Biz Associations Summary - Fall ‘18 (Cofone)by Talia Ralph 0. INTRO TO ENTERPRISE LAW 5

1. AGENCY LAW 5Agency problems as limits on performance incentives 5

Moral Hazard 5The law of Agents 5

Formation 5Jensen Farms Co. v. Cargill (1981) 6

Termination 6Principal’s Liability in Contract 6

White v. Thomas (1991) 6Gallant Ins. Co. v. Isaac (2000) 7

Principal’s Liability in Tort 7Humble Oil v. Martin (1949) 7Hoover v. Sun Oil (1965) 8

Agent’s Duties to the Principal 8Tarnowski v. Resop (1952) 8In Re Gleeson (1954) 8

2. PARTNERSHIP LAW 8Types of business organizations 8General aspects of partnership law 9

Definition of Partnership 9A.E. LePage Ltd. v. Kamex Developments Ltd (1997) 9Volzke Construction Lrd. v. Westlock Foods Ltd. (1986) 10Pooley v. Driver (1876) 10

Relationships 11Relationship of the Partners to One Another 11Relationship of the Partners to 3rd Parties 11

Legal Personality 11

Forms of partnership 13Limited Partnerships 13

Haughton Graphic Ltd. v. Zivot (1986, ON) 13Nordile Holdings Ltd. v. Breckenridge (1992) 14

Limited Liability Partnerships (LLPs) 14

3. CORPORATE LAW I: Purpose and Scope 15Goals of Corporate Law 15

Market Methods to Control Managers 15Forces that Shape Corporate Law 15Characteristics of the Corporate Form 16Theories of Corporate Governance 16

Shareholder supremacy AKA shareholder wealth maximization 17Managerialism 17Director primacy 17

The Corporate Contract 17Mandatory vs. Enabling/Default Interpretations of Corporate Statutes 17

Bushell v. Faith (1970) 17Directorial Power RE: Interpreting the Corporate K 17

Kelly v. Electrical Construction Co. (US 1907) 17Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cunninghame (UK 1906) 18Hayes v. Canada-Atlantic and Plant S.S. Co. (1910) 18Sherman and Ellis v. Indiana Mutual Casualty (US 1930) 19Kennerson v. Burbank Amusement Co. (1953) 19Realty Acceptance Corp. v. Montgomery (US 1930) 19Southern Foundries Ltd. v. Shirlaw (UK 1940) 19

The Scope of the Corporate Contract 19Ultra Vires Doctrine (Old) 19Agency Doctrines (Current) 20

The Constructive Notice Rule 20The Indoor Management Rule 20Sherwood Design Services v. 872935 Ontario Limited (1998 ON CA) 21Eugene F Fama and Michael C Jensen, “Separation of Ownership and Control” (1983) 21

Veil piercing 21Clarkson Co. v. Zhelka (1967) 21

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Transamerica Life Insurance Co of Canada v. Canada Life Assurance Co (1996) 22Walkovszky v. Carlton (NY 1966) 22

Corporate Social Responsibility 23Dodge v. Ford Motor Co. (1919) 23Miles v. Sydney Meat preserving Co. Ltd. (1913) 23Parke v. Daily News Ltd. (1962) 23BCE Inc. (SCC 2008) 24CNR “Run-Throughs” Report 24Report of the Royal Commission on Corp. Concentration (1978) 24Richard A Posner, Economic Analysis of Law (1986) 25Henry Hansmann and Ranier Kraakman, “The End of History for Corporate Law” (2001) 25Kent Greenfield, “Reclaiming Corp Law in a New Gilded Age” (2008) 25

Board Diversity 25

4. CORPORATE LAW II: Liability and Formation 26Limited liability 26

Directorial Liability 27Said v. Butt Exception 27Mesheau v. Campbell (1982 ON CA) 27ADGA Systems International Ltd. v. Valcom (1999 Oregon CA) 27

Incorporation 28General Aspects of Incorporation 28Regulatory Competition 28Extra-Provincial Licensing and Filing Requirements 28Continuance under the Law of Another Jurisdiction 29Classification of Corporations 29Incorporation Techniques 34The Nature of the Corporate Constitution 34Alteration of the Corporate Constitution 35Pre-Incorporation Contracts: 3 Types 35

Kelner v. Baxter (UK, 1866) 35Black v. Smallwood (AUS, 1966) 36Wickberg v. Shatsky & Shatsky (B.C. S.C., 1969) 36Landmark Inns v. Horeak (1982, Sask.) 36

5. Corporate Law III: Duties in the Relationship between Shareholders and Board of Directors 372

Duty of Care and Duty of Loyalty 37Rules vs. Standards 37PRE-CBCA 37

City Equitable Fire Insurance Co. Ltd. (1925) 37Re Brazilian Rubber Plantation and Estates Ltd. (1911) 37

POST-CBCA 37Peoples Department Stores Ltd (1992) (SCC) 37

Regulatory Liability RE: Securities 38Standard Trustco Ltd. Re (1992) (Securities Commission) 38Magna International Inc., Re (2010) (Securities Commission) 38

The Business Judgment Rule 39Smith v. Van Gorkom (Del. S.C. 1985) 40UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc (Repap decision) (ON SCJ 2002) 41Brant Investments Ltd. v. KeepRite Inc. (US 1991) 42Pente Investment Management Ltd. v. Schneider Corp. (ONCA 1998) 42Unique Broadband Systems Inc., Re (ONCA 2014) 42

Duty of Care + Biz Judgement Rule: Policy Implications 43Legal History of Fiduciary Duty 45Interaction between FDs and BJR 46Overlap Between Fiduciary Duties and the Oppression Remedy 46

Duty of Loyalty 46Recipients of Duty of Loyalty 46Self-Dealing Transactions 46Corporate Opportunities 47

Regal (Hastings) Ltd. v. Gulliver (1942) 47Brudney and Clark, “A New Look at Corporate Opportunities” (1981, Harvard Law Review) 48

Competition 48London and Mashonaland Exploration Company, Limited v. New Mashonaland Exploration Company, Ltd. (1891 WN) 48Slate Ventures Inc. v. Hurley (Nfdl 1996) 48Slate Ventures v. Hurley (Nfldlnd CA 1997) 49Cranewood Financial Corp. v. Norisawa (BCSC 2001) 49BCE Inc. Re (SCC 2008) re: recipients of fiduciary duty 49

Sanction of Fiduciary Breach by Shareholders 49North-West Transportation Company, Limited v. Beatty (1887) 50Guest Lecturer - Lionel Smith (trust law and corporate law) 50

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6. Corporate Law IV: Rights and Remedies in the Relationship between Shareholders and Board of Directors 51Shareholder Voting + Pre-emptive Rights 51

Pre-Emptive Rights 51Shareholder Voting 51Voting for directors 51Right to Appoint a Proxy 52Permissible Limitations on the right to Vote in the Corporate Constitution 54

Jacobsen v. United Canso Oil and Gas Ltd. (1980, Alberta QB) 54Brown v. Duby (1980 ON) 55

Shareholder Meetings: 2 Types 55Unanimous Shareholder Resolutions 56

Eisenberg v. Bank of Nova Scotia (1965 SCC) 56The Use of Directors’ Powers in Relation to Meetings 56

Schnell v. Chris-Craft Industries Inc. (1971 SC Delaware) 56The Conduct of Meetings and the Right of Discussion 57

Blair v. Consolidated Enfield Corp. (1993 SCC) 57Shareholder Proposals 57

Varity Corp v. Jesuit Fathers of Upper Canada (1987 ON C.A.) 58Shareholder-Requisitioned Meetings 58

Airline Industry Revitalization Co. v. Air Canada (1999 ON SCJ) 59Judicially Ordered Meetings 59

Canadian Javelin Ltd. v. Boon-Strachan Coal Co. (1976 QC S.C.) 59Goodwood Inc. v. Cathay Forest Products Corp. (2012 ON SCJ) 60

Shareholder rights: good faith and oversight 60Right to Corporate Info: Access to Corporate Records 60Right to Appoint an Auditor 65

Livent Inc. (Receiver of) v. Deloitte and Touche (2016 ONCA) 66Shareholder Remedies 70

Derivative Action 70Foss v. Harbottle Rule 72

Statutory Derivative Action 72Re Northwest Forest Products Ltd (1975 BC SC) 72Turner et Al. v. Mailhot et. al. (1985) (ON HC) 72

The Relationship Between the Complainant and the Corp 73Statutory Derivative Actions Post-BCE 73

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BCE Inc. RE: Remedies for Shareholders 73Personal Actions 73

Goldex Mines v. Revill (1975) 73Hercules Management Ltd. v. Ernst & Young (SCC 1997) 74

Oppression Remedy 75Judicial Interpretation of the Oppression Remedy 76

First Edmonton Place Ltd v. 315888 Alberta Ltd. (1988 AB QB) 76Ferguson v. Imax Systems Corp (1983 SCC) 77

Reasonable Expectations in the Oppression Remedy 77BCE Reasonable Expectations test 77Westfair Foods Ltd. v. Watt (AB CA 1991) 77

Other Remedies 78Appraisal Remedy 78Compliance and Restraining Orders 78Rectification Orders 78Investigations 78Winding Up 78

7. Corporate Law V: Relationship between Majority Shareholders and Other Stakeholders79Fiduciary duties to minority shareholders 79

The Current CDN Position re: FDs of Shareholders at CML 80Brant Investments Ltd. v. Keeprite Inc. (1991) 80

Duties Owed by Shareholders under the Oppression Remedy 81Ebrahimi v. Westbourne Galleries Ltd. (1972) 81Ferguson v. Imax Systems Corp (SCC 1983) 81Scottish Co-Op Wholesale Society Ltd. v. Meyer (ER 1958) 82

The Duty of a Controlling Shareholder When Tendering a Takeover Bid82Pente Investment Management Ltd. v. Schneider Corp. (1998 ON SC) 82

The Duty of the Board When There is a Controlling Shareholder 82Pente Investment Management Ltd. v. Schneider Corp. (1998 ON CA) 82

Majority of the Minority Voting 83Role of Securities Regulators 83

Re: Canadian Tire (Securities Commission 1987) 83Are Controlling Shareholders Good for CDN Capital Markets? 83Most Canadian corporations DO have controlling shareholders 83

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Other stakeholders 85Luca Enriques et al, “The Basic Governance: Minority Shareholders and Non-Shareholder Constituents” (Oxford: 2017) 85

Mergers & Acquisitions 85 Sale of control block 85

Why merge/acquire? 85Ways to Merge 86

Zetlin v. Hanson Holdings (NY 1979) 86Paul Davies, Klaus Hopt and Wolf-Georg Ringe, “Control Transactions” (Oxford: Oxford University Press, 2017) 86

Freeze-Out Mergers 86Hostile Takeovers 87Defensive Tactics and the Theory of Takeovers 87

Two-tier (front-end loaded) coercive tender offers 87Poison Pill Defense (Canada) 87Theoretical Perspectives 87

“The Poison Pill: A Noxious Nostrum for Canadian Shareholders”, Jeffrey MacIntosh (1993) 87Other Takeover Defenses 88

“The Proper Role of a Target’s Management in Responding to a Tender Offer” Easterbrook and Fischel (1982) 88“A Guide to Takeovers: Theory, Evidence and Regulation”, Roberta Romano (1992) 89

Legal Regulation of Hostile Takeovers 89Teck v. Millar (BC SC 1972) 89Unocal v. Mesa (Delaware 1985) 89Revlon v. MacAndrews (Delaware 1986) 90

REVIEW SESSION 92

Agency Law 92

Purpose of Corp Law 92

Scope of Corporate Contract 93

Corporate Liability 93

Fiduciary Duties 93

Shareholder Rights 94

Shareholder Actions 94

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Minority Shareholders 95

Shareholder Protections Overview 95

M&A 95

MISC DEFINITIONS 950. INTRO TO ENTERPRISE LAW The fundamental goal of enterprise law = to increase social welfare (AKA shareholder/investor welfare, but also general welfare)

● Criterion for evaluation = Economic efficiency How?

1. Providing standard platforms for biz entities, agency contracts, creditor protections (default terms open to contractual modification)

2. Permitting biz actors to modify 3rd party property rights (?) 3. Providing a variety of rules and standards (fiduciary duties) to prevent

moral hazards (see below)

1. AGENCY LAW ● Governs the legal relationships between principals and the third parties

(3Ps) with whom the agents (As) of principals (Ps) interact ● Principal-agent relationship = one person extends their own activity to

another by engaging them to act (i.e someone acting on someone else’s behalf)

Agency problems as limits on performance incentivesMoral Hazard = when an agent is not acting in the best interest of the principal

● “Actions that have efficiency consequences are not freely observable so that the person taking them may choose to pursue their own interests at others’ expense” (Milgrom and Roberts)

3 Elements of Moral Hazard1. Diverging interests between parties 2. Reason to contract 3. Difficulty in verification of agent’s actions

Sources of uncertainty re: an agent’s actions: i. Agent’s efforts are unobservable ii. The result desired isn’t objectiveiii. Agent doesn’t put in effort (not likely).

Solutions to Moral Hazard 1. Monitoring - learn more about the agent

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a. There’s an ideal amount here - too much monitoring actually has negative effects

2. Explicit incentives a. Performance incentives in contracts b. Punishments

NOTE: These may align divergent interests but also expose agents to risk Agency Problems

1. Owners v. hired managers 2. Majority v. minority interests 3. Owners v. employees/creditors/customers

The law of Agents● Fiduciary Duty = an agent must act in best interests of the principal ● Mandate = agency relationship in CVL

Formation3 Elements of an Agency Relationship

1. Consent from both the principal and the agent 2. The principal has the right to select and control an agent (varied by K)3. The agent holds the power to affect the principal’s legal relations

w/in the agreed-upon scope of appointment ● Special agents = agency is limited to a single act/transaction ● General agents = agency includes a series of acts/transactions● Disclosed principals = 3rd parties understand an A is acting on a

particular Ps behalf ● Undisclosed Ps = 3rd parties believe an A is the P ● Partially disclosed Ps = 3Ps deal with an A without knowing Ps identity

CCQ 2130. (1) Mandate is a contract by which a person, the mandator, confers upon another person, the mandatary, the power to represent him in the performance of a juridical act with a third person, and the mandatary, by his acceptance, binds himself to exercise the power. (2) That power and, where applicable, the writing evidencing it are also called power of attorney.

CCQ 2136. The powers of a mandatary extend not only to what is expressed in the mandate, but also to anything that may be inferred therefrom. The mandatary may carry out all acts which are incidental to such powers and which are necessary for the performance of the mandate.

CCQ 2138. (1) A mandatary is bound to fulfill the mandate he has accepted, and he shall act with prudence and diligence in performing it. (2) He shall also act honestly and faithfully in the best interests of the mandator, and shall avoid

placing himself in a position where his personal interest is in conflict with that of his mandator.

CCQ 2145. A mandatary who, alone, exercises powers that he is charged to exercise with another exceeds his powers, unless he has exercised them in a manner more advantageous to the mandator than that agreed upon.

CCQ 2146. (1) The mandatary may not use for his benefit any information he obtains or any property he is charged with receiving or administering in the performance of his mandate, unless the mandator consents to such use or such use arises from the law or the mandate. (2) If the mandatary uses the property or information without authorization, he shall indemnify the mandator by paying, in addition to any indemnity for which he may be liable for injury suffered, in the case of information, an amount equal to the enrichment he obtains or, in the case of property, appropriate rent or the interest on the sums used.

CCQ 2147. (1) The mandatary may not, even through an intermediary, become a party to an act which he has agreed to perform for his mandator, unless the mandator authorizes it or is aware of his quality as a contracting party. (2) Only the mandator may avail himself of the nullity resulting from the violation of this rule.

Jensen Farms Co. v. Cargill (1981) Principal-agency relationships can be formed without an explicit agreement.

● FACTS: Warren operated a grain elevator and purchased grain from farmers. Cargill financed them. The bank would issue special drafts from Cargill on Warren’s behalf. Warren defaulted; farmers sue Cargill as Warren’s P.

● ISSUE/HOLDING: Is Cargill the principal in this situation and thus liable for W’s default? YES.

● ANALYSIS: All three elements of an agency relationship are present: (1) C had control over W’s operations (2) There was an agreement between the parties (3) Both parties consented to the relationship

● This is more than a debtor-creditor relationship because of the control C exerted over W’s operations

● NOTE: Like consideration in K law, courts want to see intent on behalf of the parties to create an agency relationship. Here, that intent is clearly present, even though they don’t call it “an agency relationship” explicitly.

Termination ● Either the principal or agent can terminate an agency at any time

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● If their K fixes a term, then the decision to revoke/renounce before the end of term gives rise to a claim for damages for breach of K

CCQ 2139. (1) In the course of the mandate, the mandatary is bound to inform the mandator, at the mandator’s request or where circumstances warrant it, of the stage reached in the performance of the mandate. (2) The mandatary shall inform the mandator without delay that he has fulfilled his mandate.

Principal’s Liability in Contract ● Actual Authority = what a reasonable person in the As position would

think their responsibilities were to the P in response to P’s actions ○ Implicit Authority = all the steps needed to be taken to fulfill

those responsibilities also fall under the A’s authority ● Apparent Authority = what a reasonable 3rd party would infer about A’s

responsibilities from the Ps actions ○ e.g. giving someone who has no authority to contract materials,

stationery, forms, a truck with a company logo, or letting him work out of the company office

● Inherent Authority = what a reasonable 3rd party would infer regarding A’s rights/responsibilities were from the A’s actions

○ Provides reliance to 3Ps -- As who act as though they have authority vested from Ps should be held responsible for those representations

POLICY THOUGHTS: This doctrine puts the onus of monitoring the A on the P, not 3P.

● P has an interest in monitoring to ensure their interests are being fulfilled by A.

● It’s also often cheaper for the P to monitor A than for a 3P to monitor A. ● Inherent authority is in some ways a negligence rule, in that it allows us

to hold both the P and the 3P responsible for monitoring.

White v. Thomas (1991) An agent can’t establish their own authority. Principals won’t be held responsible for rogue actions taken by their agents.

● FACTS: White’s assistant Ms. Simpson bought land for more than she was authorized to by W, so she sold some of it to the Thomases. White found out, and wanted to void the sale.

● ISSUE/HOLDING: Is W bound by the K entered into by S? NO. ● PH: Lower court ordered specific performance; this appeals court

reversed.

● ANALYSIS: Apparent authority must be inferred from the actions of the P, not the A. Thomases never verified with W. S was not explicitly authorized to sell W’s property, only to buy property.

Gallant Ins. Co. v. Isaac (2000) Created the doctrine of inherent authority as an equitable remedy.

● FACTS: Thompson-Harris, an independent insurance agency and an A of Gallant, bonded Isaac’s new car insurance on Dec. 3 without I paying. On Dec. 4, I had a car accident. I paid the insurance on the 5th and reported it. G claims I wasn’t under insurance on the 4th and thus isn’t covered.

● ISSUE/HOLDING: Is G liable to cover I’s accident costs? YES. ● ANALYSIS: Inherent authority is derived from the agency relationship.

○ G and TH clearly have an agency relationship, and the customer relied on this relationship

○ TH’s promise to bond the insurance was clearly in their scope of authority, so customer has no reason to believe that TH’s bond wasn’t authorized.

CCQ 2157. (1) A mandatary who binds himself, within the limits of his mandate, in the name and on behalf of the mandator, is not personally liable to the third person with whom he contracts. (2) The mandatary is liable to the third person if he acts in his own name, subject to any rights the third person may have against the mandator.

CCQ 2158. A mandatary who exceeds his powers is personally liable to the third person with whom he contracts, unless the third person was sufficiently aware of the mandate, or unless the mandator has ratified the acts performed by the mandatary.

CCQ 2160. (1) A mandator is liable to third persons for the acts performed by the mandatary in the performance and within the limits of his mandate unless, under the agreement or by virtue of usage, the mandatary alone is liable. (2) The mandator is also liable for any acts which exceeded the limits of the mandate, if he has ratified them.

CCQ 2163. Where a person has allowed it to be believed that another person was his mandatary, he is liable, as if there had been a mandate, to a third person who in good faith has contracted with that other person, unless he took appropriate measures to prevent the error in circumstances in which it was foreseeable.

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Principal’s Liability in Tort● In most circumstances, Ps are liable for torts committed by their

employee As. ● Apparent authority is a basis for imposing vicarious liability onto Ps for

As behaviour

Humble Oil v. Martin (1949) Employers will be held liable for harm caused by their employees; the employee-employer relationship is characterized by control.

● FACTS: M and his children were hit from behind by Love’s car after she left it for Humble Oil to service. The station was operated by Schneider. M sues.

● ISSUE/HOLDING: Who should be held responsible for the injuries suffered by M? Humble Oil.

● ANALYSIS: S is an employee because Humble maintained considerable control over S by dictating several important aspects of Schneider’s business:

○ Humble had significant financial control and supervision, rendering Schneider’s station a retail marketing enterprise for Humble’s products.

○ The dissent disagreed with the court’s decision to hold Love responsible for any damages since Love transferred control to the station.

○ The court distinguished this case from other master-servant cases that were similar but illustrated more control by the servant over the operations.

○ The court will not allow a master to have it both ways: substantial control without any liability.

Hoover v. Sun Oil (1965) Conversely, employers will not be held liable for independent contractors’ actions. Financial control and monitoring / allocation of financial risks are key features of the agency relationship and will determine liability in tort.

● FACTS: Hoover’s car caught on fire at Sun Oil. He sued the manager of the station, the employee, and Sun Oil. Sun Oil claims manager, Barone, was an IC.

● ISSUE/HOLDING: Is Sun Oil liable? No, Barone is. ● ANALYSIS: Barone purchased gas from Sun Oil, paid them rent, used

their equipment. Sun Oil would give him voluntary advice, but B assumed financial risk. Therefore, B is an IC.

CCQ 2164. A mandator is liable for any injury caused by the fault of the

mandatary in the performance of his mandate unless he proves, where the mandatary was not his subordinate, that he could not have prevented the injury.

Agent’s Duties to the Principal● A’s legal power over property is held for the sole purpose of advancing

the aim of the relationship pursuant to which she came to control that property

● Fiduciary is bound to exercise good faith judgement ● Duty of Obedience = to the documents creating the relationship and to

obey Ps commands ● Duty of Loyalty = pervasive obligation to exercise legal power over the

subject of the relationship in a way that the P believes in good faith is advancing their interests / that A isn’t exercising their power for personal benefit

● Duty of Care = duty to act in good faith as one believes a reasonable person would act in holding fiduciary/agency power

Tarnowski v. Resop (1952) An agent who violates his duty of loyalty is liable to the principal for any secret profit earned, as well as the principal’s consequential damages.

● FACTS: Tarnowski hired Resop as his agent to investigate and negotiate for the purchase of a route of coin-operated music machines. R purchased the biz, telling T details about it that ended up being false. Upon discovery, T rescinded the sale. He offered to return what he received, but seller refused to give him the money back. T sued the sellers and won. T sues R because he received a secret commission for the sale, which T wants to recover.

● ISSUE/HOLDING: Is a disloyal agent liable for secret profits and consequential damages? YES. R ordered to return profits.

In Re Gleeson (1954) A trustee cannot deal with trust property in an individual capacity and receive a profit.

● FACTS: In 1951, Gleeson renewed the lease of her farmland with the petitioner. Gleeson died two weeks before the lease was to expire in 1952. Gleeson devised the land to the petitioner, as trustee, for the benefit of her three children. After Gleeson’s death, with the expiration of the second lease imminent, the petitioner remained on the land for another year until March 1, 1953 and made a bigger profit for the trustees (increasing his rent)

● ISSUE/HOLDING: Did the petitioner breach his duty of loyalty by holding onto the land? YES.

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● ANALYSIS: Though the petitioner’s holdover did not damage the property, he is still liable and must turn over the profits he made while he remained a tenant to the trust. The fact that the petitioner’s actions did not harm the land did not absolve him of his duty to refrain from self-dealing.

2. PARTNERSHIP LAWTypes of business organizations

1. Sole Proprietorship ○ A business owned and operated by one person.○ No steps taken to formally organize the business, no formal

process to establish one. Not an organization. ○ No formal Terms of Association○ Most business relationships governed by contract. ○ The sole proprietor manages the business unless they choose to

hire a manager. Can delegate managerial authority by contract.○ Benefits to the sole proprietor are generally governed by property

law. Assets owned by sole proprietor. Income or loss considered personal income/loss of the sole proprietor in personal capacity.

2. Partnership○ “Partnership is the relation that subsists between persons

carrying on a business in common with a view to a profit.” (s. 2 of Partnerships Act of Ontario)

■ Meaning, however, is complicated – it’s less clear what “business in common” means because there are other relationships between people where they may be seeking to make profits (e.g. joint ownership).

■ Parties acting in concert based on an agreement between them (express, implied, presumed from conduct)

■ PAO, s. 1(1): business = every trade, occupation and profession (View to a profit)

○ The partnership is the most simple, flexible form of organization. Very malleable. The default organizational form for collective enterprise.

○ Statute sets out default rules. Statutory rules will apply even if you’ve done nothing to set up an agreement or taken steps to structure the business differently; the law will assume two people carrying on a business to be a partnership unless proven otherwise.

○ Regulated by provincial and territorial statutes (no federal partnerships).

○ Usually written agreement, but doesn’t need to be.

3. Business Corporation (see below)

General aspects of partnership law

CCQ 2186. (1) A contract of partnership is a contract by which the parties, in a spirit of cooperation, agree to carry on an activity, including the operation of an enterprise, to contribute thereto by combining property, knowledge or activities and to share among themselves any resulting pecuniary profits. (2) A contract of association is a contract by which the parties agree to pursue a common goal other than the making of pecuniary profits to be shared among the members of the association.

CCQ 2230. (1) A partnership is dissolved for the causes of dissolution provided for in the contract, by the achievement of its object or the impossibility of achieving it, or by consent of all the partners. It may also be dissolved by the court for a legitimate cause. (2) The partnership is then liquidated.

CCQ 2232. The uniting of all the shares in the hands of a single partner does not entail dissolution of the partnership, provided at least one other partner joins the partnership within 120 days.

Definition of Partnership A.E. LePage Ltd. v. Kamex Developments Ltd (1997)Joint ownership of property is not sufficient to constitute a partnership. Look to parties’ behaviour/intentions to determine existence of partnership.

● ISSUE/HOLDING: (1) Is this a partnership? NO. Joint ownership is not sufficient; must be explicit statement of seeking profit. (2) Did March sign the exclusive listing on behalf of a partnership? NOT RELEVANT, SEE Q(1).

● ANALYSIS: A partnership means carrying on (a) a business; (b) in common; (c) with a view to a profit. Being co-owners of a property does not make you partners. Need intention to hold property jointly, rather than maintain rights to deal with respective interests in property.

○ PA s. 3(3) – proof that there is a profit sharing arrangement generates a rebuttable presumption that there is a partnership.

○ PA s. 3(1) – in certain kinds of relationships there is sharing of profits and losses that are not necessarily partnerships. e.g. joint ownership, etc…

● Whether or not there is a partnership depends on the intention of the parties. Did they intend to carry on a business, or just have an agreement to regulate their rights and obligations as co- owners of a property?

○ Look to circumstances, how the parties conducted themselves, how they articulated their relationship, terms of any agreements.

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○ Consider if there is evident of property being held jointly, if there are constraints on the ability of partners to deal with their interests freely.

○ See whether profits had to be applied to the partnership, or if co-owners were free to take their share of profits.

○ Need to intend to become partners in a joint venture, not merely be co-owners of property (Thrush v. Read, 1950). There is no such intention here - intending to acquire, hold, and sell property for profit doesn’t make you partners.

○ They were trying to keep their interests separate in this case; clear evidence there was not a partnership.

Volzke Construction Lrd. v. Westlock Foods Ltd. (1986) Intention is important in determining if there is a partnership. Courts will look to any and all agreement and behaviour of parties as indicia.

● ISSUE/HOLDING: Is this a partnership? YES. ● ANALYSIS: Control is not legally relevant and has nothing to do with

whether or not there is a partnership. There are often active and dormant partners in a partnership. Shared control is not an essential characteristic of partnerships. Can have silent partners. Shared control, where present, is not sufficient to find that there is a partnership.

○ Must look to intent, which is revealed by terms of agreement between parties as well as their conduct:

■ Spoke of each other as partners;■ Intended to share the costs of developing the business,

as well as the profits, 80-20;■ They had a joint bank account; ■ Sent clients to each other; ■ jointly managed the property.

○ Clear on the facts of this case that they were partners in a business operating the shopping centre.

NOTE: Courts will be more likely to find that a co-ownership is not a partnership when the evidence shows that, like in Kamex, there is a short-term intention to sell. Volzke looked more like a partnership because they owned a shopping mall and were involved in active management, etc.

Pooley v. Driver (1876) Even if you say that it’s not a partnership but it looks and feels like a P, the law will recognize it as such—esp. if you’re trying to avoid P liability.

● ISSUE: Are the Drivers partners of the partnership or creditors of the partnership? Partners.

● ANALYSIS: Seeking to differentiate between partnership relationship and debtor/creditor relationship. Again, always look to surrounding circumstances and intentions of parties.

○ Terms of the loan were unusual...Drivers had the same rights as would be enjoyed by dormant partners.

○ They enjoyed control over how the capital they provided would be used – not the ordinary position of lenders. Normally lenders are not interested in how capital is used except for when it comes times for repayment.

○ Loan was for the duration of the partnership – intended to be an advance of capital to the partnership for the purpose of carrying it on.

○ In a normal loan the bankruptcy of the creditor wouldn’t have anything to do with anything... Would be remarkable for a regular loan to be impacted by bankruptcy of creditor. Here, fact that agreement comes to an end should the creditor go bankrupt is significant in that it makes it look more like a partnership agreement.

■ Lenders agreed to repay interest they’d received if the partnership didn’t turn a profit. What creditor would agree to that?! None.

■ Arbitration clause present – common in partnerships, not common in loans.

■ Had rights to accounting – unusual for lender, standard for partners b/c of concern about what others are doing with your money.

■ Courts will look through to see in substance, what is this. Will ignore superficial, self-serving representations.

■ Loaners were looking to make it look like they were more like creditors than partners, because they didn’t want the additional liability.

■ True relationship here one of dormant/active partners and not of creditors/debtors. Based on the documents and looking at the transaction as a whole, this is not a loan.

■ NOTE: Today, this issue dealt with by Partnerships Act, s. 3(3)(d).

Thorne v. New Brunswick (Workers Comp Board) (1962) A partnership, unlike a corporation, is not a legal person. No legal agency can be attributed to it, including the capacity to enter into a contract with anyone, let alone the capacity to enter into a contract with a partner in the partnership.

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● FACTS: Partner in logging firm was injured while carrying out logging activities. To obtain workers’ compensation, he needed to be injured as an employee. So, to receive compensation, T needs to be found to be an employee of the partnership of which he is a member.

● ISSUES/HOLDING: (1) Are partnerships legal entities distinct from their component members? NO. (2) Is it possible for T to enter into an employment agreement with the partnership of which he is a member to get workers comp? NO.

● ANALYSIS: A partnership is a legal organization, but in terms of its status, it has no legal capacity to do anything of its own right.

It doesn’t enjoy the attributes of a separate legal personality. A partnership is therefore not a distinct legal entity from its members. As a result, a partnership does not have the legal status required to allow it to contract with one of its members. Partners cannot therefore be employees of the partnership – you can’t contract with yourself to work. There is no such thing as “self-employment” in a partnership.

Relationships1. Relationship of the Partners to One Another

a. Equality i. Partners enjoy presumptive equality re: liability,

entitlement to shares of profit, management ii. Partnership agreements can modify these presumptions

of equality. b. Consensualism

i. It’s all about the will of the parties to be in business together. Mutual consent.

ii. Can be found in signatures to a partnership contract or in behaviour of actors.

iii. Terms of the partnership will be in the agreement, if there is one. If not, default rules in statute will apply.

c. Fiduciary Obligations i. Each partner is considered in law to be an agent of the

other in conducting the business of the partnership. Partners are fiduciaries to each other.

ii. Agency = relationships of high trust and confidence. Fiduciary principles protect these kinds of relationships.

iii. Can’t contract out of fiduciary obs because they’re fundamental to partnerships

d. Personal Character i. Personal = tied to individuals, rights cannot be fully

assigned to 3rd parties.

ii. Because partnerships are personal, they dissolve upon the death or insolvency of a partner (s. 33, PA)

2. Relationship of the Partners to 3rd Parties i. Pre-partner Liability - Liabilities incurred by partnership before

defendant became a memberii. Liability as Partner - Liabilities incurred by partnership while

defendant was a member iii. “Holding out” Liability - Liabilities incurred by partnership

while defendant held themselves out, or allowed themselves to be held out, as a partner in the biz

iv. Liability of Apparent Partner - Liabilities incurred by partnership after defendant has retired as a partner but before the creditor became aware of the change

v. Posthumous liabilities

Legal Personality● A partnership is not distinct from the individuals/entities that make up a

partnership (doesn’t enjoy a distinct legal personality) ● The business is carried out by all of the partners and the property is held

by all of the partners as tenants in common● Profits and liabilities flow directly to the partners according to the terms

of the partnership agreement.● Liability of partners is same as sole proprietorship – unlimited personal

liability. Partners through their individual agency allow the partnership to function, in the same way as individuals do in sole proprietorship.

● Partnerships can sometimes be recognized as legal entities for practical purposes (e.g. in a lawsuit of two partners).

CCQ 2206. Where one of the partners is, on his own account, the creditor of a person who is also a debtor of the partnership, and the debts are equally due, the amounts he receives from the debtor shall be charged to both claims in proportion to their respective amounts.

CCQ 2221. (1) With respect to third persons, the partners are jointly liable for the obligations contracted by the partnership but they are solidarily liable if the obligations have been contracted for the service or operation of an enterprise of the partnership. (2) The creditors may bring an action against a partner for payment only after they have discussed the property of the partnership; even then, the property of the partner is applied to the payment of the creditors of the partnership only after his own creditors have been paid.

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CCQ 2198. (1)A partner is a debtor to the partnership for everything he promises to contribute to it. (2) Where a person promises to contribute a sum of money and fails to do so, he is liable for interest from the day his contribution ought to have been made, subject to any additional damages which may be claimed from him.

CCQ 2199. (1) A contribution of property is made by transferring rights of ownership or of enjoyment and by placing the property at the disposal of the partnership. (2) In his relations with the partnership, the person who contributes property is warrantor therefor, in the same manner as a seller towards a buyer, where the contribution consists in the ownership of property; he is warrantor therefor, in the same manner as a lessor towards a lessee, where the contribution consists in the enjoyment of property. (3) In the case of property that would normally need to be renewed during the term of the partnership, a contribution consisting in enjoyment transfers ownership of the property to the partnership, subject to the obligation for it to return property of the same quantity, quality and value.

CCQ 2201. Participation in the profits of a partnership entails the obligation to share in the losses.

CCQ 2202. (1) The share of each partner in the assets, profits and losses is equal if it is not determined by the contract. (2) If the contract determines only each partner’s share of the assets, profits or losses, that determination is presumed to be made for all three cases.

CCQ 2203. (1) Any stipulation whereby a partner is excluded from participation in the profits is without effect. (2) Any stipulation whereby a partner is exempt from the obligation to share in the losses may not be set up against third persons.

