LAW 315 - BUSINESS ASSOCIATIONS

I. INTRODUCTION: THE PRIMARY FORMS OF BUSINESS ASSOCIATION

Primary Forms of Business organization- Closely held Private Corporation : A corporation where all the shares are held by individuals and not

listed on a stock exchange or publicly exchanged. - Publicly Traded Corporation : governed by securities regulation. Shares are listed on a stock exchange in

Canada or elsewhere. - Crown Corporations : (public but not publicly traded) Special purpose corporations incorporated under a

special provincial or federal statute. All the shares are owned by government, covered and governed by a certain statute. Ex BC Hydro, CBC, BC Ferries

Other Forms of Business Organizations- Cooperative corporations : Credit unions, buy a share when you open your first account- Business trusts : mutual fund trusts, unit, trusts, private trust structures- Unlimited Liability companies - Limited liability companies - Joint ventures : can be partnership for limited period, corporation is formed to carry out a venture, or

contractual joint venture. No single legal meaning Non Commercial Entities

- Societies (BC Societies Act, Canada Corporations Act) non-profit and charitable activities, associations, unions, social enterprise organizations

II. SOLE PROPRIETORSHIP

Partnership Act Sections 88-90, 90.3, 90.4, 90.5

- Section 88: if you’re trading name implies a plurality of partners, must file within 3 months of business name being used.

- Section 89: cannot file a name if it is used by or close to another company. (2) they can file it if the other corporation consents in writing, or the business name was used by the applicant for registration before the corporation first used its name.

- Section 90: Indices – must keep declarations filed under firm index and individual indexo In firm index must put the styles of respective firms, names of the person composing the firm,

and date of receipt by the registrar. In individual index must place the names of each member in and date of receipt in respect of which a declaration has been filed.

- Section 90.3: Anyone can search the register based on name of firm or partner, inspect the records an make copies of all documents.

- Section 90.4: It is an offence to knowingly or assists in making false statements. (2) If it’s a corporation that does this, they director or officer is liable.

- Section 90.5: a person who commits an offence under Section 90.4 is liable to a fine of not more than $5,000 or $2,000 if individual

Sole Proprietorship- Unincorporated business “owned” by a single individual. Carrying on a commercial activity, solely

responsible, don’t form a partnership or incorporate.- Typically used by farmers, fishers, other small informal family enterprise, professionals, consultants- Assets: Legal Ownership of business assets (equipment, goodwill) is not separate from the individuals

personal assets – the individual owns both, and both are equally available to satisfy the claims of business and personal creditors.

- So why not incorporate1

o Expensive: pay taxes not worth it if small enterprise operating locallyo If you don’t need to raise capital, then there is no reason to incorporate.

- Employees: may have employees and they are in an employment relationship not partnership. They are the “servant” of the SP, so SP may be VL for the torts committed in the course of employment

- Name: May use a business name that is not the individual entrepreneur’s legal name, but must be registered in accordance with the Partnership Act s. 88-90, 90.3, 90.4, 90.5

- Failure to registero SP have an obligation to register their trading name so that people know who is behind the

business. In case you need to sueo If they use a name other than their own name, or a name that suggests more than one person in

business, has to file a registration statement, Section 88.1o S. 90.3 allows any person to search the register and S. 90.4 makes making misleading statements

an offence, cannot make a name which confuses people into thinking your affiliated with another corporation in some way.

- Why incorporate?o Incorporate to have an entity separate from yourself, so that your assets are no longer available to

everyone. To be able to raise capital and issue shares. o Also if you want money from the bank, normally have to incorporate.

III. AGENCYWhat is Agency?

- Agent : a person who affects the legal relationship of another person called the “principal”. Agent represents the principal and can affect their relationship in respect to third party. Can make contracts that bind them, deal with their assets and money may be oral or written

- Fiduciary Obligations : a principal will only choose an agent who they trust and will want that particular person to carry out the agency. Require confidence, confidentially and trust

- It is a way to become more productive, have someone else do work for you so you get more done

Agency and employment- Employee doesn’t have the right to enter into contractual relations on behalf of the employer and may

not owe fiduciary duties to the employer. But employee may be agent- Employees can often act on behalf of their employer to affect their legal relationship, the higher you are

in the company, the more likely you can affect the employers relationship because then have fiduciary relationships

- The agency has to be kept separate from the employee relationship. - Roles of employees and agents overlap. More authority, more likely you are acting as an agent- Employment is governed by different acts and common law principles so must be kept separate from

employee relationships.

Agency and Trust - Both have fiduciary duties, but in an agency relationship the acts of the agent bind the principal while in

a trust relationship the trustee does not bind either the settlor or the beneficiary. - Person who is given credit to trustee not involving trust does not have access to the trust assets to satisfy

claims whereas in agency, creditors of an agent have access to all the property held by the agent even if the agent is holding that property for transfer to the principal

- In agent and principal, the money is given to agent to carry out the principal’s duty. Not a trustee of the money to hold for another

- When the agent holds the money, he is not a trustee of it, simply holds it for the benefit of the principal and then must give it back.

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A. Relationship between principal and agentActual authority

- Where the principal intended to give that agent authority to affect his/her legal relations or where the principal and agent would have reasonably expected the agent to have authority, the agent is aid to have actual authority

- Express : Oral or written agreement between principle and agent and the principle tells the agent, in writing or orally, the powers they have

- Implied : actual authority which is not expressed, the authority A would be expected to haveo Usual: Refers to what this principal has allowed this agent to do in the past. Certain acts may

not have been in the contemplation of the principal at the time, but if they continued and the principal did not stop them, it was within the agent’s authority.

Policy: The idea is fairness to the agent, if they are allowed to do certain things in the past, they should not be liable the one time it was detrimental to the principal. But if the written agreement clearly restricts certain behaviour then ratification would not normally be said to result in implied authority.

Example of Freeman and Lockyearo Customary: Determined by looking at the kind of authority agents of that type normally have.

Simms: client asks stock broker to sell shares and the broker sold the shares on credit. It was held that in this business at the time, it was not customary for the agent to sell shares on credit. They had to collect the payment at the time. You would have to have express authority to do this at the time.

Duties of the agent to the principal- These rules apply unless there is an express removal of any of these particular obligations- (1) To Perform Agency Obligations

o Duty to perform the tasks assigned by the terms of the agreement or according to instruction. Do what they were asked or empowered to do by the principal

o This is breached where agent fails due to their own fault, ex: principal tells agent to buy insurance for ship, they forget and the ship sinks. So then they sue.

o If no insurance was available then the agent has no failure because they made all the efforts. It is not a failure to preform if the subject matter doesn’t exist

o Important that the agent does not go beyond their authority. Ex: lawyers accepting settlements without permission of client.

o Agent not liable if the act they have been asked to perform is illegal. Obligation to perform is negated if illegal act

- (2) To Perform with Reasonable careo Standard is the degree of skill and diligence that an agent in his/her position would normally

possess or exercise. o Have expert evidence to balance whether it’s negligent or not. o If it is a professional it is the legal skill and care of someone else in that occupation

- (3) Fiduciary Obligations- (a) Duty of Loyalty

o To act in the best interest of the principal. Arises in partnerships and corporate relationship o (i) Avoid Conflict of interest in duty

Personal interest should never conflict with your duty as an agent The remedy is that the agent cannot keep the proceeds and have to pay profits to

principal. Or the principal may obtain damages if they missed a different action which would have been more favourable.

o (ii) Not to make secret profits (accounting) The agent cannot make profits from two sources, the principal and another party.

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- (b) Duty not to delegateo For the agent to ask someone else to do what they were empowered to do, is taking the power

away from the principal to ensure they have the sense of trust and confidence in the agent. o The delegate of the agent will not be able to bind the principal.o Can delegate where they have been given express authority to do so, like delivery of minor

goods or situations of necessity or simple tasks where it doesn’t matter to the principal does it.o Remedy: damages for loss in situations where breach caused by delegation. The principal may

also never engage that agent again. - (4) Duty to keep proper accounts

o Agent must keep their own money separate from that of principals. The court will make a presumption that if the agent cannot produce clear accounts, any discrepancy belongs to the principal.

o Must have proper expenses and receipts without which principal can refuse to reimburseo Documents and any other property must be returned to the principal at the end of the contract.

Duties of the principal to the agent- (1) Requirement to pay remuneration: Must be clear and need express agreement on how much the agent

is going to be paid. o Where no express agreement of commission, court will reward value of work. When it is clear

that they did not act gratuitously, court will look at the value of the services and award an amount based on that.

- (2) Requirement to pay the agents expenses and indemnify the agent against losses: Principal is obligated to reimburse agent for reasonable expenses incurred on behalf of agency. Also to indemnify them for any loss. Expenses must be necessary and reasonable in the context. Cannot be reimbursed if illegal use of money.

Termination of the agency relationship- (1) By the act of the parties: where the agency agreement provides for the termination of the agency

relationship. Where no term, can unilaterally terminate on notice. Can be immediate, no need for reasonable time.

- (2) Operation of law: where the principal or agent becomes bankrupt, there is frustration or deatho Frustration: where the whole purpose of the relationship no longer exists. The whole objective of

the agency is no longer attainable in any way, beyond the physical capacity to be fulfilled. Test : it is impossible or illegal or so different that it would be unjust to make the agent

perform. Example is if someone enters a relationship and then is drafted in army and sent away.

Too difficult to perform the agency now and unjust to let the principal sue.

B. Relationship between principal and third party, and agent and third party

Agency by Estoppel/ Ostensible/ Apparent Authority- Arise where the agent does not have actual authority or where the P never gave express or implied

authority to the agent to act in the way they did. - Agent has no authority as a matter of law, the principal has never authorized the agent to do what they

did but the principal by their actions or representations are estopped from denying the agent authority- Elements: (1) The Principal must have made a representation or permitted a representation that the

alleged agent had authority to act on behalf of the P. (2) The 3P reasonably relies on the representation to his/her disadvantage.

- The representation can be express or implied from words, or circumstances but need evidence to prove it

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- Llyod: The clerk was in the office doing work that a conveyance clerk does and despite the fact that he committed fraud, the company gave him that ability, so they are liable for his actions.

o It was reasonable for her to ask the clerk to give her advice and for her to trust him. o Here the firm was the principal who was liable for the actions of the agent.

- Freeman and Lockyer v Buckhurst: There was a partnership of architects and they thought they were retained by the company to do some design work. The guy they had dealt with, Kapoor, had never been officially appointed as managing director but they believed that he was

o Decision: You allowed him to do things in the past even though he was never appointed, ratified his acts. Therefore they clothed him with ostensible authority and so he exercised the usual authority of what he had done in the past and was customary of what a managing director does

o The firm was reasonable in believing that he was the managing direction, the principal could have stopped this bad behaviour if they wanted to. They knew or ought to known that he was running around town purporting to have authority. Harder for the third party to know that he did not have authority.

- Reasons for having ostensible authority:- (1) Protection of Reliance by 3Ps: Where the P could have readily taken steps to avoid potential reliance

by third parties on a reasonably perceived authority of an alleged A, then the Ps should not be unfairly surprised.

- (2) Least cost avoidance: the principal ought to know that this person is acting as their agent. They have the ability to decide if this person is trustworthy and appoint them if necessary. It is up to the principal to severe the relationship or make clear that the relationship does not exist. The P has the ability to (1) check the agents trustworthiness (2) monitor their behaviour and (3) dismiss an agent who has acted beyond their authority

Breach of warranty of authority- This comes up where the alleged agent does not have the authority to perform so the 3P sues the agent in

tort for having falsely held themselves out as being something that they are not- Elements of action

o Third party must prove the agent represented that he/she had authorityo Representation must be falseo Third party acted to their detriment on the claim

- The measure of damages is different than negligent misrepresentation where you get reliance. Here you get expectation damages, this could include lost expected profits.

Ratification- Where the agent acts beyond their authority the P may choose to accept by ratifying the act.- It has a retrospective aspect, occurs in cases of usual and ostensible authority. - Rule : a person who is not in fact the principal, but by ratification becomes the principal can ratify the

contract if three conditions are present- (1) Agent must have purported to act on the part of the person who wants to ratify. A prior idea of who

the principal was. - (2) The person who becomes the principal must be ascertainable and in existence at the time the

transactions was entered into by the agento This is in relation to corporations who may not be in existence at the time the contract was made.

- (3) Principal must have the legal authority to do the act both at the time the other person acted and at the time of ratification.

o Need legal capacity at the time the agent acts with the third party and at the time of ratification

Requirements for Ratification

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- (1) Express Ratification: By conduct or acquiescence, any performance or part performance of the terms of the K by the principal may be sufficient to constitute ratification.

o Conduct: partial performance or acceptance of the third parties actions. By allowing the third party to comply with the agreement can be seen as ratification

o Acquiesce: within a reasonable time of learning that someone has entered into a contract on your behalf, the purported principal has to reject the transaction or they will be considered to have accepted it by acquiescence. You know about it but do nothing, you let the other person assume that everything is okay.

- (2) Principal has to have sufficient knowledge of the relevant details of the transaction to be able to ratify. If P is consenting to a transaction that the agent had no authority to enter into then the principle needs to know the nature of the deal being accepted.

o May be able to argue that this doesn’t amount to acquiesce because I did not have sufficient information of the terms

Consequences of Ratification - A binding contract between the third party and principal. The principal can sue the 3P or the 3P can sue

principal- The agent is no longer liable for breach of warranty of authority. The agent has been retroactively

clothed with authority by the principal. - The agent has to admit they didn’t have authority or the principal will be liable on the transaction.- The agent will no longer be liable to the principal for exceeding their authority. - Expands the agents authority via usual authority, the principal has allowed this to happen, so this has

become part of his authority now. - The principal will be liable to the agent for reasonable remuneration and to indemnify the agent for

expenses reasonably incurred by the agent in effecting the contractPolicy reasons

- Why do we allow ratifications?- (1) Mutual Benefit: both the principal and the 3P want it

o If the principal likes the deal, he has an interest in ratifying. Also the third party has an interest because they believed the principal to have authority

- (2) Take away the option of the principal to change their mindo Once ratified, they have to be bound because if we allow them to change their mind if the princes

change, etc. would cause uncertainty. o Gives the third party some enforceability once you have some sort of acceptance on the part of

the principal- (3) Unjust enrichment

o Of the principal at the expense of the agent, if things go bad, then the P can go after the agent after the fact

o Also of the principal at the expense of the 3P

Undisclosed principal- General principal is that an undisclosed principle can disclose the agency relationship and sue the third

party on a K entered into by the agent with the 3P- The third party will be considered to be looking to the agent alone to perform if: (1) the terms of the K

require that only the agent perform the terms agreed to be the agent and (2) the circumstances indicate that the 3P clearly intend to K with the agent alone

o The 3P may be able to say that I wanted you to do it because I know you agent, and so I wanted you to perform this service

- An agent may not disclose that they are acting on behalf of a principal because they may sell different things to a number of different principals.

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- The third party may not realize that they are dealing with an agent and cannot later refuse to carry out contract if principal disclosed

- The undisclosed principal can later disclose the take the benefit from the contract. - Rights of the third party : (1) they can sue on learning of agency relationship (2) can sue agent as party to

the K (3) in action by P against 3P, then can set off any rights the 3P would have against the agent and can use any defence that the 3P would have had against the agent.

- Said v Butto Illustration of the problem of undisclosed principalo Facts : he wanted to attend an opening night performance of a play in London. He had said some

bad things about the people in the theater. He asked a friend to buy his tickets and then when he got to the show wasn’t let in

o Decision : Said was the principal, the friend was the agent and the 3P was the theater company. So issue of whether they are bound by the undisclosed principal. The company said that if we knew it was you, we would have never sold the ticket. Here the 3P was able to resist the contract.

- Principal and 3P can both enforce the contracts against each other, but an agent can also be sued by the 3P. But the principal can say that the agent was acting in their capacity so they can be indemnified

- 3P can ask for an accounting with respect to the position they have already taken with the principal - Generally speaking, the principal is liable for the torts committed in the course of an agency.

o To deter principals from hiring reckless and negligent agentso Principal has the best opportunity to not hire these types of peopleo Want the loss to fall on the person who employed the agento They have chosen the activity to apply to agent, so they should be held liableo Agent may not be able to compensate for the damage done.

Liability of principal for agent’s torts – not in lecture- P is liable for a tort committed by the A if committed while acting within the course of his/her authority- Ps do not authorize As to act wrongfully can commit fraud- P does not have to benefit from the As fraud nor does the A have to intend benefit the P in order for the

P to be liable for the As fraud (Lloyd v Smith Co)- Policy : deterrence and least cost avoidance, allocation of the loss of activity causing the loss and

concern for compensation of victims.

IV. PARTNERSHIP

A. Introduction

Partnership- Parts 1 and 2 are the same as the 1894 Act, the common law origins and rules of equity are still relevant

because the partnership acts preserve them to the extent they are inconsistent with the act. - Critical thing about partnerships is that the partners are personally liable for all the debts of the firm. The

partners split the liability but any creditor can go to one partner and demand all from them. Without limited liability, personal assets of partners are all up for grabs. Like the house, cars, retirement savings can be taken to pay back the debts of the partnerships. Limited and limited liability can help cover some of this.

Uses of Partnership - Professionals: doctors, lawyers, dentists, engineers or accountants form partnerships- Joint Ventures: two or more corporations joining to engage in a JT- Tax reasons: partners can use his/her share of partnership losses against his/her other sources of income- Default: no formalities of this, two or more persons carrying on business in common with a view of

profit are partners.

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Why General Partnership?- They form between people who decide to work together and make a business- It is self-financed; they put in the capital, knowledge and time. They prefer not to incorporate because

then they have to file tax, etc. and would rather keep it informal. - In BC we allow professionals to incorporate now therefore partnerships are less common. Before this it

was the preferred form to carry on a profession until incorporation or LLP were permitted- In larger groups or corporations and multiple partnerships, the primary motivation is tax planning.

Partnerships are not separately taxable, so it can be helpful if there are start-up losses. Partnership Act

- This is the default unless you say otherwise, partners are treated as agents for each other. - Corporations are persons in the eyes of the law, can have a partnership composed of corporations. But

you cannot be a corporation which is a partnership but can be a corporation and a partner.- Partnerships can come into existence without the awareness of the partners. - If you are carrying on business with someone else with the intention of profits, you are partners despite

the fact that you didn’t think about it or wanted it. You just have to have met the criteria of Section 2

Definitions and vocabulary: Partnership Act (“PA”) s. 1.- Section 1:

o Business name of a partnership and a corporation. It is the name that they hold out to the public, the name that people know them by

o Firm: usually refers to a partnership, general. o Firm name: the business name is the firm name

PA S. 2: Definition of Partnership- Partnership is the relation which subsists between persons carrying on business with common view of

profit- Elements:- (1) Persons (more than one, can be corporation)- (2) Carrying on business- (3) In common- (4) With a view of profit (revenue less expenses)

PA S. 3: Exclusion of Corporations- Where the business is carried on through a corporation, then the particular corporate statute applies and

the Partnership Act does not. - It sets out the way in which a corporation might be formed and then saying that these corporations

however formed are not partnerships Backman v. Canada – Partners must satisfy all 4 criteria

- What we mean by the criteria set up in section 2- Facts: There were 39 Canadian tax payers and they used partnership to reduce taxes paid. US partners

formed a limited partnership in Texas, they bought land and built an apartment building with a carefully drafted partnership agreement. The value in land diminished substantially and so they lost 6 million in the partnership. The Canadians saw an opportunity to use the losses against their Canadian interest and pay less tax. So they bought the interest of the Texans in the partnership. They converted the limited partnership into general. The Texans then created a new partnership and bought the apartment and land from the Canadians. In essence Canadian’s bought apartments and then sold it back immediately to realize capital loss.

- Issue: Whether there was a valid partnership- Argument : CRA argued not a real partnership you were not carrying on a business with a view of profit,

intention was to crystalize losses and use them. Even though you don’t need profit, that’s the objective - Decision: Backman and partners lost all the way up to SCC. To be a partnership you have to satisfy all 4

criteria of the Partnership Act.

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o Business: Requires the occupation of time, attention and labour. Incurring of liabilities to other persons and purpose is to gain a livelihood and profit. Doesn’t have to be a new business, can take over existing, can be passively taking rent, no need to have meetings or enter new transactions

Here having bought out the Texans doesn’t mean that it’s not a business, can be formed for a single transaction, no need to have it carried on for a long time but intention must be to gain profit.

o In common: Exists by consent of partners who are in a common purpose. Not every partner plays the same role, some do nothing but put money up, but every partner must contribute something (sleeping or silent partner), skill, profits or assets

o View of profits: Tax motivation for entering a partnership doesn’t mean it’s not carried on with a view of profit, profit making can be ancillary and not primary purpose.

- How do you determine intention?o You have to examine the evidence and look to the true intention, not just what is written and

what the person asserts. Examine context o Here the first act was to terminate the business that they had just acquired, so that refutes any

assertions to the contrary. - Spire Freser case: it was partnership because they carried business in common with one property

Legal Nature of Partnership- Partnerships are not separate legal entities from the partner. They are a relationship, they are not a legal

person and do not have separate legal personality from their partners- The partners are the owners in common and carry out business in their own right- They are not employees of the relationship

Thorne v New Brunswick - A partnership is not a separate legal entity- Facts : Two men owned a lumbering, mill and cutting business. They paid into premiums for the workers

for injury. Had an oral agreement that they would pay each other $75 a week in wages. One of the partners got injured and claimed workers comp as an employee of the business. He stated that the profits were his wages. At the time he had paid premiums protecting the employees, had an opportunity to protect themselves as owners of the business, they chose not to get this.

- Argument : Argued that the partnership was separate legal entity from the partners. If this was the case, he could argue that he was the employee, but you can’t be both the employer and employee.

- Decision : partnerships are a relationship, not separate entity at law. The fact that they agreed to pay themselves wages didn’t mean that they were employees. What they were taking was draws, which are advance of profits.

Gillen Notes Chapter 5 – not in lectureConsequences of partners not being separate legal entities

- (1) Each partner is liable to the full extent of his personal assets for debts and other liabilities of the partnership business.

- (2) Partner may not be an employee of the partnership business- (3) A partner cannot be a creditor of the partnership - A partnership is not recognized as a separate legal entity in spite of the fact that there are some instances

in which it is treated as a collective entity. Names and Registration

- Section 81 requires persons associated in partnership for trading, manufacturing or mining to file a registration statement with the registrar. Failure to do so is an offence under the offence act and can result in a fine of up to $2000.

- Where there is any change or alteration in the membership or in the name of the firm, a new registration statement must be filed pursuant to Section 83.

The Partnership Agreement

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- Section 21-34 provide a type of standard form contract. S. 21 allows partners to make their own rules so partnership form is very flexible

- Rules are based on the assumption of equality between the partners. - Need written agreement to override default rules- Partnership interests can be assigned, but the assignee doesn’t become a partner. Also cannot be forced

to accept a new partner because interest was sold. All one can do is assign interests of profits or share of assets after dissolution.

Default Provisions- Partnership property: any property brought into the partnership or acquired on account of the firm,- Section 27: sets out rules in relation to capital profits, losses, management, admission or new partners,

record keeping - Section 28: removal of partners, need consent unless express agreement to the contrary- Section 22: partners owe fiduciary duties to one another, - S. 31: partners are bound to render accounts and full information of all things affecting the partnership to

any partner- S. 32: partners must account for any benefits derived without consent of the other partners from

transactions concerning the partnership or from the use of partnership property- S. 33: partners account for profits made from engaging in competing business

Rochwerg v Truster- No written partnership agreement existed so mutual rights and duties of partners were governed by

Partnership Act. - Here he was forced to account to his former partners for the shares and stock options

McKnight v Hutchinson- Facts: law firm partnership which ended when McKnight learned that Hutchinson had received earnings

from part ownership in a private company. - Obligations can be varied with consent and that Article 2.8 of the partnership agreement contemplated a

partner could conduct business outside of the partnership so long as the business was not the practice of law. Here no notice was given and it was same activities of the law firm.

Dissolution- (1) By the act of partners. Set a fixed term or venture or by notice of intention to dissolve- (2) Dissolution on death, bankruptcy or dissolution of a partner. Automatic upon the happening of one of

these events.

B. Indicia of partnershipIndicia of Partnership

- Sharing in net profits : Profits being revenue, minus the expenses of providing the goods and services. - Section 7 : Partners are agents of each other, each partner is an agent of every other partner - Partnership v Co-Ownership : Can co-own property without being in a partnership. Can each have a half

interest and not in fact be partners. - Partnership v Creditor : A person who is not a partner, but lends money to the partnership may ask for it

back out of profit and a certain amount of interesto Here they stop getting money once they have been repaid the full amount in debt. o If someone becomes a partner, they never get repaid, they simply get more of the shares or more

interest in the partnership. Not a lender borrower relationship, because although they may get their money back in profits, they keep on getting profit after

- Section 6: Property and rights to property brought into the partnership stock. o One person may contribute capital which is used to buy the necessary assets or pay rent. Another

person may contribute equipment and this becomes partnership property and belongs to all the partners

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- Sleeping/Silent Partners : Partners how only contribute cash, share of profits indefinitely. But they do not put their name into the partnership. They waive rights to be in management, etc.

o This is generally the partner that has the money and become liable for all the partnership liabilities. Creditors will look to these partners for the money

PA section 4(a) – (c)(iii) - In determining whether a partnership does or does not exist, regard must be had to the following rules:- Section 4(a): joint tenancy, tenancy in common, joint property, common property or part ownership does

not of itself create a partnership as to any property that is so held or owned, whether the tenants or owners do or do not share any profits made by the use of the property;

o Under co-ownership the co-owners are not agents for each other and they deal with their own interest in the property without the consent of the other co-owners.

o Under partnership the partners are agents of each other unless agreed otherwise and a partner cannot transfer his/her interest without consent of other partners and normally no partner can deal with an interest the property itself since the property is held by the parties jointly as an asset of the business itself.

- Section 4(b): the sharing of gross returns does not create a partnership. May have revenue and not profit because expenses may be too high.

- Section 4(c): a sharing in net profits is a rebuttable presumption that someone is a partner. Receipt of share does not of itself make someone a partner, but absent evidence to the contrary he/she is seen as a business partner. In particular

o (i) payment of debts or liquidates amount by the instalments out of profits does not of itself make a person a partner

o (ii) a contract for the remuneration of an employee or agent of a person engaged in a business by a share of the profits of the business does not of itself make the employee or agent a partner in the business or liable as a partner,

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

o Sharing of profits is a pretty good indicator, transfers the burden to the person receiving the profit to prove they are not a partner

o Ex: one parent gives their child money, but the first year they only want interest. Then they say we will accept 5% of net profits each year before the loan is repaid. Are the parents partners? They are receiving a share of profits

According to Section 4(c) there is the presumption of partners so the parents have to show that it was just a loan and not partnership.

If you are going to be a lender and not partner and take a share of profits you should get it in writing and be careful not to engage in other parts of the partnership.

A.E. LePage Ltd. v. Kamex Developments Ltd. – Co-ownership alone doesn’t make you partners- Facts : Camex was the legal titleholder to the apartment building. Could only sell the property if they all

agreed, but only one of them signed an agreement with LePage. The owners wanted to sell the building via an open listing and not an exclusive listing, March signed an agreement for an exclusive listing and so now LePage wanted their commission

o There was a written agreement that revenues and profits were to be shared proportionately. A co-owner could sell their interest in the building without the permission of the others but it had to be first offered to the other co-owners. Decision to sell the building had to be made by the majority of the owners.

- Issue: Was March a partner of the other co-owners. If so then all the other partners were bound as partner is an agent of the firm (S.7)

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- Section 11: a partner is liable jointly for all the debts with all the other partners. So LePage argued that since he was a partner, they are all bound and so all liable

- Decision : March did not have actual authority and the owners did not ratify the exclusive listing. March purported to sell the agreement on behalf of all of them

o Also they were not partners, not carrying on business with a view of profit. They are co-owners who acted collaboratively to make the best of their investment. Independent part owners of the building.

o Not partners because each co-owner could sell their share to anyone else without permission, no fiduciary relationship and no carrying on a business with a view of profit

o The fact that the owners intended to acquire, hold and sell a building for profit doesn’t make them partners. They wanted to keep everything separate, even for tax purposes.

- Policy : (1) reliance, no indication March held out as having authority and company relied on other members to say partnership (2) unjust enrichment, the relators could be unjustly enriched not partners (3) lease costs, partners had very little control over the management of property.

- Interesting that they did not argue ostensible authority, also they did not sue March for breach of warranty of authority.

- Illustrates the idea that co-ownership alone doesn’t make you a partner, it is simply an element.- Section 34 is relevant here, it emphasizes the difference between co-owners and partnership

Volzke Construction Ltd. v. Westlock Foods Ltd. – nothing requires each partner to act as manager - Facts : Volze was in the business of construction and they are suing Westlock arguing that they are a

partner of B. V had engaged B to construct a shopping center, there was on oral contract. B is not able to pay that amount and so V sues the other two as partners hoping to collect.

o There was a joint bank account, only one party had signing authority. Worker from W introduced B as partner to V

o Also earlier, W sued B on their partnership agreement where the court said you were either partners or joint ventures and W gets 20% of profits. They argued that they were partners

- Trial : Not partners, V could only recover from B. No intention to enter partnership and W had no control- CA : You are partners, nothing in the definitions that requires each partner to act as a manager. You can

be a silent partner, do nothing but contribute cash. You can give authority to the other partners to do management. Section 4(c) of Alberta act, receipt of share of profits raises presumption of partnership which is not rebutted.

o The section says that receipt of prima facie profits is proof of partnershipo So although W had not signed the K with V, because they are a partner with B who did sign the

contract and since V has proven they are partners, can get money from either

C. The relationship among the partners: equality, consensualism, fiduciary character; significance of partnership agreements

PA sections - S. 21: Can vary rights and duties by consent either express or implied- S. 22: Duties of utmost honesty, fairness and good faith- S. 24: Property bought with firm money is deemed to have been bought on account of the firm- S. 27: Rules for determining rights and duties of partners in relation to partnership

o These rules are binding, if no other agreement o (a) If there are 5 partners, each are 20% owners unless there is an express or implied agreement

that varies this otherwise. Have to contribute equally to the losses in proportion to the losseso (b) Firm must indemnify all the partners for losseso (c) and (d) not relevant

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o (e) Every partner may take part in the management of the business, presumption that every partner is a manager and owner. But usually you separate all the obligations. Example of Thorne, they separated the tasks.

o (f) Partner is not entitled to remuneration, entitled to a share of profitso (g) Cannot be introduced as a partner, unless all existing partners consent. This is because of the

fiduciary relationship, you have to be convinced that this person will fulfill their obligations, and you have to be able to fulfill these obligations also.

o (h) Basic rule of management, unanimity for change in the partnership business but for ordinary matters, can be just a majority

o (i) Partnership books must be kept at the place of business, or if more than one, at a place where they all can access.

o (j) This is the default rule, any difference concerning the agreement goes to arbitration and you cannot change that.

