1. HISTORY AND THEORY...................................................................................................................................32. PARTNERSHIPS.................................................................................................................................................. 4

A. Common Law Partnerships......................................................................................................................4B. Civil Law Partnerships................................................................................................................................4C. LPs/LLPs/LLCs.............................................................................................................................................. 4

3. CORPORATIONS AND THE CONSTITUTION COOPERATIVES?.....................................................4A. The Constitutional Framework..............................................................................................................4B. Legislative Power to Create Corporations.........................................................................................4

a. The Provincial Power..............................................................................................................................4b. The Federal Power...................................................................................................................................5

C. Regulating corporate activity.................................................................................................................. 5a. The Provincial Powers........................................................................................................................... 5

John Deere Plow c Wharton, 1914.......................................................................................................5Bonanza Creek Gold Mining Co v The King, 1916..........................................................................5Multiple Access Ltd v McCutcheon, 1982..........................................................................................5

b. The Federal Powers................................................................................................................................ 6Multiple Access Ltd v McCutcheon, 1982..........................................................................................6

D. The Canadian Charter of Rights and Freedoms..............................................................................6R v Agat Laboratories Ltd, 1998............................................................................................................7Little Sisters Book & Art Emporium v Canada, 1996...................................................................7Slaight Communications inc v Davidson, 1989...............................................................................7

4. BUSINESS TRUSTS............................................................................................................................................. 75. CORPORATE PERSONALITY..........................................................................................................................7

A. The Corporation as a Legal Person (Corporate Personality)....................................................7a. What is a corporation............................................................................................................................. 7b. The principle of corporate personality...........................................................................................8

Welling, Corporate law in Canada: the governing principles, Indian idol case, 1925...8Macaura v Northern Assurance.............................................................................................................8Kosmopoulos v Constitution Insurance co of Canada, 1983....................................................9Lee v Lee’s air farming Ltd, 1961, New Zealand.............................................................................9

c. Questioning the principle: the corporate veil theory.............................................................10Clarckson Co v Zhelka, 1967................................................................................................................ 10Littlewoods Mail order stores Ltd v Inland Revenue Commissioners, 1969..................10Transamerica Life Insurance Co of Canada v Canada Life Assurance, 1996...................10Rotman, Fiduciary Law...........................................................................................................................11Welling, Corporate law in Canada: the governing principles................................................11

B. Corporate personality: Some innovative approaches................................................................11Einhorn v Westmount Investment ltd, 1969.................................................................................12McFadden v 481782 Ontario Ltd, 1948..........................................................................................13369413 Alberta LTD v Pocklington, 2000......................................................................................13ADGA systems international inc v Valcom LTD, 1999..............................................................14

6. CORPORATE PURPOSE................................................................................................................................. 14A. What is the purpose of corporations? Whose interests matter for the purposes of corporate law?...................................................................................................................................................... 14B. What is the corporation?........................................................................................................................ 16

7. CORPORATE LIABILITY: TORT/CRIMINAL.........................................................................................17

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Canadian Dredge & Dock v The Queen, 1985 SCC......................................................................19R v Fitzpatrick’s Fuel Ltd, 2000..........................................................................................................19

8. CORPORATE LIABILITY: CONTRACT LAW..........................................................................................20A. Introduction................................................................................................................................................. 20B. Theories re: corporations getting out of contracts.....................................................................20

a) Restrictions in the Corporate constitution on Corporate capacity.....................................20Communities Economic Development fund v Canadian Pickles Corp, 1991 SCC.........21Re: John Beauforte (London) ltd, 1953 UK....................................................................................21

b) Contracting through corporate agents............................................................................................21Schwartz v Maritime Life Assurance Co, 1997.............................................................................22

9. INCORPORATION............................................................................................................................................ 23A. Registration.................................................................................................................................................. 23B. Minimum requirements of corporate constitution.....................................................................24C. Continuance: corporate emigration and immigration...............................................................24D. Amalgamation: Corporate combination..........................................................................................24E. The corporate name.................................................................................................................................. 24F. Pre-incorporation contracts..................................................................................................................24G. Attempts at statutory reform re: pre-incorporation contracts.............................................24H. Pre-incorporation contracts in CVL...................................................................................................24

10. ROLE OF MANAGEMENT............................................................................................................................. 24A. The role of management.........................................................................................................................24B. Directors: myth and reality....................................................................................................................25C. Controls on management........................................................................................................................25D. Assuming management positions.......................................................................................................26E. Management compensation.................................................................................................................. 26

11. THE OBLIGATIONS OF MANAGEMENT.................................................................................................26A. Duty of care................................................................................................................................................... 26

a) Introduction................................................................................................................................................ 26b) Origin of duty of care in Corporate law..........................................................................................27c) Scope of duty of care in corporate law............................................................................................27d) Beneficiary of duty of care in corporate law................................................................................27e) The standard of care................................................................................................................................27f) The standard of care at CML vs The standard of care under CBCA.....................................27

Soper v Canada, 1997 FCA.....................................................................................................................28Peoples v Wise, 2004 SCC......................................................................................................................28

B. Duty of loyalty: duties of managers...................................................................................................29a) Introduction............................................................................................................................................. 29b) Duty of loyalty......................................................................................................................................... 29o CBCA, 122(1)(a)................................................................................................................................29Peoples v Wise, 2004 SCC......................................................................................................................30

c) Corporate fiduciary duty: improper purposes.........................................................................30Hogg v Cramphorn, 1967 UK............................................................................................................... 31Teck Corp v Millar, 1972........................................................................................................................31

d) Four ways to breach duty of loyalty..............................................................................................31Aberdeen Railway..................................................................................................................................... 32NorthWest Transportation Co v Beatty, 1887..............................................................................32

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Peso Silver Mines Ltd Cropper, 1966 SCC......................................................................................34Canadian Aero v O’Malley, 1974 SCC................................................................................................34Olympia & York v Hiram Walker, 1986...........................................................................................36

e) Independent directors.........................................................................................................................36Brant Investments v Keeprite inc, 1991.........................................................................................37

f) Forgiving disloyalty – ratification, revisited..............................................................................37Hollinger International Inc v Black...................................................................................................38

12. MAJORITY RULE.............................................................................................................................................. 39A. Introduction................................................................................................................................................. 39B. Perennial problems of shareholder control...................................................................................39C. Directors......................................................................................................................................................... 39D. Shareholders................................................................................................................................................ 40E. Responses to problems re: shareholders........................................................................................40F. Shareholders meetings............................................................................................................................ 40

a) Notice requirements.............................................................................................................................40b) Location of meetings............................................................................................................................ 40c) Voting at a meeting............................................................................................................................... 40d) Proxy voting............................................................................................................................................. 40e) Shareholder intiatives......................................................................................................................... 40f) Types of meeting: ordinary business/annual meetings.......................................................40g) Types of meeting: extraordinary business /special meetings...........................................40h) Shareholder accountability............................................................................................................... 40

13. MINORITY PROTECTION............................................................................................................................. 40A. Standing and Representative Action.................................................................................................40

a) Shareholder accountability: introduction...................................................................................41Greehalgh v Arderne Cinemas, 1951 UK.........................................................................................41

b) Corporate law remedies: standing.................................................................................................41First Edmonton Place v 315888 Alberta Ltd, 1988....................................................................42

c) Representative actions: general, the prerequisites................................................................42d) Representative actions VS Personal actions..............................................................................43

Farnham v Fingold, 1973.......................................................................................................................43Goldex Mines v Revill, 1974..................................................................................................................44

B. Oppression remedy................................................................................................................................... 44a) Oppression 1: Statutory framework..............................................................................................44 CBCA 241(3)......................................................................................................................................... 45

b) Oppression 2: Meaning........................................................................................................................45c) Oppression 3: Relationship with representative action.......................................................49

First Edmonton Place v 315888 Alberta Ltd, 1988....................................................................49d) Oppression 4: Relationship with fiduciary duty......................................................................50

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1. HISTORY AND THEORY

2. PARTNERSHIPS

A. Common Law Partnerships

B. Civil Law Partnerships

C. LPs/LLPs/LLCs

3. CORPORATIONS AND THE CONSTITUTION COOPERATIVES?

A. The Constitutional Framework Pouvoirs législatifs et provinciaux légifèrent la création de corporations et la régulation

de leurs activités. Mais différences entre les pouvoirs provinciaux et fédéral. Suffit que la loi adoptée par la province soit dirigée premièrement à la création &

régulation des corporations pour qu’elle relève de sa compétence.

B. Legislative Power to Create Corporations a. The Provincial Power

92(11) LC 1867: “make laws in relation to the incorporation of companies with provincial objects”

o “Companies” : peu de différence légale avec le terme “corporations”o “provincial objects”:

Re: Incorporation of Companies in Canada, 1913 “objects”: le but organisé de la compagnie; le business que la corporation est autorisé

à poursuivre dans le but d’obtenir un profit. o “with provincial objects”: exclut de la compétence provinciale les corporations

d’intérêt et d’importance canadienne”o La province ne peut légiférer que si l’activité de la corporation peut être

considérée comme tombant sous le champ provincial. Une corporation peut exercer son activité en dehors de la provinces si l’autre

territoire accepte les corporations étrangères. Corporation n’a dans ce cas que les pouvoirs que l’État étranger lui confère.

o Province ne peut pas conférer à ses corporations des pouvoirs allant au-delà de la province: cela dépasse ses compétences.

Distinction entre “capacité” et “pouvoir”: Bonanza Creek Gold Mining Co v The King, 1916 Seuls les pouvoirs et droits conférés par la province aux corporations peuvent être

exercés exclusivement dans la province. Mais la capacité d’accepter les pouvoirs et droits extra-provinciaux n’est pas limitée à la

province.

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Donc: La province ne peut conférer des droits et des pouvoirs à la corporation qu’à l’intérieur de sa limite territoriale. Au-delà, elle ne peut que conférer à ses corporations la capacité d’acquérir de tels droits en dehors de la province.

b. The Federal Power Pouvoir fédéral de légiférer dans le domaine des corporations découle du pouvoir

résiduel prévu dans le préambule “peace, order and good government”. Quelle est l’étendue de ce pouvoir?

Citizens Insurance Co of Canada v Parsons, 1881 L’incorporation des compagnies d’objet autre que provincial relève de la

compétence fédérale.

C. Regulating corporate activity Fédéral et provincial ont la compétence de réguler les comportements des corporations

créées. Mais dans quelle mesure le fédéral ou le provincial peuvent-ils réguler les comportements des corporations relevant d’autres jurisdictions?

o Regarder le “pith and substance” d’une loi (lien avec 91 ou 92 LC 1867)? o Doctrine de la prépondérance fédérale: en cas de conflit entre provincial et

fédéral sur une législation, seule la législation fédérale s’applique Compagnie Hydraulique de St Francois, 1909

Esso Standard inc v JW Enterprises: compétence fédérale exclusive pour l’incorporation des compagnies ayant un obet autre que provincial et affectant seulement de manière incidente la propriété et les droits civils.

a. The Provincial Powers John Deere Plow c Wharton, 1914 BC exigeait que corporations extraprovinciales (incluant corporations fédérales)

aient une licence provinciale pour exercer leurs activités. o Cette restriction n’est pas conforme à LC 1867.

91(2) LC 1867 permet au fédéral seul de réguler le commerce par voie législative. La compétence “propriété et droits civils” tombant sous la compétence provinciale doit être interprétée restrictivement.

o Province ne peut pas légiférer pour priver la corporation fédérale de son statut et de ses pouvoirs.

o Mais corporation exerçant en dehors de sa province d’incorporation doit respecter les lois de la province.

Une législation provinciale ne peut abolir le statut et les pouvoirs conférés à la corporation par la législation fédérale.

Bonanza Creek Gold Mining Co v The King, 1916 Une compagnie incorporée dans une province en conformité avec 92 LC 1867 a-t-elle la

capacité d’acquérir et exercer des pouvoirs et droits en dehors des limites territoriales de la province?

