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CORPORATIONS Course Summary

Course Code 230B Section 002 Instructor Ron Davis Term 2011W Fall Author Vic Schappert School University of British Columbia Faculty of Law Textbook Yalden et al, Business Organizations: Principles, Policies and Practice (Toronto: Emond Montgomery, 2008)

CONTENTS CONTENTS ..................................................................................................................................................................... 1

1. Business Organization .......................................................................................................................................... 5

Framework of Analysis .................................................................................................................................... 5

Glossary of Terms ........................................................................................................................................... 5

Sole Proprietorships ........................................................................................................................................ 6

Partnerships.................................................................................................................................................... 6

General Partnerships ............................................................................................................................... 6

Limited Partnerships.............................................................................................................................. 12

Limited Liability Partnerships ................................................................................................................. 14

A Relationship of Trust and Confidence ................................................................................................. 14

Partnerships Example Problem .............................................................................................................. 14

2. Introduction to Corporations ............................................................................................................................. 15

Three Theories of Corporations ..................................................................................................................... 16

Nexus of Contracts ................................................................................................................................ 16

Mediating Hierarchy .............................................................................................................................. 16

Public Institution ................................................................................................................................... 16

Incorporation and Its Consequences ............................................................................................................. 17

The Corporation as a “Separate Legal Person” ....................................................................................... 17

Limited Liability ..................................................................................................................................... 17

The Process of Incorporation ........................................................................................................................ 19

Articles of Incorporation ........................................................................................................................ 19

When Does a Corporation Begin to Exist? .............................................................................................. 19

Piercing the “Veil” ......................................................................................................................................... 20

Rough Taxonomy of Reasons ................................................................................................................. 20

When the Veil Won’t Be Pierced ............................................................................................................ 21

Insurable Interests Cases ....................................................................................................................... 21

Fraud and Reasons of Justice ................................................................................................................. 22

Tax Liability ........................................................................................................................................... 22

Enterprise Liability ................................................................................................................................. 22

Tort Liability .......................................................................................................................................... 23

Final Notes on Veil Piercing ................................................................................................................... 23

Pre-Incorporation Contracts .......................................................................................................................... 24

Common Law of Pre-Incorporation Contracts ........................................................................................ 24

CBCA Statutory Regime ......................................................................................................................... 25

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BCBCA Statutory Regime ....................................................................................................................... 26

Summary of Statutory Regimes ............................................................................................................. 27

Agency .......................................................................................................................................................... 27

Actual Authority .................................................................................................................................... 28

Defective Appointments ........................................................................................................................ 28

Indoor Management Rule (a.k.a. Ostensible Authority) ......................................................................... 28

Management Hierarchy: CBCA ............................................................................................................... 29

Ultra Vires: Boundaries on the Corporation’s Capacity to Act ........................................................................ 29

Ultra Vires Doesn’t Really Exist Anymore ............................................................................................... 29

Modern Restrictions on Management Authority .................................................................................... 29

Constitutional Considerations ....................................................................................................................... 30

Federal vs Provincial Incorporation ........................................................................................................ 30

Charter Rights........................................................................................................................................ 31

3. Equity Investments ............................................................................................................................................ 33

Bundles of Rights & Obligations, Not Ownership ........................................................................................... 33

Creating New Types of Shares ....................................................................................................................... 34

Class ...................................................................................................................................................... 34

Series .................................................................................................................................................... 34

Issuing Shares ............................................................................................................................................... 35

Par Value Shares are Prohibited............................................................................................................. 35

Consideration for Shares ....................................................................................................................... 35

Authorized Share Capital ....................................................................................................................... 37

Rights Attached to Shares ............................................................................................................................. 37

Minimum Rights .................................................................................................................................... 37

Distribution of Assets on Dissolution of the Corporation ........................................................................ 38

Dividends .............................................................................................................................................. 38

Rights Attach to Shares, Not Shareholders ............................................................................................. 39

Debt Stands Before Equity ..................................................................................................................... 39

Pre-Emptive Rights ................................................................................................................................ 39

Preferred Stock and Common Stock .............................................................................................................. 40

Common Stock ...................................................................................................................................... 40

Preferred Stock ..................................................................................................................................... 40

Risks to Shareholder ..................................................................................................................................... 40

4. Directors’ Powers and Duties ............................................................................................................................. 42

Powers .......................................................................................................................................................... 42

To Appoint Corporate Officers and Delegate Certain Functions ............................................................. 42

To Organize and Conduct Shareholder Meetings ................................................................................... 42

To Change Corporation’s Capital Structure ............................................................................................ 42

Duties ........................................................................................................................................................... 42

Duty of Care .......................................................................................................................................... 43

Duty of Loyalty (The Statutory Fiduciary Duty) ....................................................................................... 45

Duty to Comply ..................................................................................................................................... 49

Statutory Liabilities ....................................................................................................................................... 50

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Defences to Statutory Liabilities ............................................................................................................ 50

Director Indemnification and Insurance ........................................................................................................ 50

CBCA Indemnification Structure ............................................................................................................ 51

Requirement of Good Faith ................................................................................................................... 51

Indemnification as of Right .................................................................................................................... 52

CYA ....................................................................................................................................................... 52

BJR and Defenses to Illegal Payment of Indemnities .............................................................................. 52

Director and Officer Insurance ............................................................................................................... 52

Selecting (and Removing) Directors ............................................................................................................... 52

Qualifications of Directors ..................................................................................................................... 53

Removal of Directors ............................................................................................................................. 53

Summary of CBCA Provisions ................................................................................................................. 53

5. Shareholders and Governance ........................................................................................................................... 54

Shareholders’ Meetings ................................................................................................................................ 54

Ordinary and Special Resolutions........................................................................................................... 54

Business Conducted At Meetings ........................................................................................................... 54

Special Meetings of the Shareholders .................................................................................................... 55

Voting Rights Attached to Shares ........................................................................................................... 56

Voice in Management ................................................................................................................................... 56

Fundamental Changes ........................................................................................................................... 57

Agreements among Shareholders .......................................................................................................... 58

Unanimous Shareholder Agreements .................................................................................................... 58

Nominating a Different Slate of Directors .............................................................................................. 58

Other Shareholder Proposals ................................................................................................................. 59

Proxy Voting and Governance of Widely-Held Corporations .......................................................................... 59

Intermediaries and Beneficial Owners ................................................................................................... 60

Proxies and Proxyholders ...................................................................................................................... 60

Proxy Solicitation ................................................................................................................................... 61

NI 54–101 .............................................................................................................................................. 62

6. Court Actions ..................................................................................................................................................... 63

General Concepts.......................................................................................................................................... 63

Complainants ........................................................................................................................................ 63

Compliance Order Remedy .................................................................................................................... 64

Investigation Remedy ............................................................................................................................ 64

Derivative Action: Enforcing Managers’ Duties .............................................................................................. 64

Requirement of Leave/Test for Leave .................................................................................................... 64

Court Control of the Action ................................................................................................................... 65

BJR and the Derivative Action ................................................................................................................ 66

Windfalls to New Shareholders .............................................................................................................. 66

Oppression Remedy: Limiting the Power of Directors .................................................................................... 67

Standing and Interests Protected ........................................................................................................... 67

Test for Oppression ............................................................................................................................... 68

Court Control of the Action ................................................................................................................... 70

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Tying the Order Sought to Protected Interests ....................................................................................... 70

Limits to the Scope of the Remedy ........................................................................................................ 71

Comparing Oppression and Derivative Action ............................................................................................... 72

When is Oppression Remedy Allowed? .................................................................................................. 72

Advantages and Disadvantages ............................................................................................................. 72

7. Mergers and Acquisitions................................................................................................................................... 73

Introduction .................................................................................................................................................. 73

Types of Business Rearrangement ......................................................................................................... 73

Regulation of M&A Transactions for CBCA Companies .................................................................................. 73

Corporate Law: Going-Private, Squeeze-Out, and Compelled Acquisition Transactions .......................... 73

Securities Law ....................................................................................................................................... 76

Asset Sales .................................................................................................................................................... 77

Test for Substantially All ........................................................................................................................ 78

Summary of Relevant CBCA Provisions and Case Law ............................................................................. 78

Amalgamations ............................................................................................................................................. 78

Share Purchases ............................................................................................................................................ 79

Friendly and Hostile Takeovers and Conflicts of Interest ........................................................................ 79

Takeovers and Defensive Tactics ........................................................................................................... 80

Securities Commissions and Corporate Law: Dueling Visions ................................................................. 83

8. Case Chart ......................................................................................................................................................... 85

9. Statute Chart ................................................................................................................................................... 133

10. Index of Key Cases ........................................................................................................................................... 191

11. Index ............................................................................................................................................................... 193

12. Exam Quick Sheets ........................................................................................................................................... 195

Business Organization Corporations

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1. Business Organization

Concept Cases/Statutes Framwork of Analysis Glossary of Terms Sole Proprietorships Partnerships

o General Partnerships Is there a partnership? Cox & Wheatcroft v Hickman, Pooley v Driver,

Backman v Canada, A.E. LePage Ltd v Kamex Developments Ltd, Lansing Building Supply (Ontario) Ltd v Ierullo

What is the effect of partnership? Ernst & Young v Falconi, Re Thorne and NB Worker’s Compensation Board

How is a partnership governed? Partnership Act Table of Statutory Provisions Partnership Act

o Limited Partnerships Remainder of the Act Applies Partnership Act At Least 2 Partners Partnership Act s 50 Limited Liability Partnership Act ss 57, 64

Corporate General Partners Haughton Graphic Ltd v Zivot, Nordile Holdings Ltd v Breckenridge

Separation of Ownership and Control Table of Statutory Provisions Partnership Act

FRAMEWORK OF ANALYSIS When analyzing a business organization problem, ask yourself:

1. What is the form of the legal relationship among those involved in the business?

2. How does the law treat a business organization in which those involved have this kind of relationship, with

respect to:

duties and obligations between themselves;

how business decisions are made and by whom;

the need to advise the rest of the world about the type of relationship;

the ability of individuals in the relationship to make binding commitments on behalf of the business

or the other individuals involved; and

the potential that the activities of one individual in the business will make all or some of the other

individuals personally liable for any damage resulting from those activities?

GLOSSARY OF TERMS

Term Definition Continuation The process of changing the corporate law regime that governs a corporation (e.g. moving

from BCBCA to CBCA governance). Distributing Corporation

Essentially, a public company (a “reporting issuer” under securities regulation).

Equity The right to receive a residual amount. Normally represents a claim to a share of the

Corporations Business Organization

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Term Definition business profits, as well as a share of the proceeds of the sale of the assets when the business is wound up.

Greenmail Demand by a potential acquirer for payment in order to desist from a takeover bid. No-recourse loan A loan in which creditor contracts away right to have recourse to debtor’s personal assets. Personal guarantee A guarantee extracted by a creditor of a business from a director or owner of the business.

This type of guarantee allows the creditor to circumvent any limited liability protection that might otherwise exist and gives the creditor a secured claim over the owner’s personal assets. This allows the business creditor to “jump the queue” and gain seniority over even personal creditors of the owner whose claims are unsecured.

Promoter The individual purporting to act on behalf of a company prior to its incorporation (see textbook p 264 and Pre-Incorporation Contracts (p 24 of this document).

Special resolution A special resolution is defined in section 2 of the CBCA to mean a resolution that requires a two thirds majority of the votes cast to be carried.

Trade credit e.g. Credit advanced by a supplier: supplies delivered now, payment in 30 days. Don’t forget that a trade creditor is a creditor, and hence an investor, in the business!

SOLE PROPRIETORSHIPS A sole proprietorship is a non-corporation business with a single equity investor. Any additional persons owning the

business would result in a partnership. A sole proprietorship is not a separate legal person distinct from the

proprietor. As such, the proprietor himself is liable for all debts and obligations incurred by the business, and if these

cannot be satisfied out of the business assets, they will come out of his personal assets.

Advantages Disadvantages Less paperwork and administrative overhead Generally clean decision-making Business income flows through as personal income of

proprietor any business losses incurred in early going can offset proprietor’s personal income…

Unlimited liability including personal assets Can only draw on proprietor’s assets to fund equity

investment = limited opportunity to raise capital Business income flows through as personal income of

proprietor big earners may attract big tax liability Creditors have significant leverage (may extract

personal guarantees or loan agreement terms that reduce ability to make business decisions)

See also: L02 -- 20110912 -- Class Exercise

PARTNERSHIPS Partnerships come in three flavours: general partnerships, limited partnerships, and limited liability partnerships. In

contrast to partnerships, which were creatures of the common law whose rules have been partly codified, LPs and

and LLPs were created by statute.

General Partnerships When considering the partnership aspects of a problem, the first question is whether a partnership has actually

arisen. Once a partnership is established, the effect of the partnership on the partners and their personal and

partnership property needs to be considered. A final aspect is the governance of partnerships.


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Two of the most crucial aspects of partnership are unlimited liability and the fact that a partnership may arise by

operation of law. This means that a partner may be liable under one or more provisions of the BCPA despite believing

himself not to be in a partnership. The courts may also refuse to recognize a partnership.

IS THERE A PARTNERSHIP? The test for partnership is found in s 2 of the Partnership Act. It is an objective test:

1. The relation which subsists between persons

2. Carrying on a business

3. In common

4. With a view to profit

Two people are needed for a partnership. This is obvious! One person by himself is a sole proprietor.

Any legal person can be a partner in a partnership. This means partnerships can arise between any mix of natural

persons and corporations.

Case/Statute Juris. P Key Points Lansing Building Supply (Ontario) Ltd v Ierullo

1989 ON/DC 106 Intention of the parties does not matter. Despite emphasizing in the “co-ownership agreement” that they are not partners and there is no partnership, the court found a partnership.

Backman v Canada 2001 CA/SC 89 Objective test: intention of the parties does not matter. Despite calling itself a partnership and carrying out all the formalities, a “partnership” set up purely to realize a tax loss was found not to be a partnership.

CREDITORS A “true” creditor is not a partner, but partnerships may arise between “creditors” and “debtors” if, for example, the

“debt” is actually a disguised equity interest.

Case/Statute Juris. P Key Points Cox & Wheatcroft v Hickman 1860 Eng/HL 97 To be a partner is to have a business carried on for your benefit.

While receipt of profit is evidence of a partnership, the presumption is rebuttable.

Creditors found not to be partners. Pooley v Driver 1876 Eng/CH 116 Debt investment looked suspiciously like an equity investment.

“Creditors” found to be partners. This would not fall under BCPA s 4(c)(i) because the debt is never

liquidated!

CARRYING ON A BUSINESS IN COMMON The courts look for various indicators that the putative partners are carrying on a business, and consider whether

they intended to carry it on in common. As usual, the test is objective.

Case/Statute Juris. P Key Points A.E. LePage Ltd v Kamex Developments Ltd

1977 ON/CA 87 No partnership found. Key facts: owners of the building maintained completely separate interests

which they could alienate. This is inconsistent with partnership property, which is jointly held.

Court also implied mere buying of an apartment building for resale does not constitute “carrying on a business”.


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Case/Statute Juris. P Key Points Lansing Building Supply (Ontario) Ltd v Ierullo

1989 ON/DC 106 Partnership found. Distinguished from Kamex because onerous restrictions on each co-owner’s

share were more consistent with jointly owned partnership property. Also, real estate development found to be “carrying on a business” in

contrast with merely investing in an apartment building. Volzke Construction v Westlock Foods 1986 AB/CA 130 This case is on pp 80–3 of the text. We did not cover it in class, but it is worth re-

reading once to see a relationship that was found to be a partnership by the courts.

WITH A VIEW TO PROFIT The putative partners must intend to profit, even if they do not in fact actually manage to. However, their motivation is irrelevant. For instance, if they intend to profit from a relationship and enter into it because they are motivated to

realize a tax advantage, this motivation is irrelevant. But if they don’t intend to profit, they aren’t a partnership.

Case/Statute Juris. P Key Points Backman v Canada 2001 CA/SC 89 The supposed partners wanted to realize a tax loss and had no intention of

profiting from the transaction. It isn’t necessary for the overriding intention to be for profit-making. It is

sufficient that there is an ancillary profit-making purpose. However, the oil & gas property failed to meet the ancillary profit-making

purpose, partly because SCC found that aspect of the partnership failed even to meet the “business in common” requirement—it was a nominal investment and at best co-ownership of property.

WHAT IS THE EFFECT OF PARTNERSHIP? Partnership at law affects the partners in various ways. General partnership has its single most important effect on

the liability of the partners for debts, contracts, and torts. This liability follows from the law of agency and status of

the partners as agents for each other. There are additional considerations, such as how partners and partnerships are

treated for income tax purposes; whether partnerships can employ a partner; and procedural aids made available to

people who want to sue partnerships.

AGENCY Under s 7 of the BCPA, “every partner is an agent of the firm and of every other partner for the purpose of the

business of the partnership”. This means that any contract entered into by one partner ostensibly on behalf of the

firm is binding on all the other partners. I’m not sure this is as relevant to tort liability as it is to contract, but in any

case, liability is discussed directly below.

LIMITS OF AGENCY Clearly the concept of agency must have some limits. Both s 7(1), s 7(2), and s 10 of the Partnership Act help define

these limits (see p 134).

s 7(1) uses the words “for the purpose of the business of the partnership” to delimit the scope of agency. s 7(2) further clarifies. Acts of partners “for carrying on business in the usual away bind the firm”. But if both

subparagraphs (a) and (b) are satisfied, namely:

(a) the partner has no authority to act in the matter; and

(b) the third party knows about the lack of authority, or does not believe the partner to be a partner

then the act does not bind the firm.

s 10 allows partners to agree among themselves that a certain partner will not have authority to bind the

firm in a certain matter. If a partner breaks this agreement, his contravening act is not binding on the firm if

the third party involved had notice of the agreement.


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RD says there is recent SCC jurisprudence holding that if you believe yourself to be contracting with an individual person, you can’t turn around and sue the firm: Vieweger Construction Co v Rush & Tompkins Construction Ltd (1965

CA/SC).

Case/Statute Juris. P Key Points Ernst & Young v Falconi 1994 ON/GD 99 In interpreting the [Ontario] liability for wrongs section, the court interprets the

phrase “ordinary scope of business”, which is similar to “carrying on business in the usual way”.

LIABILITY As well as attracting tort liability due to Agency (above), the BC Partnership Act has a number of provisions on

liability:

s 11: A partner is jointly liable with the others for all debts and obligations incurred while he is a partner…

o Note that this doesn’t include debts incurred before or after…

o This includes judgment debts…

ss 12–14: Together these paragraphs make a partner jointly and severally liable for:

o Torts committed by a partner acting in the ordinary course of business of the firm or with the

authority of the other partners…

o Money of a third person “misapplied” by a partner or the firm

Note that s 12 clearly covers torts but doesn’t seem to cover the case of torts committed by an employee. See

Employment (below) for more on that case.

Case/Statute Juris. P Key Points Ernst & Young v Falconi 1994 ON/GD 99 In interpreting the [Ontario] liability for wrongs section, the court interprets the

phrase “ordinary scope of business”, which is applicable to… Partnership Act s 12 RSBC 1996 135 …liability for tortious acts “in the ordinary course of business” of the firm.

PERSONAL CREDITORS Personal creditors of a partner can satisfy a judgment against a partner in his personal capacity out of that partner’s share of the partnership assets if it cannot be fully satisfied from the partner’s personal assets.

PARTNERSHIP CREDITORS Because a partner is jointly liable for debts and obligations incurred (BCPA s 11) while he is a partner, any partner’s personal assets may be at stake if an obligation is incurred that cannot be satisfied by the partnership assets.

PARTNERSHIP PROPERTY While the common law doesn’t regard a partnership as a legal person—and thus property owned by the partnership

must be legally owned by the individual partners or some other legal person—it is still considered to be held jointly.

Thus, no partner has a right to a division of the property in specie. Instead, they have a right to a division of the

profits, and to a sale and division of the proceeds of sale on dissolution after discharge of liabilities.

See text pp 80–1 in Kamex. BCPA s 6 defines partnership property, and s 23(2) says that legal owners of partnership

property hold it upon trust for the partnership as a whole.

TAX TREATMENT The Income Tax Act, as distinct from other laws, treats a partnership as a single entity for the purpose of determining

overall P&L. At this point, however, P&L is divided among the partners according to their share in the firm and flows


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directly into their personal income. This can be an advantage, since many businesses incur losses in the early going,

and these losses can offset a partner’s personal income.

EMPLOYMENT A partner cannot be employed by the partnership. Because of Agency, an employment contract with the firm would

involve the partner contracting with himself, which is impossible.

If an employee of a partnership commits a tort in the course of his employment (in other words, while doing an

authorized act, or an act so connected with an authorized act that it could be regarded as a mode of doing it) then

the firm is vicariously liable: Liability of the principal for the wrongful acts of the agent while the agent is acting for the principal in the normal course of business is derived from the tort law principle of respondeat superior—he who receives the benefit of the activity should share in the liability arising from the risks undertaken. The principal in the case of an employee of a partnership is all of the partners conducting the partnership business. Thus all of the partners [and the employee] will be liable and that liability will be joint and several pursuant to ss 11 & 14. The damage award will become a debt or obligation of the partnership (RD via email).

Case/Statute Juris. P Key Points Re Thorne and NB Worker’s Compensation Board

1962 NB/CA 120 A partner cannot be employed by the partnership.

RULES OF COURT The rules of court in most common law jurisdictions permit a partnership to sue and be sued under its firm name.

This procedural nicety does not change the fact that it is really the individual partners who are suing or being sued.

HOW IS A PARTNERSHIP GOVERNED? Provisions of the Partnership Act codify parts of the common law of partnerships with respect to governance, but

these default rules can be contracted out of in custom partnership agreements. The most important default rules are

in s 27. See also s 21 (“variation of partnership rules and duties by consent”).

LIABILITY AS BETWEEN PARTNERS The unlimited liability of partners is as between 3rd parties and the partners. As between each other, the partnership

and the statutory and default rules govern. Due to joint and several liability, one partner may be obliged to sue

another to recover the other partners’ share of a judgment debt that the judgment creditor chooses to enforce

against the first partner.

FIDUCIARY DUTY The BCPA imposes a general fiduciary duty on each partner with respect to the other partners. For instance, s 22(1)

imposes a duty of “utmost fairness and good faith” toward the other members of the firm (p 136). In addition,

ss 31–33 impose a specific duties:

to be truthful and give full information to the other partners and their representatives (s 31);

to “account” for benefits received without the consent of the other partners (s 32); and

to pay over and “account” for all profits received from running a competing business of a similar kind (s 33).

An accounting is an equitable remedy for breach of fiduciary duty to prevent unjust enrichment. D is treated as if he

was running a business for P so that P can recover the profits received by D as a result of the breach of duty.

QUICK TABLE OF GENERAL PARTNERSHIP CLAUSES See Partnership Act (p 133).


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Clause Meaning P Relevant Case(s) Rules for determining the existence of a partnership

2 Definition of partnership 133 Cox & Wheatcroft, Pooley, Kamex, Lansing, Backman

3 Corporations not partnerships 133 4 Rules for determining partnership 133

(a) Co-owners not necessarily partners even if sharing profit 133 Kamex, Lansing (c) Profit evidence of partnership except where not (rebuttable

presumption). There are qualifications: 133

(i) Receipt of debt or other liquidated amount not necessarily partner

133 Cox & Wheatcroft v Hickman, Pooley v Driver

(ii) Employee getting profit not necessarily partner 133 (iii) Annuity paid to relatives of deceased partner doesn’t

necessarily make them partners 133

(iv) Lending to firm doesn’t necessarily make you partner 134 Cox & Wheatcroft v Hickman, Pooley v Driver

(v) Person who sold his share in return for an annuity or share in profits (see s 34, also, p 139) not necessarily partner

134

Partners are agents of one another 7 Liability of partners (and agency) 134 8 Acts or instruments in the firm name 134 9 No pledge of credit for non-firm business 134 10 Notice of restriction of power of partner 135 16 Person representing himself as partner 135 17 Partner’s evidence 136

No limited liability status Creditor can go after the assets of any one of the partners

11 , 19(1–2) Liability of partners for firm debts 135 12 Liability for wrongs 135 13 Liability for misapplication of funds 135 14 Joint and several liability under ss 12–3 135 15 Liability for trust funds 135

Partners owe each other a fiduciary obligation 22 Duty of fairness and good faith 136 31 Partners must render true accounts and full information 138 32 Partners must account for benefits 138 33 Profits of partner carrying on a similar business 139

Partnership property 6 Defines partnership property 134 23 Application of partnership property 136

(1) Partnership property must be held by partners exclusively for the partnership…

136 Inconsistent with A.E. LePage Ltd v Kamex Developments Ltd

(2) Legal owners of partnership property are trustees 136 Also inconsistent with Kamex 24 Property bought with firm money belongs to partnership 137 26 Execution against partnership property requires judgment

against firm 137

Rules of conduct for partnerships 27 Default rules for partnership 137 28 Majority cannot expel partner 138

Partnerships can be ended 29 Ending the partnership 138 30 Continuation of a partnership after expiry 138 35 Dissolution of the partnership 139

Partnerships with more than 2 partners can continue after dissolution


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Clause Meaning P Relevant Case(s) 36 Dissolution by bankruptcy, death, or dissolution of partner

or charging order 139

Partners can exclude one of the partners through the courts 38 Power of court to decree dissolution in certain cases 140

Dissolution/change in firm constitution 39 Change in firm 140 40 Dissolution 141 41 Authority of partners after dissolution 141

Rights of outgoing partners 45 Rights where partnership dissolved by death or retirement 141 46 Debts at date of dissolution or death 142

Partnership property is divisible on dissolution 47 Settlement of accounts on dissolution 142

Limited Partnerships Unlike partnerships, which arose at common law and were later codified, limited partnerships are statutory beasts

that were created to provide an option to alleviate the extremes of unlimited liability inherent in partnerships. As such, limited partnerships can’t just arise by operation of law! In British Columbia, a limited partnership can only be

formed by filing a certificate in the correct form, as stipulated in s 51 of the BCPA.

Note that, at least for the purposes of having a partnership recognized under tax law, it probably isn’t enough to file

the certificate in the correct form. While s 51 says that the limited partnership “is formed when” the certificate is filed, in Backman v Canada, the alleged partnership was supposed to be a limited partnership. Thus, similar

formalities to those required in BC had likely been followed. Yet the Supremes held that the entity created was not a

partnership at all and thus the “partners” could not take advantage of their tax loss under the Income Tax Act.

REMAINDER OF THE ACT APPLIES Note that the provisions of the BCPA discussed under General Partnerships apply to limited partnerships unless

otherwise contracted out of or contradicted by the provisions of Part 3.

AT LEAST 2 PARTNERS A limited partnership needs at least two partners, a limited partner and a general partner. See s 50.

LIMITED LIABILITY Under s 57 of the Partnership Act, the liability of a limited partner for obligations of the limited partnership is

limited to the amount of his investment. However, a limited partner can lose the benefit of this limitation by taking

part in the “management” of the business (see s 64 on p 145).

CORPORATE GENERAL PARTNERS What exactly does “management” entail? Clearly, it involves more than exercising the rights accorded to limited partner under s 58. But what if the general manager of a limited partnership is a corporation, and the directors and

officers of the corporation are limited partners of the partnership? RD says the ratio of the following cases is identical.

Case/Statute Juris. P Key Points Haughton Graphic Ltd v Zivot 1986 ON/HC 103 Zivot found liable as a general partner.

He held himself out to be the “president” of the limited partnership, including printing this on business cards, the magazine masthead, and when introducing himself to people.

AB statute used the word “control”, not “management” as in s 64…


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Case/Statute Juris. P Key Points Nordile Holdings Ltd v Breckenridge 1992 BC/CA 111 Ds found NOT liable as a general partner.

An agreed statement of facts stated that Ds participated in managing the partnership “solely in their capacities as directors and officers of the general partner, Arbutus”.

Many limited partnerships have a single corporate general partner, and that corporation in turn is purposefully set up

to have very few assets. However, the directors of a corporation have a fiduciary duty to act in the best interests of

the corporation, which in turn has fiduciary duties as general partner, so the actions of the directors of the corporate

general partner are still constrained.

SEPARATION OF OWNERSHIP AND CONTROL: LIMITED PARTNERSHIPS From the textbook, p 122:

Limited liability facilitates having a large number of investors, and many of them will have relatively small stakes in the business. They will accordingly have limited incentive to carefully monitor the management of the business. In limited partnerships, the incentive is further decreased as a result of provisions in the statute that make investors potentially liable as general partners if they take part in the management of the business.

Limited partnerships, and limited liability partnerships, like corporations, tend to create “separation of ownership from control”. The limited partners often contribute the bulk of the capital and are often referred to as “owners” of the business, although RD and the textbook are sceptical about this, since the BCPA effectively prevents limited

partners from controlling the business (without attracting liability as general partners). This can potentially place the

limited partners at the mercy of the managers of the business. Unlike corporation law, which has numerous statutory

requirements designed to protect the investors, it is up to the limited partners to ensure adequate disclosure and

other requirements are drafted into the partnership agreement. The BCPA is silent.

QUICK TABLE OF LIMITED PARTNERSHIP CLAUSES Clause Meaning P Relevant Case(s)

Is composed of both general and limited partners 50 Indicates that at least 2 people required: a general partner

and a limited partner. 143

Can only be formed by filing a certificate 51 Formation of limited partnership (requires certificate) 143

Has a name that complies with restrictions 53 Requires “Limited Partnership” suffix and can’t contain

names of limited partners. 144

Provides limited liability to people who do not take part in the management of the firm 56 Rights of general partners…Some acts require unanimous

consent of limited partners. 144

57 Liability of limited partner is limited to amount of investment.

144

58 Rights of limited partners. 145

64 Limited partners not liable unless they take part in management.

145 Haughton Graphic Ltd v Zivot and Nordile Holdings Ltd v Breckenridge


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Limited Liability Partnerships Not examinable this year.

A Relationship of Trust and Confidence Davis is at pains to remind us that a partnership is a relationship of trust and confidence. The agency and unlimited

liability aspects; the fiduciary duties; and the fact that limited partners are essentially at the mercy of general

partners are examples of this phenomenon. To enter into a partnership is to trust one’s partners implicitly. This is one aspect in which, at least in theory, a partnership may differ significantly from a corporation.

Partnerships Example Problem See: L04 -- 20110919 -- Jerry's Cherry [under Review/Fact Patterns]

Introduction to Corporations Corporations

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2. Introduction to Corporations

Concept Cases/Statutes Three Theories of Corporations

o Nexus of Contracts o Mediating Hierarchy Peoples Department Stores Inc (Trustee of) v

Wise o Public Institution

Incorporation and Its Consequences o The Corporation as a “Separate Legal Person” Salomon v Salomon & Co Ltd, Lee v Lee’s Air

Farming Ltd, Macaura v Northern Assurance Co Ltd and others

o Limited Liability Agency Costs

The Process of Incorporation CBCA ss 6(1), 8, 9 Piercing the “Veil”

o Insurable Interests Cases Macaura v Northern Assurance Co Ltd and others, Kosmopoulos v Constitution Insurance Co

o Fraud and Reasons of Justice Clarkson Co Ltd v Zhelka, Big Bend Hotel Ltd v Security Mutual Casualty Co, 642947 Ontario Ltd v Fleischer

o Tax Liability De Salaberry Realties Ltd v MNR, Alberta Gas Ethylene Co v MNR

o Enterprise Liability De Salaberry, AGEC, Gregorio v Intrans-Corp o Tort Liability Gregorio, Walkovszky v Carlton, Wolfe v Moir

The Said v Butt Exception Said v Butt, AGDA Systems International Ltd v Valcom Ltd

Pre-Incorporation Contracts o Common Law of Pre-Incorporation Contracts Kelner v Baxter, Newborne v Sensolid (Great

Britain) Ltd, Black et al v Smallwood & Cooper, Wickberg v Shatsky

o CBCA Statutory Regime CBCA s 14, Sherwood Design Services Inc v 872935 Ontario Ltd, Canbar West Projects Ltd v Sure Shot Sandblasting & Painting Ltd

o BCBCA Statutory Regime BCBCA s 20, Wickberg v Shatsky Agency

o Defective Appointments CBCA s 116 o Indoor Management Rule CBCA ss 17, 18, 116, Royal British

Bank v Turquand, Sherwood, Canadian Laboratory Supplies Ltd v Englehard Indus. of Canada Ltd

o Management Hierarchy: CBCA CBCA ss 102, 115, 121 Ultra Vires: Boundaries on the Corporation’s Capacity to Act

o Ultra Vires Doesn’t Really Exist Anymore Ashbury Ry Carriage & Iron Co v Riche o Modern Restrictions on Management Authority CBCA ss 6(1)(f), 15, 16(2–3), 247

Constitutional Considerations o Federal vs Provincial Incorporation BNA Act, 1867 ss 91 & 92(11)

Federal Incorporation BNA Act, 1867 s 91, Citizens Ins Co v Parsons Extra-Provincial Licensing BNA Act, 1867 s 92(11), Bonanza Creek Gold

Mining Co v The King, BCBCA s 375 Continuation

o Charter Rights Ford v Québec, R v Big M Drug Mart, Canadian Egg Marketing Board Agency v Richardson

Corporations Introduction to Corporations

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THREE THEORIES OF CORPORATIONS The textbook presents three “theories” of the corporation:

1. Wealth maximization/nexus of contracts (see pp 41–3 of the textbook)

2. The corporation as mediating hierarchy (see pp 43–7)

3. The corporation as public institution (see pp 48–57)

We are supposed to keep these “theories” in view as we go through the course learning the law on corporations. Past RD exams don’t have essay components, but these might be the kind of thing that would support a “public policy argument” on an exam…

Nexus of Contracts The nexus of contracts theory (proposed by William Bratton, p 41) is that the firm serves as a nexus for a set of

contracting relations among individual factors of production. The theory is meant to stand in contrast to a

management centred conception. The firm springs out of contracts in markets for corporate securities, managers,

and other labour. Since the contracts are bilateral, management power and corporate hierarchy, as previously

conceived, disappear. In a firm of bilateral contracts between free market actors, both parties possess equal power to contract someplace else.

The theory applies the principle of natural selection and posits that rational economic actors solve problems in the

process of pursuing wealth maximization. One component of the theory is that firm contracts take forms

determined by the imperative of agency cost reduction. Since rational economic actors know about agency costs,

they charge these costs against their contracting partners ahead of time. Given competition, the party that most

reduces agency costs has the edge. Thus the lowest cost contract forms survive. Within the nexus of contracts

theory, managers act as agents of shareholder principals and attempt to maximize shareholder wealth.

Mediating Hierarchy The mediating hierarchy theory (proposed by Blair & Stout on p 43 of the textbook) “builds on” the “contractarian” thinking of the nexus of contracts theory by “acknowledging the limits of what can be achieved by explicit

contracting”.

Blair & Stout argue that an essential but frequently overlooked “contract” fundamental to public corporations is the “pactum subjectionis” under which shareholders, managers, employees, and other groups that make firm-specific

investments yield control over both the investments themselves and the resulting output to the corporation’s internal governing hierarchy. They say that the notion that shareholders “own” corporations is incorrect because shareholders rights are of such limited value that they are unlikely to influence the outcome except in extreme cases.

Corporate law thus leaves boards of directors free to pursue whatever projects and directions they choose.

The mediating hierarchy is a “team production analysis” of the public corporation. If corporate law is not designed

primarily to protect shareholders—if, instead, it is designed to protect the corporate coalition by allowing directors

to allocate rents among various stakeholders, while guarding the collation as a whole only from gross self-dealing by

directors—then the rules of corporate law begin to make more sense.

Public Institution The theory of the corporation as public institution is advanced by Greenfield (p 48). It goes way out into cuckoo left

field and says that contract and property rights “are not best perceived as natural, pre-legal, or non-political, but


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rather should be seen as tools to be utilized in furtherance of social good, however defined” (p 50). To this end,

Greenfield sets out 5 “principles”:

1. The ultimate purpose of corporations should be to serve the “interests of society as a whole”. (p 51)

2. Corporations are distinctively able to contribute to the “societal good” by creating financial prosperity. (p 51)

3. Corporate law should further principles 1 & 2. (p 52)

4. A corporation’s wealth should be shared “fairly” among those to contribute to its creation. (p 53)

Here, of course, Greenfield includes labour and consumers, as well as shareholders and creditors. He also

includes that most successful investor of all, the Government.

5. Participatory, democratic corporate governance is the best way to ensure “sustainable” creation and “equitable” distribution of corporate wealth. (p 54)

Among the many ingenious proposals here is allowing employees and “communities in which the company employs a significant percentage of the workforce” to propose representatives on the board.

Case/Statute Juris. P Key Points Peoples Department Stores Inc (Trustee of) v Wise

2004 CA/SC 114 SCC seems to endorse a mediating hierarchy (or is it public institution?) view of corporations, rather than the wealth maximization theory.

RD: according to the SCC, no one has a right to complain about a decision of the directors since it “may be” legitimate to consider the interests of various groups, of which the shareholders are only one.

INCORPORATION AND ITS CONSEQUENCES The Corporation as a “Separate Legal Person” The following cases are considered in more detail in the section on Piercing the “Veil” (p 20):

Case/Statute Juris. P Key Points Salomon v Salomon & Co, Ltd 1896 Eng/HL 123 A corporation is a separate legal person. Even a “one-man company” is a

separate entity, not an agent of the controlling shareholder/director. Lee v Lee’s Air Farming Ltd 1961 NZ/PC 107 A corporation is distinct from its controlling shareholders/directors and can

contract with them in their personal capacity. Macaura v Northern Assurance Co Ltd and others

1925 Eng/HL 107 A corporation owns its own property, and neither a shareholder nor a creditor has any legal interest in it.

This case should not be considered in isolation from Kosmopoulos v Constitution Insurance Co (p 106). See the Insurable Interests Cases.

Limited Liability

AGENCY COSTS According to the textbook (p 149), “an economic analysis of the situation posits that the separation of ownership and control in widely held corporations introduces what is known as an ‘agency cost’ problem, since all firm managers (as

agents) have imperfect incentives to maximize the interests of all claimholders (as principals).” In other words, the costs of doing poor work are shifted from the economic agent to another person, the shareholder. Agency problems

can include:

Effort Shirking

Asset Diversion


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THE ROLE OF CORPORATE LAW Corporate law addresses issues of shirking and diversion by providing general parameters for behaviour by insiders

and by establishing a governance structure in statute. Corporate law regulates the relationship between insiders and

outsiders with the objective of protecting the legitimate interests of the participants while retaining the advantages

of the firm.

See also: L06 -- 20110926 -- The Firm

EASTERBROOK & FISCHEL, “LIMITED LIABILITY AND THE CORPORATION” In an article on p 149 of the textbook, Frank Easterbrook and Daniel Fischel argue that limited liability actually

reduces the agency costs of the separation and specialization inherent in a large firm. They give the following

reasons:

1. Limited liability decreases the need to monitor. This is because it makes diversification and passivity a more rational investment strategy (RD) than active monitoring, thus decreasing the cost of operating the

corporation. Investors can also price their agency cost risk into the shares (RD).

2. Limited liability reduces the costs of monitoring other shareholders. In a non-limited liability world,

shareholders would have to monitor each other since the greater any shareholder’s wealth, the more likely he will be to get stuck paying a judgment cost due to joint and several liability. Limited liability makes the

identity of other shareholders irrelevant, thus avoiding these costs.

3. Limited liability promotes free transfer of shares, increasing managers’ incentives to act efficiently. Under a rule of unlimited liability, shares are not liquid (RD) since the identity of the shareholder must be factored

into the price. With limited liability, shares are fully liquid (RD) and the price reflects the value of the firm as

reflected by the specialized agents. Poorly-run firms will attract new investors who can assemble large blocks

of shares and install a new managerial team, so there is an incentive to run the firm well to keep the price up.

4. Limited liability makes it possible for market prices to impound additional information about the firm.

With unlimited liability, this information would be obscured since the identity of the shareholder factors into

the price.

5. Limited liability allows “more efficient” diversification. Investors can minimize risk by diversifying and firms

can raise capital at lower costs because investors need not bear the special risk associated with non-

diversified holdings. Unlimited liability makes diversification risk increasing instead of risk reducing!

6. Limited liability facilitates optional investment decisions. Firm managers can maximize investors’ welfare by investing in any project with net present value, including riskier ventures, since investor risk is hedged via

diversification.

PROTECTING THE BUSINESS CAPITAL: PERSONAL LIABILITY While corporations protect the personal assets of shareholders from the liability of the corporation, they also protect

the business capital of the corporation from the personal liability of the investors. If a shareholder’s share in the business is taken, he loses the shares, but the paid-in capital from those shares cannot be withdrawn. The

shareholder’s rights under the shares are merely reassigned to his judgment creditor.

Consider, for example, the case of Clarkson Co Ltd v Zhelka (p 96): if the trustee was smart, he would have gone

after Selkirk’s shares. But even if the trustee had acquired them, he wouldn’t have been able to take the business assets of the firm. (Except that this is a foolish example, since the trustee would have become the sole shareholder,

installed himself as director, and conveyed the land to Selkirk’s personal creditors. But that’s beside the point!).


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THE PROCESS OF INCORPORATION We went over pp 251–261 very rapidly at the end of L06. The process and requirements of incorporation obviously

aren’t that important.

A corporation is formed by:

1. filing articles of incorporation;

2. filing a notice of the registered office of the corporation;

3. filing a notice of directors; and

4. paying the prescribed fee.

Under the CBCA, step 1 is done using “Form 1” and steps 2–3 are done using “Form 2”.

Articles of Incorporation The articles of incorporation for simple CBCA corporations are prepared by filling out Form 1. The current Form 1

requires the following specific information about the proposed corporation, pursuant to s 6(1) of the CBCA:

Item CBCA Section Description

(a) Name 6 (1)(a) 10 (5–6)

Name must be unique, which requires a name search except for numbered companies. Name must include a suffix such as “Ltd”, “Inc”, or “Corp”. For speed, a numbered company can be incorporated (instead of a name, bureaucracy assigns you a number, such as 12345 Canada Limited. Law firms often keep a stable of numbered “shelf” companies for quick use by clients. (see, e.g., Sherwood Design Services Inc v 872935 Ontario Ltd). Within limits of s 10, these numbered companies can carry on business under a “firm name or style”.

(b) Registered office 6 (1)(b) Articles only require province of registered office. Street address must be given separately in Form 2.

(c) Classes and maximum number of shares

6 (1)(c) Small issuers will most often be incorporated with common shares only, with no special rights or privileges attaching to the share, although there may be restrictions on ownership or transfer (see below). There is no requirement to stipulate the maximum number of shares a CBCA corporation is authorized to issue: it is optional.

(d) Restrictions on ownership or transfer

6 (1)(d) Securities legislation may give substantial advantages to “private companies”, which generally need to restrict the right to transfer shares and limit the number of shareholders.

(e) Number of directors 6 (1)(e) 102 (2)

The articles must set out the minimum and maximum number of directors. Every CBCA corporation requires at least one director, and “distributing corporations” (i.e. public companies) require at least three.

(f) Restrictions on business of company

6 (1)(f)

This is completely unnecessary but can be provided.

When Does a Corporation Begin to Exist? Under the CBCA, the Director (of the CBCA bureaucracy) is required to issue a certificate of incorporation when the

articles of incorporation are received: section 8. Section 9 (“effect of the certificate”) states clearly:


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A corporation comes into existence on the date shown in the certificate of incorporation.

See also: L06 -- 20110926 -- Form 1, Articles of Incorporation

L06 -- 20110926 -- Form 2, Initial Registered Office and First Board of Directors

Pre-Incorporation Contracts (p 24)

PIERCING THE “VEIL” a.k.a. Court Intervention to Extend Liability beyond the Corporate Form

Despite the firmly-entrenched Salomon principle, in extraordinary circumstances courts have proven willing to ignore

the separate legal existence of the corporation and impose liability on controlling shareholders of corporations.

These controlling shareholders may, of course, be natural persons or may themselves be corporations. This process is

sometimes described as “lifting” or “piercing” the corporate veil.

Rough Taxonomy of Reasons The casebook sets out an attempt to categorize the cases where courts have found it appropriate to disregard the

separate legal personhood of a corporation, at p 168. These are:

1. cases that involve allegations of fraudulent conduct or objectionable purposes on the part of a company’s principals;

2. cases where a company existed as a “shell” and was clearly undercapitalized to meet its reasonable financial

needs;

3. cases that involve tort claims against the company, particularly those where a director, shareholder, or

employee has committed an intentional tort, or the tort of inducing breach of contract;

4. cases where the company was not incorporated for bona fide business reasons but for other purposes, often

to avoid taxation;

5. cases that involve non-arm’s-length transactions between parent and subsidiary companies; and

6. cases where the courts determine that equity or the interests of justice are better served by disregarding the

corporate form.

I would personally add a seventh category:

7. cases where the shareholders/directors of “one-man” companies disregard the formalities required under

corporations legislation

The following table attempts to categorize the cases studied according to the above organization.

Case Pierce On

(1)

(2)

(3)

(4)

(5)

(6) (7) Salomon v Salomon & Co, Ltd No Lee v Lee’s Air Farming Ltd No Macaura v Northern Assurance Co Ltd and others No


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Case Pierce On

(1)

(2)

(3)

(4)

(5)

(6) (7) Kosmopoulos v Constitution Insurance Co No*

Clarkson Co Ltd v Zhelka No Big Bend Hotel Ltd v Security Mutual Casualty Co Yes

# Individual

Rockwell Developments Ltd v Newtonbrook Plaza Ltd No

642947 Ontario Ltd v Fleischer Yes† Individuals De Salaberry Realties Ltd v Minister of National Revenue Yes Enterprise

Alberta Gas Ethylene Co v Minister of National Revenue No

Gregorio v Intrans-Corp No Walkovszky v Carlton No Wolfe v Moir Yes Individual ‡ AGDA Systems International Ltd v Valcom Ltd No

@ Individuals

*: But Macaura principle overruled #: Not necessary in Big Bend: RD †: Decision pertained to costs only ‡: Formalities not complied with @: Liability was imposed in AGDA, but not as a result of veil-piercing!

When the Veil Won’t Be Pierced RD says that veil lifting is NOT available to give shareholders ownership of the corporation’s assets. Separate legal

personality implies full ownership rights.

Insurable Interests Cases In Macaura v Northern Assurance Co Ltd and others (p 107), the court discussed the moral hazard that arises if

the shareholders are allowed to insure the assets of a corporation. An incentive is created to have the corporation

borrow to buy assets and then destroy the assets, since this screws over the creditors and enriches the shareholders,

who collect on the insurance. In its theoretical reasoning, the House of Lords ignores the fact that Macaura was

virtually the only creditor of Irish Canadian Saw Mills Ltd.

Fast forward to Kosmopoulos v Constitution Insurance Co (p 106). Here, the sole shareholder’s insurable interest arose out of his employment using the assets in question, so that there was no moral hazard (note however that

SCC says it did not lift the veil). According to RD:

1. Macaura wasn’t binding on the SCC. 2. The equities were all on the side of Mr Kosmopoulous since his broker made a mistake; he lost his livelihood;

and he paid the premiums and they were accepted by the insurance company on the basis that everything

was insured, but then the insurers refused to pony up. “The insurance company had no equities on its side”. 3. The problem of multiple shareholders is hard to fit into the Kosmopoulos ratio. For instance, what if one of

five shareholders insures the whole value of the assets himself? Now his insurable interest greatly exceeds

his actual interest. Now there is definitely a moral hazard. RD says maybe…if you just insured your own interest, you could “jam” your claim into the ratio.


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Keep in mind Lord Buckmaster’s reasoning in Macaura as well that the shareholder is only has a residual claim on

distribution of the assets when the corporation is wound up, and it is impossible to calculate how much the

destruction of any given asset reduces this amount.

Fraud and Reasons of Justice The following cases seem to fall under either fraud or reasons of justice:

Case/Statute Juris. P Key Points Clarkson Co Ltd v Zhelka 1967 ON/HC 96 The veil was not pierced, because the wrongs Selkirk’s trustee in bankruptcy was

pleading weren’t wrongs against Selkirk’s personal creditors. Big Bend Hotel Ltd v Security Mutual Casualty Co

1980 BC/SC 91 The court claimed it was piercing the veil, but RD sees this as unnecessary to achieve the result, and I agree.

642947 Ontario Ltd v Fleischer 2001 ON/CA 85 Laskin JA pierced the veil in justifying not awarding costs to Halasi and Krauss, saying that if the injunction they procured had caused damages, they would have been personally liable because they knowingly tendered a worthless undertaking to the court.

Tax Liability The short rule for tax appears to be “your corporate organization will be construed against you for tax purposes”. If it is convenient for the tax collectors to consider your whole group of companies as one enterprise, they will do so. If it

is convenient for them to look at each company in isolation, they will do that. RD seems to confirm this: “when it comes to taxes, you’d better have a good reason for a certain arrangement, better than minimizing tax liability”.

Case/Statute Juris. P Key Points De Salaberry Realties Ltd v Minister of National Revenue

1974 CA/FCA 98 Court argues that it can’t tell what the business of a subsidiary is without considering it in the context of the whole group of companies.

Alberta Gas Ethylene Co v Minister of National Revenue

1989 CA/FCA 88 Court says “one has to ask for what purpose and in what context is the subsidiary being ignored”, en route to refusing to ignore the separate existence of ASCO, the Delaware-incorporated loan conduit.

Enterprise Liability The textbook (p 194, note 2) says:

Courts appear to be more willing to disregard the corporate entity where the effect of doing so is to link a parent company with its subsidiary or to link a subsidiary with one or more other subsidiaries through a parent corporation. In so doing, the court is in effect looking at the entire group of corporations or what is sometimes referred to as the whole “corporate enterprise”.

The following cases touch on enterprise liability:

Case/Statute Juris. P Key Points De Salaberry Realties Ltd v Minister of National Revenue

1974 CA/FCA 98 See Tax Liability (above).

Alberta Gas Ethylene Co v Minister of National Revenue

1989 CA/FCA 88 See Tax Liability (above).

Gregorio v Intrans-Corp 1984 ON/CA 102 Court finds no enterprise liability for Canadian subsidiary Paccar Canada Ltd. It says even a wholly-owned subsidiary will only be found to be the “alter

ego” of its parent to prevent conduct akin to fraud or that would otherwise unjustly deprive claimants of their rights.

As the court notes in Walkovszky v Carlton (p 130), that case isn’t really about enterprise liability at all, since

although the plaintiff alludes to Carlton’s supposedly unscrupulous corporate structure, plaintiff’s goal is to fix Carlton personally with liability for negligence.


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Tort Liability A corporation is vicariously liable for a tort if an individual, acting as an agent of the corporation, committed the tort

in the scope of his authority as agent. However, agents can themselves be liable for their tortious acts.

Case/Statute Juris. P Key Points Gregorio v Intrans-Corp 1984 ON/CA 102 See Enterprise Liability (above). Walkovszky v Carlton 1966 NY/CA 130 Majority finds no cause of action against person who maintains many 2-cab taxi

corporations, each carrying the statutory minimum collision liability insurance. Wolfe v Moir 1969 AB/SC 132 Moir liable personally for damages to plaintiff at the roller rink because he

disregarded the corporate formalities by advertising without using the corporate name, contrary to statute.

CBCA s 10(5) RSC 1985 148 Similar to the ABCA section in Wolfe v Moir, but note that it does not contain the word “advertising”!

Said v Butt 1920 Eng/KB 122 Establishes the exception that directors of a corporation cannot be liable for procuring a breach of contract between the corporation and a third party while acting bona fide in the scope of their authority.

AGDA Systems International Ltd v Valcom Ltd

1999 ON/CA 87 Actions of Valcom officers/employees in potentially committing intentional torts (including inducing a breach of contract between AGDA and Corrections Canada) do not fall under the exception in Said v Butt as interpreted by the court. Hence this is not veil-piercing.

Employees have a duty of loyalty to their employer which a person can be liable for inducing them to breach: RD.

THE SAID V BUTT EXCEPTION The exception in Said v Butt has both policy and legal rationales.

Policy rationale: Breaching contracts is a necessary part of business which would be frustrated if directors

were personally liable for choosing efficient breach as a business decision.

Legal rationale: In Said, the director did not induce breach because there was no separation between the

director and the corporation. The director acted as the corporation.

LIMITS ON THE EXCEPTION According to the textbook (p 215 note 3),

In AGDA, Justice Carthy reviewed the “Said v Butt” exception, which was often said to constitute the broad proposition that directors or officers of corporations could not be liable for torts committed when they were acting bona fide in the scope of their authority as agents for a corporation. He appeared to limit the Said v Butt exception to cases involving the tort of breach of contract, raising the spectre of potential substantial tort liability for directors, officers, and employees…

BONA FIDE INTERESTS OF THE CORPORATION RD highlights this passage from AGDA Systems International Ltd v Valcom Ltd (textbook p 212, from Kepic) as

meaning that what constitutes the “best interests” of a corporation are circumscribed by the law:

[Said v Butt does not apply in] the case where a director acts in a fraudulent manner. Fraudulent efforts by a director of a corporation to increase the revenue of that body cannot be said to be bona fide in its best interest.

Final Notes on Veil Piercing RD notes the following:

1. Do NOT get fooled into arguing Salomon v Salomon when the substance of your claim should be an independent cause of action: AGDA Systems International Ltd v Valcom Ltd.


24

2. Veil piercing happens more in contract contexts than in tort, partly because there is more room for conduct of the shareholders or directors evincing an intention to be personally bound.

3. Courts will generally respect the separate legal personality of the corporation except where they see “conduct akin to fraud that would otherwise unjustly deprive claimants of their rights” as Laskin JA calls it

in Gregorio v Intrans-Corp.

PRE-INCORPORATION CONTRACTS Pre-incorporation contracts are a fact of life, for many legitimate business reasons. For instance, the promoters of

some enterprise may need to conclude contracts rapidly and before they have the time to incorporate a company.

However these types of contracts cause legal problems. What if the corporation never comes into being? Who is

liable on the contract? What if one or both of the parties don’t know the corporation doesn’t exist? Who is liable?

Common Law of Pre-Incorporation Contracts According to the textbook, “[t]here are fundamentally two types of situations that arise with pre-incorporation

contracts” (p 264):

1. Contracts where both contracting parties know that no corporation has yet been incorporated.

2. Contracts where one party (and usually both parties) are under the mistaken belief that the corporation has

been incorporated when in fact it is not in existence at time of contracting.

Generally speaking, this raises two possible issues:

1. Is the promoter personally liable on the contract?

2. Can the corporation ratify the contract once the corporation comes into existence?

The following table summarizes the common law cases, which must now be considered in light of the federal and BC

statutory regimes and applicable case law.

Case/Statute Juris. P Plaintiff Defendant Result Kelner v Baxter 1866 Eng/CP 105 Knows no company Knows no company Individuals liable Newborne v Sensolid (Great Britain) Ltd

1953 Eng/CA 110 Mistaken belief he has company

Mistaken belief P has company

Individuals not liable

Black et al v Smallwood & Cooper 1966 Aus/HC 92 Mistaken belief Ds have company

Mistaken belief they have company

Indivduals not liable Follows Newborne

Wickberg v Shatsky 1969 BC/SC 131 Mistaken belief Ds have company

Knows no company Individuals not liable (Except nominal damages for

breach of warranty of authority) Follows Black

My take on the “pre-incorporation contracts” common law cases is that in view of Newborne, Black, and Wickberg,

the courts apply a rule of construction, not a rule of law, to the contract and hold those who sign on behalf of the

corporation personally liable if-and-only-if the parties can be construed to have intended to be personally bound at

the time the contract was signed.

Bear in mind that among the common law cases, only Kelner is properly a “pre-incorporation contract” in the sense

that all the parties to the contract understood it to be so. In Newborne and Black, it was pre-incorporation in the

sense that the company did not exist yet, but the parties all mistakenly believed the company did exist. Finally, in


25

Wickberg, the defendants knew that the corporation on whose behalf they were signing did not exist. If fraud had

been pleaded, they might have been found liable, but as a matter of contract law they could not be bound.

ADOPTING A PRE-INCORPORATION CONTRACT AT COMMON LAW RD emphasizes that at common law, in order for a corporation to adopt a pre-incorporation contract and release the promoters from obligations, a new contract between the corporation and the counterparty must be negotiated which specifically releases the promoters from their obligations. The objective of the CBCA and BCBCA

statutory regimes is to allow pre-incorporation contracts to be adopted without the need for a new agreement.

BOTTOM LINE At common law, the question is the intention of the parties to be bound, and the form of their signature, as part of

the document objectively construed, and construed as a whole, may help determine that intention.

See also: L08 -- 20111003 -- Not Binding on Anyone

L08 -- 20111003 -- Binding on Someone

Both the above examples ripped from L08 -- 20111003 -- Pre-Incorporation Ks at Common Law

CBCA Statutory Regime Section 14 of the CBCA overcomes the problem that a corporation cannot adopt a pre-incorporation contract at

common law. Moreover, it clarifies the extent of the promoters’ liability under ss 14(1) and 14(4).

WRITTEN CONTRACTS ONLY Unlike the BCBCA, the CBCA refers to written contracts only. Section 14(2) provides, in part:

A corporation may … 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…

This means that if a person purports to enter into an oral contract on behalf of a CBCA corporation to be

incorporated in the future, or if a CBCA corporation attempts to adopt an ORAL contract, the CBCA does not apply

and the Common Law of Pre-Incorporation Contracts governs!

SIGNIFYING INTENTION TO ADOPT RD thinks the threshold is very low for adoption by the corporation, since it merely needs to “signify” under s 14(2).

RD takes this to mean that the intention need not be communicated to the counterparty. The word “intention” means the intention of the corporation, as evidenced by the actions of its agents.

CONTRACTING OUT OF PERSONALLY LIABILITY Under s 14(4), a promoter can by written agreement contract out of the personal liability that would otherwise

accrue under s 14(1). Of course, the promoter must also contract out of the benefits, so that such a promoter would

not be capable of enforcing the contract. The BCBCA has a similar provision: s 20(8).

JUDICIAL DISCRETION Regardless of whether a pre-incorporation contract is adopted, s 14(3) gives a court the discretion to make “any order it sees fit” if any party to the contract brings an application for an order to determine the apportionment of liability between the corporation and a promoter who entered into the contract on its behalf.

RELEVANT CASE LAW AND STATUTORY PROVISIONS Case/Statute Juris. P Key Points


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Case/Statute Juris. P Key Points Sherwood Design Services Inc v 872935 Ontario Ltd

1998 ON/CA 124 A company that began life as a Miller Thomson shelf corporation held liable under a pre-incorporation contract made by completely different individuals because Miller Thomson reused the shelf corporation…

CBCA s 14 RSC 1985 149 Pre-incorporation contracts regime in the CBCA, which has language similar to s 21 of the OBCA as considered in Sherwood.

Canbar West Projects Ltd v Sure Shot Sandblasting & Painting Ltd

2011 AB/CA 95 A company named “Canbar West Projects Ltd” was able to adopt the benefits of a pre-incorporation K entered into between “Can-West Projects Ltd”, an effectively non-existent corporation at the time the K was signed, and Sure Shot. This allowed Canbar West to file a builder’s lien.

The Alberta statutory regime had effectively the same wording as CBCA.

OUTCOME CHANGES The following common law cases might see different outcomes under the CBCA.

Case/Statute Juris. P Key Points Kelner v Baxter 1866 Eng/CP 105 The corporation’s adoption under s 14(2) would have liberated the promoters

from liability under s 14(2)(b) unless Kelner got a discretionary order under s 14(3)*.

Newborne v Sensolid (Great Britain) Ltd

1953 Eng/CA 110 Newborne’s corporation could have adopted the K pursuant to s 14(2) and the applicable case law (Sherwood, Canbar). Thus he could have enforced against Sensolid.

Black et al v Smallwood & Cooper 1966 Aus/HC 92 The defendants would have become personally liable under s 14(1).

*: RD thought of a scenario in which Kelner falls under the CBCA and the corporation adopts the contract after the

promoters have already consumed half the wine. Subsequently, the corporation cannot afford to pay for the wine.

Kelner could apply for an order under s 14(3) apportioning half the liability for the wine onto Baxter et al personally.

BCBCA Statutory Regime

PROBABLY NOT THAT IMPORTANT RD said he will never give us a fact pattern with an issue of whether an individual facilitator is personally liable under the BCBCA pre-incorporation contracts statutory regime. I take this to mean that, in general, RD doesn’t care much about the BCBCA and it is better to concentrate on the CBCA.

“PURPORTED” CONTRACT While the federal statute accepts the existence of a contract between the “promoters” and the counterparty that is personally binding on the promoters, the provincial statute instead refers to a “purported” contract. This “purported” contract does not become a real contract until it is adopted under s 20(3), so that up until that point, the

facilitators are merely “deemed to warrant” that the company referred to will come into existence “within a reasonable period of time” and adopt the contract within a “reasonable period of time” from that.

“ACT” VS “ACTION” RD asked whether Sherwood Design Services would be decided any differently under the BCBCA s 20 regime as

compared to the CBCA s 14. The relevant language in terms of adoption is:

CBCA BCBCA 14(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 . . .

20(3) If, after a pre-incorporation contract is entered into, the company in the name of which or on behalf of which the pre-incorporation contract was purportedly entered into by the facilitator is incorporated, the new company may, within a reasonable time after its incorporation, adopt that pre-incorporation contract by any act or conduct signifying its intention to be


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bound by it . . . RD concludes that on the facts of Sherwood, it would not be decided differently under the provincial statute.

