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CORPORATIONS LAW
LAW 451
University of Alberta, Faculty of Law
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1. CHOOSING THE FORM OF BUSINESS VEHICLE ......................................................... 10
A. Introduction .................................................................................................................. 10
Main Factors in Choosing the Form of Business Enterprise ......................................................................................... 10
B. Types of Business Vehicles ............................................................................................ 10
Introduction ................................................................................................................................................................. 10 Choosing the Business Vehicle ..................................................................................................................................... 10 Sole Proprietorship ...................................................................................................................................................... 11 Partnerships ................................................................................................................................................................. 12 Joint vs. Several vs. Joint and Several Liability ............................................................................................................. 14
C. Agency .......................................................................................................................... 15
1. Overview: Agency and Business Law ....................................................................................... 15
Partners as Agents ....................................................................................................................................................... 15
2. Partnership ............................................................................................................................. 15
How to Tell if A Partnership Exists or Not – s. 4 of the PA ........................................................................................... 15 Volzke Construction Ltd v Westlock Foods Ltd – The Partnership Test is Based on Intent, but the Intent is Functional; Look At All the Factors; Control Not Required ............................................................................................................. 16 Kinds of Authority ........................................................................................................................................................ 17 McDonic Estate v Hetherington – Test for Agent Authority ......................................................................................... 18 “Am I My Partner’s Keeper” ......................................................................................................................................... 20 Limited Liability Partnerships ....................................................................................................................................... 20 Limited Partnerships .................................................................................................................................................... 21
D. Business Arrangements ................................................................................................. 22
Difference Between a Business Vehicle and a Method of Doing Business .................................................................. 22
2. A BACKGROUNDER TO CORPORATIONS ................................................................. 22
A. Introduction .................................................................................................................. 22
Methods to Incorporate and Kinds of Corporations .................................................................................................... 22 Salomon v Salomon & Co Ltd – Most Important Case in Corporations Law ................................................................. 22 General Structure of a Corporation ............................................................................................................................. 26
B. Corporate Constitution .................................................................................................. 27
The Corporate Constitution ......................................................................................................................................... 27 Who are the Corporation's Internal Groups? ............................................................................................................... 27 Who are the Corporation’s External Groups? .............................................................................................................. 27
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How Does a Corporation Come into Existence? ........................................................................................................... 27 3 Models on How to Incorporate ................................................................................................................................. 28 What Would the Constitution of the ABCA Include? ................................................................................................... 28 Summary of General Acts of Incorporation in Common Law Canada .......................................................................... 28 Canadian Jorex v 477749 Alberta Ltd – Directors Have the Power to Cancel a Special Meeting, Unless Limited by Bylaws or USAs ............................................................................................................................................................. 28
SUMMARY OF THE 3 BUSINESS VEHICLES .................................................................. 30
Sole Proprietorship ...................................................................................................................................................... 30 Partnership ................................................................................................................................................................... 31 Corporations ................................................................................................................................................................ 33 Pros and Cons of a Corporation ................................................................................................................................... 34 Major Forms of Business Organization ........................................................................................................................ 34
3. THE PROCESS OF INCORPORATION ........................................................................ 35
A. Procedures .................................................................................................................... 35
Where to Incorporate .................................................................................................................................................. 35 Who Does the Incorporating? ...................................................................................................................................... 35 How Does One Incorporate? ........................................................................................................................................ 35 Articles Restricting the Transfer of Shares ................................................................................................................... 36 Unanimous Shareholder Agreements .......................................................................................................................... 37 Cicco v 609940 Ontario Inc (Trustee of) – A USA Does Not Bind a 3rd Party Without Knowledge of It ........................ 37 Bylaws .......................................................................................................................................................................... 39 Directors Organization Meeting ................................................................................................................................... 39 Summary – If We Want to Determine the Rules that Govern a Corporation, What Do We Have to Know? ............... 39 Other Matters – Corporate Records ............................................................................................................................ 40 Professional Conduct – Joint Retainers, Potential Conflicts, Informed Consent .......................................................... 40
B. Corporate Names .......................................................................................................... 41
1. Common Law and Statutory Requirements ............................................................................. 41
Naming a Corporation .................................................................................................................................................. 41 Definition of a NUANS Search ...................................................................................................................................... 41 Paws Pet Food and Accessories Ltd v Paws and Shop Inc – Similar Names Caused Second Company to Change its Name ............................................................................................................................................................................ 42 Stenner v ScotiaMcLeod – Example of “Passing Off” ................................................................................................... 43 Corporate Names – Trademarks vs Tradenames ......................................................................................................... 45
C. Share Capital ................................................................................................................. 45
Introduction on Shares ................................................................................................................................................. 45 2 Main Kinds of Shares – Common vs Preference ........................................................................................................ 45
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D. Pre-Incorporation Contracts .......................................................................................... 45
Pre-Incorporation Contracts ........................................................................................................................................ 45 Westcom Radio Group Ltd v MacIsaac – Ludicrous Decision on the Wording of s. 21 of the OBCA and Looking at the Common Law First Before Applying the Statute .......................................................................................................... 47 Sherwood Design Services v 872935 Ontario Ltd – Bad Decision on the Act of the Solicitor Being Sufficient to Show Intention; Minority Later Adopted in Szecket .............................................................................................................. 48 Estey: What Do We Learn from Sherwood? ................................................................................................................. 49 Szecket v Huang – Functionally Overruled Westcom ................................................................................................... 50 How We Approach Matters in Alberta – s. 15 of the ABCA ......................................................................................... 50 Wickberg v Shatsky et al – How We Measure Damages for Breach of Warranty Under the ABCA ............................. 51 The ABCA vs CBCA regarding Pre-Incorporation Contracts .......................................................................................... 52 Summary of Pre-Incorporation Contracts .................................................................................................................... 52
4. THE CORPORATOIN AS A LEGAL PERSON ............................................................... 53
A. Nature of the Corporate Personality .............................................................................. 53
Introduction ................................................................................................................................................................. 53
B. Grounds for liability of Those Behind the Corporation ................................................... 53
1. Liability Based on Lifting the Corporate Veil ............................................................................ 53
Introduction ................................................................................................................................................................. 53 Excerpt from Khimji and Nicholls, “Piercing the Corporate Veil in the Canadian Common Law Courts: An Empirical Study ............................................................................................................................................................................ 54 Kosmopoulos v Constitutional Insurance Co of Canada – The Test to Lift the Corporate Veil ..................................... 54 Yaiguaje v Chevron Corporation – Example of the Corporate Veil Not Being Pierced; Transamerica Test .................. 54 Big Bend Hotel Ltd v Security Mutual Casualty Co – Corporate Veil Will Be Lifted When Trying to Cover Fraud; Insurance Fraud ............................................................................................................................................................ 57 Performance Industries Ltd v Sylvan Lake Golf & Tennis Club Ltd – Indirect Way of Testing the Applicability of Big Bend; SCC Affirms ABCA and Trial Judge’s Ruling; O’Connor Couldn’t Hide Behind His Corporation .......................... 58 Jin v Ren – Most Recent Corporate Veil Lifting Case in AB; Improper Purpose ............................................................ 59 Wildman v Wildman – Reverse Corporate Veil; Corporate Liability for Shareholders in Marriage Dispute ................ 61 Review of Big Bend, Sylvan Lake, Jin, Wildman – Cases Where the Corporate Veil Was Successfully Lifted .............. 62 Rockwell Developments Ltd v Newtonbrook Plaza Ltd – When Not to Lift the Corporate Veil .................................... 63 There is Still a Corporate Veil ....................................................................................................................................... 64 Send the Account to My Company ............................................................................................................................... 65
2. Liability Based on Thin Capitalization ...................................................................................... 65
Thin Capitalization Introduction ................................................................................................................................... 65 Henry Brown Example – Thin Capitalization Fails ........................................................................................................ 65 Walkovszky v Carlton – Liability for Thin Capitalization Rejected ................................................................................ 66
3. Liability Based on Total Disregard of Formality ....................................................................... 67
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Wolfe v Moir – Personal Liability Can Be Found When Formalities Are Disregarded .................................................. 67 Vallis v Prairie Alternative Energy Solutions Ltd – Failing to Comply with Identification Formalities Can Lead to Personal Liability .......................................................................................................................................................... 68
4. Liability in the Area of Trust Law ............................................................................................. 69
Introduction to Trust Liability – Knowing Assistance and Knowing Receipt ................................................................ 69 Citadel Assurance Co v Lloyds Bank Canada – Trust Liability Based on Knowing Receipt; Explanation of Knowing Assistance vs Knowing Receipt ..................................................................................................................................... 69 Air Canada v M&L Ltd – Trust Liability Based on Knowing Assistance ......................................................................... 71 Chapter 4 Review ......................................................................................................................................................... 72
5. TORTIOUS, CRIMINAL, REGULATORY, AND CONTRACTUAL LIABILITY OF THE CORPORATION .......................................................................................................... 73
A. Introduction .................................................................................................................. 73
Individual vs. Corporate Liability in Contract, Tort, and Crime .................................................................................... 73
B. Criminal and Tortious Liability ....................................................................................... 73
1. Attributing Liability to a Corporate Body ................................................................................. 73
The “Rhone” v The “Peter AB Widener” – What is a Directing Mind? .......................................................................... 73 Deloitte & Touche v Livent Inc (Receiver Of) – Duty of Care Shaped by the Purpose for Which Representation is Given; Strict Application of Canadian Dredge Not Needed .......................................................................................... 75
2. Statutory Criminal Liability ..................................................................................................... 78
New Amendments to the Criminal Code ...................................................................................................................... 78 Metron – Expansion of Corporate Criminal Liability Due to Those Below a “Directing Mind” (I.e. a Senior Officer) .. 78
3. Deferred Prosecution Agreements .......................................................................................... 80
What is a DPA? ............................................................................................................................................................. 80
C. Regulatory Offences ...................................................................................................... 80
The Different Kinds of Offences ................................................................................................................................... 80 R v Bata Industries Ltd (Ontario Provincial Court) – Due Diligence Defence; Look at the Individual’s Authority ........ 81 R v Syncrude Canada Ltd – How an AB Court Dealt with the Breaching an Environmental Standard ......................... 83
D. Contractual Liability ...................................................................................................... 85
Introduction – Liability in Contract Overview .............................................................................................................. 85
1. Doctrine of Ultra Vires ............................................................................................................ 86
Jon Beauforte (London) Ltd Re – Application of the Doctrine of Ultra Vires; Constructive Notice .............................. 86 Restriction on the Doctrine of Ultra Vires – A Legislative Response ............................................................................ 87 Communities Economic Development Fund v Canadian Pickles Corp – Doctrine of Ultra Vires Limited to Special Act Corporations ................................................................................................................................................................ 87
2. Contracting with Agents of the Corporation ............................................................................ 89
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Agency Law Diagram .................................................................................................................................................... 89 Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd – Bayne Found to Have Apparent Authority as the Company Secretary; Job Title Clothed Him with Authority ............................................................................... 89 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd – The Test for Apparent Authority ......................... 90 Doiron v Manufacturers Life Insurance Co (ABQB) – Apparent Authority Test in AB; Employment vs Independent Contractor Test ............................................................................................................................................................ 93 Doiron v Manufacturers Life Insurance Co (ABCA) – Strong Endorsement of the Freeman Approach; Agrees with the ABQB ............................................................................................................................................................................ 95 Review of the Authority Cases So Far .......................................................................................................................... 96 Canadian Laboratory Supplies Ltd v Englehard Industries of Canada – Englehard’s Liability Ends at Certain Date; Laskin Dissent on Never Having Actual Authority to Give the Agent Authority ........................................................... 96 Agency (Freeman, Doiron) ............................................................................................................................................ 98 Chapter 5 Review ......................................................................................................................................................... 99
6. CORPORATE GOVERNANCE ................................................................................... 100
A. Introduction ................................................................................................................ 100
Corporate Governance ABCA Statutes of Note .......................................................................................................... 100 Introduction to the Role of the Board of Directors .................................................................................................... 100 Principles of Corporate Governance .......................................................................................................................... 100 Business Roundtable Statement of the Purpose of a Corporation ............................................................................ 101
B. Director Positions ........................................................................................................ 101
(Dis)Qualifications to Be a Director – s. 105 of the ABCA .......................................................................................... 101 Elections of Directors – s. 106 of the ABCA ................................................................................................................ 102 New Diversity Disclosure Provision in the CBCA ........................................................................................................ 102 An Introduction to Cumulative Voting ....................................................................................................................... 102
C. Statutory Duties of Directors and Officers ................................................................... 103
1. Introduction to Director’s Fiduciary Duty and Duty of Care and the Business Judgment Rule 103
A Director’s Duty of Care – Statutory vs Common Law .............................................................................................. 103 Peoples Department Stores Inc (Trustee of) v Wise – Fiduciary Duty and Duty of Care; Business Judgment Rule; Professional Defence .................................................................................................................................................. 103 Transportaction (a Follow-up on Peoples) and Livent Test for Negligence ................................................................ 107 Other Causes of Actions or Alternatives That Could Have Been in Peoples – Derivative Action and Oppression ..... 109 BCE Inc v 1979 Debentureholders – Fiduciary Duty to a Corporation; Companion Case to Peoples .......................... 110 Peoples and BCE Summary on s. 122 ......................................................................................................................... 112 Amendments to the CBCA Regarding s. 122: Bill C-97 – Codifying What Peoples and BCE Said on Who’s Included in Considering the Best Interests of the Corporation .................................................................................................... 113 Smith v Van Gorkom – Breaching Duty of Care to the Corporation; Example of a Horrible Process; Not Binding in AB Since This is in Delaware; Presumption of the BJR ..................................................................................................... 113
2. Fiduciary Duties .................................................................................................................... 115
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(a) Introduction ................................................................................................................................... 115 Introduction to the Breach of Fiduciary Duty ............................................................................................................. 115
(b) Taking Corporate Opportunities ..................................................................................................... 116 Cook v Deeks – Breach of Fiduciary Duty Can Be Established Where They Take Corporate Opportunity ................. 116 Canadian Aero Service Ltd v O’Malley – Taking Corporate Opportunity; Key Consideration is Fairness ................... 117 Matic et al v Waldner et al – More Recent Case then Canadian Aero On the Law on Corporate Opportunity ......... 120
(c) Self-Dealing Transactions – Common Law ....................................................................................... 121 Self-Dealing Transactions ........................................................................................................................................... 121 Aberdeen Railway v Blaikie Bros – Absolute Rule Against Self-Dealing; Strict Test; No Longer the Law ................... 121 North-West Transportation Company Ltd v Beatty – Creates an Opening in the Aberdeen Rule That Allows Self-Dealing Contracts Where Its Authorized by Shareholders ......................................................................................... 122
(c) Self-Dealing Transactions – Legislative Response ............................................................................ 124 Introduction to Self-Dealing Contracts Under s. 120 of the ABCA – Disclosure by Directors and Officers in Relation to Contracts .................................................................................................................................................................... 124 The Two Kinds of Conflicts Under s. 120 – Direct and Indirect .................................................................................. 125 Dimo Holdings Ltd v H Jager Developments Inc – Narrow View of Material Interest à Financial Interest ............... 126 Zysko v Thorarinson – Broad View of Material Interest à Includes Emotional Interest ........................................... 128
(d) Competing Director ........................................................................................................................ 128 London and Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd – Nothing Wrong with Sitting on Competing Boards; NOT the law Anymore ........................................................................................................... 128 Sports Villas Resort, Inc (Re) – More Recent Case; You Can Sit on Multiple Boards, You Just Have to Avoid Real or Potential Conflicts of Interest .................................................................................................................................... 129
(e) Takeover Bids and Defensive Tactics by Management .................................................................... 131 Maple Leaf Foods v Schneider Corp – How Directors Can Protect Themselves During a Takeover Bid; Fiduciary Duty ................................................................................................................................................................................... 131
(f) Other Sources of Fiduciary Obligation ............................................................................................. 133 Tongue v Vencap Equities Alberta Ltd – Fiduciary Duty Can Be Owed to Individual Shareholders in Certain Circumstances ............................................................................................................................................................ 133
(g) Shareholder Ratification of a Breach of Fiduciary Duty ................................................................... 136 Ratification of Breach of Fiduciary Duty ..................................................................................................................... 136
(h) Sitting on a Client’s Board of Directors ........................................................................................... 136 Sitting on a Client’s Board .......................................................................................................................................... 136
(i) Dissenting Director .......................................................................................................................... 137 Dissenting Directors on Any Resolutions Passed/Action Taken at Meetings – Big Difference Between the CBCA and ABCA Presumption of Consent ................................................................................................................................... 137
3. Other Statutory Duties .......................................................................................................... 138
Zwierschke v MNR – Liability Under the Income Tax Act ........................................................................................... 138
4. Case Study: Directors’ and Officers’ Liability in Tort to Third Parties ..................................... 138
(b) Intentional Torts: Inducing Breach of Contract ............................................................................... 138
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McFadden v 481782 Ontario Ltd – To Escape Personal Liability for Personal Tort; Inducing Breach of Contract, Director Must Have Been Acting in the Scope of Duty; Pocklington Ingredients ....................................................... 138
(c) Negligence ...................................................................................................................................... 141 Director Liability: ScotiaMcLeod vs ADGA .................................................................................................................. 141 Montreal Trust Co of Canada v ScotiaMcLeod Inc – Broad Protection for Directors for Personal Liability; Negligent Misrepresentation ...................................................................................................................................................... 141 London Drugs Ltd v KNI Ltd – The Employees Committed a Tort and are Responsible for it ..................................... 143 ADGA Systems International v Valcom – Narrow Protection for Directors for Personal Liability; Inducing Breach of Contract ...................................................................................................................................................................... 143 NBD Bank, Canada v Dofasco Inc – Accepts the ADGA Approach; Negligent Misrepresentation .............................. 146 Test for Negligent Misstatement, Applied to NBD ..................................................................................................... 147 Hogarth v Rocky Mountain Slate Inc – ABCA Generally Follows the Broad Liability Protection From ScotiaMcLeod; Negligent Misrepresentation; Important Concurring Opinion from Slatter JA on the Current Law .......................... 149 Comparing ScotiaMcLeod to ADGA to Hogarth ......................................................................................................... 153 General Overview and Summary of SM, ADGA, Hogarth, and Slatter JA Threading the Needle ............................... 154 Hall v Stewart – Factors Identified by Case Law as to When D/Os Would Have Personal Liability for their Own Tort; Takes Slatter JA’s Approach ....................................................................................................................................... 156 Andersen v Canadian Western Trust Company – Also Validates Slatter JA’s Approach ............................................. 156 Apt Estate – Recent ABCA Also Validating Slatter JA’s Approach; And Repurposes ScotiaMcLeod ........................... 157 Chapter 6 Review ....................................................................................................................................................... 158
7. CORPORATE SOCIAL RESPONSIBILITY .................................................................... 159
Introduction ............................................................................................................................................................... 159 Ferguson, Global Corruption Law: Theory and Practice ............................................................................................. 159 Corporate Social Responsibility in the case of BCE .................................................................................................... 160 Friedman on Corporation Social Responsibility – The Traditional Property View ..................................................... 160 Dodge v Ford Motor Company – Manifestation of the Property View ...................................................................... 160 The Roundtable Statement – Rejection of the Traditional Property View ................................................................. 161 The Social Entity View ................................................................................................................................................ 161 Talisman Example – Bad Corporate Social Responsibility .......................................................................................... 161 Shareholder Proposals ............................................................................................................................................... 161 Re Varity Corp and Jesuit Fathers of Upper Canada et al (Ont HCJ) – Proposal in Opposition to Application Not Circulated Because it Was for a General Political Cause, Which Wasn’t Allowed Under s. 131(5)(b) at the Time .... 162 Re Varity Corp and Jesuit Fathers of Upper Canada et al (ONCA) – Upheld Lower Court’s Decision; Important Dissent; Would it Differ Today with Amended CBCA? ............................................................................................... 163
8. SHAREHOLDER RIGHTS AND REMEDIES ................................................................ 164
Introduction to Shareholder Rights .................................................................................. 164
Shareholder’s Rights Chart ......................................................................................................................................... 164 Examples of Personal Rights Held by Shareholders ................................................................................................... 165
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Relief from Oppression or Unfairness .............................................................................. 166
Judicial Interpretation .............................................................................................................. 166
(a) What is Oppressive or Unfair Conduct? .......................................................................................... 166 Deluce Holdings Inc v Air Canada – Relief from Oppression or Unfairness; Responsiveness of the Oppression Remedy ...................................................................................................................................................................... 166 BCE Inc v 1979 Debentureholders – Judicial Interpretation of What is Oppressive or Unfair Conduct; Landmark Case; Oppression Remedy in ABCA in s. 242 ....................................................................................................................... 168 Re Ferguson and Imax Systems Corp – Oppression Found on a Lower Threshold ..................................................... 171 Downtown Eatery (1993) Ltd v Ontario – Oppression Doesn’t Require Harm to the Complainant; Complainant Can Be Under s. 239(b)(iv) ................................................................................................................................................ 173 Shefsky v California Gold Mining Inc – Derivative Actions Cannot be Masqueraded as Oppression Actions; Oppression Governed by Three Rules from BCE ........................................................................................................ 174
(b) Oppression or Derivative? .............................................................................................................. 176 ABCA Provisions Regarding Oppression and Derivative Actions ................................................................................ 176 Hercules Managements v Ernst & Young – There’s a Difference Between a Personal Action and Derivative Action; Individual Shareholders Don’t Have a Cause of Action in Law for Harms Against the Corporation; Duty of Care Between Auditors and Shareholders Negated for Policy Reasons ............................................................................. 177 Brunette v Legault Joly Thiffault – Also Goes to the Difference Between a Personal and Derivative Action; Trusts are Just Shareholders; Only Time a Shareholder Can Sue is if the Wrongdoer Owes them a Separate Legal Duty ......... 179 Causes of Action Summary Slide – Hercules ............................................................................................................... 180 Pathak v Moloo: Leave to Commence a Derivative Action Requirements per the ABCA .......................................... 180 Rea v Wildeboer – When is a Matter Derivative and When is it Oppression; Oppression Requires Personal Harm; Shuts Down Malata Line of Reasoning; Here This Was a Derivative Action .............................................................. 181 1043325 Ontario Ltd v CSA Building Sciences Western Ltd – The Distinction Between Oppression and Derivative Action is Enforced More Strictly (Rea Approach); Skene Co Showed Particular Prejudice of Damage to Warrant Oppression ................................................................................................................................................................. 182 The Conduit-Like Nature of a Derivative Action – Truck Slide ................................................................................... 184 Case Law Summary: Oppressive vs Derivative ........................................................................................................... 185
Scope of Relief Available .......................................................................................................... 186
Wilson v Alharayeri – 2-Part Test for When a D/O Will Be Personally Liable In Oppression; 4 General Principles in Fashioning a Remedy ................................................................................................................................................. 186 Naneff v Con-Crete Holdings Ltd (Ont Ct J (Gen Div)) – TJ Found Oppression; Orders that the Business Be Sold in Its Entirety and Any Family Member Could Bid .............................................................................................................. 187 Naneff v Con-Crete Holdings Ltd (ONCA) – Reverses the TJ’s Order; Ordering the Sale of the Company is too Punitive Towards Mr. Naneff; Was Never a Reasonable Expectation that Alex Could Purchase the Company; Discretionary Powers Under the OBCA Must Be Exercised With 2 Important Limitations .............................................................. 189 Chapter 8 Review ....................................................................................................................................................... 191
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1. CHOOSING THE FORM OF BUSINESS VEHICLE A. INTRODUCTION Main Factors in Choosing the Form of Business Enterprise
• The main factors in choosing the form of business enterprise are: o 1. The steps required to create it and other formalities o 2. The risk of loss involved o 3. The power of control desired o 4. Who participates in profits/distributions of assets o 5. Dissolution
B. TYPES OF BUSINESS VEHICLES Introduction
• Per McGuinness, a corporation: o Is an artificial or juristic entity created by or under the authority of the laws of a state, province or nation, that is regarded
in law as being a legal person* separate and distinct from the person or persons who comprise its membership. As such, it may acquire rights and property in its own name, sue and be sued, and assume or be subject to legal obligations.
§ *Note that “person” has two meanings according to context: An artificial person (a corporation) and a natural person (an individual; a human being).
• Both are persons in law • What unites standard corporate law topics is that they say something about:
o What a corporation is, what its rights and liabilities are; o The human beings behind the corporation and what their rights and liabilities are; or o The rights of those dealing with or being impacted by the corporation and/or those behind the corporation
• We will be looking at businesses that provide goods and services on a for profit basis • Imagine you have a client who wants to start a for profit business
o Your job is to explain the options o You would typically recommend a corporation, but it really can depend
Choosing the Business Vehicle
• • Factors to consider:
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o Creation and other formalities § How is the business set up?
o Risk of loss § What is the risk of loss associated with the business organization? § Who carries the loss?
o Power of control § Who makes the decision affecting it?
o Participation in profits/distribution of assets; and § How are the profits distributed in order to have a successful business? § Who are entitled to the assets at the end?
o Dissolution § How is the business brought to an end?
Sole Proprietorship • How is it created?
o Earliest form of business enterprise o Inherently simple to start
§ You just enter into business o Can be large/small
§ Normally the small operations are SP's o There are still some formalities – e.g. in the Partnership Act
§ 110 – Individual using trade name • (1) Each person who
o (a) is engaged in business for trading, manufacturing, contracting or mining purposes, o (b) is not associated in partnership with any other person or persons, and o (c) uses as the person’s business name
§ (i) some name or designation other than the person’s own, or § (ii) the person’s own name with the addition of “and company” or some
other word or phrase indicating a plurality of members in the firm, • shall sign and file with the Registrar a declaration in writing of the fact.
o Someone providing services like accounting or lawyering are not caught by s. 110(1)(a) o What "trading, manufacturing, contracting or mining purposes" can mean can be seen
from looking at what judges have said in case law, or definitions from certain statutes o "Contracting" – Not every business can be covered by this, so it's not broadly meant
§ Someone's in the business of contracting, like highway creation o "Mining" is pretty obvious o Note that even though it’s called the Partnership Act, filing a declaration under it also
applies to SP’s § If you don't sign your s. 110 declaration, there is a penalty in s. 112 of the PA
• 112 – Penalty for Late Filing o Every member of a partnership and every other person required to file a declaration
under this Act who fails to comply with the provisions of this Act respecting filing is guilty of an offence and liable to a fine of not more than $500.
§ You get a $500 fine § S. 113 of the PA allows you the sued party to stay an action
• 113 – Stay of action o An action or other proceeding instituted in any court in Alberta
§ (a) by an unregistered partnership, or § (b) by any other person who is required to register a declaration under this
Act but has failed to comply with the requirements respecting registration o may be stayed on the application of the defendant or party opposite in interest until the
partnership becomes registered or until the declaration is filed, as the case may be • E.g. Mike (client) is supposed to register his sportswear and doesn't
o Gets fined $500 o What happens if Mike wants to sue someone?
§ The D's counsel could work that Mike is unregistered, and make an application pursuant to s. 113 and have Mike's action stayed
§ His action is put on hold until he complies with s. 110 § The action is not struck though; what's happening is it just stayed
§ Municipal law that requires a business license to operate in the city § Zoning for a business
• You must have the right zoning where it is you're purporting to set up your business • Risk of loss
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o This is a one-person show o This person is legally responsible for all debts and obligations o If the SP incurs a debt, the owner incurs the debt o It does not have a separate personality/legal existence o Personal assets can be taken then too, not just the assets in the business o Personal guarantees example (in the context of corporations): If Mike ran his business as a corporation (Mike Ltd.) and
the corporation defaults, the bank is restricted to the corporation's assets – why? § The judgment debtor is the corporation here, not the individual's § Mike's personal assets would be safe unless he signed the guarantee
§
§ The creditor cannot seize everything that the individual (Mike) has though • There is legislation that says certain things are not subject to being seized
o There is unlimited liability o You also have vicarious liability towards any employees as well
§ This is because of the relationship they have with the tortfeasor • Power of control
o The entire management of the business rests on the sole proprietor o All decisions are up to the sole proprietor
• Participation in profits o The owner has the sole right to profits and can decide what to do with them
• Dissolution o The owner has the power to terminate the business at will
§ You just stop doing business o It also ends if the owner dies
• Legislation o S. 111 of the PA – Ceasing to use business name
§ If a person who has filed a declaration under section 110 ceases to carry on business under the business name referred to in the declaration, the person may file with the Registrar a declaration stating
• (a) the date the declaration under section 110 was signed, and • (b) the date on which the person ceased to carry on business under that business name.
• Summary o Unlimited personal liability
§ The largest risk this person bears o There’s no separation between the SP and the sole proprietor
§ Any debts incurred by the SP are incurred by sole proprietor
Partnerships • 3 kinds
o Ordinary Partnership: unlimited personal liability per the PA (see Volzke and McDonic) o Limited Liability Partnerships: unlimited personal liability subject to s. 12 of the PA. (Many law firms operate as LLPs.) o Limited Partnerships: the general partner has unlimited liability; the limited partner has liability limited to the amount of
its investment, subject to s. 64 of the PA. § The limited partners are really there as investors, and really just stand to lose their investment
• Per PA, s. 1(g), "partnership" means the relationship that subsists between persons carrying on a business in common with a view to profit.
o Note that the PA is just a collection of common law decisions § The PA is just one source though that governs partnerships
• Per PA, s. 6: “Each partner is an agent of the firm and of the partner's other partners for the purposes of the business of the partnership.”
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o Agency definition (British): § Agency is the fiduciary relationship which exists between persons, one of whom expressly or impliedly
consents that the other should act on his behalf so as to affect his relations with third parties, and the other of whom similarly consents so to act or so acts. The one on whose behalf the act or acts are to be done is called the PRINCIPAL. The one who is to act is called the AGENT. Any person other than the principal and the agent may be referred to as a third party.
• Partnerships are not distinct legal entities o E.g. Dentons does not exist as a separate legal entity o This is similar to a SP, however the consequences in an OP are magnified and worse
§ You have unlimited personal liability in in an ordinary partnership • For example, you are on the hook for bad legal advice that another partner gives
o The P client can go after any of the D lawyer partners for 100% of the judgment § If 1 partner pays 100% of the judgment, that partner can sue the other
partners for their portion after • Creation and other formalities
o There is nothing you need to do to create an OP § No declaration needed or form
o There are still other provisions that can affect this though § E.g. As with a SP, a partnership will have to find a named declaration in certain circumstances, in s. 106 of the
PA • 106 – Filing of declarations of partnerships
o Persons associated in partnership for trading, manufacturing, contracting or mining purposes in Alberta shall file with the Registrar a declaration in writing, signed by the several members of the partnership
• If you're in these sectors, you have to file a declaration § If you have filed something like that, now look at s. 115
• 115 – Liability of persons signing declaration o (1) Until a new declaration is made and filed by a person, or by the person’s partners, or
any of them, the person who signed a declaration is deemed not to have ceased to be a partner
o (2) Nothing in this Act exempts from liability a person who, being a partner, fails to declare that fact, but that person may be sued jointly with the partners mentioned in the declaration, or they may be sued alone, and if judgment is recovered against them any other partner or partners may be sued jointly or severally in an action on the original cause of action on which judgment was rendered
o (3) Nothing in this Act affects the rights of partners with regard to each other, except that no declaration shall be controverted by a signatory to it.
• You face ongoing liability • Risk of loss
o Joint, several, or joint and several • Power and control
o Different levels depending on seniority • Participation in profits/distribution of assets
o See s. 28 – Determination of partners’ interest § Subject to section 12 and subject to an agreement, express or implied, between the partners, the interest of
partners in the partnership property and their rights and duties in relation to the partnership shall be determined by the following rules:
• (a) all the partners are entitled to share equally in the capital and profits of the business and shall contribute equally toward the losses, whether of capital or otherwise, sustained by the firm, but a partner is not individually liable to contribute to losses arising from a liability for which the partner is not liable under section 12;
• (b) the firm shall indemnify each partner in respect of payments made and personal liabilities incurred by the partner
o (i) in the ordinary and proper conduct of the business of the firm, or o (ii) in or about anything necessarily done for the preservation of the business or
property of the firm, but a partner is not required to indemnify or make contributions to other partners in respect of debts or obligations of the partnership for which the partner is not liable under section 12;
• (c) a partner who makes for the purpose of the partnership a payment or advance beyond the amount of capital that the partner has agreed to subscribe is entitled to interest from the date of the payment or advance;
• (d) a partner is not entitled before the ascertainment of profits to interest on the capital subscribed by the partner;
• (e) each partner may take part in the management of the partnership business; • (f) no partner is entitled to remuneration for acting in the partnership business;
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• (g) no person may be introduced into the firm as a partner without the consent of all existing partners;
• (h) a difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners;
• (i) no change may be made in the nature of the partnership business without the consent of all existing partners;
• (j) the partnership books are to be kept at the place of business of the partnership, or the principal place of business if there is more than one, and each partner may have access to and inspect and copy any of the books
• Dissolution o Unless it says otherwise, it ends on the death/bankruptcy of a partner
Joint vs. Several vs. Joint and Several Liability • Joint liability: A shared liability such that each defendant is liable to the full extent of the obligation in question. See, for example, s.
11(2) of the PA o S. 11 – Liability of partner
§ (2) Each partner in a firm is liable jointly with the other partners for debts and obligations of the firm incurred while that partner is a partner
o A shared liability where each D is fully liable to the extent in question o Each partner is 100% liable for what is outstanding
• Several liability: A separate or distinct liability based on apportionment according to fault or responsibility. o "Each D is 20% responsible for what happened"
§ Several liability flows from that o E.g. Insider trading under the ABCA in Tongue v Vencap
§ Facts • Directors bought shares from the P • At the time of the negotiation, the directors did not advise the interest of 3rd parties (so the shares
we're undervalued because the P didn't know they were going to another party, otherwise they would have asked for more)
§ S. 130 under the ABCA – Civil liability of insiders • 130(1) An insider who sells to or purchases from a shareholder of the corporation or any of its
affiliates a security of the corporation or any of its affiliates and in connection with that sale or purchase makes use of any specific confidential information for the insider’s own benefit or advantage that, if generally known, might reasonably be expected to affect materially the value of the security
o (a) is liable to compensate any person for any direct loss suffered by that person as a result of the transaction, unless the information was known or in the exercise of reasonable diligence should have been known to that person at the time of the transaction… [emphasis added]
• Counsel for Tongue was able to establish liability under s. 130 § What you'd want is to establish that all the directors are jointly liable
• It gives you a lot more flexibility § On this point, the Court found more to it than this
• By reading the act, you can determine whether it's joint or several • "direct loss" = several liability • In the end, the D would have to compensate the P equal to the proportion of shares that director
individually purchased § Summary
• Section 130 contemplates several liability, and the directors are only responsible for the particular shares they were directly part of
• Joint and several liability: A form of liability such that, for example, the plaintiff can collect 100% on its judgment from any of the defendants but facilitates apportionment as between defendants according to fault or responsibility. See s. 15 of the PA
o S. 15 – Liability for wrongs, joint and several § Except as provided in section 12, each partner is liable jointly with the partner’s co-partners and also severally
for everything for which the firm while the partner is a partner in it becomes liable under section 13 or 14 • Example
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o o Mr. X leases a photocopier to Ms. Y (who happens to be a business partner of Mr. Z) o Should a problem arise, X can sue Y or Z for 100%
§ Then, Y or Z would have some kind of indemnification right against the other
C. AGENCY 1. Overview: Agency and Business Law
Partners as Agents • As said before, per s. 6 of the PA: each partner is an agent of the firm and of the partner’s other partners for the purposes of the
business of the partnership • Agency definition:
o Agency is the fiduciary relationship which exists between persons, one of whom expressly or impliedly consents that the other should act on his behalf so as to affect his relations with third parties, and the other of whom similarly consents so to act or so acts. The one on whose behalf the act or acts are to be done is called the principal. The one who is to act is called the agent. Any person other than the principal and the agent may be referred to as a third party.
o
2. Partnership
How to Tell if A Partnership Exists or Not – s. 4 of the PA • 4 – Determining existence of partnership
o In determining whether a partnership does or does not exist, regard shall be had to the following rules: § (a) joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself
create a partnership as to anything so held or owned, whether the tenants or owners do or do not share profits made by the use of it;
• Just because there's co-ownership, that doesn't mean people are partners or create a partnership
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§ (b) the sharing of gross returns does not of itself create a partnership, whether the persons sharing the returns have or have not a joint or common right or interest in property from which or from the use of which the returns are derived;
• Gross returns - refers to all the money that the business brings in (no deduction for cost) o If you're sharing that money, this does not create a partnership
§ (c) the receipt by a person of a share of the profits of a business is proof, in the absence of evidence to the contrary, that that person is a partner in the business, but the receipt of the share, or of a payment contingent on or varying with the profits of the business, does not of itself make the person receiving the share or payment a partner in the business, and in particular:
• (i) the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make that person a partner in the business or liable as a partner;
• (ii) a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as a partner;
• (iii) a person who is a surviving spouse or adult interdependent partner or child of a deceased partner and who receives by way of annuity a portion of the profits made in the business in which the deceased person was a partner does not by reason only of that receipt become a partner in the business or liable as a partner;
• (iv) the advance of money by way of loan to a person engaged or about to engage in a business on a contract with that person that the lender shall
o (A) receive a rate of interest varying with the profits, or o (B) receive a share of the profits arising from carrying on the business, does not of itself
make the lender a partner with the person or persons carrying on the business or liable as a partner, so long as the contract is in writing and signed by or on behalf of all the parties to the contract;
• (v) a person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by the person of the goodwill of the business is not by reason only of that receipt a partner in the business or liable as a partner.
• Notes o As soon as you're sharing profit, you're far along the road to partnership o Why is sharing profit so important?
§ If a person is sharing a profit, the person would almost be concerned with how the business is being run
§ Sharing a profit suggests that you are in business with the other person § This is very different than gross returns § Prima facie sharing of profit = partnership
o Co-ownership when splitting profits is definitely suggestive of partnership
Volzke Construction Ltd v Westlock Foods Ltd – The Partnership Test is Based on Intent, but the Intent is Functional; Look At All the Factors; Control Not Required
• Facts o Mall was co-owned by Bonel (80%) and Westlock (20%). Shefsky (dead) was the main shareholder in Westlock o Volzke (plaintiff), the general contractor, did work on Bonel, but had not been paid in full the final amount of $77K o Volzke sued Westlock alleging that they were partners with Bonel, and thus jointly and severally liable for the unpaid
balance o Westlock argued that since they didn’t have signing authority or control, it was not a partner
§ PA s. 1(g): “partner” means the relationship that subsists between persons carrying on a business in common with a view to profit
• Issue o Were Westlock and Bonel partners or co-owners?
• Analysis o If Westlock is partner, it has joint liability to pay Volzke’s bill o PA s 4: sharing of profits of a business is proof, in absence of evidence to the contrary, that person is a partner o To determine if partnership exists, look at all factors:
§ Westlock took on part of costs and profit in 80%/20% split § Dealt with complaints of tenants § Bank account with both of their names (although only Bonel had signing authority) § Both signed a debenture with the bank § Sent proposed new tenants for approval § Right to be consulted about new tenants § In another dispute, Westlock appeared to argue they were a partner
• Holding
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o Westlock and Bonel were partners • Ratio
o The partnership test is a functional test: Look at what is done and how the business conducts itself. Particular focus on how profit is shared
o Sharing of profit is prima facie proof of partnership (PA s. 4(c)) o Control is not a requirement of partnership
• Notes
o Why it matters: If W is a partner, it has liability on the P’s bill o ABCA corrects the trial judge o Issue of whether the parties (2 D corporations W and B) are jointly liable for the 77k o CA goes through a process for how to analyze whether a partnership exists o Examples of pointing towards being partners
§ The parties spoke of each other as partners § Bank account both in the parties' names, although Bonel had sole signing authority § Both parties signed on the same debenture to borrow money from the bank
• Refers to a document which evidences a debt of the corporation • AKA, a corporate IOU
§ There had been a past conflict between W and B over the parking lot; as a result of a chambers application, there was affidavit evidence in this earlier matter showing activities entirely consistent with a partnership
§ Both parties gave a mortgage • Borrowing money and pledging their property as security for their loan • If the mortgagor pays off the debt, then the property is dead to the lender • If the mortgagor fails to pay off the debt, the property is dead to them
§ Bills were paid on printed cheques of both parties § Costs and profit were shared on an 80/20 basis
• This is the most important o Trial
§ However, there's no partnership here, because W did not have any control over the business § If you don't have control, you can't be a partner...
• Where does it say in the PA that "control" is an indicium of partnership? There's no requirement of control
o Court of Appeal
§ The PA doesn't ask or require control as the indicia of partnership • You can't add things that aren't in the Act
§ Cites s. 4 – sharing of profit is prima facie proof of a partnership § The parties don't have to be equal § The test for partnership is based on intent, but the intent is a functional one
• Parties are partners based on what they do and that's what binds them • Even if it were to say "we're not partners" a bunch of times in the agreement, you may still be
acting like partners o It's about the interaction o How it's described doesn't matter
§ Trial judge overruled • B and W were partners • As a result, and by operation of the PA, there’s joint liability on the obligation to pay V
Kinds of Authority • What are the kinds of authority that other partners are bound by? • The third party is dealing with the agent; the question is whether the principal is bound? • Agency law says that a principal will be bound if the agent has actual or apparent authority • Actual authority
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o
o A legal relationship between a principal and agent created by a consensual agreement to which they alone are parties o Can be expressed or implied
§ Expressed • "You must do this..."
§ Implied • Implied based on instructions • Back to contract law
o You can have express and implied terms o Once you establish that an implied term, it's just as strong as an express term
• "Every agent has an implied authority to do everything necessary for, and ordinarily incidental to carrying out his express authority according to the usual way in which such authority is executed. For example, an agent authorized to find a purchaser for certain property is impliedly authorized to describe it and tell a prospective purchaser about the state of the property." And beyond this, "An agent's implied authority is further extended by what are termed the 'usual' and/or 'customary' authority of an agent in the trade, business, profession or place in which the particular agent is being employed would usually, normally or customarily possess, unless something was expressly said by the principal to contradict it."
o Agents have a lot of implied authority, but the actual scope is a fact-driven question o Sometimes usual authority is categorized as actual authority (as seen here) or as
apparent authority § It probably doesn't matter; the principal is bound either way
• Apparent authority o Arises from a representation from the principal to the 3rd party o "The impression of authority that the principal has created." As McGuinness notes, the principle of ostensible or
apparent authority comes into play "where a person is held out as an agent when that person is not an agent, or being an agent is held out to possess an extent of authority greater than that which has actually been conferred."
§ The principal has clothed the agent with the appearance of authority § E.g. Let's say the agent has authority to enter into contracts up to $25K; what if the agent gets into one that is
$30k • Can the principal say they're not liable?
o You could argue that apparent authority is in place o By permitting the agent to represent the principal in the marketplace, you're saying
you're open for business o Just because there's some secret limit it's not going to affect the outside world
• In a partnership, each partner is an agent of the other partners o A rogue partner can bind the firm then, even if the other partners don't want to be bound
McDonic Estate v Hetherington – Test for Agent Authority • Facts
• W (lawyer) cheated clients through investing money § Clients sue law firm (defendant) and claim lawyer was an agent of the law firm.
• Important factors to finding implied authority: Lawyer was a partner; he had an office at firm; he corresponded with P on firm letterhead; P received cheques from firms trust account; all records of their involvement were kept by employees of the firm; funds were deposited and dispersed from partnership account
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• 2 ways to find liability under PA s 13: § 1) If they were acting (investing money) in the ordinary course of business; or § 2) If W had authority (actual, implied or apparent)
• Issue • Was W acting within the scope of express, implied, or apparent authority? Were the actions of W done in the ordinary course
of business of the firm? • Analysis
• Implied authority: § W acted under implied authority (although badly) § PA s 6 - Every partner is an agent of the firm and his other partners for the purpose of the bus of the P and all partners
are liable for the acts of other partners for anything done in the usual way of business unless the partner had no authority to act for the firm in the particular matter.
§ Actions were undertaken under the ordinary course of business, therefore there was implied authority § Course of business (fact driven inquiry): W’s activities were the same as those carried on by the firm for other clients
• It did not matter that law firms typically do not provide investment advice, as doing so was in the ordinary course of business for this firm
• Test for ordinary course of business is specific to the particular business in question § Even though he did not have express authority, he had implied authority because he acted in ordinary course of
business • Apparent authority:
§ Agent acting as partner, had office in firm, clients identified as clients of the firm (not of agent), cheques came from firm account, firm charged P’s for services—nothing to distinguish this activity from any other
• Holding • There was implied, or at least apparent authority
• Ratio • Partner can have express, implied, or apparent authority to act on behalf of partnership • Nature of the activity, not manner in which activity is performed will determine whether that activity falls within the scope of
the firm’s ordinary business • Authority test in partnership:
§ 1) Express (actual) authority flows from authorization of other partners; § 2) Implied (actual) authority flows from acts done in ordinary course of business of the firm § 3) Apparent authority flows from a consideration of whether a person dealing with the partner would reasonably
regard the partner as acting on behalf of the partner
• Notes o Facts
§ M retains W in relation to investing § W is a partner of the law firm H § M loses all their money; W did not protect their interests with the risky investments
• Sued W and want the partners to make good of the loss § Are the partners liable based on actual or apparent authority? § W did not put up a defence
o Issue § Are the partners liable for what's happened here?
o Trial § The partners are not liable
• W was acting as an investment advisor; those dealings don't fall within a law firm's ordinary business
• Thus, there's no actual authority • There's also no apparent authority, as the partners didn't no anything about this
o Court of Appeal § Does not agree with the Trial judge on either front § Relevant statutes from the PA
• 13 - Liability of firm for wrongs o When, by a wrongful act or omission of a partner acting in the ordinary course of the
business of the firm or with the authority of the partner’s co-partners, loss or injury is caused to a person not being a partner in the firm, or a penalty is incurred, the firm is liable for it to the same extent as the partner so acting or omitting to act. [Note: This provision is the equiv. of s. 11 on the OPA referred to in McDonic and refers to actual authority].
§ If W fits within s. 13, it's actual authority then • 14 - Misapplication of money
o The firm is liable to make good any loss when
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§ (a) one partner acting within the scope of the partner’s apparent authority receives the money or property of a third person and misapplies it, …[Note: This provision is the equiv. of s. 12 on the OPA referred to in McDonic and refers to apparent or ostensible authority].
§ Court's summary of actual and apparent authority • Per court, express [actual] authority flows from the authorization of the other partners; implied
[actual] authority flows from acts done in the ordinary course of the business of the firm. o The other partners would say "W you can do X"
• Per court, apparent authority concerns whether a person dealing with the partner would reasonably regard the partner as acting on behalf of the partnership. (This would be due to a representation of authority by the other partner(s) to the third parties. Put another way, have the other Partners clothed W with the apparent authority to do what he did?)
o It's a communication by the partners to the outside world § On the facts, there's no express authority; they didn't even know about W doing this § Is there implied authority?
• Yes, if the investing of money is within this law firm's ordinary scope of business • The trial judge said that it didn't fall within the ordinary scope of business • The Court of Appeal disagreed
o The money that M gave to invest went through the partnership's bank account o It wasn't money that W just held on o The transaction appeared in the books of firm
• This is strong evidence that this is ordinary business of the firm o They're using the firm business machinery to handle this transaction
• Thus, there was clear evidence that W's activities were like that of his partners • W acted under implied authority, and thus the partners are therefore liable
§ How about apparent authority? • Was there a representation by the partners to the third party? • The TJ said there was no apparent authority since the partners were unaware of what had
happened • Court of Appeal
o TJ can't be right, otherwise that means you'd always need words saying you knew what happened
o W is conducting business under the law firm, and that's a representation to the outside world
§ Even though we think of a law firm as typically not in the area of business advising, this particular law firm did
§ Thus, the partners were liable for W’s malpractice • Therefore, liability flows
o Note that in this case, this was an ORDINARY PARTNERSHIP
“Am I My Partner’s Keeper” • Korz v St. Pierre: “A partner is liable for the wrongful acts of another partner committed in the ordinary course of the partnership’s
business, even though he or she had no direct participation in the events giving rise to the lawsuit or was even aware of them” o Firm should have policy about personal business dealings with clients.
• In McDonic Estate, the lack of partners’ awareness made no difference for partner’s liability as the nature of the activity was done in the ‘ordinary course of business’, even though the performance of the activity was negligent.
• Summary o You are liable for your partners! You must know what they are doing!
Limited Liability Partnerships • Partners have unlimited personal liability subject to s. 12 of the PA
o S. 12 is the shield that protects unprotected partners • The impetus for having LLPs
o Accountants had these massive partnerships all over the world; why should we be unlimited personally liable for people in another place?
o Lobbied to have a change in the law; that's how we end up with s. 12 o SKO: This whole problem is self-inflicted
• Certain kinds of professions (law firms and accountants) are allowed to operate by way of LLP • This is different from liability in an OP
o Back to McDonic § W's partners were jointly liable
• In an LLP, the liability is subject to a s. 12 shield, which applies in certain circumstances
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o 12 – LLP Limited Liability § (1) Subject to subsections (2) and (4), a partner in an Alberta LLP is not individually liable, directly or
indirectly by means of indemnification, contribution, assessment or otherwise, for debts, obligations or liabilities of the partnership or another partner that arise from the negligence, wrongful acts or omissions, malpractice or misconduct of
• (a) another partner, or • (b) an employee, agent or representative of the partnership that occur in the ordinary course of
carrying on practice in an eligible profession within the meaning of section 81 while the partnership is an Alberta LLP.
• Talks about when the shield does apply § (2) Subsection (1) does not operate to protect a partner from liability:
• (a) where the partner knew of the negligence, wrongful act or omission, malpractice or misconduct at the time it was committed and failed to take reasonable steps to prevent its commission, or
• (b) where o (i) the negligence, wrongful act or omission, malpractice or misconduct was committed
by an employee, agent or representative of the partnership for whom the partner was directly responsible in a supervisory role, and
o (ii) the partner failed to provide such adequate and competent supervision as would normally be expected of a partner in those circumstances.
• Talks about when the shield doesn’t apply § (3) A partner in an Alberta LLP is not a proper party to a proceeding by or against the partnership that claims
relief in respect of negligence, wrongful acts or omissions, malpractice or misconduct referred to in subsection (1).
§ (4) The protection from liability given to a partner under subsection (1) shall not be construed as offering any protection from claims against that partner’s interest in the partnership property.
§ Notes • The innocent uninvolved partner escapes liability for the negligence/wrongful acts of another
partner • You're okay provided that the practice is in question is an eligible profession • It doesn't protect this partner's capital contribution to the firm though
o When you join a partnership, you make a contribution to it (capital contribution) o That contribution is subject to a plaintiff's action against the law firm o This contribution is still exigible o We'll protect the innocent party to some extent, but not to the extent of their capital
contribution • Partners in an Alberta LLP are not shielded from liability for the partnership's ordinary contractual obligations • Back to McDonic
o If the law firm was operating as an LLP, would the innocent uninvolved partners be protected by s. 12? § The result would likely be the same § Only practicing law would be covered, not the advising part § If W had been practicing law, the uninvolved innocent partners could shield under s. 12 § The complaint against W was not about bad legal advice, it was that he gave bad investment advice § Investment advisors cannot operate as LLPs
• There are certain formalities in creating an LLP • When considering LLPs, think of a law firm
Limited Partnerships • In the context of an LP, there are specific provisions in the PA that discuss them • LPs has nothing to do with LLPs • Like an OP, they are governed by the PA, but specific steps need to bring them into existence • Limited Partnership are composed of
o Limited partners § Only stands to lose what they invested in the LP § Like a shareholder in terms of liability
o General partner § Like an OP in terms of liability
• The Limited partner has no liability towards LP unless they take control of the LP o Section 64 - Liability to creditors
§ A limited partner does not become liable as a general partner unless, in addition to exercising the limited partner’s rights and powers as a limited partner, the limited partner takes part in the control of the business
• Becomes liable as if they were a general partner
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D. BUSINESS ARRANGEMENTS Difference Between a Business Vehicle and a Method of Doing Business
• In Volzke, W held the IGA franchise • What is a franchise?
o A franchise is not a business vehicle; it's a business arrangement and takes the form of a contractual commitment o Contractual arrangement between manufacturer, wholesaler or service organization (franchisor) and independent
business (franchisee) who buys right to own/operate units of franchise system o As a general rule, the franchisee pays a start-up fee and royalties to the franchisor
• What about the business vehicle that would operate the franchise? o It would be a corporation
§ The franchise is just the business arrangement
2. A BACKGROUNDER TO CORPORATIONS A. INTRODUCTION Methods to Incorporate and Kinds of Corporations
• 2 main methods to create a corporation o Incorporate under the ABCA o Via the CBCA
• Difference between the 2: o Negligible, however there are some important ones that will be explained
• Under the ABCA, what can you create under that legislation? o Business corporation (follow the steps)
§ Confers limited liability on shareholders (only lose investment in the firm) o Professional corporations
§ Contemplated by the Legal Profession Act for lawyers for example • If you want to use a PC through which to practice law, there are tax advantages, but it doesn't help
you in terms of liability • You're as liable as if you were practicing as a sole practitioner • Why? We want the legal profession to be responsible for clients
o Unlimited liability corporations § Have been used by Americans as an effective tax vehicle to hold business interests in Canada
Salomon v Salomon & Co Ltd – Most Important Case in Corporations Law • Facts
o Salomon & Company, Ltd (Respondent) (in liquidation); Aron Salomon (Appellant, the individual) incorporated his sole proprietorship (Salomon Ltd.) and, on a related front, sold the assets of his sole proprietorship to the newly created company – made this a Corporation and therefore was afforded Ltd Liability
o Was a sole proprietor, wanted to incorporate his company to operate as a corporation. o Roll the assets of the sole proprietor into the corporation o At the time, you needed 7 shareholders to make a corporation, he did so as such o Salomon Ltd. purchased the sole proprietorship assets for 39,000 pounds. o Salomon Ltd. paid this amount owed to Aron the individual by:
§ Issuing 20,000 shares with a par value of one pound each (we don’t have par value shares anymore)
• It’s worth what someone else might pay you for it. (not necessarily 1 pound) • Now he’s got a total of 20,001 shares
§ Issuing a debenture (a legal I.O.U.) in the amount of 10,000 pounds. [Note: a debenture is a document that evidences a debt and in this case provided for a floating charge on the inventory – this made him a secured creditor of his own company (gets paid before unsecured creditors)]
§ As an unsecured creditor he would be paid before the shareholders. § Providing a few other benefits.
o As court summarizes the matter, it would seem that, all told, Aron (the individual) received: § About 1,000 pounds cash; § A 10,000 pound debenture from Salomon Ltd; and § About half the nominal capital in company (approx. 20,000 shares)
o After, Salomon Ltd. started to experience financial reversals due to a depression in the boot and shoe trade.
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§ To help Salomon Ltd., Aron personally lent money to the company (lending as the individual to the corporation)
§ He also got his debentures cancelled and reissued to Mr. Broderip as security for a 5000 pound loan to Aron, which Aron then gave to the company
§ When Salmon Ltd. failed to make a required interest payment to Mr. Broderip under the debenture, Broderip had a receiver appointed to force the sale of corporate assets.
§ Loaning money from Broderip and giving it to the company. Broderip gets a debenture. o Claims filed with the liquidator of Salomon Ltd. (look at assets and liabilities of company) were as follows (paid out in this
order): § Broderip paid out on the debenture (5000 pounds); § Aron gets paid on the balance of what was left on the debenture once Broderip was paid out; and § Unsecured creditors then get paid last (nothing left for them) à unsecured creditors are not going to be paid
out o Once Broderip was paid off, there would only about 1055 pounds left and, if Aron were to receive this amount as the next
secured creditor in line, there would be absolutely nothing left for the unsecured creditors § Trade creditors were unsecured – they loan the money, knowing they will have to wait for the sale to get the
money back, and also take the risk if the company goes under o In response to Broderip’s claim, the liquidator brought a counter claim to which Aron was also named a D. As the H.L
summarizes the matter, the liquidator disputed the validity of the debentures on the ground of fraud. On the same ground he claimed rescission of the agreement for the transfer of the business, cancellation of the debentures, and repayment by Mr. Salomon of the balance of the purchase money
§ The liquidator said that the entire deal making the company into a corporation was a fraud and that Salomon should be personally liable for all his debts, not the corporation
o Trial judge § Aron is the principal and the company is the agent § Under agency law, the debts are thus Aron’s § The company had the right to be indemnified by Aron for the amount owing to the creditors and Salomon
acted badly by setting up a corporation to avoid personal liability • Issue
o Is Aron personally liable for the debts of Salomon Ltd? o Is Aron a legitimate creditor of Salomon Ltd?
• Analysis o There were at least 4 main arguments for personal liability:
§ Salomon Ltd was not properly constituted under the Act § The only legitimate shareholder was Aron and the other have no function powers § The formation of Salomon Ltd was a scheme to enable Aron to carry on business § The company was his agent § Aron defrauded the company
o Lord Halsbury – The judgment should be reversed § Legislation requires 7 shareholders - first condition of Companies Act is met
• Doesn’t say they must be independent/unrelated as lower court stated • Motives of those who promote company are irrelevant
§ Not prepared to add requirements to Act • Therefore, corporation was properly constituted
§ Trial judges erred in not treating company as having a real existence § Once company is incorporated it must be treated as any other independent person with its own rights and
liabilities § Aron carrying on business through corporation is not contrary to intent of Act § Company was not acting as Aron’s agent (no intent)
• Either it was a legal entity in itself or not; if no, there is no thing to be an agent; if yes, it conducts its own business
§ Aron did not defraud company (got paid too much in purchase) • Other shareholders knew of the purchase price and agreed that Aron would get 20,000 shares, etc
– so how can it be fraudulent? • Other creditors could go to corporate registry and find out any info about deal – can’t say they
didn’t understand what was going on • The unpaid creditors can’t take advantage of publicly filed documents, then complain later
• They took a risk and unfortunately it didn’t pay off • So, no fraud on the shareholders, corporation itself, or creditors
o Lord Watson – The orders should be reversed § According to “intent” of legislature, company has not been incorporated so there can be no liquidation under
Companies Act and counterclaim fails
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§ No limit imposed by statute upon number of shares or shareholders § Creditor who does not use means to protect himself provided in status bears consequences of his own
negligence o Lord MacNaghten – The appeal should be allowed and the counterclaim dismissed
§ TJ misunderstood scope and effect of Companies Act § Requires MOA to be signed by 7 persons; no requirement that they be independent or unconnected to
undertaking § Company attains maturity on its birth; does not lose individuality by issuing bulk of its capital to one person;
does not act as agent or trustee § One-man company is still legally incorporated; not contrary to intention of Act or public policy - no fraud or
misrepresentation • Holding
o There is no issue with a one-person corporation or aiming to reduce liability – also nothing wrong with lending to your own company
§ Every creditor is entitled to get best security possible § ABCA: Corporation has rights and powers of natural person § Key: Endorsement of principle of limited liability for shareholders in a corporation. § Note: Creditors going after shareholders is called “piercing the corporate veil.”
• Usually you only deal with the corporation, but if you can pierce the veil you can go after shareholders and their assets.
o Order reversed; cross-appeal dismissed with costs • Ratio
o A corporation is a separate legal entity from its shareholders § In the absence of any fraud, a corporation, properly incorporated under the Act, will protect the directors
from liability arising upon bankruptcy o A company under the absolute control of one person is legally incorporated if statutory requirements have been
complied with; securing limited liability is not fraudulent
• Notes o What this case shows is
§ 1) Corporations are separate legal entities § 2) Corporations are not agents of the majority shareholder § 3) Shareholders can lend to their own corp, and shareholders can take a secure loan
o What is a floating charge debenture? § A debenture is a corporate IOU § This is partly what is at issue in this case § Historically, debentures could be fixed or floating
• Fixed • Form of security over a given piece of property owned by the debtor (e.g. A
photocopier; when the debtor doesn't pay you get the photocopier on the act of default)
• Floating • When the subject matter of the security is not going to precisely stay identical • E.g. Inventory - can come and go • S was selling boots • SKO: Look at it as a glass bowl hovering over, until there is an act of default
• At that moment, this bowl captures whatever is underneath (i.e. A boot) o When this case was decided, the corporation was still a new concept
§ Up until 1855, companies were just regarded as large partnerships § After, England decided to confer limited liability on shareholders
• The only bad thing that can happen to you now is that you just lose your investment o Legislation here is from 1862 - had addons that helped govern corporations
§ At the time of Salomon, it wasn't sure if smaller companies were protected from this legislation o Facts
§ We have Aron running his business as a SP (unlimited personal liability) § Decided to turn it into corporation so he just had limited liability (nothing wrong with doing this) § He formed and incorporated Salomon Ltd to run his boot shoe company § Looks at Companies Act, which sets out the rules at the time
• Legislation at the time required 7 shareholders • Aron used his family members
§ Salomon Ltd purchased the sole proprietorship assets for 39,000 pounds. • Salomon Ltd paid this amount owed to Aron the individual by:
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• Issuing 20,000 shares with a par value of one pound each.
• Issuing a debenture (a legal I.O.U.) in the amount of 10,000 pounds. [Note: a debenture is a document that evidences a debt and in this case provided for a floating charge.]
• Providing a few other benefits. § As court summarizes the matter, it would seem that, all told, Aron (the individual) received:
• About 1,000 pounds cash; • A 10,000 pound debenture from Salomon Ltd; and • About half the nominal capital in company (approx. 20,000 shares)
§ Essentially, Aron has 1000 pounds in his pocket § Soon thereafter, Salomon Ltd started to experience financial reversals due to a depression in the boot and
shoe trade. § To help Salomon Ltd, Aron lent money to the company. He also got his debentures cancelled and reissued to
Mr. Broderip as security for a 5000 pound loan to Aron, the proceeds of which Aron gave to the company. When Salmon Ltd failed to make a required interest payment to Mr. Broderip under the debenture, Broderip had a receiver appointed to force the sale of corporate assets.
§ Claims filed with the liquidator of Salomon Ltd were as follows • a) Broderip on the debenture; • b) Aron on the balance of what was left on the debenture once Broderip was paid out; and • c) Unsecured creditors
• AKA people who supply the leather for example § Once Broderip was paid off, there would only be about 1055 pounds left and, if Aron were to receive this
amount as the next secured creditor in line, there would be absolutely nothing left for the unsecured creditors.
§ In response to Broderip’s claim, the liquidator brought a counter-claim to which Aron was also named a defendant (decides to go after Aron instead). As the House of Lords summarizes the matter, the liquidator:
• Disputed the validity of the debentures on the ground of fraud. On the same ground he claimed rescission of the agreement for the transfer of the business, cancellation of the debentures, and repayment by Mr. Salomon of the balance of the purchase money….
o 2 key questions to consider § 1) Is Aron personally liable for the debts of Salomon Ltd? § 2) Is Aron a legitimate creditor of Salomon Ltd?
o The House of Lords responded to at least 4 somewhat related arguments as to why Aron was personally liable: § a. Salomon Ltd has not been properly constituted under the Act;
• Lower Court: There is no corporation • Even though the act required 7 shareholders, we have the lower court adding
requirements • Where does it say in the Act that it says that the shareholders have to be
independent?? • HOL: Whether this company exists depends on whether the statutory requirements have been met
• The fact that the party has 7 shareholders is good enough § b. The formation of Salomon Ltd. was a “mere scheme” to enable Aron to carry on business in the name of
the corp; • According to the CA, this was improper and therefore Aron would have liability to the creditors • HOL: Fights back on this
• Wholly unable to follow the proposition that this was contrary to the true intent and meaning of the Companies Act
• We don't have to worry about schemes here, the legislation speaks for itself and through that you get the corporation
• The corporation is a real thing with its own liabilities; there's nothing wrong with this particular example (a 1-person corporation)
§ c. Salomon Ltd was Aron’s agent; and
• Argument: The corporation is not its own legal creature, it's really Aron's agent • HOL: Shuts down this
• Either it's a legal entity or it's not; if it was there was no person and no thing to be an agent at all; and it is impossible to say at the same time that there is a company and there is not
• There is no agency relationship, the corporation is conducting its own business § d. Aron defrauded the company
• Serious allegation • HOL: This allegation does not land
• Who is the victim?
