cans.ubclss.comcans.ubclss.com/application/media/cans/Hawes_Law_230... · Web viewContents. INTRODUCTION6. WHAT IS A CORPORATION:6. Dodge v Ford6. WHY INCORPORATE:6. TYPES OF CORPORATIONS:6

Camille ChisholmHawes (December 2010)Corporations Law 230

ContentsINTRODUCTION........................................................................................................................................................6

WHAT IS A CORPORATION:...................................................................................................................................6

Dodge v Ford....................................................................................................................................................6

WHY INCORPORATE:............................................................................................................................................6

TYPES OF CORPORATIONS:...................................................................................................................................6

WHERE TO INCORPORATE – Federal or Provincial:..............................................................................................7

Federal Versus Provincial Incorporation...............................................................................................................7

Bonanza Creek Gold Mining Co. v. The King (1916 PC).....................................................................................8

SEPARATE LEGAL ENTITY..........................................................................................................................................8

Salomon v. Salomon & Co, Ltd [1895-1899] ER................................................................................................8

Lee v. Lee’s Air Farming Ltd. (1961) PC.............................................................................................................8

LIFTING THE CORPORATE VEIL..................................................................................................................................9

Macaura v. Northern Assurance Co Ltd and others (1925) HL..........................................................................9

Big Bend Hotel Ltd. v. Security Mutual Casualty Co. (1980) BCSC....................................................................9

Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd. (1972) Ont CA..........................................................9

642947 Ont. Ltd. v. Fleischer (2001) Ont CA.....................................................................................................9

Parent and Subsidiary Companies and the Veil....................................................................................................9

Adams v Cape Industries [General Rule]..........................................................................................................9

Smith, Stone & Knight [Agency Exception]......................................................................................................9

De Salaberry Realties Ltd v Minister of National Revenue [Parent LIABLE]...................................................10

Transamerica Life v Canada Life (Ont Gen Div; aff’d Ont CA) [Parent NOT liable].........................................10

Thin Capitalization..............................................................................................................................................10

Walkovszky v Carlton (US case)......................................................................................................................10

Use Company’s Name when Dealing with Outsiders..........................................................................................10

Wolfe v Wolfe (AB) [Personal liability without lifting veil].............................................................................11

Statutory Lifting the Veil.....................................................................................................................................11

CORPORATE CAPITAL STRUCTURE - Shares............................................................................................................11

What is a Share...................................................................................................................................................11

Atco v. Calgary Power Ltd. (1982) SCC............................................................................................................11

Rights Attached to Shares...................................................................................................................................11

Power to Issue Shares........................................................................................................................................11

Edmonton Country Club v Case......................................................................................................................12

Shares Terminology............................................................................................................................................12

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Classes of Shares................................................................................................................................................12

International Power Co. v. McMaster University (1946) Que CA....................................................................12

In re The Isle of Thanet Electric Supply Co (Eng CA).......................................................................................13

Variation of Class Rights of Shareholders...........................................................................................................13

Special Resolution..........................................................................................................................................13

Limitations on Share Classes..............................................................................................................................13

Re Bowater Canadian Ltd. v. R.L. Crain Inc. (1987) Ont CA.............................................................................13

Jacobsen v. United Canso Oil & Gas Ltd. (1980) Alta QB................................................................................13

Dividends............................................................................................................................................................13

Dodge v Ford (US case)...................................................................................................................................14

The Queen v McClurg (SCC)............................................................................................................................14

CORPORATE STRUCTURE - Debt.............................................................................................................................14

Debts and Shares Compared..............................................................................................................................14

Institutional Investors.........................................................................................................................................15

Directors Decisions.............................................................................................................................................16

Baron – you have to agree you are in a meeting for it to be considered a meeting.......................................16

Shareholders Decisions – Voting Rights..............................................................................................................16

Shareholder Meetings........................................................................................................................................16

Shareholder Ordinary and Special Resolutions [BCBCA s 1; CBCA s 2(1)]..........................................................17

Notice Requirements – Shareholders Meetings.................................................................................................17

Proxy Voting.......................................................................................................................................................17

Challenging a Shareholder Resolution................................................................................................................17

Division of powers between shareholders and Directors...................................................................................18

Automatic Self-Cleansing Filter Syndicate Co. v. Cunninghame (1906) CA.....................................................18

Hollinger Inc v Hollinger International Inc (US case) [What is “substantially all” of co’s assets]....................18

MEETINGS..............................................................................................................................................................18

Shareholder Meeting - Chairperson...................................................................................................................18

Blair v. Consolidated Enfield Corp. (1993) Ont CA [Good Faith Duties of the Meeting Chair]........................18

Re Marshall (1981) Ont HC.............................................................................................................................19

Warring Board Factions – How Far Should Courts Intervene.............................................................................19

Re Canadian Javelin Ltd. (1976) Que SC [Court calls s/holder meeting]........................................................19

Charlebois v. Bienvenu (1968) Ont CA............................................................................................................19

sHAREHOLDER pROPOSALS:...............................................................................................................................20

CONTRACTS WITH OUTSIDERS...............................................................................................................................20

Actual Authority.................................................................................................................................................20

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Hely-Hutchinson v Brayhead [Implied Actual Authority]...............................................................................20

Ostensible/Apparent Authority..........................................................................................................................21

Canlab Supplies v Engelhard Industries Ltd (1979) SCC..................................................................................21

When will an Outsider not have Protection under s 146(1) Assumptions..........................................................21

1394918 Ontario Ltd v 1310210 Ontario Inc [when does an outside “know”/ “ought to know”].................21

DIRECTORS AND OFFICERS DUTIES.........................................................................................................................21

WHO IS A DIRECTOR OR OFFICER.......................................................................................................................21

DIRECTOR DUTIES...................................................................................................................................................22

Duty of Care & FIduciary Duty............................................................................................................................22

Peoples Department Stores Inc. (Trustee of) v. Wise (2004 SCC)...................................................................22

Smith v. Van Gorkom (US case 1985).............................................................................................................23

Avoiding Liability for Breach of Duties................................................................................................................23

Business Judgment Rule.................................................................................................................................23

Peoples Department Stores Inc. (Trustee of) v. Wise (2004 SCC)...................................................................24

Smith v. Van Gorkom (US case 1985).............................................................................................................24

Reliance..........................................................................................................................................................24

Indemnification and Insurance.......................................................................................................................24

Conflicts of Interest............................................................................................................................................25

Aberdeen Ry. Co. v. Blaikie Brothers (1854) HL..............................................................................................25

Taking Advantage of Corporate Opportunities [‘Secret Profits’]........................................................................25

Regal (Hastings) Ltd. v. Gulliver (1942) HL......................................................................................................25

Ways For Directors and Officers to Avoid Liability..............................................................................................26

Disclosure of Interest......................................................................................................................................26

Shareholder Ratification.................................................................................................................................26

Peso Silver Mines Ltd. v. Cropper (1966) SCC.................................................................................................27

Irving Trust Co. v. Deutsch 1935 US case........................................................................................................27

Business Opportunities that Arise After Director Leaves Company....................................................................27

Canadian Aero Service Ltd. v. O’Malley (1974 SCC)........................................................................................27

Competing with the Company............................................................................................................................28

PUBLIC COMPANIES –Q about Director’s duties in public co consider whether they have fulfilled duty to public (also consider insider trading)................................................................................................................................29

Exemptions.........................................................................................................................................................29

Policy Behind Exemptions...............................................................................................................................29

Exemption Categories.....................................................................................................................................30

CONTINUOUS DISCLOSURE REQUIREMENTS......................................................................................................30

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“Material Change” in Continuous Disclosure......................................................................................................30

Pezim v BC......................................................................................................................................................31

Kerr v Danier Leather......................................................................................................................................31

Consequences for Breach of Securities Law.......................................................................................................32

Available Defences.............................................................................................................................................32

Re YBM Magnex International Inc. (2003) Ontario Securities Commission....................................................32

Insider Trading....................................................................................................................................................32

REMEDIES...............................................................................................................................................................33

dERIVATIVE aCTION............................................................................................................................................33

Primex Investments v. Northwest Sports Enterprises Ltd. (1995) BCSC [Test for leave to bring derivative action (under BCBCA)]....................................................................................................................................33

Re Northwest Forest Products Ltd. (1975) BCSC [“Reasonable efforts to cause co to bring action”]............34

First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) Alta QB [“Proper Person” to Bring the Application].......................................................................................................................................................................34

Oppression Remedy [first remedy you should apply for]...................................................................................35

BCE Inc. v 1976 Debentureholders (S.C.C. 2008) [“Reasonable Expectations” of parties].............................35

Clitheroe v. Hydro One Inc. (2002) Ont SCJ [“Any other person” (CBCA)].....................................................36

Downtown Eatery (1993) Ltd. v. Ontario (2001) Ont CA [“Any other person” (CBCA)].................................36

West v. Edson Packaging Machinery Ltd. (1993) ON [“Any other person” (CBCA)].......................................36

First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) Alta QB [“Any other person” (CBCA)]...................36

Oppression Remedy: Family Disputes................................................................................................................37

Ferguson v. Imax (1983) ONCA.......................................................................................................................37

Naneff v. Con-Crete Holdings Ltd. (1993) ON [Oppression is a remedy not a punishment]..........................37

Oppression Remedy: Public Companies.............................................................................................................38

Ford Motor Co. of Canada v. Ontario Municipal Employees Retirement Board (2006) ONCA........................38

Some Typical Situations Where ‘Oppression’ Remedy Has Been Given.........................................................38

Compliance and Restraining Order.....................................................................................................................38

Compulsory Liquidation (Winding Up) Order.....................................................................................................38

“Just and Equitable”.......................................................................................................................................39

Ebrahimi v. Westbourne Galleries Ltd (1973) HL............................................................................................39

Dissent and Appraisal Right................................................................................................................................40

Remedies for Public Company Stakeholders......................................................................................................40

PARTNERSHIPS.......................................................................................................................................................40

Partnership vs Corporation.................................................................................................................................40

Existence of Partnership.....................................................................................................................................40

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A.E. LePage Ltd. v. Kamex Development Ltd. (1977) ONCA [do co-owners of property = partners]..............41

Volzke Construction v. Westlock Foods (1986) ABCA.....................................................................................41

Lansing Building Supply (Ontario) Ltd. v. Ierullo (1989) Ont Dist Ct................................................................42

Backman v Canada..........................................................................................................................................42

Liability of Partners.............................................................................................................................................42

Ernst & Young Inc v Falconi (1994) Ont Gen Div.............................................................................................43

Fiduciary Duties / Liability to other Partners......................................................................................................43

Olson v Gullo (1994) Ont CA...........................................................................................................................44

Limited Liability Partnership (LLP)......................................................................................................................44

Limited Partnership (LP).....................................................................................................................................44

Haughton Graphic Ltd. v. Zivot (1986) Ont HC................................................................................................45

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INTRODUCTION

WHAT IS A CORPORATION:- Legal person/entity- Bundle of rights: including own property, make contracts, hire people, sue or be sued- Limited liability for shareholders- Exist in perpetuity (unless dissolved)- Can include non-profits

Dodge v Ford (USA) – can’t ignore interests of shareholders to benefit societyPurpose of corporation is to benefit shareholders – benefit to society might be ok as a secondary goal

WHY INCORPORATE: Investors (shareholders) get limited liability Corporation is separate legal entity – can make contracts, sue, be sued Perpetual Existence A shareholder acting alone has no power to bind the corporation (different than partnerships) Ability to buy and sell shares – can sell shares to get rid of interest in corporation Business expands a lot – selling shares is an efficient way to raise money from many people

o Has additional facilities for raising additional capital (including shares and debentures)o “Debentures” – evidence of indebtedness; anyone can produce a debenture and sell it to

another person May be some tax benefits – many places have lower corporate tax rate (than high income tax rate)

o Can leave funds in corporation and have them taxed at lower rate – instead of paying out and having them taxed as your income

o Double-taxation aspect of incorporation – corporation is taxed on income, then that same income is taxed again in the hands of the shareholders when distributed

o Partnership – partners are taxed based on individual income from partnership Flowthrough of losses in partnership/sole proprietorship is not available with a

corporation Keep in mind: incorporation has a bit more regulation than partnership – but now it is pretty simple and

cheap to set up a corporation; there is a cost to incorporation but it is small

TYPES OF CORPORATIONS:Letters Patent Main documents = letters patent and bylaws Government has discretion whether to approve incorporation (may impose conditions on incorporation)