CCQ 2204. A partner may not compete with the partnership on his own account or on behalf of a third person, or take part in an activity which deprives the partnership of the property, knowledge or activity he is bound to contribute to it; any profits arising therefrom belong to the partnership, without prejudice to the remedies it may pursue.

CCQ 2205. A partner is entitled, if he was in good faith, to recover the amount of the disbursements he made on behalf of the partnership and to be indemnified for the obligations he contracted and for the losses he suffered in acting for the partnership.

CCQ 2209. (1) A partner may, without the consent of the other partners, become a partner with a third person with respect to his share in the partnership, but he may not make him a member of the partnership without their consent. (2) Within 60 days after becoming aware that a person who is not a member of the partnership has acquired the share of a partner by onerous title, any partner may exclude the person from the partnership by reimbursing him for the price of the share and the expenses he has paid. That right may only be exercised within one year from the acquisition of the share.

CCQ 2215. (1) Failing any stipulation as to the mode of management, the partners are deemed to have conferred the power to manage the affairs of the partnership on one another. (2) Any act performed by a partner with respect to the common activities binds the other partners, without prejudice to their right to object, jointly or separately, to the act before it is performed. (3) In addition, each partner may compel his partners to incur any expenses necessary to preserve the common property, but a partner may not change the condition of that property without the consent of the others, regardless of how advantageous such change may be.

CCQ 2216. (1) Every partner has the right to participate in collective decisions, and the contract of partnership may not prevent him from exercising that right. (2) Unless otherwise stipulated in the contract, collective decisions are taken by a majority vote of the partners, regardless of the value of their interests in the partnership, but collective decisions to amend the contract of partnership are taken by a unanimous vote.

CCQ 2217. A partner without management powers may not alienate or otherwise dispose of common property, subject to the rights of third persons in good faith.

CCQ 2218. (1) Notwithstanding any stipulation to the contrary, any partner, even though he is excluded from management, has the right to inform himself as to the state of the affairs of the partnership and consult its books and records. (2) In exercising this right, the partner is bound not to unduly hinder the operations of the partnership nor to prevent the other partners from exercising the same right.

CCQ 2219. (1) Each partner is a mandatary of the partnership with respect to third persons in good faith and binds the partnership for every act concluded in its name in the ordinary course of its activities. (2) No stipulation to the contrary may be set up against third persons in good faith.

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CCQ 2220. (1) An obligation contracted by a partner in his own name binds the partnership when it comes within the scope of the activities of the partnership or when its subject is property for use by the partnership. (2) A third person may, however, cumulate the defences which may be set up against the partner and the partnership and plead that he would not have entered into the contract if he had known that the partner was acting on behalf of the partnership.

CCQ 2221. (1) With respect to third persons, the partners are jointly liable for the obligations contracted by the partnership but they are solidarily liable if the obligations have been contracted for the service or operation of an enterprise of the partnership. (2) The creditors may bring an action against a partner for payment only after they have discussed the property of the partnership; even then, the property of the partner is applied to the payment of the creditors of the partnership only after his own creditors have been paid.CCQ 2222. (1) A person who gives reason to believe that he is a partner, even though he is not, may be held liable as a partner to third persons in good faith acting in that belief. (2) The partnership is, however, liable to third persons only if it gave reason to believe that such a person was a partner and it failed to take measures to prevent the error on their part in circumstances in which it was foreseeable.

CCQ 2223. Silent partners are liable to third persons for the same obligations as declared partners.

CCQ 2224. A partnership may not make a public offering of securities or issue negotiable instruments, on pain of nullity of the contracts entered into or of the securities or instruments issued and on pain of the obligation to make reparation for any injury the partnership causes to third persons in good faith.In such a case, the partners are solidarily liable for the obligations of the partnership.

CCQ 2225. A partnership may sue and be sued under the name it declares.

CCQ 2226. A partner ceases to be a member of the partnership by the transfer or redemption of his share, by his death, by being placed under protective supervision, by becoming bankrupt, or by the exercise of his right of withdrawal; he also ceases to be a member by his own will, by his expulsion or by a judgment authorizing his withdrawal or ordering the seizure of his share.

CCQ 2227. A partner who ceases to be a member of the partnership otherwise than by the transfer or seizure of his share is entitled to receive the value his share had when he ceased to be a partner, and the other partners are bound to

pay him that value as soon as it is determined, with interest from the day on which his membership ceased.

Forms of partnership

1. Limited Partnerships ● A limited partnership exists when two or more partners unite

to conduct a business in which one or more of the partners is liable only to the extent of the amount of money that partner has invested -- governed by the Ontario Limited Partnerships Act

Haughton Graphic Ltd. v. Zivot (1986, ON) If a limited partner takes part in the control of the business he is liable as a general partner even though the 3rd party did not rely on him as being personally liable. LP turns into a GP if they (1) manage the company as a GP and (2) are gaining advantage from limited liability as LP.

● ISSUE/HOLDING: should the limited partners – in their personal capacity – be held liable for debts owed by the limited partnership? YES.

● ANALYSIS: The defendant, Zivot, was “in complete control of the limited partnership” and thus was a general partner in fact: he was the directing mind of the limited partnership, was responsible for it, and managed it. He signed cheques on behalf of the limited partnership. The fact that he and Marshall were both employees of the general partner did not save them in this case.

○ How can a corp manage a general partnership? It can’t. The “employees” have to manage it.

○ Court also rejects the defendant’s arguments that they shouldn’t be liable on the basis that the printing company knew it was dealing with a LP.

● NOTE: This doesn’t mean that Corporations can never be general partners…it just means that if you assume the role of GP, you can be held liable as one. The control aspect is central, not the corporation/LP status of the parties.

Nordile Holdings Ltd. v. Breckenridge (1992) If an LP contracts as LP for the limited partnership, and in the contract it expresses that LPs cannot be held liable, then the LP cannot be held liable.

● ISSUE/HELD: Is Breckenridge, as a limited partner of ARPL, shielded from liability? YES. B is not liable.

● ANALYSIS: Nordile argued that B acted solely in capacity as a director and officer of the general partner, not as a limited partner. “Directing mind” concept requires control of corporation as a shareholder. Note that Nordile relied on BC PA, s. 64, which provides that a LP is not liable as a

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GP unless he takes part in the management of the business. In this case, the LPs were only controlling the GP, which was controlling ARPL, the limited partnership that defaulted. The agreed statement of facts unequivocally stated that Beckenridge participated in the management as directors and they did so “solely in their capacities as directors and officers of the GP” (i.e. the sole GP of ARPL). There was also a lack of reliance - the contract was clear, and the other party knew they were limited partners

● NOTE: As opposed to Haughton, in this case the the limited partner had entered into an express agreement that said Nordile could not sue the LPs.

CCQ 2244 (below) specifies that LPs become GPs when (1) They assume control or (2) act as mandatary or agent of partnership or (3) allow their name to be used in any act of the partnership. EXCEPT if a partner clearly indicates they are a LP (in CML this applies to all rules; in CVL it only applies to named partners)

● NOTE: The BIG (rare) difference between CML and CVL: ○ CVL turns LPs into GPs if they control the corp○ CML will allow officers and directors of a GP to exert some

element of control while still holding on to their position as LPs NOTE: You cannot legally be both a general partner and a limited partner at the same time. You cannot have limited liability for decisions you are making! The law would be sanctioning harming third parties in some cases.

● This would create unfair reliance by 3rd parties when they contract the partnership — 3rd parties assume partners are sharing in benefits and costs of a partnership.

Limited Liability Partnerships (LLPs) A partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore can exhibit elements of partnerships and corporations. each partner is not responsible or liable for another partner's misconduct or negligence. In QC, it’s in the code des professions 187.12 -- it only exists for professionals, like lawyers

● Works like a GP except that each partner is liable for their own wrongful or negligent omissions (and those of their subordinates as well, but only if they’re wrongful, negligent, or criminal/fraudulent)

CCQ 2188. (1) Partnerships are either general partnerships, limited partnerships or undeclared partnerships. (2) They may also be in joint-stock form, in which case they are legal persons.

CCQ 2189. (1) A general or limited partnership is formed under a name that is

common to the partners. (2) It shall file a registration declaration in accordance with the Act respecting the legal publicity of enterprises (chapter P-44.1); otherwise, it is deemed to be an undeclared partnership, subject to the rights of third persons in good faith.

CCQ 2236. A limited partnership consists of one or more general partners who are the sole persons authorized to administer and bind the partnership, and of one or more special partners who are bound to contribute to the common stock of the partnership.

CCQ 2250. (1) The contract by which an undeclared partnership is constituted may be written or verbal. It may also arise as a result of facts clearly indicating the intention to form an undeclared partnership. (2) Mere indivision of property existing between several persons does not create a presumption of their intention to form an undeclared partnership.

CCQ 2244. (1) A special partner may only give advisory opinions regarding the management of the partnership. (2) A special partner may not negotiate any business on behalf of the partnership or act as mandatary or agent for the partnership or allow his name to be used in any act of the partnership; should he do so, he is liable in the same manner as a general partner for the obligations of the partnership resulting from such acts and, according to the importance or number of such acts, he may be liable in the same manner as a general partner for all the obligations of the partnership.

CCQ 2247. A special partner whose name appears in the firm name of the partnership is liable for the obligations of the partnership in the same manner as a general partner, unless his quality of special partner is clearly indicated.

CCQ 2267. The contract by which an association is constituted may be written or verbal. It may also arise as a result of facts clearly indicating the intention to form an association.

3. CORPORATE LAW I: Purpose and ScopeGoals of Corporate Law

● Intermediate goal: Reduce transaction costs for all parties, contain agency problems

● Final goal: Maximize social welfare / aggregate welfare of all stakeholders, where stakeholders are:

● Shareholders - supply equity capital, dividends, residual rights ● Directors - hire/supervise officers ● Officers (c-suite) - manage day-to-day

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● Creditors - secured and unsecured ● Employees ● Gov’t ● Customers ● General public / local communities

In other words, firms are striving for Kaldor-Hicks efficiency = where aggregate welfare of everyone is increased (not that no one loses, but that they will lose less than someone else will gain)

Market Methods to Control Managers*The focus should be on making managers act in a way that doesn’t harm shareholders

1. Hostile takeovers / the market for corporate control = When a corp isn’t doing very well, a shareholder can buy a majority stake of the shares in order to improve the management of the corp (50% + 1 share)

2. Product market = bad managers either can’t sell (enough) products or they price products too high and go bankrupt, causing a changeover of managers (products as a proxy for manager performance)

3. Manager markets = if you’re a bad manager, you’re not going to get paid well, or you’re going to get fired, or you’re going to have a hard time getting a new job (so you’re incentivized to do well)

QBCA Section 10. A corporation is constituted as of the date and, if applicable, the time shown on the certificate of constitution issued by the enterprise registrar in accordance with Chapter XVIII. The corporation is a legal person as of that time.QBCA Section 224. Shareholders are not, as shareholders, liable for any act of the corporation. However, they are debtors to the corporation for any unpaid amount on shares they hold in its share capital.

CCQ 301. Legal persons have full enjoyment of civil rights.

CCQ 302. Every legal person has a patrimony which may, to the extent provided by law, be divided or appropriated to a purpose. It also has the extra-patrimonial rights and obligations flowing from its nature.

CCQ 303. (1) Legal persons have capacity to exercise all their rights, and the provisions of this Code concerning the exercise of civil rights by natural persons are applicable to them, adapted as required. (2) They have no incapacities other than those which may result from their nature or from an express provision of law.

Forces that Shape Corporate Law A. Patterns of share ownership

○ Dispersed share ownership : a lot of people own a little bit -- makes it hard to control the board of directors, but makes shareholders more equal

○ Concentrated share ownership: a few people own a lot (one or two majority shareholders) -- reduces conflict between managers and shareholders, but majority shareholders can take advantage of minority shareholders

B. International competition ○ Openness of market economies and free trade expose domestic

companies to foreign competition ○ To compete, you need innovation, which requires spending on

R&D, which requires financing C. Regulatory harmonization between jurisdictions D. Regulatory competition among jurisdictions

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Characteristics of the Corporate Form 1. Legal personality

○ The law regards the corp as a legal entity and person separate and distinct from participating individuals

○ Separate patrimony = the firm has a pool of assets distinct from the firm’s owners and shareholders and which the firm owns >>> enables entity shielding, which protects the assets of the firm from the creditors of the firm’s individual owners

■ AKA affirmative asset partitioning = the creditors of the firm have a claim on the firm's assets that come before claims by personal creditors of the firm's co-owners

■ Manifests via: 1. Priority rule = Grants creditors of the firm a claim on the firm’s

assets prior to the claims of the personal creditors of a firm’s owners

○ AKA if a firm goes bankrupt, its creditors get paid out first

2. Liquidation protection rule = Individual owners of the firm (shareholders) cannot withdraw their assets from a firm at will, not can personal creditors of an individual owner foreclose on their share of the firm’s assets

○ A key feature of corps not held by other legal forms like partnerships

2. Limited liability ○ A default term in Ks between a firm and its creditors which

limits creditors to making claims against assets owned by the firm itself (i.e. creditors have no claim against assets the shareholders of the firm hold in their own names)

○ WHY? It incentivizes shareholder investment, allows for diversification of portfolios, reduction of risk for each company

○ Owner shielding (AKA protecting the assets of the firm’s owners from the firm’s creditors) is also called defensive asset partitioning

3. Transferable shares ○ Permits the firm to conduct the firm to conduct business

uninterruptedly as the owners’ identities change, avoiding complications of member withdrawal and enhancing the liquidity of shareholders interests + promotes portfolio diversification

○ Bundle assignability: Permits the free transferability of all the firm’s Ks taken together while preserving the general default rule that makes individual Ks non-assignable without consent of the K’s counterparty

Some definitions re: share transferability: ● Closed corporation = Firms with restrictions on who can be sold fully

transferable shares● Open corporation = Firms whose shares are freely transferable on an

exchange (Required of corps that want to float their shares on stock exchange)

● Listed corp = on a stock market ● Unlisted corp = not on a stock market

● Closely held corporation = a firm whose stock is held by a small number of people

● Widely held corporation = a firm whose stock is held by a large number of people

NOTE: All jurisdictions provide for free tradeability for at least one class of corp; however, free tradeability can make it difficult to maintain negotiated arrangements for sharing control/management, so all jurisdictions also provide mechanisms for restricting transferability

4. Delegated management under board structure ○ Shareholders delegate authority over corporate affairs to a board

of directors through elections ○ A board is (1) Separate from operational managers (2) Elected by

shareholders (3) Distinct from shareholders and (4) consists of multiple members

○ This separation is meant to economize the costs of decision-making by avoiding the need to inform every shareholder / get their consent for all but the most fundamental decisions regarding the firm; it also facilitates monitoring of agents and checks decision-making

5. Shared residual rights / investor ownership ○ Both the right to claim residual assets of the firm AND the right

to have some level of control over the board of directors are proportional to the amount of capital contributed to the firm

Theories of Corporate Governance● Who has the real control of the corp? Depends on what you think the

interests to be maximized by the corp are.

Shareholder supremacy AKA shareholder wealth maximization (can be tempered by considering aggregate stakeholder welfare)

● Shareholders as the beneficiaries of corporations. Corporate purpose is equated with the interests of shareholders.

● When determining shareholder interests, look at shareholders as an aggregate class (not as individual shareholders).

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○ Interests of shareholders = seeking the greatest possible return on their investment through increased share value + dividend payments

● Because we know where shareholder interests lie, we have a clear and strong decision making norm that comes out of this approach for managers – whenever a manager is torn, facing competing demands, the manager must act as is best for the shareholders, do what would be most profitable for shareholders.

○ Some object to this because this approach will lead managers to ignore the interests of other groups of people w/ interests at stake

○ Managers are not allowed to sacrifice profits for other purposes.

Managerialism ● Belief in the value of professional managers and of the concepts and

methods they use; associated with hierarchy, control, accountability and measurement, and to an ideologically determined belief in the importance of tightly-managed organizations

● “Managerialism combines management knowledge and ideology to establish itself systemically in organisations and society while depriving owners, employees (organisational-economical) and civil society (social-political) of all decision-making powers. Managerialism justifies the application of managerial techniques to all areas of society on the grounds of superior ideology, expert training, and the exclusive possession of managerial knowledge necessary to efficiently run corporations and societies.”

Director primacy ● Belief that a board's authority derives from the owners -- while the board

is appointed by the owners, the nature of the appointment is one in which the power to be exercised is not under the control of the appointing members.

● Once appointed, directors are almost unfettered in their exercise of their powers. However, they are subject to overarching fiduciary responsibility which aligns their required actions with a shareholder wealth maximization principle

The Corporate Contract Mandatory vs. Enabling/Default Interpretations of Corporate Statutes

● Default provisions = rules that govern only if the parties do not explicitly provide for something different

● Mandatory laws = leave parties no choice but to conform to them ● Conflicts between a corp’s internal rules and mandatory provisions in a

corporate statute often arise

Bushell v. Faith (1970) A company’s rules govern if the government’s laws do not speak to the specific issue/article at hand.

● FACTS: A property company called Bush Court (Southgate) Ltd owned a block of flats. 100 shares were held by Mr. Faith and the other 200 by his two sisters, Mrs Bushell and Dr Bayne. Article 9 of the company constitution said that under a resolution to remove a director, that directors’ shares would carry three votes each. When the two sisters tried to remove him, Mr Faith recorded 300 votes and the other two, 200 votes together.

● ISSUE/HOLDING: Is this provision valid? YES. There was no express indication by Parliament that it intended otherwise.

● ANALYSIS: The article in the co’s constitution was “obviously designed to evade section 184 (1) of the Companies Act, 1949 which provides that a company may by ordinary resolution remove a director notwithstanding anything in its articles. The extra voting power given by that article to a director, whose removal from office is proposed, makes it impossible in the circumstances of this case for any resolution for the removal of any director to be passed if that director votes against it.”

Directorial Power RE: Interpreting the Corporate K Kelly v. Electrical Construction Co. (US 1907) If a bylaw doesn’t exist at the time of a BoD election, it cannot be “read in” to exist (i.e. to ignore proxy votes). Mandatory laws governing the creation of by-laws take precedence where they are explicitly referencing a matter.

● FACTS: Action to set aside the election of the board of directors of ECC.4 shareholders, including Kelly, were not allowed to vote using proxy votes conferred on them. Directors had adopted a bylaw requiring that proxy-appointing documents be deposited at the corp’s head office one day before they are to be used, but the by-law wasn’t confirmed at an annual meeting, only at a shareholder meeting in 1905. Kelly + co contend that the company’s BoD did not have the right to bar them from the vote.

● ISSUE/HOLDING: Was the bylaw re: proxies in force at the time of the vote? NO. Should there be a new vote for directors? YES.

● ANALYSIS: The election of directors is a matter under control of a majority of shareholders in respect of acts within the powers of the company. The Companies Act S. 47 gives directors the right to make by-laws, but they must be ratified at the co’s annual meeting. Because they were not ratified, those proxy votes produced at the meeting were sufficient, and should have counted.

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○ Companies Act giving power to directors to pass by-laws concerning proxy votes impliedly withholds it from general shareholders. Therefore, when the election of the directors happened, there was no by-law regulating proxies in existence (BoD failed to do it, the shareholders can’t do it)

○ Those proxy votes produced at the meeting were sufficient authorization, and should have entitled those votes to count.

Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cunninghame (UK 1906) Directors are not agents of the shareholders and so are not bound to implement shareholder resolutions where special rules already provide for different procedures.

● FACTS: ASCFSC had 2700 shares and the plaintiff, Mr McDiarmid, owned 1202 of them. He wanted the company to sell its assets to another company. At a meeting he got 1502 of the shares to vote in favour of the sale. The directors were opposed and declined to comply. Mr McDiarmid brought this action in the name of the company against the company directors, including Mr Cuninghame.

○ NOTE: The company’s constitution stated that only a three-quarter majority could remove the directors. It also said the general power of management was vested in the directors and that they were explicitly allowed to sell company property.

● ISSUE/HOLDING: Can a simple majority of shareholders order the directors to effect a sale that they don’t agree with? NO.

● ANALYSIS: A simple majority of shareholders was not enough to override the requirement in the constitution that the directors may only be given instructions through a three quarter majority; the directors were entitled to reject the offer. They are not agents to the shareholders nor the company. The shareholders would need to dismiss the directors or change the constitution.

● “Shareholders have by their express contract mutually stipulated that their common affairs should be managed by certain directors to be appointed by the shareholders in the manner described by other articles, such directors being liable to be removed only by special resolution.”

Hayes v. Canada-Atlantic and Plant S.S. Co. (1910) The “full powers” of the Executive Committee/BoD are not absolute. In public companies, the directors can only operate by delegating discretionary authority to committees, officers and agents.

● FACTS: CAPSSC sued Hayes, its president and director, for recovery of the salary and other payments paid to him, arguing that the salary was not legally authorized/established. The executive committee had removed the

Treasurer and appointed a new one; fixed the annual salary of the members of the Executive Committee; amended the by-laws by giving the President the sole authority to call a shareholders meeting and a board of directors meeting; and amended the composition of the Executive Committee by limiting it to just two people, Hayes and Gale.

● ISSUE/HOLDING: Did Hayes and Gale have the rights to delegate their own powers without special authority from the relevant authorities? NO.

● ANALYSIS: The Court ruled that these actions were not valid because if they were, it would put the corporation in a situation wherein only two men, acting in their own pecuniary interests, would have absorbed the powers of the entire corporation. All the proceedings in the meetings were in the pecuniary interests of Hayes and Gale, and they were the only persons who were voting.

○ In the absence of any statute, by-law, or practice of a corporation fixing the time or method of calling meetings of the executive committee or board of directors, a reasonable notice is necessary to ensure the validity of such meetings. The notice given in this case did not comply.

○ It is also intolerable to maintain that “full powers” in the provision for the appointment of the by-laws is absolute. It is to be understood as restricted to ordinary business transactions of the corporation. Neither the President nor any director is entitled to compensation for services without some special provision of statute, or some action of the stockholders or other directors.

○ Because neither the notices for the alleged meetings of the executive committee nor that for the alleged meeting of the directors were sufficient in law, both meetings were invalid.

Sherman and Ellis v. Indiana Mutual Casualty (US 1930)Some duties of a corporation may be delegated to outsiders, but not the entire duties of a corp. A corp must have a board of directors. FACTS: IMC granted Ellis its management for a 20 year period, during which he was supposed to control the whole corporation without a board of directors. ISSUE/HOLDING: Was the agreement between Ellis and IMC valid as a corporation? NO. ANALYSIS: Insurance companies (and really all companies) depend on conservative management and financial responsibility for its policyholders. Ellis was clearly not the agent of the company here; and there was no one to control or mitigate a conflict of opinion. Also, the length of the agreement also indicated the entire policy of IMC was to be fixed and determined by the appellant.

● “The agreement which accomplished this result transcends the spirit and theory upon which corporate franchises are based, and is void.”

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Kennerson v. Burbank Amusement Co. (1953) Directors of a corp can make a valid decision to have their biz operated by a 3rd party so long as they continue to function as a board with ultimate control over the biz.

● FACTS: Burbank Amusement Co (BAC) conferred upon Kennerson the practical management of the Manor Theater building. Kennerson was under a duty to make periodic reports to the board.

● ISSUE/HOLDING: Does this transfer of management comply with s. 27 of the General Corp Law, which states a business shall be managed by its board of directors? NO.

● ANALYSIS: Transfering effective management of a corp to a third party “sterilizes” the powers of the board of directors. If it’s in the best interest of the biz to transfer ownership, then fine, but the board still has to retain control.

Realty Acceptance Corp. v. Montgomery (US 1930) Bylaws should not be read into employment Ks.

● FACTS: M was the president of the Stuyvesant Corp. owned by RAC. He sued to recover damages from RAC for a breach of an employment K (they fired him). RAC argues that it followed its bylaws and didn’t do anything wrong.

● ISSUE/HOLDING: Is the K valid? YES. Was it breached? YES. Is RAC liable for breach of K? YES.

● ANALYSIS: The court upholds the validity of individual Ks (employment Ks) in the face of the corporation’s undoubted power to amend its bylaws or articles of association or to not re-elect or remove a director.

Southern Foundries Ltd. v. Shirlaw (UK 1940) A company cannot be precluded from altering its articles, but the alteration may be a breach of K if contrary to a stipulation in a K validly made before the alteration takes place.

● FACTS: Shirlaw was appointed managing director of SFL for a 10-year period. The articles of the corp provided for the appointment of an MD and provided they be subject to the same provisions re: removal as the other directors but “subject to the provisions of any K between them and the co.” Also said that the article said that if the MD ceased to be a Director they immediately cease to be a D. Federal Foundries acquired SFL, adopted new articles, and removed Shirlaw.

● ISSUE/HOLDING: Did the change in articles by FF breach the K SFL validly made with S? YES.

● ANALYSIS: SFL is also responsible for S’s removal, because they sold themselves to FF, so they can be held liable for breach of contract.

The Scope of the Corporate ContractUltra Vires Doctrine (Old)

● The ultra vires doctrine = a corporation has no legal capacity to act in any way that was not specifically authorized by its incorporating documents

● An act must be intra vires, within the powers of the corp, for the corp to pursue it

CBCA 15 (1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.(2) A corporation may carry on business throughout Canada.(3) A corporation has the capacity to carry on its business, conduct its affairs and exercise its powers in any jurisdiction outside Canada to the extent that the laws of such jurisdiction permit.

CBCA 16 (1) It is not necessary for a by-law to be passed in order to confer any particular power on the corporation or its directors.(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.(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.

Agency Doctrines (Current) A principal is liable for the actions of an agent if the agent had actual, usual, apparent, or ostensible authority to commit the acts from the principal

● Usual = authority ascribed to the agent by common/trade understanding of the office held by them

● Apparent/ostensible = authority with which agent has been clothed as a result of implied or express representations by the principal

Agency doctrine also applies to corps, but is greatly complicated by factors including:

● Complex organizations of many agents and principals make it difficult to tell who is entitled to make representations

● Courts superimposed special corporate rules on the normal agency rules

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The Constructive Notice Rule ● Outsiders are deemed to be familiar with the contents of those of the

corp’s constitutional and related documents that are filed in public office -- if these docs impose restrictions on agent’s authority, the outsider will be bound even if the agent was acting without authority

The Indoor Management Rule● Confined the constructive notice rule to actual restriction on a corporate

agent’s authority; it does not require an outsider to satisfy themselves with internal corporate regulations

● Courts sought to balance corporate interest in not having its assets dissipated by unauthorized acts of agents with the interests of outsiders to be able to conduct biz with the corp’s agents without undue restrictions

CBCA 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.CBCA 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, officer, agent or mandatary of the corporation has not been duly appointed or has no authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for a director, officer, agent or mandatary;(e) a document issued by any director, officer, agent or mandatary of a corporation with actual or usual authority to issue the document is not valid or genuine; or(f) a sale, lease or exchange of property referred to in subsection 189(3) was not authorized.(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.

CBCA 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.(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.

Sherwood Design Services v. 872935 Ontario Limited (1998 ON CA) A K made by promoters of a company before incorporation binds only the promoters; after, a company by its unilateral act may take the benefit and assume the liabilities of a K made in its name or on its behalf before incorporation.

● FACTS: O. entered into a pre-incorporation K of purchase/sale for assets of S. Law firm taking care of transaction took a ‘shelf-company’ under name of Fuller, partner, to assign to O. The transaction failed to close in time. The new directors of the company never signed any of the documents taking control of the company, so partner, Fuller, remained sole director. Later, they passed the same shelf-company off to a new client, without realizing the liabilities to S. that this legal person still had for the past breach, which S. is suing for.

● ISSUE/HOLDING: Can O. be held liable for a K entered into before incorporation? YES.

● ANALYSIS: A company has no existence before its incorporation. A K made by promoters of a company before incorporation binds only the promoters; after, a company by its unilateral act may take the benefit and assume the liabilities of a K made in its name or on its behalf before incorporation.

○ For action/conduct to show intention of corporation to adopt pre-incorporation K:

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1. Must be performed by the corporation2. Must be performed with the knowledge of the terms

of the K○ In entering into pre-incorporation K, S. took the risk that O. may

not be incorporated.

Eugene F Fama and Michael C Jensen, “Separation of Ownership and Control” (1983)

● Separation of decision and risk-bearing functions happens because (1) it’s beneficial to specialize in one of the other of these and (2) it controls/minimizes agency problems

Veil piercing Why do we have the corporate veil?

● Corp’s legal personality = its capacity to acquire, hold, dispose of property; to enter into Ks; to sue/be sued, incurring rights distinct from any other person

● Corp’s ownership of assets protects the reliance interest of corp’s employees and other creditors, who know that assets will be available to meet obligations to them + cannot be diverted

Piercing, AKA “disregarding the corp’s separate legal personality”, refers to 2 legal phenomena:

1. Imposition of liability upon shareholders of a corporation for the obligations of a corporation (removal of limited liability)

2. Non-recognition of the separate legal personality of a corp where the correct construction of statutory or other legal standards so requires

● Basis for doing so = corp personality can’t be upheld where it would produce results flagrantly opposed to justice (note that case law is criticized for being discordant on this)

● Piercing will only happen for limited liability and corporate personality (test is muddy, hard to predict court rulings re: veil piercing)

○ Company as shareholder of other companies

Clarkson Co. v. Zhelka (1967) If a company is formed for the express purpose of doing a wrongful or unlawful act, the individuals as well as the company are responsible for wrongful acts. Where a company is a sham, cloak, or alter ego for an incorporator, the company is considered a mere agent for conduct of personal business. In both cases, the corp veil will be lifted.

● FACTS: D’s brother incorporated several companies. Company 1 never had money; owned large parcel of land. Company 1 was lent money by Companies 2 and 3. Company 1 sold part of the land and conveyed the

rest to D in return for a $120k promissory note. P mortgaged the land to third party. D’s brother went bankrupt; trustee in bankruptcy claiming that land owned by D’s brother.

● ISSUE/HOLDING: Should the corporate veil be pierced? YES. ● ANALYSIS: Company was used as a “mere device” for personal needs of

D’s brother. Third-party creditor was prejudiced.

Transamerica Life Insurance Co of Canada v. Canada Life Assurance Co (1996) Corporate veil will not be lifted on broad basis of justice and equity. Three circumstances where veil may be pierced: (1) Where court is construing a contract; (2) Where court is satisfied that corp is mere facade - mere instrument - to enable incorporators to advance own interests; (3) Where it can be established that corp is authorized agent of incorporators or controllers.

● FACTS: TA entered K with CLA (wholly owned subsidiary of CL). K: CLM agreed to arrange 54 mortgage loans, many of which fell into default. TA claimed against CLM on grounds that it failed to perform underwriting obligations in arranging mortgages (no due diligence, risk assessments etc). TA also claimed against parent company: veil piercing + knowing assistance in breach of trust.

● ISSUES/HOLDING: Is parent corp liable for debts of subsidiary on basis of equity? Is parent corp liable for accessory breach? NO. Parent company not liable because parent was not in complete control of subsidiary - not agent.

● ANALYSIS: Subsidiary will not be found to be alter ego, unless:○ Subsidiary under complete control of owner (complete

domination, such that subsidiary does not function independently); AND

○ Subsidiary is no more than conduit to avoid liability.■ AKA Conduct akin to fraud.

○ No evidence that president of parent company or any other CL officer were involved in dealings between TA and CLM. Not discussed before board of subsidiary, significant because controlled by CL. No dealing directly between TA and parent corp.

■ No complete control and no evidence of shield = no veil piercing.

● Accessory liability (applied Air Canada test): No evidence to support claim of accessory liability ofparent. Extends Air Canada to parent-subsidiary relationship.

Walkovszky v. Carlton (NY 1966) Thin capitalization is an insufficient basis to pierce corporate veil.

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● FACTS: W was a pedestrian severely injured by a cab owned by Seon Cab Corp which was being driven negligently by a driver M. C is an individual who is a shareholder of 10 corporations, including Seon. Each of those corporations has only 2 cabs registered in its name (virtually no assets). Each carry minimum liability insurance ($10,000). Intent was clearly to limit liability and recovery against the company. W sues all 10 corporations and argues that stockholders should be held personally liable for his injuries since the corporate structure serves as an unlawful attempt to defraud members of the public who might be injured in the cabs.

● ISSUE/HOLDNING: Can C, as a shareholder of Seon, be held personally liable for the injuries suffered by W? NO.

● ANALYSIS: No cause of action here that could be asserted against C. RE: Veil piercing, says corporate personality is a privilege and that it should be disregarded in instances of fraud, where directing mind uses corporation to further own interests rather than corporation’s interests.

○ The court finds no basis for veil piercing here. Statement of claim reveals no allegations that C was conducting business on his own personal account.

○ Even intentional thin capitalization is not enough for piercing the corporate veil. Can’t do it merely because the assets/insurance coverage are insufficient to cover the liabilities of the corporation.

○ Says it’s up to the legislature... punts it over for them to deal with. Should act to require higher levels of insurance coverage for taxis if they’re concerned with this.

Dissent (Keating)● Talks about thin capitalization: Said was intentional to avoid

dealing with issues that were bound to happen when operating a large taxi enterprise.

● Giving limited liability seems to reward abuse of corporate form.● Thinks plaintiff should be able to recover personally because

companies were intentionally set up to avoid liability for precisely this kind of thing.

NOTE: Much has been made of this case because the companies were set up this way intentionally. Also, because the creditor in this case was involuntary. The victim here was not wanting to get involved with the company, didn’t want to accept limited liability. Cofone thinks if this was argued on corporate personality, it may have been more successful - all the corps should be liable for the tort of one corp, since they’re the same.

POLICY PERSPECTIVE● All veil piercing cases are for Ks. ● Concern in tort is deterrence of externalizing costs.

Issues with unlimited liability / piercing the veil often● Deters investment ● Impedes diversification (joint and several) ● Logistical nightmare or a public company

○ Shareholders can avoid anyway - judgement-proof shareholders invest in risky firms

○ It won’t work with widely held corps ○ Veil piercing happens more with closely held corps

● Torts ○ Undercapitalization is key but hard to define ○ Intentionality is hard to defend

● Contracts ○ Deception is important but hard to define ○ Unity factors (formalities) hard to justify

DATA ON VEIL PIERCING ● Not widely litigated (619 cases in canada in what period? They only

pierced 223 veils) ● It is not an exception to limited liability - you actually see more corporate

personality piercing than limited liability ● Veil piercing does also happen in tort law and via statute or regulation ● Veil piercing happens way more in the case of individual human

shareholders than parent corporations

Corporate Social Responsibility ● Shareholders own a stake in the corporation● CSR is often a lot of talk, but not a lot of action

Shareholders v. Stakeholders ● Stakeholders = workers, community, customers, environment,

society/government○ Subject to corporate power without being able to decide what the

corporation does

Dodge v. Ford Motor Co. (1919) “The corporation is for the profit of stockholders; the board cannot shape the affairs of the corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others.” NOTE: No longer good law, conflicts with BJR

● FACTS: Dodge brothers were Ford shareholders, but also wanted to start their own car company (they’re competitors, so they don’t want to see Ford succeed!) D objected to F (1) not declaring a special dividend despite

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profits/cash holdings and (2) deciding to open the River Rouge plant. Dodge bros argue that Court should make Ford pay out a dividend, because he has an obligation to the shareholders, not to the general public/employees. Ford doesn’t want to give dividends to his competitors; he also doesn’t want to pay taxes on dividends.

● ISSUE/HOLDING: (1) Should Ford pay a dividend? YES. (2) Should he be stopped from building the plant? NO.

