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Canadian Corporate Law, Veil-Piercing, and the Private Law Model CorporationAuthor(s): Jason W. NeyersSource: The University of Toronto Law Journal, Vol. 50, No. 2 (Spring, 2000), pp. 173-240Published by: University of Toronto PressStable URL: http://www.jstor.org/stable/825991Accessed: 17-02-2016 09:16 UTC
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2/69
Jason
W.
Neyers*
CANADIAN CORPORATE
LAW,
VEIL-PIERCING,
AND THE
PRIVATE LAW
MODEL
CORPORATIONt
TABLE OF
CONTENTS
Introduction
174
I
CurrentDoctrine s Incoherent and
Confusing
176
A
Incoherence
Defined
176
B
The
Failings
of Present
Doctrine
179
II A PrivateLaw Model of theCorporation 189
A
Limited
Liability
191
1. The Shareholder
Contract
's'
Contract)
191
2. The Directors'
Contract
'D' Contract)
192
3.
The
Position
of
Contractual
Creditors f the
Corporate
Patrimony
194
4. The Position of Tort
Creditors f the
Corporate Patrimony
195
B
Effective
egal
Personality
200
C
Free
Transferability
f
Shares
201
D
Perpetual
Existence &
Separation
of
Ownership
and
Control
201
E
Questions
and
Objections
Relating
to
the
PrivateLaw
Model
202
1.
General
Responses
202
2.
Specific
Response
to H.L.A.Hart
208
3.
Differentiating
he
Private
Law Model
fromOther
Contractual
Models
212
III
The
Veil-piercing
ases
Re-examined
215
A
Legislative
nterventions
216
B
Statutory
nterpretation
217
C Fraud or
Mere
Facade'
219
D Agency 225
E
Tort
227
F
Veil-piercing
s not
Exceptional
237
Conclusion
238
*
D.
Phil.
andidate
Oxon.).
t
An earlier ersion
f this rticle
waswrittennder
he
upervision
fProfessor
.D.
Prentice,
hom would
ike o
thank
or
his
nvaluable
uidance
nd
critical eviews
without
hich
hisworkwould
not
have
been
possible.
also
gratefullycknowledgethedebtowed o
my
wife ebecca
Neyers
orher
helpful
diting
ndmoral
upport.
Finally,
would
ike o
thank
rofessor
avid
tevens,
omasz
ojka,
nd
the
members
of
the
Oxford
rivate aw
Reading
Group
or heir
ery
elpful
omments
n
earlier
draftsf his
roject.
ny
rrors
nd
omissionsn
the
paper,
however,
emain
he ole
responsibility
f
he
uthor.
(2000),
50
UNIVERSITY F
TORONTO
LAWJOURNAL
73
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174 UNIVERSITY
F TORONTO
LAWJOURNAL
Thinking
ike a
lawyer
nvolved
being
suspicious
and distrustful.ou
re-
evaluated
statements,
nferred rom
ilences,
ooked for
oopholes
and
ambiguities. ou did everythingut take a statementt face value. So on
one hand
you
believed
nothing.
And on
the
other,
for
he sake
of
ogical
consistency,
nd
to
preserve ong-established
ules,
you
would
accept
the
most
ridiculous
fictions
-
that a
corporation
was a
person,
that an
apartment
enantwas
renting
and and not a
dwelling....'
Introduction
The
question
of the
'true nature' of the
corporate egal person
and its
personality
as been one ofthemost troublesome nd
time-consuming
questions
ever
pondered byphilosophers,
ociologists,
conomists,
histo-
rians,
inguists,
nd
jurists.2
xaminations
of this
problem
have lead to
radically
different,
nd
seemingly
mutually
exclusive,
answers to this
question.
Once
it is
realized,
however,
hat there
are a multitude f dis-
tinctive
et
qually
valid
ways
f
ooking
at
any
phenomenon,
the
quest
to
find
nd defend the one
true'
answerbecomes
unnecessary.
nstead,
one
comes
to
realize
that here
can be
any
number
of true'
answers
o
long
as
the dictates and fundamental ssumptions f a given disciplineare ad-
hered to.
Thus,
it
s
consistent o
say
hat,
ccording
to
economics,
there
s
no
such
thing
as
corporate
personality
ince the
'true' nature of
the
corporation
s
a
nexus
of
contracts,3
hile
also
stating,
hat
ccording
to
sociology
or
social
philosophy,
orporatepersonality
s real'
and reflects
the willof the
group.4
ikewise,
ne
can make
inguistic
rguments
o
say
thatthe
use
of the
word
person'
to denote
an inanimate
patrimony5
s
a
1 S. Thurow,OneL (NewYork:
Penguin,
1977) at 93.
2
Professor
Wolff nce
argued
that ll
continental
egal
scholars could be
broken into
one
of
two
camps:
those
who had
written
bout
corporate
personality
nd those
that
had
not
yet
done
so,
M.
Wolff,
On the
Nature
of
Legal
Persons'
(1938)
54
Law
Q.
Rev. 494
at 494.
On
the
different
heories
of
legal personality,
ee
R.W.M.
Dias,
Jurisrudence,
th ed.
(London:
Butterworths,
985)
at
253,
ff.
3
While the
literature
using
this
paradigm
is too
vast
to
list,
good
summaries of this
approach
can be
found n
R.
Romano,
Foundations
f
Comporate
aw
(New
York:
Oxford
University
ress,
1997);
B.R.
Cheffins,
Company
aw:
Theory,
tructurend
Operation
(Oxford:
Clarendon
Press,
1997).
4 See,for xample, .J. hillips,ReappraisingtheReal Entity heoryoftheCorporation'
(1994)
21 Florida State
Univ.
L. Rev.
1061.
5
Patrimony
s
a civilian
xpression
for
the
totality
f
existing
nd
potential
ssets
(and
liabilities)
of a
person,
or
specific
fund,
that
are
capable
of
pecuniary
evaluation.
While a
patrimony
s
attached to
all
people,
in modern
civilian
doctrine one
may
lso
be
dedicated to
a
purpose
as a
patrimonie'affection,
ee
Arts.
1256
&
1261 Civil
Code
of
Quebec
[hereinafter
.C.Q.].
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CANADIAN ORPORATE
AW
175
fiction
ccording
to common
usage"
or to
argue
that
peaking
of
groups
as
if
they
were natural
persons
is
a
very
natural
phenomenon.7
While
these argumentsare of general interest, nd the answersreached by
these various
non-legal
participants
n
the debate have
validity
in
their
own
disciplines,
heyreally
have
very
ittle o
say
to the
lawyer
bout
the
legalprinciple
of
the
corporation
s a
separate person.8
In
seeking
to
analyze
the
'separate
entity'
principle,
this
paper
will
employ
a
purely
internal
private
aw
perspective.
Thus,
it makes
no
imperialistic
laims that ts
nswers re the
one 'truth'
hat
trumps
ll an-
swers
reached
in
other
disciplines.
ts
only
claim willbe
thatthe answers
provided
form
coherent
way
o examine
this ssue from
legal perspec-tive. n order to reach thisconclusion,the
paper
is divided into three
main sections. n
Part
,
this
paper
will
ssert hat
Canadian
corporate
aw
is
incoherent s a result f ts
organization
round
a
separate
egal person
doctrine
that:
firsts
directly
ontradicted
y
the
body
of
aw
dealing
with
piercing
the
corporate
veil;
and
second
fails
to
provide
a
unifying
explanation
of
thatwhich t
claims to
be an
organizing
principle.
