Partnership - LSAlsa.mcgill.ca/.../598-miller_businessassociations_Winter2… · Web viewLetter...

David Suk’s BizAzzzzzzzz Summary, Professer Paul Miller, Winter 2015. Drop me a line if this has been helpful!

Table of ContentsPartnership........................................................................................................................................................ 2

Is there a partnership?...................................................................................................................................................2Partner-Partner Relationship.....................................................................................................................................3Partner-Outsider Relationship...................................................................................................................................4Sole proprietorship.........................................................................................................................................................6

Constitution of the Corporation..................................................................................................................6Corporate Personality.................................................................................................................................... 7

Tort of Inducing Breach of Contract........................................................................................................................8Tort of Knowing Assistance in breach of trust.................................................................................................10Piercing the veil..............................................................................................................................................................11Liability for thin capitalization................................................................................................................................11

Purpose of the corporation........................................................................................................................12Corporate Liability....................................................................................................................................... 13

Corporate Liability in Tort........................................................................................................................................13Corporate Liability in Criminal Law......................................................................................................................13Corporate Liability in K (Ultra Vires doctrine).................................................................................................16The Constitutional issue.............................................................................................................................................16Contracting through agents......................................................................................................................................16

Incorporation................................................................................................................................................. 18INCORPORATION..........................................................................................................................................................18Liability for Pre-Incorporation Contracts...........................................................................................................18

The Role of Management............................................................................................................................ 20Directors............................................................................................................................................................................20Officers............................................................................................................................................................................... 21Defects................................................................................................................................................................................21

Overall Solution Map: So you think there has been a wrong…...........................................22Step One: Who has been Wronged by Who?.........................................................................................22Representative Action................................................................................................................................. 23

Does the person bringing the action qualify as a complainant?...............................................................23Will leave be granted?.................................................................................................................................................24If leave is granted,......................................................................................................................................................... 25MISC.................................................................................................................................................................................... 25

Breach of Duty of Care................................................................................................................................. 26Duty of Care (Peoples).................................................................................................................................................26

Fiduciary Duty................................................................................................................................................ 28Fiduciary Duty -- Self Dealing Cases and their ratification.........................................................................29Fiduciary Duty – Misappropriation of opportunities “belonging” to the corporation....................30Fiduciary Duty – Entrenchment Cases / Improper Purposes....................................................................31

Oppression Remedy..................................................................................................................................... 32Does the person bringing the action qualify as a complainant?...............................................................32Oppression Remedy.....................................................................................................................................................33Overall Test......................................................................................................................................................................34Relationship between oppression and representative action...................................................................35

MAJORITY RULE............................................................................................................................................. 36Shareholder Meetings – Types................................................................................................................................36Notice of meetings........................................................................................................................................................ 36

1


Location of meetings....................................................................................................................................................37Voting at Meetings........................................................................................................................................................37Proxy Voting (CBCA 147-154).................................................................................................................................37Shareholder Proposals................................................................................................................................................37Shareholder Accountability before the Oppression Remedy.....................................................................38

Slush....................................................................................................................................................... 38“Improper Purposes” Cases......................................................................................................................................38Self Dealing Cases..........................................................................................................................................................39Misappropriation of property or opportunities “belonging” to the corporation..............................40Entrenchment / enrichment cases........................................................................................................................41

Partnership

Is there a partnership?

Partnerships Act s 2. Partnership is the relation that subsists between persons carrying on a business in common with a view to profit, but the relation between the members of a company or association that is incorporated by or under the authority of any special or general Act in force in Ontario or elsewhere, or registered as a corporation under any such Act, is not a partnership within the meaning of this Act.

“the relation that subsists between persons” 2+ persons required

“carrying on a business” “business” includes every trade, occupation and profession; (s1(1)) Excludes charities , NGOs (contra corp)

“business in common” “in common” contemplates parties acting in concert based on an agreement b/t them,

whether express, implied, presumed. However, “relation” implies that strictly, no K is necessary. Often there is a “partnership agreement” but this is not a requirement.

Distinguish from: co-ownership, lending/borrowing How is property distributed? How is authority distributed?

“with a view to profit” = object of making profit + reasonable efforts

Have not formed some other type of business association The partnership is the default form of business organization

The crux of the question: CARRYING ON A BUSINESS IN COMMON Is this an instance of partners carrying on a business in common, or is it merely co-owners,

debtors and creditors, or landlords and tenants carefully delineating their respective rights and responsibilities?

To determine whether there is a “business in common” the court will examine the relationship between the parties holistically (Kamex, Vozlke, Pooley).

Subjective : Initially, the inquiry will be whether the parties subjectively intended to form a partnership. “Carrying on a business in common” goes to subjective intent.

2


Determine intent by examining terms, behavior towards one another, behavior towards 3rd parties (Volzke)

Objective : Where parties want to be partners, but not seen as partners, the court will make them partners. In these cases, focus shifts to objective considerations. What is the actual character of the relationship here? Look to the agreements, behavior, etc. – same things – but characterize them objectively. (Pooley)

Sharing in profits raises a presumption of partnership (3(3)), but there are exceptions, instances where there is sharing of profits but no partnership.

Co-ownership arrangements (3(2)); In Kamex, there was no partnership, only co-ownership)

Where parties intend to treat their respective interests separately (e.g., for tax purposes), there is likely co-ownership but not partnership. (Kamex)

Where parties may transfer and otherwise manage their respective interests independently, there is likely co-ownership, but not a partnership. (Kamex)

Partnerships always involve sharing of profits and losses. Co-ownership only sometimes (Kamex)

Creditor-debtor arrangements (3(3)(d); Pooley). Though in Pooley, Driver, a lender, was part of the partnership, because

notwithstanding the parties portrayal of the relationship as one of creditor-lendor, Driver was engaged in a “business in common”.

Co-tenancy relationships (3(1) (Volzke) In Volzke, there was a partnership. Parties were operating a mall together.

Other indicia An ongoing enterprise is more likely to be seen as a partnership. Compare property

speculation (Kamex) to operating a mall together (Volzke). Control is not determinative of the existence of a partnership. Silent partners are possible.

(Volzke). However, joint control is likely indicative of partnership (Miller).

Kamex – no partnership, Co-Ownership. Speculating on property together.

Decisive factors: parties could dispose of respective interests independently, and treated them separately.

Volzke – partnership

Decisive factors: subjectively, the parties appeared to view and treat their relationship as one of partnership. Plus, this was an on-going enterprise, operating a mall together.

Pooley – partnership, and a lender was part of it.

Decisive factors: notwithstanding portrayal of the relationship as one of creditor-lender, the relationship was, objectively, a partnership.

Thorne v NB Workman’s Comp -- Partner clams to be employee to get workman’s comp, fails, partnership can’t K with one of partners on employment basis since no separate legal entity.

Partner-Partner Relationship Personal nature : Partnerships are personal to the partners because they are formed by

agreement or conduct of the partners with one another. Therefore:

3


Assignment of one partner’s share in an active partnership gives the assignee only a right to the assignor’s share of the profits, as determined by the remaining partners, but no right to engage in management, administration, to receive accounts, etc. (s 31).

Not mandatory rule. Can K out of it, per s 20, b/c partnerships are consensual. Partnership is dissolved upon the death or insolvency of a partner (s 33),

Not mandatory rule. Can K out of it, per s 20, b/c partnerships are consensual. Fiduciary Character : Partners can bind one another w/o consent. Thus, partnerships must be

relationships of mutual trust and confidence, and they are characterized by reciprocal fiduciary duties. (see Olson v Gullo).

Generally, this means partners must, within the scope of the partnership, subordinate their personal interests and interests of third parties to those of the partnership collective. They must act with honest, loyalty, integrity, and good faith.

More specifically, s 28: render true accounts and full information s 29(1): accountability for private profits (Olsen v Gullo) s 30: duty to not compete, pay over profits if compete (Olsen v Gullo) More generally, no conflicts of interest, no conflicts of duty.

Fiduciary duty is mandatory. You can’t K out of it. This is established at CML. Reciprocal agency : each partner may both bind (s6) and be bound by (s7) the actions of the

other partners (in K, in ECO, etc.) The partnership agreement can stipulate otherwise, but such stipulations are only

effective if the 3rd party contracting with the firm is aware of them (s 9) Presumptive equality : w.r.t. share in profits/losses (s 24(1)), right of management (s 24(5))

Not mandatory. Consensual Nature : s 20 notes that partners may, by agreement or course of dealing, vary

from the default rules provided for in the Act. However, changes to the nature of the partnership require unanimous consent (can’t contract out of this. That would be crazy). Ordinary matters require only majority consent (s 24(8))

Dissolution : Death or insolvency (s 33) unless stated otherwise

Olsen v Gullo Olsen acted disloyally by buying land outside of partnership with Gullo. He made a huge

profit. Clear breach of conflict of interest. TJ gave all profit to Gullo. Issue on appeal is remedy Morden JA: profit should be divided 50/50. Default is that proceeds got to parternship, not

individual partner. (so 50% still to Gullo) PA s. 29(1) “must account to firm” Duty to account to partnership Complete exclusion would be forfeiture of his share. Fiduciary in partnership not same as fiduciary in trust (Lavigne case, full amount goes to

beneficiary). There is some self-interest of partner that partnership succeed. Not secret profit case: he didn’t act dishonestly, try to hide

Partner-Outsider Relationship General rule: each partner is liable for all partnership contracts, debts, and torts during the

ordinary course of the partnership business. (s7)

4


Recall: Reciprocal agency : each partner may both bind (s6) and be bound by (s7) the actions of the other partners (in K, in ECO, etc.)

The partnership agreement can stipulate otherwise, but such stipulations are only effective if the 3rd party contracting with the firm is aware of them (s 9)

Can be joint or joint and severally liable (s10) Before : Liability incurred by a partnership before one becomes a partner:

generally, such liability is not incurred (s 18(1)), however, a new partner’s contributions to the partnership may be seized in satisfaction for debts that arose before that partner’s joining.

During: Generally, such liability exists (s 7). It continues after the partner’s death (s 10(1)) or withdraw from the partnership (s 18(2)).

Liability is generally joint, but where it arises from a single partner’s wrong or misappropriation, it is joint and several. (s 13).

Defenses: s 6, s 9 The partner was not authorized to contract the liability at issue and the other

party knew this (had notice). (s6, s9) The other party did not know/believe the partner was, in fact, a partner.

After retirement : A retiring partner will retain liability to third parties who had had dealings with the

firm prior to the retirement unless: 1) actual notice is given to the third party (s 36(1); Clarke v Burton); 2) the third party never knew that the retiring partner was a partner (Clarke v

Burton ) or 3) the partner retired from the partnership because of insolvency or death. (s

36(3)) A retiring partner will retain liability to third parties who DID NOT have dealings

with the firm prior to the retirement only if: 1) no announcement in the Gazette (s 36(2)) 2) the third party was aware that the partner was once a partner

After death Not liable for the partnership’s liabilities incurred after death, even if the partnership

continues to use the deceased partner’s name (s 36(3)) Holding out liability:

Non-partners (like employees) can bind partnership. (s7 and 15) Can’t act as a partner and then say you are not for liability reasons (equivalent of

estoppel) Generally, non-partners not liable, but if they represent themselves as

partners, and that representation is relied upon by a 3rd party extending credit, then there is liability – s 15(1)

Dissolution of partnerships Occurs automatically upon

Expiry of term is there was a term Where term is undefined, upon notice by one of the partners of the intention to

dissolve. Where partnership formed for a single adventure/undertaking, at its

conclusion.

5


Death or insolvency of a partner (unless agreement says not) If becomes illegal (s.34) By the court where a partner is found incompetent, or other circumstances

(after a crime). Provisions for windup: s 44.

