Business Associations Chapter 4

Corporation as a Legal

Person

What is a corporation An artificial person Treated as a person in legal analysis, but

not as a person outside Can do things that humans do

- hold property, commit torts, contract with others etc

- distinguished from a natural person (human being or individuals)

Common law has always taken the view that the creation of a corporation is privilege deriving form the power of the state

As power passed from crown to legislature, corporations were created by special statutes

Purpose of co was a vehicle to pull resources together for a collective venture

Soloman indicated two things business people twanted

Personal assets from that of the corporation

Limited their liability Wanted any liability they were

responsible for was limited to their investment in the corporation

19th Century saw the adoption of registration statutes which granted civil servants the authority to create corporations on the application of members of the public

A legal fiction, treated as a person for the purpose for legal analysis

Theoretical Basis Consequence of incorporation = Creation of a new legal person, separate in LAW from its shareholders Basic principle of corporate personality was settled in Salomon

o Most significant feature of incorporation is the segregation of business and profits and losses from the personal accounts of the individual participants

Corporations cannot be owned The form of property acquired upon becoming a shareholder is called a corporate share Corporate share like any other property is a legal relationship

o Share defines the set of legal relations between the shareholder and the corporation, determining how each will be legally required to behave in various circumstances

Practical Consequences of Co as Legal Person Corporations can make decisions, hold property and complete legal transactions Some physical acts and transactional details that we think are done by individuals can be legally attributed to a

corporation Corporate intent in Bolton (Engineering) Co. v. Graham and Sons

o Directors and managers represent the directing mind and will of the company and control what it doeso State of mind of the managers = state of mind of the companyo Intention of managers or intention of company depends on the nature of the matter under consideration,

the relative position of the officer or agent and the other relevant facts in the circumstances of the case Daimler Co. v. Continental Tyre and Rubber Co.,

o Act’s of a company’s directors, managers, secretary, functioning within the scope of their authority are the company’s act

Notes:1) Practice of issuing partly paid shares has been abandoned Full price is paid at the

time of purchase, vendor cannot subsequently compel the holder to pay more

Liability used to be limited to just the amount the shareholders had paid for the shares (not at full price)

Salomon v. Salomon [1897 A.C. 22, 66 L.J. Ch. 35, 75

S decides to incorporate after running business as sole proprietor for many yrs.

Leg requires 7 s/h, so S gives his wife & kids 1 share each, and keeps the rest himself 20,001

S lends corp $ & becomes a secured creditor (debenture).

B loaned money to co and Salomon was given the right to that loan, and B didn’t pay interest.

Co goes bankrupt, unsecured creditors are upset that S is first in line.

Co is liquidated, but not even enough $ to pay total owed to S.

Liquidator argues on behalf of creditors that it’s not a real corp, it’s a puppet b/c it does whatever S says. S should be liable to other creditors for their debts - as a Principal would be liable for debts of its Agent (corp). Trial, CA agreed.

Is there an implied agency relation from the mere fact of being the sole proprietor of a corporation?

CA said he was using the corporate firm as a scam 20000+1 and other shares and was really just masquerading as a corporation and was a sole proprietor

Statute says nothing as to the extent or interest that one or a majority of shareholders over the other

Company is clearly a person and as a separate person is liable for its own debts.

As a secured creditor, S is first in line for payment.Can’t make an agency relation from control that comes

from being the controlling shareholderEither a corporation or its not, cant be a both a corporation

and have Mr. Salomon as an agent, separate legal entitiesCan’t read into the act of parliament limitations that are

not thereCourt doesn’t care about the motive behind becoming a

shareholder, just fulfil regulationsStatute was something for economic growth and nothing

more

A corporation’s legal personality is separate and independent from its shareholders.

Corporate registration statutes mean what they say (statute said 7 and the court read into it 7 substantial shareholders

Secured Creditors are protected, unsecured not protected

Bank if Co goes under and whatever assets are available, liquidates them, banks will seek personal guarantees from investors (goes under, bank takes house, uses money to pay loan)

Unsecured creditors are people who don’t have securities

In practical terms if you are a family or a single person which wants to start a corporation, lenders will seek personal guarantees from the investor

Not easy when corporation is small to obtain full benefits of separate identify

Employee acting for the corporation can generate tort on behalf of the corporation

which HOL said there is no reason to read in.

Economic development worth the downside of damaging unsecured creditorsCorporations shield investors from corporate liabilities and some creditors may suffer as a result of that separate identity

Law gives individuals to establish the corporation for whatever purpose they see fit, difficult to see how courts grab the right to go behind that corporate identity

Macaura v. Northern Assurance Co. Ltd. and others, (1925 Eng. HL

Appellant owns an estate, and took insurance with respect to timber and wood goods situated in the open on the said domain.

The insurance ks were made with the respondents (5 insurance companies), subsequently he assigned the whole goods to another company, receiving as part of the payment shares in the comp, but the goods remained on his land.

The goods were later on destroyed in a fire. Subsequently the insurance companies declined to accept liability. Case went to arbitration and arbitrator held that appellant had no insurable interest in the timber- upheld in first instance and by the CA

Did the appellant have any insurable interest in the goods subject to the policies? NO

In the circumstances were the respondents at liberty to raise the contention that he had no interest in the manner in which it was raised in the course of proceedings?

A shareholder has no legal or equitable interest in the property of the corp.

In order to insure, would have to calculate the extent to which his share in the ultimate distribution would be diminished by the loss of the asset - almost impossible to calculate.

Sh is entitled to a share of the profits while the comp continues to carry biz, and a share of the surplus of assets when the comp is wound up.

Neither a simple creditor nor a shareholder in a company has any insurable interest in a particular asset which a company holds

Note:Later in General accident fire life assurance corp. v. Midland Bank ltd [1940] held that a parent corp holding a controlling interest in the shares of a subsidiary corp had a “business interest” in the subsidiary’s assets not an “insurable interest”.

Insurable interest is to make it not gambling

Can’t just insure other peoples property because you have no interest in whether other peoples property survives

Corporation ensures the life of CEO

Kosmopoulos v. Constitution Insurance co of Canada (CA), 1983 OVERRULED

K was a Greek immigrant that operated a leather goods store, that he had incorporated and was its sole shareholder and director. Following this operation K still believed that he owns the biz, even though the lease and insurance policies remained in his name. The store suffered damage from fire and the insurance companies denied K’s claim for damages

Does K have an insurable interest? NO

Insurance law in Canada- “insurable interest” concept- the validity of the insurance k is dependent on the interest the insured has in the subject matter of the k.

K benefited from the existence of the store and was prejudiced by its destruction, in contrast with the ptf. in Macaura, in this case the ptf is the sole owner, so no problem of calculating the insurable interest of shareholders.

Zuber JA concludes that the SCC has accepted the rule in Macaura only to the extent needed to decide Aqua Land case (one sh of three had no insurable interest)- therefore the issue of whether a sole sh has such an interest remains open.

There no reason to impose the rigidity of Macaura rule to the recent development in ON company law (ie: allowing of corp with a single director/ shareholder)

Kosmopoulos v. Constitution Insurance co of Canada (SCC),

K was a Greek immigrant that operated a leather goods store, that he had incorporated and was its sole shareholder and director. Following this operation K still believed that he owns the biz, even though the lease and insurance policies remained in his name. The store suffered damage from fire and the insurance companies denied K’s claim for damages.

Does K have an insurable interest? Yes…but on different grounds

Concept of insurable interest was broader than earlier grounds

Wilson J was willing to ignore the corp, if necessary. Upholds corporate personality point from Macaura but broadens insurance law point. A sole s/h, though lacking any proprietary interest in the corp’s assets, had an “insurable interest” in them.

Those who have chosen the benefits of incorporation must bear the corresponding burdens, so that if the veil is to be lifted at all that should be done in the interests of third parties who would otherwise suffer as a result of that choice, in addition if the application of the rule leads to harsh justice then should examine the rule itself rather than affirm it and ameliorate it on case by case basis

Court wanted to avoid distinguishing between companies with one shareholder and more than one shareholder

For these reasons the corporate veil should be lifted in this case.

Affirmed Because:

Not a salmon problem, an insurance problem

No risk he would be ensuring someone else property for gamble cause he was 100% shareholder

K as a sole sh was so placed as to have benefit from the assets’ existence and suffer prejudice from their destruction- had moral certainty of advantage but for the fire- had an insurable interest, therefore can recover. [in the case of the sole sh there’s identity with the comp]

A sole shareholder, though lacking any proprietary interest in the corporations assets, had an insurable interest in them

Lee v. Lee’s Air Farming LTD. [1960]

L = controlling s/h, managing director & employee. Terrible plane crash, L dies. Widow sues co for compensation & wages for his death. Corp says L wasn’t really an employee b/c you can’t employ yourself, this was a one-man show.

Was the deceased an employee within the meaning of the Workers’ Compensation Act 1922 and its amendments?

Yes Appeal allowed- deceased was an employee within the

meaning of the act

Court says that Lee can act in different capacities, wear different hats within the corp structure

What needs to be ascertained is the capacity in which the individual in question is acting, which hat is he wearing at the relevant point in time in order to determine liability.

ex facie L had a contract of services with the corp, so the real issue is whether L’s position as sole governing director made it impossible for him to be the servant of the comp.

Fact that as long as L continued to be a governing director with lots of powers, it would be for him to act as the agent of the company to give orders

Does not alter the fact that the company and L are two different and distinct legal persons

Deceased had a contact of service with the company and the company has the right of control

In light of the above there’s no such impossibility.Note:

Case shows that just because an individual is the controlling shareholder/director of a corp this doesn’t mean he has to forfeit his individual personality.

Corporation and LE were two separate legal entities

Corporation hired Lee as a an employee, not Lee

Nothing in the case to cause the court to question the validity of allowing Mrs. Lee to recover

Doctrine of Lifting the Corporate Veil Used to describe situations in which judges have presumed to simply ignore the existence of the corporate person and fix liability on the managers or the shareholders Clarkson Co. Ltd. v. Zhelka – exceptions to Soloman appear to be cases where to refusal to apply the rigid principle only where it would be flagrantly opposed to justice

o Eg. If a company formed for the express purpose of doing a wrongful act or unlawful act, or those in power expressly direct a wrongful thing to be done, individuals as well as company are responsible to those who liability is legally owed

o Legislature in the fields of taxation and revenue have made much greater departure in the lifting of the veilo In cases like the one above, the company is a mere agent of a controlling corporator (sham , cloak or alter ego)

Littlewoods Mail Order Stores Ltd v. Inland Revenue Commissioners – courts can and often to draw aside the veil. Look to see what really lies behind. Legislature has shown the way with group accounts and the rest and the courts should follow suit.

Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. – Courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conducto Must be shown that there is a complete domination and that the subsidiary company does not function independentlyo Is there conduct akin to fraud that would otherwise unjustly deprive claimants of their rights

Corporate Character Traits Just because corporation has separate legal identity does not mean that one is expected to ignore the identity of individual shareholders and managers Fact that a corporation is likely to bear familial resemblance to its founders or dominant managerial group has influence judicial attitudes

Common for corporations to form groups

Big Bend Hotel Ltd. v. Security Mutual Casualty Co. [1980] B.C.J. No. 1427, 19 B.C.L.E. 102 (S.C)

Kumar president and sole shareholder of the plaintiff corporation and contracted insurance contract with defendant to insure hotel as sole asset. Hotel burned and Kumar had don’t the same thing with another hotel who had burned less than three years earlier.

Insurers denied coverage n the basis that plaintiff at the time of application for insurance fraudulently omitted to communicate circumstances that were known to be material to the insurers in order to enable them to

Does insurance co have to pay out fire insurance - or is this a material fact not disclosed?

Material non-disclosure. It’s appropriate to lift the corp veil here b/c equity will not allow an individual to use a co as a shield for improper conduct or fraud.

The test is not what is material to the ptf. But what a reasonable insurer would have done or how he would have reacted to the true facts- K knew info from prior loss had to be disclosed- his failure to do so was to mislead or deceive the insurers- concludes that insurers would have decline to take the risk if would have known.

There exceptions to the general rule when courts have lifted the corp veil, eg improper conduct or fraud (Gilford motor v. Horne 1933- Eng. CA)- in the case at bar due to circumstances it is appropriate to lift the corp veil, as equity will not allow an individual to use a comp as a shield for improper conduct or fraud.

Limited responsibility to disclose information that is detrimental to our side

Not a positive duty to disclose things that are not beneficial to you

Insurance policies are on the few circumstances where you have to declare information that is negative to you and beneficial to insurance company

Have to declare matters that are regarded as material to the insurance company

judge of the risk to be undertaken Plaintiffs counsel argued that

although big bend hotel and other company were personally controlled by Kumar they were separate entity

Court is saying from insurance law perspective you had a positive obligation to disclose that a corporation that you were a primary shareholder of cashed in an insurance policy

Hercules Managements Ltd. v. Ernst and Young [1997] S.C.J. No. 15, [1997] 2 S.C.R.

NGA and NGH wee lending and investing money on the security of real property mortgages.