- S. 28: Majority cannot expel partner unless express agreement between partners and power exercised in good faith

- S. 29: Ending partnership, can be via notice of intention - S. 30: Continuation after expiry, same terms and agreements as before. Assumed that they agree to

extend- S. 31: Partners must render accounts- S. 32: Partners much account for benefits derived without consent of others resulting from transactions

dealing with partners. You have to disclose and share the benefits unless you have given full disclosure and permission by the other partners to keep it

- S. 33: Profits carrying on similar business, if carry on business of same nature which competes with the firm, partner must account for and pay over to the firm all profits.

- S. 91: Rules of Equity and Common Law continue in force except where they are inconsistent with the express provision of this act.

Rochwerg v. Truster – Duties of the partners to avoid conflict and sharing of profits - Facts: R had worked as the accountant for Tecklogix (T) and they were his loyal clients. Then they

moved to a National Firm when they decided to go public. RTZ lost almost all the work from T but T still wanted R to be an advisor so they offered him the position of director. He would be given money annually for attending each meeting. R paid his fees and annual salary to the partnership. He was using the connection of the firm in his position with T

o He didn’t disclose the option to purchase stock shares to RTZ. As a director, once he had 8000 shares, had the option to buy more at a penny each.

o On the dissolution of the partnership, his partners wanted the benefits of his stock options- Issue : Was he required to inform them about his stock options and is he obliged to account to his former

partners any benefit or profits he got. If accounting is required, to what extent- Law: Equitable principles impose on partners duties of loyalty, good faith and avoidance of conflict

and self-interest. Principles preclude a partner from using partnership assets for personal gain, from making secret profits in anything connected with the partnership firm, and from engaging in his/her personal benefit in competing or similar business to that of the partnership

- Decision : There was no partnership agreement here- The court has to look at the Ontario Partnership act, similar to BC.

o Section 21 says that the rules in the act apply unless they are varied by consent or agreement. Court starts by looking at conduct to determine what they had agreed to do in cases of stock options. No mention in the agreement

- Judgment emphasizes that the partners duty is to make full disclosure and not compete with the partnership interest, sounds like agency

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o At the time of his acquisition of rights/shares he owed fiduciary duties to other partners of RTX. Although he thought it was personal and so not obligated to disclose, cases confirm that bad faith, fraud, or deliberate withholding of information are not necessary to found liability to account.

- Section 32 of the BC Act, partner must account to the firm for any benefit derived from partnership name, etc.

o Court found his being a director was outside the scope of partnership business as T was not in a business or service of providing accounting services. Rs role with T was different, but by taking a role with a former client his transactions were concerning the partnership (s.32(1))

o Partners don’t have to show that it was in the scope, in that he was in a competing business, so S. 33 doesn’t apply, but 32(1) does because of the connection with the business. His liability to account arises out of the use of partnership property, the relationship with the client, which was a partnership asset and the business asset.

- The proper approach to his accounting is to require him to compensate the appellants for their proportion share of the worth of the benefits represented by the shares

Dockrill v. Coopers & Lybrand – Duties of partners go up until they are expelled or given notice - Facts : They realized they had too many partners and needed to get rid of one. The partners allowed a

group of managing partners to make this decision. It was decided that Dockrill would be expelled and he was given notice once the company was given permission from the Toronto office, after seeking advice from their in-house counsel.

- Law: Section 28 says that majority cannot expel unless they have been given express permission. So have to assume that there was something in the agreement that said the managing partners could expel.

- Argument : The partner being expelled said he was being wrongfully expelled and the agreement did not allow this. He asked for a list of documents, and a number of documents were listed under solicitor client privilege with the in-house counsel dating before he was expelled. One document contained the legal analysis of the partnership agreement and the expelled partner wanted it, other party said privileged

o He claimed he was a partner at the time the analysis was undertaken and so he is entitled to see all the books and records pertaining to the partnership while he was a partner. Therefore it cannot be privileged vis a vie the partner.

- Decision : Court said that all these documents are available to the partners, until he had notice that he was being expelled he was entitled to access all the information. Court looked at mutual agency, and the difference between employees and employers. Also they said that the fiduciary obligations go up until the person is expelled. The documents cannot be privileged until both parties know about the dispute.

D. Liability of partners to third partiesLiability of Partners to Third Parties – Chp 6

- Section 6: Definitions, Partnership property, once a partners contributes property it becomes partnership property and is owner in common with the other partners

o "partnership property" means property and rights and interests in property (a) originally brought into the partnership stock, (b) acquired, whether by purchase or otherwise, on account of the firm, or (c) acquired for the purposes and in the course of the partnership business.

- Section 8: actual authority of agent or partner- Section 7: Liability of partners, partners are agents and actions are binding on one another unless the

person has no authority and the person dealing with them knows that or doesn’t know they are a partner. o If you have a partner whose ability to do work is limited, need to give notice to a lot of people. o 3P might be able to rely on the apparent authority of partners to bind fellow partners because the

partners were carrying on a business of the kind usually carried on by the firm- Section 9: no pledge of credit of nonfirm business. If you pledge credit, not connected with firms

ordinary business firm not bound unless authorized by other partners.

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o No ostensible authority so partners are not bound unless the particular partner had actual authority. So if one partner pledges credit of the firm and does so for a purpose apparently not connected with the firms ordinary course of business, then the firm is not bound unless the person was specifically authorized by the other partners

- Section 10: Notice of restriction of power of partner, unless the person has actual notice that the partner is acting beyond their authority, the firm will be bound. Not very common for people to have actual notice on the restriction of partners

o If the 3P has notice of a restriction on the power of a partners actions in contravention of the restriction do not bind the firm.

- Section 11: liability of partners for firm depts. Joint and several after death, estate is still laibleo You are jointly liable for all debts and anyone can sue any partner and recover the full amount

from that partner. Contractual - Section 12: Firm is liable for all non-contractual liability of all partners, mostly tort. Like agency,

partnership is liable for wrongful acts or omission where a partner acted with the authority of co-partners or acted in the ordinary course of business of the firm.

- Section 13: liability for misapplication, must make good any misapplication of money. Firm must return money from who the firm stole it

- Section 14: Joint and several liability under Section 12 and 13. - Section 16: Ostensible authority – if a person holds themselves out as a partner or allows themselves to

be seen that way, can be liable to someone who reasonably relied on the representation. Even a non-partner can be liable if they allow themselves to be held out as a partner.

o (2): Don’t have to show that they knew they were representing themselves as partners. o (3): if someone uses name after death, the estate is not liable

- Section 17: Anything said by a partner in the course of work can be used as evidence.- Section 18: Don’t have to tell each partner individually, notice to one is sufficient except in cases of

fraud committed by or consented to by that partner. - Section 19: Time limits because composition of partnership can change

o (1) Don’t incur debts from before you were partnero (2) Once you retire, you are still liable up to the debt until your partnership. o (3) Can be freed upon retirement if you have agreement with other members and creditors..

Ernst & Young Inc. (Mancini) v. Falconi – Partners liable for acts in the ordinary course of business of firm - Facts : A lawyer, F was guilty of assisting persons who were adjudged bankrupt in making fraudulent

dispositions of their property. He used the legal services of his firm. The creditors (Ernst & Young) could not get their money back from F so they argued that Klein was Fs partner and therefore should be liable. K did not know that F was doing these bad things

- Decision : The activities of F were within the ordinary course of business of the company and therefore K would be vicariously liable for the loss or damage caused to persons as a result of such activities. Court used Section 7 to say that because F used the firm to transfer and hide assets and even though they were dishonest, they were carried out in the ordinary business of the firm and so Ks estate was held liable with F.

Indemnification- When a partner is found liable, they are liable for the full amount- Liability is independent of any right of the partner to seek indemnification or contribution from the other

partners. Underlying Values or policy

- (1) Reliance: Persons dealing with a business may rely on those involved in the business to satisfy obligations undertaken in connection with the business. Also when it appears that both partners have

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sufficient assets to pay for product or that someone with substantive assets stands behind the store, a 3P may rely on that

- (2) Unjust Enrichment: A basis for finding a person to be a partner where they receive a share of the profits. If you share the profits, must also bear the burden (Grace v Smith).

- (3) Least Cost Avoidance: (a) the persons involved in the business/partnership is in a better position to assess the risk and control for it, the creditors and third parties have a less of an incentive to do this. (b) Lowers overall loss of credit, putting risk on the person better able to assess and control risk lowers overall cost of credit.

Retirement of Partners- Section 19(2): a person who retires from a firm does not cease to be liable for partnership debts or

obligations incurred before his/her retirement. - May be liable for debts incurred after unless steps taken to prevent this- Section 39(1): need notice to persons dealing with firm, otherwise assume all partners, even if retired- Section 39(2): for people who don’t have prior dealings with firm can get notice via Gazette- Section 39(3): liable to those who can show no notice- Section 89(b): failure to register a new registration statement on the retirement of a partner, results in

that person continuing to be considered a partner and therefore liable- “Apparent partner”: in Section 39(1) has been held to mean apparent to those dealing with the firm and

not what was apparent to the whole world or community. - Policy : more costly for those who have already had dealings with a firm to check every time to see if

anyone retired then firm giving notice. - Onus is on the partner to take steps to protect against reliance on the retiring partners still being a partner

by persons dealing with the firm. - Satisfy onus by: (1) provide notice to all those with whom firm has had prior dealings (2) put notice in

Gazette (3) file a revised registration excluding name of retired partner

E. Dissolution of partnerships- Section 34: Assignment by partner of a share- Section 35: Dissolution

o (1)(a)If set term which expireso (1)(b) For a single undertaking, joint ventures o (1)(c) If entered into for undefined term but given notice to cancel, (2) dissolved at the time

notice is given - Section 36: Dissolution by bankruptcy, death, dissolution of partner or charging order.

o (1) With 2 people, dissolvedo (2): With more than 2 people, then can agree to just dissolve with dead, bankrupt person, the

remaining partners continue to exist. Different than other jurisdictions where the whole thing is gone

F. Registration of PartnershipsPA 80.1-87, 90.3-90.5

- Important because it interconnects with sole proprietorship, Section 88. Have to file for registration if it looks as if you’re working with someone else, same thing happens with partnerships

- In general partnerships you have to register so that people know who the partners are - Section 80.1: Definition of Registration statement - Section 81: Duty to file registration statement - Section 82: Timing, registration statement must be filed within 3 months after formation of firm- Section 83: When the firm changes compensation statement, must be changed in registration- Section 84: Allegation in a registration statement can be used as evidence, so that people wanting to sue

can see where the money is

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- Section 85: Rights and liabilities of partners, does not exempt those who are partners but not registered. Section 86: Notice of dissolution, want to get your lawyer to ensure that this has in fact been filed at registrar

- Section 87: Actions don’t have to name all the partners in a writ. A person who wants to sue the partnership can bring an action against all members or one or more and allege they are partners. If they succeed then they are all jointly and severally liable.

- Section 90.3: Search of the register, can search according to the name or partner. Can inspect records, obtain copies

- Section 90.4: misleading statements on offence. If you make misleading statements or omit material facts it is an offence

- Section 90.5: fine is no more than $5,000 anyone other than an individual and no more than $2,000 for an individual

G. Joint Ventures- Section 35(1)(b): deals with partnership joint ventures, the partnership is dissolved after the termination

of the undertaking.- Partnership for a short period of time. People try not to have these without a proper agreement around

them, so they try to use corporations instead - Suggestion in the act that a short partnership can be a joint venture, but be very careful with this.

H. Limited Partnerships

Limited Partnership- Part 3 of the Partnership Act of BC - Need to see where the limited partnership was formed and therefore the laws of that province will apply- Came into use in the 1980s and were commonly used in real estate and film and videogame

development. Generally for capital intensive or high risk business that wanted to use a tax transparent entity. LPs are not seen as a legal personality and therefore the profits and losses of each partner is taxed but the limited partnership itself is not

- This can have both advantages and disadvantages. In the 1980s and again in 2006 many of the tax advantages of LPs were limited and so they are becoming less prevalent

- Purpose : To provide limited personal liability for the passive investors who put money or property and don’t take part in the management of the partnership

o Should be able to invest in a partnership and avoid liability by not participating the business side- Requirements : You have to have at least one general partner who has the liability. They have to pay

the creditors from their personal assets. Must have the words “limited partnership” at the end of name - The most a limited partner can lose is the amount that they contributed to the partnership. That amount

became part of the partnership property and so they lost that, but their personal assets are safe- To have this, you have to file a certificate with the registrar which has to contain certain information like

who has contributed what, who the general partners are, etc.Relationship among partners

- Separate among ownership and control : LPs are usually the major contributors of the capital of the business and in that sense are sometimes referred to as owners. But LP do not control the business, and so this separation puts the LPs at the mercy of managers

- Have mandatory provisions that protects limited partners from being taken advantage of by the managers of the limited business

o Section 56: General partners cannot do an act that makes it impossible to carry a judgment against the partnership or consent to judgment against the partnership

- Right to inspect books and disclosure : have default rights under section 58(1)(a) and (b), but if rights are waived or modified for a general partner, then also for LP

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- Assignment of LP interests: cannot assign without the consent of other partners, S. 66. Section 51(4)(b) if assignment permitted then the certificate must set out provisions concerning the right to make such an assignment

- Restriction of the admission of additional partners : Section 56(d) provides that a general partner has no authority to admit a person as a general partner or limited partner unless the right to do so has been given in the certificate. Section 61 is share of profits

Reasons for using limited partnerships- Taxation of partnership is such that any losses incurred during start up can be passed on to the limited

partners and the can make use of these losses against their other sources of income.

PA sections 48 (“certificate”); 49, 50, 51, 53, 56, 57, 59, 64, 77, Statutory requirements of LP

- Section 48: Definition of Certificate- Section 49: Application of this part, except to the extent that Part 3 is inconsistent with Part 1 and 2,

Parts 1 and 2 apply. Only to the extent that Part 3 changes the rules for general partnerships, does this section apply.

o The default rules don’t apply because an extensive agreement that everyone agrees on o Section 22 in principle applies to LPs as well, so the courts will say that the real relationship in

LP is different, may be hard to get the court to say this because unless they are contracted out of or inconsistent with part 3, they are moot

- Section 50: can form LP to carry on any business that a general partnership can carry on, basically anything that is lawful.

o (1) At least one general partner and (2) at least one limited partner. Corporation can be a partner in either capacity

- Section 51: all the general partners have to sign the partnership agreement, partnership is not formed until the certificate is filed

o When you become a LP you will want to see a copy of the certificate to make sure that it is filed, otherwise fully liable

o Need a business name, address of the LP, names of partners, the term for which LP exists (need a date for dissolution where someone is keeping track) and a statement of how much each partner contributed

o The certificate may state the name and the address of the LP, but you don’t have to anymore. o You need a written agreement so that all the factors can be covered in the certificate

- Filing a certificate is necessary but not sufficient to create a partnership.o The court said that you have to be carrying on a business with an intention in common.

- Section 53: Must have the name end with Limited Partnership in full. Provides the world notice that this is a limited liability. Corporate name must not appear in the firm name, LP whose surname is corporate name, can be liable as a GP

- Section 55: limited partner is not to contribute services to partnership business- Section 56: The rights of general partners, the same as in a general partnership except: without the

written consent of LP unanimously or by ratification a GP has no authority to do any of the following:o (a) Make it impossible to carry on the business, like selling the assetso (b) Consent to judgmento (c) Take off with the limited partnership propertyo (d) No authority to admit a person as GP or LP unless right to do so is given in certificate o (e) To continue business without consent o The third party has to have actual knowledge of the authority to the partner. Part 3 says

constructive knowledge is sufficient - Section 57: If they take part in the management of the LP, they can be liable, lose their limited liability

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- Section 59: Share of profits, no return of capital to partners is permitted if after the return, the partnership would be insolvent

- Section 64: not liable as a LP unless they take part in the management of the business o Main provision that says you’re not liable and it is inconsistent with section 7 and 14 of Part 2

which says that every partner is liableo It is a provision that overrides section 7 and 14 from part 2

- Section 77: Don’t have to name each of the LP, may change from day to day

The Queen v. Robinson Trust (S. 64) – LPs are by nature partners, even though no management role- Stands for the principle that LPs are by nature partners even though they don’t take part in managing.

They are contributing to the carrying on of business even though not devoting time, labor or expertise- Facts : RT was one of the limited partners in the trust. A trust is a relationship and not legal entity, the

trustees hold legal title to the assets and they have the power to invest the assets on behalf of the beneficiary. Acting on behalf of the trust, they invested some of the assets in the Nursing home partnership; the trust document said they could invest in limited partnerships. The nursing home had two general partners, both of which were corporations.

o The two corporations could be liable to all the debts as they were in charge of managing the operations of the nursing home.

o The trust simply contributed money and took its share of profitso Tax issue was whether the trust was earning income from carrying on a property or from other

sources o To decide this the court had to look at the nature of a limited partner.

- TJ: the trust did not carry on business only the LP carried on business- CA: all the partners of a LP both general and limited are carrying on a business; they have divided up

the roles. Even if their only role is to contribute funds still contributing to the business. o Need to look at statutory content, looked at Manitoba equivalent of Section 64, as long as they

don’t take part in the management of the partnerships not liableo Both GP and LP are both partners carrying on a business in common. But the LP have waived

their right to take part in the management o All partners in a partnership carry on a business

Essential Points- Have to have a certificate filed, one GP and one LP- LP only liable up to the amount of capital or property they have contributed or agreed to contribute- Part 1 and 2 only apply if they are not inconsistent with part 3- Possibility that if the agreement is silent, the default rules from the first 2 parts apply

I. Limited Liability Partnerships (“LLPs”)- Part 6 of the Partnership Act- Ontario was the first province, not until 2005 that they came to BC- Background: Came into being by lobbying by large accounting firms which were GPs who wanted to

limit the personal liability of the partners. When the investors lost their investments, they looked to the auditing and consulting firms to get back these losses. They would sue the accounting firms for negligence and when that money was done, they would go after the personal assets.

o The partners who were not involved in the faulty audits would also be liable. The companies were concealing the frauds from their auditors, and so they were audited as well.

o If there is negligence and the accounting firm is liable, the creditors recover from the liability of the firm, then the partnership itself and lastly the personal assets, this is in a GP

- In LLP, if you are a partner your only personally liable for your own personal negligence or the negligence of the people you are supervising. The partnership is primarily liable and if there is no hard assets then the partners will be personally liable, but only those who were actually negligent.

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- Test: You are personally liable for your own negligence or if you are aware of the negligence of someone else and didn’t stop it. This is actual knowledge not should have known, different from Ontario or Alberta.

Structure in Ontario and Alberta- Partial liability shield : LLP act provides that partners are not liable for the malpractice of fellow partners

or employees unless they were directly supervising the activity. Also partners are not liable to indemnify their fellow partners who had been found liable for malpractice.

- Business name registration : LLP act also provides that a LLP is not allowed to carry on business unless the registered business name contains the words LLP

Structure in BC- Full shield liability : S. 104(1) provides that a partner in a LLP is not personally liable for a partnership

obligation merely because the person is a partner. A person in LLP is not personally liable for an obligation under an agreement between the partnership and another person nor is a partner personally liable to the partnership or another partner for an obligation of the partnership

o Partner is not relieved from liability where he/she knew of the negligent act or omission of a fellow partner and did not take actions a reasonable person would have taken to prevent it.

- Full shield liability protection subject to partnership agreement : opening words of section 104 allow the partners to opt out of the full shield liability. May want to do this for tax purposes, given the different tax treatments, the partners may want to restrict the shield to a partial liability shield. Full liability protection is different from general partners with a partial shield liability protection for tax.

LLP v LP- Full shield liability under LLP regime gives partners equivalent protection from liability that limited

partners have in a LP but with the advantage that the partners in LLP can take advantage in management of the partnership business without becoming personally liable for partnership debts.

- Registration necessary if not then treated as a general partnership, also need the cautionary suffix.

PA sections 94 – 98; 100, 104-107, 129.

- Section 94: Definitionso "extraprovincial limited liability partnership" means a foreign partnership that is registered as an extraprovincial

limited liability partnership under this Part or under regulations made in accordance with Part 7;o "foreign partnership" means a partnership that has a governing jurisdiction other than British Columbia;o "general partnership" means a partnership that (a) has British Columbia as its governing jurisdiction, and (b) is

neither a limited partnership nor a limited liability partnership;o "governing jurisdiction" means, in relation to a partnership, the jurisdiction to which the interpretation of the

partnership agreement is subject;o "limited liability partnership" means a partnership registered as a limited liability partnership under this Part;o "partnership" includes "firm" unless the context otherwise requires;o "partnership obligation" means any debt, obligation or liability of a partnership, other than debts, obligations or

liabilities of partners as among themselves or as among themselves and the partnership;o "profession" means a profession or occupation that is governed or regulated by (a) an Act, and (b) a body created

by or under an Act;o "professional partnership" means a partnership through which one or more persons carry on the practice of a

profession;o "register" means the information that is maintained by the registrar from records filed or registered with the

registrar;o "registered general partnership" means a general partnership in relation to which a registration statement is filed

under Part 4.- Partnership Obligations: Need to look at the business obligations, which includes the liability for

negligence - Section 95: Application of the section, subject to subsection 2, parts 1,2,4 and 5 apply to LLP

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o In principle they are partnerships except to the extent excluded by subsection 2, critical that sections 11 and 14 don’t apply to LLP

o Section 11 is the joint and several liability of partnership to firm debts, and Section 14 is non-contractual provisions like negligence etc.

o Section 129(5): if your registration for the LLP is cancelled for some reason then you become a GP and Section 14 and 11 apply

o Foreign partnerships become a non-limited liability partnership if not properly registered. - Section 96: The act sets out what you have to file, what information you have to produce- Section 97: If you’re a professional partnership, the profession has to allow you be carried on through an

LLP. Accountants and Lawyers have this permission - Section 98: Process or Registration- Section 100: You have to have LLP or SLR written at the end of the name. You have to indicate your

status in the name of the business which acts as notice to the people dealing with the partners- Section 104 – very important: Basic rule is that a partner in a LLP is not liable merely because they are

a partner. This is very different from GP where every partner is personally liable.o The partnership property is still available, exception is with the personal assets. o (1) Except as provided in this Part, in another Act or in a partnership agreement, a partner in a

limited liability partnership (a) is not personally liable for a partnership obligation merely because that person is a partner, (b) is not personally liable for an obligation under an agreement between the partnership and another person, and (c) is not personally liable to the partnership or another partner for an obligation to which paragraph (a) or (b) applies.

In general partnership if you have paid a judgment for the partnership, all the other partners have to indemnify you. In LLP (c) says that you don’t have to indemnify them where they have met a partnership liability

o (2) Subsection (1) does not relieve a partner in a limited liability partnership from personal liability (a) for the partner's own negligent or wrongful act or omission, or (b) for the negligent or wrongful act or omission of another partner or an employee of the partnership if the partner seeking relief (i)  knew of the act or omission, and (ii) did not take the actions that a reasonable person would take to prevent it.

There has to be actual knowledge and failure to prevent ito (3) Subsection (1) does not protect a partner's interest in the partnership property from claims

against the partnership respecting a partnership obligation.- Section 105: Partners are subject to the same obligations as corporations. Directors are not generally

liable for corporations and therefore this provision doesn’t make sense. You can’t hide behind the corporation if you’re liable under subsection 3. Don’t think that by making your corporation a LLP you are getting any extra protection from your own liabilities caused by negligence.

o So far there have been no case on LLP in BC o S.105(1): doesn’t tell you where to look

- Need to focus on the protection provided by 104 and you lose it if you lose your registration - Section 106: If you’re a general partnership converting to LLP, you cannot wipe out your liability from

the past, not retroactive- Section 107: Must notify all the clients that we are converting to a LLP. May see these in newspapers,

but less general partners converting to LLP over forming LLPs - Section 129: Where the registrar might cancel registration you go back to GP and your limited liability

under 104 ceases to protect youo You are still protected even if the performance goes on beyond the cancellation

V. CORPORATIONS: THE BASICS

A. Introduction to Corporations21

i. The Nature of the CorporationGeneral Structure

- Comes into existence through the issuing of a certificate by a government body, becomes a legal personality.

- Shareholders: Equity claimants, invest for a return. Possess claims or rights in terms of voting rights and divided rights and rights on liquidation. Their liability is limited to the amount of investment. Don’t own the corporation, just shares in it.

o Shares: a bundle of rights which are specified in the corporate document. - Corporation : a separate personality and has perpetual existence- Directors: appoint officers to manage the corporation. They make major decisions on corporate policy

(could consist of just one director)o They shall manage or supervise the management of the business and shares of the corporation.

They have the obligation to meet and make decisions about the business that the corporation will carry on and its affairs and relationships with other parties

o The board of directors has managerial control, shareholders have voted them into to do thiso They appoint or delegate to officers of the corporations, CEO and president, etc. to do these

tasks. They have specific roles delegated to them by the board. - Officers : manage the corporation, hire others to assist in the management and carrying on of the

business of the corporation. o Officers are employees under the provincial employment laws.

- Board of directors, elected by shareholders, appoint officers to manage the day to day operations of the corporations. Officers engage others to assist in carrying out managerial tasks or in otherwise carrying on the business.

- There is only one statutory framework which covers a large variety of businesses. A corporation can be one person who owns all the shares or have many partners, CBCA applies to all

- Stakeholders in corporate governance : people in the public who have a stake in the corporations. People need to assure themselves that the corporations are being properly governed and regulated.

o Only the internal tasks are governed by corporate laws. The regulation of business activity, what you can do in a jurisdiction is not related to the status of the corporation.

- No precise structure that every corporation follows but some features of the corporate form that all organizations share

- Equity interests are divided into shares and the holder of the shares are referred to as shareholders

3 basic rights provided in shares- (1) Right to vote: the right to elect directors who will manage, or supervise the management of

corporations.o Shareholders meet once a year to elect a board, need more than 50% of vote to elect the board of

directors you want. - (2) Right to Profits, dividends: right to receive distributions out of the profits of the corporations when

the directors chose to provide such a distribution by declaring a dividend. Obtain profits based on the number of shares you hold

- (3) Rights to Liquidations: right to receive what remains when the assets of the corporation are sold and liabilities are paid off

- Key features of a corporate form:o Limited Liability: only to the amount of investment o Separate Personality: Treated as a persono Perpetual Existence: does not just end because a shareholder has died or sold his/her shares to

another person

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ii. History of Canadian Business Corporations Law

- Courts analogized corporations to partnerships in the past when there was not a lot of law on it- We know a lot about the rights and obligations of shareholders, etc. because our statue is long and

detailed and has been litigated a lot- There were 2 types of corporations imported from the British System

o Letters Patent: only in PEI or Quebec if they still exist, they came into existence by the exercise of the Crown Prerogative

o Memorandum Style Companies: derived from British law, BC is the last jurisdiction to have this type of company. Mostly just different terminology. In BC we have:

“Memorandum of Incorporation”: short document which is filed electronically, this is company this is name

“Article of Incorporation”: this is how we carry on our business, that is how we get directors, this is how they meet, etc.

o Feds (CBCA) and almost all the other provinces have a “pure registration system”. Articles of Incorporation: this is similar to the Memorandum of incorporation in BC By-laws: this is equivalent to the articles of incorporations in BC

o The English system is very similar to BC. o In BC you call them “members” of a company where Feds call it “shareholders” because they

wanted to move away from the notion that corporations are similar to partnerships. - In BC non-profits and charities are under the Societies Act which is an entirely different act from regular

act.

iii. Constitutional jurisdiction

Constitution Act 92(11) and 91- Section 92(1): Legislatures in each province may make laws in relation to the incorporation of

companies with provincial objectso “With provincial objects” is not seen as a restriction on the capacity of provincially incorporated

companies. Generally any restriction of this has been ignored- Section 91 : Federal government is given power to make laws in relation to all matters not coming within

the classes of subjects by this act assigned exclusively to the Legislatures of the Province. - Federal Power is under POGG, said to include incorporation, Citizens case

o Federal corporations can carry on almost any business, some exceptions but very few. o Allows the incorporation of companies for any purpose, not just federally regulated areas.

Bonanza Creek v. The King – Scope of Provincial Power, can give power to carry on business elsewhere- What powers can a provincial statue clothe a provincially incorporated company with- Facts: The company is incorporated under the Ontario statute and has operations in the Yukon, so they

have been granted a license to work there. Then the federal government refused to grant additional licenses and Bonanza sued them to enforce its contractual rights to the additional mining licenses

- Argument: the feds argued that since Bonanza incorporated under the Ontario statute, they have no capacity to operate outside Ontario because the Ontario legislation only had power to incorporate companies with provincial objects.

- Issue: The federal government is challenging some of the licenses. Saying that you are an Ontario company and so don’t have to power to carry on business in Yukon

- Decision : Provincially incorporated companies have the capacity to carry on the business anywhere. The provincial incorporation statute can give them the capacity to work in the province and outside but the host jurisdiction must grant them the right to carry on business there. Capacity under provincial law and rights under the Yukon legislation

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o A company can be incorporated under a provincial statute and still carry on a business not only in that province, but in any other province as long as the other jurisdiction grants the company the right to carry on business in its jurisdiction

Scope of Federal PowerCitizens Insurance v Parsons

- The federal government had a broader power to incorporate companies under its power to incorporate companies in relation to all matters not coming within the classes of subjects by this Act assigned exclusively to the Legislatures of the Provinces.

John Deere v Wharton and John Deere v Duck- Facts in Wharton : Argued that the federally incorporated John Deere plow company could not be

granted a business license in BC because its name was confusingly similar to the name of the company which he was the sole shareholder and which was incorporated in BC

o Federal companies have the power and right to carry on business in Canada and the registrar in any province cannot refuse them registration

- Facts in Duck : Duck purchased a tractor from the federally incorporated company and didn’t pay, he resisted the claim on the basis that the BC legislation for licensing of companies incorporated outside BC provided that a company incorporate outside BC that was not registered pursuant to the legislation could not maintain an action in BC.