In
Part
II,
this
paper
will
show
that
the
traditional
ormulation f
a
corporation
as a
legal person
is also
unnecessary.
This will be
accom-
plished throughthe formulation f a 'private aw model' corporation
constructed
with
nothing
more
than the basic
legal
conceptions
of
natural
persons,
property,
ort,
ontract,
nd
unjust
enrichment.
t will
be
argued
that
this
model is
capable
both of
mimicking
he
most
basic
structural
orm
f
modern
Canadian
corporation
tatutes nd of
explain-
6
See
Trustees
f
Dartmouth
ollegev.
Woodward,
7
U.S.
518
(1819)
at
636
perMarshall
C.J.
('A
corporation
is an
artificial
being,
invisible,
ntangible,
and
existing only
in
contemplation
f
aw.').
7 See S.A. Schane, 'The Corporation s A Person: The
Language
Of A
Legal
Fiction'
(1987)
61
Tul.
L.
Rev.
563.
8 For
example,
he fiction
theory
orrectly
upposes
that rom n
everyday
inguistic oint
of
view the
short-hand
ormulation
corporate
person"
cannot
be
literally
rue.'
D.
Stevens,
The
Regulation
of
Takeovers
and the Idea of
the
Corporation'
[1994/95]
Meredithectures
72 at 419
[hereinafter
fter
Regulation'].
It is
not,
however,
legal
theory
about the
corporation,
as this
assertion tells
us
nothing
about how the
relationships
nd
legal
issues
surrounding orporate
law should
be solved.
Similarly,
the
realist ersion s
also
true
people
do
oin together
o
form
roups.
These
groups
often
ake on an
enduring
culture'
and
when mmersed
n these
groups
people
often
behave differentlys a result, ee Schane,supranote 7 at 567.Yet,therealist ersion s
'legally
rrelevant ince the
existence of
a
group identity
ays
nothing
bout the
legal
form
f
the
dentity,'
Regulation'
at 419.
Whatwe
are concerned with s
lawyers
s the
principle
of
legal
personality
and its
recognition
as
legal
doctrine,
not
'social,
psychological,
or
erotic
personality.'
See B.
Welling,
Corprrate
aw in
Canada:
The
Governing
rinciples,
d
ed.
(Toronto: Butterworths,
991)
at 80
[hereinafter
orporate
Law].
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176
UNIVERSITY
F
TORONTO
AWJOURNAL
ing
all
the traditional ttributes f the
corporation,
viz,
imited
iability,
effective
egal
personality, erpetual
existence,
free
transferability
f
shares, nd separationofownership nd control. "
In Part
III,
this
paper
will
then
test
the
private
aw
model of the
corporation
to see
if it
provides
a more coherent
way
to
understand
difficult
egal
situations.
he
testing round
will
be the
quagmire
of aw
that
s
formed
by
the
veil-piercing
ases. The
argument
f
Part
V
s
that
when
the
corporation
s
properly
onceptualized,
the
riddle
of
the
veil-
piercing
cases
is
easily
solved
as
simply
he
proper application
of
com-
mon law
principles
o
the
corporation.
I Current
octrine
s incoherentnd
confusing
A. INCOHERENCE
DEFINED
In order
to
go
about
demonstrating
hat Canadian
corporate
law
is
incoherent and
confusing,
ne must
indicate
in
what
sense
the term
'incoherence' is
being
utilized. For the
purpose
of this
paper,
the
followingprivate
aw definition f
coherence will be
employed.
Under
this
view,
ncoherence
can manifest
tself n two
ways
n
any
egal system.
The first nd most common manifestation ccurswhen twodoctrines
directly
nd
logically
ontradict ne another n one
unified
area of law.
For
example,
tort
aw s
incoherent n
this
ense so
long
as the
principle
that one is
responsible
for
ll
reasonably
oreseeable
harm' is
seen to
be
contradicted
by
non-recovery
or
pure'
economic loss.
While
this
s the
primary
ormof
incoherence,
there s
also a
second
manifestation.
his
more subtle form
occurs
when a
self-appointed
oundational
principle
fails to
explain
areas
which are
central to its
experience
and
which
by
common
understanding
are to
be
included in
that
body
of
law. For
example,
a theoretical
understanding
fcontract awwould be incoher-
ent,
in
this econd
sense,
if
t
could
not
explain
and
integrate
expecta-
tion'
damages
into
its
overall
ustification
f
contract.
n
sum,
to be
coherent
a
body
of
law
must
consistof
doctrines hat
exemplify
single
theme' and
constitute
unitary
whole,
rather than
merely
being
'an
aggregate
of
conceptually disjunct
or
inconsistent
elements
that
...
9 These are an amalgam of the traditionalattributes isted in P.L. Davies (with
contribution rom
D.D.
Prentice),
Gowerv
Principles
f
Modern
Company
aw,
6th
ed.
(London:
Sweet
&
Maxwell,
1997)
at c.
5.
[hereinafter
Gower'];
R.C.
Clark,
Corporate
Law
(Boston:
Little
Brown,
1986)
at
s.1.1
2);
H.A.J.
Ford & R.P.
Austin,
Principles
f
Corporations
aw
(Sydney:
Butterworths,
995)
at 86-7
[hereinafter
rinciples];
.E.
Ribstein,
Limited
Liability
nd
Theories of the
Corporation'
50
Mar.
L. Rev.
80 at 89
[hereinafter
Limited
Liability'].
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CANADIAN ORPORATE
AW
177
happen
to
be
juxtaposed.'""
The
forthcoming rgument
will be that
Canadian
corporate
aw s incoherentbecause its
organizing
principle
s
both contradicted rbitrarilynd failsto explain the totalityf the law
relating
o
corporations
n a unified
fashion.
The next
mportant
ask,
specially
o
convince the
pragmatic
awyer,
is to answerthe
question:
Our
current
nderstandingmay
be
inelegant
and
technical,
but it
gets
the
ob
done in
most
cases,
so
what
does
it
matter
f
corporate
law is
incoherent?'
n
other
words,
why
does
coher-
ence matter?While one
could write whole
manuscript ddressing
this
question,"
a
short
nswerwould take the
following
orm. f a
body
of
aw
is
coherent,
ne
can
readily
etermine nd
comprehend
ts
tructure nd
rules. One can
identify
he core formor
principle,
s well as: how this
principle
s
applied
in
secondary
doctrines;
how these
doctrines nterre-
late withone
another;
and how
they
re
further efined nto
third evel
rules
designed
for
specific
ircumstances."
hus,
the
quest
for
oherence
forces one to
formulate
econdary
doctrines nd rules so
that
they
re
ultimately
eferable
o
that
pre-eminent
rinciple.
n
doing
so,
coher-
ence renders
the
law both
intelligible
nd
accessible.13
ince a
coherent
system
s
intelligible,
people
can also be
reasonably
sure
when
their
actionswillcontravene he aw,makeplausible arguments n howthe aw
should
develop
to meet
future
demands,
and
thereby
tructure heir
relations with others in
a more
certain fashion.
Thus,
coherence also
provides predictive
alue.
Beyond
these
virtues,
oherence
also
serves to
justify
he
operation
of
law with the
public.