Hercules were shareholders in NGA Ernst was the auditor of both

companies NGA and NGH went into

receivership and Hercules sought a determination that the audit reports were negligently prepared and wanted damages for financial losses for reliance

Can accountants who perform an audit of a corporations financial statements owe a duty of care in tort to shareholders of the corporation who claim to have suffered losses in reliance on such statements

Can certain types of claims against auditors may be properly brought by shareholders as individuals or whether they must be brought by the corporation in the form of a derivative action

The purpose for which the audit reports were prepared in this case was the standard statutory one of allowing shs. as a group to supervise management and to take decisions with respect to matters concerning the proper overall administration of the corporation.

Therefore the purpose might be said to have been a “collective” one, not aimed at protecting the interests of individual shs, but rather enabling the shs. acting as a group to safeguard the interests of the corp themselves. (fufill their duties as shareholders as a group AGM/Meetings for receiving information)

Nature of duty was owed to shareholders as a group for the purpose of managing the corporation

In so far as it must concern the interest of each individual sh. the appellants’ claim in this regard can be no different from the other “investment purposes” in respect of which respondents owe no duty of care.

In supervising management the shs must be seen as acting like a body in respect of the corp interests- they assume a managerial role collectively.

Respect of this aspect of the shs’s functions, then would be owed not to shs individually but to all shs as a group acting in the interests of the corp.

In such case if the decisions with respect to the corp affairs were taken collectively in reliance on negligently prepared audit reports then this would result in a wrong to the corp for which the shs cannot recover as individuals

Corporations as Agents and Partners

Corporations can act as agents, like other legal peopleAgency can arise by express agreement between principal and agent or by implication from their dealingsAgent’s authority can bind his principal to a contractPrincipal is liable for torts committed by his agent within the scope of the agencyIf you can show the corporation was acting as the agent of another person you will have the prospect of making that person liable for what the corporation has done

Salomon says the relationship of controlling shareholder and corporation does not in general constitute a relationship of principal agentIf the courts use the agency concept to circumvent Salomon, they must distinguish between the situation where the corporation is acting as an agent of its controlling interest from that where the controlling interest is merely exercising the prerogative of control

o Look at the capacity in which the shareholder acting. (unless the shareholder was acting in personal capacity, only corporation is involved) Deciding that an individual is acting in a personal capacity?

o Only periodically courts have used agency concepts to treat corporation as agento Attempt made in Smith Stone and Knight LTD. v. Birmingham Corp

Smith, Stone and Knight LTD. v. Birmingham

Corp held interest in land, which it rented to subsidiary corp.

City expropriated land under a statute which required compensation

Was there an Agency Relation? YES

No agreement between companies and business was never assigned to subsidiaryNothing was done to transfer the beneficial ownership to the subsidiary If physically or technically subsidiary was in occupation, it was for the services it was doing for

the parent

Simply because corporation as set up to avoid liability did not take away the division between the two corporations

Corp to be paid to estate holders doing business on the land, but city evicted tenants without compensation

P claimed compensation saying it, not the subsidiary was carrying on business on the and

P had run the business itself prior to turning operation to subsidiary

Occupation of the subsidiary was occupation of the parent companyQuestions to be asked1) Were the profits treated as profits of the parent company?2) Were the persons conducting the business appointed by the parent company?3) Was the company the head and the brain of the trading venture?4) Did the company govern the venture, decide what should be done and what capital should be

embarked on the venture5) Did the company make the profits by its skill and direction6) Was the company effectual and constant control?

Reasonable to treat as a group because concern about compensation

Sometimes treat groups of corporations as one and thereby ignore the separate legal identity of the parent or subsidiary

Corporate Personality: Some Innovative Approaches

Judges aren’t clear when explaining how corporate personality works (because they can lift the veil and disregard separate existenceSome cases illustrate well known remedies (tort, sometimes equity)a) Inducing Breach of Contract

A contractor who violates a term can be sued for breach of contract Anyone who knowingly induced the breach of contract can be sued in tort Gets complicated when a corporation is this person Court will not attack Salomon head on Respect for separation between corporations and investors Respect for separation between parent and subsidiary If it seems fair to treat co as one, in particularly in expropriation cases, courts will do so (treat these as separate, courts don’t look favourable and want to protect people

from expropriation) If individual setting up Co for protect from liability, not much scrutiny by courts When actions of directors seem geared towards breaking contracts they will get zapped by the court

Garbutt Business College LTD. v. Henderson Secretarial School LTD.

School teacher had restrictive covenant which restrained him from engaging in or managing a rival business college in Calgary for 5 years.

Teacher resigned and incorporated a rival business college that used his surname as part of the corporate name and taught there

All the shares were held by H except for wife and daughter who had 3

Is defendant corporation liable for inducing H to breach his contract

YES

Damages are awarded against H for breach of contract, but company is a separate entity and no contract with plaintiff and can’t be held for damages (must be found in tort)

Company and all his officers knew that employing H was a breach of an agreement with plaintiff

Wilfulness beyond knowledge is not essentialDefendant company committed a tort

Have to have a reasonable belief that

Einhorn v. Westmount Investments LTD. (1969), 6 D.L.R. (3d) 72, 69 W.W.R. 31 SKQB

Einhorn was a realtor with a commission contract for obtaining property with Westmount controlled by Belzbergs.

Westmount transferred the property to another Belzberg company making it impossible for them to pay commission under contract

Are the Belzbergs liable for inducing breach of contract between Westmount and Einhorn?

Court uses principle in Lumley v. Gye “each of the parties to a a contract has a right to the performance of it and it is wrong for another to procure one of the parties to break it or not perform it”

Rely on the principle to extend inducing to deliberate and direct interference in the execution of a contract

Three Elementso First: Must be interference in the execution of a contract (not

confined to procurement of a breach of K)(Extends to a case where a third person prevents or hinders one party from performing K)

o Second: interference must be deliberate (person must know of the contract, or at any rate turn a blind eye to it and intend to interfere with it)

o Third: interference must be direct (indirect interference will not do)(indirect interference is only unlawful if unlawful means are used)

McFadden v. 481782 Ontario Ltd (1984), 47 O.R. (2d 134,

P had K with work for PMAI. PMAI sold its business to PMAC. NT and MT were sole shareholders and directors of PMAC. P worked for PMAC. TJ found an implied contract of employment between PMAC and P. PMAC didn’t do well, PMAI offered bought back. Nt

Are NT and MT liable for inducing PMAC to break its contract to P YES

Are NT and MT personally liable to P? Yes

Payments were unauthorized by bylaws or statute and in breach of MT and NTs statutory obligations as directors and officers of the company

Payments also made with the intention of defeating any claim P had against CO

Acting with a view to their own interests and not the companies P as contract creditor must sue on behalf of himself and other creditors so

will have to amend his style of causeNT + MT induced PMAC to breach its contract to plaintiff If officer or director of corporation is to be relieved as an agent of the

told P he had no job which judge found was a breach by PMAC. NT and MT took all PMACS money thus depriving P of settlement

consequences of otherwise tortious conduct, it is so because he acts under a compulsion of duty to company

If he does not act under a compulsion of duty to the company, or bona fide within the scope of his authority, his act is no longer justified and he becomes liable

In procuring a breach they were not acting in furtherance of any duties or obligations (acting to secure transfer of funds from PMAC to themselves) (NO protection as n Said v. Butt)

369413 Alberta LtD. v. Pocklington

D’s company was in trouble, worked out complicated scheme with Alberta government.

Shell corporation was created to ease the moving of assets around and D transferred Gainer’s shares in the shell to his own Pocklington holdings for 100$. Because P holdings had not guaranteed gainer’s debts, the shares could not be seized as per agreement. Alberta argues the transfer of shares violated master loan agreement where Gainers had agreed not to sell or otherwise dispose of its assets without prior written consent which was not given.

Did Pocklington in transferring piece of real estate that Albeta gov had security to another corporation induce Gainers to breach the loan agreement? Yes

Seven Elements satisfied for inducement of breach1. Existence of a contract2. Knowledge or awareness by the defendant of a contract3. Breach of the contract by a contracting party4. Defendant induced the breach5. Defendant by his conduct intended to cause the breach6. Defendant acted without justification7. Plaintiff suffered damages

Intent can also be inferred when the consequences of the conduct were necessary or reasonably foreseeable result (intention to bring about breach need not be the primary object

Can also be established when the defendant was reckless or wilfully blind to a breach

For a mistaken belief to be bona fide, some basis for the belief must exist and some reasonable effort must have been made by the defendant to learn the truth

Evidence indicates that D didn’t care about whether his actions were a breach

Admitted he was acting in his own interests and trying to defeat the mortgage

On Justification – D acquired an asset of value for nominal consideration at the expense of Gainer’s creditors.

Since Gainers was insolvent, creditors interests were the interests of the company and promoting the interest of one shareholder at the expense of creditors is not the best interest of the company (no justification for his deeds)

Adga System International INC. v. Valcom Ltd.

Two corporations, ADGA Systems International Ltd. and Valcom Ltd., submitted competing tenders for a contract with a third party, Correctional Services Canada, to provide technical support and maintenance of security systems in federal prisons.

As part of the tender process, the tendering party had to provide the names of 25 senior technicians with their qualifications, to show that the tendering company would be competent to perform the work required under the contract. Given ADGA’s previous contracts with Correction Services Canada, the company had the requisite number of qualified technicians.

In an attempt to submit a more competitive bid for the contract in question, a director and two employees of Valcom convinced almost all of ADGA’s technical employees to agree to allow their names to be

1. Can the director and two employees be sued for their actions as individuals, assuming those actions were genuinely directed to the best interests of the corporate employer?

2. Would the allowance of individual liability in this context constitute a piercing of the corporate veil?

(b) No. Court does not find that this is a case in which the corporate veil would be pierced in the event that the director/employees were to be found personally liable.

The fact that the director/employees were acting “in pursuance of the interests of the corporation” does not, in itself, constitute a defence to personal liability for tortious conduct. Although the Court recognizes that there is a potential policy concern (as expressed in previous jurisprudence) relating to potential inhibition of efficient business functioning, Carthy J.A. maintains that “where, as here, the plaintiff relies upon establishing an independent cause of action against the principals of the company, the corporate veil is not threatened and the Salomon principle remains intact.”

The Said v. Butt exception applies where an employee induces a breach of contract between his (corporate) employer and a third party. In this situation, the employee would not be individually liable in tort should the person whose contract has been breached brings forth a suit.

Carthy J said that the precedent in Said v. Butt [ 1920] provides an exception to the general rule that “ in all events, officers, directors and employees of corps are responsible for their tortious conduct even tough that conduct was directed in bona fide manner to the best interests of the company”.

Normally you would add corporation to a cause of action as a defendant

Even though directors could say they were acting to the best interests of the company, they were not freed from tort of inducement

Policy argument behind this is because dealing with competitors, court not able to protect them in this case

included in Valcom’s bid package and to promise to join Valcom if the bid was successful. The court has assumed that these practices (employee “poaching”) constitutes a tort on the part of the defendant (Valcom) against the appellant (ADGA).

Air Canada v. M & L Travel LTD. [1993] 3 S.C.R. 787, 108 D.L.R. (4th) 592

MT ran a travel agency with directors and shareholders M and V.

Co was to hold proceeds of ticket sales in trust for P but instead put them into general operating account, where general expenses paid

Airline was owed money for sales and commenced action against directors personally for amount owed

Was the relationship between corporation and airline a trust?

If so is appellant director personally liable for the breach of trust by the relationship

Intent of agreement is to create a trust from wording “all money less applicable commissions …shall be property of airline and held in trust”

Object of the trust is the respondent airline and subject matter is fund collected for the ticket sales

Having found trust, M&L’s actions were breach of trust

Two general bases where a stranger to the trust can be held liable as constructive trustee for breach of trust.

o Can be liable as trustees de son torto Can be liable for breach of trust if they

knowingly participate in breach of trust “knowing assistances

Knowledge requirement is actual knowledge; recklessness or wilful blindness

If stranger received a benefit as a result of the brach this may ground inference that stranger knew of the breach but not a necessary or sufficient condition to draw inference

Constructive notice is insufficient to bind someone to give rise to personal liability

Appellants knew of the trust (signed agreement), knew the funds were being deposited in bank = actual knowledge of breach of trust

Can be liable for breach of trust if they knowingly participate in breach of trust – knowing assistanceKnowledge requirement is actual knowledge; recklessness or wilful blindness

Transamerica Life Insurance co. of Canada v. Canada life Assurance co (1996), 28 O.R. (3d) 423 (Gen. Div)

Trans made 54 mortgage (mtg) loans arranged by the CLMS, a number of them have fallen into default causing losses to ptf. Trans alleges breach of k, breach of fiduciary duty (underwriting should have been done with due diligence, risk assessment and analysis), fraud, misrepresentation and negligence. Trans sues also Canada life as being liable by virtue of an agency relation with CLMS, its subsidiary.

Can liability be attached to Canada life as the sole shareholder of CLMS? NO

Is there basis for holding Canada life liable as an accessory to a breach of fiduciary duty by CLMS?