Memorandum and Articles of Association In BC and Nova Scotia; create “companies” BC: main documents = notice of articles and articles of association

o Documents form a contract between shareholders, directors and companyo When you buy shares in the company you are deemed to have agreed to this contract – can be

sued for any breach of the articleso Memorandum and articles set out terms of contract and incorporation is in effect by registration

of that agreement with the government

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o Basic allocation of powers between directors and shareholders is set out in the incorporating documents

o complete freedom to include in the memorandum and articles any conditions not in conflict with the statute

Division of Powers Corporations Based on USA model Main documents = articles of incorporation and by-laws

o Articles and by-laws are not a contracto May adopt unanimous shareholder agreement (“usa”) – to give shareholders more control over

management, to entrench control and give contractual rightso Makes setting up these corporations more difficult – requires an extra legal agreement

Includes all other provinces and the Canada Business Corporations Act (CBCA)o CBCA contains rules regarding how corporation can be structured and run (instead of allowing

corporations to decide themselves – like in BC)o By-laws are easier to change than in BC – only requires 50% of shareholderso Directors of the company can change by-laws and later seek shareholder approvalo Leads to less stable by-laws than in BC

WHERE TO INCORPORATE – FEDERAL OR PROVINCIAL: Under the Constitution Act the power to incorporate is given to both the federal and provincial

governments s.92(11) Constitution Act – allows provincial legislatures to incorporate companies with “provincial

objects” Different types of corporations because of competition

o Governments competing to attract business to their provinces by offering easier incorporation, clearer rules, etc.

o Province by province legislation may also be better able to address localized interests of corporations in each area

FEDERAL VERSUS PROVINCIAL INCORPORATION Each province has legislation requiring a corporation incorporated outside of the province to register

with an official in order to carry on business in the province – a CBCA corporation will have to register in each province it wishes to do business

Issuance of license is at official’s discretiono Most common ground for denial of registration is confusion of corporate names between

the applicant and a corporation already qualified to do business within the province Certain provinces have reciprocal agreements allowing companies incorporated in either province to

carry on business in the other without a license “Extra-provincial corporation” includes corporations organized outside Canada – but non-Canadian

corporations will usually not do business here without incorporating into a Canadian subsidiary (see Income Tax Act s.219)

Because BCBCA is unique, it might be more difficult for business people/corporations from other provinces to understand it

o If doing inter-provincial business it might be better to use the CBCA for convenience Under CBCA – once name is approved you are allowed to use it throughout Canada (without reapplying

for name in different provinces)

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o Under BCBCA – name is only protected in BC (have to apply to use that name in other provinces) CBCA is simpler act to read and understand If doing BC only business = use BCBCA; if doing business nationally = use CBCA BCBCA:

o Don’t have to have resident Canadians as directors in corporation (to attract foreign business to BC)

Under CBCA – have to have at least ¼ of directors as Canadian residents (and at least 1 if you have fewer than 4 directors)

o Articles are more stable in BC company – more difficult to change them CBCA – bylaws are easier to change; can use USA to fix the bylaws in place

o BCBCA gives more flexibility in customizing rights and powers of people (more flexibility in structuring company)

CBCA – much more fixed in terms of what you can do There aren’t large differences – it is up to the client what they wish to do

Bonanza Creek Gold Mining Co. v. The King (1916 PC) Provincial incorporated companies – don’t have right to do business in other provinces But provincial companies have capacity to do business extra-provincially – need permission from

provinces doing business in

SEPARATE LEGAL ENTITY

BCBCA s 13; CBCA s 9 – company comes into existence on date of filing application, or date specified in incorporation application

BCBCA s 30; CBCA s 15 – legal capacity and powers of company/corporation are the same as an individual person

Salomon v. Salomon & Co, Ltd [1895-1899] ER1. Ensure that the company was set up in accordance with the legislation (BCBCA or CBCA)2. Ensure there was no fraud when the company was set up

The company is a separate legal entity Unless fraud is proven, once the company is legally incorporated it must be treated like any other

independent person with rights and liabilities appropriate to itself, and the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are

The creditors have notice that they are dealing with a company the liability of the members of which is limited, and the register of shareholders informs them how the shares are held, and that they are substantially in the hands of one person, if this be the fact

Lee v. Lee’s Air Farming Ltd. (1961) PC Application of Salomon – the company is a separate legal entity

o Lee and company were separate legal entities – therefore could contract with each othero Lee and company were separate legal entities - so company could give an order to Lee

It is possible to have a position in the company and also be a worker for the company – as long as when you sign the contract it is clear that it is the company that is signing

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LIFTING THE CORPORATE VEIL

Macaura v. Northern Assurance Co Ltd and others (1925) HL Assets belong to the corporation and aren’t owned by a shareholder – therefore the shareholder has

no insurable interest in those assets Neither a simple creditor of nor a shareholder in a company has any insurable interest in a

particular asset which the company holds

Kosmopoulos v. Constitution Insurance Co. (1987) SCCIssue: whether a sole shareholder of a corporation has an insurable interest in the assets of that corporation

The law on “lifting the corporate veil” is inconsistent – lack of overarching regime or policy CA: would lift the veil because they thought this was unfair SCC: don’t lift the veil because this would go against Salomon

o If you choose to incorporate you choose the benefits and also get the burdens Instead – redefined “insurable interest”

o Because Kosmo is only shareholder and would be affected by destruction of company’s assets (loss to him personally as company’s only shareholder) – he has insurable interest in company’s assets

Big Bend Hotel Ltd. v. Security Mutual Casualty Co. (1980) BCSC Circumstances in which the veil was lifted – equity will not allow an individual to use a company as a

shield for improper conduct or fraud If there is fraud by the people who control the corporation the court will not allow them to get

away with this fraud by invoking the separate legal entity concept

Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd. (1972) Ont CA Shows difficulty of getting courts to lift veil despite informality and total control of corporation by

shareholders where no fraud present Court found no fraud because: company was incorporated properly and Newtonbrook knew they

were signing with a company (company name was on contract) – therefore should be aware of limited liability

642947 Ont. Ltd. v. Fleischer (2001) Ont CA Obiter remarks – but indicates when veil might be lifted Shareholders made undertaking to pay damages when they knew corporation didn’t have assets Some kind of fraud or bad behaviour on the part of shareholders creates risk they will lose limited

liability – court likely to lift the corporate veil and find them personally liable

PARENT AND SUBSIDIARY COMPANIES AND THE VEIL

Adams v Cape Industries [General Rule] General Rule: each company is a separate legal entity

o Generally parent companies won’t be liable for debts of subsidiary companies because of limited liability

Smith, Stone & Knight [Agency Exception] Exception: where one company acts as agent for the other courts will view them as one company

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1. Express Agency: one company signs contract “as agent for” other company; by agreement o Parent co will be liable for subsidiary as long as agent is acting within their authority

2. Implied Agency: parent completely dominates and controls subsidiary (subsidiary has no independent decision making power of its own)

6 Elements of Implied Agency:1. Were the profits treated as profits of the parent co2. Were the persons conducting the business appointed by the parent co3. Was the parent co the head and brain of the trading venture4. Did the parent co govern the adventure, decide what should be done, and what capital should be embarked on the venture5. Did the parent co make the profits by its skill and direction6. Was the parent co in effectual and constant control

Very difficult test to meet – most subsidiaries have slight independence from parent co

De Salaberry Realties Ltd v Minister of National Revenue [Parent LIABLE]Subsidiary co claimed land was purchased for shopping complex, then sold; but subsidiary was part of parent conglomerate that was a realty/land transfer business

Court looked at question of control: was there total domination and control of subsidiary by parento Two companies each owned 50% of De Salaberry, but they were working together and

parent cos made all decisions for De Salaberry Followed Smith, Stone & Knight – treated subsidiary as part of conglomerate group**Keep in mind: this is a tax case; courts are more willing to lift veil to ensure taxes are paid**

Transamerica Life v Canada Life (Ont Gen Div; aff’d Ont CA) [Parent NOT liable] Shows how difficult to make parent co liable for subsidiary Parent not liable because:

o Even though only shareholder and appointed directors – not all directors were sameo Evidence that cos had different accounting systemso Evidence that it was more of an arms length relationship between coso Some difference/distinction between cos – behaved slightly differently

THIN CAPITALIZATIONWalkovszky v Carlton (US case)Taxi case – injured by taxi, sue taxi corp, no assets to pay out settlement

Court maintained separate legal entity principle from Salomon To hold shareholder personally liable it is not enough to just show that the company has little or no

assets Must have more than thin capitalization to make shareholders personally liable for debts of corp

o Ex. intermingling of personal and corp funds, no regard for formality of corp structure, breach of statute (illegality), etc.

Can set up a corporation with virtually no assets as long as at the time you set up you don’t owe money that you are trying to get out of paying = fraud

USE COMPANY’S NAME WHEN DEALING WITH OUTSIDERSBCBCA s 27 – in all public communications, a company must display its name in legible characters

Wolfe v Wolfe (AB) [Personal liability without lifting veil]

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Court finds that there was a breach of the Corporations Act (BCBCA s 27) – therefore don’t have to follow Salomon

If no outsider could have known they were dealing with the corporation then the relationship is with you personally and not the corporation

o Moir held personally liable because portraying everything in his name (not corporation’s) made the relationship with him personally

o The company still has a separate legal entity but it was not involved in this relationship

STATUTORY LIFTING THE VEILBCBCA s 142 – directors and officers personal liabilityBCBCA s 227 – oppressive behaviour by shareholders CORPORATE CAPITAL STRUCTURE - Shares

WHAT IS A SHARE Share – connotes a common, divided, participation interest in the corporation’s business

o Provides no title to the assets of the companyo Ownership of shares gives investor a bundle of rights – defined in the co’s constitution and

the corporations act

Atco v. Calgary Power Ltd. (1982) SCC Shareholders have no proprietary interest in the assets of the company in which they hold shares –

their proprietary interest is in their shares only See also Salomon; Macaura

RIGHTS ATTACHED TO SHARES Largely dependent on co’s constitution If only one class of shares rights generally include [CBCA s 24(3)]:

o Right to vote on shareholder’s resolutions (including electing directors)o Right to receive dividends – if they are declaredo Right to share in assets remaining after liquidation

If more than one class – rights may be divided up between classes Transfer rights: Common law default rule – shares are transferable

o Can be restricted by co’s constitution or corporations Acto Once company becomes public – can’t restrict transfer of shares

Shareholders also have limited liability [BCBCA s 87]o Shareholder is not personally liable for coo Shareholder can only be liable for the amount invested

POWER TO ISSUE SHARES Usually board of directors have power to issue shares – subject to articles/bylaws [BCBCA s 62;

CBCA s 25(1)] BC Table 1 Articles s 20.2 – shares cannot be sold, transferred or disposed of without consent of the

directors

Edmonton Country Club v Case

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Golf club with three provisions in articles: (1) annual fee – if not paid shares forfeited; (2) transfer fee for shares; (3) directors have discretion to review share transfers for any reason

(1) Requiring you to continue paying is against limited liability – once you’ve paid for your shares initially you don’t have to pay more

o Can have an annual fee, but can’t make share ownership contingent on payment of fee (2) You can only be charged the administrative costs of transferring shares – can’t be charged an

unreasonable transfer fee that would be more than the costs incurred (3) Common law rule that shares are transferrable – this can be limited by co’s articles

o Common law rule is subject to co’s articles

SHARES TERMINOLOGYAuthorized Capital [BCBCA s 53(b)] = maximum # of shares co permits itself to issue

