Business Associations Final Outline – O’BrienAsif Abdulla – 2011 Fall

Table of Contents

SOLE PROPRIETORSHIP...................................................................................................................................... 4Partnership Act:.................................................................................................................................................................. 4

Section 88 – Trading under firm name implying plurality of partners.......................................................4Section 89 – Names similar to corporation............................................................................................................4Section 90 – Indices....................................................................................................................................................... 4Section 90.3 – Search of the Registrar..................................................................................................................... 4Section 90.4 – Misleading Statements an Offence...............................................................................................4Section 90.5 – Penalty................................................................................................................................................... 4

AGENCY..................................................................................................................................................................... 5Definition:......................................................................................................................................................................... 5

Relationship Between Principal and Agent:.............................................................................................................. 5Actual Authority, Implied Authority, Usual Authority.......................................................................................5Duties of the Agent to the Principal......................................................................................................................... 6Duties of the Principal to the Agent......................................................................................................................... 6Termination of the Agency Relationship................................................................................................................7

Relationship Between Principal and 3P, and Agent and 3P:................................................................................7Ostensible Authority; Agency by Estoppel.............................................................................................................7Ratification....................................................................................................................................................................... 8Undisclosed Principal................................................................................................................................................... 9Liability of Principal for Agent’s Torts................................................................................................................. 10

PARTNERSHIP...................................................................................................................................................... 11Formation of Partnership............................................................................................................................................. 11

Four Elements of Section 2:...................................................................................................................................... 11Partnership Act................................................................................................................................................................. 11

Section 1 - Definitions................................................................................................................................................ 11Section 2 – Definition of Partnership.................................................................................................................... 11Section 3 – Exclusion of Corporations...................................................................................................................11

Indicia of Partnership..................................................................................................................................................... 12Section 4 – Rules for Determining Partnership.................................................................................................13

Relationship Among the Partners.............................................................................................................................. 14Partnership Act Default Rules................................................................................................................................. 14

Liability of Partners to 3Ps........................................................................................................................................... 16Partnership Act Liability to 3Ps.............................................................................................................................. 16

Dissolution of Partnerships.......................................................................................................................................... 17Partnership Act Dissolution:.................................................................................................................................... 17Retirement of Partners.............................................................................................................................................. 18

Registration of Partnerships........................................................................................................................................ 18Partnership Act – Registration Requirements...................................................................................................18

Joint Ventures.................................................................................................................................................................... 19Advantages of General Partnerships......................................................................................................................... 19Limited Partnerships – Part 3...................................................................................................................................... 19

Essentials:....................................................................................................................................................................... 19Partnership Act – Limited Partnerships.............................................................................................................. 20Significant Aspects of LP Partner Relations........................................................................................................21

Advantages of a Limited Partnership........................................................................................................................ 21

1

Limited Liability Partnerships – Part 6.................................................................................................................... 22Partnership Act - LLPs................................................................................................................................................ 22Partnership Act – Formation of LLPs.................................................................................................................... 22Partnership Act – Obligations of LLPs...................................................................................................................23

CORPORATIONS................................................................................................................................................... 24General Corporate Structure................................................................................................................................... 24Constitutional Jurisdiction....................................................................................................................................... 25Implications of Constitutional Position................................................................................................................26BCBCA – Extra Provincial Registration.................................................................................................................26

CBCA Basics........................................................................................................................................................................ 27Forms:.............................................................................................................................................................................. 29CBCA – Directors and Officers.................................................................................................................................. 29

Consequences of Incorporation.................................................................................................................................. 30Incorporation Process:.............................................................................................................................................. 30Post-Incorporation Steps Under the CBCA.......................................................................................................... 30Advantages of Incorporation:.................................................................................................................................. 31

Corporate Personality and the “Corporate Veil”...................................................................................................31CBCA Sections – Shareholder Immunity...............................................................................................................31Piercing the Corporate Veil (Disregarding the Legal Entity)........................................................................33

Requirement to Display Corporate Name................................................................................................................36Section 10(5) – Publication of Name..................................................................................................................... 36BCBCA Sections – Corporate Naming:................................................................................................................... 36

Jurisdiction of Incorporation....................................................................................................................................... 37CBCA Advantages:........................................................................................................................................................ 37BCBCA Advantages:..................................................................................................................................................... 37Change of Jurisdiction of Incorporation...............................................................................................................37CBCA Continuance....................................................................................................................................................... 37

Pre-Incorporation Contracts........................................................................................................................................ 38Section 14 – Personal Liability................................................................................................................................ 38

Ultra Vires Acts of Certain Corporations..................................................................................................................40Ultra Vires...................................................................................................................................................................... 40Constructive Notice and Indoor Management Rule.........................................................................................40

Shares and Shareholders............................................................................................................................................... 42The Nature of a Share, and the Share (Securities) Register..........................................................................42Issuing and Paying for Shares.................................................................................................................................. 42Share Rights and Restrictions................................................................................................................................. 431. Voting Rights............................................................................................................................................................. 432. Dividend Rights........................................................................................................................................................ 443. Rights on Liquidation or Winding Up...............................................................................................................46Redemption and Repurchase of Shares............................................................................................................... 47

GOVERNANCE – DIRECTORS AND OFFICERS.............................................................................................. 48Appointment and Powers of Directors and Officers............................................................................................ 48

Appointment, Removal, Meetings of Directors..................................................................................................48Powers of Directors..................................................................................................................................................... 50Access to Records of Directors................................................................................................................................ 52

Duties of Directors and Officers.................................................................................................................................. 52Fiduciary Duties........................................................................................................................................................... 52Other CBCA Duties of Directors............................................................................................................................... 57Obligations Under Other Legislation.....................................................................................................................59Tort Liability of Directors and Officers................................................................................................................ 60Indemnification and Insurance............................................................................................................................... 61

GOVERNANCE - SHAREHOLDERS................................................................................................................... 622

General Powers of Shareholders................................................................................................................................ 62No Usual Management Powers................................................................................................................................ 62Access to Information About Corp......................................................................................................................... 62Resolutions.................................................................................................................................................................... 62Election and Removal of Directors........................................................................................................................ 63Amendment of By-Laws............................................................................................................................................. 63Review Financial Statements................................................................................................................................... 63Appoint an Auditor...................................................................................................................................................... 64

Shareholder Meetings..................................................................................................................................................... 64Fundamental Changes.................................................................................................................................................... 66

4 Fundamental Changes............................................................................................................................................ 66Amendment of Articles.............................................................................................................................................. 66Continue (Export) to Another Jurisdiction..........................................................................................................67Extraordinary Sale, Lease or Exchange of Assets..............................................................................................68Voluntary Liquidation and Dissolution................................................................................................................68

Shareholder Initiatives.................................................................................................................................................. 69SH Proposals.................................................................................................................................................................. 69Proxy Solicitation and Circulars............................................................................................................................. 70Access to Other Corp Information.......................................................................................................................... 72

Closely Held Corporation............................................................................................................................................... 73Vote Pooling Agreements.......................................................................................................................................... 73

Unanimous Shareholder Agreements....................................................................................................................... 74Requirements for Unanimous SH Agreements:.................................................................................................74

SHAREHOLDER REMEDIES............................................................................................................................... 76Personal Action............................................................................................................................................................ 76Derivative Actions....................................................................................................................................................... 76

Oppression Action............................................................................................................................................................ 76Requirements for Oppression:................................................................................................................................ 76

Compliance and Restraining Orders..........................................................................................................................80Section 247 – Restraining or Compliance Order...............................................................................................80Section 248 – Summary Application to Court.....................................................................................................80

Rectification of Corporate Records............................................................................................................................ 80Section 243 – Application to Court to Rectify Records....................................................................................80

3

SOLE PROPRIETORSHIP- No formal legal structure – owned by an individual- Legal ownership of the business assets is not separate from the sole proprietor’s own assets- Benefits:

o Almost no cost to run a business this wayo Losses are deductable against personal income

- Individual owners make all their own decisions, assets are all owned in the same way that personal assets are owned

o Growing business would likely convert to corporation after making money

Partnership Act:

Section 88 – Trading under firm name implying plurality of partners- Where indicating a plurality of partners, there must file with the registrar

Section 89 – Names similar to corporation- (1) Must not file a business name that

o (a) Is used by a corporation registered or continued in BCo (b) Nearly resembles a name such that it is likely to confuse or mislead, or is a name that the

registrar disapproves in its discretion- (2) Registrar may file the certificate if corp consents in writing or business used the name for registration

before the corp first used the name

Section 90 – Indices- Registrar must keep two indices of the declarations filed under the Act- Lays out the administrative process for these indices

Section 90.3 – Search of the Registrar- Any person may

o (a) conduct search by name of firm or name of partnero (b) inspect records and information maintained by the registraro (c) obtain copy of all or any part of a record maintained by registraro (d) require that copy by certified by registrar

Section 90.4 – Misleading Statements an Offence- (1) Person who makes a statement in registration commits an offence if the statement

o (a) is false or misleading of any material facts oro (b) omits any material fact that makes the statement false or misleading

- (2) directors who knowingly authorize, permit or acquiesced to the commission of the offence are party to the offence and guilty

- (3) Not guilty if that persono (a) didn’t know the statement was false or misleading ando (b) with the exercise of reasonable diligence, could not have known that the statement was

false/misleading

Section 90.5 – Penalty- Liable fine of not more than $5000 (if person); or fine of not more than $2000 (if individual)

4

AGENCYDefinition:

- The “agent” is a person who affects the legal relations of another person, called the “principal” o Agent can effect the legal relations of the principal in several ways but primarily through entering

contracts on behalf of the principal- “The relationship that exists between two person when one, called the agent, is considered in law to

represent the other, called the principal, in such a way as to be able to affect the principal’s legal position in respect of strangers to the relationship by the making of contracts or the disposition of property”

- Businesses require agents to carry out their function

Relationship Between Principal and Agent:- Agent is considered at law to represent the principal- Agent may effect the principal’s legal position- Agency may exist through written agreement, oral agreement, and does not require consideration- Agent owes fiduciary duty to principal – chosen based on trust- Differs from Employment relationship

o Employee does not necessarily have the right to bind the employer- Differs from Trust relationship

o Both owe fiduciary duties, but acts of trustee do not bind the settlor or the beneficiary

Actual Authority, Implied Authority, Usual Authority- Express Actual Authority:

o Can be written or oralo Provides specific authorities and powerso Where tasks are required to complete the subject matter expressly authorized, then those tasks are

seen as impliedly authorized- Implied Actual Authority:

o Constitutes authority in the absence of express actual authorityo Usual Authority:

What this specific agent has been allowed to do in the past Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd (1964, QB) – see below

Actual authority implied from the circs – scope of authority would be based on what directors of the board usually had allowed Kapoor to do in the past

- Customary Authority:o Look at what agents of that type typically are authorized to doo Bank managers, stock brokers, etco Wiltshire v. Sims – below

Stockbrokers did not customarily have authority to sell shares on credit – no authority hereo Differs from usual authority:

Usual looks at what THIS principal allowed THIS agent to do the past Customary looks at what agents OF THIS TYPE are NORMALLY ALLOWED do in other

similar relationships

Freeman & Lockyer v. Buckhurst Park Prpoerties (Mangal) Ltd (1964 QB)- P was a firm of architects engaged by Kapoor on behalf of the D- P was not paid by D for the work they did, so sued D for the fees- Held:

o Principal is liable to a 3P who enters into K with principal through an agent who has actual authority to act on behalf of the principal

o Here, Kapoor was acting as a managing director, but never actually appointed by the board of directors

5

But board was aware that Kapoor was acting in this capacityo Actual authority is implied from the circs

Scope of authority is based on what directors of the board usually had allowed Kapoor to do in the past

Wiltshire v. Sims (1808)- While stockbrokers usually have authority to sell shares on behalf of clients, they don’t normally have

authority to sell shares on credit- So in absence of express authority/prohibition, look to customary authority of agents of that particular type- Held:

o Stockbrokers do not generally have authority to sell shares on credit – so no authority here

Duties of the Agent to the Principal- Fiduciary duties are owed to the principal – implied terms of the relationship- May be varied by express agreement, but not by implication from the circs- Duty to Perform Agency Obligations:

o Must perform the assigned tasks according to principal’s instructionso Standard – all reasonable and best efforts to perform the dutieso Must not exceed authorityo Agent not liable if the act they are authorized to perform is illegal

- Duty to Perform with Reasonable Careo Standard of care is the degree of skill and diligence that an agent in his/her position would normally

posseso Professionals – act within the degree of skill or a reasonably competent professional in their trade

- Fiduciary Duties:o Loyalty - Agent must act in the best interests of the principal – must put principal’s interests ahead

of agent’so Conflicts of Interest:

Not to put himself in position where agent’s interests conflict with the principal’s interests Remedy – transaction is void and agent is required to account to the principal any profits

made in the transaction Damages would compensate for any losses caused by the conflict

o Not to Make Secret Profits: Cannot act as a double-agent No kickbacks or finder’s fees for performing principal’s contracting Remedy – Agent required to account for profits made by agent to the principal

- Duty not to Delegate:o Principal-Agent relationship is based on trust – only principal can determine who is an agento Remedy – damages for any loss resulting from delegation – possible injunction from further

delegationo Delegation may be appropriate where there are extraneous circs – where done in good faith and is

necessary to carry out a simple (but important in some cases) task on behalf of the principal- Keep Proper Records:

o Keep books/accounts in order – separately from agent’s own accountingo Must be able to produce records upon requesto Remedy – evidentiary presumption against agent – amount of profit to the agent or loss to principal

– whichever is most favourable to the principal

Duties of the Principal to the Agent- To Pay Remuneration

o Generally requires express agreement – commissions only where agent is successful

6

o Where it is clear that agent would not have been inclined to act gratuitously Quantum Meruit – compensation for what work was actually done

- To Pay Agent’s Expenses and Indemnify Against Losseso Agent must be acting within scope of actual authority – not expenses through the fault of agento Must be reasonable and necessary expenseso Negligence of agent that results in additional costs does not require repaymento Cannot have reimbursement for illegal expenses

Termination of the Agency Relationship- By Act of the Parties:

o Where agency agreement provides for terminationo Unilaterally terminable on notice

- By Operation of Law:o Principal or Agent becomes bankrupto Frustration

Where purpose of the agency relationship no longer existso Death/Incapacity of Principal or Agent

Relationship Between Principal and 3P, and Agent and 3P:- Agent cannot enforce contract and is not party to the contract – contract exists between principal and 3P- Recall Actual Authority

o Where actual authority exists and it is clear agent was acting for principal in dealings with 3P, then the K, if otherwise valid, will be a binding K between the principal and the 3P

Ostensible Authority; Agency by Estoppel- Principal has never in fact authorized agent’s actins, but by representations or actions, is estopped from

denying the agent’s actions- Occurs where 3P and Principal are at disagreement as to whether the agent had authority to bind principal

o Protects the reliance interests of 3P who are led to reasonably believe the person is acting as agent- To the public it appears as if the agent had the authority

o Either principal represented or permitted the agent to represent self that he had actual authority

Essential Elements:- Representation or permitting of representation that the agent had authority

o Rep can be express, implied or circumstantial- Reasonable reliance on the representation to the 3P’s detriment

Freeman & Lockyer – above – Kapoor – not actually a director – implied/customary actual authority- Also ostensible authority – reasonably relied upon that Kapoor had the usual authority

Lloyd v. Grace, Smith & Co – more below- Client wants help from lawyer – lawyer left conveyancing clerk in charge of the office- Clerk committed fraud – client sued law firm saying they were liable for agent’s action- Held:

o Firm didn’t authorize clerk, but they did hold out the clerk as someone who is authorized by the office to do things that clerks do

o Fact that clerk did something illegal doesn’t change the fact that the rep of trust and authority was made by the firm

o Client reasonably believed the clerk was agent of the firm – lawfirm was the principle

7

Therefore, firm was liable for the actions of the agent

Reasons for Ostensible Authority:- Protection of reliance by 3P

o Competing interest is unfair surprise – principal will be surprised at being bound to a Ko But principal could have taken steps to avoid the potential reliance interest

- Least Cost Avoidanceo Obligation is on the person who can avoid risk at least costo Principal can check agent’s trustworthiness, monitor agent, dismiss agents

Breach of Warranty of Authority (Tort)- Claim by 3P against an agent, where agent warranted that he/she had authority but in fact did not have actual

or ostensible authority- Developed before negligent misrepresentation- Elements:

o 1. The agent represents that he/she has authorityo 2. Representation is false ando 3. The 3P acts on the representation to his/her detriment

- Claims:o 1. Against the alleged principal on the basis that the agent had authority (actual/ostensible)o 2. Against the alleged agent on the basis of breach of warranty of authority

- Damages:o Negligent misrepresentation – reliance damageso Breach of warranty of authority – expectation measure of damages

Includes lost expected profits from the transaction Put the 3P in the position he/she would have been had the ‘agent’s’ promise been true

Ratification- Where agent acts beyond authority, but principal chooses to accept what the agent has done- Generally occurs in instances of usual authority- Circumstances:

o 1. Person purported to act on behalf of another person who seeks to ratifyo 2. Person who seeks to ratify was in existence and was ascertainable at the time the other person

purported to act as agent; ando 3. Person who seeks to ratify must have had the legal capacity to do the act both at the time the other

person acted and at the time of the ratification Commonly related to corporations that come into existence after Ks are in place

- Requirements:o 1. Ratification can be express, by conduct or by acquiescence

Generally, performance of the K is sufficient Also, simply waiting and seeing what the outcome of the K will be, is sufficient

o 2. Ratification must be based on a knowledge of all the relevant facts Principal must be aware of the nature of the deal Minor aspects may not allow the principal to escape duties under the K

- Consequences:o Creates an enforceable contract between 3P and Principal – they can sue each othero 1. Relates back to the time of the offer and acceptance between the agent and 3P (formation time)o 2. Principal can sue 3P and vice versao 3. Agent is no longer liable for breach of warranty of authorityo 4. Agent is no longer liable to the principal for exceeding his/her authority

8

o 5. Principal will be liable to the agent for reasonable remuneration and to indemnify the agent for expenses reasonably incurred by the agent in effecting the K

- Policy Reasons:o Mutual benefit

K is determined to be good for everyone Promotes certainty

o Unjust Enrichment of the Principal at the Expense of the Agent w/out ratification, principal would have no down-side risk – if deal went through, they win

if it goes south, then sue the ‘agent’ Also, principal would be able to go through with K and not indemnify/pay agent

o Unjust Enrichment of the Principal at the Expense of the 3P (principal’s speculation) Rat by acquiescence

avoids potential upside gain for the principal Rat by conduct

Ensures principal cannot just perform K until it’s not beneficial anymore Principal in existence

Ensures that persons cannot wait to see if the deal is good before creating the principal – no ratification unless principal was in existence at formation

Principle Ascertainable Same argument

o Unjust Enrichment of the 3P at Expense of Principal (3P’s speculation) Protects principal from 3P reneging on deal to get a better deal in rising market

o Cures Minor Defects in the Grant of Authority Reduces legislation in actual/ostensible authority

Undisclosed Principal- Where Agents act on behalf of principals without disclosing the relationship to the 3P- Contract is believed to be between 3P and Agent

o Principal can still sue the 3P in some circso Once principal discloses they are the principal, they effectively take over the K

- Where Principal can Sue 3Po Generally, they can sue once they disclose their principal relationship and take over Ko But if 3P was looking to contract with agent alone, then this does not apply

Maybe agent has special skills – 3P may be able to escape the dealo Objective test:

3P will be seen to be looking to the agent alone to perform if: 1. The terms of the K require that only agent perform the terms agreed upon OR 2. Circumstances indicate that 3P clearly intended to contract with the agent alone

o Must be some corroborating circs such as previous relationships

Said v. Butt- Said wanted to attend an opening night performance in London, but had said terrible things about the staff- Had a friend (agent) buy tickets for him – but manager refused his entry- Held:

o If staff knew they were contracting with Said, they never would have sold the ticketo No enforceable contract

Rights of the 3P:- Reciprocal protections for the 3P:

o 1. 3P, on learning of the agency relationship, can sue the principal if neededo 2. 3P can still sue agent (as party to the K)

9

Principal/agent have joint-severable liability, but the principal will indemnify the agent and return any costs, including 3P’s suit, and

o 3. In action against 3P by the principal, 3P can set off any rights the 3P would have against the agent and can use any defence that the 3P would have against the agent

May request an accounting of prior transactions

Policy Reasons for Undisclosed Principals:- Mutual Benefit

o If not looking for the agent to perform, then the same benefit is derived from allowing the principal to contract with the 3P as would have been achieved from the agent

- Unjust Enrichment of the 3P (potential)o 3P should not be able to avoid performance after principal has carried out obligations

- Unjust Enrichment of Principal (potential)o Principal should not be able to escape liability after the 3P has carried out obligations

Liability of Principal for Agent’s Torts- Similar to vicarious liability- Agent can also affect legal relations of the principal by committing torts while acting on behalf of the

principal

The Legal Test:- Principal is liable for a tort committed by the agent if the agent committed the tort while acting within the

scope of his/her authorityo Simply must be doing the type of things that agent would normally do to carry out mandateo Principal has deeper pockets usually

Lloyd v. Grace, Smith & Co (1912 AC)- Clerk in law firm defrauded a client in a conveyancing act- Even where principal did not authorize agent to commit fraud, he/she may have put the agent in a place to

do that sort of act, and must be answerable for the manner in which that agent has conducted himself/herself o MacKay and Barwick

- Held:o Clerk had authority to receive deeds and carry through sales and conveyanceso Fraud occurred in carrying out that capacityo Principal does not have to benefit from the agent’s fraud, nor does the agent have to intent to benefit

the principal - Principal is liable.

Ernst & Young v. Falconi (1994 ON)- Partnership – partners are agents for one another and are liable for the torts of fellow partners, so long as the

tort was committed in the scope of authority- F was a lawyer, pled guilty to charge under Bankruptcy Act – fraudulent disposition of property, Partner had

no involvement with the transaction- Held:

o This was not in the regular course of duties of the law firm, but it is sufficient that the agent used the facilities of the law firm to perform services normally carried out by the law firm in carrying out the transaction that resulted in the loss

o F’s actions were of the nature of the normal legal services provided by a lawyer within the practiceo The fact that they were intended to defraud creditors of the bankrupts does not take the acts out of

the ordinary course of business of the law firm

Policy Rationale for Liability of Principal for Agent’s Torts:

10

- Deterrence / Least Cost Avoidanceo Encourages principal to take steps to avoid harm that activity may cause

- Allocation of the Loss to the Activity Causing the Losso Price increases can be worked into the service/product to reflect the cost of potential loss

- Concern for Compensation of the Victim- Other Concerns - Trust for a particular profession - General policy considerations in tort

PARTNERSHIP

- Three types of partnerships:o General Partnerships (GP);o Limited Partnerships (LP);o Limited Liability Partnerships (LLP).

