Table of Contents

1. AGENCY 5

ELEMENTS OF THE AGENCY RELATIONSHIP 5GORTON V. DOTY [1937] 5UNDISCLOSED PRINCIPAL 5FRIEDMANN EQUITY DEVELOPMENTS INC. V. FINAL NOTE LTD [2000] 5DISTINCTION BETWEEN ACTUAL, APPARENT, AND OSTENSIBLE AUTHORITY 6FREEMAN & LOCKYER V. BUCKHURST PARK PROPERTIES (MANGAL LTD.) [1964] 6WATTEAU V. FENWICK [1893] 7DISTINCTION BETWEEN AGENCY AND EMPLOYMENT: QUESTION OF VICARIOUS LIABILITY OF MASTER (EMPLOYER) FOR THE TORTS OF ITS SERVANT (EMPLOYEE) DISTINGUISHED FROM AGENCY 7671122 ONTARIO LTD. V. SAGAZ INDUSTRIES CANADA INC. [2001] 7

2. PARTNERSHIPS 8

NATURE AND EXISTENCE OF PARTNERSHIP RELATIONSHIP 8KHAN V. MIAH [2000] 8HURST V. BYRK [2002] 8INDICA OF THE PARTNERSHIP RELATIONSHIP 8PARTNERSHIP ACT, R.S.O. 1990 (SS. 1-3) 8POOLEY V. DRIVER [1876] 9A.E. LAPAGE LTD V. KAMEX DEVELOPMENTS LTD. (AND MARCH) [1977] 10LEGAL NATURE OF THE PARTNERSHIP 10RE THORNE AND NEW BRUNSWICK WORKMANS’ COMPENSATION BOARD 10PARTNERSHIP ACT, R.S.O 1990 SS. 1, 2, 3 (PA) 11RELATIONSHIP AND NATURE OF THE RELATIONSHIP BETWEEN THE PARTNERS 11MEINHARD V. SALMON [1928] 11OLSON V. GULLO [1994] 11RELATIONSHIP OF THE PARTNERS TO THE OUTSIDE WORLD 12STROTHER V. 3464920 CANADA INC. [2007] (BBCA AND SCC) 12DISSOLUTION OF THE PARTNERSHIP 13HURST V. BYRK, [2000] 13PARTNERSHIP ACT, SS. 6, 7, 11, 13, 24, 28-30, 33-35 14WRAPPING UP PARTNERSHIPS & LIMITED PARTNERSHIPS AND THE QUESTION OF CONTROL BY LIMITED PARTNERSHIPS 14HAUGHTON GRAPHIC LTD. V. ZIVOT [1986] 14LIMITED PARTNERSHIP ACT, R.S.O. 1990, S.13(1) 14

3. CORPORATIONS 14

(A) GENERAL CONSIDERATIONS 14

CONSTITUTIONAL CONSIDERATIONS OF CORPORATE LAW IN CANADA. CONCURRENT PROVINCIAL AND FEDERAL POWER OF INCORPORATION. LIMITS OF PERMISSIBLE PROVINCIAL INTERFERENCE WITH FEDERALLY-INCORPORATED CORPORATIONS 14REFERENCE IN THE MATTER OF THE INCORPORATION OF COMPANIES IN CANADA [1913] 14BONANZA GOLD MINING CO., LTD. V. THE KING [1916] 15

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ABILITY BY INCORPORATING JURISDICTIONS TO GRANT EXTRATERRITORIAL CAPACITY TO ITS CORPORATIONS 15JOHN DEERE PLOW CO., LTD. V. WHARTON [1915] 15APPLICATION OF THE CHARTER TO CORPORATIONS AND THE STANDING OF CORPORATIONS TO CHALLENGE LEGISLATION ON THE BASIS OF THE CHARTER 16CANADIAN EGG MARKETING AGENCY V. RICHARDSON [1998] 16CONSTITUTION ACT, 1867, SS.91 (POGG), 91(15) AND 92(11) 17CBCA, R.S.C. 1985 SS.3(4)-(5) AND 15(2)-(3) 17

(B) THE PROCESS OF CREATION OF A CORPORATION AND ITS EFFECT 17

PRE-INCORPORATION CONTRACTS 17KELNER V. BAXTER [1866] 17SHERWOOD DESIGN SERVICES INC. V. 872935 ONTARIO LTD. [1998] 17MECHANICS OF CREATING A CORPORATION; DATE ON WHICH A CORPORATION IS CREATED; QUESTIONING THE VALIDITY OF INCORPORATION 18C.P.W. VALVE AND INSTRUMENTS LTD. V. SCOTT 18EFFECT OF INCORPORATION 18SALOMON V. SALOMON CO. 18BASIC CORPORATE STRUCTURE: DISTINCTION BETWEEN ARTICLES AND BYLAWS; THE DEATH OF THE ULTRA VIRES DOCTRINE 19ATTORNEY GENERAL OF BELIZE V. BELIZE TELECOM LTD. 19CBCA SS.9, 14, 15-18, 102-3(1) ET (2), 104-106, 109, 115-116, 121, AND 256(2) 20CORPORATE PURPOSE: THESIS 20FORD V. DODGE 20ANTI-THESIS 20SHLENSKY V. WRIGLEY 20CANADIAN SOLUTION 21BCE INC. V. 1976 DEBENTUREHOLDERS [2008] 21RECENT LEGISLATIVE DEVELOPMENTS IN BC AND NS 21BC FINANCE STATUTES AMENDMENT ACT, 2012 21NS COMMUNITY INTEREST COMPANIES ACT, 2012 21

(C) SHAREHOLDERS 21

SOURCES OF FINANCING AVAILABLE TO A CORPORATION. BASIC DISTINCTION: DEBT AND EQUITY. WHAT IS A SHARE: THE BASIC NATURE OF A SHARE AND BASIC RIGHTS ON A SHAREHOLDER 21SPARLING V. QUEBEC (CAISSE DE DÉPÔOT ET PLACEMENT DU QUÉBEC) 21ATCO LTD. V. CALGARY POWER LTD. 22BOWATER CANADIAN LIMITED V. R.L. CRAIN AND CRAISEC LTD. 22BASIC LIMITATION OF THE POWER OF A SHAREHOLDER 23KELLY V. ELECTRICAL CONSTRUCTION CO [1907] 23AUTOMATIC SELF-CLEANING FILTER SYNDICATE CO. LTD. V. CUNINGHAME [1906] 23THE MECHANICS OF ISSUING SHARES AND WHAT ASSUMPTIONS CORPORATE LAW MAKES ABOUT THE NATURE OF SHAREHOLDERS AND ARE THEY STILL VALID (THE CONTINUING VALIDITY OF THE DISPERSED OWNERSHIP ASSUMPTION 24CBCA SS.6(1)(C)-(D), 24, 25, 26, 30, 34, 49(8), 50, 118, 189 24SHAREHOLDERS’ RIGHTS TO DIVIDENDS AND THEIR RIGHTS UPON LIQUIDATION 24INTERNATIONAL POWER CO. V. MCMASTER UNIVERSITY [1946] 24THE MECHANICS OF DIVIDEND DECLARATION AND DIVIDEND PAYMENT 24R. V. MCCLURG [1990] 24

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CBCA SS. 42, 45, 211(7)(D) 25SHAREHOLDERS – THE CORPORATE FRANCHISE (1) WHEN CAN SHAREHOLDERS VOTE (REGULAR AND SPECIAL MEETINGS); ON WHAT CAN SHAREHOLDERS VOTE; AND THE PROCESS OF ORGANIZING SHAREHOLDER VOTES – PROXY SOLICITATION 25GOODWOOD INC. V. CATHAY FOREST PRODUCTS CORP [2012] 25GOODWOOD INC. V. CATHAY FOREST PRODUCTS CORP [2013] (COSTS) 27CBCA SS. 109, 133-135, 137, 139-143, 146, 173, 176, 183, 190, 210-211 27SHAREHOLDERS – THE CORPORATE FRANCHISE (2) OBLIGATIONS SHAREHOLDERS HAVE TO THE CORPORATION AND TO OTHER SHAREHOLDERS; LIMITS ON THE RIGHT TO VOTE IN THE ARTICLES/BYLAWS 27JACOBSEN V. UNITED CANSO OIL & GAS LTD. (ALBERTA QB) 27JACOBSEN V. UNITED CANSO OIL & GAS LTD. (NOVA SCOTIA SC) 28BOWATER CANADIAN LIMITED V. R.L. CRAIN AND CRAISEC LTD. (REPEAT) 28AND ON EXERCISE OF THE SHAREHOLDER FRANCHISE 28TELUS CORPORATION V. MASON CAPITAL MANAGEMENT LLC (BCCA) 28

MANAGEMENT OF A CORPORATION 29

INTRODUCTION TO THE STRUCTURE OF CORPORATE MANAGEMENT 29MERIDIAN GLOBAL FUNDS MANAGEMENT ASIA LTD V. SECURITIES COMMISSION 29DIRECTORS AND OFFICERS; CURRENT STRUCTURE AND MAKE-UP OF THE BOARD; AND THE EFFECT OF IMPROPER APPOINTMENT OF DIRECTORS 29MORRIS V. KANSSEN [1946] 29CORPORATE CRIMINAL LIABILITY 30RHÔNE (THE) V. PETER A.B. WIDENER (THE) 30CBCA SS.102(1), 115, 116, 118, 119, 121, AND 122(1)(B), SEE ALSO CRIMINAL CODE SS.2 (DEFINITION OF ORGANIZATION, REPRESENTATIVE, AND SENIOR OFFICER), 22.2 30DIRECTORS’ DUTIES OF CARE 30PEOPLES DEPARTMENT STORES INC. (TRUSTEE OF) V. WISE 30FIDUCIARY DUTIES – INTRODUCTION – BASIC STATUTORY DUTY 31PEOPLES DEPARTMENT STORES INC. (TRUSTEE OF) V. WISE 31THE DUTY OF SUPERVISION 31IN RE CAREMARK INTERNATIONAL INC. 31CBCA, S.122(1)(A) 32MANAGER’S FIDUCIARY DUTIES I – CONFLICT OF INTEREST AND DUTY 32NORTH-WEST TRANSPORTATIONS CO. V. BEATTY [1887] 32AFFIRMING OR APPROVING INTERESTED TRANSACTIONS 33CBCA S.120 33MANAGER’S FIDUCIARY DUTIES II – CORPORATE OPPORTUNITY DOCTRINE 33REGAL (HASTINGS) LTD. V. GULLIVER [1942] 33PESO SILVER MINES LTD. V. CROPPER 33CAN. AERO V. O’MALLEY 34BROZ V. CELLULAR INFORMATION SYSTEMS, INC. 35MANAGERS’ FIDUCIARY DUTIES III – CHANGE OF CONTROL TRANSACTIONS. 35INTRODUCTION TO THE RISE OF TAKEOVERS; EARLY ATTEMPTS TO CONTROL THE PROCESS: REVIEWING THE EXERCISE OF POWERS BY DIRECTORS FOR AN IMPROPER PURPOSE 35HOGG V. CRAMPHORN LTD. 35TECK CORP. V. MILLAR 36THE NEW APPROACH 37BCE INC. V. 1976 DEBENTUREHOLDERS [2008] 37

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MANAGERS’ FIDUCIARY DUTIES IV – CHANGE OF CONTROL TRANSACTIONS II; PROTECTING DIRECTORS: D & O INSURANCE AND INDEMNIFICATION OF DIRECTORS 39CYTRYNBAUM V. LOOK COMMUNICATIONS INC. [2013] 39CBCA S.124 39

REASONS FOR SETTING THE BASIC CORPORATE RISK ALLOCATION: VEIL-PIERCING AND REVERSE VEIL-PIERCING 39

LEE V. LEE’S AIR FARMING LTD. 39TRANSAMERICA LIFE INSURANCE CO. OF CANADA V. CANADA LIFE ASSURANCE CO. 40VTB CAPITAL PLC V. NUTRITEK INTERNATIONAL CO. 41THIRD PARTIES SUING DIRECTORS, EMPLOYEES, AND SHAREHOLDERS DIRECTLY OF A CORPORATION FOR CONSEQUENCES OF THEIR INTERACTION WITH THE CORPORATION. SUING SHAREHOLDERS 41THE THIN CAPITALIZATION ARGUMENT 41WALKOVSKY V. CARLTON 41PROBLEM OF SUING DIRECTORS FOR INDUCING THE BREACH OF CONTRACT INTO WHICH A CORPORATION THEY ARE DIRECTORS OF AND THE SCOPE THE SAID V. BUTT DEFENCE 42SAID V. BUTT 42ADGA SYSTEMS INTERNATIONAL INC. V. VALCOM LTD. 43HOGARTH V. ROCKY MOUNTAIN SLATE INC. 44OTHER WAYS DIRECTORS CAN BE PERSONALLY LIABLE 45AIR CANADA V. M & L TRAVEL LTD 45SHAREHOLDERS SUING TO DIRECTLY ENFORCE RIGHTS THAT BELONG TO THE CORPORATION – SHAREHOLDER’S INSURABLE INTEREST 46MACAURA V. NORTHERN ASSURANCE CO. 46KOSMOPOULOS V. CONSTITUTION INSURANCE CO. OF CANADA 46HERCULES MANAGEMENTS LTD. V. ERNST & YOUNG 47HOULE V. BANQUE CANADIENNE NATIONALE 49SMITH, STONE AND KNIGHT LTD. V. BIRMINGHAM CORP. [1939] 50

REMEDIES 50

THE REPRESENTATIVE/DERIVATIVE ACTION 50HERCULES MANAGEMENTS LTD. V. ERNST AND YOUNG 50APPRAISAL REMEDY; AND INVESTIGATION 51CBCA SS. 104, 162, 167, 190, 238-240 51OPPRESSION REMEDY I – WHO IS ENTITLED TO SUE UNDER THE OPPRESSION REMEDY? 51FIRST EDMONTON PLACE LTD. V. 315888 ALBERTA LTD. [1988] 51DOWNTOWN EATERY (1993) LTD. V. ONTARIO [2001] 52DISTINCTION BETWEEN THE OPPRESSION REMEDY AND THE DERIVATIVE ACTION 53PASNAK V. CHURA [2003] 53CBCA SS. 238, 241-242 54OPPRESSION REMEDY II 54BCE INC. V. 1976 DEBENTUREHOLDERS [2008] 54

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1. Agency

Elements of the Agency Relationship

Gorton v. Doty [1937]Facts: Teacher tells football coach that he can use her car to drive team to their game “as long as he was the one driving.” Accident causes injury to one of the players, and player is now suing the teacher as the principal of the coach, who was the agent.Issue:Was the coach acting as an agent of the teacher?Reasoning:Agency denotes the relationship where one person acts for another.

- The manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.

For this relationship to exist, a contract or compensation are not necessary1. The appellant consented that the coach should act for her and in her behalf in driving the car to and from the football game by volunteering her vehicle with the express stipulation that he should drive it2. The coach consented to so act for the appellant by his act driving the car

The relationship of principal and agent existedDissent:There is insufficient evidence showing that the coach was (a) acting as an agent of the teacher, and (b) acting within the scope of his authority

- Agency involves more than passive permission; requires request, instruction, or command- This was nothing more than a kindly gesture and the statement that only the coach should drive was not instruction, it was a mere precaution

Holding:The relationship of principal and agent existed; the player can pursue the teacher for damages.

Undisclosed Principal

Friedmann Equity Developments Inc. v. Final Note Ltd [2000]Facts:FE is trying to sue the principals of FN (doctors) because FN doesn’t have enough money to pay back the loan defaulted upon. The contract, though, was made under seal, which prevents action against anyone but the signatories.Issue:Will FE be permitted to do away with the sealed K rule?Reasoning: (SCC, Bastarache)An undisclosed principal cannot be sued on a K executed by his or her agent when that K is executed under seal (also does not need consideration)

- Courts should not interfere with established rules of law without clear evidence that it is necessary to change the law to be in step with commercial reality and that a change in the rule will not have unwarranted ramifications

In a simple K this would not be a problem, but here it was clearly under sealHarmer v. Armstrong:

- In the case of a trust, the sealed K rule doesn’t apply because it involved a breach of trust; was an equitable remedy as opposed to the CML sealed contract rule (doesn’t apply here)- Provides the means for beneficiaries to enforce those agreements entered into by their trustees when they refuse to do so.