Is there a basis for “piercing the corporate veil” and holding Canada life liable for the acts of its wholly owned subsidiary, CLMS?

The courts will disregard the separate legal personality of a corp entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct.

No case since Kosmopoulous has applied preferred just and equitable test

a. “complete control”- requires more than ownership, must show that the subsidiary doesn’t function independently- in the case at bar the evidence indicates a typical parent- subsidiary relation, no evidence to show that CLMS is the puppet of Canada life.

The nature of the conduct: there is no evidence to suggest that Canada life has any involvement in the alleged fraud, apart from the fact that CLMS is its wholly owned subsidiary.

Principle affirmed in Air Canada v. ML Travel ltd. case- a stranger to a trust may become personally liable for a breach of trust committed by the trustee, but in this case the directors were personally and directly involved in the misappropriation of the trust funds- the stranger involved in the breach must have actual knowledge, be reckless or wilfully blind- in the case at bar Canada life is in a mere innocent breach of trust which is not enough. Therefore, no genuine issue for a trial against it.

To support claim of accessory, plaintiff must show a breach of trust of a fraudulent or dishonest nature

(innocent breach wont suffice)Law does not impose equitable liability because the

defendant is the owner of a corporate entity which committed the equitable wrong

Walkovszky v. Carlton 18 N.Y. 2d 414, 223 N.E.2d 6

Involves a common practice of vesting the ownership of a taxi fleet in many corps, each owning one or two cabs. Ptf. is injured by one of the cabs registered in dft’s name as a sub-corp part of a multiple corp structure that operated as a single entity, unit.

Can the ptf. hold personally liable the sub-corps stockholder for damages sought because the multiple corporate structure constitutes an unlawful attempt “to defraud the members of the public” who might be injured by the cabs?

The action is dismissed because cause of action hasn’t been properly framed.

Courts will pierce the corporate veil whenever necessary in order to prevent fraud or to achieve equity- as per Cardozo J- whenever anyone uses control of the corp to further his own rather than the corp biz, he will be liable for the corp’s action “ upon the principle of respondent superior applicable whenever the agent is a natural person”.

It is different to claim that the corp is a “dummy” for its individual stockholders who in reality are carrying out the biz in their personal capacities for purely personal rather than corporate ends. In fact the principle relied upon in the complaint to sustain the imposition of personal liability is not agency but fraud- it is not fraudulent for the owner-operator of a single cab corp to take out only the minimum required liability insurance, the enterprise doesn’t become illicit or fraudulent merely because it consists of many such corporations.

Whatever rights the ptf. can assert against parties other than the registered owner of the vehicle, are justified not because he has been defrauded, but because according to the principle of respondent superior (vicarious liability) he is entitled to hold the whole enterprise responsible for the acts of its agents.

Other:Keating J dissenting: - a participating sh of a corporation vested with a

public interest organized with insufficient capital in order to meet liabilities which are certain to arise in the ordinary course of corp’s business, may be held personally responsible for such liabilities.

As a result corporate enterprises, such as the one in the case at bar, designed solely to abuse the corporate privilege at the expense of the public interest will be discouraged.

Henry Browne & Sons Ltd. v. Smith [1964] 2 Lloyd’s Rep. 476 (Eng Q.B)

An individual who owned a yacht transferred it to a corporation and ordered work to be done

Work was not paid for and the worker sued the individual and was told he could not recover because the corporation had no assets

There is no evidence to support the proposition that Ocean Charters Ltd. was acting as an agent to Smith.

Corporate Purpose

Corporations provide a vehicle for investment that insulates investors from the form of liability incurred by sole proprietors and partners in partnerships

Aim of for profit corporations is to make a profit, Subject to contention over which process the co make seek out profits, whose benefit profits are for and to whom corporation may be found liable

Contractarian vision of the corporation – shareholders are regarded as having primacy among the various corporate stakeholders Sometimes shareholders are characterized as the principals or “owners of the firm”

Dodge v. Ford Motor Co. 204 Mich. 459, 170 N.W.

Defendant corporation was the dominant manufacturer of cars when this case was initiated. At one point, the cars were sold for $900, but the price was slowly

The issue is whether Plaintiff shareholders can force Defendant to increase the cost of the product and limit the money invested into expansion in order to pay out a larger dividend.

Held:

The purpose of a corporation is to make a profit for the shareholders, but a court will not interfere with decisions that come under the business judgment of directors.

a business corporation is organized primarily for the

Courts judgement explicitly states that purpose of for-profit corporations is to maximize profit for shareholders, it determines that courts may interfere with business decisions where profit

lowered to $440 – and finally, Defendant lowered the price to $360. The head of Defendant corporation, Henry Ford, admitted that the price negatively impacted short-term profits, but Ford defends his decision altruistically, saying that his ambition is to spread the benefits of the industrialized society with as many people as possible. Further, he contends that he has paid out substantial dividends to the shareholders ensuring that they have made a considerable profit, and should be happy with whatever return they get from this point forward. Instead of using the money to pay dividends, Ford decided to put the money into expanding the corporation.

Plaintiffs are entitled to a more equitable-sized dividend, but the court will not interfere with Defendant’s business judgments regarding the price set on the manufactured products or the decision to expand the business. The purpose of the corporation is to make money for the shareholders, and Defendant is arbitrarily withholding money that could go to the shareholders. Notably, Ford did not deny himself a large salary for his position with the company in order to achieve his ambitions. However, the court will not question whether the company is better off with a higher price per vehicle, or if the expansion is wise, because those decisions are covered under the business judgment rule

profit of the stockholders, as opposed to the community or its employees. The discretion of the directors is to be exercised in the choice of means to attain that end, and does not extend to the reduction of profits or the nondistribution of profits among stockholders in order to benefit the public, making the profits of the stockholders incidental thereto.

Because this company was in business for profit, Ford could not turn it into a charity. This was compared to a spoilation of the company's assets.

The court therefore upheld the order of the trial court requiring that directors declare an extra dividend of $39 million.

maximaization is not the primary motivation of directors

Court doesn’t interfere with FMC infrastructure improvement plan.

Fords motives not altruistic purely The lead plaintiffs, the Dodge brothers,

had a motive outside of their position as minority shareholders. Their own business competed with Defendant, and larger dividends would have helped finance their business while draining resources from Defendant. There could then be an argument that Ford’s decision was in the best interests of Defendant corporation.

Shlensky . v. Wrigely 237 N.E.D.2d 776

Plaintiff (minority shareholder) sought damages and an order that defendants cause the installation of lights in Wrigley Field and the scheduling of night baseball games.

Is there a cause of action? The judgment of the directors of corporations enjoys the benefit of a presumption that it was formed in good faith and was designed to promote the best interests of the corporation they serve.

There must be a fraud or a breach of that good faith which directors are bound to exercise toward the stockholders in order to justify the courts entering into the internal affairs of the corporations

Peoples Department Stores Inc. (Trustee of) v. Wise [2004] S.C.J. No. 64, [2004] 3 S.C.R.

. In 1992 they acquired Peoples Department Store, a competitor. From 1994 their business interests went through a difficult time. To cut down on costs they developed a scheme where certain inventory would be purchased through Peoples and then given to Wise on credit. Soon, Wise owed more than 18 million dollars to Peoples. By 1995, both Wise and Peoples declared bankruptcy. The creditors for Peoples bought an action against the Wise brothers for breach of their fiduciary duties as directors under section 122(1) of the CBCA by implementing the credit scheme.

The Trustees argued that the Wise brothers favoured the interests of Wise Stores over that of Peoples.

Did the Wise brothers breach their duty under s. 122 of the CBCA NO

There is no fiduciary duty owed by directors to creditors when a corporation is in the nebulous vicinity of insolvency, directors can owe a duty of care to creditors

The implementation of the new policy was a reasonable business decision that was made with a view to rectifying a serious and urgent business problem in circumstances in which no solution may have been possible.

Directors and officers owe their fiduciary obligation to the corporation

Interests of the corporation are not to e confusd with the interests of the creditors or those of any other stakeholders

Residual rights of shareholders will generally become worthless if the corporation is declared bankrupt

Upon bankruptcy the directors of the corporation transfer control to trustee who administers the corporations assets for benefit of creditors

Directors fiduciary duty doesn’t change when corporation is in the vicinity of insolvency

Any honest and good faith attempt to redress the corporations financial problems, will if successful both retain value for shareholders and improve the position of creditors, if unsuccessful, it will not qualify as a breach

Duty of care will be satisfied where the director acts "prudently and on a reasonably informed basis

BCE INC. v. 1976 Debentureholders [2008] S.C.J. No. 37, [2008] 3 S.C.R. 560

BCE Inc. was the subject of multiple offers involving a leveraged buyout, for which an an auction process was held and offers were submitted by three groups.

All three offers contemplated the addition of a substantial amount of new debt for which Bell Canada, a wholly owned subsidiary of BCE, would be liable.

One of the offers, which involved a consortium of three investors, was determined by BCE's directors to be in the best interests of BCE and BCE’s shareholders.

This was to be implemented by a plan of arrangement under s. 192 of the Canada Business Corporations Act,[2] which was approved by 97.93% of BCE’s shareholders, but was opposed by a group of financial and other institutions that held debentures issued by Bell Canada.

These debentureholders sought relief under the oppression remedy under s. 241 of the CBCA.[3]

They also alleged that the arrangement was not “fair and reasonable” and opposed s. 192 approval by the court.

Their main complaint was that, upon the completion of the arrangement, the short-term trading value of the debentures would decline by an average of 20 percent and could lose investment grade status.

Did directors breach their fiduciary duty to shareholders? NO, Peoples expanded

Fiduciary duty of the directors to corporation originated in common law and it is a duty to act in the best interests of the corporation

Often, the interests of stakeholders and shareholders coincide, but if they conflict, duty of directors is to the corporation peoples

Fiduciary duty of the directors is broad and contextual concept, not confined to short term profit or share value.

Directors must look to the best interests of the corporation

Courts should also give appropriate deference to the business judgement of directors who take into account these ancillary interests as reflected by the business judgement rule.

Business judgement rule accords deference to business decision so long as it lies within a range of reasonable alternatives

Fundamental rule is that duty of the directors cannot be confined to particular priority rules, but is rather a function of business judgment of what is in the best interests of the corporation, in the particular situation it faces

Best interests of the corporation arguably favoured the acceptance of the offer at the time

Directors decision is found to have been within the range of reasonable choices that they could have made in weighing conflicting interests, courts will NOT go on to determine whether their decision was the perfect one

Corporate Obligations

Person can incur obligation in three ways:1. May incur obligations to other people based on on duties recognized in tort law to other people based on duties recognized in tort law or

contracts2. Agency: if an agent contracts according to your instructions, then you are bound to a contract (liability is CONSENSUAL) in the send

you authorized your agent to bind you, agent generally not a party to contract)3. If your agent commits a tort within the scope of the agency then you are liable to the victim on the basis of vicarious liability respondeat

superior (liability is NON consensual, agent liable in tort as well) Two Theories on Corporate Obligation

o 1) Concerned with identifying a particular human brain that could be said to have been operating as the corporate mind in particular circumstances Brain WAS the corporate brain so corporation incurred liability personally (used in criminal and tort law cases) DIRECTING MIND

o 2) Individuals acting as corporate agents (concerned with the scope of the corporations ability to avoid external liabilities by pleading limitations on its agents powers (used in contract and most tort situations) AGENCY

B. Crime and Tort: Establishing Corporate Mens rea A corporation has an existence and can be summoned before the courts Corporation is vicariously liable like any other employer for torts of its agents Vicarious liability does not apply to situations of criminal liability (can’t be criminally liable for acts of another)

Notion that corporation can actually make a decision to commit a crime is difficult to grasp (doesn’t have a heart or mind itself…so how to find requisite intent)

Courts resolve this by using relationship of agency, if agent commits a crime in the course of her duties, then corp could be responsible for this persons actions as if it was a criminal act of its own

Attach vicarious responsibility of acts of others is through directing mind notion and through agency relations

Aggregation theory has not been used in any of the tort cases and Canadian Dredge has not been applied to criminal

Many prohibited acts are criminal only if mens rea the elusive guilty mind can be proved on part of accused Liability in tort does not usually depend on any state of mind, and so vicarious liability reasoning usually provides a solution Common Law Test

o Proving someone’s mens rea is a criminal law problemo Corporate law problem is whether the guilty mind of some individual can be proved to have been the corporate mind in the circumstances

The Rhone v. The Peter A.B. Widener [1993] S.C.J. No. 19, [1993] 1 S.C.R. 497, 101 D.L.R. (4th) 188

The peter caused a shipping accident, under Captain Kelch who worked for the corporation that owned the vessel

Great Lakes Towing Co. wanted to limit its liability under vicarious liability principle in the CSA where a provision operates to limit liability only if the damage was caused without the actual fault or privity of the owner of the ship

If owner was at actual fault, it bears unlimited liability

Is the maser of the tug the directing mind of the corporation (to limit liability?) NO

Are Captain Kelch’s faults essentially the actual faults of Great lakes by reason of his position within the corporate hierarchy of appellant