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• Shareholders? • The shareholders knew of the transaction; the whole point of
setting up the corporation was to facilitate that deal • We can't say it was fraudulent towards the shareholders
• Company? • The shareholders had no objections, so it's impossible to say even
that the company is being defrauded • Unsecured creditors?
• The memorandum of association (publicly filed) showed the main objectives and who was owed what
• The unsecured creditors took the business risk • They extend product on credit, and hope they get paid • Usually they do, but when they don't: They took a business risk
and it didn't pay off • You have to accept that you're the last in line to be paid out
(before the shareholders) • Is Aron allowed to position himself as a secured creditor?
• HOL: A shareholder can lend to the money, and can do so on a secured basis, and there's nothing fraudulent about that
• Thus, the floating charge debenture is valid • The creditors who went after the debenture could have checked
o HOL reversed CA decision § There’s nothing wrong with a 1-person corporation
General Structure of a Corporation
• Shareholders o Not a debt relationship o They invest, and hope they do well
• Corporation o Separate personality
• Directors o Elected by shareholders o Make major decisions regarding the corporation
• Officers o Appointed by the Board of Directors o President, VP, treasurer o Often manage the corporation (although Directors can do this as well)
THE GENERAL STRUCTURE OF ACORPORATION
- equity claimants - invest for a return
- claims or rights in terms of voting rights dividend rights and rights on liquidation
- liability limited to amount of investment _______________________________________ - separate personality - perpetual existence_______________________________________ - appoint officers to manage the corporation - make major decisions on corporate policy (Could consist of just one director)_______________________________________ - e.g. president, vice-presidents, secretary, treasurer - manage the corporation - hire others to assist in management and carry on business of the corporation
Shareholders
Corporation
Directors
Officers
Source: Notes on Business Association© Mark Gillen
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B. CORPORATE CONSTITUTION The Corporate Constitution
• Rules that govern a corporation, and how it regulates relationships • The corporate constitution (per McGuinness)
o Every company has certain basic charter documents that constitute the fundamental terms of the corporation concerned. In exercising its power, carrying on its business and organizing its affairs, every company must stay within the boundaries traced out by that constitution. The nature of the documents comprising the corporate constitution depends upon the statute under which the company is incorporated, and may take the form of letters patent, a special Act, articles of incorporation or a memorandum of incorporation.
§ When exercising its powers, the corporation has to stay inside the confines of the document concerning it § Anytime there's a conflict between shareholders and Directors, what are the rules to determine who wins this
fight? • This is where you'd look at the corporate constitution primarily
• In Alberta, the corporate constitution includes o Articles of incorporation: Per McGuinness, and for the most part, the Articles contain “only the most basic provisions
concerning the corporation: its name, the structure of its share capital, the place of its registered office, the size of the board of directors, and any restriction on the business in which it may engage” at 304.
§ Only the most basic provisions o Bylaws: Per McGuinness, these are rules “adopted by a company for the regulation of its own actions and concerns,
and of the rights and duties of members among themselves” at 304. § Sort of an in-house document
o USAs: See s. 146 of the ABCA – Unanimous shareholder agreement § S. 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
• Contract between all the shareholders of the corporation
Who are the Corporation's Internal Groups?
• Employees o Corporate law doesn't pay much attention to this, it's more of an employment law issue o Section 119 of the ABCA concerns circumstances where Directors are liable for employee wages though
• Shareholders o Elect the BoD on the principle of majority rule o Vote for the BoD if they have voting shares though o In smaller companies, shareholders have a much larger role and can be involved in day-to-day operations
• Directors o Oversee corporate strategy o Have to act in the best interest of the corporation (not the shareholders that elect them) o One of the main roles is to keep an eye on the CEO, to make sure they're doing the job fairly
• Officers o Have important management functions o CEOs are at the helm, appointed by the Board o COO is responsible for everything at the firm in a bottom-line sort of way; makes all the strategic decisions
Who are the Corporation’s External Groups? • Government, the public, and creditors • Creditors
o Get some treatment under the ABCA, but not to a large extent
How Does a Corporation Come into Existence? • 2 main ways
o 1. Special act of incorporation § Created federally or provincially § Creates it for a specific purpose
• E.g. CN railways existed through the CN Railways Act § If you're ever suing one of these, start by reading its act § This method is not available to the ordinary business person
o 2. General act of incorporation § The ABCA and the CBCA for us § Generic because: The nature of the business is irrelevant
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§ The corporation has to abide by all the laws that apply, but the idea is that its created pursuant to a generic machinery
3 Models on How to Incorporate • 1) Letters Patent Model
o Applies to corporations in PEI and Quebec o Where you make an application to a crown rep, who has the power to issue an incorporation document called a letters
patent o E.g. The Hudson's Bay Company o Forms part of the new constitution of the company o Includes name, business purpose, its ownership/share structure o Also going to be rules governing the day to day rules (called Bylaws and are in a separate document) o Also have to include the legislation of the province it's being incorporated in
• 2) Memorandum of Association Model o Patterned after the English general acts system o AB used to follow this model under the Companies Act
§ But then was repealed in the 80s with the Corporations Act o Incorporation via this model
§ Register a MoA, and articles of association o Memorandum includes
§ Constitution, name, share capital, restrictions o The articles set out the day-to-day operating rules of the company; usually quite extensive
§ Tend to regulate internal matters like BoD meetings, voting/issuing/transferring of shares o Still used in NS
• 3) Articles of Incorporation (or Division of Powers model) o Followed by AB, ON, SK, NFLD, MB, and federally o Articles are filed through an agent who issues a certificate of incorporation o Articles are like the memorandum of association or letters patent
§ Recite the name, general matters o Constituting documents
§ Articles: General matters (name of company, corporate structure, purpose) § Bylaws govern the day to day operating rules/internal governance but are not filed with the corporate registry
• Think of these as in-house rules § Statute § USA (usually in smaller corporations)
What Would the Constitution of the ABCA Include?
• Articles of incorporation, bylaws, the USA, and the legislation (which provides rules)
Summary of General Acts of Incorporation in Common Law Canada Jurisdiction Model Name of Incorporating
Document Name of Documents Containing “In-House” Rules
AB, MB, NB, NFLD, SK, ON, and federally
Articles of Incorporation Articles of Incorporation Bylaws
NS Memorandum of Association Memorandum of Association Articles of Association PEI Letters patent Letters patent Bylaws BC Hybrid
Canadian Jorex v 477749 Alberta Ltd – Directors Have the Power to Cancel a Special Meeting, Unless Limited by Bylaws or USAs
• Facts o Board of Directors of Jorex called a special meeting, then purported to cancel
§ Many shareholders were not happy; wanted to examine auditor § 477749, a shareholder of Jorex, applied to QB for an order confirming that Notice of Cancellation was of no
force and effect o Legislation: ABCA s. 132 - 2 types of shareholder meetings
§ AGM: Annual General Meeting (s. 132(1)(a)) § Special meeting (s. 132(1)(b)) - all other meetings § ABCA s. 101 - subject to USA, directors shall manage or supervise management of business and affairs of
corporations o Chambers
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§ Granted order; Jorex directors had no right to cancel the meeting once called o Jorex argues no restriction on directors’ ability to cancel meetings in Canadian Business Corporations Act (CBCA) or USA –
inclusive approach o 477749 argues no power expressly conferred on directors to cancel meetings in CBCA or bylaws – exclusionary approach
• Issue o Do the directors of a federal corporation have the power to cancel a special meeting called by them in advance of its
scheduled date? • Analysis
o Must distinguish between power enjoyed by directors and manner in which power is exercised (only the first is at issue) o Under corporate model adopted by CBCA, residual power to manage corporation’s affairs rests with directors (s.102)
§ Given by statute, not derived from shareholders’ delegation of powers § cf Smith v Paringa Mnies: In absence of express authority in articles of association, directors have no power to
postpone general meeting (British model) § Residual powers under s. 102 must be interpreted in conjunction with any other statutory provisions limiting
those powers § Since there is no bylaw or USA restricting their power to cancel, they can cancel
o Respondents (477749) argue that shareholders will be deprived of any meaningful protection, but several avenues remain open to them:
§ S. 242: Oppression remedies under CBCA where directors breach duties § S. 142: Shareholders can requisition calling of a meeting (S.101 subject to 142) § S. 144 CBCA/S.143 ABCA: Can apply to court for order directing meeting proceed § S. 132: Statutory requirement that a general meeting be held every 15 months § At annual general meeting, shareholders may remove directors § Shareholders retain right to eliminate directors’ power to cancel meetings by including provision in bylaws (s.
102(5)) or a USA (s. 146) o The ABCA has direct counterparts to provisions in the CBCA
• Holding o Appeal allowed o The directors have the power to cancel a special meeting called by them in advance of its scheduled date o The cancellation remains in effect
• Ratio o Directors of a corporation created under the CBCA have the power to cancel a special meeting called by them, unless
expressly limited by bylaws or USA o S. 102 of the CBCA (s. 101 of the ABCA) confers residuary power on the Board where power has’t been expressly limited
by a corporation's bylaws • Notes
o Demonstrates the importance of these 3 models talks about o Goes through many of the provisions of the ABCA o Facts
§ Directors of Jorex § Called a special meeting for Dec. 10, 1991 § Purported to cancel the special meeting by notice dated November 27, 1991
o Minority shareholders in Jorex § Applied for an order declaring that notice of cancellation of no force or effect
o Trial judge § They don't have the power to cancel it once they've called the meeting § No one is suggesting that the directors are acting with ulterior motives
o Issue § Once a special meeting has been called, do the directors have the power to cancel it
o There's 2 kinds of meetings § AGM - Annual General Meetings
• Outlined in s. 132 of the ABCA § Special meetings
• If it's not an AGM, it's a special meeting o Shareholders: If this meeting is cancelled, we're going to lose our chance to examine the auditor o Reasons that there is a power to cancel
§ Important provisions • S. 102 of the CBCA (or the s. 101(1) of the ABCA)
o Directors shall supervise the management of the corporation • S. 101 broadly confers power on the Directors to manage, and s. 17 says that you don't need
specific bylaws to have confer particular powers o Do the Directors have the power to begin with?
§ They have the residual power via 101
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o Arguments § Shareholders
• Unless the ABCA gives the directors to an express power to cancel, they don't have it • Backup argument
o Bylaws give the shareholder the power to adjourn § Cancellation is the ultimate adjournment § Therefore, the directors don’t have the power to cancel
o This was rejected § Directors
• We have all these provisions with shareholder meetings, it's a complete code; if it's not in there it's not in there
§ Shareholders rely on many English authorities to support that contentions that the Directors don't have the residual power to cancel
• Smith - In absence of express authority in articles of association, directors have no power to postpone general meeting (British model)
o Court § Problem with Smith: It's from another jurisdiction/another model
• British model here is that the shareholders have the power to manage the corporation o If they want the Directors to do this, they have to delegate the power
• Our model (ABCA model) o It's the directors who have the power to manage, and the residual power to cancel
which hasn't been taken away o This can be taken away from them by USAs or by virtue of bylaws
§ This doesn't apply though on these facts here though • Thus, the court rejected this Smith line of thinking
§ Other reason the court rejected the argument: • There wasn't any real reasoning process
o What could the disgruntled shareholders have done? § Court have requisitioned the directors to have called a meeting – s. 142
• Counter-argument: They could just cancel this meeting too o Does this work?
§ Unlikely, the residual powers in s. 101 to cancel do not extend to the specificity of a s. 142 meeting
§ Bring an application an oppression action – s. 242 • Minority shareholders get a remedy for having been treated unfairly • This is a broad remedy
§ Shareholders can apply for the Court to order a meeting – s. 143 • Go to court, you get an order that a meeting be called and held
§ AGM has to be held no later than 15 months after the general meeting – s. 132 • Under s. 155, you'll get to see the auditor's report • All you have to do is wait, and you'll get your change to talk to an auditor
§ Remove directors by ordinary resolution – s. 109 • However, you do need to be a majority shareholder; not really of use to a minority shareholder
§ Have a USA – s. 146 • However, likely not an option for a minority shareholder though
§ Get a bylaw in place removing the Director's residual power to cancel the meeting – s. 102(5) • However, it's likely not going to pass given that this is majority rule (against the minority
shareholders) o CA overturns the trial decision, and says that the director has the ability to cancel, given all these options the minority
shareholders had
SUMMARY OF THE 3 BUSINESS VEHICLES Sole Proprietorship
Governed by • Not governed by any legislation • The least complex business structure available à for the smaller operations
Definition • An individual carries on business in his/her personal capacity, accepting all risks associated with the business
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• Not a separate entity from individual Creation/Formalities • Register business name under s 110 of the Partnership Act IF you use a business name other than
your own name AND you’re involved in: trading, manufacturing, contracting, or mining o Penalty: s 112 allows a fine of not more than $500; s 113 You cannot commence a claim
(will be stayed) until you register. o Must file a declaration of that fact within six months of first using the business name
Liability • A sole proprietor is personally liable, to the full extent of his/her own property and assets, for all liabilities incurred in the conduct of the business, including tortious acts of employees
• A sole proprietor has unlimited personal liability • Bank can’t go after everything there are some exemptions • Vicarious liability for employees as well
Power of Control • Sole proprietor has full control of operation of business Profit/ Assets • All the benefit of the business goes to the sole proprietor
Dissolution • Really nothing to dissolve, just stop doing business, also death results in dissolution Advantages • It is less costly to operate a sole proprietorship
• It may be appropriate where an individual has just established his/her business Bottom Line • No separation between organization and the sole proprietor; business obligations are personal
obligations
Partnership
Partnerships (Generally) Governed by • The Partnership Act, with the rules of equity and common law remaining in force (unless inconsistent
with the Act (s. 105)) Definition • The relationship existing between or among persons (including corporations) carrying on a business in
common with a view to profit (s. 1(g)) Formalities • There are no formalities except registration under the Act in particular circumstances Three Types • 1. Ordinary
• 2. Limited • 3. Limited liability
Indicia of Partnerships • To determine whether or not a partnership exists, examine the true intention of the parties and the effect of any agreement or arrangement between or among them
• One essential aspect of a partnership is that the parties must agree to participate in business with a view to profit
• Joint ownership of property and sharing of gross returns do not of themselves create a partnership (s. 4(a) and (b))
• Receipt of a share of the profits of a business is prima facie proof that a person is a partner in the business (s. 4(c))
• Volzke Construction Ltd o The test for whether parties are partners is functional. Parties are partners because
they are acting like partners. Not enough that we say “we’re partners” § Factors that look like partnership: Share profits, share losses, jointly own
property, shared accounts, cost sharing, partnership agreement, government filings that indicate a partnership, use of partnership name, etc.
Liability • A firm is liable and each partner is jointly and severally liable, for any penalty or loss or injury caused to a non-partner by the wrongful act or omission of a partner acting in the ordinary course of business, or with the authority of the co-partners, to the same extent as the wrongdoing partner (ss. 13 and 15)
• Joint Liability à where each partner has 100% liability for a judgment o But the partner who pays 100% has right of indemnity against those who didn’t pay
• Joint liability à each person is liable for the whole loss. Bigger problem than several. • Under joint and several liability or all sums, a claimant may pursue an obligation against any one party as
if they were jointly liable and it becomes the responsibility of the defendants to sort out their respective proportions of liability and payment
• Each partner of a firm is liable jointly with the other partners to the full extent of that partner’s personal assets for all debts and obligations of the firm while a partner (s. 11)
Profit/Assets • Partners are entitled to share equally in the capital and profits of the business and must contribute equally to the losses (s. 28(a))
• Before the ascertainment of profits, a partner is not entitled to interest on capital subscribed by him/her (s. 28(d))
Basic Principles • A partnership is not a legal entity, separate from its partners • Each partner is an agent of the firm and of the other partners for the purpose of the business of the
partnership (s. 6)
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Mutual Rights and Duties of Partners
• Ss. 22 and 48 deal with partners’ mutual rights and duties o These rules are subject to variation by all of the partners’ consent, express or implied
• Most partnerships are governed by an agreement which sets out the partners’ mutual rights and obligations
Ordinary Partnerships Governed by • The Partnership Act, with the rules of equity and common law remaining in force (unless inconsistent
with the Act (s. 105)) • Partnership agreement governs parties’ mutual rights and obligations between each other
Definition • The relationship existing between or among persons (including corporations) carrying on a business in common with a view to profit (s. 1(g))
Formalities • There are no formalities except registration under the Act in particular circumstances (unlike limited/LLP)
• Not a separate legal entity from partners • PA has default rules that can be contracted out of
Liability
• P can sue all or even just one innocent partner for negligence of other. Innocent party has right of indemnity against other partners so the burden of judgment is shared equally
• Each p/er is liable jointly with the other p/ers to the full extent of that p/er’s personal assets for all debts and obls of the firm while they are a p/er [PA s 11]
• Liability for firm wrongs, the whole firm, meaning all of the p/ers, are liable [PA s 13] • Each p/er is liable jointly, as well as severally, for anything for which the firm becomes liable [PA s 15] • SOB: • [PA s 6] each partner of the firm is agent of the firm in ordinary course of business • Partners liable where there is actual or apparent authority (for contract or negligence—if it is in the
ordinary course of business) --- renovations count as firms operations thus within ordinary course Control • Each partner is agent of the firm and for other partners [PA s. 28(a)]
Profit/Assets • P/ers are entitled to share equally in the capital & profits of the business & must contribute equally to the losses [PA s.28(a)] (but this default rule of equal sharing can be changed through a P agreement)
Dissolution • P can be dissolved upon the death of a p/er [PA s.37(1)] or by illegality of the P [PA s.38] o Can also be dissolved by other ways (ss.36-39). Also depends on the agreement made
between the parties.
Limited Partnerships Definition • One or more persons who are general partners and any number of persons, which may include persons
comprising a firm (s. 6), who are limited partners (s. 51(2), (3) and (4) of the PA) • Essentially, a limited partnership has all the characteristics of a general partnership except for one
very significant difference: only the general partner is liable for the obligations of a limited partnership
Creation/ Formalities • Strict compliance with the Act is required to ensure that a limited partnership is established • A special certificate must be filed at the Registry to set up a limited partnership – the certificate must
contain the information set out in s. 52(3) • The surname of a limited partner must not appear in the firm name unless it is also the name of one of
the general partners (s. 54) Liability • General partners are subject to all the liabilities of a partner in an ordinary, non-limited partnership (s.
56) • Limited partners are not liable for the obligations of the limited partnership except in respect of the
amount of property they contributed or agreed to contribute to the capital (s. 57) • The Act prescribes the limited circumstances under which a limited partner’s contribution can be
returned (s. 62) • A limited partner will not become liable as a general partner unless the limited partner takes part in
the control of the business (s. 64) Profit/Assets • Must make contractual arrangement that distinguishes power of partners. Default rule is that all are
equal PA 28(a) Control • Consists of 1+ persons who are gen p/ers & any # of persons who are ltd p/ers [PA ss.51(2),(3),(4)]
• General p/ers are allowed to take part in duties concerning governance and control • Ltd p/ers should not be taking part in control of the P or liability may ensue
Dissolution • The retirement, death or mental incompetence of a general partner dissolves the partnership unless the business is continued by the remaining general partners pursuant to a right to do so stated in the certificate
Limited Liability Partnerships
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Definition • Members of certain professions are permitted to carry on business under limited liability partnerships (LLPs)
Formalities • LLPs are governed by Part 3 (ss. 81-104) of the Act • Formal steps must be taken to form an LLP – if they are not taken, it is an ordinary partnership • Under s. 3 of Alberta’s Partnership Regulation, the name of an Alberta LLP must contain the legal
element “Limited Liability Partnership” or its abbreviation • Under s. 85 of the Act, a partnership must advise all of its existing clients of its registration as an Alberta
LLP, and explain in general terms the potential changes in partners’ liability as a result of that registration
• LLPs can only be created in an “eligible profession” within the meaning in PA s. 81 (law, dentistry, accountants)
Liability • Where one of the partners is negligent, the innocent partners are shielded from personal liability in excess of their share in the partnership’s assets (s. 12)
• Assets which are owned jointly by the partners and the partnership’s insurance coverage are available to satisfy any claims
• Individual partners bear full personal liability for their own negligence or wrongful acts, for the negligence or wrongful acts of people under their supervision, and for failing to act when they know of another’s negligence or wrongful act
• Under the law in some jurisdictions, partners are shielded from claims arising out of both professional negligence or misconduct and the partnership’s ordinary contractual obligations
• However, partners are afforded only a partial shield against claims arising from professional negligence or misconduct
• Rationale for shield: starting with the accountants they went global with partnerships and then start complaining about not knowing what the partners in other nations are doing. The view was that a global or national perspective was the case so partnerships would be needed for the innocent non-involved partners. Law firms also got quite large and required assistance with this
• Shield does not apply when the partner knew of the negligence or wrongful act and failed to take reasonable steps to stop it [PA s. 12(2)]
• Shield only covers in the “normal course of carrying on practice in an eligible profession” [PA12(1)] o McDonic
Key Components • KEY: Limited liability partnerships mean that if one of the LLP partners are negligent, the other partners are shielded from personal liability in excess of their share in the partnership’s assets
o BUT: [PA 12(4)] innocent partners’ capital contribution to the firm is not protected. The successful plaintiff (in the instance that insurance fees cannot cover) the firm assets including capital contribution is available to that client
• Oil and gas companies are generally LP’s, while law firms are generally LLP’s • The major difference between and LP and an LLP
o In an LP: limited partners risk for business debts, losses or liabilities capped at their individual investment o In an LLP: partner’s liability is capped only for negligent acts or omissions
Corporations Governed by • A corporation can be incorporated provincially under Business Corporations Act (BCA) or federally under
the Canada Business Corporations Act (CBCA) o Federal incorporation is not normally sought unless the company will be conducting
business across several provinces Definition • A corporation is a creature of statute, separate and distinct from its shareholders or members
• Once incorporated, a corporation can have a perpetual existence – it ceases to exist if it is struck from the register, wound-up or dissolved
Creation/ Formalities • Under the ABCA, one or more persons may incorporate a corporation (s. 5) • People interested in creating a corporation must prepare articles of incorporation in the prescribed
form and set out the following information: o The corporation’s name o The classes and any maximum number of shares the corporation is authorized to issue
with special rights, privileges, restrictions and conditions attaching to each class, and may have transfer restrictions
o The number of corporate directors o Any restrictions on the corporation’s business
Liability • An advantage of incorporation is that is provides shareholders with a shield from personal liability arising out of the operation of a business
• The ABCA provides that shareholders of a corporation are not liable…for any liability, act or default of the corporation (s. 46(1))
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• However, there are certain exceptions to the principle of limited liability – personal liability is visited upon one or some of the shareholders when:
o A shareholder signs a personal guarantee for the corporation’s debts o A shareholder has contracted personally without giving adequate notice to a third party
that he/she was acting as an agent for the corporation o Loss occurs as a result of a shareholder’s personal act or the negligence of a
shareholder o Personal liability is provided for by statute o A shareholder has assumed powers of a director under a unanimous shareholders
agreement o A court has “lifted the corporate veil”
Four Basic Principles (Welling)
• 1. Corporate personality: the principle that a corporation’s behaviour is to be legally analyzed by analogy to the behaviour of human beings
• 2. Managerial power: the principle that the daily operation of corporate business is to be done by a relatively independent managerial group (this generally applies to large corporations)
• 3. Majority rules: the principle that internal corporate decisions are to be made by a democratic process among those constitutionally enfranchised (those given voting rights) on any particular issue (subject to fairness to the minority). Default rule is that majority rules.
• 4. Minority protection: the principle that certain corporate, managerial or majority shareholder inclinations ought to be restrained from injuring the minority members of any voting group created by the corporate institution
Pros and Cons of a Corporation Pros Cons
Limited liability: Because it is a separate legal entity, a corporation can assume its own liabilities. The shareholder stands to lose the amount he invested in the corporation, but no more
Higher costs: Creating a corporation incurs filing fees and legal costs
Flexibility: A corporation permits differing degrees of ownership and sharing in profits
Public disclosure: When a corporation offers shares to the public, the corporation must comply with strict disclosure and reporting requirements
Greater access to capital: Limited liability makes the corporation a very suitable vehicle through which to raise capital
Greater regulation: Corporation statutes govern many decisions, limiting management options and requiring specific kinds of record keeping
Continuous existence: The lifespan of a corporation is not tied to its shareholders
Dissolution: Ending a corporation's life can be complicated
Tax benefits: Though this is a fact-specific issue, a corporation can facilitate greater tax planning, for example, by permitting income splitting
Tax disadvantages: A corporation may be subject to double taxation, depending on the circumstances. This is a fact-specific issue
Transferability: Ownership in a corporation is more easily transferable through shares
Possible loss of control: A corporation has diminished control because it issues shares with voting rights
Potentially broad management base: A corporation is managed by directors and officers, who can provide a level of specialized expertise to the corporation
Potential bureaucracy: The many levels of authority in a corporation may impede decision making
Major Forms of Business Organization Characteristic Sole Proprietorship Partnership Corporation
Creation • At will of owner • By agreement or conduct of the parties
• By incorporation documents
Duration • Limited by life of owner • Terminated by agreement, death
• Perpetual unless dissolved
Liability of Owners • Unlimited • Unlimited • Limited Taxation • Net income taxed at
personal rate • Net income taxed at
personal rate • Income tax to the
corporation; dividends and salary taxed to shareholders
Transferability • Only assets may be transferred
• Transferable by agreement • Transferable unless incorporating documents restrict transferability
Management • Owner manages • All partners manage equally unless otherwise specified in agreement
• Shareholders elect a board to manage the affairs of the corporation; officers can also be hired
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3. THE PROCESS OF INCORPORATION A. PROCEDURES Where to Incorporate
• Under a provincial statute or the federal CBCA? o There's only a few jurisdictions that offer ULCs o Otherwise, there's not really a huge difference between the ABCA and the CBCA o The general practice is to incorporate provincially o If the corporation expects to conduct business in several provinces, then you should incorporate under the CBCA
Who Does the Incorporating? • Section 5 of the ABCA – Incorporation
o One or more persons may incorporate a corporation by signing articles of incorporation and complying with section 7 § One or more persons may incorporate a corporation § A person can be an individual or a corporation
• Here, it includes both an individual or a corporation • Thus, a corporation can incorporate a corporation
How Does One Incorporate? • Section 7 – Delivery of articles of incorporation
o (1) An incorporator shall send to the Registrar § (a) articles of incorporation, and § (b) the documents required by ss. 12(3), 20 and 106
o (2) If the name of the corporation set out in the articles of incorporation contains the words “Professional Corporation”, the incorporator shall also send to the Registrar evidence satisfactory to the Registrar of an approval of the articles that is less than 2 years old by or on behalf of the governing body of the appropriate profession or occupation.
o What you need to send • Section 12(3) – Prohibited Names
o There shall be sent to the Registrar documents relating to corporate names that are prescribed by regulations § You have to send in articles § Relates to corporate name § Have to choose a good name that can survive litigation, and far from the "edge of the line"
• Section 20 – Registered office, records office, address for service by mail o (1) A corporation shall at all times have a registered office within Alberta o (2) A notice of
§ (a) the registered office • Street address that notices can be sent
§ (b) a separate records office, if any, and § (c) the post office box designated as the address for service by mail, if any, must be sent to the Registrar in the
prescribed form together with the articles of incorporation o (3) Subject to subsection (4), the directors of the corporation may at any time
§ (a) change the address of the registered office within Alberta, § (b) designate, or revoke or change a designation of, a records office within Alberta, or § (c) designate, or revoke or change a designation of, a post office box within Alberta as the address for service
by mail of the corporation. o (4) A post office box designated as the corporation’s address for service by mail shall not be designated as the
corporation’s records office or registered office. o (5) A corporation shall send to the Registrar, within 15 days after any change under subsection (3) or (4), a notice of that
change in the prescribed form, and the Registrar shall file it. o (6) The corporation shall ensure that its registered office and its records office are
§ (a) accessible to the public during normal business hours, and § (b) readily identifiable from the address or other description given in the notice referred to in subsection (2).
o (7) Unless the directors designate a separate records office, the registered office of a corporation is also its records office. o Have to send in documents
• Section 106 – Election and appointment of directors
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o (1) At the time of sending articles of incorporation, the incorporators shall send to the Registrar a notice of directors in the prescribed form and the Registrar shall file the notice.
§ Includes notice of directors o (2) Each director named in the notice referred to in subsection (1) holds office from the issue of the certificate of
incorporation until the first meeting of shareholders. o (3) Subject to subsection (9)(a) and section 107, 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 next annual meeting of shareholders following the election.
o (4) If the articles so provide, the directors may, between annual general meetings, appoint one or more additional directors of the corporation to serve until the next annual general meeting, but the number of additional directors shall not at any time exceed 1/3 of the number of directors who held office at the expiration of the last annual meeting of the corporation.
o (5) It is not necessary that all directors elected at a meeting of shareholders hold office for the same term. o (6) A director not elected for an expressly stated term ceases to hold office at the close of the first annual meeting of
shareholders following the director’s election. o (7) Notwithstanding subsections (2), (3) and (6), if directors are not elected at a meeting of shareholders, the incumbent
directors continue in office until their successors are elected o (8) If a meeting of shareholders fails to elect the number or the minimum number of directors required by the articles by
reason of the disqualification or death of any candidate, the directors elected at that meeting may exercise all the powers of the directors if the number of directors so elected constitutes a quorum.
o (9) The articles or a unanimous shareholder agreement may provide for the election or appointment of a director or directors
§ (a) for terms expiring not later than the close of the 3rd annual meeting of shareholders following the election, and
§ (b) by creditors or employees of the corporation or by a class or classes of those creditors or employees • Section 6 – Articles of incorporation
o 6(1) Subject to section 15.3, articles of incorporation shall be in the prescribed form and shall set out, in respect of the proposed corporation,
§ (a) the name of the corporation, § (b) the classes and any maximum number of shares that the corporation is authorized to issue, and
• (i) if there are 2 or more classes of shares, the special 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 each series, and the rights, privileges, restrictions and conditions attaching to the shares of each series,
§ (c) if the right to transfer shares of the corporation is to be restricted, a statement that the right to transfer shares is restricted and either
• (i) a statement of the nature of the restrictions, or • (ii) a statement that the nature of the restrictions appears in a unanimous shareholder agreement,
§ (d) the number of directors or, subject to section 107(a), the minimum and maximum number of directors of the corporation, and
§ (e) any restrictions on the businesses that the corporation may carry on. o (2) The articles may set out any provision permitted by this Act or by law to be set out in the bylaws of the corporation. o (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 the Act to effect any action, the provisions of the articles or of the unanimous shareholder agreement prevail.
o (4) The articles may not require a greater number of votes of shareholders to remove a director than the number required by s. 109
• Section 8 – Certificate of incorporation o On receipt of the documents and evidence required under section 7 and the prescribed fees, the Registrar shall issue a
certificate of incorporation in accordance with section 267. • Section 9 – Effect of certificate of incorporation
o (1) A corporation comes into existence on the date shown in the certificate of incorporation o (2) A certificate of incorporation is conclusive proof for the purposes of this Act and for all other purposes
§ (a) that the provisions of this Act in respect of incorporation and all requirements precedent and incidental to incorporation have been complied with, and
§ (b) that the corporation has been incorporated under this Act as of the date shown in the certificate of incorporation. 1981
Articles Restricting the Transfer of Shares • 2 reasons for including transfer restrictions
o 1. Small corporations in which shareholders are also the managers of the company typically want to restrict transfers because they don't want just anyone joining the corporation
§ This small corporation is like a partnership, with a small amount of people that you can trust
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o 2. Presence of share transfer restrictions is an important feature of modern private companies and the idea of a private issuer
§ Part of being a private issuer is that your shares are not fully transferrable • There's a clause that restricts share transfer
o In order to be a private issuer (i.e., not a reporting issuer) National Instrument 45-106 requires that the corporation's securities, excluding non-convertible debt securities, be:
§ subject to restrictions on transfer that are contained in the issuer's constating documents or security holders' agreements;
§ beneficially owned, directly or indirectly, by not more than 50 persons, not including employees and former employees of the issuer or its affiliates, provided that each person is counted as one beneficial owner unless the person is created or used solely to purchase or hold securities of the issuer in which case each beneficial owner or each beneficiary of the person, as the case may be, must be counted as a separate beneficial owner; and
§ distributed only to persons described in securities legislation or regulations (e.g., people at non-arms length with the corporation such as directors, officers, employees, family and friends).
§ It is suggested that to meet the first requirement (i.e., restriction the transfer of securities in constating documents), a provision restricting the transfer of shares should be in Item 4-Restrictions, if any, on share transfer of the articles. To meet the requirement for restrictions on the transfer of securities other than shares, a provisions should be added to Item 7 – Other provisions, if any.
• Since 1999, a corporation document under the ABCA is filed electronically
Unanimous Shareholder Agreements • If incorporators wish to set up special ground rules, they can do so through USAs • Device by which closely held corporations (small) enjoys the benefits of corporation (limited liability) with the flexibility of a
partnership (the relationship amongst shareholders can be customized) • Can deal with a number of different matters • The idea is to get contractual ground rules • Section 146 of the ABCA – Unanimous shareholder agreement
o Governs the rules of USAs o It isn't just something that restricts management, but other things as well
• Can also be used to limit the transfer of shares o E.g. Giving shareholders the first right of refusal
• CBCA approach to a USA is more narrow than the ABCA approach o For it to be a USA, it has to concern the directors' power to manage o In s. 146 of the ABCA, it covers more terrain
• What is the difference between a USA and an ordinary shareholders agreement? o USA is part of the corporation's constitutional documents
§ It ranks on par with corporation's articles and bylaws § It's a document of high standing § It is thus governed by the statute § Section 248 of the ABCA – Compliance or restraining order
• If a corporation or any shareholder, director, officer, employee, agent, auditor, trustee, receiver, receiver-manager or liquidator of a corporation contravenes this Act, the regulations, the articles or bylaws or a unanimous shareholder agreement, a complainant or a creditor of the corporation may, in addition to any other right the complainant or creditor has, apply to the Court for an order directing that person to comply with, or restraining that person from contravening any of those things, and on the application the Court may so order and make any further order it thinks fit.
o You can get a court order getting them to comply if not adhering to the USA § Section 146(8) – Unanimous shareholder agreement
• A unanimous shareholder agreement may not be amended without the written consent of all those who are shareholders at the effective date of the amendment.
o If shareholder relations start to disintegrate, someone could disagree under this provision to prevent a change
Cicco v 609940 Ontario Inc (Trustee of) – A USA Does Not Bind a 3rd Party Without Knowledge of It • Facts
o Mr. C and Mr. B were sole shareholders (50% each) o Entered a USA which provided that "all decisions affecting the corporations shall be made only with the consent of both B
and C" o Director (Mr. B) made an assignment in bankruptcy (which was accepted by a trustee), which Mr. C claimed was in
contravention of the USA
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§ New sections override the CL rule that shareholders could not fetter power and discretion of directors by agreements amongst themselves
• Issues o Are the terms of the USA binding on the trustee who accepted the assignment into bankruptcy? o Is the assignment into bankruptcy annulled because it contravenes the USA? o Does the USA bind third parties? o Should the assignment be annulled because the supporting director's resolution was made in breach of the USA?
• Analysis o Test for annulment: Where order should not have been made, the court may order to annul the bankruptcy o Effect of USA is to limit director’s authority but that is internal matter between director and shareholders, not
something trustee should have to inquire into o Indoor Management Rule: A person dealing with a corporation has no obligation to ensure that corporation has gone
through any procedures required by its articles, bylaws, resolutions, contracts, or policies to authorize a transaction or to give authorization to a person purporting to act on behalf of a corporation
§ Common law, and statutory (ABCA s. 19) § But does not apply if: You're aware of the USA or you have a relationship with the corporation that suggests
that you should have known o Old common law rule that shareholders could not fetter the power and discretion of directors by agreement between
themselves - overruled by the new BCA o USA is an internal matter between the director and shareholders
• Holding o The assignment is allowed as it was based on bankruptcy law o The effect of the USA was to limit the authority of the directors, but that is entirely an internal matter between the
directors and the shareholders § The trustee was a third party without notice of the USA, and thus is not bound by its terms
• Ratio o A USA is not binding on a third party without notice (or constructive notice) of the USA
• Notes
o Facts § C and B were shareholders in a company
• C o Owns 50% of the shares o Is a director
• B o Owns 50% of the shares o Is a director
§ Cicco and Bertucci entered into a USA which provided that "…all decisions affecting the Corporation shall be made only with the consent of both Bertucci and Cicco."
§ In breach of this USA, Bertucci adopted a director's resolution that the company to make an assignment in bankruptcy (which was accepted by a trustee)
§ Upon learning of the assignment, Cicco moved for an annulment of the assignment • He claims that because director's resolution enabling the assignment was in breach of the USA, the
assignment was unauthorized. § C: Somehow this USA impacts on the bankruptcy and insolvency legislation
o Issue § Should the assignment be annulled because the supporting director's resolution was in breach of the USA?
• There's no doubt that B breached the USA o Court
§ "To annul the assignment the court must therefore conclude that the assignment ought not to have been made. This is a wide ranging and flexible test. There is no simple or universal principle prescribed. It is a case by case decision which imports the exercise of discretion. In the past the bankruptcy courts have annulled an assignment on the ground of mistake, lack of proper notice of the director’s meeting adopting the enabling resolution and a clear sufficiency of assets to pay all.”
§ creditors’ claims • The assignment here was proper because the company was insolvent; but is it contrary to USA? • Ultimately, the USA doesn't matter
§ "There is no question that the resolution and assignment are regular on their face; the director was duly appointed and qualified to act. The effect of the unanimous shareholder agreement is to limit his authority but in my opinion that is an entirely internal matter between the director and the shareholders. He may be accountable to them for failure to comply with the agreement and the statute but that does not render the assignment void or disentitle the trustee to rely on the assignment and supporting resolution. To hold
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otherwise would have the result that no trustee could safely act under a corporate assignment in bankruptcy without enquiring into the internal (and unpublished) fetters on the authority of the duly appointed directors convened in a regular meeting. In my opinion that cannot have been the intention of the legislature"
Bylaws • Regulate corporate conduct within the broad scope of the articles • Set up regulatory guidelines for managerial action that is less specific than an ordinary director's resolution • E.g. Section 131(3) – Place of shareholders’ meetings
o (3) Subject to any limitations or requirements set out in the regulations, if any, a shareholder or any other person entitled to attend a meeting of shareholders may participate in the meeting by electronic means, telephone or other communication facilities that permit all persons participating in the meeting to hear or otherwise communicate with each other if
§ (a) The bylaws so provide, or
• Can participate by telephone if you have a bylaws permitting that § (b) Subject to the bylaws, all the shareholders entitled to vote at the meting consent
o and a person participating in a meeting by those means is deemed for purposes of this Act to be present at that meeting • Typically emanate from directors, but have to be approved by shareholders
o Section 102(2) – Bylaws § The directors shall submit a bylaw, or an amendment or a repeal of a bylaw, made under subsection (1) to the
shareholders at the next meeting of shareholders, and the shareholders may, by ordinary resolution, confirm, reject or amend the bylaw, amendment or repeal
• Has to go to the shareholders at the next meeting for approval • Usually means a simple majority
o Section 102(4) - Bylaws § If a bylaw, or an amendment or a repeal of a bylaw, is rejected by the shareholders, or if the directors do not
submit a bylaw, or an amendment or a repeal of a bylaw, to the shareholders as required under subsection (2), the bylaw, amendment or repeal ceases to be effective and no subsequent resolution of the directors to make, amend or repeal a bylaw having substantially the same purpose or effect is effective until it is confirmed or confirmed as amended by the shareholders.
• If you don't submit your bylaw to the shareholders at the next meeting, you don't have a bylaw anymore
• Most law firms supply a standard form of bylaws
Directors Organization Meeting • Section 104(1) – Organization Meeting
o (1) After issue of the certificate of incorporation, a meeting of the directors of the corporation shall be held at which the directors may
§ (a) make bylaws § (b) adopt forms of security certificates and corporate records § (c) authorize the issue of securities § (d) appoint officers § (e) appoint an auditor to hold office until the first annual meeting of shareholders § (f) make banking arrangements, and § (g) transact any other business
• Section 25(2) – Corporate Seal o (2) A document executed on behalf of a corporation by a director, an officer or an agent of the corporation, is not invalid
only because the corporate seal is not affixed to the document § You don't have to have a corporate seal to make a document valid
Summary – If We Want to Determine the Rules that Govern a Corporation, What Do We Have to Know?
• It comes down to looking at the o Corporate statute (e.g. The ABCA) o Case law
§ Interpreting the subject matter of the conflict o Articles o Bylaws o Directors resolutions in place that touch upon the struggle
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o Shareholders resolutions that touch upon the struggle o USAs that touch upon the struggle
Other Matters – Corporate Records • Section 21 – Corporate records
o (1) A corporation shall prepare and maintain at its records office records containing § (a) the articles and the bylaws, all amendments to the articles and bylaws, a copy of any unanimous
shareholder agreement and any amendment to a unanimous shareholder agreement, § (b) minutes of meetings and resolutions of shareholders § (c) copies of all notices required by section 106 or 113 § (d) a securities register complying with section 49
• Concerns a list of who the shareholders are § (e) copies of the financial statements, reports and information referred to in section 155(1), and § (f) a register of disclosures made pursuant to section 120.
• Section 23 – (Who has) Access to corporate records o (1) The directors and shareholders of a corporation, their agents and legal representatives may examine the records
referred to in section 21(1) during the usual business hours of the corporation free of charge. § This is all about accountability and disclosure
Professional Conduct – Joint Retainers, Potential Conflicts, Informed Consent • The process of incorporating can lead to representing multiple clients • Code of Professional Conduct
o Joint Retainers § 3.4-5 Before a lawyer acts for more than one client in the same matter, the lawyer must:
• (a) obtain the consent of the clients following disclosure of the advantages and disadvantages of a joint retainer;
• (b) ensure the joint retainer is in the best interests of each client; • (c) advise each client that no information received in connection with the matter from one client
can be treated as confidential so far as any of the others are concerned; and • (d) advise each client that, if a conflict develops that cannot be resolved, the lawyer cannot
continue to act for both or all of them and may have to withdraw completely • Potential conflicts?
o A potential conflict exists when clients are aligned in interest and there is no dispute among them in fact, but the relationship or circumstances are such that there is a possibility of differences developing. Examples are co-plaintiffs; co-defendants; co-insured; co-accused; shareholders entering into a unanimous shareholder agreement; spouses granting a mortgage to secure a loan; common guarantors; beneficiaries under a will; and a trustee in bankruptcy or court appointed receiver/manager and the secured creditor who had the trustee or receiver/manager appointed. This list is not exhaustive
• What is informed consent? o If a lawyer determines that joint representation is permissible, then the consent of the parties must be obtained. Consent
will be valid only if the lawyer has provided disclosure of the advantages and disadvantages of, first, retaining one lawyer and, second, retaining independent counsel for each party. Disclosure must include the fact that no material information received in connection with the matter from one party can be treated as confidential so far as any of the other parties is concerned. In addition, the lawyer must stipulate that, if a dispute develops, the lawyer will be compelled to cease acting altogether unless, at the time the dispute develops, all parties consent to the lawyer continuing to represent one of them. Advance consent may be ineffective since the party granting the consent may not at that time be in possession of all relevant information (see commentary to Rule 3.4-1). Lawyers must disclose any relationships with the parties and any interest in or connection with the matter, if applicable.
• Does there need to be written consent? o While it is not mandatory that either disclosure or consent in connection with joint representation be in writing, the
lawyer will have the onus of establishing that disclosure was provided and that consent was granted. Therefore, it is advisable to document the communication between the lawyer and client and to obtain written confirmation from the client
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B. CORPORATE NAMES 1. Common Law and Statutory Requirements
Naming a Corporation • Our key section is s. 12 of the ABCA - Prohibited Names
o 12(1) A corporation shall not have a name § (a) that is prohibited by the regulations or contains a word or expression prohibited by the regulations, § (b) subject to the circumstances and conditions prescribed by the regulations, that is identical to the name of
• (i) a body corporate incorporated under the laws of Alberta, unless the body corporate has been dissolved for a period of 6 years or more,
• (ii) an extra-provincial corporation registered in Alberta, or • (iii) a Canada corporation,
§ (c) subject to the circumstances and conditions prescribed by the regulations, that is similar to the name of • (i) a body corporate incorporated under the laws of Alberta, • (ii) an extra-provincial corporation registered in Alberta, or • (iii) a Canada corporation,
if the use of that name is confusing or misleading, or § (d) that does not meet the requirements prescribed by the regulations
o It can't be identical, and it can't be similar • 3-fold component to a good name
o 1. Distinctive element to it § Because of the regulations (page 479 prohibits a name that is too general)
• E.g. Can't name your company "Drycleaners Inc" - too general § In terms of the distinctive element, you can make up words (e.g. Xerox)
o 2. Need a descriptive element o 3. Legal element, required by s. 10(1) of the ABCA - Corporate Name
§ 10(1) Subject to section 15.4(1), the word “Limited”, “Limitée”, “Incorporated”, “Incorporée” or “Corporation” or the abbreviation “Ltd.”, “Ltée”, “Inc.” or “Corp.” shall be the last word of the name of every corporation, and a corporation may use and may be legally designated by either the full or the abbreviated form.
Definition of a NUANS Search • How do you get a named approved?
o NUANS Search • NUANS = Newly Updated Automated Name Search
o A NUANS corporate name search report is required by the federal and most provincial/territorial governments when granting new corporate names for use. The reports list similar existing corporate names and trademarks; they are used to determine the availability of a new proposed name. Ensuring that new corporate names do not create confusion with others is intended to protect Canadian businesses and consumers.
• The applicant remains responsible for any confusion that may arise though o What you want to use the NUANS search for then is to see if there is a similar name to what you want to name your
company so there is no confusion/avoid court • Practice in AB
o The Registrar will reject the name if it's identical • Law firms will create numbered companies in case a client needs a corporation quickly
o These are called shelf companies • Can appeal under s. 247(1)(b) if you think the ruling of the names being too similar is wrong
o S. 247 – Appeal from decision of Registrar or Commission § (1) A person who feels aggrieved by a decision of the Registrar
• (a) to refuse to file in the form submitted to the Registrar any articles or other document required by this Act to be filed by the Registrar,
• (a.1) to issue, or to refuse to issue, a certificate of revival under section 208, or to impose terms on a revival,
• (a.2) to correct, or to refuse to correct, a certificate, a notice, articles or another document under section 270,
• (b) to approve, change or revoke a name or to refuse to approve, change or revoke a name under this Act,
• (c) to refuse under section 188(11) to permit a continued reference to shares having a nominal or par value, (
• d) to refuse to issue a certificate of discontinuance under section 189, • (e) to refuse to revive a corporation under section 208, • (f) to dissolve a corporation under section 213, • (g) to refuse an exemption under section 277(2), or
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• (h) to cancel the registration of an extra-provincial corporation under this Act, § may apply to the Court for an order requiring the Registrar to change that decision, and on the application the
Court may so order and make any further order it thinks fit. § (2) A person who feels aggrieved by a decision of the Commission to refuse to grant an exemption under
section 3(3), 151(a), 156(2) or 171(3) may appeal the decision to the Court of Appeal, and section 38 of the Securities Act applies to that appeal.
Paws Pet Food and Accessories Ltd v Paws and Shop Inc – Similar Names Caused Second Company to Change its Name
• Facts o Paws Pet Food (applicant) seeks to order under the ABCA s. 239(1) compelling the Registrar to direct the Respondent
(Paws and Shop) to change its name by eliminating the "Paws" § Name of the Applicant has been extensively used and publicized in Calgary since 1987 § It has actually acquired good will in its name, particular "Paws", which is part of the logo
o The Respondent has commenced business in 1991 in the same business in Calgary o Registrar claimed names were not similar enough under s. 6 of the Regulations and the applicant had to provide specific
evidence of customers being misled • Issue
o Was the Respondent's corporate name "confusing or misleading" contrary to the s. 12 rules and regulations? • Analysis
o The fact that customers believed the Respondent was a second store of the Applicant's indicated some are being misled and confused by the name
§ Leads to the reasonable inference that the Respondent would be associated with the Applicant o Thus, the name is similar in fact and pursuant to s. 6(1) of the Regulations
• Holding o Appeal allowed o The Registrar must require the Respondent to change its name
• Ratio o If a corporate name is similar to another and potentially misleading, the Registrar or Court may require that corporation
to change its name • Notes
o Facts § Paws Pet Food and Accessories Ltd applied to the Registrar, asking him for an order for Paws and Shop Inc. to
change its corporate name by dropping the word "Paws." The power to do so order is in s. 13 of the ABCA. § The Registrar refused.
• "I have received your request to have Paws and Shop Ltd. change its name. In my opinion the two names are not similar as set out in section 6 of the Business Corporations Regulations. As a result, I will not direct Paws and Shop Ltd. to change its name. The affidavit you sent me states that customers had asked if the Plaintiff had opened a new shop. I feel this information is insufficient for me to take action. If you can provide me with specific evidence of customers being confused or misled, I will reconsider my decision"
§ In response, Paws Pet Food and Accessories Ltd brought an application under s. 247(1) (b) of the ABCA. § Both stores were in Calgary, and sold the same pet food product § The first company had advertised extensively, and people knew its name
o Issue § Should the application be granted on the basis that the respondent's corporate name is "confusing or
misleading" contrary to s. 12 and the Regulations? o Court
§ Rules in favour of the applicant § The name was contrary to s. 12 § There's also a violation of the Regulations (Business Corporations Regulations)
• Section 4(5) - Similar and Identical Names o For the purposes of subsections (1), (2) and (4), a name is similar if it is
§ (a) a name that would reasonably lead to the inference that the corporation or extra-provincial corporation bearing the name is or would be associated or affiliated with the corporate person, dissolved body corporate or person proposing the name if the corporation or extra-provincial corporation and the corporate person, dissolved body corporate or person proposing the name are not or will not be associated or affiliated, or
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§ (b) a name whose similarity to the name of the corporate person or dissolved body corporate or to the proposed name would lead someone who has an interest in dealing with the corporate person, dissolved body corporate or person proposing the name to deal with the corporation or extra-provincial corporation bearing the name in the mistaken belief that he or she is dealing with the corporate person, dissolved body corporate or person proposing the name.
§ Thus, the second company was ordered to change its name
Stenner v ScotiaMcLeod – Example of “Passing Off” • Facts
o Parties § Gordon Stenner (P), suing for, inter alia
• Breach of fiduciary duty [for soliciting clients etc.] • Passing off [ie: that defs passed themselves off as being associated with the plaintiff after their
relationship had terminated] • Trademark infringement
§ Defendants include: • Vanessa Stenner-Campbell (plaintiff's daughter) • Raymond Campbell (plaintiff's then son-in-law) • Laura O'Connell (plaintiff's former admin. assistant)
o General facts § Plaintiff Gordon Stenner is a financial consultant and investment advisor at National Bank Financial. § His team was comprised of Vanessa, Raymond, and O'Connell as the assistant. These three were paid by
National Bank but also received bonuses and other forms of remuneration by the plaintiff. § The team was highly successful, with the daughter being an important member. § Plaintiff did marketing research, twice weekly radio shows, and published a client newsletter; daughter was
more responsible for providing advice and service to the clients. § Plaintiff committed to sell his book of business (i.e. client list) to his daughter with a phased retirement
planned for the plaintiff. § There was a falling out and the plaintiff did not sell his book of business to the daughter. [He eventually sold
to a third party in 2003.] § The daughter, son-in-law, and assistant moved to ScotiaMcLeod (a competitor) without notice.
• Issue o Is there a valid claim for passing off on family name used for corporation? o How much in damages does the D owe?
• Analysis o Potential for confusion is heightened by 3 family members all operating as independent financial advisors in a small
geographic area, using the same advertising media § The D's were aware of the potential for confusion and the benefit to be deprived from use of the name
o Common law action for passing off § "Passing off" means representing D's goods as being those of the P's
• 3 elements: P must prove o 1) Existence of good will o 2) Deception of public by misrepresentation, and o 3) Actual or potential damages to the P
§ "Goodwill" means benefit of a good name, reputation and connection of business • Different than action for a trademark infringement • It's essential to prove it was known and recognized generally in the market • Grant of trademark by Registrar proves the P had a reputation and goodwill association to
"Stenner" and its use by others would mislead the public • The D's were well aware of the goodwill
§ What did Vanessa do that was misleading? • Her name is Stenner-Campbell, but Stenner/Campbell suggests that there are two people one of
whom is named Stenner (i.e. Her father) o "Same name defence"
§ Stenner is not a "full and distinctive identification of a person" § If she wanted to rely on this defence, she would have to use her full Christian name § The Court is drawing conclusions from her reluctance to use her given name
o Liability
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§ ScotiaMcLeod is liable for actions of employees, Ms. S and Mr. C (aware of or wilfully blind to the use of the name "Stenner")
o Damages § Award based on accounting of profits (compensatory, not punitive) § Only 10% of Ds' gain to trial was causally related to the passing off § Much of money earned by Vanessa was because of her own skill, not her father's name
• Holding o The passing off claim was successful o Judgment against D's for tort of passing off, permanent injunction from name stennerteam.ca, transfer of internet
domain and return of propriety documents o No injunction restraining the D's from using "Stenner" (e.g. Vanessa Stenner is acceptable)
• Ratio o Elements required to prove the tort of passing off (when you take on a corporate name that is too close to another):
§ 1) Existence of good will § 2) Deception of the public due to a misrepresentation § 3) Actual loss of profit or defendant's gain (plaintiff can choose which to claim for)
• Notes o What does the tort of passing off mean?
§ You're misrepresenting that your services are associated with the plaintiff § It wrongly taps into the plaintiff's goodwill
• Goodwill in law is a broad concept that means the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force that brings in custom
§ To succeed in a passing-off action, the plaintiff must prove 3 things: • 1. The existence of goodwill • 2. Deception of the public due to a misrepresentation, and
o Somehow the businesses are associated • 3. Actual or potential damage to the plaintiff
o In this case § Step 1: Goodwill
• Yes, the P has goodwill in the financial services sector • His name was known
§ Step 2: Deception • Passing off activities:
o The Stenner/Campbell thing implies that there is 2 people and is not reflective of what's actually going on
o Solicitation letters to the Stennerteam clients at National Bank implied a link between Stennerteam at ScotiaMcLeod
o Copying the strategy of the radio show o The ongoing disregard for the infringement of the plaintiff’s entitlement to protection of
the name “Stenner” was dramatically illustrated during the course of trial when a telephone call was placed to Ms. Stenner-Campbell’s office at ScotiaMcLeod and was answered by the receptionist as “The Stenner Team”. I accept that was by employee misunderstanding and was not what had been instructed, but more diligence is needed
• What is Vanessa's biggest defence to passing off though? o "This is my legal name" - same name defence o Court not satisfied though: “The defendants raise the “same name defence” claiming an
entitlement of Ms. Stenner-Campbell to use her family name Stenner. The use of “Stenner” in combination with “Campbell” however does not make the use permissible as it is not a full and distinctive identification of a person which has been held to require use of full Christian names.”
§ You haven't used your full name so you can't use the same name defence
o Damages - what should Mr. Stenner get? § The successful P can either get the accounting of Vanessa's profits OR the dad proves what he lost as a result
of what was passed off • AKA, Vanessa's gain or the father's loss
§ You have to show the D's game was related to the tort of passing off § What amount of revenue then can Vanessa gain as a result of passing off? § Court
• Not all of Vanessa’s gain was due to passing off, only about 10%
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Corporate Names – Trademarks vs Tradenames • Trademark
o Word, symbol design, or combination distinguishing one person's product from another • Tradename
o Name of which a business operates under
C. SHARE CAPITAL Introduction on Shares
• There are 2 ways to capitalize a corporation o Company can take on debt o Company can issue shares
• Debt ranks ahead of equity when the company dissolves o All of the creditors get paid first, then if anything is left it goes to the shareholders
• Shares are a form of intangible personal property • Shareholders don't actually own the company, just shares of the company • Rights associated with shares:
o Right to vote o Right to dividends o Right to winding up
§ Corporation dissolving and what's left at the end of that process
2 Main Kinds of Shares – Common vs Preference • Common shares
o In Canadian and American corporate finance practice, the term “common shares” has traditionally been used to describe shares that confer a full right of participation in the corporation that issues them, and thus unrestricted rights to participate in dividends and in the distribution of the remaining property of a corporation upon dissolution (as well as the right to vote). If all the company shares are issued without differentiation among them, then all of those shares are considered to be common shares.
o Common shares are often referred to as “equity shares” because they are entitled to the equity of the company, that is the residue remaining after the payment of all,
§ Profits after all prior claims, such as the loan interest and preference dividends; and § Capital after repayment of all prior claims as to capital, such as tax, creditors, loan capital, and (generally)
preference shares. • In contrast, the term “preference share” has been used to describe special shares so to which was attached some preferential right
which caused the share in question to rank ahead of the common shares of a corporation in some way o Typical preferences include
§ A prior right to receive a dividend (usually at a fixed rate, such as a percentage of par value or alternatively at a stated amount; preferential dividend rights might be cumulative or noncumulative);
§ Priority in the repayment of capital upon winding-up; § Special and quite often separate class voting rights, either generally with respect to all matters to be decided
by shareholders, or with respect to the election of directors, or concerning some matter of particular importance, such (in the case of privatized former Crown corporations), a change in the business of the corporation, any sale of a significant portion of its undertaking, or in the location of the head office;
§ A right of redemption or retraction, either at a specified time or in specified circumstances, as, for instance, upon the death of the holder;
§ Conversion rights; § Poison pill rights, which augment the rights attached to the shares in the event of a take-over bid.
o Preference shares are also typically non-voting
D. PRE-INCORPORATION CONTRACTS Pre-Incorporation Contracts
• No area of corporate law has had a more tortuous, chequered and unfortunate history than liability under pre-incorporation contracts
• Common law leading up to the statutory provisions • Estey Article - very CBCA-driven • The CBCA has a totally different approach to pre-incorporation contracts compared to the ABCA • The parties in a typical PIC
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o
o Promoter § Usually wishes to avoid liability under the contract § "Agent” of the corporation to be created
o 3rd party § Other party to the "contract"
o Corporation to be created § "Principal"
• Promoter purports to contract “on behalf of a corporation to be incorporated.” • Example
o 3rd party sues promoter personally on the contract. o Is the promoter personally liable?
• Kelner v Baxter (1866); Black v Smallwood (1966) - 2 different cases on this issue • SKO: Pre-incorporation contracts are something that you don't want to do • How can a 3rd party have a contract with an entity that doesn't exist?
o Answer: You can't; you can't have a contract with a legal entity that doesn't exist at the time of the contract • Agency law: The Promoter (Agent) has entered into a contract that is an impossibility, and so when the corporation comes into
existence, common law says that as a principal you cannot ratify an impossibility • When you enter into a pre-incorporation contract, you've engaged in a nullity • There are several cases that illustrate this
o Kelner – harsh ruling § The 3rd party sues the promoter personally on the PIC § Company was created and did adopt the contract, however never performed it; that's why the 3rd party is
suing § Is the promoter liable? § There was no intention that the promoter be liable § However, the promoter is liable by operation of agency law § As the agent, the promoter acted for a non-existent principal, agency law dictates he has personal liability § The fact that the contract was adopted doesn't matter - you cannot adopt a nullity § Lord Denning
• As I understand Kelner…it decided that, if a person contracted on behalf of a company which was non-existent, he himself would be liable on the contract. Just as, if a man signs a contract for and on behalf 'of his horses,' he is personally liable."
o Black – takes a softer approach § Whether the Promoter is liable depends on the parties' intentions § Did the parties intend that the Promoter would be a party/would be responsible or not? § In this case, there was no intention that the promoter be liable § Therefore, the promoter was not found liable
• Kelner vs Black - What are we supposed to tell our clients? o We had a legislative response to this mess
§ E.g. s. 21(1) of the OBCA • Except as provided in this section, a person who enters into an oral or 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 the benefits thereof.
o Intentions don't matter, you are personally bound if you are a promoter to a pre-incorporation contract
o And, if the parties § Adopt the contract à promoter is released § Don't adopt the contract à promoter remains on the hook, and is liable for
non-performance of the contract • This legislation repeals the ruling in Kelner • It's an anti-Kelner provision
• Estey on s. 14 of the CBCA and s. 21 of the OBCA o These sections provide that, prima facie, a promoter will be personally bound by a pre-incorporation contract unless the
corporation adopts the contract, within a reasonable time after incorporation, by any action or conduct signifying an intention to be bound. In that case, the corporation becomes bound by the contract and the promoter is released. In addition, whether or not a pre-incorporation contract is adopted by the corporation, a party to the contract may apply to
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a court for an order fixing obligations under the contract as joint or joint and several or apportioning liability between the corporation and the promoter and, upon such application, the court may make any order it thinks fit. Finally, if a pre-incorporation contract expressly so provides, the promoter is neither bound by the contract nor entitled to any benefits thereunder. Thus, a promoter is permitted to “contract out” of personal liability in the event that the corporation to be incorporated is not formed or does not adopt the contract
o In short, these sections were intended to ameliorate the harshness of the common law rules. They also sought to avoid the arbitrary and sometimes confusing distinctions made by the courts in determining liability based upon the knowledge of the parties as to the existence of the corporation, their intentions as to who was to be bound by the contract, and the manner in which the parties actually signed the contract. The next section of this article will discuss whether those objectives were achieved.
Westcom Radio Group Ltd v MacIsaac – Ludicrous Decision on the Wording of s. 21 of the OBCA and Looking at the Common Law First Before Applying the Statute
• Facts o The promoter entered into a series of contracts with a 3rd party (signed as director and signing officer)
§ Both the promoter and the 3rd party thought the company had been created § The company did not exist, and the P sued the D Promoter
• Issue o Is a failed attempt at a PIC captured by the statute? o Is the promoter personally liable?
• Analysis o s.21(1) OBCA only applies if enforceable contract is entered into
§ Court applied 2-step approach: • Considered common-law per Black: Was there intention that individual D would be personally
bound? o No, and therefore, no contract at common law o Purported or failed attempt at contract only
• Considered statute: s.21(1) does not apply because there is no contract o Statute did not supplant CL in situations like Black
• Holding o A failed attempt at a PIC is not captured by the statute o The promoter is not personally liable o Action dismissed – the section of the OBCA does not apply, as there is no contract at common law
§ Court strictly construed the statute, ignoring the intent of the legislature • Ratio
o First: Was there intention to contract? (per Black) § Here there was clearly no intention, therefore no contract at common law § Because the corp does exist there is no contract
• We do have a purported contract though o Second: Look at statute (If there is no contract, s 21 does not apply)
§ This is not the intent of the legislation; it is clear that is should have contemplated a failed attempt at contract; the idea of the legislation was that they wanted the promoter on the hook until the corporation ratifies the contract
o Thus, the court’s decision is contrary to the intent of the legislation (to require a common law “contract” essentially negated purpose of the legislation)
• Notes o The D Promoter (MacIsaac) thought she owned shares in a corporation that existed; it turns out the corporation was
never created § She wasn't being deceitful or fraudulent, she really thought it existed
o When the P sued the D for the amounts owing, the P was unsuccessful and unsuccessful on appeal o S. 21 of the OBCA: Except as provided in this section, a person who enters into an oral or 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 the benefits thereof.