● ANALYSIS: RE: Dividends: Court sides with Dodge; goal of the corp is to maximize the wealth of the shareholders. RE: River Rouge Plant: Dodge loses -- Ford is allowed to build the plant.

Miles v. Sydney Meat preserving Co. Ltd. (1913)Directors don’t have a duty to make profits in order to distribute dividends; they can pursue another goal that is beneficial to shareholders.

● FACTS: SMP was incorporated by special Act. Act provided regs could be altered, but not in opposition to the scope/intent of the original deed; also said no dividends should be paid except out of profits. Dividends were to be paid proportionally to shares held. Most shareholders were graziers. SMP never paid dividends, but the co’s goal was to benefit the pastoral industry. Miles was a shareholder and director, and sued for a declaration that the directors weren’t entitled to carry on the biz to benefit only the interests of graziers and an injunction to force them to earn profits and not just to benefit the graziers.

● ISSUE/HOLDING: Does SMP have a contractual duty to make profits/distribute dividends? NO.

● ANALYSIS: Companies can have goals other than profit, which are decided by internal management. Companies aren’t obligated to make the maximum profits; many companies have other primary goals.

● Dissent: this basically allows companies to divert shareholder dividends to support their own goals, or benefit some shareholders over others.

Parke v. Daily News Ltd. (1962) The interests of employees don’t need to be taken into account by directors when acting in the best interests of the company.

● FACTS: Daily News Ltd. was sold, and the directors decided to distribute the residual capital amongst the employees who were being let go. The shareholders objected claiming directors were not required to take into account the interests of employees. .

● ISSUE/HOLDING: Should the directors place employees interests before shareholders? NO.

● ANALYSIS: Directors can use profits to pay for things that are reasonably incidental and within the scope of carrying on the business of the company. Compensation and gratuity for past services rendered by

employees are not reasonably incident to the carrying on the business of the company for the purposes of its continued existence. Thus, employees’ interests should not be considered ahead of the interests of the company as a whole. If the payment doesn’t bring any benefit to the company, then it can’t be made.

○ However a consideration of interests of employees may be appropriate where some benefit to be gained by the company (such as industrial relations).

BCE Inc. (SCC 2008)● FACTS: Three bids to purchase the outstanding shares of BCE by a

consortium of purchasers all added a substantial amount of new debt that would be the responsibility of Bell Canada, a wholly owned subsidiary of BCE. The arrangement’s price = a premium of 40% above the market price for BCE shares, costing $52 billion. Bell would guarantee $30 billion of BCE’s debt and purchaser would invest $8 billion of new equity capital in BCE. The plan was approved by 97.93% of BCE’s shareholders but was opposed by financial and other institutions that hold debentures issued by Bell. They are seeking relief under the oppression remedy (s. 241 of CBCA) and allege the arrangement was not fair and reasonable re: s.192 of CBCA. The short-term value of their debentures would decline by 20% and lose investment grade status.

● PH: QC Superior Court approved the arrangement; Court of Appeal overturned, finding the arrangement unfair and ruling it should not have been approved.

● ISSUE/HOLDING: Does BCE owe a duty to the debentureholders of Bell? NO.

● ANALYSIS: Shares are an essential component of a corp. A share is a “bundle of interrelated rights and liabilities.”

○ This case involves the fiduciary duty of directors to the corporation, which is fundamental to the reasonable expectations of shareholders claiming an oppression remedy

○ Fiduciary duty = a mandatory duty to act in the best interests of the corp. If they conflict, the director’s duty is to the corp (Peoples)

■ Must look to long-term interests of the corp. ○ It may sometimes be appropriate to consider the interests of

shareholders, employee, suppliers, creditors etc. (Peoples) ■ Stakeholders can reasonably expect fair treatment

○ Question re: oppression = “whether, in all the circumstances, the directors acted in the best interests of the corp having regard to all relevant considerations including, but not confined to, the need to treat affected stakeholders in a fair manner

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commensurate with the corp’s duties as a responsible corp citizen.”

○ No one set of interests should prevail over another ○ In this case, BCE considered the interests of the

debentureholders and concluded that while the K terms of the debentures would be honoured, no further commitments could be made

CNR “Run-Throughs” Report● Report sought to establish CN Railways’ responsibilities towards

communities in the “run-through” areas of its rails, as a publicly owned corp

● Concluded that publicly owned companies do not owe communities a special duty; it would impose an unfair burden on them relative to private companies like Canadian Pacific Railway

● Also, just because CN “parents” a community doesn’t mean it owes those communities special duties

● The rail industry is heavily regulated, so if this duty existed, it could be regulated

Report of the Royal Commission on Corp. Concentration (1978) ● Deals with, the social responsibilities of large corporations ● Businesses must respond to social change but can’t be expected to be at

the forefront of social change● Social problems that lie outside business activity should not be expected

to be dealt with by corps. ● Businesses should be concerned only with things that are direct

consequences of economic activity ● Says that innovative social action programs in the US “were generally

unsuccessful” and that business people’s skills can’t be deployed in almost any field to solve any problem

Richard A Posner, Economic Analysis of Law (1986) ● Says that though charitable donations can be justified to shareholders as

efficient advertising or PR expenses, they’re not feasible or appropriate ● Competitive markers mean corps can’t have a sustained commitment to

any other goal besides profit● Customers will feel the burden of these expenditures● Managers who try to produce for the market and to improve society will

do neither well● How can managers decide what politically/ethically correct stances are? ● Profit maximization allows shareholders to increase wealth and devote

that wealth to social good

Henry Hansmann and Ranier Kraakman, “The End of History for Corporate Law” (2001)

● The best way for companies to be accountable to society broadly is to have managers be accountable to shareholders first (shareholder primacy)

● The most efficient legal protections for non-shareholder parties lie outside corporate law

● Creditors are, to some degree, an exception (see: rules on veil piercing and limits on distributing dividends in cases of inadequate capital)

● Why? ○ The interests of equity investors (residual claimants) cannot

adequately be protected by contract — they need to be given control of the firm

○ If equity holders have strong, exclusive rights, they have powerful incentives to maximize a firm’s value

○ Interests of other parties is best assured through contract and regulation

○ Giving the firm direct responsibility for other parties creates more problems than it solves

Kent Greenfield, “Reclaiming Corp Law in a New Gilded Age” (2008)● Question is really whether its more efficient to regulate corporations from

the inside (corporate law) or outside (regulatory initiatives)● However, regulations often have the goal of changing firm behaviour ● Regs fall into three categories: (1) regs that require or encourage certain

results (i.e. pollution laws prohibiting discharges); (2) regs that require or encourage certain processes/actions (i.e. disclosure laws); (3) regs that require or encourage certain internal structures (i.e. a board)

● Corporations may be more efficient in dealing with problems, and it’s cheaper to avoid a problem than to rectify it later

● Corp law should not be left as an “untapped resource” for offering non-shareholder stakeholders more regulatory protection

Board Diversity ● One way to make boards diverse is to force quotas for women to join

corporate governance bodies, like in France and Norway ○ Norway’s has no limit on # of board positions held by women

(“golden skirts” problem) ○ France limits women to 4 boards max - which should in theory

create more diversity on boards ● More diverse firms tend to favour stakeholder consideration● Non-diverse leadership leads to crisis (e.g. All-male board at Weinstein co

ignored payoffs) Could female members have mitigated this?

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● Study conclusions: ○ Women may change process but not substance

■ Process changes = quality of participation (talked about different things); less confrontationalism (fought less, etc.); more methodical; chivalry’s role? (women allowed to speak first...not necessarily a good thing)

○ No changes in substantive decisions ■ board’s role is limited - it doesn’t define strategy, it

approves strategy■ participant resistance to substantive impacts■ structures dominate individual differences■ no shift in risk aversion■ potential for diff. greater stakeholderism

○ Out-of-network choices ■ Not Grandes Ecoles, more foreigners, younger, etc. ■ Newness impacts the firm - leads to a different debate

● What about less regulated countries? Industry can play a bigger role

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4. CORPORATE LAW II: Liability and FormationLimited liabilityTHOUGHTS ON THE QUESTION: Can shareholders be liable?

● Limited liability = widely held companies○ Unlimited liability in this case would create uncertainty in the

valuation of securities and threaten securities markets ○ Some exceptions include:

■ Misrepresentation to creditors re: the legal or financial status of a firm

■ Involuntary creditors - i.e. Walkovszky v. Carlton (see: veil piercing)

■ Employees ● Unlimited liability = small, tightly held companies

○ Limited liability would incentivize owners to exploit moral hazard and transfer risks to creditors

● Hansman and Kraakman ○ Pro rata liability (i.e. liable based on amount of shares) ○ Incentives to monitor ○ Non-interference with capital markets

● Other sources of creditor protection ○ De minimis corporate capital (rare) ○ Duties of safeguard (challenge fraude) ○ Veil piercing ○ Collateral/high interest rate○ Officer/director liability

QBCA 12. Third persons are not presumed to have knowledge of the information contained in a document concerning a corporation, other than the information specified in section 98 of the Act respecting the legal publicity of enterprises (chapter P-44.1), solely because the document has been deposited in the enterprise register or may be inspected in the offices of the corporation.

QBCA 13. Third persons may presume (1) that a corporation is exercising its powers in accordance with its articles and by-laws and any unanimous shareholder agreement;(2) that the documents relating to the corporation that are deposited in the enterprise register contain accurate information;(3) that the directors and officers of the corporation validly hold office and lawfully exercise the powers of their office; and(4) that the documents of the corporation issued by a director, officer or other

mandatary of the corporation are valid.

QBCA 14. Sections 12 and 13 do not apply to third persons in bad faith or to persons who ought to have knowledge to the contrary because of their position with or relationship to a corporation.

QBCA 15. With respect to third persons, a corporation is deemed to be operating in compliance with any restrictions on its business activity imposed by its articles.

CBCA 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.

CBCA 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, officer, agent or mandatary of the corporation has not been duly appointed or has no authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for a director, officer, agent or mandatary;(e) a document issued by any director, officer, agent or mandatary of a corporation with actual or usual authority to issue the document is not valid or genuine; or(f) a sale, lease or exchange of property referred to in subsection 189(3) was not authorized.(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.

Directorial LiabilityDirectors are liable under:

● Statutes ○ CBCA - fiduciary duties○ Environmental statutes

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● Contracts (NDAs, unpaid wages) ● Torts (personally committed by director, except breach of K (see below))

Said v. Butt Exception● This case created the exception to personal liability for the tort of

inducing breach of contract: it precludes a party who contracts with the corporation from asserting both a claim for breach of K against and a claim for tortious conduct against a corp

● “A servant acting in good faith the scope of his authority procures or causes the breach of contract between his employer and a third person, he does not thereby become liable in tort. However … a director or a servant who takes part in or authorizes such torts as assault, trespass to property, nuisance, or the like may be liable in damages….”

● The Said v. Butt exception has also been justified on the basis that it ensures officers and directors are capable of terminating contracts of employment without fear of personal liability and that it is appropriate for corporations to terminate Ks that are no longer in its best interest

Mesheau v. Campbell (1982 ON CA) Directors cannot be held personally liable for damages owed employees as result of wrongful dismissal actions.

● ISSUE/HOLDING: Are the directors liable to an employee for a unsatisfied judgement debt against a corporation on a claim for wrongful dismissal? NO.

● ANALYSIS: These debts were incurred at the time of termination of the employees and not during the time the employees served the corporation. This was therefore not a ‘’debt … for services performed’’ for the corporation and was not collectable from the directors.

ADGA Systems International Ltd. v. Valcom (1999 Oregon CA) Directors may be held personally liable for torts if they commit a tort in the course of their duties, except for the narrow Said v Butt exception.

● FACTS: ADGA had a substantial government K for a number of years. The K came up for renewal and a request for tenders was issued. One of the conditions of the tender was that the tendering party provide the names of a certain number of senior technicians as a means of ensuring that they’d be competent to perform the work.. Through the years that it had held and serviced the contract, ADGA had built up a large technical staff. Competing corp. Vs senior employees convinced ADGA's technicians to permit their names to be used on V's tendering document, and to come to work for V if the tender was successful. All but one of ADGA's technical staff "signed on" with V. V was the successful bidder and won the K. ADGA sued V and the director and two senior

employees of V, for inducing breach of K and inducing breach of fiduciary duty.

● ISSUE/HOLDING: Are the sole director and employees of V were personally accountable for a tort committed by V as a consequence of their personal involvement directed to the perceived best interests of the corporation? YES.

ANALYSIS: “The decided cases in which employees and officers of companies have been found personally liable for actions ostensibly carried out under a corporate name are fact-specific. In the absence of findings of fraud, deceit, dishonesty or want of authority on the part of employees or officers, they are also rare. Those cases in which the corporate veil has been pierced usually involve transactions where the use of the corporate structure was a sham from the outset or was an afterthought to a deal which had gone sour. There is also a considerable body of case-law wherein injured parties to actions for breach of contract have attempted to extend liability to the principals of the company by pleading that the principals were privy to the tort of inducing breach of contract between the company and the plaintiff… In every case, however, the facts giving rise to personal liability were specifically pleaded. Absent allegations which fit within the categories described above, officers or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own.” (per Finlayson J.A., ScotiaMcLeod Inc. v. Peoples Jewellers Ltd, 129 DLR (4th) 711 (1995)(Ont. CA))

● In Said the inducement to breach was with a company that the director was a director of, i.e. induced his own company to breach with a 3rd party

● In ADGA, the director induced the breach of K by a company that he was not the director of (by poaching employees)

IncorporationGeneral Aspects of IncorporationWho can incorporate?

● Any legal person (or people) over 18, solvent, of sound mind ● Another corporation

Documents ● Articles of incorporation AKA memorandum

○ Name, technical stuff ● Articles of association AKA Bylaws

○ More substantive Requirements

● Name, HQ location, # of proposed directors (7-20) , Share structure/rights, Restrictions on object, if any, Fee

Place of Incorporation

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● No corporations Acts require incorporators to be resident in the province or territory of incorporation

● Some Acts impose Canadian nationality and/or residency requirements for directors (see: CBCA s.105(3), OBCA s.118(3))

● Conflict of laws rule = validity of incorporation, personal law, etc. will be governed by the law of its incorporation (hence some incorporators will incorporate offshore for tax reasons)

Corporate Names ● Goal is to ensure the public will not be misled by confusingly similar

names ● May be subject to additional requirements outside the corporation law

statutes (i.e. ON Biz Names Act) ● If there is no evidence the company tried to deceive with their name,

public policy tends to look past the use of an improper name + will validate Ks made under that name

● Full legal name must be displayed on everything; if not, agents can be held personally liable

● The specific characteristics (i.e. knowledge, skill) of the class of purchasers will be taken into account in considering potential for deception re: naming

● If a lawyer is advising an unsophisticated or high-risk client and doesn’t convey the importance of using the full corporate name + consequences re: personal liability for failure to do so, the lawyer will be liable for breach of duty of care

Regulatory Competition System in the US = States set competition rules, and Delaware “won” - it is the home of over 50% of U.S. corporations

● Competition is among states (i.e. do you incorporate in your home state or Delaware?)

System in the Canada = Same rules in every province / federally ● Not a competition mindset - lawyers may be more conservative and

unwilling to expose clients to an unfamiliar corporate law regime ● General rule = incorporate provincially in the province where the corp

expects to carry on its business, and incorporate federally if the corp expects to conduct biz across several provinces

Extra-Provincial Licensing and Filing Requirements Ontario Extra-Provincial Corporations Act says:

● Class 1 corporations = corps incorporated in a province other than ON are not required to obtain a license to carry on biz in ON

● Class 2 corporations = corps incorporated federally or under a territory are not required to obtain a license to carry on biz in ON

● Class 3 corporations = corps incorporated outside of Canada are subject to the full force of the provincial requirements applicable to extra-provincial corps

Basic requirements for corps to be licensed as extra-provincial: 1. You need a license to operate in the province (though prosecutions are

rare) 2. If you’re not licensed, you can’t sue or commence other proceedings (but

you can cure this retroactively by getting a license) 3. Licenses are granted with discretion by a designated official (though

refusals are rare) 4. Must make annual filings of pertinent information

These requirements are triggered only if the corp is “carrying on business” ● Definition has been litigated heavily, but is basically that the corp has “a

resident agent, representative, warehouse, office or place where it carries on business” (OEPCA s.1(2))

● Carrying on biz is NOT “taking orders, buying or selling goods, wares, or merch, or offering or selling services” (OEPCA s.1(3))

Continuance under the Law of Another Jurisdiction Corps have the ability to “continue” their corporate existence under the law of another jurisdiction (in the US, “reincorporation”) 2-step process:

1. Obtain the consent from the authorities in the jurisdiction of incorporation (export step)

2. Meet the requirements of the federal or provincial Act under which it seeks to be continued (import step)

NOTE: continuance does not affect the migrating corp’s prior obligations, property rights, or involvement in proceedings pending before continuance (CBCA 187(7) and OBCA s.181(9))

Classification of Corporations 1. Publicly traded v. Privately held

○ OBCA s. 1(1) defines an “offering” vs. “non-offering” corp ○ CBCA doesn’t provide a single definition but relies on different

distinguishing factors in different contexts 2. One-person corps

○ Where a corp only has one shareholder, they alone constitute a meeting (lol)

3. Constrained share corps

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○ See CBCA s.142(1) + OBCA s.104(1) 4. Professional corps

○ The liability of a member of a profession is not affected by the fact that they are practicing through a professional corporation, and shareholders remain liable under their governing legislation for acts of employees and agents

○ Professional corps in Canada are largely motivated by tax considerations, but the benefits vary by type of professional, size of firm, and objective of incorporating

5. Unlimited Liability Corps (ULCs) ○ Exist in Alberta, BC, and Nova Scotia only ○ Corporations without limits on the liability of their members ○ Shareholders usually interpose a LLC or Limited Partnership

between them and the corp

ONBCA 19. A corporation or a guarantor of an obligation of a corporation may not assert against a person dealing with the corporation or with any person who has acquired rights from the corporation that,(a) the articles, by-laws or any unanimous shareholder agreement have not been complied with;(b) the persons named in the most recent notice filed under the Corporations Information Act, or named in the articles, whichever is more current, are not the directors of the corporation;(c) the location named in the most recent notice filed under the Corporations Information Act or named in the articles, whichever is more current, 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 does not have authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for such director, officer or agent;(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 184 (3) was not authorized,except where the person has or ought to have, by virtue of the person’s position with or relationship to the corporation, knowledge to that effect.

CBCA 18. 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, officer, agent or mandatary of the corporation has not been duly appointed or has no authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for a director, officer, agent or mandatary;(e) a document issued by any director, officer, agent or mandatary of a corporation with actual or usual authority to issue the document is not valid or genuine; or(f) a sale, lease or exchange of property referred to in subsection 189(3) was not authorized.(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.

QBCA 3. A corporation may be constituted by one or more founders.

QBCA 4. Any natural person qualified to be a director of a corporation may be the founder of a corporation. A legal person may also be the founder of a corporation.

QBCA 5. The articles of constitution must set out(1) the name of the corporation, unless a designating number in lieu of a name has been requested from the enterprise registrar;(2) the name and address of each founder, or the name of the founding legal person, the address of its head office and an exact reference to the Act under which it is constituted;(3) the amount to which its share capital is limited, if applicable;(4) the par value of its shares, if any;(5) if there will be two or more classes of shares, the rights and restrictions attaching to the shares of each class;(6) if a class of shares may be issued in series, the authority given to the board of directors to determine, before issue, the number of shares in, the designation of the shares of, and the rights and restrictions attaching to the shares of, each series;(7) any restrictions on the transfer of its instruments or shares;(8) the fixed number or the minimum and maximum number of directors; and(9) any restrictions on its business activity.

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QBCA 8. The following must be filed with the articles:(1) a list of the directors of the corporation, containing their names and domiciles;(2) a notice of the address of the corporation’s head office;(3) unless a designating number has been requested, a declaration stating that reasonable means have been taken to ensure that the name chosen is in compliance with the law; and(4) any other document the Minister may require.However, the list of directors and the notice of the address of the head office are not required to be filed if the initial declaration required under the Act respecting the legal publicity of enterprises (chapter P-44.1) is filed with the articles.

QBCA 9. The articles of a corporation, signed by the founders, the documents required to be filed with them, and the fee set out in the Act respecting the legal publicity of enterprises (chapter P-44.1) must be sent to the enterprise registrar.

QBCA 10. A corporation is constituted as of the date and, if applicable, the time shown on the certificate of constitution issued by the enterprise registrar in accordance with Chapter XVIII.The corporation is a legal person as of that time.

QBCA 16. A corporation’s name must not(1) contravene the Charter of the French language (chapter C-11);(2) include an expression which the law reserves for another person or prohibits the corporation from using;(3) include an expression that evokes an immoral, obscene or scandalous notion;(4) incorrectly indicate the corporation’s juridical form or fail to indicate that form when required by law;(5) falsely suggest that the corporation is a non-profit group;(6) falsely suggest that the corporation is, or is related to, a public authority determined by government regulation;(7) falsely suggest that the corporation is related to another person or group of persons, particularly in the cases and in view of the criteria determined by government regulation;(8) be identical to a name reserved for or used by another person or group of persons in Québec, particularly in view of the criteria determined by government regulation;(9) be confusingly similar to a name reserved for or used by another person or group of persons in Québec, particularly in view of the criteria determined by government regulation; or

(10) be misleading in any other manner.

QBCA 19. The name of a corporation must appear on all of its negotiable instruments, contracts, invoices and purchase orders for goods or services.

QBCA 20. If a corporation’s name does not include the term “société par actions” or “compagnie”, it must comprise the abbreviation “s.a.”, “ltée” or “inc.” at the end to indicate that the corporation is a limited-liability corporation.

QBCA 38. In any action or proceeding against a corporation or any shareholder, the records of the corporation are proof of their contents in the absence of any evidence to the contrary.

QBCA 213. All the shareholders of a corporation, whether or not their shares carry voting rights, may agree in writing among themselves or among themselves and one or more third persons to restrict the powers of the board of directors to manage, or supervise the management of, the business and affairs of the corporation, or to withdraw all such powers from the board.A sole shareholder may make a written declaration that restricts the powers of the board of directors or withdraws all powers from the board. The declaration is equivalent to a unanimous shareholder agreement.

QBCA 214. To the extent that a unanimous shareholder agreement restricts the powers of the board of directors to manage, or supervise the management of, the business and affairs of the corporation, or withdraws all such powers from the board, parties to the unanimous shareholder agreement who are given those powers have all the rights, powers, duties, obligations and liabilities of directors 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 liability for the wages of the corporation’s employees, to the same extent.

QBCA 215. The corporation must, in accordance with the Act respecting the legal publicity of enterprises (chapter P-44.1), declare to the enterprise registrar, for entry in the enterprise register, the existence or the termination, including on the corporation becoming a reporting issuer, of a unanimous shareholder agreement that restricts, in whole or in part, the powers of the directors.

QBCA 216. If a unanimous shareholder agreement withdraws all powers from the board of directors and confers them on shareholders or third persons, the corporation must declare to the enterprise registrar the name and domicile of those who have assumed those powers.

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The shareholders are in such a case subject to the rules of Divisions I and II, unless otherwise provided in the unanimous shareholder agreement or the by-laws.The shareholders may choose not to establish a board of directors.

QBCA 217. Decisions of a sole shareholder on whom all of the powers of the board of directors have been conferred may be made by written resolution.Any act by such a sole shareholder on behalf of the corporation is deemed to be authorized.Such a sole shareholder may choose not to establish a board of directors and not to appoint an auditor, and is not required to comply with the requirements of this Act relating to the by-laws, shareholders meetings and meetings of the board of directors.

QBCA 218. A person who becomes a shareholder subsequent to the signing of a unanimous shareholder agreement is deemed to be a party to the agreement.However, a person who, on becoming a shareholder, is not given notice of the existence of the unanimous shareholder agreement, may, no later than 30 days after becoming aware of the existence of the unanimous shareholder agreement, have the transaction by onerous title by which the person became a shareholder annulled.The person is presumed not to have been aware of the unanimous shareholder agreement if its existence is not stated on the share certificate or, in the case of uncertificated shares, if the person was not given notice of its existence.

QBCA 219. A unanimous shareholder agreement terminates when the corporation becomes a reporting issuer or, subject to the provisions of the amalgamation agreement, when the corporation amalgamates by the long-form process.

QBCA 220. Nothing in this subdivision prevents shareholders or third persons from fettering their discretion when exercising the powers conferred on them under a unanimous shareholder agreement.

QBCA 460. If a corporation or a director, officer, employee, mandatary or auditor of a corporation does not comply with this Act, the articles, the by-laws or a unanimous shareholder agreement, any interested person may, without prejudice to any other right that person has, apply to the court for an order directing the corporation or any person concerned to comply. The court may, to that end, make any further order it thinks fit.

QBCA 472. On receiving articles and other documents required by this Act, the

enterprise registrar(1) records the date of receipt;(2) issues the appropriate certificate and assigns a date to it;(3) deposits the articles, the related certificate and the accompanying documents in the enterprise register; and(4) sends the corporation or its representative a copy of the articles and the certificate.

QBCA 474. The enterprise registrar refuses to issue the appropriate certificate if the articles(1) do not contain the contents required by this Act; or(2) are not filed in the form prescribed by the Act respecting the legal publicity of enterprisesThe enterprise registrar also refuses to issue such a certificate if(1) the articles specify a corporation name that is not in compliance with paragraphs 1 to 6 and 8 of section 16;(2) the documents required by this Act have not been sent to the enterprise registrar; or(3) the fee set out in the Act respecting the legal publicity of enterprises has not been paid.

CBCA 5. (1) One or more individuals or bodies corporate may incorporate a corporation by signing articles of incorporation and complying with section 7.(2) An individual may incorporate a corporation only if that individual:(a) is not less than 18 years of age;(b) is not incapable; or(c) does not have the status of bankrupt.

CBCA 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

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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.(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.(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.

CBCA 7. An incorporator shall send to the Director articles of incorporation and the documents required by sections 19 and 106.

CBCA 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) The Director may refuse to issue the certificate if a notice that is required to be sent under subsection 19(2) or 106(1) indicates that the corporation, if it came into existence, would not be in compliance with this Act.

CBCA 9. A corporation comes into existence on the date shown in the certificate of incorporation.

CBCA 10. (1) The word or expression “Limited”, “Limitée”, “Incorporated”, “Incorporée”, “Corporation” or “Société par actions de régime fédéral” or the corresponding abbreviation “Ltd.”, “Ltée”, “Inc.”, “Corp.” or “S.A.R.F.” shall be part, other than only in a figurative or descriptive sense, of the name of every corporation, but a corporation may use and be legally designated by either the full or the corresponding abbreviated form.(1.1) Subsection (1) does not apply to a corporation that has a corporate name that, immediately before the day on which this subsection comes into force, included, other than only in a figurative or descriptive sense, the expression “Société commerciale canadienne” or the abbreviation “S.C.C.”, and any such corporation may use and be legally designated by either that expression or that abbreviation.(2) The Director may exempt a body corporate continued as a corporation under this Act from the provisions of subsection (1).(3) Subject to subsection 12(1), the name of a corporation may be set out in its articles in an English form, a French form, an English form and a French form, or a combined English and French form, so long as the combined form meets

the prescribed criteria. The corporation may use and may be legally designated by any such form.(4) Subject to subsection 12(1), a corporation may, for use outside Canada, set out its name in its articles in any language form and it may use and may be legally designated by any such form outside Canada.(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.(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.

CBCA 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.(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.(3) A purchaser or transferee of shares subject to a unanimous shareholder agreement is deemed to be a party to the agreement.(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.(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.(6) Nothing in this section prevents shareholders from fettering their discretion

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when exercising the powers of directors under a unanimous shareholder agreement.

CBCA 257. (1) A certificate issued on behalf of a corporation stating any fact that is set out in the articles, the by-laws, a unanimous shareholder agreement, the minutes of the meetings of the directors, a committee of directors or the shareholders, or in a trust indenture or other contract to which the corporation is a party, may be signed by a director, an officer or a transfer agent of the corporation.(2) When introduced as evidence in any civil, criminal or administrative action or proceeding,(a) a fact stated in a certificate referred to in subsection (1),(b) a certified extract from a securities register of a corporation, or(c) a certified copy of minutes or extract from minutes of a meeting of shareholders, directors or a committee of directors of a corporation,is, in the absence of evidence to the contrary, proof of the facts so certified without proof of the signature or official character of the person appearing to have signed the certificate.(3) An entry in a securities register of, or a security certificate issued by, a corporation is, in the absence of evidence to the contrary, proof that the person in whose name the security is registered is owner of the securities described in the register or in the certificate.

CCQ 319. A legal person may ratify an act performed for it before it was constituted; it is then substituted for the person who acted for it.The ratification does not effect novation; the person who acted has thenceforth the same rights and is subject to the same obligations as a mandatary with respect to the legal person.

CCQ 320. A person who acts for a legal person before it is constituted is bound by the obligations so contracted, unless the contract stipulates otherwise and includes a statement to the effect that the legal person might not be constituted or might not assume the obligations subscribed in the contract.

Incorporation Techniques Historically:

1. Registration or memorandum jurisdictions (western provinces, NS and NF) = some provinces where incorporation happens by delivering a memo and articles of association to an incorporating official, who could not decline to incorp if the Act was complied with

2. Letters patent jurisdictions (everywhere else + fed) = making an application to a public official for letters of patent, which contained

roughly the contents of the mom but no req. To file bylaws (Minister had absolute and uncontrolled discretion to refuse to grant incorporation)

Now: Letters patent jurisdictions moved towards a system of minimum admin discretion. Instead, you file “letters of incorporation” to the incorporating officer (CBCA ss. 6-9, OBCA ss. 4-7). You don’t have to file by-laws; they can be entrenched in articles

● If docs are in order, officer is required to issue a certificate of incorporation; refusal can be appealed

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The Nature of the Corporate Constitution Pre-CBCA Distinctions Current regime

Letters Patent Memorandum Significant Changes

Capacity Deemed to have powers and capacity of a natural person

Subject to the doctrine of ultra-vires

Doctrine of ultra vires re: 3rd parties and doctrine of constructive notice re: public docs have been abolished

Articles of association

Not required to be filed, so constructive notice doctrine doesn’t apply

A public document and outsiders were deemed to have notice of its contents

See above

Binding power of memo and articles

Source of Letters Patent Acts’ power is not contractual but statutory

Yes, memo and articles are a K between shareholders and co.

Allocation of power/authority

Directors derive power from the Act; have the exclusive power to adopt bylaws -- reasonableness of bylaws could be tested by courts, however. Residual authority of shareholders never defined.

An internal question to be resolved by the co’s constitution -- residual authority remains with shareholders to break deadlock among directors

Directors power is entrenched by statute but subject to important qualifications re: unanimous shareholder agreements, proposals, powers to initiate bylaw changes, and trust agreements. Duty of directors to run company, not shareholders.Shareholders + other complainants can also enjoin a corp to follow the Act, its own regs, or the corp’s constitution

NOTE: Differences are much less important in practice.

Alteration of the Corporate Constitution ● It’s impossible to summarize how each piece of corp legislation governs

the alteration of the corp constitution, but here are some general characteristics of the statutory requirements:

○ Alteration requires a special procedure, generally a shareholders’ resolution

○ When rights are attached to one class of shareholder, they give their consent separately to an alteration of their rights

○ Shareholders who disagree with or vote against proposed changes are entitled to have their shares bought (AKA appraisal remedy)

○ Shareholders CANNOT be required to take or subscribe to more shares or to have their liability to contribute to the corp’s assets increased

○ A majority cannot exercise its powers in fraud to oppress a minority

Pre-Incorporation Contracts: 3 Types1. Both parties know there’s no company yet (finds them liable) 2. Only the promoter party only knows there is no company (considered

liable but nominally so) 3. Neither party knows there’s no company (not considered liable)

RATIONALE: There is an assumption of risk when you contract with a non-incorporated company.

CBCA 14 (1) Subject to this section, a person who enters into, or purports to enter into, a written contract in the name of or on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to its benefits.

CBCA 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,

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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;(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.

CBCA 14(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.

Kelner v. Baxter (UK, 1866)Where an agent contracts on behalf of a principal that doesn’t exist, the agent is personally liable.

● FACTS: A group of company promoters for a new hotel business entered into a contract, purportedly on behalf of the company which was not yet registered, to purchase wine. Once the company was registered, it ratified the contract. However, the wine was consumed before the money was paid, and the company unfortunately went into liquidation. The promoters, as agents, were sued.

● ISSUE/HOLDING: Is B liable for breach of contract personally? Or is the corporation? Baxter personally – at time contract was entered into, corporation didn’t exist and therefore can’t be held liable.

● ANALYSIS: If the corporation had existed at the time of the contract signing, B could have signed as agent of the company. However, no corporation here.

○ Therefore, where there is an agent but no principal, the contract binds the person that signs it personally.

○ Subsequent ratification of the contract by the corporation that comes into existence cannot relieve this responsibility.

○ The corporation that comes into existence cannot later ratify the contract – liability remains with agent

Black v. Smallwood (AUS, 1966) You need a common intention of parties to make agent personally liable for pre-incorporation contracts.

● FACTS: Two directors, Smallwood and Cooper, both thought they were directors of a corporation. They signed a sale of land with a person called Black. Turns out, the corporation had not come into existence yet, but C,

S and B all thought that the corporation existed at the time. B brings action against S personally, trying to force him to buy the land he contracted to buy as the corporation.

● ISSUE/HOLDING: Is S personally liable to buy the land? NO – in signing as director, clear that S didn’t intend to bind himself personally.

● ANALYSIS: General rule is that where an agent contracts on behalf of a principal that doesn’t exist, the agent is personally liable (Kelner). However, liability requires common intention (spinning Kelner).

○ In Kelner, was clear that there was no company and so there was common intention as tothe personal liability of the agent.

○ Here, both parties thought the company existed and were contracting as such. Impossible to demonstrate common intention to bind S personally.

Wickberg v. Shatsky & Shatsky (B.C. S.C., 1969) If someone signs a K as a director of a company, they cannot be held personally liable. Both parties must have the intention at the time of signing that the director be held personally liable.

● FACTS: Lawrence and Harold Shatsky became shareholders and directors in Rapid Addressing Systems Ltd. They decided to incorporate a new company, Rapid Data (Western) Ltd., to take over Rapid Addressing Systems Ltd. Rapid Data (Western) Ltd. was never formed; instead, they formed Celer Data Ltd. On May 1966, a day two before the certificate of incorporation was issued the plaintiff (Wickberg) was hired as a manager. The terms of employment were on letterhead with the name of Rapid Data (Western) Ltd. on it and signed by Lawrence Shatsky. The letter noted that Wickberg was to get a salary of $15,000/year. A few days later Lawrence Shatsty told Wickberg that the company was to be referred to as Rapid Data (Western) without the “Ltd." Shatskys could not keep up with paying Wickberg’s salary so asked him to work on straight commission. Wickberg refused, and was dismissed. He sued for wrongful dismissal. However, he had to prove he had an employment contract.

● ISSUE/HOLDING: Are the Shatskys’ personally liable for the employment K? NO.

● ANALYSIS: The court took the rule of construction approach, concluding that it was not the intention that either Lawrence Shatsky or Harold Shatsky would be personally liable on the employment contract

○ The court held there was a breach of warranty of authority in that Lawrence Shatsky and Harold Shatsky represented the existence of Rapid Data (Western) Ltd. And that they could sign on behalf of Rapid Data (Western) Ltd. while they knew the company did not exist.