Losses paid from profits first, then capital, then partners in proportion to interests

Remaining assets go to creditors, then partners recovering advances/loans, then to partners according to shares.

Sole proprietorship Non-entity. Oldest and simplest way of doing business Default form of doing business One person owns / operates a business Business is run by individual, often under their name No formal law applies = not a business organization Business has no independent existence in law Relationships with supplies / customers, employees, government all through contract. Establishment: just do it Management: by sole proprietor (can hire anyone she wants). Benefits: assets personally held by SP, part of proprietor’s estate. Income/loss are personal

and taxed as such. Responsibilities to outsiders? SP responsible for liabilities, so personal assets could be seized Riskiest way to do business

Responsible for all liabilities Responsible from personal estate Very difficult to raise capital and attract investors

Investors can be held eprosnally liable No red tape.

Constitution of the Corporation

The residual power to manage the corporations lies with the directors. (CBCA 102; Jorex) CBCA s 102: “the directors shall manage the business and affairs of a corporation” CBCA s 2(1): affairs = “the relationship among a corp its affiliates and the

shareholders, directors, and officers of such bodies corp” Right of access to records (CBCA 170(1) [pg. 36 leg] Roles)

Any right of access to records is not absolute. Access may be denied if the court is not satisfied that the purpose for which access to the records is sought is a proper one, for the benefit of the company. (Roles)

Corporate Personality

In Brief : The corporation is a legal entity and right and duty bearing unit in its own right (CBCA 15(1); QBCA 10(2)). At CML, a consequence of legal personality is limited liability. The debts and acts of a corporation are its own; no corporate constituent (director, officer, shareholder, etc.) is personally liable for them (Salomon).

6


15. (1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person. (see also QBCA 10(2), then CCQ 301-03 re: legal persons generally) “subject to this act”. Legal personality is a privilege, extended to corporations by statute. It

can therefore also be limited by statute.

Consequences of legal personality Corporations are rights and duty bearing units (Salomon)

They may hold property, enter into contracts, sue and be sued in tort, be held criminally responsible, be subject to human rights codes, exercise certain Charter rights (legislative intent is key) etc.

A corporation is capable of entering contracts , including employment contracts, of its own right, regardless of the identity of the other contracting party, including w/ person who causes it to do so (a director) (Lee v Lee)

Corporations (and not their shareholders) own corporate property . The shareholder has a right of ownership, but in the share, not in the

corporation’s assets. Therefore, shareholders have no insurable interest in corporate property. (Macura)

Thus, in Macura, a shareholder who held an insurance policy on Timber owned by a corporation could not make a claim. You cannot insure another’s property!

Limited liability – The debts and acts of a corporation are its own, and it alone is liable for them. Corporate constituents (directors, officers, shareholders, etc.) are not personally liable for the acts and debts of the corporation (Salomon).

Insofar as the corporation is a legal entity in its own right, the motivations of the incorporators and managers are irrelevant (Salomon)

Re: Shareholders, see CBCA 45(1); QBCA 224 Salomon takes this for granted, but does it follow? Unclear, says Miller.

Theoretical basis Fictionalism: The law treats corporations like people because this generates rationally

defensible and socially acceptable results. Corporate personality is a convenient legal fiction (for shareholders). We should only maintain the illusion as long as it is convenient.

DIRECTING MINDS Sometimes, the fiction is very thin. Consider Henderson, where the court finds that Henderson caused the corporation to induce himself to breach his contract with a prior employer. This shows, of course, how we attribute actions to the corporation. We look to their directing minds.

Realism: The law treats corporations like people because they actually are people, or at least, they actually behave like people. They have wills and personalities that are distinct from their constituents’; ones that persist even as constituents come and go.

Compelling for very large, widely held, corporations, in which competing constituent voices coalesce such that the corporation appears to have a mind of its own

Problematic for closely held corporations. A corporation with a sole director and shareholder does not have a mind independent of that director/shareholder.

Corporations and civil rights

7


In Canada, corporations enjoy Charter rights, but only to those Charter rights that could meaningfully protect an interest of the corporation. For example, corporations do not enjoy:

Freedom of Expression (Charter s 2(a)), contra Citizens United, SCotUS Right not to be arbitrarily detained or imprisoned (Charter s 9) Freedom of religion? (Big M) ???, Hobby Lobby, SCotUS, 2014

Why? Inter alia: Federal Interpretation Act s 29: the word “person” includes corporations. I should try to find the relevant judgments in Canadian law

Tort of Inducing Breach of Contract Generally : Where A knowingly and without justification induces B to break (or in UK,

interfere with) a contract between B and C, C may hold A liable in tort (Quinn v Lethem) When a director causes a corporation to breach its contract, has he committed the tort

of inducing (the corporation’s) breach of contract? The notion of corporate personality and limited liability would suggest that no,

directors cannot be held liable. When a director causes the corporation to act, his action should not be analyzed as an action of his own, but rather an action of the corporation.

However, courts are reluctant to take corporate personality this far…

Test ( Pocklington ) 1. There must be a Contract

Generally, between the plaintiff and a 3rd party. The D induced the 3rd party to breach.2. There defendant must be aware of the contract.

Can’t be held responsible for inducing breach of a K you weren’t aware of! 3. The contract must be breached.

In Canadian law, breach is necessary (Pocklington, contra Einhorn). In UK law (Quinn v Leatham), the tort is broader, covering not only inducing breach, but also any other interference in contractual relations of another that results in liability.

4. The defendant must have induced the breach5. The defendant must have intended to cause the breach

Malicious motive, unlawful conduct, hatred, or intention to harm are unnecessary. (Pocklington)

Intent can be inferred when the consequences of the conduct where a necessary or reasonably foreseeable result. (Pocklington)

The intention to bring about breach need not be primary object, it is sufficient that the interference is necessarily incidental to attaining the defendant’s primary objective. (Pocklington)

Reckless or willful blindness suffices as intention. (Pocklington; Torquay Hotel, cited in Einhorn)

Acting under a bona fide belief that the contractual rights would not be infringed is a defense, as long as there is some basis for the belief such that it does not count as willful blindness. (Pocklington)

Willfulness beyond knowledge is unnecessary (Henderson)6. The defendant must have acted without justification

8


The defense of justification is available when the defendant caused the breach while acting under a duty imposed by law. (Pocklington)

When the interests of the company are best served by breaking its contractual commitments, the director’s act of inducement is justified by his fiduciary duty to the corporation (CBCA 122(1)), and therefore not a tort. (Pocklington)

The plaintiff bears the burden of proving, on the balance of probabilities, that the director was not acting in the best interests of the corporation (Pocklington, consistent with Teck).

An officer or director of a corporation is relieved, as an agent, of the consequences of his otherwise tortuous act of inducement, where he/she acted under the compulsion of a duty to the corporation. (McFadden)

“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.” (Said v Butt, UK, 1920, cited in McFadden, ON 1984)

Limits on the defense of justification (ADGA) It applies where directors and officers are making business decisions. It does not, however, excuse directors from causing their corporation to

commit a civil wrong (AGDA). In particular, it does not apply where involuntary creditors (e.g. victims in

tort) have been wronged (AGDA). 7. 7. The plaintiff must have suffered damaged (loss) as a result.

Interference must be direct. For example, cornering the market on a commodity, which causes many others to break their Ks, does not count (Torquay Hotel, cited in Einhorn)

Henderson (ABCA 1939)

Corporation hires its own director, even though he was bound by a no-compete clause.

Outsider (Garbutt College), attempts to hold a corporation (Henderson Ltd.) liable for inducing a constituent (Mr. Henderson, director of Henderson Ltd.) to breach his (the constituent’s) K with that outsider (Garbutt College).

Issue: Did the corporation induce its constituent to breach his contract with another?

Result: Yes!Einhorn (SK, 1969)

Transferring property from 1 corp to another so a real-estate agent couldn’t collect commission

Outsider (E) attempts to hold a constituent (the Bs) liable for inducing their corporation (W Inc.) to breach its contract with the outsider (E).

Issue: Might the Bs have induced their corporation to breach its K with the plaintiff (E)? (motion to strike)

Result: Yes!McFadden (ON, 1984)

Transferring certain assets beyond the reach of a creditor/employee

Outsider (M), attempts to hold a constituent (Ts) liable for inducing their corporation (PMAC) to breach its K with that outsider (M).

Issue: Did the Ts induce their corporation to breach its K with the plaintiff (M)?

Result: Yes!Pocklington (ABCA, 2000)

Transferring certain

Outsider (AB), attempts to hold a constituent (P) liable for inducing their corporation (Gainers) to breach its K with that outsider (AB).

Issue: Did P induce his corporation to breach its K with the plaintiff (AB)?

9


assets beyond the reach of creditors Result: Yes!ADGA (ONCA, 1999)

Raiding a competitor’s employees in order to secure a contract.

Outsider (AGDA), attempts to hold a constituent (directors/employees) liable for inducing (via the corporation, Valcom) another outsider (former AGDA employees) to breach its K with the first outsider (AB).

Issue: Should the charges against the director and two employees be dismissed on the basis of the defense of justification?

Result: No!

Tort of Knowing Assistance in breach of trust

Context: situations in which a stranger to a trust may be held liable: Air Canada v M&L Travel A stranger to a trust may be held liable for breach of trust when his/her conscience is

sufficiently affected to justify the imposition of personal liability. Conscience is sufficiently affected when:

(1) trustee de son tort: the stranger, though not appointed as trustee, takes it upon herself to act as such; to poses and administer trust property.

(2) the stranger is an accessory, or knowing participant in the breach of trust. (a) Knowing receipt: this might involve the receipt of trust funds, knowing

they are trust funds… (b) or, it might involve knowing assistance in breach of trust

Knowing Assistance in breach of trust: Air Canada v M&L Travel persons who assist, (i) with knowledge, (ii) in a dishonest and fraudulent design on part of

the trustees will be liable for the breach of trust as constructive trustees.(i) “With knowledge” = means actual knowledge, recklessness, or willful blindness.

Constructive knowledge or carelessness falling short of willful blindness (you probably should have known, but weren't a complete moron) does not suffice.

Receiving a benefit as a result of the breach of trust may (or may not) ground an inference that the stranger knew of the beach

Almost always met where trustee=corporation and stranger=director, at least in closely held corporations.

Knowledge of what? That There is a trust and that the conduct is in breach. Everyone has constructive knowledge of trusts deemed by statute.

E.g., director – shareholder, is, by statute, a fiduciary relationship(ii) Dishonest & fraudulent (not innocent) design ( breach) on part of trustees

It counts as fraud if the trustee takes a risk that he/she/it knows he/she/it had no right to take, and that that prejudices the rights of the beneficiary.

The accessory must know that the trustee’s breach is fraudulent. But then Iacobucci expands the definition of fraud to something that sounds like negligence. Why? Because it would be difficult to attribute fraudulent motives to a corporation!

Air Canada v M&L Travel: The contract between ML Ltd. and Air Canada stipulated that ML must hold AC funds in trust. The corporation’s failing to do so meets (ii). Of course

10


ML’s directors, knew everything about these transactions – they caused then. Thus (i) is also met. Additionally for (i), the directors got a benefit. Had the AC funds been held in trust, the bank that ultimately seized them would have been unable to seize them. That bank then would have claimed repayment from the directors, who had personally guaranteed a loan to the corporation.

Transamerica Life: doesn’t add much new.

Piercing the veil In certain situations, courts will ignore, or “pierce the veil” of corporate personality to

impose personal liability on corporate constituents. No General principle : While there is no unifying general principle according to which courts

will decide whether to pierce the veil (Kosmopoulos), some form of “flagrant injustice” a common characteristic of cases where the veil is pierced (Zhelka).