§ Aren't we done then, isn't this the answer? o Both levels of the court said:
§ 1) First, you look at common law principles, and see if the parties intended there to be a contract • Here, there was no intention, so at common law there is no contract as there is only the party that
exists § 2) Then, does the statute in question change the outcome?
• This is where the court gets hung up on the highlighted words o “We don't have an oral/written contract”
o At trial, the court had applied common law principles and, on the basis of the decision in Black, concluded that the defendant was not personally liable. Austin J. in the Divisional Court agreed with this conclusion. In his view, there was no evidence that either party had entered into the contracts with the intention that the defendant would be bound
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personally. He then went on to consider the effect of s. 21(1) of the OBCA. In his opinion, the key to the interpretation of this provision is the term “contract”. If, by virtue of contracting with a person on behalf of a non-existent corporation, the purported contract is a nullity, then s. 21(1) can have no application
§ Essentially, Section 21 doesn't apply because there is no contract o If, however, an enforceable contract is entered into, then s. 21(1) would apply:
§ In coming to any conclusion about the case at bar, the starting point must be to determine whether the plaintiff intended to contract with the non-existent company exclusively. If so, then the purported “contract” is a nullity. Whether the defendant will be personally liable under the OBCA will depend upon the interpretation of the word “contract” in s. 21(1). It is probable that the intention of the legislators was to remedy the perceived unfairness of the Black principle, but it is questionable whether the current wording of the Act clearly includes purported agreements which are in law nullities. While there is no explicit statement in any of the Canadian cases to the effect that the OBCA or the CBCA has “obliterated” the Kelner, Black distinction, such reasoning seems implicit.
o Nonetheless, Austin J put his conclusion in the following terms: § The OBCA arguably provides a complete codification of the law concerning personal liability for pre-
incorporation contracts. While the intent of the legislature may have been to obliterate the seemingly unfair distinctions adopted in Black, the literal wording of the statute does not apply to a classic Black scenario.
§ In the present case, application of the common law leads to the conclusion that no contract ever existed. That being the situation, there is nothing to which s. 21(1) of the OBCA can apply.
o According to Westcom, a failed attempt to contract means that the Act is not triggered § The steps are
• See if at common law there is a contract o If there is à apply the statute (s. 21) o If there is not à remain at common law to resolve the problem
o Estey: This is a ludicrous decision § Clearly, the intent of the legislators was to supplant the common law rules with a statutory code for dealing
with liability under pre-incorporation contracts. Based upon its legislative history, this code was obviously intended to be free of the shackles of the common law rules. Even Austin J. expressly acknowledged, in the course of his reasons for judgment, that it was “probable” that the legislators intended to remedy the unfairness of the Black v. Smallwood principle, that the OBCA “arguably provides a complete codification” of pre-incorporation contract liability rules, and that “the intent of the legislature may have been to obliterate the seemingly unfair distinctions adopted in Black”. In light of these remarks and the clear legislative history of the provision, it is, to say the least, remarkable that he came to the conclusion he did in Westcom.
§ The Westcom decision entirely thwarted the legislative purpose behind s. 21 by reintroducing into this statutory code the old common law rules. The result of this was, in effect, to cause the common law rules to act as a “gatekeeper” to even getting into the statutory code. It is therefore not at all “questionable whether the current wording of the Act clearly includes purported agreements which are in law nullities” (to quote from Austin J. in Westcom). That such is the case seems clear beyond doubt. While the wording of the section could have been more felicitous, when read in context and in light of its legislative history, s. 21(1) ought to have been applied to the facts of Westcom. As a matter of statutory interpretation, where a provision has been enacted specifically to change or substantially modify pre-existing common law rules which were perceived to be deficient, the provision ought to be interpreted by the courts to give it that effect.
o The whole point of the legislation was to solve the problems at common law § If you make the common law the gate to get into the statute, you're not solving much and acting contrary to
legislative intention § The whole purpose was to address the Kelner vs Black divide
Sherwood Design Services v 872935 Ontario Ltd – Bad Decision on the Act of the Solicitor Being Sufficient to Show Intention; Minority Later Adopted in Szecket
• Facts o Individual defendants entered into a $300,000 agreement of purchase and sale “in trust for a corporation to be
incorporated” with Sherwood Design. § A PIC essentially
o In furtherance of the asset purchase, counsel for the defendants wrote to counsel for plaintiff/vendors stating as follows: § That a corporation had been assigned to the transaction and would complete the asset purchase. (Counsel
used one of the firm’s shelf companies for this purpose.) o Included in this correspondence were draft organizational documents as well as a draft, unsigned resolution of the
directors adopting the pre-incorporation contract. o The deal did not proceed; the shelf company was returned to the shelf and assigned to a subsequent client of the law
firm. o Sherwood Design (corporate P and vendor of assets) sued individual Ds and corporate D (872935 Ontario Ltd) on the
transaction § As observed by the CA, this corporate defendant had the “assets able to answer any liability the earlier
transaction may have attracted.”
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• Issue o Was the conduct by counsel for the defendant in bullets 2 and 3 above sufficient adoption of the contract under the Act
such that the shelf company is now bound? • Analysis
o The contract had been adopted § Abella JA: "Section 21(2) does not set out the “manner of adoption”, and there is no principled basis for
imposing a stringent requirement of formality. Parties should be able to take at face value letters such as the one sent -- and received -- in good faith by the purchasers’ lawyer on January 11, 1990"
• Even though it was an unsigned resolution, it was a shelf company that had been assigned o The act of the solicitor as agent for the corporation was sufficient to show intention on the part of the corporation to
adopt and be bound by the agreement o Conduct of a lawyer for one of the Ds amounted to the corporation adopting the contract in question o Only the corporation is liable on the contract; the individual Ds are not liable
• Holding o Judgment in over $200k o The corporate D is liable (not the individual Ds); the third party is also liable even though they were unaware of the
contract • Dissent – Borins JA (later adopted in Szecket)
o The act of the solicitor in writing the letter was not sufficient evidence of adoption of agreement by the corporation § The action of the agent is not sufficient § Conduct by the corporation was required and the individual Ds ought to be held personally liable
o The majority in Sherwood is as confused as the court in Westcom § They’re ignoring the intent of the legislature of s. 21 § They’re ignoring the remedial nature of s. 21 § Westcom is about whether a promoter is personally liable § This case is about whether the PIC has been adopted
• Ratio o S. 21 does not include failed contracts
§ This is later reversed in Szecket • Notes
o Estey on the Majority § Doesn't like the decision § Doesn't like the idea of sufficient conduct for adoption § "It is, however, contrary to common sense and standard commercial practice to conclude that by merely
giving the number of the corporation that was intended to be used in the transaction, together with draft organizational documents, to the vendor’s solicitor, the solicitor for the purchasers had taken an act that would, by itself, be sufficient to constitute adoption by the corporation under s. 21(2) of the OBCA. Given the fact that there was substantial authority on the adoption point and given the lack of clarity and the considerable uncertainty in the pre-incorporation contract area, it is unforgivable that an appellate court judge would write such a bald and, frankly, unhelpful judgment."
o Estey on the Dissent § What is of most significance for purposes of this article, however, is the comment Borins J.A. made in his
reasons about the validity and correctness of the Westcom decision. In considering the proper approach to be taken to interpreting s. 21(2) (the “adoption” provision), Borins J.A. noted that “in my view, to ignore [as the majority did] the remedial nature of s. 21(2), and to fail to apply a company law analysis, would be to rewrite s. 21(2) and invest it with a meaning not intended by the legislature”. Borins J.A. then stated the following:
• "Regrettably, in my view, this is what occurred in the one case in which s. 21 has been considered, although the focus of the consideration was on s. 21(1): Westcom Radio Group Ltd. v. MacIsaac . . . This case was relied on by counsel for the respondents as authority for certain common law principles of pre-incorporation contracts. Although the case is not of assistance in the resolution of this appeal, I refer to it because, in my opinion, there is validity in Professor Ziegel’s criticism of the interpretation which the court placed on s. 21(1), which by logical extension may be read as affecting the interpretation of s. 21(2): J.S. Ziegel, “Promoter’s Liability and Pre-incorporation Contracts: Westcom Radio Group Ltd. v. MacIsaac"
Estey: What Do We Learn from Sherwood? • The facts and the decision in the Sherwood Design case have been summarized above. It will be recalled that the defendants agreed,
on behalf of a corporation to be incorporated, to purchase the assets of the plaintiff. The deal ultimately fell through. However, prior to the contemplated closing date, the defendants’ lawyers, a major law firm, had designated or “assigned” one of their “shelf companies” as the corporation to complete the transaction on behalf of the defendants. When the transaction did not close, the law firm returned the company to its “shelf” and assigned the company some three months later to other clients for a wholly unrelated transaction – the purchase of a commercial building of some value. As a result of the decision of the majority of the Court of Appeal in that case, those clients, who were entirely unaware of the prior events involving “their corporation” and its supposed adoption of the pre-incorporation contract at issue, surprisingly found themselves subject to a judgment for damages in excess of $200,000.
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• The teaching from this case, therefore, is that law firms or sole practitioners who incorporate “shelf companies” for the use of their clients should appreciate the risks involved in doing so. Specifically, they should ensure that once a shelf company is “taken off the shelf” for use by one client, or is in any way identified for use by a particular client in a particular transaction, it should not be “returned to the shelf” for later use by another client. As the Sherwood Design case illustrates, this is a dangerous practice.
• As a practical matter, the difficulties encountered by the purchaser’s solicitor in the Sherwood Design case could have been avoided if the letter identifying the corporate vehicle to be used to complete the transaction in that case had expressly stated that mere identification of the corporation did not constitute adoption of the pre-incorporation contract in question. It should accordingly have been made clear that adoption would only take place when an express resolution to that effect had been passed by the duly appointed directors of the corporation, once the necessary organizational procedures have been completed.
Szecket v Huang – Functionally Overruled Westcom • Facts
o P and D promoter begin negotiations on behalf of contract to be formed o Corporation is never formed, disappointed P sued o TJ
§ Followed Westcom because he thought he was supposed to § Is there a contract in CL?
• Yes § Thus, since there's a contract, we can apply s. 21, and the promoter is liable
• Issue o Does the Promoter have liability?
• Court of Appeal o Why is the TJ doing this?
§ This isn't what you do, you just apply the legislation, the purpose is to overcome the confusion § You don't go to the CL to apply the statute, you just apply the statute
o Westcom analysis is flawed à Nothing turns on analyzing whether D intended to be personally liable o Adopts dissent from Sherwood Design (Westcom no longer the law)
§ In situation where company is not incorporated and contract not performed, liability for breach depends on application of s 21
o Application § D personally liable under s 21(1) § Not excused from liability under s 21(4) because contract did not “expressly” provide that he is not liable
• Holding o The individual D is personally liable via the statute
§ Did not read the section in a technical way like the court in Westcom did • Ratio
o The legislation captures a failed attempt at contracting o The promoter is liable because he had not expressly contracted out of personal liability
• Notes o This case overrules Westcom o Current state of the law
§ CBCA • Took the Szecket case and expressly wrote it into the legislation
§ ABCA • Different approach
How We Approach Matters in Alberta – s. 15 of the ABCA • In AB, we have a completely different model
o We say that the Promoter makes deemed warranties § Under the ABCA, the promoter is a deemed warrantor: Deemed to warrant corporation will come into
existence and adopt the contract in a reasonable time • E.g. You're in a fight, how do you know if the section applies? • Section 15 - Pre-incorporation contracts
o (1) This section applies unless the person referred to in subsection (2) and all parties to the contract referred to in that subsection
§ (a) believe that the body corporate exists and is incorporated under, or § (b) intend that the body corporate is to be incorporated under
the laws of a jurisdiction other than Alberta. § If the parties involved intended that the corporation will exist, the ABCA will apply
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o (2) Except as provided in this section, if a person enters or purports to enter into a written contract in the name of or on behalf of a body corporate before it comes into existence,
§ (a) that person is deemed to warrant to the other party to the contract • (i) that the body corporate will come into existence within a reasonable time, and • (ii) that the contract will be adopted within a reasonable time after the body corporate comes into
existence, § (b) that person is liable to the other party to the contract for damages for a breach of that warranty, and § (c) the measure of damages for that breach of warranty shall be the same as if the body corporate existed
when the contract was made, the person who made the contract on behalf of the body corporate had no authority to do so and the body corporate refused to ratify the contract.
• How do we measure this? (See Wickberg) § What about oral contracts?
• The common law would apply • This gets us back into the Kelner vs Black argument
Wickberg v Shatsky et al – How We Measure Damages for Breach of Warranty Under the ABCA • Facts
o Wickberg (P) is "hired by" and "contracts" with Rapid Data (Western Ltd) (which doesn't exist) o Individual Ds: Lawrence and Harold Shatsky who are directors of Rapid Addressing Systems Ltd o Individual defendants' company, Rapid Addressing Systems Ltd, sells and services business machines and also sells
supplies. o These defendants decide to incorporate Rapid Data (Western) Ltd but never actually did
§ However, they carried on business under that name (improperly). o Plaintiff was hired to be the new manager for the new 'company' on May 9, 1966 and received his employment contract
on Rapid Data (Western) Ltd letterhead. o Contract was signed by the defendant Lawrence Shatsky as President of Rapid Data (Western) Ltd. o The business was not successful and the plaintiff was fired on August 26, 1966 for refusing to work on straight
commission. • Issue
o Are the individual D's personally liable? o What are the damages for the pre-incorporation contract?
• Analysis o In this case, the P thought Rapid Data was in existence and D's knew it was not
§ Issue 1: Black v Smallwood is applicable to this case • Not intention of parties when contract was made that the D signing as director should be
personally liable; therefore, he cannot be held liable § Issue 2: However, D’s acted so as to warrant to P that Rapid Data was a legal entity
• Reprehensible for D’s to use name when they had abandoned intention of forming corporation; but court did not believe P that he didn’t attach significance to omission of ‘Ltd’ from name
§ Issue 3: Rapid Addressing Systems was proprietor of firm at all material times • P never thought D’s were carrying on business as partners
o But what are the damages? § No causal connection between damage suffered by P and breach of warranty § Loss resulted from business not succeeding
• Therefore, P entitled only to nominal damages from both D’s • Holding
o The Ds are liable o Judgment for the P in the amount of $10; found a breach of warranty
• Ratio o Under the ABCA s. 15, a third party will not be able to recover unless they show that the breach in warranty of authority
by the promoter/agent caused the loss o Damages for breach of warranty limited to P's losses caused by breach of warranty o Where agent not personally liable on contract, action for breach of warranty of authority only produces nominal damages
because corporation has no existence and funds o Section 15 generally only produces nominal damages (SKO)
• Notes
o This case is useful for how to measure damage for breach of warranty o Common law
§ Court has to decide whether to apply Kelner or Black in terms of whether Shatsky is going to have personal liability
• Kelner - automatic liability
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• Black - depends on intention § Court decides to go with Black
• Thus, he didn't have personal liability o However, there were some false warranties o What are the P's alleged loss?
§ P: I won't be able to recover damages for wrongful dismissal o Issue
§ Did the breach of warranty cause the P's loss? • This all should apply to s. 15 of the ABCA technically
o Court § You need to show a causal relationship between the breach of warranty and your loss § Whether the warranty was fulfilled or not though, the P would have been in the same position
• The problem isn't the existence of the corporation – it's that the business is unsuccessful § There is therefore no causation
• He was working for a business that was failing • Whether it was incorporated or not, he would be in the same position • Thus, the breach of warranty did not cause the loss • The negligent words had no influence on the outcome
o Holding § There was a breach of warranty, so entitled to nominal damages for $10 (felt bad for the P)
o Based on Wickberg, you're going to have trouble getting damages under s. 15 o AB Law Reform Institute commentary
§ Not a fan of the PIC model in the CBCA since it doesn't reflect reality • Most of the time, the promoter isn't intended to be liable
§ We need an addition which is that a warranty of a company of means will be created • If you don't have that warranty, you're going to be hooped under s. 15 • You should not be in a better position just because the corporation didn't come into existence
o Alternative partnership argument that was made by the P: The Shatsky brothers were in a partnership § Joint liability of the partners § But the court said there was no partnership, there was no intention to have one
The ABCA vs CBCA regarding Pre-Incorporation Contracts • 1. Conflicting CL cases concerning the enforceability of PICs
o Kelner vs Black o Per Lord Denning on Kelner: "As I understand Kelner…it decided that, if a person contracted on behalf of a company
which was non-existent, he himself would be liable on the contract. Just as, if a man signs a contract for and on behalf 'of his horses,' he is personally liable."
• 2. Statutory interventions; 2 models o CBCA/OBCA: Promoter is party to the contract vs o ABCA: Promoter is a warrantor o See for example, s. 21(1) of the OBCA in Westcom
§ Except as provided in this section, a person who enters into an oral or 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 the benefits thereof.
• 3. Judicial interpretation of the CBCA/OBCA model o Westcom - bad o Sherwood - dissent important o Szecket - complete clarity; includes purported contracts
• 4. New statutory amendments (anti-Westcom) • 5. ABCA
o Promoter is a warrantor, not a deemed contracting party § See s. 15(2) of the ABCA
• Except as provided in this section, if a person enters or purports to enter into a written contract in the name of or on behalf of a body corporate before it comes into existence,
o (a) that person is deemed to warrant to the other party to the contract § (i) that the body corporate will come into existence within a reasonable time, § (ii) that the contract will be adopted within a reasonable time after the body
corporate comes into existence… • 6. Measure of Damages under the ABCA
o Wickberg
Summary of Pre-Incorporation Contracts • What is the legal effect of contracting on behalf of a corporation to be incorporated?
o 1. Common law
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§ Kelner v Baxter (1866): Promoter has personal liability on the contract because he acted for a non-existent principal. That’s simply what agency law dictates.
§ Black v Smallwood (1966): Any liability on the promoter depends on the parties intentions. Here, no liability. § Confusion reigns.
o 2. Statute § CBCA-like approach: Promoter is a deemed party until, within a reasonable time, corporation comes into
existence and adopts contract. If contract expressly provides that promoter is not bound by contract, no personal liability. (Promoter can contract out of the Act).
§ For example, legislation at issue in Westcom Radio v MacIsaac (1989) states: • Except as provided in this section, a person who enters into an oral or written contract in the made
of or on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to its benefits.
o 3. Caselaw interpreting the statute § Westcom:
• A scenario involving failed attempt to contract is not caught by the provision. If no contract exists (because not intended that promoter would be liable), there is nothing to which the statute can apply.
§ Sherwood Design (1998): • Majority: Conduct of lawyer for one of the defendants amounted to the corporation adopting the
contract in question. Only the corporation is liable on the contracts. Individual defendants are not liable.
• Dissent: Contract NOT adopted by the corporation. Individual defendants should be liable. But more important for our purposes is that dissent takes a run at Westcom in obiter: Westcom ignores the remedial nature of s. 21.
§ Szecket v Huang (1998) • TJ followed Westcom: (1) is there a contract at common law? If so (2) then apply s. 21 whereby the
individual promoter becomes personally liable. • Appeal court strongly critical of this approach and relies on dissent in Westcom. Instead, courts are
just supposed to apply s. 21. In short, s. 21 is intended to include failed contracts. • Szecket effectively overrules Westcom.
o 4. Statutory amendments to the legislation § CBCA s. 14(1): purports to enter into a written contract… § ABCA s. 15(2): purports to enter into a written contract… § Common law would apply to pre-incorporation contracts falling outside the Act.
o 5. ABCA approach and the problem of measuring damages per Wickberg
4. THE CORPORATOIN AS A LEGAL PERSON A. NATURE OF THE CORPORATE PERSONALITY Introduction
• The corporation is a separate legal entity (the Salomon principle) • It is a legal consequence of the decision in Salomon that one person may function in dual capacities: As an employee, officer, and/or
director of a corporation • A director is not the corporation itself; a director is an agent of the corporation
o Being a director is no impediment to being an employee of the company (Lee) o Per Lee, you can be an employee of your own corporation o In partnership law, a partner cannot be an employee
• Slur article o Corporations are consensual hallucinations – we agree as a society that they exist
B. GROUNDS FOR LIABILITY OF THOSE BEHIND THE CORPORATION 1. Liability Based on Lifting the Corporate Veil
Introduction • Corporations exist by operation of the ABCA • We know from Salomon is that corps are separate legal entities
o The corp § Has its own obligations and enters into its own contracts § It commits its own crimes
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o Creditors that deal with corporations - it's on them • Example
o Facts § Mr X signs a non-compete contract with employer
• "I won't compete with you" § Mr. X quits, and sets up a company called Mr. X Ltd
o Can Mr. X Ltd compete with the employer? o One way of solving the problem:
§ Implied in the clause that you wouldn't create a corporation to create § Usually the non-compete clauses are more broadly drafted than this one; thus by implication you can't
o Another view - Lord Denning § Lift the corporate veil between Mr. X and Mr. X Ltd, and say that the corporation is operating for an improper
purpose § Courts can offer and draw the veil aside
• SKO: This is actually not that common; it's unusual, but it can happen • It is very rare to lift the corporate veil in Canada
Excerpt from Khimji and Nicholls, “Piercing the Corporate Veil in the Canadian Common Law Courts: An Empirical Study
• Reviewed decisions up to 2008 • The Canadian federal courts have pierced the veil least often while Alberta and Ontario courts have pierced the veil most often. Veil
piercing rates were highest in the case of sole shareholder corporations. Third party government entity claims have been the most successful, while attempts by the corporation itself or parties related to the corporation have been the least successful
• The highest veil piercing rate was found to occur in the family law context. Furthermore, the rate of veil piercing in tax cases where the claimant was a third party government entity was also higher than the overall rate of veil piercing found in the study
Kosmopoulos v Constitutional Insurance Co of Canada – The Test to Lift the Corporate Veil • The best that can be said is that the “separate entities” principle is not enforced when it would yield a result “too flagrantly
opposed to justice, convenience or the interests of the Revenue” o Essentially: We're capturing very specific circumstances
Yaiguaje v Chevron Corporation – Example of the Corporate Veil Not Being Pierced; Transamerica Test • Facts
o Indigenous villagers won a $9.5 billion judgment against Chevron Corp in Ecuador in connection with environmental harm.
o The appellants commenced an action in the US, where Chevron Corp was based, in order to recover against Chevron Corps’ assets there
o However, the US District Court in NY refused to enforce the judgment on the grounds that the appellants’ counsel in the Ecuadorian proceedings had engaged in fraudulent conduct
o Unable to enforce the judgment in the US, the appellants commenced an action in Ontario to enforce the judgment against Chevron Corporation’s Canadian subsidiary, Chevron Canada.
o The appellants argued that the Execution Act permits execution by them on Chevron Canada’s shares and assets to satisfy the Ecuadorian Judgment (Chevron Canada being a seventh-level subsidiary of Chevron Corp).
o Alternatively, they argued that the Court should pierce the corporate veil in order to render Chevron Canada’s shares and assets exigible to satisfy the Judgment.
• Issue o Are the shares and assets of Chevron Canada available for seizure to satisfy judgment?
§ If so, should Chevron Canada's corporate veil be pierced so that its shares and assets are available? • Analysis
o The appellants argued that the Execution Act applied to Chevron Canada’s shares and assets and sought a declaration that those shares, and assets were exigible under the Execution Act.
§ The Court rejected this and said that the Execution Act is a purely procedural statute and does create new substantive rights
• Since Chevron Corp did not have an existing legal right to the assets of Chevron Canada, those assets were not exigible under the Execution Act
§ The majority emphasized principles of corporate separateness and the distinction between a corporation and its shareholders
• Relying on BCE the majority stated that shareholders only have a right to the assets of a corporation if and when it is wound up.
• While the corporation is ongoing, shareholders have no such right. • It followed that if Chevron Corp had no right to Chevron Canada’s assets, then neither did Chevron
Corps’ creditors.
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o The appellants also argued that the Court should pierce the corporate veil “when the interests of justice demand it” § In that regard, the court’s reasons focused on Kosmopoulos
• The law on when a court may disregard this principle by “lifting the corporate veil” and regarding the company as mere “agent” or “puppet” of its controlling shareholder/parent company follows no consistent principle. The “separate entities” principle is not enforced when it would yield a result “too flagrantly opposed to justice”
• "Courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct." (Transamerica test)
o Y argued that Chevron Corp had an indirect beneficial interest in Chevron Canada because it had full ownership of shares through CCC
o However, since Y did not attempt to argue, and would have failed in arguing, that Chevron Canada was incorporated for fraudulent purposes, the court affirmed the TJs decision refusing to pierce the corporate veil and upholding the corporate separateness between Chevron Canada and Chevron Corp.
o Step 1: Show that Chevron Canada doesn’t not function independently § First step is not satisfied
o Step 2: Show nature of conduct, it must be akin to fraud or some other improper purpose o 3 standards
• Holding o Appeal dismissed o The corporate veil should not be pierced
• Ratio o Transamerica test showing three circumstances where the court will pierce the corporate veil:
§ 1) Court construing a statute, contract or other document § 2) "Mere façade" of concealing the true facts
• In a case where it is alleged that a subsidiary corporation is a “mere façade” that protects its parent corporation, a court must be satisfied that:
o (i) Complete control of the subsidiary; "mere puppet", or o (ii) Subsidiary was incorporated for a fraudulent or improper purpose or used by the
parent shell for improper activity § 3) Established that the company is an authorized agent of its controllers
• Notes o Important case on the corporate veil o Facts
§ P (appellants) are asking to lift the corporate veil § There's quite a chain between the D and the corporation § The P had gotten their judgment in Ecuador, and now have gone to the USA to satisfy it there § Went to NY Court
• Refused to enforce the foreign judgment • The judgment had been secured by fraud
§ Appellant wants to force the judgment in the USA, can't succeed; so its next step is to enforce the judgment in Canada
• To do so, realize below Chevron Corp (Chevron US) are 7 subsidiaries o The parent has control over the subsidiary o Chevron Canada Ltd is a 7th level subsidiary
• Chevron Canada's direct parent is subsidiary number 6: Chevron Canada Capital Company (CCCC) o This means that Chevron US doesn't own Chevron Canada Ltd o The immediate direct parent owns all the shares, in this case CCCC o The judgment debtor owns no shares in Chevron Canada
o Court § This action is going to fail § The Execution Act permits Chevron US to seize assets; but is Chevron Canada an asset of Chevron US?
• No, it has no shares in Chevron Canada • The entity that owns the shares is CCCC • Thus, the only way you can get to the assets of Chevron Canada is to lift the corporate veil between
Chevron US and Chevron Canada • The appellants say there's an inherent jurisdiction to lift this veil when it’s just
o This is incorrect § Nor can the appellants’ alternative argument, that this court should ignore
the corporate separateness of Chevron Corporation and Chevron Canada, succeed. They submit that our courts have an equitable ability to pierce the corporate veil whenever it appears just. That is not the law in this province. Indeed, this submission ignores more than twenty years of jurisprudence
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o There's a specific legal test that needs to be satisfied § The ‘separate entities’ principle [between corporation and shareholder] is
not enforced “when it would yield a result ‘too flagrantly opposed to justice….’”
§ The current state of the law in the United States is comparable to the state of the Canadian jurisprudence at the time of Kosmopoulos. The appellants misinterpret Wilson J.’s statement in that case, quoted above at para. 64, as an endorsement of a standalone just and equitable standard for piercing the corporate veil. It was not.
o Chevron (ONCA 2018) endorses Sharpe J’s analysis in Transamerica Life Insurance Co of Canada v. Canada Life Assurance Co
o As noted by the court in Chevron, and more generally, Sharpe J identifies three circumstances where courts will lift the corporate veil. Only the second one concerns us, namely that the court will lift the corporate veil when, per Sharpe J, “the court is satisfied that a company is a "mere facade" concealing the true facts.” [In this, Sharpe is relying on Gower’s Principles of Modern Company Law (an English text), where the idea of the corporate structure as a “mere façade” has, in England, replaced other descriptions like the impugned corporation being a “sham” and a “cloak.” And as Gower’s notes, “the difficulty is to know what precisely may make a company a ‘mere facade.’”
o The general principle per Sharpe J (as he then was) is as follows: “the courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct. [emphasis added]”
§ This involves two elements or steps: • 1. Per CA in Chevron at para 66: the court must be satisfied that “there is complete control of the
subsidiary, such that the subsidiary is the ‘mere puppet’ of the parent corporation” and • 2. Per CA in Chevron at para 66: the court must be satisfied that “the subsidiary was incorporated
for a fraudulent or improper purpose or used by the parent as a shell for improper activity.” o Going to fraud or improper conduct
§ This is the 2 step test the appellants have to meet o The trial judge decided that Chevron US didn't actually have complete control over Chevron Canada, so you don't meet
the first step of the test § "Look at all the subsids between them"
o Court of Appeal § Let's put that to aside, the appellants cannot meet the second step of the test
• First, they submit that Hainey J. erred in finding that Chevron Corporation did not wield sufficient control of Chevron Canada to meet the first part of the Transamerica test. I need not consider that argument, as it is plain that the appellants cannot meet the second part of the conjunctive test. Chevron Canada was incorporated over 50 years ago. There is no allegation of wrongdoing on its part and no suggestion that it was established or used for fraudulent or improper purposes. Indeed, in their Amended Statement of Claim, the appellants specifically plead that Chevron Canada has not engaged in any inappropriate conduct. As Hainey J. correctly found, under the Transamerica test, this is a complete bar to the request to pierce the corporate veil.
§ Alternative argument shot down as well - "forget Transamerica, there's broad jurisdiction for the court to lift the corporate veil"
• Next the appellants argue that Transamerica is not applicable because in this case we are dealing with the enforcement of a judgment debt, not a case of first instance where the issue is establishing liability. This submission cannot be accepted. If it were, a judgment against any corporation could be enforced against the assets of any other related corporation. Resourceful litigators would not sue multiple related corporations who could rely on the Transamerica test. Instead, they would pick one company to sue and then enforce their judgment against all related corporations who would then be barred from relying on the Transamerica test. The non-judgment debtor corporation would thus lose all of its protection as a natural person under the CBCA. The exception to the rule of corporate separateness would become the rule once judgment was obtained
• Not only is such an argument problematic from a policy standpoint, it comes dangerously close to the adoption of the group enterprise theory of liability. That theory holds that where several corporations operate closely as part of the same “group” of corporations, they are in reality a single enterprise and should, accordingly, be responsible for each other’s debts. It has been consistently rejected by our courts
§ Alternative argument - "look at all the subsidiaries, all these businesses are working together, and it's really one big corporation/enterprise"
• Doesn't make sense, each corporation is separate § Alternative argument - "lifting it based on policy reasons"
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• The appellants further submit that the corporate separateness of Chevron Corporation and Chevron Canada should be ignored for policy reasons. Yet they provide no guidance regarding the basis upon which it will be appropriate to pierce the corporate veil in future cases. Once the Transamerica test is jettisoned and no principled basis for piercing the corporate veil replaces it, we are left with a purely ad hoc test. In the end, Mr. Lenczner’s submissions boil down to an exhortation that we should do the right thing for his clients, untethered to the jurisprudence, the statutory rights of corporations, or any discernible principle. Even if we were free to do that, which we are not, this case illustrates the difficulties with this approach. At this stage, the equities of this case are far from clear. On the one hand, the appellants have suffered devastating loss through no fault of their own. On the other, on the finding of the United States courts, the Ecuadorian judgment against Chevron Corporation was the result of a massive fraud
o This just too loose a test o Holding
§ The Court is unwilling and unable to be of any assistance o Elbow River
§ The law in AB is Transamerica
Big Bend Hotel Ltd v Security Mutual Casualty Co – Corporate Veil Will Be Lifted When Trying to Cover Fraud; Insurance Fraud
• Facts o K&S Ltd operated a hotel (Fort Hotel)
§ Hotel is destroyed by fire § Insurer had to pay-out for the loss
o Kumar (P, president and sole shareholder of K&S) incorporated a new company which purchased a new hotel, Big Bend Hotel Ltd
o Kumar left the new insurance form’s “loss history” section blank – which is technically true because it is a new company o New hotel burns down
§ Insurance company claims fraud – personal liability on Kumar (failure to disclose a material risk). o P argued that Big Bend and K&S Enterprises (operator of Fort Hotel) were separate entities although both controlled by
Kumar; not proper case for lifting corporate veil o D’s argued record indicated no previous losses, otherwise they may have declined to accept risk
• Issue o Should the corporate veil be lifted?
• Analysis o Insurance Act: If any person applying for insurance falsely describes the property to the prejudice of the insurer, or
misrepresents or fraudulently omits to communicate any circumstances which is material to be made known to the insurer in order to enable it to judge of the risk to be undertaken, the contract shall be void as to any property in relation to which the misrepresentation or omission is material
§ Basic test: Whether mind of prudent insurer would be affected • From perspective of reasonable insurer, not insured • Good faith and full disclosure of all material facts required by insured
§ Clear that Kumar knew of materiality - failed to disclose prior loss because he knew from past cancellations he would be unable to obtain insurance
• Kumar knew he would be unable to obtain insurance if he disclosed past loss and was using Big Bend as a sham or cloak
§ Although courts generally adhere to Salomon principle (separate legal entity), courts have lifted the corporate veil to take into account actions of individual members
• Especially in cases of improper conduct or fraud § Equity will not allow individual to use company as a shield
• Holding o Action dismissed; it was appropriate to lift the corporate veil
• Ratio o Corporation as a separate legal entity principle will be disregarded where the corporation is used for misrepresentation
or fraud (a "sham and a cloak") o Piercing the corporate veil is not a cause of action on its own, but a remedy the P seeks because of the D's conduct
• Notes o This case precedes Transamerica o Parties
§ Big Bend Hotel Ltd • Plaintiff and insured
§ Kumar • President and sole shareholder of Big Bend Hotel Ltd
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§ Security Mutual Casualty Co • Defendant and insurer
§ Reed Shaw Stenhouse Ltd • Defendant and insurance agent
o Kumar § Used to have K&S Ltd which operated a hotel that was destroyed by a fire § The only asset of this new corporation was the hotel § Had an insurance policy on the hotel, but was cancelled by the insurer for reasons not disclosed § On behalf of Big Bend Ltd, Kumar dealt with Reed Stenhouse to get another insurance policy to cover the hotel
should it burn down • Application had a space for private losses, but left that space blank
§ Hotel burned down, and the insurer denied coverage • Wanted the corporate veil to be lifted
o On the insurance point § Statutory condition 1 of the policy of the insurance, taken from s. 208(2) of the Insurance Act of this province,
and relied on by the defendants, reads as follows: • 1. If any person applying for insurance falsely describes the property to the prejudice of the insurer,
or misrepresents or fraudulently omits to communicate any circumstance which is material to be made known to the insurer in order to enable it to judge of the risk to be undertaken, the contract shall be void as to any property in relation to which the misrepresentation or omission is material.
§ The rules for determining what facts are material are discussed in 22 Hals. (3d) 187, para 357: • The basic test hinges upon whether the mind of a prudent insurer would be affected, either in
deciding whether to take the risk at all or in fixing the premium o AKA, would a prudent insurer want to know this hotel loss?
§ Here • Kumar knew he wouldn't be able to claim insurance unless he kept his past problems under wraps • Seems then that he used this new company to hide that • Based on that, the contract is void since there was a failure to disclose facts that were material to
the risk o On lifting the corporate veil
§ Court would lift it here § Situation where the insurer was duped § He was using this new corporation as a sham/cloak; a mere facade - used this new corporation as a setup
o The Salomon principle applies, but not when there's fraud o There are thus two ways to win; insurance law and corporate law
§ In this case, insurance law was the better case
Performance Industries Ltd v Sylvan Lake Golf & Tennis Club Ltd – Indirect Way of Testing the Applicability of Big Bend; SCC Affirms ABCA and Trial Judge’s Ruling; O’Connor Couldn’t Hide Behind His Corporation
• Facts o Fred Bell was owner and sole shareholder of Sylvan Lake Golf (P) o O'Connor was the sole shareholder of Performance Ltd (D) o Verbal agreement discussed as to interest held by each party and development - Joint venture agreement to acquire a
golf course as tenants in common § Title to be held by Performance § Sylvan to have sole possession of property for 5 years at which point Performance would buy out Sylvan § Either corporation could develop some of the course into a residential development if lands could be sold to
third party developer for at least $400K o O’Connor instructed solicitor to prepare written agreement to reflect terms
§ O’Connor snuck in clause 18 which had effect of drastically limiting any development opportunity (re 18th hole) § Bell’s solicitor reviewed the documents and did not catch it § Bell later claimed it did not reflect verbal agreement but he did not realize at the time
o Trial Judge § Found Performance Ltd acted deceitfully and dishonestly and did not want him to benefit from his misconduct
• Both the individual (O'Connor) and Performance were liable on a joint and several basis § Awarded punitive damages, making O'Connor personally liable for his own conduct (lifted the corporate veil) § Clause 18 is something no reasonable person would have agreed to
o Court of Appeal § Agreed with this § Lifting the corporate veil is appropriate, relying on Big Bend
• "The trial judge found the actions of O'Connor to be "fraudulent, dishonest and deceitful". Those findings of fact require deference on appeal. They provide the necessary support for lifting the
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corporate veil. As the corporate veil cannot be used as a shield for misconduct or fraud, liability may be extended to the principals of a corporation where they have engaged in this type of conduct"
• Issue o Can the P secure rectification (i.e. Court re-drafts contract to reflect what it should have?) o Should the court award damages against O'Connor personally?
• Analysis o TJ found that O’Connor’s actions were “fraudulent, dishonest and deceitful”
§ This finding of fact entitled to deference on appeal § Provides necessary support for lifting corporate veil, which cannot be used as shield for misconduct or fraud § SCC affirmed rectification (O’Connor had fraudulently misrepresented written document as accurately
representing oral agreement; therefore, personally liable) o Argument: If Bell or lawyer had been more diligent, would have noticed clause
§ SCC rejected; it’s not a defence to fraud to say other party should have been less trusting o Although quantum of damages was generous (failed to account for some contingencies), we will not interfere with award
§ However, punitive damages should only be awarded if they achieve a rational purpose • Here, both punishment and deterrence served by compensatory damages
• Holding o Appeal allowed in part; award of punitive damages set aside
§ O'Connor knowingly/intentionally misrepresented the written document as representing an oral contract • Ratio
o Liability may be extended to the principals of a corporation who engage in misconduct or fraud o A corporation cannot be used as a shield for fraudulent, dishonest, or deceitful behaviour
• Notes o Big Bend was cited by this case o Indirect way of testing the applicability of Big Bend o ABCA's approach here is still valid o Parties
§ Sylvan Ltd • Plaintiff • Sole shareholder: Fred Bell • Has right of first refusal to buy golf property from NA Properties
§ Performance Ltd • Defendant • Sole shareholder: O'Connor (who is also a D)
o Facts § There was a joint venture Agreement between companies to acquire a golf course as tenants in common
• Title to be held by Performance • Sylvan to have sole possession of property for 5 years at which point Performance could buy out
Sylvan • Either corporation could develop some of the course into a residential development if lands could
be sold to third party developer for at least $400K • O’Connor “snuck in” clause 18 which had effect of drastically limiting any development opportunity
§ Bell's lawyer didn't notice this clause that caused so much trouble § When B tried to proceed with the 18th hole development, O'Connor's lawyer brought up clause 18 (which was
very restrictive) o Issue
§ Can the P secure rectification? § Should the court award damages against O'Connor personally?
o SCC § Affirmed rectification § O'Connor fraudulently misrepresented the document § O'Connor's argument: You should have found clause 18
• Court: You can't say to someone “if you weren't so stupid you would have discovered the fraud” § Judgment against O'Connor and his company Performance Ltd § O'Connor cannot hide behind his corporation
Jin v Ren – Most Recent Corporate Veil Lifting Case in AB; Improper Purpose • Facts
o Ren (D) enticed Jin (P, Shanghai businessmen) to invest $300K in AB-based hemp growing/processing venture – Hart Fibre Trade Company Ltd
§ Ren was Director
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o Jin delivered $300K for promise of controlling interest in Hart Fibre and shares o Ren had delivered nothing in return one year later o Proposed returning Jin’s investment if Jin would guarantee no involvement in hemp o Jin sues both Hart Fibre and Ren
§ Ren argues that Salomon applies, and that Jin should leave him alone • Issue
o Was there unjust enrichment, and can Ren be personally liable? § I.e. Can the corporate veil be lifted?
• Analysis o Salomon: A corporation is distinct legal entity from shareholders o However, in narrow range of circumstances lifting corporate veil is appropriate:
§ Where improper conduct has been committed by a corporation's shareholders or controlling mind (Halpern) § Where leaving it intact would yield a result “too flagrantly opposed to justice” (Kosmopoulos) § Where: (Transamerica Life Insurance Company)
• 1) Court is construing a statute, contract or other document; • 2) Court is satisfied that a company is a “mere façade” concealing the true facts (the courts will
disregard the separate legal personality of a corp entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct); or
• 3) It can be established that the company is an authorized agent of its controllers or members, corporate or human
§ Fleischer • Typically when company is incorporated for an illegal, fraudulent or improper purpose; or when • If when incorporated “those in control expressly direct a wrongful thing to be done”
§ Important factors to finding control sufficient to lift veil (Shoppers Drug Mart) • Sole signing authority over corporation’s accounts; authorized transfer of money for improper
purposes when it was supposed to be used for another o In this case
§ Hart Fibre was not set up as a shield or façade to improperly attract P’s money § But, Ren acted for an improper purpose
• Ren was controlling mind of corporation as he was sole shareholder à retained money for an improper purpose (expressly directed a wrongful thing to be done)
• Holding o An unjust enrichment claim is not precluded against Ren personally
§ The Court lifted the corporate veil here because of the improper conduct by Ren • Ratio
o The corporate veil can be pierced where controlling mind of corp (e.g. sole director) retains investments/company is incorporated for fraudulent or improper purpose, OR if those in control expressly direct a wrongful thing to be done
o Liability may be based on unjust enrichment. • Notes
o Parties § Jin
• Plaintiff, investor § Ren
• Defendant, Director of Hart Fiber § Hart Fibre Trade Company
• Alberta-based hemp business o Facts
§ Jin invested $300,000 in Hart Fibre for a controlling interest – all at the behest of Ren. § Ren kept Jin’s money but never provided proof of his interest in Hart Fibre nor provide an account of the
money. § Ren eventually promised to return Jin’s money if Jin agreed to a non-competition clause in relation to the
hemp-related industry. § Ren's defence: I'm just an individual person, you need to the sue the corporation and leave me out of this
o Issue § Should the court life the corporate veil?
o TJ § Cites Kosmopoulos
• Law on piercing the corporate veil followed no consistent principle. She noted however that the veil would be pierced where leaving it intact would yield a result “too flagrantly opposed to justice"
§ Cites Transamerica • The courts will disregard the separate legal personality of a corporate entity where it is completely
dominated and controlled and being used as a shield for fraudulent or improper conduct. § Fails to see Hart Fibre as a mere facade, but doesn't hesitate to conclude that Ren enticed Jin's investment for
an improper purpose • What does this mean?
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§ Still finds them personally liable since Ren used it for an improper purpose § For an unjust enrichment, there has to be
• An enrichment o Here
• A corresponding deprivation o Here
• Absence of juridical reason for the reason o There is no reason why Ren should have access to this money
§ Court finds both Ren and Hart jointly and severally liable o Appeal
§ Upheld on appeal
Wildman v Wildman – Reverse Corporate Veil; Corporate Liability for Shareholders in Marriage Dispute
• Facts o Chris (appellants) and Angela (respondent) Wildman were married in 1993 for ten years; 2 children together
§ Chris owed a highly successful business, Precision Landscape; Angela stayed home to raise kids o Divorce proceedings occur o However, Angela couldn't collect on support orders because Chris was hiding assets and ducking obligations o Trial judge
§ Ordered $25K in child and spousal support per month § Ordered all amount secured and enforceable not only against appellant personally but also against his various
enterprises (made support obligation also an obligation of his corporation) • Court lifted corporate veil and imposed liability on corporation for amount owed by husband for
child support • Essentially a reverse lifting of veil
o Usually lift veil to impose liability on individual shareholders o In this case it is imposing liability on corporation for their shareholders
o Important facts: Sole shareholder and director; only person involved in his business entities o Court tried reverse corporate veil by attempting to induce the husband’s company into paying his child support and lifting
the corporate veil o Chris argued the TJ improperly pierced the corporate veil and imposed liability for money owing
• Issue o Did the judge err in piercing the corporate veil and imposing a charge against the appellants' companies for various
support amounts owed? • Analysis
o Very unusual case; appellant owes over $800K to respondent and only challenges two enforcement mechanisms employed by TJ
o Q: Whether the exception to the principle of separate legal personality for corporations set out in Fleischer and Transamerica should be injected into family law.
o Disregard separate legal personality of corporate entity where "completely dominated and controlled and being used as a shield for fraudulent or improper conduct"
o Separate legal personality of corporation is not an absolute principal § Not enforced where it would be fragrantly opposed to justice
o Fleischer: Can be pierced where company is incorporated for fraudulent or improper purpose, OR if those in control expressly direct a wrongful thing to be done
o Here, the usual concern (unanticipated personal liability) is not present o This exception should be injected into family law
§ 3 circumstances must be met: • Appellant exercised complete control over finances/business practices • Control was used to commit a fraud or wrong unjustly depriving claimant of rights; and • Misconduct was reason for third party’s injury or loss
§ These factors were met in the case • Wildman exercised complete control over business in way that diverted assets away from
enterprises to himself personally • Injury was caused to children because they weren’t receiving money
§ Therefore, liability extends to corporation o It would be flagrantly opposed to justice to allow the appellant to hide behind corporate veil that he himself does not
respect • Holding
o Appeal allowed in part; it would be flagrantly opposed to justice to allow the appellant to hide behind the corporate veil that he himself does not respect
o This reverse piercing was due to the facts at hand • Ratio
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o Piercing the corporate veil of one spouse’s business may be essential mechanism for ensuring other spouse/children receive financial support they are entitled to
§ The following circumstance must be present: • 1. Individual exercises complete control over finances, policy, and business practices; • 2. Control used by individual to commit a fraud or wrong that would unjustly deprive claimant of
rights • 3. Misconduct is the reason for the third party’s loss.
• Notes
o Family law situation where corporate veil cases are more common o Ex-husband has poor record of paying support obligations o Trial Court ordered that these obligations would also be owed by all of his corporations
§ A reverse corporate veil in a way § The corporation is being held responsible for the actions of the husband
o Husband cites Salomon § You cannot make the corporations responsible for his obligations
o Court of Appeal § The crucial question in this appeal is whether the exception to the principle of separate legal personality for
corporations set out in Fleischer and Transamerica Life Insurance should be injected into family law. Should the courts in appropriate family law cases disregard the separate legal personality of a corporate entity where, in the words of Sharpe J. in the latter case, "it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct"? In my view, the answer to this question is a resounding "Yes". I say this for two reasons.
• 1. The appellant is the sole owner of, and exercises complete control over, his various business enterprises. With respect to Precision Landscape Construction Ltd., the appellant is the sole shareholder and director. In the transcript of a motion before Clarke J. on May 10, 2005, the appellant called himself a "sole proprietor". Furthermore, the appellant appears to make no distinction between his personal and business assets. For example, in the cash logs prepared by the appellant (and produced at trial by the respondent) the appellant did not differentiate between personal and business assets. In short, the appellant's business enterprises are his alter ego; they are not distinct from him and have no connection to any third party.
• 2. There is no question that the appellant has controlled his business enterprises and structured his corporate assets in a way that diverts money from them to his own personal use. The most compelling evidence on this issue is probably the evidence gathered by the private investigator engaged by the respondent concerning the appellant's business relationship with a client, M[r]. Z. It is clear from this evidence that the appellant negotiated payment options with Mr. Z. in a manner designed to maximize the appellant's personal cash intake and minimize the amount of money flowing to the company.
§ In the end, although a business person is entitled to create corporate structures and relationships for valid business, tax and other reasons, the law must be vigilant to ensure that permissible corporate arrangements do not work an injustice in the realm of family law. In appropriate cases, piercing the corporate veil of one spouse's business enterprises may be an essential mechanism for ensuring that the other spouse and children of the marriage receive the financial support to which, by law, they are entitled. The trial judge was correct to recognize that this was such a case.
Review of Big Bend, Sylvan Lake, Jin, Wildman – Cases Where the Corporate Veil Was Successfully Lifted
• When we lift a corporate veil, you see the people behind the corporation, and whether they have personal liability • When a corporation is being used as a mere facade, then piercing the corporate veil can happen • “Piercing the corporate veil is not a separate cause of action” - McGuinness à hasn't ever been stated in law, but It is broadly
correct o In Transamerica, you do have to show those 2 steps o As a result of that, the corporate veil is lifted
§ This is the remedy • Big Bend
o Kumar was using the corporation as a way of hiding his prior insurance history o Court lifted the corporate veil since you cannot use your company as a shield in that way o Kumar also lost on an insurance point as well
§ Failed to articulate a fact that was material to the risk • Sylvan Lake
o Follows Big Bend o More extreme form of misconduct o O'Connor really duping Bell and his corporation o As a result of the fraudulent misrepresentation, the Court was willing to lift the corporate veil
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o O'Connor and his company were jointly and severally liable for his losses • Jin
o Personally liable for failing to return money to plaintiff after taking it for an improper purpose o Court said veil could be lifted
• Wildman o Court said it would be flagrantly opposed to justice for the person to hide behind the corporate veil to get out of
personal/family obligations • These are all examples where the veil was lifted, Rockwell is one where it hasn't…
Rockwell Developments Ltd v Newtonbrook Plaza Ltd – When Not to Lift the Corporate Veil • Facts
o Kelner, via Rockwell, tried to buy land from Newtonbrook § The deal fell through, and N sued R who was found liable § The TJ ordered Kelner to personally pay the damage, since R had no assets and Kelner had been conducting all
the business without authorization from the directors of R o Rockwell Shareholders:
§ Kelner (director) à 1 share in trust for Planet à so beneficially owns the shares in Planet § Cooper (director) à 1 share in trust for Planet § Random girl (director) à 1 share in trust for Planet § Planet Ltd à 23 shares
o No resolution of R directors authorizing Kelner to purchase land; sale deposit was advanced by Kelner, not the company; company had no assets except small bank account ($400)
o No deceit or fraud o Kelner claimed the money for the land was a shareholder loan o No claim of misconduct against Kelner
• Issue o Should Kelner be responsible for costs awarded to the successful Newtonbrook party in litigation brought against it by
Rockwell Ltd? o Should the corporate veil be lifted?
• Analysis o Kelner undertook questionable practices and didn’t proceed “by the book”, but this is not enough to say that Kelner was
the “actual contracting party” – the contract was made with the Rockwell alone o Even though Kelner stood to benefit from the deal, there were no allegation of fraud or misconduct against Kelner
§ These are generally marks of a corporate veil case o Look at the reasonable expectations of the parties too: N knew Kelner was running a business, so they understood the
limited liability implications o Notwithstanding Jin and Salomon, this case is really how things usually end o Salomon principles:
§ One-man corporations are allowed § Property of company is distinct from its members § Transactions create legal rights and obligations vested in company, not members
• Holding o Kelner should not be responsible for the costs, and the corporate veil should not be lifted
• Ratio o Conduct must be extreme to lift the corporate veil o A one-man corporation is still fine as a separate legal entity; mere sloppy paperwork is not enough to lift the corporate
veil absent fraud or wrongdoing. o Courts are unlikely to lift the corporate veil o Should have gotten personal guarantee if they wanted to hold him liable for Rockwell
• Notes
o Parties
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§
o Kelner incorporated every time there was a new transaction o 2 actions
§ Rockwell Ltd was suing Newtonbrook • According to Rockwell, we have a failed real estate transaction, and Newtonbrook should be liable • Newtonbrook disputed this and won at trial • Newtonbrook was awarded costs around $500,000 and it wanted the money from Rockwell Ltd
o Taking steps to collect its costs § Newtonbrook examines an officer of Rockwell (Kelner), and it turns out that Rockwell only has $31 in assets
• Application that Kelner personally pay it off o TJ
§ Agreed to do so, Kelner should pay the costs o Issue
§ Should Kelner be responsible for costs awarded to the successful Newtonbrook Ltd. in litigation brought against it by Rockwell Ltd?
o Court of Appeal § Have to look at the whole situation § From the material filed on such motion a number of additional facts emerged. There was no resolution of the
directors of Rockwell authorizing Kelner to enter into the offer to purchase on its behalf; the deposit of $10,000 was advanced by Kelner and his partner Cooper from their own funds, direct to Newtonbrook or its agent, and did not go through the bank account of Rockwell nor was there any entry in Rockwell’s books of account respecting it. The tendered sum of $28,000 which preceded the action was also advanced by Kelner and Cooper, and did not go through the bank account or books of Rockwell. In due course both the deposit of $10,000 and the tendered amount of $28,000 found its way back to Kelner and Cooper. There was no resolution of the directors authorizing the institution of Rockwell’s action against Newtonbrook, nor the defence of the action of Newtonbrook against Rockwell. There was no resolution respecting the retainer of solicitors, although solicitors were retained to prosecute Rockwell’s action and to defend Newtonbrook’s action against it.
§ Even though it's run unorthodox, it was corporation who contracted, not the promoters/shareholders § There's no allegation of misconduct, and this is an attempted lifting of veil which shouldn't fly if there isn't any
o Holding § We're not lifting the veil § Kelner stood to benefit as a shareholder, but the contract was between the two companies § The use of a “one man company” for the carrying on of business transactions, authoritatively recognized and
expressed in Salomon, and the correlative propositions that the property of the company is distinct from that of its members, and its transactions create legal rights and obligations vested in the company itself as opposed to its members, continue today
There is Still a Corporate Veil • Some clients treat assets of their private companies cavalierly
o They feel free to intercept or spend company funds o That can be breach of trust of theft even if the client owns all the shares o Even if no shareholder or director ever complains, guarantors or other creditors may complain o Indeed they may sue everyone who participated in the breach of trust or theft
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• So, don't treat your clients and their clients as the same thing, even if they do • Get the authority of the directors before you pay funds to someone else other than the company
Send the Account to My Company • If X tells you to bill a personal matter to his company account and he's the only shareholder, officer, director and the driving force of
the company, don't do it • The corporate veil still exists in this scenario • Don't take the chance of violating the Code of Conduct, if even X tells you it's not for the purposes of using it as a tax deduction -
what other reason could it be for?
2. Liability Based on Thin Capitalization
Thin Capitalization Introduction • A situation where a company has a very low initial capital contribution by its shareholders and cannot pay for its liabilities • American view: Some courts have mentioned that thin capitalization could lead to piercing of the corporate veil (never actually been
done) o Rationale: the failure to provide sufficient capital for the corporation to operate is tortious
• Canadian view: No case where this argument has been successful o Reason: there is no requirement to supply a corporation with a certain amount of capital o Thin capitalization is not fraudulent and is never enough on its own to lift the corporate veil – the test is still
Kosmopolous
Henry Brown Example – Thin Capitalization Fails • Facts
o
o HB Ltd enters into a contract for steering device with Ocean Charters Ltd (D) o Steering device delivered, but cash never paid o P finds out that OC has 2 shareholders (Mr. And Mrs. Smith)
§ Company was capitalized to the amount of 2 pounds (1 each) o HB is easily going to get a judgment, but how about getting it enforced? o Thus, action against Mr. Smith the individual for the purchase price (AKA lifting the veil)
§ HB argues he's using the company as a sham • Court
o There's nothing fraudulent about running a business through a corporation o There's no liability here
• What really happened here o Supplier took a chance on a sale o They shouldn't have extended credit, or do things to better protect themselves
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Walkovszky v Carlton – Liability for Thin Capitalization Rejected • Facts
o P was severely inured in NYC after being hit by a taxi owned by D, Seon Cab Corporation § Individual D, Carlton, is a stockholder of 10 corporations, including Seon
• Employer of the negligent employee, Marchese • Each corporation has 2 cabs registered in its name • Each corporation has $10,000 in auto liability insurance (statutory minimum) • Its sole shareholder is Mr. Carlton
o P alleged the corporations operated as a single entity/enterprise so are all properly named as D's and he is entitled to hold stockholders personally liable for damage
§ Each corporation is set up like Seon and judgment-proof § So, P argues that Carlton the individual should have liability - multiple corporate structure is an unlawful
attempt to defraud members of the public who might be injured by cabs • Issue
o Is Carlton the individual personally liable for using a multiple corporate structure to limit liability? • Analysis
o There was no fraud § Complies with the statute - state of NY can change the minimum insurance obligation § If transfers were fraudulent conveyances, then we can pierce the veil or reverse transactions; but otherwise
no § You can't win solely on the basis that corporations are thinly capitalized and have little in the way of assets § Cannot reasonably be inferred that Seon may have actually been carried on by a larger corporate entity
composed of many corporations which, under agency law, would be liable to each other's creditors in contact and tort
• Holding o The complaint does not adequately establish a cause of action against Carlton as individual
• Dissent o The shareholders should all be held individually liable for the P for injuries
§ An attempt to do corporate business without providing a sufficient basis of financial responsibility to creditors is an abuse of the separate entity
• Ratio o There is no fraud in using a multiple corporate structure to limit liability; thin capitalization is not enough on its own to lift
the corporate veil • Notes
o Background to Seon Cab Corp. § Employer of negligent employee (Marchese) § Owns 2 cabs § Has $10,000 in auto liability insurance § Sole shareholder is Mr. Carlton
§ o Facts
§ The plaintiff was severely injured by a cab owned by the D, Seon Cab Corp, and negligently driven by a Seon Cab Corp employee, Marchese.
o Issue § Does Carlton have personal liability for the injuries suffered by the P?
o Arguments advanced by the P as to why Carlton the individual should be held in the action: § These 10 corporations are a single entity/enterprise
• Court: o Not a successful argument, each one of these corporations has been properly set up and
exists independently § Carlton the individual should have liability since what he's doing is defrauding the public
• Court o If Carlton just operated through a sole corporation, we wouldn't say there was any fraud o So, if he did this 10 times then what's the problem?
§ Thin capitalization – the way these corporations are set up (with little money each) is intentional • Court
o There's nothing wrong with this: Each had the minimum $10,000 needed
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o If you have a problem with this, the one responsible for this number is the State of New York, so take it up with them
o Dissent § From their inception these corporations were intentionally undercapitalized for the purpose of avoiding
responsibility for acts which were bound to arise as a result of the operation of a large taxi fleet having cars out on the street 24 hours a day and engaged in public transportation. And during the course of the corporations’ existence all income was continually drained out of the corporation for the same purpose.
• It's a virtual certainty that there's going to be an accident, so how is this okay? § What I would merely hold is that a participating shareholder of a corporation vested with a public interest,
organized with capital insufficient to meet liabilities which are certain to arise in the ordinary course of the corporation’s business, may be held personally responsible for such liabilities. Where corporate income is not sufficient to cover the cost of insurance premiums above the statutory minimum or where initially adequate finances dwindle under the pressure of competition, bad times or extraordinary and unexpected liability, obviously the shareholder will not be held liable
• Are these suggested caveats workable though? o One of the problems is that you're opening up this whole area of inquiry
§ E.g. Why don't you have enough money? Is this because you're incompetent?
3. Liability Based on Total Disregard of Formality
Wolfe v Moir – Personal Liability Can Be Found When Formalities Are Disregarded • Facts
o The 14 year old P (Wolfe) was injured while rollerblading at Fort Whoop-Up o The D individual (Moir) was involved with the company formed to run Fort Whoop-Up (owned by Chinook Sport Shop Ltd) o Evidence given that Moir was secretary of Chinook Ltd o Name of the company did not appear on the ticket issued to the P
§ There was no mention of Chinook on tickets or other indication that rink was owned by Chinook o In his testimony, Moir referred to someone as “his manager”” and referred to company as himself.
§ Court put significant weight on this o Ads referred to the premises as "Moir's Sportland"
• Issue o Is the D Moir personally liable?
• Analysis o The fact that non-registration of the business name under the Partnership Act was not relevant o Salomon was based on all requirements of the Companies Act having been complied with o Section 82(1)(c) of the Companies Act - Nothing to indicate these usual corporate formalities were met
§ To rely on protection from personal liability, you must establish that all formalities have been complied with § No indication of limited liability status; no mention of the corporation at all § It just looks like Moir was carrying on business under the name Fort Whoop Up § Court implied that Moir thought he was the owner:
• When in direct examination, Moir referred to McKinnon as "my manager" and said "before I went there it was called Fort Whoop-Up"
o Section 82(1(b) of the Companies Act: If a person chooses to advertise and to hold himself out to the public without identifying the name of a company with which he is associated, he runs the risk of being personally liable
o Court did not require the P to prove reliance on Moir being the owner o The Act required the corporate name (Chinook Sports) to be on certain documents and they weren't, and Moir held
himself out as the owner, therefore he is personally liable • Holding
o Moir is liable for damage to the plaintiff • Ratio
o For a person to successfully rely upon what is the extraordinary protection from personal liability granted to an individual by The Companies Act, it is incumbent upon the person to establish that at least the formalities prescribed by the statute have been complied with
• Notes o Example of disregarding formalities
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o
o Court § There was nothing advertising this rink as being owned by Chinook Ltd, it was operated as Fort Whoop Up - it
looks like Moir's operation § Agreed that the D failed to comply with the legal requirements (in what is now s. 10(8) of the ABCA)
• Someone who holds themselves as the owner of a business has to deal with the consequences § Seems to put stock in Moir speaking as this business as his own - "It may be significant to note that when Moir
was asked, in direct examination, as to the capacity in which Neil McKinnon was running the skating rink, he referred to McKinnon as “my” manager."
• SKO: Not sure this is that relevant o How Moir speaks about his business has nothing to do with whether the company exists
in law § Failure to comply with the equivalent of s. 10(8) of the ABCA makes you liable
o Section 10(8) of the ABCA – Corporate Name § (8) A corporation shall set out its name in legible characters in or on all contracts, invoices, negotiable
instruments, and orders for goods and services, issued or made by or on behalf of the corporation
Vallis v Prairie Alternative Energy Solutions Ltd – Failing to Comply with Identification Formalities Can Lead to Personal Liability
• Facts o Karras (D) was listed as the President/Secretary, shareholder, and sole director of Prairie Ltd o Parties entered into a contract for a heating system installation
§ The Ps hired and dealt with Karras only § Two documents failed to identify correct name of corporation; D personally involved in physical labour; no
business name on truck; no business cards; cheque didn’t use “ltd.”; didn’t use “ltd”, “corp” or “inc” in then name of the business
§ The P assumed he was dealing with Karras personally as the sole proprietor on a business under the name of Prairie Alternative
o Judgment entered against the corporate D, Prairie Ltd, for $4,176 o Ps claims Karras is personally liable because he did not represent the business as having been incorporated and never
alerted them to the possibility that he was acting on the corporation's behalf o D claims they're not personally liable because he never held himself out to be in acting in a personal capacity and did not
guarantee the work of the corporation • Issue
o Was Karras liable to the Ps in his personal capacity for the same sum? • Analysis
o SKBCA requires publication of the name and makes it an offence to carry on business under a name not including ltd, inc, etc.
o Relevant criteria for determining personal liability for a corporation's debts § Naming of parties/contracting status in doc’s, ads, signs that might have come to the P's attention § D’s non-compliance with applicable business corp/trade name statutes § Oral exchanges between parties re contracting parties' legal status § Whether P asked individual D for a guarantee § Relative degree of sophistication between parties § Nature of D’s business
o Karras failed to comply with the BCA provisions regarding proper identification of a corporation under which he was carrying on business
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§ It was an honest mistake, but the law is clear that failure to accurately represent the corporate status of a business leads to personal liability
• Holding o The P has judgment against Karras in personal capacity for $4,176
• Ratio o Failure to accurately represent corporate status of a business/comply with the BCA may lead to personal liability
§ I.e. An individual does not make it clear that you are dealing with a corporation • Notes
o Issue § Whether the individual D is personally liable
o Court § Mr. Karras described himself as an employee and shareholder of the corporate Defendant. He maintained that
he should not be liable because he never held himself out to be acting in a personal capacity and did not guarantee the work of the corporate Defendant. All dealings, he stated, were under the name of Prairie Alternative Energy Solutions. He testified that it was not until this action was commenced and after obtaining legal advice that he appreciated the need to specify that his business was indeed incorporated.