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Rien n’empêche la province de conférer à la corporation une capacité analogue ou identique à celle d’une personne physique, qui peut ainsi acquérir les droits et pouvoirs garantis par les autres provinces.

Multiple Access Ltd v McCutcheon, 1982 Il n’y a conflit au sens de la doctrine de la prépondérance fédérale que lorsque les

législations fédérales et provinciales s’opposent de telle manière que se conformer à l’une résulte en une violation de l’autre.

Ici, les deux lois (Canada Corporations Act et l’Ontario Securities Act) s’appliquent à corporation fédérale.

Canadian Indemnity Co De la même façon, semble essayer de permettre une plus large réglementation

provinciale des corporations. Mais retournement de situation dans Re: ss 92 and 92 of the BNAA 1867

où la Cour établit que les provinces ne peuvent pas réguler l’usage du nom d’une corporation fédérale.

o Donc provinces ont large pouvoir pour limiter les corporations d’autres provinces, mais soumises à des limites importantes en ce qui concerne les corporations fédérales.

b. The Federal Powers Aucune disposition ne confère au Parlement fédéral une compétence expresse en ce qui

concerne la régulation de l’activité des corporations, même si toutes corporations sont soumises à des lois fédérales, peu importe le lieu d’incorporation.

Corporations principalement affectées par les lois provincialeso Car provinces ont large pouvoir sur questions localeso Car conception restrictive de la compétence fédérale “trade & commerce”

(Canada v Alberta, 1916). Est-ce que le pouvoir fédéral de créer des corporations inclut celui de les réguler? Multiple Access Ltd v McCutcheon, 1982 Est-ce que les règles concernant l’insider trading peuvent-être incluses dans une

loi d’incorporation fédérale et s’appliquer aux corporations fédérales? Loi fédérale est identique à la loi ontarienne mais ne doit pas être déclarée invalide car

offre une protection en ce qui concerne le commerce des actions dans les provinces n’ayant pas de telle régulation.

o Tombe sous le champ fédéral, ne fait pas simplement partie de la compétence provinciale de “propriété et droits civils”, relève plutôt du droit sur les corporations.

La législation sur le insider trading fait partie du droit des sociétés et relève ainsi de la compétence de l’autorité constitutive de la corporation.

D. The Canadian Charter of Rights and Freedoms Corporations se voient généralement accorder le statut de personnes donc de nombreux

articles de la Charte s’appliquent aux corporations.

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Les termes “chacun”, “tout inculpé, “public” ou “toute personne” incluent les corporation.

o The question of whether a given Charter right applies to a corporation turns on legislative intent, whether Parliament intended for the corporation to enjoy a given right.

But where a given right cannot protect a corporate interest, it cannot be held by a corporation.

o If it could apply, look at the intention of the drafters. R v Agat Laboratories Ltd, 1998 Débat sur l’article 7, Agat dit que le manquement de la couronne de produire certains

documents affecte sa capacité à produire argumentaire et défense solides. Art 7 de la Charte s’applique aux corporations.

o Survol historique et jurisprudentielo La possibilité d’une corporation d’invoquer la Charte dépend de s’il y a un intérêt

à faire profiter les corporations d’une certaine disposition et si celui-ci est en accord avec l’objectif de la disposition en question.

o Si le droit permet la poursuite criminelle de corporations comme d’individus, il doit leur accorder la même protection que représente le droit à un procès équitable (11b)

o Tout accusé (corporation ou individu) a un intérêt à produire une défense lorsqu’accusé.

Little Sisters Book & Art Emporium v Canada, 1996 Une fois que la corporation réussit à soulever un moyen d’inconstitutionnalité, elle peut

en soulever un autre sans que le fait qu’elle soit une corporation ne s’y oppose.

Slaight Communications inc v Davidson, 1989 Art 8 s’applique implicitement aux corporations.

4. BUSINESS TRUSTS

5. CORPORATE PERSONALITY

A. The Corporation as a Legal Person (Corporate Personality)

a. What is a corporation An artificial person, treated as a person in legal analysis, can do many similar things to

human beings. o Treated separately from their members.o Can attract, alienate, hold or exercise legal rights, legal powers and liabilities.o Can form contracts, breach them and therefore be sued for these breacheso Can be tortfeasors: commit civil wrongs, and be held liable by their victims.o Can commit criminal wrongs: be held criminally accountable.

How do corporations act?

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o Can’t do anything on their own. Can only be made to act through representatives – persons authorized to act on behalf of the corporation.

o Who? Directors and officers: directing minds who have the authority to act on

behalf of the corporation. Officers’ authority is delegated from the board.

Corporate personality: 15(1) CBCA; 301-303 CCQ.

b. The principle of corporate personality Main consequences of incorporation is the creation of a new legal person, separate in

law from its shareholders. More than just a partnership.

Salomon v Salomon, 1897 UKHL : basic principle of the corporate personality settled. Was Salomon liable personnaly for the debts of his corporation (which had 7

shareholders)? Registration : corporation comes into existence at that moment, which creates a

separate legal person. Concentration in shareholding (S had 20000 shares, and his wife and children 6): a

corporation is not disqualified from legal personality because the bulk of the company is concentrated in one person.

Legal personality and pre-incorporation enterprise : a corporation is at law a different person from its constituents (directors, shareholders, officers) even if the business itself is substantially as it was before incorporation.

Corporation as independent legal person : corporation is not an agent or a trustee of its constituents. It’s a legal person in its own right.

Implications of personality : all liabilities incurred by the corporation are the corporation’s own. Limited liability

This is commonly reinforced by sections 15(1), 45(1) CBCA.

Welling, Corporate law in Canada: the governing principles, Indian idol case, 1925o Hindu deity: Idol consecrated as a family divinity is a legal person under

hindu law. Has a juridical power of suing and being sued.o Its interests are attended to by the person who has the deity in charge (in

law= manager).o It is like an individual = cannot be owned. o Look at what are the best interest of the deity.

Deity should be represented by a disinterested person appointed by the court to have its interests defended. Indeed, a corporate manager can only be relied on to protect the interests of the legally personified corporation where its self-interest conflicts with that of the corporation.

Deity has legal rights to be protected. Practical consequences: all actions can be attributed to the corporation and not to the

individuals.o Directors and managers represent the directing mind and will of the company

and control what it does.

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Macaura v Northern Assurance Question of lifiting the corporate veil, request made by the corporation’s owner. Insurance Co refuses to pay insurance because property was not individual holding the

policy’s property – it was the property of the corporation. Even as shareholder has not insurable interest in the property.

o Plaintiff’s the sole shareholder of the company. How to characterize the interests of shareholder?

o Though economically interested in the property had no insurable interest in the property.

The sole owner of a single-shareholder, single-director company has no insurable interest in the assets of that company. The company has a separate legal existence.

o Rule later rejected in Kosmopoulos.

Kosmopoulos v Constitution Insurance co of Canada, 1983 K sole shareholder of incorporated business, not really aware of the consequences of

incorporation. Insurance purchased in his name, not the corporation’s. Seeks to recover insurance payment for fire damage to corporate assets.

On insurable interest of a shareholder : The concept of insurable interest was broader than in Macaura.

o Rejects Macaura: A sole shareholder, though lacking any proprietary interest in the corporation’s assets had an insurable interest in them.

o Court says it’s obvious that where all shares are concentrated in one person, that person has a real and robust economic interest in recovery from the insurance company.

On corporate veil : o General rule is that a corporation is a legal entity distinct from its shareholders.

Lifting the corporate veil: disregarding the principle.o Veil piercing follows no consistent principle. o But IF the veil is to be lifted at all that should only be done in the interests

of third parties, not incorporators who have made a bad decision. o Here, just an incorporator seeking a disregarding of corporate personality – not

allowed. Corporate personality upheld.

Lee v Lee’s air farming Ltd, 1961, New Zealand L died in course of employee duties but was also shareholder, director. Held that you can be an employee, shareholder, director, officer of a corporation

all at once.o A man acting in one capacity can give order to himself in another capacity. o The fact that he was a director is no impediment to his entering into a contract to

serve the company. The company was employing L. o Corporation is a separate legal person and can enter into legal contracts of their

own right.

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

A member of a company can contract with a company of which he is a shareholder. The directors are not precluded from being an employee of the company for the purpose of workmen's compensation legislation.

c. Questioning the principle: the corporate veil theory Doctrine of lifting the corporate veil : situations in which judges have ignored the

existence of the corporate person and fixed liability of the corporation on the managers or the shareholders.

o Criticized : because no underlying theory to answer questions of where and why corporate veil piercing should happen.

o But there are trends, cases where courts are more likely to pierce the veil : Fraudulent conduct on part of principals of the company. Corporation undercapitalized: intentionally not enough money to satisfy

reasonably foreseeable debts. Corporations set up for an illegal/questionable purpose. Where there are non-arms length transaction between parent and

subsidiary corporations.o Source of the power of the court to lift the veil:

Inherent jurisdiction to prevent miscarriage of justice or abuse of right. “concession theory”: state grants privilege of incorporation, so retains

power to define the outside limits of this privilege. See above Kosmopoulos, 1987.

Clarckson Co v Zhelka, 1967 Principle of Salomon (legal person created by incorporation is an entity distinct from

its shareholders and directors) generally rigidly applied. But exceptions: where it would be flagrantly opposed to justice to apply the

principle. o Eg: where company is formed for the express purpose of doing a wrongful or

unlawful act. o Lift the corporate veil where the compay is the mere agent of a controlling

corporator.

Littlewoods Mail order stores Ltd v Inland Revenue Commissioners, 1969 “the courts can and often do draw aside the veil. They look to see what reality lies

behind.”

Transamerica Life Insurance Co of Canada v Canada Life Assurance, 1996 Corporate veil not lifted in this case to hold the sole shareholder liable. Court reaffirms importance of corporate personality. 3 circumstances to lift the corporate veil (not finite):

o Where court is required to disregard corporate personality due to the express provisions of a statute.

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o Where company is being used as a shield for fraudulent or improper conduct (is there conduct akin to fraud that would otherwise unjustly deprive claimants of their rights?)

o Where the corporate entity is completely dominated and controlled (more than mere ownership - complete domination is necessary).

This is at issue here: would rarely disregard distinct legal personality of parent and subsidiary companies.

Here, not parent company not in complete control of the subsidiary.

Rotman, Fiduciary Law The relative ease with which incorporation may be obtained potentially allows for

the abuse of the corporation’s independent legal existence by using the corporate vehicle as a means to shield the socially or economically inappropriate conduct of its investors

o Therefore the idea of piercing the corporate veil has been developed. Other test for lifting the corporate veil :

o “when the conception of corporate entity is employed to defraud creditors, to evade an existing obligation, to circumvent a statute, to achieve or perpetuate monopoly, or to protect knavery or crime in order to do justice between real persons”.

o A reasoned and legally sustainable basis for ignoring the legal implications of incorporation must be demonstrated.

o Inequitable conduct must be shown to be inextricably linked with corporate activity and be inimical to the purposes for which the separation of corporate and shareholder liability is granted through incorporation → high threshold that will not be simply met because a result is unfair.

Welling, Corporate law in Canada: the governing principles The reasoning in Transamerica has mostly been used recently. Kosmopoulos: But the law “follows no consistent principle. Salomon principle is not

enforced when it would yield a result too flagrantly opposed to justice, convenience, or the interests of the revenue.”

B. Corporate personality: Some innovative approaches

Inducing a breach of contract Runs parallel to veil piercing but doesn’t actually involve veil piercing.

o Cases where a constituent or employee of the corporation has committed an intentional tort – here, the CML tort of inducig breach of contract.

o When can a corporation be found liable for inducing breach of contract? o When may limited liability be circumvented for liability to be placed on a

constituent who would normally be protected via principle of limited liability?