Not Just and equitable standard : “Flagrant injustice” however, is insufficient. The courts do not lift the corporate veil according to a “flexible just and equitable standard” (Transamerica Life) which would “smack of palm tree justice (Precco).

(1) Mere façade (parent/subsidiary) : Courts may disregard corporate personality where the corporation is a “mere façade” (Kosmopoulos); more specifically, where: (Transamerica Life)

(1) the corporation is completely dominated and controlled such that it does not function independently. This involves more than mere ownership; and

(2) the corporation is being used as a shield for fraudulent or improper conduct.. (2) Agent : Courts will disregard corporate personality where it can be established that the

company is an authorized agent of its controllers or its members, corporate or human (Kosmopoloulos)

(3) Construing a statute, contract, or other document ??? “subject to this act” CBCA 15(1) allows for this possibility Certain tax legislation, failure to use “LTD” etc.

(4) Thin Capitalization

Liability for thin capitalization Yes! According to Keating J, dissenting in Walkovsky, where shareholders have severely

undercapitalised a corporation such that its capital is illusory or trifling compared with the business to be done and the associated risks – and where this appears to be an attempt to avoid personal liability – under such circumstances there has been an abuse of the corporate form such that the corporate veil should be lifted the shareholders should bear the corporation’s liabilities personally.

No! More commonly, judges have declined to impose liability in cases of undercapitalisation. For example, the majority in Walkovsky determined that undercapitalization is not enough to justify lifting the corporate veil. Rather, the legislature can deal with the undercapitalisation issues by setting minimum liability insurance levels or capital requirements for high-liability sectors.

Voluntary Creditor : the arguments for lifting the veil in cases of undercapitalisation are weaker where the plaintiff is a voluntary creditor that was put on notice of the corporate form (Browne v Smith) favour of lifting the veil on the

11


Walkovsky v Carlton (NYCA 1966) – Veil not lifted, Keating dissenting

Taxis: 10 corporations each owning 2 taxis, each with the minimum liability insurance, the corporations are treated as a single entity.

Browne v Smith (UK 1964) – Veil not lifted!

Yachts – Smith bought an autopilot for his corporation, Ocean Charters Ltd., which was undercapitalised. Throughout the sale process, it was clear that the corporation was the customer.

Purpose of the corporation

Ford – shareholder primacy Wrigley – stakeholder balancing Peoples – stakeholder balancing

PEOPLES “best interests of the corporation” in CBCA s 122(a) does not mean “best interests of the

shareholders”. I think what is going on here is that plaintiffs, creditors, said, as close to bankruptcy, you of FD to me! Court said nope, at ALL TIMES FD is to corp person. (pg. 345) -- yes, Miller says this is pointing out that the fiduciary is the corp, not the shareholders or the creditors.

Rather, from an economic perspective it means maximization of the value of the corporation.

Plus, it may include other factors/interests – directors effectively have a duty not only to advance corporate interests, but also to define them!

In determining the best interests of the corporation it may be legitimate, depending on the circumstances, for directors/officers to consider the interests of shareholders, employees, suppliers, creditors, consumers, governments, and the environment.

Compared to USA, a ringing endorsement of the balancing view. Even as the corporation approaches insolvency, fiduciary duty is owed to the corporation, not

to the shareholders, the creditors, or any other stakeholders. No honest and good faith attempt by directors/officers to address a near-bankrupt

corporations’ financial problems will constitute a breach of statutory fiduciary duty. Even if the creditors might prefer that the corporation hold tight to the remaining

assets it has, rather then depleting them on an attempt to stay solvent.

Corporate Liability

Corporate Liability in Tort Via agency (normal approach) : Corporations generally accrue liability in tort through the

principles of vicarious liability, as they would for any agent or employee. The determinative questions will be whether the corporate agent in fact committed a tort (think negligence / 1457), and whether or not the corporate agent’s tortuous act was “in the course of

12


employment” – that is, either an authorized act or so connected with authorized acts that it might be considered a (unauthorized) mode of an authorized act.

Vicarious liability barred by statute : In some cases, statute bars the operation of vicarious liability. In these cases, must resort to the “identification” method outlined in Rhone.

For example, in Rhone, where “actual fault or privity by the owner” was required under the Canadian Shipping Act.

Torts w/ intention element : For certain torts, it is necessary to establish subjective intention. For these torts, vicarious liability via agency cannot operate. The corporation can only be held liabile if it can be held to hold the necessary state of mind. Again, use the “identification method”

e.g. disparagement of a competitor’s goods: false statements that establish malice. e.g. defamation, a defense to it requires honest belief.

Corporate Liability in Criminal Law Vicarious liability does not, of course, apply in criminal law. Thus, the agency approach is

insufficient. At CML, At CML, the act of a corporate agent (director/officer/employee) will be

understood as an act of the corporation if the agent who undertook it was a directing mind of the corporation within the relevant sphere of corporate activity (Rhone). Rhone laid out criteria for determining whether this is the case. Parliament, however, displaced Rhone with amendments to the Criminal Code in 2004.

Test for identification under statute – negligence offencesCriminal Code 22.1 In respect of an offence that requires the prosecution to prove negligence, an organization is a party to the offence if

(a) acting within the scope of their authority(i) one of its representatives is a party to the offence, or(ii) two or more of its representatives engage in conduct, whether by act or omission, such that, if it had been the conduct of only one representative, that representative would have been a party to the offence; and

(b) the senior officer who is responsible for the aspect of the organization’s activities that is relevant to the offence departs — or the senior officers, collectively, depart — markedly from the standard of care that, in the circumstances, could reasonably be expected to prevent a representative of the organization from being a party to the offence.

Test for identification under statute – mans rea offences

Criminal Code 22.2 In respect of an offence that requires the prosecution to prove fault — other than negligence — an organization is a party to the offence if, with the intent at least in part to benefit the organization, one of its senior officers

(a) acting within the scope of their authority, is a party to the offence;(b) having the mental state required to be a party to the offence and acting within the scope of their authority, directs the work of other representatives of the organization so that they do the act or make the omission specified in the offence; or(c) knowing that a representative of the organization is or is about to be a party to the

13


offence, does not take all reasonable measures to stop them from being a party to the offence.

Back to the Criminal Law Appraoch via “identification” : Liability may accrue to the corporation in criminal law, however, via

“identification”, where the court deems the act (actus reus) and state of mind (mens rea) of a directing mind to be the act and state of mind of the corporation.

Or, in the case of strict liability offences, where no particular state of mind (mens rea) is required, where the court deems the act (actus reus) of a directing mind to be the act of the corporation (R v Fitzpatrick)

Test for Identification at CML: Rhone, though it is a negligence case where vicarious liability was statute-barred, sets out the test for identification that applies in criminal law. At CML, the act of a corporate agent (director/officer/employee) will be understood as an act of the corporation if the agent who undertook it was a directing mind of the corporation within the relevant sphere of corporate activity (Rhone). Directing mind = an executive (not administrative or operational) manager, a person who

designs and supervises corporate policy rather than merely implements it. The key question is what a person does, is responsible for, not his/her title. There can be many directing minds. The exercise of discretion is not sufficient to make a person a directing mind. In R v Fitzpatrick, it seemed pivotal that the employee was only one dealing with the

public. Identification of an agent as a corporate mind is a question of mixed fact & law.

The legal piece involves identifying which functions/duties would suffice to ground identification.

The factual piece involves determining whether the person under consideration for identification in fact exercises those functions/duties.

Defenses ( Canadian Dredge & Dock ) Directing mind acting contrary to instruction is NOT a valid defense

A corporation accused of a criminal [or tortuous] act may not raise as a defense the fact that its directing mind was acting contrary to corporate instructions. Because if this were a valid defense, corporations could escape liability simply by issuing general instructions that no agent of the corporation may break the law.

Acting in total fraud of the corporation is a VALID defense A corporation accused of a criminal [or tortuous] act will escape liability where the

act of the purported directing mind was in total fraud of the corporation – was against the interests of the corporation and committed with a view to damaging it (irrespective of the purported directing mind’s personal interests).

Failed in R v Fitzpatrick Acting for exclusive personal benefit is a VALID defense

A corporation accused of a criminal [or tortuous] act will escape liability where the act of the purported directing mind was intended for the purported directing mind’s exclusive personal benefit and in fact resulted in no benefit to corporation.

14


b/c in such a case, the person is acting in his/her personal capacity, not as a directing mind.

E.g. accountant embezzling corporate money. Failed in R v Fitzpatrick – corp benefited b/c sale was made.

Acting beyond authority is a VALID defense A corporation accused of a criminal [or tortuous] act will escape liability where the

purported directing mind was acting outside the scope of the authority delegated to him/her pursuant to the corporate constitution.

Failed in R v Fitzpatrick, b/c was within employee’s authority.

Rhone (SCC, 1993)

F: Shipping captain negligently caused shipping accident. I: Can his corporation be held liable? H: No! R: Vicarious liability barred by Canadian Shipping Act, which required “actual fault or privity by the owner”. Identification failed because while the captain had decision making authority on navigational matters, his authority was operational rather than executive. He had no control over company policy, he merely implemented company policy as a subordinate to another captain who had executive authority.

Canadian Dredge (SCC, 1985)

4 competing corporations were accused of bid-rigging in a competitive tendering process, which was a criminal offence.

R v Fitzpatrick Fuel (NFLD, 2000)

A gas bar attendant (one of 2, alternating shifts) sold beer to a minor. This is a strict liability offence. The gas bar was incorporated. Mr. Fitzpatrick was the sole shareholder/director. He posted signs at the store instructing employees not to sell to minors.

Court applied Rhone test, surprisingly, found employee was a directing mind.

Due diligence failed. Should have hired employees good enough to follow directions.

Henderson (ABCA , 1939), above in inducing breach of K is also an example of a corporation being found liable in tort – identification theory again.

Corporate Liability in K (Ultra Vires doctrine) At common law, the effects of corporate personality extend only to acts that are consistent

with a corporation’s constitution. Acts inconsistent with the constitution are ultra vires and therefore invalid (Ashbury Railway; Pickles). Thus, for example, a utility could not enforce its contract with a corporate customer that had failed to pay its bill because that corporate customer’s articles of incorporation specified that its object was to manufacture one product while in fact it was manufacturing another (Re Beauforte).

INAPPLICABLE: Modern business corporations created under statute, because the statutes say so. (otherwise would be like statutory corporations) CEDF v Pickles

Legislation has displaced the doctrine of ultra vires for modern business corporations.

15


CBCA 16.(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.

QC: see QBCA s 15 INAPPLICABLE: CML corporations (corporations created by the crown through the

exercise of royal prerogative, in particular, Charter corporations). They’ve always had the powers of a natural person CEDF v Pickles

APPLIES: corporations created by statute (only have those powers which are expressly or impliedly granted to them, according to the terms of the corporate charter or memorandum.)

This was the case in CEDF v Pickles, a special act corporation Caveats even where ultra vires does apply :

Interpreting the objects clause in a way that renders everything incidental to carrying out the enumerated objects to be intra vires. (Great Eastern Railway)

Adding the clause, “to carry on any other business which the company may consider can be carried out in connection with the business” (Welling)

Relationship with constructive notice : The objects clauses are in a publically available document, so everyone has

constructive notice of them (Welling)

The Constitutional issue In theory, if a corporation with a federal rather than provincial object (see CA 1867 s 92(11))

is purportedly created by or under a provincial statute, no corporation has been created at all, and any act by the non-corporation is ultra vires and void.

The SCC has not ruled on this point. Of course, provincially incorporated corporations do not generally articulate their

purposes in their articles of incorporation.