Onus is on the ship owner claiming the limitation to establish a complete absence of actual fault or privity on its part

Not discharged by showing merely that the owner was not the sole or principal cause of the mishap

Actual fault or privity is something personal and blameworthy to a shipowner as opposed to a constructive fault arising under the doctrine of respondeat superior

In case of corporate ship owner, necessary to consider whether the acts of an individual give rise to liability should be attributed to that of the company itself

Mere fact that a manager exercised limited discretion in the performance of his assigned role did not render him part of the directing mind of the company

Focus of the inquiry must be whether the impugned individual has been delegated the governing executive authority of the company within the scope of his or her authority

Is the discretion conferred on an employee an express or implied delegation of executive authority to design and supervise the implementation of corporate policy rather than to simply carry it out

Negligence of master of ship does not amount to actual fault or privity on ship owner

From the evidence, CK was a port captain subject to the supervision and direction of Captain Lloyd

Key fact which distinguishes directing minds from normal employees is the capacity to exercise decisions-making authority on matters of corporate policy, rather than merely to give effect to such policy on an operational basis, whether at head office or across the sea

Notes: Privity, so closely involved that they are

part of it Pg. 229 (mixed fact and law) save for right

of appeal If Iacobucci said it was just a question of

act, he would have to take that fact as a given, and arrive at decision based on fact or appeal as an egregious error

Necessary for appeal courts to provide themselves with jurisdiction to overturn, if the facts they don’t like they say mixed fact and law

Criticism of Tesco makes it more difficult to attach criminal responsibility to the corporation

More than one directing mind, can broaden scope of what it means to have a directing mind

Very often where corporation is not particularly responsible, kind of innocent and person hit or injured is very innocent

Trying to find the least responsible out of two not very responsible people

Generally the actions of someone else who the corporation will argue it didn’t have control over and innocent 3rd party will say they are more responsible than anyone else

Identity doctrine – all of the people can be merged into, can get bits of authority, and can’t quite work out directing mind but has to be in there somewhere

Can find a directing mind by adding bits of a lot of people and finding in those bits a directing mind somewhere,

If you can aggregate a number of people it makes it easier to find a corporation responsible

Only going to look and be flexible if they want them to be responsible for the criminal act

In Tesco, courts were more lenient with corporations saying it was hard to be control of situation when its so far from head office

Elusive notions because they exists solely to find or not find responsibility

Criminal Liability: Mens rea Offences

SCC accepted the use of the directing mind and will test but applied it more flexibly than Tesco Can we find somewhere in the corporation a directing mind of the corporation such as to attach criminal responsibility to the corporation (how to

resolve criminal issues about corporations and SOME tort questions) (NOT used in contractual responsibility) Courts must consider the who has been left with the decision making power in a relevant sphere of corporate activity Court held in Canadian Dredge & Dock Co. there could be a defence that the relevant individual was acting entirely for his own account and

against the interests of the corporation (limited defence to situations where the corporation was not intended by the individual to derive any benefit from the individual’s actions and furthermore did not in fact derive any benefit exclusively them

Criminal Code provisions s 22.2 stipulate how an organization is to be made criminally liable (negligence and fault other than negligence (mens rea))

Difficulty in identifying a single directing mind, if you can identify the potential for more than one could say that in the corporate structure there is a directing mind – cant pin all on one person but corp as a whole (legislative provision makes it easier to find directing mind

If you know that somebody in the organization (22.c) is about to commit or has commit an offence and you don’t take all reasonable steps to stop them, that’s one way corporation will be found responsible

Provisions 21(1) 22(2) not exactly clear what they achieve (clear what they attempted, but not to what they did achieve)

R v. Fitzpatrick’s Fuel Ltd. [200] N.J. No. 149 (Prov. CT)

Corporation was licenced to sell beer and charged with selling beer to a minor. PF was sole shareholder, director and officer + two employees who worked alternating shifts aloe and unsupervised.

Should the company be held liable for the wrongful actions of the clerk? Yes

The Act under which the offense was committed was public welfare legislation – strict liability offense

The sole employee acted within the scope of the criteria set out by Estey – action was partially to the benefit of the corporation

Corporations are ‘staples’ in the delivery of modern congress – essential for that purpose and must be rigidly controlled – because of this there is an obligation to employ trustworthy staff and supervise that staff

Constitutional Restrictions on a Corporation’s Abilities

Constitutional documents whether crown patent, special statute or articles filed under a general enabling statute may expressly or impliedly prohibit certain corporate endeavors

Idea was that ultra vires would protect shareholders so they know their investment would be used for a specifically stated purpose (wouldn’t waste its cash on activities that are outside the corporations power) (protect predators under doctrine of constructive notice are not taken to know powers of corporation but risking that the corporations powers were being used beyond the corporation because the constitutional document of the memorandum of association were public )(didn’t read? Didn’t know? Accept risk that they are different)

Doctrine of constructive notice Creditors found themselves in situations where they were not getting paid 2 possible interpretations of a statutory interpretation

o Intended result can’t occur – (impossible to contract to murder)o Activity sanctioned by criminal punishment: ( no one thinks outlawing murder makes it impossible)

19th century – any activity beyond corporate objects was described as being ultra vires the corporationCommunities Economic Development Fund v. Canadian Pickles Corp [1991] S.C.J. No. 89, [1991] 3 S.C.R. 388

A special act corporation – the corporation under the statute was directed to make loans to businesses in certain kinds of underdeveloped areas

In making the loan, the corporation demanded personal guarantees be given by the principles of the defendant – there was a default Defense – loans had been made and they were ultra vires the corporation as the corporation was engaged in business in a jurisdiction not defined within the corporate constitution

Is the loan ultra vires the corporation’s constitution? YES

The doctrine of ultra vires is applied to common law corporations, those created by statute, memorandum corporations, letters patent corporations, as well as special act corporations

Special Act – created by a statute of the particular jurisdiction in which they are functioning

Due diligence requires that one undertake to uncover how a corporation has been incorporated

The loan was ultra vires. However, there was unjust Enrichment Courts have consistently applied the

doctrine of ultra vires to special act corporations if they undertake an act outside the scope of the legislation

All cases of ultra vires involves an interpretation of the instrument that creates the corporation

Corporation acting outside the scope of it constitution acts ultra vires

Context: constitutional (incorporating) documents may expressly or impliedly prohibit certain corporate endeavorsThe doctrine of ultra vires has been abolished by statute for corporations incorporated under the business corporations legislation in most Canadian jurisdictions

The Canadian Constitution

Some Residual Problems Corporation might be deprived of contractual capacity by a deficiency of legislative power in the incorporating jurisdiction Some subject matters are beyond the legislative capacity of the provincial legislature and some are exclusive to the provinces and beyond federal parliaments capacity An matter beyond the legislation capacity of a parliamentary body cannot be pursued by a business corporation owing is existence and scope of activities to laws, whether

general or particular passed by the legislative body

Contracting Through Corporate Agents

Corporation has an ongoing relationship with the agent; the outsider negotiates with the agent; the outsider claims that the negotiations created a contract with the corporation

Object is to ascertain whether the agent can be proved to have been the appropriate type of agent through whom to arrange contract of that type If outsider can’t prove allegation of authority, there is no contract between outsider and corporation If can prove authority, corporation is bound as a principal on whose behalf the agent contracted with outsiderProving Corporate Contracts in CanadaA) Actual authority at common law

If agent has actual authority to perform function x an outsider may deal with her in respect of that function as if the agent were an extension or manifestation of the principal’s own personality

If outsider can prove agent had actual authority they may get to rely on what the agent said as binding on the corporationAgent may get actual authority from his principal in 3 ways

1. Agent may have express actual authority: Principal may have said in no uncertain terms to the agent “you perform x” Not often invoked in cases involving outsiders’ contracts Cases in which actual authority has been proved often involved corporate disputes with individuals who had some position with the corporation (not like most

outsiders) Often difficult for outsider to get access to evidence concerning the relationship between principal and agent Judicially created concept of “ostensible authority” or “apparent authority” is more useful for outsider

2. Agent may have implied actual authority: verbal or non verbal exchanges between principal and agent might have been interpreted by the agent as authorization to do x3. The agent may have been given actual authority retroactively by the principal’s ratification or adoption of what the agent did in excess of his actual authority

(essentially principal chooses to forgive agent and accept the agreement then breach of authority will be regarded as retroactively healed) Ratification is impossible if the unauthorized agent purported to act as a principle

Freeman and Lockyer (referenced in Schwartz) (the test, but not the clearest statement of principle) Apparent or ostensible authority is a legal relationship between principal and contractor created by a representation, made by the principal to the contractor

intended to be and in fact acted on by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a king within the scope of the apparent authority so as to render the principal liable to perform any obligations imposed on him by such a contract

Has to be intended to acted upon, and in fact acted upon (holding out has to be done with the purpose that it be acted upon and acted on. Representation has to be that the apparent agent has the kind of the authority that an agent in that situation as they normally would Certain things are indicated to third person that this agent is an agent, not from a contract (can even say not an agent) 2nd holding out is by the corporation to Mr. Schwartz to the third party (third party to agent) Holding out between Mr. Rideout and Mr. Schwartz (agent to third party) Agent doesn’t play a role in the ostensible authority (simply a representation) When there is an estoppel they are prevented from denying certain facts. Not a rule of substantive law, it’s a procedural matter (rule of evidence) Estoppel will arise in agency cases where the plaintiff is asking for the corporation to be estopped from asserting something like (he is your agent) Corporation is prevented from denying he is not their agent (not that he IS, but that they can’t deny that he is not an agent) If you are faced with an estoppel you can’t deny some contrary statement (plaintiff cannot say you ARE an agent, only that corporation cannot deny)Statutory Reform

Whether corporate agent had actual authority will depend on the facts in each particular case Whether outsider can establish the perquisites to ostensible authority is also based on facts Facts of case is really about what evidence can be presented Canadian statutes set up a statutory rule that lists certain types of facts that corporations will not be permitted to assert against an outside As result, whether a corporate agent lack actual authority in a case is usually not disputed

In statutory changes affecting ostensible authority, leg tried restate and qualify Freeman provision

Schwartz v. Maritime Life Assurance co. [1997] N.J. No. 77, 149 Nfld. & P.E.I.R. 234 (C.A)

Ostensible Authority at Common Law

P gave Rideout money for investment, which was expropriated.

P wants to go after D saying R was acting as an agent to bind the company

Was Rideout an agent or representative of he respondent when he received the money from appellant? YES

Whether principal/agent relationship exists depends on the nature of the authority granted, or deemed to have been granted, by the principal to the agent

Apparent or ostensible authority is a legal relationship between principal and contractor created by a representation, made by the principal to the contractor intended to be and in fact acted on by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a king within the scope of the apparent authority so as to render the principal liable to perform any obligations imposed on him by such a contract

Agency can also arise by principle of estoppel (where a person by his or her words or conduct has allowed another to appear to the outside world to be his agent, with the result that third parties deal with him in this capacity, that person cannot thereafter repudiate this apparent agency if doing so would hurt third parties)

No express authority was ever granted by the respondent to Rideout to bind respondent Agreements between R and D illustrate non binding (P must establish R did something which would

allow him or lead him to believe he did have the authority and he relied on it) Letterhead used by Rideout must be deemed to have been intended by the respondent to be

communicated to members of the general public including the appellant Rideout held himself out as representing the respondent and letterhead with respondents name shows

that agreed he did so Could not be expected that public would be aware that Rideout did not hold the authority to bind

appellant Marshall (Dissenting)

On whose behalf was Rideout acting in holding the money (Dual agency issue) Rideout was an agent of Maritime Rideout had no express authority to allow him to affect Maritime’s legal position, but did with

Schwartz D gave Rideout authority to enter into a binding agreement while Maritime had not empowered

him to bind it When money was turned over to Rideout it was taken to have been held by him on D’s behaf

pending Rideout obtainging the annuity investment on the terms of which the deposit was conditioned.

When theft happened, there was no contract with Maritime and insurance company could not have a claim of entitlement to it.

D could have claimed right to return up until maritime accepted D was owner of the funds and was entitlted to them at the time of the theft and must bear the

consequential loss from agent’s dishonesty Apparent authority is not a basis to rely on the ostensible principle Case is that there is no belief by D in Rideout’s authority from Maritime and therefore no causal

connection between any holding out of Rideout by Maritime as agents (therefore Maritime isn’t liable)

Corporate Name Prior to all documentation taking place, to incorporate, people interested in forming corporation, person who intends to bring corp to life will go out and do things prior to it being a legal entity (buy photochopy machine,

rent an office, factory, inventory ordered) Will do so in personal capacity, or do so purporting to act for a corporation not yet/soon to be incorporated What is the nature of this transaction? (made by corporation that does not exist) First question – who are the two parties

o We know one exists (guy selling stuff) (outsider)(third party)

Who is this guy contracting with?o Objective intention of the promoter?