What if the person “knowingly inducing a breach of contract” is a corporation? o CML tort of inducing breach of contract stems from:

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Quinn v Leathem, 1901 HL: No one should interfere in contractual relationships without good reason. If you do you

are guilty of a tort. Any interference without justification = tort.

Where a corporation has breached a contract of its own, the corporation will be directly liable under contract law for the breach.

o But when might we find another person liable (directing mind, officer?). o Who ought to bear the tortious liability for inducing the breach? The corporation

or directing minds? Both?

Garbutt Business College ltd v Henderson Secretarial School Ltd, 1939: Teacher Henderson worked for plaintiff Garbutt College. Henderson incorporated a new

rival school, in breach of a restrictive covenant contracted with Garbutt. G sues H for breach of contract and the new school for having induced H to breach his contract.

H liable in contract for breach of contract. Corporation HSS ltd however cannot be liable in contracts, but may be liable in tort for

inducing breach of contract.o The corporation, through the agency of H, induced a breach of contract by H.o Must be liable in tort upon the principle of Quinn v Leathem because company

aided and encouraged and paid to break its contract with the plaintiff deliberately and knowingly: the corporation wrongfully employed its co-defendant.

Test for inducing breach (Quinn v Leathem):o Interference with contractual relationships without justification. o Needs to be willful or deliberate – intentional tort. “deliberate” can be satisfied

by mere “knowledge”. o Notably broad: embraces any kind of interference with a contract, even if it does

not lead to a breach of contract. Any corporation is a separate legal person that acts through the agency of a

directing mind. If through this agency, it interferes with a contract to which it is not a party, it should be held liable.

What if the breacher is the corporation and the inducer is the shareholder? Einhorn v Westmount Investment ltd, 1969

o Bs in control of W ltd, induce W to breach contract with E. Knowing that E was about to seek recovery from W, Bs siphoned money away from W, so now W incapable of satisfying its corporate liabilities. So E sues W ltd for breach of contract but also Bs for inducing breach of contract.

o The shareholders of the corporate entity can be held liable for inducing a breach of contract by the corporation of which they are shareholders when there has been deliberate interference in the execution of the contract.

Directing minds are agents of the corporations and they should not be allowed to use corporate personality as a shield to escape liability for causing corporations to breach contracts.

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o Modern test for inducing breach of contract : elaboration of Quinn v Leathem – to establish liability for inducing a breach of contract there must be

Interference in executio of the contract Interference must be deliberate and direct.

o Lifting of the corporate veil: Officers Bs not protected from liability here because conduct of Bs unjustly deprived E of his rights. Bs should be personally liable for interfering with the contract.

While company directors are referred to as “agents” the cold fact here is that they control the company, and they are guilty of intentional tortious acts. They cannot escape personal liability by the device of clothing themselves in a corporate veil of their own spinning.

McFadden v 481782 Ontario Ltd, 1948 Principals induced breach of contract by fraudulently conveying money to themselves as

shareholders. Employee sues principals personally in tort for inducing corporation to breach its contract with him.

There is an exception to the principle set in Einhorn v Westmount ltd: if the director/officer is acting in the best interest of the corporation, there won’t be liability.

o Inducement to breach contract is justified where taken as a duty to act in the best interest of the company.

o This stems from Said & Butt, see also Pocklington below. o However here, principals were acting in their own self-interest, so liable

personally as agents of corporation; corporation not liable.

7 elements to establish that a person has intentionally induced a breach of contract

369413 Alberta LTD v Pocklington, 2000 Pocklington acted in his own interest and intentionally induced the corporation to

breach the contract. P therefore found guilty of inducing G ltd to breach its contract with AB.

New test set out to induce the breach of contract:o Existence of Ko Knowledge or awareness by the defendant of the Ko Breach of K by contracting partyo Defendant induced the breach o The defendant, but its conduct, intended to cause the breach

Wilful or deliberate conduct is not required – intent can be inferred where breach of contract would be a foreseeable result of your behaviour.

Intent may also be established in cases of wilful blindness.o The defendant acted without justification (see Said v. Butt)

Defence of justification: available when the defendant caused the breach while acting under a duty imposed by law or in the best interest of the corporation (extended rule from Said v Butt from employees to directors) – so directing minds pretty well protected now if they are acting well and

13

making good strategc decisions about whether to repect corporation’s obligations.

o The plaintiff suffered damages

What if the directors/officers by inducing a breach of contract were fulfilling fiduciary duties to the corporation mandated by statute?

ADGA systems international inc v Valcom LTD, 1999o V ltd persuaded employees of ADGA inc to come to V. Action against the sole

director and 2 senior employees of V in personal capacity for inducing breach of contract and breach of fiduciary duty between ADGA employees and their employer. V wants to use defence of justification, saying it was in the best interest of the company.

o Defense of justication: court explains policy reasons, why directing minds should be able to seek protection.

However says this case is different: would be contrary to public policy to allow the defense.

Tries to draw boundaries around defense of justification. Voluntary creditor VS involuntary creditors:

Would be wrong to allow directing minds to protect themselves behind the justification defence when dealing with involuntary creditors.

o Here ADGA is in a position of involuntary creditor because could do nothing to protect itself, had not consented to behaviour of the employees.

6. CORPORATE PURPOSE

A. What is the purpose of corporations? Whose interests matter for the purposes of corporate law?

Corporations facilitate business, earn profits due to being vehicles for investment that insulate investors from liability.

What remains contentious : the processes by which corporations seek out profits, for whose benefit those profits are sought, and to whom corporations may be found liable.

Question of the corporate purpose : arises in the context of conflict:o Internal conflict: between or among constituents.o External conflict: between and the corporation and outsider.

2 theories exist. Shareholder primacy/maximization (Berle – Columbia)

o They’re the beneficiaries of corporations.o Corporate purpose: interests of shareholders as a group, not as individuals.o Shareholders: seeking the greatest possible return on their investment

through increased share value and dividend payments.

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o So the manager must act in the best interest of shareholders. Objections to this: will lead managers to disregard other groupss of

people’s interests (general public etc).o Contractarian analysis/Shareholder primacy :

Dodge v Ford Motor, 1919 US Ford wanted massive re-investments, restructuring. Minority shareholders Dodge claim

F had duty to distribute accumulated profits to shareholders and its purpose is not to pursue charitable ends.

Held that Ford has a duty to distribute accumulated profits to shareholders. Corporate purpose : limits the directional authority of directors. It is to create

profit for shareholders. Directors only have discretion re: the means of attaining this purpose.

Charitable purpose: A business can only engage in charitable activities if there is a business rationale for it.

o Not the case here: “business corporation is organized and carried on primarily for the profit of the shareholders, this does not extend to a reduction of profits”.

o Directors may not change the purpose of a corporation. “The purpose of for-profit corporations is to maximize profit for shareholders and

courts may interfere with business decisions where profit maximization is not the primary motivation of directors.”

o Shareholder primacy gives a clear rule in corporate decision-making. But it is inflexible: doesn’t give directing minds much discretion and fails

to account for broader social/economic realities that corporations work in.

o Dictum of Dodge not universally accepted , even in the US, emphasis on communautarian interests:

Shlensky v Wringley, 1968 USA. W, president of corporation, refuses to install lights because believes “baseball is a

daytime sport”, worries for the neighborhood. S alleges the corporation is acting for reasons contrary and unrelated to the business interests of the corporation.

Held that a minority shareholder cannot force the majority shareholder to put lights on the field to increase profits of the club.

A court cannot intervene with the business judgment of directors where there is no fraud, illegallity or conflicts of interests. Courts will defer to the business judgment rule (presumption of good faith; judges not business experts).

Court not satisfied that W’s motives were contrary to the best interests of the corporation.

Dodge not set aside – court says the situation is not the same as in Dodge, purposes were clearly charitable so totally counter the legal duty of corporation to return profits.

o Case is early example of the business judgment rule: extreme deferrence to board of directors.

Broader constituency (Dodd – Harvard)

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o Much larger constituency: shareholders, corporate employees, broader social goals, corporate social responsibility.

o Corporate managers must be the guardians of all the interests which the corporation affects.

o Rejects the notion that there is a clear decision-making norm to be applied in any situation of conflict.

o Corporate interests are inherently indeterminate: up to the directing minds to determine the interests on a case by case basis by balancing stakeholders’ interests.

o no legal obligation to maximize short or long term profits. o Policy makers (except in the US) tend to favour this approach. o Business judgment rule and duties of directors in Canada :

Peoples Departments Stores inc v Wise, 2004 SCC The stakeholders (not shareholders)’ interests should be considered when

considering the best interests of the corporation. May be legitimate for the board to consider the interests of shareholders, employees,

creditors etc = stakeholders. Emergence of distinctly Canadian approach to the question of corporate purpose.

o Managers and directors have obligation to the corporation, not shareholders. o Shareholder primacy rejected. Directors are the ones to make corproate interests

determinate on an ongoing basis by balancing the interests of various groups.

o Clarification & ampliphication of principles of Peoples v Wise :

BCE inc v 1976 Debentureholders, 2008 SCC Held that the board acted properly regarding the debenture holders’ interests, court will

not intervene. The best interest of the corporation must motivate directors’ decisions. Directors

may weigh the interests of competing stakeholders. o While directors must consider the best interests of the corporation, they may

also consider the impact of their decisions on shareholders. o Primacy of the corporation’s interests: If these conflict, the interests of the

corporation come first. o Courts should defer to the directors’ decisions under the business judgment

rule provided the decision falls “within the range of reasonable choices they could have made in weighing conflicting interests”. Case-by-case basis.

B. What is the corporation? Is a corporation one kind of private institution that is more or less like other social or

legal institutions? Or is it instead a product of private ordering/ something that draws on private law

concepts? Two theories exist. Contractarian theory

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o Corporate form = nexus of contract between interested actors. When a corporation is running, it is doing everything via contract.

o Corporations are the most important legal relationships. So we should see corporations as the result of private ordering, private choice (= contracts).

o View of shareholders as the owners of the firm. Anti-contractarian/entity theory

o Corporations are not just the product of private law, but also public law.o Concession theory – corporations could not do anything without the state. o Corporate forms as means to ensure directing minds’ fidelity to

corporations’ interests.o Rejects shareholder primacy norm, particularly shareholder characterization

as owners of the firm.

7. CORPORATE LIABILITY: TORT/CRIMINAL Personal versus corporate liability for civil wrongs

o Corporate liability in tort/criminal law turns not just on actions but on intention.o When & how is liability fixed on a corporation by/through the conduct of its

representatives? o Does and ought corporate liability turn on the question of whether a purpoted

member of the organization had the authority to act? o Does the law give us a coherent basis to ascribe intent to corporation?

Two theories of corporate liability o Canada is more of a mélange between the 2 theories.o Personal liability theory/ Personification doctrine

Corporation is understood to attract liability directly as a legal person through the conduct and mental state(s) of the directing minds.

How does it work? Contract – corporation personally binds itself when signed by a

directing mind Tort/criminal law – corporation personally attracts liability

through conduct/intention of directing mind, who personifies the corporation in his behabiour.

o Agency liability Dominant in the US. Corporation is not itself a person – have to

understand liability through agency. Corporation is the principal and representatives are agents, liability will

always be vicarious through agency law: corporation will be liable vicariously for acts of agents.

Corporation attracts liability indirectly by standing in relationship with agents. May be many agents authorized to act on behalf of the corporation.

Crime & tort: establishing intent

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o Tort situations – vicarious liability theory (agency law) is enough to establish corporate liability.

Exceptions: few torts where a mental element is needed = make the courts get involved in the state of mind of the accused.

Tort of disparagement of a competitor’s goods: requires false statements that reflect malice

Tort of defamation: defence to defamation requires that tortfeasor honestly believed the statement said to be defamatory and that there not be any malice.

