Tag: corporations

2L Exam (long) Summary: Business Associations

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Sole Proprietorship

Advantage:

  • of a sole proprietorship is the ease of commencement and dissolution
  • Most common form
  • Person cannot be an employee of the business

Disadvantage:

  • unlimited personal liability
  • All contractual obligations, torts, personal assets can be seized, tax
  • Dissolution has no effect on liabilities
  • Cannot raise money to start because there is no ownership to divide up
  • Not suitable for large venture

Statute:

  • Ontario Business Name Act
    • Possible 2k fine and inability to sue
    • Not a trademark, but can sue for 500 for any similar names

Partnership

  • Two or more persons carry on business in common with a view to a profit (Partnership Act)
    • No actual profit is required (Blackman v R)
    • Joint tenancy or common ownership does not necessarily create a partnership (AE LePage Ltd v Kamex Developments Ltd); test of intention of parties
    • Partner can limit liability by becoming a limited partner: cannot play a role in direction of the business
    • Partners in qualifying professions may go for a limited liability partnership

Statute:

  • Ontario Business Names Act
  • Ontario Partnership Act
    • Must notify creditors of a partner’s retirement
  • Dissolution of the partnership
    • unless explicitly agreed
    • expiry of the fixed term (OPA 32a)
    • notice of the partner to others (OPA 26 and 32c)
    • if formed for single venture (OPA 32b)
    • death or insolvency of partner (OPA 33.1)
    • illegality (OPA 34)
    • just and equitable grounds, like incapacity (Landford Greens Ltd v 746470 Ontario Inc)
    • dissolution must pay out claims against partnership relative to share of partnership (OPA 38)

Limited Liability Partnerships

  • incorporation with full limited liability for professional not permitted for most Canadian jurisdictions
    • allowed partnerships to have limited liability
    • limit liability for negligence (only liable for their own negligence)
    • Ontario liability limits “debts, obligations and liabilities”: still responsible for their personal negligence and those under their supervision; liable for crimes if they knew or ought to have known
  • requirement: varied by province
    • sign an agreement
    • profession governed by statute
    • governing professional body requires partnership to carry minimum liability insurance
    • registered under Business Name Act with “LLP”

Limited Partnerships

  • Requirement: at least one general partner (unlimited liability) and one limited partner
  • taxes: primary reason to invest
    • sharing losses since deductible by limited partners against their other income
    • (for corporation, no tax consequences for shareholders)
  • province specific and must register if they cross lines
  • Ontario: Limited Partnerships Act
    • a person can be both a general and limited partner (OLPA 5.1
    • cannot admit another general partner (OLPA 8)
    • liability is limited to the extent of contribution (OLPA 9)
    • a limited partner may be paid more or have priority (OLPA 11 and 14)
    • full transparency to limited partners
    • limited partner may be an employee (OLPA 12)
    • limited partners may advise management (OLPA 12.2.a) but taking control of the business may lose their limited liability (OLPA 13.1)
      • difficult to draw a line (Stillwater Forest Inc v Clearwater Forest Products Inc)
    • if limited partner is in the name, they lose their protection if creditor thinks they’re a general partner (OLPA 6.2)
    • limited partner’s interest is transferrable with consent of all partners and the partnership agreement (OLPA 18)
    • limited partners can receive repayment of their investment in: dissolution, specified by agreement, six-month notice, unanimous consent of partners (OLPA 15.1); no priority over creditors (OLPA 15.2)

Corporations

  • Separate legal personhood
    • Shareholders not personally liable
    • Shareholders do not own the business or corporate property
    • Shareholder can be an employee and a creditor to the corporation
    • Corporations persist even when shareholders die
    • Corporations are taxed separately for income
  • Some professions are not allowed (e.g. lawyers)
  • Must hold meetings, elect directors, and provide info to shareholders
    • Corporate filings become public record
  • Mechanisms for accountability to shareholders
    • Corporate democracy: shareholders can elect and remove directors
    • Director duties: fiduciary
    • Shareholder remedies: remedies for management failure
    • Shareholder rights to info

Statute

  • Business Name Act
    • Lawyer can be held liable for negligence if they fail to convey importance of name: Turi v Swanick
    • CBCA regulations part 2; s 17-34
  • Capacity and power: part 3; see also 15-18
    • Statutory scheme can be limited through corporation constitutions (articles and corporate by-laws) or shareholders’ agreements

Pre-incorporation Contracts

  • Corporation doesn’t exist yet, but agent enters into a contract
    • Is the agent personally liable? Does the corporation have to adopt the contract? (OBCA s 21)
  • Agent liability can be unclear: problem of existence of corporation and mind of contractors
    • If parties knew the corporation was non-existent, personal liability is implied
    • If parties did not know, look to circumstances: Black v Smallwood; mistaken belief in incorporation and court held no personal liability
  • Common law reform: unsatisfactory because third parties were denied relief and conclusion inconsistent with intention of parties in contract; CBCA section 14 made agents liable in most circumstances; agent bears all liability prior to corporations adopting the contract, unless contracted out
    • Some provinces in Canada only apply to written contracts
    • Unclear what happens if corporation is never incorporated (possible solution: apply conflict of law rules of the provinces, or look at the intention of the agent who was going to incorporate)
    • language of the statute implies the need for a contract, which just restates the common law rule
    • Courts reluctant to grant relief to hold the agent liable after incorporation: Bank of Nova Scotia v Williams
  • Sherwood Design Services Inc: purpose and meaning of the indoor management rule; corporations cannot dispute ostensible authority; law firm and shelf corporation; pre-incorporation contract adopted by the shelf corporation?
    • Court held communication was sufficient to adopt the contract (however, there was a strong dissent)
    • What is required for adoption? any action or conduct signifying an intention to be bound: Design Home Associations v Raviv
    • CBCA and OBCA: adoption must be within a reasonable time after incorporation
  • Scope of the corporate contract: when are parties subject to corporate law?
    • ultra vire doctrine: acting beyond capacity and powers (CBCA 15 and 16)
    • agency law: many agents and many principal
    • ostensible or “usual” authority to act on behalf of principal: Freeman and Lockyer v Buckhurst Park Properties
    • courts superimpose special corporate rules on normal agency rules: Ernest v Nicholls (1857); outsiders are deemed to know a corporation’s constitution
    • indoor management rule (Royal British Bank v Turquand): constructive notice doctrine confined to actual restrictions on an agent’s authority; CBCA s17 and 18

Incorporation

S 2-14

  • Place of incorporation
    • Federal and provincial have concurrent jurisdiction to incorporate
    • None require incorporator to be resident (some limits on residency of directors), so can shop around provinces
    •  must be wary of conflict of law rules (some American courts refused to apply the laws of incorporator)
    • US constitution “full faith and credit” led to states attracting incorporation (Delaware winning, but too lax?); approach favored by law and economics analysis
    • Canadian laws are perhaps too focused on uniformity than revenue (high transaction costs)
  • Extra-provincial corporation (EPCA)
    • Other provinces (class 1) or territories (class 2) do not need licenses, but out of Canada do (class 3)
    • Offence to carry on business in a province without a license
    • Unlicensed corporations cannot sue under contracts
  • Continuance under the law of another jurisdiction
    • Continuing existence in another jurisdiction involves a two-step
    • First, emigrating corporations must obtain consent from authorities in its current jurisdiction (export step)
    • Second, it must meet its federal/provincial requirements (import step)
  • Modes of incorporation: Western provinces used registration or jurisdiction; duty of incorporating officer to ensure compliance
    • Other provinces use an application to a public official for a Letters Patent of Incorporation at Minister’s discretion, which is now minimized
    • Now deliver articles of incorporation to an officer who issues a certificate of incorporation