Most cos have a very high number to permit future growth This is now basically meaningless – abolished in the CBCA; and optional in BCBCA

Share Capital – how much money co has raised from issuing shares since it was founded Amount has to be included in co records

Issue Price [BCBCA s 63] – cost of buying share in co when shares first issued Only important when you first buy shares from co; price will fluctuate with success of co

Market price/value – better reflection of how co is doing; may be higher or lower than issue price

CLASSES OF SHARES Different classes of shares = different rights; may be different class even if not called a class Companies can call their shares whatever they want – no fixed terms for shares

o Look at co’s constitution to determine what rights of each class are Common – share in profits and also have voting rights Preference – receive dividends before common shares; usually give up voting rights except in issues

that directly affect their share classo If liquidation occurs the preferred stock has priority, but only with reference to the common

stock –creditors are first priority Therefore this priority only has meaning and value if asset values remain after

creditors have been fully satisfied Cumulative – if dividends are not paid one year, have right to double dividends next year (arrears

accumulate) Participating – if co makes extra profits over dividends agreed to pay to preference shareholders,

those shareholders can share in those extra profits Convertible – convertible to a common share after certain period of time at option of shareholder Different rights of share classes must be included in co’s articles [BCBCA ss 11(g), 12(2)(b); CBCA s

6(1)]o *Make sure articles are clear about what rights of each share class are*

International Power Co. v. McMaster University (1946) Que CAPreference shares receive 7% dividends before common shares; co was paying common shares 8% and preference 7%; McMaster wanted back pay for the 1% extra profit they wanted preference shares to share in – no mention in articles of whether preference shares were participatory or non-participatory

If co’s articles don’t say that preference shares are participatory then they are non-participatoryo Therefore preferences shares not entitled to share in extra 1% profit

On winding up under common law shareholders have right to share in money left after all debts paid

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o Court said preference shares could share in profits left after debts paid out – based on common law rights of shareholders

o Viewed the shares as participating (in relation to winding up) even though articles didn’t specify they were participating

In re The Isle of Thanet Electric Supply Co (Eng CA) If articles don’t specify that shares are participating – they are non-participating shares

VARIATION OF CLASS RIGHTS OF SHAREHOLDERSBCBCA s 61; CBCA s 176 – rights of a share class can’t be varied without a separate special resolution of those shareholders

Special Resolution BCBCA s 1 – default is 2/3 majority; ranges from 2/3 – ¾ majority depending on articles CBCA s 1 – 2/3 majority

LIMITATIONS ON SHARE CLASSES

Re Bowater Canadian Ltd. v. R.L. Crain Inc. (1987) Ont CAFacts: one class of shares divided into common and special common shares. Special common shares had 10 votes per share unless sold to a new shareholder who would only receive 1 vote per share.

CBCA s 24(3) – where a corporation has only one class of shares, the rights of the holders thereof are equal in all respects

o If only one class of shareholders they each have to be treated the same (have same rights) s 24(4) – the articles may provide for more than one class of shares

o Court read in that if there is more than one class, the rights which are attached to a class of shares must be provided equally to all shares of that class – founded on the principle that rights, including votes, attach to the share and not to the shareholder

Jacobsen v. United Canso Oil & Gas Ltd. (1980) Alta QB CBCA s 24 – all shareholders, if there is only one class, have to be treated equally

o Where shareholders only allowed to vote up to 1000 shares – not treating shareholders equally; ex. those with 2000 shares are only getting ½ vote per share = discrimination within a single share class

[Company gave up CBCA designation and moved to Nova Scotia where they were allowed to maintain this restriction]

o *Always consider – if you can’t get away with it under one corporation act, try another one in a different jurisdiction*

DIVIDENDSDividend – distribution of company profit to shareholders

BCBCA s 136 – usually directors make decision of whether to pay dividends; implied in their s 136 powersProfit can be reinvested into the company to allow for growth – rather than paying dividends

CBCA s 102(1) - The power to declare dividends is a power of the directors subject only to a unanimous shareholders’ agreement

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Directors are not obligated to declare dividends There is no duty on the corporation, or the directors on behalf of the corporation, to declare

dividends The directors must exercise their powers in the best interests of the corporation; and in a way that is

not oppressive, or unfairly prejudicial toward one or more shareholders, or that unfairly disregards the interests of one or more shareholders

BCBCA s 70(1); CBCA s 42(b) – in BC can pay dividends out of profit, capital, however co chooses; under CBCA co can only pay dividends out of profits

BCBCA s 70(2); CBCA s 42(a) – if you pay out a dividend and the co becomes insolvent because of that, the directors will be personally liable to creditors for money lost due to co’s insolvency

Dodge v Ford (US case) If directors don’t have a reason that is in the best interest of the company – it is unfair and

oppressive to shareholders to not distribute dividends

The Queen v McClurg (SCC) “Discretionary dividend clauses” – directors have discretion to decide whether any class can get

dividends and which class should get it Majority viewed this as ok – directors have general power to declare dividends or not, so if included

in articles, why not give them power to decide which class will get dividends in which year The declaration of dividends is limited legally in that it must be exercised in good faith and in the

best interests of the company The rights carried by all shares to receive a dividend declared by a company are equal unless

otherwise provided in the articles of incorporationo Prima facie shareholders participate in the benefits of membership equally. It is only when a

company divides its share capital into different classes with different rights attached to them that the prima facie presumption of equality of shares may be displaced

Shareholder rights attach to the shares themselves and not to shareholderso The division of shares into separate classes is the means by which shares are distinguished

and in turn allows for the derogation from the presumption of equality (Bowater Canadian Ltd.)

Dissent – directors shouldn’t have this much discretion to divide the profits of the company; idea is against principle of equality of dividends (HAWES: doesn’t understand dissent reasoning)

CORPORATE STRUCTURE - Debt

DEBTS AND SHARES COMPAREDShares:

Potential for dividends Not guaranteed to get initial investment back if company wound up Potential for higher return – if profitable = higher dividends, sell shares for high price Can get voting rights (depending on class of share) Don’t have to give security over shares – may not be able to get loan because don’t have security Shareholders are last in line if company is wound up

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Shareholders have more control over management of company – by virtue of their rights and remedies

Debts: Guaranteed return Must be repaid when co wound up Fixed return – ensured that you will get back amount in loan agreement No voting rights Interest paid on debt Tax benefits – can write off a lot of costs of loan against income “Convertible Debt” – hybrid security which starts as a bond and after a few years, bondholder has

option to convert into shares at agreed formula Debt Securities

o A corporation may issue and sell debt securities to the public, just as it might issue and sell equity

o A debt security represents a right to receive periodic payments of interest and return of principal on specified dates and in accordance with the other terms of their issue

o The main advantage in issuing debt securities – very large amounts of money may be borrowed through the issue of securities without the need to identify a single lender that is prepared to advance the entire amount

o When a large loan is carved into smaller pieces issued by debt securities, it is more difficult for the “lenders” to act in concert to try to monitor or discipline the corporate borrower

INSTITUTIONAL INVESTORS Investors buy units in the mutual fund Shareholder in the company is the mutual fund – it holds all the voting rights; investor has no voting

rights Basically bad investment – would be better to just buy and hold shares (meant to be long term

investment)

DIVISION OF POWERS BETWEEN DIRECTORS AND SHAREHOLDERS

IF THERE IS A DISPUTE BETWEEN SHAREHOLDERS AND DIRECTORS:o 1. LOOK IN ARTICLES OR USA FOR HOW POWERS ALLOCATEDo 2. LOOK AT RELEVANT CORPORATIONS ACT TO SEE WHO HAS POWER

Powers are divided up in the business corporations acts and corporate articles, bylaws or shareholder agreements

o Includes procedures for company to followo And rules about who decides various corporate issues

Directors: primary power is to manage the co (BCBCA s 136; CBCA s 102)o Includes most decisions relating to co issues – except if limited by Act or articleso Management powers can be delegated to officers tooo Restriction on powers – will be in articles or USA

Shareholders: Powers to vote on certain major co decisionso Includes: electing directors, changing articles, changing co type, voluntary winding up, sale

of all assets (see Hollinger), etc

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Board of Directors makes initial proposal and shareholders have the right to approve or not

o Have to look to corporations act to find out what powers are

DIRECTORS DECISIONS Director’s mandatory qualification requirements [BCBCA ss 120-124]:

o Must be natural personso Over 18 years oldo Not bankrupto Must not be of unsound mind – or “incapable of managing the individual’s own affairs”

Make decisions by passing director’s resolutions A single director cannot make decisions unless they have the power delegated to them by the BoD

Two ways to pass director’s resolutions:1. By meeting – majority of directors pass the director’s resolution

Requires a “quorum” – number of people that must be present to have a valid meeting where a resolution can be passedMust tell all the directors about the meeting – have to give proper noticeMeetings can be done by phone or other means if this is written into the articles

2. No meeting – have the directors sign a resolutionTo pass this must be unanimous – signed and approved by all directors on the board

If co only has one director – that director = a meetingAny resolutions passed must be written down and signed; included in company’s records

Baron – you have to agree you are in a meeting for it to be considered a meeting

SHAREHOLDERS DECISIONS – VOTING RIGHTS Shareholders make decisions by voting in meetings or passing resolutions

o Resolutions are passed in the same two ways as for directors Shareholders have the right to elect directors of the co Shareholders are given the right to vote in relation to certain changes that are considered

“fundamental”o On these fundamental changes, shareholders are generally entitled to vote whether or not

the shares of the class they hold otherwise carry the right to vote

SHAREHOLDER MEETINGS Notice:

o must be given 21 days in advanceo must be given to all shareholderso any non-ordinary business to take place at the meeting must be set out in the notice

Annual General Meeting:o Co must have these meetings every yearo Directors are elected, look at financial statements, etc.

Extraordinary General Meeting (Special Meeting):o Meeting called at another time, to discuss something co must decide right away

Directors have power to call s/holder meetings

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S/holders can call s/holder meetings if they have 5% or more of the votes in the coo S/holders can combine to equal 5% and call a meeting in conjunction

Quorum = in BCBCA minimum of 2 s/holders presento CBCA - If none specified a quorum is present if holders of a majority of the shares entitled to

vote at the meeting are present or represented by proxyo If single shareholder co – only one presento Most cos will specify a higher number of shareholders must be present (in articles)

SHAREHOLDER ORDINARY AND SPECIAL RESOLUTIONS [BCBCA S 1; CBCA S 2(1)] Ordinary resolution – passed by majority Special resolution – passed by special majority (at least 2/3 majority)

o For major decisions that change the structure of the co Special business – no correlation with special resolution

o Must give notice if discussing special business at the s/holder meetingo Any business outside of ordinary business – must give notice that this business will occur

Ordinary business: electing directors, looking at financial statements, appointing auditor

NOTICE REQUIREMENTS – SHAREHOLDERS MEETINGS Notice requirements for s/holder meetings are much more strict than for directors meetings Notice must sufficiently specify the nature of the business of the meeting – if special business Director’s must fully disclose facts that may affect s/holder decision to vote or attend meeting Information sent to s/holder must be:

o Fairly presentedo Reasonably accurateo Clearly written and o Not misleading

Garvie v Axmith (1961) Ont HC – applies in BCo Shareholders may attack decisions made at shareholder meetings if notice was insufficiento The court may nullify a meeting if notice didn’t clearly state what the meeting would be

about Means another meeting must be held, with proper notice

PROXY VOTING Public cos must provide proxy forms with the notice of s/holder meeting

o Management’s obligation is that shareholders are notified of their proxy rights and given the opportunity to exercise them

o Where management fails to send the required information with the proxy a court will nullify the results of the shareholders meeting