BC and CBCA have attempted to deal with ambiguity and uncertaintyLegislation allows corporation to adopt the contract (statutory ratification on the part of the corporation even though it was not in existence at the time the transaction was made)S.1.14 provides that a promoter before it comes into existence will be personally responsible (as if they were the party) s.2 if the corporation comes into existence and adopts the contract, it takes the benefits and responsibilities of that contract and the agent comes out of the picture MUST BE CONTRACT TO ADOPTWhat if no contract to adopt? Nothing do to!CBCA permits third party apportioning liability between corporation and promoter regardless if corporation adopt the contract

Case Footnotes: A is not liable in a contract where A and O mistakenly thought corporation existed but they are also NOT entitled to the benefit either Newborne v. Sensolid (Great Britain) Ltd C.B.C.A. s.14(1) nearly identical to OBCA s.21(1) until 2001 (although CBCA excludes oral contracts) when words were added “enters into or purports to enter to” C.B.C.A. s. 14(2) is almost identical to the wording of O.B.C.A. s.21(12) CBCA only apply to written contracts, so old common law rules still apply to oral contracts made by or on behalf of the corproation

Welling: Standard business practice to arrange for goods/services to be supplied between the time of the idea of the corporation and the time of issue of the certificate of incorporation Whether an agreement concluded prior to the existence of a corporation constitute a contract is a question of law Can’t label it to make it a contract When two parties AGREE what will happen following the creation of a third person (corporation),

1. Ask whether hose two parties or he corporation were INTENDED to incur legal obligations (use points of contract law) Under Common law, if A acts on behalf of future C to create a contract with O(outsider)

o If A and O are in agreement that contract will be with corporation O, Contract Fails (cant be party to a contract if it doesn’t exist)o If A seeks a contract between Corporation and O and O seeks a contract with A and O Contract Fails (contract requires agreement to at least its fundamental terms)o If contract is to be created between A and O, THEY must be parties and a common intention that A is to be personally liableoDifficult when both parties know the corporation doesn’t exist

Relevant Section Under both CBCA and OBCA an adoption must be within a reasonable time following incorproation

CBCA

BCBCA

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

Pre-incorporation and pre-amalgamation contracts

(2) A corporation may, within a reasonable time after it comes into existence, by any action or conduct signifying its intention to be bound thereby, adopt a written contract made before it came into existence in its name or on its behalf, and on such adoption

(a) the corporation is bound by the contract and is entitled to the benefits thereof as if the corporation had been in existence at the date of the contract and had been a party thereto; and

(b) a person who purported to act in the name of or on behalf of the corporation ceases, except as provided in subsection (3), to be bound by or entitled to the benefits of the contract.

Application to court

(3) Subject to subsection (4), whether or not a written contract made before the coming into existence of a corporation is adopted by the corporation, a party to the contract may apply to a court for an order respecting the nature and extent of the obligations and liability under the contract of the corporation and the person who entered into, or purported to enter into, the contract in the name of or on behalf of the

Pre-incorporation contracts Rather than making A bound by the contract and entitled to the benefits thereof, sections deem A to warrant to O that the corporation will be formed and that it will adopt the contract within a reasonable time Also say that A will be liable to O if the warranty is breached and that the measures of damages will be the same as if the corporation had existed but had given no authority to A and had refused to ratify the

contract Sections provide expressly for an unjust enrichment like liability of a corporation that receives a benefit under a pre-incorporation transaction but fails to adopt the transaction within a reasonable time Doesn’t really add anything to common law of unjust enrichment, in fact more restrictive since it doesn’t provide for any unjust enrichment liability of O or A Promoter, rather than being liable under contract itself, is liable for breach of warranty of authority if the corporation does not come into existence and adopt the contract within a reasonable time unless the

liability is expressly excluded Shelf Corporations:

oCorporations created by lawyers but do not carry on a business.oWhen a client wants a new corporation the lawyer transfers the shares of an existing “self corporations” to the client as a quick alternative to creating a new corporations

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

Pre-incorporation and pre-amalgamation contracts

(2) A corporation may, within a reasonable time after it comes into existence, by any action or conduct signifying its intention to be bound thereby, adopt a written contract made before it came into existence in its name or on its behalf, and on such adoption

(a) the corporation is bound by the contract and is entitled to the benefits thereof as if the corporation had been in existence at the date of the contract and had been a party thereto; and

(b) a person who purported to act in the name of or on behalf of the corporation ceases, except as provided in subsection (3), to be bound by or entitled to the benefits of the contract.

Application to court

(3) Subject to subsection (4), whether or not a written contract made before the coming into existence of a corporation is adopted by the corporation, a party to the contract may apply to a court for an order respecting the nature and extent of the obligations and liability under the contract of the corporation and the person who entered into, or purported to enter into, the contract in the name of or on behalf of the

20  (1) In this section:

"facilitator" means a person referred to in subsection (2) who, before a company is incorporated, purports to enter into a contract in the name of or on behalf of the company;

"new company" means a company incorporated after a pre-incorporation contract is entered into in the company's name or on the company's behalf;

"pre-incorporation contract" means a purported contract referred to in subsection (2).

(2) Subject to subsections (4) (b) and (8), if, before a company is incorporated, a person purports to enter into a contract in the name of or on behalf of the company,(a) the person is deemed to warrant to the other parties to the purported contract that the company will

(i)  come into existence within a reasonable time, and(ii)  adopt, under subsection (3), the purported contract within a reasonable time after the company comes into existence,

(b) the person is liable to the other parties to the purported contract for damages for any breach of that warranty, and(c) the measure of damages for that breach of warranty is the same as if

(i)  the company existed when the purported contract was entered into,(ii)  the person who entered into the purported contract in the name of or on behalf of the company had no authority to do so, and(iii)  the company refused to ratify the purported contract.

(3) If, after a pre-incorporation contract is entered into, the company in the name of which or on behalf of which the pre-incorporation contract was purportedly entered into by the facilitator is incorporated, the new company may, within a reasonable time after its incorporation, adopt that pre-incorporation contract by any act or conduct signifying its intention to be bound by it.

Kelner v. Baxter (1866) L.R. 2 C.P.

K was to be manager of new hotel, and contracted for goods before incorporation with D's

D had no principal…they entered into K on behalf of the hotel

- Does entering on behalf of the hotel prevent the defendants from being bound by the K?

Only those party to contract can sue/have rights that arise out of it If the contract is not made with corporation, its out of the picture, only person left is the agent or the

promoter Agency principle, a person who is not in existence at the time the agent makes the contract cannot ratify the

contract made by the agent Corporation can’t come along later and say its my contract if it didn’t exist at the time Objective intention of the parties is that someone should pay and if no corporation, who can pay? Only

agent (uses objective intention) Wine was supplied Corporation didn’t exist at the time

Court relates to agency law:oClaims that general rule of agency where a K is signed by one who professes to be an agent, but who has

no principal existing at the time, and K would be inoperative unless binding upon the person who signed it, he is bound thereby

oCannot be an agent if principal does not exist, and this does not change just because a “principal” later ratifies the contract

oMust be two parties to a contract, rights and obligations cannot be transferred to a third that does not yet exist

R: General common law position is that the corporation cannot enter a contract before it is formed; therefore, if a member signs on behalf of a company that doesn't exist, they may be bound personally

In later cases point is asked whether it is a rule of law that the agent will be responsible?

Only in which a responsible person would think the contract is intending to make an agent responsible

Black v. Smallwood (1966), 117 C.L.R. 52, 39 A.L.J.R.

Both parties sign K for the sale of land with mistaken belief that the company came into existence

Vendors sue for specific performance

Are the purchasers bound? No, for D, contracting party didn't exist, so K was a nullity, and claim for specific performance fails No consensus as to the parties to the transactions No agreement to who the parties to the contract was

High Court of Australia holds that Kelner doesn't stand for the proposition where a person on behalf of a non-existent principal is liable for the contract

o In Kelner, the parties intended that the corporation would pay, but also intended that if the corporation did not, then the D would pay personally – the D was the buyer of the goods

o Buying “on behalf of” another party does not mean that you are not buying them, you areo Here it was not the intention of the D to be bound personally…ie: both parties thought the

company existed Instead, intention of the parties to be bound is critical

o Court looks for anything in the writing inconsistent with the conclusion that the defendants should be bound personally

o Here, intention of the parties was not that the individuals would be bound, and since it was with a corporation, a K with a non-existent entity is no K at all

o Note P may have succeeded in a claim for breach of warranty of authority, but didn't plead itR: - The fundamental question in pre-incorporation contract cases is what the parties intended or

must be understood to have intended

Differentiated Kelner

Szecket v. Huang [1988] O.J. No. 5197, 168 D.L.R. (4th) 402 (C.A)

H approached S with a development proposal in Taiwan

Agreement signed purported to be between S and H(acting on behalf of the company to be formed)

Transaction never completed and proposed company was never formed

S sued for breach of contract

H denied personal liabilityTJ found there was

common law contract between S +H and applies 21 of the OBCA

Can H be held personally liable

Yes! (21.1) applies

H knew and intended that H and his associates were contracting on behalf of a company to be incorporated Legislature intended to remedy common law problems with pre incorporation contracts with section s.21(1) of

the O.B.C.A Under this, Personal Liability is established and prevails unless either contracted out of pursuant to

s.21(4) or displaced by the adoption of the contract by the company subsequent to its incorporation pursuant to s.21(2)

1394918 D co agreed to sell S.21 of the OBCA was intended to replace common law Notes:

20  (1) In this section:

"facilitator" means a person referred to in subsection (2) who, before a company is incorporated, purports to enter into a contract in the name of or on behalf of the company;

"new company" means a company incorporated after a pre-incorporation contract is entered into in the company's name or on the company's behalf;

"pre-incorporation contract" means a purported contract referred to in subsection (2).

(2) Subject to subsections (4) (b) and (8), if, before a company is incorporated, a person purports to enter into a contract in the name of or on behalf of the company,(a) the person is deemed to warrant to the other parties to the purported contract that the company will

(i)  come into existence within a reasonable time, and(ii)  adopt, under subsection (3), the purported contract within a reasonable time after the company comes into existence,

(b) the person is liable to the other parties to the purported contract for damages for any breach of that warranty, and(c) the measure of damages for that breach of warranty is the same as if

(i)  the company existed when the purported contract was entered into,(ii)  the person who entered into the purported contract in the name of or on behalf of the company had no authority to do so, and(iii)  the company refused to ratify the purported contract.

(3) If, after a pre-incorporation contract is entered into, the company in the name of which or on behalf of which the pre-incorporation contract was purportedly entered into by the facilitator is incorporated, the new company may, within a reasonable time after its incorporation, adopt that pre-incorporation contract by any act or conduct signifying its intention to be bound by it.

Onario Ltd. v. 1310210 Ontario Inc. [2002] O.J. No. 18, 57 O.R. (3d)

property in land to R in trust for company to be incorporated and not in his personal capacity

Agreement was to become null and void if purchaser did not complete the transaction within 120 days

119 days after the agreement was signed, D Co said agreement was null and void

R wants damagers for unlawful repudiation

After two weeks P co was incorporated and R quickly attempted to assign his rights under the contract

Section should be read on its own terms and in an interpretative context of the purpose it was intended to fulfill

Scheme shouldn’t be used to thwart common law on contracts that requires to parties and co-existent liabilities If s.21 calls for liability absent those features, those liabilities must flow and the contract referred to must be

treated as a statutory creation Commercial business concerns inform 21 Section is directed at meeting the needs of a party who wishes and has negotiated for liability to be assumed

by a yet - unincorporated corporation 21.1 binds the promoter personally by the contract and entitled to its benefits, either party can sue on the

other’s breach Prior to incorporation and adoption, A is not personally bound or entitled to the benefits of the contract He is described as a functionary, performing duties as assuring that any necessary inspections of property or

tittle are pursued and that the deadlines are met and defaults avoided which might excuse the third party from the obligations

Corporation does not exist or has not adopted the contract and thus is not bound by it or entitled to its benefits Entity called a contract under statute but no one is entitled to sue for its breach (not that the ongoing

obligations can be ignored Entitlement of the corporation must depend on its adoption of the contract if there was anything left to adopt Position in Canada is that contractual obligations continue to exist after accepted repudiation Accepted repudiation terminates the contract (only future obligations under the contract are

extinguished) Accrued obligations under the contract still exist in the form of a secondary obligation to pay damages

Prior to this case, courts did not find that s.21 created a statutory contract and continued to apply the common law distinction between Black and Kelner

Sherwood Design Service Inc v. 872935 Ontario Ltd. [1998] O.J. No. 1611, 39 O.R. (3d) 576 (C.A.)

Agreement to sell assets of Sherwood

Memorandum of agreement was signed by the individual defendants in trust for corporation to be incorporated

872935 was incorporated after the agreement was signed by a partner at a law firm acting for the defendants who was its first and sole director

Lawyer indicated by letter to the Sherwood that they would complete the purchase

No shares were issued and there were no shareholders

The issuing of the shares of the new corp never happened

872935 backed out of the deal and the firm decided to use it for other purposes and shares were issued to other clients of the law firm

Did the Corporation adopt the contract YES

What constituted any action or conduct signifying the corporations intent to be bound by the pre-incorporation transaction?