- Decision : Since federal governments residual power to incorporate companies was a power to incorporate companies with something more than just provincial objects, a federally incorporated company had the power and right to operate throughout the country

o If provincial registrar exercised power to prevent a company from registering to carry on business in BC it would be contrary to the constitutional right of federally incorporated company to carry on business throughout the country

o By doing so would deprive the dominion company of its status and power

Great West Saddlery Co v The King- Held that legislation prohibiting a company from maintaining an action in the province unless it had

obtained a license to carry on business in the province could not be applied to a federal company - Federal companies can work in the province even though not registered

Points about scope- (1) Not necessary for the validity of a federal incorporation that the company carry on business in more

than one province- (2) Federal powers of incorporation are not limited to companies incorporated for purposes that would

fall within enumerated federal powers under section 91- This does not mean that the companies are immune from the system, they have to pay provincial income

tax, have to get a business license - Provincial laws of general application apply to federal companies as well

AG Canada v AG Manitoba- Federally incorporated companies could not be refused a license on the basis that the sale of shares was

necessary to finance a company and that without financing from a sale of shares a company could not even being to carry on business.

Canadian Indemnity Co. v. AGBC - Facts : ICBC is a Crown Corporation incorporated by a Provincial statue and they have a monopoly over

car insurance. When this universal compulsory car insurance system was brought in, all the other

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companies lost their business in BC. Some of them were federally incorporated and they stated that you have destroyed us as corporations

- Test: Was the creation of ICBC sterilizing or incapacitating the federal company as a company. Provinces cannot eliminate the essential capacities of federal companies

- Decision : Provincial legislation may create laws under section 92 and in so doing may completely paralyze all activities of a federal company so long as it doesn’t encroach on the power and status of the federal law. The law applied to all companies or legal persons no matter where they were incorporated

o Cannot adjust the federal company like abolish all the shareholderso Cannot encroach on the federal corporate law in a way that undermines the status of the

corporation as a corporation but can prevent it from carrying on its business if it is a law of general application.

Multiple Access v. McCutcheon - What happens when both federal and provincial laws apply- This is generally the issue in securities laws where you have overlap in rules - Issue: Can you have a provincial securities regulator applying the same laws as federal corporate law

and have both laws apply. Are they both valid and if so which one takes precedence- Facts : Ontario Security regulator prohibited insider trading. The federal corporations act had very

similar rules for insider trading.- Since there were two sets of rules, the companies were saying that either the federal or provincial

legislation were ultra vires. If both were valid then the provincial law had to be suspended in terms of provincially incorporated entities, so had to move under the federal

- Decision: both sets of law were valid; the federal provisions were under POGG for federal companies. The provincial ones were a valid exercise of property and civil rights and they did not impair the powers of the federal company. They did not restrict the powers of the federal company

o The provincial law duplicates but does not contradict, so you can abide by both o This means that the both sets of laws can continue to work concurrently.

- The provincial registrars cannot refuse registration to a federal company.

Implications of Constitutional Position- (1) both the provincial and federal government can pass valid legislation for the incorporation of

companies- (2) a corporation incorporated under a provincial statute can carry on business throughout the rest of the

country as long as the other provinces permit it to do so- (3) a federally incorporated company can operate throughout the country or in one or any number of

provinces.

Extra-provincial registration: BC BCA sections 375-378 and 398 - A company incorporated under Provincial law does not have to register federally. They only have to

incorporate in other provinces if they want to work there- Corporations outside of Canada have to register in the provinces they are carrying their business but do

not have to register federally. The theory is that if you are in Canada then you are in the province- The companies need to be identifiable and there has to be a mechanism to obtain the basic information

about them. Need transparency, a registry where you can find things

Section 375 - Foreign entities required to be registered.- (1) A foreign entity must register as an extraprovincial company in accordance with this Act within 2

months after the foreign entity begins to carry on business in British Columbia.

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- (2) For the purposes of this Act and subject to subsection (3), a foreign entity is deemed to carry on business in British Columbia if

o (a) its name, or any name under which it carries on business, is listed in a telephone directory (i) for any part of British Columbia, and (ii) in which an address or telephone number in British Columbia is given for the foreign entity,

o (b) its name, or any name under which it carries on business, appears or is announced in any advertisement in which an address or telephone number in British Columbia is given for the foreign entity,

o (c) it has, in British Columbia, (i) a resident agent, or (ii) a warehouse, office or place of business, or

o (d) it otherwise carries on business in British Columbia.- (3) A foreign entity does not carry on business in British Columbia

o (a) if it is a bank,o (b) if its only business in British Columbia is constructing and operating a railway, oro (c) merely because it has an interest as a limited partner in a limited partnership carrying on

business in British Columbia.- (4) A foreign entity need not be registered under this Act or comply with this Part other than subsection

(5) of this section, and may carry on business in British Columbia as if it were registered under this Act, if

o (a) the principal business of the foreign entity consists of the operation of one or more ships, ando (b) the foreign entity does not maintain in British Columbia a warehouse, office or place of

business under its own control or under the control of a person on behalf of the foreign entity.- (6) Sections 384 and 385 apply to a foreign entity referred to in subsection (4) as if it were an

extraprovincial company.S. 376 - Application for registration.

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

o (a) reserve its name or an assumed name under section 22 or 26, as the case may be,o (b) appoint one or more attorneys if required under section 386, ando (c) submit to the registrar for filing (i) a registration statement, and (ii) any other records the

registrar may require.- (2) Subsection (1) (a) of this section does not apply to a federal corporation.

o This reiterates the John Deere ruling, federal companies have the right to keep their namesS. 377 – Registration

- (1) After a foreign entity complies with section 376 to the satisfaction of the registrar, the registrar must, if the foreign entity is a federal corporation, and may, in any other case,

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

S. 378 - Effect of registration. – corporate register is conclusive evidence that the entity is registered- (1) Whether or not the requirements precedent and incidental to registration of a foreign entity as an

extraprovincial company have been complied with, a notation in the corporate register that a foreign entity has been registered as an extraprovincial company is conclusive evidence for the purposes of this Act and for all other purposes that the foreign entity has been duly registered as an extraprovincial company under this Part on the date and time shown in the corporate register.

- (2) Subject to the provisions of this Act, to the laws of British Columbia and to the laws of any other jurisdiction that are or may be applicable to it, an extraprovincial company may, for the purpose of carrying on business in British Columbia, exercise in British Columbia the powers contained in or permitted by its charter or similar record.

o Once a foreign entity is registered, it becomes an extraprovincial company and that is its license to carry on business

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- (3) Registration of a foreign entity as an extraprovincial company does not entitle the foreign entity to do either of the following:

o (a) carry on any business or exercise any power that its charter or similar record restricts it from carrying on or exercising;

o (b) exercise any of its powers in a manner inconsistent with those restrictions in its charter or similar record.

o If you are restricted under the constitutional document, they you don’t get more power by simply registering in BC.

- (4) No act of a foreign entity that carries on business in British Columbia, including a transfer of property, rights or interests to it or by it, is invalid merely because

o (a) the act contravenes subsection (3), oro (b) the foreign entity was not, at the time of that act, registered as an extraprovincial company.o Why register, when the company is seeking capital the person lending will want a statement

which says that all the law and rules have been complied with S. 398 - Lieutenant Governor in Council may cancel registration of extraprovincial companies.

- (1) The Lieutenant Governor in Council may cancel the registration of a foreign entity as an extraprovincial company.

- (2) The Lieutenant Governor in Council may restore the registration of a foreign entity that has had its registration as an extraprovincial company cancelled.

- (3) This section does not apply to a federal corporation.- Never happens, but they cannot cancel a federal registration

iv. Basic concepts and vocabulary: Section 2(1) CBCA definitions.- Exclude: “call”, “going private transaction”, “put”, “squeeze-out transaction”- Corporation means a CBCA corporation, incorporated under this act- Body corporate : a company or any other incorporation, that is incorporate under a different jurisdiction,

like a provincial corporation. - Distributing Corporations : technical term, one that is governed by the securities law, can be contrasted

with private corporations that doesn’t have its shares listed in the stock exchange.

v. CBCA 2(2) – (6): affiliates, control, holding and subsidiary corporations.

- Section 2(2): definition of affiliated body corporates. Two body corporates are affiliated where one is the subsidiary of the other or both are subsidiaries of the same body corporate.

- Section 2(3): a person has control if they possess more than 50% of the votes to elect directors and where if exercised they can elect a majority of directors

- Section 2(4): a body corporate is the holding body corporate of another if that other body corporate is its subsidiary

- Section 2(5): a body corporate is a subsidiary if it is controlled but the other body corporate or other bodies also controlled by that one.

- Section 2(6): Exemption, if a corporation applies then the Director may determine that the corporation was not a distrusting corporation if this is not prejudicial to the public.

B. Incorporation and its consequences

Steps in the incorporation process- Section 5 says that one or more individuals or bodies many incorporate, must be over 18 and not

bankrupt and of sound mind- Must sign articles of incorporation and comply with Section 7- “D” director is the administration of the CBCA and director with “d” means director of corporations

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- Names cannot be similar or confused with others- Actual steps:- (1) Filing articles of incorporation (S 5,6 and Form 1)- (2) Filing a notice of the registered office (S. 7, 19, Form 3)- (3) Filing a notice of directors (S. 7, 106, Form 6)- (4) Paying the prescribed fee (Reg 97 and Sched 5)- (5) If the corporation is to have a name other than #, filing a NUANA name status report

Issuance of certificate of incorporation- On receipt of documents, and upon assessment that documents meet requirements of Act including

acceptability of name, the Director issues a certificate of incorporation (S.8 and 12(1))- Section 9 states that corporations come into existence on the date shown in the certificate- Section 6 sets out the articles which are the primary constitutional document of the corporation

Post-Incorporation Steps- Section 104 says a meeting of the directors must be held where they make bylaws, adopt forms of

security certificates, authorize issuance of shares, appoint officers, make banking arrangements and transact any other business.

- Directors have the power to borrow on behalf of the corporation. So can delegate this power- May want to pass by-law restricting either the process that must be followed or the powers of the

directors to borrowWhy incorporate - 7 advantages

- (1) Corporations provide limited liability for its shareholders against the joint and several liability of partners.

- (2) Corporation provides the perpetual succession of a body corporate contrasting with indefinite tenure of partnership.

- (3) Corporation allows for ease of transfer of shares as against difficult and inconvenience of terminating partnership to permit changes in persons.

- (4) Individual partners may bind the firm but a shareholder alone cannot obligate the body corporate. - (5) A shareholder can contract with, sue a body corporate, a partner cannot sue or contract with his firm- (6) Facilities for a body corporate to secure additional capital are not possessed by a partnership- (7) Tax advantages may accrue to the sole proprietor or small partnership which coverts for a corporate

form. Features of Corporation

- (1) Limited Liabilityo Sometimes partners or shareholders have to provide a personal guarantee for a lease or a loan

which reverse the limited liability obtained by incorporationo May only protect from tort claims of insignificant amount of trade credit. But the court may

pierce the corporate veil- (2) Perpetual Succession: One may be able to anticipate potential future succession problems through

care in the drafting of contractual terms on assignment or enforcement - (3) Ease of transfer of shares: Can transfer unless restrictions placed on them. It is common in closely

held corporations to have a restriction on the transfer of shares that is often identical to the kinds of restrictions that are often put on the transfer of partnership interests

- (4) Shareholders can contract with a corporation. This is because a corporation is a separate person from the shareholders of the corporation, a shareholder can enter into a contract with the corporation

- (5) Facilities for a body corporate to secure additional capital: Debentures are just evidence of indebtness and they are not instruments that can be sold by corporations

CBCA section 2(1)- “articles”: the original or restated articles of incorporation, articles of amendment, etc. - “Director”: means the Director appointed under section 260

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- “director”: means a person occupying the position of director by whatever name called and directors and board of directors includes a single director

- “officer”: an individual appointed as an officer under Section 121, the chairperson of the board of directors, the president, a vice-president, the secretary, the treasurer, the comptroller, the general counsel, a general manager, a managing director, of a corporation or any other individual who performs functions for a corporation similar to those normally performed by an individual occupying any of those offices.

Section 5 – requirements of corporation - Incorporator: someone that signs articles of incorporation- One or more individuals not one of who is (a) under 18, (b) not of unsound mind or (c) has a status of

bankrupt corporation - Section 5(2): One corporation can incorporate another corporation by signing articles of incorporation

Section 6 – requirements of articles- The articles of incorporation, 6 things that must be set out

o (a) nameo (b) province where registered office iso (c) classes of shares and the rights attached to eacho (d) if restriction on transfer, must be statedo (e) number of directors, max and mino (f) any restrictions on the business

- (2) can have additional provisions- (3) if special majorities required, must state- (4) cannot require a greater majority then a simple majority to remove a director

Section 7- Delivery of articles of incorporation, must be sent to Director as required by S 19 and 106

Section 8- Once all documents are in order, the Director shall issue a certificate of incorporation. - (2)You are entitled to obtain this unless you don’t meet the criteria or fill out forms incorrectly - It is stated to be incorporation as a right.

Section 9- Incorporation comes into existence on the date shown on the certificate

Section 10 - Name- (1) must have variation of Ltd. in the name of corporation- (2) may be able to get an exemption from Director- (3) can set out name in French or English- (4) can use alternate name outside Canada- (5) name must be published in legible characters on all documents produced by corporation- (6) can carry out business under another name, as long as it doesn’t have ltd etc. on it. - Name of corporation, can also use numbers because it becomes easier. - You can use a number indefinitely

Section 11- Can reserve a name for 90 days. (2) can also get a designated number assigned

Section 12- (1) certain names are prohibited- (2) if name gets changed inadvertently and ask to have it changed Director may refuse

Section 19(2) - Notice of registered office, have to tell the Director where the registered office of the corporation is

located. Often times this will be a law firm, the corporation will use the offices corporate firmSection 106(1)

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- Notice of directors, when sending articles of incorporation, the incorporators have to send a notice of directors to the Director

Section 263- Requirement to file an annual return, a document which says that we are still carrying on business and

our directors are these and our files have not changed.- Just to show that we are still carrying on business

Section 266- If you pay the fee you can examine the documents required by this act and (2) get copies of any

corporate documents. - This is all done online now. Any person who wants to know who they are dealing with can get all the

information and documents.

Form 1 – Articles of incorporationForm 3 – Change of registered officeForm 6 – Changes Regarding directorsForm 22 – Annual Return

Section 102 – Directors Powers to Manage- (1) the directors shall manage or supervise the management of the business and affairs of the corporation

(2) number of directors - This is very important because it tells you who is in charge or the corporations. - The directors have the ultimate authority and they essentially decide this via consensus and if something

had to go to a vote it would be the majority of directors S. 136 BC BCA

- (1) The same provision as 102 in CBCA they use must and not shall

- (2) Without limiting section 146, a limitation or restriction on the powers or functions of the directors is not effective against a person who does not have knowledge of the limitation or restriction.

S. 103 – Bylaws- The by-laws, set out the internal workings or the organization. They are not sent to the Director, so not

available to public. But they do have to be kept at the registered office of the corporation and some people have access to them

- Since no set forms for the by-laws they are much more flexible, but generally repetitive of CBCA or articles. Also very procedural rather than structural, like who has signing authority, where is corporate seal kept, who chairs the corporate meetings, what subcommittees will exists, what directors will be on them.

- (1) The by-laws are adopted by the directors who can make resolutions to make, amend, or repeal any bylaws in relation to the regulation of the business or the affairs of the corporation

o Adopted at first director meeting, then submitted to first shareholder meeting which has to occur within 18 months

- (2) They must have shareholder approval. What will happen is that there is a directors meeting and they will resolve the attached by-laws.

- (3) They are effective from the day a resolution is made until it is confirmed or rejected by the shareholders

- (4) If a by-law is rejected by shareholders and the directors make a subsequent resolution of the same thing it is not effective until it has been confirmed by the shareholders.

- (5) A shareholder who is entitled to vote at an annual meeting can make a proposal to make, amend or repeal a bylaw.

- Ordinary resolution : simple majority of the shareholders who vote. The by-laws are brought to the shareholders and if they are not accepted by them, then the by-laws are not effective.

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o They have to be confirmed or rejected by the shareholders in their next meeting. If it is not submitted to them then it is said to fall through

S. 104 - Organizational Meeting- How to make the company start running. 104(1), after the certificate is issued, the directors who are

named will meet and they will make by-laws adopt forms, authorize the issue of securities, appoint officers, appoint auditor, make banking arrangements, transact any other business

- Authorize the issue of securities: they are essentially shares and debt obligations of the corporation. When the act talks about securities, for our purposes it is shares.

- Every corporation has to have an auditor, ensures the shares are in order.

S. 105 - Qualifications of Directors- (1) Disqualified from being a director if you are less than 18 years old, unsound mind, not an individual,

bankrupt status- (2) Not required to hold shares of a corporation- (3) Residency, described below

S. 124 BC BCA- Persons disqualified as directors - Same things that disqualify you (under 18, bankrupt, unsound mind), except you cannot have been in or

out of British Columbia of an offence in connection with the promotion, formation or management of a corporation or unincorporated business, or of an offence involving fraud unless 5 years have lapsed since imprisonment, fine, etc.

S. 106(1) - Notice of Directors- When incorporating and sending in articles of incorporation, the incorporators must send a notice of

directors to the Director

S. 105(3): residence of directors- There is a requirement for 25% resident Canadian or at least one if less than 4 directors, which is a

defined term in Section 2 as a Canadian citizen- Can only be a resident Canadian director if you’re a permanent resident who has been living in Canada

for 1 year.- This is very restrictive provision, for people who don’t want citizenship it is discriminatory because if

they are a permanent resident then may have to obtain a director who is a citizen.

S. 2(1) “Resident Canadian” - Means an individual who is a Canadian Citizen ordinarily resident in Canada, a citizen not resident in

Canada but a member of a prescribed class of persons, or a permanent resident and ordinarily resident in Canada except a permanent resident who has been ordinarily resident in Canada for more than a year after the time at which he or she first became eligible to apply for Canadian citizenship

Regulations 13 - Classes of persons who are prescribed in the definition of resident Canadian: - (a) If you are an employee of the government who has to live outside the country due to employment,

like members of the diplomatic service or Canadian’s forces living abroad- (b) People who are Canadian citizen who are working for companies controlled by Canadian citizens

and their job is to work abroad. - (c) Students who are living abroad, outside Canada for less than 10 yrs- (d) Employee of an international organization working abroad, NATO, WHO

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- (e) Persons who were resident Canadians when they turned 60 and have been outside Canada for fewer than 10 consecutive

- Still have to be a Canadian citizen, this is a very demanding provision

S. 121 - Appointment of Officers- After incorporation, the incorporators call the first meeting of the directors and then they set up the

banking and issue the shares and must appoint officers- In 102 we saw that directors shall manage the affairs, and they may delegate some of their duties to full

time employees who are the executive or officers of the corporation. - Under this section, the directors designate what offices the corporation will have and appoint the

officers. This is the default rule for directors. - (a) the directors may designate the offices of the corporation, appoint as officers persons of full capacity,

specify their duties and delegate to them powers to manage the business and affairs of the corporation, except power to do anything referred to in subsection 115(3)

o The officers are the fulltime day to day employees at the highest point of corporate structure and they have to report to the directors, President, VP, managing directors, treasures or chief financial officers, chief executive officer, CEO

- (b) Can be a director and officer at the same time, o A director is supposed to supervise an officer, so how can you criticize them. This is frowned

upon but in small companies they may all be directors, shareholders and employees- (c) You can hold more than one position at a time, can be CEO and chief financial officer

CBCA 2(2) – Affiliated Body Corporate - Subsidiaries and Affiliates- Control: subsection 2(3) a person controls a body corporate if they have more than 50% of the votes to

elect the board of directors.o They get to elect the shareholders, can elect yourself.

- Holding body corporate : in relation to another body corporate if one is the subsidiary of the other, the holding corporation has subsidiaries

o We know that it is a subsidiary if this is controlled by the other body corporate o Look at the chart this is not just CBCA corporations, but also includes them

C. Corporate Personality and the “Corporate Veil”

S. 15 – Capacity of a Corporation- (1) Effect of being incorporated is that it can act as a natural person and carry out business in Canada,

and (3) outside Canada to the extent that the laws permit it - Same as BC law, has power of individual of full capacity and the capacity outside Canada but has to get

permission constitutionally to carry out business outsides BC.

S. 45 – Shareholder Immunity - The shareholders of a corporation are not liable for any liability, act, or default of the corporation except

under certain sections, 38(4), 118(4) and (5), 146(5), 226(4) or (5) o S. 38(4) on a reduction of capital, liable for the money they put in if it’s take on prematurely. o S. 118(4) and 5(a): directors who vote for the paying of a dividend or redeeming shares on assets

so that the corporation can no longer pay its liabilities, may become personally liable to reimburse the corporations for the amounts paid to shareholders.

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

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o Section 226(4) and (5): when a corporation has been dissolve (4) makes a shareholder to whom any property of the corporation was distributed liable to the creditor to the extent of the property distributed. (5) Provides for the action which may be taken by the creditor against the shareholder as a class to ensure the amounts received by them from the corporation are available to pay the creditor’s claim.

- There are certain statutory provisions which protect creditors:o Section 35 and 36 prevent a corporation from repurchasing or redeeming its shares if this action

would make the corporation unable to pay its creditorso Section 42 prohibits a corporation from paying a dividend if after paying the dividend it is unable

to pay its creditorso Section 44 prohibits a corporation from paying a dividend if after paying the dividend it is unable

to pay its creditors.

S. 87 - BC BCA Liability of shareholders - (1) No shareholder of a company is personally liable for the debts, obligations, defaults or acts of the

company except as provided in Part 2.1.- (2) A shareholder is not, in respect of the shares held by that shareholder, personally liable for more than

the lesser ofo (a) the unpaid portion of the issue price for which those shares were issued by the company, ando (b) the unpaid portion of the amount actually agreed to be paid for those shares.

- (3) Money payable by a shareholder to the company under the memorandum or articles is a debt due from the shareholder to the company as if it were a debt due or acknowledged to be due by instrument under seal.

Fundamental Ideas of Corporation (1) Shareholders have limited liability(2) Separate Legal Personality: Moral person with own legal personality(3) Perpetual Existence

- You can have a corporation that exist for a long time, in principle no natural lifespan of corporation, this is different from general partnership where when one person dies the partnership is over, even though BC changed that rule

Separate Legal Entity- Cases recognizing that a company is a separate legal entity:- Saloman: incorporated company has separate legal personality and so shareholders are not personally

liable- Lee: Individual may be sole shareholder, director, officer and employee of a company, separate interests

from a corporation- Macaura: shareholder has no legal or equitable ownership of corporations assets, no insurable interest- Kosmopolous: corporate veil should not be lifted for the benefit of sole shareholder, but they may have

insurable interest - Implication of the nature of companies/corporations

o A shareholder can also be a creditor. It is apparent from Soloman that a shareholder who is also a creditor can rank equally with other creditors for the amount of debt or even ahead of other creditors to the extent of any security held for the debt

o Also a shareholder can be a director, officer and/or an employee of the corporation, Leeo The corporation owns the assets, not the shareholders, Macaura

Corporate Veil- Cases where it has been argued successfully or unsuccessfully that a corporate veil should be lifted- Big Ben: equity will not allow a wrongdoer to sue a company as shield for improper conduct or fraud

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- Gilford Motors: here the company purpose was to try and enable Horne to under a cloak or sham, to engage in business contrary to his contractual obligations

- BG Preco: strong affirmation of Soloman, rejection of US where veil lifted to prevent unfairness. Policy of limiting circumstances where corporate veil may be lifted to decide cases: fraud, improper conduct, case limited to those where a corporation is used to effect of purpose or commit an act which the shareholder could not legally achieve himself

- De Salaberry Realities: (in tax) where proven that a common intention of a group that intent will be imputed to a member of a group. But the view not lifted to impose the tax liability of one corporation on other members. Also in a corporation where shares held by Indian, not exempt from tax because the corporation itself is not Indian.

- Steven Meredith v The Queen: he had companies which he worked under, court found it was an error to disregard the contractual relationship between the companies on the basis that the contracts were made with the companies in order to obtain Meredith’s expertise. The fact that Meredith controlled the company and used it to carry on business did not make the business Meredith’s. The person is separate from the organization and can be an employee, not going to disregard the separate corporate status of the corporation. If the tax courts can find a section of the act which allows them to lift the veil/combine tax attributes for companies can’t do it

- Summary: Courts generally apply Soloman except where a company has been used as an instrument of fraud or to effect a purpose the shareholder could not legally achieve personally and where the company was really the mere agent or alter ego of the shareholder, the courts have been willing to impose liability on the controlling shareholder or otherwise disregard the corporate veil.

-Corporate Veil Language

- Generally used in relation to shareholders, may come up with directors being liable but not correct usage.

- Purpose: To disregard the separate personality of the shareholder from company and eliminate the limited liability that shareholders will generally have.

- Why do we allow corporations to have limited liability? What purpose does this serve? o In closely held corporations this is overruled by contracts and guarantees held by the

shareholderso In larger corporations the shareholders cannot control what is going on, so they will not put their

money up if they will be personally liable. But the big lenders will be looking for assets and security.

Potential Problems- Shareholders may cause company to become indebted to them so when it is about to become insolvent

they put themselves in front of other creditors by taking a security interest - Companies may also make payouts to shareholders when it is insolvent- Also a company may enter into a contract with shareholders that are very unfavourable to other

shareholders or creditors - People might set up companies with very little capital and thereby defeat the interests of creditors who

act in relation of minimum capital- Third parties may be tricked into thinking they are dealing with individual or partnership when in fact it

is a corporation with limited liability- A person may incorporate to avoid potential obligations or restrictions.

Legal Personality CasesSaloman v Saloman – Absent fraud, shareholder/directors not liable

- The fact situation can no longer come up in current time, it has been statutorily overruled in some circumstances, CBCA says we won’t accord shareholders limited liability

- Essence is that it confirms corporation is a separate person in law from its shareholders.

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- Facts : Erin S was a sole proprietorship and his 4 sons worked in the business, he incorporated the company. Under the law at the time, needed 7 shareholders/incorporators who needed to sign the memorandum of association. His 4 sons, a daughter and the husband and wife signed to memorandum and incorporated the company Saloman and Co.

o The company had authorized capital of 40,000 shares with maximum capital of 40,000 pounds. o Erin and two sons elected as the directors. Erin owned all the assets of the leather boot business

and he transferred the assets from himself to the corporation for 20,001 shares, pretty much in charge. Corporation paid him 1000 pounds in cash and gave him a 10,000 debenture (a document which provides evidence of indebtness). Corporation also assumed $8,000 in debt that Erin had from the original boot business.

So he is now a shareholder and a secured creditor. The debenture provided a security in which some assets could be seized in the event of a default in the payment of the interest or the face value of the debenture.

- After this transaction, there was a strike and the market for boots and shoes fell off. Company lost some of the major contracts and if failed. At the time there were creditors who had not been paid.

o Receiver was appointed, everything was sold and those who did not have security were left unpaid

- Issue : Was Erin personally liable. - Trial : Although no fraud involved, the company was unfairly incorporated. It was an agent or an alias

for Erin and so as the principle, Erin had an obligation to pay. Therefore his personal assets would be on the line. He was not just a shareholder, but a person carrying on the business.

- CA : they took a different approach, but found Erin could be held liable to meet the claim of all creditors- HL : Overturned both lower courts. The creditors had full notice that the company was limited and that

they must be taken to have been cognizant of the memo and articles of association. o Here the act has been formally complied with; don’t conflate the shareholders with the company.

Taking advantage of the companies act does not conflate with fraud o Every creditor is allowed to take the best security it can obtain legally. Erin had taken security

for a debt for the assets of the company and just because he was the owner, doesn’t mean he cannot get a security on it.

o The unsecured creditors are entitled to sympathy but since no fraud, cannot go after Erin. They had full notice that they were dealing with a company and not Erin anymore.

o If you’re an unsecured creditor, trade supplier, you have to make sure that you never sell on credit what you cannot afford to lose. Up to you to recognize if you’re not getting paid properly and ask for security. Cannot just assume that you are dealing with the owners of the corporation

o Also makes clear that a single individual can have many relationships in the corporate structure and this does not invalidate the nature of the corporation as a corporate entity.

Lee v Lee’s Air Farming - Shareholder can be director, officer or employee- Facts: Action by Lee’s widow. He had created a farming company and he flew over farms and dropped

fertilizers. He had all shares with another person holding one. He was appointed director for life, he was the board of directors, and chief pilot so employee and obtained a salary for that. He died while flying and widow seeks compensation from workers compensation

- Claim was resisted on the basis that he couldn’t be an employee because he was employing himself - CA : They held that since he was a director, could not be an employee. - Privy Council : Unlike in Throne, where it was a partner, Lee can be a director and employee. Since he is

claiming as chief pilot his being the sole shareholder was different. The corporation is a separate entity, so he can contract with the company even though he controlled that agreement. It is possible to be an employee in your own corporation since the company had a separate legal existence. The fact that he was giving orders to himself is irrelevant

- Implications : a sole shareholder can be employee and managing director, and chief pilot as in this case

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Macaura v Nothern Assurance – Shareholders own shares not assets- Stands for principle that shareholders don’t own the assets, they own shares. Which are a bundle of

rights which the shareholder has- Facts : Here the owner of the land assigned all his timber to a corporation, this company paid for it in

shares and owed him money. He then went out and got insurance in his name for the timber and the wood on the estate.

- The insurance company refused to pay saying that you didn’t have an insurable interest in the property, it belongs to the company so we won’t honour the insurance policy.

- Decision : He did not have an insurable interest in the assets of the company because they belonged to the company. His only interest was in the share of profits and a share of assets when the company is wound up. No legal or equitable interest

- Implications : company is a person with the interest in the assets not the shareholders.

Kosmopoulos – Shareholder and corporation are distinct, no lifting of the veil even if sole shareholder- Strong affirmation of the Salomon principle. - Facts : he started a leather goods store, was originally a sole proprietor and was incorporated later to

protect his personal assets, sole director/shareholder. The landlord of building refused to change the lease to the corporation so it was in his own name. So although he had transferred the assets, he wasn’t running the business as though he was corporation. The insurance was under his name, not company

- There was a fire and he claimed on the insurance - Issue : can you lift the corporate veil and look through the person who is the sole owner, etc. and pretend

that they are one and the same. If you can, then he can recover on the fire insurance. o As a matter of Canadian insurance law, a sole shareholder had an insurable interest in the

corporate assets, as no other person would have the same moral certainty as having a loss if the assets are destroyed.

o As a matter of corporate law, we will not lift the veil. The shareholder and corporation are distinct, we will not conflate them as being the same. Strongly affirm, particularly where there a sole shareholder, that they will be very reluctant to lift the veil at the instance of the sole shareholder. Only done where it is a creditor who has been misled by the way in which the business was carried on.

