Sole Proprietorship................................................................................................................ 4Registration......................................................................................................................................... 4

Agency......................................................................................................................................... 6Actual Authority................................................................................................................................. 6

Express Actual Authority:.............................................................................................................................6Implied Actual Authority:.............................................................................................................................6

Ostensible Authority........................................................................................................................ 7Breach of Warranty Authority...................................................................................................... 8Duties of the Agent to the Principal............................................................................................ 8

Fiduciary Duties................................................................................................................................................8Duties of the Principal to the Agent............................................................................................ 9Events of Termination..................................................................................................................... 9Ratification........................................................................................................................................ 10Undisclosed Principal.................................................................................................................... 11

Partnership............................................................................................................................. 11General Partnership P/P.............................................................................................................. 11

Formation of a Partnership:.....................................................................................................................11Name/Registration and Liability:..........................................................................................................15Default Contract.............................................................................................................................................15Ending a Partnership...................................................................................................................................16Partnership is not a separate legal entity...........................................................................................17Fiduciary Duties of Partners.....................................................................................................................18Liability of Partnerships to Third Parties...........................................................................................19

Limited Partnership LP/P............................................................................................................21Limited Liability Partnership LLP.............................................................................................24

Corporation: General........................................................................................................... 26Reasons to Incorporate (Or Not To).........................................................................................27Closely Held Corporation............................................................................................................. 28Constitutional Jurisdiction.......................................................................................................... 28

Scope of Provincial Power.........................................................................................................................28Scope of Federal Power..............................................................................................................................29Overlapping Provincial and Federal Jurisdiction............................................................................30Extra-Provincial Incorporation...............................................................................................................31

Choosing Jurisdiction of Incorporation...................................................................................33The Incorporation Process.......................................................................................................... 33

Federal............................................................................................................................................................... 33Provincial..........................................................................................................................................................35Post Incorporation Process – Getting Up and Running................................................................35Subsidiaries and Affiliates.........................................................................................................................37

Corporate Status.............................................................................................................................. 38The Corporate Veil.......................................................................................................................... 40Lifting the Corporate Veil.............................................................................................................41Requirement to Display the Corporate Name.......................................................................43Reincorporation/Continuance...................................................................................................44Pre-Incorporation Contracts.......................................................................................................46

Summary of the Common Law:...............................................................................................................46Statutory Modification:...............................................................................................................................48

Ultra Vires Acts of Certain Corporations.................................................................................50

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Shares and Shareholders..............................................................................................................51Preferred Shares:...........................................................................................................................................53Access to Information about Shares.....................................................................................................54Issuing and Paying for Shares:.................................................................................................................54Share Rights and Restrictions:.................................................................................................................55

Dividends........................................................................................................................................... 57Repurchase and Redemption......................................................................................................59Dissolution Rights on Liquidation or Winding Up:.........................................................59

Corporate Governance: Directors and Officers...........................................................61Appointment and Removal of Directors.................................................................................61

Who can be Elected Director:...................................................................................................................61Who can be Appointed Officer:...............................................................................................................61Term of office:.................................................................................................................................................62Vacancies:......................................................................................................................................................... 63

Meetings of Directors.................................................................................................................... 64Quorum..............................................................................................................................................................64Notice..................................................................................................................................................................65Validity of Acts:...............................................................................................................................................65Resolution in Lieu of Meeting:.................................................................................................................65Dissent:..............................................................................................................................................................66

Power of Directors..........................................................................................................................66Common Law on Delegation.....................................................................................................................68

Operation of the Boards of Public Corporations..................................................................69

Duties of Directors and Officers.......................................................................................70Fiduciary Duty.................................................................................................................................. 71

Transacting With the Corporation.........................................................................................................71Taking Corporate Opportunities/Competition................................................................................73Widening the Scope of Fiduciary Duties.............................................................................................75

Duty of Care....................................................................................................................................... 76Defenses to Breaches of Duty......................................................................................................78Oppression Remedy....................................................................................................................... 79Shareholder Ratification.............................................................................................................. 83Other CBCA Duties of Directors..................................................................................................84

Joint and Several Liability for things that will make a corporation insolvent....................84Joint and Several Liability for Wages....................................................................................................85

Obligations Under Other Legislation........................................................................................87Tort Liability of Directors and Officers...................................................................................89Indemnification and Insurance..................................................................................................90

Corporate Governance:....................................................................................................... 92

Shareholders.......................................................................................................................... 92General Powers................................................................................................................................92

No unusual management power:...........................................................................................................92Access to Corporate Information:..........................................................................................................92Resolutions:.....................................................................................................................................................93Election and Removal of Directors:.......................................................................................................93Amendment of By-Laws:............................................................................................................................93Review of Financial Statements:.............................................................................................................94Appoint an Auditor.......................................................................................................................................94

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Shareholder Meetings................................................................................................................... 95When................................................................................................................................................................... 95Where:................................................................................................................................................................95Quorum:.............................................................................................................................................................96Right to vote:................................................................................................................................................... 96Voting:................................................................................................................................................................96Resolution in lieu:.........................................................................................................................................97Requisition of meeting by SH:..................................................................................................................97Court may: order meeting, review election of directors..............................................................97

Shareholder Control of Fundamental Changes.....................................................................98Amendment of the Articles of Incorporation....................................................................................98Export or Continuation of CBCA corporation.................................................................................100Extraordinary Sale, Lease, Exchange of substantially all corporate assets.......................100Voluntary Liquidation and Dissolution.............................................................................................101

Shareholder Proposals............................................................................................................... 101Proposal Procedure:..................................................................................................................................102

Proxy Solicitation and Proxy Circulars.................................................................................103Proxy:............................................................................................................................................................... 104Management Circulars.............................................................................................................................105

Vote Pooling Agreements.......................................................................................................... 107Unanimous Shareholder Agreements...................................................................................108

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Sole ProprietorshipAn unincorporated business “owned” by a single individual who is the sole person responsible for success, failure, liabilities, and assets.

Characteristics:- Sole owner with decision-making power – no one else has ownership interest in

the business- “Personal Liability” Individual and sole proprietorship are one person legally

for all purposes o Assets and income o Liabilities and debto Vicariously liable for employees torts

- Creditors Creditors are personal creditors, and the debt is personal- Employees Sole Proprietorship may have employees, even several levels of

complex management structure, but the employees are not owners of the business

Advantages: - Small local enterprises with no need to acquire capital, can avoid corporate

reporting and tax requirements- Since there is no separation of the business and personal assets, the proprietor can

deduct both the business’ and his personal losses

Disadvantages: - difficult to grow, diff to raise capital (banks like to deal w/corps that are separate

bus entities)

Restrictions:- Lenders will often put restrictions on the operation of sole proprietorships

arises from situations where the sole proprietor does not have significant personal funds (judgment proof) and could be tempted to use the lenders funds to make a risky business move.

RegistrationPurpose of Registration

- (1) Identify the SP for Credit Checks- (2) Identify the SP for the purpose of starting an action- (3) Avoid the deception of a name indicating plural persons- (4) Avoid “Passing Off” – SP passing off a claim to another SP/company with the

same business name

Remember, a Sole Proprietorship begins when the individual begins operating a business, NOT when he registers a business name

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PARTNERSHIP ACT Part 4:88(1) Business Name Registration:

- A Sole Proprietorship may operate under a business name, but is required to register that name (within 3 months) if:

o the SP is in the business of trading, manufacturing, or miningo the SP is not a partnershipo the business name is not the name of the SP, or implies a

plurality of persons*required to register b/c name does not indicate who owner is, or is misleading in indicating a plurality of ownership*register is used to find out who is the entity behind the name

89 Names Already Registered:- (1) SP cannot register or use a name that:

o has already been registered, oro that is so close that it may be confused

- (2) SP can use a corporation’s name if:o the corporation submits in writingo the business name was used by the applicant before the

company incorporated*applies to corps and their depts – including trade name used by corp (e.g. McDonald’s)

90 Registrar must keep two indices - enables you to search under either firm or personal name

(2) Firm index - styles of registered firms

(4) Individual index - names of members of each firm

90.3 Anyone can search the register - (a) search name- (b) inspect records- (c) obtain copies

90.4 (1) It is an offence to file a misleading statement w/registrar that is: (a) false or misleading statement that relates to material fact, or(b) omits any material fact that makes the statement false or misleading

90.5 Person who commits offence under 90.4 is liable to a fine, if an individual of not more that $2000, and if a non-person, not more than $5000

BC RULES OF COURT: (govern actions in the BCSC)Rule 7: deals w/how to sue a partnership

7(10): a person carrying on a business under a name or style other than their own name can be sued in that name (can be sued under trade name whether or not it is registered)

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AgencyFridman, The Law of Agency “the relationship that exists between two persons when one, call 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.”

The principal “clothes” an agent with authority to affect the principal’s legal relationships

Characteristics:- (1) Legally Recognized- (2) Consensual- (3) May be a contractual relationship- (4) Fiduciary Duties- (5) Principal or Agent may terminate the relationship at will

Actual AuthorityExpress Actual Authority:Authority that is actually stated, orally or in writing, between the principal and agent

- Actual authority includes authority that can be inferred from the wording or context of an agreement between principal and agent

Implied Actual Authority:Authority that is associated with the relationship. It goes with the commercial context and circumstances.

The authority is not spelled out, but is understood with reference to the usual or customary authority of the agent:

- (1) Usual Authority determined by looking at what THAT AGENT has been allowed to do in the past

o Must look to what this principal has allowed this agent to doo if the agent has done certain things in the past that are outside the express

authority of the agent but the principal has allowed the agent to do those things, then the agent may be said to have usual authority to those things Freeman & Lockyer v. Buckhurst Park Properties

-- (2) Customary Authority determined by looking at the kind of authority

AGENTS OF THAT TYPE normally have.o An express grant of authority that is inconsistent with some aspect of the

customary authority of agents of that type \ would override the customary authority

o The usual authority of a certain agent would also overrule customary

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authority

Freeman & Lockyer v. Buckhurst Park PropertiesExample of both usual and customary implied actual authorityArchitects thought they were retained by Buckhurst, were not paid, the man they worked with, Mr. Kapur (agent), had never been formally made managing director of Buckhurst – however, Buckhurst had allowed Kapur to act as their managing director.Held:

- Kapur had implied actual authority, and Buckhurst was liable- Kapur was acting with the customary authority of a managing director, and the

usual authority of what he had done in the past with this particular company

Ostensible Authority“Agency by Estoppel” can arise in the absence of express or implied actual authority; it protects the reliance of innocent third parties

Where a principal has made representations that a party has authority to act as an agent, intending for the third party to act on that representation, they will be barred by equity from refusing to honour that contract Freeman & Lockyer

Elements:- (1) Alleged principal must have made a representation OR permitted a

representation that the alleged agent had the authority to act on their behalf

- (2) The third party reasonably relies on the representation to his or her detriment

Lloyd v. Grace Smithlawyer leaves conveyancing clerk in charge, clerk defrauds widow of her property, clerk had been working for lawyer for many years as a conveyancing agentHeld:

- Firm was liable, clerk has ostensible authorityo (a) Clerk was permitted to act as with authority; “clothed with authority”

by the law firmo (b) and the widow’s reliance was reasonable

Freeman & Lockyer v. Buckhurst Park PropertiesFoundational Case on Ostensible AuthorityArchitects thought they were retained by Buckhurst, were not paid, the man they worked with, Mr. Kapur (agent), had never been formally made managing director of Buckhurst – however, Buckhurst had allowed Kapur to act as their managing director.Held:

- Buckhurst was liable, Kapur operated with ostensible authority, and Buckhurst was barred from refusing to honour the contract

- Kapur was acting with the customary authority of a managing director, and his

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usual authority with this particular company – Thus; the principal had permitted a representation to be made that Kapur was their agent, and Freeman’s reliance was reasonable

Policy Rationales:- (a) Protection of 3rd party reliance- (b) Least Cost Avoidance

o Alleged principal can check the agent’s trustworthiness, monitor the agent’s behavior, and dismiss an agent that acts beyond his authority at a much lower cost than the third party

Breach of Warranty AuthorityWhere third party fails in action against the principle (in contract) they may attempt action against the agent (in tort)

This is an action by the third party against an agent in tort; where the agent warranted but did not have actual or ostensible authority

Elements:- (1) The Agent represented that she/he had authority- (2) The Representation was False- (3) The third party acted to her/his detriment

Damages: Expectation (put the third party in the position they would have been in had the warranty been true)

Duties of the Agent to the PrincipalBased on the fiduciary relationship between principal and agent, they can be varied by express agreement

To Perform Agency Obligations- Or, when the object of the agency relationship cannot be completed, the agent

must do his/her best- Agent will not be liable when the obligation placed on them is illegal

-To Perform with Reasonable Care

- Standard is the skill and diligence an agent in his or her position would normally possess and exercise

NOT to exceed the scope of authority

Fiduciary Duties(1) Duty of Loyalty

a. Duty to act in the best interests of the principalb. Duty not to put oneself in a position where one’s personal interests

conflict with the principal’s interest

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i. Normal Remedy: transaction is void and the agent is required to account for any profits made

(2) Duty not to Delegate a. Normally: no delegation (agent is assumed to be trusted representative

designated by the principal)b. In some situations: circumstances or express authorization make

delegation allowable i. (e.g.: Captain that has been made an agent to trade goods at port

has circumstantial authority to delegate some tasks to people who speak the language and understand the local market)

(3) Duty to Keep Proper Accounts a. If an agent does not keep proper accounts, the court will take a view of the

amount of the profit to the agent or loss to the principal that is most favourable to the principal (Evidentiary Presumption)

b. If an agent has multiple principles, he/she must keep separate accounts for each of the principles

(4) Duty not to take Secret Profits a. Thompson v. Meade: Agent should not take secret profit (breach of FD);

stockbroker asked to sell stock for 10, sold for 12, kept the 2b. Remedy : equitable remedy of accounting for profits (person in breach has

to account for any gain)

Duties of the Principal to the Agent(1) Requirement to Pay Remuneration

a. normally requires express agreement, since agency relationships can be gratuitous

b. In situations where there is no express agreement BUT circumstances are such that the agent would not reasonably have been acting gratuitously – courts may award merit on a quantum merit basis

(2) Requirement to Pay the Agent’s Expenses and Indemnify the Agent Against Losses

a. Agent must be acting within the scope of their actual authorityb. Expenses must be necessary and reasonable for carrying out the agencyc. Losses must not be the fault of negligence of the agentd. Agent may not receive reimbursement for expenses incurred that are

illegal

Events of Termination(1) By Act of the Parties

a. Agency Relationships are Unilaterally Terminable On Notice – no requirement for reasonable notice period (as in employment)

b. When the task that the agent was set to is complete, the powers of the agent is complete

(2) By Operation of Law a. When either party becomes bankrupt

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b. Death or Incapacity (i.e. insanity) by either partyc. Where the whole purpose of the relationship is presumed to have been

frustrated

RatificationWhere the agent acted beyond his/her authority, the principle can nonetheless ratify the interaction

Conditions for ratifying a contract:(1) The Agent purported to act on behalf of another person who seeks to ratify(2) The person who seeks to ratify was in existence and was ascertainable at the time

the other person purported to act as agent, and at the time of ratification(3) The 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

Ratification can be:(1) Express(2) By Conduct

a. By beginning to fulfill a contract(3) By Acquiescence

a. By failing to reject the transaction within a reasonable time of learning that the purported agent entered into it

b. Ratification must be based on a knowledge of all the facts

Consequences of Ratification:(i) The ratification relates back to the time of the offer and acceptance between

the agent and the third party(ii) The principal can sue the third party and can be sued by the third party(iii) The agent is no longer liable for a breach of warranty of authority(iv) The agent is no longer liable to the principal for exceeding her or his authority(v) The 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 contract

Policy Reasons for Allowing Ratification:- Allow for transactional flexibility – both principal and agent want the deal- Certainty – once there has been an act of ratification, the principal must be legally

bound- Prevention of unjust enrichment – not allowing principal that has ratified to back

out of a deal

Undisclosed PrincipalAgents that act for principals (potentially several principals) and have their own premises (distributor for many manufacturers) may contract with the third party and not disclose that they are acting for a principal

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(a) Generally, an undisclosed principle can, by disclosing their interest, enforce a contract with a third party

a. the principal may disclose to the third party that they are the principal, and in doing so take ownership of the contract

(b) Undisclosed principal CANNOT enforce a contract if:a. The third party was under the distinct impression and had the intention

that the Agent personally complyb. and/or that the third party can demonstrate that they would never have

contracted with the principal.

Said v. ButtUndisclosed principal could not enforce a contract, because the third party successfully showed that they never would have contracted with the principalS had friend (Agent) buy a ticket to a theatre which he had maligned, denied entry on night of performance, theatre was successful in barring him because they reasonably expected the Agent to be performing the contract

Partnership

General Partnership P/PThere is no formality to a general partnership relationship Two or more persons carrying on business in common with a view of profit are partners

Characteristics:- Partners share rights and liabilities equally- Partners act as agents for each other

o One partner can affect the legal relationships of all partners with third parties

o All partners owe fiduciary duties to each other- Partnerships are not treated as separate legal entities for Tax purposes

Formation of a Partnership:- There is no formal process for the creation of a general partnership (except

registration), partnerships can be created without the express intention of the parties (Backman v. Canada)

Partnership Act s. 2 Partnership is a Relation which subsists between persons carrying on business in common with a view of profit

Backman v. Canada (1) Whether a partnership has been established in a particular case will depend on

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an analysis and weighing of the relevant factors in the context of all the surrounding circumstances

(2) Calling a partnership does not make it a partnership – it must conform to the definition in s.2

(3) People can form partnerships without intending to or expressly agreeing toAppellant and 38 others sought to take advantage of apartments (in Texas) that were costly beyond their fair market value by buying the apartments and selling them back to the Texans, then deducting the “loss” from their taxes – Revenue Canada argues they were not a partnership, since they never had an intention of “carrying on a business….with a view of profit”Held:

- There was no real partnership, despite the claims of the parties involvedo Properties were just window dressing to make a tax-motivated transaction

seem like a partnershipo They had no real view of profit, they had a view of loss

The Court went on to examine components of a partnership: (OBJECTIVE TEST)- PERSONS

o “Person” is defined in s. 29 of the B.C. Interpretation Act “a corporation, partnership or party, and the personal or other legal representatives of a person to whom the context can apply according to law.”

o Can be a corporation, a partnership, or an individual- CARRYING ON A BUSINESS : can be either short- or long-term organized

commercial activity (can be a single transaction or ongoing); can be either new or existing, active or passive, but there must be some form of business

o “business” broadly defined in Part 6 – “every trade, occupation or profession” (can’t rely on this – Part 6 does not apply to Part 1)

o Ordinary Definition: Black’s Dictionary, “to hold one’s self out to others as engaged in the selling of goods or services”

o Gordon v. The Queen: Carrying on a business: (1) occupation of time, attention, and labour (2) incurring of liabilities to other persons

(3) purpose of livelihood and profito Not necessary to hold partnership meetings or regularly enter into new

agreements – business can be passively receiving rent Partner does not need to manage, you can be a silent partner

(Volzke)o Must have some sort of assets generating or with the potential to generate

income, and the intent to generate income- IN COMMON : partners have to act together, whether by oral, written or express

agreement/consent in a common enterprise (each partner contributes, though not necessarily equally, each is entitled to share in profits)

o the authority of each partner is relevant, but the fact that management rests with a single partner does not necessarily invalidate a partnership

o Evidence must be consistent with an intention to carry on business in common

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o s. 4(a) common ownership of property (although it is an indicator of partnership) does not, by itself, make co-owners partners

o Relevant Factors: contribution of skill, knowledge or assets to a common undertaking joint property interest in the subject-matter of the venture sharing of profits and losses (4(c) – creates a rebuttable

presumption of partnership) (Volzke) filing of income tax returns as partnership, joint financial

statements/bank accounts (Volzke) holding themselves out as partners (Volzke)

- VIEW OF PROFIT : objective must be commercial in nature (i.e. not charitable or social), must at least be the intention to profit (partnership that loses money is still a partnership)

o Tax motivation will not derogate from validity of a partnershipo Ancillary profit-making purpose will be sufficient

e.g. having a primary tax motive won’t mean you aren’t partners, you just must be able to show ancillary motive of profit-making (OBJ test)

o Does not require a net gaino s. 4(b) Sharing of gross returns does not, by itself, make a

partnership Travelling play and theatre share profits of show, and are

not in partnershipo s. 4(c) Presumption: The receipt by a person of a share of net profits

in a business is proof in absence of contrary evidence that he or she is a partner in the business

o Except: (i) repayment of a debt by installments out of profit does not in of

itself make the creditor a partner in the debtor’s business. (ii) a contract for the remuneration of an employee or agent by a

share of the profits of a business does not of itself make the person a partner

(iii) a spouse or child of a deceased partner who receives an annuity out of continuing profits from the partnership is not a partner merely because of the receipt of profits

(iv) Bovil’s Act (controversial) (i) an advance of money by way of a loan; (ii) to a person engaged in business or about to engage in a

business (iii) on a contract between that person and the lender; (iv) where the contract is in writing (v) the contract is signed by or on behalf of all parties to it;

and (vi) under the contract the lender is to receive a rate of

interest varying with the profits or a share of the profits from the business

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does not of itself not make the lender a partner with the person carrying on the business.