RELEVANT CASE LAW AND STATUTORY PROVISIONS Case/Statute Juris. P Key Points

BC Business Corporations Act s 20 SBC 2002 188 British Columbia regime, which covers oral, as well as written, “purported” contracts and uses a breach of warranty approach.

Wickberg v Shatsky 1969 BC/SC 131 Involved a breach of warranty of authority, which RD says: is a tort; is the same as the warranty under BCBCA s 20(2); and has damages calculated such that failure to mitigate is a novus actus

interveniens sufficient to break the chain of causation… Sherwood Design Services Inc v 872935 Ontario Ltd

1998 ON/CA 124 RD believes this case would not be decided differently under the BCBCA due to the similar wording of the statutes. See “Act” vs “Action” (above).

Summary of Statutory Regimes

COMMON LAW

Is there a contract? If yes, with whom? Does corporation have a contract?

If no, how can it get one?

Type 1 Both parties know

corporation doesn’t exist Yes

Promoters in their personal capacity

No Negotiate a new

one

Type 2 One or both parties believe

non-existent corporation exists

No N/A No Negotiate a new

one

STATUTORY

Is there a contract? If yes, with whom? Does corporation have a contract?

If no, how can it get one?

CBCA s 14 Yes, if in writing: s 14(1)

Promoter personally: s 14(1)

Not when it comes into existence

It can adopt under s 14(2)

BCBCA s 20 No, it is “purported”: s 20(1–2)

No one, but facilitator is liable for

warranties: s 20(2)

Not when it comes into existence

It can adopt the “purported” K to

make it real: s 20(3) See also: L09 -- 20111005 -- Pre-Incorporation K Tables

AGENCY a.k.a. Authority to Bind the Corporation and Make It Liable

As RD loves to stress ad infinitum, only natural persons can act, express intentions, or undertake obligations.

Though we treat corporations as being capable of these things, in the end it must be natural persons who do them .

The law attributes the actions of these natural persons to the corporation through the legal concept of agency.

Agency is a relationship in which someone is authorized to act on someone else’s behalf. This raises a number of issues:

Which natural persons are authorized to be agents of the corporation?

Which actions of the agents are authorized and which are not?

How can outsiders to the corporation tell who has authority?


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The textbook discusses issues of actual authority, defective appointments, and ostensible authority.

Actual Authority The actual authority of a director, officer, or employee of a corporation comes from contracts of employment, board

resolutions, articles and bylaws, and statute. Actual authority may be express or implied. Indeed, actual authority is

found to exist where an officer exceeds the authority that usually attaches to his position with the knowledge or

acquiescence of the corporation.

Defective Appointments Section 116 of the CBCA provides that where a properly appointed officer or director would have authority to bind

the corporation in a given manner, that authority cannot be questioned even if there has been some irregularity in

the appointment or election of the particular person. This is deemed actual authority to bind the corporation in

dealings with third parties.

Indoor Management Rule (a.k.a. Ostensible Authority) “Ostensible” authority is authority that is not actually valid according to the internal law of the corporation, but that

is represented as valid to the outside world.

COMMON LAW INDOOR MANAGEMENT RULE The case of Royal British Bank v Turquand created what became known as the “indoor management rule” at common law. The idea of the rule is that what happens between management personnel of the corporation stays

“indoors” and outsiders are not compelled to investigate it. The substance of the rule is that third parties who deal

with a corporation and who have satisfied themselves that the dealing is otherwise valid may rely on its validity

without inquiring into whether it is allowed by the corporation’s internal law.

STATUTORY INDOOR MANAGEMENT RULE The indoor management rule is codified in s 18 of the CBCA. According to RD, the purpose of the rule is to do away with the need to get confirmation of authority to deal when the authority is “usual”. For this reason, he believes

Carthy JA’s interpretation of the rule in Sherwood Designs is closer to Estey J’s reasons in Canadian Laboratory

Supplies than is Borins JA’s interpretation.

Section 18(1)(d) is the most important section of the statute, as it deals with the authority of persons “held out” as directors, officers, or agents. However, section 18(2) denies the benefits of section 18(1) where the third party knew

or ought to have known that the authority was not valid.

RELEVANT CASE LAW AND STATUTES Case/Statute Juris. P Key Points

Royal British Bank v Turquand 1856 Eng/XC 122 The bank was not obliged to look farther than the statute and Memorandum of Association. Thus, corporation could not hide behind the fact that the directors’ borrowing wasn’t authorized by the resolution as required.

CBCA s 18(1) RSC 1985 150 Statutory indoor management rule. Sections 18(1)(d) and 18(1)(f) are particularly important.

CBCA s 18(2) RSC 1985 150 Benefits of section 18(1) not available where the third party knew or ought to have known that the authority exercised was invalid.

Note that Borins JA’s argument, according to similar language in the OBCA, that the circumstances in Sherwood should have put the plaintiffs on inquiry [textbook p 301] was rejected by the majority of Carthy and Abella JJA.

Sherwood Design Services Inc v 872935 Ontario Ltd

1998 ON/CA 124 Carthy JA for the majority says indoor management rule applies because the MT associate “held out authority to speak on behalf of the corporation when he referred to it as a creature of his legal firm”.


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Case/Statute Juris. P Key Points Canadian Laboratories Supplies Ltd v Englehard Indus. of Canada Ltd

1979 CA/SC 95 Estey J explains indoor management rule. RD says Carthy JA in Sherwood Designs is closest to Estey J’s views.

CBCA s 116 RSC 1985 157 Complement to s 18(1)(d) with respect to defects or irregularities in the election or appointments of officers and directors.

CBCA s 17 RSC 1985 150 Third parties NOT deemed to have knowledge of the contents of a document concerning a corporation merely because it was filed publicly.

This, of course, would include the Articles of Incorporation…

Management Hierarchy: CBCA Case/Statute Juris. P Key Points

CBCA s 102 RSC 1985 153 Directors manage and supervise the management of the business. CBCA s 115 RSC 1985 157 Directors may delegate to a managing director or managing committee of

directors, with some exceptions. CBCA s 121 RSC 1985 161 Directors may appoint officers and delegate anything to them they could

delegate to managing director &c. under s 115.

ULTRA VIRES: BOUNDARIES ON THE CORPORATION’S CAPACITY TO ACT Ultra Vires Doesn’t Really Exist Anymore The ultra vires doctrine doesn’t exist anymore, plain and simple. It was a common law doctrine created in the

Ashbury Railway case and applicable in jurisdictions that use the Memorandum and Articles style of incorporation.

Because it prohibited a company from pursuing objects other than those declared in its Memorandum of Association,

it allowed corporations to repudiate contracts that pursued such objectives.

Note: the ultra vires doctrine is consistent with a contractarian approach to the corporation. See: Nexus of Contracts

(p 16).

Modern Restrictions on Management Authority According to the textbook (p 294), the ultra vires doctrine has been “substantially abolished” by statute in Canada.

For instance, s 15(1) of the CBCA states that “[a] corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.” Nevertheless, it is still possible to restrict the objects of a CBCA

corporation in its Articles (see, e.g., Form 1; see also s 6(1)(f) of the CBCA).

Case/Statute Juris. P Key Points Ashbury Ry Carriage & Iron Co v Riche

1875 Eng/HL 88 Created the old, obsolete, common law doctrine of ultra vires. The corporation was allowed to repudiate its contract with Riche.

CBCA s 6(1)(f) RSC 1985 148 Enables restrictions on the businesses the corporation may carry on within the Articles of Incorporation. See also Form 1 and s 16(2–3).

CBCA s 15(1) RSC 1985 149 A corporation has the rights of a natural person. And of course a natural person can carry on any business he likes!

CBCA s 16(2) RSC 1985 149 A corporation may not carry on a business or do anything that is restricted by its Articles. See also s 6(1)(f) and s 16(3).

CBCA s 16(3) RSC 1985 150 Notwithstanding s 16(2), no act of a corporation is invalid just for being contrary to its Articles or the Act. This overrules Ashbury Railway.

CBCA s 247 RSC 1985 187 “Complainants” and creditors can sue for an injunction to stop a corporation from contravening the Articles &c.

If the Ashbury Railway scenario occurred today under the CBCA regime, the corporation would be bound by its

contract with Riche: s 16(3). However, the shareholders would have a remedy—getting an order restraining the

directors from carrying out the contract: s 247. Of course, then the corporation would be in breach (unless the

shareholders got wind of the plan early enough to get an order restraining the directors from making the K).


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Thus, the CBCA:

1. protects 3rd parties (contract counterparties) more than common law ultra vires;

2. protects discretion of directors to decide what risks to take; and

3. provides some protection for shareholders, as long as they are informed and vigilant, since the corporation

can’t simply repudiate without paying damages for breach.

The CBCA’s protections for shareholders are less than the protection offered them by the doctrine of ultra vires.

CONSTITUTIONAL CONSIDERATIONS The constitutional considerations concerning corporations have two aspects:

1. Those related to the division of powers under the Constitution Act, 1867.

2. Those related to rights and freedoms guaranteed under the Canadian Charter of Rights and Freedoms.

Despite readings that covered them, RD did not mention Charter rights at all during the lecture on constitutional

considerations, ultra vires, and agency. Do NOT concentrate on the Charter when preparing for the exam.

Federal vs Provincial Incorporation The division of powers under the BNA Act, 1867 has certain effects on federal and provincial corporate law regimes.

The main issues are:

1. federal incorporation;

2. extra-provincial licensing; and

3. continuation.

FEDERAL INCORPORATION In Citizens Ins Co v Parsons, the Judicial Committee of the Privy Council held that the POGG power under s 91 of

the BNA Act, 1867 allows the federal government to enact laws governing corporations with objects to be carried out

in more than one province. In practice, however, a CBCA corporation can be created to carry out any business in any

number of provinces. Even a CBCA corporation that merely does business in one province is valid. The POGG power

bars any province from prohibiting a CBCA corporation from carrying on business within its borders; however, the

province may regulate all corporations, including CBCA companies, in a non-discriminatory manner.

EXTRA-PROVINCIAL LICENSING Every province has enacted laws requiring a corporation incorporated outside of the province to register with an

official in order to carry on business in that province. Since CBCA corporations are incorporated “outside” of any province, any CBCA company must complete at least one extra-provincial registration to carry on business. A

province’s ability to require CBCA corporations to register follows from its right to regulate them in a non-

discriminatory manner.

CARRYING ON BUSINESS Each provincial statute gives a slightly different definition to “carrying on business”; it can be as little as having an address or a telephone number in the province. Section 375 of the BC Business Corporations Act sets out what it

means for a corporation to “carry on business” in British Columbia.


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CONSEQUENCES OF FAILING TO REGISTER If an extra-provincial corporation fails to register in a province, the most important consequence is often an inability to sue to enforce rights it might otherwise have. Thus, for instance, an unregistered extra-provincial corporation

could not collect on its debts.

CONTINUATION Continuation is the process by which a corporation changes the corporate law that governs it. The following are

instances of continuation:

transitioning a corporation from federal provincial incorporation (e.g. CBCA BCBCA);

transitioning a corporation from provincial provincial incorporation (e.g. BCBCA ABCA);

transitioning a corporation from provincial federal incorporation (e.g. ABCA CBCA).

The directors of a corporation would likely choose to pursue continuation if they believed that the target corporate

law regime provided some legal benefits not available under their current corporate law regime. Continuation

requires approval of the directors and permission from both the source and destination corporate law bureaucracies.

Continuation is one of the Fundamental Changes to a corporation under the CBCA.

RIGHTS OF SHAREHOLDERS It should be borne firmly in mind that not all shareholders’ rights are defined in the Articles of Incorporation of a

given company: different corporate law regimes grant different rights and remedies to shareholders. Thus, a

continuation may have a material impact on the rights of a corporation’s shareholders.

SUMMARY: EXTRA-PROVINCIAL LICENSING AND CONTINUATION Continuation Extra-Provincial Licensing Federal Incorporation

Change of “home” jurisdiction. Corporation will have right to

operate in new “home” jurisdiction.

Obtain right to operate in another jurisdiction.

Corporation of course retains right to operate at “home”.

Right to carry on business in any Canadian province.

However, must be registered in each such province.

SUMMARY OF RELEVANT CASE LAW AND STATUTES Case/Statute Juris. P Key Points

Constitution Act, 1867 s 91 1867 UK 190 POGG power is interpreted in the Parsons case, below. Constitution Act, 1867 s 92(11) 1867 UK 190 Power to incorporate companies with Provincial Objects interpreted in Bonanza

Creek, below. Bonanza Creek Gold Mining Co v The King

1916 CA/PC 93 Section 92(11) of the BNA Act allows provinces to bestow the capacity, but not the right, to do business in another province upon a corporation.

Citizens Ins Co v Parsons 1881 CA/PC 96 The POGG power allows the federal government to enact laws governing corporations with objects to be carried out in more than one province.

Charter Rights As mentioned above, RD did not mention Charter rights at all in class. Just be aware that the legal issue is to what

extent corporations, as legal “persons” are able to benefit from Charter rights. Also be aware of the fact that the

Charter uses very different and inconsistent language to identify the beneficiaries of rights in its various provisions:

for example, “individuals”; “citizens”; “everyone”; “anyone”; and “persons”. The consensus is that “persons” includes corporations, and “everyone” and “anyone” likely does too, but that “individuals” and “citizens” do not.


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BIG M DRUG MART EXCEPTION The so-called Big M Drug Mart exception was recognized in R v Big M Drug Mart and expanded in Canadian Egg Marketing Agency v Richardson. Basically, it allows a corporation to challenge the constitutionality of a law even

under a Charter right that is not guaranteed to corporations.

SUMMARY OF RELEVANT CASE LAW Case/Statute Juris. P Key Points

Ford v Québec 1988 CA/SC 102 Recognized that the guarantee of freedom of expression under s 2(b) of the Charter applies to commercial expression, and thus corporate “speech”.

R v Big M Drug Mart 1985 CA/SC 117 Gave standing to corporations to challenge the constitutionality of penal laws under which they compelled to appear before a court, even if Charter right that the law contravenes is not guaranteed to corporations.

Canadian Egg Marketing Agency v Richardson

1998 CA/SC 94 Expanded the Big M Drug Mart exception to include civil, as well as penal, laws.

Equity Investments Corporations

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3. Equity Investments

Concept Cases/Statutes Bundles of Rights & Obligations Sparling v Québec, Atco v Calgary Power Ltd, United

Fuel Investments v Union Gas, Macaura v Northern Assurance Co Ltd

Creating New Types of Shares o Class CBCA ss 6(c), 173(1)(e) & (g), Re Bowater o Series CBCA ss 6(c)(ii), 27(1–3), 173(1)(j–k), Re Bowater

Risks of Unlimited Ability to Define Series How the Risks are Controlled

Issuing Shares o Par Value Shares are Prohibited CBCA s 24(1), Ooregum Gold Mining Co v Roper,

See v Heppenheimer o Consideration for Shares CBCA s 25(3)

No Issue of Shares on Credit CBCA s 25(5) Watered Stock CBCA s 25(3–4), 118(1), 241, &c.

Rights Attached to Shares o Minimum Rights CBCA ss 24(3–4) o Distribution of Assets on Dissolution CBCA ss 24, 211(7)(d), United Fuel Investments v Union

Gas, International Power Co v McMaster University o Dividends

Legally Permitted Types CBCA s 43(1) Illegal Declaration/Payment of Dividends CBCA ss 42, 118(2)(c) Directors are Not Obliged to Pay Dividends

(Exception When They Are?) CBCA ss 102, 115(3), Dodge v Ford Motor Co, Ferguson v Imax, International Power Co v McMaster University

o Rights Attach to Shares, Not Shareholders Re Bowater Canadian Ltd v R.L. Crain Inc o Debt Stands Before Equity CBCA ss 42, 118(2)(c), 189(1–2), 211(7) o Pre-Emptive Rights CBCA ss 28(1), 28(2)(a), 241, Sparling v Québec, Re Sabex

Internationale Ltée Preferred Stock and Common Stock Risks to Shareholder Shares are used to raise equity capital. A share is a bundle of rights and obligations and does not represent a

“proprietary” or “ownership” interest in a corporation from a legal point of view.

The purchase of a share represents a risk to the purchaser because the corporation’s directors have the power to significantly alter the position of the corporation in ways that may make the rights attached to the share less valuable

in the future. For this reason, some of the rights that come with share ownership under the CBCA statutory regime

are designed to reduce certain risks to the shareholder. The risks for which some degree of protection is available

include dilution of an income or voting interest and subordinating a share’s rights to newly-issued shares.

BUNDLES OF RIGHTS & OBLIGATIONS, NOT OWNERSHIP The predominant view in Canada is that shares represent not an ownership interest in a corporation but a bundle of

rights with attendant burdens.

Case/Statute Juris. P Key Points

Corporations Equity Investments

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Case/Statute Juris. P Key Points Sparling v Québec (Caisse de depot et placement du Québec)

1988 CA/SC 126 La Forest J: A share is not an isolated piece of property. It is a bundle of rights and liabilities that cannot be separated from the statute that defines it.

Atco v Calgary Power Ltd 1982 CA/SC 88 No majority judge contradicts Wilson J’s statement that a company does not “own” the assets of subsidiaries that it controls.

United Fuel Investments Ltd v Union Gas Company of Canada Ltd

1963 ON/CA 128 Shareholders have no right to specific assets of the corporation in specie when it is wound up.

Macaura v Northern Assurance Co Ltd and others

1925 Eng/HL 107 No shareholder has any right to any item of property owned by a corporation: he has no legal or equitable interest in it.

CREATING NEW TYPES OF SHARES The CBCA uses two terms to discuss groupings of shares: class and series.

Class “Class” is not directly defined anywhere in the Act. However, adding classes or altering the rights associated with

classes is a “fundamental change” to the Articles of Incorporation under s 173(1)(e) and (g) and thus requires a

special resolution, which takes a 2/3 majority vote. For this reason, the issuance of “series”, over which the directors have more control, allows management more flexibility in changing the capital structure of the corporation.

Case/Statute Juris. P Key Points CBCA s 6(c) RSC 1985 148 Articles of Incorporation shall set out the classes and maximum number of

shares a corporation can issue. Plus, > 1 class of shares Articles must set out rights and privileges

attached to each class. CBCA s 173(1)(e) & (g) RSC 1985 172 Articles can be amended to add new classes (e) or alter existing issued or

unissued shares (g) but this takes a special resolution requiring 2/3 approval. Re Bowater Canadian Ltd v R.L. Crain Inc

1987 ON/CA 117 Rights attach to shares, not shareholders, so that all shares of the same class must have the same rights, regardless of in whose hands they are held.

Series Unlike a “class”, a “series” is defined in s 2 of the CBCA as a “division of a class of shares”. In other words, series provide the possibility of sub-grouping shares within a given class. Besides the hierarchical relationship, the crucial

difference between a class and a series is that the directors may be given powers to fix, within certain defined limits,

the rights and privileges attached to a series of shares. While the shareholders must approve a change in the rights

associated with a class (or addition of a new class) via special resolution, the directors have certain discretion to

create new series of shares within a class and to fix the rights associated with the series themselves. The series

concept thus gives directors flexibility to make some changes to the capital structure of the firm without making a so-

called “fundamental change” under s 173.

RISKS OF UNLIMITED ABILITY TO DEFINE SERIES The directors do not have unlimited discretion to define series because the CBCA imposes a number of restrictions on

them. Hypothetically, if the directors did have unlimited discretion to define series, they would be able to prejudice

the interests of existing shareholders by issuing new series with better rights than existing series of the same class.

HOW THE RISKS ARE CONTROLLED BY THE CBCA With classes, the CBCA controls the risk to existing shareholders by labelling changes to the Articles a “fundamental change” under s 173. With series, a different approach is taken:


35

The directors’ authority to create new series at all, and the limits to that authority, must be explicitly

declared in the Articles under s 6(c)(ii). Changing the Articles, of course, would require a special resolution

under s 173(1)(j).

A new series cannot have superior rights to dividends or return of capital over earlier series of the same class

of shares under s 27(3).

If the corporation doesn’t have enough money to pay dividends or return of capital owed to one or more

series of shares in a class, each series of shares must be paid rateably from what is available. In other words,

if there is $10 to pay dividends and series 1 is owed $15 and series 2 is owed $5, series 1 doesn’t get the whole $10: instead, series 1 gets $7.50 (because it is has a claim to 75% of the dividends); and series 2 gets

$2.50 (because it has a claim to 25% of the dividends). The enabling section here is s 27(2).

Case/Statute Juris. P Key Points CBCA s 6(c)(ii) RSC 1985 148 Articles of Incorporation shall set out what authority directors have to issue

series and fix rights and privileges attached. CBCA s 27(1) RSC 1985 151 Articles of Incorporation can either fix the rights/privileges/number of shares in a

series or give discretion to directors subject to any limits set out in the Articles. CBCA s 173(1)(j) RSC 1985 172 Changes to discretion given to the directors, as set out in the Articles, is a

fundamental change requiring a special resolution. CBCA s 27(2) RSC 1985 151 Shares of the same series participate rateably in dividends and return of capital

that can’t be paid out in full. CBCA s 27(3) RSC 1985 152 Directors may not give a new series priority in terms of dividends and return of

capital over existing series of the same class. CBCA s 173(1)(k) RSC 1985 172 Giving directors discretion to change the rights of any unissued shares of

any series is a fundamental change requiring a special resolution. Presumably, even where this is done, the whole series must be unissued.

Otherwise, wouldn’t it run afoul of Re Bowater by allowing different shares of the same series to have different rights?

Re Bowater Canadian Ltd v R.L. Crain Inc

1987 ON/CA 117 Presumably the ratio, which was stated in terms of shares of a class, applies to shares of a series of a class, so that you couldn’t avoid Bowater by putting the step-down provision on a “series” instead of on a “class”.

ISSUING SHARES Par Value Shares are Prohibited Many of the legal problems associated with issuing shares are no longer applicable, as they were particular to the

problem of par value shares, which have been abolished under s 24(1) of the CBCA.

Case/Statute Juris. P Key Points CBCA s 24(1) RSC 1985 150 Par value shares are not permitted. Ooregum Gold Mining Co v Roper 1892 Eng/HL 112 This is a par value case: not relevant under CBCA s 24(1). See v Heppenheimer 1905 NJ/CH 124 I can’t see how this case would have taken place without par value shares.

However, it is still relevant to the issue of Consideration for Shares (below).

Note: Strictly speaking, par value shares are still allowed under the BCBCA, just not under the CBCA.

Consideration for Shares Under the CBCA s 25(3), there are precisely 3 types of valid consideration for shares:

1. money;

2. property; or

3. past services


36

Moreover, any property or past services exchanged for new stock must be the “fair equivalent” of the money that would have been received if the shares had been issued for money: s 25(3–4). See Watered Stock.

NO ISSUE OF SHARES ON CREDIT In case s 25(3) isn’t clear enough, s 25(5) states that neither promissory notes nor any other promises to pay are valid

“property” within the meaning of s 25(3). The combination of s 24(1) and s 25(5) completely prohibits the old system

of issuing par valued shares on credit.

WATERED STOCK The textbook (p 322) says:

[The term watered stock is] derived from the efforts of ranchers to increase the weight of their cattle before a sale. Watered stock will arise whenever no par value shares are issued for an inadequate consideration, whether in a monetary or non-monetary form.

The risk to existing shareholders from issue of so-called “watered stock” is that new shares with rights equal (or even

superior) to theirs may be issued for inadequate consideration, thus diluting their income, return of capital, or

control interests. For instance, the capital received in exchange for “watered stock” may not increase the earning power of the business in proportion to the number of shares issued, thus decreasing the income and return of capital

interests of prior shareholders.

Section 25(3) of the CBCA seems to try to protect the shareholder from “watered stock”. If the directors are caught

issuing “watered stock” in contravention of s 25(3), they are personally liable to pay the corporation whatever

amount is needed to make good the deficit between the actual and “fair equivalent” value under s 118(1).

Despite the protections of s 25(3), it seems that s 25(1) gives directors unlimited discretion to issue shares for

whatever money consideration they deem appropriate and that a combination of ss 25(1) & (3) would allow directors

to circumvent the protections of s 25(3). However, RD says this is not the case:

[P]rotection from this dubious course of conduct is found in the other general duties of directors—duty of loyalty and duty of care—as well as the oppression remedy’s protection of the reasonable expectations of shareholders, creditors, &c. from unfair prejudice or disregard.

Assuming that there are a number of shareholders who previously paid much more than the tiny nominal consideration paid in money for the subsequent shares of the same class, they could claim that the directors acted out of a conflict of interest, were careless or unfairly prejudiced their interests. The argument would revolve around the “actual” value of the shares based on the value of the claims they grant against the assets/cash flow of the existing business. If the business is not in any financial distress or there is not any other reason why the directors need to sell shares at a discount from previous valuations then the directors may have to provide an explanation based on business considerations for their actions.

SUMMARY OF RELEVANT CASE LAW AND CBCA PROVISIONS Case/Statute Juris. P Key Points

CBCA s 25(1) RSC 1985 151 Subject to Articles, bylaws, s 25(3), their various duties, and the oppression remedy, directors can issue shares at whatever times and for whatever consideration they determine in their discretion.

CBCA s 25(3) RSC 1985 151 Valid consideration: money, property, or past services. Property and past services must be “fair equivalent” of money that would

have been received.


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Case/Statute Juris. P Key Points See v Heppenheimer 1905 NJ/CH 124 Despite being an old US case, could potentially be used to argue that when

determining if property is the “fair equivalent of money”, projected future earnings cannot be included in the property valuation.

However, if those projected earnings are reasonably based on a past earnings record, then arguably they can be included in the valuation!

CBCA s 25(5) RSC 1985 151 No issue of stock on credit. CBCA s 118(1) RSC 1985 158 Directors who issue stock for property or past service consideration less than the

“fair equivalent” in money are personally, jointly, and severally liable to make up the deficit to the corporation.

CBCA s 118(6) RSC 1985 158 Directors have a defence to liability for issuing watered stock under s 118(1) if they did not know and could not reasonably have known that the property received was not fair equivalent of the money that would have been received.

CBCA s 123(4) RSC 1985 162 Directors have due diligence defence for breach of s 118.

Authorized Share Capital Corporations no longer need to have a defined “authorized share capital” in their articles. Under the CBCA, specifying

a maximum number of shares of a class that may be issued is purely optional. However, if a maximum is specified (for

instance, on Form 1 when first incorporating), then changing this number requires an amendment to the Articles and

is one of the Fundamental Changes that requires shareholder approval by special resolution.

Case/Statute Juris. P Key Points CBCA s 6(1)(c) RSC 1985 148 Articles of Incorporation shall set out the classes of shares and any maximum

number of shares the corporation shall be permitted to issue. CBCA s 173(1)(d) RSC 1985 172 Changes to the maximum number of issuable shares require a special resolution. CBCA s 176(1)(a) RSC 1985 173 If the maximum number of issuable shares of a class is being changed, that class

gets a separate vote.

RIGHTS ATTACHED TO SHARES There are two flavours of rights attached to shares: the minimum rights guaranteed by the CBCA, and any other

rights assigned to a class or series of shares by the Articles of Incorporation or the directors, as appropriate.

Minimum Rights Sections 24(3) and 24(4) describe the three minimum rights that must be available to shareholders. If a corporation

has only one class of shares (i.e. it has only common stock) then s 24(3) requires that all of the rights attach to that

class. However, if the corporation has multiple classes of shares, then RD’s interpretation of s 24(4) is as long as each of the minimum rights is available to some class, then the statutory requirement is satisfied.

The minimum rights include a right of control and two rights of access to the corporate income stream. They are:

(a) the right to vote at a shareholder’s meeting: see Directors’ Powers and Duties (p 42) for more;

(b) the right to receive any dividend declared by the corporation: see Dividends (below); and

(c) the right to receive the remaining property of the corporation on dissolution: see Distribution of Assets on

Dissolution of the Corporation (below).

Case/Statute Juris. P Key Points CBCA s 24(3) RSC 1985 150 Minimum 3 rights that must be included on shares when a corporation has only

one class: voting; receive dividends when declared; and receive surplus property of the corporation on dissolution.

CBCA s 24(4) RSC 1985 151 When a corporation has several classes of shares, each of the three rights described above must be on some class of shares.


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Distribution of Assets on Dissolution of the Corporation Case/Statute Juris. P Key Points

CBCA s 24 RSC 1985 150 Shares and rights of shareholders. CBCA s 211(7)(d) RSC 1985 184 Creditors’ claims have priority over shareholders in bankruptcy or dissolution of

the corporation. United Fuel Investments Ltd v Union Gas Company of Canada Ltd

1963 ON/CA 128 Shareholders have no right to any part of assets of a corporation in specie on dissolution—only to a share in remainder of proceeds of sale of the assets.

International Power Co v McMaster University

1946 QC/CA 104 Case decided under old Dominion Companies Act, 1902: preferred shares have same rights as common to distribution of surplus assets on liquidation, plus any priorities allotted to them in the Articles/bylaws.

Unless otherwise stipulated, their priorities/extra rights are additive.

Dividends

LEGALLY PERMITTED TYPES OF DIVIDENDS Under the section 43(1) of the CBCA, there are 3 legally permissible types of dividends:

1. cash dividends (“money”); 2. in specie dividends (“property”); and

3. stock dividends (“fully paid up shares of the corporation”).

ILLEGAL DECLARATION/PAYMENT OF DIVIDENDS Under section 42 of the CBCA, dividends cannot be declared or paid if the corporation is insolvent at the time or if

payment would make the corporation insolvent. If the directors authorize payment of a dividend in breach of s 42,

they can be held personally liable under section 118(2)(c).

It has been held at common law that a declared dividend is a debt of the corporation. The textbook (p 374) casts

some doubt on whether this remains true given the language of s 42 related to payment.

DIRECTORS ARE NOT OBLIGED TO PAY DIVIDENDS…(EXCEPT WHEN THEY ARE?) The power of directors to declare dividends falls implicitly under the general powers of management and supervision

in s 102(1) of the CBCA. Under section 115(3), the directors are not permitted to delegate this power.

Neither the corporation nor the directors have a duty to pay dividends. However, in exceptional cases, shareholders

have succeeded against corporations that have refused to declare dividends: Dodge, Ferguson.

SUMMARY OF RELEVANT CASE LAW AND STATUTES Case/Statute Juris. P Key Points

CBCA s 42 RSC 1985 153 Limitation on power to declare/pay dividends. If this section is contravened, there is a remedy under s 118(2)(c).

CBCA s 43(1) RSC 1985 153 Permitted types of dividends: money, in specie, and stock. CBCA s 102 RSC 1985 153 Directors’ power of management and supervision, subject only to unanimous

shareholders’ agreement. CBCA s 115(3)(d) RSC 1985 157 Directors cannot delegate the power to declare a dividend. CBCA s 118(2)(c) RSC 1985 158 Personal liability for directors who authorize dividend declaration or payment

contrary to s 42. Dodge v Ford Motor Co 1919 MI/SC 99 In this Michigan case, directors breached their fiduciary duty to the corporation

by saying they were expanding in the best interests of society, not for the profit of the corporation.

Ferguson v Imax 1983 ON/CA 100 Relief granted to Mrs Ferguson under OBCA oppression remedy because under circumstances, corporation’s refusal to pay dividends was oppressive to her.

International Power Co v McMaster University

1946 QC/CA 104 Unless specified in bylaws or articles, preferred shareholders have no right to equal treatment in dividend payments beyond their prior right to dividend payment.


39

Case/Statute Juris. P Key Points CBCA s 118(4) RSC 1985 158 Shareholder may have to pay back dividends incorrectly paid out in breach of

s 42. The Queen v McClurg 1990 CA/SC 127 Discretionary dividend clauses are valid.

Rights Attach to Shares, Not Shareholders RD’s interpretation of the Bowater decision is that rights attach to shares, not people. The step-down provision on

the “special common stock” was invalid because it purported to change the voting rights attached to the shares based on the person who owned the shares.

Case/Statute Juris. P Key Points Re Bowater Canadian Ltd v R.L. Crain Inc

1987 ON/CA 117 See also: Class (p 34) and Series (p 34).

Debt Stands Before Equity A crucial factor distinguishing debt securities from shares is that debt stands before equity. This principle is enshrined

in several CBCA provisions. In particular, s 42 prohibits the declaration or payment of dividends if there are

reasonable grounds to believe that such a dividend would make the corporation unable to meet creditors’ claims on both cash flow and balance sheet tests; and s 211(7) makes clear that creditors’ claims are to be satisfied in full before any surplus is distributed to shareholders on dissolution.

A crucial risk to shareholders’ interests arises from equity’s subordination to debt, plus the directors’ discretion to borrow on the credit of the firm and to pledge corporate assets as security for these debts under s 189(1–2).

Directors or their delegates could erase all the equity in a corporation by borrowing sufficient sums.

Case/Statute Juris. P Key Points CBCA s 42 RSC 1985 153 Limitation on power to declare/pay dividends. If this section is contravened,

there is a remedy under s 118(2)(c). CBCA s 118(2)(c) RSC 1985 158 Personal liability for directors who authorize dividend declaration or payment

contrary to s 42. CBCA s 211(7)(d) RSC 1985 184 Obligations to creditors must be paid off before any distribution of surplus

property to the shareholders. CBCA s 189(1) RSC 1985 176 Unless limited by Articles/bylaws/unanimous shareholder agreement, directors

can borrow on the credit of the corporation and pledge corporate property as security at their discretion.

CBCA s 189(2) RSC 1985 176 Directors can delegate borrowing power to a director, committee of directors, or an officer.

CBCA s 189(3) RSC 1985 176 Sale &c. of all or substantially all of corporate property requires shareholder approval. But an equally destructive effect can be accomplished without approval under ss 189(1–2).

Pre-Emptive Rights A pre-emptive right is the right of a shareholder to purchase a quantity of shares from a new issue proportionate to

his number of shares before the issue, and on the same terms as the others to whom the shares are issued, so as to

avoid dilution of his interest. The CBCA does not explicitly provide any pre-emptive rights to shareholders. Pre-

emptive rights, subject to exceptions, must either be stated in the Articles or bylaws, or they do not exist.

Case/Statute Juris. P Key Points Sparling v Québec (Caisse de depot et placement du Québec)

1988 CA/SC 126 Considering La Forest J’s language in Sparling, it is unlikely that a court in Canada would hold that a shareholder has inherent pre-emptive rights.

Thus, since the CBCA provides no pre-emptive rights explicitly, it is unlikely they will be held to exist.


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Case/Statute Juris. P Key Points CBCA s 28(1) RSC 1985 152 Pre-emptive rights can be created by the Articles of Incorporation, subject to

s 28(2)(a). CBCA s 28(2) RSC 1985 152 Even if the Articles create pre-emptive rights, they are not valid in certain

situations such as, for example, the issue of shares in exchange for property. CBCA s 241 RSC 1985 185 Oppression remedy. It might be possible to get an order prohibiting a share or

rights offering if it is oppressive to any security holder, &c. See Re Sabex. Re Sabex Internationale Ltée 1979 QC/SC 119 Oppression remedy (CBCA s 241) successfully used to prohibit corporation from

issuing undervalued shares, which would oblige minority shareholders to subscribe to avoid having their interests severely diluted.

PRE-EMPTIVE RIGHTS CAN CAUSE PROBLEMS FOR RAISING CAPITAL As the textbook says on p 330:

Suppose that [a corporation] has found a new investor willing to provide needed capital in exchange for a particular percentage of firm equity. Pre-emptive rights may frustrate the transaction by introducing a risk that the new investor will not obtain the percentage of shares he … requires.

PREFERRED STOCK AND COMMON STOCK Neither “common stock” nor “preferred stock” have definitions under the CBCA. They are terms of art whose

meanings bring to mind shares with particular attributes. Corporations also often use the names “common” and “preferred” when naming particular classes or series of shares.

Common Stock Common stock is normally used to describe a class of shares having the rights described in s 24(3) of the CBCA.

Preferred Stock Preferred stock tends to have attributes that make it look somewhat more like a debt instrument than a share of

common stock. In particular, preferred shares tend to be senior to the common (although junior to any debt

instruments) and to act like a debt instrument in the following ways:

Preferred stock normally has a dividend fixed as a certain percentage of par. Of course, par value shares are

prohibited under CBCA s 24(1), but a fixed dollar amount dividend acts in the same way.

Preferred stock normally has priority for dividend payments over the common, up to the value of the

preferred dividend. Typically after this amount, any remaining dividend goes to the common. See, e.g.,

International Power Co v McMaster University (p 104).

Preferred stock normally has priority for return of capital on dissolution, at least up to the par value or some

fixed amount. After this, depending on the precise rights, it may or may not participate in the rest of the

surplus along with the common. See, e.g., International Power Co v McMaster University.

RISKS TO SHAREHOLDER When a shareholder gives his money to a corporation in exchange for shares, he loses all proprietary interest in the

money and gains only the bundle of rights and liabilities that make up the share. At the same time, subject only to

the limitations and duties imposed by the CBCA and the Articles and bylaws, the directors assume control over all

capital raised by virtue of their duty to manage and supervise under s 102.

For this reason, the shareholder is subjected to a number of risks. The CBCA may or may not have a provision

mitigating a given risk. Aside from those facilities for mitigation laid out in this Chapter, the Chapter on Directors’


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Powers and Duties will explain other rules and remedies available to protect the interests of shareholders and other

stakeholders.

Corporations Directors’ Powers and Duties

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4. Directors’ Powers and Duties

POWERS Directors are responsible for the management (or supervision of the management) of the business and affairs of the

corporation: CBCA s 102. This responsibility is subject to modification only by Unanimous Shareholder Agreements.

Included within these wide powers are the powers to: appoint corporate officers; delegate some of the directors’ functions; and to organize and conduct shareholder meetings.

To Appoint Corporate Officers and Delegate Certain Functions Case/Statute Juris. P Key Points

CBCA s 102 RSC 1985 153 General power/duty to manage or supervise management, subject to Unanimous Shareholder Agreements.

CBCA s 115(3) RSC 1985 157 Directors may delegate their authority, subject to certain limitations. For instance, power to declare Dividends cannot be delegated: s 115(3)(d); neither can power to issue securities: s 115(3)(c) or the power to change bylaws: s 115(3)(j).

CBCA s 121 RSC 1985 161 Directors may designate the offices of the corporation and appoint officers. Any power that can be delegated under s 115 to committee/managing director can be delegated to officers.

CBCA s 189(2) RSC 1985 176 Notwithstanding s 115(3)(c), directors may delegate borrowing powers to managing directors/committee/officers.

To Organize and Conduct Shareholder Meetings RD says that the power to organize and conduct Shareholders’ Meetings should not be underestimated. By picking a

time and place which suits them, and by having significant power over the agenda, the directors can influence the

outcome of the meeting to a significant degree.

Case/Statute Juris. P Key Points CBCA s 133(1) RSC 1985 163 Directors must call “annual” meetings. First must be no more than 18 months

after corporation comes into existence. After, no more than 15 months apart. CBCA s 133(2) RSC 1985 163 Directors may call special shareholders’ meetings at any time they want. CBCA s 132 RSC 1985 163 Place of meetings is as determined by the bylaws, or as determined by the

directors otherwise. Recall that directors can change bylaws effective immediately, subject to ex post rejection by the shareholders: s 103.

Re Routley’s Holdings Ltd 1960 ON/CA 119 Interesting case involving a closely-held company in which judge ordered, inter alia, shareholders’ meeting to be held in a neutral location, not president’s law office.

To Change Corporation’s Capital Structure The directors have the power to change the corporation’s capital structure, subject to: the Articles of Incorporation; the requirements of Fundamental Changes (p 57); and limitations on the powers of the directors to delegate to a

managing director/committee of directors or an officer. See also: Equity Investments (p 33).

DUTIES The directors:

1. owe a general Duty of Care under CBCA s 122(1)(b);

2. owe a Duty of Loyalty (The Statutory Fiduciary Duty) to the corporation under CBCA s 122(1)(a);

Directors’ Powers and Duties Corporations

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3. must avoid Conflicts of Interest as specified in CBCA s 120; and

4. must follow the provisions of the Act; its associated regulations; the Articles of Incorporation; the bylaws;

and Unanimous Shareholder Agreements under CBCA s 122(2)

Duty of Care In Peoples Department Store, the SCC held that the directors’ duty of care is “open-ended”. Thus, unlike the fiduciary duty, which is owed only to the corporation, the duty of care may allow the directors to be fixed with liability in

negligence if they cause harm to:

1. the corporation (the most common scenario);

2. creditors of the corporation, as in Peoples Department Stores Inc (Trustee of) v Wise; and

3. other third parties, such as employees, within the “neighbourhood” of the directors, such as the plaintiff in Nielsen Estate v Epton.

The Business Judgment Rule protects directors from liability for bona fide business decisions made on a reasonably

informed basis.

NEGLIGENCE FRAMEWORK The purpose of the duty of care is to allow the directors and officers to be fixed with liability under the tort of

negligence. For this reason, unless an exam question clearly indicates that you are to consider only the duty of care,

you need to give (cursory) consideration to the entire negligence framework:

1. duty of care;

2. standard of care and breach;

3. causation and remoteness;

4. actual damage; and

5. defences (contributory negligence, volenti, ex turpi).

NEIGHBOURHOOD Don’t forget: in order for a duty of care to exist, the plaintiffs must be neighbours in law of the directors!

STANDARD OF CARE According to Peoples, the standard of care is objective, that of a reasonably prudent person in comparable

circumstances. A close look at the standard shows that it requires directors to exercise both skill and care. This raises

the question of what, precisely, the “skill” of a reasonably prudent person is. This question is complicated by the fact

that the actual qualifications required to become a director are minimal (as set out in CBCA s 105). RD speculates that a reasonably prudent person would take care not to assume an office which he didn’t have the skill to carry out, but there is no case law on point. Note that securities law requires additional care from directors, because it

imposes liability for misrepresentation or omission in continuing disclosure requirements.

SUMMARY OF RELEVANT CASE LAW AND CBCA PROVISIONS Case/Statute Juris. P Key Points

CBCA s 122(1)(b) RSC 1985 161 Directors’ duty of care. Peoples Department Stores Inc (Trustee of) v Wise

2004 CA/SC 114 The duty of care is objective and open-ended, so it is owed to creditors. However, decisions that injure creditors may be protected by the BJR.


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Case/Statute Juris. P Key Points Nielsen Estate v Epton 2006 AB/QB 111 Three-step test for when s 122(1)(b) duty owed to employees:

1. director knows or ought to know of avoidable danger; 2. director has authority to establish policies to avoid the danger; and 3. it is within director’s reasonable capacity to envision and establish such

policies.

CAUSATION In addition to establishing a breach of the standard of care toward a person to whom the directors owe a duty, it

must be shown that actual damage was caused by this breach.

Case/Statute Juris. P Key Points Barnes v Andrews 1924 US/FC 89 While Andrews breached his duty of care, plaintiff failed to prove that, had he

fulfilled it, the company would not have failed. Peoples Department Stores Inc (Trustee of) v Wise

2004 CA/SC 114 There were more proximate causes of the bankruptcy and loss to the creditors than the procurement policy.

Note however that Supremes found no actual breach of the duty of care.

NON-ATTENDANCE AT MEETINGS AND DEEMED CONSENT In addition to any liability a director might incur for breach of the duty of care due to non-attendance of meetings,

section 123(3) of the CBCA also deems that a director consents to all decisions made at meetings he does not attend

(unless he objects in the proper form). Directors are also deemed to have consented to any decisions taken when

they are present unless they specifically cause their dissent to be recorded in the proper form.

RD made up an interesting scenario involving Nielsen Estate v Epton: Suppose it was a four director company instead of a one director company and all four directors were needed to make the required policy. Then the director who knew about the problem had a duty to inform the other three. Subsequently, if the group decided to do nothing about it, all four would be liable unless they dissent from the decision of the group.

Case/Statute Juris. P Key Points CBCA s 123(3) RSC 1985 161 Deemed consent to resolutions adopted when a director was not present at a

meeting.

STATUTORY DEFENCES Directors have statutory defences to breach of the duty of care. If they made their decision in good faith reliance on

financial statements represented by a director or officer, or on a report by a professional, they may be protected by

CBCA s 123(4) or s 123(5).

Case/Statute Juris. P Key Points CBCA s 123(5) RSC 1985 162 Defence of good faith reliance. Note that s 123(5) applies s 122(1), while s 123(4)

applies to s 122(2). Peoples Department Stores Inc (Trustee of) v Wise

2004 CA/SC 114 A person with a bachelor’s degree in commerce and 15 years’ experience is not an accountant subject to regulatory overview of a professional organization and had no negligence insurance. Thus Wise Bros could not rely on him under s 123(5)(b)

Note that at ¶ 78 (text p 714), court’s reasoning is partly based on the enumerated groups which have since been deleted.

THE BUSINESS JUDGMENT RULE The business judgment rule protects directors from liability when they make informed business judgments that could

have worked out better in hindsight. As the SCC puts in in Peoples at ¶ 67:


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Directors and officers will not be held to be in breach of the duty of care under s 122(1)(b) of the CBCA if they act prudently and on a reasonably informed basis. [They must make] reasonable business decisions in light of all the circumstances which [they] knew or ought to have known. . . . [P]erfection is not demanded.

The BJR is supposed to avoid hindsight bias and relieve the directors of an impossible standard of perfection. The

courts will assess the appropriate amount of prudence and diligence in the circumstances, but will not attempt to

supplement or question the business expertise of the directors. A number of cases in which the courts have refused

to apply the BJR, including Van Gorkum, UPM, and Ford Canada v OMERS, involve situations where the directors

failed to reasonably inform themselves or failed to exercise any business judgment at all.

CANADIAN CASES Case/Statute Juris. P Key Points

Peoples Department Stores Inc (Trustee of) v Wise

2004 CA/SC 114 The implementation of the procurement policy that allegedly resulted in the bankruptcy was a reasonable business decision.

UPM-Kymmene Corp v UPM Kymmene Miramichi Inc

2002 ON/SC 129 Both Compensation Committee and whole board failed to act on a reasonably informed basis. Moreover, Compensation Committee allowed the board to assume it had fully reviewed the contract when it hadn’t.

Brant Investments v KeepRite Inc 1991 ON/CA 93 Acquisition was thoroughly reviewed by an independent committee of directors and then approved by the shareholders.

Business decisions are subject to examination, but not microscopic examination, by the courts. Therefore, oppression remedy claim fails.

Ford Motor Co of Canada v OMERS 2006 ON/CA 101 Like in UPM, BJR didn’t apply because the directors failed to bring any actual business judgment to bear on transfer pricing agreements.

Maple Leaf Foods v Schneider Corp 1998 ON/CA 108 If a board of directors acted on the advice of a committee having no conflict of interest, and that committee acted independently and in good faith and made an informed recommendation as to the best available M&A transaction to the shareholders, the BJR applies.

AMERICAN CASES Case/Statute Juris. P Key Points

Smith v Van Gorkom 1985 DE/SC 125 BJR did not apply because the directors were grossly negligent and accepted Van Gorkom’s presentation of the Pritzker offer without informing themselves of any of the relevant information.

Duty of Loyalty (The Statutory Fiduciary Duty) There are two main aspects to the directors’ duty of loyalty:

1. interested directors’ contracts; and

2. corporate opportunities

Under the CBCA, the statutory fiduciary duty is comprised of sections 120 and 122(1)(a). Section 120 relates to

interested directors’ contracts, while section 122(1)(a) is the residual duty which captures everything else, including corporate opportunities.

INTERESTED DIRECTORS’ CONTRACTS Interested directors’ contracts were initially governed by the common law. However, the CBCA now covers most

aspects under section 120.

COMMON LAW OF INTERESTED DIRECTORS’ CONTRACTS At common law, where a director was involved on behalf of the corporation in a contract or transaction in which he

had a personal interest, a strict rule of equity applied:


46

the contract could be set aside at the instance of the corporation (Aberdeen)—and the interested director

could be required to disgorge any profit he obtained from the transaction

except that if a shareholder majority ratified the contract by fair and proper means, the strict rule of equity no longer

applied and the transaction was unimpeachable (North-West Transportation).

Case/Statute Juris. P Key Points Aberdeen Ry Co v Blaikie Brothers 1854 Eng/HL 86 Aberdeen successfully avoided the contracted made by its chairman, Blaikie,

with Blaikie Brothers, a partnership of which he was a member. North-West Transportation Co v Beatty

1887 CA/PC 112 A bylaw approving the sale of Beatty’s steamer to North-West was ratified by a majority of the shareholders. The sale could thus not be impeached.

See also: L17 -- 20111108 -- Clarifying Common Law on Interested Directors' Ks

CONFLICTS OF INTEREST UNDER THE CBCA Section 120 of the CBCA contains a “safe harbour rule” which:

1. shelters directors from the equitable remedy of an accounting; and

2. prevents the corporation from avoiding contracts in which directors had a material interest

provided that certain requirements are met. If these requirements are not met, subsection 120(8) contains a self-

executing remedy that allows a shareholder or the corporation to apply to court for an accounting or to have the

contract set aside without using the mechanism of the derivative action.

Directors and officers must disclose conflicts of interest under CBCA s 120(1). In particular, for any given contract or

transaction whether made or proposed with the corporation, a director must disclose when he is

(a) a party to the contract or transaction;

(b) a director, officer, or, or person acting in a similar capacity, of a party; or

(c) materially interested in the transaction.

Subsections 120(7) and 120(7.1) contain the conditions under which an interested directors’ contract will be unimpeachable. Subsection 120(7) requires compliance with subsections (1) to (6) in addition to its 3 conditions.

However, Subsection 120(7.1) allows an interested directors’ contract to be approved by special resolution on

certain conditions despite not being in compliance with subsections (1) to (6) or (7). This codifies a more stringent

version of the rule in North-West Transportation Co v Beatty.

Case/Statute Juris. P Key Points CBCA s 120(1) RSC 1985 159 Disclosure requirements. See also subsections (2–4) for disclosure timing

requirements. CBCA s 120(5) RSC 1985 160 A director may not vote on matters in which his interests conflict (subject to

certain exceptions). CBCA s 120(7) RSC 1985 160 A contract isn’t invalid and director need not account if (a) he complied with

subsections (1-6); (b) the directors approved the contract; and (c) it was fair and reasonable to the corporation when approved.

CBCA s 120(7.1) RSC 1985 160 Similar to s 120(7) except in this case it is OK if it is approved by special resolution of the shareholders, they voted with enough information, and it was fair and reasonable when approved.

SELF-EXECUTING REMEDY OF CBCA S 120(8) Normally to prosecute a wrong to the corporation, a shareholder must apply for leave to launch a derivative action

(for example, this is required to sue for wrongful appropriation of Corporate Opportunities). However, under section


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120(8), a shareholder or the corporation may apply directly to court without the formalities of a derivative action to

have a non-compliant interested directors’ contract set aside or a disgorgement ordered.

Case/Statute Juris. P Key Points CBCA s 120(8) RSC 1985 161 If a director or officer fails to comply with section 120, the corporation or a

shareholder may apply to court to have the K avoided or an accounting ordered. Churchill Pulp Mill Ltd v Manitoba 1977 MB/CA 96 Stands for the proposition that section 120(8) is a self-executing remedy.

QUALITY OF DISCLOSURE Section 120(1) mandates disclosure in writing or by requesting to have it entered in the minutes of the meeting the

nature and extent of any interest. What is sufficient to disclose the nature and extent?

Case/Statute Juris. P Key Points UPM-Kymmene Corp v UPM Kymmene Miramichi Inc

2002 ON/SC 129 Berg’s disclosure fell well short of what was expected of him. The Repap directors were not fully informed of “the real state of things”. Court lists a number of factors material to board’s judgment that Berg should have disclosed.

WHAT IS A MATERIAL INTEREST? The “loosest” situation in which a conflict of interest described in CBCA s 120(1) may arise is where a director or

officer has a material interest in a party to the K or transaction. The cases below examine material interests.

Case/Statute Juris. P Key Points Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co

1914 Eng/CA 128 An interest need not be pecuniary to be material. For instance, the pure legal interest of a trustee counts as a material interest.

Exide Canada v Hilts 2005 ON/SC 100 Close personal relationship to a person controlling the counterparty and directing money to that party results in a material interest.

OSC RULE 61-501 Like all securities law rules, this rule affects distributing corporations within the jurisdiction of the appropriate

securities regulator—in this case, the Ontario Securities Commission. Thus, for example, it affects companies publicly

traded on the TSE. The rule is discussed in the context of interested directors’ contracts at p 746 of the textbook. The

substance of the rule is as follows:

When a company enters into a transaction with a majority shareholder to buy or sell assets valued at more than 25%

of the company’s market valuation, it must:

1. obtain a formal valuation of the asset; and

2. obtain approval of a majority of the shareholders who are not interested in the transaction (the majority of

the minority rule).

Note that this securities law requirement is not necessarily sufficient under corporate law:

Case/Statute Juris. P Key Points CBCA s 242(1) RSC 1985 186 Approval by the shareholders not necessarily determinative of actions under

ss 240 & 241. Primex Investments Ltd v Northwest Sports Enterprises Ltd

1995 BC/SC 116 Approval by the shareholders in compliance with OSC Rule 61-501 of a transaction possibly in breach of one or more directors duties did not prevent leave being granted for a derivative action.


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CORPORATE OPPORTUNITIES Looting of corporate opportunities by directors is chiefly governed by the common law, since the duty to act in good

faith with a view to the best interests of the corporation is really just code for the application of fiduciary law.

Directors are fiduciaries and the corporation is their principal.

Since a director must act with a view to the best interests of the corporation, his interests will be conflicted

whenever he wants to profit from an opportunity that the corporation itself might also desire. If it is found that the

director took the opportunity for himself in breach of his duty of loyalty, he may find himself ordered to account for

profits, or he may find that he now holds the opportunity upon trust for the corporation. Certain issues that arise in

corporate opportunities include:

1. whether an opportunity is properly a corporate opportunity;

2. whether it was impossible for the corporation to pursue the opportunity; and

3. whether the director owes a duty to multiple corporations

The issue of windfalls is considered in the chapter on Court Actions, specifically in the context of the derivative action

and the oppression remedy…

LEADING CORPORATE OPPORTUNITIES CASES Case/Statute Juris. P Key Points

CBCA s 122(1)(a) RSC 1985 161 Duty to act honestly and in good faith with a view to the best interests of the corporation.

Peso Silver Mines Ltd v Cropper 1966 CA/SC 115 Cropper not in breach of fiduciary duty since prior to pursuing the speculative claims personally, they were turned down by the corporation in an honest and considered opinion of the whole board.

Canadian Aero Service Ltd v O’Malley 1974 CA/SC 94 In finding O’Malley and Zarzycki liable for breach of duty of loyalty, Laskin J lays down 10 contextual factors to consider.

Primex Investments Ltd v Northwest Sports Enterprises Ltd

1995 BC/SC 116 Although this is topically more about the test for leave for a derivative action, the court found that the claim against Griffiths for looting a corporate opportunity had a reasonable prospect of success.

IS IT A CORPORATE OPPORTUNITY? How do you know if an opportunity is a corporate opportunity? There are two standards that are useful from the

point of view of making an argument on an exam:

1. present interest or expectancy test: looks at whether the corporation has either a present interest or an

expectancy growing out of an existing right. This test would explain the result in Canaero.

2. line-of-business test: this test looks at whether an opportunity could be adapted to the firm’s present business and is consonant with its reasonable needs and aspirations for expansions. This test can both be

overbroad and over-narrow at times, but would appear to explain the result in Johnston v Green.

IMPOSSIBILITY AND CORPORATE OPPORTUNITIES The courts do not look favourably on directors claiming that it was impossible for the corporation to pursue the

opportunity as a defence to charges of breach of fiduciary duty. They generally incline to a stricter Keech v Sanford

interpretation of the duty. Often, but not always, claims of impossibility arise when the corporation supposedly can’t get financing for a deal, but a director manages to raise the financing himself. In these cases, the courts recognize

that conflicted directors have an incentive not to exert their whole efforts to secure financing on behalf of the

corporation and normally find a breach of duty.


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FAILED IMPOSSIBILITY ARGUMENTS Case/Statute Juris. P Key Points

Canadian Aero Service Ltd v O’Malley 1974 CA/SC 94 O and Z claimed that Canaero would not have obtained the contract even if they hadn’t resigned and taken it. However, this was not certain and Laskin J held that Canaero need not prove that but for O and Z’s actions, it would have obtained the contract: O and Z’s liability was grounded in their breach of fiduciary duty.

Zwicker v Stanbury 1953 CA/SC 132 The fact that LNH had no money to buy the mortgage was quite irrelevant. Directors learned about the opportunity in their capacity as directors of LNH.

Abbey Glen Property Corp v Stumborg 1978 AB/AD 86 The impossibility stemming from Traders’ refusal to enter into a joint venture with Terra is irrelevant.

Regal (Hastings) Ltd v Gulliver 1942 Eng/HL 120 While the directors could not be compelled to enter into personal guarantees they did not want, this doesn’t mean they had to buy the opportunity themselves either.

Irving Trust Co v Deutch 1935 US/CA 104 Deutch may not justify taking the patent rights that Acoustic deemed essential on the grounds that Acoustic lacked the money.

SUCCESSFUL IMPOSSIBILITY ARGUMENTS Case/Statute Juris. P Key Points

Robinson v Brier 1963 PA/SC 121 When S Corp started manufacturing the frames, all of M Corp’s space was taken up with luggage assembly and M Corp was behind on filling orders.

DIRECTOR OF MULTIPLE CORPORATIONS There is no prohibition in law against a person being a director of several corporations and this state of affairs is

actually quite common in practice. In this case, to whom does the director owe the duty of loyalty? The answer is

that he owes it to all of them and whether he breached it will be fact-specific.

Case/Statute Juris. P Key Points Johnston v Green 1956 DE/SC 105 Odlum did not breach his duty to Airfleets because Airfleets’ business did not

have anything to do with Nutt-Shel. It would be absurd to find that he breached his duty of loyalty to every corporation he was a director of and to which he didn’t offer the Nutt-Shel patents.

Scottish Co-operative Wholesale Society Ltd v Meyer

1959 Eng/HL 123 Directors of the subsidiaries were nominees of the Society and in conflict of duty. They breached their duty of loyalty to the subsidiary by not standing up for it.

Duty to Comply In addition to the duties contemplated by ss 120 and 122(1), there is a general duty under s 122(2) to comply with:

the CBCA;

the regulations;

the bylaws and Articles of the corporation; and

any Unanimous Shareholder Agreements (p 58).

If the directors fail to comply, the following people can apply to a court to order compliance:

Complainants (p 63); and

Creditors

Because complainants can bring an action to enforce, you can have a lot of leeway on an exam to argue that just

about anyone can bring a s 247 application under the proper person category of s 238(d).

Case/Statute Juris. P Key Points CBCA s 122(2) RSC 1985 161 Duty to comply with the Act, the regulations, the bylaws and Articles of the

corporation, and a unanimous shareholder agreement. CBCA s 123(4) RSC 1985 162 Defences to a failure to comply: reasonable diligence and care.


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Case/Statute Juris. P Key Points CBCA s 247 RSC 1985 187 Enforcement provision for s 122(2). CBCA s 238 RSC 1985 184 Definition of complainant.

STATUTORY LIABILITIES The following are directors’ statutory liabilities, which directly prohibit certain actions as a complement to the

positive duties defined in ss 120 & 122. Beneath the table immediately below is another table showing the defenses

that are available to directors to negate the statutory liabilities.

Case/Statute Juris. P Key Points CBCA s 118(1) RSC 1985 158 Directors are liable to the corporation for issuing Watered Stock. CBCA s 118(2) RSC 1985 158 Directors are liable to the corporation for making certain payments that would

make the corporation insolvent—for instance, payment of Dividends contrary to s 42; payment of an indemnity contrary to s 124; and payment to a shareholder contrary to ss 190 or 241.

CBCA s 119 RSC 1985 158 Directors are liable to employees for up to 6 months unpaid wages. There are certain limitation periods.

CBCA s 146(5) RSC 1985 168 To the extent that a unanimous shareholder’s agreement relieves directors of management responsibilities, they are also relieved of their liabilities.

Defences to Statutory Liabilities Case/Statute Juris. P Key Points

CBCA s 123(4) RSC 1985 162 Exercise of care skill and diligence a reasonably prudent person would have exercised in the circumstances is a defense to liability under ss 118 & 119.

CBCA s 123(4)(a) RSC 1985 162 A defense under s 123(4) can include good faith reliance on financial statements from a director or officer, or a report of the auditor.

CBCA s 123(4)(b) RSC 1985 162 A defense under s 123(4) can also include good faith reliance on the report of a professional. But see Statutory Defences (p 44) under Duty of Care for caveats…

CBCA s 123(1) RSC 1985 161 A director present at a meeting can dissent if he follows the right protocol. This might also be used to found a defense.

CBCA s 123(3) RSC 1985 161 A director absent from a meeting can dissent if he follows the right protocol. This might also be used to found a defense.

CBCA s 118(6) RSC 1985 158 Directors have a defence to liability for issuing Watered Stock under s 118(1) if they did not know and could not reasonably have known that the property received was not fair equivalent of the money that would have been received.

DIRECTOR INDEMNIFICATION AND INSURANCE The policy rationale for director liability is that it provides incentives to (1) exercise due care; (2) abide by the

fiduciary duty; and (3) avoid conduct that would undermine the corporate existence. However, director liability has

the potential to create problems, too. Liability may make directors risk averse, and the costs of this risk aversion will

be borne by the corporation rather than the directors themselves. If directors are overexposed to liability, they may

adopt a “less than socially optimal level of risk taking”.