The sealed K rule applies to corporations equally as to individuals

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- The application of the seal must be conscious and deliberate; must examine the instrument/circumstances surrounding its creation to determine intention to officially seal

No principled reason for getting rid of the sealed K rule; would create uncertainty in the lawHolding:FE cannot sue the principals of FN because they were not parties disclosed on the K, which was signed under seal.

Distinction between Actual, Apparent, and Ostensible Authority

Freeman & Lockyer v. Buckhurst Park Properties (Mangal Ltd.) [1964]Facts:K. represented to F. (contractors) that B. would hire and pay them for a surveying job. There was a default, and F. is now seeking payment from B., who is saying that K. didn’t have authority and they can’t be bound. B. says liability is K.’s not theirs.Issue:Did B. confer authority on K. to enter into contracts on their behalf?Reasoning:Actual Authority:

- Legal relationship between principal and agent created by a consensual agreement to which they alone are parties- If the agent enters into a K pursuant to the actual authority, contractual rights/liabilities are created between the principal and the contractor

Apparent/Ostensible Authority:- Legal relationship between the principal and the contractor created by a representation made by the principal to the contractor intended to be, and actually, acted upon that the agent has authority to enter into a K so as to render the principal liable to perform any obligations imposed upon him by such a K.

* Capacity of a corporation is limited by its constitutionA corporation cannot do any act, or make any representation, except through its agent (Doctrine of ultra vires)In order to create an estoppel between the corporation and the contractor, the representation must be made by some persons who have actual authority from the corporation to make such representations

- Can be conferred by the constitution of the corp. namely the board of directorsCriteria to entitle a contractor to enforce a representation made by an agent:

1. Representation that the agent had authority to enter on behalf of the company into a K of the kind sought to be enforced was made to the contractor2. Representation was made by a person who had ‘actual’ authority to manage the business of the company3. The contractor was induced by representation to enter into the K, and that he relied on that representation4. That under its constitution the company was not deprived of the capacity either to enter into a K of the kind sought to be enforced, or to delegate authority to enter into a K of that kind to the agent

* The only ‘actual’ authority that matters is that of the person making the representation relied upon (this is ostensible authority doctrine)Application:1. Board knew that K. had been acting as managing director, permitted him to do so, and by such conduct represented that he had authority to enter into K’s. 2. The constitution of the corporation conferred full powers of management on the board (actual authority)3. F. was induced to believe that K. was authorized to enter into K’s on behalf of F., and relied on those representations.

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4. The articles of the constitution do not deprive the company of capacity to delegate authority to K. to enter into K’s on behalf of the company.Holding:K. had was legitimately delegated authority by B. to enter into K’s on their behalf. Therefore they are liable. Ruled for F.

Watteau v. Fenwick [1893] Facts:W. suing for price of cigars sold to F. W. dealt with H. the entire time, when the business actually belonged to F. Issue: Was H. acting within the authority of his agency?Reasoning:Once it is established that the defendant was the real principal and H. the agent, the principal is liable for all the acts of the agent which are within the authority usually confided to an agent of that character, notwithstanding limitations, as between the principal and the agent, put upon that authority

- “holding out of authority” is not strictly necessary; otherwise undisclosed principals wouldn’t exist

Holding: The plaintiff can sue the defendant for price of the unpaid cigars.

Distinction between Agency and Employment: Question of Vicarious Liability of master (employer) for the torts of its servant (employee) distinguished from agency

671122 Ontario Ltd. v. Sagaz Industries Canada Inc. [2001]Facts:O. suffered serious loss when it was replaced as supplier to Canadian Tire by S. This happened because a bribe was paid by A. to CT. O. brings this action. Issue:Is S. vicariously liable for the tortious conduct of the consultant A.?Reasoning: (SCC Major J.)Agency does not create vicarious liability; requires a much stronger connection (one of employment)Criteria of an employee relationship:

1. Control over the worker2. Ownership of the tools/equipment used3. Chance of profit remains with the employer4. Risk of loss remains with the employer

* Not an exhaustive listApplication:

- A. was in control of his job functions- He worked on his own commission rates- His chances of profit/risk of loss depended completely on his own initiative

Holding:A. was an independent contractor and not an employee of S., therefore S. cannot be held vicariously liable for A.’s actions.

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2. Partnerships

Nature and Existence of Partnership Relationship

Khan v. Miah [2000]Facts:K. and M. were partners with the goal of running a restaurant. K. were the cooks and M. were the financiers. The location/stock/other things were acquired but the relationship broke down before the actual restaurant started business. Was there ever a partnership?Issue:Do parties to a joint venture become partners only when the actual trading commences?Reasoning:CA said that partnership only starts once the actual venture commences

- Impossibly narrow view of the enterprise- The acquisition, conversion, fitting out of the location were all part of the joint venture, were undertaken with a view of ultimate profit, and formed part of the business which the parties were in the partnership for

The rule is that persons who agree to carry on business as a joint venture do not become partners until they actually embark on the activity in question; obtaining the things necessary for the carrying on of that business counts as embarking on the activity (starting the trading is secondary)Holding:Trial judge’s orders restored. Ruled for M.

Hurst v. Byrk [2002]Facts:H. and defendants B. became partners in a firm of solicitors. All save H. served retirement notices, sought early termination despite H.’s objections. H. then sought declaration that he was discharged from contributing towards the partnership liabilities accruing after the early termination due to the alleged ‘repudiation’ of the K through the early termination.Issue:Is the innocent partner discharged from further liability to contribute to the debts/obligations of the partnership after a fundamental breach terminating the partnership?Reasoning:H. contends that by accepting his partners’ repudiatory breach, he was discharged from his contractual obligation to contribute to the deficit.

- H.’s obligations are not contractual but equitable- However much an individual partner may have been wronged by his fellow partners, he remains jointly liable with them for the debts of the firm- * His liability accrued before the breach occurred, and was in no way caused by his partners’ breach; they accrued while he was still a partner, so he is equally responsible for them

H. is entitled to damages based on the breach if he can show that damages occurred (which he can’t)Partnerships are governed by equity not the CML; you can’t walk away from your partnership obligations or unilaterally rescind the partnership even because of a material breachHolding:Ruled for B. H.’s obligations to the partnership remain after the dissolution.

Indica of the Partnership Relationship

Partnership Act, R.S.O. 1990 (ss. 1-3)3. In determining whether a partnership does or does not exist, regard shall be had to the following rules:

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3.1. 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 any profits made by the use thereof.3.2. The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived.3.3. 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 the person is a partner in the business, but the receipt of such a share or payment, contingent on or varying with the profits of a business, does not of itself make him or her a partner in the business, and in particular,(a) the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make him or her a partner in the business or liable as such;(b) a contract for the remuneration of a servant or agent or 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 such;(c) a person who,

(i) was married to a deceased partner immediately before the deceased partner died,(ii) was living with a deceased partner in a conjugal relationship outside marriage immediately before the deceased partner died, or(iii) is a 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 partner was a partner is not by reason only of such receipt a partner in the business or liable as such;

(d) 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 is to receive a rate of interest varying with the profits, or is to receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such, provided that the contract is in writing and signed by or on behalf of all parties thereto;(e) a person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by him or her of the goodwill of the business, is not by reason only of such receipt a partner in the business or liable as such.

Pooley v. Driver [1876]Facts:Under a deed B. and H. agreed to enter into a trade partnership agreement. The defendant D. was to provide financing for 500L as a “creditor” and would then share in the profits realized by the partnership indefinitely. However, if it turned out that the profits of any years which had been paid exceeded the total profits made from the business, the contributors were to pay back the excess, never exceeding the amount they had contributed. B. and H. went bankrupt, P. is seeking to collect against D. as a partner of B. and H.Issue: Despite being described in the deed as a quasi-creditor, is D. in fact a partner against which P. can seek satisfaction of the partnership’s outstanding debts?Reasoning:State of the LawAs a general rule, a partnership involves a commercial business carried on with a view to profit and for division of profits between the partners

- Generally, each partner contributes something, but it isn’t an absolute rule; there can be silent partners (see Watteau v. Fenwick)

There is a prima facie presumption that a partnership exists where a person participates in the profits of a joint endeavor

- Rebuttable where different circumstances exist- Participating in the profits entails participation in the liabilities

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* Participating in profits is a proper test for partnership where nothing exists to rebut itApplicationThe intention on the face of the document was to extend to D. all the benefits of the partnership, while protecting them from the liabilities* The lending of a sum of money on a bona fide contract to receive a rate of interest varying with the profits does not make the lender a partner; simple sharing of the profits in this way does not a partner make. BUT:

- D. got ALL the benefits of the deed of partnership- D. became entitled to shares of the capital, but ALSO entitled to compel the partners to employ that capital in “the regular course of trade”- There is a provision that if D. were to go bankrupt, the partnership would terminate (this covenant is very strange for someone in the position of a lender, but not so strange for someone acting as a partner)

Not only profit but control; not the position of an ordinary lenderHolding:Ruled for P. The defendants, D., were acting as partners and are liable as such.

A.E. LaPage Ltd v. Kamex Developments Ltd. (and March) [1977]Facts:M. mistakenly put up an exclusive listing agreement with A., a real estate agent, then sold through someone else. K. refusing to pay commission. Did M. have authority to do so, and was he a partner signing on behalf of the partnership?Issue:Was M. a partner of K. and did he sign on behalf of the partnership?Reasoning: Keywords of definition of partnership in Partnerships Act are “persons carrying on a business in common with a view to profit”

- Mere fact that property is owned in common and that profits are derived therefrom does not of itself constitute the co-owners as partners- Depends on whether the intention of the co-owners was to carry on a business or simply provide for an agreement for the regulation of their rights and obligations as co-owners of a property

ApplicationIt is clear from the documents that the parties wanted to maintain their separate rights as co-owners of the property

- No partnership existed, and therefore M.’s signature did not bind them- M. was a co-owner not a partner

Did M. then incur personal liability thereby?- No. M. signed as an agent to the knowledge of the employees of the respondent with whom he dealt. He is not personally liable.- M. was acting on behalf of K. as an agent, but outside of his authority; A. could have sued M. for breach of warranty, but didn’t bring it up so they don’t get it

Holding:There was no partnership. Ruled for K.

Legal Nature of the Partnership

Re Thorne and New Brunswick Workmans’ Compensation BoardFacts:T. and another entered into oral agreement to carry on partnership of lumbering/sawmill business. They filed all the proper stuff with the Board. T. suffered injuries in the course of his job. Applied for compensation alleging he was a workman within the meaning of the Act, and entitled to benefits thereunder. Issue:

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Was T., on the day of the accident, a workman employed by the partnership within the meaning of the Workman’s Compensation Act, and so entitled to benefits?Reasoning:Under the Partnership Act, no person can enter into a contract with himself or be his own employer

- Partnerships regarded as having no legal existence distinct from the individuals composing it, no person could be an employee of a firm to which he is a member

O. contends that partnerships should be regarded as legal entities distinct from their component members, and therefore that the firm was capable of entering a K of employment with him

The firm name (partnership name) is a mere expression, not a legal entityHolding:The firm is not a legal entity, and therefore T. cannot seek compensation as an employee.

Partnership Act, R.S.O 1990 ss. 1, 2, 3 (PA)

Relationship and nature of the relationship between the partners

Meinhard v. Salmon [1928]Facts:S. was manager and had lease of building for 20yrs with M. joint adventurer. Near the end of the lease, S. organized to renew the lease to a company which he owned and controlled without telling M. M. now seeking holding that the lease part of the partnership.Issue:Does M. have a right to half of the lease as was his interest in the joint venture with S.?Reasoning: (Cardozo)Joint adventurers, like partners, owe each other, while the enterprise continues, the duty of the finest loyaltyS. excluded M. from any chance to enjoy the opportunity for benefit

- This is an Equity questionThe exclusive managerial role held by S. charged him even more with a duty of disclosure

- S. obtained his opportunity for the venture while he was a partner, and was thus bound not to separate his interest from M.’s - There can be no abuse of special opportunities growing out of a special trust as manager or agent

M.’s interest should be equal to his contribution to the joint adventure (1/2)Dissent: (Andrews)Fair dealing and honesty is required, but nothing moreWhen the partner takes no new lease but buys the reversion in good faith, there is no offshoot of the original lease

- Must show Fraud, dishonesty, or unfairness The new lease started after the end of the partnership, covered additional property, and had new terms

- Was not a renewal; was the purchase of the reversionM. had an equitable interest in the original lease, but it ended when the joint adventure didHolding:S. breached duty of honesty to his joint adventurer, M. owes him half the value of the lease.

Olson v. Gullo [1994]Facts:O. and G. were equal partners in the development of a tract of land. G. bought and sold for his own profit a piece of the land owned by the partnership and made a bunch of money. O. suing for his share.JH:Trial judge awarded O. disgorgement of entire profit made by G.Issue: Is the proper remedy disgorgement or half?

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Reasoning:No question that the parties were partners and G. purposefully tried to screw O.G. must not be allowed to profit from his breach

- The proper remedy is to give 50% of the profits to O. not the entire amount* This puts O. in the same position which he would have occupied if there had been no wrongdoing (had G. not done the sale in secret)

- The remedy is in Equity; should not be penal in nature, which it would be if disgorgement were ordered* Fact that G. tried to hire a hit-man to kill O. doesn’t factor in (he was already convicted for that)

Holding:The proper remedy is 50% of the profits to O., not disgorgement (accounting of profits).

Relationship of the partners to the outside world

Strother v. 3464920 Canada Inc. [2007] Facts:S. was a rainmaker in tax law at Davis LLP. Manipulated Canadian tax credits to make big bucks, finance movies, etc. Monarch (346…) was a client of S.’s, he was giving them tax advice, billing them for his own work, giving the other lawyers at Davis side-work on the file. New tax ruling came out with big implications for M. Instead of telling them, S. incorporates his own company (against the instruction of the firm), and took all of M.’s business (made about 65M$). M. sues S. as well as Davis. JH:CA – Allowed appeal, ordered S. to disgorge to M. all benefits/profits received or receivable from S.’s new company Sentinel. Also ordered Davis to disgorge profits it earned in the form of legal fees from acting for Sentinel in breach of duty to M. from January 1, 1998 and return to M. all fees paid by it from that date.Issues: Who is liable and for what?Reasoning: (SCC Binnie J.)Equitable remedies are always subject to the discretion of the courtDisgorgement can serve two different equitable purposes:

1. * Prophylactic Purpose: give to the person whose fiduciary duty was violated any profits/benefits made through the breach2. Restitutionary: Return to the beneficiary profits which were wrongly appropriated by the fiduciary in breach of its duty

Relevant causation is the breach of fiduciary duty and the defendant’s gain (not the plaintiff’s loss)Legal Fees Paid by Monarch to DavisThere must be a causal relationship between the fiduciary breach and the profits earned

- D. committed no breach of fiduciary duty to M. and is not responsible for S.’s breach. There can be no equitable relief against D. here.

Legal Fees Paid by Sentinel to D.CA ordered D. to disgorge profits earned from acting for Sentinel in breach of its duty to M.

- There was no conflict known to D. that prevented it from acting for both Sentinel and M.- Therefore legal fees paid by Sentinel to D. cannot be said to be “in consequence” of breaches of fiduciary duties owed by D. to M.

Profits Earned by S.S. must account for profit earned from the personal financial opportunity he pursued in Sentinel in breach of his fiduciary duty to M.

- Sentinel advanced S. 1M$ before he quit D.- S. cannot be permitted to profit from the money made through his breach of fiduciary duty to M.

Period for which S. has to disgorge S. denied M. the opportunity to find other counsel and take advantage of the new tax rulingAlso failed to notify M. of the new tax ruling which came out October 6, 1998

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- S. should disgorge all profits received during his time with D. between January 1998 and March 1999 (when M. and S. severed links with D.)

Is D. liable for S.’s fiduciary breach? If so to what extent?No only was D. unaware of S.’s financial interest, but D. ordered S. to not take any interests in Sentinel; no reason for them to believe that he didn’t complyBUT M. contends that D. is still statutorily liable under the BC Partnership Act:

11. A partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he or she is a partner…12. If, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with authority of his or her partners, loss or injury is caused to any person who is not a partner in the firm or any penalty is incurred, the firm is liable for that loss, injury or penalty to the same extent as the partner so acting or omitting to act.