What is the correct application and interpretation of s.21

Corporation held liable for breach even though it had never been controlled by anyone involved in or aware of the transaction

No specified manner of adoption No need to impose stringent formality Letter was sufficient to indicate intention of part of corporation to be bound Act of conduct that signifies the intention of the corporation to adopt the contract need not involve

communication with O. (could result in O reaching the contract because O has no idea for whom to perform the acts specified in the contract)

Irrelevant that at the moment the letter of intent was sent the company was not actually transferred to the individual purchasers

It was in existence and identified as being designated for the purpose of closing purchase and only awaited the formal documentation transferring the shares

Dissent (Borins J.A) No evidence that corporate defendant signified an intention to adopt the agreement entered into by

the individual defendants Corporate defendant was not bound by pre incorporation contract, individual defendants were Whatever conduct or action signifies intention to be bound must be that of corporation Letter did not constitute act of corporation, was the lawyers F was sole directing mind of the corporation and took not action on co’s behalf Corporation could not have adopted the contract since the draft documents indicated that the control

of the corporation had not yet been transferred to the purchaser If the corporation was not under purchasers control could not cause it to adopt the contract Lawyers communication at most would be notice of an intention to transfer control and then to have

the corporation adopt the contract at a future date Ince adoption never occurred, the corporation could not be liable

NOTES: Followed by Gurdev Holdings Ltd. v. Schmidt [2009] B.C.J. – held the adoption by the corporation had

occurred without any formal notice to that effect where O had executed contractual documents identifying the corporation as the other party to the contract

Design Home Associations v. Raviv

What is the meaning of “any action or conduct signifying an intention to be bound

Corporation had adopted a lease signed by some individuals prior to incorporation based on a subsequent request by the corporation to have correspondence relating to the lease directed to it, paying the rent called for under the lease and requesting an assignment of the lease

What approach have courts taken in dealing with pre incorporation transactions?

What are they doing with legislation?

Look to intention, look at the fact that legislature was trying to remedy effects of the common law.Judges have taken this activism out of the legislation which doesn’t really provide for itWhat if its pre-incorporated but never established? Do statutory provisions apply?

Eg promoters made contracts on behalf of corporations that are going to be established in the future If never been incorporated, can’t be a transaction that is a pre-incorporation transaction Protection to the third party Corporation, or promoter or both should be responsible for what is seen as misrepresentation (promise that didn’t turn out)

Corporate Management

Mace + Welling Law focus on directors and the role of directors, but not what happens within corporations Primarily historical reasons for that Only time shareholders focused on when courts considered best interests of corporations from best interest of shareholders Know from Hollinger Salomon just because something is in the best interest of the shareholders doesn’t mean the directors must do it Rise of institutional investors People who look after my investments (pension funds etc) California Teachers Pensions Funds had a lot of money in ENRON Decided to pull investment out of Enron, which they did Instead of exercising its rights as shareholders it just snuck away After Enron, legislative intervention in the US and Canada to try to do something about these situations

Directors Would think they do objective strategies or policies

Obligation they must perform Will see lots of that in the videos Independent director is simply a director that is not a senior manager of the corporation (from outside the corporation) appointed and elected by the shareholders to bring a

different perspective other than senior management Problem is they are not independent really (directors of other corporations often, CEO of other corporations, same social standing) Corporations are entities designed to be and established to be profit maximizers, why would they be paying them lots of money to do nothing if they are maximizing

profits Distinction drawn between practices required by stock exchanges, requiring a certain number of independent directors with the expectation that these directors will pay

more attention and actually act as directors. How will a corporation work out how much to pay their directors? Whose legal responsibility is that Directors have the power and responsibility to manage or supervise the management of the corporations (how much they get paid is the decision of the board of directors) Hard conflict of interest to avoid Also decide how much officers get paid, and officers have a role in deciding how much they will be paid Problem not fixed easily unless you have someone outside the corporation Checks and balances Market, Market analysts (threat is that they will buy those shares and take over the corporation and run it in such a way to make money) When exercising fiduciary duties = best interests of the corporations with reasonable grounds for believing so, utmost good faith and loyalty Will be a tipping point If you’re a shareholder and you don’t like what is going on in the corporation (LIKELY EXAM QUESTION)

o Duty of care is a statutory duty predicated on common lawo In Quebec, civil law notion of duty of care and negligence and fault is linked in with CBCA provisiono Excepted to act at the standard of a reasonably prudent persono Peoples from common law perspective, CL says before statutory provision, plainly dragged up duty of careo Common law was super low, dragged up to reasonable persono Articulation of the duty of care of members of boards of directors is not designed to ensure that the decision and directors are high as possible

Next time contrast Soper and peoples departmentLook at directors fiduciary obligations, (other directors duty issues which allow us to control the quality of actions)Read most of fiduciary duties materials in one goNorth west transportation

Only effective remedy is that they give back the benefit they acquired because it was not rightfully theirs (disgorge profit)Soper v. Canada [1997] F.C.J. No 881

Corporation went bankrupt and directors didn’t correctly file taxes

Director could avoid liability if they exercised care under s.277.1(3)

Crown wanted to make him liable

Was Soper Liable? Yes Duty of Care Owed by Director…(Subjective/Objective Standard) A director need not exhibit in the performance of

his or her duties a greater degree of skill and care than may reasonably be expected from a person of his or her knowledge and experience.

The standard is partly objective (standard of the reasonable person), and partly subjective in that the reasonable person is judged on the basis that he or she has the knowledge and experience of the particular individual.

Not enough to say they did their best, but also not held to professional standard

Director not obligated to pay continuous attention to the affairs of company, or attend all meetings although if its possible they should do so

Peoples Department Stores In . (Trustee of) v. Wise [2004] S.C.J no.64

The indebtedness of a number of People’s creditors went unsatisfied. In the wake of the failure of the chain, People’s trustee in bankruptcy brought an action against the directors of Peoples.

Whether directors of a corporation owe a fiduciary duty to the corporation’s creditors comparable to the statutory duty owed to the corporation.

No liability

Directors owe a duty of care to creditors but NOT a fiduciary duty Court acknowledged that s.102 of the CBCA provides that directors elected by the

shareholders are responsible for managing it (shareholders do not actually own the corporation)

S.122 of the CBCA establishes two distinct duties to be discharged by directors and officers –

1. Fiduciary duty (duty of loyalty) (act honestly and in good faith with a view to the best interests of the corporation

2. Duty of care – legal obligation upon directors and officers to be diligent in supervising and managing the corporations affairs

Wise brothers cannot be held contractually liable because they didn’t guarantee debts

Extra-contractual liability is only possibility

More skill – more responsible.Soper – court was interested in intensifying the duty,

How you work out if someone has performed their duty of care is not an easy question

Soper should have known that when the business was in trouble that they were paying the appropriate taxes. Court quite tough on Soper for inaction as opposed to peoples where they lenient on them.

Emphasizes that the standard is objective to make it clear that factual aspects surrounding the actions of the director or officer are important in the case of the duty of care.

Contextual approach of s.122(1)(b) of the CBCA emphasizes primary facts and also permits taking into account socioeconomic conditions

Canadian courts have developed rule of deference to business decisions In order for a plaintiff to succeed in challenging a business decision have to show

that the directors a) breached their duty of care b) breached the duty in a way that caused injury to the plaintiff

Directors will NOT be held liable s.122(1)(b) for breach of duty of care if they act prudently and on a reasonably informed basis

Decisions must be reasonable decisions in light of all the circumstance about which the directors have acted in a manner that breached the duty of care (perfection not demanded)

Implementation of the wise brothers procurement policy was a reasonable business decision with a view to rectifying a serious and urgent business problem that had no other solutions

Court discussed the Wise brothers seeking advice of financial VP Recognized that courts cannot be experts in all aspects of the corporations they

manage or supervise (illustrated by section 123(4)(b) Court said despite his expertise, can’t avoid liability by relying on the VP as is was

not the level of professionalism required to avoid liability (must be accountant, engineers and appraises)

Can’t use 123(4)(b) and say you are relying on it because the professional advice was not suitable and must rely on other defences

Possible the decision was based on a mistake given that that claim was brought by the corporation not its creditors and a trustee always represents the creditors interests but does not enforce rights that belong to someone other than the bankrupt (Trustee would not have any standing to enforce rights that creditors have against the directors)

Court had no jurisdiction to pronounce on rights held by creditors directly against directors. (creditors were no parties to the litigation and no such rights were asserted)

Duty to care has nothing to do with loyalty, good faith

Peoples does talk about those questions (although wouldn’t make any difference)

Can creditors sue?

All secured creditors were looked after, is there enough money to pay unsecured creditors?

In Canada we have no corporate commercial lawyers as judges…problem?

DistinguishIf your litigating in BC first point is that it’s a Quebec case, so rely on Soper (more ardous burden for directors

Not about things fitting together, use different parts of the case in different ways depending on what part of the argument you want to use

Managers Fiduciary Obligations

Nature and Source of ObligationFiduciary duty of directors to corporations evolved from trust law (trustees required to act in best interest of beneficiaries)Has been recognized that corporate officers owe the same fiduciary duties Canadian Aero Services LTd. v. O’MalleyPerson who administers someone else’s property in fiduciary context have a duty of utmost good faith and loyalty to that person

o Sealy “ Fiduciary Relationships” Law of trusts is recognized as a separate branch of law Law of fiduciary relationships not found there but rules and principles governing the relationships are (same as law of trusts) Essential Quality of all fiduciary relationships Fry, J “every remedy which can be sought against a fiduciary is one which might be sought against a trustee on the same

grounds Mere fact that there is a fiduciary relationship does not mean that a particular fiduciary principle or remedy can be applied because each equitable remedy is available in

only a limited number of fiduciary situations Must define fiduciary relationships by class and find out rule or rules that govern each class

Court has said that the subjective motivation of the director or officer is the central focus of the statutory fiduciary dutyNo Conflict Rule – fiduciary may not put himself or herself in a position in which his or her own interests might conflict with the duty of loyalty to the beneficiary (not even allowed

to put in a position where a duty of loyalty to one beneficiary conflicts with the duty of loyalty to another beneficiary)No Profit Rule – may not derive unauthorized profit from his or her positionRules are designed to prevent fiduciaries from being in stations where they might not act in the best interest of their beneficiariesSelf Dealing Rule: constrained in his or her ability to deal in a personal capacity with the beneficiaries or with the trust property

Consequence (renders voidable at the instance of a beneficiary any transaction in which the trustee buys trust property or sells property to the trustFair Dealing Rule: applies where trustee purports to buy not trust property but the interest of a beneficiary in the trust

o In Corporate law happens when a director or an officer purports to make a contact with the corporation to which he or she owes a duty of loyaltyNo conflict and no profit rules create a paradox If fiduciary violates one of those rules by being in conflict of interest and duty then a liability will arise even if the fiduciary was acting in what he or she perceived to be the best

interests of the corporationCarelessness or lack of diligence are not the same as disloyalty Lac Minerals Ltd v International Corona ResourcesBrant Investments Ltd v. KeepRite Inc held that majority shareholders do not owe a fiduciary duty to minority shareholdersDirectors have shareholders money to invest and use for corporate purposes, risk they might waste it, pay attention to their responsibility

Law started with an extremely strict view on conflict and the courts have been more flexible (Teck)This is recognizing the entrepreneurial nature and risk taking decisions that directors doJudicial Review of the Exercise of Managerial Powers Exercise of power is reviewable based on the purpose for which it was exercised Understood in two ways

o Legal power to be implicitly limited as to the purpose for which they may be used (power given for a specific purpose it can’t be used for some other purpose and any attempt to do so will be legally ineffective

o Find the limitation in the fiduciary obligation owed by corporate managers Whether or not power has been effectively exercised requires an examination of the motives for which it was used for

If used for what fiduciary thought was in best interest of the corporation, it is effective; otherwise notCan Arrow – SC of Canada being strict as wellTension with need to be strict with fiduciaries, (need to keep tabs) and trying to ensure they will take risks needed for economic activityProper purose of issuing shares is to raise money for the corporation’s activity normal reason to issue sharesHogg, Cramphorn, Teck shares issued to takeover bid

Fired; Would seem that depending upon the nature of the business, cases will decide when fiduciary duty will endCourts are concerned when directors leave to exploit corporate opportunity (if they leave for that purpose, cannot get profits as result)Duties do not consider after leaving for an unlimited time

Peoples Department Stores INC. (Trustee of) v. Wise [2004] S.C.J. No. 64

Same facts as before

Whether directors of a corporation owe a fiduciary duty to the corporation’s creditors comparable to the statutory duty owed to the corporation

DirectorsOfficers Power vested in corporation’s directors originates in s.102 of the CBCA For officers, the power comes from power delegated to them by the directors When shareholders decide to invest in they transfer assets to the corporation and then to directors expecting that the directors

and officers will use the corporations resources to make reasonable business decisions for the corporation’s advantages Settled in Canadian law that the fiduciary duty owed by director and officers imposes strict obligations Canadian Aero Service Ltd v. O’Malley – directors and officers may even have to account to the corporation for profits they

make that do not come at the corporations expense Not required that directors and officers in all cases avoid personal gain as a direct or indirect result of their honest and good

faith supervision or management of the corporation (e.g. if they are shareholders they will naturally make money if the corporation improves)

