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Course:Business Organizations - LAW 459/Unit 1

2016-09-08T04:23:07Z

DavidHeinrich:

UNIT 1 (WEEK 1): INTRODUCING BUSINESS ORGANIZATIONS & THEIR REAL WORLD CONTEXTS

http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Bombardier_BD-700-1A11_Global_5000_Jet_Aviation_Business_Jets_JP6462270-360x245.jpg
 

Source of image: <a href="http://commons.wikimedia.org/wiki/File:Bombardier_BD-700-1A11_Global_5000,_Jet_Aviation_Business_Jets_JP6462270.jpg">http://commons.wikimedia.org/wiki/File:Bombardier_BD-700-1A11_Global_5000,_Jet_Aviation_Business_Jets_JP6462270.jpg</a>

UNIT OVERVIEW: Corporate law exists not only within legal and juridical contexts, but also within political and social ones. Prof. Joel Bakan’s seminal film “The Corporation” explores those nexus points. As part of this Unit you should also begin familiarizing yourself with the course materials and syllabus generally.

 

UNIT OUTCOMES: You will have the opportunity to reflect on the reality that corporate law, beyond being a legal subject has profound impacts on our society, and implicates important ethical and economic issues. You should be able to name three such impacts. You should have obtained a glimpse of the dichotomies of corporate law. On one level a technical and detail oriented vehicle of commerce, and on another an ethical conundrum because of its requirement of profit and the fiction of “corporate personhood”.

UNIT TOPICS:

TOPIC 1: A BASIC METHODOLOGY FOR APPROACHING THE COURSE

 

Spend some time introducing yourself to some of the underlying ideas of the course. First read through the Course Syllabus and familiarize yourself with the course. Then go through this unit and finish all its activities.

Starting with elementary Stuff – ask yourself what, for a lawyer, is a company?

It is an organizational form recognized by the law, to coordinate and regulate the activities of those who provide the various inputs necessary to carry on a business designed to earn profits.

It is the most successful form of organization for doing this – at end of the course you should be able to explain in some detail why that is.

Whose activities are being coordinated and regulated? Company law suggests three groups:
<ul>
<li>Shareholders,</li>
<li>Directors (and to some extent senior managers who are not directors), and</li>
<li>Creditors</li>
</ul>
What is being regulated are the relations between these groups (e.g., shareholders as against directors; creditors as against shareholders), and also the relations within each group (e.g., majority/minority shareholders, secured/unsecured creditors).

The Law also has some interest in how one becomes a member of a group and in how one leaves.

You may well ask what of others whose activities must be coordinated for a business to succeed: employees, suppliers, and customers, at the very least.

In general company law not interested in them, though other areas of law are.

In short as you go through the remainder of this Unit (and in fact the remainder of this course), a good starting point is to continuously ask and re-ask yourself three basic questions:
<ul>
<li>What does company law concern itself with?</li>
<li>What not?</li>
<li>Why (in either case)?</li>
</ul>
A helpful reference in this regard may be the following “Bloomberg Businessweek” article: “Time Warner: 25 Years of Acquisitions, Sales, and Spinoffs” (and especially the chart it contains) at: <a href="http://www.businessweek.com/articles/2014-07-24/time-warner-25-years-of-acquisitions-sales-and-spinoffs">http://www.businessweek.com/articles/2014-07-24/time-warner-25-years-of-acquisitions-sales-and-spinoffs</a>

Discussion Activity: Please introduce yourself on the course discussion forum called “Introduction” and think about who you are and how the course can be relevant to your goals and interests.

Watch, Think, Activity: Watch the movie “The Corporation” at your leisure. Note that the film is available for purchase or rent through iTunes and YouTube. There is also a DVD version. As well, an official shareware version of the film is available at: <a href="http://youtu.be/s6zQO7JytzQ">http://youtu.be/s6zQO7JytzQ</a>

Discussion Activity Unit 1:

Considering some of the issues you have identified and please discuss your impressions of the film “The Corporation” in less than three pages under the heading “The Corporation”. Feel free to incorporate any of the “reflective questions” enumerated below into your posted page of impressions. However you approach your blog, in particular please address in some way whether you see it as mostly inevitable that corporations will be have badly. If so, why? If not, why not?

http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Movie_poster_the_corporation-231x300.jpg 
Poster for the film “The Corporation” showing the outline of a businessman with an angel’s halo above his head and a devil’s tail.

Source of image: <a href="http://en.wikipedia.org/wiki/The_Corporation_(film">http://en.wikipedia.org/wiki/The_Corporation_(film</a>)

 

Reflective Questions: ThINKING ABOUT THE issues raised by “The Corporation” IN THE CONTEXT OF THIS COURSE
<ol>
<li>Think about how companies as a form originated. Is it what you expected?</li>
<li>How much do we really know about the purposes of companies? In many areas of law, origins and history play a vital role in defining the scope and details of all the emergent law in that area (e.g. criminal, constitutional, equity) – do you feel the same applies to business organizations?</li>
<li>Do we “anthropomorphize” corporations? Why do you think we do?</li>
<li>What purpose does being a “person” serve for corporations? Why not animals? What about robots?</li>
<li>Is it fair to suggest that if the corporation is a person then it is in fact a psychopath? Is Hannah Arendt’s notion of the banality of evil worth considering in this context?</li>
<li>Are corporations inevitably psychopathic? “Bad apple” or Sructural problem? Consider the Sanford Prison experiments and the systemic not personal nature of evil – See Philip Zimbardo’s “The Lucifer Effect” <a href="http://www.lucifereffect.com">http://www.lucifereffect.com</a></li>
<li>Is greater regulation the answer? Are there other alternatives?</li>
<li>What do you see as the role of lawyers in the creation of the corporation (implication that the personhood of slaves was the legal mechanism lawyers took advantage of to popularize the corporate form)? Do our responsibilities relate to our role in creating the legal fictions that are the corporate form? What are our responsibilities as lawyers given the above?</li>
<li>Why shouldn’t corporations do “good” even if it does not benefit them? After all natural persons do that all the time.</li>
</ol>
 

 

TOPIC 2: CORPORATE LAW – SOME INTRODUCTORY NOTES
<ol>
<li> WHAT IS COMPANY LAW ABOUT?</li>
<li>A company is the most successful among a variety of organizational forms – including, for example, partnerships –recognized by law to coordinate the activities required to carry on a business designed to earn profits.</li>
<li>The persons whose activities are necessary to this end are shareholders, directors and senior managers who are not directors, creditors, employees, suppliers, and customers (i.e. users of the company’s products or services).</li>
</ol>
III. In general company law is not interested in the activities of employees, suppliers, and customers. It focuses on shareholders, directors and, to some extent, creditors.
<ol>
<li>The questions as to why company law is concerned with shareholders, directors and creditors, but for the most part uninterested in employees, suppliers, and customers are, therefore, important questions.</li>
<li>As to those groups with whom company law is concerned, it focuses on:</li>
</ol>
<ul>
<li>how one becomes a member of one of these groups;</li>
<li>how one ceases to be a member;</li>
<li>regulating the relations between them (e.g., shareholders as against directors; creditors as against shareholders) and</li>
<li>regulating the relationships within the groups, for example, between majority and minority shareholders and between secured and unsecured creditors.</li>
</ul>
<ol>
<li> SHAREHOLDERS</li>
<li>Become a shareholder by acquiring shares<a href="#_ftn1" name="_ftnref1">[1]</a> either from</li>
</ol>
<ul>
<li>the company itself in exchange for cash, property or services; or</li>
<li>an existing shareholder - generally, but not invariably, for cash.</li>
</ul>
<ol>
<li>Cease to be a shareholder by disposing of shares</li>
</ol>
<ul>
<li>to another investor. The ease with which this may be done is, from the perspective of company law, principally a function of the existence of a public market for the shares – if there is such a market, exit may be easy; if there is no market, exit could be difficult.</li>
<li>rarely to the company itself, and then only subject to restrictions and limitations designed to protect creditors and/or other shareholders,.</li>
</ul>
III. Rights acquired by shareholders not, generally speaking, defined by law. Contained in a contract between the investor and the company. The content of the contract is generally not limited in any way.<a href="#_ftn2" name="_ftnref2">[2]</a> Telus Corporation, for example, has created and sold First Preferred, Second Preferred and Common shares, each with different rights. Teck Cominco has Class A common shares without par value, Class B subordinate voting

shares and preferred shares. Bombardier has Class A (Multiple Voting) Shares, Class B (Subordinate Voting) Shares, Series 2 Cumulative Redeemable Preferred Shares, Series 3 Cumulative Redeemable Preferred Shares and Series 4 Cumulative Redeemable Preferred Shares.
<ol>
<li>The “Common” share is the most basic form of share. Generally, there are no entitlements to financial gain even though the courts have (as you will see) found that financial gain must be the motive underlying the corporate enterprise. While shareholders may expect, or hope for, dividends or capital gains arising out of an increase in market price there is not generally an enforceable right to any of this. To compensate for this shareholder will generally (but not invariably) have the right to vote, i.e. theoretically at least to exercise control over corporate affairs.</li>
<li>In contrast to the “Common” share are “Special” shares, e.g. preferred, which are generally accorded defined financial entitlements which can be of various kinds, e.g. assured dividends at defined rate, liquidation rights (otherwise than through sale to another investor) and financial priorities of one sort or another. Generally, in recognition of the financial entitlements associated with “Special” shares, there will be no right to control through votes.</li>
</ol>
 
<ol>
<li> DIRECTORS</li>
<li>Typically manage, or arrange for management, - generally a “board”.</li>
<li>If shareholders numerous, generally little overlap between authority of shareholders and of directors. Efficiency requires that decision-making be in hands of a small group.</li>
</ol>
III. If few shareholders distinction between them and directors, although formally required, may be quite trivial and artificial.
<ol>
<li>There is some flexibility in allocating power and authority as between shareholders and directors.</li>
</ol>
 
<ol>
<li> CREDITORS</li>
<li>Relationship between a company and creditors (a comprehensive term covering various relationships, e.g. customer who has pre-paid for goods, employee who is owed salary or the maker of a [long-term] loan, holder of a judgment enforceable against company) is, as with shareholders, primarily contractual.</li>
<li>However creditors’ rights can be quite different from shareholders. In principle there is no limit to the variety of rights. But customarily borrowers’ are obliged to repay loans at a fixed future date with the result that their investment is locked for a period rather than, at least in the absence of a public market for shares, is the case for shareholder. Creditors’ normally possess an entitlement to periodic return in form of interest. Contrast this with the shareholders much more uncertain position.</li>
</ol>
III. Lenders’ claims against company rank ahead of claims of shareholders’. Extent of claims determined by contract. Lender may have security for repayment of loan and payment of interest in form of charge against assets; rarely have voting rights, though not impossible. Because of creditor priority, common shareholders often described as “risk” or “equity” shareholders.
<ol>
<li>Company law regulates shareholder/company relationships quite extensively, presumably because both are creatures of that law. It has a far narrower interest in creditor/company relationships.</li>
<li>Why would there be less interest (pardon the pun) in creditor/company relationships? That is because a corporate party, whether creditor or debtor, is not intrinsic to the existence of a debtor/creditor relationship. Many such relationships do not involve companies. So generally they creditor/debtor relationships seem best left to be regulated by general law. This may also possibly explain, partly at least, company law’s relative disinterest in other groups such as employees and customers. Their rights and obligations cannot turn on whether the party with whom they contract is a company and so can safely left to regulation by general commercial and consumer law. This proposition has been generally accepted, though, at least in connection with the position of employees, it is considered controversial.</li>
<li>Other legal systems have different approach - German law, e.g. has special rules requiring employee representation on the boards of large companies.</li>
</ol>
VII. But why does company law have anything to say about relations between creditors and corporations?
<ul>
<li>limited liability – corporate creditor can only proceed against assets of company, separate from those of shareholders and hence creditor cannot ordinarily pursue claims against members.</li>
</ul>
 
<ol>
<li> THE CENTRAL PRINCIPLES OR POLICIES UNDERLYING COMPANY LAW</li>
</ol>
 Five core characteristics at the heart of company law
<ul>
<li>the company an entity distinct from all its shareholders.</li>
<li>limited liability for shareholders.</li>
<li>specialized management, separate from the shareholders.</li>
<li>freely transferable shareholder interests</li>
<li>shareholder control.</li>
</ul>
Query whether there might be a sixth core characteristic at the heart of company law being that “for profit” is the sole legally permissible motive?
<ol>
<li>Separate personhood (or, commonly, “separate personality”)</li>
<li>Unavoidable, inevitable consequence of incorporation - true of every company, whether large or small. This concept is truly fundamental to the conceptual structure of company law. </li>
<li>While personhood facilitates other core features – e.g. limited liability and transferable shares – it sometimes complicates legal analysis - an additional “person” has to be taken into account.</li>
<li>Relations between the key groups – directors/managers, shareholders and creditors - not generally directly contractual but mediated through the “company” e.g. directors obligations are owed to company, not individual shareholders; and individual shareholders generally do not have rights against directors – their rights are against “company”.</li>
<li>“Company” acts as a sort of ‘focal point’ for all these relationships. Functionally, this eliminates need for individual contracts among multiple parties in interest and the further need to re-do contracts whenever there is a change in personnel.</li>
<li>Conferring legal personality sometimes acts as a temptation to treat the company as if it were a natural legal person instead of an artificial one - to attribute ‘interests’ to it which, in the nature of the case, it cannot possibly have.</li>
<li>“Interests of the company” shorthand for interests of one or more groups of natural persons who have legal relations with it, e.g. directors owe fiduciary duties to “the company”. Meaning? In our law, typically the natural persons having legal relations with companies are members/shareholders who with some frequency interpret the “interests of the company” through the lens of their own interests.</li>
<li>Limited liability</li>
<li>Refers to the liability of the company and the fact that creditors’ rights are against company assets only, not against personal assets of the shareholders. “Limited liability company” is a common but misleading expression. The liability of the company is not limited at all – company assets available to full extent to creditors. It is the liability of the shareholders that is limited.</li>
<li>Separate personhood facilitates limited liability – it is easy to distinguish business assets (owned by the company) from personal assets (owned by the shareholders/directors). It guarantees limited liability. If a third party has a contract with company as a separate legal person, liability on the contract is confined to the company and its assets - does not extend to natural persons – directors/shareholders - and their assets.</li>
<li>Guarantee particularly significant if company “insolvent” – i.e. assets insufficient to meet claims of creditors – shareholders not liable to contribute.</li>
<li>Policy reason for limited liability – limited liability encourages investment by those who do not wish to be involved in management.</li>
<li>Countervailing consideration - reality suggests (as is pointed out frequently in “The Corporation”) that limited liability may permit, or even encourage, opportunistic behaviour by controllers of company as against its creditors, for example, by disposing of assets which the company was represented as owning when credit extended. This not in interest of shareholders generally: may increase cost of credit – higher interest than if shareholders’ liability not limited.</li>
<li>Challenge for company law is not simply to implement limited liability but design a set of rules which achieves the desired benefits of limited liability (encouraging shareholder investment) and at the same time reduces or even eliminates opportunistic behaviour as against creditors.</li>
</ol>
III. Centralized management
<ol>
<li>In companies of any size not surprising that management is not left with the shareholders but entrusted to a small group of managers – reasons flexibility, cost, expertise. Main occupation of individual investors may be entirely unrelated to business. Partly, also, motivation or rather lack of it. Shareholder who is one of, 1,000 shareholders may have no motivation to invest much time in working out the correct answer to a question confronting shareholders, but rather to free-ride on the efforts of the others. If all behave this way, none will prepare properly. The dynamics of small group decision-making, which will govern decisions of the managers, are entirely different.</li>
<li>But law does not require a centralized management structure. In general there is considerable freedom to develop appropriate structures and to divide powers between the shareholders and the board in the most convenient fashion, e.g. a company with few shareholders can decide that it does not need a centralized management structure - shareholders may be few enough that they could also be directors/managers.</li>
<li>Strangely, company law in Canada says relatively little about the qualifications (and disqualifications) of directors, at least in the case of private companies. The Jim Pattison Group, based in Vancouver, is described on its website as “the second largest private company in Canada”, with sales in 2012 of $7.5 billion and more than 35,000 employees working at almost 500 different locations worldwide and engaged in the automotive, media, packaging, food sales and distribution, magazine distribution, entertainment, export and financial industries. The Group does in fact have a board of directors all of whom seem to have impressive credentials. But this is not required by law. Should this be a matter of concern?</li>
<li>Contrast companies traded on public markets, which are subject to increasing regulation of who their directors are and what they do.<a href="#_ftn3" name="_ftnref3">[3]</a></li>
<li>Shareholder control</li>
</ol>
Traditional company law view - shareholders are ultimate repository of authority. This is reflected in control over the company’s:
<ul>
<li>constitution;</li>
<li>management; and</li>
<li>surplus assets.</li>
</ul>
<ol>
<li> Control over constitution</li>
<li>The key (but not the only) constitutional document is in British Columbia called the “articles of association” or “articles” (or, in the case of corporations incorporated federally or in Ontario, the “bylaws”). They deal with the internal governance of a company.</li>
<li>Generally, the content of “articles” is not prescribed by law. Instead, because of the primacy accorded to freedom of contract, the law tends to contain default rules only, that is, rules that apply unless the interested parties make a contrary or different agreement. The articles are thus a critical source of the governance rules for the company. In British Columbia the legislation includes a “model” set of articles that apply except to the extent that different provision is made.</li>
</ol>
iii. Articles under control of shareholders. Content, and changes to content, require shareholder approval.
<ol>
<li> Control over management</li>
<li>Intimately related to control of constitution.</li>
<li>Company law does not generally prescribe in detail and minutely the way in which power and authority is to be distributed as between shareholders and directors. This is in general left to shareholders to decide but the law also allows shareholders to remove directors from office by following certain special procedures.</li>
<li> Control over surplus assets</li>
<li>In general, directors may only distribute surplus assets to shareholders, or to satisfy a legal claim against the company, or otherwise to further the company’s business.</li>
<li>The shareholders’ primary entitlement to surplus results from the combination of two features of company law:</li>
</ol>
<ul>
<li>in the case of a company that is a going concern their contracts will define their rights – though common shareholders rarely have a right to participate while the company is a going concern – depends on discretion of directors who are obligated to act “in the best interests of the company”;</li>
<li>in the case of a company going out of business, law does not allow a payment to anyone that is not in satisfaction of a legal claim.</li>
<li>company to make voluntary severance payments to its employees – no legal claim and no claim based on goodwill Since the payments are not in satisfaction of any legal claim on the company and a company which is ceasing to trade has no need to generate goodwill amongst its workforce, such payments were held to be unlawful at common law.</li>
<li>The entitlement of shareholders to a participate in a surplus while the company is a going concern depends In fact, companies tend to be extremely cautious in granting legally enforceable entitlements to dividends to ordinary shareholders.</li>
</ul>
iii. Assets must be used to further business of legal person (i.e. in “company’s best interests”).
<ol>
<li>Our corporate law deeply committed to principle of shareholder control (i.e. the shareholders and their interests are the virtually exclusive objects of legal affection.</li>
<li>But the principle is, at least in the minds of some, controversial and has been challenged. They advance a “stakeholder” argument the nub of which is that the economic power of corporations and their impact or influence over the lives and work of citizens, demands a reconsideration of shareholder primacy. This discussion continues – most often in connection with the relationship between corporations and their employees.</li>
<li>Transferability of shares</li>
<li>Transferability is crucial for two reasons:</li>
</ol>
<ul>
<li>flexibility and liquidity for investors.</li>
<li>governance considerations - the company may function more smoothly if a dissatisfied investor (or one who simply needs cash) is able to leave the company rather than remain as a carping minority.</li>
</ul>
<ol>
<li>Generally, corporate funds may not be used to provide liquidity to investors. Investment, once made, is “locked in”, i.e. investor loses control over funds contributed.</li>
<li>Use of corporate funds to provide liquidity only available, in the absence of contractual entitlement, in limited circumstances narrowly defined to protect interests of other shareholders and of creditors.</li>
</ol>
<ul>
<li>promotes stability in the resources available to the company. If the funds used to provide liquidity for its investors, there would have to be a higher degree of liquidity of corporate assets to ensure corporate development</li>
<li>note: separate legal personhood facilitates liquidity through the market for shares. Disposition of the investor’s interest in the company, (i.e. a share), does not involve a transfer of underlying business assets which are owned by the company and not by the shareholders</li>
<li>One can contract for liquidity – redeemable shares – but precisely because they weaken the company’s control over its assets they tend to be rare.</li>
</ul>
<ol>
<li>Despite importance of market and liquidity, company law does not guarantee:</li>
<li>existence of a market; or</li>
<li>outside a market, that shares may be transferred freely – consents, restrictions, may apply which reflect valid purposes.</li>
<li> SOME GENERAL COMMENTS</li>
<li>Only separate personhood is inevitable and unavoidable. The other core features of corporate existence can be avoided through appropriate provisions in a company’s constitution or by contracts with the company or its shareholders.</li>
<li> Relationship between core features and corporate size</li>
<li>Very small companies most likely not to display the four optional core features.</li>
<li>For example: Ms. Smith and Mr. Jones incorporate Smith & Jones (Home Renovations) Ltd, to run a small home renovation business.</li>
</ol>
<ul>
<li>Each agrees to subscribe for one share for which each pays $1. There are no other shareholders. They control the company.</li>
<li>Business financed with funds borrowed from bank which insists on personal guarantees from Smith and Jones. To this extent anyway, they do not have the benefit of limited liability. </li>
<li>They appoint themselves the only directors. Indifferent to whether they make decisions as shareholders or as directors. There is complete unity of shareholding, board membership, and management in this company. No centralized management separate from the shareholders. </li>
<li>The articles require (a) consent of all existing shareholders to admission of new shareholders and (b) if an existing shareholder wishes to sell his or her shares, they must first be offered to the other existing shareholders. No free transferability of shares.</li>
<li>Smith and Jones in total control disposition of surplus funds.</li>
</ul>
<ol>
<li>Smith and Jones have acquired control not because they have made a major financial investment but because they are the people who will get and do the work that the company is set up to carry on.</li>
<li>Contrast, at the other end of the size spectrum, companies such as Telus, Teck, Bell and Rogers, all with shares traded on public markets, each of which has thousands of shareholders, none of whom has given any personal guarantee of the company’s debts or liabilities; the board of each is clearly distinct from both the shareholders and the senior management of the company; and the shares are freely transferable from both the shareholders’ and the company’s point of view. As far as the law is concerned, the shareholders also control the company in the ways defined above – at least in theory. However, by way of contrast with Smith & Jones Ltd, the sheer number of the shareholders raises a serious question whether the difficulties the shareholders will face in coordinating their actions mean that in fact they are incapable of exercising the control the law confers upon them.</li>
<li>Nearly all public companies and a substantial number of private companies, display the five core features.</li>
</ol>
III. Interaction among core features
<ol>
<li>The core features sometimes compete – so a solution that implements one feature may impair attainment of another, e.g.</li>
</ol>
<ul>
<li>placing broad range of decisions in hands of shareholders would expand their control but at a likely cost of efficiencies derived from centralized management, so more likely to be found in small private rather than large public companies.</li>
<li>Consequently, for public companies there is likely to be a search for techniques that provide the benefits of shareholder control without at the same time imposing greater costs by way of loss of the benefits of centralized management.</li>
</ul>
<ol>
<li>Correlation between corporate size and presence of all five core features not accidental.</li>
</ol>
<ul>
<li>As companies grow, capital needs of business likely to increase – invite public participation through risk (common) capital;</li>
<li>Public shareholders:
<ul>
<li>more likely to invest if they can subsequently dispose of their shares on a market and if they benefit from limited liability</li>
<li>unlikely to want or have ability to manage, leading to centralized management;.</li>
<li>having provided investment with no legal guarantee of a return, are likely to want the power to remove the management if business unsuccessful.</li>
</ul>
</li>
</ul>
 

Unit Wrap Up: At this point, you should have nothing but questions. Plus perhaps two particularly nagging ones along the lines of:
<ol>
<li>“If corporate law is so bad, why are so many lawyers practicing in and around this area?” &</li>
<li>“What exactly are those lawyers doing?”</li>
</ol>
This course will not adequately answer the first question but hopefully facilitate and informed exploration of the second, beginning with some observations about the corporate lifespan. In Unit 2 we begin with the legal version of “immaculate conception” and move forward from there.

<a href="#_ftnref1" name="_ftn1">[1]</a> Certain aspects of the process of acquiring and disposing of shares are regulated by company law; other aspects by securities law.

<a href="#_ftnref2" name="_ftn2">[2]</a> Stock exchanges or other public markets may, however, impose certain restrictions as a condition of permitting the shares to be traded through the facilities of the exchange. For example, certain exchanges prohibit or limit the use of shares without voting rights.

<a href="#_ftnref3" name="_ftn3">[3]</a> This regulation is generally found in the securities laws administered by regulatory bodies such as the stock exchanges and provincial securities commissions and not in company law.

Course:Business Organizations - LAW 459/Unit 1

2016-08-16T17:51:09Z

DavidHeinrich:

UNIT 1 (WEEK 1): INTRODUCING BUSINESS ORGANIZATIONS & THEIR REAL WORLD CONTEXTS

http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Bombardier_BD-700-1A11_Global_5000_Jet_Aviation_Business_Jets_JP6462270-360x245.jpg
 

Source of image: <a href="http://commons.wikimedia.org/wiki/File:Bombardier_BD-700-1A11_Global_5000,_Jet_Aviation_Business_Jets_JP6462270.jpg">http://commons.wikimedia.org/wiki/File:Bombardier_BD-700-1A11_Global_5000,_Jet_Aviation_Business_Jets_JP6462270.jpg</a>

UNIT OVERVIEW: Corporate law exists not only within legal and juridical contexts, but also within political and social ones. Prof. Joel Bakan’s seminal film “The Corporation” explores those nexus points. As part of this Unit you should also begin familiarizing yourself with the course materials and syllabus generally.

 

UNIT OUTCOMES: You will have the opportunity to reflect on the reality that corporate law, beyond being a legal subject has profound impacts on our society, and implicates important ethical and economic issues. You should be able to name three such impacts. You should have obtained a glimpse of the dichotomies of corporate law. On one level a technical and detail oriented vehicle of commerce, and on another an ethical conundrum because of its requirement of profit and the fiction of “corporate personhood”.

UNIT TOPICS:

TOPIC 1: A BASIC METHODOLOGY FOR APPROACHING THE COURSE

 

Spend some time introducing yourself to some of the underlying ideas of the course. First read through the Course Syllabus and familiarize yourself with the course. Then go through this unit and finish all its activities.

Starting with elementary Stuff – ask yourself what, for a lawyer, is a company?

It is an organizational form recognized by the law, to coordinate and regulate the activities of those who provide the various inputs necessary to carry on a business designed to earn profits.

It is the most successful form of organization for doing this – at end of the course you should be able to explain in some detail why that is.

Whose activities are being coordinated and regulated? Company law suggests three groups:
<ul>
<li>Shareholders,</li>
<li>Directors (and to some extent senior managers who are not directors), and</li>
<li></li>
</ul>
What is being regulated are the relations between these groups (e.g., shareholders as against directors; creditors as against shareholders), and also the relations within each group (e.g., majority/minority shareholders, secured/unsecured creditors).

The Law also has some interest in how one becomes a member of a group and in how one leaves.

You may well ask what of others whose activities must be coordinated for a business to succeed: employees, suppliers, and customers, at the very least.

In general company law not interested in them, though other areas of law are.

In short as you go through the remainder of this Unit (and in fact the remainder of this course), a good starting point is to continuously ask and re-ask yourself three basic questions:
<ul>
<li>What does company law concern itself with?</li>
<li>What not?</li>
<li>Why (in either case)?</li>
</ul>
A helpful reference in this regard may be the following “Bloomberg Businessweek” article: “Time Warner: 25 Years of Acquisitions, Sales, and Spinoffs” (and especially the chart it contains) at: <a href="http://www.businessweek.com/articles/2014-07-24/time-warner-25-years-of-acquisitions-sales-and-spinoffs">http://www.businessweek.com/articles/2014-07-24/time-warner-25-years-of-acquisitions-sales-and-spinoffs</a>

Discussion Activity: Please introduce yourself on the course discussion forum called “Introduction” and talk about who you are and how the course can be relevant to your goals and interests.

Watch, Think, Blog Activity: Watch the movie “The Corporation” at your leisure. Note that the film is available for purchase or rent through iTunes and YouTube. There is also a DVD version. As well, an official shareware version of the film is available at: <a href="http://youtu.be/s6zQO7JytzQ">http://youtu.be/s6zQO7JytzQ</a>

Blog Activity Unit 1:

Considering some of the issues you have identified and please blog your impressions of the film “The Corporation” in less than three pages under the heading “The Corporation”. Feel free to incorporate any of the “reflective questions” enumerated below into your posted page of impressions. However you approach your blog, in particular please address in some way whether you see it as mostly inevitable that corporations will be have badly. If so, why? If not, why not?

Please also read at least two other blogs from your peers and add comments.

For the blog activities, you need to create your own blog account.

 

If you are a UBC Blog user, click on the activity title and then reply to the posting. You will then be asked to login with your CWL. Once you enter your CWL, you will be in the activity. Click Reply to start your posting.

 

If you are a non-UBC Blog User (haven’t used UBC blogs before), you need to sign up to be a UBC Blog user first. In order to register, click on the activity title (or go to <a href="http://blogs.ubc.ca/">http://blogs.ubc.ca</a>) and you will be prompted with a screen to sign up to be a UBC Blog user. You will need to fill out the form with username etc. (Please note that your user name cannot be changed) and then choose to sign up as a user. You will then have to fill out your profile. Once this is complete and you have signed up for a UBC Blogs user account return to your course. Click on the activity title, enter your CWL and click Reply.

 

For more information about how to get an account go to <a href="http://wiki.ubc.ca/UBC_Blogs_FAQ">http://wiki.ubc.ca/UBC_Blogs_FAQ</a> or 

<a href="https://www.mail.ubc.ca/owa/redir.aspx?C=29SnWhVXdU2qH9MzedevqWTrMAVahNEIpsDfPJQ_jrCZh0Vcna4EStJYYIfTVoJv1drGfhhgoZc.&URL=http%3a%2f%2felearning.ubc.ca%2ftoolkit%2fblogs%2f">http://elearning.ubc.ca/toolkit/blogs/</a> 

http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Movie_poster_the_corporation-231x300.jpg 
Poster for the film “The Corporation” showing the outline of a businessman with an angel’s halo above his head and a devil’s tail.

Source of image: <a href="http://en.wikipedia.org/wiki/The_Corporation_(film">http://en.wikipedia.org/wiki/The_Corporation_(film</a>)

 

Reflective Questions: ThINKING ABOUT THE issues raised by “The Corporation” IN THE CONTEXT OF THIS COURSE
<ol>
<li>Think about how companies as a form originated. Is it what you expected?</li>
<li>How much do we really know about the purposes of companies? In many areas of law, origins and history play a vital role in defining the scope and details of all the emergent law in that area (e.g. criminal, constitutional, equity) – do you feel the same applies to business organizations?</li>
<li>Do we “anthropomorphize” corporations? Why do you think we do?</li>
<li>What purpose does being a “person” serve for corporations? Why not animals? What about robots?</li>
<li>Is it fair to suggest that if the corporation is a person then it is in fact a psychopath? Is Hannah Arendt’s notion of the banality of evil worth considering in this context?</li>
<li>Are corporations inevitably psychopathic? “Bad apple” or Sructural problem? Consider the Sanford Prison experiments and the systemic not personal nature of evil – See Philip Zimbardo’s “The Lucifer Effect” <a href="http://www.lucifereffect.com">http://www.lucifereffect.com</a></li>
<li>Is greater regulation the answer? Are there other alternatives?</li>
<li>What do you see as the role of lawyers in the creation of the corporation (implication that the personhood of slaves was the legal mechanism lawyers took advantage of to popularize the corporate form)? Do our responsibilities relate to our role in creating the legal fictions that are the corporate form? What are our responsibilities as lawyers given the above?</li>
<li>Why shouldn’t corporations do “good” even if it does not benefit them? After all natural persons do that all the time.</li>
</ol>
 

 

TOPIC 2: CORPORATE LAW – SOME INTRODUCTORY NOTES
<ol>
<li> WHAT IS COMPANY LAW ABOUT?</li>
<li>A company is the most successful among a variety of organizational forms – including, for example, partnerships –recognized by law to coordinate the activities required to carry on a business designed to earn profits.</li>
<li>The persons whose activities are necessary to this end are shareholders, directors and senior managers who are not directors, creditors, employees, suppliers, and customers (i.e. users of the company’s products or services).</li>
</ol>
III. In general company law is not interested in the activities of employees, suppliers, and customers. It focuses on shareholders, directors and, to some extent, creditors.
<ol>
<li>The questions as to why company law is concerned with shareholders, directors and creditors, but for the most part uninterested in employees, suppliers, and customers are, therefore, important questions.</li>
<li>As to those groups with whom company law is concerned, it focuses on:</li>
</ol>
<ul>
<li>how one becomes a member of one of these groups;</li>
<li>how one ceases to be a member;</li>
<li>regulating the relations between them (e.g., shareholders as against directors; creditors as against shareholders) and</li>
<li>regulating the relationships within the groups, for example, between majority and minority shareholders and between secured and unsecured creditors.</li>
</ul>
<ol>
<li> SHAREHOLDERS</li>
<li>Become a shareholder by acquiring shares<a href="#_ftn1" name="_ftnref1">[1]</a> either from</li>
</ol>
<ul>
<li>the company itself in exchange for cash, property or services; or</li>
<li>an existing shareholder - generally, but not invariably, for cash.</li>
</ul>
<ol>
<li>Cease to be a shareholder by disposing of shares</li>
</ol>
<ul>
<li>to another investor. The ease with which this may be done is, from the perspective of company law, principally a function of the existence of a public market for the shares – if there is such a market, exit may be easy; if there is no market, exit could be difficult.</li>
<li>rarely to the company itself, and then only subject to restrictions and limitations designed to protect creditors and/or other shareholders,.</li>
</ul>
III. Rights acquired by shareholders not, generally speaking, defined by law. Contained in a contract between the investor and the company. The content of the contract is generally not limited in any way.<a href="#_ftn2" name="_ftnref2">[2]</a> Telus Corporation, for example, has created and sold First Preferred, Second Preferred and Common shares, each with different rights. Teck Cominco has Class A common shares without par value, Class B subordinate voting

shares and preferred shares. Bombardier has Class A (Multiple Voting) Shares, Class B (Subordinate Voting) Shares, Series 2 Cumulative Redeemable Preferred Shares, Series 3 Cumulative Redeemable Preferred Shares and Series 4 Cumulative Redeemable Preferred Shares.
<ol>
<li>The “Common” share is the most basic form of share. Generally, there are no entitlements to financial gain even though the courts have (as you will see) found that financial gain must be the motive underlying the corporate enterprise. While shareholders may expect, or hope for, dividends or capital gains arising out of an increase in market price there is not generally an enforceable right to any of this. To compensate for this shareholder will generally (but not invariably) have the right to vote, i.e. theoretically at least to exercise control over corporate affairs.</li>
<li>In contrast to the “Common” share are “Special” shares, e.g. preferred, which are generally accorded defined financial entitlements which can be of various kinds, e.g. assured dividends at defined rate, liquidation rights (otherwise than through sale to another investor) and financial priorities of one sort or another. Generally, in recognition of the financial entitlements associated with “Special” shares, there will be no right to control through votes.</li>
</ol>
 
<ol>
<li> DIRECTORS</li>
<li>Typically manage, or arrange for management, - generally a “board”.</li>
<li>If shareholders numerous, generally little overlap between authority of shareholders and of directors. Efficiency requires that decision-making be in hands of a small group.</li>
</ol>
III. If few shareholders distinction between them and directors, although formally required, may be quite trivial and artificial.
<ol>
<li>There is some flexibility in allocating power and authority as between shareholders and directors.</li>
</ol>
 
<ol>
<li> CREDITORS</li>
<li>Relationship between a company and creditors (a comprehensive term covering various relationships, e.g. customer who has pre-paid for goods, employee who is owed salary or the maker of a [long-term] loan, holder of a judgment enforceable against company) is, as with shareholders, primarily contractual.</li>
<li>However creditors’ rights can be quite different from shareholders. In principle there is no limit to the variety of rights. But customarily borrowers’ are obliged to repay loans at a fixed future date with the result that their investment is locked for a period rather than, at least in the absence of a public market for shares, is the case for shareholder. Creditors’ normally possess an entitlement to periodic return in form of interest. Contrast this with the shareholders much more uncertain position.</li>
</ol>
III. Lenders’ claims against company rank ahead of claims of shareholders’. Extent of claims determined by contract. Lender may have security for repayment of loan and payment of interest in form of charge against assets; rarely have voting rights, though not impossible. Because of creditor priority, common shareholders often described as “risk” or “equity” shareholders.
<ol>
<li>Company law regulates shareholder/company relationships quite extensively, presumably because both are creatures of that law. It has a far narrower interest in creditor/company relationships.</li>
<li>Why would there be less interest (pardon the pun) in creditor/company relationships? That is because a corporate party, whether creditor or debtor, is not intrinsic to the existence of a debtor/creditor relationship. Many such relationships do not involve companies. So generally they creditor/debtor relationships seem best left to be regulated by general law. This may also possibly explain, partly at least, company law’s relative disinterest in other groups such as employees and customers. Their rights and obligations cannot turn on whether the party with whom they contract is a company and so can safely left to regulation by general commercial and consumer law. This proposition has been generally accepted, though, at least in connection with the position of employees, it is considered controversial.</li>
<li>Other legal systems have different approach - German law, e.g. has special rules requiring employee representation on the boards of large companies.</li>
</ol>
VII. But why does company law have anything to say about relations between creditors and corporations?
<ul>
<li>limited liability – corporate creditor can only proceed against assets of company, separate from those of shareholders and hence creditor cannot ordinarily pursue claims against members.</li>
</ul>
 
<ol>
<li> THE CENTRAL PRINCIPLES OR POLICIES UNDERLYING COMPANY LAW</li>
</ol>
 Five core characteristics at the heart of company law
<ul>
<li>the company an entity distinct from all its shareholders.</li>
<li>limited liability for shareholders.</li>
<li>specialized management, separate from the shareholders.</li>
<li>freely transferable shareholder interests</li>
<li>shareholder control.</li>
</ul>
Query whether there might be a sixth core characteristic at the heart of company law being that “for profit” is the sole legally permissible motive?
<ol>
<li>Separate personhood (or, commonly, “separate personality”)</li>
<li>Unavoidable, inevitable consequence of incorporation - true of every company, whether large or small. This concept is truly fundamental to the conceptual structure of company law. </li>
<li>While personhood facilitates other core features – e.g. limited liability and transferable shares – it sometimes complicates legal analysis - an additional “person” has to be taken into account.</li>
<li>Relations between the key groups – directors/managers, shareholders and creditors - not generally directly contractual but mediated through the “company” e.g. directors obligations are owed to company, not individual shareholders; and individual shareholders generally do not have rights against directors – their rights are against “company”.</li>
<li>“Company” acts as a sort of ‘focal point’ for all these relationships. Functionally, this eliminates need for individual contracts among multiple parties in interest and the further need to re-do contracts whenever there is a change in personnel.</li>
<li>Conferring legal personality sometimes acts as a temptation to treat the company as if it were a natural legal person instead of an artificial one - to attribute ‘interests’ to it which, in the nature of the case, it cannot possibly have.</li>
<li>“Interests of the company” shorthand for interests of one or more groups of natural persons who have legal relations with it, e.g. directors owe fiduciary duties to “the company”. Meaning? In our law, typically the natural persons having legal relations with companies are members/shareholders who with some frequency interpret the “interests of the company” through the lens of their own interests.</li>
<li>Limited liability</li>
<li>Refers to the liability of the company and the fact that creditors’ rights are against company assets only, not against personal assets of the shareholders. “Limited liability company” is a common but misleading expression. The liability of the company is not limited at all – company assets available to full extent to creditors. It is the liability of the shareholders that is limited.</li>
<li>Separate personhood facilitates limited liability – it is easy to distinguish business assets (owned by the company) from personal assets (owned by the shareholders/directors). It guarantees limited liability. If a third party has a contract with company as a separate legal person, liability on the contract is confined to the company and its assets - does not extend to natural persons – directors/shareholders - and their assets.</li>
<li>Guarantee particularly significant if company “insolvent” – i.e. assets insufficient to meet claims of creditors – shareholders not liable to contribute.</li>
<li>Policy reason for limited liability – limited liability encourages investment by those who do not wish to be involved in management.</li>
<li>Countervailing consideration - reality suggests (as is pointed out frequently in “The Corporation”) that limited liability may permit, or even encourage, opportunistic behaviour by controllers of company as against its creditors, for example, by disposing of assets which the company was represented as owning when credit extended. This not in interest of shareholders generally: may increase cost of credit – higher interest than if shareholders’ liability not limited.</li>
<li>Challenge for company law is not simply to implement limited liability but design a set of rules which achieves the desired benefits of limited liability (encouraging shareholder investment) and at the same time reduces or even eliminates opportunistic behaviour as against creditors.</li>
</ol>
III. Centralized management
<ol>
<li>In companies of any size not surprising that management is not left with the shareholders but entrusted to a small group of managers – reasons flexibility, cost, expertise. Main occupation of individual investors may be entirely unrelated to business. Partly, also, motivation or rather lack of it. Shareholder who is one of, 1,000 shareholders may have no motivation to invest much time in working out the correct answer to a question confronting shareholders, but rather to free-ride on the efforts of the others. If all behave this way, none will prepare properly. The dynamics of small group decision-making, which will govern decisions of the managers, are entirely different.</li>
<li>But law does not require a centralized management structure. In general there is considerable freedom to develop appropriate structures and to divide powers between the shareholders and the board in the most convenient fashion, e.g. a company with few shareholders can decide that it does not need a centralized management structure - shareholders may be few enough that they could also be directors/managers.</li>
<li>Strangely, company law in Canada says relatively little about the qualifications (and disqualifications) of directors, at least in the case of private companies. The Jim Pattison Group, based in Vancouver, is described on its website as “the second largest private company in Canada”, with sales in 2012 of $7.5 billion and more than 35,000 employees working at almost 500 different locations worldwide and engaged in the automotive, media, packaging, food sales and distribution, magazine distribution, entertainment, export and financial industries. The Group does in fact have a board of directors all of whom seem to have impressive credentials. But this is not required by law. Should this be a matter of concern?</li>
<li>Contrast companies traded on public markets, which are subject to increasing regulation of who their directors are and what they do.<a href="#_ftn3" name="_ftnref3">[3]</a></li>
<li>Shareholder control</li>
</ol>
Traditional company law view - shareholders are ultimate repository of authority. This is reflected in control over the company’s:
<ul>
<li>constitution;</li>
<li>management; and</li>
<li>surplus assets.</li>
</ul>
<ol>
<li> Control over constitution</li>
<li>The key (but not the only) constitutional document is in British Columbia called the “articles of association” or “articles” (or, in the case of corporations incorporated federally or in Ontario, the “bylaws”). They deal with the internal governance of a company.</li>
<li>Generally, the content of “articles” is not prescribed by law. Instead, because of the primacy accorded to freedom of contract, the law tends to contain default rules only, that is, rules that apply unless the interested parties make a contrary or different agreement. The articles are thus a critical source of the governance rules for the company. In British Columbia the legislation includes a “model” set of articles that apply except to the extent that different provision is made.</li>
</ol>
iii. Articles under control of shareholders. Content, and changes to content, require shareholder approval.
<ol>
<li> Control over management</li>
<li>Intimately related to control of constitution.</li>
<li>Company law does not generally prescribe in detail and minutely the way in which power and authority is to be distributed as between shareholders and directors. This is in general left to shareholders to decide but the law also allows shareholders to remove directors from office by following certain special procedures.</li>
<li> Control over surplus assets</li>
<li>In general, directors may only distribute surplus assets to shareholders, or to satisfy a legal claim against the company, or otherwise to further the company’s business.</li>
<li>The shareholders’ primary entitlement to surplus results from the combination of two features of company law:</li>
</ol>
<ul>
<li>in the case of a company that is a going concern their contracts will define their rights – though common shareholders rarely have a right to participate while the company is a going concern – depends on discretion of directors who are obligated to act “in the best interests of the company”;</li>
<li>in the case of a company going out of business, law does not allow a payment to anyone that is not in satisfaction of a legal claim.</li>
<li>company to make voluntary severance payments to its employees – no legal claim and no claim based on goodwill Since the payments are not in satisfaction of any legal claim on the company and a company which is ceasing to trade has no need to generate goodwill amongst its workforce, such payments were held to be unlawful at common law.</li>
<li>The entitlement of shareholders to a participate in a surplus while the company is a going concern depends In fact, companies tend to be extremely cautious in granting legally enforceable entitlements to dividends to ordinary shareholders.</li>
</ul>
iii. Assets must be used to further business of legal person (i.e. in “company’s best interests”).
<ol>
<li>Our corporate law deeply committed to principle of shareholder control (i.e. the shareholders and their interests are the virtually exclusive objects of legal affection.</li>
<li>But the principle is, at least in the minds of some, controversial and has been challenged. They advance a “stakeholder” argument the nub of which is that the economic power of corporations and their impact or influence over the lives and work of citizens, demands a reconsideration of shareholder primacy. This discussion continues – most often in connection with the relationship between corporations and their employees.</li>
<li>Transferability of shares</li>
<li>Transferability is crucial for two reasons:</li>
</ol>
<ul>
<li>flexibility and liquidity for investors.</li>
<li>governance considerations - the company may function more smoothly if a dissatisfied investor (or one who simply needs cash) is able to leave the company rather than remain as a carping minority.</li>
</ul>
<ol>
<li>Generally, corporate funds may not be used to provide liquidity to investors. Investment, once made, is “locked in”, i.e. investor loses control over funds contributed.</li>
<li>Use of corporate funds to provide liquidity only available, in the absence of contractual entitlement, in limited circumstances narrowly defined to protect interests of other shareholders and of creditors.</li>
</ol>
<ul>
<li>promotes stability in the resources available to the company. If the funds used to provide liquidity for its investors, there would have to be a higher degree of liquidity of corporate assets to ensure corporate development</li>
<li>note: separate legal personhood facilitates liquidity through the market for shares. Disposition of the investor’s interest in the company, (i.e. a share), does not involve a transfer of underlying business assets which are owned by the company and not by the shareholders</li>
<li>One can contract for liquidity – redeemable shares – but precisely because they weaken the company’s control over its assets they tend to be rare.</li>
</ul>
<ol>
<li>Despite importance of market and liquidity, company law does not guarantee:</li>
<li>existence of a market; or</li>
<li>outside a market, that shares may be transferred freely – consents, restrictions, may apply which reflect valid purposes.</li>
<li> SOME GENERAL COMMENTS</li>
<li>Only separate personhood is inevitable and unavoidable. The other core features of corporate existence can be avoided through appropriate provisions in a company’s constitution or by contracts with the company or its shareholders.</li>
<li> Relationship between core features and corporate size</li>
<li>Very small companies most likely not to display the four optional core features.</li>
<li>For example: Ms. Smith and Mr. Jones incorporate Smith & Jones (Home Renovations) Ltd, to run a small home renovation business.</li>
</ol>
<ul>
<li>Each agrees to subscribe for one share for which each pays $1. There are no other shareholders. They control the company.</li>
<li>Business financed with funds borrowed from bank which insists on personal guarantees from Smith and Jones. To this extent anyway, they do not have the benefit of limited liability. </li>
<li>They appoint themselves the only directors. Indifferent to whether they make decisions as shareholders or as directors. There is complete unity of shareholding, board membership, and management in this company. No centralized management separate from the shareholders. </li>
<li>The articles require (a) consent of all existing shareholders to admission of new shareholders and (b) if an existing shareholder wishes to sell his or her shares, they must first be offered to the other existing shareholders. No free transferability of shares.</li>
<li>Smith and Jones in total control disposition of surplus funds.</li>
</ul>
<ol>
<li>Smith and Jones have acquired control not because they have made a major financial investment but because they are the people who will get and do the work that the company is set up to carry on.</li>
<li>Contrast, at the other end of the size spectrum, companies such as Telus, Teck, Bell and Rogers, all with shares traded on public markets, each of which has thousands of shareholders, none of whom has given any personal guarantee of the company’s debts or liabilities; the board of each is clearly distinct from both the shareholders and the senior management of the company; and the shares are freely transferable from both the shareholders’ and the company’s point of view. As far as the law is concerned, the shareholders also control the company in the ways defined above – at least in theory. However, by way of contrast with Smith & Jones Ltd, the sheer number of the shareholders raises a serious question whether the difficulties the shareholders will face in coordinating their actions mean that in fact they are incapable of exercising the control the law confers upon them.</li>
<li>Nearly all public companies and a substantial number of private companies, display the five core features.</li>
</ol>
III. Interaction among core features
<ol>
<li>The core features sometimes compete – so a solution that implements one feature may impair attainment of another, e.g.</li>
</ol>
<ul>
<li>placing broad range of decisions in hands of shareholders would expand their control but at a likely cost of efficiencies derived from centralized management, so more likely to be found in small private rather than large public companies.</li>
<li>Consequently, for public companies there is likely to be a search for techniques that provide the benefits of shareholder control without at the same time imposing greater costs by way of loss of the benefits of centralized management.</li>
</ul>
<ol>
<li>Correlation between corporate size and presence of all five core features not accidental.</li>
</ol>
<ul>
<li>As companies grow, capital needs of business likely to increase – invite public participation through risk (common) capital;</li>
<li>Public shareholders:
<ul>
<li>more likely to invest if they can subsequently dispose of their shares on a market and if they benefit from limited liability</li>
<li>unlikely to want or have ability to manage, leading to centralized management;.</li>
<li>having provided investment with no legal guarantee of a return, are likely to want the power to remove the management if business unsuccessful.</li>
</ul>
</li>
</ul>
 

Unit Wrap Up: At this point, you should have nothing but questions. Plus perhaps two particularly nagging ones along the lines of:
<ol>
<li>“If corporate law is so bad, why are so many lawyers practicing in and around this area?” &</li>
<li>“What exactly are those lawyers doing?”</li>
</ol>
This course will not adequately answer the first question but hopefully facilitate and informed exploration of the second, beginning with some observations about the corporate lifespan. In Unit 2 we begin with the legal version of “immaculate conception” and move forward from there.