Classifications of Corporations

  • Corporation as legal existence and limited liability; powers and privileges of a natural person
    • Salomon v Salomon
  • Publicly traded vs privately held
    • Closely held corporations (CHC)
    • OBCA distinguishes non-offering vs offering: Lien in shares (ss 40), restrictions on transfer (42), minim number of directors (115), insider liability (138), exemption from audit (148), information before annual meeting (154) audit committee (158) compulsory acquisitions (Part XV)
    • “distributing corporation” and CBCA: definition of “squeeze-out” (2), corporate records (21), proxies (102), notice of meeting (135), etc.
  • One person corporation
    • Meetings: problem of requiring two or more person; most acts make an exception
  • Constrained share corporations
    • Publicly issue shares can be restricted to comply with Canadian ownership and control requirements
  • Professional corporations
    • Members of professions can incorporate themselves
    • OBCA permits if: act expressly permits and it is a listed profession
    • Largely motivated by tax considerations
  • Unlimited liability companies
    • Alberta, BC, NC

Capitalization

Sections 6; 24(1)-(4); 25; 26(1)-(5);

Sections 27(1)-(3); 28; 30(1); 34-36; 38; 39;

Sections 42; 43; 49; 50; 118(1) and (6); 189

Shares

  • Shares: bundle of rights against a corporation
    • Personal property, but no claim to property right in the corp’s assets or ownership interest
    • Shares determine the risks and returns of holder’s investment
    • Rights attach to the share and not the shareholder
  • Issuing and Paying for Shares
    • “Fair equivalent”. CBCA, s. 25(4); s. 118(1); s. 118(6); s. 123(4)
    • “Fully paid” shares. CBCA, s. 25(3)
    • “Non-assessable” shares. CBCA, s. 25(2)
  • Shareholder rights: CBCA s 24(3)
    • Vote at shareholder meetings
    • Receive dividends declared by directors
    • Upon dissolution, receive property remaining after creditors are paid
  • Classes of shareholders
    • Classes must be on share certificate: s 49.1 and 13
    • some class must hold these rights, although all three rights need not be attached to the same class: s 24(4)
    • if articles are silent, then each share has one vote: s 140(1)
    • McClurg v Canada challenged discretion on the principle of equal treatment of shares
      • SCC upheld that shares were distinguishable
      • OBCA allowed splitting of classes with same characteristics to give discretionary dividend allotment
  • Series of shares: subdivision under classes of shares and structures power, control, management, and profits
    • Must have more than one class to have different sets of rights (unless subdivided in “series”)
    • Series shares must be expressed in articles and fully defined before issues: CBCA 27(3)
    • Series applies to public corps to sell shares faster
    • All series have the same priority: s 27(3)
  • pre-emptive rights (s 28): existing shareholders first dips at shares in proportion to their current holders
    • Avoids dilutions
    • Constrains inappropriate issuance of shares
    • Prevents issuance of shares at under value
  • A record of ownership of all shares issued, a securities register, must be maintained
    • CBCA ss 20 and 50
    • Stands as proof of ownership: s 257(3)

Dividends

  • Declaration of dividends is at the directors’ discretion; cannot be delegate, per s115(3)(d), but can be assumed by shareholder agreement; no agreement or article can compel directors to pay dividends)
    • Discretion is not unlimited: may be compelled to pay dividends if failure would be oppressive to shareholders (s 241)
      • Ferguson v Imax: prevented dividend to wife and it was oppressive
  • Test: s 42-43
    • Insolvency test: corp would be able to pay its liabilities as they become due
    • Capital impairment test: the corp’s assets would not be less than its liabilities and stated capital of all classes (capital impairment test, per s 42)
  • if the test is breached, directors are personally liable to pay back to corp (s 118.2.c)

Corporate Finance

  • issuing and paying for shares
    • “authorized capital” = number of shares authorized to be issued; no set requirement on number of shares
    • directors have power to issue shares and this power cannot be delegated since fiduciary duty
    • subscription of shares must obey provincial securities law
    • shares may be issued for money, property, or past services: fair equivalent (cbca 25.4) else director personally liable (118)
    • consideration must be paid in full at the time of issuance
  • issuing vs authorized capital
    • issue up to the maximum amount authorized by the article
    • authorized capital is how much you CAN issue but issuance is how much is actually issued
  • subscription of shares: s 25
    • right of shareholder or group of shareholders interested in investing more
    • approach board and board issues resolution for issuing shares (“allotting shares”)
      • authorization by board but issuance by coproration
  • shared capital account: money company raises by issuing stock
    • separate account for each class and series it Increase (CBCA, s. 26(4), Adjust (CBCA, ss. 26(5) and 38),
    • Reduce (CBCA, s. 38 issues, and record stated capital (s 26.1)
    • stated capital is the historical total paid, even dividends paid in shares is added (26.4)
    • stated capital can be adjusted by shareholders by special resolution
      • when stated capital exceeds realizable value of corp assets and restricts capital impairment test
      • cannot reduce stated capital if restrictions of s 38
  • repurchase of shares: 34-36
    • generally corp may not hold shares in itself or subsidiaries: s 30 and “trafficking in”
    • exceptions: corp may hold its own shares as security or as a trustee
      • cannot exercise rights of shares
      • must adjust stated capital to deduct these purchases
  • holding shares as security or trustee
    • transaction in the ordinary course of a business, like money lending (cbca 31)
    • don’t want corporations to have a beneficial interest in the shares
      • 31(1): fictional entities: parent, subsidiary, etc.
      • corporation has legal title but nobody has beneficiary title
  • purchase of shares
    • corp may want to buy back shares to return capital to shareholders
    • can do so as long as it passes the financial tests in ss 34 and 35
      • capital impairment test is relaxed if the purchase is to settle debt, eliminate fractional shares, or fulfil terms of contract between corp and its employees
      • may cancel or authorized but unissued (39.6)