Enter indemnification, which is available for directors IF they do not breach their fiduciary duties. Per Iacobucci J in

Blair at ¶ 74, indemnification provides:

. . .reimbursement for reasonable good faith behaviour, thereby discouraging the hindsight application of perfection. Indemnification is geared to encourage responsible behaviour yet still permit enough leeway to attract strong candidates to directorships and consequently foster entrepreneurism. It is for this reason that indemnification should only be denied in cases of mala fides.


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CBCA Indemnification Structure The overall structure of indemnification under CBCA s 124 provides for permissive indemnification which allows

corporations to indemnify directors if they so choose. However, there are three caveats to the general permissive

scheme:

1. directors are entitled to indemnification as of right in some circumstances under s 124(5);

2. directors may not receive indemnification if they breached their duty of loyalty under s 124(3); and

3. a court order is required to indemnify a director who is being sued by the corporation itself, for instance in a

derivative action: s 124(4).

Note that the indemnity permitted under s 124(1) is very broad:

it includes legal fees, settlements, and adverse judgments; and

it may be issued for costs arising in civil, criminal, administrative, and investigative proceedings

Case/Statute Juris. P Key Points CBCA s 124(1) RSC 1985 162 Permissive indemnity. CBCA s 124(2) RSC 1985 162 Corporation may advance costs. This subsection implies that all payments of

costs are advances that must be paid back if s 124(3) is breached. CBCA s 124(3) RSC 1985 162 To be indemnified:

(a) A director may not be in breach of his fiduciary duty. See Requirement of Good Faith (below); and

(b) In administrative/criminal matters enforced by a monetary penalty, director must have reasonable grounds for believing his conduct was lawful. Onus on corporation to prove lack of reasonable grounds: Bennett v Bennett Environmental Inc (p 91).

CBCA s 118(2)(d) RSC 1985 158 Directors are personally liable for authorizing payment of an indemnity contrary to s 124. However, note that there are Defences to Statutory Liabilities (p 50).

CBCA s 124(4) RSC 1985 162 If corporation is suing the director, then it must apply to court if it wants to indemnify him. This applies to derivative actions.

CBCA s 124(5) RSC 1985 163 Indemnification as of right if on termination of proceedings, director acted in good faith and was not judged to have been at fault. Includes settlements!

CBCA s 124(7) RSC 1985 163 A corporation may apply for a court order approving indemnification. CYA!

Requirement of Good Faith Regardless of anything else, if a director’s conduct is found to have breached s 124(3), for instance if he did not act in

good faith with a view to the best interests of the corporation, he is prohibited by law from receiving an indemnity.

PRESUMPTION OF GOOD FAITH Because of the consequences of s 124(3), the courts have held for policy reasons that allegations of bad faith or other

contraventions of s 124(3) must be strictly proved. Thus, there is a presumption that the director acted in good faith

and the onus is on the party alleging bad faith to prove it.

Case/Statute Juris. P Key Points Blair v Consolidated Enfield Corp 1995 CA/SC 92 There is a presumption of good faith which the corporation must disprove.

Reliance on actuarial and legal advice would militate against a finding of misconduct.

Manitoba (Securities Commission) v Crocus Investment Fund

2007 MB/CA 108 Allegations in pleadings or by the MBSC or in extra-judicial proceedings by the Auditor General are not evidence and . . . cannot displace the presumption of good faith that is well-recognized in law.

Bennett v Bennett Environmental Inc 2009 ON/CA 91 For reasons analogous to those in Blair, the corporation also bears the burden of proving that a director’s belief in the lawfulness of his conduct was not reasonable.


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Indemnification as of Right If the proceedings terminate without a finding of fault and the director complies with s 124(3), then he is entitled to

indemnity as of right under s 124(5). Of course, if there is no finding of fault, it seems unlikely that the director could

possibly be in breach of s 124(3), especially because he can take advantage of the Presumption of Good Faith. Since

the only requirement is no finding of fault, a director is entitled to indemnification even if he settles.

However, by the time the proceedings terminate, a director who wasn’t permissively advanced costs under s 124(2)

may be out a good deal of money. For this reason, standard business practice is to insist on the corporation agreeing

to provide a right to indemnity. This is usually done using the wording of s 124(3) but replacing the word “may” with “shall”. Several strategies could be employed:

1. The right to indemnity could be guaranteed in the bylaws, as in Blair, Crocus, and Bennett. However, the

disadvantage of this technique is that the bylaws are vulnerable to repeal by the other directors if the one

being sued is dismissed or outnumbered. This is a potential exam observation…

2. The right to indemnity could be guaranteed in a contract with the corporation, such as an officer’s contract of employment. This solves the problem noted in #1 above.

However note that no matter which technique is used, if there is a contravention of s 124(3), indemnity is prohibited.

CYA Because payment of an indemnity in contravention of s 124 makes the directors who consented to it personally liable

under s 118(2)(d), RD recommends that directors contemplating indemnity should apply to court to have it approved under s 124(7). Presumably, this will more than meet the due diligence requirements of the s 123(4)

defense.

BJR and Defenses to Illegal Payment of Indemnities RD asks whether the BJR would apply to protect directors who made a “business judgment” to indemnify a director if the payment turns out to be in contravention of s 124 so as to attract s 118(2)(d) liability. His answer: No. However,

BJR or not, reasonable diligence is a complete defense to a charge under s 118. See Defences to Statutory Liabilities.

Case/Statute Juris. P Key Points CBCA s 118(2)(d) RSC 1985 158 Directors liability for indemnity contrary to s 124. CBCA s 123(4) RSC 1985 162 Defense of reasonable diligence, care, and skill.

Director and Officer Insurance Under CBCA s 124(6), corporations are permitted to insure their directors and officers against liability arising under

the CBCA or otherwise. This insurance comes in handy when directors are disentitled to indemnification through

operation of s 124(3) or corporations exercise their discretion not to indemnify under s 124(1). When this occurs,

insurance under s 124(6), which most directors and officers would negotiate with “their” corporation, is a crucial

backstop.

SELECTING (AND REMOVING) DIRECTORS The initial directors of a corporation are the ones named in Form 2 pursuant to section 106(1) of the CBCA. These

directors hold office until the first shareholder’s meeting: s 106(2). Directors are elected at each annual shareholders’ meeting and hold office until the next election of directors at the following annual meeting: s 106(3).


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Qualifications of Directors Section 105(1) CBCA disqualifies the following persons from being directors:

(a) minors (under 18);

(b) crazy people (of “unsound mind”); (c) non-individuals (i.e. corporations); and

(d) bankrupts

Removal of Directors A director may be removed from office by ordinary resolution of the shareholders at a special meeting of the

shareholders: s 109. Under s 6(4), the Articles may not change the number of votes required to dispose of a director,

so that it is always done by ordinary resolution. The vacancy caused by removal of the director must be filled at the

same meeting at which he was removed. If not, the provisions of s 111 become applicable.

As well as being removed, directors may also leave office due to death, resignation, or failing to meet one of the

Qualifications of Directors set out in s 105(1): s 108(1); this could occur if the director becomes bankrupt, for

example. When a vacancy arises other than from a removal under s 109, s 111 directs how it should be filled.

Summary of CBCA Provisions Case/Statute Juris. P Key Points

CBCA s 6(4) RSC 1985 148 Articles cannot change requirements for removing directors under s 109: it is always an ordinary resolution.

CBCA s 105(1) RSC 1985 155 Qualifications of directors: natural persons 18 or over, of sound mind, and not bankrupt.

CBCA s 106(1) RSC 1985 155 Initial directors. See also Form 2. CBCA s 106(2) RSC 1985 155 Term of office of initial directors. CBCA s 106(3) RSC 1985 155 Maximum director’s term before re-election is three consecutive AGMs. CBCA s 108(1) RSC 1985 156 When directors cease to hold office: resignation, death, failure to meet criteria

of s 105(1), and removal under s 109. CBCA s 109 RSC 1985 156 Removal of directors by ordinary resolution at a special meeting of the

shareholders. See also: Special Meetings of the Shareholders. CBCA s 111 RSC 1985 156 Filling/dealing with vacancies of directors…

See also: L06 -- 20110926 -- Form 2, Initial Registered Office and First Board of Directors

Corporations Shareholders and Governance

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5. Shareholders and Governance

SHAREHOLDERS’ MEETINGS Ordinary and Special Resolutions Ordinary resolutions and special resolutions are defined in section 2 of the CBCA. An ordinary resolution requires a

bare majority of the votes cast to pass. A special resolution, on the other hand, requires no less than two thirds of the votes cast to pass. For example, if only 5% of the voting shares are voted, then ordinary and special resolutions

can effectively be decided by 2½ percent and 3.33% of the potential votes!

The following tables show how ordinary and special resolutions are used. Note that ordinary resolutions are only

binding in certain circumstances.

Ordinary Special Question S P Binds Question S P Binds

Bylaw approval/rejection 103(2) 154 Fundamental Changes / 57 Elect directors 106(3) 155 Save directors from confl. of int. 120(7.1) 160 Remove directors 109(1) +6(4) 156 Other special resolutions† Appoint auditor 162(1) 172 Remove auditor 165(1) / Approving Squeeze-Outs 194 180 Other ordinary resolutions† †: Not binding, except where a unanimous shareholders’ agreement would make them so under ss 102 & 146.

Business Conducted At Meetings NOTICE OF MEETINGS

Actual notice of any shareholders’ meeting must be sent to shareholders between 60 and 21 days before the

meeting is held. This is the period prescribed in the regulations (SOR 2001/512 s 44) and referred to in CBCA s 135(1).

ORDINARY BUSINESS According to section 135(5) of the CBCA, ordinary business can only be conducted at a regular annual meeting of the

shareholders. Moreover, even at an annual meeting, it consists of only of four things:

1. consideration of the financial statements;

2. auditor’s report; 3. election of directors; and

4. re-appointment of the incumbent auditor

SPECIAL BUSINESS All business conducted at a special shareholders’ meeting is special business, and all business conducted at a normal annual meeting that is not listed above is also special business: CBCA s 135(5). The significance of special business is

that there are extra detail requirements attached to how notice is to be done under CBCA s 135(6).

Shareholders and Governance Corporations

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MEETING RIGHTS IN WIDELY HELD CORPORATIONS One of the things RD keeps harping on is that the management of widely-held corporations has built-in advantages because it can pick the time and place of meetings and is able to nominate the default slate of directors. These

problems are mitigated somewhat by proxy voting rules under corporate and securities law, but the monitoring and

governance costs of diversified shareholders with small interests will still tend to outweigh their perceived advantage

from monitoring and governance, thus resulting in “rational apathy”.

Special Meetings of the Shareholders The directors of a corporation may call a special meeting of the shareholders (which is any meeting that is not a

normal annual meeting) at their total discretion at any time under CBCA s 133(2). Under some circumstances, they

may also be compelled by the Act to call a meeting. However, there are two ways in which meetings can be called

either against the will of directors or at least without their consent. Shareholders may requisition a special meeting,

or a court may order it.

REQUISITIONING MEETINGS Shareholders combining for at least 5% of the voting shares (this appears to mean 5% of shares which carry a right to

vote, rather than 5% of votes) of a corporation may requisition a special meeting under CBCA s 143. The directors

then have 21 days to call the meeting; if they do not, the shareholders may call it themselves, in which case the

corporation must reimburse them.

MEETINGS ORDERED BY THE COURT A court may also order a meeting to be held under CBCA s 144, and in doing so it may set down rules for how it must

be conducted (including varying the bylaws, varying the quorum, and setting the time and place). Typically, courts

intervene to order meetings where the directors are at fault (Re Routley’s) or where a meeting is necessary for the

protection (Canadian Javelin) of the corporation.

In Charlebois v Bienvenu, the Ontario Court of Appeal ruled that it could not order a meeting to be held for the

purpose of electing a new board of directors if in doing so it would contravene the Ontario Corporations Act

provisions governing terms of directors. RD raises the possibility that s 145 of the CBCA may now give a court the right to so order and thus Charlebois may be obsolete.

SUMMARY OF CASE LAW AND STATUTORY PROVISIONS RELATING TO SPECIAL MEETINGS Case/Statute Juris. P Key Points

CBCA s 143 RSC 1985 166 Shareholders who have at least 5% of the voting shares of a corporation may requisition a special meeting.

CBCA s 144 RSC 1985 167 A court may order a meeting (a) if it is impracticable to call it using normal mechanism; (b) if it is impracticable to conduct it using normal mechanism; or (c) for any other reason.

Re Routley’s Holdings Ltd 1960 ON/CA 119 Court orders a special meeting due to the fault of Boland, the president, at the annual meeting. Court varies quorum and orders neutral location to be safe.

Re Canadian Javelin Ltd 1976 QC/SC 118 Court orders a special meeting because two sets of people claiming to be valid directors threaten to damage the assets of the company.

CBCA s 145(2)(c). RSC 1985 168 Court may order a new election of directors to resolve a controversy over the election of directors: this most likely obsoletes Charlebois, below.

Charlebois v Bienvenu 1968 ON/CA 95 Court refused to order a special meeting for the purpose of electing new directors, because the term of the old ones might not have been up yet—this had yet to be determined at trial.


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Voting Rights Attached to Shares Voting rights may be attached to shares—indeed, they are attached by default under CBCA ss 140 & 24(3). Where a

corporation has more than one class of shares, not every class must carry the right to vote, though at least one must

have it. Even shares without voting rights may gain the right to vote under certain circumstances (i.e. certain

Fundamental Changes), though these shares would only move from zero votes to one vote and would be at a

disadvantage against any shares carrying multiple votes.

A number of issues arise as to whether and to what degree the right to vote may differ among shareholders of the same class. As far as the common law is concerned, a quote from Palmer’s Company Law is favoured by the judiciary

and pops up in several cases, including Jacobsen and McClurg:

Prima facie the rights carried by the shares rank pari passu, i.e. the shareholders participate in the benefits of membership equally. It is only when a company divides its share capital into different classes with different rights attached to them that the prima facie presumption of equality may be displaced.

Case/Statute Juris. P Key Points Re Bowater Canadian Ltd v R.L. Crain Inc

1987 ON/CA 117 Rights attach to shares, not shareholders. Thus, a step-down provision coming into effect when the shares changed hands was severed.

Jacobsen v United Canso Oil & Gas Ltd 1980 AB/QB 105 The articles of a corporation with only one class of shares tried to limit each shareholder to voting 1,000 shares. Court ruled this is invalid because in a corporation with only one class of shares, each shareholder has the right to vote on the basis of the number of shares held. Judge pointed to CBCA ss 24(3), 24(4)(b), and 140.

CBCA s 24(3) RSC 1985 150 Where a corporation has only one class of shares, all holders are equal and get rights to vote, receive dividends, and receive residue on dissolution. See Minimum Rights (p 37).

CBCA s 24(4) RSC 1985 151 If a corporation has more than one class of shares, the Minimum Rights must attach to at least some class.

CBCA s 140(1) RSC 1985 166 Unless the articles say differently, every share gets one vote at a shareholders’ meeting.

The Queen v McClurg 1990 CA/SC 127 Case about Dividends (p 38), but in which idea of equal treatment was canvassed by Dickson CJC.

VOICE IN MANAGEMENT Other than their ability to make certain binding changes by Ordinary and Special Resolutions and their right to pass

Unanimous Shareholder Agreements, shareholders have no say in the management of the corporation, which is the

province of the directors under s 102. Moreover, management is free to ignore any shareholder resolutions passed

which are not specifically binding within the CBCA. At common law, the example of Automatic Self-Cleansing Filter Syndicate Co v Cunninghame is illustrative.

Of course, shareholders can remove and elect directors, but RD likens this indirect influence on the management to “pushing on a string”. They can also make proposals under section 137 and can nominate a different slate of

directors (see below, p 58) either directly at a shareholders’ meeting or using the machinery of section 137 if their

holdings are big enough.

The sections below discuss certain initiatives in which the shareholders get a direct say by statute. However, it is also

worthwhile to consult the summary table in Ordinary and Special Resolutions (above, p 54).


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Fundamental Changes Fundamental changes may be proposed by shareholders or management. In either case, they must be approved by

special resolution of the shareholders. Certain changes may trigger any or all of the following entitlements:

1. entitlement to a separate class or series vote; and/or

2. entitlement to dissent and appraisal; and/or

3. entitlement to vote an otherwise non-voting share

SEPARATE CLASS & SERIES VOTES Certain fundamental changes may trigger a separate class vote. This means that, in addition to the special resolution of all shareholders entitled to vote, the class or classes of shares involved must also pass special resolutions to ratify

the change.

Note that there are certain other provisions in the CBCA outside of s 176 that create separate rights to vote. See the

Summary of Fundamental Changes table for more.

Case/Statute Juris. P Key Points CBCA s 176 RSC 1985 173 The main, but not only, provision on class and series votes. CBCA s 176(5) RSC 1985 174 When a class or series is entitled to a separate vote, it gets it regardless of

whether that class or series would otherwise get a vote. CBCA s 176(4) RSC 1985 173 A series only gets a separate vote if that series would be affected differently

from other shares in the same class.

See also: Textbook p 554 asks a question regarding the “Quick Buys” fact pattern

L14 -- 20111026 -- Voting Question (text p 554) Answer Sheet

DISSENT AND APPRAISAL RIGHTS Certain fundamental changes give shareholders a right to dissent under CBCA s 190 (see the table Summary of

Fundamental Changes for all the sections involved). This right allows a shareholder who dissents from the

fundamental change in question to have the corporation buy back his shares at fair market value. The purpose of this

right is to protect minority shareholders (the 1/3 or fewer who voted against the special resolution in question) from

having the majority (in RD’s words) “change the deal”.

Section 190 is very long (26 subsections). The following table provides a quick summary, but there are many details

that should be read in full:

Subsection P Meaning (1) 177 Any shareholders (this is regardless of whether voting or not) affected by certain listed changes are

entitled to dissent. See Summary of Fundamental Changes. (2) 177 Holders of any shares entitled to vote under s 176(1) also get dissent rights if the shares are affected as

described in s 176(1). See Summary of Fundamental Changes. (3) 177 Price to be paid: fair market value at close of business day before resolution adopted (4) 177 No partial dissents (5) 178 Shareholder must send a written objection to the corporation at or before the meeting at which the

resolution is to be voted on. (7) & (8) 178 Shareholder must send a demand for payment and send his share certificate to the corporation. (12) 178 Corporation must make an offer to pay. (15) .. (23) 179 If corporation and shareholder can’t agree on the price, either party can apply to court and there is a

procedure for getting the court to sort it out. (26) 180 Corporation forbidden to pay for shares if by doing so it would fail the same solvency test used in s 42


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SUMMARY OF FUNDAMENTAL CHANGES <<I moved the fundamental change/vote table to the end of the document…Click here to view>>

Agreements among Shareholders A non-unanimous agreement among shareholders to vote a certain way or to co-operate to influence the

management of a corporation is binding as between the shareholders. However, it is not binding on subsequent

owners of the shares: see Unanimous Shareholder Agreements (below).

Case/Statute Juris. P Key Points Ringuet v Bergeron 1960 CA/SC 121 A non-unanimous agreement among shareholders is binding as between the

parties to the contract. CBCA s 145.1 RSC 1985 168 Codification of the rule in Ringuet v Bergeron.

Unanimous Shareholder Agreements A unanimous shareholder agreement allows shareholders to subject the directors of a corporation to the will of the

shareholders. Such an agreement is binding on subsequent owners of the shares and, to the extent that it ousts

managerial rights from the directors, it also transfers the corresponding liabilities onto the shareholders.

Note that unanimous shareholder agreements are only viable governance options for closely-held corporations… Also be aware that USAs must be in writing, so that an oral contract can never function as a USA under the CBCA.

This is similar to the writing requirements for Pre-Incorporation Contracts under the CBCA.

Case/Statute Juris. P Key Points CBCA s 102(1) RSC 1985 153 Directors manage or supervise the management subject to any unanimous

shareholder agreement. CBCA s 121 RSC 1985 161 In a particular application of general rule from s 102(1), definition of offices and

appointment of officers is also subject to unanimous shareholder agreement. CBCA s 122(2) RSC 1985 161 Directors have a duty to comply with unanimous shareholder agreements. See

also Duty to Comply. CBCA s 146(1) RSC 1985 168 Otherwise lawful unanimous shareholder agreements are valid. CBCA s 146(4) RSC 1985 168 If a share purchaser did not have notice of a unanimous shareholder agreement

encumbering the shares, he can rescind the purchase within a certain timeline. CBCA s 146(5) RSC 1985 168 To the extent that a unanimous shareholder agreement restricts directors’

powers to manage: the directors are relieved of their liabilities, including under ss 118, 119, and

122; and the parties to the agreement who acquire the power to manage also

acquire those liabilities to the same extent.

Nominating a Different Slate of Directors Under section 137(4) of the CBCA (p 165), shareholders can nominate a different slate of directors than those

nominated by management, either directly at a shareholders’ meeting or indirectly using the rules for shareholder proposals. As with any Other Shareholder Proposals (below), regardless of whether the proposal mechanism is used or whether the shareholder moves a motion from the floor of the shareholders’ meeting, certain requirements must

be met. For nominating directors under s 137(4), these are:

a shareholder must have, or command the support of:

o 5% of total outstanding shares; or

o 5% of the shares entitled to vote at the meeting;

-AND-


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the shareholder must have held the shares for the “prescribed period” in the regulations, namely 6 months before the proposal. See Other Shareholder Proposals, below.

The advantage to submitting a proposal rather than moving from the floor of the meeting is that the shareholder can

leverage the Management Proxy Circular to have notice of the proposal sent out to the other shareholders.

Other Shareholder Proposals Under CBCA s 137, shareholders may submit proposals to the corporation and have the corporation “support” them by including them in the Management Proxy Circular and even including supporting statements. The directors have

significant discretion to turn down frivolous proposals. Note that:

both registered shareholders and beneficial owners may submit proposals or raise the issue at meetings:

CBCA s 137(1); and

the eligibility requirements are the same whether it is a proposal is sent to the corporation or the issue is

raised from the floor of the meeting: CBCA s 137(1)(a) & (b).

Case/Statute Juris. P Key Points CBCA s 137(1) RSC 1985 165 Both registered and beneficial owners may (a) submit proposals or (b) raise the

issues at the meeting, subject to eligibility requirements in subsection (1.1) &c. CBCA s 137(1.1) RSC 1985 165 Eligibility requirements:

Prescribed number of shares: CBCA Regulations SOR 2001/512 s 46(a) o either share holdings worth $2,000 on the day the proposal is

submitted; or o 1% of the outstanding voting shares of the corporation on the day the

proposal is submitted. Prescribed period: CBCA Regulations SOR 2001/512 s 46(b)

o 6-month period ending on the day the proposal is submitted. Also applies to nominations for directors under s 137(4).

CBCA s 137(2) RSC 1985 165 Corporation that solicits proxies must set out the proposal in, or attach it to, the Management Proxy Circular.

CBCA s 137(3) RSC 1985 165 Corporation that solicits proxies must, at request of proposer, include a supporting statement in the Management Proxy Circular written by the proposer.

CBCA s 137(5) RSC 1985 165 Exemptions allowing directors to avoid including frivolous proposals.

See also: Nominating a Different Slate of Directors, above.

PROXY VOTING AND GOVERNANCE OF WIDELY-HELD CORPORATIONS Under section 140 of the CBCA, the right to vote shares belongs strictly to the registered shareholder. However, the

registered shareholder may appoint a proxyholder to vote according to his instructions by executing a form of proxy.

In addition, section 153 of the CBCA prohibits an “intermediary”, which includes a registered shareholder from voting

shares that it does not beneficially own other than on the instructions of the beneficial owner. The governance of

widely-held corporations is conducted mainly by proxy. In certain cases, corporate law does not provide all the rules

for management conduct. Securities law plugs these gaps.


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Intermediaries and Beneficial Owners

Mr JonesRegistered OwnerBeneficial Owner

Share RegisterJones & Co Ltd

Mr SmithBeneficial Owner

Clearing and Depository System

(CDS)Registered Owner

Intermediary

Clearing and Depository System

(CDS)Registered Owner

Intermediary

TD WaterhouseIntermediary

Mr MannBeneficial Owner

Mr Smith’s Broker

Under the CBCA, an intermediary is

anyone who either holds a share

registered in its own name or causes it to be held in the name of someone else and who is not the actual

beneficial owner of the share.

The beneficial owner of a share is the

ultimate owner.

Only the registered shareholder is

entitled to vote the share or to

appoint a proxyholder to vote the

share, but no intermediary is

permitted to vote the share without

the instructions of the beneficial

owner.

An interesting result of these

limitations is that if a beneficial owner causes himself to be appointed proxyholder for the shares that he beneficially owns, he

is limited to the rights granted in the

proxy, which are usually less than

those of a registered shareholder!


CBCA s 147 RSC 1985 169 Definition of “intermediary”. CBCA s 153 RSC 1985 171 Duties of intermediaries. Note that the CBCA does not compel intermediaries to

solicit voting instructions from the beneficial owners: under pure corporate law, they may refrain from any action whatsoever. See NI 54–101 (below).

VALIDITY OF VOTES CAST BY AN INTERMEDIARY The votes cast by an intermediary are valid even if they contravene the duties of the intermediary or the wishes of

the beneficial owner.

CBCA s 153(6) RSC 1985 171 Failure to comply with section 153 does not render void any action taken at the

shareholders’ meeting—but the intermediary is liable under s 153(8). Re Marshall 1981 ON/HC 118 A chairman at an AGM is entitled to rely on the votes as cast by the registered

owner of the shares. Even if the shares are voted against the wishes of the beneficial owner(s), a court will not vary the result of the vote.

Proxies and Proxyholders A registered shareholder can appoint a proxyholder to act according to his instructions at a particular shareholders’ meeting. It is possible to imbue the proxyholder with significant discretion in terms of how to vote (for example, see

the management proxy circular: textbook p 650 at 651). However, a proxyholder does not step into the shoes of a


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registered shareholder—he acquires only the rights specifically granted in the proxy, which may be less than those of

a registered shareholder.

According to the CBCA regulations, any form of proxy, whether used by management or others, must state that the

registered shareholder may appoint someone other than the person pre-designated on the form as proxyholder.

[This is technically in NI 51-102 s 9.4(3)].

Case/Statute Juris. P Key Points CBCA s 147 RSC 1985 169 Definitions of “form of proxy” and “proxy”. CBCA s 148 RSC 1985 169 Proxyholder has only the authority granted in the proxy: s 148(1).

Only a registered shareholder (or his attorney) can execute a proxy: s 148(2).

Proxy Solicitation Proxy solicitation is defined in CBCA s 147. Its meaning is intuitive: a person who solicits proxies is going out and

attempting to obtain executed forms of proxy in order to be able to vote another person’s shares. The purpose is to obtain a large enough block of shares by proxy to influence the outcome of a shareholders’ meeting. The definition in s 147 is broader than that, however, and covers attempts to cause others to withhold or revoke proxies, &c.

INFORMATION CIRCULAR According to section 150, anyone, whether management or dissident, who solicits proxies must send an information

circular to all shareholders entitled to receive notice of a meeting (under s 135).

The circular must be in the “prescribed form” (i.e. as the regulations require). This requires disclosing the interests of the persons doing the solicitation in the matters to be voted on. If any special matters, such as, but not limited to,

Fundamental Changes, are to be voted on, the information circular must provide information in sufficient detail to

allow shareholders to form a reasoned judgment on the matter.

MANAGEMENT PROXY CIRCULAR The management of certain corporations is required to solicit proxies under s 149 of the CBCA. The first situation in

which such solicitation is required is in the case of public (i.e. “distributing”) CBCA corporations. In addition, CBCA

corporations having more than 50 voting shareholders must also solicit proxies under s 149. The textbook p 650

discusses the interests which management must disclose, and gives a sample management circular on pp 650–5.

DISSIDENT PROXY CIRCULAR If dissidents solicit proxies in a distributing corporation with more than 50 voting shareholders, they are required to

send a dissident proxy circular to all shareholders entitled to receive notice of a meeting. This requirement can

impose crippling expense on dissidents and moreover, the risk that any activity a dissident may engage in with the

goal of replacing management or stopping the management agenda will be deemed soliciting proxies is high. Large

shareholders such as institutional investors are favoured by proxy solicitation rules since, by definition, they need

communicate with fewer other shareholders to effect their agenda…

A less expensive way for a dissident to affect the management of the company is to submit a proposal meeting the

requirements of section 137. Under section 137(2), management is required to include the proposal on the

management proxy circular.

SUMMARY OF RELEVANT CBCA PROVISIONS Case/Statute Juris. P Key Points

CBCA s 147 RSC 1985 169 Definition of proxy solicitation.


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Case/Statute Juris. P Key Points CBCA s 149 RSC 1985 170 Management of a distributing corporation and corporations with more than 50

voting shareholders is required to solicit proxies from those entitled to receive notice of the shareholders’ meeting.

CBCA s 135 RSC 1985 164 Shareholders entitled to notice of a meeting are those entitled to vote, which means registered shareholders. Nothing in the CBCA requires notification of beneficial owners. See NI 54–101 for rights of beneficial owners.

CBCA s 150 RSC 1985 170 Rules for soliciting proxies. See the exceptions in s 150(1.1) & 150(1.2). If soliciting affects fewer than 15 shareholders or is done via certain public announcements, information circular is not mandatory.

CBCA s 137(2–3) RSC 1985 165 Management must include shareholder proposals on the management information circular, subject to exceptions in s 137(5) & 137(5.1).

NI 54–101 Because only registered shareholders are entitled to receive management proxy solicitation under the CBCA,

securities law stepped in to ensure that beneficial shareholders also receive proxy-related information. National

Instrument 54–101, Communication with Beneficial Owners of Securities of a Reporting Issuer has the following

effects:

1. notice of meeting and management proxy circulars must be sent by intermediaries to all beneficial

shareholders who have indicated a wish to receive such materials (NOBOs);

2. intermediaries must supply reporting issuers with the NOBO lists upon request.

Note two key points. First, a proxy must still be executed by the registered shareholder in order to be valid, which

means that the intermediary who is a registered shareholder must sign a form of proxy in which a beneficial owner

indicates a desire to appoint a proxyholder. Second, the textbook states at p 663:

A common misconception is that a beneficial shareholder who has himself appointed as his own proxyholder, by filling in his name instead of management’s nominee on the form of proxy, will be put in the same position as a registered holder at the meeting. . . .

Things will only work that way if:

1. the form of proxy contains a grant of discretionary authority to deal with other business at the meeting; and

2. the form of proxy doesn’t bind the proxyholder in how to vote on any matters at the meeting.

See also: L15 -- 20111031 -- Corporations as Shareholder Democracies

Sample Management Information Circular, textbook pp 651–5

Court Actions Corporations

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6. Court Actions Corporations and corporate management get involved in lawsuits all the time. One obvious example of this is where

a corporation sues some third party, for instance for a breach of contract as in Piller Sausages v Cobb Int’l Corp. In

this case, the directors must either pass a resolution authorizing the legal action against the third party, or must

delegate that authority to an officer such as the company’s in-house legal counsel.

If the directors injure the corporation through some breach of duty, the same considerations apply—for instance, a directors’ resolution will be required to sue the breaching directors. This may be difficult to obtain if the same directors are in charge of the corporation! This chapter thus focuses not on actions initiated by the directors, but on actions initiated in spite of the directors.

GENERAL CONCEPTS The actions discussed in this chapter address the following situations:

Problem Solution 1. Directors or officers refuse to comply with the CBCA, regulations,

Articles, bylaws, or a unanimous shareholder agreement

Any complainant or creditor can sue under CBCA s 247 for a court order mandating compliance.

2. Security holder is suspicious that fraud or oppression may be afoot

A security holder may request a court-ordered investigation

3. Injury to corporation due to directors’ breach of duty

Corporation sues directors through Derivative Action initiated by a complainant

4. Injury to individual stakeholder through oppression caused by corporation, directors, officers, or corporation’s affiliate

Individual stakeholder sues corporation, directors, officers, or affiliate under Oppression Remedy.

The following actions are not discussed:

Problem Solution 5. An interested directors’ contract was made in violation of s 120. See

Interested Directors’ Contracts (p 45)

Corporation or shareholder may apply to have K avoided or accounting under s 120(8).

6. Injury to corporation by third party

Directors or delegees cause corporation to sue third party

7. Injury to third party due to directors’ breach of duty of care owed to third party.

Third party sues directors in negligence, as in Nielsen Estate v Epton

8. Injury to third party due to corporation’s negligence. Third party sues corporation in negligence.

Complainants The crucial section 238 (p 184) of the CBCA defines the term complainant. It is important because only a complainant

may bring a derivative action or application regarding oppression, and only a complainant or creditor may apply for a

compliance order. The term complainant does not include creditor, but does include:

(a) Registered or beneficial holders or former holders of a security of the corporation or any of its affiliates. This

includes shareholders, bondholders, former shareholders, and former bondholders, of the corporation itself

or subsidiaries and parent companies.

(b) Directors, officers, former directors, and former officers of the corporation or any of its affiliates.

(c) The Director of the CBCA bureaucracy.

Importantly, in addition to the above enumerated members, there is a discretionary class of complainants:

Corporations Court Actions

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(d) Any person that a court considers to be a proper person to bring an application.

Compliance Order Remedy The compliance order remedy in section 247 (p 187) is open to complainants and creditors. They can bring an

application to court for an order restraining the directors or officers or the corporation from non-compliance, or

mandating compliance, with the CBCA, the regulations, the Articles, the bylaws, and any unanimous shareholder

agreement.

Investigation Remedy The investigation provision in section 229 (p 184) is open only to security holders. It is essentially an outsiders’ remedy that allows a security holder who is concerned about fraud, dishonesty, or oppression to apply for a court-

ordered investigation into the alleged misfeasance of the company. The applicant may apply ex parte, meaning the

court can order the investigation without hearing from the corporation or its directors. If the investigation turns up

any non-compliance, it may be rectified by the Compliance Order Remedy, a derivative action, or the oppression

remedy as the circumstances require.

DERIVATIVE ACTION: ENFORCING MANAGERS’ DUTIES The most important thing to remember is that there must be an injury to the corporation to found a derivative

action, and it is the corporation itself which must be the plaintiff. The term derivative action is used because the

complainant’s right to begin the action in the corporation’s name derives from the corporation’s primary right to seek redress for the injury done to it.

The law on derivative actions is quite simple compared to oppression remedy applications, because in terms of

grounding liability for the actual injury itself, all the applicable law has already been discussed at length in relation to

the directors’ Duties (p 42). The only thing left to consider is the mechanics of the derivative action in the CBCA.

Briefly, the main issues are the requirement to seek leave of the court; the court’s ability to control the action; our

good friend the business judgment rule; and possible windfalls to new shareholders.

Requirement of Leave/Test for Leave Unlike the oppression remedy, the derivative action requires leave from a court before a complainant can actually

pursue a suit. Section 239(2) sets out a test with three requirements that were interpreted in the Primex case:

(a) the complainant must give at least 14 days’ notice to the directors that he plans to bring an application for

leave;

(b) the complainant must be acting in good faith; and

(c) the action must appear to be in the best interests of the corporation.

NOTICE REQUIREMENT The notice requirement is straightforward: it’s either met, or it isn’t. It is sufficient to tick it off on an exam and move

on. Be wary of the Re Northwest Forest case because under the BC Companies Act governing in that case, the

complainant had to make “reasonable efforts” to cause the directors to begin the action themselves, a requirement

that is not present in the CBCA.

GOOD FAITH REQUIREMENT The good faith requirement is discussed in Primex Investments. If the petitioner wants the corporation to do some

action for the benefit of all shareholders, it does not matter that he may be motivated partly out of self-interest, or


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that he personally dislikes one or more directors. If the complainant wants to pursue what he genuinely considers to be a valid claim, then he is acting in good faith.

APPEARANCE OF BEST INTERESTS REQUIREMENT Primex Investments Ltd v Northwest Sports Enterprises Ltd splits the best interests requirement into two parts:

1. the action must have a reasonable prospect of success, which the court describes at ¶ 39 (text p 792) as

based on an argument that would not be dismissed of hand; and

2. the court must be satisfied that the potential relief available in the proposed action is sufficient to justify the inconvenience to the company of being involved in the act.

According to the court in Primex, costs should not weigh too heavily at this stage because the court has discretion to

have the corporation pay the complainant’s costs and the court can refuse to exercise this discretion if the action is a

failure.

SUMMING IT UP: IS IT HARD TO GET LEAVE? Based on the criteria above, the threshold for leave is very low. As RD puts it, if you can keep a straight face while arguing your application, you are likely to get leave.

Case/Statute Juris. P Key Points CBCA s 239(2)(a) RSC 1985 185 14 days notice required CBCA s 239(2)(b) RSC 1985 185 Good faith of applicant required CBCA s 239(2)(c) RSC 1985 185 It appears to be in the interests of the corporation or its subsidiary Primex Investments Ltd v Northwest Sports Enterprises Ltd

1995 BC/SC 116 Considers the good faith and interests of the corporation parts of the test. Interests of the corporation require that the action has a reasonable prospect of success and that the potential damages are sufficient to justify the inconvenience to the corporation of maintaining the action.

CBCA s 242(1) RSC 1985 186 Evidence of shareholder approval not determinative of an application for leave (or regarding oppression, or for a compliance order…).

Re Northwest Forest Products Ltd 1975 BC/SC 118 This case mainly demonstrates that leave is easy to get. Here the court chose to ignore shareholder approval—as allowed by CBCA s 242(1).

First Edmonton Place Ltd v 315888 Alberta Ltd

1988 AB/QB 100 Despite having oppression application turned down, landlord got leave to pursue a derivative action on its behalf against the directors due to potential fraud.

Court Control of the Action One significant aspect of the derivative action which is not present in applications regarding oppression is that the

court has significant discretion to control a derivative action.

A court may issue an order allowing the complainant or any other person to control the conduct of the action under

CBCA section 240(a). However, it may also direct the conduct of the action itself under section 240(b)!

COSTS The court has discretion to order a corporation to pay a complainant’s interim costs and reasonable legal costs

under sections 242(4) and 240(d), respectively. A complainant whose interim costs are paid by the corporation may

be accountable to return this money upon final disposition, according to section 242(4). According to the court in

Primex, this discretion is one reason the bar for leave is so low.

In the textbook at p 817, there is a Janis Sarra article on costs in derivative actions. RD glossed over this very quickly.

He alluded to the Barry Estate v Barry Estate test described by Sarra at p 819, which she says creates unnecessary

barriers to interim costs and disregards the fact that the alleged harm is to the corporation. Knowing this doesn’t seem very important, but in case it comes up, interim costs under Barry Estate require that:


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1. the applicant have a strong prima facie case;

2. the applicant be genuinely in such financial circumstances that he can’t pursue the action without an order for interim costs; and

3. there must be a connection between the conduct complained of and the applicant’s financial ability.

Sarra mentions that the courts have held that declining to order interim costs early in the action will better discipline

the complainant to control the costs of the action.

NO SETTLING! A derivative action (like an application under the oppression remedy) may not be settled without approval of the

court. This rule is expressed in section 242(2) of the CBCA. The policy rationale for the rule is that, because directors

have an incentive to settle, predatory lawyers may try to get leave for the action and then settle immediately,

resulting in big fees to the lawyer for very little work.

SUMMARY OF RELEVANT CBCA PROVISIONS Case/Statute Juris. P Key Points

CBCA s 240 RSC 1985 185 Three key subparagraphs: (a) court can authorize complainant or any other person to control the

conduct of the action; (b) court can direct the conduct of the action; (d) court can order the corporation or its subsidiary to pay reasonable

legal fees of the complainant See section on Windfalls to New Shareholders (below) for a description of paragraph (c).

CBCA s 242(2) RSC 1985 186 The action may not be settled (among other things) without consent of the court.

CBCA s 242(4) RSC 1985 187 Court has discretion to order interim costs paid for the complainant by the corporation, but the complainant may have to account for these payments on final disposition.

BJR and the Derivative Action What happens if the directors object to the derivative action? It depends on who is being sued! RD says: “I think that if you want to sue an unconflicted third party, the courts should be very deferential to the directors. Courts should be less deferential if the complainant wants the corporation to sue the current directors”. In other words, where the directors object to a derivative action to sue a third party with whom the directors have no conflict of interest,

The Business Judgment Rule may apply.

Windfalls to New Shareholders In certain cases we have seen, the effect of pursuing former directors for breach of fiduciary duty has been that an

entirely new set of shareholders gets a windfall that wasn’t priced into their shares when they purchased them (similar to a remedy for past oppression). Of course, the courts have rejected the idea that this is a windfall to the

shareholders at all, relying on the separate legal personhood of the corporation and the fact that the injury was done

to the corporation, to justify large payments to the corporation that ultimately do benefit the new shareholders.

RD points to section 240(c) of the CBCA, which could be used to prevent such a windfall in the case of a derivative

action. Of course, it should be borne in mind that neither Regal (Hastings) nor Abbey Glenn were derivative actions

(the lawsuits having been undertaken by the new management) but if they were, then a provision such as s 240(c)

might help.



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Case/Statute Juris. P Key Points CBCA s 240(c) RSC 1985 185 A judgment for the corporation obtained in a DA may be paid instead to present

or former holders of its securities. Regal (Hastings) Ltd v Gulliver 1942 Eng/HL 120 Lord Porter kept the stiff upper lip: “This, it seems, may be an unexpected

windfall, but . . . the principle that a person occupying a fiduciary relationship shall not make a profit by reason thereof is of such vital importance that the possible consequence in the present case is in fact, as it is in law, an immaterial consideration.”

Abbey Glen Property Corp v Stumborg 1978 AB/AD 86 The fact that not one of Abbey’s shareholders was a shareholder of Terra at the relevant time did not prevent the accounting in Abbey’s favour.

See also: L19 -- 20111114 -- Bullard Derivative Action Questions

OPPRESSION REMEDY: LIMITING THE POWER OF DIRECTORS The oppression remedy is equitable in its origins, as the Supremes point out in their BCE v Debentureholders

judgment. This means it is wise to keep your equitable maxims in mind when dealing with the oppression remedy.

However, I wouldn’t spend too much time on this since the structure of RD’s exams doesn’t really seem to put maxims in play.

When considering the oppression remedy, you must ask the following questions:

1. Does the applicant have standing to bring an oppression application?

2. Did the alleged oppression affect one of the interests protected by CBCA s 240(2)?

3. Does the application pass the BCE test for oppression?

a. Was a reasonable expectation of the plaintiff’s breached?

b. Was this breach oppressive, unfairly prejudicial, or unfairly disregarding of a protected interest?

In addition, to the above, the following issues are raised:

What if the directors have fulfilled their fiduciary duty to the corporation?

How does The Business Judgment Rule (p 44) fit into applications regarding oppression?

Standing and Interests Protected Standing and interests protected are very similar, but aren’t exactly the same thing. Standing refers to who is permitted to bring an application which, in the case of oppression, is any complainant, as defined in section 238.

When standing becomes an issue, it is always over whether a person qualifies under the discretionary class of proper persons defined in paragraph (d) of the complainant definition in section 238.

Even if a person has standing, his oppression application will fail unless it is found the oppression affected a

protected interest enumerated in section 241(2). These interests are those of:

a security holder;

a creditor; or

a director or officer

Case/Statute Juris. P Key Points CBCA s 238 RSC 1985 184 Definition of complainant—see also Complainants (above) CBCA s 241(1) RSC 1985 185 A complainant may bring an application regarding oppression.


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Case/Statute Juris. P Key Points CBCA s 241(2) RSC 1985 185 The interests protected are those of a security holder, creditor, director, or

officer. Clitheroe v Hydro One Inc 2002 ON/SC 97 Despite Clitheroe’s standing (former officer) as a complainant, she had no

protected interest: wrongful dismissal only gets relief under the OR when it is part of an overall pattern of oppression.

First Edmonton Place Ltd v 315888 Alberta Ltd

1988 AB/QB 100 Despite being given standing as a “proper person”, the landlord had no protected interest at the time of the alleged oppression because he was not a creditor until the rent became due.

Downtown Eatery (1993) Ltd v Ontario

2001 ON/CA 99 RD says that to distinguish this from First Edmonton Place, you need to argue that the liability arose before the oppressive act of draining Best Beaver.

West v Edson Packaging Machinery Ltd

1993 ON/GD 131 Protected interest of applicants, as shareholders, arose both before and after their purchase of Howe’s shares.

STANDING OF CREDITORS Creditors are an odd class under the oppression remedy because some creditors have explicit standing as

Complainants—any holder of a debt security such as a bond or debenture is a “security holder”—while others do not

and have to sneak in under the proper persons clause. However, the interest of a creditor is a protected interest

under section 241(2).

The courts are sensitive to the fact that some classes of creditors are able to protect themselves. For example,

creditors have a contract law remedy against the debtor corporation to sue for repayment of the debt. In addition,

voluntary creditors are frequently sophisticated businessmen who are capable of knowing standard commercial

practices and negotiating for standard protections. Additionally, since voluntary creditors have chosen to contract

with a corporation, they are supposed to accept the burdens of dealing with that legal form. Recognizing oppression

against voluntary creditors requires a high bar since in some sense it is tantamount to veil-piercing.

On the other hand, the courts are sensitive to the fact that involuntary creditors often had very little or no ability to

negotiate protections as the harms they suffer are generally not reasonably foreseeable.

Case/Statute Juris. P Key Points First Edmonton Place Ltd v 315888 Alberta Ltd

1988 AB/QB 100 Landlord was not a creditor at the time the numbered company was drained. While it had no standing under the OR, it would have been granted leave to bring a derivative action to prosecute the fraud on the numbered company.


2001 ON/CA 99 Involuntary creditor was oppressed. There is no requirement of bad faith by the directors.

Piller Sausages v Cobb Int’l Corp 2003 ON/SC 115 Involuntary creditor was oppressed. Moreover, despite having negotiated a contract of purchase and sale, it could not reasonably have foreseen the oppression it was subjected to.

BCE Inc v 1976 Debentureholders 2008 CA/SC 90 Voluntary creditors were sophisticated investors who could have negotiated protection in their trust indentures. They had a reasonable expectation that their economic interests would be considered, but not protected.

Test for Oppression In BCE v Debentureholders, the Supreme Court lays down a two part test for oppression.

1. the applicant must show that a reasonable expectation was breached by the corporation, its directors, or

officers; and

2. the expectations must be violated by conduct falling within the terms “unfair prejudice”, “unfair disregard”, or “oppressive”.


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REASONABLE EXPECTATIONS Expectations are based on relationships. Due to the significant difference between closely-held and widely-held

corporations, this leads to different sources of reasonable expectations in the two cases. The following excerpt from

¶ 62 of the BCE case should be taken as the starting point:

As denoted by "reasonable", the concept of reasonable expectations is objective and contextual. The actual expectation of a particular stakeholder is not conclusive. In the context of whether it would be “just and equitable” to grant a remedy, the question is whether the expectation is reasonable having regard to the facts of the specific case, the relationships at issue, and the entire context, including the fact that there may be conflicting claims and expectations.

CLOSE CORPORATIONS Close corporations tend to be founded on personal relationships that form part of the compact between the parties.

On an exam, you definitely want to use the term “relationship of trust and confidence”, and might consider the following list of factors as well as the cases below:

commercial practice: departure from normal business practice that undermines or frustrates exercise of his

legal rights will usually give rise to a remedy (see Downtown Eatery (1993) Ltd v Ontario);

past practice; and

preventive steps: whether claimant could have taken steps to prevent himself can be relevant, as mentioned

in First Edmonton Place Ltd v 315888 Alberta Ltd.

Case/Statute Juris. P Key Points West v Edson Packaging Machinery Ltd

1993 ON/GD 131 The past behaviour of the company and the representations alleged to have been made by Mr Gibson gave rise to reasonable expectations before and after the applicants’ purchase of shares sufficient to qualify them as complainants.

Naneff v Con-Crete Holdings Ltd 1993 ON/CA 109 Alex’s “shareholder’s expectation” that he would be a partner with his brother and father and have complete co-ownership after his father’s desk underlay “the entire corporate relationship” between the members of the Naneff family.

Ferguson v Imax 1983 ON/CA 100 Mrs Ferguson’s expectations arose from the fact that the company was a family venture.

BCE Inc v 1976 Debentureholders 2008 CA/SC 90 The Supreme Court suggested that courts may give more latitude under the oppression remedy to smaller companies.

PUBLIC COMPANIES In widely-held, publicly-traded companies, the sources of reasonable expectations are different of necessity from

those in closely-held companies, since the intimate relationships among the parties usually do not exist. RD says that it is difficult to establish reasonable expectations beyond your legal rights in a widely-held corporation. The most

important factors relevant to reasonable expectations in public corporations appear to be:

public statements (see, especially, Ford Motor Co of Canada v OMERS);

absence of ability to take preventive step (see, especially, BCE Inc v 1976 Debentureholders); and

fair resolution keeping in mind the best interests of the corporation and the business judgment of directors

(see Brant Investments v KeepRite Inc).

Case/Statute Juris. P Key Points BCE Inc v 1976 Debentureholders 2008 CA/SC 90 The absence of a reasonable expectation that the investment grade of the

debentures would be maintained was confirmed by the overall context of the relationship, the nature of the corporation, its situation as the target of a bidding war, as well as by the fact that the claimants could have protected themselves by negotiating appropriate contractual terms.


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Case/Statute Juris. P Key Points Ford Motor Co of Canada v OMERS 2006 ON/CA 101 Ford Canada’s public financial statements, which said that prices would be

negotiated between Ford Canada and Ford US, create a reasonable expectation in shareholders that this would happen. But there was no such negotiation.

Maple Leaf Foods v Schneider Corp 1998 ON/CA 108 Public statements of the directors were worded in such a way as not to create a reasonable expectation that an auction would be held.

Icahn Partners LP v Lion’s Gate Entertainment

2011 BC/CA 103 A standstill agreement and other evidence showing Icahn did contemplate dilution show he had no reasonable expectation of not being diluted. Also relevant was the fact that the corporation really did need to deleverage.

CONDUCT OPPRESSIVE, UNFAIRLY PREJUDICIAL, OR UNFAIRLY DISREGARDING The Supremes make clear in BCE that not all conduct which violates reasonable expectations will be unfair. Conduct

that qualifies may be “harsh and abusive”, as connoted by the word “oppressive”, or it may be something less, as suggested by “unfair prejudice” and the even less stringent term “unfair disregard”. Getting a sense of what is

oppressive is probably easiest from comparing the cases below in which oppression has been found. Do not forget

that the SCC requires, in addition to wrongful conduct, that the plaintiff demonstrate causation and a compensable

injury.

Case/Statute Juris. P Key Points UPM-Kymmene Corp v UPM Kymmene Miramichi Inc

2002 ON/SC 129 Berg’s breach of his fiduciary duty and the other directors’ breach of their duty of care was oppressive to TDAM.

Ford Motor Co of Canada v OMERS 2006 ON/CA 101 Failure to negotiate the TPAs at arms-length, or at all, was oppressive to the minority shareholders.


2001 ON/CA 99 Draining Best Beaver of assets when it was known that it might have to satisfy a wrongful dismissal judgment was oppressive to the plaintiff.

Piller Sausages v Cobb Int’l Corp 2003 ON/SC 115 Draining CIC of assets in order to avoid repaying money for the machine that was not delivered, and then avoid paying the judgment debt, was oppressive to Piller.

Naneff v Con-Crete Holdings Ltd 1993 ON/CA 109 Firing Alex, selectively declaring dividends to prevent him getting any, and excluding him from the management of the company because of dislike of his lifestyle choices was oppressive to Alex.

Ferguson v Imax 1983 ON/CA 100 Refusal to pay dividends just to prevent Mrs Ferguson from participating in the company’s growth, and then attempting to push her out via capital restructuring so dividends could be paid to everyone else, was oppressive to her.

Re Sabex Internationale Ltée 1979 QC/SC 119 Rights issue at an under value was oppressive because applicants were compelled to subscribe or else suffer severe dilution of their holdings.

347883 Alberta Ltd v Producers Pipelines

1991 SK/CA 85 Takeover defenses that deprive shareholders of their right to dispose of their shares as they see fit may be oppressive if done without legitimate business reason or without seeking shareholder approval.

Court Control of the Action The court does not have explicit authority to control the conduct of an oppression action, as it does a derivative

action. However, section 242(2) applies to the oppression remedy, so settling is prohibited without court approval.

Tying the Order Sought to Protected Interests The scope of orders available under the oppression provision is very broad. A court may make any order it thinks fit,

and the list of examples under s 241(3) illustrates the breadth of the remedies that have been thought of so far!

These include extremely activist interference in the management of the company; orders directing compensation

either directly, or indirectly through forced purchase of securities; and orders setting aside a contract to which the

corporation is a party. In considering the available remedies, the Naneff case stands for the fact that the court’s order must be remedial, but not punitive.



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Case/Statute Juris. P Key Points Naneff v Con-Crete Holdings Ltd 1993 ON/CA 109 The court cannot award a plaintiff a remedy that was never within his

reasonable expectations. CBCA s 241(3) RSC 1985 185 The court may make any order it thinks fit; 14 examples are listed. CBCA s 241(3)(a) RSC 1985 185 An injunction is one possible form of relief. See Ferguson v Imax (p 100). CBCA s 241(3)(f) RSC 1985 185 The court may order the corporation to purchase someone’s securities. CBCA s 241(3)(h) RSC 1985 186 One order a court may make is to set aside a contract to which a corporation is a

party. This seems closer to the relief that would be sought under the derivative action, and illustrates the overlap between the two provisions. See also UPM-Kymmene Corp v UPM Kymmene Miramichi Inc.

CBCA s 241(3)(j) RSC 1985 186 The court may make an order compensating an aggrieved person. CBCA s 241(6) RSC 1985 186 A corporation may not pay out under s 241(3)(f) or (g) if after doing so it will fail

the insolvency test.

Limits to the Scope of the Remedy

WHEN DIRECTORS’ FIDUCIARY DUTY FULFILLED The cases are clear that oppression is more likely to occur when the directors are in breach of their fiduciary duty.

However, as Brant Investments v KeepRite Inc and Downtown Eatery (1993) Ltd v Ontario both point out, no

bad faith at all is required to found an oppression claim. In fact, CBCA paragraph 241(2)(a) clearly contemplates “any act or omission” that “effects a result” that is unfairly prejudicial, &c. (p 185). Regardless of what remedy lies against

the corporation, RD says it is crystal clear that when directors have fulfilled their fiduciary duty, no liability will lie against the directors personally under the oppression remedy.

BJR AND THE OPPRESSION REMEDY Although it likely wouldn’t be dispositive in cases where the result alleged is really really oppressive, where directors have made a considered business judgment in good faith, the courts may be deferential to it. After all, The Business

Judgment Rule exists because the courts aren’t well-equipped to make business decisions. However, they are well-

equipped to determine if interests have been unfairly prejudiced or unfairly disregarded and will look for signs of

good process before they defer. Factors they will consider:

Were there any conflicts of interest, or did an independent body make the decision?

Did the directors actually deliberate?

Did did the directors inform themselves?

Was relevant information considered?

Was there sufficient consideration of the protected interest?

Case/Statute Juris. P Key Points Brant Investments v KeepRite Inc 1991 ON/CA 93 A committee that was truly independent considered the purchase on its merits

(its decision was subsequently ratified by a majority of shareholders). The BJR was applied.

Ford Motor Co of Canada v OMERS 2006 ON/CA 101 BJR doesn’t apply because there is no evidence that any judgment at all was brought to bear.


2002 ON/SC 129 BJR does not apply where Board acts on advice of a committee that makes an uninformed recommendation.

Each director was required to consider the terms and meaning of the Agreement and to consider it carefully against the circumstances of Repap.

BCE Inc v 1976 Debentureholders 2008 CA/SC 90 Evidence shows directors considered the bondholders’ interests and was clear that their legal rights would be protected.


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COMPARING OPPRESSION AND DERIVATIVE ACTION Oppression is a personal remedy. A derivative action is, at least nominally, undertaken by the corporation to redress

an injury done to the corporation.

When is Oppression Remedy Allowed? In terms of available remedies, there is considerable overlap between the oppression action and the derivative

action. However, for policy reasons, a derivative action may be preferable where the injury is done to the corporation

itself and only indirectly harms individual persons through the price of their securities. This is the grounding for the

rule in Pasnak v Chura, which is the law in British Columbia. The rule is that a shareholder can bring a claim in

respect of the same breach for which a company could also claim provided that the complaining shareholder has

been affected by the breach in a manner different from or in addition to the indirect effect on the value of all shareholders’ shares generally.

RD raises the question of whether the Ontario public company oppression cases comply with this rule. It is arguable

that they do, as the table below demonstrates.

Case/Statute Juris. P Key Points Pasnak v Chura 2003 BC/SC 113 Double J failed to show any loss other than its share value in Fleetwood, equal to

that of the other shareholder, Chura Holdings. Thus, it should have brought a derivative action and the oppression claim was denied.

Ford Motor Co of Canada v OMERS 2006 ON/CA 101 The minority shareholders were clearly differentially affected, since Ford US, the majority shareholder made up for the losses to its subsidiary with offsetting profit to the US operation, profit which the minority did not share in.


2002 ON/SC 129 This is more difficult to argue. One way of looking at it is that Berg was a large shareholder (4.3%), and he received a signing bonus of 25M shares, options for 75M shares, and a market cap bonus that was destined to kick in due to cyclical share price.

Advantages and Disadvantages The oppression action has some advantages over the derivative action. Here are two of the biggest ones:

1. the court has no statutory authority to control an oppression action like it does a derivative action under

s 240(a–b); and

2. there is no leave requirement for an application regarding oppression.

However, recall that in both cases, settlement or staying the action is not permitted without court approval!

Mergers and Acquisitions Corporations

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7. Mergers and Acquisitions INTRODUCTION

Mergers and acquisitions involve two separate concepts, which are frequently inter-related:

1. combining (or separating) corporations to improve business efficiency; and

2. changing the people who control, and/or own shares in, a corporation (this can be either voluntary or

involuntary).

The two concepts are frequently tied together. For example, in Neonex Int’l Ltd v Kolasa, an amalgamation (#1)

was designed to effect a going-private transaction (#2).

Types of Business Rearrangement There are three types of business rearrangements. The first two are also Fundamental Changes, while the third is

not:

1. Asset Sales (p 77)

2. Amalgamations (p 78)

3. Share Purchases (p 79), which may be either compulsory or voluntary

Asset Sale Amalgamation Share Purchase

Method Directors negotiate, shareholders approve

Directors negotiate, shareholders approve

Depends

Relationship with other company Friendly by definition Friendly by definition Hostile or friendly

Dissent rights If squeeze-out or

going-private Approval vote under corporate law Special resolution Special resolution If squeeze out

Separate class vote rights If affected differently If new articles engage s 176 If squeeze-out Approval vote under securities law MI 61-101 MI 61-101 Likely director conflict of interest If hostile

REGULATION OF M&A TRANSACTIONS FOR CBCA COMPANIES In addition to the rules directly governing amalgamations and asset sales, the CBCA has certain rules governing going-

private, squeeze-out, and takeover bids. Securities law may also apply and where it does, it uses a different definition

of takeover bid, and imposes additional rules.

Corporate Law: Going-Private, Squeeze-Out, and Compelled Acquisition Transactions

GOING-PRIVATE TRANSACTIONS A going-private transaction is defined in section 2 of the CBCA by reference to the regulations, SOR/2001-512 s 3(1):

“going-private transaction” means an amalgamation, arrangement, consolidation or other transaction involving a distributing corporation, other than an acquisition of shares under section 206 of the Act, that results in the interest of a holder of participating securities of the corporation being terminated without the consent of the holder and without the substitution of an interest of equivalent value in participating securities of the corporation or of a body corporate that succeeds to the business of the corporation, which

Corporations Mergers and Acquisitions

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participating securities have rights and privileges that are equal to or greater than the affected participating securities.

This is basically the same definition as for a squeeze-out transaction as defined in section 2 of the CBCA, except that it

applies to public (distributing) corporations. A key point to keep in mind is that a going-private transaction is not a takeover bid as defined in section 206:

If some party makes an offer to acquire 100% of the shares of some class, it is a takeover bid under the CBCA.

If any shareholder or group of shareholders has the voting power to terminate the interests of other

shareholders without their consent, it is a going-private transaction under the CBCA and its regulations.

SECURITIES LAW COMPLIANCE Under CBCA s 193, a going-private transaction must comply with applicable Securities Law (p 76). The most relevant

securities law here is MI 61-101. The wording of the definition of going-private transaction under MI 61-101 is very

nearly the same as the CBCA definition given above. CBCA s 193 doesn’t seem to do anything but state the obvious (that applicable securities law must be followed) but its effect is that breach of securities law is also breach of the CBCA and a remedy under the CBCA, such as provided by s 247, is thus available when securities law is not followed.

DISSENT AND APPRAISAL RIGHTS Shareholders may dissent from going-private transactions under section 190(1)(f).

SQUEEZE-OUTS Squeeze-outs are essentially going-private operations for closely-held companies. In a squeeze-out, some controlling

shareholder(s) decide(s) to eliminate the other shareholders without their consent. A squeeze-out is defined in

section 2 of the CBCA as:

[A] transaction by a corporation that is not a distributing corporation that would require an amendment to its articles and would, directly or indirectly, result in the interest of a holder of shares of a class of the corporation being terminated without the consent of the holder, and without substituting an interest of equivalent value in shares issued by the corporation, which shares have equal or greater rights and privileges than the shares of the affected class

VOTING PROTECTIONS Section 194 of the CBCA requires a squeeze-out to be approved by separate ordinary resolutions of each class

affected, even if they don’t normally have a right to vote. This is on top of the protections they would normally have

due to amendments of the articles.