Application of the personification doctrine for tort liability :

The Rhone v The Peter AB Widener Boat accident. Peter AB Widener under the command of the captain. Defendant

corporation wants to limit its tort liability thanks to provision of the Canada Shipping Act: not liable if the damage caused without the actual fault of the owner of the ship. Otherwise, owner bears unlimited liability.

o Held that the fault cannot be attributed to the defendant corporation through the captain’s conduct.

Ship owner must establish complete absence of fault to benefit from the protection of the limited liability provision. At what point is the fault of an employee to be treated as the fault of the company?

o For a corporation to be held liable, the employee who physically committed the offence must be the directing mind of the corporation.

o There can be more than one directing mind. Test is who has been left with the decision-making power in the relevant spere of corporate activity?

o Key factor that distinguishes directing minds from normal employees: capacity to exercise decision-making authority on matters of corporate policy.

Here, captain did not have governing authority over managemet and operation of the corporation.

No fault on the part of the corporation, protected by limited liability clause.

Test for directing minds : look at substance, asking what discretion the individual was given and what decisions they were allowed to make. What capacity/discretion does the employee have to exercise decision-making authority on matters of corporate policy?

Iacobucci J: finds personification doctrine too rigid. Don’t look at the hierarchy in the corporation, rather the status/function performed by the agent of the corporation. Must have managerial authority – strong discretion. Look at what the individuals have done. Broader than the UK approach.

o Criminal situations – personal liability theory because agency liability is uncomfortable fit.

must identify the corporate state of mind by locating the corporate brain.

Raises a lot of question:

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Whose mind personifies the corporation/ who has the corporate brain?

On what basis is personification established? Does the corporate constitution tell us who is a directing

mind/corporate brain? See below Canadian Dredge & Dock v The Queen.

Defences to corporate liability : Supposing that a directing mind has been found responsible are there circumstances where a corporation can point to a defence and avoid liability?

Canadian Dredge & Dock v The Queen, 1985 SCC Reaffirms “directing mind and will” test from The Rhone, flexible approach: even

junior individuals can count as directin minds so long as the “person has governing executive authority: has been left with the decision making power in a relevant sphere of corporate activity”.

Defences to corporate liability : o SCC rejects idea that there could be any defence on the basis that the conduct

in question was carried out contrary to express instructions from the corporation.

o Accepts a defence that the relevant individual was acting entirely for hiw own account and against the interests of the corporation. But limited to where corporation was not intended by the individual to derive any benefit from the individual’s actions and did not actually derive any benefit from the individual’s actions.

Criminal liability : does it make sense to subject corporations to it?o Holding corporations liable in addition to individuals silly because won’t

serve certain values re: punishment: Retribution: corporation liability doesn’t enable victims to feel like their

interests in retribution have been satisfied. Importance of deterrence: deterrence = punishment will make you less

likely to commit a crime. But does punishment have a impact on corporate behaviour? Unclear, because burden of criminal punishment is borne by the corporation.

Reducing recidivism: corporations don’t feel emotions.

Strict liability offences/ non-mens rea offences o Strict liability: makes a person legally responsible for the damage and loss

caused by his/her acts and omissions regardless of culpability (mens rea in criminal law)

So doesn’t make work with personification doctrine where you’re trying to find the corporate brain and the intent/mental state.

So for strict liability offences, plaintiff against corporation needs to prove actus reus – corporation will be found liable unless it can show due diligence or reasonable care (defences – not available in cases of absolute liability).

R v Fitzpatrick’s Fuel Ltd, 2000

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Corporation charged with serving beer. F sole shareholder, director and officer, but 2 employees who sold the beer although they were signs prohibiting it.

o Held: corporation liable for the wrongful actions of the employee. Employee considered a directing mind.

Offence: strict liability offence under the Liquor control act. Only defence possible is to show reasonable care or due diligence to avoid the commission of the offence (no need for mens rea – just actus reus).

o Here, employee was personifying the corporation when owner wasn’t here. Enough to make him the directing mind.

This case doesn’t seem to follow test for directing minds set in Dredge & Dock.

Statutory reforms o 2004 Criminal Code amendments have altered treatment of corporate criminal

mind: particularly in relation to offences where mens rea is one of recklessness or criminal negligence.

o CML rule does not allow for aggregation of multiple minds: in a large organization, may be impossible to find a single individual who was negligent in the relevant way.

o 12 years since these reforms, not a corporation convicted under the amendments ( 22.1, 22.2 Criminal code).

8. CORPORATE LIABILITY: CONTRACT LAW

A. Introduction Contractual liability: through agency theory today. Corporation never directly

concludes contract with outsider, always happen through agents. Authority of agents to bind corporations is limited in some way

o Principals have power to supervise their agents.o Principals can correct the course by giving new directions

Authority of directors found in corporate constitution, CBCA. Authority of officers/senior executive managers found in contract. But see below 2 theories re: corporations getting out of contracts.

B. Theories re: corporations getting out of contracts a) Posits that the corporation did not have the capacity to enter into a contract,

therefore contract never existed (contract is ultra vires)o For something to be ultra vires, it must have been impossible for it to have

happened. o See below (a) cases – but recent statutory reform to limit the scope of this

doctrine. b) Or, authority theory: corporation had capacity to enter, but it was

unauthorized. The subject matter fell beyond mandate of the agent, or the person wasn’t an agent at all.

o See below (b).

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a) Restrictions in the Corporate constitution on Corporate capacity

Communities Economic Development fund v Canadian Pickles Corp, 1991 SCC CEDF made loans to support economic development in remote communities contrary to

its power to lend under the Special Act. Those who received the money don’t want to pay back and just say the contracts were ultra vires.

o Held that the loan is void for reasons of being ultra vires because the corporation is created under statute (Special Act).

3 types of corporations: o CML corporations – UV doctrine doesn’t applied because CML corporations

established by royal prerogative have all the powers of a natural person. If it acts outside stated objects, acts are not invalid although legal action can be taken.

o Corporations created under statutes – only have those powers that are expressly or impliedly granted to them.

Actions are UV if the corporation acts beyond its powers. Powers of a statutory corporation are limited by the purpose of the

corporation as set out in the Special Act. Anything that’s outside this will not be valid;

o Corporations established by business statutes (QBCA, CBCA) Today, UV doctrine ablished because (i) incorporators have express

preference for broad scope of business interests and (ii) concern for creditors – UV creates trap for the creditors unaware of the constraints on capacity.

There are legitimate reasons for legislators to impose object clauses and for them to be enforced, must pursue only those objectives.

Re: John Beauforte (London) ltd, 1953 UK Company was making women’s gowns, then switched to making veneered panels, which

was not within the objects clause but was reflected on new letterhead as to inform third parties). Letterhead was used to place an order for supply of fuel, Company goes into liquidation and refuses to pay fuel bill.

o Held that the contract was ultra vires, the fuel company had constructive notice (letterhead) so constructive notice that the transaction was UV.

Demonstrates how creditors can get screwed by the UV doctrine, so we moved away from this (see above corporations established by business statutes).

Statutory reform of corporate capacity/incapacity There have been statutory changes due to concerns with UV doctrine since 1970. Legislators have shifted the burden of risk associated with corporate capacity from

creditors at CML to shareholders and incorporators.

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b) Contracting through corporate agents Corporate contracts analyzed through agency principles: individual is the agent of the

corporation. What’s his authority? Is he the appropriate type of agent through whom to arrange the sort of contract that was negociated?

Structure: corporation has a relationship with agent outsider negociates with agent outisder claims that negociations created a contract with the corporation.

3 different theories:o (a) Beginning 20th century, the actual authority theory: plaintiff needed to

produce clear evidence of a corporate agent’s scope of authority.o (b) Mid-century, the ostensible authority theory: corporations treated almost

like human principals.o (c) 21st century, corporate principals discriminated against in favour of

outsiders in agency matters.

(a) Actual authority Did the person who make the contract on behalf of the corporation actually have

the authority to do so?o Look at the relationship between agent and their principal. About the principal

granting authority to the agent. 3 ways to get actual authority for an agent:

o Express actual authorityo Implied actual authorityo Actual authority retroactively (ratification by principal of what the agent

already did that was beyond their authority at the time)

(b) Ostensible authority Creditors not typically in a position to know about relationships of actual authority. So

will be claiming that agent had apparent or seeming authority to act on behalf of corporation.

Not concerned about the actual relationship between principal and agento It’s about the relationship between principal and creditors.o What did the corporation enable or encourage the creditor to believe about

the agent? Did the corporate act to generate an appearance of authority? Test: Ostensible authority exist when the principal has made some representation

that an individual had the authority to act on behalf of the principal:

Freeman & Lockyer, 1974 UK Representation by the corporation to an outsider that the agent has the authority

to enter into a contract of that kind on the corporation’s behalf Representation made by someone who had the actual authority to manage the

business in general or with respect to the subject matter of the transaction. Outsider must show they relied on the representation and they were induced by

the representation to enter into the contract.

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Schwartz v Maritime Life Assurance Co, 1997 R had a relationship with ML, but no authority to bind ML. S gave R $$ to place with ML,

R fucked off fraudulently. Should S or ML bear the loss assiociated with R’s fraud? Was R an agent of ML?

o Held that R appeared to be an agent of ML to S so the losses should lie with ML. Whether a principal/agent relationship exists depends on the nature of the

authority granted or deemed to have been granted . Look at the exact circumstances of the relationship between alleged principal and defendant.

o Actual authority : in most cases, there is a contract setting it out. Look at any contracts existing between purported agent and principal. Here no basis for actual authority between ML & R. Had a contract

together, but the terms specifically excluded agency authority. o Ostensible authority : where a person by his words or conduct has allowed

another to appear to the outside world as his agent, with the result that 3rd

parties deal with him in this capacity. Tough to prove it here because no communication between ML & S. Ask whether R did in anyway hold himself out to S as being authorized to

enter into a relationship with S on behalf of ML? This is a shift: looks to whether agent did anything to hold

himself out as agent, not what principal did to convey agency to 3 rd party .

Court held that R appeared to be the agent of ML, even if indicia of it dated from 6 years of ago – passage of time not a problem. So ML is liable.

Ostensible authority most significant for creditors, largely relying on appearances. Corporations need to be careful for ex with the use of tokens of authority – not really protected for their misuse.

Statutory reform re: authority of agents See CBCA 18(1)(2)

9. INCORPORATION

what are the formalities required to bring a corporation into existence under the statute?

A. Registration A corporation comes to be only through a legal process: process of registration for that

particular corporation. Initiated by incorporators.

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B. Minimum requirements of corporate constitution

C. Continuance: corporate emigration and immigration

D. Amalgamation: Corporate combination

E. The corporate name

F. Pre-incorporation contracts

G. Attempts at statutory reform re: pre-incorporation contracts

H. Pre-incorporation contracts in CVL

10. ROLE OF MANAGEMENT

A. The role of management Management = directors and officers Director primacy theory (Bainbridge, UCLA)

o Idea that directors occupy the most powerful role.o Under the CBCA, directors are the ones who are the locus and pinnacle of

management control 102 CBCA – directors shall supervise the management of the business

and affairs of the corporation. No mention of officers or shareholders. Directors enjoy primacy based on the legislation. Have ultimate control

over the affairs of the corporation and wield control over other parties. Enjoy broadest and superior authority

o Under the CBCA, managers enjoy managerial power over the corporation through their offices that have been created by the board and powers are delegated to these offices/officers.

Enjoy day-to-day power over the corporation. CBCA 121(A) CBCA 115(3) – limits to what the board can delegate away to officers.

Board must retain certain powers. Managerial primacy theory

o Idea that professional managers are the best ones to occupy the most powerful role.

o Idea that most practical power over corporations actually wielded by professional managers (officers). Have gained a lot of control over the board of directors

o See below (B) Directors: myth and reality. Traditional understanding of corporate governance

o Corporation traditionally understood to be managed for the benefit of the shareholders alone, and it is managed by directors, put there by shareholders and responsive to them.