- Benefits of GP:o Like minded people decide to work together on a business ventureo Smaller localized businesses that are self-financed are often set up this wayo Avoid paperwork and business tax scheme

- Legal Consequences:o Each partner liable to the full extent of persona assets for debts and other liabilities of the businesso Partner may not be considered an employee of the business (Thorne)o Partner cannot be a creditor of the partnership (exceptional circs in the Partnership Act)o Income from business is calculated from the partnership firm – firm itself is not taxed, the shares are

apportioned to the partners individual personal taxes- Do not carry separate legal entity

o May exist without partners being aware of ito Carrying out business with someone, with intention of generating profit – partnership – s.2

- Partners are the owners in common of business and assetso They carry on business in their own right in common, they are not employees

Formation of Partnership- No formal steps required to set up a GP- There is a registration requirement, but GPs can exist without registration- Basically a question of the nature of the relationship

Four Elements of Section 2:1. Persons (more than one, and includes corporations)2. Carrying on business (ordinary meaning – trade, profession, occupation, buying/selling, commercial, etc)3. In common (together in some way – see section 4)4. With a view of profit (no actual profit is required, just a view towards it)

Partnership Act

Section 1 - Definitions- “Business name” – name under which a business is carried on or is to be carried on and includes firm name- “Firm” – collective term for persons who have entered into partnership with one another- “Firm name” – style or name under which the business of a firm is carried on- “Principal place of business” principal premises in BC where business is carried on- “Registrar” – registrar of companies under the BCA- “Writ of Execution” – order for seizure and sale issued under small claims rules

11

Section 2 – Definition of Partnership- Partnership is the relation which subsists between persons carrying on business in common with a view of

profit

Section 3 – Exclusion of Corporations- Relations between members of a company or association that is

o (a) incorporated under an Act oro (b) formed or incorporated under an other statute or letters patent or royal charter

- Is not a partnership within the meaning of this Act

Backman v. Canada (The Queen) (2001 SCC) – View to Profit (can be ancillary purpose), here – no.- 39 Canadian tax payers were arguing that a partnership had been formed, so that they could use losses that

had accrued on ‘partnership property’ to deduct against their law practice profits in Canada- Texans purchased land in Dallas, property value diminished significantly

o 39 Cdns purchased interest in property, converted from limited partnership to general partnershipo Texans created new partnership and bought it back for the same price – but not before 39 Cdns were

able to use it for to write losses against their profits back in Canada- Issue: was there a “view to profit” in this endeavour?- Held: There was never a view of profit here – this was a specific view to loss

o Mere manoeuvre to crystallize losses for tax purposes – no business carried out that could have been profitable in any way – one day transaction

o Carrying on a business – organized commercial effort over a period of time; incurring liabilities to other people; purpose of gaining livelihood or profit

o Tax motivation does not necessarily mean that it’s not carried out with a view of profit – so long as there is a secondary intention of earning profit other than tax benefit, then s.2 is satisfied

o Must look to true intention of the parties- Takeaway points:

o Calling something a GP doesn’t make it a GPo View of profit can be an ancillary purpose of the partnershipo Must have objectively provable criteria for section 2

Thorne v. NB (Workman’s Comp Board) (1962 NBSC App Div)- GP between Thorne and R – each agreed to take 75$/week in wages- Registered GP with WCB and paid premiums for ‘employees’ – Thorne injured on the job – claimed WCB

o WCB ownership protection was not paid for- Held:

o GPs are relationships, not a separate entity at lawo Wages does not mean that they were employees – actually just taking partnership drawso Loss cannot be compensated because T is not an employee

- Takeaway:o Partners are personally liable for debts of the firmo Any creditor can look to any partner for entire debt – partners can then seek indemnity from otherso GPs – personal belongings of partners are pooled with the business assets

Indicia of Partnership

1. Sharing of Net Profits:a. Income minus expenses – if the profits are shared in proportion of interest, then that is

indication that there is a partnership2. Persons are in Agency Relationship:

Policy Considerations12

1. Reliancea. Reliance on a known participant in the business – 3Ps may rely on those involved in the business to

satisfy obligations in connection with that business – 3P may reasonably believe the person dealt with was acting as agent for the others

b. Reliance on person not known by 3P2. Unjust Enrichment

a. Persons sharing in profits of the business is getting the benefit of creditor avoidance3. Least Cost Avoidance

a. Position to assess the risk and control of itb. Lowers overall cost of credit

Section 4 – Rules for Determining Partnership- In determining whether a partnership does or does not exist, regard must be had to the following rules:

- (a) Common ownership of property does not itself make the co-owners(holders) partners o This is only an indicator of partnership – common intention for profit is still requiredo Co-ownership vs. Partnership

C – not agents for one another; can deal with their own interest in the property w/out consent of the other co-owners

P – agents for one another; unless agreed by all partners, cannot transfer interest in property

- (b) Sharing of gross returns does not of itself create partnershipo Think of the relationship between the travelling play owner and the theatre owner

- (c) Receipt by a person of a share of the profits of the business is proof in the absence of evidence to the contrary, that he/she is a partner in the business. But not proof in of itself (but strong indicator), puts the burden on other party to show it’s not a partnership.

o Specifically not presumptively a partnership where:o (i) Payment of a debt or liquidated amount by instalments out of profitso (ii) Contract for the remuneration of an employee or agent by share of the profits of a businesso (iii) Spouse or child of a deceased partner who receive an annuity out of the profits

AE Lepage v. Kamex Developments (1977 aff’d by SCC) – s. 4(a) issue – TIC v. Partnership- Distinguished between TIC and partnership (s. 4(a))- Group formed syndicate to buy property; Kamex was incorporated to hold the property in trust on their

behalf – the group entered into agreement:o Property held in trust in proportion to their own interests – profit distributed in ratioo Decision to sell could be made by majority of the parties

No individual could sell without first offering to other group members- AE entered into agreement with March to sell property – March signed on behalf of group w/out their

authorityo S. 7 Partnership Act would bind the partners to March’s action if they are a partnership

S. 7(2)(a)(b) – where no authority and AE knew that, then can escape s. 7- Property sold by someone else – AE suing them as partners for breach of k- Issue:

o Whether March’s actions were binding on all of the group memberso Was March in a partnership with the group members?

- Held:o Agreement among group was an ownership in common, NOT a partnershipo Ability of individual co-owners to deal with the individual property interests was inconsistent with

partnership – partnership interests cannot be sold without authority – fiduciary relationship Right of refusal is indicative, but not determinative – its avail in co-ownership as well Each member treated the property differently for their personal taxation

- Takeaway:

13

o Partners cannot usually deal with particular partnership property as if it is their own, but it is possible to have a partnership in which such right is provided

o Policy considerations seem to point to lack of partnership Reliance – no indication that March had been held out as having authority Unjust Enrichment – AE would be unjustly enriched if paid without selling the place Least Cost Avoidance – AE could have simply just checked with Kamex

o Failed to claim ostensible authority; and failed to sue March for breach of warranty of authority

Volzke Construction Ltd v. Westlock Foods Ltd (ABCA)- V is arguing that W was in a partnership with another company – V contracted with the other company B- Oral construction contract existed between V and B – but V seeking recovery from both B and W- W owns IGA franchise and makes agreement to put it in B’s mall; W seeks construction contract with V,

holding out B as W’s partnero A joint account existed, but B had all the signing authority and all tenancy issues were forwarded

directly to B – W did not partake in any of those matterso In a previous matter, W obtained a ruling that W and B were partnerso Now W is claiming they are not partners for this claim against B

- Trial – no intention for partnership; W had insufficient control of the business- CA – They are partners

o Nothing in the defn of partnership that requires each part to act in the management of businesso W and B agreed to share profits/expenses of the entire centre 80/20; spoke of themselves as GPso Therefore V can make a claim against W as well as B.

Relationship Among the Partners- Default rules are created by the Partnership Act – Written Agreement can be made to override the rules- Based on the assumption that partners are equal with respect to their capital contributions, rights to

participate in management of the business and share in the profits of the business- Principles: Equality, Consesnualism, Fiduciary Character, Partnership Agreement

Partnership Act Default Rules

21 Variation of Rights and Duties by Consent- Mutual rights and duties of partners as determined by agreement of this Part, may be varied by consent

of all partners – this may be express or implicit consent22 Fairness and Good Faith

- (1) Partner must act with utmost fairness and good faith towards other members of the firm- (2) Duties imposed by this section are in addition to any rules of equity

24 Property Bought with Firm Money- Unless contrary intention appears, property bought with money belonging to a firm is deemed to have

been bought on account of the firm27 Rules for Determining Rights and Duties of Partners in Relation to Partnership

- Subject to any agreement express or implied between parties, partnership interests, rights and duties with regard to partnership property must be determined by the following rules:

- (a) All partners are entitled to share equally in capital and profits of business and must contribute equally towards losses of the firm

- (b) Firm must indemnify every partner in respect of payments made and personal liabilities incurred in (i) ordinary and proper conduct of business or (ii) about anything necessarily done for the preservation of business of the firm

- (c) Any capital advanced beyond agreed upon amounts is entitled to interest at a fair rate from the date

14

of payment or advance- (d) Partner is not entitled to interest on the capital subscribed by him or her- (e) Every partner may take part in the management of the partnership business- (f) Partner is not entitled to remuneration for acting in the partnership business- (g) Person may not be introduced as a partner without the consent of all existing partners- (h) Differences in ordinary business must be decided by majority of the partners – but no change to the

nature of the partnership without consent of all existing partners- (i) Partnership books are to be kept at place of business of partnership – every partner must have acess- (j) Partner may refer a difference in interpretation or application of partnership K to arbitration

28 Majority Cannot Expel Partner- Majority of partners cannot expel a partner unless a power to do so has been conferred by express

agreement between the partners and is exercised in good faith29 Ending the Partnership

- (1) If no term is set, partner may end partnership at any time on giving notice to all other partners- (2) If originally constituted by deed, notice is also sufficient

30 Continuation of Partnership After Expiry- (1) If partnership entered into for a set term is continued after expiry, without new agreement, rights

and duties of the partners remain the same as they were prior to expiry of the previous term- (2) Continuance of business as habitually acted in during the term, without settlement or liquidation, is

presumed to be a continuance of the partnership31 Partners Must Render Accounts

- Partners are bound to render true accounts of the information of all things affecting the partnership32 Partner Must Account for Benefits

- (1) Partner must account to firm for any benefit derived by the partner without the consent of the other partners, from transactions conducted on behalf of the partnership

- (2) Applies also to transactions after a partnership is dissolved by death of a partner and before the affairs of the partnership have been completely wound up

33 Profits of Partner Carrying on Similar Business- If, without consent, carried on business of the same nature and competing with firm, partner must

account for and pay over profits made in that competing business34 Assignment by Partner of a Share

- (1) Partnership share can be assigned, but that does not result in assignee becoming a partnero Assignee is entitled to a share of profits and share of assets on dissolutiono Not entitled to participate in management or administration of the businesso Based on fiduciary principles – trust relationships

91 Rules of Equity and Common Law- Rules of equity and common law applicable to partnership continue in fore, except in so far as where

inconsistent with express provisions of this Act

Rochwerg v. Truster (2002 ONCA) – must account for benefits – s. 32- R was a partner in RTZ – R left and partnership dissolved- Prior to leaving, R became director of Techlogic and its subsidiary, which both were clients of RTZ

o R disclosed this involvement and remitted his director’s fees to RTZ for the first yearo R also received stock option purchases which amounted to huge profits when IPO’d

- Issue: Whether partners were entitled to an accounting of R’s shares and stock options as well?- Held: Shares constituted compensatory benefit – obliged to disclose and account (s. 32)

o Fiduciary duties between partners – loyalty, utmost good faith and avoidance of conflicts of interesto S. 32(1) – obligation to account for profits of a competing activity – any benefitso Does not have to be a business that is the same or similar to the partnership business

Relationship with clients was a business asset of RTZ – stocks are linked in R became director of new company only because of his role in RTZ

15

Dockrill v. Coopers & Lybrand – Disclosure duty between partners and operation of s. 28 - expulsion- Consent existed for managing partners to make termination decisions – they terminated Dockrill with notice- Section 28 – majority cannot expel partner unless there is express authority to do so and good faith

o Docs delivered to Dockrill – some solicitor/client privilege docs that were discussing his expulsiono D applied for disclosure of those docs as he was a director at the time of analysis and preparation

- Held:o D is entitled to see all the books/docs while he was a partner – cannot be privileged for partners

Common property of all partners, therefore, entitled Fiduciary duty to disclose everything to each other – mutual agency – knowledge sharing

Liability of Partners to 3Ps- Based on presumption of equality, consensualism and fiduciary obligations- Partnership Act is the default partnership agreement – recall from above section

Partnership Act Liability to 3Ps

6 Definitions- “Business” – every trade, occupation or profession- “Court” – includes every court and judge having jurisdiction in the case- “Partnership Property” – property and rights and interests in property

o (a) originally brought into the partnership stocko (b) acquired, whether by purchase or otherwise, on account of the firmo (c) acquired for the purposes and in the course of the partnership business

7 Liability of Partners- (1) Partner is agent of the firm and the other partners for purpose of firm business- (2) Acts of every partner for business that is the type carried on by the firm, bind the firm and partners

unless:o (a) the partner so acting has in fact no authority to act for the firm on that particular matter, ando (b) the 3P knows that the partner has no authority, or does not know or believe him/her to be a

partner of the firm9 No Pledge of Credit for Nonfirm Business

- (1) If partner pledges credit of the firm for a purpose not apparently connected with the firm’s ordinary business, then the firm is not bound unless the partner was specifically authorized

- (2) This does not affect any personal liability incurred by individual partners10

Notice of Restriction of Power of Partner- If agreed upon by partners that certain acts are restricted upon a particular partner, those acts, if

committed are not binding on the partnership11

Liability of Partners for Firm Debts- Partners are jointly liable for all debts and obligations incurred while partners; after death, estate is also

severally liable in a due course of administration for those debts and obligations 12

Liability of Firm- Firm is liable to the same extent as the partner who commits an act/omission that causes loss or injury

to any non-partner in the ordinary course of firm business with the authority of partners13

Liability for Misapplication- A firm must make good any loss arising from:

o (a) partner acting in scope of apparent authority receives money/property from 3P and misapplies it

o (b) firm, in the course of business receives money/prop from 3P and money is misapplied by one or more of the partners while in custody of the firm

16

14

Liability Under sections 12 and 13- Partner is jointly and severally liable with partners for everything for which the firm, while he/she is a

partner, becomes liable under either section 12 or 13. 16

Person Representing Self as Partner- (1) Person who by spoken/written words or by conduct represents self, or knowingly allows

representation of self, as partner in a particular firm is liable as a partner to anyone who has, on the faith of that representation, given credit to the firm

- (2) Subsection (1) applies whether rep has or has not been made to the 3P with knowledge of the apparent ‘partner’ making the representation

- (3) If after a partner’s death, partnership continues with old name, this does not itself make estate liable for any partnership debts contracted after death of the partner

17

Partner’s Evidence- Admission/representation made by any partner concerning partnership affairs, if made in ordinary

course of business, is evidence against the firm18

Notice to Partner- Notice to any partner who habitually acts in the partnership business of any matter related to firm

business, operates as notice to the firmo Except for fraud on the firm committed by the partner

19

Liability of Partners- (1) A person who is admitted as a partner into existing firm does not become liable to creditors for

anything done before becoming partner- (2) Partner who retires does not cease to be liable for partnership debts incurred before retirement- (3) Retiring partner may be discharged from existing liabilities by agreement between retiring partner

and the members of the firm and the creditors- (4) Agreement under (3) may be either express or inferred as fat from course of dealings between

creditors and new constituted firm

Ernst & Young Inc (Mancini) v. Falconi (1994 ON) – s. 7 – liability for acts of the partner – ordinary business- F was a lawyer in firm KFA – F pled guilty to charge under Bankruptcy Act for assisting with fraudulent

dispositions of property; K had no involvement with the transaction- Each transaction involved the legal services of KFA- Creditors sued F and K as part of the partnership; - Issue: Whether F’s acts were within the ordinary course of business- Held: Acts were within the ordinary course of business – K also liable as partner

o S. 7 – every partner is liable for the acts of the partners of the firmo Even though fraud was not the ordinary course of business, the type of transactions were within the

ordinary honest transactions of the firmo Sufficient that F used the facilities of the lawfirm to perform services normally performed by the

law firm in carrying out the transactions that resulted in the loss to creditors Improper acts in of themselves do not take the action out of the ordinary course of business

Dissolution of Partnerships- Can be dissolved by action of the parties, death or bankruptcy- Automatic dissolution upon death, bankruptcy or dissolution- When dissolution occurs in this manner, entirely new partnership agreement is required

17

Partnership Act Dissolution:

Recall Section 34 – Assignment by Partner of a Share

Recall section 30 – Continuance of regular business = continued past termination

Section 35 – Dissolution of Partnership- (1) Subject to agreement between partners, partnership is dissolved:

o (a) if entered into for a set term, by the expiration of that termo (b) if entered into for a single adventure or undertaking, by the termination of that adventure or

undertaking; oro (c) if undefined end date, by any partner giving notice to the other’s of intention for dissolution

- (2) In (1)(c) – partnership is dissolved as from date mentioned in the notice as the date of dissolution, or if no date, from the date of communication of the notice

Section 36 – Dissolution by bankruptcy, Death, Dissolution of Partner or Charging Order- (1) On death, bankruptcy or dissolution of partner

o (a) partnership of 2 partners is dissolved; ando (b) subject to agreement among the partners, a partnership of more than 2 partners is dissolved as

between the bankrupt, dead or dissolved partner and the other partners

Retirement of Partners- Recall section 19(2) – partner who retires from a firm does not cease to be liable for partnership debts or

obligations incurred before retirement- Section 39 – Retirement of partners

o (1) persons dealing with firm after retirement of a partner can treat all “apparent” partners as partners until they have notice of the change in partnerships

o (2) persons who have not had prior dealings with the firm, the notice can be effeted by way of notice in the Gazette

o (3) retired partner will not be liable to those who can be shown not ot have known the retired partner was a partner

- Section 84(b) – if one fails to file new registration statement on the retirement of a partner, that person will continue to be considered to be a partner

- Policy:o 3P who had prior dealings with firm may have relied on the particular retired partnero Where no prior dealings, 3P can reasonably check gazette o Those who have prior dealings cannot be made to check gazette regularlyo If didn’t know partner existed at all, then there’s no reliance

- Steps to Protect when Retiring:o Onus is on retiring partner to take steps to protect against potential reliance on retiring partnero Follow steps from the Act: provide actual notice; put notice in Gazette; file revised registration

Registration of Partnerships- There is a requirement to register GPs, but there’s really no repercussion for not doing so- There can be fines, but it’s unlikely that a GP gets fined

Partnership Act – Registration Requirements

Section 80.1 – Definition- “Registration statement” – a registration statement in the prescribed form or prescribed information

submitted to the registrar in a prescribed manner

18

Section 81 – Duty of General Partnership to File Registration Statement- (1) Requires persons associated in partnership for trading, manufacturing or mining to file a registration

statement with the Registraro Purpose: system of knowledge of who is dealing with who

- Subsequent subsections detail the requirements for the registrar to maintain the registration statement

Section 82 – Registration must be filed within 3 months after formation

Section 83 – Registration statement must be filed on change and alteration of firm

Section 84 – Allegations in registration statement is evidence

Section 85 – Rights and liabilities of the partners are not to be avoided by not including them in the registration

Section 86 – On dissolution any/all partners can advise the registrar of dissolution

Section 87 – Actions- (1) If no registration statement is filed under this Part, action may be brought against any member of the

firm- (2) partners are jointly or severally liable on the original cause of action

Recall Section 90.3 – Search of the Registrar- Any person may: (a) conduct a search by name of firm/partner; (b) inspect records and information; (c)

obtain copy of all or any part of a record; (d) require that a copy be certified by the registrar

Recall Section 90.4 – Misleading statements are an Offence- See sole proprietorship above

Recall Section 90.5 – Peanlty – persons $5k; individuals $2k.

Joint Ventures

Section 35(1)(b) – deals with partnership joint ventures – partnership is dissolved if entered into for a single adventure or undertaking at the termination of that adventure or undertaking

- Suggests that some partnerships are accurately defined as joint ventures, but this is likely not the right terminology in the majority of cases

Advantages of General Partnerships

- Easy form – no formal steps- Very flexible form of association – less stat requirements than corporation- Same disadvantages as sole proprietorship – personal liability

o Where few investors, this is less advantageous- Taxes – losses can be passed to the partners and used by them to offset gains from other sources

19

Limited Partnerships – Part 3- Responds to the risk that 3Ps would be deceived by undisclosed limited liability- Shift away from the rule in GPs that personal liability applies- Allows some partners (Investors) to have limited liability, but only if the partnership does business under a

name that adds the words “Limited Partnership” as the suffix- Facilitates having a large number of investors – limited partners are generally the major capital contributors

Essentials:- Must be a partnership – as per s. 2 - Must have a certificate filed – as per s. 51- Must have at least one GP and one LP – as per s. 50- Must have “LP” in business name – as per s. 53(1)- LP name must not contain LPs’ surname or corporate name – as per s. 53(2)-(4)- LP’s cannot contribute to management – as per s. 64- Limited Partners only liable only up to contribution amount – as per s. 57- General partners do not have limited liability – as per s. 56- Parts 1 and 2 of the Act apply except where inconsistent with Part 3- Relationships governed primarily by written agreement – reproduced in the certificate

Partnership Act – Limited Partnerships

48

Defintion- “Certificate” – certificate filed under s. 51 and includes all amendments made to the certificate

49

Application of Part 3- Limited Partnership Sections

50

Limited Partnership- (1) LP may be formed to carry on any business that a GP may carry on- (2) LP consists of: (a) one or more general partners and (b) one or more limited partners

51

Formation of Limited Partnerships- (1) LP is formed when certificate is filed with registrar, signed by each general partner- (2) Certificate must state:

o (a) business nameo (b) general nature of the business carried on or intended to be carried ono (c) full name and residential addresss of each general partnero (d) term for which the LP is to existo (e) aggregate amount of cash and the nature and fair value of any property contributed by LPso (f) additional contributions agreed to be made by LPs and times of happeningo (g) basis on which LPs will be entitled to share in profits

- (3) Certificate may state full name and last known address of LPs- (4) Specific provisions of the partnership agreement must be stated in the certificate as well – listed

53

Name of Partnership- (1) Business name of each LP must end with “Limited Partnership” or French equivilent- (2) Surname of LPs are not to be in the firm name unless (a) also name of a GP or (b) name of the

business had that name before the LP joined- (3) Corporate name of an LP or significant part of that name should not appear in firm name- (4) Those contrary to (2) and (3) are liable as general partners to any creditor of the LP who has

extended credit without actual knowledge that the LP is not a general partner56

Rights of General Partners- GPs in an LP have all the rights and powers and are subject to all the restrictions and liabilities of a

20

partner in a general partnership, EXCEPT (without consent to the ratification of specific acts by all LPs):

o (a) act which makes it impossible to carry on the business of the LPo (b) consent to a judgement against the LPo (c) possess LP property, dispose of rights in LP property, for other than partnership purposeo (d) admit a person as GP or to admit a person as LP, unless right to do so is in certificateo (e) continue business of LP on bankruptcy, death, retirement, mental incompetence or

dissolution of a GP, unless right to do so is in the certificate57

Liability of Limited Partner- Except as otherwise provided, LPs are not liable for obligations of the LP except in respect of the

amount they have contributed or agreed to contribute to the capital of the LP

Also see section 58 – Rights of the Limited Partner59

Share of Profits- (1) LPs have the right to (a) share of the profits or any other compensation by way of income and (b) to

have his/her contribution returned- (2) LP may receive profits or compensation by way of income stipulated in the certificate, so long as

after payment, whether from limited partnership property or general partners’ property, all the LP’s assets exceed all the LP’s liabilities, except liabilities to limited partners on account of their contributions and to general partners

64

Liability to Creditors- LPs are not liable as general partner unless he/she takes part in management of the business

77

Parties to the Proceedings- Legal proceedings against an LP, it is not necessary to name LPs.

Significant Aspects of LP Partner Relations

1. Right to Inspect Books and Right to Disclosurea. No mandatory right to disclosure of information to LPsb. S. 58(1)(a) – gives LPs right to inspect and make copies of partnership booksc. S. 58(1)(b) – right to be given, on demand, true and full information of all things affecting the LP

i. Recall s. 27(i) for GPs – that requirement can be varied by agreement

2. Assignment of Limited Partnership Interestsa. Default rule – partners cannot assign interests without consent of the other partiesb. S. 66 – LPs must not assign interest unless (a) all LPs and GPs consent AND (b) accordance with

partnership agreementi. Recall s. 51(4)(b) – if permitted, it must be in the certificate!

