et al v Waldner et al 2017 MBCAI What constitutes a fiduciary duty?R The duty to avoid conflicts of interest with the corporation includes not only the director’s personal interests,
but those of any other corporation in which the director is interested The obligations required by the fiduciary duty of a director or officer will vary with the factual context “corporate opportunity doctrine”: in order to find that D took an opportunity in breach of fiduciary duty,
must determine whether opportunity ‘belonged’ to the corp, and there are various overlapping tests:o (1) The “interest or expectancy” test, which precludes acquisition by corporate officers of the
property of a business opportunity in which the corporation has a “beachhead” in the sense of a legal or equitable interest or expectancy growing out of a pre-existing right or relationship;
o (2) the “line of business” test, which characterizes an opportunity as corporate whenever a managing officer becomes involved in an activity intimately or closely associated with the existing or prospective activities [of] the corporation; and
o (3) the “fairness” test, which determines the existence of a corporate opportunity by applying ethical standards of what is fair and equitable under the circumstances
factors to consider: o factors given in above case + The manner in which the opportunity came to the knowledge of the
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director is not determinative, but is a fact to be taken into account as part of the contextual analysis
o the maturity of the opportunity; whether it was actively pursued by the corporation; whether the corporation was capable of taking advantage of the opportunity; whether the opportunity was in the corporation’s line of business or a related business; how the opportunity arose or came to the attention of the director; whether the other directors of the corporation had knowledge of the director’s pursuit of the opportunity; and whether the other directors gave their fully informed consent to the director’s pursuit of the opportunity.
o note: the corp need not be actively pursuing the opportunity and opportunity could even be merely potential and not yet matured, because strict ethic shall be imposed as stated in Canadian Aero Service
Defences: if the person in the fiduciary position made the profits with the knowledge and consent/approval of the company then they are okay
Self-Dealing Transactions: Common Law
2 kinds of conflicts arise under s 120 o Direct conflict
When director is a party to the material contract (as in Beatty)o Indirect conflict
When the director is NOT a party to the contract but has a material interest in a party that is a party to the contract (alleged in Dimo)
Material interest = a) financial; or b) relationship or emotion based MAYBE? Section 120 requirements under the ABCA include:
a. disclosure in writing/minutes under s. 120(1) and followingi. see too: s. 120(7): disclosure via general notice
b. approval by the appropriate bodyi. s. 120(6)
ii. s. 120(5).c. proof that contract is fair and reasonable at the time it was approved per s.120(8)
If s. 120 requirements are complied with, contract is insulated from attack on the basis of self- dealing under s. 120(8), and are not voidable
BUT if there is a failure to comply, court has jurisdiction under s. 120 (9) to set aside the contract on any terms that it thinks fit or require an accounting or both contract is VOIDABLE
s. 120 (8.1): the whoops provision – 8.1 says too that if D acted in good faith and honestly, maybe still safe
Aberdeen Railway Co v Blaikie Bros 1843 EnglF Aberdeen entered into a contract to purchase chairs from Blaikie Bros., a partnership. At the time, a director of
Aberdeen was also a member of the partnershipI Is this a self-dealing contract such that there is a conflict of interest? Is it voidable at the request of Aberdeen?R Directors are the bodies that manage the affairs of a company, and since a corporate body can only act through
agents, the duty of those agents is to act to best promote the interests of the corporationThese agents have fiduciary duties and it is a rule that no one with that duty is allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with the interests of the Corp
Strict adherence to this principle; court will thus give no weight to the fairness or unfairness of a self-dealing contract
REMEDY: ***If a contract is found to be self-dealing it is voidable at the option of the corporation*** A As director, B was duty bound to make the best bargains he could for the benefit of the company – while he was in
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this position, he entered into a contract on behalf of the company with his own firm for purchase of chairs at a stipulated price. His duty to the company imposed on him the obligation of obtaining the chairs at the lowest possible price. His personal interest would lead him in an entirely opposite direction, inducing him to fix the price as high as possible. It does not matter that B was only one of a board of directors – he had the duty to give the co-directors full benefit of all the knowledge and skill he had on the matter. He put his interest in conflict with his duty
H Yes – contract voidable at A’s application. There was a conflict of interest (cannot be on both sides of contract without informing of an interest as a result)
North-West Transportation Company Ltd v Beatty 1887 PC F One of the directors was sole owner of a steamer, which he sold to the corporation. He had vast majority of the
shares. At meeting, shareholders voted and agreed that the company would buy it. A shareholder not present at meeting then sues to set aside the sale, arguing director’s sale of his own boat to the corp was self-dealing
R a director of a company is precluded from dealing, on behalf of the company, with himself, and from entering into engagements in which he has a personal interest conflicting, or which possibly may conflict, with the interests of the Corp
If majority of shareholders approve though, then it will be binding on the minority Any such dealing or engagement may be affirmed or adopted by the company, provided such affirmance
or adoption is not brought about by unfair or improper means, and is not illegal or fraudulent or oppressive towards those share-holders who oppose it
A Normally, any deficiency of the position of the director would have been remedied by the fact that the shareholders voted and resolved to buy the steamer – but here it is complicated by the fact that D was not only director and owner of the steamer, but also the majority shareholder – he had also transferred shares to 2 others such that they were elected directors. Between the 3 of them, the three defendants were in a position to carry anyresolution or to pass any by-law upon which they were agreed
Therefore, the majority of votes in favour of the confirmation of the by-law was due to the votes of the defendant himself
the contract entered into by the directors before the meeting could not have been enforced against the company at the instance Beatty, but it was within the competency of the shareholders at the meeting of to adopt or reject it. SHs adopted it by a majority and this must prevail unless the vote was brought by unfair/improper means
the impropriety alleged is that B had majority voting power to ratify a contract he and the other directors entered into - But the constitution of the company enabled him to acquire this voting power; there was no limit upon the number of shares which a shareholder might hold, and for every share he held he was entitled to a vote
o D was acting within his rights in voting as he did, and the exercise of his voting power was not so oppressive as to invalidate the purchase – no unfair or improper means that would invalidate the ratification
***likely decided differently now though in light of s 120 in the ABCA
ABCA s 120: conflict while someone is a director very important section!
Key points: know laskin’s comments in Canero + the concept of fidcuary duty can extend to after the relationship is over!! 3 variations of the corporate opportunity doctrine; key question at the end of Matic is:what opportunities fairly belong to the corporation (use Laskin’s factors + you’ll know it when you see it); s 120 codifies these cases. Note hat Abderdeen and North-west cases would not happen today by virtue of s 120
The corporation can make application to have the contract set aside and have the director to account to the corporation
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Dimo Holdings Ltd v H Jager Developments Inc 1998 ABQBF M is a director of H Jager and his wife the sole director/shareholder of Dimo. Dimo lent Jager money for a project
that was a disaster, and sued Jager to recover. Jager asked for order setting aside the judgement, alleging its director had material interest in Dimo and was required to disclose interest – by failing this, the contract should be set aside.
I Does M have a material interest despite not being a director or shareholder of Dimo? R S 120 requires a director of a corporation who is a director or an officer of or has a material interest in any person
who is a party to a material contract, to disclose in writing to the corporation the nature and extent of his interest“material interest” is a broad concept that denotes a financial interest, but to be material must be significant.
The term would include a material beneficial interest, possibly it would even include an interest in which an individual could exercise discretion or control over sufficient shares so as to affect the financial outcome of a company
material interest is not defined, but it is obviously not ‘marriage’If director fails to disclose his interest in a material contract, a Court may set aside the contract on any terms it sees fit. The section is permissive and the remedy, if any, is discretionary.
s 120(9) allows court to set aside a transaction on the basis of non-disclosure of a material interest. (8) then gives guidance as to what circumstances would set aside the contract under (9);
A The fact that M acted as an intermediary in this transaction, and as a trustee for the receipt of funds, does not automatically mean that he has a material interest in Dimo. Frequently funds are paid to intermediaries, such as solicitors in trust for a party, and that hardly qualifies them as having a material interest
People are permitted to structure their financial affairs. There are no allegations of fraud and no evidence that this structure was created to defeat Jager’s rights. According to the facts, M has no financial interest in Dimo.
M’s wife is his associate and the ABCA acknowledges that in CERTAIN circumstances, disclosure is required – but s 120 only requires MATERIAL interests, not mere associates. Moeller had no material interest in his wife’s company, Dimo, and therefore was not required to disclose
o She was the sole shareholder, director and officer – he played no part in Dimo apart from being married to her. If he had been a director of Dimo then yes, he would have had to disclose to his own corp because that would likely be a material interest. But the fact that simply by virtue of being married to Dimo’s owner, and maybe gets some down stream benefit (eg. she uses the profits to buy a new couch) is not enough to rise to the level of a material interest
Note: Even in the absence of an enforceable contract, Jager is obligated to pay under unjust enrichment. There are 3 tests of unjust enrichment: enrichment of D, corresponding deprivation of P, and no juristic reason for the deprivation
H M did not have a material interest in Dimo
Zysko v Thorarinson 2003 ABQBI what counts as a material transaction under the ABCA?R In the context of conflict of interest contracts, the meaning of “material interest” is conditioned by the purpose
behind the section: to identify those negotiations in which a corporate manager’s ability to bargain effectivelyon behalf of the corporation may be inhibited by some interest he has in the other side. Any personal relationship or monetary interest he may have in the other side that might be thought to be an
inhibiting factor is a material interest if disclosure of the relationship or interest might be relevant to the corporate decision whether to involve the particular manager in the negotiations.
Whether to participate in a proposed contract is a corporate decision and the corporation is entitled to full disclosure from its fiduciaries of all facts that might affect that decision.
If the director or officer has the ability to cause the person in question to enter into the contract with the corporation, the director has a “material interest” in the transaction The conflict of interest is clear and the nature of the circumstances must be disclosed.
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o If you have control over it, even if you have no personal or financial interest, it can still be a material interest
o the term “material” is a question of fact that extends beyond the more commonly held notion of financially material.
rule of thumb: there should be disclosure whenever the director or officer’s involvement might be relevant to the corporation’s decision-making process (corporation would undertake additional due diligence to determine whether the contract or any of its terms is truly in its best interest or if it would assign another director or officer to handle the negotiations)
A this case pushes the law a little further. Case quotes Dimo when looking at the notion of what is material – we know that merely being married is NOT what we mean by material.What defines material? The term is not defined, and it denotes financial interest, but to be material it must be more than insignificant. Here, the court goes further and states that material is a question of fact that extends the more commonly held notion of financially material. If there is a possibility that director could benefit from the contract more than de minimis, disclose it. See rule of thumb, above: pushes this beyond “financial”
Competing Director
London and Mashonaland Exploration Company, Limited v New Mashonaland Exploration Company, Limited 1891 EnglF Companies were rivals and plaintiff passed resolution appointing LM as director and chairman. They allege LM
accepted and approved of a prospectus privately circulated where his name appears as director and numerous applications for shares were received upon faith of such prospectus. Later, prospectus by D with LM’s name circulated. LM had never acted as director for P and never agreed to not become director of any similar company
A There was no suggestion of breach of fiduciary duty, conflict of interest, or any fraud. No case had been made out that LM was about to disclose to the defendant company any information that he had obtained confidentially in his character of chairman. No sufficient damage had been shown, and no case had been made for an injunction: the application was wholly unprecedented, and must be dismissed with costsBUT what might a court do nowadays? see Sports Villas case
Sports Villas Resort, Inc (Re) 2000 NFCAF D was a director/SH of SP who owned golf course facility. D informed other directors that he was managing/had
shares in another company that wanted to open a golf course elsewhere in Nfld. Directors want to disqualify D as a director because of he has ownership interest in competitor and allege appropriation to his own benefit of corporate information and opportunity belonging to Sports Villas
R Fiduciary duty does NOT preclude membership on boards of multiple companies Must look at particular facts of the case; the fiduciary duties of a director are not intended to act as a “straightjacket” A Director MAY, in some cases, engage in a competing business, but their fiduciary obligations still require
avoidance of actions which would come into conflict w/ the interests of the business.o If no evidence that other corp is in direct competition w/ existing business, then no breach of their
duty can be found. The court considers whether there is actually the presence of a competition In the public interest to allow business people to be involved in business and be directors without casting in
their way obstacles beyond those necessary to assure fair and honest dealings with companies whose affairs they direct (the “straightjacket”)
A There was no evidence that D did anything improper that would reflect a breach of his fiduciary duty. He had not used any confidential information, there was no evidence of direct competition. Further, D found out about this opportunity through a private channel and not through his employment as a DirectorCompetition argument; the corporations are not in competition - Corporate fiduciary duty doesn’t prevent one from having multiple memberships on the boards of different
corporations
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- Directors shouldn’t place themselves in positions of potential conflict between corporate fiduciary duties and own personal interests
o BUT, societal interest in not applying standard beyond what’s necessary to meet that end - Factual context:
o The distance between the courses: In this case, the golf courses are 266km away – they’re not competing.
o Minimal negative impact is expected from he opening of the new golf course o No direct competition – very different clientele pools
Proprietary interest argument - If the contemplated scope of Sport Villas’ activities had been to acquire all future golf developments, the
argument might hold that Dobbin took an opportunity belonging to Sports Villa and was in conflict o However, there’s no evidence that Sports Villas intended to acquire all future golf developments o Also, no evidence that Dobbin took any information, confidential or otherwise
- Corporate opportunity o The opportunity to open the new golf course was something that came to Dobbins as an individual, not
within his role of director of Sports Villas o No evidence that Dobbin took a maturing corporate opportunity that was the target of Sports Villas
H No conflict here between director of one company and director of another
Summary of principles looked at thus far:
Directors have duties directors are not the agents of the shareholders. The directors have absolute power to manage the affairs of the
company even if their decisions contravene the express wishes of the majority shareholder acting in the best interests of the company does not necessarily mean that the directors must act in the best
interests of one of the groups protected; There may be a conflict between the interests of individual groups of shareholders and the best interests of the company
If the directors have unfairly disregarded the rights of a group of shareholders, the directors will not have acted reasonably in the best interests of the corporation and the court will intervene
The court looks to see that the directors made a reasonable decision not a perfect decision; as long as decision is one of a range of reasonable decisions, the court will give deference
Takeover Bids and Defensive Tactics by Management
Hostile takeover: one company comes in and offers large sum of money to take over a company, and usually the management is replaced. Thus, management not fond of this, as they may find themselves in a situation where it is difficult to act in the best interests of the corporation because they face losing their job. Often in these scenarios then, the management will set up a special committee to review the terms of the supposed hostile takeover.