<a href="#_ftnref1" name="_ftn1">[1]</a> Certain aspects of the process of acquiring and disposing of shares are regulated by company law; other aspects by securities law.

<a href="#_ftnref2" name="_ftn2">[2]</a> Stock exchanges or other public markets may, however, impose certain restrictions as a condition of permitting the shares to be traded through the facilities of the exchange. For example, certain exchanges prohibit or limit the use of shares without voting rights.

<a href="#_ftnref3" name="_ftn3">[3]</a> This regulation is generally found in the securities laws administered by regulatory bodies such as the stock exchanges and provincial securities commissions and not in company law.

Course:Business Organizations - LAW 459/Unit 1

2016-08-16T17:35:06Z

DavidHeinrich:

UNIT 1 (WEEK 1): INTRODUCING BUSINESS ORGANIZATIONS & THEIR REAL WORLD CONTEXTS

http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Bombardier_BD-700-1A11_Global_5000_Jet_Aviation_Business_Jets_JP6462270-360x245.jpg
 

Source of image: <a href="http://commons.wikimedia.org/wiki/File:Bombardier_BD-700-1A11_Global_5000,_Jet_Aviation_Business_Jets_JP6462270.jpg">http://commons.wikimedia.org/wiki/File:Bombardier_BD-700-1A11_Global_5000,_Jet_Aviation_Business_Jets_JP6462270.jpg</a>

UNIT OVERVIEW: Corporate law exists not only within legal and juridical contexts, but also within political and social ones. Prof. Joel Bakan’s seminal film “The Corporation” explores those nexus points. As part of this Unit you should also begin familiarizing yourself with the course materials and syllabus generally.

 

UNIT OUTCOMES: You will have the opportunity to reflect on the reality that corporate law, beyond being a legal subject has profound impacts on our society, and implicates important ethical and economic issues. You should be able to name three such impacts. You should have obtained a glimpse of the dichotomies of corporate law. On one level a technical and detail oriented vehicle of commerce, and on another an ethical conundrum because of its requirement of profit and the fiction of “corporate personhood”.

UNIT TOPICS:

TOPIC 1: A BASIC METHODOLOGY FOR APPROACHING THE COURSE

 

Spend some time introducing yourself to some of the underlying ideas of the course. First read through the Course Syllabus and familiarize yourself with the course. Then go through this unit and finish all its activities.

Starting with elementary Stuff – ask yourself what, for a lawyer, is a company?

It is an organizational form recognized by the law, to coordinate and regulate the activities of those who provide the various inputs necessary to carry on a business designed to earn profits.

It is the most successful form of organization for doing this – at end of the course you should be able to explain in some detail why that is.

Whose activities are being coordinated and regulated? Company law suggests three groups:
<ul>
<li>Shareholders,</li>
<li>Directors (and to some extent senior managers who are not directors), and</li>
<li></li>
</ul>
What is being regulated are the relations between these groups (e.g., shareholders as against directors; creditors as against shareholders), and also the relations within each group (e.g., majority/minority shareholders, secured/unsecured creditors).

The Law also has some interest in how one becomes a member of a group and in how one leaves.

You may well ask what of others whose activities must be coordinated for a business to succeed: employees, suppliers, and customers, at the very least.

In general company law not interested in them, though other areas of law are.

In short as you go through the remainder of this Unit (and in fact the remainder of this course), a good starting point is to continuously ask and re-ask yourself three basic questions:
<ul>
<li>What does company law concern itself with?</li>
<li>What not?</li>
<li>Why (in either case)?</li>
</ul>
A helpful reference in this regard may be the following “Bloomberg Businessweek” article: “Time Warner: 25 Years of Acquisitions, Sales, and Spinoffs” (and especially the chart it contains) at: <a href="http://www.businessweek.com/articles/2014-07-24/time-warner-25-years-of-acquisitions-sales-and-spinoffs">http://www.businessweek.com/articles/2014-07-24/time-warner-25-years-of-acquisitions-sales-and-spinoffs</a>

Discussion Activity: Please introduce yourself on the course discussion forum called “Introduction” and talk about who you are and how the course can be relevant to your goals and interests.

Watch, Think, Blog Activity: Watch the movie “The Corporation” at your leisure. Note that the film is available for purchase or rent through iTunes and YouTube. There is also a DVD version. As well, an official shareware version of the film is available at: <a href="http://youtu.be/s6zQO7JytzQ">http://youtu.be/s6zQO7JytzQ</a>

Blog Activity Unit 1:

Considering some of the issues you have identified and please blog your impressions of the film “The Corporation” in less than three pages under the heading “The Corporation”. Feel free to incorporate any of the “reflective questions” enumerated below into your posted page of impressions. However you approach your blog, in particular please address in some way whether you see it as mostly inevitable that corporations will be have badly. If so, why? If not, why not?

Please also read at least two other blogs from your peers and add comments.

For the blog activities, you need to create your own blog account.

 

If you are a UBC Blog user, click on the activity title and then reply to the posting. You will then be asked to login with your CWL. Once you enter your CWL, you will be in the activity. Click Reply to start your posting.

 

If you are a non-UBC Blog User (haven’t used UBC blogs before), you need to sign up to be a UBC Blog user first. In order to register, click on the activity title (or go to <a href="http://blogs.ubc.ca/">http://blogs.ubc.ca</a>) and you will be prompted with a screen to sign up to be a UBC Blog user. You will need to fill out the form with username etc. (Please note that your user name cannot be changed) and then choose to sign up as a user. You will then have to fill out your profile. Once this is complete and you have signed up for a UBC Blogs user account return to your course. Click on the activity title, enter your CWL and click Reply.

 

For more information about how to get an account go to <a href="http://wiki.ubc.ca/UBC_Blogs_FAQ">http://wiki.ubc.ca/UBC_Blogs_FAQ</a> or 

<a href="https://www.mail.ubc.ca/owa/redir.aspx?C=29SnWhVXdU2qH9MzedevqWTrMAVahNEIpsDfPJQ_jrCZh0Vcna4EStJYYIfTVoJv1drGfhhgoZc.&URL=http%3a%2f%2felearning.ubc.ca%2ftoolkit%2fblogs%2f">http://elearning.ubc.ca/toolkit/blogs/</a> 


<img class="alignnone wp-image-189 aligncenter" src="http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Movie_poster_the_corporation-231x300.jpg" alt="Movie_poster_the_corporation" width="302" height="392" />
Figure 1: The Corporation
ALT: Poster for the film “The Corporation” showing the outline of a businessman with an angel’s halo above his head and a devil’s tail.

Source of image: <a href="http://en.wikipedia.org/wiki/The_Corporation_(film">http://en.wikipedia.org/wiki/The_Corporation_(film</a>)

 

Reflective Questions: ThINKING ABOUT THE issues raised by “The Corporation” IN THE CONTEXT OF THIS COURSE
<ol>
<li>Think about how companies as a form originated. Is it what you expected?</li>
<li>How much do we really know about the purposes of companies? In many areas of law, origins and history play a vital role in defining the scope and details of all the emergent law in that area (e.g. criminal, constitutional, equity) – do you feel the same applies to business organizations?</li>
<li>Do we “anthropomorphize” corporations? Why do you think we do?</li>
<li>What purpose does being a “person” serve for corporations? Why not animals? What about robots?</li>
<li>Is it fair to suggest that if the corporation is a person then it is in fact a psychopath? Is Hannah Arendt’s notion of the banality of evil worth considering in this context?</li>
<li>Are corporations inevitably psychopathic? “Bad apple” or Sructural problem? Consider the Sanford Prison experiments and the systemic not personal nature of evil – See Philip Zimbardo’s “The Lucifer Effect” <a href="http://www.lucifereffect.com">http://www.lucifereffect.com</a></li>
<li>Is greater regulation the answer? Are there other alternatives?</li>
<li>What do you see as the role of lawyers in the creation of the corporation (implication that the personhood of slaves was the legal mechanism lawyers took advantage of to popularize the corporate form)? Do our responsibilities relate to our role in creating the legal fictions that are the corporate form? What are our responsibilities as lawyers given the above?</li>
<li>Why shouldn’t corporations do “good” even if it does not benefit them? After all natural persons do that all the time.</li>
</ol>
 

 

TOPIC 2: CORPORATE LAW – SOME INTRODUCTORY NOTES
<ol>
<li> WHAT IS COMPANY LAW ABOUT?</li>
<li>A company is the most successful among a variety of organizational forms – including, for example, partnerships –recognized by law to coordinate the activities required to carry on a business designed to earn profits.</li>
<li>The persons whose activities are necessary to this end are shareholders, directors and senior managers who are not directors, creditors, employees, suppliers, and customers (i.e. users of the company’s products or services).</li>
</ol>
III. In general company law is not interested in the activities of employees, suppliers, and customers. It focuses on shareholders, directors and, to some extent, creditors.
<ol>
<li>The questions as to why company law is concerned with shareholders, directors and creditors, but for the most part uninterested in employees, suppliers, and customers are, therefore, important questions.</li>
<li>As to those groups with whom company law is concerned, it focuses on:</li>
</ol>
<ul>
<li>how one becomes a member of one of these groups;</li>
<li>how one ceases to be a member;</li>
<li>regulating the relations between them (e.g., shareholders as against directors; creditors as against shareholders) and</li>
<li>regulating the relationships within the groups, for example, between majority and minority shareholders and between secured and unsecured creditors.</li>
</ul>
<ol>
<li> SHAREHOLDERS</li>
<li>Become a shareholder by acquiring shares<a href="#_ftn1" name="_ftnref1">[1]</a> either from</li>
</ol>
<ul>
<li>the company itself in exchange for cash, property or services; or</li>
<li>an existing shareholder - generally, but not invariably, for cash.</li>
</ul>
<ol>
<li>Cease to be a shareholder by disposing of shares</li>
</ol>
<ul>
<li>to another investor. The ease with which this may be done is, from the perspective of company law, principally a function of the existence of a public market for the shares – if there is such a market, exit may be easy; if there is no market, exit could be difficult.</li>
<li>rarely to the company itself, and then only subject to restrictions and limitations designed to protect creditors and/or other shareholders,.</li>
</ul>
III. Rights acquired by shareholders not, generally speaking, defined by law. Contained in a contract between the investor and the company. The content of the contract is generally not limited in any way.<a href="#_ftn2" name="_ftnref2">[2]</a> Telus Corporation, for example, has created and sold First Preferred, Second Preferred and Common shares, each with different rights. Teck Cominco has Class A common shares without par value, Class B subordinate voting

shares and preferred shares. Bombardier has Class A (Multiple Voting) Shares, Class B (Subordinate Voting) Shares, Series 2 Cumulative Redeemable Preferred Shares, Series 3 Cumulative Redeemable Preferred Shares and Series 4 Cumulative Redeemable Preferred Shares.
<ol>
<li>The “Common” share is the most basic form of share. Generally, there are no entitlements to financial gain even though the courts have (as you will see) found that financial gain must be the motive underlying the corporate enterprise. While shareholders may expect, or hope for, dividends or capital gains arising out of an increase in market price there is not generally an enforceable right to any of this. To compensate for this shareholder will generally (but not invariably) have the right to vote, i.e. theoretically at least to exercise control over corporate affairs.</li>
<li>In contrast to the “Common” share are “Special” shares, e.g. preferred, which are generally accorded defined financial entitlements which can be of various kinds, e.g. assured dividends at defined rate, liquidation rights (otherwise than through sale to another investor) and financial priorities of one sort or another. Generally, in recognition of the financial entitlements associated with “Special” shares, there will be no right to control through votes.</li>
</ol>
 
<ol>
<li> DIRECTORS</li>
<li>Typically manage, or arrange for management, - generally a “board”.</li>
<li>If shareholders numerous, generally little overlap between authority of shareholders and of directors. Efficiency requires that decision-making be in hands of a small group.</li>
</ol>
III. If few shareholders distinction between them and directors, although formally required, may be quite trivial and artificial.
<ol>
<li>There is some flexibility in allocating power and authority as between shareholders and directors.</li>
</ol>
 
<ol>
<li> CREDITORS</li>
<li>Relationship between a company and creditors (a comprehensive term covering various relationships, e.g. customer who has pre-paid for goods, employee who is owed salary or the maker of a [long-term] loan, holder of a judgment enforceable against company) is, as with shareholders, primarily contractual.</li>
<li>However creditors’ rights can be quite different from shareholders. In principle there is no limit to the variety of rights. But customarily borrowers’ are obliged to repay loans at a fixed future date with the result that their investment is locked for a period rather than, at least in the absence of a public market for shares, is the case for shareholder. Creditors’ normally possess an entitlement to periodic return in form of interest. Contrast this with the shareholders much more uncertain position.</li>
</ol>
III. Lenders’ claims against company rank ahead of claims of shareholders’. Extent of claims determined by contract. Lender may have security for repayment of loan and payment of interest in form of charge against assets; rarely have voting rights, though not impossible. Because of creditor priority, common shareholders often described as “risk” or “equity” shareholders.
<ol>
<li>Company law regulates shareholder/company relationships quite extensively, presumably because both are creatures of that law. It has a far narrower interest in creditor/company relationships.</li>
<li>Why would there be less interest (pardon the pun) in creditor/company relationships? That is because a corporate party, whether creditor or debtor, is not intrinsic to the existence of a debtor/creditor relationship. Many such relationships do not involve companies. So generally they creditor/debtor relationships seem best left to be regulated by general law. This may also possibly explain, partly at least, company law’s relative disinterest in other groups such as employees and customers. Their rights and obligations cannot turn on whether the party with whom they contract is a company and so can safely left to regulation by general commercial and consumer law. This proposition has been generally accepted, though, at least in connection with the position of employees, it is considered controversial.</li>
<li>Other legal systems have different approach - German law, e.g. has special rules requiring employee representation on the boards of large companies.</li>
</ol>
VII. But why does company law have anything to say about relations between creditors and corporations?
<ul>
<li>limited liability – corporate creditor can only proceed against assets of company, separate from those of shareholders and hence creditor cannot ordinarily pursue claims against members.</li>
</ul>
 
<ol>
<li> THE CENTRAL PRINCIPLES OR POLICIES UNDERLYING COMPANY LAW</li>
</ol>
 Five core characteristics at the heart of company law
<ul>
<li>the company an entity distinct from all its shareholders.</li>
<li>limited liability for shareholders.</li>
<li>specialized management, separate from the shareholders.</li>
<li>freely transferable shareholder interests</li>
<li>shareholder control.</li>
</ul>
Query whether there might be a sixth core characteristic at the heart of company law being that “for profit” is the sole legally permissible motive?
<ol>
<li>Separate personhood (or, commonly, “separate personality”)</li>
<li>Unavoidable, inevitable consequence of incorporation - true of every company, whether large or small. This concept is truly fundamental to the conceptual structure of company law. </li>
<li>While personhood facilitates other core features – e.g. limited liability and transferable shares – it sometimes complicates legal analysis - an additional “person” has to be taken into account.</li>
<li>Relations between the key groups – directors/managers, shareholders and creditors - not generally directly contractual but mediated through the “company” e.g. directors obligations are owed to company, not individual shareholders; and individual shareholders generally do not have rights against directors – their rights are against “company”.</li>
<li>“Company” acts as a sort of ‘focal point’ for all these relationships. Functionally, this eliminates need for individual contracts among multiple parties in interest and the further need to re-do contracts whenever there is a change in personnel.</li>
<li>Conferring legal personality sometimes acts as a temptation to treat the company as if it were a natural legal person instead of an artificial one - to attribute ‘interests’ to it which, in the nature of the case, it cannot possibly have.</li>
<li>“Interests of the company” shorthand for interests of one or more groups of natural persons who have legal relations with it, e.g. directors owe fiduciary duties to “the company”. Meaning? In our law, typically the natural persons having legal relations with companies are members/shareholders who with some frequency interpret the “interests of the company” through the lens of their own interests.</li>
<li>Limited liability</li>
<li>Refers to the liability of the company and the fact that creditors’ rights are against company assets only, not against personal assets of the shareholders. “Limited liability company” is a common but misleading expression. The liability of the company is not limited at all – company assets available to full extent to creditors. It is the liability of the shareholders that is limited.</li>
<li>Separate personhood facilitates limited liability – it is easy to distinguish business assets (owned by the company) from personal assets (owned by the shareholders/directors). It guarantees limited liability. If a third party has a contract with company as a separate legal person, liability on the contract is confined to the company and its assets - does not extend to natural persons – directors/shareholders - and their assets.</li>
<li>Guarantee particularly significant if company “insolvent” – i.e. assets insufficient to meet claims of creditors – shareholders not liable to contribute.</li>
<li>Policy reason for limited liability – limited liability encourages investment by those who do not wish to be involved in management.</li>
<li>Countervailing consideration - reality suggests (as is pointed out frequently in “The Corporation”) that limited liability may permit, or even encourage, opportunistic behaviour by controllers of company as against its creditors, for example, by disposing of assets which the company was represented as owning when credit extended. This not in interest of shareholders generally: may increase cost of credit – higher interest than if shareholders’ liability not limited.</li>
<li>Challenge for company law is not simply to implement limited liability but design a set of rules which achieves the desired benefits of limited liability (encouraging shareholder investment) and at the same time reduces or even eliminates opportunistic behaviour as against creditors.</li>
</ol>
III. Centralized management
<ol>
<li>In companies of any size not surprising that management is not left with the shareholders but entrusted to a small group of managers – reasons flexibility, cost, expertise. Main occupation of individual investors may be entirely unrelated to business. Partly, also, motivation or rather lack of it. Shareholder who is one of, 1,000 shareholders may have no motivation to invest much time in working out the correct answer to a question confronting shareholders, but rather to free-ride on the efforts of the others. If all behave this way, none will prepare properly. The dynamics of small group decision-making, which will govern decisions of the managers, are entirely different.</li>
<li>But law does not require a centralized management structure. In general there is considerable freedom to develop appropriate structures and to divide powers between the shareholders and the board in the most convenient fashion, e.g. a company with few shareholders can decide that it does not need a centralized management structure - shareholders may be few enough that they could also be directors/managers.</li>
<li>Strangely, company law in Canada says relatively little about the qualifications (and disqualifications) of directors, at least in the case of private companies. The Jim Pattison Group, based in Vancouver, is described on its website as “the second largest private company in Canada”, with sales in 2012 of $7.5 billion and more than 35,000 employees working at almost 500 different locations worldwide and engaged in the automotive, media, packaging, food sales and distribution, magazine distribution, entertainment, export and financial industries. The Group does in fact have a board of directors all of whom seem to have impressive credentials. But this is not required by law. Should this be a matter of concern?</li>
<li>Contrast companies traded on public markets, which are subject to increasing regulation of who their directors are and what they do.<a href="#_ftn3" name="_ftnref3">[3]</a></li>
<li>Shareholder control</li>
</ol>
Traditional company law view - shareholders are ultimate repository of authority. This is reflected in control over the company’s:
<ul>
<li>constitution;</li>
<li>management; and</li>
<li>surplus assets.</li>
</ul>
<ol>
<li> Control over constitution</li>
<li>The key (but not the only) constitutional document is in British Columbia called the “articles of association” or “articles” (or, in the case of corporations incorporated federally or in Ontario, the “bylaws”). They deal with the internal governance of a company.</li>
<li>Generally, the content of “articles” is not prescribed by law. Instead, because of the primacy accorded to freedom of contract, the law tends to contain default rules only, that is, rules that apply unless the interested parties make a contrary or different agreement. The articles are thus a critical source of the governance rules for the company. In British Columbia the legislation includes a “model” set of articles that apply except to the extent that different provision is made.</li>
</ol>
iii. Articles under control of shareholders. Content, and changes to content, require shareholder approval.
<ol>
<li> Control over management</li>
<li>Intimately related to control of constitution.</li>
<li>Company law does not generally prescribe in detail and minutely the way in which power and authority is to be distributed as between shareholders and directors. This is in general left to shareholders to decide but the law also allows shareholders to remove directors from office by following certain special procedures.</li>
<li> Control over surplus assets</li>
<li>In general, directors may only distribute surplus assets to shareholders, or to satisfy a legal claim against the company, or otherwise to further the company’s business.</li>
<li>The shareholders’ primary entitlement to surplus results from the combination of two features of company law:</li>
</ol>
<ul>
<li>in the case of a company that is a going concern their contracts will define their rights – though common shareholders rarely have a right to participate while the company is a going concern – depends on discretion of directors who are obligated to act “in the best interests of the company”;</li>
<li>in the case of a company going out of business, law does not allow a payment to anyone that is not in satisfaction of a legal claim.</li>
<li>company to make voluntary severance payments to its employees – no legal claim and no claim based on goodwill Since the payments are not in satisfaction of any legal claim on the company and a company which is ceasing to trade has no need to generate goodwill amongst its workforce, such payments were held to be unlawful at common law.</li>
<li>The entitlement of shareholders to a participate in a surplus while the company is a going concern depends In fact, companies tend to be extremely cautious in granting legally enforceable entitlements to dividends to ordinary shareholders.</li>
</ul>
iii. Assets must be used to further business of legal person (i.e. in “company’s best interests”).
<ol>
<li>Our corporate law deeply committed to principle of shareholder control (i.e. the shareholders and their interests are the virtually exclusive objects of legal affection.</li>
<li>But the principle is, at least in the minds of some, controversial and has been challenged. They advance a “stakeholder” argument the nub of which is that the economic power of corporations and their impact or influence over the lives and work of citizens, demands a reconsideration of shareholder primacy. This discussion continues – most often in connection with the relationship between corporations and their employees.</li>
<li>Transferability of shares</li>
<li>Transferability is crucial for two reasons:</li>
</ol>
<ul>
<li>flexibility and liquidity for investors.</li>
<li>governance considerations - the company may function more smoothly if a dissatisfied investor (or one who simply needs cash) is able to leave the company rather than remain as a carping minority.</li>
</ul>
<ol>
<li>Generally, corporate funds may not be used to provide liquidity to investors. Investment, once made, is “locked in”, i.e. investor loses control over funds contributed.</li>
<li>Use of corporate funds to provide liquidity only available, in the absence of contractual entitlement, in limited circumstances narrowly defined to protect interests of other shareholders and of creditors.</li>
</ol>
<ul>
<li>promotes stability in the resources available to the company. If the funds used to provide liquidity for its investors, there would have to be a higher degree of liquidity of corporate assets to ensure corporate development</li>
<li>note: separate legal personhood facilitates liquidity through the market for shares. Disposition of the investor’s interest in the company, (i.e. a share), does not involve a transfer of underlying business assets which are owned by the company and not by the shareholders</li>
<li>One can contract for liquidity – redeemable shares – but precisely because they weaken the company’s control over its assets they tend to be rare.</li>
</ul>
<ol>
<li>Despite importance of market and liquidity, company law does not guarantee:</li>
<li>existence of a market; or</li>
<li>outside a market, that shares may be transferred freely – consents, restrictions, may apply which reflect valid purposes.</li>
<li> SOME GENERAL COMMENTS</li>
<li>Only separate personhood is inevitable and unavoidable. The other core features of corporate existence can be avoided through appropriate provisions in a company’s constitution or by contracts with the company or its shareholders.</li>
<li> Relationship between core features and corporate size</li>
<li>Very small companies most likely not to display the four optional core features.</li>
<li>For example: Ms. Smith and Mr. Jones incorporate Smith & Jones (Home Renovations) Ltd, to run a small home renovation business.</li>
</ol>
<ul>
<li>Each agrees to subscribe for one share for which each pays $1. There are no other shareholders. They control the company.</li>
<li>Business financed with funds borrowed from bank which insists on personal guarantees from Smith and Jones. To this extent anyway, they do not have the benefit of limited liability. </li>
<li>They appoint themselves the only directors. Indifferent to whether they make decisions as shareholders or as directors. There is complete unity of shareholding, board membership, and management in this company. No centralized management separate from the shareholders. </li>
<li>The articles require (a) consent of all existing shareholders to admission of new shareholders and (b) if an existing shareholder wishes to sell his or her shares, they must first be offered to the other existing shareholders. No free transferability of shares.</li>
<li>Smith and Jones in total control disposition of surplus funds.</li>
</ul>
<ol>
<li>Smith and Jones have acquired control not because they have made a major financial investment but because they are the people who will get and do the work that the company is set up to carry on.</li>
<li>Contrast, at the other end of the size spectrum, companies such as Telus, Teck, Bell and Rogers, all with shares traded on public markets, each of which has thousands of shareholders, none of whom has given any personal guarantee of the company’s debts or liabilities; the board of each is clearly distinct from both the shareholders and the senior management of the company; and the shares are freely transferable from both the shareholders’ and the company’s point of view. As far as the law is concerned, the shareholders also control the company in the ways defined above – at least in theory. However, by way of contrast with Smith & Jones Ltd, the sheer number of the shareholders raises a serious question whether the difficulties the shareholders will face in coordinating their actions mean that in fact they are incapable of exercising the control the law confers upon them.</li>
<li>Nearly all public companies and a substantial number of private companies, display the five core features.</li>
</ol>
III. Interaction among core features
<ol>
<li>The core features sometimes compete – so a solution that implements one feature may impair attainment of another, e.g.</li>
</ol>
<ul>
<li>placing broad range of decisions in hands of shareholders would expand their control but at a likely cost of efficiencies derived from centralized management, so more likely to be found in small private rather than large public companies.</li>
<li>Consequently, for public companies there is likely to be a search for techniques that provide the benefits of shareholder control without at the same time imposing greater costs by way of loss of the benefits of centralized management.</li>
</ul>
<ol>
<li>Correlation between corporate size and presence of all five core features not accidental.</li>
</ol>
<ul>
<li>As companies grow, capital needs of business likely to increase – invite public participation through risk (common) capital;</li>
<li>Public shareholders:
<ul>
<li>more likely to invest if they can subsequently dispose of their shares on a market and if they benefit from limited liability</li>
<li>unlikely to want or have ability to manage, leading to centralized management;.</li>
<li>having provided investment with no legal guarantee of a return, are likely to want the power to remove the management if business unsuccessful.</li>
</ul>
</li>
</ul>
 

Unit Wrap Up: At this point, you should have nothing but questions. Plus perhaps two particularly nagging ones along the lines of:
<ol>
<li>“If corporate law is so bad, why are so many lawyers practicing in and around this area?” &</li>
<li>“What exactly are those lawyers doing?”</li>
</ol>
This course will not adequately answer the first question but hopefully facilitate and informed exploration of the second, beginning with some observations about the corporate lifespan. In Unit 2 we begin with the legal version of “immaculate conception” and move forward from there.

<a href="#_ftnref1" name="_ftn1">[1]</a> Certain aspects of the process of acquiring and disposing of shares are regulated by company law; other aspects by securities law.

<a href="#_ftnref2" name="_ftn2">[2]</a> Stock exchanges or other public markets may, however, impose certain restrictions as a condition of permitting the shares to be traded through the facilities of the exchange. For example, certain exchanges prohibit or limit the use of shares without voting rights.

<a href="#_ftnref3" name="_ftn3">[3]</a> This regulation is generally found in the securities laws administered by regulatory bodies such as the stock exchanges and provincial securities commissions and not in company law.

Course:Business Organizations - LAW 459/Unit 4

2016-08-16T17:30:59Z

DavidHeinrich:

UNIT 4 (WEEKS 4 & 5): CORPORATE PERSONHOOD – SOME SPECIFIC ISSUES AND PROBLEMS
 http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Unit-4-360x270.jpg

 
Figure 4: “Occupy Wall Street” protest
 

ALT: A sign is held up during the “Occupy Wall Street” protests in New York City which began September 17, 2011. The handwritten sign says: “IF CORPORATIONS ARE PEOPLE, THEN WHY CAN’T WE PUT THEM IN JAIL?”

 

Source of image - <a href="http://mulevariations.com/columns/trust-me-im-doctor/occupy-mule">http://mulevariations.com/columns/trust-me-im-doctor/occupy-mule</a>

 

 

 

UNIT OVERVIEW:

 

This unit will be devoted to exploring some of the limitations and conundrums, both legal and practical, which arise out of the assignment of “personhood” to the corporation and how does the law deal with them. What are the limits to this idea? Can other “non-persons” have legal personhood? Can a chimpanzee? Can corporations commit crimes and make contracts? Do corporations have privacy rights, or the right to free speech, or religious freedom or other constitutional protections? Can a corporation be defamed? If you are driving in the HOV lane with only a copy of your certificate of incorporation in the passenger seat, are you violating the requirement that there be two persons in the car? In what circumstances and for what purposes may the personhood of a corporation be disregarded, whether by “piercing” or, as may appeal to some of the more prurient minded among you, “lifting” the “corporate veil’? Are these the same thing?

In the end this unit prepares you to ask in a myriad of ways, what function does “personhood” perform in the analysis of legal problems relating to the corporation?

 

UNIT OUTCOME:

By the end of this unit you should be able to identify the core tensions arising from corporate personhood – and the profound contradictions which arise as a result and which the law must grapple with. The most obvious of these is the tug of war between shareholder financial expectations and management prerogatives. You will also understand, starting from the seminal case of Salomon v. Salomon how tempting it is for the courts to “pierce the corporate veil” and the inevitability of the connection between corporations being separate people and the countervailing force that is the doctrine of “piercing the veil”. Finally you will appreciate that the two forces and how frustrating it is in a legal sense that these two forces working against each other have not yielded and elegant yin and yang, but rather a messy set of legal doctrines that seem more whimsical than principled.

 

UNIT READINGS:

Please read the following material:

Casebook pages 83-91,134-226

BCBCA sections 30, 33, 136, 142, 227

Prest v. Petrodel 2013 UKSC 34 <a href="http://www.bailii.org/uk/cases/UKSC/2013/34.html">http://www.bailii.org/uk/cases/UKSC/2013/34.html</a>

 
<ol start="373">
<li> Todd Henderson, “Everything Old Is New Again: Lessons from Dodge v. Ford Motor Company” (2007) U of Chicago Law & Economics, Olin Working Paper No. 373: <a href="http://www.law.uchicago.edu/files/files/373.pdf">http://www.law.uchicago.edu/files/files/373.pdf</a></li>
</ol>
 

TOPIC 1: CORPORATIONS AND THE CHARTER 

Please read pages 83-91 of the Casebook. The extent to which corporations enjoy the protections of the Charter is considered on these pages. There is little to add.
<ol>
<li> v. Agat Laboratories (1998) 17 C.R. 95th) 147 (Prov.Ct.) which is found at pages 84-88 of the casebook is generally accepted as describing the proper approach. The question in issue is whether s.7 of the Canadian Charter of Rights and Freedoms applies to corporations who, after all, are not natural persons. S.7 provides:</li>
</ol>
“Life, liberty and security of person
<ol start="7">
<li>Everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice.”</li>
</ol>
 

Blog Activity 4.1:

Then please consider the questions in Notes 1 and 2 on page 88 of the Casebook.

How would you answer them? Why would you answer them that way?

Please succinctly summarize the present state of the law on the rights of corporations to use Section 7 of the Charter. Please blog your summary in no more than one page under the heading called “Corporations and the Charter”.

As you should now be able to appreciate, the fiction of corporate personhood can potentially result in some very real confusions and contortions when it comes to legal analysis. Sometimes it feels like the approach is somewhat akin to “Companies are people, except when they are not”.

Query whether such legal stretching and contorting is really necessary to accommodate the fiction of corporate personhood, or whether alternative approaches may be possible.

Blog Activity 4.2

Please consider whether s. 30 of the BC Business Corporations Act could simply be eliminated and replaced by an inclusive list of rights, powers and privileges, but without invoking any form of “personhood”. Would this be advisable or useful? Why or why not?

“Capacity and powers of company

 
<ol start="30">
<li> A company has the capacity and the rights, powers and privileges of an individual of full capacity.”</li>
</ol>
Please blog your views on this question and your reasons in no more than one page under the heading “Eliminating Corporate Personhood?”

 

TOPIC 2: Some practical consequences of “personhood” 

Please read pages 134-143 of the Casebook.

We have previously identified some of the practical consequences of “personhood” – e.g., corporation is the only proper plaintiff for a wrong done to it and that an individual shareholder cannot sue for an alleged pro rata share of losses derived from those suffered by the corporation – as in the Robak case.

Now start to explore some other implications

The material on pages 134-143 of the Casebook deals with some of these. 

Please refer to the questions on page 135 of the Casebook:

Question 1:

Principal shareholder and de facto controller testifies on behalf of corporate plaintiff. Disbelieved. Corporation still wins. Should the corporation be deprived of costs because “it” lied?

Question 2:

Can a corporation be held in contempt of court for failure to comply with a court order? See Northern Counties Securities v. Jackson & Seeple, [1974] 2 All ER. 625 referenced in note 2 on page 135 of the Casebook.

Question 3:

Macaura v. Northern Assurance [1925] A.C. 619 at pages 135-137 of the Casebook.

Owner of timber sold it to a company that was owned almost solely by him. He was the company's largest creditor. In his own name he insured the timber against fire. Timber was in fact destroyed by fire. Insurer denied the claim on the basis that the timber now belonged to the company and not to the previous owner or to the largest shareholder in the company.

Their argument was that the company being in law a legal entity separate from shareholders had an insurable interest but held no policy. Mr. Macaura had a policy, but no insurable interest. This left him with only a debt due by the company as a result of the fire that destroyed the timber he had sold.

The House of Lords held this way, finding that “…Neither a simple creditor nor a shareholder in a company has any insurable interest in a particular asset which a company holds.”

Does this really make policy sense? 

In thinking about this question note the words of Lord Buckmaster on where the benefits and burden lie (at p.136 of the Casebook). In this case all the benefits and burdens effectively fell on Mr. Macaura.

Suppose I am convinced that a building I have no interest in beyond that of any other citizen will collapse within a year. I contract with an insurer to pay me $50K if it does. Isn’t this just betting – my object is to make a windfall gain not to protect against loss. That situation is clearer then the Macaura case.

Might it be suggested that Macaura was wrongly decided because it’s definition of insurable interest is too narrow?

To try and answer you will have to ask yourself what the point of “insurable interest” is?

In an early case on the subject (Lucena v. Crawford (1806) 127 E.R. 471), one judge found that an insured could recover if she suffered “factual expectation of loss”. Unfortunately, another judge in that case required that, in addition to “factual expectation of loss”, the plaintiff must also have a “legal or equitable interest” in the property. The test of “legal or equitable interest” in the property is the one that prevailed. Under it for example, a lender who lent money for a construction project would have no insurable interest unless he had taken out a security interest in the property.

Which bring us to the important case of Kosmopoulos v. Constitution Insurance and how the separate corporate personality doctrine can have unintended and unforeseen consequences. The decision of the Ontario C.A. is found at page 137 of the Casebook. 

Mr. Kosmopoulos was the sole shareholder and director of leather goods company. He originally ran that business as a sole proprietor and the lease for its office was in the name of Mr. Kosmopoulos, as was the insurance on office. His lease for the company office was under his own name from when he originally ran the business as a sole proprietor. Even after the incorporation of his company the insurance on the office remained in his own name. The insurance agency he was dealing with knew that he was personally on the lease but carrying on business as a corporation. A fire in a neighboring lot damaged his office.

When a claim was made insurance coverage was denied.

The trial judge found that Mr. Kosmopoulos could not recover damages as the owner of the assets as the company, and not he, owned them. However he could recover as an insured because of his insurable interest in the building.

The Ontario Court of Appeal agreed, restricting the application of the Macaura precedent to cases involving multiple shareholders.

The Supreme Court of Canada upheld the ruling of the lower courts.

Wilson J. obseved that there was no consistent principle as to when a court may disregard separate personhood by “lifting the corporate veil” and regarding the company as a mere “agent” or a “puppet” of its controlling shareholder or a parent corporation”. Though the corporate veil would not be lifted, Mr. Kosmopoulos as sole shareholder of the company was found to be so placed with respect to the assets of the business as to have benefit from their existence and prejudice from their destruction. He had a moral certainty of advantage or benefit from those assets but for the fire. He had, therefore, an insurable interest in them capable of supporting the insurance policy and is entitled to recover under it.

McIntyre J. preferred the approach of Zuber J. in the Ontario C.A. That is that the Macaura rule should not be accepted to compel a holding that a sole shareholder and sole director of a company could not have an insurable interest in the assets of the Company. Underlying this conclusion is that modern company law permits the creation of companies with one shareholder. The identity then between the Company and that sole shareholder (and director) is such that an insurable interest in the Company's assets may be found in the sole shareholder.

Now please consider questions 2, 3 and 4 on page 140 of the Casebook.

Please read Lee v. Lee’s Air Farming at pages 140-142 of the Casebook which helps bring some clarity to the question of how to separate different roles in a corporate structure, even where they seemingly reside within the same physical being. 

Mr. Lee formed a company, held nearly all its shares, was managing director, and a pilot. Lee appointed himself the chief pilot for the company, and in this way became in effect both employer and worker. The contract of employment was between him and the company, but in effect Mr. Lee both gave orders and obeyed them.

The New Zealand Courts held that the two offices were clearly incompatible. On appeal the Privy Council reversed finding that it was the company who gave the orders, not Mr. Lee personally.

Please read Notes 1-3 on page 142 of the Casebook.

Blog Activity 4.3

Please consider the hypothetical in Note 4 on page 142 of the Casebook. What do you think? Would “x” be able to avoid liability in by “springing out” the corporation in the scenarios provided? Please blog your views on this question and your reasons in less than one page under the heading “Ambiguities of Corporate Personality”.

 

TOPIC 3: QUESTIONING THE PRINCIPLE - THE CORPORATE VEIL THEORY 

Please Read Pages 143-149 Of The Casebook.

It is noteworthy that clear doctrines and explanations of when “the corporate veil” will be lifted are few and far between.

Since the decision in Salomon v. Salomon a steady stream of common law decisions and legislative enactments has eroded the immutability of the separate legal entity doctrine. These decisions and enactments are conveniently seen as ways to “lift or pierce the corporate veil”. Piercing seems to happen freakishly ... rare, severe and unprincipled - almost like lightning. This lack of clarity perhaps suggests that using a fiction such as “personhood” is a poor and impractical fit. This is not just a bit of critical analysis with some normative pedagogic purpose. Rather it may be the unifying thread of virtually all aspects of this course. Because the ethical reasons underlying the principle of separate corporate personality seem to not be particularly present, know or understood, we should perhaps not be surprised at the degree of judicial flailing and uncertainty that many of the cases we are studying seem to manifest.

What Little Is Clear Is That Limited Liability Is No Longer Sacrosanct: The Principle In Salomon's Case No Longer Rules.

See the quotation from Clarkson v. Zhelka [1967] 2 O.R. 565 (H.C.) at page 144 of the casebook:

“The cases in which the Courts…have seen fit to disregard the corporate entity or personality, and instead to consider the economic realities behind the legal façade, fall within a narrow compass. The Legislature, in the fields of revenue and taxation…has made much greater departure in this respect. Such cases as there are illustrate no consistent principle. The only principle laid down is that in the leading case of Salomon v. Salomon & Co. Ltd., [1897] AC 22; and in general such principle has been rigidly applied. Briefly stated, it is that the legal persona created by incorporation is an entity distinct from its shareholders and directors and that even in the case of a one-man company, the company is not an alias for the owner.

The exception would appear to represent refusals to apply the logic of the Salomon case where it would be flagrantly opposed to justice.

…If a company is formed for the express purpose of doing a wrongful or unlawful act, or, if formed, those in control expressly direct a wrongful thing to be done, the individuals as well as the company are responsible to those to whom liability is legally owed.”

Note Welling’s critique of this part of Clarkson as obiter dicta (at page 148 of the Casebook).

Note Sharpe J. statement in Transamerica Life v. Canada Life (1996) 28 O.R. (3d) 423 at 433-434 (which can be found at the pages 144-145 of the Casebook): 

“There are undoubtedly situations where justice requires that the corporate veil be lifted…[I]t will be difficult to define precisely when the corporate veil is to be lifted, but that lack of a precise test does not mean that a court is free to act as it pleases on some loosely defined ‘just and equitable” standard…

[T]he courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct. The first element “complete control”, requires more than ownership. It must be shown that there is complete domination and that the subsidiary company does not, in fact, function independently…

The second element refers to the nature of the conduct: is there “conduct akin to fraud that would otherwise unjustly deprive claimants of their rights?” (References omitted.)

Note Welling at page 149 of the Casebook: 

“Courts in Canada have yet to take the final step and acknowledge that they have no inherent power to pretend that a corporation does not exist. I suspect the reason is simple. Most barristers concede the judgers has power to “pierce the corporate veil”, then argue this is not an appropriate case in which to use the power. They are conceding too much and they are ignoring the clear wording of Canadian corporate statutes. It is time for someone to stand up and say “quo warranto?”

It is clear from commentators and judges that the immense confusion around when the “corporate veil’ is to be pierced relates directly to principle of Salomon v. Salomon and the separate personality of companies. This being so it is quite curious why the fiction of “corporate personhood” does not itself draw as much attention as it might. It is at least arguable that if we chose to dispense with the fiction that corporations are “persons”, we would more easily and clearly be able to identify and define permitted corporate action strictly in terms of what is permissible. 

 

TOPIC 4: corporate personality in practice: some problem areas 
<ol>
<li> Corporate Character Traits</li>
</ol>
Please read extract from Welling at page 150 of the Casebook.

Please note in particular the last three sentences:

“A fully capable corporation may well have been born yesterday. Does the law permit us to look inside of the corporation’s equivalent of a family to establish a pattern of behaviour? A cautious “yes” can be advanced, provided the principle of corporate personality is not sacrificed.”

 

Please read Big Bend Hotel Ltd. v. Security Mutual (1980) 19 BCLR 102 at pages 150-152 of the Casebook.

This is an example of the corporate veil being lifted to prevent improper conduct or fraud.

Vincent Kumar was the president and sole shareholder of Big Bend Hotel Ltd. Big Bend had obtained insurance from Security Mutual on the hotel, its sole asset. The hotel burned down.

Kumar had previously been the president and sole shareholder of another corporation whose hotel had burned less than three years earlier. This fact had not been disclosed to security Mutual.

The court held that this was a material non-disclosure. It was found to be appropriate to lift the corporate veil here because equity will not allow an individual to use a co as a shield for improper conduct or fraud.

Callaghan J. found that Kumar knew the prior loss had to be disclosed and that his failure to do so was intended to mislead or deceive the insurers who would have declined risk had they known.