If ordinary business – directors don’t have to give space to allow voting for or againsto Only choices: for or withheld

If special business – have to give the option to vote for, against or withhold

CHALLENGING A SHAREHOLDER RESOLUTION Challenge for unfairness, oppressive to minority shareholders (includes not in best interest of co) Proxy form contents – should include ability to vote against if it is special business Argue ultra vires the co purpose if co has an “objects clause”

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Decisions relating to remuneration is considered management of co – shareholders can’t decide this (BoD decides remuneration)

Argue that the decision is something which is not in the scope of powers of s/holders – it’s a decision only directors can make

DIVISION OF POWERS BETWEEN SHAREHOLDERS AND DIRECTORS The formal grant of authority to directors implicitly removes power from shareholders

o Also CBCA s.102 – focuses contests for control of the corporation around the shareholders’ right to elect directors

Automatic Self-Cleansing Filter Syndicate Co. v. Cunninghame (1906) CAIssue: whether the directors are bound to accept, in substitution of their own view, the views contained in the resolution of the company

Within the authority granted by the co’s constitution, the board may act independently of the views of the majority of shareholders and in a manner opposed by a majority

Shareholders don’t have the right to interfere with management powers granted to the directors in the articles

o Even with a majority of votes shareholders can’t directly engage in management of the coo Once this power has been assigned to the directors you must let them manage, as long as

they are acting within their powers The only way s/holders can get involved in managing the co is through election of directors

Hollinger Inc v Hollinger International Inc (US case) [What is “substantially all” of co’s assets] Selling all or substantially all of the co’s assets requires shareholder approval Substantially all:

o Vital part of co’s business – when co can no longer properly function after that asset is sold off

o Not based on percentage – something which leaves the co with hardly any business left Controlling shareholders have no inalienable right to usurp the authority of the BoD that they elect

MEETINGS On an application by shareholders under CBCA s.144 (BCBCA s.186) a court may order a

shareholders’ meeting be calledo Such orders may be made if it is “impracticable” to call or conduct a meeting in another way

or “for any other reason a court thinks fit”o Court is careful to disrupt as little as possible – and will order that any meeting should be

called and conducted in conformity with such articles and regulations as far as practicable

SHAREHOLDER MEETING - CHAIRPERSON

Blair v. Consolidated Enfield Corp. (1993) Ont CA [Good Faith Duties of the Meeting Chair]TRIAL: should proxy forms, altered to include another candidate for director, be accepted

Chairpersons duty is one of honesty and fairness to all individual interests, and directed generally to the best interests of the company

o Includes interests of shareholders not present at the meetingo The duty of fairness relates to the decision making process and the conduct of a proper

corporate meeting

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o Chair should act in a quasi-judicial manner (has to act impartially even if shareholder and involved in election to be director) – if they fail to do this their decision should not stand

APPEAL: Blair wanted indemnification for costs of trialRule for most cos: will pay costs (including legal costs) if there hasn’t been bad faith on behalf of the director

Director has to act in good faith when making decisions for the co Legal advice does not automatically make conduct which is based upon that advice honest and in

good faith for the purpose of claiming indemnityo But legal advice should be considered in assessing good faith – should be considered in the

context in which it was given and alongside the duty of the chairperson to act fairlyo Where legal advice relating to the decision was sought and followed, and no evidence

lawyers were motivated by personal gain – likely can’t say that the Chair or director was acting in bad faith

Re Marshall (1981) Ont HC General rule in company law that the persons entitled to vote as a shareholder are those shown

on the company’s books to be shareholders A chairman at an AGM should not have to determine the legal rights of beneficial owners of shares

registered in the name of others – he is entitled to rely on the votes as cast by the registered owner of those shares

o When counting votes, you don’t to go behind the vote to find out who is the real owner of the vote – this would be too inefficient

Registered shareholders can vote however they want – don’t have to go behind the list of registered shareholders

WARRING BOARD FACTIONS – HOW FAR SHOULD COURTS INTERVENEYou can challenge decisions made at meetings or have courts order meetings – won’t always succeed

*a lot depends on the wording of the corporation act and the co’s articles*

Re Canadian Javelin Ltd. (1976) Que SC [Court calls s/holder meeting]Director applied to court to order a s/holders meeting to elect new BoD because of inability of divided board to agree on how to control the company

Court ordered a s/holder meeting and appointed an independent chair whose decisions had to be followed

o Court felt there was no other way to rectify this situation – board was in a deadlocko This was the only way to give effect to s/holders wishes

Charlebois v. Bienvenu (1968) Ont CA Issue: can the court order for the calling and conducting of a shareholders meeting to achieve some purpose which is beyond the powers of shareholders at a meeting called in any other manner

CBCA s.144 is directed at and limited to the removal of difficulties militating against the calling of a shareholders meeting or militating against the conducting of business which lawfully might come before the meeting

Once these difficulties are removed it is open to the shareholders present at the meeting to conduct only such business thereat which could have been conducted at a meeting legally called in any other manner

o Co’s bylaws said a new board could only be elected yearly

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o Court shouldn’t go behind corporations act or co’s constitution to interfere with procedures of co

This provision does not allow the court to “order” shareholders to do in a meeting what they would otherwise have no power to do simply because it had been established that without the help of the court it was “impracticable” to call, hold or conduct the meeting

SHAREHOLDER PROPOSALS: Usually just a way to have opinion voiced, issue discussed

o Directors manage the co and don’t have to act on any proposal – even if it is voted ono Can be influential on management – in order to avoid negative publicity

No need to include proposal at meeting if:o Proposal is in relation to personal interests or grievances – issues co shouldn’t necessarily be

discussing at s/holder meetingo If not related to co’s business in any wayo If only for publicityo If proposal has been presented in previous years and only got a small minority of votes

Have become more popular recently as a way to comment on co’s social policy

CONTRACTS WITH OUTSIDERS

Co’s may enter into contracts o Directly – through one of its organs, usually BoDo By an officer or agent with delegated authority

Outsiders don’t have to read the articles or notice of articles – can assume co complied with its articles

If the co holds someone out you can assume they are what they are held out to be

ACTUAL AUTHORITYA relationship based on agreement between the co and an agentGiven expressly or implied

The actual authority of an officer may be determined by the officer’s employment contract or a formal board resolution

Actual authority will also be found to exist where an officer, without formal permission, exceeds the authority that usually attaches to his position but does so with the knowledge and acquiescence of the corporation

Managing Director cannot act in respect of “critical matters” (something that affects the whole of the co) without authorization of the board

Normally a single director (chair, officer) – can’t bind the co without the authority of the boardo Unless the co has allowed them to do this for a period of time and they have built up a

course of business where the person has been allowed to bind the co (implied authority)

Hely-Hutchinson v Brayhead [Implied Actual Authority]Richards signed K on behalf of co; co said he had no authority therefore K wasn’t binding

If you allow someone to sign for you then that person will have implied actual authority to bind the co to Ks

Co had allowed Richards to sign many previous Ks on their behalf and had never prevented him from doing this

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o The co had acquiesced to his behaviour – created implied actual authority to bind the co

OSTENSIBLE/APPARENT AUTHORITY Ostensible authority is the appearance of authority even though no actual authority has been

granted. o It creates an agency by estoppel: the company cannot claim that the agent’s acts were

unauthorized A representation or holding out to the outsider, intended to be and in fact relied upon by the

contractor, that a person (the agent) has authority to enter into contract(s) on behalf of a company (the principal). (Freeman and Lockyer v Buckhurst Park Properties)

Representation can be by words or by behaviour/conduct IMPORTANT: the person doing the representing must have actual authority to act for the

company: (Freeman and Lockyer) Apparent authority can be a single transaction – implied authority requires a built up course of

conduct

Canlab Supplies v Engelhard Industries Ltd (1979) SCC Doesn’t matter if you are in a low position – if your area of the co’s business is purchasing and you

have been allowed to purchase on behalf of the co then you have implied actual authority to make Ks and bind the co in that area where you have been given authority

WHEN WILL AN OUTSIDER NOT HAVE PROTECTION UNDER S 146(1) ASSUMPTIONS BCBCA s.146(2) - when they have knowledge or ought to have knowledge due to their relationship

to the company that these assumptions were incorrect (compare CBCA s.18(2))o You cannot rely s 146(1) where you know or ought to have known about company

procedure because of personal knowledge of the co or working in the co

1394918 Ontario Ltd v 1310210 Ontario Inc [when does an outside “know”/ “ought to know”]Ontario Business Corporations Act – similar to CBCA s 18(2)

Normally for an outsider it doesn’t matter if the co’s articles aren’t being complied with – but where you know the articles aren’t being complied with you aren’t protected

DIRECTORS AND OFFICERS DUTIES

WHO IS A DIRECTOR OR OFFICERBCBCBA s 1:“Director” means,

(a) in relation to a company, an individual who is a member of the board of directors of the company as a result of having been elected or appointed to that position, or(b) in relation to a corporation other than a company, a person who is a member of the board of directors or other governing body of the corporation regardless of the title by which that person is designated

"senior officer" means, in relation to a corporation (applicable to “officers” too),(a) the chair and any vice chair of the board of directors or other governing body of the corporation, if that chair or vice chair performs the functions of the office on a full time basis,(b) the president of the corporation,

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(c) any vice president in charge of a principal business unit of the corporation, including sales, finance or production, and(d) any officer of the corporation, whether or not the officer is also a director of the corporation, who performs a policy making function in respect of the corporation and who has the capacity to influence the direction of the corporation

Whether or not you actually are a director – if you behave like a director, the courts will treat you like one in terms of legal liability

DIRECTOR DUTIES

DUTY OF CARE & FIDUCIARY DUTY

BCBCA s.142(1) A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case may be, must

(a) FIDUCIARY DUTY - act honestly and in good faith with a view to the best interests of the company,- Directors are in a position of trust in the co and therefore must act in the best interests of the people relying on them (shareholders and co)

(b) DUTY OF CARE - exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances

- Where you are in a position of responsibility you can’t act carelessly- There is a certain standard of care that must be met and if directors fall below it they have breached the standard of care – can be sued for negligence if you cause loss to someone

Peoples Department Stores Inc. (Trustee of) v. Wise (2004 SCC)Duty of Care [BCBCA s 142(1)(b); CBCA s 122(1)(b)]

“Duty of care” – imposes a legal obligation upon directors and officers to be diligent in supervising and managing the corporations’ affairs

o This provision requires more of directors and officers than the traditional common law duty of care

Directors must be “reasonably informed” Diligence standard – have to attend meetings if you can attend, must have good excuse for missing

meetings The standard of care is an objective, contextual standard

Contextual – dependent on the type of co No breach of the duty of care: if directors act prudently and on a reasonably informed basis.

o The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known

o Perfection is not demanded HAWES: doesn’t think the standard is very high for directors

Fiduciary Duty [BCBCA s 142(1)(a); CBCA s 122(1)(a)] “Fiduciary Duty” – requires directors to act honestly and in good faith with a view to the best

interests of the corporationo Must respect the trust and confidence that have been reposed in them to manage the

assets of the corporation in pursuit of the realization of the objects of the corporationo Must avoid conflicts of interest with the corporation

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o Must avoid abusing their position to gain personal benefito Must maintain confidentiality of information they acquire by virtue of their positiono All circumstances may be considered in evaluating good faith and honestyo In determining whether they are acting in the best interests of the corporation, it may be

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

o At all times the directors owe their fiduciary obligation to the corporation. The interests of the corporation are not to be confused with the interests of the creditors or those of any other stakeholder

UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. (2002 Ont SCJ) [What is standard of care]Case of the ridiculously huge compensation package for Berg; approved by BoD after getting an incomplete remuneration consultant report; Breach of duty of care for approving this compensation package?