A common method used to alleviate concerns that a conflict of interest exists between directors, who may be major shareholders, and the interests of a minority or non-voting group of shareholders, is the creation of a special committee from among the independent members of a board who do not have a conflict. The purpose of a special committee is to advise the Directors and to make a recommendation as to what the Board should do.
Maple Leaf Foods Inc et al v Schneider Corporation et al 1998 ONCA F Schneider establishes a Special Committee of Independent Directors to advise the Board of Directors about the
takeover deal and whether or not the SH should accept the offer. The Committee solicits more bids (Maple Leaf = $22/share, Smithfield = $25/share and some other tax benefits to the SH). The Schneider family says it will not accept the Maple Leaf Bid and that they don’t want a takeover at all. The Committee recommends the Board accept the Smithfield offer and they take steps to initiate the process. Leaf then offers $29/share cash; this
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becomes a better deal. Maple Leaf and minority SH of Schneider bring an action against the DirectorsI Did the special committee act in the best interests of the corporation? Were they truly independent? R ASK: Did the Directors take the steps necessary to avoid a conflict of interests?
If a board of directors has acted on the advice of a committee composed of persons having no conflict of interest, and that committee has acted 1) independently, 2) in good faith, and 3) made an informed recommendation as to the best available transaction for the shareholders in the circumstances, the business judgment rule applies and the court will give deference
Note: when change of control of a company is happening, it does not HAVE to hold an auction – auction is just ONE way to prevent conflicts of interest by requiring directors act in neutral manner toward several bidders
Possible conflict of interest could arise where: If a senior official is negotiating directly with bidder/takeover, there MAY be a pull between acting in best
interests of the corp vs negotiating with their potential future employer or executioner; or too much involvement in the special committee, which may undermine the committee’s independence
A The Directors acted on the advice of the Committee that was comprised of persons having no conflict of interest Court agrees that S did the right thing in setting up the special committee The committee acted independently and the involvement of the senior official in the negotiations was only
because he had depth of knowledge, but did not inherently erode the committee’s independence – no allegations he acted improperly or unreasonably
the committee acted in good faith in the sense that they acted honestly. The committee’s decision was the best available and also informed, in the sense that the committee was aware
that any offer for Schneider’s shares might be bettered by Maple Leaf, and that the Family would not sell to Maple Leaf
o Maple Leaf simply did not bid enough money initially and, had they really wanted the opportunity, they should have bid more money; the fact that the Committee didn’t go back to Maple Leaf wasn’t considered an issue because this wasn’t an auction, and not a guarantee that ML would top it
o They were not able to show that the Maple Leaf offer would be clearly more beneficial than the one that was accepted.
They set up a data room as well: argument that proprietary info was a valuable asset and given away. But this failed, it was essential to conduct a market scan of all offers. In creating the data room, they acted independently and reasonably. By making the room, they offered information to all the bidders. The data room allowed for bids to be review reasonably
Other Sources of Fiduciary Obligation
S 126(b): a director is defined as an “insider”
S 130: civil liability of insiders
This section prohibits insider from selling or purchasing securities of a shareholder and in connection with this sale or purchase makes use of specific confidential info for the insider’s benefit, and which is reasonably expected to affect the value of that security
o Sanctions: liable to compensate for direct loss suffered as a result of the transaction; and accountable to the corporation for any direct benefit received
Tongue v Vencap Equities Alberta Ltd 1994 ABCA F Plaintiffs are minority shareholders in company, and Ds are directors/shareholders or directors/non-shareholders.
The Corp is also a defendant, and is intermediary that purchased P’s shares. Ds negotiated to buy P’s shares without disclosing that named buyer was negotiating to buy all shares for triple the price. Ps sold to the directors for lower price unknowingly, and then all shares were subsequently sold for significantly more. Ps sued for breach of insider trading provisions, as well as for breach of fiduciary duty to the shareholders. Directors acquired the
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shares through an intermediary and did not disclose the interested party or the price he was willing to payI Do the Directors here owe the shareholders a fiduciary duty? R As per s 122 of the BCA, there is no general fiduciary duty in the statute that arises between a director and
shareholders simply because of that relationship, since the fiduciary duty is only owed to the corporation itself: something more must be present before a fiduciary duty arises.
A fiduciary duty arises when :o Directors act outside of their ordinary duties
Either because they did something unusual, or because they bought SH’s shareso Directors purchase shares from shareholders (an Ad Hoc Fiduciary Duty)o and in various other circumstances (the category is never closed)
failure to disclose info that SH’s needed to make a decision o NOTE: A Director can owe a fiduciary duty to others than the corporation.
Directors cannot obtain a valid release from liability for future breaches of the BCA – cannot contract out of your duties in this manner
A N was orchestrating the whole deal with V acting as his intermediary. He has by virtue of his function in soliciting, and arranging for, the sale of the shares owned by the shareholders; thus a different relationship arose between N and the SHs. Negin occupied a position that was outside of the scope of the duties of ordinary directors, and a fiduciary relationship was created with him
Fiduciary duty also arose because director was buying shares from shareholders, putting him in position of power
A fiduciary duty did arise on the facts of this case and that it was breached. As a result the Plaintiffs suffered a loss when they sold their shares at a price far below their value
On any proposal being received by them which involved the acquisition of the shares, they were bound to disclose to the shareholders the nature of the proposal and the price offered. If they, acting under their duties to the company and the shareholders, secured a highly advantageous offer, they were bound to make full disclosure of the offer to the company and the shareholders
concealment of offer, which greatly enhanced the value of the shares, with a scheme in view to buy the shares at a low price, was a breach of duty and a fraud upon the shareholders whose shares they acquired, by means of that concealment, at a price far less than their value
They had information which the Plaintiffs required to make an informed sale, but which they did not disclose. They used their positions for personal advantage at the expense of the Plaintiffs
The Directors are DIRECTLY liable for a breach of their fiduciary duty. The defendants had information that the plaintiff required to make an informed decision, which they should have disclosed to the shareholder. Further, even though they signed Releases and they realized that they were giving up any profit on future sale, the Release did not contemplate the liability for breaching the CBCA for insider trading and the release of the defendants from liability in that respect – Release therefore does NOT discharge the defendants because they didn’t know and you cannot release yourself from what you are totally unaware ofDirector shareholders: Negrin et al – each owed the plaintiffs a fiduciary duty to disclose and they breached this dutyDirector non-shareholders: they had no other relationship with the plaintiffs beyond being directors of the corporation that the plaintiffs had shares in Make sure we know how the court handles the 2 different groups of directors **quote from Petit: the trust can claim the whole loss for any one trustee and even where a trustee is obtained all of them, may execute the judgement against any of them. Using trust law to determine liability. Negrin et al therefore are jointly and severally liable as a result of a breach of the fiduciary duty. Make sure we know civil liability under s 130 and that there are fiduciary duties where directors purchase shares from shareholders. Know that the liability is direct.
H Directors are jointly and severally liable for 1) insider trading and 2) breach of a non-statutory fiduciary duty S 130: liable to compensate the plaintiffs for an amount equal to the proportion of the T and H shares purchased on their behalf
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Shareholder Ratification of a Breach of Fiduciary Duty
Before the enactment of the CBCA, it was possible in most jurisdictions for shareholders to absolve fiduciaries of the consequences of a breach of fiduciary duty by voting to approve or “ratify” it
o The only circumstances where a breach could not be ratified was where it was oppressive to the minority (refer to Cook v Deek) – only such serious actions were precluded from being ratified
o However, there was wide abuse of the ratification process: no prohibition against majority shareholders voting their shares to ratify breaches of fiduciary duty in which they were involved personally, and the narrow interpretation given to what would be found to oppress interests of the minority
CBCA therefore greatly reduced the effect of shareholder approval of fiduciary breaches o Except in accordance with the scheme for rendering self-dealing contracts enforceable under section
120 of the CBCA and other provincial schemes, a shareholder resolution approving a breach of fiduciary duty does not cure a breach or relieve the fiduciary of liability for the breach
o The only legal effect of such a resolution is that it must be considered by the court in deciding whether to grant a shareholder the right to bring a derivative action on behalf of the corporation for breach of fiduciary duty
Summary of Shareholders Ratification of Breach of Fiduciary Duty
Old law: o Shareholders can ratify breach of fiduciary duty by directors or officers as long as:
Not oppressive Not obtained by improper means
New law: o Available to ratify contract made between corporation and director/officer or party in which
director/officer has a material interest, ABCA s 120(8.1)o Otherwise, only one consideration Court will look at when asked to grant an order for a derivative
action, see ABCA s 240
Sitting on a Client’s Board of Directors
rather than fostering confidence between lawyer and client, sitting on the client’s board often leads to waivers of client confidentiality, conflicts of interest, exposure to increased risk of liability for you and your firm, and questions about your insurance coverage
in board meeting, almost impossible for a lawyer-director to separate business judgments from legal advice and make that separation clear to other board members
o Not only is the lawyer less effective as corporate counsel when it’s unclear to the other board members just when legal advice is being given, but also this confusion of roles may result in an inadvertent waiver of client confidentiality
The lawyer-director role can give rise to conflicts of interest or compromised professional independence Sitting on the board also increases the likelihood the lawyer will be named as defendant or witness in litigation
that challenges board decisions. The lawyer then may be disqualified and rob the company of its choice of counsel when company needs informed lawyer most
Lawyer-director held to higher standard of care – might even find themselves personally liable! Make sure to get Director’s insurance if you decide to, but beware of the potential for serious negative
consequences
Other Statutory Duties Directors Liabilities under other Statutes
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Taxo E.g., Income Tax Act, s 227.1o Zwierschke v Minister of National Revenue, did director establish defence of due diligence?
Employee Wageso E.g., Employment Standards Code, s 112, ABCA s 119
Pension Contributions Environmental Liabilities
Zwierschke v MNR 1991 CTCF Z had construction business and was director and shareholder. Used line of credit for business operations.
Company went way into overdraft on its line of credit, its assets were ultimately seized, and the corporation was liquidated. When the proceeds of sale of the company were remitted to the Credit Union, there was not enough in excess to pay the amount owing by the company in income tax. Z claimed that he had exercised the required degree of skill diligence, and care under s 227.1(3) of the Income Tax Act
R STATUTORY DUTY UNDER INCOME TAX ACT TO REMIT TAXES – FAILURE TO PAY taxesA No defense; appellant was the person who managed the business and knew the most about its affairs
S 227.1(3) of ITA requires directors to exercise a degree of care, diligence and skill. In this case, the directors exercised no care, diligence or skill.
The appellant managed the company’s business and knew more about the business affairs than any other person
He knew that his company’s line of credit was in overdraft and that he would have collect enough receivables in order to cover the cheque sent to the CRA to cover outstanding tax liabilities
He just wrote the cheque and hoped it wouldn’t bounce. Section 227(4) of the Income Tax Act provides that amounts withheld from salaries and wages for taxation
purposes are deemed to be held in trust for the Crown in right of Canada. This imposes a duty to ensure that those funds are properly paid to the Crown
Director PERSONAL Liability in Tort We know that under s 122 the director has a duty of care to the corporation (and possibly to a third party like a
creditor under s. 122(b)) Here, focus is not on Director liability to the corporation under s. 122 (1)(b) of the CBCA/ABCA whereby Ds
must, in relation to the corporation, “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”
o The focus, instead, is on the D/O’s personal liability to THIRD PARTIES for torts committed in a business context or otherwise while pursuing a corporate purpose
o What is involved here is a very difficult question of policy. On the one hand, there is the principle that an incorporated company is separate and distinct in law from its shareholders, directors and officers, and it is in the interests of the commercial purposes served by the incorporated enterprise that they should as a general rule enjoy the benefit of the limited liability afforded by incorporation. On the other hand, there is the principle that everyone should answer for his tortious acts.
corporations can commit torts and have liability in a primary way, as opposed to merely vicariously. When the directing mind commits a tort, the corporation has committed the tort, pure and simple. The complicating question is whether the directing mind is also a tortfeasor in a PERSONAL CAPACITY, and therefore should also be personally liable?
o common law continues to be in a fractured state regarding when directors and officers are personally liable for torts they commit while acting for the corporation
Personal liability of directors involves a collision of values:
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o Corporate Law Values: separate corporate personality, limited liability, don’t want to discourage people from being Directors for fear of personal liability.
o Tort Law Values: provide compensation to people harmed by tortious conduct, holds individuals engaged in tortious conduct accountable for their actions, and deters tortious conduct
It would appear that for INTENTIONAL torts (aka NOT negligence) Directors and Officers will have liability o There is one defence to director personal liability from Said v Butt where the director is not liable
when acting bona fide within the scope of his authority, and this ONLY applies to the tort of inducing breach of contract
Intentional Torts and Fraud Negligence tortsScotiaMcleod: Directors usually not liable for their intentional torts, but can be where there’s extreme misconduct (fraud/dishonesty) or where there’s separate identity of the director
ADGA: Directors always liable for their torts even when in best interests of the corpDirectors liable for inducement of breach of contract EXCEPT for Said v Butt defence: director not liable if acting bona fide within scope of his authority
ScotiaMcleod: directors NOT liable for negligence, even if their actions were negligent, so long as there is no separate identity
Hogarth: liability may be found, following the same process for establishing whether a duty of care exists in the circumstances of a regular employee (Slatter’s concurring opinion in Hogarth)
NBD: takes the ADGA rule that directors liable for their tortious conduct even when acting genuinely in the corp’s best interests, and applies it to negligence too
ScotiaMcleod absent findings of deceit, dishonesty etc, directors will rarely be found personally liable UNLESS their actions are themselves show extreme misconduct captured as where it shows a separate identity or interest from that of the company so as to make the act complained of their own (fraud is one of those actions that shows sufficient seperateness)
o case states that directors are not personally liable when their tortious conduct is in the best interests of the corporation this is the law in Alberta
so, directors won’t often be liable in tort to 3 rd parties
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o Disadvantages of the case: Creates moral hazard because case assumes that Ds do not have liability for ordinary negligence;
that is, negligence does not generally exhibit the requisite separateness. Could encourage carelessness.