An injury, even without loss, is sufficient - Doesn’t say anywhere that prior knowledge of the delinquency is a condition precedent to liability

Requires S.’s wrong to be so connected with the partnership business that it can be said that D. introduced the risk of the wrong that befell M.

- CA said no- SCC says Yes

Holding:D. is vicariously liable for the profits that S. billed to M. directly, but nothing else. S. is liable for all the profits he made in breach of the fiduciary duty owed to M.

Dissolution of the partnership

Hurst v. Byrk, [2000]Facts:H. and defendants B. became partners in a firm of solicitors. All save H. served retirement notices, sought early termination despite H.’s objections. H. then sought declaration that he was discharged from contributing towards the partnership liabilities accruing after the early termination due to the alleged ‘repudiation’ of the K through the early termination.Issue:Is the innocent partner discharged from further liability to contribute to the debts/obligations of the partnership after a fundamental breach terminating the partnership?Reasoning:H. contends that by accepting his partners’ repudiatory breach, he was discharged from his contractual obligation to contribute to the deficit.

- H.’s obligations are not contractual by equitable- However much an individual partner may have been wronged by his fellow partners, he remains jointly liable with them for the debts of the firm- His liability accrued before the breach occurred, and was in no way caused by his partners’ breach; they accrued while he was still a partner, so he is equally responsible for them

H. is entitled to damages based on the breach if he can show that damages occurred (which he can’t)Partnerships are governed by equity not the CML; you can’t walk away from your partnership obligations or unilaterally rescind the partnership even because of a material breachHolding:Ruled for B. H.’s obligations to the partnership remain after the dissolution.

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Partnership Act, ss. 6, 7, 11, 13, 24, 28-30, 33-35

Wrapping up Partnerships & Limited Partnerships and the Question of Control by Limited Partnerships

Haughton Graphic Ltd. v. Zivot [1986]Facts:H. suing Z. for the payment of an outstanding printing debt incurred by Z.’s magazine before going under. Printcast (Ltd partnership), Lifestyle (General partner), and Z. and M. (limited partners). Z. was known to suppliers as the president, used the title to introduce himself, used Printcast business cards, etc.Issue:Can Z. be held liable as a general partner?Reasoning:Z.’s relationship with PrintcastAlberta Partnership Act:

63. A limited partner does not become liable as a general partner unless, in addition to exercising his rights and powers as a limited partner, he takes part in the control of the business.

* If a limited partner takes part in the control of the business, he becomes liable under the statute as a general partner, which entails unlimited liability to the extent of his assetsHolding:Z. took a direct role in controlling/managing Printcast, and is therefore a general partner according to s.63, entailing unlimited liability towards creditors.

Limited Partnership Act, R.S.O. 1990, s.13(1)

3. Corporations

(A) General Considerations

Constitutional Considerations of Corporate Law in Canada. Concurrent Provincial and Federal power of incorporation. Limits of permissible provincial interference with federally-incorporated corporations

Reference in the Matter of the Incorporation of Companies in Canada [1913]Facts:Reference as to the nature and extent of the restrictions upon the power of provincial legislatures in regard to the incorporation of companies.Issue:Can a provincially incorporated company operate within its charter outside the jurisdiction in which it was incorporated?Reasoning: (SCC Anglin J.)Has to do with the division of powers between ss. 91/92 of the BNA

- s.92(11): gives prov power to incorporate companies with “provincial objects”- s.91(15): gives fed exclusive power to incorporate banks

Clause at s.92 doesn’t negative the provincial power of incorporating other provincial corporations to which it doesn’t apply

- Incorporation Federally falls under Peace Order and Good Government (POG) - Incorporation can be done either fed/prov

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Understood that incorporation of companies with fed objects is prohibited for the provs and vice versa for fedBut nothing to suggest that a provincially incorporated company can’s seek the “Comity” of another state/prov to enable it to operate within its borders

- Permission, registration, license giving right to operate- A province can’t give a corporation powers outside of the province because it would be ultra vires the legislatures power

A fed incorporated company is a domestic company in all parts of Canada; exercises its powers as of right in all Canadian provincesHolding: Both Prov and Fed can incorporate.

Bonanza Gold Mining Co., Ltd. v. The King [1916]Facts:B. created as corporation with Letters Patent giving it same powers, etc. as natural person. B. signed leases with the Crown for mines/mining rights. B. wants to expand, K. denies B.’s status as a corporation, it being incorporated outside of Ontario and therefore operating outside of its area of jurisdiction.Issue:Can a provincially incorporated company operate outside of the jurisdiction in which it was created?Reasoning: (Viscount Haldane)No words in Letters Patent limit the area of operation or prohibit the company from carrying out its objects beyond the provincial borders

- Companies created by statue may very well be limited by the terms which serve to create the company, but letters patent create natural persons with the freedoms of movement inherent in such- “The company derives its existence from the act of the Sovereign and not merely from the words of a statute”

However, the prov doesn’t have the power to GIVE rights/powers outside of the jurisdiction- However, the Co does have the power to ACCEPT extraterritorial powers from another jurisdiction where they are offered/given

B. had the capacity to accept, and was given, the authority to carry out its mining operations in OntarioHolding:Ruled for B.

Ability by incorporating jurisdictions to grant extraterritorial capacity to its corporations

John Deere Plow Co., Ltd. v. Wharton [1915]Facts:J. sells machines to W. then W. refuses to pay because under BC legislation it isn’t officially a corporation, even though fed incorporated.Issue:Can a prov legislation limit the powers of a federally incorporated company?Reasoning: (Viscount Haldane)Concerns provisions of the BC Companies Act that 1. Prohibit companies not incorporated in BC from taking action in BC courts unless they have a license, 2. Impose penalties on companies operating without license in BCWas it within the Prov’s powers to legislate as to interfere with the carrying on of business of a fed incorporated company?

- The provincial ability to incorporate cannot affect J., it being a company incorporated under the Peace Order and Good Government of the fed powers- Fed can confer power to trade everywhere in Canada, but not to infringe on prov rights under s.92

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The prov provisions compelling J. to get a prov license/register in the prov as a condition of exercising its powers or suing in the courts are inoperative

Prov cannot interfere with the status/corporate capacity of a Dominion company in so far as powers conferred by the Parliament of Canada

Holding:Provincial legislature cannot restrict fed company powers directly conferred upon it by the fed government; it can, however, tax all companies equally through the vehicle of a license, just not in a way that targets fed companies.

Application of the Charter to Corporations and the Standing of Corporations to Challenge Legislation on the basis of the Charter

Canadian Egg Marketing Agency v. Richardson [1998]Facts:C. attacking R.’s right to challenge legislative provisions in question on the grounds that C. is a corporation with monopoly over egg production in NWT and as a corporation cannot claim constitutional rights under s.2(d) and s.6 of the Charter, which protect individuals only. Issue:Can a corporation claim Charter protection as an individual?Reasoning: (SCC Iacobucci and Bastarache JJ)Corporations can invoke the Charter under the Big M Drug Mart exception (corporation allowed to invoke s.2(a) religious freedom in face of mandatory religious closure on Sundays)

- Time to expand the rule to allow corporations to invoke the Charter when they are defendants in civil proceedings instigated by the state or a state organ pursuant to a regulatory scheme

Generally a party seeking to invoke the Charter can be granted standing:1. As of right2. The Big M Drug Mart exception3. Public interest standing4. Under Residuary Discretion

Big M Drug Mart ExceptionCreated an exception that granted standing as of right to an accused charged under legislation alleged to be unconstitutional; Big M extended this right to an accused whose own rights are not in fact violated (corporation doesn’t have religious freedom), but who alleges that legislation under which the accused is being prosecuted is unconstitutional

* Same principle applies here and gives standing as of right to R.R. isn’t before the court voluntarily, it was forced there by a state organ, C.

- If the foundations of the remedies sought by C. is an unconstitutional law, it would be ridiculous to bar R. from challenging them merely because R. is a corporation

Holding:If a corporation is involuntarily brought before the court by a state agency pursuant to a regulatory regime that the corporation believes is unconstitutional, then that corporation can invoke the Charter as a defense under standing as of right. Ruled for R.

* Sidebar: For Big M exception to apply (give corporation recourse to Charter “as of right”):1. Must be corporation2. Must be defendant brought before court involuntarily 3. Plaintiff must be the state or a state agency

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Constitution Act, 1867, ss.91 (POGG), 91(15) and 92(11)

CBCA, R.S.C. 1985 ss.3(4)-(5) and 15(2)-(3)

(B) The Process of Creation of a Corporation and its Effect

Pre-Incorporation Contracts

Kelner v. Baxter [1866]Facts:K. was wine merchant with property, it was suggested that a joint stock company be formed for management of the property. Directors: B. (and others) and K. with K. as manager. Obtained certificate of incorporation. Before Incorporation, sale of some goods by K. to defendants “on behalf of the proposed Gravesend… Hotel.” Issue:Are the defendants personally liable where the company had not yet been incorporated?Reasoning: (Erle C.J.)If the company had been an existing company at the time of the sale, the persons who signed the agreement would have signed as agents of the company; as there was no company existing at the time, the agreement would be wholly inoperative unless it’s held binding on the defendants personally

- Where a K is signed by one who professes to be signing as an agent, but who has no principal existing at the time, and the K would be inoperative unless binding upon the person who signed it, he is bound thereby

- Companies are not liable for obligations that arose before their creationHolding:The defendants are personally liable for the K that they signed; companies aren’t liable for obligations arising before their creation.

Sherwood Design Services Inc. v. 872935 Ontario Ltd. [1998]Facts:O. entered into a pre-incorporation K of purchase/sale for assets of S. Law firm taking care of transaction took a ‘shelf-company’ under name of Fuller, partner, to assign to O. The transaction failed to close in time. The new directors of the company never signed any of the documents taking control of the company, so partner, Fuller, remained sole director. Later, they passed the same shelf-company off to a new client, without realizing the liabilities to S. that this legal person still had for the past breach, which S. is suing for. JH:Trial judge found that corporation wasn’t bound, but that the individuals were. Issue:Can O. be held liable for a K entered into before incorporation?Reasoning: (ONCA Borins J) DISSENTINGObvious that S. doesn’t care about getting decision against individual respondents; no money. They are directly going after the corporation in its new form, whether or not it has a new directorship

Provisions of s. 21 of the OBCA : holds that persons who enter K’s on behalf of a corporation before it comes into existence are personally bound by the K and entitled to the benefits/consequences thereof

However, a corporation can signify its intention to be bound by a pre-incorporation K through an act or conduct (OBCA s.21(2))

In making the corporation available to the use of the respondents, Fuller was only acting as partner in charge of the shelf companies, not on behalf of the corporation

Therefore letter sent by the associate at the law firm did not constitute any action or conduct of the corporation for the purposes of OBCA

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o The action must be that of the corporationGeneral PrinciplesA company has no existence before its incorporation

See Kelner v. Baxter A K made by promoters of a company before incorporation binds only the promoters;

after, a company by its unilateral act may take the benefit and assume the liabilities of a K made in its name or on its behalf before incorporation

CBCA s.14 supports thisFor action/conduct to show intention of corporation to adopt pre-incorporation K:

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

In entering into pre-incorporation K, S. took the risk that O. may not be incorporatedHolding:[Appeal allowed by majority]

Mechanics of creating a corporation; date on which a corporation is created; questioning the validity of incorporation

C.P.W. Valve and Instruments Ltd. v. ScottFacts:Involves a distributorship K between parties. Pre-incorporation K based on the fact that S. wasn’t actually incorporated on the date the deal was to go through since the articles of incorporation showed it had incorporated on June 15th, when it was actually back-dated, and was really registered on the 16th, so C. refused the order, sued for breach.Issue:Does a corporation become a legal entity on the date listed on certificate of incorporation or the date of registration?Reasoning: MAJORITY (Clement J.)Companies Act of Canada s.133:

Also states that the date on the certificate is conclusive proof of legal capacity/existenceHowever, the existence of the company on the date listed is a presumption that is rebuttable by proof that registrar had not in fact finished his duties

In this case, the burden has been met; the registrar hadn’t finished his duties until the 16th, so that day is when S. became a company

Dissent: (ABCA McDermid J)Alberta Corporations Act s.28:

States that the date on the certificate is what counts If the certificate (charter of the company) bears a date earlier than that upon which

the Seal was affixed, then the company acquires status as of the earlier dateTherefore the company did have capacity to enter into K’s on the 15th

Holding:S.’s corporation didn’t become a legal entity until the 16th; ruled for C.

Effect of incorporation

Salomon v. Salomon Co.Facts:A father decided to include his family members in his business by incorporating the buisness and dividing the shares between them. However, he held almost all the shares for himself, giving one share to each of the other 6 shareholders to give them a basic interest. Business went out the window, creditors (S. Co.) going after S. personally saying the company wasn’t actually a companyIssue: Was this a validly constituted corporation?Reasoning: (Lord Halsbury)

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Argued here that it can’t be a company simply having 6 minimal shareholders enabling the 7th to carry on a corporation for the purpose of protecting himself from liabilityNothing in statute dictating the proportion of interest that each shareholder must have

One share is enough to make someone a shareholder Absent fraud/misconduct, there’s nothing to limit him from doing this

Impossible to deny the validity of the transactions into which it has entered if it was validly incorporatedConcurring: Lord MacNaghtenA company cannot lose its individuality by issuing the bulk of its capital to one person over the others

Limiting personal liability is one of the main attractions of incorporation along with borrowing money; the Co and the shareholders are separate legal entities

“The unsecured creditors of S. Co. may be entitled to sympathy, but they have only themselves to blame for their misfortunes”Holding:S. had a legitimate company.

Basic Corporate Structure: distinction between articles and bylaws; the death of the ultra vires doctrine

Attorney General of Belize v. Belize Telecom Ltd.Facts:Gov wanted to sell its financial interests in Belize Telecommunications Authority to the new company, B. Articles of incorporation include a ‘Golden Share’ which can only be transferred to a minister of the gov of Belize which confers no economic authority; just an instrument of control. Article exists which gives special shareholder power to require company to redeem/extinguish the special share. Articles protect the special shareholder on three levels: 1. Special rights to appoint/remove directors 2. Restrictions on what majority of board can do without the special shareholder’s consent 3. Restrictions on what shareholders in general meetings can do without special shareholder’s consent (this case challenges #1). Holder of special share can only appoint directors if it also holds 37.5% of C ordinary shares. Issue: What is the meaning of the articles?Reasoning:Only person who has power to remove directors is special shareholder with 37.5% of common shares

Because of default and seizure of assets, there was no such person in existence Nothing in articles dealing with situation of special share holder without enough common

sharesB. says that result is that directors are irremovableA. says this is ridiculous Court has no power to improve the document, just to determine what it means

Intention of the partiesFor a term to be implied in a K:

1. Must be reasonable/equitable2. Must be necessary to give business efficacy to the K3. Must be so obvious that it goes without saying4. Must be capable of clear expression5. Must not contradict any express terms

ApplicationBoard constructed to reflect interests of the parties

Political/Economic interest of gov, economic interest of ordinary shareholdersProblem is that articles don’t deal with a change in shareholding that results in board no longer reflecting appropriate shareholder interests, without enabling this to be corrected

Terms must be read to mean that when the special share goes, the government appointed directors go with it; so when the special share is redeemed, the gov official is out

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Also, upon redemption of the special share, the special C directors cease to hold officeHolding:The company was part of a privatization scheme, and the intent of the parties would not seek to keep the gov officials as perpetual directors.

CBCA ss.9, 14, 15-18, 102-3(1) et (2), 104-106, 109, 115-116, 121, and 256(2)

Corporate Purpose: Thesis

Ford v. DodgeFacts:This is argument between shareholders of Ford (D.) and director of Ford (F.). F. building up funds for big expansion of the plant, and instead of giving dividends to shareholders, he gave employees big wage increase. D. arguing that he is acting against the ‘corporate purpose’ (profit/wellbeing of shareholders) by not paying dividends. Issue:Is F. acting against corporate purpose?Reasoning:1. The whole plan of expansion is part of a business plan carefully formulated to provide more profits in the long run (no problem)2. Raising employees wages in huge amount without paying dividends not so much

Goes against the interests of the company as well as the shareholders Discretion of the directors will not be interfered with unless there has been bad faith, willful

neglect, or abuse of discretion* However, the agents of a corporation cannot arbitrarily withhold profits earned by the company or apply them to a use which is not authorized by the company’s charter

Cannot devote to company’s purpose to public good on a whim; purpose of the company is profit

[ all Ford had to do to win was convince the court that benefitting the public would benefit the company; he was too big of a megalomaniac dick to phrase it properly at trial]Holding:Expansion project is ok, salary increases aren’t; directors had duty to distribute dividends to stockholders.