Since rules are
coherently
related to
'principle'
(and
courts
ustify
heir
decisions
n
written
udge-
mentsfor ll to
see),
persons
nvolved n
disputes
can see that
decision
was
rendered
for
legal
reasons
and not because of
sympathy,
olitical
expedience, subjective
moral
assumption,
r
arbitrary
mechanism
(e.g.,
flipping
coin in
despair)."
Thus, coherence has
justificatory
alue and
demonstrates hatthe
state's
mposition
f
coercion
is
ustified
on
some
10
E.J.
Weinrib,
Legal
Formalism:
On
the
mmanent
Rationality
f the
Law'
(1988)
97
Yale
L.J.
949 at
968-9.
11 See
E.J.
Weinrib,
The dea
ofPrivate
aw
(Cambridge:
Harvard
University
ress,
1995)
[hereinafter
rivate
aw].
12 This
is
largely
he
structure f the
C.C.Q.,
Book
Five,
which
startswith n
organizing
principle
of
Obligations,
hen
proceeds
to
define
ts
manifestationsn
Contract,
Civil
Responsibility, nd UnjustifiedEnrichment;how these doctrines relate to one
another;
and
then
finally
he
special
rules for
Nominate Contracts
nd Torts.
13 For
evidence,
compare
the
organization,
anguage,
and
length
of the
C.C.Q.,
which
regulates
all of
private
aw with the
Companies
Act
U.K.),
1985,
c.
6.
[hereinafter
U.K.C.A.],
which
attempts
o
regulate
only orporations.
14 D.
Stevens,
Restitution,
roperty,
nd the
Cause
of
Action in
Unjust
Enrichment:
GettingBy
with
Fewer
Things'
(1989)
39
U.T.L.J.
258,
270.
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178
UNIVERSITY
F TORONTO
LAWJOURNAL
plane
higher
than brute force.
Finally,
ecause
the
quest
for
coherence
takes
principle,
ntelligibility,
nd the
process
of
ustification eriously,
t
helps to ensure that there s an internal hange mechanism within he
law itself.
Thus,
even on an
internal
understanding
f
the
law,
we
can
legitimately
rgue
that ome cases or
doctrines re
wrong
even
ancient
rules
that have
spawned
extensive nd
ramified
urisprudence'
-
because
they
do not
adequately
reflect' he
higher
principle
to
which
they
are
said
to
cohere.'"
Thus,
coherence
ensures that
working
withinthe
law
does
not
come to
equal
accepting
the
entire
orpus
of
holdings
as
if
hey
were
factsof
nature.'"'
Coherence, therefore,
lso has a
corrective
alue.
The true virtues f
coherence,
however,
re more
readily
demonstrated
when it s absent from
legal
system.
Without
oherence,
a
body
of
aw
becomes
increasingly
echnical
and
confusing
s it
retreats nto
conventionalism nd
arbitrary
istinction o
justify
he
increasingly isparate
holdings
of
the
cases. With this
disso-
nance,
the
lawyer
an
no
longer
properly
dvise his or
her
clients as to
the
probable
outcome of
litigation
r
how to
order their affairs.
hus,
'testing' itigation
ncreases,
s do
claimsof
malpractice
r
misrepresenta-
tion.Judges
xasperated
with he
increasing omplexity
nd
incoherence
of the cases either come to strangeconclusions that run counter to
intuition but
conform to
the 'law' as
conventionally
understood
it;17
reinterpret
lear
language
with
tatementsike
although
the aw
says
x,
t
really
means Y or
sometimes
Z';18
or
resort o
policy,'
Equity'
or
overtly
historicist"
rguments
ojustify
remedy iven
o
those whom
they
hink
are
deserving.2"
oon
litigants,
itigators,
nd
commentators
ose faith
n
that
body
of aw's
ability
o
properlyjustify
ts
outcomes,
often
retreating
into
other
disciplines
for
understanding.21
hen,
finally,
ecause the
law
shows no
sign
of
correcting
tself,
egislation
s
passed
to
remedy
the
worst
failings
of the
system,
ften
by
giving
the
judiciary
even wider
remedies
designed
to do
'justice'
in
the
circumstances.22
nfortunately,
15 Private
aw,
supra
note 11 at
13.
16 Ibid. at 13.
17
See the
discussion of
poison pills
surrounding
note
65,
below.
18 See
discussion
of best
interests
f the
corporation'
surrounding
note
58,
below.
19
This is
the view hat
rule can
be set
aside
without n
examinationof
ts
merits
merely
because
it
was
historically
onditioned;
for
xample,
hat
the doctrine
of
consideration
should be rejected because it is said to representa nineteenth-centuryaisser aire
mentality.
20
See
discussion
of the
corporate
approach'
tort
ases in
Part II
(E),
which
are said
to
protect
the
policy
of
imited
iability.
21
Such as the
hugely
popular
law
and
economics'
approach.
22
For
example,
he
Canadian
oppression
remedy:
the
broadest,
most
comprehensive
nd
most
open-ended
shareholder
remedy
n
the
common law
world. t is
unprecedented
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CANADIAN CORPORATE
LAW
179
as the
pragmatic
awyer
will have
realized,
this
state of affairs
largely
describes
the
present
state
of
Canadian
corporate
law. What he or she
mightnot have realized is thatmuchof this discord is directly ttribut-
able to
corporate
aw's
incoherence,
rather
than
to its
increasing
com-
plexity.
Thus,
when
coherence
is
removed
fromthe
law,
one
can more
readily
ee
why
ts
bsence
should
concern the
pragmatic awyer
s much
as it does the academic.
B. THE FAILINGS
OF
PRESENT
DOCTRINE
Open
any major
corporate
aw
textbook nd one will
be
inundated
with
claims to the
effect
hat
he
principlerecognized
n
Salomon
.
A.
Salomon
& Co.
Ltd.,2
and codified in the Canadian Business
Corporations
ct,
.
15(1)24
-
that the
corporation
s a
legal
person
distinct
from
ts share-
holders, directors,
nd
any
other
legal person
-
is the
central and
foundational
principal
of
corporate
aw.25
urthermore,
hat this
princi-
ple
is
ustified,
necessary,
nd
should continue to
form such a basis
is
rarely
questioned.2"
As Lord
Templeman
claims,
it is the
'unyielding
rock'27
n which
corporate
law is
constructed.28
While this traditional
'black
letter'
pproach
has
survived
or
more than
100
years,
t is
unwise,
however, o infer uccess from urvival.What is more important s that
the
principle
can be shown .. to be
inherently
ound.'2
This is
preciously
where the
problem
with
orporate
personality
ies
foran
examination of
this
principle
revealsthat t
rendersCanadian
corporate
aw incoherent.
Clearly,
Canadian
corporate
aw
s
incoherent
n
the first
ense
due
to
the fact hat he
separate
entity
rinciple
s
directly
ontradicted
by
other
in its
scope.'
See
820099
Ontario nc. v. Harold
Ballard
Ltd.
(1991),
3 B.L.R.
(2d)
123
(Ont.
Gen.
Div.)
at
179.
23 [1897] A.C. 22 (H.L.) [hereinafter alomon .Salomon].
24
R.S.C.
1985,
c.
C-44
[hereinafter
.B.C.A.].
See also
Ontario
usiness
Corqorations
ct,
R.S.O.
1990,
c. B.16. at
s.15
[hereinafter
.B.C.A.].