3. Restriction on the Admission of Additional Partnersa. Recall s. 56 limitations on what GPs can do without consent of the LPs or ratification after the factb. Recall s. 51(4)(c) – requires any such right to admit to be in the certificate

4. Share of Profitsa. S. 61 – LPs share in the profits of any return of capital in proportion to their contribution unless LP

provides otherwise

The Queen v. Robinson Trust – LPs are by nature partnerships- R was an limited partner in an LP – R was a trustee holding legal title to estate assets

21

o R has the power to invest assets on behalf of beneficiaryo Invested in Holidy Haven Nursing Home LP – had two GPs, both corps

- Tax Issue: whether the income of R was income from a business or propertyo R claims no decision making, so not carrying out a business

- Court of Appeal – all the partners of an LP are carrying out a business, whether limited or general partners

Advantages of a Limited Partnership- Relatively common for start up operations- Taxation – any losses, which are more likely at start-up, can be passed on to limited and general partners

personally and they can deduct against personal gains- Greater flexibility than corporate model- Facilitates investment capital – encourages venture capitalism

Limited Liability Partnerships – Part 6- Response to lobbying by large accounting and management consulting firms- Goal was to obtain limited liability for individual partners of a firm- Commonly used amongst professionals – accountants, lawyers, engineers, doctors, dentists, architects, etc

o These professions have been subject to various corporate restrictionsLiability Structure – see s. 104

- First liability insurance, then Firm Assets, then partner who was negligent- LLPs in ON – each partner is only liable for up to own personal negligence, or those being directly

supervised by that partnero Still LLP business is first liable, then any extra goes to the negligent partner

- LLPs in BC – personal assets are only vulnerable for partners’ own negligence, or actual knowledge of some else’s negligence that partner did not act upon

o After LLP business property is exhausted (and liability insurance), then comes personal assets of those negligent partner(s).

Partnership Act - LLPs

Section 94 – Definitions:- “General Partnership” – partnership in BC that is neither an LP or and LLP- “Limited Liability Partnership” – partnership registered as an LLP under this Part- “Profession” – Profession or occupation that is governed or regulated by an Act or body under an Act- “Partnership Obligation” – Any debt, obligation or liability of a partnership, other than personal partnership

debts, obligations or liabilities

Section 95 – Application- (1) Subject to (2), section 1 and Parts, 1, 2, 4, and 5 apply to LLPs- (2) Subject to s. 129(5), sections 11, 14, 80.1 to 88, 90 and 90.3 do not apply to LLPs

o Recall – 11 – liability of partners for firm debtso Recall – 14 – liability of partners for acts/omissions/misapplications by firmo Recall – 80.1 – 88 – registration requirements for GPs – stops before similar names sectiono Recall – 90 and 90.3 – other registration issues

22

Partnership Act – Formation of LLPs

96 Application for Registration- (1) Partners may apply to register the partnership as LLP- (2) In order for registration, must be file a registration statement- (3) Registration statement may be filed on behalf of partnership by (a) person who has received

approval of partners to do so or (b) person authorized to do so under partnership agreement- (4) Registration must:

o (a) set out: (i) the business name and (ii) name that is to be the business name of the partnership after it is registered as LLP

o (b) set out the mailing address of main officeo (c) if partnership is professional partnership, (i) indicate that fact and (ii) confirm

authorization s97o (d) if partnership is a LP or a registered GP, then indicate thato (e) contain statement that (i) person submitting has received approval of all partners or (ii)

partnership agreement authorizes the actiono (f) set out any other info required by the regs

- (5) Allegations in the registration statement are evidence of information contained in allegations97 Professional Partnerships

- If a partnership wishes to be an LLP and is an professional partnership, it may not register unless:o (a) members of that profession are expressly authorized under the Act governing that

profession ando (b) any prerequisites to that authorization have been established under the Act have been met

98 Registration of LLP- (1) If registration statement under s. 96 is satisfactory, the registrar MUST

o (a) file the registration statemento (b) publish a notice of the registration of the LLP ando (c) acknowledge receipt and filing of the registration statement and filing date by

(i) sending an acknowledgement to applicant and (ii) sending acknowledgement to registered office of LLP

- (2) On filing of registration, the partnership is registered as an LLP100

Name of Partnership LLP- LLPs must have the words “Limited Liability Partnership”, “LLP” or French equivalent in name

104

Limited Liability for Partners- (1) Except as provided in this Part, in another Act or in partnership agreement, a partner in an LLP

o (a) is not personally liable for a partnership obligation merely because that person is a partnero (b) is not personally liable for an obligation under k between the LLP and a 3p ando (c) is not personally liable to the LLP or another partner for an obligation to which (a) or (b)

applies- (2) Partner is not relieved from personal liability

o (a) for that partner’s own negligent or wrongful act or omission ORo (b) the negligent or wrongful act/omission of another partner or an employee of the

partnership, if that partner: (i) knew of the act/omission and (ii) did not take the actions that a reasonable person would have taken to prevent it

- (3) Subsection (1) does not protect a partner’s interest in the partnership property from claims against the partnership respecting a partnership obligation

NOTE: This protection can be lost if not properly registered as per sections above.105

Partners Subject to Same Obligations as Corporate Directors- (1) Partners in LLPs are personally liable for a partnership obligation if and to the same extent they

would be liable for the obligation ifo (a) the obligation was an obligation of a corporation ando (b) they were directors of that corporation

23

106

Previous Obligations- Partnership obligations that arose before the formation of LLP or arose out of a K entered into before

becoming an LLP are not limited in liability by this Part

Partnership Act – Obligations of LLPs

Section 107 – Notice to Clients- Promptly after registered as LLP, partnership must take reasonable steps to notify all existing clients in

writing of the registration and the changes resulting from registration, in the liability of the partners

Section 129 – Cancellation of Registration- If cancelled, protection from s. 104 no longer applies- Failing to file annual reports; termination of association; etc- Must notify LLP by letter that registration is cancelled and give one-month’s notice- (4) does not dissolve LLP, just removes liability protection and it becomes a GP- (7) Cancellation doesn’t effect liability that arose before the cancellation

CORPORATIONS

- No precise structure- Definition in s.1 – BC Interpretation Act

o “Incorporated association, company, society, municipality or other incorporated body, where and however incorporated, and includes a corporation sole other than Her Majesty or the Lieutenant Governor

Historical Context:- Originally two types of corporations

o Letters Pattent – almost out of existenceo Memorandum of Incorporation – only exists in BC – results in different terminology from other

provinces- BC: mostly online

o Memorandum of Incorporation – constitutiono Articles of Incorporation – form the structure of the business

- CBCA: pure registration system – formally letters patent systemo Articles of incorp – equiv to BC memorandum of incorp - constitutiono By-laws – structure of the business

General Corporate Structure- Is ‘born’ with certificate of incorporation – legal personality- Equity interests are divided into shares and holders are the shareholders (SH)

Three basic rights must be provided somewhere throughout the share structure:- 1. Voting Rights – most importantly to elect directors- 2. Dividend Rights – receive distributions out of profits when directors declare dividends - 3. Liquidation Rights – right to receive what remains when assets of corp are sold and liabilities paid

Management Structure:

24

- Shareholderso Equity claimants – invest for returno Rights – voting, dividend and liquidationo Liability limited to investment capital

- Corporationo Separate personality, perpetual existence

- Directorso Board of directors appointed by voting SH – majority requiredo Manage business affairs of the corp – obligation to act in best interest of corp’s business and affairso Appoints officers to manage day-to-day decisions on corp policy

- Officerso President (CEO), VP, Secretary, Treasurer, etco Manage the corp – hire others to assist in management and carry out functions of the business

NOTE: Rights and obligations associated to these structural elements is the focus of corporate law

Key Features of Corp:- Limited liability – to SH in the amount they have invested in capital- Separate personality – treated as its own legal entity (person) – can enter into contracts, commit torts, etc- Perpetual existence – does not come to an end just because a SH has died or sold shares to someone else

Constitutional Jurisdiction- S. 92(11) – provincial power to make laws in relation to “the incorporation of companies with provincial

objectives”- S. 91 – federal power to make laws “in relation to all matters not coming within the classes of subjects by

this Act assigned exclusively to the provinces”

Bonanza Creek Gold Mining v. The King (1916 PC) – Provinces can confer powers that are valid elsewhere- fed granted mining leases to B in the Yukon – fed refused to grant additional licences needed – B sued govt- B was incorporated by ON statute; had licence from Yukon to carry out business there- Fed argued that B had no capacity to operate outside ON- Held:

o ON could confer powers on corp to carry on business within the province and extra-provinciallyo Could not confer right to operate in another province, but Yukon had every right to licence B to

operate there – therefore, valid contract with feds- Takeaway:

o Company can be incorporated under a provincial statute and still carry on business not only in that province, but in other provinces, and anywhere in the world, so long as that other jurisdiction grants the company the right to do so

Citizens Insurance Co v. Parsons (1881 PC) – Meaning of Federal Power- Federal govt had a broader power to incorporate companies under its power to incorporate companies “in

relation to all matters not coming within the classes of subjects by the act assigned exclusively to the legislatures of the province”

John Deer Plow Co v. Wharton and John Deer Plow Co v. Duck (1914 PC) – Fed corps rights to operate in provWharton:

- W was sole SH of John Deer Plow Co. Incorporated in BC; W sought to stop J2 from carrying on business in BC – J2 was federally incorporated with almost identical name

25

- BC legislation allowed company outside BC to carry on business in BC if licenced – condition was that name of company could not be the same or confusingly similar to name of company already incorp in BC

Duck:- D purchased tractor from federally incorporated J2 and J2 alleged that D failed to pay for it- J2 sued D, and D resisted the claim on the basis that the BC legislation for licencing companies outside BC

provided that a company incorporated outside BC, but not registered in BC pursuant to legislation, could not maintain action in BC

Held:- Federally incorporated companies had the power and the right to operate throughout the country- Provincial registrar cannot refuse them for reason of name alone

o If allowed it would operate such that a provincial legislation could deprive a Dominion company of its status and power

Takeaway:- Federally incop corps have the right to carry business in provinces, and their regulations cannot be denied

for name requirements- Fed Corps are not immune to provincial corp law – regulations still apply to fed corps if they are laws of

general application (Canadian Indmenity below)

Canadian Indemnity Co v. AG BC (1977 SCC) – prov laws of general application apply to fed corps- BC replaced private auto insurance regime with public scheme – destroyed business that offered private

insurance, some of which were fed- Held:

o Legislation was valid and enforceable against fed corps, because it was not restricted to just fed corps, but applied to all companies

o Province cannot legislate to remove fundamental aspect of fed incorporated bodies, but it can cast legislation of general application effecting all corps operating in the prov evenly

Multiple Access v. McCutcheon (1982 SCC) – fed legislation can co-exist with prov on same subject matter- Provincial insider trading legislation that was identical to legislation in fed corp Act could still be applied to

the federally incorporated corp- Issue: Could prov legislation be enacted that is in effect the same as fed legislation?- Held: Both sets of laws were valid

o Fed attached to ownership of the shares in fed corp; ON securities act were valid under property and civil rights power – did not impede on fed powers

o Simultaneous compliance was possible – so both exist concurrentlyo Fed legislation did not occupy the field if it doesn’t conflict with provincial leg

Implications of Constitutional Position- Both Prov and Fed can pass valid legislation for the incorporation of companies- Under Prov leg, can still carry on business extra-provincially, but needs licence - Bonanza- Fed corp can operate throughout the country

o Prov leg requirement to register corporate name is valid, but cannot stop fed from registering for name violation alone – John Deere

- Prov leg imposing penalties for failure to comply with requirements can be validly applied to fed corps- Fed corp’s “right” to be registered, does not mean that Province cannot require registration

o But prov cant refuse registration from a fed corp though- Fed corps will need to obtain at least one extra-provincial registration to operate in a province

BCBCA – Extra Provincial Registration

BC Section 1 – Definitions

26

- “Foreign Entity” – a foreign corporation; limited liability company…- “Foreign Corporation” – a corporation that is:

o not a company, has issued shares, is not required under the cooperative association act to be registered under that act, and was: incorporated, continued or amalgamated

- “Extra-provincial Company” – foreign entity, registered under s. 377 as an extraprovincial company or under s. 379 as an amalgamated extraprovincial company

BC Section 375 – Foreign Entities Required to be Registered- (1) Must register as an extraprovincial company within 2 months after beginning business in BC- (2) Deemed carrying on business if

o Name listed in phone book, name used in advertisement, has a BC agent or property, or otherwise carries on business in BC

- (3) Does not carry on business in BCo If it’s a bank, constructing/operating railway; or mere interest as an LP in a LP operating in BC

- (4) Deemed registered if principal business is operation of ships and doesn’t maintain a BC warehouse- (6) sections 384 and 385 apply to foreign entity referred to in (4) as if it were an extraprovincial company

BC Section 376 – Application for Registration- How to apply for registration – all done online now- Describe the directors, corp year, last annual meeting, etc- (1)(a) does not apply to fed corps – does not have to reserve its name

BC Section 377 - Registration- Once compliance with 376 is met – Registrar MUST if federal, and MAY if not federal

o (a) file the registration statement ando (b) register the foreign entity as an extraprovincial company

BC Section 378 – Effect of Registration- (1) Registration is effective evidence for the purposes of corporation- (2) Once registered, BC laws are applicable to the corp and its charter applies- (3) Registration does not expand powers or capacities of its charter- (4) No act of an entity that carried on business in BC is invalid merely because that act contravenes (3) or

the corp was not registered as an extraprovincial company.

BC Section 398 – Cancelation of Registration of Extraprovincial Corps- Lieutenant Governor can cancel registration and can restore it as well- Cannot cancel fed corp’s registration

CBCA Basics

2(1) Definitions- Corporation – a body corporate incorporated or continued under this Act- Body Corporate – includes company or other body corporate wherever or however incorporated- Distributing Corp – subject to (6) and (7), publicly traded- Articles – original articles of incorp and amendments- Incorporator – person who signs articles- Director – Big D director appointed under s. 260 – Director of the registrar- director – person occupying the position of director by whatever name called- Officer – appointed as officer under s. 121

2 - (2) Affiliated Bodies Corporate27

o (a) affiliated with another body corp if one of them is subsidiary of the other or both are subsidiaries of the same body corp or controlled by the same person; and

o (b) if two bodies corp are affiliated with same body corp at the same time, they are deemed affiliated

- (3) Controlo body corp is controlled by person or by two or more bodies corp if

(a) securities of the body corp are attached more than 50% of the votes and (b) votes attached to those securities are sufficient to elect a majority of directors

- (4) Holding Body Corporateo Where a body corp is held by another body corp such that it is a subsidiary

- (5) Subsidiary Body Corporateo Body corp is a subsidiary of another if:

(a) it is controlled by (i) that body corp; (ii) that body corp and other bodies corp each of which

is controlled by that other body corp or; two or more bodies corp each of which is controlled by that other body corp or

(b) it is a subsidiary of a body corp that is a subsidiary of that other body corp- (6) Exemptions – on application by corporation

o On application of a corp, Director may determine that the corp is not a distributing corp if the Director is satisfied that the determination would not prejudice the public

5 Incorporators – Who Can Incorporate?- (1) One or more individuals, not one of whom is less than 18, is of unsound mind or has the status

of bankrupt, may incorporate by signing articles of incorporation and complying with section 7- (2) Bodies Corporate – one ore more bodies corporate may incorporate by signing articles per s. 7

6 Articles of Incorporation – form 1- (1) Articles shall follow the form that Director fixes and shall set out in respect of proposed corp

o (a) name of the corpo (b) province where registered office is to be situatedo (c) classes and any max number of shares that corp is authorized to issue and

(i) if two or more classes of shares, the rights, privileges, restrictions and conditions attaching to each class of shares; and

(ii) if a class of shares may be issued in series, the authority given to the directors to fix the number of shares in, and to determine the designation of, and the rights, privileges, restrictions and conditions attaching to, the shares of each series

o (d) if the issue, transfer or ownership of shares is restricted, a statement to that effect and nature

o (e) number of directors, subject to 107(a), the min and max number of directors of corp ando (f) any restrictions on the business the corp may carry out

- (2) additional provisions can be entered- (3) special majorities – subject to (4), if the articles or a USHA require a greater number of votes

of directors or shareholders than required by the Act, the provisions of the articles or of the USHA prevail

- (4) articles may not require a greater number of votes of SH to remove a director than the number required by s. 109

7 Delivery of Articles of Incorporation- Send to Director as required by s. 19 and 106

8 Certificate of Incorporation- (1) Subject to (2), on receipt of articles, Director SHALL issue certificate of incorp in accordance

w s. 262- (2) Exception – Director may refuse certificate if a notice that is required under 19(2) or 106(1)

indicates that the corp would not be in compliance with this Act9 Effect of Certificate

- Corporation comes into existence on date shown in certificate

28

10 Name of Corporation- (1) “limited”, “incorporated”, “corporation” or abreviations or French must be in the name- (2) Director may exempt corps from (1)- (3) Alternate names; (4) Alternate names outside Canada- (5) Publication of Name – Name must be set out in legible fashion on all corp docs- (6) May carry business under other name if no suffix is associated (no ltd, or corp, etc)

11 Reserving Name- (1) Director may reserve a name for 90 days for an intended corporation- (2) If requested, Director will assign a number with “Canada” after it

12 Prohibited Names- Cannot use deceptively misdescriptive or names reserved for another corp

15 Capacity of a Corporation- (1) corp ahs capacity and rights, powers and privileges of a natural person, subject to Act- (2) May carry on business throughout Canada- (3) Corp has capacity to carry on its business affairs in any jurisdiction outside Canada to the extent

that the laws of such jurisdiction permit19(2) Notice of Registered Office

- Notice of registered office shall be sent to Director together with any articles that designate or change the province where the registered office of the corp is located

- Change of registered office – form 3106(1)

Notice of The Directors- At the time of sending articles of incorporation, shall send to Director a notice of directors- Change of directors – form 6

263 Annual Return- Every corp shall send to Director annual return in the form that Director fixes- Form 22 – Annual Return Form

266 Inspection and Copies- (1) person who has paid required fees is entitled to examine docs required by this Act sent to the

Director- (2) Director shall furnish any person with copy, extract, certified copy or certified extract of the

document required by this Act

Forms:

Form 1 – Articles of IncorporationForm 3 – Change of Registered Office AddressForm 6 – Changes Regarding DirectorsForm 22 – Annual Return

CBCA – Directors and Officers

102

Director’s Power to Manage- (1) Duty to manage or supervise management – subject to USHA, directors shall manage, or supervise

management of the business and affairs of the corpo Note: affairs are not business – they are inter-corporate relationships; business is income

earning- (2) Number of directors – corp shall have one ore more directors but a distributing corp shall have not

fewer than 3 directors, at least 2 of whom are not officers or employees of the corp or affiliates

29

103

By Laws- (1) Unless articles, by-laws or USHA states otherwise, directors may make resolution to make, amend,

or repeal any by-laws that regulate the business or affairs of the corp- (2) directors shall submit by-law or amendment to the SH at next meeting of SH – SH by ordinary

resolution can confirm, reject or amend the by-law, amendment or repeal- (3) effective date from time of resolution fro directors until confirmed or rejected- (4) if rejected by SH, by-law ceases to be effective; directors cannot resolve new make, repeal,

amendment that is of substantially the same nature without SH approval- (5) Shareholder is entitled to make proposal to make, amend, or repeal a by-law at SH annual

meetingsNOTE: not reported to Director – not public docs like other constitutional docs – they do have to be at the registered office though

- Often repetitive of CBCA provisions or articles- Procedural issues are generally contained in them

104

Organizational Meeting- (1) After certificate of incorporation, a meeting of directors of corp shall be held where directors may

o (a) make by-lawso (b) adopt forms of security certificates and corporate recordso (c) authorize the issue of securitieso (d) appoint officerso (e) appoint an auditor to hold office until the first annual meeting of SHo (f) make banking arrangements ando (g) transact any other business

105

Qualifications of Directors- (1) Lists persons who are disqualified from being directors of a corp

o (a) less than 18; (b) unsound mind; (c) person who is not an individual or (d) bankrupt- (2) Unless required by articles, directors do not have to hold shares issued by the corp- (3) Residency requirements – at least 25% of directors must be resident Canadians, if less than 4, at

least one director must be resident Canadiano Section 2(1) – Resident Canadian – Candian citizen ordinarily resident in Canada or not

ordinarily resident in Canada, but designated under Regulation 13o Regulation 13:

(a) full-time employees of Govt of Canada/Provinces, whos principle reason for living abroad is for employment

(b) full-time employees who work abroad for a body corp which is 50% owned by resident Canadians, majority of directors are resident Canadian OR is a subsidiary of (i) or (ii)

(c) full-time students fewer than 10 years abroad consecutively (d) full-time members of intnl association/organization of which Canada is a member (e) snow-birds – persons who were ordinarily resident when turned 60 gone for less

than 10 consecutive years121

Appointment of Officers- Subject to articles, by-laws or USHA,

o (a) directors may designate the offices of the corp, appoint officers persons of full capicty, specify their duties and delegate to them powers to manage the business and affairs of the corp, except anything under s. 115(3)

o (b) director may be appointed to any office of the corporation; ando (c) two or more offices of the corp may be held by the same person

30

Consequences of Incorporation

Incorporation Process:- 1. Filing articles or incorporation (see. S. 5 and 6 and Form 1)- 2. Filing a notice of the registered office (ss. 7, 19, and Form 3)- 3. Filing a notice of directors (ss. 7, 106 and Form 6)- 4. Paying the prescribed fee (Reg s. 97 and Schedule 5); and- 5. If corp is to have a name other than a numbered name, filing a NUANS Name Status Report- 6. The Issuance of a Certificate of Incorporation

o Upon assessment of the documents to determine that they meet the requirements of the Acto Director SHALL issue a certificate of incorporation (ss. 8 and 12(1))o S. 9 – the corporation comes into existence on the date shown in the certificate of incorporation

Post-Incorporation Steps Under the CBCA- Section 104 provides that after certificate of incorporation, a meeting of directors shall be held - Normally, first meeting of directors will pass a set of general by-laws that deal with:

o 1. Procedures at director’s meetings;o 2. Notice for and procedures with respect to shareholders meetings;o 3. Procedures for the allotment and issuance of shares;o 4. Procedures for the declaration and payment of dividends; ando 5. Procedures for the appointment of officers.