The duty of care requires that where directors make decisions likely to affect shareholder welfare, their decision must be made on an informed and reasoned basis

Retention of advisors is encouraged, but does not relieve directors of the obligation to exercise reasonable diligence

Smith v. Van Gorkom (US case 1985) Here there was a breach of duty of care because:

o No attempt to get an independent valuation by an expert When selling co you must get it valued – can’t rely on share price

o Price was fixed to benefit purchaser not shareholders – not considering interests of shareholders when fixing price

o None of the board read the merger agreement before signing it – didn’t know it prevented them from seeking other offers

Board making decisions for a company must:o Get independent adviceo If talking about valuations you need to get professionals to do it for you and then you can

maybe make your decision based on that info - if you fail to even try to get that information you are breaching duty of care

o Read agreements before you approve them

AVOIDING LIABILITY FOR BREACH OF DUTIESBusiness Judgment Rule

Courts will defer to the business judgment of the directors if they have been duly diligent and have made informed decisions

o Duly diligent – includes ensuring they are informed, have considered various courses of action, and have made the decision in the best interests of the corporation

The courts will assess the reasonableness of the decision, not whether it was perfect - if directors have acted in a range of reasonableness, the court will not substitute its own opinion for theirs

*Applied in Peoples Dept Stores; not successful in UPM-Kymmene, Van Gorkom – because they were careless*

Peoples Department Stores Inc. (Trustee of) v. Wise (2004 SCC)

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Canadian courts have developed a rule of deference to business decisions called the “business judgment rule”

o The court looks to see that the directors made a reasonable decision, not a perfect decision. Provided the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board’s determination

UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. (2002 Ont SCJ) “Business judgment rule” protects Boards and directors from those that might second guess their

decisions - The court looks to see that the directors made a reasonable decision, not a perfect decision

Directors are only protected to the extent that their actions actually evidence their business judgment

o Courts are entitled to consider the content of their decision and the extent of the information on which it was based and to measure this against the facts as they existed at the time the impugned decision was made

o The business judgment rule cannot apply where the Board acts on the advice of a director’s committee that makes an uninformed recommendation

Smith v. Van Gorkom (US case 1985) The business judgment rule is a presumption that in making a business decision, the directors of a

corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company

o The party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one

o The determination of whether a business judgment is an informed one turns on whether the directors have informed themselves prior to making a business decision, of all material information reasonably available to them

Reliance Reliance on qualified professionals, audited financial statements, or other reliable information

o If you rely on these reports you can escape liability yourself

BCBCA s 157 Allows for very broad reliance Must be reasonable and in good faith

CBCA s 123(4)(5) Much narrower than BCBCA Reliance must be in good faith and also requires directors to exercise care, diligence and skill that a

reasonably prudent person would have exercised in comparable circumstances

Indemnification and Insurance “Indemnification” – company agrees to pay costs, legal fees, etc. that a director has been found

liable to pay to someone elseo Restricted in what co can indemnify directors foro No indemnification if director has breached fiduciary duty

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o No indemnification if there is unlawful conduct by the director (where director knew they were acting unlawfully)

o Co can indemnify director for negligence – if has been careless and breached duty of care “Insurance” – money will be paid by an insurance co; co only pays insurance premiums

o No restrictionso Insurance paid if director found liable for any behaviouro But in practice insurance co will probably put restrictions on what will be insurable – ex.

probably won’t insure for acting in bad faith

CONFLICTS OF INTEREST

Aberdeen Ry. Co. v. Blaikie Brothers (1854) HL The directors have a fiduciary duty to act in the best interests of the corporation

o No one having such duties shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with the interests of the corporation

This is applied strictly – no determination of the fairness or unfairness of the contract entered into is required

o Inability to contract doesn’t depend on the subject-matter of the agreement, but on the fiduciary character of the contracting party

Very strict rule – even if no direct conflict, applies where there is the possibility of conflict Consequences: rescission of transaction and/or compensation to co for losses caused by breach

TAKING ADVANTAGE OF CORPORATE OPPORTUNITIES [‘SECRET PROFITS’] Where opportunity is something the company would be in the business of the director must offer

the opportunity to the companyo Where director hears about the opportunity due to his position as a director in the companyo If the director diverts the opportunity to themselves or to a company the director controls

or is on the board of - the first company can sue for any profits that were made from that opportunity because the profit rightfully belonged to this first company

Regal (Hastings) Ltd. v. Gulliver (1942) HL Directors may be liable to account for profits which they made by reason and in course of a

fiduciary relationship with the co The liability arises from the mere fact of a profit having – not necessary to prove fraud or bad faith,

or that the co was damaged in any way The plaintiff company has to establish two things:

o That what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in utilisation of their opportunities and special knowledge as directors

o That what they did resulted in a profit to themselves – may not be liable if you don’t personally make the profit out of these opportunities

If you control the cos that you are using to take the opportunity and make the profit you will be liable

The directors would have been absolved from liability in this case if they had secured approval of their conduct from the Regal shareholders

WAYS FOR DIRECTORS AND OFFICERS TO AVOID LIABILITY

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Disclosure of Interest Disclosure of material interest in material transactions [BCBCA s147-153; CBCA s 120] Directors will be held to have a material interest in a contract with their corporation, even when

that interest is based on a close personal relationship with the principal of the counterparty What is “material” (Zysko v. Thorarinson AB):

o If there was a possibility that the director was to benefit from the contract more than de minimus then the transaction should be disclosed to the corporation

o There should be disclosure whenever the directors/officers involvement might be relevant to the corporation's decision making process

o Ex. if the director has disclosed their interest would the company have to do more due diligence to find out whether this really is in the best interest of the company; would they assign a different director or officer to be involved in the negotiations around this transaction

o Some exceptions for e.g. remuneration, transactions with affiliated companies (BCBCA s 147(2)(4))

What is adequate disclosure (Gray v New Augarita Porcupine Mines)o Adequate disclosure requires telling the board what exactly is your interest and how would

you be benefiting from this decisiono Have to explain what kind of benefit you are getting out of this - this will probably have an

impact on whether they decide to approve it or noto When you disclose a conflict of interest, it is not enough to just say you have a conflict of

interest, unless the board actually knows what exactly your conflict is and how much benefit you are getting out of this

Level of disclosure required to meet the statutory requirement (CBCA s.120) (UPM-Kymmene Corp):o The amount of detail required depends on the nature of the contract and the contexto Disclosure must make the board “fully informed of the real state of things”

Director/senior officer must disclose interest to other directors, and other directors can approve transaction (BCBCA s.148-9)

o If you stay out of the voting and the transaction is then approved you will not be held liable to pay over profits made due to that conflict of interest - it was a decision made by the company without you being involved in it

Alternatively, shareholders can approve transaction by special resolution after full disclosure (BCBCA s.148(2)(c))

o Reason this is there - sometimes all the directors have a conflict of interest in a transaction - where they are all benefiting from a transaction

Result of failure to disclose: court can set aside transaction and order accounting (BCBCA s.150)**If you have a conflict of interest as a director/officer - disclose it to the board of directors and then stay out of the voting**

Shareholder Ratification If material self-interested transaction would breach directors’/officers’ duty, shareholders can

approve in advance by special resolution (BCBCA, s.148(2)(c))o Requires proper disclosure

Minority shareholders can bring an action against directors for breach of their duties (BCBCA s.233(6))

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o Because of provision requiring a special resolution, and remedies of shareholders - you can still bring an action against directors even if there has been a shareholders resolution approving the directors decision

Ratification is one thing the courts will take into account, but won't prevent the directors from being liable

If you don't get a special resolution of shareholders to approve the transaction and it hasn't been approved by the board after proper disclosure then shareholders will be able to sue even if there is an ordinary resolution approving it (ordinary resolution is not enough)

Peso Silver Mines Ltd. v. Cropper (1966) SCC If a board considers an investment which is offered to the company and bona fides decides it is not

an investment the company should make – any director who it bona fides come to, who chooses to put up the money for that investment himself is not liable to account for this to the company

o Director is then acting as “an individual member of the public”o Almost like the fiduciary duty has stopped with respect to that particular transaction

because the board has decided not to take it for good business reasons Where a director, acting in that capacity, learns of an opportunity within the corporation’s line of

business, he must offer the opportunity to the corporationo Where the corporation determines not to pursue the opportunity, the director is free to

pursue it on his own HAWES: main difference between Regal and Peso is the timing

o Regal - this decision was made at the same time that the profit would be made - there was a real temptation for the directors here to make a profit for themselves

o Peso - no idea that this property had any silver in it, just one property in many, only after a year or two that the company found out it was a good opportunity; dispute only arose after a new shareholder took over and had a dispute with Cropper

Consider whether it is fair or not to force the directors to pay over money that they have earned through their own efforts - and their company wasn't interested in it initially

Irving Trust Co. v. Deutsch 1935 US case Impossibility – if directors are permitted to justify their conduct this way, there will be a temptation

to refrain from exerting their strongest efforts on behalf of the corporation since, if it does not meet the obligations, an opportunity of profit will be open to them personally

o Courts will be extremely suspicious of any director who says it would be impossible for the company to take this opportunity

HAWES: facts were so different in Peso because there were so many opportunities for the company in Peso

o This Deutsch case might be more similar to Regal where it was impossible for the company to put in more money to buy the leases (probably could have made more effort to find a bank loan)

BUSINESS OPPORTUNITIES THAT ARISE AFTER DIRECTOR LEAVES COMPANYCanadian Aero Service Ltd. v. O’Malley (1974 SCC)

Senior officers owe the same fiduciary duty to the company as directors The fiduciary duty of a director or officer does not terminate upon resignation and it cannot be

renounced at will by the termination of employment

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If the opportunity is a maturing one - the company that you are leaving has already started getting involved in this business opportunity, it's not completely profitable yet but the company is aiming to get it, and you resign to take up that same opportunity then the profit that you get are payable over to the company that you left because you obtained the opportunity by reason of the fact that you were officers of that company

o Even though you are not longer still working for the company you could not have got that opportunity without working for that company

o Main thing to look for - is this opportunity something that the company started to be interested in before you left the company

If you are a director/officer of the company you cannot use confidential information of the company to benefit yourself or others with whom you have a relationship - This is part of the fiduciary duty

COMPETING WITH THE COMPANYWhen serving as a director/officer:

Generally not acceptable - can't compete with a company in which you are a director But fairness test applied: Johnston v Greene (US case, text p.785-7) to consider whether it is

something the company would really be interested in as part of its normal businesso Big companies with lots of different businesses - Not clear whether company is really

interested in that opportunity or not - so many interests that they could argue they are interested in any opportunity

The connection between the two businesses was not really obvious Fairness is an issue and used in the States - implied by some Canadian cases (if taking up an

opportunity have to ask whether the company would really be interested in that opportunity)

After resignation: Depends on contract Some companies require non-competition agreements If you don’t have a non-compete agreement or clause in your contract - after you resign as a

director/officer you are allowed to compete with your former company - this is part of freedom of individuals to make a livelihood

o If you are a director or officer there is a bit of a restriction because you have found out a lot of information that may be confidential to the company

o If you found out this information because you were a director of the company you are not allowed to use that information when you leave the company and set up a competing business

Competing may be permissible, but not direct solicitation of clients! See W.J. Christie v Creer (Man. CA, 1981): text p.784-5 You can compete with the company but you can't use confidential information that you learned

while you were working for that companyo Could not directly solicit the customers because the information was confidential to the

companyo If customers had come to him - that would be fine, but he was not allowed to directly go

after them HAWES: other cases have said that if you can remember customers' information you can inform

them that you have left and are starting up this new business (aren't allowed to take customer lists, etc.)