Anti-Thesis

Shlensky v. WrigleyFacts:Shareholder is bringing action against director of Wrigley for not hosting night-games at Wrigley baseball stadium. S. claims that night games would produce more profits, and that the only reason W. doesn’t host them is because of a personal dislike for them. S. alleges this amounts to direction against the corporate purpose à la Dodge v. Ford. Issue:Was W. acting negligently/mismanaging as a director by not having night games?Reasoning:S. alleges that the reason the Chicago Cubs aren’t making as much profit is because they aren’t having night-games. W. has admitted that he has not refused night games because of any interests in the economic wellbeing of the company, but because of his concern for the neighborhood

Fraud, illegality, conflict of interest not the only bases for stockholder’s action against director

S. argues that this establishes arbitrary/capricious use of director’s discretion, which under Dodge v. Ford is another actionable instance

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ApplicationClear that in Ford, court felt there must be fraud, etc. to ground an action against a director; made clear when they refused to interfere with expansion

Taking potential patrons of the stadium (neighbourhood) into consideration is a logical business move

Question is not whether it was right or wrongAlso no grounds to show that any damage has occurred to the company based on W.’s actionsHolding:Burden of proof of S. hasn’t been met; there were business justifications for W.’s decision, and not clear evidence of any detriment to the company resulting from them.

Canadian Solution

BCE Inc. v. 1976 Debentureholders [2008](See p37)

Recent Legislative developments in BC and NS

BC Finance Statutes Amendment Act, 2012

NS Community Interest Companies Act, 2012

(C) Shareholders

Sources of financing available to a corporation. Basic distinction: debt and equity. What is a share: the basic nature of a share and basic rights on a shareholder

Sparling v. Quebec (Caisse de dépôt et placement du Québec)Facts:Q. is an agent of the Crown, therefore according to s.16 of the Interpretation Act, can put itself outside the purview of the CBCA because of immunity provisions. Q. became an ‘insider’ of Domtar according to CBCA s.122 (2),(4) by owning more than 10% (22.7%) of its common shares. According to that article, Q. was supposed to submit an insider report, which it refused to do under immunity. Director of Domtar, S., filed for motion for declaration that CBCA applies to Q. Issue:Does the CBCA apply to Q., a Crown agent?Reasoning: (SCC La Forest J)Normally, a Crown agent is exempt from the application of state legislation

However, exception under the ‘Benefit/Burden Exception’ to Crown immunity (“waiver exception”)

Q.: By purchasing shares, Q. did nothing but exercise a right conferred by the charter* The issue is not whether the benefit and burden arise under the same statute, but whether there exists a sufficient nexus between the benefit and burden.

A share is not an isolated piece of property; it is a bundle of interrelated rights and liabilities

Statute, common sense, and common law indicate that this bundle can’t be apportioned piecemeal at the whims of the Crown (taking only benefits not liabilities)

* The very act of purchasing is an implicit acceptance of the benefits AND liabilities Holding:There was a close nexus between the benefit/burden to trigger the exception to Crown immunity. By buying the shares, the Crown implicitly agreed to be governed by the CBCA.

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Atco Ltd. v. Calgary Power Ltd.Facts:A. owns majority shares of Canadian Utilities, which in turn owns all the shares of three Alberta public utilities. A. attempted a takeover of C., which applied to Public Utilities Board of Alberta for interim order restraining the takeover. Under the Public Utilities Board Act s.98, Board found A. to be an ‘owner of a public utility’ for purposes of the Act, therefore subject to its jurisdiction.Issue:Does a parent company own the public utility of its subsidiary for the purposes of the Public Utilities Board Act of Alberta?Reasoning: (SCC Wilson J): DISSENTINGThe public utility is the physical plant and associated services:

Shareholders have no proprietary interests in the assets of the company in which they hold shares; their interest is in the shares only

* Must distinguish between ‘Control’ as a corporate law term and ‘Control’ in its dictionary sense which is what the legislator meant here; control of the physical assets

The company continues to own, operate, manage and control its assets regardless of who owns or controls it: Salomon v. Salomon and Co.

Application:If the acceptance of A.’s offer gives it de facto control over the companies, it does not give the shareholders ‘control’ over its public utility assets; companies retain this:

Obligations of ‘owners’ more appropriately discharged by people having day to day control of physical plant

The owners are the operating companies or public utility companies themselvesA. might obtain de facto control of the public utility companies, but it will not acquire de facto control of the assets of Canadian Utilities and its subsidiaries

* Shareholders do not own OR control the assets of the companies in which they hold shares

Bowater Canadian Limited v. R.L. Crain and Craisec Ltd.Facts:B. filed application challenging voting provisions in C.’s articles of incorporation; offended the CBCA. Had ‘step down’ provision whereby the special common shares were worth 10 votes in the hands of C. but only 1 vote in the hands of any potential transferee. Issue:Does the voting provision offend the CBCA and how can it be remedied?Reasoning: (ONCA Houlden J)The holders of special common shares share equally with other shareholders in winding-up of corporation- All shareholders share equally in distribution of dividendsNo express prohibition of this in CBCA s.24(4), but should be interpreted in accordance with general principles of corporate law

Rights which are attached to a class of shares must be provided equally to all shares of that class; rights attach to the share and not the shareholder

The step down provision can be severed; so special common shares are worth 10 votes to whoever gets them.Holding:The voting provision does offend the CBCA; however severable.

Basic Limitation of the power of a shareholder

Kelly v. Electrical Construction Co [1907]Facts:

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Action to set aside the election of the board of directors of E. K. was not allowed to use proxy votes conferred upon them in the voting, and contend that they would have been elected had they not been barred from using the proxies. Issue:Did this constitute an usurpation of office?Reasoning:The election of directors is a matter under control of a majority of shareholdersIn respect of acts within the powers of the company, and thus capable of confirmation by the majority of the shareholders, the Court will not interfere at the instance of individual shareholders

Plaintiffs have to obtain the consent of the company to sue in the company’s nameBy-law respecting proxies passed by BoD 1897:

According to Companies Act s.47, directors have power to pass by-laws regulating proxy votes, but for this By-Law to be valid, it had to be confirmed at the next general meeting

This by-law was not confirmed, thus it ceased to have forceAnnual Shareholders meeting 1905:

Purported to pass a by-law of the exact same language Companies Act giving power to directors to pass by-laws concerning proxy votes

impliedly withholds it from general shareholdersTherefore, when the election of the directors happened, there was no by-law regulating proxies in existence (BoD failed to do it, the shareholders can’t do it)

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

However, no reasonable certainty who they would have voted for* The election should be set aside and a new vote hadHolding: There should be a new vote for directors.

Automatic Self-Cleaning Filter Syndicate Co. Ltd. v. Cuninghame [1906]Facts: C. is a majority shareholder of A. and is trying to force the directors to effect a sale of all the assets of the company which the directors don’t agree with. Issue:Can a simple majority of shareholders order the directors to effect a sale that they don’t agree with?Reasoning: (Warrinton J)Depends on the construction of the articles of incorporationOn the true construction of the articles the management of the business/control of the company are vested in the directors

To remove control of any particular transaction from them would require an alteration of the articles, which would require a special resolution

The special resolution article wouldn’t exist if they had wanted the possibility of compelling the directors by simple majority

Directors can’t be bound by the simple majority voteReasoning: (Collins)If the shareholders want to compel the directors it has to be done by extraordinary resolution, not simple majority vote

It is by consensus of all the individuals in the company that directors became agents and hold their rights as agents; this is not a simple Principal-Agent relationship

Reasoning: (Cozens-Hardy)Articles of association are a K between the members of the company

Once there is a stipulation for a ‘special resolution’ vote requirement, what right is there to interfere with the K apart from in situations of misconduct on part of directors?

Not a simple Principal-Agent relationship; directors are in position of managing partners appointed to fill the post by a mutual agreement between the shareholders

Holding:

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The shareholders can only bind the directors according to the articles of incorporation; in this case by a special resolution.

The mechanics of issuing shares and what assumptions corporate law makes about the nature of shareholders and are they still valid (the continuing validity of the dispersed ownership assumption

CBCA ss.6(1)(c)-(d), 24, 25, 26, 30, 34, 49(8), 50, 118, 189

Shareholders’ rights to dividends and their rights upon liquidation

International Power Co. v. McMaster University [1946]Facts:A company, is being liquidated. I. is a substantial owner of common shares, and M. is a substantial owner of preference shares. Dispute over rights upon liquidation of the different shareholders. Also side dispute about difference in dividend distribution (common gets 10% while preferred get 7%). Issue:Are preferred share owners only entitled to their dividend plus repayment of their shares at par upon liquidation, or are they entitled to equal sharing of surplus with holders of common shares?Reasoning: (SCC Taschereau J.)The decision must depend upon the true construction of the essential words of the letters patent + by-laws of the company

Under the Dominion Companies Act, preferred shareholders prima facie have all the rights and liabilities of a common shareholder

* Can be limited by the by-laws, but in the absence of anything to the contrary, then preferred shareholders have equal right to surplus as common shareholders

After discharging the debts/liabilities and repaying to ordinary/preference holders the capital paid on their shares, the surplus assets ought to be divided amongst all the shareholders in proportion to the shares held

The rights of all classes of shareholders are on a basis of equality, unless they have been modified by the by-laws or the letters patent of the company

In this case, there is nothing in the articles to limit the preferred shareholders rights to share equally in the liquidationThe right to dividend and the right to capital and surplus assets in the winding up are distinct

Preferred shareholders dividend rights are defined in the articles, and they have no right to equality in this since they K’d into it

Holding:Common and preferred shareholders prima facie have equal rights unless modified by the by-laws or articles of the company.

The Mechanics of dividend declaration and dividend payment

R. v. McClurg [1990] Facts:Articles of incorporation of M. are divided into A Common (husbands): voting only, B Common (wives): participating where authorized by the directors, and C Preferred: preferred. The directors have discretion in the articles to allocate dividends among classes of shares as they see fit. Crown saying that dividends in past years should have been properly attributed to all the common shares notwithstanding the discretionary provision; rights attach to the shares, not the people holding them. Issue:Is the discretionary dividend clause valid?Reasoning: (Dickson CJ)

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Decision to declare a dividend lies within the discretion of the directors, subject to any restrictions included in the articles of incorporation

The rights carried by all shares to receive a dividend declared by a company are equal unless otherwise provided in the articles of incorporation

The presence of a discretionary dividend clause can only be interpreted as creating differences between share classes; rebuts the equality presumption

The fact that directors may consider the identity of shareholders doesn’t necessarily render the declaration invalid on the basis of a conflict of duty/self-interest

The limitation on the duty is based on a Fiduciary Duty owed by directors to the corporation (Canadian Aero Service Ltd. v. O’Malley); no breach here

Represents a legitimate exercise of the K rights between partiesDissenting: (La Forest)Directors do not have the power to discriminate between different classes of shares when determining how a dividend should be distributedAll shares of a type must be treated equally

Even when more than one class of shares is created, the directors are not free to discriminate arbitrarily between the classes when awarding a dividend (just how much each will get)

Cites Jacobsen and Bowater as authority that even shareholders themselves may not agree to circumvent the principle that rights attach to shares not the individuals

This discretionary dividend clause contravenes principle that directors can’t favour one class at the expense of another

Shareholders cannot agree to give directors discretion to interfere with their right to dividends/return of capital by choosing to give another series priority

Holding:The potential of each type of share to receive dividends in different amounts is sufficient to differentiate the A/B/C shares. It is valid exercise of incorporation powers.

CBCA ss. 42, 45, 211(7)(d)

Shareholders – The Corporate franchise (1) When can shareholders vote (regular and special meetings); on what can shareholders vote; and the process of organizing shareholder votes – proxy solicitation

Goodwood Inc. v. Cathay Forest Products Corp [2012]Facts:G. is shareholder of C. applying for multiple orders against C. (i) order directing holding of shareholder meeting; (ii) orders requiring C. to comply with provisions of CBCA; (iii) order restraining C. from transacting certain types of business without court approval prior to constitution of new BoD.

Current BoD lacks Quorum of directors (4/7; only has 3) according to Company By-Law 1. By law s.10: no business can be transacted until quorum is met, majority are resident

Canadianso CBCA 105(3): directors can’t transact business unless 25% of BoD are resident

Canadians Ontario Securities Act ss.77, 78: C. has failed to file financial statements for period after Sept.

30, 2010 = violation CBCA 133(1): BoD of C. required to hold annual general meeting no later than June 30, 2011;

failure = violationIssues:Does the shareholder have the rights to force the BoD’s position in this way?Reasoning:G. hired shareholder advisory firm VC&Co. to represent them

Submitted outline of plan to reconstitute company’s BoD

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Wrote to C. about CBCA s.111(2)o Failing quorum of BoD/failure of remaining BoD to call meeting, special meeting can

be called by any shareholdero C. BoD refused; called it a bad-faith move

Also requested pursuant to CBCA s.21 to see records of company and shareholders listo BoD hasn’t complied

Mr. Chan (C. BoD) blames all problems on BoD members who leftMr Miller (C. BoD) also divulged that business was still being carried out by them

Also, ~900K$ frozen in C.’s Canadian account (no signatories; CFO terminated)Analysis:(i.a) Calling a shareholder meetingCBCA s.144 authorizes the court to call a shareholder meeting where other means of calling it are “impracticable”

Courts have interpreted ‘impracticable’ narrowly, ordering shareholder meetings only in exceptional circumstances

G. is entitled to call a shareholder meeting1. Current directors have failed to do so, contravening CBCA s.111(2)2. Shareholders have lodged requisition with the BoD under CBCA 143(1); it’s clear the BoD

has no intention of responding by calling a meeting Under CBCA 111(2) and 143(4) shareholders can call meeting where board refuses or

neglects to actIt is appropriate for the court to call the meeting in these ‘extraordinary’ circumstances

C. lacks a BoD with authority to manage business affairs of C. Mr. Chan (C. BoD) called the request for meeting “bad-faith”; shows fundamental

misunderstanding of their duties; his comments raise concerns of past mismanagement (i.b) Directions for conduct of the meetingMeeting must be held in accordance with timetable accommodating C.’s shareholders time decide who to vote for

Proxies will go through Equity Financial Trust Company Distributing notice of meeting will be task of applicants (BoD not trustworthy) C. is entitled to have access to funds to retain counsel to provide advice in respect of ordered

shareholder meeting (can apply to have funds unfrozen)(ii) Compliance OrdersCBCA s.247 allows shareholders to apply to the court for orders in situations where BoD “does not comply with this act”; the court can make “any further order it sees fit”

1. List of shareholders; 2. List of beneficial owners; 3. Name/contact of company’s share transfer agent

Applicant is entitled to all three(iii) Restrictions on powers of current BoDG. seeks to prevent C. BoD from transacting any business other than that necessary to convene the meeting; specifically preventing them from spending money, entering K’s, hiring/terminating employees, etc.

Court must tailor remedy under CBCA s.247 to the specific issue Must be proportionate

G.’s orders should be granted pursuant to CBCA s.247 Serious doubt that C. BoD will comply with ‘ordinary course of business’ stipulation Temporary receiver and manager should be named to deal in the meantime

Holding:Yes to all three of G.’s requests.

Goodwood Inc. v. Cathay Forest Products Corp [2013] (Costs)Facts:Pursuant to earlier ruling against C., G. submitted request for costs:

1. Printing notice of meeting/dissident’s proxy circular 2. Fees of Court-appointed independent chair of shareholders’ meeting

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3. Fees/disbursements of VC&Co (shareholder advisory consultant) 4. Legal fees (McCarthy’s)

Issue:What fees is G. entitled to?Reasoning:At the meeting, C.’s shareholders voted overwhelmingly to elect the four new directors supported by G. CBCA s.143(6) deals with reimbursement of costs of the requisitioning shareholders:

Any costs “reasonably incurred by them in requisitioning, calling and holding the meeting”

For meeting called by court, no specific provisions, however court reserves broad jurisdiction to determine/award costs under the CBCA

G. should recover costs similar to those he would be entitled to if he had called the meeting himself (according to s.143(6))

1./2. Both recoverable as they represent costs incurred for ‘holding the meeting’ and ‘calling the meeting’3. Fixed fee of 400K$ with VC&Co Different types of work performed

I. Actual requisitioningII. Providing evidence

III. Discussions with the court-appointed temporary receiver and managerIV. Providing strategic advice to G. and shareholdersV. Providing strategic advice to G.’s proposed slate of directors

CBCA s.143(6) covers only those costs under first heading; the rest don’t fall under “requisitioning, calling, holding the meeting”4. G. is entitled to legal fees incurred with McCarthy’s on a straight time basis plus H.S.T. and disbursements

Fees incurred for calling/holding the meeting, including the application to court to secure the meeting (falls under CBCA 143(6))

G. is not entitled, however, to ‘bonus’ paid to McCarthy’s subject to successHolding:C. must reimburse G. on the terms discussed above.