At first glance, these voting protections seem like they would only rarely increase minority shareholder protection,

since by definition a squeeze-out requires a change to the Articles, and such changes will normally give rights to

separate class/series votes and require approval by special resolution. The voting protections would come in handy if

the Articles are set up, under s 176(1)(b), to eliminate the separate class/series vote that would ordinarily occur

when the Articles are amended to change, reclassify, or cancel of shares. In this case, if the squeeze-out was effected

by reclassifying voting shares as non-voting, or calling in voting shares, the affected class would have a right to

approve by ordinary resolution despite the Articles.

See also the example under compelled acquisition transactions for an illustration of how the Caveats (below) make

the s 194 protections more valuable.


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CAVEATS CBCA s 194 excludes certain shareholders from the voting rights it creates. The excluded shareholders are interested

parties who presumably benefit from the squeeze-out:

(a) affiliates of the corporation; and

(b) shareholders who are going to get better rights as a result of the squeeze-out than other shareholders of the

same class.

DISSENT AND APPRAISAL RIGHTS Shareholders may dissent from squeeze-outs under section 190(1)(f).

DIFFERENCES IN THE DEFINITIONS OF GOING-PRIVATE AND SQUEEZE-OUT TRANSACTIONS Note two differences between the regulatory definition of going-private transactions and the statutory definition of

squeeze-outs:

1. the former is not triggered if appropriate securities are substituted; the latter requires substitution of shares

to avoid being triggered; and

2. a transaction must require an amendment to the Articles to qualify as a squeeze-out, but this is not the case

with a going-private transaction.

COMPELLED ACQUISITION TRANSACTIONS Compelled acquisition transactions are conceptually different than going-private and squeeze-out transactions.

Under the CBCA, takeover bids are defined in s 206 as offers to acquire 100% of the shares of any given class. Thus to

qualify as a statutory takeover under the CBCA, there must be an offer to acquire 100% of the shares. In section 206,

takeover bidders are given a special statutory right to compel shareholders who refuse to tender their shares to the

bid (“dissent”) to surrender their shares in exchange for either the bid offer or “fair value” if-and-only-if at least 90%

of the shares of the class not already held by the bidder are tendered to the bid. The statutory scheme under s 206

by which dissenters surrender their shares and get paid is similar to the dissent and appraisal scheme under s 190.

Note the difference between the CBCA definition of a takeover and the securities law definition under the Ontario

Securities Act, RSO 1990, c S-5 (OSA).

EXAMPLE Consider the following example: suppose the holders of 85% of the shares of a close corporation want to get rid of an

intransigent minority. If they try to squeeze them out, section 194 gives the class special voting rights. Since the

majority will likely get better rights than the squeezed-out minority, s 194(b) disqualifies the majority from voting, so

the s 194 rights essentially require a majority of the minority. Alternatively, they could make a takeover bid, but in

that case 90% of the minority would have to tender to the offer in order to trigger compelled acquisition rights under

CBCA s 206(1).

SUMMARY OF APPLICABLE CBCA PROVISIONS AND RELEVANT CASE LAW Case/Statute Juris. P Key Points

CBCA s 190(1)(f) RSC 1985 177 Dissent and appraisal rights from going-private and squeeze out operations. CBCA s 193 RSC 1985 180 Going-Private Transactions (above) must comply with Securities Law (below)—

specifically, the Ontario Securities Act, RSO 1990, c S-5 (OSA) and MI 61-101. CBCA s 194 RSC 1985 180 A squeeze-out (private company) must be approved by ordinary resolution of

each class voting separately, including otherwise non-voting shares. CBCA s 176(1)(b) RSC 1985 173 One example when s 194 squeeze-out protection may come in handy.


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Case/Statute Juris. P Key Points CBCA s 206 RSC 1985 180 A takeover bid is an offer to acquire all of the shares of any class. If an offeror in

such a bid gets 90% of the shares that it did not already hold of any class, it can compel the holders of the other 10% of the shares to sell.

CBCA s 206.1 RSC 1985 183 If a takeover bid offeror doesn’t send notice that it is acquiring a dissenting offeree’s shares, the dissenting offeree can compel the offeror to purchase his shares.

CBCA s 2 RSC 1985 146 Definition of going-private and squeeze out transactions. See also SOR/2001-512 s 3(1) for definition of a going-private transaction.

CBCA s 115(3)(a) RSC 1985 157 Directors may not delegate to officers responsibility of submitting to shareholders any matter requiring their approval.

CBCA s 115(3)(e) RSC 1985 157 Directors may not delegate authority to purchase/redeem/acquire shares of the corporation.

CBCA s 115(3)(h) RSC 1985 157 Directors may not delegate authority to approve a takeover bid circular… CBCA s 247 RSC 1985 187 Provides a corporate law remedy if a going-private transaction fails to follow

applicable securities law as directed by s 193. Neonex Int’l Ltd v Kolasa 1978 BC/SC 110 RD says that if this case had been decided after MI 61-101/CBCA s 193, the

transaction would have required approval of a majority of the minority as well as a special resolution.

Securities Law Two elements of securities law may apply to exam: the Ontario Securities Act (OSA), and Ontario securities regulation

promulgated by the Ontario Securities Commission (OSC). This regulation will apply to companies within the

jurisdiction of the OSA. For the purposes of the exam, this will definitely be when a distributing corporation has

shares traded on the TSX. If the fact pattern merely mentions that the company is publicly traded without

mentioning a stock exchange, it would be wise to speculate that it may be traded on the TSX and to mention Ontario

securities law from a hypothetical point of view.

ONTARIO SECURITIES ACT, RSO 1990, C S-5 (OSA) The OSA defines a takeover bid as an offer to acquire enough shares to hold 20% or more of a company’s outstanding voting shares. This means that a shareholder who owns precisely 20% less one share of a corporation’s voting stock is making a take-over bid if he offers to buy one more share. Any takeover bid must be kept open for at least 35 calendar days. Moreover, the OSA has onerous disclosure requirements: offerors must disclose publicly

upon obtaining 10% of the target’s voting shares and thereafter at each 2% step (12%, 14%, etc) up to a total of 20% of the stock. Takeover bids may be conditioned on tender of a certain number of shares.

The following table summarizes these requirements:

S Item Description 89(1) Definition A takeover bid is an offer to acquire 20% or more of outstanding voting stock but

excludes steps in amalgamations, reorganizations, and arrangements that require shareholder approval.

94 Bid Requirement A takeover bid must be made to all Ontario shareholders of the same class 98 Bid Requirement A takeover bid must remain open for at least 35 days 98.1(1)(b) Bid Requirement A shareholder can withdraw shares tendered ~ up to 10 days after tender?

102.1(1) Disclosure Disclosure of position required upon reaching 10% 102.1(2) Disclosure Further disclosure upon reaching 12%, 14%, 16%, 18%, 20% Note: technically the OSA applies whenever either a corporation with a registered office in Ontario is involved in a

takeover or a corporation with at least one security holder in Ontario is involved in a takeover.

See also: CBCA s 193 (p 180) and Going-Private Transactions (above)


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MI 61-101 Multilateral Instrument 61-101 is the successor to OSC Rule 61-501. It is “multilateral” because it is a joint policy of the OSC and Québec’s securities commission, the AMF. It imposes voting and valuation rules on going-private transactions, which includes any transaction in which the security holder’s interest will be terminated without his

consent and without substitution of an interest of equivalent value in a participating security of the issuer or a

successor of the issuer. Presumably “equivalent value” means that you can’t, for instance, swap a voting share for a non-voting share. The following are the requirements:

1. The transaction must pass the majority of the minority test: it must be passed by a majority of the

disinterested shareholders.

This requirement is waived if the controllers hold 90% of the shares and statutory appraisal rights are

available.

In a two-step acquisition, if intention to eliminate the minority shareholders was disclosed when the

offer was first made, then the shares acquired during the first step may be counted toward tallying

the majority of minority in the second-step freezeout transaction.

2. A corporation must obtain a formal valuation from an independent valuator and include it in the information

circular that is sent to the shareholders in conjunction with the shareholder’s meeting that will be asked to approve the transaction.

This requirement is waived if the price was determined in the 12 months immediately preceding the

transaction in an arms-length transaction or negotiation with a selling security holder of a control

block of securities.

See also: CBCA s 193 (p 180) and Going-Private Transactions (above)

RELEVANT CBCA PROVISIONS AND CASE LAW Case/Statute Juris. P Key Points

CBCA s 193 RSC 1985 180 Going-private operations must comply with applicable securities law. Primex Investments Ltd v Northwest Sports Enterprises Ltd

1995 BC/SC 116 Compliance with securities law does not necessarily mean that directors have fulfilled their duties under corporate law.

ASSET SALES Asset sales, like amalgamations, are by definition friendly operations negotiated by the corporation’s management. A

sale (or lease or exchange) of all or substantially all of a corporation’s assets other than in the ordinary course of business requires approval by the shareholders: CBCA s 189(3). Two issues should be noted:

1. while the definition of “all” assets is easy enough, the definition of “substantially all” is trickier; and

2. if the assets are sold in the ordinary course of business (for example, a company whose business is

speculative buying and selling of assets) then the provision does not apply.

The test for “substantially all” is canvassed below.

If section 189(3) is triggered, the shareholder votes must be done in accordance with sections 189(4–8). Shares that

would otherwise not have a vote are given one vote each under section 189(6). A separate class or series vote is held

only if the class or series in question is affected differently by the sale than the shares of another class or series. The

type of resolution required for approval is a special resolution. There is a right of dissent and appraisal under section

190(1)(e).


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On an exam, be alert for corporations that are selling (or leasing, or exchanging) most or all of their assets. If the fact

pattern contains such a sale, chances are you should remark on it. Be aware that if the required formalities are not

followed, as usual, the corporation cannot assert against the buyer that its internal law was not followed and that the

contract should be avoided as a result: see the Indoor Management Rule (a.k.a. Ostensible Authority): s 18(1)(f).

Test for Substantially All In the Cogeco Cable case, a test for what constitutes “substantially all” of a corporation’s assets was set out. There are two criteria:

1. Quantitative: no fixed percentage of total asset value exists as a rule, but when the sale involves 75% or more

of the total corporate property, it must be submitted for approval.

2. Qualitative: even if quantitative analysis doesn’t describe the assets as “substantially all”, qualitative analysis must also be done. In this case:

a. If the transaction is a fundamental reorientation which strikes at the heart of the company’s activities, it is qualitatively “substantially all”.

b. The qualitative test must consider the quantitative factors, so that the higher the quantity of assets

involved, the more likely they are to be qualitatively “substantially all”.

Summary of Relevant CBCA Provisions and Case Law Case/Statute Juris. P Key Points

CBCA s 189(3) RSC 1985 176 Sale, lease, or exchange of all or substantially all assets other than in the ordinary course of business must be approved by the shareholders.

CBCA s 189(4) RSC 1985 176 Notice of meeting required in accordance w s 135 CBCA s 189(6) RSC 1985 177 Non-voting shares may vote CBCA s 189(7) RSC 1985 177 Separate class/series vote only if the class/series in question is affected

differently than the shares of another class/series. CBCA s 189(8) RSC 1985 177 Special resolution required to approve CBCA s 189(4)(b) RSC 1985 176 Notice of meeting must tell shareholders about their dissent and appraisal rights. CBCA s 190(1)(e) RSC 1985 177 Dissent and appraisal rights for shareholders under a sale of all or substantially

all of the corporate assets Cogeco Cable Inc v CFCF Inc 1996 QC/CA 97 Test for substantially all has both qualitative and quantitative components. CBCA s 18(1)(f) RSC 1985 150 Asset sales are specifically covered by the Indoor Management Rule (a.k.a.

Ostensible Authority)

AMALGAMATIONS Like asset sales, amalgamations are friendly operations in the sense that they are negotiated by company

management. An amalgamation under the CBCA is an actual merger in which two previously existing companies

cease to exist and a third company, the amalgamated corporation, is spawned upon issuance of a certificate of

amalgamation under CBCA s 186. The new corporation assumes the rights and liabilities of the constituent

corporations.

If section 183(1) is triggered, shareholder approval of an amalgamation by special resolution is required. Otherwise

non-voting shares gain the right to vote under s 183(3). Separate class and series voting rights for shareholders of

either amalgamating corporation are not created unless the articles of the amalgamated corporation are equivalent

to a change that would trigger s 176 protection: s 183(4).

Unlike asset sales, amalgamations are not covered under the Indoor Management Rule (a.k.a. Ostensible Authority).



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Case/Statute Juris. P Key Points CBCA s 183(1) RSC 1985 174 Amalgamations must be submitted to the shareholders for approval. CBCA s 183(2) RSC 1985 174 A notice complying with s 135 must be sent to the shareholders regarding the

meeting to approve the amalgamation. The amalgamation agreement must be attached to the notice.

CBCA s 183(3) RSC 1985 175 Non-voting shares may vote CBCA s 183(4) RSC 1985 175 Separate class/series vote only if the Articles of the amalgamated company

cause a change that would trigger s 176 protections. CBCA s 183(5) RSC 1985 175 Special resolution(s) required to approve CBCA s 183(2)(b) RSC 1985 174 Notice of meeting must tell shareholders about their dissent and appraisal rights. CBCA s 190(1)(c) RSC 1985 177 Dissent and appraisal rights for shareholders under an amalgamation CBCA s 193 RSC 1985 180 If the amalgamation is a going-private transaction, securities law must be

complied with CBCA s 194 RSC 1985 180 If the amalgamation is a squeeze out, certain special rights voting rights accrue Neonex Int’l Ltd v Kolasa 1978 BC/SC 110 This amalgamation was a going-private transaction. If done currently, it would

have to comply with s 193 and MI 61-101.

SHARE PURCHASES Share purchases represent another avenue for acquiring a company either partially, in the sense of buying a control

block of shares, or completely in the sense of acquiring all the shares and taking the target company private. Buyers

who acquire a control block of shares can also, of course, cause other operations to occur such as amalgamating the

target corporation with another corporation controlled by the buyer. In Canada, mergers and acquisitions by way of

share purchases are regulated both by corporate law and securities law (see Regulation of M&A Transactions for

CBCA Companies, p 73) and you must recall that securities law and corporate law use different definitions for the

concept of a takeover bid.

Friendly and Hostile Takeovers and Conflicts of Interest Share purchases may be friendly, in the sense of a buyout negotiated between the target company’s directors and another corporation; or hostile, in the sense of an unsolicited takeover bid resisted by company management. In

hostile takeovers, both directors (particularly inside directors) and company management may be involved in two

separate conflicts of interest:

1. management's desire to remain employed/remunerated versus best interests of the corporation; and

2. best interests of the corporation (perhaps long-term profitability) versus desire of current shareholders to

sell their shareholding at maximum profit.

The first conflict, above, is a purely corporate law issue and, of course, the director’s duty of loyalty absolutely forbids a director putting his interests ahead of those of the company. On the other hand, the second conflict reflects a

tension between the philosophy of corporate law espoused in decisions such as Peoples Department Stores Inc (Trustee of) v Wise, in which the interests of the corporation are paramount, and the philosophy of securities

regulators, who believe that the principle issue when a firm is put up for sale is maximizing the sale price. This issue is

discussed in Securities Commissions and Corporate Law: Dueling Visions (below).

Genuinely friendly takeovers don’t generate much controversy. It is when at least one hostile bidder is involved and the directors are trying to fend it off with defensive tactics that legal proceedings arise. Thus the remainder of this

section will deal with defensive tactics in the context of share purchases.


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Takeovers and Defensive Tactics

TYPES OF DEFENSIVE TACTICS

DEFENSIVE DEFENSES Tactic Description Case Juris P

Crown jewel sale If the acquirer wants to get control of a particularly attractive division, sell it off to a third company

Defensive share repurchase Company buys its own shares on the market or makes an issuer bid

Unocal Corp v Mesa Petroleum Co

1985 DE/SC 128


1991 SK/CA 85

Lock-up agreement

Asset lock-up a.k.a. crown jewel lock-up: gives acquirer the option to acquire an attractive asset

Revlon Inc v MacAndrews & Forbes Holdings Inc

1986 DE/SC 120

Stock lock-up Gives acquirer option to purchase controlling block from controlling shareholder

Maple Leaf Foods v Schneider Corp

1998 ON/CA 108

No-shop agreement Contract with a friendly buyer prohibiting target from shopping for other bids


1986 DE/SC 120

Maple Leaf Foods v Schneider Corp

1998 ON/CA 108

Paramount Communications v QVC

1994 DE/SC 113

Poison pill Gives all shareholders but acquirer rights to buy additional shares from the company at a discount, thus diluting the acquirer


1986 DE/SC 120


1991 SK/CA 85

White knight Friendly company buys an asset or makes a friendly takeover bid. This is often in conjunction with other defensive tactics against a hostile bidder.

Teck Corp v Millar 1972 BC/SC 127


1986 DE/SC 120


2011 BC/CA 103

Other ways to look unattractive

Debt loading Target could take on so much debt that it makes itself unattractive to the acquirer

Becoming too big Target could itself acquire another company Paramount Communications v Time Inc

1989 DE/CH 112

Shark repellants

Techniques such as staggered boards of directors make it difficult for a hostile acquirer to seize control via a proxy fight in order to shut down a poison pill.

DEFENSE BY ENTICING A RIVAL BID A number of maneuvers aren’t directly defensive, in the sense of preventing a hostile bidder from acquiring a

controlling block of the company’s shares, but attempt to defend against a particular acquirer by enticing a more

palatable acquirer to step forward with a higher bid. The most obvious thing to do is to solicit for rival bids. To make

the time and cost of a bid worthwhile to a potential acquirer, certain incentives might be given in the way of

contracts:

A break fee (or “bust-up fee”) agreement is a payment used by the target corporation for the purpose of

enticing another competitive bidder to enter the fray. It is paid to the competitive bidder when its bid fails or

is superseded by a better offer. Here is what securities commissions have to say on the matter (textbook

p 1108):


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Although break-up fees have become a more or less usual feature of the takeover bid landscape, the quantum of a specific fee could, in our view, result in the agreement being viewed as an improper defensive tactic. However, a break-up fee in an appropriate amount could, in our view, be properly agreed to by a target company if it were necessary to agree to it in order to induce a competing bid to come forward.

A lock-up agreement may have a similar purpose;

A no-shop agreement guaranteeing the competitive bidder that the target won’t shop around for a better offer has a similar purpose.

US LAW American cases do not, of course, represent the law in Canada. One big difference in the two countries is that under

Delaware law, directors appear to owe a fiduciary duty to the shareholders qua shareholders rather than only to the

corporation as in the Peoples view of Canadian law (though note that various courts in Canada have at times

mentioned duties to the shareholders). American cases tend to come closer to the Securities Commission view of

directors’ duties in M&A. Nevertheless, some of the concepts in the Delaware cases are applicable to Canadian fact

patterns.

Case/Statute Juris. P Key Points Smith v Van Gorkom 1985 DE/SC 125 Directors breached their duty of care in accepting a takeover bid without

adequately informing themselves about the transaction. Unocal Corp v Mesa Petroleum Co 1985 DE/SC 128 Unocal’s self-tender for shares valid because:

1. directors perceived on reasonable grounds that Mesa’s bid threatened corporate policy and effectiveness; and

2. the self-tender was reasonable in relation to the threat posed. Revlon Inc v MacAndrews & Forbes Holdings Inc

1986 DE/SC 120 In applying Unocal, Delaware Supreme Court creates the Revlon mode: once directors contemplate a change of control transaction, they are obligated to obtain the best price for the shareholders.

Paramount Communications v Time Inc

1989 DE/CH 112 Revlon distinguished because transaction would leave shareholdings of merged Time-Warner widely dispersed with no control block; thus the directors did not contemplate a change of control.

The fact that the Warner merger was already planned and only the form changed was considered during application of the Unocal test.

Change of form of Time-Warner merger to avoid shareholder vote was ruled OK under the Unocal test.

Paramount Communications v QVC 1994 DE/SC 113 Since sale of Paramount to Viacom would put a control block in the hands of Viacom, a change of control was contemplated by the directors. Thus Revlon mode was triggered and directors were under a duty to obtain the best price.

CANADIAN LAW

REMEDIES FOR BITTER BIDDERS A spurned acquirer, or “bitter bidder” will normally have acquired significant shareholdings in the target company

before the takeover bid is made. The reason for this is that a formal announcement of a takeover bid often results in

the shares trading at a [control] premium over their usual market price. Thus, it is in the bidder’s interests to acquire

as many shares as possible before announcing the bid. Recall that under the OSA, the bidder can acquire up to 10%

(see p 76) before having to tip its hand by disclosing its shareholdings, and up to 20% less one share before being

compelled to make a formal bid. Because bitter bidders are shareholders, they may avail themselves of shareholders’ court actions to attempt to defeat defensive maneuvers engaged in by the target company’s board of directors. They may also attempt to win a proxy fight to replace incumbent management in order to defuse

defensive measures.


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OPPRESSION REMEDY The oppression remedy seems to be the technique of choice for attacking a board’s response to a takeover bid. This

approach was taken in 3 of 4 Canadian cases, including all three of the “modern” ones (those after Teck). Note that

the only successful bitter bidder was the acquirer in 347883 Alberta Ltd v Producers Pipelines.

DERIVATIVE ACTION We didn’t study any cases where the bitter bidder attempted a derivative action. However, if an injury to the corporation could be shown through some breach of directors’ duties, then this action would come into play. If facts similar to Smith v Van Gorkom were demonstrated in which the directors failed to “act prudently and on a reasonably informed basis” (Peoples) and they entered into break fee or lock-up agreements that were clearly unfair

to the corporation, or did it some other injury, then a derivative action would be à propos. A derivative action could

also be launched if the directors act as faithless fiduciaries, for example by appropriating Corporate Opportunities.

SECTION 120(8) SELF-EXECUTING REMEDY We didn’t study any cases where this remedy was used, but assuming the bitter bidder has the knowledge to prove breach of section 120, it may be able to have certain contracts with white knights (or similar entities) nullified.

CASES Note that the only Canadian case in which a bitter bidder was successful is Producers Pipelines, in which the court

leaned heavily on securities law policy and cited the Unocal decision with approval.

Case/Statute Juris. P Key Points Teck Corp v Millar 1972 BC/SC 127 Shares may be issued to defeat a takeover bid if the board believes, on

reasonable grounds, that defeat of the bid is in the best interests of the corporation.

Maple Leaf Foods v Schneider Corp 1998 ON/CA 108 If a board of directors acted on the advice of a committee of people having no conflict of interest, and the committee acted independently and in good faith, and made an informed recommendation as to the best available transaction to the shareholders, The Business Judgment Rule applies.


1991 SK/CA 85 Since the court inferred that the only purpose of the directors in extending the poison pill without shareholder approval was to force shareholders to tender to the issuer bid, and they failed to show that their actions were in the best interests of the company, these actions were oppressive to the acquirer.


2011 BC/CA 103 Icahn’s oppression claim fails since he had no reasonable expectation of not being diluted (quite the opposite!) and the deleveraging operation was in the best interests of Lion’s Gate.

COMPARE AND CONTRAST: CANADA VS US Certain similarities emerge between the American and Canadian cases and it is instructive to put them side-by-side to

consider these:

Theme Canadian Case American Case A defensive maneuver is OK if the directors believe, on reasonable grounds, that defeating a bid is in the best interests of the corporation.

Teck Corp v Millar Unocal Corp v Mesa Petroleum Co (but note proportionality requirement added to subjective belief requirement)

A premium over market isn’t necessarily a fair share price

Neonex Int’l Ltd v Kolasa Smith v Van Gorkom

Auction is in the best interests of the shareholders if a control transaction is involved



Paramount Communications v QVC


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Theme Canadian Case American Case An operation with ancillary defensive effects that was pre-planned or is in the best interests of the corporation is OK

Icahn Partners LP v Lion’s Gate Entertainment Paramount Communications v Time Inc

The business judgment rule protects a defensive decision made in good faith and with reasonable investigation

Maple Leaf Foods v Schneider Corp Unocal Corp v Mesa Petroleum Co Paramount Communications v Time Inc

Securities Commissions and Corporate Law: Dueling Visions

THE CORPORATE LAW VISION The corporate law vision of directors’ duties during takeover transactions is best summed up in the following quotes from Teck (see textbook at p 1011 and cited approvingly in Peoples ¶ 42):

If today the directors of a company were to consider the interests of its employees no one would argue that in doing so they were not acting bona fide in the interests of the company itself. Similarly, if the directors were to consider the consequences to the community of any policy that the company intended to pursue, and were deflected in their commitment to that policy as a result, it could not be said that they had not considered bona fide the interests of the shareholders.

I appreciate that it would be a breach of their duty for directors to disregard entirely the interests of a company’s shareholders in order to confer a benefit on its employees. But if they observe a decent respect for other interests lying beyond those of the company’s shareholders in the strict sense, that will not, in my view, leave directors open to the charge that they have failed in their fiduciary duty to the company.

and Peoples at ¶ 42:

We accept as an accurate statement of law that in determining whether they are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment.

These views clearly leave open the possibility that directors might find it necessary to defeat a takeover bid in the

bona fide application of their business judgment. The corporate law perspective can be summed up by a statement in

the Paramount v Time decision to the effect that corporate law puts control of the company in the hands of the

directors, not the shareholders. RD says this view is anathema to securities regulators.

THE SECURITIES COMMISSION VISION The Securities Commission vision of takeover transactions is similar to the Revlon view. Once a change of control

transaction is contemplated, it is in the public interest to maximize the sale price of the company for the benefit of

shareholders. Since Securities Commissions are given broad discretionary powers under their public interest jurisdiction, they are usually inclined to use these powers to neuter poison pills. Normally, they allow the pill to run

for some time to let the target company’s directors solicit other bidders so as to increase the sale price. In the end,

however, they frequently stymie poison pills by issuing cease-trade orders on the rights involved. Thus there appears

to be a conflict between the corporate law view of directors’ duties and the securities law view, since corporate law

might well consider the poison pill to be valid.

CREEPING INFLUENCE OF SECURITIES LAW The Producers Pipelines case is interesting because, although it was ostensibly decided under the oppression remedy,

the Saskatchewan Court of Appeal discussed Securities Commission policy at some length. This is especially peculiar

since it might have reached the same result by more thoroughly analyzing the oppression claim. Arguably, under the


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BCE v Debentureholders standard, shareholders might have a reasonable expectation that a “shareholders’ rights” plan would be put to the shareholders for approval…

Case Chart Corporations

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8. Case Chart

347883 Alberta Ltd v Producers Pipelines 1991 SK/CA

Facts An acquirer made an unsolicited takeover bid for PP, a small SK oil & gas company that was publicly traded in the

OTC market. To defend, PP’s directors instituted a poison pill which they scheduled to expire before the next AGM.

However, the directors extended the poison pill without shareholder approval and issued an issuer bid to acquire

enough of PP’s shares to prevent the acquirer from obtaining a controlling stake. They extended the pill a second time, again without shareholder approval even though another intervening AGM had occurred, so that the pill

would not end until after the issuer bid had completed. The acquirer applied under the SBCA’s oppression remedy. The directors gave no evidence of a legitimate business purpose for the pill.

Issue Was the directors’ use of the poison pill without shareholder ratification an oppressive interference with the

shareholders right to determine the disposition of their shares?

Analysis Since the directors never explained a legitimate business purpose for the pill, the inference is irresistible that

the purpose was to effectively prohibit the acquirer’s—or anyone else’s—takeover bid until the shareholders

were forced to consider tendering to the issuer bid.

Judge quotes extensively from National Policy 38 of the Canadian Securities Administration and looks at SK

Securities Act to determine that the primary role of directors in a takeover is to advise shareholders rather than

deciding the issue for them. RD says this is similar to the Revlon court’s view.

Directors failed to show that their actions were in the best interests of the company. Furthermore, a defensive

decision like this is to be made by the shareholders. Directors may not deprive shareholders of that right.

Held Acquirer’s right to determine the disposition of its shares was violated by the directors in an unfairly prejudicial

manner. Remedy is to set aside the poison pill and extend the issuer bid to give the acquirer time to counterbid.

Ratio 1. If directors can’t give a legitimate business reason for a defensive tactic, it is oppressive to a takeover bidder.

2. Defensive tactics must either be put to the shareholders before they are instituted or submitted to them for

ratification as soon as possible afterward.

See Also Revlon Inc v MacAndrews & Forbes Holdings Inc (p 120)

642947 Ontario Ltd v Fleischer 2001 ON/CA

Facts Halasi and Krauss controlled Sweet Dreams Delights Inc. In the course of a real estate deal dispute, they obtained an

injunction barring Burnac Corp from buying some land. They gave “the usual” undertaking to the court that Sweet Dreams would pay any damages caused by the injunction. However, H&K knew Sweet Dreams had no assets with

which to pay damages. While ultimately H&K were found not to have caused any damages, the question arose

whether they would be personally liable if they had caused damages.

Issue Should the “corporate veil” be pierced to make H&K personally liable to perform Sweet Dreams’ undertaking to pay damages, since they knew when giving it that Sweet Dreams could not possibly perform it?

Analysis The separate legal personality of a corporation (from Salomon) cannot lightly be set aside.

Only in exceptional cases when the separate personality yields a result “too flagrantly opposed to justice, convenience, or the interests of the revenue” can it be disregarded.

BUT if people tender an undertaking to a court that they know to be worthless and then try to hide behind a

Corporations Case Chart

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shell company that they control to escape liability, the veil can be pierced to hold them liable.

Held H&K would be personally liable if their causal connection to the damages suffered had been proved. Despite a

favourable result, H&K do not get their costs.

Ratio If the directors of a corporation give an undertaking to a court which they know their corporation cannot perform,

then they may be held personally liable to perform the undertaking.

Note Laskin JA, who decided this case, had similar words to say in Gregorio v Intrans-Corp (p 102).

See Also Piercing the “Veil”

Abbey Glen Property Corp v Stumborg 1978 AB/AD

Impossibility and Corporate Opportunities (p 48)

Facts The Stumborg Brothers were officers and directors of Terra. On behalf of Terra, the Stumborgs approached Traders

Financial Corp to attempt a joint venture to develop certain parcels of land. Traders refused to deal with Terra

because Terra was publicly held and joint ventures with public companies contravened Traders’ policies. As a result, the Stumborgs and Traders formed a new corporation, Green Glenn, to develop the parcels and the venture was a

great success. Terra later became Abbey Glen, which sued the Stumborgs for breach of fiduciary duty.

Analysis The impossibility stemming from Traders’ refusal to enter into a joint venture with Terra is irrelevant. (RD surmises that the deal could have been structured in a way that gave Terra the proceeds of the deal, such as a debt financing instead of giving Terra equity in the joint venture).

Held The Stumborgs breached their fiduciary duty to Terra and are accountable to it for their profit.

See Also Irving Trust Co v Deutch (p 104), Robinson v Brier (p 121)

Windfalls to New Shareholders (p 66) in Derivative Action: Enforcing Managers’ Duties

Facts No shareholder of Terra at the time the joint venture was created were shareholders of Abbey Glen when it sued for

breach of fiduciary duty.

Held An accounting is ordered. It is not a “windfall” for the new shareholders because it is not a “windfall” for Terra—it

does no more than give it restitution of its beneficial interest in the original trust res.

See Also Regal (Hastings) Ltd v Gulliver (p 120), CBCA s 240(c)

Aberdeen Ry Co v Blaikie Brothers 1854 Eng/HL

Facts Blaikie was Chairman of the Board of Directors of Aberdeen and a partner in Blaikie Brothers. The company

contracted with Blaikie Brothers to buy certain railway “chairs” and then breached the contract. BB sued for specific performance.

Issue Is a director precluded from dealing on behalf of the company with himself or a firm in which he is a partner?

Analysis Blaikie’s duty as a director to get the lowest possible price for the “chairs” conflicted with his personal interest to get the highest possible price for Blaikie Brothers.

Held Aberdeen wins and can avoid the contract.

Ratio At common law, a corporation can avoid any contract which an interested director participated in making, subject to

the rule in North-West Transportation Co v Beatty (p 112).

See Also Interested Directors’ Contracts (p 45), CBCA s 120.


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A.E. LePage Ltd v Kamex Developments Ltd 1977 ON/CA

Facts A group of people bought an apartment building and transferred it to a trustee to be held in trust. Each co-owner

maintained a separate, undivided beneficial interest in his share that he was able to transfer or sell freely, subject

only to the other co-owner’s right of first refusal. Co-owners earned income from the rental property (“profit”); each co-owner’s beneficial interest in the income kept separate for income tax purposes. Decisions by majority vote.

Intent: flip the building at a profit. One co-owner incurred a liability by listing the building exclusively with a realtor

for sale despite explicit decision by majority not to do so.

Issue Is there a partnership? (i.e. Was liability incurred by the co-owner jointly and severally shared by others?)

Analysis Ability to alienate an undivided interest in the property is inconsistent with the definition of partnership property.

The right of first refusal is not inconsistent with each co-owner’s right to deal in his own interest. In addition, the separation of the beneficial interests for income tax purposes is inconsistent with partnership.

p 79:

The real question is whether … the property … was to be held jointly as partnership property, and sold as such. A common intention that each should be at liberty to deal with his undivided interest in the land as his own [is] incompatible with an intention that each should be bound to treat the corpus as joint property, the property of partnership.

Moreover, equivalent of BC Partnership Act s 4(a) says co-ownership of profit and profit sharing does not

necessarily create a partnership.

Held No partnership. Thus other co-owners have no liability.

Ratio Ability to freely transfer an undivided interest in co-owned property is inconsistent with partnership.

See Also Is there a partnership? (p 7), Lansing Building Supply (Ontario) Ltd v Ierullo (p 106), Assignment 1 (paragraph)

AGDA Systems International Ltd v Valcom Ltd 1999 ON/CA

Facts AGDA contracted to provide prison security systems to Corrections Canada. When AGDA’s contract came up for renewal, CC put it out to tender and Valcom won it. Valcom won in part because its sole director, McPherson, and

two senior employees, Ewing and and McKenzie, lured AGDA’s senior technicians away. In addition to suing Valcom,

AGDA sued McPherson, Ewing, and McKenzie personally for inducing breach of contract, interference with economic

interests, and for inducing breaches of fiduciary duty.

Issue Can directors or employees be sued personally for an intentional tort such as inducing one third party to breach a

contract with another third party?

Analysis The corporate veil does not have to be lifted because plaintiffs (Valcom) are relying on an independent cause of

action against the individual defendants. Moreover, the facts of the case do not fall within the limited exception to

personal liability from Said v Butt.

Held AGDA has an independent cause of action against the individual defendants, but there is no need to “lift the veil” to achieve this.

Ratio Where a plaintiff relies on an independent cause of action against an individual defendant that does not fall within

the limited exception from Said v Butt, the claim may proceed.

Note RD emphasizes: this is not veil-piercing; it is about establishing an independent cause of action in tort.

See Also Tort Liability (p 23), Wolfe v Moir (p 132), Said v Butt (p 122)


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Alberta Gas Ethylene Co v Minister of National Revenue 1989 CA/FCA

Facts To obtain a lower rate of interest from US lenders, AGEC incorporated ASCO, a Delaware corporation. ASCO then

borrowed from US lenders on AGEC’s behalf, and AGEC borrowed from ASCO. The tax collector assessed AGEC for

taxes on interest payments made to ASCO as a non-resident of Canada. AGEC argued for “veil piercing”, saying the court should look at the substance of the transaction, to save itself from the tax liability.

Issue 1. Is ASCO just a “sham” or “shell company” that is no more than a borrowing arm of AGEC?

2. Is ASCO just the agent of AGEC according to the six tests from Smith, Stone and Knight? (see text p 194)

Analysis You can’t just consider the 6 criteria (from Smith) and when they are all met (as they are in this case) ignore the

separate legal existence of the subsidiary. You must ask for what purpose & in what context it is being ignored.

Held AGEC has to pay taxes as if ASCO had a separate legal existence.

Note It would appear that “purpose” and “context” includes whether the separate legal existence of the subsidiary helps or hinders the government’s tax collection. Tax man gets to have it both ways—see De Salaberry Realties Ltd v Minister of National Revenue (p 98).

See Also Gregorio v Intrans-Corp (p 102), Enterprise Liability (p 22)

Ashbury Ry Carriage & Iron Co v Riche 1875 Eng/HL

Facts Ashbury (D) was incorporated in 1862. It agreed with a Belgian businessman, Riche (P) in which D would purchase a

railway concession and contract the work of building the railway line to P. D’s shareholders thought the deal ran contrary to the objects of the corporation listed in D’s articles of incorporation. D repudiated the contract with P as ultra vires.

Held Under the old UK Joint Stock Companies Act, 1862, the contract was ultra vires the corporation and the corporation

was thus not bound by it.

Note The closest thing in modern Canadian law to ultra vires is s 16(2) of the CBCA. However, unlike the common law

doctrine of ultra vires, a corporation is still bound by acts that are contrary to its articles.

See Also Ultra Vires: Boundaries on the Corporation’s Capacity to Act (p 29)

Atco v Calgary Power Ltd 1982 CA/SC

Facts Atco wanted to buy a controlling stake in Calgary Power (both companies owned large stakes in another company,

which in turn owned all the shares in 3 Alberta public utility companies). Calgary Power tried to defend itself by

relying on an Alberta statute forcing “a person owning, operating, managing, or controlling a public utility” to seek approval from a government Board.

Issue Can a parent company own the physical plant of its subsidiary?

Held No. This follows from the Salomon principle and, e.g., the ruling in Macaura.

Note This case is injected in the textbook to make us think about “conceptions of ownership”, blah blah blah. The Wilson J

judgment is a dissent, but the textbook notes that the majority judges didn’t disagree with her on this one issue.

See Also Re Bowater Canadian Ltd v R.L. Crain Inc (p 117), Sparling v Québec (Caisse de depot et placement du Québec) (p 126), Salomon v Salomon & Co, Ltd (p 123), Bundles of Rights & Obligations, Not Ownership (p 33)


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Automatic Self-Cleansing Filter Syndicate Co v Cunninghame 1906 Eng/CA

Facts The Articles of a corporation, incorporated in 1896, vested management of the business and control of the company

in the directors “subject . . . to such regulations . . . as may from time to time be made by extraordinary resolution”. At a shareholder’s meeting, the shareholder’s purported to force the directors to sell the corporation’s assets by an “ordinary resolution” (i.e. a bare majority).

Issue Can the shareholder’s manage the business by an ordinary resolution?

Ratio At this time, under this statute: no, the shareholders need the extraordinary resolution required by the Articles.

Note Textbook (p 547) says this result is codified in section 102(1) of the CBCA, but I can’t see any need to cite this case directly rather than the statute…

Backman v Canada 2001 CA/SC

Facts Group of Ds bought a money-losing property in Texas to realize a tax loss. Incidentally to the same transaction, they

also bought a small number of shares (1% stake) in an Alberta oil & gas property. They claimed a “partnership” for income tax purposes. Tax man sued saying they couldn’t claim the tax loss.

Issue Is there a partnership? Specifically, what does with a view to profit mean?

Analysis Motive is irrelevant. Thus, a motivation to gain a tax advantage has no bearing on partnership formation. However,

there must be an intention to profit. If the “partners” have absolutely no belief they will profit, a partnership can’t be formed. Profit need not be the overriding intention—profit can be an “ancillary” intention—but it must be an

intention. A nominal, passive, investment in shares (i.e. the oil & gas company) is hard to characterize as “carrying on a business” and is in this case more like “co-ownership of property”.

Held No partnership. No intention to profit. Purchase of oil & gas shares was “window dressing” and not ancillary intention to profit.

Ratio “With a view to a profit” means the persons must have an actual intention to profit from their activities.

Note Court also noted that first act of “partners” was to dissolve the property as a business, meaning they probably couldn’t be said to have been “carrying on a business in common” either…

Court also notes that a group could be deemed not a partnership in one context (i.e. the tax prosecution) and

yet found to be a partnership as between another set of third parties, for instance if they held themselves out

to be a partnership… See Partnership Act s 16(1), p 135.

The inquiry is objective. Parties can say they had a partnership or, as in this case, carry out all the associated

formalities, but the courts will look to their objective intentions.

Barnes v Andrews 1924 US/FC

Facts D (Andrews) was a director of a company organized to manufacture starters for Ford motors and aeroplanes. He also

made a substantial investment in the company. When D took office, the employees and officers were already hired

and the factory was built. During his tenure, D attended only one of two directors’ meetings and contented himself to receive general assurances from the president that this business looked promising and all was well. Production

delays caused by employee discord depleted the company’s capital. D resigned, and the company failed some months later. P sued D for breach of his duty of care. The court found D was negligent.

Issue Although D was negligent in his duty, did his negligence cause the company to fail?


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Analysis P has the burden of showing that performance of D’s duties would have avoided loss, and what loss it would have avoided. In sum, P must show that D’s performance of his duties could have saved the company.

Held D wins because P failed to show that his negligence caused the company to fail.

Ratio It is not enough to show a breach of the directors’ duty of care to trigger liability: it must be shown that this breach

caused actual damage.

See Also Peoples Department Stores Inc (Trustee of) v Wise (p 114), Causation (p 44), Duty of Care (p 43)

BCE Inc v 1976 Debentureholders 2008 CA/SC

Facts BCE’s directors assisted in a going-private transaction to take BCE private. Over 97% of BCE’s shareholders voted in

favour of the transaction. However, the plan required loading BCE and a subsidiary, Bell Canada, with so much new

debt that the credit rating of certain existing debentures would be downgraded. While it is common practice for

trust indentures to contain protections preventing this kind of occurrence, the indentures of the debt instruments at

issue did not have any such protection. The creditors wrote to the BCE directors demanding that the transaction

take their interests into account, and the directors wrote back that BCE would honour the legal requirements of the

trust indentures. The directors proceeded with the transaction and institutional investors holding the existing

debentures sued under CBCA s 241 claiming their interests were being unfairly prejudiced.

Issue Were the creditors oppressed so as to qualify for a remedy under CBCA s 241?

Analysis General:

Oppression is an equitable remedy that seeks to ensure fairness in the context of business realities.

The remedy focuses on equity and fairness, not strict legal rights, so unlawfulness not necessary for claim.

What is just and equitable is fact-specific and depends on context and relationships.

Reasonable expectations:

Determining whether an expectation is reasonable is difficult since interests of stakeholders may conflict.

Directors and shareholders are entitled to maximize profit/share price but not at expense of treating other

stakeholders unfairly.

The following factors in the case law are relevant to reasonable expectations:

(i) Commercial practice: Departure from normal business practice that undermines or frustrates

exercise of his legal rights will usually give rise to a remedy e.g. Downtown Eatery (1993) Ltd v Ontario (p 99)

(ii) Size and nature of corporation: Courts may give more latitude to directors of smaller companies.

See e.g. First Edmonton Place Ltd v 315888 Alberta Ltd (p 100)

(iii) Relationships: See e.g. Ferguson v Imax (p 100)

(iv) Past practice: May create reasonable expectations, especially in closely-held corporations

(v) Preventive steps: Whether claimant could have taken steps to prevent himself can be relevant. See

e.g. First Edmonton Place Ltd v 315888 Alberta Ltd

(vi) Representations and agreements: [Ford Motor Co of Canada v OMERS]

(vii) Fair resolution of conflicting interests: Best interests of the corporation must be considered

(Peoples Department Stores Inc (Trustee of) v Wise). Business judgment of directors will be

deferred to.

Conduct that is oppressive, unfairly prejudicial, or unfairly disregarding of interests

Not every breach of a reasonable expectation qualifies.

Also plaintiffs must show wrongful conduct, causation, and a compensable injury.


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Held Debentureholders were not oppressed. The evidence disclosed a reasonable expectation that directors would

consider their interests, which they did. However, maintenance of the trading value of their debentures was not a

reasonable expectation. Had they wanted this, they could have bargained for it.

Ratio There is a two-prong test for whether oppression occurred:

1. Were the reasonable expectations of the complainants breached?

2. If so, was this breach unfair? (i.e. oppressive, unfairly disregarding, or unfairly prejudicial to interests)

Bennett v Bennett Environmental Inc 2009 ON/CA

Facts Bennett was founder, CEO and a director of BEI, a CBCA company, as well as a member of Board’s Disclosure Committee. Like in Blair and Crocus, the bylaws mandated director indemnification subject to conditions equivalent

to CBCA s 124(3). BEI won an enormous contract sponsored by the US Army Corps of Engineers from a US company

but after the K was announced, the USACE began protesting it.

Bennett believed the K to be legally binding and had assurances from the US company involved that USACE would

not end the K; consequently, the controversy was not disclosed to the public as a material fact as required by the

Ontario Securities Act. Importantly, Bennett did not sell any stock and took his bonus in BEI stock options. However,

the USACE did kill the K. BEI announced the news, and suffered a 50% share price hit.

The OSC successfully prosecuted Bennett, which, inter alia, ended his directorship. In the proceedings, Bennett

admitted that the controversy surrounding the K was a material change that should have been disclosed. Bennett

sought indemnification from BEI for his administrative penalty and the costs of the proceeding.

Issue Is indemnification of Bennett by BEI, despite the bylaw, prohibited by CBCA ss 124(3)(a) & (b)?

Analysis Per Blair¸ the degree of misconduct required to prohibit indemnification is mala fides (although this term will

also encompass opportunistic and self-seeking behaviour and may include inexplicable recklessness).

Admission of the “material fact” in OSC proceedings doesn’t automatically lead to prohibiting indemnification

under s 124(3)(b)—otherwise, there would be no point allowing indemnification for administrative and criminal

judgments under s 124(1).

Blair does not mandate consulting legal counsel in order to have acted honestly and in good faith &c.

Held Considering ss 124(3)(a) & (b) separately, Bennett meets both standards. BEI must indemnify.

Ratio For reasons analogous to those in Blair, the corporation also bears the burden of proving that a director’s belief in the lawfulness of his conduct was not reasonable.

See Also CBCA ss 124(3)(a) & (b), Manitoba (Securities Commission) v Crocus Investment Fund (p 108),

Blair v Consolidated Enfield Corp (p 92), Director Indemnification and Insurance (p 50)

Note Extra case from WebVista. Note also that OSC proceedings are civil/administrative, not criminal. Yet by the word

administrative, they appear to fall under CBCA s 124(3)(b).

Big Bend Hotel Ltd v Security Mutual Casualty Co 1980 BC/SC

Facts Kumar owned a hotel through a corporation, insured it against fire, and it burned down. There was an arson

investigation with inconclusive results. He then bought all the shares in another hotel corporation, Big Bend, and

was unsuccessful in getting fire insurance. Eventually, he managed to get insurance after leaving the “Loss Record” on the application form blank. Wouldn’t you know it, that hotel burned down too. After learning of the previous

loss and the omission on the form, the insurer refused to pay out and Big Bend sued for indemnity. Kumar argued

that Big Bend had no duty to report on the history of the first corporation, because it was a completely separate


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legal entity.

Issue Must the insurance company indemnify Big Bend for the destruction of its hotel by fire?

Analysis After determining that Kumar had omitted material information which he had a duty to report, the court stated

that “equity will not allow an individual to use a company as a shield for improper conduct or fraud” and that as a result it was “lifting the veil”. But was any lifting really necessary? RD says no need. Big Bend, the corporation, knew of a material circumstance—that it had been turned down multiple times for insurance due to the involvement of a key shareholder/director in another corporation whose hotel burned down. That’s it: no need for veil piercing or jumping on Mr Kumar. The corporation made a material omission and loses benefit of policy.

Held Kumar loses and is not indemnified.

See Also Piercing the “Veil” (p 20)

Black et al v Smallwood & Cooper 1966 Aus/HC

Facts Ps contracted to sell land to Western Suburbs Holdings Pty Limited whose directors were supposedly Smallwood and

Cooper. The company had not been incorporated at the time the K was executed, but everyone (Ps and Ds) believed that it had been. Ds didn’t close the sale and P sued Ds for specific performance, alleging that the Ds contracted as

agents on behalf of a non-existent principal, as described by Erle CJ in Kelner v Baxter (p 105).

Issue Are Ds personally liable under a contract purportedly between Ps and a company which did not exist yet?

Analysis Majority distinguished Kelner v Baxter on the facts:

o The fact that the Kelner signers had no principal was obvious to both parties but this wasn’t enough.

o The Kelner court also examined the written instrument and found that the parties intended the

defendants to be bound personally.

o Finally, in Kelner, the plaintiff had fully performed and defendants took the benefit.

The court firmly dismissed the proposition that Kelner stands for a general rule that “agents” contracting on behalf of a non-existent company are automatically personally liable under the contract.

In this case, it is clear that the defendants did not intend to personally contract.

Held Newborne is directly on point and should be followed. Ds are not personally liable.

Ratio “The fundamental question in every case must be what the parties intended or must be fairly understood to have intended. If they have expressed themselves in writing, the writing must be considered by the court.”

See Also Newborne v Sensolid (Great Britain) Ltd (p 110), Wickberg v Shatsky (p 131), Common Law of Pre-

Incorporation Contracts (p 24)

Blair v Consolidated Enfield Corp 1995 CA/SC

Facts Blair was president and a director of Enfield, an OBCA corporation. The company bylaws decreed that the president would chair the AGM. At the AGM, Canadian Express, a major shareholder, assembled a slight majority of votes

available at the meeting in order to oust Blair from his directorship. However, the proxies held by the CanEx bloc

failed to name Price, the director CanEx wanted to elect instead of Blair.

At the meeting, Blair sought advice from Enfield’s counsel, Osler, saying: “You know the law. I will take my direction from you. What should I do?” Osler said Blair had a duty as chairman to rule, and that legally the proxies held by the CanEx bloc could not be used to vote other than for management’s slate of directors including Blair. Reading verbatim a legal opinion prepared by Osler, Blair ruled that CanEx failed and he was re-elected.

In a later legal action, CanEx succeeded in having the proxies ruled valid and ousting Blair as director. As Enfield was


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now controlled by hostiles, it refused to indemnify Blair for his costs in the action. OBCA had a permissive

indemnification provision identical to CBCA s 124(1) and the Enfield bylaws provided mandatory indemnification of

directors as long as they complied with terms identical to CBCA s 124(3). Blair sued for indemnification.

Issue Did Blair act honestly and in good faith with a view to the best interests of the corporation, so as to be (1) not

disqualified under equivalent to CBCA s 124(3) and (2) entitled to indemnification under the Enfield bylaws?

Analysis [C]ourts, through hindsight, are reluctant to find chairmen in dereliction of their duties barring proof of bad faith.

Blair’s reliance on Osler’s advice was reasonable and in good faith. Reliance on actuarial and legal advice would militate against a finding of misconduct. Iacobucci J also discussed policy reasons for director indemnification.

Held Enfield must indemnify Blair.

Ratio There is a presumption of good faith which the corporation must disprove.

See Also CBCA s 124(1) & (3), Manitoba (Securities Commission) v Crocus Investment Fund (p 108), Bennett v Bennett Environmental Inc (p 91), Director Indemnification and Insurance (p 50)

Note Extra case from WebVista

Bonanza Creek Gold Mining Co v The King 1916 CA/PC

Ratio While a provincial legislature is not competent to bestow a right to engage in business outside the home province, it

may grant it the capacity to engage in business in any other province that is willing to allow it to do so.

See Also Citizens Ins Co v Parsons (p 96), Federal vs Provincial Incorporation (p 30)

Brant Investments v KeepRite Inc 1991 ON/CA

Facts KeepRite’s directors set out to buy a heating business (to offset its cyclical cooling business) from a subsidiary of its

majority shareholder, ICG. Since it was buying from an affiliate [CBCA s 2(2)], it set up an independent committee of

directors independent of both KeepRite and ICG management to review the transaction. The trial judge found that

this committee was truly independent and considered the transaction on its merits.

Shareholders subsequently approved the acquisition, but a disgruntled minority dissented under the appraisal

remedy. These dissenters then refused KeepRite’s offer [CBCA s 190(12)] and sued KeepRite and ICG under the

oppression remedy [CBCA s 241]. One of their allegations was that the transaction would dilute KeepRite’s EPS, however in the directors’ business judgment, the transaction would have the opposite effect.

Issue To what extent can courts delegate a decision as to fairness of corporate conduct to the directors of a corporation or

an independent committee of them?

Analysis Evidence of bad faith or want of probity is unnecessary in OR due to CBCA s 241(a). (RD notes that if there is no bad faith, probably there will be no personal liability of directors although corporation may be liable).

Directors are not required when entering into a transaction to consider every available alternative.

Courts must consider the nature of the impugned acts and the method by which they were carried out, but may

not substitute their own business judgment because they don’t know even enough to make such a decision.

Held Transaction not oppressive. KeepRite wins and dissenters lose. Regarding the dilution of EPS, it is a matter of the

directors’ business judgment.

Ratio Business decisions are subject to examination, but not microscopic examination, by the courts.

See Also The Business Judgment Rule, Ford Motor Co of Canada v OMERS (p 101), Pasnak v Chura


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Canadian Aero Service Ltd v O’Malley 1974 CA/SC

Facts Zarzycki, O’Malley, and Wells had been directors of Canaero. O and Z had also been senior officers in charge of

winning a certain contract in Guyana. W left Canaero in February 1965 and suggested that O and Z form their own

company. More than a year later, in August 1966, O and Z incorporated Terra Surveys Limited and resigned from

Canaero a few days later. Terra won the contract. Canaero sued all three for breach of fiduciary and an accounting.

Issue 1. Are Zarzycki and O’Malley liable for breach of their fiduciary duty to Canaero?

2. Is Wells liable for breach of fiduciary duty to Canaero?

Analysis Laskin J: the fiduciary duty of a director or officer does not end on resignation and cannot be renounced at will by

termination of employment (text p 779). Also (at p 777):

The reaping of a profit by a person at a company’s expense while a director thereof is . . . an adequate ground upon which to hold the director accountable. Yet there may be situations where a profit must be disgorged, although not gained at the expense of the company, on the ground that a director must not be allowed to use his position as such to make a profit even if it was not open to the company, as for example, by reason of legal disability, to participate in the transaction.

Held 1. O and Z are liable.

2. Wells is not liable.

Ratio Standards of loyalty, good faith and avoidance of a conflict of duty and self-interest for officers and directors must

be tested in each case by many factors, which include but are not limited to:

(a) position or office held; (b) nature of the corporate opportunity;

(c) ripeness of the opportunity; (d) specificness of the opportunity;

(e) director or officer’s relation to the opportunity; (f) amount of knowledge possessed;

(g) circumstances in which it was obtained; (h) whether it was special or even private;

(i) factor of time in the continuation of the fiduciary duty;

(j) circumstances of relationship termination (retirement, resignation, or discharge).

See Also CBCA s 122(1)(a), Corporate Opportunities (p 48)

Canadian Egg Marketing Agency v Richardson 1998 CA/SC

Facts The agency brought a civil action against Richardson’s corporation, Pineview Poultry Products Ltd, under a statutory provision. When Richardson/Pineview challenged the constitutionality of the legislation under Charter ss 2(d) & 6,

the agency argued that Pineview has no standing to challenge because (1) these provisions protect individuals only;

and (2) the suit is civil, not penal, in nature.

Issue Does the Big M Drug Mart exception give a corporation standing to challenge the constitutionality of a law under

Charter sections that do not protect corporations if it is brought before a court involuntarily in civil proceedings?

Analysis No one should be subject of coercive proceedings and sanctions authorized by an unconstitutional law.

Held Pineview has standing to challenge the constitutionality of the law.

Ratio The Big M Drug Mart exception is expanded to cover not just penal, but also civil, proceedings in which a

corporation is brought involuntarily before the court.

See Also R v Big M Drug Mart (p 117), Ford v Québec (p 102), Big M Drug Mart Exception (p 32)


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Canadian Laboratories Supplies Ltd v Englehard Indus. of Canada Ltd 1979 CA/SC

Analysis On p 298 of the textbook, an excerpt from Estey J attempts to justify the indoor management rule:

The corporation is the vehicle of modern commerce.

Both corporate sides to a contractual transaction must be able to make secure arrangements at the lowest

level at which adequate business controls can operate. Division of authority according to function is as

necessary as it is commonplace.

Persons, including corporate persons, dealing with a corporation must for practical reasons be able to deal

in the ordinary course of business with personnel from that corporation secure in the knowledge that the

law will back their practicalities up with binding consequences…

See Also Royal British Bank v Turquand (p 122), Sherwood Design Services Inc v 872935 Ontario Ltd (p 124), Indoor

Management Rule (a.k.a. Ostensible Authority) (p 28), CBCA s 18

Canbar West Projects Ltd v Sure Shot Sandblasting & Painting Ltd 2011 AB/CA

Facts Shareholders of Canbar contracted to build a building for Ds. The pre-incorporation contract was between “Can-

West Projects Ltd” and Sure Shot, but Can-West had not yet been incorporated. It is disputed whether Ds knew this.

Canbar’s shareholders did most of the work before incorporating. They then realized that the name “Can-West” was taken, so they incorporated as “Canbar West” (spelling out the “-“). A dispute arose due to unpaid bills and Canbar

filed for a builder’s lien on the property.

The relevant provision—Alberta Business Corporations Act s 15(3)—has identical language to CBCA s 14(2), in

particular that the corporation can adopt a K made “in its name or on its behalf”.

Issue Can Canbar adopt the K made between Can-West and Sure Shot so that it can be “entitled to the benefits” of the K, in particular the rights to payment under the K and thus to file the builder’s lien?

Held Canbar wins: it adopts the K and it gets a valid builder’s lien on Sure Shot’s property.

Ratio A corporation can “adopt” a K made “in its name” even if the ultimate name of the corporation is a close permutation of the name used in the K, and if the evidence is unclear as to whether the counterparty knew that the

corporation it contracted with was not in existence.

Note RD assigned this case as extra reading (WebVista) but never covered it in class.

See Also CBCA s 14(2) on p 149

Charlebois v Bienvenu 1968 ON/CA

Facts A shareholders meeting was called to elect directors of BIF, but after the meeting controversy arose as to who was

actually elected. A trial was scheduled to determine who the valid directors were, but because the trial could not be

expedited, a judge ordered a new shareholder’s meeting under s 310 of the old Ontario Corporations Act (analogous

to current CBCA s 144) to elect new directors. This order was appealed.

Issue 1. Under s 310 of the OCA, can a judge order a shareholder’s meeting to achieve some purpose that the meeting would not otherwise be authorized to do?

2. Is electing new directors under the circumstances something the meeting would not otherwise be authorized to

do?

Analysis Aylesworth JA acknowledged that the “impracticable to call a meeting test” had been met. However, the problem is that under the OCA, directors serve for a year, and if an election is not held at the proper time, the existing directors


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continue to serve until a proper election is held. So if directors were validly elected at the contested election, the

new election ordered by the judge would have no power to depose them. Thus the issue of whether the election

was valid must first be determined. In other words, the trial must take place.

Held Appeal dismissed: the judge was not authorized by the OCA to order a shareholder’s meeting to elect new directors, since it might have the effect of contravening the statute.

Note RD asks in his slides whether this decision is good law given ss 144(3) and 145 of the CBCA? It appears that it is not:

1. The language of CBCA s 144(3) was already integrated into s 310 OCA, so this is not a problem.

2. The trial which was slated to occur was for the purpose of determining who the directors were. In other

words, an application had been made under the OCA which was analogous to an application under CBCA

s 145. The problem is that the trial hadn’t taken place yet! However, it appears that under s 145(2)(c), a

court is expressly authorized to order a new election, so the reasoning in Charlebois cannot apply.

See Also Re Canadian Javelin Ltd (p 118), Re Routley’s Holdings Ltd (p 119), Meetings Ordered by the Court (p 55)

Churchill Pulp Mill Ltd v Manitoba 1977 MB/CA

Ratio Section 120(8) of the CBCA is a self-executing remedy which doesn’t require compliance with the process required for a derivative action under section 239.

See Also Conflicts of Interest under the CBCA, Self-Executing Remedy of CBCA s 120(8) (p 46)

Citizens Ins Co v Parsons 1881 CA/PC

Ratio POGG power gives federal government the right to make laws in respect of companies not “with Provincial Objects”. In other words: companies having objects to be carried out in more than one province.

See Also Bonanza Creek Gold Mining Co v The King (p 93), Federal vs Provincial Incorporation (p 30)

Clarkson Co Ltd v Zhelka 1967 ON/HC

Facts Selkirk owned a number of thinly capitalized companies including Industrial, a validly incorporated company. In

order to protect a tract of land from Industrial’s [corporate] creditors, Selkirk caused Industrial to convey the land to

his sister, Miss Zhelka. Selkirk then personally declared bankruptcy. Clarkson, his trustee in bankruptcy, sued Zhelka

claiming that the land in question was the property of Selkirk and should be vested in the trustee for the benefit of

Selkirk’s personal creditors.

Issue Can the “veil” be pierced so that the land in question can be treated as owned by Selkirk and thus held for the

benefit of his personal creditors?

Analysis This is not a case where the debtor has transferred his personal assets to a corporation to protect them.

The evidence falls short of establishing fraud on Selkirk’s personal creditors using Industrial or its property.

And there is no claim before the court from Industrial’s creditors alleging fraud.

Held No veil piercing. There is no reason Selkirk’s personal creditors should have access to Industrial’s corporate assets.

Ratio A fraud, or alleged fraud, perpetrated on the creditors of a corporation does not give the personal creditors of the

alleged mastermind a claim on the corporation’s assets.