§ In business dealings with the P, Karras never said his company was incorporated, so Karras the individual is liable
§ In cross-examination Mr. Karras acknowledged that he didn’t use “ltd.”, “corp.” or “Inc.” in the name of his business because he didn’t believe it to be relevant. As a result of this cause of action, he now uses “ltd.” to describe his corporation.
§ Mr. Karras failed to comply with the provisions of the SKBCA insofar as the proper identification of the corporation under which he was carrying on business. This failure was not dishonestly done. Nonetheless, the law is very clear in this regard and the facts having been clear that he failed to accurately represent the corporate status of his business; he is personally liable to the Plaintiffs. The Plaintiff will have judgment against Peter Karras in his personal capacity in the sum of $4,176.00. No further costs are awarded.
4. Liability in the Area of Trust Law
Introduction to Trust Liability – Knowing Assistance and Knowing Receipt • 1. Knowing assistance in a breach of trust per Citadel
o Involves furthering a fraud and is a fault-based form of liability o Therefore requires actual knowledge of the breach of trust
§ Actual knowledge includes recklessness or willful blindness § Recklessness is doing something without caring if it was wrong or not, going about it regardless of whether it
was wrong § Taking a risk you have no right to take
o Constructive knowledge is insufficient to found liability. § Constructive knowledge is knowledge of facts that would put a reasonable person on notice
o In Air Canada, directors were personally liable for knowing assistance • 2. Knowing receipt of trust property per Citadel
o Requires that strangers to the trust receive or apply trust property for their own use and benefit and involves receipt-based liability
o Constructive knowledge (a lower knowledge threshold) is therefore sufficient due to restitutionary concerns. § Constructive knowledge is knowledge of facts that would put a reasonable person on notice
o In Citadel, the bank was liable for knowing receipt.
Citadel Assurance Co v Lloyds Bank Canada – Trust Liability Based on Knowing Receipt; Explanation of Knowing Assistance vs Knowing Receipt
• Facts o Drive On Ltd (insurance agent co; sells insurance and collects premiums on behalf of the insurer) was trustee for Citadel
Assurance Co (P, Beneficiary) § Drive On held in trust proceeds of insurance policy premiums on P's behalf § Proceeds held in bank account at Lloyd's Bank Canada (D) § Lloyd's accepted instructions from parent of trustee/insurance agent (Parent Co of Insurance) to transfer
money from this account to the parent's account, to reduce the parent's overdraft at the bank § Senior officers at the bank knew money was held in the subsid's account § When the trustee failed to remit to the P, the P sued the Bank
• Issue o Should the Bank be held liable for its actions/unwillingness to further investigate?
• Analysis o In insurance law, there are 2 types of liability: knowing assistance and knowing receipt
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§ Knowing assistance: Occurs where on assists with fraud • Requires actual knowledge of the breach of trust
o Actual knowledge includes R or WB o R is doing something without caring if it was wrong or not, going about it regardless of
whether it was wrong (taking a risk you have no right to take) • Constructive knowledge is insufficient to found liability
o Constructive knowledge is knowing facts that would put a reasonable person on notice • Knowing assistance involves furthering fraud • Fault-based liability
§ Knowing receipt: Occurs where a party receives trust property improperly • Constructive knowledge is sufficient • Requires that strangers to the trust receive or apply the trust property for their own use and
benefit • A lower knowledge threshold is enough due to restitution concerns • Receipt-based liability
• Holding o Lloyd's is liable via knowing receipt to Citadel
§ On receiving knowledge of the trust relationship, the Bank should have inquired whether the use of premiums to reduce the account overdraft constituted a breach of trust
§ By failing to make these inquiries, the Bank's enrichment was unjust, thereby rendering it liable to Citadel as a constructive trustee
• Ratio o Knowing receipt: Relief granted where stranger to trust, having received trust property for own benefit and having
knowledge of facts which would put reasonable person on notice (constructive knowledge), actually fails to inquire as to the possibility of misapplication of trust property
§ Claim is for unjust enrichment o The director of the trustee corporation can be personally liable where the trustee corporation was involved in a breach of
trust – refer above for the test for knowing assistance and knowing receipt. o Accessory (knowing assistance) is fault-based; recipient (knowing receipt) is receipt-based
• Notes
o
o Why was the bank so willing to make that transfer?
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§ "Parent Co had overdraft, who cares about Citadel, this will help deal with the overdraft" – Bank getting the benefit of the money
• Overdraft = extension of credit from a bank that is granted when an account reaches zero; allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal
o What is the mental state that you have to show for a knowing receipt scenario? o Court
§ In “knowing receipt” cases, relief flows from the breach of a legally recognized duty of inquiry. More specifically, relief will be granted where a stranger to the trust, having received trust property for his or her own benefit and having knowledge of facts which would put a reasonable person on inquiry, actually fails to inquire as to the possible misapplication of trust property. It is this lack of inquiry that renders the recipient’s enrichment unjust.
Air Canada v M&L Ltd – Trust Liability Based on Knowing Assistance • Facts
o Martin (D) and Valliant (D) were 2 shareholders and directors of their travel agency corporation, M&L Travel Ltd (D) § Their travel agency was in a trust relationship with Air Canada (P), whereby they sold Air Canada tickets, held
the fare in trust for Air Canada, and paid Air Canada the collected funds twice a month o M&L deposited all of their money into a general operating account o Dispute arose between Martin and Valliant; M&L business closed o Bank withdrew money from the operating account (seized) for a line of credit personally guaranteed by both Martin and
Valliant o Air Canada wanted to hold both the directors individually liable for the money owing on its ticket sales, for knowing
assistance in the breach of trust § M&L Travel Ltd. breached its trust with AC by not accounting for airfare it collected on behalf of AC. § AC sued M&L and Martin and Valliant personally for money owing on ticket sales
o The CA entered judgment against the directors • Issue
o Do the directors have personal liability? • Analysis
o Trust relationship: Need 3 characteristics for a trust (3 certainties): § 1. Certainty of intent (intention to create trust)
• Intent to create trust evident on agreement § 2. Certainty of subject-matter § 3. Certainty of object (beneficiary)
o Knowing assistance § Requires actual knowledge (WB or R)
• Generally, not a difficult hurdle to overcome in cases involving directors of closely held corporations
• Dishonest and fraudulent; taking a risk that there is no right to take • In this case:
o M&L knew about the agreement; knew about the possibility that the general account was subject to demand loan from the bank
§ Where the breach is trust is caused directly by the (fraudulent and dishonest) conduct of the directors, they are personally liable
• 1) Relation of trust (a trust) • 2) Trustee breaches the trust • 3) Breach was dishonest or fraudulent • 4) D assisted a trustee in that breach with actual knowledge (including R or WB) - i.e. The Directors
• Holding o This is not knowing receipt because the directors themselves did not get any property (money went into general
corporate account – not M&L’s personal accounts) o But there is knowing assistance – there is a trust, there is a breach of trust, and this breach was dishonest and
fraudulent. • Ratio
o To be found liable of knowing assistance in breach of trust, it must be shown that individual knowingly assisted the trustee in a fraudulent and dishonest breach of trust
§ Fraud: Taking a knowingly wrongful risk resulting in prejudice to the beneficiary is sufficient to ground liability • Notes
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o
o Facts § AC (P) suing individual Directors (V and M)
o Are V and M personally liable for the breach of trust? o Court
§ Elements in knowing assistance • There is a relationship of trust [here, between Air Canada and M & L Travel Ltd] • The trustee breaches the trust [M & L Travel Ltd did not protect the trust funds] • Which breach was dishonest and fraudulent
o I.e.: “taking of a risk by the trustee or fiduciary to the prejudice of the beneficiary where the risk is known to be one which there is no right to take.” [M & L Travel placed the trust funds in its general account which was subject to a demand loan from the Bank.]
• Defendants [the directors] assisted trustee in that breach with actual knowledge (which includes recklessness or willful blindness). [That is, the defendant directors had actual knowledge of the relationship of trust and the dishonest or fraudulent breach by M & L Travel Ltd.]
o Thus they're personally liable § In the instant case, as a party to the contract between itself and the respondent, M & L knew that the Air
Canada monies were held in trust for the respondent, and were not for the general use of M & L. Trust accounts were set up by M & L in 1978, but never used. M & L also knew that any positive balance in its general account was subject to the Bank's demand. By placing the trust monies in the general account which were then subject to seizure by the Bank, M & L took a risk to the prejudice of the rights of the respondent beneficiary, Air Canada, which risk was known to be one which there was no right to take. Therefore, the breach of trust by M & L was dishonest and fraudulent from an equitable standpoint.
o We're not lifting the corporate veil, V and M knowingly assisted in breaching the trust, so they are personally liable
Chapter 4 Review
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5. TORTIOUS, CRIMINAL, REGULATORY, AND CONTRACTUAL LIABILITY OF THE CORPORATION A. INTRODUCTION Individual vs. Corporate Liability in Contract, Tort, and Crime
• 1. Individual liability o A. Liability Without Agency (i.e. Direct Liability)
§ i. Contract • Ms. X enters into a contract
o Ms. X has primary, personal liability § ii. Tort
• Ms. X commits a tort o Ms. X has primary, personal liability
§ iii. Crime • Ms. X commits a crime
o Ms. X has primary, personal liability o B. Liability Through Agency
§ i. Contract • Ms. X’s agent, at Ms. X’s request, enters into a contract
o Ms. X has primary, consensual liability. o Ms. X can also have liability based on her agent’s ostensible authority
§ ii. Tort • Ms. X's agent, who is also her employee, commits a tort in the ordinary scope of employment
o Ms. X has non-consensual, vicarious liability § iii. Crime
• Ms. X's agent commits a crime (not at Ms. X's request) o Ms. X has no liability
§ There is no vicarious liability in criminal law • 2. Corporate liability
o A. Liability without agency (though this is a little fictional in that corporations require human actors to facilitate business activity.)
§ i. Contract • N.A: Corporate liability in contract is only established via agency law.
§ ii. Tort • Corporation X commits a tort.
o Corporation X has primary liability established by the directing mind doctrine. § If the directing mind commits the tort, its as if the corporation committed
the tort § iii. Crime
• Corporation X commits a crime o Corporation X has primary liability established through the directing mind doctrine as
augmented by recent amendments to the Criminal Code. § CC has overtaken the common law today
o B. Liability through agency § i. Contract
• The corporation is bound if its agent has actual or ostensible authority. § ii. Tort
• The corporation’s employee commits a tort in the ordinary course of employment. o The corporation’s liability is non-consensual and vicarious.
§ iii. Crime • N.A.
B. CRIMINAL AND TORTIOUS LIABILITY 1. Attributing Liability to a Corporate Body
The “Rhone” v The “Peter AB Widener” – What is a Directing Mind? • Facts
o 2 vessels collide § Collision caused by negligence of Tugmaster Kelch § The vessel damaged in the collision sues the other vessel's owner, Great Lakes Co for compensation
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§ Under a provision of the Canada Shipping Act, Great Lakes Co is not vicariously liable for Tugmaster Kelch • Will only be liable to damaged vessel if Tugmaster Kelch's actions are those of the corporation • Gives owner of a ship benefit of limited liability for acts or omissions in the navigation to the ships
that occur without the owner’s actual fault or privity o TJ found that cause was negligence of master of Kelch
§ Captain was a directing mind of corporation and therefore company could not rely on limitations of liability clause in legislation
• Issue o Is Tugmaster Kelch a directing mind of Great Lakes Co?
• Analysis o What constitutes a directing mind?
§ Question of mixed fact and law: • Law: identify which functions or offices ground corp identification (identification theory) • Fact: who carries out these functions or fills these offices?
§ To find a corporation criminally liable under the identification theory, the employee who physically committed the offence must be “the ego”, the “centre” of the corporate personality, the “vital organ” of the body corporate, the “alter ego” of the employer corporation or its directing mind
§ One must determine whether the discretion conferred on an employee amounts to an express or implied delegation of executive authority to design and supervise the implementation of corporate policy rather than simply to carry out such policy
o Shipping specifics § There exists an overall duty on a ship-owner to supervise properly the navigation of its vessels § Courts have further applied a “reasonable likelihood” test in determining whether the exercise of particular
duty by a ship-owner would have prevented the impugned damage o Application to the case
§ Captain gave instructions to other vessels, described as being part of management, salaried employee, fleet Captain and person responsible for breaking in new captains
• Also responsible for necessary paperwork for all tugs in Great Lakes fleet § Additional tasks do not denote delegation to captain of the governing executive authority over the
management and supervision of Great Lakes fleet • Holding
o Tugmaster Kelch was not a directing mind and therefore the corporation is criminally not liable • Ratio
o Corporation can be liable for criminal/tortious acts if committed by a directing mind of the corp o To find corporation criminally or tortiously liable under identification of directing mind: One must determine whether the
discretion conferred on an employee amounts to an express or implied delegation of executive authority to design and supervise the implementation of corporate policy rather than simply to carry out such policy
o Key distinction between directing mind and normal employee is the capacity to exercise decision making authority on matters of corporate policy, rather than merely to give effect to such policy on an operational basis
• Notes
o
o Legal issues § (1) Is Captain Kelch a directing mind of Great Lakes? § (2) Did the collision occur with the actual fault or privity of Great Lakes per s. 647(2) of the Shipping Act or
not? (The Shipping Act states that the owner of a ship has the benefit of limited liability concerning acts or omissions in the navigation to the ships that occur without the owner's actual fault or privity.)
o SCC
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§ Patterson Steamships • Lord Roche adopted the meaning attributed to the words “fault and privity” by both the Court of
Appeal and the House of Lords in Lennard’s, supra, and further highlighted that the fault or privity of a shipowner must be fault or privity in respect of that which causes the loss or damage in question.
• Therefore, in the case of a corporate shipowner, it is necessary to consider whether the acts of a particular individual giving rise to liability should be attributed to that of the company itself. Said differently, the question that arises is at what point in the hierarchy of a company is the fault of a person employed in the organization to be treated as the fault of the company itself.
§ Lennard's • My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of
its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. That person may be under the direction of the shareholders in general meeting; that person may be the board of directors itself, or it may be, and in some companies it is so, that that person has an authority coordinate with the board of directors given to him under the articles of association, and is appointed by the general meeting of the company, and can only be removed by the general meeting of the company.
o Who really is the directing mind of the corporation? § Denning in HL Bolton
• A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such.
§ Canadian Dredge & Dock - involves criminal liability, but is the leading Canadian case for directing minds • The identification doctrine • Summary: The focus of inquiry must be whether the impugned individual has been delegated the
“governing executive authority” of the company within the scope of his or her authority. I interpret this to mean that one must determine whether the discretion conferred on an employee amounts to an express or implied delegation of executive authority to design and supervise the implementation of corporate policy rather than simply to carry out such policy. In other words, the courts must consider who has been left with the decision-making power in a relevant sphere of corporate activity.
§ So what about Captain Kelch, does he have governing executive authority? • If he is the directing mind, the corporation cannot rely on the defence under the Canada Shipping
Act § Is Kelch the directing mind?
• No • Transcript
o Kelch is saying over and over again that he was just a flunkie, and didn't have governing executive authority
o Holding § Though Kelch has some important duties and some decision-making matters, that doesn't make him a
directing mind § You need to have governing authority over the management, operational, policies, etc. § Thus, the company can rely on this statutory defence
Deloitte & Touche v Livent Inc (Receiver Of) – Duty of Care Shaped by the Purpose for Which Representation is Given; Strict Application of Canadian Dredge Not Needed
• Facts o Livent “brought the entire enterprise, from production to performance, under one roof – a roof that Livent, as a
proprietor of theatre properties, also owned” o Unfortunately, Livent’s apparent success was a fraud
§ Two directors, theatre moguls Drabinsky and Gottlieb, as well as some of their associates, “cooked the books” by manipulating Livent’s financial records.
§ This included booking falsified expenses as assets and recording “imaginary revenue.” o Meanwhile, Deloitte & Touche (now Deloitte LLP) had been retained on a number of Livent matters, including to conduct
audits as required by statute. § Unfortunately, Deloitte conducted its audit incompetently and failed to detect the frauds perpetrated by
Drabinsky, Gottlieb and their associates.
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o The following year, new investors in Livent put new managers in place who, in turn, discovered the frauds or financial “irregularities.”
o Soon after, Livent went into receivership and, through its receiver, sued Deloitte. § Livent claimed that as a result of Deloitte’s negligence, Livent’s shareholders were unaware of Livent’s true
financial state and were unable to properly supervise management § This, in turn, artificially extended Livent’s corporate life and increased its liquidation deficit beyond what it
would otherwise have been. o Trial
§ Livent was successful and awarded money for breach of duty of care, or alternatively breach of contract o Deloitte argued that Livent's directors (Drabinsky and Gottlieb) have engaged in illegal or wrongful conduct
§ This "illegal or wrongful conduct" is attributable to Livent via directing mind theory o Livent argued "we hired you to detect that fraud to begin with"
• Issue o Assuming Livent can establish the tort of negligent misstatement against Deloitte (TBA), can Deloitte establish the
defence of illegality (ex turpi)? Per SCC at para 98: § “The defence of illegality bars an otherwise valid action in tort on the basis that the plaintiff has engaged in
illegal or immoral conduct and, therefore, should not recover (Hall v. Hebert, [1993] SCC; British Columbia v. Zastowny, [2008] SCC). Grounded in public policy, it is available in very “limited” circumstances, only where it is necessary to preserve the “integrity of the justice system” (Hall). And, the integrity of the justice system will only be compromised where a “damage award in a civil suit would, in effect, allow a person to profit from illegal or wrongful conduct, or would permit an evasion or rebate of a penalty prescribed by the criminal law” (Hall; Zastowny).
• Analysis o To attribute the fraudulent acts of an employee to its corporate employer, two conditions must be met (Canadian
Dredge): § (1) The wrongdoer must be the directing mind of the corporation; and § (2) The wrongful actions of the directing mind must have been done within the scope of his or her authority;
that is, performed within the sector of corporate operation assigned to him. o For the purposes of this analysis, an individual will cease to be a directing mind unless the action
§ (1) Was not totally in fraud of the corporation; and § (2) Was by design or result partly for the benefit of the corporation
o But a strict application of Canadian Dredge is not warranted here § Doctrine is one of “judicial necessity” and where its application “would not provide protection of any interest
in the community” or “would not advantage society by advancing law and order”, the rationale “fades away” o Considered Canadian Dredge, but noted these principles provide sufficient basis but not necessary to find actions of
directing mind attributable to corporation § Must take fraud of D’s and attribute it to corporation, but also consider policy reasons
o Purpose of a statutory audit is to provide a means by which fraud and wrongdoing may be discovered, so denying liability on the basis that an individual within the corporation has engaged in the very action that the auditor was enlisted to protect against would render the statutory audit meaningless
§ Where, as here, application of corporate identification doctrine would render meaningless the very purpose for which a duty of care was recognized, such application will rarely be in the public interest.
§ If a professional undertakes to provide a service to detect wrongdoing, the existence of that wrongdoing will not normally weigh in favour of barring civil liability for negligence through the corporate identification doctrine
o Deloitte could have limited liability through apportionment (third party claims against guilty parties – Drabinsky and Gottlieb) for their wrongful actions but chose not to
• Holding o Appeal dismissed, Livent wins
§ While the conditions of the test are on the face of it, present, the doctrine of corporate identification does not apply on these facts as courts retain the discretion to refrain from applying doctrine where in the circumstances of the case, it would not be in the public interest to do so
§ In this case, its application would render the meaningless the very purpose for which a duty of care was recognized (i.e. the duty to detect wrongdoing when conducting a statutory audit of a company’s books)
§ If a professional undertakes to provide a service to detect wrongdoing, the existence of that wrongdoing will not normally weigh in favour of barring civil liability for negligence through the corporate identification doctrine.
• Ratio o Affirms the Canadian Dredge test
§ TEST for corporate identification doctrine • (1) The wrongdoer must be the directing mind of a corporation; and • (2) The wrongful actions of the directing mind must have been done within the scope of his or her
authority. § An individual will cease to be a directing mind unless the action
• (1) Was not totally in fraud of the corporation; and
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• (2) Was by design or result partly for the benefit of the corporation (i.e. the corporation was a direct victim)
o Simplified: If the directing minds are ripping off their own corporation (via fraudulent acts), and their actions were taken without the benefit of the corporation in mind, then the previously directing minds of the corporation are no longer directing minds
• Notes o Says that Canadian Dredge is the leading case o Parties
§ Livent Inc • A theatre production company
§ Deloitte • An accounting firm
o Facts § Livent hired Deloitte to do a statutory audit of Livent. § Conducting the audit negligently, Deloitte failed to detect that two Livent directors (Drabinsky and Gottlieb)
were defrauding Livent by, for example, recording “imaginary revenue” and otherwise “cooking the books.” § The following year, new investors put in new managers who, in turn, discovered the Drabinsky and Gottlieb
frauds. • Fresh eyes
§ Livent sued Deloitte’s in negligence, arguing that its incompetent audit meant that management was not being properly supervised and Livent’s liquidation deficit was larger than it otherwise would have been.
o Deloitte raises the defence of illegality § An otherwise valid claim [here, in negligence] is barred due to the plaintiff’s “illegal or immoral conduct”,
citing Hall. § That is, Drabinsky and Gottlieb’s illegal and wrongful conduct should be attributed to Livent, the plaintiff,
based on the identification theory, and provide a full defense to the action in negligence. o Livent's response is essentially this
§ We hired you, inter alia, to discover illegal and wrongful conduct in the corporation. Now you are claiming that your negligent failure to discover illegal and wrongful conduct is not actionable because Livent was engaged in illegal and wrongful conduct.
• You guys are supposed to find this out, that's why we hired you o SCC
§ 1. Canadian Dredge “remains the authoritative test for the corporate identification theory”; and furthermore • The test for corporate attribution was set out by this Court in Canadian Dredge. To attribute the
fraudulent acts of an employee to its corporate employer, two conditions must be met: (1) the wrongdoer must be the directing mind of the corporation; and (2) the wrongful actions of the directing mind must have been done within the scope of his or her authority; that is, his or her actions must be performed within the sector of corporate operation assigned to him.
• For the purposes of this analysis, an individual will cease to be a directing mind unless the action (1) was not totally in fraud of the corporation; and (2) was by design or result partly for the benefit of the corporation
o The individual is the directing mind unless § (1) There is a complete break with the corporation; your conduct is totally in
fraud; and § (2) It was not in design/result partly for the benefit of the corporation
• In this case o F and G would survive this test
§ Even though they were fraudsters, they were trying to do this for the corporation
§ Thus, they are the directing minds § 2. There is a discretion in the court not to attribute the actions of a directing mind to the corporation as here
• "As a principle that is grounded in policy, and which only serves as a means to hold a corporation criminally responsible or to deny civil liability, courts retain the discretion to refrain from applying it where, in the circumstances of the case, it would not be in the public interest to do so. And where, as here, its application would render meaningless the very purpose for which a duty of care was recognized, such application will rarely be in the public interest. If a professional undertakes to provide a service to detect wrongdoing, the existence of that wrongdoing will not normally weigh in favour of barring civil liability for negligence through the corporate identification doctrine.”
§ 3. Finally, given the limited application of the defence of illegality, as recognized by this Court in Hall and Zastowny, we find no further compelling reason to justify the use of the corporate identification doctrine in these circumstances.
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2. Statutory Criminal Liability
New Amendments to the Criminal Code • Over time, there was frustration with the lack of corporations being liable for criminal liability
o Public inquiry in 1990s highlighted this • Feds passed Bill C-45 to fix this • Criminal Code
o Section 2 - Definitions of representative and senior officer § Representative, in respect of an organization, means a director, partner, employee, member, agent or
contractor of the organization;(agent) § Senior officer means a representative who plays an important role in the establishment of an organization’s
policies or is responsible for managing an important aspect of the organization’s activities and, in the case of a body corporate, includes a director, its chief executive officer and its chief financial officer
• This is different than a directing mind (governing executive mind), you just need to merely be a senior officer
o Section 22.1 - Offences of negligence - organizations § In respect of an offence that requires the prosecution to prove negligence, an organization is a party to the
offence if • (a) acting within the scope of their authority
o (i) one of its representatives is a party to the offence, or o (ii) two or more of its representatives engage in conduct, whether by act or omission,
such that, if it had been the conduct of only one representative, that representative would have been a party to the offence; and
• (b) the senior officer who is responsible for the aspect of the organization’s activities that is relevant to the offence departs — or the senior officers, collectively, depart — markedly from the standard of care that, in the circumstances, could reasonably be expected to prevent a representative of the organization from being a party to the offence.
o Section 22.2 – Other offences – organizations § In respect of an offence that requires the prosecution to prove fault — other than negligence — an
organization is a party to the offence if, with the intent at least in part to benefit the organization, one of its senior officers
• (a) acting within the scope of their authority, is a party to the offence; • (b) having the mental state required to be a party to the offence and acting within the scope of
their authority, directs the work of other representatives of the organization so that they do the act or make the omission specified in the offence; or
• (c) knowing that a representative of the organization is or is about to be a party to the offence, does not take all reasonable measures to stop them from being a party to the offence.
o The senior officer can provide the mens rea
Metron – Expansion of Corporate Criminal Liability Due to Those Below a “Directing Mind” (I.e. a Senior Officer)
• Facts o A swing stage collapsed; 6 workers were on the stage at the time of fall; 5 fell 14 floors down, the 6th was held by a
lifeline and was pulled to safety o 4/5 that fell died, with one suffering serious injuries
• Metron had been found guilty of a single charge of criminal negligence causing death • The Ontario Court of Justice sentenced Metron to a $200,000 fine and a $90,000 fine on Metron's president after he pleased guilty,
as a company director, to 4 charges under the Ontario OHSA o All criminal charges against the company president were withdrawn by the Crown as a result of these guilty pleas
• This case o Represents the first corporate criminal negligence conviction in Ontario following passage of Bill C-45
§ The sentences imposed on Metron and its president are the highest monetary penalties imposed for a workplace accident under the CC and OHSA
o Had a significant factor in motivating the review of the OHS system in Ontario § Resulted in a number of regulatory changes
o Demonstrates how Bill C-45 has managed to broaden the means by which to prove criminal negligence § Shows that one of the main objectives in amending the CC - making it easier to obtain criminal negligence
convictions against organizations - has been met • The conduct that attracts criminal liability to Metron is entirely that of the Site Supervisor (one of the deceased)
o The Supervisor was a "senior officer" of Metron o He was not employed directly by Metron; he had his own construction company and was hired by the Project Manager
who was also charged under the CC and OHSA
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o As such, Metron's conviction demonstrates how Bill C-45 has expanded the potential routes for establishing criminal negligence by a corporation
§ Prior to Bill C-45, the Supervisor was not someone whose conduct would likely attract criminal liability for the corporation; he was not employed directly by Metron
• Metron demonstrates that the behaviour of people with a high degree of localized responsibility can attract criminal liability for an entire organization
o The conduct of the (third-party, hired) Site Supervisor that displaced the positive steps that were taken by Metron, and was agreed to render Metron criminally negligent, included:
§ 1. Directing or permitting 6 workers to work on the swing stage when he knew, or should have known, that it was unsafe to do so
§ 2. Directing or permitting 6 workers to board the swing stage knowing that only two lifelines were available § 3. Permitting workers under the influence of drugs to work on the project
o These factors were considered to establish that Metron had failed to take reasonable steps to prevent bodily harm and death, and in doing so, had demonstrated wanton and reckless disregard for the lives or safety of others
o Criminal negligence is not established by the mere breach of a health and safety requirement or industry standard; there must be wanton or reckless disregard for lives or safety before the departure from a legislated or industry standard becomes criminal
• Metron suggests that not only can the senior officer impute criminal liability to an organization, if that senior officer is injured or killed as a result of their conduct, the organization will be sentenced for that death or injury the same as for any other victim
o The Court sentenced Metron for the death of the Site Supervisor and the others killed o This was interesting because the Supervisor and Metron were treated as one for the purpose of finding Metron guilty of
criminal negligence: The Supervisor's conduct was the conduct of Metron o However, for sentencing purposes, the Supervisor was considered a victim of Metron's criminal negligence
• The amendments to the CC made by Bill C-45 also augment the sentencing factors to be considered by a court; the CC requires a court to consider factors that are specific to corporate Ds including:
o Any advantage realized by the organization as a result of the offence; o The degree of planning involved in carrying out the offence and the duration and complexity of the offence; o Whether the organization has attempted to conceal its assets, or convert the, in order to show that it is not able to pay a
fine or make restitution o The impact that the sentence would have on the economic viability of the organization and the continued employment of
its employees o The cost to public authorities of the investigation and prosecution of the offence o Any regulatory penalty imposed on the organization or one of its representatives in respect of the conduct that formed
the basis of the offence o Whether the organization was - or any of its representatives who were involved in the commission of the offence were -
convicted of a similar offence or sanctioned by a regulatory body for similar conduct; and o Any measures that the organization has taken to reduce the likelihood of it committing a subsequent offence
• Prior to Bill C-45, in order to convict a corporation of criminal negligence, the Crown would have to prove that the "directing mind" of the corporation showed wanton and reckless disregard for the lives or safety of other persons
o This concept, known as Identification Theory, made prosecuting charges of criminal negligence against a corporation difficult as it was challenging to prove that the conduct of the person or people constituting the directing of the corporation rose to the level necessary for criminal liability
• Bill C-45 expanded the means to establish corporate liability because it jettisoned the Identification Theory and made it possible for the Crown to prove the wanton and reckless disregard for lives or safety of others through the conduct of a corporate representative - either singularly or cumulatively with another representative
o In addition, the Crown is required to establish that a senior officer has failed to act o The term "senior officer" is broadly defined in the CC to include people of varying degrees of managerial authority or
responsibility o Metron demonstrates how Bill C-45 has broadened the means by which criminal negligence can be proven against a
corporation because the actions of a mid-level manager and the Site Supervisor, attracted criminal liability for the organization
• Anecdotal evidence is that the CC has not displaced regulatory legislation as the primary means to enforce workplace health and safety standards
o Thus, there has been a restrained approach to instituting criminal charges • Summary
o Metron shows the highest monetary penalties ever given out under the OHSA and the CC for a workplace accident o Metron demonstrates how the means to prove criminal negligence against a corporation has been expanded and that the
positive measures taken by a corporation can be quickly displaced by the conduct of a local manager or supervisor • Corporate Criminal Liability Based Solely on Supervisory Action?
o Bill C-45 jettisoned the Identification Theory such that, in order to prove criminal negligence against an organization under the amendment, the Crown now has to establish
§ 1. That there has been wanton and reckless disregard for lives or the safety of others through the conduct of a corporate "representative", acting within the scope of their authority, either alone or through the combined conduct of multiple representatives ("representative" is broadly defined to include a director, partner, employee, member, agent, or contractor of an organization) and
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§ 2. That a "senior officer" of the organization departed markedly from the reasonable standard of care expected to prevent the representative from causing harm ("senior officer" includes an individual who plays an important role in the establishment of an organization's policies or is responsible for managing an important aspect of the organization's activities)
o "Senior officer" is also broadly defined under the CC and encompasses people with varying degrees of managerial authority or responsibility
§ As seen from Metron, a "senior officer" includes management with localized authority that would likely have been insufficient for them to be the "directing mind" under the Identification Theory
o Metron is notable because the Crown's burden of proof under the revised test for corporate criminal negligence was collapsed into the conduct of one person: the site supervisor
§ It was agreed by the organization in pleading guilty - and the court implicitly accepting this by granting the conviction - that the site supervisor was both a "representative" and a "senior officer" of Metron
• He was a "senior officer" because he was responsible for managing an important aspect of the organization's activities: The construction project where the accident occurred
• Notes o D corporation plead guilty to criminal negligence causing death
§ Corporation agreed/conceded that the site supervisor provided the mens rea § At sentencing, Metron was fined $200k
o Analysis § It is considerably less than the directing mind of old § Under the new CC, this supervisor can be regarded as a senior officer
o "Criminal liability rises to the top" article § Effectively, this expands the attribution of corporate criminal liability to a class of actors comprised of policy
and decision makers and those who manage or supervise operations. o In sum
§ Identification theory: Still the law in tort § However, when you move to the CC, you can rip this up
• What matters is that you have something like a "senior officer" o Someone who is a directing mind will obviously fit this o But someone less than a directing mind may fit it now too
3. Deferred Prosecution Agreements
What is a DPA? • A DPA is an agreement entered into between a prosecutor and a company alleged to have engaged in economic crimes
o Fraud for example o Not like the case of Metron
• The effect of the DPA is to suspend the outstanding prosecution while simultaneously establishing specified undertakings that the organization must fulfill in order to avoid facing the potential criminal charges. These undertakings often include fines, remediation measures, enhanced reporting requirements or allowing for independent third-party oversight of corporations compliance techniques. Once the accused company has fulfilled the terms of the DPA the charges will be dropped.
• It is important to note that individuals don't get this kind of special treatment • In the SNC Lavalin affair
o The prosecution didn't offer SNC a DPA o Led to the AG resigning, she claimed that the PM's office pressured her to get those prosecutors to change their minds
C. REGULATORY OFFENCES The Different Kinds of Offences
• Both a corporation and officers/directors have regulatory liability • Regulatory offence
o Not criminal, but something prohibited since it's in the public interest o Sometimes called statutory offences, public welfare offences
• Whether or not there's a MR requirement depends on the nature of the offence at issue • Back to Canadian Dredge, it articulates the kinds of offences there are:
o Offences requiring mens rea § These are the traditional criminal offences for which an accused may be convicted only if the requisite mens
rea is demonstrated by the prosecution… o Absolute liability offences
§ Where the legislature by the clearest intendment establishes an offence where liability arises instantly upon the breach of the statutory prohibition, no particular state of mind is a prerequisite to guilt. Corporations and individual persons stand on the same footing in the face of such a statutory offence. It is a case of automatic
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primary responsibility. Accordingly, there is no need to establish a rule for corporate liability nor a rationale therefor. The corporation is treated as a natural person.
• No mens rea; you show the AR and that's it, you're liable o Offences of strict liability***
§ Where the terminology employed by the legislature is such as to reveal an intent that guilt shall not be predicated upon the automatic breach of the statute but rather upon the establishment of the actus reus, subject to the defence of due diligence, an offence of strict liability arises. See R. v. City of Sault Ste. Marie. As in the case of an absolute liability offence, it matters not whether the accused is corporate or non-corporate, because the liability is primary and arises in the accused according to the terms of the statute in the same way as in the case of absolute offences. It is not dependent upon the attribution to the accused of the misconduct of others. This is so when the statute, properly construed, shows a clear contemplation by the Legislature that a breach of the statute itself leads to guilt, subject to the limited defence above noted. In this category, the corporation and the natural defendant are in the same position. In both cases liability is not vicarious but primary.
• Due diligence goes towards "did you take all reasonable care?”
R v Bata Industries Ltd (Ontario Provincial Court) – Due Diligence Defence; Look at the Individual’s Authority
• Facts o Officers of the Ontario Ministry of Environment drove through a closed shoe manufacturing plan of Bata Industries and
noticed many uncovered, decaying chemical waste barrels § Charges laid under the Ontario Water Resources Act and Environment Protection Act § 3 individual D's (Directors/Officers) : Thomas Bata, Douglas Marchant, Keith Weston
o Actus reus of sections is “engaging in an activity that may or does discharge” § Ds have to show due diligence on the balance of probabilities
o Company has four divisions § Bata mainly an advisor, chairman of board, and director § Marchant was president § Weston was general manager/director/VP
• Issue o Can the individual directors successfully raise the defence of due diligence?
• Analysis o No written records - very difficult in ordinary course for director to establish due diligence if there is no contemporary
written records o Bata: Successful in invoking defence of due diligence; not guilty
§ Director with least personal contact at plan, responsibilities primarily directed at global level § No evidence that he was aware of environmental problem § In two instances he dealt appropriately with environmental issues that had arisen in the past § Remained aware of environmental responsibilities and had written directions to that effect § Entitled to assume that on-site manager/director would bring to his attention any problems
o Marchant: Did not establish the defence of due diligence on the balance of probabilities; guilty § Visited site once a month and knew of offence for 6 months and did nothing § To establish due diligence defence: Demonstrate that he was encouraging those whom he may be normally
expected to influence or control to an accepted standard of behavior § Responsible to give instructions and see that they were carried out to minimize damage § Delay in cleanup showed lack of due diligence
o Weston: Guilty § On-site director, making him more vulnerable to prosecution § Had experience in industry and was reminded about environmental responsibilities § Should have been alert to problem based on business quotes and responsibilities of role § Had motivation to ignore problem (financial incentives based on bonus)
• Holding o Bata Industries, Marchant, and Weston found liable and fined accordingly (Bata the individual not guilty)
§ Judge made it a term of Bata Industries' probation that it could not indemnify the D's • Ratio
o Onus is on party raising defence of due diligence to prove on a BOP that they acted with reasonable care § Due diligence means to exercise all reasonable care § Scope of duties taken into account when determining what constitutes reasonable care
o Business judgement rule: Business corporation is profit-oriented, and an honest error of judgment should not impose liability provided the requisite standard of care is met
o When assessing the liability of directors for the regulatory offences of the corporation, the court will look to evidence of the individual's authority to control, including responsibility actually undertaken or neglected, which relates to the offence
• Notes
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o
o Facts § Bata Industries Ltd charged under environmental protection legislation § Biggest problem for Bata Ltd: Now have to establish the defence of due diligence - showing all reasonable care
o Issue § Can the individual directors successfully raise the defence of due diligence?
o Court § Liability of the corporation
• Bata did not establish a proper system to prevent the commission of the offence, nor did they take reasonable steps to ensure the effective operation of whatever system they had. They simply allowed the barrels to sit, rust and eventually disintegrate. There is no evidence that any barrels were ever moved. They not only ignored the direction given to them in TAC 298 (their internal procedures), but were oblivious to the actions being taken by their next-door neighbour.
• "The due diligence which must be established is that of the accused alone. Where an employer is charged in respect of an act committed by an employee acting in the course of employment, the question will be whether the accused exercised all reasonable care by establishing a proper system to prevent commission of the offence and by taking reasonable steps to ensure the effective operation of the system. The availability of the defence to a corporation will depend on whether such due diligence was taken by those who are the directing mind and will of the corporation, whose acts are therefore in law the acts of the corporation itself." - From Syncrude but applicable here
o Have to establish the proper system, and show they took all reasonable steps in following through with that
o Here: They did not, they have primary liability under the statute § The individuals
• Crown has to show the AR BARD (causing the discharge) • Follows on the D to show they took all reasonable care on a BOP • Court comes up with a following test
o I ask myself the following questions in assessing the defence of due diligence: § (a) Did the board of directors establish a pollution prevention “system” as
indicated in R. v. Sault Ste. Marie. i.e., was there supervision or inspection? was there improvement in business methods? did he exhort those he controlled or influenced?
§ (b) Did each director ensure that the corporate officers have been instructed to set up a system sufficient within the terms and practices of its industry of ensuring compliance with environmental laws, to ensure that the officers report back periodically to the board on the operation of the system, and to ensure that the officers are instructed to report any substantial non-compliance to the board in a timely manner?
• Other directions: o I reminded myself that:
§ (c) The directors are responsible for reviewing the environmental compliance reports provided by the officers of the corporation, but are justified in
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placing reasonable reliance on reports provided to them by corporate officers, consultants, counsel or other informed parties.
§ (d) The directors should substantiate that the officers are promptly addressing environmental concerns brought to their attention by government agencies or other concerned parties including shareholders.
§ (e) The directors should be aware of the standards of their industry and other industries which deal with similar environmental pollutants or risks.
§ (f) The directors should immediately and personally react when they have notice the system has failed.
§ Bata the individual • Off the hook • Did not have a lot of responsibility at the site in question • Least personal contact • No evidence that he was WB to a problem • Successful in using the defence of due diligence
o Mostly because he was an off-site person, and responded well when the problem was brought to his attention
§ Marchant • Storage problem brought to his attention, but didn't do anything about it immediately • He has responsibility not only to give instruction, but to see that they're carried out • In the circumstances, it is my opinion that due diligence requires him to exercise a degree of
supervision and control that “demonstrate that he was exhorting those whom he may be normally expected to influence or control to an accepted standard of behaviour”
• He had a responsibility not only to give instruction but also to see to it that those instructions were carried out in order to minimize the damage. The delay in clean-up showed a lack of due diligence. There is no corporate documentation between February 15, 1989 and August 31, 1989 to assist him in his defence of due diligence. In my opinion, he has not established the defence of due diligence on the balance of probabilities and is therefore guilty as charged.
• Thus, Marchant is liable § Weston
• Had the most on-site duties • Knew of his responsibilities, and failed to establish all reasonable care • Should have seen the problem based on the business quotes • Suspicion: Maybe it would have hurt Weston's bottom line to report the problem - likely not
properly motivated • Weston is also liable; absence of due diligence
o Penalty § Found 2/3 directors liable - punishment was a fine and an order saying that they couldn't be indemnified by
the corporation • Wanted them to personally suffer the consequences
o This is what the CA looked at
R v Syncrude Canada Ltd – How an AB Court Dealt with the Breaching an Environmental Standard • Facts
o Birds landing in tailing ponds, Syncrude charged with violating environmental legislation o Strict liability offence; D used defence of due diligence (reasonable care)
• Issue o Did the D establish it took all reasonable steps to ensure that birds would not be contaminated in its tailings ponds?
• Analysis o Onus and standard of proof
§ In strict liability cases: Crown must prove BARD that the accused committed a prohibited act § For the due diligence defence, the D must establish it took reasonable care on a BOP
o Defence of due diligence § Defence will be available if there is:
• 1. Mistake of fact: The accused reasonably believed in a mistaken set of facts which, if true, would render the act or omission innocent
• 2. Reasonable foreseeability: If the accused took all reasonable steps to avoid the event o Conduct is assessed against that of a reasonable person in the circumstances
§ Reasonable care: Existence of a proper system and reasonable steps to ensure the effective operation of the system must be proven (reasonable person standard)
§ Reasonable care factors (non-exhaustive list) - bold means considered • 1) Nature and gravity of the adverse effect; • 2) Foreseeability of the effect, including abnormal sensitivities;
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o Test: (Rio Algom Ltd) – whether a reasonable person would have foreseen that the circumstances that lead to the accident created a hazard requiring remedial intervention
• 3) Alternative solutions available; • 4) Legislative or regulatory compliance • 5) Industry standards; • 6) Character of neighborhood; • 7) What efforts have been made to address the problem; • 8) Over what period of time, and promptness of response; • 9) Matters beyond the control of accused, including technological limitations; • 10) Skill levels expected of the accused; • 11) Complexities involved; • 12) Preventative systems; • 13) Economic considerations; • 14) Actions of officials
§ Actions based on information available at the time of the offence o Application to the case: Due Diligence (took all reasonable steps)
§ Gravity of effect • Influences efforts it would reasonably be expected to undertake to prevent harm • Number of ducks killed would have little significant impact on total duck populations
§ Complexity • High level of expertise demanded, it is reasonable that company should have in place or access to
expertise to effectively manage risk to wildlife • Application: Given the complexity of the problem, a reasonable person would have the expertise to
deal with the risk o Syncrude’s experts had no formal training in bird deterrence
§ Preventive System • Obligated to have in place system to prevent killing birds • Application: preventative system faced cutbacks and was not set up in time to prevent the birds
from landing in the tailing ponds § Alternative Solutions
• Application: There were numerous reasonable alternatives that D did or should have known o No evidence to suggest that these alternatives weren’t economically feasible
§ Foreseeability • Test is not whether the particular accident was foreseeable, but whether a reasonable person
would have foreseen that “the circumstances that lead to the accident created a hazard requiring remedial intervention"
• Application: Reasonable person in Syncrude’s place would have foreseen the acts and omissions leading up to events would cause an unacceptable hazard
§ Facts indicating the defence fails: Set up their system too late, systems had been put into place in the past, head of bird team had no formal training of bird deterrence, cutbacks to the bird team, other companies (i.e. Shell) were doing much better
• Holding o D failed on due diligence defence; guilty
• Ratio o Defence of due diligence available in prosecution for strict liability if:
§ 1) A reasonably believed in mistaken set of facts, which if true would render act or omission innocent; or § 2) Took all reasonable steps to avoid particular event (reasonable care)
• Consider factors above • Notes
o Facts § Syncrude charged with violating environmental protection legislation (tailings ponds) § Syncrude was charged with failing to store a hazardous substance (bitumen) in a manner that ensured it did
not come into contract with any animals contrary to provincial environmental protection legislation. It was also charged with depositing a substance harmful to migratory birds in an area frequented by migratory bird’s contrary to federal legislation
§ 1600 birds died as a result of landing on a bitumen contaminated pond. o Issue
§ Is Syncrude liable for violating environmental legislation? Can Syncrude prove it took all reasonable care to avoid the contraventions as a defence?
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• Did they exercise all reasonable care? o Court
§ Crown has to establish BARD they didn't follow the standard § Legislation then puts onus on Syncrude to show due diligence
• This goes to what did the directing mind do § Syncrude doesn't have to show they're perfect, we need to look for a proper system, and reasonable steps to
ensure that the system was carried out § Goes through a process like Bata § Factors that could bear on the defence (see non-exhaustive list of 14)
• Syncrude argues that it had in place a system which worked for many years to prevent the loss of all but a small number of birds. It says that it could not reasonably have anticipated the confluence of circumstances that resulted in the deaths of more than 1600 waterfowl.
o This can give off the wrong tone, as it shows that you don't really think that is a big deal by raising this defence
• Due diligence does not require clairvoyance or that the accused should have foreseen every possible failure
• The evidence here, while disclosing no real industry standard for bird deterrence, offered a number of reasonable alternatives. The most obvious alternative was to have sufficient equipment and staff ready for deployment of adequate deterrents no later than early April. Shell Albian Sands Muskeg River Mine and Suncor were both able to commence deployment in early April in 2008. These operators also had more comprehensive written procedures, oversight by individuals with appropriate training and advance planning and preparation of equipment. I am not suggesting that Syncrude was required to adopt either of these systems, simply that there were reasonable alternatives available
o Sentencing § Fined the maximum $500k and an additional $300k, research towards the UofA - overall ended up being
$3,000,000 o Would it have been better to accept liability at the beginning?
§ Probably
D. CONTRACTUAL LIABILITY Introduction – Liability in Contract Overview
• At common law, the contractual liability of the company is tied to: o The ultra vires rule [see s. 16 and s. 17(3)]
§ Per McGuinness: “The Latin term "ultra vires" describes a class of acts of a body that were beyond its powers or jurisdiction.”
§ E.g. AB gov't passes the CC of AB • This would be ultra vires since the provincial government doesn't have jurisdiction over criminal
law; that's in federal jurisdiction § Section 16 of the ABCA - Capacity of a corporation
• (1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person
• (2) A corporation has the capacity to carry on its business, conduct its affairs and exercise its powers in any jurisdiction outside Alberta to the extent that the laws of that jurisdiction permit.
§ Section 17(3) - Restriction on powers • (3) No act of a corporation, including any transfer of property to or by a corporation, is invalid by
reason only that the act or transfer is contrary to its articles or this Act. o The constructive notice doctrine [see s. 18]
§ Per McGuinness: “Constructive notice is knowledge of a fact that is presumed or imputed by law. …At common law, a person who dealt with a corporate body was deemed to have notice of the contents of all documents that the corporation was required file with, and did file with, a public office that were open to public inspection.”
§ Section 18 of the ABCA - No constructive notice • No person is affected by or is deemed to have notice or knowledge of the contents of a document
concerning a corporation by reason only that the document has been filed by the Registrar or is available for inspection at an office of the corporation.
o The indoor management rule [see s. 19] § Per McGuinness: “Even during the heyday of the doctrine of ultra vires, the courts were loath to require third
parties dealing with a corporation to enquire into compliance by a corporation of its directors and officers or into the internal rules of management governing the conduct of the business or affairs of a corporation. Such rules might govern the directors and officers, and might entitle to corporation or its shareholders to restrain them from acting in contravention or to seek damages should those rules be broken, but they were not a matter which the general public had need to concern itself.”
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• The purpose of indoor management is to provide some protection for those who enter into contracts from consequences that are possibly complex
• Those dealing with the company are not affected by indoor management of the company; AKA in-house rules
• Outsiders can assume that there is compliance with the in-house rules § Section 19 of the ABCA - Authority of directors, officers and agents
• A corporation, a guarantor of an obligation of the corporation or a person claiming through the corporation may not assert against a person dealing with the corporation or dealing with any person who has acquired rights from the corporation
o (a) that the articles, bylaws or any unanimous shareholder agreement have not been complied with,
o (b) that the persons named in the most recent notice filed by the Registrar under section 106 or 113 are not the directors of the corporation,
o (c) that the place named as the registered office in the most recent notice filed by the Registrar under section 20 is not the registered office of the corporation,
o (d) that the post office box designated as the address for service by mail in the most recent notice filed by the Registrar under section 20 is not the address for service by mail of the corporation,
o (e) that a person held out by the corporation as a director, an officer or an agent of the corporation
§ (i) has not been duly appointed, or § (ii) has no authority to exercise a power or perform a duty that the director,
officer or agent might reasonably be expected to exercise or perform, o (f) that a document issued by any director, officer or agent of the corporation with
actual or usual authority to issue the document is not valid or not genuine, or o (g) that financial assistance referred to in section 45 or a sale, lease or exchange of
property referred to in section 190 was not authorized, • unless the person has, or by virtue of the person’s position with or relationship to the corporation
ought to have, knowledge of those facts at the relevant time. o Agency law
§ Quick review • The authority of the agent can be actual or ostensible • Principal is bound by the agent's conduct if the agent is acting with actual or ostensible authority
1. Doctrine of Ultra Vires
Jon Beauforte (London) Ltd Re – Application of the Doctrine of Ultra Vires; Constructive Notice • Facts
o In Jon Beauforte’s memorandum of association, restrictions on business state that company’s purpose to produce/sell various types of clothing, furs and curtains, and carry on any business ancillary to the above
o Later, company decides to carry out business of producing veneer panels, without amending MOA o Incurs trade debts to creditors from veneer operations – construction of veneer factory, and supplying with materials for
veneered panels o Company goes into liquidation
§ Creditors files proofs of claim for debts owed o Liquidator rejects them on basis that agreements ultra vires and unenforceable o Creditors appeal
• Issue o Are 3 contracts at issue (contract for construction of the veneer factory; contract for veneer; and contract for fuel used in
the factory) ultra vires and therefore unenforceable? • Analysis
o Doctrine of constructive notice (at the time): § Since a memorandum is filed at the corporate registry, it is publicly available, and anyone can look at it. § Therefore, the doctrine holds that everyone dealing with the corporation has constructive notice of the
articles of the corporation’s memorandum of association, and what the corporation is/isn’t allowed to do. o Also, no unjust enrichment, because there is a juristic reason (ultra vires) for enrichment/deprivation.
• Holding o Court upheld the liquidator's decision
§ The Contracts were ultra vires the MOA, and thus void • Ratio
o A contract that is outside the articles of association of a company is ultra vires that company, and is void and unenforceable.
o At common law, a party with constructive notice of a company’s MOA could not recover for debt incurred under an ultra vires contract
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• Notes
o
o Issue § Is the specific contract at issue (the contract for fuel used in the veneer factor) ultra vires and therefore
unenforceable? o Court
§ The creditors don't get paid out, the contracts are ultra vires § The creditors knew it was ultra vires (constructive knowledge)
o Harsh judgment
Restriction on the Doctrine of Ultra Vires – A Legislative Response • As a result, there have been changes to the legislation - essentially punts ultra vires in the ABCA
o Section 16 - Capacity of a corporation § (1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person § (2) A corporation has the capacity to carry on its business, conduct its affairs and exercise its powers in any
jurisdiction outside Alberta to the extent that the laws of that jurisdiction permit. o Section 17(3) - restriction on powers
§ (3) No act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only that the act or transfer is contrary to its articles or this Act.
• AKA, this alone won't have the matter set aside • This doesn't apply to special acts corporations (see the Pickles case), so the doctrine of ultra vires will apply there...
Communities Economic Development Fund v Canadian Pickles Corp – Doctrine of Ultra Vires Limited to Special Act Corporations
• Facts o Appellant, CEDF, is a lending institution created by statute to encourage economic development of “remote and isolated
communities” in Manitoba o Respondents, CPC, a Manitoba company located in Stony Mountain (just outside Winnipeg), was approved for $150K loan
from the appellant with personal guarantee by directors of CPC (the O’Donnell’s) o CPC defaulted on loan o Board of Directors of the appellant did not a pass by-law establishing criteria of remoteness and isolation o Appellant sued the company and guarantors o The Respondents argued that CEDF could only get its power from statute and the loan was ultra vires because Stony
Mountain was neither remote nor isolated § Section 9: No loan shall be made under this Act if the making contravenes any provisions of this Act
• Issue o Applicability of doctrine of ultra vires to a statutory corporation, and liability of the guarantor to repay loan that is ultra
vires the lender • Analysis
o Does ultra vires doctrine apply? (Yes) § General abolition of doctrine of ultra vires accord with sound policy § Original purposes (protect creditors and investors) have been largely frustrated § Statutory and case law developments have made it a trap for the unwary § But limited application with respect to corporations created by special act
• Protects the public interest; company created for specific purpose ought not to have the power to do things not in furtherance of that purpose
o Was the appellant expressly or impliedly authorized to act beyond statutory objects? (No)
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§ Must look to Communities Economic Development Fund Act and Corporations Act (application limited by s.3(1) – not all remedies and offences apply to corporation created for government purposes)
§ Loan to CPC contravened s.9(7) of the Act and was ultra vires the appellant o Is the respondent liable to repay loan as guarantor? (No)
§ Must always read the wording of guarantee § On correct interpretation of the contract, the respondent is not liable to repay money advanced in the event
the principal debt is ultra vires § It was open to appellant to insist on contract that made respondent liable in these circumstances, but did not
do so • Holding
o The loan was ultra vires, and repaying money for the ultra vires loan is not covered by the guarantee o Appeal dismissed; respondent not liable
• Ratio o Doctrine of ultra vires is limited to a corporation created by special act for public purpose and applies when they exceed
their powers expressly or impliedly granted to it by statute § Doctrine of ultra vires abolished by ABCA/CBCA for policy reasons, except it can still apply with respect to
corporations created by special act. • Notes
o
o Issue § Is the loan to Pickles ultra vires and do the guarantees fall accordingly?
o Court § The loan is ultra vires § Abolishing ultra vires generally under general statutes is a good thing under the ABCA (i.e. Like John
Beauforte) § But it still persists for special act corporations - read the act to see if it applies
• In my view, the general abolition of the doctrine of ultra vires is in accordance with sound policy and common sense. The original purposes of the doctrine, which were “to protect creditors by ensuring that the company’s funds to which creditors must look for payment were not dissipated in unauthorized activities and to protect investors by allowing them to know the objects for which their money was to be used”, have been largely frustrated. Subsequent statutory and case law developments have made the doctrine a protection to no one and a trap for the unwary. No less an authority than L.C.B. Gower has recommended “total abolition of the ultra vires rule in so far as it affects the capacity of companies” and indeed referred favourably to the approach taken by the Canada Business Corporations Act in this respect.
• However, in spite of the general trend towards abolition of the doctrine of ultra vires, the limited aspects of the doctrine, as seen from the above review, may be present with respect to corporations created by special act for public purposes. Not only is there a long line of cases supporting the principle, but one may argue that this protects the public interest because a company created for a specific purpose by an act of a legislature ought not to have the power to do things not in furtherance of that purpose. Of course, it is open to the legislature to rebut this presumption because, for example, the legislature may provide for other remedies short of invalidity for acts contrary to the statute. But this takes us to discussing the application of the general principles of law on ultra vires to the facts of this case
§ Here, the doctrine of ultra vires should apply
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2. Contracting with Agents of the Corporation
Agency Law Diagram
• • Trump/SKO Example
o E.g SKO says on NBC that Trump is running to start a party in Canada § Actual authority?
• No § Ostensible authority?
• No • There was no representation from Trump to the outside world that SKO represent him
o E.g. What if a third party said SKO represented Trump? § No § The third party doesn't have the authority to do this
o E.g. What if SKO has a friend who works in word processing for the Trump organization, and SKO says that NBC can contact this friend to confirm SKO's with Trump?
§ No, you hit the same wall § Even though we're closer to Trump, that person in word processing does not have actual authority to
represent who has ostensible authority § Thus, the person needs actual authority to make that representation
Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd – Bayne Found to Have Apparent Authority as the Company Secretary; Job Title Clothed Him with Authority
• Facts
o
o Panorama Ltd (plaintiff company, 3rd party) runs a car hire business called Belgravia Car Hire Co o Mr. Bayne (defendant, agent), the corporate secretary of Fidelis Furnishing Fabrics Ltd (defendant, principal), defrauded
Belgravia while the managing director of Fidelis was gone § Secured agreement with Panorama, purporting to lease luxury vehicles on behalf of the corporate employer;
ultimate bill went to Fidelis, the principal § Bayne would rent the cars from Panorama, and then turn around and rent them out to others; he pocketed
the money he made renting the cars and never paid for the rentals
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o When the managing director discovered the fraud, Bayne was convicted § Bayne jailed for fraud; unable to pay out any judgment
o Panorama sued Fidelis for amount of the hire due; AKA, they're looking to Fidelis for payment § Fidelis would have a claim against Bayne in return, but not very helpful
o Trial Judge § Found against Fidelis; they were responsible for Mr. Bayne
o Fidelis argued the contracts were made with Bayne personally, not with the company § Letters signed by Bayne as "company secretary" do not bind the corporation because he had no authority to
represent them • Issue
o Did Bayne have authority to bind Fidelis to a contract with Panorama? • Lord Denning
o Looking beyond the hire agreement at all that took place, its clear that cars were hired as result of letters describing Fidelis as the contracting party
§ Company secretary nowadays is officer with extensive duties and responsibilities § Although Bayne was a fraud, the company put him in position in which he was able to commit the frauds as
company secretary; therefore, corp must pay for the contracts • Could argue Bayne had actual authority; his job title is communication of actual authority to the
world • But courts usually focus on ostensible authority since it’s all you need
o Easy argument; officer of company with extensive power o When the Board gives you title of Corporate Secretary, that represents to the world
ostensible authority to enter into contracts (title clothed him with certain authority) • Salmon LJ
o Secretary is now the chief administrative officer of a company and has ostensible authority to sign contracts on behalf of a company
§ Question of which of the two innocent parties must bear a loss caused by a rogue § Sympathy for the managing director; but there's no doubt that Fidelis must pay
• Holding o Bayne had authority to bind Fidelis to a contract with Panorama o Appeal dismissed
• Ratio o The title of "corporate secretary" may be enough to clothe an agent with ostensible authority (the Board who have actual
authority can give ostensible authority by appointing the person to that position) • Notes
o Facts § Panorama (3rd party) believes it's in a contract with Fidelis (Principal) § Bayne (agent) is the rogue, and secured the contract that would bind Panorama
• Had a side business where he'd rent the cars out himself o Issue
§ Did Bayne have authority to bind Fidelis to a contract with Panorama? § Can a corporate secretary bind his company, Fidelis?
o Court § Could argue that Bayne's job title gives him actual authority
• Corporate secretary has actual authority to rent cars § However, courts jump to ostensible authority
• Bayne is an officer that has extensive responsibilities o It would come within his ostensible authority to rent cars
• If arguing ostensible, we need a representation from Fidelis to Panorama o There's no record of that happening...so where is the representation?
§ By appointing him to the position of corporate secretary, that is a representation of his authority
§ The Board has actual authority to speak on behalf of the corporation; the Board clothed Bayne with ostensible authority by naming him to the position of corporate secretary
o Thus, Fidelis has liability
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd – The Test for Apparent Authority • Facts
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o
o Architects (P, third party) does work for Buckhurst Ltd (D, principal) o Question of whether or not there is a contract o Kapoor (the rogue) is an agent of the D, functions as managing director, though never formally appointed as such
§ He is also a shareholder o The Ps have received their instructions from Kapoor to do the work
§ Kapoor has since left with the cash o Now the question is whether his employer will have to pay the bill o Hoon is a director and shareholder of the D company o D argues that Kapoor didn’t have any authority, and shouldn’t have been doing this
• Issue o Will the principal, the rogue agent’s employer, have to pay the bill?
• Analysis o Actual authority: Requires not just silent acceptance of the board, but communication by words or conduct of consent
§ At first meeting there was no quorum, so board couldn’t have given actual authority, even though board knew he was acting as if he was authorized
o Actual vs apparent/ostensible authority § Actual: Legal relationship between principal and agent created by consensual agreement
• If agent enters contract pursuant to actual authority it creates contractual rights and obligations between principal and 3rd party contractor
§ Apparent: Legal relationship between principal and 3rd party created by representation, made by principal, to 3rd party
o Test – Four Conditions that Must be Satisfied to bind based on apparent authority: § 1) A representation that the agent had authority to enter into these types of contracts on behalf of the
corporation • This is fulfilled because the board knew that K was acting as a managing director, and permitted
him to do so § 2) That the representation was made by persons who had actual authority to manage the business
(principal) • You can’t just have a random person in the company making claims • Fulfilled because the board can manage via articles of association, legislation
§ 3) Reliance by P on the representation • Fulfilled because P contracted on reliance on K’s authority
§ 4) Under its memorandum of association, the corporation was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent
• Basically, the contract can’t be ultra vires • This could come back to bite you in a special act corporation, but nowhere else
o No longer really an issue or considered
• Holding o Buckhurst Ltd held liable, as Kapoor was acting with ostensible authority o Appeal dismissed
• Ratio
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o Four-part test for apparent authority: § 1. Representation made to third party that agent had authority to enter into these types of contracts on
behalf of the corporation § 2. Representation was made by a person who had actual authority to manage business (i.e. principal) § 3. Contractor was induced by such representation to enter into the contract (in fact relied upon it) § 4. Under the MOA, corp was not deprived of capacity either to enter into a contract of that kind or to
delegate authority to enter into a contract of that kind to agent • Only applies to corporations incorporated via special acts (s. 17(3) overrides ultra vires doctrine).
• Notes o Facts
§ P (3rd party) says they're in a contract with Buckhurst (Principal) § Dealt with Kapoor (some kind of agent for Buckhurst, never formally appointed as managing director even
though he says he is) § P needs to be paid by Buckhurst § Buckhurst's defence: This rogue (Kapoor) did not have authority to bind us to this contract
o Issue § Who are the parties to the contract?
o Court § The parties intended that the contract be between the architect and Buckhurst § Does Kapoor have the authority to bind Buckhurst? Definitions
• An “actual” authority is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties. Its scope is to be ascertained by applying ordinary principles of construction of contracts, including any proper implications from the express words used, the usages of the trade, or the course of business between the parties. To this agreement the contractor is a stranger; he may be totally ignorant of the existence of any authority on the part of the agent. Nevertheless, if the agent does enter into a contract pursuant to the “actual” authority, it does create contractual rights and liabilities between the principal and the contractor. It may be that this rule relating to “undisclosed principals”, which is peculiar to English law, can be rationalised as avoiding circuity of action, for the principal could in equity compel the agent to lend his name in an action to enforce the contract against the contractor, and would at common law be liable to indemnify the agent in respect of the performance of the obligations assumed by the agent under the contract.
o The county court judge did not hold (although he might have done) that actual authority had been conferred on the second defendant by the board to employ agents.