- Wilson : Only when the result of not lifting the veil is such a huge injustice or unfairness will the courts disregard the corporate entity. Where the corporate form has been misused for fraud or to deceive someone

Corporate Veil CasesBig Ben Hotel – cannot use company as a shield or instrument of fraud

- 1980 decision, equity will not allow wrongdoer to use company as shield or instrument of fraud. - Facts : Man obtained ownership of hotel company, insurer of the hotel cancelled the fire policy after he

got ownership. Then he was unable to get fire insurance for the hotel from another source. There was a group insurance policy from the BC Hotel Association, so he managed to get coverage via this because Big Ben was a member of this association.

o The form asked about prior losses, the owner left this blank and got the insurance o The hotel was destroyed by fire and then the insurer refused to cover him. This is because he

owned a hotel in Langley which also burned down and didn’t claim this, if they knew no coverage

- He argued that Big Ben was a separate entity from the Langley hotel and therefore he had no obligation to disclose the loss of the Langley hotel, not a proper case to lift the veil

- Insurance company said that because he controlled both companies this was material and he admitted that he knew this and that is why he didn’t fill out the pervious loss record.

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- Decision : There was fraud on Kumar’s part and his intent was to mislead. Generally separate legal existence is recognized but in this case the exception applies, will not allow a corporation to reproduce inappropriately the information.

- They cite the Guildford Motor case, which is very old, so not the best precedent. But it is used for the idea of not being allowed to hide behind the veil in such cases.

Guildford Motors v Horne – if you can show corporation used improperly, may lift veil- Facts : the managing director of GM had signed a covenant that after dismissal he would not solicit or

interfere with the customers of GM. Horne was fired and he immediately set up a business in his own name. Then remembered about this covenant and incorporated the company.

- Wife owned 50% of shares and the other half were a former employee of GM he had hired. But all the evidence was that Horne was running the business under sons name

- Issue : Can the court grant an injunction against the company because Horne is actively soliciting the customers

- Decision : The company is the channel through which Horne was carrying out business, although a separate entity, it was used as a device to mask the business of the individual. The corporation was a cloke or a shame that he had coveted not to take part in.

o Very improper, dishonest and fraudulent conduct. - If you can show that the use of the corporation is clearly inappropriate, fraudulent and meant to conceal

reality you will have a hard time resisting the lifting of the veil

BG Preeco v. Bon Street – Veil will not be based simply on unfairness, must be something person could only so via a corporation

- Facts: Preco owned land by Granville Island which it wanted to sell before the expo. Bon Street made an agreement to buy the land but then repudiated the offer and after the closing date made a new offer.

o It kept the property off the market and held it and until the prices had come down - Bond Street was known as a company to have assets, the business card showed the two men as officers

of Bond Street and the letterheads, etc.o At the time they were members of the original Bond Street but before making the offer, they

changed their name back to the numbered name. Then a new Bond Street was incorporated and they were controlled by the same people. Permission was given to the new company to have its name, so this was a shell company with no assets.

o The old company didn’t change its business cards or letterhead, was still calling itself Bond Street even though it had already given up its name. Also hadn’t changed their name in the land registry

- Here there was a lawyer involved, making these name changes. Entering into a contract so that they can get it for a lower offer and relying on the corporate veil

- Decision : TJ and CA found the original Bond Street and officers committed fraud so they were held liable for breach of contract, but uncollectable because the new company has no assets.

- Preco also tries to argue the agent and old company should be held liable for the new company, lift the veil and make the old people pay the damages.

- TJ : Refused to lift the veil, it was a valid transfer and the company had the capacity to contract. Awarded reliance and fraud and the amount was very low. The deposit would have been high if they knew it was a company with no assets.

- CA: Dismissed the appeal and rejects the idea which allows the corporate veil to be lifted in any situation where there was fraud.

o In Kosmo SCC is reaffirming the solidity of the veil. Only when the corporation is used to commit an act which the shareholder couldn’t do themselves. Improper conduct not done in any other way.

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o Preco was deceived in relation to the assets and not the company with which he was contracting. They knew they were dealing with a company and fraud caused him it believe it had assets, the use of a company as a means of avoiding business loss is neither unusual nor a basis for lifting liability.

- Implication : Case stands for a new hardline position, not going to expand the circumstances on mere unfairness. This case has been followed, courts have become very reluctant to lift the veil

Exceptions to Soloman- Courts have often disregarded the corporation as a separate legal person and assigned liability to

individuals piercing the corporate veil- Exceptions have to be made where it would be too flagrantly opposed to justice to apply the principle- Approach: (1) look at the courts reasons (2) look at the types of cases (3) broader policy reasons- Courts appear to be more willing to disregard the corporate entity where the effect of doing so is to link

a parent company with its subsidiary or to link a subsidiary with one or more other subsidiaries through a parent corporation.

Smith Stone and Knight- Facts: the city expropriated land belonging to corporation and shareholders and wanted company. City

said it was separate legal entity - Exception to Soloman arises where the corporation is simply an agent. The test is:- (1) Were the profits treats as profits of the corporation- (2) Were the persons conducting business appointed by the corporation- (3) Was the parent corporation the head and brain of trading venture- (4) Did parent govern the trading venture, decide what should be done and what capital should be

embarked on the venture- (5) Did parent corporation make profits by its skill and direction- (6) was the parent corporation in effectual and constant control

Alberta Gas v MNR- Facts: A company wanted a lower rate on their loan so they incorporated under Alberta Gas- Decision : Court found that it was not sufficient to consider the 6 criteria and when they are all met, to

ignore the separate legal existence of the subsidiary company. One has to ask for what purpose and in what context is the subsidiary being ignored. In certain cases consequences will be drawn despite the legal existence of a separate subsidiary corporation

- Canadian company was trying to argue that it was the same entity as the American subsidiary, lost argument

Gregorio v Intrans Corp- Brought truck from Canadian corporation who got it from American parent- Generally a subsidiary, even wholly owned, will not be found to be the alter ego of its parent unless the

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

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

D. Requirement to display corporate nameCBCA Section 10

- S. 10(1): name of corporation must have ltd or any variation of it- S. 10(5): publication of name, must be on all contracts, invoices, negotiable instruments- S. 10(6): may carry on business under other name if that other name doesn’t contain other than in the

figurative or descriptive sense, either the word or expression ltd. BCA sections 27, 158 and 384

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- Section 27: must display name in legible characters, in a conspicuous way where it carries on business on all notices and official publications, letters, invoices, etc.

- Section 158: personal liability if a company’s name not displayed, doesn’t exist in CBCA- Ssection 384: liability if name of extraprovincial company not displayed

H&D Hobby v. Svatos – Improper use of corporate name, personally liable- Is a shareholder liable if they do not properly use their business name and indicators of corporate status - Section 88 applies to corporations also, cannot use business names that make it seem like they are

dealing with an individual. - Facts : Albert corporations act has section similar to Section 10 of the CBCA. Svatos worked at a store

which was shut down. He decided to open his own hobby shop and asked Madsen to supply him with product for credit. The name Edmonton Hobby was used on all the documents which suggested that he was a sole proprietor, no ltd to show otherwise. The corporation was carried on under a numbered Alberta company. Only document which had a corporate name was the cheques.

o S got into financial difficulties and owed money to M’s business. S can’t pay the amount but since Christmas was coming up wrote a letter to M saying he will pay the amount owed after Christmas if he gives more supply. The letter was under Edmonton Hobby and seemed to be a proposal of how S would make it good, no mention of the numbered company

o M took it as being a personal guarantee and thought he was dealing with S only, thought he was a sole proprietor with a personal promise to pay for the stock. Since no mention of corporation

o S company failed and M was out a lot of money. Had relied on this letter.- M wanted payment from S who said it was the company that owes him the money, no personal liability. - Decision : The court decided using 10(5) of the Alberta act, (similar to CBCA) and said that since you

did not use the corporate name on the documents no indication to M that he was dealing with a corporation. Although he mentioned it in passing, it was not a binding representation.

- Policy : Did not do enough to let people know that they were dealing with a corporation. - Here he was considered to be personally liable. He not only failed to use the name but also favoured one

creditor over the other.

E. Jurisdiction of Incorporation

Corporate Continuance- Can choose under which jurisdiction to incorporate. This can be because the rules are different. - There is no bias in Canada, most jurisdictions are treated the same

o For example in Delaware in the US, the Directors have more power and so many people incorporate there. There is a more pro-management stance

- In each province the lawyers are familiar with the law regarding their own incorporation statue and so tend to incorporate in regards to there

- Most of the time you chose the jurisdiction because the statue makes it easier with carrying out certain actions.

Reasons for choosing CBCA - (1) Name protection: right to use the federal name in all provinces. If you are going to do international

work, Canada will be in the name and this is recognizable to people- (2) No restriction to maintain an action, right to maintain an action in any jurisdiction in Canada

o Can be a concern re uncertainty with respect to carrying on business. - (3) Lawyers and shareholders in other provinces are familiar with it- (4) There is developed case law at a high level because it overlaps with Ontario and Alberta law.

Whereas with BC body of law only built up since 2004. - (5) Neutral: has a lot of standard, administratively simple rules, follows standard practice in many

jurisdictions. Don’t have odd provisions like the BC act, and other letters patent jurisdictions

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Reasons for choosing BC BCA- (1) Lawyers here tend to be more familiar with it- (2) It is easier to deal with Victoria then Ottawa- (3) It is cheaper, CBCA has one more extra-provincial regulation that the BC BCA doesn’t have- (5) Some tax reasons

General Differences- Shareholder voting approval varies between the two. So this may impact the one you chose.

o Under CBCA need 2/3 of the shareholders for special resolutiono In BC it requires 75%, which is higher

- Registration: if incorporated under one statue and want to carry on business in another province, you have to register in the other province, you don’t have to transfer your incorporation. This is different from re-incorporation

o A corporation working in BC and Alberta which is incorporated under CBCA, is primarily governed by the CBCA although it has to comply with the provinces laws

Re-incorporation- Changing the statue of incorporation after a corporation has been incorporated in one jurisdiction. They

decide to become incorporated under a different statue in another jurisdiction - Done in several ways. One is to incorporate under the statute of jurisdiction and have the new

corporation issue shares to shareholders of original corporation in exchange for old ones. Now new corporation owns all shares of original and can wind it up

Continuance- Simpler way of reincorporating set out in CBCA- (1) Obtain a resolution from the shareholders permitting the continuance (S. 188(1), (5))- (2) Obtain approval from directors (S. 188(1))- (3) Register in the other jurisdiction making amendments to the incorporation document to make them

conform to the requirement of the jurisdiction in which the company is being incorporated- The shareholder approval provides one measure of protection against adverse changes in their rights as

shareholders- After approval corporation seeking continuance under CBCA would apply to the directors for a

certificate of continuance (S. 187(1)) by sending articles of continuance to the Director together with a notice of the registered office of the corporation and a notice of the directors of the corporation (187(3))

Change of jurisdiction of incorporationCBCA Section 187

- Section 187(1): a body corporate if authorized by the laws of its jurisdiction may apply to continue under the CBCA

- Section 187(2): amendments of articles if permitted by the articles. This is because they were meant to deal with the original jurisdiction

- Section187(3): articles of continuance shall be kept in the form Director fixes- Section 187(4): Director shall issues this certificate when it receives the articles of continuance.- Section 187(5): the certificate of continuance is deemed to be the certificate of incorporation, so it is as

if it was always incorporated under CBCA - Section 187(6): Copy of certificate shall be sent to appropriate official public body in other jurisdiction- Section 187(7): the obligations from the old jurisdiction are still applicable, rights preserved.

o Still liable for the obligations, any existing cause of actions are not affected, no effects on prosecutions or judgments

- Importing in to the CBCA doesn’t require too much compliance - Export from the CBCA to another jurisdiction, is much more difficult because it seen as a fundamental

changeCBCA Section 188

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- Section 188(1): request to be incorporated into another jurisdiction as if it had been originally incorporated under those laws.

o This is a fundamental change so always has to be approved by the shareholders, and they have to vote by special resolution, need the 2/3 majority

- Section 188(3): have to call a notice of meeting which has to comply with section 135. Also must state that any dissenting shareholder is entitled to be paid fair value for shares.

o There is a special meeting, they have to have enough notice so that the shareholders can properly vote.

- Section 188(4): special voting right, even in situations where shareholders don’t generally have a right to vote, will in this situation

- Section 188(5): special resolution, need the 2/3- Section 188(6): directors can decide not to carry on the continuance if authorized by shareholders- Section 188(7): the discontinuance, when the Director in Ottawa gets notice, they will issue a certificate,

the corporation has ceased to exist under the CBCA because it is carrying on under another statue- Section 188(9): CBCA ceases to apply- Section 188(10): all rights and obligations in existence at the time of continuance, continue. They want

to make sure under the new corporate statue the shareholders, creditors, and other dealing with the former CBCA don’t lose any rights by the reason of the leaving CBCA. Cannot move to another jurisdiction unless the laws allow the property to be that of the body corporate, continue to be liable for obligations, existing cause of actions unaffected, prosecutions unaffected and judgments unaffected.

Section 190(1)(d)- The right to dissent if the corporation resolves to be continued under Section 188

F. Pre-incorporation Contracts

Review of Ratification- A person can ratify if: (1) the other person purported to act on behalf of the person who seeks to ratify,

(2) the person who seeks to ratify must have been in existence and ascertainable at the time the other person purported to act on his/her behalf, (3) the person who seeks to ratify must have the capacity to do the act both at the time the other person acted and at the time of the ratification.

o Condition 1 and 2 make it impossible to have pre-incorporation contractsCommon Law Position

- (i) A corporation cannot ratify a contract that a promoter purported to enter into on behalf of the corporation before the corporation came into existence (Kelner v. Baxter).

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

- (iii) Where the promoter purported to act on behalf of a corporation before it came into existence the promoter can be liable for a breach of warranty of authority (Black v. Smallwood and Wickberg v. Shatsky). However, the damages may be nominal where the corporation, or the business which it was intended would be carried on by the corporation, is now insolvent (Wickberg v. Shatsky).

- If no corporate statue applies, then you resort back to the common lawCases

- Kelner v Baxter: a contract made by a promoter is not binding on the company and cannot be enforced by the company if not at existence at the time. The contract may not be ratified by the company, this is because the corporation is not in existence at the time.

o After the corporation is incorporated, it has to enter into a new contract, may do so via the promoter

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o Highlight the potential for promoters to be liable on contracts they purport to enter on behalf of an unincorporated company. Not clear if promoters are automatically liable (rule of law approach) or liability depended on whether it was intended that the promoter be a party of K (rule of construction approach)

o Could the promoter be personally bound at common law? Courts have approached this as a question of intention, look at the ways the contract is signed and what the parties knew about each other. Very fine distinctions and points of evidence will determine if the contract is binding.

- Newborn v Sensolid: promoters only liable if it was intended in the circumstances that they were themselves parties to the contract. Agreement for Newborn to supply ham to Sensolid, under a non-incorporated company they refused shipment and so he brought an action in the promoters name. Here the contract was intended to be with the corporation only, not the promoter.

- Black v Shallwood & Cooper: they made a contract thinking the company was incorporated. Here it appeared to be clear that the contract with the company was intended and since it didn’t exist, no contract. The promoters were liable for breach of warranty of authority

- Wickberg v Shatsky: the P was hired as a manager two days before it was incorporated and the letter of employment was on a letter head for a company. After Witburg was hired, said don’t used Ltd when dealing with the company. The company failed and not able to pay its employees, so the brothers were sued.

o Decision : Telling him not to use ltd was notice that this was not a corporation and simply a business name. Neither of the brothers were liable because not the intention that they would be, intention that P would be working for the company and not the brothers.

o The one who signed the letter that used the letterhead of a company that did not exist, was liable for breach of warranty of authority. He had authority and purported to be an agent of a company to contract when he wasn’t because the company doesn’t exist.

o But the court only gave nominal damages because even if he had authority, that would have meant you were hired by the company and since it was broke, you would not have gotten anything anyways. Even if he had the authority that you thought he had, you would not get anything because the company cannot pay you anyway.

o Law : a person signing on behalf of a non-existent corporation is not automatically liable.Problems with the Common Law

- Created risk for both promoter and the third party that there would no enforceable contract. - Creates a risk that reliance on the purported contract will be defeated along with the potential for unjust

enrichment of promoters at the expense of the third parties or the promoters- Common law position creates unnecessary costs. It would make more sense to have just one party incur

the cost, allocate it to the person who can confirm the existence of the corporation at the least cost - But there is also the issue of corporations adopting to relieve the third parties but have no assets

CBCA s. 14; BC BCA s. 20- Common law applies to oral contracts - Section 14 modifies the common law because:

o (1) it says that a promoter can be personally liable (14(1))o (2) allows a corporation to adopt a contact after it becomes into existence (14(2))o (3) allows the court to apportion liability between the corporation and the promoter (14(3)), and o (4) parties can expressly agree in written contract that the person who enters into a contract is not

bound by it - If the corporation adopts the contract, it becomes bound by the contract and entitled to the benefits, and

the promoter ceases to be bound. No jurisprudence on the reasonable time, but it has to be soon- S. 14(1): if a person enters into a contract on behalf of a corporation before it comes into existence, they

are personally bound by the contract and entitled to the benefits (codifies rule in Kelner v Baxter)

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- S. 14(2): a corporation can, within reasonable time adopt a written contract made before it comes into existence and they become bound by the contract and the person who entered into the contract ceases to be bound, expect by (3)

- S. 14(3): can apply to a court to determine the extent of the obligations of the corporation and the person who entered into it and grant an order it thinks fit. This will arise if the third party has partially performed and runs up against the argument of no ratification or adoption, who should have to pay

- S. 14(4): if in the written contract there is an express statement that the promoter is not to be bound, it is recognized as being the enforceable provision. The contract would have to be adopted for anyone to be bound.

- Section 20(2): when a person enters into a contract for a company they are deemed to warrant that the company will come into existence, adopt the contract, the person is liable, the measure of damages is the same as if the company had existed and even if they refused to ratify.

o This leaves open the possibility that the promoter could be liable on contract but only if they were intended to be a party to the contract.

- Section 20(3): After a pre-incorporation contract is entered into, the new company may, within a reasonable time after its incorporation, adopt that pre-incorporation contract by any act of conduct signifying its intention to be bound by it.

- Section 20(4): new company is bound and the facilitator ceases to be bound- Section 20(5): If the new company does not adopt the pre-incorporation contract, the facilitator or any

party to the contract may apply to the court for an order directing the new company to restore to the applicant any benefit received by the new company under the pre-incorporation contract.

- Section 20(6): Whether or not the new company adopts the pre-incorporation contract under subsection (3), the new company, the facilitator or any party to the pre-incorporation contract may apply to the court for an order (a) setting the obligations of the new company and the facilitator under the pre-incorporation contract as joint or joint and several, or (b) apportioning liability between the new company and the facilitator.

- Section 20(7): court can make any order they think fit- Section 20 (8): A facilitator is not liable under subsection (2) in respect of the pre-incorporation contract

if the parties to the pre-incorporation contract have, in writing expressly so agreed.Landmark Inns v Horeak – Must expressly state that promoter not personally liable- Facts: An optometrist wanted a lease and he offered to rent space which was accepted. Contract made in

which all the renovations were done to make the space in compliance with what the optometrist request. Then he repudiated the contract, leasor accepted the repudiation and immediately started to mitigate their losses by looking for a new tenant, lost rent for 7 months and spent money in reliance of an optometrist moving into the space. The optometry company was incorporated and then it purported to ratify the lease, passed a resolution to be bound by the lease, but it had no assets

- Tenant sued the optometrist directly but he said I am not bound because the company is incorporated and they ratified the lease, so you have to deal with them.

- Decision : The company couldn’t ratify or adopt this lease because it had already been repudiate. Landmark had already accepted the repudiation and so you cannot get out of your liability by applying Section 14(1)

- The second defence was that it was held that he was not personally liable, because expressly stated. - But the court said that this is not what Section 14(4) requires, to not be personally bound, the letter/lease

must contain express provisions that a person who enters into a written contract in the name of the company before it comes into existence is not personally bound by the contract. Has to be expressly stated, cannot simply be implied.

Bank of Nova Scotia v Williams- Here she loaned money to start a corporation, it went under and she asked for court to apportion liability

between the corporation and the promoter.

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- Court refused saying that she was not misled as to which party she was advancing money to, nor did any action of Mr. Williams or the corporation misled her as to who would be assuming responsibility for repayment

When will CBCA apply?- Does the federal power to incorporate corporations allow it to alter provincial contract law with respect

to contracts entered into by the CBCA corporations before CBCA corporation came into existence. - May be argued that although section 14 deals with contracts, provincial property and civil rights, the

regulation of pre-incorporation contracts is necessary ancillary power to the federal government’s power to incorporate companies with broader provincial objects

- The CBCA is written contracts, so if it is oral then the common law applies.

G. Ultra Vires acts of certain corporations CBCASection 15

- (1) Capacity of a corporation, that of a natural person - (2) Corporation has the capacity to conduct its affairs and exercise its powers in any jurisdiction outside

Canada to the extent that the laws permitSection 16 – overruled ultra vires

- (1) Powers of a corporation, bylaws don’t have to be passed to confer power to directors or corporation- (2) Restricted business or powers, cannot carry on business which is restricted by its articles - (3) No act of a corporation is invalid by reason only that it is contrary to its articles.

Section 17 – abolishes constructive notice - No constructive notice, just because documents have been filed by the Director, don’t assume person has

knowledge of the contents just because they are available.Section 18 – prevents the corporation from asserting inside management

- Cannot argue that a person who conducted the deal was not part of management so invalid agreement- No person who is a director, agent or officer of a corporation can assert that a person who acquired

rights or is dealing with a corporation didn’t comply with the articles, bylaws, the people in the notice are not directors, the place in the notice is not registered office, person held out by the corporation as director does not actually have any powers, a document issued by a director with authority is not valid, and a sale, lease or exchange of property was not valid.

Section 116- Validity of acts of directors and officers, any acts of these people is valid unless there was an irregularity

in their election, or appointment or they are not qualified BC BCASection 30

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

Section 32- Corporation has extra-territorial capacity

Section 33- Restricted businesses and powers – (1) A company must not (a) carry on any business or exercise any

power that it is restricted by its memorandum or articles from carrying on or exercising, or (b) exercise any of its powers in a manner inconsistent with those restrictions in its memorandum or articles.

- (2) No act of a company, including a transfer of property, rights or interests to or by the company, is invalid merely because the act contravenes subsection (1).

Section 143- Validity of acts of directors and officers – An act of a director or officer is not invalid merely because

of an irregularity in the election or appointment or a defect in the qualification of that director or officer.Section 146

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- Persons may rely on authority of companies and their directors, officers and agents – a guarantor of an obligation of a company may not assert against a person dealing with the company, that the articles, have not been complied with, the directors in the corporate register are not the directors of the company, that a person held out by the company as a director, officer or agent is not or has no authority, a record issued by any director, officer or agent of the company with actual or usual authority to issue the record is not valid or genuine, or accurate

- This doesn’t apply in respect of a person who has knowledge, or, by virtue of the person’s relationship to the company, ought to have knowledge, of a situation described in paragraphs (a) to (e) of that subsection.

Doctrine of Ultra Vires- CBCA sections 15 and 16, BC BCA Sections 30 and 33- For a long time the companies were required to state their objects and anything outside them was outside

their corporation articles. There was a legitimate reasons requiring them to state objects, but not required so no one does this anymore

o Don’t really have these problems anymore because statues have dealt with ito This was a trap for the unwary because anything that exceeded the corporation’s authority, any

contract made with a third party in this regard was a nullity. Obligations to pay not enforceable (Ashbury Ry. Carriage)

- This has been dealt with in modern times by giving the corporation the capacity and powers of a natural person (15(1)) and is not required to state its objects and powers in the articles of incorporations.

o Only restrictions are those found in S. 3(4) and (5): no corporation can carry on the business of a bank, a cooperative credit union, insurance company, trust or loan company, educational institution

- However, a corporation may restrict its articles (16(2)) or may be statutorily restricted if made under acts of Parliament. Example is below:

Communities Economic Development Fund v Canadian Pickles Corp- Facts: The P was a corporation under a specific act of the Manitoba legislature. The purpose of the fund

was to promote economic development in isolated areas. A loan was given to the Pickles company and a personal guarantee was taken from one of the shareholders. The company failed and the fund sued on the guarantee.

- Shareholder argued that the loan given was ultra vires and therefore a nullity so the guarantee cannot be enforced, since loan cannot be enforced. This is because the pickle company was not in an isolated community, which was the only place the fund could give money

- Decision : It was not a remote or isolated community, therefore the loan was a nullity and so was the guarantee

o Although there was legislative intention in this act to give the corporation all the powers of a natural person the powers were limited in section 9(7) of the act where the isolated communities provision was included.

- Law : presumption at common law is that corporations created by or under a statue have only those powers which are expressly or impliedly granted to them. To the extent that the corporation acts beyond its powers, its actions are ultra vires and invalid. But this doctrine has been abolished by statue but it still exists with respect to corporations created by special act for public purpose.

Remedies- For corporate acts which are ultra vires or contract to articles or Act:- Section 247: provides that where directors or officers do not comply with act, articles, etc. the

complainant apply to the court for an order directing such person to make the person comply with whatever rules they were breaking. Can get an order from the court saying that entering into that contract is a breach and the court can order that act not carry out

- Section 251: it is an offence punishable by summary conviction to contravene the act.

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- Section 252(3): preserves the right to bring an action in civil court - Corporate oppression: where powerful people within the corporate structure use the corporation to make

unfair decisions, can result in damages or other wide range of remedieso Any person who disagrees can go to court to get it stopped, even if not in a position of power.

- Same thing in BC act, s. 30 and 31

Agency, Constructive Notice and Indoor Management Rule- The doctrine of constructive notice related not to the capacity of the corporation but to the authority of

the human agents of the corporate principal (now abolished by S. 17)- The doctrine of constructive notice is based on the assumption that all the document are available in the

public domain and you could have looked it up and seen that this person did not have any authority - The significance of this doctrine was that persons dealing with a corporation through its human agents

were deemed to be aware of any restrictions on the human agent’s authority to contract which were set out in the public documents even if they didn’t actually know about them

o So when an agent exceed its authority, the corporation was not bound and third party deemed to have notice

- Freeman & Lockyer: The corporation allowed the person to hold himself out as managing director, so although no actual authority, he had ostensible authority and the contract that he made was within the usual or customary authority which a managing director would have and it was reasonable for the plaintiffs to rely on it.

- In Door management Rule (Turquand’s rule): counteraction of doctrine of notice o Persons contracting with a company and dealing in good faith may assume that the acts within its

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

o Essentially that a person dealing with a corporation does not need to satisfy herself that the necessary corporate procedure has been followed to allow the corporation to enter into a contract or do another act

- This rule does not preclude the corporation from arguing the person had actual knowledge but it does confine the application of constructive notice rule

- The corporation can show that the person actually knew the corporation did not have the appropriate authority, the rule only deals with those who are acting in good faith. Can argue the person has actual notice if they have evidence to support it.

- Section 17: abolish the doctrine of constructive noticeo No presumption that you know everything public about it

- The extremely important qualification in subsection 18(2) is that a person who has or ought to have, by virtue of his position with or relationship to the corporation, knowledge to the contrary, cannot have the benefit of subsection 18(1).

- Section 18: takes away the corporations argument that they didn’t have the power to do what they were allowed to

o Section 18(d): cannot deny that a person held out by the corporation has not been properly appointed, this is the Freeman situation.

o Doesn’t apply where a person has or ought to have knowledge, this is where a director, officer or shareholder is asserting something, but the other person knew this and had access to the corporate records. Should have known due to internal relationship.

H. Shares and Shareholders

i. The nature of a share, and the share (securities) registerCBCA S. 2(1) “security”

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- Means a share of any class or series of shares or a debt obligation of a corporation and includes a certificate evidencing such a share or debt obligation

Section 49(1)- Rights of a holder to obtain a security certificate or an acknowledgement that they can obtain such a

certificate Section 50(1)

- Securities Records, each corporation shall maintain a securities register which shows the names, of each security holder, the number of shares held and the date and particulars of issue

ii. Issuing and paying for sharesSection 25

- (1) Directors make the decision about issuing shares, to who, when and how many- (2) Shares are not assessable and holders are not liable to the corporation or creditors - (3) Consideration requirement: Share cannot be validly issued without paying. Can give property or past

services when allotting shares, but this may expose director to liability if they don’t properly assess them- (4) Consideration other than money: Not uncommon for the incorporators, who have created the

company to be issued shares in relation to the time and effort they have put into creating the corporation. o Do not want to overvalue their services

- Watered-stock : Incorporators actually transfer less property than the shares issued. There is a large difference in assets and amount on books to deceive the creditors. So creditors may sue

o 25(3), doesn’t allow water-stocko Remedies are that directors will be jointly and severally liable (118(6)), directors subject to penal

sanctions (251), an action against the shareholders Section 115(3)(c)

- No managing director or committee of directors has the authority to issue securities except as authorized by the directors

Section 121(a)- Directors can delegate a vast amount of powers to officers except what is in 115(3), issuing of shares

being one of those exemptions Issuing and paying

- Subscription for shares: an application for shares. It is an offer and if made before incorporation can be revoked or not accepted once incorporated

- Allotment: directors decide which subscriptions to accept and to whom the shares will be issued.Redemption and repurchase

- A corporation can repurchase its shares as long as it doesn’t violate financial solvency tests that provide that the corporation cannot purchase or otherwise acquire its own shares

o If the corporation is or would after payment be unable to pay its liabilitieso Assets less then debts

- Section 36(1) lets a corporation repurchase its own shares as a result of an express term but it cannot redeem them if becomes in solvent or assets less then debts.

iii. Share rights and restrictions: Section 24(3)

- Rights attached to shares. When only one class, then all shares are equal and they carry all three of the basic rights

o (a) right to vote at any meeting of shareholders of the corporationo (b) right to receive any dividend declared by the corporationo (c) right to receive the remaining property of the corporation on dissolution

- They are called common shares when you have only one class.- All these rights must appear, can be in different classes

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Section 24(4).- Rights to classes of shares- Articles may provide more than one class and if so they provide:

o (a) the rights, privileges, restrictions and conditions attaching to the shares of each class be set out therein

o (b) the rights set out in (3) shall be attached to as least one class of shares but all such rights are not required to be attached to one class.

- Have to set out the rights in relation to each class and each right has to attach to at least one class. All those rights have to belong to someone.