See Also Piercing the “Veil” (p 20)


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Clitheroe v Hydro One Inc 2002 ON/SC

Facts The Ontario government passed a law directing Hydro One to negotiate new employment contracts with its officers

and removing officers’ rights to compensation for termination of employment until the new contracts were in place.

P was dismissed as CEO of Hydro One and sued, inter alia, under the OBCA’s oppression remedy.

Issue Can a claim for wrongful dismissal be included as part of an application for relief under the oppression remedy?

Held P did not allege any pattern of oppressive conduct, so the OR claim fails.

Ratio A claim for wrongful dismissal can only be included as part of an application for relief under the OR when the

dismissal may properly be considered as part of an overall pattern of oppression.

See Also Downtown Eatery (1993) Ltd v Ontario (p 99), Oppression Remedy: Limiting the Power of Directors (p 67)

Cogeco Cable Inc v CFCF Inc 1996 QC/CA

Facts CFCF, a CBCA corporation, owned cable and broadcast TV businesses. Over the past decade, broadcast TV had lost

money and the cable divisions are what kept CFCF afloat. By the valuation measure advanced by Cogeco, a

shareholder of CFCF, the cable TV business accounted for up to 80% of CFCF’s total value, while its broadcast business was only about 20%. As part of a strategic realignment, CFCF decided to divest itself of its cable TV

subsidiary and to acquire additional broadcast TV stations (analogous to Bell Canada selling its mobile division to acquire a land line business!). Cogeco sued demanding that the transaction be approved by the shareholders.

Issue Is CFCF’s divestiture of the cable business a sale of “substantially all” of its assets as contemplated by CBCA s 189(3)?

Analysis CFCF doesn’t claim that the transaction occurred in the “ordinary course of its business”.

Held After considering both quantitative and qualitative criteria, the sale is a fundamental change which strikes at the

very heart of the company. Therefore, Cogeco wins and CFCF must submit the transaction to the shareholders to be

approved by special resolution in accordance with CBCA s 189(8).

Ratio Both quantitative and qualitative criteria must be considered when determining whether “substantially all” of the corporate assets are involved under s 189(3):

1. Quantitative: no fixed percentage, but when the sale involves 75% or more of the total corporate property,

it must be submitted for approval.

2. Qualitative: even if quantitative analysis doesn’t describe the assets as “substantially all”, qualitative analysis must also be done. In this case:

a. If the transaction is a fundamental reorientation which strikes at the heart of the company’s activities, it is qualitatively “substantially all”.

b. The qualitative test must consider the quantitative factors, so that the higher the quantity of

assets involved, the more likely they are to be qualitatively “substantially all”.

See Also Asset Sales (p 77), CBCA s 189

Cox & Wheatcroft v Hickman 1860 Eng/HL

Facts A partnership became insolvent. Rather than seizing the assets and losing a lot of money, creditors allowed it to be

reconstituted as a trust managed by an independent trustee. The creditors obtained a beneficial interest in the

profits of the reconstituted business until their debts were paid off. A trade creditor sued them to make good his

trade debt, alleging that the old creditors were partners.


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Issue Are the creditors partners because they are being paid out of the profit of the reconstituted business?

Analysis p 63:

The debtor is still the person solely interested in the profits, save only that he has mortgaged them to his creditors. He receives the benefit of the profits as they accrue, though he has precluded himself from applying them to any other purpose than the discharge of his debts.

The presumption that profit, i.e. Partnership Act s 4(c), implies partner is rebuttable.

Held Creditors are not partners. Their benefit is fixed to the amount owing under the original loans.

Ratio To be a partner is to have the business carried on for your benefit (RD).

See Also Pooley v Driver, Is there a partnership? (p 7)

De Salaberry Realties Ltd v Minister of National Revenue 1974 CA/FCA

Facts RD: “There was a tax issue”. Basically, if land owned by De Salaberry

Realties Ltd (D) was

treated as merely owned

by the corporation, there

would be a lower overall

tax liability, whereas, if it

was treated as owned by

the enterprise as a whole,

there would have been a

higher overall tax liability.

Cemps Investments Ltd(Bronfman family)

Steinberg’s Ltd(Steinberg family)

Cemps Holdings Ltda.k.a. Fairview Ltd

... ...Ivanhoe Corp

De Salaberry Realties Ltd“The Puppet”

Capitalization: $1,000

50% 50%

... ... ... ... ... ...

The court noted that the sub-companies are “instruments” of their parent companies, which:

caused them to be incorporated;

determined their thin capitalization;

financed them via loans (RD);

dictated their policy; and

did the bulk of the work relating to their business (e.g. employing architects)

Issue Should D be treated as being an independent legal entity, or as belonging to a group of companies, for tax purposes?

Analysis Such “pyramiding” of corporations, in each group, demonstrates the extent of the need not to restrict the scrutiny of the course of conduct to D, which is only an instrument in the hands of the groups.

It isn’t possible to determine the business of D without taking into account the business of the whole groups. Courts are more willing to treat a company as agent of its controlling shareholder where the shares are held by

another company.

Held Enterprise liability imposed: D’s tax liability is determined as if the whole enterprise were one company.

Ratio When a corporation is merely an “instrument” of some parent company(ies), it is necessary to look at the conduct of

the whole group of companies to determine the business of that corporation.

See Also Enterprise Liability (p 22), Alberta Gas Ethylene Co v Minister of National Revenue (p 88),

Walkovszky v Carlton (p 130)


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Dodge v Ford Motor Co 1919 MI/SC

Facts Ford had amassed substantial retained earnings. The directors chose not to declare a dividend and Henry Ford

stated that the reason for keeping the cash was to expand his production system “for the greater benefit of society”.

Held Since the directors made their decision not with regard to company profit—and thus not with a view to the best

interests of the corporation—the directors breached their duty to act in the best interests of the corporation.

See Also CBCA s 122(1)(a), Directors Are Not Obliged to Pay Dividends…(Except When They Are?) (p 38)

Downtown Eatery (1993) Ltd v Ontario 2001 ON/CA

Facts P was employed as a manager in a nightclub owned by Ds. P received his paycheques from one corporation within

Ds’ group of companies incorporated under the OBCA: Best Beaver Management Inc. When P was fired from his job,

he began a successful wrongful dismissal claim against Best Beaver, but by the time he became entitled to his

damage award, Ds had wound up Best Beaver and it had no assets. Ds claimed Best Beaver was wound up as a

business decision because the “union threat” which was the reason for its separate existence had disappeared.

Issue Did the winding up of Best Beaver effect a result that was unfairly prejudicial to or that unfairly disregarded Ps’ interests as an involuntary [judgment] creditor of Best Beaver?

Analysis Intent to harm is unnecessary: OR contemplates “effecting a result” that is unfair, e.g. CBCA s 241(2)(c).

It was abundantly clear to Ds that Ps claim might result in a judgment and they should have taken steps to meet

that contingency.

Thus P had a reasonable expectation that if Best Beaver was wound up, Ds would leave a reserve to meet the

contingency that resulted.

Held P wins: the winding up of Best Beaver was unfairly prejudicial to or unfairly disregarded P’s interests as a person who stood to obtain a judgment against Best Beaver and there was nothing P could have done to prevent it.

Note How can this decision be distinguished from First Edmonton Place Ltd v 315888 Alberta Ltd (p 100)? RD says it

is because here you can imagine that the wrongful dismissal liability arose before the winding up.

See Also West v Edson Packaging Machinery Ltd (p 131), BCE Inc v 1976 Debentureholders (p 90), Standing and

Interests Protected under the oppression provision (p 67)

Ernst & Young v Falconi 1994 ON/GD

Facts Falconi pleaded guilty to assisting bankrupt persons to make fraudulent dispositions of their property. Klein, a

lawyer in Falconi’s firm, had no personal involvement in the fraud.

Issue Were Falconi’s fraudulent acts “within the ordinary scope of business” of the law firm so as to make Klein liable?

Held Klein is jointly and severally liable with Falconi.

Ratio Court doesn’t need to find that it is within the ordinary course of business of a law firm for a partner of the firm to conspire to commit fraud. It is enough that the partner used the facilities of the law firm to perform services

normally performed by the law firm in perpetrating that fraud.

See Also Partners’ liability in tort: Partnership Act s 12 (p 135)


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Exide Canada v Hilts 2005 ON/SC

Facts The CEO of Exide and his executive assistant signed a corporate cheque for $1.3M and deposited it into a joint

account in their names. They later transferred $300K of that money into a corporation controlled by the executive

assistant and then executed a K on behalf of Exide with the corporation controlled by the executive assistant.

Issue Did the CEO have a material interest in the corporation controlled by the executive assistant?

Held Hells yeah. Because:

1. he directed $300K to it while the K was being negotiated; and

2. he had a close personal relationship with the executive assistant who controlled the contracting

corporation.

See Also What is a Material Interest? (p 47), Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co (p 128)

Ferguson v Imax 1983 ON/CA

Facts Mr and Mrs Ferguson both held shares in the defendant corporation. Additionally, Mr Ferguson was an employee of

the corporation, but Mrs Ferguson was not. When their marriage broke down, Mr Ferguson used his position of

influence in the company to ensure that no dividends were paid, thus giving Mrs Ferguson no return on her shares.

Mr Ferguson then caused the company to attempt to amend its articles to force Mrs Ferguson to redeem her class

“B” non-voting preference shares. The purpose of this transaction was to force Mrs Ferguson out of the company so

that dividends could be paid to the other shareholders (i.e. so they could participate in earnings but not her). Mrs

Ferguson sought an injunction under the OR—i.e.. CBCA s 241(3)(a)—to restrain the company from putting the

capital structure amendments to a shareholder vote.

Issue Is the attempted capital reorganization oppressive to Mrs Ferguson?

Analysis When dealing with a close corporation, a court may consider the relationship among shareholders and not just the legal rights as such.

Due to the intention of the group [of directors] to deny Mrs Ferguson any participation in the growth of the

company, the capital reorganization is the culminating event in a lengthy course of oppressive and unfairly

prejudicial conduct to Mrs Ferguson.

Due to the nature of the corporation as a family venture started by three couples, Mrs Ferguson can’t be considered to be in the same position as a minority shareholder who came to the company lately.

Held Attempt to push Mrs Ferguson out is oppressive in the circumstances. An order will go forever prohibiting the

company from implementing the capital restructuring.

See Also Directors Are Not Obliged to Pay Dividends…(Except When They Are?) (p 38), Naneff v Con-Crete Holdings Ltd

(p 109), Reasonable Expectations and oppression (p 69)

First Edmonton Place Ltd v 315888 Alberta Ltd 1988 AB/QB

Facts A numbered company controlled by three lawyers signed a 10-year lease with FEP, a landlord. As inducements to

sign the lease, the landlord paid the numbered company $140K in cash and gave it an 18-month rent-free period.

The evil lawyers immediately caused the corporation distribute the cash to them. They occupied the premises during

the rent-free period plus 3 more months during which the numbered company paid its rent. They then vacated the

premises and their numbered company, out of which they had transferred all the assets, stopped paying the rent.


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Issue Is the landlord a “proper person” within meaning of ABCA equivalent to CBCA s 238 for the purposes of OR?

Analysis A creditor will be a “proper person” under the OR if the directors or corporation perpetrate fraud on the creditor OR if a breach of the creditors’ reasonable expectations occurs.

In considering whether reasonable expectations were breached, the extent to which acts complained of were

unforeseeable/creditor could not have protected himself, and detriment to creditors’ interests, are relevant.

There was no evidence that the landlord expected the numbered company to retain the incentive cash in its

hands for any set period of time or any time at all.

Held The landlord can’t claim the oppression remedy since he wasn’t a creditor at the time of the acts complained of.

However, since the lawyers took the incentive cash out of their corporation and didn’t use it for corporate purposes, the landlord has standing to pursue a derivative action against them.

Ratio In order to have a protected interest under the OR, a creditor must have been a creditor at the time of the conduct

complained of. A lessor in respect of rent yet not owing is not such a creditor.

See Also Downtown Eatery (1993) Ltd v Ontario (p 99), West v Edson Packaging Machinery Ltd (p 131), Standing and

Interests Protected under the oppression provisions (p 67)

Ford Motor Co of Canada v OMERS 2006 ON/CA

Facts Ford US (FUS) owned 94% of Ford Canada (FCan). FUS put in place a system of transfer pricing agreements (TFAs)

with FCan that was skewed to assign losses to FCan. Thus FCan’s minority shareholders were deprived of a “fair share” of FCan’s profits, but the majority shareholder, FUS, was not injured since the losses on its FCan shares were offset by profits in its sales to FCan under the TFAs.

FCan’s financial reports said that prices would be negotiated with FUS, but there was no such negotiation. FCan

directors brought little judgment to bear on the TFAs and just accepted the system put in place by FUS. In addition,

the TFAs between the GM/Chrysler US and Canadian divisions were not unfairly skewed, nor were FUS’ deals with unrelated third parties (Kia & Mazda).

OMERs, a minority shareholder, sued FCan under CBCA s 241 demanding a personal remedy for oppression caused

by the TFAs.

Issue 1. Did the TFAs unfairly prejudice or unfairly disregard FCan’s minority shareholders?

2. Can a court grant a personal remedy for past oppression (i.e. that would already be priced into the shares)?

Analysis TFAs and Oppression:

Fairness of TFAs is determined by what a truly independent entity in the position of Ford Canada would

insist upon before carrying on business.

Reasonable expectations…

o …are a question of fact and can be proved by direct evidence or drawing reasonable inferences from circumstantial evidence.

o Where minority shares in a public company are widely held, it may be difficult to adduce direct

evidence of reasonable expectations. Hence they can be inferred from the company’s public statements and the shared expectations about how a public company should be run.

Business judgment rule in which court would give deference to directors’ business decision does not apply here because, as in UPM-Kymmene Corp v UPM Kymmene Miramichi Inc (p 129), the evidence is that

they brought very little judgment to bear on the pricing system.

Personal Remedy for Past Oppression:

To award a shareholder personal compensation for past oppression (i.e. that occurred before he became a


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shareholder) would not be compensation but a windfall.

However, CBCA s 241(3)(h) does contemplate remedying historical wrong to a corporation. For instance, in

UPM-Kymmene, an order was obtained under the OR setting aside the company’s contract with Berg.

Held OMERS wins because TFAs were oppressive but doesn’t get compensation for historical oppression.

See Also Pasnak v Chura (p 113), Reasonable expectations and Public Companies (p 69), The Business Judgment Rule (p 44)

Ford v Québec 1988 CA/SC

Facts The Attorney General of Québec brought a suit against Ford for violation of a language law.

Issue Is the fundamental freedom of expression in s 2(b) of the Charter guaranteed to corporations as well as to natural

persons?

Analysis Textbook p 244:

There is no sound basis on which commercial expression can be excluded from the protection of s 2(b) of the Charter. . . . Over and above its intrinsic value as expression, commercial expression, which . . . protects listeners as well as speakers plays an important role in enabling individuals to make informed economic choices. . .

See Also Canadian Egg Marketing Agency v Richardson (p 94), R v Big M Drug Mart (p 117), Charter Rights (p 31)

Gregorio v Intrans-Corp 1984 ON/CA

Facts Gregorio bought a Peterbilt truck from Intrans-Corp. Intrans bought it from Paccar Canada Ltd. Paccar Canada is the

Canadian subsidiary of Paccar Inc, the US-based manufacturer of the truck. Gregorio sued Intrans-Corp for breach of

warranty and also claimed against Paccar Canada for negligent manufacture of the truck.

Issue Can the “corporate veil” be pierced to make Paccar Canada responsible for the negligent manufacture of the truck given that the truck was really manufactured by its parent company, Paccar Inc?

Analysis Laskin JA (textbook p 195). The emphasis in the last sentence comes from the textbook.

Generally, a subsidiary, even a wholly owned subsidiary, will not be found to be the alter ego of its parent unless the subsidiary is under the complete control of the parent and is nothing more than a conduit used by the parent to avoid liability. The alter ego principle is applied to prevent conduct akin to fraud that would otherwise unjustly deprive claimants of their rights.

Held Gregorio can’t sue Paccar Canada Ltd for negligent manufacture of the truck (no veil pierce).

Note See 642947 Ontario Ltd v Fleischer (p 85) for another case decided by Laskin JA.

See Also De Salaberry Realties Ltd v Minister of National Revenue (p 98), Alberta Gas Ethylene Co v Minister of National Revenue (p 88), Enterprise Liability (p 22)

Harris v Universal Explorations Ltd 1982 AB/CA

Facts A meeting of the shareholders of a corporation (Petrol) was held to approve amalgamation with another company,

Universal. A management information circular in support of the amalgamation indicated that a consultant, Colt, had

done an “evaluation” of one of Universal’s key assets. The circular was structured to imply that Colt was an independent expert that had determined the asset’s market value. However, Colt had merely done an operational

analysis of the asset. Shareholders who dissented from the decision to amalgamate sued to have the amalgamation


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set aside due to inadequate disclosure.

Issue Did the circular provide “sufficient detail to permit shareholders to form a reasoned judgment” as required by the

applicable regulations under the Alberta Companies Act?

Analysis The test is not whether a shareholder was in fact misled by the circular, but whether there is a substantial likelihood

that someone was misled.

Held Dissident shareholders win despite not being able to prove that anyone was misled: amalgamation denied.

Ratio 1. The test for “sufficient detail” is whether no material facts were omitted. A material fact is one for which there

is a substantial likelihood that a shareholder would consider it important in deciding how to vote.

2. If a circular implies that a report is an independent and expert valuation of a property, then the fact that it is not

is a material fact the omission of which is a failure to provide sufficient detail.

See Also CBCA ss 135(6) & 150, which use the same language of “sufficient detail” and “reasoned judgment”. Management

Proxy Circular

Haughton Graphic Ltd v Zivot 1986 ON/HC

Facts Zivot started a limited partnership called Printcast. Zivot was a limited partner. The general partner of Printcast was

a corporation of which Zivot was director and officer. Zivot introduced himself as the “president” of Printcast and

had this printed on his business cards and his magazine’s masthead. Printcast went bankrupt and Haughton sued Zivot for payment of a debt owed to Haughton by Printcast.

Under the Alberta Partnership Act, which was found to be the applicable law, a limited partner is liable as a general

partner if he takes part in the “control” of the business. [The equivalent provision is s 64 of the BC Partnership Act,

which uses the term “management” instead of “control”]

Issue Is Zivot a general partner of Printcast and thus personally liable to Haughton?

Analysis Eberle J in Zivot seemed to think that he would have held for the plaintiff even if Zivot had not introduced himself as

“president” of Printcast. However, RD says this is obiter and that the ratios of Nordile and Zivot are not different.

Held Zivot is personally liable as a general partner.

Ratio A limited partner who is a director or officer of a corporation which is the general partner of a limited partnership is

liable as a general partner if he takes part in the management of the limited partnership in his personal capacity.

This seems to require holding one’s self out to be a manager of the limited partnership itself in light of Nordile.

See Also Limited Partnerships (p 12), Nordile Holdings Ltd v Breckenridge (p 111), Partnership Act s 64

Icahn Partners LP v Lion’s Gate Entertainment 2011 BC/CA

Facts LG had a lot of debt. Icahn held a lot of LG notes and vociferously complained in the media about LG’s “crushing debt load” and the danger it posed. LG’s directors were also concerned about the debt load and were looking for

ways to reduce it. Icahn set about trying to acquire LG. At one point, LG entered into a standstill agreement with

Icahn while they negotiated: during the standstill period, LG could not issue more stock and Icahn could not acquire

more. At the expiry of the standstill agreement, LG’s directors executed a debt swap with a large creditor: they exchanged $100M of their outstanding notes for convertible notes. They facilitated this creditor selling the notes to

a friendly party who then converted them into equity. Evidence showed the directors approved of the transaction

both because it would significantly reduce LG’s debt load and because it would dilute Icahn and make acquisition

more difficult. Although he had to admit the debt reduction helped the corporation, Icahn sued claiming the note

exchange was oppressive and asked to have the note exchange unwound as the remedy.


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Analysis Icahn could not point to any reasonable expectation that he would not be diluted.

In fact, the standstill agreement is evidence that his actual expectation is that the company would employ its

stock issuance power as soon as it could.

The fact that LG was heavily indebted and needed to deleverage also supports the bona fides of the transaction

and augurs against a shareholder’s reasonable expectation of not being diluted.

Held LG wins. Since Icahn cannot point to a reasonable expectation of not being diluted, he has no oppression remedy.

Note RD is very amused by the term “bitter bidder”. Also, neither court bothered itself with analyzing securities law.

See Also Teck Corp v Millar (p 127)

International Power Co v McMaster University 1946 QC/CA

Facts International held most of the common shares in Porto Rico Power (PRP). McMaster held a large block of preferred

stock with par value of $100. The prescribed dividend of 7% was always paid on the preferred and there were no

arrears. In recent years, a larger dividend (8-49½ percent) was paid on the common. PRP was wound up and there

remained a surplus of assets after paying liabilities.

The bylaws of PRP gave the preferred shareholders priority in obtaining reimbursement of their invested capital, and

a right to share in the division of assets, but no priority in dividends beyond the 7%.

International contended that after repayment of the preferred at par value, the remainder of the surplus

belonged to holders of the common stock.

McMaster contended that any dividends in excess of 7% paid to the common were just an advance and that

the preferred is entitled to be put on an equal footing, after which the preferred and common should share

equally in the surplus.

Issue 1. How are common and preferred shares to be treated during distribution of assets on liquidation?

2. How are common and preferred shares to be treated with respect to dividends?

Analysis The priorities attached to the preferred shares must be found in the Articles and bylaws of the company. The

priorities given to preferred shareholders are in addition to existing rights, not a declaration of all their rights. In the

case of the PRP bylaws, these priorities include a right to be repaid their invested capital at par, plus any accrued

and unpaid dividends. The rights of preferred shareholders to share in the profits are not affected by the bylaws.

Held In winding up PRP, preferred shareholders are first entitled to repayment up to par value of their shares. After this,

preferred and common share equally in remainder of surplus in proportion to their holdings.

See Also CBCA s 24(3), Distribution of Assets on Dissolution of the Corporation (p 38)

Irving Trust Co v Deutch 1935 US/CA

Facts Acoustic agreed to buy a controlling block of shares in a company which owned valuable patent rights related to

Acoustic’s business. Acoustic deemed it essential to obtain the patent rights. At the last moment, Deutch, Acoustic’s president, announced that he was unable to obtain the financing for Acoustic to buy the stock. He then bought the

stock himself as part of a group including two other Acoustic directors.

Analysis If directors are allowed to justify taking an opportunity on the basis that their principal lacks the necessary funds,

they will be tempted to refrain from exerting their best efforts on behalf of the corporation since, if it does not

obtain the money, an opportunity to profit will be available to them personal.

Held Defendants breached their fiduciary duty and liable to account to Acoustic for their profits.


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See Also Abbey Glen Property Corp v Stumborg (p 86), Robinson v Brier (p 121), Impossibility and Corporate

Opportunities (p 48)

Jacobsen v United Canso Oil & Gas Ltd 1980 AB/QB

Facts United Canso was continued under the CBCA. It had a single class of share and the Articles specified that the

shareholders get one vote per common share they beneficially own up to a maximum of 1,000 votes.

Issue May a CBCA corporation with a single class of shares cap the number of shares a shareholder may vote?

Held Restriction struck down as contravening the CBCA. Thus, shareholders may vote all their shares.

Ratio Textbook p 560:

[R]eading s 24 as a whole, each shareholder has the right to vote at any meeting of the shareholders on the basis of the number of shares held where the corporation has only one class of shares and . . . this presumption can only be upset where there are more [than] one class of shares established in which case the provisions of subs. (4) come into play.

See Also CBCA ss 24(3–4), 6(c), 140, Re Bowater Canadian Ltd v R.L. Crain Inc (p 117), Voting Rights Attached to Shares

(p 56).

Johnston v Green 1956 DE/SC

Facts Odlum was well known as a prominent financier. He was also director of many corporations, including Airfleets,

which was a cash-rich company that was organized to finance aircraft sales. Hutton offered to sell him some patents

for self-locking nuts plus shares Nutt-Shel, the exclusive licensee of the patents. Odlum offered the shares to

Airfleets’ board, which bought them, but purchased the patents himself. An Airfleets shareholder sued him.

Issue Was Odlum in breach of his fiduciary duty to Airfleets by not offering to sell it the patents?

Analysis Airfleets’ business had nothing to do with Nutt-Shel or the patents. Moreover, many of Odlum’s companies had cash to invest, not just Airfleet. If he had a fiduciary duty to offer the opportunity to Airfleets, did he not have a duty to

offer it to all the others? How do you pick which one? If you can’t pick, how can he have been under such a duty?

Held Odlum wins: the opportunity to purchase the patents belonged in equity to him, not any of his companies.

See Also Director of Multiple Corporations (p 49) in Corporate Opportunities (p 48)

Kelner v Baxter 1866 Eng/CP

Facts Kelner made a written contract to sell wine to the individual Ds “on behalf of the proposed Gravesend Royal

Alexandra Hotel Company, Limited”. In additional to the clear reference to the proposed company, the contract was signed by all the individual Ds “on behalf of the Gravesend Royal Alexandra Hotel Company, Limited”. All parties knew the company was not yet in existence at time of contracting. Kelner performed his obligations by delivering

the wine to the Ds, who consumed it. The company was subsequently incorporated, and quickly failed before

paying. Kelner sued the individual Ds for breach.

Issue Are the individual defendants liable on the pre-incorporation contract?

Analysis Erle CJ applies law of agency and holds that agents purporting to contract on behalf of a non-existent principal

are themselves bound by their contract.

o This approach appears to be repudiated by Lord Goddard CJ in Newborne v Sensolid (Great Britain)


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Ltd (p 110), who distinguished Newborne on the facts.

o Same story in Black et al v Smallwood & Cooper (p 92), which again tries to constrain Kelner.

Willes J considers the intention of the parties, but says the words “on behalf of” are irrelevant. He says the parties clearly contemplated that the people signing it would be personally liable…

Held Individual defendants are personally liable on the contract.

Ratio A company cannot ratify a contract, or purported contract, entered into on its behalf if the company was not in

existence at the time the contract was made (textbook’s analysis p 267).

See Also Common Law of Pre-Incorporation Contracts (p 24)

Kosmopoulos v Constitution Insurance Co 1987 CA/SC

Facts Kosmopoulos (K) created a corporation to run his [previously sole proprietorship] leather business. The lease was in

K’s own name, but the corporation owned the other business assets. K got fire insurance for the business; the policy described the insured as “Andreas Kosmopoulos O/A Spring Leather Goods”. A fire broke out and the insurance company, which had accepted all premium payments, refused to indemnify K for damage to assets owned by the

corporation. K argued that the “corporate veil” should be lifted, so that the company’s property was, in law, that of K.

Issue Can the sole shareholder in a “one-man company” have an insurable interest in the company’s assets, contrary to the Macaura principle?

Analysis The corporate veil should not be lifted…if it were then “a very arbitrary and…indefensible distinction might emerge between companies with one shareholder and companies with more than one shareholder”.

“Those who have chosen the benefits of incorporation must bear the corresponding burdens”. However…K “as sole shareholder was so placed with respect to the assets of the business as to have a benefit

from their existence and a prejudice from their destruction. He had a moral certainty of advantage or benefit

from those assets but for the fire…”

Held No veil lift, but K had an insurable interest in the assets capable of supporting insurance and is entitled to recover.

Ratio A shareholder can have an insurable interest in the property of the corporation (Macaura partly overruled).

Note RD says the insurance in K’s own name was due to his insurance broker’s mistake, but this isn’t apparent in the facts, especially because the leasehold was held by K personally while the corporation owned the business assets.

See Also Macaura v Northern Assurance Co Ltd and others (p 107), The Corporation as a “Separate Legal Person” (p 17),

Piercing the “Veil” (p 20), Insurable Interests Cases

Lansing Building Supply (Ontario) Ltd v Ierullo 1989 ON/DC

Facts A group of people became “co-owners” of the Courtyard Joint Venture, a real estate development project. Co-

ownership agreement stipulated that they were not partners. Among other things, it:

stipulated that co-owners’ share in the profits was to be kept separate for income tax purposes;

severely restricted their ability to alienate the property (ex: required unanimous written approval of co-

owners, and after that still subject to a right of first refusal); and

had a “shotgun buy-sell clause”;

A trade creditor sued some of the co-owners for payment of a debt incurred by another co-owner.

Issue Are the co-owners partners? (i.e. Are they carrying on a business in common?)


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Analysis Profit separation was flagged in Kamex as inconsistent with partnership but it is not definitive. Kamex distinguished

because owners retained right to deal in their share, whereas they didn’t here. Moreover, in Kamex, owners merely

bought a property with the intention of reselling it (“invested”). Here actual development implies a business. BUT NOTE RD does not think that “passive investment is not carrying on business” survives SCC judgment in Backman v Canada.

Held Co-owners are partners.

Ratio Combination of treating corpus of property as joint property and real estate development carrying on a business.

See Also A.E. LePage Ltd v Kamex Developments Ltd (p 87), Is there a partnership? (p 7), Assignment 1 (paragraph)

Lee v Lee’s Air Farming Ltd 1961 NZ/PC

Facts Lee incorporated Lee’s Air Farming Ltd to do crop dusting. He was the sole director, shareholder, and officer. He was also employed by the company as chief pilot at a salary he arranged. When Lee was killed while flying the company

plane on a crop dusting mission, his wife claimed compensation under the Worker’s Compensation Act.

Issue Was Lee a “worker” under the Worker’s Compensation Act? This turns on whether he was capable of contracting as

an employee with the company that he also controls as sole director, shareholder, and officer.

Analysis The contract of employment was valid. Indeed, had Lee chosen to retire as director of the corporation, the contract

would have persisted and he would have remained bound by it to stay employed by the company. Moreover, there

is no problem in law with a person acting in one capacity giving orders to himself in another capacity. Thus, there

can’t be a problem with making a contract with himself in another capacity.

Held Lee had a valid contract of employment with the corporation and thus was a worker.

Ratio A corporation is distinct from its controlling shareholders and directors. Thus, persons acting as agents of the

corporation can contract on the corporation’s behalf with themselves acting in their personal capacity.

See Also Salomon v Salomon & Co, Ltd (p 123), Macaura v Northern Assurance Co Ltd and others (p 107)

Note Contrast with the partnership-related decision in Re Thorne and NB Worker’s Compensation Board

Macaura v Northern Assurance Co Ltd and others 1925 Eng/HL

Facts Macaura cut down a bunch of wood on his estate. He then purchased insurance against fire on “timber and wood goods” on this property. Finally, he transferred the wood to a corporation called Irish Canadian Saw Mills Ltd in

return for 42,000 shares at 1£. In addition to being the company’s principal shareholder, Macaura became its principal creditor, as Irish Canadian Saw Mills Ltd owed him 19,000£. Subsequently, a fire destroyed most of the timber, now owned by Irish Canadian Saw Mills, that was lying on Macaura’s land. Macaura sought indemnity

under the insurance policies he had purchased in his personal capacity.

Issue Does Macaura have any insurable interest in the timber?

Analysis No shareholder has any right to any item of property owned by the company, as he has no legal or equitable

interest in it. His insurable interest would be the amount by which his residual interest in the assets of the

company when it is ultimately wound up is diminished by the fire, a quantity which is impossible to measure.

A creditor can’t insure his debtor’s property either.

Held No insurable interest.

Ratio A corporation owns its own property, and shareholders may not insure it.

Note Insurable interest component of ratio overruled in Kosmopoulos v Constitution Insurance Co (p 106)


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See Also Salomon v Salomon & Co, Ltd (p 123), Lee v Lee’s Air Farming Ltd (p 107), The Corporation as a “Separate Legal Person” (p 17)

Manitoba (Securities Commission) v Crocus Investment Fund 2007 MB/CA

Facts Crocus was governed by the Manitoba Corporations Act, which had no permissive advance of fees provision like

CBCA s 124(2). The bylaws gave directors a right of indemnification if they complied with terms identical to CBCA

s 124(3). Crocus went into receivership and the former directors came under prosecution by the Manitoba Securities

Commission. The receiver obtained a court order to advance legal fees to the former directors subject to an

undertaking that they repay if they were found to have breached conditions equivalent to CBCA s 124(3) [this

arrangement was a mandatory equivalent to CBCA s 124(2)]. The order also required the receiver to pay unfavourable judgments, again subject to 124(3)-equivalent conditions. The MBSC appealed the order.

Issue Are the former directors disentitled to advances due to “serious allegations of bad faith”?

Analysis Business reality (directors of widely-held corporations expect to be indemnified) and Iacobucci policy rationale from

Blair (foster entrepreneurship, avoid hindsight application of perfection) were discussed…

Held Judge’s order to advance fees &c. upheld.

Ratio 1. Allegations in pleadings, or by the MBSC, or in extra-judicial proceedings by the Auditor General are not evidence and . . . cannot displace the presumption of good faith that is well-recognized in law.

2. Judges have wide discretion to direct payment of ongoing defence costs (or delay such payment until end of

proceedings).

See Also CBCA ss 124(1), (2) & (3), Blair v Consolidated Enfield Corp (p 92), Bennett v Bennett Environmental Inc

(p 91), Director Indemnification and Insurance (p 50)

Note Extra case from WebVista

Maple Leaf Foods v Schneider Corp 1998 ON/CA

Facts The Schneider Family owned 75% of voting common in SC and thus controlled it. They also owned 17% of the PFD

non-voting. Remainder of stock was widely held, traded on TSX. The Family initially had no intention to sell their

stake until MLF made an unsolicited bid. At this point, Family advised Board it would consider selling and an

independent Special Committee made up of the Board’s outside directors was set up to pursue other bidders. Dodds, the CEO (thus officer and inside director) negotiated on behalf of the Committee because Committee had no

M&A experience and the officers knew the company better than them.

The Board decided that it was in the interests of the company to sell. The Family advised the Board that it had three criteria for an acceptable offer: (1) financial criteria, including tax treatment; (2) continuity of Schneider consistent

with Family’s desires; and (3) effect of transaction on customers and suppliers. The family refused to sell to MLF at any time because none of its bids met any of the criteria!

The Family decided to sell to Smithfield, a US company. The Board was reluctant to recommend the merger with

Smithfield to the shareholders as “fair” because the offered share price was below their investment banker’s valuation. As an alternative to director recommendation, the Family would enter into a stock lock-up agreement

with Smithfield. To do this, they had to ask the Board to remove a poison pill and waive a standstill provision in the

company’s confidentiality agreement with Smithfield.

The sale to Smithfield still looked like the best option because if the company failed to sell itself, its share price

would fall precipitously; the Family would not accept the MLF offer, which was worse anyway all-in-all; there were


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few bidders for the company; and Smithfield threatened to withdraw its offer if Schneider shopped around for

purchasers. Thus, on recommendation of the Special Committee, the Board allowed the stock lock-up to proceed.

MLF sued under the OBCA’s oppression provision.

Issue 1. Did the Special Committee fail to act independently by (a) using Dodds to negotiate; and (b) being unduly

deferential to the Family’s wishes?

2. Did Board’s public statements create an expectation that an auction for its controlling block would be held?

Analysis Special Committee Independence:

Dodds had no real financial bias as a negotiator, since the MLF offer would have benefitted him personally

much more than the Smithfield offer. Moreover, it was reasonable of Committee to leverage his expertise.

It was beyond the power of the Committee to insist that the Family give up its veto power.

Investment bankers’ advice is frequently a pale substitute for a canvass of the market such as the Committee undertook.

Evidence shows the Committee acted independently and dealt with the transaction on its merits.

Expectation of Auction: While public statements can create reasonable expectations, in this case, the Board’s public communications carefully noted the Family’s conditional position and thus did not create expectations of an auction.

Held MLF’s oppression claim fails on all grounds.

Ratio If a board of directors acted on the advice of a committee of people having no conflict of interest, and the

committee acted independently and in good faith, and made an informed recommendation as to the best available

transaction to the shareholders, the BJR applies.

Note Weiler JA notes that Revlon Inc v MacAndrews & Forbes Holdings Inc is not the law in Ontario: there is no duty

to auction the company every time there is a change of control.

See Also Teck Corp v Millar (p 127), Naneff v Con-Crete Holdings Ltd (below), Takeovers and Defensive Tactics

Naneff v Con-Crete Holdings Ltd 1993 ON/CA

Facts Nick Naneff started a successful concrete company. He wanted his two sons Alex and Boris to co-own the business

after he was gone, so he transferred 50% of the common to each of them, while retaining control through special

voting preferred stock. Nick led the sons to believe that they would have complete ownership and control after he

died.

When Nick and Boris took issue with Alex’s lifestyle, they caused the company to fire Alex without severance from

his position as officer. They also declared dividends only on shares held by Nick and Boris and excluded Alex from

day-to-day operations and management of the business as a shareholder and as a director.

Issue 1. Was Alex oppressed?

2. If so, what should the remedy be?

Analysis Given the family nature of the close corporation, the fact that Alex was led to believe he would co-own with

Boris, and the fact that this is how they had all carried on the business, gave Alex a reasonable expectation, as a

shareholder, that he would co-own and control with Boris.

Conduct of Nick and Boris breached this expectation in a manner that was unfairly prejudicial to Alex’s interests.

Held Alex was oppressed. The remedy is that Nick and Boris have to purchase all of his shares at fair value without

minority discount. Allowing Alex to acquire the business from Nick and Boris is beyond what he could have expected.

Ratio [Also cited in Ford Motor Co of Canada v OMERS (text p 929) in the context of past oppression]:

A remedy that rectifies cannot be a remedy which gives a shareholder something that . . . he


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never could have reasonably expected.

See Also Ferguson v Imax (p 100), CBCA s 241(2)(c), Reasonable Expectations and oppression (p 69)

Neonex Int’l Ltd v Kolasa 1978 BC/SC

Facts

Old NeonexRetained earnings $23.6M

Share book value $4.10-$4.21Trading range $1.04-$2.40

JPL

Amalgamation agreement: CBCA s 182 Approved by 94%: CBCA s 183(5) Certificate of amalgamation: CBCA s 186

New NeonexRetained earnings $7.9M

~$11.6M spent acquiring remaining53.5% of common at $3/share

Jim Pattison46.5% of common, but effective control

100% ownership

100% of common

Other Shares Widely Held

53.5% ofcommon

Jim Pattison effected a

“going private” transaction on Neonex

by performing a s 181

amalgamation of the old

Neonex with JPL, a

company he controlled.

Under the terms of the

amalgamation

agreement, Old Neonex

shareholders could

convert their common

stock into either $3 cash

or $3 non-voting

preferred. Only Pattison

had the option of

exchanging his Old Neonex common for New Neonex common. Shareholders who voted against the special

resolution approving the amalgamation dissented under CBCA s 190 and New Neonex made them an offer at $2.50 a

share. They rejected the offer and New Neonex applied to court for a valuation under CBCA s 190(15).

Held There should be a trial to determine the fair value of the shares. Just because the offer is above the market value

does not make it the fair value (similar to Smith v Van Gorkom. p 125).

Note This amalgamation would now qualify as a “going-private” transaction under s 3(1) of the regulations SOR/2001-512

and would thus have to comply with applicable securities law such as MI 61-101 under CBCA s 193.

Newborne v Sensolid (Great Britain) Ltd 1953 Eng/CA

Facts P went into the provision trade. He incorporated a company, Leopold Newborne (London) Ltd. P sold goods on

contract to D before the company was registered. The contract was on the company stationery and signed “Yours faithfully, Leopold Newborne (London) Ltd” (i.e. the company name) with P’s signature underneath. D refused to

take delivery of the goods. Realizing that the company was not in existence at the time of the K, P attempted in his personal capacity to sue D.

Issue Was there a valid pre-incorporation contract between P in his personal capacity and D?

Analysis Kelner v Baxter (p 105) does not stand for a general proposition that every time a prospective company, not

yet in existence, purports to contract, everybody who signs for the company makes himself personally liable.

Distinguishing Kelner:

The only person who has any contract here is the company, and Mr Newborne’s signature is merely confirming the company’s signature. The document is signed: “Yours faithfully, Leopold Newborne (London) Ltd” and the signature underneath is that of the person authorised to sign on behalf of the company.


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The company was not in existence when the K was signed and there was never a K.

Held P loses. The contract is not binding as between him and D.

Ratio If a company (which doesn’t exist) purports to be a party to a contract, then someone merely signing on behalf of the company did not intend to be personally bound and is not (narrows Kelner and makes intention paramount).

See Also Common Law of Pre-Incorporation Contracts (p 24), Black et al v Smallwood & Cooper (p 92)

Nielsen Estate v Epton 2006 AB/QB

Facts Nielsen was killed while working at the shop of his employer, Fabtec. Fabtec was a CBCA corporation and Epton was

its director, president, and CEO. Although Epton was not present at the time of the accident, he had issued specific

instructions to the onsite supervisor to install the spreader beam that fell on Nielsen and killed him. Nielsen’s estate sued Epton personally in negligence.

Issue Did Epton, as director, owe the statutory duty of care under s 122(1)(b) to Nielsen, his employee?

Analysis While it will only happen where the director is factually and legally proximate enough to an employee, there will be

times when a director owes a personal duty of care.

Held Epton owed a personal duty of care to Nielsen.

Ratio A director owes an employee a duty of care under s 122(1)(b) when:

1. the director knows or ought to know, personally, of serious and avoidable or reducible danger to which the

corporation’s employees are exposed while doing corporation-related activities;

2. the director has the authority to establish and enforce corporate policies that could reasonably avoid or

reduce such serious danger; and

3. it is within the director’s “reasonable capacity” to envision, establish, and enforce such policies and thus reasonably avoid or reduce the danger.

Note This is not veil-piercing, as RD emphasizes. As in AGDA Systems International Ltd v Valcom Ltd, it involves

establishing an independent cause of action against a director in his personal capacity.

See Also CBCA s 122(1)(b), Peoples Department Stores Inc (Trustee of) v Wise (p 114), Negligence Framework (p 43)

Nordile Holdings Ltd v Breckenridge 1992 BC/CA

Facts Nordile sold land to Arman Rental Properties Limited Partnership and loaned Arman the money to make the

purchase. Arman was managed by a corporation general partner, Arbutus Management Ltd. Ds (Breckenridge and

Rebiffe) were limited partners of Arman and minority shareholders, directors, and officers of Arbutus. An agreed statement of facts stated that when Ds participated in the management of Arman, “they did so solely in their

capacities as directors and officers of the general partner, Arbutus”. Arman defaulted on the debt to Nordile.

Issue Are Ds liable as general partners of Arman under s 64 of the BC Partnership Act because they took part in the

“management” of Arman?

Analysis The agreed fact by itself is enough to exclude liability: acting solely in one capacity negates acting in any other.

Held Ds are not liable as general partners.

Ratio If individuals who are limited partners manage a limited partnership solely in their capacity as officers and directors

of a corporate general partner, they are not themselves liable as general partners.

See Also Limited Partnerships (p 12), Haughton Graphic Ltd v Zivot (p 103), Partnership Act s 64


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North-West Transportation Co v Beatty 1887 CA/PC

Facts Beatty, a director of North-West, owned a steamer which North-West needed. He acquired a majority of the shares

in North-West. A directors’ resolution passed a bylaw approving purchase of the steamer from him. The bylaw was then ratified by a slight majority of the shareholders owing to Beatty’s large block of shares.

Issue Should the sale be set aside as an interested directors’ contract under the rule in Aberdeen Ry Co v Blaikie Brothers (p 86)?

Held The contract cannot be avoided because it was ratified by a majority of the shareholders.

Ratio At common law, if an interested directors’ contract is ratified by a majority of the shareholders, it is valid as long as

the ratification wasn’t procured by “improper means”.

Note The reason Beatty had to transfer shares to Rose and Laird is because in order to put a bylaw to shareholder vote, he

first needed to be sure to have a majority of the directors onside to carry his proposed bylaw. Under the rules at the

time, they needed to own stock to be directors.

See Also Interested Directors’ Contracts (p 45), CBCA s 120

Ooregum Gold Mining Co v Roper 1892 Eng/HL

Facts Ooregum was incorporated in 1880 in the Memorandum and Articles styles. Its shares had a par value of 1£ (=20s).

The company was failing and about to be wound-up; the market price of its shares had fallen to 2s 6d when, at an

“extraordinary general meeting”, it was decided to issue 120,000 preferred shares of 1£ par value. The subscribers

of the new shares paid only 5s/share, but the shares were listed in the books as having 16s paid on them, so that the

subscribers only owed an additional 4s. With the new capital, the company prospered, and Roper, a holder of the

original common stock sued under the ultra vires doctrine to have the books of the company rectified so that the

preferred holders had to pay the remaining 15s.

Held Issuance of discounted shares held to be ultra vires the corporation and holders of the discounted shares required to

pay full balance of 15s.

Note This case isn’t really relevant because par value shares have been abolished under CBCA s 24(1).

See Also CBCA s 24(1): no par value.

Paramount Communications v Time Inc 1989 DE/CH

Facts Time’s directors had agreed to an amalgamation with Warner and a vote of Time’s shareholders was scheduled to

approve it. Paramount then made an unsolicited hostile takeover bid for Time. A merged Time-Warner would be too

large for Paramount to acquire, so Paramount’s bid was contingent upon termination of the Time-Warner merger

agreement.

Time’s directors decided the price offered by Paramount did not overcome the drawbacks of sale to Paramount and

the foregone strategic advantages from merging with Warner. They thus decided that Time was not for sale. The

directors worried that Time’s shareholders would be tempted by Paramount’s premium to vote down the Warner

merger, so they restructured the deal into a leveraged acquisition of 100% of Warner’s shares. Shareholders were

not entitled to vote on such a share purchase. Paramount sued to restrain Time’s purchase of Warner shares.

Issue Is the share purchase in breach of the directors’ fiduciary duty for the illegitimate purpose of entrenching the power

of the existing directors?


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Analysis Corporate law says directors can change their minds even after an amalgamation is approved by shareholders,

so they can clearly change their minds before it is approved.

Since after the Time-Warner transaction, shares of the combined entity would remain widely-held, a change of control can’t be said to have been contemplated and Revlon does not apply.

The fact that the change occurred after Paramount’s takeover bid just means it must pass the Unocal test.

o Reasonable grounds to believe a danger to corporate policy exists: the planned strategic merger with

Warner had its origins in non-defensive bona fide business considerations. The company has a legal

interest in achieving its strategic plan, and Paramount’s bid was reasonably perceived as a threat to it. o Proportionality: the board did only what was necessary to carry a pre-existing strategic merger plan

forward in an altered form and this was reasonable in relation to the threat posed.

Held Time wins: its directors are not in breach of their fiduciary duty.

Ratio Corporate law puts the fate of the company in the hands of the directors, not a majority of the shareholders.

Note RD says the above is anathema to Canadian securities commissions.

See Also Teck Corp v Millar, Unocal Corp v Mesa Petroleum Co, Revlon Inc v MacAndrews & Forbes Holdings Inc

Paramount Communications v QVC 1994 DE/SC

Facts Some years after Paramount Communications v Time Inc (above), Paramount entered into a merger agreement

with Viacom. QVC then made an unsolicited takeover bid for Paramount. Unlike in Time, Paramount agreed to let

Viacom acquire control of its shares through a tender offer to be followed up with a second-step merger. One of the

defensive arrangements included in the agreement was a no-shop provision.

Analysis The case is distinguished from Time because although stockholdings in Paramount were widely dispersed before

the transaction, after the transaction, there would be a controlling shareholder with the voting power to

materially alter the nature of the corporation and the public stockholders’ interests. As a result, the stockholders are entitled to receive a control premium.

Held Directors were under a Revlon duty to maximize stockholder value through an auction.

Ratio A transaction in which a party acquires a controlling block of shares triggers Revlon duties.

See Also Revlon Inc v MacAndrews & Forbes Holdings Inc (p 120)

Pasnak v Chura 2003 BC/SC

Facts Pasnak and Chura did business together through four companies. Chura ran one of their companies, Fleetwood, into

the ground so that the shares were virtually worthless. Pasnak’s Fleetwood shares were owned by Pasnak’s wholly-

owned corporation, Double J. Double J sued Chura under the BC Company Act’s oppression remedy alleging that

Chura operated Fleetwood in a manner oppressive to Double J.

Issue In addition to Fleetwood’s claim against Chura, Does double J have an claim under the oppression remedy?

Held Double J cannot show any loss other than its share value in Fleetwood, equal to the loss of the other shareholder

(Chura). The claim is thus properly Fleetwood’s to bring, through a DA, not Double J’s through the OR.

Ratio While the OR and DA are not mutually exclusive causes of action, a shareholder can only bring an oppression claim

in respect of the same breach for which the corporation could also claim if he was affected in a manner different

from, or in addition to, the indirect effect on the value of all shareholders’ shares generally.

See Also Ford Motor Co of Canada v OMERS (p 101), Comparing Oppression and Derivative Action (p 72)


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Peoples Department Stores Inc (Trustee of) v Wise 2004 CA/SC

Three Theories of Corporations (p 16)

Ratio See textbook p 57:

Insofar as the statutory fiduciary duty is concerned…the phrase “the best interests of the corporation” should not be read simply as the “best interests of the shareholders.” From an economic perspective, the “best interests of the corporation” means maximization of the value of the corporation: … [I]n determining whether they are acting with a view to the best interests of the corporation, it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers, governments, and the environment.

Yes, apparently in the Supreme Court’s crazy world, even “the environment” has interests. Moreover, as RD emphasizes, the directors are not obliged to consider anyone. The shareholders have no legal right to have their

interests “trump” other ones.

See Also CBCA s 122(1)(a), Public Institution theory of corporation (p 16), Mediating Hierarchy theory. Which is it?

Duty of Care, p 43, and Duty of Loyalty (The Statutory Fiduciary Duty), p 45

Issue 1. What is the content of the statutory fiduciary duty of directors under CBCA s 122(1)(a)?

2. What is the content of the directors’ duty of care under CBCA s 122(1)(b)?

Analysis Statutory Fiduciary Duty:

It would be better to call it a “duty of loyalty”. In determining whether directors and officers are acting in the best interests of the corporation, it “may be”

legitimate to consider all the groups mentioned in the quote above.

At all times directors and officers owe their fiduciary duty to the corporation.

Directors must try to act in the corporation’s interest by ‘creating a “better” corporation’ and not to favour the

interests of any one group of stakeholders (p 524 textbook).

Any honest and good faith attempt to redress a corporation’s financial problems will, if successful, retain value for shareholders and improve the position of creditors. If unsuccessful, it is not a breach of the statutory

fiduciary duty (p 524 textbook).

Duty of Care

Identity of beneficiary of the duty of care is open-ended, and it appears obvious that it must include creditors.

The duty of care is an objective standard taking into account the factual circumstances surrounding the actions

of the directors.

Many decisions have to be made with high stakes under time pressure without detailed information, and some

thus fail. To avoid hindsight bias, the Canadian courts apply the “business judgment rule”. Directors and officers will not be held in breach of the duty of care under s 122(1)(b) if they act prudently and

on a reasonably informed basis. They must make reasonable business decisions in light of all the circumstances

about which they knew or ought to have known.

Ratio 1. Directors’ statutory fiduciary duty is to serve the corporation selflessly, loyally, and honestly; to strive to create a “better” corporation; and not to favour any one stakeholder group over another.

2. The statutory duty of care is an objective standard that accounts for the actual circumstances and that is open-

ended with respect to beneficiary—thus the beneficiaries of the duty include creditors.

See Also CBCA s 122(1)(a) & (b), Nielsen Estate v Epton (p 111), The Business Judgment Rule (p 44)

Causation (p 44)


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Analysis The SCC held that the trial judge’s conclusion that the procurement policy led inexorably to the bankruptcy of Peoples was factually incorrect. Other factors, such as the precarious finances of both corporations prior to the

acquisition of Peoples by Wise Brothers, the debt used to finance the acquisition, and the competitive retail

marketplace were held to be more proximate causes. Textbook asks at p 711 whether this means that breach of the

duty of care must be the only cause of loss to the plaintiff.

Peso Silver Mines Ltd v Cropper 1966 CA/SC

Facts Cropper was a director of Peso. A prospector offered a large block of speculative mining claims to Peso, but the

board rejected the offer because (a) it didn’t have the cash; and (b) it got 2–3 such offers per week. The trial judge

found as a fact that the rejection was an “honest and considered decision” of the whole board done solely in the

interests of Peso. The prospector then offered the claims to Cropper, who bought a share in them personally.

Issue Is Cropper in breach of his fiduciary duty to Peso such that he must turn over his interest in the claims to Peso?

Analysis Cartwright J at textbook p 769:

On the facts . . . I find it impossible to say that the respondent obtained the interests he holds . . . by reason of the fact that he was a director of the appellant in the course of that office.

Distinguishing Regal (Hastings) allows Cartwright J to avoid applying the strict rule in that case. Cartwright J also

approves of Bull JA’s remarks that this case matches Lord Greene MR’s hypothetical in Regal (Hastings)...i.e. where a

board bona fide considers and turns down an opportunity and a director subsequently invests in it himself.

Held Cropper wins: he is not in breach of his fiduciary duty.

Ratio If the board of directors bona fide rejects a corporate opportunity, then it no longer belongs to the corporation in

equity and a director may pursue it without breaching his fiduciary duty.

Note RD says this case is “unfortunate for Canada” and his view is it is the speculative nature of the claims that distinguishes the case from Canaero.

See Also Corporate Opportunities (p 48), Canadian Aero Service Ltd v O’Malley (p 94)

Piller Sausages v Cobb Int’l Corp 2003 ON/SC

Facts Cobb was the sole officer and director of CIC, a CBCA corporation. Piller began demanding that CIC return the money

Piller paid to CIC for a machine that CIC failed to deliver. After these demands, Cobb caused all the assets to be

drained out of CIC by a series of dividend and bonus payments. Thus when Piller successfully sued CIC for return of

the money, CIC had no assets with which to satisfy the judgment debt.

Issue Was CIC’s conduct oppressive to Piller?

Analysis Because Cobb started draining CIC after Piller started asking for its money back, the conduct was unfairly

prejudicial, unfairly disregarding, and oppressive to Piller.

Piller should not have to enter into every contract of purchase assuming the counterparty will mistreat it. Thus

Piller could not reasonably have forseen/protected itself from Cobb’s oppression.

Held Cobb and the companies he controlled oppressed Piller. The appropriate remedy is to make Cobb and the

companies he controlled jointly and severally liable for Piller’s original judgment debt.

See Also First Edmonton Place Ltd v 315888 Alberta Ltd, BCE Inc v 1976 Debentureholders, Standing of Creditors

under the oppression provisions (p 68)


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Pooley v Driver 1876 Eng/CH

Facts All the capital for a partnership was provided by a group of passive “lenders”. The “loan agreement” had some peculiarities:

The loan was perpetual—principal to be paid off on dissolution of the partnership.

The loan agreement allowed the “lenders” to enforce the partnership agreement. The “lenders” were to take a share of the profits of the business. In the event of a lender’s bankruptcy, the loan agreement came to an end.

A holder of a bill of exchange drawn on the partnership sued the “lenders” to settle the bill of exchange debt.

Issue Are the “lenders” partners?

Analysis The lenders don’t appear to be managing the business, but there can be silent partners, and they are just as liable as

managing partners. The lenders appear to have all the rights of an ordinary “dormant” partner. The substance of the agreement looks suspiciously like an equity stake. That lenders didn’t intend to incur partner liability is irrelevant.

Held The “lenders” are partners and thus liable for the bill of exchange debt.

Ratio Inquiry into existence of partnership is objective. Management status and intention to incur liability is irrelevant.

See Also Cox & Wheatcroft v Hickman, BC Partnership Act s 4(c)(i) & (iv), which don’t apply because the “debt” is never liquidated and the “loan” isn’t really a loan.

Primex Investments Ltd v Northwest Sports Enterprises Ltd 1995 BC/SC

Facts Primex was a minority shareholder in NW, a company under the BC Company Act. NW owned the Canucks NHL

franchise and was building a new arena for it. Griffiths was majority shareholder and a director of NW. He got

permission from the NW board to pursue an NBA franchise on behalf of a separate partnership he belonged to by

misleading the board as to a key fact: G claimed the franchise would rent space from the new arena NW was

building, whereas in reality G planned to snatch the arena for the partnership.

G’s partnership obtained the arena in the following way: it made a takeover bid for NW; it then made transfer of the

arena by NW to the partnership for nominal consideration ($100) a condition of increasing the bid. The arena

transfer was put to the shareholders and it was approved by a majority of the minority (see OSC Rule 61-501).

Issue Does Primex have leave to pursue the derivative action in Northwest’s name:

1. against Griffiths for appropriating a corporate opportunity (the NBA franchise); and

2. against the directors for selling the arena other than in the best interests of Northwest?

Analysis Good Faith: The good faith requirement [CBCA equivalent is s 239(2)(b)] can be met even if complainant personally

dislikes the target of the desired lawsuit, and even if complainant has a financial interest in the lawsuit, as long as

this interest is aligned with that of the corporation.

Best Interests of the Corporation:

Corporate opportunity claim has a reasonable prospect of success. G relies on Peso Silver Mines Ltd v Cropper, but the facts are different because here evidence suggests G was pursuing the NBA

franchise before NW stopped pursuing it/gave permission, and of course, G also misled the board.

Arena sale claim has a reasonable prospect of success on evidence. Moreover, compliance with securities

law (OSC Rule 61-501) doesn’t necessarily mean directors complied w all their duties as shareholders may

have only been considering their own interests and not those of NW [see also CBCA s 242(1)].

Held Leave to appeal granted. Primex is acting in good faith and has a reasonable prospect of success.


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Ratio The test for whether a DA “appears to be in the interests” of the corporation [CBCA s 239(2)(c) is the equivalent

provision] is whether the action discloses a reasonable prospect of success and whether the potential relief to the

corporation is sufficient to justify the inconvenience to the company of being involved in the action.

See Also Re Northwest Forest Products Ltd (p 118), Requirement of Leave/Test for Leave (p 64)

R v Big M Drug Mart 1985 CA/SC

Ratio A corporation has standing to challenge the constitutionality of a penal law under which it is brought before a court,

even if corporation cannot claim protection of the Charter right that the law contravenes.

Note This so-called Big M Drug Mart Exception is expanded to include civil proceedings in Canadian Egg Marketing Agency v Richardson (p 94)

Re Barsh and Feldman 1986 ON/HC

Facts Feldbar Construction company was incorporated by Feldman and Benjamin Barsh under the OBCA. There were three

shares, with Feldman owning one, Benjamin another, and Benjamin’s son Harvey the third. Benjamin died leaving his share to Harvey. The bylaws of the company required a quorum of three shareholders at meetings of

shareholders and directors and provided for winding up the company if unanimous consent could not be achieved.

Desiring to get effective control of the company, Harvey requisitioned a shareholders’ meeting under Ontario equivalent of CBCA s 143, but Feldman didn’t show up (as Harvey could outvote him) so no quorum. Harvey applied to court to have the quorum reduced under Ontario equivalent of CBCA s 144(2).

Issue Can a court vary the quorum of shareholders’ meeting of a closely held company that was “carefully structured so that no shareholder could control it”?

Held Application dismissed: if shareholders can’t agree, then answer is winding up the corporation.

Ratio “The answer to disagreement among shareholders is not to compel a meeting where two of the three equal

shareholders may outvote the third”.

Note RD did not actually mention this case in class. The textbook uses this case as an illustration of the proposition that

“[t]he courts have long been reluctant to interfere with closely held companies and the arrangements made among

shareholders to protect their interests.” (see p 610 textbook).

See Also CBCA ss 143, 144(2). Meetings Ordered by the Court (p 55)

Re Bowater Canadian Ltd v R.L. Crain Inc 1987 ON/CA

Facts Crain, a CBCA company, had defined a class of special common shares in its articles of incorporation. The special

common shares had a step-down provision: they were entitled to 10 votes per share in the hands of the first person

they were issued to, but only 1 vote per share as soon as they changed hands. Bowater bought some special

common stock from its initial owner and sued to be entitled to the 10 votes per share instead of 1.

Issue Can the rights on a class of CBCA shares change when they are held by different people?

Analysis The step-down provision is severable and severing accords best with the intention of the parties.

Held The special common shares retain their right to 10 votes in the hands of any owner because the step-down provision

was severable according to the evidence on the intention of the parties at the time the special common was issued.


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Ratio Rights attach to shares, not shareholders.

Or, as the book puts it: the rights that are constitutive of shares of a given class [and series?] must be the same for

all shares of that class [and series?].

See Also CBCA ss 24(3–4), Rights Attach to Shares, Not Shareholders (p 39), Class (p 34), Series (p 34), Jacobsen v United Canso Oil & Gas Ltd (p 105), Voting Rights Attached to Shares (p 56)

Re Canadian Javelin Ltd 1976 QC/SC

Facts Two parallel boards of directors were purporting to act for the company. A shareholder attempted to requisition a

special general meeting of the shareholders, but the company said it could not call the meeting because its financial

statements were not ready. Moreover, it was clear that the company had no intention of calling a meeting in the

near future and would soon be in default of the statutory requirement to have an annual meeting. The shareholder

petitioned the court to intervene to protect the company from detriment due to the uncertainty of management.

Analysis The court pointed to Re Routley’s as an example of how, if it is unlikely that the business of a shareholder’s meeting will be properly conducted except under court order, the court could order how the meeting be conducted…

Held 1. Annual meeting must be called “as soon as possible” so the shareholders can decide on management. 2. A disinterested person named by the court is to chair the meeting.

Note RD styles this case “protective intervention”, in contrast with the “intervention on the basis of fault” in Re Routley’s.