- No shares will be actually issued until this point- Records must be maintained pursuant to s. 20- Directors must act as a group, no individual authority

o Generally at the first meeting, officers are appointed to carry out specific tasks- Common for directors to pass resolution as to which bank will be used to deal with corporate finances and

signing authorities- Directors normally have the power to borrow on behalf of the corporation – this can be delegated

Advantages of Incorporation:- Limited Liability - Separate Corporate Personality - Perpetual Existence

Common Advantages:1. Provides limited liability for SH as against joint and several liability found in partnerships2. Provides the perpetual succession of a body corporate in contrast with nature of partnerships3. Ease of transfer of shares against inconvenience of terminating partnerships to permit changes4. Individual partners may bind the firm, but SH alone cannot obligate a body corporate5. SH can contract with or sue a body corp6. Facilities for a body corp to secure additional capital (share issues)7. Tax advantages – CCPC, etc

Corporate Personality and the “Corporate Veil”

- Generally difficult to pierce the corporate veil (disregard the legal entity of a corp)- Corp is treated as a separate legal person (s. 15) (Salomon)

31

o Can acquire debts, enter into Ks, sue or be sued, etc- Once incorporated, separate legal status, property, rights and liabilities continue to exist until company is

dissolved, even if SH sell shares, die or leave the company- SH can be director, officer and/or employee of a corp (Lee)- Corp owns the assets, not the SH (Macaura)

CBCA Sections – Shareholder Immunity

Recall Section 15 – Corps have the same capacities as legal persons

Section 45 – Shareholder Immunity- (1) SH of a corp are not, as SH liable for any liability, act, or default of the corp except under subsections

38(4), 118(4) or (5), 146(5) or 226(4) or (5) (exceptions discussed below)

Note: BCBCA s. 87 – Liability of SH- (1) No SH is personally liable for debts, obligations or acts of the company except provided in Part 2.1- (2) Not liable for more than the lesser of: unpaid portion of the issue price of shares and the unpaid portion

of the amount actually agree to be paid for the shares

EXCEPTIONS:

Section 38(4) – where SH receives a payment from corp on a reduction of capital, SH may be required by creditor of corp to repay that amount

Section 118(4) and (5)(a) – directors who vote/consent to dividends, redemptions such that corp cannot pay liabilities, they become personally liable to reimburse corp for the amounts paid to SH – These sections allow director found liable to obtain court order compelling SH recipient to repay the amount received

Section 146(5) – SH may be liable as director where acting in place of director under USHA

Section 226(4) and (5) – where corp is dissolved, creditor has action against corp before or within 2 years of dissolution, SH are liable to the extent of property distributed – these amounts (not exceeding such property) can be recovered from the SH recipients

NOTE: These sections allow recovery from SH, but never in the amount more than their capital investment plus any additional amounts received from corp on distribution of corp’s property to SHs

LIMITATIONS:

Sections 35 and 36 – Corp is prohibited from repurchasing or redeeming shares if the action would make the corp unable to pay creditors

Section 42 – Corp is prohibited from paying dividend if after paying is unable to pay creditors

Section 44 – Corp is prohibited from making loan, or giving financial assistance, to SH, directors or related corps if it would be unable to pay creditors

NOTE: These sections are intended to require a corp to preserve its capital and assets for the benefit of its creditors rather than distributing it to its SH

- Section 251 makes it a strict liability offence for any person to contravene the CBCA

32

Salomon v. Salomon & Company Ltd (1897 HL) – Corp has separate legal entity- S sold sole proprietorship to his own corp; sons became SH of the new corp along with daughter and wife- S became largest SH and creditor of the corp- Hard times – default – receivership – Money could be left for S, but nothing for the other creditors- Issue Whether S was personally liable to pay creditor’s debts- Held: - not personally liable

o Formal compliance of corp formation regs were followed – 7 SH, in any amount, so legitimateo Company is a different person at law – not an agent/trustee relationship with SHo SH are not personally liable to cover the debts of the company no matter what their capital

investment waso Without fraud or dishonesty, the losses remain where they remain – creditors knew they were

contracting with the corp and not S- Policy:

o Potential for fraud on creditors Sale to corp could be used to defraud creditors, but here not the case as S was also willing to

lend money to the corpo Affect on existing businesses

Holding this arrangement invalid would effect many other sole SH corps- Takeaway:

o Cited for prop that company has separate legal entityo SH can also be creditors of the corp; Sole-SH corps are perfectly legitimate

Lee v. Lee’s Air Farming Ltd (1961 PC) – Sole SH can be director, officer and employee- L is the sole SH of corp; also director and only employee (pilot) – received salary- L died carrying out business for the corp – wife made claim for compensation under WC leg.- Issue: whether L could be an employee while also the governing director?- Held: - L was an employee

o Nothing to prevent L from acting in more than one capacity – not like Thorne (partnership)o Corp was separate person from L, so L could be an employee – WCB is available to him

- Takeaway:o Even a sole SH can be an employee, director and officer of companyo Company is a separate legal entity that acts through SH to the extent they have powers to authorize

certain acts of the company

Macaura v. Northern Assurance Co Ltd (1925) – Corporation Owns the Assets, not the SH- M transferred interest in timber to a company called ICS for 27k plus 42k in shares- Insurance on the timber – it is destroyed – M claims on the policy – insurance refuses (insurable interest)- Held:

o M could not claim on insurance because he did not have insurable interest, only corp had an ins interest in the timber because the company owned the timber

o SH’s interest is in the distribution of profits by way of dividend, and proceeds at winding up- Takeaway:

o Corp is the person that has an interest in its assets, not SHo Shares are essentially incorporeal “bundles of rights”

- Note: Insurance law – overruled by Kosmopolous SCC – SH don’t own assets, but they do have ins int.o Corp veil not lifted there

Kosmopolous v. Constitution Insurance (SCC 1987)- “The most that can be said is that the courts’ policy is to lift the veil if they think that justice demands it and

if they are not constrained by contrary binding authority. The results in individual cases may be commendable, but it smacks of palm-tree justice rather than the application of legal rules.”

33

Potential Problems with Separate Legal Entity:- SH may cause deliberate indebtedness to defraud creditors when going under- Corp can make payouts to SH even where insolvent (return capital/repurchase shares/dividends)

o There are rules to deal with these – discussed later- Corp may contract with SH in an unfavourable way to other SH- Deception of 3Ps who contract with person without knowing of corp- **Oppression remedy addresses most of these concerns

Piercing the Corporate Veil (Disregarding the Legal Entity)- Piercing the corporate veil only occurs where there would be some huge injustice in not doing so

o Where corp is being used as a tool for fraud / intentional set up to deceive- In a case where a company has been used as an instrument of fraud or to effect a purpose the shareholder

could not legally achieve personally, and where the company was really the “mere agent” or alter ego of the shareholder, the courts have been willing to impose liability on the controlling shareholder or otherwise disregard the corporate veil. (Preeco)

- Affliated Enterprises:o Courts are more willing to disregard corp entity where the effect is to link to a parent company with

its subsidiary, or to other subsidiaries through a parent corp o Test: Whether the subsidiary was really just an agent of the parent corp (Smith, Stone and Knight)

Big Bend Hotel Ltd v. Security Mutual Casualy Company (1980 BC) – Equity will no longer allow a wrongdoer to use a company as a shield for improper conduct or fraud

- Sole SH (Kumar) bought shares of Big Bend – Insurer cancelled policy on hotel, and SH could not obtain other insurance – eventually got coverage from BC Hotels Association

o Omitted previous claims on application form- Hotel burnt down – Big Bend suing for enforcement of policy – Insurer claims misrep- Issue: whether SH had to disclose preivious loss when Big Bend was a separate legal entity- Held:

o Equity will not allow wrongdoer to use company to shield improper conduct or fraudo Kumar’s intent was to deceive or mislead the insurer

Generally separate legal existence is recognized, but this is an exceptional case Wrongdoer cannot hide behind corp to induce policy that never would have been granted

Gilford Motors v. Horne (1933) – company formed as device for deception- Application for injunction to stop H and company from soliciting customers from Gilford- H was managing director of G and gave covenant that he would not solicit clients for 5 years – fired from G- H incorporated and began soliciting clients through his corp – attempted to hide ownership in other SH- Held:

o Company was formed as a device, a strategem in order to mask the carrying on of a business, in breach of contract, by Horne

It was a channel through which H carried on business for himself- Takeaway:

o If you can show that a corp is a clear deception to carry out the owner’s fraud, then it would be likely that the corp veil would be pierced

BG Preeco v. Bon Street Holdings (1989 BCCA) – affirms Salomon principle – limits lifting veil- Preeco owned land near Granville island and wanted to sell before expo 86 – Bon agreed to buy for 4.2M- Bon repudiated offer and then after closing makes new offer of 3.3M – tied up prop with initial offer- Before initial offer, Bon changed name back to registered numbered company, created a new “Bon Street”

corp which allowed numbered co to use its name – Old co eventually renames to Bon Street Holdings (def)34

o Then new Bon makes offer for 4.2M and has no assets but makes deposito Preeco sues old company for the diminution in sale price

- Held:o Preeco was not deceived as to who they were dealing with, only deceived on how much assets availo Old Bon committed fraud – deceived Preeco into thinking New Bon was Old Bob w/ assets;

New Bon would be liable for 1.7M, but it has no assets to pay ito No disregarding the corp entity here – corp complied with corp law requirements, therefore it is an

entity with separate legal personality – Salomon principleo Must show that the corp committed some fraud or improper conduct such that the corp is used in

such a way that the SH could not have done on their own (like Gilford)- Note: Court did award damages against directors for the difference in deposit that would have been asked- Takeaway:

o Represents a new hard line position – no expansion on lifting the veil

Smith, Stone and Knight Ltd v. Birmingham Corporation (1939 KB) – affiliated enterprises- SSK Ltd owned all shares of subsidiary; City expropriated the premises of subsidiary’s business

o SSK sought compensation from city – challenged because subsidiary is separate legal entity- Held:

o Exception to Salomon principle arises where corp is simply an agent of the SH Look to treatment of profits; appointment of officers; location of brain of corp; govern

trading venture; control- Note:

o Would likely be decided differently today

Alberta Gas Ethylene Co v. MNR (1989 FedTD, aff’d FedCA) – Cannot disregard to benefit of SH- AGE sought financing in USA for pipeline – insurance required domestic portion of investment

o AGE incorporated subsidiary in Delaware for the purposes of the financing / insurance- Minister assessed AGE for the interest deductions they were making for the loan- Issue: whether subsidiary was a separate legal entity such that AGE could not claim interest deductions- Held:

o Court did not ignore separate legal entity- Note:

o Likely due to the fact that the SH is the one looking to pierce the veilo Kosmopolous – person benefiting from separate entity cannot take advantage of disregarding it

Gregorio v. Intrans-Corp (1984 ONCA) – Alter Ego principle is to prevent conduct akin to fraud- G bought truck from IC that was defective – IC ordered truck through Paccar Canada, which was subsidiary

of USA Paccar Inc – Paccar Canada ordered truck from Paccar USA- G claimed against Paccar Canada Inc for negligent manufacture of the truck (made by USA Paccar though)- Issue: Whether Paccar Canada was the same person as Paccar USA Inc- Held:

o Corporate entity should not be disregardedo Generally, subsidiary (even if wholly owned), will not be found to be the alter ego of its parent

unless the subsidiary is under the complete control of the parent and is nothing more than a conduit used by the parent to avoid liability

o Alter Ego principle is applied to prevent conduct akin to fraud that would otherwise unjustly deprive claimants of their rights

35

Steven G. Meredith v. Her Majesty the Queen (2002 FCA) – Further limitation on Alter Ego principle- “Lifting the corporate veil is contrary to long-established principles of corporate law. Absent an allegation

that the corporation constitutes a "sham" or a vehicle for wrongdoing on the part of putative shareholders, or statutory authorization to do so, a court must respect the legal relationships created by a taxpayer (see Salomon v. Salomon & Co., [1897] A.C. 22; Kosmopoulos v. Constitution Insurance Co. of Canada, [1987] 1 S.C.R. 2).”

- The FCA also found that the TCC had erred in finding that Meredith was not an employee of Stem, misapplying Wiebe Door in ignoring the separate legal identity of the company. Closely held as well as widely held corporations are separate legal entities from their shareholders.

- It was irrelevant that Meredith was the sole shareholder and director. The legal relationships between Meredith, Stem and the U.S. companies were bona fide, and must be respected.

Requirement to Display Corporate Name

Section 10(1) – Name of Corporation- Ltd, Corp, Inc, etc must be displayed in the corporate name

Section 10(5) – Publication of Name- Corp shall set out its name in legible characters in all contracts, invoices, negotiable instruments and orders

for goods or services issued by the corp

Section 10(6) – Other Name- Subject to (5) and 12(1), Corp may conduct business under other name than its corp name, so long as other

name does not contain ltd, corp, inc, etco 12(1) – prohibits the use of a name that is prohibited or deceptively misdescriptive or that is

reserved for another corp or intended cop under s. 11

H&D Hobby Distributing Ltd v. Svatos (1998 ABQB) – improper registration of name + improper conduct = liable- Act Requires corp that is using trade name that differs from corp name to register as such- HD was run by sole SH, met Svatos who ran business called Edmonton Hobby – all indications was a sole

proprietorship – only cheques had reference to numbered AB companyo Corp used trade name but didn’t register it as per Act requirements

36

- Svatos (EH) owes 150k to HD – cannot pay the amount, so writes letter to HD proposing EH pay off as much as possible and then the rest after Chirstmas – signed “Edmonton Hobby, Svatos”

o Svatos couldn’t pay and gave inventory to creditor to protect himself- Issue: whether HD can go after Svatos personally for the amount owed- Held:

o Personal liability found hereo Based on three factors:

1. Failure to comply with s.10(5) – AB equivalent 2. Letter agreement for further inventory – read as a personal guarantee 3. Fraudulent preference – uses assets to favour one creditor over another

- Takeaway:o Unlikely that veil would be lifted for just name registration issues, something more is required

BCBCA Sections – Corporate Naming:

Section 27 – Name to be displayed

Section 158 – Liability if a company’s name is not displayed- Director who knowingly allows, is liable to indemnify, purchasers for goods/services, supplier of

goods/services, persons holding security of the company

Section 384 – Liability if extraprovincial company’s name is not displayed- Pretty much the same

Jurisdiction of Incorporation

- Choice between several jurisdictions – rules are generally common between provinces- Corps tend to set up in locality for convenience and access to legal expertise

CBCA Advantages:1. Name protection (only for registration really, there are IP concerns with name infringement)2. No restriction on carrying on an action3. Lawyers and SH in other provinces are familiar with it4. Administratively simple standard rules – less cumbersome than provincial statutes

BCBCA Advantages:1. Lawyers in BC tend to be more familiar with it2. Easier to deal with local provincial govt – less relevant these days3. Cheaper – CBCA requires at least one extraprovincial registration4. There are some tax-related reasons to chose BC5. Level of SH voting approval varies

a. Under CBCA – majority for ordinary resolution; 2/3 for special resolutionb. Under BCBCA – majority for ordinary resolution; 3/4 for special resolution (much higher)c. Most can be contracted out of anyways

37

Change of Jurisdiction of Incorporation

Continuance to Another Jurisdiction:- More convenient than full transfer (open new corp; sell shares of old to new corp; wind up old corp)- Simple and convenient way of reincorporating- May result in significant change in rights of SH, thus approval from SH and directors is required

Continuance out of the CBCA into Another Jurisdiction:1. Obtain a resolution from the SH permitting the continuance (s. 188(1), (5))2. Obtain approval from the Director (s. 188(1))3. Register in the other jurisdiction making amendments to the incorporation docs to make them conform to the

requirements of the new jurisdictiona. Must satisfy name requirements

Continuance into the CBCA from Another Jurisdiction:1. Apply to Director for certificate of continuance (s. 187(1))

a. By sending articles of continuance to Director along with notice of the registered office of the corp and a notice of the directors of the corp (s. 187(3))

CBCA Continuance

187 Continuance – Import- (1) Body corp, if authorized by laws of incorp jurisdiction, may apply to Director with docs in s.

9 and 106- (2) Amendment of articles of incorporation- (3) Shall send articles of continuance to Director in accordance with s. 262- (4) On receipt of articles of continuance, Director SHALL issue certificate of continuance- (5) Corp becomes CBCA corp on date shown on certificate, articles of continuance are deemed

to be articles of incorporation, and certificate of continuance is deemed to be certificate of incorporation

- (6) Copy of certificate to be sent to originating jurisdiction- (7) All rights existing before the continuance, are maintained

o Cannot run from obligations- (8) Issued shares remain the same as they were before the corp continued

188 Continuance – Export- (1) Subject to (10), corp may apply to another jurisdiction for continuance to that jurisdiction if

o (a) Corp is authorized by SH in accordance with this section to make application ando (b) Satisfies Director that its proposed continuance will not adversely affect

creditors/SH- (3) Notice of a meeting of SH shall be sent to each SH in accordance with s. 135

o Shall state that dissenting SH is entitled to be paid FMV of their shares as per s. 190- (4) Every SH has the right to vote- (5) Authorized when SH vote it so on a special resolution- (6) directors of a corp may, if authorized by SH at the time of approving an application for

continuance, abandon the application without further approval of the SH- (7) Director SHALL file notice and issue a certificate of discontinuance upon receipt of

satisfactory notice of continuance from new jurisdiction- (8) Notice referred to in (7) is deemed to be the articles- (9) This Act ceases to apply to the corp on the date of the certificate- (10) Corp shall not be continued to a new jurisdiction unless those new laws provide in effect

that

38

o (a) property of the corp continues to be property of the corpo (b) liabilities continue to the new corpo (c) existing causes of action, claim or liability is unaffectedo (d) civil, criminal or administrative action or preceeding pending may be continuedo (e) conviction may be enforced

190(1)(d)

Right to Dissent- SH may dissent if corp is subject to an order under para 192(4)(d) that affects the SH if the corp

resolves to…be continued under s. 188- (3) – entitled to fair market value for shares

o cannot pay FMV if would fail financial solvency test (s.190(26))

Pre-Incorporation Contracts

- Agency disallows promoters to act as agents for corporations that do not exist yet- Often promoters enter into K’s before formation of a corp –promoter did not intend personal liability- Recall Ratification of a Contract can Only Occur if:

o 1. The person purported to act on behalf of the party seeking to ratifyo 2. The person seeking ratification must have been in existence and ascertainable at the time the other

person purported to act on his/her behalf, ando 3. Person who seeks to ratify must have capacity to act both at the time the other person acted and at

the time of ratification- Impossible for a corp to ratify a pre-incorporation contract

Section 14 – Personal Liability- (1) Person who enters into k in name of corp before it exists is personally bound by the k and entitled to its

benefits- (2) Corp may, within reasonable time of being formed, adopt written K made before it came into existence,

by any action or conduct signifying its intention to be bound thereby, adopt a written k made before it came into existence, and on such an option:

o (a) corp is bound by the k and entitled to benefits as if it were in existence when madeo (b) person who purported to act for the corp ceases, except (3), to be liable/entitle to benefit

- (3) Subject to (4), regardless of adoption of the k, party to the k may apply to a court for an order respecting the nature and extent of the obligations and liability under the k

- (4) If EXPRESSLY provided in the written k, person who purported to act in the name of a corp before it exists is not bound by the k to the benefits thereof

BCBCA Section 20 – Pre-Incorporation Contracts- (2)(a) facilitator is deemd to warrant that the corp will come into existence within reasonable time and adopt

as per (3) the contract within a reasonable time after formingo (b) liable to other parties to the purported contract for damages for breach of that warranty ando (c) measure of damages – same as if corp had existed at formation; person had no authority; and

corp refused to ratify Agency – breach of warranty of authority

- (3) new company, may within reasonable time adopt the pre-incorporation contract by act/conduct- (4) new company bound by obligations and entitled to benefits – facilitator ceases to be bound/benefit- (5) facilitator may apply to court for an order of adoption- (6) overall ability to seek court determination of obligations/parties/etc- (8) facilitator can escape personal liability through express agreement that no personal liability exists

39

Landmark Inns of Canada Ltd v. Horeak (1982 SKQB)- H (optometrist) signed a lease for space in L’s mall – signed lease as chair of corp that did not yet exist- Offer to lease indicated that it was being made with a corp – H backed out of the deal after L spent money- H created a corp that adopted the K and then claimed that L could not sue H personally- Held:

o Corp could not adopt K which was repudiated since K was already terminated o Section 14(2) could not relieve H from liabilityo To relieve from liability under s. 14(4), contract must contain something more than just the

corporate name that is not yet in existence Must contain express provision that the person who enters into K in the name of a company

before it exists, is not personally liable for the Ko L can recover losses from H personally

Kelner v. Baxter (1866) – company cannot ratify K that was entered into pre-existence- Early cases based on ratification principles

Newborne v. Sensolid (Great Britain) Ltd (1953 All ER CA) – Rule of Construction Approach- Test – whether the promoted was intended, in the circumstances to be a party to the contract or not

Black v. Smallwood & Cooper (1966 Aus) – followed Newborne

Wickberg v. Shatsky (1969 BCSC) – BC BCA Principles- W hired as manager and his K was written on Corp letterhead and signed by S- S said not to use the “ltd” in the company name – business fails – bankrupt- W sued S personally for employment wages- Held:

o Removal of Ltd was notice to W that he was not dealing with a corporationo Person signing for a non-existent company is not automatically personally liableo Here, W is entitled to nominal damages for breach of warranty – failure to connect damages

If representation were correct, it would have been against the corp which had no money

Ultra Vires Acts of Certain Corporations

Ultra Vires- Majority of issues in this realm have been statutorily normalized within the CBCA and the BCBCA- Applies still where the objects of a corporation are restricted to particular purposes

o No object required anymoreo S. 6(1) articles shall set out (f) any restrictions that the corp will carry on

Generally not exercised- S. 16 has basically abrogated the ultra vires findings

Section 15 – Capacity of a Corporation- (1) Capacity and rights, powers and privileges of any person, subject to this Act- (2) May carry on business anywhere in Canada- (3) May carry on business abroad

Section 16 – Powers of a Corporation- (1) By-laws do not have to be passed to confer powers on a corporation- (2) Corp shall not carry on any business that is restricted by its articles, or in manner restricted by articles- (3) No act of a corporation, is invalid by reason only that the act or transfer is contrary to its articles or Act

40

NOTE: pretty much abrogates the doctrine of ultra vires; (3) results in a complete fix for actions outside of the authority of the company; it’s not a blanket permission to disregard the Act, its just not automatically null

BCBCA Sections- 30 – Capacity and powers of a company – company has the capacity and rights, powers, privileges of an

individual of full capacity- 33(1) – Restricted businesses and powers – company must not carry on any business that is restricted by

memorandum of articles or in a manner inconsistent with those restrictions in memorandum- 33(2) – no act is invalid merely because the act contravenes subsection (1)

Communities Economic Development Fund v. Canadian Pickles Corp (1991 SCC)- CEDF shares all held by provincial govt – so still corp, but not under the normal incorporation act- Purpose of fund was to develop funding for zones of AB underfunded- Loan made to CPC, but director personally guarantees the loan – CPC goes bankrupt- CPC director claims the loan was ultra vires the corp’s objects- Held:

o This was not a remote or isolated community, so the loan was ultra vires and therefore a nullity- Takeaway:

o Provisions of s. 16 were not in the special act incorporating the CEDF – ulta vires applied

Constructive Notice and Indoor Management Rule- Doctrines of constructive notice (abolished by s. 17) and corollary, indoor management rule, relate not to

capacity, but to the authority of the human agents of the corporate principal- Recall Agency Principles

o Express authority – written/oral agreement includes authority to do incidental tasks to the main tasko Usual authority – acts that the principal has habitually accepted and ratified in the past

Customary authority – regularly recognized within community for that particular agent typeo Ostensible authority – apparent authority or agency by estoppel

Where the agent has no actual authority but 3P reasonably believed agent had authority, as principal allowed agent to hold himself out, on which 3P relied.