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Can compete where: Company allows you to compete - allows you to take up business in the same area as the company Requires consent - by directors or shareholders after proper disclosure and special resolution

PUBLIC COMPANIES –Q about Director’s duties in public co consider whether they have fulfilled duty to public (also consider insider trading)

“Reporting Issuer” – any co that issues securities if those securities are not covered by an exemption “Securities” – include shares, bonds, debentures, and units in a limited partnership

o Definition should be interpreted broadly to encourage disclosure to the publico Are distributed to investors to raise the capital necessary to carry on businesso May be distributed at the inception of a business, or subsequently to take advantage of

business opportunities where funds from business earnings are insufficiento Pacific Coast Coin Exchange – bags of silver coins were interpreted as securities

Even though this didn’t fit into the definition in the Securities Act, it should be considered securities because – it is a risky situation people are getting into and the co has more knowledge than the prospective investors

No prospectus was produced = breach of Securities Act Anytime securities are distributed the substantive requirements of securities law are engaged

o Expensive disclosure requirements are activated:1. Prospectus – issued every time new shares (that aren’t exempt) are issued

Must also set out “risk factors”BCSA s.61 – no person or company can trade in a security where the trade would be considered under the definition of a distribution of security unless a preliminary prospectus and a prospectus have been filed

2. Annual information formsProduced yearly; provide detail about co and what has happened/is expected

3. Published financial statements4. Continuous disclosure

If anything changes which may affect share value – must disclose immediate (via press release)

5. Extra corporate governance requirements come into effect

EXEMPTIONSPolicy Behind Exemptions

Four main policy objectives of prospectus exemptions:o 1. Allowing more flexibility in generating initial capital for small or medium-sized issuerso 2. Acknowledgement that some wealthy and/or sophisticated investors are capable of

making investment decisions without the information that a prospectus provides Assumption that these investors are capable of acting rationally in their own

economic self-interest and will seek out directly from the issuer any information they consider relevant to their investment decision making

o 3. Where issuers are issuing securities to those with whom they have a pre-existing relationship – prospectus requirements may be relaxed

Assumption is that the investor has access to adequate current information about the issuer and its financial prospects

o 4. Some types of securities are so safe that a prospectus is considered redundant

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Ex. Bonds, debentures or other debts guaranteed by the government of Canada, any province or territory of Canada, the government of the UK or any foreign country, Canadian municipal corporations, financial institutions governed by other legislation, securities issued by charitable issuers, etc.

Where risk to investor is low, disclosure rules can be relaxed

Exemption Categories1. The Private Issuer Exemption

50 non-employee shareholders or less Applies to issuers where a small number of security holders are involved No restriction on number of investors to whom securities are offered as long as the maximum

number of ultimate security holders isn’t exceeded

2. The Family, Friends, and Business Associates Exemption No restriction on the number of investors to whom securities may be distributed Cannot rely on this exemption if the issuer advertises or pays a commission or finder’s fee to a third

party to find purchasers under this exemption Must be in a close relationship

3. The “Accredited Investor” Exemption Accredited investor includes: a variety of sophisticated financial institutions, levels of government

and “persons other than individuals” with net assets of $5 million In practice many accredited investors obtain from the issuer an offering memorandum that contains

a good deal of prospectus-like information Accredited investor designation can be applied to individuals as well – based on “financial assets”

test, “net income” threshold, or “net assets” threshold

4. The Minimum Amount Investment Exemption - controversial Exemption if the security has an acquisition cost to the purchaser of not less than $150,000 paid in

cash at the time of the trade

5. Offering Memorandum Exemption Exemption if the issuer provides the purchaser with an offering memorandum instead of a

prospectuso Only allowed to use an OM instead of prospectus for certain kinds of investors (ex. very rich,

have had financial advice, etc.) Purchaser must also sign a “risk acknowledgement” in a prescribed form The OM must provide a statutory or contractual right of action against the issuer for

misrepresentation

CONTINUOUS DISCLOSURE REQUIREMENTS Reporting issuers must immediately disclose to the public any “material change” in the co’s

business, operations or capital that may reasonably be expected to have an effect on the value or market price of the co’s securities

o Each co is different – “material change” will depend on what type of business you are in“MATERIAL CHANGE” IN CONTINUOUS DISCLOSURE

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“Material Fact” – a fact that significantly affects or could reasonably be expected to significantly affect the market price or value of the securities

“Material Change” – a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer

o Relevant to the assessment of when a reporting issuer needs to update the information available to the secondary market about its securities

Pezim v BC Managers were found liable for failure to disclose Three directors/officers set up system where they were not allowed to receive drilling results from

Calpine's operation - did this so they could invest in the company and profit from it [set up "Chinese Wall" which prevented information about drilling results from coming back to them]

Positive drilling results would count as something which should normally be disclosed - because it affected share price

It is the directors responsibility to be informed about the company's duty - if they don't stay informed they have breached the duty of care

Court said they were not insider trading (because they didn't actually know the drilling results) but at the same time they can't just have this "Chinese Wall" and refuse to be responsible when the company fails to disclose information

The company was liable for failure to disclose information and directors were also liable for failing duty of care

Kerr v Danier Leather Managers were found not liable for failure to disclose Final prospectus issued (May 6 - $4.5 mill); final day to buy shares (May 20); before May 20 CEO and

CFO questioned whether co would make $4.5 mill that year (thought they would make it up in 2 sales, but didn’t)

o After sales and difference not made up – disclosed they were short (June 4); share price went down

o By end of June (end of year in prospectus) co ended up making almost exactly what was expected

Investors who bought shares in May 6-20 period and sold shares after June 4 at a loss sued co: said they should have disclosed information before May 20

Court of Appeal: they didn’t have to disclose this change on May 19 because it was not a material change in the company's business operations or capital (didn't fit into definition of what needs to be continuously disclosed)

o Partly because there was a reasonable belief by CEO and CFO around May 19 that they could still reach the forecast

Not a material change because forecast was still possible - wasn’t a change in business operation or capital of the company

One reason sales were low was change of weather - change of weather is not material change in operation of business or capital because this is not something that directors would be expected to take into account when deciding whether to disclose or not

o HAWES: in some businesses a change in weather could be considered material because it could totally cause a material change in your business (ex. farming)

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HAWES: not sure if it would have been decided differently if they hadn't made almost the same amount they had forecast; this showed that the forecast was still accurate since they ended up making basically what they had forecast

CONSEQUENCES FOR BREACH OF SECURITIES LAW1. Civil Action

Can be sued by shareholders; parties who lose money because of failure to disclose Can demand that share contracts be rescinded – money returned for purchase of shares

2. Criminal prosecutions under Crim Code and Securities Act3. Administrative penalties decided by the Securities Commissions

Usually fines; sometimes disqualification from managing a co for a year or twoUsually directors/officers that are liable for failure to disclose, misrepresentation, or misleading disclosureLawyers may be liable if they have improperly advised – ie. said don’t have to disclose when you do

AVAILABLE DEFENCES Defences to statutory civil liability include:

o Showing P had knowledge of the misrepresentationo Showing the misrepresentation did not cause the losso Showing the misrepresentation was not made by the particular D and that the D had no

reason to believe and did not believe that the statement was falseo That the D either did not consent to the filing of the prospectus or withdrew his consent

prior to the purchase of the securities by the purchasero Due Diligence – D must show that he conducted a reasonable investigation to provide

reasonable grounds for a belief that there was no misrepresentation and that he did not believe that there was misrepresentation

Standard of reasonableness is that required of a prudent person in the circumstances of the particular case

The issuer of the securities is not entitled to claim the defence of due diligence, the defence of not having consented to the prospectus or the defence that the misrepresentation was not made by the issuer

o The issuer is effectively strictly liable for misrepresentations in a prospectus

Re YBM Magnex International Inc. (2003) Ontario Securities CommissionFBI investigating co not disclosed in prospectus

Directors who knew about investigation (in whole or in part) = liable Directors who did not know about investigation at all, and couldn’t have known = not liable Consider each director according to his degree of participation, access to information and skill

INSIDER TRADING Relates to disclosure issue Trading on information that is not publicly available that could affect the company’s share value

o Information that is only known to insiders to the company - directors, officers, employees and their family members

o Information must be "not publicly available" - not required to disclose stuff that would be in the news, etc.

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o Includes material changes (only relates to changes in company's business operation or capital) in company's business and any material facts (any material facts which would affect share price but aren't know publicly) which may affect company's share price

See also “tipping” and “tippees”o "Tipper": If you tell someone information about the company and they act on that

information you will be liable because you have given the information selectively and not ot the public as a whole

o "Tippee": Person who receives information knowing it is insider information will also be liable

Typical example of a tippee – lawyer

REMEDIESDERIVATIVE ACTIONBCBCA s 232, 233; CBCA s 238, 239, 240

Test to get leave to bring lawsuit:[For BCBCA only – have to make reasonable efforts to have the co bring the action]1. Have to give notice to directors of co that you are planning to bring this application to court2. Have to be acting in good faith3. Has to appear to be in the best interests of the co that the action be brought

Once you get leave other side will likely settle – a judge has already determined this is in best interests of co

Benefits usually go back to the co – court does have power to order benefits paid to shareholders or whoever brought action [BCBCA s 233; CBCA s 240(c)]

Re MacRae - any other person under the BC Act should be restricted to persons who have “a direct financial interest in how the company is being managed”

A debentureholder was not permitted to bring a derivative action

Primex Investments v. Northwest Sports Enterprises Ltd. (1995) BCSC [Test for leave to bring derivative action (under BCBCA)]

TEST: 1. Effort to cause directors to bring action [stronger than CBCA which only requires notice]2. Good faith

o Must show some kind of financial purpose (can’t be personal vendetta)o But personal dislike of directors is not enough to show bad faitho Personal interest may coincide with action – because you are shareholder

3. In the best interests of the coo Doesn’t require evidence that case would be won – just evidence that this is an arguable

caseo Directors raising defence won’t prevent leave – unless watertight defence, won’t stop court

from giving leaveo If it is asserted that the proposed defendants in the derivative action have a defence to the

claim, the Court must decide whether such a defence is bound to be accepted by a TJ following the completion of the trial of the derivative action

Where the applicant is acting in good faith and otherwise has the status to commence the action and where the intended action does not appear frivolous or vexatious and could reasonably succeed

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and where such action is in the interest of the shareholders, then leave to bring the action should be given

The court should also be satisfied that the potential relief in the proposed action is sufficient to justify the inconvenience to the company of being involved in the action

Court granted application to bring an action on behalf of the co

Re Northwest Forest Products Ltd. (1975) BCSC [“Reasonable efforts to cause co to bring action”] “Reasonable efforts to cause the co to bring the action” (BCBCA s 233(1)(a)):

o Making reasonable efforts requires some specifics about the precise nature of the action – but no more is required than that sufficient to found an endorsement on a writ

o Not required to be exactly the same as subsequent law suit you bringo Only requires that you tell directors you plan to bring lawsuit and the lawsuit you eventually

bring is approximately the same If shareholders have voted not to bring the lawsuit

o Look at how the meeting was conducted (see notes above on “Meetings”)o What information was provided at the meetingo Shareholder vote is one factor courts will take into consideration [BCBCA s 233(6)]

Court here decides not to take apparent approval of the shareholders into consideration – unclear who voted proxy shares, or if any shares were voted by proxy

o Shareholder vote is a factor courts can take into account – but it is not determinative Shareholder ratification may be evidence of the fairness of the transaction or of the desirability of

forgiving the breach (CBCA s.242)o Persuasiveness of such evidence may depend on many factors:

Such as the adequacy of proxy disclosure How outside shareholders have voted The nature of the impeached transaction

First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) Alta QB [“Proper Person” to Bring the Application]**Under the ABCA – use for CBCA corporations**

CBCA s.238(d) – a person may be a complainant if he is a person “who in the discretion of the Court is a proper person to make an application under this Part”

Issue: is a landlord owed money under a lease a “proper person” to bring a lawsuit on behalf of the co?