Redemption

  • redemption: CBCA, s. 31; CBCA, ss. 45(2)-(3)
    • corp may redeem its own shares: buying them
    • return invested capital to shareholders
    • must meet financial tests: “reasonable grounds for believing”
      • CBCA, s. 36
  • Repurchase:
    • More relaxed tests: CBCA, ss. 35(1) and (3); 190 and 241; 35(2), 190(26) and 241(6).
    • Cancel the shares / authorized but unissued (CBCA, s. 39(6))
  • don’t want corporations to have a beneficial interest in the shares
    • 31(1): fictional entities: parent, subsidiary, etc.
      • corporation has legal title but nobody has beneficiary title
  • Redemption and repurchase of shares
    • Corp cannot hold shares in itself: s 30 (“trafficking in”)
    • Exception: may hold as security or trustee
      • Also, purchase or redemption
    • May act as trustee/security if lending is in its ordinary course of business: s 31
    • May hold a lien on its own shares in security for any debts owed: s 45(2)/(3)
    • Purchase of shares is possible as long as it passes financial tests: s 34 and 35
      • Insolvency and capital impairment test
    • Redemption: s 36 also must pass financial tests
  • Share transfers
    • Problematic for smaller businesses
      • Hard to find people, hard to value, etc.
    • Example of shareholder agreement regulation: right to first refusal
  • Dispute settlement
    • ADR
  • Sale of all corporate assets
    • Cannot be completed without approval of shareholders by special resolution: s 189(3-9)
    • Sale may fundamentally change shareholder investments
      • Quantitatively substantive relative to other assets
      • Assets integral to core of business
  • Private or closely held corps
    • Sale of all assets, asset transaction, share transaction, restrictions on share transfer
    • Resembles partnerships
    • Never sold shares to public
    • E.g. subsidiaries
  • Restrictions on transfer of shares: s 6(1)(d), 48(8-9)
    • Prevent intrusions of unwanted business associations
    • Preserve interest of owners
    • Resolve deadlocks
    • Comply with private corp legislation
    • Ensure continuity
    • Provide fair market price for shares
    • Restriction types
      • Absolute restrictions: invalid, at most up to five year
      • Consent restrictions: no transfer is valid until approved by director or shareholder
      • First option restriction: shareholder must offer them to other shareholders before selling it other outsiders
      • Event options: triggered by some time or occurrence
      • Buyout arrangements
      • Buy-sell agreement: death of shareholder
  • Re Smith & Fawcett (1942)
    • Director absolute power to refuse transfer of shares? No, must be bona fide and interest of the corp
  • Case v Edmonton country club (1974)
    • Annual minimum fee; ultra vires because shareholders are free from further pecuniary obligations; bad faith striking down of transfer and unreasonable

Shareholders

Sections 132-136; 138-144

CBCA Regulations – Part 5

Voting

  • Equality of shares ensures same voting rights (Jacobsen v United Canso Oil)
  • Special vote: absent explicit voting right
    • Fundamental changes: amalgamation of a corp (183.3), sale/exchange of all of property (189.6), continuance of a corp (188.4), dissolution (211.3), some amendments to articles (176.5)
    • Class vote: may vote if it would have prejudicial effects on the class (s 176)
      • Possible dissent and appraisal remedy (corp buys shares, per 190.3)
    • irregular timing and outside of annual shareholder meetings: special vote meeting
      • quorum: s 139

Power

  • active powers of shareholders
    • proposal for discussing matters in shareholder meetings (137 and 103.5)
    • shareholder agreement to take power: unanimous shareholder agreement (s 146)
    • CBCA gives shareholders some ability to initiate some corporate actions
      • some other remedial options: special meetings (s 143) and removal (s 109)
  • right to corp info: s 20, 21, 143, 160, 243
    • Info allows shareholders to evaluate strengths and weaknesses; this info enables exercise of rights to hold directors/officers in check
    • Statute: gives shareholder rights to company records; rights to request meetings and circulate proposals; disclosure of financial and insider trading info; right to inspectors and auditors appointed; how far should the rights go?
  • shareholders can vote for directors and proposals made to them
    • More than 50% unless it’s a special resolution, which requires two-thirds (140,173,183,189)
    • amendment of articles (s173)
    • creation or amendments to by-laws (s103)
    • sale, lease, or chance of all of property other than ordinary course of business (189.3)
    • amalgamation with another corporation (s 183)
    • continuance (s188)
    • dissolution (s 211)
    • Proxy: appoint another person to represent them and vote their shares (cbca 148.1)
      • Must vote in accordance with shareholder (cbca 152.4)
      • Cannot vote on new matters or beyond authority given
  • Shareholder proposal: facilitates communication of shareholders at corporation’s expense
    • Shareholders can solicit votes from other shareholders
      • Must send out a “dissident’s proxy circular”
    • Director denying proposal circulation: not submitted before 90 days; relates to a personal grievance; not relate significantly to business affairs; made a proposal within the last 2 years and failed to speak at meeting; similar proposal was submitted within five years and received less than 3% of votes; right of proposal is being abused
    • Shareholder proposals
      • Cbca 137; obca 99
      • Four categories of proposals
      • Article amendments (cbca 175.1; obca 169.1)
      • By-law amendments (cbca 103.5; obca 116.5)
      • 5% shareholder nominations for election of directors (137.4; 99.4) and hold them for six months prior
      • Residual power for proposals (proposal requirements: 2k or 1% of shares)
  • Shareholder can be a director, officer, or employee of the company: Lee v Lee’s air Farming
    • No insurance interest in assets of corporation: Macaura v Northern Assurance
  • CBCA, s. 45(1) shareholders of corporation are not liable for any liability, act or default of the corporation except under:
    • s.38(4) where shareholder received payment from company on reduction of capital,maybe required to repay amount
    • s.118(4)(5) director held liable to obtain court order compelling shareholder who has received payment under resolution to repay amount received, make sure shareholders not receiving money if company about to go bankrupt
    • s.146(5) shareholder may be liable as director when acting in place of director

Remedies

  • Shareholder remedies
    • Right of shareholders in relation to the corp and directors
      • Derivative action: asking the court to take action on behalf of the corp
      • Oppression action: direct action for directors oppressing shareholder’s interest
    • Shareholder remedy for abuse of directors’ power
      • apply to terminate corp existence (s214)
      • bring action (derivative action) on behalf of corp against director/officer (s 239)
      • relief from oppression (s 241)
      • seek compliance for breach (s 247)
      • seek rectification of corp records (243)
    • Relevant CBCA sections
      • Orders to comply with requirements (s 247)
      • Orders to rectify corporate records (s 243)
      • Orders to investigate (229-37)
      • Right of shareholder to dissent to fundamental changes and have shares bought for “fair value” (s 190)
      • Termination of corp (s 214)
    • Personal actions
    • Other rights enforced through civil action
      • No claim based on fiduciary or duty of care because it’s owed to corp not shareholders
      • Test: was the injury to shareholders merely incidental to the injury to the corporation? If no, then personal claim is good (e.g. negligent audit report relied on by shareholders was not in breach of personal shareholder obligation)
  • Shareholders and how they exercise power: must act collectively
    • Annual meeting must be no later than 15 months after previous or six months after end of financial year, whatever is earlier (133)
    • Annual meeting must include: election or directors, financial statements, and appointment of auditors
    • Directors call meetings but shareholders may force them to (5%) per cbca 143 within 21 days
    • Meeting place must be specified by by-laws
    • Notice: cbca requires 21-60 days notice (135 and regulation 44); although attendance can waive notice requirement (136)
    • Record date can be fixed by directors (134)
  • Are shareholder proposal useless because they routinely fail?
    • Problem of encroaching on the powers of directors
    • Perhaps not; puts issues on public agenda, have salutary effect, etc.
    • Varity Corp. v Jesuit Fathers of Upper Canada (1987)
      • Proposal to end investments in South Africa due to apartheid; company cannot be compelled to distribute the proposal
  • Shareholder ratification of breaches of fiduciary duty
    • Shareholders deciding a transaction is a breach can be one rationale
      • But suspect because fiduciary duties are owed to the corp and not shareholders
    • CBCA reduced ratification powers
    • Must do so under s 120 (see also 242, 241, 214)
  • Shareholder agreements
    • Shareholders’ ways to customize their relationship
    • Decision-making structure
    • Voting and management: can contract to agree on how to vote
    • Common to set mechanism in shareholder agreements to regulate share transfer
      • e.g. right of first refusal: other shareholders have time to purchase shareholders first
    • Unanimous shareholders’ agreement
      • USA (s 146)
      • Shareholders may agree on how to exercise power taken from directors
  • Enforcement
    • Breach may be oppression (s 241)
    • Failure to comply may result in dissolution (214)
    • OBCA rules can be more comprehensive