Ordinary negligence would likely not be sufficient to found liability as negligence doesn’t rise to the level of fraud/deceit/misconduct that court requires for director liability
ScotiaMcleod now problematic for failing to align with SCC’s decision in People that directors CAN owe a duty of care to 3rd parties under s 122(1)(b) of the BCA (but not under s 122(1)(a))
If the plaintiff can establish that a duty of care exists, s. 122(1)(b) supplies the standard of care which, if breached, leads to D/O liability.
absolute barriers erected in ScotiaMcLeod against directors’ and officers’ personal liability in ordinary negligence may no longer stand — at least in the context of CBCA corporations.
Though liability is not automatic, it certainly is possible, with it falling to the plaintiff to establish that a duty of care actually exists, applying a common law analysis (see Cooper case)
o Advantages of the case: Helps ensure that D/Os do not become functional guarantors of corporate operations. (See
Slatter JA in Hogarth) Is arguably more consistent with Salomon, including that the corporation is a separate legal
entityo Used corporate law values : sought to ensure that service in a corporation was not unduly fraught with
the risk of personal liability.o ScotiaMcLeod appears to imply that “so long as directors are acting with the role of ‘directing minds’ of
the corporation, they will not be exposed to personal liability for their tortious conduct.” ADGA case goes the other way, and basically favors tort law principles/values – directors pretty much always
being concurrently liable with the Corp for any torts committed except for the Said v Butt exception when dealing with inducing breach of contract
o Disadvantages of the case: problematic because it undermines the principle of separate corporate personality and the
reasons to incorporate Forces D/O’s to backstop corporate operations. D/Os essentially face concurrent liability with
the corporation (per Slatter JA), thereby compromising aspects of Salomon. Might make D/Os conduct themselves with undue caution out of fear of liability
o Advantages of the Case: Consistent with the SCC in Peoples (there can be liability in negligence) and London Drugs (ie:
ADGA ensures there is no longer any special deal for D/Os in a tortious context). Hogarth case: the ABCA followed the decision in ScotiaMcleod but the concurring reasons of Slatter went more
middle ground o liability depends on the director’s impugned actions being themselves “tortious or [exhibiting] a
separate identity or interest from that of the corporation so as to make the act or conduct complained of their own.”
Hence directors will normally not be liable when acting for the corporation, and therefore preserves the separate legal personality principle
HOWEVER, should the director stray by acting in a way that destroys this separate identity, then the act will become his own – hence the bar not so high as ScotiaMcleod
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Requirements for Torts:
NEGLIGENT MISREPRESENTATION ( Deloitte v Livent ): o First, is there a duty of care owed?
(1) was the harm that occurred reasonably foreseeable consequence of the defendant’s act? (a) Foreseeability: Should defendant have objectively anticipated the act/omission
would cause P harm? (b) Proximity: Is there a relationship of sufficient proximity between the parties such
that it would not be unjust or unfair to impose a duty of care on the defendant?o Consider the reasonableness of the plaintiff’s reliance:
The defendant had a direct or indirect financial interest in the transaction in respect of which the representation was made.
The defendant was a professional, or someone who possessed special skill, judgment, or knowledge.
The advice or information was provided in the course of the defendant’s business.
The information or advice was given deliberately and not on a social occasion.
The information or advice was given in response to a specific enquiry or request.
If Ps knew they were dealing with an LTD corp, then less proximity Per Slatter only: whether it was reasonable for them to assume that the
individual director was infused with a personal responsibility for accuracy of their statements? Did Director represent in some way that he was personally liable for his statements?
o Livent: In cases of pure economic loss arising from negligent misrepresentation or performance of a service, two factors are determinative in the proximity analysis: the defendant’s undertaking and the plaintiff’s reliance. Where the defendant undertakes to provide a representation or service in circumstances that invite the plaintiff’s reasonable reliance, the defendant becomes obligated to take reasonable care. And, the plaintiff has a right to rely on the defendant’s undertaking to do so
If a prima facie duty of care based on these factors arises, the courts can then consider residual policy concerns, extraneous to the relationship
(2) are there residual policy concerns, notwithstanding the proximity between the parties established in the first part of this test, that tort liability should not be recognized here?
Here courts can take into account the corporate law norms associated with Salomon; eg. indeterminate liability?
factors relevant to determining whether personal liability should be imposed on officers and directors (Deloitte v Livent):
o whether P chose to deal with a limited liability corp or had corporation relationship ‘imposed’ on it
o expectations of the parties (reasonable for P to regard representation as belonging to individual as opposed to the corp?)
o whether tort was independent or one that was closely identified with the corp activity
o whether tort at issue was intentional tort o whether damage was physical or economic
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o Per Slatter only: the importance of the limited liability corporation in the Canadian economy and whether imposing duty here would undermine that?
o Second, once a duty of care is established, ask: Was representation in question untrue, inaccurate, or misleading? Was representor acting negligently in making the representation? Did representee rely, in a reasonable manner, on the negligent misrepresentation? and Was the reliance detrimental to the representee in the sense that damage resulted?
INDUCING BREACH OF CONTRACT o When you know a contract exists, so you act in a way that causes the party (your corporation) to breach
that contract, which subsequently causes a loss to a third party. That third party can sue you for inducing a breach of contract.
o Test ( 1369413 Alberta Ltd. v Pocklington ) : 1. Existence of a contract; 2. Knowledge or awareness by the defendant of the contract; 3. A breach of the contract by a contracting party;4. The defendant induced the breach;5. The defendant, by his conduct, intended to cause the breach;6. The defendant acted without justification; and7. The plaintiff suffered damages
o The rule in Said v Butt: If a servant acting bona fide within the scope of his authority procures or causes the breach of a
contract between his employer and a third person, he does not thereby become liable to an action of tort at the suit of the person whose contract has thereby been broken.
Summary: o Courts have essentially agreed that directors and officers have liability for their intentional torts,
subject to the defense of Said which applies only to the tort of inducing breach of contract. Courts are much more at loggerheads in the area of negligence, where personal liability will
either be commonly found (ADGA) or not commonly found (Scotia McLeod).o A number of cases purport to lay down general statements of the liability of individuals for torts
committed while conducting corporate business, without distinguishing between intentional torts and negligence, and between torts causing economic as compared to physical damage
o while Hogarth case also hesitant to find liability of directors too easily, unlike ScotiaMcLeod, does not insist on an extreme set of facts (involving fraud, dishonesty, or want of authority) as being necessary before such a conclusion can be reached
Negligence
Montreal Trust Co of Canada v ScotiaMcLeod Inc (1995) ONCAF MY bought debentures from a company for 17mil. S was underwriter (intermediary between company and
investors). MT complains the documents disclosed only one contingent financial liability that company had; in fact, there were several. These contingencies made the company less attractive as an investment. MT claims S, as underwriter, failed to disclose the liabilities, and was a negligent misrepresentation. S claimed against specific directors for negligent misstatements in failure to disclose.
I whether the issuance of debentures by a public company gave rise to liability on the part of the company’s directors?
R In the absence of findings of fraud, deceit, dishonesty or want of authority on the part of employees or officers, personal liability is rare
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cases in which the corporate veil has been pierced usually involve transactions where the use of the corporate structure was a sham from the outset or was an afterthought to a deal which had gone sour.
Absent allegations which fit within the categories above, Officers are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own
A None of the conduct alleged against the respondent directors falls within the broad categories corporation may be liable for contracts that its directors or officers have caused it to sign, or for
representations those officers or directors have made in its name, but this is because a corporation can only operate through human agency, aka through its “directing mind”. Considering that a corporation is an inanimate piece of legal machinery incapable of thought or action, the court can only determine its legal liability by assessing the conduct of those who caused the company to act in the way that it did. This does not mean, however, that if the actions of the directing minds are found wanting, that personal liability will flow through the corporation to those who caused it to act as it did.
***To hold the directors of Peoples’ personally liable, there must be some activity on their part that takes them out of the role of directing minds of the corporation. In this case, there are no such allegations
ADGA v Valcom concerns an intentional tort but is included below for its interpretation of ScotiaMcLeod
ADGA Systems International Ltd v Valcom Ltd 1999 ONCA F P and D both submitted bids for a contract with federal prison that required names/qualifications of technicians.
But, D had no senior technicians, so in prep for the bid, D’s director raided P’s technicians who agreed to switch employment to D if D won the bid. D won, and P’s employees left en masse, crippling them. P sues D for inducing breach of contract
I whether the director and employees of Valcom can be PERSONALLY liable for inducing a breach of contract even if genuinely directed to best interests of the Corporation?
R Policy concerns about proliferation of claims against directors because a business cannot function properly if corporate officers are prohibited from carrying on business for a fear of being inappropriately swept into lawsuits or driven away from getting involved in corps for fear of potential exposure to ill-founded litigation
in all events (intentional tort or negligence etc), officers, directors and employees of corporations are responsible for their tortious conduct even though that conduct was directed in a manner looking at the best interests of the company, always subject to the Said v. Butt exception
Said v Butt exception: directors will NOT be liable for inducing that corp to breach its contract when they are performing bona fide their functions as corp officers
A The rule in Said v Butt does not apply here because it applies to situations where you as human have caused company to breach contract with third party
NBD Bank, Canada v Dofasco Inc 1999 ONCAF NBD Bank loans money to Algoma Steel based on representations made by Percival (Officer of Dofasco) and James
(Algoma’s VP Finance, Secretary, and Treasurer). Algoma was a subsidiary of D. Algoma then went insolvent. NBD Bank sues Dofasco and James for negligent misrepresentation as to the true financial state of Algoma. Dofasco and James are held liable and appeal.
R In negligent misrepresentation, one must first establish that a duty existed per the Anns/Cooper test. To do this, there must be sufficient proximity in the first stage Proximity will exist where the following 2 criteria are met such that we find a “special relationship” exists:(a) the defendant ought reasonably to foresee that the plaintiff will rely on his or her representation; and (b) reliance by the plaintiff would, in the particular circumstances of the case, be reasonable.
Whether a director is personally liable for torts they commit in the course of their duties is fact-specific and not automatically precluded simply by virtue of them acting in the best interests of the corp – policy considerations
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(eg. indeterminate liability) can be considered in the Anns/Cooper test to determine whether a duty should be owed. Therefore, acting in corps interests won’t save you, but not owing a duty of care might
it would be contrary to good policy to immunize officers from the consequences of their negligent statements
****This case took ADGA (intentional tort) and opens it up to the possibility of finding liability for negligenceA Melville not protected from liability for his tortious acts simply because he may have been acting in pursuance of
the interests of the corporation. If he is to avoid liability, it can only be on the basis that he did not owe a duty of care refer to Anns/Cooper test
there was a special relationship here sufficient to meet first part of the test – o by virtue of his position as VP Finance of Algoma and the contact point there, and holding himself
out as being capable of making decisions for Algoma, he must have known carelessness by him would result in loss by P because P would rely on it
o this reliance was found to be reasonable o hence, the court found that there was a prima facie duty of care owed
was the prima facie DoC negated by residual policy consideration? Yes o indeterminate liability was not issue here because Melville was aware of the identity of the plaintiff
and his statements were used for the very purpose and transaction for which they were madeo The Impact of the CCAA (insolvency proceedings): Its unfair that you can go after the principle
here when you are no longer able to go after the corporation because the corporation has started insolvency proceedings
The court was not convinced this was a good policyo Allocation of Risk: Contracts should govern . NBD entered into a contract w/ Algoma and knew
they were dealing w/ a limited liability enterprise and that they want to ignore that and go after the individuals. However, James was supposed to do certain things under his contract that would have protected NBD, which they were not able to take advantage of because of James’ actions. Therefore, it’s not fair for James to say that they should be held to the contract, when his conduct prevented them from benefitting from the safeguards in the contract
H There was no DoC
Hogarth v Rocky Mountain Slate Inc 2013 ABCAF D’s created plan to exploit a quarry, so the incorporated RMS and became shareholders and directors. Ds outlined
business plan and created documents to attract investments. No claim of fraud, but investors are arguing negligent misrepresentation
I Can plaintiffs successfully sue director personally for negligent misrepresentation?R For a director to be liable in tort, the acts of the director must be tortious in and of itself or exhibit the separate
identity or interest necessary to ***make the act the director’s own *** The expectations of the parties can help inform whether it is appropriate to hold directors personally liable
for torts committed by the corporation. For negligent misrepresentations, there must be a causal nexus between the misrepresentation and
damage for liability to be found; the plaintiff must show some independence of the tort on behalf of the director – relying on the director, rather than the corporation for which the director is working
regarding parties who have voluntarily involved with limited liability structure, there is no duty of care, and no liability for negligence causing pure economic loss unless there is some kind of assumption of personal liability
A Court found no liability because, while Simonson DID commit the tort of negligent misstatement, it was “not sufficient to create a separate identity” as required by SM, Here, the statements were made for the purposes of raising funds for the corporation and for its benefit. That
Simonson himself was an officer and investor in the corporation is not sufficient to create a separate identity There was no aspect of his conduct in making the impugned representations independent from his activity as a
corporate officer - On the facts, it is difficult to find any "independent tort" on the part of the defendants as 75
they were at all times acting within their authority as directors.o It was not objectively reasonable to think that the authors of the promotional materials were attaching
any sort of personal legal responsibility to their accuracyThe tort for negligent misrepresentation was also unsuccessful because no causation was shown between the damages and the misrepresentations and the facts do not support the finding that negligent misrepresentations were madeNote: this was a limited liability partnership and not a true LLC, but both business models encompass aspects of limited liability Slatter: argues ADGA is too rigid and implicitly disregards ScotiaMcleod. He contemplates liability for directors in ordinary negligence, even while they are acting in the context of corporate business.
o Directors CAN face liability based on ordinary negligence but it must first be established that Director owed a duty of care to/had a special relationship with the investors
o He is like ScotiaMcleod in that he is reluctant to find personal liability too easily; but unlike Scotia he does not insist on those extreme factors (eg. fraud) so he is more middle of the road. In fact, he did not find personal liability here. Like ADGA, he argues that a director can be personally liable in tort, including ordinary negligence.