See Also Re Routley’s Holdings Ltd (p 119), Charlebois v Bienvenu (p 95); Canadian Javelin Ltd was a widely held

corporation: contrast with Re Barsh and Feldman (p 117); CBCA s 144(1): “held and conducted in a manner that the court directs” and, in particular, s 144(1)(c); Meetings Ordered by the Court (p 55)

Re Marshall 1981 ON/HC

Facts The registered owner of a certain number of shares agreed in writing to vote the shares for the slate of directors

desired by the beneficial owner, but at the shareholders’ meeting he voted them for the other slate in contravention of the agreement. The beneficial owner sued to have the votes tabulated as he had directed.

Issue Is the chairman of an annual shareholders’ meeting required to go behind the share register and, in case of dispute, accept written directions from beneficial owners as to the manner in which their vote shall be cast?

Held Application dismissed: the votes are to remain as tabulated by the meeting chairman.

Ratio A chairman at an AGM is entitled to rely on the votes as cast by the registered owner of the shares. Even if the

shares are voted against the wishes of the beneficial owner(s), a court will not vary the result of the vote.

Note We did not cover this case in class. Also note: Iacobucci J reiterates the ratio in Blair v Consolidated Enfield Corp:

“no duty to inquiry into the minds of the beneficial owners of the shares” ¶ 56.

See Also CBCA s 153(6), Validity of Votes Cast by an Intermediary

Re Northwest Forest Products Ltd 1975 BC/SC

Facts NW sold its 51% stake in a subsidiary to Green River for $200K. The divestiture was approved by NW’s shareholders, but there was no evidence about how many shares were actually voted. Green River then turned around and pledge

the subsidiary’s assets to a bank for $290K. The reason NW gave for this unexplained increase in asset value is that


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the subsidiary was insolvent, but certain shareholders were unhappy. They gave notice to NW that they wanted a

DA against NW’s directors for apparently losing $90K of value but their notice didn’t state the specific cause of action. When NW refused to sue its directors, the disgruntled shareholders applied to court for leave.

Held Leave granted for derivative action.

Ratio 1. Approval of shareholders may be taken into account, but it doesn’t have to be. Where there isn’t evidence of much many shares were voted, a court may just ignore this factor.

2. Notice to the company doesn’t have to state precise cause of action—it just has to give enough detail for the

directors to figure it out.

Note The textbook uses this case to illustrate how easy it is to get leave for a derivative action in Canada.

See Also Primex Investments Ltd v Northwest Sports Enterprises Ltd (p 116)

Re Routley’s Holdings Ltd 1960 ON/CA

Facts Routley’s Holdings had 158 shares held by 4 shareholders of whom only 3 matter: J.F. Boland (26), Clara Routley (1), and Routley’s Ltd (130). Boland was president. No annual meeting had been held for many years and Clara and

Routley’s Ltd threatened to sue unless a shareholders’ meeting was called. Boland then called one at his own law

office, where he rejected the proxies of Clara and Routley’s Ltd despite their being valid. He also continued the meeting despite the fact that there was no quorum once the proxies were rejected: quorum was 3 shareholders

with at least 50% of the shares.

Issue Clara and Routley’s Ltd sued for an order:

1. convening a meeting at a neutral locale; and

2. lowering the quorum to 2 shareholders with at least 50% of the shares so Boland couldn’t thwart it by not attending.

Held The desired order was granted. The court emphasized Boland’s clear breaches of the law in his conduct of the

previous shareholders’ meeting.

See Also Re Canadian Javelin Ltd (p 118), Charlebois v Bienvenu (p 95), CBCA ss 143, 144 & 144(2) are analogous to the

statutory provisions involved in this case. Meetings Ordered by the Court (p 55)

Re Sabex Internationale Ltée 1979 QC/SC

Facts The applicants held 44% of Sabex’s common shares. They sought an order under CBCA s 241 (oppression remedy) to

prohibit a rights offering that would have enabled existing shareholders to subscribe for new shares on a pro rata basis. The rights issue would have more than quadrupled the total number of shares, and allowed purchase at a

steep discount.

The problem was that the applicants had lost a struggle for control of Sabex and, having invested money in a

competing corporation, could not afford to buy the shares even at the discount.

Issue Is the rights issue oppressive to the applicants?

Held The rights issue is oppressive to minority shareholders. Because the issue was at an undervalue, minority

shareholders were obliged to subscribe to avoid having their holdings severely diluted.

See Also CBCA s 241, Pre-Emptive Rights (p 39)


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Re Thorne and NB Worker’s Compensation Board 1962 NB/CA

Facts Two men formed a partnership. They paid themselves a weekly wage, and paid out an amount corresponding to

their wage to the WCB. After being injured on the job, one partner applied to the WCB for benefits. According to

previous case law, to get benefits, a person must be a “workman”, which requires being an employee.

Issue Can a partner be employed by his partnership?

Analysis If a partner was an employee of the partnership, this would mean that he had entered into an employment contract

with himself, because of the agency aspect of partnership. But a person can’t contract with himself.

Held Partner not an employee. Thus, no workman’s comp benefits.

Ratio A partnership is not a legal entity separate from the partners. Thus a partner cannot be an employee of the

partnership.

Regal (Hastings) Ltd v Gulliver 1942 Eng/HL

Facts The directors of Regal were working on a business deal involving an acquisition and sale. The acquisition involved:

floating a subsidiary corporation, Amalgamated, to acquire two cinema leases. Amalgamated

would have a capitalization of 5,000 shares at 1£, which Regal would acquire for £2,000 cash

and the remainder for past services. The directors would be required to guarantee the rent on

the leased properties until Amalgamated’s subscribed capital reached £5,000.

The proposed sale involved Amalgamated turning around and selling the leases at a profit. However, the directors

balked at guaranteeing the rent payments personally and ultimately decided to buy the remaining £3,000 in

outstanding Amalgamated shares themselves, which would have deprived Regal of 3/5 of the sale profit.

Although the lease sale fell through, the buyers made a new offer: to buy all the shares of Amalgamated at a 280%

premium to the original share price. If the directors had not initially bought Amalgamated’s shares for themselves,

their part in the profit would have accrued to Regal instead of them. Later, Regal’s controlling interest changed hands and the new management sued the old directors.

Issue Did the directors breach their duty of loyalty by appropriating the opportunity to buy Amalgamated stock?

Held Directors held liable to disgorge all profits under a strict application of Keech v Sandford.

Note The directors bought the shares themselves ostensibly because Regal did not have the £3,000 cash itself and thus

this was the only way to be rid of the need to personally guarantee. This made no different at all to the outcome. To

avoid liability, they would have had to either drop the deal altogether or ensure Regal still got all the shares.

See Also Corporate Opportunities (p 48), Peso Silver Mines Ltd v Cropper, Canadian Aero Service Ltd v O’Malley

Revlon Inc v MacAndrews & Forbes Holdings Inc 1986 DE/SC

Facts Pantry Pride made a hostile takeover bid for Revlon at $45. The Revlon directors determined that the bid was

“grossly inadequate” and implemented a poison pill and other defensive maneuvers. Pantry kept upping its bid, and eventually the board decided to negotiate with other potential buyers. Eventually, Pantry made an offer at $58 per

share and Forstmann made one at $57¼. The directors agreed to sell to Forstmann and entered into lock-up and no-

shop agreements to that effect. This decision was partly motivated by Forstmann’s agreement to support certain Revlon notes that were trading below par in the markets and generating litigation threats from the noteholders.

Issue Pantry sued to have the lock-up agreement invalidated.


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Analysis The early defensive maneuvers were instrumental in raising Pantry’s bid from $45 to $58 and thus OK. However, when Pantry increased to $50 and it became clear that sale of the company was inevitable, duty of

the board under Unocal changed from preservation of the company as a corporate entity to maximizing its sale

value for the shareholders.

The lock-up, while not per se illegal, was impermissible under Unocal.

Held Lock-up is invalid in the circumstances, since it was created for reasons other than maximizing the sale value for the

shareholders (i.e. reasons such as protecting the directors from suit by the noteholders).

Ratio Once the directors decide that a company is for sale, under Delaware law it enters “Revlon mode” where the duty of directors is to maximize the sale value for the shareholders.

See Also Unocal Corp v Mesa Petroleum Co (p 128), Paramount Communications v Time Inc (p 112)

Ringuet v Bergeron 1960 CA/SC

Facts Ringuet, Pagé, and Bergeron were shareholders in St Maurice Knitting Mills Limited, a closely held corporation

governed by the Québec Companies Act. The three were aiming for a controlling interest in the company. They

agreed among themselves that each party would:

ensure appointment of Bergeron as secretary-treasurer and assistant general manager of the company;

vote the party’s shares unanimously with the other two; and

cede the party’s shares free of charge to the other two in equal parts if he violated the agreement.

This contract was not a unanimous shareholders’ agreement because a fourth shareholder, Gerard Jean, was not a party.

Ringuet and Pagé began to take steps to oust Bergeron from management. They held a shareholders’ meeting that Bergeron had no notice of and voted themselves directors. As directors, they then ousted Bergeron from his

secretary-treasurer/general manager post. Bergeron sued to enforce the penalty clause of the contract.

Issue Is a non-unanimous shareholders’ agreement providing for direction and control of a company void as contrary to

public order?

Held Bergeron wins: the contract is enforced, as it is not contrary to the Companies Act or public order.

Ratio A non-unanimous contract among shareholders is binding as between the parties to the contract.

See Also CBCA s 145.1, Agreements among Shareholders (p 58)

Robinson v Brier 1963 PA/SC

Facts D (Brier) owned, together with Ps (Robinsons), all the shares of L Corp, which assembled luggage. D had various

other business interests, which were known to Ps. D determined that the prices L Corp paid for wooden frames for

luggage were too high. He convinced suppliers to reduce their prices but eventually concluded that S Corp, of which

he was sole owner, could make them even cheaper (at the time, all of L Corp’s available space was being used for luggage assembly and it was behind in filling orders as it was). S Corp began to sell the frames to L Corp at a

cheaper price than was available anywhere else. Ps sued D for an accounting of S Corps’ profits from the frame sales.

Held Because L Corp’s space was all spoken for and it was behind in filling orders, there was no usurpation of corporate opportunity. Thus D is not liable to account.

See Also Impossibility and Corporate Opportunities (p 48), Irving Trust Co v Deutch (p 104), Abbey Glen Property Corp v Stumborg (p 86)


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Rockwell Developments Ltd v Newtonbrook Plaza Ltd 1972 ON/CA

Facts A real estate deal in which R agreed to buy a plot of land from N fell through because R would not complete the

agreement according to its terms. R sued N for specific performance at an abated price and lost, with costs awarded

to N. R failed to pay the costs award, and N made a motion for a judgment that Kelner, a solicitor and the

shareholder/director of R, personally pay the costs. Evidence was heard that Kelner and his partner kept sloppy

records; that they constantly made payments due by R with their personal monies instead of through R*; and that R

had only $31.85 in its bank account against the $4,800 costs due. The trial judge held Kelner personally liable for the

costs and R appealed.

*: They described these transactions as “shareholders loans”

Issue Can Kelner be held personally liable for the judgment debt owed by Rockwell by “lifting the veil”?

Analysis Court underscored Salomon: a “one-man” company, like any company, has property distinct from its members and its transactions create legal rights and obligations vested in the company itself.

Moreover, Kelner and the owner of Newtonbrook both pursued the same course of action: “they were quite content to enter into contracts made by the companies which they respectively controlled”. i.e. N took the risk by dealing with a limited liability corporation (RD).

Court implies shoddy recordkeeping is a wrong against shareholders of R (i.e. Kelner), not against N.

Held Kelner is not personally liable. Only Rockwell is liable to pay the judgment debt.

Ratio Even if the principal shareholder behind a one-man company uses shoddy record-keeping and fails to separate his

personal and corporate dealings, the [judgment] creditors of his corporation have no recourse to his personal assets.

See Also Piercing the “Veil” (p 20), Clarkson Co Ltd v Zhelka (p 96), Wolfe v Moir (p 132)

Royal British Bank v Turquand 1856 Eng/XC

Facts Plaintiff bank sued to collect debt owed by defendant corporation and procured by two if its directors. D’s articles allowed its directors to borrow if authorized by a general resolution of the company and no such resolution had

been given to borrow from P.

Issue Is the corporation bound by the actions of its agents who had apparent, but not actual, authority for their actions?

Held Defendant corporation is bound to repay the debts.

Ratio Indoor management rule: Where an outsider dealing with a corporation satisfies himself that the transaction is valid on its face to bind the corporation, he need not inquire as to whether all of the preconditions to validity that the

corporation’s internal law might call for have in fact been satisfied.

See Also Indoor Management Rule (a.k.a. Ostensible Authority) (p 28), Canadian Laboratories Supplies Ltd v Englehard Indus. of Canada Ltd (p 95), Sherwood Design Services Inc v 872935 Ontario Ltd (p 124)

Said v Butt 1920 Eng/KB

Ratio The following is an exception to the general rule that persons are responsible for their own conduct:

If [an employee] acting bona fide in the scope of his authority procures or causes a breach of contract between his employer and a third person, he does not become liable in tort [to the third person, for inducing breach of contract].


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Note The underlined part of the citation is factor that distinguishes Said from the facts alleged in AGDA.

See Also Cited in AGDA Systems International Ltd v Valcom Ltd at pp 208–9 of the textbook.

Salomon v Salomon & Co, Ltd 1896 Eng/HL

Facts Aron Salomon incorporated a corporation, A Salomon & Co, to which he sold his successful leather merchant

business in exchange for 20,001 shares at £1/share, £10,000 in debentures, and £6,000 in cash. Aron was the

controlling shareholder, with 6 other members of his family holding 1 share each (20,007 total shares). All the

necessary legal formalities of the Companies Act were fully complied with. The corporation suffered an unlucky first

year, failed, and was wound up.

If the remaining assets of the corporation were applied against Aron’s debentures, there would be nothing left for the ordinary creditors of the company. Some of these creditors sued and obtained a judgment that the corporation

was merely an agent of Aron, the principal, and thus Aron was required to indemnify the corporation for debts

incurred on his behalf. As a result, Aron was rendered a pauper. He also lost in the Court of Appeal, which declared

that his actions went against the “true intent and meaning” of the Act. Aron appealed to the House of Lords.

Issue Does the a “one-man company” have a separate legal existence, so that it is not merely the agent of its controlling

director/shareholder?

Analysis With regard to the initial judgment: either the company was a legal entity or it was not. If it was, the business

belonged to it and not to Mr Salomon; if it was not, there was no person and nothing to be an agent at all.

With regard to the Court of Appeal: You can’t read in an intention into the statute that is not present in the text.

Aron complied with the statute exactly and thus he successfully created a corporation.

Held Aron wins. Judgments below reversed with costs.

Ratio A corporation is a legal person with a separate legal existence from the directors and shareholders. It is not their agent.

See Also Lee v Lee’s Air Farming Ltd (p 107), Macaura v Northern Assurance Co Ltd and others (p 107), Wolfe v Moir

Scottish Co-operative Wholesale Society Ltd v Meyer 1959 Eng/HL

Facts Society needed Meyer & Lucas to help it start a rayon business, which was incorporated as a partly-owned

subsidiary with Meyer & Lucas holding balance of shares. Subsidiary board was 5: Meyers, Lucas, and 3 nominees of

Society. When Meyer & Lucas became dispensable, Society offered to buy them out at an inadequate price so they

refused. Society then started a separate rayon business in-house to compete with its own subsidiary, seriously

harming the subsidiary’s profits. The 3 Society nominees on the board of the subsidiary took no action to try to prevent this harm. Meyers & Lucas sued the Society under old UK Companies Act oppression remedy.

Analysis Lord Denning (textbook p 872):

[T]he affairs of a company can . . . be conducted oppressively by the directors doing nothing to defend its interests when they ought to do something.

Held Affairs of subsidiary were conducted in a way oppressive to Meyer & Lucas. Remedy is that Society must buy Meyer

& Lucas’ shares at a fair price, being the price the shares would have had at the petition date but for the oppression.

Note Denning’s reasoning is essentially: the 3 directors did nothing thus breaching their duty of good faith to the

subsidiary. Since they were nominees of Society and executing Society’s corporate will, the harm was really done by Society. Textbook points out at pp 874–5 that liability would be more easily grounded under the CBCA since s 241(2)

contemplates oppression by affiliates of the corporation, which the Society was to its subsidiary.


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See v Heppenheimer 1905 NJ/CH

Facts Ds created a corporation to establish, and profit from, monopoly pricing power over straw paper milling. They

bought a number of mills for $2.25M and sold them to the corporation for $1M in bonds and $4M in stock,

presumably with a par value. The promoters believed that the $2.25M of assets were worth $5M if future monopoly

profits were considered. When the monopoly pricing scheme backfired and the corporation failed, Ps (the

corporation’s creditors) sought to recover from the shareholders.

Issue If stock is issued in exchange for property, can the valuation of that property include future earnings?


The intention of the Legislature…was that the capital stock of all corporations should at the start represent the same value, whether paid for in property or money. . . . That result can only be obtained by supposing that the property is to be appraised at its actual cash value . . . [as if the directors bought the property using real cash in an arm’s length transaction with its actual vendor].

Ratio Future earnings may not be considered when valuing property received in exchange for stock.

Note Textbook notes at p 328 (and RD points out) that there are exceptions to this rule: “[a] subsequent New Jersey case

permitted a valuation on a going concern basis when the promoter derived his estimate of future earnings from the

business’ past earnings record”.

See Also CBCA ss 25(3–5), Consideration for Shares (p 35)

Sherwood Design Services Inc v 872935 Ontario Ltd 1998 ON/CA

Facts Sherwood (P) contracted to sell its business assets to the individual Ds “in trust for a Corporation to be

incorporated”. Individual Ds retained Miller Thomson (MT) to represent them in closing the deal. MT gave them a shelf corporation (872935) whose sole director was Robert J Fuller, a MT partner. MT wrote a letter to P saying

“872935 had been assigned by MT as the corporation that will complete the asset purchase”. The letter included a

copy of an unsigned resolution of the 872935 board, apparently consisting of the individual Ds, purporting to adopt

the pre-incorporation contract on behalf of 872935 (as well as being unsigned it was dated Jan 12 and sent to P on

Jan 11).

The individual Ds backed out of the sale: before they had been appointed directors of 872935; before Fuller resigned

as sole director; and thus before the directors’ resolution was approved. MT returned 872935 to the shelf. They

assigned it to new and completely unrelated clients later, and P swooped in to sue 872935 because it now had

assets.

The Ontario Business Corporations Act (OBCA) s 21(2) states:

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 an oral or written contract made before it came into existence in its name or on its behalf . . .

Pre-Incorporation Contracts (p 24)

Issue Is 872935 liable under the OBCA s 21(2) for adopting the pre-incorporation contract “by any action or conduct

signifying its intention to be bound thereby”?

Majority Abella JA says that MT solicitors were the directors of 872935 and had the authority from their clients to convey

an intention to be bound.


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She stressed that the OBCA allows “any” action and held that the letter MT sent was action enough.

Dissent Borins JA said “Sherwood cannot presume in its own favour that the letter of Jan 11 was an act of the corporation

signifying its intention to be bound by the pre-incorporation contract” and pointed out that the unsigned draft documents included with the letter “made it obvious that the corporation had not had the opportunity to directs its

mind to whether it would adopt, or reject, the pre-incorporation contract.”

Held 872935 is liable.

Ratio Under the OBCA statutory regime, which is nearly the same as the CBCA, the merest act by people with authority to

adopt a contract on behalf of a corporation will be construed as an intention to adopt it and result in its adoption.

Note There are three potential acts here that could have “signified” adoption under s 14(2):

1. Assignment of the shelf corporation by MT.

2. Sending of the unsigned draft resolutions to P.

3. The letter sent by the MT associate.

RD says both majority and dissent focus on number 3.

See Also CBCA s 14. Unlike in Canbar West Projects Ltd v Sure Shot Sandblasting & Painting Ltd (p 95), here the

corporation was not named and, ex facie the contract, existing, but was “to be incorporated”.

Indoor Management Rule (a.k.a. Ostensible Authority) (p 28)

Issue Does the indoor management rule prevent 872935 from disputing that the MT solicitor who wrote the letter to P

had authority to bind the corporation?

Majority Carthy JA says that “the solicitor ...held out the authority to speak on behalf of the corporation when he referred to it as a creature of his legal firm” and thus 872935 is bound.

Dissent Borins JA says that OBCA s 19(d) is directed at cases where a party is seeking to enforce a K entered into on

behalf of the corporation by an agent who, the corporation alleges, had no authority to contract on its behalf.

That is not the case here, since P had not had any contractual dealings with 872935.

See Also CBCA s 18 has almost identical language to OBCA s 19.

Smith v Van Gorkom 1985 DE/SC

Facts TransUnion management believed an LBO would create value by enabling the company to use some of its stockpile

of tax credits. The trading range for TU stock was $29.50–$38.25 and the CFO calculated that TU could handle the

debt needed for an LBO at $50, but not at $60. Van Gorkom, the CEO and chairman of the board, wanted more for

his shares, so he asked Pritzker, the head of another company, to conduct an LBO of TU at $55.

Van Gorkom made a 20-minute oral presentation to the board during a meeting in which they had no prior

knowledge that they would be considering a cash-out merger. Van Gorkom had not read the proposed agreement,

so presented only based on his “understanding” of it. The directors did not inquire into Van Gorkom’s role in the sale or establishing the price; were uninformed about the intrinsic value of the company; and approved the sale

upon two hours consideration without prior notice and without the exigency of any emergency or crisis.

Issue Did the board reach an informed business judgment on the decision to accept Pritzker’s $55/share offer, or did it breach its duty of care?

Analysis A premium over market value is not enough to determine that a buyout offer is fair.

In this deal, in all respects, the directors failed to inform themselves.

Held Directors were grossly negligent and cannot rely on the BJR to cover a decision in which they failed to inform

themselves.


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Ratio A business judgment is not informed unless the directors informed themselves prior to making it.

Note Although this case is about the duty of care, RD points out that the court also found that VG breached his duty of loyalty in soliciting the bid, fixing the price himself, and not disclosing his interest.

See Also The Business Judgment Rule (p 44), Neonex Int’l Ltd v Kolasa (p 110)

Smith, Stone and Knight Ltd v Birmingham Corporation 1939 Eng/KB

Ratio Often cited for the proposition that an exception to the Salomon principle arises when a corporation is simply the

agent of a corporate shareholder, by satisfying the following 6 tests:

1. Were the profits treated as profits of the parent company?

2. Were the persons conducting the business appointed by the parent company?

3. Was the parent company the head and brain of the trading venture?

4. Did the parent company govern the trading venture, decide what should be done, and what capital should

be embarked on the venture?

5. Did the parent company make profits by its skill and direction?

6. Was the parent company in effectual and constant control?

Note RD says the problem is these 6 criteria describe the classic parent-subsidiary relationship, but the “veil” is not lifted in every such relationship.

See Also Alberta Gas Ethylene Co v Minister of National Revenue (p 88), Gregorio v Intrans-Corp (p 102)

Sparling v Québec (Caisse de depot et placement du Québec) 1988 CA/SC

Facts The Caisse was a Crown agency created by Quebec statute. It owned 22.7% of the shares in Domtar Inc, a company

incorporated under the CBCA. This made the Caisse an “insider” under the CBCA, but the Caisse refused to submit

the insider report prescribed by the act, claiming Crown immunity.

Issue The real issue is whether the Crown can claim immunity with respect to certain burdens prescribed in the CBCA, but

the textbook wants us to look at La Forest J’s analysis of the nature of a share and share ownership.

Analysis La Forest J… at textbook pp 309–10:

Upon purchasing the shares certain rights, e.g., the right to vote the shares and the right to receive dividends, accrue immediately to the purchaser. . . . [T]he aggregate of these rights and their attendant obligations are definitive of the notion of a share.

At textbook p 310:

A share is not an isolated piece of property. It is rather, in the well-known phrase, a “bundle” of interrelated rights and liabilities. A share is not an entity independent of the statutory provisions that govern its possession and exchange. Those provisions make up its constituent elements. . . . Nothing in the statute, common sense or the common law indicates that this bundle can be parceled piecemeal at the whim of the Crown.

Held Crown loses. It cannot claim immunity without receiving a larger right than the statute actually conferred.

See Also Bundles of Rights & Obligations, Not Ownership (p 33), Re Bowater Canadian Ltd v R.L. Crain Inc (p 117)


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Teck Corp v Millar 1972 BC/SC

Facts Teck was trying to take over Afton Mines Ltd so that it could cause Afton to enter into a particular kind of mining

contract with it. Afton’s management thought Afton would be better off making the contract with Placer

Development Ltd. Millar, an Afton director, approached Placer asking it to help defend Afton so they could make a

deal. Placer demanded enough shares to give it 40% equity in Afton. Millar held out and Afton eventually issued

enough shares to Placer to give it 30% equity and prevent Teck from acquiring a majority. Teck, though it conceded

Afton’s directors may have believed they were acting in Afton’s best interests, sued to have the Placer contract

declared null and void on grounds Afton’s director’s use of the white squire defense breached their fiduciary duty.

Issue May directors selectively issue shares to defeat a takeover bid?

Analysis The directors must have considered the consequences of a transfer of control and acted on reasonable grounds.

Millar wanted if possible to contract with Placer, not Teck, while the directors still had the power to do this.

Millar’s purpose was to defeat Teck, but not at any price. The fact that he held out for a better deal (30%, not

40%) is proof of this.

Held The Afton directors’ issue of shares was not for an improper purpose and Teck’s suit fails.

Ratio Shares may be issued to defeat a takeover bid if the board believes, on reasonable grounds, that defeat of the bid is

in the best interests of the corporation.

See Also Unocal Corp v Mesa Petroleum Co (p 128), Takeovers and Defensive Tactics (p 80)

The Queen v McClurg 1990 CA/SC

Facts McClurg and Ellis were directors of Northland Trucks a company incorporated under the Saskatchewan BCA. The

Articles provided for 3 classes of shares: Class A Common, Class B Common, and Class C Preferred. Each class carried

the “right to receive dividends exclusive of other classes of shares”. The wives, Mrs McClurg and Mrs Ellis each owned half of the Class B Common shares.

Over the course of 3 years, McClurg and Ellis voted $10K of dividends to the Class B common and none to any other

class, thus paying out income to their wives only. The tax collectors sued, “deeming” a lot of the $10K to have been paid to McClurg and Ellis on the grounds that the dividends should have been attributed equally among all common

shares, no matter the class, because “the rights carried by all shares to receive a dividend declared by the company are equal unless otherwise provided in the articles of incorporation”.

Issue Is a discretionary dividend clause allowing directors to assign dividend among classes at their discretion valid?


The fact that dividend rights are contingent upon the exercise of the discretion of the directors to allocate the dividend between classes . . . does not render entitlement to a dividend any less a “right”. Rather, it is the entitlement to be considered for a dividend which is more properly characterized in those terms.

Also:

If shares are divided into separate classes, one of which contains a preferred entitlement to dividends declared by the company, the directors effectively have the discretion to allocate dividends only to that preferred class.

Held Discretionary dividend clause upheld: tax man fails to pin income on McClurg and Ellis.

Ratio A discretionary dividend clause is both a valid means of allocating declared dividends and is sufficient to rebut the

presumption of equality among shares [at common law].


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Note RD points out that the shareholders might have an action under the oppression remedy if the discretionary dividend clause was used oppressively. See Ferguson v Imax, CBCA s 241.

See Also Jacobsen v United Canso Oil & Gas Ltd (p 105), Re Bowater Canadian Ltd v R.L. Crain Inc (p 117), CBCA ss

24(3), 42, 102(1), 241, Dividends (p 38), Voting Rights Attached to Shares (p 56).

Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co 1914 Eng/CA

Ratio Where a director of a corporation holds shares in another corporate party to a contract as trustee, rather than

beneficially, that interest is sufficient to attract the conflict of interest prohibition.

See Also What is a Material Interest? (p 47), Exide Canada v Hilts (p 100)

United Fuel Investments Ltd v Union Gas Company of Canada Ltd 1963 ON/CA

Facts United Fuel was a holding company whose principle asset was shares in its wholly owned subsidiary. When United

Fuel was wound up, these shares in the subsidiary were to be sold and the surplus after paying creditors &c.

distributed to United Fuel’s shareholders. A small group of shareholders objected and sued to have whatever shares

in the subsidiary that remained after paying United Fuel’s debts distributed to United Fuel’s shareholders.

Issue Do shareholders have a right to call for the property of a corporation in specie to be distributed to them on

dissolution?

Held The shareholders lose and get cash, not stock in the subsidiary.

Ratio Shareholders of a corporation have no title to the assets of a company. They are entitled on dissolution to receive a

pro rata share of the proceeds remaining in the hands of the liquidator after paying debts and costs of winding up.

See Also CBCA ss 24(3)(c) & 24(4)(b), Bundles of Rights & Obligations, Not Ownership (p 33), Distribution of Assets on

Dissolution of the Corporation (p 38), Macaura v Northern Assurance Co Ltd and others (p 107)

Unocal Corp v Mesa Petroleum Co 1985 DE/SC

Facts Mesa, a notorious greenmailer, launched a two-step takeover bid for Unocal that Unocal’s directors believed was both coercive and undervalued. The coercion came from the fact that the “front end” step would acquire 37% of the shares for $54 cash, while the “back end” would acquire the remainder outstanding for junk bonds purportedly

worth $54. This was designed to stampede shareholders into selling on the front end for fear of getting stuck with

low quality securities on the back end.

Unocal’s outside directors, acting independently recommended that Unocal should defend against the inadequate

offer by making a counteroffer, effective if Mesa got its 37% front end, to repurchase 49% of its own shares at $72

by exchanging for them senior debt securities. Mesa sued to enjoin this defensive maneuver.

Issue 1. Do the directors have the power and duty to oppose a takeover threat reasonably perceived to be harmful to

the corporate enterprise?

2. If so, are their actions protected by the business judgment rule?

Held Unocal’s directors win: they had the power to oppose Mesa’s tender offer and to undertake a selective stock exchange made in good faith upon reasonable investigation pursuant to a clear duty to protect the corporation.

Their action was reasonable in relation to the threat posed by the grossly inadequate coercive two-tier offer.

Ratio There is a two-prong test for determining the appropriateness of directors’ defensive maneuvers:


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1. The directors must believe [subjective] on reasonable grounds [objective] that a danger to corporate policy

and effectiveness existed due to another person’s stock ownership. This burden can be satisfied by showing a good faith and reasonable investigation. [This prong very similar to Teck Corp v Millar]

2. Proportionality is required: to be protected by the BJR, the decision must be reasonable in relation to the

threat posed.

See Also Revlon Inc v MacAndrews & Forbes Holdings Inc (p 120) , Paramount Communications v Time Inc (p 112)

UPM-Kymmene Corp v UPM Kymmene Miramichi Inc 2002 ON/SC

Oppression Remedy: Limiting the Power of Directors (p 67) The Business Judgment Rule (p 44)

Facts Procedural History: TD Asset Management (TDAM) owned 13.4% of Repap Paper, a CBCA corporation. It sued Repap

under the oppression remedy (s 241) for alleging that Berg, the chairman of the Board of Directors breached his

fiduciary duty to the company and that the other directors breached their duty of care [to the corporation?]. UPM

later acquired all common shares of Repap and TDAM assigned its rights under the action to UPM. Subsequently,

Repap became UPM Miramichi by amalgamation.

Subject Matter: Berg was to become Senior Executive Officer of Repap. His employment K was unduly generous. The

contract was proposed at two Board meetings. At the first meeting, where K was contentious and not approved. The

matter was referred to the Compensation Committee. After the meeting, two directors resigned including the

Chairman of the Compensation Committee. At the second meeting, K was approved by differently constituted Board

and Compensation Committee [Berg and allies had used their CBCA s 111(1) powers to appoint friendly directors to

fill resignation vacancies]. They relied in part on a report “of limited scope” prepared by independent consultant

who was not advised that management had questioned K’s propriety and directors had resigned in protest of it.

Issue 1. Did the Compensation Committee and Board of Directors fail in their obligations to establish a prudent or

reasonable process that led to a contract that is not fair and reasonable?

2. Does the Business Judgment Rule shield the contract from scrutiny?

Analysis Prudent or Reasonable Process:

A Board is entitled and encouraged to retain advisors but this does not relieve directors of the obligation

to exercise reasonable diligence.

Compensation Committee failed to exercise oversight over the consultant; failed to inform itself of the

prior deliberations of the Compensation Committee; failed to inform itself about the agreement before

recommending it to the Board; and allowed remainder of Board to assume it had fully reviewed the

agreement.

Other members of the Board failed to do any kind of analysis of the agreement’s terms.

Business Judgment Rule:

Textbook p 719:

The principle of deference presupposes that directors are scrupulous in their deliberations and demonstrate diligence in arriving at decisions. Courts are entitled to consider the content of their decision and the extent of the information on which it was based and to measure it against the facts as they existed at the time the impugned decision was made. Although Board decisions are not subject to microscopic examination with the perfect vision of hindsight, they are subject to examination.

BJR does not apply where Board acts on advice of a committee that makes an uninformed

recommendation.

Each director was required to consider the terms and meaning of the Agreement and to consider it


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carefully against the circumstances of Repap at the time.

Held The directors breached their duty of care:

1. They failed to establish a prudent or reasonable process and were not entitled to rely on independent

consultant in the circumstances.

2. They are not entitled to rely on business judgment rule in the circumstances.

See Also Peoples Department Stores Inc (Trustee of) v Wise (p 114), Smith v Van Gorkom (p 125)

Quality of Disclosure (p 47)

Issue Did Berg make adequate disclosure of the nature and extent of his interest in a material contract with the

corporation, as required by CBCA s 120?

Analysis It will rarely be enough for a director to say “I am interested” and leave it at that…His declaration must inform his colleagues of the real state of things.

If it is material to the directors’ judgment that they know what the interest is and how far it goes, then the

interested director must see to it that they are informed.

It is not enough to say that the directors could have discovered the information themselves.

Against this standard, Berg’s disclosure was completely inadequate. He had a duty to inform the directors of all

the problems that management and the prior Board members had with the K, that it had changed in several

material respects, and of the limited scope of the consultant’s report.

Held Berg’s disclosure failed to meet the requirements of section 120 of the CBCA.

See Also Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co, Exide Canada v Hilts

Volzke Construction v Westlock Foods 1986 AB/CA

Ratio Textbook p 75: one can be a partner without active participation, or without having control over the business.

See Also Textbook p 80 (case), Pooley v Driver

Note We didn’t cover the case in class.

Walkovszky v Carlton 1966 NY/CA

Facts Carlton owned 10 corporations, including Seon Cab Corporation,

each of which owned only two taxis. The corporations carried only

the statutory minimum liability insurance and were extremely

thinly capitalized. Each corporation’s main property, the taxis, were mortgaged, resulting in few net assets. Carlton also took as much

money out of them as possible to ensure they never had much that

could be taken in a tort judgment.

Plaintiff was hit by one of Seon’s cabs and sued Carlton.

Carlton(Defendant)

Seon Cab Corporation2 cabsMinimum liability

insurance: $10,000

... X 9... ...

etc. etc.

Issue Does plaintiff have a cause of action against Carlton personally

because Carlton deliberately kept Seon too thinly capitalized to pay

a significant tort judgment?

Analysis It is one thing to assert that a corporation is a fragment of a larger combine which actually conducts the

business. It is quite another to claim that the corporation is a “dummy” for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends. [In


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other words, plaintiff is asking for personal liability of shareholder, not enterprise liability]

Carrying the statutory minimum insurance is not a crime. If you want it changed, change the statute.

Held Plaintiff has no cause of action.

Ratio Shareholders can’t be made individually liable for a tort judgment just because they keep the corporation too thinly capitalized to pay a judgment debt from some tort action that might occur in the future.

Note What would happen if this case was tried in Canada and Walkovszky had claimed as a creditor under the oppression

remedy? Downtown Eatery (1993) Ltd v Ontario (p 99).

See Also Enterprise Liability (p 22), De Salaberry Realties Ltd v Minister of National Revenue (p 98)

West v Edson Packaging Machinery Ltd 1993 ON/GD

Facts The applicants were management employees at Edson Packaging, an OBCA corporation and wholly-owned

subsidiary of Edson Holdings. Holdings was a privately-owned company with a history of buying back the shares that retiring Packaging employees held in Holdings at fair market value. The applicants were induced by Trevar

Gibson, the president of Packaging & Holdings to buy shares in Holdings to show support for both Gibson and the

company. They were led to believe that if they bought the shares of a retiring manager, James Howes, then within 6

months a shareholders’ agreement would be executed guaranteeing that Holdings or other shareholders would buy their shares upon death or termination. Gibson then refused to enter into the shareholders’ agreement and refused to buy the applicants shares when they were fired.

Issue Are the applicants “proper persons” to bring an oppression claim under the OBCA?

Analysis The conduct the applicants complain of gave rise to certain reasonable expectations over a period of several

months, both before (i.e. when they were just employees) and after their purchase of Howes’ shares.

Held The applicants are “proper persons” to bring a claim. However, the matter requires a trial to be resolved.

See Also First Edmonton Place Ltd v 315888 Alberta Ltd (p 100), Downtown Eatery (1993) Ltd v Ontario (p 99),

Standing and Interests Protected under the oppression provision (p 67)

Wickberg v Shatsky 1969 BC/SC

Facts Wickberg contracted to manage the Shatsky business. The contract was on the letterhead of Rapid Data (Western)

Ltd and signed by Shatsky (D) as president. However, the company had never been incorporated and D knew this,

but Wickberg did not. When the business failed, Wickberg was fired. He sued for breach of his employment contract.

Issue 1. Is D personally liable on the employment contract?

2. Is D liable for breach of warranty of authority, for having warranted the existence of Rapid Data (Western) Ltd

and his authority to contract on its behalf?

Analysis Although it looks like the difference between Black and this case is that in Black both parties believed the

company to exist and here Shatsky knew it did not, the court refused to accept this distinction.

Moreover, the distinction between Kelner v Baxter and Black is that in Kelner all parties knew there was no

corporation and the circumstances and written instrument disclosed an intention to bind the defendants.

Even though here the parties did not have the same view of the facts, Black applies.

Held 1. D is not personally liable because the intention of the parties was not that D would be personally bound.

2. D is liable for breach of warranty of authority but due to lack of causation, P gets only nominal damages.

Ratio If a contract is purportedly between a corporation and some other party, and the corporation did not actually exist


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at time of contracting, then the persons signing on behalf of the corporation are only personally liable if that was the

intention of the parties when the contract was signed.

See Also Common Law of Pre-Incorporation Contracts (p 24), Black et al v Smallwood & Cooper (p 92), BC Business Corporations Act s 20(2) on p 188.

Wolfe v Moir 1969 AB/SC

Facts Gordon Moir was well-known in Lethbridge because he had been recreation director of the city. He bought a limited

company, Chinook Sport Shop Ltd, that operated a roller rink called Fort Whoop-Up Playland. However, Moir

advertised the roller rink in the local newspaper as “Moir’s Sportland” (Fort Whoop-Up) and there was no mention of Chinook Sport Shop Ltd in the advertisements. Witnesses knew the rink colloquially as “Moir’s Sportland”.

Section 82(1)(c) of Alberta’s Companies Act —which is analogous to CBCA s 10(5)—required that “every company…have its name set forth in all notices, advertisements, and … official publications of the company”. Wolfe was injured at the rink and sued Moir personally.

Issue Does Moir lose the benefit of limited liability that a shareholder of Chinook Sport Shop Ltd would enjoy because he

failed to comply with the statutory requirement to identify the company when he advertised for it?

Analysis A careful reading of the judgment in Salomon shows that it proceded on the basis that all the requirements of the

Companies Act, 1862 had been complied with.

Held Moir is liable for the damages to the plaintiff, Wolfe.

Ratio The effect of s 82(1)(c) is that if a person chooses to advertise and to hold himself out to the public without

identifying the name of a company with which he is associated, he runs the risk of being held personally liable.

See Also Tort Liability (p 23), AGDA Systems International Ltd v Valcom Ltd (p 87), CBCA s 10(5)

Zwicker v Stanbury 1953 CA/SC

Facts Defendants were directors of LNH Ltd, the corporation that owned the Lord Nelson Hotel. CP Rail owned 50% of the

shares in LNH, as well as a second mortgage on the hotel. CP told the directors it had written off its investment as a

loss. The directors then promised to refinance the first mortgage bonds if CP would turn over the shares to them

gratis. CP turned the shares over to the directors personally. Subsequently, the refinancing succeeded, LNH

prospered, and the share price climbed significantly. In a separate transaction, defendants purchased the second

mortgage from CP at a 50% discount to face value.

Analysis Refinancing/Shares: Since the directors were acting for the corporation in their dealings with CP, any

consideration that CP was willing to part with should have gone to the corporation, not the directors personally.

Second Mortgage: The fact that LNH didn’t have the money to buy the mortgage is irrelevant. The defendants

learned of the value that CP placed on it in their capacity as directors of LNH Ltd.

Held 1. Shares: Directors breached fiduciary duty to LNH and hold the shares obtained from CP upon trust for LNH Ltd.

2. Second Mortgage: Directors breached fiduciary duty to LNH, which is entitled to cancel the mortgage at the

same 50% discount to face that the defendants obtained it for.

Note This is the first case in which the Supreme Court of Canada adopted the judgment in Regal (Hastings) Ltd v Gulliver (p 120).

See Also Corporate Opportunities, Impossibility and Corporate Opportunities (p 48). Contrast with Peso Silver Mines Ltd v Cropper (1966).

Statute Chart Corporations

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9. Statute Chart

Partnership Act RSBC 1996

PART 1—THE NATURE OF PARTNERSHIP [ … ]

Partnership defined

2 Partnership is the relation which subsists between persons carrying on business in common with a view of

profit.

Persons who are not a partnership

3 The relation between members of a company or association that is

(a) incorporated under an Act for the time being in force and relating to the incorporation of joint

stock companies, or licensed or registered under an Act relating to the licensing or registration of

extraprovincial companies, or

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

is not a partnership within the meaning of this Act.

Rules for determining partnership

4 In determining whether a partnership does or does not exist, regard must be had to the following rules:

(a) joint tenancy, tenancy in common, joint property, common property or part ownership does not

of itself create a partnership as to any property that is so held or owned, whether the tenants or

owners do or do not share any profits made by the use of the property;

(b) the sharing of gross returns does not of itself create a partnership, whether the persons sharing

the returns have or have not a joint or common right or interest in property from which or from

the use of which the returns are derived;

(c) the receipt by a person of a share of the profits of a business is proof in the absence of evidence

to the contrary that he or she is a partner in the business, but the receipt of a share, or of a

payment contingent on or varying with the profits of a business, does not of itself make him or

her a partner in the business, and in particular

(i) the receipt by a person of a debt or other liquidated amount by instalments or

otherwise out of the accruing profits of a business does not of itself make him or her a

partner in the business or liable as a partner,

(ii) a contract for the remuneration of an employee or agent of a person engaged in a

business by a share of the profits of the business does not of itself make the employee

or agent a partner in the business or liable as a partner,

(iii) the spouse or child of a deceased partner who receives by way of annuity a portion of

the profits made in the business in which the deceased person was a partner is not

merely because of the receipt a partner in the business or liable as a partner,

Corporations Statute Chart

134

(iv) the advance of money by way of loan to a person engaged or about to engage in a

business, on a contract between that person and the lender under which the lender is

to receive a rate of interest varying with the profits or is to receive a share of the profits

arising from carrying on the business, does not of itself make the lender a partner with

the person carrying on the business or liable as a partner, as long as the contract is in

writing and signed by or on behalf of all the parties to it, and

(v) a person receiving by way of annuity or otherwise a portion of the profits of a business

in consideration of the sale by him or her of the goodwill of the business is not, merely

because of the receipt, a partner in the business or liable as a partner.

PART 2—GENERAL PARTNERSHIPS Definitions

6 In this Part: "business" includes every trade, occupation or profession;

"court" includes every court and judge having jurisdiction in the case;

"partnership property" means property and rights and interests in property

(a) originally brought into the partnership stock,

(b) acquired, whether by purchase or otherwise, on account of the firm, or

(c) acquired for the purposes and in the course of the partnership business.

Liability of partners

7 (1) A partner is an agent of the firm and the other partners for the purpose of the business of the

partnership.

(2) The acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he or she is a member bind the firm and his or her partners, unless

(a) the partner so acting has in fact no authority to act for the firm in the particular matter, and

(b) the person with whom he or she is dealing either knows that the partner has no authority, or

does not know or believe him or her to be a partner.

[VS: See also Ernst & Young v Falconi and s 12]

Acts or instruments in firm name

8 (1) An act or instrument relating to the business of the firm and done or executed in the firm name, or in any

other manner showing an intention to bind the firm, by any person authorized to do so, whether a partner or not, is binding on the firm and all the partners.

(2) This section does not affect any general rule of law relating to the execution of deeds or negotiable

instruments.

No pledge of credit for nonfirm business

9 (1) If one partner pledges the credit of the firm for a purpose apparently not connected with the firm's

ordinary course of business, the firm is not bound unless the partner is in fact specially authorized by the

other partners.

(2) This section does not affect any personal liability incurred by an individual partner.


135

Notice of restriction of power of partner

10 If it has been agreed between the partners that a restriction is to be placed on the power of any one or more

of them to bind the firm, an act done in contravention of the agreement is not binding on the firm with

respect to persons having notice of the agreement.

Liability of partners for firm debts

11 A partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he or she is a partner, and after his or her death his or her estate is also severally liable in a due course

of administration for those debts and obligations, so far as they remain unsatisfied, but subject to the prior

payment of his or her separate debts. [VS: See also s 19(1–2)]

Liability of firm

12 If, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or

with the authority of his or her partners, loss or injury is caused to any person who is not a partner in the firm

or any penalty is incurred, the firm is liable for that loss, injury or penalty to the same extent as the partner

so acting or omitting to act. [VS: See also Ernst & Young v Falconi]

Liability for misapplication

13 A firm must make good any loss arising in the following cases:

(a) if one partner acting within the scope of his or her apparent authority receives the money or

property of a third person and misapplies it;

(b) if a firm in the course of its business receives money or property of a third person, and the

money or property so received is misapplied by one or more of the partners while it is in the

custody of the firm.

Liability under 2 preceding sections

14 A partner is jointly and severally liable with his or her partners for everything for which the firm, while he or

she is a partner in it, becomes liable under either section 12 or 13.

Liability for trust funds

15 (1) If a partner, who is a trustee, improperly employs trust property in the business or on the account of the

partnership, no other partner is liable for the trust property to the persons beneficially interested in it.

(2) This section does not affect any liability that is incurred by any partner because of his or her having

notice of a breach of trust.

(3) Nothing in this section prevents trust money from being followed and recovered from the firm if it is still

in its possession or under its control.

Person representing himself or herself as partner

16 (1) A person who, by words spoken or written, or by conduct, represents himself or herself, or who

knowingly allows himself or herself to be represented, as a partner in a particular firm is liable as a partner to any one who has, on the faith of any such representation, given credit to the firm.


136

(2) Subsection (1) applies whether the representation has or has not been made or communicated to the

person so giving credit by or with the knowledge of the apparent partner making the representation or

allowing it to be made.

(3) If, after a partner's death, the partnership business is continued in the old firm name, the continued use

of that name, or of the deceased partner's name, as part of it does not of itself make his or her

executor's or administrator's estate or effects liable for any partnership debts contracted after his or her

death.

Partner's evidence

17 An admission or representation made by any partner concerning the partnership affairs, if made in the

ordinary course of its business, is evidence against the firm.

[ … ]

Liability of partners

19 (1) A person who is admitted as a partner into an existing firm does not become liable to the creditors of the

firm for anything done before he or she became a partner. [VS: See also s 11]

(2) A partner who retires from a firm does not cease to be liable for partnership debts or obligations

incurred before his or her retirement. [VS: See also s 11]

(3) A retiring partner may be discharged from any existing liabilities by an agreement to that effect between

the retiring partner and the members of the firm as newly constituted and the creditors.

(4) An agreement under subsection (3) may be either express or inferred as a fact from the course of dealing

between the creditors and the firm as newly constituted.

[ … ]

Variation of rights and duties by consent

21 The mutual rights and duties of partners, whether ascertained by agreement or defined by this Part, may be

varied by the consent of all the partners and the consent may be either express or inferred from a course of

dealing.

Fairness and good faith

22 (1) A partner must act with the utmost fairness and good faith towards the other members of the firm in

the business of the firm.

(2) The duties imposed by this section are in addition to, and not in derogation of, any enactment or rule of

law or equity relating to the duties or liabilities of partners.

Application of partnership property

23 (1) Subject to subsection (2), all partnership property must be held and applied by the partners exclusively

for the purposes of the partnership and in accordance with the partnership agreement.

(2) The legal estate or interest in land that belongs to the partnership devolves according to its nature and

tenure and the general rules of law applicable to it, but in trust so far as necessary, for the persons

beneficially interested in the land under this section.


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(3) If co-owners of an estate or interest in any land, that is not partnership property, are partners as to

profits made by the use of that land or estate, and purchase other land or estate out of the profits to be

used in a similar manner, the land or estate so purchased belongs to them, in the absence of an

agreement to the contrary, not as partners, but as co-owners for the same respective estates and

interests as are held by them in the land or estate first mentioned at the date of the purchase.

Property bought with firm money

24 Unless the contrary intention appears, property bought with money belonging to a firm is deemed to have

been bought on account of the firm.

Partnership property treated as personalty

25 If land or any heritable interest in it has become partnership property, it must, unless the contrary intention

appears, be treated as between the partners, including the representative of a deceased partner, and also as

between the heirs of a deceased partner and his or her executors or administrators, as personal or movable

and not real or heritable estate.

Execution against partnership property

26 (1) A writ of execution must not issue against partnership property except on a judgment against the firm.

(2) The Supreme Court within its territorial jurisdiction, may,

(a) on the application by summons of any judgment creditor of a partner, make an order charging

that partner's interest in the partnership property and profits with payment of the amount of the

judgment debt and interest on it, and

(b) by the same or a subsequent order appoint a receiver of that partner's share of profits, whether

already declared or accruing, and of any other money that may be coming to him or her in

respect of the partnership, and direct all accounts and inquiries, and give all other orders and

directions that might have been directed or given if the charge had been made in favour of the

judgment creditor by the partner, or that the circumstances of the case may require.

(3) The other partner or partners is or are at liberty at any time to redeem the interest charged, or, in case of

a sale being directed, to purchase it.

Rules for determining rights and duties of partners in relation to partnership

27 Subject to any agreement express or implied between the partners, the interests of partners in the

partnership property and their rights and duties in relation to the partnership must be determined by the

following rules:

(a) all the partners are entitled to share equally in the capital and profits of the business and must

contribute equally towards the losses, whether of capital or otherwise, sustained by the firm;

(b) the firm must indemnify every partner in respect of payments made and personal liabilities

incurred by him or her

(i) in the ordinary and proper conduct of the business of the firm, or

(ii) in or about anything necessarily done for the preservation of the business or property

of the firm;


138

(c) a partner making, for the purpose of the partnership, any actual payment or advance beyond the

amount of capital that he or she has agreed to subscribe is entitled to interest at a fair rate from

the date of the payment or advance;

(d) a partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed

by him or her;

(e) every partner may take part in the management of the partnership business;

(f) a partner is not entitled to remuneration for acting in the partnership business;

(g) a person may not be introduced as a partner without the consent of all existing partners;

(h) any difference arising as to ordinary matters connected with the partnership business may be

decided by a majority of the partners, but no change may be made in the nature of the

partnership business without the consent of all existing partners;

(i) the partnership books are to be kept at the place of business of the partnership, or the principal

place, if there is more than one, and every partner may, when he or she thinks fit, have access to

and inspect and copy any of them;

(j) a partner may refer a difference concerning the interpretation or application of the partnership

agreement to arbitration for a final and binding decision under the Commercial Arbitration Act.

Majority cannot expel partner

28 A majority of the partners can not expel any partner unless a power to do so has been conferred by express

agreement between the partners and the power is exercised in good faith.

Ending the partnership

29 (1) If no set term has been agreed on for the duration of the partnership, any partner may end the

partnership at any time on giving notice to all the other partners of his or her intention to do so.

(2) If the partnership has originally been constituted by deed, a notice in writing, signed by the partner giving

it, is sufficient for this purpose.

Continuation of partnership after expiry

30 (1) If a partnership entered into for a set term is continued after the term has expired, and without any

express new agreement, the rights and duties of the partners remain the same as they were at the

expiration of the term, so far as is consistent with the incidents of the partnership at will.

(2) A continuance of the business by the partners or those of them as habitually acted in it during the term,

without any settlement or liquidation of the partnership affairs, is presumed to be a continuance of the

partnership.

Partners must render accounts

31 Partners are bound to render true accounts and full information of all things affecting the partnership to any

partner or his or her legal representatives.

Partner must account for benefits

32 (1) A partner must account to the firm for any benefit derived by the partner without the consent of the


139

other partners from any transaction concerning the partnership, or from any use by the partner of the partnership property, name or business connection.

(2) This section applies also to transactions undertaken, after a partnership has been dissolved by the death

of a partner and before the affairs of the partnership have been completely wound up, by any surviving

partner or by the representatives of the deceased partner.

Profits of partner carrying on similar business

33 If a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, the partner must account for and pay over to the firm all profits made by

him or her in that business.

Assignment by partner of a share

34 (1) An assignment by any partner of the partner's share in the partnership, either absolute or by way of

mortgage or redeemable charge, does not, as against the other partners, entitle the assignee, during the

continuance of the partnership, to interfere in the management or administration of the partnership

business or affairs, or to require any accounts of the partnership transactions or to inspect the

partnership books, but entitles the assignee only to receive the share of profits to which the assigning

partner would otherwise be entitled, and the assignee must accept the account of profits agreed to by

the partners.

(2) In case of a dissolution of the partnership, whether as respects all the partners or as respects the

assigning partner, the assignee is entitled to receive the share of the partnership assets to which the

assigning partner is entitled as between that partner and the other partners and, for the purpose of

ascertaining that share, to an account as from the date of the dissolution.

(3) The assignee may enforce his or her rights under subsection(2) against the assigning partner, the other

partners, or both.

Dissolution of partnership

35 (1) Subject to any agreement between the partners, a partnership is dissolved

(a) if entered into for a set term, by the expiration of that term,

(b) if entered into for a single adventure or undertaking, by the termination of that adventure or

undertaking, or

(c) if entered into for an undefined time, by any partner giving notice to the other or others of his or

her intention to dissolve the partnership.

(2) In a case referred to in subsection (1) (c) the partnership is dissolved as from the date mentioned in the

notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of

the notice.

Dissolution by bankruptcy, death, dissolution of partner or charging order

36 (1) On the death, bankruptcy or dissolution of a partner,

(a) a partnership of 2 partners is dissolved, and

(b) subject to agreement among the partners, a partnership of more than 2 partners is dissolved as

between the bankrupt, dead or dissolved partner and the other partners.


140

(2) If the share in the partnership property of a partner is charged under section 26 for the separate debt of

the partner, the other partners may by notice in writing to the partner whose share is charged,

(a) dissolve the partnership, or

(b) if there are 3 or more partners, dissolve the partnership as between the partner whose share is

charged and the other partners.

(3) A notice under subsection (2) takes effect at the time specified in the notice or immediately if no time is

specified.

[ … ]

Power of court to decree dissolution in certain cases

38 (1) On application by a partner, the court may decree a dissolution of the partnership in any of the following

cases:

(a) if a partner is declared under the Patients Property Act to be incapable of managing his or her

affairs or if it is shown that a partner is, because of mental infirmity, incapable of discharging his

or her duties as a partner;

(b) when a partner, other than the partner suing, becomes in any other way permanently incapable

of performing his or her part of the partnership contract;

(c) when a partner, other than the partner suing, has been guilty of conduct that, in the opinion of

the court, regard being had to the nature of the business, is calculated to affect prejudicially the

carrying on of the business;

(d) when a partner, other than the partner suing, wilfully or persistently commits a breach of the

partnership agreement or otherwise so conducts himself or herself in matters relating to the

partnership business that it is not reasonably practicable for the other partner or partners to

carry on the business in partnership with him or her;

(e) when the business of the partnership can only be carried on at a loss;

(f) whenever circumstances have arisen that, in the opinion of the court, render it just and equitable

that the partnership be dissolved.

(2) If there are 3 or more partners, the partnership may be dissolved or may be dissolved as between the

partner whose condition or conduct gave rise to the application and the remaining partners.

Change in firm

39 (1) If a person deals with a firm after a change in its constitution, the person is entitled to treat all apparent

members of the old firm as still being members of the firm until the person has notice of the change.

(2) An advertisement in the Gazette as to a firm is notice to persons who had no dealings with the firm

before the date of the advertised dissolution or change.

(3) The estate of a partner who dies or who becomes insolvent, or of a partner who, not having been known

to the person dealing with the firm to be a partner, retires from the firm, is not liable for partnership

debts contracted after the date of the death, insolvency or retirement.


141

Dissolution

40 On the dissolution of a partnership or the retirement of a partner, any partner may publicly notify the other

partners or the retiring partner and may require the other partner or partners to concur for that purpose in

all necessary or proper acts, if any, that cannot be done without his, her or their concurrence.

Authority of partners after dissolution

41 (1) Subject to subsections (2) and (3), after the dissolution of a partnership, the authority of each partner to

bind the firm and the other rights and obligations of the partners continue despite the dissolution so far

as may be necessary to wind up the affairs of the partnership, and to complete transactions begun but

unfinished at the time of the dissolution, but not otherwise.

(2) The firm is not bound by the acts of a partner who has become insolvent.

(3) Subsection (2) does not affect the liability of any person who has after the insolvency represented

himself or herself or knowingly allowed himself or herself to be represented as a partner of the insolvent.

Application of assets on dissolution

42 (1) On the dissolution of a partnership, every partner is entitled, as against the other partners in the firm and

all persons claiming through them in respect of their interests as partners,

(a) to have the property of the partnership applied in payment of the debts and liabilities of the

firm, and

(b) to have the surplus assets after the payment applied in payment of what may be due to the

partners respectively after deducting what may be due from them as partners to the firm.

(2) For the purposes of subsection (1), any partner or the partner's representatives may, on the termination

of the partnership, apply to the court to wind up the business and affairs of the firm.

Return of premium

43 If one partner has paid a premium to another on entering into a partnership for a set term, and the

partnership is dissolved before the expiration of that term otherwise than by the death of a partner, the

court may order the repayment of the premium, or of a part of it as it thinks just, having regard to the terms

of the partnership contract and to the length of time during which the partnership has continued, unless

(a) the dissolution is, in the judgment of the court, wholly or chiefly due to the misconduct of the

partner who paid the premium, or

(b) the partnership has been dissolved by an agreement containing no provision for a return of any

part of the premium.

[ … ]

Rights where partnership dissolved by death or retirement

45 (1) Subject to subsections (2) and (3), if any member of a firm has died or otherwise ceased to be a partner,

and the surviving or continuing partners carry on the business of the firm with its capital or assets

without any final settlement of accounts as between the firm and the outgoing partner or his or her

estate, then, in the absence of any agreement to the contrary, the outgoing partner or the estate is

entitled, at the option of himself or herself or his or her representatives, to


142

(a) the share of the profits made since the dissolution that the court may find to be attributable to

the use of his or her share of the partnership assets, or

(b) interest at a fair rate on the amount of his or her share of the partnership assets.

(2) If, by the partnership contract, an option is given to surviving or continuing partners to purchase the

interest of a deceased or outgoing partner and that option is exercised, the estate of the deceased

partner, or the outgoing partner or his or her estate is not entitled to any further or other share of

profits.

(3) If any partner, assuming to act in exercise of an option referred to in this section, does not in all material

respects comply with the terms of it, he or she is liable to account under this section.

Debts at date of dissolution or death

46 Subject to any agreement between the partners, the amount due from surviving or continuing partners to an

outgoing partner, or the representatives of a deceased partner, in respect of the outgoing or deceased

partner's share, is a debt accruing at the date of the dissolution or death.

Settlement of accounts on dissolution

47 Subject to any agreement, in settling accounts between the partners after a dissolution of partnership, the

following rules must be observed:

(a) losses, including losses and deficiencies of capital, must be paid first out of profits, next out of

capital, and lastly, if necessary, by the partners individually in the proportion in which they were

entitled to share profits;

(b) the assets of the firm, including the sums, if any, contributed by the partners to make up losses

or deficiencies of capital, must be applied in the following manner and order:

(i) in paying the debts and liabilities of the firm to persons who are not partners;

(ii) in paying to each partner rateably what is due from the firm to that partner for

advances as distinguished from capital;

(iii) in paying to each partner rateably what is due from the firm to that partner in respect

of capital;

(iv) the ultimate residue, if any, must be divided among the partners in the proportion in

which profits are divisible.

PART 3 — LIMITED PARTNERSHIPS Definitions

48 In this Part:

"certificate" means a certificate filed under section 51 and includes all amendments made to the certificate;

[ … ] "partnership agreement" includes all amendments made to the agreement;

Application of Part

49 The provisions of this Act must in the case of limited partnerships be read subject to this Part.


143

Limited partnership

50 (1) Subject to this Part, a limited partnership may be formed to carry on any business that a partnership

without limited partners may carry on.

(2) A limited partnership consists of

(a) one or more persons who are general partners, and

(b) one or more persons who are limited partners.

Formation of limited partnership

51 (1) A limited partnership is formed when there is filed with the registrar a certificate, signed by each person

who is, on the formation of the partnership, to be a general partner.