Derivative actions

  • Sue on behalf of the corporation: Foss v Harbottle
    • Ratification by majority
  • Minority can sue in four caes
    • Fraud on minority
    • Ultra vires acts
    • Defect in majority approval
    • Personal rights
  • Approval test
    • 14 days notice to directors to apply for leave
    • Acting in good faith (no frivolous or vexatious); no delays or to get leverage (Lost Lake Properties v Sunshine Ridge Properties)
    • Action is in the interest of corp (s 239)
  • Cannot stay, discontinue, or settle without court approval (s 242.2)
    • Prevent frivolous, pay offs, etc.
  • Interim costs usually awarded: Barry estate v Barry estate
    • Strength of case; financial circumstances; conduct complained connection to financial inability
  • Creditors may bring derivative action: peoples department stores v wise (SCC)
  • Foss v Harbottle
  • CBCA s 239
  • S 240: orders courts can make
  • Re Northwest Forest Product (1975)
    • Satisfaction of s 222 requirement of interest of company
  • Re Marc-Jay Investments and Levy (1974)
    • Beneficial owner even though he is not a shareholder
  • Re Bellman and Western Approaches (1981)
    • Notice, good faith, interest of corporation
  • BCE: creditors might be able to bring a derivative action
    • Also, common law remedy may sstill be available
  • Turner et al v Mailhot et al (1985): indemnity for costs
    • Indemnity against wrongdoer or corporation?
  • RE BCE: SCC reconsidered BCE in 2008
  • After Peoples and BCE, distinction between personal and derivative action may collapse
    • Peoples suggests duty of care is owed to creditor
    • Peoples also suggests fiduciary duty interest is broad stakeholders, derivative and oppression remedies should be available to broad range of stakeholders
  • Shareholder litigation and free rider problem: costly to litigants but beneficial to all shareholders
    • What is the relationship between complainant and the corp?

Oppression remedy

  • CBCA, ss.238; 241
  • Duties owed by shareholders under the oppression remedy
    • Fiduciary duty may be re-crafted under the oppression remedy
    • Others just term this an equitable right
    • Overlaps and compliments both fiduciary and duty of care
  • Ebrahimi v Westbourne Galleries (1972; English)
    • Dispute between three directors; one director removed; force purchase of shares or wind-up company; applies to partnership, but does it apply to corps; language of “just and equitable”; yes, apply to corps; perhaps small and private, but Canadians ignore small and focus on private
    • Bona fide interest of the company?
  • CBCA 214: just and equitable; winding up
  • Ferguson v Imax Systems Corp (1983)
    • Ontario; amendment of article is unfairly prejudicial, oppressive, or disregards security holder interest; divorce to oust a shareholder; held that it was oppressive and unfair
    • Duty of fair dealings with minority shareholders; consider good faith of corporation transaction in question
  • How to fit majority shareholders in sections dealing with corporation or directors?
    • Shareholder resolution can become corporate conduct once acted upon
  • Common remedy is to give order of controlling shareholder to purchase shares of the complaining minority
  • Bad faith is no a prerequisite to the oppression remedy, but bad faith likely leads to findings of oppression (Ferguson)
    • Courts may also consider the relationship between shareholders in private corporations
  • Scottish Co-operative Wholesale Society v Meyer (1958)
    • English; parent company formed subsidiary and managing director forced out by parent company establishing its own department doing the same thing; interlocking dictatorship
    • Denning: was it to promote business in good faith? No, this is oppressive
      • Think of counterfactual: what could have the directors done?
    • Remedy: wind up company?  No, have oppressors buy the shares so the corp can survive
  • Relief from oppression: contra majority rule
  • Wind up as a remedy in UK
    • Controlling directors unreasonably refuse to register transfers of minority holdings to force reduced price
    • Directors award themselves excessive remuneration that cut into dividends
    • Prevent issuing of share to directors on special terms
    • Prevent refusal to declare non-cumulative preference dividends on shares held by minority
  • S 242 adds four procedural and evidentiary qualifications to s 241
  • Overlap between oppression remedy and fiduciary duty
    • Court shy away from characterizing oppression remedy with duty
    • However, any breach of fiduciary duty seems to be oppression and courts have allowed some derivative actions
    • Oppression offers broader cause of action than fiduciary duties and remedies are broader
  • BCE Inc Re
    • 2008; SCC; 241 oppression remedy
    • Look at the underlying principles and reasonable expectations, then consider whether conducted amounts to oppression, unfair prejudice, or unfair disregard
    • Oppression is an equitable remedy and fact specific
    • Oppression is not necessarily bad faith or abusive/coercive; simply ignoring interests can be oppressive
  • Derivative action = corporation; oppression = shareholders, officers, etc
  • Standing to bring an oppression action: “proper person”
  • First Edmonton Place v 315888 Alberta (1988)
    • Lease is a security of corp and lessor is beneficial owner; creditors can be complainant if they are a holder or beneficial owner of a security in the corp capable of being registered; applies
  • Substantive scope of oppression remedy
    • “fraud on minority”
    • Common law roots
  • Ferguson v Imax
    • Husband and wife; wife received class b shares (non voting); divorce and squeeze out:
      • As noted above, the right of compulsory acquisition is available to a purchaser who has acquired, within 120 days following the date of the take-over bid, 90% or more of the shares of the class of shares to which the take-over bid relates, other than shares held at the date of the take-over bid by or on behalf of the purchaser or an affiliate or associate of the purchaser. However, when a purchaser acquires fewer than 90% of the shares subject to the take-over bid, the purchaser may nevertheless squeeze-out the remaining minority shareholders through a subsequent shareholder-approved transaction, provided that the subsequent transaction is approved by at least 66 2/3% of the votes cast at a shareholders meeting held to approve the transaction. As a result, take-over bids typically include a condition to the purchaser’s obligation to acquire shares under the bid that at least 66 2/3% of the outstanding shares shall have been tendered to the bid.
    • Not acted in good faith in exercising powers to amend
  • Reasonable or legitimate expectation: see equitable principles from law of partnership and see real intention of parties (House of Lords)
  • Bad faith? Never supposed to be necessary, but points to unfair results
    • Likely more to do with fiduciary duty than oppression
    • Adopted in Brant Investment v KeepRite (1991)
  • Rea v Wildeboer (2015)
    • Ontario; alleged insiders breached fiduciary duty and misappropriate 50-100m of funds; brought oppression remedy
    • Wants to bring oppression remedy for derivative action for wrong done solely to the corporation
      • Distinction is murky
      • Statutory distinction remain in effect
    • Held: oppression and derivative action are not mutually exclusive, but remain distinct for procedure; facts of case suggest no oppression only derivative action for harms to corporation
  • Can the oppression remedy apply to conduct of shareholders?
    • Note it applies to affiliates of corp
    • Denning noted parent companies can be oppressive 
    • If oppressive shareholder resolution has passed, then corp can be said to commit oppression
    • Remedies, however, can be directed towards shareholders e.g. majority having to buy shares of minority
  • Oppression remedy and duties of director in corporate transactions
    • Shareholders may attempt to defeat takeover bids using oppression action, but without much success
    • Business judgment rule becomes important: standard practice to form committee to assess takeover bid
  • Costs ordered under oppression remedy
    • Interim costs (Alles v Maurice)
  • Remedy
    • Judiciary has been innovative in granting remedies
      • Most common is share purchase
      • Small amount involves wind-up order