§ CA says that Kapoor may have had actual authority to bind contracts, but this isn't what the judge considered
• An “apparent” or “ostensible” authority, on the other hand, is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted on by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the “apparent” authority, so as to render the principal liable to perform any obligations imposed on him by such contract. To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation. The representation, when acted on by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract.
o The key idea: Principal has given a representation to the 3rd party § The representation as to Kapoor's authority has to come from someone with actual authority
• The commonest form of representation by a principal creating an “apparent” authority of an agent is by conduct, viz., by permitting the agent to act in the management or conduct of the principal’s business. Thus, if in the case of a company the board of directors who have “actual” authority under the memorandum and articles of association to manage the company’s business permit the agent to act in the management or conduct of the company’s business, they thereby represent to all persons dealing with such agents that he has authority to enter on behalf of the corporation into contracts of a kind which an agent authorised to do acts of the kind which he is in fact permitted to do normally enters into in the ordinary course of such business. The making of such a representation is itself an act of management of the company’s business. Prima facie it falls within the “actual” authority of the board of directors, and unless the memorandum or articles of the company either make such a contract ultra vires the company or prohibit the delegation of such authority to the agent, the company is estopped from denying to anyone who has entered into a contract with the agent in reliance on such “apparent” authority that the agent had authority to contract on behalf of the company.
§ If the foregoing analysis of the relevant law is correct, it can be summarised by stating four conditions which must be fulfilled to entitle a contractor to enforce against a company a contract entered into on behalf of the company by an agent who had no actual authority to do so. It must be shown:
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• (a) that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor;
• (b) that such representation was made by a person or persons who had “actual” authority to manage the business of the company either generally or in respect of those matters to which the contract relates;
• (c) that he (the contractor) was induced by such representation to enter into the contract, i.e., that he in fact relied on it; and
• (d) that under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent.
o Goes to the idea of ultra vires, but this is only applicable to special acts corporations § The entity with actual authority is the Board; the Board held out Kapoor as a managing director (who can
enter into these contracts); therefore, Buckhurst is bound § There is a representation not by words, but by conduct
Doiron v Manufacturers Life Insurance Co (ABQB) – Apparent Authority Test in AB; Employment vs Independent Contractor Test
• Facts
o o Mr and Mrs. Doiron (third party, P) are suing Manulife (principal, D) o Mr. Demmers is associated with Manulife (sales of Manulife and other products) o Sale of home in Calgary o Wanted to invest money in the short run to make a return; contacted Demmers asking for a low-risk, high-return
§ Invested in a scam product § The product sold to them was not a Manulife product
o The Doiron's lost everything, including their principal, not just the interest o Sued everyone, with Manulife being the most liquid D o Claimed either vicarious liable as employer or responsible as agent (principal)
• Issue o Was Demmers an ostensible agent of Manulife? o Is Manulife bound and liable as a result?
• Analysis o Employee vs Independent Contractor
§ Test: Whether the person performing is doing so as a person in business or on own account § Consider:
• Level of employer control • Does worker provide own equipment? • Does worker hire his own employees? • Degree of financial risk taken by worker
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• Degree of responsibility for investment and management held by worker • Workers opportunity to profit
§ Application: Independent contractor • Contract stated they were in an independent contractual arrangement • Paid for own employees • Manulife had no control over day to day operations
o Actual authority? § No, contract stated he had no power to enter Manulife into any contractual authority
o Apparent authority? - Freeman Test: § 1) Representation that the agent had authority to enter on behalf of the company into a contract of the kind
sought to be enforced was made to the 3rd party • Representation must be made by principal to person relying upon it (express or implied) • Reasonable person must believe that the agent had authority
o P wasn’t privy to details of middle man and D’s relationship. o Middle man provided them with Manulife business card, to contact middle man they
would have to call Manulife, o Visited him in his office on same floor as Manulife office; office displayed Manulife
promotional material; correspondence printed on Manulife letterhead o These show a representation made by Manulife
§ 2) Representation was made by person or persons who had actual authority to manage the business of the company either generally or in respect of those matters to which the contract relates;
• Any representation created apparent authority must have been made by someone with actual authority to bind principal
o P knew about and encouraged middle man’s actions representing himself as their agent. o Provided them with business cards and other Manulife stuff. o Ran co-op advertising
§ 3) 3rd party was induced by such representation to enter into the contract (i.e. that he relied on it) • Reliance led directly to loss • At time of investing, they relied on impression that they were investing in Manulife product
§ 4) Under its constituting documents the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent
• Holding o Manulife held liable
§ Demmers was found to be an agent of Manulife acting with ostensible authority • Ratio
o Principal is liable for the acts of an agent so long as the agent is acting within the scope of their actual/ostensible authority
• Notes
o Facts § P have sold their house in Calgary, but don't need their money right away, so decide to invest it § Contact Demmers to invest their money; want a no-risk venture
• Had sold Manulife products in the past • Talks about different investment vehicles • Ps reject them, saying that the return wasn't good enough
o SKO: This is unreasonable § In the end, they agree to invest in a company (Devon)
• However, the venture was a fraud, and the Doirons never get their money back § Ps sue everyone, allege Manulife is liable as the Principal in an agency relationship
• Whatever Demmers has done wrong, Manulife is also liable § The Ps assumed that the product was a Manulife product, when it was not
o Issue § What is the nature of Demmers' relationship with Manulife?
o Court § Actual authority?
• Clause 4 of this agreement specifies that compensation is to be primarily by commission, and • Clause 3(b) states:
o The Producer is not authorized to make contracts on behalf of the Principal, or to alter or amend any of the provisions of the Principal’s contracts, or to waive forfeitures or bind the Principal in any way not specifically authorized in writing by the Principal.
• So Demmers has no actual authority
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§ Demmers has some kind of relationship though; it was a non-exclusive relationship as he could sell Manulife products, but also represented other companies' insurance products
• Devon is not a Manulife product § If he's going to be an agent then, it has to be through ostensible authority
• How has Manulife communicated to the outside world that Demmers has ostensible authority? • Ultimately, the representations take a few forms:
o Demmers provided them with a Manulife Financial business card identifying him as a “financial planner”;
o To contact Demmers, the Doirons would call the Manulife office and be transferred directly to his line;
o The Doirons had visited Demmers in his office while he was on the same floor as the Manulife office;
o Demmers’ office displayed Manulife o Promotional materials, and his door had the Manulife logo prominently displayed; o Prior to the Devon investment, correspondence from Demmers was printed on Manulife
letterhead; o Manulife had assigned Demmers to the Doirons when Les Vescy left the company
• These indicia point towards some kind of relationship § It looks like then that the Doiron's thought that Demmers was Manulife's agent; they placed reliance in this § There are a few strikes against the Doirons though
• Just because Demmers looked like a Manulife agent is one thing, but is it fair for the Doiron's to assume that every product is a Manulife product?
o SKO: Is it also a representation that Demmers only sold Manulife products – I don’t necessarily see that
• When the Doiron's received correspondence on the transaction, they saw it wasn't a Manulife product - why didn't they pick up the phone and solve this?
o Court: Yeah, they probably couldn't have done anything so why does it matter? § SKO: It does matter, since they relied on thinking it was Manulife's § Correspondence showed that they didn't purchase a Manulife product - this is
when you would start jumping up and yelling, not doing anything; shows they didn't really care
Doiron v Manufacturers Life Insurance Co (ABCA) – Strong Endorsement of the Freeman Approach; Agrees with the ABQB
• Facts o Manulife appealed the decision that found it liable for the acts of Demmers on the basis that Demmers was acting as an
agent with ostensible authority § Argued that Demmers had ostensible authority, but that he had sold a non-Manulife product, never saying
that it was Manulife's § Manulife claimed that for them to be liable, Demmers as the agent must have specifically represented that the
agreement being made was with the principal, Manulife • Issue
o Did the ABQB err in finding Manulife liable? • Analysis
o Another version of apparent authority test: Apparent authority which negatives the existence of actual authority is merely a form of estoppel… it has been termed agency by estoppel, and you cannot call in aid an estoppel unless you have three ingredients:
§ (i) a representation; § (ii) a reliance on the representation, and § (iii) an alteration of your position resulting from such reliance
o Representation of authority can be express or implied and can be a misrepresentation on the part of an agent o Representation, when acted upon, operates as an estoppel to prevent principal from asserting that they are not bound by
the contract • Holding
o Manulife is liable because Demmers had ostensible authority to enter into contracts on its behalf; it was reasonable for the Doiron's to think that Demmers was acting on behalf of Manulife
o Appeal dismissed • Ratio
o Ostensible authority can be found where there is no explicit representation. § If the principal has made a situation such that is reasonable to infer and rely upon an implied representation
of authority, that is sufficient. • Notes
o Manulife is liable
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o The evidence demonstrates that Demmers provided little oral and no written information regarding the investment before accepting the Doirons’ money. The Doirons did not ask whether the investment was with Manulife. They assumed, wrongly, that Demmers, as a Manulife employee, would follow their instructions and invest their money in accordance therewith. Demmers did not tell the Doirons that Devon was a Manulife product. More importantly, however, he did not tell them that it was not connected to Manulife. Given their previous dealings, the Doirons’ apparent lack of sophistication, and the circumstances surrounding the transaction, the failure of Demmers to inform them that they were not investing with Manulife constitutes a misrepresentation that Demmers was purporting to contract on behalf of Manulife. The trial judge found their belief that they were dealing with Manulife reasonable.
o The trial judge appears to have concluded from all of the surrounding circumstances that what Demmers did was purport to contract on behalf of Manulife. Given the misrepresentation as to who the principal really was and the ostensible authority conveyed by Manulife to Mr. Demmers, his finding that Manulife was bound by virtue of ostensible authority is supportable. We find no palpable and overriding error warranting appellate intervention.
o The trial judge found that Manulife was not vicariously liable in this case. This finding is the subject of a cross-appeal which was filed in the event that the appeal was successful. In the circumstances, we do not find it necessary to comment on the findings of the trial judge regarding vicarious liability. The appeal and the cross appeal are therefore dismissed.
Review of the Authority Cases So Far • A corporation is bound by its agent actual or apparent authority • Comes down to 2 things
o In Panorama § The rogue agent bound his employer to a corporate contract since he had apparent authority because of his
position - company secretary § Board made representation to the world about the rogue's authority through his job title/naming him to his
position o In Freeman
§ Similar situation - Board had actual authority to represent Kapoor's authority § Made representation by permitting Kapoor to function as a managing director
• He therefore had apparent authority to enter into contracts of the type (hiring architects to do corporate work)
§ The leading test (p. 175) is also given here § Doiron - applied the Freeman test
Canadian Laboratory Supplies Ltd v Englehard Industries of Canada – Englehard’s Liability Ends at Certain Date; Laskin Dissent on Never Having Actual Authority to Give the Agent Authority
• Facts
o
o Canlab (Principal; P; victim of Cooks fraud); Englehard (3rd party; D; victim of Cooks fraud) o Cook (sales agent) ordered platinum from Englehard, supposedly for Canlab (his employer) o In ordinary course of business, Canlab would purchase minerals from Englehard, sell product to customers and then resell
scraps to Englehard o Cook arranged to buy on behalf of Canlab and sell to fictitious customer “Giles”, return scraps to Englehard and pockets
the cash
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o 1966: Englehard became concerned that it was being paid late by Canlab. § Englehard’s sales manager, Snook (a purchasing agent), who then redirected his inquiry to Cook
o 1968: Englehard President called Canlab’s VP of operations to inquire and fraud was discovered • Issue
o Could Englehard rely on representations made by Cooks as having the proper authority to act as he did? o Is Englehard liable to Canlab in conversion (converted Canlab’s platinum to its own use)?
§ If so, at what point does its liability end or it is liable for Canlab’s whole loss? • Analysis – liability ends in 1966
o Snook does have actual authority to hold out Cook as having ostensible authority - Snook was the purchasing agent- natural to expect that Englehard’s inquiries regarding payment by Canlab for purchases would be directed in the first instance to Snook
o Division of authority according to function is as necessary as it is commonplace § Some employee must be placed in charge of buying, another of selling, another of financing, and another in
charge of accounting and so on, and each must have the authority necessary to deal responsibly with his counterpart in other trading and government organizations
o Three representations upon which Englehard relied: § 1) Cook implied he had authority in 1962 to make this deal § 2) In 1966, Englehard expressed some concern about late payments – Snook was not able to provide a reason
for the late payments, but referred Englehard to Cook, an agent; § 3) In 1968 Englehard becomes concerned about the situation its senior officer called the VP of Ops of Canlab
directly who referred Englehard to Cook o Indicia of powers and authority of agent
§ 1) Title of individual § 2) Usual course of conduct in that corporation (indoor management rule) § 3) Custom in the field
• Holding o Englehard held liable for conversion until 1966, when Cook was held out as having authorization to purchase by another
employee, after which Cook had ostensible authority to carry out the platinum transactions (Cook did not have ostensible authority before 1966)
• Dissent – liability ends in 1968 o Snook, like Cook, had no managerial authority
§ He was a mere purchasing agent o Liability goes from 1964 and continues until 1968—when Englehard talked with VP o If agent does not act consistently with the role, the 3rd party should be making inquiries o Great difficulty in determining whether Snook’s referral to Englehard was a representation upon which Englehard might
rely o Conclusion: Snook nor Cook were in high enough positions to justify Englehard relying upon a representation made by
him o Englehard liable up until 1968 at which point holding out was made o Without actual authority you are missing part of the Freeman test
• Ratio o Lower level employees can act with apparent authority to indicate what the company is bound to o 3rd parties can rely on representations of lower level employees
§ Don’t need a senior officer to sign off on everything to find apparent authority (BUT SEE LASKIN DISSENT) • Notes
o Parties § Canlab (Principal) is the victim of the rogue's fraud; long-time customer of Englehard § Cook ("Gilles", rogue) is an employee in the sale department
o Facts § Canlab regularly bought platinum from def. Englehard and would regularly sell the scrap back to Englehard § Cook contacted Englehard with the following narrative: Canlab's customer, a scientist named 'Giles', was
conducting some ‘secret experiments’; platinum would be needed for this experiment, but it was all top secret.
§ Englehard agreed to ship platinum ordered by Canlab and to accept scrap returns directly from Giles and make payment for the scrap returns directly to Giles. Hmmm.
§ Cook managed to run the scam for almost seven years at which point he was discovered and interrupted. By this time, Cook had stolen well over a million dollars via platinum scrap ‘reimbursement’ payments.
o Issue § Is Englehard liable to Canlab in conversion (i.e.: it converted Canlab’s platinum to its own use)? If so, at what
point does its liability end or is it liable for Canlab’s whole loss? • Remember, all along this is Canlab's scrapped platinum; Englehard is taking something that belongs
to Canlab o Court
§ Timeline
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• 1962 - Fraud Beings o Cook the crook asks Englehard to send scrap payment directly to ‘Giles’ o Can this representation bind Canlab? (Does Cook have actual authority?)
§ No, since he's just an employee, it's not going to be enough; we need a representation from someone with actual authority
§ Englehard therefore liable in 1962 • 1966 - D, through Mr. McCullogh, makes enquiry of Canlab's Mr. Snook
o Snook was a Canlab purchasing agent; he told McCullogh to take his concerns to Cook ("Talk to Cook")
o Can this representation bind Canlab? (Does Snook have actual authority?) § This is where it ends; cuts off Englehard’s liability 1966 § Cook was said to be the person to see regarding the Englehard complaint,
Cook was approached, and by McCullough’s doing as directed by Cook, the complaint was remedied. How Cook actually brought about the desired result was not to be investigated by Englehard. This, in my view, operates as an affirmative holding out by Canlab through a responsible and appropriate representative, of Cook’s status in connection with the platinum dealings,
• Snook had actual authority to hold out Cook o Dissent – Laskin
§ Snook has no managerial authority - it would be odd to say then that he has actual authority § 1968 is actually when his liability ends - Englehard Pres. (Scott) speaks to Canlab’s VP operations (Fabian)
• The VP obviously has actual authority • Clearly, this representation would bind.
§ I come hence to the crucial question whether Englehard must answer for the whole of the loss suffered by Canlab. Lacourcière J.A. would have cut the loss at October 1966, by reason of the telephone conversation between McCullough of Englehard and one Snook, an employee of Canlab, who directed his inquirer to get in touch with Cook. What militates against this, however appealing it may be as an equitable solution in a situation where Cook duped both his employer and a third party which did business with the employer, is that Snook like Cook had no managerial authority. He was merely a purchasing agent in the purchasing department and there was no evidence of any back-up authority by which he could hold Cook out as having power to compose the difficulty, as raised by Englehard, in settling accounts.
• On what theory does Snook have the actual authority to hold out Cook? • He's just an employee
§ SKO: Agrees with Laskin on Snook not having any actual authority
Agency (Freeman, Doiron) • A. Freeman's requirements regarding ostensible/apparent authority have been approved by the SCC in Canlab and the ABCA in
Doiron. Per Doiron: o The requirements to establish ostensible authority are set out in the leading case of Freeman. They are:
§ a) That a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor;
§ b) That such representation was made by a person or persons who had actual authority to manage the business of the company either generally or in respect of those matters to which the contract relates;
§ c) That the contractor was induced by such representation to enter into the contract (i.e. that he in fact relied upon it); and
§ d) That under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent
• B. How to establish ostensible authority? o Route 1: Representation by virtue of the office/apparently held by the Agent (Panorama/Freeman/Doiron); or o Route 2: Representation as to Agent's authority by a corporate representative with actual authority to make such a
representation. (Canlab)
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Chapter 5 Review
•
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6. CORPORATE GOVERNANCE A. INTRODUCTION Corporate Governance ABCA Statutes of Note
• Whether the company is big or small, there are obligations on the Directors o They are elected by shareholders, and are responsible for the corporation
• Section 101 – Directors o (1) Subject to any unanimous shareholder agreement, the directors shall manage or supervise the management of the
business and affairs of a corporation § Legislative source of Directors' power to manage
• Section 122 – Duty of care of directors and officers o (1) Every director and officer of a corporation in exercising the director’s or officer’s powers and discharging the
director’s or officer’s duties shall § (a) act honestly and in good faith with a view to the best interests of the corporation, and
• Under (a) - Fiduciary duty § (b) exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable
circumstances • Under (b) - Duty of care obligation
o Thus, Directors owe both of these things o Officers are also bound by these duties as well (CFO, CEO, VP, etc.)
Introduction to the Role of the Board of Directors • Per Donald Thain and David Leighton, “any board that is adequately fulfilling its responsibilities, these general requirements are
carried out through five basic tasks. The tasks are: o 1. Appointing and supervising the CEO and other officers
§ This task includes appointing, setting terms of employment, supervising, evaluating, compensating and, if necessary, removing all corporate officers, beginning with the CEO. It also involves approving major organizational changes, and ensuring that adequate plans are in place for management succession.
• The number 1 job is to keep your eye on the CEO; the CEO is the person who can bamboozle you if you are not alert
o 2. Directing and evaluating strategy § Strategic management is the integrated planning and implementation of the major changes needed to
improve corporate performance. The board should oversee an action program based on the purpose, strategy, operations, results, organization, resources and environment of the company. Supervision focuses on keeping management accountable for performance in implementing plans, meeting objectives, competing successfully and satisfying the requirements necessary to merit the continuing support of shareholders and other stakeholders.
o 3. Representing shareholders and maintaining shareholder relations § These tasks include reflecting shareholder concerns to management, reporting to shareholders as legally
required and otherwise communicating to them directly or indirectly through the financial press, analysts and others as to plans and results.
o 4. Protecting and enhancing the company's assets § When major issues arise in management, ownership, investments, acquisitions, divestments or raids, or
insolvency, the board must be fully involved…. o 5. Fulfilling fiduciary and [other] legal requirements
§ The board is responsible for adherence to the laws, regulatory requirements and the preparation and maintenance of necessary minutes, documents, contracts and records."
§ This is what we'll focus on
Principles of Corporate Governance • American Association of CEOs that represent American companies
o Historically, a roundtable would say maximizing shareholder return was the main goal o Now, the long-term value is more important
• Principles o 1. The board approves corporate strategies that are intended to build sustainable long-term value; selects a chief
executive officer (CEO); oversees the CEO and senior management in operating the company’s business, including allocating capital for long-term growth and assessing and managing risks; and sets the “tone at the top” for ethical conduct.
§ Long-term value as the main goal
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o 2. Management develops and implements corporate strategy and operates the company’s business under the board’s oversight, with the goal of producing sustainable long-term value creation.
o 3. Management, under the oversight of the board and its audit committee, produces financial statements that fairly present the company’s financial condition and results of operations and makes the timely disclosures investors need to assess the financial and business soundness and risks of the company.
o 4. The audit committee of the board retains and manages the relationship with the outside auditor, oversees the company’s annual financial statement audit and internal controls over financial reporting, and oversees the company’s risk management and compliance programs.
o 5. The nominating/corporate governance committee of the board plays a leadership role in shaping the corporate governance of the company, strives to build an engaged and diverse board whose composition is appropriate in light of the company’s needs and strategy, and actively conducts succession planning for the board.
§ Diverse board - there are amendments in the present CBCA in terms of diversity o 6. The compensation committee of the board develops an executive compensation philosophy, adopts and oversees the
implementation of compensation policies that fit within its philosophy, designs compensation packages for the CEO and senior management to incentivize the creation of long-term value, and develops meaningful goals for performance-based compensation that support the company’s long term value creation strategy.
o 7. The board and management should engage with long-term shareholders on issues and concerns that are of widespread interest to them and that affect the company’s long-term value creation. Shareholders that engage with the board and management in a manner that may affect corporate decision-making or strategies are encouraged to disclose appropriate identifying information and to assume some accountability for the long-term interests of the company and its shareholders as a whole. As part of this responsibility, shareholders should recognize that the board must continually weigh both short-term and long-term uses of capital when determining how to allocate it in a way that is most beneficial to shareholders and to building long-term value.
o 8. In making decisions, the board may consider the interests of all of the company’s constituencies, including stakeholders such as employees, customers, suppliers and the community in which the company does business, when doing so contributes in a direct and meaningful way to building long-term value creation.
§ We see this approach being taken in BCE • When directors are trying to act in the best interests of the corporation, whose interests are they?
§ The CBCA has been recently amended (s. 122(1.1)) § Creates an extensive list of those stakeholders that the Directors may consider when seeking to act in the best
interest of the corporation • 122(1.1) – Best interests of the corporation
o When acting with a view to the best interests of the corporation under paragraph (1)(a), the directors and officers of the corporation may consider, but are not limited to, the following factors:
§ (a) the interests of • (i) shareholders, • (ii) employees, • (iii) retirees and pensioners, • (iv) creditors, • (v) consumers, and • (vi) governments;
§ (b) the environment; and § (c) the long-term interests of the corporation.
Business Roundtable Statement of the Purpose of a Corporation • States the purpose of a corporation • It's not just to make money, but to deliver value more broadly • Corporation needs to govern in a way that has this broader perspective • It's great that they put this on paper, but what do these CEOs do in their own corporation?
B. DIRECTOR POSITIONS (Dis)Qualifications to Be a Director – s. 105 of the ABCA
• Section 105 of the ABCA - Qualifications of directors o (1) The following persons are disqualified from being a director of a corporation:
§ (a) anyone who is less than 18 years of age; § (b) anyone who
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• (i) is a represented adult as defined in the Adult Guardianship and Trusteeship Act or is the subject of a certificate of incapacity that is in effect under the Public Trustee Act,
• (ii) is a formal patient as defined in the Mental Health Act, • (iii) is the subject of an order under The Mentally Incapacitated Persons Act, RSA 1970 c232,
appointing a committee of the person or estate, or both, or • (iv) has been found to be a person of unsound mind by a court elsewhere than in Alberta;
§ (c) a person who is not an individual; • I.e. Corporations cannot be Directors
§ (d) a person who has the status of bankrupt.
Elections of Directors – s. 106 of the ABCA • Section 106 - Election and appointment of directors
o (1) At the time of sending articles of incorporation, the incorporators shall send to the Registrar a notice of directors in the prescribed form and the Registrar shall file the notice.
o (2) Each director named in the notice referred to in subsection (1) holds office from the issue of the certificate of incorporation until the first meeting of shareholders.
o (3) Subject to subsection (9)(a) and section 107, 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 next annual meeting of shareholders following the election.
§ Directors elected by ordinary resolution
New Diversity Disclosure Provision in the CBCA • Diversity disclosure
o Consistent with global trends, the federal government is aiming to increase diversity on boards of directors and among senior management. The draft CBCA regulations impose diversity disclosure requirements under a "comply-or-explain" model consistent with Canadian securities laws
o However, while Canadian securities laws have been focused solely on the underrepresentation of women, the draft CBCA regulations require disclosure addressing enumerated categories derived from Canada's Employment Equity Act, namely women, visible minorities, aboriginal people and people with disabilities. Also in contrast to securities laws, the draft CBCA regulations do not contemplate any exemption for venture issuers.
• Why have the diversity - 2 reasons: o Social justice o Competitive advantage
An Introduction to Cumulative Voting • Procedure in the CBCA and the ABCA • Purpose of the provision is to give the minority shareholder the chance of naming someone to the Board • *Per Welling, cumulative voting may be authorized by either the statute or the corporate constitution. • *See the rules in s. 107 ABCA: Each shareholder has the right to vote the number of shares she holds multiplied by the number of
directors to be elected. This means that the minority shareholder can concentrate her votes. • Example from the first edition of Welling text:
o (a) A holds 101 shares of X Inc. o (b) B holds 400 shares of X Inc. o (c) There are 4 directors to be elected to the board.
• Simple majority procedure o A casts his votes this way: (Candidates C,D,E,F)
§ (a) C = 101 votes § (b) D = 101 votes § (c) E = 101 votes § (d) F = 101 votes
o B casts his votes this way: § (a) G = 400 votes § (b) H = 400 votes § (c) I = 400 votes § (d) J = 400 votes
o Result: All four of B's favourites are elected. • Cumulative voting procedure
o By a cumulative voting provision in the articles, A has 404 possible votes, while B has 1600 votes. Each can distribute them as he or she pleases. A can choose to concentrate votes in one candidate
o A casts his votes this way: § (a) C = 404 votes
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o B casts his votes this way: § (a) G = 405 votes § (b) H = 405 votes § (c) I = 405 votes § (d) J = only 385 votes left
C. STATUTORY DUTIES OF DIRECTORS AND OFFICERS 1. Introduction to Director’s Fiduciary Duty and Duty of Care and the Business Judgment Rule
A Director’s Duty of Care – Statutory vs Common Law • Section 122(1)(b) - Statutory law
o 122(1) Every director and officer of a corporation in exercising the director’s or officer’s powers and discharging the director’s or officer’s duties shall
§ (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances
• City Equitable case - Common Law o Facts
§ Directors who were incompetent and lazy; didn’t give much time to the company § Company in the meantime was being robbed by the managing director § Liquidator in company looks at situation: The directors should be liable since they didn't do their job
o Court § Ruled against the liquidator - it's a subjective standard
o Notes § Legislature didn't like this and that's why we have it as objective in the statute
• At common law, if you can read financial statements for an example that's good enough • Now you need to be a reasonably prudent person under the statute - get some training in financial
literacy § Note that this isn't standard isn't a “reasonably prudent director”
Peoples Department Stores Inc (Trustee of) v Wise – Fiduciary Duty and Duty of Care; Business Judgment Rule; Professional Defence
• Facts o Wise Stores Inc and Peoples Stores Inc were department stores primarily in Eastern Canada o As competitive pressure increased, Wise expressed an interest in acquiring Peoples which the British Parent Company
(M&S) became receptive to, and a formal share purchase agreement was drawn up and executed § Under the agreement, Wise was to pay M&S the balance of the purchase price over 8 years
• Only then could Peoples merge with Wise § To address inefficiencies in running 2 corporations, directors of Wise adopted a joint-inventory procurement
policy where Peoples would make all purchases from NA suppliers, and Wise would make all purchases from overseas suppliers
• Given the source of inventory, this meant that Peoples took on more debt for Wise than the other way around
o The inventory procurement policy was less than successful, and Peoples and Wise declared bankruptcy § The trustee in bankruptcy brought an action, claiming that the Wise brothers (as directors of Peoples) had
favoured the interests of Wise over Peoples to the detriment of Peoples' creditors, in breach of their duties as directors under s. 122(1) of the CBCA by virtue of the inventory procurement policy
• 122(1) - Duty of care of directors and officers o 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 • Issue
o Did the directors breach their duty under s. 122(1) of the CBCA? • Analysis
o S. 122(1) has encompassed 2 distinct duties on directors and officers: § Statutory fiduciary duty - s. 122(1)(a) § Duty of care - s. 122(1)(b)
o Statutory fiduciary duty - s. 122(1)(a)
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§ Requires acting honestly and in good faith with a view to the best interests of the corporation (subjective motivation focus)
§ Must avoid conflicts of interest with corporation; abusing position for personal gain; maintain confidentiality of information acquired by virtue of position; serve selflessly, honestly and loyally
§ This benefit (director compensation), though paid by the corporation, does not, if reasonable, ordinarily place them in breach of their fiduciary duty
§ The duty owed is highly dependent on the circumstances: • Sometimes they may have to account for corporation profits that they make that do not come at
the corporation's expense, but not always • Often, interests of shareholders and stakeholders are co-extensive with the interests of the
corporation; but if they conflict, the duty owed to the corporation takes priority o It is sometimes legitimate for the board of directors to consider the interests of all
stakeholders (shareholders, employees, creditors, consumers, government, and the environment) when acting in the best interest of the corporation (the duty is not owed to stakeholders, but it can be legitimate to consider interests in determining what is in the best interest of the corporation)
§ No need to read in the interest of creditors into the duty set out in s. 122(1)(a) § In this case
• TJ found no fraud or dishonesty • No fiduciary duty of care owed to the creditors • Directors considered the issues and implemented a policy they hoped would solve them • There is no evidence of a personal interest or improper purpose of the new policy
o Duty of care - s. 122(1)(b) § Imposes a legal obligation upon the directors and officers to be diligent in supervising and managing the
corporation's affairs (objective focus) § Duty of care doesn't provide a cause of action on its own - it must be some other cause of action (i.e. Breach
of contract, etc.) § A duty is owed to creditors (in addition to others depending on the circumstances) § The factual aspects of the circumstances are important, as opposed to subjective motivations
• Takes into account both primary facts and socio-economic considerations • Consider the business judgment rule
o The business judgment rule (applies to both fiduciary duty and the duty of care) – Not liable if: § 1. Acting prudently and on a reasonably informed basis (process); and § 2. Decision is reasonable based on what they knew or ought to have known (reasonable decision)
o Application of the duty of care and business judgment rule: § The implementation was a reasonable business decision made with a view to rectify problems in
circumstances in which no solution may have been possible § Many other factors that led to the loss:
• Peoples was unprofitable at the time of acquisition, retail market was very competitive, no incentive for directors to jeopardize the interests of Peoples in favour of Wise
o S. 123(5) of the CBCA; s. 123(3) ABCA defence: Relying on the report from professional who lends credibility to the statement
§ 123(5) - Defence — good faith • A director has complied with his or her duties under subsection 122(1) if the director relied in good
faith on o (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
o (b) a report of a person whose profession lends credibility to a statement made by the professional person.
§ In this case: • VP Finance (Clement) gave the statement that the directors relied on (had a financial degree) • Clement was not an accountant, not subject to the regulatory overview of the professional
organization and didn't carry independent insurance coverage for professional negligence • Clement was a non-professional; thus, the provisions do not apply because he wasn't a
professional • Holding
o The directors are not guilty; they complied with their fiduciary duty and can rely on the business judgment rule in regard to s. 122(1)(b)
• Ratio o S. 122(1) imposes both a fiduciary duty, and a duty of care on directors and officers o Business Judgment Rule: Directors and officers not liable for reasonable decisions if
§ 1) Acting prudently and on a reasonably informed basis; and § 2) Decision was reasonable based on what they knew or ought to have known
o To rely on s 123(5) CBCA/123(3) ABCA defence, an individual must have been a professional • Notes
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o Facts
§
§ Wise brothers also become directors of Peoples § Due to financial considerations, they couldn't amalgamate the 2 companies until there was payment in full
• This is why they implemented the joint-inventory procurement policy o Wise Stores was to purchase overseas inventory for its stores and bill Peoples o Peoples was to purchase NA inventory and bill Wise
§ Most of the sourcing was in NA, so Peoples was taking on more debt... § In 1995, both Wise Stores and Peoples filed for bankruptcy. § The Trustee in bankruptcy for Peoples brought an action against the Wise Bros as directors of Peoples,
alleging, inter alia, breach of fiduciary duty and breach of duty of care under s. 122 CBCA. The contention was that the Wise Bros favored the interests of Wise Stores Inc. over the interests of Peoples.
• Peoples is taking on all this debt whereas Wise isn't o Issue
§ Have the Wise brothers as directors breached s. 122? o Court
§ This case gives some content as to what s. 122 means § Statutory fiduciary duty under s. 122(1)(a)
• Creditors (liquidator) were saying that the Wise brothers owed a fiduciary duty and that they breached it
o Court: Creditors are not owed a fiduciary duty under s. 122(1)(a), this duty is just to a corporation only
o Directors may owe creditors a fiduciary duty in other circumstances, but not under s. 122(1)(a)
• General statement on the fiduciary duty: The statutory fiduciary duty requires directors and officers to act honestly and in good faith vis-à-vis the corporation. They must respect the trust and confidence that have been reposed in them to manage the assets of the corporation in pursuit of the realization of the objects of the corporation. They must avoid conflicts of interest with the corporation. They must avoid abusing their position to gain personal benefit. They must maintain the confidentiality of information they acquire by virtue of their position. Directors and officers must serve the corporation selflessly, honestly and loyally
• We accept as an accurate statement of law that in determining whether they are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment.
• Here o The Wise brothers didn't have a plan to do screw Peoples, it was an honest attempt to
make efficiencies § The Directors were trying to make Wise and Peoples better corporations, the
plan just didn't work § There thus wasn't a breach of the statutory fiduciary duty
o In our opinion, the trial judge’s determination that there was no fraud or dishonesty in the Wise brothers’ attempts to solve the mounting inventory problems of Peoples and Wise stands in the way of a finding that they breached their fiduciary duty
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o In the absence of evidence of a personal interest or improper purpose in the new policy, and in light of the evidence of a desire to make both Wise and Peoples “better” corporations, we find that the directors did not breach their fiduciary duty under s. 122(1)(a) of the CBCA
o There's no liability since they didn't owe fiduciary duty to the creditors, and they didn't breach their fiduciary duty towards the corporation
§ Duty of care under s. 122(1)(b) • There's no breach of the duty of care under the statute
o Directors won't be liable if they act prudently and on a reasonably informed basis o Directors are protected by something called the business judgment rule
§ Judges should defer to the judgment of the Boards; they shouldn't be second-guessing the Boards
§ We don't want to hold them to a standard of perfection with 20/20 hindsight • Directors and officers will not be held to be in breach of the duty of care under s. 122(1)(b) of the
CBCA if they act prudently and on a reasonably informed basis. The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known. In determining whether directors have acted in a manner that breached the duty of care, it is worth repeating that perfection is not demanded. Courts are ill-suited and should be reluctant to second-guess the application of business expertise to the considerations that are involved in corporate decision making, but they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made.
• Rousseau on the BJR - this is the test in Canada o Without referring to these prior versions, the court proposed a new business judgment
rule following which tribunals should refrain from finding directors liable for "bad" business decisions where two conditions are met:
§ 1. The first concerns the decision-making process and requires that directors acted prudently and on a reasonably informed basis – AKA, good process
§ 2. The second involves an examination into the reasonableness of the decision made: "The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known."
o This BJR which consists in a 2-pronged test mimics the enhanced scrutiny test developed in Delaware
• The identity of the beneficiary of the duty of care is much more open-ended, and it appears obvious that it must include creditors.
o Under the duty of care provision, there is a duty owed to the creditors here; it's not limited to the corporation like the fiduciary duty
o There's no express attempt in the words of 122(1)(b) to limit your duty to the corporation, as compared to 122(1)(a) - it's much more open-ended
o A breach against creditors does not found a cause of action for the creditors though - there's no cause of action for breach of statutory duty
§ Breach of the statute is simply an aspect* of the common law of negligence, a whole analysis you need to go through - Summary:
• Step 1: You have to show there's a duty of care • Step 2: Did the D breach the standard of care?
o *Section 122(1)(b) constitutes/supplies the standard of care
• Step 3: Did the P sustain damage? • Step 4: Was the damages caused, in fact and in law, by the D's
breach? § Potential defence?
• Section 123(3) - Dissent by Director o (3) A director is not liable under section 118, and has complied with the director’s duties
under section 122, if the director exercises the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances, including reliance in good faith on
o (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 to reflect fairly the financial condition of the corporation, or
o (b) an opinion or report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by that person
• Problem: The person they relied on wasn't a professional, so they couldn't use this defence o Holding
§ No, they did not breach s. 122
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• They did find there was a duty of care owed to the creditors, but didn't do anything in the judgment to that point; there was no breach of the standard of care due to the BJR though
Transportaction (a Follow-up on Peoples) and Livent Test for Negligence • Transportaction Lease Systems Inc v Weaver
o [issue: does creditor have a good cause of action against the corporate debtor’s VP of Finance under s. 122 of the ABCA?]
o Negligence - Breach of the Statutory and Fiduciary Duties under s. 122 of the ABCA § Counsel has referred extensively to the Supreme Court of Canada case of Peoples as supporting an action for a
breach of the statutory duty or a breach of fiduciary duty under the A.B.C.A…. § The Peoples case dealt extensively with s. 122 of the C.B.C.A., the wording of which is the same as s. 122 of
the A.B.C.A. Peoples was an action originating in the Province of Quebec and thus involved the Quebec Civil Code provisions. In that case, a trustee in bankruptcy represented the interests of a number of creditors directly against the directors of bankrupt companies. The creditors in this case did not bring a derivative action or an oppression remedy application under the CBCA. Rather, they sued the directors for alleged breach of duties imposed by s. 122(1) of the C.B.C.A….
§ The Court then went on to deal with s. 122(1) of the C.B.C.A. which is the same as s. 122(1) of the A.B.C.A. and reads:
• 122(1) Every director and officer of a corporation in exercising the director's or officer's powers and discharging the director's or officer's duties shall
o (a) act honestly and in good faith with a view to the best interests of the corporation, and
o (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
§ The Court characterized the duty in s. 122(1)(a) as a "statutory fiduciary duty" and after an extensive discussion concluded that creditors and other "stakeholders" cannot avail themselves of the statutory fiduciary duty so as to sue directors for failing to take care of their interests. The Court pointed out that creditors have other means at their disposal within the C.B.C.A., namely the oppression remedy which had been described as "the broadest, most comprehensive and most open-ended shareholder remedy in the common law world". The Court pointed out that the oppression remedy applies equally to creditors and went on to say
• In light of the availability both of the oppression remedy and of an action based on the duty of care, which will be discussed below, stakeholders have viable remedies at their disposal.
§ The Court in Peoples then turned its attention to s. 122(1)(b) or, as they had described it, the "duty of care" provision. Again, before embarking upon the discussion respecting this subsection, the Court said:
• As mentioned above, the CBCA does not provide for a direct remedy for creditors against directors for breach of their duties and the C.C.Q. is used as suppletive law.
§ The Court pointed out that unlike s. 122(1)(a), the duty of care in s. 122(1)(b) "does not specifically refer to an identifiable party as a beneficiary of the duty" and that the identity of the beneficiary of the duty of care includes a creditor. This enabled the Court to find that this conclusion was consistent with the civil law interpretation of the wording of the Civil Code section in question. The Court held that the Civil Code section did not specify the standard of conduct but rather incorporated s. 122(1)(b) of the C.B.C.A. Therefore, s. 122(1)(b) was used to define the duty owed under the Civil Code section in determining whether or not the directors in that case could be held liable.
§ In Peoples, this duty of care formed the basis of the plaintiffs' action under the Quebec Civil Code. I do not read this portion of the judgment in Peoples as detracting from the clear statements earlier made that a stakeholder, including a creditor, has no direct action under the C.B.C.A. and therefore the A.B.C.A. against a director or "officer" of the corporation other than a possible remedy under s. 242 as earlier discussed.
§ Thus, the alleged breach of the duty of care as contemplated by s. 122(1)(b) does not give the Plaintiff a direct action under the A.B.C.A., but may constitute the standard of conduct owed by directors and "officers" to creditors at common law in an action based upon the tort of negligence if the elements of that tort can be made out. The Court in Peoples stated:
• It is clear that s. 122(1)(b) requires more of directors and officers than the traditional common law duty of care outlined in, for example, Re City Equitable Fire Insurance
• To say that the standard is objective makes it clear that the factual aspects of the circumstances surrounding the actions of the director or officer are important in the case of the s. 122(1)(b) duty of care, as opposed to the subjective motivation of the director or officer, which is the central focus of the statutory fiduciary duty of s. 122(1)(a) of the CBCA.
• Basically, creditors can argue they're owed a duty of care under s. 122, but they have to establish all the steps in negligence
o If you can show there was a duty of care owed, then you have to look at the standard of care
§ It may also be the standard of conduct which a Court will apply when entertaining an application under s. 242(2)(b) of the A.B.C.A.
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§ Notwithstanding that s. 122(1)(b) of the A.B.C.A. may set out the standard of care owed by a director or "officer" to a corporation's creditors, it may still be that following the common law analysis set out in Anns, as modified by the SCC in Cooper, that there may be factors which negate such a duty of care as contemplated by Lord Wilberforce in Anns.
• Per Livent: “In a successful negligence action, a plaintiff must demonstrate that (1) the defendant owed him or her a duty of care; (2) the defendant’s behaviour breached the standard of care; (3) the plaintiff sustained damage; and (4) the damage was caused, in fact and in law, by the defendant’s breach.”
• Since Donoghue, courts have continued to refine the test for whether a duty of care is owed. As formulated by the Supreme Court of Canada, a court must first ask whether the case at bar presents a novel situation or not. If the case is comparable to an already-decided case in which a duty of care was recognized, the second stage of the duty enquiry can generally be skipped. If the case at issue is novel, then both stages must be undertaken. As Livent states: “If a relationship falls within a previously established category, or is analogous to one, then the requisite close and direct relationship is shown. So long, then, as a risk of reasonably foreseeable injury can also be shown — or has already been shown through an analogous precedent — the first stage of the Anns/Cooper framework is complete, and a duty of care may be identified”
• Test o Step 1: Does the defendant owe the plaintiff a duty of care?
§ Stage 1: Is there a prima facie duty of care? • This stage involves two questions:
o Reasonable foreseeability: was an injury to the plaintiff a reasonably foreseeable consequence of the defendant’s negligence? AND
o Proximity: Is there a relationship of sufficient proximity between the parties such that it would be “just and fair having regard to that relationship to impose a duty of care in law”
• If the answer to both questions is yes, proceed to Stage 2. o Note: You may reasonably foresee something happening, but remember you also need
the proximity aspect § E.g SKO example with random person walking icy steps and guaranteeing
someone will slip going up them (no proximity so not liable § Stage 2: Are there “residual policy considerations” outside the relationship of the parties that may negate the
imposition of a duty of care • What does this entail? Per SCC: “In Cooper, this Court identified factors which are external to the
relationship between the parties, including (1) whether the law already provides a remedy; (2) whether recognition of the duty of care creates “the spectre of unlimited liability to an unlimited class”; and (3) whether there are “other reasons of broad policy that suggest that the duty of care should not be recognized”. In this way, the residual policy inquiry is a normative inquiry. It asks whether it would be better, for reasons relating to legal or doctrinal order, or reasons arising from other societal concerns, not to recognize a duty of care in a given case.”
o Step 2: Did the defendant breach the standard of care? § In the context of Peoples and related cases, the standard of care for directors and officers is supplied by s.
122(1)(b): Did the defendant fail to show the care, diligence, and skill of the reasonably prudent person? o Step 3: Did the plaintiff sustain damage? o Step 4: Was the damages caused, in fact and in law, by the defendant’s breach?
§ While the legal test for in-fact causation is sometimes debated, courts generally ask the following question: Would the harm not have occurred but for the defendant’s actions?
§ Cause in law goes to remoteness. At this point in the test for negligence, a court asks, “Even if there is an obligation to take reasonable care and it was breached, how far will the legal liability of the defendant stretch?”. More specifically, Livent states that remoteness examines whether the actual harm suffered was “too unrelated to the wrongful conduct to hold the defendant fairly liable”. The idea is that there must be some limit on the defendant’s responsibility for the consequences of his negligence
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Other Causes of Actions or Alternatives That Could Have Been in Peoples – Derivative Action and Oppression
•
• Other alternatives? o S. 240 ABCA Derivative action: Creditors seek to bring an action on behalf of Peoples for a wrong done to the
corporation. (Not mentioned by SCC) § If the officers or directors had breached their fiduciary duty or duty of care to the corporation, a creditor could
bring an action on behalf of the corporation § 240 – Commencing derivative action
• (1) Subject to subsection (2), a complainant may apply to the Court for permission to o (a) bring an action in the name and on behalf of a corporation or any of its subsidiaries,
or o (b) intervene in an action to which a corporation or any of its subsidiaries is a party, for
the purpose of prosecuting, defending or discontinuing the action on behalf of the corporation or subsidiary
• (2) No permission may be granted under subsection (1) unless the Court is satisfied that o (a) the complainant has given reasonable notice to the directors of the corporation or its
subsidiary of the complainant’s intention to apply to the Court under subsection (1) if the directors of the corporation or its subsidiary do not bring, diligently prosecute, defend or discontinue the action,
o (b) the complainant is acting in good faith, and o (c) it appears to be in the interests of the corporation or its subsidiary that the action be
brought, prosecuted, defended or discontinued. • (3) Notwithstanding subsection (2), when all the directors of the corporation or its subsidiary have
been named as defendants, notice to the directors under subsection (2)(a) of the complainant’s intention to apply to the Court is not required.
o S. 241 of the CBCA/s. 242 ABCA Oppression: Creditors sue the Ds/corp for conduct that is oppressive, unfairly prejudicial or unfairly disregards interests of creditors
§ Argument is based on notion that creditors have a reasonable expectation that Wise Stores and Peoples would share debt exposure more equitably, as mentioned by SCC.
§ SKO not sure why they didn't bring this action in Peoples; probably still would've lost though
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§ 242 – Relief by Court on the ground of oppression or unfairness • (1) A complainant may apply to the 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 o (a) any act or omission of the corporation or any of its affiliates effects a result, o (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 o (c) the powers of the directors of the corporation or any of its affiliates are or have been
exercised in a manner
o that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the Court may make an order to rectify the matters complained of.
BCE Inc v 1979 Debentureholders – Fiduciary Duty to a Corporation; Companion Case to Peoples • Facts
o A group of purchasers (headed by ON Teachers’ Pension Plan) proposed a leveraged buy-out of all the shares of BCE § Part of the deal meant that Bell Canada (subsidiary of BCE) would be liable for a substantial amount of new
debt ($30B) o A minority of Bell’s debentureholders resisted because, they contend, Bell’s increased liability would have the effect of
downgrading the value of their debentures (by 20%) while conferring a benefit on the shareholders of BCE by way of a premium (of 40%)
o Before it could be implemented, the buy-out first had to be approved by the court as “fair and reasonable” under s. 192 of the CBCA
o Debentureholders brought an oppression action (transaction amounted to oppression) under s. 241 of the CBCA, and also challenge the approval of the plan of arrangement under s. 192 as not being “fair and reasonable”
• Issue o What remedies are available to the creditors? o What rights and obligations are found in the CBCA?
• Analysis o Rights and obligations - s. 122(1)(a) - Fiduciary duty
§ Often, interests of shareholders and stakeholders are co-extensive with the interests of the corporation (must look at the long-term interests of the corporation); but if they conflict, the director's duty is to the corporation
§ Minimum duty: To ensure that the corporation meets its statutory obligations § The Business Judgment Rule gives deference to a business decision, so long as it lies within the range of
reasonable alternatives § Stakeholders cannot enforce this, so you must look at remedies...
o Remedies for the stakeholders (creditors) § Derivative action s. 239 CBCA/s. 240 ABCA - allows stakeholders to enforce corporations’ rights or director’s
duty to corporation when directors are unwilling to do so • Focus is on enforcement of a right
§ Civil action for breach of duty • Not grounded in s. 122(1)(b), but can inform the standard that should be reasonably expected • Claim must be grounded in law of tort and contract
§ Oppression, s. 241 CBCA/s. 242 ABCA - this is the one they went with • Focus is on harm to the legal and equitable interests of stakeholder affected by oppressive acts of
corporation or director • Available to wide range of stakeholders
§ [Arrangement, s. 192 CBCA/s. 191 ABCA: Not a remedy per se, but where corporations seek to effect fundamental changes to a corporation that affects stakeholders’ rights, court must be satisfied that:
• (i) Statutory procedures have been met; • (ii) Application has been put forth in good faith; and • (iii) Arrangement is fair and reasonable
o Burden upon the corporation to establish these elements or else it will not be allowed to go forward]
o In this case § The directors faced competing interests, and might not have a choice but to take the course of action that was
in the best interest of the corporation, but benefited some shareholders at the expense of the debentureholders (i.e. there was no better offer on the table)
§ All of the options involved taking on debt; no matter what the Board chose, it wasn't going to end well for the debentureholders
• Holding o Debentureholders failed to establish grounds to have the arrangement reversed under ss. 241 or 192 of the CBCA
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§ BCE did nothing wrong just because some shareholders benefitted while other stakeholders stood to lose from the transaction
o Appeal allowed, the decision of the CA set aside, and the TJ's approval of the plan of arrangement is affirmed • Ratio
o How a stakeholder can make a claim against directors § Step 1: Establish that you are owed duty of care (common law) § Step 2: Standard of care established in s. 122(1)(b) of the CBCA - show there is a breach
o Four remedies are available to stakeholders: § Derivative action (s. 239) § Civil action for breach of duty (founded in tort or contract, s. 122(1)(b)); § Oppression (s. 241) § Arrangement (s. 192)
o If the interests of some shareholders/stakeholder’s conflict with others, the fiduciary duty is to corporation. • Notes
o Facts
§ § A group of purchasers (headed by Ontario Teachers’ Pension Plan) proposed a leveraged buy-out of all the
shares of BCE Inc. (Canada’s largest telecommunications corporation). § Bell Canada, a wholly owned subsidiary of BCE, to guarantee $30 billion of the debt BCE would incur to
support the purchase. § Bell’s debenture holders resisted because, they contend, Bell’s increased liability would have the effect of
downgrading the value of their debentures (by 20%) while conferring a benefit on the shareholders of BCE by way of a premium (of 40%).
§ Before it could be implemented, the buy-out first had to be approved by the court as “fair and reasonable” under s. 192 of the CBCA.
• Section not important for this course. § Debenture holders brought an oppression action under CBCA (s. 241) and challenged the approval of the plan
of arrangement under s. 192 as not being “fair and reasonable" o Court
§ Affirms some points from Peoples • Emphasizes that Directors have to act in the best interests of the corporation, and that you need to
look at a variety of stakeholders: o In considering what is in the best interests of the corporation, directors may look to the
interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions.
§ Also says that s. 122(1)(b) doesn't found a cause of action - need to go through negligence analysis § What is a share? Court gives a definition:
• An essential component of a corporation is its capital stock, which is divided into fractional parts, the shares/ While the corporation is ongoing, shares confer no right to its underlying assets
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• A share “is not an isolated piece of property, but a ‘bundle of inter-related rights and liabilities”. These rights include the right to a proportionate part of the assets of the corporation upon winding-up and the right to oversee the management of the corporation by its board of directors by way of votes at shareholder meetings.
§ Options for the debentureholders • Debentureholders could bring a derivative action under s. 240 • They could proceed by way of breach of duty of care under s. 122(1)(b)
o This didn't happen • Proceed by way of an oppression action under s. 242 – what they did
o Debentureholders had a reasonable expectation that the directors would consider the value of their debenture and that they would choose a deal that maintained the investment grade of those debentures
§ In the end, the debentureholders lost their oppression action • No matter what deal they chose, any of the 3 competing bids would require Bell Canada to take on
more debt
Peoples and BCE Summary on s. 122
•
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Amendments to the CBCA Regarding s. 122: Bill C-97 – Codifying What Peoples and BCE Said on Who’s Included in Considering the Best Interests of the Corporation
• Amongst other content, Bill C-97 amends s. 122 of the CBCA in order to codify BCE as follows: o 41 Section 122 of the Canada Business Corporations Act is amended by adding the following after subsection (1):
§ Best interests of the corporation • (1.1) When acting with a view to the best interests of the corporation under paragraph (1)(a), the
directors and officers of the corporation may consider, but are not limited to, the following factors: o (a) the interests of
§ (i) shareholders, § (ii) employees, § (iii) retirees and pensioners, § (iv) creditors, § (v) consumers, and § (vi) governments;
o (b) the environment; and o (c) the long-term interests of the corporation
• This codifies Peoples and BCE, and therefore makes them statutory law
Smith v Van Gorkom – Breaching Duty of Care to the Corporation; Example of a Horrible Process; Not Binding in AB Since This is in Delaware; Presumption of the BJR
• Facts o Trans Union was a publicly traded company with large cash flow, but had difficulty generating sufficient taxable income
to offset large investment of tax credits o Van Gorkom, TU's Chair and CEO, proposed to senior management a leveraged buy-out as a strategic alternative to
selling the company § Cash out merger: A merger in which the acquiring company (New T) buys the outstanding shares or stock of
the target company (TU), including those held by dissenting shareholders for cash, thereby "cashing out" the shares or stock of the target company
§ Leveraged buy-out: Method of purchasing stocks of a corporation by management or outside investors, with financing consisting primarily of funds borrowed from investment bankers
o Pritzker, a corporate takeover specialist and acquaintance of Van Gorkom's, made an offer § CFO said selling the shares between $50-60 would be reasonable § CEO Van Gorkom indicated $55 was the offer
o The Board of Directors approved the proposed merger agreement based primarily on Van Gorkom's oral representations (never explained how he came up with the share price of $55)
§ What did the Board rely on? • A 20 minute presentation by Van Gorkom • Corporate lawyer told the Board they could be sued for rejecting the offer • TU shares were trading at $38/share
o Class action brought by the shareholders of TU seeking rescission of the cash-out merger of TU into D company New T Company (or damages in the alternative)
§ The shareholders claimed the "cash-out" merger deal should be set aside § They either wanted the deal to be undone, or the individual D's liable to shareholders for selling shares at too
low a price o Lower Court
§ Granted judgment for the D directors based on 2 findings: • 1) Board of Directors acted in an informed manner so they were protected by the BJR • 2) The shareholder vote approving the merger should not be set aside because they were fairly
informed • Issue
o Did the Board conduct itself competently, with the care of a reasonably diligent person? • Analysis
o The BJR is a procedural rule not a substantive rule - low threshold to examine the business decision o In making a business decision, the directors of a corporation must (the BJR is a presumption of these):
§ 1. Act on an informed basis § 2. In good faith § 3. Honest belief that the actions taken were in the best interests of the company
o In the US, there is a presumption that the Board acted reasonably § Not the case in Canada
o The determination of whether judgment is valid turns on whether directors informed themselves prior to making the decision of all material information reasonably available to them
§ No protection for directors who made "an unintelligent or unadvised judgment" o In this case, the directors:
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§ 1. Did not adequately inform themselves as to Van Gorkom's role in forcing the "sale" of the Company and in establishing the per share purchase price
§ 2. Were uninformed as to the intrinsic value of the Company and could have taken more steps § 3. Given these circumstances, at a minimum, were grossly negligent in approving the sale after just 2 hours'
consideration, without prior notice, and without the exigency of a crisis or emergency o What about the price offered being above the stock price?
§ Corporate officers complained that the price did not reflect the real worth of the company - there was no other basis to decide if $55 was the best offer
• There was no professional valuation • Holding
o Reversed decision; judgment in favour of the plaintiffs for fair value of the stockholdings § Both rulings of the Court of Chancery were clearly erroneous § The Trial Court committed a reversible error in applying the BJR § All 10 directors held jointly and severally liable for $23.5M
• Dissent o Requiring directors to "inform themselves" is a farce - you could just pretend to meet for 5 days just to pass the law o The law is correct, just improperly applied to the facts
§ These men knew the company very well and were more than well-qualified to make on the spot, informed business judgments concerning the affairs of TU, including a sale
• Ratio o A Board of directors in Delaware must act in an informed manner to avail itself of protection from liability provided by
the BJR; unlike in Canada, there is a presumption that the business judgment of Board is informed • Notes
o Decision out of Delaware, so not binding in AB o Still a good example of showing what the Court thinks is negligence o Facts
§ § Class action brought by disgruntled shareholders of TU; what they want is the merger deal set aside or
damages § In August 1980, the Board of TU thought they should sell for certain tax credit benefits
• CFO, who reports to the Board, says that a buyout of TU was possible at $50-$60 a share § The CEO Van Gorkom indicates $55 would be a good number
• Just went with the middle of the suggestion range • The Board approved this proposal
§ There had been previous meetings on what to do • September 20: Twenty-minute oral presentation from Van Gorkom • Corporate lawyer said they could be sued if they don't accept the offer
o They also could be sued either way though, which is what happened... • Came to a decision in about 2 hours to approve it
§ On the Board side of things, TU shares were trading at $38/share o Even though $55 is more, this doesn't mean that this was a good valuation o It's not that it's more, but how much more should it be
§ Lower Court • Chancellor rules that this deal is safe based on the BJR; which is presumed in the USA
o Under Delaware law, the business judgment rule is the offspring of the fundamental principle, that the business and affairs of a Delaware corporation are managed by or under its board of directors. The business judgment rule exists to protect and pro-mote the full and free exercise of the managerial power granted to Delaware directors. The rule itself “is a presumption that in making a business decision, the directors of a
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corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” Thus, the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one
• Is this presumption in Canada? o SKO: Doesn’t think so o Ultimately, if it were, the court in Peoples would have said it was a presumption, but
they didn't o Therefore, there likely isn't a presumption in Canada o Regardless, it's not going to protect Boards who have failed to protect themselves
o Issue § What due diligence did the Board do when it recommended this number?
o Court § The Board didn't inform themselves of Van Gorkom's role § There was no valuation study of where this number came from § They weren't informed as to the intrinsic value of the Company
• There were people they could have hired (accountants) who could have given them a real valuation of that company
§ The Board was grossly negligent in approving the sale in basically 2 hours • This isn't enough time
§ No summary of the merger, no documents from the meetings • This is relevant to s. 123(5) defence (which has an equivalent statute in Delaware): If you rely on
reports of experts, this could be a defence; is that possible here? o Since there were no reports, you cannot rely on this defence o All there had been was Van Gorkom's oral presentation
§ The experience of the Board doesn't really matter • You're only as good as your last deal
§ On the lawyer saying the Board would be sued if they didn't accept the offer: Not a good argument • They were sued for accepting the argument anyways
o Holding § The individual directors were therefore grossly negligent § Jointly and several liability for $23.5M
• The Director insurance only covered $10M, so there was $13.5M o Interesting to note that Pritzker ended up bailing them out
o Dissent § Very upset about what's happened with how the Majority is reading the facts
• The majority opinion reads like an advocate’s closing address to a hostile jury. And I say that not lightly.
§ The people on this Board are very business-savvy • These Directors weren't born yesterday and won't be taken as naïve or taken advantage of by
someone like Van Gorkom o Bayless Manning on the Delaware Court in Trans Union
§ Exploded a bomb...Stated minimally, the court there pierced the business judgment rule and imposed individual liability on independent (even eminent) outside directors of Trans Union because (roughly) the court thought that they had not been careful enough and had not enquired enough…The corporate bar generally views the decision as atrocious.
2. Fiduciary Duties
(a) Introduction Introduction to the Breach of Fiduciary Duty
• Statement of law: Due to their fiduciary obligations, Directors and officers must avoid a conflict between duty [to the corporation] and [self-] interest.
• Classic examples o 1. Taking Corporate Opportunity
§ Corporation might have a business opportunity, and belongs to them through a certain test § A Director can't take that opportunity for themselves; avoid self-interest
o 2. Self-Dealing § You are on both sides of a transaction § Director will be liable if they have an interest on both sides
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§ Prohibited by common law § E.g. Yacht transaction
• Facts o Director XYZ Ltd acts in his personal capacity to sell his yacht to XYZ Ltd o Director of XYZ Ltd acts in his official capacity as director of the corporate purchaser,
XYZ Ltd • The Director is present in a personal capacity, and professional capacity as acting on behalf of the
purchaser • Inherent conflict
o 3. Competing Director § Directors are entrusted to not be on a competing enterprise § Would only sit on the Board of one, not both
o 4. Proper Purpose § As a fiduciary, the Director can only use his power for a proper purpose
(b) Taking Corporate Opportunities Cook v Deeks – Breach of Fiduciary Duty Can Be Established Where They Take Corporate Opportunity
• Facts
o
o 3 Directors wanted to exclude Cook and obtain a contract in their own name to the exclusion of the company § They pressed CPR not to deal with Toronto Construction and instead to deal with their new company (guise of
a new company) § Contract obtained under circumstances amounting to a breach of trust by the Directors
o The Directors voted afterwards declaring the company had no interest in the contract o Cook brought an action on behalf of the shareholders seeking declaration that the benefit received by the Ds was held in
trust for the company § They obtained contracts by accelerating work on expiring contracts with CPR, so that the individuals could get
the next contract § Secretly negotiated their contract so the company would not get it
• Issue o Have the D Directors appropriated a corporate opportunity? o Did they breach their duty?