This covers a lender getting X interest or share of profits for the period of the loan – as opposed to a partner taking a share of profits commensurate with stake in the firm

Allows investors to share in profits without having to become partners and expose themselves to associated risks

Reasons for Finding a Partnership:- Least Cost Avoidance- Reliance

o On a known or unknown participant to the business- Unjust Enrichment

o Grace v. Smith: should not share in the profit without sharing in the loss

A.E. Lepage v. Kamex DevelopmentsExample of the court determining on the facts that persons were co-owners and not partnersKamex (Corporation) holds legal title to apt. bldg. in trust for beneficial owners in accordance with their specific interests (common – because partnerships cannot hold title to land, not a legal entity) – One co-owner signed exclusive listing agreement with Lepage – question: are the beneficial owners partners, such that beneficiary’s contract is binding on all partners?Held:

- Co-owners were not partners, they were simply co-owners acting collaboratively in their best interests

o Lepage could not enforce agreement on other ownerso Note that there was no argument for ostensible authority or breach of

warranty of authority – why not?- Facts suggesting co-owners and not partners:

o Sharing ownership with others alone does not make a partnership, though can be a potentially important component

o Each co-owner had the right to sell his/her share to a stranger without the approval of the other co-owners

Volzke Construction Ltd. v. Westlock Foods Inc.Example of the court determining on the facts that persons were partners, not co-ownersVolsky suing Westlock, arguing that W is a partner with another company, Bonelle, that V wants to recover from – V had already shown breach of K by B. Held:

- W and B were partners- Facts Considered:

o The held themselves out to be partners Owner of Westlock represented Bonelle as their partner Intention of the parties is considered but not determinative

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o You do not need to have managerial authority to be a partner Westlock and Bonelle opened joint account in their corporate

names, but ONLY Bonelle had signing rights Partners do not have to have equal interests

o They were jointly liable for mortgages

Name/Registration and Liability:- s. 81 Persons associated in partnership for trading, manufacturing, or mining

must file a registration statement with the Registrar (within 3 months of formation 82)

o Registrar keeps an index of names of registered partnershipso Mandatory BUT not Required

- s. 83 new registration form must be filled out if there is any change or alteration to the membership of a firm

o Retiring partner will be considered to remain a partner until changes are registered

- s. 85 Can’t escape liability by not registering (you will just be fined under the Offence Act)

o (1) just because you have been omitted from the partnership registration does not make you immune, if you are in fact, a partner

o (3) un-registered partners are jointly and severally liable like regular partners

o s. 87 If a 3rd party wants to sue an unregistered partnership, they bear the burden of proving that it is a partnership

- s. 86 Notice of Dissolutiono On the dissolution of a firm, any or all of the persons who composed the

firm may, in the prescribed manner, submit to the registrar for filing a notice advising the registrar of the dissolution of the firm

Default Contract- As Between Partners: the BCPA sets out a default contract : This contract ca

be altered by the parties through express agreement or inference from the course of dealings

- s. 21 This “default contract” is variable by consent o Provisions in the Partnership Act will operate to govern partnerships, but

can be overridden by express agreement or through conduct (normally there is a written agreement)

- s. 23 Partnership Property: o applies to property brought into the partnership, acquired on account of

the firm, or for the purposes of and in the course of partnership businesso (1) – property must be held and applied for the purposes of the partnershipo (2) - land in the name of individual partners is held in trust for the

partnership- s. 24 Presumption about Property

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o Presumption that property bought by money belonging to the firm is partnership property

- s. 27 Default Rules: List of presumptions about partnership Capital, Profits, Losses, Management, Admission of New Partners and Record Keeping

o (a) partners share capital, losses, profits equallyo (b) firm must indemnify partners for payments/liabilities in the ordinary

and proper conduct of business for the firmo (c) partner that invests capital above what he agreed to make is entitled to

interest at a fair rate essentially a loan to the partner that invests more but does not

want to increase stake in partnershipo (d) A partner is not entitled to interest on the required capital subscribed

by that partnero (e) Every partner may take part in the management of the businesso (f) Partners are not entitled to remuneration for working in the partnership

business (they are entitled to a share of the profits)o (g) No new partner can be admitted to the partnership without the consent

of each of the partners fiduciary relationship – every partner must accept a new agent

o (h) Decisions on ordinary business matters are to be decided by a majority of the partners – Changes to the nature of the partnership must be unanimous

o (i) Partnership books are to be kept at the principal place of business of the partnership and every partner may have access to the books to inspect them or copy them

fiduciary duty to keep proper accounts- s. 28 Removal of Partners

o No majority of partners can expel any partner unless power to do so has been conferred by express agreement AND the power is exercised in good faith

o Such a change to the partnership would have to be made unanimously (27(h))

- s. 34 Assignment of Partnership Interesto Partnership interests can be assigned, but this does not result in the

assignee becoming a partnero Partners cannot be forced to accept another partner, as it is a fiduciary

relationship

Ending a Partnership- s. 29 Normal Rule for Informal General Partnerships

o If the partnership is not for a fixed term, or a particular venture, then it may be dissolved by notice of intention to dissolve – dissolution will take effect from the date of the notice unless otherwise specified

- s. 30 Continuing a Partnership After a stated date of Expiryo (1) where partners carry on after a stated date of dissolution, the

partnership is presumed to continue on the same terms

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o (2) A continuance of the business by the partners or those of them as habitually acted in it during the term, without any settlement or liquidation of the partnership affairs, is presumed to be a continuance of the partnership

- s. 35 By Act of the Partnerso Partners can set a fixed term for the relationshipo Any partner can give notice of intention to dissolve

- s. 36 By Operation of Lawo Death, bankruptcy, or dissolution of a partnero Note: 36(1)(b) when one partner ceases to exist by operation of law,

the partnership is dissolved only as between the gone partner and the remaining partners. The remaining partners continue on as the same partnership.

- s. 38 Powers of the Court to Dissolve a Partnershipo (1) On application by a partner, the court may decree a dissolution of the

partnership in any of the following cases: (a) if a partner is incapable of managing his or her affairs or

incapable of discharging his or her duties (declared insane) (b) when a partner becomes in any other way permanently

incapable of performing his or her duties (c) when a partner has been guilty of conduct that is calculated to

affect prejudicially the carrying on of the business (d) when a partner willfully or persistently commits a breach of the

partnership agreement (e) when the business of the partnership can only be carried on at a

loss (f) whenever circumstances have arisen that, in the opinion of the

court, render it just and equitable that the partnership be dissolved.

Being a Shareholder does not make you a Partners. 3 Corporations do not make partners

- This does not mean that corporations cannot be partners- Simply creates a special exception that says that shareholders in a corporation are

NOT made by necessary implication also partnerso This is a way of avoiding inevitable application of the Partnership Act to

corporations – which are governed by a different Act

Partnership is not a separate legal entityRe: ThorneA partnership is not recognized as a separate legal entityThorne worked with a partner (faller and miller), was injured, denied Worker’s Compensation because it is meant for “employees” and Thorne and his co-worker were partners (Thorne argued partnerships are separate legal entities, and that he was an employee for the partnership)Held:

- Thorne was not an employee, partnerships are not separate legal entities

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- What Thorne thought were “wages” were actually “partnership draws”

Consequences:(1) Each partner is liable to the full extent of his personal assets for debts and other

liabilities of the firm (any creditor can look to any partner)(2) A partner may not be an employee for the partnership business(3) A partner cannot be a creditor of the partnership (except in specific circumstances

in the PA)

Fiduciary Duties of PartnersPartners owe fiduciary duties to each other, as they act as each others’ agents. The Partnership Act serves as a default partnership agreement amongst the partners, where there are no express terms

s. 22 Partner must act w/utmost good faith and fairness towards other partners, and duties imposed by s.22 are in addition to those imposed by law and equity

- s. 31 Partners must render full accounts- s. 32 Partners must keep proper records- s. 33 Partners must account for profits made from competing business

Rochwerg v. TrusterCourt reinforced that fiduciary duties are owed by partners to other partners

- duty not to make secret profits- duty to keep proper accounts- duty to avoid conflicting personal interests

R was partner in firm with T, also director of a company that was a client of their firm – R disclosed director’s salary and remitted it to firm, but did not disclose stock options with which he made a substantial profitHeld:

- where undisclosed benefits are derived by a partner from a transaction "concerning the partnership", or from use by a partner of the "partnership property, name or business connection", a duty to account will arise

- In this case, the partner had a duty to account:o profits “concerning the partnership”, because they were paid by a client of

RTZo benefits derived by him from his use of a "partnership  . . .  business

connection" he got the position because of his work with Tech previously as part of RTZ, and he would not have had the stock options if it were not for the directorship

Dockrill v. Coopers & LybrandDuty of Disclosure each partner has a duty to keep proper accounts, which means full disclosure to other partnersPartnership needed to downsize after merger, managing partners sought legal and received in-house legal advice and asked for partner’s resignation, terminated partner

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sued for wrongful dismissal and applied to have the legal advice produced in court. Partnership claimed solicitor-client privilege.Held:

- Common property principle documents were not privileged because they were generated at a time that the respondent was a member of the partnership which had ordered them

- Until Dockrill had notice that he was going to be expelled, he was entitled to access to all the privileged information as part of the fiduciary duties of full disclosure among partners (knowledge of one partner is presumed to be knowledge of all partners)

McKnight v. HutchinsonLaw firm that ended when M learned H had received earnings from part ownership of a private company. Partnership agreement contained specific provision that contemplated a partner conducting business outside of the partnership so long as the business was not the practice of law.Held:

- Violation of the Partnership Agreemento Proper disclosure was not madeo Some of the profits may also have been made through the practice of law

Liability of Partnerships to Third PartiesContract:

- s. 11 Partners are Jointly and Severally Liable: for all debts/obligations incurred while they were partners

- s. 7 Every partner is an agent acting with apparent authority for the other partners of the firm, capable of binding other partners to debts/obligations where “carrying on in the usual way business of the kind carried on by the firm”

o UNLESS: (1) the partner did not have authority to act in this specific matter,

AND (2) the third party knew the person had no authority OR did not

believe the person he dealt with to be a partnerPledges of a Partner will NOT bind the firm where:

- s. 9 they are pledged for a purpose apparently not connected to the firm’s ordinary course of business, and the partner was not specifically authorized

- s. 10 if 3rd party has actual notice of restrictions on partner’s authority

Tort: - s. 7 Every partner is an agent acting with apparent authority for the other

partners of the firm, and binds the other firm partners where “carrying on in the usual way business of the kind carried on by the firm”

- s. 12 Partners are Jointly and Severally Liable: for wrongful acts/omissions of another partner, where that other partner:

Acted in the authority of partners; OR Acted in the ordinary business of the firm

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Holding Out person who is not a partner can be as liable as a partner: o 16(1): those who appear to be partners, or hold themselves out as partners

(by words or conduct), or knowingly allow themselves to be represented as partner, are liable as partner

e.g. using firm letterhead, business card, etc. (Tower Cabinet)o 16(2): a general holding out is sufficient, it does not have to be made

directly to the person relying on it partners will still be liable (doesn’t have to be direct

communication – all 3P must show is that they heard about it and relied on it)

partner will only have a defence if can show 3P knew that the person w/whom he was dealing had no auth to bind the firm on the particular matter or did not know or belief him to be a partner (7(2))

o 16(3): If after a partner’s death the partnership business is continued, the continued use of that name or the deceased partner’s name will not make the deceased partner’s estate liable for debts incurred after death

Someone who has lent $$ to the firm relying on the person who has held themselves out would usually sue the partnership, in addition to the non-partner

19(1) and (2): New partner is not liable for debts/obligations incurred prior to joining firm84(b): Retired partners will be liable for the debts/obligations of the firm until a change to the partnership registration is filed

o 39(1): 3rd Party is entitled to treat all apparent partners of old firm until person has notice of change

39(2): notice in gazette is sufficient 39(3): retired partner not liable unless the 3rd Party knew, at the

time of dealing with the partnership, that s/he was a partner (Tower Cabinets)

19(3) and (4): A retiring partner may be discharged from debts/liabilities of the partnership by an (express or inferred) agreement to that effect with the new partnership and the creditors

Ernst&Young v. FalconiApplication of s. 7 Partners are agents of other partners, and bind those other partners when carrying on in the usual way of business of the kind carried on by the firm.”Falconi was a lawyer in a firm with Klien, pled guilty to fraud, Klein had not been involved, though the fraud involved legal services from the firm.Held:

- It was enough that Falconi provided ordinary legal services, even if used for illegal purposes, to bind his partners as vicariously liable (presumed to be acting as an agent)

o Falconi was an ostensible agent

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o Other partners are liable for the debts incurred

Narrowing Joint and Several Liability:- s. 53 of the Law and Equity Act

o (1) person sued does not have the right to stay proceedings until the other parties indicated in the suit are engaged

o (2) As long as the others have been named in the suit, proceeding against any one person who is jointly liable does not release the other jointly liable persons

o (3) Every person against whom an order has been obtained who has satisfied the order is entitled to demand and recover in the court contribution from any other person jointly liable with the person.

- Supreme Court Rule 7 o Partnership can be sued in the name of the firm (do not have to serve one

person in particular)

Limited Partnership LP/P- Governed by Part III of BCPA

Remember:- Sections 1 and 2 of the BCPA applies EXCEPT where varied in this section

(49)- To be valid, an LP must be a Partnership within the definition in s.2 (see also

Backman) AND registered under 51

- Characteristics:o Usually one GP and a number of “silent” LPs that invest some funds but

remain at arms length from the business and from liabilityo combines flexibility of partnerships in general and some of their tax

attributes, with ltd liabilityo useful if starting a speculative venture, expect losses – able to use losses to

personal tax advo ideal vehicle for sleeping/silent partners

80: LPs formed outside BC may carry on bus in BC if registered under BCPA

REQUIREMENTS:- 50(1): LP may be formed to carry on any business that a general partnership may

carry on- 50(2): Composition – LP must have one or more GPs, and one or more LPs

o must be at least one GP, so that if the partnership fails, and the liabilities of the partnership exceed the assets of the partnership, those liabilities can be claimed against the personal assets only of the general partner

- 51(1): Registration – L/P can ONLY be formed by the express filing of a certificate under s.51 (no formation by conduct)

o registration is necessary but not sufficient to form LP must also meet definition of a partnership in s.2 (carrying on bus with a view to profit)

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o (2): registration certificate must contain:a. business name under which LP will operateb. general nature of the businessc. full name and address of each GPd. term for which LP is to existe. aggregate amount of case and the nature and fair value of any other

property to be contributed by all the LPsf. aggregate amount of any additional contributions agreed to be

made by LPs and the times at which or events on the happening of which the additional contributions are to be made

g. the bases on which LPs are entitled to share in profits or receive other compensation

o (3): LPs themselves do not have to register public can look at register to see what is behind LP, but registry

may not list all LP’s (just GPs)o (4): if PA contains provisions respecting any of the following, the

certificate must also contain those provisions:a. the times when contributions of LPs are to be retunedb. the right of a LP to substitute an assignee as contributor in his or

her place, and the terms and conds of the substitutionc. the right to admit additional LPsd. the extent to which one or more of the LPs has greater rights than

the otherse. the right of a remaining GP to continue the business on the

bankruptcy, death, retirement, mental incompetence, or dissolution of a GP

f. the right of a LP to demand and receive property other than cash in return for his contribution

g. the right of the LPs or ay of them to admit an additional general partner to the partnership or to permit or require a GP to retire from the partnership

56: PROTECTION OF THE LPs: GP has all the rights and powers of GP in general partnership, subject to limitations (unless written consent of LPs):

- (a) can’t do an act which makes it impossible to carry on the bus of the LP

- (b) can’t consent to judgment against the LP- (c) can’t hold LP property or dispose of any rights in LP property, for

other than partnership purpose- (d) can’t admit a person as a GP or LP unless right to do so is expressly

given in the certificate- (e) can’t cont the bus of the LP on the bankruptcy, death, retirement,

mental incompetence or dissolution of a GP, unless the right to do so is given in the cert

- 57: LP is not liable for the obligations of the limited partnership except in respect of the amount of property he or she contributes (subject to this Part)

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- 58: Rights of a Limited Partner- (1) A limited partner has the same right as a general partner to:

a. inspect and make copies of or take extracts from the limited partnership books at all times

b. be given, on demand and when reasonable, true and full information of all things affecting the limited partnership

c. obtain dissolution and winding up of the limited partnership by court order

- 59: Share of the Profits- (1) Subject to this Act and the partnership agreement, a limited partner

has the right:a. to a share of the profitsb. to have his contribution to the LP/P returned

- (2) No “Abandoning Ship” (see – Protection of 3rd parties)- 64: A limited partner is not liable as a general partner unless he or she takes

part in the management of the business

PROTECTION OF THIRD PARTIES:- 53(1): business name of each LP must end w/words “Ltd Partnership”- 53: name of the LP must not appear on the name of the Partnership- 55: limited partner may not contribute services to the partnership business- 64: limited partner may not take part in the management of the partnership- 59(2): “no abandoning ship” provision – no return of capital to partners is

permitted if after the return of capital the partnership would be insolvent (prevents general partners from pulling out in the face of financial difficulty and leaving creditors with limited partners only)

s.77: how to sue an LP – don’t have to name all LPs (Rule 7 – sue in firm name)

LIABILITY:- 57: Limited Liability LP is only liable for partnership obligations to the extent of

his contribution (personal assets are protection from execution – creditors have no access)

- Exceptions from ltd liability:- 64: LP is not liable as GP, UNLESS s/he or it takes part in the management of

the bus (Haughton, Nordile)- If person who invests as LP is also a management taking part in mgmt

of bus of LP on behalf of GP corporation (52(1))- 55(1): LP may contribute money or other property but not services

(confusing w/prohibition from involvement in mgmt)- 60(1): LP may lend $$ to, borrow $$ from and trade w/LP

- 53(2), (3), (4): LP should ensure name is not included in firm name otherwise will be liable as GP

o Exceptions: won’t be liable if the business had that name before it became an L/P, or the L/P has the same surname as a GP

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- 75: if partner thinks they are investing as LP, but no one ever registers LP, as a matter of law that partner will be treated as GP, BUT:

(a): a person is not, by exercising the rights of an LP, a GP (b): as long as you stay out of mgmt you don’t become liable for

partnership obligations IF: on ascertaining the mistaken belief, s/he promptly renounces his/her interests in profits or other compensation by way of income from the business (escape liability by immediately renouncing share of profits)

Robinson v. RAll partners, even Limited Partners, are deemed to be “carrying on business” as part of the partnership (even if they have waived the right to actually be active)LP/P formed for building and operating a nursing home. Appellant trust was a limited partner. Issue is whether the particular trust “did not carry on any active business” – if the trust did not, it will not be taxed for that year.Held:

- the LP was carrying on business as part of the partnership- LPs cannot have a managerial role in a partnership without becoming GPs, but

they are still partners- All partners in a partnership are “carrying on” the business of the partnership, by

definition

Limited Liability Partnership LLP- New to BC – Legislation came into force January 17, 2005

o Response to lobbying from large firms who were facing MONSTER claims and unable to avoid liability

- Distinct from LPs no restriction on participation in management of the business- Relevant provisions in Part VI of BCPA- In BC, the legislation governing LLPs is much more flexible and business-friendly:

o In BC, any business can be an LLPo In BC, LLPs have full shield protection (as opposed to protection only

from professional negligence and misappropriation of funds)- Full Shield Protection:

o Same protection that LPs have in a LP/P (104(1))o Personal assets can be made vulnerable only: (104(2))

(1) through your own negligence (2) If you were actually aware of a partner’s negligence and did

nothing

CREATION:- 94: LLP MEANS a partnership registered as an LLP

o Note that a partnership must still exist, as defined in s.2- 96(2): MUST register otherwise will be treated as GP

o 107: must provide NOTICE of registration as LLP to clients in writing- 97: Professional partnerships can’t register as LLP unless

o (a) the act regulating the profession permits it, and

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o (b) have complied with pre-requisites in that Act (usually, that you have registered the LLP as such)

- 100: An LLP must have the words “Limited Liability Partnership” or their French equivalents, in the name of the business (or LLP)

Liability- 104(1): FULL SHIELD PROTECTION: Ltd liability affords protection to partners

against anything (not just negligence on part of other partner)o partnership obligationso obligations under agreement between partnership and another persono not liable to indemnify another partner where they have met a

liability with personal assets- 104(2): EXCEPTIONS TO PROTECTION: Ltd liability doesn’t extend to your

own NEG, OR that which you new about AND failed to prevento 106: will be liable for obligations that arose prior to registration as LLP

- 95(2): the following sections of the BCPA DON’T APPLY to LLPs11: liability of the firm – partners jointly liable for debts and obligations of firm12: firm liable for loss, injury or penalty arising out of any wrongful act or omission of any partner14: joint and several liability**13 not excluded (liability for misapplication of funds)

Liability same as directors (but no FD or DoC – because directors owe duties to the corporation, and partners only owe duties to other partners)- 105(1): Partners are liable for obligations of partnership as if they were directors of a

corporation- 105(2): but partners do not owe a fiduciary duty or duty of care to the LLP ITSELF

o this means partners are liable for obligations of the partnership where, under an Act of the BC Leg, personal liability is imposed on directors of a corporation

o e.g. Liable for wages under 119o e.g. under ESA, environmental protection leg,

104(1) may open door to liability of partner, as a dir would, under s.96 of ESA for up to 2 months unpaid wages

Cancellation:- s. 129:

o (1) Conditions in which Registrar can Cancel Registration of an LLP LLP fails to file an annual report for 2 years Request or cancellation by the LLP LLP is not authorized to carry on business as a profession

o (2) Registrar must notify and give LLPs 2 month’s notice of cancellationo (4)&(5) Lapse or Cancellation of registration does not

dissolve the partnership, but simply turns it back into a general partnership

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o (7) Cancellation does not affect liability shield with regard to obligations accrued as an LLP

Corporation: GeneralCanada Business Corporations Act (CBCA) – model/reference act which most provinces have followedBC Business Corporations Act (BC BCA) – came into force Jan 05, more complex and more permissive than CBCA (favours flexibility in corporation formation and reorganization)

Key Features:(1) Separate legal existence: (CBCA 15)

o corp is a legal person, recognized as having personhoodo corp has capacity to act for itselfo SH/mgrs are distinct from the corps in which they participate (e.g. Nordile – B

& R were SH and execs, but were not the GP, the corp was the GP)o Corp’s property is not the SH’s property – SH own a share (bundle of rights

that entitle them to share in profits of corp)(2) Limited Liability of SH: effect of separate legal existence of corp (CBCA 45)

o SH not liable for corp’s liabilities (most they will lose is value of shares)o SH can participate in mgmt of corp w/o losing shield of ltd liability (distinct

from LPs, LLPs)o Become SH either by: subscribing for shares (buy shares from corp itself at

first issue), or by acquiring existing shares (secondary market – TSX, gift, private transaction, etc.)

(3) Perpetual existence: corp can live forevero Shares can be traded forever to whomever (corp doesn’t die upon death of SH

– unlike SP, GP)o Can cease to exist on neglect (e.g. failure to file w/Director) or by design (SH

can vote to dissolve corp) (Part 18 211, 212)-

Agency & corps : corps are legal fiction, must act through human agents (no body to kick, no soul to damn)

o Agents not usually liable for actions on behalf of principal, so directors will not be personally liable for acts or neg in course of carrying on corp’s bus

o Corp alone will be fixed w/liabilityo Corps deemed to have rights, incl Ch rights (freedom of expression, right to

be free from unreasonable search and seizure, but not s.7)o Amendments to CC to make it easier to convict corp execs of criminal acts

(CL test made it too diff to hold people at fault for negotiation) Aberdeen Railway

Separation of ownership and management:o SH own interest in a corp – they own property rights relative to the corp, but

don’t own the corporation’s property (Sparling)

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o Management means, at its broadest, the Board of Directors and Officers – but more commonly refers just to the exec (high level officers – Pres, VP, CEO, COO, CFO, etc.)

o Neither directors or officers are necessarily SH – SH status carries no entitlement to participate in mgmt, may overlap but not necessarily

o SH are passive, management makes the decisions (either Board of Directors 102, or Board of Directors delegates 115

Reasons to Incorporate (Or Not To)Limited Liability

o Limits the liability of each shareholdero Note: this can be effectively negated in situations where creditors

require personal guarantees from shareholders to advance credit (common)

o Note: The limiting of personal liability against tort claims against the corporation may, in some cases, be nullified if courts “pierce the corporate veil” particularly in closely-held corporations (few shareholders)

Perpetual Existenceo Corporation does not end when one shareholder dies or goes bankrupto Note: The problems of reconstituting partnerships upon the death or

bankruptcy of one partner are usually anticipated in express partnership contracts (partnerships are not necessarily at a disadvantage here)

Ease of Assignment of Shareso Shares are freely transferrable unless there is an express restriction on

the transfer of shareso Note: Because the shareholders in closely-held corporations are

usually involved in management, and usually want to carefully choose who to go into business with, it is common for such corporations to have virtually identical restrictions on the transfer of shares to the restrictions out on transfer of partnership interests

Shareholders Alone Cannot Bind the Corporationo Individual shareholders do not have the power to bind the corporationo Note: In closely-held corporations, individual shareholders are usually

officers of the corporation and have authority delegated to them as agents to bind the corporation in certain capacities

A Shareholder Can Contract With a Corporationo Because a corporation is a separate legal entity, a shareholder can

contract with a corporationo Note: This can be simulated in a partnership by a partner entering into

a contract with his partners that is separate from and in addition to the partnership agreement

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Closely Held CorporationRemember: some provisions can only really be effectively applied to small corporations

EXAMPLES132(2): for annual shareholder meetings, if it is not going to be held in Canada, all the shareholders must agree to hold it elsewhere

139(4): if there is only one shareholder, you only need that one for a meeting

142(1): possible to have a unanimous shareholders resolution in writing

163(3): shareholders of a non-distributing corporation can unanimously dispense with the need for an auditor

117(1): can have a unanimous written director’s resolution instead of a meeting

Constitutional Jurisdiction- Provincial :

o s.92(11) Provinces have exclusive power over the incorporation of “companies with provincial objects” (what does that phrase mean?)