Directors and Officers

Sections 6(3) and (4); 102-121;

Sections 173; 174; 189(1) and (2)

  • Business judgment rule
    • Business decisions are given a lot of discretion and deference
    • Courts lack business expertise and danger of hindsight bias
    • Only applies when they have been scrupulous in deliberations and demonstrated diligence
  • Election and appointment of directors
    • First directors filed with articles of incorporation (106.2)
    • Shareholder meeting within 18th months (133)
    • Individual vs slate voting
    • Majority voting: shareholders vote both for and against
    • Shareholders can remove directors (109)
    • Director vacancies filled by shareholder meeting (111.2)
    • Public shares require at least 3 directors with 2 non-officers/employees (102.2)
  • Election and appointment of directors
    • First directors filed with articles of incorporation (106.2)
    • Shareholder meeting within 18th months (133)
    • Individual vs slate voting
    • Majority voting: shareholders vote both for and against
    • Shareholders can remove directors (109)
    • Director vacancies filled by shareholder meeting (111.2)
    • Public shares require at least 3 directors with 2 non-officers/employees (102.2)
  • Director meetings
    • Place has no statutory default (114.1)
    • Notice; OBCA 10 days (126.9)
    • Notice can be waived through attendance (114.6)
    • Min number of directors: quorum (114.2)
    • Phone or online meetings allowed with consent (114.9)
    • First meeting agenda set out by s 104
    • Directors deemed to consent to resolutions unless they dissent (123)
    • Management proxy circular must include: description of shareholders’ right to appoint proxy; transactions with insiders of corporation; disclosure from shareholders holding more than 10% of how many shares; details of directors up for election; details about special business at the meeting
      • Management must disclose financial statement to shareholders (155)
    • Director can call special meetings (CBCA 133.2; OBCA s 94(1)(B))
      • 5% of shareholders can also push for meetings (CBCA 143, OBCA 105)
      • Special meetings must state nature of meeting (cbca 135.6)
    • Wall v London and Northern Assets Corp (1898)
      • General meeting was held; director objected but outvoted; chair closed resolution and shareholders could not speak; special resolution ultra vires
      • Issue: did they close too early before letting them talk? No, dismissed
    • National Dwellings Society v Sykes (1984)
      • Chair declared meeting dissolved and left the meeting
      • Held: chairman has no authority to stop the meeting at his own pleasure
    • Re Bomac Batten ltd (1983): chairman refused to discuss proxy; meeting continued with new chair and new directors; court held it chairman improperly adjourned and new election was legit
    • Canadian express ltd v Blair (1989): Proxy voting and voting rights freedom; Blair the chair lost and sued for costs
    • Blair v Consolidated Enfield Corp (1993) SCC
      • OBCA s 136(1) apply? Did Blair act honestly and in the best interests of the corp?
      • Voting procedure must be preserved; Blair claimed he was acting on advice of lawyers in good faith; legal advice does not automatically sanctify but must be considered within the context; chairing is quasi-judicial, but better described as a duty of honesty and fairness
      • Appeal allowed in favor of Blair
  • Delegation
    • Officers’ power defined by by-laws; only required to be of sound mind or “full capacity” (cbca 121a)
    • S 115 and 121 of cbca
    • Cannot delegate powers to supervise management or powers in s 115(3)
    • Delegation outside the company is becoming more common (e.g. management companies); not expressly dealt with in the CBCA
    • Reliance on management: director must depend on management and others for reliable info (s 123)

Duties and Liabilities

CBCA, ss. 120–124

OSA, s. 130

Fiduciary duty

  • honestly and in good faith with a view to the best interests of the corporation not directly the shareholders
    • Exercise the care, diligence and skill that a reasonably prudent pers would exercise in comparable circumstances
    • S 122(1)
  • Fiduciary duty similar to trustee: no conflicts; content of fiduciary duties vary with circumstance and the interest of the corporation
    • No personal transactions
    • No taking advantage for personal gain
    • No competition with corporation
    • No blocking takeovers which would benefit the company
  • Corporate opportunities
    • Appropriating valuable investments for themselves
  • Requirements for potential conflicts:
    • Notice
    • Approval
    • and fair/reasonable to firm
  • Factors in determining the strength of a corporation’s interest
    • Maturity
    • Specificity
    • Significance of opportunity
    • Public or private
    • Rejection (in good faith)
    • [size of corporation: public corps are less scrutinized by shareholders]
  • Relationship of fiduciary to opportunity
    • Position of fiduciary
    • Relationship between fiduciary and opportunity
    • Knowledge as fiduciary
    • Use of position
    • Time after termination
  • Competition by directors or officers
    • Cannot use fiduciary position for competitive advantage after termination: e.g. confidential info or solicit customers
    • No absolute rule on multiple directorship, but can lead to conflict
  • BCE Inv  v 1976 Debentureholders
    • Interests of shareholders and other stakeholders can be coextensive
      • Where they conflict, the duty is to the corporation
      • Not mandatory to take into account the impact on stakeholders, as long as they’re treated fairly
    • Business judgment rule: defer to the business judgment of directors
      • Standard: lies within a range of reasonable alternatives
  • Aberdeen Railway Co v Blaikie Bros
    • Transactions with corporations may be voidable
    • “possibly may conflict” = breach of duty and voidable
    • S 120: materiality and non-trivial as the threshold: would it affect their ability to perform
  • UPM-Kymmene Corp v UPM Kymmene Miramichi (Repap)
    • Obligation to disclose
    • Generous compensation package but details were not disclosed and omitted
  • Rooney v Cree Lake Resources Corp
    • fair and reasonable means assessing substance and process of negotiation (no conflicts and not too hasty)
  • Estate v 1156653
    • director did not hide his interest and it was obvious to all stakeholders, and it would have been approved if put to a vote
  • Cook v Deeks
    • reasonable prospect of a corporation acquiring something and director cannot intervene for their own benefit; acquired railway
  • Regal (Hastings) v Gulliver
    • Impediment to a corporation obtaining opportunity: fiduciary still cannot exploit
  • Canadian Aero Service v O’Malley
    • contract to map Guyana; started their own company with similar work; SCC held they breached duty
    • Does the opportunity belong to the corporation? How closely connected is it?
    • What is the relationship of the fiduciaries to the opportunity?
  • Star-Link Entertainment inc v Star-Quest
    • Star-Link seeking valuable license; other directors sought license and resigned; remedy of restitution