Slatter JA’s approach has the advantage of being consistent with Peoples, though Peoples is not mentioned in the concurring decision or in the majority, for that matter
his decision also has the advantage of being consistent with the SCC’s decision in London Drugs such that D/O’s no longer get a special break on tortious liability over that offered to the junior employee.
Note, too, that Slatter JA also criticizes London Drugs for being too quick to find a duty of care in the defendant employees whose conduct caused damage to the plaintiff’s property.
Slatter JA threads the needle between SM and ADGA by allowing the SM analysis with the relaxed position that complainant must first establish that a duty of care existed from the director to the complainant Acknowledging that D/Os can be liable for ordinary negligence and not just for torts that exhibit a
separateness, such as fraud. It is thereby somewhat consistent with ADGA. Introducing corporate law values in assessing policy so as to make it more difficult for plaintiff to establish
liability. It is thereby somewhat consistent with SM’s reluctance to find D/Os liable to third parties in tort. o contends that corporate law norms associated with Salomon be engaged at the stage of assessing
residual policy considerations related to the duty question. He states: separate corporate existence, and the resulting limited liability, is not a loophole, a technicality, or a mischievous stratagem; it is an essential tool of social and economic policy.
o Slatter’s suggested policy analysis: it is important to consider the “effect of individual liability” on “corporate structures and their viability.” The presence of a corporation may disrupt or act as a barrier to any ostensible proximity between the disgruntled investors and the defendant Simonson
An important residual policy consideration: importance of the limited liability corporation in the Canadian economy. There is nothing illegitimate about using limited liability business structures, and imposing a duty that undermines the viability of that structure is a genuine policy concern.
While "holding tortfeasors accountable" and "compensating victims" are also legitimate and central objectives of the law of tort, these concepts are not without limit. If these values always prevailed there would be no need for the test in Cooper v. Hobart. They do not automatically prevail over all other objectives, such as the legitimate desire of entrepreneurs to operate in a limited liability environment. They also do not displace any responsibility on the plaintiff to accept some risk of what is known to be a risky investment.
absent a personal guarantee or other circumstance indicating that the director (or officer) has assumed personal responsibility for his words, there is no duty to the plaintiff and therefore no liability for negligence causing pure economic loss in an investment context.
Slatter: In this case, the loss was economic only, this was not an intentional tort, and there was no dishonesty involved. The investors knew they were dealing with a limited liability business structure. They were all sophisticated business people who must have realized there were risks involved in the quarry venture. They
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knew that the appellant Simonson, like themselves, had invested significantly in the quarry. It was objectively unreasonable for them to have an expectation that if there were any misstatements in the promotional materials that Simonson was assuming or attracting personal liability for the contents, even if they were negligently made
Deloitte & Touche v Livent Inc (Reciever Of) 2017 SCCR This decision re-visits when negligent misstatement is a tort – For there to be a tort, there must be proximity
and reasonable foreseeability. How is reasonable foreseeability established: 2 factors from Hercules case
o Does the defendant have a direct or indirect interest in the transaction? (financial interest in the transaction in which the representation was made)
o Is D possessed of some special skill or knowledge?o Was it provided within D’s scope of business?o Advice given deliberately?o Advice was in connection with specific inquiry or request
Residual policy considerations outside the relationship that may negate imposition of the duty of care?o Para 40: see 3 bullet points there
A Takeaway: if a relationship falls within the established categories then the requisite close relationship is shown. Then it’s the duty of care: proximity and reasonable foreseeability, and then in stage 2 it considers residual policy considerations that would negate the imposition of the duty of care.
o Keep in mind paras 19 and 25, 30, 32, 35, and then 40
Intentional Torts: Inducing Breach of Contract
McFadden v 481782 Ontario LtdF James (McFadden) is employed by a # company. Norman and Mary decide to sell the # company’s assets. Norman
and Mary terminate James w/o cause and pay funds of the # company out to themselves as shareholders. James sues the # company for wrongful dismissal and Norman and Mary for inducing breach of contract
I Are Norman and Mary personally liable for inducing a breach of contract? Were they acting “bona fide” in the best interest of the company?
R If a Director commits a tort, then they can be held personally liableIf an officer or director of a corporation is to be relieved of liability it is because he acts under the compulsion of a duty to the corporation. His act is thus justified.
BUT where he does not act under such a duty, as, for example, where he fails to act bona fide within the scope of his authority, his act is no longer justified, and he becomes PERSONALLY liable The corporation remains insulated from the legal consequences of such an act, inasmuch as the director or officer has acted outside the scope of his authority
If conduct is motivated by the director’s own self interest, then by virtue of their behaviour in incurring and inducing a breach of contract, they cannot be said to be acting in furtherance of their duties and obligations to the corporation, and therefore cannot claim the defence from Said v Butt Note: this does NOT reflect the law in AB, since AB follows scotiamcleod and this case is essentially ADGA
A The defendants are personally liable for inducing breach of contract. They were trying to drain their corporation of all its assets, so there would be nothing for McFadden to sue the corporation for. In this case, they were not acting w/n the scope of their duty to do what is best for the corporation – instead, they were acting to secure the transfer of the greatest amount of funds to shield those funds from an obligation to McFaddenThe case effectively deals with the exception in Said v Butt. However, Norman and Mary, the tortfeasors here, were NOT allowed to take refuge in the protection that Said v Butt gives. They fell outside the exception because they sought to feather their own nest rather than the company that they were under a duty to serve.
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In procuring and inducing the breach of the plaintiff’s contract with PMAC, they were not acting in furtherance of the duties and obligations owed to the corp. They were not acting bona fide with a view to the best interest of PMAC, but rather were acting with the purpose of moving the most amount of money to themselves
Indemnification by the Corporation Indemnification is under section 118 and 124
The corporation MAY indemnify a Director/Officer for costs and expenses arising from a civil, criminal, or administrative procedure if:
The Director or Officer “acted honestly and in good faith with a view to the best interests of the corporation” AND
For criminal and administrative offences, the Director or Officers “had reasonable grounds for believing that the director’s or officer’s conduct was lawful.
Even if an individual is already convicted, that does not prohibit the corporation from indemnifying the individual.
The corporation must indemnify the Director/Officer for costs/expenses arising from defending a civil, criminal, or admin procedure if:
Two criteria above are satisfied; AND Director or Officer substantially successful in defence; AND “Fair and reasonable” to indemnify.
If the corporation indemnifies in other situations:
The Director who voted for indemnification are personally liable to repay the corporation; and Recipient of indemnification can be required to repay the corporation
Blair v Consolidated Enfield Corp 1993 ONCAF Blair was director and held SH meeting to vote in new director; B was candidate for re-election. He got legal advice
with regard to what ballots should be counted. B chaired the AGM of Enfield and on legal advice from the in-house counsel, he did not count the proxy votes that had been mailed in. Lawyer had said those ballots were invalid. One SH was a company called Canadian express. CE had nominated their own individual to be a director of the company (Tim Price). When CE heard the election results, they challenged the determination under the provisions of the BCA. TJ found B personally liable for 160k. Blair then seeks for Enfield indemnify him
I Whether B had acted honestly and in good faith with a view to best interests of the Corp such that he can be indemnified?
R S 124: if a director has acted honestly and in good faith with regards to the interests of the corp, the corp MAY indemnify the director as a result of this judgement against he or she by virtue of him being a director or officer. This is discretionary
A TJ had stated that director had not acted in the best interests of the corp in bringing this litigation, but CA disagreesB had acted honestly and in good faithThere is little guidance in Canadian authorities in the extent to which legal advice affects the directors conduct. Legal advice does not automatically sanctify conduct. At the end of the day it is the director’s own decision. However, it is a FACTOR that should be taken into account.
consideration of whether it was reasonable to rely on legal advice AND if he acted in good faith Blair had properly conducted the meeting, acted honestly and good faith, and he brought himself within
the protection and therefore was entitled to indemnify While he was mistaken, there is nothing to suggest he had done anything improper or fraudulent
Note: does not necessarily sanctify the conduct, but does provide protectionH Judgement granted against Enfield, such that they have to pay Blair for the costs he incurred through the litigation
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R v Bata Industries Ltd (Ont CA) 1995 ONCAF M and W were the directors of the behaviour with regard to the barrels of toxic chemical. Following their
convictions, the TJ imposed probation order and penalty. Probation order was placed on the Corp, which prohibited corp to provide indemnity to M and W. Directors applying for indemnification
I Can a corporation be prevented from indemnifying Directors as a term of the corporation’s probation?R S 124 establishes the circumstances under which a corporation may, with and without court approval, indemnify
an officer or director, and when a corporation must indemnify an officer or director also establishes the circumstances under which a corporation cannot indemnify an officer or director hence, indemnification limits are already set out, and they cannot be added to by probation orders.
A TJ concluded the punishment would only work if Bata did NOT indemnify the directors. Directors brought an application to allow the Corp to indemnify them. The CA referred to s 124 and the notion of indemnification by the CorpCA was critical of the TJ. TJ made no reference in reasons so s 124 of the BCA. This section permits corp to indemnify directors if they acted honestly and in good faith. M and W acted honestly and in good faith. If Corp is to be prohibited from indemnifying, the prohibition should be by virtue of the BCA and not by the probation order. If they did act in good faith then the probation order wold be contradicting the BCADid they act in good faith then? Indemnification prohibition in the prohibition order was found to not be appropriate for reasons of contradiction with the legislative scheme of the BCA.
Summary of ways in which directors can do something wrong
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8. SHAREHOLDER RIGHTS AND REMEDIESINTRO TO SHAREHOLDER RIGHTSTo illustrate:
that shareholders can exercise control over the corporation by asserting numerous rights in the ABCA. that the ABCA provides potentially robust remedies for shareholders, including under the oppression action. that an interested party may be able to bring an action in the name of the corporation in certain circumstances.
Voting at SH meetings.
Can by modified by the Articles of Incorporation. o Example) A corporation may have one or more classes of “non-voting shares.”
All SH have a right to vote on some fundamental change to the corporation. o An amalgamation w/ another corporation (section 183(3)). o Sale of all, or substantially all, of the corporation’s property (section 190(4)). o Removing a Director is not considered to be a “major change” in the corporation.
Other Rights
Requisition (call) a SH meeting (section 142). SH can put items on the SH meeting agenda. Shareholder proposal (section 136).
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Suggest a change in bylaws (section 102(5)).
Shareholder Remedies
1. Oppression Action: if you bring this action as a SH, you are saying that you have been treated unfairly and you want a remedy.
2. Derivative Action: when something has happened to the corporation, you can sue in the corporation’s name.3. Compliance & Restraining Orders: where a SH is not complying w/ a USA or the Articles (what the business is
restricted to), someone can get a Compliance/Restraining Order to shut down what is being done. 4. Dissent and Appraisal: if you’re a SH that has voted against a major change in the corporation, you can force the
corporation to buy your shares (only available to SH). 5. Class Veto: when there are certain changes that will affect a class of shares, that class can vote. If they vote
against the change, the change cannot be accepted (only available to SH). 6. Investigations: powers under the ABCA allow for corporations to collect information re: what’s going on,
including having an inspector investigate the books. Most useful w/ Director fraud.
INTRO TO SHAREHOLDER REMEDIES At common law, minority shareholders in corporations had very little protection in the face of conduct by the majority (or by directors controlled by the majority) that negatively affected either the corporation itself or their interests as minority shareholders.