In other words the fact of a separate corporate entity was not allowed to interfere with the obligation to disclose, and the veil would be pierced to put the sole shareholder corporate president to the same standard he would be held to if no company existed as a shield.

Please read Note 1 at page 152 of the Casebook:

Wasn’t it enough to decide the case to conclude that had they known, the insurer would have declined risk?

Should the insurance company have had an application form that asked for disclosure not only from the company applicant but from all its principals.

Please read Note 3 at page 152 of the Casebook:

London Computer Operators Training Ltd and others v British Broadcasting Corporation and others [1973] 2 All ER 170 deals with how separate corporate existence can have real impact on other legal areas, such as defamation.

Two speakers on BBC radio alleged that a computer school was “a financial racket”, that their advertising was misleading, and that the founder had “woeful” business record. The school and two of its directors bought an action for libel against BBC Radio who pleaded justification (that the statements were in fact true) and fair comment. The founder, who was still running the school, was not joined as a plaintiff. The defendants subsequently discovered that the founder had a criminal record and sought leave to amend their particulars of justification (truth) by adding details of his convictions and sentences. Leave to amend was granted. The court found that the words complained of were capable of the meaning that the company was being run by people of questionable honesty and background who were unfit to run a computer school.

If the company is separate from its shareholder how is the shareholders criminal record of convictions and sentencing relevant to an action involving the company only, and not the shareholder?

Read Hercules Managements Ltd. v. Ernst & Young [1997] 2 S.C.R. 165 at page 155 of the Casebook

Two companies, Northguard Acceptance Ltd (‘NGA”) and Northguard Holdings Ltd. (‘NGH”) carried on business lending and investing money on the security of real property mortgages. Hercules Managements Ltd. was a shareholder in NGA. Ernst & Young were hired as auditors of NGH and NGA, prepared financial statements and provided audit reports to the companies’ shareholders. NGA and NGH went into receivership and Hercules Managements Ltd. sued Ernst & Young alleging that their audit reports had been negligently prepared.

Ernst & Young sought dismissal on the ground, inter alia, that the claims asserted by the plaintiffs could only properly be brought by the corporations themselves and not by the shareholders individually. La Forest J. agreed with Ernst & Young holding that “the shareholders’ reliance on negligently prepare audit reports…will result in a wrong to the corporation for which the shareholders cannot, as individuals, recover.”

Blog Activity 4.4

 

What is the policy justification for this result in your view? Please blog your views on this question and your reasons in less than one page under the heading “Justifying Ernst & Young”.

 
<ol>
<li> Corporations as Agents and Partners </li>
</ol>
Please read pages 157-158 of the Casebook.

The question is: When is it appropriate to treat a company as being the agent or partner of its controlling shareholder? 

Note that the parameters of partnership can be reviewed in Unit 3.

In this regard please read Smith, Stone & Knight Ltd. v. Birmingham Corp. [1939] 4 All E.R. 116 at page 158 of the Casebook.

Birmingham Corporation expropriated premises owned by a wholly‑owned subsidiary of Smith, Stone & Knight Ltd. (“SSK”). 497 of 502 issued shares in the subsidiary were held by SSK; the other 5 shares were held for SSK. The subsidiary had no staff and no separate accounting records. The subsidiary was effectively treated as a department of SSK.

SSK claimed compensation for loss of business as a result of the expropriation. Birmingham Council’s response was that the loss was suffered by subsidiary ‑ a separate legal entity and for that reason SSK’s claim should fail.

It was held that compensation was indeed payable by Birmingham to SSK. The court found that the subsidiary was carrying on no business of its own, but was in fact carrying on SSK’s business as agent.

The court identified six factors to be shown before agency found and veil lifted:
<ul>
<li>Profits of the subsidiary must be treated as profits of the holding company;</li>
<li>Those conducting the subsidiary's business must be appointed by the holding company;</li>
<li>The holding company must be the head and brain of the trading venture;</li>
<li>The holding company must be in control of the venture and must decide what capital should be spent and what should be done;</li>
<li>The profits made by the subsidiary's business must be made by the holding company's skill and direction; and</li>
<li>The holding company must be in constant and effective control.</li>
</ul>
Does this make sense? Are economic realities such that a group of companies trade as a group, raise capital as a group, and are viewed as a group by those dealing with them?

Should one attach obligations and responsibilities to the group and not to individual companies?

Lifting the corporate veil on the basis of agency involves examining the relationship between two or more separate legal entities and attributing the acts of one of the entities as the acts of the other entity.

 

The key issue involved in the case was whether the parent had suffered any loss as a result of the council's compulsory acquisition of the property, causing disturbance to the subsidiary's business. Atkinson J. decided that the relationship between the parent and subsidiary was really an agency relationship, with the business of the subsidiary being carried on an apparent basis only. The relevant facts were:
<ol>
<li>The directors of the parent were also directors of the subsidiary but did not take a salary from their positions on the subsidiary’s board;</li>
<li>The business purportedly carried on by the subsidiary company was purchased by the parent and never formally assigned to the subsidiary;</li>
<li>The subsidiary had no staff apart from a manager;</li>
<li>The subsidiary's books were kept and maintained by the parent and were not the property of the subsidiary or accessible by the manager of the subsidiary;</li>
<li>The work purportedly carried out by the subsidiary was beneficially owned by the parent without any agreement to transfer the business to the subsidiary; and</li>
<li>The subsidiary was treated for accounting purposes as if it were merely a department of the parent, including, significantly, appropriating the profits of the subsidiary for payment to the parent (by direct payment rather than dividend).</li>
</ol>
Smith, Stone & Knight Ltd. v. Birmingham Corp. [1939] 4 All E.R. 116 can be seen as a poor example of lifting the corporate veil on the basis of agency. It is preferable not to use the case for the purpose of lifting the corporate veil for two reasons:
<ol>
<li> Maclaine Watson & Co Ltd v. Department of Trade and Industry [1988] 3 All ER 257 at 310-311 per Kerr LJ:</li>
</ol>
“…the facts [in Smith, Stone and Knight] were so unusual that they cannot form any basis of principle" 
<ol start="2">
<li> See Note 4 on page 159 of the Casebook:</li>
</ol>
“Is there any reason why corporate shareholders should be made to answer for the liabilities of the corporations in which they hold shares, to a greater degree than individual shareholders?”

Read Notes 7 and 8 on pages 159-160 including excerpts from the decision in DHN Food Distributors Ltd. v Tower Hamlets London Borough Council [1976] 1 W.L.R. 852 (Eng. CA).

DHN Food Distributors Ltd. (“DHN”) owned and controlled a business of importing and distributing groceries, operating out of a warehouse owned by a subsidiary of DHN, Bronze Investments Ltd. Vehicles used in the business were owned by yet another subsidiary of DHN. DHN held all the shares in both subsidiaries and the companies had common directors.

In 1969 the local council made a compulsory purchase order to acquire the land on which the warehouse sat. DHN was unable to relocate and the business subsequently closed down.

The question was whether DHN was entitled to compensation for disturbance in having the business closed down. Council argued none payable since the subsidiary was not disturbed. They further argued that even if both subs were disturbed, the subsidiaries were not entitled to any compensation because they had no interest in the land. Moreover the argument continued, DHN itself was not entitled to compensation under the provisions of a statute. The council argued that DHN was only a licensee of Bronze Investments Ltd.

 

The English Court of Appeal treated the companies as one economic entity and following from this, DHN could be treated as owner of the property and was thus entitled to compensation for disturbance to its business.

Lord Denning found that the corporate veil could indeed be lifted – finding that the companies were in reality a group, and should be treated as one. 

“These subsidiaries are bound hand and foot to the parent company and must do what the parent company says … virtually the same as a partnership … They should not be treated separately.”

This notion is not so easily reconcilable with other cases. Denning’s views were disapproved by the House of Lords in Woolfson v Srathclyde Regional Council, 1978 SC 90 (HL). There Lord Keith expressed doubt as to whether the decision in DHN correctly applied the principle that it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere facade concealing the true facts

 

 

TOPIC 5: CORPORATE PERSONALITY - SOME INNOVATIVE APPROACHES 

Please read the short web article “Corporation not person in carpool lanes” which can be found at <a href="http://www.sfgate.com/bayarea/article/Corporation-not-person-in-carpool-lanes-4173366.php">http://www.sfgate.com/bayarea/article/Corporation-not-person-in-carpool-lanes-4173366.php</a>

 

Then please read page 160 of the Casebook:

 

“Judges have rarely been clear when explaining how corporate personality works. This is due in part to the facile notion that they are at liberty to disregard the separate existence of the corporate entity. There are, however, some reported cases that clearly illustrate the application of some well-known remedies, mostly in tort situations, but some from the field of equity. Using them as examples one can formulate a principled approach that treats corporate personality as a solution rather than a problem.”

 
<ol>
<li> Inducing Breach of Contract</li>
</ol>
 

Please read Garbutt Business College Ltd. v. Henderson Secretarial School Ltd. [1939] 4 D.L.R. 151 (Alta. C.A.) at pages 161-162 of the Casebook. It helps illustrate yet another way that “separate” corporate personality might be manipulated in an attempt to evade responsibility.

Henderson a teacher was subject to a restrictive covenant governing employment. It specifically restrained him from engaging in or managing a rival business college for 5 years. He resigned and started a rival college that used his name and employed him to teach. He held all but 3 shares. His wife and daughter held those 3 shares. Garbutt Business College Ltd. lost students to new college.

The court upheld the restrictive covenant against Mr. Henderson but found there could be no corporate liability as against Henderson Secretarial School Ltd. in the contract. Any such liability must be in tort, and accordingly the court found liability against Henderson Secretarial School Ltd. in damages for interference with business relations and inducing breach of contract between Mr Henderson and Garbutt Business College Ltd.

Please note Questions 1 and 3 on pages 162-163 of the Casebook

 

1.This question is in effect: What if Henderson only incorporated a rival entity using his name but did not teach or manage?

 
<ol start="3">
<li>In looking at this question consider the facts in Jones v. Lipman [1962] 1 WLR 832. In that case Mr. Lipman contracted to sell a house to Jones for £5,250. He changed his mind and refused to complete. To try and avoid specific performance, he conveyed the house for £3000 to a company formed for that purpose alone, which he alone owned and controlled. In the end specific performance against Mr. Lipman and his company was ordered: “The defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity.”</li>
</ol>
 

In this regard please consider the following excerpt’s from Lord Sumption’s judgment in Prest v. Petrodel 2013 UKSC 34 (especially paragraph 30 on Jones v. Lipman) which can be found here: <a href="http://www.bailii.org/uk/cases/UKSC/2013/34.html">http://www.bailii.org/uk/cases/UKSC/2013/34.html</a>

 

As you will see Lord Sumpton of the United Kingdom Supreme Court had the following observations:

“27. In my view, the principle that the court may be justified in piercing the corporate veil if a company's separate legal personality is being abused for the purpose of some relevant wrongdoing is well established in the authorities….[T]he recognition of a limited power to pierce the corporate veil in carefully defined circumstances is necessary if the law is not to be disarmed in the face of abuse… 
<ol start="28">
<li> The difficulty is to identify what is a relevant wrongdoing. References to a "facade" or "sham" beg too many questions to provide a satisfactory answer. It seems to me that two distinct principles lie behind these protean terms, and that much confusion has been caused by failing to distinguish between them. They can conveniently be called the concealment principle and the evasion principle. The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the "facade", but only looking behind it to discover the facts which the corporate structure is concealing. The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company's involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement. Many cases will fall into both categories, but in some circumstances the difference between them may be critical. This may be illustrated by reference to those cases in which the court has been thought, rightly or wrongly, to have pierced the corporate veil.”…</li>
<li> Jones v Lipman [1962] 1 WLR 832 was a case of very much the same kind. The facts were that Mr Lipman sold a property to the plaintiffs for £5,250 and then, thinking better of the deal, sold it to a company called Alamed Ltd for £3,000, in order to make it impossible for the plaintiffs to get specific performance. The judge, Russell J, found that company was wholly owned and controlled by Mr Lipman, who had bought it off the shelf and had procured the property to be conveyed to it "solely for the purpose of defeating the plaintiffs' rights to specific performance." About half of the purchase price payable by Alamed was funded by borrowing from a bank, and the rest was left outstanding. The judge decreed specific performance against both Mr Lipman and Alamed Ltd. As against Mr Lipman this was done on the concealment principle. Because Mr Lipman owned and controlled Alamed Ltd, he was in a position specifically to perform his obligation to the plaintiffs by exercising his powers over the company. This did not involve piercing the corporate veil, but only identifying Mr Lipman as the man in control of the company. The company, said Russell J portentously at p 836, was "a device and a sham, a mask which [Mr Lipman] holds before his face in an attempt to avoid recognition by the eye of equity." On the other hand, as against Alamed Ltd itself, the decision was justified on the evasion principle, by reference to the Court of Appeal's decision in Gilford Motor Co. The judge must have thought that in the circumstances the company should be treated as having the same obligation to convey the property to the plaintiff as Mr Lipman had, even though it was not party to the contract of sale. It should be noted that he decreed specific performance against the company notwithstanding that as a result of the transaction, the company's main creditor, namely the bank, was prejudiced by its loss of what appears from the report to have been its sole asset apart from a possible personal claim against Mr Lipman which he may or may not have been in a position to meet. This may be thought hard on the bank, but it is no harder than a finding that the company was not the beneficial owner at all. The bank could have protected itself by taking a charge or registering the contract of sale.” (Emphasis added.)</li>
</ol>
 

The next few cases should help you bring separate corporate personality into focus as applied to the rough and tumble of “modern” business dealings. 

 

 

Please read Einhorn v. Westmount Invesments Ltd. (1969), 6 D.L.R. (3d) 71 at pages 164-166 of the Casebook.

This was an application to strike out a Statement of Claim. Accordingly the facts alleged did not have to be proven in this limited context.

Jacob Einhorn was a licensed real estate agent who provided services to Westmount Investments Ltd. a company that three brothers, Hyman, William and Samuel Belzberg, were “at all material times in complete control” of. Westmount Investments Ltd. never paid Mr. Einhorn what he was owed. It was alleged that instead the Belzberg brothers “siphoned off the assets” of Westmount Investments Ltd. to another company they controlled Regina Midtown Centre Ltd. leaving Westmount an empty shell incapable of satisfying its contract with Mr. Einhorn.

Note that neither the Belzberg’s nor Regina Midtown Centre Ltd. induced a breach of contract (as was the case in Garbutt Business College Ltd. v. Henderson Secretarial School Ltd.), they just prevented Westmount Investments Ltd. from executing their contract with Mr. Einhorn.

The court considered whether the Belzberg brothers could be individually liable. The answer was yes, because they met the test for the tort of interference with contractual relations. This was because it appeared that the Belzberg brothers interfered with Westmount’s performance of the contract and each of the parties to a contract have a right to performance of it. There are three ingredients to the tort:
<ol>
<li>Interference in execution of contract: This interference is not confined to breach of contract; it extends to case where a third person prevents or hinders a party from performing the contract.</li>
<li>The interference must be deliberate.</li>
<li>The interference must be direct.</li>
</ol>
 

Please also read McFadden v. 481782 Ontario Ltd., (1984), 47 O.R. (2d) 134 (H.C.) at page 166 of the Casebook.

In this case two directors authorized payments to themselves as shareholders that put the corporation in a position where it could not fulfill its contractual obligations to an employee. The employee sued the directors on the basis that they induced the corporation to breach its contract with him.

It was held that the directors were liable. They acted with a view to their own interests not those of the company.

 

They are not protected, therefore, by the exception to the rule in Said v. Butt that they would be excused if they were acting "under the compulsion of a duty to the corporation." The court held that the directors could not fall within the exception Said v. Butt [1920] 3 K.B. 497 that: “…if a servant acting bona fide within the scope of his authority, procures or causes me to break a contract that I have made with you, you cannot sue the servant for interference with the contract; for he is my alter ego, and I cannot be sued for inducing myself to break a contract.” This exception effectively ensures officers and directors can terminate employment contracts without fearing personal liability and also that companies can terminate contracts that may no longer be in their best interests to fulfill.

However, in McFadden v. 481782 Ontario Ltd. the exception did not apply since the Directors were acting with a view to their own interests and not those of the corporation. Accordingly they could not be said to be acting under the compulsion of a duty to the corporation. That is to say that for an officer or director to be relieved from the consequences of his act of inducement, it is because he acts under the compulsion of a duty. Where she or he does not, for example because of a failure to act bona fide and hence outside the scope of their authority, liability to that Director will result. The corporation in question ought to be unaffected precisely because the Directors were acting outside the scope of their authority,

 

Please read the Questions at pages 169-170 of the Casebook and then ask yourself the following questions:
<ol>
<li> What was the conduct that induced the breach in McFadden v. 481782 Ontario Ltd.?</li>
<li> Is it a sound principle that a director who fails to act in the best interests of the corporation ceases to act on behalf of the corporation? Should the fact that the Director acts in breach of their obligation to the corporation have any relevance to the rights of an employee?</li>
</ol>
 

Please read 369413 Alberta Ltd v. Pocklington (2000) 194 D.L.R. (4th) 109 (Alta. C.A.) at pages 171-178 of the Casebook.

Gainers was one of Canada’s largest meat-packing companies. In acute financial distress, Gainers breached an agreement it had with the Province of Alberta. Peter Pocklington owned Pocklington Foods Inc. which held shares in Gainers. Alberta opted to sue Gainer’s sole director, Peter Pocklington alleging that Pocklington had “induced” the breach by signing a director’s resolution transferring certain shares in another company owned by Gainers (valued in the millions) to another of his own companies, Pocklington Holdings Ltd., for $100. Gainers had earlier agreed not to sell or dispose of its assets without the prior written consent of the Province of Alberta.

The Court awarded the Province $4.7 million in damages as against Pocklington.

Fruman J.A. set out various elements of the case as follows:

“ELEMENTS OF INDUCING BREACH OF CONTRACT

In order to find that a defendant intentionally induced a breach of contract, seven elements must be established:
<ol>
<li>i) the existence of a contract;</li>
<li>ii) knowledge or awareness by the defendant of the contract;</li>
</ol>
iii) a breach of the contract by a contracting party;
<ol>
<li>iv) the defendant induced the breach;</li>
<li>v) the defendant, by his conduct, intended to cause the breach; </li>
<li>vi) the defendant acted without justification; and</li>
</ol>
vii) the plaintiff suffered damages…

INTENT

The Law

…Therefore, if the breach was a reasonable or foreseeable consequence of that transfer, or alternatively, if Pocklington completed the transfer recklessly, was wilfully blind to its consequences, or was indifferent as to whether or not it caused a breach, the necessary intent element for the tort will be met.

The Evidence

…The clear implication of Ogilvie and Company’s carefully worded letter is that either the lawyers did not share their clients’ views, or they were invited to keep their legal advice to themselves. Pocklington nevertheless signed the documents to give effect to the share transfer, and retained the shares despite Alberta’s early protests and Ogilvie and Company’s apparent reservations. He had the means of knowledge, but chose to act without legal advice. Pocklington was wilfully blind to the consequences of his actions and showed clear indifference to the breach. The intent component of the tort is satisfied.

JUSTIFICATION

 

In some situations, a defendant’s plea of justification may avoid liability: South Wales Miners’ Federation, supra, and Quinn, supra. The defence of justification is available when the defendant caused the breach while acting under a duty imposed by law. The issue in each case is whether, upon consideration of the relative significance of all the factors, the defendant’s conduct should be tolerated despite its detrimental effect on the interests of others: Fleming, supra, at 657.

 

Directors of companies owe duties to the corporation; they are obliged both at common law and under Statute to act in the best interests of the company: Re Cawley & Co. (1889), 42 Ch. 209 at 233 (C.A.). For example, s. 117(1)(a) of the ABCA provides: “Every director and officer of a corporation in exercising his powers and discharging his duties shall act honestly and in good faith with a view to the best interests of the corporation [...] ”.

 

Therefore, when the interests of the company are best served by breaking its contractual commitments, the director’s act of inducement is justified because it is “taken as a duty”… 

But if the director is not complying with that duty, the rationale for relieving personal liability disappears…

 

In order to succeed under the Imperial Oil test, a plaintiff must prove that the director knew the legal rights of others would be jeopardized by the director’s actions, and intended to deprive the aggrieved party of contractual benefits… 

The concerns expressed in Imperial Oil are not misplaced. In order to protect the fine fabric of the corporate veil, courts should refrain from requiring directors to prove the legitimate corporate purpose motivating their actions. However, courts also should not condone inappropriate conduct by automatically placing a difficult onus on a plaintiff, by reason only that the defendant director owed legal duties to the company whose contract he had a hand in breaching. Some balance is required…

 

In this case Pocklington acquired a valuable asset for nominal consideration at the expense of Gainers’ creditors. Since Gainers was insolvent at that time, its creditors’ interests were the interests of the company. Promoting the interests of one shareholder at the expense of the creditors is not in the best interests of the company: Levy-Russell at 169. A director who pursues these objectives is not acting in furtherance of his corporate duty, and there is no justification for his deeds.

Pocklington has not demonstrated any legitimate business interest of Gainers that could have been served by the 350151 share transfer… 

By transferring the 350151 shares to his own company, Pocklington was not discharging his legal duty to act honestly and in good faith with a view to the best interests of Gainers; he was acting solely in his own interests. As no legitimate interest of Gainers could possibly be served by the transaction, the court need not go on to consider whether Pocklington’s act was aimed at depriving Alberta of the benefits of its contract. Pocklington’s position as director cannot provide justification for his actions.”

(Emphasis added.)

Blog Activity 4.5

In your view is the Pocklington decision consistent with, among others, the McFadden decision? Please blog your views on this question and your reasons in less than one page under the heading “Pocklington & McFadden”.

 

Please read Adga Systems International Inc. v. Valcom Ltd. (1999) 43 O.R. (3d) 101 (Ont. C.A.) at pages 178-183 of the Casebook.

Note that this case represents a significant shift in the spectrum of directors’ liability/personal liability imposed on officers and directors for actions taken in the course of their duties.

The plaintiff, Adga Systems sued their competitor Valcom Ltd., as well as Valcom’s sole director in his personal capacity and two senior employees of Valcom in their personal capacity. Adga alleged that Valcom had raided its employees and caused Adga economic damage. Adga sought damages for inducing breach of contract and inducing breach of fiduciary duty. The Ontario Divisional Court dismissed the claim against the three personal defendants holding that, since the employees of Valcom Ltd. were not furthering their own interests and were pursuing their duties of employment to further the interests of their employer, no cause of action was revealed which justified a trial. The plaintiff Adga appealed to the Ontario Court of Appeal.

 

Adga’s appeal was allowed and the three personal defendants, being the Director of Valcom and two employees of Valcom were reinstated as defendants. Carthy J.A. focussed on the issues as follows:

“The issue that I must deal with is whether, on the assumption that the defendant Valcom committed a tort against the appellant, the sole director and employees of Valcom can be accountable for the same tort as a consequence of their personal involvement directed to the perceived best interests of the corporation… 

However, where, as here, the plaintiff relies upon establishing an independent cause of action against the principals of the company, the corporate veil is not threatened and the Salomon principle remains intact…

It is my conclusion that there was no principled basis for protecting the director and employees of Valcom from liability for their alleged conduct on the basis that such conduct was in pursuance of the interests of the corporation. It may be that for policy reasons the law as to the allocation of responsibility for tortious conduct should be adjusted to provide some protection to employees, officers or directors in the limited circumstances where, for instance, they are acting in the best interests of the corporation with parties who have voluntarily chosen to accept the ambit of risk of a limited liability company. However, the creation of such a policy should not evolve from the facts of this case where the alleged conduct was intentional and the only relationship between the corporate parties was as competitors.” (Emphasis added.)

Please read Note 2 at page 183 of the Casebook: What is result if directors must choose between (1) inducing breach of contract because it is in the best interests of the company and (2) acting contrary to the company’s best interests so to avoid inducing breach?

In this regard please note the discussion on page 181 of the Casebook regarding the SCC decision in London Drugs v. Kuehne & Nagel: 

 

“ The Supreme Court of Canada again considered the issue of an employee's liability for acts done in the course of his duties on behalf of the employer in London Drugs Ltd. v. Kuehne & Nagel International Ltd., <a href="http://www.canlii.org/en/ca/scc/doc/1992/1992canlii41/1992canlii41.html">1992 CanLII 41 (SCC)</a>, [1992] 3 S.C.R. 299, 97 D.L.R. (4th) 261. The plaintiff delivered a transformer to a warehouse company for storage. An employee of the warehouse company negligently permitted the transformer to topple over, causing extensive damage. Even though there was a contractual relationship between the company and the customer, the majority held in favour of the claim against the employee.

Iacobucci J. stated at pp. 407-08:

There is no general rule in Canada to the effect that an employee acting in the course of his or her employment and performing the "very essence" of his or her employer's contractual obligations with a customer does not owe a duty of care, whether one labels it "independent" or otherwise, to the employer's customer. . . .

…The mere fact that the employee is performing the "very essence" of a contract between the plaintiff and his or her employer does not, in itself, necessarily preclude a conclusion that a duty of care was present.”

 

Please read Note 6 at page 184 of the Casebook: Is there a different standard of liability of employees and directors where each acts within scope of duties?

 
<ol>
<li> Knowing Assistance in a Breach of Trust </li>
</ol>
Please read Air Canada v. M & L Travel Ltd. [1993] 3 S.C.R. 787 at pages 184-191 of the Casebook.

M&L Travel Ltd., the directors of which were Mssrs. Martin and Valliant, was a travel agency. It had an agreement with Air Canada under which M&L Travel Ltd. was to hold proceeds of ticket sales in trust for Air Canada. M&L Travel Ltd. in fact did not hold the proceeds in trust as agreed but rather used them for general operating expenses as M&L found itself in financial difficulties.

Air Canada sued (1) the travel agency, and (2) both directors personally for the money owed to it for ticket sales.

Air Canada’s action succeeded against M&L Travel Ltd. but failed against the Directors Mssrs. Martin and Valliant. Accordingly Air Canada successfully appealed the decision holding the Directors not to be personally liable and judgment was entered against them as well.

The matter came before the Supreme Court of Canada. At issue was: (1) whether the relationship between M&L Travel Ltd. and Air Canada was one of trust, or one of debtor and creditor? and (2) if of trust, under what circumstances could the directors of a corporation be held personally liable for breach of trust by the corporation - and were those circumstances present here.

Although involving a corporation, the case fell to be resolved on trust principles, and does not raise general questions of the personal liability of directors for the acts of the corporation.

(1) The Supreme Court of Canada held that there was a trust relationship between M&L Travel Ltd. and Air Canada.

(2) With respect to the personal liability of directors the Supreme Court of Canada was of the view that the imposition of personal liability on a stranger to a trust depends on whether the stranger's conscience is sufficiently affected to justify the imposition of personal liability. A stranger to the trust can be held liable as a constructive trustee for breach of trust (trustee de son tort). The stranger, although not appointed a trustee, takes on him or herself to act as trustee and to possess and administer trust property and becomes liable if he or she commits a breach of trust while acting as a trustee. This type of liability was found to be inapplicable in the case of M&L Travel Ltd. v. Air Canada because the directors did not personally take possession of trust property or assume the office or function of trustees.

 

The court pointed out that strangers to a trust could also be personally liable for breach of trust if they knowingly participate in a breach of trust. They either were acting as a trustee in receipt and chargeable with trust property (a constructive trusteeship termed "knowing receipt") or they knowingly assisted in a dishonest and fraudulent design on the part of the trustees (termed "knowing assistance"). Since the "knowing receipt" category did not apply here, the only basis upon which the directors could be held personally liable were as constructive trustees under the "knowing assistance" head of liability. This basis of liability raises two main issues: the nature of the breach of trust and the degree of knowledge required of the stranger.

 

The knowledge requirement for this "knowing assistance" type of liability is actual knowledge; recklessness or wilful blindness will suffice. A person will be deemed to have known of the trust if it was imposed by statute. If the trust was contractually created, then whether the stranger knew of the trust will depend on his or her familiarity or involvement with the contract.

The stranger will be liable if he or she knowingly assisted the trustee in a fraudulent and dishonest breach of trust. Therefore, it is the corporation's actions that must be examined. Where the trustee is a corporation, rather than an individual, the inquiry as to whether the breach of trust was dishonest and fraudulent may be more difficult to conceptualize, because the corporation can only act through human agents who are often the strangers to the trust whose liability is in issue. The actions of the directors were relevant to the examination, given the extent to which the defendant directors controlled the travel agency.

 

The breach of trust by the travel agency was dishonest and fraudulent from an equitable standpoint. The taking of a knowingly wrongful risk resulting in prejudice to the beneficiary is sufficient to ground personal liability. As a party to the contract between itself and Mr. Martin, M&L Travel Ltd. knew that the Air Canada monies were held in trust, and were not for the general use of the travel agency. It set up trust accounts, but never used them. It also knew that any positive balance in its general account was subject to the Bank's demand. By placing the trust monies in the general account that was then subject to seizure by the Bank, the travel agency took a risk to the prejudice of the rights of the beneficiary, Air Canada. It had no right to take this risk.

 

It was found clearly that the appellant directors participated or assisted in the breach of trust. There were dealing with the funds in question ‑‑ stopping payment on all cheques, opening a trust account, and attempting to withdraw the stop payment orders and to transfer the funds into a new trust account. The breach of trust was directly caused by the conduct of the defendant directors. Their actions in stopping payment on the cheques to protect their own interests not only prevented payment on cheques issued to Air Canada but also precipitated the seizure by the Bank of the only funds available in the unprotected general account.

Accordingly the court found that directors personally liable for breach of trust as constructive trustees.

 

Please read Transamerica Life Insurance Co. v. Canada Life Assurance Co. (1996), 28 O.R. (3d) 423 (Ontario Gen. Div.) at pages 192-198 of the Casebook. 

The defendant Canada Life Mortgage Services Ltd. (“CLMS”) was a wholly owned subsidiary of the defendant Canada Life Assurance Company. CLMS was incorporated by Canada Life Assurance Company to carry on the business of mortgage correspondent and general financial agent to deal with both Canada Life Assurance Company as well as other institutional investors. CLMS had its own head office and branch offices distinct from those of the Canada Life Assurance Company. Those offices were managed and operated independently of the Canada Life Assurance Company. The management of CLMS exercised independent discretion in conducting its business.

A number of the mortgage loans made by the plaintiff Transamerica Life Insurance Company of Canada that had been arranged by CLMS fell into default. The plaintiff Transamerica Life Insurance Company of Canada claimed that CLMS owed it a duty to do the underwriting for these loans, that it failed in that regard, and that Transamerica Life had suffered loss as a consequence. The terms of the Master Agreement that governed the relationship of the plaintiff Transamerica Life and CLMS did not specifically provide that CLMS was to perform any underwriting function on Transamerica Life’s behalf, and CLMS took the position that the agreement excluded this duty.

Transamerica Life sued CLMS for damages for breach of contract, breach of fiduciary duty, fraud, misrepresentation and negligence. Transamerica Life also sued Canada Life Assurance Company, asserting that it was liable for the wrongs of CLMS.

Canada Life Assurance Company moved for summary judgment dismissing the action against it.

It was held that the motion should be granted and the action against Canada Life Assurance Company be dismissed.

Transamerica Life relied on Kosmopoulos in arguing that the court should lift the corporate veil whenever it was "just and equitable" to do so. Sharpe J. rejected this approach finding that lifting the corporate veil whenever it was "just and equitable" to do so would represent a significant departure from the following principle established in Salomon:

“The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.” (at page 195 of the Casebook).

Sharpe J. then quotes Gower, Modern Company Law 5th ed. (1992):

“There seem to be three circumstances only in which the courts can [pierce the veil]. These are: 
<ol>
<li> When the court is construing a statute, contract or other document; </li>
<li> When the court is satisfied that a company is a "mere facade" concealing the true facts; and </li>
<li> When it can be established that the company is an authorized agent of its controllers or its members, corporate or human.” (At page 196 of the Casebook)</li>
</ol>
Then Sharpe J. concludes:

“... the courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct. The first element, "complete control", requires more than ownership. It must be shown that there is complete domination and that the subsidiary company does not, in fact, function independently.... The second element relates to the nature of the conduct: is there "conduct akin to fraud that would otherwise unjustly deprive claimants of their rights?” (At page197 of the Casebook)

Accordingly, Transamerica's claim against Canada Life was dismissed

 

TOPIC 6: THE PARTICULAR PROBLEM OF THIN CAPITALIZATION 

Please read pages 198-199 of the Casebook.

Companies have no minimum capitalization requirement in Canada. Often new corporations are created with one share valued at only $1. Thin capitalization refers to the situation where a corporation is established with high debt to equity ratio. Assuming that debt is normally secured, if something goes wrong there is no one protected except the secured creditors. In other words, in thinly capitalized companies trade creditors are very much at risk.

The question to be considered is whether thin capitalization, per se, should be a ground for lifting the corporate veil? Is it legitimate evidence where owners seek the benefit of limited liability without paying for it with adequate capital investment?

To understand what thin capitalization can look like in practical terms begin by reading the U.S. case of Walkovszky v. Carlton 18 N.Y. 2d 414 (Ct. App. 1966) at pages 199-204 of the Casebook. 

The facts are that the plaintiff Walkovszky was hit by a taxicab owned by the Seon Cab Corporation and sued. Carlton was a stockholder of ten corporations, including Seon, each of which had two cabs registered to its name and only minimal insurance. This was a rather common practice at the time in the taxicab industry.

Walkovszky claimed that although seemingly independent, the companies in fact operated as a single entity with regard to financing, supplies, repairs, employees and garaging and all of the companies are named as defendants. Walkovszky further argued that he was entitled to hold the stockholders personally liable for the damages sought because the multiple corporate structures constituted an unlawful attempt to defraud members of the general public who might be injured by the cabs.

Carlton’s motion to dismiss Walkovszky’s case was granted.

The issue in the case was whether Carlton could be held personally liable in this case and the majority of the court held that Carlton could not be held personally liable.

Fuld J. observed that incorporation of a business is permitted for the purpose of enabling its proprietors to escape personal liability. However, one can “pierce the corporate veil” when anyone uses control of the corporation to further his own rather than the corporation’s business.

That is to say that the courts will pierce the corporate veil whenever necessary in order to prevent fraud or inequity. In determining whether to lift the veil the court is to be guided by “general rules of agency.” Whenever a person uses the corporation to further his own interests as opposed to those of the corporation, he will be liable for the corporation’s acts. This liability is not just for the corporation’s dealings, but also as regards its negligence.

Here, while the complaint alleges that the separate corporations were undercapitalized and that their assets have been intermingled, it failed to mention that the defendant Carlton and his associates were actually doing business in their individual capacities, shuttling their personal funds in and out of the corporations without regard to formality.

The majority felt that if the insurance coverage required by statute was inadequate for the protection of the public, the remedy was not with the courts but with the Legislature.

In a similar case (Mangan) it was proved that operating companies existed only for the purpose of allowing the defendant to avoid the weight of the financial responsibilities and other liabilities. “However, it is one thing to assert that a corporation is a fragment of a larger corporate combine which actually conducts the business…It is quite another to claim that the corporation is a “dummy” for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends. Either circumstance would justify treating the corporation as agent and piercing the corporate veil to reach the principal but a different result would follow in each case. In the first, only a larger corporate entity would be held financially responsible...while, in the other, the stockholder would be personally responsible…” 

The majority further found that the separate corporations in this case (being Mangan) were undercapitalized and the assets intermingled, with personal funds being shuttled in and out of the corporations without formality and to suit the immediate convenience of the stockholders, then such perversions of the corporate form would justify personal liability on the stockholders.

Accordingly, a corporation is not illicit or fraudulent because it consists of other corporations.

The dissenting opinion of Keating J. went in rather a different direction:

“…From their inception these corporations were intentionally undercapitalized for the purpose of avoiding responsibility for acts which were bound to arise as a result of the operation of a large taxi fleet...”

Keating J. found that not only were the corporations intentionally undercapitalized for the purpose of avoiding liability, income was also drained from the corporations continuously for that same purpose. Keating J. did not believe that the privilege of limited liability through the use of the corporate device should be abused no matter what the cost to the public. In his view if a corporation exists without sufficient capital to pay its debts, it is inequitable that the shareholders should sustain such an organization only to escape personal liability. From this perspective attempting to do business without financial coverage is an abuse of the existence of a separate entity and should not exempt the shareholders from personal liability. Keating J. believed the policy of the law ought to be that shareholders should, in good faith, have enough capital in the business to secure the corporation. Otherwise grounds exist for denying the privilege associated with being a separate entity.

Keating J. also pointed out cases standing for other related propositions:
<ol>
<li>The equitable owners of a corporation are personally liable when they treat the company’s assets as their own and add or withdraw capital at will, or when they provide inadequate capital and actively participate in the corporation’s affairs.</li>
</ol>
 
<ol start="2">
<li>The sacrifice of limited liability happens when public policy must be defended or upheld. Fraud is part of this exception. Obvious inadequacy of capital is also considered to be a reason to deny the defense of limited liability.</li>
</ol>
 
<ol start="3">
<li>When corporate income is not sufficient to cover unexpected liabilities or extraordinary bad times, obviously the shareholders will not be held liable. However they will be when the corporation was designed solely to abuse the corporate privilege at the expense of public interest.</li>
</ol>
 

Please read the Notes and Questions 2 & 4 at page 204 of the Casebook.

 

Blog Activity 4.6

 

In your view: what ought to be the measure of adequate capitalization? 

 

And..

 
<ol>
<li>At which of the following points ought adequacy to be determined?</li>
</ol>
 
<ol>
<li> As of the time of trial?</li>
</ol>
 

It has been widely held that “some ‘wrong’ beyond a creditor’s inability to collect” must be shown before the veil will be pierced. Absent this, time of trial would be tantamount to a rule of unlimited liability. Creditor typically will pursue a veil piercing theory only where corporate assets are inadequate to meet its claim.
<h2>1. At the time of incorporation?</h2>
<h2>2. At an intermediate time?</h2>
<h2>That is to say what if the company had been adequately capitalized at formation, but subsequent developments have left it too thinly capitalized?</h2>
<h1>B. Now suppose that although initial funds at the time of incorporation and for sometime thereafter were adequate to satisfy existing contractual and likely tort obligations: (a) all profits were drained out of the firm in the form of dividends or salaries paid to the controlling shareholders, leaving it with insufficient reserves to meet its likely obligations; or, (b) the nature of the firm has changed, such that the initially adequate capital is no longer adequate.</h1>
Please blog your views on these question and your reasons in less than two pages under the heading “Adequate Capitalization”.

 

 

Now please read Henry Browne & Sons Ltd. v. Smith [1964] 2 Lloyd’s Rep. 476 (Eng. Q.B.) at pages 204-206.

In this case the plaintiffs Henry Browne & Sons Ltd. manufacture, supply and install a navigational device for boats. They installed such a device on an ocean cruiser and were not paid. As a result they sued Mr. Smith.

Mr. Smith’s defence was that the order was placed on behalf of Ocean Charters Ltd., a private limited company with an authorized capital of 3,000 one pound shares, of which two were issued – one held by Mr. Smith and the other held by his wife. Mr. Smith was the sole director of Ocean Charters Ltd.

The plaintiff Henry Browne & Sons Ltd. argued that the company Ocean Charters Ltd. was merely a sham or a name under which Mr. smith traded, or, alternatively, that the order was placed by Ocean Charters Ltd. as agent for Mr. Smith. It was held that the principals to the contract were Henry Browne & Sons Ltd. and Ocean Charters Ltd. only and that there was no liability on the part of Mr. Smith.

Please ask yourself what has this case got to do with “thin capitalization”? Was there any evidence that “thin capitalization” was actually the issue?

 

TOPIC 7: CORPORATE PURPOSE & FIDUCIARY DUTIES 

Please read pages 206-226 of the Casebook.

As a first exercise please:
<ol>
<li> Read the last sentence of first paragraph on page 207 of the Casebook; and</li>
<li> The excerpt from “Rotman, Fiduciary Law” at pages 207 and 208 of the Casebook. </li>
</ol>
Attempt to state for your own benefit the essence of to whom fiduciary duties ought to be owed in a corporate context

Please read the seminal case of Dodge v. Ford Motor Co. 204 Mich. 459 (1919) at pages 208-212 of the Casebook. The facts of this case memorably put into sharp relief the tensions between profit and purpose an a corporate context.

 

Ford was the dominant manufacturer of cars. At one point, the cars were sold for $900, but the price was slowly lowered to $440 – and finally, to $360. Henry Ford admitted that the price negatively impacted short-term profits, but argued that his ambition was to spread the benefits of the industrialized society among as many people as possible. The Dodges, who had recently founded their own firm to compete with Ford, objected to a decision by the Ford board of directors to withhold special dividends and to spend millions of dollars to build the world’s largest auto manufacturing facility instead. Their claim was that the decision was based on Henry Ford’s idiosyncratic preferences about doing social good for workers and customers as opposed to making the greatest amount of money for shareholders.

Ford was emphatic in both his pre-trial comments and in his testimony that the decision to build the factory was about doing “as much good as we can, everywhere, for everybody concerned . . . [a]nd incidentally to make money.” (See Allen Nevins & Frank E. Hill, Ford: Expansion and Challenge, 1915-33, at 99-100 (1957) (quoting interview).

Further, Ford essentially contended that he has paid out substantial dividends to the shareholders ensuring that they have made a considerable profit, and should be happy with whatever return they get from that point forward. Instead of using the money to pay dividends, Ford decided to put the money into expanding the corporation.

The issue was whether the Plaintiff shareholders could force Ford to increase the cost of the product and limit the money invested into expansion in order to pay out a larger dividend.

It was held that the Plaintiffs were entitled to a more equitable-sized dividend, but the court did not interfere with Ford’s business judgments regarding the price set on the manufactured products or the decision to expand the business.

In essence the court determined that the purpose of corporations is to make money for their shareholders, and that Ford was arbitrarily withholding money that could have gone to the shareholders. Notably, Henry Ford did not deny himself a large salary for his position with the company in order to achieve his ambitions. However, the court was not willing to questions whether the company would be better off with a higher price per vehicle, or if the expansion was wise, because those decisions are covered under the business judgment rule.

Let us further analyze the actual decision. Read through the following for a second time and then answer the questions following the quote for yourself:

 

“There should be no confusion (of which there is evidence) of the duties which Mr. Ford conceives that he and the stockholders owe to the general public and the duties which in law he and his codirectors owe to protesting, minority stockholders. A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.

 

There is committed to the discretion of directors, a discretion to be exercised in good faith, the infinite details of business, including the wages which shall be paid to employees, the number of hours they shall work, the conditions under which labor shall be carried on, and the price for which products shall be offered to the public. It is said by appellants that the motives of the board members are not material and will not be inquired into by the court so long as their acts are within their lawful powers. As we have pointed out, […] it is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others, and no one will contend that, if the avowed purpose of the defendant directors was to sacrifice the interests of share-holders, it would not be the duty of the courts to interfere.” (Emphasis added)
<ol>
<li> Were these words necessary to the decision or were they merely dictum?</li>
<li> Does the BCBCA section 227 preclude the result in Dodge v. Ford Motor Co.? Does it authorize it?</li>
</ol>
 

“Restricted businesses and powers
<ol start="33">
<li> (1) A company must not</li>
</ol>
(a) carry on any business or exercise any power that it is restricted by its memorandum or articles from carrying on or exercising, or

(b) exercise any of its powers in a manner inconsistent with those restrictions in its memorandum or articles.

(2) No act of a company, including a transfer of property, rights or interests to or by the company, is invalid merely because the act contravenes subsection (1).

 

 

Powers and functions of directors
<ol start="136">
<li> (1) The directors of a company must, subject to this Act, the regulations and the memorandum and articles of the company, manage or supervise the management of the business and affairs of the company.</li>
</ol>
 

 Duties of directors and officers

142 (1) A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case may be, must
<ul>
<li>act honestly and in good faith with a view to the best interests of the company,</li>
</ul>
 
<ul>
<li>exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances,</li>
</ul>
 
<ul>
<li>act in accordance with this Act and the regulations, and</li>
</ul>
 

(d) subject to paragraphs (a) to (c), act in accordance with the memorandum and articles of the company.

(2) This section is in addition to, and not in derogation of, any enactment or rule of law or equity relating to the duties or liabilities of directors and officers of a company.

(3) No provision in a contract, the memorandum or the articles relieves a director or officer from

(a) the duty to act in accordance with this Act and the regulations, or

(b) liability that by virtue of any enactment or rule of law or equity would otherwise attach to that director or officer in respect of any negligence, default, breach of duty or breach of trust of which the director or officer may be guilty in relation to the company.

 

Complaints by shareholder
<ol start="227">
<li> (1) For the purposes of this section, "shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) A shareholder may apply to the court for an order under this section on the ground

(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or

 

(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.

(3) On an application under this section, the court may, with a view to remedying or bringing to an end the matters complained of and subject to subsection (4) of this section, make any interim or final order it considers appropriate, including an order

(a) directing or prohibiting any act,

(b) regulating the conduct of the company's affairs,

(c) appointing a receiver or receiver manager,

(d) directing an issue or conversion or exchange of shares,

(e) appointing directors in place of or in addition to all or any of the directors then in office,

(f) removing any director,

(g) directing the company, subject to subsections (5) and (6), to purchase some or all of the shares of a shareholder and, if required, to reduce its capital in the manner specified by the court,

(h) directing a shareholder to purchase some or all of the shares of any other shareholder,

(i) directing the company, subject to subsections (5) and (6), or any other person, to pay to a shareholder all or any part of the money paid by that shareholder for shares of the company,

(j) varying or setting aside a transaction to which the company is a party and directing any party to the transaction to compensate any other party to the transaction,

(k) varying or setting aside a resolution,

(l) requiring the company, within a time specified by the court, to produce to the court or to an interested person financial statements or an accounting in any form the court may determine,

(m) directing the company, subject to subsections (5) and (6), to compensate an aggrieved person,

(n) directing correction of the registers or other records of the company,

(o) directing that the company be liquidated and dissolved, and appointing one or more liquidators, with or without security,

(p) directing that an investigation be made under Division 3 of this Part,

(q) requiring the trial of any issue, or

(r) authorizing or directing that legal proceedings be commenced in the name of the company against any person on the terms the court directs.

(4) The court may make an order under subsection (3) if it is satisfied that the application was brought by the shareholder in a timely manner.