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○ However, there was no connection between the damage suffered by the plaintiff and the breach of warranty of authority.

○ There were no damages because all Wickberg would have had the representations been correct would be an action against Rapid Data (Western) Ltd. on a claim of wrongful dismissal. Such an action would have yielded nothing because the company through which the business was operated was now bankrupt and thus had the business been carried on through Rapid Data (Western) Ltd. as originally planned that business would have been bankrupt and Wickberg would have collected nothing on a wrongful dismissal claim against that company.

Landmark Inns v. Horeak (1982, Sask.) A written K must contain an express provision that a person who enters into it in the name of a company is not personally bound.

● FACTS: H wanted to start an optometry biz. He entered into a lease agreement with Landmark in 1979 and signed it as “South Albert Optical” and appointing himself chairman. He then decided to lease a different property, and his lawyer wront LI and H confirmed by telephone. He incorporated in 1980, and then went back to the lease with Landmark. Landmark sued for loss of rent and the cost of renovations.

● ISSUE/HOLDING: Does s.14 of the Biz Corps Act of Saskatchewan (similar to CBCA s.14) apply? AKA is H personally bound by the K? YES.

5. Corporate Law III: Duties in the Relationship between Shareholders and Board of Directors Duty of Care and Duty of Loyalty NOTE: sometimes “fiduciary duty” is used to refer to both duties, sometimes just refers to duty of loyalty. Duty of care is sometimes called “diligence”.

● Legal norms imposed on directors and managers in relation to their conduct with the corporation and shareholders (may also affect the relationship between diff. Shareholders and the corp) which ensure that the corporate actors:

○ carry out their respective duties with the utmost good faith○ do not put themselves in a position where their duties conflict

with self-interest ○ Do not derive a secret profit from their office

● Law and economics view: shareholder centric duty is most appropriate ○ I.e. directors and officers should be charged with maximizing

shareholder wealth and departures from that goal = breach of FD

○ Shareholders = the only constituency with a residual interest in the corporation’s profits

○ FD is essentially a “gap-filling doctrine” - shareholders are residual claimants - they are the most exposed to the dangers of director misconduct

○ Other stakeholders are covered by the matrix of private and public laws

■ I.e. employees are protected by contract law, employment law, health and safety laws

● Broader conception of FD: all stakeholders should be taken into account

○ This is difficult to put into operation○ “A duty to all degenerates into a duty to none” ○ However, corporations are instrumental in modern society

(largest employers in private sector)

Rules vs. Standards ● Rule = objective, legally binding -- E.g. drive at 60MPH● Standard = subjective - has to do with a number of factors, more like

principles (mushy, flexible, non-binding) -- E.g. drive safely ● So, the duties are standards - they are not exact and not binding; they are

guiding principles

PRE-CBCA ● The standard for duty of care was lax and very subjective● It was difficult to hold a director liable; similar to BJR

City Equitable Fire Insurance Co. Ltd. (1925) Directors are held to a subjective reasonable person standard.

● FACTS: CE sold fire insurance. Lost 1 million pounds due to failed investments due to fraud on the part of the managing director. Liquidator replaces board of directors and sues director for breach of duty of care.

● ISSUE/HOLDING: Did the director breach his duty? NO. Is he liable? NO.

● ANALYSIS: Reasonable person standard is subjective; it depends on the facts and the person / people involved.

Re Brazilian Rubber Plantation and Estates Ltd. (1911) Only gross negligence on the part of a director will make them liable for negligence.

● FACTS: 4 men were “induced” to become directors by a 5th director, H. They all joined for stupid reasons and weren’t actually active. The

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company failed, and a liquidator took over the company and sued the directors for negligence/duty of care.

● ISSUE/HOLDING: Did the directors act without reasonable prudence in adopting the K? YES. Are they liable for the company’s failure? NO.

● ANALYSIS: Court fixes a standard for negligence or gross negligence; we need GROSS negligence to hold directors liable. Their duties were not clearly defined.

POST-CBCA Peoples Department Stores Ltd (1992) (SCC) Corporations owe their creditors a duty, but not the duty of loyalty they owe to their corporation.

● FACTS: Wise Inc., a chain of QC department stores was owned by three brothers. They bought Peoples, another dept. Store chain. They took a long time to pay them, and were required to keep the companies separate as part of the deal. However, running Peoples as a subsidiary was very expensive. Directors decided to move inventory of both companies in such a way where Peoples would buy all the inventory, and then Wise would buy inventory from Peoples. Wise went bankrupt, which meant that creditors were not going to get paid in full. Additionally, Peoples’ creditors need to wait in line with all the other creditors of Wise to get paid out.

● Peoples bought $8 million in inventory, and gave ½ to Wise. People then had less cash liquid than Wise when they went bankrupt. Wise was thus one of People’s biggest creditors.

● The trustee sued on behalf of the creditors, claiming they were harmed as a result of a breach of the duties imposed by s.122(1) and that the directors had favoured the interests of Wise stores over Peoples to the detriment of Peoples’ creditors.

● ISSUE/HOLDING: Do the directors of a corporation owe a fiduciary duty to the corporation’s creditors comparable to the statutory duty owed to the corporations? NO - they do owe them a duty, but not one that rises to the level of a duty of loyalty.

● ANALYSIS: Duty of care standard is objective, and factual circumstances must be considered -- not subjective motivations of directors. Cites Soper v. Canada (Federal Court of Appeals called the standard “objective subjective”; SCC disagreed)

○ Look at the CBCA! It’s about a reasonably prudent person, not the particular person in that circumstance.

● The duty of care standard is owed to all stakeholders -- this decision broadens the scope of the duty of care.

● Court also rejects the defense that they were allowed to rely on the CEO’s expertise; he’s not a professional - he was not regulated by a professional body.

○ See Statutory exception: CBCA 123(5) ● The standard is subjective - there’s no strict formula - “in comparable

circumstances” + “a manner which encourages responsibility” NOTE: when a director attends a meeting, it is assumed they agree to motions unless they register an objection in the minutes.

Regulatory Liability RE: Securities Standard Trustco Ltd. Re (1992) (Securities Commission)The addition of public interest powers to the Securities Commission.

● FACTS: Trustco was a holding company, which held all the shares of Standard Trust. OSFI (Federal Regulator) warned them about financial issues within the company, but the board of directors approved a glowing press release which glossed over issues.

● ANALYSIS: The regulators protect public interest. Are you caring about just shareholders? Or others? In this case, others as well.

Magna International Inc., Re (2010) (Securities Commission) ● FACTS: Magna had a dual class share structure: Class A (subordinate

voting) and Class B shares (controlling votes, 300 votes per share). M wanted to eliminate the dual class structure by purchasing back the Class B shares + issue new Class A shares + paying $300 million. They were going to decide if this would happen via a shareholder vote.

○ Companies borrow money, issue shares, and do business to make money

○ Shareholders own the shares that are valued at a price -- so companies can issue an open call to shareholders to sell their shares back to them as opposed to selling them on the market (fewer shareholders = value is higher).

CCQ 322. (1) A director shall act with prudence and diligence. (2) He shall also act with honesty and loyalty in the interest of the legal person.

CCQ 1457. (1) Every person has a duty to abide by the rules of conduct incumbent on him, according to the circumstances, usage or law, so as not to cause injury to another. (2) Where he is endowed with reason and fails in this duty, he is liable for any injury he causes to another by such fault and is bound to make reparation for the injury, whether it be bodily, moral or material in nature. (3) He is also bound, in certain cases, to make reparation for injury caused to another by the act, omission or fault of another person or by the act

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of things in his custody.

QBCA 119. (1) Subject to this division, the directors are bound by the same obligations as are imposed by the Civil Code on any director of a legal person. (2) Consequently, in the exercise of their functions, the directors are duty-bound toward the corporation to act with prudence and diligence, honesty and loyalty and in the interest of the corporation. (3) In their capacity as mandataries of the corporation, the officers are bound, among other things, by the same obligations as are imposed on the directors under the second paragraph.

QBCA 120. Subject to the provisions of section 214, no provision of the articles, the by-laws, a resolution or a contract may relieve directors from their obligations, or from liability for a breach of their obligations.

● NOTE: In QC, duty of loyalty and duty of care are both owed to the corporation (unlike CBCA, where duty of loyalty is towards the corp but not duty of care, which seems to be owed to everyone according to Peoples)

QBCA 440. An application made under subdivision 2 or 3 may not be dismissed on the sole ground that it is shown that an alleged breach of a right of or an obligation owed to a corporation or its subsidiary has been or may be approved by the corporation’s shareholders, but evidence of approval by the shareholders may be taken into account by a court in making a decision under either of those subdivisions.

CBCA 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.

CBCA 122(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.

CBCA 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.

SECURITIESCBCA 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.

(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.

(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.

NOTE: You can use the provincial statutes to interpret the CBCA -- the explicit intent of the CBCA is trying to unify the body of law -- you could say both duties are owed to the corp and that People’s is bad law?

The Business Judgment Rule● Not statutory! Revolves around deference to biz decisions. ● Argument is that it is impossible to put yourself in the shoes of biz

directors at the time they made the decision. ● Courts are not expert, they defer to biz experts. ● BUT...hindsight is 20/20 in every field of law, and we don’t protect other

people accused of things…

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Definition: “When there is no evidence of fraud, illegality or conflict of interest in respect of a given corporate action involving business judgement, the directors are presumed to have acted in good faith and on a reasonable basis” (Shlensky v. Wrigley)

● BJR is a defense for directors which results in no liability for breach of either the duty of loyalty or duty of care

● US rule = onus-shifting device, not a burden shifting device ○ Onus of proof determines who must prove their case (in civil,

burden is usually on plaintiff)○ Usually, a person accused of having been a faithless fiduciary

must demonstrate the entire fairness of the transaction -- under the biz judgement rule in the US, the onus is on the plaintiff to show the transaction was a a fiduciary breach

● Canadian rule = onus is always on the plaintiff, thus there is no need to shift the onus of proof

● However, the question of whether the onus ought to shift to the directors once the plaintiff has adduced sufficient evidence remains

Smith v. Van Gorkom (Del. S.C. 1985) Formalization of procedure to assess duty of care. Standard for holding directors accountable for a breach is gross negligence. AKA there is no biz judgement rule without biz judgement.

● FACTS: VG came up with a figure for a share price on his own; there was no evidence he or the the directors did an independent assessment of the company’s value before agreeing to merge.

○ VG was the chairman of TransUnion (one of three major credit bureaus, which determines people’s credit scores via algorithm). TU had 5 inside and 5 outside directors. TU was entitled to certain tax credits and deductions but didn’t have enough income to take advantage of them. In Aug. 1980, TU’s board considered a sale.

○ Romans, CFO of TU, reported to the board that he did a rough feasibility investigation and suggested a price of $50-$60/share. VG said he’d take $55 for his shares.

○ In Sept. 1980, VG approached a corporate takeover specialist Pritzker, who agreed to make an offer via his company Marmon. At the time, the shares were worth $37.25. VG met with the TU sr. management, who supported the buyout at a price of $55/share. VG took the proposal to a director’s meeting on Sept. 20; he and Roman’s gave a 20-min presentation (w/out explaining how the share price had been arrived at).

○ The board which voted to support the takeover without looking at the Merger Agreement; attorney for TU told the board they

might be sued if they turned down the offer. The board approved the merger after 2 hours.

○ Smith sued on behalf the shareholders who did not approve the merger; he was representing a class of former TU shareholders, who alleged the decision to sell was uninformed *alleged breach of duty of care.

● PH: Court of Chancery found the biz judgement rule protected the directors.

● ISSUE/HOLDING: Does the business judgement rule apply to the directors’ actions at the Sept. 20 meeting? NO. The directors did not act in an informed manner.

● ANALYSIS: Determining whether a biz judgement is informed “turns on whether the directors have informed themselves prior to making a biz decision of all material information reasonably available to them.” the duty to inform oneself as a director flows from the fiduciary duty you owe to your corporation and shareholders. You’re representing other people financially!

○ Defendant argues that $38 to $55/share is a huge premium. But market value doesn’t necessarily reflect the actual value of the company, according to the court. You still need to inform yourself as a director about the premium that should be paid for control.

○ The defendants also said they had so much expertise between their inside and outside directors that they should be protected. Court says their sophistication was undermined by the fact that they didn’t inform themselves AT ALL.

○ Defendants lastly argued that their lawyer warned them and basically made them take the deal; the court said the risk of lawsuit is always there, but the biz judgement rule is there to protect you if you make an informed decision.

○ Director liability is predicated upon concepts of gross negligence; a director has a duty to act in an informed and deliberate manner and with an honest belief the actions were taken in the best interest - determined only upon the basis of information reasonably available to directors and relevant to their decision to accept the Pritzker merger proposal

Was the decision informed? NO. ○ The directors did not adequately inform themselves on VG’s role

in forcing the sale and establishing the share price ○ They were uninformed as to the intrinsic value of the company

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○ Given the circumstances, they were grossly negligent in approving the sale upon 2hours consideration without prior notice and without emergency

Did the board rely on “reports”? NO. ● At à minimum for à report to enjoy the status conferred by

statute, it must be pertinent to the subject matter on which the board is acting and will be entitled to good faith, not blind reliance

● Directors were duty-bound to make reasonable inquiries of VG and Romans -- if they’d done that, the inadequacy of the info they relied on would have become apparent

What about the lawyer’s warning? ● Counsel’s acknowledgement that lawsuits may arise is not a

justification for à board “permitting itself to be stampeded into a patently unadvised act”

NOTE: Director and officer insurance paid $10 million of the settlement; the D&O market froze as a result and statutory provisions popped up in Delaware (other states?) allowing a corp’s certificate of incorporation can contract out of director duty of care, but not duty of loyalty (see: DGCL S. 102(b)(7))

NOTE: Recall Peoples Ltd. the Wise bros relied on Clement, their VP of Finance “in good faith”

● Asking for advice doesn’t EXEMPT you from the duty of care.

QBCA 121. A director of a corporation is presumed to have fulfilled the obligation to act with prudence and diligence if the director relied, in good faith and based on reasonable grounds, on a report, information or an opinion provided by(1) an officer of the corporation who the director believes to be reliable and competent in the functions performed;(2) legal counsel, professional accountants or other persons retained by the corporation as to matters involving skills or expertise the director believes are matters within the particular person’s professional or expert competence and as to which the particular person merits confidence; or(3) a committee of the board of directors of which the director is not a member if the director believes the committee merits confidence.

CBCA 123(4) A director is not liable under section 118 or 119, and has complied with his or her duties under subsection 122(2), 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.

CBCA 123(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.

UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc (Repap decision) (ON SCJ 2002) Directors are only protected by the BJR to the extent that their actions evidence their biz judgement.

● FACTS: Board of directors of Repap approved the compensation of a proposed chairman Mr. Berg, relying on the opinion of a compensation consultant. Consultant was unaware that the compensation agreement (very large compensation and a golden parachute provision that would have bankrupted the company) was opposed by management and resisted by previous directors. Shareholder sues for breach of fiduciary duty.

● ISSUE/HOLDING: Is the agreement invalid? YES. Does it breach the directors’ fiduciary duty? YES. Agreement set aside. BJR not applied.

● ANALYSIS: Boards can retain advisors but that doesn’t relieve them of their obligation to exercise reasonable diligence

○ Proper exercise of duty of care in informing oneself as a director is a precondition of fulfilling the duty to act in the best interests of the corp

○ “Directors are only protected to the extent that their actions evidence their biz judgement”

○ BJR does not apply where a Board acts on the advice of a committee that makes an uninformed recommendation

○ A K like this should be the subject of careful objective analysis and this one was not

Brant Investments Ltd. v. KeepRite Inc. (US 1991)Example of use of the biz judgement rule. “Biz decisions should not be subjected to microscopic examination.”

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● FACTS: KeepRite was owned by a subsidiary of parent company ICM. KR was publicly held. ICM merged KR with two of its wholly-owned subsidiaries. An independent committee of the board of directors reviewed the transaction and indicated it would only approve the merger if the price paid to public shareholders increased. Changes were made and they approved; minority shareholders still sued claiming the transaction was opposed to their interests.

● ISSUE/HOLDING: Did the board violate the minority shareholders’ interests? NO.

● ANALYSIS: The 3-person committee was independent as they were all outside members of KR. They also “felt at all times free to deal with the impugned transaction upon its merits.

○ The committee considered some alternative possibilities for solving KR’s problems -- but their function was to determine whether a proposed transaction to buy assets from ICG companies

○ KR had a plan to utilize the proposed benefits of the transaction - not a detailed plan but that’s not required

○ The committee retained a consulting firm to assess the transaction which drafted a report; court says this initial report was adequate and that the info used was accurate and not misleading

○ “The trial judge is required to consider the nature of the impugned acts and the method in which they are carried out. That does not mean that the trial judge should substitute his own biz judgement for that of managers, directors, or a committee such as this one.”

Pente Investment Management Ltd. v. Schneider Corp. (ONCA 1998)“The BJR accords deference to a biz decision so long as it lies within a reasonable range of alternatives.” BJR applies to decisions on stakeholders interests as much as other directorial decisions.

● FACTS: Maple Leaf made a takeover bid for Schneider Corp., which Schneider thwarted by entering into a lock-up arrangement with another bidder (i.e. a K prohibiting the sale of any shares by insiders or underwriters of a company for a period of time).

● ISSUE/HOLDING: Is the burden of proof in this case on the directors to justify their actions as being in the company’s best interest, or on the shareholders challenging the actions? Shareholders - BJR applies in this case and burden of proof does not shift.

● ANALYSIS: If a board has acted on the advice of a committee with people that have no conflict of interest, have acted independently and in good faith, and made an informed recommendation as to the best

available transaction for shareholders in the circumstances, the BJR applies. The burden of proof is not an issue.

Unique Broadband Systems Inc., Re (ONCA 2014) BJR is not applicable when a director does not satisfy the pre-conditions of honesty, prudence, good faith, and a reasonable belief that their actions were in the best interest of the company.

● FACTS: UBS had an incentive-driven share appreciation rights plan (SAR Plan) for its directors and senior management. UBS sold a telecom spectrum from a company it acquired for $80 million in 2009, and resolved to treat the sale as a triggering event for the SAR. The directors, who all stood to benefit, disclosed their conflict of interest, and then voted to create a SAR cancellation pool of a ton of money and award excessive bonuses. The directors, including CEO McGooey, were removed by shareholders and McGooey resigned.

● ISSUE/HOLDING: Did the directors breach their fiduciary duties? YES. McGooey’s actions were driven by self-interest, unsupported by any reasonable or objective criteria, and contrary to the best interests of UBS.

● ANALYSIS: Subsumed in the fiduciary duties of good faith and loyalty is the duty to avoid conflict of interest. A fiduciary is barred from dividing loyalties between competing interests, including self-interest.

○ Disclosure of a director’s interest does not relieve a director of their obligations to act honestly and in the bests interests of the corporation.

○ There is no evidence as to how UBS’s board arrived at the non-market price of .40$ per unit and how it was determined this was in the corp’s best interests (no credible analysis was provided, no expert advice sought, etc.)

○ Mr. Gooey’s cancellation award was $600,000! As opposed to a SAR Plan payment which would have been $75,000.

○ Doesn’t matter that he resigned - entering into a potential conflict of interest is a breach whether or not the conflict is operative; the fiduciary breach gives rise to remedies at law as soon as it jeopardizes the shareholders or their property

○ “BJR is a rebuttable presumption that directors acted on an informed basis, in good faith, and in the best interests of the co. Courts will not sit idly by when it is clear a board

Duty of Care + Biz Judgement Rule: Policy Implications ● Biz judgement rule tames the monitoring mechanism that is the duty of

care and allows directors to take more risks ● Avoids incentivizing overly cautious decisions (balancing) ● Monitoring mechanisms can be imposed by law or by contract

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● The background is agency law - a director is an agent who is also a principal

CBCA 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(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,(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, agent or mandatary 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.Access to disclosures - (6.1) The shareholders of the corporation may examine the portions of any minutes of meetings of directors or of committees of directors that contain disclosures under this section, and any other documents that contain those disclosures, during the usual business hours of the corporation.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;(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

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was approved or confirmed.Application to court - (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.

CBCA 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;[...](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.

CBCA 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.

CCQ 321. A director is considered to be the mandatary of the legal person. He shall, in the performance of his duties, conform to the obligations imposed on him by law, the constituting act or the by-laws and he shall act within the limits of the powers conferred on him.

CCQ 322. (1) A director shall act with prudence and diligence. (2) He shall also act with honesty and loyalty in the interest of the legal person.

CCQ 323. No director may mingle the property of the legal person with his own property nor may he use for his own profit or that of a third person any property of the legal person or any information he obtains by reason of his duties, unless he is authorized to do so by the members of the legal person.

Conflict of interest - CCQ 324. (1) A director shall avoid placing himself in any situation where his personal interest would be in conflict with his obligations as a director. (2) A director shall declare to the legal person any interest he has in an enterprise or association that may place him in a situation of conflict of interest and of any right he may set up against it, indicating their nature and

value, where applicable. The declaration of interest is recorded in the minutes of the proceedings of the board of directors or the equivalent.

Disclosure - CCQ 325. (1) A director may, even in carrying on his duties, acquire, directly or indirectly, rights in the property under his administration or enter into contracts with the legal person. (2) The director shall immediately inform the legal person of any acquisition or contract described in the first paragraph, indicating the nature and value of the rights he is acquiring, and request that the fact be recorded in the minutes of proceedings of the board of directors or the equivalent. He shall abstain, except in case of necessity, from the discussion and voting on the question. This rule does not, however, apply to matters concerning the remuneration or conditions of employment of the director.

CCQ 326. (1) Where the director of a legal person fails to give information correctly and immediately of an acquisition or a contract, the court, on the application of the legal person or a member, may, among other measures, annul the act or order the director to render account and to remit the profit or benefit realized to the legal person. (2) The action may be brought only within one year after knowledge is gained of the acquisition or contract.

QBCA 119. (1) Subject to this division, the directors are bound by the same obligations as are imposed by the Civil Code on any director of a legal person. (2) Consequently, in the exercise of their functions, the directors are duty-bound toward the corporation to act with prudence and diligence, honesty and loyalty and in the interest of the corporation. (3) In their capacity as mandataries of the corporation, the officers are bound, among other things, by the same obligations as are imposed on the directors under the second paragraph.

QBCA 120. Subject to the provisions of section 214, no provision of the articles, the by-laws, a resolution or a contract may relieve directors from their obligations, or from liability for a breach of their obligations.

QBCA 122. A director or officer of a corporation must disclose the nature and value of any interest he or she has in a contract or transaction to which the corporation is a party.For the purposes of this subdivision, “interest” means any financial stake in a contract or transaction that may reasonably be considered likely to influence decision-making. Furthermore, a proposed contract or a proposed transaction, including related negotiations, is considered a contract or transaction.

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QBCA 123. A director or an officer must disclose any contract or transaction to which the corporation and any of the following are a party:(1) an associate of the director or officer;(2) a group of which the director or officer is a director or officer;(3) a group in which the director or officer or an associate of the director or officer has an interest.The director or officer satisfies the requirement if he or she discloses, in a case specified in subparagraph 2, the directorship or office held within the group or, in a case specified in subparagraph 3, the nature and value of the interest he or she or his or her associate has in the group.

QBCA 440. An application made under subdivision 2 or 3 may not be dismissed on the sole ground that it is shown that an alleged breach of a right of or an obligation owed to a corporation or its subsidiary has been or may be approved by the corporation’s shareholders, but evidence of approval by the shareholders may be taken into account by a court in making a decision under either of those subdivisions.

Legal History of Fiduciary Duty 1. Borrowed from trust law (strict)

a. Conflict rule = if a director/officer acted with the least conflict of interest, the K or transaction was voidable by the corporation

b. Profit rule = if a director/officer made a nominal profit as a result of their position with the corp, the FD was breached

2. Full disclosure clauses (less strict) a. Private corps often have directors who sell or buy assets from th

corp, or who have interests that create conflicts of interest b. Became common to include a clause in company’s founding

document that allowed officers to enter into Ks with their co, or to have material interests in other parties, as long as full disclosure was made and the interested party refrained from voting

c. More flexible standard used by courts = act in good faith and in co’s best interests

d. Based on shareholder primacy 3. Statutory reform (CBCA )

a. Formulated by the Dickerson Committee in the 1970s (1st major review of corp law in 40yrs) -- still reflecting shareholder primacy

b. See: CBCA 122(1), above 4. SCC rejects shareholder primacy

a. Peoples Ltd. - “at all times, directors and officers owe their fiduciary obligation to the corp. The interests of the corp are not to be confused with the interests of the creditors or those of any other stakeholders”

b. BCE - Neither of these cases are saying the corp owes a FD to every constituency; court treats the corp like an abstract entity and requires managers to determine what course of conduct is in the best interest of that entity

c. Some suggest this view of FD is conceptually incapable of sensible interpretation

● Now, the adjudication of alleged breaches of fiduciary duty revolve around whether directors and officers may claim the benefit of the BJR

● Canadian courts, re: takeover bids, require some objective evidence to back up managers’ statements that they were acting in the best interests of the company

○ Takeover bid = officer by a person or company made to all shareholders to purchase shares in a target corp to acquire control of the target

○ Hostile bid = a bid made without the approbation of management

Interaction between FDs and BJR ● If directors fulfill certain conditions - mostly involving the procedural

integrity of the decision-making process - they tend to escape liability● The focal point of most contemporary adjudication re: breaches of FD is

whether directors/officers may claim the benefit of the BJR ● The weird treatment of takeover bid cases (i.e. they depart from the

statutory standard) have been where BJR is worked out, but BJR is applied “without differentiation” in other cases

● In the US, the BJR applies ONLY in the takeover bid context

Overlap Between Fiduciary Duties and the Oppression Remedy ● There is a lot! ● Oppression provision makes actionable any conduct that results in the

directors’ powers being exercised in an oppressive manner ● Substantive trigger for invoking OR is unfairness - which is almost always

broader than the substantive trigger for the invocation of FDs ● Courts have regularly characterized directorial conduct that breaches FDs

as oppressive● While the drafters of the OR seemed to intend oppression actions have a

personal character, most courts have allowed actions of a derivative character to go forward under the OR (which has further confounded actions for breach of FD and those alleging oppression)

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○ OR basically expands FD (but courts have shied away from characterizing the substantive duties created by the OR as fiduciary

● What if an officer who is not a director breaches FD? Acts of any senior officer are acts of the corp and thus drawn into the OR.

Duty of Loyalty Situations where it is central:

1. Self-dealing 2. Corporate opportunities - managers take something owed to corp 3. Competition - conflict of duties (can serve two duties)

Recipients of Duty of Loyalty● The corporation; shareholders owed consideration (BCE)● Not just shareholders - is more pluralistic ● Typically, complex transactions are carried out as “arrangements” - to

make it more practicable (must be ok’ed by a court) ● Courts can require corporations to call, hold, and conduct a shareholder

meeting to approve an arrangement by a special resolution; each class of shares must approve by an ordinary resolution

○ Not common for courts to call a meeting of any other constituencies

● Once a vote passes, courts must also approve the final arrangement

NOTES on BCE + Fiduciary Duty ● Peoples says that considering various constituencies isn’t mandatory but

permitted; BCE creates a duty to consider best interests of debenture-holders

● Oppression remedy envisions a more limited set of plaintiffs than those whose interests directors have a duty to consider

● Derivative action = an action where all shareholders are harmed equally and indirectly

Self-Dealing Transactions ● K or transaction concluded between directors or officers of a corp and

their corporation, directly or through their interest in another entity ○ E.g. the sale of an asset at a price higher than the asset’s fair

market value ● Dangers: the risk of diversion of corporate wealth through terms

favourable to the insider ● Stop-gap: require a director to have a direct stake in the corp (however, a

self-dealing transaction will usually outweigh that stake re: benefit to the officer/director)

○ Used to be punished through conflict and profit rule, but now are governed by judicial review

Corporate Opportunities ● Problems that arise when persons operating in a fiduciary relationship to

the corp independently invest in a project that could have been acquired by the corp

● Problematic b/c, like with self-dealing transactions, valuable opportunities may be diverted from the corporation to officers/directors acting in a personal capacity

● Stop-gap: impose fiduciary duties that limit their ability to “take” opportunities from the corp.

○ But little agreement on criteria re: when an opportunity belongs to a corp

● Main issue: determining whether the manager has usurped the authority granted to them by shareholders in order to acquire some unbargained-for personal benefit

Regal (Hastings) Ltd. v. Gulliver (1942) If a director takes advantage of an opportunity to profit that they found through their work, then they will be found in breach of FD and will have to disgorge profits - EVEN if in company’s best interest.

● FACTS: Regal (cinema company) wanted to expand business by acquiring new theatres. Did this by acquiring new theatre leases and did this through a subsidiary (Amalgamated). R was unable to seize on the opportunity because didn’t have enough capital to secure lease; A was capitalized to extent of 2000 pounds and landlord wanted 5000 pounds to secure lease. Directors of R were trying to figure out how to solve problem. Four directors and a lawyer each invested 500 pounds in A by buying shares. The chair of the board did not invest, but he convinced outside people to finance A. Anow was properly capitalized and could satisfy landlord to secure leases. Directors of R sold interests in A and sold shares at significant profit. R changes hands, has new owner and directors. They claim conflict of interest of old directors for investing in subsidiary, A.

● ISSUES/HOLDING: (1) Were former directors of R guilty of breach of fiduciary duty re: appropriation of opportunities for profit? YES. They are obliged to return the profits they realized

● ANALYSIS: Fiduciaries taking opportunity where it seems that opportunity is bound up in corporate opportunity that could not have been taken up without the disloyal behaviour.

● ASK: Has this opportunity come to F through her fiduciary position or in context of her fiduciary relationship? If the opportunity falls outside

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current fiduciary relationship, there is no conflict, because anyone could have taken up the opportunity. Here, however, the opportunity came to individuals in course of their fiduciary relationship – it would not have occurred to them to invest in A if they weren’t trying to puzzle through the capital Issue. If you can show that there has been a conflict and that any profi has come from it, Fs will have to pay.

● Former directors of R said this was a different kind of conflict of interest case – they were just doing their best to advance the interests of the company. Knew there was an opportunity for the company and company couldn’t realize it if they didn’t invest and risk their personal capital. So they didn’t see it fair that they should have to pay their profits back to the company.

○ Court flatly rejected this argument – it’s a super flat, strict rule. If there is a conflict, your liability automatically follows from that.

● Directors could have avoided this problem if they had received approval by the board before hand, or shareholder ratification after the fact.

NOTE: Many think this case is suuuuper strict re: what it expects from fiduciaries. Nonetheless, has been adopted by SCC in Canada in Zwicker.

● Economy criticism – Duty of loyalty meant to incentivize directors to do best they can for company and if they only way they can do that is to, say, risk own money, then how can that be bad? Could say that these guys were not just loyal but extraordinarily loyal to the company by being willing to put their money up. If this is going to be the deal, then directors will be less willing to be so loyal because it becomes not in their interest to do so.

Peso Silver Mines Ltd. v. Cropper (SCC 1966) If a director/officer comes across an opportunity independently, they are not liable for profits earned / there has been no FD breach.

● FACTS: Dickson, a prospector, owned several mineral claims, one of which was contiguous to claims held by Peso Silver Mines. He offered to sell them to Peso, but its board of directors rejected the offer. Mr. Cropper, a managing director and member of the board, was approached later on by three other investors, and the four formed a private company to acquire the claims, and a public company later to take over, finance and develop them.

○ Some time later, Peso received an offer from another company to acquire a significant interest in it, and accepted. The board was increased. At a meeting of the new board, Cropper, acting in compliance with a notice from the chairman, disclosed his private interest in the companies developing the Dickson claims. At a subsequent meeting of the board he refused to comply with the chairman's request that he turn over his interest in them at

cost. A motion was passed rescinding Cropper's appointment as executive VP and as a member of the executive committee. He was asked to vacate the offices of the company and the chairman asked him to resign. Cropper refused, but did so later, and his resignation was accepted. Peso sued, asking that C deliver the shares to them. C counter-claimed for wrongful dismissal.

● ISSUE: Was this opportunity for profit within the scope of C’s fiduciary duties to PSM? NO.

● ANALYSIS: The corporation had been granted the opportunity to take the profit for itself and PSM decided to refuse the opportunity after proper decision-making process, even though C participated in it. So, after having passed on it, the opportunity became fair game. Because it had been considered and refused, the opportunity was placed outside the ambit of fiduciary duty of C.

NOTE: Court distinguishes this case from Regal – in Regal, the opportunity came to the directors in the scope of their duties.

Brudney and Clark, “A New Look at Corporate Opportunities” (1981, Harvard Law Review) Argue that different rules should apply to close and publicly held corporations

● For publicly held corps, rules should depend on whether the appropriator is a full time officer/executive, an outside director or part-time executive, or a parent corporation

● Selective approach = forbids only behaviour that in particular circumstances creates a serious probability of injury to the beneficiary = best for close corporations

○ Stockholders of closely held companies have much more control over management

● Categorical approach = forbids all personal gains to a trustee from dealings related to trust property, even if no harm is done to the beneficiary = best for public corporations

○ Investors are usually passive, widely scattered contributors of $○ Directors put their full-time effort towards running public

companies and have little time or energy to benefit via other corps

Competition● Unlike self-dealing transactions, which involve Ks between

directors/officers and a corp, competition deals with a director or officer directly competing with the corp by:

○ Directors who serve on the board of 2 competing corps ○ Directors/officers operating a biz that competes with the corp

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○ directors/officers who have a material interest in an entity that competes with the corp

London and Mashonaland Exploration Company, Limited v. New Mashonaland Exploration Company, Ltd. (1891 WN)There is nothing inherently objectionable in the position of a company director (and chairman) who, without breaching any express restrictive agreement or disclosing any confidential information, becomes engaged, whether personally or as a director of another company, in the same line of business.

Slate Ventures Inc. v. Hurley (Nfdl 1996)Where info or opportunity is acquired independently, directors may compete, but if there is an actual conflict of interest, they will be found in breach of their FD and required to disgorge their profits.

● FACTS: Hurley had been in the slate business since 1983. He developed and operated various slate quarries in Newfoundland. In 1985, he began to investigate the purchase of various properties on Random Island including the Allison Quarry. In 1988, Hurley incorporated Newfoundland Slate. In 1990, Slate Ventures purchased shares in Newfoundland Slate. Hurley remained a director of Newfoundland Slate.

○ In the share purchase agreement, Hurley stated that he had no information or knowledge of any facts relating to the business which, if known to the purchaser, might reasonably be expected to deter the purchaser from completing the transaction. Hurley also agreed to transfer all mining permits, licences granted in favour of himself or the subsidiaries to be transferred to Newfoundland Slate.

○ In a shareholders' agreement between Slate Ventures and Hurley, Hurley agreed to keep confidential all information and trade secrets concerning Newfoundland Slate for a period of 12 months after he ceased to be a shareholder.

○ In 1995, Hurley informed Slate Ventures that he had personally concluded a deal to purchase the Allison Quarry property. While Hurley had been dealing with the owners since 1988 or 1989, he never disclosed the availability of the property to Slate Ventures. Earlier, Newfoundland Slate had attempted to obtain another property in the same area. Slate Ventures claimed that the property should have been purchased in the name of Newfoundland Slate. Slate Ventures sued for an order the Allison Quarry be transferred from Hurley to Newfoundland Slate, in return for the payment of the purchase price and expenses.