25
Gower%',
upra
note
9
at
77;
Coirorate
aw,
supra
note
8 at c.
3;
H.
Sutherland,
Fraser
Stewart
ompany
aw
of
Canada,
6th
ed.
(Scarborough,
ON:
Carswell,
1993)
at
17
[hereinafter
raser].
26
As R. Grantham
& C.
Rickett,
The
Bookmaker's
Legacy
to
Company
Law Doctrine' in
Corporate
ersonality
n
the 0th
Century,
. Grantham
& C.
Rickett,
ds.,
(Oxford,
Hart
Publishing,
1998)
1
at 1
[hereinafter
Bookmaker']
claim: The
century
ld
decision
of
the
House of
Lords
in
Salomon
.
Salomon& Co.
Ltd.
is
probably
the
most cited
company awcase inthe urisdictions fthe Commonwealth.The case iscreditedwith
having
articulated the
founding propositions
of
company
law,
and
it is
accordingly
treated
by
udges
and
academics
alike
with reverence
bordering
on the
religious.'
27
L.
Templeman, Forty
ears On'
(1990)
11
Co. Law 10.
28
See also L.S.
Sealy,
Cases
nd
Materials
n
Company
aw,
6th
ed.
(London:
Butterworths,
1996)
at 54
(described
as a
cornerstone).
29
'Bookmaker,'
supra
note
26
at 7.
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9/69
180 UNIVERSITY
F TORONTO
LAWJOURNAL
common law doctrine
relating
o
the
corporation.
For
evidence of
this,
one need
simply
xamine
any
udgement
where
sharp
practice
s
alleged
or any majorscholarlyworkon thesubject.No soonerhas it been stated
that
the
corporation
s a
legal person
distinct rom
ts
hareholders
than
courts and
academic writers llow that
legal personality
hould
some-
times be
disregarded.30
ow
can the
'legal
person
doctrine' that is
so
central
to
corporate
aw
n
one sentence
be
disregarded
o
casually
n
the
next?Both
propositions
annot be
true.
Something
annot both be'
and
'not be.' This
'very
ingular
contradiction' s
logically
mpossible."'
As
Lord
Halsbury
laimed
in
Salomon's
ase itself:
Either a
limited
ompany
was
a
legal entity
r it
was
not.'32
Until
this
contradiction
t
the
heart of
corporate
aw
is
explained
in some
principled
fashion,
r
reliance
upon
the
legal person
doctrine is
discontinued,
Canadian
corporate
aw will
remain
radically
ncoherent.
This
area of
conflict nd
incoherence
becomes
even
more
problem-
atic when
the
veil-piercing
octrines are
examined
more
closely.
Such
scrutiny
eveals hat he
body
of
doctrine
hat
hreatens he
coherence
of
corporate
aw
s itself
arfrom
oherent.The
first
ign
of
this
s
thatthere
is
very
ittle
agreement
as to
what,
in
fact,
constitutes
piercing
the
corporate
veil.33
s lookingat theactionsofshareholders n a corporation
veil-piercing?
ome
argue
yes,34
thers no.35 s
looking
at
the actions
of
directors
eil-piercing? gain,
imilar
yes"6
nd
no
answers.37
The
second
problematic ign
is
thatthere s
no
agreement
s to
eitherhe
number of
categories
llowing
the courts
to
pierce
the
corporate
veil;
the
doctrinal
requirements
necessary
or
each of
the
categories;
or
which cases
exem-
30 The
phenomenon
is
so
widespread
thatone
hesitates o
cite
anyone
n
particular,
ut
see Nedco
td. v. Clark
1973),
43
D.L.R.
(3d)
714
(Sask. C.A.) [hereinafterNedco] t
721
(Salomon
principle
s
fundamental
but
there are some
cases in
which the
court
can
and
should lift
he
corporate
veil')
and
R.R.
Pennington,
Company
aw,
7th
ed.
(London: Butterworths,
995)
at c.
2.
31
Corporate
aw,
supra
note
8
at
126.
32
Salomon .
Salomon,
upra
note
23
at
31.
33
R.
Flannigan,
'Corporations
Controlled
By
Shareholders:
Principals,
Agents
Or
Servants?'
1986)
51
Sask.
L. Rev.
23
at
25
[hereinafter
Agents']
and
M.A.
Pickering,
'The
Company
as
a
Separate
Legal
Entity'
1968)
31
M.L.R. 481 at
483.
34
S.
Ottolenghi,
From
Peeping
Behind
The
Corporate
Veil,
To
Ignoring
t
Completely'
(1990)
53 M.L.R.
338.
35 D. Goddard, 'Corporate
Personality
LimitedRecourse and itsLimits,' n
Corporate
Personality
n
the
20th
Century,
.
Grantham
& C.
Rickett,
eds.,
(Oxford,
Hart
Publishing,
1998)
11
at
62;
'Agents,'
upra
note 33
at
25-6;
S.W.
Mayson
t
al.,
Mayson,
French,
Ryan
on
Company
aw
(London:
Blackstone,
1997)
at
128,
138
[hereinafter
Mayson].
36
I.
Roxborough,
Directors
Liability'
1997)
141
Sol.J.
252.
37
Ottolenghi, upra
note
34
at 341.
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10/69
CANADIAN CORPORATE LAW 181
plify
which
category."8
s
Mayson,
French,
nd
Ryan
correctly
tate,
given
the
present
onceptualization
f the
corporation,
t would
be
impossible
to reconcile the hundredsof cases thoughtto be relevantto the argu-
ment
or
the
dozens
of
academic
opinions.
Cases are decided
by udges
who
adopt
different ttitudes o the
question
and
rarely,
f
ever,
state
whattheir
general theory
f
corporate
personality
s.'"
Despite
this
prob-
lem,
some of
the
many
principled categories'
often
put
forward
n-
clude40
gency,
raud r mere
facade,
group enterprise,
rusts,
nterpreta-
tion of
contracts, ort,
nemy
legislation,
ax
legislation,
disrespect
of
corporate
formalities,
ther
egislation,
non-arm's-length
arent-subsid-
iary
relations,
nd
undercapitalization.
Looking
at the list,one comes to the conclusion that there is
really
nothing
coherent
about the
categories.
Rather,
they
merely
categorize
the
circumstances
surrounding
when he veil is
lifted,
s
opposed
to
exemplifying
principled
basis
from
which the courts
derive
uthority
o
pierce
the veil. f
t
s
indeed
the
former,
hese
ists re
of
ittle se
to the
judge
or
legal
scholar.
Looking
more
deeply
at
the
categories,
one wonders
why
some of
them
are even
included. For
example,
what does
agency
have
to
do
with
veil-piercing? lthough gency, s currentlypplied, has the same effect
as
veil-piercing
viz,
holding
shareholders or
directors
iable for
the
debts of the
corporation
-
it is
arguably
not a real
violation of
the
separate entity
rinciple.41
ather,
t
is
a
reaffirmationf
that
principle
because it
allows
thatone
legal
person,
a
corporation,
may
be the
agent
of
another
egal
person,
ust
as a
natural
person might.
Yet,
this
category
is to be
found
under the
veil-piercing
ategory
n
many
works
on
the
38
Pickering, upra
note 33 at
483;
A.
Beck,
'The
Two
Sides of the
Corporate
Veil'
in
Contemporaryssues n
Company
aw,
J.