(5) If an order is made under subsection (3) (g), (i) or (m), the company must pay to a person the full amount payable under that order unless there are reasonable grounds for believing that

(a) the company is insolvent, or

(b) the payment would render the company insolvent.

(6) If reasonable grounds exist for believing that subsection (5) (a) or (b) applies,

(a) the company is prohibited from paying the person the full amount of money to which the person is entitled,

(b) the company must pay to the person as much of the amount as is possible without causing a circumstance set out in subsection (5) to occur, and

(c) the company must pay the balance of the amount as soon as the company is able to do so without causing a circumstance set out in subsection (5) to occur.

(7) If an order is made under subsection (3) (o), Part 10 applies.

 
<ol start="3">
<li> How do you identify what is to the “benefit of shareholders” in the case of a corporation with more than one shareholder? </li>
</ol>
Different shareholders have different investment time frames, different tax concerns, different attitudes toward firm-level risk due to different levels of diversification, different interests in other investments that might be affected by corporate activities, and different views about the extent to which they are willing to sacrifice corporate profits to promote broader social interests, such as a clean environment or good wages for workers.

Could there be any single, uniform measure of shareholder “wealth” to be “maximized”?

Please now read the excerpt from “Rotman, Fiduciary Law” on pages 212-214 of the Casebook. 

For an interesting article on the background to the case, see M. Todd Henderson, “Everything Old Is New Again: Lessons from Dodge v. Ford Motor Company” (2007) U of Chicago Law & Economics, Olin Working Paper No. 373: <a href="http://www.law.uchicago.edu/files/files/373.pdf">http://www.law.uchicago.edu/files/files/373.pdf</a>

 

Following up on Dodge v. Ford Motor Co. is the equally memorable case (at least if you are a baseball fan) of Shlensky v. Wrigley 237 N.E.2d 776 (Ill. App.1968) at pages 214-218 of the Casebook. 

Mr. Phillip K. Wrigley was a director of the Chicago National League Ball Club (Inc.), which was the company that owned the Chicago Cubs. The Board tended to follow Mr. Wrigley’s lead for a variety of reasons not relevant to the outcome of this case. Although every other major league team had installed lights to allow for night games, Defendant did not install them for the Cubs because he was concerned that night baseball would be detrimental to the surrounding neighborhood.

Mr. Shlensky, a minority shareholder of the Chicago National League Ball Club (Inc.), brought a derivative action against the decision not to install lights. A derivative action is where an action is brought against the corporation in essence in the name of the corporation. Hence the word “derivative” as the right to bring action is derived from the corporation itself, and what is in the best interests of the corporation. Much more on this concept later in this course, but Wrigley v. Shlensky is a useful introduction to the concept. 

In his argument, ostensibly on behalf of the Chicago National League Ball Club (Inc.), Mr. Shlensky pointed out that the team was losing money, and that the other Chicago team, the White Sox, had higher attendance during the weekdays because they played at night. Therefore in his view the Cubs would draw more people with weekday night games. Shlensky argued that Wrigley’s first concern ought to be with the shareholders rather than the neighborhood.

The issue in the case was whether decisions made by Wrigley should be overruled absent a showing of fraud, illegality or a conflict of interest?

The decision was not to overrule Wrigley’s determination on the issue of lights. The court cited some reasons why the light installation could be detrimental, such as lowering the property value of the park itself, a lack of proof that financing would be available for lights and some uncertainty whether the costs would in fact be offset by increasing revenues. In essence the court set out that business decisions should not be disturbed just because a reasonable case can be made that the policy chosen by the company might not be the wisest possible. This was all the more true where there was no evidence of illegality, fraud or a conflict of interest

The court upheld the directors’ decision. Moreover the court reasoned (as the directors themselves had not) that a decline in the quality of life in the local neighbourhoods might in the long run hurt property values around Wrigley Field, harming shareholders’ economic interests.

In many ways this decision on those like it can be seen as a form of abstention by judiciary; an unwillingness to supplant the business judgment of a properly constituted and motivated Board of Directors. This so-called “BUSINESS JUDGMENT RULE” establishes a presumption against judicial review of duty of care claims. 

There are several interesting questions and observations that flow from this case:
<ol>
<li>For one was Wrigley an innovator making a venturesome business decision or an eccentric who was just behind the times? How can we know when the “business judgment rule” precluded Mr. Shlensky from even getting up to bat? </li>
</ol>
 
<ol>
<li>Encouraging risk-taking is part of the story, and the business judgment rule allows for that, but it is only a part of the story. Something else is going on as well. This is because if the business judgment rule is framed as an abstention doctrine, judicial review is more likely to be the exception rather than the rule. That is because the court begins with a presumption against review. It then reviews the facts to determine not the quality of the decision, but rather whether the decision making process was tainted by self-dealing and the like. The requisite questions to be asked are more objective and straightforward: Did the board commit fraud? Did the board commit an illegal act? Did the board self-deal? Whether or not the board exercised reasonable care is irrelevant, as well it should be. The business judgment rule thus builds a prophylactic barrier by which courts pre-commit to resisting the temptation to review the merits of the board’s decision.</li>
</ol>
 
<ol>
<li>A deeper look at Shlensky v. Wrigley also illustrates the malleability of the concept of “the best interests of the company”. It can be all to easy, as Mr. Shlensky’s argument illustrated to define those interests too narrowly, or to directly or indirectly align them with “personal best interests.”</li>
</ol>
 

A classic example of judicial eagerness to protect directors from claims that they failed to maximize shareholder wealth follows. Please read Peoples Department Stores Inc. (Trustee of) v. Wise [2004] 3 S.C.R. 461 (SCC) at pages 219-221 of the Casebook.

The directors of Peoples Department Stores, a federal business corporation wholly owned by Wise Stores Inc. ("WSI"), were the three Wise brothers (editors note: there really were three Wise brothers - no joke), who were also the directors and majority shareholders of WSI.

To rationalize the operations of their two overlapping companies, the Wise brothers adopted a joint inventory procurement policy: Peoples Department Stores bought all its merchandise from North American suppliers (i.e., 86% of the total), and WSI bought its merchandise from overseas suppliers (the other 14%). The merchandise purchased by Peoples Department Stores for WSI was transferred to WSI, but Peoples Department Stores did not seek immediate payment. This resulted in an inter-company loan of $18 million, which WSI were unable to repay. WSI went bankrupt owing $4.44 million. Peoples Department Stores also had to close.

The trustee in bankruptcy of Peoples Department Stores sued the three Wise brothers for that amount of $4.44 million, specifically alleging that the brothers had breached their fiduciary duty and their duty of care under section 122 (1) of the Canada Business Corporations Act ("CBCA") by favouring the interests of WSI over those of Peoples Department Stores while they were corporate directors of Peoples Department Stores.

The relevant statutory provisions provided:

“102. (1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.
<ol start="122">
<li> (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall</li>
</ol>
 (a) act honestly and in good faith with a view to the best interests of the corporation; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.” 

 

The Supreme Court of Canada found the three Wise brothers not to be liable. Following are a number of the court’s observations about the case:
<ol>
<li>The court held that this appeal did not relate to the non-statutory duty directors owe to shareholders. It was concerned only with the statutory duties owed under the <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html">CBCA</a>. Insofar as the statutory fiduciary duty is concerned, it is clear that the phrase the “best interests of the corporation” should not be read simply as the “best interests of the shareholders”. From an economic perspective, the “best interests of the corporation” means the maximizing of the value of the corporation.</li>
<li> The court accepted as an accurate statement of law that in determining whether directors are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment. </li>
<li>The court made the following practical and important observations:</li>
</ol>
“The interests of shareholders, those of the creditors and those of the corporation may and will be seen as consistent with each other if the corporation is profitable and well capitalized and has strong prospects. However, this can change if the corporation starts to struggle financially. The residual rights of the shareholders will generally become worthless if a corporation is declared bankrupt. Upon bankruptcy, the directors of the corporation transfer control to a trustee, who administers the corporation’s assets for the benefit of creditors. 

Short of bankruptcy, as the corporation approaches what has been described as the “vicinity of insolvency”, the residual claims of shareholders will be nearly exhausted. While shareholders might well prefer that the directors pursue high-risk alternatives with a high potential payoff to maximize the shareholders’ expected residual claim, creditors in the same circumstances might prefer that the directors steer a safer course so as to maximize the value of their claims against the assets of the corporation.

The directors’ fiduciary duty does not change when a corporation is in the nebulous “vicinity of insolvency”. That phrase has not been defined; moreover, it is incapable of definition and has no legal meaning. What it is obviously intended to convey is deterioration in the corporation’s financial stability. In assessing the actions of directors it is evident that any honest and good faith attempt to redress the corporation’s financial problems will, if successful, both retain value for shareholders and improve the position of creditors. If unsuccessful, it will not qualify as a breach of the statutory fiduciary duty…

In resolving these competing interests, it is incumbent upon the directors to act honestly and in good faith with a view to the best interests of the corporation. In using their skills for the benefit of the corporation when it is in troubled waters financially, the directors must be careful to attempt to act in its best interests by creating a “better” corporation, and not to favour the interests of any one group of stakeholders. If the stakeholders cannot avail themselves of the statutory fiduciary duty (the duty of loyalty, supra) to sue the directors for failing to take care of their interests, they have other means at their disposal.” (Emphasis added)

 

Next please read an important case you will see referred to on several occasions throughout the course:

BCE Inc. v. 1976 Debentureholders [2008] 2 S.C.R. 560 (SCC) at pages 222 – 225 of the Casebook.

This case arose from challenge by a group of Bell Canada debentureholders to the proposed acquisition of BCE by a consortium headed by the Ontario Teachers’ Pension Plan Board through a $52 billion arrangement under section 192 of the CBCA. For contextual purposes section 192 provides in part:

“192. (1) In this section, “arrangement” includes

(a) an amendment to the articles of a corporation;

(b) an amalgamation of two or more corporations;

(c) an amalgamation of a body corporate with a corporation that results in an amalgamated corporation subject to this Act;

(d) a division of the business carried on by a corporation;

(e) a transfer of all or substantially all the property of a corporation to another body corporate in exchange for property, money or securities of the body corporate;

(f) an exchange of securities of a corporation for property, money or other securities of the corporation or property, money or securities of another body corporate;

(f.1) a going-private transaction or a squeeze-out transaction in relation to a corporation;

(g) a liquidation and dissolution of a corporation; and

(h) any combination of the foregoing…

 

…(3) Where it is not practicable for a corporation that is not insolvent to effect a fundamental change in the nature of an arrangement under any other provision of this Act, the corporation may apply to a court for an order approving an arrangement proposed by the corporation.

 (4) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,

(a) an order determining the notice to be given to any interested person or dispensing with notice to any person other than the Director;

(b) an order appointing counsel, at the expense of the corporation, to represent the interests of the shareholders;

(c) an order requiring a corporation to call, hold and conduct a meeting of holders of securities or options or rights to acquire securities in such manner as the court directs;

(d) an order permitting a shareholder to dissent under section 190; and

(e) an order approving an arrangement as proposed by the corporation or as amended in any manner the court may direct.”

 

The arrangement in question was to have been financed in part through BCE’s assumption of an additional $38.5 billion in debt, of which $30 billion was to have been guaranteed by Bell Canada, a wholly owned subsidiary of BCE. BCE’s common shareholders in fact overwhelmingly approved the transaction. However the debentureholders objected to the arrangement on the grounds that it would diminish the trading value of their debentures by an average of 20 percent, while conferring a premium of approximately 40 percent of the market price to holders of BCE common shares.

The Supreme Court of Canada made the following observations (excerpted not from the Casebook, but rather from the full decision which can be found here: <a href="http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/6238/index.do">http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/6238/index.do</a>):

“ The directors are responsible for the governance of the corporation. In the performance of this role, the directors are subject to two duties: a fiduciary duty to the corporation under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec122subsec1_smooth">s. 122(1)</a>(a) (the fiduciary duty); and a duty to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec122subsec1_smooth">s. 122(1)</a>(b) (the duty of care). The second duty is not at issue in these proceedings as this is not a claim against the directors of the corporation for failing to meet their duty of care… 

The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation. The content of this duty varies with the situation at hand. At a minimum, it requires the directors to ensure that the corporation meets its statutory obligations. But, depending on the context, there may also be other requirements. In any event, the fiduciary duty owed by directors is mandatory; directors must look to what is in the best interests of the corporation… 

In considering what is in the best interests of the corporation, directors may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions. Courts should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule. The “business judgment rule” accords deference to a business decision, so long as it lies within a range of reasonable alternatives: see Maple Leaf Foods Inc. v. Schneider Corp. 1998 CanLII 5121 (ON CA), (1998), 42 O.R. (3d) 177 (C.A.); Kerr v. Danier Leather Inc., 2007 SCC 44 (CanLII), [2007] 3 S.C.R. 331, 2007 SCC 44. It reflects the reality that directors, who are mandated under s. 102(1) of the CBCA to manage the corporation’s business and affairs, are often better suited to determine what is in the best interests of the corporation. This applies to decisions on stakeholders’ interests, as much as other directorial decisions. 

Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debentureholders in these appeals. This is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen. However, the directors owe a fiduciary duty to the corporation, and only to the corporation. People sometimes speak in terms of directors owing a duty to both the corporation and to stakeholders. Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases (such as these appeals) may arise where these interests do not coincide. In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation.”

Accordingly the claim of the debenture-holders failed.

 

Blog Activity 4.7

Please consider questions 2 & 3 of the notes on page 225 of the Casebook. As well please read the excerpt from “Rotman, Fiduciary Law” at pages 225-6 of the Casebook, especially the last paragraph on page 226 of the Casebook.

 

In your view what general conclusions do you draw concerning the law on corporate purpose? Please blog your views on these question and your reasons in less than two pages under the heading “Corporate Purpose”.

 

UNIT WRAP UP: 

By now the contradictions inherent to and consequent upon corporate personhood have been explored (even if not quite capable of ever being fully understood). Moving forward we have no pedagogic alternative to accepting that this “thing” we call a corporation is believed to exist. So what can it do and what can’t it do? How does it commit a crime? How can it commit a crime? And so much more…the following Unit is meant to explore such questions.

Course:Business Organizations - LAW 459/Unit 4

2016-08-16T17:29:51Z

DavidHeinrich:

UNIT 4 (WEEKS 4 & 5): CORPORATE PERSONHOOD – SOME SPECIFIC ISSUES AND PROBLEMS
 http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Unit-4-360x270.jpg

Figure 4: “Occupy Wall Street” protest
 

ALT: A sign is held up during the “Occupy Wall Street” protests in New York City which began September 17, 2011. The handwritten sign says: “IF CORPORATIONS ARE PEOPLE, THEN WHY CAN’T WE PUT THEM IN JAIL?”

 

Source of image - <a href="http://mulevariations.com/columns/trust-me-im-doctor/occupy-mule">http://mulevariations.com/columns/trust-me-im-doctor/occupy-mule</a>

 

 

 

UNIT OVERVIEW:

 

This unit will be devoted to exploring some of the limitations and conundrums, both legal and practical, which arise out of the assignment of “personhood” to the corporation and how does the law deal with them. What are the limits to this idea? Can other “non-persons” have legal personhood? Can a chimpanzee? Can corporations commit crimes and make contracts? Do corporations have privacy rights, or the right to free speech, or religious freedom or other constitutional protections? Can a corporation be defamed? If you are driving in the HOV lane with only a copy of your certificate of incorporation in the passenger seat, are you violating the requirement that there be two persons in the car? In what circumstances and for what purposes may the personhood of a corporation be disregarded, whether by “piercing” or, as may appeal to some of the more prurient minded among you, “lifting” the “corporate veil’? Are these the same thing?

In the end this unit prepares you to ask in a myriad of ways, what function does “personhood” perform in the analysis of legal problems relating to the corporation?

 

UNIT OUTCOME:

By the end of this unit you should be able to identify the core tensions arising from corporate personhood – and the profound contradictions which arise as a result and which the law must grapple with. The most obvious of these is the tug of war between shareholder financial expectations and management prerogatives. You will also understand, starting from the seminal case of Salomon v. Salomon how tempting it is for the courts to “pierce the corporate veil” and the inevitability of the connection between corporations being separate people and the countervailing force that is the doctrine of “piercing the veil”. Finally you will appreciate that the two forces and how frustrating it is in a legal sense that these two forces working against each other have not yielded and elegant yin and yang, but rather a messy set of legal doctrines that seem more whimsical than principled.

 

UNIT READINGS:

Please read the following material:

Casebook pages 83-91,134-226

BCBCA sections 30, 33, 136, 142, 227

Prest v. Petrodel 2013 UKSC 34 <a href="http://www.bailii.org/uk/cases/UKSC/2013/34.html">http://www.bailii.org/uk/cases/UKSC/2013/34.html</a>

 
<ol start="373">
<li> Todd Henderson, “Everything Old Is New Again: Lessons from Dodge v. Ford Motor Company” (2007) U of Chicago Law & Economics, Olin Working Paper No. 373: <a href="http://www.law.uchicago.edu/files/files/373.pdf">http://www.law.uchicago.edu/files/files/373.pdf</a></li>
</ol>
 

TOPIC 1: CORPORATIONS AND THE CHARTER 

Please read pages 83-91 of the Casebook. The extent to which corporations enjoy the protections of the Charter is considered on these pages. There is little to add.
<ol>
<li> v. Agat Laboratories (1998) 17 C.R. 95th) 147 (Prov.Ct.) which is found at pages 84-88 of the casebook is generally accepted as describing the proper approach. The question in issue is whether s.7 of the Canadian Charter of Rights and Freedoms applies to corporations who, after all, are not natural persons. S.7 provides:</li>
</ol>
“Life, liberty and security of person
<ol start="7">
<li>Everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice.”</li>
</ol>
 

Blog Activity 4.1:

Then please consider the questions in Notes 1 and 2 on page 88 of the Casebook.

How would you answer them? Why would you answer them that way?

Please succinctly summarize the present state of the law on the rights of corporations to use Section 7 of the Charter. Please blog your summary in no more than one page under the heading called “Corporations and the Charter”.

As you should now be able to appreciate, the fiction of corporate personhood can potentially result in some very real confusions and contortions when it comes to legal analysis. Sometimes it feels like the approach is somewhat akin to “Companies are people, except when they are not”.

Query whether such legal stretching and contorting is really necessary to accommodate the fiction of corporate personhood, or whether alternative approaches may be possible.

Blog Activity 4.2

Please consider whether s. 30 of the BC Business Corporations Act could simply be eliminated and replaced by an inclusive list of rights, powers and privileges, but without invoking any form of “personhood”. Would this be advisable or useful? Why or why not?

“Capacity and powers of company

 
<ol start="30">
<li> A company has the capacity and the rights, powers and privileges of an individual of full capacity.”</li>
</ol>
Please blog your views on this question and your reasons in no more than one page under the heading “Eliminating Corporate Personhood?”

 

TOPIC 2: Some practical consequences of “personhood” 

Please read pages 134-143 of the Casebook.

We have previously identified some of the practical consequences of “personhood” – e.g., corporation is the only proper plaintiff for a wrong done to it and that an individual shareholder cannot sue for an alleged pro rata share of losses derived from those suffered by the corporation – as in the Robak case.

Now start to explore some other implications

The material on pages 134-143 of the Casebook deals with some of these. 

Please refer to the questions on page 135 of the Casebook:

Question 1:

Principal shareholder and de facto controller testifies on behalf of corporate plaintiff. Disbelieved. Corporation still wins. Should the corporation be deprived of costs because “it” lied?

Question 2:

Can a corporation be held in contempt of court for failure to comply with a court order? See Northern Counties Securities v. Jackson & Seeple, [1974] 2 All ER. 625 referenced in note 2 on page 135 of the Casebook.

Question 3:

Macaura v. Northern Assurance [1925] A.C. 619 at pages 135-137 of the Casebook.

Owner of timber sold it to a company that was owned almost solely by him. He was the company's largest creditor. In his own name he insured the timber against fire. Timber was in fact destroyed by fire. Insurer denied the claim on the basis that the timber now belonged to the company and not to the previous owner or to the largest shareholder in the company.

Their argument was that the company being in law a legal entity separate from shareholders had an insurable interest but held no policy. Mr. Macaura had a policy, but no insurable interest. This left him with only a debt due by the company as a result of the fire that destroyed the timber he had sold.

The House of Lords held this way, finding that “…Neither a simple creditor nor a shareholder in a company has any insurable interest in a particular asset which a company holds.”

Does this really make policy sense? 

In thinking about this question note the words of Lord Buckmaster on where the benefits and burden lie (at p.136 of the Casebook). In this case all the benefits and burdens effectively fell on Mr. Macaura.

Suppose I am convinced that a building I have no interest in beyond that of any other citizen will collapse within a year. I contract with an insurer to pay me $50K if it does. Isn’t this just betting – my object is to make a windfall gain not to protect against loss. That situation is clearer then the Macaura case.

Might it be suggested that Macaura was wrongly decided because it’s definition of insurable interest is too narrow?

To try and answer you will have to ask yourself what the point of “insurable interest” is?

In an early case on the subject (Lucena v. Crawford (1806) 127 E.R. 471), one judge found that an insured could recover if she suffered “factual expectation of loss”. Unfortunately, another judge in that case required that, in addition to “factual expectation of loss”, the plaintiff must also have a “legal or equitable interest” in the property. The test of “legal or equitable interest” in the property is the one that prevailed. Under it for example, a lender who lent money for a construction project would have no insurable interest unless he had taken out a security interest in the property.

Which bring us to the important case of Kosmopoulos v. Constitution Insurance and how the separate corporate personality doctrine can have unintended and unforeseen consequences. The decision of the Ontario C.A. is found at page 137 of the Casebook. 

Mr. Kosmopoulos was the sole shareholder and director of leather goods company. He originally ran that business as a sole proprietor and the lease for its office was in the name of Mr. Kosmopoulos, as was the insurance on office. His lease for the company office was under his own name from when he originally ran the business as a sole proprietor. Even after the incorporation of his company the insurance on the office remained in his own name. The insurance agency he was dealing with knew that he was personally on the lease but carrying on business as a corporation. A fire in a neighboring lot damaged his office.

When a claim was made insurance coverage was denied.

The trial judge found that Mr. Kosmopoulos could not recover damages as the owner of the assets as the company, and not he, owned them. However he could recover as an insured because of his insurable interest in the building.

The Ontario Court of Appeal agreed, restricting the application of the Macaura precedent to cases involving multiple shareholders.

The Supreme Court of Canada upheld the ruling of the lower courts.

Wilson J. obseved that there was no consistent principle as to when a court may disregard separate personhood by “lifting the corporate veil” and regarding the company as a mere “agent” or a “puppet” of its controlling shareholder or a parent corporation”. Though the corporate veil would not be lifted, Mr. Kosmopoulos as sole shareholder of the company was found to be so placed with respect to the assets of the business as to have benefit from their existence and prejudice from their destruction. He had a moral certainty of advantage or benefit from those assets but for the fire. He had, therefore, an insurable interest in them capable of supporting the insurance policy and is entitled to recover under it.

McIntyre J. preferred the approach of Zuber J. in the Ontario C.A. That is that the Macaura rule should not be accepted to compel a holding that a sole shareholder and sole director of a company could not have an insurable interest in the assets of the Company. Underlying this conclusion is that modern company law permits the creation of companies with one shareholder. The identity then between the Company and that sole shareholder (and director) is such that an insurable interest in the Company's assets may be found in the sole shareholder.

Now please consider questions 2, 3 and 4 on page 140 of the Casebook.

Please read Lee v. Lee’s Air Farming at pages 140-142 of the Casebook which helps bring some clarity to the question of how to separate different roles in a corporate structure, even where they seemingly reside within the same physical being. 

Mr. Lee formed a company, held nearly all its shares, was managing director, and a pilot. Lee appointed himself the chief pilot for the company, and in this way became in effect both employer and worker. The contract of employment was between him and the company, but in effect Mr. Lee both gave orders and obeyed them.

The New Zealand Courts held that the two offices were clearly incompatible. On appeal the Privy Council reversed finding that it was the company who gave the orders, not Mr. Lee personally.

Please read Notes 1-3 on page 142 of the Casebook.

Blog Activity 4.3

Please consider the hypothetical in Note 4 on page 142 of the Casebook. What do you think? Would “x” be able to avoid liability in by “springing out” the corporation in the scenarios provided? Please blog your views on this question and your reasons in less than one page under the heading “Ambiguities of Corporate Personality”.

 

TOPIC 3: QUESTIONING THE PRINCIPLE - THE CORPORATE VEIL THEORY 

Please Read Pages 143-149 Of The Casebook.

It is noteworthy that clear doctrines and explanations of when “the corporate veil” will be lifted are few and far between.

Since the decision in Salomon v. Salomon a steady stream of common law decisions and legislative enactments has eroded the immutability of the separate legal entity doctrine. These decisions and enactments are conveniently seen as ways to “lift or pierce the corporate veil”. Piercing seems to happen freakishly ... rare, severe and unprincipled - almost like lightning. This lack of clarity perhaps suggests that using a fiction such as “personhood” is a poor and impractical fit. This is not just a bit of critical analysis with some normative pedagogic purpose. Rather it may be the unifying thread of virtually all aspects of this course. Because the ethical reasons underlying the principle of separate corporate personality seem to not be particularly present, know or understood, we should perhaps not be surprised at the degree of judicial flailing and uncertainty that many of the cases we are studying seem to manifest.

What Little Is Clear Is That Limited Liability Is No Longer Sacrosanct: The Principle In Salomon's Case No Longer Rules.

See the quotation from Clarkson v. Zhelka [1967] 2 O.R. 565 (H.C.) at page 144 of the casebook:

“The cases in which the Courts…have seen fit to disregard the corporate entity or personality, and instead to consider the economic realities behind the legal façade, fall within a narrow compass. The Legislature, in the fields of revenue and taxation…has made much greater departure in this respect. Such cases as there are illustrate no consistent principle. The only principle laid down is that in the leading case of Salomon v. Salomon & Co. Ltd., [1897] AC 22; and in general such principle has been rigidly applied. Briefly stated, it is that the legal persona created by incorporation is an entity distinct from its shareholders and directors and that even in the case of a one-man company, the company is not an alias for the owner.

The exception would appear to represent refusals to apply the logic of the Salomon case where it would be flagrantly opposed to justice.

…If a company is formed for the express purpose of doing a wrongful or unlawful act, or, if formed, those in control expressly direct a wrongful thing to be done, the individuals as well as the company are responsible to those to whom liability is legally owed.”

Note Welling’s critique of this part of Clarkson as obiter dicta (at page 148 of the Casebook).

Note Sharpe J. statement in Transamerica Life v. Canada Life (1996) 28 O.R. (3d) 423 at 433-434 (which can be found at the pages 144-145 of the Casebook): 

“There are undoubtedly situations where justice requires that the corporate veil be lifted…[I]t will be difficult to define precisely when the corporate veil is to be lifted, but that lack of a precise test does not mean that a court is free to act as it pleases on some loosely defined ‘just and equitable” standard…

[T]he courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct. The first element “complete control”, requires more than ownership. It must be shown that there is complete domination and that the subsidiary company does not, in fact, function independently…

The second element refers to the nature of the conduct: is there “conduct akin to fraud that would otherwise unjustly deprive claimants of their rights?” (References omitted.)

Note Welling at page 149 of the Casebook: 

“Courts in Canada have yet to take the final step and acknowledge that they have no inherent power to pretend that a corporation does not exist. I suspect the reason is simple. Most barristers concede the judgers has power to “pierce the corporate veil”, then argue this is not an appropriate case in which to use the power. They are conceding too much and they are ignoring the clear wording of Canadian corporate statutes. It is time for someone to stand up and say “quo warranto?”

It is clear from commentators and judges that the immense confusion around when the “corporate veil’ is to be pierced relates directly to principle of Salomon v. Salomon and the separate personality of companies. This being so it is quite curious why the fiction of “corporate personhood” does not itself draw as much attention as it might. It is at least arguable that if we chose to dispense with the fiction that corporations are “persons”, we would more easily and clearly be able to identify and define permitted corporate action strictly in terms of what is permissible. 

 

TOPIC 4: corporate personality in practice: some problem areas 
<ol>
<li> Corporate Character Traits</li>
</ol>
Please read extract from Welling at page 150 of the Casebook.

Please note in particular the last three sentences:

“A fully capable corporation may well have been born yesterday. Does the law permit us to look inside of the corporation’s equivalent of a family to establish a pattern of behaviour? A cautious “yes” can be advanced, provided the principle of corporate personality is not sacrificed.”

 

Please read Big Bend Hotel Ltd. v. Security Mutual (1980) 19 BCLR 102 at pages 150-152 of the Casebook.

This is an example of the corporate veil being lifted to prevent improper conduct or fraud.

Vincent Kumar was the president and sole shareholder of Big Bend Hotel Ltd. Big Bend had obtained insurance from Security Mutual on the hotel, its sole asset. The hotel burned down.

Kumar had previously been the president and sole shareholder of another corporation whose hotel had burned less than three years earlier. This fact had not been disclosed to security Mutual.

The court held that this was a material non-disclosure. It was found to be appropriate to lift the corporate veil here because equity will not allow an individual to use a co as a shield for improper conduct or fraud.

Callaghan J. found that Kumar knew the prior loss had to be disclosed and that his failure to do so was intended to mislead or deceive the insurers who would have declined risk had they known.

In other words the fact of a separate corporate entity was not allowed to interfere with the obligation to disclose, and the veil would be pierced to put the sole shareholder corporate president to the same standard he would be held to if no company existed as a shield.

Please read Note 1 at page 152 of the Casebook:

Wasn’t it enough to decide the case to conclude that had they known, the insurer would have declined risk?

Should the insurance company have had an application form that asked for disclosure not only from the company applicant but from all its principals.

Please read Note 3 at page 152 of the Casebook:

London Computer Operators Training Ltd and others v British Broadcasting Corporation and others [1973] 2 All ER 170 deals with how separate corporate existence can have real impact on other legal areas, such as defamation.

Two speakers on BBC radio alleged that a computer school was “a financial racket”, that their advertising was misleading, and that the founder had “woeful” business record. The school and two of its directors bought an action for libel against BBC Radio who pleaded justification (that the statements were in fact true) and fair comment. The founder, who was still running the school, was not joined as a plaintiff. The defendants subsequently discovered that the founder had a criminal record and sought leave to amend their particulars of justification (truth) by adding details of his convictions and sentences. Leave to amend was granted. The court found that the words complained of were capable of the meaning that the company was being run by people of questionable honesty and background who were unfit to run a computer school.

If the company is separate from its shareholder how is the shareholders criminal record of convictions and sentencing relevant to an action involving the company only, and not the shareholder?

Read Hercules Managements Ltd. v. Ernst & Young [1997] 2 S.C.R. 165 at page 155 of the Casebook

Two companies, Northguard Acceptance Ltd (‘NGA”) and Northguard Holdings Ltd. (‘NGH”) carried on business lending and investing money on the security of real property mortgages. Hercules Managements Ltd. was a shareholder in NGA. Ernst & Young were hired as auditors of NGH and NGA, prepared financial statements and provided audit reports to the companies’ shareholders. NGA and NGH went into receivership and Hercules Managements Ltd. sued Ernst & Young alleging that their audit reports had been negligently prepared.

Ernst & Young sought dismissal on the ground, inter alia, that the claims asserted by the plaintiffs could only properly be brought by the corporations themselves and not by the shareholders individually. La Forest J. agreed with Ernst & Young holding that “the shareholders’ reliance on negligently prepare audit reports…will result in a wrong to the corporation for which the shareholders cannot, as individuals, recover.”

Blog Activity 4.4

 

What is the policy justification for this result in your view? Please blog your views on this question and your reasons in less than one page under the heading “Justifying Ernst & Young”.

 
<ol>
<li> Corporations as Agents and Partners </li>
</ol>
Please read pages 157-158 of the Casebook.

The question is: When is it appropriate to treat a company as being the agent or partner of its controlling shareholder? 

Note that the parameters of partnership can be reviewed in Unit 3.

In this regard please read Smith, Stone & Knight Ltd. v. Birmingham Corp. [1939] 4 All E.R. 116 at page 158 of the Casebook.

Birmingham Corporation expropriated premises owned by a wholly‑owned subsidiary of Smith, Stone & Knight Ltd. (“SSK”). 497 of 502 issued shares in the subsidiary were held by SSK; the other 5 shares were held for SSK. The subsidiary had no staff and no separate accounting records. The subsidiary was effectively treated as a department of SSK.

SSK claimed compensation for loss of business as a result of the expropriation. Birmingham Council’s response was that the loss was suffered by subsidiary ‑ a separate legal entity and for that reason SSK’s claim should fail.

It was held that compensation was indeed payable by Birmingham to SSK. The court found that the subsidiary was carrying on no business of its own, but was in fact carrying on SSK’s business as agent.

The court identified six factors to be shown before agency found and veil lifted:
<ul>
<li>Profits of the subsidiary must be treated as profits of the holding company;</li>
<li>Those conducting the subsidiary's business must be appointed by the holding company;</li>
<li>The holding company must be the head and brain of the trading venture;</li>
<li>The holding company must be in control of the venture and must decide what capital should be spent and what should be done;</li>
<li>The profits made by the subsidiary's business must be made by the holding company's skill and direction; and</li>
<li>The holding company must be in constant and effective control.</li>
</ul>
Does this make sense? Are economic realities such that a group of companies trade as a group, raise capital as a group, and are viewed as a group by those dealing with them?

Should one attach obligations and responsibilities to the group and not to individual companies?

Lifting the corporate veil on the basis of agency involves examining the relationship between two or more separate legal entities and attributing the acts of one of the entities as the acts of the other entity.

 

The key issue involved in the case was whether the parent had suffered any loss as a result of the council's compulsory acquisition of the property, causing disturbance to the subsidiary's business. Atkinson J. decided that the relationship between the parent and subsidiary was really an agency relationship, with the business of the subsidiary being carried on an apparent basis only. The relevant facts were:
<ol>
<li>The directors of the parent were also directors of the subsidiary but did not take a salary from their positions on the subsidiary’s board;</li>
<li>The business purportedly carried on by the subsidiary company was purchased by the parent and never formally assigned to the subsidiary;</li>
<li>The subsidiary had no staff apart from a manager;</li>
<li>The subsidiary's books were kept and maintained by the parent and were not the property of the subsidiary or accessible by the manager of the subsidiary;</li>
<li>The work purportedly carried out by the subsidiary was beneficially owned by the parent without any agreement to transfer the business to the subsidiary; and</li>
<li>The subsidiary was treated for accounting purposes as if it were merely a department of the parent, including, significantly, appropriating the profits of the subsidiary for payment to the parent (by direct payment rather than dividend).</li>
</ol>
Smith, Stone & Knight Ltd. v. Birmingham Corp. [1939] 4 All E.R. 116 can be seen as a poor example of lifting the corporate veil on the basis of agency. It is preferable not to use the case for the purpose of lifting the corporate veil for two reasons:
<ol>
<li> Maclaine Watson & Co Ltd v. Department of Trade and Industry [1988] 3 All ER 257 at 310-311 per Kerr LJ:</li>
</ol>
“…the facts [in Smith, Stone and Knight] were so unusual that they cannot form any basis of principle" 
<ol start="2">
<li> See Note 4 on page 159 of the Casebook:</li>
</ol>
“Is there any reason why corporate shareholders should be made to answer for the liabilities of the corporations in which they hold shares, to a greater degree than individual shareholders?”

Read Notes 7 and 8 on pages 159-160 including excerpts from the decision in DHN Food Distributors Ltd. v Tower Hamlets London Borough Council [1976] 1 W.L.R. 852 (Eng. CA).

DHN Food Distributors Ltd. (“DHN”) owned and controlled a business of importing and distributing groceries, operating out of a warehouse owned by a subsidiary of DHN, Bronze Investments Ltd. Vehicles used in the business were owned by yet another subsidiary of DHN. DHN held all the shares in both subsidiaries and the companies had common directors.

In 1969 the local council made a compulsory purchase order to acquire the land on which the warehouse sat. DHN was unable to relocate and the business subsequently closed down.

The question was whether DHN was entitled to compensation for disturbance in having the business closed down. Council argued none payable since the subsidiary was not disturbed. They further argued that even if both subs were disturbed, the subsidiaries were not entitled to any compensation because they had no interest in the land. Moreover the argument continued, DHN itself was not entitled to compensation under the provisions of a statute. The council argued that DHN was only a licensee of Bronze Investments Ltd.

 

The English Court of Appeal treated the companies as one economic entity and following from this, DHN could be treated as owner of the property and was thus entitled to compensation for disturbance to its business.

Lord Denning found that the corporate veil could indeed be lifted – finding that the companies were in reality a group, and should be treated as one. 

“These subsidiaries are bound hand and foot to the parent company and must do what the parent company says … virtually the same as a partnership … They should not be treated separately.”

This notion is not so easily reconcilable with other cases. Denning’s views were disapproved by the House of Lords in Woolfson v Srathclyde Regional Council, 1978 SC 90 (HL). There Lord Keith expressed doubt as to whether the decision in DHN correctly applied the principle that it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere facade concealing the true facts

 

 

TOPIC 5: CORPORATE PERSONALITY - SOME INNOVATIVE APPROACHES 

Please read the short web article “Corporation not person in carpool lanes” which can be found at <a href="http://www.sfgate.com/bayarea/article/Corporation-not-person-in-carpool-lanes-4173366.php">http://www.sfgate.com/bayarea/article/Corporation-not-person-in-carpool-lanes-4173366.php</a>

 

Then please read page 160 of the Casebook:

 

“Judges have rarely been clear when explaining how corporate personality works. This is due in part to the facile notion that they are at liberty to disregard the separate existence of the corporate entity. There are, however, some reported cases that clearly illustrate the application of some well-known remedies, mostly in tort situations, but some from the field of equity. Using them as examples one can formulate a principled approach that treats corporate personality as a solution rather than a problem.”

 
<ol>
<li> Inducing Breach of Contract</li>
</ol>
 

Please read Garbutt Business College Ltd. v. Henderson Secretarial School Ltd. [1939] 4 D.L.R. 151 (Alta. C.A.) at pages 161-162 of the Casebook. It helps illustrate yet another way that “separate” corporate personality might be manipulated in an attempt to evade responsibility.

Henderson a teacher was subject to a restrictive covenant governing employment. It specifically restrained him from engaging in or managing a rival business college for 5 years. He resigned and started a rival college that used his name and employed him to teach. He held all but 3 shares. His wife and daughter held those 3 shares. Garbutt Business College Ltd. lost students to new college.

The court upheld the restrictive covenant against Mr. Henderson but found there could be no corporate liability as against Henderson Secretarial School Ltd. in the contract. Any such liability must be in tort, and accordingly the court found liability against Henderson Secretarial School Ltd. in damages for interference with business relations and inducing breach of contract between Mr Henderson and Garbutt Business College Ltd.

Please note Questions 1 and 3 on pages 162-163 of the Casebook

 

1.This question is in effect: What if Henderson only incorporated a rival entity using his name but did not teach or manage?

 
<ol start="3">
<li>In looking at this question consider the facts in Jones v. Lipman [1962] 1 WLR 832. In that case Mr. Lipman contracted to sell a house to Jones for £5,250. He changed his mind and refused to complete. To try and avoid specific performance, he conveyed the house for £3000 to a company formed for that purpose alone, which he alone owned and controlled. In the end specific performance against Mr. Lipman and his company was ordered: “The defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity.”</li>
</ol>
 

In this regard please consider the following excerpt’s from Lord Sumption’s judgment in Prest v. Petrodel 2013 UKSC 34 (especially paragraph 30 on Jones v. Lipman) which can be found here: <a href="http://www.bailii.org/uk/cases/UKSC/2013/34.html">http://www.bailii.org/uk/cases/UKSC/2013/34.html</a>

 

As you will see Lord Sumpton of the United Kingdom Supreme Court had the following observations:

“27. In my view, the principle that the court may be justified in piercing the corporate veil if a company's separate legal personality is being abused for the purpose of some relevant wrongdoing is well established in the authorities….[T]he recognition of a limited power to pierce the corporate veil in carefully defined circumstances is necessary if the law is not to be disarmed in the face of abuse… 
<ol start="28">
<li> The difficulty is to identify what is a relevant wrongdoing. References to a "facade" or "sham" beg too many questions to provide a satisfactory answer. It seems to me that two distinct principles lie behind these protean terms, and that much confusion has been caused by failing to distinguish between them. They can conveniently be called the concealment principle and the evasion principle. The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the "facade", but only looking behind it to discover the facts which the corporate structure is concealing. The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company's involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement. Many cases will fall into both categories, but in some circumstances the difference between them may be critical. This may be illustrated by reference to those cases in which the court has been thought, rightly or wrongly, to have pierced the corporate veil.”…</li>
<li> Jones v Lipman [1962] 1 WLR 832 was a case of very much the same kind. The facts were that Mr Lipman sold a property to the plaintiffs for £5,250 and then, thinking better of the deal, sold it to a company called Alamed Ltd for £3,000, in order to make it impossible for the plaintiffs to get specific performance. The judge, Russell J, found that company was wholly owned and controlled by Mr Lipman, who had bought it off the shelf and had procured the property to be conveyed to it "solely for the purpose of defeating the plaintiffs' rights to specific performance." About half of the purchase price payable by Alamed was funded by borrowing from a bank, and the rest was left outstanding. The judge decreed specific performance against both Mr Lipman and Alamed Ltd. As against Mr Lipman this was done on the concealment principle. Because Mr Lipman owned and controlled Alamed Ltd, he was in a position specifically to perform his obligation to the plaintiffs by exercising his powers over the company. This did not involve piercing the corporate veil, but only identifying Mr Lipman as the man in control of the company. The company, said Russell J portentously at p 836, was "a device and a sham, a mask which [Mr Lipman] holds before his face in an attempt to avoid recognition by the eye of equity." On the other hand, as against Alamed Ltd itself, the decision was justified on the evasion principle, by reference to the Court of Appeal's decision in Gilford Motor Co. The judge must have thought that in the circumstances the company should be treated as having the same obligation to convey the property to the plaintiff as Mr Lipman had, even though it was not party to the contract of sale. It should be noted that he decreed specific performance against the company notwithstanding that as a result of the transaction, the company's main creditor, namely the bank, was prejudiced by its loss of what appears from the report to have been its sole asset apart from a possible personal claim against Mr Lipman which he may or may not have been in a position to meet. This may be thought hard on the bank, but it is no harder than a finding that the company was not the beneficial owner at all. The bank could have protected itself by taking a charge or registering the contract of sale.” (Emphasis added.)</li>
</ol>
 

The next few cases should help you bring separate corporate personality into focus as applied to the rough and tumble of “modern” business dealings. 

 

 

Please read Einhorn v. Westmount Invesments Ltd. (1969), 6 D.L.R. (3d) 71 at pages 164-166 of the Casebook.

This was an application to strike out a Statement of Claim. Accordingly the facts alleged did not have to be proven in this limited context.

Jacob Einhorn was a licensed real estate agent who provided services to Westmount Investments Ltd. a company that three brothers, Hyman, William and Samuel Belzberg, were “at all material times in complete control” of. Westmount Investments Ltd. never paid Mr. Einhorn what he was owed. It was alleged that instead the Belzberg brothers “siphoned off the assets” of Westmount Investments Ltd. to another company they controlled Regina Midtown Centre Ltd. leaving Westmount an empty shell incapable of satisfying its contract with Mr. Einhorn.

Note that neither the Belzberg’s nor Regina Midtown Centre Ltd. induced a breach of contract (as was the case in Garbutt Business College Ltd. v. Henderson Secretarial School Ltd.), they just prevented Westmount Investments Ltd. from executing their contract with Mr. Einhorn.

The court considered whether the Belzberg brothers could be individually liable. The answer was yes, because they met the test for the tort of interference with contractual relations. This was because it appeared that the Belzberg brothers interfered with Westmount’s performance of the contract and each of the parties to a contract have a right to performance of it. There are three ingredients to the tort:
<ol>
<li>Interference in execution of contract: This interference is not confined to breach of contract; it extends to case where a third person prevents or hinders a party from performing the contract.</li>
<li>The interference must be deliberate.</li>
<li>The interference must be direct.</li>
</ol>
 

Please also read McFadden v. 481782 Ontario Ltd., (1984), 47 O.R. (2d) 134 (H.C.) at page 166 of the Casebook.

In this case two directors authorized payments to themselves as shareholders that put the corporation in a position where it could not fulfill its contractual obligations to an employee. The employee sued the directors on the basis that they induced the corporation to breach its contract with him.

It was held that the directors were liable. They acted with a view to their own interests not those of the company.

 

They are not protected, therefore, by the exception to the rule in Said v. Butt that they would be excused if they were acting "under the compulsion of a duty to the corporation." The court held that the directors could not fall within the exception Said v. Butt [1920] 3 K.B. 497 that: “…if a servant acting bona fide within the scope of his authority, procures or causes me to break a contract that I have made with you, you cannot sue the servant for interference with the contract; for he is my alter ego, and I cannot be sued for inducing myself to break a contract.” This exception effectively ensures officers and directors can terminate employment contracts without fearing personal liability and also that companies can terminate contracts that may no longer be in their best interests to fulfill.

However, in McFadden v. 481782 Ontario Ltd. the exception did not apply since the Directors were acting with a view to their own interests and not those of the corporation. Accordingly they could not be said to be acting under the compulsion of a duty to the corporation. That is to say that for an officer or director to be relieved from the consequences of his act of inducement, it is because he acts under the compulsion of a duty. Where she or he does not, for example because of a failure to act bona fide and hence outside the scope of their authority, liability to that Director will result. The corporation in question ought to be unaffected precisely because the Directors were acting outside the scope of their authority,

 

Please read the Questions at pages 169-170 of the Casebook and then ask yourself the following questions:
<ol>
<li> What was the conduct that induced the breach in McFadden v. 481782 Ontario Ltd.?</li>
<li> Is it a sound principle that a director who fails to act in the best interests of the corporation ceases to act on behalf of the corporation? Should the fact that the Director acts in breach of their obligation to the corporation have any relevance to the rights of an employee?</li>
</ol>
 

Please read 369413 Alberta Ltd v. Pocklington (2000) 194 D.L.R. (4th) 109 (Alta. C.A.) at pages 171-178 of the Casebook.