• Analysis o Directors "who assume the complete control of a company's business must remember that they are not at liberty to
sacrifice the interests which they are bound to protect...and divert in their own favour business which should properly belong to the company they represent"
o But what about the vote saying the corporation wasn't interested? § Fraud on minority: Shareholders directly or indirectly appropriated an advantage that belongs to the
corporation § Therefore, ratification is not valid when directors take corporate opportunities (taking something that
belongs to the corporation and making a present to themselves of it) o Remedy
§ Accounting for profits • An action for equitable relief against a person in a fiduciary relationship to recover profits taken in
breach of the relationship § Disgorgement
• The act of giving something up (such as profits illegally obtained) on demand or by legal compulsion § Constructive trust
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• A trust imposed by a court on equitable grounds against one who has obtained property by wrongdoing, thereby preventing the wrongful holder from being unjustly enriched
• Holding o The D's guilty of breach of duty and must be regarded as holding it on behalf of the company o The new company must turn over the profits to the old company
• Ratio o Directors can’t pursue interests of their own at expense of the corporation. o Subsequent ratification by a vote of shareholders will not validate breach of this fiduciary duty – fraud on the minority o Directors must disclose their interest and receive proper approval from the Board (not in fraud of the minority) in order
to take a maturing corporate opportunity. • Notes
o Facts § Cook is a shareholder in Toronto Construction
• Seems like Cook is unpopular with his business associates o The 3 others found him unsatisfactory
§ Toronto Construction had a contract with CPR to provide services • 3 D's said let’s work really hard to impress CPR to get another contract from them; however, when
we do that contract will go to another new corporation: Our corporation § Cook heard about this deal, and sued on his behalf
o Issue: Have the D Directors appropriated a corporate opportunity o Court
§ It is quite right to point out the importance of avoiding the establishment of rules as to directors’ duties which would impose upon them burdens so heavy and responsibilities so great that men of good position would hesitate to accept the office. But, on the other hand, men who assume the complete control of a company’s business must remember that they are not at liberty to sacrifice the interests which they are bound to protect
§ If, as their Lordships find on the facts, the contract in question was entered into under such circumstances that the directors could not retain the benefit of it for themselves, then it belonged in equity to the company and ought to have been dealt with as an asset of the company. Even supposing it be not ultra vires of a company to make a present to its directors, it appears quite certain that directors holding a majority of votes would not be permitted to make a present to themselves. This would be to allow a majority to oppress the minority
• Let's bring it to a vote within the company o There was a clear majority in favour of the deal (75%...) o Usually majority rule is valid, unless there's oppression
§ Here, there is oppression • Majority shareholders cannot appropriate to themselves money
that belongs to the corporation § Ordered all the new benefits the majority shareholders got to go back to Toronto Shareholders
Canadian Aero Service Ltd v O’Malley – Taking Corporate Opportunity; Key Consideration is Fairness • Facts
o Claim by Canadian Aero (P, appellant) that the Ds had improperly taken the fruits of a corporate opportunity in which Canadian Aero had a prior and continuing interest
§ Allegation against the Ds O'Malley and Zarzycki was that while the Directors or officers of Canadian Aero they had devoted effort and planning in respect of the particular corporate opportunity as representatives of Canadian Aero, but had subsequently wrongfully taken the benefit thereof in breach of a fiduciary duty to Canadian Aero
§ Defendant W, who had been the director of Canadian Aero, but never an officer, was brought into the action as associate of other individual Ds in an alleged scheme to deprive Canadian Aero of the corporate opportunity which it had developing through O and Z
§ And, D Terra Surveys Ltd (T) was joined as the vehicle through which the individual Ds in fact obtained the benefit of which Canadian Aero had been negotiating
o Essentially: § O an Z resigned from Canadian Aero and incorporate a new company (Terra Surveys Ltd), and then
immediately took over a contract that Canadian Aero had been pursuing for years (under the direction of O and Z)
§ Cultivated opportunity while working at Canadian Aero, then started a new company to take that opportunity • Issue
o What is the relationship between the D and the P? o What duties do the D owe to the P? o Has there been a breach of duty by taking corporate opportunity? o What is liability for breach of duty?
• Analysis
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o Relationship § It doesn't matter if they were properly appointed as Directors of Canadian Aero of if they did or did not act as
Directors § They were in top/senior management (President and Executive VP) and therefore owed a fiduciary duty § Although they were subject to the supervision of officers of the controlling company, their position as senior
officers of the subsidiary charged them with initiatives and responsibilities far removed from servant o Duty: Loyalty, good faith, and avoidance of conflict of duty and self-interest à "strict application"
§ Director or senior officer is precluded from obtaining for himself, either secretly or without the approval of the company, any property or business advantage belonging to the company or for which it has been negotiating
§ This extends even after they resigned, where: • 1) Resignation may be said to have been prompted or influenced by the desire to acquire it for
himself; or • 2) Position with the company that led him to acquire it
o Has the duty been breached by taking? § It does not matter that the project had varied in some details when it became subject of invited proposals § Does this opportunity in fairness apply to the corporation? Factors (non-exhaustive):
• 1) Position or office held, • 2) The nature of the corporate opportunity, • 3) Its ripeness, its specificness, and the director's or managerial officer's relation to it, • 4) The amount of knowledge possessed, • 5) The circumstances in which it was obtained and whether it was special or private, • 6) The factor of time in the continuation of fiduciary duty where the alleged breach occurs after
termination of the relationship with the company, o Unfair where:
§ 1) Resignation prompted/influenced by wish to acquire opportunity; § 2) It was his position rather than fresh initiative that led him to the
opportunity which he later acquired • 7) The circumstances under which the relationship was terminated (i.e. retirement or resignation
or discharge) o Other situations where they may have to disgorge
§ Reaping of profits by person at the company's expense while they're director § Liability has been found where the company has failed to obtain a business contract and the Director left the
company to obtain it for himself o Remedy
§ Recovery does not depend on proof that without the Director's actions the corporation would have obtained the opportunity
§ You choose a remedy from: • Accounting for profits: What the D earned; relief to recover profits taken in breach of the fiduciary
duty • Disgorgement based on unjust enrichment: Giving back something that was illegally obtained • Loss of profits: What the P loss
• Holding o The Ds are liable for breach of duty by taking a corporate opportunity o Appeal allowed against all Ds except W o O and Z held liable; Canadian Aero awarded $125,000 in damages, equal to the value of the contract lost
• Ratio o Corporate opportunity doctrine: Precludes a fiduciary from obtaining for themselves, either secretly or without the
approval of the company, any property or business advantage either belonging to the company or has been negotiated for, especially if this person is involved in those negotiations
o The test for taking a corporate opportunity is as follows: Does this opportunity in fairness belong to the corporation? Consider and apply the below factors:
§ 1) Position or office held, § 2) The nature of the corporate opportunity, § 3) Its ripeness, its specificity, and the director's or managerial officer's relation to it, § 4) The amount of knowledge possessed, § 5) The circumstances in which it was obtained and whether it was special or private, § 6) The factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of
the relationship with the company • Unfair where:
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o 1) Resignation prompted/influenced by wish to acquire opportunity; o 2) It was his position rather than fresh initiative that led him to the opportunity which
he later acquired § 7) The circumstances under which the relationship was terminated (i.e. retirement or resignation or discharge)
o A fiduciary duty is also owed by officers in addition to directors o A fiduciary duty survives post-resignation
• Notes
o Leading decision o Facts
§
§ CanAero Service Ltd • O and Z are getting ready to bid on a contract for them • Did much of the initial studying and negotiating - front and centre
§ By the time it goes out for tender, they left the corporation, and tried doing the same thing under a new corporation
§ Both CanAero and the new company (Terra Surveys Ltd) submit proposals, and the new company gets it § Court of Appeal
• They were not fiduciaries, they were just mere employees o Issue
§ Did the individual Ds breach their fiduciary duties to CanAero and take a corporate opportunity belonging to CanAero?
o Court § They were more than mere employees; they were senior management and had a fiduciary duty
• Note s. 122(1)(a): Directors and officers owe a fiduciary duty § It follows that O’Malley and Zarzycki stood in a fiduciary relationship to CanAero, which in its generality
betokens loyalty, good faith and avoidance of a conflict of duty and self-interest. Descending from the generality, the fiduciary relationship goes at least this far: a director or a senior officer like O’Malley or Zarzycki is precluded from obtaining for himself, either secretly or without the approval of the company (which would have to be properly manifested upon full disclosure of the facts), any property or business advantage either belonging to the company or for which it has been negotiating; and especially is this so where the director or officer is a participant in the negotiations on behalf of the company.
• There's a duty to the corporation, and self-interest § SCC refuses as well to follow the strict and formulaic test set out in Regal Hastings. In Regal, court said
directors could not take a corporate opportunity even though the corporation itself did not have the financial wherewithal to pursue the opportunity itself.
• The legal rule used to be in Regal Hastings - was very strict o "The liability arises from the mere fact of a profit having, in the stated circumstances,
been made. The profiteer, however honest and well- intentioned, cannot escape the risk of being called upon to account.
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o The directors…having obtained…this benefit BY REASON AND ONLY BY REASON OF THE FACT THAT THEY WERE DIRECTORS OF REGAL and IN THE COURSE OF execution OF THAT OFFICE, are accountable for the profits…."
§ If you find out a corporate opportunity and it was in the course of your office, you cannot take your opportunity
• This is both too broad and too narrow § Laskin's response in CanAero
• It is a mistake, in my opinion, to seek to encase the principle stated and applied in Peso, by adoption from Regal Hastings…in a straight-jacket of special knowledge acquired while acting as directors or senior officers, let alone limiting it to benefits acquired by reason of and during the holding of those offices. As in other cases in this developing branch of law, the particular facts may determine the shape of the principle of the decision without setting fixed limits to it….
• The general standards of loyalty, good faith and avoidance of a conflict of duty and self-interest to which the conduct of a director or senior officer must conform, must be tested in each case by many factors which it would be reckless to attempt to enumerate exhaustively. Among them are the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness, and the director's or managerial officer's relation to it, the amount of knowledge possessed, the circumstances in which it obtained and whether it was special or, indeed, even private, the factor time in the continuation of the fiduciary duty where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the relationship was determined, that is whether by retirement or resignation or discharge.
o The Laskin factors § In this case, the D's argued four defences
• The Ds argue they resigned from CanAero o Court: Merely resigning doesn't eliminate your fiduciary duties
• It wasn't an opportunity, it was a pre-opportunity o Court: No, it's fact-driven, but a ripening opportunity (not formed but still out there)
• Our new corporation wont the contract, on a proposal we changed up a bit o Court: How could it possible be the case that you change a few details you're home
free? • CanAero would never have been awarded this contract in any event; no harm no foul
o Court: They don't care whether CanAero would have gotten the contract or not, at the time of their fiduciary duty, CanAero didn't abandon its plan to get the contract
§ Remedy • Liability of O’Malley and Zarzycki for breach of fiduciary duty does not depend upon proof by
CanAero that, but for their intervention, it would have obtained the Guyana contract; nor is it a condition of recovery of damages that CanAero establish what its profit would have been or what it has lost by failing to realize the corporate opportunity in question. It is entitled to compel the faithless fiduciaries to answer for their default according to their gain. Whether the damages awarded here be viewed as an accounting of profits or, what amounts to the same thing, as based on unjust enrichment, I would not interfere with the quantum.
o What did the fiduciaries gain is the easier approach to take here
Matic et al v Waldner et al – More Recent Case then Canadian Aero On the Law on Corporate Opportunity
• Introduction o The common law fiduciary duty has been codified in s. 117(1)(a) of Manitoba's Corporations Act
§ 117 - Duty of care of directors and officers • (1) Every director and officer of a corporation in exercising his powers and discharging his duties
shall o (a) act honestly and in good faith with a view to the best interests of the corporation
• Analysis o Nature of the "corporate opportunity"
§ Key to the analysis is the determination of whether the opportunity "belonged" to the corporation: Contextual § Fiduciary duty tests (Rotman)
• (1) The "interest or expectancy" test: Precludes "growth out of a pre-existing relationship" • (2) The "line of business" test: Corporate opportunity whenever a managing officer becomes
involved in an activity intimately or closely-associated • (3) The "fairness" test: Determines the existence of an opportunity by applying ethical standards of
what is fair and equitable under the circumstances o Laskin J in Canadian Aero: Prohibits an executive from appropriating himself a business opportunity which in fairness
should belong to the corporation § He also highlights the prevalence of a "maturing business opportunity"
o Mature business opportunity
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§ Leaning in the direction that the Director cannot act in a potential conflict with the corporation § Sports Villas Resort Inc
• "Involves a duty not just to avoid conflict of duty and interest, but also potential conflict" o Active pursuit
§ Factor related to the maturity of the opportunity is the extent to which the corporation is actively pursuing the opportunity
§ Actively pursuing as per Canadian Aero • There is no strict formula to apply, and the existence of a corporate opportunity will depend on the
facts • The question of whether a fiduciary has breached his duty by taking a particular opportunity is a
question of fact that can turn on many factors, some of which are set out by Laskin J in Canadian Aero
o Circumstances in which opportunity obtained § The manner in which the opportunity came to the knowledge of the director is not determinative, but is a fact
to be taken into account as part of the contextual analysis o Limits on liability of directors and officers
§ Nothing short of fully informed consent § The only defence available to a person in such a fiduciary position is that he made the profits with the
knowledge and asset of the trustees § In Canadian Aero, Laskin J concluded that a breach of fiduciary duty occurred, not only because the
opportunity belonged to the corporation, but because the fiduciary obtained the opportunity "either secretly or without the approval of the company"
• Summary o In determining whether a director has breached his or her fiduciary duty under the corporate opportunity doctrine
requires an extensive contextual analysis o All relevant factors must be taken into account, including: the maturity of the opportunity; whether it was actively
pursued by the corporation; whether the corporation was capable of taking advantage of the opportunity; whether the opportunity was in the corporation’s line of business or a related business; how the opportunity arose or came to the attention of the director; whether the other directors of the corporation had knowledge of the director’s pursuit of the opportunity; and whether the other directors gave their fully informed consent to the director’s pursuit of the opportunity
§ The overall goal of the analysis is to determine whether the opportunity fairly belonged to the corporation in the circumstances.
• Notes
o MBBCA has the same fiduciary duty (s. 117(1)(a)) as s. 122(1)(a) of the ABCA o Law
§ The test is whether the opportunity in fairness belongs to the corporation § Also references the Laskin factors
• The factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director’s or managerial officer’s relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or, indeed, even private, the factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge.
o On an exam § When you the facts, go back to CanAero and write down the test of fairness, then run to the factors that
Laskin indicated, and which ones apply
(c) Self-Dealing Transactions – Common Law Self-Dealing Transactions
• Involves the director or officer being on both sides of the transaction, representing the party selling and the party buying • A director will sell something to a company that they own
o E.g. Aberdeen
Aberdeen Railway v Blaikie Bros – Absolute Rule Against Self-Dealing; Strict Test; No Longer the Law • Facts
o Aberdeen Railway entered into a contract to purchase chairs from Blaikie Bros, a partnership § At the time, a director of Aberdeen was also a member of the partnership
• Issue o Is this a self-dealing contract, thereby making it voidable at the option of the purchasing company (Aberdeen)?
• Analysis
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o An agent (directors and board members) has duties to charge of a fiduciary character towards his principal (corporation) o The director put his interest in conflict with his duty, and whether he was the sole director or one of many, can make no
difference in principle o “The directors are a body to whom is delegated the duty of managing the general affairs of the company. A corporate
body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such an agent has duties to discharge of a fiduciary character towards his principal, and it is a rule of universal application that no one having such duties to discharge shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with the interests of those whom he is bound to protect. So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into."
• Holding o Contract set aside on the grounds that Blaikie was self-dealing, indicating a conflict of interests between Blaikie's
personal interest and the interest of Aberdeen Railway • Ratio
o Directors/board members cannot enter into engagements in which they have or could have a personal interest conflicting, or which possibly may conflict with the interests of those whom they are bound to protect
§ Strict application rule, no question is allowed to be raised as to the fairness of the contract o You cannot be on both sides: When a particular transaction leads to a conflict of interest, the director should recuse
themselves from participating in that decision § Self-dealing occurs when the director is on both sides of a contract
• Notes o No longer states the law, but a good case to illustrate the strict application o Facts
§
o Issue § Is this a self-dealing contract, thereby making it voidable at the option of the purchasing company (i.e.
Aberdeen) o Court
§ No allegations that the sales contract was unfair, or fraudulent § The concern is on the appearance of bias § It's no defence at common law to say the contract was fair and reasonable § Blaikie cannot put himself in a position where there's a fiduciary duty and self-interest § Thus, Blaikie shouldn't have done what he did, and the contract should be set aside
o At this point in the law § Absolute bar to self-dealing (after Aberdeen)
• This is quite harsh § Now (after North-West) …
• We then have a partial opening, from corporate solicitors trying to fix this, yet also ensure fairness • So: It’s okay, so long as it’s brought up with the shareholders and they agree to it
North-West Transportation Company Ltd v Beatty – Creates an Opening in the Aberdeen Rule That Allows Self-Dealing Contracts Where Its Authorized by Shareholders
• Facts o Beatty (P) is a shareholder in NWTC, and sued on behalf of himself and all the other shareholders in the company, except
those who were Ds § The Ds are the company and five shareholders, who, at the commencement of the action, were the Directors
of the company § The claim is to set aside a sale made to the company by Beatty, one of the Directors, of a steamer called the
United Empire, of which previously to the sale was the sole owner § Beatty, D and shareholder, voted his shares to ratify his sale
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• Director of NWTC has around 40% stock and enters agreement to purchase steamship owned by himself
• Director at one point owned 301 shares (>50%) and sold them off to individuals who he knew would vote same way as him
o This gave them enough shares to be elected directors • Together they voted in favour of contract
• Issue o Is this self-dealing contract voidable or does ratification insulate it (since Beatty voted own shares)?
• Analysis o 2 conflicting principles:
§ 1) Majority rule: Resolution of majority shareholders is binding upon the corporation and minority shareholders
§ 2) Self-dealing: Director is precluded from dealing, on behalf of the company, with himself, and from entering into engagements in which he has a personal conflict, or which possibly may conflict, with interests of those whom he has a fiduciary duty to protect
o So, was it unfair, oppressive, or illegal? § No, the constitution allowed people to acquire voting power; director had perfect right to acquire shares and
exercise voting power • No limit on his power; D held 200 shares, 1/3 of the aggregate number
§ The needed a new ship anyways • Holding
o The majority shareholders can practice self-dealing, if not done in an improper manner or fraudulent/oppressive to other shareholders
• Ratio o A self-dealing contract may be affirmed, ratified or adopted by the company’s shareholders, provided that affirmation is
not brought about by improper means, and is not illegal, fraudulent, or oppressive (so long as there is no fraud on the minority).
o The interested director/shareholder is entitled to vote his shares • Notes
o Facts
§
§ Director Beatty had a suitable steamship, and the company needed one § The Board Directors approve the deal, and then goes to shareholders for ratification
• Ratified, but really it was Beatty as the shareholder who carried the day (a majority of votes were from Beatty)
o Issue § Is there a conflict? § Is this self-dealing contract voidable or does ratification insulate it?
o Court
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§ There didn't seem to be any fraud § Beatty was entitled to vote with his shares, and thus he can do what he wants to do § The only unfairness or impropriety which, consistently with the admitted and established facts, could be
suggested, arises out of the fact that the defendant J.H. Beatty possessed a voting power as a shareholder which enabled him, and those who thought with him, to adopt the by-law, and thereby either to ratify and adopt a voidable contract, into which he, as a director, and his co-directors had entered, or to make a similar contract, which latter seems to have been what was intended to be done by the resolution passed on the 7th of February.
• The only complaint is using his vote in favour of himself, but there's nothing wrong this
(c) Self-Dealing Transactions – Legislative Response Introduction to Self-Dealing Contracts Under s. 120 of the ABCA – Disclosure by Directors and Officers in Relation to Contracts
• If you're in a self-dealing contract, there are certain requirements in order to make it enforceable under s. 120 of the ABCA • Section 120 requirements under the ABCA include:
o 1. Disclosure in writing/minutes under s. 120(1) and following § (1) A director or officer of a corporation who
• (a) is a party to a material contract or material transaction or proposed material contract or proposed material transaction with the corporation, or
• (b) is a director or an officer of or has a material interest in any person who is a party to a material contract or material transaction or proposed material contract or proposed material transaction with the corporation,
shall disclose in writing to the corporation or request to have entered in the minutes of meetings of directors the nature and extent of the director’s or officer’s interest.
§ See too: s. 120(7): Disclosure via general notice • (7) For the purpose of this section, a general notice to the directors by a director or officer is a
sufficient disclosure of interest in relation to any contract or transaction made between the corporation and a person in which the director has a material interest or of which the director is a director or officer if
o (a) the notice declares the director is a director or officer of or has a material interest in the person and is to be regarded as interested in any contract or transaction made or to be made by the corporation with that person, and states the nature and extent of the director’s interest,
o (b) at the time disclosure would otherwise be required under subsection (2), (3), (4) or (5), as the case may be, the extent of the director’s interest in that person is not greater than that stated in the notice, and
o (c) the notice is given within the 12-month period immediately preceding the time at which disclosure would otherwise be required under subsection (2), (3), (4) or (5), as the case may be.
o 2. Approval by the appropriate body § s. 120(6)
• (6) A director referred to in subsection (1) shall not vote on any resolution to approve the contract or transaction unless the contract or transaction is
o (a) an arrangement by way of security for money lent to or obligations undertaken by the director, or by a body corporate in which the director has an interest, for the benefit of the corporation or an affiliate,
o (b) a contract or transaction relating primarily to the director’s remuneration as a director, officer, employee or agent of the corporation or an affiliate,
o (c) a contract or transaction for indemnity or insurance under section 124, or o (d) a contract or transaction with an affiliate.
§ s. 120(5). • (5) If a material contract or material transaction or proposed material contract or proposed
material transaction 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 entered in the minutes of meetings of directors, the nature and extent of the director’s or officer’s interest forthwith after the director or officer becomes aware of the contract or transaction or proposed contract transaction.
o 3. Proof that contract is fair and reasonable at the time it was approved § s.120(8)
• (8) If a material contract or material transaction is made between a corporation and one or more of its directors or officers, or between a corporation and another person of which a director or officer of the corporation is a director or officer or in which the director or officer has a material interest,
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o (a) the contract or transaction is neither void nor voidable by reason only of that relationship, or by reason only that a director with an interest in the contract or transaction is present at or is counted to determine the presence of a quorum at a meeting of directors or committee of directors that authorized the contract or transaction, and
o (b) a director or officer or former director or officer of the corporation to whom a profit accrues as a result of the making of the contract or transaction is not liable to account to the corporation for that profit by reason only of holding office as a director or officer,
if the director or officer disclosed the director’s or officer’s interest in accordance with subsection (2), (3), (4), (5) or (7), as the case may be, and the contract or transaction was approved by the directors or the shareholders and it was reasonable and fair to the corporation at the time it was approved.
• If s. 120 requirements see compliance, contract is insulated from attack on the basis of self-dealing under s. 120(8). • If there is a failure to comply, the court has jurisdiction under s. 120(9) to set aside the contract on any terms that it thinks fit or
require an accounting or both. o (9) 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 material contract or material 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 both.
• s. 120 (8.1): The whoops provision – Amendment to the Act o (8.1) Even if the conditions of subsection (8) 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 material contract or material transaction for which disclosure is required under subsection (1), and the material contract or material transaction is not void or voidable by reason only of the interest of the director or officer in the material contract or material transaction, if
§ (a) the material contract or material transaction was 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 material contract or material transaction was approved or confirmed, and
§ (c) the material contract or material transaction was reasonable and fair to the corporation when it was approved or confirmed.
The Two Kinds of Conflicts Under s. 120 – Direct and Indirect • Situation #1: Conflict is direct because Beatty is a party to a material contract
o • Situation #2: Conflict is indirect
o
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Dimo Holdings Ltd v H Jager Developments Inc – Narrow View of Material Interest à Financial Interest • Facts
o
o Herb Moeller is a Director of Jager (D, appellant); Herb's wife, Mrs. Moeller, is the sole Director, officer, and shareholder of Dimo (P, respondent)
o Dimo lent Jager $50,000, the majority of which remains unpaid o Dimo sued Jager to recover the amount
§ Successfully obtained summary judgment o However, Jager alleges that the transaction should be set aside as Herb had a material interest in Dimo and did not
disclose that interest in accordance with s. 115 (s. 120 of the ABCA) • Issue
o What constitutes a "material interest"? o Should the loan be voidable because the interest wasn't disclosed? o Does s. 120 of the ABCA apply?
• Analysis o ABCA
§ S. 120: Requires disclosure of directors and officers of companies in relation to contracts § S. 120(1)(b) requires disclosure of material interest in any person who is a party to a material contract, to
disclose in writing to the corporation the nature and extent of his interest § S. 120(9): If there is a failure to disclose interest, the court may set aside contract on any terms it sees fit
o Declaration of material interest § What is material interest?
• Broad concept, but must be more than an insignificant interest • Herb had no interest in Dimo
o Wife is the sole director, officer and shareholder (the operating mind) o All agreements were signed by the wife o Services provided to Dimo were on behalf of another company o Herb did not profit from the transaction o The fact that he acted as an intermediary does not automatically mean he has a material
interest o Alternatively: Should the contract be set aside under s. 120(9), if it was a material interest not disclosed?
§ S. 120(9) analysis: • 1) Was the contract reasonable and fair to the corporation at the time it was approved? If yes,
don't set it aside o Seemed reasonably fair; accepted by the D; monies paid in advance, D benefited from it;
D acknowledged the debt twice • 2) Based on the above, should the court order accounting of profits, or set aside contract?
o Neither the Director nor Dimo profited from this transaction o Money was lent by Dimo to Jager, and only Jager was required to repay it o Even if the contract was unenforceable, Jager would be required to repay under the
principle of unjust enrichment o Unjust enrichment test
§ 1. An enrichment of the D • Jager was enriched
§ 2. A corresponding deprivation of the P • Dimo was deprived
§ 3. No juristic reason for the enrichment • None
§ Thus, Jager needs to repay the loan
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• Holding o Appeal dismissed, and the loan upheld as enforceable o There was no material interest and the contract was reasonable and fair
• Ratio o Material interest denotes a financial interest that is more than insignificant.
§ It is a question of fact in each case § It includes a material beneficial interest, and an interest in which an individual could exercise discretion or
control over sufficient shares so as to affect the financial outcome of a company o To set aside contract under s. 120(9) of the ABCA:
§ (1) Was the contract reasonable and fair at time? • Yes à Don't set aside • No à Set aside
§ (2) Should court set aside contract or order accounting of profits based on (1)? • Notes
o If we're talking about a material interest, a financial interest will count § Trifling involvement will not count
o Facts § Jager is borrowing money § Dimo lending $50k to Jager § It was the case that J needed that money on an emergency basis for promoting a country music concert § $30K of the principal remains unpaid/outstanding; concert was a disaster § Dimo is suing wanting their money back from Jager § Apply for summary judgment from the Master in Chambers for the balance outstanding § J says they don't have to pay the money back, because Mr. Moeller had a material interest in the lender and
didn't disclose it • Moeller made no disclosure
§ The interest that D charged was 50%/annum • Master reduced it to 5.5%
o Issue § Is the contract between J and D caught by what is now s. 120 of the ABCA?
• Does Mr. M have a material interest in the lender? o QB
§ Section 120 doesn't apply because M is neither a director nor an officer of Dimo; Dimo is completely owned by Mrs. M
§ Mr. M has to disclose his material interest, but doesn't have to disclose his wife's material interest • SKO: Not really sure about this; shouldn't it include more than financial interest?
o His wife is probably benefitting this... o Legislation says material interest, not material financial interest
• Another argument: Maybe Mr. M is an indirect financial interest § Mr. M did not do anything wrong § In the alternative (material interest not disclosed) if wrong, they do go through the s. 120 analysis
• Mr. M has failed to comply with s. 120 since he didn't disclose his material interest • Under (9), the court may be set aside • Steps
o Was the contract fair and reasonable? § They said it is
o If it's not, the court could adjust it to make it fair (e.g accounting for profits) • Here
o Court says the interest rate was excessive, but now it's down to 5.5%, so it's fine o The loan was solicited by J o J on the facts would be obliged to pay back this anyways based on unjust enrichment;
there are 3 tests § One, enrichment of the defendant; two, a corresponding deprivation of the
plaintiff; and three, the absence of any juristic reason for the enrichment. Lambert J.A. suggests at 172, that the injustice must be against sound commercial conscience
• In this case, the three tests are met. There is no juristic reason for the enrichment. In my view it would be against sound commercial conscience for Jager to be forgiven the requirement to repay the loan it requested, negotiated, accepted, benefited from, and acknowledged. The only possible terms on which a Court would set aside the contract between Jager and Dimo relate to the payment of interest. This has already been dealt with by the Master. Even if Mr. Moeller had a material interest in Dimo, there is no genuine issue to be tried.
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Zysko v Thorarinson – Broad View of Material Interest à Includes Emotional Interest • Facts
o ESJ Equities Inc originally owned by JZ (50%), ST (25%) and ET (25%) (Company A) o JZ sole shareholder of ES’J Developments (Company B); ST sole shareholder of Bluebird (Company C) o Company A acquired land and contracts to develop apartment complex o Company B and Company C acquired 50% owners of Company A o USA signed between Company A, B and C—Company A and another related 3rd party injected cash into project o ST and ET, through Company C lent Company A $1,000,000
§ Bluebird gave $1M to ESJ in exchange for a mortgage o JZ did not agree to the loan from Company C (owned by other two directors of Company A) o IMPORTANT FACTORS: All documents prepared by husband and wife; husband-wife relationship, actions expressly went
against USA • Issue
o Is the mortgage and other security granted to Bluebird by ESJ valid? o Does s. 120 of the ABCA apply?
• Analysis o Mortgage was a material contract under s. 120(1)(a)
§ Section 120 of the ABCA identical to Section 120 of the CBCA o Was there a material interest? Yes
§ Material interest is a matter of fact, and extends beyond financial interest § Rule of thumb: There should be disclosure whenever the Director or officer's involvement might be relevant
to the corporation's decision-making • Material if
o A) Corporation would undertake due diligence to determine if contract in best interest; or
o B) Corporation would assign another officer or director to handle negotiations o In this case
§ Documentation ordered by ST and ET § JZ and Company B did not expressly consent to the financing § Actions were oppressive, unfairly prejudicial and there was an unfair disregard for ESJ (Company A), ES'J
Developments (Company B), and JZ § Thus mortgage is thus invalid
• Holding o The mortgage and other security granted to Bluebird was not valid
§ Section 120 applies • Ratio
o Wider view of material interest: If there is possibility that Director was to benefit from contract more than de minimis, then the transaction should be disclosed to the corporation (this includes emotional interest)
• Notes
o This judge takes a different view on s. 120, cites Welling § It seems clear that the statute also addresses the problem of a director or officer who has no monetary
interest in a person on the other side, yet who is likely to have an emotional involvement. Thus, a deal in which the corporation is negotiating with a close relative, or even a close personal friend, of one of the directors or officers ought to be suspect
§ What is meant by “material” in the context of conflict of interest contracts, the meaning of “material contract” and “material interest” is conditioned by the purpose behind the section. The purpose is to identify those negotiations in which a corporate manager’s ability to bargain effectively on behalf of the corporation may be inhibited by some interest he has in the other side.
(d) Competing Director London and Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd – Nothing Wrong with Sitting on Competing Boards; NOT the law Anymore
• Facts o 2 rival companies o P registered first, and appointed Lord Mayo as a Director and Chair o Later that year, D said that Lord Mayo was their Director and Chair o P wants to restrain the D from publishing any announcement that May was one of their directors, and to restrain Mayo
from as Director of the D o Lord Mayo never acted as a Director, nor attended any board meetings of the P company; he also never agreed (expressly
or otherwise) to not become a director of any similar company • Issue
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o Can the Director sit on the competitor's (D's) Board of Directors? • Analysis
o There is nothing in the P company's articles that requires him to give part of his time, much less the whole of his time, to the business of the company, or that prohibits him from acting as a Director of another company
§ He is permitted to act on both boards o No evidence he used confidential information from the P company in helping the other o There is no damage shown
• Holding o The P company cannot prevent Lord Mayo from sitting on the rival D's board
• Ratio o There is nothing inherently objectionable in the position of a company director 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.
• Notes
o Facts § Lord Mayo (Director) agrees to sit on the board of a rival company § P company wants him to stop this, so ask for an injunction
o Court § Lord Mayo didn't commit any time to this P company
• This isn't really their problem though... § There was no evidence that he was going to disclose any confidential information
• This is a pretty high bar • Just to be in a position on a competing board like this is problematic
o Other shareholders could argue in 2019 that shareholders would have a reasonable expectation that a director wouldn't place himself in a conflict like this
§ In any event, we would have a situation where this would be oppression o They were surprisingly tolerant at this point
Sports Villas Resort, Inc (Re) – More Recent Case; You Can Sit on Multiple Boards, You Just Have to Avoid Real or Potential Conflicts of Interest
• Facts
o
o Directors of Sports Villas bring an application seeking to disqualify BD and JD from sitting on the Sports Villas' Board of Directors
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§ Sports Villas owns a golf course, Terra Nova o BD has ownership interest in a competitor golf course (Clovelly) located 220km away, which is a tourism destination for
vacations and conventions o Claim grounded in conflict of interest and breach of fiduciary duty o Important factors: BD let everyone know that he was pursuing the interest o Trial judge
§ Relied on Slate Ventures - If businesses are in competition, how can you be on the Board of both and say there is no conflict?
• Issue o Was there a conflict of interest due to:
§ A) Competition, or § B) Proprietary interest/taking corporate opportunity?
• Analysis o Fiduciary corporate duty does not preclude multiple membership on the Boards of different companies o Competing interests in relation to the fiduciary duty that must be balanced:
§ 1. Public interest requires the strict application of standards precluding directors from placing themselves in positions of potential conflict between fiduciary duties and own interest
§ 2. Society's interest in not applying the standard beyond what is necessary to achieve the above o Argument 1: Competition argument
§ To determine if they compete: • 1. Do the products compete?
o Products: One was a resort product, the other was for day golf - different facilities and clients
• 2. Geographic scope of competition? o Geography: 220km apart
§ There is no competition between the companies • Unless it can be demonstrated that they competed, there can be no basis to find that BD put
himself in a conflict position o Argument 2: Proprietary interest/Corporate opportunity
§ Argument 2a: Taking corporate opportunities in future (potential conflict) • Opportunity came independently from his role as Director of Sports Villa • If it could be proven that the scope of Sports Villas' activities included all future golf developments
in the province, the argument may have succeeded o There is no evidence that this is the case
• The other course did not impact upon the financing or personnel available to Sports Villas § Argument 2b: Claimed Sports Villas had a proprietary interest in confidential information that the D misused
• No evidence of this: BD should not be prevented from using generic expertise in the other company, as long as it does not violate the initial understanding or misuse confidential information or resources
• Holding o There was not a conflict of interest on the part of BD o Appeal dismissed
• Ratio o The fiduciary duty requires a duty not just to avoid actual conflict of duty and interest, but also potential conflict
§ A director can sit on multiple boards but must avoid actual or potential conflict. o A director can sit on other boards, provided there is no realistic potential competition between the two (potential conflict
of interest) § If there was competition, liability would likely be found § But if they aren’t competing, there won’t be liability for sitting on competitors board
• Notes
o Facts § SV owns Terranova Park Lodge (golf course), located quite out of town from St. John's § On SV's Board
• There's Anthony, Pardy, and Dobbin § Pardy is against Dobbin and Dobbin's daughter
• Argues Dobbin is taking a corporate opportunity that belongs to SV, and is a competing director of SV (through Clovelly Golf Course)
§ Application to get Dobbin and his daughter off the Board • Wants Dobbin off the Board?
o Indirect financial interest; she might be a leak § Corporate history of the 2 courses
• Different kinds of markets o Terranova - more a vacation resort o Clovelly - more for the golf
o Issue
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§ Dobbin, as a director has a fiduciary duty; has he met that standard? § Are these corporations even in competition?
o TJ § On competition
• Relied on a case called Slate Ventures o Director may in certain circumstances engage in a competing interest
§ SKO: Doesn't really agree with this; how are you avoiding a conflict of interest if they really are competitors?
§ Doesn’t really even give an example § On corporate opportunity
• There wasn't a taking; the overall test is fairness • The judge went on to observe, even if they were competing businesses, the evidence was
insufficient to satisfy him that Mr. Dobbin “was in any actual conflict of duty or interest situation or is presently in a potential conflict of duty or interest situation”. In this respect, the judge pointed out that the evidence “discloses that business opportunity was acquired independently of his role as a director of SVRI”
o Dobbin didn't learn of this opportunity through Sports Villa § SKO: There's more to this than just this (see CanAero)
o Court of Appeal § On competition argument
• The companies are not in competition; because of this, we don't have a competing director § On taking corporate opportunity argument (when you see competing director you usually see taking corporate
opportunity) - CA: Does a better job of explaining this • To recapitulate, the corporate fiduciary duty exacts from directors a strict ethic to act honestly and
in good faith in the corporation’s best interests. In the general terms employed by Canadian Aero, this holds directors to the obligations of acting towards companies on whose boards they sit with “loyalty, good faith and avoidance of conflict of duty and self-interest”. This involves a duty not just to avoid actual conflict of duty and interest, but also potential conflict. It is one thing, however, to state the standard in such general terms, but quite another to define its contents in the specific terms required to fairly apply it. Once more, Laskin J.’s words in Canadian Aero are instructive where, at p. 619, he intimates it would be a mistake to try to encase the principle in a “straight-jacket” because “... in this developing branch of the law, the particular facts may determine the shape of the principle of decision, without setting fixed limits to it”.
• The fiduciary duty doesn't include multiple memberships on Boards of different companies; we want people to have the freedom to serve on as many boards
• There wasn't a taking of corporate opportunity o It never belonged to Sports Villa
• There also wasn't a proprietary interest in the confidential information o This is much more nuanced and different than what was said in Mashonaland
(e) Takeover Bids and Defensive Tactics by Management Maple Leaf Foods v Schneider Corp – How Directors Can Protect Themselves During a Takeover Bid; Fiduciary Duty
• Facts o Maple Leaf and some minority shareholders claim the Board of Schneider's did not act in the best interest of the
corporation following its hostile takeover bid § They claim they should have accepted the offer because it was good for the shareholders; but they may lose
their job if they sell o Schneider's (D, target company); controlled by the family
§ Established a special committee composed of independent, non-family members...although the CEO (Dodds) helped negotiate with the bidders
• Mandated to review offers and explore alternatives • Ultimately accepted the family's wish to sell to Smithfield, which met the family's concern about
the impact on employees, welfare of suppliers, etc. o Maple Leaf tried to purchase Schneider's, making 3 separate offers for $19, $22, and $29/share
§ 3rd offer of $29 was made after Schneider's Board accepted Smithfield's offer of $25/share § Factoring in tax considerations, this $29 offer was merely on par with Smithfield's offer
• Issue o Did the Board of Schneider's act in the corporation's best interest in accepting the lower bid and their actions?
• Analysis o General duty of Directors
§ Directors have an obligation to act honestly and in good faith in the best interest of corporation § Directors must exercise the care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances
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§ If actions of directors unfairly disregard interests of shareholders, unfairly prejudices those interests, or are oppressive to them (can’t oppress minority shareholders), the court can grant remedies
o Did the Directors act in the best interests of the corporation? § Best interest of company doesn’t mean directors must always act in best interests of protected group (i.e.
shareholders, environment, creditors etc.) § Business judgment rule:
• Court will look to see if directors made a reasonable decision (not a perfect decision) • Fact that a transaction was rejected by directors is irrelevant, unless it can be shown that a
particular alternative was definitely available and clearly more beneficial to the company § Board members may be major shareholders, or may be worried about keeping their job
• Companies have used special committees to avoid conflicts of interest comprised of members who do not have a conflict (i.e. maybe they aren’t shareholders)
• Burden of proof (Fork in Law) in change of control situations o Delaware (enhanced security/proper purpose): Directors have the burden to show that
actions are consistent only with interests of company o Where directors took successful steps to avoid conflict of interests à no rationale for
shifting burden to directors o Where board acts on independent committee and made informed recommendation à
business judgement rule applies o Should members of Schneider's have been permitted to play a significant role in the sale negotiations?
§ Claim is that Schneider’s management had interest in continued employment with company § Senior management was not part of special committee, but conflict arose because they were engaged in
negotiating with bidders § There was a conflict (keeping employment), but other factors lessened this conflict: golden parachute;
assurances that they could keep job; told he would retain salary o Process Arguments
§ Should the special committee have been created? Yes à Was done to obtain best transaction available § Should committee have created the data room? Yes à Doing so was acting independently and reasonably
• Made confidential information available to all bidders to get best transaction available to shareholders
o Was there a duty to conduct an auction? § Auction is one way to prevent conflict of interests, but not required § Multiple buyers à auction is appropriate mechanism to ensure board acts neutrally and achieve best value
reasonably available in circumstances § Single buyer à canvas of market to find higher bids is appropriate and may be necessary § Application: Not reasonable to expect that auction would be held
• Sale of conditional interest was conditional and expressed to be so o Application: If Smithfield’s offer can reasonably be considered the best available offer in the circumstances, then the
Smithfield offer was not unfair or contrary to the best interests of the company § If it went public with Smithfield’s bid, Maple Leaf could have matched bid, got Smithfield to drop, then reduce
their price § Maple Leaf couldn’t have made offer that would be satisfactory to Schneider family at that time § Board exercised power and acted honestly in good faith and pursued all available opportunities
• Holding o Schneider's Board did act in the corporation's best interest
§ It's okay for the Board to choose the bid it did; it was in the best interests of the corporation, and the BJR was met
• Ratio o When a corporation is in the process of takeover bid, Directors must act in the best interest of corporation—must
consider if they took steps to avoid conflict of interest (create independent board; hold auction, market canvas, etc.) § Best interest is not necessarily limited to purchase price (can take other things into consideration)
• Notes
o Court § The members of the committee acted in good faith in the sense that they acted honestly. The committee’s
decision was also informed, in the sense that the committee was aware that any offer for Schneider’s shares might be bettered by Maple Leaf, and that the Family would not sell to Maple Leaf. While the appellants have challenged Farley J.’s finding that the Family would not sell to Maple Leaf, there is ample evidence to support this finding. Even at $29 a share, when tax considerations were factored in, the Maple Leaf offer was only as advantageous as the Smithfield offer to the Family, not more advantageous. Apart from financial criteria, Maple Leaf did not meet the Family’s expressed concern about the effect of a change of control on the continuity of employment for Schneider’s employees, the welfare of suppliers, and the relationship with its customers, whereas Smithfield did. Once again, the real questions are whether the committee was independent and whether the process undertaken by the special committee was in the best interests of Schneider and its shareholders in the circumstances.
§ Series of complaints that ML made
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• Committee wasn't independent o “The CEO is on the committee, how can this be independent?”
§ Court: Counter-argument though: If he wasn't there, ML would have probably argued he should've been there if he was to be properly-informed
• The advice that the special committee gave wasn't in the best interest o Did the Directors take necessary steps to avoid a conflict?
§ Court: They did set up a special committee, acted on its advice, the committee was independent and acted in good faith
• So, the BJR applies o Don't use this case though for BJR, but Peoples and
BCE o Have to show a good process
§ E.g. Setting up a special committee o And that you made a reasonable decision
§ Was it reasonable to follow the advice of a special committee?
• ML's offer that they wanted to make wasn't still as good as Smithfield's offer, so there's nothing to complain about
• Special committee used resources that included confidential information - a data room of employee information that could be useful for bidding on a big company - "the point was to oust ML as a contender"
o Court: § No, the process was set up to see what other bids might be out there § It was in the best interests of the company to get multiple offers, and the
data room was part of that • Duty to have an auction; they should have gotten back to ML instead
o Court: § An auction is only one way of preventing a conflict, but there's no automatic
rule to get the price § Board isn't required to institute bidding § There was no reasonable expectation that a public auction was going to be
held • Board was wrong to weigh in stand-still provisions in the contract with Smithfield
o Stand-still agreement: You cannot seek to acquire the shares of Schneider's for 2 years without the consent of the Board
§ The Board waived the stand-still agreement and the bid was successful o Court:
§ The Board did so reasonably, there is no oppression, and nothing done incorrectly
§ The Board acted on the advice of the special committee in agreeing to facilitate the Smithfield bid by passing a resolution waiving the standstill provision, thereby allowing Smithfield to bid and to enter into the lock-up agreement with the Schneider Family. Unless another bid was received that was not conditional on the tender of any of the Schneider Family shares, which was highly unlikely, this decision by the Board had the effect of making the Smithfield bid the only one which would effectively be available to the shareholders. Implicit in the steps taken by the Board was a decision by the Board that the Smithfield bid was in the best interests of all the shareholders and therefore a bid which the Board could recommend to the shareholders.
o After all of this though, Smithfield sold Schneider to Maple Leaf
(f) Other Sources of Fiduciary Obligation Tongue v Vencap Equities Alberta Ltd – Fiduciary Duty Can Be Owed to Individual Shareholders in Certain Circumstances
• Facts o Ps (Tongue and Harrap) are minority shareholders in Synerlogic Inc o There are 2 groups of individual Ds:
§ Director-shareholders (Negin et al) § Directors who are non-shareholders (Slator and McDougald)
o Corporate D, Vencap, is the agent of the D director-shareholders (Negin et al) § Negotiated to purchase P's shares at $0.60/share without disclosing that a named buyer was negotiating to
buy all of the company shares for $1.97/share or more (essentially way more) o The Ps sold their shares at $0.60 and signed a released; all shares were later sold by the D's to Anderson for $2.16/share
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§ Ps sued Ds, claiming civil liability in damages for breach of the insider trader provisions of s. 131 of the CBCA and breach of the fiduciary duty
• Issue o Did the Ds owe a fiduciary duty to the Ps? o Does the signed release prevent the Ps from recovering?
• Analysis o Liability for breach of fiduciary duty and insider trading may co-exist o There is no general fiduciary duty between the director and shareholder just because of that relationship, but can arise in
the following circumstances: § A) Directors act outside the ordinary scope of duties (director/shareholder liable)
• Factors: Negin was responsible for soliciting and arranging the disposition of shares owned by the shareholders
• Fiduciary duty arises § B) When directors purchase shares from the shareholder (director/shareholder liable)
• Director-shareholders owed a duty to disclose the fact that a 3rd party was interested in buying shares and the price they were willing to pay (doesn't matter that they were using an intermediary)
• Director/non-shareholders: No liability, they were not shareholders and were not purchasing shares
§ C) Other grounds (all liable) - Categories of fiduciary relationship are not closed • Duty owed: Owed a duty to disclose information about the buyer • Breached: Concealing information, or alternatively, for failing to disclose • Loss: Difference between their sale price and Vencap's purchase price
o Does the release indemnify the Directors? § No § It was a generally worded release of liability
• A dispute that had not emerged cannot be considered as bound and concluded by the anticipatory words of a general release
• The Ps didn't contemplate a loss of profit on the transaction in which they were involved § The Directors cannot obtain a valid release from liability for future breaches of fiduciary duty (ABCA s. 122(3))
o Is liability joint or several? § BC courts have distinguished between (1) and (2), but under both they would be jointly and severally liable
• 1) Fiduciary breach akin to trust • 2) Fiduciary breach akin to breach of duty (i.e. failure to disclose) à treated as fraud
• Holding o The Ds breached a fiduciary duty, and are liable on different grounds o D are jointly and severally liable
§ P may collect from one, or two or more jointly, or all of them • Ratio
o There is no general fiduciary duty between a director and shareholder just because of that relationship, but can arise from the following circumstances:
§ A) Directors act outside ordinary scope of duties § B) When directors purchase shares from shareholder § C) Other grounds (concealing information; using position for personal advantage)
o Releases of liability do not protect against causes of action that were not contemplated at the time (must be specific) § Directors cannot contract out of liability for breaches of the CBCA/ABCA
• Notes o Shows Directors can know a fiduciary duty just be operation of law o Note that Directors only have fiduciary duty to the corporation, not shareholders (BCE)
§ This doesn't mean that they never owe a fiduciary duty to them though... o Parties
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§
§ Ps are minority shareholders in Synerlogic § Ds divided into 2 groups
• Director-Shareholders • Director-Non-shareholders
§ Vencap is the agent of the D-S § Arthur Anderson
• Very large accounting firm o Facts
§ Ds failed to disclose that AA wanted to buy all the shares of Synerlogic § Instead, one of the Directors went up to Tongue asking if they wanted to sell their shares, without mentioning
AA § D-S group purchased the shares at $0.60, with AA offering $2.00+/share in their back pocket § Ps say this failure to disclosure was a breach of a fiduciary duty and a breach of s. 130
o Issue § Do Directors owe a fiduciary duty to shareholders? § Breach of s. 130?
• 130 – Civil liability of insiders o (1) An insider who sells to or purchases from a shareholder of the corporation or any of
its affiliates a security of the corporation or any of its affiliates and in connection with that sale or purchase makes use of any specific confidential information for the insider’s own benefit or advantage that, if generally known, might reasonably be expected to affect materially the value of the security
§ (a) is liable to compensate any person for any direct loss suffered by that person as a result of the transaction, unless the information was known or in the exercise of reasonable diligence should have been known to that person at the time of the transaction, and
§ (b) is accountable to the corporation for any direct benefit or advantage received or receivable by the insider as a result of the transaction
o (2) An action to enforce a right created by this section may be commenced only within 2 years after the date of completion of the transaction that gave rise to the cause of action.
o Court § Fiduciary duty
• No, on the words of s. 122, the fiduciary duty is owed to the corporation • However, even though this is true under the statute, fiduciary duties arise all the time outside of
the ABCA o When they're acting outside the scope of their ordinary duties
§ The Ds should have disclosed § Negrin, one of the Directors, was thus bound by a fiduciary duty and
breached it • Negrin has by virtue of his function in soliciting, and arranging for,
the disposition of the shares in Synerlogic owned by the
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shareholders, a different relationship arose between Negin and the Plaintiffs
o When directors purchase shares from the shareholder § This also happened here, and they should have disclosed this
o If not, there are other grounds § Directors had information which the P's required in order to make the sale § Directors were using their position for a personal advantage
§ Breach of s. 130 - goes to legal reality • Insiders are entitled to buy and sell shares that they are a Director of, but not when they're acting
on information that hasn't been disclosed to the public • This section provides a cause of action to those who have suffered loss • The D-S were insiders, and used confidential information for their own benefit
o They are thus liable § What about the releases the Tongue signed to prohibit any future causes of action?
• Court: These kinds of releases are not magic wands, and only cover what the parties had in contemplation (it cannot be random)
• Look at s. 122(3) – Duty of care of directors and officers o Subject to section 146(7), no provision in a contract, the articles, the bylaws or a
resolution relieves a director or officer from the duty to act in accordance with this Act or the regulations or relieves the director or officer from liability for a breach of that duty.
o Remedy § We have a number of Defendants who are liable - is there a way they can be jointly liable? Or is it just
severally? • If so, you can receive recovery from the richest ones
§ What the liability provisions say: s. 130 says that D is liable for the direct loss sustained • Court: reads that as several liability
o How much did each individual director make § But then on breach of fiduciary duty, by analogy to fraud and trust law the Ds are jointly and severally
liability • Thus, each D is liable in full, and its up to the P to collect from one or all
(g) Shareholder Ratification of a Breach of Fiduciary Duty Ratification of Breach of Fiduciary Duty
• The CBCA (and ABCA) have greatly reduced the effect of shareholder approval of fiduciary breaches • Except in accordance with the scheme for rendering self-dealing contracts enforceable under s. 120 of the CBCA and other
provincial schemes, a shareholder resolution approving a breach of fiduciary duty does not cure a breach or relieve the fiduciary of liability for the breach (s. 122(3) of the CBCA)
o The self-dealing contract is only enforceable if it's fair and reasonable § So, it still needs to be a fair contract
• The only legal effect of such a resolution is that it must be considered by the court in deciding whether to grant a shareholder the right to bring a derivative action on behalf of the company for a breach of fiduciary duty (s. 242(1) of the CBCA), and in determining whether any action of incorporation or the directors is oppressive under s. 241 of the CBCA
(h) Sitting on a Client’s Board of Directors Sitting on a Client’s Board
• Sitting on a client's board (including a non-profit's board) can be problematic for a number of reasons from both the lawyer's and the corporate client's perspective
o Potential for conflicts of interest § A lawyer who advises not only the corporation but also another part (e.g an individual corporate officer or
employee whose interests may diverge from those of the corporation) is in a conflict position lawyer acts for individual founders of the corporation, then later the corporation;
§ Scenarios that highlight some of the possible conflicts that arise: • Lawyer advises more than one shareholder in a closely-held corporation (for example, family
members); • Lawyer sits on the board of a merged corporation after having acted for a predecessor corporation; • Lawyer advises both the corporation and individuals within the corporation, when these parties’
interests diverge; or • Lawyer sits on the board of a corporation while having a financial or other interest in a party with
which the corporation does business. § If asking the question "who is my client" is ambiguous, you should probably terminate the relationship
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o Potential for loss of solicitor-client privilege § The duties and role of a corporate director and the director's responsibility to the shareholders do not overlap
neatly with the duties of a lawyer to a client • A lawyer sitting on a corporate board will be expected to consider non-legal issues and to comment
on business directors and decisions § Where someone provides legal advice, business advice, and mixed legal-and-business advice to a Board or its
members, the statements made may not meet the established legal tests for solicitor-client privilege § A lawyer would do well to formally advise the client of the risk of loss of solicitor-client privilege that Board
participation poses o Potential for loss of ability to represent client
§ If the lawyer-director is called as a witness in proceedings for example, he could easily become a party adverse in interest to either the company as a whole or to other individual directors
• As a result, the lawyer would lose the right to represent the corporate client (and the corporation would lose its counsel)
o Insurance coverage gaps § A lawyer considering sitting on a client's board should be aware that his professional insurance only covers the
provision of "professional services" qua lawyer, as defined in the policy • Acting as a director does not fall within the definition of professional services • Lawyers who sit on corporate boards should ensure they are covered under a directors' or officers'
liability coverage policy, and/or an outside directors' liability policy § See if the firm already has a policy in place with respect to lawyers serving on boards
• Allen o It seems to me that it is arguable that a lawyer who, through his or her law firm, acts as external corporate counsel to a
corporation and who also sits on the corporation’s board, may well be acting in the ordinary course of the law firm’s business when he or she takes a seat at the boardroom table. Indeed, such a relationship with the corporation may be encouraged by the law firm to strengthen the relationship with the client, to raise the profile of the lawyer and the law firm and to increase business. To the extent there are risks for the lawyer and the law firm, they undoubtedly can be offset by appropriate liability insurance.
(i) Dissenting Director Dissenting Directors on Any Resolutions Passed/Action Taken at Meetings – Big Difference Between the CBCA and ABCA Presumption of Consent
• CBCA o s. 123 – Dissent
§ (1) A director who is present at a meeting of directors or committee of directors is deemed to have consented to any resolution passed or action taken at the meeting unless
• (a) the director requests a dissent to be entered in the minutes of the meeting, or the dissent has been entered in the minutes;
• (b) the director sends a written dissent to the secretary of the meeting before the meeting is adjourned; or
• (c) the director sends a dissent by registered mail or delivers it to the registered office of the corporation immediately after the meeting is adjourned.
§ (2) A director who votes for or consents to a resolution is not entitled to dissent under subsection (1) § ***(3) A director who was not present at a meeting at which a resolution was passed or action taken is
deemed to have consented thereto unless within seven days after becoming aware of the resolution, the director aware or the resolution, the director
• (a) causes a dissent to be placed with the minutes of the meeting; or • (b) sends a dissent by registered mail or delivers it to the registered office of the corporation.
o If the Director is not present, they are deemed to have consented (s. 123(3)), unless they take certain steps • ABCA
o s. 123 – Dissent by Director § (1) A director who is present at a meeting of directors or committee of directors is deemed to have consented
to any resolution passed or action taken at the meeting unless • (a) the director requests that the director’s abstention or dissent be, or the director’s abstention or
dissent is, entered in the minutes of the meeting, • (b) the director sends the director’s written dissent to the secretary of the meeting before the
meeting is adjourned, • (c) the director sends the director’s dissent by registered mail or delivers it to the registered office
of the corporation immediately after the meeting is adjourned, or • (d) the director otherwise proves that the director did not consent to the resolution or action.
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§ (2) A director who votes for or consents to a resolution or action is not entitled to dissent under subsection (1) § (3) A director is not liable under section 118, and has complied with the director’s duties under section 122, if
the director exercises the care, diligence and skill that a reasonably prudent o If the Director is not present, there is no provision that deems the absentee director to have consented
• If you don't go to meetings, you probably are breaching your fiduciary duty
3. Other Statutory Duties
Zwierschke v MNR – Liability Under the Income Tax Act • Facts
o Zwierschke (appellant) appealed from an assessment by the CRA under the Income Tax Act o Appellant was born in 1925 and left school before he completed grade 9 o 1964, he started a business doing trenching and construction; hired 3-4 employees who he’d supervise while his wife did
most of the paperwork for the business § Business transferred to a corporation of which the appellant was only director in 1978. § Business all the while was using Niagara Credit Union to finance equipment purchases.
• The business had a line of credit with Niagara (manager was Mr. Disley), which was used to pay wages, purchase materials, and pay for other business expenses
o Company went way into overdraft on its line of credit, its assets were ultimately seized, and the corporation was liquidated
§ Zwierschke still owes $17,000 to the Credit Union. o When the proceeds of sale of the company were remitted to the Credit Union, there was not enough in excess to pay the
amount owing by the company in income tax § Made source deductions as it should have, but forgot to do second step (remit to government – Minister of
National Revenue) • Likely using it for operating capital; business having cash flow issues
o Appellants puts forward 2 defences: § 1. Exercised the required degree of care, diligence, and skill under s. 227.1(3) of the Income Tax Act § 2. The assessment was issued more than two years after he last ceased to be a director of the company
• Issue o Can the appellant defend himself by virtue of s. 227.1(3) under the Income Tax Act?
• Analysis o The appellant has no defence at all under s. 227.1(3) because he did not exercise and degree of care, diligence or skill to
prevent the failure (i.e. the failure to remit the amounts withheld by the Company as source deductions). § He managed the Company’s business and he knew more about its business affairs than any other person
• He knew when the Company’s line of credit was in overdraft. § S.227(4) of the Income Tax Act provides that amounts withheld from salaries and wages are deemed to be
held in trust for the Crown in the right of Canada. • The Company (under the appellant’s management) from time to time used funds held in trust for
the Crown to finance its business • It was for these circumstances that s.227.1(1) was enacted.
• Holding o Defence failed, personally liable
§ The appellant (as sole director of the Company and the manager of its business) did nothing within the meaning of s.227.1(3) to escape liability
• Ratio o Statutory duties of care will apply to Directors (e.g under the Income Tax Act) and may go beyond the regular duty of care o A Director can be personally liable under the Income Tax Act for unremitted taxes o S. 227(4) of the Income Tax Act deems amounts withheld from salaries and wages is to be held in trust for the Crown
• Notes o Facts
§ Directors were managing a company that was cash-poor o Court
§ There is additional liability is also there under s. 119 of the ABCA § Also s. 118(3)
4. Case Study: Directors’ and Officers’ Liability in Tort to Third Parties
(b) Intentional Torts: Inducing Breach of Contract McFadden v 481782 Ontario Ltd – To Escape Personal Liability for Personal Tort; Inducing Breach of Contract, Director Must Have Been Acting in the Scope of Duty; Pocklington Ingredients
• Facts
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o McFadden (P) is employed by PMAI on a fixed contract o PMAI sells business to PMAC, and McFadden becomes their employee o Mr. and Mrs. Taylor (Ds) are shareholders, officers, and directors of PMAC
§ McFadden comes over on an implied contract that was the same as PMAI. o But, PMAC’s business didn’t succeed, and PMAI wants to buy their business back
§ Mr. and Mrs. Taylor tell McFadden that his services aren’t required anymore (Directors induce the corporation to fire him)
• But before this, they pay out a total of $32K to themselves ($22k improperly) from PMAC § On behalf of PMAC, they then terminate McFadden’s employment.
o Important facts: § Nothing required termination of contract; no restrictive covenant on PMAC continuing same line of business;
they were acting to get the most amount of PMAC’s funds as possible by doing away with obligations of PMAC to McFadden
• Issue o Are the Taylors (individual Ds) personally liable to McFadden (P) for inducing breach of contract and therefore the
amount warded against the D corporation? § Note: The cause of action against PMAC is wrongful dismissal but the cause of action against the Taylors is the
tort of inducing breach of contract • Draining PMAC of its assets and getting valuable property for themselves • Fraudulent preference = debtor deals with property in a way that prefers one creditor over another
§ First, find a breach of contract then introduce the Ds into the action by finding they committed a tort • Analysis
o The tort of inducing breach of contract is committed when the D, knowing of a contract between the P and a 3rd party and intending to procure a breach of that contract to the injury of P, induced the 3rd party without justification to breach that contract
§ In this case, I would have had no hesitation in finding that the D Taylors had induced the D PMAC to breach its contract of employment with the P
§ However, it has been said that if a servant acting bona fide within the scope of his authority procures or causes the breach of a contract between his employer and a 3rd person, he does not thereby become liable to an action of tort at the suit of the person whose contract has thereby been broken (Said)
• You cannot sue the servant for interference with the contract; for he is an alter ego and cannot he cannot be sued for inducing himself to break a contract (Thompson)
• Note that in Said, the statement is premised on the condition that the servant was acting "bona fide within the scope of authority"
o I have some difficulty with the rationale offered in Said § The fact that the agent is an alter ego of the corporation may afford a defence to the corporation, but it is not
clear why that should relieve the agent § As a general rule, an agent is always liable personally for his tortious acts
o It appears to me that the real reason for relieving the agent of liability lies instead in the realm of justification § Acts of inducement are justified where they are "taken as a duty" § If an officer or director of a corporation is to be relieved as an agent of the consequences of his otherwise
tortious act of inducement, it is not because he is the company's alter ego • Rather, it is because in so acting he acts under the compulsion of a duty to the corporation
o His act is thus justified • But where he does not act under such a duty, as for example where he fails to act bona fide
within the scope of his authority, his act is no longer justified, and he becomes liable o Thus, if it could be said that in acting as they did, the Taylors were acting in furtherance of their duties and obligations as
directors and officers of PMAC, then they would have available to them the defence of justification for any breach of contract they induced
o But, in procuring and inducing the breach of the P's contract with PMAC, they were not acting in the furtherance of any such duties and obligations
§ There is nothing in the contract of sales of the assets of PMAC to PMAI that required the termination of the P's contract
§ There was no restrictive covenant in the contract of sale that precluded either PMAC or the Taylors from continuing on in the same line of business
• Indeed, the Taylors incorporated a new company, shortly after the sale to carry essentially the same business as that which had hither to been conducted by PMAC
• Holding o In procuring the breach, the individual Ds were not acting bona fide with a view to the best interests of the D PMAC, but
were rather acting to secure the transfer of the greatest possible amount of PMAC's funds to themselves unhindered by any obligations that PMAC might have to the P
o By effecting the sale of PMAC's assets to PMAI, the Ds sought as well to carry on its business without any of its existing liabilities
o The unauthorized transfer of funds is evidence that in acting as they did, the D Taylors acted with a view to their own best interests rather than those of PMAC
§ They were not, in other words, acting under a compulsion of a duty to PMAC
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§ That being the case, they fall outside the protection that would otherwise be afforded them by the principle enunciated in Said, are so liable for inducing a breach of contract
o The individual Ds are liable for inducing a breach of contract § Ordered to return $22k back to PMAC
• Ratio o If an officer or director of a corporation is to be relieved as an agent of the consequences of his otherwise tortious act of
inducement, it is not because he is the company's alter ego § Rather, it is because in so acting he acts under the compulsion of a duty to the corporation
• His act is thus justified § But where he does not act under such a duty, as for example where he fails to act bona fide within the scope
of his authority, his act is no longer justified, and he becomes liable • Notes
o Parties
§
o Facts § D directors induced PMAC to fire McFadden § PMAC is now liable for breach of contract since they're liable for wrongful dismissal § PMAC has no money though § There is a tort called inducing breach of contract, and it applies where the D directors induced PMAC to break
their contract o Issue
§ How do you establish the tort of inducing a breach of contract? o ABCA
§ Ingredients of the tort per ABCA in 369413 Alberta Ltd v Pocklington (in CB), customized to McFadden: • 1. The existence of a contract [between McFadden and PMAC]. • 2. Knowledge/awareness [here by the defendant directors] of that contract. • 3. A breach of the contract by the contracting party [here the corporate employer]. • 4. That the defendant [directors], by their conduct, induced that breach. • 5. That the defendant [directors] acted without justification. • 6. That the plaintiff, [the employee McFadden] suffered loss.