Common Shares- have the three rights in S. 24(3)

Preferred Shares- Stated Capital: amount paid in per shares, the total of all the amounts for which all the outstanding

shares were issued. - They are preferred because they typically have a preference with respect to some right. Usually in

regards to receiving dividends or share of proceeds on liquidation - International Power co v McMaster: a priority claim as to dividends is not presumed, unless expressly

provided for. - Features : - Cumulative: if any dividend in any year is unpaid it accumulates and is to be paid in the subsequent year- Noncumulative: nothing carries over, not very common.- Preferential cumulative dividend: means it would be paid before any common shares are paid out.- Participating: allows the shareholder to participate in the distribution of dividends beyond what the

preferred dividend right. If not specified then presumed to be nonparticipating. - Convertible: can surrender a predetermined number of preferred shares for predetermined number of

common shares- Retractable: allows shareholder to sell back to corporation for pre-determined price- Redeemable: company reserves the right to buy back at predetermined price plus accumulated dividend

Other types of shares- Nonvoting common shares: allows groups to obtain further financing without losing control over the

corporation. Investors do this since votes don’t make a difference, if too little shareso Dual class recapitalization: new voting shares would be issued to certain preferred persons

(insiders) and existing common shares would be altered to remove voting rights Concerns: left rights to dividends those with most control. No incentive to act in favour

of shareholders. Also distribution effects, investors might have paid for shares in the expectation that management was subject to the threat of a loss of control only to later have the threat of loss of control removed

o Dual Class Share issuance: new class without voting rights is created and sold to public- Special voting shares and subordinate voting shares. Can maintain control via these shares.

Handout re stated capital- Dissolution: the preferred shares are entitled to capital and the cumulative dividends before the common

shares are entitled to receive anything.- These are not equity shares, if the corporation does well, they don’t get to share in the millions that the

corporation would be worth- Common rights and restrictions: they are entitled to receive upon the dissolution of the company all the

assets. This is where the risk is, if they do well then you get lots but if goes badly then the shares worth nothing, they become valueless

o Policy: is the preservation of assets until creditors paid and then preferred is paid o Common shareholder only get money back after everyone is paid

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o The directors are there to safeguard the interests of the creditors and if they screw up then they will be personally liable.

iv. Voting rights- This is the most important right, in some circumstances the CBCA has given shareholders right to vote

who normally don’t have this right. This is generally where the decision can have prejudicial impact on the rights and interest of those associated with that class.

Section 140(1)- Right to vote, unless articles state otherwise, one share equals one vote

Section 146(1)- Unanimous shareholder agreement- An agreement signed by all the shareholders that restricts the powers of the directors to manage or

supervise the management of, the business and affairs of the corporation is valid.

Jacobsen v. United Canso – Must treat all shareholders in a class the same way- Facts : Federal Corporation had bylaws which stated that each share gets one vote up to 1000 shares. The

shareholders were trying to win control over the board by getting rid of the old management, Jacobsen was one of those people. The Buckley family was in control despite the fact that they don’t own the majority of the shares.

o The committee trying to take over was having issue getting shares due to the voting restriction. - Issue: Is the provision which allows shares of the same class to have different number of votes contrary

to the CBCA presumption of equality- Decision : There is a presumption of equality and if your voting rights differ, must have different classes

of shares. The 1000 vote rule is invalid because it differentiates between shareholders in same class. It was invalid under the old act and continuing it under the new act doesn’t make it valid per say.

o The provision is not automatically invalid under Section 16(3), so went under 247 to say this article is invalid because it is in conflict with the act and therefore it has to be amended.

o Interesting to note that the day after they decided that the CBCA applies, the corporation moved to move to Nova Scotia where the 1000 rule may be valid. They did this based on 1 vote to 1 share. He then brought this under the Nova Scotia court, was seeking an injunction to stop the company from applying the rule at the shareholders meeting.

o The action was dismissed, the court should not interfere with the management unless there is bad faith. They said that since not enough time to make a proper reason, they will differ to management

o The 1000 vote was approved by a majority on a 1 vote and 1 share basis. Jacobsen bought the votes knowing this, also had the opportunity to get fair value and so the court will not stop the meeting from taking place

Bushel v Faith- Whatever the shareholders have agreed on is okay. They all signed it, that is there agreement on how to

run the corporation. The act at the time doesn’t preclude granting of different amount of votes. - Voting rights can vary depending on who owns them etc. - Courts will look at the legitimate expectations, the law may not protect the brother but the court will

protect him. They will come at it a different way. At the time the oppression remedy was in its infancy, but under the CBCA the brothers claims are valid

- This is not good law under the CBCA

Bowater v. Crain – Rights of shareholders in one class are equal with all respects- Facts : Had a class of special shares when held by P they had10 votes per share, but if they were sold or

transferred then it would switch to one vote

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- Issue : within a class of shares the votes are supposed to be the same - Decision : just because the step-down provision is invalid doesn’t mean the whole clause is invalid. The

step-down provision can be severed without affecting the validity of the provisions for 10 votes for each special common share. Applied Section 24(3) and (4)

- Here Bowater knew about the step-down provision when it acquired the shares from another party. They bought the shares knowing about the step down, but hoping to challenge the provision so that they could acquire control

o But the court was concerned about this provision because it prevents an opportunity of fraud, if potential purchasers don’t know about the provision. Court accepts as a principle of corporate law that the rights of shareholders are equal in all respects with a series of shares. This is taken from the Alberta act, CBCA doesn’t have this provision.

R v McClurg – Can have different rights in different classes- This was a tax case concerned the Saskatchewan act, but the provisions are similar to CBCA.- Facts : 2 classes of shares, Class A and B, one was voting the others were not

o Equity shares: they are entitled to the equity or the assets upon winding up after all the creditors and other shareholders are paid. They are taking the bigger risk, the more profit over time, the more they will be worth because they get the capital last

o Husbands had the voting rights and the wives had the shares that had no voting rights. - Issue: Is a difference in voting enough to make it separate classes- Decision: There are two classes, one votes the other doesn’t. So the distinction here is good enough.

Within a class all the rights and restrictions have to be different. Can have different divided rights as long as the shares are different.

o To create a validly separate class of shares, there must be a distinction in some right between that class and the other.

v. Dividends- Once dividends have been declared, they become debts of the corporation and a shareholder can sue for

them. - They can only be paid for out of profits, if the payment is not justified, directors can be liable.

Section 42- A corporation shall not declare or pay a dividend it there are reasonable grounds for believing that - (a) Solvency Test: the corporation would be unable to pay their liabilities. This is things like its interests,

payrolls, trade creditors, etc. - (b) Stated Capital Test: where the corporation’s assets become worth less than the liabilities upon paying

the dividend. - No duty to declare dividends, only if it is in the best interest of the corporation and not in a way that is

oppressive to one or more shareholdersSection 115(3)(d)

- No managing director and no committee of directors has the authority to declare dividends- This is a power that is given only to the directors, must look carefully at the profits and reserve amounts

Section 118(2)(c)- Directors are liable jointly and severally to restore the corporation any amounts distributed in a

payment of a dividend contrary to section 42. - Can ask the court to force other directors who voted to also pay, may compel shareholders to pay back

unauthorized dividendSection 123(4)

- Defence for liability, they are not liable under section 118 if they exercised the due care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. This includes relying in good faith on (a) financial statements of the corporation or reports of a person who is a professional

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Dodge v Ford- The retention of the earnings was said to be for the best interest of society, not of the corporation so he

was forced to pay. If it was done for the purpose of making a profit for the corporation then it would have been okay

Fergusson v Imax- Here he refused to pay dividends after a fight with his wife. - Court found that his refusal was oppressive and granted a remedy under oppression

vi. Rights on Liquidation or Winding up- Liquidation: The process whereby all the assets are collected and used to pay the creditors anything that

has not been paid. Once all the assets are divided to the creditors then the shareholders can get itSection 211

- (1) Proposing liquidation and dissolution. May be proposed by a director or shareholder who is entitled to vote at an annual meeting

- (2) Notice of meeting: shall set out terms and date- (3) Shareholders Resolution: can be by special resolution of shareholders or special resolutions of

holders of each class, whether or not they are entitled to vote- (4) Statements of intent to dissolve: in the form required by Directors- (5) Certificate of intent to dissolve: Director issues this after receipt of notice of intent- (6) Effect of certificate: corporation ceases to carry on business expect in regards to liquidation - (7) Liquidation: (a) must notify creditors (b) give notice to each province where carrying on business (c)

collect property and dispose of everything else (d) adequately discharge payments Involuntary Liquidation

- Section 213: This is court ordered, failed to hold shareholder meetings, etc.- Section 214: shareholder remedy, where there has been oppression to one group of shareholders or one

person that has an interest and the court thinks it’s just an equitable to wind it up o Generally trust has been lost in some way and cannot kick them out.

Westfair Foods v. Watt – in the power of directors to change dividend policy, even if unfair to some- Leading case on adjusted equitable winding up and the oppression remedy - Facts: they are a successful grocery company and it has 2 classes of shares

o They are equity shares in that they get $2 divided but there is a cap on ito The second type of share is common and they are voting and they receive a divided at the

discretion of the directors. - There was a new dividend policy to be implemented which favored the common shares over the class A

shares. If there was a surplus, profits would be paid out each year, bad for the class A shares because the value of their share is not growing, no accumulation.

- They argued their interest had been unfairly disregarded- Decision : There had been unfair disregard, and they had not properly dealt with the reasonable

expectation of a person buying the class A shareo Expected a two dollar divided and the right for share in the end.o But there was no right to leave money in the account and for the surplus to grow, this is because

the directors are permitted to distribute their profits. Using that discretion is part of their job. It would be wrong to make them wind up.

o So the court ordered the company to purchase the shares at fair market value- The court can protect from unfair actions to of the company but cannot stop action that merely impairs

an unreasoned expectation of advantage that if affirmed is arguably unfair to others - Divided policy can affect the value of shares that share in surplus. Just because it is in the articles and a

particular policy was implemented in the past doesn’t mean it will be there forever

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VI. CORPORATE GOVERNANCE STRUCTURES: DIRECTORS AND OFFICERS

A. Appointment and Powers of Directors and Officers

Definition of “director” and “officer”: CBCA 2(1)- “director”: a person occupying the position of director- “officer”: an individual appointed under section 121, chairperson, board of directors, president, etc

1. Appointment, removal, meetings of directors Appointment Section 105(except (3.1)-(3.3)) Qualitifications

- (1) Qualification of Directors: over 18, must be of sound mind, not bankrupt, an individual - (2) Cannot hold shares unless articles allow- (3) 25% resident Canadian

o Rational for this is that Canadian residents will be more responsive to Canadian national interests in the operation of a corporations affairs

- (4) Exception for holding corporation Section 106 Appointment

- (1) When incorporating, the incorporators must send a list with a name of directors. The first directors are the ones whose names are in the notice

- (2) They hold office until the first meeting of the shareholders, this meeting has to occur within 18 months.

- (3) Subsequent Directors: Election happens by a vote of an ordinary resolution, the maximum term is 3 years (end of the 3rd annual meeting)

- (4) Staggered terms, don’t all have to hold office at the same period- (5) If the term is not stated, ends at the next meeting, the base rule is an annual election. - (6) Incumbent Directors: if the directors are not elected, the existing directors continue until they are

elected. This is to prevent a gap in time where there are no directors. No limit on re-election- (7) Vacancy among candidates: When vacancies, not sufficient numbers elected or someone doesn’t

consent to act or is disqualified, then the elected directors can fill those vacancies to meet the quorum. - (8) Appointment of Directors- (9) Cannot be elected or appointed director unless present at the meeting and did not refuse, or if not at

the meeting consented in writing prior to the meeting or were a director pursuant to meeting. RemovingSection 108

- (1) Cease to hold office if die or resign, become bankrupt or are found to be of unsound mind, or in accordance with S. 109

- (2) Have to resign via written letter, and effective the date it is sent or date stated in letter Section 109 and 6(2)-(4),

- (1) Can remove before the term is up via an ordinary resolution at a special meeting - (2) Cannot put in place special majorities for removal of directors. This is not a default rule, cannot be

changed. Must be an ordinary resolution - (3) Vacancies are filled via S. 111- (4) If all directors have resigned or removed and not replaced then a person managing can be deemed to

be a director. - (5) Exception: doesn’t apply to people who are in control of shareholder or director, a lawyer or other

professional or a trustee in bankruptcy, receiver, receiver-manger or secured creditorMeetingsSection 110(1)

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- A director is entitled to receive notice of and to attend and be heard at every meeting of shareholders. Section 111

- (1) A quorum of directors may fill a vacancy of a director- (2) Calling a Meeting: if they cannot fill minimum must call a special meeting to appoint them- (3) Class Director: if a certain class has a right to elect directors and a vacancy occurs then the

remaining directors from that class can fill it or a meeting will be called so they can fill it- (4) Shareholders filling vacancy: the vacancy can only be filled by a vote of the shareholders- (5) Unexpired term: a director filling the vacancy holds office for the unexpired term of predecessor

Section 113(1)- Notice of change of directors: after 15 days of change being made must send notice setting out change to

the Director Section 114 – Place, Qurom, Notice, Means,

- (1) must meet at the place required by the by-laws- (2) quorum- (3) Canadian directors must be present at the meeting, need the minimum requirement from S. 105- (4) Exception: can continue without the Canadian member if they approve in writing, and the number

would have been met if that directors was the meeting - (5) Notice of meeting: must specify any matter to be dealt with in meeting unless bylaw provides

otherwise- (6) Waiver of Notice: can waive the notice requirement by coming to meeting unless the purpose to

come was to object to unlawful transaction- (7) Adjournment: don’t need to give notice if it was announced at the meeting- (8) One director meeting: when they have one director, they may constitute a meeting- (9) Participation: can participate via electronic, telephonic means if agreed on by all

Section 117 – Resolutions - (1) Resolution in lieu of meeting: can all sign and same as meeting- (2) filing resolution: need a copy in minutes- (3) Evidence: unless a ballot is demanded simply stating resolution carried out or defeated in minutes is

proof of significant number of votes Section 123

- (1) Dissent: deemed to have consented to any resolutions unless (a) requests dissent entered into minutes (b) sends a written dissent before meeting is adjourned (c) sends dissent by mail or delivers to office immediately after adjournment of meeting

- (2) loss of right to dissent: cannot dissent if vote for or consent to resolution- (3) Dissent of absent director: if not present at a meeting have 7 days to register a dissent into minutes or

by registered mail

2. Powers of DirectorsSection 102

- (1) they have a duty to manage and supervise- (2) Number of directors: requirement for how many directors, if distributing corporation (shares are

listed on a stock exchange) then have to have at least 3 directors and 2 of them cannot be officers or senior employees of the corporation, this means they must be independent.

o You want independent people sitting on the board, if they are all insiders they are not as critical as their own performance as outsiders tend to be.

Section 103 – Power to adopt, appoint, or repeal bylaws- (1) Bylaws: unless articles say otherwise, the directors can make, amend or repeal any bylaws that

regulate the business or affairs of the corporation - (2) Shareholder Approval: these changes have to be submitted to shareholders - (3) Effective date: the bylaw is effective from the date of the resolution of directions until confirmed - (4) If not approved or taken to a meeting, then it ceases to be in effect

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- (5) Shareholder Proposal: a shareholder entitled to vote can make a proposal to make amend or repeal a bylaw

Section 104 Meetings- (1) Organization Meeting: after issue of certificate a meeting may be held where directors: make bylaws,

adopt forms of security, authorize issue of security, appoint officers, appoint an auditor, make banking arrangements, transact other business

- (2) Doesn’t apply where certificate issued under 185(4) or 187(4)- (3) Calling a meeting: must give at least 5 days’ notice

Section 115 (except 115(3)(f) and (h)) Restriction on Powers of Managing Directors/Committee- (1) Delegation: directors can appoint a managing director who is a resident Canadian to do all the things

a director can do- (3) Limits: no managing director or committee of directors can: submit to shareholders anything they

must approve, fill a director vacancy, issue securities, declare dividends, purchase, redeem or acquire shares issued by the corporation, approve any financial statements or adopt, amend or repeal bylaws

Section 121 – Power to appoint officers- (a) Directors may designate officers, specify their duties, delegate them powers - (b) A director can be an officer- (c) Two or more offices can be held by the same person

Section 123 - Dissent- (1) Dissent: deemed to have consented to any resolutions unless (a) requests dissent entered into minutes

(b) Sends a written dissent before meeting is adjourned (c) sends dissent by mail or delivers to office immediately after adjournment of meeting

- (2) Loss of right to dissent: cannot dissent if vote for or consent to resolution- (3) Dissent of absent director: if not present at a meeting have 7 days to register a dissent into minutes or

by registered mail - (4) Defence of reasonable diligence: exercise the care, diligence, and skill of a reasonably prudent

person- (5) Defence of Good faith: director has complied with duties if he/she relied in good faith on financial

statements of the corporation or a report of a professional Section 125 – Power to determine compensation

- Remuneration: they may fix a remuneration of the directors, officers and employees of the corporation Section 133 – Power to call meetings

- (1) Calling annual meetings: must be no later than 18 months after corporation comes into existence and not later than 15 months since the last preceding meeting

- (2) Calling of special meetings: can call it anytime- (3) Order to delay calling of a meeting: may ask for a court to order extending the time for calling an

annual meeting. Section 189 – Power to Borrow

- (1) Borrowing Powers: they can borrow money, issue, sell debt obligations, give a guarantee on behalf of the corporation, mortgage or otherwise pledge property of the corporation

- (2) Delegation of borrowing powers to officer, director or committee of directors Power to issue shares – section 25, 27Power to appoint additional Directors – Section 106(8)Power to fill a vacancy on a board – Section 111Power to fill a vacancy in the position of an auditor – Section 166(1)Cases from Gillen

- Hayes v Canada-Atlantic Plant: directors could not delegate all their powers and put up a new management structure in lieu of that formally established by the shareholders

- Sherman & Ellis v Indian Mutual: a corporation can delegate certain managerial duties to strangers but such duties cannot be indefinitely be delegated. Contract was invalid because it is contrary to public policy and because the time frame was too long and it delegated all the powers of management

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- Kennerson v Burbank: as long as corporation exists its affairs must be managed by the duly elected board. It said the board cannot delegate all the powers of management

Removal of Officers- Directors have the power to remove officers but where officers have long term contracts removing them

may result in actions for wrongful dismissal with potentially high damages- Corporation may benefit from long term as officer may be willing to accept less in form of

compensation with hopes of long-term rewards, officers are willing to invest more in the form of “human capital”

- Re Paramount Publix Corp: US case, directors can remove a person from a particular agency or office but if they dismissed the person from employment entirely then there would be the usual consequences of breach of employment contract

- Shinder v Northern Raincoat: P was director for term of 10 years and company decided to sell to another one who didn’t want him as a director. Negotiations failed and he was removed as managing director. He was given constructive dismissal. The principle to be applied was that where a party enters into an arrangement whose effectiveness requires continuance of an existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances

- Upholding long term contracts is motivated by reliance. May have relied on accepting a lower level of compensation in return for the security of a long-term contract and the company may be unjustly enriched by allowing it to get away with removing them before the agreed upon term.

- Golden Parachute clause : liquidated damages term in an employment contract for corporate executives that give them very lucrative compensation should they be dismissed. May get shot down

- Tin Parachute clause : replace by somewhat less but still highly lucrative contracts, these have been upheld.

- When takeovers happen, directors try to resist but if they have these terms, less likely to

3. Access to records of directors

Section 20(2)- A corporation shall prepare and maintain adequate accounting records and records containing minutes of

meetings and resolutions of the directors and any committeeSection 20(4)

- The records shall be kept at the registered office of the corporation or at such other place as the directors think fit and shall at all reasonable times be open to inspection by the directors.

o These are not available to public, they are confidential but can get them by the permission of the court, not privileged

B. Duties of Directors and Officers

1. Fiduciary duty3 of them

- Transacting with the corporation- Appropriation of corporate opportunities- Directors duty of care, diligence and skill and the business judgment rule

Content and Origins- Since agents and trustees acted on behalf of others it was reasonable for the parties to such relationships

to expect the trustee or agent would act in the best interest of the persons on whose behalf they acted - Had a duty of loyalty, care in that they acted with a reasonable degree of care- Since directors were acting on behalf of the companies it was held that they were acting in a fiduciary

relationship. These were then codified CBCA Section 122(1)(a); BC BCA s. 142

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- Every director and officer of a corporation in exercising their powers and discharging their duties shall: act honestly and in good faith with a view to the best interests of the corporation

- This duty is owed to the corporation as a whole

(i) Transacting with the Corporation

CBCA s. 120- Section 120 abrogates the common law rule and substitutes a procedural safeguard with the added

requirement that the transaction be fair and reasonable- Section 120 basically provides that where there is (1) disclosure (2) approval by directors or approval by

shareholders (3) and the transaction is reasonable and fair then the contract is not void and director is not accountable

- (1) Disclosure of Interest: director has to inform in writing or have it entered in the meeting the nature and extent of any interest that they have in a material contract or transaction if they are (a) a party to the contract or transaction, (b) is a director or officer of a party to the contract or transaction or (c) has a material interest in a party to the contract or transaction

o Test from Grey v Porcupine Mine: Duty of disclosure requires the person to disclose the real state of things, clear about exactly what you own or other interests

o The burden lies on the director or officer to make an objective decision. - (2) Time of disclosure for director: must disclose when they become aware of this, at the first meeting

proposed, or if they become later interested- (3) Time of disclosure for officer: as soon as they learn they are in conflict or if after transaction

immediately after they become interested - (4) Time of disclosure for director and officer: If there is a conflict in a material contract or material

transaction, in the ordinary course of business which doesn’t require director approval, must inform in writing as soon as they are aware

- (5) Voting: must abstain from voting on the transaction. As an officer you don’t have voting rightso Exceptions of certain types of transactions where they can vote is (a) can vote where it relates to

their remuneration (b) for indemnity from potential liabilities from being an officer (c) if it is a K between a parent and subsidiary relationship

o Conflict of interest transaction can be approved if the interested director does not vote - (6) Continuing disclosure: directors can giving general disclosure that they are interested is enough - (6.1) Access to disclosure: shareholders can examine the minutes where the directors state their interests - (7) Avoidance of disclosures: contract is not invalid and the director is not accountable if they made the

disclosure and the transaction was approved as it was reasonable and fair to the corporation. - (7.1) Confirmation of shareholders: even if proper disclosure was not made but director acted honestly

and in good faith, the contract is not invalid if it was approved or confirmed at a shareholders meeting, disclosure was made to shareholders that was sufficient to indicate the nature and the contract/transaction was reasonable and fair to the corporation

- (8) Application to court: the right of action for 120, a provision which allows the court to make a final decision on what it thinks is a just remedy in the circumstances

- This section provides a limited statutory permission but it requires strict compliance with the rules or the transaction can be voidable

- It is better to err on the side of disclosure, like if it is a sibling, etc. you will want to disclose it. - Must disclose it at the first opportunity, if later become interested must disclose at the first meeting.

Normally you disclose your interest before being elected as a director- For officers, they will not be at every meeting and aware that a transaction is coming to a meeting. They

may not be aware that they are about to transact with a company that they have an interest it so the rules are a bit different

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o Based on awareness, or when they become an officer they state this. As soon as they are aware of the conflict, they have to disclose it

Aberdeen Railway Co. v. Blaikie Bros. – Strict Rule- Facts : One of the brothers was the chairman of the company and he was a partner of the other. One party

repudiate the contract but court said it would be enforced- Decision : An agent has fiduciary duties to principle, so should not be allowed to enter into engagements

where you have or can have conflicting interest.o It doesn’t matter if the contract is fair, it is gone and neither party can get out of it. It is not

enforceable by the courts. It doesn’t matter that it is only one director that had the conflict on the board, each individual director has the duty to give all directors their full knowledge, etc.

o Corporation has the right to have the full interest of the directors, even if one tainted director can taint the whole board, they may be very convincing.

o Rule : no one having duties to principal to discharge shall be allowed to enter into engagements in which he/she has or can have a personal conflicting interest which possibly may conflict with the interests of those whom he is bound to protect.

- This rule was avoidable via ratification, if the shareholders ratified the contract upon proper disclosure of interest

- It became very common for companies giving permission to director in their by-laws to transact and when they could be transacted. For example they had to disclose their interest and were not permitted to vote

Transvaal Lands Co. v. New Belgium (Transvaal) Land and Development Co.- Facts: There were 3 directors of Transvaal, and two of them were the director of another corporation. At

a meeting of Transvaal one director said they should buy some shares of one company from another. S was a director of both and had an interest because he owned some of the shares. He abstained from the vote because but didn’t declare his personal interest in the share purchase. H did vote on the resolution even though he held many shares of the other corporation as a trustee under his father-in-laws will and another 1000 as trustee for wife. He had control over the property on behalf of his wife.

- When the transaction was challenged the court found it was voidable and the company could get its costs back in exchange of shares

- Reason : H was the director and even though he held the shares as trustee, his fiduciary duty as trustee was in conflict with his fiduciary duty as a director. He also had a personal interest but the fiduciary obligation conflict was more paramount. He did not disclose his obligation or abstain from voting. If he had abstained, there would not have been a quorum of directors

- Section 122(3): you can’t write into your articles some kind of explication rule, the rules are the rules, you cannot minimize them but it was possible at the time of this transaction

(ii) Appropriation of Corporate Opportunities- This is when the director takes an opportunity which the corporation could have taken- How do you know that an opportunity or a project belonged to the corporation? Must it be in the

corporations usual line of business? We have to think about the defences, does the opportunity belong to the corporation simply because the director or officer heard about it due to the relationship with the corporation. Must the corporation itself be in a position to take advantage or does it matter that the corporation is financially, legally able to take part in the opportunity? What if the corporation has rejected the opportunity?

- The decisions are very fact and credibility based. - Generally an opportunity which arouse out of the business of a corporation and is particularly promising

then it is presumably in the best interest of the corporation to have pursued though the corporation. - Cannot take opportunities for yourself and must account to the corporation of any benefits received.

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- Initial Strict Approach : if trustee has gotten some benefit that the trustee become aware of only through execution of his/her duties as a trustee then there was no question of whether the trustee acted in good faith. (Regal)

- Canadian Approach : If directors bona fide decide not to invest their corporation’s funds in some proposed investment, a director who thereafter embarks his own money therein is not accountable to any profits he made to the corporation. (Peso)

Cook v. Deeks- Facts : there were four 25% shareholders and three of them decided that when new contracts came up,

they would abandon one of the shareholders and start their own enterprise with a certain contractor. A new contract came to the corporation, it was kept hidden from Cook and the shareholders deliberately decided to exclude the interest of the company whose it was their first duty to protect. They were justified in seeking to severe the relationship but this does not allow them to breach their duty.

o The shareholder, Cook sued on behalf of the corporation, arguing the other shareholders took a corporate opportunity that belonged to the company. This is a derivative action, today Cook would have been able to bring an oppression action.

- Decision: You are bound to represent your company fairly and protect its interests. Therefore the benefit of the contract, the corporate opportunity, is held in corporate trust for the company. When the contract is done, the profits have to be paid over to Toronto Construction and when the company is wound up, Cook will receive his share, surplus divided four ways

o Courts do not sanction directors if they have acquired for themselves property or rights which they must be regarded as holding on behalf of the corporation.

o A resolution that the rights of the corporation should be disregarded in the matter could amount to fettering the interests and property of the corporation in favour of the majority of shareholders who are interested in securing the property for themselves.

- Here if it had gone to the Directors there could be a ratification by the shareholders since they were the majority. In the CBCA situation, the issue of whether or not shareholders can ratify has been dealt with.

- What should they have done to get out of their relationship with Cook?o Before the next opportunity, bring it to a vote to wind up, they had the necessary majority to do

that, under 211. o Also they could have offered to buy Cook out at a fair price. But they could not use the company

to take the contracts which would have been offered to it. Regal v. Gulliver

- Facts : Regal Hastings owned a cinema in Kent, England. The directors of the company wanted to sell it and decided the best price would be gotten if they sold it as a package. So they wanted Regal to get control of 2 other cinemas in Hastings. To get control they had Regal incorporate as a wholly owned subsidiary, Emalgated. Regal capitalized it with all the free capital they had at the time. The landlord of the new cinemas wanted personal guarantees, so to get control of the other 2 they would have to either give personal guarantees or raise more money.

- Instead of giving guarantees they went looking for further capital, the chairman of the board found three subscribers (3000 pounds). The other directors subscribed personally, the solicitor for Regal also subscribed. This was approved by the board of Regal and Emalgated. So now Emalgated is not wholly owned subsidiary of Regal.

- The deal then changed and instead of having the purchaser buy the assets of Regal and Emalgated, the purchasing group bought all the shares of both in separate transactions. The shares of Emalgated which were purchased by the Directors had realized a significant gain, tripled in value due to the way the transaction was structured (the 3000 pounds).

o Never in doubt that the directors didn’t act in good faith, the actions were all for the benefit for the corporation.

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- The new purchaser of Regal appointed new directors and brought an action against the old directors, saying they breached their fiduciary duty by purchasing the shares. The opportunity was Regal’s alone, you had no right to subscribe to Emalgated shares and so you now have to disgorge those shares

- The directors then said that Regal had no money, the TJ and CA both agreed- Decision : The House of Lords ruled that the 4 directors had acquired the shares due to their relationship,

they held the profit as trustees despite the fact that they were bona fide, in good faith. o The shares were acquired by reason that they were directors of Regal and in the course of their

obligationo Sets out the strict duty in equity : insists on those who by use of a fiduciary position make a profit

in no way desponds on fraud or absence of bona fides or upon such considerations or questions as to whether the profit would or should otherwise have done to the P or whether the profiteer was under a duty to obtain the source of the profit for the p or whether he took a risk or acted as he did for the benefit of the P or whether the P has in fact been damaged or benefited by the action

Doesn’t matter that they were acting honestly in the benefit of the corporation. Liability arises from the fact that a profit was made. He analogized corporate directors to trustees.

o Having been in a fiduciary relationship it doesn’t matter that Regal didn’t have the capacity to buy Emalgated.

o These shares were acquired by reason that they were directors and would not have had this opportunity but for their role as directors. The fact that Regal didn’t lose anything doesn’t matter, the fact that there was a profit it important..

- The chairman didn’t buy the shares himself, and so he didn’t profit. Also in terms of the solicitor, he wasn’t liable to give his shares because he was asked to buy the profits.

- This case has been highly criticized because the new shareholder received a refund of their purchase price. If they didn’t want to pay the high amount in the beginning, they should have just offered lower to begin with. This was a windfall to the new shareholders of Regal. The shareholders could have ratified the directors if there was a worry. However nowadays this is not possible unless there is unanimous shareholder agreement.