Contracting through agents Note, if this issue comes up, the issue of defect in director’s qualification will also likely

come up! The basic game: an outsider and an agent appear to negotiate a K between the outsider and

the corporation. The outsider will claim a K was formed. But the corporation may claim that the agent was acting the scope of her authority. If the outsider cannot prove the agent had the authority to negotiate the contract, then no K was formed.

In Practice, under the CBCA The 3rd party will assert that the apparent agent had actual authority. The corporation will

have to provide evidence disproving this. It is barred by statute from introducing certain types of evidence, in particular:

18. (1) No corporation and no guarantor of an obligation of a corporation may assert against a person dealing with the corporation or against a person who acquired rights from the corporation that…(d) a person held out by a corporation as a director, officer, agent or mandatary of the corporation has not been duly appointed or has no authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for a director, officer, agent or mandatary;(e) a document issued by any director, officer, agent or mandatary of a corporation with actual or usual authority to

16


issue the document is not valid or genuine; or… QC: See QBCA s 13

Actual Authority If the 3rd party can show that an apparent corporate agent had actual authority, then she may

rely on what the agent says as binding the corporation. Express actual authority

Actual authority of directors (CBCA s 102; QBCA 112); managing director (CBCA s 115); officers (CBCA 121; QBCA 116)

For employees and mid-level agents, actual authority will be provided for in K. Need not be written (Schwartz)

Implied actual authority Implied by a course of dealing (Schwartz)

Retroactive actual authority via the principal’s ratification of the agent’s conduct Note: ratification is impossible if the unauthorized agent purported to act as principal

(i.e. there can be no ratification by an “undisclosed principal”) Example: in Schwartz, Ridout did not have actual authority to bind the corporation, because

all of the Ks b/t him and the corporation made this clear (Schwartz)

Ostensible Authority – agency arising by operation of the law (a form of estoppel) Test : When a principal makes a representation to a 3rd party that an (apparent) agent has

authority to contract, and the 3rd party relies on this representation to apparently conclude contract with the principal via the 3rd party, the principal is bound (Freeman & Lockyer; Schwartz; CCQ 2163 paraphrased).

Representation must be made by someone with actual authority (to manage generally, or w.r.t.

the subject matter) principal must intend the representation to be relied upon (Schwartz) The provision by the principal to the agent of a token of authority (e.g.

letterhead, e-mail signatures or addresses?) that the principal could have foreseen would be used to communicate with 3rd parties who would understand it to connote authority – this may suffice as a representation (Schwartz).

What do you have to do to correct this? Online directory update? Letter to everyone the agent dealt with? (Schwartz)

Reliance – 3rd party must believe the representation, believe the principal had actual

authority (see CBCA 18(2)) Marshall, dissenting in Schwartz: A third party cannot hold the

principle labile if there is no causal connection between the representation and his dealing with the agent. Argues that the 3rd party did not in fact rely on the agent’s ostensible authority. He did not choose to deal with the company b/c of the representation. Rather, longstanding relationship b/t ostensible agent and 3rd party.

3rd party must have been induced. K – must fall within the scope of the representation.

17


Application: While he was regional superintendent, MLA gave Rideout stationary with which to communicate with the general public. The public cannot be expected to have known that Rideout did not, as regional superintendent, not have the authority to bind the company. Through the letterhead, he effectively represented that he did have such authority. The company, by providing the letter head, consented to this. Sure, by 1984, Rideout was no longer an employee, but Schwartz was never informed of this, could not be expected to be aware of the change in circumstances. Thus, Rideout had apparent and ostensible authority to bind the company. MLA is liable. (Schwartz)

Incorporation

INCORPORATION One of more persons (CBCA s.5)

o 18 years, sound mind, not bankrupt [note: not high standard]o QBCA 3 – no requirement for solvency or capacity.

Articles of incorporation (CBCA 6.(1)) QBCA s.5o Name, province where situated, classes # of shares, # of directors o (f) restriction on business

The director shall issue 8(1) [no discretion] Comes into existence on date on certificate [CBCA s.9, QBCA s.10] 10(1) must have limited, incorporated, Inc etc as part of name. (QBCA s.20)

o notice to outsiders that its a corpo READING NOTES after CPW for prohibited names: to general, obscene, linked to

Canada 10(5) corporation must set out its name on all contract etc (QBCA s.19) small filing fee

Continuance changing jurisdiction, p.286

Amalgamation bringing two corporations together, p. 286

Liability for Pre-Incorporation Contracts

CBCA 14. (1) Subject to this section, a person who enters into, or purports to enter into, a written contract in the name of or on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to its benefits.Pre-incorporation and pre-amalgamation contracts(2) A corporation may, within a reasonable time after it comes into existence, by any action or conduct signifying its intention to be bound thereby, adopt a written contract made before it came into existence in its name or on its behalf, and on such adoption

(a) the corporation is bound by the contract and is entitled to the benefits thereof as if the corporation had been in existence at the date of the contract and had been a party thereto; and(b) a person who purported to act in the name of or on behalf of the corporation ceases, except as provided in subsection (3), to be bound by or entitled to the benefits of the contract.

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

18


Exemption from personal liability(4) If expressly so provided in the written contract, a person who purported to act in the name of or on behalf of the corporation before it came into existence is not in any event bound by the contract or entitled to the benefits thereof.

Corp not bound : A corporation is not bound by contract purportedly concluded before incorporation (CBCA 14(1); Kelner v Baxter; Black v Smallwood).

See, “when is the corporation born”, below. Agent bound : Rather, where a person purports, before incorporation, to conclude a written

contract on behalf of the corporation, that person is personally bound by the contract (CBCA 14(1); CCQ 320; Kelner v Baxter; contra Black v Smallwood).

Unless the contract stipulates that the person will not be bound (CBCA 14(4)) Black v Smallwood position (bad law!): At CML, when a person signs a contract as

an “agent” for a principal that does not exist, and that both parties understand does not exist, that person is personally bound by the terms of the contract. If, on the other hand, the “agent” signs with one or both parties believing the principal in fact exists, then no contract is formed.

Ratification OK : The corporation may, however, ratify the pre-incorporation contract. Doing so binds the corporation and releases the person who purported to conclude the contract on behalf of the corporation (CBCA 14(2); CCQ 319).

At CML, the purported ratification of such a contract by the principal once it comes into existence has no effect. It does not bind the principal or relieve the “agent”. (Kelner v Baxter)

Discretion : The court may, upon application, “make any order it sees fit” regarding pre-incorporation contracts, except that it may not derogate from CBCA 14(4) (CBCA 14(3)). This might involve, for example, an apportionment of liability.

Szecket v Huang confirms that the CBCA means what it says.

When is the corporation born?

CBCA 9. A corporation comes into existence on the date shown in the certificate of incorporation. See QBCA s 10, 38 – also ambiguous. ABCA less ambiguity “for this act and all other purposes”

S 9 appears to establish that a contract concluded on or after the date shown on the certificate will bind the corporation. However, this is not so. s9 merely indicates that a corporation exists as of the date appearing on the certificate, for the purposes of the Act. It cannot, for purposes related to other areas of law, trump evidence that shows that the corporation did not yet exist on the date indicated (CPW Valve, regarding section 28 in the Companies Act).

Thus, as the evidence here shows that notwithstanding the date on the certificate, the corporation did not yet exist the date the contract was concluded, the contract does not bind the corporation.

This is an inconvenient rule that ignores how businesses operate and may also be unfair. It defeats the expectations of an outsider who reasonably understood herself to be entering a contract with a corporation

The Role of Management

19


Directors Directors are the locus of management control within the corporation. They have a duty to

manage or supervise the management of the corporation (CBCA 102; QBCA 112(1) – QBCA doesn’t frame as duty?

What does this duty include : Establish long range corporate objectives, policies, and strategies (Welling) Provide competent managerial personnel to carry them out (Welling) Setting by-laws (CBCA 103, see also (cannot be delegated) 115(3)(j) with

115(3); QBCA 118) Setting / Reviewing Financial Statements (cannot be delegated -- (CBCA

115(3); QBCA 118) Qualifications for directors

Natural person, 18+, sound mind, not bankrupt (CBCA 105(1); QBCA 108; CCQ 327)

Residency: CBCA ONLY: 25% of directors, or higher were prescribed (e.g. aviation) (105(3), (3.1), (4)). Anachronistic?

No minimums re: education, experience, accreditation, etc. A senate committee has suggested a director’s training program.

Number of directors At least one (CBCA 102(2); QBCA 106) If corporation issues shares to the public, at least 3, and 2 of these have to be

independent (CBCA 102(2); QBCA 106) Directors upon incorporation : First directors are chosen by incorporators, hold office until 1st

shareholder meeting. (CBCA 106; QBCA 107) Election of directors : Thereafter, the shareholders elect the directors by ordinary resolution.

(CBCA 106(3)); QBCA 110) Term : max 3 years, default 1 year. May be (and normally are) staggered (CBCA

106(3)-(5)); QBCA 110). Nomination: 5%+ of shareholders (or shareholders holding voting shares) may

nominate directors (CBCA s. 137(4), QBCA s. 198 ) Class voting : the constitution may specify that certain classes of shares elect certain directors.

(CBCA s. 111(3) and (4), QBCA ss. 147-48) – this is a mechanism for minority shareholders to retain control, e.g. in a family business.

Casual vacancies : The board may fill vacancies arising when directors die, resign, etc. The replacement director holds office until the expiry of the predecessor’s term. (CBCA 111, QBCA 153) –

Cumulative voting : The articles may provide for this (seldom used in Canada). Grants each share the number of votes as there are directors, allows her to cast these all for one director, or distribute the amongst directors (CBCA 107, QBCA 111). This is a mechanism to assure that minority shareholders can, by concentrating their votes on preferred directors, assure representation on the board.

Removal : Shareholders may remove directors at a special meeting by ordinary resolution. (CBCA 109, QBCA 144)

Remuneration : The board decides how its members are remunerated, unless the constitution specifies otherwise (CBCA 125; QBCA 117)

20


Officers Directors may designate officers and delegate authority to them (CBCA 121(a); QBCA s

112(2), 116). Also managing directors (CBCA 115(1); 112(2)). QBCA 112 is broader than CBCA 121: except to extent provided by law, power may

be delegated? Certain aspects of director authority, however, cannot be delegated.

Submitting Qs to shareholders, filling board or auditor vacancies, issuing securities, declare dividends, buy-back shares, approving financial statements, adopting or modifying bylaws (CBCA 115(3); QBCA 118)

QBCA ONLY: hiring and firing certain officers, setting their remuneration – CFO, COO, etc. (QBCA 118(3)).

Directors always retain the residual authority to supervise what officers do with delegated powers.

Remuneration : The board decides how officers are remunerated, unless the constitution specifies otherwise (CBCA 125; QBCA 117)

o

Defects Defects in qualification or appointment do not make ineffective the actions taken by invalidly

elected director – either for internal governance or in dealings with outsiders. Holding Out : A Corporation may not assert against an outsider that a person (directors,

officers, agents) does not have authority as a result of a defect in qualification or designation (CBCA s. 18(d))

QC equiv .: Third parties may presume that directors and officers validly hold office (QBCA s. 13(3))

Why ? Unreasonable to think a third person will check on validity of directors appointment.

Curative Proviso : An act of a director or officer is valid notwithstanding an irregularity in their election or appointment or a defect in their qualification (CBCA 116)

QC equiv .: The acts of a director or senior officer may not be annulled on the sole ground that he was disqualified or that his designation was irregular. (CCQ 328) – is this different? Welling seems to think so.