This handicap was due to two well entrenched common law principles of corporate law: the notion of a “corporate personality” and the “indoor management rule”. Both of these principles can be traced back to the decision of Foss v. Harbottle
The rule in Foss v. Harbottle provides simply that a shareholder of a corporation — even a controlling shareholder or the sole shareholder — does not have a personal cause of action for a wrong done to the corporation
o A shareholder cannot be sued for the liabilities of the corporation and, equally, a shareholder cannot sue for the losses suffered by the corporation (aka separate personality)
o Foss v Harbottle avoids multiple lawsuits: without it, a shareholder would always be able to sue for harm to the corp because any harm to the corp indirectly harms SH
if an act that was claimed to be wrongful could be ratified by the majority at a general meeting of shareholders, neither the corporation nor an individual shareholder could sue to redress the wrong
o legislative provisions have reduced these restrictions on SH however: the derivative action and the oppression remedy are now available to SH
derivative action counteracts the rule in Foss v Harbottle by allowing “complainant” with right to apply to the court for leave to bring an action in the name of or on behalf of the corp in order to prosecute/defend the action on behalf of the corp
It is an action for “corporate” relief, in the sense that the goal is to recover for wrongs done to the company itself
Must apply for leave: Court will be satisfied under (2)(a) where complainant has given reasonable notice to directors that they intend the apply; the complainant is acting in good faith
the leave requirement fulfills its important threefold purpose of:o (i) preventing strike suits, o (ii) preventing meritless suits, and o (iii) avoiding a multiplicity of proceedings
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Note: in a small closely held corp however, there is less reason to require plaintiff to seek leave of the court because less shareholders means less likely there will be frivolous law suits against the corp
oppression remedy is meant to counteract Foss v Harbottle by allowing “complainant” with right to apply to the court, without obtaining leave, to recover for wrong done to the individual complainant by the company/resulting from company affairs being conducted in a manner oppressive to the complainant
It is a personal claim o Note: these 2 forms of redress often overlap (see below); the distinction between them remains
murky
In law, a corporation is a legal entity distinct from its shareholders. It followed from this that shareholders were precluded from bringing their own action in respect of a wrong done to the corporation. Except as modified by the derivative action, the oppression remedy, and winding-up proceedings, this remains a governing principle in Canadian corporate law
RELIEF FROM OPPRESSION OR UNFAIRNESSIntro
Note on the oppression remedy: it protects the legitimate expectations of shareholders and therefore a public statement of the corp can arouse reasonable expectations. The reasonableness of these expectations will be determined objectively
Courts have struggled to articulate the scope of an auditor’s potential liability at common law, given the numerous stakeholders that may seek to rely on audited financial statements for a range of diverse purposes.
Courts have addressed a fundamental policy question about auditor liability: given the wide circulation and use of audited financial statements, it may arguably be foreseeable that negligence by an auditor could affect the audit client, its shareholders or its creditors. But what responsibility should the auditor bear for negligence and to whom, particularly when financial statements are primarily the responsibility of the company and the directors of the company have committed fraudulent acts? Moreover, would the imposition of liability create a risk of indeterminate liability for an indeterminate class of users of financial statements?
With respect to auditor liability to persons other than the audit client, Hercules remains the governing law in Canada.
o Absent special circumstances, there is no duty of care owed by an auditor to shareholders and persons other than the auditor’s client in relation to an audit (which is the CORPORATION)
Hercules Managements Ltd v Ernst & Young 1997 SCCF Ps were shareholders in a company, NGH. D was hired to perform audits of the company. Ps bring action against
them alleging that the audit reports were negligently prepared and that in reliance on those reports, Ps suffered financial loss (Hercules made an advancement of 600k it made to NGH, and other shareholders claiming loss in value of their existing shareholdings)
I whether and when accountants who perform an audit of a corporation’s financial statements owe a duty of care in tort to shareholders of the corporation who claim to have suffered losses in reliance on the audited statements?
R Anns Test applies to misrepresentation cases involving pure economic loss – it should be treated no differently than other negligence cases:First step of Anns/Cooper = A prima facie duty of care
See indicia of reasonableness, aboveSecond step = policy considerations
In cases such as this, must consider indeterminate liability This step will often, though not always, negate the DoC for auditors.
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o Shareholders using the audit for something other than the specific purpose which it was created for will negate the prima facie DoC because of the issue of indeterminate liability
o The statutory audit is meant only to be for the purpose of informing the shareholders, as a group, of the performance of the corporation’s management, and to help them decide whether they should retain or replace the management based on this performance. It is NOT meant to provide them information on which to make personal investment decisions. If they do so, they do so at their own peril, and the auditor does not owe a DoC in that regard
o An auditor performing a statutory audit will generally owe its duty of care to the audit client, not to shareholders or other third parties.
The rule in Foss v. Harbottle provides that individual shareholders have no cause of action in law for any wrongs done TO THE CORPORATION and that if an action is to be brought in respect of such losses, it must be broughteither by the corporation itself through management, or by way of a derivative action
To be able to bring an action by a shareholder qua individual, there would have had to have been a separate duty of care (such as where the auditor had provided the report to shareholders for the specific purpose of them making personal investment decisions)
A Prima facie duty of care existed: Reasonable foreseeability: possibility that the Ps would rely on the audited financial statements in conducting
their affairs and that they may suffer harm if the reports were negligently prepared must have been reasonably foreseeable to the respondents. This is confirmed simply by the fact that shareholders generally will often choose to rely on audited financial statements for a wide variety of purposes
Whether there was indeterminate liability: Even though Ds were the auditors for 10 years by this point and very well knew the identity of the Plaintiff
shareholders who claim reliance on the reports, and knowledge of the plaintiff of limited class of plaintiffs obviates against indeterminate liability, indeterminate liability can still be found where the statement itself was used by the plaintiff for some purpose or transaction other than that for which it was prepared
Here, the plaintiffs did not use the report for the specific purpose in which it was created, therefore indeterminate liability negated the prima facie DoC
o The specific purpose they were created for was as a statutorily required annual audit, and forces the board of directors managing the company to give an account to a general meeting of the shareholders. It is the auditors’ function to ensure, so far as possible, that the financial information as to the company’s affairs prepared by the directors accurately reflects the company’s position in order first, to protect the company itself from the consequences of undetected errors or, possibly, wrongdoing and, second, to provide shareholders with reliable intelligence for the purpose of enabling them to scrutinise the conduct of the company’s affairs and to exercise their collective powers to reward or control or remove those to whom that conduct has been confided [info is only meant to allow them to decide whether they should replace management if they’ve been fucking up]
the only purpose for which shareholders receive an auditor’s report is to provide the shareholders with information for the purpose of overseeing the management and affairs of the corporation and not for the purpose of guiding personal investment decisions or personal speculation with a view to profit.
Thus, since the shareholders used the report for that purpose, which was outside the specific purpose the reports were created for, they are NOT owed a DoC by the auditors
H No DoC owed to the shareholders – plaintiff should have brought a derivative action on behalf of the corporation, rather than trying to sue the defendant in tort under Anns/Cooper
Deluce Holdings Inc v Air Canada 1992 ONSCF Parties are shareholders in Air Ontario, with AC being having 75% and D having 25%. AC moved to acquire 100%
ownership, and legitimacy of its actions are in question. There was a USA between D and AC which gives AC option to acquire D’s interest upon termination of employment of the Deluce family by Air Ontario. Another provision calls
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for arbitration in event of dispute over value of the shares. This provision was triggered and is the subject of the oppression action commenced by D. Deluceco alleges that Air Canada improperly exercised its majority control of the board of directors of the holding company to terminate Mr. Deluce’s employment and did so for sole purpose of enabling it to buy out the D minority interest. D argues this was oppressive and the exercise of the arbitration clause is of no force or effect
I In what circumstances, if at all, may “oppressive” conduct operate to undermine what would otherwise be a contractually arbitrable issue?
R This case introduces the oppressive action of s 242. Key points: complainant (which is a wide class), and not JUST a shareholder can bring the claim. Furthermore, “interests” means there is fairly wide remedial ability. In sum, oppression is fairly wide for several reasonsWithin s 242, strict attention should be paid to the interests of all shareholders not just the legal rights of shareholders
when dealing with a close corporation, the court may consider the relationship between the shareholders and not simply legal rights as such.
Even if the directors can be said to have acted in good faith as required by s 122, the result of such action may still be such that it oppresses the interests of the minority shareholder in such a way as to bring the oppression remedy into play while it would be appropriate for a director to consider the individual desires of one or more various
shareholders (particularly his “appointing” shareholder) in order to come up with a plan for the operation of a corporation, it would be inappropriate for that director to only consider the interests of certain shareholders and to either ignore the others or act in a way detrimental to their interests.
o The safe way to avoid this problem is to have the directors act in the best interests of the corporation (and have the shareholders derive their benefit from a “better” corporation)
Note: merely because the plaintiffs in a minority shareholder oppression action rely on conduct which might in the first instance have caused harm to the company (and, therefore, give rise to a derivative claim), the plaintiffs are not deprived of their personal remedy under s. 242 if there was a individual harm as well
A Court finds the language used to describe D was unequivocally positive and therefore cannot justify AC’s claim that they terminated him due to poor performance, rather than as part of their scheme to get rid of the minority shareholder so they would acquire 100% ownership. This begs the question of whether AC was entitled to utilize majority position or whether such conduct was oppressive? If oppressive, the question then becomes whether this oppression undercuts the right of Air Ontario to terminate D and trigger AC’s call on the shares.The court looks at the USA and finds that it was not the intention of the parties to permit AC to trigger its call on the D shares at will by causing its nominees on the Air Ontario board to terminate D ‘s employment for that predominant purpose only a termination effected for the purpose of promoting the best interests of Air Ontario - for whatever
reason - can constitute a “termination” within the meaning of the Agreement such as to trigger Air Canada’s right to call the Deluceco shares
the directors, in terminating D, acting solely in the best interests of Air Canada’s agenda and made little analysis of the best interests of Air Ontario – the action was unfairly prejudicial to and unfairly disregarded the interests of D as minority shareholder as those interests are set out in the USA was oppressive
o D’s expectation when they entered into the USA was that William would only be terminated in the interests of Air Ontario, not so that AC could exercise their right to buy out all the shares
arbitration is stayed and the oppression action B shall go forward
Judicial Interpretation What is Oppressive or Unfair Conduct?
BCE Inc v 1979 DebentureholdersF Group of purchasers proposed a buyout of all the shares of BCE. The effect is that it would downgrade the value of
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debenture securities (which is a debt of the company that it has loaned from the debentureholders). The debentureholders brought an oppression action and challenge the approval of the plan of arrangementunder s. 193 as not being „fair and reasonable‟.
I What must be shown to establish the right to a remedy under s 242?R Section 242(1) list 3 types of conduct enumerated: oppression, unfair prejudice, and unfair disregard conduct
can be that of the corporation itself, a director/officer, or even another shareholder Preliminary step: Once you establish that an individual has standing as a claimant to bring an oppressive action, under section 239(b)2-step test for establishing oppression: 1. Does the evidence support the reasonable expectations of the claimant stakeholder?
Reasonable Expectation factors: general commercial practice, relationships at issue, size/nature of the corp, past practice, failure to negotiate protections, agreements and representations, and the fact that there may be conflicting claims and expectations
The corporation and shareholders are entitled to maximize profit and share value, but not by treating individual stakeholders unfairly. Fair treatment – the central theme running through the oppression jurisprudence – is most fundamentally what stakeholders are entitled to “reasonably expect” and thus need not establish unlawfulness
Note: directors owe their duty to the corporation, not to stakeholders, and the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation. This must always be considered when scrutinizing the conduct of directors
2. Does evidence establish that the reasonable expectation was violated by conduct? Ask whether the conduct complained of rises to the level of “oppression”, “unfair prejudice” or “unfair disregard” “Oppression” = conduct that is coercive and abusive, and suggests bad faith.
o “burdensome, harsh and wrongful”, “a visible departure from standards of fair dealing”, and an “abuse of power”
“Unfair prejudice” = less culpable state of mind, that nevertheless has unfair consequences. o squeezing out a minority shareholder, failing to disclose related party transactions, changing
corporate structure to drastically alter debt ratios, adopting a “poison pill” to prevent a takeover bid, paying dividends without a formal declaration, preferring some shareholders with management fees and paying directors’ fees higher than the industry norm
“Unfair disregard” of interests extends the remedy to ignoring an interest as being of no importance, contrary to the stakeholders’ reasonable expectations
o favouring a director by failing to properly prosecute claims, improperly reducing a shareholder’s dividend, or failing to deliver property belonging to the claimant
***Since oppression is an equitable remedy, it gives court wide discretion to determine what is just and equitable in the particular facts of the case. Courts considering claims for oppression should look at business realities, not merely narrow legalities.
A Debentureholders argue reasonable expectation that the directors of BCE would protect their economic interests as debentureholders in Bell Canada by putting forward a plan of arrangement that would maintain the investment grade trading value of their debentures court rejects this and fails to find reasonable expectation; Bell had explicitly warned investors against forming
this expectation. Further, the directors had fiduciary duty to act in best interests of the Corp, and they may have had no choice but to approve transactions that were in best interests of corp but would benefit some groups at expense of others. That the shareholders stood to benefit while debentureholders were prejudiced does not alone mean they breached their fiduciary duty. Under the BJR, deference accorded to business decisions take in good faith and in performance of functions they were elected to perform by shareholders
Alternative expectation was that directors would consider interests of bondholders in maintaining trading value of debentures. Given the potential impact on the debentureholders of the transactions under consideration, one would expect
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the directors, acting in the best interests of the corporation, to consider their short and long-term interests in the course of making their ultimate decision therefore it was a reasonable expectation
Evidence that directors DID consider the interests of the debentureholders and, having done so, concluded that while the contractual terms of the debentures would be honoured, no further commitments could be made. This fulfilled the duty to consider debentureholders’ interests
o Having considered its options in the difficult circumstances it faced, it made its decision, acting in what it perceived to be the best interests of the corporation. Factors mentioned indicate no reasonable expectation here
Court eliminates oppression claim at step 1 and does not have to continue to step 2Summary: Considering all the relevant factors, court found that the debentureholders failed to establish a reasonable expectation that could give rise to a claim in oppression. The expectation that the investment level of debentures would be maintained was NOT supported by the evidence. The directors listened to the debentureholders before making the decision – they were not ignored
H reasonable expectation that the debentureholders’ interests would be considered is established, but was fulfilled. Oppression under s 242 not made out
Re Ferguson and Imax Systems Corp 1983 ONCA F Couple were also business partners. Wife had been a founder of the company. But relations broke down. They
were shareholders in Imax. The company attempted to amend its articles and reorganize capital, and wife alleges it was acting oppressively with regard to her interests as a security holder. The husband was quite friendly with the other directors, and she had been discharged from the company after they divorced. Wife seeks injunction to restrain the company from holding a special meeting to vote on the resolution. The effect would be that she would be put out of the company. In chambers, her application was dismissed, stating that she had not made out a case of oppression
R The policy of the law is to ensure just and equitable treatment of minoritiesThe fact that majority governs is fundamental, but the corollary is also important; the majority must act fairly and honestly
If the majority SH deliberately makes a business decision that is intended to disadvantage a minority SH, then the minority SH can sue for oppression.