Peso v. Cropper – if corporation turns down, then a director can obtain in good faith- BCCA decision, in 1966. This ruling was affirmed in SCC in very short reasons- Facts : Peso was a BC company and held a number of silver claims in the Yukon. Later offered shares to

the public and became a distributing corporation under CBCA. In spring of 62 Peso was offered some additional claims, Dixon claims, the offers were brought to the shareholders. The board considered the possibility of acquiring the claims and turned down the offer for financial reasons. They felt they had sufficient claims and a honest decision to not take the claims

- 6 weeks later, the 3 original incorporators of Peso formed a company, Crossbow, and acquired the claims which were rejected by Peso. This was done because Peso could not take advantage of the corporation and Crossbow was acting on behalf of Peso and preventing anyone else from getting them.

- Issue : 2 years later, Charter Oil acquired voting control over Peso, and they wanted the 3 shareholders to turn the Crossbow claims over to them. They said you acquired them due to you relationship with Peso, two of them give them, but one refused.

o He was dismissed from managing director and sued for accounting, breach of trust and a declaration that he holds his interest in Crossbow on behalf of Peso. The shareholder claims constructive dismissal and he won all the way up to the SCC

- Decision: Peso admits they have to rely on the Regal Hastings duties that were imposed. Regal has not been rejected by SCC and has in large part approved. There is a fiduciary duty to account for profits when they are obtained via a conflict of interest.

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o Here they say Cropper owed a duty to Peso, but he acted in good faith and had no intention to profit at the expense of Peso. The interests in the new claims ceased to exist when the board carefully rejected the claims, at which point Peso it was open to the others to go and get them

o They distinguished Regal on the point that the company wanted the opportunity and was looking for ways to get it. Whereas in Peso the board said we can’t manage it and so won’t take it

Regal does not stand for the proposition that once it’s before the board it belongs to the company for all time.

o Peso also argued that Cropper acquired his knowledge only because of his position as director. But the court said that Cropper didn’t acquire the claims on behalf of Peso, and not in the course of execution of the office. Cropper went out on his own behalf and these claims were still available to anyone. Wasn’t acting in the course of his directorship of Peso.

- Policy : See a bit of back peddling from Regal. No one will want to be a director because the duties imposed on them are so strict, at the time in mining, everyone was involved in everything and to draw very strict lines would make the mining development hard.

- Regal and Peso have to be seen as two ends of a continuum, neither is seen as the end point and each new case has to be argued on the new facts

Canadian Aero Service Ltd. v. O’Malley – Principles from Regal not exhaustive, need to look at each set of facts

- Facts: the two Ds are assigned by Aero to prepare a project for them to map Ghana. The two Ds were never properly appointed as directors, they had served as president and vice-president, and so were senior officers/senior management.

o The two Ds resigned while Aero was still trying to bid for the company. They then put in a bid for the same contract via a new company, Terra. Some of the details were different but substantially the same bid. They got the contract and so Aero sued for accounting of profits

- SCC : Senior management is bound by obligations, they are not mere employees and therefore owe the same duties as directors. But there is an evidentiary burden of proof to show that someone is not a mere employee. You cannot take property or business advantage especially when you were charged with negotiating and obtaining the bid. Should have put their best foot forward with Aero, and cannot leave once frustrated with directors and take it for your own. Cannot resign and then have all your fiduciary obligations leave.

o Court notes that the SCC has approved some of the statements in Regal. The principles in Regal are correct, the obligations were correctly stated, but the principles are not exhaustive, new situations will have to be considered and evolve with the law. The categories are not closed.

o But there may be situations where a profit must be disgorged although it was not gained at the expense of the corporation on the ground that the director must not be allowed to use his position as such to make a profit even if it was not open to the company by reason of a legal disability to participate in the transaction.

- Policy: The fiduciary obligation reflects the degree of control, officers have control over corporations and they play an important role in society, so need to be accountable for this. Not just a duty to the shareholder, it is more a need to ensure that our business community responds to high standards of accountability.

- Law : The general standards of loyalty, good faith and avoidance of conflict of duty and self-interest to which the conduct of a director or senior official must conform must be tested in each case by many factors which it would be reckless to attempt to enumerate exhaustively.

- Here Peso is distinguished, no full disclosure and rejection of the plan. Not only seen as a wrongful appropriation of a corporate opportunity, but can also talk about wrongful conduct

- Misappropriation of Corporate Property: Can you appropriate the good will of a corporation. Name something after yourself despite the fact that the company paid the money.

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(iii) The Director’s duty of care, diligence and skill and the Business Judgment RulePre-Codification

- Re Cardiff: director only exercises reasonable care at those meeting which the director attends. - Re Brazillian: degree of care they take depends on the directors particular abilities- Re City Equitable: (1) reasonable care, ordinary person (2) degree of skill, a person of his/her

knowledge (3) degree of attention, doesn’t have to be continuous (4) trust of officials, honesty, absence of grounds for suspicion

Post Codification- Concerned with leniency in the common law so made it more strict - Identically worded provision in the tax act, where a fairly high standard of care for directors and officers

is articulated- Soper v The Queen: tax act is the same as the CBCA Section 122(1)(b), expect director to be a

reasonably prudent person with knowledge and experience of the particular director. o Subjective and objective in that it’s comparable circumstances but then reasonably prudent

person. - Peoples Department Store v Wise: Under section 122(1)(b) is not restricted to a corporation, if there is a

breach of the standard of care, creditors may be able to succeed in an action against the directors where they are also show damages and causation.

o Also stated it’s on objective standard and stated the causation requirement. Also reiterated the business judgment rule, court will not second guess the management decisions

- UPM-Kymere: directors have a duty to proceed cautiously and to educate themselves thoroughly. They should obtain the views of management and of experts on executive compensation.

o Business judgment rule only protects directors who are scrupulous in their deliberations and demonstrate diligence in their deliberations and in arriving at their decisions

- Section 124 permits indemnification of directors and officers generally not allowed where the director did not act honestly and in good faith with a view to the best interest of the corporation or in cases of criminal or administrative action where a director did not have reason to believe the action was unlawful

- Indemnification of an action is only for the costs of action and does not include an amount paid to settle an action or satisfy judgment

Section 122(1)(b)- Every Director and officer of a corporation in exercising their powers and discharging their duties shall

exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

Section 123(4) - Defence of reasonable diligence- Not liable if they exercised the care diligence and skill that a reasonably prudent person would have in

comparable circumstances. Including reliance in good faith on: financial statements or report of a person whose profession lends credibility to a statement made by a professional.

Section 123(5) - Defence of good faith reliance on financial statements, professional advice.- A director is entitled to rely in good faith on financial statements of the corporation represented to the

director by an officer of the corporation or in a written report of the auditor of the corporation or a report of a person whose profession lends credibility to a statement made by professional (123(5))

UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. (“Repap”)- We have a system of corporate governance that works quasi-democratically, directors voted in and

protect the shareholders and when this breaks down, the court has to intervene- Facts : Repap was in distressed circumstances, it had borrowed too much, paper prices were depressed,

three people left running corporation CEO, CFO and in-house consultant. Mr. Berg brought in a big American company, 3rd Ave, who became the largest shareholder, he was the largest individual shareholder. If the two were acting together, that was enough to control.

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o 3rd Ave sponsors Berg to become the chairman, they see him as an ally and someone who had the objective to turn the company around and increase its share price. He immediately retained counsel for the company without consulting Repap’s in-house counsel, which is general practice. He instructs the new counsel to draft an employment contract between himself and the company, this was also strange as it would normally come from the Board. The agreement had generous salary, pension benefits, a large option entitlement which was as the value of the shares increased, he would be paid case bonuses.

- The first draft agreement came before the directors and they all talked about it, were shocked that he put it forward and wanted to send it to a compensation consultant. One of the long serving directors rights a letter to the consultant saying we can’t pay him anything or afford it (somehow Berg gets this). 2 directors resign, as they realize that their plans were different from Bergs, and 3rd Ave decides to stay back from management.

- Berg then puts a new board together; he exchanges drafts of his agreement with the lawyers and then puts a finalized draft to the board. The new compensation committee meets right before the directors meeting to review the finalized draft. They don’t have the report from the individual committee meeting but it gets passed in 5 minutes and recommends that the agreement be adopted without even looking at the compensation consultant report. The consultant was not invited to the meeting to explain her report also not called to give evidence at the trial. Judge assumed that any evidence she would have given would be contrary to him, she would have thought she was Berg’s lawyer

- Board approves the agreement and one of the long-time directors abstained and he resigned the next day. When the shareholders learned of this, they immediately raised issue to it, wanted to replace the board as they were not properly keeping the interests of the shareholders. Berg was not nominated again, he said his contract had been breached and he claimed based on his contract.

- All the shares were then bought out by UPM and the Ps rights to fight the case were also assigned to them. They argued breach of fiduciary duty by Berg and so the agreement could be set aside by section 120, no full disclosure and the contract was not fair and reasonable.

- Also an argument against Repap saying that the Board failed in its duty of care, didn’t exercise the care that a board would in comparable circumstances.

- Decision: The director’s duties of honesty, care, diligence and skill have been breached by Berg. Also the duty of disclosure is included in the honesty part. He is in conflict because he is promoting his own employment agreement.

- Did he comply with Section 120?o Contract is invalid unless disclosure is met, contract is reasonable and fair. There are two parts to

fairness: procedural and substance Procedural: agreement is procedurally unfair in that there had been no arm’s length

negotiations, inadequate information given and it was approved with undue haste Substantive: it was substantively unfair in that it created an enormous liability for the

cooperation without bringing any benefit o No answer to the duty to disclose to say that the directors could have discovered this themselves.

This duty is an absolute one, positive duty impose on the director who is putting forward an agreement.

o The classic way a board protects itself is to appoint independent counsel and committees. They appoint an independent committee, people who are not officers of the corporation, to evaluate the fairness of the bids and make recommendations of the shareholders

o Application : Duty to disclose is part of fiduciary duty of good faith. Berg failed to fully disclose the concerns that others had, the way it developed and the interactions between the lawyer and previous boards. Put it forward knowing how this agreement could hurt a company like Repap.

o Inappropriate that he got a lawyer to represent on his behalf, when he made it seem as though they were acting on behalf of Repap. His own self-interest prevailed. He was also seen as being a non-credible witness.

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o Agreement cannot be saved under section 120, disclosure was not met and the contract was unfair.

- Section 122(1)(b) o Here the court went through each director and stated where each went wrong.

- Berg tried to save the agreement by arguing that it was saved by using the Business Judgment ruleo The rule protects decisions of directors so long as they are reasonable and diligent, doesn’t

have to be perfect. Directors are only protected to the extent that their actions actually evidence their business judgement. Courts are entitled to consider the context of their decision and the extent of the information on which the decision is made. Recognizes the autonomy of the corporation. Court has the ability to examine the context in which the decision was taken

o The fact that they made a wrong decision should not be reason to question it. Courts may not be equipped to say that a certain decision is wrong.

o Application: Here there was no proper and careful deliberations, the committee met for 5 minutes and never even looked at the agreement or reports of the experts. The only person who spoke about it was the lawyer for Berg. Decision neither informed nor reasoned

o Cannot defend this decision based on the business judgment rule, business judgment was not brought into bear here.

- Oppression: Section 241 allows the court to act where conduct is oppressive and unfairly prejudicial or unfairly disregards the interests of the security holders, even if the conduct is unlawful. Here the agreement was set aside as the directors and Berg unfairly disregarded the interests of the shareholder by approving the agreement (241(3)(h))

People’s Department Stores v. Wise – Objective analysis, duty is to corporation but may extend to others when looking at the best interests of corporation

- Dealt with both the breach of fiduciary duty (122(1)(a)) and duty not to be negligent (122(1)(b)). - Facts : Wise was a federally incorporated company, publically traded but the control was within the

family. Wise then acquires all the shares of Peoples from Marks and Spencer. They borrowed heavily from TD Bank and then took on debt from Marks and Spence which was going to be paid out from the profits of the corporation.

- The plan was to amalgamate the two companies but the sellers doesn’t want this to happen until it had been fully paid by Peoples. The business systems were beginning to break down, a solution was brought forward, to the brothers and they implemented without a board meeting or any consultation with the directors. The solution didn’t work and Wise stores became indebted to Peoples, then the two went bankrupt, they were in direct competition with Walmart. Brothers being sued by unsecured creditors

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

- Argument: Directors favoured Wise over Peoples and didn’t act with the requisite care. - Decision: - TJ: Case became notorious because at trial found in favour of the creditors. Held that as a corporation is

going under, directors owe a duty to protect the creditors, not just shareholders and corporation. Duty shifts from the corporation to the creditors because they need protection.

- CA : reversed this and said no fiduciary duty ever owed to the creditors and the Wise brothers acted in good faith

- SCC: Also disagreed with the trial judge, but different from CA. Limited to Section 122(1)- To whom do they owe a fiduciary duty?

o It is not specified but it is assumed to be the corporations as the directors are agents of the corporation and so should be protecting their interests.

o In “comparable circumstances”, is a purely objective analysis, doesn’t go to the skill or experiences of the person, it is simply comparable circumstances

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o There will not be a breach of fiduciary obligations if the directors take a long term view. Don’t have to look only at profit maximization or shareholder primacy.

o Accept as an accurate statement that if they are acting in view of the best interest, may be able to look at the interest of many different groups. Didn’t go as far to say that the duty shifts in the vicinity of bankruptcy/insolvency. The duty is always to the corporation, but in the broad concept, not just profit maximization.

- Application: Here the brothers acted in good faith, wanted to solve the problems of the merger. Not liable for the breach of the fiduciary duty. No ulterior motive here, so they fulfilled their fiduciary obligation.

o Creditors should have brought an oppression actiono Also say that the creditors cannot sue directly of 122(1)(a), no cause of action based on fiduciary

duty, the creditors do not have a personal, action. - Defences : Section 123(5): they were directors and officers of both. But the court never decides if they

were acting as directors or officers, they assumed they were directorso The obligations are imposed equally on both, but the defence is only for directors o Officers don’t have this defence but may be able to argue that the business judgment rule should

apply to them as well.

- Business Judgement Rule : Directors and officers will not be held to be in breach of the duty of care under 122(1)(b) of the CBCA if they act prudently and on a reasonably informed basis. The decisions must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known. Courts are ill-suited and should be reluctant to second-guess the application of business expertise to the considerations that are involved in corporate decision-making but they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made.

(iv) Directors’ duties and the oppression remedy

Introduction to the oppression remedy CBCA Section 238, 241.

- Looked at this in the Westfair case but there we focused more on the shares and the different rights. There is very broad discretionary power of the court to hear complaints, it is a real equitable remedy that began to develop in the 20th century but then became a statutory remedy when the CBCA was first introduced

- Section 238: Definition of Complainant, shareholder or bond holder, director or officer, Director, or any other proper person.

- Section 241(1): Application to the court re oppression. - 241(2): Grounds, act or omission of the corporation or affiliates, business or affairs conducted in a

manner, or powers used in a manner that is oppressive or unfairly prejudicial or that unfairly disregards the interests of any security holder, director or officer may order a court to rectify

- 241(3): Powers of the court, gives us the list of orders that the court can make - 241(4): Duty of Directors- 241(5): Exclusion- 241(6): Limitation, corporation shall not pay if after payment it would be unable to pay its liabilities or

assets become less than liabilities- Can claim 122(1)(a), (b) and oppression. The 122 ones are argued to feed into the oppression remedy.

Shareholder Ratification of Breach of Fiduciary Duty

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Generally you cannot ratify but only one exception: Section 120(7.1) – Ratification by shareholders

- If the director acted honestly and in good faith, they do not have to account for profits from a contract for which disclosure was required and the contract is not invalid if

o (a) it was approved or confirmed by special resolution at a meeting of shareholders o (b) disclosure was met in a manner sufficient to indicate the nature before the contract or

transaction was approvedo (c) the contract or transaction was reasonable and fair to the corporation when it was approved or

confirmed.Section 122(3)

- Subject to section 146(5), where shareholders restrict the powers of directors, no provision in this act relieves a director or officer from the duty to act in accordance with this act or from liability.

Section 242(1)- Evidence of shareholder approval is not decisive - An application brought under oppression is not stayed or dismissed just because it can be shown that an

alleged breach of a right or duty owed to the corporation has been or may have been approved by the shareholders. The court can take this into account, however it is not decisive, just evidence.

Ratification of Duty under S. 122- Cooks v Deeks: taking a corporate opportunity cannot be ratified by the shareholders. - Northwest and Beatty: Shareholders could ratify contracts with interested directors, this was probably a

term in the articles. They also held that he could vote in favour of his own interest. - The cases which tend to permit ratification are the English cases based on the theory of a corporation

based on contractual relationship. In BC act you may try to suggest that ratification is possible if majority agree, it is a contractual relationship why should they not be allowed to do this

3. Other CBCA duties of directors

Section 42- Corporation shall not pay dividends if there are reasonable grounds to believe it would make a

corporation unable to pay liabilities or assets become less then liabilities. Section 118

- (1) Directors Liabilities: director who votes for or consents to a resolution to issue shares, where inadequate consideration is given may be jointly or severally liable.

o Can be where property or past services are not equal to the value of the shares. o Also important here that if you dissent is not registered, you are deemed to have consented

- (2) Further liabilitieso (a) purchase, redemption or other acquisition of shares contrary to s. 34, 35, 36o (b) commission contrary to section 41o (c) Paying a dividend when not in a position to pay it, directors have to make up or re-contribute

the amount to the extent that it exceeds what it should have been. Can also go after the shareholder who received the illegal divided and ask for contribution from the other ones.

o (d) payment of indemnity under section 124, indemnification of directors occurs where the directors having been sued when exercising their duties as a director, has the corporation pay their legal costs

They were acting in the best interest of the corporations but it was contrary to someone else’s interests. If one pays the entire liability, the others have to also contribute

o (e) payment of a shareholder contrary to section 190 or 241. When shareholders disagree to a fundamental change, they have the right to have their shares bought out at fair value.

Court can order that the shareholders purchase the oppressed shareholders shares.

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A director who votes for or consents to a resolution to repurchase shares when the corporation doesn’t have the financial capacity to do this, have to make them liable

All about making sure that the corporation is able to pay the debts if need be, if it puts payment of creditors in jeopardy

- (3) Contribution: can force other directors to contribute if satisfied a judgment - (4) Recovery: can get a court to order recovery of whatever was given - (5) Order of court- (6) No liability: not liable if the director did not and could not have known that the fair value was not

given- (7) Limitation: 2 years

Section 119 – Liability to employees - A protection for employees, directors can be personally liable for unpaid wages. - (1): directors are jointly and severally liable for all debts up to 6 months wages for each employees for

services performed for the corporation- (2): condition precedent to liability, must have sued the corporation within 6 months, corporation must

be liquidated or bankrupt. - (3): Must do it within 2 years - (4): only liable to the extent that the corporation cannot pay - (5): subrogation of director, if they pay the employee, entitled to any preference the employee may get- (6): Contribution from other directors

Section 122(2)- Duty to comply, every director and officer of a corporation shall comply with act, regulations, articles,

bylaws, and any unanimous shareholder agreement Section 190(26)

- A corporation shall not make a payment to a dissenting shareholder if there are reasonable grounds to believe that it will make the corporation unable to pay its liabilities or the assets become less then liabilities.

Section 241- Oppression

Section 123(4) - Defence of reasonable diligence. - The director is not liable under section 118 or 119 and is deemed to have met duties under 122(2) if the

director exercised the care, diligence, and skill that a reasonably prudent person would have in comparable circumstances. This includes reliance on

o (a) financial statements or (b) a report of a person whose profession lends credibility to the statement

Cases on Section 119Barrette v. Crabtree Estate – only liable for services already performed, not debts of corporation

- There have been changes in the CBCA since it was made, Section 114 is now Section 119- Facts: A plant was closed and managers were laid off, there was no agreement and so no notice given.

They were awarded judgment but company was bankrupt and could not pay so brought an action against directors. The employees had received all wages for the work provided, wanted damages now

- Issue : Whether under Section 119 the directors of a corporation against which employees have obtained judgment can be held personally liable for sums of money awarded by a court as remuneration in lieu of notice of dismissal

- Policy for Section 119 : The directors know how the company is doing financially, and if they allow the employees to work despite knowing they may not get paid is unfair. Should give notice to the employees, it imposes an obligation to act. The employees are also very vulnerable as the employment is generally the only source of income.

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- Section 119 is exceptional in that it departs from the fundamental principle of separate legal personality and more generally that no one is liable of the debts of another, since directors are separate from corporation

- Decision : Distinguished the debt for wrongful dismissal from the debt of services performed. Section 119 makes them pay for services performed for the corporation and the court says that in this case the amounts awarded for damages are not debts for services of the corporation. All the wages for service had been paid, this debt is not one of the ones covered under section 119

Proulx v. Sahelian Goldfields – payable services not necessarily wages, can be other expenses incurred- Facts: The corporation failed and ceased operations, employees brought actions for wages, vacation pay

and travel expenses. - Section 131(1) of the Ontario act which provided that directors are liable to the employees for all debts

not exceeding six months wages that become payable for services performed by the corporation. Very close to the provision in CBCA.

- The directors argued that the amounts they were claiming were not wages, and so not included in the section

- Issue : Do other unpaid expenses constitute a debt for services which were performed for the corporation- Decision: No need to equate payable for services with wages, it was sufficient that the employees

were entitled for reimbursement of debts for services that the employees had performed. May not be a direct payment for services, it was a debt in relation to services performed for the corporation.

o Here there was no doubt that the expenses which were incurred resulted directly from the performance of their individual employment duties. Don’t have to look at whether wages includes expenses.

4. Obligations under other legislation

R. v. Bata Industries Ltd. - This was the first environmental standards offence type of case in Ontario where directors and officers

were charged with offences related to the criminal offence which the corporation was charged- Facts : Bata was the Canadian arm of the Bata shoe empire, 80 corporations worldwide. They stored their

chemical waste on site in leaking drums and pails and no one was taking care of it. o Westin was the director of the board and VP, his main job was to stop the losses of the

corporation and try to keep manufacturing and employment in Canada high o He was successful in this by cutting senior employment, environmental concerns were not high

on his list and Mr. DeBrown was responsible for this. - In 1986, there was discussion about the waste storage drums, and Westin told DeBrown to get a quote

on how to get rid of it. The first quote was too high and a second quote was obtained a year later. Westin was then transferred to Malaysia and he budgeted $100,000 to clean the pails but nothing was done. It ended up costing about $450,000 to clean up the mess

- Due Diligence : As a corporation, they failed to take reasonable care, a system was put in place that was not followed. They did nothing. Need to ask

o (1) Did the board of directors establish a pollution prevention "system", was there supervision or inspection? Specifically did each director ensure that the corporate officers have been instructed to set up a system sufficient within the terms and practices of its industry of ensuring compliance with environmental laws, to ensure that the officers report back periodically to the board on the operation of the system, and to ensure that the officers are instructed to report any substantial non-compliance to the board in a timely manner?

o (2) The directors are responsible for reviewing the environmental compliance reports provided by the officers of the corporation, but are justified in placing reasonable reliance on reports provided to them by corporate officers, consultants, counsel or other informed parties.

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o (3) The directors should substantiate, supervise, that the officers are promptly addressing environmental concerns brought to their attention by government agencies or other concerned parties, including shareholders

If they delegate, must be done effectively, doesn’t rid them of responsibility o (4) The directors should be aware of the standards of their industry, and other industries

which deal with similar environmental pollutants or risks.o (5) The directors should immediately and personally react when they have noticed the system

has failed.- Bata : Main director, more of an advisory, had knowledge of the entire organization and had the least

personal contact because managing at the international level. He had done what was expected, when he became more aware of environmental regulation, had the technical advisory circulated which emphasized environmental concerns. He had told the entire organization that environmental concerns will be higher and expected the president and vice-president to comply with his orders

- Marchant : he had greater responsibility then Bata and had personal knowledge of the problem for 6 months and did nothing. So his due diligence would have required a degree of supervision and control but he was silent despite knowing a problem

- Westin : he was on site and when he accepted the job wanted authority over the job site. So he had complete authority over everything that happened there

o He delegated to DeBrown and then failed to give him the resources to deal with the problem o Westin did not make an informed business judgment because he didn’t spend enough time

assessing and focusing on the situation. - Sentencing was all in the form of fines.

o Bata will not indemnify Westin and Marchanto During the term of the probation order, Bata will make environmental issues at each board

meeting for the term of probation

B.C. Employment Standards Act s. 96 - Allows recovery where the CBCA would generally not- S. 96(1): a person who was a director or officer at the time the employee should have been paid, is liable

for 2 months wages- This is different from CBCA because here officers are also liable- S. 96(2): not liable for any liability under section 63 the basic pay in lieu of notice or wrongful

dismissal, for bankrupt corporations, vacation pay or time banked- S. 95: the parent and subsidiary corporations are considered one employer so the employees would be

able to recover from the parent corporation without going after subsidiary, which is also strange- Corporation is not specific to BC corporations, this is a law of general application and so federally

regulated employers in BC are subject to this o So a director of a CBCA corporations would be liable under Section 119 and the employment

standard act as that is the general law of BC- They are not the same, the bankrupt CBCA corporations would not be liable under employment

standards act, but would be under CBCA.

5. Tort liability of directors and officers

Said v. Butt – Director who acts in his powers on behalf of corporation, is not liable in tort - Generally an agent who acts on behalf of an undisclosed principal can make a contract between the

principal and the 3P. The 3P is still bound and the principal may disclose themselves and make the 3P perform. Only way to get out is if one party can show that they would never have contracted with the principal

- Facts : he tried to buy a ticket for a show, they wouldn’t sell it to him so his friend bought one for him.

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- Decision : There was no enforceable contract because they would never have willingly contract with Said- The court also considered a case in tort against Butt who was a director and managing director. Said

argued that he had induced the corporation to breach the contract. - Decision in obiter : Court found Butt had powers to act on behalf of the corporation and acted in good

faith and in the best interests of the company when he conducted his actions. If Said is correct then every breach of contract of the corporation will make the directors personally liable. This cannot be right because it transfers liability from the corporation to the director.

o The director that acts in his powers on behalf of the corporation is in a different position then a stranger who wrongfully induces the breach of contract

o If a servant acting bona fid within the scope of his authority causes or procures a breach of a contract between his employer and a third party, he does not thereby become liable to an action of tort at the suit of the person whose K has thereby been broken. This is not inconsistent with the rule that an employee who actually authorizes a tort may be liable as a joint participant

- Rule: An individual acting within their authority which causes someone to breach the contract, is not liable, affirmed in ADGA

ADGA Systems v. Valcom Ltd. – Specific acts were tortious, and independent of the corporation - Leading case on directors and officers liability- Facts: A and V were competitors, and biding for a contract. To bid they had to show they had at least 25

senior technicians. A had the contract in the past and so had 45 of the technicians who were already performing. Allegation is that V had none so then they apparently through the sole director and 2 senior employees of convinced all of As employees to work for them and put their names in their bid

- Allegation is that these 3 people induced the employees to breach their contracts with A and to breach their fiduciary duties. Allegation is the senior employees were the same as officers and directors.

- Issue : can directors and senior employees be sued for their actions as individuals assuming those actions were genuinely directed to the best interest of their corporate employers. If it is held that V is held liable, can the three individuals be held personally liable for their personal acts in inducing the employees of A

- Policy concern : If every time you have a dispute between corporations and can plead directors are personally liable will have a chilling effect on the corporations. If you really believe the corporation should breach the contract and that it is in the best interest of the corporation, the range of action could be constrained. Generally you are not supposed to be personally liable for the acts of the corporation or the contractual obligations of the corporation.

o Lots of people will say I don’t want to be a director if every time something goes wrong they can be liable

o Also generally where they act in the best interest of the corporation and parties have voluntarily chosen to accept the risk of a limited liability corporation, should not go after directors

- Decision : You should not be able to hide behind a corporation every time something goes wrong. o An individual acting within their authority which causes someone to breach the contract, is not

liable (Said principle). But employees, officers, and directors will be held personally liable for tortious conduct causing physical injury, property damage or nuisance even when their actions are pursuant to their duties to the corporation.

o But in this case, the three individuals were not causing V to breach the contract but were inducing employees of A to breach their contract. So Said doesn’t apply here, it is distinguishable.

o There are allegations that specific acts were tortious and independent of the acts of V. The pleadings support a claim against the individuals, they were not acting as agents or officers or managers of V in regards to what they did. We will allow this case to continue for that reason.

o Here there are no policy reasons to not make them liable, - Berger v Willowdale: an employee sued the president of her employer when she slipped on the sidewalk.

She was covered by workers compensation and barred from suing other employees or other employees

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and sued the president directly. She was successful because he worked in the same building, he could see there was ice and had the power to send someone else and people were slipping. He was a person who had the power to ensure that someone was not hurt. The facts in this case are exceptional

- London Drugs v Khun: there was a cap of liability to a certain amount and the actual damage was more, so London Drugs could only get so much so they sued the employee. He said the employer will be VL due to the negligence of the employee. The SCC said nothing that bares you from suing the employee as well, they are not personally liable for their own independent tortious actions

6. Indemnification and insurance

Section 124- (1): the enabling provision, a corporation may indemnify a director or officer against all costs, or

amounts to satisfy a judgment, has to be reasonable incurred or in a civil, criminal, investigative matter etc. They use entity instead of body corporate because it may affiliate

- (2) Advance of costs if needed - (3) Limitation, may not indemnify unless the individual acted honestly and in good faith, or in the case

of a criminal and administrative action which is enforced by a penalty - (4) Indemnification in derivative actions- (5) The right to an indemnity, despite subsection 1, they are entitled to recover expenses reasonable

incurred to which they are subject due to the association with the corporation if they were not judged to have committed any fault, or omitted to do anything that the individual ought to have done. If you win your case you are entitled to indemnity of costs

- (6) Insurance, this is often purchased for the directors in the board - (7) Application to the court for indemnity- (8) Notice to Director

Section 118(2)(d) - Directors are liable if they permit an indemnity which should not have been given in the first place

Consolidated Enfield Corp. v. Blair – Presumption of good faith - Facts : Blair was the director of Enfield and held a large portion of the shares, his main opponent was

Canadian Express. They had an annual meeting and the board had been able to agree on a slate of nominees, Blair was one of the nominees. His group nominated 6, other side 5

- Blair was the chair since Enfield’s by-laws said that the president should act as the chair of the meeting. There were supposed to be 11 nominees but then at the meeting a surprise nomination was proposed by Canadian express. They were able to elect Price and so Blair was defeated.

o The night before the meeting, Blair met with Osler and they advised him that there cannot be a surprise nomination and so at the meeting he had to declare the votes. When the vote came in, the lawyers said reject the votes cast for Price and that his majority should be accepted. But then he immediately set up another meeting with Price as the nominee. Canadian Express didn’t accept this and challenged the rejection all the way up.