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o Core problem : emergence of a separation of ownership interests and controlling interests. Groups of individuals organized into any kind of assocation have 3 functions they have to perform:

Those who invest capital, get in exchange for the investment proprietary interest (ownership interest)

Those who have power over the organization, set the strategic objectives Those who act, who enable it to achieve its objectives (employees for ex)

o 3 phases: previously corporations were small, run by those personally acquainted

with one another. Then, came to see ownership and legal control over the corporation as

concentrated in the owners. 20th century: in larger industrial corporations, power and

proprietary interests became separated. Happened as members of public became interested in investing small amounts of capital in corporations.

Shareholders were losing all practical power over these corporations – now we still think of shareholders as passive, not active owners.

o The divergence and separation of ownership and control was reinforced by moder statutes of incorporation:

Directors given primary power over corporation, but no obligation to invest capital.

Shareholders contribute capital but have no control over how the affairs of the corporation are managed. Only indirect control through right to vote.

B. Directors: myth and reality Director primacy more of a myth. Generally board of directors of large/medium corporations don’t actually set objectives,

strategies, policies – left to management (officers).o They simply approve decisions made by officers. Lack expertise to engage in

long-term strategic planning, don’t have time. Rarely reject choice of president, usually suggested by outgoing president. So in the end, professional managers have a lot of power – they control the levels of

power within the corporation.

C. Controls on management (1) Control from managerial market: all professional managers have a market they

have to respond to for their skill. o If you’re reasonably responsible to personal reputation, you won’t want to

develop a reputation of incompetence because your own personal chances in the managerial market will be lowered.

(2) Control from shareholer behaviour: shareholders as a group can exercise market discipline through their behaviours within that market

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o if they will see their investments suffering, they will want to do something about it, may act on the legal controls they have, make directors and officers respond to them.

o Can also sell their shares. (3) Corporate raiders: people looking for underperforming companies to turn them

around and yield a profit. o Prospect of a hostile takeover is therefore a significant market control for shitty

managers. Will lose their power in a hostile takeover because will be fired.

D. Assuming management positions Elections and appointments

o Initial appointment Defects in qualifications of appointed/elected directors

o

E. Management compensation

11. THE OBLIGATIONS OF MANAGEMENT

A. Duty of care

a) Introduction Evolution of duty of care, from CML to CBCA

o Has been marked by great inconsistency – reflects unsettled view about what we ought to make of the duty of care, whether its justification is solid.

o Mandatory duty of care long been recognized as being important in corporate law

CML settled on non-existent or low standard – gross negligence.o Policy makers came to question this view, that was informed by the deferrence

toward business (business judgment rule).o So Peoples: held that the CBCA provisions on duty of care were enacted to

raise the standard of the duty of care. In Canada today, standard is objective but has a contextual element.

Test is to assess the objectively available evidence re: circumstances. In Peoples, SCC acknowledged business judgement rule but scope of it not

clear. Worries that it might undermine duty of care because this is what happened in the US.

What is the duty of care about? o We tend to think about negligence in terms of tort law/carelessness/

inattentiveness to risk. But duty of care in corporate law is not just an extension of what we see in tort law.

o Negligence claims against directors and officers (rare, claims usually brought under duty of loyalty) are allegations of shirking – category of agency costs.

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o Examples of shirking for directors: failure to attend board meetings, review documents, engage in meaningful thinking/discussion, etc.

o Examples of shirking for officers: failure to capitalize on business opportunities because too busy doing something else, failure to engage in proper oversight of employees, failure to implement business strategies/priorities, etc.

There is a legal duty of care, first just on directors, then extended to officers.

b) Origin of duty of care in Corporate law Emerged in CML from fiduciary administration – extention from trust law.

o Directors/officers have significant control over property that is not theirs (belongs to shareholders/corporation as a legal person). So makes sense to extend duty of care to them, they occupy similar role to trustees.

CVL – see 322 CCQ, must act with prudence and diligence.

c) Scope of duty of care in corporate law Scope of duty applies to director’s actions within their official capacity. So first determine if behaviour falls within the ambit of person’s official capacity.

d) Beneficiary of duty of care in corporate law Duty of care: Corporate law obligation intended to constrain behaviour of directors and

officers in capacity of managerial function, which is undertaken for the benefit of the corporation.

o Can also stand to benefit shareholders.o Traditional view is that legal beneficiary is the corporation – has the standing to

sue for breach of duty of care by directors/officers. o This has changed since Peoples.

e) The standard of care Standard of care: includes diligence, care, skill. So different from tort law – care is

only one out of 3 elements. Directors and officers need to exercise powers well and for the benefit of the

corporation:o With a reasonable level of skill (they have been hired because of their skills, so

reasonable to expect them to demonstrate a reasonable level of skill). o Be reasonably diligent/attentive to duty to act.

Care element requires foresight of harm to corporation that might reasonably be expected to arise as a result of a course of conduct.

f) The standard of care at CML vs The standard of care under CBCA In CML, the standard was so weak that many said it was non-existent , or frequently

violated, exceedingly difficult to attach liability. Reflected deferrence to business (business judgment rule).

o The standard was one of gross negligence (négligence grave). Now, standard under corporate law has changed: it’s been elevated.

o Effort to upgrade the standard when CBCA was enacted, described in Peoples.

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o See 122(1)(b) CBCA.

Soper v Canada, 1997 FCA What does the standard of care require of a director? How much attention do you need

to show in exercising your duties?o Standard of care is hybrid: objective-subjective standard. o But doesn’t say much more than : total passivity and irresponsibility are

not permitted. Still essentially a low standard, still very subjective. Reflects the previously dominant

way of thinking about a duty of care: courts preferred regulating risks rather than management.

o Seen in the time of CM that standard should be flexible, not fixed because of the variety of qualifications and work.

Peoples v Wise, 2004 SCC W bought Peoples from M&S. M&S filed bankrupcy proceedings against W; trustees filed

suit against W as directors/officers of Peoples saying that the joint strategy they put in place was negligent and favoured their interests at the expense of the unsecured creditors. Do W owe a duty of care to creditors?

No duty of care to creditors o No duty of care to the creditors under CBCA, no direct remedy.o But breach of statutory duty of care may found claim of extracontractual liability

under 1457 VVQ because duty of care was articulated openly regarding who enjoys it.

But this narrowly applies to CBCA corporations that operate inside Quebec.

Standard of care o Standard at CML was very low, higher now under CBCA, more demanding.o Standard is objective with a contextual element: must pay attention to the

context but that doesn’t mean it’s subjective. Must look at objective information re:relevant contextual features in

context that director/officer made decisions. o Look at evidence related to primary facts:

Those that relate to course of conduct itself: what was the decision, and what are the reasons given for the decision?

Look at prevailing socio-economic conditions. Business judgment rule

o BJR is an attitude of deference. Court more or less unwilling to second guess decisions made in climate of uncertainty so long as decision was within a range of reasonable alternatives.

o Maple Leaf Foods – there is a BJR in Canada. Looks to see if a reasonable, not perfect decision, was made. But not very

clear what it means. Causation

o Causation requirement for corporate law duty of care.

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o Here, causation was questionable. Many elements made the joint policy a failure. Defences

o Defence of W under 123(5) CBCA was to say that they relied in good faith on expertise and advice of senior officers re: joint policy.

o But court says this defence applies only where you obtain advice from members of regulated profession. Here, the officers had a business training/expertise, but not enough to come within this defence.

B. Duty of loyalty: duties of managers Unlike duty of care, duty of loyalty widely recognized as being a necessary

constraint on power of directing minds. Debate is: how we understand the duty and its basic parameters.

o By what standards is loyalty assessed? o Whose interests is this duty supposed to protect? To whom should directors be

loyal?

a) Introduction Corporate fiduciary relationship (Sealy)

o Various types of fiduciary relationships o We took what we saw from trust law and applied it to the corporate settingo So doesn’t think there is fixed set of rules/principles at play here

Other view o Certain categories – recognized as having an inherent fiduciary natureo Key characteristic of fiduciary relationships: fiduciary (eg: directing minds) has

legal discretionary power over the interests of someone else. What are the implications of a relationship being found to be fiduciary?

o Assume additional legal burdens/obligations Many are rather uniform: duty of care, duty of candour/disclosure, duty of

loyalty. May also be found to have to pay more generous remedies if they breach

their dutieso Remedies include: disgorgement of profits, remedial constructive trust

b) Duty of loyalty Came frome equity and trust law Implies at least 2 rules (conflict rules)

o Rule against conflicts of interests Fiduciary can’t permit her own actual or possible interets to conflict with

those of a beneficiary You can’t take on obligation to serve another if you’ve already got

obligations to serve another can’t undertake to serve two masters if their interests conflict.

o Rule against conflicts of duty/ conflicting mandates Statutory incarnation

o CBCA, 122(1)(a)

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Duty to act honestly and in good faith with view to the best interests of the corporation

Conflict rules don’t make any appearance in this definition… so look at jurisprudence.

Peoples v Wise, 2004 SCC Held: no disloyalty. The corporate fiduciary relationship

o SCC didn’t need to say much about whether there was a fiduciary relationship here – about discretionary power.

o Usually, directing minds’ relationship with corporation seen as a fiduciary one.

Content of the duty of loyalty o “Supersoaker standard”

Act honestly and in good faith Respect trust and confidence put in them Avoid conflicts of interest with corporation Avoid abusing position to gain personal benefit Maintain confidentiality of information they acquire by virtue of their

position Serve corporation selflessly

o Super broad: what should we focus on to establish disloyalty? Establishing disloyalty: conduct or motive?

o Not required that directing minds avoid personal gain in all instances as a result of their honest and good faith supervision of the corporation.

Beneficiary of the duty of loyalty o SCC rejected view that duty is owed to shareholders or to corporation + its

shareholders.o Only owed to the corporation as an entity.o Loyalty measured by directing minds’ behaviour and the corporate interests.o Corporate interests: how do we know what they are?

Directing minds decide on a case-by-case basis what they are balance the view between the various stakeholders.

c) Corporate fiduciary duty: improper purposes Shareholders will often bring the claim that corporate directing minds used their

power for improper purposes when they feel they’re in a position of conflict of interests

2 different ways to frame these kinds of allegations: non-fiduciary frame VS fiduciary frame

o Non-fiduciary frame/ Improper purpose doctrine Focus on purpose of specific powers – question of corporate

constitutional law So propriety of purpose depends on whether a power was exerised

for the right kind of purpose

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Hogg v Cramphorn, 1967 UK Takeover situation, C challenged for exercising his powers inappropriately. C thought

takeover was bad for corporation and employees, dilutes shareholders trying to launch the takeover’s votes.

o Held that there was good faith belief that it was necessary to issue shares because it was best for company. However not permitted because improper purpose, exercised for the wrong reasons.

Improper purpose doctrine is a way that corporate constitutional law limits scope of corporate fiduciary law.

o Overriding fiduciary obligation Not about construction of particular powers – question is whether power

was exercised in good faith effort to advance interests of the company

Fiduciary frame is the most important frame of referenceTeck Corp v Millar, 1972 M director of junior company A believed best interests of the company would be served

by concluding agreement with K, not T. T ended up buying shares in A, eventually held majority status – M worried and issued shares to avoid an unwelcome takeover by T.

Seems that Hogg v Cramphorn should apply – but doesn’t happeno Court says there was proper purpose in issuing shares – if they couldn’t use

their powers in this way would mean they couldn’t do anything to prevent takeover.

o Fiduciary principle is of higher/greater importance: where you can show fiduciary propriety in exercise of power, that should be sufficient.

o Most important consideration is what’s best for the company and directing minds are the ones who determine this.

o It’s about whether the power was exercised in view to satisfying fiduciary obligation.

Directing minds should be allowed to consider who is seeking control and why. If they believe substantial damage will result, exercising powers to defeat takeover will not necessarily be characterized as improper.