Duty of care

  • generally owed to corporation but expanded to corporate stakeholders (e.g. creditors)
    • SCC: reasonably prudent person
    • objective standard departure from common law subjective standard
    • Peoples Department Stores & s 122
  • Peoples Department Stores:
    • SCC; not just corporation but to other stakeholders too; attracted criticism; OBCA made explicit that duty of care only owed to corporation
  • Standard of care
    • Meetings and s 123: know affairs of corp, know business, etc.
    • Rely on expert: good faith reliance (123.4); expert must be a part of a regulated profession
    • Articles of incorp setting out lower standards than common law is not allowed (122.3)
    • Other duties
      • If there’s a problem with financial statements, directors must investigate: francis v united jersey bank
      • Compensation package issue: upm-kymmene corp
    • Higher standard for management role directors: more inside info
    • Duty of care cannot be delegate
  • Other duties
    • Regulatory laws and corporate statutes
    • Liable for six months of unpaid wages if corp bankrupt (s119)
    • Personal liability under s 118
    • Due diligence defense for 118 and 119 (122)
      • Good faith reliance broader in OBCA

Legal Personality

CBCA, ss. 38(4); 45; 118(4) and (5);

CBCA, ss. 146(1), (2) and (5); 226(4) and (5);

CBCA, ss. 263-266.

CBCA Form 22: annual return – shareholder meeting and keeps Canadian database up to date

Piercing the Veil

  • Disregards of the separate personality of corporation
    • Limited purposes; no consistent principle
    • Courts have interfered for shareholders rather than individuals, but combined with multiple factors
  • piercing corporate veil: fairness, objectionable purpose (tax, fraud in identification, breach obligation like non-compete, or avoiding alimony), agency
    • reluctant to piece in Canada in order to promote business
    • more sympathetic to third parties than shareholders to piece
  • Hudbay: pierce corporate veil? depends on control
  • Liability for torts
    • Courts have not be consistent in personal liability and corporate liability
  • Scotia Macleod Inc v Peoples Jewellers: test for liability; for torts, directors committed it outside of their roles and severed from corp
  • ADGA Systems International v Valcom: corporate managers have a separate identity from the corp
    • Even if acting in best interest of company, they breached their employment contracts
  • Berger v Willowdale AMC: slip and fall; could not sue company; sued president personally; court found president had a responsibility that he failed to discharge
  • London Drugs v Kuehne & Nagel: employees damaged property; employees escaped liability but only based on contract
  • Said v Butt: inducement of breach and excusing directors since they act in corps best interest
  • McFadden v 461782: excuses directors and officers if they were under the compulsion of duty to the corp
    • Cannot be available between two third parties
    • Also not available if other torts are present, like deceit or negligent misstatement: TD Bank v Leigh Instruments
  • Kosmopoulos: flagrantly opposed to justice
    • macaura v northern assurance co (1925): more straightforward than Kosmopolis
  • Transamerica Life Insurance: not a carte blanche equitable standard
  • Meditrust Healthcare v Shoppers Drug Mart: refused to disregard separateness of subsidiary
  • “objectionable purpose”
    • Illegality or fraud
  • Big Bend Hotel: insurance fraud
    • history of fire loss claim not disclosed when contracting with new insurance policy
    • objectionable purpose
  • Gilford Motor Co v Horne: breached non-compete contract using the corp
    • Rogers Cantel v Elbanna Sales: non-compete; breached and objectionable purpose
  • ASICS Corporation v 9153
    • Fraud of transferring assets to the corp
  • BG Preeco v Bon Street Holdings: misrepresentation
  • Reduce taxes may be improper: De Salaberry
    • SCC: Stubart Investments v MNR (1984): less willing to disregard separateness even if it’s solely for taxes
    • 1988: general tax avoidance rule: transactions are abusive if the sole purpose is tax benefit
  • Wildman v Wildman: spousal support and sole owner of corp
  • Agency: corp is merely acting as agent of someone else
    • Test: extensive control by shareholder over corp
  • Smith, Stone and Knight v Birmingham Corp
    • Profits; appointment of business conductor; shareholder the head and brain of trading; shareholder govern the adventure; profit by skill; shareholder in effectual and constant control
    • Control in itself is not problematic
  • Alberta Gas Ethylene v MNR: one must ask the purpose of the corp and overall context of obligations to third parties
    • look beyond six factors in Smith, Stone and Knight
  • Gregorio v Intrans-Corp: piercing veil is to prevent fraud to unjustly deprive rights
  • Other factors: lack of respect for the corporate form
    • Wolf v Moir: officers operated skating rink and held personally liable for injuries
    • Inadequate or thin capitalization is usually not a factor

M&A

Takeover Bids

  • Lots of attention for conflict cases
  • Takeover bid replaces directors and directors want to keep their post
  • Management should not be a part of defending takeovers, with some exceptions
    • low price
  • How do we decide what is in the best interest of the corporations for takeovers?
  •  “poison pill” or “shareholder rights plans”
    • Provision for shareholders to buy at higher than market price
    • If bidder triggers overtaking percentage, shares lower but bidder cannot buy, and forces bidder to renegotiate with management
  • Teck Corp v Millar: reasonable grounds that directors were acting in the corps best interest?
  • Olympia York Enterprises v Hiram Walker: take positive steps to defend if the takeover is a bad deal
  • Exco Corp v Nova Scotia Savings: any defense must be consistent with corp best interest and inconsistent with other interests (e.g. director’s personal)
  • Icahn Partners LP v Lions Gate: reasonable grounds and bona fide belief
  • 347883 Alberta v Producers: Prior shareholder approval should be obtained
  • Unless US, no general duty to set up an auction to look for higher prices
  • Pente Investment Management v Schneider Corp: break fee to entice competing bids and paying out of assets if bid is unsuccessful
  • BCE v 1976 Debentureholders: endorse business judgment rule; unclear approach; bona fide belief; broad conception of best interest of corporation and giving deference to directors
  • Canadian Aero Service v Omalley: categories of fiduciary duty are not closed
  • Conflict between majority vs minority shareholders: majority can replace directors so temptation to partiality
  • Hostile takeover and defensive tactics
    • Question of fiduciary duty
    • Outsider making bid for majority of voting shares while sidestepping management
  • Management may resist in fear of losing their job
    • Management discipline hypothesis
  • Can judges discern desirable vs undesirable takeovers?
    • What is the scope of management defensive tactics?
  • Takeover motives and auctions for share price?
  • BCE disrupted jurisprudence since it’s not about shareholders anymore but corporations
  • Dilemma: public interest and pluralistic corporate law OR shareholder-centred security law?