Exception : Courts will only apply the curative proviso where there has been a technical defect in appointment, not where there has been no genuine attempt to appoint (or re-appoint). Nor will proviso apply where the office has been from the outset usurped (Morris v Kanssen)

Exception : There is a distinction between validating the appointment of directors and validating the acts of defectively appointed directors. The curative provision can only validate the latter (Oliver v Elliott). Thus, if a director is appointed in a meeting were there is no quorum, he is not a director. The curative proviso cannot change this. It can, however, cure his subsequent actions, including his participation in the appointment of another director (Oliver v Elliott).

21


Overall Solution Map: So you think there has been a wrong…

Step One: Who has been Wronged by Who?

If an outsider has been wronged by the corporation or a director/officer/agent >>> personal action e.g. in K if there is one, or in ECO. If ECO, may rely on breach of statutory duty of care to establish fault (Peoples; BCE)

The personal action may be against the corporation It may also be against officers/directors/agents in their personal capacities. Here, will

have to ask if liability can be imposed in spite of corporate personality.

If the corporation has been wronged by its own directors/officers… (or another?) >>> consider either direct corporate action. Can/will the corporation sue itself? This

will also be a preliminary step in representative action, b/c notice is required to BoD. The corporation sued directly, e.g. in Regal v Gulliver, Peso, Gravino,

Canadian Aero (?). Notably, all misappropriation of opportunity cases. If involves breach of duty of care, GO TO PAGE If involves breach of fiduciary duty, GO TO PAGE

>>> If direct corporate action doesn’t seem feasible, consider representative action GO TO PAGE, then go to material on duty of care / fiduciary duty

If a corporate stakeholder (security holder, creditor, director, or officer) has been wronged by the corporation, its affiliates, or its directors…

>>> personal action, if possible >>> action in oppression, if personal action is not possible, GO TO PAGE

Note, combinations of these actions are possible. Representative action plus oppression

Commonly sought together First Edmonton Place: only representative action successful

Sometimes both are successful E.g. Deluce Holdings v Air Canada Or, consider: Majority shareholder causes BoD, through her nominees

on the board, to enter into a K or loan agreement b/t her (the majority shareholder) and the company on terms that are highly favorable to her (the majority shareholder). Here, a minority shareholder may bring a representative action against the BoD and also an action in oppression against the BoD.

Personal action + representative action: possible, but difficult. The same [corporate] action may give rise to both a personal claim and a

representative claim where a stockholder suffers injury that is distinguishable from (“not merely incidental to”) the injury suffered by the corporation. (Goldex)

22


The statement of claim must clearly differentiate from the representative claims and the personal claims and leave must be sought and granted for the representative claims (Farnham; Goldex).

Hercules v E&Y: found there was no personal action distinguishable from the representative action. The reasoning in the case, however, was questionable. First it established that auditors owe a duty of care to shareholders as a group. Second it equated shareholders group interests with those of the corporation. This is contra e.g. Peoples. The conclusion that followed, however, was that…

Representative Action

Don’t even think about applying this unless a wrong against the corporation is at issue, and the corporation won’t sue the wrongdoer itself!

Does the person bringing the action qualify as a complainant? Practically, leave will be refused if the person does not.

Does the person fall into one of the categories of CBCA 238(a)-(c) / QBCA 439(1)-(2)?

238. In this Part, “complainant” means

(a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates, Definition of “security” includes shares and registered debt obligations (bonds debentures,

and notes) but not regular loans (CBCA 2(1); First Edmonton) QBCA: Definition of “security” does not include debt securities for private (untraded)

corporations (QBCA 2, 439(1)). Current and former! “beneficial owner”, so beneficiaries of bonds, etc. held in trust are included.

(b) a director or an officer or a former director or officer of a corporation or any of its affiliates,

(c) the Director [the federal bureaucrat responsible for the administration of the statute] No parallel provision in the QBCA

If not, might the person qualify as a “proper person” per CBCA 238(d) / QBCA 439(3)?

(d) any other person who, in the discretion of a court, is a proper person to make an application under this Part. QBCA: “has the interest required to make an application under this division.” (QBCA

439(3)) This is narrower than the CBCA, requiring a personal stake or interest in the corporation or its conduct.

Courts have considerable discretion under (d) to, where justice and equity so require, recognise as complainants persons not falling into the other categories. Where will justice and equity require recognition? (First Edmonton)

23


For the purposes of the representative action , the person must be one “who could reasonably entrusted with the responsibility of advancing the interests of the corporation seeking a remedy to right the wrong allegedly done to the corporation” (First Edmonton) – a reliable “litigation fiduciary”.

This might include a creditor, or even someone to whom the corporation is contingently liable, depending on the circumstances. (First Edmonton)

Bear in mind the general purpose of representative actions (and the oppression remedy): assuring managerial accountability. (First Edmonton)

Also, representative action is a mechanism for correcting wrongs against the corporation that would not otherwise be righted (First Edmonton). So, if the injury to the person seeking to invoke the representative action is one that arises independent of the wrong to the corporation, then that should be a personal claim (Goldex)

Will leave be granted? 239. (1) Subject to subsection (2), a complainant may apply to a court for leave to bring an action in the name and on behalf of a corporation or any of its subsidiaries, or intervene in an action to which any such body corporate is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate.(2) [caveats] No action may be brought and no intervention in an action may be made under subsection (1) unless the court is satisfied that

(a) the complainant has given notice to the directors of the corporation or its subsidiary of the complainant’s intention to apply to the court under subsection (1) not less than fourteen days before bringing the application, or as otherwise ordered by the court, if the directors of the corporation or its subsidiary do not bring, diligently prosecute or defend or discontinue the action;(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.LEAVE: Before an applicant may launch a representative action, she must obtain leave. The leave requirement is strictly enforced (Farnham v Fingold): The wrong complained of must be against the corporation (CBCA 239(1); QBCA 445) 2 weeks notice to the directors, so they have the option to bring the action themselves

(CBCA 239(2)(a); QBCA 446) Notice need not be detailed. Just point out the general area of concern. Often,

applicants are going only on hearsay. That’s okay at this point (Armstrong v Gardner) The complainant is acting in good faith (CBCA 239(2)(b); QBCA 446(2))

Little case law on this requirement. It does not seem to be a heavy one. (474) The action appears to be in the corporation’s interests – not some minor technical matter

(CBCA 239(2)(c); QBCA 446(2)) This is not a high bar. Requires an arguable case, excluding frivolous and vexatious

actions (BCE) If the corporation investigated the matter and decided not to pursue it, the court will

show some deference, especially if independent directors made the decision (Bellman v Western; see also Keeprite)

Ratification is relevant, but not dispositive, in determining whether the action is in the corporation’s interests (CBCA 242(1); QBCA 440).

24


If leave is granted, Powers of the court in the conduct of the suit: “any orders it thinks fit,” including

authorization, directions for conduct of action, legal fees, $$ to be paid directly to former and present security holders rather than the corporation, etc. (CBCA 240)

QBCA: Some of the listed remedies are surprising – amending the articles, USA, etc. (QBCA 447)

Now you have to establish that the corporation has indeed been wronged. Breach of fiduciary duty by a director or officer GO TO PAGE Breach of duty of care by a director or officer GO TO PAGE Some other breach: e.g., an outsider has breached a K with the corporation

MISC Statement of claim / relationship b/t personal and representative action:

Where the same action is a wrong against both the stockholder in her personal capacity and a wrong against the corporation, the stockholder can sue the corporation in her personal capacity for any injury that is not incidental to an injury to the corporation … [for any injury] that does not arise simply because the corporation itself has been damaged and as a consequence of the damage to it, its shareholders have been injured (Goldex)

Where a stockholder suffers injury attributable to the wrongful act of a 3rd party (director/officer), the stockholder may bring: (Goldex)

With leave, a derivative action on behalf of the corporation for injury suffered by the shareholder that is incidental to an injury suffered by the corporation

A personal action against the 3rd party for injury suffered by the shareholder independent of the injury suffered by the corporation.

Deluce, ON, 1992 – Rep action (and oppression) succeeds.

F: AC bought Deluce. USA specified AC could, upon the termination of Mr. Deluce, call the 25% Deluce stake. AC, via its directors, fired Mr. Deluce w/o cause, made the call. Deluce brought rep. action.

I: Did the AC directors violate their fiduciary duty to act in Air Ontario’s best interests? H: Yes!

Breach of Duty of Care

Duty of Care ( Peoples )

CBCA 122. (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

QBCA 119. Subject to this division, the directors are bound by the same obligations as are imposed by the Civil Code on any director of a legal person. // Consequently, in the exercise of their functions, the directors are duty-bound toward the corporation to act with prudence and

25


diligence, honesty and loyalty and in the interest of the corporation.// In their capacity as mandataries of the corporation, the officers are bound, among other things, by the same obligations as are imposed on the directors under the second paragraph

Who? “director and officer” (CBCA 122(1)) – Same in QC (QBCA 119) Scope? “in exercising their powers and discharging their duties” (CBCA 122(1))

The duty of care applies to actions falling within the scope of directors’ and officers’ duties. It does not apply to actions they take in their personal capacities (then ECO).

What are these duties? See [ROLE OF MANAGEMENT] Recall: directors have a duty to manage and or supervise the management of

the corporation (CBCA 102; QBCA 112(1)). Recall: officers’ duties are those the directors assign to them (CBCA 121(a);

QBCA s 112(2), 116), by contract. Same in QC: “In the exercise of their functions” (QBCA 119)

Duty to who ? The Corporation : Directors and officers owe their statutory duty of care to the

corporation (Peoples). Where they breach the duty, the corporation can sue, either through the board of directors, or via the the representative action mechanism.

Also oppression remedy. Others : Directors and officers also owe their statutory duty of care (contra duty of

loyalty) to others – for example, creditors (Peoples) However, the CBCA provides no “independent foundation for claims” where

the breach is in respect of the duty of care owed to others. Rather, that party must resort to CML negligence or CCQ 1457. She can rely on breach of the statutory duty of care to establish fault (Peoples; BCE). At CML, there will often be issues concerning limitations on recovery for pure economic loss (Welling).

QC: in CBCA 119, seems limited to the corporation only, but more broad in CCQ 322

Standard of Care ? Elements : “care, diligence and skill” (CBCA 122(1)) – diligence and skill are CML+!

Care: Like at CML, care requires directors and officers to foresee and take precautions against harm that is reasonably foreseeable to follow from a certain course of managerial conduct.

Diligence: Requires reasonable attentiveness to managerial obligations This does not require “continuous attention to the affairs of the

company” does not require 100% attendance at meetings (Soper) Skill: Requires acts are consistent with those of a reasonably knowledgeable

and experienced manager. Justification: directors, and especially officers, are hired on account of their skills!

“prudence and diligence” under the QBCA 119 Objective : “that a reasonably prudent person would exercise” (CBCA 122(1))

This does not require perfection (Peoples) But it is a higher standard than the one that applies for negligence at CML

(Peoples). It is not a “objective subjective” standard. It is not adjusted for the particular capacities of the director at issue (Peoples, contra Soper).

26


QBCA 119 does not make clear that the standard is objective! Contextual : “in comparable circumstances” (CBCA 122(1))

Take into account market and sectorial conditions (Peoples) Take into account time pressures, etc. Don’t judge by information that is

available only in hindsight. QBCA 119 does not make clear that the standard is contextual!

Business Judgment Rule Pursuant to the business judgment rule, in evaluating whether a director’s

business decision is consistent with her statutory duty of care, a court will show some deference (Soper; Peoples; BCE).

On account of corporate manager’s relative expertise (compared to courts), courts will not interfere with business decisions falling “within a range of reasonable alternatives”, irrespective of whether such decisions are “perfect” (Maple Leaf Foods; BCE)

The “reasonable range of alternatives” excludes, however, instances of gross negligence or bad faith.