● ISSUE/HOLDING: Did Hurley breach his fiduciary duty? YES. The court directed Hurley to transfer the property to Newfoundland Slate.

● ANALYSIS: H did not acquire the information about the Allison Quarry opportunity by virtue of his position as director of Slate. However, NSV had a “general interest in acquiring new slate quarries”

○ Fiduciaries will be liable for any profits they incur: ■ Where there is an actual conflict of duty and interest

and the info or opportunity is acquired by virtue of the fiduciary’s position

■ Where there is a potential conflict of duty and interest and the info or opportunity is acquired by virtue of the fiduciary’s position

■ Where there is an actual conflict of duty and interest but the info or opportunity is acquired independently, the fiduciary is liable

■ Where there is no conflict of duty and interest, but the information or opportunity is acquired by virtue of the fiduciary position, the fiduciary is liable

○ Fiduciaries will not be liable: ■ Where there is NO conflict of duty and interest, real

or potential, and the info or opportunity is acquired independently

■ Where there is a potential conflict of duty and interest but the info or opportunity is acquired independently, the fiduciary is not liable

Slate Ventures v. Hurley (Nfldlnd CA 1997) Directors and managers of a corp are expected to meet general standards of loyalty, good faith, and avoidance of a conflict of duty and self-interest

● Affirmed lower court’s judgement; breach of fiduciary duty found ● However, argues for a stricter standard (that a potential conflict of interest

should still result in a fiduciary being held accountable)

Cranewood Financial Corp. v. Norisawa (BCSC 2001) Enunciates test for competition as follows:

1. Was there either an actual or potential conflict of interest by virtue of the director’s actions? If yes, then director is liable.

2. Were the opportunities acquired independently or through the director’s position with the corp? If yes (even where no actual or potential conflict of interest) director is liable.

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BCE Inc. Re (SCC 2008) re: recipients of fiduciary duty ● FD of directors originated in CML as a duty to act in the best interests of

the corporation ● Often shareholder/stakeholder interests are coextensive with the corps;

when they conflict, the directors’ duty is to the corp ● Shareholders can file for an oppression remedy under s.241 of the CBCA

- they must prove they have a reasonable expectation to be treated fairly by the corp

● This makes it seem like directors owe shareholders a FD, but really their only FD is to the corporation

○ Thus, the reasonable expectation of shareholders is that the directors should act in the best interest of the corp.

● Commercial reality undermines the claim that a way could have been found to preserve the trading position of the debentures in the context of the leveraged buyout

● Best interests of the corp favoured acceptance of the offer at the time

Sanction of Fiduciary Breach by Shareholders Ratification = Shareholder approval of an act by the board or directors that constitutes a breach of fiduciary duty

● The value of ratification is suspect - shareholders of widely held corporations don’t examine ratification issues closely

● Ratification power is derived from memorandum corporate law jurisdictions, where shareholders hold residual power in the corp -- the adoption of the residual power by courts in letters patent jurisdictions was highly suspect

○ In early days, there was a strong majoritarian bias ○ The right plaintiffs in a case where the company suffers harm is

the company itself -- there is no derivative action at CML (Foss) ○ An individual member can’t sue a company for a wrong that was

agreed upon by the majority

North-West Transportation Company, Limited v. Beatty (1887) When a director personally enters into a contract with the company of which he is a director, apparently breaching his fiduciary duty to the company, if the contract is subsequently approved by a majority of shareholders (absent unfair/improper means) the sale will remain valid. The director has the right to cast his own vote(s) as a shareholder in such a circumstance.

● FACTS: NWT needed a ship and one of the directors, James Beatty, had a ship to sell. NWT buys ship from B, B makes personal profit. B disclosed his interests in the transaction to the board. Transaction was approved by the board of directors of NWT (of which B was a member) and then by shareholder vote. Shareholder vote passed 306-289 (of those

306 votes, 291 were cast by B, the director of NWT who sold the ship). Evidence that the ship was awesome and it wouldn’t have been possible to find such a damn good ship anywhere else. Also found that personal profit B made was not excessive – he could have gotten a better sale price elsewhere. So, looked like this was a good deal for the company. However, shareholder of NWT, also named Beatty!? - sues B in name of NWT on behalf of all shareholders. Seeks to have sale set aside on grounds of breach of loyalty.

● ISSUE/HOLDING: Was there a violation of the conflict of interest rule? YES,– making contract prima facie voidable. But... could rule from Aberdeen Railway be surmounted by ratification? NO. Is the contract valid? YES – ratification of the contract valid and contract no longer voidable.

● ANALYSIS: General rule is that a director cannot enter into an agreement that conflicts or might conflict with the interests of the corporation. (Aberdeen Railway). Here, the evidence shows that the acquisition itself was appropriate – price wasn’t excessive or unreasonable, for example. Any concern about the board of directors ratifying the sale was remedied by the fact that it was then also by the majority of shareholders so long as there was no procedural unfairness or impropriety.

○ This is true even though B was the majority shareholder because the corporation was constructed in such a way that B could acquire the voting power that he did – he had a right to acquire as many shares as he wanted and he had a right to vote on them all. Rejecting the votes cast by B would disregard the rights of the majority in favour of those held by the minority.

NOTE: Normally board will approve deal before hand and shareholders will engage in ratification after the deal in order to avoid/forgive potential liability.

● Risky to ask shareholders for ratification because by letting them know about the potential liability issue they may get pissed, not ratify it, and then sue the corporation for the conflict of interest and their allowing it to take place.

● Why was this case controversial? Result was perverse on the facts – fiduciary forgiving himself using his powers as shareholder.

● Reasoning driven in large part by unique state of the facts. Here, the self-dealing transaction was clearly good for the company and B didn’t overreach. So, focusing on the facts/equities of the case then the court was particularly willing to allow the transaction to stand.

● Was highly influential in Canada and CML – some Canadian cases recognized the controversy surrounding this situation recognized that the ratification would only be good if it was unanimous (Bourbon v. Earl in ON).

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Guest Lecturer - Lionel Smith (trust law and corporate law)1. Private law remedies are not about shaping the conduct of non-parties to

the litigation; they’re about the rights of the parties ○ General private law principle = plaintiff and defendant’s rights

and duties are assessed based on past occurances to do justice to the legal sitch between those two parties (rights-based theory)

○ Punitive damages are a deterrent, yes, but deterrence is exceptional in terms of what the private law does

2. Putting parties back where they started isn’t a great deterrent in any case ○ i.e. disgorging only profits made from conflicts of interest ○ Why wouldn’t we make punitive damages double what you gain?

3. Fiduciary obligations are independent of whether any harm was caused ! so linking them to deterrents doesn’t work

Ad-hoc fiduciary duties: duties that people who are sometimes but not always fiduciaries have to their clients/customers, etc. You’re not in a formal category, but by virtue of what you do you may be in a fiduciary relationship.

● e.g. investment advisors ● In what capacity do you have these powers? Through your own wealth, or

for and on behalf of the other person? ○ The power of a corporate director come from allowing them to

manage the corporation, not their own regard IN SUM: If you extract a profit where you’re acting for and on behalf of another person, the law attributes that benefit to the other person.

● You don’t have to have done anything wrong! ● You also have to disclose all relevant information.

What about the costs of acting as a fiduciary? Aren’t those chargeable to your beneficiary? Directors/officers/all fiduciaries are to be indemnified for costs/losses incurred in their duties (this is in the CBCA).

6. Corporate Law IV: Rights and Remedies in the Relationship between Shareholders and Board of DirectorsShareholder Voting + Pre-emptive Rights Pre-Emptive Rights

● Gives shareholders the right to purchase new shares before anyone else so that their interest in the corporation isn’t diluted (when the company issues new shares)

CBCA 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.(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.

Shareholder Voting ● Another monitoring mechanism for shareholders - helps solve agency

problem between managers and shareholders ● Non-voting shares problem

○ Non-voting classes are at a disadvantage when votes come up that can decide the value of their shares / fate of the company

○ Also, in hostile takeover bids - they may only offer shares with a high premium to voting shares because those are the shares that give power

What’s at stake in voting issues? ● Shareholder vs. management power - How easily can shareholders replace

board? Who should decide / influence key transactions? ○ E.g. Buy another company or sell the company

Protection of non-voting shares in a takeover bid● When a takeover bid is made, usually only for the voting shares of a target

corporation. This because the acquirer can only exercise control if it has the power to replace the directors.

● Almost always made at premium to the current market price to induce shareholders who hold voting shares to tender.

● It has been suggested that this “unequal” treatment (as non-voting shares do not receive a premium) is unfair; certain securities regulations take care of this through “coattail” provisions as seen in Re Canadian Tire.

○ AKA, in takeover circumstances sometimes non-voting shares can be converted into voting shares.

○ The idea that shareholders should be treated equally underlies coattail provisions.

Approach of the law ● Specify when required (corporate law) ● Standardize information to shareholders (securities law) ● Orderly system of voting (securities law)

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Do shareholders care? ● Rational apathy - shareholders know it’s not worth it to inform

themselves re: votes ● Moderating factor to rational apathy = agents monitoring agents (i.e.

increase in institutional shareholders like pension funds, banks, etc.)

Voting for directors ● 99% are uncontested ● Typical board election - 9 directors for 9 seats; shareholders vote for each

nomineePlurality voting = top 9 vote-getters win assuming quorumMajority voting = director must get > majority “for” (for must beat withhold)

● Any vacancies are filled by the board ● NOTE: Most companies use plurality voting, not majority

Staggered board voting = you’re not voting for the whole board in the same meeting (i.e. choose 3 directors every year)

● So no one can change the full direction of the board

Cumulative voting for directorsCBCA 107. Where the articles provide for cumulative voting,(a) the articles shall require a fixed number and not a minimum and maximum number of directors;(b) each shareholder entitled to vote at an election of directors has the right to cast a number of votes equal to the number of votes attached to the shares held by the shareholder multiplied by the number of directors to be elected, and may cast all of those votes in favour of one candidate or distribute them among the candidates in any manner;(c) a separate vote of shareholders shall be taken with respect to each candidate nominated for director unless a resolution is passed unanimously permitting two or more persons to be elected by a single resolution;(d) if a shareholder has voted for more than one candidate without specifying the distribution of votes, the shareholder is deemed to have distributed the votes equally among those candidates;(e) if the number of candidates nominated for director exceeds the number of positions to be filled, the candidates who receive the least number of votes shall be eliminated until the number of candidates remaining equals the number of positions to be filled;(f) each director ceases to hold office at the close of the first annual meeting of shareholders following the director’s election;(g) a director may be removed from office only if the number of votes cast in favour of the director’s removal is greater than the product of the number of directors required by the articles and the number of votes cast against the

motion; and(h) the number of directors required by the articles may be decreased only if the votes cast in favour of the motion to decrease the number of directors is greater than the product of the number of directors required by the articles and the number of votes cast against the motion.

● instead of having to vote on proportionality of shares, you can pool your votes and allocate them however you want (i.e. use all your votes for one person)

○ i.e. you have the total number of shares you have times 9 (# of people to vote for)

● In cumulative voting, a shareholder’s votes are multiplied by the number of directors to be elected and the shareholder can concentrate the total number of its votes on one candidate or group of candidates. Concentration of votes assists (but does not guarantee) that minority shareholders obtain some representation on the board of directors. Under cumulative voting, the candidates receiving the fewest number of votes are eliminated so that the candidates receiving the greatest number of votes are elected to the positions on the board open for election.

● Under the OBCA and CBCA, cumulative voting applies if, but only if, the articles expressly provide for it. In current Canadian practice, it is rare for a corporation to opt into cumulative voting.

Should cumulative voting provisions be mandatory?YES: democratic necessity or fairness concept -> cumulative voting system is equitable and consistent with acceptable democratic principles (BUT this is premised on the similarity between a political body and business organization, two things that are inherently different) NO: Encourages the election of directors representing particular interest groups who, by virtue of their partisan role, encourage disharmony in the management of the affairs of the company

● Even when available, cumulative voting rarely used by shareholders likely because they usually regard themselves as investors and are content to leave management in the hands of the managers

Protections to cumulative voting● Requiring annual retirement of entire body of directors > prevents

rotating directorships● Limit in the right to reduce the number of directors in corporations in

which cumulation is permitted -> prevents arbitrary reduction in roles so cumulation power becomes weakened

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● Election of every director must be subject of a separate resolution, unless shareholders first pass a resolution allowing more than one director to be elected by single resolution -> deals with the problem if there are a greater number of candidates then offices to be filled (which would weaken the cumulation power)

Right to Appoint a Proxy● Proxy voting = when you send someone else to vote for you (agency

agreement) ● Background to present legislation: CML position was that shareholders

have a right to receive sufficient information with notice of meeting to permit them to come to an intelligent conclusion for voting decision BUT that use of a proxy form with the names of a proxy already printed therein do not vitiate the notice of a meeting (even if they are not good corporate practice)

Proxy legislation● Provides means of participation for shareholders in company decisions● Provides disclosure of sufficient information so that shareholders may

evaluate proposed company initiatives● Provides disclosure of information which adequately depicts the financial

position of the company and which is vital to the investing public● In Canada: federal, Ontario, Alberta, BC have all adopted acts enshrining

the above purposes● Not abiding by these nullifies decisions taken by shareholder voting

decisions

Concept of solicitation● process by which shareholders are invited/requested to authorize

someone to be their proxy at a shareholder meeting and vote their shares as they (the proxy) sees fit

● Includes (art. 147 CBCA): ○ Request for a proxy whether or not accompanied by or included

in a form of proxy○ Request to execute or not to execute or, in Quebec, to sign or

not to sign a form of proxy or to revoke a proxy○ 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

● Does not include (art. 147 CBCA)○ Sending of a form of proxy in response to an unsolicited request

made by or on behalf of a shareholder

○ Performance of administrative acts or professional services on behalf of a person soliciting a proxy

○ Solicitation by a person in respect of shares of which the person is the beneficial owner

○ Public announcement, as prescribed, by a shareholder of how the shareholder intends to vote and the reasons for that decision

○ 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

Distribution of proxy circular (art. 150(1))● If management soliciting proxies: they must provide a management proxy

circular with notice of meeting● If dissident shareholders soliciting proxies: they must provide a dissident

proxy circular stating the purpose of the solicitation

Remedies for contravention of proxy solicitation rules in Duby● Must be considered adequate (for both sides)● Interlocutory injunction: extraordinary remedy can really only be ordered

unless it is clearly required to protect the shareholders in the circumstances

Critique of the proxy provisions● Seem to go against the general purpose of proxy rules that is to foster

shareholder democracy by ensuring management’s nominees for directors and proposed fundamental changes are exposed to scrutiny (ie: information must be presented) AND shareholders should have an adequate opportunity to vote

● Risk that relatively informal communications between shareholders may be construed as proxy solicitations requiring the assembly (at great expense) of a dissidents’ circular (Duby)

● This all led to legislative amendments in Canada for exceptions to requirement for assembly of dissident proxy circular in case of

○ Targeted solicitation to 15 or fewer shareholders (art. 150(1.1) CBCA) or if solicitation is by public broadcast, speech or publication (art. 150(1.2) CBCA)

○ Press release that does not inherently request proxies (Smoothwater)

Proxy solicitation expenses● Statutory: corporation shall reimburse shareholders for costs relating to

proxy solicitation or holding shareholders’ meetings with some exceptions (art. 143(6) CBCA)

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Common law● If dissident proxy circular discloses intention to seek reimbursement and

shareholders overwhelmingly support the proposal -> dissident shareholder entitled to reimbursement (Goodwood)

● Directors have the right to use corporate treasury money for the purpose of persuading shareholders of their position in a contest over policy which they believe, in good faith, is in the best interests of the corporation (Rosenfeld)

● Shareholders have the right to be reimbursed for reasonable and good faith expenses incurred by them in any such policy contest (Rosenfeld)

Remedies for breach of proxy legislation● Implied civil right of action: implied right for harmed parties to bring

private action for the breach of the statutory provisions● Has been held by courts that this right is present for breach of proxy

legislation (Duby and Goldex)● BUT SCC has thrown a bit of doubt onto this with Saskatchewan Wheat

Pool where they held that breach of statutory provision does not itself grant right to private action

● Despite this, courts have recognized implicit rights of action in the securities law context (Jones)

Statutory liability● IF a form of proxy, management proxy circular, or dissident’s proxy

circular contains an untrue statement of a material fact OR omits to state a material fact required therein or necessary to make a statement contained therein, an interested person or the director may apply to a court which may make an order it thinks fit including a restraining order, mandatory injunction and an order enjoining the meeting (art. 154 CBCA)

● A complainant or creditor can seek a restraining or compliance order for breach of proxy legislation and court has discretion to make such an order (art. 246 CBCA)

○ Complainant or creditor -> DOES NOT include shareholders (Polar Star)

● Court would likely only grant such an order if conduct had substantial risk of harm to the corporation or shareholders as a group OR conduct was patently clear to be illegal or abusive (Polar Star)

● Injunctions: flexible tool that can effectively prevent anything from occurring (restraining order) or to require one to take action (compliance order)

● Reluctance to use against dissident shareholders (Duby)

● Courts not shy to use in cases involving misleading or incomplete proxy materials sent to shareholders by management (Garvie)

Damages● Courts prefer injunctive relief and are reluctant to hand out damages (not

a single case in Canada where courts have done it for proxy legislation breach)

● Difficulties associated with awarding damages for breach of proxy legislation -> extremely difficult to quantify the damages arising out of this

● BUT if too late to issue injunctive relief -> courts could likely award damages as they would likely be the only available remedy (Norcan)

Permissible Limitations on the right to Vote in the Corporate Constitution Jacobsen v. United Canso Oil and Gas Ltd. (1980, Alberta QB) If voting rights vary, separate classes must be created so that the different number of votes can be attached to the shares themselves, and not to holder. This is to separate control from financial interest on capital return.

● FACTS: Union Canso Oil passed a bylaw that shareholders could only vote for up to 1000 shares, no matter how many shares they held. Jacobsen, who had more than 1000 shares, brought an action to find out if the law was in violation.

● ISSUE/HOLDING: Was the bylaw filed in accordance with the Companies Act? NO. Is the principle of equality mandatory or default (can it be contracted around?) It’s mandatory within a class of shares, to the extent that you can’t limit a shareholder’s voting power to less than the amount of shares they hold. It’s default to the extent that…

● ANALYSIS: SH have equal rights and equal liabilities. Three rights: dividends, return on capital and voting. Unless indicated, shares will have rights to all 3.

○ To trump the presumption, you have to issue different classes of shares, which have different kinds of voting. Voting can be contingent on types of shares, not on the shareholder themselves.

■ In Bushell v. Faith, the law upheld a bylaw that allowed the director who was being voted out to triple their shares - making it impossible to remove the director.

■ This current case goes against Bushell ■ But the rule should be different for open and closed

corporations ■ All shares within a class are equal = mandatory rule ■ All shares are equal = default rule (b/c you can create

different classes of shares)

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■ The court is trying to make everyone more equal

Why have rules for classes of shares and max voting? ● Transferability of shares

○ Enhances liquidity ○ Facilitates portfolio diversification

Securities law - regulation of voting (provincial) ● Detailed information must be disclosed to shareholdings (security law

course) ○ Proxy statement ○ 50-200 pages

● Highly regulated ● SEC reviews, comments on, and approves

Brown v. Duby (1980 ON) The test for solicitation of proxies = “taking a properly realistic view, is there a substantial likelihood that the misstatement or omission may have lead a stockholder to grant a proxy to the solicitor or to withhold one from the other side, whereas in the absence of this he would have taken a contrary course”.

● FACTS: Committee of shareholders (aka dissident shareholders) of United Canso Oil (huge canadian company) dissented on the general direction of the corporation and sent two letters: (1) to all shareholders in the US and (2) to all shareholders period. Canso issued an injunction to stop shareholders from having a proxy contest (when a minority shareholder solicits other minority shareholders via a proxy circular (AKA a letter) to get their voting rights to start a contested election of a board). Plaintiff accused the shareholder committee of solicitation of proxy, a violation of the CBCA.

● ISSUE/HOLDING: Did the proxy letters breach the CBCA? YES. ● ANALYSIS: Plaintiffs argued that this was a solicitation; defendants said

it was just a call to vote, not a proxy. Court says the first proxy letter was not a solicitation, but it was a request to go to the meeting to elect and not delegate their vote to management.

■ Telling someone not to give a proxy is a proxy ! ○ CBCA requirements apply to all shareholders regardless of what

country they are in.○ Sending a letter asking shareholders not to sign management

proxies and instead consider other information = soliciting a proxy. This was held even though the letter stated that they were not requesting proxies at the time.

■ Basically, no letter should engage a “proxy contest”.

■ Here, the letter was critical of management. Shareholders are allowed to discuss this, as long as it does not engage an active proxy contest.

CBCA 147 - In this Part, form of proxy means a written or printed form that, on completion and execution or, in Quebec, on signing by or on behalf of a shareholder, becomes a proxy; (formulaire de procuration)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. (intermédiaire)

proxy means a completed and executed or, in Quebec, signed form of proxy by means of which a shareholder appoints a proxy holder to attend and act on the shareholder’s behalf at a meeting of shareholders; (procuration)

Shareholder Meetings: 2 Types1. Annual - CBCA 106(3)

● Appointment of auditors); Presentation of financial statements and auditor reports; Anything else

2. Special - CBCA 133(2) ○ Fundamental changes that arise between meetings - mergers,

change of jurisdiction, etc.

CBCA 106(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

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annual meeting of shareholders following the election.

CBCA 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.(2) The directors of a corporation may at any time call a special meeting of shareholders.

CBCA 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.

Unanimous Shareholder Resolutions Eisenberg v. Bank of Nova Scotia (1965 SCC) A corporation can’t deny a transaction to which all the shareholders have given their assent, even when it is given in an informal manner or by conduct distinguished from a formal resolution at a duly convened meeting. CBCA s142 allows for unanimous shareholder resolutions, but doesn’t go as far as the rule here which allows for shareholders to give assent through informal manner or by conduct.

● FACTS: E was the trustee in bankruptcy of the corporation and brought the action to recover from the bank certain sums realized by the bank from assets which the said company had pledged to the bank as security for a loan to two brothers (one being the president/director). The president/director was also the sole shareholder and he instigated the loan. There was no shareholders’/directors’ meeting.

● ISSUE/HOLDING: Can shareholders approve of ultra vires transactions? YES.

● ANALYSIS: There was unanimous authorization by shareholders for these transactions. Acquiescence or conduct is enough for shareholder agreement. It is implied that the result of any shareholders’ meeting would be that the president would approve of this loan since he is the one who instigated it.

CBCA 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.

● AKA - As long as you have a written signed agreement by shareholders, the decision is valid

Is Eisenberg still good law in light of CBCA 142(1)? ● Two ways to look at this:

a. Reasoning by analogy - if the statute said X, it must have implied Y (for similar situations not expressly legislated for)

b. A contrario sensus - the statute is specific for a reason● In our textbook, authors say it is still good law - when you don’t satisfy

CBCA requirements, you can still use Eisenberg to support your non-written resolution - up for interpretation, though.

The Use of Directors’ Powers in Relation to Meetings Schnell v. Chris-Craft Industries Inc. (1971 SC Delaware) Board can’t abuse director powers to avoid the election of new directors by shareholders.

● FACTS: Minority shareholders of Chris-Craft wage a proxy contest to elect new directors at the next annual meeting, scheduled in the bylaws for January 11, 1972. The directors employed various tactics to make the contest more difficult for the dissidents. They refused to turn over their list of shareholders and hired proxy solicitors to work on their behalf. At the October 18, 1971 board meeting, the directors invoked a new provision of the Delaware Corporate Law to advance the date of the annual meeting by a month, to December 8, 1971. This change made it virtually impossible for the dissident shareholders to wage a successful proxy contest to unseat the incumbent directors. The dissident shareholders petitioned the court to enjoin the board from changing the meeting date. The trial court denied the petition, and the shareholders appealed. Management modifies the bylaws so that it can happen anytime in December or January so that they can have the meeting in early December and stop the proxy fight.

● ISSUE/HOLDING: Was management’s move of the meeting valid? NO.

● ANALYSIS: The change by the managers is in blatantly bad faith (they blamed it on the weather, lol). They wanted to keep themselves in office,

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obviously. Though technically legal, they did so for “inequitable purposes”.

NOTE: small difference in the amount of time you have to move a meeting between QBCA and CBCA. CC could have argued the biz judgement rule; but probably wouldn’t have succeeded. Duty of loyalty isn’t as easy to win.

The Conduct of Meetings and the Right of Discussion CBCA 137(1)(b) - 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.

● NOTE: non-voting shareholders have no voice or vote, thus no right to attend meetings, discuss, or ask questions

● To elect a director, you need at least 5% of the voting class of shares (not total shares, but shares of your voting class)

Blair v. Consolidated Enfield Corp. (1993 SCC) Establishes a right to discussion for all meetings, not just annual meetings (contradicts the CBCA’s right to discussion in annual meetings only).

● FACTS: B was the director, CEO and substantial shareholder in CEC. Canadian Express was the largest shareholder in CEC. At the annual shareholders’ meeting, CE nominated Timothy Price as director and its proxy-holders voted for Price. B declared that proxy votes invalid b/c Enfield’s lawyers told him that the form of proxy used only gave proxy-holders discretion to vote for the management slate. A rep of CE asked for the floor and B denied him the right to speak.

● PH: CE sued Blair and Enfield for a declaration that Price had been validly elected as director; the ON High Court ruled that Price was validly the director and that B had failed to accord dissenting shareholders the right to be heard. Blair asked for Enfield to indemnify him for his costs and they refused, so he sued. The judge ruled that Blair was not entitled to indemnity under s.136 OBCA; Blair appealed.

● ISSUE/HOLDING: was Blair’s conduct as Chair of the shareholders’ meeting proper? YES. Is Blair entitled to indemnity from CE under s.136 OBCA? YES.

● ANALYSIS: Best interest of the corp in this case is about the integrity of the voting procedure and validity of corporate acts of the directors following the vote, not the election of a given director

○ If Blair was acting in the corp’s best interests, he would have given CE reps the chance to correct the proxies or make representations

○ Legal advice alone does not sanctify conduct as being in good faith re: best interests of the company

○ The duty of fairness of the chair of a shareholders’ meeting extends to all shareholders, not just the ones present to vote

Shareholder Proposals ● AKA a proposal for a publicly-traded company to take a certain course of

action, submitted by a shareholder > shareholders ask the company to include item for shareholder vote in meeting

● Company pays the printing/mailing cost - sent in proxy circular ● Shareholders can:

○ Amend articles of incorporation○ Amend bylaws ○ Nominate directors ○ Propose action - put public pressure on management ○ Topica can include political/social issues, internal governance

issues, etc.● Requirements: must hold shares; 500 word limit

Does management have to say yes to the proposal? ● Exclusions: “that does not relate in a significant way to biz or affairs of

corp” (CBCA 137(5)(B.1) ● Could evoke BJR to exclude a shareholder proposal

○ “I’m doing this to maximize shareholder value” - manager is tasked with the long-term health of company

Process 1. Shareholder proposes to company 2. Company accepts or refuses 3. If company refuses, must notify SEC

a. If SEC agrees - no action letter; shareholder can seek injunction b. If SEC disagrees, notifies company to include proposal

CBCA 137(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

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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 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.

Varity Corp v. Jesuit Fathers of Upper Canada (1987 ON C.A.) Shareholder proposals cannot be brought for general purposes, i.e. to end apartheid. Can be brought as a separate claim, not as a shareholder proposal.

● FACTS: JFUC owned shares in Canadian Corp. V. They submitted a proposal asking V to limit its business in South Africa (due to apartheid). V refused to push forward the proposal under old CBCA exception 131(5)(b) - “if it clearly appears the proposal is submitted...primarily to promote economic, racial, etc. provisions.”

○ Now, this provision is CBCA 137(5) ● ISSUE/HOLDING: Is the proposal’s aim simply to aid in the end of

apartheid? YES. Was V justified in refusing the proposal? YES. ● ANALYSIS: The purpose of the proposal is general, but related to

specific business of V’s in SA. However, court said it could not ignore the general purpose of the proposal - to end or encourage the end of apartheid.

○ Jesuits agued apartheid created an unstable biz environment environment - Court disagreed, saying that the leg makes it clear that if the purpose is listed, which is was, that a corporation can refuse the proposal

○ Claim can be brought separately, but not as a shareholder proposal

Would this be decided differently under the new CBCA? ● Maybe not but it is easier to argue for sure

Impact of shareholder ownership

● Supporting short-term shareholder value (maximizing value of shares) = shareholder ownership = reduces weight of other stakeholders’ positions

● In this case, however, no clear corporate stakeholders are being harmed - it’s not about wider stakeholder interests!

● Shareholder ownership -- Shareholders can do what they want, so if they don’t want this co to operate in SA anymore, they should be allowed

Shareholder-Requisitioned Meetings ● Directors and shareholder with >5% shares can call meetings

CBCA 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.(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.(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 in the requisition includes matters described in paragraphs 137(5)(b) to (e).(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

Airline Industry Revitalization Co. v. Air Canada (1999 ON SCJ) Upholds CBCA 143-144 re: shareholders’ rights to call a meeting.

● FACTS: AIR Co. wanted to take over AC and acquired 3.1% of its common shares and 6.6% of class A non-voting shares. AC called a special shareholders’ meeting in January 2000 where AIRCo and other shareholders comprising over 5% of AC’s shares requisitioned the Board to call a special meeting to approve the takeover bid. Federal gov’t

● ISSUE/HOLDINGS: Does the board have a duty to call a meeting under the CBCA? NO. Can AIRCo + the other shareholders call a meeting? YES. Should the court call a meeting? NO.

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● ANALYSIS: Plaintiffs argue this should be discussed at a general meeting; CBCA points to shareholders who can vote at a general meeting.

○ See: CBCA 143(3) and (4) ○ Shareholders shouldn’t file an injunction for directors to call a

meeting - they should call one themselves

Judicially Ordered MeetingsCourts can order meetings if (a) it’s impractical for any other person to call the meeting; (b) it is impracticable to conduct the meeting according to the CBCA and bylaws or (c) any other reason. Impracticable = technical reason like quorum, or a reflection of dispute over control

● Serves as another monitoring mechanism

CBCA 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.

Canadian Javelin Ltd. v. Boon-Strachan Coal Co. (1976 QC S.C.) To determine if a meeting should be judicially ordered, the court will “examine the circumstances of the particular case and answer the question whether, as a practical matter, the desired meeting of the company can be conducted, there being no doubt that it can be convened and held.”

● FACTS: John Doyle was the owner of 18% CJL stock. He was the director + its driving management since its founding in 1951. Another faction of management alleged he had offered to resign if other directors decided his presence was detrimental at a meeting in 1976. At a director’s meeting later that year at which Doyle wasn’t present, they accepted his offer to resign. At another meeting they appointed new directors and officers. As a result, the bank terminated their line of credit. BSCC, a shareholder of CJL and owned by Doyle, requested that the court order a general special meeting of shareholders.

● ISSUE/HOLDING: Can/should the court order a meeting? YES.

● ANALYSIS: These moves were clearly not in best interest of the company; directors need to act in a fiduciary capacity, not oust people/take control of the company for their own personal benefit.

○ CJL claims the financial reports aren’t ready - that’s not a good reason not to hold a shareholder meeting!

○ Impracticable does not mean impossible ○ TEST: “examine the circumstances of the particular case and

answer the question whether, as a practical matter, the desired meeting of the company can be conducted, there being no doubt that it can be convened and held.”

○ Courts should order meetings of the shareholders so that the will of the shareholders or the majority can be ascertained

○ Evidence here shows it is urgent that a general meeting be called to stop any damage to the company

○ The company will be in default if they don’t call a meeting by June 1976, and don’t seem to be preparing proxy materials or anything for a meeting

○ It’s in the best interest of the company to give a clear mandate to those people whom the shareholders want to manage the com

Goodwood Inc. v. Cathay Forest Products Corp. (2012 ON SCJ) Courts can order a shareholder meeting in “extraordinary circumstances”, like when a board has so obviously messed up their responsibilities.

● FACTS: Directors of Cathay failed to hold an annual meeting and failed to comply with ON Securities Act continuous disclosure reqs. There was also lack of quorum on the board and an insufficient # of resident Canadian directors. Because of all this, 10 of the largest shareholders sought a court order directing the holding of a shareholder meeting.

● ISSUE/HOLDING: Should the court order a shareholder meeting, or leave it to the shareholders to call on? Court ordered.

● ANALYSIS: Applicant can call a shareholder meeting for two reasons: (1) Current directors have failed to call a special meeting of shareholders to meet board quorum requirements as required by CBCA s.111(2) Shareholders have launched a requisition with the board under CBCA s.143(1) and it’s clear the board has no intention of responding by calling a meeting

○ This is an extraordinary circumstance justifying a court order■ Cathay lacks a board with authority to manage or

supervise the management of the corp (dysfunctional state of affairs)

■ Cathay’s chair characterized the efforts by the shareholders to call a meeting as “bad faith conduct” and the remaining directors tried to fill the board

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vacancies without calling a meeting so they clearly don’t understand their corporate governance duties

○ Order to call a meeting ot Cathay shareholders to elect up to 7 board members

Shareholder rights: good faith and oversight Shareholder rights = Voting, selling shares, oversight, (dividends - only when directors distribute them)

Right to Corporate Info: Access to Corporate Records ● includes: bylaws, resolutions, register of member, mortgages, minutes of

general meetings (See CBCA 20-22) ○ NOTE: Non-voting shareholders still have right to access

information● Statutes require corps to keep specific records and allow access to them

by shareholders and other designated persons and includes provisions which:

○ Give shareholders the right to inspect company records ○ Allow specified numbers of shareholders to requisition general

meetings and circulate proposals ○ Require disclosure of financial and insider trading info ○ Give the right to have inspectors and auditors appointed to

investigate the corp’s affairs ● Disclosure has been described as “the fundamental principle underlying

the Companies Act” ● Info allows shareholders/securities market to evaluate the enterprise and

make informed decisions about investing in the company; it also allows them to evaluate the directors and officers’ performance and to exercise their rights in holding them accountable for their actions

● Company’s directors also have CML and statutory rights to inspect the company’s books

CBCA 19. (1) A corporation shall at all times have a registered office in the province in Canada specified in its articles.(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.(3) The directors of a corporation may change the place and address of the registered office within the province specified in the articles.(4) A corporation shall send to the Director, within fifteen days of any change of address of its registered office, a notice in the form that the Director fixes and the Director shall file it.