(2) A certificate must state the following:

(a) the business name under which the limited partnership is to be conducted;

(b) the general nature of the business carried on or intended to be carried on;

(c) the full name and residential address of each general partner or, in the case of a general partner

other than an individual, the name and address in British Columbia;

(d) the term for which the limited partnership is to exist;

(e) the aggregate amount of cash and the nature and fair value of any other property to be contributed by all of the limited partners;

(f) the aggregate amount of any additional contributions agreed to be made by limited partners

and the times at which or events on the happening of which the additional contributions are to

be made;

(g) the basis on which limited partners are to be entitled to share profits or receive other

compensation by way of income on their contributions.

(3) A certificate may state the full name and last known residential address of a limited partner or, in the

case of a limited partner other than an individual, the name and address in British Columbia.

(4) If a partnership agreement contains provisions respecting any of the following, the certificate filed in

respect of that agreement must also contain provisions respecting those matters:

(a) the times when contributions of limited partners are to be returned;

(b) the right of a limited partner to substitute an assignee as contributor in his or her place, and the

terms and conditions of the substitution;

(c) the right to admit additional limited partners;

(d) the extent to which one or more of the limited partners has greater rights than the others;

(e) the right of a remaining general partner to continue the business on the bankruptcy, death,

retirement, mental incompetence or dissolution of a general partner;

(f) the right of a limited partner to demand and receive property other than cash in return for his

contribution;

(g) the right of the limited partners or any of them to admit an additional general partner to the

partnership or to permit or require a general partner to retire from the partnership.

General and limited partners

52 (1) A person may be a general partner and a limited partner at the same time in the same limited

partnership.


144

(2) A person who is at the same time a general partner and a limited partner has the same rights and powers

and is subject to the same restrictions as a general partner but in respect of the person's contribution as

a limited partner, the person has the rights against the other partners that the person would have had if

he or she were not also a general partner.

Name of partnership

53 (1) The business name of each limited partnership must end with the words "Limited Partnership" in full or

the French language equivalent.

(2) The surname of a limited partner must not appear in the firm name of the limited partnership unless

(a) that surname is also the surname of one of the general partners, or

(b) the business of the limited partnership has been carried on under that name before the

admission of that partner as a limited partner.

(3) The corporate name or a significant part of the corporate name of a limited partner must not appear in

the firm name of a limited partnership unless the business of the limited partnership has been carried on

under that name before the admission of that corporate partner as a limited partner.

(4) A limited partner whose surname or corporate name appears in the firm name contrary to subsection (2) or (3) is liable as a general partner to any creditor of the limited partnership who has extended the

credit without actual knowledge that the limited partner is not a general partner.

[ … ]

Rights of general partners

56 A general partner in a limited partnership has all the rights and powers and is subject to all the restrictions

and liabilities of a partner in a partnership without limited partners except that, without the written consent

to or ratification of the specific act by all the limited partners, a general partner has no authority to do any of the following:

(a) to do an act which makes it impossible to carry on the business of the limited partnership;

(b) to consent to a judgment against the limited partnership;

(c) to possess limited partnership property, or to dispose of any rights in limited partnership

property, for other than a partnership purpose;

(d) to admit a person as a general partner or to admit a person as a limited partner, unless the right

to do so is given in the certificate;

(e) to continue the business of the limited partnership on the bankruptcy, death, retirement, mental

incompetence or dissolution of a general partner, unless the right to do so is given in the

certificate.

Liability of limited partner

57 Except as provided in this Part, a limited partner is not liable for the obligations of the limited partnership

except in respect of the amount of property he or she contributes or agrees to contribute to the capital of

the limited partnership.


145

Rights of limited partner

58 (1) Subject to subsection (2), a limited partner has the same right as a general partner to do any of the

following:

(a) to inspect and make copies of or take extracts from the limited partnership books at all times;

[VS: See also s 27(i) on p 138]

(b) to be given, on demand, true and full information of all things affecting the limited partnership

and to be given a formal account of partnership affairs whenever circumstances render it just

and reasonable; [VS: See also s 31, p 138]

(c) to obtain dissolution and winding up of the limited partnership by court order. [VS: See also s 38

on p 140]

(2) The executive director may, in whole or in part, exempt a limited partnership from the rights granted

under subsection (1) (a) or (b) or both if the executive director considers that it is in the public interest to

do so.

[ … ]

Liability to creditors

64 A limited partner is not liable as a general partner unless he or she takes part in the management of the

business. [VS: See also Haughton Graphic Ltd v Zivot (p 103) and Nordile Holdings Ltd v Breckenridge

(p 111)]


146

CBCA RSC 1985

CONTENTS Part P Sections Key Topics

1 Interpretation and Application ....................... 146 2 Definitions

2 Incorporation ................................................. 147 5, 6, 8, 9, 10, 14 Articles, Certificate, Name, Pre-Incorporation Ks

3 Capacity and Powers ...................................... 149 15–18 Capacity, Indoor Management Rule

4 Registered Office and Records ........................ 150 19

5 Corporate Finance .......................................... 150 24–28, 34–36, 42, 43, 45

Shares, Pre-Emptive Rights, Dividends, Limited Liability of Shareholders

10 Directors and Officers ..................................... 153 102–109, 111, 114(2), 115–124

Duty to Manage, Bylaw Amendment, Qualific-ations, Delegation, Personal Liability, Disclosure of Conflicts, Duties, Deemed Consent, Indemnity

12 Shareholders .................................................. 163 125, 137, 140, 142–146

Notice of Meeting, Shareholder Resolutions, Right to Vote, Requisitioning Meetings, Unanimous Shareholder Agreements

13 Proxies ........................................................... 169 147–149, 150, 153

Definitions, Mandatory Proxy Solicitation, Soliciting Proxies, Duty of Intermediary

14 Financial Disclosure ........................................ 169 162(1), 163(1) Appointment of Auditor, Dispensing with Auditor

15 Fundamental Changes .................................... 172 173, 176, 181–183, 188–190

Changes to Articles, Separate Class/Series Votes, Amalgamation, Continuance, Borrowing Powers/Sale of Assets, Dissent and Appraisal

16 Going-Private and Squeeze-Out Transactions . 180 193–194

17 Compulsory and Compelled Acquisitions ........ 180 206, 206.1

18 Liquidation and Dissolution ............................ 183 211(7)(d) Residue of Property Distributed to Shareholders

19 Investigations ................................................. 184 229 Investigation Remedy

20 Remedies, Offences, and Punishments ........... 184 239–242, 247 Complainant, Derivative Action, Oppression Remedy, Action for an Order to Comply

PART 1—INTERPRETATION AND APPLICATION 2 (1) In this Act,

[ … ] “affiliate” means an affiliated body corporate within the meaning of subsection (2);

“associate”, in respect of a relationship with a person, means

(a) a body corporate of which that person beneficially owns or controls, directly or indirectly, shares or

securities currently convertible into shares carrying more than ten per cent of the voting rights under all

circumstances or by reason of the occurrence of an event that has occurred and is continuing, or a

currently exercisable option or right to purchase such shares or such convertible securities,

[ … ]

“beneficial interest” means an interest arising out of the beneficial ownership of securities;

“beneficial ownership” includes ownership through any trustee, legal representative, agent or other intermediary;

[ … ] “distributing corporation” means, subject to subsections (6) and (7), a distributing corporation as defined in the

regulations;

[ … ] “going-private transaction” means a going-private transaction as defined in the regulations; [see SOR/2001-512 s 3(1) and Going-Private Transactions (p 73)]

[ … ]


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“ordinary resolution” means a resolution passed by a majority of the votes cast by the shareholders who voted in

respect of that resolution;

[ … ] “series”, in relation to shares, means a division of a class of shares;

“special resolution” means a resolution passed by a majority of not less than two-thirds of the votes cast by the

shareholders who voted in respect of that resolution or signed by all the shareholders entitled to vote on that

resolution;

“squeeze-out transaction” means a transaction by a corporation that is not a distributing corporation that would

require an amendment to its articles and would, directly or indirectly, result in the interest of a holder of shares of a

class of the corporation being terminated without the consent of the holder, and without substituting an interest of

equivalent value in shares issued by the corporation, which shares have equal or greater rights and privileges than the

shares of the affected class;

“unanimous shareholder agreement” means an agreement described in subsection 146(1) or a declaration of a

shareholder described in subsection 146(2).

Affiliated bodies corporate

(2) For the purposes of this Act,

(a) one body corporate is affiliated with another body corporate if one of them is the subsidiary of the other

or both are subsidiaries of the same body corporate or each of them is controlled by the same person; and

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

be affiliated with each other.

Control

(3) For the purposes of this Act, a body corporate is controlled by a person or by two or more bodies corporate if

(a) securities of the body corporate to which are attached more than fifty per cent of the votes that may be

cast to elect directors of the body corporate are held, other than by way of security only, by or for the

benefit of that person or by or for the benefit of those bodies corporate; and

(b) the votes attached to those securities are sufficient, if exercised, to elect a majority of the directors of the

body corporate.

Holding body corporate

(4) A body corporate is the holding body corporate of another if that other body corporate is its subsidiary.

Subsidiary body corporate

(5) A body corporate is a subsidiary of another body corporate if

(a) it is controlled by

(i) that other body corporate,

(ii) that other body corporate and one or more bodies corporate each of which is controlled by that

other body corporate, or

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

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

PART 2—INCORPORATION Incorporators

5 (1) One or more individuals not one of whom

(a) is less than eighteen years of age,

(b) is of unsound mind and has been so found by a court in Canada or elsewhere, or

(c) has the status of bankrupt,

may incorporate a corporation by signing articles of incorporation and complying with section 7.


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(2) One or more bodies corporate may incorporate a corporation by signing articles of incorporation and complying

with section 7.

Articles of incorporation

6 (1) Articles of incorporation shall follow the form that the Director fixes and shall set out, in respect of the proposed

corporation,

(a) the name of the corporation;

(b) the province in Canada where the registered office is to be situated;

(c) the classes and any maximum number of shares that the corporation is authorized to issue, and

(i) if there will be two or more classes of shares, the rights, privileges, restrictions and conditions

attaching to each class of shares, and

(ii) if a class of shares may be issued in series, the authority given to the directors to fix the number

of shares in, and to determine the designation of, and the rights, privileges, restrictions and

conditions attaching to, the shares of each series;

(d) if the issue, transfer or ownership of shares of the corporation is to be restricted, a statement to that

effect and a statement as to the nature of such restrictions;

(e) the number of directors or, subject to paragraph 107(a), the minimum and maximum number of directors

of the corporation; and

(f) any restrictions on the businesses that the corporation may carry on.

Additional provisions in articles

(2) The articles may set out any provisions permitted by this Act or by law to be set out in the by-laws of the

corporation.

Special majorities

(3) Subject to subsection (4), if the articles or a unanimous shareholder agreement require a greater number of votes

of directors or shareholders than that required by this Act to effect any action, the provisions of the articles or of

the unanimous shareholder agreement prevail.

(4) The articles may not require a greater number of votes of shareholders to remove a director than the number

required by section 109. [ which is an ordinary resolution ]

[ … ]

Certificate of incorporation

8 (1) Subject to subsection (2), on receipt of articles of incorporation, the Director shall issue a certificate of

incorporation in accordance with section 262.

(2) [ … ]

Effect of certificate

9 A corporation comes into existence on the date shown in the certificate of incorporation.

Name of corporation

10 [ … ]

Publication of name

(5) A corporation shall set out its name in legible characters in all contracts, invoices, negotiable instruments and

orders for goods or services issued or made by or on behalf of the corporation. [ See Wolfe v Moir, but note that

the word advertisement is not mentioned in the CBCA provision! ]


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Other name

(6) Subject to subsections (5) and 12(1), a corporation may carry on business under or identify itself by a name other

than its corporate name if that other name does not contain, other than in a figurative or descriptive sense, either

the word or expression “Limited”, “Limitée”, “Incorporated”, “Incorporée”, “Corporation” or “Société par actions de régime fédéral” or the corresponding abbreviation.

[ … ]

Personal liability

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. [ Note this means if you make an oral contract on behalf of a non-existent corporation, you can escape being bound altogether under the Common Law of Pre-Incorporation Contracts (p 24) ]

Pre-incorporation and preamalgamation 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.

[ See Sherwood Design Services Inc v 872935 Ontario Ltd, Canbar West Projects Ltd v Sure Shot Sandblasting & Painting Ltd ]

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.

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.

PART 3—CAPACITY AND POWERS Capacity of a corporation

15 (1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person. [ See

Salomon v Salomon & Co, Ltd ] (2) A corporation may carry on business throughout Canada.

(3) [ … ]

Powers of a corporation

16 [ … ]

Restricted business or powers

(2) A corporation shall not carry on any business or exercise any power that it is restricted by its articles from carrying

on or exercising, nor shall the corporation exercise any of its powers in a manner contrary to its articles.


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Rights preserved

(3) No act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only that the

act or transfer is contrary to its articles or this Act.

No constructive notice

17 No person is affected by or is deemed to have notice or knowledge of the contents of a document concerning a

corporation by reason only that the document has been filed by the Director or is available for inspection at an office of

the corporation.

Authority of directors, officers and agents

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

(a) the articles, by-laws and any unanimous shareholder agreement have not been complied with;

(b) the persons named in the most recent notice sent to the Director under section 106 or 113 are not the

directors of the corporation;

(c) the place named in the most recent notice sent to the Director under section 19 is not the registered office

of the corporation;

(d) a person held out by a corporation as a director, an officer or an agent 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 or agent; [ See Sherwood Design Services Inc v 872935 Ontario Ltd ]

(e) a document issued by any director, officer or agent of a corporation with actual or usual authority to issue

the document is not valid or not genuine; or

(f) a sale, lease or exchange of property referred to in subsection 189(3) was not authorized.

Exception

(2) Subsection (1) does not apply in respect of a person who has, or ought to have, knowledge of a situation described

in that subsection by virtue of their relationship to the corporation.

PART 4—REGISTERED OFFICE AND RECORDS Registered office

19 [ … ]

Notice of registered office

(2) A notice of registered office in the form that the Director fixes shall be sent to the Director together with any

articles that designate or change the province where the registered office of the corporation is located.

PART 5—CORPORATE FINANCE Shares

24 (1) Shares of a corporation shall be in registered form and shall be without nominal or par value.

(2) [ … ]

Rights attached to shares

(3) Where a corporation has only one class of shares, the rights of the holders thereof are equal in all respects and

include the rights

(a) to vote at any meeting of shareholders of the corporation;

(b) to receive any dividend declared by the corporation; and

(c) to receive the remaining property of the corporation on dissolution.


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Rights to classes of shares

(4) The articles may provide for more than one class of shares and, if they so provide,

(a) the rights, privileges, restrictions and conditions attaching to the shares of each class shall be set out

therein; and

(b) the rights set out in subsection (3) shall be attached to at least one class of shares but all such rights are

not required to be attached to one class.

Issue of shares

25 (1) Subject to the articles, the by-laws and any unanimous shareholder agreement and to section 28, shares may be

issued at such times and to such persons and for such considerations as the directors may determine.

Shares nonassessable

(2) Shares issued by a corporation are nonassessable and the holders are not liable to the corporation or to its creditors

in respect thereof.

Consideration

(3) A share shall not be issued until the consideration for the share is fully paid in money or in property or past services

that are not less in value than the fair equivalent of the money that the corporation would have received if the

share had been issued for money.

Consideration other than money

(4) In determining whether property or past services are the fair equivalent of a money consideration, the directors

may take into account reasonable charges and expenses of organization and reorganization and payments for

property and past services reasonably expected to benefit the corporation.

Definition of “property”

(5) For the purposes of this section, “property” does not include a promissory note, or a promise to pay, that is made

by a person to whom a share is issued, or a person who does not deal at arm’s length, within the meaning of that

expression in the Income Tax Act, with a person to whom a share is issued.

Stated capital account

26 (1) A corporation shall maintain a separate stated capital account for each class and series of shares it issues.

Entries in stated capital account

(2) A corporation shall add to the appropriate stated capital account the full amount of any consideration it receives for

any shares it issues.

(3) [ … ]

Shares in series

27 (1) The articles may authorize, subject to any limitations set out in them, the issue of any class of shares in one or more

series and may do either or both of the following:

(a) fix the number of shares in, and determine the designation, rights, privileges, restrictions and conditions

attaching to the shares of, each series; or

(b) authorize the directors to fix the number of shares in, and determine the designation, rights, privileges,

restrictions and conditions attaching to the shares of, each series.

Series participation

(2) If any cumulative dividends or amounts payable on return of capital in respect of a series of shares are not paid in

full, the shares of all series of the same class participate rateably in respect of accumulated dividends and return of

capital.


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Restrictions on series

(3) No rights, privileges, restrictions or conditions attached to a series of shares authorized under this section shall

confer on a series a priority in respect of dividends or return of capital over any other series of shares of the same

class that are then outstanding.

Amendment of articles

(4) If the directors exercise their authority under paragraph (1)(b), they shall, before the issue of shares of the series,

send, in the form that the Director fixes, articles of amendment to the Director to designate a series of shares.

Certificate of amendment

(5) On receipt of articles of amendment designating a series of shares, the Director shall issue a certificate of

amendment in accordance with section 262.


(6) The articles of the corporation are amended accordingly on the date shown in the certificate of amendment.

Pre-emptive right

28 (1) If the articles so provide, no shares of a class shall be issued unless the shares have first been offered to the

shareholders holding shares of that class, and those shareholders have a pre-emptive right to acquire the offered

shares in proportion to their holdings of the shares of that class, at such price and on such terms as those shares are

to be offered to others.

Exception

(2) Notwithstanding that the articles provide the pre-emptive right referred to in subsection (1), shareholders have no

pre-emptive right in respect of shares to be issued

(a) for a consideration other than money;

(b) as a share dividend; or

(c) pursuant to the exercise of conversion privileges, options or rights previously granted by the corporation.

[ … ]

Acquisition of corporation’s own shares

34 (1) Subject to subsection (2) and to its articles, a corporation may purchase or otherwise acquire shares issued by it.

Limitation

(2) A corporation shall not make any payment to purchase or otherwise acquire shares issued by it if there are

reasonable grounds for believing that

(a) the corporation is, or would after the payment be, unable to pay its liabilities as they become due; or

(b) the realizable value of the corporation’s assets would after the payment be less than the aggregate of its

liabilities and stated capital of all classes.

Alternative acquisition of corporation’s own shares

35 (1) Notwithstanding subsection 34(2), but subject to subsection (3) and to its articles, a corporation may purchase or

otherwise acquire shares issued by it to

(a) settle or compromise a debt or claim asserted by or against the corporation;

(b) eliminate fractional shares; or

(c) fulfil the terms of a non-assignable agreement under which the corporation has an option or is obliged to

purchase shares owned by a director, an officer or an employee of the corporation.

(2) Notwithstanding subsection 34(2), a corporation may purchase or otherwise acquire shares issued by it to

(a) satisfy the claim of a shareholder who dissents under section 190; or


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(b) comply with an order under section 241.

Limitation

(3) A corporation shall not make any payment to purchase or acquire under subsection (1) shares issued by it if there

are reasonable grounds for believing that


(b) the realizable value of the corporation’s assets would after the payment be less than the aggregate of

(i) its liabilities, and

(ii) the amount required for payment on a redemption or in a liquidation of all shares the holders of

which have the right to be paid before the holders of the shares to be purchased or acquired, to

the extent that the amount has not been included in its liabilities.

Redemption of shares

36 (1) Notwithstanding subsection 34(2) or 35(3), but subject to subsection (2) and to its articles, a corporation may

purchase or redeem any redeemable shares issued by it at prices not exceeding the redemption price thereof

stated in the articles or calculated according to a formula stated in the articles.

Limitation

(2) A corporation shall not make any payment to purchase or redeem any redeemable shares issued by it if there are

reasonable grounds for believing that


(b) the realizable value of the corporation’s assets would after the payment be less than the aggregate of

(i) its liabilities, and

(ii) the amount that would be required to pay the holders of shares that have a right to be paid, on

a redemption or in a liquidation, rateably with or before the holders of the shares to be

purchased or redeemed, to the extent that the amount has not been included in its liabilities.

[ … ]

Dividends

42 A corporation shall not declare or pay a dividend if there are reasonable grounds for believing that


(b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities and stated capital of all classes.

Form of dividend

43 (1) A corporation may pay a dividend by issuing fully paid shares of the corporation and, subject to section 42, a

corporation may pay a dividend in money or property.

(2) [ … ]

[ … ]

Shareholder immunity

45 (1) The shareholders of a corporation are not, as shareholders, liable for any liability, act or default of the corporation

except under subsection 38(4), 118(4) or (5), 146(5) or 226(4) or (5).

(2) [ … ]

PART 10—DIRECTORS AND OFFICERS Duty to manage or supervise management

102 (1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the


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business and affairs of a corporation.

Number of directors

(2) A corporation shall have one or more directors but a distributing corporation, any of the issued securities of which

remain outstanding and are held by more than one person, shall have not fewer than three directors, at least two

of whom are not officers or employees of the corporation or its affiliates.

By-laws

103 (1) Unless the articles, by-laws or a unanimous shareholder agreement otherwise provide, the directors may, by

resolution, make, amend or repeal any by-laws that regulate the business or affairs of the corporation.

Shareholder approval

(2) The directors shall submit a by-law, or an amendment or a repeal of a by-law, made under subsection (1) to the

shareholders at the next meeting of shareholders, and the shareholders may, by ordinary resolution, confirm,

reject or amend the by-law, amendment or repeal.

Effective date

(3) A by-law, or an amendment or a repeal of a by-law, is effective from the date of the resolution of the directors

under subsection (1) until it is confirmed, confirmed as amended or rejected by the shareholders under subsection

(2) or until it ceases to be effective under subsection (4) and, where the by-law is confirmed or confirmed as

amended, it continues in effect in the form in which it was so confirmed.

(4) If a by-law, an amendment or a repeal is rejected by the shareholders, or if the directors do not submit a by-law,

an amendment or a repeal to the shareholders as required under subsection (2), the by-law, amendment or repeal

ceases to be effective and no subsequent resolution of the directors to make, amend or repeal a by-law having

substantially the same purpose or effect is effective until it is confirmed or confirmed as amended by the

shareholders.

Shareholder proposal

(5) A shareholder entitled to vote at an annual meeting of shareholders may, in accordance with section 137, make a

proposal to make, amend or repeal a by-law.

Organization meeting

104 (1) After issue of the certificate of incorporation, a meeting of the directors of the corporation shall be held at which

the directors may

(a) make by-laws;

(b) adopt forms of security certificates and corporate records;

(c) authorize the issue of securities;

(d) appoint officers;

(e) appoint an auditor to hold office until the first annual meeting of shareholders;

(f) make banking arrangements; and

(g) transact any other business.

Exception

(2) Subsection (1) does not apply to a body corporate to which a certificate of amalgamation has been issued under

subsection 185(4) or to which a certificate of continuance has been issued under subsection 187(4).

Calling meeting

(3) An incorporator or a director may call the meeting of directors referred to in subsection (1) by giving not less than

five days’ notice thereof by mail to each director, stating the time and place of the meeting.


155

Qualifications of directors

105 (1) The following persons are disqualified from being a director of a corporation:

(a) anyone who is less than eighteen years of age;

(b) anyone who is of unsound mind and has been so found by a court in Canada or elsewhere;

(c) a person who is not an individual; or

(d) a person who has the status of bankrupt.

Further qualifications

(2) Unless the articles otherwise provide, a director of a corporation is not required to hold shares issued by the

corporation.

Residency

(3) [ … ]

Notice of directors

106 (1) At the time of sending articles of incorporation, the incorporators shall send to the Director a notice of directors in

the form that the Director fixes, and the Director shall file the notice.

Term of office

(2) Each director named in the notice referred to in subsection (1) holds office from the issue of the certificate of

incorporation until the first meeting of shareholders.

Election of directors

(3) Subject to paragraph 107(b), shareholders of a corporation shall, by ordinary resolution at the first meeting of

shareholders and at each succeeding annual meeting at which an election of directors is required, elect directors

to hold office for a term expiring not later than the close of the third annual meeting of shareholders following

the election.

Staggered terms

(4) It is not necessary that all directors elected at a meeting of shareholders hold office for the same term.

No stated terms

(5) A director not elected for an expressly stated term ceases to hold office at the close of the first annual meeting of

shareholders following the director’s election.

Incumbent directors

(6) Notwithstanding subsections (2), (3) and (5), if directors are not elected at a meeting of shareholders the

incumbent directors continue in office until their successors are elected.

Vacancy among candidates

(7) If a meeting of shareholders fails to elect the number or the minimum number of directors required by the articles

by reason of the lack of consent, disqualification, incapacity or death of any candidates, the directors elected at

that meeting may exercise all the powers of the directors if the number of directors so elected constitutes a

quorum.

Appointment of directors

(8) The directors may, if the articles of the corporation so provide, appoint one or more additional directors, who shall

hold office for a term expiring not later than the close of the next annual meeting of shareholders, but the total

number of directors so appointed may not exceed one third of the number of directors elected at the previous

annual meeting of shareholders.


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Election or appointment as director

(9) An individual who is elected or appointed to hold office as a director is not a director and is deemed not to have

been elected or appointed to hold office as a director unless

(a) he or she was present at the meeting when the election or appointment took place and he or she did not

refuse to hold office as a director; or

(b) he or she was not present at the meeting when the election or appointment took place and

(i) he or she consented to hold office as a director in writing before the election or appointment

or within ten days after it, or

(ii) he or she has acted as a director pursuant to the election or appointment.

[ … ]

Ceasing to hold office

108 (1) A director of a corporation ceases to hold office when the director

(a) dies or resigns;

(b) is removed in accordance with section 109; or

(c) becomes disqualified under subsection 105(1).

Effective date of resignation

(2) [ … ]

Removal of directors

109 (1) Subject to paragraph 107(g), the shareholders of a corporation may by ordinary resolution at a special meeting

remove any director or directors from office. [ Normally unnecessary at the annual meeting due to elections… ]

Exception

(2) Where the holders of any class or series of shares of a corporation have an exclusive right to elect one or more

directors, a director so elected may only be removed by an ordinary resolution at a meeting of the shareholders of

that class or series.

Vacancy

(3) Subject to paragraphs 107(b) to (e), a vacancy created by the removal of a director may be filled at the meeting of

the shareholders at which the director is removed or, if not so filled, may be filled under section 111.

Resignation (or removal)

(4) If all of the directors have resigned or have been removed without replacement, a person who manages or

supervises the management of the business and affairs of the corporation is deemed to be a director for the

purposes of this Act.

Exception

(5) [ … ]

[ … ]

Filling vacancy

111 (1) Despite subsection 114(3), but subject to subsections (3) and (4), a quorum of directors may fill a vacancy among

the directors, except a vacancy resulting from an increase in the number or the minimum or maximum number of

directors or a failure to elect the number or minimum number of directors provided for in the articles.


157

Calling meeting

(2) If there is not a quorum of directors or if there has been a failure to elect the number or minimum number of

directors provided for in the articles, the directors then in office shall without delay call a special meeting of

shareholders to fill the vacancy and, if they fail to call a meeting or if there are no directors then in office, the

meeting may be called by any shareholder.

Class director

(3) [ … ]

Shareholders filling vacancy

(4) [ … ]

Unexpired term

(5) A director appointed or elected to fill a vacancy holds office for the unexpired term of their predecessor.

[ … ]

Meeting of directors

114 (1) [ … ]

Quorum

(2) Subject to the articles or by-laws, a majority of the number of directors or minimum number of directors required

by the articles constitutes a quorum at any meeting of directors, and, notwithstanding any vacancy among the

directors, a quorum of directors may exercise all the powers of the directors.

(2) [ … ]

Delegation

115 (1) Directors of a corporation may appoint from their number a managing director who is a resident Canadian or a

committee of directors and delegate to such managing director or committee any of the powers of the directors.

(2) [ … ]

Limits on authority

(3) Notwithstanding subsection (1), no managing director and no committee of directors has authority to

(a) submit to the shareholders any question or matter requiring the approval of the shareholders;

(b) fill a vacancy among the directors or in the office of auditor, or appoint additional directors;

(c) issue securities except as authorized by the directors;

(c.1) issue shares of a series under section 27 except as authorized by the directors;

(d) declare dividends;

(e) purchase, redeem or otherwise acquire shares issued by the corporation;

(f) pay a commission referred to in section 41 except as authorized by the directors;

(g) approve a management proxy circular referred to in Part XIII;

(h) approve a take-over bid circular or directors’ circular referred to in Part XVII;

(i) approve any financial statements referred to in section 155; or

(j) adopt, amend or repeal by-laws.

Validity of acts of directors and officers

116 An act of a director or officer is valid notwithstanding an irregularity in their election or appointment or a defect in

their qualification.


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Resolution in lieu of meeting

117 (1) A resolution in writing, signed by all the directors entitled to vote on that resolution at a meeting of directors or

committee of directors, is as valid as if it had been passed at a meeting of directors or committee of directors.

(2) [ … ]

Directors’ liability

118 (1) Directors of a corporation who vote for or consent to a resolution authorizing the issue of a share under section 25

for a consideration other than money are jointly and severally, or solidarily, liable to the corporation to make good

any amount by which the consideration received is less than the fair equivalent of the money that the corporation

would have received if the share had been issued for money on the date of the resolution.

(2) Directors of a corporation who vote for or consent to a resolution authorizing any of the following are jointly and

severally, or solidarily, liable to restore to the corporation any amounts so distributed or paid and not otherwise

recovered by the corporation:

(a) a purchase, redemption or other acquisition of shares contrary to section 34, 35 or 36;

(b) a commission contrary to section 41;

(c) a payment of a dividend contrary to section 42;

(d) a payment of an indemnity contrary to section 124; or

(e) a payment to a shareholder contrary to section 190 or 241.

Contribution

(3) A director who has satisfied a judgment rendered under this section is entitled to contribution from the other

directors who voted for or consented to the unlawful act on which the judgment was founded.

Recovery

(4) A director liable under subsection (2) is entitled to apply to a court for an order compelling a shareholder or other

recipient to pay or deliver to the director any money or property that was paid or distributed to the shareholder or

other recipient contrary to section 34, 35, 36, 41, 42, 124, 190 or 241.

Order of court

(5) In connection with an application under subsection (4) a court may, if it is satisfied that it is equitable to do so,

(a) order a shareholder or other recipient to pay or deliver to a director any money or property that was paid

or distributed to the shareholder or other recipient contrary to section 34, 35, 36, 41, 42, 124, 190 or 241;

(b) order a corporation to return or issue shares to a person from whom the corporation has purchased,

redeemed or otherwise acquired shares; or

(c) make any further order it thinks fit.

No liability

(6) A director who proves that the director did not know and could not reasonably have known that the share was

issued for a consideration less than the fair equivalent of the money that the corporation would have received if

the share had been issued for money is not liable under subsection (1).

Limitation

(7) An action to enforce a liability imposed by this section may not be commenced after two years from the date of

the resolution authorizing the action complained of.

Liability of directors for wages

119 (1) Directors of a corporation are jointly and severally, or solidarily, liable to employees of the corporation for all debts

not exceeding six months wages payable to each such employee for services performed for the corporation while

they are such directors respectively.


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Conditions precedent to liability

(2) A director is not liable under subsection (1) unless

(a) the corporation has been sued for the debt within six months after it has become due and execution has

been returned unsatisfied in whole or in part;

(b) the corporation has commenced liquidation and dissolution proceedings or has been dissolved and a

claim for the debt has been proved within six months after the earlier of the date of commencement of

the liquidation and dissolution proceedings and the date of dissolution; or

(c) the corporation has made an assignment or a bankruptcy order has been made against it under the

Bankruptcy and Insolvency Act and a claim for the debt has been proved within six months after the date

of the assignment or bankruptcy order.

Limitation

(3) A director, unless sued for a debt referred to in subsection (1) while a director or within two years after ceasing to

be a director, is not liable under this section.

Amount due after execution

(4) Where execution referred to in paragraph (2)(a) has issued, the amount recoverable from a director is the amount

remaining unsatisfied after execution.

Subrogation of director

(5) Where a director pays a debt referred to in subsection (1) that is proved in liquidation and dissolution or

bankruptcy proceedings, the director is entitled to any preference that the employee would have been entitled to,

and where a judgment has been obtained, the director is entitled to an assignment of the judgment.

Contribution

(6) A director who has satisfied a claim under this section is entitled to contribution from the other directors who

were liable for the claim.

Disclosure of interest

120 (1) A director or an officer of a corporation shall disclose to the corporation, in writing or by requesting to have it

entered in the minutes of meetings of directors or of meetings of committees of directors, the nature and extent

of any interest that he or she has in a material contract or material transaction, whether made or proposed, with

the corporation, if the director or officer [ note the word “proposed” ] (a) is a party to the contract or transaction;

(b) is a director or an officer, or an individual acting in a similar capacity, of a party to the contract or

transaction; or

(c) has a material interest in a party to the contract or transaction.

Time of disclosure for director

(2) The disclosure required by subsection (1) shall be made, in the case of a director,

(a) at the meeting at which a proposed contract or transaction is first considered;

(b) if the director was not, at the time of the meeting referred to in paragraph (a), interested in a proposed

contract or transaction, at the first meeting after he or she becomes so interested;

(c) if the director becomes interested after a contract or transaction is made, at the first meeting after he or

she becomes so interested; or

(d) if an individual who is interested in a contract or transaction later becomes a director, at the first meeting

after he or she becomes a director.

Time of disclosure for officer

(3) The disclosure required by subsection (1) shall be made, in the case of an officer who is not a director,


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(a) immediately after he or she becomes aware that the contract, transaction, proposed contract or

proposed transaction is to be considered or has been considered at a meeting;

(b) if the officer becomes interested after a contract or transaction is made, immediately after he or she

becomes so interested; or

(c) if an individual who is interested in a contract later becomes an officer, immediately after he or she

becomes an officer.

Time of disclosure for director or officer

(4) If a material contract or material transaction, whether entered into or proposed, is one that, in the ordinary course

of the corporation’s business, would not require approval by the directors or shareholders, a director or officer

shall disclose, in writing to the corporation or request to have it entered in the minutes of meetings of directors or

of meetings of committees of directors, the nature and extent of his or her interest immediately after he or she

becomes aware of the contract or transaction.

Voting

(5) A director required to make a disclosure under subsection (1) shall not vote on any resolution to approve the

contract or transaction unless the contract or transaction

(a) relates primarily to his or her remuneration as a director, officer, employee or agent of the corporation or

an affiliate;

(b) is for indemnity or insurance under section 124; or

(c) is with an affiliate.

Continuing disclosure

(6) For the purposes of this section, a general notice to the directors declaring that a director or an officer is to be

regarded as interested, for any of the following reasons, in a contract or transaction made with a party, is a

sufficient declaration of interest in relation to the contract or transaction:

(a) the director or officer is a director or officer, or acting in a similar capacity, of a party referred to in

paragraph (1)(b) or (c);

(b) the director or officer has a material interest in the party; or

(c) there has been a material change in the nature of the director’s or the officer’s interest in the party.

(6.1) [ … ]

Avoidance standards

(7) A contract or transaction for which disclosure is required under subsection (1) is not invalid, and the director or

officer is not accountable to the corporation or its shareholders for any profit realized from the contract or

transaction, because of the director’s or officer’s interest in the contract or transaction or because the director was

present or was counted to determine whether a quorum existed at the meeting of directors or committee of

directors that considered the contract or transaction, if

(a) disclosure of the interest was made in accordance with subsections (1) to (6);

(b) the directors approved the contract or transaction; and

(c) the contract or transaction was reasonable and fair to the corporation when it was approved.

Confirmation by shareholders

(7.1) Even if the conditions of subsection (7) are not met, a director or officer, acting honestly and in good faith, is not

accountable to the corporation or to its shareholders for any profit realized from a contract or transaction for

which disclosure is required under subsection (1), and the contract or transaction is not invalid by reason only of

the interest of the director or officer in the contract or transaction, if

(a) the contract or transaction is approved or confirmed by special resolution at a meeting of the

shareholders;


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(b) disclosure of the interest was made to the shareholders in a manner sufficient to indicate its nature

before the contract or transaction was approved or confirmed; and

(c) the contract or transaction was reasonable and fair to the corporation when it was approved or

confirmed.


(8) If a director or an officer of a corporation fails to comply with this section, a court may, on application of the

corporation or any of its shareholders, set aside the contract or transaction on any terms that it thinks fit, or

require the director or officer to account to the corporation for any profit or gain realized on it, or do both those

things. [Even if a contract is not made, the wording “proposed” from subsection (1) suggests an accounting might

still be possible under subsection (8). Note that the case of Churchill Pulp Mill Ltd v Manitoba (p 96) found this subsection to be a separate, self-executing remedy…]

Officers

121 Subject to the articles, the by-laws or any unanimous shareholder agreement,

(a) the directors may designate the offices of the corporation, appoint as officers persons of full capacity,

specify their duties and delegate to them powers to manage the business and affairs of the corporation,

except powers to do anything referred to in subsection 115(3);

(b) [ … ]

Duty of care of directors and officers

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; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable

circumstances.

Duty to comply

(2) Every director and officer of a corporation shall comply with this Act, the regulations, articles, by-laws and any

unanimous shareholder agreement.

No exculpation

(3) Subject to subsection 146(5), no provision in a contract, the articles, the by-laws or a resolution relieves a director

or officer from the duty to act in accordance with this Act or the regulations or relieves them from liability for a

breach thereof. [ Corporation can’t contract directors out of their duties ]

Dissent

123 (1) A director who is present at a meeting of directors or committee of directors is deemed to have consented to any

resolution passed or action taken at the meeting unless

(a) the director requests a dissent to be entered in the minutes of the meeting, or the dissent has been

entered in the minutes;

(b) the director sends a written dissent to the secretary of the meeting before the meeting is adjourned; or

(c) the director sends a dissent by registered mail or delivers it to the registered office of the corporation

immediately after the meeting is adjourned.

Loss of right to dissent

(2) A director who votes for or consents to a resolution is not entitled to dissent under subsection (1).

Dissent of absent director

(3) A director who was not present at a meeting at which a resolution was passed or action taken is deemed to have

consented thereto unless within seven days after becoming aware of the resolution, the director


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(a) causes a dissent to be placed with the minutes of the meeting; or

(b) sends a dissent by registered mail or delivers it to the registered office of the corporation.

Defence—reasonable diligence

(4) A director is not liable under section 118 or 119, and has complied with his or her duties under subsection 122(2)

[which is the duty to comply], if the director exercised the care, diligence and skill that a reasonably prudent person

would have exercised in comparable circumstances, including reliance in good faith on

(a) financial statements of the corporation represented to the director by an officer of the corporation or in a

written report of the auditor of the corporation fairly to reflect the financial condition of the corporation;

or

(b) a report of a person whose profession lends credibility to a statement made by the professional person.

Defence—good faith

(5) A director has complied with his or her duties under subsection 122(1) if the director relied in good faith on

(a) financial statements of the corporation represented to the director by an officer of the corporation or in a

written report of the auditor of the corporation fairly to reflect the financial condition of the corporation;

or

(b) a report of a person whose profession lends credibility to a statement made by the professional person.

Indemnification

124 (1) A corporation may indemnify a director or officer of the corporation, a former director or officer of the

corporation or another individual who acts or acted at the corporation’s request as a director or officer, or an individual acting in a similar capacity, of another entity, against all costs, charges and expenses, including an

amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil,

criminal, administrative, investigative or other proceeding in which the individual is involved because of that

association with the corporation or other entity.

Advance of costs

(2) A corporation may advance moneys to a director, officer or other individual for the costs, charges and expenses of

a proceeding referred to in subsection (1). The individual shall repay the moneys if the individual does not fulfil the

conditions of subsection (3). [ See Manitoba (Securities Commission) v Crocus Investment Fund (p 108) ]

Limitation

(3) A corporation may not indemnify an individual under subsection (1) unless the individual

(a) acted honestly and in good faith with a view to the best interests of the corporation, or, as the case may

be, to the best interests of the other entity for which the individual acted as director or officer or in a

similar capacity at the corporation’s request; [ See Blair v Consolidated Enfield Corp (p 92), Bennett v Bennett Environmental Inc (p 91) ] and

(b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty,

the individual had reasonable grounds for believing that the individual’s conduct was lawful. [Onus on

corporation to prove lack of reasonable grounds: Bennett v Bennett Environmental Inc (p 91) ]

Indemnification in derivative actions

(4) A corporation may with the approval of a court, indemnify an individual referred to in subsection (1), or advance

moneys under subsection (2), in respect of an action by or on behalf of the corporation or other entity to procure a

judgment in its favour, to which the individual is made a party because of the individual’s association with the

corporation or other entity as described in subsection (1) against all costs, charges and expenses reasonably

incurred by the individual in connection with such action, if the individual fulfils the conditions set out in

subsection (3).


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Right to indemnity

(5) Despite subsection (1), an individual referred to in that subsection is entitled to indemnity from the corporation in

respect of all costs, charges and expenses reasonably incurred by the individual in connection with the defence of

any civil, criminal, administrative, investigative or other proceeding to which the individual is subject because of

the individual’s association with the corporation or other entity as described in subsection (1), if the individual

seeking indemnity

(a) was not judged by the court or other competent authority to have committed any fault or omitted to do

anything that the individual ought to have done; and

(b) fulfils the conditions set out in subsection (3).

Insurance

(6) A corporation may purchase and maintain insurance for the benefit of an individual referred to in subsection (1)

against any liability incurred by the individual

(a) in the individual’s capacity as a director or officer of the corporation; or

(b) in the individual’s capacity as a director or officer, or similar capacity, of another entity, if the individual

acts or acted in that capacity at the corporation’s request.


(7) A corporation, an individual or an entity referred to in subsection (1) may apply to a court for an order approving

an indemnity under this section and the court may so order and make any further order that it sees fit. [RD loves this provision.]

Notice to Director

(8) An applicant under subsection (7) shall give the Director notice of the application and the Director is entitled to

appear and be heard in person or by counsel.

Other notice

(9) On an application under subsection (7) the court may order notice to be given to any interested person and the

person is entitled to appear and be heard in person or by counsel.

[ … ]

PART 12—SHAREHOLDERS Place of meetings

132 (1) Meetings of shareholders of a corporation shall be held at the place within Canada provided in the by-laws or, in

the absence of such provision, at the place within Canada that the directors determine.

(2) [ … ]

Calling annual meetings

133 (1) The directors of a corporation shall call an annual meeting of shareholders

(a) not later than eighteen months after the corporation comes into existence; and

(b) subsequently, not later than fifteen months after holding the last preceding annual meeting but no later

than six months after the end of the corporation’s preceding financial year.

Calling special meetings

(2) The directors of a corporation may at any time call a special meeting of shareholders.

Order to delay calling of annual meeting

(3) Despite subsection (1), the corporation may apply to the court for an order extending the time for calling an annual

meeting.


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Fixing record date

133 (1) The directors may, within the prescribed period, fix in advance a date as the record date for the purpose of

determining shareholders

(a) entitled to receive payment of a dividend;

(b) entitled to participate in a liquidation distribution;

(c) entitled to receive notice of a meeting of shareholders;

(d) entitled to vote at a meeting of shareholders; or

(e) for any other purpose.

No record date fixed

(2) If no record date is fixed, [ … ] [ … ]

Notice of meeting

135 (1) Notice of the time and place of a meeting of shareholders shall be sent within the prescribed period [between 60

and 21 days before the meeting is held: SOR 2001-512 s 44 ] to

(a) each shareholder entitled to vote at the meeting;

(b) each director; and

(c) the auditor of the corporation.

[ See also NI 54–101 (p 62) ]

Exception—not a distributing corporation

(1.1) In the case of a corporation that is not a distributing corporation, the notice may be sent within a shorter period if

so specified in the articles or by-laws.

Exception—shareholders not registered

(2) A notice of a meeting is not required to be sent to shareholders who were not registered on the records of the

corporation or its transfer agent on the record date determined under paragraph 134(1)(c) or subsection 134(2),

but failure to receive a notice does not deprive a shareholder of the right to vote at the meeting.

Adjournment

(3) [ … ]

Notice of adjourned meeting

(4) [ … ]

Business

(5) All business transacted at a special meeting of shareholders and all business transacted at an annual meeting of

shareholders, except consideration of the financial statements, auditor’s report, election of directors and

reappointment of the incumbent auditor, is deemed to be special business.

Notice of business

(6) Notice of a meeting of shareholders at which special business is to be transacted shall state

(a) the nature of that business in sufficient detail to permit the shareholder to form a reasoned judgment

thereon; and

(b) the text of any special resolution to be submitted to the meeting.

[ … ]


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Proposals

137 (1) Subject to subsections (1.1) and (1.2), a registered holder or beneficial owner of shares that are entitled to be voted

at an annual meeting of shareholders may

(a) submit to the corporation notice of any matter that the person proposes to raise at the meeting (a

“proposal”); and

(b) discuss at the meeting any matter in respect of which the person would have been entitled to submit a

proposal.

Persons eligible to make proposals

(1.1) To be eligible to submit a proposal, a person

(a) must be, for at least the prescribed period [6 month period immediately before shareholder submits

proposal: SOR 2001/512 s 46(b)], the registered holder or the beneficial owner of at least the prescribed number [1% of total outstanding, or $2,000 aggregate value: SOR 2001/512 s 46(a)] of outstanding shares

of the corporation; or

(b) must have the support of persons who, in the aggregate, and including or not including the person that

submits the proposal, have been, for at least the prescribed period, the registered holders, or the

beneficial owners of, at least the prescribed number of outstanding shares of the corporation.

[ … ]: ss (1.2–1.4 removed)

Information circular

(2) A corporation that solicits proxies shall set out the proposal in the management proxy circular required by section

150 or attach the proposal thereto.

Supporting statement

(3) If so requested by the person who submits a proposal, the corporation shall include in the management proxy

circular or attach to it a statement in support of the proposal by the person and the name and address of the

person. The statement and the proposal must together not exceed the prescribed maximum number of words.

Nomination for director

(4) A proposal may include nominations for the election of directors if the proposal is signed by one or more holders of

shares representing in the aggregate not less than five per cent of the shares or five per cent of the shares of a class

of shares of the corporation entitled to vote at the meeting to which the proposal is to be presented, but this

subsection does not preclude nominations made at a meeting of shareholders.

Exemptions

(5) A corporation is not required to comply with subsections (2) and (3) if

(a) the proposal is not submitted to the corporation at least the prescribed number of days before the

anniversary date of the notice of meeting that was sent to shareholders in connection with the previous

annual meeting of shareholders;

(b) it clearly appears that the primary purpose of the proposal is to enforce a personal claim or redress a

personal grievance against the corporation or its directors, officers or security holders;

(b.1) it clearly appears that the proposal does not relate in a significant way to the business or affairs of the

corporation;

(c) not more than the prescribed period before the receipt of a proposal, a person failed to present, in person

or by proxy, at a meeting of shareholders, a proposal that at the person’s request, had been included in a

management proxy circular relating to the meeting;

(d) substantially the same proposal was submitted to shareholders in a management proxy circular or a

dissident’s proxy circular relating to a meeting of shareholders held not more than the prescribed period


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before the receipt of the proposal and did not receive the prescribed minimum amount of support at the

meeting; or

(e) the rights conferred by this section are being abused to secure publicity.

Corporation may refuse to include proposal

(5.1) If a person who submits a proposal fails to continue to hold or own the number of shares referred to in subsection

(1.1) up to and including the day of the meeting, the corporation is not required to set out in the management

proxy circular, or attach to it, any proposal submitted by that person for any meeting held within the prescribed

period following the date of the meeting.

(6) [ … ]

[ … ]

Right to vote

140 (1) Unless the articles otherwise provide, each share of a corporation entitles the holder thereof to one vote at a

meeting of shareholders. [Holder thereof is a registered shareholder]

Representative

(2) If a body corporate or association is a shareholder of a corporation, the corporation shall recognize any individual

authorized by a resolution of the directors or governing body of the body corporate or association to represent it at

meetings of shareholders of the corporation.

Powers of representative

(3) An individual authorized under subsection (2) may exercise on behalf of the body corporate or association all the

powers it could exercise if it were an individual shareholder.

Joint shareholders

(4) Unless the by-laws otherwise provide, if two or more persons hold shares jointly, one of those holders present at a

meeting of shareholders may in the absence of the others vote the shares, but if two or more of those persons who

are present, in person or by proxy, vote, they shall vote as one on the shares jointly held by them.

[ … ]

Resolution in lieu of meeting

142 (1) Except where a written statement is submitted by a director under subsection 110(2) or by an auditor under

subsection 168(5),

(a) a resolution in writing signed by all the shareholders entitled to vote on that resolution at a meeting of

shareholders is as valid as if it had been passed at a meeting of the shareholders; and

(b) a resolution in writing dealing with all matters required by this Act to be dealt with at a meeting of

shareholders, and signed by all the shareholders entitled to vote at that meeting, satisfies all the

requirements of this Act relating to meetings of shareholders.

(2) [ … ]

Requisition of meeting

143 (1) The holders of not less than five per cent of the issued shares of a corporation that carry the right to vote at a

meeting sought to be held may requisition the directors to call a meeting of shareholders for the purposes stated in

the requisition.


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Form

(2) The requisition referred to in subsection (1), which may consist of several documents of like form each signed by

one or more shareholders, shall state the business to be transacted at the meeting and shall be sent to each

director and to the registered office of the corporation.

Directors calling meeting

(3) On receiving the requisition referred to in subsection (1), the directors shall call a meeting of shareholders to

transact the business stated in the requisition, unless

(a) a record date has been fixed under paragraph 134(1)(c) and notice of it has been given under subsection

134(3);

(b) the directors have called a meeting of shareholders and have given notice thereof under section 135; or

(c) the business of the meeting as stated inthe requisition includes matters described in paragraphs 137(5)(b)

to (e).

Shareholder calling meeting

(4) If the directors do not within twenty-one days after receiving the requisition referred to in subsection (1) call a

meeting, any shareholder who signed the requisition may call the meeting.

Procedure

(5) A meeting called under this section shall be called as nearly as possible in the manner in which meetings are to be

called pursuant to the by-laws, this Part and Part XIII.

Reimbursement

(6) Unless the shareholders otherwise resolve at a meeting called under subsection (4), the corporation shall reimburse

the shareholders the expenses reasonably incurred by them in requisitioning, calling and holding the meeting. by

court

Meeting called by a court

144 (1) A court, on the application of a director, a shareholder who is entitled to vote at a meeting of shareholders or the

Director, may order a meeting of a corporation to be called, held and conducted in the manner that the court

directs, if

(a) it is impracticable to call the meeting within the time or in the manner in which those meetings are to be

called;

(b) it is impracticable to conduct the meeting in the manner required by this Act or the by-laws; or

(c) the court thinks that the meeting should be called, held and conducted within the time or in the manner it

directs for any other reason.

[ See Re Routley’s Holdings Ltd (p 119), Re Canadian Javelin Ltd (p 118) ]

Varying quorum

(2) Without restricting the generality of subsection (1), the court may order that the quorum required by the by-laws or

this Act be varied or dispensed with at a meeting called, held and conducted pursuant to this section.

Valid meeting

(3) A meeting called, held and conducted pursuant to this section is for all purposes a meeting of shareholders of the

corporation duly called, held and conducted. [ See, in conjunction w s 145, Charlebois v Bienvenu (p 95) ]

Court review of election

145 (1) A corporation or a shareholder or director may apply to a court to determine any controversy with respect to an

election or appointment of a director or auditor of the corporation.


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Powers of court

(2) On an application under this section, the court may make any order it thinks fit including, without limiting the

generality of the foregoing,

(a) an order restraining a director or auditor whose election or appointment is challenged from acting pending

determination of the dispute;

(b) an order declaring the result of the disputed election or appointment;

(c) an order requiring a new election or appointment, and including in the order directions for the

management of the business and affairs of the corporation until a new election is held or appointment

made [See, in conjunction w s 143(3), Charlebois ]; and

(d) an order determining the voting rights of shareholders and of persons claiming to own shares.

Pooling agreement

145.1 A written agreement between two or more shareholders may provide that in exercising voting rights the shares

held by them shall be voted as provided in the agreement. [ Ratio from Ringuet v Bergeron (p 121) ]

Unanimous shareholder agreement

146 (1) An otherwise lawful written agreement among all the shareholders of a corporation, or among all the shareholders

and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the directors

to manage, or supervise the management of, the business and affairs of the corporation is valid. [ Note it says all shareholders, not all voting shareholders! ]

Declaration by single shareholder

(2) If a person who is the beneficial owner of all the issued shares of a corporation makes a written declaration that

restricts in whole or in part the powers of the directors to manage, or supervise the management of, the business

and affairs of the corporation, the declaration is deemed to be a unanimous shareholder agreement.

Constructive party

(3) A purchaser or transferee of shares subject to a unanimous shareholder agreement is deemed to be a party to the

agreement.

When no notice given

(4) If notice is not given to a purchaser or transferee of the existence of a unanimous shareholder agreement, in the

manner referred to in subsection 49(8) or otherwise, the purchaser or transferee may, no later than 30 days after

they become aware of the existence of the unanimous shareholder agreement, rescind the transaction by which

they acquired the shares.

Rights of shareholder

(5) To the extent that a unanimous shareholder agreement restricts the powers of the directors to manage, or

supervise the management of, the business and affairs of the corporation, parties to the unanimous shareholder

agreement who are given that power to manage or supervise the management of the business and affairs of the

corporation have all the rights, powers, duties and liabilities of a director of the corporation, whether they arise

under this Act or otherwise, including any defences available to the directors, and the directors are relieved of their

rights, powers, duties and liabilities, including their liabilities under section 119, to the same extent.

Discretion of shareholders

(6) Nothing in this section prevents shareholders from fettering their discretion when exercising the powers of

directors under a unanimous shareholder agreement.


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PART 13—PROXIES Definitions

147 In this Part,

“form of proxy” means a written or printed form that, on completion and execution by or on behalf of a shareholder,

becomes a proxy;

“intermediary” means a person who holds a security on behalf of another person who is not the registered holder of

the security, and includes

(a) a securities broker or dealer required to be registered to trade or deal in securities under the laws of any

jurisdiction;

(b) a securities depositary;

(c) a financial institution;

(d) in respect of a clearing agency, a securities dealer, trust company, bank or other person, including another

clearing agency, on whose behalf the clearing agency or its nominees hold securities of an issuer;

(e) a trustee or administrator of a self-administered retirement savings plan, retirement income fund,

education savings plan or other similar self-administered savings or investment plan registered under the

Income Tax Act;

(f) a nominee of a person referred to in any of paragraphs (a) to (e); and

(g) a person who carries out functions similar to those carried out by individuals or entities referred to in any

of paragraphs (a) to (e) and that holds a security registered in its name, or in the name of its nominee, on

behalf of another person who is not the registered holder of the security.

“proxy” means a completed and executed form of proxy by means of which a shareholder appoints a proxyholder to

attend and act on the shareholder’s behalf at a meeting of shareholders;

“solicit” or “solicitation”

(a) includes

(i) a request for a proxy whether or not accompanied by or included in a form of proxy,

(ii) a request to execute or not to execute a form of proxy or to revoke a proxy,

(iii) the sending of a form of proxy or other communication to a shareholder under circumstances

reasonably calculated to result in the procurement, withholding or revocation of a proxy, and

(iv) the sending of a form of proxy to a shareholder under section 149; but

(b) does not include

(i) the sending of a form of proxy in response to an unsolicited request made by or on behalf of a

shareholder,

(ii) the performance of administrative acts or professional services on behalf of a person soliciting a

proxy,

(iii) the sending by an intermediary of the documents referred to in section 153,

(iv) a solicitation by a person in respect of shares of which the person is the beneficial owner,

(v) a public announcement, as prescribed, by a shareholder of how the shareholder intends to vote

and the reasons for that decision,

(vi) a communication for the purposes of obtaining the number of shares required for a shareholder

proposal under subsection 137(1.1), or

(vii) a communication, other than a solicitation by or on behalf of the management of the

corporation, that is made to shareholders, in any circumstances that may be prescribed;

“solicitation by or on behalf of the management of a corporation” means a solicitation by any person pursuant to a

resolution or instructions of, or with the acquiescence of, the directors or a committee of the directors.

Appointing proxyholder

148 (1) A shareholder entitled to vote at a meeting of shareholders may by means of a proxy appoint a proxyholder or one


170

or more alternate proxyholders who are not required to be shareholders, to attend and act at the meeting in the manner and to the extent authorized by the proxy and with the authority conferred by the proxy.

(2) [ … ]

Mandatory solicitation

149 (1) Subject to subsection (2), the management of a corporation shall, concurrently with giving notice of a meeting of

shareholders, send a form of proxy in prescribed form to each shareholder who is entitled to receive notice of the

meeting.

Exception

(2) The management of the corporation is not required to send a form of proxy under subsection (1) if it

(a) is not a distributing corporation; and

(b) has fifty or fewer shareholders entitled to vote at a meeting, two or more joint holders being counted as

one shareholder.

Offence

(3) If the management of a corporation fails to comply, without reasonable cause, with subsection (1), the corporation

is guilty of an offence and liable on summary conviction to a fine not exceeding five thousand dollars.

Officers, etc., of corporations

(4) Where a corporation commits an offence under subsection (3), any director or officer of the corporation who

knowingly authorized, permitted or acquiesced in the commission of the offence is a party to and guilty of the

offence and is liable on summary conviction to a fine not exceeding five thousand dollars or to imprisonment for a

term not exceeding six months or to both, whether or not the corporation has been prosecuted or convicted.

Soliciting proxies

150 (1) A person shall not solicit proxies unless

(a) in the case of solicitation by or on behalf of the management of a corporation, a management proxy circular in prescribed form, either as an appendix to or as a separate document accompanying the notice

of the meeting, or

(b) in the case of any other solicitation, a dissident’s proxy circular in prescribed form stating the purposes of

the solicitation is sent to the auditor of the corporation, to each shareholder whose proxy is solicited, to

each director and, if paragraph (b) applies, to the corporation.

Exception—solicitation to fifteen or fewer shareholders

(2) Despite subsection (1), a person may solicit proxies, other than by or on behalf of the management of the

corporation, without sending a dissident’s proxy circular, if the total number of shareholders whose proxies are

solicited is fifteen or fewer, two or more joint holders being counted as one shareholder.

Exception—solicitation by public broadcast

(3) Despite subsection (1), a person may solicit proxies, other than by or on behalf of the management of the

corporation, without sending a dissident’s proxy circular if the solicitation is, in the prescribed circumstances,

conveyed by public broadcast, speech or publication.

Copy to Director

(4) [ … ]


171

Offence

(5) A person who fails to comply with subsections (1) and (2) is guilty of an offence and liable on summary conviction to

a fine not exceeding five thousand dollars or to imprisonment for a term not exceeding six months or to both,

whether or not the body corporate has been prosecuted or convicted.

Officers, etc., of bodies corporate

(6) Where a body corporate commits an offence under subsection (3), any director or officer of the body corporate

who knowingly authorized, permitted or acquiesced in the commission of the offence is a party to and guilty of the

offence and is liable on summary conviction to a fine not exceeding five thousand dollars or to imprisonment for a

term not exceeding six months or to both, whether or not the body corporate has been prosecuted or convicted.

[ … ]

Duty of intermediary

153 (1) Shares of a corporation that are registered in the name of an intermediary or their nominee and not beneficially

owned by the intermediary must not be voted unless the intermediary, without delay after receipt of the notice of

the meeting, financial statements, management proxy circular, dissident’s proxy circular and any other documents

other than the form of proxy sent to shareholders by or on behalf of any person for use in connection with the

meeting, sends a copy of the document to the beneficial owner and, except when the intermediary has received

written voting instructions from the beneficial owner, a written request for such instructions.

Restriction on voting

(2) An intermediary, or a proxyholder appointed by an intermediary, may not vote shares that the intermediary does

not beneficially own and that are registered in the name of the intermediary or in the name of a nominee of the

intermediary unless the intermediary or proxyholder, as the case may be, receives written voting instructions from

the beneficial owner.

Copies

(3) A person by or on behalf of whom a solicitation is made shall provide, at the request of an intermediary, without

delay, to the intermediary at the person’s expense the necessary number of copies of the documents referred to in

subsection (1), other than copies of the document requesting voting instructions.

Instructions to intermediary

(4) An intermediary shall vote or appoint a proxyholder to vote any shares referred to in subsection (1) in accordance

with any written voting instructions received from the beneficial owner.

Beneficial owner as proxyholder

(5) If a beneficial owner so requests and provides an intermediary with appropriate documentation, the intermediary

must appoint the beneficial owner or a nominee of the beneficial owner as proxyholder.

Validity

(6) The failure of an intermediary to comply with this section does not render void any meeting of shareholders or any

action taken at the meeting. [ At common law, see Re Marshall (p 118) ]

Limitation

(7) Nothing in this section gives an intermediary the right to vote shares that the intermediary is otherwise prohibited

from voting.


172

Offence

(8) An intermediary who knowingly fails to comply with this section is guilty of an offence and liable on summary

conviction to a fine not exceeding five thousand dollars or to imprisonment for a term not exceeding six months or

to both.

Officers, etc., of bodies corporate

(9) If an intermediary that is a body corporate commits an offence under subsection (8), any director or officer of the

body corporate who knowingly authorized, permitted or acquiesced in the commission of the offence is a party to

and guilty of the offence and is liable on summary conviction to a fine not exceeding five thousand dollars or to

imprisonment for a term not exceeding six months or to both, whether or not the body corporate has been

prosecuted or convicted.