Conflict between majority rule and directorial control/accountability.

d) Four ways to breach duty of loyalty Self dealing

o The fiduciary entered into a contract or other kind of transaction/ arrangement with the beneficiary and has done so for personal gain.

Problem: fiduciaries are people supposed to act on behalf of the corporation.

o Conflict of interests problems: Raise the question of whether the manager will bargain to the full extent

of his abilities on the corporation’s behalf

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But mitigated risk: there is risk, but in many cases a self-dealing transaction might be good for the corporation.

o History At CML, traditionally: strict rule against self-dealing contracts because

involved conflict of interests Aberdeen Railway No one with a fiduciary duty can enter into contracts in which they have or could

have a personal interest conflicting with the interests of whoever they’re bound to protect

Strict application – don’t look at if the contract is fair or unfair. But may mean that the corporation couldn’t engage in a transaction that might actually be good for it.

“In order to protect the duty to act in the beneficiary’s best interests we forbid conflicts: if there is conflict, the fiduciary’s not even allowed to prove that he was in fact acting in the best interest of the beneficiary.”

o Statutory regime for self-dealing CML approach supplanted by statutory regime. Modified in recognition that self-dealing transactions are often good for

the company so saw need for scheme that allows these transactions to be regulated.

CBCA 120: Director/officer party to contract must disclose nature and extent of interest asap and refrain from voting in any resolution to approve contract.

CBCA 120(7): such contracts become non-voidable and conflicted director is not accountable so long as disclosure made and non-conflcited directors/officers approved it and the deal was reasonable and fair.

If contract made non-voidable, fiduciary not accountable for any profit made on the contract.

CBCA 120(1)-(6) – Details what disclosure must look like Made in writing or included in board meeting minutes. What? Specifications re: nature and extent of conflict.

NorthWest Transportation Co v Beatty, 1887 B, director of NWT, sells ship to NWT, makes personal profit. Transaction was approved

by board, then by shareholder vote (majority of shares held by B though). Profits made by B not excessive. Some shareholders sue B in name of NWT on behalf of shareholders for breach of loyalty.

o Held that there was a violation of the conflict of interest rule, making prima facie contract voidable.

o However, contract valid thanks to ratification. When a director personally enters into a contract with the company of which he is

a director, apparently breaching his fiduciary duty to the company, if the contract is subsequently approved by majority shareholders (absent unfair/improper means) the sale will remain valid.

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Rule of Aberdeen Railway used: a director cannot enter into an agreement that conflicts with interests of the corporation.

o But surmounted by ratification (even though B was the majority shareholder – majority rule) and the circumstances (price not excessive or unreasonable).

But controversial case o Fiduciary forgave himself using his powers as shareholdero But highly influential in Canada & CML – some cases say ratification will only

surmount the conflict if it is unanimous (Bourbon v Earl). o Also, better to have your deal approved by the board beforehand in order to

avoid/ forgive potential liability. But risky because shareholders could may get pissed.

Misappropriation of property/opportunities for profit o Not specifically regulated in the CBCA. o Conflict doesn’t arise out of contract – more when opportunity for profit

belonged in some sense to the corporation. Where fiduciary is said to have taken property that belongs to the

corporation or where fiduciary is alleged to have taken a business opportunity for profit. Instead of pursuing business opportunity through corporation, has taken that opportunity for himself.

Cook v Deeks: directors not at liberty to sacrifice the opportunities available to the corporation. One of key roles as director is to identify and pursue corporate opportunities.

o Establishing liability: Show that business opportunity was open to the corporation, in line

with its business, genuine interest of the corporation – then easy to establish breach of fiduciary duty.

o Strict case but adopted in Canada in Zwicker: Regal (Hastings) Ltd v Gulliver, 1942 UKHL 4 directors and lawyer of R invest in A by buying shares so as to allow A to be properly

capitalized and satisfy landlord to secure leases. Directors of R sold after shares of a at significant profit. R changes hands, has new owners and directors , claim conflict of interest of old directors for investing in subsidiary A.

o Held that former directors were guilty of breach of fiduciary duty re: appropriation of opportunities for profit. They’re obliged to return the profits.

Liability for appropriation/ profit o Fiduciaries taking opportunity where seems that opportunity is bound up

in corporate opportunity that could not have been taken up without the disloyal behaviour.

Scope of liability o If the opportunity falls outside the current fiduciary relationship, then

there’s no conflict because anyone could have taken up the opportunity. o But here, came to the individuals in the course of their fiduciary relationship.

Liability to account

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o Remedial liability to account follows – strict, flat rule: if there is a conflict, your liability automatically follows from that.

Significance of approval/ratification o Could have avoided the problem if had received approval by the board

beforehand, or shareholder ratification after the fact.

Peso Silver Mines Ltd Cropper, 1966 SCC PSM is offered opportunity to invest in speculative mining ventures – PSM and C as

director rejected offer because found it wasn’t in the best interest of the company. Eventually, C was involved in group that purchased the claim previously offered to PSM. PSM changes hands, new board finds out and sues C for breach of fiduciary duty.

o Held that this opportunity for profit wasn’t within the scope of C’s fiduciary duties to PSM.

Wasn’t because the corporation had been granted the opportunity to take the profit but refused it. After having passed on it, opportunity became fair game.

Distinguish from Regal, as the opportunity in Regal came to the directors in the scope of their duties.

Canadian Aero v O’Malley, 1974 SCC Defendants, senior officers for CA. Left company, formed they owned enterprise and by

virtue of knowledge from CA they entered into a tender process, won and obtained profits.

o Held that you cannot get out of your fiduciary duties by quitting. Regal: there is a strict ethic re: conflict of interests which disqualifies directing

minds from usurping for themselves a maturing business opportunity even after resignation.

o Fiduciary duty does not terminate upon resignation and cannot be renounced at will.

Long list of factors to determine if opportunity is close enough to constitute breach look at them says jurisprudence.

o Follows Aero but doesn’t apply it to the facts: Gravino v Enerchem, 2008 QCCA G and C directing minds in ETI, were employed in negotiations while employed in ETI,

decided they wanted out of ETI, sold shares, resigned positions, set up new corporation and did so with a competitor of ETI.

o Held that they’re not guilty and it’s not the same case as Canadian Aero. CCQ provisions are similar to CBCA re: directors being fiduciaries of corporation, duty of

loyalty, and ratification. Appropriation of opportunity as disloyalty

o Canadian Aero: accepted as law, look at its criteria when to consider is an opportunity is within the fiduciary duty.

Countervailing policy considerations

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o Public interest and free and open competition – reasonable loyalty to employer during course of employment BUT should be free once you leave to pursue interests that may have been forbidden when you were employed.

Neither a non-competition clause should be able to prevent a person from earning a living by using skills/knowledge from a previous company.

Application : Not like Canadian Aero o No appropriation of property or clients – just used info when they were

fiduciaries. Information is not an opportunity here: not mature in the hands of ETI,

and not exclusive to ETI. Any other competitor could have pursued it. o Didn’t take confidential/strategic info. o No actual conflict of interest (weird reasoning)o They quit before and then started negotiations – just acting as competitors.

Entrenchment/enrichment cases: cases of hostile takeovers/ change of control transactions

o Entrenchment = when fiduciary attempts to use her power to maintain her position of power within the company for her own benefit.

Directing minds alleged to violate duty of loyalty to company in doing this. Board of directors said to be exercising powers that they have, but exercising them in the context of a hostile bid to keep their positions, entrench themselves, to maintain their personal interests in their positions

Understandable that directing minds are resistant to hostile takeover attempts.

o Management has developed several tools to resist hostile takeover bids: Issue shares to a friendly party, dilute the voting pwer of incumbent

shareholders Poison pills – exercise power of constitutional amendments to change

rights attached to shares in the corporation to make it unattractive to bidders.

o Takeovers subject to rigorous corporate regulations and securities regulations. Aimed to protect markets, shareholders, public at large.

o Hostile takeovers place 2 fundamental principles of corporate law in stark contract:

Courts reluctant to interfere in business decisions of corporation’s managers.

At the same time, they have authority to supervise the actions of management re: skill and loyalty.

Also generally accepted view that in the case of hostile takeovers, the interests of a corporation are to be identified as per the shareholders as a whole. Rejected in Canada though:

Need for a bright line rule on this issue?

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o Revlon v McAndrews (US): the duty of the board changed from the presevation of the corporate entity to the maximization of Revlon’s value at a sale for the shareholders’ benefit.

o VS Maple Leaf Foods: obligation is to company as a whole, no just short-term interest or interest of the shareholders. Rejection of Revlon. Same rejection in Peoples, BCE.

Canada: prefer to use independent committees to be used to handle responses to hostile takeovers.

Olympia & York v Hiram Walker, 1986 Hostile bidder proposing takeover of HW. Directors of HW resist bid through

complicated scheme – takeover bid defeated. o Held that the directors’ actions are not in breach of their fiduciary obligations.

Application of Teck – directors do not breach their fiduciary duties when they act in good faith, on what they believed on reasonable and probably grounds to be in the best interests of the company.

o The case here. Motivated by desire to maximize returns for all shareholders. Then irrelevant if they also benefit. Were not trying to entrench themselves as management.

Directors have a right and obligation to take steps that they honestly and reasonably believe are in the interests of the company and its shareholders in response to a takeover bid.

o Director’s duty to take all reasonable steps to maximize the value of shares for all shareholders.

o Seeking out independent advice from advisors will lend credence to the idea resisting the bid was in the interest of shareholders.

o In the absence of bad faith or dishonesty the court will defer.

Secret profits case o Fiduciary uses position to gain secret profit

Other problem: Multiple loyalties – conflict of dutieso En cas de conflits de devoirs, règle aussi stricte que pour les conflits d’intérêto On va souvent avoir des administrateurs dans deux companies différentes.

Mais ne peut être sur le conseil d’administration de 2 companies concurrentes (In Plus Group Ltd v Pyke, 2002)

Une opportunité qu’un directeur n’aurait pas pu prendre en son nom propre ne peut pas être prise par le biais de l’autre société (Cook v Deeks)

o On peut avoir le consentement éclairé des deux parties auxquelles le devoir est dû: parfois impossible de le faire parce qu’informer l’une ou l’autre revient à violer son devoir.

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e) Independent directors Ideal world: independent directors only focused on the interests of the corporation

without regard to the own interests. Often have prior employment, personal relationships with officers, financial stake etc.

How to improve this? o Create an independent committee (which has no other role in the corporation)o Could be used to respond to takeover bids, deals with pay of directors etc. o Might be enough to remove taint of conflict of interests and make its

recommendations more likely to be accepted by a court as a business decision properly made in the interests of the company.

Brant Investments v Keeprite inc, 1991 Plaintiff (minority shareholders) alleges that independent committee was not

independent and that the advice they gave the company’s board was not in the best interests of the company and its shareholders.

o Held that the majority shareholders did not have fiduciary obligation toward minority shareholders; the review of the transaction by the independent committee was valid.

Business decisions made honestly by directors or independent committee should not be subjected to microscopic examination, the judge should not substitute his own business judgment for that of one those bodies.

Fiduciary obligations o US law used to recognize a fiduciary duty from controlling shareholders to

minority shareholderso No precedent for this in Canada. No fiduciary duty between majority and

minority shareholders. Majorities aren’t like true fiduciaries: they have economic control of

the corporation due to their shares but don’t have authority to bind/make decsions for minorities.

Should be free to exercise their legitimate power in their own self-interest.

Independent committee o Nothing indicates that committee wasn’t independento Independence lies in the absence of an affiliation with the interests of the

parties in the transaction where the affiliation would interfere with the directors’ capacity to independently evaluate the transaction.

Remaining problems though: o we still don’t have a set of criteria to determine the independence of these

directors/committees. o Re: whether these independent committees are actually good for shareholders –

may exist a competence problem where those best positioned to know what’s good for the company are the insiders (like shareholders), who are technically “conflicted”.