All circumstances may be scrutinized to determine whether the directors and officers have acted honestly and in good faith with a view to the best interests of the corporation

TJ’s finding that there was no fraud or dishonesty in the wise brothers attempt to solve the inventory problem stands in the way of finding a breech of their fiduciary duty

Best interests of the corporation should not be read as simply best interest of shareholders, often they will align but they are not the same thing

Economic perspective - best interests of the corporation mean the maximization of the value of the corporation In determining whether they are acting with a view to the best interests of the corporation it may be legitimate, given

the circumstances of a case, for the board of directors to consider the interests of the shareholders, employees, suppliers, creditors, consumers, governments and the environment

At all times directors and officers owe fiduciary duty obligation to the corporation Shifts in corporations fortunes (rise and fall) do not affect the content of fiduciary duty under s.122(1)(a) of the CBCA Residual rights of shareholders become worthless if a corporation’s is declared bankrupt In the vicinity of insolvency, residual claims of shareholders is near exhausted Director’s fiduciary duty doesn’t change in the vicinity of insolvency Any honest and good faith attempt to redress the corporations financial problems will if successful both retain value

for shareholders and improve position of creditors; if not then it will not qualify as a breach of the statutory fiduciary duty

Directors must be careful to attempt to act in its best interests of anyone group of stakeholders If stakeholders cannot use fiduciary duty statute and sue directors for not taking care of their interest then they have other

methods to do so Fact that creditors interests increase in relevancy as corporation goes in the toilet is relevant to the courts use of discretion in

giving a party standing to bring an action under ss.239 and ss. 240 of the CBCA or oppression remedy under s.241 of the CBCA

Creditors who are not security holders within the meaning of para (a) can apply for the oppression remedy under (d) by asking a court to exercise its discretion and grant them status as a complainant

Other remedies were available to them and no need consequently to read the interests of the creditors into the duty set out in s.122(1)(a) of the CBCA and they also didn’t breach duty

Rejects argument that the duty is owed to creditors when the corporation is in the vicinity of insolvency Court rejects assumption that the duty is usually owed to shareholders Duty is owed the corporation – whether solvent or not Effects? Other parties (creditors) do not have the right to sue for breach of fiduciary duty (but can use oppression remedy)

Directors owe fiduciary duty to the corporationEven though CBCA doesn’t say corp is targetCorporation itself as an entity is owed a fiduciary dutyA legal fiction so what does that mean?

Hogg v. Cramphorn [1967] Ch. 254, [1966] 3 All E.R. 420

Cramphorn faced with takeover bid and chairman and managing director thought it would be bad for business and that the employees would be unsettled

Minority shareholder sought to prevent the share issue scheme

Articles said that that shares shall be under the control of the directors who may issue/dispose of shares to persons on terms and times when directors see fit

Is issuing shares to defeat a takeover a legitimate act on the part of the directors

Jurisprudence (Piercy v. S. Mills & Co. Ltd) – directors are not entitled to use powers of issuing shares purely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company or merely for the purpose of defeating the wishes of the existing majority of shareholders

Court disagrees with this and says unless a majority in a company is acting oppressively towards the minority, the court should not and will not itself interfere with the exercise by the majority of its constitutional rights or embark upon an inquiry into the respective merits of the view held or policies favoured by the majority and the minority

Court will not permit directors to exercise powers which have been delegated to them by the company in circumstances which put the directors in a fiduciary position when exercising those powers, in such a way as to interfere with the exercise by the majority of its constitutional rights

Courts should not investigate the rival merits of the views or policies of the parties Issuing of 5707 shares with special voting rights that directors attached to them could not

be justified on the view that the directors genuinely believed that it would benefit the company if they had a majority of the votes in the general meetings.

Fact that directors were mistaken in thinking that they could attach those shares is irrelevant, fact that it was exercised for an improper motive means it should be set aside

Teck Corp v. Millar (1972) 33 D.L.R. (3d) 288

REJECTS HOGG

Afron Mines Ltd. had mining properties and two major corporations were interested.

Millar thought it was best for the company if Canex a major shareholder got long term agreement

Teck had been buying shares and eventually owned the majority position

Millar purported to conclude a contract with Canex and issue Canex enough shares to frustrate Teck’s takeover

Did the directors had acted for an improper purpose and that therefore the shares could not be issued?

No dispute that the defendant directors had the power to manage the affairs of the company

Articles of the association contain the provisions that clearly give power to directors to manage the affairs of the business

Directors had power to enter into contract with Canex and allot shares pursuant to this

Teck had the right like any other shareholder to challenge the exercise of power by saying it was for improper purpose

Reviewed jurisprudence which say is that if they issue share to retain control for themselves that it is an improper purpose

Teck says purpose not important (could have been in the best interest of the corporation

Rejects Cramphorn, inconsistent to say that directors have the right to consider the interest of the company and exercise powers accordingly but say that there is an exception when it comes to power to issues shares and that they can’t issue shares to defeat an attempt to gain control

Impropriety lies in directors purpose If their purpose is not to serve the company’s interest then it is an improper

purpose Impropriety depends upon the proof that the directors were actuated by a

collateral purpose, doesn’t depend upon the nature of any shareholders’ rights that may be affected by the exercise of the director’s powers

Said in deciding whether Cramphorn should be followed should take into account the fact that corporations provide the legal framework for the development of resources and the generation of wealth in the private sector of the Canadian economy

Says it would be a breach for directors to completely disregard entirely the interests of a company’s shareholders in order to confer a benefit on its employees Parke

If they observe a decent respect for other interests beyond the shareholders it will not leave directors open to liability for failing in their fiduciary duty

Directors ought to be allowed to consider who is seeking control and why If they believe that there will be substantial damage to the company’s

interest if the company is taken over then the exercise of their powers to defeat those seeking a majority will not necessarily be categorized as improper

How to determine purpose?o Something more than mere assertion of good faith is required

English cases stricter than Canadian cases

Shareholders don’t have duties owed to them at all, they are owed to the corporation

Shareholders do not owe a duty to other shareholders (private property argument)

Directors can vote in their own self interest as shareholders

Voidable not voidIf shareholder vote to sustain the issue it is not voidable but enforaceable

Teck had to prove there were no reasonable grounds for belief it was in the best interset

o Courts should apply the general rule that they must act in good faitho Must be reasonable grounds for their beliefo No reasonable grounds? Justify that grounds were improper

Evidence doesn’t show that he was willing to make any deal to frustrate teck Question is what did they have uppermost in their minds Found there object was to obtain the best agreement they could while still in

control, and to foreclose Teck’s opportunity to get the best deal This is not improper purpose – trying to get the best deal he court for Afton (as

far as court should go) Directors were elected to exercise best judgement, not bound to the directions

of the majority Onus of proof is on the plaintiff

North-West Transportation v. Beatty

Corp needs boat. New purchase approved by director J (overwhelming maj s/h) and at s/h meeting. Boat was appropriate and good price but owned by J. Min s/hs sue.

- Company had fleet of steamships, and needed a replacement for the Asia ship

- The company needed another steamer, and purchased the United Empire, provided by J.H. Beatty, which was a good steamer, the only one available, and the price wasn't unreasonable

- While a majority of shareholders ratified the contract, John Beatty claims that the resolution was passed by unfair and improper means

- J.H Beatty had a majority of shares, sold 2 to create other directors and get just under a majority of shares to vote under the articles, and got vote through with new directors assistance

J “oppressive” considering limited s/h oversight?

s the shareholder ratification resolution valid? YES! Overturns SCC

NO. 2 conflicting rules: 1) min s/h bound by maj rule, 2) directors can’t deal on behalf of corp in matters where they could possible have a conflict of interest. J could have acted less objectionably but not oppressive: didn’t invalidate purchase.

Other: Cdn situation unsatisfactory: now assume conflicts inevitable so need to address resulting voidable Ks. So legislated procedure for corps to handle on their own = CBCA 120

- Vote of majority must prevail unless the adoption was brought about by unfair or improper means

- Here, every shareholder, including the vendor, had a right to vote on this question, notwithstanding that he might have a personal interest in the subject-matter in conflict with the interest of the company itself- Beatty got the shares in accordance with the articles- If court disregards vendor's votes, it would disregard opinion of the majority- Also, PC wants rule to have process as simple

as possible- If only disinterested shareholders were entitled to vote, great confusion would be introduced into the affairs of big companies if the circumstances of shareholders, voting in that character at general meetings, were to be examined, and their votes practically nullified, if they also stood in some fiduciary relation to the company

R: - The fact that a director is also a shareholder does not entitle the director to exercise their ordinary rights as a shareholder to ratify any contract involving a breach of a duty, even if it was his breach of duty

- Note that securities regulations provide where there's a publicly traded company, and transaction involves significant assets, there must be independent analysis and minority shareholder ratification

120/

Regal (Hastings) Ltd. v. Gulliver (1942 HL)

…If director uses position to make personal

- Regal owned cinemas and got an offer to lease two others but landlord he wouldn't lease to them unless the subsidiary had over $5000 in take up capital

- Since they could only come up with $2000, all 6 directors had arranged to come up with $500 each to come up with the remaining $3000 to get

Was this a corporate opportunity that the directors took for themselves?

Court holds that the rule of equity, which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of good faith

Instead, strict two-part test to determine breach of fiduciary duty

a) Fiduciary Relationship Directors acting in course of their execution of their office b) Profit Made Liability arises from the mere fact of a profit having been

Nothing in here that would surprise after Hogg and Cramphorn, same basis strict approach

Windfall nature of this action is not regarded as problematic.

Directors breached duty because opportunity offered by leases was opportunity presented to the corporation which they cannot expoit

profit, conflict the leases - After this, the directors

sold leases and shares of Regal for $15,000, a 3-time increase in value

- New owners of Regal claim that the leases were a corporate opportunity and the directors were obligated to account for the increased value…D's claims Regal wasn't in a position to take on leases

made Profiteer, however honest and well-intentioned, can't

escape risk of being called to account Equitable principle is a rule of general application Court would find it difficult to determine good faith after-

the-fact Here, this was a corporate opportunity because they

acquired shares in the subsidiary by reason, and only by reason, of the fact they were directors of Regal and in the course of their execution of office

Remedy is that the directors had to pay the profits back Thus the new owners of Regal got a windfall of profits R: Directors must not take advantage of a corporate

opportunity, regardless of whether or not it is to the benefit of the corporation to do so or if the opportunity would be available to the corporation otherwise

Corporate opportunity on occasion regards as corporate property that can’t be used to advantage

Peso Silver Mines Ltd. v. Cropper [1966] S..R. 673

Peso offered mining property by Dickson

D was managing director of plaintiff

Board of directors considered Dickson’s offer and rejected it

D became involved with a group that ended up buying those mining properties from Dickson

Plaintiff corp changed hands and they wanted to acquired D’s interest in the profitable mine

Is director liable for taking advantage of opportunity? NO

Usually got 2-3 offers a week for property Peso said that the shares in the new mine are property that

was obtained by him as a result of his position as a director of the appellant without shareholder approval and he has to account for that

D did not obtain the interest in the new mine by reason of the fact that he was director of Peso in the course of the execution of that office

When the offer was in front of the board he had a fiduciary duty (offer rejected but acted in good faith and had sound reasons to reject the offer)

When D was approached to invest it was not in his capacity of director but member of the public

Industrial Development Consultants Ltd. v. Cooley [1972] 1 W.L.R. 443,

D was managing director of P company.

D attempted to negotiate contracts on behalf of company with Eastern Gas but they didn’t like P’s corporate set up

New guy at gas board wants to do business with defendant in personal capacity only

D resigned position saying he was sick and contracted with gas board

P wants the profits for breach of fiduciary duty

Does D have to disgorge profits as a result of opportunity

D got his contract for himself as a result of work he did in capacity as managing director

Substance of the contract was what the plaintiffs would have like to have and tried to get

At june 13 meeting D had knowledge and information which employers didn’t know which they would have liked to now (about Eastern Gas and their plans)

D argued that contract was not equally available to the company and nature of the east gas approach was in a private citizen setting

1) Consider whether or not the defendant was in a fiduciary relationship with his principals and plaintiffs-defendant had one capacity and one capacity only (managing director of the plaintiffs) Although the company wouldn’t have likely got the benefit the principle of equity is that a man must not be allowed to put himself in a position in which his fiduciary duty and his interests conflictWhat defendant actually did was substitute himself as individual for the company he was a managing director and to which he owed a duty-Opportunity to persuade Eastern gas was there (no matter how small)

R: Question of whether or not the benefit would have been obtained but for the breach of trust has always been treated as irrelevant

Gravino v. Enerchem

D was in small niche market for petro chemical transport. To take

Did the defendants had misappropriated a maturing

Put call agreement in shareholder agreement meant that non-competition in the same agreement was inapplicable

Anything covered on assignments NOT covered in exams

Transport Inc [2008] J.Q. no 9347

an advantage of a business opportunity P exercised a put call option that led to their shares in ETI being bought by majority shareholder.