Recall Freeman & Lockyer – K was allowed to hold himself out as director

Constructive Notice:- Held that person dealing with a corp was deemed to be aware of the contents of docs filed in a public office- Persons dealing with a corp, through its human agents, were deemed to be aware of any restrictions on

human agents’ authorityo Result was that where corp’s agent exceeds authority, corp would not be bound

Indoor Management Rule- Arose at essentially the same time- Persons contracting with a company and dealing in good faith may assume that acts within its constitution

and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been regular

o Does not preclude an argument that a 3P had actual notice of the restriction on agent’s authority, but it confines the application of the doctrine of constructive notice to restrictions on the corporate agent’s authority which are set out in the public docs

o Allows 3Ps to assume that any action the corp could take privately to override those restrictions

NOTE: basically overridden by the CBCA

Section 116 – Validity of Acts of Diretors and Officers

41

- Acts of directors and officers are valid notwithstanding irregularities in their election or appointment, or defect in their qualification

Section 17 – No Constructive Notice- No person is affected by or is deemed to have notice or knowledge of the contents of a doc concerning a

corp by reason only that the doc has been filed by the Director or is available for inspection at an office of the corp

Section 18(1) Authority of Directors, Officers and Agents- No corp may assert against a 3P that

o (a) articles, bylaws and any USHAs have not been complied witho (b) persons named in the most recent notice to Director under 106 are not the directors of the corpo (c) place named in notice under 19 is not registered officeo (d) person held out by corp as director, officer or agent has not been duly appointed or has no

authority to exercise the powers that are customary in the business of the corp or usual for a director, officer or agent

o (e) Doc issued by any director, officer or agent with actual authority, is not valid or not genuineo (f) sale, lease or exchange of property was not authorized

- (2) EXCEPTION – does not apply in respect of a person who has, or ought to have, knowledge of a situation described in (1) by virtue of their relationship to the corp

BCBCA Sections- 421 – No constructive notice- 143 – Validity of acts of directors and officers- 146 – Persons may rely on authority of companies and their directors, officers and agents

o (2) does not apply to people with actual knowledge by virtue of relationship to corp

Shares and Shareholders

The Nature of a Share, and the Share (Securities) Register- Shares are generally described as “Bundles of Rights” (Sparling v. Caisse Depot et Placement SCC)- They are incorporeal property- Share is not a property right in the assets of the corp, it does not represent a property ownership interest in

the corp itself o No legal/beneficial ownership of assets – may still have an insurable interest though (Kosmopolous)

- Bundle of rights can be created in a variety of ways – subject to few restrictions only

Classes of Shares:- Each bundle of rights can be grouped together in a “class” of shares- Section 6(1)(c)(i); 24(4) allow for different classes of shares with different rights/restrictions

o Rights/restrictions must be set out in articles where more than one class of shares Articles must set out rights, restrictions, and obligations – s. 6

o Where only one class – all three rights apply to every share – s. 24(3) Voting, dividend and rights on dissolution

42

Section 2(1) – Definitions- “Security” – share of any class or series of shares or debt obligation of a corporation and includes a

certificate evidencing such a share or debt obligation

Section 49(1) – Rights of Holder- Every security holder is entitled at their option to a security certificate

Section 50(1) – Securities Records- Corp shall maintain a securities register in which it records the securities issued by it in registered form,

showing with respect to each class or series of securities:o (a) names, alphabetically arranged, and latest known address of each SHo (b) number of securities held by each SH ando (c) date and particulars of the issue and transfer of each security

Issuing and Paying for Shares- Subject to articles, bylaws or USHA, directors decide when to issue shares, to whom they are issued and for

what consideration (s. 25(1))o This duty CANNOT BE DELEGATED! (s. 115(3)

- Limits can be placed on issuance of shares within the articles – rarely used (s. 6(1)(c))- Directors who vote for share issuance under s. 25 are jointly and severally liable to the corp to make good

any amount which the consideration received is less than fair equivalent of the money that corp would have received if consideration was money on the date of resolution (s. 118(1))

o This is for when property or services are accepted as consideration

25 Issuing Shares- (1) Subject to articles, bylaws and USHA, and s. 28, shares may be issued at the discretion of the

directors- (3) Share shall not be issued until consideration for the share is fully paid in money or property or

past services that are not less in value than the fair equivalent of the money the corp would have received

- (4) In determining if property/services are fair equivalent, directors may take into account reasonable charges and expenses of organization and reorganization of payments for the property and past services reasonably expected to benefit the corp

115 Limits on Delegation Authority- (1) Directors of a corp may appoint from their number a managing director who is a resident

Canadian or a committee of directors and delegate to them any powers of the directors- (3)(c) Notwithstanding (1) No managing director and no committee of directors has authority to

issue securities except as authorized by the directors121(a)

Officers- Subject to articles, bylaws or USHAs, directors may designate the offices of the corp, appoint as

officers persons of full capacity, specify their duties and delegate to them powers to manage the business and affairs of the corp, except powers referred to in s. 115(3)

Share Rights and Restrictions- Classes of shares, rights, privileges and conditions must be set out in articles (s. 6(1)(c)(i))- Rights are not limited to the three main types, there’s infinite rights that can be assigned (tax planning)- The three main rights must appear in the corp share structure somewhere (s. 24(4)(b))

Three Main Rights:1. Right to vote on company matters

43

2. Right to receive dividends when declared by directors3. On dissolution, right to receive property of the corp remaining after creditors and any other persons with

claims against the corp are paid off

Section 24 – Shares- (3) Rights attached to shares

o Where a corp has only one class of shares, the rights of all SH are equal in all respects and include:o (a) right to vote at any meeting of the SH of the corpo (b) right to receive any dividend declared by the corp; ando (c) Right to receive the remaining property of the corp on dissolution

- (4) Rights to classes of shareso Articles may provide for more than one class of shares, if they so provide,o (a) the rights, privileges, restrictions and conditions attaching to the shares of the class shall be set

out in the articles, ando (b) rights set out in (3) shall be attached to at least one class of shares, but all such rights are not

required to be attached to one class

1. Voting Rights- Must vote to elect directors of corp; approve changes to articles or certin major transactions- Special resolutions require 2/3 majority to pass – non-voting shares sometimes have voting rights

o Fundamental changes (below)- Presumption of one share = one vote (s. 140(1))- Presumption that all shares within a class have equal rights (Jacobsen; Bowater)

Section 140(1) – Right to Vote- Unless articles otherwise provide, each share entitles the SH to one vote at a meeting of SH

Section 146(1) – Unanimous Shareholder Agreement- A lawful written agreement, among all SH of a corp, and any others who are not SH, that restricts the

powers of directors to manage or supervise the management of the business and affairs of the corp, is valid

Jacobsen v. United Canso (1989 ABQB) – Shares within a class must have the same rights- J was member of SH-committee – unhappy with directors appointing themselves as officers

o Trying to win control of the board and get rid of old management – 10k SH and 12M shares issued- J’s committee represents 6% of shares – in conflict with Buckley fam – they vote together as a block- Articles state “no SH can have more than 1000 votes no matter how many shares they own” – problem- Issue: the articles create differing rights within a class of shares – is this possible?- Held:

o Max-votes rule was invalid – must be a fixed vote per share to be valido It is clear that where there is more than one class of shares, a corp can differentiate between voting

rights – also there is presumption under s. 140(1)o Compliance order under s. 247 – only takes effect moving forward, does not invalidate past acts

Bowater v Crain (ONCA) – Confirms common rights between same class shares- Original SH got 10 votes per share and then when they are transferred, new holders become single-vote SH- B knew about the step-down provision when he purchased the shares, which gave prior holder control- Held:

o Applied 24(3) – rights of the SH are equal where onl one class; (4)(a) for multiple class ruleso Rights for any SH within the same class are equal o B ends up with more than he bargained for – got the 10 votes when step-down provision struck out

44

- Takeaway:o Articles provisions cannot offend SH rights!

McClurg (1990 SCC) – Classes must have some right that creates a distinction between them and other classes- To create a valid separate class of shares, there must be a distinction in some right between that class and

other classes, need not be overly significant distinction- 2 classes of common shares – class A and B – A voting and B non-voting (wives) – priority to As- CRA challenged that all common shares should have the same rights- Held:

o Sufficient distinction here to allow the sprinkling dividendo Two classes can have the same rights, there simply has to be some right over which there is a

distinction while the others can be the same

2. Dividend Rights- Dividends can be paid in cash, property and in shares of the corp (s. 43)- Declaring dividends is within the power of the directors, subject to USHA (s. 102)- Dividends in excess of profits are considered returns of capital- Dividends cannot be paid if would leave the company insolvent (s. 42)

o Directors can be personally liable if they declare such dividends (s. 118)o They can subsequently go after SH for return of those payments

42 Dividends- Corp shall not declare or pay a dividend if there are reasonable grounds for believing that

o (a) corp is, or will be, unable to pay its liabilities as they become due; oro (b) the realizable value of the corp’s assets would thereby be less than the aggregate of

its liabilities and STATED CAPITAL of all classes115(3)(d)

Limit on Delegation- Directors cannot delegate the duty of declaring dividends (cannot delegate to officers s. 121(a))

118(2) Director’s Liabilities- Directors who vote for or consent to a resolution authorizing any of the following, are jointly

and severally liable to restore to the corp any amounts distributed or paid and not otherwise recovered:

o (a) purchase, redemption or other acquisition of shares contrary to s. 34/35/36o (b) commission contrary to s. 41o (c) a payment of a dividend contrary to section 42o (d) payment of an indemnity contrary to section 124 oro (e) payment of a SH contrary to section 190 or 241

123(4) Defence of Reasonable Diligence- Director is not liable under 118 or 119, and complied with 122(2), if director exercised care,

diligence and skill that a reasonably prudent person would have exercised in comparable circs, including reliance on good faith on

o (a) financial statements of the corp presented by officer or written auditor’s report ORo (b) report of a person whose profession lends credibility to a statement made by the

professional

Stated Capital- Stated capital account is maintained for each class of shares issued (s. 26(1))- Simply a bookkeeping entry – does not fluctuate with market price of the shares- When shares are issued/redeemed, stated capital account is to be adjusted accordingly

45

- Because shares are only issued once, their stated capital stays the sameo It’s only where more shares are issued or some redemption/reduction occurs that the stated capital of

the shares is changed- Treated as a liability on the balance sheet – ensures that dividends are not paid out of capital amount

Example: Yco- y1: 1,000,000 shares issued at $1/share = stated capital of $1 million- y5: 1,000,000 shares issued at $2/share = new stated capital is $3 million

o Stated capital per share is 3M/2M = $1.50 / share- Y6: Bob buys shares at $5/share from the original holder of the shares

o Stated capital remains $3M or $1.50/shareo Market value has no bearing on stated capitalo The original capital collected for the issued shares is all that is counted

Preferred Shares:- Preferred shares carry no voting rights except for special circs (fundamental changes)- Cumulative Preferred Shares:

o Entitled to preferential cumulative dividend – is paid before dividends are paid to common SHso If can’t pay preferred set rate, then it cumulates to the next year

- Non-Cumulative Preferred Shares:o Also entitled to set preferential dividend, but it does not cumulate if it can’t be paid in a given year

- Usually treated like debt – with preferred dividend approximating interest that would have been received- On dissolution, preferred SH are entitled to return of capital together with unpaid dividends before common

SH are entitled to receive remaining assetso Preferred SH not entitled to share in proceeds beyond their capital + dividend

- Participating preferred shares – rights to dividends with common share holders after preferred dividend

Example s. 42 Application: Xco

Xco has authorized capital of ulimited common shares and 20M preferred shares

Stated Capital:- Issued 5M common shares for $1 per share = $5M- Issued 1M preferred shares for $3 per share = $3M- Total stated capital is $8M

Preferred Shares:- Preferential cumulative dividend of $0.15/share and no further dividends- Xco may redeem preferred shares for $3/share

Xco has liabilities of $2M, and assets of $11M, can it pay a dividend of $0.25 per common share?- Assets:

o 11,000,000 less 150,000 in preferential dividends = 10,850,000o 10,850,000 less 1,250,000 in common dividend = 9,600,000

- Liabilities:o 2,000,000 in liabilities plus 8,000,000 in stated capital = 10,000,000

- Therefore:o Liabilities exceed assets by 400,000 – violates s. 42o Would result in directors’ liability – s. 118(2)

Ask for return from SH – s. 118(5); also contribution from other directors (3)

46

3. Rights on Liquidation or Winding Up- Assets are first used to pay creditors and any cumulative dividends that have not been paid- Preferred shares often recover any amounts before common shares- Voluntary dissolution – s. 211

o Director led; SH approved; notice to Director; debts paid, surplus distributed to SH- Involuntary dissolution

o Fails to hold SH meetings; fails to file docso Section 213, but not studied here

Section 211 – Proposing Liquidation and Dissolution - (1) Directors may propose, or SH entitled to vote at annual SH meetings may, as per 137, make a proposal

for the voluntary liquidation and dissolution of a corp- (2) Notice of any meeting of SH at which voluntary liquidation and dissolution is to be proposed shall set

out the terms thereof- (3) Corp may liquidate and dissolve by special resolution of the SH, or where more than one class of shares

exist, by special resolution of the holders of each class, whether or not they have voting rights- (4) Statement of intent to dissolve shall be sent to Director- (5) On receipt of statement of intent to dissolve, Director SHAL issue certificate of intent to dissolve- (6) On issue of certificate, the corp shall cease to carry on business except to the extent necessary for

liquidation, but corporate existence continues until Director issues certificate of dissolution- (7) After issued cert of intent to dissolve, corp shall

o (a) immediately cause notice to each known creditor of the corpo (b) without delay take reasonable steps to give notice in each province where corp was carrying on

business o (c) collect property, to dispose of properties that are not to be distributed in kind to SH, to discharge

all obligations and do all other acts required to liquidate business, ando (d) after notice in (a) and (b), and obligations discharged, distribute remaining property amongst SH

according to respective rights

Westfair Foods v. Watt (ABCA) – Leading case on just and equitable winding up; oppression also; dividend rights and rights to share on surplus sometimes interact between shares

- Westfair is successful grocery store – two classes of shares: A - $2 dividend, non-cumulative and share equally with the common shares on winding up the corp; B – common shares, voting shares, share in surplus and receive dividend at director’s discretions

- 1994 – enormous surplus – new dividend policy made – first 2/share to A shares, and then remainder to common shares

o All profits paid each year – profits to common shares – negative for A shares who would have had that money at the dissolution phase, but it is not being paid to common shares

o With inflation, A shares actually decreasing in value – no growtho It was a single common shareholder that held all the common shares – getting all the profits!

- Held:o There was no expectation that A shares would increase in value over life of the holdingo Westfair directors had the right to arrange the dividend policy as they saw fito A SHs just expected to receive 2/share per year as they are currently receiving

- Note:o This was also heard under oppression remedy – see that section for outcome

Redemption and Repurchase of Shares- Corp can repurchase its own shares as ong as it does not violate financial solvency test (s. 34(2))

o Same as dividend paying rules

47

- Corp cannot hold shares in itself (s. 30(1) – so if it does not repurchase shares, it must cancel them, or it can restore the shares to the status of authorized but unissued shares

- Corp may also purchase its own shares as a result of an express term for the repurchase of shares in articleso S. 36(1) – (2) – same test as dividend

- S. 118(2) – directors can be personally liable to restore the corp any amounts paid contrary to the financial solvency test in s. 34(2) or s. 36(2)

o SH who receive amounts paid in contrary to those provisions may be required to return it (118(5))

GOVERNANCE – DIRECTORS AND OFFICERS

Appointment and Powers of Directors and Officers

Section 2(1) – Definitions- “director” – person occupying the position of director by whatever name called and “directors” and “board

of directors” includes a single director- “Officer” – individual appointed as an officer under s. 121, the chairperson of the board of directors, the

president, a VP, the secretary, the treasurer, the comptroller, the general counsel, the general manager, a managing director, of a corp, or any other individual who performs functions for a corp similar to those normally performed by an individual occupying any of those offices

Section 102 – Duty to Manage or Supervise Management- (1) Subject to and USHA, directors shall manage, or supervise the management of the business and affairs of

the corpNumber of Directors

48

- (2) Corp shall have one or more directors but a distributing corp shall have at least 3 directors, two of whom are not officers or employees of the corp or its affiliates

NOTE: Much more onerous process for amending articles than bylaws:

Section 173 – Amending Articles- (1) Subject to 176 and 177, articles of a corp may be amended by special resolution to: listed a-o- 176(1) Class Vote – SH classes are entitled to vote separately for particular articles amendments

o (5) right to vote applies to all SH whether or not they have voting rightso (6) each class or series must come to special resolution for it to pass

- 177(1) amendment to be sent to Directoro (2) reductions in share capital cannot detriment creditors (s. 38(3) and (4))

Section 103 – Amending By-Laws- (1) Unless articles, bylaws or USHA otherwise provides, directors may, by resolution make, amend, or

repeal any bylaws that regulate the business or affairs of the corp- (2) directors shall submit bylaw or amendment or repeal to the SH at next SH meeting, and SH may, by

ordinary resolution, confirm, reject or amend the bylaw, amendment or repeal

Appointment, Removal, Meetings of Directors

105 Qualifications of Directors- (1) Disqualified if: (a) less than 18; (b) unsound mind; (c) not an individual; or (d) bankrupt- (2) Unless articles otherwise provide, director is not required to hold shares in corp- (3) At least 25% of directors must be resident Canadians, if less than four directors, at least one

director must be resident Canadiano Recall: Section 2(1) – Resident Canadian – Candian citizen ordinarily resident in Canada

or not ordinarily resident in Canada, but designated under Regulation 13o Regulation 13:

(a) full-time employees of Govt of Canada/Provinces, whos principle reason for living abroad is for employment

(b) full-time employees who work abroad for a body corp which is 50% owned by resident Canadians, majority of directors are resident Canadian OR is a subsidiary of (i) or (ii)

(c) full-time students fewer than 10 years abroad consecutively (d) full-time members of intnl association/organization of which Canada is a

member (e) snow-birds – persons who were ordinarily resident when turned 60 gone for

less than 10 consecutive years106 Appointment of Directors

- (1) When articles are sent, incorporators to send notice of directors to Director- (2) Original term is up until the first SH meeting- (3) Subject to 107(b), SH shall vote by ordinary resolution at first SH meeting and each succeeding

annual meeting where election is required, will elect directors for terms not exceeding 3 yearso 107(b) – each entitled SH may case number of votes equal to total votes attached to shares,

and may distribute votes among candidates if they wish- (4) Staggered directors terms are fine- (5) If no stated term, then presumed to be terminated at next annual SH meeting- (6) If directors not elected at a meeting of SH, the incumbent directors continue in office until

successors- (7) If fails to elect number of directors required by articles, directors elected can exercise the

powers of a quorum of directors- (8) If articles allow, directors may appoint one or more additional directors (up to 1/3 of number of

49

elected directors) to hold office for term expiring at next annual meeting o CAN NOT DELEGATE (115(3)(b) and 121(a) for Officers)

- (9) Elected director is not a director unless:o (a) was present at the meeting where election/appointment happened and did not refuse ORo (b) was not present and (i) consented previously/10days after in writing or (ii) acted as

director pursuant to the election/appointment108 Ceasing to Hold Office

- (1) director ceases to hold office when: (a) dies/resigns; (b) removed by 109; or (c) disqualified 105(1)

- (2) resignation is effective at time written resignation is sent to corp or time specified in the letter, the later

109 Removal of Directors- (1) Subject to 107(g), SH may by ordinary resolution at a special meeting remove any director

o 107(g) – votes for removal must be greater than number of required directors + votes against

- (2) Where a class as exclusive election rights, they can only remove the directors by ordinary resolution

- (3) Vacancy may be filled at meeting of SH or may be filled under 111- (4) If all removed/resigned, manger/supervisor of management is deemed to be director- (5) Subsection (4) doesn’t apply to: (a) officer under control of SH or other person; (b) lawyer,

notary, accountant or other professional who’s role is to provide professional service; (c) TiB, receiver, receiver-manager or secured creditor

6 Articles – voting requirements- (2) – Articles may set out any provisions permitted by this Act or by law to be set out in the bylaws- (3) – Subject to (4), if articles or USHA require a greater number of votes of directors or SH than

that required by this Act, provisions of the articles/USHA prevail- (4) Articles may not require greater number of SH votes to remove a director than the number in

109110(1)

Director’s Attendance at Meetings- Directors are entitled to receive notice and to attend and be heard at any SH meeting

111 Filing Vacancy- (1) Despite 114(3), but subject to (3) and (4), quorum of directors can fill vacancy unless vacancy

is from an increase in number of director positions or failure to elect number of directors as per articles

o CAN NOT DELEGATE (s. 115(3)(b))- (2) If no quorum or failure to elect exists, directors shall without delay call a special meeting of SH

to fill vacancy, if they fail, SH can call the meeting- (3) If class holds exclusive rights to elect directors and vacancy occurs,

o (a) subject to (4), remaining directors elected by the holders of that class may fill the vacancy except increase position/failure to elect OR

o (b) if no remaining directors, any SH of that class may call meeting of class for to fill the vacancy

- (4) Articles may provide that vacancies only be filled by SH votes/class vote- (5) Director appointed/elected to fill vacancy holds office for the unexpired term of their

predecessor113(1)

Notice of Change of Director’s Address- Corp shall, within 15 days after; (a) change is made among its directors; or (b) receives notice of

change of address of director; send notice to the Director setting out the change114 Meeting of Directors

- (1) – Unless articles or bylaws, directors may meet at any place upon notice required by bylaws- (2) Subject to articles/bylaws, a majority of the number of directors or minimum number of

directors required by articles constitutes a quorum at any meeting of directors – may exercise all directors powers

50

- (3) Directors shall not conduct business unlesso 25% of the directors present are resident Canadian, or if less than 4, at least one is resident

Canadian- (4) Exception to (3) where a resident Canadian director approves in writing or by other

communication and requirement would have been met if that resident Canadian were present- (5) Notice of meeting of directors shall specify any matter referred to in 115(3), but unless bylaws

otherwise provide, need not specify purpose of or the business to be transacted at meeting- (6) Director may waive notice in any manner; attendance constitutes waiver, except where

attending to expressly object to transaction of business on grounds of improper meeting procedures- (8) Where corp has only one director, that director may constitute a meeting- (9) Subject to bylaws, director may (if directors consent) participate in a meeting of directors or of

a committee by tele/comp/other communication – deemed present at the meeting117 Directors Resolutions

- (1) Written resolution signed by all directors entitled to vote is as valid as had been passed at meeting

- (2) Copy of every resolution shall be kept with the director’s minutes- (3) Unless ballots used, minute entries that chairperson declared resolution carried/defeated, is

proof of the fact without proof of number of votes recorded in favour or against (absent evidence to contrary)

123 Dissenting- (1) Director is deemed to consent unless (a) requests dissent entered into minutes; (b) sends written

dissent to secretary of meeting before adjournment; (c) sends dissent by registered mail or delivers it to registered office immediately after the meeting is adjourned

- (2) Director who votes for or consents to resolution is not entitled to dissent under (1)- (3) Absent director at a meeting where resolution was passed is deemed to have consented unless

within 7 days after becoming aware of resolution, directoro (a) causes dissent to be placed with minutes of meeting; oro (b) sends dissent by registered mail or delivers it to registered office of corp

Powers of Directors- Broad management power suggests that it operates as a residual power to the other specified powers

102

Duty to Manage or Supervise Management- (1) Subject to any USHA, directors shall manage, or supervise the management of the business and

affairs- (2) One ore more directors; if distributing, at least 3 directors, 2 of which are not officers/employees

103

By-Laws- (1) Unless stated otherwise by articles, bylaws or USHA, directors may make resolution to amend,

repeal or make any bylaws that regulate the business and affairs of the corp o CAN NOT DELEGATE (s. 115(3)(j) and 121(a) to Officers)

- (2) Directors shall submit new/change/repealed bylaw at next SH meeting – SH may confirm, reject or amend the bylaw by ordinary resolution

- (3) Effective as of the date of the resolution of directors until it is confirmed/rejected by SH, or ceases to be effective under (4); where confirmed, continues effect from that date onward

- (4) If rejected by SH, of if directors don’t present it, the bylaw ceases to be effective and no subsequent make, amend or repeal can be passed by resolution of the directors having substantially the same purpose or effect until approved by SH

- (5) SH that is entitled to vote at annual meeting of SH may, in accordance with 137, propose to make, amend or repeal a bylaw

10 Organizing Meeting

51

4 - (1) After incorporated, meeting of directors shall be held to discuss:o (a) make bylaws; (b) adopt security certificates and corp records; (c) authorize issue of

securities; (d) appoint officers; (e) appoint auditor to hold office until the first annual meeting of SH; (f) make banking arrangements; and (g) transact any other business

- (3) Incorporator or director may call the meeting of directors by giving not less than 5 days notice by mail to each director, stating time and place of meeting

115

Delegation of Directors Authority- (1) Directors may appoint a managing director who is a resident Canadian or a committee of directors

and delegate any powers of the directors- (3) No managing director and no committee of directors has authority to:

o (a) Submit questions to SH that require their approvalo (b) fill a vacancy among the directors/auditor, or appoint additional directorso (c) issue securities except as authorized by directorso (c.1) issue shares of a series under 27 except as authorized by directorso (d) declare dividendso (e) purchase, redeem or otherwise acquire shares issued by the corpo (g) approve management proxy circular referred to in Part XIIIo (i) approve any financial statements referred to in s. 155; oro (j) adopt, amend or repeal bylaws.