“Provincial object” has largely been ignored as a restriction, provincial companies have great freedoms in their objects Bonanza Creek

- Federal :o Residual power under POGG held to include all Matters not coming

within the Classes of Subjects by this Act assigned exclusively to the Legislatures of the Provinces

Constitution itself is silent on any specific fed power over incorporation

Federal power over corporations is POGG residual power; 92(11) restricts exclusive provincial power to corps with provincial objects – therefore, companies with objects that weren’t purely provincial fall w/in fed jurisdiction Parsons

Ancillary powers for particular types of corps (e.g. banks/banking)

Scope of Provincial Power(1) Provincially Incorporated companies have the POWER but NOT the right to operate throughout the country Bonanza Creek Gold Mining v. The KingA company can be incorporated under a provincial statute and still carry on business in any other province (or anywhere in the world), as long as the other jurisdiction grants the company the right to carry on business in its jurisdiction.

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Federal govt. grants mining licenses to BCGM (a company incorporated in Ontario). Fed refuses to grant additional licenses as provided under the contract. BCGM sues feds, feds argue that contract was invalid because BCGM had no capacity to operate outside Ontario, as it was incorporated with “Provincial Objects”Held:

- In this case, the contract was valid because the corporation had been granted the power to carry on business extra-provincially

o Provincially Incorporated Companies can operate extra-provinciallyo Whether the provincially incorporated company has the right to operate

on that jurisdiction is up to the other jurisdiction

Scope of Federal Power(1) A federally incorporated company has the POWER and the RIGHT to operate throughout the country

- John Deere Plow Co v. Wharton o Shareholder in provincially incorporated “John Deere Plow Co.” tried to

prevent federally incorporated “John Deere Plow Company” from operating in BC because the names were confusingly similar

- John Deere Plow Co v. Duck o Duck resisted paying in claim from federally incorporated “John Deere

Plow Company” on the grounds that provincial legislation prevented companies from operating in BC with names that were prohibited by statute (in this case for being too similar)

Appeals Held Together- (1) A federally incorporated company has the power and the right to operate

throughout the country- (2) Provincial powers cannot refuse to register a federal corporation, on the

basis of a name conflict, since that would have frustrated the federal corporation’s right to operate anywhere in the country

- (3) Federal incorporation does not confer general immunity from provincial laws of general application

Federal Companies are NOT limited by:- It is not necessary for the validity of a federal corporation that the company carry

on business in more than one province Colonial Building and Investment Association v. AG Quebec

- Federal powers of incorporation are not limited to companies incorporated for purposes that would fall within the enumerated federal powers under s. 91

(2) Great West Saddlery Provincial laws cannot affect the NATURE of federally incorporated corporationsLegislation prohibiting a federal company from maintaining an action in the province unless it had obtained a license to carry on business in the province was found to be inapplicable to the federal companyHeld:

- In this case:

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o Legislation inoperative because the law required the federal corporation to affect its corporate nature

o The ability to maintain an action goes to the nature of a corporation It is a necessary component of the ability to carry on business

(3) Canadian Indemnity Provincial laws of GENERAL APPLICAITON can affect the business of a federally incorporated company, as long as they are not targeting the core of a federal company

(4) Royalite Oil Company Provinces can fine federally incorporated companies for not complying with their regulations

Potentially Broad Scope of Federal Powers AG Can v. AG Man Building on the Broad Scope of Federal Powers enumerated in John Deere Provinces cannot prevent federal companies from operating in their jurisdiction, or even create a system in which such prevention COULD occurMan passed legislation requiring anyone seeking to sell shares within the province to obtain a license, which could be refused if the investment had no merits. Fed argued this could not be applied to federal corporations.Held:

- Federally incorporated company could not be refused a license, because the sale of shares was necessary to finance, without which a company could not carry on its business

o Note that modern securities legislation allows for this kind of legislationo The cases seem to say that a province cannot prevent a federally

incorporated company from carrying on a business in the province

Reigning in of Federal Power Lymburn v. Mayland Narrowing AG Can v. AG Man Provinces can require that a company carry on business in the province in a certain way (though not prevent them from carrying on business) An Alberta statute that prohibited the sale of securities except through a licenced broker could be applied to a federally incorporated company.Held:

- Regulating the manner in which a company can sell shares does not infringe on Federal Authority, because it does not prevent the federally incorporated company from operating in the province

- Other types of Provincial Legislation regulating the operation of Federal companies that have been held to be valid:

o Provincial laws which prohibit any corporations from owning land Canadian Indemnity Co.

o Provincial legislation requiring a federal company to register its corporate name, and any names under which it carries on business Reference Re: Constitution Act

Overlapping Provincial and Federal Jurisdiction

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Multiple Access v. McCutcheonFederal and Provincial laws can apply concurrently, as long as the Provincial laws do not infringe the basic essence or status of the federal corporationOntario securities commission alleging under Ontario securities law a violation by a federal corporation of insider trading rules. Federal corporation said that either the legislation was ultra vires, or that even if it was valid it should be suspended in favour of the federal rules. Can you have a provincial securities regulator applying laws that are essentially the same as federal corporate laws, and have both laws apply?Held:

- Both Laws are Valid:o Federal laws under POGGo Provincial laws under 92(11)

- Provincial laws did not contradict the federal law – simultaneous compliance was possible

o Both laws apply concurrentlyAt this point the two constitutional powers stand side-by-side, there have not been many examples of a law being struck down for infringing on the core of another head of power’s authority over corporations

Extra-Provincial IncorporationCanada Business Corporations Act/ BC Business Corporations Act15(1)

15(2)

15(3)

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Capacity of a corp – subject to the act, the corp has capacity, rights, powers and privileges of a natural person

Corp may carry on business throughout Canada

Extra-territorial capacity – corp has capacity to carry on its bus, conduct its affairs and exercise its powers in any jurisdiction outside Cad to the extent that the laws of such juris permit

A company has the capacity and the rights, powers and privileges of an individual of full capacity.

BC Business Corporations Act2 “foreign entity” = foreign corporation or limited liability corporation

“foreign corporation” – a corp that was not incorporated under BC law (corp incorporated under CBCA or law of any other prov)

28 (1) If a name applied for by company contravenes any of the prescribed requirements: the registrar may order the company to change its name (control over companies name in BC)

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(2) Registrar has same authority over the name of extra-provincial companies

(3) This section doesn’t apply to FIC (constitutional rule that federal corporation has right to use it’s name throughout Cad)

32 unless restricted by its Charter or by an act, each BC corporation has the capacity to carry on its bus, conduct its affairs, exercise its powers, to the extent that the laws of that jurisdiction permit

375 Foreign corporation MUST register as extra-provincial company w/in 2 months of carrying on bus in BC

(2) Foreign entity is DEEMED to be “carrying on bus” if:- (a) If’s name or bus name is in phonebook in BC and that listing shows a

BC phone # or address- (b) Its name or any name under which it carries on bus appears in an ad in

BC, giving BC phone # or address- (c) it has, in British Columbia

o (i) a resident agento (ii) a warehouse, office, or place of business

- (d) It otherwise carries on bus in BC (lots of room for interpretation)

(4) Shipping Exception A foreign entity need not be registered if it’s principle business is the operation of ships and it doesn’t maintain warehouse, office or place of bus

376 Application for Registration

(1) To apply to register as an extra-provincial company under this Act, a foreign entity must provide to the registrar the records and information the registrar may require and must:

- (a) reserve its name or an assumed name under section 22 or 26, as the case may be

- (b) appoint one or more attorneys if required under section 386, and- (c) submit to the registrar for filing

o (i) a registration statemento (ii) any other records the registrar may require

(2) Requirement in 376(1)(a) to reserve corp name as part of registration process does not apply to fed corporation (fed corp gets name and registrar will require prov corp to change their name)

377 Registration

Once foreign entity has complied with all terms, the registrar must if it is a fed corp, and may if it is a foreign corp, file the registration

- (rarely says no – registration is not really a control mechanism, more a means of keeping track of who’s operating, where and when)

-

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378 Effect of Registration

(1) Proof of registration of foreign entity is cert as an extra-provincial company

(2) Sets out powers, rights, etc. of extra-provincial company – recognition of the incorporation power of the foreign jurisdiction, subject to general laws of BC (e.g. environ laws, safety regulations, employ standards, consumer protection, etc.) – issue becomes to what extent provincial laws can apply to fed incorporated companies

384 Liability if name of extra-provincial company not displayed

(1) A director or officer of an extra-provincial company who knowingly permits the extra-provincial company to contravene section 27 (1) (a), (b) or (c) is personally liable to indemnify any of the following persons who suffer loss or damage as a result of being misled by that contravention

398 Registrar has ability to cancel incorporation of extra-provincially incorporated company, but not Federally Incorporated Companies

Choosing Jurisdiction of IncorporationChoice between Federal and BC incorporation:

- CBCAo Name protectiono No restriction on maintaining an actiono Lawyers and shareholders in other provinces are familiar with it

- BCBCAo Lawyers in BC are more familiar with ito Easier to talk to Victoria than Ottawao Cheaper

The Incorporation Process(1) file articles of incorporation (see s. 5 and 6 and Form 1); (2) file notice of the registered office (ss. 7, 19, and Form 3); (3) file a notice of directors (ss. 7, 106, and Form 6); (4) pay the prescribed fee (Reg. s. 97 and Schedule 5); and (5) if the corporation is to have a name other than a numbered name, filing a NUANS Name Status Report.

Issuance of a Certificate of Incorporation:Ss.8 and 12(1) On receipt of the required documents, and upon assessment that the documents meet the requirements of the Act the Director shall issue a certificate of incorporation

Federal

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- Process :o 5 Who can incorporate

(1) any person who is 18, of sound mind and not bankrupt (2): incorporation by signing articles of incorporation and

complying with s.7o 6 The Articles

(1): Articles of incorporation must include: (a) name(b) province where registration office is located(c) classes and any max # of shares corporation is auth to issue(d) any restrictions on shares(e) the number of directors, or min-max of directors(f) any restrictions on the bus the corporation may carry on

(2): articles may set out any additional provisions permitted by the act

(3): subject to USA and (4), the articles can specify a greater number of votes than required in the act

(4): articles may not require more than a simple majority to remove a director

o 7 To Incorporate, you must Send to the Director: articles of incorporation notice of registered office (19) and notice of directors (106)

o 8 Director issues certificate of incorporationo 10 Name requirements

(1) Name must include a corporate designation (Inc. Ltd. Corp. etc.)

(5) corporate name MUST be on certain documents: contracts invoices negotiable instruments and orders for goods and services

BCBCA also has requirements for places you must display your name, and there are more of them

(6) A corporation may carry on business under or identify itself by a name other than its corporate name if that other name does not contain a corporate designation

Name must not be the same as or confusingly similar to another corporate or business name

The CBCA allows for the granting of a numbered name in which the Director gives the corporation the next number in sequence together with the words “Canada Ltd.”

o Remember that under BCBCA s.27 a corporation or extraprovincial company must display its name and under BCBCA 158: A director or officer of a company who knowingly permits the company to contravene section 27 (1) (a), (b) or (c) or (2) is personally liable to indemnify any of the following persons who suffer loss or damage as a result of being

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misled by that contravention: purchaser of goods/services from the company supplier of goods/services from the company person holding security in the company

o 263 Requirement to file an annual return failing to file an annual return can lead to the corporation being

stricken by the directoro 266 If you pay the required fee, public can inspect the records

- Result :o 15: Corp has capacity, rights, powers and privileges of individual o 45: SH not liable for any liability, defaults or acts of corporation, subject to

exceptions

ProvincialGoverned by the BCBCA For all practical purposes, the BC company is no different than a federally incorporated company

Corporate law will be governed under BC jurisdiction; in which it was incorporated (“takes its corporate statute with it wherever it goes to carry on business”)

Differences from CBCA Incorporation:

34 Subject to section 40, a company must maintain a registered office and a records office in British Columbia

124 Who can become a Director- (1) A person must not become or act as a director of a company unless that person

is an individual who is qualified to do so.- (2) An individual is not qualified to become or act as a director of a company if

that individual is:o (a) under 18o (b) found by a court to be incapable of managing his affairso (c) bankrupto (d) convicted in or out of British Columbia of an offence in connection

with the promotion, formation or management of a corporation or unincorporated business, or of an offence involving fraud, unless

(i) the court orders otherwise (ii) 5 years have elapsed since:

(A) the expiration of the period set for suspension of the passing of sentence without a sentence having been passed

(B) imposition of a fine (C) conclusion of a term of imprisonment (D) conclusion of term of probation

(iii) pardon granted under Criminal Records Act- (3) A director who ceases to be qualified to act as a director of a company must

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promptly resign

Post Incorporation Process – Getting Up and RunningMeeting: was it held in time? Did directors act w/in their powers?

o 104(1): First meeting of directors of corp – directors shall hold meeting after issuance of certification of incorporation (give 5 days notice – 104(3))

At which meeting the directors “may” (i) make by-laws

o “by-laws” described in s.103 (ii) adopt forms of securities and corporate records (iii) authorize the issuance of shares (iv) appoint officers (v) appoint an auditor to hold office until the first meeting

of shareholders (vi) make banking arrangements (vii) transact any other business

Influence of agency law – meeting is held after certification of incorporation issued b/c A (directors) can’t do anything on behalf of Pr (corp) until the Pr exists (Pr has to be in existence at the time the A purported to act in order to later ratify the acts of the A)

o 133(1)(a): first meeting must be called w/in 18 months of corp coming into existence

Directors: are there enough directors? Have they met residency requirements?o 102 Director’s Power to Manage

(1): Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation

(2): Every corporation must have at least one dir (3): Corps that have issued shares to the public must have at least 3

directors, at least 2 of whom are not officers or employees of the corp or its affiliates

o 103 By-Laws (1) directors make/amend/repeal any by-laws (by-laws must have

shareholder approval) (2) by-laws will last to the next shareholder meeting, at which

shareholders adopt it by ordinary resolution (3) If the directors fail to take it to the shareholders at the next

shareholders meeting, then it is deemed not to be adoptedo 105(1): Qualifications of directors

Corp cannot act as dir of another corp (105(1)(c)) Dir not required to hold shares (105(2))

o Restrictions on directors: Residency requirement: at least ¼ of directors must be resident Cads;

if there are less than 4 directors, at least one must be resident in Cad

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(105(3)) – make sure you have enough Cad citizens on your board (landed immigrants and perm res don’t qualify)

“Res Cad” defined in Regulation 13 – people who, though they may not reside in Cad, have otherwise close connections

Definition of “resident Cad” will prevent someone from forming one-person corporation (if you are perm res but not citizen, can’t incorporation under CBCA, but could under BC BCA)

o 106(3): Term of directors: maximum term is 3 years Articles or by-laws may impose specified term (1-3yrs) (106) If no specified term, directors must be re-elected at next SH meeting

(106(5)) Terms may be staggered – expire at diff times (106(4))

o 106(9): Director must acquiesce to being made a director, by:a. being present at the meeting when election or appt took place and

didn’t refuse to hold officeb. was not present and,

i. consent to hold office in writing before the elect or appt, or w/in 10 days

ii. acted as dir pursuant to the elect or appto Annual meeting of SH must be held (133(1))

Subsidiaries and AffiliatesSection 2 of the CBCA

2 Affiliates- For the purposes of this Act:

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

o (b) if two bodies corporate are affiliated with the same body corporate at the same time, they are deemed to be affiliated with each other

3 “Control”- A body corporate is controlled by a person or two or more bodies corporate if:

o (1) you have more than 50% of the votes, ANDo (2) that is more than enough to elect the majority of the directors

4 Holding Body Corporate- A body corporate is the holding body corporate of another if that other body

corporate is its subsidiary

5 Subsidiary Body Corporate- A body corporate is a subsidiary of another body corporate if:

o (a) it is controlled by (i) that other body corporate

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(ii) that other body corporate and one or more bodies corporate each of which is controlled by that other body corporate

(iii) two or more bodies corporate each of which is controlled by that other body corporate

o (b) it is a subsidiary of a body corporate that is a subsidiary of that other body corporate

Corporate StatusCBCA15 Corporation has the capacity and (subject to this Act) the rights, powers, privileges of a natural person

45(1) (1) The shareholders of a corporation are not, as shareholders, liable for any liability, act or default of the corporation except under subsection 38(4), 118(4) or (5), 146(5) or 226(4) or (5)

- Exceptions: o 38(4): where a shareholder has received payment from the company on

reduction of capital (portion or all of the amount the shareholder paid for shares) the shareholder may be required by a creditor for the company to repay the amount

o 118(4)&(5): Directors who vote for/consent to resolutions that authorize transactions which reduce the assets of a corporation that cannot pay its liabilities may become personally liable to reimburse the corporation for the amounts paid

o 146(5): a shareholder may be liable as a director when she or he acts in the place of a director under a unanimous shareholder agreement.

o 226(4)&(5): where a corporation has been dissolved and a creditor has taken action against the corporation either before it was dissolved, or within two years of its dissolution

- Note that these exceptions only operate to make the shareholder pay back to the corporation, and are limited to the original contribution and any additional amount received as distribution of the corporation’s property

BCBCA87 Liability of Shareholders

- (1) No shareholder of a company is personally liable for the debts, obligations, defaults or acts of the company except as provided in Part 2.1.

- (2) A shareholder is not, in respect of the shares held by that shareholder, personally liable for more than the lesser of

o (a) the unpaid portion of the issue price for which those shares were issued by the company, and

o (b) the unpaid portion of the amount actually agreed to be paid for those shares.

Salomon v. Salomon & Co. (UK)

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(1) A corporation should properly be considered a separate legal entity from the shareholders

(2) A Shareholder can also be a creditor of the corporationSalomon had a boot manufacturing business that he ran as a sole proprietorship, he sold the business to a company that he had formed. He sold the business to the corporation partially on credit. Business did not go well, and Salomon and his wife left money to the business, as well as Mr. B. The corporation eventually defaulted on loan from Mr. B. The Courts Below:

- Trial suggested the company could be viewed as a mere “alias” for Salomon, making him personally liable

- Appeal preferred to compare the situation to one of trust where the company was a trustee for Mr. Salomon

Held:- Properly constituted corporations are separate legal persons

o To not consider this corporation a separate legal entity would jeopardize existing businesses under the incorporation legislation

o The creditors were not deceived, the corporation was legally constructed

Lee v. Lea’s Air Farming Ltd. (NEW ZEALAND)A shareholder can also be a director of the corporation, an officer for the corporation and an employee of the corporationLee was sole shareholder, sole director, president and the only employee of the company. Lee died on the job, his wife filed under worker’s comp. Worker’s comp. resisted, claiming he was not an employee under the legislation because he employed himself (director to employee).Held:

- Lee and Lee’s corporation were separate legal entities.o It did not matter that Lee gave orders to himself, because he did so as an

agent for the corporation, which had a separate legal existence.- Note: this is a good example of a one-shareholder corporation

Macaura v. Northern Assurance CoThe corporation owns the assets, not the shareholderM transferred his interest in a timber company and cost of timber felled for $42,000, which was paid for in $1 par value shares. After he signed the 5th insurance contract the timber was destroyed by fire. His claim on the insurance was denied because the company owned the asset, even though he had signed for it.Held:

- The company is the person that has an interest in the assets not the shareholders- The shareholders, as shareholders, have a contractual claim against the company

with respect to the rights given in the shares they hold but they do not have an ownership in the assets of the company

Westbank Property Management Ltd v. BC

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A corporation, all shares of which are owned by a tax-exempt Aboriginal person (under the Indian Act) is not tax-exempt – because the corporation is a separate legal entity.

The Corporate VeilKosmopolous v. Constitution Insurance

(1) The principle in Salomon should be respected, the corporate veil should not be lifted (i.e. the separate legal personality of the corporation from its sole shareholder should not be disregarded) for the benefit of the shareholder

(2) However, as a matter of insurance law, the sole shareholder of a company can have an insurable interest in the assets of the company

Wilson “ The law on when a court may disregard [the separate legal personality principle] by “lifting the corporate veil” and regarding the company as a mere “agent” or “puppet” of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the “separate entities” principle is not enforced when it would yield a result “too flagrantly opposed to justice, convenience or the interests of the Revenue”

BG Preeco v. Bon StreetCourt Examined cases on lifting the corporate veil Strong Affirmation of the Salomon principle (Cases lifting the corporate veil were not followed)∏ agreed to sell property to Bon Street for ~4million, BS later repudiated and offered 3million. When ∏ took BS to court for repudiation, it turned out that the BS that had entered into the contract was a shell company with no assets. The BS with which ∏ had originally dealt had changed its name and was now Bon Street Holdings. The shareholder and director of the two companies were the same. It was the original company that the plaintiff dealt with at the beginning and thought it was dealing with throughout. It knew of no other company. It was the original company through its officers that led the plaintiff to that belief. It was the original company that paid the deposit of $100,000.Held:

- Though π can claim damages for fraudulent misrepresentation against the directors personally (the change of name was deliberately deceptive), the court will not pierce the corporate veil

- Cases where corporate veil was pierced for “fraud or improper conduct”: Gilford Motor Co. v. Horne court granted injunction against person

using a corporation to avoid a restrictive covenant Jones v. Lipman Verdict against a former ∆ who tried to avoid a finding

of specific performance by selling the property involved to a shell company Lockharts Ltd. v. Excalibur Holdings judgment against one company

was binding on another company owned by the same individual, as assets had been conveyed to the second company in order to avoid the plaintiff's judgment.

- Authorities on not lifting the corporate veil Professor Welling in Corporate Law in Canada Little need be said

about this rationale, other than that it simply will not do. There are, so far as we know, no such broadly enforceable standards of "fair play and good

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conscience," at least in Canadian corporate law Wilson in Kosmopoulos The most that can be said is that the courts'

policy is to lift the veil if they think that justice demands it and 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.

De Salaberry Realties- Normally, where common intention of a group of companies (owned by the same

people) is proven, it will be imputed to a member of the group- However Corporate veil was not lifted to impose tax liability of one

corporation on members of the group

Steven G. Meredith v. The Queen“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”Engineer incorporated, the corporation contracted with US companies and the engineer performed the service in the US for 6 months. Engineer applied for overseas employment tax credit for employees of a Canadian corporation. The CRA assessed him as an independent contractor, saying there was no difference between him and the corporation.Held:

- It was an error to pierce the corporate veil between the corporation and the engineer simply because the engineer controlled the corporation and used it to carry on business

-

Lifting the Corporate Veil1) With Few Exceptions, courts have upheld the principle from Salomon (Separate Entities)

2) Exceptions have been made to the Salomon principle where it would be “too flagrantly opposed to justice” to apply the principle

- While the rhetoric is similar, the reasons given by courts for piercing the corporate veil “follow no consistent principle” Kosmopoulos

- “Equity will not allow a wrongdoer to use a company as a shield for improper conduct or fraud” [Big Bend Hotel Ltd. v. Security Mutual Casualty Company (1980, BC)]

Reasons Given for those Rare Exceptions:- (1) Where the company was really the “mere agent”/alter

ego/instrument/puppet/sham/cloak of the shareholder-- (2) Disregard of the corporate entity by the shareholders themselves

o court may refer to failure to keep separate books, make corporate records,

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hold corporate meetings, make regular corporate filings

- (3) Conduct akin to fraudo 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 Gilford Motors

-- (4) Affiliated Enterprises

o The courts appear to be more willing to disregard the corporate entity where the effect of doing so is to link a parent company with its subsidiary or to link a subsidiary with one or more other subsidiaries through a parent corporation

Smith, Stone and Knight Ltd. v. Birmingham CorporationExample of the “affiliated enterprises” situation in which courts have been willing to pierce the corporate veil ALTER EGO PRINCIPLESmith, Stone, and Knight Ltd. owned all the shares in a subsidiary corporation which had its land expropriated by the city. SS&K sought compensation - the city held that it needed to pay considerably less than normal expropriation because the land was expropriated from a subsidiary which was a separate legal entityHeld:

- SS&K were proper owners of the land, the separate corporate entity of the subsidiary was discarded

- Exception to the Salomon principle arises where the corporation is simply an agent of the shareholder

- Court will Consider: o Were profits treated as profits of the parent companyo Were persons conducting business appointed by the parent companyo Was the parent company “head and brain” of the trading ventureo Did parent company govern the trading ventureo Did the parent company make profits by its skill and directiono Was the parent company in effectual and constant control

Problem: the answers to these questions appear to always be yes in any parent-subsidiary relationship: are no subsidiaries separate legal entities?