The interests of minority shareholders should be interpreted broadly in the BCA; court may consider relationships between shareholders and not simply the legal rights. The court has discretion (Note the parallels with the wide definition of complainant)What is oppressive in one case may not necessarily be so in the slightly different setting of another
A Court disapproves of the conduct of the husband - There was no issue with regard to the evidence. Court satisfied that what wife said was true. The company could pay dividends - Mr. Ferguson set out to stop the payment because he did not want Mrs. Ferguson to share in the benefits in the growth of the company and wanted to force her to sell her shares to him or to one of the other men in the company. It was argued that he was but one shareholder and one director and alone could not stop the company from the payment of dividends. But the fact is that he did so. The others were his friends and close to him and from the evidence of Mrs. Ferguson it is clear that they yielded to the pressure that he brought on them to bring about this result. This conduct was oppressive and unfair to her.What husband did was oppressive: the resolution authorizing the change in the capital of the company is the culminating event in a lengthy course of oppressive and unfairly prejudicial conduct to the appellant. The company has not acted bona fides in exercising its powers to amend. By the payment of moneys now as a capital payment, which moneys on the evidence ought to have been paid by way of dividends over the years the appellant’s nonredeemable shares are now to be redeemed and those in control of the company will be rid of her. **The efforts at attempting to reorganize the corporate capital which were oppressive to the wife re what brought her within the section in the BCA – there is no BJR applicable hereThe resolution was the “final solution to the problem” of the ex-wife shareholderPlaintiff also got costs in this court and all the proceedings below
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H Court found that there was oppression by the majority SH and ordered that the resolution not be implemented (remedy under section 242(2)(a)).
Downtown Eatery (1993) Ltd v Ontario 2001 ONCA F 2 gentlemen owned nightclubs in Toronto. They got Alouche, an immigrant from Egypt, and offered him a position
as manager of the nightclub. He was payed by company called Best Beaver Management Inc. Several months after hire, he was fired. He commenced an action against Beaver as a creditor, and therefore needs court approval. There was a reorganization as the lawsuit was going on – 2 guys reorganized the corp and Best Beaver ceased to exist. He got a judgement against Best Beaver, but BB did not pay because it no longer existed. Alouche seized cash from Downtown Eatery, also owned by the 2. They sued Alouche
I If owners dissolve a company that is being sued in order to make it defendant-proof, is that oppressive?R The test of unfair prejudice or unfair disregard should encompass the following considerations: protection of
underlying expectation of a creditor in its arrangement with the corporation, the extent to which the acts complained of were unforeseeable or the creditor could reasonably have protected itself from such acts, and the detriment to the interests of the creditor***The intention is really not key in finding oppression; the conduct need not be undertaken with the intention of harming the plaintiff. It is the ACT that results in the deprivation, not the mindset
A Court dealt with notion of who is a ‘complainant’: complainant can be any other person in the discretion of the court is the proper person to make an application to the court. Court stated that Alouche is a proper complainant (complainant need not have been a shareholder of the company and a creditor like Alouche may suffice)
The 2 guys came to court and argued the reorganization had nothing to do with the ongoing lawsuit. TJ agreed and dismissed the oppression claim, and accepted guys’ reasons for the corporate reorganization and for BB’s cessation of operations. The CA went 2 ways: it does not matter if there was harm INTENDED, but by their ACTIONS they defeated his chance to get a remedy - this is oppressive.
TJ erred in failing to grant the oppression remedy by failing to appreciate the conduct that causes the harm need not be undertaken with the intention of harming
o First, A had reasonable expectation that there would be some money retained in a reserve to satisfy his judgment
o Second, no question that causing the company to go under in the face of a trial affected a result that was unfairly prejudicial or that unfairly disregarded the interests of Alouche as a person who stood to obtain a judgment against BB – there was nothing Alouche could have done to prevent the winding up of BB
o When BB went out of business it was profitable and the profits were sufficient to cover any employment termination claims. Yet, they took no steps to ensure that BB retained a reserve to meet the contingency. If they had put money aside, then perhaps the oppression remedy would not have succeeded. They instead just transferred all the money out and by diverting the accumulated profits to other companies that they owned, they were able to insulate the funds from being available to satisfy Alouche’s claim
H Reasonable expectation that there would be some money retained in a reserve to satisfy his judgment, and the conduct resulted in A’s interests being unfairly disregarded or prejudiced therefore oppression made out
Shefsky v California Gold Mining Inc 2016 ABCA F ABCA gives a summary with regard to what you need to look for when looking at BCE case in an oppression claim
How oppression is defined with regard to the BCE test. Of course, must still look to the oppression provisions in the BCA, but also look to BCE to see what the provisions contain
R Not all unfair conduct rises to the level of oppression to which the court will grant a remedy What is oppressive in one situation will not be in another – take a broad contextual approach and look at the facts(Fact finding is also entitled to a high degree of deference on appeal)3 governing principles for granting an oppression remedy:
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A. not every expectation, even if reasonably held, will give rise to a remedy because there must be some wrongful conduct, causation and compensable injury in the claim for oppression (In BCE, court found that despite being a reasonable expectation, there was no wrongful conduct)
B. not every interest is protected by the statutory oppression remedya. only their interests as shareholder, officer or director as such which are protected and cannot be
used to advance directly or indirectly other personal interests C. Business judgement rule: the court must not second-guess business judgement of the directors of a
corporation – court must decide if the decisions were REASONABLE in the circumstances and not whether the directors made PERFECT decisions. There will be a range of reasonableness
BCE two-step test for oppression:1. Does the evidence support the reasonable expectation asserted by the claimant?2. Does the evidence establish that the reasonable expectation was
(a) violated by conduct, and(b) falls within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest?
a. See the definitions of these terms ***It is essential that the complainant establish wrongful conduct, causation and compensable injury, because not all failures to meet reasonable expectations will mean oppression
BCE factors in determining whether a reasonable expectation exists:• general commercial practice• the nature of the corporation• the relationship between the parties• past practice• steps the claimant could have taken to protect himself• any representations and agreements, and• the fair resolution of conflicts between corporate stakeholders
Oppression or Derivative?
In Foss v. Harbottle, it was held that for any wrong done to a company, the decision to undertake an action was a matter reserved for a majority of shareholders. So an individual shareholder could not sue for a wrong done to a corporation if the majority of shareholders had ratified the wrong or could ratify the wrong. Harbottle is the basis for the principle that the courts are reluctant to interfere in matters relating to the internal management of companies.
First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadit quaestio. No wrong had been done to the company or association and there is nothing in respect of which anyone can sue. If, on the other hand, a simple majority of members of the company or association is against what has been done, then there is no valid reason why the company or association itself should not sue. It is implicit in the rule that the matter relied on as constituting the cause of action should be a cause of action properly belonging to the general body of corporators or members of the company or association as opposed to a cause of action which some individual member can assert in his own right.
o The Foss v Harbottle rule has been effectively eviscerated by the derivative action and oppression claim sections – the only real relevance it has now is with regard to the fact that, if the majority shareholders had ratified what happened then it is only evidence and NOT determinative as in Foss v Harbottle
o the corp can bring evidence of ratification by shareholders as evidence that they couldn’t possibly have been oppressive of this shareholder if everyone else was okay, and the shareholder must then show
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they indeed they were uniquely and personally oppressed – this will be difficult as the oppression often affects a class of shareholders and thus doesn’t look very personal.
Oppression action: some complainants do not need prior approval of the court (shareholders and other security holders, directors, officers, former directors, former officers) and some complainants do need prior approval of the court (such as creditors as in Downtown Eatery); they must convince the court that they are a proper party.
Note: if there is another cause of action (eg. Tort) that you can fit your claim in, then you have to use that, not oppression however, CAN argue that a SERIES of conduct viewed together is oppressive
Don’t want you taking legal wrongs and bringing them into oppression claims where there would be a very different standard applied
Derivative action: a complainant must always apply to the Court for permission and must satisfy the court under section 240(2). Section 240(1): Subject to subsection (2), a complainant must apply to the Court for permission to (a) Bring an action in the name and on behalf of a corporation or any of its subsidiaries, or (b) Intervene in an action to which a corporation or any of its subsidiaries is a party, for the purpose of prosecuting, defending, or discontinuing the action on behalf of the corporation or subsidiary.
Section 240(2): No permission may be granted under (1) unless the Court is satisfied that: (a) The complainant has given reasonable notice to the directors of the corporation; (b) The complainant is acting in good faith; and (c) It appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended, or discontinued.
Rationale for requirement for leave to court (Malata): prevent multiplicity of proceedings, prevent frivolous actions, or prevent strike suits (lawsuits intended to force the company to settle with the plaintiffs).
Steps for bringing a derivative action (Moloo v Pathak)
1. Have standing as a complainant under s. 239 of the ABCA 2. Bring an application for leave 3. Three requirements under s 240(2) to commence a derivative action (court must approve the action for it to
proceed): o Reasonable notice to the board o Complainant is acting in good faith o The application is in the interests of the corporation there must be a prima facie case
Two views as to whether you can take what is essentially a derivative action and run it as an oppression action
1) Strict Approach If you have a complaint where there is a wrong done to a corporation, shareholder must apply for leave and
must run the case as a derivative action (strict/traditional approach) Complainant must have distinct harm to them in order to succeed under an oppression action
o This is the prevailing approach in Alberta o Pappas v Acan; Hercules Management; Rea v Wildeboer; Icahn
2) A more flexible approach (as per Malata) Overlap between oppression and derivative action; injury to corporation that causes harm to individual can
allow for proceeding by way of oppression (Malata) o This was a temporary trend in Ontario (does not appear to be prevailing anymore re: Rea)
If there’s no difference between the actions and can pursue either option, why would anyone bring a derivative claim, which requires a leave application?
o Monetary reason: If you want company to fund the litigation on an ongoing basis, a lot easier to get that order when you proceed by derivative action – see s 241(d)
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o Careful lawyering: courts may end up determining that your matter is derivative, so you will have lost your claim if you didn’t apply for leave to bring a derivative action rather than an oppression action (Hercules Management)
NOTE: where the corp is a large publicly held corp, then it will be less likely that injury to the corp will directly and uniquely injure a shareholder, whereas with a small closely held corp a wrong caused to the corp will often be a wrong to the minority shareholder directly (Rea v Wildboer)
Pappas v Acan Windows Inc Nfld SC 1991F Action was commenced by minority shareholders and an alleged creditor of the corporation Acan Windows Inc.
They complain that other shareholders have combined to have Acan invest in land and premises plus renovations and equipment at inflated prices for the benefit of the other shareholders but to the detriment of Acan and the minority shareholders and creditors
I Should the action have been brought as an oppression action (wrongful appropriation of corporate funds), or a derivative action?
R When the rights invaded are not the rights of the company or association but the rights of the individual members, the rule in Foss v. Harbottle precluding SH from seeking recourse has no applicationDirectors and majority shareholders may owe to minority shareholders a duty to act fairly and honestly and not to supply false information. An action for breach of such duties is not derivative, but personalThere is no clear dividing line b/w cases where there is a remedy for relief from oppression (personal action) and where a derivative action will be available and appropriate. There is a middle ground where both will be available and the aggrieved person will be able to select the remedy which best resolved their problem. • The objective of a derivative action is to remedy a wrong done to the corporation. The usual object of an oppression is to remedy a wrong done to a minority shareholder or other aggrieved
person Thus, where there is overlap between them, then either a derivative action in name of corp or a personal
action by a SH seeking oppression remedy may be available That said, cannot claim oppression merely by showing that the corp itself was damaged with consequential
damage to the SHA 250k debt owed claim: Ds undertook to pay 250k to Pappas. This constitutes a personal claim against Ds only as it
arose pursuant to a contractual agreement outside the business and affairs of the corp• Ps also allege agreement with Ds to proceed on a joint venture and that Ds agreed to act with honesty/integrity
in dealing with Ps. This is a personal claim, not a claim arising primarily because of a wrong done to the company (though wrong done to company may be incidental)
• While the agreements the Defendants entered into violates their JV, this is not oppressive, it is not derivative, it is a breach of contract claim ONLY
• P’s claim for oppression therefore dismissed as it is a personal claim and can be pursued via debt owed insteadMisappropriation of corporate funds claim: Allegations of misappropriation of corp funds, misrepresentation and fraud are not claims which Ps are entitled to pursue personally – P’s injury not distinct from the corp’s • This harms the company because Acan’s funds have decreased through the improper contracts, which makes
them worth less. This was brought improperly as an oppressive action and should have been a derivative actionExamples of Claims:Example 1: Derivative Action, Diversion of Corporate Profits to a Director
Directors have stolen money from the company. The company is harmed because of this. The SH might also be harmed because there would be less money for them if the corporation is wound up; the court would find that the harm to the SH is indirect. Therefore, SH would not have an oppression claim.