§ What is the one defence as the director? • The defence in Said
o If a servant acting bona fide within the scope of his authority procures or causes the breach of a contract between his employer and a third person, he does not thereby become liable to an action of tort at the suit of the person whose contract has thereby been broke
§ If you're acting as a Director bona fide and you induce a breach of contract, you won't be liable for the tort
• Court goes on to talk about justification, and whether they were acting under the compulsion of a duty to the corporation
o No; all the Taylors were doing were trying to take care of themselves, so they couldn't rely on the defence of Said
o Therefore they have personal liability o Note:
§ The directors of PMAC induced their own corporation to breach its contract with the plaintiff. Therefore, Said v Butt is a possible defense (though it failed).
§ The directors of Valcom in ADGA (TBA) induced employees of another company (ADGA) to breach their employment contracts with ADGA. They did not induce their own corporation (Valcom) to breach any of its contracts. Said v Butt is therefore not a possible defense.
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(c) Negligence Director Liability: ScotiaMcLeod vs ADGA
• SM: Directors and officers' liability to third parties is rare • ADGA: Liability is common • Arguments
o Is it fair for Directors to be personally liable; does this offend the Salomon principle? o The other side though is that if you committed a tort, why should you get special deal just because you're a Director?
Montreal Trust Co of Canada v ScotiaMcLeod Inc – Broad Protection for Directors for Personal Liability; Negligent Misrepresentation
• Facts
o Peoples (one D) issued debentures; Montreal Trust (P) purchased them for $17M o 2 underwriters who were directors/executives at ScotiaMcLeod (company who acted as an intermediary between
Peoples and investors) had neglected to mention that the company had other obligations (prospectus failed to disclose everything the buyer needed to know)
§ The prospectus, purchase agreement and the information disclosed only one contingent liability of Peoples in relation to Zale (a corporation in which Peoples was a majority shareholder) where in fact there were several
• The P claims that this constituted an "intentional or negligent misrepresentation by ScotiaMcLeod" o ScotiaMcLeod third partied the directors and officers of Peoples in relation to any misrepresentation made by Peoples
§ ScotiaMcLeod claims against specific directors (Gill and Gerstein) for negligent misrepresentation • Issue
o Can directors be personally liable for the tort of negligent misrepresentation?
• Analysis o The decided cases in which employees and officers of companies [such as Peoples] have been found personally liable for
actions ostensibly carried out under a corporate name are fact-specific § IN THE ABSENCE OF FINDINGS OF FRAUD, DISHONESTY OR WANT OF AUTHORITY ON THE PART OF THE
EMPLOYEES OR OFFICERS, THEY ARE ALSO RARE… [SKO emphasis]. o 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…to hold the directors of Peoples personally liable, there must be some activity on their part that takes them out of the role of directing minds of the corporation.
o While the authorities make clear that officers of corporations who are the directing minds of the corporation have the same identity of interest as directors and thus the same immunity to suit, I am not prepared to dismiss the action against Gill and Irving Gerstein at this stage
§ The threshold of sustainability of pleadings is very low § Although I am of the view that the appellants are attempting to stretch the envelope of available
jurisprudence to encompass the acts of Gill and Irving Gerstein, an action should not be dismissed at this stage simply because IT IS NOVEL IN LAW [SKO emphasis].
o Court lets out all the directors except for Charles Gill and Irving Gerstein • Holding
o The two directors could be sued for negligent misrepresentation, but not the other passive 9 directors who weren't intimately involved
• Ratio o Absent fraud, deceit, dishonest or want of authority, officers or employees of corporations are protected from personal
liability unless it can be shown that 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
§ To make a claim against director, must be either • 1) fraud, deceit etc. (lifting veil); or • 2) actions are not in best interest of corporation; or • 3) actions are tortious themselves
• Notes
o Parties
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§
§ Peoples issued senior unsecured debentures • Corporations can sell debt in your company, or equity • A debt security like a debenture represents a right to receive period payments of interest and
principal on a specified date • Instead of having to find 1 big lender and get 1 cash infusion, the company sells debt instruments
to a number of people - way of raising money § SM
• Underwriter; acts as an intermediary between the issuer (Peoples) and the people giving money o Facts
§ Plaintiff (Montreal Trust) is concerned because the prospectus, purchase agreement, and the information disclosed only one contingent liability of Peoples in relation to Zale (another company) when in fact there were several.
• According to the P, Peoples was a less attractive investment than led to believe, since they had a lot of contingencies
§ Plaintiff says ScotiaMcLeod (the defendant/appellant) as underwriter failed to disclose all of Peoples’ liabilities. This constituted "an intentional or negligent material misrepresentation on the part of the appellants [ScotiaMcLeod]."
§ ScotiaMcLeod (defendant/appellant) third partied the directors and officers of Peoples in relation to any misrepresentations made by Peoples.
§ ScotiaMcLeod claims, inter alia, against specific directors [Charles Gill & Irving Gerstein] for negligent misrepresentation.
§ The Directors say they're not liable
o Issue § Should the third-party claims be dismissed for not disclosing a reasonable cause of action?
o ONCA § The decided cases in which employees and officers of companies [such as Peoples] have been found
personally liable for actions ostensibly carried out under a corporate name are fact specific. IN THE ABSENCE OF FINDINGS OF FRAUD, DISHONESTY OR WANT OF AUTHORITY ON THE PART OF THE EMPLOYEES OR OFFICERS, THEY ARE ALSO RARE… [SKO emphasis].
• Very important part of the decision § In every case, however, the facts giving rise to personal liability were specifically pleaded (if you're going to
successfully sue someone, your pleadings have to be good; they need to be specifically). Absent allegations which fit within the categories described above (i.e. fraud, dishonesty, want of authority) 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….
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• The tort you're alleging has to have some kind of separateness o You're not acting for the corporation, you're doing your own thing
§ To hold the directors of Peoples personally liable, there must be some activity on their part that takes them out of the role of directing minds of the
§ While the authorities make clear that officers of corporations who are the directing minds of the corporation have the same identity of interest as directors and thus the same immunity to suit, I am not prepared to dismiss the action against Gill and Irving Gerstein at this stage (these 2 directors were not off the hook). The threshold of sustainability of pleadings is very low. Although I am of the view that the appellants are attempting to stretch the envelope of available jurisprudence to encompass the acts of Gill and Irving Gerstein, an action should not be dismissed at this stage simply because IT IS NOVEL IN LAW [SKO emphasis].
• Even though the action against these 2 will fail, we'll let them stand, since there was some particularity in the pleadings
o It's novel; it hasn't been successfully argued yet o 3 takeaways
§ Pleadings must be particular; set out the basis of the tort you're alleging § Directors have to make a tort their own, such that there is no longer an identity of interest § Absent fraud, dishonesty, want of authority, liability is rare
o This case seems to suggest that directors won't be found responsible should they commit torts
London Drugs Ltd v KNI Ltd – The Employees Committed a Tort and are Responsible for it • Facts
o
o LD is a P and customer who owns a transformer, and mails that to KNI (employer); employee drops transformer o LD sues KNI in breach of contract and tort of negligence o However, KNI had a clause which limited its liability to $40 o LD then also sues the employees for being negligent
• Court o Employees (Dennis and Hank) are liable in tort o There is no general rule in Canada to the effect that an employee acting in the course of his or her employment and
performing the “very essence” of his or her employer’s contractual obligations with a customer does not owe a duty of care, whether one labels it “independent” or otherwise, to the employer’s customer
o The mere fact that the employee is performing the “very essence” of a contract between the plaintiff and his or her employer does not, in itself, necessarily preclude a conclusion that a duty of care was present.
§ Dennis and Hank committed the tort, and are responsible for their own tort o Dennis and Hank could shelter under the liability clause though...
§ Not as relevant at this time
ADGA Systems International v Valcom – Narrow Protection for Directors for Personal Liability; Inducing Breach of Contract
• Facts o Correction Services Canada and the Department of Supply and Services called for tenders for the renewal of a contract
with the federal prisons to provide technical support and maintain security systems
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§ To ensure competency, Correction Services Canada required the tendering companies to provide the names and qualifications of 25 senior technicians with its tender. Both ADGA Systems International Ltd (“ADGA”) and Valcom Ltd (“Valcom”) submitted a bid for the lucrative contact
o ADGA, the plaintiff, had contracted with Correction Services Canada for a number of years prior to the call for tenders and Valcom, the defendant, was one of ADGA’s competitors
§ However, Valcom allegedly had no senior technicians on staff § In preparation for the bid, Valcom’s director, MacPherson, as well as two senior employees raided ADGA’s
technicians who agreed to join Valcom if Valcom won the bid § When Valcom was the successful tenderer, the employees moved to Valcom § In response, ADGA started a lawsuit, including a claim against the Valcom director and senior employees
personally for, inter alia, inducing breach of contract o In response to an application for summary judgment by the individuals, the motions judge concluded that “in these
circumstances, it is not possible to resolve these and many other issues by way of application for summary judgment.” o On further appeal, the court reversed, stating as follows “the Motions Judge never dealt with the threshold question as to
whether these Appellants [the individual defendants] could be held personally liable. On the evidence before the Motions Judge, there is in our view, no genuine issue for trial with respect to these Appellants. The Order is therefore set aside and there shall be Summary Judgment granted for the Appellants pursuant to their original Motion”
o The matter was further appealed to the Ontario Court of Appeal. o MacPherson claimed he was protected under the Said v Butt rule
• Issue o Whether director and employees of corporation that induces breach of fiduciary duties by employees of competitor firm
can be sued personally – even though this action was in the best interest of the defendant firm? o Should the Individual defendants be liable?
§ Is the conduct actionable, even though it was in the best interests of Valcom? o Difference between director liability in this section and lifting corporate veil…P is relying on establishing an independent
cause of action against the director…therefore doesn’t violate Salomon o In ScotiaMcLeod there was no allegation of wrongdoing against passive directors - here there is
• Analysis o London Drugs: Officers, directors and employees of corporations are responsible for tortious conduct (causing physical
injury, property damage or a nuisance) even though the conduct was directed in a bona fide manner in best interests of the company, subject to the defence in Said v Butt
§ Said v Butt: Where bona fide actions of directors and officers, acting within the scope of their authority (and in the bona fide interests of the company), cause a breach of contract between a third party and the corporation, they aren’t personally liable for the breach or the tort of inducing the breach; the claim lies against the corporation.
§ Directors are not immune from economic torts like negligent misrepresentation or breach of contract o This is completely inconsistent with ScotiaMcLeod where court said that you must make the tort your own; ADGA is saying
that the window for liability is actually much bigger • Holding
o The Directors are liable for their own tort § Said v Butt defence didn’t apply because director was not inducing the corporation itself to breach its
contract; rather, inducing other people to breach their contracts • Valcom induced employees to leave; MacPherson also induced employees, but Said v Butt would
only apply if they had induced Valcom to breach their contract o Appeal allowed; original motion for summary judgment against ADGA dismissed
• Ratio o Officers, directors, and employees are personally liable for their tortious conduct, even if the acts were in a bona fide
manner to the best interest of corporation, (except in case of Said v Butt) § Said v Butt – Where the bona fide (good faith) actions of directors and officers within the scope of their
authority cause a breach of contract between the third party and the corporation, directors are not personally liable for the breach or for a tort of inducing or causing the breach.
• Notes o Facts
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§
§ ADGA (P) sues Valcom (D, competitor) and MacPherson (sole Director of Valcom) and some senior employees § Valcom wanted to bid to provide services to Correct Services federally
• In preparation, it talked to all of its employees of ADGA and said if our bid is successful, will you ditch ADGA and join us?
• They have induced the employees of ADGA to breach their contracts § Valcom bid on the basis that the employees of ADGA would leave § Valcom's business won § ADGA was upset
o Court
§ The court assumed in this case that the Directors of Valcom were acting in the best interest of the corporate employer, Valcom
• Based on SM, how can we say their tort of inducing breach of contract has the necessary degree of separateness?
o The line is technically not broken; MacPherson was acting for the benefit of the corporation...
§ This is what the TJ thought • There was no evidence to show that what these appellants did
was to further their own interests in any respect. All evidence points to the fact that their actions were done as part of their duties of employment and to further the interests of Valcom
§ The CA wants to overturn this though • Mentions London Drugs, and how Dennis and Hank would be personally liable à therefore the
Directors here are liable • Mentions ScotiaMcLeod and other cases that affirm this point…
o "The consistent line of authority in Canada holds simply that, in all events, officers, directors and employees of corporations are responsible for their tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the company, always subject to the Said v. Butt exception."
§ SKO: This is saying that ADGA is saying the same thing as SM, which is not true!!
o The operative portion of this paragraph is the final sentence which confirms that, where properly pleaded, officers or employees can be liable for tortious conduct even when acting in the course of duty. That this is clearly the intent of what was being stated is evidenced by the conclusion that the action should proceed against two defendants; against whom negligent conduct had been properly pleaded. The reasoning of ScotiaMcLeod has been recently applied by this court in decisions which confirm my interpretation.
§ SKO: • The court is repackaging SM to just say that pleadings need to be
proper
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• But, it's not just that the pleadings have to be good, it's what you're pleading
o Torts like negligent misstatement can be pleaded, but you need to plead them properly
NBD Bank, Canada v Dofasco Inc – Accepts the ADGA Approach; Negligent Misrepresentation • Facts
o NBD Bank (P) sued Dofasco Inc (D) § Dofasco, Melville (VP Finance), and Nicholas (D/O) at trial were found jointly and severally liable to the Bank
for ~$2M § Specifically, the appellant Melville negligently misled Bank as to Algoma’s true financial state according to
TJ § Algoma was wholly owned subsidiary of Dofasco § Relying on the misrepresentation, bank lent $4 million § Two weeks later, Algoma was announced to be insolvent
• Issue o Is Melville personally liable for negligent misrepresentation?
• Analysis o ScotiaMcLeod/ADGA; difference: in this case, D’s actions were themselves tortious o Ultimately, Melville is liable. He cannot protect himself on the basis that he was acting in corporation’s best interests…can
only rely on basis that he did not owe a Duty of Care (meaning that the Court applies ADGA). But, this decision shows the confusion that SM vs. ADGA can cause
§ Court cites Scotia: “absent fraud, deceit, dishonesty or want of authority, it is rare for directors to be held personally liable for actions ostensibly carried out under a corporate name “unless it can be shown that the action are tortious and exhibit a separate identity of interest from that of the company.”
• This is Melville’s defence § Court also cites ADGA: “the consistent line of authority in Canada holds simply that…officers, directors and
employees of the corporations are responsible for their own tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the company, always subject to the Said v. Butt exception.”
o There is a relationship of proximity § When M was speaking to the bank, was he speaking on his own behalf and giving an undertaking? Is he
speaking as the corporation, or as the individual? (the Court doesn’t really ask this) § The court ultimately comes up with an ADGA proposition using SM: they state that SM allows liability to be
found, but that it does so based on whether the tort is pleaded correctly o Duty of care analysis: Applied Ann’s test (close relationship + policy considerations)
§ Ann’s Test: (if occurred today would apply Livent) • Part 1: was there a relationship of proximity sufficient to find duty of care? Yes
o 1) The D ought to reasonably foresee that the P will rely on his or her representation; and
o 2) Reliance by the P would, in the particular circumstances of the case be reasonable § Factors: D was P’s contact at company; D held himself out as capable of
making decisions; knew that carelessness would result in P’s loss • Part 2: Policy considerations sufficient to negate liability?
o Argument 1: Would subvert CCAA (insolvency) process because they were barred from making claim against corporation
§ Approach: It would be contrary to good policy to immunize officers from consequences of actions which might otherwise be made in anticipation of being forgiven under subsequent proposal or arrangement
o Argument 2: Allocation of risk was between the parties § Approach: D’s conduct put P in vulnerable position and undermined risk
allocation o Argument 3: Indeterminate liability
§ Approach: Indeterminate liability not a concern where D knows identity of P and the purpose for which representation was made
• Holding o Appeal dismissed; Melville found liable for negligent misrepresentation as Director of Algoma
§ Court applied ADGA; had the court applied ScotiaMcLeod, he would not be liable because he didn't make the tort his own
• Ratio o A director can be personally liable for their own tortious acts, even where they were acting in the best interests of the
corporation o To be personally liable, there must be a duty of care
• Notes o Also from the ONCA, like SM and ADGA
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§ Offers a small shield of protection for directors following ADGA o Parties
§ o Kinds of misrepresentations were pretty bad
§ Algoma was having short term cash problems due to the “ramping up” after the strike. [Implying that this was the only problem when there was a longer term structural problem.]
§ The promise to supply cash flow statements. [Wrongly implying that the cash flow statements would support the short term “ramping up” problem.]
§ The Royal Bank line of credit had been secured for about 10 years. [In fact, the security had only been taken in June 1990.]
§ Algoma’s U.S. accounts receivable were not pledged and available as security to the respondent. [In fact, all the receivables, including the U.S. accounts, were pledged to the Royal Bank.]
o TJ § Not going to worry about fraud (Melville was lucky on this) § But, he was negligent; it was egregious
o Melville goes to the CA relying on SM, arguing that he was acting for the benefit of his employer and thus no personal liability
§ “There’s no separateness” o Court
§ Cites SM (the idea that liability is rare), but then cites ADGA (that liability is common) – This doesn't seem to bother them
• Court cites Scotia : “absent fraud, deceit, dishonesty or want of authority, it is rare for ds to be held personally liable for actions ostensibly carried out under a corporate name “unless it can be shown that the action are tortious and exhibit a separate identity of interest from that of the company.”
• Court also cites ADGA: “the consistent line of authority in Canada holds simply that…officers, directors and employees of the corporations are responsible for their own tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the company, always subject to the Said v. Butt exception.”
§ After going through a negligence analysis (see next heading), Melville was found to have committed the tort of negligent misstatement and is thus personally liable
§ There's also no indeterminate liability o What do we do in Alberta?
§ According to Hogarth, we follow SM
Test for Negligent Misstatement, Applied to NBD • The leading case now is Deloitte & Touche v Livent Inc • In relation to the two-stage process relating to duty, Livent states at para 26: “If a relationship falls within a previously established
category, or is analogous to one, then the requisite close and direct relationship is shown. So long, then, as a risk of reasonably
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foreseeable injury can also be shown — or has already been shown through an analogous precedent — the first stage of the Anns/Cooper framework is complete, and a duty of care may be identified.” (at para. 36).
• What follows is the court’s articulation in Livent of the test in the context of negligent misstatement. Paragraph references are to Livent.
o 1. DUTY OF CARE § Stage 1: Is there a prima facie duty of care? This exists when there is proximity and reasonable foreseeability
of harm. • 1. Proximity asks “whether the parties are in such a ‘close and direct’ relationship that it would be
‘just and fair having regard to that relationship to impose a duty of care in law’ (Cooper, at paras. 32 and 34)” at para 25.
o [policy analysis relating to the parties would fit here too] o In cases of pure economic loss arising from negligent misrepresentation or performance
of a service, two factors are determinative in the proximity analysis: the defendant’s undertaking and the plaintiff’s reliance. Where the defendant undertakes to provide a representation or service in circumstances that invite the plaintiff’s reasonable reliance, the defendant becomes obligated to take reasonable care. And, the plaintiff has a right to rely on the defendant’s undertaking to do so…. These corollary rights and obligations create a relationship of proximity….
o Here: § There is pure economic loss, and the D represented himself to invite the P's
reliance § This is a close and direct relationship to establish proximity
• 2. Reasonable foreseeability of harm asks “whether an injury to the plaintiff was a reasonably foreseeable consequence of the defendant’s negligence” at para 32.
o At para 35, reasonable foreseeability is established if “(1) the defendant should have reasonably foreseen that the plaintiff would rely on his or her representation; and (2) such reliance would, in the particular circumstances of the case, be reasonable (Hercules, at para. 27).”
o At para 34: “… in cases of negligent misrepresentation or performance of a service, the proximate relationship — grounded in the defendant’s undertaking and the plaintiff’s reliance — informs the foreseeability inquiry. Meaning, the purpose underlying that undertaking and that corresponding reliance limits the type of injury which could be reasonably foreseen to result from the defendant’s negligence.”
o Here: § It was reasonably foreseeable that the bank would rely on Melville and this
reliance was reasonable § Stage 2: “Are there ‘residual policy considerations’ outside the relationship of the parties that may negate the
imposition of a duty of care (Cooper, at para. 30; Edwards, at para. 10; Odhavji, at para. 51)” at para 37. • What does this entail? Per Livent at para 40: “In Cooper, this Court identified factors which are
external to the relationship between the parties, including (1) whether the law already provides a remedy; (2) whether recognition of the duty of care creates “the spectre of unlimited liability to an unlimited class”; and (3) whether there are “other reasons of broad policy that suggest that the duty of care should not be recognized” (para. 37). In this way, the residual policy inquiry is a normative inquiry. It asks whether it would be better, for reasons relating to legal or doctrinal order, or reasons arising from other societal concerns, not to recognize a duty of care in a given case.”
• Here: o Melville's lawyer suggested reasons why there was no duty of care (SKO: He did a good
job...) § The client was speaking on behalf of the corporation § Cites legislation (CCAA) which allows corporations to restructure their debt:
It's anomalous to say that Algoma is off the hook but not its officers • The court doesn't buy this though, you can't hide behind this
§ Allocation of risk: The bank made a bad loan and is trying to do an end-run by claiming a tort against the Melville
o The court found there were no residual policy reasons o Melville was also aware of all of the circumstances that put the respondent at risk. He
had attended the relevant board meetings of Algoma and Dofasco. He had promised to provide cash flow forecasts to Mr. Hynes, but had failed to do so because, as found by the trial judge, he knew that if they were disclosed the respondent would have cancelled the facility. By his own conduct he had put the respondent in a vulnerable
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position and undermined the effectiveness of the safeguards that did exist to protect the respondent. In those circumstances, I see no policy reason for immunizing Mr. Melville from the consequences of the negligent misrepresentations that the trial judge characterized as “egregious, serious misstatements"
o 2. BREACH OF STANDARD OF CARE o 3. THE PLAINTIFF SUSTAINED DAMAGE o 4. THE DAMAGE WAS CAUSED, IN FACT AND IN LAW, BY THE DEFENDANT’S BREACH.
Hogarth v Rocky Mountain Slate Inc – ABCA Generally Follows the Broad Liability Protection From ScotiaMcLeod; Negligent Misrepresentation; Important Concurring Opinion from Slatter JA on the Current Law
• Facts o Limited partners (P) invested in a limited partnership based on misrepresentations from the General Partner (Rocky
Mountain Slate, D) and its director (Simonson, individual D) o Misrepresentations that were actionable: Management skills and abilities, misrepresentation that the engineer would be
involved, and that the project was compliant with regulation o TJ
§ Found Simonson personally liable to investors for misrepresentations § TJ found five-part test for negligent misrepresentation was met § Simonson et al provided investors with documents to facilitate their decision. § Based on facts, duty of care exists based on sufficient proximity and reasonable reliance. § TJ found there was a special relationship between Simonson and the investors such that their reliance on his
representations was both reasonably foreseeable and reasonable in the circumstances. A prima face duty of care was therefore established.
• Note: This is an ADGA principal – she should not have been applying ADGA, as the law is settled that AB is an SM jurisdiction
• Second, TJ held there were no residual policy reasons to obviate this duty (i.e. no indeterminate liability issues); the duty/special relationship stands.
§ TJ applied ADGA such that Simonson was personally liable for his own tort. § TJ: "Officers and directors of corporations are responsible for their tortious conduct in the course of their
duties and as the corporation's directing minds if that conduct is pled and the plaintiff establishes the elements of the tortious conduct.”
o Simonson alleged the TJ erred in finding there were negligent misrepresentations, that Simonson was personally liable for the losses, and failing to reduce the amount of judgment by settlement proceeds received by plaintiffs from Powell
• Issue o Are the partners individually liable?
• Analysis o Morrows/Blacklaw: Approved ScotiaMcLeod in Alberta
§ “Where those actions are themselves tortious or exhibit a separate identity or interest from that of the corporation so as to make the act or conduct complained of their own, they may well attract personal liability
o Acknowledges that he committed negligent misrepresentation, but it is not of such nature sufficient to attach personal liability
§ Negligent misrepresentation is not sufficient to establish a separate identity o Conduct of the D was not tortious itself, and was not separate from interest of corporation
§ Factors: The negligent misrepresentation was made for making money for corporation itself • ***Concurring***
o Examines the case law § Some cases approach director liability for tort under duty of care, while others along piercing the corporate
veil § London Drugs: Difference between when liability of employee is primary and corporate liability is vicarious,
and when misrepresentation is the primary liability of corporation § ADGA: distinguishes — in ADGA, P was a stranger to D corporation, who had acted on his own; also involved
tort of inducing breach of contract, not tort of negligence o Personal liability
§ Case law unclear—doesn’t distinguish between intentional torts vs negligence and economic vs physical damage
§ Factors that might indicate whether personal liability should be imposed: • 1) Whether P voluntarily dealt with corporation or whether relationship was imposed • 2) Expectations of parties • 3) Was tort independent • 4) Said v Butt
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• 5) Nature of tort, was it intentional • 6) Were damages physical or economic
o Independent tort § There are some corporate torts that are independent from the torts of human agents — where corporation
prepares promotional documents to induce investments from person who know they are dealing with corporate structure: Not independent
• Individual liability for misrepresentations should be exceptional and secondary • Factors: Materials made in the name of the corporation, not signed personally by directors, no
indication that any individual is taking personal responsibility o Duty of care analysis
§ Stage 1: Is there a prima facie duty of care? • A) Is the harm that occurred a reasonably foreseeable consequence of D’s actions? – considers
whether D should objectively have anticipated that act or omission would cause harm to P • B) Is there sufficient proximity between parties such that it would not be unjust or unfair to impose
a duty of care on D? • *** In some circumstances there may be a duty of care for directors (such as when they are directly
involved in preparing business plan and impugned materials, and in attendance at the promotional meeting – threshold test may be met)
§ Stage 2: Are there residual policy considerations outside the relationship of the parties that may negate the imposition of a duty of care?
o In this case § Duty of care à approached as novel duty of care so used Ann’s test
• 1) Foreseeability + Proximity à to establish prima facie duty of care (didn’t find one) o Foreseeability: Yes o Proximity: No, because this was a limited liability corporation
§ A) Did D reasonably foresee that P would rely on representations? Yes § B) P’s reliance was reasonable? No, not reasonable to believe that they
would be personally responsible for their accuracy • It was reasonable for D to rely on corporate vehicle to protect
himself from personal liability. • Unreasonable for P to rely on D personally
o Would be appropriate in cases involving intentional tort, fraud, or other misconduct or physical damage to find duty of care à not one for fraudulent misrepresentation
• 2) Residual policy considerations o Attaching liability would result in decreasing the viability of the corporate vehicle o An important residual policy consideration is the importance of the limited liability
corporation in the Canadian economy. § As previously noted, there is nothing illegitimate about using limited liability
business structures, and imposing a duty that undermines the viability of that structure is a legitimate policy concern
§ Factors indicating no personal liability: Only economic loss; not an intentional tort; not dishonest; knew they were dealing with LLC; sophisticated, unreasonable for them to think that director was assuming personal liability
§ Factors indicating personal liability: D involved in preparation of promotional material; knew purpose for which it was to be and was used
• Holding o They are not personally liable; there is a duty of care, but there was not a sufficiently separate tort
• Ratio o Directors/officers can be liable where:
§ a) actions are themselves tortious; or § b) acts are made in personal interest rather than in interest of corporation
• Notes o Facts
§
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§ Plaintiffs invested in a Limited P/ship based on misrepresentations from the General Partner and its director, Simonson. The investment failed.
o Issue § Can the plaintiffs successfully sue Simonson personally for negligent misrepresentation?
o TJ § Yes; Simonson et al provided the investors with documents and information to facilitate their investment
decision. A duty of care exists based on sufficient proximity and reasonable reliance. § Essentially applied ADGA
• Not sure what happened here, he should have applied SM o CA Majority – Reverses TJ
§ Per O’Brien and Rowbotham JJA, there is no personal liability on Simonson based on Morrow (Alta. C.A.) which applied ScotiaMcLeod (Ont.C.A.) That is, only where the director’s/officer’s actions are “themselves tortious or themselves exhibit a separate identify or interest from that of the corporation so as to make the act or conduct complained of their own” is personal liability founded. See para 13.
§ More specifically, according to the majority: • While Simonson did commit the tort of negligent misstatement, we are not satisfied that the
conduct of Simonson was tortious in itself, or exhibited a separate identity or interest from that of RMS, the corporation [and General Partner]. Here, the statements were made for the purposes of raising funds for the corporation and for its benefit. It is not sufficient to create a separate identity that Simonson himself was an officer and investor in the corporation. As pointed out in Morrow, having a shareholding or other financial interest in the corporation does not translate into a separate interest for purpose of establishing personal liability in trust (para 77). Nor did the trial judge identify any aspect of Simonson's conduct in making the impugned representations independent from his activity as a corporate officer. The claim against Simonson for personal liability in carrying out the business of the corporation must fail.
o Slatter JA concurred in the result, but offered additional analyses of the director’s exposure to personal liability in the context of tort law à “It’s time to add some corporate law values to this”
§ On the issue of whether the directors were personally liable for any misrepresentations, the trial judge analyzed the leading cases, and summarized her view of the law as follows at para: 59:
• “I am following that analysis and conclude that officers and directors of corporations are responsible for their tortious conduct in the course of their duties and as the corporation's directing minds if that conduct is pled and the plaintiff establishes the elements of the tortious conduct.”
o The trial judge viewed the test as one of universal concurrent liability of the corporation and those who are acting in its name. Where a tort is committed by human agents of a corporation in the name of a corporation there essentially is no corporate veil.
§ Discussion by Slatter JA of Cooper v Hobart (which gives the test for when a duty of care is established) as offering the “broad platform” upon which the law of negligent misstatement is built. [ie: the ‘special relationship’ between representor and representee as based on foreseeability and proximity.] Slatter JA relies on the SCC in Cooper v Hobart when assessing duty – with a particular interest in policy analysis. For background, here is what Cooper posits as the test for negligence:
• [Step 1: Does the defendant owe the plaintiff a duty of care? o Stage 1: Is there a prima face duty of care? That is:
§ Is the harm that occurred a reasonably foreseeable consequence of the defendant’s act?
• Reasonable foreseeability considers whether the defendant should objectively have anticipated that his or her act or omission would cause harm to the plaintiff.
§ Is there a relationship of sufficient proximity between the parties such that it would not be unjust or unfair to impose a duty of care on the defendant?
• Proximity considers whether the specific circumstances of the parties’ relationship are such that the defendant is under an obligation to be mindful of the plaintiff’s “legitimate interest” in conducting his or her affairs.
o Stage 2: Are there residual policy considerations outside the relationship of the parties that may negate the imposition of a duty of care?
§ This state of the enquiry no longer considers the relationship between the parties but asks the question more generally, to determine whether imposing a duty in these kinds of circumstances would be unwise.]
§ Slatter on Stage 1 • [para 122] As noted, Hercules Managements held that establishing a prima facie duty of care in
this type of case involves determining if "proximity" arises because the defendant ought reasonably to have foreseen that the plaintiff would rely on any representation, and reliance by the plaintiff was, in the particular circumstances of the case, reasonable. This part of the test should properly encompass the fact of reliance, the extent of reliance, and the reasonableness of both. In other words, when seeking to hold individuals responsible for misrepresentations in the
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corporate context, the issue is not whether it was reasonable for the plaintiff, in the abstract, to rely on the misrepresentations. The issue is whether it was reasonable for the plaintiff to rely on the individual director's personal involvement so as to create a personal duty of care in the director. In this appeal it was reasonable for the respondents to rely on the representations in the promotional documents, but the more focussed issue is whether it was reasonable for them to assume that the individual appellant was infused with a personal responsibility for their accuracy [emphasis added].
• [para 123] ... [That is], was it reasonable for the plaintiff to rely on the individual defendant's connection to the representation as engaging a personal duty on the part of that defendant. On these facts this stage of asserted reliance was unreasonable and beyond the reasonable expectations of the parties [emphasis added].
• [para 124] ...was it reasonable for the appellant [Simonson] to believe that he was protected from personal liability by the corporate structure, and correspondingly whether it was reasonable for the respondents [plaintiffs] to think that a duty was owed outside that corporate structure. There was nothing illegitimate about the appellant choosing to promote this business opportunity through a limited liability vehicle. Why is it then, in the words of Cooper v Hobart at para. 34 "just and fair having regard to that relationship to impose a duty of care in law" upon him? In a case involving an intentional tort, or fraud, or other misconduct, or physical damage, a duty of care would be appropriate, but not in cases of this type.
§ Slatter on Stage 2 • [para 125] Even if proximity and foreseeability are shown, Cooper v Hobart holds that residual
policy considerations must be considered before a duty of care is imposed. As discussed, there is a considerable overlap in the factors to be considered. An important residual policy consideration is the importance of the limited liability corporation in the Canadian economy. As previously noted, there is nothing illegitimate about using limited liability business structures, and imposing a duty that undermines the viability of that structure is a legitimate policy concern. While a few of the cases have paid lip service to this concept, there has been little real recognition of it in the ultimate decisions.
• [para 126] Some courts have observed that holding individuals personally liable for torts committed while conducting corporate business does not really involve a piercing of the corporate veil, or undermine the principle of independent corporate existence affirmed in Salomon v. Salomon. The individual is not being found liable for a corporate tort, but rather for his or her own tort. That may be true, but it is hardly a helpful distinction. Whether it is done directly or indirectly, a finding of personal liability has an impact on the limited liability feature of corporations, and the policy concerns are the same. This type of argument quite properly did not prevail in Said v. Butt. Holding an individual liable for a tort committed directly in pursuit of the company's business amounts to requiring that individual to grant a personal guarantee for the tort liabilities of the company. The starkest example is NBD Bank v. Dofasco (NBD Bank did not do a good job on the duty question)
§ At para 128, Slatter JA concludes that there is no personal duty of care owed by Simonson to the investors. The tort committed by the corporation “is not sufficiently ‘independent’ to engage Simonson personally and “Reliance by the respondent investors on any personal recommendation of Simonson was unreasonable.”
• There's no duty of care here • SM says there is no liability for ordinary negligence
o Slatter: Yes there is liability for ordinary negligence, but show me the duty § It's going to be very difficult for the plaintiffs to show the individual director
took personal responsibility § Note too, there is no proximity between Simonson and the investors because the investors knew they were
dealing with a limited liability corporate enterprise. o SKO on why Slatter JA’s approach is correct:
§ Remember that under s. 122, d/o could owe a duty of care to third parties (Peoples obiter) • That court didn't talk about SM or ADGA or Hogarth, since they weren't decided then; however,
they seem to be saying that SM isn't the law o At this juncture, SM cannot state the law since it's inconsistent with Peoples, albeit in
obiter § 2 additional cases…
• The ABCA came back to this issue in Hall v Stewart, and took Slatter JA's approach in their unanimous decision
o This elevates the concurring decision to the position of the ABCA • In APT Estate, 2019 ABCA 16
o Posits that view that when individual defendants take responsibility for the actions of their words, this may be sufficient to establish separateness
§ AKA, SM is the law, as understood to encompass negligent misstatement, but it's really tough to show negligent misstatement since you need to show the individual director took personal responsibility
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Comparing ScotiaMcLeod to ADGA to Hogarth • ScotiaMcLeod and ADGA
o
§ Remember that Said only applies to inducing a breach of contract § Fraud is covered by both tests. Negligence is generally only caught by the ADGA test though there is an
emerging view to the contrary. TBA. • Hogarth
o
§ Yes, it is consistent
• Although Peoples didn't talk about SM or ADGA, the obiter is a big signal o Slatter JA wants to introduce corporate law values
§ Makes it more difficult to find liability, and thus in line to ScotiaMcLeod § The investors were talking to Simonson as a corporation
• This corporation acts as a barrier o Ultimately, Slatter JA identifies a bright line for when a director is liable
§ Simonson's situation: No § But if he had assumed personal liability ("I am personally guaranteeing what the documents say is accurate")
then he's invited reliance, and this reliance would be reasonable
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• Anything short of this: There's no duty
General Overview and Summary of SM, ADGA, Hogarth, and Slatter JA Threading the Needle • Discussion Points
o 1. How values associated with tort law, on the one hand, and corporate law, on the other, collide in the area of D/O liability to third parties.
o 2. How judicial responses to that collision create inconsistent lines of authority. See: § Montreal Trust v ScotiaMcLeod Inc 1995 CanLII 1301 (ON CA), leave to appeal refused (“SM”) § ADGA Systems International v Valcom Ltd 1999 CanLII 1527 (ON CA), leave to appeal to the SCC refused
(“ADGA”) o 3. How the concurring decision in Hogarth v Rocky Mountain Slate Inc 2013 ABCA 57, leave to appeal to the SCC
refused (“Hogarth”), might prove to be a highly promising way forward.
• Focus o Focus is not on D/O liability to the corporation under s. 122 (1)(b) of the CBCA/ABCA whereby D/Os must, in relation to
the corporation, “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”
o The focus, instead, is on the D/O’s personal liability to third parties for torts committed in a business context or otherwise while pursuing a corporate purpose.
• Per Justice Le Dain in Mentmore Manufacturing Co v National Merchandise Manufacturing in 1978 o What is involved here is a very difficult question of policy. On the one hand, there is the principle that an incorporated
company is separate and distinct in law from its shareholders, directors and officers, and it is in the interests of the commercial purposes served by the incorporated enterprise that they should as a general rule enjoy the benefit of the limited liability afforded by incorporation. On the other hand, there is the principle that everyone should answer for his tortious acts.
• ScotiaMcLeod à ONCA favours the corporate law view. Accordingly: o Absent “fraud, deceit, dishonesty or want of authority,” personal liability in D/Os “is rare.” o Only extreme misconduct is captured as where directors have “shed their identity with the corporation”; or as where the
impugned 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.”
o Subsequent case law following SM confirms, with some exceptions, that there is no personal liability for tortious conduct “in the best interest of the corporation”, per Janis Sarra of UBC.
• ADGA à ONCA by way of contrast, favours the tort view. Accordingly: o The “consistent line of authority in Canada holds simply that, in all events, officers, directors and employees of
corporations are responsible for their tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the company, always subject to the Said v. Butt exception.”[Said v Butt concerns a defense to inducing breach of contract only.]
• SM says that D/O liability in tort to 3rd parties is rare o Disadvantages
§ Creates moral hazard because SM assumes that D/Os do not have liability for ordinary negligence; that is, negligence does not generally exhibit the requisite separateness. Could encourage carelessness.
§ Conflicts with the subsequent decision of Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68 which states that D/Os can owe a duty of care to third parties, pursuant to s. 122(1)(b). If the plaintiff can establish that a duty of care exists, s. 122(1)(b) supplies the standard of care which, if breached, leads to D/O liability. (Note, however, that Peoples did not cite SM or ADGA, let alone reference the conflict between them.)
§ Is inconsistent, at least somewhat, with the previous decision of London Drugs Limited v Kuehne & Nagel International Ltd, [1992] 3 SCR 299 which says that junior employees are liable for their own negligence. That is, SM creates a two tiered system.
o Advantages § Helps ensure that D/Os do not become functional guarantors of corporate operations. (See Slatter JA in
Hogarth) § Is arguably more consistent with Salomon v Salomon & Co, [1897] AC 22 (HL), including that the corporation is
a separate legal entity.
• ADGA says that D/O liability in tort is common o Disadvantages
§ Forces D/O’s to backstop corporate operations. D/Os essentially face concurrent liability with the corporation (per Slatter JA), thereby compromising aspects of Salomon.
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§ Might make D/Os conduct themselves with undue caution out of fear of liability. o Advantages
§ Consistent with the SCC in Peoples (there can be liability in negligence) and London Drugs (ie: ADGA ensures there is no longer any special deal for D/Os in a tortious context).
• Hogarth o Facts
§ Simonson, a director and shareholder of Rocky Mountain Slate Inc., was sued, among other defendants, by disappointed investors for negligent misrepresentation regarding a quarry project.
§ The trial judge found that there was a special relationship between Simonson and the investors such that their reliance on his representations was both reasonably foreseeable and reasonable in the circumstances. A prima face duty of care was therefore established.
§ Second, there was no residual policy reasons to obviate this duty (i.e. no indeterminate liability issues) according to the TJ. The duty/special relationship stands
• The TJ applied ADGA such that Simonson was personally liable for his own tort o CA reverses
§ Per majority, SM states the law of Alberta, not ADGA. Here, no liability because, while Simonson did commit the tort of negligent misstatement, it was “not sufficient to create a separate identity” as required by SM.
§ Per Slatter JA (concurring): D/Os can face liability based on ordinary negligence but it must first be established that Simonson owed a duty of care to/had a special relationship with the investors.
o Slatter JA’s approach has the advantage of being consistent with Peoples, though Peoples is not mentioned in the concurring decision or in the majority, for that matter.
§ Peoples was, however, cited by the Alberta QB in Transportaction Lease Systems Inc v Weaver 2007 ABQB 246 (in the context of a summary j application). The motions judge accepted Peoples as authority for the proposition that D/Os do face liability for ordinary negligence. However, the motions judge did not mention SM or ADGA at all.
o Slatter JA’s concurring decision also has the advantage of being consistent with the SCC’s decision in London Drugs such that D/O’s no longer get a special break on tortious liability over that offered to the junior employee.
§ Note, too, that Slatter JA also criticizes London Drugs for being too quick to find a duty of care in the defendant employees whose conduct caused damage to the plaintiff’s property.
o Slatter JA threads the needle between SM and ADGA by: § Acknowledging that D/Os can be liable for ordinary negligence and not just for torts that exhibit a
separateness, such as fraud. It is thereby somewhat consistent with ADGA. § Introducing corporate law values in assessing policy so as to make it more difficult for plaintiff to establish
liability. It is thereby somewhat consistent with SM’s reluctance to find D/Os liable to third parties in tort. o For example, Slatter JA contends that corporate law norms associated with Salomon be engaged at the stage of
assessing residual policy considerations related to the duty question. He states: § Separate corporate existence, and the resulting limited liability, is not a loophole, a technicality, or a
mischievous stratagem; it is an essential tool of social and economic policy. o Per Slatter JA re policy analysis regarding Simonson’s possible liability in negligence:
§ It is important to consider the “effect of individual liability” on “corporate structures and their viability.” § The presence of a corporation may disrupt or act as a barrier to any ostensible proximity between the
disgruntled investors and the defendant Simonson. § In terms of negligent misstatement, Slatter JA asked whether it was “reasonable for … [Simonson] to believe
that he was protected from personal liability by the corporate structure, and correspondingly whether it was reasonable for the respondents to think that a duty was owed outside that corporate structure.”
o Slatter JA concludes on this point: § The loss was economic only, this was not an intentional tort, and there was no dishonesty involved. The
investors knew they were dealing with a limited liability business structure. They were all sophisticated business people who must have realized there were risks involved in the quarry venture. They knew that the appellant Simonson, like themselves, had invested significantly in the quarry.
§ It was objectively unreasonable for them to have an expectation that if there were any misstatements in the promotional materials that Simonson was assuming or attracting personal liability for the contents, even if they were negligently made.
§ Contrast this approach to NBD Bank, following ADGA, where the court easily found a duty of care between the VP Finance and the lender in the context of negligent misstatement.
o In terms of residual policy considerations, Slatter JA stated:
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§ An important residual policy consideration is the importance of the limited liability corporation in the Canadian economy. As previously noted, there is nothing illegitimate about using limited liability business structures, and imposing a duty that undermines the viability of that structure is a legitimate policy concern. While a few of the cases have paid lip service to this concept, there has been little real recognition of it in the ultimate decisions.
o Per Slatter JA § While "holding tortfeasors accountable" and "compensating victims" are also legitimate and central objectives
of the law of tort, these concepts are not without limit. If these values always prevailed there would be no need for the test in Cooper v. Hobart. They do not automatically prevail over all other objectives, such as the legitimate desire of entrepreneurs to operate in a limited liability environment. They also do not displace any responsibility on the plaintiff to accept some risk of what is known to be a risky investment.
o What follows the bright line offered by Slatter JA in the context of a director acting in the best interests of the corporation with parties who have voluntarily dealt with a limited liability vehicle:
§ Absent a personal guarantee or other circumstance indicating that the director (or officer) has assumed personal responsibility for his words, there is no duty to the plaintiff and therefore no liability for negligence causing pure economic loss in an investment context.
• The current uncertainty in the law requires that the SCC grant to leave to heard an appeal on the point. To date, it has not done so. Leave to appeal has, in fact, been denied in many important cases, including:
o SM, ADGA, Pryce, Hogarth
Hall v Stewart – Factors Identified by Case Law as to When D/Os Would Have Personal Liability for their Own Tort; Takes Slatter JA’s Approach
• A decision of the ABCA released on March 18, 2019 summarizes, inter alia, factors identified by caselaw as to when D/Os would have personal liability for their own tort.
• Factors include: o The expectations of the parties: Was it reasonable for the plaintiff to think that the individuals involved would be
personally responsible for any damage that resulted? In the area of negligent misrepresentation, this factor takes on a particular importance: was it reasonable for the plaintiff to rely on the representation coming from the individual, rather than the corporation?
o Whether the tort was “independent”. The cases sometimes say that the employee or individual is liable for his or her “independent” torts, implying that there are some torts which are so closely identified with corporate activity that they are not fairly categorized as “individual torts” as well. However it has been held that the issue is more correctly whether the corporation was responsible for the individual tort, not the other way around;
o The case law clearly recognizes the exception in Said v Butt, specifically respecting claims of inducing breach of contract, without identifying whether it is a narrow or wide exception, nor the principles upon which it is based;
o The nature of the tort, and particularly whether it was an intentional tort o Whether the damage was physical or economic. This partly relates to accessibility to insurance, which is more common
for physical damage
Andersen v Canadian Western Trust Company – Also Validates Slatter JA’s Approach • Facts and Issue
o Whether the individual applicants (who provided investment advice through an incorporated service provider) had personal liability for the negligent misstatement alleged by the P
• Analysis o The Applicants mention in their brief and supplemental submissions that Stier and Hafer have been sued in their personal
capacity despite the fact they worked for Quarry, and CWT (P) has not provided evidence to support a claim in their personal capacity
o In this summary judgment application, the onus in the first instance is on the Applicants to demonstrate that the claim has no merit, not on CWT to demonstrate it has merit
o CWT cites Hignell where the court held that a fiduciary obligation and a duty of care in tort can be imposed on an individual financial advisor notwithstanding that he provided their services through intermediary of an incorporated service provider
o In cases of pure economic loss arising from negligent performance of a service, 2 factors are determinative in the proximity analysis: The D's undertaking and the P's reliance
§ When a prima facie duty of care is established through this analysis, the Court must then consider residual policy concerns which might negate the duty
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o In principle, a corporate officer or employee may have a personal duty of care and may be liable for acts that are in themselves tortious notwithstanding the involvement of a corporation
o The existence of personal duties on individual professional advisors, acting through a corporation, in favour of some or all of their clients is a fact-specific matter
§ Considerations include the degree of proximity in the relationships at issue, the expectations of the parties, the nature of the relationship, and the degree of reasonableness of reliance on, the individual D
o The limited summary judgment record does not sufficiently address these matters § The Applicants' position cannot be fairly determined on the record presently before the Court
• Conclusion o The Application is refused o This does not preclude the Applicants from renewing their applications after additional discovery is completed or affect
any position they take at any trial • Notes
o Talks about Hogarth and Hall (AB case that adopts Slatter JA's words) § Makes the concurring opinion valid
o In principle, a corporate officer or employee may have a personal duty of care and may be liable for acts that are in themselves tortious notwithstanding the involvement of a corporation
Apt Estate – Recent ABCA Also Validating Slatter JA’s Approach; And Repurposes ScotiaMcLeod • Repurposes SM
o If a director invites personal reliance on their words, they have essentially fit the test of separateness of SM • Based on Hogarth, Hall, and this case, a D/O can be responsible for ordinary negligence, but you have to show a duty of care which
won't be easy for the reasons above o You need to show the D/O inviting personal reliance on their words
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Chapter 6 Review
•
o Section 122 § Recall that the statutory standard of care is much higher (reasonably prudent) than it was at common law § BCE and Peoples also said that a duty of care is owed to third parties
• This isn't automatic though, the P has to show that this duty exists § BJR on s. 122
• Can be relied on as a defence to being sued • Directors have to show they
• Relied on a good process • That their decision was within the range of a reasonable decision based on what they
knew or should have known o Duty of Care
§ Van Gorkom
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• About incompetence and breach of a duty of care o Fiduciary duty
§ Very predictable ways Directors breach this duty (4) • Corporate opportunity
• CanAero • The key question to ask: Is this an opportunity that in fairness belongs to the
corporation • List of factors by Laskin to be considered in relation to whether a corporate
opportunity has been taken • Self-dealing
• Section 120 • The rule for how a D/O can get a self-dealing contract bulletproof
• Competing directors • Sports Villas
• In limited circumstances, this might be okay • Don't be a competing director though, the wiggle room is small
even though the Court doesn't say what it is • Takeovers
• Maple Leaf • Court approved the business judgment here since they had a special
committee o Other sources of fiduciary duty
§ Tongue • By circumstances of the case, the D/O owed a fiduciary duty
o Ratification to cure a breach § This won't really help d/o in particular § It only works to a certain extent pursuant to s. 243 § It's something the court takes into account, but aren't bound by it
o Liability in tort to 3rd parties § Add to the box Apt Estate case which is the last installment in this area
7. CORPORATE SOCIAL RESPONSIBILITY Introduction
• Corporations have broader obligations beyond making money • Corporate social responsibility is now very mainstream
Ferguson, Global Corruption Law: Theory and Practice • There are routes to CSR • CSR is not a new concept • Corporate social responsibility (“CSR”) is a broad and evolving concept. Its content is shaped by shifting societal expectations which
are dependent in part on the industrial context in which it operates and the people who are impacted by its behaviour. The John F. Kennedy School of Government at Harvard University explains that CSR is a concept that arises from the growing expectation that businesses should embrace social accountability. In the same vein, the Conference Board of Canada suggests that the foundation of CSR is the notion that corporations have responsibilities to stakeholders other than their shareholders.
• Industry Canada, a government department, defines CSR as “the way a company achieves a balance or integration of economic, environmental and social imperatives while at the same time addressing shareholder and stakeholder expectations.” The UK Government describes CSR as “the voluntary actions that businesses can take over and above legal requirements to manage and enhance economic, environmental and societal impacts.” Though definitions of CSR vary, international sources reflect consensus on the following characteristics:
o CSR involves obligations apart from the formal requirements of law, and is instead a reflection of normative standards; o CSR involves companies demonstrating varying degrees of commitment to concepts such as corporate citizenship,
sustainable development, and environmental sustainability; and, o Governments, citizens, and investors now generally expect companies to adopt some form of internal CSR business
strategy
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Corporate Social Responsibility in the case of BCE • Reflected in the case of BCE
o Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debentureholders in these appeals. This is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen.
Friedman on Corporation Social Responsibility – The Traditional Property View • Friedman: The shareholder primacy model/property view – doesn’t believe in CSR
o "A fundamental misconception of the character and nature of a free economy. In such an economy, there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud"
§ Essentially, corporations have no social responsibility § It needs to have a tangible benefit to the corporation for it to be worth (i.e. reputation)
• Criticisms o Friedman is just old-fashioned; people expect more of corporations now than when he said this in 1962
• This is reflected in the common law, and is also in the case law
Dodge v Ford Motor Company – Manifestation of the Property View • Facts
o Henry Ford controlled the Board and said he was not giving any more special dividends because he wanted to devote some of the money to the company to lower the price of cars (reason: To improve employment and the lifestyle of Americans)
o Minority shareholders (P) sought an order declaring a dividend of money that should've been ordered • Issue
o Should the requested dividend have been ordered? • Analysis
o The court agreed that Ford went too far o There's a difference between incidental humanitarian expenditure (i.e. building a hospital), and general purpose to
benefit mankind at the expense of others § KEY: Specific vs general § “My ambition,” said Mr. Ford, “is to employ still more men, to spread the benefits of this industrial system to
the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business.”
§ Court: “A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes.”
o Also a possibility that Ford was trying to protect the company from Dodge § "If I give special dividends I’m just funding my competition"
o There's an argument that he was looking at the corporation’s best interest in a way, but this still would have been impeachable
§ You can’t use the corporation's finances for an improper purpose • Holding
o Ford's decision not to declare dividends was impeachable o Court agreed with Dodge, dividends ordered
• Ratio o Common law takes the view here that when running a corporation, you must do so with view to profit the shareholders
(property view of corporation) § Cannot run it with a charitable purpose when it comes to a for-profit corporation
o A business corporation is organized and carried on primarily for the profit of the stockholders § The powers of the directors are to be employed to that end
o The difference between an incidental humanitarian expenditure of corporate funds for the benefit of the employees, like the building of a hospital for their use and the employment of agencies for the betterment of their condition, and a general purpose and plan to benefit mankind at the expense of others, is obvious
• Notes
o Facts § Ford has a tremendous amount of money and is very successful § Mr. Ford, who controlled the Board, decided no more special dividends; had a new idea
• Wanted to retain that in the corporation so he can devote the money towards lowering the price of cars
• Re-invest in the corporation § 2 minority shareholders, the Dodge brothers, fought Ford on this
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• Sought a court order that the usual large dividend would be declared o Court
§ Went through Mr. Ford's analysis on things § The difference between an incidental humanitarian expenditure of corporate funds for the benefit of the
employees, like the building of a hospital for their use and the employment of agencies for the betterment of their condition, and a general purpose and plan to benefit mankind at the expense of others, is obvious. There should be no confusion (of which there is evidence) of the duties which Mr. Ford conceives that he and the stockholders owe to the general public, and the duties which in law he and his codirectors owe to protesting, minority stockholders. A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes.
• You can't be philanthropic to the expense of shareholders o At this point, the Dodge brothers were in competition with Ford
§ Probably didn't want to fund the Dodge brothers... § You can conclude that Mr. Ford was in some ways trying to act in the best interests of the corporation by not
trying to find Dodge § SKO: Not sure philanthropy was involved at all, but rather Mr. Ford was being strategic § However, you cannot use corporate powers for a collateral purpose either
• The Dodge brothers could have brought an oppression action if Mr. Ford had been upfront about not wanting to fund Dodge
The Roundtable Statement – Rejection of the Traditional Property View • The goal of maximizing shareholder profit is no longer the main goal • Corporations need to govern in a way that delivers value more broadly
The Social Entity View • Corporations do have a social purpose; it's not just about making money • The corporation is not strictly a private entity • Allen
o A corporation is tinged with a public purpose o A corporation can only come into existence by act of statute, which is an act of government concurrence
• This idea reaches back in time and at least comes from the Roundtable statement o The Roundtable statement when it came out was subject to a lot of criticism, since it was breaking the property view:
§ It undercuts the notions of managerial accountability to shareholders § It's too complicated to look out for people beyond the shareholders § Other criticisms too were that it was very vague so as to be unenforceable
• How is the Roundtable statement good for the shareholders: o Helps with morale with the company; makes you feel engaged o You might make a better decision and the corporation might do better in the long run by taking this approach
§ When you have a longer term and inclusive perspective, it'll have a lot of benefits
Talisman Example – Bad Corporate Social Responsibility • Extremely profitable company, possibly funding Sudan war via the government royalty • Led to a drop in their shares due to their reputation in continuing business in Sudan • Tried to make steps to fix this, and ended up divesting their interests out of Sudan • SKO
o Shows the power of public opinion and the internet; new reality that corporations will be publicly held to account
Shareholder Proposals • One route to make management accountable to a minority shareholder who's concerned with something
o Could be a variety of topics (e.g human rights)
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Re Varity Corp and Jesuit Fathers of Upper Canada et al (Ont HCJ) – Proposal in Opposition to Application Not Circulated Because it Was for a General Political Cause, Which Wasn’t Allowed Under s. 131(5)(b) at the Time
• Facts o Application by Varity Corporation for an order permitting Varity not to include in its mailing to shareholders for the
annual general meeting a proposal that the company end its investments in South Africa; the proposal was put forward by 2 shareholders: Jesuit Fathers and Ursuline Religious
§ Application on the basis that the proposal has been submitted only because of views on apartheid (the two shareholders are anti-apartheid)
o Management argues that they do not have to circulate the proposal based on s. 131(5)(b) of the CBCA, which says that management does not have to share proposals if they are submitted for personal or general economic/political causes
o The 2 shareholders argue it has a specific purpose: Getting out of an unsafe investment environment • Issue
o Does the proposal have to be sent to shareholders, or does it fall into the exemption as a proposal for the purpose of promoting general economic, political, racial, religious, social or similar causes?
• Analysis o Section 131 CBCA: Shareholders may require corporation to circulate proposals and supporting statements o Section 131(5)(b) CBCA (exemption): Do not have to comply with s. 131 if the proposal is submitted for purpose of
enforcing personal claim/redressing personal grievance or for purpose of promoting general economic, political, racial, religious, social or similar causes
o In this case § Primary purpose of proposal is abolition of apartheid; the fact that there may be a more specific purpose or
target does not save the proposal • Holding
o Found in favour of Varity corporation; they do not have to pay for sending the proposal out to shareholders § The 2 shareholders' purpose was not specific
• Thus, Varity can use the s. 131(5)(b) CBCA exemption • Ratio
o If the proposal is only about a political issue, then under s. 131(5)(b) management does not have to circulate the proposal • Notes
o Facts § Minority shareholder (Jesuit Fathers) wanted to circulate a proposal of what they thought was important, in
opposition to an application by Varity Corp § Law under the CBCA and the ABCA (131(5)(b) and 136(5)(b) respectively)
• Management is not required to circulate these proposals; it depends on what is going on • Under the statute at the time
o Section 131(5)(b) of the Act provides that a corporation is not required to comply with a shareholder’s request if
§ (b) it clearly appears that the proposal is submitted by the shareholder primarily for the purpose of enforcing a personal claim or redressing a personal grievance against the corporation or its directors, officers or security holders, or primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes;
§ The application was opposed by the Jesuit Fathers and the Ursuline Religious. Their position was that: • (a) the onus was on the applicant; • (b) apartheid is not only socially and morally wrong, it contributes to the maintenance of an
unstable and undesirable business climate from which Varity should withdraw; • (c) most shareholders of companies such as Varity do not attend company meetings so one of the
obstacles to reaching and activating shareholders is the cost of communication; • (d) section 131 was designed to permit shareholders to communicate with other shareholders on
matters concerning the company at the company’s expense; • (e) to succeed, the applicant has to persuade the court that the proposal was submitted primarily
for the purpose of promoting general economic, political, racial, religious, social or similar causes;
• (f) the present proposal relates not to any such general purpose but to the specific business affairs of Varity in South Africa.
§ SKO thinks Jesuit and Ursuline did a good job; kept it economic too • WHEREAS present conditions in South Africa make continued viable economic investments risky;
§ Management didn’t circulate it though o Lower court
§ The language of the proposal and the supporting statement leave me in no doubt that the primary purpose of the proposal is the abolition of apartheid in South Africa
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Re Varity Corp and Jesuit Fathers of Upper Canada et al (ONCA) – Upheld Lower Court’s Decision; Important Dissent; Would it Differ Today with Amended CBCA?
• Analysis o In our opinion, Austin J corrected interpreted the section of the CBCA, and its application to the proposal put forward by
the appellants for submission to shareholders • Holding
o Appeal dismissed
• Dissent – Tarnopolsky JA o Of the view that the issue of apartheid in South Africa and its nefarious effect on investment in that country by the
respondent cannot be a "general" economic, political, racial, religious, social or similar causes; it must considered "specific" on the sense of being "exact" or "particular" as opposed to "general" in the sense of "universal" or "unbounded"
• Notes
o Court of Appeal § Affirmed what the lower court did
o Dissent § This was specific enough; it wasn't general or universal
o Varity did not seek costs at this point § Would look bad to take money from a church group
o Since this decision, the CBCA provision was amended (no longer had “exclusion of proposals that sought to promote general economic, political, racial, religious, social or similar causes" but does have this new subsection (b.1) on “not relating in a significant way to the business or affairs of the corporation”)
§ (5) A corporation is not required to comply with subsections (2) and (3) if (AKA doesn’t need to send out a shareholder proposal if):
• (a) the proposal is not submitted to the corporation at least the prescribed number of days before the anniversary date of the notice of meeting that was sent to shareholders in connection with the previous annual meeting of shareholders;
• (b) it clearly appears that the primary purpose of the proposal is to enforce a personal claim or redress a personal grievance against the corporation or its directors, officers or security holders;
• (b.1) it clearly appears that the proposal does not relate in a significant way to the business or affairs of the corporation;
• (c) not more than the prescribed period before the receipt of a proposal, a person failed to present, in person or by proxy, at a meeting of shareholders, a proposal that at the person’s request, had been included in a management proxy circular relating to the meeting;
• (d) substantially the same proposal was submitted to shareholders in a management proxy circular or a dissident’s proxy circular relating to a meeting of shareholders held not more than the prescribed period 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. o Would it be decided differently with this new amendment?
§ SKO: Not sure • Could say it would be the same result, due to subsection b.1
o "Would this allow management to exclude a proposal on human rights because it did not significantly relate to the corporation's business or affairs? This unfortunate outcome would appear to be entirely possible on the basis of the statutory wording. For that reason, it has been suggested that this exception in effect mirrors the pre-amendment CBCA's exclusion of proposals that sought to promote general economic, political, racial, religious, social or similar causes."
o NOTE: The old CBCA: Our wording under the ABCA, s. 136(5)(b)
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8. SHAREHOLDER RIGHTS AND REMEDIES INTRODUCTION TO SHAREHOLDER RIGHTS Shareholder’s Rights Chart
• • Notes
o Basic shareholder rights § Different right examples - general articulation, but these can be customized; you need to look at the share § Section 26(3) and 139 ABCA
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• S. 26(3) – Shares and classes of shares • S. 139 – Right to vote
o Shareholder control over D/Os § It's shareholders who can elect/remove directors
• S. 106(3) – Election by ordinary resolution § Can also be removed
• S. 109 – Removal of directors § Participate in AGM
• One way to know how a company is doing is by looking at the financials § Shareholder proposals
• See Varity • Shareholders who don't like how a corp is being managed can bring forward a shareholder proposal
o However, management might be able to push back if not specific enough • Discussed in s. 136 – Shareholder proposals
o Control over the corporation § Who has access to certain corporate records - s. 23 – Access to corporate records § Power to appoint an auditor (role to keep d/o's on the straight and narrow)
• s. 162 – Auditor’s appointment and remunerations • s. 163 – Dispensing with auditor
§ Shareholder initiatives • Proposals for bylaws • USAS
o S. 146 – Unanimous shareholder agreement o Comes up in Deluce
• Requisition a meeting o Comes up in Jorex - shareholders can requisition a meeting
o Control over the majority shareholders § There are limits on what a majority can do § For example, notice and conduct of meetings: There are rules governing this
• S. 134(7) – Notice of meeting, adjournment, business and notice of business o Nature of the notice that must be given
• Case law - 3 cases o Special rights in the event of fundamental changes
§ A fundamental change: Bigger changes to the corporation; changing in a large way • Examples
o Continuance § Procedure whereby a corporation incorporates in 1 jurisdiction but then
emigrates to a new jurisdiction § E.g. An ABCA corporation wants to continue as a CBCA corporation
• Would swap out the ABCA as its governing legislation o Alteration in corporate constitution
§ We know that a corporation's constitution can be amended according to a formula
§ S. 173(1) – Amendment of articles • Has to be a special resolution (not ordinary) since bigger changes
happening § S. 176(3) – Class votes
• Everyone votes, even if you don't have a voting share § S. 191(1) – Shareholders right to dissent
• Dissenters have appraisal right under s. 191(3) • Special resolution - special protection in the event of a continuance
Examples of Personal Rights Held by Shareholders • The following are a list of legal rights (except for the right to sue for oppression):
o Right to vote one’s voting share o Right to propose bylaws o Rights triggered upon a Fundamental Change o Right to sue Ds for breach of fiduciary duty (Tongue) o Right to sue Ds in tort
• Right to sue for oppression o The oppression action is a personal action - this is a personal right to sue o Usually in the context of a minority shareholder o Oppression itself: You don't need to show the violation of a legal right, just the violation of a reasonable expectation
§ This makes it an extremely broad remedy
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• Derivative Actions (not a personal action; bringing on behalf of corporation)
o Involves a shareholder or a claimant bringing an action to enforce a claimant's rights o A minority shareholder usually brings the action on behalf of a corporation o The purpose is to secure redress for the corporation, not for yourself o The corporation is the only person who has the cause of action
§ The wrong was done to the corporation, but the derivative action is the way of bringing it forward § You're proceeding on behalf of the corporation; it's not a personal action
o The injury suffered by the shareholder is indirect – usually the reduction in value of the share § If you're only complaint is only about reduction in value, you don't have a personal action, or an oppression
action; just a derivative action • When in doubt, proceed by way of oppression and derivative
RELIEF FROM OPPRESSION OR UNFAIRNESS Judicial Interpretation
(a) What is Oppressive or Unfair Conduct? Deluce Holdings Inc v Air Canada – Relief from Oppression or Unfairness; Responsiveness of the Oppression Remedy
• Facts o Air Canada (75%) and Deluce Co (25%) are shareholders in Air Ontario through a holding company, 152160 Canada Inc o Air Canada wanted to acquire 100% o There is a USA which governs their relationship which stated that upon termination of the last Deluce family member
from Air Ontario, AC has the option to acquire Deluce's interest in Air Ontario § The USA also provided for arbitration clause in event of a dispute over the value of the shares
o AC terminated employment of the father to acquire 100% ownership § They claim this was okay since there was nothing in the USA prohibiting what they did
o Deluce alleges that AC improperly exercised its majority control of the BoD of the holding company to terminate Mr. Deluce's employment as vice chair and CEO of Air Ontario, and that it did so for the sole purpose of enabling it to buy out Deluce's minority interest in the holding company, and thus Air Ontario
§ Conduct was "oppressive” per s. 241 CBCA • Issue
o Is there oppression, or was AC entitled to fire the last Deluce family member for the purpose of its own corporate objectives?