CBCA 20 (1) A corporation shall prepare and maintain, at its registered office or at any other place in Canada designated by the directors, records containing(a) the articles and the by-laws, and all amendments thereto, and a copy of any unanimous shareholder agreement;(b) minutes of meetings and resolutions of shareholders;(c) copies of all notices required by section 106 or 113; and(d) a securities register that complies with section 50.(2) In addition to the records described in subsection (1), a corporation shall prepare and maintain adequate accounting records and records containing minutes of meetings and resolutions of the directors and any committee thereof.(2.1) Subject to any other Act of Parliament and to any Act of the legislature of a province that provides for a longer retention period, a corporation shall retain the accounting records referred to in subsection (2) for a period of six years after the end of the financial year to which the records relate.(3) For the purposes of paragraph (1)(b) and subsection (2), where a body corporate is continued under this Act, “records” includes similar records required by law to be maintained by the body corporate before it was so continued.(4) The records described in subsection (2) shall be kept at the registered office of the corporation or at such other place as the directors think fit and shall at all reasonable times be open to inspection by the directors.(5) If accounting records of a corporation are kept outside Canada, accounting records adequate to enable the directors to ascertain the financial position of the corporation with reasonable accuracy on a quarterly basis shall be kept at the registered office or any other place in Canada designated by the directors.(5.1) Despite subsections (1) and (5), but subject to the Income Tax Act, the Excise Tax Act, the Customs Act and any other Act administered by the Minister of National Revenue, a corporation may keep all or any of its corporate records and accounting records referred to in subsection (1) or (2) at a place outside Canada, if(a) the records are available for inspection, by means of a computer terminal or other technology, during regular office hours at the registered office or any other place in Canada designated by the directors; and(b) the corporation provides the technical assistance to facilitate an inspection referred to in paragraph (a).(6) A corporation that, without reasonable cause, fails to comply with this section is guilty of an offence and liable on summary conviction to a fine not exceeding five thousand dollars.

CBCA 21 (1) Subject to subsection (1.1), shareholders and creditors of a corporation, their personal representatives and the Director may examine the records described in subsection 20(1) during the usual business hours of the corporation, and may take extracts from the records, free of charge, and, if the corporation is a distributing corporation, any other person may do so on payment

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of a reasonable fee.(1.1) Any person described in subsection (1) who wishes to examine the securities register of a distributing corporation must first make a request to the corporation or its agent or mandatary, accompanied by an affidavit referred to in subsection (7). On receipt of the affidavit, the corporation or its agent or mandatary shall allow the applicant access to the securities register during the corporation’s usual business hours, and, on payment of a reasonable fee, provide the applicant with an extract from the securities register.(2) A shareholder of a corporation is entitled on request and without charge to one copy of the articles and by-laws and of any unanimous shareholder agreement.(3) Shareholders and creditors of a corporation, their personal representatives, the Director and, if the corporation is a distributing corporation, any other person, on payment of a reasonable fee and on sending to a corporation or its agent or mandatary the affidavit referred to in subsection (7), may on application require the corporation or its agent or mandatary to provide within 10 days after the receipt of the affidavit a list (in this section referred to as the “basic list”) made up to a date not more than 10 days before the date of receipt of the affidavit setting out the names of the shareholders of the corporation, the number of shares owned by each shareholder and the address of each shareholder as shown on the records of the corporation.(4) A person requiring a corporation to provide a basic list may, by stating in the affidavit referred to in subsection (3) that they require supplemental lists, require the corporation or its agent or mandatary on payment of a reasonable fee to provide supplemental lists setting out any changes from the basic list in the names or addresses of the shareholders and the number of shares owned by each shareholder for each business day following the date the basic list is made up to.(5) The corporation or its agent or mandatary shall provide a supplemental list required under subsection (4)(a) on the date the basic list is furnished, where the information relates to changes that took place prior to that date; and(b) on the business day following the day to which the supplemental list relates, where the information relates to changes that take place on or after the date the basic list is furnished.(6) A person requiring a corporation to furnish a basic list or a supplemental list may also require the corporation to include in that list the name and address of any known holder of an option or right to acquire shares of the corporation.(7) The affidavit required under subsection (1.1) or (3) shall state(a) the name and address of the applicant;(b) the name and address for service of the body corporate, if the applicant is a body corporate; and(c) that the basic list and any supplemental lists obtained pursuant to subsection (4) or the information contained in the securities register obtained pursuant to

subsection (1.1), as the case may be, will not be used except as permitted under subsection (9).(8) If the applicant is a body corporate, the affidavit shall be made by a director or officer of the body corporate.(9) A list of shareholders or information from a securities register obtained under this section shall not be used by any person except in connection with(a) an effort to influence the voting of shareholders of the corporation;(b) an offer to acquire securities of the corporation; or(c) any other matter relating to the affairs of the corporation.(10) A person who, without reasonable cause, contravenes 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.

CBCA 22 (1) All registers and other records required by this Act to be prepared and maintained may be in a bound or loose-leaf form or in a photographic film form, or may be entered or recorded by any system of mechanical or electronic data processing or any other information storage device that is capable of reproducing any required information in intelligible written form within a reasonable time.(2) A corporation or its agents or mandataries shall take reasonable precautions to(a) prevent loss or destruction of,(b) prevent falsification of entries in, and(c) facilitate detection and correction of inaccuracies in the registers and other records required by this Act to be prepared and maintained.(3) A person who, without reasonable cause, contravenes 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.

CBCA 138 (1) A corporation shall prepare an alphabetical list of its shareholders entitled to receive notice of a meeting, showing the number of shares held by each shareholder,(a) if a record date is fixed under paragraph 134(1)(c), not later than ten days after that date; or(b) if no record date is fixed, on the record date established under paragraph 134(2)(a).(2) If a record date for voting is fixed under paragraph 134(1)(d), the corporation shall prepare, no later than ten days after the record date, an alphabetical list of shareholders entitled to vote as of the record date at a meeting of shareholders that shows the number of shares held by each shareholder.(3) If a record date for voting is not fixed under paragraph 134(1)(d), the corporation shall prepare, not later than 10 days after the record date that is fixed under paragraph 134(1)(c) or not later than the record date that is established under paragraph 134(2)(a), as the case may be, an alphabetical list of shareholders who are

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entitled to vote as of the record date that shows the number of shares held by each shareholder.(3.1) A shareholder whose name appears on a list prepared under subsection (2) or (3) is entitled to vote the shares shown opposite their name at the meeting to which the list relates.(4) A shareholder may examine the list of shareholders(a) during usual business hours at the registered office of the corporation or at the place where its central securities register is maintained; and(b) at the meeting of shareholders for which the list was prepared.

OBCA 139. (1) Where this Act requires a record to be kept by a corporation, it may be kept in a bound or looseleaf book or may be entered or recorded by any system of mechanical or electronic data processing or any other information storage device. R.S.O. 1990, c. B.16, s. 139 (1).(2) The corporation shall,(a) take adequate precautions, appropriate to the means used, for guarding against the risk of falsifying the information recorded; and(b) provide means for making the information available in an accurate and intelligible form within a reasonable time to any person lawfully entitled to examine the records. R.S.O. 1990, c. B.16, s. 139 (2).(3) The bound or looseleaf book or, where the record is not kept in a bound or looseleaf book, the information in the form in which it is made available under clause (2) (b) is admissible in evidence as proof, in the absence of evidence to the contrary, of all facts stated therein, before and after dissolution of the corporation. R.S.O. 1990, c. B.16, s. 139 (3).(3.1) Subsection (3) does not apply to the register described in clause 140 (1) (e).(4) No person shall remove, withhold or destroy information required by this Act or the regulations to be recorded, or,(a) record or assist in recording any information in a record; or(b) make information purporting to be accurate available in a form referred to in clause (2) (b),knowing it to be untrue.

OBCA 140 (1) A corporation shall prepare and maintain, at its registered office or at such other place in Ontario designated by the directors,(a) the articles and the by-laws and all amendments thereto, and a copy of any unanimous shareholder agreement known to the directors;(b) minutes of meetings and resolutions of shareholders;(c) a register of directors in which are set out the names and residence addresses, while directors, including the street and number, if any, of all persons who are or have been directors of the corporation with the several dates on which each became or ceased to be a director;

(d) a securities register complying with section 141; and(e) a register of ownership interests in land complying with section 140.1.(2) In addition to the records described in subsection (1), a corporation shall prepare and maintain,(a) adequate accounting records; and(b) records containing minutes of meetings and resolutions of the directors and any committee thereof,but, provided the retention requirements of any taxing authority of Ontario, the government of Canada or any other jurisdiction to which the corporation is subject have been satisfied, the accounting records mentioned in clause (a) need only be retained by the corporation for six years from the end of the last fiscal period to which they relate. (3) For the purposes of clause (1) (b) and subsection (2), where a body corporate is continued under this Act, “records” includes similar records required by law to be maintained by the body corporate before it was so continued. (4) If a corporation is incorporated or continued under this Act or a predecessor of it before the day section 2 of the Forfeited Corporate Property Act, 2015 comes into force, clause (1) (e) applies to the corporation on and after the second anniversary of the coming into force of that section, in respect of its ownership interests in land on and after that second anniversary.(5) If a corporation is incorporated or continued under this Act on or after the day section 2 of the Forfeited Corporate Property Act, 2015 comes into force, clause (1) (e) applies to the corporation on and after the day it is incorporated or continued, in respect of its ownership interests in land on and after the day it is incorporated or continued. 2015, c. 38, Sched. 7, s. 44 (3).

OBCA 140.1 (1) A corporation shall prepare and maintain at its registered office a register of its ownership interests in land in Ontario.(2) The register shall,(a) identify each property; and(b) show the date the corporation acquired the property and, if applicable, the date the corporation disposed of it. 2015, c. 38, Sched. 7, s. 44 (4).(3) The corporation shall cause to be kept with the register a copy of any deeds, transfers or similar documents that contain any of the following with respect to each property listed in the register:1. The municipal address, if any.2. The registry or land titles division and the property identifier number.3. The legal description.4. The assessment roll number, if any. 2015, c. 38, Sched. 7, s. 44 (4).

OBCA 141 (1) A corporation shall prepare and maintain at its registered office, or at any other place in Ontario designated by the directors, a securities register in

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which it records the securities issued by it in registered form, showing with respect to each class or series of securities,(a) the names, alphabetically arranged of persons who,(i) are or have been within six years registered as shareholders of the corporation, the address including the street and number, if any, and an e-mail address if one is provided, of every such person while a holder, and the number and class of shares registered in the name of such holder,(ii) are or have been within six years registered as holders of debt obligations of the corporation, the address including the street and number, if any, and an e-mail address if one is provided, of every such person while a holder, and the class or series and principal amount of the debt obligations registered in the name of such holder, or(iii) are or have been within six years registered as holders of warrants of the corporation, other than warrants exercisable within one year from the date of issue, the address including the street and number, if any, and an e-mail address if one is provided, of every such person while a registered holder, and the class or series and number of warrants registered in the name of such holder; and(b) the date and particulars of the issue of each security and warrant. (2) A corporation shall cause to be kept a register of transfers in which all transfers of securities issued by the corporation in registered form and the date and other particulars of each transfer shall be set out.

OBCA 142. For each class of securities and warrants issued by it, a corporation may appoint,(a) a trustee, transfer agent or other agent to keep the securities register and the register of transfers and one or more persons or agents to keep branch registers; and(b) a registrar, trustee or agent to maintain a record of issued security certificates and warrants,and, subject to section 48, one person may be appointed for the purposes of both clauses (a) and (b) in respect of all securities and warrants of the corporation or any class or classes thereof. R.S.O. 1990, c. B.16, s. 142.

OBCA 143 (1) The securities register and the register of transfers shall be kept at the registered office of a corporation or at such other places in Ontario designated by the directors, and the branch register or registers of transfers may be kept at such offices of the corporation or other places, either within or outside Ontario, designated by the directors. (2) Registration of the transfer of a security or warrant of a corporation in the register of transfers or a branch register of transfers is a complete and valid registration for all purposes. R.S.O. 1990, c. B.16, s. 143 (2).(3) In each branch register of transfers there shall be recorded only the particulars

of the transfers of securities or warrants registered in that branch register of transfers. (4) Particulars of every transfer of securities and warrants registered in every branch register of transfers shall be recorded in the register of transfers. (5) A corporation or a person appointed under section 142 is not required to produce,(a) any security certificate or warrant that is not in registered form; or(b) any security certificate or warrant that is in registered form after six years,

(i) in the case of a share certificate, from the date of its cancellation,(ii) in the case of a warrant, from the date of its transfer or exercise, whichever occurs first, or(iii) in the case of a certificate representing a debt obligation, from the date of cancellation of such certificate.

OBCA 144 (1) The records mentioned in sections 140 and 141 shall, during normal business hours of a corporation, be open to examination by any director and shall, except as provided in sections 140 and 143 and in subsections (2) and (3) of this section, be kept at the registered office of the corporation. (2) A corporation may keep at any place where it carries on business such parts of the accounting records as relate to the operations, business and assets and liabilities of the corporation carried on, supervised or accounted for at such place, but there shall be kept at the registered office of the corporation or such other place as is authorized under this section such records as will enable the directors to ascertain quarterly with reasonable accuracy the financial position of the corporation. (3) A corporation may keep all or any of the records mentioned in subsection (1) at a place other than the registered office of the corporation if the records are available for inspection during regular office hours at the registered office by means of a computer terminal or other electronic technology. (4) The Director may by order upon such terms as the Director thinks fit rescind any order made under subsection (3) or any order made by the Lieutenant Governor in Council or the Minister under a predecessor of that subsection.

OBCA 145 (1) Registered holders of shares, beneficial owners of shares and creditors of a corporation, their agents and legal representatives may examine the records referred to in subsection 140 (1) during the usual business hours of the corporation, and may take extracts from those records, free of charge, and, if the corporation is an offering corporation, any other person may do so upon payment of a reasonable fee. (2) A registered holder or beneficial owner of shares of a corporation is entitled upon request and without charge to one copy of the articles and by-laws and of any unanimous shareholder agreement.

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OBCA 146 (1) Registered holders, beneficial owners of shares and creditors of a corporation, their agents and legal representatives and, if the corporation is an offering corporation, any other person, upon payment of a reasonable fee and upon sending to the corporation or its transfer agent the statutory declaration referred to in subsection (6), may require the corporation or its transfer agent to furnish a basic list setting out the names of the registered holders of shares of the corporation, the number of shares of each class and series owned by each registered holder and the address of each of them, all as shown on the records of the corporation. (2) The basic list referred to in subsection (1) shall be furnished to the applicant as soon as is practicable and, when furnished, shall be as current as is practicable having regard to the form in which the securities register of the corporation is maintained, but, in any case, shall be furnished not more than ten days following the receipt by the corporation or its transfer agent of the statutory declaration referred to in subsection (1) and shall be made up to a date not more than ten days before the date on which it is actually furnished. (3) A person requiring a corporation to supply a basic list may, if the person states in the statutory declaration referred to in subsection (1) that the person requires supplemental lists, require the corporation or its agent upon payment of a reasonable fee to furnish supplemental lists setting out any changes from the basic list in the names or addresses of the registered holders of the corporation’s shares and the number of shares owned by each registered holder for each business day following the date to which the basic list is made up. (4) The corporation or its agent shall furnish a supplemental list required under subsection (3),(a) on the date the basic list is furnished, where the information relates to changes that took place prior to that date; and(b) on the business day following the day to which the supplemental list relates, where the information relates to changes that take place on or after the date the basic list is furnished. (5) A person requiring a corporation to supply a basic or supplemental list may also require the corporation to include in that list the name and address of any known holder of an option or right to acquire shares of the corporation. (6) The statutory declaration required under subsection (1) shall state,(a) the name and address including the street and number, if any, of the applicant and whether the applicant is a registered holder, beneficial owner, creditor or any other person referred to in the subsection;(b) the name and address including street and number, if any, for service of the body corporate if the applicant is a body corporate; and(c) that the basic list and any supplemental lists shall be used only as permitted under subsection (8). (7) If the applicant is a body corporate, the statutory declaration shall be made by a

director or officer of the body corporate. R.S.O. 1990, c. B.16, s. 146 (7).(8) A list of registered holders obtained under this section shall not be used by any person except in connection with,(a) an effort to influence the voting by registered holders of the corporation;(b) an offer to acquire shares of the corporation; or(c) any other matter relating to the affairs of the corporation. 146.1 (1) Before providing a document referred to in sections 145 or 146 to a person who claims to be a beneficial owner of shares of the corporation, a corporation may require the person to provide proof that the person is a beneficial owner. (2) A written statement by a securities intermediary, as defined in the Securities Transfer Act, 2006, that a person is a beneficial owner is sufficient proof for the purposes of subsection (1).

OBCA 147 No person shall offer for sale or sell or purchase or otherwise traffic in a list or a copy of a list of all or any of the holders of securities or warrants of a corporation.

Right to Appoint an Auditor ● An audit is an annual assessment of the accuracy of a corps financial

statements● Auditor has a right to access records, attend meetings, ask for

explanations etc. ● Shareholders can replace the auditor ● Auditing is a mandatory provision - exception is non-publicly traded corps

(CBCA 163) ○ Law makes mandatory laws to prevent harm / symmetry for

power // Auditor’s job - CBCA 170

Auditor’s liability for misstatements ● Standard of care: reasonable cautious and/or competent auditor ● The bylaws can change that standard, however ● Duties are NOT actually owed to the shareholders

If a corp refuses to allow shareholders to appoint an auditor, shareholders can apply to the court to appoint one regardless of the corp’s financial circumstances (Merrill v. Afab Security, Li v. Global Chinese Press)

● Some companies don’t require auditors - i.e. those that are non-reporting or those where revenues don’t exceed certain limits, or both

○ Iacobucci and co. argue the exemption should not be widely available - the requirement encourages compliance with statutory regs, checks corporate mismanagement, etc.

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Eligibility + Functions ● All auditors must be independent ● Auditors must make such examinations as will enable them to report on

the financial statements on an annual basis○ auditors can demand access to info, attend meetings, etc. ○ auditors must report statements consistent with generally

accepted accounting principles, attend shareholder meetings and other questions, etc.

■ A director or shareholder has the right to order an auditor to attend a meeting

■ Auditor duties can also be enforced by application to a court

Removal Two ways to remove an auditor:

1. An interested party may apply to the court for an order to disqualify or remove the auditor

2. Shareholders may pass an ordinary resolution at a special or general meetings which has been called for the purpose of removing the auditor

● If corp is reporting, notice of removal must be given in the info circular with the name of management’s new nominee placed in the proxy form

○ Protects the independence of the auditor by allowing them to offer an explanation to the shareholders re: his replacement

Oversight ● Done by the Canadian Public Accountability board● All public accounting firms that issue auditors’ reports re: reporting

issuers’ financial statements must enter into an agreement with CPAB ● Firms found not to be in good standing are prohibited from issuing

auditors’ reports

Liability of Auditors (Iacobucci et al.) ● No standard of care or duty of skill is specified in Acts which impose

duties on an auditor; Case law is still developing○ Hedley Byrne - relationship between the parties must be

"sufficiently proximate" as to create a duty of care○ “If there is anything calculated to excite suspicion the auditor

should probe it to the bottom; but in the absence of anything suspicious the auditor is only bound to be reasonably cautious and careful.” (Re Kingston Cotton Mill Co No. 2)

○ “An auditor’s vital task is to take care to see that errors are not made, be they errors of computation, or errors of omission or commission, or downright untruths. To perform this task

properly, he must come to it with an inquiring mind — not suspicious of dishonesty — but suspecting that someone may have made a mistake somewhere.” (Lord Denning in obiter of Formento (Sterling Area))

○ Complexities and changes to modern corporations mean that an auditor now has more responsibility (SCC, obiter of Dickson J. in Haig v. Bamford)

○ NOTE: case law has not established that an auditor is under the obligation to examine the reliability of the statements on which they report absent any suspicious circumstances

● Standard of care for an auditor may be specified in the company’s articles or the contract - otherwise CML governs

● Traditionally, auditors are required to only be watchdogs - i.e. not to dig for information but to assume the servants of the company are acting in good faith

Livent Inc. (Receiver of) v. Deloitte and Touche (2016 ONCA) Auditors may be subject to a higher standard of care than that of a “reasonably cautious and competent accountant” in relation to complex and high risk audits.

● FACTS: Livent developed high-profile theater. New management found out that the owners (Drabinsky and Gottleib) were manipulating the financial books and records to inflate earnings so they could attract more investment in capital markets. They filed for bankruptcy and assets were sold for US$144 million. D and G were convicted of fraud and jailed. Deloitte was Livent’s auditor from 1989 to 1998 when the fraud was discovered. Deloitte issued clean audited financial statements the whole time. The receiver of the insolvency sued Deloitte for damages in K and negligence.

● ISSUE/HOLDING: Can Deloitte be held liable for Livent’s fraud? YES.

● ANALYSIS: Professional skepticism was required here; you’re not there to accommodate management’s needs as an accountant.

○ Deloitte was governed by the CICA Handbook and ICAO handbook - according to SCC “rules set by a self-governing body are of guiding importances in determining the nature of the duties flowing from a particular professional relationship”

○ CICA Handbook says that assuming management’s good faith is a fundamental auditing posture “in the absence of evidence to the contrary” -- audits should be approached with professional skepticism

○ Auditors are also responsible for detecting material misstatements AKA errors or fraud and other irregularities

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■ Fraud is very difficult to detect, but proper auditing procedures must be in place to reduce the risk of missing fraud

○ In high risk assessments like this, you need heightened audit procedures providing more reliable evidence and the use of personnel with more experience/training

○ Suspicions must be probed “to the bottom” ○ Deloitte was “too accommodating” -- i.e. when they warned G

not to add $6 million in revenue in a Q2 statement and he did it anyway, they didn’t take action even though they threatened to

● NOTE: the court wanted a higher standard for high risk assessments because there is a greater risk of harm to third parties

Evaluation● Accounting’s broad principles provide too much discretion and allow

management to posture (Puri) ● Management controls who the accountant is and when they’re dismissed ● Post Enron and Worldcom, US Congress passed laws requiring the SEC

to strengthen its auditing rules ○ Canadian reform mirrored this but relies on a self-regulatory

model as opposed to gov’t regs● Large or widely held corporations must appoint an independent audit

committee to review the company’s financial statements before they’re signed by directors

○ Level of independence is prescribed by provincial law

CBCA 155 (1) The directors of a corporation shall place before the shareholders at every annual meeting(a) prescribed comparative financial statements that conform to any prescribed requirements and relate separately to(i) the period that began on the date the corporation came into existence and ended not more than six months before the annual meeting or, if the corporation has completed a financial year, the period that began immediately after the end of the last completed financial year and ended not more than six months before the annual meeting, and(ii) the immediately preceding financial year;(b) the report of the auditor, if any; and(c) any further information respecting the financial position of the corporation and the results of its operations required by the articles, the by-laws or any unanimous shareholder agreement.(2) Notwithstanding paragraph (1)(a), the financial statements referred to in subparagraph (1)(a)(ii) may be omitted if the reason for the omission is set out in

the financial statements, or in a note thereto, to be placed before the shareholders at an annual meeting.

CBCA 156. On the application of a corporation, the Director may exempt the corporation, on any terms that the Director thinks fit, from any requirement set out in section 155 or any of sections 157 to 160, if the Director reasonably believes that the detriment that may be caused to the corporation by the requirement outweighs its benefit to the shareholders or, in the case of a distributing corporation, to the public.

CBCA 157 (1) A corporation shall keep at its registered office a copy of the financial statements of each of its subsidiary bodies corporate and of each body corporate the accounts of which are consolidated in the financial statements of the corporation.(2) Shareholders of a corporation and their personal representatives may on request examine the statements referred to in subsection (1) during the usual business hours of the corporation and may make extracts free of charge.(3) A corporation may, within fifteen days of a request to examine under subsection (2), apply to a court for an order barring the right of any person to so examine, and the court may, if it is satisfied that such examination would be detrimental to the corporation or a subsidiary body corporate, bar such right and make any further order it thinks fit.(4) A corporation shall give the Director and the person asking to examine under subsection (2) notice of an application under subsection (3), and the Director and such person may appear and be heard in person or by counsel.

CBCA 158 (1) The directors of a corporation shall approve the financial statements referred to in section 155 and the approval shall be evidenced by the manual signature of one or more directors or a facsimile of the signatures reproduced in the statements.(2) A corporation shall not issue, publish or circulate copies of the financial statements referred to in section 155 unless the financial statements are(a) approved and signed in accordance with subsection (1); and(b) accompanied by the report of the auditor of the corporation, if any.

CBCA 159 (1) A corporation shall, not less than twenty-one days before each annual meeting of shareholders or before the signing of a resolution under paragraph 142(1)(b) in lieu of the annual meeting, send a copy of the documents referred to in section 155 to each shareholder, except to a shareholder who has informed the corporation in writing that he or she does not want a copy of those documents.(2) A corporation that, without reasonable cause, fails to comply with subsection

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(1) is guilty of an offence and liable on summary conviction to a fine not exceeding five thousand dollars.

CBCA 160 (1) A distributing corporation, any of the issued securities of which remain outstanding and are held by more than one person, shall send a copy of the documents referred to in section 155 to the Director(a) not less than twenty-one days before each annual meeting of shareholders, or without delay after a resolution referred to in paragraph 142(1)(b) is signed; and(b) in any event within fifteen months after the last preceding annual meeting should have been held or a resolution in lieu of the meeting should have been signed, but no later than six months after the end of the corporation’s preceding financial year.(2) A subsidiary corporation is not required to comply with this section if(a) the financial statements of its holding corporation are in consolidated or combined form and include the accounts of the subsidiary; and(b) the consolidated or combined financial statements of the holding corporation are included in the documents sent to the Director by the holding corporation in compliance with this section.(3) A corporation that fails to comply with this section is guilty of an offence and is liable on summary conviction to a fine not exceeding five thousand dollars.

CBCA 161 (1) Subject to subsection (5), a person is disqualified from being an auditor of a corporation if the person is not independent of the corporation, any of its affiliates, or the directors or officers of any such corporation or its affiliates.(2) For the purposes of this section,(a) independence is a question of fact; and(b) a person is deemed not to be independent if they or their business partner(i) is a business partner, a director, an officer or an employee of the corporation or any of its affiliates, or a business partner of any director, officer or employee of any such corporation or any of its affiliates,(ii) beneficially owns or controls, directly or indirectly, a material interest in the securities of the corporation or any of its affiliates, or(iii) has been a receiver, receiver-manager, sequestrator, liquidator or trustee in bankruptcy of the corporation or any of its affiliates within two years of the person’s proposed appointment as auditor of the corporation.(2.1) For the purposes of subsection (2), a person’s business partner includes a shareholder of that person.(3) An auditor who becomes disqualified under this section shall, subject to subsection (5), resign forthwith after becoming aware of the disqualification.(4) An interested person may apply to a court for an order declaring an auditor

to be disqualified under this section and the office of auditor to be vacant.(5) An interested person may apply to a court for an order exempting an auditor from disqualification under this section and the court may, if it is satisfied that an exemption would not unfairly prejudice the shareholders, make an exemption order on such terms as it thinks fit, which order may have retrospective effect.

CBCA 165 (1) The shareholders of a corporation may by ordinary resolution at a special meeting remove from office the auditor other than an auditor appointed by a court under section 167.(2) A vacancy created by the removal of an auditor may be filled at the meeting at which the auditor is removed or, if not so filled, may be filled under section 166.

CBCA 166 (1) Subject to subsection (3), the directors shall forthwith fill a vacancy in the office of auditor.(2) If there is not a quorum of directors, the directors then in office shall, within twenty-one days after a vacancy in the office of auditor occurs, call a special meeting of shareholders to fill the vacancy and, if they fail to call a meeting or if there are no directors, the meeting may be called by any shareholder.(3) The articles of a corporation may provide that a vacancy in the office of auditor shall only be filled by vote of the shareholders.(4) An auditor appointed to fill a vacancy holds office for the unexpired term of the auditor’s predecessor.167 (1) If a corporation does not have an auditor, the court may, on the application of a shareholder or the Director, appoint and fix the remuneration of an auditor who holds office until an auditor is appointed by the shareholders.(2) Subsection (1) does not apply if the shareholders have resolved under section 163 not to appoint an auditor.

CBCA 168 (1) The auditor of a corporation is entitled to receive notice of every meeting of shareholders and, at the expense of the corporation, to attend and be heard on matters relating to the auditor’s duties.(2) If a director or shareholder of a corporation, whether or not the shareholder is entitled to vote at the meeting, gives written notice not less than ten days before a meeting of shareholders to the auditor or a former auditor of the corporation, the auditor or former auditor shall attend the meeting at the expense of the corporation and answer questions relating to their duties as auditor.(3) A director or shareholder who sends a notice referred to in subsection (2) shall send concurrently a copy of the notice to the corporation.(4) An auditor or former auditor of a corporation who fails without reasonable cause to comply with subsection (2) is guilty of an offence and liable on

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summary conviction to a fine not exceeding five thousand dollars or to imprisonment for a term not exceeding six months or to both.(5) An auditor is entitled to submit to the corporation a written statement giving reasons for resigning or for opposing any proposed action or resolution when the auditor(a) resigns;(b) receives a notice or otherwise learns of a meeting of shareholders called for the purpose of removing the auditor from office;(c) receives a notice or otherwise learns of a meeting of directors or shareholders at which another person is to be appointed to fill the office of auditor, whether because of the resignation or removal of the incumbent auditor or because the auditor’s term of office has expired or is about to expire; or(d) receives a notice or otherwise learns of a meeting of shareholders at which a resolution referred to in section 163 is to be proposed.(5.1) In the case of a proposed replacement of an auditor, whether through removal or at the end of the auditor’s term, the following rules apply with respect to other statements:(a) the corporation shall make a statement on the reasons for the proposed replacement; and(b) the proposed replacement auditor may make a statement in which he or she comments on the reasons referred to in paragraph (a).(6) The corporation shall send a copy of the statements referred to in subsections (5) and (5.1) without delay to every shareholder entitled to receive notice of a meeting referred to in subsection (1) and to the Director, unless the statement is included in or attached to a management proxy circular required by section 150.(7) No person shall accept appointment or consent to be appointed as auditor of a corporation to replace an auditor who has resigned, been removed or whose term of office has expired or is about to expire until the person has requested and received from that auditor a written statement of the circumstances and the reasons, in that auditor’s opinion, for their replacement.(8) Notwithstanding subsection (7), a person otherwise qualified may accept appointment or consent to be appointed as auditor of a corporation if, within fifteen days after making the request referred to in that subsection, the person does not receive a reply.(9) Unless subsection (8) applies, an appointment as auditor of a corporation of a person who has not complied with subsection (7) is void.

CBCA 169 (1) An auditor of a corporation shall make the examination that is in their opinion necessary to enable them to report in the prescribed manner on the financial statements required by this Act to be placed before the shareholders, except such financial statements or part thereof that relate to the

period referred to in subparagraph 155(1)(a)(ii).(2) Notwithstanding section 170, an auditor of a corporation may reasonably rely on the report of an auditor of a body corporate or an unincorporated business the accounts of which are included in whole or in part in the financial statements of the corporation.(3) For the purpose of subsection (2), reasonableness is a question of fact.(4) Subsection (2) applies whether or not the financial statements of the holding corporation reported on by the auditor are in consolidated form.

OBCA 148 In respect of a financial year of a corporation, the corporation is exempt from the requirements of this Part regarding the appointment and duties of an auditor if,(a) the corporation is not an offering corporation; and(b) all of the shareholders consent in writing to the exemption in respect of that year.

OBCA 149 (1) The shareholders of a corporation at their first annual or special meeting shall appoint one or more auditors to hold office until the close of the first or next annual meeting, as the case may be, and, if the shareholders fail to do so, the directors shall forthwith make such appointment or appointments. (2) The shareholders shall at each annual meeting appoint one or more auditors to hold office until the close of the next annual meeting and, if an appointment is not so made, the auditor in office continues in office until a successor is appointed.(3) The directors may fill any casual vacancy in the office of auditor, but, while such vacancy continues, the surviving or continuing auditor, if any, may act. (4) The shareholders may, except where the auditor has been appointed by order of the court under subsection (8), by resolution passed by a majority of the votes cast at a special meeting duly called for the purpose, remove an auditor before the expiration of the auditor’s term of office, and shall by a majority of the votes cast at that meeting appoint a replacement for the remainder of the auditor’s term. (5) Before calling a special meeting for the purpose specified in subsection (4) or an annual or special meeting where the board is not recommending the reappointment of the incumbent auditor, the corporation shall, fifteen days or more before the mailing of the notice of the meeting, give to the auditor,(a) written notice of the intention to call the meeting, specifying therein the date on which the notice of the meeting is proposed to be mailed; and(b) a copy of all material proposed to be sent to shareholders in connection with the meeting. (6) An auditor has the right to make to the corporation, three days or more before the mailing of the notice of the meeting, representations in writing,

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concerning,(a) the auditor’s proposed removal as auditor;(b) the appointment or election of another person to fill the office of auditor; or(c) the auditor’s resignation as auditor,and the corporation, at its expense, shall forward with the notice of the meeting a copy of such representations to each shareholders entitled to receive notice of the meeting. (7) The remuneration of an auditor appointed by the shareholders shall be fixed by the shareholders, or by the directors if they are authorized so to do by the shareholders, and the remuneration of an auditor appointed by the directors shall be fixed by the directors. (8) If a corporation does not have an auditor, the court may, upon the application of a shareholder or the Director, appoint and fix the remuneration of an auditor to hold office until an auditor is appointed by the shareholders. Note: On a day to be named by proclamation of the Lieutenant Governor, subsection 149 (8) of the Act is amended by striking out “or the Director”.(9) The corporation shall give notice in writing to an auditor of the auditor’s appointment forthwith after the appointment is made.

Shareholder Remedies● Remedies = the means for ensuring that shareholders are given the rights

to which they are entitled ○ e.g. shareholders have the right to vote their shares. If the

company denies them that right, the shareholder can commence a personal action, a derivative action, or an oppression action.

○ Note that the line between right and remedy is fuzzier in practice: the oppression remedy, for example, is also an expansion of shareholder rights

● Shareholder remedies may be commenced where all shareholders are affected equally by the impugned conduct

○ Plaintiff = corporation ○ Remedy will be given in favour of the corp, rather than individual

shareholders ● Personal actions may be commenced where certain shareholders have a

grievance that they don’t share with others

What triggers derivative action (DA) and/or oppression remedy (OR)? ● DA: A harm to the corporation itself ● OR: A harm to any stakeholder in the corporation

○ This seems straightforward but isn’t, thanks to BCE which basically swallowed up derivative actions into Oppression Actions. Have fun!

Derivative ActionAn action taken by a shareholder on behalf of the corporation to rectify a wrong committed against the corporation for which management did not seek redress (often because a manager was the alleged wrongdoer)

● derivative/indirect action is in contrast to the personal/direct action where a shareholder enforces their own rights as made distinct from the corporation

● Can be an effective private remedial instrument to ensure/enhance management accountability

● Can also be litigation that seeks to extract gains from the nuisance value of claims for high damages

CBCA 238. In this Part, action means an action under this Act; (action) 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. (plaignant)

CBCA 239 (derivative action). (1) Subject to subsection (2), a complainant may apply to a court for leave to bring an action in the name and on behalf of a corporation or any of its subsidiaries, or intervene in an action to which any such body corporate is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate.

(2) 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.

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CBCA 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.

QBCA 439. Applications under subdivisions 2 and 3 may be made by any of the following:(1) a registered holder or beneficiary, and a former holder or beneficiary, of a security of a corporation or any of its affiliates;(2) a director or an officer or a former director or officer of a corporation or any of its affiliates;(3) any other person who, in the discretion of the court, has the interest required to make an application under this division.

QBCA 440. An application made under subdivision 2 or 3 may not be dismissed on the sole ground that it is shown that an alleged breach of a right of or an obligation owed to a corporation or its subsidiary has been or may be approved by the corporation’s shareholders, but evidence of approval by the shareholders may be taken into account by a court in making a decision under either of those subdivisions.2009, c. 52, s. 440.