121

Designating Officers- Subject to articles, bylaws or USHA,

o (a) directors may designate offices of the corp, appoint as officers persons of full capacity, specify their duties and delegate to them powers to manage the business and affairs of corp, EXCEPT powers to do anything referred to in s.115(3)

o (b) director may be appointed to any office of the corp; ando (c) two or more offices of the corp may be held by the same person

125

RemunerationSubject to articles, bylaws or any USHA, directors may fix the remuneration of any directors, officers or employees of the corp

133

Calling Annual and Special SH Meetings- (1) Directors shall call an annual meeting of SH (a) not later than 18 months after corp is formed; and

(b) subsequently, not later than 15 months after holding last preceding SH meeting, but no later than 6 months after end of corp’s preceding financial year

- (2) Directors may call special SH meetings at any time- (3) Director may apply to court for an order extending time of annual meeting

189

Borrowing Powers- (1) Unless articles, bylaws or USHA states otherwise, directors may, without authorization from SH:

o (a) borrow money on credit of the corp;o (b) issue, reissue, sell, pledge or hypothecate debt obligations of the corpo (c) give a guarantee on behalf of the corp to secure performance of an obligation of any

person ; ando (d) mortgage, hypothecate, pledge or otherwise create a security interest in any property of the

corp, owned or subsequently acquired, to secure obligation of the corp- (2) Not withstanding 115(3) and 121(a), unless articles, bylaws or USHA otherwise states, directors

may delegate powers in (1) to managing director, committee of directors or officers, by ordinary resolution

Access to Records of Directors

Section 20 – Corporate Records

52

- (1) Corp shall prepare and maintain at registered office, records containing (a) articles, bylaws and all amendments and any USHAs; (b) minutes of meetings and resolutions of SH; (c) copies of notices as required by 106 and 113; and (d) a securities register that complies with s. 50

- (2) Also accounting records and minutes/resolutions of directors meetings must be kept- (4) Records from (2) are to be kept at registered office of the corp, or other place directors deem fit, and

SHALL at all reasonable times be open to inspection by directors

Duties of Directors and Officers- Problems generally arise where directors put their own interests ahead of the interests of the

corp/SH/creditors/etc

Fiduciary Duties- Expected to act in the best interests of the corp – must look to the long term interests

o BCE: Directors may consider interests of SH, employees, suppliers, creditors, consumers, governments and the environment in determing the best interests of the corp and fulfilling their fiduciary duty

- Directors are considered the operating mind of the corp- Three classic breaches:

o 1. Director/Officer transacting with the corp, is transacting on their own behalfo 2. Appropriation of business opportunityo 3. Competing with corporation (tends to overlap with 2)

Section 122(1) – Duty of Care of Directors and Officers- Every director and officer in exercising their powers and discharging duties shall

o (a) act honestly and in good faith with a view to the best interests of the corporation; and Duty of loyalty (fiduciary)

o (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circs

Duty of care- (2) Every D/O must comply with this Act, regulations, articles, bylaws and any USHAs- (3) Subject to 146(5), no contractual provision, articles, bylaws or a resolution relieves a D/O from the duty

to act in accordance with this Act or regs or relieves them from liability of a breach thereof

Note: BCBCA section 142 – essentially the same

1. Transacting with the Corporation- Common Law rule: strict rule against director contracting with the corporation

Section 120 – Disclosure of Interests – No ability to contract out of this- (1) D/O shall disclose to the corp in writing or in minutes, the nature and extent of any interest they have in

a material contract or material transaction, whether made or proposed, if the D/Oo (a) is a party to the contract or transactiono (b) is a director or officer, of an individual acting in similar capacity of a party to k / transactiono (c) has a material interest in a party to the contract or transaction

- (2) Time of Disclosure for Director – shall be made:o (a) at the meeting at which proposed k or transaction is first considered

53

o (b) at the first meeting after becoming interested; (c) if becomes interested after contract or transaction is made, at the first meeting after that; (d) if individual interested in k/transaction later becomes a director, at first meeting after that

- (3) Time of Disclosure for Officer who is not a director – shall be made:o (a) immediately after becoming aware that c/transaction is to be considered at a meetingo (b) if becomes interested after k/transaction made, immediately after thato (c) if interested individual later becomes officer, immediately after that

- (5) Voting – director required to make a disclosure under (1) shall not vote on any resolution to approve the k or transaction unless the k or transaction

o (a) relates to his/her remuneration as director, officer, employee or agent of corp or affiliateo (b) is for indemnity or insurance under s. 124; oro (c) is with an affiliate

- (6) Provides for general disclosure of an interest in another company- (6.1) SH of the corp may examine the portions of any minutes that contain disclosures under this section

o This would allow SH to determine if they had a cause of action against a conflict- (7) Avoidance standard – K/transaction is not invalid, and director is not liable for profits, if

o (a) disclosure made in accordance with (1) – (6) o (b) directors approved the k/transaction; ando (c) k/transaction was reasonable and fair to the corp when it was approved

- (7.1) Even if conditions in (7) are not met, D/O, acting honestly and in good faith, is not accountable for profits and k/transaction is not invalid if

o (a) k/transaction is approved or confirmed by special resolution at a SH meetingo (b) disclosure of interest was made to SH in a manner sufficient to indicate its nature before the k or

transaction was approved of confirmed; ando (c) k/transaction was reasonable and fair to the corp when approved/confirmed

- (8) Court remedy – if D/O fails to comply with this section, a court may, on application by the corp or any SH, set aside the k/transaction on any terms it sees fit, or require the D/O to account to corp for any profit, or both

Aberdeen Railway Co v. Blaikie Bros (1846) – K’s entered into in conflict are voidable- BB was a partnership that manufactured chairs – contracted with A to sell chairs to BB – One of the BBros

was a director of A – so he’s transacting with a corp of which he’s a director- A backed out of the deal and BB tried to enforce it- Held:

o BB could not enforce the contract – breach of director’s duty to Ao Duty of agents(directors) are to act in the best interests of the corp

Conflict of interest to contract with the corp on behalf of selfo Each director gives full respect to knowledge and skill of another director

- Takeaway:o K’s entered into in conflict are voidable – even if the K is fair on its face

Transvaal Lands Co v. New Belgium (Transvaal) Land and Development Co- 3 directors of T; Young, Harvey and Samuel – who is also a director of NB- Sam suggested buying a company from NB – abstained from voting, but did not declare interest- H voted on the resolution, but he held an interest of NB as a trustee under his father’s will- Held:

o K is voidable, and T could recover their capital from the transactiono Harvey was in conflict with his fiduciary duty to T – articles required disclosure and no vote

- Note:o Had Harvey/Sam complied with articles, there likely would have been a valid contract hereo S. 122(3) would have limited ability to contract out of duties, but that wasn’t around then

54

2. Appropriation of Corporate Opportunities- Where D/O independently invests or takes an opportunity that the corp could have taken- Where an opportunity no longer belongs the corp, it may be fair game for the D/O (Peso)- Leading case – Canadian Aero Services

Cook v. Deeks (JCPC 1916) – Must account for profits where stolen corporate opportunity- K with railway Toronto Construction Co. to build sections of track; Toronto owned by Cook, Hines and two

Deeks (25% each)- Deeks had relationship with source of contracts and decided to leave the corp at next opportunity- Cook brought action on behalf of Toronto Co against Deeks and Hines

o Deeks/Hines had authority of the corp and took next opportunity of themselves, cut out Cook- Held:

o Cook/Hines breached fiduciary obligations to the corpo Deliberate use of position as directors to exclude the corp, when primary duty was to the corpo After contract is complete, Cook/Hines must remit profits to Toronto Corp – then they can wind up

They could also ratify the K into Toronto Corp without requisite authority

Regal v. Gulliver (HL) – Strict duty – question is whether D/O profited from transaction – account for profits- R owned cinema, directors wanted to sell cinema as par of a bigger business to get a better price – to do this

they had to acquire two more cinemas to build a package deal- R incorporated a wholly owned subsidiary – R capitalized subsidiary with all of R’s capital

o Subsidiary entered into K’s for cinema leases, but they either had to personally guarantee the Ks or inject more capital into the deals, so they put in their own money

o Subsidiary was then 2K owned by R and 3K owned by directors of R who also owe duty to R- Deal went through – sold the package, HUGE GAINS – director’s contributions tripled in value

o Was a good faith deal, but R shareholders didn’t get as good a deal as directors did- New owner brought action against directors- Held:

o Share acquired by reason only that directors were directors of Ro Strict fiduciary duty – must account for profits – liability arises from profit being made, not

intentions of the directors No loss to R, but this is not the test, question is whether the directors profited?

- Note:o The effect of this ruling was for the purchasers to actually get a refund on part of their purchase

Peso v. Cropper (BCCA 1966, aff’d SCC) – Other side of spectrum – allows directors to contract where no intent to defraud, and opportunity no longer belongs to the corp

- P (BC corp) held number of silver claims in Yukon; C an original SH and became managing director- C was presented an offer that he brought to P – P’s board of directors turned it down for financials- 6 weeks later, C (with others), formed new corp and acquired the offer – also became distributing corp- 2 years later, P is bought out, and new owners go after C’s corp for the property- Held (unanimously)

o Recognized Regal principles, but would not go so far as to apply them so strictlyo C acted in good faith and at no time intended to defraud Po Offer was no longer P’s after they carefully considered it and rejected it

Regal – objective to attain cinemas was maintained throughout dealings, here the objective was expressly rejected

o C’s knowledge of the offer was related his role with P, but the actions taken were separate from the directorship duties under P

55

Canadian Aero Service Ltd. v. O’Malley (1974 SCC) – Principles of Regal confirmed- CAS topical graphing – providing foreign aid to Guiana – O’Malley and other were not properly elected

directors, but they were senior officers in any case- O and other resigned while CAS was still pursuing the bid – they reincorporated and competed- Their new corp won the bid – CAS sued O and other for the profit from the contract- Held:

o O and other owe and accounting of profits to CAS – breached their fiduciary dutieso Title of O/D is irrelevant – if they had control in management decisions, fiduciary duty applieso They were in charge of preparing CAS’s bid, and then directly competed with it

Resignation is insufficient to negate this duty – motivation for the resignation was to take the opportunity away from the corp

o Principles taken from Regal – equitable principles that apply to corps Confirms that they govern the area of corp law Not exhaustive

o Policy rationale Recognition of the degree of control D/O have over day-to-day operations of businesses Corps play an important and valuable roll in economy and society There must be some accountability

o Deails of the contract awarded may have changed, but that would have been the deal for CASo Peso – bona fide rejection of offer, here that is not the case

- Note:o CAS doesn’t have to prove that it would have gotten the contract, rather that the fiduciaries have

to answer to the breach according to their gain resulting from the breach

3. Director’s Duty of Care, Diligence and Skill and the Business Judgement Rule

Recall Section 122(1)(b) – D/O must exercise the care, diligence and skill of a reasonably prudent person in similar circumstances

Section 123(4) – Defence of Reasonable Diligence- Director is not liable under s 118 or 119 and had complied with duties under 122(2), if director exercised

care, diligence and skill that a reasonably prudeent person would have exercised in comparable circs, including reliance in good faith on:

o (a) financial statements represented by director or officero (b) professional report by professional person

Section 123(5) – Defence of Good Faith Reliance on Financial Statements or Professional Advice- A director has complied with duties under s. 122(1) if director relied in good faith on

o (a) financial statements of the corp represented by director of officero (b) professional report from professional person

NOTE: defences do not cover interests of the Officers, only directors acting in good faith…

“REPAP” UPM-Kymmene Corp v. UPM-Kymene Miramichi Inc (2002 ONSC aff’d ONCA)- Repap was public company – too little revenue, shares trading at very low levels- Berg became director and Chairman of the board of Repap - Berg’s counsel prepared employment k for

generous salary and benefits to Bergo 4 new directors and 2 long-serving directors felt uneasy about the K and sought assistance from

compensation consultant – compensation committee was to consider the K and report to board- 1 of the long-standing directors resigned and the Chair of the committee resigned leaving memo

56

- Berg received notices of resignation and memo’s of explanation from resingee – didn’t share with directors- Berg presented a “finalized draft” – committee recommended its adoption w/ no comp consultant report

o Last long-standing director abstained from vote and resigned the next day- SH blow-back– Berg was not re-elected – so he sued for 27M on the agreement terms- Held:

o Berg owed CL and stat fiduciary duties to Repap – act honestly and in good faith with a view to the best interest of the corp and to exercise the care diligence and skill that a reasonably prudent person would exercise in comparable circs

Berg should have disclosed facts that were material to their judgement Where conflict – independent advisors and committees can be used as safeguards Berg breached in overseeing his contract without protecting Repap – Repap not involved in

negotiating the terms of the contract Not fraud – but totally opposite that required of him as a fiduciary – disclosure, honesty,

loyalty, candour and the duty to favour Repap’s interest over his own.o Other directors who approved the Agreement failed to act carefully, diligently and skilfully in the

best interests of the corp. Did not inform themselves of the corp, the opinion of management or previous members Did not consider compensation consultant’s report in any meaningful way As new board, higher duty to educate themselves before making decisions Even the director who abstained and resigned did not satisfy duty – should have dissented

o Business Judgement Rule: Protects decisions of directors where they are made reasonably Decision cannot be protected when it was made without understanding terms and meaning

of that Agreement and situation of the companyo Agreement was procedurally unfair in that there had been no arm’s length negotiations, inadequate

information was given to the board, and it was approved with undue haste at the insistence of Bergo Substantially unfair in that it created an enormous liability for the company without bringing benefito Remedy - Contract was set aside as per s. 120 and as per oppression remedy s 241(3)(h)

People’s Department Stores v. Wise (2004 SCC) – Duty is owed to more than just SH – longer term view- W is CBCA corp – 75% shares owned by W’s fam and rest are publically traded- W acquires all the shares of People’s corp – borrowed heavily to acquire – almost totally leveraged- Owes money to Mark’s and Spencer – plan was to amalgamate P and W, but M doesn’t want that to occur

until W pays M for the loan – W and P are combined for purchasing power, but not as amalgamation- W’s fam made the decision without consulting directors of W – plan was to have W become heavily

indebted to P – then Walmart came and crushed both companies- TiB for P is suing W fam personally – breach of fiduciary duties under s. 122(1)(a) and (b)- Held:

o Wbros acted in good faith and honestly – decisions of inventory debts were to solve debt woeso Who is owed a duty under 122(1)?

Does not provide that the duty is specifically owed to the corp – broader than that Directors to take a longer term view of what’s in the corp’s best interest – not just SH Look to creditors, community, environment etc Duty is to the corp – no one group should be favoured over the others

o Standard: D/O are not in breach of CBCA duty if they act prudently and on a reasonably informed

basis in comparable circs. Decisions must be reasonable business decisions in light of all cirs about which the D/O knew or ought o have known of

o Causation: P must establish that D/O acted (i) in breach of duty of care; and (ii) in way that caused loss

o Business Judgement Rule: Perfection is not demanded – courts are ill-suited and should be reluctant to second-guess

application of business expertise, but they are capable of determining whether an 57

appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made

o Oppression claim would have been more appropriate- Notes:

o Defence of 123(4) would be avail if they were acting as directors, but they decided w/out board- Takeaway:

o Elevated standard for directors – duty owed to others as well as SH

4. Director’s Duties and The Oppression Remedy

NOTE: Covered more thoroughly in SH Remedies below

Introduction to the Oppression Remedy:- Removes the technicalities of proving that a person is a proper litigant before hearing merits of the case

o Recall Cook – derivative action was brought because the majority of SH would not have allowed the suing of their own corp

o The prima facie case requirement is not present in oppression remedies- Now common for one or more SH to bring oppression actions

o Allege breach of fiduciary duy (122(1)(a)), breach of duty of care (122(1)(b); and oppression (241)o Repap goes through all of these duties of directors

Section 238 – Definition of Complainant- (d) any other person, in discretion of the court, is a proper person to make an application

o Used for the oppression remedy

Section 241 – Application to Court Re Oppression- Broad powers of the court to rectify oppressive situations- See SH Remedies below for more information

SH Ratification of Breach of Fiduciary Duty- Recall s. 120(7.1) – Failure to disclose conflict of interest – SH can ratify the k/transaction with disclosure- Recall s. 122(3) - no k provision, articles, bylaws or resolution relieves D/O from a duty to act in

accordance with this Act or regs- Section 242(2) – court can take a purported ratification into account in making order for oppression action,

but does not bar any remedy, just to be used as an indicator of appropriate remedy in the circs.

Other CBCA Duties of Directors- Recall 42 – Dividends – corp shall not declare or pay dividend if there are reasonable grounds for believing

that corp would be unable to pay liabilities or realizable value of assets would be less than aggregate of liabilities and stated capital

- Recall 123(4) – Defence of Reasonable Diligence- Recall 122(2) – Duty of D/O to comply with Act

118 Directors’ Liability- (1) Directors who vote/consent resolution authorizing issue of share under s25 for consideration

other than money are jointly and severally liable to make good any amount the consideration falls short of equivalent money owed for the shares

- (2) Directors who vote/consent to authorizing any of the following are jointl and severally liable to restor amounts distributed, not otherwise recoverable

o (a) purchase, redemption or other acquisition of shares contrary to 34/35/36o (b) commission contrary to 41

58

o (c) payment of a dividend contrary to 42o (d) payment of an indemnity contrary to 124 oro (e) payment of a SH contrary to 190 or 241

- (3) Contribution can be sought from other directors that voted for/consented- (4) Recovery from SH who received the payments – director may apply for court order- (5) Court order may demand return of money, shares be returned, or any other remedy seen fit- (6) No liability under (1) where director can prove they did not know and could not reasonably

have known that the share was issued for less than could have been received from the consideration given

(7) Limitation – 2 years from date of the resolution authorizing the action119 Liability of Directors for Wages – SEE CASES BELOW

- (1) Directors liable to employees for all debts not exceeding six months wages payable to each such employee for services performed for the corp

- (2) Conditions precedent to liability under (1) – 6 month limit on claims window – see specifics- (3) Limitation – must be a director or within 2 years of being a director- (4) Amount recoverable is amount remaining unsatisfied after execution- (5) Subrogation – director is entitled to preference employee would have had as a creditor on

bankruptcy(6) Contribution can be sought from other directors

190(26)

Limitation on Payment of Dissenting SH- Corp shall not make payment to dissenting SH under this section if there are reasonable grounds

to believeo (a) corp is or would be unable to pay liabilities after payment; oro (b) realizable value of the corp’s assets would thereby be less than the aggregate of its

liabilitiesNote, no reference to stated capital in the second arm of the test

241 Oppression Application- See SH Remedies below

Barrette v. Crabtree Estate (1993 SCC) – s. 119 only includes actual wages for 6 months- Textile plant closes down – employees terminated without notice – sued for wrongful dismissal- Corp couldn’t pay, so action against directors for amount awarded for the lack of notice

o Wages were paid, but this was for recovery of the award for wrongful dismissal- Held (unanimous)

o Directors are not liable here under s. 119 because the award is not for wageso 119 is to protect employees in event of bankruptcy – ensures funds are used to pay employees

Recognizes vulnerability of employees – only source of income – no decision making Departs from the distinct entity theory of corp law

o Damages here were a result of failure to provide notice – debt of the corp 119 specifically states it is for wages not exceeding 6 months – not captured

o Employees left to claim in bankruptcy – likely will recover less than full award

Proulx v. Shehelian Goldfields (2001 ONCA) – Any debts for services of the employee to the corp- SG failed and ceased operations – sued for unpaid wages, vacation pay, expenses incurred, etc- Held:

o No need to consider if amounts were considered wageso Sufficient that they were a debt for services that the employee performedo Claim for unreimbursed expenses is for services performed for the corp – its not wages, but is a debt

in relation to the services none the less

59

Obligations Under Other Legislation

R. v. Bata Industries Ltd – crim liability depends on responsibilities and actions of each party- D/Os charged with offences related to criminal offence – environmental standards offence- Stored chemical waste on site, once it was drummed, it just sat there – leaked into ground- Westin – director and then VP – both director/officer – main job was to stop economic loss

o Extremely successful – cost cutting and reduction in middle management o Delegated environmental issues to DeBrown – no real assistance there thougho Circular issued to Bata employees prepared by CEO – emphasis on environment

- Held:o Company is liable – corp failed to take reasonable care to avoid committing offence

Standard – level of due diligence that corp should have to put in place to establish a proper system to prevent commission of offence, and must ensure it operates effectively

o Directors’ liability – dependent on roles and responsibilities Once actus reus proven, onus on D to show they acted with due diligence Directors can delegate, but they must also assess for effectiveness Director must act personally where receive actual notice of wrong

o Westin – liable – delegation alone was insufficient Had full authority to determine the management of the site Received quotes for the clean up and did nothing with them If DeBrown wasn’t performing, it was on Westin to address this issue

o Thomas Bat – CEO – not liable – advisory role – did what was expected of himo Marchant – liable – director that had been shown the drums and did essentially nothing

- Sentencingo Fines imposed on corp and on directors personally (12k each)o Bata will not indemnify Merchant/Westin for their fineso During probation, environmental issues will be made mandatory agenda item

- Note: they got indemnified by the corp anyways – discussed later

NOTE: LLP Partners may have more protection than directors of a corp here- Section 105(2) PA – provides that partners of an LLP are not subject to duties imposed on directors of a

corporation from the CL or under s. 142 of the BCBCAo Effectively removes fiduciary duty and standard of care doesn’t it?

BC Employment Standards Act s. 96 – Corporate Officer’s Liability for Unpaid Wages- (1) D/O of a corp at the time wages of an employee of the corp were earned or should have been paid is

personally liable for up to 2 months unpaid wages for each employee- (2) Despite (1), person who was a D/O of a corp is not personally liable for

o (a) liability under 63, termination pay or payment for individual or group terminations, if the corp is in receivership

63 provies for payments in lieu of notice based on length of serviceo (b) liability to an employee for wages if the corp is subject to action under 427 Bank Act or

proceeding under the insolvency Act; o (c) vacation pay that becomes payable after the D/O ceases to hold office; oro (d) money that remains in the employee’s time bank after the D/O ceases to hold office

- (4) “director or officer of a corp” includes a director or officer of a corporation, firm, syndicate or association that the director treats as one employer under s. 95

60

Section 95 – May treat affiliates, parents, subsidiaries as single employer for the purposes of this act – if so, they are jointly and separately liable for payment in satisfaction of the amounts in 96

NOTE:- This leg can end up making D/O liable for wages of employees even where they wouldn’t be under CBCA

o Where subsidiary goes bankrupt, employees can’t sue; but the act could say that parent/subsidiary is all one corp, so the employee could look to parent for recovery

o Intrusion on federal corporate law?

Tort Liability of Directors and Officers

Said v. Butt (1920 KB) – Director acting bona fide for corp within authority – no tort of inducing breach of k- Recall from Agency: undisclosed principal– generally agent who acts on behalf of undisclosed principal can

effectively make a K between the principal and 3P, even though 3P doesn’t know of principalo Unless 3P can demonstrate that they intended to k with agent personally or never would have

contracted with the principal- Held:

o No enforceable contract because 3P would never have contracted with Saido Obiter - Tort claim considered as well against Butt – tort of inducing breach of K

Butt had wide powers to act on behalf of corp – acted within those powers If this was deemed a tort of inducing a corp to breach K, then the director of any breached

corp K would be liable in tort – ridiculouso Director acting bona fide on behalf of corp differs from stranger who wrongfully induces a breach

ADGA Systems v. Valcom Ltd – approved Said/Butt on tort issue – when director can be sued in tort- Approved Said v. Butt on tort of induced breach of K issue- ADGA and V are competitors both after a particular K – to bid must show at least 25 senior techs

o ADGA had the K in the past with 45 techs – V poached ADGA’s employees- Allegation – V and directors (personally named) induced employees to breach contracts- Held:

o No ruling, but principles set outo Policy:

Directors cannot be attacked every time there’s conflict between corps – stifle business Sometimes its in the best interests for a corp to breach contract – directors have a duty to the

corp, so they may have to breach to meet this dutyo Person acting in bona fide duties on behalf of the court differs from a stranger who wrongfully

induces the corp to breach contract – Said approvedo Here, the three directors were not inducing ADGA to breach K, they were inducing employees of

AGDA to breach their Ks, so this is distinguishable from Saido Comes down to pleadings – here they would be sufficient that if proven, they would amount to a

tort, but does not determine specifically that tortious action occurred here

Notes:- Berger and Willodale – successful tort action against president where employee slipped on ice – president

was present at all times and could see the ice forming- London Drugs – Personal liability may exist even where there is also vicarious liability to the corp

Indemnification and Insurance

Section 124 – Indemnification- (1) Corp may indemnify D/O or other individual acting in that capacity, against all costs, charges and

expenses, including an amount paid to settle an action or satisfy a judgement, reasonably incurred by the

61

individual in respect of any civil, criminal, admin, investigative or other proceeding in which individual is involved because of association with the corp

- (2) May pay up front for legal costs or whatever other costs – it’s repaid if doesn’t meet (3)- (3) Limitation – corp may not indemnify unless individual

o (a) acted honestly and in good faith with view to best interests of the corp ando (b) in the case of crim/admin action, the individual had reasonable grounds for believing that the

individual’s conduct was lawfulo NOTE: cannot be contracted out of this provision

- (5) Right to Indemnity – if the case is won, or is not heard for any reason, still entitled to indemnity- (6) Insurance – corp may purchase and maintain insurance for benefit of individual referred to in (1) against

liability incurred by that individual in (a) capacity as D/O of the corp or (b) capacity as D/O of other entity acting at corp’s request

- (7) May apply to court for order approving indemenity NOTE: (7) Protects Directors for personal liability of paying indemnity where not allowed s. 118(2)(d)

Consolidated Enfield Corp v. Blair (1995 SCC)- Two groups of SH for Enfield – Blair was president and SH of Enfield – was a major SH- Main opponent was Canadian Express – major SH from other block of shares- At present B was a nominee and his allies would keep him in control – 11 nominees – 6 B’s side and 5 CE’s

o Surprise nomination at meeting made by CE – B lost majority of director nominationso Legal counsel advised there must only be 11 directors – B must declare results – advised in meeting

that he could not declare the surprise nominee director – B ordered it so, maintained control, but immediately scheduled another meeting and added new nominee to the list so that it could be voted

- Lawsuit is about the costs of legal services at this point – B seeking indemnity for them- Held:

o B’s intentions were bona fide – he had the intent of having a properly elected board – which was his role as President, and which was in the best interest of the corporation

Best interest of the corp – to have the integrity of its voting process honouredo Nothing he did was done dishonestly or in bad faith – asked for legal advice, received it, and made

the determination based on that adviceo Immediately after making decision, he announced the next vote which may result in him losing

power to the surprise nominee – show of good faith- Notes:

o No opinion on the legitimacy of the legal advice given, just a ruling that it was not made dishonestlyo ONCA determined it to be the wrong advice – so under s. 124, would indemnification be allowed?