P then resigned and made own corp and persuaded Z to leave and join them and also got Shell on board (ETI wanted them originally)

Because of this they had enough work for the vessels in question

ETI sued P for this and TJ held them liable

business opportunity after P sold their shares (duty of loyalty however did not become inapplicable)

Gravino et co could compete with ETI in the small market but had to do so loyally

Before concluding misappropriation must identify something mores specific than a mere lead or working hypothesis known to those people who have experience in the relevant market

Opportunity must have attained such a degree of specificity or quiddity as to make it almost independent

It has to be quite specific and quite similar to the original plan put forward

Corporate opportunity taken up by the directors did not come to them by virtue of their duties

Evidence doesn’t show that appellants took information with them which would give them the key to a contract with Ultramar

Business opportunity in question is well known Opportunity had long been on the horizon Unless Gravino abandoned their experience and

knowledge they must have known that is was still possible to take part of the advantage

After they left ETI they were under no contractual obligation and legally free to compete with ETI

Described Officers and Directors as having fiduciary duty

Just because it was something the corp was interested in. doesn’t mean directors had to disgorge profits

Where the opportunity is significantly different or more advanced than original one

Relied specifically on canero1) notion of business opportunity as being mature, or maturingTension between strict application of fiduciary duties and enhance business efficiency

Vast majority of cases that require directors to prove they acted bona fide and had reasonable grounds involve takeover bids

Directors do not have to dedicate 100% of their time to the activities of the corporation, some will be explicitly part time and consequently for that chunk of time they are not expected to be or in fulfillment of fiduciary duties they are free to do other things

US Beaches excused if acted on

Bhullar v. Bhullar

2 familes, 1 family had 2 directors on BOD, and other had 3

Family feuds, trying to separate S family directors noticed for

sale on building they owned and persuaded the seller to sell it to them

Other directors said it should have been offered to corporation, should not have taken them, corp should get

Have to decide to accept or reject, cannot just ignore it On reasonable grounds, acting bona fide, have to decide if

it is in the best interest of the corporation Court dismissed all strict arguments and held them to

account for profits they made No issue about bona fide Much tougher test here Maturing business argument rejected Opportunity that was exploited came as a result of

being a director, came to the directors in their personal capacity

Breached obligation, even though it came to them in personal capacity, and they were directors at the time

Good faith = doesn’t matterLess strict cases say “act in good faith…..nothing more is required”

Takeover Bids

Hostile takeover – don’t want takeover because they are afraid they will lose their positions as officers (people who have an interest in buying shares in the corporation offer to buy shares that are outstanding from people that own them at a particular price, pay more because they think its worth more

Focus is on giving the shareholders having enough information Have opportunites for them in hostile bids Subject to fiduciary duties, whatever they do in response has to be carried out in accordance of fiduciary duties (to the corporation) If directors reject the take over bid, that opinion has to be expressed in the context of what is in the view to the best for the corporation Directors will establish different techniques to make it more difficult for takeover bid to be successful Teck, Millar, giving more shares to canex. Issue more shares and then takeover bidder has to get more shares to get more control Can go find a white knight, someone they like and offer shares to that person and play around with assets of corporation Court is saying responsibility is to the shareholders to make sure they have all the information In takeover – owe duties to the shareholders

Issue is whether there is enough information to everyone, and shareholders have enough (401) of the cases) information to decide whether or not to sell their shares

Olympia and York

Walker

Producers pipeline

Proxy Voting In large corporations, not likely that shareholders will travel across country to AGM in Halifax or across the country Corporations are able to (legislatively restrictedly) (s.147-154), board of directors get “right” to vote for these shareholders Process arose where directors seeking proxies had to send out lots of info ahead of time, say how they were going to vote in a particular way, so

the could make an informed decision (designed to protect shareholders interest) Shareholders do have rights to bring agenda items at AGM – shareholder proposals/initiates (right to be treated seriously, on the agenda) Changing the main business of the co, merging, selling assets (critical decisions, substantial, (requires constitutional amendments) require

approval by shareholders and special resolutions (2/3rd and occasionally ¾ majority) Important to contain potential abuse of corporate action and to provide those shareholders who disagree the opportunity to keep the operation on

the straight and narrow (first in ONTARIO then in CBCA)3 Potential Remedies available to shareholders

Derivative Action Minority/dissenting shareholders and others can apply to the court to bring an action on behalf of /in the name of the corporation (Derivative

Action..ish)(shareholders are doing actions that belong to the corporation as shareholders do not derive actual rights from the corporation) (corporation should sue if they have the right, if they don’t sue and unlikely it will, then SH can seek leave of the court to bring an action for the corp)

Courts have wide discretion Nature of the actions are predicated on notions of justice and equity (not precise)

Just

When leave is being sought, that is NOT a venue for resolving the dispute, just making a prima facie case to proceed on the action Derivative actions we are seeing is whether or not leave will be granted by the court (doesn’t resolve whether there IS a duty breach only that there

is ENOUGH to go to court) Sometimes actions by directors involve both breaches to corporations and shareholders and the courts are concerned to keep them separate

Oppression Remedy Difference between oppression and derivative remedy This is an action owed to the PLAINTIFF, not for the corporation No leave required Oppressive taken to mean “in bad faith, taking advantage of” Now you worry about interests being unfairly disregarded Have to assert that the behaviour disregards the interest of the shareholder, creditor, or officer Courts can make whatever order they see fit Describes this bad behaviour and who are those that have to be harmed for an oppression remedy to be successful Nowhere near as open ended as “complainant” Far less broad for those who are the target of the compliance order In order to be successful, loss has to be caused to security holder, director or officer, creditor (no one else)

Compliance Order Order requiring offending persons to do a particular thing/act in a particular way Fairly broad, Court can make any order it sees fit Action on behalf of the complainant or a creditor to require the corporation and the director to comply with the act and comply with the

constitution Not seen by the courts available to the shareholder to pursuer a director for breach of fiduciary duty (duty is NOT owed to the shareholder)

What is meant by Complainant: Former shareholder of the corporation or current shareholder, creditor, director or officer (former or current) (includes any affiliates) and

other person in the discretion of the court is a proper person to make an application under the provision (subsection D) Internal policing device….--> but adds “any other person in the discretion….” (Plainly to refer to a creditor)

Scope of Behaviour that could be oppressive Behaviour that is oppressive to one or more shareholder Means person bringing action must be adversely affected by oppressive nature of the behaviour (can’t just be someone enforcing the legislation

and the behaviour of those Weak provision (unfairly disregardsCBCA) Easier to enforce behaviour you don’t like under the CBCA

Employee? How would you go about this Apply under subsection d to be considered an complainant Ask the court to exercise discretion to say you are able to bring a derivative action or oppression remedy Whether court exercises discretion to say you have standing and then whether or not you could be a creditor and whether or not your harmed is a

matter of courts discretionRemedies for Shareholder

o Remedies blend with statutory that directors have (to the corporation)o Form a set of weapons to address corporate activitieso 2 primary ways dissenters can approach problemo 1) bring an action on behalf of the corporation (derivative, simply palcing themselves as if the shareholders were the corporation)o because its asserting an action which is not theirs, but the corporation, need to seek LEAVE from the courto 2) Oppression Remedy, subsidiary remedies to correct errors in corporate recordso been looking at WHO can interveneo Definition in legislationo Range of people who could fit in this category, very broad terminologyo Large brush by the court to make sure creditors/others are heardo Corporation and those who run in are kept on the straight and narrowo 459, note#4o Security holder in one caseo Richardson Greenfield case concerned about corporations being run and bought shares in that corporation and then pursued a derivative action,

bought them with knowledge that bad things were going ono Court permitted them to bring an action as an complainant, (even though it was not a security holder at the time it still arose (concerns still

existed))o Court said that because it was in the public and corporate interest to pursue, then they were allowed to become a complaintiffo Court was more focused on trying to get wrong righted as opposed to who gets wrongs rightedo Newer cases much more open to courts interventiono Oppression rmedyo When SH complains that they are being oppressed, there the inquiry is what happened what were the reasonable expectations of the

complainant and were they thwarted, ends up (was the effect on the plaintiffs fair and reasonable on the circumstances)o when there is a claim that directors failed duty (look what the did)

Nobody pursues oppression remedy, argue that your interests were disregarded is easier to argueOppression

o Just have to show that you were affectedo Can see from the cases that the plaintiff gets so far and doesn’t quite get the result they want (can’t satisfy all the requirements)o Courts are being more lenient in allowing to go forward (just whether or not there is reasonable basis, whether or not successful)o Because the focus is different, see different approaches taken by the courts in directors duty vs. shareholder remedieso Derivative

o Directors have to be given notice that they are bringing an action and a rejection of thato Plaintiff must be acting in good faitho Feingold – separate personal for derivative and need leave for derative claimso GOldex – identifies that there are some wrongs owed both to the corporation and the shareholders and others (pg 406)o If the action pursued is a wrong to the corporation (seek leave) if not (no leave)o We are not going to fix it if you mess it up, go fix it and then come backo Prerequisite steps, clear that giving notice is not a big dealo Olympia….failure to give notice was not regarded as huge problem (not much of a formality)o Appears to be in the interest of the corporation, doesn’t seem to be much of an onuso Armstrong Gardner – provision of the act shouldn’t be construed in a unduly technical manner

BCEo Complex scenario involving different stakeholders, almost impossible for directors to respond equally well to each of the stakeholderso Not every claim that your interests have been ignored will be acceptedo Courts tended to stand behind directors who have acted with a view to the intersts of the corporationo Expectations of the DBE was that their interest be considered

Oppression Remedyo Issue is that the court has the primary power to rectify the effects of the unacceptable behaviouro Naneff v Con-Crete Holdings Ltd. – Alex would only get control of his company once his dad was gone, remedy would have given him more than

he would have expected given his dad was still alive, ended uo Remedy has to RECTIFY, not OVERCOMPENSATE, has to be one which addresses the needs of the complainant in the capcity that they are

complaining (shareholder complaining? Has to be a remedy that flows as a shareholder (Can’t give them a remedy that flows from them beng a family member)

o If you have/ seek a remedy and the remedy is to buy my shares, there is a whole process that will work out value of those sharesFirst Edmonton Place Ltd. v. 315888 Alberta Ltd.

Office had to get standing to claim the wrong done to the corporation by the directors who took the money out.

3 lawyers took money out could not be seen as a view to the best interest of the corporation1st Edmonton place wanted money out of this corporation with who the lease was with (no assets, couldn’t do anything)wanted to get the corporation to sue the directors for breach

First Edmonton said corporation was manipulated by directors and I have remedies available to me to enforce remedy against the directors

Is the officer tower an appropriate complainant who in the discretion of the court can make an application?

Can it bring an application on behalf of the corporation against the directors?

Court said it wasn’t a former shareholder and wasn’t prepared to say it was a security holderCreditor of corporation doesn’t mean you will get standing

Reasonable expectations of parties, beyond legal expectations of partiesWhat first Edmonton place would have in reasonable expectations in dealing with these three lawyersSome underlying expectation of the applicant, arising from the circumstance in which the circumstances aroseDoesn’t have to be someone part of the corporationPurpose of 232 and 234 is to ensure managerial accountability

Encompasses protection of rights of not only minority shareholders but also creditors an even the public in general.

Westfair Foods Ltd. v. Watt

Corporation had two classes of shares, A and BA non voting shares got a fixed dividend and for years the appellant had paid the fixed divdedend and got the rest of the profit.It changed its policy and after paying the fixed dividend it paid all its net annual earnings to the single common shareholder.

Were the actions oppressive to the shareholder?

Yes. Court upheld order for corporation to purchase the class A shares (oppression)

Provisions remain a way for parliament to say that classes of shareholders in are to be treated fairly and justly by corporations

Parliament did not want to give it a restrictive meaning so it should be interpreted broadly Jurisprudence suggests that the courts are to impose the obligation of fairness on the parties Court went with the rules in contract, equity and partnership law as guides to voluntary relationships

(company and shareholders are voluntary in a relationship) Reasonable expectations (or expectations deserving of protection) fill this

oRegulate voluntary relationships by regard to the expectations raised in the mind of a party by the word or deed of the other and which the first party ordinarily would realize it was encouraging by its words and deeds

oAll words and deeds of the parties are relevant to assessment of reasonable expectations, not necessarily only those consigned to paper and not only those made when relationship first arose

What courts will protect through oppression remedies is the reasonable expectations of the shareholders in their capacity as shareholders

Daleuce fired members of air Ontario to get rid of any minority shareholders in the corporation, recognition between interplay between breach of fiduciary duties and oppression remedy, very much ok for directors to pursue this approach, but nonetheless is the effect on the daleuces is that it was unjust

Effect of the approach taken was unfair to the family

Exam prepo Consider general interaction between opportunities available to a person who is unhappy with the awy a corp is being runo What can they do to have their interests protected?o