The Business judgment rule has a moderating impact on the Duty of Care (Peoples). In the United States, Delaware has taken the business judgment rule to the extreme, effectively refusing to review business decisions on their merits, and instead focusing only on procedural review. It is unclear if this is the case in Canada.

Defenses : Reliance in good faith on the financial statements of the corporation, presented by a

director, officer, or auditor of the corporation – or on a professional (lawyer, accountant, etc.) – is a defense for a director alleged to have breached her statutory duty of care to the corporation (CBCA 123(5))

Peoples: Duty of care not breached.

The Peoples trustee alleges that the Wise Brothers breached their duty of care by implementing a new procurement policy to the detriment of Peoples’ creditors. The duty of care did not result in liability in this case because the circumstances in which Peoples found themselves were dire and they made the decision as best they could. Plus, there were other factors that drove Peoples into insolvency

Soper: Duty of care breached. Tax case. Should have deducted and remitted from employees as required.

Fiduciary Duty

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

27


QBCA 119. Subject to this division, the directors are bound by the same obligations as are imposed by the Civil Code on any director of a legal person. // Consequently, in the exercise of their functions, the directors are duty-bound toward the corporation to act with prudence and diligence, honesty and loyalty and in the interest of the corporation.// In their capacity as mandataries of the corporation, the officers are bound, among other things, by the same obligations as are imposed on the directors under the second paragraph

Who? “director and officer” (CBCA 122(1)) – Same in QC (QBCA 119) Scope? “in exercising their powers and discharging their duties” (CBCA 122(1))

The duty of loyalty applies to actions falling within the scope of directors’ and officers’ duties. It does not apply to actions they take in their personal capacities.

What are these duties? See [ROLE OF MANAGEMENT] Recall: directors have a duty to manage and or supervise the management of

the corporation (CBCA 102; QBCA 112(1)). Recall: officers’ duties are those the directors assign to them (CBCA 121(a);

QBCA s 112(2), 116), by contract. Same in QC: “In the exercise of their functions” (QBCA 119)

Duty to who ? “best interests of the corporation” (CBCA 122(1)) – Fiduciary duty is owed to the corporation, not to shareholders or creditors (Peoples; Brant v Keeprite).

Thus, only the corporation can sue for breach of fiduciary duty. – Rep Action? What about oppression?

QC: in CBCA 119 = same. The prophylactic rules: The duty of loyalty includes prophylactic rules which are designed to

prevent fiduciaries from placing themselves in situations where they will be tempted to violate their duty of loyalty.

No conflicts of interest : the fiduciary shall avoid situations where her self-interest conflicts with her duty of loyalty to the beneficiary (unless the beneficiary authorizes the situation with full information). (CCQ 324)

No conflicts of duty : (multiple masters rule): the fiduciary shall avoid all other duties that conflict with her duty of loyalty to a beneficiary (unless the beneficiary authorizes the conflicting duty with full information).

Conduct or motives? Generally, fiduciary duty regulates conduct, not motives. An a fiduciary’s action

constitutes, irrespective of the motives underlying it, a breach of her fiduciary duty if it is disloyal to beneficiary’s interests (e.g. KLB, as cited in Peoples). The Court in Peoples, however, even after reviewing KLB, placed considerable emphasis on motives.

Remedies : Disgorgement of profit: Gains-based remedy; reimburse profit gained in breach of

duty Equitable damages: where the beneficiary has suffered a loss, they may be

compensated in the nature of compensatory damages. Rescission: of any contract on behalf of the fiduciary. Shareholders can also sue. Constructive trust: proprietary rather than personal remedy

28


Fiduciary Duty -- Self Dealing Cases and their ratification Rule : At CML, A contract between a corporation and one of its fiduciaries

(directors/officers) is voidable by the corporation, and the fiduciary is accountable to the corporation for all profits associated with the contract, irrespective of whether it was in the corporation’s best interest to conclude the contract (Aberdeen Railway; see also CCQ 326).

Strict : The no self-dealing rule is strict. As an incarnation of the prophylactic no conflict of interest rule, it must be followed, even to the detriment of the general fiduciary principle that underpins it.

Ratification at CML : At CML, a corporation’s shareholders may ratify a self-dealing transaction by majority (NW Transportation Co v Beatty), or perhaps unanimous (Burland v Earle), vote.

Ratification under the CBCA and QBCA : In general, self-dealing transactions remain voidable [CBCA 120(8), CCQ 326,

QBCA 131] The board may, however, approve a self-dealing transaction where the fiduciary

disclosed in writing her interest in the transaction to the company and where the transaction was “reasonable and fair to the corporation when it was approved” [CBCA 120(7)]. The self-dealing director is not allowed to vote on approval of the self-dealing transaction [CBCA 120(5)].

QBCA requires more comprehensive disclosure – disclosure not just of “material” interests, but of “any” interest, including ones where board approval would not be required [QBCA s 122, 126, compare with CBCA s 120(1)].

QBCA: the conflicted officer/director may not even be present when the board considers approval of self-dealing transaction is considered [QBCA 127 contra CBCA 120(5)].

QBCA: If all directors are interested and therefore conflicted, the transaction can only be approved if approved by shareholders on majority vote. CBCA didn’t contemplate this issue [QBCA 129]

QBCA: To be approved, the transaction must be “in the interests of the corporation.” [QBCA 132, 133]. A higher bar than CBCA’s “reasonable and fair to the corporation”? [CBCA 120(7)]. This may be more demanding standard, one more consistent with the FD of directors and officers – fiduciaries not just required to be fair, but to be champions for their corps!

CBCA 120(7.1) also permits shareholders to approve a self-dealing transaction by special resolution (=2/3 vote, see s 2(1)). Shareholder approval is effective even if disclosure to the corporation did not occur. It requires, however, disclosure at the shareholder to the shareholders, that the transaction was reasonable and fair, and also that the director or officer acted in good faith.

QBCA: Regular majority rather than 2/3 majority shareholder vote is required, but only non-conflicted shareholders may vote [QBCA 133 contra CBCA 120(7.1), contra NW Transportation Co v Beatty]

QBCA: Again, “in the interests of the corporation.” >>> See above.

NW Transportation Co v Beatty – yes, there was a self-dealing transaction therefore a violation of the duty of loyalty, but ratification was effective, even though the conflicted

29


director voted his own shares.

Fiduciary Duty – Misappropriation of opportunities “belonging” to the corporation Rule : Where a director/officer profits by reason of and in the course of her position, she is

accountable for her profits to the corporation (Regal v Gulliver). Strict : The no self-dealing rule is strict. As an incarnation of the prophylactic no conflict of

interest rule, it must be followed, even to the detriment of the general fiduciary principle that underpins it.

It applies even in the absence of fraud, where the director/officer acted in the best interest of the corporation, and where it was impossible for the corporation to seize the business opportunity itself (Regal v Gulliver).

Outside Ambit Defence : The fiduciary may, however, avoid liability by convincing the court that the opportunity fell beyond the ambit of the fiduciary relationship [Peso Silver].

Canadian Aero provided a list of factors which will assist a court in determining whether an opportunity fell within this ambit. (see below)

Position or office held Nature of corporate opportunity Ripeness / Specificity of corporate opportunity Management’s relationship to the opportunity Amount of knowledge possessed by management Circumstances in which info was obtained Whether knowledge of opportunity was special or private Time in continuation of FD where alleged breach occurs after termination

with company. Circumstances under which the relationship was terminated

Gravino v Enerchem placed particular emphasis on the business opportunity’s maturity, finding that if an opportunity, once seized, differs considerably in form from the opportunity as it appeared when the corporation initially considered, it may not fall within the ambit of the fiduciary relationship. (see below)

Ratification : Shareholder approval of misappropriated business opportunities is possible.

Regal (HOL, 1942) – cinema leases. DoL breached. Ratification possible but not attempted.

Peso (SCC, 1966) – No breach of DoL. Outside ambit b/c approached privately.

Aero (SCC, 1974) – Tender, resignation, compete for tender, K. DoL breached. Applies after resignation.

Gravino (QCCA, 2008) – leasing tankers. DoL not breached. Opp. Not mature.

Fiduciary Duty – Entrenchment Cases / Improper Purposes It is unconstitutional for directors to use their fiduciary powers purely or primarily to

interfere with shareholders’ voting rights – to destroy an existing majority or to prevent the creation of a new majority (Hogg v Cramphorn, as nuanced by Teck, Olympia).

Teck and Olympia’s care to distinguish rather than overrule Hogg suggests that

30


However, directors may exercise their fiduciary powers in a manner that interferes with shareholders’ voting rights if they are primarily motivated by a reasonable belief that their actions are in the long-term best interests of the corporation. Under these circumstances, there is no breach of directs’ FD, even if the directors’ actions also serve their individual interests (Olympia, Teck).

Directors must exercise their powers in good faith, in accordance with their fiduciary duties. (Teck Corp v Millar)

Reasonable Grounds : They must, that is, have objectively reasonable grounds to believe that their actions are in the best interests of the company. (Teck Corp v Millar)

BoP : Good faith is presumed – a person challenging an action that is, bears the burden of proving that the directors had no reasonable grounds to believe their actions were in the best interests of the corporation. (Teck Corp v Millar)

Independent directors??? (Brant v Keeprite) In Delaware, when a corporation’s sale is inevitable, management’s DoL of management

shifts to an obligation to get the best possible price for shareholders (Revlon, Delaware, 1986). However, this does not appear to be the law in Canada (Maple Leaf Foods, 1998)

Hogg, UK, 1967 – Breach of DoL. Improper purpose.

Teck, BCSC, 1972 – no breach of DoL. Primary purpose wasn’t entrenchment.

Olympia, ON, 1986 – no breach of DoL. Acted in accordance w/ DoL.

Brant, ONCA, 1991 – no breach of DoL. Independent directors helped.

Oppression Remedy

The oppression remedy is concerned with abuse of an inequality in bargaining power. Thus, relief is not available where power and authority are equally distributed. (First Edmonton). Unclear if talking about information, money, knowledge, interest, etc.

Oppression does not proctect corp interests! (First Edmonton) The oppression remedy protects minority stakeholders’ legal and equitable interests from

oppressive acts of a corporation or its directors (BCE).

Does the person bringing the action qualify as a complainant?

Does the person fall into one of the categories of CBCA 238(a)-(c) / QBCA 439(1)-(2)?

238. In this Part, “complainant” means

(a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates, Definition of “security” includes shares and registered debt obligations (bonds debentures,

and notes) but not regular loans (CBCA 2(1); First Edmonton) QBCA: Definition of “security” does not include debt securities for private (untraded)

corporations (QBCA 2, 439(1)).

31


Current and former! “beneficial owner”, so beneficiaries of bonds, etc. held in trust are included.

(b) a director or an officer or a former director or officer of a corporation or any of its affiliates,

(c) the Director [the federal bureaucrat responsible for the administration of the statute] No parallel provision in the QBCA

If not, might the person qualify as a “proper person” per CBCA 238(d) / QBCA 439(3)?

(d) any other person who, in the discretion of a court, is a proper person to make an application under this Part. QBCA: “has the interest required to make an application under this division.” (QBCA

439(3)) This is narrower than the CBCA, requiring a personal stake or interest in the corporation or its conduct.

Courts have considerable discretion under (d) to, where justice and equity so require, recognise as complainants persons not falling into the other categories. Where will justice and equity require recognition? (First Edmonton)

(1) The person must not have an personal, for example proprietary or contractual remedy. (First Edmonton). This is not a mechanism for debt collection.

(2) Bear in mind the general purpose of the oppression remedy (and representative actions): assuring managerial accountability. (First Edmonton).