QBCA 441. An application made or an action brought or intervened in under subdivision 2 may not be discontinued or settled without the approval of the court given on such terms as the court thinks fit.

QBCA 445. An applicant may apply to the court for leave to bring an action in the name and on behalf of a corporation or a corporation that is one of its subsidiaries, or intervene in an action to which the corporation or subsidiary is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the corporation or subsidiary.

QBCA 446. No application for authorization may be made unless the applicant

has given the directors of a corporation or its subsidiary 14 days’ prior notice of the applicant’s intention to apply to the court.Authorization may be granted if the court is satisfied that the board of directors of the corporation or its subsidiary has not brought, diligently prosecuted or defended or discontinued the action, and if the court considers that the applicant is acting in good faith and that it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued.When all the directors of the corporation or its subsidiary have been named as defendants, prior notice to the directors of the applicant’s intention to apply to the court is not required.

QBCA 447. In connection with an action brought or intervened in under this subdivision, the court may make any order it thinks fit, including(1) an order authorizing the applicant or any other person to control the conduct of the action;(2) an order giving directions for the conduct of the action;(3) an order revising the functioning of the corporation or its subsidiary by amending the articles or the bylaws or by establishing or amending a unanimous shareholder agreement;(4) an order making appointments to the board of directors of the corporation or its subsidiary, either to replace all or some of the directors or to increase the number of directors;(5) an order directing an investigation to be made under Division I;(6) an order directing that any amount awarded against a defendant 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(7) an order requiring the corporation or its subsidiary to pay, in whole or in part, the professional fees and other reasonable costs incurred by the applicant in connection with the action or intervention.

Foss v. Harbottle Rule ● If the corporation is a legal person separate from its members, then for a

wrong done to it the corporation itself is the only proper plaintiff; shareholders have no separate cause of action in law for any wrongs which may have been inflicted upon a corporation

● NOTE: Derivative actions and oppression remedy were introduced by legislators in response to this hands-off approach by the courts

Statutory Derivative Action Conditions that must be met for a court to allow a derivative action (s.239 CBCA):

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1. Complainant must give the directors notice of their intent to apply 14 days before the application is made so that the directors themselves have the chance to bring the action

2. Complainant must act in good faith 3. Action must appear to be in the interests of the corporation

NOTE: Courts are central to derivative actions, in part as a stopgap for abuse.

Courts can order (s.240 CBCA): ● A person to control the action ● A direction re: the conduct of the action ● That the payment to a defendant go to security holders instead of the

corporation ● The corporation to pay the complainant’s legal fees

● NOTE: shareholder approval of an alleged wrongdoing is not conclusive but may be taken into account (s. 242(1) CBCA)

Judicial Interpretation of Derivative Actions Re Northwest Forest Products Ltd (1975 BC SC) Applicants for a derivative action must only show that their action is in the best interests of the company (here, prima facie in interest of company), not show their case is fully formed.

● FACTS: NW was 51% owner of Fraser Valley. Assets of FV were sold to another company at what appeared to be a great undervaluation. Directors of NW were petitioned by its shareholders to allow them to vote to set aside the sale, but did not respond. Complainants sought leave to commence a derivative action. Directors argued that complainants did not provide enough details of action when they tried to get directors to act.

● ISSUE/HOLDING: Is the derivative action valid? YES. Application granted.

● ANALYSIS: The level of details that must be provided to directors is no more than what would be sufficient to found an endorsement on a generally endorsed writ of summons. Sufficient details were provided here.

○ Real question here is whether it is prima facie in interests of company that the action is brought – applicants need not prove a prima facie case. Matters here concern interests of company as major shareholders of FV— matters of concern to individual shareholders do not detract from derivative nature of action sought.

Costs in Derivative Actions

Costs in derivative actions can be astronomical especially for one sole minority shareholder. Ways to minimize these include:

● Allowing recovery of costs by the plaintiff from all those who stand to profit from a favourable judgement

● Having the corporation pay the costs of the litigation ○ This is subject to a demonstration the plaintiffs have brought the

action in good faith and/or that the action has a reasonable possibility of success

Turner et Al. v. Mailhot et. al. (1985) (ON HC) It is inappropriate to pay out company funds for personal matters. A derivative action prima facie can be brought, but if full indemnification is rooted in a personal issue and P was not acting as an agent for the company, but rather, for himself, the company should not have to pay legal fees.

● FACTS: Plaintiff (Turner) and his wife held 30% of the shares of the company owned by D (Mailhot). After a disagreement, P were locked out of the company and the husband’s employment was terminated. P sought leave to bring a derivative action, seeking return to the company and lost income that had been diverted to D.

● ISSUES/HOLDING: Should P get full indemnity of his costs of litigation? NO. Court orders half indemnity only. Should D’s costs be covered? NO. The company should not pay the defense costs for Mailhot, since they are essentially for his benefit and not the company’s. The $40,000 paid for his defense should go towards Turner’s indemnification.

● ANALYSIS: The purpose of derivative action is not to benefit P more than the company – litigation costs shouldn’t be covered by the company for personal matters.

○ The right to prima facie indemnity is not absolute ○ Financial inability on the part of the plaintiff should weigh

heavily in favour of a grant of indemnity, which is not the case here

The Relationship Between the Complainant and the Corp● The fact that the company’s name is used as plaintiff should not obscure

the substance of the litigation - as that between two classes of shareholders (Discovery v. Ebco)

● A representative acting on behalf of a company assumes a fiduciary duty to that company

● Others say that the relationship between parties can be both adversarial and fiduciary

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Statutory Derivative Actions Post-BCEBCE Inc. RE: Remedies for Shareholders

1. Derivative actions (s.239 CBCA) - “actions in the name and on behalf of the corporation, including the rights correlative with the directors’ duties to the corporation”

2. Civil action for a breach of duty of care (s.122(1)(b) CBCA) - “The [duty of care] is not owed solely to the corporation and thus may be the basis for liability to other stakeholders in accordance with the principles of tort and extracontractual liability”

a. This does not itself provide a foundation for claims but instead implies a standard of behaviour to be reasonably expected

b. BUT in Peoples the court suggests that if the duty of care is owed in substance to creditors, a procedural right to enforce the duty follows

3. Action for oppression (s. 241 CBCA) - “unlike the derivative action, which is aimed at enforcing a right of the corporation itself, the oppression remedy focuses on harm to the legal and equitable interests of the stakeholders affected by the oppressive acts of a corp or its directors”

a. Available to security holders, creditors, directors, and officers ● NOTE: some say BCE has rendered differentiation between

derivative and personal actions impossible ● NOTE: Peoples and BCE also make it so that derivative actions

and oppression remedy procedures “ought to be receptive to claims by a range of stakeholders”

Personal Actions ● Shareholders have certain personal rights, including:

○ Right to receive timely and informative notice of company meetings

○ Right to vote ○ Right to have properly executed proxies accepted ○ Right to inspect some of corporation’s records

● No one who brings the action really cares about the interests of the corporation... it’s really about having a personal interest in the issue. All these actions only get off the ground because a real person take this up and pays for the proceedings.

● HOWEVER, Court insists that derivative actions are kept separate from any personal wrongs/claims the claimant has suffered/could bring.

● BUT Counsel are often not very good at separating our personal claims from derivative claims.

Goldex Mines v. Revill (1975) A derivative action is one in which the wrong is done to the company, and must be made separately from personal actions.

● FACTS: Warring factions of shareholders of Probe Mines are in court for the 5th time. Allege misdeeds of directors and shareholders, but do not specify in the writ whether duties alleged were owed to SH or to corp. Plaintiffs did not seek to bring representative action on behalf of the corporation.

● ISSUE/HOLDING: Do the shareholders have standing without obtaining leave of the court under s. 99 OBCA (representative action)? YES, because there is a personal claim that can proceed on the basis that it can be distinguished from other claims belonging to the corporation. Where the same acts of directors or shareholders cause damage to the company and also to the shareholders, is the shareholder’s cause of action derivative? NO.

● ANALYSIS: There was a personal set of claims that could be distinguished from the representative claims and the action could then proceed on the basis of the personal claims. The representative claims have to be pursued through the legislative scheme.

○ If a legal wrong is done to shareholders by directors or other shareholders: SHs suffer a personal wrong and may seek redress for it in a personal action (typically class action)

○ Derivative action, on the other hand: wrong done to the company and brought by class action in representative form (common law rule recognized under s. 99 OBCA)

○ Farnham: did not consider situation where same wrongful act is wrong to corp and wrong to each individual shareholder. Here, there were concurrent claims that could be separated.Some distinction between personal action and derivative action is necessary, because leave of Court is required for the latter.

○ Easy cases: one group of shareholders (not as directors) act in such a way as to deprive another group of shareholders of their rights (established in AoI, by-laws, etc.) ! clearly a personal claim

○ Hard cases: directors with controlling or substantial shareholdings cause company to act in a manner that deprives SH of their rights. It would clearly be a breach of FD to the company, but may also be a breach of FD owed to shareholders as a whole.

○ Court holds that certain acts (e.g. sending misleading info to SH before AGM) is a breach of both the duty to the company and the duty to shareholders! This is because SH have a right to adequate info from which he can form intelligent judgment.

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■ Minority SH: have always been able to sue even when there is a clear wrong to the company: if there has been an oppressive and unjust exercise of power of majority SH

■ Majority SH: governs in corporate affairs, but the corollary is that it must act fairly and honestly. Equity can kick in here!

○ Here, there is no specific allegation of personal harm in the pleading, but the court interprets pleadings as pleadings of wrongful acts causing damage to plaintiff and other SH.

○ Circulation of false annual report is a wrong to the company. This, accompanied by solicitation on behalf of the directors of the SH’s proxies is also a wrong to the SH.

○ Problem: Statement of claim did not disclose an attempt to differentiate between personal and derivative claims. Court will not suggest a redraft, but will allow the claimant to properly plead

● NOTE: IMPORTANT to properly draw up the writ! Also, personal and derivative actions may be joined.

○ This case has many dangerous statements – did it establish an FD between directors and SH or between majority and minority SH? NO! Canadian law has rejected this.

Hercules Management Ltd. v. Ernst & Young (SCC 1997) Shareholders are prevented from bringing personal claims for losses suffered as a result of a harm done to the corporation. However, when shareholder losses are incidental to a primary harm that is done to the corporation, the proper cause of action is the statutory representative (“derivative”) action.

● FACTS: E&Y, who were accountants, did audited financial statements for two companies, NGA and NGH. Appellants, shareholders in NGA and NGH, claimed the respondents acted carelessly in preparing the statements. They claim to have suffered economic loss b/c they relied on a statement to buy more shares and based on their existing holdings.

● ISSUE/HOLDING: Is a derivative action the proper method of proceeding with this claim? YES.

● ANALYSIS: the audited reports are provided to the shareholders as a group to allow them to take collective (as opposed to individual) decisions

○ Foss v. Harbottle rule = individual shareholders have no cause of action in law for any wrongs done to the corporation and that if an action is to be brought re: such losses it must be done by the corp itself via management or by way of a derivative action

■ A corporation is a separate legal entity - it is liable for its contracts and torts, but the shareholders aren’t

■ Same goes for causes of action - companies can sue for torts and breaches of K against it, but shareholders cannot

○ “When the shareholder acquires a share they accept the fact that the value of their investment follows the fortunes of the company and they can only exercise influence by the exercise of their voting rights in a general meeting.”

○ Any duty auditors have to shareholders is to them as a group, not individuals

○ Shareholders must be able to oversee or supervise management - if they cannot, they have cause for a derivative action

CCQ 1627. (1) A creditor whose claim is certain, liquid and exigible may, in the debtor’s name, exercise the rights and actions of the debtor where the debtor, to the prejudice of the creditor, refuses or neglects to exercise them. (2) However, he may not exercise rights and actions which are strictly personal to the debtor.

CCQ 1628. It is not necessary for the claim to be liquid and exigible at the time the action is instituted, but it is necessary that it be so at the time judgment is rendered.

CCQ 1629. The person against whom an oblique action is brought may set up against the creditor all the defenses he could have set up against his own creditor.

CCQ 1630. Property recovered by a creditor in the name of the debtor falls into the patrimony of the debtor and benefits all his creditors.

Oppression Remedy ● Majority rule = majority shareholders decide who will be the directors of

the corp and thus how the corp will be run; they also determine the outcome of questions referred to shareholders for approval

● Interests of minority shareholders are recognized through the duties owed by directors and the equitable restraints placed on majority shareholders

● However, courts in the past were very reluctant to intervene to protect shareholders being unfairly or improperly treated

● In 1945, UK Cohen Committee recommended giving the court power to put an end to an act of oppression, which was codified in the 1948 Companies’ Act s.210; in 1962 the scope and application of the oppression remedy was expanded

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● “Oppression provision is probably the most important innovation in corporate law in the 20th century, and one that stands to transform the relationship between corporate directors, officers, and shareholders. But it is has mostly been used in cases involving private companies.” - “Poonam Puri et al.”

Remedy is appropriate where: 1. Controlling directors unreasonably refuse to register transfers of the

minority’s holdings to force a reduced sale price for them to take advantage of

2. Directors award themselves excessive remuneration that diminishes funds available for distribution as dividends

3. Shares are being issued to directors or others on special or advantageous terms

4. There is a refusal to declare non-cumulative preference dividends on shares held by the minority

CBCA Oppression Remedy (241) allows a complainant to apply to a court for an order and where a court is satisfied that

a. Any act or omission of the corp or its affiliates effects a result ORb. The biz or affairs of the corp have been conducted in a manner ORc. The powers of the directors 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 interim or final order as it sees fit

CCQ 1457 - duty of care

CBCA 238 (standing). In this Part, action means an action under this Act; (action) // 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. (plaignant)

CBCA 241. (1) A complainant may apply to a court for an order under this section(2) If, on an application under subsection (1), the court is satisfied that in respect

of a corporation or any of its affiliates(a) any act or omission of the corporation or any of its affiliates effects a result,(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or(c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a mannerthat 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.(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;(b) an order appointing a receiver or receiver-manager;(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;(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) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested person financial statements in the form required by section 155 or an accounting in such other form as the court may determine;(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) an order directing an investigation under Part XIX to be made; and(n) an order requiring the trial of any issue.(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.

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(5) A shareholder is not entitled to dissent under section 190 if an amendment to the articles is effected under this section.(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.(7) An applicant under this section may apply in the alternative for an order under section 214.

CBCA 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.(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 or, in Quebec, failure to respect the agreement between the parties as to the conduct of the proceeding without the approval of the court given on any terms that the court thinks fit and, if the court determines that the interests of any complainant may be substantially affected by such stay, discontinuance, settlement, dismissal or failure, 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.(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.

Judicial Interpretation of the Oppression Remedy First Edmonton Place Ltd v. 315888 Alberta Ltd. (1988 AB QB) A “proper person” to bring an action for an oppression remedy is “a person who can reasonably be entrusted with the responsibility of advancing the interests of the corporation by seeking a remedy to right the wrong allegedly done to the corp.”

● FACTS: FEP signed a lease with the numbered corporation above. The sole shareholders + directors of the numbered corp were 3 lawyers who practiced together. The numbered corp was a “shelf” company

(incorporated for no purpose and had no assets). As inducement to sign a 10-year lease, FEP granted the numbered corp 18 months of free rent, a leasehold improvement allowance of 115K, and payment of 140K. The lawyers occupied premises without entering a lease with the corp. They stayed for the rent-free period, paid 3 months rent and left. FEP submits that the directors deliberately breached their obligations as directors of the corporation. FEP is the corporation’s only creditor and seeks alternative forms of relief under the ABCA: representative action and oppression remedy.

● ISSUE/HOLDING: Is FEP a “proper person” under the CBCA? YES. Can they bring a claim for OR? NO.

● ANALYSIS: To be considered a proper person, a complainant must show (1) evidence of oppression or (2) evidence of unfair prejudice or (3) unfair disregard for the interests of a security holder, creditor, director or officer

● If the applicant was a creditor of the corp at the time of the act or conduct complained of, they have to show that given the circumstances of the case, justice and equity require that he get the opportunity to try the claim. 2 circumstances where justice/equity would allow a creditor to be recognized as a proper person:

○ If the act/conduct of the directors or management = using the corp as a vehicle to commit fraud upon the applicant

○ If the act/conduct breached an underlying expectation of the applicant arising from their relationship with the corp

● Did something prevent the applicant from taking steps to protect their interests?

○ In this case, FEP should have done more due diligence, they’re a sophisticated creditor.

NOTE: Shareholders are still the largest class of complainants under oppression remedy, but creditors have a much higher success rate in cases under OR. Puri says we’ll see more success and more cases brought by creditors.

Ferguson v. Imax Systems Corp (1983 SCC) When dealing with close corps, courts will consider the relationships between shareholders in determining whether OR is appropriate.

● FACTS: IMAX was incorporated by three couples. Husbands got 700 common shares each, wives got 700 class B shares each. Fergusons got divorced and the other directors tried to force Mrs. Ferguson, who had participated in biz management, out by refusing to declare dividends + cancelling all class B shares. Ferguson sought relief under OR.

● ISSUE/HOLDING: Were the actions by IMAX oppressive? YES.

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● ANALYSIS: “when dealing with a close corporation, the court may consider the relationship between the shareholders and not simply legal rights as such”

○ Majority must act fairly and honestly; the company didn’t act bona fides in exercising its powers

○ Mrs. Ferguson is entitled to relief under OR

Reasonable Expectations in the Oppression Remedy BCE Reasonable Expectations test

1. Is there evidence to support the expectations? 2. Was there an oppressive breach of conduct?

● Note: expectations may conflict (BCE) ● The directors are expected to act in the best interest of the

corporation ● Based on their discretion, which is problematic

Where are reasonable expectations found? 1. Commercial practice 2. The nature, size, structure of corp 3. Relationships between parties 4. Steps claimant should have taken to protect themselves 5. General fairness concepts

Scope of expectations Westfair Foods Ltd. v. Watt (AB CA 1991) One of the limits on the oppression remedy is whether the court considers the plaintiff’s expectations to be reasonable.

● FACTS: WF had two classes of shares: (1) voting shares and (2) non-voting preferred shares (NVPS). NVPS got $2/year/share but were entitled to a slice of the corporate assets once the corporation were to be wound up. NVPSHs also had an interest in the current value of their shares. Historically, the corporation retained most of its earnings and only paid low dividends to its voting (common) shareholders. NVPSHs only got the required $2/year. In 1985, the policy changed and all the net annual earnings were paid to a single voting (common) shareholder. This meant that the corporation was worth less, which thereby diminished the value of the NVPS (because of their residual interest in the assets of the corporation). NVPSHs therefore sought oppression remedy. Judicial History

● ISSUE/HOLDING: Was the new policy oppressive toward the NVPSHs? YES.

● ANALYSIS: Oppression is not about intent – it’s about outcomes. Doesn’t matter if there was bad faith or what the intention was – it’s about injuries to the plaintiff.

Scope of remedy and impact on majority rule● The scope of the remedy is expansive – it governs or relates to all of the

activities of the corporation.● Shareholders have a right to be “insulated from anything oppressive,

unfairly prejudicial, or that unfairly disregards their interests” vis-a-vis their relationship with the company.

● Court recognizes that this remedy is a major modification of the principle of majorityRule.

● The problem with this, of course, is that it’s difficult to determine what it means to be treated unfairly, or in an oppressive or prejudicial manner.

Meaning of oppression = a duty to act in the interests of shareholders as a group, to pay heed to the interests of all. Also stands for the proposition that the majority shareholders cannot profit at the expense of the minority shareholders.

Reasonable expectations● The relationship between the company and shareholders is regulated by

regard to the reasonable expectations of the parties, which are deserving of protection.

● Court indicated that under an oppression analysis, they are focused on protecting the reasonable expectations of the parties not otherwise protected by law.

● In determining what these reasonable expectations are, all of the words and deeds of the parties should be considered. It’s not just about what’s written down, the formal elements – it’s about the actual relationship.

● The test for the oppression remedy is very fact specific and precedent is of limited use.

Other RemediesAppraisal Remedy

● The statutory right of corporate shareholders who dissent or oppose some extraordinary corporate action, for example a merger, to have their shares judicially appraised and to demand that the corporation buy back their shares at the appraised value

● Reconciles the majority’s need to adjust to changing economic conditions with the right of the members of the minority to refuse to participate in ventures beyond their initial contemplation

● Critique (Manning): it’s laborious, slow, technical, expensive and unpredictable and so doesn’t actually serve shareholders; it also drains

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corporate cash flow at a critical time, may scare creditors and suppliers, and creates uncertainty by an unknown # of dissenters

Compliance and Restraining Orders ● An order forcing a company to comply with its articles of

association/bylaws OR restrain them (the corp is the proper plaintiff here)

Rectification Orders ● An application to the court for a name of a person to be

entered/retained/removed/etc from the company register or other articles of incorporation

Investigations ● Court-ordered investigation into corporate affairs so shareholders can get

requisite information - different than shareholder-appointed investigations

Winding Up ● Liquidation or winding up can take place by shareholder resolution

(voluntary) or court order (involuntary) ● The most drastic form of shareholder relief

QBCA 450. An applicant may obtain an order from the court to rectify a situation if the court is satisfied that(1) any act or omission of the corporation or any of its affiliates effects or threatens to effect a result,(2) the business or affairs of the corporation or any of its affiliates have been, are or are threatened to be conducted in a manner, or(3) the powers the board of directors of the corporation or any of its affiliates have been, are or are threatened to be exercised in a mannerthat is or could be oppressive or unfairly prejudicial to any security holder, director or officer of the corporation.

QBCA 451. In connection with an application under this subdivision, the court may make any order it thinks fit, including(1) an order restraining the conduct complained of;(2) an order appointing a receiver;(3) an order revising the functioning of the corporation by amending the articles or the by-laws or establishing or amending a unanimous shareholder agreement;(4) an order directing an issue or exchange of securities;(5) an order making appointments to the board of directors, either to replace all or some of the directors or to increase the number of directors;

(6) an order directing the corporation or any other person to purchase securities of a security holder;(7) an order directing the corporation or any other person to pay a security holder all or any part of the monies that the security holder paid for securities;(8) an order varying, setting aside or annulling a contract or a transaction to which the corporation is a party and compensating the corporation or any other party to the contract or transaction;(9) an order requiring a corporation, within a time specified by the court, to make available to the court or an interested person the financial statements referred to in sections 225 and 226, or an accounting of them in the form determined by the court;(10) an order compensating a person who has suffered prejudice;(11) an order directing rectification of the records of a corporation in accordance with sections 456 and 457;(12) an order dissolving the corporation and winding it up if it has property or obligations;(13) an order directing an investigation to be made under Division I; and(14) an order condemning, not only in the case of improper use of procedure but also whenever the court thinks fit, any party to the proceedings to pay, in whole or in part, the professional fees and other costs of any other party.The corporation may not make any payment to a shareholder under subparagraph 6 or 7 of the first paragraph if there are grounds for believing that it would or could cause the corporation to be unable to pay its liabilities as they become due.

QBCA 452. Despite the second paragraph of article 10 of the Code of Civil Procedure (chapter C-25.01), the court may make any order it thinks fit under section 451, whether or not the order has been requested by the applicant. However, if the order has not been requested by the applicant, the court must give the parties an opportunity before the order is made to make representations on the remedy proposed by the court.

QBCA 453. If the court, under section 451, orders an amendment of the articles or the by-laws of a corporation or a unanimous shareholder agreement, no other amendment to the articles or by-laws or to the unanimous shareholder agreement may be made without the consent of the court, for the period or under the conditions determined by the court.If the court orders an amendment of the articles, the board of directors must send without delay to the enterprise registrar a copy of the order, the articles of amendment required by this Act, and the documents required by the Act respecting the legal publicity of enterprises (chapter P-44.1).Shareholders do not have the right to demand the repurchase of their shares

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under Chapter XIV if an amendment to the articles is directed by an order of the court.

7. Corporate Law V: Relationship between Majority Shareholders and Other Stakeholders Fiduciary duties to minority shareholders Controlling shareholders fall into two camps:

● “De jure” control they hold 50% +1 of the votes, and can thus pass ordinary resolutions without the cooperation of any other shareholder.

● “De facto” control when only shares that are voted actually count towards the passing of a resolution. Arises out of statutes, for ex. Through CBCA s. 2(1).

○ E.g. not all shareholders vote, so even a shareholder holding 20% of shares can be confident of securing the passage of an ordinary resolution. So, this type of shareholder will be a “controlling” shareholder, not a majority shareholder.

Why should we worry about the exercise of power by controlling shareholders?● Directors are agents of the shareholders; but by virtue of their

discretionary powers, they have the ability to favour their interests over those of the principal. This is why statutory fiduciary duties exist!

● majority/controlling shareholders also have incentives to favour themselves at the expense of other corporate claimants, including minority shareholders

○ The primary means of doing this is through their voting powers; the controllers might vote to amend the articles to expropriate minority shareholders at an undervalue/vote to transfer the corporation’s assets to themselves at undervalue

○ They could also do this through appointing/dismissing directors of their choice – or in some cases may act as both managers and controlling shareholders.

● Thus, the ability to harm minority shareholders and other stakeholders arises whether or not controlling shareholders themselves formally participate in the management of the company.

● As the shares really boil down to a property interest, controlling/majority shareholders may take actions that are in their favour but actually detrimental to the corporation as a whole

Costs to imposing fiduciary duties on controlling shareholders:

● May deter transactions that are purely redistributive (from minority to majority shareholders), which is wasteful from a social perspective.

● Creates new costs associated with litigating disputes about the propriety of shareholder conduct.

History/Background in the CML● Historical tendency of the CML to favour majoritarianism.● The first steps towards crystallizing a fiduciary duty was seen in Allen v.

Gold Reefs of West Africa, where it imposed upon shareholders a duty to exercise their voting power in good faith.

○ The Allen principle required shareholders to act in a manner that was for the “benefit of the company as a whole” in addition to being in good faith fundamentally a fiduciary duty (this was ultimately eviscerated by subsequent judgments)

○ Allen principle has recently been revived under the oppression remedy, which substantially incorporates the typically statutory fiduciary duty (good faith +best interests of the company) and extends it to include a duty of fairness.

The Current CDN Position re: FDs of Shareholders at CML ● The court has had a schizophrenic attitude. ● In 4 lower court holdings (one affirmed by the ONCA), the principle that

shareholders owe no fiduciary duty has been affirmed. ○ In Wotherspoon v. Canadian Pacific Ltd (ONCA) the court said

in obiter that if shareholders owe any fiduciary duty, it would be only to the company and not to other shareholders

○ There are other ONCA judgments have pointed to the existence of shareholder fiduciary duties -

● Goldex Mines (1975) is one of these – the CA appears to have signalled the existence of shareholder fiduciary duties

○ The principle of the majority governing in corporate affairs is fundamental to corporate law, but it’s also important that they act fairly and honestly. “Fairness is the touchstone of equitable justice, and when the test of fairness is not met, the equitable jurisdiction of the Court can be invoked to prevent or remedy the injustice which misrepresentation or other dishonesty is caused”.

○ This has been interpreted as the FD of major shareholders is towards minority shareholders, rather than the company

● CA rejected this later in Brant Investments, where it said this should be interpreted not as directly saying that a fiduciary duty is owed by the majority shareholders to the minority shareholders

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Brant Investments Ltd. v. Keeprite Inc. (1991) There is no explicit fiduciary duty owed by majority shareholders to minority shareholders, based on existing case law. The case that comes closest is Goldex, but this involves facts that would now be covered by s. 234 CBCA or s. s. 247(2) OBCA.

● FACTS: KeepRite was owned by a subsidiary of parent company ICM. KR was publicly held. ICM merged KR with two of its wholly-owned subsidiaries. An independent committee of the BoD reviewed the transaction and indicated it would only approve the merger if the price paid to public shareholders increased. Changes were made and they approved; minority shareholders still sued claiming the transaction was opposed to their interests. Plaintiff minority shareholders allege that independent committee was not independent and that the advice they gave to the company’s directors was not in the best interests of the company and its shareholders.

● ISSUE/HOLDING: Do majority shareholders have a fiduciary obligation toward minority shareholders? NO. Is the review of the transaction by the independent committee valid? YES.

● ANALYSIS: In certain circumstances US law recognizes a fiduciary duty from controlling shareholders to minority shareholders.

○ e.g. Where the abusive control/act is at the expense of the minority, this should not be permitted

○ There is no precedent for this in Canada, however. So, court refuses to recognize FD between maj and min shareholders.

● Majorities aren’t like true fiduciaries anyway – while they have economic control of the corporation due to their shares, they don’t have the authority to bind/make decisions for minorities. Therefore, majority shareholders should be free to exercise their legitimate power in their own self-interest.

Duties Owed by Shareholders under the Oppression Remedy Ebrahimi v. Westbourne Galleries Ltd. (1972) Shareholder expectations are a source of rights; broadens the grounds upon which a minority can challenge the actions of controlling shareholders.

● FACTS: Mr Ebrahimi and Mr Nazar were partners in a biz buying and selling Persian rugs. E and N were the sole shareholders in the company and took a director's salary rather than dividends for tax reasons. A few years later, when N’s son came of age, he was appointed to the board of directors and E and N both transferred shares to him. After a falling out between E and N, son called a company meeting, at which they passed an ordinary resolution to have E removed as a director. E applied to the court for a remedy to have the company wound up AKA dissolved.

● ISSUE/HOLDING: What are E’s rights as a minority shareholder?

● ANALYSIS: In the case of a small company the rights and obligations of a company went beyond bare company law requirements. The applicant had been excluded from being involved in the management of the company against his reasonable expectations.

○ Since he was unable effectively to dispose of his interest, the company should be wound up. The term ‘quasi-partnership’ is dangerously misleading.

○ Equitable considerations can come to be applied where the association has personal characteristics and rests on a relationship of trust and confidence; all members are expected to take an active part and share transfers are restricted.

○ “A limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The ‘just and equitable’ provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.”

How does this relate to Canadian law?● The “just and equitable” ground for winding up is found in CBCA s.

214(1)(b)(ii)● Lord Wilberforce says that in small or private corporations, sometimes the

strict legal bargain can be altered in the name of “equitable considerations” when it comes to a “just and equitable winding up”. Canadian courts have just ignored this limitation and transposed the expectations principle to the oppression remedy, although this is more commonly seen with private rather than public companies.

● Lord Wilberforce also says that in order to invoke this expectations principle, there must be some sort of association formed/continued on the basis of a personal relationship (other criteria too). Canadian courts

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will take these criteria into account but they are not seen as essential indicia of oppression.

Ferguson v. Imax Systems Corp (SCC 1983) Illustrates how OR has revived early judicial attempts to create a FD for shareholders.

● FACTS: IMAX was incorporated by three couples. Husbands got 700 common shares each, wives got 700 class B shares each. Fergusons got divorced and the other directors tried to force Mrs. Ferguson, who had participated in biz management, out by refusing to declare dividends + cancelling all class B shares. Ferguson sought relief under OR.

● RELEVANT ANALYSIS: Traces the policy of the law to ensure “just and equitable treatment for minorities” to early cases including Allen, Goldex Mines, etc. (see above!)

○ This was a small, close corp controlled by the same group of closely related individuals; Mrs. Ferguson’s part in the group and her work for the corp were very important - the act to force her to sell her shares through non-payment wasn’t just pushed by her husband but by the group as a whole

○ Ferguson cannot be compared to “someone who came to the company lately and took a minority position in several classes of stock”

NOTE: While strictly speaking a shareholder resolution doesn’t amount to corporate conduct, once the the corp acts on that conduct it converts shareholder conduct into corporate conduct - which falls within the purview of the OR. -- OR also allows the Court to make orders against a controlling shareholder.

● By using Allen and Goldex, the Court here revises Brant and breaks the pro-majoritarian paradigm and moves towards a more balanced view of controlling/minority relations

● Ferguson also suggests that a showing of bad faith is almost certain to lead to a finding of oppression

Scottish Co-Op Wholesale Society Ltd. v. Meyer (ER 1958) First time the Companies’ Act Oppression provision came before the Court. Court defines “oppressive” as “burdensome, harsh, and wrongful” and can be used to punish shareholder conduct, not just corporate conduct (NOTE: this is an old UK case)

● FACTS: The SCOWSL set up a new company called "Scottish Textile & Manufacturing Co Ltd" with Dr Meyer and Mr Lucas to manufacture rayon cloth. They needed state licensing and to get a license experienced managers were needed. Dr Meyer and Mr Lucas were the managing directors, with some shares, while the SCOWSL held the majority of the company's shares and appointed the other three directors to the board.

These three were also directors of the Scottish Co-op itself. In 1952, the licensing system was ended by the government. SCOWSL used its majority votes to transfer all the business to a branch of the Co-op. It also cut off the supplies of raw materials. The company could not continue, no profits were made and the share value crashed. Mr Meyer and Mr Lucas petitioned for relief under section 210 of the Companies Act 1948.

● ISSUE/HOLDING: Was the conduct of SCOWSL oppressive? YES. ● ANALYSIS: It is not possible to separate the transactions of the

society/majority shareholder from the company ○ “It seems to me that the co-operative society all the time was

seeking to promote its own interests. It was ready in 1946 to enlist the cooperation of Dr. Meyer and Mr. Lucas when they were useful to it - so as to get an introduction into the rayon trade - but it was ready to throw them over when they were no longer useful.”

○ S.210 of the Companies’ Act is “designed to suppress an acknowledged mischief”

○ NOTE the English Court of Appeal has also applied the OR to the conduct of shareholders

The Duty of a Controlling Shareholder When Tendering a Takeover Bid Pente Investment Management Ltd. v. Schneider Corp. (1998 ON SC)

● FACTS: Maple Leaf attempted a takeover bid of Schneider Corp, but the directors of SC thwarted this by entering a lock-up arrangement with another bidder (Smithfield).

● ISSUE/HOLDING: (1) Did the Schneider family (as shareholders) owe the other shareholders a FD in deciding whom to tender, or could they act solely out of self-interest? NO, they did not owe other shareholders a duty. (2) Can shareholders consider the best interests of constituencies other than shareholders in deciding how to tender?

● ANALYSIS: Farley J. draws a distinction between a shareholder’s decision about whether to tender into a takeover bid, and a shareholder’s decision abou how to vote. Says Schneider family could have decided not to sell to anyone no matter how lucrative the bid.

○ The only restriction a shareholder has from using their discretion to act in their own interests is that their decision must benefit the whole shareholding class and not just them personally (British America Nickel Corp)

○ The second issue isn’t explicitly addressed by the court but the decision suggests it’s permissible

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The Duty of the Board When There is a Controlling Shareholder Pente Investment Management Ltd. v. Schneider Corp. (1998 ON CA) Appeal of the previous decision. Directors are not the agents of the shareholders, and have absolute power to manage the company even if their decisions contravene the express interests of the majority shareholder.

● Because the Schneider family refused to tender any bid other than the Smithfield bid, the board took steps to favour that bid over the others.The board also withdrew its poison pill for Smithfield.

● If the Smithfield offer can reasonably be considered the best available offer, it’s not unfair or contrary to best interests of the company

● While the existence of a controlling shareholder doesn’t alter the board’s duty to act in the company’s best interests, it can condition the options available to the board

○ The board couldn’t force the Schneider’s to tender into any particular bid, so they had to do what was best for the company given those constraints

● NOTE: the convening of an independent committee is now standard procedure and important in the court's’ consideration of whether directors acted appropriately

Majority of the Minority Voting ● Another way to protect minority interests from majority shareholders in

which corporate action is conditioned on the approval of shareholders excluding either the controlling shareholder(s), any shareholder that stands to benefit from the corporate action, or both.