Example 2: Oppressive Action, Refusing to Declare Dividends to Squeeze out Minority SH Directors are refusing to declare the dividends because they want to push out a SH. The company is still
making money here and aren’t harmed. The SH are being harmed personally and, if they can show they have a reasonable expectation that has been violated, which is oppressive, they can succeed on an oppression claim.
Example 3: Mixed, Paying Excessive Salary to Dominant SH who is also an Officer90
SH who appoints himself as an Officer and pays himself a large salary. This harms the company because the SH is misappropriating funds from the company. This harms the other SH; if they had paid themselves a normal salary, the rest of the money would have gotten paid out through dividends to the SH.
o Where there is overlap, the Court must determine if: “The statement of claim is… saturated by derivative claims… it cannot be allowed to stand.” “The derivative claims are merely incidental to, and clearly of secondary important,” it can
be allowed to stand. “The personal claims can be… clearly separated from the derivative claims” the former
should be continued and the latter struck. Examples of personal shareholder rights:• shareholder voting rights;• the right to complain about discriminatory alterations to the corporation’s constitutional documents;• the right to timely and informative notice of company meetings;• the right to have a properly executed proxy accepted; and• the right to inspect certain of the corporation’s records;• the right to be heard at shareholders’ meetings.The concept of incidental injury serves a useful purpose in the resolution of the threshold question of whether theaction is personal or derivative. The answer involves two considerations. First, is the individual’s injury distinct from thecorporation’s injury in that it does not occur simply because the corporate injury exists? Second, is the individual’s injuryin an area where the shareholders by their own representative actions are exercising a power in bad faith, or the directors are abusing a duty owed to the minority shareholders different from that owed to the corporation?
If yes to either, then personal cause of action will exist
Rea v Wildeboer 2015 ONCA F M is public company. Ps are the founders, and became directors with Ds. R was significant minority shareholder
(12-17%). After alleged improper transactions, R sold shares but later reacquired them. Ps alleging Ds undertook transactions that involved breach of their fiduciary and other duties to the corp and resulted in misappropriation of corp funds for their personal benefit. Rea brings an application for oppression
I Whether plaintiffs may assert, by way of oppression remedy, a claim that is by nature a derivative action for wrong done solely to the corp and therefore circumventing the requirement for leave in a derivative action?
R The oppression remedy and the derivative action are not mutually exclusive, and there will be instances that give rise to both and the complainant may proceed by way of oppression remedy (thereby avoiding requirement to get leave from court). That said, they are still different remedies (one for the corp, one personally)
HOWEVER, claims must be pursued by way of a derivative action after obtaining leave where: 1. the claim asserted seeks to recover SOLELY for wrongs done to a public corporation, 2. the main relief sought is solely for the benefit of that corp, and3. there is no allegation that complainant’s individualized personal interest has been affected by
the wrongful conduct Where the wrongs asserted were to the corporation BUT the wrongful act DOES directly affect the
complainant in a manner different from the indirect effect of the conduct on complainants (some unique harm), then oppression claim may be available
o The corporation will be injured when all shareholders are affected equally, with none experiencing any special/unique harm = derivative action
o By contrast, in a personal or “direct” action, the harm has a differential impact on shareholders, whether the difference arises amongst members of different classes of shareholders or as between members of a single class
A Ps asserting oppression claim for misappropriation of funds and argue that they may do so because the line between oppression remedies and derivative actions is gone. Ds argue the claim is that of corp and must be pursued as derivative action on behalf of corp with leave of court. Here, there is no overlap between the derivative action and the oppression remedy – it is a large publicly held corp (not a small closely held one where wrong caused to a corp will often be a wrong to the minority shareholder
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directly) and also the plaintiffs are NOT asserting that their personal interests as shareholders have been adversely affected in a way other than the type of harm suffered by all shareholders as a collective
Plaintiff’s open-ended approach to the oppression remedy in circumstances where the facts support a derivative action on behalf of the corporation misses a significant point: the impugned conduct must harm the complainant personally, not just the body corporate, i.e., collectivity of shareholders as a whole
The oppression remedy is NOT available simply because a complainant asserts a “reasonable expectation” (eg. that directors will conduct themselves with honesty and integrity in best interests of the corp) and the evidence supports that the reasonable expectation was violated by conduct falling within terms “oppression” “unfair prejudice” “unfair disregard” must also be direct injury to the SH
Here, all the alleged wrongdoings in the pleadings establish loss to the corp’s financial bottom line, ie. To the collectivity of shareholders as a whole and not to any particular shareholder individually
H No reasonable cause of action based upon the oppression remedy and must be pursued via derivative action
Brunette v. Legault Joly Thiffault 2018 SCCF Fiducie was sole shareholder of holding company that controlled a group of corporations which operated seniors
homes. However, Revenu Québec issued unexpected taxes against several corporations in the group. These notices and the subsequent collection action resulted in the bankruptcy of most of the corporations and of the holding company. This caused the total loss of value of the patrimony of Fiducie, which was comprised exclusively of shares in the holding company. B and M, acting in their capacity as trustees of Fiducie, commenced an action against a group of professionals (lawyers and accountants) to recover the lost value of Fiducie’s patrimony claiming that they had committed a number of professional faults in setting up ill-advised tax structure of the corps, hence breaching duty to advise
R For SH to succeed in oppression there must be:1) legal obligation owed (the reasonable expectations test in BCE); and 2) there is an injury suffered distinct from that of the corporation itself
Shareholders usually can’t sue when a corporation is harmed, causing their shares to lose valueThe sufficient interest of the claimant must be capable of determination at the stage of preliminary motions, without the court needing to determine whether the claim is founded in law. In all actions for civil liability, this requires that the sufficient interest of the claimant be established before the court considers the claim on its merits (must be a prima facie case)
A Patrimony is a concept to deal with the sum total of your assets (the aggregate of things owned)The principles of corporate law bar shareholders from exercising rights of action that belong to corporations in which they hold shares, unless they can demonstrate a breach of a distinct obligation and a direct injury that is distinct from that suffered by the corporation in question. In this case, since the claim does not establish these requirements, B and M have not demonstrated a direct and personal interest that would allow Fiducie to claim damages from the professionals. The loss that they suffered was the same as the loss of all the corporations in the group. Only the corporation itself could have sued
H Action by B dismissed
Scope of Relief Available Director Liability for Oppression
Wilson v Alharayeri 2017 SCC extension of oppression and derivative action to include non-corporate partiesF A was the former CEO of Wi2Wi Corp, who held a certain class of shares. Wi was negotiating merger and A sold his
shares without telling the Board. Board found out and A was censured for concealing the sale. A resigned as President/CEO/Director and W took over. The Board then issues convertible secured notes to people holding common shares, which thus diluted the proportion of common shares held by any shareholder who did not participate in this conversion. Also, prior to the issuance, the Board converted the 100,000 C Shares held by W into
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common shares, despite doubts by the auditors that the test for the C Share conversion had been met. But A’s shares were not converted, even though they were convertible. Thus, his proportion of common shares drastically reduced. His shares and their values were reduced. A now claiming oppression against the directors
I When may personal liability for oppression be imposed on directors directly as opposed to the corporation?R Test for finding Director personal liability for oppression:
1. the oppressive conduct must be properly attributable to the director because he or she is implicated in the oppression
a. either exercised, or failed to exercise his powers so as to effect the oppressive conduct2. the imposition of personal liability must be “fit” or just in the circumstances, using the following 4
general guiding principles:i. the oppression remedy must be a fair way of dealing with the situation; indicia of fairness:
a. director has derived a personal benefit;b. director has breached a personal duty she owes as director or misused a corporate
power;c. directors have increased their control of the corporation by the oppressive conductd. where a remedy against the corporation would unduly prejudice other security holderse. Director misused corporate powerf. Director has virtually all control over a closely held corporation
ii. While the powers of court under s 242 is wide (see long list of remedies) it is not limitless so any oppression remedy should go no further than necessary to rectify the oppression;
iii. such orders may serve only to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders;
a. cannot vindicate familial or personal relationships and cannot serve a purely tactical purpose
b. cannot be permitted in order to allow a complainant to jump the queue of creditors of the corporation
iv. Court must consider general corporate law: director liability cannot be a surrogate for other forms of statutory or common law relief, particularly where such other relief may be more fitting in the circumstances
Note that bad faith, personal control and personal benefit, while they are strong indicators of when it will be fair and fit to impose directors personally liable, are not NECESSARY criteria for determining personal liability Therefore, conduct may run afoul of s. 242 even when it is driven by lesser states of mental culpability
A Here, no one is denying that A was oppressed; rather, W, the new president, challenges the conclusion that it is fit to hold him personally liable for the oppressive conductWilson argued that the jurisdiction was a limited one. There should be liability only where a director has control of the corporation and acts in bad faith by using the corporation to advance her personal interest or where the corporation is the director's alter ego (aka in lifting the corporate veil)However, Wilson and Black had played the lead role in the board's discussions resulting in the non-conversion of Alharayeri's shares; therefore, they were implicated in the oppressive conduct. The court thus found oppression directly by the directors: specific allegations had been made that the directors "acted in their own personal interest" and "to the
detriment of Wi2Wi and its shareholder in focusing mainly on their personal financial gains"; damages were specifically sought against the directors, and not against the corporation; legal authorities that were cited by the appellant were not relevant in this matter, as they were distinguishable
on their facts; and a right of appeal is not a backstop for procedural choices made prior to trial
H The directors are personally liable for oppression
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Naneff v Con-Crete Holdings Ltd 1993 ONSCF A was employee, manager and officer of his family’s corporation. He and his brother worked closely with the family
business for their adult lives. He and B were 50% owners of equities in the company. They ran the day-to-day operations of the company with father giving oversight. A expected to take over business after father’s retirement. A argues that his removal from the companies was precipitated by his parents’ refusal to accept his wife. Parents argue it was the result of his partying and drinking, which they say affected his work. A is seeking relief under oppression remedy
I Whether the parents overstepped the restraints of their treatment of their son as shareholder?R Oppression remedies aim to protect reasonable shareholder expectations; **an oppression remedy is not meant
to punish** but only to meet the reasonable expectations of the complainant A strong theme running through the authorities dealing with the oppression remedy is its emphasis on the
protection of reasonable shareholders’ expectations in the context of the shareholders’ corporate relationship – shareholder “interests” are intertwined with their expectations
the expectations of a shareholder in a small closely held corp might be different than those in a large corp, and therefore what is outlandish in a large corp might be quite reasonably expected
The powers of the court in granting an oppression remedy are very broad – the BCA says the court can make “any order it sees fits” – but they are not limitless and cannot be used for punitive purposes
s 242 lists 14 specific types of relief the judge should use his ingenuity to effect the remedy most suitable to the situation
***Evidence of bad faith or want of probity is not essential to ground a finding of oppression (Wilson)A The family treated the son in a way that makes no distinction between his position as a member of the family
(disciplined as an errant son) and his position as a shareholder. Oppression test:The son was led to believe by parents that he would be a co-owner of the companies, and that after his father’s death would have complete ownership and control. A and his brother worked full-time for the business and with their father, and gradually assumed more responsibility. They were each responsible for certain divisions, and the reorganization that took place was consistent with concept that sons would ultimately take over
A had a reasonable expectation of taking over the company and this and underlies the entire corporate relationship between members of the family – this is a consideration when looking at the conduct of the Corp in its treatment of A
Court finds A was object of conduct that was oppressive - Far too much has taken place since the father gifted shares to the son, in a corporate and business sense regarding A’s involvement, for the father to now reverse this in order to discipline a disappointing son
Oppressive conduct showed a pattern of conduct designed to exclude P from active role in company: refusal to pay P’s shareholder loans in reasonable time; refusal to pay severance pay in lieu of notice of termination; etc on pg 442
this oppressive conduct was not justified in relation to A’s rights, even if he married someone parents disliked or maybe partied too much as there was no proof it had any materially adverse affect on performance of his obligations to the Corp
Note: wrongful dismissal alone is not a claim to assert by oppression remedy unless it is part of overall pattern of oppression and where employment is closely connected with rights as SH
H removal of Alexander from his position of employment and from his positions as an officer of the various companies, and his exclusion from the day-today operations and management of the business and from participation as a director and shareholder in any meaningful way constitute “oppression”Remedy: Court orders the business to be sold so that A has the opportunity to make a bid and potentially continue on with the company
Naneff v Con-Crete Holdings Ltd 1995 ONCA R **Family differences can never justify oppressive conduct**
Though the court’s jurisdiction is broad, there are 2 limits on this power:
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1. The remedy can only rectify the oppression and cannot punish 2. The wording of the section indicates “oppressive to the interests of any security holder, creditor, director,
or officer of the corporation” and therefore any rectification can only be made with respect to the person’s interest AS A SHAREHOLDER, CREDITOR, DIRECTOR OR OFFICER
o These people may have other interests, but anything outside their interests specifically in these capacities is not to be rectified under the oppression remedy
A remedy that rectifies cannot be a remedy which gives a shareholder something that even he never could have reasonably expected**Look at the relationship of the principles when fashioning a remedy!Note the conduct of the corp that one looks at is only that which actually impacted the shareholder’s expectations and not all the other conduct
A Sale of business: CA found that the remedy of public sale of the business was an error in principle and unjust to the father because it punished him
This is not a normal corporation, but rather a family business. The court should examine and act upon the real rights, reasonable expectations and obligations which actually exist between the principals
any remedy granted in this case had to be fashioned so that it was just, having regard to the considerations of a personal character which existed among Father and 2 sons. **Look at the relationship of the principals
A knew he would not get absolute control until his father died or retired – these were his expectations – therefore under no circumstances could Alex’s reasonable expectations include the right to control the family business while his father was alive and active
A remedy that rectifies cannot be a remedy which gives a shareholder something that even he never could have reasonably expected.