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f) Forgiving disloyalty – ratification, revisited CBCA 120 : permits/regulates self-dealing transactions Ratification

o Ratification = forgiveness. Can forgive breach of fiduciary duty after the fact. Only effectively done with full information – directors seeking

ratification need to ensure that shareholders know what they’re ratifying. Can even apply when fiduciary didn’t purport to act on behalf of

beneficiary.o Will happen where incumbent managers will ask for forgiveness from

shareholders for any breaches of their obligations in the last year. What’s the impact of ratification?

o In theory, ratification can happen but in practice, not really: how to extinguish manager’s breach of fiduciary duty?

o In most jurisdictions in Canada, an individual shareholder doesn’t have a right to bring a corporate action. Instead, individual shareholder may aply for specific judicial persmission to bring statutory representative action

Puisque le devoir est du à la société c’est seulement elle qui peut pardonner. À quel moment considérer que la décision des actionnaires traduit celle de la société de pardonner ?

o La plupart du temps pour modifier la constitution il faut une majorité spéciale. Accorder à la majorité la possibilité de ratifier une violation de la constitution apparaît en quelque sorte comme un moyen de contourner cette règle

Hollinger International Inc v Black Le juge affirme que la société avait bien droit d’amendement des by-laws de la société

mais qu’en l’espèce leur modification était invalide, même si la corporation n’avait pas de devoir de loyauté à l’égard de l’autre.

Peut-on dire pour autant que même les actions des actionnaires sont révisables par les juges sur le fondement de leur motivation ? Peut-on sinon l’expliquer d’une autre manière ?

o UK   : on trouve les pouvoirs des directeurs dans la constitution. On peut alors considérer la violation du devoir fiduciaire par un manager comme une violation du contrat entre la société et l’actionnaire, celui-ci peut alors poursuivre la bonne exécution du contrat. Avec cette vision ratifier une violation semble particulièrement impossible.

Vieille règle anglaise dans Foss v. Harbottle qui dit que les actionnaires ne peuvent se plaindre en justice du tort causé à la société. Ne prend pas compte la réalité du contrat.

Compensé avec un certain nombre d’exceptions. Mais dans tous les cas il faut une décision majoritaire des actionnaires (ratification) pour

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désapprouver les actions des managers (NorthWest Transportation Co v Beatty).

o Canada   : une telle action n’est pas possible. But they may apply for specific judicial permission to bring a statutory representative action (CBCA s. 239).

CML gouvernant les actions dérivées est donc remplacée en ce domaine par les mécanismes prévus par la loi.

12. MAJORITY RULE

A. Introduction Significant legal power of the shareholders through the right to vote.

o Voting is the solution to problem of how to decide on collective course of action. o Have voting rights attached to shares. Directors each get one vote, whereas

shareholders get one vote for every share they own. How practically significant is it?

o Will depend on the nature of corporation, and how shares are held in the corporation.

Shareholder control is indirect, and highly specific/particularized.o Indirect control : even if shareholders are in the majority, don’t have input on

the day-to-day operations of the company.o Particularized control : not broad like the powers of the directors. Matters

reserved to their decision-making are narrow and specified by the corporate constitution.

Right to vote in and out of directors: Improve amendments to corporate constitution; Vote to election of independent auditor.

Voting power is exercised generally through the majority rule – special majority and unanimity will apply in rare cases.

No need to decide everything through voting at meetings – can also make decisions through unanimous shareholders agreements. Cost-saving device.

Those entitled to participate in decisions by majority rule are protected by certain safeguards:

o Decision must be made at a meeting.o Right to be notified of all meetingso Requirement that meeting has at least 2 people in attendance Barron v Potter,

1914 UK – unless authorized by statute or corporate constitution. o Need to have common purpose for the meeting – not just something that

happens by chance.

B. Perennial problems of shareholder control Conflict re: how corporation should be governed. Conflict re: minority shareholders feeling like the majority is trying to appropriate

value at expense of the minority shareholders.

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Conflict re: feeling like majority shareholders are overreaching, trying to abuse minority shareholders.

C. Directors Generally board must act in the setting of a meeting, with quorum present,

following notice of the meeting being provided to directors. o Exceptions :

Decision can be made without meeting but only if the decision is in writing and it’s unanimous CBCA 117.

If there is only one director, may act unilaterally on the basis of unanimity (CBCA 117) or that may constitute a meeting (CBCA 114(8)).

D. Shareholders In an idealized context, shareholder power as a group seems pretty significant. But in

reality, widely held corporations have a huge number of shares that makes shareholder control mythical.

o In a large corporation, shareholders usually passive. But not true in small corporations were shareholders can be very engaged.

Certain shareholder rights are ancillary to voting: right to call meetings, to present non-binding shareholder proposals for vote, to information, etc.

E. Responses to problems re: shareholders Abuse and apathy are the main problems re: shareholder control. Law reformers have been very concerned about this and have taken policy action:

introduction of statutory oppression remedy (see below 13 B. Oppression remedy).

F. Shareholders meetings

a) Notice requirements

b) Location of meetings

c) Voting at a meeting

d) Proxy voting

e) Shareholder intiatives

f) Types of meeting: ordinary business/annual meetings

g) Types of meeting: extraordinary business /special meetings

h) Shareholder accountability

13. MINORITY PROTECTION

A. Standing and Representative Action What are we concerned about here?

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o Majority shareholders can exercise their powers in a way that injures the interests of the minority.

o Deal with abuse of power, control by majority shareholders. CML failed to come up with answer that balanced need for flexible minority

protection and recognition that shareholders have their rights by virtue of property and should be able to exercise those rights in their own self-interest.

Remedies available to minority shareholders o Compliance and restraining ordero Representative actiono Oppression remedy

All these remedies have a broad scope, and have been put into place for the protection of different stakeholders’ interests (cororation, outsiders – creditors, etc).

a) Shareholder accountability: introduction Shareholders have significant control in practice and exercise their power largely

through voting. CML’s response not clear: would tend not to intervene unless there’s egregious

and clear abuse of power: Allen v Gold Reefs, 1900 UK Extraordinary meeting of shareholders called for the purpose of passing special

resolution to alter the resgistered articles of association and extend the company’s lien to fully paid shares, and not just partly-paid shares.

o Held that the shareholders can do this. Even though it prejudices the minority shareholders, this is OK. All shareholders when exercising their rights are limited by a set of fiduciary obligations

to the company as a whole. Think about what’s best for the company, not necessarily what’s best for your bottom line as a shareholder.

Actions of the majority shareholders were consistent with acting in the best interests of the corporation.

Greehalgh v Arderne Cinemas, 1951 UK Special resolution passed: allows transfers of shares to outsiders if approved by a

simple majority of shareholder.o Held that the exercise of power of majority shareholders was valid.

Surprising by contemporary view – shareholders aren’t free to do whatever they do, they have to honestly believe that the decision they’re taking is in the best interest of the company as a whole (=shareholders as a collective).

o Here, the special resolution wa consistent with this, because shareholder should be free to try to get as much money as they can for their shares in a sale.

So not much protection under CML – look for protection under corporate law:

b) Corporate law remedies: standing

CBCA 238o Governs access to new remedies set out by state via statute

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o Gatekeeping function performed by courtso Standing – those persons named in the provision.

Registered holders or beneficiaries, or former holders/beneficiaries of a security; directors

But also other ‘proper person’ if the court feels the claimant ought to be granted standing to bring an action.

First Edmonton Place v 315888 Alberta Ltd, 1988 FEP signed lease with numbered ltd, whose sole shareholders and directors were 3

lawyers. They paid 3 months rent and then left, FEP says their conduct is a deliberate breach of their obligations as directors of the corporation. FEP as corporation’s only creditor seeks representative action or oppression remedy.

o Held that the landlord of FEP should be granted standing here. Standing

o Broad discretion of courts to grant standing. But discretion vested for a particular purpose – seek to do justice and equity where a person would otherwise not be a complainant.

o Show a few things: You as an individual or the corporation have suffered a wrong No other remedy to rectify the wrong Applicant is a person who can reasonably be trusted with responsibly

pursuing litigation in the interests of the company Some evidence of oppression for unfair prejudice or unfair disregard for

those who are protected by oppression remedy. Giving access to remedies to creditors

o Court should be pretty restrictive re: standing for creditors, because creditors should rather be careful in their contracts.

o 2 circumstances where creditors can be granted standing & remedy: Where creditor alleging, and has some evidence, that directors and

officers have used corporation to commit fraud against them and they can’t remedy that fraud otherwise.

Where directors/officers have breached extra-contractual expectations and the creditor can therefore not seek remedy under contract

Court allowed the claim/standing for derivative/representative action to the landlord, but no to the oppression claim because no fraud against FEP. No evidence apart from faud of breach of extracontractual expectations.

c) Representative actions: general, the prerequisites Representative = derivative action. What is it? A claim that is brought on behalf of the corporation, not brought by the

claimant personally. o The individual bringing the claim seeks redress of a wrong suffered by the

corporation, can be an kind of wrong.

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o Representative is therefore acting in a fiduciary capacity for the corporation.o Remedies paid are paid to the corporation

Why do we have representative actions? o Whenever there is a legal or natural person who cannot bring action on their

own behalf there needs to be a guardian to bring action on their behalf o Especially obvious re: corporations because corporations are artificial persons

Normally when corporation is wronged, we don’t go directly to representatives actions because usually the board hires a lawyer to bring a claim to protect company’s interests

o Sometimes board won’t take action; sometimes themselves implicated in the wrongdoing (won’t sue themselves lol)

o So statutory schemes designed to fix the problem in that case to protect the corporation’s interests.

With the representative action & oppression remedy, courts have delicate balance to maintain.

Statutory framework/ other prerequisites o CBCA 239(1) – Entitlement to bring representative action (standing)o CBCA 239(2) – Limits on bringing representative action. Courts must be satisfied

that: Complainant has given notice to directors Have to give opportunity to directors to know about the grievance in

question, then do something about it (less than 14 days) How much details does the complainant need to give?

o Courts pretty flexible about this. o Cause for concern needs to be stated. o Board needs to be able to investigate.

Complainant must be acting in good faith – action can’t be brought merely because complainant has personal grudge. Needs to show there is a prima facie wrong against the corporation.

Good faith = goes to motive of the action. o CBCA 240 – power for courts to control how the action is brought and controlled

over time Minority protection and representative actions

o Representative actions: not really about protecting shareholders. About redressing injury to corporation

o Indirect benefit : because action or threat of action will keep directors in lineo Direct benefit : if court decides to make part of payout to shareholders directly.

d) Representative actions VS Personal actions Reality is that no one really cares about the interests of the corporation – really about

having a personal interest in the issue. Courts insist that derivative actions are kept separate from any personal wrongs/claims

the claimant has suffered/could bring. What do courts do when they get statement of claim that mixes representative +

personal claim?

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Farnham v Fingold, 1973 Minority shareholder brings statement of claim that’s mixing personal class action

claims o The claim is not allowed because should be brought as derivative claim.

Judge can: o strike parts of claim to sort out personal from representativeo send claim back to lawyer to fix ito throw the whole thing out.

Important that the statement of claim be well drafted and personal claims be kept out of any representative action.

Goldex Mines v Revill, 1974 Plaintiffs do not specify in the writ whether duties alleged were owed to shareholders or

to the corporation. Plaintiffs did not seek to bring representative action on behalf of the corporation.

o Personal set of claims could be distinguished from the representative claims – representative claims have to be pursued through legislative scheme.

Important to keep claims separated.

B. Oppression remedy

CML oppression remedy o Used wherever shareholders have egregiously abused their power showing

lack of good faith AND did so at clear prejudice to minority shareholder. Narrow limit available to minority shareholders to ensure that

majority rule wasn’t being used to injure them.o Rarely invoked with success, so considered to be consistent with principle of

judicial non-intervention. Courts tend to defer to majority rule (corporate constitution). Problem: a lot of grossly unfair conduct went un-remedied.