[ … ]

PART 14—FINANCIAL DISCLOSURE [ … ]

Appointment of auditor

162 (1) Subject to section 163, shareholders of a corporation shall, by ordinary resolution, at the first annual meeting of

shareholders and at each succeeding annual meeting, appoint an auditor to hold office until the close of the next

annual meeting.

(2) [ … ]

Dispensing with auditor

163 (1) The shareholders of a corporation that is not a distributing corporation may resolve not to appoint an auditor.

(2) [ … ]

[ … ]

PART 15—FUNDAMENTAL CHANGES Amendment of articles

173 (1) Subject to sections 176 and 177, the articles of a corporation may by special resolution be amended to

(a) change its name;

(b) change the province in which its registered office is situated;

(c) add, change or remove any restriction on the business or businesses that the corporation may carry on;

(d) change any maximum number of shares that the corporation is authorized to issue;

(e) create new classes of shares;

(f) reduce or increase its stated capital, if its stated capital is set out in the articles;

(g) change the designation of all or any of its shares, and add, change or remove any rights, privileges,

restrictions and conditions, including rights to accrued dividends, in respect of all or any of its shares,

whether issued or unissued;

(h) change the shares of any class or series, whether issued or unissued, into a different number of shares of

the same class or series or into the same or a different number of shares of other classes or series;

(i) divide a class of shares, whether issued or unissued, into series and fix the number of shares in each series

and the rights, privileges, restrictions and conditions thereof;

(j) authorize the directors to divide any class of unissued shares into series and fix the number of shares in

each series and the rights, privileges, restrictions and conditions thereof;

(k) authorize the directors to change the rights, privileges, restrictions and conditions attached to unissued

shares of any series;

(l) revoke, diminish or enlarge any authority conferred under paragraphs (j) and (k);


173

(m) increase or decrease the number of directors or the minimum or maximum number of directors, subject to

sections 107 and 112;

(n) add, change or remove restrictions on the issue, transfer or ownership of shares; or

(o) add, change or remove any other provision that is permitted by this Act to be set out in the articles.

Termination

(2) The directors of a corporation may, if authorized by the shareholders in the special resolution effecting an

amendment under this section, revoke the resolution before it is acted on without further approval of the

shareholders.

Amendment of number name

(3) Notwithstanding subsection (1), where a corporation has a designating number as a name, the directors may

amend its articles to change that name to a verbal name.

[ … ]

Class vote

176 (1) The holders of shares of a class or, subject to subsection (4), of a series are, unless the articles otherwise provide in

the case of an amendment referred to in paragraphs (a), (b) and (e), entitled to vote separately as a class or series

on a proposal to amend the articles to

(a) increase or decrease any maximum number of authorized shares of such class, or increase any maximum

number of authorized shares of a class having rights or privileges equal or superior to the shares of such

class;

(b) effect an exchange, reclassification or cancellation of all or part of the shares of such class;

(c) add, change or remove the rights, privileges, restrictions or conditions attached to the shares of such class

and, without limiting the generality of the foregoing,

(i) remove or change prejudicially rights to accrued dividends or rights to cumulative dividends,

(ii) add, remove or change prejudicially redemption rights,

(iii) reduce or remove a dividend preference or a liquidation preference, or

(iv) add, remove or change prejudicially conversion privileges, options, voting, transfer or pre-

emptive rights, or rights to acquire securities of a corporation, or sinking fund provisions;

(d) increase the rights or privileges of any class of shares having rights or privileges equal or superior to the

shares of such class;

(e) create a new class of shares equal or superior to the shares of such class;

(f) make any class of shares having rights or privileges inferior to the shares of such class equal or superior to

the shares of such class;

(g) effect an exchange or create a right of exchange of all or part of the shares of another class into the shares

of such class; or

(h) constrain the issue, transfer or ownership of the shares of such class or change or remove such constraint.

Exception

(2) [ … ]

Deeming provision

(3) [ … ]

Limitation

(4) The holders of a series of shares of a class are entitled to vote separately as a series under subsection (1) only if

such series is affected by an amendment in a manner different from other shares of the same class.


174

Right to vote

(5) Subsection (1) applies whether or not shares of a class or series otherwise carry the right to vote.

Separate resolutions

(6) A proposed amendment to the articles referred to in subsection (1) is adopted when the holders of the shares of

each class or series entitled to vote separately thereon as a class or series have approved such amendment by a

special resolution.

[ … ]

Amalgamation

181 Two or more corporations, including holding and subsidiary corporations, may amalgamate and continue as one

corporation.

Amalgamation agreement

182 (1) Each corporation proposing to amalgamate shall enter into an agreement setting out the terms and means of

effecting the amalgamation and, in particular, setting out

(a) the provisions that are required to be included in articles of incorporation under section 6;

(b) [ … ]; (c) the manner in which the shares of each amalgamating corporation are to be converted into shares or

other securities of the amalgamated corporation;

(d) if any shares of an amalgamating corporation are not to be converted into securities of the amalgamated

corporation, the amount of money or securities of any body corporate that the holders of such shares are

to receive in addition to or instead of securities of the amalgamated corporation; [ See Neonex Int’l Ltd v Kolasa (p 110) here and below…]

(e) [ … ]; (f) whether the by-laws of the amalgamated corporation are to be those of one of the amalgamating

corporations and, if not, a copy of the proposed by-laws; and

(g) details of any arrangements necessary to perfect the amalgamation and to provide for the subsequent

management and operation of the amalgamated corporation.

Cancellation

(2) If shares of one of the amalgamating corporations are held by or on behalf of another of the amalgamating

corporations, the amalgamation agreement shall provide for the cancellation of such shares when the

amalgamation becomes effective without any repayment of capital in respect thereof, and no provision shall be

made in the agreement for the conversion of such shares into shares of the amalgamated corporation.


183 (1) The directors of each amalgamating corporation shall submit the amalgamation agreement for approval to a

meeting of the holders of shares of the amalgamating corporation of which they are directors and, subject to

subsection (4), to the holders of each class or series of such shares.

Notice of meeting

(2) A notice of a meeting of shareholders complying with section 135 shall be sent in accordance with that section to

each shareholder of each amalgamating corporation, and shall

(a) include or be accompanied by a copy or summary of the amalgamation agreement; and

(b) state that a dissenting shareholder is entitled to be paid the fair value of their shares in accordance with

section 190, but failure to make that statement does not invalidate an amalgamation.


175

Right to vote

(3) Each share of an amalgamating corporation carries the right to vote in respect of an amalgamation agreement

whether or not it otherwise carries the right to vote.

Class vote

(4) The holders of shares of a class or series of shares of each amalgamating corporation are entitled to vote separately as a class or series in respect of an amalgamation agreement if the amalgamation agreement contains a

provision that, if contained in a proposed amendment to the articles, would entitle such holders to vote as a class

or series under section 176.


(5) Subject to subsection (4), an amalgamation agreement is adopted when the shareholders of each amalgamating

corporation have approved of the amalgamation by special resolutions.

Termination

(6) An amalgamation agreement may provide that at any time before the issue of a certificate of amalgamation the

agreement may be terminated by the directors of an amalgamating corporation, notwithstanding approval of the

agreement by the shareholders of all or any of the amalgamating corporations.

[ … ]


186 On the date shown in a certificate of amalgamation

(a) the amalgamation of the amalgamating corporations and their continuance as one corporation become

effective;

(b) the property of each amalgamating corporation continues to be the property of the amalgamated

corporation;

(c) the amalgamated corporation continues to be liable for the obligations of each amalgamating corporation;

(d) an existing cause of action, claim or liability to prosecution is unaffected;

(e) a civil, criminal or administrative action or proceeding pending by or against an amalgamating corporation

may be continued to be prosecuted by or against the amalgamated corporation;

(f) a conviction against, or ruling, order or judgment in favour of or against, an amalgamating corporation may

be enforced by or against the amalgamated corporation; and

(g) the articles of amalgamation are deemed to be the articles of incorporation of the amalgamated

corporation and the certificate of amalgamation is deemed to be the certificate of incorporation of the

amalgamated corporation.

[ … ]

Continuance—other jurisdictions

188 (1) Subject to subsection (10), a corporation may apply to the appropriate official or public body of another jurisdiction

requesting that the corporation be continued as if it had been incorporated under the laws of that other jurisdiction

if the corporation

(a) is authorized by the shareholders in accordance with this section to make the application; and

(b) establishes to the satisfaction of the Director that its proposed continuance in the other jurisdiction will

not adversely affect creditors or shareholders of the corporation.

(2) [ … ]


176

Notice of meeting


each shareholder and shall state that a dissenting shareholder is entitled to be paid the fair value of their shares in

accordance with section 190, but failure to make that statement does not invalidate a discontinuance under this

Act.

Right to vote

(4) Each share of the corporation carries the right to vote in respect of a continuance whether or not it otherwise

carries the right to vote.


(5) An application for continuance becomes authorized when the shareholders voting thereon have approved of the

continuance by a special resolution.

Termination

(6) The directors of a corporation may, if authorized by the shareholders at the time of approving an application for

continuance under this section, abandon the application without further approval of the shareholders.

(7) [ … ]

Borrowing powers

189 (1) Unless the articles or by-laws of or a unanimous shareholder agreement relating to a corporation otherwise

provide, the directors of a corporation may, without authorization of the shareholders,

(a) borrow money on the credit of the corporation;

(b) issue, reissue, sell, pledge or hypothecate debt obligations of the corporation;

(c) give a guarantee on behalf of the corporation to secure performance of an obligation of any person; and

(d) mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the

corporation, owned or subsequently acquired, to secure any obligation of the corporation.

Delegation of borrowing powers

(2) Notwithstanding subsection 115(3) and paragraph 121(a), unless the articles or by-laws of or a unanimous

shareholder agreement relating to a corporation otherwise provide, the directors may, by resolution, delegate the

powers referred to in subsection (1) to a director, a committee of directors or an officer.

Extraordinary sale, lease or exchange

(3) A sale, lease or exchange of all or substantially all the property of a corporation other than in the ordinary course of business of the corporation requires the approval of the shareholders in accordance with subsections (4) to (8).

Notice of meeting


each shareholder and shall

(a) include or be accompanied by a copy or summary of the agreement of sale, lease or exchange; and

(b) state that a dissenting shareholder is entitled to be paid the fair value of their shares in accordance with

section 190, but failure to make that statement does not invalidate a sale, lease or exchange referred to in

subsection (3).


(5) At the meeting referred to in subsection (4), the shareholders may authorize the sale, lease or exchange and may fix

or authorize the directors to fix any of the terms and conditions thereof.


177

Right to vote

(6) Each share of the corporation carries the right to vote in respect of a sale, lease or exchange referred to in

subsection (3) whether or not it otherwise carries the right to vote.

Class vote

(7) The holders of shares of a class or series of shares of the corporation are entitled to vote separately as a class or

series in respect of a sale, lease or exchange referred to in subsection (3) only if such class or series is affected by

the sale, lease or exchange in a manner different from the shares of another class or series.


(8) A sale, lease or exchange referred to in subsection (3) is adopted when the holders of each class or series entitled to

vote thereon have approved of the sale, lease or exchange by a special resolution.

Termination

(9) The directors of a corporation may, if authorized by the shareholders approving a proposed sale, lease or exchange,

and subject to the rights of third parties, abandon the sale, lease or exchange without further approval of the

shareholders.

Right to dissent

190 (1) Subject to sections 191 and 241, a holder of shares of any class of a corporation may dissent if the corporation is

subject to an order under paragraph 192(4)(d) that affects the holder or if the corporation resolves to

(a) amend its articles under section 173 or 174 to add, change or remove any provisions restricting or

constraining the issue, transfer or ownership of shares of that class;

(b) amend its articles under section 173 to add, change or remove any restriction on the business or

businesses that the corporation may carry on;

(c) amalgamate otherwise than under section 184;

(d) be continued under section 188;

(e) sell, lease or exchange all or substantially all its property under subsection 189(3); or

(f) carry out a going-private transaction or a squeeze-out transaction.

Further right

(2) A holder of shares of any class or series of shares entitled to vote under section 176 may dissent if the corporation

resolves to amend its articles in a manner described in that section.

If one class of shares

(2.1) The right to dissent described in subsection (2) applies even if there is only one class of shares.

Payment for shares

(3) In addition to any other right the shareholder may have, but subject to subsection (26), a shareholder who complies

with this section is entitled, when the action approved by the resolution from which the shareholder dissents or an

order made under subsection 192(4) becomes effective, to be paid by the corporation the fair value of the shares in

respect of which the shareholder dissents, determined as of the close of business on the day before the resolution

was adopted or the order was made.

No partial dissent

(4) A dissenting shareholder may only claim under this section with respect to all the shares of a class held on behalf of

any one beneficial owner and registered in the name of the dissenting shareholder.


178

Objection

(5) A dissenting shareholder shall send to the corporation, at or before any meeting of shareholders at which a

resolution referred to in subsection (1) or (2) is to be voted on, a written objection to the resolution, unless the

corporation did not give notice to the shareholder of the purpose of the meeting and of their right to dissent.

Notice of resolution

(6) The corporation shall, within ten days after the shareholders adopt the resolution, send to each shareholder who

has filed the objection referred to in subsection (5) notice that the resolution has been adopted, but such notice is

not required to be sent to any shareholder who voted for the resolution or who has withdrawn their objection.

Demand for payment

(7) A dissenting shareholder shall, within twenty days after receiving a notice under subsection (6) or, if the

shareholder does not receive such notice, within twenty days after learning that the resolution has been adopted,

send to the corporation a written notice containing

(a) the shareholder’s name and address; (b) the number and class of shares in respect of which the shareholder dissents; and

(c) a demand for payment of the fair value of such shares.

Share certificate

(8) A dissenting shareholder shall, within thirty days after sending a notice under subsection (7), send the certificates

representing the shares in respect of which the shareholder dissents to the corporation or its transfer agent.

Forfeiture

(9) A dissenting shareholder who fails to comply with subsection (8) has no right to make a claim under this section.

Endorsing certificate

(10) A corporation or its transfer agent shall endorse on any share certificate received under subsection (8) a notice that

the holder is a dissenting shareholder under this section and shall forthwith return the share certificates to the

dissenting shareholder.

Suspension of rights

(11) On sending a notice under subsection (7), a dissenting shareholder ceases to have any rights as a shareholder other

than to be paid the fair value of their shares as determined under this section except where

(a) the shareholder withdraws that notice before the corporation makes an offer under subsection (12),

(b) the corporation fails to make an offer in accordance with subsection (12) and the shareholder withdraws

the notice, or

(c) the directors revoke a resolution to amend the articles under subsection 173(2) or 174(5), terminate an

amalgamation agreement under subsection 183(6) or an application for continuance under subsection

188(6), or abandon a sale, lease or exchange under subsection 189(9), in which case the shareholder’s rights are reinstated as of the date the notice was sent.

Offer to pay

(12) A corporation shall, not later than seven days after the later of the day on which the action approved by the

resolution is effective or the day the corporation received the notice [i.e. demand for payment] referred to in

subsection (7), send to each dissenting shareholder who has sent such notice

(a) a written offer to pay for their shares in an amount considered by the directors of the corporation to be

the fair value, accompanied by a statement showing how the fair value was determined; or

(b) if subsection (26) applies, a notification that it is unable lawfully to pay dissenting shareholders for their

shares.


179

Same terms

(13) Every offer made under subsection (12) for shares of the same class or series shall be on the same terms.

Payment

(14) Subject to subsection (26), a corporation shall pay for the shares of a dissenting shareholder within ten days after

an offer made under subsection (12) has been accepted, but any such offer lapses if the corporation does not

receive an acceptance thereof within thirty days after the offer has been made.

Corporation may apply to court

(15) Where a corporation fails to make an offer under subsection (12), or if a dissenting shareholder fails to accept an

offer, the corporation may, within fifty days after the action approved by the resolution is effective or within such

further period as a court may allow, apply to a court to fix a fair value for the shares of any dissenting shareholder.

Shareholder application to court

(16) If a corporation fails to apply to a court under subsection (15), a dissenting shareholder may apply to a court for the

same purpose within a further period of twenty days or within such further period as a court may allow.

Venue

(17) [ … ]

No security for costs

(18) [ … ]

Parties

(19) On an application to a court under subsection (15) or (16),

(a) all dissenting shareholders whose shares have not been purchased by the corporation shall be joined as

parties and are bound by the decision of the court; and

(b) the corporation shall notify each affected dissenting shareholder of the date, place and consequences of

the application and of their right to appear and be heard in person or by counsel.

Powers of court

(20) On an application to a court under subsection (15) or (16), the court may determine whether any other person is a

dissenting shareholder who should be joined as a party, and the court shall then fix a fair value for the shares of all

dissenting shareholders.

Appraisers

(21) A court may in its discretion appoint one or more appraisers to assist the court to fix a fair value for the shares of

the dissenting shareholders.

Final order

(22) [ … ]

Interest

(23) [ … ]

Notice that subsection (26) applies

(24) If subsection (26) applies, the corporation shall, within ten days after the pronouncement of an order under

subsection (22), notify each dissenting shareholder that it is unable lawfully to pay dissenting shareholders for their

shares.


180

Effect where subsection (26) applies

(25) If subsection (26) applies, a dissenting shareholder, by written notice delivered to the corporation within thirty days

after receiving a notice under subsection (24), may

(a) withdraw their notice of dissent, in which case the corporation is deemed to consent to the withdrawal

and the shareholder is reinstated to their full rights as a shareholder; or

(b) retain a status as a claimant against the corporation, to be paid as soon as the corporation is lawfully able

to do so or, in a liquidation, to be ranked subordinate to the rights of creditors of the corporation but in

priority to its shareholders.

Limitation

(26) A corporation shall not make a payment to a dissenting shareholder under this section if there are reasonable

grounds for believing that

(a) the corporation is or would after the payment be unable to pay its liabilities as they become due; or

(b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities.

PART 16—GOING-PRIVATE AND SQUEEZE-OUT TRANSACTIONS Going-private transactions

193 A corporation may carry out a going-private transaction. However, if there are any applicable provincial securities laws,

a corporation may not carry out a going-private transaction unless the corporation complies with those laws. [ For

instance, MI 61-101 and the Ontario Securities Act ]

Squeeze-out transactions

194 A corporation may not carry out a squeeze-out transaction unless, in addition to any approval by holders of shares

required by or under this Act or the articles of the corporation, the transaction is approved by ordinary resolution of the

holders of each class of shares that are affected by the transaction, voting separately, whether or not the shares otherwise carry the right to vote. However, the following do not have the right to vote on the resolution:

(a) affiliates of the corporation; and

(b) holders of shares that would, following the squeeze-out transaction, be entitled to consideration of greater

value or to superior rights or privileges than those available to other holders of shares of the same class.

[ … ]

PART 17—COMPULSORY AND COMPELLED ACQUISITIONS Definitions

206 (1) The definitions in this subsection apply in this Part.

“dissenting offeree” means, where a take-over bid is made for all the shares of a class of shares, a holder of a share of

that class who does not accept the take-over bid and includes a subsequent holder of that share who acquires it from

the first mentioned holder;

“offer” includes an invitation to make an offer.

“offeree” means a person to whom a take-over bid is made.

“offeree corporation” means a distributing corporation whose shares are the object of a takeover bid.

“offeror” means a person, other than an agent, who makes a take-over bid, and includes two or more persons who,

directly or indirectly,

(a) make take-over bids jointly or in concert; or

(b) intend to exercise jointly or in concert voting rights attached to shares for which a take-over bid is made.

“share” means a share, with or without voting rights, and includes

(a) a security currently convertible into such a share; and

(b) currently exercisable options and rights to acquire such a share or such a convertible security.


181

“take-over bid” means an offer made by an offeror to shareholders of a distributing corporation at approximately the

same time to acquire all of the shares of a class of issued shares, and includes an offer made by a distributing

corporation to repurchase all of the shares of a class of its shares.

Right to acquire

(2) If within one hundred and twenty days after the date of a take-over bid the bid is accepted by the holders of not less than ninety per cent of the shares of any class of shares to which the take-over bid relates, other than shares

held at the date of the take-over bid by or on behalf of the offeror or an affiliate or associate of the offeror, the

offeror is entitled, on complying with this section, to acquire the shares held by the dissenting offerees.

Notice

(3) An offeror may acquire shares held by a dissenting offeree by sending by registered mail within sixty days after the

date of termination of the take-over bid and in any event within one hundred and eighty days after the date of the take-over bid, an offeror’s notice to each dissenting offeree and to the Director stating that

(a) the offerees holding not less than ninety per cent of the shares to which the bid relates accepted the take-

over bid;

(b) the offeror is bound to take up and pay for or has taken up and paid for the shares of the offerees who

accepted the take-over bid;

(c) a dissenting offeree is required to elect

(i) to transfer their shares to the offeror on the terms on which the offeror acquired the shares of

the offerees who accepted the take-over bid, or

(ii) to demand payment of the fair value of the shares in accordance with subsections (9) to (18) by

notifying the offeror within twenty days after receiving the offeror’s notice;

(d) a dissenting offeree who does not notify the offeror in accordance with subparagraph (5)(b)(ii) is deemed

to have elected to transfer the shares to the offeror on the same terms that the offeror acquired the

shares from the offerees who accepted the take-over bid; and

(e) a dissenting offeree must send their shares to which the take-over bid relates to the offeree corporation

within twenty days after receiving the offeror’s notice.

Notice of adverse claim

(4) Concurrently with sending the offeror’s notice under subsection (3), the offeror shall send to the offeree

corporation a notice of adverse claim in accordance with section 78 with respect to each share held by a dissenting

offeree.

Share certificate

(5) A dissenting offeree to whom an offeror’s notice is sent under subsection (3) shall, within twenty days after

receiving the notice,

(a) send the share certificates of the class of shares to which the take-over bid relates to the offeree

corporation; and

(b) elect

(i) to transfer the shares to the offeror on the terms on which the offeror acquired the shares of

the offerees who accepted the take-over bid, or

(ii) to demand payment of the fair value of the shares in accordance with subsections (9) to (18) by

notifying the offeror within those twenty days.

Deemed election

(5.1) A dissenting offeree who does not notify the offeror in accordance with subparagraph (5)(b)(ii) is deemed to have

elected to transfer the shares to the offeror on the same terms on which the offeror acquired the shares from the

offerees who accepted the take-over bid.


182

Payment

(6) Within twenty days after the offeror sends an offeror’s notice under subsection (3), the offeror shall pay or transfer

to the offeree corporation the amount of money or other consideration that the offeror would have had to pay or

transfer to a dissenting offeree if the dissenting offeree had elected to accept the takeover bid under subparagraph

(5)(b)(i).

Consideration

(7) The offeree corporation is deemed to hold in trust for the dissenting shareholders the money or other

consideration it receives under subsection (6) [ … ]

When corporation is offeror

(7.1) A corporation that is an offeror making a take-over bid to repurchase all of the shares of a class of its shares is

deemed to hold in trust for the dissenting shareholders the money and other consideration that it would have had

to pay or transfer to a dissenting offeree if the dissenting offeree had elected to accept the takeover bid under

subparagraph (5)(b)(i), [ … ]

Duty of offeree corporation

(8) Within thirty days after the offeror sends a notice under subsection (3), the offeree corporation shall

(a) if the payment or transfer required by subsection (6) is made, issue to the offeror a share certificate in

respect of the shares that were held by dissenting offerees;

(b) give to each dissenting offeree who elects to accept the take-over bid terms under subparagraph (5)(b)(i)

and who sends share certificates as required by paragraph (5)(a) the money or other consideration to

which the offeree is entitled, disregarding fractional shares, which may be paid for in money; and

(c) if the payment or transfer required by subsection (6) is made and the money or other consideration is

deposited as required by subsection (7) or (7.1), send to each dissenting shareholder who has not sent

share certificates as required by paragraph (5)(a) a notice stating that

(i) the dissenting shareholder’s shares have been cancelled,

(ii) the offeree corporation or some designated person holds in trust for the dissenting shareholder

the money or other consideration to which that shareholder is entitled as payment for or in

exchange for the shares, and

(iii) the offeree corporation will, subject to subsections (9) to (18), send that money or other

consideration to that shareholder without delay after receiving the shares.


(9) If a dissenting offeree has elected to demand payment of the fair value of the shares under subparagraph (5)(b)(ii),

the offeror may, within twenty days after it has paid the money or transferred the other consideration under

subsection (6), apply to a court to fix the fair value of the shares of that dissenting offeree.

(10) If an offeror fails to apply to a court under subsection (9), a dissenting offeree may apply to a court for the same

purpose within a further period of twenty days.

Status of dissenter if no court application

(11) Where no application is made to a court under subsection (10) within the period set out in that subsection, a

dissenting offeree is deemed to have elected to transfer their shares to the offeror on the same terms that the

offeror acquired the shares from the offerees who accepted the take-over bid.

Venue

(12) [ … ]


(13) [ … ]


183

Parties

(14) On an application under subsection (9) or (10)

(a) all dissenting offerees referred to in subparagraph (5)(b)(ii) whose shares have not been acquired by the

offeror shall be joined as parties and are bound by the decision of the court; and

(b) the offeror shall notify each affected dissenting offeree of the date, place and consequences of the

application and of their right to appear and be heard in person or by counsel.

Powers of court

(15) On an application to a court under subsection (9) or (10), the court may determine whether any other person is a

dissenting offeree who should be joined as a party, and the court shall then fix a fair value for the shares of all

dissenting offerees.

Appraisers

(16) A court may in its discretion appoint one or more appraisers to assist the court to fix a fair value for the shares of a

dissenting offeree.

Final order

(17) [ … ]

Additional powers

(18) [ … ]

Obligation to acquire shares

206.1 (1) If a shareholder holding shares of a distributing corporation does not receive an offeror’s notice under subsection

206(3), the shareholder may

(a) within ninety days after the date of termination of the take-over bid, or

(b) if the shareholder did not receive an offer pursuant to the take-over bid, within ninety days after the later

of

(i) the date of termination of the take-over bid, and

(ii) the date on which the shareholder learned of the take-over bid,

require the offeror to acquire those shares.

Conditions

(2) If a shareholder requires the offeror to acquire shares under subsection (1), the offeror shall acquire the shares on

the same terms under which the offeror acquired or will acquire the shares of the offerees who accepted the take-

over bid.

PART 18—LIQUIDATION AND DISSOLUTION Proposing liquidation and dissolution

211 (1) The directors may propose, or a shareholder who is entitled to vote at an annual meeting of shareholders may, in

accordance with section 137, make a proposal for, the voluntary liquidation and dissolution of a corporation.

[ … ]

Liquidation

(7) After issue of a certificate of intent to dissolve, the corporation shall

(a) [ … ] (b) [ … ] (c) [ … ]; and


184

(d) after giving the notice required under paragraphs (a) and (b) and adequately providing for the payment or

discharge of all its obligations, distribute its remaining property, either in money or in kind, among its shareholders according to their respective rights.

[ … ]

PART 19—INVESTIGATION Investigation

229 (1) A security holder or the Director may apply, ex parte or on such notice as the court may require, to a

court having jurisdiction in the place where the corporation has its registered office for an order directing an

investigation to be made of the corporation and any of its affiliated corporations.

Grounds

(2) If, on an application under subsection (1), it appears to the court that

(a) the business of the corporation or any of its affiliates is or has been carried on with intent to defraud any

person,

(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted,

or the powers of the directors are or have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of a security holder,

(c) the corporation or any of its affiliates was formed for a fraudulent or unlawful purpose or is to be

dissolved for a fraudulent or unlawful purpose, or

(d) persons concerned with the formation, business or affairs of the corporation or any of its affiliates have in

connection therewith acted fraudulently or dishonestly,

the court may order an investigation to be made of the corporation and any of its affiliated corporations.

Notice to Director

(3) A security holder who makes an application under subsection (1) shall give the Director reasonable notice thereof

and the Director is entitled to appear and be heard in person or by counsel.


(4) [ … ]

[ … ]

PART 20—REMEDIES, OFFENCES AND PUNISHMENTS Definitions

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,

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

(c) the Director, or

(d) any other person who, in the discretion of a court, is a proper person to make an application under this

Part.

Commencing derivative action

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.


185

Conditions precedent

(2) 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.

Powers of court

240 In connection with an action brought or intervened in under section 239, the court may at any time make any order it

thinks fit including, without limiting the generality of the foregoing,

(a) an order authorizing the complainant or any other person to control the conduct of the action;

(b) an order giving directions for the conduct of the action;

(c) an order directing that any amount adjudged payable by a defendant in the action shall be paid, in whole

or in part, directly to former and present security holders of the corporation or its subsidiary instead of to

the corporation or its subsidiary; and

(d) an order requiring the corporation or its subsidiary to pay reasonable legal fees incurred by the

complainant in connection with the action.

Application to court re oppression

241 (1) A complainant may apply to a court for an order under this section.

Grounds

(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, [see Brant Investments v KeepRite Inc, Downtown Eatery (1993) Ltd v Ontario, BCE Inc v 1976 Debentureholders—equitable remedy, unlawfulness not required]

(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.

Powers of court

(3) In connection with an application under this section, the court may make any interim or final order it thinks fit

including, without limiting the generality of the foregoing,

(a) an order restraining the conduct complained of [see Ferguson v Imax];

(b) [ … ]; (c) an order to regulate a corporation’s affairs by amending the articles or by-laws or creating or amending a

unanimous shareholder agreement;

(d) an order directing an issue or exchange of securities;

(e) an order appointing directors in place of or in addition to all or any of the directors then in office;

(f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a

security holder [see Naneff v Con-Crete Holdings Ltd];


186

(g) an order directing a corporation, subject to subsection (6), or any other person, to pay a security holder

any part of the monies that the security holder paid for securities;

(h) an order varying or setting aside a transaction or contract to which a corporation is a party and

compensating the corporation or any other party to the transaction or contract;

(i) [ … ]; (j) an order compensating an aggrieved person;

(k) an order directing rectification of the registers or other records of a corporation under section 243;

(l) an order liquidating and dissolving the corporation;

(m) [ … ]; and

(n) an order requiring the trial of any issue.

Duty of directors

(4) If an order made under this section directs amendment of the articles or by-laws of a corporation,

(a) the directors shall forthwith comply with subsection 191(4); and

(b) no other amendment to the articles or bylaws shall be made without the consent of the court, until a court

otherwise orders.

Exclusion

(5) A shareholder is not entitled to dissent under section 190 if an amendment to the articles is effected under this

section.

Limitation

(6) A corporation shall not make a payment to a shareholder under paragraph (3)(f) or (g) if there are reasonable

grounds for believing that

(a) the corporation is or would after that payment be unable to pay its liabilities as they become due; or

(b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities.

Alternative order

(7) [ … ]

Evidence of shareholder approval not decisive

242 (1) An application made or an action brought or intervened in under this Part shall not be stayed or dismissed by

reason only that it is shown that an alleged breach of a right or duty owed to the corporation or its subsidiary has

been or may be approved by the shareholders of such body corporate, but evidence of approval by the

shareholders may be taken into account by the court in making an order under section 214, 240 or 241.

Court approval to discontinue

(2) An application made or an action brought or intervened in under this Part shall not be stayed, discontinued, settled

or dismissed for want of prosecution without the approval of the court given on such terms as the court thinks fit

and, if the court determines that the interests of any complainant may be substantially affected by such stay,

discontinuance, settlement or dismissal, the court may order any party to the application or action to give notice to

the complainant.


(3) A complainant is not required to give security for costs in any application made or action brought or intervened in

under this Part.


187

Interim costs

(4) In an application made or an action brought or intervened in under this Part, the court may at any time order the

corporation or its subsidiary to pay to the complainant interim costs, including legal fees and disbursements, but

the complainant may be held accountable for such interim costs on final disposition of the application or action.

[ … ]

Restraining or compliance order

247 If a corporation or any director, officer, employee, agent, auditor, trustee, receiver, receiver-manager or liquidator of a

corporation does not comply with this Act, the regulations, articles, by-laws, or a unanimous shareholder agreement, a

complainant or a creditor of the corporation may, in addition to any other right they have, apply to a court for an order

directing any such person to comply with, or restraining any such person from acting in breach of, any provisions

thereof, and on such application the court may so order and make any further order it thinks fit.


188

BC Business Corporations Act SBC 2002

PART II — INCORPORATION

Division 1 — Formation of Companies Pre-incorporation contracts

20 (1) In this section:

"facilitator" means a person referred to in subsection (2) who, before a company is incorporated, purports to

enter into a contract in the name of or on behalf of the company;

"new company" means a company incorporated after a pre-incorporation contract is entered into in the

company's name or on the company's behalf;

"pre-incorporation contract" means a purported contract referred to in subsection (2).

(2) Subject to subsections (4) (b) and (8), if, before a company is incorporated, a person purports to enter

into a contract in the name of or on behalf of the company, [ unlike CBCA s 14(1), doesn’t say written ] (a) the person is deemed to warrant to the other parties to the purported contract that the

company will

(i) come into existence within a reasonable time, and

(ii) adopt, under subsection (3), the purported contract within a reasonable time after the

company comes into existence,

(b) the person is liable to the other parties to the purported contract for damages for any breach of that warranty, and

(c) the measure of damages for that breach of warranty is the same as if

(i) the company existed when the purported contract was entered into,

(ii) the person who entered into the purported contract in the name of or on behalf of the

company had no authority to do so, and

(iii) the company refused to ratify the purported contract.

[ Wickberg v Shatsky (p 131), is sort-of relevant, as it involved breach of warranty of authority ]

(3) If, after a pre-incorporation contract is entered into, the company in the name of which or on behalf of

which the pre-incorporation contract was purportedly entered into by the facilitator is incorporated, the

new company may, within a reasonable time after its incorporation, adopt that pre-incorporation

contract by any act or conduct signifying its intention to be bound by it. [ See CBCA s 14(2) ]

(4) On the adoption of a pre-incorporation contract under subsection (3),

(a) the new company is bound by and is entitled to the benefits of the pre-incorporation contract as

if the new company had been incorporated at the date of the pre-incorporation contract and had

been a party to it, and

(b) the facilitator ceases, except as provided in subsections (6) and (7), to be liable under subsection

(2) in respect of the pre-incorporation contract.

(5) If the new company does not adopt the pre-incorporation contract under subsection (3) within a

reasonable time after the new company is incorporated, the facilitator or any party to that pre-

incorporation contract may apply to the court for an order directing the new company to restore to the

applicant any benefit received by the new company under the pre-incorporation contract.


189

(6) Whether or not the new company adopts the pre-incorporation contract under subsection (3), the new

company, the facilitator or any party to the pre-incorporation contract may apply to the court for an

order

(a) setting the obligations of the new company and the facilitator under the pre-incorporation

contract as joint or joint and several, or

(b) apportioning liability between the new company and the facilitator.

(7) On an application under subsection (6), the court may, subject to subsection (8), make any order it

considers appropriate.

(8) A facilitator is not liable under subsection (2) in respect of the pre-incorporation contract if the parties

to the pre-incorporation contract have, in writing, expressly so agreed. [ See CBCA s 14(4) ]


190

Constitution Act, 1867 1867 UK

POWERS OF THE PARLIAMENT Legislative Authority of Parliament of Canada

91 It shall be lawful for the Queen, by and with the Advice and Consent of the Senate and House of Commons,

to make Laws for the Peace, Order, and good Government of Canada, in relation to all Matters not coming

within the Classes of Subjects by this Act assigned exclusively to the Legislatures of the Provinces…

[ VS: POGG power includes power to incorporate companies not directed at provincial objects. See Citizens Ins.

Co. of Canada v Parsons (1881) ]

[ … ]

EXCLUSIVE POWERS OF PROVINCIAL LEGISLATURES Subjects of exclusive Provincial Legislation

92 In each Province the Legislature may exclusively make Laws in relation to Matters coming within the Classes

of Subjects next hereinafter enumerated; that is to say, —

[ … ] (11) The Incorporation of Companies with Provincial Objects.

[ … ]

Index of Cases Corporations

191

10. Index of Key Cases The following is a partial index of the most important cases in the Case Chart.

Case Juris. P Subject 347883 Alberta Ltd v Producers Pipelines 1991 SK/CA 85 M&A, defensive tactics, securities law policy, oppression 642947 Ontario Ltd v Fleischer 2001 ON/CA 85 Veil piercing, reasons of equity and fraud, undertaking to court Abbey Glen Property Corp v Stumborg 1978 AB/AD 86 Corporate opportunity, impossibility, windfall to new shareholders A.E. LePage Ltd v Kamex Developments Ltd 1977 ON/CA 87 Partnership property, co-ownership, ability to alienate, investment AGDA Systems International Ltd v Valcom Ltd 1999 ON/CA 87 Tort liability, not veil-piercing, luring away employees Alberta Gas Ethylene Co v Minister of National Revenue

1989 CA/FCA 88 Enterprise liability, tax, no veil-piercing

Backman v Canada 2001 CA/SC 89 Partnership, with a view to profit Barnes v Andrews 1924 US/FC 89 Directors’ duty of care, causation BCE Inc v 1976 Debentureholders 2008 CA/SC 90 Oppression, reasonable expectations, what is just and equitable Bennett v Bennett Environmental Inc 2009 ON/CA 91 Director indemnification, interpretation of CBCA s 124(3)(b) Big Bend Hotel Ltd v Security Mutual Casualty Co

1980 BC/SC 91 Veil-piercing which RD believes to be unnecessary

Black et al v Smallwood & Cooper 1966 Aus/HC 92 Pre-incorporation K, both parties believed corporation existed Blair v Consolidated Enfield Corp 1995 CA/SC 92 Director indemnification, presumption of good faith Brant Investments v KeepRite Inc 1991 ON/CA 93 Oppression, business judgment rule Canadian Aero Service Ltd v O’Malley 1974 CA/SC 94 Faithless fiduciaries, corporate opportunity, factors Canbar West Projects Ltd v Sure Shot Sandblasting & Painting Ltd

2011 AB/CA 95 Pre-incorporation K, “in its name or on its behalf”

Churchill Pulp Mill Ltd v Manitoba 1977 MB/CA 96 CBCA s 120(80 is a self-executing remedy not requiring a DA Clarkson Co Ltd v Zhelka 1967 ON/HC 96 No veil-piercing: personal creditors can’t have corporate assets Clitheroe v Hydro One Inc 2002 ON/SC 97 Wrongful dismissal must be part of an overall pattern of oppression Cogeco Cable Inc v CFCF Inc 1996 QC/CA 97 Test for “substantially all” corporate assets Cox & Wheatcroft v Hickman 1860 Eng/HL 97 To be a partner is to have business carried on for your benefit De Salaberry Realties Ltd v Minister of National Revenue

1974 CA/FCA 98 Enterprise liability, tax, veil-piercing

Dodge v Ford Motor Co 1919 MI/SC 99 Dividends, greater benefit of society…but what about Peoples? Downtown Eatery (1993) Ltd v Ontario 2001 ON/CA 99 Oppression, involuntary creditor, wrongful dismissal, no assets Ernst & Young v Falconi 1994 ON/GD 99 If services normally done in ordinary course of business used for

fraud, partners are liable… Relevant to BCPA s 12 Exide Canada v Hilts 2005 ON/SC 100 Material interest, directors’ fiduciary duty, CBCA ss 120 & 122(1)(a) Ferguson v Imax 1983 ON/CA 100 Oppression, relationships, family business, dividends First Edmonton Place Ltd v 315888 Alberta Ltd 1988 AB/QB 100 Oppression, “proper person”, not a creditor, derivative action OK Ford Motor Co of Canada v OMERS 2006 ON/CA 101 Oppression, reasonable expectations, past oppression Gregorio v Intrans-Corp 1984 ON/CA 102 Tort liability, no veil-piercing since corporate structure not for fraud Harris v Universal Explorations Ltd 1982 AB/CA 102 Sufficient detail in a management information circular Haughton Graphic Ltd v Zivot 1986 ON/HC 103 Liability of directors of a corporate general partner, president Icahn Partners LP v Lion’s Gate Entertainment 2011 BC/CA 103 Oppression, reasonable expectations, deleveraging operation International Power Co v McMaster University 1946 QC/CA 104 Rights of common and preferred shares to dividends and residue Irving Trust Co v Deutch 1935 US/CA 104 Corporate opportunities, impossibility, essential patent rights Jacobsen v United Canso Oil & Gas Ltd 1980 AB/QB 105 Voting cap: one vote per common share up to maximum of 1,000 Johnston v Green 1956 DE/SC 105 Corporate opportunities, director of multiple corporations, Nutt-Shel Kelner v Baxter 1866 Eng/CP 105 Pre-Incorporation K, parties knew corporation did not exist, wine Kosmopoulos v Constitution Insurance Co 1987 CA/SC 106 One-man company insurable interest exception, no veil-piercing Lansing Building Supply (Ontario) Ltd v Ierullo 1989 ON/DC 106 Partnership, co-ownership, unable to alienate Lee v Lee’s Air Farming Ltd 1961 NZ/PC 107 One-man company can hire director/shareholder as employee Macaura v Northern Assurance Co Ltd and others

1925 Eng/HL 107 Corporation owns own property, shareholder no insurable interest

Manitoba (Securities Commission) v Crocus Investment Fund

2007 MB/CA 108 Director indemnification, bylaw, advances, presumption of good faith

Maple Leaf Foods v Schneider Corp 1998 ON/CA 108 M&A, oppression, business judgment rule, reasonable expectations Naneff v Con-Crete Holdings Ltd 1993 ON/CA 109 Oppression, family relationship, reasonable expectations

Corporations Index of Cases

192

Case Juris. P Subject Neonex Int’l Ltd v Kolasa 1978 BC/SC 110 Amalgamation, Jim Pattison, dissent and appraisal, fair value Newborne v Sensolid (Great Britain) Ltd 1953 Eng/CA 110 Pre-Incorporation K, both parties believed corporation existed Nielsen Estate v Epton 2006 AB/QB 111 Tort liability, directors’ duty of care, neighbourhood, test Nordile Holdings Ltd v Breckenridge 1992 BC/CA 111 Liability of directors of corporate general partner Paramount Communications v Time Inc 1989 DE/CH 112 M&A, best interests of corporation, pre-existing merger with Warner Paramount Communications v QVC 1994 DE/SC 113 M&A, change of corporate control, no-shop agreement Pasnak v Chura 2003 BC/SC 113 Difference between derivative action and oppression Peoples Department Stores Inc (Trustee of) v Wise

2004 CA/SC 114 Three theories of corporation, business judgment rule, causation, duty of care open-ended and may be owed to creditors

Peso Silver Mines Ltd v Cropper 1966 CA/SC 115 Corporate opportunity, directors turned it down in good faith Piller Sausages v Cobb Int’l Corp 2003 ON/SC 115 Oppression, involuntary creditor, reasonable expectations Pooley v Driver 1876 Eng/CH 116 Partnership, “debt” that looks like equity, suit on a bill of exchange Primex Investments Ltd v Northwest Sports Enterprises Ltd

1995 BC/SC 116 Derivative action leave, corporate opportunity, directors’ duty of care, compliance with securities law compliance w corporate law

Re Barsh and Feldman 1986 ON/HC 117 Court refuses to order meeting in carefully structured close corp Re Bowater Canadian Ltd v R.L. Crain Inc 1987 ON/CA 117 Rights attach to shares, not shareholders; step-down provision Re Canadian Javelin Ltd 1976 QC/SC 118 Meeting ordered by court for protection; two parallel boards Re Northwest Forest Products Ltd 1975 BC/SC 118 Leave for derivative action Re Routley’s Holdings Ltd 1960 ON/CA 119 Meeting ordered by the court due to fault, CBCA s 144 Re Sabex Internationale Ltée 1979 QC/SC 119 Oppression, rights issue oppressive to minority shareholders Re Thorne and NB Worker’s Compensation Board

1962 NB/CA 120 A partner cannot be an employee of the firm, as this would mean contracting with himself

Regal (Hastings) Ltd v Gulliver 1942 Eng/HL 120 Corporate opportunity, faithless fiduciaries, windfall to new owners Revlon Inc v MacAndrews & Forbes Holdings Inc 1986 DE/SC 120 M&A, auction, duty to maximize sale price Ringuet v Bergeron 1960 CA/SC 121 Agreement btwn shareholders to vote together valid, CBCA s 145.1 Robinson v Brier 1963 PA/SC 121 Corporate opportunity, successful impossibility argument, S Corp Rockwell Developments Ltd v Newtonbrook Plaza Ltd

1972 ON/CA 122 No veil-piercing to make Kelner personally liable for costs

Said v Butt 1920 Eng/KB 122 Agents of a corp may procure its breach of K w/o personal liability Salomon v Salomon & Co, Ltd 1896 Eng/HL 123 Separate legal personality, one-man company, leather Scottish Co-operative Wholesale Society Ltd v Meyer

1959 Eng/HL 123 Directors’ fiduciary duty, oppression, think affiliates in CBCA

Sherwood Design Services Inc v 872935 Ontario Ltd

1998 ON/CA 124 Pre-Incorporation K adopt, indoor mgmt rule, CBCA ss 14 & 18

Smith v Van Gorkom 1985 DE/SC 125 Directors’ duty of care, business judgment rule, M&A Sparling v Québec (Caisse de depot et placement du Québec)

1988 CA/SC 126 La Forest J shares are bundles of rights not ownership of corp

Teck Corp v Millar 1972 BC/SC 127 Reasonable grounds to believe share issue in best interests of corp The Queen v McClurg 1990 CA/SC 127 Discretionary dividend clause is valid, tax Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co

1914 Eng/CA 128 Trustee’s legal interest in trust rem is a material interest, CBCA s 120

United Fuel Investments Ltd v Union Gas Company of Canada Ltd

1963 ON/CA 128 Shareholders have no right to residue in specie on dissolution

Unocal Corp v Mesa Petroleum Co 1985 DE/SC 128 M&A, defensive share buy, two-part rule adds proportionality to Teck UPM-Kymmene Corp v UPM Kymmene Miramichi Inc

2002 ON/SC 129 Interested directors’ K, duty of care, BJR, quality of disclosure

Walkovszky v Carlton 1966 NY/CA 130 Tort liability, no veil-piercing West v Edson Packaging Machinery Ltd 1993 ON/GD 131 Oppression, “proper person”, expectations before share purchase Wolfe v Moir 1969 AB/SC 132 Veil-piercing, disregarding corporate formalities, CBCA s 10(5) Zwicker v Stanbury 1953 CA/SC 132 Corporate opportunity, impossibility

Index Corporations

193

11. Index Agency

Corporations ........................................................27 Partnerships .......................................................... 8

Asset lock-up ........................... See Lock-up agreement Beneficial Owners

Proxy Voting .........................................................60 Big M Drug Mart Exception

Charter Rights .......................................................32 Break fee

Defense by Enticing a Rival Bid .............................80 Business Judgment Rule ...........................................71

and the Derivative Action .....................................66 and the Oppression Remedy .................................71 Directors' Duty of Care .........................................44 Peoples Department Stores Inc (Trustee of) v Wise

.......................................................................114 Conflicts of Interest

Duty of Loyalty .....................................................46 Consideration for Shares ..........................................35 Continuation

Constitutional Considerations ...............................31 corporate coalition

Mediating Hierarchy Theory .................................16 Corporate Opportunities

Duty of Loyalty .....................................................48 Costs

Barry Estate test ...................................................65 Deemed Consent (of directors) .................................44 Dissent and Appraisal Rights .....................................57 Distributing corporation ............................................ 5 Easterbrook, Frank

Limited Liability and the Corporation ....................18 Equity ........................................................................ 5 Extra-Provincial Licensing .........................................30 Fiduciary Duty

of Partners............................................................10 Fischel, Daniel

Limited Liability and the Corporation ....................18 Fundamental Change

Creating New Types of Shares ...............................34 Shareholders and Governance ..............................57 Summary Table .....................................................58

Indemnification and Insurance (of Directors) ............50 Indoor Management Rule .............. 28, 78, 95, 122, 125 Information Circular

Proxy Solicitation ..................................................61

Interested Directors’ Contracts Duty of Loyalty ..................................................... 45

Intermediary Proxy Voting......................................................... 60

Leave Requirement for a Derivative Action .................... 64

Line-of-business test Is it a Corporate Opportunity? .............................. 48

Lock-up agreement Takeovers and Defensive Tactics .......................... 80

Material Interest Conflict of Interest ................................ 47, 100, 128

Mediating Hiearchy Theory ...................................... 16 moral hazard

Insurable Interests Cases ...................................... 21 Nexus of Contracts Theory ....................................... 16 NI 54–101 ................................................................ 62 Nominating a Different Slate of Directors

Voice in Management .......................................... 58 No-recourse loan ....................................................... 6 No-shop agreement

Takeovers and Defensive Tactics .......................... 80 Notice requirement

Special Business ................................................... 54 Ontario Securities Act

Securities Regulations .......................................... 76 Ordinary Business .................................................... 54 Ordinary resolution .................................................. 54 OSC Rule 61-501

Interested Directors' Contracts............................. 47 Primex Investments v Northwest Sports Enterprises

...................................................................... 116 ostensible authority ................................................. 28 Personal guarantee .................................................... 6 Poison pill

Takeovers and Defensive tactics ........................... 80 Pre-Emptive Rights................................................... 39

Problems for raising capital .................................. 40 Present interest or expectancy test

Is it a Corporate Opportunity? .............................. 48 Presumption of Equality

Palmer’s Company Law ........................................ 56 Presumption of Good Faith

Director Indemnification ...................................... 51 Promoter ............................................................. 6, 24 Public Institution Theory .......................................... 16

Corporations Index

194

rational apathy .........................................................55 Reasonable Expecations

in Close Corporations............................................69 Reasonable Expectations

in Public Companies..............................................69 respondeat superior

Partnerships .........................................................10 Securities Regulations

continuing disclosure ............................................43 MI 61-101 .............................................................77 NI 51-102 (requirement to allow other nominee) .61 NI 54-101..............................................................62 OSC Rule 61-501 ...................................................47 The Securities Commission Vision (of takeover

transactions) .....................................................83 View of break fees ................................................80

Separation of ownership from control Agency Costs ........................................................17 Limited Partnerships .............................................13

Shareholder Proposals ............................................. 59 Shark repellants

Takeovers and Defensive Tactics .......................... 80 Special Business ....................................................... 54 Special Meeting ....................................................... 55 Special resolution................................................. 6, 54 Stock lock-up ........................... See Lock-up agreement Tax Treatment

of Partnerships ....................................................... 9 Trade credit ............................................................... 6 Unanimous Shareholder Agreements ....................... 58 vicarious liability

Corporations ........................................................ 23 Partnerships ......................................................... 10

Watered Stock Issuing Shares ...................................................... 36

Wealth Maximization Theory ................................... 16 White knight

Takeovers and Defensive Tactics .......................... 80

Exam Quick Sheets Corporations

195

12. Exam Quick Sheets

The three pages that follow are meant to be combined together into a 2-page quick reference

sheet for the exam. The last 2 pages are designed to be printed on top of each other so that

together they make one page. In sum, you can print all the reference sheets on a single two-

sided piece of regular 8½ x 11 paper.

PARTNERSHIP p 11

Existence Definition 2 Common Property 4(a) Presume Profit Partner 4(c) EXCEPT NOT OF ITSELF Debt 4(c)(i) Employee 4(c)(ii) Loan 4(c)(iv)

Agency Partner= Agent 7 Acts in Firm Name 8 Notice: Restricted Power of Partner 10 Representing Self as Partner 16 Liability Debts 11 Wrongs 12 Missapplication 13 Joint and Several[12-13] 14 Retirement 19

Fiduciary General 22 True Accounts 31 Profit Derived from Partnership Property 32 Similar Business Competing 33 Property Definition 6 Exclusively for Partnership Purposes 23(1) Trust 23(2) Bought with Firm Money 24 Dissol 47

Rules Default Rules 27 Majority Cannot Expel Partner 28 Exclude Partner through Courts 38 Ending Ending by Notice 29 Dissol @ End of Term/Adventure, or on Notice 35 Dissol by Death/Bankruptcy 36

LIMITED PARTNERSHIP pp 13-14 Forming GP and LP required 50 Formation (requires certificate) 51

Name Requires “Limited Partnership” suffix and can’t contain surnames of partners 53 GPs Rights 56 LPs Liability Limited to Amount Invested 57 Rights 58 No Liability Unless Take Part in Mgmt 64 Nordile, Haughton

CORPORATIONS 1 Interp Definitions 2 [going-private= SOR 2001/512 s 3(1)]

2 Incorp Incorporators 5 Articles 6 Classes 6(1)(c) No Change Director Removal 6(4) Certificate 8-9

Public. of Name 10(5) Pre-Incorporation Ks 14—writ/personally bound(1), action or conduct (2), court (3), exemption (4) 3 Capacity &

Powers Capacity 15 Restrictions on Biz 16(2) No Constructive Notice 17 Indoor Mgmt Rule 18 Held Out 18(1)(d)

Document not Valid 18(1)(e) Sale/Lease/Exchange 18(1)(f) 4 Reg’d Off Notice of Registered Office 19(2)

5 Corp Finance

No Par Value 24(1) One Class Rights 24(3) Multiple Classes 24(4) Consideration Directors Determine 25(1) Valid Consideration 25(3–4) No Shares on Credit 25(5) Series 27 No Extra Priority to New Series 27(3) Pre-Emptive Rights 28 Acquisition of Own Shares 34–35 Redemption 36 Dividend Rule 42 Valid Dividend 43(1) Shareholder Limited Liability 45(1)

10 Dirs & Offs

Duty to Manage 102 By-Laws 103 Shrhldr Bylaw Approval 103(2) Org Mtg 104 Qualifs 105 Terms 106 Cease to Hold Office 108 Removal 109 Filling Vacancies 111 Director Mtgs 114 Deleg 115 Validity of Acts (Ind Mgmt) 116 Director Liability 118 Liab for Wtrd Stck 118(1) Liab for Divs 118(2)(c) Liab for Indemnity 118(2)(d) Liab for Pay Shrhldr 118(2)(e) Def to 118(1) did not knw/rsnbly knw 118(6) Liab for unpaid wages 119 Interested Ks 120 Designate Offices/Appt Officers 121 Duties 122 No K out of duty 122(3) Deemed Consent 123(1)-(3) Defence to 118, 199, 122(2) 123(4) Defence to 122(1) 123(5) Indemnification 124 Indemnity in Derivative Action 124(4) Application to Court 124(7)

12 Shrhldrs

Annual Mtgs 133(1) Special Mtgs 133(2) Notice of Mtg 135(1) + SOR 2001/512 s 44 Proposals 137 Elig to Propose 137(1.1) + SOR 2001/512 s 46 Nominating Dirs 137(4) Right to Vote (Reg’d) 140 Requisition Mtg 5% 143(1) Mtg by Court 144 Validity 143(3) Court Review Election 145 Ringuet v Bergeron 145.1 Unanimous Shrhldr Agreement 146 Binds Next 146(3) If no Notice 146(4)

13 Proxies Definitions 147 Appoint pxyhldr 148 Mdtry solicit’n 149 Soliciting 150 Exceptions 150(2–3) Duties 153 14 Fin Discl Appoint Auditor 162 Private Comps Don’t Have to 163

15 Fundtl Changes

Amend Articles by special 173(1) Separate class/series to 173(1) 176(1) Limit on Series 176(4) All May Vote 176(5) Approve Amalg 183(1) All May Vote 183(3) Separate class/series if 176 183(4) Amalg special 183(5) Amalg terminate 183(6) Cert of amalg 186 Continuing 188 Borrowing 189(1–2) Approve sale 189(3) All May Vote 183(6) Separate class/series if affected 183(7) Sale special 183(8) Sale terminate 183(9) Dissent 190 Dissent articles shares 173 190(1)(a) Dissent biz 173 190(1)(b) Dissent amalg 190(1)(c) Dissent cont 190(1)(d) Dissent sale 190(1)(e) Dissent go-priv/sqze 190(1)(f)

16 Go-Priv Go-private 193 + NI 51-101 Squeeze-out 194 No affiliate vote 194(a) No advantaged vote 194(b) 17 Comp Acq Takeover = offer 100% 206(1) Right to acquire if 90% 206(2) Notice 206(3) Can Put Back if No Notice 206.1

18 Dissol Debt ranks before equity 211(7)(d) 19 Investig Investigation ex parte 229(1) Fraud 229(2)(a, b, d) Oppression on security holder 229(2)(c)

20 Remedies Complainant 238 DA leave: apply 239(1) DA leave: test 239(2) Powers of Court 240 Oppression 241 Shhldr Approval Not Decisive 242(1) Leave Required to Settle 242(2) Compliance Order 247

OSA p 77 Definition Takeover = 20% or more but not amalgs/other things need shrhldr approv 89(1)

Reqs All Ont shrhldrs same class 94 Remain open at least 35 days 98 Wthdrw up to 10 days after tender 98.1(1)(b)? Disclose Disclose position upon reaching 10% 102.1(2) Further disclosure on 12%, 14%, 16%, 18%, 20% 102.1(2)

Voting Requirements

Cate

gory

Ite

m

Loc

Spec

ial

Res.

Req

Loc

Sh

are

Vote

Ca

veat

to C

lass

/Ser

ies V

ote

Loc o

f Se

para

te

Vote

Loc o

f Di

ssen

t Ri

ghts

Capital Structure

Chan

ge m

axim

um n

umbe

r of

sha

res

173(

1)(d

) 17

6(5)

If c

lass

incr

ease

d ha

s ri

ghts

equ

al o

r su

peri

or

Ca

n be

lim

ited

in A

rtic

les

176(

1)(a

) 19

0(2)

Crea

te n

ew c

lass

of s

hare

s 17

3(1)

(e)

176(

5)

Onl

y if

clas

s eq

ual o

r su

peri

or

Ca

n be

lim

ited

in a

rtic

les

176(

1)(e

) 19

0(2)

Chan

ge d

esig

nati

on o

f sha

res

or r

ight

s on

sh

ares

, whe

ther

issu

ed o

r un

issu

ed

-OR-

Ex

chan

ge s

hare

s in

to d

iffer

ent n

umbe

r of

sh

ares

of s

ame

clas

s/se

ries

or

sam

e or

di

ffer

ent n

umbe

r of

sha

res

of d

iffer

ent

clas

s/se

ries

-O

R-

Div

ide

clas

s w

heth

er is

sued

or

unis

sued

, int

o se

ries

and

set

rig

hts

of s

erie

s

173(

1)(g

)

-OR-

17

3(1)

(h)

-O

R-

173(

1)(i)

176(

5)

176(

5)

176(

5)

If

exc

hang

e, r

ecla

ssify

sha

res

of c

lass

Can

be li

mit

ed b

y ar

ticl

es

176(

1)(b

) 19

0(2)

If c

hang

e ri

ghts

pre

judi

cial

ly

176(

1)(c

) 19

0(2(

)

If a

dd r

ight

s to

cla

ss o

r se

ries

tha

t is

equa

l or

supe

rior

17

6(1)

(d)

190(

2)

If a

ddin

g ri

ghts

mak

es a

cla

ss e

qual

or

supe

rior

17

6(1)

(f)

190(

2)

Exch

ange

sha

res

into

or

crea

te a

rig

ht o

f ex

chan

ge in

to s

hare

s of

this

cla

ss

176(

1)(g

) 19

0(2)

Aut

hori

ze d

irec

tors

to m

ake

seri

es

173(

1)(j)

A

utho

rize

dir

ecto

rs to

cha

nge

seri

es r

ight

s 17

3(1)

(k)

Chan

ge s

erie

s au

thor

ity

conf

erre

d by

(j–k

) 17

3(1)

(l)

Add

/cha

nge/

rem

ove

rest

rict

ions

on

shar

e tr

ansf

er o

r ow

ners

hip

173(

1)(n

) 17

6(5)

O

nly

for

clas

s on

whi

ch t

he c

onst

rain

t is

bein

g ad

ded/

chan

ged/

rem

oved

17

6(1)

(h)

190(

1)(a

)

Going Concern

Am

alga

mat

ion

183(

5)

183(

3)

Onl

y if

amal

gam

atio

n ag

reem

ent w

ould

tr

igge

r a

sect

ion

176

prot

ecti

on

183(

4)

190(

1)(c

)

Cont

inua

tion

18

8(5)

18

8(4)

19

0(1)

(d)

Sale

/Lea

se/E

xcha

nge

/Sub

st.

Ass

ets

189(

8)

189(

6)

Onl

y if

clas

s/se

ries

aff

ecte

d di

ffer

entl

y 18

9(7)

19

0(1)

(e)

Add

/cha

nge/

rem

ove

rest

rict

ions

on

busi

ness

17

3(1)

(c)

190(

1)(b

)

Changes to Articles

Chan

ge n

ame

173(

1)(a

)

Ch

ange

pro

vinc

e of

reg

iste

red

offic

e 17

3(1)

(b)

Chan

ge r

equi

red

num

ber

of d

irec

tors

17

3(1)

(m)

Any

oth

er c

hang

e to

Art

icle

s 17

3(1)

(o)

Other

Goi

ng-p

riva

te

190(

1)(f

)

Sque

eze-

out

194

No

cave

ats

but n

ote

is O

RDIN

ARY

res

olut

ion

194

190(

1)(f

)

App

rove

inte

rest

ed d

irec

tor

cont

ract

12

0(7.

1)

Ord

inar

y Re

solu

tions

By

law

acc

ept/

reje

ct 1

03(2

)

Elec

t D

irec

tors

106

(3)

Re

m D

irec

tor

109(

1) +

6(4

)

App

t au

dtr

162(

1)

Rem

aud

tr 1

65(1

) App

rv s

quee

ze-o

ut 1

94

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