For the purposes of the oppression remedy , the person must have some evidence of conduct that is “oppressive, unfairly prejudicial, or that unfairly disregards the interests of any security holder, creditor, director or officer”. (CBCA 241(2); First Edmonton)

This would include a creditor if: (1) “the conduct complained of constituted using the corporation as a

vehicle for committing fraud on the applicant” (First Edmonton) (2) the conduct complained of constituted a breach of the applicant’s

reasonable expectations (First Edmonton)

Oppression Remedy 241. (1) A complainant may apply to a court for an order under this section.(2) If, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates

(a) any act or omission of the corporation or any of its affiliates effects a result,(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or(c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner

that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of. Whose conduct are we concerned with?

the corporation, its affiliates, directors (CBCA 241(2)) QBCA: same (QBCA 450)

32


The conduct of other actors, such as shareholders, may also support a claim for oppression. (BCE)

What type of conduct are we concerned with? [conduct] “that is oppressive or unfairly prejudicial to or that unfairly disregards the

interests of…” (CBCA 241(2)) Concerns the reasonable expectations of the parties (First Edmonton; BCE) Concerns

Concerns effect, not intent (Westfair Foods) Not necessary to prove an actual injury. Prospect of an injury or loss may suffice. QBCA omits “unfair disregard”, which seen as the broadest basis for a claim (QBCA

450(1)-(3)) QBCA says “threatens to…” in each clause – suggests remedy may be deployed

proactively. (QBCA 450(1)-(3)) Whose interests are protected?

“security holder, creditor, director or officer” (CBCA 241(2)) QBCA omits creditor (QBCA 450)

Remedy: courts effectively have unlimited powers to fashion any remedy they think suitable (CBCA 241(3); QBCA 451)

Limitation: the court may not, via oppression, effectively grant shareholders preference over creditors. (CBCA 241(2); QBCA 451)

Nor may the remedy extend beyond rectifying the oppression (Naneff)

Overall Test Oppression is an equitable remedy. Thus, the overall burden on the plaintiff is to demonstrate

that it would be “just and equitable” for the court to provide a remedy (BCE). The analysis concerns fairness rather than legal rights (BCE)

(0) Has there been conduct “that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of a [protected stakeholder]”?

(1) What were the protected stakeholder’s reasonable expectations under the circumstances? (2) Was one of these reasonable expectations breached? (BCE)

Fair treatment, is most fundamentally what stakeholders are entitled to “reasonably expect”. (BCE)

Directors’ fiduciary duties are to act in the corporation’s not stakeholders’ best interests (Peoples) thus, stakeholders can only reasonably expect that directors will act in the corporation’s best interests (BCE)

An objective analysis – the actual expectation of the stakeholder is not decisive. (BCE)

A contextual analysis, considering: (BCE) general commercial practice (can expect consistency with), the nature of the corporation, (what expect given size, dispursion,etc.) the relationships between the parties, (friends? Family? Etc.) (esp.

Deluce) past practice (note: practices are fluid), (esp. Westfair) steps the claimant could have taken to protect itself, representations and agreements , (including promotional docs.)

33


the resolution of conflicting interests between corporate stakeholders; -- it falls to directors to resolve them. That’s reasonable. (esp. BCE)

You can’t please everyone! Sometimes, directors must act against particular interests! They should use their business judgment (BCE)

Contracts are often fatal: One cannot generally invoke a contract to establish a reasonable expectation, because corporations routinely break their contracts. Where there is a contract, sue in contract, but no claim in oppression.

(3) Is the breach of a reasonable expectation actionable? Does it amount to oppression, unfair prejudice, or unfair disregard? These are not watertight compartments. They comingle (BCE)

Oppression : coercive, abusive, in bad faith (BCE); Unfair prejudice : less culpable state of mind, but unfair consequences (BCE)

Discrimination between shareholders benefiting the majority to the the detriment of the minority shareholder is indicative of “oppression…” (Arthur v Signum)

Bad faith is indicative of “oppression…” but is not a necessary condition. (Arthur v Signum; Westfair Foods)

Examples: squeezing out a minority shareholder, failying to disclose related party transactions, changing corporate structure to drastically alter debt ratios, adopting a “poson pill” to prevent a takeover bid, paying dividends without a formal declaration, pereferring some shareholders with management fees and paying directors fees higher than the industry norm (BCE)

Unfair disregard : ignoring a protected stakeholder’s interest (BCE), or setting it aside as unimportant.

Examples : favouring a director by failing to properly prosecute claims, improperly reducing a shareholder’s dividend, failing to deliver property belonging to the claimant

BCE : consideration of debenture holders’ interests was required (and met)

Additional guidelines : Even lawful activity can fall under “oppression…” (Deluce) Lack of valid corporate purpose is indicative (Arthur v Signum) Lack of disclosure of information to minority shareholders is indicative

(Arthur v Signum) Unreasonable failure to act at arms length is indicative (Arthur v Signum)

Relationship between oppression and representative action Common concern of the two is abuse of power. (First Edmonton)

BCE, SCC 2008 – Oppression Failed.

I: In agreeing to a takeover whereby a corporate subsidiary acquired new debt

Westfair, ABCA, 1991 – Oppression succeeds.

F: W had 2 types of shares, common and preferred. Preferred shares entitled to

Deluce, ON, 1992 – Oppression (and rep action) succeeds.

F: AC bought Deluce. USA specified AC could, upon the termination of Mr. Deluce, call

34


which resulted in the downgrade of the debt rating for certain debentures, did BCE directors oppress the debenture holders?

H: No. The debenture holders had a reasonable expectation their interests would be considered, and they were considered. They did not have a reasonable expectation, under the circumstances, that the company would reject a deal that upheld debenture holders’ contractual rights, but hurt their interests.

$2 dividend plus retained earnings at liquidation. Past practice was to pay small dividend to common shareholders and retain the rest. Changed: started paying out big dividends to common instead of retaining earnings?

I: Did the company oppress its preferred shareholders?

H: Yes!

Order: buy the preferred shares!

the 25% Deluce stake. AC, via its directors fired Mr. Deluce w/o cause, made the call.

I: Was AC’s conduct oppressive?

H: Yes. Deluce’s held a reasonable expectation, based on the USA and its history and relationship with AC, that the latter would act in good faith, and not terminate w/o cause in order to make a call.

NB: The suit succeeded against AC, because though the board was the instrument of oppression, AC was the oppressor!

First Edmonton, ABQB, 1988 -- First Edmonton not a complainant for purposes of oppression. No breach of reasonable expectations. No evidence of fraud against the applicant. Only the corporation. Plus, First Edmonton was not a creditor at the time it took the cash payment. No rent due yet.

MAJORITY RULE

Shareholder Meetings – Types Annual General Meeting Who calls it? The directors (CBCA 133(a)).

Or shareholders/court if the directors fail (CBCA 143-144) When? Within 18 months of incorporation, 15 months after last AGM (CBCA 133(a)). For What?

Election of directors (CBCA 106(3)) Consider (confirm, reject, or amend) directors’ changes to bylaws (CBCA 103(2)) Appoint an auditor (CBCA 162(1)) Presentation by directors of financial statements, auditor’s report (CBCA 155(1)) Consider shareholder proposals (CBCA 137)

Special Meeting Who calls it? The directors (CBCA 133(2)) When? When significant decision needs to be made. For what?

Removal of directors (CBCA 109(1)) or the auditor (CBCA 165(1)) To appoint more directors where there is no quorum (CBCA 166(2)) Also bylaws (above) Constitutional amendments – special resolution (CBCA 173(1).

For example, voting classes (CBCA 176) Sale of corporate assets – special resolution (CBCA 189(3)) Winding up – special resolution (CBCA 211(1))

35


Requisitioned Meeting Who calls it? Shareholders with at least 5% stake in corporation (CBCA 143(1))

10% in QBCA 208 For what? Whatever the shareholder thinks is so urgent: often removal of directors,

controversial by-laws, shareholder proposals. Who pays? The corporation (CBCA 143(6))Court Ordered Meetings (CBCA 144) Last resort option when no one wants to call a meeting but the court feels that it has to be

done. This does not happen very often

Notice of meetings To Whom? Shareholder entitled to vote, directors, and the auditor (CBCA 135(1)). No clear

indication in CBCA that notice to non-voting shareholders is required. How much notice? 21-60 days (CBCA Regulations)

QBCA: shorter notice period for small private corporations (QBCA 165) Of What?

When and where the meeting is to be held (CBCA 135(1)) Any special business: anything other than financial statements, auditor’s report,

election of directors, re-appointment of auditor (CBCA 135(5)-(6)) Proposed amendment to articles (CBCA 175(2))

Adequacy of notice: Notice is adequate only where it gives shareholders sufficient detail and comprehensible knowledge such that they can understand the matter and reach an informed decision on that matter. This requires more than generalizations. If notice is inadequate, all decisions purportedly taken at the meeting are invalid (Garvie v Axmith).

Location of meetings The meeting must be held in the jurisdiction of incorporation (in Canada for CBCA

corporations). It may be held elsewhere if all shareholders agree (CBCA 132(1)-(2)) This rule is strict, even if the location of the meeting is of no practical consequence, would

not have changed the result, was in the wrong place due to a good faith mistake, etc. (Upper Canada Resources). The strictness reflects the importance attributed to shareholder meetings.

QBCA permits entirely virtual meetings, if bylaws allow this (QBCA 175)

Voting at Meetings Quorum: 50% of shares, in-person or by proxy, unless by-laws say otherwise (CBCA 139(1))

If only 1 Shareholder: he/she in-person, constitutes the meeting (CBCA 139(4) Method: Vote by hand, anyone may demand ballot; or electronic (CBCA 141) A shareholder may sue to complain of a voting irregularity in her personal capacity (Pender v

Lushington, contra MacDougall v Gardiner).

Proxy Voting (CBCA 147-154) 148(1): A shareholder may appoint a proxy. 148(4): May revoke a proxy’s any time before meeting or show up at meeting personally. 149(1): corporations have obligation to solicit proxy voters

Those opposed to management can also set up proxy, but can be expensive

36


Regs, ss. 54-59 – managers must specify they can specify another person…proxy ballot must provide space to specify how shares to be voted on each issue.

148(1): proxies must vote as directed, unless given discretion.

Shareholder Proposals Function: Management is not bound by shareholder directive. But they improves

shareholder voice. These proposals disrupt the corporate governance problem of management control over meetings (i.e. where managers decide what will be put on the agenda to be voted on at meetings).

The Content of proposals is that in theory, they are limitless. Section 137(1) CBCA: Entitlement Shareholder proposals can be included in the

management proxy circuit Sections 46-49 CBCA: a shareholder must have at least 1% of shares in the corporation or

$2,000 worth + held for at least 6 months to submit a proposal Section 137(5): Limits

A corporation is not required to circulate a proposal if its primary purpose is to put forth a personal claim or redress for personal grievance

Nor if the proposal doesn’t relate in a significant way to corporate business QBCA also allows shareholders to debate matters other than shareholder proposals (QBCA

187)

Shareholder Accountability before the Oppression Remedy Majority shareholders owe a DoL to the corporation (Allen v Gold Reefs, not good law) Shareholders, in exercising powers over the corporation, must honestly believe that their

decision is in the best interest of the corporation as a whole (Greenhalgh v Ardene) Not good law! Proprietary interest, etc. See short answer question.