Gainers was one of Canada’s largest meat-packing companies. In acute financial distress, Gainers breached an agreement it had with the Province of Alberta. Peter Pocklington owned Pocklington Foods Inc. which held shares in Gainers. Alberta opted to sue Gainer’s sole director, Peter Pocklington alleging that Pocklington had “induced” the breach by signing a director’s resolution transferring certain shares in another company owned by Gainers (valued in the millions) to another of his own companies, Pocklington Holdings Ltd., for $100. Gainers had earlier agreed not to sell or dispose of its assets without the prior written consent of the Province of Alberta.

The Court awarded the Province $4.7 million in damages as against Pocklington.

Fruman J.A. set out various elements of the case as follows:

“ELEMENTS OF INDUCING BREACH OF CONTRACT

In order to find that a defendant intentionally induced a breach of contract, seven elements must be established:
<ol>
<li>i) the existence of a contract;</li>
<li>ii) knowledge or awareness by the defendant of the contract;</li>
</ol>
iii) a breach of the contract by a contracting party;
<ol>
<li>iv) the defendant induced the breach;</li>
<li>v) the defendant, by his conduct, intended to cause the breach; </li>
<li>vi) the defendant acted without justification; and</li>
</ol>
vii) the plaintiff suffered damages…

INTENT

The Law

…Therefore, if the breach was a reasonable or foreseeable consequence of that transfer, or alternatively, if Pocklington completed the transfer recklessly, was wilfully blind to its consequences, or was indifferent as to whether or not it caused a breach, the necessary intent element for the tort will be met.

The Evidence

…The clear implication of Ogilvie and Company’s carefully worded letter is that either the lawyers did not share their clients’ views, or they were invited to keep their legal advice to themselves. Pocklington nevertheless signed the documents to give effect to the share transfer, and retained the shares despite Alberta’s early protests and Ogilvie and Company’s apparent reservations. He had the means of knowledge, but chose to act without legal advice. Pocklington was wilfully blind to the consequences of his actions and showed clear indifference to the breach. The intent component of the tort is satisfied.

JUSTIFICATION

 

In some situations, a defendant’s plea of justification may avoid liability: South Wales Miners’ Federation, supra, and Quinn, supra. The defence of justification is available when the defendant caused the breach while acting under a duty imposed by law. The issue in each case is whether, upon consideration of the relative significance of all the factors, the defendant’s conduct should be tolerated despite its detrimental effect on the interests of others: Fleming, supra, at 657.

 

Directors of companies owe duties to the corporation; they are obliged both at common law and under Statute to act in the best interests of the company: Re Cawley & Co. (1889), 42 Ch. 209 at 233 (C.A.). For example, s. 117(1)(a) of the ABCA provides: “Every director and officer of a corporation in exercising his powers and discharging his duties shall act honestly and in good faith with a view to the best interests of the corporation [...] ”.

 

Therefore, when the interests of the company are best served by breaking its contractual commitments, the director’s act of inducement is justified because it is “taken as a duty”… 

But if the director is not complying with that duty, the rationale for relieving personal liability disappears…

 

In order to succeed under the Imperial Oil test, a plaintiff must prove that the director knew the legal rights of others would be jeopardized by the director’s actions, and intended to deprive the aggrieved party of contractual benefits… 

The concerns expressed in Imperial Oil are not misplaced. In order to protect the fine fabric of the corporate veil, courts should refrain from requiring directors to prove the legitimate corporate purpose motivating their actions. However, courts also should not condone inappropriate conduct by automatically placing a difficult onus on a plaintiff, by reason only that the defendant director owed legal duties to the company whose contract he had a hand in breaching. Some balance is required…

 

In this case Pocklington acquired a valuable asset for nominal consideration at the expense of Gainers’ creditors. Since Gainers was insolvent at that time, its creditors’ interests were the interests of the company. Promoting the interests of one shareholder at the expense of the creditors is not in the best interests of the company: Levy-Russell at 169. A director who pursues these objectives is not acting in furtherance of his corporate duty, and there is no justification for his deeds.

Pocklington has not demonstrated any legitimate business interest of Gainers that could have been served by the 350151 share transfer… 

By transferring the 350151 shares to his own company, Pocklington was not discharging his legal duty to act honestly and in good faith with a view to the best interests of Gainers; he was acting solely in his own interests. As no legitimate interest of Gainers could possibly be served by the transaction, the court need not go on to consider whether Pocklington’s act was aimed at depriving Alberta of the benefits of its contract. Pocklington’s position as director cannot provide justification for his actions.”

(Emphasis added.)

Blog Activity 4.5

In your view is the Pocklington decision consistent with, among others, the McFadden decision? Please blog your views on this question and your reasons in less than one page under the heading “Pocklington & McFadden”.

 

Please read Adga Systems International Inc. v. Valcom Ltd. (1999) 43 O.R. (3d) 101 (Ont. C.A.) at pages 178-183 of the Casebook.

Note that this case represents a significant shift in the spectrum of directors’ liability/personal liability imposed on officers and directors for actions taken in the course of their duties.

The plaintiff, Adga Systems sued their competitor Valcom Ltd., as well as Valcom’s sole director in his personal capacity and two senior employees of Valcom in their personal capacity. Adga alleged that Valcom had raided its employees and caused Adga economic damage. Adga sought damages for inducing breach of contract and inducing breach of fiduciary duty. The Ontario Divisional Court dismissed the claim against the three personal defendants holding that, since the employees of Valcom Ltd. were not furthering their own interests and were pursuing their duties of employment to further the interests of their employer, no cause of action was revealed which justified a trial. The plaintiff Adga appealed to the Ontario Court of Appeal.

 

Adga’s appeal was allowed and the three personal defendants, being the Director of Valcom and two employees of Valcom were reinstated as defendants. Carthy J.A. focussed on the issues as follows:

“The issue that I must deal with is whether, on the assumption that the defendant Valcom committed a tort against the appellant, the sole director and employees of Valcom can be accountable for the same tort as a consequence of their personal involvement directed to the perceived best interests of the corporation… 

However, where, as here, the plaintiff relies upon establishing an independent cause of action against the principals of the company, the corporate veil is not threatened and the Salomon principle remains intact…

It is my conclusion that there was no principled basis for protecting the director and employees of Valcom from liability for their alleged conduct on the basis that such conduct was in pursuance of the interests of the corporation. It may be that for policy reasons the law as to the allocation of responsibility for tortious conduct should be adjusted to provide some protection to employees, officers or directors in the limited circumstances where, for instance, they are acting in the best interests of the corporation with parties who have voluntarily chosen to accept the ambit of risk of a limited liability company. However, the creation of such a policy should not evolve from the facts of this case where the alleged conduct was intentional and the only relationship between the corporate parties was as competitors.” (Emphasis added.)

Please read Note 2 at page 183 of the Casebook: What is result if directors must choose between (1) inducing breach of contract because it is in the best interests of the company and (2) acting contrary to the company’s best interests so to avoid inducing breach?

In this regard please note the discussion on page 181 of the Casebook regarding the SCC decision in London Drugs v. Kuehne & Nagel: 

 

“ The Supreme Court of Canada again considered the issue of an employee's liability for acts done in the course of his duties on behalf of the employer in London Drugs Ltd. v. Kuehne & Nagel International Ltd., <a href="http://www.canlii.org/en/ca/scc/doc/1992/1992canlii41/1992canlii41.html">1992 CanLII 41 (SCC)</a>, [1992] 3 S.C.R. 299, 97 D.L.R. (4th) 261. The plaintiff delivered a transformer to a warehouse company for storage. An employee of the warehouse company negligently permitted the transformer to topple over, causing extensive damage. Even though there was a contractual relationship between the company and the customer, the majority held in favour of the claim against the employee.

Iacobucci J. stated at pp. 407-08:

There is no general rule in Canada to the effect that an employee acting in the course of his or her employment and performing the "very essence" of his or her employer's contractual obligations with a customer does not owe a duty of care, whether one labels it "independent" or otherwise, to the employer's customer. . . .

…The mere fact that the employee is performing the "very essence" of a contract between the plaintiff and his or her employer does not, in itself, necessarily preclude a conclusion that a duty of care was present.”

 

Please read Note 6 at page 184 of the Casebook: Is there a different standard of liability of employees and directors where each acts within scope of duties?

 
<ol>
<li> Knowing Assistance in a Breach of Trust </li>
</ol>
Please read Air Canada v. M & L Travel Ltd. [1993] 3 S.C.R. 787 at pages 184-191 of the Casebook.

M&L Travel Ltd., the directors of which were Mssrs. Martin and Valliant, was a travel agency. It had an agreement with Air Canada under which M&L Travel Ltd. was to hold proceeds of ticket sales in trust for Air Canada. M&L Travel Ltd. in fact did not hold the proceeds in trust as agreed but rather used them for general operating expenses as M&L found itself in financial difficulties.

Air Canada sued (1) the travel agency, and (2) both directors personally for the money owed to it for ticket sales.

Air Canada’s action succeeded against M&L Travel Ltd. but failed against the Directors Mssrs. Martin and Valliant. Accordingly Air Canada successfully appealed the decision holding the Directors not to be personally liable and judgment was entered against them as well.

The matter came before the Supreme Court of Canada. At issue was: (1) whether the relationship between M&L Travel Ltd. and Air Canada was one of trust, or one of debtor and creditor? and (2) if of trust, under what circumstances could the directors of a corporation be held personally liable for breach of trust by the corporation - and were those circumstances present here.

Although involving a corporation, the case fell to be resolved on trust principles, and does not raise general questions of the personal liability of directors for the acts of the corporation.

(1) The Supreme Court of Canada held that there was a trust relationship between M&L Travel Ltd. and Air Canada.

(2) With respect to the personal liability of directors the Supreme Court of Canada was of the view that the imposition of personal liability on a stranger to a trust depends on whether the stranger's conscience is sufficiently affected to justify the imposition of personal liability. A stranger to the trust can be held liable as a constructive trustee for breach of trust (trustee de son tort). The stranger, although not appointed a trustee, takes on him or herself to act as trustee and to possess and administer trust property and becomes liable if he or she commits a breach of trust while acting as a trustee. This type of liability was found to be inapplicable in the case of M&L Travel Ltd. v. Air Canada because the directors did not personally take possession of trust property or assume the office or function of trustees.

 

The court pointed out that strangers to a trust could also be personally liable for breach of trust if they knowingly participate in a breach of trust. They either were acting as a trustee in receipt and chargeable with trust property (a constructive trusteeship termed "knowing receipt") or they knowingly assisted in a dishonest and fraudulent design on the part of the trustees (termed "knowing assistance"). Since the "knowing receipt" category did not apply here, the only basis upon which the directors could be held personally liable were as constructive trustees under the "knowing assistance" head of liability. This basis of liability raises two main issues: the nature of the breach of trust and the degree of knowledge required of the stranger.

 

The knowledge requirement for this "knowing assistance" type of liability is actual knowledge; recklessness or wilful blindness will suffice. A person will be deemed to have known of the trust if it was imposed by statute. If the trust was contractually created, then whether the stranger knew of the trust will depend on his or her familiarity or involvement with the contract.

The stranger will be liable if he or she knowingly assisted the trustee in a fraudulent and dishonest breach of trust. Therefore, it is the corporation's actions that must be examined. Where the trustee is a corporation, rather than an individual, the inquiry as to whether the breach of trust was dishonest and fraudulent may be more difficult to conceptualize, because the corporation can only act through human agents who are often the strangers to the trust whose liability is in issue. The actions of the directors were relevant to the examination, given the extent to which the defendant directors controlled the travel agency.

 

The breach of trust by the travel agency was dishonest and fraudulent from an equitable standpoint. The taking of a knowingly wrongful risk resulting in prejudice to the beneficiary is sufficient to ground personal liability. As a party to the contract between itself and Mr. Martin, M&L Travel Ltd. knew that the Air Canada monies were held in trust, and were not for the general use of the travel agency. It set up trust accounts, but never used them. It also knew that any positive balance in its general account was subject to the Bank's demand. By placing the trust monies in the general account that was then subject to seizure by the Bank, the travel agency took a risk to the prejudice of the rights of the beneficiary, Air Canada. It had no right to take this risk.

 

It was found clearly that the appellant directors participated or assisted in the breach of trust. There were dealing with the funds in question ‑‑ stopping payment on all cheques, opening a trust account, and attempting to withdraw the stop payment orders and to transfer the funds into a new trust account. The breach of trust was directly caused by the conduct of the defendant directors. Their actions in stopping payment on the cheques to protect their own interests not only prevented payment on cheques issued to Air Canada but also precipitated the seizure by the Bank of the only funds available in the unprotected general account.

Accordingly the court found that directors personally liable for breach of trust as constructive trustees.

 

Please read Transamerica Life Insurance Co. v. Canada Life Assurance Co. (1996), 28 O.R. (3d) 423 (Ontario Gen. Div.) at pages 192-198 of the Casebook. 

The defendant Canada Life Mortgage Services Ltd. (“CLMS”) was a wholly owned subsidiary of the defendant Canada Life Assurance Company. CLMS was incorporated by Canada Life Assurance Company to carry on the business of mortgage correspondent and general financial agent to deal with both Canada Life Assurance Company as well as other institutional investors. CLMS had its own head office and branch offices distinct from those of the Canada Life Assurance Company. Those offices were managed and operated independently of the Canada Life Assurance Company. The management of CLMS exercised independent discretion in conducting its business.

A number of the mortgage loans made by the plaintiff Transamerica Life Insurance Company of Canada that had been arranged by CLMS fell into default. The plaintiff Transamerica Life Insurance Company of Canada claimed that CLMS owed it a duty to do the underwriting for these loans, that it failed in that regard, and that Transamerica Life had suffered loss as a consequence. The terms of the Master Agreement that governed the relationship of the plaintiff Transamerica Life and CLMS did not specifically provide that CLMS was to perform any underwriting function on Transamerica Life’s behalf, and CLMS took the position that the agreement excluded this duty.

Transamerica Life sued CLMS for damages for breach of contract, breach of fiduciary duty, fraud, misrepresentation and negligence. Transamerica Life also sued Canada Life Assurance Company, asserting that it was liable for the wrongs of CLMS.

Canada Life Assurance Company moved for summary judgment dismissing the action against it.

It was held that the motion should be granted and the action against Canada Life Assurance Company be dismissed.

Transamerica Life relied on Kosmopoulos in arguing that the court should lift the corporate veil whenever it was "just and equitable" to do so. Sharpe J. rejected this approach finding that lifting the corporate veil whenever it was "just and equitable" to do so would represent a significant departure from the following principle established in Salomon:

“The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.” (at page 195 of the Casebook).

Sharpe J. then quotes Gower, Modern Company Law 5th ed. (1992):

“There seem to be three circumstances only in which the courts can [pierce the veil]. These are: 
<ol>
<li> When the court is construing a statute, contract or other document; </li>
<li> When the court is satisfied that a company is a "mere facade" concealing the true facts; and </li>
<li> When it can be established that the company is an authorized agent of its controllers or its members, corporate or human.” (At page 196 of the Casebook)</li>
</ol>
Then Sharpe J. concludes:

“... the courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct. The first element, "complete control", requires more than ownership. It must be shown that there is complete domination and that the subsidiary company does not, in fact, function independently.... The second element relates to the nature of the conduct: is there "conduct akin to fraud that would otherwise unjustly deprive claimants of their rights?” (At page197 of the Casebook)

Accordingly, Transamerica's claim against Canada Life was dismissed

 

TOPIC 6: THE PARTICULAR PROBLEM OF THIN CAPITALIZATION 

Please read pages 198-199 of the Casebook.

Companies have no minimum capitalization requirement in Canada. Often new corporations are created with one share valued at only $1. Thin capitalization refers to the situation where a corporation is established with high debt to equity ratio. Assuming that debt is normally secured, if something goes wrong there is no one protected except the secured creditors. In other words, in thinly capitalized companies trade creditors are very much at risk.

The question to be considered is whether thin capitalization, per se, should be a ground for lifting the corporate veil? Is it legitimate evidence where owners seek the benefit of limited liability without paying for it with adequate capital investment?

To understand what thin capitalization can look like in practical terms begin by reading the U.S. case of Walkovszky v. Carlton 18 N.Y. 2d 414 (Ct. App. 1966) at pages 199-204 of the Casebook. 

The facts are that the plaintiff Walkovszky was hit by a taxicab owned by the Seon Cab Corporation and sued. Carlton was a stockholder of ten corporations, including Seon, each of which had two cabs registered to its name and only minimal insurance. This was a rather common practice at the time in the taxicab industry.

Walkovszky claimed that although seemingly independent, the companies in fact operated as a single entity with regard to financing, supplies, repairs, employees and garaging and all of the companies are named as defendants. Walkovszky further argued that he was entitled to hold the stockholders personally liable for the damages sought because the multiple corporate structures constituted an unlawful attempt to defraud members of the general public who might be injured by the cabs.

Carlton’s motion to dismiss Walkovszky’s case was granted.

The issue in the case was whether Carlton could be held personally liable in this case and the majority of the court held that Carlton could not be held personally liable.

Fuld J. observed that incorporation of a business is permitted for the purpose of enabling its proprietors to escape personal liability. However, one can “pierce the corporate veil” when anyone uses control of the corporation to further his own rather than the corporation’s business.

That is to say that the courts will pierce the corporate veil whenever necessary in order to prevent fraud or inequity. In determining whether to lift the veil the court is to be guided by “general rules of agency.” Whenever a person uses the corporation to further his own interests as opposed to those of the corporation, he will be liable for the corporation’s acts. This liability is not just for the corporation’s dealings, but also as regards its negligence.

Here, while the complaint alleges that the separate corporations were undercapitalized and that their assets have been intermingled, it failed to mention that the defendant Carlton and his associates were actually doing business in their individual capacities, shuttling their personal funds in and out of the corporations without regard to formality.

The majority felt that if the insurance coverage required by statute was inadequate for the protection of the public, the remedy was not with the courts but with the Legislature.

In a similar case (Mangan) it was proved that operating companies existed only for the purpose of allowing the defendant to avoid the weight of the financial responsibilities and other liabilities. “However, it is one thing to assert that a corporation is a fragment of a larger corporate combine which actually conducts the business…It is quite another to claim that the corporation is a “dummy” for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends. Either circumstance would justify treating the corporation as agent and piercing the corporate veil to reach the principal but a different result would follow in each case. In the first, only a larger corporate entity would be held financially responsible...while, in the other, the stockholder would be personally responsible…” 

The majority further found that the separate corporations in this case (being Mangan) were undercapitalized and the assets intermingled, with personal funds being shuttled in and out of the corporations without formality and to suit the immediate convenience of the stockholders, then such perversions of the corporate form would justify personal liability on the stockholders.

Accordingly, a corporation is not illicit or fraudulent because it consists of other corporations.

The dissenting opinion of Keating J. went in rather a different direction:

“…From their inception these corporations were intentionally undercapitalized for the purpose of avoiding responsibility for acts which were bound to arise as a result of the operation of a large taxi fleet...”

Keating J. found that not only were the corporations intentionally undercapitalized for the purpose of avoiding liability, income was also drained from the corporations continuously for that same purpose. Keating J. did not believe that the privilege of limited liability through the use of the corporate device should be abused no matter what the cost to the public. In his view if a corporation exists without sufficient capital to pay its debts, it is inequitable that the shareholders should sustain such an organization only to escape personal liability. From this perspective attempting to do business without financial coverage is an abuse of the existence of a separate entity and should not exempt the shareholders from personal liability. Keating J. believed the policy of the law ought to be that shareholders should, in good faith, have enough capital in the business to secure the corporation. Otherwise grounds exist for denying the privilege associated with being a separate entity.

Keating J. also pointed out cases standing for other related propositions:
<ol>
<li>The equitable owners of a corporation are personally liable when they treat the company’s assets as their own and add or withdraw capital at will, or when they provide inadequate capital and actively participate in the corporation’s affairs.</li>
</ol>
 
<ol start="2">
<li>The sacrifice of limited liability happens when public policy must be defended or upheld. Fraud is part of this exception. Obvious inadequacy of capital is also considered to be a reason to deny the defense of limited liability.</li>
</ol>
 
<ol start="3">
<li>When corporate income is not sufficient to cover unexpected liabilities or extraordinary bad times, obviously the shareholders will not be held liable. However they will be when the corporation was designed solely to abuse the corporate privilege at the expense of public interest.</li>
</ol>
 

Please read the Notes and Questions 2 & 4 at page 204 of the Casebook.

 

Blog Activity 4.6

 

In your view: what ought to be the measure of adequate capitalization? 

 

And..

 
<ol>
<li>At which of the following points ought adequacy to be determined?</li>
</ol>
 
<ol>
<li> As of the time of trial?</li>
</ol>
 

It has been widely held that “some ‘wrong’ beyond a creditor’s inability to collect” must be shown before the veil will be pierced. Absent this, time of trial would be tantamount to a rule of unlimited liability. Creditor typically will pursue a veil piercing theory only where corporate assets are inadequate to meet its claim.
<h2>1. At the time of incorporation?</h2>
<h2>2. At an intermediate time?</h2>
<h2>That is to say what if the company had been adequately capitalized at formation, but subsequent developments have left it too thinly capitalized?</h2>
<h1>B. Now suppose that although initial funds at the time of incorporation and for sometime thereafter were adequate to satisfy existing contractual and likely tort obligations: (a) all profits were drained out of the firm in the form of dividends or salaries paid to the controlling shareholders, leaving it with insufficient reserves to meet its likely obligations; or, (b) the nature of the firm has changed, such that the initially adequate capital is no longer adequate.</h1>
Please blog your views on these question and your reasons in less than two pages under the heading “Adequate Capitalization”.

 

 

Now please read Henry Browne & Sons Ltd. v. Smith [1964] 2 Lloyd’s Rep. 476 (Eng. Q.B.) at pages 204-206.

In this case the plaintiffs Henry Browne & Sons Ltd. manufacture, supply and install a navigational device for boats. They installed such a device on an ocean cruiser and were not paid. As a result they sued Mr. Smith.

Mr. Smith’s defence was that the order was placed on behalf of Ocean Charters Ltd., a private limited company with an authorized capital of 3,000 one pound shares, of which two were issued – one held by Mr. Smith and the other held by his wife. Mr. Smith was the sole director of Ocean Charters Ltd.

The plaintiff Henry Browne & Sons Ltd. argued that the company Ocean Charters Ltd. was merely a sham or a name under which Mr. smith traded, or, alternatively, that the order was placed by Ocean Charters Ltd. as agent for Mr. Smith. It was held that the principals to the contract were Henry Browne & Sons Ltd. and Ocean Charters Ltd. only and that there was no liability on the part of Mr. Smith.

Please ask yourself what has this case got to do with “thin capitalization”? Was there any evidence that “thin capitalization” was actually the issue?

 

TOPIC 7: CORPORATE PURPOSE & FIDUCIARY DUTIES 

Please read pages 206-226 of the Casebook.

As a first exercise please:
<ol>
<li> Read the last sentence of first paragraph on page 207 of the Casebook; and</li>
<li> The excerpt from “Rotman, Fiduciary Law” at pages 207 and 208 of the Casebook. </li>
</ol>
Attempt to state for your own benefit the essence of to whom fiduciary duties ought to be owed in a corporate context

Please read the seminal case of Dodge v. Ford Motor Co. 204 Mich. 459 (1919) at pages 208-212 of the Casebook. The facts of this case memorably put into sharp relief the tensions between profit and purpose an a corporate context.

 

Ford was the dominant manufacturer of cars. At one point, the cars were sold for $900, but the price was slowly lowered to $440 – and finally, to $360. Henry Ford admitted that the price negatively impacted short-term profits, but argued that his ambition was to spread the benefits of the industrialized society among as many people as possible. The Dodges, who had recently founded their own firm to compete with Ford, objected to a decision by the Ford board of directors to withhold special dividends and to spend millions of dollars to build the world’s largest auto manufacturing facility instead. Their claim was that the decision was based on Henry Ford’s idiosyncratic preferences about doing social good for workers and customers as opposed to making the greatest amount of money for shareholders.

Ford was emphatic in both his pre-trial comments and in his testimony that the decision to build the factory was about doing “as much good as we can, everywhere, for everybody concerned . . . [a]nd incidentally to make money.” (See Allen Nevins & Frank E. Hill, Ford: Expansion and Challenge, 1915-33, at 99-100 (1957) (quoting interview).

Further, Ford essentially contended that he has paid out substantial dividends to the shareholders ensuring that they have made a considerable profit, and should be happy with whatever return they get from that point forward. Instead of using the money to pay dividends, Ford decided to put the money into expanding the corporation.

The issue was whether the Plaintiff shareholders could force Ford to increase the cost of the product and limit the money invested into expansion in order to pay out a larger dividend.

It was held that the Plaintiffs were entitled to a more equitable-sized dividend, but the court did not interfere with Ford’s business judgments regarding the price set on the manufactured products or the decision to expand the business.

In essence the court determined that the purpose of corporations is to make money for their shareholders, and that Ford was arbitrarily withholding money that could have gone to the shareholders. Notably, Henry Ford did not deny himself a large salary for his position with the company in order to achieve his ambitions. However, the court was not willing to questions whether the company would be better off with a higher price per vehicle, or if the expansion was wise, because those decisions are covered under the business judgment rule.

Let us further analyze the actual decision. Read through the following for a second time and then answer the questions following the quote for yourself:

 

“There should be no confusion (of which there is evidence) of the duties which Mr. Ford conceives that he and the stockholders owe to the general public and the duties which in law he and his codirectors owe to protesting, minority stockholders. A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.

 

There is committed to the discretion of directors, a discretion to be exercised in good faith, the infinite details of business, including the wages which shall be paid to employees, the number of hours they shall work, the conditions under which labor shall be carried on, and the price for which products shall be offered to the public. It is said by appellants that the motives of the board members are not material and will not be inquired into by the court so long as their acts are within their lawful powers. As we have pointed out, […] it is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others, and no one will contend that, if the avowed purpose of the defendant directors was to sacrifice the interests of share-holders, it would not be the duty of the courts to interfere.” (Emphasis added)
<ol>
<li> Were these words necessary to the decision or were they merely dictum?</li>
<li> Does the BCBCA section 227 preclude the result in Dodge v. Ford Motor Co.? Does it authorize it?</li>
</ol>
 

“Restricted businesses and powers
<ol start="33">
<li> (1) A company must not</li>
</ol>
(a) carry on any business or exercise any power that it is restricted by its memorandum or articles from carrying on or exercising, or

(b) exercise any of its powers in a manner inconsistent with those restrictions in its memorandum or articles.

(2) No act of a company, including a transfer of property, rights or interests to or by the company, is invalid merely because the act contravenes subsection (1).

 

 

Powers and functions of directors
<ol start="136">
<li> (1) The directors of a company must, subject to this Act, the regulations and the memorandum and articles of the company, manage or supervise the management of the business and affairs of the company.</li>
</ol>
 

 Duties of directors and officers

142 (1) A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case may be, must
<ul>
<li>act honestly and in good faith with a view to the best interests of the company,</li>
</ul>
 
<ul>
<li>exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances,</li>
</ul>
 
<ul>
<li>act in accordance with this Act and the regulations, and</li>
</ul>
 

(d) subject to paragraphs (a) to (c), act in accordance with the memorandum and articles of the company.

(2) This section is in addition to, and not in derogation of, any enactment or rule of law or equity relating to the duties or liabilities of directors and officers of a company.

(3) No provision in a contract, the memorandum or the articles relieves a director or officer from

(a) the duty to act in accordance with this Act and the regulations, or

(b) liability that by virtue of any enactment or rule of law or equity would otherwise attach to that director or officer in respect of any negligence, default, breach of duty or breach of trust of which the director or officer may be guilty in relation to the company.

 

Complaints by shareholder
<ol start="227">
<li> (1) For the purposes of this section, "shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) A shareholder may apply to the court for an order under this section on the ground

(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or

 

(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.

(3) On an application under this section, the court may, with a view to remedying or bringing to an end the matters complained of and subject to subsection (4) of this section, make any interim or final order it considers appropriate, including an order

(a) directing or prohibiting any act,

(b) regulating the conduct of the company's affairs,

(c) appointing a receiver or receiver manager,

(d) directing an issue or conversion or exchange of shares,

(e) appointing directors in place of or in addition to all or any of the directors then in office,

(f) removing any director,

(g) directing the company, subject to subsections (5) and (6), to purchase some or all of the shares of a shareholder and, if required, to reduce its capital in the manner specified by the court,

(h) directing a shareholder to purchase some or all of the shares of any other shareholder,

(i) directing the company, subject to subsections (5) and (6), or any other person, to pay to a shareholder all or any part of the money paid by that shareholder for shares of the company,

(j) varying or setting aside a transaction to which the company is a party and directing any party to the transaction to compensate any other party to the transaction,

(k) varying or setting aside a resolution,

(l) requiring the company, within a time specified by the court, to produce to the court or to an interested person financial statements or an accounting in any form the court may determine,

(m) directing the company, subject to subsections (5) and (6), to compensate an aggrieved person,

(n) directing correction of the registers or other records of the company,

(o) directing that the company be liquidated and dissolved, and appointing one or more liquidators, with or without security,

(p) directing that an investigation be made under Division 3 of this Part,

(q) requiring the trial of any issue, or

(r) authorizing or directing that legal proceedings be commenced in the name of the company against any person on the terms the court directs.

(4) The court may make an order under subsection (3) if it is satisfied that the application was brought by the shareholder in a timely manner.

(5) If an order is made under subsection (3) (g), (i) or (m), the company must pay to a person the full amount payable under that order unless there are reasonable grounds for believing that

(a) the company is insolvent, or

(b) the payment would render the company insolvent.

(6) If reasonable grounds exist for believing that subsection (5) (a) or (b) applies,

(a) the company is prohibited from paying the person the full amount of money to which the person is entitled,

(b) the company must pay to the person as much of the amount as is possible without causing a circumstance set out in subsection (5) to occur, and

(c) the company must pay the balance of the amount as soon as the company is able to do so without causing a circumstance set out in subsection (5) to occur.

(7) If an order is made under subsection (3) (o), Part 10 applies.

 
<ol start="3">
<li> How do you identify what is to the “benefit of shareholders” in the case of a corporation with more than one shareholder? </li>
</ol>
Different shareholders have different investment time frames, different tax concerns, different attitudes toward firm-level risk due to different levels of diversification, different interests in other investments that might be affected by corporate activities, and different views about the extent to which they are willing to sacrifice corporate profits to promote broader social interests, such as a clean environment or good wages for workers.

Could there be any single, uniform measure of shareholder “wealth” to be “maximized”?

Please now read the excerpt from “Rotman, Fiduciary Law” on pages 212-214 of the Casebook. 

For an interesting article on the background to the case, see M. Todd Henderson, “Everything Old Is New Again: Lessons from Dodge v. Ford Motor Company” (2007) U of Chicago Law & Economics, Olin Working Paper No. 373: <a href="http://www.law.uchicago.edu/files/files/373.pdf">http://www.law.uchicago.edu/files/files/373.pdf</a>

 

Following up on Dodge v. Ford Motor Co. is the equally memorable case (at least if you are a baseball fan) of Shlensky v. Wrigley 237 N.E.2d 776 (Ill. App.1968) at pages 214-218 of the Casebook. 

Mr. Phillip K. Wrigley was a director of the Chicago National League Ball Club (Inc.), which was the company that owned the Chicago Cubs. The Board tended to follow Mr. Wrigley’s lead for a variety of reasons not relevant to the outcome of this case. Although every other major league team had installed lights to allow for night games, Defendant did not install them for the Cubs because he was concerned that night baseball would be detrimental to the surrounding neighborhood.

Mr. Shlensky, a minority shareholder of the Chicago National League Ball Club (Inc.), brought a derivative action against the decision not to install lights. A derivative action is where an action is brought against the corporation in essence in the name of the corporation. Hence the word “derivative” as the right to bring action is derived from the corporation itself, and what is in the best interests of the corporation. Much more on this concept later in this course, but Wrigley v. Shlensky is a useful introduction to the concept. 

In his argument, ostensibly on behalf of the Chicago National League Ball Club (Inc.), Mr. Shlensky pointed out that the team was losing money, and that the other Chicago team, the White Sox, had higher attendance during the weekdays because they played at night. Therefore in his view the Cubs would draw more people with weekday night games. Shlensky argued that Wrigley’s first concern ought to be with the shareholders rather than the neighborhood.

The issue in the case was whether decisions made by Wrigley should be overruled absent a showing of fraud, illegality or a conflict of interest?

The decision was not to overrule Wrigley’s determination on the issue of lights. The court cited some reasons why the light installation could be detrimental, such as lowering the property value of the park itself, a lack of proof that financing would be available for lights and some uncertainty whether the costs would in fact be offset by increasing revenues. In essence the court set out that business decisions should not be disturbed just because a reasonable case can be made that the policy chosen by the company might not be the wisest possible. This was all the more true where there was no evidence of illegality, fraud or a conflict of interest

The court upheld the directors’ decision. Moreover the court reasoned (as the directors themselves had not) that a decline in the quality of life in the local neighbourhoods might in the long run hurt property values around Wrigley Field, harming shareholders’ economic interests.

In many ways this decision on those like it can be seen as a form of abstention by judiciary; an unwillingness to supplant the business judgment of a properly constituted and motivated Board of Directors. This so-called “BUSINESS JUDGMENT RULE” establishes a presumption against judicial review of duty of care claims. 

There are several interesting questions and observations that flow from this case:
<ol>
<li>For one was Wrigley an innovator making a venturesome business decision or an eccentric who was just behind the times? How can we know when the “business judgment rule” precluded Mr. Shlensky from even getting up to bat? </li>
</ol>
 
<ol>
<li>Encouraging risk-taking is part of the story, and the business judgment rule allows for that, but it is only a part of the story. Something else is going on as well. This is because if the business judgment rule is framed as an abstention doctrine, judicial review is more likely to be the exception rather than the rule. That is because the court begins with a presumption against review. It then reviews the facts to determine not the quality of the decision, but rather whether the decision making process was tainted by self-dealing and the like. The requisite questions to be asked are more objective and straightforward: Did the board commit fraud? Did the board commit an illegal act? Did the board self-deal? Whether or not the board exercised reasonable care is irrelevant, as well it should be. The business judgment rule thus builds a prophylactic barrier by which courts pre-commit to resisting the temptation to review the merits of the board’s decision.</li>
</ol>
 
<ol>
<li>A deeper look at Shlensky v. Wrigley also illustrates the malleability of the concept of “the best interests of the company”. It can be all to easy, as Mr. Shlensky’s argument illustrated to define those interests too narrowly, or to directly or indirectly align them with “personal best interests.”</li>
</ol>
 

A classic example of judicial eagerness to protect directors from claims that they failed to maximize shareholder wealth follows. Please read Peoples Department Stores Inc. (Trustee of) v. Wise [2004] 3 S.C.R. 461 (SCC) at pages 219-221 of the Casebook.

The directors of Peoples Department Stores, a federal business corporation wholly owned by Wise Stores Inc. ("WSI"), were the three Wise brothers (editors note: there really were three Wise brothers - no joke), who were also the directors and majority shareholders of WSI.

To rationalize the operations of their two overlapping companies, the Wise brothers adopted a joint inventory procurement policy: Peoples Department Stores bought all its merchandise from North American suppliers (i.e., 86% of the total), and WSI bought its merchandise from overseas suppliers (the other 14%). The merchandise purchased by Peoples Department Stores for WSI was transferred to WSI, but Peoples Department Stores did not seek immediate payment. This resulted in an inter-company loan of $18 million, which WSI were unable to repay. WSI went bankrupt owing $4.44 million. Peoples Department Stores also had to close.

The trustee in bankruptcy of Peoples Department Stores sued the three Wise brothers for that amount of $4.44 million, specifically alleging that the brothers had breached their fiduciary duty and their duty of care under section 122 (1) of the Canada Business Corporations Act ("CBCA") by favouring the interests of WSI over those of Peoples Department Stores while they were corporate directors of Peoples Department Stores.

The relevant statutory provisions provided:

“102. (1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.
<ol start="122">
<li> (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall</li>
</ol>
 (a) act honestly and in good faith with a view to the best interests of the corporation; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.” 

 

The Supreme Court of Canada found the three Wise brothers not to be liable. Following are a number of the court’s observations about the case:
<ol>
<li>The court held that this appeal did not relate to the non-statutory duty directors owe to shareholders. It was concerned only with the statutory duties owed under the <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html">CBCA</a>. Insofar as the statutory fiduciary duty is concerned, it is clear that the phrase the “best interests of the corporation” should not be read simply as the “best interests of the shareholders”. From an economic perspective, the “best interests of the corporation” means the maximizing of the value of the corporation.</li>
<li> The court accepted as an accurate statement of law that in determining whether directors are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment. </li>
<li>The court made the following practical and important observations:</li>
</ol>
“The interests of shareholders, those of the creditors and those of the corporation may and will be seen as consistent with each other if the corporation is profitable and well capitalized and has strong prospects. However, this can change if the corporation starts to struggle financially. The residual rights of the shareholders will generally become worthless if a corporation is declared bankrupt. Upon bankruptcy, the directors of the corporation transfer control to a trustee, who administers the corporation’s assets for the benefit of creditors. 

Short of bankruptcy, as the corporation approaches what has been described as the “vicinity of insolvency”, the residual claims of shareholders will be nearly exhausted. While shareholders might well prefer that the directors pursue high-risk alternatives with a high potential payoff to maximize the shareholders’ expected residual claim, creditors in the same circumstances might prefer that the directors steer a safer course so as to maximize the value of their claims against the assets of the corporation.

The directors’ fiduciary duty does not change when a corporation is in the nebulous “vicinity of insolvency”. That phrase has not been defined; moreover, it is incapable of definition and has no legal meaning. What it is obviously intended to convey is deterioration in the corporation’s financial stability. In assessing the actions of directors it is evident that any honest and good faith attempt to redress the corporation’s financial problems will, if successful, both retain value for shareholders and improve the position of creditors. If unsuccessful, it will not qualify as a breach of the statutory fiduciary duty…

In resolving these competing interests, it is incumbent upon the directors to act honestly and in good faith with a view to the best interests of the corporation. In using their skills for the benefit of the corporation when it is in troubled waters financially, the directors must be careful to attempt to act in its best interests by creating a “better” corporation, and not to favour the interests of any one group of stakeholders. If the stakeholders cannot avail themselves of the statutory fiduciary duty (the duty of loyalty, supra) to sue the directors for failing to take care of their interests, they have other means at their disposal.” (Emphasis added)

 

Next please read an important case you will see referred to on several occasions throughout the course:

BCE Inc. v. 1976 Debentureholders [2008] 2 S.C.R. 560 (SCC) at pages 222 – 225 of the Casebook.

This case arose from challenge by a group of Bell Canada debentureholders to the proposed acquisition of BCE by a consortium headed by the Ontario Teachers’ Pension Plan Board through a $52 billion arrangement under section 192 of the CBCA. For contextual purposes section 192 provides in part:

“192. (1) In this section, “arrangement” includes

(a) an amendment to the articles of a corporation;

(b) an amalgamation of two or more corporations;

(c) an amalgamation of a body corporate with a corporation that results in an amalgamated corporation subject to this Act;

(d) a division of the business carried on by a corporation;

(e) a transfer of all or substantially all the property of a corporation to another body corporate in exchange for property, money or securities of the body corporate;

(f) an exchange of securities of a corporation for property, money or other securities of the corporation or property, money or securities of another body corporate;

(f.1) a going-private transaction or a squeeze-out transaction in relation to a corporation;

(g) a liquidation and dissolution of a corporation; and

(h) any combination of the foregoing…

 

…(3) Where it is not practicable for a corporation that is not insolvent to effect a fundamental change in the nature of an arrangement under any other provision of this Act, the corporation may apply to a court for an order approving an arrangement proposed by the corporation.

 (4) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,

(a) an order determining the notice to be given to any interested person or dispensing with notice to any person other than the Director;

(b) an order appointing counsel, at the expense of the corporation, to represent the interests of the shareholders;

(c) an order requiring a corporation to call, hold and conduct a meeting of holders of securities or options or rights to acquire securities in such manner as the court directs;

(d) an order permitting a shareholder to dissent under section 190; and

(e) an order approving an arrangement as proposed by the corporation or as amended in any manner the court may direct.”

 

The arrangement in question was to have been financed in part through BCE’s assumption of an additional $38.5 billion in debt, of which $30 billion was to have been guaranteed by Bell Canada, a wholly owned subsidiary of BCE. BCE’s common shareholders in fact overwhelmingly approved the transaction. However the debentureholders objected to the arrangement on the grounds that it would diminish the trading value of their debentures by an average of 20 percent, while conferring a premium of approximately 40 percent of the market price to holders of BCE common shares.

The Supreme Court of Canada made the following observations (excerpted not from the Casebook, but rather from the full decision which can be found here: <a href="http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/6238/index.do">http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/6238/index.do</a>):

“ The directors are responsible for the governance of the corporation. In the performance of this role, the directors are subject to two duties: a fiduciary duty to the corporation under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec122subsec1_smooth">s. 122(1)</a>(a) (the fiduciary duty); and a duty to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec122subsec1_smooth">s. 122(1)</a>(b) (the duty of care). The second duty is not at issue in these proceedings as this is not a claim against the directors of the corporation for failing to meet their duty of care… 

The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation. The content of this duty varies with the situation at hand. At a minimum, it requires the directors to ensure that the corporation meets its statutory obligations. But, depending on the context, there may also be other requirements. In any event, the fiduciary duty owed by directors is mandatory; directors must look to what is in the best interests of the corporation… 

In considering what is in the best interests of the corporation, directors may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions. Courts should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule. The “business judgment rule” accords deference to a business decision, so long as it lies within a range of reasonable alternatives: see Maple Leaf Foods Inc. v. Schneider Corp. 1998 CanLII 5121 (ON CA), (1998), 42 O.R. (3d) 177 (C.A.); Kerr v. Danier Leather Inc., 2007 SCC 44 (CanLII), [2007] 3 S.C.R. 331, 2007 SCC 44. It reflects the reality that directors, who are mandated under s. 102(1) of the CBCA to manage the corporation’s business and affairs, are often better suited to determine what is in the best interests of the corporation. This applies to decisions on stakeholders’ interests, as much as other directorial decisions. 

Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debentureholders in these appeals. This is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen. However, the directors owe a fiduciary duty to the corporation, and only to the corporation. People sometimes speak in terms of directors owing a duty to both the corporation and to stakeholders. Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases (such as these appeals) may arise where these interests do not coincide. In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation.”

Accordingly the claim of the debenture-holders failed.

 

Blog Activity 4.7

Please consider questions 2 & 3 of the notes on page 225 of the Casebook. As well please read the excerpt from “Rotman, Fiduciary Law” at pages 225-6 of the Casebook, especially the last paragraph on page 226 of the Casebook.

 

In your view what general conclusions do you draw concerning the law on corporate purpose? Please blog your views on these question and your reasons in less than two pages under the heading “Corporate Purpose”.

 

UNIT WRAP UP: 

By now the contradictions inherent to and consequent upon corporate personhood have been explored (even if not quite capable of ever being fully understood). Moving forward we have no pedagogic alternative to accepting that this “thing” we call a corporation is believed to exist. So what can it do and what can’t it do? How does it commit a crime? How can it commit a crime? And so much more…the following Unit is meant to explore such questions.

Course:Business Organizations - LAW 459

2016-08-16T09:40:57Z

DavidHeinrich:

{{Infobox_New_Course

|title=Business Organizations

|picture=Image:wiki.png

|subject code=LAW

|course number=459

|section number=003

|instructor=Jon Festinger

|email=zenracer@mail.ubc.ca

|office=

|office hours=

|schedule=

|classroom=Allard Hall Room 104

}}


=== Course Materials ===
===== Unit 1: INTRODUCING BUSINESS ORGANIZATIONS & THEIR REAL WORLD CONTEXTS =====
[[Course:Business Organizations - LAW 459/Unit 1]]

===== Unit 2: THE BASIC CONCEPTS OF BUSINESS ORGANIZATIONS =====
[[Course:Business Organizations - LAW 459/Unit 2]]

===== Unit 3: PARTNERSHIPS =====
[[Course:Business Organizations - LAW 459/Unit 3]]

===== Unit 4: CORPORATE PERSONHOOD – SOME SPECIFIC ISSUES AND PROBLEMS =====
[[Course:Business Organizations - LAW 459/Unit 4]]

===== Unit 5: CORPORATE OBLIGATIONS =====
[[Course:Business Organizations - LAW 459/Unit 5]]

===== Unit 6: THE LEGAL ARCHITECTURE OF BUSINESS GOVERNANCE =====
[[Course:Business Organizations - LAW 459/Unit 6]]

===== Unit 7: THE (FIDUCIARY) OBLIGATIONS OF CORPORATE MANAGEMENT =====
[[Course:Business Organizations - LAW 459/Unit 7]]

===== Unit 8: MAJORITY RULE & PROTECTING MINORITY INTERESTS =====
[[Course:Business Organizations - LAW 459/Unit 8]]

===== Unit Review =====

Course:Business Organizations - LAW 459/Unit 8

2016-08-16T09:38:22Z

DavidHeinrich:

UNIT 8 (WEEKS 12 & 13): MAJORITY RULE & PROTECTING MINORITY INTERESTS

http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Unit-8-360x239.jpg

Figure 8: Walmart shareholders meeting (By Walmart [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons)
ALT: A huge crowd at an annual meeting of Walmart shareholders.

Source of image – <a href="http://commons.wikimedia.org/wiki/File:Crowd_shot_Walmart_Shareholders%27_Meeting_2010.jpg">http://commons.wikimedia.org/wiki/File:Crowd_shot_Walmart_Shareholders%27_Meeting_2010.jpg</a>

 

 

 

 

UNIT OVERVIEW:

In this unit the variety of statutory provisions enacted with a view to protecting minority interests will be examined. There will be reference to some contractual arrangements that might be adopted towards this end. You will also consider the role of government and the securities regulatory authorities.

 

UNIT OUTCOME: 

Through this unit you will come to an understanding of the limits of corporate democracy and the rights that shareholders (and occasionally others) have in the face of a corporations’ actions. You will come to appreciate the differences between a “derivative action” and the “oppression remedy”. You should by the end of unit understand their similarities and differences. You should also be in a position to see why these legal tools are important to shareholders as you briefly examine and review some of the more notorious corporate scandals over the recent years. Finally you should be able to begin thinking about what a lawyer’s role in preventing corporate abuses might look like.

 

UNIT READINGS:

Please read the following materials:

Casebook pages 427-567.