Farrar,ed., (Auckland: Commerce
Clearing
House,
1987)
71
at
72.
39
Mayson, upra
note 35 at
128.
See
J.H.
Farrar,
Fraud,
Fairness and
Piercing
the
Corporate
Veil'
(1990)
16
Can.
Bus.
L.J.
474
at 478
[hereinafter
'Fraud']
(Commonwealth
uthority
s
incoherent).
40
These
categories
are
an
amalgam
of
those
posited
to
exist
n
Pennington,
upra
note
30 at
47,
ff.;
.H.
Farrar et
al.,
Farrar's
Company
aw,
4th
ed.
(London:
Butterworths,
1998)
at 70
[hereinafter
arrar's];
ealy,
supra
note
28
at
60;
J.S.
Zeigel
et
al.,
Cases
and
Materials on
Partnerships
nd
Canadian Business
Corporations,
d
ed.,
2
vols.
(Scarborough,
ON:
Carswell,
1994)
at 166
[hereinafter
Cases &
Materials];
Gower's,
supranote 9 at 173; Fraser,upranote 25 at 17,ff.; rinciples,upranote 9 at 119-25.
41
See
Corpate
Law,
supra
note
8
at c. 3.
This
disagreement
no
doubt stems from
the
case law on
the
subject,
which
confuses,
mangles,
nd
intermixes
egal gency,
actual
control,
ack of
separate
will
could
one
say
puppetness?)
and
veil-piercing
nto
one
unrecognizable
whole,
see
for
example,
oronto
City
of)
v.
Famous
Players
Canadian
Corporation
td.
(1935),
O.R.
314
(C.A.)
[hereinafter
amous
Players]
Wallersteinerv.
Moir,
1974]
3
All
E.R.
217
(C.A.).
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11/69
182
UNIVERSITY
OF
TORONTO
LAWJOURNAL
subject.42
imilarly,
ome authors
also have
great
difficulty
n
including
any
of the
categories relating
to
statutory
nterventions
s 'real'
veil-
piercing.43 re these reallyexceptionsto the Salomon rinciple?Or do
these
provisions,
as
express components
of the
legislative
framework
applicable
to
corporations
ctually
define the
corporate
veil rather
han
pierce
it'?44
Beyond
the
disagreements
ver
the
statutory
nd
agency categories,
what can be said of
the others? s
there
something
more
beyond
the
datum
that the
corporate
veil should
be
pierced
when
not to do
so
'would
yield
a
result too
flagrantly
pposed
to
ustice"?'45
Most
commen-
tators hink
not.
Farrar,
or
example,
has
argued:
'there is no
common
unifying
rinciple,
whichunderliestheoccasional decisionsofthecourts
to
pierce
the
corporate
veil.'46
The
Supreme
Court
of
Canada has
stated
as much.
Justice
Wilson
argued
in
Constitution
nsurance o.
of
Canada
v.
Kosmopoulos,
or
instance,
that
the courts have
followed no
consistent
principle'
when
piercing
the
corporate
veil.47
Thus,
even
our
courts
recognize
that
these
residual
categories
re not
principled
nd
coherent
interventions ut
rather
nstances of
ad hoc
udicial
discretion."
While
manyrecognize
the
need
for
change
and
coherence
in
this
rea,49
others
are contentto leave well enough alone so as not to hinder the court's
flexibility,50
r
insist
hat
uch a
rationalization s
impossible.51
This
state of
affairs
ould be
almost
comical
if
the
proper nterpreta-
tion of
the
veil-piercing
ases
were not so
important
o
our
understand-
ing
of
corporate
law. To
reiterate,
tatute nd
precedent
posits
that
the
corporation
s
a
separate
egal
person.
Courts
nd
corporate
aw
theorists
42
Ottolenghi, upra
note
34
at
345.
See
Farrar's,
upra
note 40 at 70
or
Sealy,
upra
note
28
at
60.
43 Gower's,upra note 9 at c. 8; L. Cooke ofThorndon, 'A Real Thing - First
Hamlyn
Lecture' in
Turning
oints
f
he
ommon
aw
(London:
Sweet &
Maxwell,
1997)
1
at 13
(statutory
nterventions
re not
real
veil-piercing).
44
'Agents,'
upra
note 33 at
26.
45
Constitution
nsurance
o.
of
Canada
v.
Kosmopoulos,
1987]
1
S.C.R.
2
at
10
perWilsonJ.
[hereinafter
osmopoulos].
ee also
Re a
Company,
1985]
B.C.L.C. 333
(C.A.)
at
337-8
('the
court
will
use
its
powers
to
pierce
the
corporate
veil f
t
s
necessary
o
achieve
justice.').
46
Farrar's,
upra
note
40
at 69
takenfrom
Briggs
v..
amesHardie
& Co.
Pty.
td.,
1989]
16
N.S.W.L.R.
549
(C.A.)
at
567.
47 Kosmopoulos,upra note 45 at 10.
48
See A.-G.v.
Equiticorp
ndustries roup
td.,
1996]
1
N.Z.L.R.
528
(C.A.)
at 541
(veil-
piercing
s a
process
not a
principle).
49
Ottolenghi,
upra
note 34 at
338,
ff.
50
See
Sealy,
supra
note
28 at 56 or L.
Gallagher
& P.
Ziegler, Lifting
The
Corporate
Veil in
the
Pursuit
fJustice'
1990)
J.
Bus. L.
292.
51
See
Cheffins,
upra
note
3
at 334 and
Beck,
supra
note
38
at 91.
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12/69
CANADIAN
ORPORATE AW
183
then
explain
that this
s the entral
principle
of
Canadian
corporate
aw.
This central
principle
s then
immediately
ontradictedwhen the
sepa-
ratelegal existenceofthecorporation s denied bythe courts, lbeit in
'exceptional'
circumstances.
When
the
court
is asked
to
justify
this
intervention,
ts
only
response
seems to be
because 'the
situation de-
mands'
or
'I
feel like
it.'
This state of
affairs s
unacceptable
in
such
a
developed
legal system
nd
smacksof
arbitraryustice,
rather han of
the
rational
application
of
coherent
legal
rules
to
difficult
actual circum-
stances.52
s one author
has
noted,
the
present
casuistic
approach,
even
if
permissible,
annot
satisfy
hose who believe
that
legal system
hould
be
built,
as far as
possible,
on
a
foundation of
principle.'53
Until
this
whole area of law is reformed, r
interpreted
s
complimentary
o the
separate
legal entity
principle,
Canadian
corporate
law
will
remain
radically
ncoherent.
Furthermore,
his
nteractionwith he
veil-piercing
cases shows
the
legal person
doctrine s a
weak
cornerstone n
which to
build
our
corporate
aw
edifice.
Upon
closer
examination,
Canadian
corporate
aw is
also
incoherent
in the second
sense as its
foundational
principle
fails to
explain
the
totality
f
company
aw.
Clearly,
he
legal person'
doctrinehas
done,
and
continues to do some explanatorywork. It goes a long way toward
superficially
llustrating
many
f
the
traditional
ttributes
f
the
corpora-
tion,
such as
legal personality,
imited
iability,
nd
perpetual
succession.
Furthermore,
he
egal person
doctrine an also
be
marshalled o
explain
to whom the
directors we
their
duties and in
tandem
with
Equity,
the
scope
of that
duty.