CBCA ss. 109, 133-135, 137, 139-143, 146, 173, 176, 183, 190, 210-211

Shareholders – The Corporate Franchise (2) Obligations shareholders have to the corporation and to other shareholders; Limits on the right to vote in the articles/bylaws

Jacobsen v. United Canso Oil & Gas Ltd. (Alberta QB)Issue:Does U.’s by-law 6 providing that no person can be entitled to vote more than 1000 shares no matter how many shares are owned contravene the CBCA?Reasoning:Only one class of sharesCompany first incorporated under Companies Act, got supplementary letters patent for new by-law under Canada Corporations Act, then validly brought forward through articles of continuance for CBCAArgued that law establishes a presumption of equality 1 vote for 1 share that can’t be upset

If this is to vary, then different share classes must be establishedAnalysis:The provisions of the CBCA must be read as a whole, and not in isolation

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CBCA 134(1): unless the articles provide otherwise, each share of a company gives the holder 1 vote.

This must be read in relation to CBCA 24(3), which specifies that it is only when there is more than one class of shares that different rights, etc. attaching to shares may arise

Holding:By-law 6 contravenes the CBCA and is invalid.

Jacobsen v. United Canso Oil & Gas Ltd. (Nova Scotia SC)Facts:Trial judge wasn’t aware that U. was switched from Federal to Provincially incorporate company in Nova Scotia. As such, U. would be under the Nova Scotia Companies Act, not the CBCA.Issues:Is by-law 6 still invalid?Reasoning:Independent scrutineers/independent chairman:A shareholder cannot complain if the company and its directors act within the confines of those internal regulations in the absence of fraud, illegality or oppressive conduct

None of those elements are present hereRestraining the use of by-law 6:Trial judge didn’t deal with question of voting restriction under NSCA, only CBCANot satisfied that it would be illegal under NSCA; it was approved by shareholders on a 1 for 1 share-vote basis

For chairman to apply the by-law is not oppressive or unfairly prejudicial to the plaintiffTrial decision only decided that by-law was invalid under CBCA, not NSCA; a trial regarding the by-law’s validity under the NSCA must occur to determine that matter, not at this summary hearing 4 days before the AGMHolding:The voting restriction should be applied in conformity with the articles of the corporation.

Bowater Canadian Limited v. R.L. Crain and Craisec Ltd. (Repeat)(see p22)

And on exercise of the shareholder franchise

TELUS Corporation v. Mason Capital Management LLC (BCCA)Facts:Dispute over whether, and at what rate, non-voting shares of TELUS will be converted to common shares. BoD of T. wants exchange at 1:1. M. opposes this because it has an interest in keeping the value of common shares higher that that of nonvoting shares. Would require a 2/3 shareholder vote. M. set about acquiring a whole bunch of shares by short-sales; ended up owning about 18.7% of the common shares for voting, with only a 0.21% of the company’s capital. T. realized it wouldn’t be able to get the majority needed, so cancelled the vote. They then changed the amendment so that it would not require a special vote; only 50% + 1 for common voting shares, still 2/3 of non-voting shares (clearly just a way to get around M.). T. takes position this does not amend the company’s articles. CDS on behalf of M. challenges. CDS also brought it’s own changes forward under requisition of shareholder meeting that T. brings action against asking for higher share exchange rate.Issue:Can CDS bring this action on behalf of M.? Does M. have the right to bring an action with only a minimal economic interest in the Co.?Reasoning:TELUS argues only a shareholder can requisition a meeting; CDS isn’t a shareholder, therefore has no standing in the matter

If M. isn’t a party to the matter, they shouldn’t have named them in the actionFurther, CDS has the right to requisition the meeting on behalf of M.

1. It must ensure that it is acting under instructions

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2. Those instructions must come from persons who hold requisite number of shares to requisition a meeting

There is nothing in the BCBCA s.167 that suggests that a requisitioning shareholder must be the beneficial owner of shares or that he must disclose the name of the beneficial owner

The Act should be read in its entire context in its ordinary senseResolutions brought by CDSTrial judge also found resolutions put forward by CDS would amend Art. 27 of T.’s bylaws without complying with the requirements set out in that provision

The resolution would not “delete, amend, modify, or vary” existing provisions of Art.27 (which would require a 2/3 special vote) since no right to exchange exists

The articles don’t suggest any ability to exchange non-voting shares for voting ones; therefore no right is being altered by CDS’s proposed amendments

* Therefore, CDS’s resolutions validEmpty Voting:T. argues that M. shouldn’t be able to do this because while they hold huge amount of votes, very little economic interest

Despite its hedged position, M. does hold some economic interest in T. The lack of economic connection is no reason to deny the voting rights that it came by legally

Holding:Ruled for M.; CDS can bring the action; M.’s voting rights stand despite hedged interests.

Management of a Corporation

Introduction to the Structure of Corporate Management

Meridian Global Funds Management Asia Ltd v. Securities Commission

Directors and Officers; current structure and make-up of the board; and the effect of improper appointment of directors

Morris v. Kanssen [1946]Facts:A company was incorporated with the purpose of purchasing a movie theatre. K. and C. were sole shareholders. They acquired the theatre. C. schemed with S. to get rid of K. C. and S. falsely claimed that a meeting of directors was held where S. was fraudulently appointed director, and who then requested K. resign from office of director. Later, no general meeting held in 1941, so both C. and S. ceased to be directors according to company’s articles. In 1942, S. transferred shares to M. K. then issued this action, for shares to be declared in only himself and C. as before.Issue:What happens to M.’s interests?Reasoning: (Lord Simonds)C., S., and K. all ceased to be directors in 1941M. relies on s.143 of the Companies Act and Article 88:“The acts of a director or manager shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification”

Can only be invoked where there is defect afterwards discovered in appointment or qualification of a director

Vital distinction between (a) appointment where there is a defect, (b) no appointment at all (a) Some act is done which purports to be an appointment, but is inadequate because of

some defect (b) No defect because there is no act at all

Application:

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The section does not cover a case in which there has been no genuine attempt to appoint at all Section cannot be utilized for the purpose of ignoring the substantive provisions relating to

appointment It is supposed to cure defects in appointment; here there has been a total lack of valid

appointment = in reality a fraudulent usurpation of authorityAn ostensible agent cannot bind his principal to that which the principal cannot lawfully do

Here M. was acting as director; he cannot presume in his own favour that things are rightly done if inquiry that he ought to have made would tell him that they were wrongly done

Holding:Appeal dismissed.

Corporate Criminal Liability

Rhône (The) v. Peter A.B. Widener (The)

CBCA ss.102(1), 115, 116, 118, 119, 121, and 122(1)(b), see also Criminal Code ss.2 (definition of organization, representative, and senior officer), 22.2

Directors’ Duties of Care

Peoples Department Stores Inc. (Trustee of) v. WiseFacts: Wise acquired Peoples from Marks and Spencer. L.W., R.W. and H.W. (the “Wise brothers”) were majority shareholders, officers and directors of Wise, and the only directors of Peoples.  Because of covenants imposed by M & S, Peoples could not be merged with Wise until the purchase price had been paid.  Almost from the outset, the joint operation of Wise and Peoples did not function smoothly.  Parallel bookkeeping, combined with shared warehousing arrangements, caused serious problems for both companies.  As a result, their inventory records were increasingly incorrect.  The situation, already unsustainable, was worsening.  L.W. consulted the vice-president of administration and finance of both Wise and Peoples in an attempt to find a solution.  On his recommendation, the Wise brothers agreed to implement a joint inventory procurement policy whereby the two firms would divide responsibility for purchasing.  Peoples would make all purchases from North American suppliers and Wise would, in turn, make all purchases from overseas suppliers.  Peoples would then transfer to Wise what it had purchased for Wise, charging Wise accordingly, and vice versa.  The new policy was implemented on February 1, 1994.  Before the end of the year, both Wise and Peoples declared bankruptcy.  Peoples’ trustee filed a petition against the Wise brothers.  The trustee claimed that they 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 Canada Business Corporations Act (“CBCA”). Bank and M&S get paid off, but M&S’s seizable assets disappearing by Wise milking Peoples’ assets; this is why unsecured creditors come in through trustees. Issues: Do the directors of a corporation owe creditors a fiduciary duty?Reasoning: (Major and Deschamps JJ) The creditors claimed that the inventory policy was detrimental to Peoples, because Peoples had merchandise, while Wise controlled the cash.Fiduciary Duty:

The fiduciary duty is owed to the corporation and not to the creditors CBCA s.122(1)(a). No fraud or dishonesty present. The decision to allocate the inventory in the particular manner was not a situation where the directors profited or put themselves in conflict of interest. Therefore, any liability would have to arise by virtue of the director’s breach of the generalized duty of loyalty to the company; that is, the directors did not act in the company’s best interests.

The directors can take the creditors’ interests into account, but they do not have to (permissive approach to the “entity model”).

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The court found, to the contrary, that the directors did act in Peoples’ best interests by trying to create a more efficient (less costly) procedure for acquiring, storing, and sharing merchandise between the two companies.

The creditors can sue personally under the ‘Oppression Remedy’ or ‘Duty of Care’ if the directors acted in a way that affected their interests or expectations.

Therefore, there is no need to extend the duty of loyalty to require that the directors account specifically for the creditors’ interests when managing the corporation.

The duty of the directors is to make the company a better company not necessarily preferencing one group of stakeholders over another .

Duty of Care: Directors won’t 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 Reasonable in light of all circumstances, including prevailing socio-economic conditions,

about which they knew or ought to have known No breach here; implementation of new policy was business decision trying to correct

serious problemRationale: The duty of loyalty does not extend to creditors. So long as the directors act in the best interests of the corporation, even if creditors take a loss, the directors are not personally liable for their decisions.Holding: No.

Fiduciary Duties – Introduction – Basic Statutory Duty

Peoples Department Stores Inc. (Trustee of) v. Wise

The duty of supervision

In re Caremark International Inc.Facts:Defendant corporation, Caremark International, Inc., provides health care services and products to patients who are often referred to them by a physician. Since the business is reliant on referrals, there is a temptation by companies such as Caremark to compensate physicians. A federal law, the Anti-Referral Payments Law (”ARPL”) is in place to prevent such a system, and in 1991 the Department of Health and Human Services began investigating potential ARPL violations. The Department of Justice joined the investigation soon thereafter, and by 1992 Caremark instituted several new policies and procedures in attempt to find any internal wrongdoings. But in 1994, Caremark was indicted for violating the ARPL. Plaintiffs initiated this suit that year, alleging that the Board of Directors did not exercise the appropriate attention to this problem.Issues:Did the Board exercise an appropriate level of attention to the possibility of ARPL violations?Reasoning:A breach of duty to exercise appropriate attention, as the court notes, is more difficult for Plaintiffs to prove than a breach of the duty of loyalty.

Most decisions that would come under this duty will resemble many decisions shielded by the business judgment rule.

There was no evidence that the directors knew that there were ARPL violations, and there was no systemic or sustained failure to exercise oversight.

Rule to take away: Directors are potentially liable for a breach of duty to exercise appropriate attention

if they knew or should have known that employees were violating the law, declined to

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make a good faith effort to prevent the violation, and the lack of action was the proximate cause of damages.

Holding:The terms of the settlement merely required Caremark to institute policies to further assist in monitoring for violations, which they did. Therefore the settlement was approved.

CBCA, s.122(1)(a)122. (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall(a) act honestly and in good faith with a view to the best interests of the corporation;

Manager’s Fiduciary Duties I – Conflict of Interest and Duty

North-West Transportations Co. v. Beatty [1887]Facts:Plaintiff, B., is shareholder of N., defendants are the company and 5 shareholders who were directors at the commencement of the action. Company passed by-law to purchase a new steamship through the defendant J. B. claims that J., one of the shareholder/director/defendants, breached a fiduciary duty to company through conflict of interest. Issue:Did defendant breach a fiduciary duty to the company through his conflict of interest?Reasoning: (Privy Council)Has been proven that the purchase of another steamer was essential to conduct of the company’s business, and the steamer purchase through J. was suited to that purpose; price was fair/reasonablePlaintiff argues resolution brought about by unfair/improper means:

J. acquired a majority of the shares of the company then transferred the necessary amount to become a director to his two buddies

o However no agreement between them about sale of steamero They both, however, thought it would be beneficial to the company

Voting power of three was therefore such that they could command a majority at any meeting of shareholders; so they used it to buy a new steamer from the director, J.

SCC ruled for B.; based their decision on the fiduciary character of J. as a director and breach of fiduciary duty by having personal interest in transaction of CoPrivy Council:

In form and content, by-law was adopted by majority of votes which must prevail unless the adoption was brought about by unfair/improper means

Constitution of company allowed J. to acquire this voting power; Charter itself recognized this

He had a perfect right to acquire further shares and to exercise his voting power as he saw fit to elect directors with similar views as his

Acquisition of steamer was uninfluenced question of policyHolding:Defendant was acting within his rights in by-laws/articles in voting as he did. Appeal allowed.

Affirming or Approving Interested transactions

CBCA s.120120. (1) A director or an officer of a corporation shall disclose to the corporation, in writing or by requesting to have it entered in the minutes of meetings of directors or of meetings of committees of directors, the nature and extent of any interest that he or she has in a material contract or material transaction, whether made or proposed, with the corporation, if the director or officer(a ) is a party to the contract or transaction;

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(b ) is a director or an officer, or an individual acting in a similar capacity, of a party to the contract or transaction; or(c ) has a material interest in a party to the contract or transaction.

Manager’s Fiduciary Duties II – Corporate Opportunity Doctrine

Regal (Hastings) Ltd. v. Gulliver [1942]Facts: The parent corporation owned a theatre. The company sought to acquire the lease of two more theatres, although it didn’t have enough capital to finance the transaction. The directors could have guaranteed the leases; instead, they supplied the subsidiary corporation with the capital personally. The parent corporation acquired the leases. When the parent corporation was sold, the directors received a profit. The new directors, on behalf of the corporation, sought to recover the profit from the former directors.Issues: Are the former directors liable to account for the profits?Reasoning: Directors and officers cannot make use of a corporate opportunity “by reason of and in the course of” their position as directors.

Per Lord Sankey, “at all material times, they [the defendants] were the directors and in a fiduciary position, and they used and acted upon their exclusive knowledge acquired as such directors. They framed resolutions by which they made a profit themselves. They sought no authority from the company to do so, and by reason of their position … they are liable to account to the company.”

Rationale: “By reason of” is the knowledge element while “in the course of” is the time element of the rule.Holding: Yes.

Peso Silver Mines Ltd. v. CropperFacts: Cropper was the director of the plaintiff company. He had years of business experience in the mining industry. Dickson, a prospector, approached the company with an offer to acquire a mining claim. The Board considered the offer (in good faith) but rejected it, because the Board only had a certain amount of money to spend on speculative claims. Cropper, as an officer and director of the company, received two to three offers a week. Sometime later, Dickson approached Cropper with the offer personally. Cropper and Dickson formed a company to manage the claim.

When the plaintiff company asked Cropper to disclose and turn over his interests in other mining concerns, Cropper refused. He was fired. The plaintiff company asked Cropper to turn over the shares in the new company.

Issues: Is the plaintiff company entitled to the shares?Reasoning: The Court applied the rule in Regal (Hastings). To succeed, the plaintiff must show that the director took a corporate opportunity “by reason of and in the course of” his employ as director. The plaintiff need not prove bad faith.

The Court distinguished Regal on the basis that Cropper did not rely on privileged or confidential information. Dickson approached Cropper in his personal capacity, not in his capacity as a director.