Alberta Gas Ethylene v. MNRReigning in Smith Stone and KnightAlberta corporation (AGEC) sought financing from insurance companies in the US. To get around the higher interest rates for non-domestic investments, the AGEC incorporated a subsidiary in Delaware (ASCO) which took out the loan, and paid it to the AGEC. MNR assessed AGEC for withholding taxes on interest payments made to ACSO as a non-resident. AGEC argued that ACSO was merely a shell or the “borrowing arm” of the parent corporation, and that the court should use the factors in Smith to pierce the corporate veilHeld:

- Corporate veil was not pierced

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- (1) It is NOT sufficient to consider the six criteria and when they are all met to ignore the separate legal existence of the subsidiary company

o One must consider further for what purpose and in what context the subsidiary is being ignored

- (2) We do not ignore the existence of subsidiary corporate entities per se, we simply say that consequences will be drawn in certain circumstances DISPITE the legal existence of those subsidiaries

Gregorio v. Intrans-CorpFurther mitigation of Smith Stone and Knight

(1) “Generally, a subsidiary, even a wholly owned subsidiary, will not be found to be the alter ego of its parent unless the subsidiary is under the complete control of the parent and is nothing more than a conduit used by the parent to avoid liability.”

(2) The alter ego principle is applied to prevent conduct akin to fraud that would otherwise unjustly deprive claimants of their rights

Requirement to Display the Corporate NameREMEMBER: failing to meet the requirement to display the corporate name can make directors liable under the BCBCA (this is not lifting the corporate veil) BUT when the controlling director/shareholder of a corporation fraudulently fails to comply with the naming requirements for the purpose of deceiving a person or entity with which they are contracting, the court may lift the corporate veil

CBCA Section 10:- (1) The word or expression “Limited”, “Incorporated”, “Corporation” (or

their french versions) or “Société par actions de régime fédéral” or the corresponding abbreviations shall be part, of the name of every corporation

- (2) A corporation shall set out its name in legible characters in all contracts, invoices, negotiable instruments and orders for goods or services issued or made by or on behalf of the corporation

- (3) Subject to subsections (5) and 12(1), a corporation may carry on business under or identify itself by a name other than its corporate name if that other name does not contain, other than in a figurative or descriptive sense, the expressions of corporation set out in (1)

BCBCA:- 27

o (1) company or extraprovincial company must display its name (or assumed name where allowed by this Act) in legible English or French characters

o (2) If a company has a seal, the company must have its name in legible characters on that seal

- 158o (1) A director or officer of a company who knowingly permits the

company to contravene section 27 (1) (a), (b) or (c) or (2) is personally

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liable to indemnify any of the following persons who suffer loss or damage as a result of being misled by that contravention:

purchaser of goods/services from the company supplier of goods/services from the company person holding security in the company

o (2) A director or officer of a company who issues or authorizes the issue of any instrument referred to in section 27 (1) (d) that does not display the name of the company is personally liable to the person holding that instrument for the amount of it, unless it is duly paid by the company

- 384 reproduces 158 for extraprovincial companies

H&D Hobby v. SvatosExample of a director being held personally liable for debt where he had personally signed some documents ∏ sues ∆ for the 24,000 owing in debt. ∏ believed he was dealing with the individual Alex Svatos carrying on business as Edmonton Hobby, turned out to be 327401 Alberta Ltd. carrying on business as Edmonton Hobby. ∏ argues that the director (Svatos) should be personally liable (corporate veil should be pierced) even though the contract was made with the corporation, because his failure to comply with corporate naming regulations was a deliberate act of fraud.Held:

- Svatos was personally liable (corporate veil was pierced)- The passing reference to a corporation on few cheques in one year is not sufficient

to exempt Svatos from personal liability when the entire balance of his business (including the most important piece of business done with the ∏) had no reference to the corporation at all

o Corporation shall set out its name legibly on all contracts, invoices, instruments, and orders issued or made on the corporation’s behalf (10(2))

o Evidence a business proposal sent by Svatos to the Plaintiff which Svatos signed personally, and the plaintiff understood as a personal promise to pay

Reincorporation/ContinuanceA corporation that has been incorporated under one jurisdiction may decide to become incorporated under a different stature in another jurisdiction

- this is usually to facilitate amalgamation- 181: two or more corps, including holding and subsidiary corps, may amalgamate- likely to incorporate under CBCA if carrying on bus nationally or internationally

(priority to name)Note: The Long Way to achieve this is to incorporate a new corporation in the desired jurisdiction, sell shares in the new corp. for shares in the old corp. until the new corp owns all the old corp. Wind down the old corp. Transfer credits and contracts.

Process:- (1) Obtain a resolution from the shareholders (188(1), (5))- (2) obtain approval from the Director (188(1))

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- (3) register in the other jurisdiction making amendments to the incorporation documents (by special resolution) to make them conform to the requirements of the jurisdiction in which the company is being incorporated

- (4) On receipt of notice satisfactory to Director that the corporation has been cont’d under the laws of another jurisdiction, the Dir SHALL file the notice and issue a cert of discontinuance (188(7))

187:- (1): A corporation may apply to the Director for a certificate of

continuance (if authorized by laws of jurisdiction in which incorporated)- (2): at the time of the move, the corporation can use its articles of continuance

to amend its Articles of Incorporation without specifying that it is doing so The articles of continuance are deemed to become the

articles of incorporation- (3): The corporation must draft and send articles of continuance (Form 11),

notice of office (19) and notice of directors (106) to the Director- (4): Director SHALL issue certificate of continuance (if all requirements

met and fees paid)- (5): effect of certificate of continuance – foreign body corp becomes CBCA

corp(a) articles of continuance are deemed to be articles of incorp, (b) cert of continuance treated like cert of incorp

- (6): Director SHALL send copy of cert of continuance as notice of continuance to official in original jurisdiction

- (7)(a)-(e): rights preserved – can’t change ownership of corp property, or escape liability for any debts/causes of action, pending proceedings or convictions to be enforced by moving to another juris

- (8): nothing about SH changes either – shares are deemed to have been issued in compliance w/the Act; doesn’t relieve anyone of liabilities wrt shares, nor does it deprive anyone of their rights wrt shares

*now a CBCA corp, so have to register in former prov of incorp to carry on bus, and notify other juris of the change (BC BCA s.375-378)

188:- (1): Subject to subsection (10), a corporation may apply to the appropriate

official or public body of another jurisdiction requesting that the corporation be continued as if it had been incorporated under the laws of that other jurisdiction if the corporation

(a) is authorized by the shareholders (special resolution – Fundamental Change) in accordance with this section to make the application; and

(b) establishes to the satisfaction of the Director that its proposed continuance in the other jurisdiction will not adversely affect creditors or shareholders of the corporation.

- (3): notice of meeting must be provided to SH

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- notice must be in compliance w/s.135(5) and (6) b/c this is spec bus, special notice provisions apply (notice must provide sufficient info about the proposed resolution that the SH can form an opinion; text of the res; 190 rights of dissenting SH must be in the notice – failure re: dissent rights doesn’t invalidate the discontinuance)

- (4): ALL SH are entitled to vote re: continuance - (5): application for continuance must be approved by special resolution

(2/3rds majority) of SH; by-laws or will set out quorum (or 139 –holders of majority of shares), special majority has to be of SH who attend and vote

- (6): can include a clause in the res allowing the directors to abandon the application w/o further approval

- (7): on receipt of notice satisfactory to Director that the corporation has been cont’d under the laws of another jurisdiction, the Dir SHALL file the notice and issue a cert of discontinuance

- (8): notice in (7) deemed to be arts- (9): CBCA ceases to apply on date shown on cert of discontinuance- (10)(a) – (e): prohibits export unless rights are preserved

190 Shareholder Can Object (1) Subject to sections 191 and 241, a holder of shares of any class of a corporation may dissent if the corporation is subject to an order under paragraph 192(4)(d) that affects the holder or if the corporation resolves to:

- (d) be continued under section 188

Pre-Incorporation ContractsIn some cases, a promoter will seek to contract on behalf of a corporation that has yet to be incorporated (seeking security of contract before incurring the cost of incorporation)

Summary of the Common Law:(1) A corporation cannot ratify a contract that a promoter purported to enter into on

behalf of the corporation before the corporation came into existence (Kelner v. Baxter).

(2) A promoter can be liable on a pre-incorporation contract but only if it can be said that it was intended in the circumstances that the promoter be a party to the contract (Kelner v. Baxter as interpreted by Newborne v. Sensolid Ltd., Black v. Smallwood, and Wickberg v. Shatsky)

(3) Where the promoter purported to act on behalf of a corporation before it came into existence the promoter can be liable for a breach of warranty of authority (Black v. Smallwood and Wickberg v. Shatsky)

Kelner v. Baxter (UK)A company cannot ratify a contract, or purported contract, entered into on its behalf if the company was not in existence at the time a person purported to enter into a contract on its behalf∏ and ∆ were promoters of the Gravesend Royal Alexandra Hotel Company. ∏ offered to sell wine to ∆ before the company was incorporated, which the ∆s accepted. The

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directors ratified the agreement before incorporation, and then purported to do so again immediately after incorporation.Held:

- Neither ratification was valid, because the company did not exist at the time of ratification and the principle thus did not have the power to authorize its agent at the time of the contract

o This case also highlighted the potential for promoters to be liable on contracts they purport to enter into on behalf of an as yet unincorporated entity however, the principle was not applied

o In this case, there may have been grounds for holding the promoter personally liable, since the conduct of the parties implied that there was a contract between the plaintiff and the persons who signed for the non-existent corporation

Newborne v. Sensolid Ltd. (UK)Promoters will only be liable if it was intended in the circumstances that they were themselves to be parties to the contractN contracted with S for tinned ham. Price of ham fell and S refused to complete contract. Contract was made by promoter of N before N had been incorporated. N tried to hold S to the contract.Held:

- N the company could not hold S to the contract, because it could not ratify contracts made on its behalf before incorporation

- In this case, N the person could not hold S to the contract because, given the words of the contract, it did not appear that N the person had intended to enter the contract himself

o Strict rule of construction is the contract constructed in such a way that it appears that the intent could be to bind the party to the individual signing on behalf of the not-yet-extant corporation?

Black v. Smallwood & Cooper (Aus)∏ seeks to hold ∆ to a contract signed on behalf of a corporation that did not yet exist. ∆s signed thinking the corporation had been incorporated and that they were directors.Held:

- Court followed Newbourne strict rule of construction the circumstances suggested it was not a contract between the ∏ and the

person that signed on behalf of the non-existent corp- Company did not yet exist, despite alleged directors believing it existed, and

therefore the contract could not be ratified It was nonetheless suggested that the defendants could be liable for a breach

of warranty of authority

Wickberg v. Shatsky (BCSC)Affirmed Principles of Pre-Incorporation Contracts in BCWickberg was hired by Shatsky to manage a new corporation. His employment contract

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was signed by Shatsky for a corporation that was never incorporated. W’s claim for wrongful dismissal from the new corporation (which ran into the ground) was complicated by his attempts to prove he had a valid employment contractHeld:

- (1) Personal Liability in Contract A person signing on behalf of a nonexistent company is not automatically

liable for that contract there must be some indication that the promoter was reasonably within the scope of the contract

- (2) Breach of Warranty of Authority In this case, there was a breach of warranty of authority because S represented

the existence of the non-existent corporation while knowing it was not there (However, expectation damages were nominal, because he was

only getting the amount that he would have otherwise gotten from the corporation, which was bankrupt)

Statutory Modification:Issues with the common law approach:

- Creates Risk that there will be no enforceable K (third party reliance)- Creates unnecessary costs (people have to take precautions to ensure corporations

exist)

CBCA s. 14- (1) Unless the contract expressly provides otherwise a person who enters into,

“or purports to enter into”, a “written” contract in the name of or on behalf of a corporation before the corporation comes into existence, is personally bound by the contract and is entitled to benefits of the contract.

- (2) A corporation can “adopt” a WRITTEN contract within a reasonable time after it comes into existence Either by action or by conduct

- (3) The court can apportion liability between a corporation and a person purporting to act for the corporation

- (4) The parties can “expressly” agree in the written contract that the person who enters into the contract on behalf of the corporation before it came into existence is not bound by the contract

BC BCA s.20- (2): person who purports to enter into a contract on behalf of a company is:

(a) deemed to warrant to the parties:o that the company will come into existence in a reasonable time, o that the company will adopt the purported contract within a

reasonable time (b) The person is liable to the other parties to the purported contract for

damages from breach of that contract (c) The measure of damages will be the same as if:

o the company existed when the K was entered into

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o the person who entered into the purported K had no right to do soo the company refused to ratify

This section does not make the promoter liable on the contract itself but rather liable on a deemed warranty, which can mean a different measure of damages than liability for breach of contract.

- (3): permits the new company to validly adopt the pre-incorporation K (overrules CL)

- (4): if the company adopts and is bound, the facilitator ceases to be bound by the warranty

- (5): if the company doesn’t adopt the K, the facilitator can seek an order that any benefit received by the co. can be recovered by the applicant (3rd party) (you can seek any benefit you’ve conferred on the company on the assumption they would adopt the K)

- (6): whether or not pre-incorporation K adopted, either party may apply to Court for order apportioning liability

- (7): A court may make any order it deems appropriate - 20(8): if there’s an express agreement to that effect in the written K, facilitator

won’t be liable

Landark Inns v. HoreakApplying s.14 of the CBCA (or its equivalent)H signed a lease for space in the ∏’s mall as chairman of a company that had not yet incorporated. Before the company was incorporated, H decided to lease another space, and terminated the lease. ∏ sued for damages, and H’s company, upon incorporation, sought to adopt the contract (so that H could avoid personal liability)Held:

- H was personally liable under CBCA 14(1)- 14(1) codifies Kelner

Having the name of the company on a contract is not sufficient for the purposes of s. 14(4) to alter the liability of the promoter under s. 14(1) – altering s. 14(1) requires an express provision

The corporation did not adopt the contract under 14(2) during the time that the contract existed

Bank of Nova Scotia v. WilliamsCourt Can apportion liability between promoter and corporation, BUT will not when apportion when the party is not mislead as to the fact that they are contracting with the corporationMrs. A put a second mortgage on her house and loaned the proceeds to Williams Co, which was later incorporated. Once the company was incorporated, the directors of the company (one being her husband) sent her a promissory note for the loan. There was no directors’ resolution for the loan, but it was signed by the directors. The company went bankrupt. Mrs. Atkins asked court to use its discretion to apportion liability between promoters and corporation.Held:

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- Court refused to apportion liability- There may be times when the company and the one who contracted on its behalf

should not be able to agree as to the assumption of liability to the detriment of the person with whom the contract was made. However, in the situation before me, Mrs. Aikins was not misled as to which party she was advancing moneys to, nor did any action of Mr. Williams or the company mislead her as to who would be assuming responsibility for repayment

Ultra Vires Acts of Certain CorporationsAn act which was outside the company’s objects and powers was null and void, and could not be given life by any act of ratification, even by unanimous resolution of shareholders Ashbury Ry. Carriage & Iron Co. v. Riche.

A corporation may be constricted by it articles, or statute in certain areas

Old Rule Doctrine of Constructive Notice - A person dealing with a corporation was deemed to be aware of the contents of

documents filed in a public office

CBCA s. 17 Effectively Abolishing the Old Rule - No person is affected by or is deemed to have notice or knowledge of the contents

of a document concerning a corporation by reason only that the document has been filed by the Director or is available for inspection at an office of the corporation

Modern Rule Indoor Management Rule - A person dealing with good faith in a company can assume that their “indoor

management” has been properly carried out Note: this rule does not preclude a corporation from asserting that a 3rd party

had actual notice of restriction of authority

CBCA: 15 (1) (BCBCA 30) corporation has the capacity and (subject to this Act)

the rights, powers and privileges of a natural person 16 a corporation may restrict its objects and powers in its articles

o (2) (BCBCA 33(1)) a corporation shall not carry on any bus or exercise or any power that it is restricted by the articles from carrying on or exercising, nor shall the corporation exercise any of its powers in a manner contrary to the articles

o (3) (BCBCA 33(2)) no act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only that the act or transfer is contrary to its articles or this Act. (WEIRD)

17 Abolishes constructive notice: no person is deemed to have constructive notice by reason only that the proper documents have been filed

18 Persons may rely on authority of companies and their directors, officers and agents

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o (1) a corporation cannot assert against a person dealing with the corporation that:

(18(1)(a)); there has been non-compliance with its constating documents

(18(1)(b) and (c)); that its directors or registered office are other than those stated in the most recent notices sent to the Director

(18(1)(d)) that a person held out by the corporation as a director, an officer or an agent of the corporation has not been duly appointed or has no authority to exercise the powers or perform the duties that are customary in the business of the corporation or usual for such director, officer or agent

o (2) Extremely important qualification a person who has or ought to have, by virtue of his position with or relationship to the corporation, knowledge to the contrary, cannot have the benefit of subsection 18(1).

116 provides that acts of directors and officers are valid notwithstanding irregularities in their election or appointment, or in their qualification.

Communities Economic Development Fund v. Canadian Pickles Corp.While the doctrine of ultra vires has been largely abolished by statute (16(3)), limited aspects of the doctrine may be present with respect to corporations created by special Act for public purposesCanadian Pickles secured a loan from the appellant, and the majority shareholders signed a guarantee. The CEDF’s articles stated that its objects were to encourage the economic development of "remote and isolated communities" in the province of Manitoba. “remote and isolated” was not defined. CP defaulted on the loan, CEDF took them to court. Trial Judge found respondent liable, CoA overturned the decision.Held:

- The appellant's loan to Canadian Pickles was contrary to the objects of the appellant as stated in s. 3 of the Act. Stony Mountain, where Canadian Pickles' operation was located, is not a

remote and isolated community- Distinction between CL and Chartered corporations:

CL all powers of a natural person, indoor management rule applies Statutory created for a public purpose, corporations cannot act outside their

legal framework- For Statutory Corporations: a company created for a specific purpose by an Act of

a legislature ought not to have the power to do things not in furtherance of that purpose

Shares and ShareholdersShares: A Bundle of Rights Sparling v. Caisse de Depot et Placement

- Share is a bundle of interrelated rights and liabilities

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- Owning a share is not owning a part of the assets of the corporation , it is only a set of rights to the benefits from the corporation

Share is not defined in the CBCA, but is included in the definition of “security” under 2(1)

Three Main Rights (Must appear somewhere) 24(3)- (1) The right to vote- (2) The right to receive dividends- (3) The right to receive residual property on dissolution (subject to the payment of

debts)

Presumption of Equality- Shares are presumed equal unless otherwise indicated- 24(3) Where a corporation has only one class of shares, it is presumed that that

those shares include each of these rights

Classes of Shares- 24(4) indicates that the articles may provide for more than one class of shares

and that if they so provide the rights, privileges, restrictions and conditions attaching to the shares of each class shall be set out in the articles

- The classes of shares must, cumulatively, have the three main rights

Series of Shares- Issue: Directors can normally issue more of an existing class of shares (subject to

authorized limit), However if it is decided that some different share rights should be offered to finance the particular venture then the directors need shareholder approval (fundamental change)

- Solution: Serieso directors can be allowed to issue the shares of one class of shares in

“series”o The authority to issue shares of a particular class in series has to be given

to the directors when the class is created- Example:

o You could have Class A with: Series 1 - $5/share with voting rights Series 2 - $8/share with voting rights

Par Value Shares- Originally: “Par Value” of a share was simply a nominal value assigned which

had no relation to the worth of the shareo This was seen as a way to provide creditors with assurance and a basis for

assessing the accessible capital of a corporation- Issues:

o Figure became meaninglesso Contributed Surplus was deceiving o Deceiving to Creditors

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- Solution:o 24(1) of the CBCA provides only for shares without par value – the

directors assign a stated value of shares for the purposes of capital accounts

Stated Capital Account26(1) a stated capital account is maintained for each class or series of shares that has been issued

- total amount for which the shares of the class or series have been issued- Not cash reserves, simply a bookkeeping entry which tracks number of shares

issued and their priceMechanism:

- if 100 class A shares at $5 are issued on Monday and 100 class A shares at $10 on Tuesday, the stated capital account will be $1500 with 200 shares outstanding.

- Each share will have a stated capital of $7.50 – the average of the class – so the greater reward going to the earlier investors who took the greater risk this has tax implications

Redemption of Shares34(1) a corporation can repurchase its own shares, so long as when it does so:

- (i) the corporation is not, or would not be after payment, unable to pay its liabilities

- (ii) the realizable value of the corporation’s assets would not, after the payment, be less than the aggregate value of its liabilities and stated capital of all classes

Under the CBCA, a corporation cannot own shares in itself – repurchased shares must be cancelled or restored to unissued shares (where the authorized limit has been reached)Redemption v. Retraction:

- Redemption Right corporation has the right to buy its shares back (shareholders must tender an offer)

- Retraction Right shareholder has the right to sell its shares back (corporation must tender an offer)

Pre-Emptive Rights28 A pre-emptive right gives existing shareholders of a class of shares the right to purchase of any newly issued shares of that classMechanism:

- If a corporation had 100 shares and there were 10 shareholders with 10 shares each (with pre-emptive rights), and the corporation issued 20 new shares, each shareholder would have the right of first refusal to 2 (1/10th) of the new shares

Preferred Shares:Usually, if there is distinction among share classes, there will be common shares and one or more class of preferred shares

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1) Distinct from “Common Shares”2) Preferred Shares typically have a preference with respect to some right, usually a

preference with respect to receiving dividends and/or receiving a share of the proceeds on liquidation preferred shareholders get their money before other shareholders

Participation: Differing Presumptions International Power Co. v. McMaster University

A preferred share is “participating” if the shareholder, after he has received his preferred dividend or funds on windup, can share in the remaining money with the common shareholders

(1) Dividends Beyond Preferred Amount Presumption is non-participating

Usually shares are presumed to have equal rights, BUT with preferred shares, unless it is expressly specified, their right to a share is limited to the amount that is preferred

I.E: if they receive $5 before common shareholders, and nothing else is specified, they receive a maximum of $5

(2) Proceeds from Dissolution Beyond the Preferred Amount Presumption is participating

presumption of equality with respect to preference shares when it comes to a share in the proceeds on dissolution

I.E: if the preferred shares have a preferred right to receive $100 on dissolution before the common shares get anything they will get the $100 and then share in anything left over with the common shares on a pro rata basis unless the incorporating documents specify otherwise.