Role of Securities Regulators ● See: ON Securities Act: Regulators can enjoin any transaction contrary to

public interest, at least if the transaction involves trading

Re: Canadian Tire (Securities Commission 1987) Ontario Securities Commission will stop any transaction they feel is contrary to the public interest.

● The Ontario Divisional Court noted that the impugned conduct confounded the "justifiable expectations" of shareholders and the capital markets in general.

Are Controlling Shareholders Good for CDN Capital Markets?● Most Canadian corporations DO have controlling shareholders● More control = more monitoring of managers, but also more incentive to

push transactions that benefit their interests

● The expropriation effected by controlling shareholders does more than transfer wealth from minority to controlling shareholders; it impairs the efficiency of the corp sector

○ When controlling shareholders are unchecked, they can divert more resources into their own pockets

QBCA DIVISION II - REMEDIES§ 1. — Special provisions applicable to exercise of certain remediesQBCA 439. Applications under subdivisions 2 and 3 may be made by any of the following:(1) a registered holder or beneficiary, and a former holder or beneficiary, of a security of a corporation or any of its affiliates;(2) a director or an officer or a former director or officer of a corporation or any of its affiliates;(3) any other person who, in the discretion of the court, has the interest required to make an application under this division.

QBCA 440. An application made under subdivision 2 or 3 may not be dismissed on the sole ground that it is shown that an alleged breach of a right of or an obligation owed to a corporation or its subsidiary has been or may be approved by the corporation’s shareholders, but evidence of approval by the shareholders may be taken into account by a court in making a decision under either of those subdivisions.An applicant may apply to the court for leave to bring an action in the name and on behalf of a corporation or a corporation that is one of its subsidiaries, or intervene in an action to which the corporation or subsidiary is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the corporation or subsidiary.

QBCA 446. No application for authorization may be made unless the applicant has given the directors of a corporation or its subsidiary 14 days’ prior notice of the applicant’s intention to apply to the court.Authorization may be granted if the court is satisfied that the board of directors of the corporation or its subsidiary has not brought, diligently prosecuted or defended or discontinued the action, and if the court considers that the applicant is acting in good faith and that it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued.When all the directors of the corporation or its subsidiary have been named as defendants, prior notice to the directors of the applicant’s intention to apply to the court is not required.

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QBCA 447. In connection with an action brought or intervened in under this subdivision, the court may make any order it thinks fit, including(1) an order authorizing the applicant or any other person to control the conduct of the action;(2) an order giving directions for the conduct of the action;(3) an order revising the functioning of the corporation or its subsidiary by amending the articles or the bylaws or by establishing or amending a unanimous shareholder agreement;(4) an order making appointments to the board of directors of the corporation or its subsidiary, either to replace all or some of the directors or to increase the number of directors;(5) an order directing an investigation to be made under Division I;(6) an order directing that any amount awarded against a defendant 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(7) an order requiring the corporation or its subsidiary to pay, in whole or in part, the professional fees and other reasonable costs incurred by the applicant in connection with the action or intervention.

QBCA 449. If authorized by the court under section 445 to act on behalf of the corporation, the applicant is deemed to be the representative of the corporation for the purposes of the proceeding and, to that end, the applicant has a right of access to all relevant information and documents held by the corporation and to any document which is held or was prepared for the corporation by any person, including a mandatary or a provider of goods or services, who rendered a service to the corporation in connection with the action or intervention authorized by the court or which relates to the facts at issue.The court may, on application, order a person who holds any information or document referred to in the first paragraph to communicate it to the applicant if communication of the information or document appears to be necessary for the purposes of the proceeding or intervention authorized by the court. Before granting the application, the court must give interested persons the opportunity to be heard.However, any information or document obtained by the applicant under this section is presumed to be confidential and may only be used in connection with the action or intervention authorized by the court and subject to the conditions determined by the court, if any.

QBCA 450. An applicant may obtain an order from the court to rectify a situation if the court is satisfied that(1) any act or omission of the corporation or any of its affiliates effects or threatens to effect a result,

(2) the business or affairs of the corporation or any of its affiliates have been, are or are threatened to be conducted in a manner, or(3) the powers the board of directors of the corporation or any of its affiliates have been, are or are threatened to be exercised in a mannerthat is or could be oppressive or unfairly prejudicial to any security holder, director or officer of the corporation.

QBCA 451. In connection with an application under this subdivision, the court may make any order it thinks fit, including(1) an order restraining the conduct complained of;(2) an order appointing a receiver;(3) an order revising the functioning of the corporation by amending the articles or the by-laws or establishing or amending a unanimous shareholder agreement;(4) an order directing an issue or exchange of securities;(5) an order making appointments to the board of directors, either to replace all or some of the directors or to increase the number of directors;(6) an order directing the corporation or any other person to purchase securities of a security holder;(7) an order directing the corporation or any other person to pay a security holder all or any part of the monies that the security holder paid for securities;(8) an order varying, setting aside or annulling a contract or a transaction to which the corporation is a party and compensating the corporation or any other party to the contract or transaction;(9) an order requiring a corporation, within a time specified by the court, to make available to the court or an interested person the financial statements referred to in sections 225 and 226, or an accounting of them in the form determined by the court;(10) an order compensating a person who has suffered prejudice;(11) an order directing rectification of the records of a corporation in accordance with sections 456 and 457;(12) an order dissolving the corporation and winding it up if it has property or obligations;(13) an order directing an investigation to be made under Division I; and(14) an order condemning, not only in the case of improper use of procedure but also whenever the court thinks fit, any party to the proceedings to pay, in whole or in part, the professional fees and other costs of any other party.The corporation may not make any payment to a shareholder under subparagraph 6 or 7 of the first paragraph if there are grounds for believing that it would or could cause the corporation to be unable to pay its liabilities as they become due.See also CBCA, ss 238–40, 241, 242(1)–(2), (4).

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Other stakeholders Luca Enriques et al, “The Basic Governance: Minority Shareholders and Non-Shareholder Constituents” (Oxford: 2017)

● “The corp governance system principally supports the interests of shareholders as a class. Nevertheless, corporate law can—and to some degree must—also address agency conflicts jeopardizing the interests of minority shareholder and non-shareholder contractual constituencies.”

○ “A governance regime must necessarily constrain the power of the shareholder majority and thereby aggravate the managerial agency problem.”

○ “Conversely, [...] empowering the shareholder majority are likely to exacerbate the agency problems faced by minority shareholders and non-shareholders at the hands of controlling shareholders.”

Ways to protect minority shareholders 1. Shareholder appointment rights and deviations from 1-share-1-vote -

granting minority shareholders the right to appoint one or more directors by reserving board seats for minority shareholders or over-weighting minority votes in the election of directors

a. Lawmakers can also increase the power of minority directors by assigning them key committee roles or by permitting them to exercise veto powers over certain classes of board decisions (note that this is relatively uncommon)

2. Incentives: trusteeship + equal treatment - population boards and key committees with independent directors or enforcing the equal treatment norm with respect to distribution and voting rights

a. Note that most independent directors aren’t rigorously screened for independence

3. Constraints and affiliation rights - constraints = standards like the duty of loyalty, OR, abuse of majority voting; affiliation strategy = mandatory disclosure

Ways to protect employees (who, as contractual counterparties to the corp, may deserve the protection of corporate law insofar as they are particularly susceptible to exploitation by the firm + labour law is held to be inefficient):

1. Appointment and decision-rights strategies - when employees can appoint directors to boards (widespread in Europe)

2. Incentives and constraints - appointed directors are weak trustees; also, employees (and lenders, and suppliers, and other non-shareholder contractual constituencies) receive compensation as fixed payments, not volatile claims on the net income of the corp - so employees should be given stocks so that they can share in the equal sharing norm

Ways to protect external constituencies (i.e. from things like environmental degradation, anti-competition behavior, human rights, etc.)

1. Other areas of the law 2. Corporate governance strategies - either because regulators have left gaps,

or industry lobbying is too powerful - may need to be used a. Affiliation strategies - increase the quality and quantity of info

available to the public (i.e. non-financial or social disclosure requirements, disclosure of ratio of CEO compensation to median employee via Dodd-Frank Act, etc.)

b. Appointment and decision rights strategies - not really a thing, but France does allow govts to appoint board reps in privatized firms; also, some jurisdictions restain directors from serving on the boards of rival firms; also, gender quotas); also, some jurisdictions have “golden shares” AKA conferring decision rights on the government

c. Incentives and constraints - beyond the parameters of corporate law; however, imposition of director duties to consider the interests of other constituencies (a la BCE) is an expression of a standards strategy)

“Corp law may become an easy target of populist or misguided reform efforts that can easily decrease the efficiency of its regime without generating meaningful gains for other constituencies”

Mergers & Acquisitions Sale of control block Why merge/acquire? Good Reasons:

● Target company poorly managed● Economies of scale● Economies of scope● Tax considerations

Bad Reasons: ● Empire building (e.g. delusions of grandeur)● Securing employment● Increasing salary

○ Managers of larger companies get more pay

Ways to Merge ● Sale of shares● Acquisition of control block (AKA hostile takeover)

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● Sale of assets● Amalgamation (CBCA 181)● Some others, e.g. reverse asset acquisition, triangular merge

Zetlin v. Hanson Holdings (NY 1979) Basically says: Sale of control block at premium price is okay. Sale of control block is a market transaction that creates rights and duties between the parties, but does not confer rights on other shareholders.

● Also good law in Canada

Paul Davies, Klaus Hopt and Wolf-Georg Ringe, “Control Transactions” (Oxford: Oxford University Press, 2017)

● Core control transaction in this paper is between a 3rd party and corp’s shareholders - but can also shift as a result of an action between the company and its shareholders or the investing public

● Merger involves corporate decisions, usually by both shareholders and the board, and all companies involved

● Control transactions are effected by private K between acquirer and shareholders individually (though in friendly transactions, the acquirer has the free choice to structure the bid as a K offer or merger proposal)

● Takeover regulation globally seeks to address two main issues: ○ Agency problems (within the target company) ○ Coordination problems among target shareholders

Freeze-Out Mergers An action taken by a firm's majority shareholders that pressures minority holders to sell their stakes in the company

● A variety of maneuvers may be considered freeze-out tactics, such as the termination of minority shareholder employees or the refusal to declare dividends.

● Freeze-outs usually occur in closely-held companies, wherein the majority shareholders can converse with one another.

● The majority shareholders will attempt to freeze out the minority from the decision making process, rendering minority voting rights useless (can be overturned by a court)

● In a typical freeze-out merger, the controlling shareholder(s) may set up a new corporation that they own and control

○ This new company would then submit a tender offer to the other company hoping to force the minority shareholders to give up their equity position

○ If the tender offer is successful, the acquiring company may choose to merge their assets into the new corporation

○ In this scenario, non-tendering shareholders would essentially lose their shares as the company would no longer exist.

○ While non-tendering shareholders would generally receive compensation (cash or securities) for their shares as part of the transaction, they would no longer retain their minority ownership stake

EC, Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids, [2004] OJ, L 142/12 - General PrinciplesFor the purpose of implementing this Directive, Member States shall ensure that the following principles are complied with:(a) all holders of the securities of an offeree company of the same class must be afforded equivalent treatment; moreover, if a person acquires control of a company, the other holders of securities must be protected;(b) the holders of the securities of an offeree company must have sufficient time and information to enable them to reach a properly informed decision on the bid; where it advises the holders of securities, the board of the offeree company must give its views on the effects of implementation of the bid on employment, conditions of employment and the locations of the company’s places of business;(c) the board of an offeree company must act in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid;(d) false markets must not be created in the securities of the offeree company, of the offeror company or of any other company concerned by the bid in such a way that the rise or fall of the prices of the securities becomes artificial and the normal functioning of the markets is distorted;(e) an offeror must announce a bid only after ensuring that he/she can fulfil in full any cash consideration, if such is offered, and after taking all reasonable measures to secure the implementation of any other type of consideration;(f) an offeree company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities.

2. With a view to ensuring compliance with the principles laid down in paragraph 1, Member States:(a) shall ensure that the minimum requirements set out in this Directive are observed;(b) may lay down additional conditions and provisions more stringent than those of this Directive for the regulation of bids.

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Hostile Takeovers● HTBs enable an outside acquirer to obtain control of a target corp

without having to obtain the consent of target management ○ Acquirer makes a bid (almost always at a premium of the mkt

value of shares) to the target shareholders for some or all of the voting shares - if the right amount of shares are tendered, the acquirer will take up the shares

● Takeovers are motivated by gains an acquirer can realize from displacing opportunistic management with more dedicated and efficient managers (maybe even themselves)

○ Thus, under this hypothesis, the gains from the takeover of a corp directly vary with the severity of agency problems the target corp faces

● “Only the takeover scheme provides some assurance of competitive affairs among corporate managers and thereby affords strong protection to the interests of vast #s of small, non-controlling shareholders.” - Henry Manne

8.3.1. Defensive Tactics and the Theory of TakeoversTwo-tier (front-end loaded) coercive tender offers

● Acquirer makes a tender offer - to purchase less than 100% of target shares (gives more money to these “front loaded” people)

● Announces then remaining shares will be purchased in back-end merger (freezeout) at a lower price

● Why is this coercive? Because it sticks people with a much lower price for shares. However, you’re not worsening their situation, they’re still getting market price.

Poison Pill Defense (Canada) 1. Starts with an issuance of rights (AKA option to buy more shares in the

company) to the company’s shareholders a. One right typically issued for each share heldb. Each right entitled shareholder to purchase one share in the

company at a half the market price at the time the right is exercised

2. Rights only become exercisable should any shareholder (acquiring person) obtain more than a stated percentage of the corp’s stock (typically 20%, sometimes 10% or rarely 5%)

3. When the ownership threshold is crossed, this is a “flip-in” event 4. Usually has a “permitted bid” feature, ● Powerful because the only shareholder who can’t exercise it is the acquirer

Theoretical Perspectives “The Poison Pill: A Noxious Nostrum for Canadian Shareholders”, Jeffrey MacIntosh (1993)

● Argues poison pills are not in the best interests of shareholders ● Courts and admin should only sanction poison pill plans approved by

shareholders ● Believes that poison pills are used to protect managers, not shareholders,

and the evidence shows that court decisions that support poison pills lead to lower share values / firms have lower profits

Poison Pills have 2 functions: 1. Shareholder interest hypothesis - poison pills prevent shareholders

from having to settle for a low price for their shares; gets the acquirer to either make a better offer or gets management to fend off the bid and/or shop the corp around for a better bid and/or put together a competing proposal

2. Management entrenchment hypothesis - poison pills may be used abusively by management in an attempt to hold on to their jobs (thus reducing share value and insulating managers from the market for corporate control, resulting in inefficient management and even lower share values)

Other Takeover Defenses Pre-bid defensive measures

● Barriers to the acquisition of shares or to exercising control: ○ Ownership caps (setting a maximum amount of voting securities

of a company that a person may hold without being required to make a mandatory takeover offer to such company's shareholders)

○ Voting caps (not allowed in Canada) ○ Multiple voting shares ○ Supermajority quorums ○ Staggered boards ○ Golden parachutes (exit compensation contracts that provide

high severance pay upon control change)

Post-bid defensive measures ● Pac Man defense (After firm A makes offer for firm B’s stock, firm B

makes an offer for Firm A’s stock) ● Sale of crown jewels (Selling assets that are most sought-after to make the

takeover less enticing) ● Scorched earth (When a target firm implements this provision, it will

make an effort to make itself unattractive to the hostile bidder, i.e. by

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selling crown jewels, or scheduling debt repayment to be due immediately following a hostile takeover. In some cases, a scorched-earth defense may develop into a poison pill)

● White knight defense (asking a company friendly to management to outbid the acquirer)

“The Proper Role of a Target’s Management in Responding to a Tender Offer” Easterbrook and Fischel (1982)

● Tender offers are a way to monitor the work of management; prospective bidders look to a corp’s potential value and compare it with its current value (reflected by share prices) - when this difference becomes too great, an outsider can profit by buying the firm and improving its management

● Source of premium of funds = reduction in agency costs ● This kind of monitoring by outsiders benefits shareholders even if there

isn’t ever a successful tender offer - reduces agency costs

Why Target Management Should Be Allowed to Adopt a Defensive Strategy● Tender offers don’t increase welfare ● The target’s shareholders benefit from price increases when tenders are

defeated ● Target management has obligations to non-investor groups that may be

harmed by a tender offer ● Target’s management is obliged to prevent unlawful conduct

Why Tender Offers Don’t Increase Welfare ● In new hands, firms can still be better-run then they are in their current

state ● Tender offers still let management to engage in long-term planning, which

may be interpreted favourably in the market via higher share prices● Insecurity of tenure spurs managers to perform at their best

○ Offers also rouse target management to action ● Funds used for a tender offer aren’t necessarily diverted from investment

to consumption because shareholders may well reinvest what they receive from the acquirer

● Stock prices post tender might go up because investors see it as the first round in an auction and anticipate another better offer

Defensive tactics and the BJR ● Courts have invoked BJR freely in order to refuse to review manager’s

defensive conduct ● Courts should implement a rule of managerial passivity: i.e. managerial

decisions would be subject to attack only if designed to defeat takeover bids, not for being inadequately researched

○ Management should be allowed to continue daily biz, send out a press release encouraging shareholders to reject/accept the offer; offeror can also communicate views to shareholders

○ However, all other defensive tactics expend the target’s resources and offer no gain to investors(i.e. Anti-takeover charter or bylaw amendments, lawsuits against offeror, acquire a competitor of the offeror, buy or sell shares to make offer more costly, give away valuable corporate info to a white knight, etc.)

● Basically, this would place the burden on management to prove th eir actions/decision were not taken for the sole purpose of resisting a takeover (timing is key here - if they happened pre-takeover...obviously not a response to a potential takeover!)

○ This doesn’t incapacitate management, but also keeps management from freely resisting takeovers

“A Guide to Takeovers: Theory, Evidence and Regulation”, Roberta Romano (1992)

● On average, there’s a 20% increase over pre-merger announcement share price and 30% increase for takeover offers - but firm’s returns are more mixed

● Acquirers’ returns have decreased over time ● Takeovers that appear to be non-value maximizing for bidders may be

socially beneficial (i.e. aggregate wealth increases)

Legal Regulation of Hostile Takeovers 1. Fiduciary duties of the board of directors + target defenses (Unocal,

Revlon)2. Securities regulations (Provincial) - Unimportant for our purposes

Teck v. Millar (BC SC 1972) A director may resist a hostile takeover so long as they are acting in good faith, and they have reasonable grounds to believe that the take-over will cause substantial harm to the interests of the corporation.

● FACTS: A tale of two mining companies, Teck and Afton. Teck had a majority shareholding in Afton (run by Millar), and had prepared a contract between the two companies which would enable Teck to exploit certain mining rights owned by Afton (this was referred to as an “ultimate deal”). In order to ensure that Afton agreed, Teck had indicated an intention to remove the board of directors of Afton and replace them with their own nominees.

● However, before this scheme could be finalised, Millar entered into a different K with another company, Canex. This contract provided that Canex would be issued a large shareholding in Afton, displacing Teck’s

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majority shareholding and frustrate the “ultimate deal”. Teck sued, arguing that (as in Hogg v Cramphorn Ltd) they had entered into the contract with Canex for the improper purpose of entrenching their own position.

● ISSUE + HOLDING: Did Miller have improper purpose in going for the subsidiary of Canex instead of Teck? NO - he was acting in best interest of the company.

● ANALYSIS: Test on whether management is acting with improper purpose in blocking a hostile takeover is one of good faith and reasonable investigation:

○ 1) Directors must act in good faith. (much more lax, like something more commonly seen in Ks)

○ 2) Ds have to have reasonable grounds to believe that it is in the best interests of the company. (this is more stringent à related to the statutory fiduciary duties)

● Sounds like the BJR, no? ● Duty of care - that’s good faith● Loyalty - this is different…● There’s no level of suspicion, we give managers discretion● In takeovers, unlike business judgement situations, there is a COI

(not as strong as a self-dealing one, but still) ● Conflict of duties/independence: “directors ought to be allowed

to consider who is seeking control and why. If they believe there is substantial damage to company’s interests…”

Unocal v. Mesa (Delaware 1985) To determine if a BoD has acted reasonably in the case of a perceived hostile takeover, ask: (1) Did directors reasonably perceive a threat? (2) Was the directors' defensive measure reasonable re: the threat posed?

● FACTS: Mesa was a corporation led by a well-known corporate raider. Mesa offered a two-tier tender offer wherein the first tier would allow for shareholders to sell at $54 per share and the second tier would be subsidized by securities that the court equated with “junk bonds”. The threat therefore was that shareholders would rush to sell their shares for the first tier because they did not want to be subject to the reduced value of the back-end value of the junk securities, even if this had the potential to earn up to $72. Unocal directors met to discuss their options and came up with an alternative that would have Defendant corporation repurchase their own shares at $72 each, once Mesa had acquired certain # of shares (this would be a trigger for Unocal to start purchasing back their shares). The Directors decided to exclude Mesa from the tender offer because it was counterintuitive to include the shareholder who initiated the conflict.

The lower court held that Defendant could not exclude a shareholder from a tender offer.

● ISSUE/HOLDING: Did the Board have the power to exclude Mesa? YES. If it did, did it breach a fiduciary duty? NO.

● ANALYSIS: The directors for Defendant corporation have a duty to protect the shareholders and the corporations, and one of the harms that can befall a company is a takeover by a shareholder who is offering an inadequate offer.

● The BJR could not be used here, as this case called for an “enhanced duty” à directors’ decision to prevent an offer such as the one at issue should be subjected to an enhanced scrutiny since there is a natural conflict when the directors are excluding a party from acquiring a majority control.

● In this case the directors met the burden. There was evidence to support that the company was in reasonable danger: the outside directors approved of their self-tender, the offer by Plaintiff included the junk bonds, the value of each share was more than the proposed $54 per share, and Plaintiff was well-known as a corporate raider. The court found that the Unocal's board of directors had reasonable grounds for believing that a danger to corporate policy or effectiveness existed and that the response was reasonable in relation to the threat posed. This reasonable relation analysis permitted an analysis of the price, nature, and timing of the offer as well as the impact on shareholders, creditors, customers, employees, and the community. (Note that this permission to consider other constituencies besides the shareholders was curtailed in Revlon v. MacAndrews.)

To determine whether directors may try to prevent a takeover, ask: 1. Did the directors reasonably perceive a threat?

a. Board may satisfy this by proving good faith, and that they have conducted a reasonable investigation.

b. Must be materially enhanced by the approval of a board comprised of outside directors to confirm that the BOD really was acting in good faith and had done their research.

2. Was the directors' defensive measure reasonable in relation to the threat posed?

a. Relies on the notion of proportionality.b. There is a need to identify the threat, first. Then, determine what

the best course of action is.c. For coercion, evening up the front and back should be enough.d. For price, getting a higher bid is often the course of action.

Note that whereas Cheff v. Mathes had sanctioned greenmail, or payment to the raider to go away, in Unocal the court sanctioned reverse greenmail, or payment to shareholders excluding the raider.

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● The court is imprecise in this case of deciding whether the defensive measures were proportionate. Determines that the self-tender at $72 was proportionate but unclear why. Would $54 per share by responsive?

● The special rule for defensive mechanisms adopted in the face of hostile bids: In between BJR and entire fairness.

Revlon v. MacAndrews (Delaware 1986)In certain limited circumstances indicating that the "sale" or "break-up" of the company is inevitable, the fiduciary obligation of the directors of a target corporation are narrowed significantly, the singular responsibility of the board being to maximize immediate stockholder value by securing the highest price available.

● FACTS: Pantry Pride’s CEO approached Revlon’s CEO and offered a $40-42 per share price for Revlon, or $45 if it had to be a hostile takeover. The CEO’s had personal differences, and the court noted this as a potential motivation for Revlon to turn elsewhere. Revlon’s directors met and decided to adopt a poison pill plan and to repurchase five million of Revlon’s shares. Pantry Pride countered with a $47.50 price which pushed Revlon to repurchase ten million shares with senior subordinated notes. Pantry Pride continued to increase their bids, and Revlon decided to seek another buyer in Forstmann. Revlon offered $56.25 with the promise to increase the bidding further if another bidding topped that price. Instead, Revlon made an agreement to have Forstmann pay $57.25 per share

subject to certain restrictions such as a $25 million cancellation fee for Forstmann and a no-shop provision. Plaintiffs, MacAndrews & Forbes Holdings, Inc., sought to enjoin the agreement because it was not in the best interests of the shareholders. Defendants argued that they needed to also consider the best interests of the noteholders.

● ISSUE + HOLDING: Was Revlon’s deal with Forstman in the best interests of the shareholders?

● ANALYSIS: Where a sale or breakup of a company is inevitable, the role of the board of directors transforms from "defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company."

○ Accordingly, the board's actions are evaluated in a different frame of reference. In such a context, that conduct cannot be judicially reviewed pursuant to the traditional BJR, but instead will be scrutinized for reasonableness in relation to this discrete obligation.

● Colloquially, the board of a firm that is "in Revlon mode" acquires certain Revlon duties, which requires the firm to be auctioned or sold to the highest bidder. (NOTE: not the law in Canada –BCE has replaced this)

REVIEW SESSION Agency Law

● How are agency relationships formed? ● How are they dissolved? ● What duties does an agent owe a principal > these translate into fiduciary

duties! ○ Tarnowski - agents are supposed to work for the principal,

they’re not supposed to accrue any benefit (duty of loyalty is the same - interests of principal above the agent)

○ Gleeson - trustee can’t benefit from trust in any way (self-dealing, conflicts of interest -

● Back in the days of agency law, we had strict rules for conflict of interest - everything that looks like a COI was banned. Now in corp law, we allow the transactions and then we check to see if they put their interests above corp (moved from rule-based to standard-based approach)

AGENCY COSTS ● Monitoring costs borne by principal

○ Acquire info, observe agents behavior, reward agent for service ● Bonding costs borne by agent

○ Contractual guarantees to have financial accounts audited by independent auditors

● Residual loss ○ $ amount of the unavoidable deviation by agent after

monitoring and bonding

THEORY OF THE FIRM ● Why do firms exist if the market works so well?

○ See: theories ○ Main takeout - firms exist because transaction costs are costly as

individual market transactions

Purpose of Corp Law ● Reduce transaction costs ● Containing agency problems ● Increase welfare of corp constituents (AKA stakeholder primacy) ● Increasing shareholder value (AKA shareholder primacy)

FORCES SHAPING CORP LAW● Patterns of share ownership

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○ E.g. in the US, most corps are dispersedly owned, EU more concentratedly owned

○ If dispersedly owned - the main agency issue is between the board and the minority shareholders

○ If concentrated - majority shareholders are likely directors/agents - the main issues will be between major/minor shareholders

■● Regulatory competition/harmonization

○ In Canada, we’re all about harmonization under the CBCA - not a lot of jurisdictional competition (unlike the US)

CORP FORM CORE FEATURES: 1. Legal personality - corp personality is separate from shareholders, can

own property, sue and be sued etc. / creditors of shareholders cannot go after firm’s assets (entity shielding)

2. Limited liability - corp cannot be held liable / creditors of the corp cannot go after shareholders’ assets (asset --)

*Veil-piercing exists to break through these first two elements ● See: Wakovski (taxi case) -- Wakovski was not held liable for his mini-

corporation’s tort, because it’s not a sham -- the plaintiff wanted to pierce the corporate veil for limited liability

● BETTER ARGUMENT might have been to pierce for legal personality -- i.e. the sham is that W in practice has one big corp and is just keeping them artificially separated (the money should come from all the corporations, not just the one - so the creditor of one corp should be the creditor of all)

○ In theory, veil-piercing is a way to not let people create corporations to defraud others

3. Transferable shares a. “Tradable shares” = shares traded on the market b. Transfers don’t necessarily happen on stock market

4. Centralized management 5. Shared residual rights

SOURCES OF FINANCING FOR A CORP 1. Shareholders 2. Creditors - bank loans etc

RELATIONSHIP WITH CREDITORS ● Defined by

○ Credit agreements

○ Bankruptcy law - triggered by non-payment

VEIL PIERCING (again) ● See above ● This is an incoherent area of law - but can we make sense of it?

○ Lack of formalities seems necessary ■ But alone, this is not enough ■ E.g. in Walkovsky, the companies shared money - so

separation is arbitrary ! ○ Injustice / fraud - important elements:

■ Severe undercapitalization ■ Intent ■ deception/fraud re: contract (note: inapplicable in tort)

● “Like lightning - rare, severe, unprincipled” ● NOTE: Holding directors personally liable IS NOT veil-piercing

TEST: 1. Unity of interest and ownership

a. Lack of corp formalities b. Commingling of funds and assets

2. Injustice / fraud

Scope of Corporate Contract ● Old doctrine:

○ Ultra vires - presumes company can’t do something unless bylaws explicitly allow it

○ Limited by bylaws ● Current doctrine

○ Powers of natural person ○ Unless explicitly restricted

Corporate Liability ● Criminal (ignore) ● Tortious ● Contractual ● KEY ELEMENT: Authority

○ Principal-agent authorization is hard to prove

Directors can be liable for: ● Breach of regulation (OHS, enviro protection - negligence standard) ● Unpaid wages - defense of justification exception - strict liability ● Torts - when committed by the person themselves, not vicariously

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Directors are not liable for breach of K

Fiduciary Duties ● Care - responsibility to take reasonable steps to do what’s best for the

corporation (diligently, carefully, etc. - do your job well!) ○ Van Gorkom is very important - proceduralized duty of care

● Loyalty - responsibility to act in the best interests of the corporation ○ This derives from agency law !

● Standard to review: BJR ○ Revolves around deference to biz decisions ○ A standard to review the duties of loyalty and care

DUTY OF LOYALTY (not super-important) ● Central in self-dealing, corp opportunities, competition ● Owed to the corp in principle - recipient, ratification

○ Shareholders? ■ This is the traditional view - but BCE complicated it ■ If there’s a takeover - the stakeholder model is more

readily relied upon ○ Other stakeholders?

■ See: Revlon - the reason why the board went one way over the other regarding a bid was to protect the creditors

■ You’re basically giving the board discretion as to who to take care of the most

■ Weakens the fiduciary duties themselves - gives the board more leeway

“We don’t need a stakeholder model because we have the oppression remedy.” ● Makes BCE’s interpretation undesirable ● But -- the BCE move can also make an argument for getting rid of the

OR , because it is super

BCE/Peoples ● Peoples (mostly about duty of care) - corps MAY take stakeholders into

account ● BCE says corps SHOULD take stakeholders into account

○ Discussion of shareholder primacy is from this statement from BCE

Shareholder Rights Transfer shares Hold meetings/vote

Right to oversight

VOTING ● Preemptive rights

○ The right to buy or sell shares first ● Voting mechanisms

○ Plurality (most common) ○ Majority ○ Cumulative

● What do they vote on?○ Appointing directors ○ Other fundamental things

● Uncontested elections

MEETINGS ● Annual vs. special ● Unanimous consent can confirm voidable acts ● Board can’t abuse director powers ● Voting shareholders have a right to discuss ● Shareholders can ask a corp to include an item for shareholder vote as

long as it related to biz or affairs of corp● Meetings can be called by shareholders, directors, judges

Shareholder Actions ● Derivative

○ On behalf of the corp for wrongs towards the corp○ Allows shareholders to embody the corp and sue on its behalf ○ If the board is the one misbehaving, it can’t represent the corp!

■ Derivative is an expansion of standing to allow shareholders to sue

○ Procedural loopholes: ■ Need permission from court ■ Need to notify board

● Personal

○ Shareholder for personal wrongs○ This used to be the only remedy available!

■ If a lot of shareholders were harmed, they did a class action

○ This was cumbersome, hard to prove, etc. ■ This incentivized derivative actions

When do you file for derivative vs. personal as a shareholder?

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● If the person wronged was a shareholder, file personal● If the harm only happens because of a wrong to corp, which has residual

effects on individuals, then derivativeNOTE: this is very complicated in actuality

● You could file a class action too! It’s a strategic decision.● See Goldex mines for distinction - “where a legal wrong is done to

shareholders by directors….” “a derivative action, on the other hand…”

● Oppression○ For personal wrongs and breach of expectations ○ It’s much wider than derivative action ! So lots of personal and

derivative actions are done as oppression actions ○ In theory, you’re representing yourself not the corp ○ But it’s so wide, you see derivative actions filed as OR

(violations of fiduciary duties) ○ Court can do anything as a consequence - so many remedies!

■ Appraisal is most common ■ Limit is to rectify the hurt party, not punish the corp

(Naneff)

Standing - doctrinal ● Leave of court ● Interest of the corp ● 14-day notice

Free riding - functional ● Costs of litigation

“The broadest, most comprehensive and most open-ended shareholder remedy in the CML world...unprecedented in its scope.”

● List of complainants is massive ● Standards:

○ Oppressive, prejudicial, unfairly disregards interests ○ Reasonable expectations (BCE + Westfair)

BCE is important b/c it defines both the oppression remedy and stakeholder primacy BCE Oppression Remedy Standard

● Oppression = conduct is coercive and abusive, suggests bad faith ● Unfair prejudice = less culpable state of mind, unfair consequences ● Unfair disregard = ignoring interest as being of no importance

1. Was there expectation / evidence to support?

2. Was the expectation breached by the oppressive conduct?

Minority Shareholders ● There’s an agency problem with minority and majority shareholders ● There is no fiduciary duty to minority shareholders ● Duties towards them = equitable rights (Ebrahimi) ● Rights from oppression remedy (Imax)● Mechanisms to protect them:

○ Legal and incentive strategies

Shareholder Protections Overview 1. Fiduciary duty lawsuits

a. Care, loyalty 2. Shareholder votes for boards

a. Contested vs. uncontested 3. Hostile Acquisitions

M&A ● Reasons to merge

○ Good = Economics of scale and scope ○ Bad = empire building, larger salaries

● Ways to merge ○ Friendly mergers - control block where boards agree ○ Sales of assets ○ Amalgamation

● Freezeouts ○ Controlling shareholder buys minority shares and freezes them

out

HOSTILE TAKEOVERS (Most important) ● Defense = poison pill ● Can a board defend itself?

○ Revlon / Unocal ■ Can’t pick favorites ■ In sale of cash, take best bid ■ In sale of control, take vest vid

MISC DEFINITIONS 2 kinds of capital:

● Debt capital = you lend money to the corp. and are expecting it back● Equity capital = you give money to the corp in exchange for a stock,

which gives you rights ● Merger = two companies merging (more statutory)

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● Acquisition = one company acquires another ○ In practice, these are used as one word

● Leveraged buyout = using debt to acquire a biz (?) ● Tender offer: invitation to sell stock at a specified price ● Hostile tender offer: one that target management did not invite

Coercive tender offer: ○ Partial offer: Market price is 33, I’m going to offer to buy stock

from a majority shareholder at 42 (as opposed to buying from all shareholders)

○ two-step 100% tender offer: offered to everyone, for a very high price, but after they get control through first offer, they squeeze others out with a lower offer

● Self-tender = company tenders for its own shares ● Exchange offer = tender offer for securities not cash ● Junk bonds = bonds that, in bankruptcy, get paid after senior debt but

before equity ● Greenmail = acquiror buys shares and threatens to be disruptive unless

company buys its shares at a premium

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