BCBCA sections 227-228, 232-236; CBCA section 241.

“Distinguishing Oppression Claims and Derivative Actions” by Tracey M. Cohen, T. Mark Pontin, and Graeme Hooper: <a href="http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf">http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf</a>

“Report Slams Hollinger's Black For a 'Corporate Kleptocracy'”: <a href="http://online.wsj.com/news/articles/SB109395499363105646">http://online.wsj.com/news/articles/SB109395499363105646</a>

Catalyst Fund General Partner Inc. v. Hollinger Inc., 2004 CanLII 40665 (ON SC) <a href="http://canlii.ca/t/1j6qd">http://canlii.ca/t/1j6qd</a>

“The Fall of Conrad Black” <a href="http://www.youtube.com/watch?v=CIRRUvjkLJo">http://www.youtube.com/watch?v=CIRRUvjkLJo</a>

“Law Society of Upper Canada appeals exoneration of two Conrad Black lawyers” <a href="http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html">http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html</a>

“Livent co-founders Drabinsky, Gottlieb convicted of fraud and forgery” <a href="http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convicted-of-fraud-and-forgery-1.778879">http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convictedof-fraud-and-forgery-1.778879</a>

“Law society revokes Garth Drabinsky’s licence over fraud convictions” <a href="http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html">http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html</a>

“Lawyers, Ethics, and Enron” <a href="http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf">http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf</a>

Code of Professional Conduct for British Columbia, sections 3.2-3, 3.2-7, 3.2-8, 3.7, 3.3-1, 3.3-2. <a href="http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3">http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3</a>

Stephen M. Bainbridge, “Corporate Lawyers as Gatekeepers” <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1980975">http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1980975</a>

 

 

TOPIC 1: INTRODUCTION/LOOKING BACK

The exploration of corporate personhood, the legal conundrums caused by it and the legal reactions to it are a significant underlying theme of this course. Another consistent theme can be identified just below the surface of many of the cases explored in the previous unit and in this final substantive unit; the problems of “equality”. How can “equality” be a problem in law you may rightly wonder? To answer that it is important to define the meaning being ascribed to equality in this particular instance and then examine the lack of legal clarity that may flow in the circumstances.

To begin with, you may have noticed that many of the cases we have explored in this course involve, plainly put, wealthy and privileged people. They are often (though by no means always) situations where individuals or companies are suing other individuals or companies alleging that they are entitled to more money (or a shareholding that they believe will equate to more money) in one way or another. This should be no surprise given that legal precedent continuously reinforces that the “best interests” of companies and shareholders is a concept aligned primarily and ultimately with profit.

It is the consequences attendant to this core set of dynamics that is perhaps the most fascinating. For one thing it means not only that “the fight” is usually about making more money as a philosophical starting point, but also that the combatants often are equally matched in both purpose and resources – in other words they are often equal, especially if for example there is a takeover battle at stake. It would be naive to think that this equality does not impact the nature of the legal proceedings. Where so much of what you learn in law school is about rights that have evolved to redress inequalities or grant liberty, the corporate law principles that have evolved that in the real world tend to be mere tools in the hands of often more or less equal litigants. No doubt principle is argued with great ferocity by highly skilled counsel in corporate law, but the fact that in the end it is all mostly just about money surely has an impact (if only below the surface). After all in corporate law we are generally not talking about basic rights (detention without trial; equality before the law; personal discrimination etc.). Is it unfair to wonder whether the relative inconsistency of corporate law principles is one product of this confluence of “equality” and also a product of not dealing with issues of true importance to the human condition, such as personal liberty?

So whether you agree or not, stay on the lookout in this unit (and feel free to look backwards at previous units) for situations where the relative “equality’ of the parties has some impact on the law evolving in a murkier rather then clearer way.

 

TOPIC 2: MAJORITY RULE

Please read pages 427-452 of the Casebook.

This section of the course is about the power of shareholder majorities. In this regard there are two questions that commend themselves:

Question 1:

What sorts of things must be done by shareholders?

The more important aspects of this question are discussed at pages 443-448 of the Casebook. You should read these pages to get a general sense of the situation. The details are not overly important for any present purpose but you should note that the BCBCA contains provisions which, in one way or another, are comparable to those of the CBCA that are referred to. We have already visited some of these subjects in detail (for example, the removal of directors).

Question 2:

Are there any limitations on shareholders when they are doing what they are authorized to do?

To begin answering this question please read Allen v. Gold Reefs Of West Africa, Ltd. [1900-1903] All E.R. Rep. 746 (Eng. C.A.) at pages 448-449 of the Casebook as well as the Notes following at pages 449-451 of the Casebook.

In Allen v. Gold Reefs of West Africa, Ltd. the company had altered its articles giving itself a lien on paid up shares which, in effect, addressed the failure of a shareholder, Mr. Zuccani, to pay what was owed in respect of other shares he had that had not been fully paid up. Gold Reefs of West Africa, Ltd.’s articles gave the company a lien on all partly paid shares held by any shareholder in respect of any debt owed to the company. Mr. Zuccani held some partly paid up shares and some fully paid up shares. Mr. Zuccani died insolvent. Gold Reefs of West Africa, Ltd. subsequently decided to alter its articles through special resolution to create a lien on all fully paid shares. This in effect changed the rights of the now deceased shareholder (as well as in theory the rights of all other shareholders going forward). Mr. Allen, who was an executor of Mr. Zuccani’s estate brought action get the fully paid shares’ value.

Lindley M.R. found that the altering of the articles of Gold Reefs of West Africa, Ltd. to be valid as long as the special resolution was done bona fide for the benefit of the company as a whole:

“ The power thus conferred on companies to alter the regulations contained in their articles is limited only by the provisions contained in the statute and the conditions contained in the company’s memorandum of association. Wide, however, as the language of s. 50 is, the power conferred by it must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded. These conditions are always implied, and are seldom, if ever, expressed. But if they are complied with I can discover no ground for judicially putting any other restrictions on the power conferred by the section than those contained in it. How’s shares shall be transferred, and whether the company shall have any lien on them, are clearly matters of regulation properly prescribed by a company’s articles of association…” (Emphasis added)
<table width="53">
<tbody>
<tr>
<td width="27"></td>
<td width="27"></td>
</tr>
</tbody>
</table>
The willingness of courts to deal with shareholder amendments and decisions and the extent to which the court’s would interfere resulted in some uncertainty, which was addressed in the case of Greenhalgh v. Arderne Cinemas Ltd. [1950] 2 ALL E.R. 1120 (Eng. C.A.). Please read the case at page 451 of the Casebook.

In Greenhalgh v. Arderne Cinemas Ltd. the original articles of association of Arderne Cinemas Ltd. provided that no sale of shares to an outsider would occur if an existing shareholder was willing to buy those shares. The articles provided: "No shares in the company shall be transferred to a person not a member of the company so long as a member of the company may be willing to purchase such shares at a fair value to be ascertained in accordance with sub-clause (b) hereof".

The majority shareholder, Mr. Mallard wanted to sell control of Arderne Cinemas Ltd. to a third party. Mr. Greenhalgh was a minority shareholder in Arderne Cinemas and wished to prevent any such sale of control. The articles of Arderne Cinemas Ltd. were amended by special resolution to permit sale to an outsider, if approved, by simple majority. Mr. Greenhalgh argued that the article change was invalid.

Evershed M.R. had the following observations:

“… Certain principles, I think, can be safely stated as emerging from those authorities. In the first place, I think it is now plain that "bona fide for the benefit of the company as a whole" means not two things but one thing. It means that the shareholder must proceed upon what, in his honest opinion, is for the benefit of the company as a whole. The second thing is that the phrase, “the company as a whole”, does not (at any rate in such a case as the present) mean the company as a commercial entity, distinct from the corporators: it means the corporators as a general body. That is to say, the case maybe taking of an individual hypothetical member and it may be asked whether what is proposed is, in the honest opinion of those who voted in its favor, for that person’s benefit.

I think that the matter can, in practice, be more accurately and precisely stated by looking at the converse and by saying that a special resolution of this kind would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and the minority shareholders, so as to give to the former an advantage of which the latter were deprived. When the cases are examined in which the resolution has been successfully attacked, it is on that ground. It is therefore not necessary to require that persons voting for a special resolution should, so to speak, dissociate themselves altogether from their own prospects and consider whether what is thought to be for the benefit of the company as a going concern. If, as commonly happens, an outside person makes an offer to buy all the shares, prima facie, if the corporators think it a fair offer and vote in favour of the resolution, it is no ground for impeaching the resolution that they are considering their own position as individuals.”

 

Blog Activity 8.1:

Do you see a test here? How are shareholders to act when voting on special resolutions? What can they consider? What must they not do? Is it clear? 

Please blog your views on these questions and your reasons in less than one page under the heading “Arderne Cinemas Ltd.”

 

 

TOPIC 3: MINORITY PROTECTIONS 

 

On the subject of “Statutory Intervention” please read pages 453-460 of the Casebook.

Welling in the excerpt from “Corporate Law in Canada: The Governing Principles” makes the noteworthy point the: “The common law courts…failed to find any principled approaches to the problem of minority shareholder protection.” What has evolved instead is a statutory codification of remedies as a bulwark against the oppressions that directors, management, and even other shareholders can be complicit in.

The relevant section of the BCBCA can be found in Part 8 “Proceedings”. They include sections 227-228 and 232-236 that broadly corresponds to the CBCA provisions referenced in the Casebook (but note that there are differences). The BCBCA sections are reproduced below:
<h4> </h4>
<h4> “Complaints by shareholder</h4>
<ol start="227">
<li>(1) For the purposes of this section, "shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) A shareholder may apply to the court for an order under this section on the ground

(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or

(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.

(3) On an application under this section, the court may, with a view to remedying or bringing to an end the matters complained of and subject to subsection (4) of this section, make any interim or final order it considers appropriate, including an order

(a) directing or prohibiting any act,

(b) regulating the conduct of the company's affairs,

(c) appointing a receiver or receiver manager,

(d) directing an issue or conversion or exchange of shares,

(e) appointing directors in place of or in addition to all or any of the directors then in office,

(f) removing any director,

(g) directing the company, subject to subsections (5) and (6), to purchase some or all of the shares of a shareholder and, if required, to reduce its capital in the manner specified by the court,

(h) directing a shareholder to purchase some or all of the shares of any other shareholder,

(i) directing the company, subject to subsections (5) and (6), or any other person, to pay to a shareholder all or any part of the money paid by that shareholder for shares of the company,

(j) varying or setting aside a transaction to which the company is a party and directing any party to the transaction to compensate any other party to the transaction,

(k) varying or setting aside a resolution,

(l) requiring the company, within a time specified by the court, to produce to the court or to an interested person financial statements or an accounting in any form the court may determine,

(m) directing the company, subject to subsections (5) and (6), to compensate an aggrieved person,

(n) directing correction of the registers or other records of the company,

(o) directing that the company be liquidated and dissolved, and appointing one or more liquidators, with or without security,

(p) directing that an investigation be made under Division 3 of this Part,

(q) requiring the trial of any issue, or

(r) authorizing or directing that legal proceedings be commenced in the name of the company against any person on the terms the court directs.

(4) The court may make an order under subsection (3) if it is satisfied that the application was brought by the shareholder in a timely manner.

(5) If an order is made under subsection (3) (g), (i) or (m), the company must pay to a person the full amount payable under that order unless there are reasonable grounds for believing that

(a) the company is insolvent, or

(b) the payment would render the company insolvent.

(6) If reasonable grounds exist for believing that subsection (5) (a) or (b) applies,

(a) the company is prohibited from paying the person the full amount of money to which the person is entitled,

(b) the company must pay to the person as much of the amount as is possible without causing a circumstance set out in subsection (5) to occur, and

(c) the company must pay the balance of the amount as soon as the company is able to do so without causing a circumstance set out in subsection (5) to occur.

(7) If an order is made under subsection (3) (o), Part 10 applies.

 
<h4>Compliance or restraining orders</h4>
<ol start="228">
<li>(1) In this section, "complainant" means, in relation to a company referred to in subsection (2), a shareholder of the company or any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) If a company or any director, officer, shareholder, employee, agent, auditor, trustee, receiver, receiver manager or liquidator of a company contravenes or is about to contravene a provision of this Act or the regulations or of the memorandum, notice of articles or articles of the company, a complainant may, in addition to any other rights that that person might have, apply to the court for an order that the person who has contravened or is about to contravene the provision comply with or refrain from contravening the provision.

(3) On an application under this section, the court may make any order it considers appropriate, including an order

(a) directing a person referred to in subsection (2) to comply with or to refrain from contravening a provision referred to in that subsection,

(b) enjoining the company from selling or otherwise disposing of property, rights or interests, or from receiving property, rights or interests, or

(c) requiring, in respect of a contract made contrary to section 33 (1), that compensation be paid to the company or to any other party to the contract…
<h4> </h4>
<h4>Derivative actions</h4>
<ol start="232">
<li>(1) In this section and section 233,</li>
</ol>
"complainant" means, in relation to a company, a shareholder or director of the company;

"shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.

(2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company

(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or

(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.

(3) Subsection (2) applies whether the right, duty or obligation arises under this Act or otherwise.

(4) With leave of the court, a complainant may, in the name and on behalf of a company, defend a legal proceeding brought against the company.
<h4> </h4>
<h4>Powers of court in relation to derivative actions</h4>
<ol start="233">
<li>(1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if</li>
</ol>
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,

(b) notice of the application for leave has been given to the company and to any other person the court may order,

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.

(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.

(3) While a legal proceeding prosecuted or defended under this section is pending, the court may,

(a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and

(b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate.

(4) On the final disposition of a legal proceeding prosecuted or defended under this section, the court may make any order it considers appropriate, including an order that

(a) a person to whom costs are paid under subsection (3) (b) repay to the company some or all of those costs,

(b) the company or any other party to the legal proceeding indemnify

(i) the complainant for the costs incurred by the complainant in prosecuting or defending the legal proceeding, or

(ii) the person controlling the conduct of the legal proceeding for the costs incurred by the person in controlling the conduct of the legal proceeding, or

(c) the complainant or the person controlling the conduct of the legal proceeding indemnify one or more of the company, a director of the company and an officer of the company for expenses, including legal costs, that they incurred as a result of the legal proceeding.

(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.

(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.
<h4> </h4>
<h4>Relief in legal proceedings</h4>
<ol start="234">
<li> If, in a legal proceeding against a director, officer, receiver, receiver manager or liquidator of a company, the court finds that that person is or may be liable in respect of negligence, default, breach of duty or breach of trust, the court must take into consideration all of the circumstances of the case, including those circumstances connected with the person's election or appointment, and may relieve the person, either wholly or partly, from liability, on the terms the court considers necessary, if it appears to the court that, despite the finding of liability, the person has acted honestly and reasonably and ought fairly to be excused.</li>
</ol>
<h4> </h4>
<h4>Applications to court under this Act</h4>
<ol start="235">
<li>(1) Subject to subsection (2), an application to the court under this Act may be brought without notice unless notice is specifically required under subsection (2) or otherwise under this Act.</li>
</ol>
(2) The court may direct that notice of any application under this Act be served on those persons the court requires.
<h4> </h4>
<h4>Court may order security for costs</h4>
<ol start="236">
<li> If a corporation is the plaintiff in a legal proceeding brought before the court, and if it appears that the corporation will be unable to pay the costs of the defendant if the defendant is successful in the defence, the court may require security to be given by the corporation for those costs, and may stay all legal proceedings until the security is given.”</li>
</ol>
 

 

TOPIC 2: STANDING

 

Now we arrive at the question of “standing”, that being “who” can sue?

Please read the case of First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) 60 Alta. L.R. (2d) 122 (Q.B.) at pages 453-459 of the Casebook.

Note first, that the definition of complainant in that case applies to both oppression and derivative actions.

In B.C., however, there are different definitions:
<ul>
<li>For “complaints by a shareholder (i.e. oppression) see section 227 (1) where “shareholder” can mean beneficial (registered) owner of a share or “any other person whom the court considers to be an appropriate person…”</li>
</ul>
 
<ul>
<li>In respect of “derivative actions” see section 232 (1) where "complainant" “means, in relation to a company, a shareholder or director of the company”.</li>
</ul>
 

The essential legal question in First Edmonton Place Ltd. v. 315888 Alberta Ltd. was whether a creditor of the company was a proper person in the opinion of the court under the Alberta Business Corporations Act? In First Edmonton Place Ltd. v. 315888 Alberta Ltd. a landlord (First Edmonton Place) sued three lawyers through their company” 315888 Alberta Ltd. for an alleged debt arising from the occupancy of the landlord’s premises.

McDonald J. framed thoroughly reviewed the legislative history of the relevant provisions before coming to the conclusion that First Edmonton Place Ltd. was indeed had standing as a proper plaintiff but not because it was a simple creditor:

“Is the applicant a "complainant" entitled to apply for leave to bring an action under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> or <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a>?

In order to obtain leave to bring an action under either of these sections, the applicant must be found to be a "complainant" as defined in s. 231. As the applicant is clearly not within s. 231(b)(ii), First Edmonton Place can satisfy this requirement only if it can come within s. 231(b)(i) or (iii).

Is the applicant a "complainant" within the meaning of s. 231(b)(i)?

It will be recalled that s. 231(b)(i) defines a "complainant" as "a registered holder or beneficial owner, or a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates"… 

This plain meaning reflects the meaning of "bonds, debentures and notes" in the world of corporate financing. In Securities Law and Practice (1984), vol. 1, by V.P. Alboini, bonds and debentures are stated to be the "traditional debt instruments issued by corporations" while notes are "issued by any issuer including individuals" (at pp. 0-33, 0-34).

Is the applicant a "complainant" under s. 231(b)(iii)?

Under s. 231(b)(iii), a person may be a "complainant" if he is a person "who, in the discretion of the Court, is a proper person to make an application under this Part."

This is not so much a definition as a grant to the court of a broad power to do justice and equity in the circumstances of a particular case, where a person who otherwise would not be a "complainant" ought to be permitted to bring an action under either <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> or <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a> to right a wrong done to the corporation which would not otherwise be righted, or to obtain compensation himself or itself where his or its interests have suffered from oppression by the majority controlling the corporation or have been unfairly prejudiced or unfairly disregarded, and the applicant is a "security holder, creditor, director or officer"…

In the case of a creditor who claims to be a "proper person" to make a <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> application, in my view the criterion to be applied would be whether, even if the applicant did not come within s. 231(b)(î) or (ii), he or it would nevertheless be a person who could reasonably be entrusted with the responsibility of advancing the interests of the corporation by seeking a remedy to right the wrong allegedly done to the corporation. The applicant would not have to be a security holder (as I have defined that notion), director or officer of the corporation. The applicant could be a creditor. The applicant might even be a person who at the time of the act or conduct complained of was not a creditor but was a person toward whom the corporation might have a contingent liability. No good purpose would be served in saying more than that now.

I turn now to an application by a person who claims to be a "proper person" to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a>. As in the case of an application made under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a>, an applicant for leave to bring an action under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a> does not have to be a security holder, director or officer. The applicant could be a creditor, or even a person toward whom the corporation had only a contingent liability at the time of the act or conduct complained of. However, it is important to note that he would not be held to be a "proper person" to make the application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a>unless he satisfied the court that there was some evidence of oppression or unfair prejudice or unfair disregard for the interests of a security holder, creditor, director or officer…

 

There are two circumstances in which justice and equity would entitle a creditor to be regarded as "a proper person". (There may be other circumstances; these two are not intended to exhaust the possibilities.) The first is if the act or conduct of the directors or management of the corporation which is complained of constituted using the corporation as a vehicle for committing a fraud upon the applicant. (In the present case there is no evidence suggesting such fraud, although there is some evidence of the directors having used the money paid as a cash inducement for their own personal investment purposes, and that, as I shall later explain, may constitute fraud against the corporation… 

Second, the court might hold that the applicant is a "proper person to make an application" for an order under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a> if the act or conduct of the directors or management of the corporation which is complained of constituted a breach of the underlying expectation of the applicant arising from the circumstances in which the applicant's relationship with the corporation arose. For example, where the applicant is a creditor of the corporation, did the circumstances which gave rise to the granting of credit include some element which prevented the creditor from taking adequate steps, when he or it entered into the agreement, to protect his or its interests against the occurrence of which he or it now complains? Did the creditor entertain an expectation that, assuming fair dealing, its chances of repayment would not be frustrated by the kind of conduct which subsequently was engaged in by the management of the corporation? Assuming that the evidence established the existence of such an expectation, the next question would be whether that expectation was, objectively, a reasonable one.

Thus, in the present case, an inquiry would properly be directed at trial toward whether the lessor, First Edmonton Place, at the time of entering into the lease, consciously and intentionally decided to contract only with the numbered company, and not to obtain personal guarantees from the three lawyers. A further proper inquiry would be into whether the lessor entered into the lease fully aware that it was not protecting itself against the possibility that the corporation might pay out the cash advance to the lawyers, leaving no other assets in the corporation, and that the corporation might permit the lawyers to occupy the space without entering into a sublease either for ten years or for any lesser period. In the absence of evidence establishing at least a prima facie case that an injustice would be done to the lessor or that there would be inequity if the lessor were not allowed to bring its action and go to trial, leave to bring the action ought not to be granted. There is, in the present case, no evidence showing that there was an expectation on the part of the lessor that the lessee corporation would retain the funds in its hands for any set period of time or any time at all. Nor is there any evidence that there was an expectation that the lessee corporation would grant a lease for a term of ten years or any other set term beyond the rent-free period, to the law firm or any other person or persons. It is true that the lease contemplated the possibility that the corporation would enter into a lease with the lawyers, for it specified that the lessee could do so. That falls far short of evidencing the existence of an expectation that there would be a lease for the entire ten-year period or for any set term longer than the rent-free period and less than ten years. Nor does the evidence establish any inequality of bargaining power between First Edmonton Place on the one hand and the three lawyers and their corporation on the other, at the time the lease was being negotiated. If there were some circumstances evidencing such inequality of bargaining power, the result might be different…

CONCLUSION

In the case of the application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a>, the applicant was not a holder of a security or a "creditor" at the time of use of the cash inducement money by the three directors. However, there is some evidence that the cash inducement money was not used for purposes of the corporation and that its use might have been a fraud upon the corporation. If it was a fraud upon the corporation, and if the corporation were entitled to recover the money from the three directors, the applicant may have a genuine interest in advancing the claim to such recovery because the corporation might be liable in damages to the applicant. Therefore the applicant is in my opinion a proper person to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> and should be granted leave to bring an action in the name and on behalf of the corporation in respect of the payment of the cash inducement money to or for the benefit of the three lawyers.

Moreover, as for the three lawyers, as directors of the corporation, permitting themselves as lawyers to occupy the leased premises without paying rent or entering into a lease, whether that conduct constituted a wrong to the corporation is a matter that should be tried. Once again, if there was a wrong, the applicant might ultimately stand to benefit from any recovery by the corporation. Therefore the applicant is in my opinion a proper person to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> in regard to this head of claim and should be granted leave in the same action to advance a claim in the name and on behalf of the corporation in respect of the occupation of the premises by the directors for their own personal purposes and in respect of the failure of the directors to obtain from themselves personally (or their law firm) a sublease for the term of the lease.” (Emphasis added)

Note that section 227 (1) of the BCBCA is an oppression provision comparable to that in First Edmonton Place Ltd. v. 315888 Alberta Ltd. However also note that section 233 (1) of the BCBCA dealing with “derivative actions”, being those where you are suing essentially “on behalf the corporation” is very different. In section 233 (1) of the BCBCA there is no discretionary category; only shareholders (legal or beneficial) or directors have standing to sue.

 

TOPIC 3: STATUTORY REPRESENTATIVE ACTIONS: “DERIVATIVE ACTIONS” 

Please read pages 461-463 of the Casebook.

Please read the following passage from the Supreme Court of Canada’s 2008 decision in BCE Inc. v. 1976 Debentureholders regarding the background and purpose of “derivative actions”.

 

“The first remedy provided by the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>is the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec239">s. 239 </a> derivative action, which allows stakeholders to enforce the directors’ duty to the corporation when the directors are themselves unwilling to do so. With leave of the court, a complainant may bring (or intervene in) a derivative action in the name and on behalf of the corporation or one of its subsidiaries to enforce a right of the corporation, including the rights correlative with the directors’ duties to the corporation. (The requirement of leave serves to prevent frivolous and vexatious actions, and other actions which, while possibly brought in good faith, are not in the interest of the corporation to litigate.)”

Please also reflect on the notion that the need for “derivative actions” arises, at least in part, from the concentration of power and attendant conflicts of interest that often flows from corporate managers overstepping their legal boundaries. Ironically, and sadly, because they are the usual representatives of the “corporate legal personality”, it is often those wrong-doing corporate managers who are cast as the representatives of the corporation which should be investigating them and seeking redress from them on behalf of the corporation and its shareholders. As the author of the casebook points out:

“…however, enforcing these fiduciary duties is difficult if the only actors who can represent the corporation are the very managers who have violated those duties. This explains why other individuals (“complainants”) are permitted to represent the corporation’s interests via the derivative action in circumstances where management fails to assume such responsibility. Since the derivative action is a representative action on behalf of the corporation that seeks recompense for harm done to the corporation, any proceeds awarded from the litigation logically flows to the corporation and not to the complainant.” 

Now please note that per the decision in Shield Development Co. v. Snyder, [1976] 3 W.W.R. 44 (B.C.S.C.) it was found that the B.C. statute limited common law “derivative” actions:

“The legislation does not expressly prohibit the bringing of a common-law derivative action but, in my view, such an action is prohibited by necessary implication. I am unable to see how the two remedies could exist side-by-side without creating confusion to an intolerable degree.”

In this light it may also be worthwhile to revisit section 232 and section 233 of the BCBCA:
<h4>“Derivative actions</h4>
<ol start="232">
<li>(1) In this section and section 233,</li>
</ol>
"complainant" means, in relation to a company, a shareholder or director of the company;

"shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.

(2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company

(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or

(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.

(3) Subsection (2) applies whether the right, duty or obligation arises under this Act or otherwise.

(4) With leave of the court, a complainant may, in the name and on behalf of a company, defend a legal proceeding brought against the company.
<h4> </h4>
<h4>Powers of court in relation to derivative actions</h4>
<ol start="233">
<li>(1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if</li>
</ol>
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,

(b) notice of the application for leave has been given to the company and to any other person the court may order,

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.

(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.

(3) While a legal proceeding prosecuted or defended under this section is pending, the court may,

(a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and

(b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate.

(4) On the final disposition of a legal proceeding prosecuted or defended under this section, the court may make any order it considers appropriate, including an order that

(a) a person to whom costs are paid under subsection (3) (b) repay to the company some or all of those costs,

(b) the company or any other party to the legal proceeding indemnify

(i) the complainant for the costs incurred by the complainant in prosecuting or defending the legal proceeding, or

(ii) the person controlling the conduct of the legal proceeding for the costs incurred by the person in controlling the conduct of the legal proceeding, or

(c) the complainant or the person controlling the conduct of the legal proceeding indemnify one or more of the company, a director of the company and an officer of the company for expenses, including legal costs, that they incurred as a result of the legal proceeding.

(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.

(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.”

 

Please read the cases of Farnham v. Fingold (1973) 2 O.R. 132 (Ont. C.A.) and Goldex Mines Ltd. v. Revill (1974), 7 O.R. (2D) 216. Please also remember the case of First Edmonton Place Ltd. v. 315888 Alberta Ltd. that you read not too long ago. Note that these cases all help define, in one way or another, the distinctions between “derivative” and “oppression” actions.

In Farnham v. Fingold, the Ontario Court of Appeal dealt with an interlocutory motion to strike out a statement of claim for disclosing no reasonable cause of action. The background facts involved the sale of a majority interest in a company for a premium. The same offer was not made to the minority shareholders. The claim alleged that the majority shareholders had a fiduciary obligation to share the premium with the minority shareholders. The decision was among the first Canadian cases to analyze and distinguish between a personal action and a derivative action in consideration of the requirements the Ontario Business Corporations Act.

Jessup J.A. stated:

“Certain parts of the statement of claim in particular all or parts of paras. 22, 23, 29, 32, 34, 36 and 37E are concerned with rights, duties or obligations owed to the defendant Slater Steel Industries Limited or with damage alleged to be suffered by the corporation as a result of the actions of the other defendants. Such matters are properly the subject of a derivative action rather than a class action.” 

On the particular claims at issue the Ontario Court of Appeal dismissing the action as a “derivative action” under the statute, but preserving the possibility of an “oppression action” being validly brought forth.

Goldex Mines Ltd. v. Revill involved the pleadings in a longstanding shareholder battle and again was concerned with the distinction between derivative actions and oppression claims.

The Ontario Court of Appeal dealt with the distinction:

“Where a legal wrong is done to shareholders by directors or other shareholders, the injured shareholders suffer a personal wrong, and may seek redress for it in a personal action. That personal action may be by one shareholder alone, or (as will usually be the case) by a class action in which he sues on behalf of himself and all other shareholders in the same interest (usually, all other shareholders save the wrongdoers). Such a class action is nevertheless a personal action. 

A derivative action, on the other hand, is one in which the wrong is done to the company. It is always a class action, brought in representative form, thereby binding all the shareholders…”

A bit later in the decision the Ontario Court of Appeal quoted with approval from the judgment of Traynor C.J. in the California case of Jones v. H.F. Ahmanson & Co. where the case of Shaw v. Empire Savings & Loan Assoc. was cited:

“…the court [in Shaw] noted the "well established general rule that a stockholder of a corporation has no personal or individual right of action against third persons, including the corporation's officers and directors, for a wrong or injury to the corporation which results in the destruction or depreciation of the value of his stock, since the wrong suffered by the stockholder is merely incidental to the wrong suffered by the corporation and affects all stockholders alike." From this the court reasoned that a minority shareholder could not maintain an individual action unless he could demonstrate the injury was somehow different from that suffered by other minority shareholders. In so concluding the court erred. The individual wrong necessary to support a suit by a shareholder need not be unique to that plaintiff. The same injury may affect a substantial number of shareholders. If the injury is not incidental to an injury to the corporation, an individual cause of action exists.” 

 

In the end the cases of Farnham v. Fingold, Goldex Mines Ltd. v. Revill and First Edmonton Place Ltd. v. 315888 Alberta Ltd. emphasize the necessity for a careful analysis of the nature of the complaint, in particular whether the class of the complaint corporate or individual (personal)? If it is not corporate, a derivative action is not appropriate.

All of this should now become somewhat clearer in looking yet again at section 232(2) of the BCBCA:

 

 “Derivative actions
<ol start="232">
<li> (2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company</li>
</ol>
(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or

(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.”

Please also read he notes on “Prerequisite Steps at pages 471-472 of the Casebook. In relation to that please also read again section 233 of the BCBCA: 

 

“Powers of court in relation to derivative actions
<ol start="233">
<li> (1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if</li>
</ol>
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,

(b) notice of the application for leave has been given to the company and to any other person the court may order,

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.

 

(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.

 

(3) While a legal proceeding prosecuted or defended under this section is pending, the court may,

(a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and

(b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate.

 

(4) On the final disposition of a legal proceeding prosecuted or defended under this section, the court may make any order it considers appropriate, including an order that

(a) a person to whom costs are paid under subsection (3) (b) repay to the company some or all of those costs,

(b) the company or any other party to the legal proceeding indemnify

(i) the complainant for the costs incurred by the complainant in prosecuting or defending the legal proceeding, or

(ii) the person controlling the conduct of the legal proceeding for the costs incurred by the person in controlling the conduct of the legal proceeding, or

(c) the complainant or the person controlling the conduct of the legal proceeding indemnify one or more of the company, a director of the company and an officer of the company for expenses, including legal costs, that they incurred as a result of the legal proceeding.

 

(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.

 

(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.”

 

 

Blog Activity 8.2:

As you review and break down the component elements in section 233 (1) of the BCBCA please also notice the provisions of the OBCA referred to in Armstrong v. Gardner (1978), 20 O.R. (2d) 648 (H.C.) at page 472-473 of the Casebook. What do you think is the explanation for OBCA section 99 (3) (a) requiring that “the shareholder was a shareholder of the corporation at the time of the transaction or other event giving rise to the cause of action…”? Might it be an effective tool to prevent speculation on “derivative actions”? Note that the same sort of limitation does not appear in the bcbca.

 

In this regard it is worth knowing that a “strike suit” is a nuisance legal action. It is brought by a small shareholder with a virtually insignificant interest in a corporation with a view to achieving a profitable settlement before actually going to court. Such actions frequently appeared in the U.S. when the defendant corporation was much larger than the plaintiff and for that reason a settlement amount could be less than what the defendant's legal costs might have been. Strike suits were never common in Canada. A 2005 decision of U.S. Supreme Court (Dura Pharmaceuticals, Inc. v. Broudo, (2005) 544 U.S. 336) made them much more difficult and accordingly they have become less common in the present day.

Are such protections as OBCA section 99 (3) (a) or an analogous decision to the that of the U.S. Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo necessary? Or are such protections subsumed within the potential interpretations of sections 233 (1) (c) and (d) of the BCBCA?:

 

“233. (1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if…

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.”

Please blog your views on these questions and your reasons in less than one page under the heading “Abusive Derivative Actions”.

 

Finally we conclude this part of the discussion with section 233 (6) of the BCBCA, which states:

 

“233. (6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.”

You will recall that we previously studied the possibly salutary impacts of both advance and subsequent shareholder approval to deal contentious issues or remedy errors where not involving fraud or bad faith. It is useful to reflect on how section 233(6) reserves considerable discretion to the court to deal with a special resolution as it sees fit. 

 

TOPIC 4: THE OPPRESSION REMEDY 

Please read pages 490-540 of the Casebook. You will find that you are already familiar with a number of the cases (and even the principles) that you will be reading.

Please note the Casebook authors’ somewhat disconcerting words at the bottom of page 490 of the Casebook:

“Most Canadian jurisdictions have followed the C.B.C.A. lead and enacted an “oppression” remedy. There is a relatively large volume of cases in Canada since the statutory change. One reason for the volume is lack of theory: the remedy is relatively new to Canada. Moreover, precedent is not particularly helpful: the remedy is invoked in a wide variety of circumstances and judges are statutorily empowered to do whatever they want in each case.”

Beginning to sound familiar?

Now please read sections 227 (1) (2) and (3) of the BCBCA:

 

“Complaints by shareholder
<ol start="227">
<li> (1) For the purposes of this section, "shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) A shareholder may apply to the court for an order under this section on the ground

(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or

(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.

 

(3) On an application under this section, the court may, with a view to remedying or bringing to an end the matters complained of and subject to subsection (4) of this section, make any interim or final order it considers appropriate, including an order

(a) directing or prohibiting any act,

(b) regulating the conduct of the company's affairs,

(c) appointing a receiver or receiver manager,

(d) directing an issue or conversion or exchange of shares,

(e) appointing directors in place of or in addition to all or any of the directors then in office,

(f) removing any director,

(g) directing the company, subject to subsections (5) and (6), to purchase some or all of the shares of a shareholder and, if required, to reduce its capital in the manner specified by the court,

(h) directing a shareholder to purchase some or all of the shares of any other shareholder,

(i) directing the company, subject to subsections (5) and (6), or any other person, to pay to a shareholder all or any part of the money paid by that shareholder for shares of the company,

(j) varying or setting aside a transaction to which the company is a party and directing any party to the transaction to compensate any other party to the transaction,

(k) varying or setting aside a resolution,

(l) requiring the company, within a time specified by the court, to produce to the court or to an interested person financial statements or an accounting in any form the court may determine,

(m) directing the company, subject to subsections (5) and (6), to compensate an aggrieved person,

(n) directing correction of the registers or other records of the company,

(o) directing that the company be liquidated and dissolved, and appointing one or more liquidators, with or without security,

(p) directing that an investigation be made under Division 3 of this Part,

(q) requiring the trial of any issue, or

(r) authorizing or directing that legal proceedings be commenced in the name of the company against any person on the terms the court directs.” (Emphasis added)

Now please note differences between sections 227 (1) (2) and (3) of the BCBCA and the equivalent sections of the CBCA section 241:

 

“Application to court re oppression
<ol start="241">
<li>(1) A complainant may apply to a court for an order under this section.</li>
</ol>
 

Grounds

 

(2) If, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates

 (a) any act or omission of the corporation or any of its affiliates effects a result,

 (b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or

 (c) the powers of the directors of the corporation or any of its affiliates 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, the court may make an order to rectify the matters complained of.

 

 Powers of court

 

(3) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,

(a) an order restraining the conduct complained of;

(b) an order appointing a receiver or receiver-manager;

(c) an order to regulate a corporation’s affairs by amending the articles or by-laws or creating or amending a unanimous shareholder agreement;

(d) an order directing an issue or exchange of securities;

(e) an order appointing directors in place of or in addition to all or any of the directors then in office;

(f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder;

(g) an order directing a corporation, subject to subsection (6), or any other person, to pay a security holder any part of the monies that the security holder paid for securities;

(h) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract;

(i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested person financial statements in the form required by section 155 or an accounting in such other form as the court may determine;

(j) an order compensating an aggrieved person;

(k) an order directing rectification of the registers or other records of a corporation under section 243;

(l) an order liquidating and dissolving the corporation;

(m) an order directing an investigation under Part XIX to be made; and

(n) an order requiring the trial of any issue.

 Duty of directors 

(4) If an order made under this section directs amendment of the articles or by-laws of a corporation,

 (a) the directors shall forthwith comply with subsection 191(4); and

 (b) no other amendment to the articles or by-laws shall be made without the consent of the court, until a court otherwise orders.

 

Exclusion

 

 (5) A shareholder is not entitled to dissent under section 190 if an amendment to the articles is effected under this section.

 

Limitation

 

(6) A corporation shall not make a payment to a shareholder under paragraph (3)(f) or (g) if there are reasonable grounds for believing that

 (a) the corporation is or would after that payment be unable to pay its liabilities as they become due; or

 (b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities.

Alternative order 

(7) An applicant under this section may apply in the alternative for an order under section 214.”

 

All of which somewhat begs the question: What is the meaning of “Oppression”? Or put another way what is the standard of what will be considered “Oppression” defined?

To focus on this question this please begin by reading Westfair Foods Ltd. v. Watt [1991] A.J. No. 321 at pages 492-494 of the Casebook.

The facts were that Westfair Foods Ltd. had Class A shares carrying a $2 dividend in priority to the common shares. There were many Class A shareholders and only a single holder of the common shares. The Class A shares were also entitled to share in surplus assets including retained earning in the event of a liquidation. Historically all profits beyond the dividend attached to the class A shares would be retained by Westfair Foods Ltd. as earnings. At a certain point the directors of Westfair Foods Ltd. decided to change the policy and after paying the fixed dividend to the holders of Class A shares, the company paid all of its net earnings to the single common shareholder. The Class A shareholders claimed the new policy was oppressive to their interests.

Kearns J.A. of the Alberta C.A. found the new policy to be oppressive to the Class A shareholders. The logic, reasoning and common sense displayed by the learned judge in examining “oppressive conduct” is well worth reproducing here:

 

“I turn then to the substantial rights conferred by the provision. Obviously, they turn on effect not intent. Equally obviously, they govern all the activities of the corporation. The rights conferred upon shareholders are that they, at any time and in any way during their relationship with the company, are to be insulated from anything oppressive, unfairly prejudicial, or that unfairly disregards their interests. For the relations among shareholders, this is a major modification of majority rule.

In my view, the provisions were and remain a compendious way for Parliament to say to the courts that the classes mentioned in the Act are to be treated fairly in the sense of justly by corporations. For example, both parties cite and rely on Ebrahimi v. Westbourne Galleries, [1973] A.C. 360. Lord Wilberforce there said at p. 379:

... there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the company structure.

I agree with a similar sentiment by McDonald J. in First Edmonton Place v. 315888 Alberta Ltd. 1988 168 (AB QB), (1988), 40 B.L.R. 28 at pp. 59-60, 60 Alta. L.R. (2d) 122, 10 A.C.W.S. (3d) 268 (Q.B.).

I cannot put elastic adjectives like "unfair", "oppressive" or "prejudicial" into watertight compartments. In my view, this repetition of overlapping ideas is only an expression of anxiety by Parliament that one or the other might be given a restrictive meaning… 

Having concluded that the words charge the courts to impose the obligation of fairness on the parties, I must admit that the admonition offers little guidance to the public, and Parliament has left elucidation to us. I have elsewhere said that I take this sort of indirection as legislative delegation: see Transalta Utilities Corp. v. Alberta Public Utilities Board 1986 ABCA 64 , (1986), 43 Alta. L.R. (2d) 171 at p. 180, 68 A.R. 171, 36 A.C.W.S. (2d) 376 (C.A.).

We fail in that duty of elucidation, I think, if we merely say "this is fair" or "that is not fair" without ever explaining why we think this or that is fair. Thus I, and I dare say others, am not much helped by cases and comments that simply announce that I am to enforce "fair play" or "fair dealing": see, for example, Dickerson, op. cit. , para. 48.

On the other hand, I do not understand that the delegation of this duty permits a judge to impose personal standards of fairness. Let me illustrate what is probably obvious by two extreme examples. A judge who firmly believes in the virtues of unrestricted private enterprise might say that fairness requires that people protect themselves to their best capacity, and that the courts not protect those who fail to protect themselves. On the other hand, a judge who firmly believes that private property is a trust held for the benefit of society as a whole might say that what is fair is what best benefits society.

The role of a judge in our society limits the impulses of both my mythical judges. We must not make rules unless we can tie them to values that seem to have gained wide acceptance. We do that largely by testing any proposed rule against other legal rules, which by long tradition seem accepted. In short we seek precedent, or we seek to argue from what we consider to be principles adopted in precedent… 

I will not attempt to catalogue all the rules generated by the words in the statute. For example, the courts have imposed the duty on directors to protect the interests of all shareholders, not just those who elect them. I will later deal with that rule. The authorities also impose upon the majority interest the obligation not to use their electoral power to profit themselves at the expense of minority shareholders. The principal complaint here does not engage that rule. The complaint is not by a minority who has been outvoted. It is by an entire class of shares in competition with another class of shares.

It is said for the shareholders that yet another rule exists. This is that the directors must have due regard for, and deal fairly with, the "interests" of all shareholders. I have concern about over-use of the word interests. This example serves to express it: a thief is very interested in my watch, and will get it if he can. A law about fairness will not, however, show any respect for his interest. The real question is whether the law should accept his obvious interest in financial gain as, in all the circumstances, one that deserves protection. I do not accept that all ambition to acquire property deserves protection. I do accept that our tradition is that a hope for profit, as opposed to a mere desire, sometimes deserves protection.

One deserving case is where the person to whom the profit will go has nourished that hope. The company and the shareholders entered voluntarily, not by duty or chance, into a relationship. Our guides are the rules in other contexts, such as contract law, equity, and partnership law, where the courts have also considered just rules to govern voluntary relationships. In very general terms, one clear principle that emerges is that we regulate voluntary relationships by regard to the expectations raised in the mind of a party by the word or deed of the other, and which the first party ordinarily would realize it was encouraging by its words and deeds. This is what we call reasonable expectations, or expectations deserving of protection. Regard for them is a constant theme, albeit variously expressed, running through the cases on this section or its like elsewhere. I emphasize that all the words and deeds of the parties are relevant to an assessment of reasonable expectations, not necessarily only those consigned to paper, and not necessarily only those made when the relationship first arose.

I do not for a moment suggest that that analysis about expectations deserving protection is the sole basis for rules under the statute. I think, for example, of totally unforeseen windfalls or calamities. This is not such a case, but I dare say that even in those cases the expectations of the parties are a sound starting point. And the test will always be helpful in cases where mere interests collide.

The test then is always facts-specific, and cases decided on other facts offer only a limited guide. Unfortunately, no other reported case offers the same facts as this.” (Emphasis added)

 

As a footnote it is well worth drawing your attention to a fuller version of the classic statement made by Lord Wilberforce in Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360 at 379 which was quoted by Kearns J.A. immediately above:

“The foundation of it all lies in the words ‘just and equitable’ and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own; that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Company Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The ‘just and equitable’ provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.”

 

Next please read again, but from a somewhat different perspective, the case of Deluce Holdings Inc. v. Air Canada (1992) 98 D.L.R. 94th) 509 (Gen. Div.) at pages 494-502 of the Casebook.

In this case Air Canada owned 75% of the shares of Air Ontario and De Luce Holdings Ltd. (controlled by the De Luce family) owned the remaining 25%. The interests of both Air Canada and De Luce Holdings Ltd. were held in a numbered company, 152160 Canada Inc. The board of directors of Air Ontario was comprised of 7 nominees of Air Canada and 3 nominees from De Luce. William De Luce was named president of Air Ontario. At a certain point Air Canada changed its business strategy to seek 100% control of its regional carriers. Despite apparently doing a good job William De Luce was asked to resign by the Air Canada board representatives. He refused and was terminated by the board of Air Ontario, which in turn was controlled by Air Canada nominees. The “Unanimous Shareholders Agreement” of 152160 Canada Inc. governed the relationship between Air Canada and the De Luce family interests. That agreement provided Air Canada with an option to acquire the De Luce shareholdings in Air Ontario at “fair market value” (to be arbitrated if not agreed upon) upon termination either by Air Ontario or 152160 Canada Inc. of the employment of the last of William De Luce of his father Stanley De Luce. Apparently, termination could be “for any reason”. In February 1989 the employment of Stanley De Luce ended and not renewed. In October 1991 William De Luce terminated by a decision of the board of 152160 Canada Inc.

 

De Luce Holdings Ltd alleged oppression. They argued that since the since the oppressive actions of Air Canada to the De Luce Family as shareholders in Air Ontario were the foundation of the arbitration that sought to determine the value of the shares which the De Luce family were required to sell to Air Canada, the arbitration should be stopped.

Blair J. noted that the motivation for terminating William De Luce as president of Air Ontario was the pursuit of a perfectly legitimate corporate objective on the part of Air Canada. However two questions commended themselves:
<ol>
<li>Was Air Canada entitled to its use majority position on the board of Air Ontario for the predominant purpose of carrying out Air Canada’s corporate objective (as opposed to the corporate objective of Air Ontario), or whether such conduct was “oppressive” of the minority shareholders in Air Ontario?;</li>
<li>If oppressive, then does that oppressiveness undercut the apparent right under the Unanimous Shareholders Agreement to terminate William De Luce “for any reason” (and thus triggering Air Canada’s call on the De Luce family shares)?</li>
</ol>
 

The Court decided to use its discretion to stay the arbitration proceedings. Air Canada’s nominee directors had too obviously disregarded the interests of other stakeholders. Whether there were sufficient reasons to terminate Mr. De Luce, it was obvious to the court that the nominee directors had failed to conduct such any legitimate and focused analysis and were in fact guided by Air Canada's corporate agenda. This sort of behavior was deemed oppressive and in breach of the nominees' fiduciary duty to Air Ontario.