Thus,
at
first
lance,
a
pragmatist
an
argue
that
many
of
corporate
aw's
basic
principles
re
seemingly
xplained
with
the
idea
thata
corporation
s a
distinct
egal
person.
Yet,
if
the
logic
of
these
assertions s
probed
a
little
deeper
it can
be
seen thatthe
legal
person
doctrinedoes less
explaining
thanwas
origi-
nallythought.
Take,
for
xample,
the imited
iability
f
shareholders.As
Professor arrar
xplains,
the
mere
fact hat he
aw
recognizes
separate
legal
person
does
not
necessarily
mean that
imited
iability
s
created as
a
matter
f
logic.54
Under
English
aw,
a
company
with
separate
legal
52
This
is
a
paraphrase
of
L.C.B.
Gower,
Gower'
Principles
f
Modern
Company
aw,
4th ed.
(London:
Stevens
and
Sons,
1979)
at 138. See
also,
R.B.
Thompson,
'Unpacking
LimitedLiability: irect andVicariousLiability fCorporateParticipants orTorts of
the
Enterprise'
(1994)
47
Vand. L.
Rev.
1
at
23
('The
legal
doctrine of
piercing
the
veil
s
so
amorphous
that t
eaves a
large
area in which
courtscan
impose
a
smell
test
of
fairness.').
53 A.
Domanski,
Piercing
the
Corporate
Veil
-
A
New
Direction?'
(1986)
103
S.A.L.J.
224.
54
Farrar's,
upra
note
40 at
79.
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184 UNIVERSITY OF TORONTO
LAWJOURNAL
identity
an still
be formed
withunlimited
iability
or ts
hareholders."
While
one can
argue
that such a state of affairs s a 'leftover'
from
a
systemwhich has a statutoryontract t itsbase, itdoes help to showthat
limited
iability
nd
separate
egal
personality
re not
conceptually
inked
as
strongly
s has been claimed. While
the link between
imited
iability
and
'legal
person'
is
perhaps
only
a minor
explanatory nconsistency
f
present
doctrine,
its
response
to directors' duties is a more
glaring
failure.
As mentioned
above,
the
legal
person metaphorposits
that
ince
the
corporation
is a
separate
legal
person,
and director's
fiduciaries,
a
director's
duty
must
be
something
imilar o the
command
of
the
C.B.C.A.
to 'act honestly nd in good faithwith viewto the bestinterests f the
corporation.'56
f
course there re
obvious
difficulties
f
nterpretation:
Are therethree
elements o
the
duty
r less?
f
there
re
three,
whatdoes
'good
faith' add to
'honestly'
nd
'best
interests'?Or
conversely,
o all
these words
characterize
the same
quality
of
motive
required
of
the
directors?57
ut
beyond
these
types
f
questions,
there s
the
underlying
problem
of
acting
n the best
interests' f
a
legal
person.
What
does
this
really
mean? As
ProfessorD.D.
Prentice
has
argued,
the term best
inter-
ests' is 'one ofthe mostproblematic n company aw,' often ndetermi-
nate' and
'arguably
ncoherent.'58
The
problem
in
this area of
the law
stems from
attempting
o
read
too much into
the
metaphor
of
'legal
person.'
As
has been
noted
byjudges
and
commentators,
ince a
corpora-
tion is
incapable
of
loyalty,
r
enmity,
r
residence,
or of
anything
ut
bare
existence in
contemplation
of
law,'"5
'requirement
to benefit
n
artificial
ntity
..
would
be
irrational nd
futile,
ince a
non-real
ntity
s
incapable
of
experiencing
well-being.'""
f the
legal
person'
metaphor
s
replaced by
the
names of the
underlying
ssets
residing
n the
corporate
patrimonythis point becomes clearer. What 'interests' does a bank
account or trade
goods
(e.g.,
tennis
rackets)
have
apart
from
he
people
who
utilize them for
the
fulfilment
f their
own
purposes
and
interests?
The
answer s
none,'
since
only
natural
persons
have
interests;
reations
55
U.K.C.A.,
s.
1(2) (c),
supra
note 13.
56 See
s.122
(1)
(a);
O.B.C.A.,
.
34(1).
57 'Regulation',supra note 8 at 457.
58
D.D.
Prentice,
Creditor's
Interests nd
Director's Duties'
(1990)
10
O.J.L.S.
265
at
273
[hereinafter
Creditor's'].
59 Daimler
Co. Ltd.v.
Continental
yre
nd
Rubber o.
(Great
ritain)
td.,
1916]
2
A.C.
307
(H.L.)
at
340
per
Waddington
L.J.
hereinafter
aimler].
60
J.E.
Parkinson,
Corporate
ower
nd
Responsibility:
ssues
n the
Theory f
Company
aw
(Oxford:
Clarendon,
1993)
at 76.
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CANADIAN
ORPORATE AW
185
of the
aw
and
inanimate
objects
do
not."'
Thus,
trying
o
figure
ut
what
the
corporation
wants o
do,
or
what s in its best
interests,'
s like
trying
to deduce its sexual orientation an impossibletask."2As we have no
rational
way
of
discerning
he
answer,
sking
the
question
s not a
fruitful
exercise.'63
But
given
the clear
statutory
ronouncement
and
long
case
history,
the
law
attempts
o
discern an
impossible
answer,
usually
n one of
two
forms.The first
method is to
ignore
the
conceptual
difficulties f
best
interests' nd
push
ahead with
olving
ases
as
ifa
patrimony
was
totally
analogous
to a human
being.64
erhaps,
the
clearest
xample
of
this
type
of
misguided reasoning
occurs n the
contextof
hostile takeovers.
Here,an offer
y
one
person
for the
personal property
f
another"5
that
s,
their hares
of
a
company
turns
nto an
attackon
the
existence of the
company
and thus its
interest n its
continued
'life,'
'integrity,'
nd
'personality.'"6
n
order
to
protect
hese
ultimate
nterests,'
ommon
law
doctrine
posits
that the
board
of
directorshas the
power
to
protect
the
corporation
from
this attack.'
Thus,
in
347883 Albertanc. v.
Producers
Pipeline
nc.,67
he
court
stated
that
defensive
measures'
by
the
board
are
permissible
o
long
as the
directors
a)
in
good
faith
erceived
threat o
thecorporation, b) actedafter proper nvestigation,nd (c) employed
means
that were
reasonable
in
relation to the
threat
posed
by
the
takeover.68
ut
once the
possibility
f
corporations
having
moral
person-
ality
nd
ultimate nterests
s
denied,
as it
should
be,
the
argument
hat
takeover hould
be
defended on these
grounds
becomes
unsustainable.
f
corporations
do not
have
nterests,
hey
annot
have
a
continued
nterest
61
'Regulation,'
supra
note
8
at 457.
Support
for this
proposition
also comes
from
both
traditional nd reform
minded
commentators,
ompare
H.G.
Manne,
The Limits
nd
Rationale of
Corporate
Altruism: n IndividualisticModel'
(1973)
59 Va. L. Rev. 708
at
710
('only
individuals,
not
corporations,
have
interests')
with C.
Axworthy,
'Corporation
Law as if
Some
People
Mattered'
(1986)
36
U.T.L.J.
392
at
398
('in
contrast o
real
people,
legal personalities
have no
interests
er
se').
62
Corporate
aw,
supra
note 8
at 436
(in
the context of
ratifying
breach of
fiduciary
duty).