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Furthermore, enough time had passed between the rejection of the offer by the corporation and Cropper’s acceptance (“forgot all about it”) – which evidenced the fact that that the opportunity was no longer a “corporate opportunity”.1

Rationale: The duty to avoid taking opportunities does not last indefinitely. After the proposition is rejected by the company, a director can act on opportunity.Holding: No.

* SideBar: The conflict between Peso and Regal seems to be: the more involved you are as a director, the less likely it is that you can take advantage of business opportunities in your personal capacity. This seems antithetical to the rule in Regal.

What happens if the directors or officers resign? Does the duty of loyalty end? The Court in Canadian Aero held that the duty of loyalty persists.

Can. Aero v. O’MalleyFacts: O’Malley and his co-defendants were exec officers of C. The defendant, while controlling C., met with Guyanese officials to secure a mapping contract. Project funded by the Canadian government, which solicited proposals from other companies. Canadian Aero bid on the deal. O’Malley and the others, however, left C. to start their own company, Terra, which also bid. The Terra bid was accepted.Issues: Is O’Malley liable to cede the profits to Canadian Aero?Reasoning: (SCC Laskin J) O’Malley and his colleagues stood in a fiduciary relationship with Canadian Aero. The law would be reduced to absurdity if directors could simply resign then take a deal from former Co. Canadian Aero never abandoned its hope of getting the bid, which distinguished this case from Peso.

The acquisition of knowledge about an opportunity while acting as a director is not enough to impose an absolute prohibition. If the director can conform to the contextual factors laid out, then the court can absolve the defendant of liability:

o The position or office held,o The nature of the opportunity,o Ripeness/timing,o Knowledge possessed, and o Status of the fiduciary relationship, among others.

Also, what distinguishes this case from Peso is that the defendants took advantage of the company’s confidential information, which they gathered in the course of their position, to snatch the deal This was a case of flat out deception. The defendants used the confidential information

obtained in the course of their employ to create their own proposal. Rationale: When the directors of a company leave, their fiduciary duty does not expire at that moment.Holding: Yes.

Broz v. Cellular Information Systems, Inc.Facts:Broz was President and sole stockholder of RFB Cellular. He was also a board member of Cellular Information Systems (CIS), a competitor of RFB.

1 What would have happened if Cropper had been offered the opportunity before the corporation? Cropper is not under a duty to give the opportunity to the corporation. In such a case, there would have been no problem. In this case, however, Cropper found out about the offer by virtue of his office. Dickson went to the company first – and as such the company had the opportunity to act.

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RFB owned a license (“Michigan-4”) which allowed it to provide cell service to a portion of rural Michigan. Mackinac Cellular Corp. owned its own license (“Michigan-2”) which was immediately adjacent to Michigan-4.

Mackinac wanted to sell Michigan-2, and Broz, after meeting with numerous CIS directors, went ahead and purchased Michigan-2 for RFB.

Issue: By purchasing the license for RFB, did Broz breach his fiduciary duties to CIS? More specifically, did he usurp a corporate opportunity?Reasoning: (Delaware)A corporate opportunity exists where:

(1) The corporation is financially able to undertake it; (2) It is in the line of the corporation’s business; (3) It is of practical advantage to it; (4) It is one in which the corporation has an interest or a reasonable expectancy; and (5) By embracing the opportunity, the self-interest of the officer or director will be

brought into conflict with that of the corporation.Application:

(1) CIS was not financially capable of exploiting the Michigan-2 opportunity – it had just emerged from a length and contentious insolvency reorganization.

(2) CIS had no interest or expectancy in the Michigan-2 opportunity – it was actually in the process of divesting its cellular licenses.

(3) There was no conflict – Broz communicated with a number of the directors prior to moving forward.

Holding:No.

Managers’ Fiduciary Duties III – Change of Control Transactions.

Introduction to the rise of takeovers; Early attempts to control the process: Reviewing the exercise of powers by directors for an improper purpose

Hogg v. Cramphorn Ltd. Facts:H. made bid to buy all shares of the defendant company. Directors of C., for various reasons, didn’t believe that it would be in best interests of either the company or its employees to make the sale, moved to block the purchase. Made allotment of 5,707 preference shares with special 10 votes each which were assigned to trust for benefit of the employees. The BoD made loan to trustees to enable it to purchase the shares out of the Employee’s Pension Fund. Then advanced further 28,293$ to enable trustees to purchase more preference shares. Thus, the BoD had enough votes to block H.’s takeover. H. became co-owner of 50 ordinary shares, brought action.Issues:1. Was the BoD actions attaching 10 votes to each of the 5707 preference shares ultra vires?; 2. Was allotment of those shares to trustees ultra vires?; 3. Was the company’s execution of the trust deed ultra vires?Reasoning: Voting

According to a collective reading of the company’s articles s.13/75, no more than one vote can be attached to each share; could not have attached the special 10-vote privilege to the 5707 shares = ultra vires BoD’s powers

However, the allotment of new shares itself is perfectly fineAllotment of shares to trustees/execution of trustAllotment was made with primary objective of preventing H. from taking over

Directors were using the utmost good faith/acting in what they considered best interests of the company

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However, Directors acted with primary purpose of ensuring their control of the company, and manipulated the voting positions

BoD is in fiduciary position when exercising its powers and cannot act in such a way as to interfere with exercise by the majority of its constitutional rights

Good Faith of BoD doesn’t factor in; a majority of shareholders in a GM is entitled to pursue whatever course it wants whether stupid or not

Power to issue shares was a Fiduciary Power which the BoD exercised for an improper motive Had the majority of shareholders approved the issue of shares, it would be ok Therefore, this question should be put to the GM, minus the 5707 shares issued, to decided

whether the shareholders want to go along with BoDThe issue of the Trust and their subsequent purchases of shares are integrally connected to issue of shares; if shares fail, so to does the trustHolding:10 vote provision is ultra vires; the question of share issuing to trustee will be remitted to GM of company* All the actions of the BoD ratified by shareholders at GM.

Teck Corp. v. MillarFacts: Afton mines is a junior mining company. It had acquired a stake in land that was rich in copper. It wanted to develop the land, but lacked the capital, resources, and expertise. Afton’s directors, including Millar, sought out a senior partner to help Afton with the project. Afton and the senior company would conclude “the ultimate deal” where the senior would acquire shares in Afton in exchange for technical assistance and financial capital.

Teck had shown an interest in doing the ultimate deal with Afton; however, Millar and the other directors felt that Teck was not a suitable partner. Teck said screw you and acquired the majority of the shares in Afton so that it could replace Millar and the other directors (by a special meeting of the shareholders) and conclude the ultimate deal. Before the Board was dismissed, Millar concluded the ultimate deal with Canex, thus diluting Teck’s majority interest in Afton.Issues: Were the directors’ defensive tactics disloyal?Reasoning: The directors are not agents of the shareholders.

Shareholders do not have powers of management; they have powers to vote at shareholders meetings, to remove directors, to pass amendments to corporate by-laws, etc.

The court overrules Hogg v. Cramphorn to state that the directors can consider the interests of the company as a whole, and not just the interests of the majority shareholders.

Shareholders are not the owners of the corporation They are passive investors and the directors have to account for the interests of the other

stakeholders as well. The directors cannot ignore the interests of shareholders, however.

The directors would be acting in good faith even if they considered the interests of the employees.

The Court applies a modified objective test to assess the fidelity of Millar’s actions. The directors must perceive a substantial risk of harm to the corporation to justify

their actions Must be acting in good faith Must have reasonable grounds to believe that the takeover is not in the best interests

of the companyIn this case, Millar was wary of Teck; he had misgivings about its financial capacity, its technical expertise, managerial strength, and marketing experience.Rationale:

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The directors can use defensive tactics if they reasonably believe that the acquiring company would substantially harm the corporation.Holding: No.

The New Approach

BCE Inc. v. 1976 Debentureholders [2008]Facts:Plan for leveraged buyout of all shares of BCE, which owns Bell Canada, valued at 52B$, but which would seriously water-down the value of bonds (debt) held by debentureholders of Bell because of the added risk from the extra debt being taken. B. said it would honour its K terms to D., but would act in best interests of bthe company. D. brings action under oppression (CBCA s.241) and opposition of court approval because of lack of fairness and reasonability (CBCA s.192). Issues:Is the deal void on oppression or fairness/unreasonability?Reasoning: (SCC, by the court)The LawDirectors of the corporation (appellants in B.) have (1) fiduciary duty to the company and (2) a DoC

This case concerns the “fair treatment” component of the directors’ fiduciary duty It is clear that where the interests of the stakeholders/company conflict, the directors owe

the duty to the corporation (Peoples)However, in considering what is in the best interests of the corporation, directors can look to the interests of shareholders, employees, creditors, consumers, governments, etc.

Business Judgment Rule: Courts must give deference to the business judgment of directors so long as those decisions lie within a range of reasonable alternatives

Remedies available to shareholders:1. CBCA s.239 Derivative Action

Allows stakeholders to bring action on behalf of the Co. to enforce directors’ duty to the corporation when directors are unwilling to do so

2. CBCA s.122(1)(b) Civil Action for breach of DoC Duty not solely owed to corporation (like in fiduciary), thus may be basis for liability to other

stakeholders (Peoples)3. CBCA s.241 Oppression

Focuses on harm to the legal and equitable interests of stakeholders affected by oppressive acts of a corporation/its directors (available to a wide range of stakeholders)

(A) Oppression RemedySecurity holders of a corporation fall within the class who may bring a claim for oppression

It is a broad equitable jurisdiction to enforce not just what is legal, but what is fairCriteria:

1. A breach of a reasonable expectationa. Some determining factors:

i. General commercial practice; nature of the corporation; past practice; representations and agreements; nature of the corporation, relationship between the parties; steps claimant could have taken to protect themself; etc.

2. Amounting to oppression, unfair prejudice, or unfair disregardDirectors may find themselves in situations where it is impossible to please all stakeholders

They must decide what is in the best interests of the corporation in the particular situation it faces

ApplicationD. asserts that they had:

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(A) A reasonable expectation that B. would protect their economic interests as security holders in Bell Canada by maintaining the investment grade trading value of their debentures

B. took 3 different bids, all involved serious debt. No reasonable expectation established here

(B) A reasonable expectation that the directors would consider their economic interests in maintaining the trading value of the debentures

Reasonable expectation established But directors fulfilled their duty to consider D.’s interests; made commitments to

honour K; just decided that while K terms would be honoured, no other commitments could be made

Criteria at (i) weigh against finding an expectation beyond the K interests* No breach of reasonable expectation established

(B) The s.192 Approval ProcessIs the arrangement, objectively viewed, fair and reasonable from the PoV of parties whose legal rights are being arranged?Difference between oppression and approval:

O: onus is on claimant to establish oppression/unfairness A: onus is on corporation to establish that the arrangement is fair/reasonable

Seeks to ensure a fair balance between conflicting interests during major changes to corporate structure* Would only apply to stakeholders whose legal rights could potentially be affected

So stakeholders with only an economic interest would not fit the gloveCriteria: (corporation must satisfy the court that…)

1. Statutory procedures have been met2. Application has been put forward in good faith; and3. The arrangement is fair and reasonable (Business Judgment Test; as opposed to Business

Judgment Rule)a. Valid business purposeb. Resolves objections of those whose rights are being arranged in fair/balanced way

* Variety of factors can weigh in: necessity of arrangement to corporation’s continued existence, approval of majority of shareholders/others entitled to vote, proportionality of impact on affected groupApplicationFirst and second criteria have been metD. did not hold any legal powers only economic interests, therefore legal rights not affected, and they don’t fall within an affected class contemplated by s.192

98% of the shareholders voted in favour of the transactionThe approval of the deal goes through. Holding:Appeals allowed.

Managers’ Fiduciary Duties IV – Change of Control Transactions II; Protecting Directors: D & O Insurance and Indemnification of directors

Cytrynbaum v. Look Communications Inc. [2013] ONCAFacts:C. were directors of L. who adopted a share plan (SARP) as incentive for officers/employees. Contrary to the terms of the SARP, the BoD authorized payment of plan at almost twice the market value per share (it was supposed to be at market value). Payments not disclosed to shareholders until almost a year later. Foreseeing lawsuit, directors then authorized Co to pay 1.5M$ in legal

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retainers for their legal fees, then resigned as directors. L. (on behalf of shareholders) commences action seeking repayment of bonuses for breach of fiduciary duty, etc. Subject of this appeal is L.’s refusal to pay advance funding 1.5M$ in legal fees. C. seeking declaration that L. has to pay. Issue:Is L. required to pay the advance legal fees of former directors?Reasoning: (Sharpe ONCA)The LawIn Canada, advance funding for legal costs for a Co’s directors requires court approval according to CBCA s.124(4)

Also, CBCA s.124(3)(a) requires that the directors acted “honestly and in good faith with a view to the best interests of the corporation”

Directors benefit from a presumption of good faith which the party bringing the action can rebut by establishing a strong prima facie case of bad faithCBCA s.124(4) applies both to actions brought by the corporation and to derivative actions Application1. Advancement of legal fees requires court approval, which should be withheld if director has not acted in good faith (CBCA s.124(3)-(4))2. The strong prima facie test for rebuttal of the presumption of good faith of the directors strikes an appropriate balance between encouraging responsible behavior and protecting the Co vs. Protecting the directors3. The trial judge did not err in finding a strong prima facie case of bad faith against the directors

The share valuation for the SARP plan was twice the actual market value, resulted in undue profits for directors

C. authorized payment of legal fees without proper legal advice and on their way out the door

Business Judgment Rule doesn’t protect them here; was not within a range of reasonable alternatives, and was not taken with any legal advice

The retainer payments were part of a pattern of self-interested behavior that supports finding a strong prima facie case of bad faithHolding:Appeals dismissed; C. is screwed.

CBCA s.124

Reasons for setting the basic corporate risk allocation: veil-piercing and reverse veil-piercing

Lee v. Lee’s Air Farming Ltd.Facts: Lee was the director, sole shareholder, and employee of Lee’s Air Farming. He took out employment insurance (as required by law) for the company. Lee died in a plane crash while doing business for the company. The insurance company refused to pay the indemnity to Lee’s wife, explaining that Lee was a director and not an employee.Issues: Can Lee be both a director and employee of a corporation?Reasoning: Again, what does it matter if Lee died, or someone else did.

A person can have multiple offices; the corporation contracted with Lee to hire him as an employee (they are separate: Peoples)

It is up to the creditor, the insurance company, to determine the risk of Lee’s death.In this case, Lee was a contractual employee of the corporation. He earned a living by piloting for the business.

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Once you have the Co it’s a separate legal personality Lee as director enters into K with Lee the worker From legal analysis, it’s correct; company is separate legal personality telling Lee the

person what to doRationale: A person can hold multiple roles in a corporation.Holding: Yes. A person can have multiple offices/roles.

Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co.Facts: The plaintiff corporation sued the parent company (parent-co) of its co-contractor, as the subsidiary (sub-co) did not have sufficient assets to pay its obligations. The plaintiff contended that the sub-co – a mortgage broker -- should have done a risk assessment of its clients. Issues: Should the court allow the claim against parent-co?Reasoning: The court described the relationship between parent-co and sub-co as follows:

sub-co had its own head office, it was managed independently of parent-co, parent-co dealt at arms-length with sub-co. Parent-co had not been involved in any dealings with the plaintiff, nor did the two parties

communicate with each other.* The plaintiff is a sophisticated party that should have known that it was dealing with a subsidiary corporation that might be under-funded.

The plaintiff should not have considered parent-co to be an underwriter for its losses.Applying Salomon, the parent-co and sub-co are distinct persons.

Only where there is a compelling reason to break down the corporate veil will the courts do so.

The entities must act as a “single business entity” to merit piercing the veil in this case. Otherwise, the risk is that the courts will engage in “palm tree justice”.

Under the common law, the corporate veil can be pierced when:(1) Legislation allows it;(2) The corporation completely dominates another Co. and uses it as a mere sham used to shield

fraudulent or improper conduct [this is problematic];a. Almost have to show that the basic mechanics of running the dominated Co. have

been set asideb. Conduct akin to fraud

(3) When the corporation is acting as an agent.Rationale: Without evidence of fraud, the court will not pierce the corporate veil and implead a parent Co. Holding: No.