Ironically (and unusually) invoking the arbitration clause might be said to have been oppressive in itself. The Court reasoned that the majority shareholder "visited oppression upon a minority shareholder" and the majority’s conduct was found to be unfairly prejudicial and to have unfairly disregarded the interests of the minority shareholder.

Blair J. had the following to say on the subject of “Oppression”:

“In my view, the conduct of Air Canada and its nominee directors, as outlined above, could be found, after a trial, to constitute "oppression” of Deluceco’s interests as a minority shareholder in Air Ontario. While the conduct may not constitute “oppression” in the classic sense of conduct which is “lacking in probity” or “burdensome, harsh and wrongful”, it may nonetheless be conduct which is “unfairly prejudicial” to or which “unfairly disregards” the interests of Deluceco as a minority shareholder, contrary to s. 241 of the C.B.C.A. The authorities make it clear that this distinction exists and that the latter sort of conduct constitutes grounds that are “less rigorous” than oppression…”

On the subject of the distinction between “legal rights” and the interests or expectations of shareholders Blair J. said the following:

“Cases dealing with oppression remedy situations have emphasized the distinction between the strict "legal rights" of shareholders and their “interests”. For instance, in Westfair Foods Ltd. v. Watt…[1990] 4 W.W.R. 685…Moore C.J.Q.B stated at page 59: 

An examination of the leading cases dealing with the C.B.C.A. and in particular s. 241, is worthwhile. In enacting s. 241, Parliament obviously intended that strict attention should be paid to the interests of all shareholders, not just the legal rights of shareholders.

(Emphasis in original.)

Mr. Justice Farley elaborated on this distinction in 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R (2d) at p.123… by commenting on the connection between shareholder “interests” and shareholder “expectations”. At pp. 185–6 he said:

Shareholder interests would appear to be intertwined with shareholder expectations. It does not appear to me that the shareholder expectations which are to be considered are those that a shareholder has as his own individual “wish list”. They must be expectations which could be said to have been (or ought to have been considered as) part of the compact of the shareholders…”

Please read the very useful notes and questions at pages 502-507 of the Casebook. In particular please note the useful summary set out by Killeen J. In Krynen v. Bugg (2003) 64 O.R. (3d) 393 (S.C.J.):

 

“A summary of the leading principles and guiding rules which has come out of that case law would include the following:

(1) The overriding lodestar principle of oppression law is that, 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. The cases on this issue have been helpfully collected and reviewed by Farley J. in 8200099 Ontario Inc. v. Harold E. Ballard Ltd. (1992) 3 B.L.R. (2d) 123 (Ont. Gen. Div.) where he said this at pp. 185-86:

Shareholder interests would appear to be intertwined with shareholder expectations. It does not appear to me that the shareholder expectations which are to be considered are those that a shareholder has as his own individual “wish list”. They must be expectations which could be said to have been (or ought to have been considered as) part of the compact of the shareholders.

This statement of principle by Farley J. was expressly approved of by the Ontario Court of Appeal in its important judgment in Naneff v. Con-Crete Holdings Limited et. al. 1995 959 (ON CA), (1995), 23 O.R. (3d) 481 (C.A.) at p. 490.

(2) The term “oppression” connotes an inequality of bargaining power while “unfairness” connotes an obligation to act equitably and impartially in the exercise of power and authority: Re Alldrew Holdings Ltd. v. Nibro Holdings 1993 5509 (ON SC), (1993), 16 O.R. (3d) 718 at p. 732. (Ont. Gen. Div.)

(3) The terms, “unfair prejudice to” and “unfair disregard of the interests of” require less rigorous tests than oppression. Where on the totality of the evidence the actions and conduct complained of go beyond mere inconvenience and lack of information, and the interests of the complainant have been unfairly disregarded, the complainant will be entitled to a remedy: Re Mason and Intercity Properties Ltd. 1987 173 (ON CA), (1987), 59 O.R. (2d) 631, at p. 635. (Ont. C.A.)

(4) There is no requirement that bad faith must be shown before an order to rectify a complaint may be made in an oppression case: Re Sidaplex-Plastic Suppliers Inc. v. Elta Group Inc. 1998 5847 (ON CA), (1998), 40 O.R. (3d) 563 at p. 567 (C.A.); Loveridge Holdings v. King-Pin Ltd. reflex, (1992), 5 B.L.R. (2d) 195, at p. 203 (Ont.Gen. Div.)

(5) Where expectations are apparently reasonable on their face but where there is a contract dealing with these expectations, the reasonableness of these expectations cannot prevail over the contract.

(6) Reasonable expectations are not necessarily “static” or frozen expectations and may evolve or change as the principals adapt their arrangements from time to time: 820099 Ontario Inc. v. Harold Ballard Ltd., supra, at p. 191.

(7) The business and affairs of a corporation are managed by or under the direction of its board of directors. The “business judgment rule” operates to shield from court intervention business decisions which have been made honestly, prudently, in good faith and on reasonable grounds. In such cases, the board’s decisions will not be subject to microscopic examination and the court will be reluctant to interfere with and usurp the board’s function in managing the corporation: Re C.W. Shareholdings Inc. v. WIC Western International Communications Ltd. 1998 14838 (ON SC), (1998), 39 O.R. (3d) 755 at para. 57 (Ont.Gen. Div.); Brant Investments Ltd. v. Keeprite Inc. 1991 2705 (ON CA), (1991), 3 O.R. (3d) 289, at pp. 320-21. (C.A.) A useful three-part test or approach has been suggested for the application of the business judgment rule:

(1) Was the impugned conduct outside the range of reasonable business judgment?

(2) Was the impugned conduct inconsistent with the reasonable expectations of the complainant?

(3) Did the impugned conduct cause prejudice to the complainant?

 Main v. Delcan Group Inc.(1999), 47 B.C.R. (2d) 200 at para. 31 (Ont. S.C.J.).

The Ontario Court of Appeal has also considered the rule in Pente Investment Management Ltd. v. Schneider Corp., 1998 5121 (ON CA), (1998), 44 B.L.R. (2d) 115, at para. 36 (C.A.):

The law as it has evolved in Ontario and Delaware has the common requirements that the court must be satisfied that the directors have acted reasonably and fairly. The court looks to see that the directors made a reasonable decision not a perfect decision. Provided the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board’s determination. As long as the directors have selected one of several reasonable alternatives, deference is accorded to the board’s decision…. This formulation of deference to the decision of the Board is known as the “business judgment rule”. The fact that alternative transactions were rejected by the directors is irrelevant unless it can be shown that a particular alternative was definitely available and clearly more beneficial to the company than the chosen transaction….”

See, also, Themadel Foundation v. Third Can. General Investment Trust 1998 973 (ON CA), (1998), 38 O.R. (3d) 749 at 754 (C.A.).

(8) Actual or material loss is not a prerequisite to a finding either of oppression, unfair prejudice or unfair disregard of interest. The object of the remedies available under s.248(3) is to prevent the continuation of the misconduct in question if it is established that a harm or detriment, in the sense of infringement of rights or privileges, will follow in the absence of restraining such misconduct. On this issue, the concept of detriment as a prerequisite to obtaining a remedy is similar to the concept inherent in a quia timet injunction – even if there is no material loss or damage at the time but reasonable grounds are established to apprehend the same occurring if there is no relief granted, the applicant for the quia timet remedy will be entitled to the relief sought. Thus, in establishing unfair disregard of the applicant’s interests as a result of misconduct, there is no requirement that there be actual detriment or loss to the applicant: Sahota v. Basra 1999 14945 (ON SC), (1999), 45 B.L.R. (2d) 143, at para. 30 (Ont. General Div.).

(9) Wrongful dismissal, standing alone, will not justify a finding of oppression. It is only where the interests of the employee are closely intertwined with his interests as a shareholder, and where the dismissal is part of a pattern of conduct to exclude the complainant from participation in the corporation, that the dismissal can be found to be an act of oppression: Naneef v. Con-Crete Holding Ltd. reflex, (1993) 11 B.L.R. (2d) 218 at para. 125; Koehner, “The Oppression Remedy: Reasonable Expectations” (1994) 73 Can. Bar. Rev. 274 at 278.”

 

You are already acquainted with the case of BCE Inc. v. 1976 Debentureholders [2008] 3 S.C.R. 560. In that case the Supreme Court of Canada made the following observations concerning the remedy of “oppression”:

“ B. The <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">Section 241 </a> Oppression Remedy

 The debentureholders in these appeals claim that the directors acted in an oppressive manner in approving the sale of BCE, contrary to <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a> of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>.

Security holders of a corporation or its affiliates fall within the class of persons who may be permitted to bring a claim for oppression under <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a> of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>. The trial judge permitted the debentureholders to do so, although in the end he found the claim had not been established. The question is whether the trial judge erred in dismissing the claim.

We will first set out what must be shown to establish the right to a remedy under <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a>, and then review the conduct complained of in the light of those requirements. 

(1) The Law

Section 241(2) provides that a court may make an order to rectify the matters complained of where

(a) any act or omission of the corporation or any of its affiliates effects a result,

(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or

(c) the powers of the directors of the corporation or any of its affiliates 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…

<a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">Section 241 </a> jurisprudence reveals two possible approaches to the interpretation of the oppression provisions of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>: M. Koehnen, Oppression and Related Remedies (2004), at pp. 79-80 and 84. One approach emphasizes a strict reading of the three types of conduct enumerated in <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a> (oppression, unfair prejudice and unfair disregard): see Scottish Co-operative Wholesale Society Ltd. v. Meyer, [1959] A.C. 324 (H.L.); Diligenti v. RWMD Operations Kelowna Ltd. (1976), 1 B.C.L.R. 36 (S.C.); Stech v. Davies, [1987] 5 W.W.R. 563 (Alta. Q.B.). Cases following this approach focus on the precise content of the categories “oppression”, “unfair prejudice” and “unfair disregard”. While these cases may provide valuable insight into what constitutes oppression in particular circumstances, a categorical approach to oppression is problematic because the terms used cannot be put into watertight compartments or conclusively defined. As Koehnen puts it (at p. 84), “[t]he three statutory components of oppression are really adjectives that try to describe inappropriate conduct…The difficulty with adjectives is they provide no assistance in formulating principles that should underlie court intervention.”

Other cases have focused on the broader principles underlying and uniting the various aspects of oppression: see First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988), 40 B.L.R. 28 (Alta. Q.B.), var’d (1989), 45 B.L.R. 110 (Alta. C.A.); 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 113 (Ont. Div. Ct.); Westfair Foods Ltd. v. Watt (1991), 79 D.L.R. (4th) 48 (Alta. C.A.).

In our view, the best approach to the interpretation of <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241subsec2">s. 241(2) </a> is one that combines the two approaches developed in the cases. One should look first to the principles underlying the oppression remedy, and in particular the concept of reasonable expectations. If a breach of a reasonable expectation is established, one must go on to consider whether the conduct complained of amounts to “oppression”, “unfair prejudice” or “unfair disregard” as set out in <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241subsec2">s. 241(2) </a> of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA</a>.

We preface our discussion of the twin prongs of the oppression inquiry by two preliminary observations that run throughout all the jurisprudence.

First, oppression is an equitable remedy. It seeks to ensure fairness — what is “just and equitable”. It gives a court broad, equitable jurisdiction to enforce not just what is legal but what is fair: Wright v. Donald S. Montgomery Holdings Ltd. (1998), 39 B.L.R. (2d) 266 (Ont. Ct. (Gen. Div.)), at p. 273; Re Keho Holdings Ltd. and Noble (1987), 38 D.L.R. (4th) 368 (Alta. C.A.), at p. 374; see, more generally, Koehnen, at pp. 78-79. It follows that courts considering claims for oppression should look at business realities, not merely narrow legalities: Scottish Co-operative Wholesale Society, at p. 343.

Second, like many equitable remedies, oppression is fact-specific. What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive in one situation may not be in another.

Against this background, we turn to the first prong of the inquiry, the principles underlying the remedy of oppression. In Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360 (H.L.), at p. 379, Lord Wilberforce, interpreting s. 222 of the U.K. Companies Act, 1948, described the remedy of oppression in the following seminal terms:

‘The words [“just and equitable”] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure.’

Lord Wilberforce spoke of the equitable remedy in terms of the “rights, expectations and obligations” of individuals. “Rights” and “obligations” connote interests enforceable at law without recourse to special remedies, for example, through a contractual suit or a derivative action under <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec239">s. 239 </a> of the CBCA. It is left for the oppression remedy to deal with the “expectations” of affected stakeholders. The reasonable expectations of these stakeholders is the cornerstone of the oppression remedy.

As denoted by “reasonable”, the concept of reasonable expectations is objective and contextual. The actual expectation of a particular stakeholder is not conclusive. In the context of whether it would be “just and equitable” to grant a remedy, the question is whether the expectation is reasonable having regard to the facts of the specific case, the relationships at issue, and the entire context, including the fact that there may be conflicting claims and expectations.

Particular circumstances give rise to particular expectations. Stakeholders enter into relationships, with and within corporations, on the basis of understandings and expectations, upon which they are entitled to rely, provided they are reasonable in the context: see 820099 Ontario; Main v. Delcan Group Inc. (1999), 47 B.L.R. (2d) 200 (Ont. S.C.J.). These expectations are what the remedy of oppression seeks to uphold.

Determining whether a particular expectation is reasonable is complicated by the fact that the interests and expectations of different stakeholders may conflict. The oppression remedy recognizes that a corporation is an entity that encompasses and affects various individuals and groups, some of whose interests may conflict with others. Directors or other corporate actors may make corporate decisions or seek to resolve conflicts in a way that abusively or unfairly maximizes a particular group’s interest at the expense of other stakeholders. The corporation and shareholders are entitled to maximize profit and share value, to be sure, but not by treating individual stakeholders unfairly. Fair treatment — the central theme running through the oppression jurisprudence — is most fundamentally what stakeholders are entitled to “reasonably expect”.

Section 241(2) speaks of the “act or omission” of the corporation or any of its affiliates, the conduct of “business or affairs” of the corporation and the “powers of the directors of the corporation or any of its affiliates”. Often, the conduct complained of is the conduct of the corporation or of its directors, who are responsible for the governance of the corporation. However, the conduct of other actors, such as shareholders, may also support a claim for oppression: see Koehnen, at pp. 109-10; GATX Corp. v. Hawker Siddeley Canada Inc. (1996), 27 B.L.R. (2d) 251 (Ont. Ct. (Gen. Div.)). In the appeals before us, the claims for oppression are based on allegations that the directors of BCE and Bell Canada failed to comply with the reasonable expectations of the debentureholders, and it is unnecessary to go beyond this.

The fact that the conduct of the directors is often at the centre of oppression actions might seem to suggest that directors are under a direct duty to individual stakeholders who may be affected by a corporate decision. Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debentureholders in these appeals. This is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen. However, the directors owe a fiduciary duty to the corporation, and only to the corporation. People sometimes speak in terms of directors owing a duty to both the corporation and to stakeholders. Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases (such as these appeals) may arise where these interests do not coincide. In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation.

Having discussed the concept of reasonable expectations that underlies the oppression remedy, we arrive at the second prong of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a>oppression remedy. Even if reasonable, not every unmet expectation gives rise to claim under s. 241. The section requires that the conduct complained of amount to “oppression”, “unfair prejudice” or “unfair disregard” of relevant interests. “Oppression” carries the sense of conduct that is coercive and abusive, and suggests bad faith. “Unfair prejudice” may admit of a less culpable state of mind, that nevertheless has unfair consequences. Finally, “unfair disregard” of interests extends the remedy to ignoring an interest as being of no importance, contrary to the stakeholders’ reasonable expectations: see Koehnen, at pp. 81-88. The phrases describe, in adjectival terms, ways in which corporate actors may fail to meet the reasonable expectations of stakeholders.

In summary, the foregoing discussion suggests conducting two related inquiries in a claim for oppression: (1) Does the evidence support the reasonable expectation asserted by the claimant? and (2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest?” (Emphasis added)

In the end the Supreme Court of Canada approved the arrangement as fair and dismissed the claim for oppression. Of particular note, though of some frustration to those who want hard and fast “rights based” rules, is the acknowledgment that the court made that oppression is fact-specific: 

“What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive in one situation may not be in another.”

Blog Activity 8.3: 

In the “Introduction” to this unit you were invited to “…stay on the lookout in this unit…for situations where the relative “equality’ of the parties has some impact on the law evolving in a murkier rather then clearer way”. Does the stress on facts as dictating legal consequences embodied by the court’s approach in BCE Inc. v. 1976 Debentureholders serve to reinforce the subjectivity of “oppression” as a remedy and effectively prevent it from ever being used as a “right” that can truly reform corporate conduct? Please blog your views on this question and your reasons in less than one page under the heading “Oppression: Remedy v. Right”.

 

Finally on the subject of “Minority Protection” let’s look (once again) at the cases of First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) 60 Alta. L.R. (2d) 122 (Q.B.) at pages 511-519 of the Casebook; and Hercules Managements Ltd. v. Ernst & Young [1997] 2 S.C.R. 165 at pages 519-522 of the Casebook.

As you will recall First Edmonton Place Ltd. v. 315888 Alberta Ltd. involved three lawyers and their landlord, and the question focussed upon earlier was what sort of “interest” a creditor would have to have in order to achieve standing in a “derivative” or “oppression” action. In the present context what is noteworthy about the decision in First Edmonton Place Ltd. v. 315888 Alberta Ltd. is what might be thought of as the “impact-oriented focus on harm” taken by the Court of Queen’s Bench of Alberta. In the end leave to bring a “derivative action” was granted but First Edmonton Place Ltd. was not permitted to bring an “oppression” action.

McDonald J. made these observations:

“Assuming the absence of fraud, in what other circumstances would a remedy under s. 234 be available? In deciding what is unfair, the history and nature of the corporation, the essential nature of the relationship between the corporation and the creditor, the type of rights affected and general commercial practice should all be material. More concretely, the test of unfair prejudice or unfair disregard should encompass the following considerations: the protection of the underlying expectation of a creditor in its arrangement with the corporation, the extent to which the acts complained of were unforeseeable or the creditor could reasonably have protected itself from such acts, and the detriment to the interests of the creditor. The elements of the formula and the list of considerations as I have stated them should not be regarded as exhaustive. Other elements and considerations may be relevant, based upon the facts of a particular case…

CONCLUSION

In the case of the application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a>, the applicant was not a holder of a security or a "creditor" at the time of use of the cash inducement money by the three directors. However, there is some evidence that the cash inducement money was not used for purposes of the corporation and that its use might have been a fraud upon the corporation. If it was a fraud upon the corporation, and if the corporation were entitled to recover the money from the three directors, the applicant may have a genuine interest in advancing the claim to such recovery because the corporation might be liable in damages to the applicant. Therefore the applicant is in my opinion a proper person to make an application under s. 232 and should be granted leave to bring an action in the name and on behalf of the corporation in respect of the payment of the cash inducement money to or for the benefit of the three lawyers.

Moreover, as for the three lawyers, as directors of the corporation, permitting themselves as lawyers to occupy the leased premises without paying rent or entering into a lease, whether that conduct constituted a wrong to the corporation is a matter that should be tried. Once again, if there was a wrong, the applicant might ultimately stand to benefit from any recovery by the corporation. Therefore the applicant is in my opinion a proper person to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> in regard to this head of claim and should be granted leave in the same action to advance a claim in the name and on behalf of the corporation in respect of the occupation of the premises by the directors for their own personal purposes and in respect of the failure of the directors to obtain from themselves personally (or their law firm) a sublease for the term of the lease.

Granting leave to bring the statutory derivative action under s. 232 does not in any way imply that on the basis of the evidence placed before me I am of the view that the action is likely to succeed. As to that, of course, I offer no opinion…

In the case of the application under s. 234, leave to bring an action in regard to either claim is denied because the applicant was not a creditor at the time of the act or conduct complained of.” (Emphasis added)

These two cases do not add all that much to what we are already familiar with from the decision in Robak Industries Ltd. v. Gardner, 2007 BCCA 61 discussed in Unit 2.

 

In Robak Industries Ltd. v. Gardner, (<a href="http://www.110.com/panli/panli_87908.html">http://www.110.com/panli/panli_87908.html</a>) you may recall that the B.C. Court of Appeal considered the case of Mr. Gardner, a director of Getty Copper Incorporated, a public company. Mr. Gardner was alleged to have conspired with others to injure John Lepinski and the company he wholly owned, Robak Industries Ltd., by "unlawful means" including seizing control of a public company, “Getty Copper Incorporated”, and its board; discrediting and ousting Mr. Lepinski; setting aside a development agreement and acquiring 100% of Getty South a company related to Getty Copper Incorporated; "applying economic duress to Getty" and "inducing Blake Cassels & Graydon to breach their duties to Getty". There were also allegations of defamation in connection with the affairs of Getty Copper Incorporated. Robak Industries Ltd.’s claim for damages for the defamatory statements included a "loss in the value of…a substantial interest in the shares of Getty".

 

Madam Justice Levine dealt with an appeal from a lower court decision striking out certain portions of the Statement of Claim in the case on the ground that the allegations and claims made in those portions disclosed no reasonable cause of action. Excerpts from her decision follow:

 

“The appellants do not contest the principle that a shareholder cannot claim a loss that is the direct result of wrongs to the company. They do not dispute that if the value of the shares of the company diminishes because of damage to the company, the loss in share value is "reflective" of the company’s loss. The appellants claim, however, that their loss is not reflective of a loss to Getty. The loss they claim is the loss of the value of their shares in the marketplace, which, they say, Getty could not claim. The appellants allege that the market forces which caused the fall in value of their shares are separate and independent from any losses which Getty may have suffered from the wrongdoings alleged. In other words, they deny that the loss in value of their Getty shares is a "reflective loss".

 

The appellants argue that in Hercules, the Supreme Court left the door open to actions by shareholders, even where the corporation may also have a separate and distinct cause of action. Justice LaForest wrote (at para. 62):

One final point should be made here. Referring to the case of Goldex Mines Ltd. v. Revill (1974), 7 O.R. (2d) 216 (C.A.), the appellants submit that where a shareholder has been directly and individually harmed, that shareholder may have a personal cause of action even though the corporation may also have a separate and distinct cause of action. Nothing in the foregoing paragraphs should be understood to detract from this principle. In finding that claims in respect of losses stemming from an alleged inability to oversee or supervise management are really derivative and not personal in nature, I have found only that shareholders cannot raise individual claims in respect of a wrong done to the corporation. Indeed, this is the limit of the rule in Foss v. Harbottle. Where, however, a separate and distinct claim (say, in tort) can be raised with respect to a wrong done to a shareholder qua individual, a personal action may well lie, assuming that all the requisite elements of a cause of action can be made out…

 

The appellants say that the English cases provide other examples of cases where shareholders were allowed to bring claims in respect of wrongs also done to the companies in which they owned shares. They argue that new and novel approaches to legal principles should not be struck out at the pleadings stage, but should be allowed to proceed to trial to be tested on evidence and full argument.

 

The respondents’ answer is that under Canadian law the appellants have no claim, and that the English cases are at best equivocal about the circumstances in which a shareholder may be permitted to claim a loss in value of the shares of a company for wrongs done to the company…

 

The appellants suggest that Goldex Mines Ltd. v. Revill et al. (1974), 7 O.R. (2d) 216 (Ont. C.A.), mentioned in Hercules, supports their claim to a separate cause of action for a wrong done to Getty. In Goldex, the Ontario Court of Appeal considered the distinction between a personal action by a shareholder for a personal wrong and a derivative action brought on behalf of the corporation for a wrong done to the corporation. The Court pointed out that an action may be brought by several shareholders for the same personal wrong. It stated:

In Farnham v. Fingold, supra, this Court was not required, on the facts of that case, to consider a situation where the same wrongful act is both a wrong to the company and a wrong to each individual shareholder. In one sense every injury to a company is indirectly an injury to its shareholders. On the other hand, if one applies the test: "Is this wrongful act one in respect of which the company could sue?", a shareholder who is personally and directly injured must surely be entitled to say, as a matter of logic, "the company cannot sue for my injury; it can only sue for its own."

 

The converse is, of course, also true. Where the company is injured, an individual shareholder cannot sue for the company’s injury; the shareholder can only sue for its own. Loss reflective of a loss suffered by the company is not the shareholder’s personal loss.

 

There are good reasons for not allowing a shareholder to claim the loss in value of its shares where a wrong has been done to the company. As explained by Laskin J.A. in Meditrust (at para. 13); La Forest J. in Hercules (at para. 59), and McKenzie J. in Rogers at 78-81 (citing Prudential Assurance and Green v. Victor Talking Mach. Co., 24 F. 2d 378 (1928) (C.A. 2nd Circ.)), the rule avoids a multiplicity of actions. Further, and consistent with the legal theory of Foss v. Harbottle, the loss in value of shares of a company is a loss of all of the shareholders, not just one or some of them. There is no logic that would allow only one shareholder to claim that loss, where the claim relates to wrongs done to the company, and all of the shareholders have suffered the loss in value. A single shareholder cannot claim that the loss in value of the shares, per se, is a personal, direct loss…

 

Summary and Conclusion

 

The appellants’ arguments, based on the consideration of the rule in Foss v. Harbottle in other jurisdictions, does not reveal that the chambers judge made any error in striking out the portions of the Further Amended Statement of Claim. She did not apply the wrong test for striking pleadings; she considered whether the appellants had a reasonable cause of action, including a valid claim for damages. She applied binding Canadian law, which has been considered and affirmed in a persuasive judgment of the Ontario Court of Appeal in Meditrust. In both Rogers and Meditrust, shareholders claimed losses in the value of their shares as the result of an alleged conspiracy against them involving wrongs done to the company, and in both cases the claims were dismissed. The chambers judge did not decide, contrary to the appellants’ arguments, that a shareholder may never bring a claim for the diminution in the value of the shareholder’s shares, but confirmed, by reference to Hercules and Haig, that a shareholder may have a cause of action for loss in the value of shares where the shareholder has both an "independent relationship" with the wrongdoer and an "independent loss" from that of the company to whom the wrong has been done. She decided that in this case, the appellants had not shown that they have a cause of action for an "independent loss" in respect of wrongs done to Getty. I agree with her conclusion.”

 

 

 

 

 

TOPIC 5: DISTINGUISHING “OPPRESSION” CLAIMS & “DERIVATIVE” ACTIONS 

 

As can be seen from the cases canvassed above it can be somewhat challenging to tell when a particular set of facts is appropriate for a derivative action and when a claim for oppression is the way to go. Because, as can be readily seen from the cases, these sorts of determinations by the courts are highly reliant on the facts and tend at the same time to be reluctant to impose hard an fast rules, you are legitimately entitled to some degree of confusion. That said a number of general distinctions between oppression claims and derivative actions can be divined (changes as always TBA by the courts).

 

The source of the following list is an excellent short article called “Distinguishing Oppression Claims and Derivative Actions” by Tracey M. Cohen, T. Mark Pontin, and Graeme Hooper which can be found here: 

<a href="http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf">http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf</a>

 
<ul>
<li>Oppression claims are personal to the shareholder, while derivative claims involve harm to the company. </li>
</ul>
 
<ul>
<li>The substantive standard for a finding of liability is different. The issue when it comes to oppression proceeding is whether a complainant’s reasonable expectation has been inequitably violated in an oppressive or unfairly prejudicial manner. A derivative action requires proof of a legal wrong.</li>
</ul>
 
<ul>
<li>Oppression remedies are broad and flexible while those in derivative actions tend to be standard remedies tied to the precise cause of action.</li>
</ul>
 
<ul>
<li>Timing: Oppression proceedings must be brought in a timely manner, while it is not particularly a factor when it comes to derivative actions.</li>
</ul>
 
<ul>
<li>Costs: Generally speaking successful derivative action claimants will recover costs on a “solicitor-client basis, while successful oppression claimants will only recover tariffed costs.</li>
</ul>
 
<ul>
<li>Leave of the court is required to commence a derivative action but not an oppression action. </li>
</ul>
 
<ul>
<li>Oppression claim are generally commenced by way of court petition proceeding, while derivative claims are standard civil claims. </li>
</ul>
 

 

TOPIC 6: “WITH GREAT POWER…”

 

All of this fussing about with the rules of corporate law (as mundane or fascinating as you may find them) can be seen as missing a larger and more disturbing point. That is that the “product” of the practice of corporate law - corporations themselves - have been known to perpetrate dastardly deeds on a not insignificant number of occasions. More disturbing to the legal practitioner is that (arguably) on many of these occasions the lawyers involved were just doing their jobs, being creating companies or facilitating the legal continuation of a corporations existence, or the expression of its independent corporate personality. Surely we don’t bear responsibility for the nefarious outcomes that can flow from “limited liability”, separate corporate personhood, the lack of accountability of subsidiaries, or the politics of board/shareholder approvals? Or do we? Should we?

 

What follows are a series of sources to help remind you of the scandals and more importantly of the role lawyers and the law have in both contributing to the conditions which formed evil, and hopefully in constructively addressing those issues and the problems that they contributed to. As you review each, ask yourself:
<ul>
<li>Were there lawyers around?</li>
<li>What were they doing?</li>
<li>Did they know things were going awry?</li>
<li>Did they try and do anything about it?</li>
</ul>
 
<ol>
<li> Conrad Black </li>
</ol>
For some background on the Black saga, please read:

The Wall Street Journal Article entitled “Report Slams Hollinger's Black For a 'Corporate Kleptocracy'”, which you may find at: <a href="http://online.wsj.com/news/articles/SB109395499363105646">http://online.wsj.com/news/articles/SB109395499363105646</a>

 

Please review but not read in detail: Catalyst Fund General Partner Inc. v. Hollinger Inc., 2004 CanLII 40665 (ON SC) <a href="http://canlii.ca/t/1j6qd">http://canlii.ca/t/1j6qd</a>

 

Please watch the BBC program “The Fall of Conrad Black” which you can find at <a href="http://www.youtube.com/watch?v=CIRRUvjkLJo">http://www.youtube.com/watch?v=CIRRUvjkLJo</a>

 

Finally, please read, “Law Society of Upper Canada appeals exoneration of two Conrad Black lawyers” at: <a href="http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html">http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html</a>
<h1></h1>
 
<ol>
<li> Garth Drabinsky </li>
</ol>
 

Please read “Livent co-founders Drabinsky, Gottlieb convicted of fraud and forgery” here: <a href="http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convicted-of-fraud-and-forgery-1.778879">http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convicted-of-fraud-and-forgery-1.778879</a>

 

Please read “Livent case turns spotlight on Canada’s undramatic whitecollar prosecutions” at: <a href="http://www.thespec.com/news-story/2272130-livent-case-turns-spotlight-on-canada-s-undramatic-white-collar-prosecutions/">http://www.thespec.com/news-story/2272130-livent-case-turns-spotlight-on-canada-s-undramatic-white-collar-prosecutions/</a>

 

Please read “Law society revokes Garth Drabinsky’s licence over fraud convictions” at: <a href="http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html">http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html</a>
<h1></h1>
Please read “The six most outrageous quotes from Garth Drabinsky’s day parole hearing” especially this: “I never directed anyone to cross over the line knowingly. I obviously did do that by the dynamic of my character—the force of my character coupled with my role in the organization.” The article can be found here: <a href="http://www.torontolife.com/informer/toronto-business/2012/10/29/garth-drabinsky-day-parole-quotes/#more-173802">http://www.torontolife.com/informer/toronto-business/2012/10/29/garth-drabinsky-day-parole-quotes/#more-173802</a>

 
<ol>
<li> Enron Corporation</li>
</ol>
Please be acquainted with “Lawyers, Ethics, and Enron” here. It is an important piece of perspective on what we actually do and ought to as lawyers:

<a href="http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf">http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf</a>

 

FINALLY PLEASE READ:

Code of Professional Conduct for British Columbia, sections 3.2-3, 3.2-7, 3.2-8, 3.7, 3.3-1, 3.3-2. Available at: <a href="http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3">http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3</a>

 

 

UNIT WRAP UP: 

We have arrived at the end of our course, so of course we begin again with a review of certain subjects in the hope of fortifying your knowledge as you prepare for the final exam.

Course:Business Organizations - LAW 459/Unit 8

2016-08-16T09:37:46Z

DavidHeinrich: Created page with "UNIT 8 (WEEKS 12 & 13): MAJORITY RULE & PROTECTING MINORITY INTERESTS <img class="alignnone wp-image-225 aligncenter" src="http://bizorgla..."

UNIT 8 (WEEKS 12 & 13): MAJORITY RULE & PROTECTING MINORITY INTERESTS

 <img class="alignnone wp-image-225 aligncenter" src="http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Unit-8-360x239.jpg" alt="Unit 8" width="549" height="364" />
Figure 8: Walmart shareholders meeting (By Walmart [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons)
ALT: A huge crowd at an annual meeting of Walmart shareholders.

Source of image – <a href="http://commons.wikimedia.org/wiki/File:Crowd_shot_Walmart_Shareholders%27_Meeting_2010.jpg">http://commons.wikimedia.org/wiki/File:Crowd_shot_Walmart_Shareholders%27_Meeting_2010.jpg</a>

 

 

 

 

UNIT OVERVIEW:

In this unit the variety of statutory provisions enacted with a view to protecting minority interests will be examined. There will be reference to some contractual arrangements that might be adopted towards this end. You will also consider the role of government and the securities regulatory authorities.

 

UNIT OUTCOME: 

Through this unit you will come to an understanding of the limits of corporate democracy and the rights that shareholders (and occasionally others) have in the face of a corporations’ actions. You will come to appreciate the differences between a “derivative action” and the “oppression remedy”. You should by the end of unit understand their similarities and differences. You should also be in a position to see why these legal tools are important to shareholders as you briefly examine and review some of the more notorious corporate scandals over the recent years. Finally you should be able to begin thinking about what a lawyer’s role in preventing corporate abuses might look like.

 

UNIT READINGS:

Please read the following materials:

Casebook pages 427-567.

BCBCA sections 227-228, 232-236; CBCA section 241.

“Distinguishing Oppression Claims and Derivative Actions” by Tracey M. Cohen, T. Mark Pontin, and Graeme Hooper: <a href="http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf">http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf</a>

“Report Slams Hollinger's Black For a 'Corporate Kleptocracy'”: <a href="http://online.wsj.com/news/articles/SB109395499363105646">http://online.wsj.com/news/articles/SB109395499363105646</a>

Catalyst Fund General Partner Inc. v. Hollinger Inc., 2004 CanLII 40665 (ON SC) <a href="http://canlii.ca/t/1j6qd">http://canlii.ca/t/1j6qd</a>

“The Fall of Conrad Black” <a href="http://www.youtube.com/watch?v=CIRRUvjkLJo">http://www.youtube.com/watch?v=CIRRUvjkLJo</a>

“Law Society of Upper Canada appeals exoneration of two Conrad Black lawyers” <a href="http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html">http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html</a>

“Livent co-founders Drabinsky, Gottlieb convicted of fraud and forgery” <a href="http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convicted-of-fraud-and-forgery-1.778879">http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convictedof-fraud-and-forgery-1.778879</a>

“Law society revokes Garth Drabinsky’s licence over fraud convictions” <a href="http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html">http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html</a>

“Lawyers, Ethics, and Enron” <a href="http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf">http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf</a>

Code of Professional Conduct for British Columbia, sections 3.2-3, 3.2-7, 3.2-8, 3.7, 3.3-1, 3.3-2. <a href="http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3">http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3</a>

Stephen M. Bainbridge, “Corporate Lawyers as Gatekeepers” <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1980975">http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1980975</a>

 

 

TOPIC 1: INTRODUCTION/LOOKING BACK

The exploration of corporate personhood, the legal conundrums caused by it and the legal reactions to it are a significant underlying theme of this course. Another consistent theme can be identified just below the surface of many of the cases explored in the previous unit and in this final substantive unit; the problems of “equality”. How can “equality” be a problem in law you may rightly wonder? To answer that it is important to define the meaning being ascribed to equality in this particular instance and then examine the lack of legal clarity that may flow in the circumstances.

To begin with, you may have noticed that many of the cases we have explored in this course involve, plainly put, wealthy and privileged people. They are often (though by no means always) situations where individuals or companies are suing other individuals or companies alleging that they are entitled to more money (or a shareholding that they believe will equate to more money) in one way or another. This should be no surprise given that legal precedent continuously reinforces that the “best interests” of companies and shareholders is a concept aligned primarily and ultimately with profit.

It is the consequences attendant to this core set of dynamics that is perhaps the most fascinating. For one thing it means not only that “the fight” is usually about making more money as a philosophical starting point, but also that the combatants often are equally matched in both purpose and resources – in other words they are often equal, especially if for example there is a takeover battle at stake. It would be naive to think that this equality does not impact the nature of the legal proceedings. Where so much of what you learn in law school is about rights that have evolved to redress inequalities or grant liberty, the corporate law principles that have evolved that in the real world tend to be mere tools in the hands of often more or less equal litigants. No doubt principle is argued with great ferocity by highly skilled counsel in corporate law, but the fact that in the end it is all mostly just about money surely has an impact (if only below the surface). After all in corporate law we are generally not talking about basic rights (detention without trial; equality before the law; personal discrimination etc.). Is it unfair to wonder whether the relative inconsistency of corporate law principles is one product of this confluence of “equality” and also a product of not dealing with issues of true importance to the human condition, such as personal liberty?

So whether you agree or not, stay on the lookout in this unit (and feel free to look backwards at previous units) for situations where the relative “equality’ of the parties has some impact on the law evolving in a murkier rather then clearer way.

 

TOPIC 2: MAJORITY RULE

Please read pages 427-452 of the Casebook.

This section of the course is about the power of shareholder majorities. In this regard there are two questions that commend themselves:

Question 1:

What sorts of things must be done by shareholders?

The more important aspects of this question are discussed at pages 443-448 of the Casebook. You should read these pages to get a general sense of the situation. The details are not overly important for any present purpose but you should note that the BCBCA contains provisions which, in one way or another, are comparable to those of the CBCA that are referred to. We have already visited some of these subjects in detail (for example, the removal of directors).

Question 2:

Are there any limitations on shareholders when they are doing what they are authorized to do?

To begin answering this question please read Allen v. Gold Reefs Of West Africa, Ltd. [1900-1903] All E.R. Rep. 746 (Eng. C.A.) at pages 448-449 of the Casebook as well as the Notes following at pages 449-451 of the Casebook.

In Allen v. Gold Reefs of West Africa, Ltd. the company had altered its articles giving itself a lien on paid up shares which, in effect, addressed the failure of a shareholder, Mr. Zuccani, to pay what was owed in respect of other shares he had that had not been fully paid up. Gold Reefs of West Africa, Ltd.’s articles gave the company a lien on all partly paid shares held by any shareholder in respect of any debt owed to the company. Mr. Zuccani held some partly paid up shares and some fully paid up shares. Mr. Zuccani died insolvent. Gold Reefs of West Africa, Ltd. subsequently decided to alter its articles through special resolution to create a lien on all fully paid shares. This in effect changed the rights of the now deceased shareholder (as well as in theory the rights of all other shareholders going forward). Mr. Allen, who was an executor of Mr. Zuccani’s estate brought action get the fully paid shares’ value.

Lindley M.R. found that the altering of the articles of Gold Reefs of West Africa, Ltd. to be valid as long as the special resolution was done bona fide for the benefit of the company as a whole:

“ The power thus conferred on companies to alter the regulations contained in their articles is limited only by the provisions contained in the statute and the conditions contained in the company’s memorandum of association. Wide, however, as the language of s. 50 is, the power conferred by it must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded. These conditions are always implied, and are seldom, if ever, expressed. But if they are complied with I can discover no ground for judicially putting any other restrictions on the power conferred by the section than those contained in it. How’s shares shall be transferred, and whether the company shall have any lien on them, are clearly matters of regulation properly prescribed by a company’s articles of association…” (Emphasis added)
<table width="53">
<tbody>
<tr>
<td width="27"></td>
<td width="27"></td>
</tr>
</tbody>
</table>
The willingness of courts to deal with shareholder amendments and decisions and the extent to which the court’s would interfere resulted in some uncertainty, which was addressed in the case of Greenhalgh v. Arderne Cinemas Ltd. [1950] 2 ALL E.R. 1120 (Eng. C.A.). Please read the case at page 451 of the Casebook.

In Greenhalgh v. Arderne Cinemas Ltd. the original articles of association of Arderne Cinemas Ltd. provided that no sale of shares to an outsider would occur if an existing shareholder was willing to buy those shares. The articles provided: "No shares in the company shall be transferred to a person not a member of the company so long as a member of the company may be willing to purchase such shares at a fair value to be ascertained in accordance with sub-clause (b) hereof".

The majority shareholder, Mr. Mallard wanted to sell control of Arderne Cinemas Ltd. to a third party. Mr. Greenhalgh was a minority shareholder in Arderne Cinemas and wished to prevent any such sale of control. The articles of Arderne Cinemas Ltd. were amended by special resolution to permit sale to an outsider, if approved, by simple majority. Mr. Greenhalgh argued that the article change was invalid.

Evershed M.R. had the following observations:

“… Certain principles, I think, can be safely stated as emerging from those authorities. In the first place, I think it is now plain that "bona fide for the benefit of the company as a whole" means not two things but one thing. It means that the shareholder must proceed upon what, in his honest opinion, is for the benefit of the company as a whole. The second thing is that the phrase, “the company as a whole”, does not (at any rate in such a case as the present) mean the company as a commercial entity, distinct from the corporators: it means the corporators as a general body. That is to say, the case maybe taking of an individual hypothetical member and it may be asked whether what is proposed is, in the honest opinion of those who voted in its favor, for that person’s benefit.

I think that the matter can, in practice, be more accurately and precisely stated by looking at the converse and by saying that a special resolution of this kind would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and the minority shareholders, so as to give to the former an advantage of which the latter were deprived. When the cases are examined in which the resolution has been successfully attacked, it is on that ground. It is therefore not necessary to require that persons voting for a special resolution should, so to speak, dissociate themselves altogether from their own prospects and consider whether what is thought to be for the benefit of the company as a going concern. If, as commonly happens, an outside person makes an offer to buy all the shares, prima facie, if the corporators think it a fair offer and vote in favour of the resolution, it is no ground for impeaching the resolution that they are considering their own position as individuals.”

 

Blog Activity 8.1:

Do you see a test here? How are shareholders to act when voting on special resolutions? What can they consider? What must they not do? Is it clear? 

Please blog your views on these questions and your reasons in less than one page under the heading “Arderne Cinemas Ltd.”

 

 

TOPIC 3: MINORITY PROTECTIONS 

 

On the subject of “Statutory Intervention” please read pages 453-460 of the Casebook.

Welling in the excerpt from “Corporate Law in Canada: The Governing Principles” makes the noteworthy point the: “The common law courts…failed to find any principled approaches to the problem of minority shareholder protection.” What has evolved instead is a statutory codification of remedies as a bulwark against the oppressions that directors, management, and even other shareholders can be complicit in.

The relevant section of the BCBCA can be found in Part 8 “Proceedings”. They include sections 227-228 and 232-236 that broadly corresponds to the CBCA provisions referenced in the Casebook (but note that there are differences). The BCBCA sections are reproduced below:
<h4> </h4>
<h4> “Complaints by shareholder</h4>
<ol start="227">
<li>(1) For the purposes of this section, "shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) A shareholder may apply to the court for an order under this section on the ground

(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or

(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.

(3) On an application under this section, the court may, with a view to remedying or bringing to an end the matters complained of and subject to subsection (4) of this section, make any interim or final order it considers appropriate, including an order

(a) directing or prohibiting any act,

(b) regulating the conduct of the company's affairs,

(c) appointing a receiver or receiver manager,

(d) directing an issue or conversion or exchange of shares,

(e) appointing directors in place of or in addition to all or any of the directors then in office,

(f) removing any director,

(g) directing the company, subject to subsections (5) and (6), to purchase some or all of the shares of a shareholder and, if required, to reduce its capital in the manner specified by the court,

(h) directing a shareholder to purchase some or all of the shares of any other shareholder,

(i) directing the company, subject to subsections (5) and (6), or any other person, to pay to a shareholder all or any part of the money paid by that shareholder for shares of the company,

(j) varying or setting aside a transaction to which the company is a party and directing any party to the transaction to compensate any other party to the transaction,

(k) varying or setting aside a resolution,

(l) requiring the company, within a time specified by the court, to produce to the court or to an interested person financial statements or an accounting in any form the court may determine,

(m) directing the company, subject to subsections (5) and (6), to compensate an aggrieved person,

(n) directing correction of the registers or other records of the company,

(o) directing that the company be liquidated and dissolved, and appointing one or more liquidators, with or without security,

(p) directing that an investigation be made under Division 3 of this Part,

(q) requiring the trial of any issue, or

(r) authorizing or directing that legal proceedings be commenced in the name of the company against any person on the terms the court directs.

(4) The court may make an order under subsection (3) if it is satisfied that the application was brought by the shareholder in a timely manner.

(5) If an order is made under subsection (3) (g), (i) or (m), the company must pay to a person the full amount payable under that order unless there are reasonable grounds for believing that

(a) the company is insolvent, or

(b) the payment would render the company insolvent.

(6) If reasonable grounds exist for believing that subsection (5) (a) or (b) applies,

(a) the company is prohibited from paying the person the full amount of money to which the person is entitled,

(b) the company must pay to the person as much of the amount as is possible without causing a circumstance set out in subsection (5) to occur, and

(c) the company must pay the balance of the amount as soon as the company is able to do so without causing a circumstance set out in subsection (5) to occur.

(7) If an order is made under subsection (3) (o), Part 10 applies.

 
<h4>Compliance or restraining orders</h4>
<ol start="228">
<li>(1) In this section, "complainant" means, in relation to a company referred to in subsection (2), a shareholder of the company or any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) If a company or any director, officer, shareholder, employee, agent, auditor, trustee, receiver, receiver manager or liquidator of a company contravenes or is about to contravene a provision of this Act or the regulations or of the memorandum, notice of articles or articles of the company, a complainant may, in addition to any other rights that that person might have, apply to the court for an order that the person who has contravened or is about to contravene the provision comply with or refrain from contravening the provision.