Legislative intent to provide a statutory remedy o When the CBCA was being put together, decided that there needed to be

legislative reforms to do something about protecting minority shareholders, as well as creditors.

o So oppression remedy is broad and amorphous by design.

a) Oppression 1: Statutory framework CBCA 241 Highlights

o Standing : CBCA 241(1), 238 Complainant can bring claim in oppresion so long as they are someone

named in s.238: Former or current holder or beneficial owner of security of

corporation or its affiliates Former or current director or officer of corporation or its affiliates

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Any “proper person” (see test in West Edmonton Place) So complainant must be a named applicant, or a person deemed by

the court to have the required interest. o Grounds for remedy

CBCA s 241(2), if court satisfied that: (a) Any act or ommission of the corporation effects a result… (b) Business or affairs of the corporation are or have been

carried out or conducted in a manner… (c) Powers of directors are or have been exercised in a manner… … that is oppressive or unfairly prejudicial to or that unfairly

disregards the interests of any security holder, creditor, director or officer.

Looking at the conduct of directors, but also (b) business or affairs of the corporation so anyone’s conduct can be looked at.

To protect the interests of the directors, the creditors, the security holders (equity holders like shareholders, but also bonholders and debenture holders)

o Powers of the court – what can they do about oppression/unfair disregard? CBCA 241(3) Courts have unchecked discretion to fashion whatever relief they

deem to be appropriate. Not an actual remedy – a basis on which to fashion a remedy.

Examples of remedies: Issue a restraining order, require issuance of securities, require

purchase of securities, fire/replace directors, order variance of a contract or rescission of a contract, order compensation, etc.

Look at BCE: open question of whether we will see more narrow definition given to these grounds. Not obvious from the case law that courts are moving to give clear guidance for each of these bases though.

Breadth of the oppression remedyo Standards

Broad scope of analysis. Standards to figure out if a remedy is to be warranted are not clearly defined.

Not intended to serve as a set of rules re: liability. Broad remedial standards that invite judicial discretion.

o Remedial discretion Courts can respond to circumstances as they wish. Would be unfair for courts to make an order and exercise their discretion

to issue a remedy that is punitive in nature – remedies must be corrective.

Cours must be sensitive to defining scope of their discretion. Sensitive to both sides.

Can stand in the shoes of directors to take their power to order remedies. But haven’t gone crazy with this.

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b) Oppression 2: Meaning

Oppression remedy : inherently flexible tool enabling courts to intervene in light of conduct that is lawful but inequitable (see CBCA 241 – where the acts or omissions are oppressive or unfairly prejudicial or unfairly disregards the interests of any security holder, creditor, director or officer)

o Summary of principles :

Krynen v Bugg Principle “When determining whether there has been oppression of a shareholder, the

court must determine what the reasonable expectations of that person were according to the arrangements which existed between the principals.”

Unfair prejudice or disregard: have a less demanding test than oppression Conduct complained of must go beyond mere inconvenience and lack of information –

interests have been unfairly disregarded. No requirements to show bad faith Reasonable expectations can change over time Business judgment rule: can be a defence to oppression claim.

o Have to show that the business decisions were made honestly, prudently, in good faith, and on reasonable grounds.

Don’t need to show actual loss to raise an oppression claim.

Oppression : o Old CML: One individual complainant has suffered a prejudicial effect as a result

of the bad faith behaviour of another. o Modern: About the consequences of a decision (if the consequences were

harsh or burdensome, bearing an outcome that is harsh/heavy/unfair). o Factors indicating oppressive conduct :

Arthur v Signum Communications Ltd Lack of valid corporate purpose for the transaction Failure of corporation to take reasonable steps to simulate an arm’s length transaction Lack of good faith on the part of the directors (not necessary though) Discrimination between shareholders with the effect of benefiting the majority to the

detriment of the minority Lack of adequate and appropriate disclosure of material information to minority

shareholders Plan or design to eliminate the minority shareholder

o Application of the oppression remedy: Westfair Foods v Watt, 1991 New policy of the company was oppressive towards the non-voting preferred shares.

The reasonable expectations of the parties ground the analysis of whether or not

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an interest deserves protection in an oppression claim. Expectations deserving protection are subject to a standard of fairness.

Intent VS outcomes o Not about intent but outcomes – doesn’t matter if there was bad faith, it’s about

injuries of the plaintiff. Scope of remedy and impact on majority rule

o Scope of the remedy is expansive – relates to all activities of the corporation.o Shareholders have a right to be “insulated from anything oppressive, unfairly

prejudicial, or that unfairly disregards their interests” vis à vis their relationship with the company.

o Major modification of the principle of majority rule – majority shareholders cannot profit at the expense of the minority shareholders.

Meaning of oppression o Command the courts to exercise their duty broadly and liberally and to impose

the obligation of fairness on the parties. o Duty to act in the interests of shareholders as a group, to pay heed to the

interests of all. Reasonable expectations

o Relationship between shareholders and company regulted by regard to the reasonable expectations of the parties – deserving protection.

o All words and deeds of the parties should be considered to determine the reasonable expectations – determine the actual relationship.

o Test is very fact-specific and precedent is of limited use.

Deluce holdings v Air Canada, 1992 D alleges AC improperly exercised its cntrol to terminate WD’s employment and acquire

D’s shares. Claim that the behavior is oppressive.o Held that the actions of AC in terminating WD’s employment with Air Ontario

were oppressive.o The court will assess the reasonable expectations arising out of the

relationship of the parties in determining whether or not conduct was unfairly prejudicial to a minority shareholder’s interests and thus subject to an oppression claim.

Reasonable expectations o Look at actual relationships, determine what expectations arose out of them

Here, focus on the relationship between D and AC in light of them being minority and majority shareholders; not just employee-employers.

Look at the intentions of the parties in light of the agreement – wasn’t intention to allow AC to trigger the buyout clause at will.WD’s employment was to be triggered ony where it was in the best interets of Air Ontario.

o So D had reasonable expectations as a sharehodler. Nature of oppression

o Even actions taken in good faith can oppress minority interess

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o Oppression remedy not concerned with lawful conduct but with the interests engaged by expectations generated by the relationships between the parties.

o Evidence showed that directors were acting to carry out the agenda of AC, rather than acting in the best interests of Air Ontario.

Remedy o Significant discretion of the court in ordering remedy. Here, allowing AC to

continue with its plan and take advantage of its oppressive action would be unjust.

Naneff v Concrete Holdings Ltd, 1995 N has complete control of the company, gave his sons A & B 50-50 nonvoting stake in

the company. Falling out with A and wants to push him out of the company. o Held that this conduct of N was oppressive. Appropriate remedy, inlight of the

fact that it’s a closely held family company it the buyout of A’s shares. But remedy can only rectify oppression, redress imbalance, not be punitive. Important to consider in deveising the remedy to look at the relationship of the parties

and their reasonable expectations (here, A son and 50% shareholder. o The remedy can’t give more than what he reasonably expected as a result of

his relationship with his father and the company.

Unfair prejudice : complainant feels that their interests in the corporation have been unfairly singled out for harsh treatment.

Unfair disregard : if the complainant’s interests have been unfairly overlooked, ignored, treated as unimportant.

o However courts tend to use broad terms and ignore the meaning of these concepts – speak rather of fairness, probity of conduct, importance of persons involved etc.

Today’s approach, the more structured and difficult to establish test:

BCE v 1976 Debentureholders, 2008 SCC Debenture holders against a leverage buyout deal, argue that it’d significantly decrease

the value of their bonds, claim that in approving this bid the BCE directors act in a way that is oppressive to their interests. Sought oppression remedy under 241 CBCAn and argue the plan was not “fair and reasonable”.

o Held claim for oppression dismissed. 2 approaches to oppression remedy:

o emphasize strict reading on 3 stated grounds for oppression in the statute. o Focus on broader principles of fairness, concern for reasonable expectations of

the parties. Court decides to do both:

o first look to principles underlying the oppression remedy, in particular reasonable expectations.

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o If there was a breach – then go to the statute and see if there was a breach of any of the 3 principles.

So (1) Determine reasonable expectations of complainant and whether they were violated

o Identify expectations of the partieso Show whether the expectations were reasonable: How?

Objective and contextual analysis: Expectations must be reasonable regarding facts of specific case, the relationship at issue, the entire context.

Factors that go to reasonableness: Commercial practice Nature of the corporation Past practice Preventative steps Representations and agreements made between parties Conflicting interests of stakeholders

o Show that reasonable expectation was violated. (2) Determine whether reasonable expectations have been actionably violated (ie:

if there is an oppression, an unfair prejudice, or unfair disregard)o oppression : oppressive conduct is one coercive, abusive and that suggests bad

faith. Involves visible departure from standards of fair dealing and an abuse of

power.o Unfair prejudice: entails less culpable state of mind than oppression. Bad, but

not as bad as bad faith. State of mind has consequences that are unfair.

o Unfair disregard: involves ignoring a known interest. The least bad of the three. Application : 2 expectations claimed by debentureholders, but none led to oppression

remedy. o (1) that BCE would act positively to protect value of debentures

not a reasonable expectation, because BCE were giving them warnings to the contrary.

Also given the context, because leveraged bids are just the way things are done in business nowadays.

Debentureholders could have negotiated protected covenants. BCE had competing interests to consder, such as shareholders’. Board will

always have a balance to strike in the best interest of the corporation. o (2) that BCE would consider the interest of the debentureholders in

maintaining the value of their debentures reasonable expectation, but not violated. Board of BCE abided by the

terms of the debentures, all it was required to do.

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c) Oppression 3: Relationship with representative action Basis for confusion is because oppression remedy is so broad: why bother bring a

representative action? Think about the difference in terms of harm to the corporation (properly the subject of a representative action) VS harm to the shareholders or other complainants (may amount to oppressive conduct and warrant oppression remedy).

First Edmonton Place v 315888 Alberta Ltd, 1988 Held that the landlord was not entitled to bring a claim in oppression because no proof

that FEP had been defrauded or that their reasonable expectations had been violated. History of corporate law remedies in general

o Desire to achieve a balance between those with competing interests in the corporate structure.

o Set of remedies that give the courts great discretion to rectify injusticeo New public minded ethic : judges to play a central role in policing inequitable

behaviouro Deliberate departure from the previous trend of judicial non-interferenceo Common concern re: abuse of power.

Scope of oppression remedy and function o Function: Remedy virtually any corporate conduct that is unfairo Scope: provide broad basis for intervention.

Look to the individualgrounds for bringing a claim (oppression, unfair prejudice, unfair disregard)

Very broad 3 grounds, so lend themselves to a general fairness test, focused on reasonable expectations of parties, that are not otherwse protected through law

Creditors’ interests o Judges a bit queasy when creditors bring claim for oppression remedy because

usually relationships governed by contract law.o Balance interests of the creditors re: extracontractual rotection and freedom of

corporate management to make decisions in the best interest of the corporation that may be to the detriment of the creditors.

o Creditor will usually have to show that the expectation he had were non-contractual ones arisen after the contract was formed.

d) Oppression 4: Relationship with fiduciary duty Points of overlap: in many cases, set of facts gives rise to claim in oppression and claim

re: fiduciary duty (see Deluce Holdings v Air Canada) Points of distinction

o Fiduciary obligations are legal duties of officers/managers alone and they’re owned only to the corporation.

Has fixed standard (care, loyalty) Clear, definite, narrow function: ensure that corporate managers

exercise their legal powers reasonably and faithfully in the interest of the company, and that they won’t be swayed by self-interest.

o Oppression remedy is not a legal duty

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Not possible for corporate managers to know where they might be exposed to a claim in oppression.

Not just about corporate interests – about a number of different parties’ interests.

Meant to enable judges to examine ex-post that the reasonable expectations of any number of individuals are secure against unfair treatment of any sort.

Concerned about a lot more than self-interest – make sure corporate structure does not conceal unfair conduct.

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