Access to Information about Shares- 49: Each SH has right to share certificate

o this is usually too cumbersome, inefficient for large corps to issue- 50: Every corporation is required to keep “share register” – kept w/minute book- 20(1) and (2): Corporations are required to keep records, including (1)(d) “share

register” - kept at registered office of the corp or at a place designated by the directors - 21(1): who has right to examine records SH, creditors, Dir

o (1.1) anyone can review the share register of a distributing corporation and take copies, for a fee

o (1.1): person seeking access to share register must sign an affidavit swearing it will only be used in accordance w/(9)

21(7) – what needs to be in affidavit name, address, use 21(9) – approved purposes for use of share register(a) an effort to influence the voting of SHs of corp;(b) an offer to acquire securities of the corp; or(c) any other matter relating to the affairs of the corp

- 21(2): Shareholders of all corps are entitled to copy of articles, by-laws, Unanimous Shareholder Agreements for free

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- 241(3): SH can apply to have error in SH register rectified

Issuing and Paying for Shares:- 25(1): Terms of the Issuing of Shares

o (1) directors have power to issue shares, but subject to articles, by-laws, USA

o (3) Shares cannot be issued until full consideration is paid in money, property, or services

This is to prohibit the Watered Stock Problem – issuing shares which are stated to be more than their real value (which misrepresents the amount of capital the corporation has)

o (4) Determining whether property or services are fair equivalent of money - directors may take into account reasonable charges and expenses of organization and reorganization and payments for property and past services reasonably expected to benefit the corporation

- 118: Remedies the “Watered Stock” Problemo (1): Director Liability If directors vote for or issue a share for

consideration other which is less than fair value, the directors will be personally liable to make up the diff to the corporation

o (3): directors can recover against other directorso (6) Defense of Due Diligence A director who proves that the director

did not know and could not reasonably have known that the share was issued for a consideration less than the fair equivalent of the money that the corporation would have received if the share had been issued for money is not liable under subsection (1)

- 115: Delegation directors can create a managing dir or committee of directors and delegate some of their powers

o 115(3)(c): Delegation Restriction directors may not delegate the power to issue securities

- 121(c): directors can create the officers and delegate auth to them, but can’t give them general powers to do anything mentioned in 115(3)(c)

Share Rights and Restrictions:- 6(1)(c): allows for different classes of shares with different rights and restrictions

o rights generally deter value of shares (entitlements vis a vis the corp)o rights must be stated in the articles

- 24o (3) : If there is only one class of share, each share is equal to

every other share and carries all three of the basic rights sets out what those rights are, but not limited to these three rights

right to vote right to receive dividends right to share in property on dissolution

Jacobsen v. United Canso, Bowater v. Craine Voting rights affirmed as matter of corp law in R. v. McClure

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o (4): The articles may provide for more than one class, and if they do they must:

Set out all of the rights attached to each class and all of the basic three rights must be accounted for

THE CLASSES MUST DIFFER IN SOME RIGHT

each of the rights listed in (3) have to be attached to at least one class of shares– if there is only one class of shares, that class must have all these rights

popular when small, closely held corps go public – family wants to retain control (i.e. 3% of shares have 62% of voting rights), SH seem willing to buy non-voting shares

common for voting power to be concentrated in small group of people multiple voting shares

- 140(1): Voting Rights 1 share – 1 vote. unless varied by the articles, presumption is one share = one vote

o Reading 24(3) and 140 together – all shares of a class must have same rights (Jacobsen, Bowater)

Bushell v. FaithThis was an English case – probably not good law anymore: seemed to say that voting rights can vary in certain situations in one class, as long as they all have the same right to the variable rights and it is done so in the articles (140(1)).Articles of association of the company held that a director got three votes/share when there was a resolution to remove that director. There were three directors with 100 shares each. This effectively meant that no one could remove a directorHeld:

- This was a valid granting of voting rightso The legislature must have known of special voting rights and if the

legislature had wanted to restrict special voting rights in these circumstances it would have said so

Jacobson v. United CansoShares of the same class must have the same voting rights United Canso incorporated in 1954 pre. CBCA. Jacobson was a member of a shareholder’s committee unhappy with the mgmt. of UC. Shareholder’s committee represented 6% of the shares, Buckley family (controlled UC) effectively continued to control corporation even though they did not own more than 50% of the shares. Shareholder’s committee began to acquire shares, encountered article that said no shareholder could have more than 1000 votes, no matter how many shares you own. Shares of the same voting class contained different voting rights depending on how many shares you have – is such a provision contrary to CBCA?Held:

- A corporation can only differentiate among classes of shareholders, not among shareholders of a certain class

o Thus, having shares with different voting rights depending on how many

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you owned was contrary to the Act- However, 16(3) holds that no act of a corporation, including any transfer of

property to or by a corporation, is invalid by reason only that the act or transfer is contrary to its articles or this Act So: Jacobsen was seeking a compliance order under section 247

Note: before this judgment came down, the ruling family was successful in getting enough votes to continue the company in Nova Scotia, likely because Nova Scotia law was seen as more conducive to the 1000 vote rule, and the AB CoA ruling was rendered moot

Bowater v. Crain Inc.Reaffirms that you cannot have shares of the same class mean different things to different shareholdersAppellant corporation challenged the voting provisions of special common shares in Crain’s articles of incorporation. It argued that they offended the CBCA, since the special common shares were worth 10 votes in the hands of the original owner (in this case Craisec), but only one in the hands of other parties. Appellant argued that the “10 vote” quality special common shares was severable with the result that those shares carry 10 votes, regardless of who owns them.Held:

- the common shares and the special common shares with the step down provision could not operate as shares of the same class

o Following Jacobson - The “step-down” provision was “severed” from the special common shares,

such that the right to 10 votes with the special common shares was became a different class of shares which anyone could own for 10 votes

R v. McClurgTo create a validly separate class of shares there must be a distinction in some right between that class and other classes. However, it appears that it may not take much of a distinction for a validly created separate class to exist.Husbands and wives formed Northland Trucks corporation. Husbands got class A shares which were voting shares, wives got class B non-voting shares. Both shares carried a discretionary right to receive dividends, but the husbands got preferred dividend rights. CRA argued the shares were ineligible shares of the same class with different voting rights, Appellant argued they were two different classes.Held:

- These shares were sufficiently distinct to be called two classes of shares some had voting rights and some did not

- Rights do not need to be specific to a class , there simply needs to be some right over which there is a distinction, while other rights can remain the same

o Overlap in rights is allowed

DividendsDirectors have the power, but not an obligation, to declare dividends (102). To declare a

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dividend The Assets of the Corporation must be greater than the Liabilities plus the Stated Capital (which is tied up in the shares).

- A Director Should Consider:o How much profit the corporation has madeo How much of a finance buffer the corporation haso How well the company is likely to do in the future

- 102 Directors have the power to declare dividends (under the residual management power)

o Directors are not obligated to declare dividends- 43 Allows for Three Forms of Dividends

o Casho Specie (other forms of property)o Stocks

- 115(3)(d): Directors CANNOT delegate the authority to declare dividends to managing directors or boards of directors

- 42 Dividends cannot be paid out if: o solvency test: the corporation is, or would become, unable to pay its

liabilities assets = cash, term deposits, assets receivable, land, IP liabilities = bank loans, trade creditors, EE wages and benefits,

shareso stated capital test: the realizable assets of the corporation would become

less than its assets stated capital: amt paid up on shares, doesn’t change if market

price changes- 118(2)(c) : Directors’ Will be Personally Liable if they consent to or authorize

the payment of dividends contrary to s.42 : o jointly and severally liableo 118(3): A director is who has satisfied a judgment can recover against

other directorso 118(4): directors can apply to court to compel a SH or other recipient to

pay or deliver any monies or property received contrary to s.42o 118(5): order of court

- 123(4) Defense of Reasonable Diligence: a director is not liable if he has exercised care, due diligence and care that a reasonable person in the circumstances would have – including reasonable reliance on

o (a) financial statements of the corporation presented by an officer of the corporation to fairly reflect the corporation’s financial circumstances

o (b) a report by a person whose profession lends credibility to their report

In some RARE circumstances, directors have been found to have a duty to declare dividends – basically as part of oppression remedies:

- Dodge v. Ford Motor Co director used dividends to invest in plant expansion “for the good of society” rather than the good of the company – he was forced to declare dividends because it was assumed that profits were in the interests of the

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corporation- Fergusson v. Imax falling out between husband and wife shareholders

(husband was preferred, wife was common). Husband used influence to prevent dividends, which meant wife got no return on her investment. The court held that this refusal was oppressive and the remedy was a declaration of dividends.

Repurchase and Redemption30(1) – A corporation may not own shares in itself (so if shares are repurchased, they are simply available to be sold again)

Repurchase34 - (1)A corporation may repurchase shares (unless it violates the solvency test in (2)) - (2) Cannot repurchase shares if:

(a) unable to pay liabilities as they become due(b) realizable assets of the corporation would become less than the total liabilities

118(2)(a) Directors will be jointly and severally liable if they vote for or acquiesce to a repurchase of shares 118(5)(b) A court may order the corporation to return the shares to the shareholders from which they were bought

Dissolution Rights on Liquidation or Winding Up:dissolution is the end point/death of corporation – in advance of dissolution, process of winding up takes place

Winding up all assets of the corporation are collected and used to pay the creditors. Once the creditors have been satisfied, the corporation can distribute the remaining assets among the shareholders according to preference and value

Dissolution is a fundamental change: special rights of SH to participate (special resolution)

211 describes VOLUNTARY DISSOLUTION o (1): director or SH w/voting rights may propose voluntary liquidation and

dissolution of a corporationo (2): Notice at any meeting where liquidation or dissolution is to be

proposed there will be notice thereofo (3): A corporation may liquidate and dissolve by special resolution of

the SH, or by special resolution of each class of shares whether or not they are otherwise entitled to vote (must be approved by each class)

o (4): Statement of Intent corporation must file statement of intent to dissolve (send to Dir)

o (5): Certificate of Intent on receipt of statement of intent to dissolve,

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Dir shall issue a certificate of intent to dissolve in accordance w/262o (6): on issue of certificate of intent to dissolve, the corp shall cease to

carry on bus, except to extent necessary for liquidation (corp existence continues until the Director issues a cert of dissolution)

o (7): after issue of cert of intent to dissolve, corp shall:(a) notify creditors(b) notify Director in jurisdiction in which it is registered to carry on bus(c) dispose of property(d) distribute remaining property among SH (“corp surplus”)

INVOLUNTARY DISSOLUTION- 212: involuntary dissolution by the Director –for failure to comply (e.g. failure to

file annual reports)- 213: Court ordered INVOLUNTARY DISSOLUTION- 214: Court ordered dissolution on application of SH (extreme remedy)

o The wording similar to oppression remedyo Can be dissolved for “oppressive conduct”

Westfair Foods v. WattA court can wind up a company by order, but will be reluctant to do so where the company is successful, there is no severe oppressive conduct, and there are other remedies availableAppellant corporation (grocery company) and some of its shareholders had dispute. Class A shares receive $2/share maximum preferred dividend and share of wind up, Class B shares have an unlimited share in surplus and share of the wind up. Corporation decided to give its entire annual profit in dividends, which capped the retained surplus at its level at the time of the decision (1984). This policy favored common shareholders, who received more immediate benefit, and left less for the preferred shareholders who had a greater stake in the liquidated assets of the corporation. Class A shareholders brought action, alleging that the change in policy was unfairly prejudicial. Trial judge found oppressive behavior on the part of the corporation, and ordered winding up.Held:

- There had been some oppressive conduct, but the court was reluctant to wind up a successful company

o Court then looked to the articles to determine what the Class A shareholders had a reasonable right to assume:

No reasonable expectation that the directors will never shift to profits distribution

Shifting to profit distribution was well within the direction of the directors

- Instead – ordered that the Class A shares be valued at their fair market value and repurchased by the company

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Corporate Governance: Directors and Officers2(1) a director or officer is a person occupying the role of director or officer, by whatever name it is called

Appointment and Removal of Directors

Who can be Elected Director:- 102(2): REQUIRED NUMBERS

o Private corporation must have at least 1 directoro Distributing Companies must have at least 3 directors at least 2 of which

can’t be officers or EEs of company or its affiliates (“outside” directors)- 105

(1): QUALIFICATIONS OF DIRECTORS 18yrs of sound mind individual (not corporation) not bankrupt

(2): Subject to articles, directors are not required to hold shares (3): at least 25% of directors must be resident Canadians; if corp has less than

4 directors, at least one must be a resident Cadadian 2(1) a “resident Canadian is a citizen of Canada or ordinarily

resident in Canada as prescribed by Reg 13 (full time government or Canadian employees, employees living outside Canada and working for Canadian companies, students)

(4): not more than 1/3 of directors of holding corp need to be resident Cads if the holding corp earns in Cad directly or through its subsidiaries less than 5% of gross revenues

- 106(9): Person has to consent or acquiesce to be a director- 145: a corporation, shareholder, or director may apply to a court for an order to

resolve any controversy concerning election or appointment of a directoro court may make “any order it sees fit”

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Who can be Appointed Officer:- 121:

o (1) Directors normally have the power to appoint officers, who conduct day-to-day management, subject to articles, by-laws, or unanimous shareholder agreement:

(a) the directors may designate the offices of the corporation, appoint as officers persons of full capacity, specify their duties and delegate to them powers to manage the business and affairs of the corporation (except powers to do anything referred to in subsection 115(3))

(b) a director may be appointed to any office of the corporation (c) two or more offices of the corporation may be held by the same

person

Term of office:- 106

o (1): A corporation’s first directors are named at time of sending articles of incorporation to the Director

o (2): Term of office – if named in notice of directors, until first annual SH meeting

133(1)(a) & (b) first annual meeting must be held within 18 months of incorporation and thereafter within 15 months

o (3): Directors are elected by Ordinary resolution and the Maximum term of office is three years

The articles can raise the majority needed to elect a director (6(3)) but not the majority needed to remove a director (6(4))

o (4): Terms of office can be staggeredo (5): Presumption that a director is elected for one year (until next

annual SH meeting), unless otherwise stated o (6): Incumbent directors hold office until successors are electedo (7): if SHs fail to elect the minimum number of directors required by

articles, elected directors can exercise all powers of directors if the # elected constitutes quorum

Directors quorum = 114(2): a majority of the number of directors required by the articles

o (8): Directors may, if articles provide, appt one or more directors who shall hold office until next annual SH meeting, but the total # of appointed directors may not exceed 1/3 of the directors elected at previous SH meeting (Repap)

Removal:- 108

o (1): Ceasing to hold office can happen through: resignation

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removal by ordinary SH resolution disqualification under 105(1) death

o (2): Resignation takes effect at time written resignation is sent to corporation, or at specified time

- 109o (1): Removal of directors by ordinary SH resolution (6(4) – articles may

NOT require a greater # of votes of SH to remove a dir than simple majority)

o (2): Exception – where specific class or series of shares has exclusive right to elect one or more directors, that director can only be removed by an ordinary resolution of that class of SH

o (4) If all directors resigned or are removed: The senior management persons are deemed to be directors

(5) BUT: lawyers or other professionals who participate in management do not become directors

Re: Paramount Publix CorpDirectors can remove officers but damages must be paid for broken employment contractsKatz was employed as an executive for 3 year period, he was dismissed less than a year later, and the corporation went into receivership. Company argued that directors had the power to remove officersHeld:

- Directors had the authority to dismiss Katz, but the corporation was liable for breach of his employment contract

- A strict interpretation of s.60 would mean that an employee could be dismissed for any reason without warning or consequence to the company employment contracts would be effectively non-binding

o The provision should be interpreted to mean that directors can remove a person from a particular office or agency but if they dismissed the person from employment entirely there would be the usual consequences of breach of an employment contract

Shindler v. Nothern Raincoat Co.Shareholders can dismiss a director, but if that director has a contract of employment then the shareholders will likely be in breach of contractShindler was managing director on a 10 year contract. Company was sold to another public company, which did not want to retain Shindler as managing director. Comparable alternative employment was untenable, so Shindler was removed as director by an extraordinary resolution.Held:

- Shindler entitled to damages for wrongful dismissalo Court rejected the company’s claim that the contract of employment

would be ultra vires if interpreted to exclude a power in the company’s general meeting to terminate it for whatever reasons seemed sufficient to

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the shareholders

Vacancies:- 109

o (3): Filling a vacancy – at meeting of SH or under 111o (4): If all directors have resigned or been removed, a person who manages

or supervises the mgmt of the bus and affairs of the corporation is deemed to be a dir for the purposes of this Act (imposition of liability)

officer managing under control of SH lawyer, notary, etc. providing professional services trustee in bankruptcy, receiver, secured creditor

o (5): exceptions to (4)What resulted in vacancy? – deters whether directors can fill it or not

- 111(1): A quorum of directors may fill vacancies on the board, except those resulting from an increase in the #, or min or max # of directors, or a failure to elect the #, or min # of directors provided for in the articlesIs there quorum of directors?

- 111(2): if there is no quorum of directors, or failure to elect the # or min # of directors provided for in the articles, directors shall call special meeting of SH (or, if there are no directors, SH shall call meeting) to fill the vacancyWho was dir elected by – all SH, or class of SH?

- 111(3): filling vacancy in situation where holders of class or series of shares have an exclusive right to elect one or more directors What do arts provide?

- 111(4): articles may provide that a vacancy among directors shall only be filled by a vote of SH, or class of SH

- 111(5): director who fills vacancy holds officer for unexpired term of predecessor

Notice to Dir- 113(1): Notice of change of dir or director’s address must be set to Dir w/in 15 days

Meetings of DirectorsLargely left up to the by-laws, the meetings can take many forms

- 102(1): Enabling: subject to USA, directors shall manage, or supervise the mgmt of the business and affairs of the corporation

- 110(1): Entitling: director is entitled to receive notice of and to attend and be heard at every meeting of SH

- 114(1): Empowering: Subject to articles or by-laws, directors can meet anywhere, anytime, w/notice as required by by-laws

Quorum- 114

o (2): Subject to articles or by-laws, quorum = a majority of the board or

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a majority of the minimum number of directors in the articles (quorum may exercise all the powers of the directors)

if arts specify # of directors, quorum = majority of directors elected if arts specify range of min-max # of directors, quorum = majority

of min # of directors if by-law is silent as to quorum, the min of the range of directors

will be held to be quorum by-law could say corp is required to have 5-10 directors, but

quorum is 3 by-law could say corp is required to have 5-10 directors, but

quorum is majority of elected directors, and 7 are elected, so quorum is 4

o (3)(a): directors shall not transact bus at a meeting unless at least 25% of directors present are resident Canadians

o (4): exceptions if (3) not met – (a) res Cad dir approves bus in writing, AND (b) req’d # of res Cad directors would have been present had that dir been present

o (8): where a corporation has only one director, that director “may constitute a meeting”

o (9): permits conference calls or any other electronic media that allows directors to communicate adequately with each other

Notice- 114

o (5): Notice of meeting is only required to specify any matter in 115(3) that is to be dealt with, unless by-laws provide otherwise

(in general, need not specify purpose or bus to be transacted)o (6): if they don’t waive notice, dir can argue the meeting wasn’t properly

called and challenge the validity of the bus transacted (attendance at meeting is waiver of notice unless purpose of attendance is to obj to the transaction of any bus on grounds that the meeting is not lawfully called)

Validity of Acts:- 116: An act of a director is valid, notwithstanding an irregularity in their election or

appt, or defect in their qualification o irregularities won’t undue everything done by directors

Resolution in Lieu of Meeting:- 117(1): A resolution in writing signed by all the directors entitled to vote on that

resolution is as valid as if it had been passed at the meeting (quorum isn’t enough – has to be unanimous)

o all directors are entitled to vote on resolution at directors meetingo only directors designated members of a committee are entitled to vote on a

resolution of that committee

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- 117(2): keep a copy of the resolution with minute book- 117(3): minutes are evidence of whether resolution was carried or defeated, unless a

ballot is demanded

Dissent:- 123

o (1): Any director present at a meeting is deemed to have consented to any resolution passed or action taken, unless:

(a) the director requests a dissent added to the minutes (b) director sends a written dissent to the secretary before the

meeting is adjourned (c) director sends dissent by mail or delivers it to corporate office

immediately after the meeting is adjourned no process for abstaining, therefore. important to have

clear process for dissenting relevant b/c of potential for personal liability - 118

o (2): director who votes for or consents to a resolution is not entitled to dissent

you can’t change your mind o (3): A director who was not present at the meeting will be deemed to have

consented unless that director within 7 days: places a dissent in the minutes sends a dissent in the mail or delivers it to the corp offices

o (4) Defense of Due Diligence A director is not liable if he exercised the care, diligence, and skill

of a reasonably prudent person in the circumstances, including good faith in:

(a) financial statement represented by director or officer (b) report by a person whose profession gives them

credibilityo (5) Defense of Good Faith

A director has complied with her duties if the director relied on: (a) financial statement represented by director or officer (b) report by a person whose profession gives them

credibility- 20

o (1)(b): Corporation must retain records of minutes of meetings and resolutions of SH

o (2): required to keep directors recordso (4): records in (2) shall be kept at registered office of corp or elsewhere,

and must be open to inspection by directors (access ltd to directors – security, confidentiality)

Power of Directors- 102: Management Power

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o (1): Directors have the power to manage, or supervise management of business and affairs of corporation

o (2) can have one or more directors, but if it’s a distributing corporation with more than one shareholder or shares outstanding, there must be at least 3 directors – at least two of whom may not be officers or senior employees

- 103: By-Lawso (1) Directors may make, amend, or repeal by-laws, unless the

articles/by-laws/shareholder agreement provide otherwiseo (2) Directors must submit by-laws or amendments to shareholders at the

next meeting of shareholders SH can confirm or reject it by ordinary resolution

o (3) A by-law/amendment/repeal is effective from the date of the resolution by the Director until:

it is confirmed/rejected by shareholders; or until it ceases to be effective

o (4) If a by-law is rejected by shareholders it ceases to be effective and no by-law/amendment/repeal substantially the same can be made effective until it is confirmed by the shareholders

- 104: Organization Metingo (1) After issuing a certificate of incorporation, the directors will have

a meeting at which they may: (a) make by-laws (b) adopt forms of security certificates and corporate records (c) authorize the issue of securities (d) appoint officers (e) appoint an auditor until first shareholder meeting (f) make banking arrangements (g) other business

o (2) Exception the above does not apply to corporations that have been continued or amalgamated

o (3) Director can call a director’s meeting by giving no less than 5 days notice by mail to each director

- 115: Delegation to Managing Directors or Committee of Directors o (1): Directors may appoint from their number a managing director who is

a resident Canadian or a committee of directors o (3): Directors cannot delegate to managing directors or board of

directors the power to: (a) submit to shareholders any matter requiring the approval of

shareholders (b) fill a vacancy among the office of auditor or appoint additional

directors (c) issue securities (except as approved by directors) (c.1) issue shares of a series under 27 (except as authorized by the

directors) (d) declare dividends

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(e) purchase, redeem, or otherwise acquire shares issued by the corporation

(j) adopt, amend, or repeal by-laws- 121: Delegation to Officers and Creation of Offices

o Subject to articles/by-laws/unanimous shareholder agreement: (a) directors my designate officers, appoint them, specify their

duties, delegate to them powers to manage the business affairs of the corporation (except powers outlined in 115(3)

(b) a director may be appointed to any office (c) a person may hold two or more offices

- 123: Dissent (see above)- 125: directors set their own remuneration (as well as that of officers and EEs),

unless articles, by-laws or USA fix remunerationo usually set their own remuneration, but delegate deter of remuneration of

officers, EEs to HR dept- 133: Calling Annual Meetings

o (1): Requires directors to call annual meeting 18 months after coming into existence, and 15 months after last meeting

o (2): Allows directors to call special meeting at any timeo (3): A corporation may apply to court for an order extending the time for

calling an annual meeting- 189: Borrowing Powers

o (1) subject to articles, by-laws, USA directors may (a) borrow money on credit (b) issue, reissue, sell, pledge, debt obligations (c) give a guarantee on behalf of the corporation to secure

performance of an obligation (d) create a security interest in all or any property of the

corporation (mortgage) to secure an obligation directors have extremely broad borrowing powers

o (2): Subject to articles, by-laws or USA, directors may delegate borrowing powers by resolution to a director, committee of directors or an officer

Common Law on Delegation The courts are balancing (1) directors to delegate to accommodate business flexibility, and (2) shareholders’ legitimate expectation of corporate management that they elected.