63 Ibid. at
436.
64
Thus,
ust
like
any
other
person'
the
corporation
must have
'interests'
nd
mustbe
subject
to
moral
duties,
ee
D.J.
Morrissey,
Toward a
New/Old
Theory
of
Corporate
Social
Responsibility'
1991)
40
Syracuse
L. Rev.
1005 at
1035.
65 See Howard mith td.v.Ampol etroleumtd., 1974] 1AllE.R. 1126 (P.C.) at 1135-6
perWilberforce
.J.
hereinafter
oward]
'right
o
dispose
of
shares at a
given
price
is
essentially
n
individual
right
o be
exercised on
individual
decision....').
66
'Regulation,'
supra
note
8
at
418.
67
(1991),
80 D.L.R.
(4th)
359
(Sask.
C.A.)
[hereinafter
roducers].
68 Ibid.
at
402.
This is
essentially
he
position
of
the
Delaware
courts,
ee
Unocal
Corp.
.
Mesa
Petroleum
o.,
493
A.2d
946
(Del.
S.C.,
1985).
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186
UNIVERSITY
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in 'life' and
do not need
protecting.
he ultimate
rony,
hen,
s that n
its
haste to
safeguard
the non-existent
nterests
f the
legal
person
from
attack, he awarguably ncouragesa board of directors o violate thereal
rights
hat hareholders
of the same class
have to
equal
treatment."'
While the
analogy
to
the human
personality
s
ultimately
lawed,
he
next solution often
employed
is to
try
o discern
who
the
corporation
'really'
is
and, therefore,
o whom
he
directors'
fiduciary
duties
are
'really'
owed.7" As Parkinson
has
argued,
since the
corporation
is a
vehicle
for natural
persons
to
realize
their
nterests,
ne
only
has
to
locate
the
proper
groups
meant
to be
benefited
n
order to
answer the
duty
uestion.71
The troublewiththis
process
is that because
corporatelaw is
inadequately conceptualized,
the term
'corporation'
can be
interpreted
o mean
virtually
nything.
herefore,
one
can
reasonably
argue
that the directors'
fiduciary
uties are owed
to the
majority,72
he
totality
f the
shareholders,73reditors,74
mployees,75
or the
community
at
large.7"
hus,
corporate
aw
s
engulfed
n a stakeholder's
debate,77
nd
corporate
aw
doctrine,
both in
and out of the
courtroom,
s thrown nto
a
'crisis'78
with
no solution.
Without
proper
egal theory
f the
corpora-
tion one will never
know
who
or what the
corporation
really
s,
nor the
content and scope of thedirectors'duties.Therefore, hesedebates and
69
See
F.H.
Buckley,
et
al.,
Corporations: rinciples
nd Policies
(Toronto:
Emond
Montgomery
ublications,
1995)
at
1094;
L.E.
Ribstein,
Takeover Defenses and the
Corporate
Contract'
78
Geo.
L.J.
71
[hereinafterTakeover'].
70
Axworthy,upra
note 61
at
399
('To
assess what
corporation's
nterests
re,
one
has
to ascertain
the nterests
f
some
group
of
people
connected with he
corporation').
71
Parkinson,
upra
note
60 at 77.
72
This
flows rom he
English.case
aw
whichholds
that
majority
f the shareholders n
a
general meeting
re the
company,
ee
Isle
of
Wight y.
. Tahourdin
1883),
25
Ch. D.
320
(C.A.);
Baronv.
Potter,1914]
1 Ch. 895.
73
See
Producers,
upra
note 67 at 590
per
Sherstobitoff
. ('corporation
cannot be
considered as
an
entity eparate
from
ts
hareholders');
Greenhalgh
. Ardene
inemas,
[1951]
Ch.
286
(C.A.).
74
See
Kinsela
v. Russell
Kinsela
Pty.
Ltd.
(1986),
4 N.S.W.L.R.
722
(C.A.)
[hereinafter
Kinsela],
quoted
in
text
surrounding
note
162,
below.
75 See Teck
Corp.
td.v. Millar
1973),
33
D.L.R
(3d)
288
(B.C.S.C)
at 313-4
perBergerJ.
(directors
ook
to interests f the
employees
consistent
with
acting
bona
fide n
the
interests f the
company').
76
See,
.for
example,
the
communitarian
scholarship
in
American
corporate
law,
representingthe 'High idealist' position,Clark, supra note 9 at s.16.2.4 (688), a
bibliography
f
which
s
in
D.
Millon,
Communitarians,
ontractarians,
nd
the Crisis
In
Corporate
Law'
(1993)
50 Wash.
& Lee L. Rev. 1373
at
1391 ff.
77 See
Symposium, Special
Issue On The
Corporate
Stakeholder
Debate: The Classical
Theory
And
Its Critics'
1993)
43
U.T.L.J.
297-796.
78 See
Symposium,
New
Directions n
Corporate
Law'
(1993)
50 Wash. & Lee L. Rev.
1373-723.
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CANADIAN ORPORATE
AW 187
arguments
show the limited usefulness of the
present 'legal person'
doctrine
to
adequately
explain
the nature and
scope
of
directors'
fidu-
ciaryduties.Thus, in regardto directors'duties and limited iability,he
contribution
of the
'separate legal
existence' doctrine
s more
meagre
than otherwise
elieved.
Beyond
these
problems,
the
'legal person' metaphor
also
fails to
explain
or
justify
orporate
law's most
important
modern innovations
and
perennial problems.
Examples
of
these
deficiencies bound.
Thus,
while the
separate
existence of the
corporation
explains why
he share-
holders
are
not
said to own the
corporate
patrimony,
t
does little to
explain
the nature
of a shareholder's interest
and
the nature of the
share. Since the
rights
nd dutiesthat attachto a share' are in doubt,so
is
theirfree
transferability,
s well as
the
nature of
the duties that
share-
holders
might
owe to one another.
In other
words,
the
legal
person
doctrine cannot
answer the
question
of whether there are
fiduciary
duties between hareholders.7" nother
deficiency
f
this
doctrine
has
to
do with ts
nability
o
explain
the
circumstances
n which
shareholders
willbe allowed to
bring
derivative ctions.
f
directors'duties are owed to
the
corporation,
then
why
are
minority
hareholders ever allowed to
bringan action under the rule in Fossv. Harbottle?8of the legal person
doctrine s so
central,
why
was this
imiting
ule amended under the new
statutoryystem
o that
there
are wide remedies
for
minority
harehold-
ers such as subsidized derivative
ctions or
compliance
orders?8' urther-
more,
what does the
legal
person
doctrine tell us about the use of the
oppression
remedy
r about
the
separation
of
ownership
nd
control?82
The answer
s that t tells us little r
nothing.
n
order
forour
corporate
law to be
coherent,
its
central
principle
must be able to
explain
and
interrelate
both
he internal nd external rules of
corporate personalityand
corporate
governance.
nstead,Canadian
corporate
aw,as
presently
formulated,
provides
us
with
a
'basic'
principle
that
incompletely
ex-
plains
some
aspects
of the
law,
with its worst
failings
amended
and
ameliorated
by
a
large statutory
ontribution.