The remedy is also clearly punitive towards the father There was also the expectation that A would only get the business as long as he was in father’s favour, and
therefore this remedy ignores the expectations and family dynamic because he would potentially be able to buy and be getting control of the corp out of his father’s favour
H The appropriate remedy was to require B and father to buy out A’s shares – this will put him back in the position he would have been in without unfairly punishing the father by the forced sale of the business he had nurtured
DERIVATIVE ACTIONCommencing an Action Typically, if a wrong is committed against a corporation, the Directors can bring a “Directors Resolution” where
they agree to bring an action on behalf of the corporation. If not, a derivative action can be brought in the corporation’s name by someone else
A complainant (section 239) can apply for leave to bring a derivative action. The court must be satisfied (section 240): (1) The directors of the corporation have been given notice and a chance to bring an action themselves (unless they’re all defendants in the action, then you don’t have to give them notice); (2) The complainant is acting in good faith; (3) The complainant is bringing the action in the interest of the company; AND (4) The complainant must show a prima face case (Pathak v Maloo)
Pathak v Moloo 2008 ABQB F Allegation of appropriating corporation opportunities that favour the business of a competing corporation. I Whether the requirements for a derivative action were met?R ***EXAM: If you commence a derivative action you must satisfy the following:
1. Reasonable notice to the directors; you go to directors and say “if you don’t do it, I will”a. “reasonable” is the key here
2. Complainant is acting in good faith 3. The proposed action is in the best interests of the corporation
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a. Test: is there a prima facie case? Can’t just be some fishing expedition A 1. A letter sent Jan 5, 2008 contemplated that derivative action application by way of originating notice. The
originating notice was filed Jan 15. On Jan 25, counsel wrote Pattak purporting to give notice. Derivative action was heard in May. This was found to be reasonable notice.
No indication there was a fishing expedition2. Was action in best interests of corp? onus Is on the applicant with regard to a prima facie case – issues must be at least arguable even if evidence is contrary
Is there a prima facie case? It appears to be in the interests of the corp3. Was there good faith? This is highly fact specific. Pattak was upset – the allegations of the respondent was that he was making threats. But the court found that bad faith was not attached to being upset, threatening legal action, nor commencing legal action when negotiations failed. In these circumstances, bringing legal action are some options that could resolve the conflict.
H P met the factors required to bring a derivative action
OTHER STATUTORY REMEDIESS 248: compliance and restraining orders
See also the following sections that may work in conjunction with s 248:
s 102(2): shareholder powers with respect to bylawso directors can make or change bylaws but they have to submit bylaw, amendment to bylaw, or repeal of
bylaw to the SHs and the SHs may confirm/reject/amend it o 102(5): a SH entitled to vote at AGM may make a proposal to make, amend or repeal a bylaw in
accordance with s 136 s 122(2): obligations of directors
o directors must comply with the Act, regulations, articles, bylaws and any USA s 175(1): proposal for amendment to the articles
o a director or SH entitled to vote at AGM may make a proposal to amend the articles in accordance with s 136
s 176: class voteso holders of shares of a class are entitled to vote separately as a class on a proposal to amend the articles
Note: bylaws are subordinate to articles (eg. Bylaws are like the regulations of an act) and therefore they have difference procedures
Compliance and Restraining Orders – s 248
Caleron Properties Ltd v 510207 Alberta Ltd 2000 ABQBF The remaining asset of the corporation was proposed by management to get donated to a church of which 2 of the
directors were members. The asset is land worth 800k. The shareholders are arguing against it. Caleron is one of the shareholders and argues that a shareholder meeting was held where they passed a resolution for bylaws to be amended. The directors had a meeting after in apparent breach of amended bylaws and Caleron argues it had no legal validity and that the director’s resolutions passed in those meetings are of no force and effect because they violated the amendments. The Corp argues that there is no provision in the BCA that gives shareholders authority to manage the corp regardless of whether they act as a majority. Caleron makes application under s 248 for order to direct directors to comply with the amended bylaws
I Whether court has jurisdiction to rule on validity of the amendments?Whether bylaw amendments passed by a majority of shareholders are valid and binding on the corp and Board of Directors?
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R S 248: If a corporation or any shareholder, director, officer, employee, agent, auditor, trustee, receiver-manager or liquidator of a corporation contravenes this Act, the regulations, the articles or by-laws or a unanimous shareholder agreement, a complainant or a creditor of the corporation may, in addition to any other right he has, apply to the Court for an order directing that person to comply with, or restraining that person from contravening any of those things, and on the application the Court may so order and make any further order it thinks fit.
It gives the court broad discretion to order compliance with bylaws of the corp by directors or officers – of course this first requires determination that the bylaws be legal/valid
o shareholders have the power to amend by-laws (s 175(1) and s 176), and such amendments are effective upon their confirmation by ordinary resolution of the shareholders at a shareholders’ meeting
o s 122(2): every director shall comply with the Act and bylaws, but in s 175(1) and 175(6) shareholders must not be allowed to circumscribe the procedures by passing/amending bylaws that are ultra vires
bylaws are subordinate to the articles and therefore any bylaw that is in violation of the articles are ultra vires
However, the right referred to is the right to access the court and not the right to a remedy per se ***Since this is in addition to any other right, the complainant is not restricted from also applying for
oppression etcA The by-law amendments with respect to quorum and signing authority purport to confer powers that are not
conferred under the articles of the Corporation. Furthermore, they have the effect of altering the rights and privileges allocated to the two classes of shareholders by the articles . Such alterations are not legal unless they are made in compliance with the procedures prescribed by s. 175 and s 176 of the ABCA. Therefore, the by-law amendments with respect to quorum and signing authority are ultra vires the articles
and in violation of the BCA, and void and of no force and effect. However, the provisions requiring that 10 days written notice of directors’ meetings be given, that directors
must attend directors’ meetings in person, and that directors’ meetings be held at the registered office of the Corporation, do not have the effect of altering shareholder rights or the Corporation’s structure of governance. They are not inconsistent with the Corporation’s articles.
o First, by-laws are void only to the extent that they are inconsistent with the articles or are in violation of the ABCA.
o Second, the legitimate exercise of shareholder power under the ABCA to amend by-laws is to be respected and endorsed.
o Therefore, amendments with respect to notice, place, and attendance of directors’ meetings to be valid and binding on the Corporation and its Board of Directors, and order the Corporation and its Board of Directors to comply with these amendments and to be restrained from contravening them.
H Court has jurisdiction AND some of the amendments are valid and therefore can be enforced by the court
Appraisal Remedy Dissent & Appraisal Remedy, s 191
s 191: a minority shareholder may be adversely affected by a decision that is beneficial to the corporation as a whole. The remedy contained in s 191 is a significant power for a shareholder to have, but it is only available in limited circumstances. This is not oppression- it is merely a minority SH that thinks its interests are adversely affected by a decision that is otherwise positive. When a decision is made to restrict the type of business the Corp can carry on, a minority SH may wish to bring an application for dissent and appraisal. It is also available when amalgamation with another corp can happen or when significant proportion of assets are sold by the corp.
Company has decided to go through big changes and majority of the shareholders have decided in favour of it. There can still be dissenting shareholders, but they are not able to block the resolution because they are minority
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o They do however, have right of dissent and appraisalo If you are minority shareholder, you have voted against drastic change to company but it went ahead
anyway, you can require the company to purchase your shares so that you will no longer be member of company
o The requirement under legislation is that the corp pay you fair value as of the day before the vote went ahead
the fair value of shares is defined as the highest price obtainable in an open and unrestricted (i.e., competitive) market between an informed, prudent and willing buyer and a seller acting at arm’s length to each other
In valuing the shares of a corporation, no allowance given for their “sentimental value”. Nor is there any entitlement to a premium (in a going private transaction) because there is a
compulsory taking of the shares. Resolutions to which right of dissent applies include (s 191(1)(a)-(e)) :
o Putting restrictions on the transferability of your shares o Change restrictions on types of business corporation can carry ono Amalgamationo Continuance into another jurisdictiono Sale, lease or exchange of substantially all of the corporation’s property
You can imagine that there will be disagreement of what constitutes fair value o What is the process? See 191(6)
The corporation is supposed to make offer and the dissenting shareholder has to decide whether they want to accept or reject
If they reject, they go to court and the court will decide You will both retain experts to decide how much they should be worth Then you apply to court, and the court will decide which valuation is most realistic
o It is expected that the corporation will make its best effort to place a fair value on the shares, and the shareholders will accept a reasonable offer.
If there are a number of people dissenting, buying them out will be expensive o This might get so pricy that directors might look at that and decide that it is not worth going through the
amalgamation They may decide to step back from resolution Hence the shareholders, though a minority, still have ways of getting their voice heard
o You will often see this language incorporated into resolution o This is also specifically contemplated in legislation as well
Investigations S 231(1): the remedy of investigation In general terms the inspection remedy is available at the instance of SH where apparent that the corps books or
records have been improperly kept, are inaccurate, or there is deceit against SH therefore bring an application under this section in connection with oppression remedy to get the info you need for said oppression remedy application
Anytime you are going to sue the corporation, you need information. If you are not corporate insider, it might be difficult to find out what is going on in corporation in order support your case of mismanagement
o the inspection remedy is available at the instance of a shareholder where it is apparent that the corporation’s books and records are not properly kept or are inaccurate, or where there has been some deceit or oppressive conduct practiced against the shareholders. Its purpose is to ensure that a corporation discharges its core obligation to provide shareholders with an accurate picture of its financial position
There is right to apply for appointment of inspectoro Inspector will be someone in the nature of forensic accountant who will look at books and try to figure
out what is going on Can apply to have an inspector appointed to investigate the business affairs of a corporation :
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o Standalone application by a security holder (very broad category), s 231 Security holder means shareholders or people who have certain debt holdings (debenture
holders) They need to satisfy the court that there is some reason to believe that the people have been
acting oppressively using definition under s. 242, or is otherwise up to unlawful behavior o Remedy for oppression, s 242(3)(o)o When Court orders dissolution, s 218
Purpose of appointing investigator under section 231 - to allow applicant to determine if: o Corporation has defrauded someoneo Oppressive conduct has occurredo Corporation formed for unlawful or fraudulent purposeo Person involved in business has acted fraudulently
Court can grant inspector wide powers to compel production of documents, examine witnesses, report to court. o They are contemplated in legislationo However, the function of an inspector is inquisitional, not prosecutorialo Includes:
Going into businesses to investigate Compelling third parties Requiring people to show up in front of inspector and answer questions under oath
They compile this information in report and put it before the court Costs usually paid by corporation
Dissolution There are a number of different ways a company can be dissolved
o Shareholders can vote to dissolve company, s 212o Shareholders can apply to Court for order dissolving company under s 215:
Oppression, unfair prejudice, unfair disregard Unanimous shareholders agreement provides for dissolution Otherwise just and equitable
o Dissolution possible in other circumstances, see e.g., s 211, 213-14
Scozzafava v Prosperi 2003 ABQBF Two groups of business people joined to make a corp selling statues under license. S and P are both directors. S
brought oppression remedy and derivative action against P, and P brought action claiming dissolution of the corp R 215(1)(b)(ii) provides that the Court may order the dissolution/liquidation of a corporation if the Court is satisfied
that it is just and equitable that the corporation should be liquidated and dissolved, such as where, in s 215(1)(a) the act or omission of the corp effects a result that is oppressive/unfairly disregards/unfairly prejudicial to the interests of any security holder.
enables the court to subject the exercise of legal rights to equitable considerations; considerations of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in any particular way
four grounds on which it would be fair and equitable to order the liquidation of a corporation: 1. Deadlock in management2. Business is akin to a partnership
o “something more” than a purely commercial relationship is required to exist to make out a partnership analogy
o Eg. an association formed or continued on the basis of a personal relationship, involving mutual confidence
3. Loss of substratum (main object of the company/reason for its existence)o Court may, by reading the memorandum or statute and considering the circumstances under
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which the company came into being, ascertain what the primary paramount or main object of the company was to be, and if that object has failed, it may treat the substratum of the company as gone and regard it as impossible for the company to carry on the real business for which it was formed
4. Loss of confidence in managemento Only in relation to the management’s conduct within the corp, and not based on their personal
lives **all 4 SHOULD be met, but even if all 4 cannot be totally met, the court may nevertheless find it just and equitable if the factors that are met are so strong
A Looking at 4 grounds where its just and equitable to dissolve corp:1. There are 2 equal shareholders and they are at odds – this is classic deadlock, and there is no way to
resolve the deadlock in the corp (eg. a buyout or shot gun clause)2. Parties use the word “partner” to refer to each other in several documents; also before the corp, S was a
valued customer of the Prosperi Brothers and that it was through this personal relationship that they formed the idea to incorporate the company
3. The corp is the exclusive licensee of the statutes. P argue that termination of the License Agreement will have the effect of rendering corp incapable of carrying out the business objectives for which is was formed and that this constitutes a loss of the substratum of the corporation.
4. P argue managing director unilaterally made significant decision without them – court unable to conclude whether lack of confidence is justified though based on the evidence
Court therefore decides that that the “just and equitable” remedy is to order that the corp be wound up Note the case of the Alexander case in the previous section
H It was just and equitable to dissolve the company