Difficult to say its wrongful, but it was in fact wrong (ONCA), but he couldn’t have done anything but ask for legal advice – depends on arguments

o By-laws in this case made the test more lenient than s. 124(5) (124(3)), but that section is not amendable by articles/contract/bylaws/USHA (apparently anyways)

Recall R. v. Bata Industries (above)- Directors convicted for contravention of environmental regulations; Bata prohibited from indemnifying

guilty directors to ensure punishment to them specifically- Appeal: Using probation order gainst Bata was improper as a matter of criminal law – scope of probation

order was exceeded – should be left to corp to determine indemnification – charge was against directors, so probation should not be prohibitive of Bata’s actions

- Note: would they be barred under s. 124(3) from indemnification? Were directors acting honestly and in good faith with a view to the best interest of the corp? Also, directors open themselves to liability if they indemnify when they should not have

62

GOVERNANCE - SHAREHOLDERS

General Powers of Shareholders- SH have the role of providing capital while D/O carry on the management- SH rights attach to their shares, not liable for corp’s obligations/debts

No Usual Management Powers- SH do not take on management or decision making powers in everyday corp functions- Recall s. 102 – duty to manage or supervise management of business and affairs is responsibility of the

directors

Automatic Self-Cleansing Filter Syndicate v. Cuninghame – SH cannot just vote on management decisions- SH owners and members of the corp and have contract as to how the corp will be run- Articles expressly gave power to directors to negotiate on behalf of company and to sell entire assets- One SH keen to find a buyer – found one, brought it back and received a 55% SH vote in favour- Directors refused to carry out sale – SH went to court- Held:

o Majority of the SH cannot force directors to do something they believe not in best interests of the corp – SH could vote them out, but can’t override them

o SH have agreed to what they’ve bargained for in the articles – amend articles with 75%o Majority cannot just take over management because they want to make decisions – that is a

director’s role- Note:

o SH have some role in management – oversight role SH approve bylaws; special resolutions; s. 189 – proposal to sell assets would require

special resolution

Access to Information About Corp

20 Corporate Records- (1) Corp shall prepare and maintain records at registered office containing:

o (a) articles, bylaws, amendments, and copy of any USHA; (b) minutes of meetings and resolutions of SH; (c) copies of notices 106 or 113; and (d) securities register complying with 50

- (2) Directors records from their meetings must be kept there- (4) Records are open to inspection by directors

o No rights anywhere for SH to inspect director’s minuteso Not privileged, they just must be formally sought on preparation for litigation

21 Access to Corporate Records- (1) Subject to (1.1), SH and creditors and Director may examine all records described in 20(1)- (1.1) Person wishing to examine securities register of distributing corp must make request to corp, and

get affidavit – on receipt of which corp will allow person access to the register- (2) SH of corp is entitled to one copy of articles and bylaws and any USHAs

Resolutions

Section 2(1) – definitions- “Ordinary resolution” – passed by majority of votes cast by SH- “Special resolution” – passed by majority not less than 2/3 of votes cast by SH

63

Section 142 – Resolution in Lieu of Meeting- (1) Except where written statement submitted by director under 110(2),

o (a) resolution in writing signed by all SH entitled to vote on that resolution at a meeting of SH is as valid as if it had been passed in the meeting and

o (b) resolution in writing dealing with all matters required by the Act to be dealt with at a meeting o SH, and signed by all SH entitled to vote, satisfies all requirements related to SH meetings

- (2) Copy of every resolution shall be kept with meeting minutes of SH- (3) Evidence – unless ballot demanded, entry in the meeting minutes that chairperson declared resolution to

be carried/defeated is, in absence of proof to the contrary, proof of fact without vote numbers

Election and Removal of Directors

Recall 106 – Appointment of Directors- (1) Notice of directors sent with articles upon incorporation- (3) Subject to 107(b), SH of a corp shall, by ordinary resolution at first meeting of SH and each annual SH

meeting where election required, elect directors to hold office for a term not more than 3 yearso 107(b) SH may vote their shares as they please up to total number of votes attached to their shares

- (4) Staggered terms are allowed- See details in Appointing Directors - above

Recall 109 – Removal of Directors- (1) Subject to 107(g), SH of a corp may by ordinary resolution at special meeting remove any director

o 107(g) votes for must be greater than product of number of required directors and votes against- (2) Where class has exclusive right to elect – that class must vote to remove- (3) Vacancy created may be filled at the SH meeting – per 107(b)-(e)

Amendment of By-Laws

Section 103 – Amendment of Bylaws- (1) Unless articles, bylaws or USHA otherwise provide, directors may, by resolution, make, amend, or

repeal any bylaws that regulate business and affairs of the corp- (2) SH must approve at next meeting of SH by ordinary resolution – may confirm, reject or amend- (3) Effective date is the date directors resolve it until confirmed or rejected by SH or ceases under (4)- (4) If rejected by SH, or directors don’t submit it to SH, bylaw ceases to be effective and no subsequent

resolution can be made by directors to make, amend or repeal bylaw having substantially the same propose or effect until confirmed by SH

- (5) SH proposal – SH that is entitled to vote at annual meeting may in accordance with 137, make proposal to make, amend or repeal bylaw

Review Financial Statements

155(1)

Annual Financial Statements- Subject to 156, directors of a corp shall place before SH at every annual meeting:

o (a) comparative financial statements as prescribed relating separately to (i) period from corp’s formation and ending not more than 6 months before annual

meeting or if completed a financial year, the period from end of last completed financial year to not more than 6 months before annual meeting AND

(ii) the immediately preceding financial yearo (b) report of the auditor, if any; ando (c) any further info respecting financial position of the corp and the result of operations

64

required by articles, bylaws or USHA at an annual meeting159 Copies to SH

- (1) Corp shall, not less than 21 days before annual SH meeting or before signing of resolution under para 142(1)(b) in lie of annual meeting, send a copy of the docs referred to in 155 to each SH, except to those who informed corp in writing that they do not want copies

- (2) Offence – corp that without reasonable cause, fails to comply is guilty of an offence and liable on summary conviction to a fine not exceeding $5000

Appoint an Auditor

161 Qualification of Auditor- (1) Subject to (5), person is disqualified if not independent of the corp, affiliates or D/O of

corp/affiliates- (2) Independence (a) is a question of fact;

o (b) person deemed not to be independent if he or his business partner (i) is a business partner, director, officer or employee of the corp or affiliates… (ii) beneficially owns or controls, directly/indirectly, material interest in securities;

or (iii) has been a receiver/receiver manager, liquidator or TiB of the corp/affiliates

within two years of his proposed appointment as auditor of corp162 Appointment of Auditor

- (1) Subject to 163, SH of corp shall, by ordinary resolution, at first annual SH meeting, and at each subsequent annual meeting, appoint auditor to hold office until close of next meeting

- (2) Auditor appointed under 104 is eligible under (1)- (3) If auditor is not appointed, incumbent auditor continues office until successor appointed- (4) Remuneration fixed by ordinary resolution of SH, if not, may be fixed by directors

163 Dispensing of Auditor- (1) SH of a non-distributing corp may resolve not to appoint auditor- (2) Such a resolution is only valid until next annual SH meeting- (3) Unanimous consent is required for resolution under (1), including SH not otherwise entitled to

vote169(1)

Examination by Auditor- Auditor shall make examination necessary to enable report on financial statements required to be

placed before SH, except statements in the period described by 155(1)(a)(ii) – previous financial year

Shareholder Meetings

132

Place of Meetings- (1) To be held at place within Canada as specified within the bylaws- (2) May meet outside Canada if place is specified in articles or all SH agree to meet at that place- (3) SH who attends meeting outside Canada is deemed to have accepted its location- (4)(5) Permits meetings by electronic means

133

Calling Annual Meetings- (1) directors of corp shall call annual meetings of SH (a) not later than 18 months after corp forms;

and (b) subsequently, not later than 15 months from previous meeting and not more than 6m from

65

corp year end- (2) Special meetings – directors may call special SH meetings at anytime

135

Notice of a Meeting- (1) Notice of time and place of SH meeting shall be sent within prescribed period to (a) voting SH; (b)

directors; (c) auditor of the corpo Reg 44 – prescribed time period is not less than 21 days and not more than 60 days before

meeting.- (2) Shorter periods may be prescribed for non-distributing corps if specified in articles/bylaws- (5) Only four things are ordinary business, the rest are special business

o Consideration of financial statements, auditor’s report, election of directors, and re-appointment of incumbent auditor

- (6) Special business SH meetings require notice that states (a) nature of that business with sufficient detail to permit SH to form reasoned judgement thereon; and (b) text of any special resolution to be submitted

136

Waiver of Notice- SH may waive notice in any manner, and attendance at the meeting is waiver of notice, except where

attendance is for express purpose of objecting to transaction of business on grounds that meeting is unlawfully called

139

Quorums- (1) Unless bylaws state otherwise, quorum of SH if holders posses a majority of shares entitled to vote

at the meeting or are represented by proxy- (2) Opening quorum is sufficient even if not present throughout the meeting- (4) Single SH meeting – that person present or in proxy constitutes a quorum

140

Right to Vote- (1) Unless articles provide otherwise, each share entitles the holder to one vote at SH meetings- (2) If body corp is a SH, corp shall recognize any individual authorized by resolution of the directors

of that body corp to represent it at the meeting of SH- (3) Powers of representative; (4) joint shareholders

141

Voting Procedure- (1) Unless otherwise provided by bylaws, voting at SH meeting shall be by show of hands except

where ballot is demanded by a SH or proxyholder- (2) Ballot – SH or proxy may demand a ballot either before or after any vote by show of hands- (3)(4) Electronic Voting – May be held in accordance with regulations for electronic voting

Reg 45 – outlines electronic voting requirements142

Resolution in Lieu of Meeting- (1) Except where written statement is submitted by director under s110(2),

o (a) resolution signed by all SH entitled to vote is valid as if passed at meeting ando (b) resolution in writing dealing with all matter required of SH and signed by all, satisfies all

requirements of this Act relating to SH meetings- (2) Copy of every resolution shall be kept with meeting minutes- (3) Unless ballot demanded, chairperson’s declaration of a resolution to be carried, once entered into

minutes, is proof of the fact without, absent evidence to the contrary143

Requisition of Meeting by SH- (1) Holders of not less than 5% of issued voting shares may requisition the directors to call a SH

meeting for purpose stated in the requisition- (2) Form may consist of more than on SH – shall state the business to be transacted at the meeting and

shall be sent to each director and to the registered office of the corp- (3) Directors shall call meeting unless (a) out of scope 134(3); (b) directors have called a meeting and

given notice under s. 135; or (c) out of scope 137(5)(b)to(e).- (4) If directors don’t do this within 21 days of receiving the requisition, any SH who signed can call

meeting- (5) Meeting shall be called as soon as possible – while complying with meeting procedures above- (6) Corp shall reimburse SH for requisitioning, calling and holding meeting

66

144

Meeting Called by Court- (1) On application of director or voting SH or Director, court may order a meeting of corp if

o (a) it is impracticable to call meeting within time/manner in which meets are to be calledo (b) it is impracticable to conduct meeting in the manner required by this Act/bylaws; Oro (c) court thinks the meeting should be called, held and conducted within the time/manner it

directs- (2) Court may vary the quorum required by bylaws or act- (3) Meetings held under this section are valid

NOTE: occurs where deadlock and corp is ungovernable – allows a single director/SH to have a court break the deadlock – may not actually work though – may refuse meeting for s. 137(5)

145

Court’s Review of Elections- (1) A corporation of a SH or director may apply to court to determine any controversy with respect to

an election or appointment of director or auditory of the corp- (2) Powers of the court – may make order it thinks fit including, within limiting the generality of

foregoing:o (a) order restraining director or auditor from acting pending determinationo (b) order declaring result of disputed election or appointmento (c) order requiring a new election or appointment, with direction for management until then,

ando (d) order determining voting rights of SH and persons claiming to own shares

Fundamental Changes

4 Fundamental Changes1. Amendment of Articles of Incorporation2. Continuation of a CBCA Corporation to Another Jurisdiction3. Extraordinary Sale, Lease or Exchange of All or Substantially All of a Corp’s Assets4. Voluntary Liquidation and Dissolution

Objective of Statutory Scheme:- Balance the right of the majority of SH to control over fundamental changes against the reasonable

expectations of the minority that the corp they originally invested in will continue to be governed by the same rules and will continue to carry on the same or similar business to the one carried on when the SH purchased the shares

o Allows SH to get out of the corp with the value they have obtained thus far

“Special Business” Notice- Notice under s. 135(6) is required

o Notice of meeting of SH at which special business is to be transacted is to state: (a) nature of that business in sufficient detail to permit SH to form reasoned judgement (b) the text of any special resolution to be submitted to the meeting

- If more than 50 SH, or the corp is a “distributing corp”, the mandatory proxy solicitation rules apply:o Section 149 – (1) mandatory solicitation of proxy; (2) exception for corps that are non distributing

and have 50 or fewer shareholders entitled to vote

Amendment of Articles- Generally amendment requires Special Resolution (173(1))- Special Notice of Amendment (175(1))- Generally, Special CLASS Vote is required (176(6)) – listed in 176(1)

67

- Dissenting SH entitled to FMV of shares (190(3)) – subject to financial solvency test (190(26))o Right to dissent found in 190(1)(a) and (b)

173

Amendment of Articles- (1) Subject to 176 and 177, articles of corp may by special resolution be amended to: (listed)

o (a)-(o) – things that can be changed in articleso (i, j, k, l) – ignoreo (g) – Change in the designation of all or any of its shares, and add, change or remove any

rights, privileges, restrictions and conditions, including rights to accrued dividends, in respect of all or any of its shares, whether issued or unissued

- (2) Directors are allowed to discontinue process of amending articles, where reasons for amendment disappears (so long as authorized by the SH in the special resolution)

- (3) Directors may change a numbered corp name to a verbal name without approval of SH175

Special Notice of Proposal to Amend- (1) Subject to (2), director or voting SH, in accordance with 137, make proposal to amend articles- (2) Notice of SH meetings shall set out the proposed amendment, and where applicable, shall state that

dissenting SH is entitled to be paid FMV of their shares in accordance with 190o Failure to make that statement does not invalidate the notice

176

Class Vote - (1) SH are entitled to vote separately as a class on a proposal to amend articles where the change

effects that class (unless articles otherwise provide for (a)(b)(e)),o (a) increase/decrease in number of shares issuedo (b) effect an exchange, reclassification or cancellation of all or part of the shares of such classo (c) add, change or remove the rights, privileges, restrictions or conditions attached to the

shares of such class…o (d) increase rights or privileges of any class of shares having rights or privileges equal or

superior to the shares of such a classo (e) create a new class of shares equal or superior to the shares of such classo (f) make inferior class of shares equal or superior to the shares of such classo (g) exchange all or part of the shares of another class into shares of such class oro (h) constrain issue, transfer or ownership of shares of such class or change/remove such

restraint- (5) Right to vote – SH has right to vote whether or not shares of a class have voting rights- (6) Separate resolutions – proposed amendment that attracts special class vote under (1), must be

approved by special resolution of each class entitled to vote177

(1) Delivery of Articles- After amendment adopted under 173, 174 or 176, articles of amendment shall be sent to Director

178

Certificate of Amendment- On receipt of articles of amendment, Director shall issue certificate of amendment

179

Effect of Certificate of Amendment- (1) Amendment effective on date shown in certificate of amendment and articles amended accordingly- (2) Rights preserved – amendments do not affect existing cause of action or claim or liability to

prosecution in favour of or against the corp or its directors or officers, or any civil, criminal or administrative action or proceeding to which corp/D/O is a party

Continue (Export) to Another Jurisdiction- Requires special resolution to pass (s.188(5))- Process requires special notice to shareholders (s.188(3))

68

- Every SH is entitled to vote, even if no voting rights (s. 188(4))

Section 188 – Continuance – Export- (1) Subject to (10), corp may apply to another jurisdiction for continuance to that jurisdiction if

o (a) Corp is authorized by SH in accordance with this section to make application ando (b) Satisfies Director that its proposed continuance will not adversely affect creditors/SH

- (3) Notice of a meeting of SH shall be sent to each SH in accordance with s. 135o Shall state that dissenting SH is entitled to be paid FMV of their shares as per s. 190

- (4) Every SH has the right to vote- (5) Authorized when SH vote it so on a special resolution- (6) directors of a corp may, if authorized by SH at the time of approving an application for continuance,

abandon the application without further approval of the SH- (7) Director SHALL file notice and issue a certificate of discontinuance upon receipt of satisfactory notice

of continuance from new jurisdiction- (8) Notice referred to in (7) is deemed to be the articles- (9) This Act ceases to apply to the corp on the date of the certificate- (10) Corp shall not be continued to a new jurisdiction unless those new laws provide in effect that

o (a) property of the corp continues to be property of the corpo (b) liabilities continue to the new corpo (c) existing causes of action, claim or liability is unaffectedo (d) civil, criminal or administrative action or preceeding pending may be continuedo (e) conviction may be enforced

Extraordinary Sale, Lease or Exchange of Assets- Requires SH approval (s. 189(3))- Special notice must be delivered to SH (s. 189(4))- SH have power to authorize transaction, and to fix or authorize the directors to fix the terms and conditions

of the transaction (s. 189(5))- Each share carries the right to vote (s. 189(6))- Class is entitled to vote separately if it is affected by transaction differently than another class (s. 189(7))- Approval is by special resolution (s. 189(8)- Right to dissent (s. 190(1)(e)) – FMV (s. 190(3)) – subject to financial solvency (190(26))

Section 189 – Extraordinary Sale, Lease or Exchange- (3) Sale, lease or exchange of all or substantially all the property of a corp other than the ordinary course of

business of the corp requires approval of the SH in accordance with (4)-(8)o In tax law, “all or substantially all” means 90% or more

- (4) Notice of Meeting – comply with section 135, to all SH and shallo (a) include summary of the agreement of sale, lease or exchange ando (b) state that dissenting SH is entitled to be paid FV for their shares in accordance with 190, but

failure to make this statement doesn’t invalidate the sale, exchange or lease- (5) SH may authorize the sale, lease or exchange and may fix or authorize the directors to fix any of the

terms and conditions- (6) Right to Vote – All shareholders have right to vote- (7) Class vote – Class entitled to vote separately ONLY if such class is affected by the sale, lease or

exchange in a manner different from the shares of another class- (8) Special resolution required (2/3 vote)

69

Voluntary Liquidation and Dissolution- Director or voting SH may propose liquidation and dissolution (211(1))- Special notice must be sent to each SH (211(2))- Must be approved by special CLASS resolution (211(3)- Dissent and appraisal remedy is not available for this type of fundamental change!- See section 211 for specific admin steps to dissolution

Shareholder Initiatives

SH Proposals- Rebalancing of powers between directors and SH – encourages SH to take more control of corp

103(5)

SH Proposal – By-Laws- SH entitled to vote at annual meetings, in accordance with 137, may make a proposal to make,

amend or repeal a bylaw137 Shareholder Proposals – Procedure

- (1) Subject to (1.1) and (1.2), SH that are entitled to vote at annual meetings mayo (a) submit notice of any matter that SH proposes to raise at the meeting (proposal) ando (b) discuss at the meeting any matter in respect of which SH would have been entitled to

submit a proposal- (1.1) Eligibility – To be eligble, SH must have held prescribed number of shares for prescribed

amount of time OR must have support of person who in aggregate meets the requirementso Reg 46 – 1% of outstanding voting shares or FMV of $2000; for 6 months before proposal

- (1.2) Information – Proposal must be accompanied by (a) name, address of supporters; and (b) number of shares held by supporters, and date acquired

- (1.4) proof may be requested that person meets (1.1)o Reg 47 – Corp may reuest proof within 14 days; SH provide proof within 21 days

- (2) Information circular – Corp that solicits proxies shall set out the proposal in the management proxy circular required under 150

- (3) Supporting statement for the proposal may be sent out with proxy circularo Reg 48 – 500 word limit

- (4) Proposal may include nomination of director if signed by SH or SHs with aggregate 5% of voting shares of the corporation

- (5) Corp can refuse to include proposal in management proxy circular for reasons:o (a) didn’t meet minimum number of days to notify corp of proposal

Reg 49 – 90 dayso (b) primary purpose of proposal is to enforce a personal claim, redress or grievanceo (b.1) does not relate to business or affairs of the corpo (c) failed to present proposal at meeting that had been included in proxy circular

Reg 50 – within two yearso (d) substantially same as a proposal within prescribed time that received less than

prescribed amount of support at the meeting Reg 51 – 3% at 1st meeting; 6% at two meetings; 10% at three+ metings; 5 years

o (e) rights of this section are so being abused to secure publicity- (5.1) if person fails to hold and maintain the requirements of (1.1) up to the day of the meeting,

corp is not required to set out any proposal in the management proxy circular for prescribed time o Reg 52 – two years

- (6) No corp or person acting on its behalf incurs any liability for circulating proposal- (7) Notice of refusal – notice is given to proposer if corp refuses to include a proposal in circular- (8) Proposer may apply to court for order after being refused to make proposal in (7)- (9) Corp may apply to court for order to omit the proposal from management proxy circular- (10) Director entitled to notice – applications under (8) and (9) shall give Director notice of the

application and Director is entitled to appear and be heard

70

175(1)

Proposal to Amend Articles- Subject to (2), director or voting SH may, in accordance with 137, make a proposal to amend

articles- See fundamental changes for specifics; (2) – notice requirement

211(1)

Proposing Liquidation and Dissolution- Directors or voting SH may, in accordance with 137, make a proposal for, the voluntary liquidation

and dissolution of a corporation

Proxy Solicitation and Circulars- SH do not have to physically be at every meeting – they can send proxy-holders- Two main types of proxy solicitation rules

o Those which apply to management and those that apply to dissenting SH Dissenting SH are those trying to make changes contrary to director’s wishes

Approach:Generally:

- Management must send proxies if it’s a distribution company or has more than 50 voting SH (149(2))First:

- Is there a solicitation being made? – look to s. 147 “solicitation”o If falls within s. 147(b) – then not a solicitation

Second:- If it is a solicitation, must provide dissident proxy circular or management proxy circular (150(1))

o Must comply with regulations (54-57, 63-64 and 67-69)o 154 – restraining order

147

Definitions - “Socliciation”- (a) Includes:

o (i) request for proxy whether o not accompanied by or included in form of proxyo (ii) request to execute or not to execute a form of proxy or to revoke proxyo (iii) sending of a form of proxy or other communication to a SH under circs reasonably

calculated to result in the procurement, withholding or revocation of proxy, ando (iv) sending of a form of proxy to a SH under s. 149

- (b) Does not include:o (i) sending of a form of proxy in response to an unsolicited request made by SHo (ii) performance of admin acts or professional services on behalf of a person soliciting proxyo (iii) sending docs referred to in 153o (iv) solicitation by person in respect of shares of which person is beneficial ownero (v) public announcement by SH of how SH intends to vote and reasons for it