Hayes v. Canada-Atlantic & PlantDirectors cannot delegate ALL their powers to the extent that they create management not elected by the shareholders.articles of the company permitted the directors to annually appoint an executive committee with powers and duties as the by-laws determined. The by-laws required the directors to appoint two directors who, along with the president, would have the full powers of the board of directors. Hayes and Gale, acting at the committee, removed Perry as treasurer, directed the payment of Hayes salary, amended the by-laws such that only

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presidents could call special meetings, amended the committee to two people, made it so that directors meetings could only be called by the president. Effectively froze out Perry, the majority shareholder.Held:

- This delegation of power to a managing director was illegal- Powers that cannot be removed from directors in this case:

o Call shareholder meetingso Set compensation of officers

- This case is an example of the courts restricting the delegation power of directors even before 115(3) was added excessive delegation is against public policy

Sherman & Ellis v. Indiana Mutual CasualtyCorporations can delegate managerial authorities to strangers for a limited period, BUT not for so long (20 years) and not that much authority (all managerial authority)Company contracted for Sherman&Ellis Inc. to be executive managers for a period of 20 years. Company later cancelled that contract, and S&E sued for specific performance. Company defended saying the contract was void as against public policy.Held:

- Contract Invalid:o (a) time frame was too longo (b) delegation of managerial duties was too complete

- Policy concern: that there was an expectation that the corporation be managed (or that management be supervised by) the persons elected by the shareholders

Kennerson v. Burank AmusementAnother example of invalid delegation the corporation must ultimately be run by duly elected officialsBA contracted for Kennerson to manage all matters including bookings, personnel, admission prices, salaries, contracts, expenses and “the exclusive right to fix and establish all policies to be followed in the operation of the Manor Theatre” for a period of five years.Held:

- Contract invalid- “by this contract ... the board has attempted to confer upon the manager the

practical control and management of substantially all corporate powers.”

Operation of the Boards of Public Corporations

- Often the chief officers of a corporation will also be directors. - Directors: Myth and Reality Miles Mace

Directors do not usually have a significant role in the management of a corporation or monitoring management performance

Directors tend to just vote in new presidents based on the recommendation of the outgoing president

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However the function of the board as an ultimate control mechanism on the president is important

- Canadian Directorship Practices: A Critical Self-Examination Conference Board of Canada (1) management often controls the board rather than the other way around and

the board’s effectiveness is often a function of the president’s desire for or tolerance of its informed input;

(2) boards are excessively hesitant to fire top management; (3) a person with a full-time job cannot adequately attend to directorship

duties if he holds more than two to six outside directorships.- The Structure of the Corporation Eisenberg

instead of trying to make sure boards of directors were in a position to actually “manage” or even “supervise the management” of the corporation, it would better to focus on what boards might reasonably be expected to do and then adjust the law and the structure of boards to meet such expectations

Suit the law to the practice The board should be controlled by non-management outsiders and the board’s

audit committee (the committee of the board that reviews financial disclosure) needed to be made up exclusively of outside directors.

Note: the American Law Institute later published a report, based heavily on Eisenberg’s principles, that recommended that a majority of directors of public corporations be independent of management

Duties of Directors and OfficersThese duties are concerned with controlling the actions of directors and managers, such that they work for the best interests of the corporation as a whole. The classical theory holds that these duties are owed to the corporation in its entirety, not just the shareholders or a specific group of shareholders.

Cases will almost always involve both fiduciary duty and duty of care, as well as oppression claims – the categories, though provided for separately in the Act, are very intertwined.

Statutory Core:122:

- (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall: (a) act honestly and in good faith with a view to the best interests of the

corporation fiduciary duty duty to act for the corporation and not for

yourself subjective/objective test: Peoples

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances

duty of care duty to bring diligence, skill, consideration to your

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acts Pure objective test: Peoples

- (2) Duty to Comply With The Law Every director and officer of a corporation shall comply with this Act, the regulations, articles, by-laws and any unanimous shareholder agreement.

- (3) You Can’t Opt Out Subject to subsection 146(5), no provision in a contract, the articles, the by-laws or a resolution relieves a director or officer from the duty to act in accordance with this Act or the regulations or relieves them from liability for a breach thereof

(BCBCA 142 essentially the same as 122)

Fiduciary Duty**broad and equitable duty that directors/officers owe to the Corp (Canaero)**

Arises in 3 circumstances- transacting with the corporation- taking corporate opportunities- competing with the corporation

Transacting With the CorporationSelf-dealing: Ks or transactions concluded between the directors and officers of a corp, either directly or through their interaction in another entity, and the corp itself

Common Law Rule Aberdeen Railway- Strict rule against transacting with a corporation No actual or potential conflict

of interest can be tolerated

Statutory Modification CBCA 120- Limited statutory window for a director to contract with the corporation - 120

(1) Requirement to Disclose: nature and extent of any interest , if the director:

Remember: the Duty to disclose is absolute Repap (must be total disclosure)

(a) is a party to the K/ transaction (b) is a director or officer or similar of a party to the K/ transaction (c) has a material interest in a party to the K/ transaction

(2) Disclosure for Directors Must Happen ASAP (a) when the proposed K/ transaction is first considered (b) if the director was not first interested, whenever that director

becomes interested (c) if the director was not interested when the K/transaction was

first made, when he becomes so interested (d) if the individual who was interested later becomes a director

(3) Disclosure by Officers Must Happen:

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Officers are given slightly more leeway, as they may not be as aware of the transaction

(a) immediately after he becomes aware of a K/ transaction in which he is interested

(b) If he becomes interested after a K/transaction is made, immediately after he becomes interested in that K/ transaction

(c) if an individual who is interested in a contract later becomes an officer, immediately after he or she becomes an officer

(4) Minor Transactions: if it is a transaction which in the ordinary course of the

corporations bus, would not require approval by SH or Board, a director or officer shall disclose interest in writing immediately after he becomes aware of the transaction

(5) Director Must Abstain from Voting where they have an Interest: Unless the contract:

Relates primarily to their remunerationThis is weird, seems like the biggest conflict of all

Is for indemnity or insurance under 124 Is with an affiliate

(6) Continuing Disclosure: general notice to directors declaring that a dir is to be regarded as

interested, for any of the reasons set out in (a) to (c) is sufficient declaration of interest in K or transaction

(6.1) Access to Disclosures: Shareholders have access to the disclosures of material interests by

directors and officers (7) Director’s Ratification:

A meeting of directors (in which the interested director cannot vote) can ratify a K/ transaction made by an interested director, as long as: (a) disclosure was made in accordance with (1) – (6) (b) directors approved the contract or transaction (c) the contract or transaction was reasonable and fair to the

corporation when it was approved procedural fairness (procedure of the contract

formation) substantive fairness (substance of the contract)

Cree Lake – would an independent board acting in good faith in the best interests of the corporation have approved the transaction

(7.1) Shareholder’s Ratification even if you don’t manage to save the transaction through

compliance with (7), shareholders can ratify the transaction, as long as: (a) K/transaction is approved by special majority (b) disclosure was made sufficiently to indicate its nature

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before K/trans was approved (c) the contract or transaction was reasonable and fair to the

corporation when it was approved procedural fairness (procedure of the contract

formation) substantive fairness (substance of the contract)

Cree Lake – would an independent board acting in good faith in the best interests of the corporation have approved the transaction

(8) Court Orders: A corporation or SH may apply to a court for an order if dir or

officer fails to comply with this section the court may set aside K or transaction, order director or officer to account for profits, or both

Aberdeen Railway v. Blakie BrothersCourt set out the strict common law rule for transacting with your own corporation (later replaced by CBCA 120)BB was a partnership that manufactured chairs, contracted to sell chairs to AR. One of the Blakie Brothers was also a director in the AR corporation. Company later repudiated the contract for sale.Held:

- Partnership could not enforce the contract invalid due to director transacting with his corporation

- Common Law Rule Corporations can only act through agents Agents are bound by fiduciary duty to act for their principles No director (being an agent) can contract with their own corporation it

creates a conflict or a potential conflict of interest

Transvaal Lands v. New Belgium DevelopmentDirector cannot, without proper disclosure and ratification, buy shares from another of his companies or from an organization of which he is a trustee “material interest” in 120(1)3 directors of Transvale, Mr. Young (chairman), Harvey, and Samuel who was a director of both corporations. Both Samuel and Harvey have a conflict of interest. At a meeting of Transvale board, Samuel said they should buy shares of a 3rd company from New Belgium. Samuel abstained from voting on the resolution, because he was director of both corporations. He argued in favour of it, but abstained from voting. Harvey voted on the resolution, despite owning significant shares of New Belgium as a trustee (shareholder in the seller and director in the buyer).Held:

- Contract was voidable Transvale could recover its purchase price on return of the shares

- Even though Harvey held shares in New Belgium as a trustee, his fiduciary duty as a trustee shareholder (to get the highest price) was in conflict with his fiduciary

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duty to Transvale (to pay the lowest amount)

Taking Corporate Opportunities/CompetitionThe problem arises when directors or officers independently invest in a project that could have been acquired by the corporation, abuse corporate assets, or loot a corporation.

Policy:- presumption is that if the opportunity is a good one, and it arose out of the

business of the corporation, then it is presumably in the best interests of the corporation

- Shareholders may have reasonably expected that any business opportunities that arose out of the use of the funds they contributed would be taken advantage of for their benefit

Breach of FD in taking a corporate opportunity or competing with the corporation cannot be ratified unlike transacting with the corporation Cook v. Deeks

Historical Rule Cook/Regal - Can’t take personal advantage of an opportunity that arose in the course of, or in

the execution of, the duties of a director or officer, regardless of whether the directors or officers had rejected the opportunity in good faith on the basis that the corporation could not or should not take the opportunity

Cook v. DeeksExample of a classic breach of fiduciary duty misappropriation of a corporate opportunityC was director and shareholder of railway company (CCC). Deeks were the other directors. They wanted to exclude C from the business, and thus they contracted with CPR, and acted as if they were still acting for CCC (though at the end they signed in their personal capacity). D then used their votes to pass a shareholder resolution declaring the company had no interest in the contract, and started a new company to deal with the CPR contracts. C left with inactive corp, brought action that the CPR contract should have been with the CCC.Held:

- Breach of Fiduciary Duty They deliberately designed to exclude, and used their influence and position to

exclude, the corporation whose interest it was their first duty to protect They used their position of agency with regard to the corporation to benefit

themselves Negotiated K w/CPR in same manner they always had for TTC,

but for their own benefit- Majority of shareholders could not ratify this taking of corporate opportunity

Taking a corporation opportunity cannot be ratified – is essentially stealing from the corporation (can’t vote your shares in favour of you stealing from corporation)

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Regal (Hastings) v. GulliverApplied the strict rule from Cook v. Deeks, even in a situation where the directors appeared to be acting in the best interests of the corporationRegal (cinema company) offered a lease on two prospective cinemas. Regal incorporated a subsidiary (A) and gave it $2000, and tried to negotiate a lease with the landlord. The landlord wanted a personal security or $5000 of capital payment. The corporation did not have $5000, so Gulliver and the other directors (plus some outside investors) each put up $500. The investment made a huge profit when the corporation was sold (purchasing company paid more than the $1/share originally put in, in order to get all the shares and assets of Regal and A). The directors were changed, and the new board sued Gulliver et al. for taking a corporate opportunityHeld:

- Strict rule applied Regal’s former directors were liable because they had acquired their shares in

A only due to their relationship w/Regal and, despite acting in good faith, must account for personal profit

- Under the strict rule, it was irrelevant that Regal suffered no loss, and that the opportunity would have otherwise been lost The test was whether the director’s profited

Note: arguable, the relaxed rule from Peso would still apply here, since the corporation did not bona fide abandon the opportunity

Current Slightly Relaxed Rule Peso - If the directors/officers of a corporation reject an opportunity on the basis of a

bona fide decision that it is not in the best interest of the corporation, then directors or officers can take the opportunity

- Still can’t take the opportunity FROM the corporation

Peso v. CropperRelaxed the strict rule from Regal If you have a bona fide decline of the offer, based on full disclosure and good and reasoned basis to refuse an opportunity, then a director is not liable to account for profits s/he makes on their ownPeso had silver mine claims. Cropper was promoter and director, and had significant influence over the board. Peso was offered 3 groups of mining claims through Cropper. Peso’s board (including Cropper) concluded that Peso could not afford to make the investment. 6 weeks later Cropper et al. were approached and decided to create a private company to take over the claims. Peso taken over by another corporation, which brought action against Cropper for the proceeds from the corporate opportunity. Cropper testified that he had forgotten about the offer to Peso, as he dealt with 200-300 such offers.Held:

- Relaxed the strict rule from Regal- Croper not liable to account for profits

Cropper owed FD to Peso, but did not take advantage of the opportunity when it belonged to the corporation during the time before the offer was rejected by the corporation

- The board of Peso had made a bona fide decision not to take the claims After

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which, the offer no longer “belonged” to the corporation

Widening the Scope of Fiduciary DutiesCanaero v. O’MalleyCourt widened the scope of fiduciary duties:

(1) Officers (as well as directors) owe fiduciary duties to their corporations(2) Fiduciary duty to account for corporate profits can extend beyond the director

or officer’s term of officeC wanted to secure a topographical mapping contract. O and Z were company president and VP. They did research and visited the site numerous times, building a relationship with bid company. They were concerned about limitations imposed by the parent company on the bids they were allowed to submit (concerned for their jobs if they failed to secure a bid). They left C and formed their own company, which later bid on the same mapping contract and won. C sued them for the profits made from the bid, on the grounds that they took advantage of a corporate opportunityHeld:

- Officers were liable to account for profits they owed a FD to the corporation, and they breached it by taking advantage of the opportunity before Canaero had passed on it

- Test is NOT whether the principle lost profit, but whether the agent gained profit - FD Extended of Officers

If you have managerial duties to a corporation, and effectively occupy a management role, you will owe fiduciary duties to that corporation regardless of whether you have been properly legally elected/appointed

Fiduciary duties have since been extended to other employees within a company

- Whether there is a FD in each case must be assessed on the facts: Position or office held Nature of corporate opportunity Ripeness of the opportunity Specificity of the opportunity Director/Officer’s relationship to the opportunity

Note: The court says that the reason fiduciary duties are extended and imposed strongly on directors/officers of corporations flows from the need to have someone in socially and economically powerful corporations held personally accountable for their actions the duty is not only to the shareholders, but to society in general

Duty of CarePrior to s. 122 CBCA: the common law standard was very lenient, it was very difficult to find liability for a breach of duty of care Re: Equitable Fire Insurance Co.

- Reasonable Care : measured by the care of an ordinary person in the circumstances- Degree of Skill: degree of skill which can be expected of a person of his/her

knowledge and experience

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- Degree of Attention : director not bound to give continuous attention - Trust of Officials: directors can trust officials in the absence of grounds for

suspicion

122(1)(b) a director/officer must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances

- much stricter standard than the common law standard

- Standard of Care: objective test of the reasonably prudent person in comparable circumstances Peoples directors have a duty to adequately inform themselves to make reasonable

business decisions Repap The standard does not take into account subjective characteristics of

individual directors – or their lack of ability Peoples if you want to avoid liability under 122(1)(b), make sure you get the right

advice, read the documentation, properly inform yourself

- Owed To: the corporation Note: In Peoples, the court also held that the duty was owed to “another”

it is unclear whether this would apply elsewhere than Quebec Peoples would have been the first time a directors would be liable

for breaching a duty of care to someone other than the corporation or shareholders

Note: In cases where it is not the government bringing suit against corporate directors/officers for failure to exercise proper care in withholding/remitting taxes, it may be less useful for shareholders to cause the directors to pay damages, because:

- Directors are usually insured by the corporation, so the damages they were liable for would be paid and then indemnified by the corporation

- Shareholders have other remedies (voting out directors, selling their shares)

Peoples Drug Mart v. WiseCourt considers director/officer fiduciary duty and duty of care, but find there has not been a breachWise family owned 75% of shares of Wise corporation, then purchased all the shares of Peoples for 27mil (fully leveraged, borrowed from TD). The deal prohibited Wise and Peoples from amalgamating for 8 years, but they could combine management and operations. So, Wise owned 100% of peoples and 75% of Wise corp. Inventory and warehousing fell apart because of incompatible systems. VP of finance advised purchasing be divided between Wise and Peoples. End result was Wise deeply indebted to Peoples, both companies go bankrupt. Trustee in bankruptcy for Peoples sues Wise family for breach of duty of care and fiduciary duty. Trustee argues that the duties of officers/directors extend from shareholders to creditors “in the vicinity of insolvency”Held:

- To Whom is the Duty Owed: Fiduciary duty is owed to the corporation

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However, in determining the best interests of the corporation, it may be legitimate, given all the circumstances, for the directors to consider the interests of SH, employees, creditors, consumers, govt, etc (adopts Teck)

Duty to act in best interests of corporation doesn’t shift in vicinity of insolvency to the creditors in the vicinity of bankruptcy per se though you can take their interests into account

The standard of care must be met in general- Fiduciary Duty

No Breach Standard: is subjective/objective (unlike DoC standard)

Takes into account the intentions and good faith of the director Fiduciary duty was satisfied by the director’s use of reasonable skill and

judgment in a good faith attempt to further the interests of the corporation Wise family relied upon advice/information from informed parties

and professionals in making their decision- Duty of Care

No Breach Standard: Reasonably Prudent Person in Comparable Circumstances

This is a purely objective test “comparable circumstances” does not go to the knowledge/skill of the director, just the circumstances in which the director finds himself

Director must be know what is going on, and act appropriately In this case, the directors met the standard

Their decisions were reasonable, made in reasonable reliance on documents prepared by professionals

Business judgment rule – perfection was not demanded, these were bona fide business decisions

Note: Oppression would have been a good remedy here – this is why oppression happens more and more recently

Defenses to Breaches of DutyFirst: Important to identify whether the person is a director or an officer. If the person is both, must determine whether the alleged wrongful action was taken while the person was acting as a director or an officer

STATUTORY DEFENCES:

123(4): Defence of Reasonable Diligence- It is a defence to DIRECTOR’S liability under 118 or 119, if the director

complied w/122(2) and met the standard of care, including relying on:o (a) financial statements prepared by officer, auditor, or professionalo (b) report of professional whose profession lends credibility to the report

123(5): Defense of Good Faith- It is a defense to DIRECTOR’S liability in an action for breach of FD under

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122(1)(a) or (b) if the director acted in good faith, i.e. relied on:o (a) financial statements prepared by officer, auditor, or professionalo (b) report of professional whose profession lends credibility to the report

Only a defence to directors (e.g. wouldn’t have applied in Canaero)

BUSINESS JUDGMENT RULE: (Maple Leaf Foods – the court looks to see that the directors made a reasonable management decision, not a perfect decision)

Directors and officers will only avoid liability under 122(1)(a) and(b) of the CBCA for business judgment decisions if they act prudently and on a reasonably informed basis

- this is only an element of a defense- directors/officers must also show that their decisions were well informed and

undertaken with a reasonable degree of prudence and diligence

Courts are hesitant to second-guess bona fide management decisions- Perfection is not demanded, it must only be shown that an appropriate degree of

prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made

Decisions must be:- (a) reasonable business decisions- (b) in light of all the circumstances about which the directors or officers knew or

ought to have known

Presumption of Good Faith Consolidated Enfield - court held that

Oppression RemedyUsually, a complainant will bring action for breach of Fiduciary Duties, breach of Duty of Care, and Oppression usually arguing that the breaches of FD and DoC lead to an “oppressive environment” (See Repap)

What is Oppression?- First used in older English cases to describe conduct by a more powerful

corporate player against a weakero Elder v. Elder & Watson (1952) the 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 shareholder who entrusts his money to a company is entitled to rely

o Scottish Co-operative Wholesale Society v. Meyer (1959) “actions that are burdensome, harsh and wrongful’” conduct, which may fall short of actual illegality or invasion of legal rights but can be described as “reprehensible”

- CBCA expands the remedy to respond to acts or omissions which are “unfairly prejudicial to” or that “unfairly disregard the interests” of a security holder,

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creditor, director or officero An application under section 241 is a means by which shareholders and

others may seek to have their reasonable expectations, and not merely their legal rights, recognized and respected

1. 238 Who can bring an oppression action: broad definition of “complainant” a. Security holder or former security holder (e.g. SH, debenture holder, bond

holder)i. SH who has dissented still has access to oppression remedy b/c

“complainant” includes “former SH” b. director or officer, or former director or officer of corporation or its affiliatesc. The Directord. Any other person who is a proper person at court’s discretion

i. If the court believes that this person stands in a relationship with the corporation such that they should be allowed to complain as to the management and operation of that corporation, they will be allowed to complain

ii. Peoples – SCC noted trade creditor should have brought oppression action

iii. Downtown Eatery – employee entitled money for wrongful dismissal found that the corporation that had paid him was asset-less, he successfully brought an oppression action against the parent corporation, despite only being a creditor

241 OPPRESSION REMEDY (1) Apply to court for an oppression order (BC – petition to BCSC, proceed on affidavit)

e. Summary application to court, expedites process as confirmed by s.248f. Court may order trial on specific issues (e.g. credibility)

(2) Establish Grounds that act or omission of corporation, business or affairs of the corporation have been carried on or conducted in manner, or powers of directors have been exercised in a manner that is oppressive or unfairly prejudicial or that unfairly disregards the interests of any SH, Creditor, Director or Officer

Conduct by the following can constitute oppression:g. act or omission by corporation or its affiliates effects a resulth. carrying on or conducting bus and affairs of corporation in a manneri. powers of directors of corporation or affiliate are or have been exercised in a

manner

- (a) Does the evidence show a breach of reasonable expectations? (BCE)o 1) show that you have reasonable expectationso 2) show that they have not been meto 3) THEN look to whether the stakeholder has suffered some kind of

oppression

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- OBJECTIVE TEST: are the expectations reasonable, having regard to the entire context?

o Factors to Consider: Relationship at issue Sophistication of the parties Past practice Steps that could have been taken

o What has not been reasonable expectation: Brant v. KeepRite minority shareholders (sophisticated

commercial parties) did not have a reasonable expectation that the corporation would not be merged

BCE Inc. sophisticated debentureholders did not have a reasonable expectation that the corporation would not be a target for takeover

Remember: Directors owe a duty to the entire corporation, not to any one group in particular

(3) Court may make any order it sees fit, including: (non-exhaustive)**broad discretion to deter what is fair- Court will not impose punitive remedies (Naneff)- Court will not harm an innocent 3rd party (Cinoplex)- Remedy will not exceed the reasonable expectations (Naneff)

o In that case, the TJ awarded the son with all the shares in the corporation, which was way beyond his reasonable expectations

(a) Order restraining the conduct complained of (247) (Ferguson)(b) Order appointing receiver/receiver manager(c) Order to amend articles, by-laws, or USA (subject to 241(4), (5))(d) Order directing an issue or exchange of securities(e) Order appointing dirs to replace or in addition to dirs(f) Order directing corp or other person to purchase shares of SH (241(6)) (Westfair,

Naneff)(g) Order directing corp or other person to pay SH what they paid for their shares

(241(6))(h) Order varying or setting aside a transaction or K to which a corp is a party and

compensating the corp or any other party to the transaction or K (Repap)(i) Order requiring corp to produce financial records pursuant to s.155(j) Order compensating aggrieved person (k) Order directing rectification of registers or other corp records (243)(l) Order liquidating or dissolving corp (214)

1. Remedy of last resort reluctance where another remedy would provide adequate or effective relief

2. Not ordered where no evididence of mismanagement or corp is successful/profitable

(m) an order directing an investigation under Part XIX to be made

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(n) Order requiring the trial of any issue

(4) Directors must comply and implement and order to amend articles or by-lawsa. must send notice of amendment to Dirb. directors can’t then amend articles without courts approval (can’t just amend

back)(5) SH cannot dissent under s.190 if order is made under this section to (c) amend articles