- Canadian Express Argument : Since his legal advice was faulty, Blair at fault as he breached his fiduciary obligations. Canadian Express sued both the corporation and Blair and so they wanted the money entirely from Blair.

- Blair Argument : He is suing for indemnification, under Enfield’s bylaws and Ontario acto To be entitled to indemnification he must have been party to the ligation as a result of his role as

director, and cost must have been reasonable incurred. o He was acting in good faith and in the best interest of the corporation and the costs were

reasonably incurred because Enfield authorized them o Section 124(5) also requires the person to not be found to be at fault

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- Decision : Court applies a presumption of good faith, nothing that suggested bad faith and so the person alleging bad faith had to bring some kind of evidence.

o Since the by-laws said the president will serve as the chairman, he was directly involved because of his position with the company.

- Law : The chairman should act quasi-judicially. A potential conflict doesn’t require a chairman to step down, the function of chairman is to make a decision based on legal advice. If there is dispute about what has occurred, the court can decide on this.

o Section 145 of CBCA allows the court to review an election and determine any controversy regarding the appointment of a chairman

o Application : Blair’s intention and actions were correct in this situation and this satisfies the test of honesty, good faith. Even though his legal advice was wrong, cannot be said it was done dishonestly or in bad faith. Also the fact that he proposed a new shareholders meeting shows his lack of bad faith

o Permitting Blair to be indemnified is consistent with broad policy goals underlying indemnity provisions, these allow for reimbursement for reasonable good faith behavior thereby discouraging the hindsight application of perfection.

- Issue of fault : Mandatory right to indemnify and fault section 124(5) o This is not a default provision, if they are found to commit fault, then no indemnity o You can put in the by-laws that every director is provided an indemnity provided they meet the

minimum rules of section 124. o Care, diligence and skill are not requirements for indemnification, this is an internal company

standardo If you look at it here, fault seems to suggest that he did something incorrect but also wrongful in

some way. So it is hard to say that this was wrongful, he could not have done anything else other than ask for legal advice. But can be argued both ways

R. v. Bata Industries Ltd. - Facts: They were not allowed to indemnify the directors according to the probation order. This is

because it would result in the directors not paying anything and the corporation receiving a tax benefit. Otherwise there would be no other option then incarceration.

- CA : The purpose of the probation order against Bata industries should be to deter and rehabilitate Bata and not to ensure punishment of the other accused. Using the probation order was improper use of criminal law. Should be left to the corporation to determine whether or not to indemnify.

- Assuming Bata was a CBCA corporation, could indemnification be possibleo This was the first case being heard where the directors or officers could be held criminally liableo So the issue that they didn’t know it was unlawful, but S.124(3)(b) no indemnification for

criminal acts - In light of statutory scheme and general application established by legislature, do not think it is

appropriate, absent compelling circumstances to impose a term of probation that would deny directors such as Marchant and West access to legislation intended to be of general application

o Also in bylaws this was not permittedo But if they really wanted to indemnify them, could do it after the 2 years.

VII. CORPORATE GOVERNANCE STRUCTURES: SHAREHOLDERS

A. General Powers of Shareholders

1. No Usual Management Powers

- The shareholders have the role of providing the capital or equity while the directors or officers carry on the management.

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- They are not liable for the corporation’s obligations or debts. Not expected to give expertise, skill or knowledge in regards to their shares. The person who is a shareholder is generally an officer or a director, but must keep each role separate in regards to the different acts they are taking part in.

- Directors manage and supervise management (S.102), not shareholders- People assume that shareholders can dictate to the board of the directors on some notion that the

shareholders are the principals and the directors the agents, but no such power exists. - They do have some power in respects to fundamental changes

Automatic Self-Cleansing Filter Syndicate v. Cuninghame – Directors are not agents of the shareholders- Facts: shareholders wanted to sell the assets and got shareholder voting, the directors then decided it was

not in the best interest of the company and so did not execute the contract. o Then one of the shareholders applied to the court to have an order compelling the director to

carry out the contract- Decision : the directors were not obliged to sell something in their prerogative which was not in the

best interest of the corporation. The directors are not the agents of the shareholders. Shareholders are not the principals with a power to dictate to directors

- Having control for day to day decisions in the hands of the shareholders makes management decisions cumbersome and expensive.

- What they could have done was kick out the directors and put in ones that would do what they wanted them to

2. Access to Information about the Corporation- In order to exercise voting rights effectively, may need access to certain records

Section 20- (1): shall maintain and prepare at the registered office records containing the bylaws and articles,

minutes of meetings, copies of all notices, a securities register- (2): Directors records, shall prepare and maintain adequate accounting records and minutes of meetings

and resolutions of directors- (2.1): Retention of accounting records, keep them for 6 years- (3): Records of continued corporation, must have records from before it was continued under this act- (4): Place of directors records, kept at the registered office or any place where the directors can inspect

them in a reasonable time- (5): Records outside of Canada must also be kept at a registered office in Canada- (5.1): when records are kept outside Canada must be available through a computer or other method of

technology- (6): Offence to not comply with these records without a reasonable cause.

Section 21- (1) Access to corporate records: shareholders and creditors of a corporation have access to all the

records described in section 20(1) during the regular business hours of a corporation, free of charge and can make copies

- (1.1) If you wish to access the securities register must first make a request to the corporation and agent and they will allow you to see it for a fee and during designated hours

- (2): Copies of corporate records, shareholder can have one copy free of charge or bylaws, articles and unanimous shareholder agreements

3. Resolutions CBCA 2(1)

- “ordinary resolution”: a resolution passed by a majority of the votes cast by the shareholder who voted in respect of the resolution

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- “special resolution”: a resolution passed by a majority of not less than two-thirds of the votes cast by the shareholders who voted in respect of that resolution or signed by all the shareholders entitled to vote on that resolution

- resolution in lieu of meeting: CBCA 142- 142(1): can have a resolution in lieu of meeting, signed by all shareholders entitled to vote, is a validly

passed resolution. But this has to be unanimous. o This is commonly done in small companieso (2) A copy of the resolution must be kept in the minutes of meetingo (3) Unless a ballot is demanded, the record of the minutes in the meeting is proof of approval

Section 135?? From lecture- Notice of a meeting must be given in a prescribed period, in regulation 44 is 21-60 days. - If notice is not received in the time, under 247 can argue there had not been a quorum but would be up

against 116(3), holding of meeting not valid

4. Election and removal of directors

- Shareholders have the power to elect directors at annual shareholder meetings. Gives them a means to exert some control over who manages the corporation or at least can allow for management to be change through a takeover bid.

- Section 106: the ways in which they can be elected, notice, term of officer, election, staggered terms, no stated terms, incumbent directors, vacancy among directors, vacancy among candidates, appointment of directors, election or appoint as director. (page 51)

- Section 109: removal of directors, exception, vacancy, resignation, exception

5. Amendment of by-laws

- Default is that directors have the right to initiate bylaw changes in CBCA corporations, these change must be ratified by shareholders at the next meeting.

- Section 103: - (1) Bylaws: unless articles say otherwise, the directors can make, amend or repeal any bylaws that

regulate the business or affairs of the corporation - (2) Shareholder Approval: these changes have to be submitted to shareholders - (3) Effective date: the bylaw is effective from the date of the resolution of directions until confirmed - (4) If not approved or taken to a meeting, then it ceases to be in effect - (5) Shareholder Proposal: a shareholder entitled to vote can make a proposal to make amend or repeal a

bylaw

6. Review financial statementsSection 155(1)

- Annual review by the shareholders of the financial statements- Under 155(1)(a) the directors have to place in front of each shareholder the financial statements so that

they can compare with the last year’s results, - (b) The report of the auditor, this is generally the person who does a review of the accounts of the

corporation and they will test the accounting records.o Role of the auditor is to say that they paid this amount and it went to the correct location. o This report is professional and they have to raise any concerns they have. If they are satisfied that

the financial statements are correct, that is fine. They can put notes to their opinions assessing where the risks are

o If there are concerns, they can go to the shareholders meetings and question directors on what is going on

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- (c) Any further documents which have information about the company’s financial position. - Offence for the corporation to not comply with section 155, this is a critical opportunity for shareholders

to learn what is going on and verify it.

Section 159 – Offence not to provide copies of the records described above- (1) The corporation must provide each shareholder at least 21 days before the meeting or signing a

resolution copies of all the financial statements mention in section 155- (2) if a corporation fails to comply with this, they are guilty of an indictable offence and liable on

summary conviction to a fine not exceeding $5000

7. Appoint an auditor

- Section 161(1): Qualification of an auditor, must be independent of the corporation and any of its affiliates or directors

o Must be an objective, professional view and not compromise the interests of the shareholders. o Auditors must ask the difficult questions and not be afraid of being too hard hitting.

- Section 161(2)(a): independence is a question of fact - Section 161(2)(b): deemed not to be independent if he or his business partner, (a) is a director, officer,

employee, an affiliate, shareholder or debt holder, etc. (b) beneficially owns or controls, directly or indirectly material interests in securities, (c) has been a receiver or manager, liquidator of corporation in the last two years

o Generally if one partner is not independent then the whole firm is not independent - Section 162(1): Shareholder appoint auditor at each meeting until the close of the next meeting

o (2): Eligibilityo (3): Incumbent auditor: it new auditor not appointed, they continue until successor appointedo (4): Remuneration: fixed by ordinary resolution of shareholders

- Section 163(1): Dispensing with auditor, if not a distributing corporation can decide not to appoint an auditor.

o (2) Limitation, only valid until next meetingo (3) Need unanimous consent

- Section 169(1): Examination, they have to make the examination that is in their opinion necessary to enable them to report in the proscribed manner.

- Auditors are also bound by professional standards, this auditing gives the shareholders the opportunity to examine finances and if they have concerns they can prepare to challenge the directors

B. Shareholder meetings

1. Generally- Section 133: directors have to call the annual meeting within 18 months of incorporation, then every 15

months after that - Section 132: (1) Meetings must be in Canada unless the articles specify a place outside of Canada.

o (2) Can happen outside Canada if specified in articles or all entitled to vote agreeo (3): If you attend outside, deemed to have consentedo (4) and (5): can attend via electronic or other means

- Section 135: (1) Notice of meetings time and place must be sent to each shareholder, director and auditor

o (1.1): period of notice may be shorter for non-distributing corporations o (2) don’t need to send notice to shareholders who are not registeredo (3) adjournment (4) notice of adjourned meetings

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o (5) business transacted at special meetings is special business, only 4 things are ordinary business, This is important because it goes to what notice must be provided to auditors for special business. Must give some background and of a special resolution to support special business, text must be provided for that as well, so additional notice.

o (6) notice of special business, state nature of business, text of any special resolution- Regulation 44: for the purpose of section 135(1) the prescribed period for the directors to provide notice

of the time and place of a meeting of shareholders is not less than 21 days and not more than 60 days. - Section 136: If you attended the meeting, it is waiver of notice. - Section 139: (1) quorum is needed for the beginning of the meeting, (2) opening is sufficient, even if

people leave before the vote (4) meeting adjourned if not met at beginning - 139(4): if only one shareholder, the shareholder present constitutes a meeting. But you want minutes or

consent authorizing that- Section 140

o (1): Presumption is that every share has one vote, unless otherwise specified o (2): The board of directors have to authorize their human representative to chair the meeting, or

authorize the proxy holdero (3) powers of the representative are of an individual shareholderso (4) joint shareholders, can have just one present, if two then only one voteo It is the number of votes and not number of shareholders that counts.

- Section 141o (1) voting is by a show of hands o (2) shareholder or proxy may demand a show of handso (3) can have electronic filing – Regulation 45(1), for the purpose of this section when a vote is to

be taken via these means, the facility must enable the votes to be gather in a verifiable way and must permit the votes to be tallied without identifying how each shareholder or group voted

o (4) voting while participating electronically – Regulation 45(2) same concerns of verification and identity

- Section 142o (1) resolution in lieu of meetingo (2) filing a resolution, in minutes of meeting o (3) evidence, a presumption that the chairpersons decision is prima facie the outcome of the vote,

it can be challenged

2. Requisition of meeting by shareholdersSection 143

- (1) Requisition of a meeting: shareholder must hold no less than 5% of shares to requisition a director to hold a meeting.

- (2) Form: may be a document with signatures and state the business to be transacted and sent to each director

- (3) Directors call a meeting, there are a few exceptions, like if (a) a record date has been fixed, (b) they have already called a meeting, or (c) they can refuse to call for a requisition if the business is one that is inappropriate as stated in S. 137(5) (b-e))

o (b) Cannot requisition if it is in regards to a personal grievanceo (b.1) doesn’t relate to the business or affairs of the corporation.o (c) person fails to present in timeo (d) substantially the same as before and didn’t received adequate support o (e) rights are used abused to secure publicity o Tried to keep out social or political matters out

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o But now the courts have said that if it is social or political but relates to the corporation’s business or affairs can requisition a meeting. If there is a business aspect or something that touches on the corporations business, then it is relevant

o If directors fail to call meeting once a requisition is given shareholders can be reimbursed.

3. Meeting ordered by courtSection 144

- (1) Allows the court to call a meeting of shareholders if it is (a) impracticable to call the meeting within the time or in the manner in which those meetings are to be called, (b) it is impracticable to conduct the meeting in the manner required under the act or (c) the court thinks that the meeting should be called

- In some circumstances, the two directors may not speak to each other and won’t come to or call a meeting. So the corporation is ungovernable and this allows one director or shareholder to get a court order to have a meeting held to break the dead lock. This may not work because there are many ways to avoid going to a meeting or quorum.

- (2) Varying the Quorum: the court can also change the quorum to take control of the court ordered meeting. This is to help arrange the dissolution.

- (3) a meeting called under this act is a valid meeting - There are alternative ways to get the corporation on the track.

4. Court review of electionsSection 145

- (1) The power of the court to review an election- This is what was happening in Blair and Enfield, under 145(2)(b) the court ordered an order declaring

the result of a disputed election - (2) the various orders, (a) can restrain a director whose lection is challenged (b) declare the result of a

disputed election (c) require a new election (d) order determining the voting rights of shareholders Conduct of Meetings

- Designated person takes the chair- Chair receives the report of the scrutinizers on proof of notice of the meeting and on the presence of a

quorum. - Motion is typically request to dispense with the reading of the minutes of the last annual report - Annual report present with president’s remarks and auditors report read out- Election of directors, slate proposed ahead of time - An appointment of auditors and meeting may then approve a motion concerning their remuneration- Duties of Chair: Wall v London Northern Assets Corp

o A chair must act in good faith and in an impartial manner and must allow shareholders to speak to matters before the meeting

o The chair need only allow a reasonable time for reasonable argument and can put down a minority bent on obstructing the business of the meeting

- Re United Canso oil and gaso At a meeting the chair refused many proxies, group was trying to oust himo Here some documents should have been allowed and the chair could not just adjourn the meeting

on his owno Court further noted that chair had not acted in an impartial manner

- Blair v Consolidated Enfield Corpo Here the chair was not sure he could vote, asked the lawyers they said it was fineo Corporation was transferred over to him, new board and sought declaration that the ballot for

replacement was not properly carried outo The issue was whether chair acted honestly and in good faitho Legal advice doesn’t automatically sanctify the director but is considered

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o A chair in a corporate meeting often has an interest as a director or shareholder and the court should therefore not say that the interest automatically makes the decision not bona fide

C. Shareholder Control of Fundamental Changes:

- Statute tries to balance the right of the majority shareholders to control over fundamental changes against the reasonable expectations of the minority of the corporation who originally invested thinking the corporation will continue to be governed by the same rules (statutory and in the articles) and will continue to carry on the same or a similar business to the one carried on when the shareholder purchased his or her shares.

o Let’s them get out of the corporation with the value before the change. You should not be prejudiced by the change and lets you out by making the corporation buy your shares.

o Since the minority is often tiny, when the shares are appraised, gets done with a discount because you don’t have control. So in a fair market value you would get much less then someone who has 51% of the shares.

- Accordingly, except in the case of a voluntary liquidation and dissolution, dissenting shareholders have the right to have their shares purchased at fair market value under the dissent and appraisal remedy in s. 190.

- When fundamental changes are proposed, they must be approved by more than a simple resolution of the directors, or ordinary resolution of the shareholders.

- Because these changes require a special resolution of the shareholders, and are “special business”, subs. 135(6) applies. If there are more than 50 shareholders or the corporation is a “distributing corporation” the mandatory proxy solicitation rules will apply: s. 149.

4 Fundamental Changes

(a) Amendment of the Articles of Incorporation - CBCA sections 173, 175(1), 176, 177(1), 178, 179.- Except with respect to creating new series of shares (section 27) or to change a number name to a verbal

name (173(3)), generally the articles must be amended by special resolution: 173(1). - Special notice provisions apply: 175- Amendment of the articles must be approved by separate vote of each class of shares which is affected

by the proposed amendment: 176(1). o Note that only the changes listed in 176(1) are considered to require separate class votes. Where

a separate class vote is held, the proposed amendment must be approved by special resolution of each class entitled to vote: 176(6)

- The right of a class of shareholders to vote separately on an amendment applies regardless of whether that class or series would normally have a right to vote: 176(5)

- After the amendments have been approved by the shareholders, the corporation must file articles of amendment with the Director, and the amendment does not become effective until the Director has issued a certificate of amendment: 177 – 179

Section 173- Provides a list of all the things a corporation can do by way of special resolution: we don’t deal with I,

J, K and Lo (a) change its nameo (b) change the registered provinceo (c) change restrictions on business o (d) change max number of shares corporation can authorizeo (e) create a new class of shareso (f) reduce or increase its stated capital

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o (g) change the designation and add change or remove any rights privileges or restrictions on shares. This comes up in corporate reorganization, any kind of takeover, amalgamation. When you change these things, it may change the value of the shares

o (h) changing the shares into different numbers in the same classeso (m) increase or decrease the minimum number of directors, decreasing the number of directors

can be very strategico (n) Add, remove or change restriction on the ownership of shares. Control of corporation can be

changed depending on who is elected o (o) is the catchall

- S. 173(2): see it in all fundamental changes, the directors may choose not to carry out the change that has been voted on. Allows the directors to discontinue a process, this is where a deal may fall apart can abandon it.

- 173(3): one thing that directors can do on their own, change the name to verbal name. Section 175

- (1) Proposal to amend: both directors and shareholders can propose to amend the articles. Although it is usually a director, can be shareholder also

- (2) Notice of amendment: must be a special resolution with a special notice with enough time. Have to advise if the dissenting shareholders can have their shares purchased by the corporation

Section 176- Class votes, need to look at what actual voting rights apply. May have to have a special class vote, but

no class can be overridden by another. - The general rule is that you need a separate class vote, but if the articles provide that there won’t be a

separate class vote, there won’t be one. Have to determine if what you are doing is in a b or e- 176(1)

o (a) increase or decrease the number of shares of class generally the right to separate class vote applies where increase or decrease in a class

o (b) effect an exchange, reclassification or cancellation of the shares of a classo (c) add or change rights, privileges, restrictions or conditions this one you always get a separate

class voteo (d) increase the rights or privileges of a class having equal or superior to the shares of this classo (e) create a new class, making one inferioro (f) make any class inferior to the shares of anothero (g) effect an exchange or create a right of exchangeo (h) constrain the issue, transfer or ownership of shares of such class or change remove such

constrain o Provides for a separate class vote where a class is affected as a class potentially in a negative

way. You have to put a rule in the articles that a b and e don’t require a class vote, because otherwise it is hard to get shareholders to give up their class vote later on

- (2) Exception- (3) Deeming Provision - (4) Limitation - (5) Right to vote, nonvoting shares get a vote- (6) Separate Resolutions, each class has to approve the amendment by special resolution of that class.

Section 177(1)- Delivery of articles

Section 178- Certificate of amendment

Section 179- (1) Effect of certificate: an amendment becomes effective on the date shown in the certificate

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- (2) Rights Preserved: no amendment to articles affects any existing cause of action or claim or liability against the corporation or its directors

(b) “Export” or Continuation of a CBCA Corporation to Another Jurisdiction - The process requires special notice to the shareholders (188(3)). Every shareholder is entitled to vote on

the proposal to continue to another jurisdiction, even when their shares do not normally carry the right to vote: 188(4). Approval is by special resolution: 188(5).

- Each share has the right to vote, the application is authorized where the shareholder voting is approved by special resolution. Special class votes, generally not included in the continuance of the CBCA there may be a possibility

Section 188- Section 188(1): request to be incorporated into another jurisdiction as if it had been originally

incorporated under those laws. o This is a fundamental change so always has to be approved by the shareholders, and they have to

vote by special resolution, need the 2/3 majority- Section 188(3): have to call a notice of meeting which has to comply with section 135. Also must state

that any dissenting shareholder is entitled to be paid fair value for shares. o There is a special meeting, they have to have enough notice so that the shareholders can properly

vote. - Section 188(4): special voting right, even in situations where shareholders don’t generally have a right to

vote, will in this situation- Section 188(5): special resolution, need the 2/3- Section 188(6): directors can decide not to carry on the continuance if authorized by shareholders- Section 188(7): the discontinuance, when the Director in Ottawa gets notice, they will issue a certificate,

the corporation has ceased to exist under the CBCA because it is carrying on under another statue- Section 188(9): CBCA ceases to apply- Section 188(10): all rights and obligations in existence at the time of continuance continue. They want to

make sure under the new corporate statue the shareholders, creditors, and other dealing with the former CBCA don’t lose any rights by the reason of the leaving CBCA. Cannot move to another jurisdiction unless the laws allow the property to be that of the body corporate, continue to be liable for obligations, existing cause of actions unaffected, prosecutions unaffected and judgments unaffected.

(c) Extraordinary sale, lease or exchange of all or substantially all of a corporation’s assets - As with the other fundamental changes, this requires special approval of the shareholders: 189(3). - Special notice must be given to the shareholders (189(4)), and the shareholders have power to authorize

the transaction, and to fix or authorize the directors to fix the terms and conditions of the transaction. - Each share carries the right to vote (189(6)), and a class or series is entitled to vote separately if it is

affected by the transaction differently than another class or series (189(7)). - Approval is by special resolution: 189(8)- 189(5): shareholder approval to authorize the sale, lease or exchange and may fix or authorize the

directors to fix any terms and conditions thereof- 189(9): termination, directors can chose to abandon without further shareholder approval if they wish - Could the corporation carry on its business without its assets or has it become a completely different

undertaking. Can be both quantitative and qualitative in that what is going on in substance.

(d) Voluntary Liquidation and Dissolution - A voluntary liquidation and dissolution is to be distinguished from an “involuntary” or court ordered one

under ss. 213-214.- A director or a shareholder entitled to vote at any annual meeting may propose liquidation and

dissolution, and a special notice must be sent to each shareholder: 211(1) and (2).79

o If you’re a non-common shareholder then you will have to have at least one common share. But normally comes from the directors.

- The proposal must be approved by special resolution, and where a corporation has more than one class of shares, each class must separately approve the proposal by special resolution: 211(3).

- Note that the dissent and appraisal remedy is not available in respect of a voluntary liquidation and dissolution.

- Special notice has to be sent to each shareholder, 211(2) - The decision to go into liquidation is that the liquidator sells everything and then pays everyone. But

normally happens because the business is no longer viable or someone is retiring and no one wants to take over.

- Everyone’s shares are cancelled and they all get their surplus if there is any, no need to pay then all out at different times.

Fundamental Changes and Class voting rights- Shareholders are given control over significant changes to the business of the corporation or the capital

structures of corporation those rights are mandatory - Section 173: sets out several significant fundamental changes that require a special resolution of the

shareholders- Special resolution is required of those shareholders that carry the right to vote generally on matters that

come before the shareholders meetings, 2/3 votes- Also need a resolution where:

o To approve an amalgamation of the corporation with another (s. 183)o The sale or lease of all or substantially all of the corporations assets (s. 189(3))o Continuance of the corporation under the laws of another jurisdiction (s. 188)o A liquidation and dissolution of the corporation (s. 211)

Class voting rights- Given protection against changes in their share rights without their approval- Also protection against creation of shares that will prejudice their share rights - Class voting right is mandatory in CBCA- Section 176(1) sets out situations where a class vote is required- If it affects a series of shares, then they can vote separately as series- Other aspects

o 176(5): right to vote whether or not they otherwise carry a right to voteo 176(6): must be special resolutiono Class voting may arise in other fundamental changes: amalgamation (183(4)), a sale, a lease or

exchange or all or substantially all assets of the corporation (189(7)), a liquidation and dissolution (211(3))

D. Shareholder initiatives

1. Shareholder proposals

- Section 137 allows shareholders to put proposals before the meeting and allows shareholders to put supporting statements on the management proxy circular

o Allows them to put their own resolution before shareholders in a low cost way- Registered or beneficial shareholder is entitled to submit a proposal - It must be submitted 90 days before meeting and must not be a way to address personal grievances and

must not be a proposal that does not relate in a significant way to the affairs of the corporation - Problems:

o May be used as a way of re-allocating day to day management

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o Concern it may be used as a mechanism to harass a corporation - A shareholder proposal could be refused by the corporation if it was primarily for the purpose of

promoting general economic, political, religious or social causes.- In Jesuit Fathers proposal refused on basis of political cause - In Greenpeace v Inco proposal refused for social cause. - The don’t generally pass, they cannot force a director to implement a proposal - If the proposal is passed can it be enforced or do they have to amend the articles to have this

implemented. This is in relation to things that are in the purview of the directors. o So this should be clarified in the bylaws.

- If a director is nominated at a meeting and they get the votes to be elected is okay. Amendments to bylaws specifically contemplates that the shareholders approve it and this results in the bylaw being approved and in force.

- If you have a proposal to amend the articles, that is binding but normally is a fundamental change which needs class votes with special resolution from each class.

Section 103(5) - A shareholder is entitled to vote at meetings, may in accordance with Section 137 make a proposal to

make, amend or repeal a by-law. Section 137

- (1) Any person entitled to vote at an annual meetings, common shareholders, may submit a notice which with the substance of the proposal or discuss any matter in respect of which the person would have been able to submit a proposal.

- The director can ask a shareholder why they are raising a proposal during a meeting. To ensure efficiency

- (1.1) Persons Eligible to make proposals, requirements that you hold a certain number or certain value of shares for a certain time. Need a minimum investment and hold it for a certain period of time. Regulation 46, have to hold either 1% of the voting shares, or shares worth $2000 and held for 6 months, relatively minimal

o (1.1b): a group can get together to try and make those requirements. - (1.2) Information to be provided: name address, number of shares administrative and technical

requirements - (1.3): Information in the proposal in part 2 (description of the proposal) is not to exceed the world limit

in (3), which is 500 words. - (1.4) Proof may be required that they meet the requirements in 1.1. Regulation 47 shareholder requests

within 14 days of receiving and shareholder provides within 21 days or getting request - (2) Information circular: it they solicit proxies must set this out in the proposal - (3) Supporting statement: statement and proposal should not exceed the words, Regulation 48 500 words- (4) Nomination for a director, must be signed by at least 5% of a class of voting shares. Can be at a

meeting, doesn’t have to be in advance- (5) Exceptions: not required to comply with (2) and (3) if. Any distributing corporation has to do a

proxy solicitation. If a corporation solicits proxies then one of the requirements, management of the corporation must create a proxy circular where they include the proposal or attach it.

o (a) proposal is not submitted within the prescribed number of days before the anniversary, must be within 90 days of the anniversary notice. So can be 5 months at the earliest Regulation 49

o (b) primary purpose is personal grievance against the corporation had been abandoned. o (b.1) can tell that it clearly does not affect the business or affairs of the corporation. Has to relate

to the business or affairs of the corporation in some way, if it doesn’t then the shareholders can reject it.

o (c) if you failed to show up at the last time it was included in the proxy, Regulation 50, if you got your proposal in the last 2 years, don’t get another go if you don’t show up

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o (d) if you make a proposal, that was rejected, the supported must have gone up by at least 3% the next year, otherwise cannot raise it. Need 6% the second time and 10% the third time, if you can’t bring it up to that then cannot bring it for 5 years. Regulation 51

o (e) rights are being abused to secure publicity - (5.1) and Regulation 52 corporation can chose to refuse to include proposal, 2 years. If they fail to

hold the number of shares they stated they have in 1.1- (6) Immunity, can’t be sued for publishing or circulating a proposal- (7) Notice of refusal, must inform the person submitting the proposal of its intention to omit the

proposal from the management proxy circular and the reasons for refusal. Regulation 53 proscribed period is 21 days

- (8) Can apply to court for meeting to be held or omit from information circular- At the meeting the person who makes the proposal can present on it. - Often the ones to remove shareholders is what is passed. See very active pension funds

Section 175(1) - Proposal to amend articles, a person who is entitled to vote at an annual meeting of shareholders may

make a proposal to amend the articles

2. Proxy solicitation and proxy circularsProxy Solicitation

- A proxy is a form signed by a shareholder that appoints a proxy holder (S. 147)- A proxy holder is a person appointed to act on behalf of the shareholder (S. 147)- A shareholder is entitled to vote at an annual meeting is entitled to appoint a proxy holder (S. 148)- Rights are the same as shareholders (S. 148)- Management must solicit proxies from each shareholder entitled to vote unless it is not a distributing

corporation and has fifty or fewer shareholders entitled to vote- Form of Proxy:

o Requiring clear indication that someone other than a designated person can be appointedo Requiring a person soliciting proxies state who is solicitingo Allowing voting for or against resolutions or a bold-face indication of how the proxy holder

will vote the shareso Providing a means by which the shareholder can vote

- A shareholder doesn’t have to be present at a meeting to vote. They give a proxy to a proxy holder and vote on their behalf

o Can be done for regular or special matters - Come up most often in widely help corporations with millions of shares and thousands of

shareholders who are all over the world.- Section 148: Proxy holders don’t have to be shareholders, can be anyone

o Usually the bylaws will give the form of proxy that they are willing to accept. o Shareholder determines the level and extent of the authority of the shareholdero Can’t give a continuing proxy, must give one for each meeting

Proxy Circulars- Anyone who solicits a proxy must provide a proxy circular (S. 150)

o Under CBCA disclosure document is proxy circular - A proxy circular is a document that contains sufficient information to allows a shareholder to make a

decision on each matter of business for which the proxy is solicited- Solicitation: section 147 says it includes a request to execute or not to execute a form of proxy or to

revoke a proxySection 147 - Definition section

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- (a) Solicitation includes: a request form, request to execute or not execute a form of proxy, sending of a form of proxy calculated to procure, withhold or revoke a proxy or sending of a form of proxy under Section 149.