VTB Capital PLC v. Nutritek International Co.Facts:V. entered deal through a Russian company RAP to buy six Russian dairy companies, for 225M$. RAP was to get the loan from V. then buy the companies from Nutritek. Nutritek was owned by Marshall Capital Holdings, which was owned/controlled by Konstantin Malofeev (M.). The companies ended up being worth about 40M$, so V. was in essence an unsecured creditor when RAP went bankrupt. V. trying to pierce the corporate veil to hold M. and MCH liable. Issue: Can V. hold M. and MCH liable for RAP’s defaulted debt?Reasoning: (Lord Neuberger)

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V. relied heavily upon false representations as to value of dairy companies when they approved the loan to RAP.

V. ignored warnings from risk department Failed to properly vet the borrower

ApplicationV. wants MCH and M. to be held jointly/severally liable with RAP for breaches of loan agreements as if they were co-contractants

Alleged that M. used RAP’s separate legal status to disguise the ownership ultimately exercised over RAP by M. and MCH

Is piercing the corporate veil a real thing? Precise nature, basis, meaning of the principle is obscure Often accompanied by prejorative expressions (sham, mask, cloak, etc.) which risk allowing

moral indignation to win over legal principleMay be right to allow the veil to be pierced in some circumstances, but can’t be invoked merely where there has been impropriety

It is necessary to show control of the company and impropriety by the wrongdoer at the time of the relevant transaction

Application of joint/several liability here goes against Salomon Company should be treated as being a person by the law in the same way as a human;

there were multiple levels of separation between him and the deal None of the actual K’ing parties intended to K with M., and he did not K with them M. never acted as if he was liable under the agreement

None of the facts involved RAP being used improperly; all of V.’s allegations are based on misrepresentations of Nutritek which RAP had nothing to do with Holding:V.’s case fails; they cannot pierce the corporate veil to pursue M. or MCH

Third Parties suing directors, employees, and shareholders directly of a corporation for consequences of their interaction with the corporation. Suing shareholders

The thin capitalization argument

Walkovsky v. CarltonFacts: Walkovsky was hit by a driver employed by Carlton’s company. Carlton structured the taxi company so that it would be a conglomerate of smaller sibling corporations. Each corporation has two cabs and the minimum amount of liability insurance. Walkovsky sued Carlton as the principal shareholder arguing that the sibling corporation was a sham (suing C. would get more money in this scenario than one of the under-capitalized cab companies). Issues: Is Carlton personally liable as a shareholder?Reasoning: The court rejects the plaintiff’s “enterprise theory” of liability.

The defendant is entitled to structure the company for tax advantages and to minimize the risk of liability.

The court also rejects the plaintiff’s “fraud theory” as the corporation was not set up fraudulently. Had the legislation required that cab companies assume greater insurance, it would have stated so.

Walkovsky should not be able to win the accident lottery by having access to deeper pockets.Dissenting: Per Keating JIn this circumstance, legal personality is being abused.

Carlton is using the right to incorporate as an abuse of rights. Carlton sets up a “flimsy corporation” to minimize liability. The firm was intentionally under-capitalized.

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Cab driving involves more than an “ordinary” risk. Carlton anticipated the risk, which is why it under-capitalized. This shows concealment

and fraud.Rationale: The court was unwilling to disregard legal personality because the debtor was undercapitalized.Holding: No.

Problem of suing directors for inducing the breach of contract into which a corporation they are directors of and the scope the Said v. Butt defence

London DrugsIacobucci: (majority)

Corporation and employees are separate legal persons They each owe a duty of care to not commit tort against 3rd parties The employees breached this DoC Exception that allows them to have defence to it through exemption clause in the K The 3rd party consensually entered into agreement with a LL-Co, and shouldn’t be able to

avoid defenceLa Forest: (minority)

Hold on In order to hold them in negligence, have to find a DoC When employees are acting as the company, they don’t owe a DoC separate from the Co

*Majority reasoning allows obnoxious actions against employees where K is badly drafted* First question is always: what is the interaction between the 3rd party and the Co? K or Tort?

If it’s K, then look for limitation of liability

Said v. ButtFacts:B. was chairman/managing director of a theatre which S. often frequented. There was a falling out between parties, S. began to openly criticize B. There was a big opera opening, and S. tried to get tickets, but was refused. Instead he bought them through a friend. B. wouldn’t have sold them to him otherwise. At the theatre, B. spotted S. and had him escorted out, tried to return his money to him. S. brings action for B. knowingly inducing the theatre company to breach a K. Issue:Can an agent be held liable for inducing his principle to breach a K?Reasoning:Defendants case rests solely on ground that B. procured the theatre to break its K with S.Before S. can succeed at trial, he has to establish that he actually had a K with the theatre company

Where a person is deceived as to the real person with whom he is K’ing and that deception induces the K or renders its terms more beneficial for the deceiving party, the K cannot be enforced against the deceived party

S. knew that B. wouldn’t sell him ticket, cannot constitute himself a contractor simply by going through another person

No KIf there were a K, could S. pursue B. (3 rd party) for knowingly procuring a breach of his K with theatre?If it were so held, it follows that whenever a managing director/BoD/officer of a company causes/procures a breach by that company of its K with 3rd party, they could be liable to an action for damages in Tort

Not technically piercing the corporate veil; establishing independent actionable wrong * An action of this kind has been recognized where the third party is a strangerBut the acts of a servant/agent are in law the acts of his employer

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It would be the master himself, by his agent, breaking the K, and such an action for the type of dmgs sought must fail

Would open the floodgates of litigationIf a servant acting bona fide within the scope of his authority procures or causes the breach of a K between his employer and a 3rd party, he does not thereby become liable to an action of tort at the suit of the person whose K was thereby broken

Person who deals with Co cannot have available to them actions in breach of K against the Co AND action in Tort against the individual directors

Holding:Ruled for B.

ADGA Systems International Inc. v. Valcom Ltd.Facts:A. claims that V. raided its employees thus purposefully causing economic harm to A. The claim is by A. against the director and two employees of V. for their personal involvement in the recruitment program which induced breach of fiduciary duty.Issues:Can the individuals be sued for their actions, assuming those actions were genuinely directed to the best interests of their corporate employer?Reasoning: According to Salomon, a company once incorporated must be treated as any other independent person1. Where the plaintiff relies upon establishing an independent cause of action against the principals of the company, the corporate veil is not threatened and the Salomon principle remains intact

This difference was clearly established in Said v Butt2. Provides an exception to the general rule that persons are responsible for their own conduct

People who accept to deal with a limited company and accept the imposition of limited liability will not be able to claim for breach of K against the company and tort against the directors

3. Those harmed as strangers to the corporate body may look for liability to the persons who caused the harm and those who have in some manner accepted limited liability in their dealings with the company would be limited in recourse to the company

In Canada, officers of the Co are responsible for their tortious conduct even though that conduct was directed in a manner to the best interests of the Co, subject to the exception in Said v Butt

An officer cannot claim the defence of Said v Butt if he isn’t acting bona fide in the interests of the Co They can be pursued in tort if their actions are themselves tortious or exhibit a

separate identity or interest from that of the Co Therefore, even in acting in the course of duty, an officer can be liable for tortious conduct

Holding:Appeal allowed; A.’s case can continue

Hogarth v. Rocky Mountain Slate Inc.Facts:H. is pursuing R. and its directors personally for negligent misrepresentations made through 3 ‘business plans’ concerning a slate mining opportunity. Issues:Was there negligent misrepresentation?* Can the officers be held personally liable?Reasoning: (O’Brien and Rowbotham)Where the actions of a director are themselves tortious or exhibit a separate identity or interest from that of the corporation so as to make the act/conduct their own, they may attract personal liability

Simonson (S.) didn’t exhibit this level of separate identity

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Concurring: (Slatter)Causation for N-M against the company requires two elements

1. But for representations, H. wouldn’t have invested the $2. Damage would not have resulted if the representations had been true

o Where investor suffers losses that are unrelated to the misrepresentation, defendant is not responsible

Three N-M alleged: 1. Expertise of management team

No N-M; plaintiffs were aware of the lack of experience of promoters Finding N-M in this case comes close to saying that directors are liable for ‘negligent

management2. Involvement of mining engineer

* YES N-M; but no sufficient causation No evidence that the lack of an engineer caused the quarry’s problems

3. Compliance with regulatory standards No N-M; rep was clearly directed towards the future, and M. was in compliance

Personal LiabilityScotiaMcLeod Inc v Peoples Jewellers: directors of a limited liability Co are not identified with the company for purposes of legal liability

* For liability to be extended to directors, their actions must exhibit a separate identity or interest from that of the company so as to make the act their own

Hercules Managements: normal test for establishing a DoC applies to N-M cases (with some modifications; fundamental concern that “indeterminate liability” not be allowed)

Physical or economic damage? Reliance reasonably foreseeable? Intentional or non-intentional tort? Etc.

ADGA Systems v Valcom: voluntarily dealing with corporation vs. stranger Stranger should be able to pursue personally, volunteer should not

Cooper v Hobart: foreseeable and reasonable reliance?* Independent factor runs through almost all of the jurisprudence

Co. should be presumptively responsible for any misrepresentations; individual liability secondary only

Application* Cooper acknowledged that expectations of parties are legitimate considerations, in specific realm of N-M, Hercules held the ‘nature of the relationship’, ‘reasonableness of the reliance on representations’ were key

It was reasonable for H. to rely on representations, but not to rely on S. as personal guarantor

Cooper v. Hobart1. Foreseeability/Proximity (reasonably foreseeable reliance)

a. Involves determining if proximity arises because defendant ought reasonably to have foreseen that plaintiff would rely on representations made, and that reliance was reasonable: Hercules

b. Investors knew they were dealing with LLP; any reliance on personal liability of S. was unreasonable: Hercules

2. Policy Considerations (at both stages)a. Foreseeability Policy: Tort not sufficiently independent to engage S. personally;

reliance by the respondent on him personally was unreasonable b. Residual Policy: Legitimacy of use of limited liability structure threatened

Holding:Errors in conclusion that N-M were made. Also, Insufficient proximity to warrant personal liability: policy considerations at both levels speak against it. Legitimate expectations of the parties don’t support it; S.’s appeal allowed.

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Other ways directors can be personally liable

Air Canada v. M & L Travel LtdFacts:V. and M. incorporated ML to sell airline tickets, with A. being their biggest sponsor. M. set up a trust account for the deposit of the airline ticket funds, which, minus commission, were supposed to all go to A. ML also obtained an operating line of credit of 15K$ from the bank to finance the operation which was seizable at any time by bank (demand loan). For unknown reason, trust account was never used and all monies went into a general account. Falling out between V. and M. led to conflicting stop-payment orders by the two, at which time they owed A. over 25K$. Faced with conflicting orders, the bank refused further withdrawal attempts, withdrew their 15K$ from the operating account. A. sued ML as well as M. and V. personally for the 25K$ owing. JH:Trial: success against ML but not M. or L.CA: success against all of themIssues: 1. Was the relationship between ML and A. one of trust?2. Under what circumstances can directors be held personally liable for breach of trust by Co?Reasoning: (SCC Iacobucci)1. The intent of the agreement creates a constructive trust

1. Certainty of intent 2. Certainty of subject matter 3. Certainty of object

There was clear language that the funds were to be held in trust; express prohibitions restricting the use of the funds, etc.2. No question that ML was in breach of trust; personal liability of directors is appropriate in this case as wellTwo general bases where personal liability of directors in equity for breach of trust will be appropriate:

1. As trustees de son torto They take on themselves to act as trustees and to possess and administer trust

property, and commits a breach of trust while so acting * 2. Knowingly assisted in a breach of trust

o Barnes v. Addy: strangers who “assist with knowledge in a dishonest and fraudulent design on the part of the trustees” will be liable for breach of trust as constructive trustees

(A) Knowledge: Requires actual knowledge, recklessness or willful blindness on part of stranger

(B) Nature of the Breach of Trust: 1 st Line of Authority : Barnes: requires (1) assistance by stranger of trustee, (2) with

knowledge, (3) dishonest/fraudulent design on part of trustee * 2 nd Line of Authority : A person who is the controlling/directing mind of a corporate

trustee can be liable for an innocent or negligent breach of trust if the person knowingly assisted in the breach of trust

Therefore only required that the trustee breached in ‘dishonest and fraudulent way’, and that the directors knew of the trust and assistedApplication

ML placed monies it knew were not for general use in a general account and made them subject to seizure; risk to the prejudice of A. the beneficiary that ML knew it had no right to take = dishonest/fraudulent

Clear that M. and V. participated in the breach of trust; directly caused by them acting in their own interest to stop payment on cheques; precipitated the bank seizure; they knew about the trust agreement as directors (even if no knowledge, was at least willful blindness)

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Holding:Directors are personal liable for the breach of trust in this situation.

Shareholders suing to directly enforce rights that belong to the corporation – shareholder’s insurable interest

Macaura v. Northern Assurance Co. Facts:M. felled a bunch of timber kept it on his land. Irish Canadian Saw Mills kept timber on his land, gave him shares in the company to pay for the timber. M. took out insurance over the timber; he was only shareholder, timber was pretty much only asset. Timber burned, N. refuses to pay.Issue:Can M. collect insurance over the company’s property?Reasoning: (Lord Buckmaster)No he cannotThe appellant could only insure as a creditor or as a shareholderCreditor:

Untenable position: would follow that any person would be at liberty to insure the furniture of his debtor

Shareholder: No shareholder has any right to any item of property owned by the company; no

legal/equitable interests therein Entitled to share in profits/dissolution

Concurring: Lord SumnerM. stood in no legal or equitable relation to the timer at all

Makes no difference that he was company’s only shareholder and wood was only assetHolding:M. fails; appeal dismissed.

Kosmopoulos v. Constitution Insurance Co. of CanadaFacts: Kosmopoulos purchased insurance for the property of his business. Kosmopoulos incorporated his sole proprietorship on the advice of his lawyer. All of the documents, including the insurance papers, referred to Kosmopoulos operating as Spring Leather Goods. After a fire damaged the premises, Kosmopoulos tried to claim the insurance proceeds, but the insurance company refused payment. The insurer claimed that the company needed to insure the premises. Kosmopoulos forgot the “little details”. This often happens, especially in small family firms; should have sued the lawyer, but didn’t.Issues: Is Kosmopoulos entitled to claim the proceeds?Reasoning: (SCC Wilson J) Citing Salomon, a legal entity is distinct from its shareholders. The court will lift the corporate veil when the company acts as a mere agent or puppet of the controlling shareholder.

Those who have chosen the benefits of the corporate form have to assume some of the risk.

This is not a corporate law problem – it is an insurance problem. The court held that Macaura did not apply in this circumstance.

Kosmopoulos had an insurable interest as the sole shareholder of the company. But for the fire, he was the sole beneficiary of the assets of the company. He benefited from the existence of the assets and was prejudiced by their destruction. Wagering was not an issue. It might have been had there been more shareholders (say 2, 5, 10, etc.).

The insurance company is raising a “technical objection” to deny insurance when everyone knows that the corporation’s assets were meant to be the object of the insurance.

K. had “Some relation to or concern in” the subject matter of the Co’s property

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The oppression remedy is always available if some of the shareholders insure the assets of the corporation and the corporation’s assets are destroyed (when there are multiple shareholders). Secured creditors might be able to access those funds.Rationale: Sole shareholders retain the benefits of the assets of the corporation and can insure those assets.Holding: Yes. The court did not have to pierce the corporate veil to issue the proceeds.

See also Lee’s Farming for another example of single shareholder skirting the rules*Sidebar: This case problematizes the one-shareholder corporation. It conflates the interests of the sole shareholder with the corporation, even though they are distinct legal entities.

Courts are reluctant to engage in piercing the corporate veil for 1-person corporation. It is not enough that there is 1 person. The corporation has to be an instrument to further the interests of the individual; a sham.

Hercules Managements Ltd. v. Ernst & YoungFacts:- Co. had K with defendant auditors to prepare financial statements- Financial statements were prepared negligently. Co. went bust.- Ptf shareholders (who have a K with the co.) brought action in contract, and in tort for negligent

misrepresentation. The ptfs argued that, had the statements not been negligently prepared they would have acted differently (i.e. they relied): they would not have bought additional shares; they would have sold their existing shares; they would have taken a more active role in supervising management.