Court found there was harm done to the co and no one else related to the co who would bring the action

o If you have some kind of financial interest in the co you can be a complainant under the CBCA

o If this interest has been harmed and the co has been harmed too – you can apply for leave to bring a derivative action

Appeal Court – refused to allow derivative action until claim in contract asking to lift the veil and find directors personally liable was settled

o Don’t bring derivative actions if you can get what you want through breach of contract action and arguing to lift the corporate veil (especially where co completely controlled by individuals who have diverted co assets – like here)

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OPPRESSION REMEDY [FIRST REMEDY YOU SHOULD APPLY FOR]BCBCA s 227; CBCA s 241Comparison with the Derivative Action

Procedural differences:o In order to bring a derivative action, a complainant must seek leave of the courto The court exercises a statutory supervisory jurisdiction over the derivative action that

enables it to issue orderso The damages awarded in a derivative action will ordinarily go to the corporation in whose

name the action was begun, unless the court orders otherwise An oppression remedy has no leave requirement and the court has no statutory power to intervene

in the conduct of the applicationo Except: s.242(2) requires court approval of any settlement, discontinuance or abandonment

of an oppression remedy application or a derivative action An oppression remedy claimant can pursue a claim for personal compensation for harm to the

complainant’s interests from the oppressive actions Basically – an oppression remedy looks to whether shareholder interest was harmed; derivative

action looks to whether co’s interest was harmed

Applying Oppression Remedy: Two Stage Test1. Look to “reasonable expectations” of parties within the corporation2. See if those expectations were dealt with unfairly

The court has broad discretion with this remedy – decisions are very fact dependent, very unpredictable, courts tend to be quite generous with the oppression remedy

BCE Inc. v 1976 Debentureholders (S.C.C. 2008) [“Reasonable Expectations” of parties]*Argued under CBCA – fit into “complainant” as security holders

1. Must have reasonable expectations – will depend on type of co dealing with and who you areo Factors to consider:

Normal business practices Nature of corporation (family, friends or public) Past practice (but keep in mind practice can change) Could plaintiff have protected himself Any representations or agreements made by the company Whether directors attempted to resolve or consider competing interests (if they

ignore an interest completely than can be indication of unfair treatment) 2. If reasonable expectation of parties not met, was it unfair

o Was the behaviour ‘oppressive,’ or unfairly prejudicial to (or under CBCA, did it unfairly disregard the interests of) the relevant person(s)?

“Oppressive” = intentionally harsh, burdensome, abuse of power, bad faith (difficult test to meet)

“Unfairly prejudicial” = results in unfairness to the person, even if not intentional and not in bad faith

“Unfairly disregard” = ignoring interests of the person, leading to unfair result Directors don’t have to intend to hurt you, but if their action results in harm

to you it can still fit into unfairly prejudicial or unfairly disregards

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Clitheroe v. Hydro One Inc. (2002) Ont SCJ [“Any other person” (CBCA)] Generally the oppression remedy is not to be used as a substitute for a wrongful dismissal action

o Oppression remedy is designed to protect interests of security holders, creditors, directors or officers – it is not designed to provide a mechanism where employees who have been terminated may bring an application for wrongful dismissal

o Its purpose is to redress oppressive conduct in relation to the claimant’s position as a security holder, creditor, director or officer of a corporation – it does not operate to provide a remedy to employees

It is a limited remedy Remedy may apply to cases of wrongful dismissal only if the termination of employment is part of a

pattern of oppressive conducto Where the dismissal is part of an overall pattern of oppression and where the complainant’s

position of employment is closely connected with his rights as a shareholder, officers and director of the company, the dismissal may properly be considered as part of that pattern of conduct

Has to be something more than just losing your job to use the oppression remedy

Downtown Eatery (1993) Ltd. v. Ontario (2001) Ont CA [“Any other person” (CBCA)] The oppressive conduct that causes harm to a complainant doesn’t have to be undertaken with the

intention of harming the complainanto If it is established that a complainant has a reasonable expectation that a company’s affairs

will be conducted with a view to protecting his interests, the conduct complained of need not be undertaken with the intention to harm the plaintiff

o If the effect of the conduct results in harm to the complainant, recovery under the oppression remedy may follow

o It doesn’t matter if you do something for a valid business reason, if it results in unfairness to someone with some kind of financial interest in the co it can be considered oppression

Factors to be considered in determining whether an oppression remedy should lie:o The protection of underlying expectations of a creditor in its arrangement with the companyo Extent to which the acts complained of were unforeseeable or the creditor could reasonably

have protected itself from such acts o Detriment to the interests of the creditoro These factors are not exhaustive – other considerations may be relevant based on the

particular case

West v. Edson Packaging Machinery Ltd. (1993) ON [“Any other person” (CBCA)] Oppression remedies sought for non-fulfilment of reasonable expectations

o Successful – even though parties weren’t shareholders at time the buy-back promise was made, the harm related to their reasonable expectations regarding their shares

The court should broadly interpret the definition of “complainant” under the oppression provision

First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) Alta QB [“Any other person” (CBCA)] What about potential judgment creditors?

Have brought a law suit against company but trial hasn't been held or Even before you bring a law suit there has been some breach of your legal rights by the

company Landlord was not "any other person" who could bring an oppression action

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First Edmonton Place was not yet a creditor when the wrongful actions happenedo that lawyers got rent free accommodation - not a breach of leaseo the $140,000 given to company as inducement was paid to lawyers - didn't make

landlord a creditor because hadn't said the company had to keep this money; money was paid out a long time before First Edmonton brought a law suit

Because the harm was done earlier and before there was a breach of agreement then First Edmonton could not be counted as a creditor at the time when the harm occurred

Court emphasized that First Edmonton should have protected itself (differs from Downtown Eatery where Alouche could not have protected himself)

The test of unfair prejudice or unfair disregard should include the following considerations:o The protection of the underlying expectation of a creditor in its arrangement with the

corporationo The extent to which the acts complained of were unforeseeable or the creditor could

reasonably have protected itself from such actso The detriment to the interests of the creditor

OPPRESSION REMEDY: FAMILY DISPUTES You cannot punish people who are shareholders, directors, officers of a co for family reasons =

oppression

Ferguson v. Imax (1983) ONCA CBCA s 241 – must be interpreted broadly

o When dealing with a close corporation the court may consider the relationship between the shareholders and not simply legal rights as such

o The court must also consider the bona fides of the corporation transaction in question to determine whether the act of the corporation or directors effects a result which is oppressive or unfairly prejudicial to the minority shareholder

o Each case turns on its own facts In this case, the resolution authorizing the change in the capital of the company is the culminating

event in a lengthy course of oppressive and unfairly prejudicial conduct to the appellant

Naneff v. Con-Crete Holdings Ltd. (1993) ON [Oppression is a remedy not a punishment]Son excluded from management (still a shareholder) because his family didn’t like his girlfriend

Court considered: o History of companyo Fact that son had worked there for yearso Fact they hadn't paid dividends and probably wouldn't

This was enough to find oppression Trial decision:

o Remedy should be that this company and all sub-companies should be sold off and three people can bid (the father and two sons) and highest bid should be accepted

Appeal decision:o Because Mr. Naneff was in total control until he died, Alex and Boris would never have

had an expectation that they could own this company while father still aliveo Should do minimum possible to correct the unfairness; shouldn't tip the balance in

favour of party who was hurt

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o Proper remedy is to order the company to buy Alex's shares at a fair market value - based on date when he was kicked out of management of the firm

Oppression is a remedy, not a punishment

OPPRESSION REMEDY: PUBLIC COMPANIES Shareholders have a reasonable expectation that directors will fulfill their duties to the co If directors fail to fulfill their duties to the co and this results in unfairness to shareholders – can

bring oppression action

Ford Motor Co. of Canada v. Ontario Municipal Employees Retirement Board (2006) ONCAFord Canada and Ford US – transfer pricing agreement

In looking at reasonable expectations of minority shareholders:o Considered public statements of the co

Reasonable expectation was not fulfilledo It was misleading for the cos to tell shareholders it was an arms-length agreement and

market price This was considered oppression because minority shareholders’ reasonable expectations were not

meto Shareholders were awarded money to compensate for losses due to transfer pricing

agreement – to be added to buyout price per share Business Judgment – can’t argue a defence based on business judgment when there is no evidence

you have made a judgment at all (ie. when no evidence directors even looked into the arrangement) Even though majority of shareholders were happy with the agreement – directors must still consider

the interests of the remaining minority shareholders “Rational Director Test” – any rational director of Ford Canada acting in the interests of that co

would not have accepted this agreement

Some Typical Situations Where ‘Oppression’ Remedy Has Been Given Warning : every case turns on its particular facts Lack of valid corporate purpose for transaction No reasonable attempt to do arm’s length transaction Directors’ lack of good faith Discrimination against minority shareholders to benefit of majority Failure to disclose required information to minority shareholders Attempting to eliminate shares of minority without fair compensation

o Examples from Arthur v Signum Communications

COMPLIANCE AND RESTRAINING ORDERBCBCA s 228; CBCA s 247

COMPULSORY LIQUIDATION (WINDING UP) ORDERBCBCA s 324; CBCA s 214

BCBCA s 324 - Court may order company be liquidated and dissolved324 (1) On an application made in respect of a company by the company, a shareholder of the company, a beneficial owner of a share of the company, a director of the company or any other person, including a

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creditor of the company, whom the court considers to be an appropriate person to make the application, the court may order that the company be liquidated and dissolved if

(a) an event occurs on the occurrence of which the memorandum or the articles of the company provide that the company is to be liquidated and dissolved, or(b) the court otherwise considers it just and equitable to do so.

(2) Nothing in subsection (1) prevents the court from requiring that security for costs be provided by a person bringing an application under that subsection.(3) If the court considers that an applicant for an order referred to in subsection (1) (b) is a person who is entitled to relief either by liquidating and dissolving the company or under section 227, the court may do one of the following:

(a) make an order that the company be liquidated and dissolved;(b) make any order under section 227 (3) it considers appropriate.

(4) If the court orders under this Act that a company be liquidated and dissolved, the court must, in its order, appoint one or more liquidators.(5) An appointment of a liquidator under subsection (4) takes effect on the commencement of the liquidation.

Under BC Act it is a much broader remedy available to almost anyone; under CBCA only available to shareholders

Liquidation remedy much less important in Canada now that we have broader oppression remedy (may be more useful in BC where oppression remedy is more limited than under CBCA)

o Generally going to be used where you have a deadlock among shareholderso You can also ask for liquidation to be ordered under the oppression remedy

“Just and Equitable” 1. Winding up has been ordered in cases of deadlock

o Courts will also find deadlock where there is constant fighting and mutual sabotage among owners whose cooperation is necessary for the conduct of business

2. Winding up has been ordered in cases like Ebrahimi where the firm is described as an “incorporated partnership” and there has been an irreversible breakdown of mutual trust and confidence

3. Commonly asserted but less commonly successful – management has demonstrated a “lack of probity” in the conduct of a corporation’s affairs

[4. (Only under CBCA) In situations of oppression – unfairness to a shareholder]

Winding up is viewed as a “drastic remedy” and is not lightly grantedIf you can satisfy the "just and equitable" test then you can ask the court for a remedy other than the liquidation order

Ebrahimi v. Westbourne Galleries Ltd (1973) HLFollowing in BCSC in Diligenti v R.W.M.D. Operations

Test for winding up co that was like a partnership:o Doesn’t have to have previously been a partnershipo Must be a small company with very few shareholders and association between shareholders

is based on personal relationship where there is a level of trust built upo There is an understanding or agreement that the shareholders will participate in

management of the co

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o Restrictions on transfer of shares – small private co where it is difficult to sell shares In this situation where someone is excluded from management they may apply for winding up – the

implied agreement built up over years and established through conduct has been broken

DISSENT AND APPRAISAL RIGHTBCBCA s 237-247; CBCA s 190

If company does certain transactions you are allowed to dissent - your right is to have your shares bought out

Appraisal - shares will be valued by company and they will offer to buy those shares from you for that value