(6) Corporation can’t make payment under 3(f) or (g) to SH if doing so would render the corporation insolvent RepapExample of breach of Fiduciary Duty, Duty of Care, and Oppression RemedyCorporation is struggling, Berg is major SH and brings in 3rd Ave Investments who becomes a major shareholder, recommends Berg be made chairman of the board, and together they appoint several directors. Berg retained independent counsel without consulting Repap’s in-house counsel, and had ridiculous employment contract drafted (including extravagant bonus clause linked to market fluctuations). It was presented to the board over concerns. Chair of compensation committee resigns, board is filled with cronies. Berg gets memos expressing concern, does not disclose them to the board. Berg also does not inform board of last-minute changes to K. Board passes K without consulting compensation committee’s report, dissenting director resigns, Berg did not vote on K. Berg deposed at next shareholder meeting, sues for 27mil. TD asset mgmt (on behalf of dissenting shareholders) bring actions.Held:

- The Ultimate Question: what is reasonable and fair to the corporation? - Claim Against Berg

o Breached FD of honesty and good faith (122(1)(a))o Contracted with the corporationo Did not disclose information relevant to the judgment of the directors:

Concerns expressed to him Dispute between in-house and outside counsel Duty to disclose is a Fiduciary duty owed by all agents to their

principalso Duty to Disclose is Absolute:

No defense that directors could have learned of it themselves Porcupine Mines must disclose enough so that the

directors/shareholders know the “Real details”- Claim Against Directors

o Breached Standard of Care (122(1)(b))o Could not be saved by Business Judgment Rule

Court looks to see that the directors made a reasonable decision, not a perfect decision

o In this case: Didn’t take steps to properly inform themselves

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Didn’t read the consultant’s report Could have discovered with minimal effort that Repap didn’t need

and couldn’t afford Berg Directors who disagreed had an obligation to dissent, and failed to

do so- Oppression Remedy

o 241: court can act where conduct is oppressive, unfairly prejudicial or unfairly disregards the interests of SH, even if the conduct is lawful

o In this case: 241(3)(h) – set aside the compensation K

BCE Inc. v. 1976 DebentureholdersLeading Case on the court looking to the REASONABLE EXPECTATIONS of the parties in determining whether there has been oppressionOffer by ON teachers pension plan for takeover of BCE (debentureholders are part of BCE). Competing takeover bids coming in. Independent Strategic oversight committee set up to supervise the process and determine which bid should be recommended to the shareholders as the best bid for the company. Committee recommends that the teachers bid be taken. Directors don’t own the shares, but recommend to shareholders which is best for corp and best deal for shareholders → they said to take Teachers’ bid. Shareholders were getting a big premium and thus voted in favour. Debentureholders are not happy, b/c more debt will be issued, thus diluting the value of the current debt they hold. They seek oppression remedy.Held:

- In this case, there was no oppression Court looks to the reasonable expectations of the debentureholders they

were sophisticated commercial players and powerful financial institutions who should have known that BCE was a takeover target, which could affect their debt value

COurt suggests that the debentureholders should have looked out for their own interests (if you don’t like the terms of the debentures, don’t but them)

Directors owe their duty to the entire corporation, not specially to one groups best interests

Debentureholders had a reasonable expectation that the directors would consider their interests as well as the shareholders interests this expectation was met

Shareholder RatificationCommon Law

- SH can ratify transaction where there is conflict of interest (Aberdeen Railway, Northwest)

- SH can’t ratify taking of a corporation opportunity (Cook v. Deeks)

CBCA:- 122(3): Generally, there is No Ratification of Breaches of Duties resolution

of SH or directors cannot approve any other breach of duty, other than one

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specifically allowed under 120(7.1)

- 120(7.1): SH can ratify a transaction or contract for which disclosure is required under (1) if director or officer was acting honestly and in good faith:

(a) the K or transaction is approved or confirmed by special resolution at a meeting of the SH,

(b) sufficient disclosure was made, AND(c) the K or transaction was reasonable and fair to the corporation

i. procedural fairness (procedure of the contract formation)ii. substantive fairness (substance of the contract)

1. Cree Lake – would an independent board acting in good faith in the best interests of the corporation have approved the transaction

- Remember: 120(8): disgruntled person (e.g. min SH) can apply to court to have K or transaction set aside

o Would likely have to show one of (7.1)(a) through (c) was violated

- 242(1): SH ratification is not conclusive, court can still find oppression court’s jurisdiction not ousted by ratification

o SH ratification will be evidence that there was no oppression

Other CBCA Duties of Directors3. 122(2): DUTY TO COMPLY W/ACT, REGS, ARTICLES, BY-LAWS, USA

- 251: failure to comply is an offence- 123(4): defence of reasonable diligence (BJR, reliance on financial statements or

professional advice)

Joint and Several Liability for things that will make a corporation insolvent118:

1. If Directors vote for or consent to a the issuance of shares for consideration other than money, they are jointly and severally liable to the corporation for the amount by which the consideration is less than the money value of the share

2. Directors are Jointly and Severally Liable if they vote/consent to:a. Purchase/redemption/acquisition of shares contrary to 34/35/36 b. Commission contrary to 41c. Payment of dividend contrary to s.42 d. Payment of an indemnity contrary to 124e. Payment of a SH contrary to 190 or 241

These are all situations in which the actions would make the

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corporation insolvent

3. Directors can recover against other directors who voted/consented to the unlawful act

4. Directors can apply to court to recover money paid to SH contrary to s.42

5. Court may : a. order SH to repay directorb. order corporation to return or issue shares to person from whom it has

purchased/redeemed, or c. make any further order it thinks fit.

6. Defense A director not liable under (1) if he proves that he didn’t know and could not reasonably have known that the share was issued for consideration less than the fair equivalent in money

7. Limitation Action must be brought against dir w/in 2yrs of the res being authorized

Who can bring action:- corporation- trustee in bankruptcy or receiver step into shoes of corporation to recover

debts owed to corporation- new control SH recover amts improperly paid by directors

123(4): defense if you exercised the care, diligence and skill that a reasonably prudent person would have in comparable circs, including reliance in good faith on (a) financial statements or (b) professional advice**directors at risk if they don’t meet standard of care

Joint and Several Liability for Wages119:

(1) Directors have joint and several liability to employees of corporation for all debts not exceeding 6 months wages, payable to each employees for services performed for the corporation while they were directors (Barrett, Proulx)

(2) Directors Not Liable Unless a. EE has sued corporation and corporation is unable to payb. Corporation has gone into liquidation and dissolution, and action for

wages was commenced w/in 6 months of earlier of date of commencement and dissolution

c. Claim made w/in 6 months of assignment or bankruptcy(3) Limitation Have to sue while they are a dir or w/in 2yrs of ceasing to be a

directors(4) The Amount Recoverable from director is amount of wages left outstanding

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by corporation(5) Subrogation – director can step into shoes of employee and recover whatever

is left after bankruptcy(6) Recovery Director who has satisfied a judgment is entitled to recover

against other directors who were liable

Policy: (Barrette)- employees are in most vulnerable position – wages are usually sole source of

income- employees don’t have good access to mgmt info – unlikely to be aware of

financial state of company- employees usually paid bi-weekly or once a month, so unlikely dir would ever be

liable for full six months- If company can’t make payroll good sign it is going down and smart dir will

resign- Statutory liability forces dir, when exercising their duties, to take into account the

interests of employees (as Teck said they should) specific statutory protection for at least one stakeholder

- Other small creditors of corporation don’t have this protection

Barrette v. Crabtree EstateTo be entitled to recover, employees must establish that the wages were for “services performed for the corporation”Wabasso Inc. goes bankrupt, plant closes and all employees laid off; former employees bring successful action for wrongful dismissal and are awarded damages in lieu of notice of $300k. The employees are also trying to recover damages against directors personally under 119.Held:

- The corporation was liable for wrongful dismissal, BUT to be entitled to recover under 119, employees must establish that the debt is “for services performed for the corporation”

1. In this case, the damages that the corporation was unable to pay were for wrongful dismissal, not for services performed

2. Directors are not liable for every debt of the corporation- Liability for wages is, essentially, If directors know that the corporation is in

financial difficulty and continue to utilize the services of employees who they know won’t be paid, as a matter of fairness the directors should be liable w/in reasonable limits

Proulx v. Sahelian GoldfieldsDirectors can be liable for expenses incurred for services performed for the corporation – even if they are not wagesEmployees working in Africa for corporation; employer K provides for salaries, vacation pay and reimbursement of expenses. Corporation goes under, and employees bring action against corporation and its directors for back wages, vacation pay and reimbursement.

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Held:- directors were liable for the wages, vacation pay, and reimbursements- Not wages, but is a debt in relation to services performed in the duties of their

employment to the corporation1. The maximum is the equivalent of 6 month’s wages

Obligations Under Other LegislationDirectors can be personally liable for failing to reasonably prevent the corporation from illegal activities

BC Employment Standards Act

“Corporation” under the BCBCA is not restricted to BC corporations- Most CBCA corporations, if they are carrying on business in BC, would be liable

under the CBCA and the Employment Standards Act- Discrepancy: Directors of a bankrupt corporation would not be liable under the

Employment Standards Act, but would be under the CBCA

Section 96 Corporate Officer’s Liability for Unpaid Wages

- (1) Directors/Officers can be liable for up to 2 months unpaid Wages -- (2) Despite subsection (1), directors/officers are not personally liable for:

(a) Wrongful dismissal payments or  payment in lieu of notice if the corporation is in receivership.

(b) Any liability to an employee for wages, if the corporation is bankrupt This is Weird – normally it is when corporations are bankrupt that

employees look to sue directors Rationale:

This protects directors in bankruptcy This encourages directors to stay on board even as their

company nears bankruptcy (c) vacation pay that becomes payable after the director or officer ceases to

hold office, or (d) money that remains in an employee's time bank after the director or officer

ceases to hold office.

Section 95 Amalgamating Parents and Subsidiaries- Basically: allows directors of ESA to impose liability on any corporation and the

directors of that corporation- if the director considers that businesses, trades or undertakings are carried on by or

through more than one corporation, individual, firm, syndicate or association, or any combination of them under common control or direction, (a) the director may treat the corporations, individuals, firms, syndicates or

associations, or any combination of them, as one employer for the purposes of

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this Act, and (b) if so, they are jointly and separately liable for payment of the amount

stated in a determination, a settlement agreement or an order of the tribunal, and this Act applies to the recovery of that amount from any or all of them.

go after the directors personally is when the corporation is bankruptPiercing the Corporate Veil?

- 95 – courts can pierce the veil to consider parent companies “employers” where their subsidiary companies are employers, and thus hold parent companies liable

- 96(4) – employees can target a director or officer in a “syndicate” that a director or officer treats as one employer (an affiliated company, or parent company, that the director or officer treats as part of the employee’s employer)

R v. Bata Industries Ltd.Example of director liability under other provincial standards acts Corporate Charges brought against corporation and 3 directors for causing chemical waste spill into river. Directors charged with not taking reasonable care in the storage of chemical waste from shoe factories (directors had consulted with removal company, but removal did not happen for 6 years, despite concerns). Directors argued they had met the prescribed due diligence standard.Held:

- BATA is convicted of environmental standards offence, and then the court looks to the liability of individual directors Remember, directors owe a duty of care to the world at large

- Once the offence by the corporation has been established, the burden is on the directors to show due diligence in preventing the issue from arising: Factors to Consider:

Director responsibility to review environmental reports Director awareness of the industry standards Directors should ensure that appropriate systems are in place Directors should immediately and personally react when they

know that things have gone wrong- Bata

Established due diligence He had done what was appropriate at his level of delegation – appointed a

responsible president and stated that environmental concerns should be a company priority

- Marchant Liable Problem was brought to his personal attention – had knowledge for 6 months,

but took no steps to address it- Weston

Liable Responsibilities as “on-site dir” make him more vulnerable to prosecution Was aware of chemicals used and environ hazard; dismissed quote out of

hand w/o further investigating it

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Accepted second quote solely on basis of price – can’t rely on bus judgement rule b/c decision was not informed and therefore was not reasonable

Tort Liability of Directors and OfficersTension:

- If every time a corporation was liable for breach of contract that liability could be shifted to the corporate directors, it would have an unreasonably chilling effect on the actions of directors

- On the other hand – you shouldn’t be able to hide behind a corporation if you personally have committed a tort

Said v. ButtBona Fide actions of a director within his authority and on behalf of a corporation will not expose the director personally to tort liability FOR BREACH OF CONTRACTS had friend (Agent) buy a ticket to a theatre which he had maligned, and was denied entry on night of performance. Theatre was successful in barring him because they reasonably expected the Agent to be performing the contract, and could prove that they would never willingly have made the contract with Said. Court also considered a claim in tort against Mr. Butt personally, director of the palace theatre corporation (Said argued that he had induced the corporation to breach the contract)Held:

- Allowing this action would make directors personally liable for every breach of contract of their corporation essentially transferring liability from corporation to directors

- Directors that act within his bona fide powers on behalf of a corporation is in a different position than a stranger that wrongfully induces the breach of contract

ADGA Systems v. Valcom Ltd.Upheld Said v. Butt, but noted that THE GENERAL RULE is that directors can be personally tortuously liable when they are not acting bona fide in their authority as directorsAppeal from an order granting summary judgment to dismiss the action against Valcom – CoA essentially saying that the case should be heard. Both corporations were bidding on a contract – conditions of the bid were to list names and qualifications of 25 senior technicians. ADGA had 45 technicians, alleged that Valcom had none. Valcom had allegedly been attempting to poach technicians from ADGA, and had persuaded all but one technician to sign on. Allegation is that Valcom and its senior directors personally, induced ADGA employees to breach their contracts and fiduciary duties.Held:

- Upheld Said v. Butt If an individual acting bona fide within his powers as director of a corporation causes that corporation to breach a contract, that individual will not be held personally liable

- However If the directors/officers have independently committed tortuous conduct, then they can be held liable as well as the corporation

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In this case: Said v. Butt does not apply The directors were not causing

employees of their corporation (Valcom) to breach a contract, they were inducing employees of ADGA to breach

Indemnification and InsuranceAlways subject to by-laws

Policy:- indemnification is to encourage reasonable, good faith behavior the cost of

mistakes made while acting in good faith w/view to best interests of the corporation shouldn’t be visited upon the individual)

- Most corps have by-laws making indemnity a right – most directors and officers would ask for a contractual commitment to indemnify

- The other option is insurance under 124(6) – an individual would particularly want to make sure there is insurance in place in situations not just where there is conflict, but where there is the possibility that the corporation will fail (if corporation can’t pay, indemnity is useless)

124- (1): A Corporation MAY indemnify a directors or officer, etc. against all costs,

charges, expenses or judgment REASONABLY INCURRED by reason of association with the corporation (e.g. position as dir, officer) discretionary and must meet (3) (Consolidated Enfield)

o This is probably for situations where a corporation voluntarily indemnifies a director/officer

- (2): A Corporation MAY advance money to officer of dir for costs of proceeding, but must repay if doesn’t meet conditions of (3).

- (3): Corp MAY NOT indemnify UNLESS the person: (a) acted honestly and in good faith w/a view to best interests of corporation (b) In the context of a criminal proceeding had reasonable grounds for believing

conduct was lawful- (5): A Director or officer has RIGHT to be indemnified with regard to all reasonable costs incurred by reason of association with the corporation, IF:

1. The expenses must be reasonable incurred while the individual was a director or officer, per 124(1)

(b) individual was acquitted or not liable, AND(c) acted honestly and in good faith, w/reasonable grounds for believing

conduct was lawful- Presumption of Good Faith : (Consolidated Enfield)

1. until there is demonstrated evidence of bad faith, a director must be considered to have acted in good faith

2. Onus of proving bad faith is on the party seeking to resist indemnification

- Was there reasonable reliance on counsel?

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1. Doesn’t guarantee indemnification but weighs against a finding of bad faith (Refuse)

- (6): A corporation may purchase INSURANCE for benefit of director or officer against any liability incurred by the individual

- most directors won’t take the job unless they have liability insurance

- (7): corporation, individual or entity may apply to a court for an order approving an indemnity

- directors may choose this route because if they vote for/consent to pay an indemnity that is unlawful they become liable (118(2)(d))

- court will review circs and deter whether indemnity should be paid

- (8): must notify the Director of application under (7)

- (9): may have to give notice to other interested persons and the person is entitled to appear and be heard in person or by counsel

- 118(2)(d) Director Liability: If directors vote for/consent to an indemnity that is unlawful (under 124(3)) they will be liable

Consolidated Enfield Corp. v. BlairExample of a director successfully claiming indemnification, having acted in good faith and for the corporation – even though in this case it was legal action against majority shareholderBy-law of corporation said directors “shall be entitled to indemnification”. Blair was director, CEO and substantial shareholder. Cad Exp was the largest shareholder. Blair would only be chair and president with the support of the board. There were originally 5 nominees from Cad Ex, and 6 from Blair. Cad Ex elects surprise 6th nominee (Price) with proxy votes, and Blair is defeated. Blair declared Cad Exp proxy votes invalid, and sought a new nomination slate with the proxy votes cast validly. Cad Ex sued, Blair defended at a cost of $165k, and Cad Ex was successful (Blair had made a mistake, the proxy votes should have counted). Cad Ex sought compensation from Blair, and Blair sought indemnity because he had acted in good faith as director and CEO and the corporate by-laws entitle him to indemnity.Held:

- Having acted in accordance with his duty to the corp, he was entitled to indemnification under the by-law

- Presumption of Good Faith : until there is demonstrated evidence of bad faith, a director must be

considered to have acted in good faith Onus of proving bad faith is on the party seeking to resist indemnification

- Director established 3 conditions required (in this case by by-laws) for indemnification: He was made party to the litigation by reason of being a director The costs were reasonably incurred He acted honestly and in good faith with a view to promoting the best interests

of the corporation

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Ensuring the integrity of the voting system Sought and reasonably relied upon legal counsel

Note: this case may have been decided differently under the CBCA, since 124(5) holds that directors have a right to indemnification unless they are found by a court to be liable.

Corporate Governance: ShareholdersGeneral PowersNo unusual management power:Shareholders do not have managerial power, they have the power to vote, receive dividends, and share of the assets on wind-up. Most shareholders in large companies employ “rational apathy” – if they don’t like what is happening with the company, they simply sell their shares.

- 102: directors shall manage and supervise mgmt of business and affairs of the corporation

- 189: special resolutions are required to sell assets of company (if directors don’t put offer to SH, SH can requisition a meeting and dump the directors)

Automatic Self-Cleaning Filter Syndicate v. CuninghameShareholders to not have a residual or overriding power to dictate to the board of directorsCompany had been incorporated with articles that held that the directors had the power to manage, including power to sell corporate property and enter into contracts for the corporation. One of the shareholders wanted to sell some assets. He called a shareholder meeting, and the sale was approved with 55%. The directors refused to authorize the sale. The shareholder sought an order from the court such that the assets had to be sold.Held:

- director not obliged to sell- Shareholders to not have residual or overriding authority over directors – they

must abide by what they have agreed to in the articles Shareholders are NOT the principals of which the directors are agents. The

directors are agents of the corporation.- Shareholders who want to change the contract which dictates the terms of their

relationship with directors or the directors authority can alter the articles with an extraordinary vote (75%)

Though most of the day to day operation of the corporation is taken care of by the directors (and their officers), the shareholders do have some ordinary powers in the running of the corporation discussed below

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Access to Corporate Information:- 20

(1) Share Register must be Available corporation shall maintain (at its home officer or in a designated

place) articles, by-laws, amendments, and unanimous shareholder’s agreements, minutes, resolutions of shareholders

(2) Shareholder DOES NOT have access to the Director’s Minutes- 21

(1) Shareholders may examine business records and may take extracts from the records, free of charge, and, if the corporation is a distributing corporation, any other person may do so on payment of a reasonable fee

(1.1) Access to securities register is slightly more complicated must undertake not to use them for improper purposes

(2) Shareholder is entitled to a copy of the by-laws on request and without charge

Resolutions:A resolution can never be passed with less than quorum more than 50% of the shares entitled to vote2(1)

- “Ordinary Resolution” resolution passed by a majority of the votes cast by the SH who voted in

respect of that resolution- “Special Resolution”

resolution passed by a majority of not less than 2/3rds of the votes cast by SH who voted in respect of that resolution OR signed by all the SH entitled to vote on that resolution

- 142 (1) Resolution in Lieu of Meeting (a) resolution signed by ALL SH

entitled to vote is valid as if passed at a meeting, and (b) may substitute a SH meeting w/a resolution signed by ALL SH entitled that deals w/all matters required by the Act to be dealt with at a meeting

if SH wants a meeting – simply has to refuse to sign the resolution (2): Copy of every resolution shall be kept with the minutes (3): Note in minutes that chairperson declared resolution to be carried or

defeated is sufficient evidence of that (prima facie chairperson’s decision governs)

Election and Removal of Directors:- 106(3): directors elected by ordinary resolution- 109(1): directors removed by ordinary resolution

1. remember, the articles cannot require anything more

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than an ordinary resolution for removal of directors

Amendment of By-Laws:- 103

(1) and (2): Directors can amend by-laws, subject to articles, by-laws or USA, BUT this must be put to SH for approval by ordinary resolution at next SH meeting (confirm, amend, reject, repeal)

(3): by-law is effective during the interim after passed by directors and before approved by SH

(4): if rejected by SH, amendment ceases to be effective; directors can try again but a by-law with substantially the same purpose will not be effective in the interim

(5): SH entitled to vote may, in accordance with 137, make a proposal to make, amend, or repeal a by-law

Review of Financial Statements:Ability to review financial statements is the foundation of SH’s ability to participate in the control and mgmt of the corporation.There is a strict obligation on directors to provide info about the financial situation of the corporation (disclose assets, liabilities, capital, shares issued, profit/loss, cash flow, etc.)

- 155 (1) : directors shall provide SH at every annual meeting:

(a) comparative financial statements, (b) report of the auditor, if any, and (c) any further info (e.g. if req’d by articles, by-laws or USA)

(2): docs required by (1) must be delivered to SH at least 21 days before the annual meeting or before the signing of a resolution (142)

(chance to review, get professional advice, prepare questions) (3): OFFENCE: failure to comply w/(1) w/o reason is an offence punishable

on summary conviction to a fine of $5000

Appoint an Auditor- 161

(1): An auditor must be independent from the corporation – i.e. in a position to make an objective review of corporation’s financials, protection for SH (“do the statements fairly and accurately rep the financial situation of the corporation?”)