Reg 67 – Speech in public forum or press release, opinion, broadcast, etco (vi) communication for purpose of obtaining the number of shares required for SH proposal

under s. 137(1.1) – recall this was to make a proposal had to have 1% or $2000o (vii) communication, other than solicitation on behalf of management, that is made to SH, in

any circs that may be prescribed (descibred in Reg 68)148

Appointing Proxy Holder- (1) SH entitled to vote may appoint a proxyholder or one or more alternates, who do not have to be

SH, to attend and act at the meeting as authorized by proxy and with authority conferred by proxy- (2) Execution of proxy – proxy shall be executed by SH in writing- (3) Validity – proxy is valid only at meeting in respect of which it is given (or adjournments)- (4) Revocation – SH may revoke proxy

o (a) by dpositing an instrument in writing executed by SH authorizing in writing (i) at registered office of the corp up to day before meeting, or

71

(ii) with chairman of the meeting on day of meeting oro (b) in any other manner permitted by law

- (5) Deposit of proxy – directors may specify in a notice calling meeting of SH a time not exceeding 48 hours before the meeting before which time proxies must be deposited with corp

149

Mandatory Solicitation- (1) Subject to (2), management of corp shall send form of proxy to each SH when sending notice of

SH meeting - (2) Exception – not required if it (a) is not a distributing corp and (b) has 50 or fewer voting SH- (3) Offence – if fail to comply without reasonable cause, corp is guilt of offence – summary

conviction to a fine not exceeding $5000- (4) D/O of corp who knowingly authorized, permitted or acquiesced in commission of offence is party

to and guilty of offence – summary conviction – fine up to $5000 or prison up to 6 months, or both150

Soliciting Proxies- (1) Person shall not solicit proxies unless

o (a) where on behalf of management of a corp, management proxy circular ORo (b) a dissident’s proxy circular stating purpose of solicitationo is sent to the auditor, each SH whose proxy is solicited, directors and for (b) to the corp

- (1.1) Exception – Solicitation can occure without dissident’s proxy circular if 15 or less SH- (1.2) Exception – Solicitation can occur without dissident’s proxy circular if the solicitation, in

prescribed circs, is conveyed by public broadcast, speech or publication – Reg 69- (2) Copy of either solicitation must be sent to Director along with connected docs- (3) Offence – failure to comply – summary offence - $5000 and/or prison less than 6months- (4) D/O of corp who knowingly authorized, permitted or acquiesced in commission of offence is party

to and guilty of offence – summary conviction – fine up to $5000 or prison up to 6 months, or both151

Exemption by Director- (1) On application, Director may exempt person from any requirements in 149 and 150(1) –

retroactive- (2) Director shall set out in a publication the particulars of the exemption and reasons

152

Attendance at Meeting- (1) person who solicits proxy or is appointed proxyholder shall attend meeting in person and comply

with directions of the SH who appointed him/her- (2) Rights – proxyholder or alternate has same rights as SH to speak at meeting in respect of any

matter, to vote (ballot or hands), except for where proxyholder has conflicting instructions from more than one SH

- (4) Offence – proxyholder/alternate who without reasonable cause fails to comply with directions of SH is guilty of summary offence - $5000/6months

154

Restraining Order- (1) If form of proxy, management proxy or dissident’s proxy contains an untrue statement of material

fact or omits to state material fact required to make statement not misleading, an interested person or the Director may apply to court, and court may make any order it sees fit, including:

o (a) order restraining solicitation, holding of meeting, implementing or acting on any resolution from the proxy

o (b) order requiring correction of any form of proxy or proxy circular and further solicitationo (c) order adjourning the meeting

- (2) Notice to Director – applicant shall give notice to Director of application and Director is entitled to appear and be heard

Brown v. Duby (1980 BCSC)- Same corp as Jacobson and Unite Canso (no SH could have more than 1000 votes – invalid because class

members have the same rights) – distributing corp, majority SH are US residents- Application for interlocutory injunction restraining SH-committee (Jacobson) from continuing to solicit

proxies (application under 154)

72

o Dissident SH upset with management – have not been making much moneyo Brown (management) claims dissident committee not complying with proxy ruleso First letter went to US SH only; second went to all SH – claim that these were unlawful

- Held:o Second letter was fine – First communication was at issue

Stated committee was established to oppose management - Intention to solicit proxies o Even though no proxy forms sent, it indicated it would send proxy forms, but asked SH to refrain

from submitting management proxy until dissident proxy circular could be read as wello 147(a)(i) includes request for proxy whether or not accompanied by proxy; also satisfied (ii)o Should have complied with Canadian corp law – definitely complied with US law

- Remedy:o Management seeking injunction from future communications with SHo Injunction shouldn’t be ordered unless clearly required to protect SH interestso Failure was one of provision of information that is required by law – no lack of discussion or

campaigning on either side here – protect ability to speak and communicate Shutting up dissidents is not in best interests of SH

o On balance of convenience, court did not grant injunction in this case- Notes:

o Likely wouldn’t have counted as a solicitation in the new regime – given number of exemptions Likely reg 68

o Since this case there has been a large expansion in ability to communicate with SH without the expensive and time consuming proxy procedures

Access to Other Corp Information

Recall Section 20(2) – Directors Records- Accounting records and minutes from directors meetings are to be kept at registered office- Also Recall (1) was for articles/bylaws/USHAs; SH minutes; securities register

Recall Section 21 – Access to Corporate Records- (1) SH and creditors can examine the records in 20(1); if distributing corp then any person w/ fee- (2) SH is etniteled to one copy of articles, bylaws and any USHAs

o Note – SH do not have access to directors minutes under 20(2)

Recall Section 155 – Annual Financial Statement- (1) Subject to 156, directors shall place before SH at every annual meeting:

o (a) comparative financial statements relating separately to 1st period, or currently completed financial year and immediately preceding financial year

o (b) report of auditor if any; ando (c) further information respecting financial position of the corp required by articles, bylaws/USHA

- (2) Exception – may be omitted if reason for omission is given to SH in a note at meeting

Section 159 – Copies to SH- (1) Corp shall, at least 21 days before SH annual meeting, send copy of docs referred to in 155 to each SH,

except for those who have informed corp that they don’t want the docs- (2) Offence – failure to comply without reasonable clause is a summary offence - $5000

73

Closely Held Corporation- Governance of small corps is significantly different- There are various provisions that really only apply to closely held corps

132(2) – Place of SH Meeting- If not in Canada, all SH have to agree to have it elsewhere – this would never happen with large corp

139(4) – Single SH Meetings- Where single SH only, that SH constitutes a SH meeting

142(1) – Unanimous written resolution is as effective as a SH meeting- With millions of SH, that’s really not an option

163(3) – Dispensing of an auditor- Non distributing corps can dispense with auditor by unanimous SH consent

102(2) – Number of Required Directors- Non-distributing corp only requires one director; distributing, minimum of 3

117(1) – Unanimous Written Resolution of Directors- Unlikely in major companies – too many directors and there’s too much going on to satisfy duty

o Repap – directors need to realize when they’re lacking information to make informed decision114(8) – Single Director Meeting

- Where only single director, that director constitutes a director’s meeting

Vote Pooling Agreements- SH can agree to vote shares together to form a pool of shares who vote together

o Written agreement may be made to this effect (145.1)- Agreement is binding on SH – remedy for breach depends on contract terms- Factional voting – ensures your pool of voters maintains power/control- Cannot be used to dictate what SH would do in management role! (Ringuet)

o Referred to as “fettering the director’s discretion”o Based on director’s obligation to inform themselves and make best decision for corp

Section 145.1 – Vote Pooling Agreements- Written agreement between two or more SH may provide that in exercising voting rights the shares held by

them shall be voted as provided in the agreement

Ringuet v. Bergeron (1960 SCC) – Limits on what SH can agree to in agreement – no director decisions- 7 SHs each hold 350 shares – 3 of them are minority and work together to acquire 4th – split between them- Together they have majority interest – make an agreement to vote together- Make Ringuet president, Panget VP and Bergeon secretary/treasurer – R gets tie-breaker vote

o Party that breaches k must forfeit shares to the others- Enter a second agreement with Jean – but first agreement was never abandoned

o Try to get rid of B – meeting without B (no notice) – B voted out – Appoint R, P and J- B lawsuit against R and P – defence was that agreement fettered director’s discretion – invalid

74

- Held:o Breach of agreement – shares forfeited to B – HE BECAME SOLE MAJORITY HOLDER!!o Defence failed – agreement to vote as a block of SH and agreement to vote as directors differ

Agreement here only determined how they would vote as SH – so this is ok Breach resulted from R and P’s failure to honour agreement to vote B in

- Dissent:o Rely on the fiduciary duties of directors

- Notes:o Problem arises – once directors, they appear to have an agreement on appointment of officers –

these would be directors’ decisions – so agreements to appoint officers would likely be invalid SCC said that wasn’t part of the agreement – just to vote B to the board – SH duty.

Unanimous Shareholder Agreements- Used primarily amongst small closely held corps- Also seen in parent corps that own 100% of the shares of a subsidiary (146(2))- USHA is more than just a SH agreement – it is a fundamental change to the normal governance structure

o Fettering director’s discretion is allowed in this context (146(6))

Requirements for Unanimous SH Agreements:- Lawful written agreement of all SH of a corp (may included non-SH) – 146(1)- Must restrict all or part of the powers of the directors to manage affairs of the corp – 146(1)

o Note, SH assume liabilities that would normally be associated to directors – 146(5)o May fetter the discretion of directors with a USHA – 146(6)

Section 2(1) – Definitions- “director” – person occupying the position of director by whatever name called- “Unanimous Shareholder Agreement” – an agreement described in 146(1) or declaration of a SH described

in 146(2)

Section 20(1)(a) – USHAs must be available at the corporate registered officeSection 21(1) – SH, creditors, Director and any other person may examine docs in 20(1)

Section 146 – Unanimous Shareholder Agreement- (1) Lawful written agreement among all SH, or among all SH and another person, that restricts, in whole or

in part, the powers of directors to manage, or supervise the management of, the business and affairs of the corp is valid

- (2) Single SH – where SH owns all shares, he/she may make declaration that restricts powers of directors and that declaration is deemed to be a unanimous shareholders agreement

- (3) Constructive party – Purchaser or transferee of shares is deemed party to USHA- (4) Notice – If notice is not given to purchaser/transferee of existence of USHA, purchaser/transferee may,

no later than 30 days after becoming aware, rescind the transaction- (5) Rights of SH – Parties given power to manage or supervise management of business and affairs have all

the rights, powers, duties and liabilities of a director (with respect to those powers restricted by USHA), including any defences available to the directors – and directors are relieved of those rights, powers, duties and liabilities, including those under 119

o Note: 119 is liability for wages section- (6) Discretion of SH – nothing in this section prevents SH from fettering their discretion when exercising

powers of directors under a USHA

Recall Section 115(3) – Powers reserved for Director – Can not Delegate- With a USHA, even these core decisions can be taken from directors

75

- SH step into role of directors for liability – recall section 42 – directors liable for shortfalls- Must always ask whether they are directors, or whether they are SH acting under the power of USHA

Duha Printers (Western) Ltd v. The Queen (SCC) – Principles for USHAs – constitutional/contractual hybrid- Complex tax question- Issue: what constituted control of the corp and whether there is a change for tax purposes?- Principles:

o Distinction between ordinary SH ks and USHAs – has there been a transfer of director’s powers? If not, then it is not a USHA, it is just an SH k – no fettering of discretion

o USHAs are corporate law hybrids – they are constitutional and contractualo Small companies often see corp as their own – they should be able to take direct control of ito USHA operates as a fundamental change in the balance of power and management of corp

Recognizes that underlying relationship amongst few SH is that they see themselves as managing the corp business and affairs – likens to partnership arrangement

Contract that adjusts the constitutional nature of the corp Enforceable on same basis as articles and by-laws – enforceable against corp and officers

- Held:o USHA took power to issue shares away from directors and transferred it to SH

Yes this is a valid USHA, and yes that changed the control of the corp

76

SHAREHOLDER REMEDIES

Personal Action- Where individual SH makes claim about individual rights as SH

o They didn’t get a dividend or aren’t on the SH registry etc.- Usually just a mistake or some technical reasons- Often swept into “Oppression Remedy”

Derivative Actions- D not really need to know anything about this- Recall Cook and Deeds

o Company was wrong – but SH had to bring action as a stand-in for the corp because corp wouldn’t sue itself – that’s a derivative action

- Requires a prima facie case be proven before granted – leave of the court required- Use oppression remedy instead

Oppression Action- Describes conduct by a more powerful corporate player against a weaker- “…conduct complained of should at the lowest involve a visible departure from the standards of fair dealing

and a violation of the conditions of fair play on which every SH who entrusts his money to a company is entitled to rely.” – Elder v. Elder & Watson (1952)

- CBCA – expands to acts or omissions which are “unfairly prejudicial to” or that “unfairly disregard the interests” of a SH, creditor, director or officer. – s. 241

o Must look to expectations of the parties – Ebrahemiem

Requirements for Oppression:- Complainants – s. 241(1):

o SH, former SH, D/O, former D/O, Director, or any other person deemed by court – s. 238o Creditors have been held as valid complainants – Downtown Eatery; Sidaplex Plastics

Also note, 142(2) – oppressive conduct includes against creditor even though not in defno Persons who can show they were induced to become SH are included – Edson Packaging

- Conduct that Constitutes Oppression:o Act or omission of corp/affilates; carrying of business or affairs of corp/affiliates; or through the

exercise of directors’ powers – s. 241(2) Test for Oppression found in BCE 1. Reasonable expectations breached?

77

2. Oppressive, unfair prejudice or unfair disregard? o Indicators:

Where there’s lack of commercial purpose to the action taken Lack of good faith – indicator, but not required for oppression action (KeepRite) Discrimination between SH – particularly benefit to the majority Lack of disclosure Plan to eliminate a minority SH or isolated director (Ferguson)

Each step alone in a plan may not be oppressive, but together they can be- Powers/Remedies

o Court can do almost anything – s. 241(3) – listed remedies Limited by financial solvency test – s. 241(6) for (3)(f or g)

o Must not usurp function of directors or supplant control of majority – KeepRiteo Remedy should aim to rectify oppression, not just punish oppressor - Naneff

238

Definitions – Complainant- (a) SH, former SH of corp and affiliates- (b) director or officer or former D/O of corp or affiliates- (c) the Director; or- (d) any other person who, in discretion of a court is a proper person to make application

241

Oppression Application- (1) Complainant may apply to court for an order under this section- (2) Court may make order to rectify conduct that is oppressive or unfairly prejudicial or that unfairly

disregards the interest of any SH, creditor, director or officer from:o (a) any act/omission of corp/affiliates;o (b) any carrying of business or affairs of the corp/affiliates; oro (c) any exercise of powers of the directors of the corp/affiliates

- (3) Powers of the Court – court may make any interim or final order it thinks fit including: listedo (a) may restrain conduct complained of o (c) amend articles, bylaws or creating USHAs, o (d) exchange securities, o (e) replace directorso (f) direct corp or any person to purchase securities, o (g) direct corp or any person pay SH any monies paid for those securities o (h) set aside transaction/contract to which corp is a partyo (i) produce financial statements, o (j) order of compensation for aggrieved person o (k) rectify register or other records under 243o (l) an order liquidating and dissolving the corpo (m) order directing an investigation be made; ando (n) an order requiring trial of any issue – this is usually the case

- (4) Duty of Director – directors must comply with orders made under this section, and they shall not allow further amendment to articles or bylaws without court’s consent

- (5) Dissent Exclusion – SH is not entitled to dissent under 190 if an amendment to articles is effected o So no FMV for dissenting SH

- (6) Financial Solvency – Corp shall not make payment to SH if that is the order made by the court under (3)(f or g) if there are reasonable grounds to believe that

o (a) corp will be unable to pay its liabilities as they become due; ORo (b) realizable value of the corp’s assets would thereby be less than aggregate of liabilities

- (7) Applicant may apply in alternative for an order under 214 (allows applicants the SH remedy)242

Evidence of SH Approval Not Decisive- (1) Application shall not be stayed/dismissed by reason only that SHs have approved a breach, but

evidence of that SH approval may taken into consideration in making orders under 214, 240 or 241- (2) Notice and approval - Application shall not be stayed, discontinued, settled or dismissed without

78

approval of the court and if court determines that complainant will be substantially affected by it, court may order any party give notice to the complainant

248

Summary Application to Court- Applications under this Act can be made in summary manner

190

Right to Dissent- (1) SUBJECT TO 191 and 241, SH may dissent if corp if the corp resolves to…listed

o See 241(5) – right is excluded- (3) – Entitled to fair market value for shares

o Note: cannot pay FMV if would fail financial solvency test (s.190(26))

Brant Investments v. KeepRight Inc (1991 ONCA) – Principles of the Oppression Remedy- ICG is sole SH of ICM; ICM is sole SH of EP and 65% SH of KeepRite – thus ICG controls the three- ICG decided to integrate assets and operations of its three subsidiaries – wanted KR to purchase ER/ICM- KR set up independe committee of directors to investigate fairness of proposed transaction

o Recommended reductionin purchase from $24M to $20M – approved by full board of KRo In order to make the purchase, rights offering would have to be made

- Minority dissented to resolution to increase authorized capital (amendment to articles) – oprresion action- Held:

o 1. There is no fiduciary duty by majority SH to minority SH – oppression remedy makes broadening fiduciary scope unnecessary

o 2. No obligation by complainant to demonstrate bad faith in oppression action Opression can occur without intent, dishonesty or disloyalty

o 3. Section 241 should be exercised with care – minority SH must be protected from unfair treatment, but court must not usurp function of the board of directors to manage the company, nor should it eliminate/supplant the control by majority

Board has valid decision-making power – not to second-guess where exercised fairlyo 4. Former SH are still able to bring oppression action under 241

Dissenting SH had their shares bought out under 190 and thus have no SH rights

Westfair Foods Ltd v. Watt (1991 ABCA) – Ordered shares be repurchased by corp- New divident policy tid not maintain fair balance between competing interests of common SH and class A

(preferred) SH- Recall – court held that Class A SH did not have reasonable expectation that corp would maintain a

permanent policy for accumulating surplus- However, on Oppression:- Held:

o In all the circs, there had been unfair disregard for Class A SH interests and ordered that the shares be purchased at price to be ascertained at subsequent hearing

Ferguson v. Imax (1983 ONCA) – Plan to squeeze out a SH/director may be oppressive in it’s entirety- Three couples incorporated; husbands received voting common shares, wives received non-voting B shares

with a preference to a .05 per share dividend per year – after which, equal participation in dividends- Mrs. F was actively involved in business – received little or no remuneration – divorced

o F was discharged by company – company only distributed the preferential dividend and held rest- Special resolution – class B shares would be converted to non-voting class A shares

o F could not block resolution even though class B would have special class resolution vote- Held:

o Resolution was the culminating event in a lengthy course of oppressive and unfairly prejudicial conduct

o Company prohibited from implementing the resolution

Naneff v. Con-Crete Holdings Ltd (1995 ONCA) – Remedy should rectify oppression, not aim to punish- Family business owned by father NN – transferred equity to two sons A and B equally, retained voting

79

o A and B were officers/directors – A got involved with woman that family didn’t likeo A thrown out of home, removed as director and officer – income from business reduced drastically

- At trial, actions found oppressive – remedy was for business to be publically sold- ONCA:

o Agreed with oppression finding, but held that remedy granted was improper – it did not seek to rectify oppression, it just sought to punish NN – inappropriate – gave A more than he ever could have expected – wouldn’t have been able to sell the company even if he was still there

o Correct remedy was to order NN and B to purchase A’s shares at FMV, without minority discount

Sidaplex-Plastic Suppliers Inc v. The Elta Group Inc (1998 ONCA) – Creditor is a valid claimant- Creditor was seeking oppression remedy- Small company, L was sole SH, director and officer; Sidaplex had judgement against EG – bank offered

security to pay EG’s debt – defaulted on debt – non-intentional on the part of L- EG sold assets and paid off other debts, but didn’t pay Sidaplex – Sidaplex claims against L personally- Held:

o Oppression order made against Lo No bad faith on L’s part, circs amounted to unfair prejudice or unfair disregard for SPS’s interesto L was personally liable for the debt owed by EG to SPS

“REPAP” UPM-Kymmene Corp v. UPM-Kymene Miramichi Inc (2002 ONSC aff’d ONCA)- Recall: claims for breach of director’s duties and oppression claim by SH- Claim – interests of SH were unfairly disregarded as a consequence of the actions of Berg and the board of

directors in approving the employment agreement for Berg- Held:

o This action saddled Repap with a huge liability and no corresponding benefit to SHo Set aside the agreement – appropriate remedy

BCE Inc v. 1976 Debentureholders (2008 SCC) – LEADING CASE – Test for what constitutes oppression- Investors (led by Tearcher’s Pension Board) bid for 100% control of the shares of BCE

o Purchase involved substantial borrowing and guarantee of BCE’s debt by subsidiary Bell Canada- 97.3% of BCE’s SH approved plan – Bell Canada debenture holders opposed the transaction and applied for

relief under s. 241 for oppression – trading value of their debentures would decline as result of the plan and they may lose their investment-grade status – held primarily by sophisticated financial bodies

- BCE set up strategic oversight committee to determine which takeover bid would be acceptedo SOC recommended Teacher’s bid – all bids had debt associated to themo Agreed on purchase price 40% higher than public price – debentures lost investment-grade and 20%

- Held:o There was no oppression hereo Directors may consider interests of SH, employees, suppliers, creditors, consumers, governments

and the environment in determining the best interests of the corp and fulfilling their fiduciary dutyo Courts should accord deference to the reasonable decisions of directors – business judgement

- Test: o First, whether reasonable expectations have not been met (threshold)

Regard to specific facts, relationships at issue and entire context, recognizing that there may be conflicting claims and expectations between stakeholders

Commercial practice is significant in forming reasonable expectations Size, past practice, representations and agreements

May be impossible to meet all expectations in business reality – duty to corp, not a group o Second, consider whether the conduct amounts to “oppression”, “unfair prejudice” or “unfair

disregard” Oppression – coercive and abusive conduct, suggesting bad faith Unfair prejudice – less culpable state of mind, but unfair consequence

80

Unfair disregard – ignoring an interest of a stakeholder, contrary to reasonable expectation

Actual unlawfulness is not required – remedy focuses on fairness and equity - Applied:

o Did debenture holders have reasonable expectation that investment grade would be maintained? They did not – sophisticated financial relationship – could have protected with contract No evidence that this could even have been achieved

o Did they have reasonable expectation that directors would consider interests in maintaining value? In either case, directors did consider interests of the debenture holders Contractual terms of debentures would be honoured, but nothing more – that’s fine

- Ratio:o In resolving conflict between groups of corp stakeholders, directors must act in a fair manner and in

the best interets of the corp Here, best interest of the corp favoured acceptance of the offer

- Notes:o Recall Westfair found oppression w/out reasonable expectation requirement

Compliance and Restraining Orders

Section 247 – Restraining or Compliance Order- If Corp, D/O, employee, agent, auditor, trustee, receiver, or liquidator of corp does anything in

contravention of this Act, the corp’s articles, bylaws or USHA, a complainant or creditor may, in addition to other rights, apply to court for an order directing compliance with/restraining any such persons from acting in breach

o Court may so order if it sees fit.

Section 248 – Summary Application to Court- Where this Act states that an application can be made to the court, that application can be made in a

summary manner, subject to any order respecting notice to interested parties or costs or order court sees fit

Rectification of Corporate Records

Section 243 – Application to Court to Rectify Records- (1) If name of person is alleged to have been wrongly entered / retained / deleted or omitted from the

registers or other corp records, the Corp, SH or any other aggrieved person may apply to court for order that records be rectified

- (2) Notice to Director – Applicant under this section will give notice to Director – who can attend and be heard in person or by counsel

- (3) Powers of the Court – may make any order including:o (a) order requiring register to be rectifiedo (b) order restraining corp from calling or holding SH meetings or paying dividends before

rectificationo (c) order determining the right of a party to have their name entered/retained/deleted/omitted from

records; ando (d) order compensating a party who has incurred a loss

81