Takeover defence

  • Issuance of more shares to friendly hands: directors can still issue shares at any time (cbca s 25)
  • Crown jewel: selling a key asset; shark poison put: debts payable upon change in control; pacman: seeking control of bidder; white knight: alternative bidder; poison pill: right for shareholders to buy more shares if some acquiring person obtains a threshold percentage of shares (flip-in event) and results in making the takeover too expensive
  • Canadian poison pill: permitted bid which allows bidders to cross the triggering threshold under some requirements
    • Hold bid open longer than statute requires
    • 50% or more of shares not already held are tendered into the bid
    • Allows shareholders to withdraw tenders at any time before taken and paid for
    • Extend bid further 10 days once 50% are tendered
  • Teck v Millar
    • Junior mining company and ultimate deal with larger company; ultimate deal was the issuance of controlling block shares; are directors trying to defend their jobs?
    • Is the directors’ purpose to serve the company’s interest?
      • Good faith
      • Reasonable grounds for their belief
  • Improper takeover defence can trigger fiduciary (122) and oppression (241)
  • Unocal Corp Mesa Petroleum Co (1985; USA)
    • Did the board have power and duty to oppose the takeover? Business judgment rule?
    • Must act in best interest of corporation and shareholders: not passive
    • Actions must be disinterested, in good faith and due care (absence of abuse of discretion)
  • Revlon Inc v MacAndrews v Forbes Holdings (1985; USA)
    • Once sale has become “inevitable“, proportionality test ends and duty of management is to stop canvassing alternatives; fail Unocal test
    • Board’s anti-takeover suggested it may be acting in its own interest over shareholders/corp
      • Directors have burden of proof that they had reasonable grounds for actions: good faith and reasonable investigation
    • Initial offer of 47.50 was unreasonable, board did good; other offers of 50 and 53 made the transaction inevitable, and board blocking this was bad
    • Asset option lock-up: White knight offered $1 more, but this is nominal; principal benefit of this was to the directors
  • Paramount Communications Inc v QVC Network Inc (1994; USA)
    • Not only cash involved, but bigger picture considerations: consequences, illegality, bidder’s identity, etc.
    • Enhanced scrutiny of board: onus on directors
      • Adequacy of decision-making process
      • Reasonableness of actions in light of circumstances
  • Pente Investment Management v Schneider Corp
    • 1998, Ontario; Class A share given option to convert shares into voting shares;
    • Business judgment must have reasonable grounds
      • Reasonable analysis of situation?
    • Used a special committee to address conflicts of interest
    • Is an auction necessary? See public expectation
  • Takeover bids
    • Rationale: economic role in reallocating economic resources for their best use
    • Statute purpose: protect shareholders and ensure takeover bids are conducted openly and even-handedly
  • Chapters Inc Re (2001, Ont)
    • Tactical poison pill; searched for white knight; Ontario Securities Commission
    • Reasonable period of time with reasonable possibility intended to increase shareholder choice and maximize value
    • Relevant factors per Jorex:
      • Shareholder approval of rights plan
      • When plan adopted
      • Broad shareholder support of plan
      • Size and complexity of target company
      • Other defensive tactics
      • Number of potential offerors
      • Steps taken for alternative bid
      • Likelihood, given time, to find other bids
      • Nature of bid
      • Length of time since bid made
      • Likelihood bid will not be extended
    • Waive for one waive for all: waiving a poison pill for one means waiving it for all
    • Just say no: hostile bids, use the poison pill to block it
      • Consider long term interest of company and not just shareholders (BCE)
  • Friendly vs hostile: depends on support of management
  • National Instrument 62-104 (Takeover Bids and Issuer Bids)
    • More than 20% of securities of the class
    • 20% because many people do not vote
    • Corporation acquiring its own shares is a issuer bid
  • Bidder must prepare a document: takeover bid circular
    • Sent to offerors and security authorities
    • Alternatively, bidder may make a public announcement
    • May be liable for misrepresentation (OSA 131)
  • Competing takeover bids are possible
  • Exemptions
    • Acquiring closely held corporations (e.g. fewer than 50 holders of securities)
    • Securities from five shareholders
    • Normal course purchases: persons with 20% and purchasing 5% within a year
    • De minimus: small number of holders of securities in local jurisdiction
    • Application for discretionary exemption
  • Compulsory acquisition: some jurisdiction allow bidders to acquire the rest of securities after takeover
    • For fair value
    • If acquisition is at 90%, remaining shareholders can force new corp to acquire (CBCA 206)

Corporate Change

CBCA, ss. 181-188 [Mergers]

CBCA, ss. 207-228 [Dissolution]

  • Corporate change and reorganization
    • Some may change the nature of shareholder investment
    • Typically involves special shareholder resolution
  • Amendment of articles
    • S 173-79
    • Requires two third
    • Dissenters may have their shares bought: “dissent and appraisal right”
  • Stated capital
    • S 38
  • By laws
    • Rules of corp governance
    • Directors have power to make changes upon directors’ resolution
      • Shareholders may confirm or amend
    • Wells v Melnyk: requires bylaws passed to be put to shareholders at next meeting
  • Continuance: 188
    • CBCA or OBCA?
    • Different jurisdiction
    • Re-incorporation
    • Importing laws: s 187
    • Export: taking laws of another jurisdiction s 188(5)
  • Amalgamation: 181
    • Combines two or more corps into a new entity
    • s 181-186
    • Long form amalgamation: s 182
      • Where the two corps have different shareholders
      • Non-affiliated
    • Short form: only requires director and no amalgamation agreement is necessary: s 184
      • Vertical and horizontal: 184
  • Arrangements: s 192
    • Fundamental change where it’s not “practicable” to follow the Act
    • Attain court approval
    • Test: BCE
      • Statutory procedures met
      • Good faith
      • Arrangement is fair and reasonable: valid business purpose and objections of rights holders are resolved in a fair and balanced way
  • Termination of corp
    • Voluntary dissolution
      • If never issues shares, then dissolved at any time: s 210(1)
    • Involuntary dissolution: any interested person can apply for dissolution based on s 213-214
      • Also oppression relief under 241
      • Director may also dissolve: 212
    • Date of issuance of certificate of dissolution kills the corp
      • Some procedure to be revived: s 209