Allowed if - written in articles, amalgamation agreement, selling the company's business, to change jurisdiction Only for a limited number of very major transactions which will affect the company's whole

business Encourage company and shareholder to negotiate before coming to the court CBCA is very similar to BCBCA

REMEDIES FOR PUBLIC COMPANY STAKEHOLDERS Sell shares on market Securities actions under securities regulations

Misrepresentation in prospectus or other disclosure document (BCSA, s.131-132.1) Failure to make timely disclosure (BCSA s.140.3)

Class actions

PARTNERSHIPSPARTNERSHIP VS CORPORATION

Partnerships don’t have to be registered (except some forms of LP and LLP) – you can be in a partnership without knowing it

If you are a partner you will be fully, personally liable for debts related to the partnership business of all other partners

Partners have a fiduciary duty (to act in best interest) toward the partnership and other partners Partnership is not a separate legal entity (Re Thorne and New Brunswick Workmen’s Compensation

Board (1962) NBCA) The Partnership Act provides default rules that will govern the relationship between partners to the

extent they have not agreed otherwiseo This facilitates partnership formation by allowing person to create a partnership without

having to create their own set of rules to govern the relationship (this reduces transaction costs)

o Ability of partners to create their own set of rules to govern their relationships makes partnership a very flexible form of business association – viewed as key advantage of partnership

EXISTENCE OF PARTNERSHIP Partnerships are regulated provincially – no federal statute

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

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Four essential elements of a partnership:o Partnership is a relationship between persons

A corporation can be a partner (s.29 Interpretation Act – “person” )o Carrying on business in common, and with a view to a profit

Co-ownership of land is not automatically a partnership, but it may be If not actively pursuing a business it won’t be considered a partnership Non-profit associations are not treated as partnerships If the object of the association is social or cultural it will generally not be a

partnership

Typical Indications of a Partnership (ss 2-4 BCPA) Don’t have to have all indications but must have some to be considered partnership:

o Sharing net profitso Sharing losseso Calling oneself a partner

But denial of being a partner doesn’t mean no partnership (Lansing v Ierullo)o Acting as a principal – allowing others to enter agreements on one’s behalfo Management participation in the businesso Mutual trust and confidence with others in the business

Ex. sharing bank accounts, payments made to one person are shared with the groupo Contributing to capital

A.E. LePage Ltd. v. Kamex Development Ltd. (1977) ONCA [do co-owners of property = partners] The mere fact that property is owned in common and that profits are derived from it does not of

itself constitute the co-owners as partners – must do something more to be considered “carrying on a business”

Whether the position of co-owners becomes that of partners depends on their intentions as evidenced by the facts of the case – it is necessary to determine whether the intention of the co-owners was to “carry on a business”

A common intention that each should be allowed to deal with his undivided interest in the land as his own would be incompatible with an intention that both should be bound to treat the corpus as joint property – the property of the partnership

o The property of the partnership is not divisible among the partners in specie; here: Any owner had the right to sell their interest in the building independently from the

others – sign of no partnership (usually if you sell your interest in a partnership it comes to an end)

Hadn’t done enough to show they were carrying on a business – were merely owning a building and then selling it

Volzke Construction v. Westlock Foods (1986) ABCA Factors considered in finding a partnership:

o Lack of control is irrelevant; control has nothing to do with the existence or non-existence of a partnership

o Sharing in costs and profits is an indication of partnershipo Parties spoke to each other as partners

Court looks at agreement, past conduct, mutual involvement in financing, costs and profits, and mutual involvement in running of business

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Saying you are or are not in a partnership will be a factor to consider but isn’t determinative – courts will look at the reality of the situation and your actions, not just your words

Lansing Building Supply (Ontario) Ltd. v. Ierullo (1989) Ont Dist Ct In determining whether a partnership exists, one must look at the intention of the parties as

disclosed by their agreement and their conduct Parties cannot contract out of a partnership by a clause stating no partnership is formed

o If a partnership in fact exists, use of a legal phrase will not prevent the substance and reality of the transaction being adjudged to be a partnership

o Insertion of a clause indicating that the relationship is not a partnership (in the co-ownership agreement) does not preclude the court from finding that a partnership did in fact exist

Where the rights of the co-owners to deal with their interest in the land are severely restricted by the agreement = great importance in the distinction between partnership and co-ownership

HAWES: in this case it was particularly significant that the party signing the contract held himself out to be a partner (acting for a partnership with the others)

o This is a case by case analysis – high fact dependent

Backman v Canada No view to profits = no partnership

o Have to be carrying on business with a view to a profit - to be a partnershipo They had no intention of making profits, their intention was to make a loss – therefore not in a

partnership Despite what you say about your business, if you aren't complying with definition of a partnership

you won't be able to get advantages of being in a partnership There was a way the courts said they could have gotten around this - if they had some other

business venture apart from this property which was obviously going to lose moneyo An ancillary profit making purpose - they might have been able to call themselves a partnership

Has to be some aspect of the business which could possibly make a profito You don't have to make a big profit or even actually profit in every year, but you have to have

the intention of making a profit - and it has to be a realistic intention of making a profit

LIABILITY OF PARTNERSLiability of partners: entering agreementss 7 (1) A partner is an agent of the firm and the other partners for the purpose of the business of the

partnership.(2) The acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he or she is a member bind the firm and his or her partners, unless

(a) the partner so acting has in fact no authority to act for the firm in the particular matter, and(b) the person with whom he or she is dealing either knows that the partner has no authority, or does not know or believe him or her to be a partner.

Third party reliance unreasonable where:o If the partner was doing something not associated with the business of the firmo Where the business is of the kind carried on by the firm but the partner is doing something

inconsistent with the usual way in which that business is carried on

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Liability of partners for firm debtss 11 A partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he or she is a partner, and after his or her death his or her estate is also severally liable in a due course of administration for those debts and obligations, so far as they remain unsatisfied, but subject to the prior payment of his or her separate debts.

Every partner is jointly liable with the other partners for all debts and obligations of the firm as long as he is a partner

After death a partner’s estate is also severally liable

Liability of New Partners and Retired Partners [BCPA s 19] A person who joins an existing partnership is not liable to creditors for debts of the partnership that

arose before the person joined the firm Once a person is a member of the firm and partners of the firm enter into contracts that bind the

firm, the person doesn’t cease to be a party to those contract just because he left the partnershipo If a creditor agrees to relieve a retiring partner from further liability that agreement will be

binding

“Holding Out” [ BCPA s 16 ] A person who represents himself as a partner, or knowingly allows himself to be represented as a

partner, will be liable to anyone who has given credit on the faith of the representationThis could apply even where there is no partnership

Ernst & Young Inc v Falconi (1994) Ont Gen Div The firm is liable for wrongful acts or omissions where a partner acted with the authority of the

other partners or acted in the ordinary course of business of the firm [BCPA s.12] Klein argued that these transactions were not within the ordinary scope of business of the law firm -

because they were fraudulent; also trying to say they were not the kind of business the firm normally did [s 7(2) - has to be some kind of business the firm carries on in their ordinary business]

Falconi had used the facilities of the law firm, and letterhead of firm, had also used the trust account to hold money while these transactions were going ahead

Because of all this evidence, it was enough to show this was the kind of business the law firm usually dido The fact that various actions were improper and with intent to defraud creditors does not

take the acts themselves out of the ordinary course of business of the law firm if they are in the nature of acts normally performed by the law firm in carrying on its usual business

o Even if law firm doesn't normally do these types of transactions, as long as law firm's facilities are used and the activities are the kind usually done by commercial law firm - then the firm and all partners will be liable for the debt

This was not an LLP - this was a regular partnershipo A lot of law firms today are actually LLPs and if it had been an LLP it may be that Klein would not

have been liable

FIDUCIARY DUTIES / LIABILITY TO OTHER PARTNERS BCPA s 22 – a partner must act with utmost fairness and good faith toward the other members of

the firm in the business of the firm Specific fiduciary duties (BCPA ss 31-33):

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o Partners are bound to render accounts and full information of all things affecting the firm to any partner (s 31)

o 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 32)

o Partners must account for profits made from competing businesses – ie. they must turn over these profits to the firm (s 33)

Olson v Gullo (1994) Ont CAPartnership to purchase and develop land; Gullo said farmers wouldn’t sell then bought and sold some land for big profit

Olson sued Gullo saying this was profit from the partnership - should be shared with the partnership (accounting of profit to the partnership - Olson should get half)

Was this a transaction concerning the partnership? [ss 32, 33] Court looked at a lot of evidence:

o Reference to each other as partnerso Evidence supporting “carrying on business” as partners o It was clear Gullo was trying to make this transaction for his own benefito At the time the transaction was made they were still in a partnership ( even though Gullo said he

viewed it as no longer being in a partnership)o Because this was in the 1000 acre area they were trying to develop, was also a land developing

transaction = similar to business they originally wanted to go intoo It was a transaction concerning the partnershipo Profits should be paid over to the partnership

Trial - because Gullo behaved so badly, Olson should be allowed to keep 100% of the profitso Should have to give up all profits because we are trying to discourage this kind of behaviour

CA - the provision actually says the partner must account to the firmo The profit has to be paid over to the partnership and then the partnership divides it among

partners based on their original agreemento If no clear agreement - Partnership Act says it is divided equallyo Even though he behaved badly that is not a reason for going against Partnership Acto Punished Gullo by making him liable for costs in the actions

LIMITED LIABILITY PARTNERSHIP (LLP) Most provinces restrict LLPs to certain professional firms (ex. law, accounting, doctors)

o professions that have insurance so liability is covered by insurance instead of partners In BC any business can register as an LLP (since 2005) In (BC and Ont) LLPs – partners are not liable for other partner’s tort, contract or negligent wrongs

or debto Unless they knew about the wrong, were directly responsible for it, or were negligent

themselveso Certain amount of due diligence required – but generally if you don’t know you aren’t liableo Will be liable for those you are directly responsible for – ie. staff working directly under you

In other provinces LLPs only protect against negligence of other partners LLPs must be registered with the province

LIMITED PARTNERSHIP (LP) Provides protection against liability for passive investors in the partnership (s 57)

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o Liability is limited as long as they don’t take part in management of the business (s 64)o Limited partners will not be personally liable – any debts, etc. will be borne by the general

partners and any available partnership assets Business is managed by general partner(s) (s 54) – also enters agreements for the LP LPs must be registered pursuant to requirements in the statute for the jurisdiction in which the

partnership functions (s 51)

Haughton Graphic Ltd. v. Zivot (1986) Ont HC s 63 of ABPA – a limited partner becomes liable if he takes part in the control of the business

o No requirement of reliance by the creditor on belief that limited partner was general partner

o Degree of control of the business required from the limited partner to make him liable as a general partner is determined on case by case basis

s 63 applies only if two conditions met:o 1. The person is a limited partner ando 2. He takes control of the business of the limited partnership

The section does not apply to someone whose sole role in and connection with the limited partnership is that of an officer, director or other controlling mind of the general partner

Nordile Holdings Ltd. v. Breckenridge (1992) BCCA s 64 of BC Partnership Act – A limited partner is not liable as a general partner unless he takes part in

the management of the business. Being director/officer of general partner and participating in limited partnership management solely

in capacity of director/officer of general partner is allowed – therefore won’t be held liable as a general partner

Court: two pieces of evidence that showed outsider this was LPo 1. in mortgage agreement itself, it says that only Arbutus Mgt Ltd. would be liable for any

default on mortgage Actual agreement limits liability to general partner By itself might not have been enough - if limited partners had actually been taking part

in management they might have been liableo 2. agreed statement of facts - said B and R are solely the managers and directors of the general

partners and they are not the managers or directors of the partnership as a whole This statement of facts distinguished the case from Haughton Graphics Because Nordile agreed to that they can't turn around and say they didn't actually agree

to this Court: you can't say they were engaged in management of partnership because you have agreed

they were noto Doesn't fit into s 64 of BCPA

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