- Court rejected contractual action.Issue:Do the auditors owe the ptf shareholders a duty of care: (i) the investment loss they incurred as result of relying on the reports; (ii) the losses in the value of their existing shareholders that they incurred as a result of reliance?Reasoning: (SCC LaForest)He’s trying to carry on, in Lord Atkins fashion, to create a test that can be applied to all difficult cases of negligence.2 part Anns test (Kamloops Test) to determine duty of care: Prima facie duty arises where:

o (1) sufficient relationship of proximity or neighbourhood such that in the reasonable contemplation of the wrongdoer, carelessness on his part might cause damage to the other.

o (2) Policy considerations which negative duty or limit its scope, the class of person to whom it is owed or the damages to which a breach of it may give rise.

This general test should not be limited to cases of physical damage; applies to economic loss cases also [trying to fashion general test!]

Step One Proximity: There is proximity in negligent misrep cases where the plaintiff reasonably relies:

o (a) the dft ought reasonably to foresee that the ptf will rely on his or her representation; and

o (b) reliance by the ptf would be reasonable in the circumstances. The combination of these factors creates a special relationship.

Step Two Policy Considerations: [1] Indeterminate liability might result b/c auditor’s statements are used by many people, and it

is almost always reasonably foreseeable that they would rely on them. [2] Deterrence of negligent conduct (i.e. concern that spectre of tort liability would be incentive

to produce accurate reports) is outweighed by limitless liability concerns. [3] Economic inefficiency b/c of costs expended to insulate from liability, litigate, etc.* In most cases of negligent misrep involving auditors, the indeterminate liability concern will

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negate the prima facie duty. However, there may be some cases where the indeterminate liability concern doesn’t arise, and thus duty not negated:

o Where the dft knows the identity of the ptf or a class of ptfs ando Where the dft’s statements are used for the specific purpose or transaction for

which they were made.

Application to facts of this case:1. Was there proximity? No question that a prima facie duty of care was owed on the facts of this case. It is reasonably

foreseeable that shareholders would rely; in fact, it is a statutory requirement that audited statements be put before the shareholders.

Reliance was reasonable : [LaF outlines indicia of reasonable reliance and holds that the first four inhere].

o (1) dft has direct or indirect financial interest in the transaction in respect of which the rep was made;

o (2) professional, possession of special skill, judgment or knowledge;o (3) advice or info provided in course of the dft’s business;o (4) information given deliberately and not on a social occasion;o (5) info or advice given in response to a specific enquiry or request.

2. Policy reasons to negate the duty? Knowledge of identity : Auditors knew the very identity of the ptf shareholders (they have been

their auditors for many years). No issue of indeterminate liability. * Were reports used for purpose of transaction for which prepared? NO. Audited statements are

made for the purposes of assisting ShareHolders (as a collective) in their task of overseeing management. Auditors did not prepare the audit reports in order to assist H. or shareholders in making personal investment decisions.

Foss v. Harbottle and derivative actions The proper way to have brought this claim would have been as a derivative action rather than a

series of individual actions Individual shareholders have no cause of action in law for any wrongs done to the

corporation, and if an action is to be brought in respect of such losses, it must be by the Co itself (through directors) or by way of a derivative action

o As a derivative action for the shareholders as a cohesive body, the action is seen to represent the corporation’s interest, not just the individual shareholders

Shareholders cannot raise individual claims in respect of a wrong done to the corporationo Only by establishing an independent actionable wrong can the individuals bring a claim

Held:No. Negated by overriding policy considerations. But LaF tries to set out a general duty of care approach.

Houle v. Banque Canadienne NationaleFacts:Houle brothers were shareholders in a family company that had dealt with bank for over fifty years. The company had a credit line with bank, including a “demand loan” (bank has the right to recall with no notice). Just 20 days after signing new trust deed, bank recalled the loan. They took possession and liquidated Houle’s assets just three hours later. The problem was that Houles were in the process of selling their company (estimated to get $1 million). After this liquidation, they were forced to sell at only $300,000. Shareholder brothers now taking action against bank, claiming difference of $700,000 they would have received had it not been for the bank’s recall, which they claimed was made in bad faith. Note that it is the shareholders, not the company (which no longer exists) suing the bank.JH:Finding that bank had acted unfairly, both trial and appeal courts “lifted the corporate veil” and awarded Houles $250,000 (what they estimate difference to be). Bank appealed.

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Issues:What are the criteria for abuse of contractual rights? What is the foundation for liability for abuse of contractual rights?What are the rights of third parties in this context?Legal Reasoning: (L’Heureux-Dubé J.)Recalling the loan and reasonable delay:

It is not contested by either party that the terms of the “demand loan” allowed the bank to recall it on demand and realize its securities without notice.

In accordance with its rights, the bank did recall its loan and realize its securities. The question is whether it abused its rights in so doing abuse can arise when otherwise valid contractual rights are not exercised in a reasonable fashion.

Termination which occurs abruptly or brusquely, that is, without prior warning and without giving a period of reasonable notice that will allow debtor to make arrangements, may be abusive.

The recalling of the loan was not in itself an abuse of the bank’s contractual rights – but now must examine reasonableness of the delay If the demand to repay is to have any meaning, there must be a reasonable time given to respond to it. The purpose of reasonable notice is to give debtor a change to make the repayment.

The bank was unjustified in acting the way it did Houles had been doing business with the bank for over fifty years, and had always

fulfilled its obligations (no reason to think they wouldn’t get it). It was so unexpected and so abrupt that the bank effectively prevented any chance

of the company meeting its obligation of repayment. While the bank had right Not absolute, must be tempered by principle of reasonable

delay. Bank acted wrongfully and committed fault against Houle company.* Rights of third parties:

The problem in this case is that the respondents are not the company – they are the shareholders. As such, they are not parties to the contract in question.

Unlike lower courts, SCC refuses to “lift the corporate veil” the bank must have committed a fault directly against respondents (independent of contract) to be held liable.

Where does SCC find liability? Bank knew about the deal Houles were making to sell their company. In such

circumstances, there is a general legal obligation that a person not prejudice the parties to a sale when it knows such a sale to be imminent. Should the sale fail to materialize or the price decrease due to conduct which constitutes fault, liability can be triggered under 1053 CCLC (now CCQ 1457)

There was a direct relationship between Bank’s fault and the damage caused to respondents. They were under a legal obligation (independent of contract) to act reasonably towards them so as not to prejudice their sale. Failure to do so resulted in their injury (lower sale).Holding:Bank’s recall constituted an abuse of their rights. Because they knew of the impending deal and the effect that this would have on respondents, they were under a general duty to act reasonably towards them and not prejudice the sale. Failure to do this triggers tort liability, but no K liability. Appeal denied, CA ruling upheld.

Smith, Stone and Knight Ltd. v. Birmingham Corp. [1939]Facts: B. wanted to buy property owned by S. In the sale, S. claimed fees for compensation for disturbance of the business which was carried on at one of the premises where a subsidiary company of S., W. was established. B. claimed that W. had to, as a separate legal entity, make those claims itself.Issue:Can S. make the claim or must, in law, the claim be made by W. itself?Reasoning:

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This would pretty much allow a piercing of the corporate veil by S. S. caused W. to be registered, both had same directors who held shares in W. in trust for S. W. kept no books, all were kept by S.; S. had complete control over W. There was no tenancy agreement upon which W. occupied the building; they were there just

in name “Apart from the name, it was really as if the manager was managing a department of

the company”B. argues Salomon (distinct legal entity)

Owning all the shares in a Co doesn’t give the person control over the company or make its property/legal rights theirs

But was the subsidiary carrying on the business as S.’s business or its own?1. Were profits treated as the S.’s?2. Were the persons conducting the business appointed by S.?3. Was S. the head/brain of the trading venture?4. Did the company govern make all the decisions?5. Did S. make the profits by its own skill/direction?6. Was S. in constant and effective control?

Yes to all these questionsHolding:Found for S.; W. was in effect only an appendage of S.

* Sidebar: Corporation acting as an agent for the principal

RemediesThe Representative/Derivative Action

Hercules Managements Ltd. v. Ernst and Young(See p46)Foss v. Harbottle and derivative actions The proper way to have brought this claim would have been as a derivative action rather than a

series of individual actions Individual shareholders have no cause of action in law for any wrongs done to the

corporation, and if an action is to be brought in respect of such losses, it must be by the Co itself (through directors) or by way of a derivative action

o As a derivative action for the shareholders as a cohesive body, the action is seen to represent the corporation’s interest, not just the individual shareholders

Shareholders cannot raise individual claims in respect of a wrong done to the corporationo Only by establishing an independent actionable wrong can the individuals bring a claim

*Sidebar:Criteria to get right to Derivative action:1. Ask management to solve the problem 2. Have to show that their refusal is tainted3. Have to get a majority of the shareholders behind you

Appraisal Remedy; and Investigation

CBCA ss. 104, 162, 167, 190, 238-240239. Derivative action

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Oppression Remedy I – Who is entitled to sue under the oppression remedy?CBCA 241(2). Oppression remedyKey language: activity that is “oppressive or unfairly prejudicial to or that unfairly disregards the interests of” (CBCA s.241)

Any security holder (stakeholder), creditor, director or officer238 who can take advantage241(1)(2) when can the person have oppression remedy241(3) what can the court do if it finds oppression?

First Edmonton Place Ltd. v. 315888 Alberta Ltd. [1988]Facts:FEP (landlord) transferred approximately $250,000 to the lawyers running the numbered company as a leasehold improvement allowance and signing bonus. It also allowed the company to rent the premises for a rent-free period. The company transferred the money to its directors and vacated the premises after the rent-free period was up, in violation of the lease. The landlord is suing the directors personally so that they can recover the bonuses.Issues:Is the landlord, as a creditor, entitled to file a derivative action or an action in oppression?Reasoning:The purpose of the remedial provisions is to ensure that the rights of creditors, minority shareholders, and the public are protected within corporate law [stakeholder model]. The view that the management of the company falls exclusively within the hands of the directors is no longer current. The wrongdoers should not be able to prevent others from undoing the effect of the wrongdoing.

1. Derivative Action

It is highly unlikely that a “toxic” board will bring an action against itself. The derivative action allows a complainant shareholder to bring an action against the directors, on behalf of the corporation, with leave of the court. The complainant must act in good faith and must demonstrate that the case is “prima facie in the interests of the corporation” so as not to “harass” the directors (CBCA s.239).

2. Oppression Action

The provision gives the court the authority to remedy conduct that it considers to be oppressive with remedies that are “just and equitable.” The remedy does not purport to deal with unpopular decisions. It should not supplant the legitimate exercise of the Board’s power. The exercise of the Board’s power must pass a threshold of oppressiveness (CBCA s.241).

The court will gauge the oppressiveness of conduct by looking at the “reasonable expectations” of the injured party. The court will assess the following factors: (1) the protection of the underlying expectation of a creditor in its arrangement with the Co; (2) extent to which the acts were unforeseeable or the creditor could reasonably have protected itself; (3) the detriment to the interests of the creditor

3. Application to the case

In this case, the landlord is not a “creditor” under the act because it does not hold a security (debt obligation). However, the landlord does fall within the generalized category of “complainant” because it is the proper person to make the application for a derivative action, but not the proper person to make an oppression action:

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1. There is no evidence that the directors used the corporation as a vehicle for committing a fraud against the creditors (even though they may have perpetuated a fraud against the corporation).

2. No breach of any underlying expectations (creditors did not have an expectation that the signing bonus would remain with the corporation)

The “good faith” requirement is supposed to prevent private vendettas from being litigated. The landlord is acting in good faith because it wants to ensure that the corporation has assets to fulfill the breach of the lease claim (which the landlord will file/has filed).

The court also rejected the landlord’s oppression claim on the grounds that it did not affect the interests of creditors. At the time that the landlord complained of the actions of the directors, it did not owe the creditors a present obligation to pay the rent; the landlord had only a future right to the rent. Creditor, when given its plain and ordinary meaning, does not apply in this circumstance.

Rationale:A landlord can file a derivative action on behalf of a corporation when the landlord seeks to recover money used to satisfy rent and when the landlord is doing so in good faith.Holding:The landlord was the proper person to make a derivative claim and the court granted leave. The landlord did not have a reasonable expectation that the corporate respondent would retain the signing bonus and therefore it cannot sustain its claim for oppression.

*Sidebar:“Underlying reasonable expectations” criteria carries through to cases afterwards: see BCE and Downtown Eatery

* See also Peoples for secured vs. unsecured creditors in action

Downtown Eatery (1993) Ltd. v. Ontario [2001]Facts:The appellant is an employee who was wrongfully dismissed. The respondents are the directors of the company he used to work for. He was fired from a managerial position at the respondents’ nightclub. He sued the respondents’ company that was responsible for paying him, B. Right before the trial, respondents shuffled the corporate structure of their companies, and B. was left with no money to pay A. A. now seeking to sue other companies of respondents under ‘common employer’ doctrine as well as under oppression remedy.Issues:Is the oppression remedy open to A.?Reasoning: (ONCA)A. is allowed to pursue the respondents’ other companies under the common employer doctrineOppression Remedys.245 of OBCA (s.241 CBCA) states that a “complainant” viable to bringing an action under oppression remedy can be anyone deemed by the court to be a “proper person”G. (defendants) testified that the reorganization of the companies was due to union activities not the upcoming trial

B. was company in charge of holding money for paying/managing employees under G.’s companies

A. is seeking the oppression remedy absent bad faith to rescue himself from inability of B. to pay his judgment, which resulted from G.’s decision to terminate B.’s business operations/suck all of its fundsTrial judge failed to appreciate that oppressive conduct need not be undertaken with the intention of harming the complainant

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As long as it’s established that a complainant has a reasonable expectation that a Co’s affairs will be conducted with a view to protecting his interests, the conduct doesn’t require intention to harm

o See the criteria of “protection of underlying expectations” enunciated in First Edmonton Place

Restructuring B. right before trial effected a result that was unfairly prejudicial to, or that unfairly disregarded the interests of, A.; there was nothing A. could have done to prevent this from occurring: see again criteria in First Edmonton PlaceHolding:A. can recover the amounts owed to him from the defendant’s companies and the defendants personally.

Distinction between the Oppression Remedy and the Derivative Action

Pasnak v. Chura [2003]Facts:P. and C. are directors of Fleetwood and indirectly shareholders in it through their respective personal companies: P.=Double J., C.=Chura Holdings. They also share interests in a bunch of other companies that they are directors/shareholders in. Falling out; P. wants to buy C.’s shares in companies, but they can’t agree on price. P. thinks he should get the price as before the big drop in share value due to mismanagement by C. of Fleetwood that amounts to cause of personal action in oppression for P. through Double J. C. argues that these are claims that only the Co Fleetwood can bring as a derivative action.Issue:Is this properly a derivative action or oppression case?Reasoning: (BC Supreme Court)Foss v. Harbottle

A company and its shareholders are distinct entities; only the Co can sue for wrong done to itTwo different streams of jurisprudence on Derivative vs Oppression* 1. C. argues the oppression remedy considered to be available to shareholder only if it is able to demonstrate that it has suffered personal losses separate and distinct from those suffered by the Co

The only rights of the shareholder affected are his derivative or corporate rights Shareholder doesn’t suffer any personal loss when share price goes down The only injuries are the company’s and not his own, and can only be righted by the

company2. P. argues the courts have granted shareholders a remedy for oppression despite the fact their losses appear to be only consequential/incidental to the company’s loss through their loss in share value

In most cases cited, oppression was only really recognized for wrongs to the company, and the order was for oppressor to pay to the Co either directly or indirectly

Application* An injury incidental to the injury of the Co is properly remedied through derivative action* An injury separate and distinct from that of the Co and personal to the shareholder is properly remedied by action in oppression

It is possible that a director’s actions can constitute a breach of fiduciary duty where Co can sue and the basis of an oppression action based on separate injuries personal to the shareholder

Wherever P. cannot show a loss other than to his share value in Fleetwood equal to the loss of share value experienced by C., he cannot bring oppression; they are properly actions that must be brought by the Co or on its behalf as derivative

Fleetwood is only Co that oppression is alleged in Even if oppression is found, share value of Fleetwood is nil so reduction of share price for

purchase by P. serves no purpose

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o Cannot transfer the remedy to reduce share prices of other companies C. has interests in; no oppression alleged in other companies, and they are separate legal entities

Holding:Ruled in favour of C.

CBCA ss. 238, 241-242

Oppression Remedy II

BCE Inc. v. 1976 Debentureholders [2008]

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