(2): Disqualified if person is (a) bus partner, dir, officer or EE of the corp or its affiliate, or bus

partner of a persons who is; (b) a significant SH; (c) has been a receiver, liquidator, or trustee in bankruptcy for the

corp or its affiliate w/in 2yrs

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- 162 (1): auditor appointed by ordinary resolution of SH at first and each annual

meeting (2):auditor appointed by directors until first SH meeting (104) is eligible to be

appointed by SH (3): incumbent auditor continues in office until a successor is appointed (4): auditor’s remuneration may be fixed by ordinary resolution of SH, or by

resolution of directors- 163

(1): SH in a CLOSELY HELD CORPORATION may resolve NOT to appt auditor

shareholders in a distributing corporation must appoint an auditor (2): res under (1) is only valid until next annual meeting (3): res under (1) not valid unless has unanimous consent of all SH

Shareholder MeetingsWhen

- 133 (1): Directors Shall call annual meetings

(a) first w/in 18 months (b) every subsequent w/in 15 months

(2): Special meetings can be called by directors anytime (3): Corporation may apply to a court for an order extending the time for

calling a meeting

Where:- 132

(1) : Must be in Canada (2) : Can be outside Canada IF all SH entitled to vote at that meeting agree

to hold meeting outside Canada (3): Attendance at meeting outside Cad is deemed to be agreement to such

meeting unless attended w/express purpose of protesting it (4): participation by electronic means is permitted, but all participants must

be able to communicate adequately with each other (5): Directors or SH who call meeting may determine that it will be held

entirely by electronic means

Notice: special business v. ordinary business determines type of notice required

- 135 (1): Notice of the time and place of meeting shall be sent to

(a) each SH entitled to vote; (b) each dir;

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(c) auditor AT LEAST 21 days in advance (Regulation 44) (1.1): Notice may be sent less than 21 days in advance in closely held

corporation (5): Special Business all business transacted at special meeting, and all

business transacted at an annual meeting, subject to 4 exceptions, is deemed special business

Exceptions Ordinary Business: consideration of financial statements, auditor’s report, election of directors and re-appt of incumbent director

(6): Special Notice notice of meeting at which special business is to be transacted shall state:

(a) the nature of the bus in sufficient detail (b) the text of any specific resolution to be submitted at the

meeting Must be specific enough for SH to decide whether to attend, give their proxy

to someone or just stay home- 136: Waiver of notice is implied by attendance at the meeting, unless attending

with express purpose of protesting the meeting

Quorum:- 139(1): Subject to by-laws, Quorum is met if: a majority of the shareholders entitled

to vote at the meeting are present in person or represented by proxy - must have quorum to have valid meeting that conducts valid business- one person w/51% of voting shares is sufficient- by-laws may impose special rules re: quorum (e.g. certain # of people, certain

class of SH present)- 139(2): Quorum at the opening of the meeting is sufficient – proceed w/bus

notwithstanding that quorum isn’t present throughout- 139(4): Single Shareholder Meeting: if a corporation only has one SH – can have a

one SH meeting - Wouldn’t do this – 142 resolution instead

Right to vote:- 140(1): subject to articles, Presumption of One share/One vote- 140(2): Corporate Representative: the board of directors of any corporate

shareholder has to authorize its physical representative or proxy to cast its vote

Voting:- 141(1): Subject to by-laws, voting may be by show of hands, except where ballot is

demanded by a SH or proxy-holder entitled to vote at the meeting- 141(2): SH or proxy-holder may demand a ballot either before or after any show of

hands- 141(3): Vote may be held electronically, if corp makes avail a communication

facility

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- Reg 45(1): communication facility must enable (a) votes to be verified and (b) tallied votes to be presented to the corp w/o being able to identify voter

- 141(4): person attending meeting by electronic means is entitled to vote by electronic means

- Reg 45(2): voting by electronic means when participating by electronic means must enable (a) votes to be verified and (b) tallied votes to be presented to the corp w/o being able to identify voter

Resolution in lieu:- 142(1)

(a): A resolution in writing can be valid as if passed at meeting, if ALL SH entitled to vote sign

(b): A meeting in writing can be held if all required business is included in resolution and ALL SH entitled to vote sign the resolution

Requisition of meeting by SH:Important this is how SH get meeting if they have lost confidence in directors and want to remove them (valuable power to intervene in management in-between annual meetings)

- 143 (1): If a shareholder holds 5% or more of the shares he may requisition

directors to call a meeting (2): requisition, signed by one or more SH, must state the business to be

transacted at the meeting and shall be sent to each dir (3): on receiving the requisition, directors SHALL call meeting, UNLESS

(a) record date has been fixed under 134(1)(c) (b) directors have called a meeting of SH and given notice thereof (c) the bus of the meeting stated in requisition includes matters

described in 137(5)(b) to (e) ineligible reasons to requisition a meeting

(4): IF directors fail to call meeting w/in 21 days, SH may do so (6): SH are entitled to reimbursement for requisitioning, calling and holding a

meeting- 137(5) Ineligible Conditions for Requesting a Meeting

(b) primary purpose of the proposal is to enforce a personal claim or redress a personal grievance against the corporation or its directors, officers or security holders

(c) person failed to send out the proposal (d) issue has been raised unsuccessfully before, and the shareholder has not

garnered any more support (e) rights conferred by this section are being abused to secure publicity

Court may: order meeting, review election of directorsArises when bad blood between SH (e.g. one group of SH can block meeting b/c they hold

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enough shares to prevent quorum)

- 144 Meetings Ordered by the Court (1) : A director or SH entitled to vote, or the Director, can apply for the

court to order meeting to be called (2): court may order that quorum required by the by-laws or this Act be varied

or dispensed with at a meeting (3): meeting called and held pursuant to this section is a valid meeting of SH

- 145 Court Review of Elections (1): A court may, on application of corporation, SH or dir, determine any

controversy with regard to the election or appointment of a director or auditor (2): Powers of the Court: ( broad discretion)

(a) order restraining election (b) order declaring results of an election (c) order requiring a new election/appointment (d) order determining the voting rights of shareholders or persons

claiming to own shares

Shareholder Control of Fundamental ChangesWhen fundamental changes are proposed, they must be approved by more than a simple resolution of the directors or ordinary resolution of shareholders

Policy The statutory regime attempts to balance: - The right of the majority shareholders to control over fundamental changes- the reasonable expectations of the minority that the corporation they originally

invested in will continue to be governed by the same rules

Fundamental Changes:- Are “Special Business” 135(5)

Which Require:- Special notice 135(6):

(a) sufficient detail to permit shareholders to form a reasoned judgment (b) text of any special resolution

- Special shareholder resolutions 2(1) 2/3 of the voters who vote 139 no less than quorum (51%)

Amendment of the Articles of Incorporation**Special Resolution – may get separate class vote – if not overruled in the existing articles for situations (a), (b), or (e)

- 173(1): Articles must be amended by special resolution

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These are some things that can be changed look to 176 to see if a class vote is necessary(173(1)(o)) – any thing that is included in the articles

- 6(3): if the articles or USA require greater number of votes than the 2/3 requires by the act for a special resolution, that is permitted (i.e. requiring in articles unanimous support for fund change – internal way

of ensuring no SH rights could be affect w/o their consent) - 173(2): directors, if authorized by shareholders in the special resolution, revoke

the special resolution without further consultation allows directors to be flexible in business dealings

- 173(3): Directors may change the corporate name from a numbered name to a word name without shareholder approval

- 175 (1): Any director or SH entitled to vote may propose to amend articles, in

accordance w/s.137 (spec notice required) (2): special notice provisions apply (SH needs to be informed)

notice must set out the proposed amend, and state that a dissenting SH is entitled to be bought out under 190

failure to make that statement doesn’t invalidate amend- 135(1) Notice must be sent to SH entitled to vote,

must determine what SH will be entitled to vote as they are the only ones who are required to receive notice

- 176 Class Votes (1): These Amendments must be approved by SEPARATE CLASS

VOTE of shares affected by the proposed amendment BUT Separate class votes can be overruled in the existing

articles, for changes set out in 173(1) (a), (b) or (e) (a) Increase or decrease max number of shares of a class, or classes

of shares superior to your shares (b) Exchange, reclassification or cancellation of all or part of

shares of a class (c) add, change, or remove rights, privileges, restrictions on

conditions attaching to shares: (i) remove or change prejudicially rights to dividends (ii) remove or change prejudicially redemption rights (iii) reduce or remove dividend or liquidation preference (iv) remove or change prejudicially conversion privileges,

options, voting, transfer, or pre-emptive rights (d) increase rights of shares with equal or superior rights to your

shares (e) create a new class of shares equal or greater to yours (f) make any shares with rights inferior or superior to yours (g) change the rights of shares of one class into shares of another

class (subsuming the rights of one class into another) (h) constrain or remove a constriction of the issue or transfer of

shares of a class

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(5): Special class of SH may have right to vote separately on amendments regardless of whether that class normally has right to vote (if they can bring themselves w/in the circs set out in (1))

each SH presumptively gets one vote (140) (6): Where a separate class vote is held, amendment must be approved by

special resolution of each class entitled to vote (2/3rds majority)

Once Approved- 177(1): amended articles will be delivered to Director

- 178: Director shall issue certification of amendment

- 179 (1): amendment is effective on date shown on certificate (2): rights preserved (amend doesn’t affect existing cause of action)

Export or Continuation of CBCA corporation **every SH votes (no class votes); SH have right to dissent

- 188 (1): Continuance requires authorization of shareholders (3): special notice to SH required (must comply w/135) (4): every SH is entitled to vote on the proposal to continue in another

jurisdiction, even when their shares don’t normally carry the right to vote (5): approval is by special resolution

Extraordinary Sale, Lease, Exchange of substantially all corporate assets**may get separate class vote, under (7); entitled to dissent under 190

Shareholders invested in the business on the understanding that it would be a certain type of business with certain types of investments fundamental changes to those assets must be approved by a special resolution

“all or substantially all” well over 50%, no clear test, look at both relative value of assets left after disposal, AND significance of assets to corporation’s business (i.e. can it still carry on the same bus??)

- look for fact pattern where almost everything is being sold, transferred, or leased

- 189 (3): Requires special approval of SH (special notice, all classes entitled to

vote, spec res) (4): Special notice must be given to SH(135(5) and (6)) and must

include: copy or summary of the sale, lease, etc. agreement notice that dissenting SH has access to 190 (failure to make this

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statement doesn’t invalidate the transaction) (5): SH have power to authorize the transaction, and to fix or authorize the

directors to fix the terms and conditions of the transaction SH can approve diff terms than are in the draft – power to change

terms of agreement (3rd party might not accept changes) (6): every SH is entitled to vote on the for extraordinary sale, lease, or

exchange of substantially all corporate assets, even when their shares don’t normally carry the right to vote

(7): A class or series is entitled to vote separately if it is affected by the transaction differently than another class or series

(8): approval is by special resolution (9): directors, if auth by SH approving proposed sale, lease or exchange, and

subject to rights of 3rd parties, can abandon the transaction w/o further approval of SH

directors have auth to abandon the deal w/o going back to SH

Voluntary Liquidation and Dissolution**Separate Class Vote Required if more than one class

Voluntary liquidation and dissolution is distinct from involuntary or court ordered one under ss.213-214

- 211 (1) and (2): A director or SH entitled to vote at any annual meeting may

propose liquidation and dissolution, and special notice must be sent to each SH (special bus – 135(5))

(3): The proposal must be approved by special resolution, and where a corporation has more than one class of shares, each class must separately approve the proposal by spec resolution

Shareholder Proposals- Recent changes to CBCA make it easier for SH to make proposals, and changes to

proxy rules makes it easier for SH to get support- any SH can give their share to proxy-holder essentially makes the PH the agent of

the SH to go to the meeting and vote the shares according to SH wishes

Remember: (1) Regardless of whether a proposal is properly made and passed by shareholders,

it may not be binding on directors with regard to the powers clearly afforded to them under the Act and the articles (management of the business and affairs of the corporation)

a. Automatic Self-Cleaning Filter: shareholders cannot bind directors when they are within their managerial powers described in the articles

b. But, proposal is often led by powerful institutional investor –

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enough voting power to influence directors to change policy (threat that SH could requisition meeting under 143(1) and remove directors)

(2) In order to affect things normally under the managerial control of the directors, Shareholders can propose to amend the by-laws or articles

a. Such a change would require special resolution and potentially a class vote

- broad categories of proposals:- 175(1): proposal that articles be amended- 211(1): proposal the liquidation and dissolution of the corporation- 103(5): proposal that a by-law be made, amended, or repealed

Proposal Procedure:- 137(1) (a) and (b): registered or beneficial SH of shares w/normal voting

rights can make any proposal and raise discussion

IF an eligible SH makes a proposal, it will be voted on at the next meeting137(3): if so requested by the parson that submits a proposal, the corporation shall include in the management proxy circular a statement in support of the proposal

IF the SH wants a special meeting to vote on the proposal, the procedure is under 143

- 137(1.1) Eligibilitya. (a): To be eligible to make a proposal, must hold minimum amount

of voting shares and have held them for prescribed period of timei. Reg 46: 1% of voting shares, or shares w/FMV of $2000,

held for 6 monthsb. (b): You can meet those minimum requirements as a group

- 137(1.2): Info to be provided by proposer:a. name, address of the person and supporters, and number of shares

held and when acquired- 137(1.3): The information provided under (1.2) is not part of the proposal

(doesn’t affect word limit)- 137(1.4): If requested, proof may be required that person meets (1.1)

a. Reg 47: corporation must request proof w/in 14 day of receiving proposal; proof must be provided by SH w/in 21 days of receiving request

- 137(4): SH w/at least 5% of shares, or 5% of class of voting shares may make nominations for election of directors (doesn’t preclude nomination at the meeting)

137(5) Inappropriate reasons for making a proposala. the proposal is not submitted to the corp w/in 90 days (Reg 49)

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before the anniversary date of the notice of meeting that was sent to SH in connection w/previous annual meeting of SH give corp time to give notice, etc.

b. if primary purpose of proposal is clearly to enforce a personal claim or redress a personal grievance against the corp or its dirs, officers or security holders

b.1 it clearly appears that the proposal doesn’t relate in a signif way to the bus or affairs of the corp

c. if proposing SH failed, w/in last 2 yrs (Reg 50) to attend a meeting, in person or by proxy, where a proposal at that person’s request had been included in mgmt proxy circular relating to the meeting

d. substantially the same proposal was submitted to SH in a mgmt or dissident proxy circular relating to a meeting of SH held not more than 5yrs (Reg 51(2)) before the receipt of proposal and didn’t received the prescribed min of support

i. Reg 51(1): if at one meeting – 3% of shares voted, if at 2 meetings – 6%, if at 3 meetings – 10%

Proxy Solicitation and Proxy CircularsShareholders do not have to be physically present at meetings, they can cast their votes through a proxy

147 Definitions- “Proxy” a completed and executed form of proxy

- “Form of Proxy” a written or printed form that, on completion and execution by or on behalf of a shareholder, becomes a proxy

- “Solicitation of Proxy” - (a) Includes:

(i) a request for a proxy whether or not accompanied by a form(ii) a request to execute (or not) a form of proxy or revoke the proxy(iii) the sending of a form of proxy or other communication to a shareholder under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy(iv) the sending of a form of proxy to a shareholder under section 149

- (b) Does not Include:(i) sending a proxy form in response to an unsolicited request of a SH(ii) performing administrative acts or professional services on behalf of a person soliciting a proxy(iii) solicitation by someone who is the beneficial owner of the sharespublic announcement by the SH of intent to vote and reasons

i. Reg 67 – speech and public broadcasts of all kinds

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ii. To avoid situations where shareholders criticize a company and are held to be soliciting proxies

(iv) Communication for the purposes of obtaining the number of shares required for a shareholder proposal(v) Communication other than solicitation that is made to shareholders, in any circumstances that may be prescribed

i. Reg 68 – things that are not solicitation include:a. communication to other shareholders about the

business and affairs of the corporationb. communications concerning the organization of a

proxy dissident solicitationc. giving financial, business, corporate, legal advice to

a dissident in the ordinary course of proxy voting advice

ii. Reg 69 – you can solicit by public broadcast if you meet certain requirements

Remember:149(1) if the company is a distributing corporation or has more than 50 shareholders, the management must solicit proxies150(1)

- if management solicits proxies, they must send a proxy circular- if dissidents solicit proxies, they must send a proxy circular UNLESS they are

soliciting 15 or less shareholders (150 (1.1))

Proxy:- 148

- (1) Proxy-holders do not have to be shareholders, they can be designated by any shareholder entitled to vote

a. (probably this includes all shareholders)- (2) proxy shall be executed by the shareholder or by the shareholder’s

attorney in writing- (3) Proxy is valid only at the meeting for which it is given, or at any

adjournment- (4) Shareholder may revoke a proxy- (5) Deposit of proxy – directors may specify a time not more than 48

hours earlier than the meeting by which the proxy must be deposited at the corporation

- 150 Soliciting Proxies- (1) A person shall not solicit proxies, UNLESS:

a. in the case of MANAGEMENT SOLICITATION, that management has sent out a management proxy circular in the prescribed form

b. In the case of a DISSIDENT SOLICITATION, the dissident sends out a dissident proxy in the required form

- Forms must be sent to the auditor, each shareholder whose proxy is

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solicited, and each director- (1.1) Exception for DISSIDENTS may solicit proxies without a proxy

circular if they are soliciting from 15 or fewer persons- 151: on application of an interested person, the Director may exempt the

person from requirements under 149 or 150(1)- 152: The person who is appointed Proxyholder

- (1) shall attend the meeting in respect of which the proxy was given- (2) shall have the same rights as the shareholder at that meeting would

have had (vote or vote by proxy)- 154: Court Oversight

- (1) If a circular contains untrue statement or omission of a material fact, and interested person or the Director may apply to the court for “any order it thinks fit”, including:

a. order restraining solicitation, meeting, or any implementation of resolution passed at meeting during which the proxies voted

b. order requiring correction of proxy form or proxy circularc. order adjourning the meeting

Management Circulars- 149(1) and (2) Concurrently with every meeting, a corporation must

solicit proxies if they are a distributing corporation or have greater than 50 shares

- 150(1)(a): if the corporation must solicit proxies, it MUST also send out a management proxy circular

a. onus is on corp to ensure everyone entitled to vote has necessary information

- 137(2): a corp that solicits proxies shall set out the proposal in the management circular required by s.150

- 137(3): proposal may request corp to include a supporting statement in the circular in support of the proposal (may also include names of person supporting)

a. Reg 48: proposal and statement together max 500 words

- 137(5): Exemptions: corp not required to comply with (2) and (3) if: (permits mgmt to omit a proposal that doesn’t relate in a significant way to the bus of affairs of the corp)

a. the proposal is not submitted to the corp w/in 90 days (Reg 49) before the anniversary date of the notice of meeting that was sent to SH in connection w/previous annual meeting of SH give corp time to give notice, etc.

b. if primary purpose of proposal is clearly to enforce a personal claim or redress a personal grievance against the corp or its dirs, officers or security holders

b.1 it clearly appears that the proposal doesn’t relate in a signif way to

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the bus or affairs of the corpc. if proposing SH failed, w/in last 2 yrs (Reg 50) to attend a meeting,

in person or by proxy, where a proposal at that person’s request had been included in mgmt proxy circular relating to the meeting

d. substantially the same proposal was submitted to SH in a mgmt or dissident proxy circular relating to a meeting of SH held not more than 5yrs (Reg 51(2)) before the receipt of proposal and didn’t received the prescribed min of support

i. Reg 51(1): if at one meeting – 3% of shares voted, if at 2 meetings – 6%, if at 3 meetings – 10%

e. Rights are being used to secure publicity**motivation no longer relevant – just has to not relate to the ordinary bus and affairs in a significant way

- 137(5.1): management may refuse to include proposal if person who submits it fails to continue to hold the # of shares required by (1.1) up to and including the day of the meeting, and may refuse to publish a proposal by that person for 2yrs (Reg 52)

- 137(6): A corporation cannot be sued for publishing a circulating proposal relying on 137(1.1)(a)

- 137(7): if a corporation refuses to include a proposal in the circular, it must notify the SH in writing w/in 21 days (Reg 53) after receiving the proposal, or after receiving proof under (1.4) and include reasons

- 137(8): SH may apply to court for an order restraining the corp from holding the meeting until it properly prepares the proxy circular

- 137(9): corp may seek order from court permitting the corp to omit the proposal from the proxy circular

- 137(10): Director shall be given notice of action under (8) or (9)

Immunity: - 137(6) – no corp or person acting on its behalf incurs any liability by reason only of

circulating a proposal or statement in compliance w/this section- Might want to go to court to get ruling re: whether corp must publish proposal

(protect themselves from defamation)

Brown v. DubyExample of a proposal found to be an solicitation of proxies without a proper dissident proxy circular, and the court applying a remedyPart of the same action in Canso (dispute over no SH holding more than 1000 votes, no matter the # of shares). Brown alleges that dissidents have been soliciting proxies without complying with the CBCA. First letter went to USA Shareholders only, and the second letter went to all SH.Held:

- The First Letter: was a letter to requisition a meeting, not a solicitation (it was fine)

- The Second Letter: was a solicitation

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- It was sent out to oppose existing management- It stated the intention to solicit proxies for the next meeting- Even though there was no proxy form sent, it asked SHs not to sign the

management proxy forma. Probably fell under the definition of a “request” to sign a proxy or

not sign a proxy in 147- The management was seeking an injunction under 154 for an improperly

prepared solicitation of proxies - Instead of an injunction, the court ordered a correction of the dissident

circular- Here, the failure was to provide the information that the law says you

must provide- There was no lack of discussion or improper conduct – preventing the

meeting through an injunction was not in the interests of ensuring the best outcome for corporate shareholders

Vote Pooling Agreements 145.1 A written agreement between two or more shareholders may provide

that in exercising voting rights the shares held by them shall be voted as provided in the agreement.

o This seems like a no-brainer, coming from BC corporate law which essentially views the corporation as a contractual relationship between shareholders

o In other jurisdictions, there is some controversy over what shareholders can agree to or team up to do outside of the constitution articles

Ringuet v. BergeronVote pooling agreements are valid and binding on shareholders, but not on directors cannot “Fetter the Discretion” of the directors to act in the best interests of the corporationClosely held corporation. Minority shareholders enter into agreement to purchase equally the shares of another shareholder so that they constitute the majority. Once they take control of the board, they make themselves VP, Pres, and Secretary, and agree to vote together (vote pooling agreement). Then the shareholders enter into a new vote pooling agreement with a 4th SH, and exclude one of the original SHs by holding a directors meeting, becoming directors, and excluding him. Excluded SH brings suit, claiming that they voted against him contrary to the VPA, and the defence is that the original vote pooling agreement was invalid.Held:

- Vote pooling agreement was valid against shareholders, it did govern their voting as shareholders, but it is no longer binding on their votes as directors

- The ousted SH wins, and the remedy is that all the votes are given to him (he is in total control)

- Fettering the Directors: The one thing that shareholders cannot do is agree in

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advance how they will act when they are directors- Agreeing as a shareholder with other shareholders to do certain things

once you’re a director is fettering your discretion as a director to act in the best interests of the corporation

Unanimous Shareholder AgreementsA USA is a fundamental change to the normal governance structure of a corporation, transferring director’s powers to shareholders

- Basically, all the shareholders acting together can affect the directors powers, including those restricted to the directors in 115(3)

- Submitting to SH any matter requiring their approval- Fill vacancy among the officer of auditor or appoint additional directors- Issue securities- Issues shares of a series- Declare dividends- Purchase, redeem, or otherwise acquire shares issued by corporation- Adopt, amend, or repeal by-laws

USA are primarily used in closely held corporations, where the shareholders are directors and officers Where there is only one or few shareholders, and their interest are closely aligned, it makes sense to have the shareholders able to unanimously direct management role

s. 2: Theoretically Defines USA – but basically describes it as what is described in s. 146

146: Unanimous Shareholder Agreement- (1) Requirements for a valid USA

- an otherwise lawful written agreement- all shareholders of the corporation must be party to it (though the

agreement can include non-shareholders)- It must restrict in whole or in part the powers of the directors to

manage the corporation- (2) If a person who owns all the shares in a corporation makes a written

declaration that restricts in whole or in part the powers of the corporation the declaration is a valid USA

- this is used in closely held corporations, or - in situations where a parent company wants to maintain control of a

subsidiary, despite that corporation’s director, it can transfer all the shares in the corporation to a single person and have that person write a USA that says that all of the management of the corporation will be undertaken by the shareholder

- (3) A purchaser or transferee of shares subject to a USA is deemed to be part of the agreement

- (4) If there was no notice of the USA, the person who purchased the shares can rescind the transaction within 30 days

- (5) Transfer of Liability

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- If management of a corporation is transferred from the directors to someone else by USA, the person that exercises the power will be subject to the same liabilities as directors (Duty of Care and FD) and the directors will be relieved of that liability

- (6) where shareholders are acting as directors, they CAN fetter their discretion (they can agree as to how to make decisions – unlike directors)

Remember: 20(1)(a) must keep a record of the USA with the corporate records

Duha Printers v. The QueenIacobucci outlines the nature of a USAComplex tax question, question was who controlled the corporation and what constitutes a proper USA.Held:

- The distinction between a USA and an ordinary shareholder’s agreement is some transfer of director’s powers to the shareholders

- Shareholders can make whatever other agreements they want, though directors do not always have to abide by these agreements

- Private agreements between shareholders that are not USA are simply subject to normal contract law

- Hybrid Nature - USAs are contracts that are also part of the corporate constitutional nature- Directors and officers might not be part of the USA, but they must agree

with it

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