Corporate Liability

  • corporation in action
    • agents and corporate liability
      • “directing mind and will” of a corp
    • contractual-approval process
  • criminal liability for corp
    • personal liability for individuals using corp to commit crime
  • absolute liability 
    • no mens rea needs to be proven
    • designed to encourage compliance
    • no imprisonment since unconstitutional (s 7)
    • general change in presumption to strict liability
  • strict liability
    • due diligence defence or honesty
  • directing mind and will: mens rea
    • identification theory: criminal liability may attach to person and corporation; acting on behalf of the corporation and governing executive control
      • common law test: is the human actor a vital organ or directing mind and will?
      • r v waterloo mercury sales: manager fraudulently turning odometers back; yes liable, even though they had a company rule against it
      • r v safety-kleen canada: truckdriver hazardous material; no managerial or supervisory functions, so not vital organ of corp
    • personal vs corporate interest
      • canadian dredge and dock: negotiation by senior officers; employee in fraud of corporate employer; held: corporation still liable because directing minds were not engaged in a scheme to deprive corp of all benefits
      • Oger v Chiefscope: corp not responsible for fraud for own benefit
  • criminal code amendments: broader than directing mind; definitions of senior officers and representatives
    • senior officer was knowing involved
    • senior officer failed to take all reasonable measures to stop the offence
  • trigger for corporate liability
    • senior officer acting within their authority is party to offence
    • senior office directs others to commit the offence
    • senior office does not take reasonable steps stop an offence
  • negligence
    • representative is party to offence and senior office’s activities area marked departure from the standard of care of a reasonable person in those circumstances
  • sentences
    • considers the realization of advantages and whether regulatory penalties were imposed
    • considers impact on innocent employees
  • tort liability
    • vicarious liability:
      • legal status of employee and not an independent contractor
      • acting in the course of employment
    • SCC: “the relationship between the tortfeasor and the [corp] must be sufficiently close that vicarious liability is appropriate”
      • also “tort is sufficiently connected to the tortfeasor’s assigned task” (closely and materially relevant)
    • SCC broadened vicarious liability
    • Bazley v Currey: corp held liable for bartender’s assault on customer; corp put bartender in position of risk to further a business interest
  • direct liability: direct liability for not merely employee but someone acting as the mind and will
    • nelitz v dyck: chiropractor and insurer; no consent; sued for battery; no vicarious liability since contractor, insurer might be held directly liable since it retained chiropractor
  • contractual liability: law of agency
    • agents act within the authority given
  • common law rules around agency
    • some connection with corporate principal: cannot bind corporation unless authorized
      • actual authority
      • apparent/ostensible authority
    • SMC electronics v akhter computers: director of sales title gave implied authority
    • Re accra wood products: agreed to security interest without knowing about scope of actual authority; since actual authority allowed this, knowledge is irrelevant
      • Indoor management rule  
    • Canadian laboratory supplies v engelhard industries: employee representation and apparent authority; no authority to buy platinum but entered contract; acquiescence to a person with certain authority may constitute apparent authority
    • Freeman & Lockyer v Buckhurst park properties: board member hired architects who were unpaid; corp claimed board member had no authority to do this; apparent or usual authority associated with roles and common title
  • indoor management rule (Turquand): constructive notice
    • persons dealing with corp has no obligation to ensure corp has gone through internal procedures
    • internal compliance is a matter for indoor management
    • only actual restrictions on public documents on restricting authority would limit this
  • statutory reform: abolished constructive notice
    • cbca s 17-18: leaves open possibility that knowledge may be deemed from circumstances
    • allows third parties to succeed in claims against corp
    • codifies common law rule
    • rationale: indoor management rule and third parties not having to worry about corporate housekeeping
      • incentivizes corps to keep public records up to date
    • third parties cannot deal with defective authorities (Ruben v Great Fingall Consolidated)
      • no expired/illegitimate directors that obviously undercuts apparent authority: Morris v Kanssen
  • M&A: merger, spinoff, share/asset acquisition

Corporate Social Responsibility

  • Corporate social responsibility
    • Interests of groups other than shareholder
    • E.g. environment, social consequence, etc.
  • BCE v 1976 Debentureholders (scc 2008)
    • Interest of shareholder and other stakeholders are “coextensive”
      • Conflict: interest of the corp
    • Obligation to treat stakeholders fairly in accordance with fiduciary relationship with corp
      • considering these expectations can help directors discharge their duties, since “the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation”
  • s 122(1)?
    • Also check finances: capital test and insolvency test
  • Economic analysis
    • Corp is the nexus of contracts between stakeholders
    • Most analyses side with shareholders as sole fiduciaries
      • Doesn’t respect creditors or employees and cannot bargain
    • Shareholders can be protected through other legal mechanism
      • Vote, meeting proposals, info, remedies
      • Market rules can be self-governing
  • Managers and non-shareholders
    • BCE
    • How to deal with conflicts between stakeholders?
    • Peoples Department Store: discretion to grant creditors oppression or derivative action for breach of fiduciary duty in cases of near insolvency
      • Royal Trust Corp of Canada v Hordo: debt action should not routinely be turned into oppression actions
    • Question of manager competence to respond to non-shareholder interest
  • Shareholder primacy as accommodating other interests
    • Dividend payouts and attracting investment?
  • Other ways legal rules can improve corporate social responsibility
    • Shareholder proposals
      • US heavily favors shareholders
    • Corporate disclosure
    • Enhancing board diversity

Outside Professionals

CBCA, section 20

CBCA, sections 122 and 123

CBCA, sections 155-172

  • shareholders can appoint and remove auditors (obca 149; cbca 162, 165)
    • auditors assess the financial statements in place and its accuracy
      • CBCA 155-172: refer to for notices and financial disclosure
    • some auditor exceptions: non-reporting companies or low gross revenue companies (although questioned by scholars)
    • qualification and independence of auditors
    • removal of auditor: vote or by court (oversight by Canadian Public Accountability Board)
  • auditor has a right to attend meetings (obca 151(1); cbca 168.1)
    • standards set by Canadian Auditing and Assurance Standards Board
    • answers questions at shareholder meetings
    • duties of auditor can be enforced by courts (cbca 247; 253 obca)
  • liability of auditors
    • no special standard of care
    • standard may be specified in the articles
    • traditionally, just a watchdog and not bloodhound; entitled to assume they are honest, and to rely upon their representations (Re Kingston Cotton)
    • test: no need to investigate unless suspicion aroused
    • Fomento v Selsdon (Denning): see that errors are not made… inquiring mind
    • Haig v Bamford (Dickson obiter): modern auditing requires more
    • Hercules Management v EY (La Forest): Anns-Kamloops test; may be proportionately liable
    • Livent Inc v Deloitte & Touche: developed a high-profile theatre that fell apart due to fraud; Deloitte issued clean auditing statements and sued for negligence; court focused on professional skepticism and Deloitte’s failure
  • good faith and professional skepticism
    • in the absence of evidence to the contrary, auditors could accept records and good, complete, truthful
    • auditor responsible for detecting errors or fraud/irregularities
    • must have procedure for detecting and not jump on low level risks
    • e.g. Deloitte failed to review the 1996 budged; failed to do more than accept management’s estimates for revenue; failed to test accuracy of estimates; failed to test reasonableness of forecasting (summation: Deloitte became too accommodating to its client; Puri picks up on this point in an article)
      • management should not decide accountants and whether they should be dismissed
    • cbca 171; obca 158: audit committee in large corps
      • majority cannot be employees of company

Policy points

  • fact driven: reasonable expectation of parties
    1. commercial practices
    2. nature of corp: size and structure
    3. past and purpose of relationships
    4. explicit or objective intention
    5. distributing risk and market efficiency
    6. equity and fairness