This
statutory
improve-
ment'
most
often
takes the formof
an
extraordinary
mount
of
discre-
tion that
permits djudicators
to
deal
with
omplicated
ssues on
an
im-
pressionistic
nd ad hoc
basis.'8"
Clearly,
hisstate of affairs s
unaccept-
79 Compare Brantnvestmentstd.v. Keel'rite1991), 3 O.R. (3d) 289 (C.A.) [hereinafter
Brant]
rejecting
hareholder
fiduciary
uties)
with
Allen .
Goldreefsf
West
frica
td.,
[1900]
Ch.
656
(C.A.) (must
vote
shares
n the best nterest f the
company).
80
(1843),
2
Hare 461
Ch.
D.)
[hereinafter
ossv.
Harbottle].
81
See
C.B.C.A.,
upra
note
24
at
ss.239,
247
O.B.C.A.,
upra
note
24
at
ss.246,
253.
82
See
C.B.C.A.,
upra
note
24
at
s.241; O.B.C.A.,
upra
note
24
at
s.
248.
83
'Regulation,' supra
note 8 at
376.
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UNIVERSITY
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able and once
again
smacks of
'whimsical'84
ustice
rather
than
the
principled application
of
egal
rules.
The truth s that although the law aspires to coherence, the best
conceptualization
of Canadian
corporate
aw
presents
tself s little
more
than an
amalgam
of
warring rinciples
nd
themes,
ncluding majority
rule,
minority
rotection,
hareholders'
rights,
orporatepersonality,
nd
managerial
power.85
While this
realization
s
important
n
demonstrating
that the
legal
person
doctrine s not as central s is
currently
hought,
t
does
little
o
show that
the
aw
s
coherent.To do thatwould
require
one
to demonstrate
how each
principle
nterrelates nd
amplifies
he
otheras
part
of an
interrelated
whole,
rather than
being
merely
isolated
-and
unrelated emanationsof state
power.'86
uch a taskwould
require
the
theorist o show
how
minority rotection
flows
naturally
rom
majority
rule,
rather than
being
an
arbitrary
imit on
either
majority
rule or
managerial power.87
ikewise,
one
would have to show how
our
under-
standing
of
corporate
personality
s
enhanced
by
the
veil-piercing
ases
rather
than
being
merely
onfused or
contradicted
by
them.
Given
the
enormity
f
the
task,
doubt whether
this
can ever be
accomplished
accepting
all
the
current
paradigms
and
principles
of
Canadian
corpo-
rate aw atface value. As Professor avies contends,
ifone
looks t the
major
evelopments
his
entury
nd the
problems
hat
hese
have
thrown
p,
it is
difficulto
avoid the
conclusion
hat here
has been
a
reluctance
o
recognise
heir
mplications
or
ompany
aw nd
that,
hen
hose
implications
ave
been
recognised,
he
reaction as been
to add to
the
existing
framework
ithout ver
re-examining
ts
foundationso
ensure hat
hey
re
sufficiently
oundto
bearthe
weight
fthe
xpanding
uperstructure.88
In
response
to this
problem,
this
paper
will
offer new
theory
of
the
corporation
- a fundamental
principle
- that unifiesthese
disparate
elements and
which
might,
onsequently,
prove sufficiently
ound' to
support
our
corporate
law
edifice and
render it
coherent.
This
model,
however,
s notmeant to
be
descriptive
f
the current
ustifications
or
corporate
law
rules
and
it
does not
replicate
the
current
thinking
of
84 B.
Welling
et
al.,
Canadian
Corporate
aw:
Cases,
Notes &
Materials
(Toronto:
Butterworths,
996)
at 358
[hereinafter
anadian].
85 Corporateaw,supranote 8 at 53.
86 Private
aw,
supra
note 11
at
12.
87
Instead,
Welling
in
Corporate
aw,
supra
note
8 at
604
argues
that
majority
ule
is no
longer
an
absolute
in
Canadian
corporate
law;
it is
conditioned
by
statute-based
minority
rotection
remedies
which,
n
a
broad
range
of
areas,
permit
discretionary
judicial
intervention.'
88
Gower's,
upra
note
9
at
62.
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18/69
CANADIANORPORATEAW
189
corporate
aw
as
to
itsbasis. t
may
thus
appear
ounter-intuitiveo
many
stepped
in
the current
paradigm.
Hopefully,
f the
pragmatic
awyer
an
suspendhis orher disbelief orlong enough,he or shewill ee thepoten-
tial
for this
conceptualization
of the
corporation
to solve
many
of
com-
pany
law's intractable
roblems
and
inconsistencies.
II
A
private
aw
model
f
he
orporation
In
this section
I
will
outline
and
supplement
a
private
aw model of
the
corporation
that was first
nunciated
by
ProfessorDavid
Stevens
in
a
lectureentitled The
Regulation
of
Takeovers nd
the dea of the
Corpo-ration.'8"
According
to this
theory,
ll the traditional ttributes f the
corporation
limited
iability,
erpetual
existence,
ffective
egal person-
ality, eparation
of
ownership
and
control,
and free
transferability
f
shares-
are all seen
as the
outcome of
contracts between
natural
persons.90
hus,
following
n
the tradition
f
Hohfeld,
this
section will
posit
that ll
rights
nd
duties that
omprise
corporation
re
ultimately
reducible to
statements f
aw
concerning
natural
persons."'
Following
the
economic
literature
f
the
agency
cost
theorists,
he
private awmodel arguesthatthecoreprincipleofcompany aw sthata
corporation
is a
'nexus' of
ural
relations
between
the various
players
involved n
its
creation."'2
his
nexus forms
what n
the civilian
tradition
would
be
termed a
'special'
or
'nominate'
contract
containing
central
provisions
hat have
been
standardized
through
usage
and
over
time."
The
argument
n this
section
is that
the
central
characteristics f this
contract are
two-fold: a
relationship
of
non-agency amongst
the
shareholders nd
between
shareholders nd
directors,
nd a
promise by
89 See 'Regulation,'supra note 8.
90 Ibid.
at
420.
91
W.N.
Hohfeld,
'Nature of
Stockholders'
Individual
Liability
for
Corporate
Debts'
(1909)
9 Colum. L.
Rev.
285
at
289
('a
corporation
s
ust
an
association
of
natural
persons
conducting
businessunder
legal
forms,
methods,
nd
procedures
that re
sui
generis'
nd
when we
say
that a
so-called
legal person
has
rights
or
that it
has
contracted,
n
reality
we mean
nothing
more
than
what an
ultimately
e
explained
by
describing
he
capacities,
rights,
rivileges,
isabilities,
uties,
iabilities,
nd so
on,
of
the
natural
persons
concerned).
92
For more
on the
agency
cost
theory
ee,
Romano,
supra
note 3. For
the
differences
between thismodel and othercontractualmodels ofthecorporationsplease see Part
II
(E)
(3),
below.
93
'Regulation,'
supra
note 8
at
420.
See also
Farrar's,
upra
note
40
at
7;
F.H.
Easterbrook &
D.R.
Fischel,
The
Corporate
Contract'
1989)
Colum. L.
Rev.
1416 at
1444-5
(corporate
law is
a kind of
standardform
ontract).
Unfortunately,
hile
this
idea
is
prominent
in
economic
literature
and the
civilian
tradition,
he
idea of
nominate contracts s
not
as
far
developed
in
the
common law.
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19/69
190
UNIVERSITY
F TORONTO
LAWJOURNAL
the directors o
manage
the
corporate
patrimony
ith are and
loyalty
o
as to