§ Should the matter go to arbitration first, or can Deluce rely on the oppression remedy? • Analysis
o There has been oppression in AC’s conduct. Deluce had a reasonable expectation that the last Deluce could only be terminated in the best interests of the corporation. Based on the application, this will go forward to trial, with P proceeding as a shareholder pursuing oppression
§ Oppression does not require a legal right, and can be found if the majority shareholder takes actions that unfairly damage the interests of the minority shareholders
§ You do not have to be malicious to be oppressive: You can act oppressively even if you think you’re acting in good faith and still be held liable
o Air Canada had the last Deluce fired by influencing its majority of the board to terminate him: Fired Deluce for an improper purpose
§ Does the USA mean that they can fire Deluce? • It doesn’t say that they can’t, but there is also an implication that it shouldn’t happen without a
good reason o In this case, AC argued they fired him for incompetence in the best interests of Air
Ontario § This was not the case § There was a letter before the termination suggesting the reason was to
acquire 100% of AO, and a representative had stated recently that he was confident in Deluce’s abilities
o “Oppressing the minority” refers to conduct that is burdensome, harsh or wrongful § But something less will do other than “oppressive”: Unfairly disregarding rights or unfairly being prejudicial à
also 2 things that work • If you actually do have oppressive conduct, it should be pleaded; but something less will do
o But, shareholders are not entitled to just having their legal rights respected: actions in good faith by the majority shareholder in the interests of the corporation may still be oppressive to the minority
§ Shareholder interests are intertwined with shareholder expectations § Shareholders could still sue if their personal interests are affected
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o You can’t just look at a USA and say “it is what it is”: If there is a reasonable expectation, it will have an impact, and if successful will impact on remedy
§ The directors can’t just do what AC tells them to: They have to act in the best interests of Air Ontario § If the nominees of AC don’t do what they want, then they will be pulled: But the court is not sympathetic to
this o Note: As minority shareholders, Deluce could have good causes of action against a number of parties
• Holding o Reasonable expectation was breached in a way that unfairly disregarded the interest of Deluce Co as a minority
shareholder o The oppression matter would have to proceed first before they could go to arbitration
• Ratio o Even where directors act in the best interest of the corporation (fulfilled fiduciary obligation), they may still oppress
the interests of minority shareholders o Strict attention should be paid to the interests of all shareholders not just their legal rights – oppression does not only
protect legal rights, but also the expectations which could be said to have been part of the compact of the shareholders. o Oppression remedy does not depend on breaching the USA or a shareholder right
§ Sufficient that reasonable expectation that has been disappointed in a way that is oppressive, unfairly prejudicial or unfairly disregards the minority shareholder
• Notes o Trying to determine is there an oppression action available to the Ps in this case? o Good example of how the oppression remedy ensures the minority shareholder isn't taken advantage of by the majority o Facts
§ § Deluce, minority shareholder indirectly in AC through a holding company - owns 25% § AC, owns 75% of the shares in Air Ontario § Deluce can appoint 3 directors, and AC can appoint 7
• Clearly AC is in control § There was a USA between the 2
• USA provides upon termination of the last Deluce, AC has option to acquire Deluce Co’s indirect interest in Air Ontario
• USA provides for arbitration in the event of a dispute over shares § In 1991, Bill Deluce is terminated from the Board
• Why would it be wrong for the AC appointed Directors to have done this? o They should have been acting in the best interests of Air Ontario, not AC o The Board can't dismiss someone for an improper purpose
§ You can't fire Mr. Deluce just to access the rights of AC to get the shares of Deluce Co
o However, the USA doesn't outline cause or without cause for termination - why add things to the USA?
§ This is what the court did o Court
§ There was nothing wrong with the performance of Mr. Deluce on the Board
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§ AC just wanted to fire him to get Deluce Co's shares § Directors cannot use their power for an improper purpose and has to be exercised in good faith § Improper purpose doctrine
• Directors have to use their powers for good and not for evil § Directors of Air Ontario cannot manage in a way that oppresses a minority § Under s. 242 ABCA - relief by court on the ground of oppression or unfairness
• Court can make an order • This conduct was contrary to s. 242
o The word oppressive in this act means something extreme § Conduct that is harsh, burdensome, wrongful
o However, something less will do § “Unfairly prejudicial” and “unfairly disregards” will also be caught
§ It is not just that Deluce Co is entitled to legal rights, its reasonable expectations are also protected • BCE talks about this in more detail
§ Governing principles • Thwarted shareholder expectation is what the oppression remedy is all about. Each shareholder
buys his shares with certain expectations. Some of these are outlandish. But some of them, particularly in a small corporation with few shareholders, are quite reasonable expectations in the circumstances. . .
• “Acts which, in law, are valid exercises of powers conferred by the articles may nevertheless be entirely outside what can fairly be regarded as having been in the contemplation of the parties when they became members of the company.”
• Bottom line o Oppression gives you a lot
§ Satisfied that oppression could be found on these facts, and AC's conduct could be found to be aggressive o Is there a derivative action here? If Deluce Co is going to advance a DA, how would this be articulated?
§ SKO • There's also a DA here • AC directors did not act in the best interests of AO; they breached their fiduciary duty
§ Thus, the same set of facts can give rise to more than 1 cause of action
BCE Inc v 1979 Debentureholders – Judicial Interpretation of What is Oppressive or Unfair Conduct; Landmark Case; Oppression Remedy in ABCA in s. 242
• Facts o A group of purchasers (headed by ON Teachers’ Pension Plan) proposed a leveraged buy-out of all the shares of BCE
§ Part of the deal meant that Bell Canada (subsidiary of BCE) would be liable for a substantial amount of new debt
• Bell Canada was to guarantee $20B of BCE debt o Before it could be implemented, the buy-out first had to be approved by the court as "fair and reasonable" under s. 192
of the CBCA o Debentureholders of Bell Canada bring an oppression action under s. 241 of the CBCA and challenge the approval of the
plan of arrangement under s. 192 as not being "fair and reasonable" § Claim it benefits BCE by 40% through share price increase, reduces the value of their debt by 20%
• Issue o Have the debentureholders been oppressed?
• Analysis o Principles underlying the remedy of oppression: "Fairness" o How to analyze an oppression claim (both must be proven by the P):
§ 1. Must show you are a complainant under s. 239(b) of the ABCA: Shareholder, security holder, director or former director or creditor
§ 2. Does the evidence support the reasonable expectation asserted by the P? • Concept of reasonable expectations:
o Contextual and objective analysis - ask if the expectation is reasonable, having regard to the facts, relationships at issue, and entire context, including if there are conflicting claims and expectations
§ Reasonable expectations are not confined to just to legal interests, and can be business interests
o Conduct of other shareholders may support claim for oppression o Director duties:
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§ Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debentureholders
• This is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen
§ But, when interests do not coincide, the duty is to the corporation and not the stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation
§ 3. Does the evidence establish that the reasonable expectation was violated by conduct failing within the terms "oppression, unfair prejudice, or unfair disregard of a relevant interest"?
• Wrongful conduct, causation, and compensable injury must be established o Application
§ Evidence support reasonable expectation of debentureholders • Expectation 1: Maintain investment grade of debt à unreasonable
o Factors: Statements about retaining investment grade accompanied by warning against forming such expectations, situation of bidding war, P could have protected themselves by negotiating contractual terms
o All competing bids required Bell to take on additional debt o Could rely on the BJR
• Expectation 2: Consider their economic interests in maintaining trading value of debt à reasonable
o Representations made over the years created expectations beyond contractual rights o One would expect the directors, acting in the best interests of the corporation, to
consider the debentureholders long and short-term interests in the course of making their ultimate decision
• Expectation 3: While not pled, their arguments amounted to an expectation that the Board would take further positive steps to restructure the purchase in a way that would maintain the market value of their debt à unreasonable
o Commercial practice: Leveraged buy-outs are not unforeseeable or unusual § The debentureholders could have negotiated protections
o Nature and size of corporations: Courts may accord greater latitude to reasonableness of expectations formed in he context of a small corporation rather than a large corporation
§ Bell is a very large corporation o Past practices: Reasonable practices may reflect changing economic and market
realities o Duty on directors to resolve conflicts between stakeholders in a fair manner that
reflects the best interests of the corporation § It was in the best interest of the corporation to accept the deal; can rely on
the BJR § Were the reasonable expectations violated by the conduct? No
• They met expectation 2 - created a competitive bidding process • Holding
o The debentureholders failed to established oppression under s. 241; appeal allowed § They had reasonable expectations that their interests would be considered by the directors in making their
decision, but those expectations were fulfilled • Ratio
o 1) Does the evidence support the reasonable expectation asserted by P? § P must identify expectations they claim are violated and establish that they were reasonable § Actual unlawfulness not required—must be wrongful § Factors: General commercial practices, nature of the corporation, relationship between the parties, past
practices, steps P could have taken to protect themselves, representations and agreements, fair resolution of conflicting interests between stakeholders
o 2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression, unfair prejudice or unfair disregard of a relevant interest"?
§ P must show that the failure to meet expectation involved wrongful conduct, causation and compensable injury
§ Oppression (highest bar): Conduct that is “burdensome, harsh and wrongful”, “visible departure from standards of fair dealing” and “an abuse of power in how corps affairs are being conducted”
§ Unfair prejudice (medium bar): Squeezing out minority shareholder, failing to disclose related party transaction, taking on substantially more debt, poison pills, paying dividends without formal declaration, preferring some shareholders with management fees and paying higher management fees than industry norm
§ Unfair disregard (lowest bar): Favouring a director by failing to properly prosecute claims, improperly reducing dividend or failing to delivery property belonging to claimant
• Notes
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o Facts § A group of purchasers (headed by Ontario Teachers Pension Plan) proposed a leveraged buy-out of all the
shares of BCE Inc. (Canada’s largest telecommunications corporation). § Bell Canada, a wholly owned subsidiary of BCE, to guarantee § $30 billion of the debt BCE would incur to support the purchase. § Bell’s debenture holders resisted because, they contend, Bell’s increased liability would have the effect of
downgrading the value of their debentures (by 20%) while conferring a benefit on the shareholders of BCE by way of a premium (of 40%).
§ Before it could be implemented, the buy-out first had to be approved by the court as “fair and reasonable” under s. 192 of the CBCA.
§ Debenture holders brought an oppression action under CBCA § (s 241) and challenge the approval of the plan of arrangement under s 192 as not being “fair and reasonable”
o Court § Step 1, show they're a complainant
• Definition of complainant in s. 239 o (b) “complainant” means
§ (i) a registered holder or beneficial owner, or a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates,
§ (ii) a director or an officer or a former director or officer of a corporation or of any of its affiliates,
§ (iii) a creditor • (A) in respect of an application under section 240, or • (B) in respect of an application under section 242, if the Court
exercises its discretion under subclause (iv), or § (iv) any other person who, in the discretion of the Court, is a proper person
to make an application under this Part. § Step 2: Meet the test for oppression
• In summary, the foregoing discussion suggests conducting two related inquiries in a claim for oppression:
o (1) Does the evidence support the reasonable expectation asserted by the claimant? And
o (2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest?
§ Recognizes some important principles regarding oppression • It's an equitable remedy • The remedy seeks to affect fairness • The remedy doesn't just enforce what is legal, but what is there RE • Oppression looks to business realities, not just narrow legalities • It's a fact-specific inquiry
o Court will decide what is just and equitable in the context of the facts § Ebrahimi
• The words [“just and equitable”] are a recognition of the fact that 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.
o Not everything is submerged into a corporation § Complainants can also under the legislation say that the D/Os have treated them oppressively § Factors that emerge from the case law that are useful in determining whether a reasonable expectation
exists include: general commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect itself; representations and agreements; and the fair resolution of conflicting interests between corporate stakeholders
• Once you establish reasonable expectations, you proceed to step (2) § Oppression references egregious conduct, however... § The CBCA has added “unfair prejudice” and “unfair disregard” of interests to the original common law
concept, making it clear that wrongs falling short of the harsh and abusive conduct connoted by “oppression” may fall within s. 241. “Unfair prejudice” is generally seen as involving conduct less offensive than “oppression”. Examples include squeezing out a minority shareholder, failing to disclose related party transactions, changing corporate structure to drastically alter debt ratios, adopting a “poison pill” to prevent a takeover bid, paying dividends without a formal declaration, preferring some shareholders with management fees and paying directors’ fees higher than the industry norm
• SKO o Agrees that squeezing out a minority shareholder is a good example o Directors paid higher than industry norm though?
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§ They have a fiduciary duty not to overpay themselves • This probably sounds more like a derivative action, not an
oppression action § Can argue that this is classically a derivative action
• Ichan Partners case § The debentureholders could not establish they had a RE that the directors of BCE would take into account
their economic interests, that the Directors would choose an option to maintain their investment grade § No matter what deal was pursued, Bell was going to take on a lot of liability as guarantor
• Under the BJR, deference should be afforded to directors who are acting in good faith • Any deal was going to end with the debentureholders taking a hit
§ Thus, the Board acted reasonably, and had a good process, made a reasonable decision; beyond this there was no RE that any deal would maintain the investment grade of the debentureholders
§ Softer claim from debentureholders: Directors would consider our interests • Court: If that's your RE, the directors did consider your interests
§ Because Step (1) wasn't met, Step (2) wasn't considered o This case is the leading test for oppression
§ Wrinkle from examples raised as oppression (since one would be a derivative action)
Re Ferguson and Imax Systems Corp – Oppression Found on a Lower Threshold • Facts
o 3 couples founded Imax company; held shares § Each husband held 700 shares of common stock § Each wife held class B stock of the company
• Class B was unredeemable and entitled the holder to receive in priority to the common shares a non-cumulative cash dividend
• Class B shares could become voting shares if the company failed to pay 5% dividends for two consecutive years
o Mrs. F (P) was a wife and worked in company until separating from Mr. F in 1972 o Company stopped paying dividends beyond minimum required in order to force her to sell her shares
§ They attempted to freeze her: put her in a position where they can cash her out o Company held special meeting to vote on resolution to amend articles to reorganize capital
§ P argues the resolution will have effect of putting her out of company • Issue
o Was this action to amend the articles and recall the class B shares oppressive to Mrs. F? § Was it sufficiently odious?
• Analysis o Effect of proposed amendment to articles: Company’s capital would be reorganized, and company could redeem class B
shares o The amendment is a fundamental change under s. 173(e)
§ Class vote is required under s. 176(4) and need it passed by special resolution § They followed this
o Fact specific inquiry - Consider: § Relationship between parties, not just legal rights § Transaction—did it result in an oppressive or unfairly prejudicial result on minority shareholder?
o In this case—oppressive § Factors:
• Small corporation controlled by same group of individuals that created it • D plays an important role in corporation (day-to-day management while husbands had day jobs) • Act was done not just by one shareholder, but by all others • She was the only one affected – differential impact
§ How was she squeezed out/ oppressed? • She was fired • Suggested she sell her shares (starved her for income) • Ferguson stopped paying dividends • Amendment to reorganize the shares and permit redemption of Class B shares (this was the most
important) • It proposed that all Class B shares redeemable, which would allow corporation to buy the shares at
FMV • They followed the statute in doing this � NOT ILLEGAL but oppression still found because it was
unfair • Holding
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o Court found oppression by the majority shareholders and ordered that the resolution not be implemented (remedy under s. 242(3))
§ Appeal allowed • Ratio
o Oppression is fact specific o Oppression remedy protects not only legal rights, but also nature of the party’s relationship o Following the law will not always help a corporation avoid an oppression claim
• Notes
o
o Facts § Initially there were 3 couples that founded IMAX
• Fergusons and 2 other couples § When set up, the husbands all got common shares § All the wives got class B shares (non-voting, right to a dividend)
• Not-redeemable, so they couldn't be forced to sell them back to the company § Mr and Mrs F are getting divorced, and there's an attempted squeeze out § Mr. F was the dominant person in the control group; how did he accomplish the squeeze out?
• Told Mrs. F her employment was terminated • Not in the interests of the company to have non-working shareholders
o Odd because the other women were non-working o This dries up her income
• Put pressure on company not to declare dividends (forces her to sell her shares) o The company was in financial shape to pay out dividends but didn't
• Proposed amendment to the articles - Changed non-redeemable class B shares to redeemable; then redeems them to end Mrs. F
o This counts as a fundamental change under the ABCA/CBCA o How is this oppression if you're falling the rules of the legislation?
§ Proposed amendments are a fundamental change under s. 173(e) § Class vote required under s. 176(4) § TJ doesn't see a problem
o Court of Appeal § Says that this was oppression § Mrs. F wouldn't be able to participate in the future growth of the company § She had a RE to participate in the future profits of the company, which was on the threshold of happening § In my opinion the company has not acted bona fides in exercising its powers to amend. By the payment of
moneys now as a capital payment, which moneys on the evidence ought to have been paid by way of dividends over the years the appellant’s nonredeemable shares are now to be redeemed and those in control
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of the company will be rid of her. She is the only one so affected. All of the other class B shareholders hold an equal number of common shares personally or through their spouses.
• 2 things o RE that she would participate in the profitability in the corporation o Differential impact - she is not affected equally to the other class B shareholders
§ The other 2 wives will access the profitability of the company through their husbands
§ Even though IMAX followed the rules in terms of capital reorganization, there's unfairness
Downtown Eatery (1993) Ltd v Ontario – Oppression Doesn’t Require Harm to the Complainant; Complainant Can Be Under s. 239(b)(iv)
• Facts o Respondents Grad and Grosman owned and operated two nightclubs o Alouche, P, appellant, was hired by Grad to manage nightclub in 1992
§ Received pay cheques from Best Beaver Inc, company controlled by G&G o Alouche received formal Notice of Discipline and was dismissed in 1993 o In 1996, Best Beaver ceased to do business and dissolved o Grad and Grosman took assets of BB and distributed to all others in their group o P had been suing for lost wages when unlawfully terminated
§ Remember though that corporation reorganized and the company that P was suing (Best Beaver) ceased to exist.
o Court uses discretion to make him a proper claimant for oppression remedy. § S. 239(b)(iv) includes “any other person who, in the discretion of the Court, is a proper person to make an
application under this Part” – makes him a judgment creditor. o Trial Judge
§ Said no oppression; reorganization not undertaken to deprive the P of recovery on his judgment, and legally permissible
• Issue o Does the D need to have intended to cause the P harm to sustain an oppression action?
• Analysis o Is P a complainant?
§ Yes, fits under s. 239 (b)(iv) — court has discretion to allow anybody to bring an oppression claim § Therefore, employee or someone bringing a claim may be able to bring oppression on this basis
o D didn’t intend to cause P harm à Doesn’t matter § If P can establish that they had a reasonable expectation that D would protect their interest, they do not need
to show that D intended to cause them harm through their conduct § Business was profitable when it was being sued. § In causing profitable company to go out of business and transferring assets, result was unfairly prejudicial or
unfairly disregarded Alouche’s interests • Holding
o Appeal allowed; oppression action against the employers was successful • Ratio
o Oppressive conduct does not need to be undertaken with intention of harming P o Oppression remedy not restricted to just past and present shareholders and directors
§ Can also be others under ABCA s. 239 (b)(iv) • Notes
o This is also quite a high watermark o From ONCA, cited by BCE o Facts
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§
§ A wrongfully dismissed • Sues for wrongful dismissal
§ Several years later, issue hasn't gone to trial, G and G reorganize companies and Best stops doing business; so that company had no assets for liability
§ A few months later, the wrongful dismissal action begins, and the P employee is successful; A wants to realize on his judgment but Best no longer exists
• What A does is goes after the assets of another company, which G and G are upset about o Issue
§ A's alleging oppression against the individual Directors for undertaking a corporate organization in the face of his claim
o Court § Is A a complainant, and under s. 239?
• Yes, under subclause (iv) § What were his RE?
• A had a RE in relation to these 2 directors and that they have a contingency fund to pay him § Was the RE disappointed in a way that was oppressive, unfairly prejudicial, or unfairly disregards his interests?
• TJ: It wasn't undertaken with any bad motives and that was okay... o CA corrects this
§ It is wrong to say that oppression requires harming a complainant; nothing in the act requires intention, just that the result was bad
§ If the effect results in harm, you have oppression • Was the reorganization oppressive in a broader sense?
o Yes o Closing a profitable company and transferring them was prejudicial and/or unfairly
disregarded A's interests § Should the court award against the Ds personally?
• The P had a RE would have this contingency fund • In failing to do so, G and G benefitted, and they were able to insulate these funds from satisfying
the P's judgment o Court was thus able to find them personally liable
Shefsky v California Gold Mining Inc – Derivative Actions Cannot be Masqueraded as Oppression Actions; Oppression Governed by Three Rules from BCE
• Facts o Fights for control of the California Gold Mining Inc
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§ CGMI was a public corporation involved in mineral exploration o Shefsky, P, appellant and his holding company allege that respondents breached his reasonable expectations that he
would control CGMI if he raised at least $5M in investments § Also, he would be able to name 3 of 5 directors on board and would retain control through shares owned by
him and the investors he introduced to CGMI § Appellants assert that the respondents engaged in oppressive conduct, including a secret placement of shares
that diluted Shefsky’s voting power and refusing to allow Shefsky to appoint a third member to the board when his initial nominee refused to accept the position.
o Private placement is utilizing an exempt prospectus to issue a block of shares o There was a secret version of this that diluted voting power
• Issue o Was there oppression?
• Analysis o Acknowledges BCE as leading case on oppression o Oppression governed by 3 principles from BCE
§ 1) Not every expectation, even if reasonably held, will give rise to a remedy because there must be some wrongful conduct, causation and compensable injury in the claim for oppression
§ 2) Not every interest is protected by oppression remedy. Oppression remedy protects only the interests of a shareholder qua shareholder. Oppression remedies are not intended to be a substitute for an action in contract, tort or misrepresentation
• Relevant to issue at pg. 446 § 3) BJR: Courts must decide whether Ds made decisions which were reasonable in the circumstances and not
whether decisions were perfect. Decisions must be in “range of reasonableness” and then given deference o No error in failing to find that loss of opportunity to gain control of CGMI was a reasonable expectation violated by Secret
Private Placement o No error in limited appellant’s complaint regarding the Secret Private Placement in being about control o Affirmation of BCE regarding oppression is personal:
§ “The oppression remedy is a personal claim and requires the complainant to identify a personal interest that is alleged to have been violated. It is not sufficient to allege that shareholders generally have an expectation that directors generally will not act oppressively. Such an assertion is contrary to the analytical framework set out in BCE”
• A derivative action should not be dressed up as oppression • Holding
o No evidence that Shefsky’s expectation that he could appoint a third director to the Board was violated in a manner that was oppressive, unfairly prejudicial or unfairly disregarded his protected interests.
o Appeal dismissed • Dissent
o Slatter found oppression o Share subscription contract had entire agreement clause; D are saying P’s reasonable expectations in relation to the term
sheet are gone because he signed a subscription agreement § Slatter says he is not interested in technical defenses
o Technical defenses to oppression claim shouldn’t succeed § Overlooks the point that oppression remedies are as much concerned with fairness as they are with strict legal
rights. o What were the reasons for the dissent regarding reasonable expectations?
§ The conduct of the respondents breached the expectations of the appellants in ways that were unfairly prejudicial and unfairly disregarded their interests
o What were the reasons for the dissent regarding oppressive conduct? § Oppression remedies are as much concerned with fairness as they are with strict legal rights, and are based on
unreasonable assumptions, or draw unreasonable inferences about the legitimate expectations of the parties o Slatter does not seem concerned that the thing was collateral
§ It was in the best interests of the company • Ratio
o Statutory oppression remedy is fact-specific • Notes
o Acknowledges BCE as the leading decision o Principles it extracts
§ First: Not every expectation, even if reasonably held, will give rise to a remedy because there must be some wrongful conduct, causation and compensable injury in the claim for oppression
§ Second: Not every interest is protected by the statutory oppression remedy. Although other personal interests may be connected to a particular transaction, the oppression remedy cannot be used to protect or advance, directly or indirectly, these other personal interests. “[I]t is only their interests as shareholder, officer or director as such which are protected. Furthermore, “the oppression remedy protects only the interests of a shareholder qua shareholder. Oppression remedies are not intended to be a substitute for an action in contract, tort or misrepresentation”
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• If you have a simple tort or breach of contract action, don't drag people through oppression, just advance the other claim
• But one thing oppression does recognize is a pattern of behaviour against the Ds § Third: Courts must not second-guess the business judgment of directors of corporations. Rather, the court
must decide whether the directors made decisions which were reasonable in the circumstances and not whether, with the benefit of hindsight, the directors made perfect decisions. Provided the directors acted honestly and reasonably, and made a decision in a range of reasonableness, the court must not substitute its own opinion for that of the Board. If the directors have chosen from one of several reasonable alternatives, deference is accorded to the Board’s decisions
o Our CA is applying Rea § Takes the position that the Court will not permit a derivative action to masquerade as an oppression action
• If it's derivative, it's derivative • While there might have been a period of time when courts will flexible for doing either, courts
aren't like that anymore - more strict § The rule in Foss v. Harbottle provides that individual shareholders have no cause of action in law for any
wrongs done to the corporation and that if an action is to be brought in respect of such losses, it must be brought either by the corporation itself (through management) or by way of a derivative action. The legal rationale behind the rule was eloquently set out as follows:
• The rule [in Foss v. Harbottle] is the consequence of the fact that a corporation is a separate legal entity. Other consequences are limited liability and limited rights. The company is liable for its contracts and torts; the shareholder has no such liability. The company acquires causes of action for breaches of contract and for torts which damage the company. No cause of action vests in the shareholder. When the shareholder acquires a share he accepts the fact that the value of his investment follows the fortunes of the company and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting. The law confers on him the right to ensure that the company observes the limitations of its memorandum of association and the right to ensure that other shareholders observe the rule, imposed on them by the articles of association. If it is right that the law has conferred or should in certain restricted circumstances confer further rights on a shareholder the scope and consequences of such further rights require careful consideration.
(b) Oppression or Derivative? ABCA Provisions Regarding Oppression and Derivative Actions
• Oppression – s. 242 o (1) A complainant may apply to the Court for an order under this section. o (2) If, on an application under subsection (1), the Court is satisfied that in respect of a corporation or any of its affiliates
§ (a) any act or omission of the corporation or any of its affiliates effects a result, § (b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in
a manner, or § (c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner
that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the Court may make an order to rectify the matters complained of.
o (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, any or all of the following:
§ (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 bylaws; § (d) an order declaring that any amendment made to the articles or bylaws pursuant to clause (c) operates
notwithstanding any unanimous shareholder agreement made before or after the date of the order, until the Court otherwise orders;
• Commencing derivative action – s. 240 o (1) Subject to subsection (2), a complainant may apply to the Court for permission to
§ (a) bring an action in the name and on behalf of a corporation or any of its subsidiaries, or § (b) intervene in an action to which a corporation or any of its subsidiaries is a party, for the purpose of
prosecuting, defending or discontinuing the action on behalf of the corporation or subsidiary. o (2) No permission may be granted under subsection (1) unless the Court is satisfied that
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§ (a) the complainant has given reasonable notice to the directors of the corporation or its subsidiary of the complainant’s intention to apply to the Court under subsection (1) if the directors of the corporation or its subsidiary do not bring, diligently prosecute, 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. o (3) Notwithstanding subsection (2), when all the directors of the corporation or its subsidiary have been named as
defendants, notice to the directors under subsection (2)(a) of the complainant’s intention to apply to the Court is not required.
• Powers of the Court – s. 241 o In connection with an action brought or intervened in under section 240 or 242(3)(q), the Court may at any time make
any order it thinks fit including, without limiting the generality of the foregoing, any or all of the following: § (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;
§ (d) an order requiring the corporation or its subsidiary to pay reasonable legal fees incurred by the complainant in connection with the action.
Hercules Managements v Ernst & Young – There’s a Difference Between a Personal Action and Derivative Action; Individual Shareholders Don’t Have a Cause of Action in Law for Harms Against the Corporation; Duty of Care Between Auditors and Shareholders Negated for Policy Reasons
• Facts
o
o Shareholders claiming negligent audit caused them harm. o NGA and NGH hired Ernst & Young (D) to do an audit o Hercules (P) was a shareholder and invested in NGA and NGH after reviewing audit o In reality audit was wrong and P lost money (claim they wouldn’t have invested if audit done right) o Also sued for loss of value of shares o Claim: 1) breach of contract; 2) negligent misrepresentation
• Issue o Whether accountants performing an audit of a corporation owe a duty of care in tort to shareholders? o Whether claims against auditors can be brought by shareholders as individuals or whether must be brought through
derivative action? • Analysis
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o There is a DoC, but this is negated by policy concerns: Would be harmful to have auditors owe a DoC to any known class of potential Ps regardless of the purpose to which they put the auditors’ reports
§ Duty of care: The possibility that shareholders would rely on financial audits meets the standard for reasonable foreseeability
§ Farley J quote (416): "Ultimately, there is no DoC owed by the auditors to the shareholders [as individuals], because the shareholders were not using the audits for the purpose for which they were created. The shareholders used the financial statements to make their own personal decisions, rather than the decisions of the corporation (i.e. overseeing management)"
§ Shareholders shouldn’t be able to rely on audit reports for whatever reason they want: If they could, auditors could be liable for effectively anything
o Shareholders argue that they lost the chance to do something about the company being on the verge of collapse, etc. Basically, argued that the negligence stopped them from exercising their power
§ Court says that this is stronger argument but still flawed: The audit was prepared for use by the shareholders as a class. Any complaints about how you are affected as an individual puts the audits to use for a purpose that they were not intended to be for
§ If this was argued as a derivative action, it might have worked: Shareholders could bring action on corporation’s behalf
o Why don’t shareholders hire their own personal auditors if they want to make investment decisions, instead of misusing audited financial statements?
o Note - The rule in Foss v Harbottle (419): The bottom line is that individual shareholders have no cause of action in law for harms against the corporation
§ The corporation is a separate legal entity: The company is liable for its torts, etc. and vice versa…it acquires causes of action for any harms or torts
§ Basically, you can’t benefit from separate legal personality regarding liability without also giving up a right to a cause of action (give-and take of corporate veil)
§ If you have been injured in a unique way, you probably do have a personal cause of action • But if you are injured in a generic way (i.e. my shares lose value), you don’t
• Holding o Action dismissed
§ Prima facie duty of care based on special relationship between Ernst and Hercules, but policy reasons obviated the finding of a duty of care owed to individual shareholders
• Danger of indeterminate liability; shareholders not using audited statements for purpose they were prepared for
§ The P should have brought an action through a derivative action claim • The bad audit was an injury to the corporation, and the injury to the shareholders was indirect and
not sufficient for an action • Ratio
o Purpose of auditor reports: To permit shareholders, as a class, to exercise their role, as a class, of overseeing the corporation’s affairs at their AGM
o Foss v Harbottle: Shareholders cannot raise individual claims in respect of a wrong done to the corporation o Claims arising out of shareholder inability to oversee management properly should be brought in a derivative action
• Notes o Court is saying there is a difference between a personal action (breach of contract, tort) and a derivative action o Classic situation for an oppression action under s. 242
§ A disgruntled minority shareholder in a closely held corps alleges conduct from the directors that is contrary to their RE
o Derivative action § Statutory means by which a claim belonging to the corp is advanced on the company's behalf by a minority
shareholder o Facts
§ Situation where EY has allegedly performed a negligent audit § Litigation brought by shareholders in the audited corporation, including Hercules
• They're bringing a personal action against the auditors o "We got these audits, and as a result we made more investments. If we had known the
true facts we wouldn't have invested and maybe would have changed up management" • Bottom line: Suing the auditors in contract and tort
§ Surely the corporation would have a cause of action too though - tort of negligence • They hired and are in contract with the auditors • Generally, the directors would sue the auditors on behalf of the corporation
§ The companies that were audited were all in receivership o Court
§ There is no contract between the shareholders and EY; so this breach of contract claim fails § On the tort claim
• Court said that the shareholder could not est that EY owed them a duty of care o Key reason: The audits weren't used for their intended purpose - shareholder didn't
use them properly
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§ It wasn't for them to make personal investments § They should have hired their own auditors for such a purpose § Reliance was not reasonably foreseeable either since it was for themselves
o The only thing the shareholder have is the value of their shares § The SCC is insisting on the difference between a personal and derivative action
• The shareholder should have just brought a derivative action in some way
Brunette v Legault Joly Thiffault – Also Goes to the Difference Between a Personal and Derivative Action; Trusts are Just Shareholders; Only Time a Shareholder Can Sue is if the Wrongdoer Owes them a Separate Legal Duty
• Facts o Brunette and Maynard managed a trust which owned 100% of the shares in a holding company
§ That holding company owned shares in Groupe Melior which owned seniors homes § In 2009, most of Group Melior went bankrupt after they received unexpected tax bills § These bankruptcies caused the holding company to go bankrupt, rendering the holding company to be
worthless o Groupe Melior’s business structure was based on bad advice from lawyers and accountants
§ They said this caused the surprise tax bills, which caused the bankruptcies, which led to the complete loss of value of the trust
§ They also argued the lawyers and accountants were supposed to tell the trust about possible problems with the tax structure right away but didn’t
§ Brunette and Maynard sued the lawyers and accountants for $55 million on the trust’s behalf. • Issue
o The main issue was whether the trust, represented by Brunette and Maynard, was allowed to sue the accountants and lawyers (did they have sufficient interest in the case to allow it to go to trial?)
• Analysis o The trust was only a shareholder of the companies that went bankrupt
§ Shareholders usually can’t sue for damages to a company they hold shares in, especially if the damage results in a loss in value of their shares
§ Only the company has the right to sue § The law only considers that when damage is done to a company, shareholders are harmed only indirectly § According to the Civil Code of Quebec, only direct harm can be claimed in court.
o The only time a shareholder can sue is if the wrongdoer owes them a separate legal duty than the one owed to the corporation, and this causes a separate harm to the shareholders
§ In order to decide if the trust had an interest that would give it the right to sue, the court had to decide if the lawyers and accountants owed it a separate duty and caused it a separate and direct harm.
• Holding o The trust can’t sue. o The Groupe Melior corporations were directly harmed, not the trust
§ The lawyers and accountants did not have an obligation to inform/advise the trust about the Groupe Melior’s tax structure.
o The trust’s loss was the same as that lost by the Groupe Melior corporations. § It was the exact same harm, which meant that it couldn’t be claimed by the shareholders, only by the
companies § The majority noted that the business structure was designed to protect the trust from having to pay the
Groupe Melior’s debts § But this also meant it couldn’t exercise the corporations’ right to sue.
• Ratio o Shareholders will only have standing to bring independent causes of action for damages flowing from losses to the
corporations they own if they plead adequate facts to establish that (1) the defendants owed the shareholders a unique obligation that was breached and (2) that the breach led to distinct and direct losses to the shareholders — losses that are separate from those suffered by the corporations.
§ Put another way: A shareholder can only independently seek damages related to losses to the corporation where that shareholder can make a distinct claim from the one the corporation could have pleaded against the defendants.
• Notes
o Goes to the idea insisting on the difference between a personal and derivative action o Court
§ [51] The principles of procedural and corporate law in Quebec bar shareholders from exercising rights of action that belong to the corporations in which they hold shares. Shareholders may institute proceedings, however, if they can demonstrate (1) a breach of a distinct obligation, and (2) a direct injury that is distinct from that suffered by the corporation in question. These requirements reflect the essential principles of civil
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liability under the C.C.Q. and provide shareholders having a direct and personal interest with a means to seek damages against third-party defendants.
§ [53] I add this. If shareholders wish to ensure that a corporation exercises its rights, they may do so by means of a derivative action in the corporation’s name: CBCA, s. 239. These rules change upon bankruptcy as all rights of action belonging to the corporation pass to the trustee. If the trustee declines to pursue an action on behalf of the corporation, the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 , provides that a creditor may obtain from the court an authorization to institute proceedings based on a right of action belonging to the corporation: s. 38(1) . As a result, other creditors are then afforded the opportunity to participate in the proceedings. Shareholders have no such right. Any surplus recovered by the creditors belongs to the estate of the corporation for the benefit of all creditors and, if anything remains, for the benefit of its shareholders. To allow shareholders to gain an independent right of action prior to this distribution for injuries suffered by the bankrupt corporation would be to upend the usual priorities of the Bankruptcy and Insolvency Act .
o Note that although this case involves Quebec civil law, the SCC confirmed that the case had broader application. See Justice Rowe, at para 24, who stated as follows: “In certain cases, the civil law produces a conclusion similar to that which would arise under the common law. This is one such case.”
Causes of Action Summary Slide – Hercules
•
Pathak v Moloo: Leave to Commence a Derivative Action Requirements per the ABCA • Requirements for a successful application for leave to commence a derivative action per ABCA and per Pathak v Moloo
o 240(1) Subject to subsection (2), a complainant may apply to the Court for permission to § (a) bring an action in the name and on behalf of a corporation or any of its subsidiaries, or § (b) intervene in an action to which a corporation or any of its subsidiaries is a party, for the purpose of
prosecuting, defending or discontinuing the action on behalf of the corporation or subsidiary. o (2) No permission may be granted under subsection (1) unless the Court is satisfied that
§ (a) the complainant has given reasonable notice to the directors of the corporation or its subsidiary of the complainant’s intention to apply to the Court under subsection (1) if the directors of the corporation or its subsidiary do not bring, diligently prosecute, defend or discontinue the action,
• [per Pathak v Moloo: met here as the letter was “clear and specific, with no indication that this is a fishing expedition.”] - you need to correspond in a way that is clear and specific on what is your problem, and let the board know
§ (b) the complainant is acting in good faith, and
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• [per Pathak v Moloo: met here as, per IGM Resources Corp: “The good faith needed is good faith with respect to commencing the derivative action, not good faith generally in all past conduct of the claimant.”]
§ (c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued
• [per Pathak v Moloo: met here as, per IGM Resources Corp: must show a “prima facie case.”] • [per SKO: Watch out as test is that it appears to be “in the interests” not that it appears to be in
the “best interests” of the corp.]
Rea v Wildeboer – When is a Matter Derivative and When is it Oppression; Oppression Requires Personal Harm; Shuts Down Malata Line of Reasoning; Here This Was a Derivative Action
• Facts o Rea (P) was co-founder, director, Vice-Chair of Martinrea Ltd o Jaekel (D) was founder and Director of Martinrea Ltd o Wildeboer and Orland were also inside directors
§ Publicly traded company o Alleging appropriation of funds by inside directors
§ Rea says misappropriation prevented Rea et al from managing their interests § Wants funds to be recovered and given back to the corporation
• Sounds derivative... § Suggesting breach of fiduciary duty owed to the corporation, but the claim is oppression
• Issue o Is this a derivative action or oppression?
• Analysis o Where oppression has been permitted even though wrongs were to the corporation, those wrongs directly affected P in a
distinct manner from the indirect effect on other shareholders o Oppression action à must show that the conduct harmed P personally, not just as it harmed the shareholders
collectively o Difference:
§ Derivative à corporation injured when all shareholders are affected equally, with none experiencing special harm
§ Oppression à harm has a differential impact on shareholders o Leave requirements for derivative action: Directors given 15 days’ notice of intention to bring application and the court
must be satisfied (i) directors will not pursue the claim; (ii) complainant is acting in good faith; and (iii) appears to be in the best interest of the corporation that the action be brought
o Oppression remedy is more likely to be found where there is a closely held corporation à greater chance that shareholder will be uniquely injured
o Application § No overlap between derivative action and oppression
• P are not asserting that personal interest has been adversely affected in any way that affected other shareholders
§ Allegations: à all of these are derivative not oppression • 1) Precluded them from managing investment/exercising right to informed vote
o BCE: Losses stemming from inability to oversee/supervise management are derivative and not personal in nature
• 2) Failure to disclose material interest o This didn’t result in any unique harm to P
§ Related to fiduciary duty • 3) Director lacked full information to exercise role
o This didn’t result in any unique harm to P § Related to fiduciary duty
• Holding o These wrongs, as pleaded, are wrongs to the corporation and form the basis of a derivative action
• Ratio o Where facts give rise to a corporate claim (derivative) and personal oppression claim it should be decided on case-by-
case basis o The harm must impact the interests of the complainant personally – giving rise to a personal action – and not simply the
complainant’s interests as a part of the collectivity of stakeholders as a whole • Notes
o When is a matter derivative and when is it oppression o Facts
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• The appellants have asserted an oppression claim under s. 248 of the Business Corporations Act alleging misappropriation of funds from Martinrea International Inc. and seeking to recover those funds for the corporation. They submit that they are entitled to proceed on that basis, arguing that the “somewhat murky” line between oppression remedies and derivative actions has all but disappeared. The respondents argue, on the other hand, that the claim is solely Martinrea's claim and that it must be pursued as a derivative action on behalf of the corporation, with leave of the court.
• This seems like a derivative matter, since it's a breach of fiduciary duty... • Confirmation that this is a derivative claim comes from the remedy sought: return of the funds to
the corporation • Thus, this likely isn't an oppression action
o Court of Appeal • I accept that the derivative action and the oppression remedy are not mutually exclusive. Cases like Malata
(outlier) and Jabalee make it clear that there are circumstances where the factual underpinning will give rise to both types of redress and in which a complainant will nonetheless be entitled to proceed by way of oppression remedy.
• However, I agree with the respondents that claims must be pursued by way of a derivative action after obtaining leave of the court where, as here, the claim asserted seeks to recover solely for wrongs done to a public corporation, the thrust of the relief sought is solely for the benefit of that corporation, and there is no allegation that the complainant’s individualized personal interests have been affected by the wrongful conduct.
• This is a derivative matter, and we're not buying it's oppression • Malata – points in opposite direction; this is what the P rely on: "We can run a derivative action as
oppression" • Court in this case said it didn't matter • In disputes involving closely held corporations with relatively few shareholders … there is less
reason to require the plaintiff to seek leave of the court. The small number of shareholders minimizes the risk of frivolous lawsuits against the corporation, thus weakening the main rationale for requiring a claim to proceed as a derivative action.
• SKO • Don't know if we should follow this • The court just gives one reason • But more importantly, the legislation requires that you separate them
• Rea shuts down the Malata line of reasoning on these facts • Malata involved a closely held corporation, and here we are dealing with a publicly traded
company • As well, all of this is essentially obiter
• Here, however, on the facts pleaded, there is no overlap between the derivative action and the oppression remedy (once one goes beyond the boiler plate repetition of the statutory language from the OBCA describing the oppression remedy). The appellants are not asserting that their personal interests as shareholders have been adversely affected in any way other than the type of harm that has been suffered by all shareholders as a collectivity. Mr. Rea – the only director plaintiff – does not plead that the Improper Transactions have impacted his interest qua director.
• Rea was not hurt in a distinct way • This is a clean derivative action
1043325 Ontario Ltd v CSA Building Sciences Western Ltd – The Distinction Between Oppression and Derivative Action is Enforced More Strictly (Rea Approach); Skene Co Showed Particular Prejudice of Damage to Warrant Oppression
• Facts o Oppression claim by 1043325 Ontario Ltd (Skene Co), a minority shareholder (one of only 2 shareholders) in the
respondent company CSA Ltd § CSA is in the business of engineering consulting § Skene Co, the principal of which is Mr. Skene, holds 44% of the issued shares of CSA § The respondent Mr. Jeck holds the remaining 56%
• At all material times, Mr. Jeck was the sole director of CSA • Issue
o Is there a valid oppression claim by Skene Co? • Analysis
o CA agreed there was oppression by the majority shareholder and sole director Jeck § For example, exceed management fees were paid to Jeck
• Can be seen as an injury to the shareholder and to the corporation
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• “In this province, the relationship between the two actions has been resolved by the principle that where a petitioner under s. 227 complains of a wrong (usually breach of fiduciary duty) to the corporation, an oppression action is unlikely to be appropriate unless he or she suffered some loss or damage 'separate and distinct from' the indirect effect of the wrong suffered by all shareholders generally”
o Malata softened the "particular loss" requirement o Rea subsequently took a more "rigorous view
§ Explained Malata on the basis that the misappropriation of funds affected "not only the company (and therefore the indirect interests of all shareholders) but the direct interests of the minority shareholder, a creditor of the company"
o CA's conclusion: The claimant in an oppression action "must show particular prejudice beyond the diminution of value of his or her shares as a result of the allegedly oppression conduct"
§ Skene Co has shown particular and personal prejudice or damage and should not be required to sue derivatively
§ “Mr. Jeck’s appropriation of a large proportion of CSA’s earnings over several years without the payment of any dividend or other benefit to Skene Co. formed part and parcel of the sustained and deliberate course of conduct that was unfairly prejudicial to Skene Co. The prejudice was suffered solely by Skene Co. as the minority shareholder; obviously, no other shareholder suffered loss or prejudice. Indeed the fact all of this occurred against the background of a two-member corporation is a key contextual factor: If Skene Co. were required to bring a derivative action on behalf of CSA against Mr. Jeck to recover the “excessive” management fees, the court would likely order that they be repaid to CSA. It of course is controlled by Mr. Jeck; thus the remedy would be wholly counterproductive.”
§ The appropriation of those funds was the culmination of the oppressive and unfairly prejudicial actions perpetrated since at least 2006.
§ “It is certainly true Mr. Jeck was ‘running’ the business and was entitled to some reward as “an owner” of CSA. But he was not the only “owner” and he was not entitled to treat CSA’s treasury as his own. The balance between majority and minority lay in determining what return to Mr. Jeck was reasonable and what was “excessive”.
• Holding o There was oppression by the majority shareholder and director Mr. Jeck
• Ratio o A claimant in an oppression action must show particular prejudice of damage beyond the diminution of value of his
shares as a result of the allegedly oppression conduct • Notes
o Cites Rea from the ONCA o Gives us a sense of what happens in BC, but also summarizes the themes we've been talking about o Question: When a shareholder has a complaint against a company, can it pursue any wrong by way of oppression?
§ Court: No • However, the action was successful here
o Case Summary § 1. Oppression claim by Skene Co, a minority shareholder in CSA Ltd. § 2. CA agreed there was oppression by majority shareholder and sole director, Jeck. § 3. For example, excess management fees paid to Jeck: Can be seen as an injury to the shareholder and to the
corporation. Solution? • In this province (BC), the relationship between the two actions has been resolved by the principle
that where a petitioner under s. 227 complains of a wrong (usually breach of fiduciary duty) to the corporation, an oppression action is unlikely to be appropriate unless he or she suffered some loss or damage “separate and distinct from” the indirect effect of the wrong suffered by all shareholders generally
• Excess management fees can be oppression § 4. References Malata’s approach as “softening of the ‘particular loss” requirement:
• A decision of the Ontario Court of Appeal suggested a softening of the “particular loss” requirement in 2008. Malata involved a company (“M”) that had three shareholders one of whom was the plaintiff, holding 18% of the shares. He was also a creditor of M. The other two shareholders held 41% each and were the only directors and officers of M. The plaintiff alleged that one of the other shareholders had misappropriated corporate funds in breach of his fiduciary duty, and sought a return of those funds back to M via an oppression claim. The defendant applied to strike out the claim on the basis that it was derivative in nature and therefore required leave. The issue on appeal was whether the chambers judge had been correct in allowing the claim to proceed as an oppression action.
§ 5. References Rea as subsequently taking a more “rigorous view” and explaining Malata on the basis that the misappropriation of funds affected “not only the company (and therefore the indirect interests of all shareholders) but the direct interests of the minority shareholder, a creditor of the company”
§ 6. BCCA’s conclusion: The claimant in an oppression action “must show particular prejudice of damage beyond the diminution of value of his or her shares as a result of the allegedly oppression conduct” at para 78.
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• This is exactly what you need to do in AB § 7. Skene Co has shown particular and personal prejudice or damage at paras 79 and 80.
• In the case at bar, Skene Co. did not seek damages for any diminution in the value of its shares in CSA. Rather it sought to have its shares purchased for a price calculated as if the fees had not been paid out, or alternatively, 44% of the fees (which it calculated as $3,205,494 in total) as damages or ‘disgorgement’. In the alternative, if leave to sue derivatively were granted, it sought an order that the fees be repaid to CSA and that CSA be ordered to pay 44% of them to Skene Co. as dividends.
• In my view, Skene Co. has shown particular prejudice or damage, personal to itself, and should not be required to sue derivatively. As seen earlier, the trial judge found that Mr. Jeck treated CSA “as if it was his alone” and without regard for the minority shareholder’s position (para. 275) and that Mr. Jeck had been motivated by the hope of buying Skene Co. out of CSA cheaply. Thus it may be said that Mr. Jeck’s appropriation of a large proportion of CSA’s earnings over several years without the payment of any dividend or other benefit to Skene Co. formed part and parcel of the sustained and deliberate course of conduct that was unfairly prejudicial to Skene Co. The prejudice was suffered solely by Skene Co. as the minority shareholder; obviously, no other shareholder suffered loss or prejudice. Indeed the fact all of this occurred against the background of a two-member corporation is a key contextual factor: if Skene Co. were required to bring a derivative action on behalf of CSA against Mr. Jeck to recover the “excessive” management fees, the court would likely order that they be repaid to CSA. It of course is controlled by Mr. Jeck; thus the remedy would be wholly counterproductive.
§ 8. Note that misappropriation of corporation opportunity claim against Jeck was advanced as oppression but this was questioned by TJ and he granted the parties leave to make further submissions re whether the matter was derivative. This was not pursued, at para 34 (not excerpted).
• This is not as important
The Conduit-Like Nature of a Derivative Action – Truck Slide
•
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Case Law Summary: Oppressive vs Derivative
• • (Disregard the cases we did not talk about)
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Scope of Relief Available
Wilson v Alharayeri – 2-Part Test for When a D/O Will Be Personally Liable In Oppression; 4 General Principles in Fashioning a Remedy
• Facts o Allegation that Mr. Wilson treated Alharayeri (P) unfairly; played key role in convincing the Board not to convert P's
shares into more valuable common shares § P was on the cusp of a big pay day, and Wilson was able to influence the Board to prevent this § Steps taken by the Board to raise more money for corporation; resulted in more shareholders
• Leads to share dilution o Lower court
§ Ordered a personal remedy against Mr. Wilson • Issue
o When can we have a personal order against directors in the context of oppression? • Analysis
o Determining the personal liability of director requires a two-pronged approach (Budd Test): § (1) Oppressive conduct must be properly attributable to the director because of his or her implication § (2) The imposition of personal liability must be fit in all of the circumstances…
o 4 general principles for fashioning a remedy under s. 241(3) of the CBCA § 1. The oppression remedy must in itself be a fair way of dealing with the situation
• (1) Personal benefit; • (2) Control increase; • (3) Breaching personal duty; • (4) Misusing corporate power; • (5) Where a remedy against others would prejudice other security holders; • (6) Closely held corporation, director has virtual control • NOTE: Personal benefit and bad faith are hallmarks BUT NOT NECESSARY
§ 2. Any order "should go no further than necessary to rectify the oppression" § 3. Any order should serve "only to vindicate the reasonable expectations" of the complainant(s) § 4. A court "should consider the general corporate law context in exercising its remedial discretion". Director
liability should not be ordered where other forms of relief) may be more fitting in the circumstances" o Wilson accrued a personal benefit as a result of the oppressive conduct: He increased his control over Wi2Wi through the
conversion of his C Shares (which was not the case for the C Shares held by others) into common shares, which allowed him to participate in the Private Placement despite issues as to whether the test for conversion had been met
§ This was done at the detriment of Alharayeri, whose own stake was diluted due to his inability to participate in the placement
o Quantum of the order was fit as it corresponded to the value of the common shares prior to the Private Placement. o Remedy was appropriately fashioned to vindicate Alharayeri's reasonable expectations that:
§ (1) His A and B shares would be converted if Wi2Wi met the applicable financial tests laid out in the corporation's articles, and
§ (2) The Board would consider his rights in any transaction impacting the A and B shares • Holding
o Personal remedy against Wilson § Appeal dismissed
• Ratio o The oppressive conduct must be properly attributable to the director because he/she is implicated in the oppression and
imposition of personally liability must be fit in all the circumstances o Two-prong test for determining personal liability of a director:
§ (1) Oppressive conduct must be properly attributable to the director because of his or her implication § (2) The imposition of personal liability must be fit in all of the circumstances…
o 4 general principles for fashioning a remedy under s. 241(3) of the CBCA § 1. The oppression remedy must in itself be a fair way of dealing with the situation § 2. Any order "should go no further than necessary to rectify the oppression" § 3. Any order should serve "only to vindicate the reasonable expectations" of the complainant(s) § 4. A court "should consider the general corporate law context in exercising its remedial discretion". Director
liability should not be ordered where other forms of relief) may be more fitting in the circumstances" • Notes
o Facts § W is the villain; Director
• Due to steps taken by W, the value of A's shares were diluted § TJ found oppression, and made an order against the oppressor personally
o Issue § When can you make an order so that the bad guy (D/O) is personally liable?
o Case Summary
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§ Per the SCC, there is no universal formulation as to when a D/O will be personally liable in oppression. The SCC endorses Budd which offers a two-prong test:
• a. The oppressive conduct must be “properly attributable to the director because he or she is implicated in the oppression”, at para 47;
• b. the “imposition of personal liability [must] be fit in all the circumstances” at para 48. o As to fitness under b. above, there are at least four general principles or guideposts:
§ 1. “the oppression remedy request must in itself be a fair way of dealing with the situation” at para 49. The SCC cites Markus Koehnen’s identification of five situations where personal orders might be appropriate as providing some indicia of fairness (ie: Ds: obtaining a personal benefit; increasing control over the corp; breaching a personal duty; misusing a corporate power; where a remedy against the corp would prejudice other security holders at para 32). Note too that “personal benefit and bad faith remain hallmarks of conduct properly attracting personal liability” at para 50 but are not exclusive.
§ 2. Any order “should go no further than necessary to rectify the oppression” at para 53.
• Don't want to punish people; just fix the problem § 3. Any order should serve “only to vindicate the reasonable expectations” of
the complainant(s). § 4. A court “should consider the general corporate law context in exercising its
remedial discretion” at para 55. Director liability should not be ordered where other forms of relief “may be more fitting in in the circumstances” at para 56.
§ Wilson is personally liable • 1. Conduct attributable to him • 2. The imposition of liability fit in the circumstances
o The share value problem was to W's personal benefit
Naneff v Con-Crete Holdings Ltd (Ont Ct J (Gen Div)) – TJ Found Oppression; Orders that the Business Be Sold in Its Entirety and Any Family Member Could Bid
• Facts o Alex Naneff was the ‘black sheep’ of his wealthy family that owned a number of prosperous companies; he was
disappointing his parents regularly; they didn’t like his partner or life choices § Fired him from all positions in company (wrongfully dismissed, removed as officer/director); excluded from
daily management o Q: What are his reasonable expectations, and have they been disappointed in a way that is unfairly prejudicial?
§ Expectation of becoming co-owner on death of father • Issue
o Is there an oppression claim? • Analysis
o Alex had rights under corporations law no matter how much the family disapproved of his choices § In normal circumstances, the wrongful dismissal of an employee would not, of itself, provide the basis for an
oppression remedy, but Alex’s interests were integrally intertwined with his interests as a shareholder and director and his dismissal was designed to exclude him from any active role in the corporation.
o Among alleged oppressive conduct: § 1) Firing him. § 2) Exclusion from the day-to-day operations and management of the business and from any meaningful
participation as a director and shareholder. § 3) Refusing to repay the plaintiff's shareholder loans within a reasonable of time (these loans had been made
by Alex to the company). § 4) Refusing to pay the plaintiff severance pay in lieu of notice of termination of his employment. § 5) Paying a $1.35 million bonus and another loan to the father. § 6) Other actions that essentially made Alex’s shares worthless.
o Although termination of employment is not oppressive by itself, since there was no evidence that Alex’s professional conduct had been sub-par, his firing was motivated by non-professional reasons. (look for overall pattern of oppression)
o What is the remedy for oppression? § 4 orders made:
• 1) Lot that was gifted to Alex but never transferred: Held in trust for Alex by father • 2) Employment dismissal: Damages of 2-year salary awarded for unlawful dismissal • 3) Court undoes the twilight voting provision
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• 4) Alex’s equity in the company—3 options o i) Restore Alex to position and remove father – Too harsh as his father started it o ii) Business ordered to be sold in its entirety and any family member can bid – chose
this as it gives Alex the opportunity to continue in the business § CA as you’ll see below: Too harsh as it was his father’s business
o iii) Shareholders required to purchase Alex’s shares at fair market value with no minority discount
§ CA overturns ii) and chooses this • Holding
o Oppression remedy succeeds § Order made that companies are to be put up for sale and sold to the highest bidder
• Ratio o The remedies available for oppression are vast - and can be very harsh
§ Within judge’s discretion to find an equitable and fair outcome. • Notes
o Parties
§
o Court § Thus, in my view, this “shareholder’s expectation” on the part of Alex was a reasonable one, and one which
underlies the entire corporate relationship between the members of the Naneff family. It must be taken into account when assessing the conduct of the Respondents and the treatment to which Alex was subjected to at and following Christmas 1990.
§ All the steps taken by Alex's parents amounted to oppression § Another issue of oppression was wrongful dismissal
• However isn't wrongful dismissal a breach of contract? o Here, it's not just that he was fired, there was a whole pattern of oppression against him o Thus, you would want to include this in the oppression action
§ He was removed from the company not for his competence, but due to his personal affairs § Remedy
• Gives A 2 years comp for wrongful dismissal • And, regarding A's shares - 3 options
o 1) Firstly, he submits that I should make an Order restoring Alex to the positions he held as at December 24, 1990 and directing that he be employed on the same terms as is Boris. Coupled with this order, he asks that I make an order removing the voting rights from the preferred shares held by Mr. Naneff in Rainbow and Con-Crete and from the Class “A” and Class “B” shares in Con-Crete and Rainbow. This would, in effect, put Alex and Boris in charge and remove Mr. Naneff from his position of control.
§ Court rejects this • This would be treating Mr. Naneff unfairly
o 2) Alternatively, he seeks an Order that the Rainbow Group of companies be placed on the market for sale on a going concern basis to the highest bidder, through an agent
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responsible to the Court. This would give each of Alex and Boris an opportunity to buy, and doesn’t arbitrarily freeze Alex out of the business which has been his life.
§ Court liked this option • Gives A a chance to stay with the company, which he spent his
whole life with • This also has the effect of making Boris lose control over his own
companies o 3) In the third alternative, Mr. Bellmore asks for an Order requiring the Respondents to
acquire Alex’s shares at fair market value and without any minority discount on the basis that Alex owns what is potentially - on his father’s death a 50% control block.
§ Court rejected this last option • This rewards Mr. Naneff for his oppressive conduct
• Goes with option 2: Business sold in its entirety
Naneff v Con-Crete Holdings Ltd (ONCA) – Reverses the TJ’s Order; Ordering the Sale of the Company is too Punitive Towards Mr. Naneff; Was Never a Reasonable Expectation that Alex Could Purchase the Company; Discretionary Powers Under the OBCA Must Be Exercised With 2 Important Limitations
• Facts o Appeal from above
• Issue o Is the remedy ordered by the trial court unjust? o Is there a more appropriate remedy?
• Analysis o Appellate courts should show high deference to trial courts in carving out remedies under the oppression heading (based
on construction of the statute). § However, in the circumstance of this case, ordering the sale of the entire family company to compensate
Alex for his equity stake is manifestly unjust. § The fact that this is fundamentally a family matter must be kept in mind when fashioning the remedy § The remedy must be fair to both parties, including the other shareholders and directors that caused the
oppression • If the remedy goes beyond what is required to correct the oppression, then it is not authorized by
law. § In this case, the remedy of ordering the sale of the company is punitive to Mr. Naneff, and that goes beyond
what the remedy should address. • Giving Alex the opportunity to purchase the company would put Alex in a better position than he
ever reasonably would have expected while his father was living § Correct remedy: Mr. Naneff should be given the opportunity to purchase Alex's shares and hence retain
control of the company he had spent his entire life building. § Discretionary powers in issuing oppression remedies have two limitations:
• 1) They must only rectify the oppressive conduct • 2) They may protect only the person’s interest as shareholder, D, or O as such
o A remedy that rectifies cannot be a remedy which gives a shareholder something that even he never could have reasonably expected
• Holding o Appeal allowed; the correct remedy is for Mr. Naneff and Alex's brother to purchase Alex's shares in the companies at fair
market value • Ratio
o Remedy for oppression must not go beyond what is required to rectify the oppression § Cannot be a remedy which gives a shareholder something that he never reasonably expected
• Notes o This is reversed by the CA o Analysis
§ The remedy the TJ gave was something A could never expected • He could not have been expected to co-own the family business while Mr. N was still alive
§ Recalibrates what the RE are, and says that he could only have RE to co-own the business if he stayed in the good graces of his father
• This is a huge contingency § Gives a test: When fashioning a remedy in an oppression claim, there's 2 limits as to what the court can do -
The discretionary powers in s. 248(3) OBCA must be exercised within two important limitations: • (i) They must only rectify oppressive conduct • (ii) They may protect only the person’s interest as a shareholder, director or officer as such
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§ The order of TJ gave Alex something which he knew he could never have while his father was alive and active – the opportunity to obtain full control of the family business. A remedy that rectifies cannot be a remedy which gives a shareholder something that even he never could have reasonably expected.
§ The second error in this remedy is that it attempts to protect Alex’s interest in the family business as a son and family member, in addition to protecting his interest as a shareholder as such
• Bringing in family relationships too much o Holding
§ Reveres what the TJ did by way of remedy § New remedy
• Option 3
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Chapter 8 Review
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