Slush

In Peoples (SCC, 2004) , Wise Stores purchased Peoples Stores from Marks & Spencer, with financing from a bank and from M&S (payment by installments) in exchange for charges on People’s assets and an undertaking by Peoples not to fully merge the two companies (to ensure the charges would be effective). Peoples’ directors tried (according to the SCC) to make the merger work in spite of the merger restriction, implementing a joint procurement policy which, before failing, caused Peoples to become indebted to Wise. Ultimately, however, largely due to poor market conditions, both companies went bankrupt. Upon liquidation, after the bank and M&S recovered, no funds remained for unsecured creditors. The trustee in bankruptcy, on behalf of the unsecured creditors, sued Wise’s directors (the Wise brothers) personally, arguing they had breached their duty of care to the creditors under CBCA s 122(b), their fiduciary duties to the corporation under s 122(a), and that as shareholders, they had oppressed (CBCA s ???) Peoples’ creditors. Major and Deschamps, rejected all three arguments for a unanimous court.

With respect to the duty of care

37


With respect to the fiduciary duty, the court found that while an effect of the joint procurement policy was to (temporarily) improve Wise’s financial position, and by extension, its indirect effect was to benefit the Wise Brothers as shareholders in Wise, the Wise brothers were not motivated by this effect. Rather, they conceived and executed the joint procurement policy as an attempt to keep both companies viable. Because there was no fraud or dishonesty involved, the Wise Brothers had not breached their fiduciary duties.

With respect to oppression,

“Improper Purposes” Cases

In Hogg v Cramphorn (UK, 1967), in order to defeat an immanent hostile takeover by bidders expected to fire many employees, the directors of Cramphorn Ltd. diluted the voting power of shareholders likely to sell at a premium by issuing new shares to the employees pension fund (which understandably opposed the bid – this is a so-called “poison pill” defense). The court found, as a matter of fact, that the directors were acting in good faith, believing it would serve the best interests of the company to defeat the hostile bid. Hogg, however, a minority shareholder, sued, arguing the share issue was ultra vires and therefore voidable because it involved the exercise of director power for an improper purpose.

Buckly J endorsed Hogg’s argument, finding that purpose of the director’s power to issue shares [CBCA 25(1)] is to raise capital for the corporation. It cannot be used for an alternate purpose, even if the alternate purpose is consistent with directors fiduciary duty to the corporation (CBCA s 122). In particular, directors may not use their powers to interfere with the constitutional right of shareholders to determine the ultimate destiny of the company. The fact that the

In Teck Corp v Millar (BCSC, 1972), Teck acquired a majority stake in Afton Ltd. in order to force it to conclude a development agreement concerning a mine it owned. Millar and his fellow Afton directors believed the development agreement was contrary to Afton’s best interests. Thus, they concluded a development agreement with Canex and issued it shares to dilute Teck’s controlling stake. Teck challenged the share issue, relying on Hogg v Cramphorn.

Berger J upheld the share issue on the basis that the directors were acting in what they reasonably believed to be the best interests of the company. Directors must exercise their powers in good faith, in accordance with their fiduciary duties – they must have objectively reasonable grounds to believe that their actions are in the best interests of the company. Good faith is presumed – a person challenging an action that is, bears the burden of proving that the directors had no reasonable grounds to believe their actions were in the best interests of the corporation.

Formally, Berger distinguished Hogg v Cramphon, arguing that while in Hogg, the directors acted primarily to assure control of the company, here, the directors acted primarily to obtain the best development agreement for their company – retention of control was secondary. In practice, Berger overturned Hogg. Hogg clearly stood for the proposition that directors may not exercise their constitutional powers to thwart the constitutional rights of other stakeholders (in particular, stockholders). Teck

38


stands for the proposition that directors may do precisely this, as long as doing so is, (reasonably) in their view in the best interests of the company.

Teck appears to prioritize director power over majority rule, as director long as the prior is exercised in accordance with fiduciary duty. Is this a good idea? What are the limits to this rule? Can directors do anything to interfere with shareholder rights, as long as it is in the best interest of the corporation? How easy will it be to distinguish primary from secondary motives?

While Hogg suggested that each power in the corporate constitution has a purpose, Teck suggest that the corporate constitution grants powers to directors for the purpose of acting within the best interests of the corporation.

Self Dealing Cases In NW Transportation Co v Beatty (JCPC, 1887), JHB, a director and (effective – he gave a

few shares to friendly directors) majority shareholder of NW Transportation, sold a ship he owned to the company. The company needed the ship, no other ship was available, and the price was reasonable. The Board of directors passed a bylaw approving the purchase and the shareholders approved the bylaw, with JHB (and his friendly directors) casting almost all of the yes votes. A minority shareholder sued JHB on behalf of the corporation in a representative action, claiming that the ratification vote was ineffective b/c JHB voted on it, and that the purchase was therefore voidable.

The JCPC upheld sale, finding that the self-dealing transaction violated JHB’s fiduciary duty to the company, but that the ratification vote was effective – even though JHB cast most of the affirmative votes. In ratification and other shareholder votes, every shareholder has the right to vote, irrespective of what corporate offices that shareholder holds.

Earle v Earle, (ONCA 1900) later established that unanimous shareholder approval is required to ratify the transactions of a disloyal fiduciary. Statutory reform?

Beatty appears to prioritize majority rule over fiduciary duty. Contra Teck? There is an argument that this result is perverse.

Misappropriation of property or opportunities “belonging” to the corporation

In Regal Ltd. v Gulliver (HoL, 1942), Regal Ltd. created a wholly owned subsidiary to acquire certain cinema leases, but the lessor required more capitalization for the subsidiary than Regal was able to raise. Four of Regal’s directors invested in the subsidiary, allowing the deal to proceed. It worked out well for everyone – Regal and its directors profited. Regal, however, under new management sued the old directors for an accounting of their profits, arguing they breached their fiduciary duties to the corporation by misappropriating a business opportunity.

The UKHL found that the directors had indeed breached their fiduciary duties to the corporation by realizing profits on account of their positions. They were therefore liable to the corporation for their profits. Where a director/officer profits by reason of and in the course of her position, she is accountable for her profits to the corporation. This rule is strict. It applies even in the absence of fraud, where she acted in the best

39


interest of the corporation, and where it was impossible for the corporation to seize the business opportunity itself – unless the transaction is approved by shareholders.

In Peso Silver Ltd. v Cropper (SCC, 1966), a prospector, at the suggestion of a geologist, offered to sell a mine to Peso Silver. Peso’s board, including its director Cropper, evaluated the offer and declined. Peso received several offers like this one each week. Later, The geologist approached Cropper personally. He purchased the property and successfully developed it. Peso, under new management, sued Cropper for an accounting of his profits, arguing he violated his Fiduciary Duty owed to Peso by misappropriating a business opportunity.

Cartwright J found Cropper had not violated his FD because Cropper had not profited by reason of his position. He did not remember the prior offer or use any confidential information gained by virtue of his office. Moreover, the geologist had approached Cropper the second time in his personal capacity, as an individual member of the public. This conclusion is difficult to reconcile with the strictness that Regal insists upon. Generally, however, it appears to stand for the proposition that a fiduciary may avoid liability by convincing the court that the opportunity fell beyond the ambit of the fiduciary relationship – due, fore example, to the corporation’s prior refusal, the fiduciary being approached in her personal capacity, the fiduciary haven forgotten about the prior offer, etc.

In Canadian Aero v O’Malley (SCC, 1974), directors and Officers of Canadian Aero

Services worked on a tender contract. They then resigned from these positions and formed their own company, competed for the tender, and won for their own corporation.

Laskin found the directors liable to Canadian Aero for an accounting of their profits on the basis that they breached their FDs by misappropriating a business opportunity – the duty of loyalty disqualifies D or O from appropriating a business opportunity even after his/her resignation.

Laskin also highlighted a series of factors which help determine whether an opporitunity is inside the ambit of a fiduciary relationship:

Position or office held Nature of corporate opportunity Ripeness / Specificity of corporate opportunity Management’s relationship to the opportunity Amount of knowledge possessed by management Circumstances in which info was obtained Whether knowledge of opportunity was special or private Time in continuation of FD where alleged breach occurs after termination

with company. Circumstances under which the relationship was terminated

In Gravino v Enerchem (QCCA, 2008), ETC negotiated with Ultramar hoping for a deal whereby Ulttramar would transfer a lease of certain tankers to ETC. The deal was not concluded. G&C, ETC directors, left and incorporated Petro-Nav which, in cooperation with other market players, concluded a deal with Ultramar. ETI sued G&C for an accounting of their profits, contending they had breached their FD toward ETC.

40


Morissette J found there was no breach of FD because the business opportunity was not mature. In doing so, he suggested that opportunities are less likely to be mature if: they are generally known rather than confidential, if they are exploratory and hypothetical rather than advanced, the absence of continuing conflict of interest (resignation), and differences between the exploited opportunity and the one under negotiation at ETC (dif partners). Miller suggests, with references to the Canadian Aero factors, that this case was wrongly decided.

Entrenchment / enrichment cases

Latent conflict

In Delaware, when a corporation’s sale is inevitable, management’s DoL of management shifts to an obligation to get the best possible price for shareholders (Revlon Inc. v MacAndrews, Delaware, 1986). However, this does not appear to be the law in Canada (Maple Leaf Foods, 1998)

In Olympia Ltd. v Hiram Walker (ON, 1986), HW’s directors sought to defeat a hostile takeover bid by selling off HW’s liquor division, and using the proceeds to purchase corporate shares at a premium. The hostile bidder sued for an injunction to stop the sale of the liquor division on the basis that HW’s directors had approved the sale to entrench themselves in management, in violation of their fiduciary duty to the corporation.

Montgomery J upheld the sale, finding that the directors acted prudently, properly, reasonably, and fairly on the advise of their legal and financial advisors. Their motivation was to maximize the value of the corporation for the benefit of all shareholders; it was not solely to retain control of the corporation. It is generally unconstitutional for directors to use their fiduciary powers purely or primarily to interfere with shareholders’ voting rights – to destroy an existing majority or to prevent the creation of a new majority. However, directors may exercise their fiduciary powers in this manner where they are motivated by a reasonable belief that doing so is in the long-term best interests of the corporation. Under these circumstances, there is no breach of directs’ FD, even though the directors’ actions also serve their individual interests. (Olympia, drawing from Teck and Howard Smith)

Directors can establish that their belief that they were acting in the best interests of the corporation was reasonable by seeking independent advice (legal and financial advisors). Additionally, the court may defer to the Business Judgment Rule (in the absence of fraud, etc.).

In Brant Investment v Keeprite (ONCA, 1991), Keeprite purchased $20 million in assets from two other corporations. The purchase was made upon the recommendation of an independent committee of Keeprite’s board of directors, and financed by an issue of rights to existing shareholders. Certain minority shareholders nevertheless challenged the deal on a variety of grounds.

First, the minority shareholders argued that Keeprite’s majority shareholders had, by approving certain aspects of the deal, violated their fiduciary duties to the minority

41


shareholders. The court dismissed this argument. It pointed out that there is no precedent for the suggestion that majority shareholders owe fiduciary duties to minority shareholders. Further, it observed that the shareholder-shareholder relationship does not appear fiduciary in character. Shareholders do not, by virtue of an agreement or a relationship of trust, have discretionary power over other shareholders interests. Finally, it remarked that a shareholder’s interest in his shares is proprietary, and courts are not in the habit on placing innovative limitations on proprietary rights.

Second, the minority shareholders argued that the transaction was problematic for the role that the independent committee played in it. The court gave the following guidance:

A director is independent when he has no affiliation to a person interested in the transaction, or where his affiliation is not of a sort that would interfere with his ability to independently evaluate the transaction.

The business judgment rule applies to independent committees, though, it does not apply in the assessment of independence.

42

Date post:	06-Mar-2018
Category:	Documents
Upload:	ngohanh
View:	213 times
Download:	0 times

Partnership - LSAlsa.mcgill.ca/.../598-miller_businessassociations_Winter2… · Web viewLetter...

Documents