- (b) Things not included in the definition of proxy- Regulation 67: this definition does not include a public announcement made by (a) a speech in a

public forum or (b) a press release, in opinion, or statement or advertisement provided via a broadcast medium etc.

- Regulation 68: describes the proscribed circumstances in which the communication is made to shareholders

Section 148 – Process - (1) Appointing a proxy holder: don’t have to be shareholders and they attend and act at the meeting

to the extent they are authorized by the proxy- (2) Execution of Proxy, by shareholder or their attorney- (3) Validity of Proxy, only valid at the meeting at which it was given- (4) Revocation of Proxy: can revoke by (a) stating in writing and bringing it to the registered office

before meeting or depositing with the chairman on the day of the meeting (b) any other manner permitted by law

- (5) Deposit of proxies: can request they are deposited 48 hours before meeting.o Allows the corporation to know in advance how many votes are in the form of proxy, know

whether a quorum is present, and count them in advance. May be a tactical advantage for directors

o Blair v Enfield, proxies not deposited in time was an issue- 2 types of rules

o Those that apply to managemento Those that apply to dissident shareholders who are making proposals or seeking to change

directors or policies contrary to what the directors have been doing. Section 149

- (1) Mandatory solicitation, must send form of proxy to each shareholder with the notice of meeting, Regulation 54 sets out the form

- (2) Exception: don’t have to send a form of proxy if (a) not a distributing corporation (b) has fewer than 50 shares

- (3) Offence, if they fail to comply it is an offence, $5000 fine under summary conviction- (4) Officers or directors of corporation will also be liable if they knew or authorized the violation

Section 150- (1) Soliciting Proxies, cannot solicit unless attached to a management proxy circular is the form of a

dissidents proxy circular. o If there are millions of shareholders, this could be a very expensive and time consuming

effort- (1.1) Exception, solicitation to 15 or fewer shareholders

o The idea is that in a small company you can actually carry out a solicitation if you only target 15 or fewer shareholders.

- (1.2) Exception, solicitation by public broadcast, can solicit without sending out dissident proxy circular if in the form of public broadcast, speech, or publication. Regulation 69: prescribed circumstances described

- (2) Copy to a Director must be sent, Regulation 56, place for the director to sign and say the circular has been sent to all shareholders, directors and auditors

- (3) Offence to not comply with (1) and (2)- (4) Officers or directors may also be liable

Section 151- (1) Exemption: Director may exempt of any terms they think fit, from section 149 or 150(1)

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- (2) Publication: must set out the particulars of the exemption granted Section 152 – proxy holder

- (1) Attendance at meeting: if you solicit a proxy or are given a proxy must attend the meeting and comply with directors

- (2) Rights of a proxy holder: same rights as the shareholder by whom they were appointed - (3) Show of hands: can chose to do it this way, unless otherwise requested- (4) Offence for failure to comply with the directions of the shareholder

Section 154- (1) Restraining order: if a proxy has something untrue or omitted can apply to the court for an order

restraining the solicitation, correction or an adjournment of meeting- (2) Notice to Director

Form of Proxy – Regulation 54Management Proxy Circular – Regulation 55 and 56Dissident Proxy Circular – Regulation 57Contents of Dissident Proxy Circular – Regulation 63 and 64Proxy Circular Exemptions – Regulation 67, 68 and 69

- Regulation 67, by public announcement. A speech in a public forum, a press release - Before this rule it was very hard for a shareholder to challenge management in a public

announcement because then it was seen as a solicitation of a proxy. - Now you see people giving speeches, saying management should be removed because they are doing

things we don’t like. - It is a lot easier to make those statements and not run the risk of management arguing you are

soliciting shareholders without giving the proper notices. - Regulation 68(2) excludes situations where the person making the communication is doing so in a

personal interest.- Dissidents have more leeway, don’t have to prepare as much information. At times they don’t have

access to as much information as they need. Also the contents are more onerous. They are able to take advantage of the different exemptions and in particular in 147(b)(7), Reg 68

Brown v. Duby – Under old rules, solicitation not complied with - Facts : This was an application to remove the Buckely’s, majority shareholders in United Canso case. All

of the defendants were members of the dissident shareholders committee. The majority of the shareholders here were US residents.

- Brown was the existing management of United Canso, and he complained that the dissident shareholders were soliciting proxies without complying with the rules. Sent two letters, the March 7th one went only to US residents, the March 30th one went to all

- Decision : o The March 30th letter was not a proxy solicitation, want to get the numbers together so that they

could put together a meeting. But the March 7th letter, was a proxy solicitation. The letter stated the intention to solicit proxies for the next meeting of shareholders and their dissent. Even though no form of proxies sent, it asked the shareholders who received it not to give their proxy to management. So don’t sign the management proxy form until you have looked at our materials

- Section 147’s definition of solicitation includes a request even if not included with a proxy. In principle the letter may not have been overt, but fell within a request to send a proxy or a request not to send a proxy in favor of management. Would have fit the definition of solicit at the time.

- Argument: The letter was sent from the US to only the US shareholders so should use American lawo Court says the corporation’s nationality is what counts, here it is the CBCA as registered as

Alberta company, so you take your statue with you. Its activities in the US have to comply with its corporate law in Canada. As the law stood at the time, this was a solicitation

- Remedy : Damages would not be appropriate and an injunction is an extraordinary remedy and only granted to protect shareholder interest

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o Here the failure was to not provide information that you had to provide. There is active campaigning on both sides so court can’t say we are not holding the meeting or the dissidents can’t speak, neither is in the interest in the corporation

o So they don’t grant the injunction, so it doesn’t end up giving the management a useful remedy- This solicitation would now comply because the old rules made it almost impossible to communicate

publically try to contract another shareholder. So this is no longer good law.

3. Access to the list of shareholders- It is important for matters engaging in proxy solicitation, requisition a meeting, making a takeover bid- Section 20(1)(d) corporation must keep a shareholder register- Corporate Purpose: Pillsbury v Honeywell

o He bought one share to access a list of shareholders to communicate with them and convince them to stop the corporation from manufacturing bombs

o He was politically opposed to their productiono Corporation refused to provide the list on the basis that it was purely political motive for access

and did not constitute a corporate purposeo Here a proper purpose is one connected with a genuine economic interest of the corporation

- Constraints on Inspection: Cooper v Premier Trusto One inspection for one hour in five days was not good enough. o The court will intervene where the right to inspection is unreasonably refuse

CBCA 21(3) – (10) (not covered)- (3) Shareholder lists: who its requested and what purpose it can be used for- (4) Supplemental lists- (5) When supplemental lists furnished- (6) Holders of options- (7) Contents of affidavits- (8) idem- (9) use of information or shareholder lists- (10) Offence

4. Access to Other Corporate Information: review

- Section 20(2): Directors Records, corporation shall maintain adequate accounting records and records containing minutes of meetings

- Section 21(1): Access to corporate records, shareholders and creditors have access during regular business hours

o 21(1.1) refers to distributing corporations, here the beneficial shareholder varies from day to day. Almost impossible now to get an up to date useful list of address from the corporation because there is too much shifting.

o There are separate rules from distributing corporation (1.1). Need an affidavit from the person seeking the record saying they won’t use it inappropriately.

- Section 21(2): Copies of Corporate records, can request one copy of bylaws, articles or unanimous shareholder agreements, directors or shareholders

- Section 155: Annual Financing statements must be placed before the shareholders at every annual meeting.

- Section 159: Must give a copy of the financial statements to the shareholders.

E. The Closely Held Corporation: Vote Pooling Agreements and other Shareholder Agreements Section 145.1

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- Pooling agreement: a written agreement between two or more shareholders may provide that in exercising voting rights the shares held by them shall be voted as provided in the agreement

o What they can agree on outside the constating documents, what are the appropriate agreements. Rule is that you can agree to vote your shares together if valid.

o You can team up and do it overtly and it is valid o A breach of the agreement can give rise to a remedy of some sort depending on what the

situation isProvisions of CBCA that Permit Less Formal Decision-Making

- Section 132(2) – place of shareholders meeting- Section 136 – Waiver of notice of shareholders meeting - Section 139(4) – single shareholder meeting; - Section 142(1) – unanimous written resolution in lieu of meeting- Section 163(3) – shareholders may unanimously dispense with auditor- Section 102(2) – can have a single director; distributing corporation must have at least 3- Section 117(1) – unanimous written resolution in lieu of directors’ meeting - Section 114(6) – waiver of notice of directors’ meeting- Section 114(8) – single director meeting- Section 146 – unanimous shareholder agreements

Ringuet v. Bergeron – Rule against fettered discretion- Indicates the limits of what shareholders can agree in a vote pooling agreement- Shareholders cannot agree in advance how they will decide matters if they become directors

o This is called fettering the directors discretiono They have an obligation to make the decision which will be in the best interest of the corporationo Saying if you make me director I will do this is fettering their discretion. o You cannot bind yourself in advance as to how you will vote as a director. But can bind yourself

as to how you will vote as a shareholder- Facts : Company had 7 shareholders, each with 50 shares. They had entered into an agreement with one

another saying they would vote shares together. In agreement they assigned the roles to each other and voted together at all meetings of shareholders. Rangay as president had the tiebreaking vote and agreed to always use it in party with them. There was also a part in the agreement which said that if a party breached the agreement, they have to forfeit their shares to the other 2.

o The three protagonists had 150 of the shares, they were a minority. But they entered into an agreement to get the shares from another shareholder and split. At that point they controlled the board, they had over 57% and could take control, can make fundamental changes. The first agreement was never abandoned.

o They then want to get rid of one of the original partners so held a new meeting where they voted and nominated each other, B was not invited and didn’t know. The three appoint themselves as new officers and B realizes that he is no longer included.

- He starts a law suit alleging breach of first agreement, the defence was that the first agreement was invalid, because it fettered the discretion of the directors

- Decision : Court distinguishes between an agreement to vote as a block and an agreement to vote in a certain way as a director. The agreement only determines how they will vote as shareholders so it was okay. Then had to forfeit the shares to him and he became majority shareholder.

o Can agree to vote your shares in a particular way - The two dissenting judges rely on English case law of fiduciary duties even though the case was in

Quebec.

F. Unanimous shareholder agreementsCBCA 2(1) “director”, “unanimous shareholder agreement”

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- “director”: a person occupying the position of director by whatever name called “director” and “board of directors” includes a single director

- “unanimous shareholder agreement”: means an agreement described in section 146(1) or a declaration of a shareholder described in subsection 146(2)

- All the shareholders agreeing to take over some of the roles of directors has been statutorily accepted - They are primarily used in small, closely-held corporations where the shareholders are the directors,

officers

Section 146- (1): Recognizes a written agreement amongst all shareholders or non-shareholders restricting the

director’s managing, supervising powers over the business and its affairs as valid. o They might enter a USA to change the power to issue new shares and the price. A way to

maintain control of the directorso Shareholders decide that certain managing decisions will be decided by the shareholders, only a

USA can take away management decisions - (2): Where there is only one shareholder, they can make a written declaration that restricts in whole or

part of the powers of the director, this is seen as a USA. o This can happen in a parent-subsidiary corporation where the parent corporation is the sole

shareholder. It gives itself all the power and appoints its own officers and delegates the powers. - (3): Constructive Party, a person who is a purchaser or transferee of shares is deemed to be a party of the

agreement. Like if you inherit shares, you are deemed to be bound- (4) When no notice given, about USA the purchaser can rescind the transaction in which they acquired

the shares within 30 days of becoming aware of it.- (5) Rights of a shareholder, if the USA transfers power to the shareholders then those shareholders have

all the rights, liabilities and can rely on the defenses the directors have. The actual directors are relieved from their rights, liabilities to that extent, including liabilities under S. 119.

o Obligation to do that thing in honesty good faith, etc. all go with it. - (6): Discretion of shareholders, when the shareholders are acting as director, they can’t fetter their

discretion. Cannot agree in advance how they will vote. Can enter an agreement to vote shares together, not how you are going to make decisions when you become directors (Rangay)

- USA is a fundamental change to the normal governance of the corporation. It is a private contract and seen as shifting managerial responsibility and liability and overrides the normal rules of the CBCA. It is one of the records which has to be kept at the registered office (21(1)), any shareholder can go look at it. Is an important constitutional document.

Duha Printers (Western) Ltd. v. The Queen - Facts : Very complex tax transaction - Issue : Has there been a transfer of directors powers to the shareholders- Law : De jure control, refers to those legal sources that determine control: namely, the corporation's

governing statute and its constitutional documents, including the articles of incorporation and by-lawso If they are constitutional documents then they fall under this test but if contractual, then don’t

- Decision : The USA is to be considered a constating document for the purposes of determining de jure control of a corporation.

o Before USAs the shareholders could not impact the management of the corporation or the directors except by removing them. Rather than removing the directors from their positions, a USA simply relieves them of their powers, rights, duties, and associated responsibilities.

o The fact that the USA has supplanted the long-standing principle of shareholder non-interference with the directors' powers to manage the corporation, an exclusive right which is granted by the statute and the corporate constitution, clearly indicates that it is at least as important as the "traditional" constating documents in assessing de jure control

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o In other words, the USA is a corporate law hybrid, part contractual and part constitutional in nature.

Contractual because the section states it must take the form of a written contract, but also that it must accord with the other, general requirements for a lawful and valid contract

The Constitutional status is greatly reinforced by s.20(1) of the Corporations Act, which requires that a copy of any USA, along with the articles and by-laws of the corporation, be contained in the corporate records required by that section to be maintained at the registered office of the corporation

- In this case, the USA took the power to issue new shares away from the directors and transferred it to the shareholders. Did this shift in the control of the corporation make it a USA? Yes it did

VIII. SHAREHOLDER REMEDIES

1. Personal Action

- A personal action and a derivative action have been combined. - Often see personal actions brought in the form of oppression actions- Like partnerships and under memorandum of association between investors and shareholders could sue

for breach of contract- The difference between rights of individual shareholders and duties owed to the company was arguably

reinforced with the acceptance of the corporation as a separate legal entity

2. Note re Derivative Actions

- Don’t need to know anything about derivative actions. This was in Cook v Deeks, here it was the company that was wrong, but the shareholder brought the action as a stand in for the corporation. This is what they mean by derivative, a shareholder stands up for a corporation that is being wronged by the majority

3. Oppression Action and Dissent and Appraisal RemedyNeed for an oppression Remedy

- Even with the derivative action minority shareholders might face difficulties challenging certain types of behavior by majority shareholders that could be detrimental to the interests of minority shareholders or other stakeholders in the corporation such as creditors.

- If cannot prove directors actions were not in the best interests of the corporation, the only option was to have the company wound up.

What is oppression?- In one early case, Elder v. Elder & Watson Ltd. [1952] it was said:

o “The essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely.”

- And in Scottish Co-operative Wholesale Society Ltd. v. Meyer [H.L. 1959] oppression is defined as: “‘burdensome, harsh and wrongful’” conduct, which may fall short of actual illegality or invasion of legal rights but can be described as “reprehensible”.

- The CBCA does not limit the remedy to oppressive conduct, but expands it to acts or omissions which are “unfairly prejudicial to” or that “unfairly disregard the interests” of a security holder, creditor, director or officer.

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o Thus the application under section 241 is a means by which shareholders and others may seek to have their reasonable expectations, and not merely their legal rights, recognized and respected

o A single action can be brought under this, but usually is a course of conduct which excludes a person from the expectations they had in the corporation and take them away from those expectations

Who can be a complainant?- Section 241(1): a complaint may apply to a court for an order of oppression- Section 238 defines “complainant” broadly. In paragraphs (a)-(c), it lists specific classes of person who

are complainantso (a) Registered and beneficial security holders, former registered and beneficial security holders

of a corporation or any of its affiliateso (b) a director, officer, former director or officer of a corporation or any of its affiliateso (c) the Director.o (d), the court is given a broad discretion to permit any other person who is a “proper person” to

make an application. Note that security holders include both shareholders and holders of debt obligations.

- Note in particular that under 241(2), oppressive conduct against a creditor may be the subject of an oppression action, even though the definition of “complainant” does not expressly include creditors (other than holders of debt obligations, who, while creditors, are also security holders).

o Downtown Eatery (1993) Ltd. v Ontario: he worked for a night club and was wrongfully dismissed. Due to company reorganization, there was no money for him. Here CA decided that while some degree of bad faith or lack of probity in the impugned conduct may be the norm, neither is essential to a finding of oppression.

o Sidaplex-Plastics Supplier Inc. v. Elta Group Inc: court almost lifted the veil - Persons who can show they were induced to become shareholders by promises of a shareholders’

agreement and the right to have their shares purchased may be proper persons to be included in the definition of complainant

o West v. Edson Packaging Machinery Ltd.: 2 men were forced to buy shares, and told that if they died or were dismissed the shares would be bought back. Here the corporation argued that they were not shareholder when it became a corporation. But court said course of conduct giving rise to the reasonable expectations occurred over several months before and after they became shareholders. So shareholders in regards to the policy even if not, “proper persons” under policy

- Clithereo v Hyrdo One: Oppression remedy cannot be used by employees, must be part of a pattern of oppression.

Whose conduct can constitute oppression?- Subsection 241(2):

o (a) Any act or omission of the corporation or any of its affiliates effects a resulto (b) The business or affairs of a corporation or its affiliate have been carried on in a mannero (c) The powers of the directors or someone exercising the powers of the directors have been

exercised in a mannero That is oppressive, or unfairly prejudicial or that unfairly disregards the interests of any security

holder, creditor, director or officer the court may make an order to rectify the matter complained of.

Procedure- There is no requirement to apply for leave of the court before bringing an application under section 241

(compare s. 239(1) for derivative actions). However, normally the issues will be too complex to resolve in a summary fashion, and the court will order the trial of one or more issues: 241(3)(n).

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- Section 248: an application to court under the CBCA means an application according to the summary procedure of the court which has jurisdiction. It appears from recent decisions that a court will allow an application to proceed under section 241 even though it might also be brought under s. 239 with leave.

o Summary application to a court for a remedy under the provisions of 241, etc. o That implies the whole thing will be resolved in chamberso In oppression there is all kinds of credibility issues, the court who hears the application says this

needs to be heard in trial Remedies

- 241(2): the court may make an order to rectify the matters complained of- 241(3): the court may make any interim or final order it thinks fit, including any in the list (a) – (n).

o can get an order restraining conduct,o (b) not important o (c) amending bylaws articles, can adjust those documents to make it fair o (d) order directing an issue or exchange of securities o (e) changing directors o (f) and (g) either but shares or give the person money they paid for those shares o (h) What they did in Repap, set aside the agreement, doesn’t serve the interest of the corporation,

taking all the value and transferring it to himself. Oppressive and a breach of fiduciary dutyo (i) produce to on interested person financial statements or accounting o (j) order to compensate the person complaining o (k) order granting rectification, summary applicationo (l) order liquidating and dissolving a corporation, interacts with 214o (m) rare, directing an investigation o (n) ordering a trial, will happen in almost every oppression case, a ton of credibility at stake

- 241(6): Limitation on when a corporation can implement an order to purchase shares o Cannot make a payment where the corporation will be insolvent or unable to pay creditors.

- 241(4) Duty of directors

Oppression, Unfair prejudice and Unfair DisregardRe Ferguson and Imax Systems Corp – Action was oppressive as only she was impacted

- Facts : Three couples incorporated, the husbands had voting shares, and the wives had nonvoting class B shares. Mrs. Ferguson had been closely involved in the corporation and worked getting the company going along with the husbands. She divorced and she was immediately fired because Mr. Ferguson was the dominant director despite not being paid

o The company finally became profitable, so he voted and persuaded the other directors to not pay dividends on the class B shares. Now other investors wanted dividends, so he changed the shares and assigned a low value

o They reorganize the capital, changed the articles and Class B became Class A non-voting, they would get more divided and a payout. Mrs. F doesn’t have enough shares to block the special resolution, she either has to dissent and be bought out immediately or she can have the 9% dividend for 5 years, followed by being bought out despite higher share value.

- She applies for a restraining order from the vote being passed. Also that she is being oppressed by the change in share capital.

- Decision : the resolution was oppressive as she was the only one affected. So they could not pass such a resolution and an assessor was appointed to determine the value of her shares.

Ebrahimi v Westbourne Galleries – Expectation Principle used to decide if oppression available - Facts: 2 men started a company and one son was later made a director. The father and son tried to kick

him out and he voted against the resolution. He brought an oppression and winding up action. - Law : Lord Wilberforce – the Expectation Principle

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o Even if legal rules have been complied with “The just and equitable provision nevertheless comes to his assistance if he can point to, and prove, some special underlying obligation of his fellow member(s) in good faith, or confidence, that so long as the business continues he shall be entitled to management participation, an obligation so basic that, if broken, the conclusion must be that the association must be dissolved.”

- Decision : the underlying presumption was that the partner would participate in management of business so if broken, it would be dissolved. Idea that I started the company and have a right to be involved in the management even though a majority of the shareholders want me out

- Now a case like this would be under the oppression remedy and the expectation principle referred to in this would be used to assess if oppression remedy would be provided.

o When this arises in a small corporation that started as a partnership the courts are more likely to apply this. People perceive themselves as business partners with the corporation as an entity. The courts are more likely to look at the entity of the individual

o Often hard to sell your shares, in this type of company. Only person willing to buy them are the ones who are oppressing you. If it is a valuable business, the court may not be as willing to wind it up

Naneff v Con-Crete Holdings Ltd.- Reasonable Expectation Principle applied - Facts : Father starts a company which is very successful, and the two sons have been working in the

business from a young age. They are officers and directors and then one of the sons got involved with a woman the parents didn’t like, he was dismissed from job, and director even though he had put in 20 years of time. He is still a shareholder but his role as a senior manager and income has been reduced. The father has control and can prevent paying of dividend and just give the other son more salary

- TJ : Found oppression and the remedy was the family business be sold and have each party be able to bid on it. The court can make any remedy

- CA: Despite oppression, the remedy case was improper, this not only compensated but it gave the sons power they didn’t have, which was the ability to purchase control over the corporation and carry it on as their own.

o Here the reasonable expectation of the son was that he could not have control over the corporation until has father died, and that the shares would be given if the relationship was maintained.

o TJ punished the father and gave son more than he could have reasonably acceptedo You are trying to rectify the family situation and not just the corporate situationo Remedy : For him to be able to sell his shares at fair market values without the minority discount. o He got wrongful dismissal damages as he was still functioning at a high level

The effect of a shareholder agreement- Has been held that an oppression application was possible even though there was a shareholder

agreement on the particular matter- The powers exercised pursuant to such an agreement might nonetheless be exercised in a manner that is

oppressive, unfairly prejudicial to or that unfairly disregards the interest of a complainant in their capacity as a shareholder, creditor, director or officer.

Application to publically held corporations

Brant Investments v Keep Rite- Facts: A Manitoba corporation, ICG had 100%, subsidiary was ICM which had 2 subsidiaries, EP which

was 100% owned and KR which was 65% o Almost complete control over Keep Rite so very easy to pass special resolution by ICM, ICG

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o ICG decides to bring the assets of the 3 subsidiaries together, best way to do this is get Keep Rite to purchase all the assets of the other three

o Sets up a committee of independent consultants, this is people from the business worlds whose jobs are not at stake. They look at fairness of the transaction, and say the purchase price is too high, should only pay 20 million, not 24. Then the full board which had some officers approve the transactions to purchase the assets of ICG and Energy

o To finance the asset purchase, Keep Rite makes a rights offering, buy a right to buy a share at a certain price. Wants to increase its share capital. If you have to increase your authorized capital, you have to change your articles.

o To amend your articles, need a special meeting a special resolution increase the capital and the dissenting shareholders have the right to be bought out

- Here the minority shareholders bring an oppression action; they voted against the increase of authorized capital, lost at the trial level. When the oppression action was heard by CA they were no longer shareholders because they had dissented.

- SCC: o (1) Oppression applies to publically held as well as closely held corporations.o (2) No obligation to demonstrate bad faith by the people they are bringing the action

Can oppress without intending it or without being evil, dishonesto (3) Majority shareholders do not owe a fiduciary duty to the minority shareholders. The directors

are the agents of the corporation and act for the corporation but as shareholders they have the right to look after their own interest regardless of how they are seen.

They are dismissing this theory from the US, oppression remedy can deal with thiso (4) Business Judgment Rule and oppression: should be not be an interference just because a

decision is unpopular with minority. TJ should look at the nature of the acts and how they were carried out but this does not mean the TJ will substitute his own business judgment for that of officers

Under 241, the court can reverse oppressive conduct, but they must be careful. This is because the corporate statute sets up the relationship among the partners. The board of directors controls the decision making power. You don’t want to second guess what the board if it can show it was taking the proper care and processes to be more effective

The minority shareholder must be protected from unfair treatment, but the court must not usurp the function of the board of directors in managing the company, nor should it eliminate or supplant the legitimate exercise of control by the majority. The court should scrutinize, in a detailed and careful manner, the nature of the transaction and the manner in which it was executed

The court can’t look back on factors that the directors could not have seeno (5) Need to show intention to engage in oppressive conducto (6) Oppression not limited to minority shareholders. Can be those with significant majority

stakes in the corporation When you dissent, no longer a shareholder, but where former shareholder can still bring

an action. The act has been amended to include them - Application : Here they acted in the best interests of the corporation, even though you wanted to keep the

company separate too bad. Before you invested, you knew your power and that you could not block changes. If you don’t like the changes then sell your shares.

Westfair Foods Ltd. v. Watt - In this case, the court considered whether any conduct of the corporation was oppressive under s. 241. - The main allegation was that the new dividend policy did not maintain a fair balance between the

competing interests of the common shareholders and the Class A shareholders.

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- However, the court found that the Class A shareholders did not have a reasonable expectation, or an expectation deserving of protection, that the corporation would maintain a permanent policy of accumulating a surplus.

- The court did however find that, in all the circumstances, there had been unfair disregard for the Class A shareholders’ interests and ordered that the shares be purchased at a price to be ascertained at a subsequent hearing. Compare this approach to that in the BCE Inc. case.

Sidaplex-Plastics Supplier Inc. v. Elta Group Inc - Here had a creditor successfully use the oppression remedy- Facts : Sidaplex had a judgement against a small, one shareholder company, Alta. As security for

payment they had a letter from the bank. A bank is backing up the commitment to pay the judgment. The letter of credit lapsed, unclear whose fault this way, it was not intentional. Alta then then sold all their assets to another purchaser and used the cash to pay another creditor, who had a had personal guarantee from shareholder. He got a benefit from choosing the creditors

- Decision: Here it looks like the creditor was trying to lift the veil, they are saying the owner has to pay out debt personally. The court agreed, you can bring an oppression action in this situation even though no bad faith, the way the whole thing happened resulted in an unfair action to Sidaplex.

o This doesn’t happen a lot, even though no intention to insulate yourself, we will not allow you to make these reorganizations which harms someone against you

o There may be some lifting of the veil, if something goes wrong, there may be an oppression type action even though in most cases the veil is pinned down.

- Important to note that the court would not reverse the transaction with the purchaser of the assets, they are an innocent third party who bought property fairly. Cannot set aside the action where other party is not at fault. If the rights of an innocent third party had intervened they will find a way to go after the bad guys

Repap- An alternate claim made by UPM was that the interests of TD and the other shareholders were unfairly

disregarded as a consequence of the actions of Mr. Berg and the board of directors of Repap in approving the employment agreement for Berg.

- This saddled Repap with “a huge liability and no corresponding benefit to shareholders.” Madame Justice Lax set aside the agreement as the appropriate remedy.

BCE v 6796508- Fact: Had a takeover bid with 97.3% support if shareholders. This is because they would be a surplus but

the debenture holders are not very happy because there would be more debt issued and so the value would decline.

o 3 competing bids, committee recommends that the board of directors accept the offer, so they take the teachers bid

- SCC : confirm the position from Peoples, you can consider the effect on different parties, don’t have to focus on just shareholders. The court should accord deference to the Board and the business judgment.

- Principles : Approach to Section 241(2) is to first look to underling principles, especially the concept of reasonable expectations. If a stakeholder’s reasonable expectations have not been met, then the second step is to consider whether the conduct amounts to oppression, unfair prejudice, or unfair disregard.

o Reasonable expectation must look at specific facts, the relationship at issue and the entire context, recognizing that there may be conflicting claims and expectations between stakeholders.

o Actual unlawfulness is not required, can look at the commercial practice because that will help inform the reasonable expectations of the parties.

You wanted better protection, should have negotiated for it, duty to protect your own interest

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o May be impossible to meet the expectations of all the shareholders.o Look at the general commercial practice, nature of corporation, relationship between the parties,

past practices, steps the claimant could have taken to protect themselves, representations and agreements, fair resolution of conflicting duties and interest between corporate stakeholders.

- Here no reasonable expectation that the investment grade of debentures would be maintained. Don’t look solely at the shareholders, try to balance everything within the corporation. Taking everything into account, the trial judge was correct, no reasonable expectation that the debentures would be maintained at investment grade

When you know oppression is happening- A lack of corporate or commercial purpose- A transaction that is being entered into that doesn’t serve the corporation, clearly favoring someone

close to someone on the board- Lack of good faith is an indicator of oppression but not necessary in every oppression action. - Discriminating between the shareholders - Lack of adequate or appropriate disclosure, including a plan or design to eliminate a minority

shareholder or isolated director, can see steps being taken to achieve an end, taken in isolation would not have been oppressive but the whole point seems to be to get someone out

4. Compliance and Restraining OrdersSection 247

- Restraining or compliance order as described below Section 248

- Summary application to court: Where this act states, a person may apply to a court, the application may be made in summary manner, by petition, originating notice of motion or otherwise as the rules of court provide and subject to any order respecting notice to interested parties or costs or any other the court thinks fit.

Compliance - Complainants under Section 238 can order compliance order - Can direct a person to comply with or restrain from breaching provisions, regulations, articles, by-laws

or unanimous shareholder agreements- Persons subject to such an order are directors, officers, employees, agents, auditor, trustee, receiver,

liquidator, of corporation. - Non-compliance of a compliance order leads to penal sanctions

5. Rectification of Corporate Records

CBCA s. 243Rectification

- Court order rectifying an error can be obtained where the name of a person is alleged to be or to have been wrongly entered or retained or deterred or omitted from the registrar or other record of corporation

- Application can be made by a corporation, security holder, or any aggrieved person, Section 243- (2) Notice to Director must be given- (3) Court has certain powers

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