(3) On an application under this section, the court may make any order it considers appropriate, including an order

(a) directing a person referred to in subsection (2) to comply with or to refrain from contravening a provision referred to in that subsection,

(b) enjoining the company from selling or otherwise disposing of property, rights or interests, or from receiving property, rights or interests, or

(c) requiring, in respect of a contract made contrary to section 33 (1), that compensation be paid to the company or to any other party to the contract…
<h4> </h4>
<h4>Derivative actions</h4>
<ol start="232">
<li>(1) In this section and section 233,</li>
</ol>
"complainant" means, in relation to a company, a shareholder or director of the company;

"shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.

(2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company

(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or

(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.

(3) Subsection (2) applies whether the right, duty or obligation arises under this Act or otherwise.

(4) With leave of the court, a complainant may, in the name and on behalf of a company, defend a legal proceeding brought against the company.
<h4> </h4>
<h4>Powers of court in relation to derivative actions</h4>
<ol start="233">
<li>(1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if</li>
</ol>
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,

(b) notice of the application for leave has been given to the company and to any other person the court may order,

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.

(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.

(3) While a legal proceeding prosecuted or defended under this section is pending, the court may,

(a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and

(b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate.

(4) On the final disposition of a legal proceeding prosecuted or defended under this section, the court may make any order it considers appropriate, including an order that

(a) a person to whom costs are paid under subsection (3) (b) repay to the company some or all of those costs,

(b) the company or any other party to the legal proceeding indemnify

(i) the complainant for the costs incurred by the complainant in prosecuting or defending the legal proceeding, or

(ii) the person controlling the conduct of the legal proceeding for the costs incurred by the person in controlling the conduct of the legal proceeding, or

(c) the complainant or the person controlling the conduct of the legal proceeding indemnify one or more of the company, a director of the company and an officer of the company for expenses, including legal costs, that they incurred as a result of the legal proceeding.

(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.

(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.
<h4> </h4>
<h4>Relief in legal proceedings</h4>
<ol start="234">
<li> If, in a legal proceeding against a director, officer, receiver, receiver manager or liquidator of a company, the court finds that that person is or may be liable in respect of negligence, default, breach of duty or breach of trust, the court must take into consideration all of the circumstances of the case, including those circumstances connected with the person's election or appointment, and may relieve the person, either wholly or partly, from liability, on the terms the court considers necessary, if it appears to the court that, despite the finding of liability, the person has acted honestly and reasonably and ought fairly to be excused.</li>
</ol>
<h4> </h4>
<h4>Applications to court under this Act</h4>
<ol start="235">
<li>(1) Subject to subsection (2), an application to the court under this Act may be brought without notice unless notice is specifically required under subsection (2) or otherwise under this Act.</li>
</ol>
(2) The court may direct that notice of any application under this Act be served on those persons the court requires.
<h4> </h4>
<h4>Court may order security for costs</h4>
<ol start="236">
<li> If a corporation is the plaintiff in a legal proceeding brought before the court, and if it appears that the corporation will be unable to pay the costs of the defendant if the defendant is successful in the defence, the court may require security to be given by the corporation for those costs, and may stay all legal proceedings until the security is given.”</li>
</ol>
 

 

TOPIC 2: STANDING

 

Now we arrive at the question of “standing”, that being “who” can sue?

Please read the case of First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) 60 Alta. L.R. (2d) 122 (Q.B.) at pages 453-459 of the Casebook.

Note first, that the definition of complainant in that case applies to both oppression and derivative actions.

In B.C., however, there are different definitions:
<ul>
<li>For “complaints by a shareholder (i.e. oppression) see section 227 (1) where “shareholder” can mean beneficial (registered) owner of a share or “any other person whom the court considers to be an appropriate person…”</li>
</ul>
 
<ul>
<li>In respect of “derivative actions” see section 232 (1) where "complainant" “means, in relation to a company, a shareholder or director of the company”.</li>
</ul>
 

The essential legal question in First Edmonton Place Ltd. v. 315888 Alberta Ltd. was whether a creditor of the company was a proper person in the opinion of the court under the Alberta Business Corporations Act? In First Edmonton Place Ltd. v. 315888 Alberta Ltd. a landlord (First Edmonton Place) sued three lawyers through their company” 315888 Alberta Ltd. for an alleged debt arising from the occupancy of the landlord’s premises.

McDonald J. framed thoroughly reviewed the legislative history of the relevant provisions before coming to the conclusion that First Edmonton Place Ltd. was indeed had standing as a proper plaintiff but not because it was a simple creditor:

“Is the applicant a "complainant" entitled to apply for leave to bring an action under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> or <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a>?

In order to obtain leave to bring an action under either of these sections, the applicant must be found to be a "complainant" as defined in s. 231. As the applicant is clearly not within s. 231(b)(ii), First Edmonton Place can satisfy this requirement only if it can come within s. 231(b)(i) or (iii).

Is the applicant a "complainant" within the meaning of s. 231(b)(i)?

It will be recalled that s. 231(b)(i) defines a "complainant" as "a registered holder or beneficial owner, or a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates"… 

This plain meaning reflects the meaning of "bonds, debentures and notes" in the world of corporate financing. In Securities Law and Practice (1984), vol. 1, by V.P. Alboini, bonds and debentures are stated to be the "traditional debt instruments issued by corporations" while notes are "issued by any issuer including individuals" (at pp. 0-33, 0-34).

Is the applicant a "complainant" under s. 231(b)(iii)?

Under s. 231(b)(iii), a person may be a "complainant" if he is a person "who, in the discretion of the Court, is a proper person to make an application under this Part."

This is not so much a definition as a grant to the court of a broad power to do justice and equity in the circumstances of a particular case, where a person who otherwise would not be a "complainant" ought to be permitted to bring an action under either <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> or <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a> to right a wrong done to the corporation which would not otherwise be righted, or to obtain compensation himself or itself where his or its interests have suffered from oppression by the majority controlling the corporation or have been unfairly prejudiced or unfairly disregarded, and the applicant is a "security holder, creditor, director or officer"…

In the case of a creditor who claims to be a "proper person" to make a <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> application, in my view the criterion to be applied would be whether, even if the applicant did not come within s. 231(b)(î) or (ii), he or it would nevertheless be a person who could reasonably be entrusted with the responsibility of advancing the interests of the corporation by seeking a remedy to right the wrong allegedly done to the corporation. The applicant would not have to be a security holder (as I have defined that notion), director or officer of the corporation. The applicant could be a creditor. The applicant might even be a person who at the time of the act or conduct complained of was not a creditor but was a person toward whom the corporation might have a contingent liability. No good purpose would be served in saying more than that now.

I turn now to an application by a person who claims to be a "proper person" to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a>. As in the case of an application made under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a>, an applicant for leave to bring an action under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a> does not have to be a security holder, director or officer. The applicant could be a creditor, or even a person toward whom the corporation had only a contingent liability at the time of the act or conduct complained of. However, it is important to note that he would not be held to be a "proper person" to make the application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a>unless he satisfied the court that there was some evidence of oppression or unfair prejudice or unfair disregard for the interests of a security holder, creditor, director or officer…

 

There are two circumstances in which justice and equity would entitle a creditor to be regarded as "a proper person". (There may be other circumstances; these two are not intended to exhaust the possibilities.) The first is if the act or conduct of the directors or management of the corporation which is complained of constituted using the corporation as a vehicle for committing a fraud upon the applicant. (In the present case there is no evidence suggesting such fraud, although there is some evidence of the directors having used the money paid as a cash inducement for their own personal investment purposes, and that, as I shall later explain, may constitute fraud against the corporation… 

Second, the court might hold that the applicant is a "proper person to make an application" for an order under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a> if the act or conduct of the directors or management of the corporation which is complained of constituted a breach of the underlying expectation of the applicant arising from the circumstances in which the applicant's relationship with the corporation arose. For example, where the applicant is a creditor of the corporation, did the circumstances which gave rise to the granting of credit include some element which prevented the creditor from taking adequate steps, when he or it entered into the agreement, to protect his or its interests against the occurrence of which he or it now complains? Did the creditor entertain an expectation that, assuming fair dealing, its chances of repayment would not be frustrated by the kind of conduct which subsequently was engaged in by the management of the corporation? Assuming that the evidence established the existence of such an expectation, the next question would be whether that expectation was, objectively, a reasonable one.

Thus, in the present case, an inquiry would properly be directed at trial toward whether the lessor, First Edmonton Place, at the time of entering into the lease, consciously and intentionally decided to contract only with the numbered company, and not to obtain personal guarantees from the three lawyers. A further proper inquiry would be into whether the lessor entered into the lease fully aware that it was not protecting itself against the possibility that the corporation might pay out the cash advance to the lawyers, leaving no other assets in the corporation, and that the corporation might permit the lawyers to occupy the space without entering into a sublease either for ten years or for any lesser period. In the absence of evidence establishing at least a prima facie case that an injustice would be done to the lessor or that there would be inequity if the lessor were not allowed to bring its action and go to trial, leave to bring the action ought not to be granted. There is, in the present case, no evidence showing that there was an expectation on the part of the lessor that the lessee corporation would retain the funds in its hands for any set period of time or any time at all. Nor is there any evidence that there was an expectation that the lessee corporation would grant a lease for a term of ten years or any other set term beyond the rent-free period, to the law firm or any other person or persons. It is true that the lease contemplated the possibility that the corporation would enter into a lease with the lawyers, for it specified that the lessee could do so. That falls far short of evidencing the existence of an expectation that there would be a lease for the entire ten-year period or for any set term longer than the rent-free period and less than ten years. Nor does the evidence establish any inequality of bargaining power between First Edmonton Place on the one hand and the three lawyers and their corporation on the other, at the time the lease was being negotiated. If there were some circumstances evidencing such inequality of bargaining power, the result might be different…

CONCLUSION

In the case of the application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a>, the applicant was not a holder of a security or a "creditor" at the time of use of the cash inducement money by the three directors. However, there is some evidence that the cash inducement money was not used for purposes of the corporation and that its use might have been a fraud upon the corporation. If it was a fraud upon the corporation, and if the corporation were entitled to recover the money from the three directors, the applicant may have a genuine interest in advancing the claim to such recovery because the corporation might be liable in damages to the applicant. Therefore the applicant is in my opinion a proper person to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> and should be granted leave to bring an action in the name and on behalf of the corporation in respect of the payment of the cash inducement money to or for the benefit of the three lawyers.

Moreover, as for the three lawyers, as directors of the corporation, permitting themselves as lawyers to occupy the leased premises without paying rent or entering into a lease, whether that conduct constituted a wrong to the corporation is a matter that should be tried. Once again, if there was a wrong, the applicant might ultimately stand to benefit from any recovery by the corporation. Therefore the applicant is in my opinion a proper person to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> in regard to this head of claim and should be granted leave in the same action to advance a claim in the name and on behalf of the corporation in respect of the occupation of the premises by the directors for their own personal purposes and in respect of the failure of the directors to obtain from themselves personally (or their law firm) a sublease for the term of the lease.” (Emphasis added)

Note that section 227 (1) of the BCBCA is an oppression provision comparable to that in First Edmonton Place Ltd. v. 315888 Alberta Ltd. However also note that section 233 (1) of the BCBCA dealing with “derivative actions”, being those where you are suing essentially “on behalf the corporation” is very different. In section 233 (1) of the BCBCA there is no discretionary category; only shareholders (legal or beneficial) or directors have standing to sue.

 

TOPIC 3: STATUTORY REPRESENTATIVE ACTIONS: “DERIVATIVE ACTIONS” 

Please read pages 461-463 of the Casebook.

Please read the following passage from the Supreme Court of Canada’s 2008 decision in BCE Inc. v. 1976 Debentureholders regarding the background and purpose of “derivative actions”.

 

“The first remedy provided by the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>is the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec239">s. 239 </a> derivative action, which allows stakeholders to enforce the directors’ duty to the corporation when the directors are themselves unwilling to do so. With leave of the court, a complainant may bring (or intervene in) a derivative action in the name and on behalf of the corporation or one of its subsidiaries to enforce a right of the corporation, including the rights correlative with the directors’ duties to the corporation. (The requirement of leave serves to prevent frivolous and vexatious actions, and other actions which, while possibly brought in good faith, are not in the interest of the corporation to litigate.)”

Please also reflect on the notion that the need for “derivative actions” arises, at least in part, from the concentration of power and attendant conflicts of interest that often flows from corporate managers overstepping their legal boundaries. Ironically, and sadly, because they are the usual representatives of the “corporate legal personality”, it is often those wrong-doing corporate managers who are cast as the representatives of the corporation which should be investigating them and seeking redress from them on behalf of the corporation and its shareholders. As the author of the casebook points out:

“…however, enforcing these fiduciary duties is difficult if the only actors who can represent the corporation are the very managers who have violated those duties. This explains why other individuals (“complainants”) are permitted to represent the corporation’s interests via the derivative action in circumstances where management fails to assume such responsibility. Since the derivative action is a representative action on behalf of the corporation that seeks recompense for harm done to the corporation, any proceeds awarded from the litigation logically flows to the corporation and not to the complainant.” 

Now please note that per the decision in Shield Development Co. v. Snyder, [1976] 3 W.W.R. 44 (B.C.S.C.) it was found that the B.C. statute limited common law “derivative” actions:

“The legislation does not expressly prohibit the bringing of a common-law derivative action but, in my view, such an action is prohibited by necessary implication. I am unable to see how the two remedies could exist side-by-side without creating confusion to an intolerable degree.”

In this light it may also be worthwhile to revisit section 232 and section 233 of the BCBCA:
<h4>“Derivative actions</h4>
<ol start="232">
<li>(1) In this section and section 233,</li>
</ol>
"complainant" means, in relation to a company, a shareholder or director of the company;

"shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.

(2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company

(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or

(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.

(3) Subsection (2) applies whether the right, duty or obligation arises under this Act or otherwise.

(4) With leave of the court, a complainant may, in the name and on behalf of a company, defend a legal proceeding brought against the company.
<h4> </h4>
<h4>Powers of court in relation to derivative actions</h4>
<ol start="233">
<li>(1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if</li>
</ol>
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,

(b) notice of the application for leave has been given to the company and to any other person the court may order,

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.

(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.

(3) While a legal proceeding prosecuted or defended under this section is pending, the court may,

(a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and

(b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate.

(4) On the final disposition of a legal proceeding prosecuted or defended under this section, the court may make any order it considers appropriate, including an order that

(a) a person to whom costs are paid under subsection (3) (b) repay to the company some or all of those costs,

(b) the company or any other party to the legal proceeding indemnify

(i) the complainant for the costs incurred by the complainant in prosecuting or defending the legal proceeding, or

(ii) the person controlling the conduct of the legal proceeding for the costs incurred by the person in controlling the conduct of the legal proceeding, or

(c) the complainant or the person controlling the conduct of the legal proceeding indemnify one or more of the company, a director of the company and an officer of the company for expenses, including legal costs, that they incurred as a result of the legal proceeding.

(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.

(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.”

 

Please read the cases of Farnham v. Fingold (1973) 2 O.R. 132 (Ont. C.A.) and Goldex Mines Ltd. v. Revill (1974), 7 O.R. (2D) 216. Please also remember the case of First Edmonton Place Ltd. v. 315888 Alberta Ltd. that you read not too long ago. Note that these cases all help define, in one way or another, the distinctions between “derivative” and “oppression” actions.

In Farnham v. Fingold, the Ontario Court of Appeal dealt with an interlocutory motion to strike out a statement of claim for disclosing no reasonable cause of action. The background facts involved the sale of a majority interest in a company for a premium. The same offer was not made to the minority shareholders. The claim alleged that the majority shareholders had a fiduciary obligation to share the premium with the minority shareholders. The decision was among the first Canadian cases to analyze and distinguish between a personal action and a derivative action in consideration of the requirements the Ontario Business Corporations Act.

Jessup J.A. stated:

“Certain parts of the statement of claim in particular all or parts of paras. 22, 23, 29, 32, 34, 36 and 37E are concerned with rights, duties or obligations owed to the defendant Slater Steel Industries Limited or with damage alleged to be suffered by the corporation as a result of the actions of the other defendants. Such matters are properly the subject of a derivative action rather than a class action.” 

On the particular claims at issue the Ontario Court of Appeal dismissing the action as a “derivative action” under the statute, but preserving the possibility of an “oppression action” being validly brought forth.

Goldex Mines Ltd. v. Revill involved the pleadings in a longstanding shareholder battle and again was concerned with the distinction between derivative actions and oppression claims.

The Ontario Court of Appeal dealt with the distinction:

“Where a legal wrong is done to shareholders by directors or other shareholders, the injured shareholders suffer a personal wrong, and may seek redress for it in a personal action. That personal action may be by one shareholder alone, or (as will usually be the case) by a class action in which he sues on behalf of himself and all other shareholders in the same interest (usually, all other shareholders save the wrongdoers). Such a class action is nevertheless a personal action. 

A derivative action, on the other hand, is one in which the wrong is done to the company. It is always a class action, brought in representative form, thereby binding all the shareholders…”

A bit later in the decision the Ontario Court of Appeal quoted with approval from the judgment of Traynor C.J. in the California case of Jones v. H.F. Ahmanson & Co. where the case of Shaw v. Empire Savings & Loan Assoc. was cited:

“…the court [in Shaw] noted the "well established general rule that a stockholder of a corporation has no personal or individual right of action against third persons, including the corporation's officers and directors, for a wrong or injury to the corporation which results in the destruction or depreciation of the value of his stock, since the wrong suffered by the stockholder is merely incidental to the wrong suffered by the corporation and affects all stockholders alike." From this the court reasoned that a minority shareholder could not maintain an individual action unless he could demonstrate the injury was somehow different from that suffered by other minority shareholders. In so concluding the court erred. The individual wrong necessary to support a suit by a shareholder need not be unique to that plaintiff. The same injury may affect a substantial number of shareholders. If the injury is not incidental to an injury to the corporation, an individual cause of action exists.” 

 

In the end the cases of Farnham v. Fingold, Goldex Mines Ltd. v. Revill and First Edmonton Place Ltd. v. 315888 Alberta Ltd. emphasize the necessity for a careful analysis of the nature of the complaint, in particular whether the class of the complaint corporate or individual (personal)? If it is not corporate, a derivative action is not appropriate.

All of this should now become somewhat clearer in looking yet again at section 232(2) of the BCBCA:

 

 “Derivative actions
<ol start="232">
<li> (2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company</li>
</ol>
(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or

(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.”

Please also read he notes on “Prerequisite Steps at pages 471-472 of the Casebook. In relation to that please also read again section 233 of the BCBCA: 

 

“Powers of court in relation to derivative actions
<ol start="233">
<li> (1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if</li>
</ol>
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,

(b) notice of the application for leave has been given to the company and to any other person the court may order,

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.

 

(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.

 

(3) While a legal proceeding prosecuted or defended under this section is pending, the court may,

(a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and

(b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate.

 

(4) On the final disposition of a legal proceeding prosecuted or defended under this section, the court may make any order it considers appropriate, including an order that

(a) a person to whom costs are paid under subsection (3) (b) repay to the company some or all of those costs,

(b) the company or any other party to the legal proceeding indemnify

(i) the complainant for the costs incurred by the complainant in prosecuting or defending the legal proceeding, or

(ii) the person controlling the conduct of the legal proceeding for the costs incurred by the person in controlling the conduct of the legal proceeding, or

(c) the complainant or the person controlling the conduct of the legal proceeding indemnify one or more of the company, a director of the company and an officer of the company for expenses, including legal costs, that they incurred as a result of the legal proceeding.

 

(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.

 

(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.”

 

 

Blog Activity 8.2:

As you review and break down the component elements in section 233 (1) of the BCBCA please also notice the provisions of the OBCA referred to in Armstrong v. Gardner (1978), 20 O.R. (2d) 648 (H.C.) at page 472-473 of the Casebook. What do you think is the explanation for OBCA section 99 (3) (a) requiring that “the shareholder was a shareholder of the corporation at the time of the transaction or other event giving rise to the cause of action…”? Might it be an effective tool to prevent speculation on “derivative actions”? Note that the same sort of limitation does not appear in the bcbca.

 

In this regard it is worth knowing that a “strike suit” is a nuisance legal action. It is brought by a small shareholder with a virtually insignificant interest in a corporation with a view to achieving a profitable settlement before actually going to court. Such actions frequently appeared in the U.S. when the defendant corporation was much larger than the plaintiff and for that reason a settlement amount could be less than what the defendant's legal costs might have been. Strike suits were never common in Canada. A 2005 decision of U.S. Supreme Court (Dura Pharmaceuticals, Inc. v. Broudo, (2005) 544 U.S. 336) made them much more difficult and accordingly they have become less common in the present day.

Are such protections as OBCA section 99 (3) (a) or an analogous decision to the that of the U.S. Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo necessary? Or are such protections subsumed within the potential interpretations of sections 233 (1) (c) and (d) of the BCBCA?:

 

“233. (1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if…

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.”

Please blog your views on these questions and your reasons in less than one page under the heading “Abusive Derivative Actions”.

 

Finally we conclude this part of the discussion with section 233 (6) of the BCBCA, which states:

 

“233. (6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.”

You will recall that we previously studied the possibly salutary impacts of both advance and subsequent shareholder approval to deal contentious issues or remedy errors where not involving fraud or bad faith. It is useful to reflect on how section 233(6) reserves considerable discretion to the court to deal with a special resolution as it sees fit. 

 

TOPIC 4: THE OPPRESSION REMEDY 

Please read pages 490-540 of the Casebook. You will find that you are already familiar with a number of the cases (and even the principles) that you will be reading.

Please note the Casebook authors’ somewhat disconcerting words at the bottom of page 490 of the Casebook:

“Most Canadian jurisdictions have followed the C.B.C.A. lead and enacted an “oppression” remedy. There is a relatively large volume of cases in Canada since the statutory change. One reason for the volume is lack of theory: the remedy is relatively new to Canada. Moreover, precedent is not particularly helpful: the remedy is invoked in a wide variety of circumstances and judges are statutorily empowered to do whatever they want in each case.”

Beginning to sound familiar?

Now please read sections 227 (1) (2) and (3) of the BCBCA:

 

“Complaints by shareholder
<ol start="227">
<li> (1) For the purposes of this section, "shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) A shareholder may apply to the court for an order under this section on the ground

(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or

(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.

 

(3) On an application under this section, the court may, with a view to remedying or bringing to an end the matters complained of and subject to subsection (4) of this section, make any interim or final order it considers appropriate, including an order

(a) directing or prohibiting any act,

(b) regulating the conduct of the company's affairs,

(c) appointing a receiver or receiver manager,

(d) directing an issue or conversion or exchange of shares,

(e) appointing directors in place of or in addition to all or any of the directors then in office,

(f) removing any director,

(g) directing the company, subject to subsections (5) and (6), to purchase some or all of the shares of a shareholder and, if required, to reduce its capital in the manner specified by the court,

(h) directing a shareholder to purchase some or all of the shares of any other shareholder,

(i) directing the company, subject to subsections (5) and (6), or any other person, to pay to a shareholder all or any part of the money paid by that shareholder for shares of the company,

(j) varying or setting aside a transaction to which the company is a party and directing any party to the transaction to compensate any other party to the transaction,

(k) varying or setting aside a resolution,

(l) requiring the company, within a time specified by the court, to produce to the court or to an interested person financial statements or an accounting in any form the court may determine,

(m) directing the company, subject to subsections (5) and (6), to compensate an aggrieved person,

(n) directing correction of the registers or other records of the company,

(o) directing that the company be liquidated and dissolved, and appointing one or more liquidators, with or without security,

(p) directing that an investigation be made under Division 3 of this Part,

(q) requiring the trial of any issue, or

(r) authorizing or directing that legal proceedings be commenced in the name of the company against any person on the terms the court directs.” (Emphasis added)

Now please note differences between sections 227 (1) (2) and (3) of the BCBCA and the equivalent sections of the CBCA section 241:

 

“Application to court re oppression
<ol start="241">
<li>(1) A complainant may apply to a court for an order under this section.</li>
</ol>
 

Grounds

 

(2) If, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates

 (a) any act or omission of the corporation or any of its affiliates effects a result,

 (b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or

 (c) the powers of the directors of the corporation or any of its affiliates 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, the court may make an order to rectify the matters complained of.

 

 Powers of court

 

(3) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,

(a) an order restraining the conduct complained of;

(b) an order appointing a receiver or receiver-manager;

(c) an order to regulate a corporation’s affairs by amending the articles or by-laws or creating or amending a unanimous shareholder agreement;

(d) an order directing an issue or exchange of securities;

(e) an order appointing directors in place of or in addition to all or any of the directors then in office;

(f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder;

(g) an order directing a corporation, subject to subsection (6), or any other person, to pay a security holder any part of the monies that the security holder paid for securities;

(h) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract;

(i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested person financial statements in the form required by section 155 or an accounting in such other form as the court may determine;

(j) an order compensating an aggrieved person;

(k) an order directing rectification of the registers or other records of a corporation under section 243;

(l) an order liquidating and dissolving the corporation;

(m) an order directing an investigation under Part XIX to be made; and

(n) an order requiring the trial of any issue.

 Duty of directors 

(4) If an order made under this section directs amendment of the articles or by-laws of a corporation,

 (a) the directors shall forthwith comply with subsection 191(4); and

 (b) no other amendment to the articles or by-laws shall be made without the consent of the court, until a court otherwise orders.

 

Exclusion

 

 (5) A shareholder is not entitled to dissent under section 190 if an amendment to the articles is effected under this section.

 

Limitation

 

(6) A corporation shall not make a payment to a shareholder under paragraph (3)(f) or (g) if there are reasonable grounds for believing that

 (a) the corporation is or would after that payment be unable to pay its liabilities as they become due; or

 (b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities.

Alternative order 

(7) An applicant under this section may apply in the alternative for an order under section 214.”

 

All of which somewhat begs the question: What is the meaning of “Oppression”? Or put another way what is the standard of what will be considered “Oppression” defined?

To focus on this question this please begin by reading Westfair Foods Ltd. v. Watt [1991] A.J. No. 321 at pages 492-494 of the Casebook.

The facts were that Westfair Foods Ltd. had Class A shares carrying a $2 dividend in priority to the common shares. There were many Class A shareholders and only a single holder of the common shares. The Class A shares were also entitled to share in surplus assets including retained earning in the event of a liquidation. Historically all profits beyond the dividend attached to the class A shares would be retained by Westfair Foods Ltd. as earnings. At a certain point the directors of Westfair Foods Ltd. decided to change the policy and after paying the fixed dividend to the holders of Class A shares, the company paid all of its net earnings to the single common shareholder. The Class A shareholders claimed the new policy was oppressive to their interests.

Kearns J.A. of the Alberta C.A. found the new policy to be oppressive to the Class A shareholders. The logic, reasoning and common sense displayed by the learned judge in examining “oppressive conduct” is well worth reproducing here:

 

“I turn then to the substantial rights conferred by the provision. Obviously, they turn on effect not intent. Equally obviously, they govern all the activities of the corporation. The rights conferred upon shareholders are that they, at any time and in any way during their relationship with the company, are to be insulated from anything oppressive, unfairly prejudicial, or that unfairly disregards their interests. For the relations among shareholders, this is a major modification of majority rule.

In my view, the provisions were and remain a compendious way for Parliament to say to the courts that the classes mentioned in the Act are to be treated fairly in the sense of justly by corporations. For example, both parties cite and rely on Ebrahimi v. Westbourne Galleries, [1973] A.C. 360. Lord Wilberforce there said at p. 379:

... there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the company structure.

I agree with a similar sentiment by McDonald J. in First Edmonton Place v. 315888 Alberta Ltd. 1988 168 (AB QB), (1988), 40 B.L.R. 28 at pp. 59-60, 60 Alta. L.R. (2d) 122, 10 A.C.W.S. (3d) 268 (Q.B.).

I cannot put elastic adjectives like "unfair", "oppressive" or "prejudicial" into watertight compartments. In my view, this repetition of overlapping ideas is only an expression of anxiety by Parliament that one or the other might be given a restrictive meaning… 

Having concluded that the words charge the courts to impose the obligation of fairness on the parties, I must admit that the admonition offers little guidance to the public, and Parliament has left elucidation to us. I have elsewhere said that I take this sort of indirection as legislative delegation: see Transalta Utilities Corp. v. Alberta Public Utilities Board 1986 ABCA 64 , (1986), 43 Alta. L.R. (2d) 171 at p. 180, 68 A.R. 171, 36 A.C.W.S. (2d) 376 (C.A.).

We fail in that duty of elucidation, I think, if we merely say "this is fair" or "that is not fair" without ever explaining why we think this or that is fair. Thus I, and I dare say others, am not much helped by cases and comments that simply announce that I am to enforce "fair play" or "fair dealing": see, for example, Dickerson, op. cit. , para. 48.

On the other hand, I do not understand that the delegation of this duty permits a judge to impose personal standards of fairness. Let me illustrate what is probably obvious by two extreme examples. A judge who firmly believes in the virtues of unrestricted private enterprise might say that fairness requires that people protect themselves to their best capacity, and that the courts not protect those who fail to protect themselves. On the other hand, a judge who firmly believes that private property is a trust held for the benefit of society as a whole might say that what is fair is what best benefits society.

The role of a judge in our society limits the impulses of both my mythical judges. We must not make rules unless we can tie them to values that seem to have gained wide acceptance. We do that largely by testing any proposed rule against other legal rules, which by long tradition seem accepted. In short we seek precedent, or we seek to argue from what we consider to be principles adopted in precedent… 

I will not attempt to catalogue all the rules generated by the words in the statute. For example, the courts have imposed the duty on directors to protect the interests of all shareholders, not just those who elect them. I will later deal with that rule. The authorities also impose upon the majority interest the obligation not to use their electoral power to profit themselves at the expense of minority shareholders. The principal complaint here does not engage that rule. The complaint is not by a minority who has been outvoted. It is by an entire class of shares in competition with another class of shares.

It is said for the shareholders that yet another rule exists. This is that the directors must have due regard for, and deal fairly with, the "interests" of all shareholders. I have concern about over-use of the word interests. This example serves to express it: a thief is very interested in my watch, and will get it if he can. A law about fairness will not, however, show any respect for his interest. The real question is whether the law should accept his obvious interest in financial gain as, in all the circumstances, one that deserves protection. I do not accept that all ambition to acquire property deserves protection. I do accept that our tradition is that a hope for profit, as opposed to a mere desire, sometimes deserves protection.

One deserving case is where the person to whom the profit will go has nourished that hope. The company and the shareholders entered voluntarily, not by duty or chance, into a relationship. Our guides are the rules in other contexts, such as contract law, equity, and partnership law, where the courts have also considered just rules to govern voluntary relationships. In very general terms, one clear principle that emerges is that we regulate voluntary relationships by regard to the expectations raised in the mind of a party by the word or deed of the other, and which the first party ordinarily would realize it was encouraging by its words and deeds. This is what we call reasonable expectations, or expectations deserving of protection. Regard for them is a constant theme, albeit variously expressed, running through the cases on this section or its like elsewhere. I emphasize that all the words and deeds of the parties are relevant to an assessment of reasonable expectations, not necessarily only those consigned to paper, and not necessarily only those made when the relationship first arose.

I do not for a moment suggest that that analysis about expectations deserving protection is the sole basis for rules under the statute. I think, for example, of totally unforeseen windfalls or calamities. This is not such a case, but I dare say that even in those cases the expectations of the parties are a sound starting point. And the test will always be helpful in cases where mere interests collide.

The test then is always facts-specific, and cases decided on other facts offer only a limited guide. Unfortunately, no other reported case offers the same facts as this.” (Emphasis added)

 

As a footnote it is well worth drawing your attention to a fuller version of the classic statement made by Lord Wilberforce in Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360 at 379 which was quoted by Kearns J.A. immediately above:

“The foundation of it all lies in the words ‘just and equitable’ and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own; that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Company Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The ‘just and equitable’ provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.”

 

Next please read again, but from a somewhat different perspective, the case of Deluce Holdings Inc. v. Air Canada (1992) 98 D.L.R. 94th) 509 (Gen. Div.) at pages 494-502 of the Casebook.

In this case Air Canada owned 75% of the shares of Air Ontario and De Luce Holdings Ltd. (controlled by the De Luce family) owned the remaining 25%. The interests of both Air Canada and De Luce Holdings Ltd. were held in a numbered company, 152160 Canada Inc. The board of directors of Air Ontario was comprised of 7 nominees of Air Canada and 3 nominees from De Luce. William De Luce was named president of Air Ontario. At a certain point Air Canada changed its business strategy to seek 100% control of its regional carriers. Despite apparently doing a good job William De Luce was asked to resign by the Air Canada board representatives. He refused and was terminated by the board of Air Ontario, which in turn was controlled by Air Canada nominees. The “Unanimous Shareholders Agreement” of 152160 Canada Inc. governed the relationship between Air Canada and the De Luce family interests. That agreement provided Air Canada with an option to acquire the De Luce shareholdings in Air Ontario at “fair market value” (to be arbitrated if not agreed upon) upon termination either by Air Ontario or 152160 Canada Inc. of the employment of the last of William De Luce of his father Stanley De Luce. Apparently, termination could be “for any reason”. In February 1989 the employment of Stanley De Luce ended and not renewed. In October 1991 William De Luce terminated by a decision of the board of 152160 Canada Inc.

 

De Luce Holdings Ltd alleged oppression. They argued that since the since the oppressive actions of Air Canada to the De Luce Family as shareholders in Air Ontario were the foundation of the arbitration that sought to determine the value of the shares which the De Luce family were required to sell to Air Canada, the arbitration should be stopped.

Blair J. noted that the motivation for terminating William De Luce as president of Air Ontario was the pursuit of a perfectly legitimate corporate objective on the part of Air Canada. However two questions commended themselves:
<ol>
<li>Was Air Canada entitled to its use majority position on the board of Air Ontario for the predominant purpose of carrying out Air Canada’s corporate objective (as opposed to the corporate objective of Air Ontario), or whether such conduct was “oppressive” of the minority shareholders in Air Ontario?;</li>
<li>If oppressive, then does that oppressiveness undercut the apparent right under the Unanimous Shareholders Agreement to terminate William De Luce “for any reason” (and thus triggering Air Canada’s call on the De Luce family shares)?</li>
</ol>
 

The Court decided to use its discretion to stay the arbitration proceedings. Air Canada’s nominee directors had too obviously disregarded the interests of other stakeholders. Whether there were sufficient reasons to terminate Mr. De Luce, it was obvious to the court that the nominee directors had failed to conduct such any legitimate and focused analysis and were in fact guided by Air Canada's corporate agenda. This sort of behavior was deemed oppressive and in breach of the nominees' fiduciary duty to Air Ontario.

Ironically (and unusually) invoking the arbitration clause might be said to have been oppressive in itself. The Court reasoned that the majority shareholder "visited oppression upon a minority shareholder" and the majority’s conduct was found to be unfairly prejudicial and to have unfairly disregarded the interests of the minority shareholder.

Blair J. had the following to say on the subject of “Oppression”:

“In my view, the conduct of Air Canada and its nominee directors, as outlined above, could be found, after a trial, to constitute "oppression” of Deluceco’s interests as a minority shareholder in Air Ontario. While the conduct may not constitute “oppression” in the classic sense of conduct which is “lacking in probity” or “burdensome, harsh and wrongful”, it may nonetheless be conduct which is “unfairly prejudicial” to or which “unfairly disregards” the interests of Deluceco as a minority shareholder, contrary to s. 241 of the C.B.C.A. The authorities make it clear that this distinction exists and that the latter sort of conduct constitutes grounds that are “less rigorous” than oppression…”

On the subject of the distinction between “legal rights” and the interests or expectations of shareholders Blair J. said the following:

“Cases dealing with oppression remedy situations have emphasized the distinction between the strict "legal rights" of shareholders and their “interests”. For instance, in Westfair Foods Ltd. v. Watt…[1990] 4 W.W.R. 685…Moore C.J.Q.B stated at page 59: 

An examination of the leading cases dealing with the C.B.C.A. and in particular s. 241, is worthwhile. In enacting s. 241, Parliament obviously intended that strict attention should be paid to the interests of all shareholders, not just the legal rights of shareholders.

(Emphasis in original.)

Mr. Justice Farley elaborated on this distinction in 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R (2d) at p.123… by commenting on the connection between shareholder “interests” and shareholder “expectations”. At pp. 185–6 he said:

Shareholder interests would appear to be intertwined with shareholder expectations. It does not appear to me that the shareholder expectations which are to be considered are those that a shareholder has as his own individual “wish list”. They must be expectations which could be said to have been (or ought to have been considered as) part of the compact of the shareholders…”

Please read the very useful notes and questions at pages 502-507 of the Casebook. In particular please note the useful summary set out by Killeen J. In Krynen v. Bugg (2003) 64 O.R. (3d) 393 (S.C.J.):

 

“A summary of the leading principles and guiding rules which has come out of that case law would include the following:

(1) The overriding lodestar principle of oppression law is that, 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. The cases on this issue have been helpfully collected and reviewed by Farley J. in 8200099 Ontario Inc. v. Harold E. Ballard Ltd. (1992) 3 B.L.R. (2d) 123 (Ont. Gen. Div.) where he said this at pp. 185-86:

Shareholder interests would appear to be intertwined with shareholder expectations. It does not appear to me that the shareholder expectations which are to be considered are those that a shareholder has as his own individual “wish list”. They must be expectations which could be said to have been (or ought to have been considered as) part of the compact of the shareholders.

This statement of principle by Farley J. was expressly approved of by the Ontario Court of Appeal in its important judgment in Naneff v. Con-Crete Holdings Limited et. al. 1995 959 (ON CA), (1995), 23 O.R. (3d) 481 (C.A.) at p. 490.

(2) The term “oppression” connotes an inequality of bargaining power while “unfairness” connotes an obligation to act equitably and impartially in the exercise of power and authority: Re Alldrew Holdings Ltd. v. Nibro Holdings 1993 5509 (ON SC), (1993), 16 O.R. (3d) 718 at p. 732. (Ont. Gen. Div.)

(3) The terms, “unfair prejudice to” and “unfair disregard of the interests of” require less rigorous tests than oppression. Where on the totality of the evidence the actions and conduct complained of go beyond mere inconvenience and lack of information, and the interests of the complainant have been unfairly disregarded, the complainant will be entitled to a remedy: Re Mason and Intercity Properties Ltd. 1987 173 (ON CA), (1987), 59 O.R. (2d) 631, at p. 635. (Ont. C.A.)

(4) There is no requirement that bad faith must be shown before an order to rectify a complaint may be made in an oppression case: Re Sidaplex-Plastic Suppliers Inc. v. Elta Group Inc. 1998 5847 (ON CA), (1998), 40 O.R. (3d) 563 at p. 567 (C.A.); Loveridge Holdings v. King-Pin Ltd. reflex, (1992), 5 B.L.R. (2d) 195, at p. 203 (Ont.Gen. Div.)

(5) Where expectations are apparently reasonable on their face but where there is a contract dealing with these expectations, the reasonableness of these expectations cannot prevail over the contract.

(6) Reasonable expectations are not necessarily “static” or frozen expectations and may evolve or change as the principals adapt their arrangements from time to time: 820099 Ontario Inc. v. Harold Ballard Ltd., supra, at p. 191.

(7) The business and affairs of a corporation are managed by or under the direction of its board of directors. The “business judgment rule” operates to shield from court intervention business decisions which have been made honestly, prudently, in good faith and on reasonable grounds. In such cases, the board’s decisions will not be subject to microscopic examination and the court will be reluctant to interfere with and usurp the board’s function in managing the corporation: Re C.W. Shareholdings Inc. v. WIC Western International Communications Ltd. 1998 14838 (ON SC), (1998), 39 O.R. (3d) 755 at para. 57 (Ont.Gen. Div.); Brant Investments Ltd. v. Keeprite Inc. 1991 2705 (ON CA), (1991), 3 O.R. (3d) 289, at pp. 320-21. (C.A.) A useful three-part test or approach has been suggested for the application of the business judgment rule:

(1) Was the impugned conduct outside the range of reasonable business judgment?

(2) Was the impugned conduct inconsistent with the reasonable expectations of the complainant?

(3) Did the impugned conduct cause prejudice to the complainant?

 Main v. Delcan Group Inc.(1999), 47 B.C.R. (2d) 200 at para. 31 (Ont. S.C.J.).

The Ontario Court of Appeal has also considered the rule in Pente Investment Management Ltd. v. Schneider Corp., 1998 5121 (ON CA), (1998), 44 B.L.R. (2d) 115, at para. 36 (C.A.):

The law as it has evolved in Ontario and Delaware has the common requirements that the court must be satisfied that the directors have acted reasonably and fairly. The court looks to see that the directors made a reasonable decision not a perfect decision. Provided the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board’s determination. As long as the directors have selected one of several reasonable alternatives, deference is accorded to the board’s decision…. This formulation of deference to the decision of the Board is known as the “business judgment rule”. The fact that alternative transactions were rejected by the directors is irrelevant unless it can be shown that a particular alternative was definitely available and clearly more beneficial to the company than the chosen transaction….”

See, also, Themadel Foundation v. Third Can. General Investment Trust 1998 973 (ON CA), (1998), 38 O.R. (3d) 749 at 754 (C.A.).

(8) Actual or material loss is not a prerequisite to a finding either of oppression, unfair prejudice or unfair disregard of interest. The object of the remedies available under s.248(3) is to prevent the continuation of the misconduct in question if it is established that a harm or detriment, in the sense of infringement of rights or privileges, will follow in the absence of restraining such misconduct. On this issue, the concept of detriment as a prerequisite to obtaining a remedy is similar to the concept inherent in a quia timet injunction – even if there is no material loss or damage at the time but reasonable grounds are established to apprehend the same occurring if there is no relief granted, the applicant for the quia timet remedy will be entitled to the relief sought. Thus, in establishing unfair disregard of the applicant’s interests as a result of misconduct, there is no requirement that there be actual detriment or loss to the applicant: Sahota v. Basra 1999 14945 (ON SC), (1999), 45 B.L.R. (2d) 143, at para. 30 (Ont. General Div.).

(9) Wrongful dismissal, standing alone, will not justify a finding of oppression. It is only where the interests of the employee are closely intertwined with his interests as a shareholder, and where the dismissal is part of a pattern of conduct to exclude the complainant from participation in the corporation, that the dismissal can be found to be an act of oppression: Naneef v. Con-Crete Holding Ltd. reflex, (1993) 11 B.L.R. (2d) 218 at para. 125; Koehner, “The Oppression Remedy: Reasonable Expectations” (1994) 73 Can. Bar. Rev. 274 at 278.”

 

You are already acquainted with the case of BCE Inc. v. 1976 Debentureholders [2008] 3 S.C.R. 560. In that case the Supreme Court of Canada made the following observations concerning the remedy of “oppression”:

“ B. The <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">Section 241 </a> Oppression Remedy

 The debentureholders in these appeals claim that the directors acted in an oppressive manner in approving the sale of BCE, contrary to <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a> of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>.

Security holders of a corporation or its affiliates fall within the class of persons who may be permitted to bring a claim for oppression under <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a> of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>. The trial judge permitted the debentureholders to do so, although in the end he found the claim had not been established. The question is whether the trial judge erred in dismissing the claim.

We will first set out what must be shown to establish the right to a remedy under <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a>, and then review the conduct complained of in the light of those requirements. 

(1) The Law

Section 241(2) provides that a court may make an order to rectify the matters complained of where

(a) any act or omission of the corporation or any of its affiliates effects a result,

(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or

(c) the powers of the directors of the corporation or any of its affiliates 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…

<a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">Section 241 </a> jurisprudence reveals two possible approaches to the interpretation of the oppression provisions of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>: M. Koehnen, Oppression and Related Remedies (2004), at pp. 79-80 and 84. One approach emphasizes a strict reading of the three types of conduct enumerated in <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a> (oppression, unfair prejudice and unfair disregard): see Scottish Co-operative Wholesale Society Ltd. v. Meyer, [1959] A.C. 324 (H.L.); Diligenti v. RWMD Operations Kelowna Ltd. (1976), 1 B.C.L.R. 36 (S.C.); Stech v. Davies, [1987] 5 W.W.R. 563 (Alta. Q.B.). Cases following this approach focus on the precise content of the categories “oppression”, “unfair prejudice” and “unfair disregard”. While these cases may provide valuable insight into what constitutes oppression in particular circumstances, a categorical approach to oppression is problematic because the terms used cannot be put into watertight compartments or conclusively defined. As Koehnen puts it (at p. 84), “[t]he three statutory components of oppression are really adjectives that try to describe inappropriate conduct…The difficulty with adjectives is they provide no assistance in formulating principles that should underlie court intervention.”

Other cases have focused on the broader principles underlying and uniting the various aspects of oppression: see First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988), 40 B.L.R. 28 (Alta. Q.B.), var’d (1989), 45 B.L.R. 110 (Alta. C.A.); 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 113 (Ont. Div. Ct.); Westfair Foods Ltd. v. Watt (1991), 79 D.L.R. (4th) 48 (Alta. C.A.).

In our view, the best approach to the interpretation of <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241subsec2">s. 241(2) </a> is one that combines the two approaches developed in the cases. One should look first to the principles underlying the oppression remedy, and in particular the concept of reasonable expectations. If a breach of a reasonable expectation is established, one must go on to consider whether the conduct complained of amounts to “oppression”, “unfair prejudice” or “unfair disregard” as set out in <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241subsec2">s. 241(2) </a> of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA</a>.

We preface our discussion of the twin prongs of the oppression inquiry by two preliminary observations that run throughout all the jurisprudence.

First, oppression is an equitable remedy. It seeks to ensure fairness — what is “just and equitable”. It gives a court broad, equitable jurisdiction to enforce not just what is legal but what is fair: Wright v. Donald S. Montgomery Holdings Ltd. (1998), 39 B.L.R. (2d) 266 (Ont. Ct. (Gen. Div.)), at p. 273; Re Keho Holdings Ltd. and Noble (1987), 38 D.L.R. (4th) 368 (Alta. C.A.), at p. 374; see, more generally, Koehnen, at pp. 78-79. It follows that courts considering claims for oppression should look at business realities, not merely narrow legalities: Scottish Co-operative Wholesale Society, at p. 343.

Second, like many equitable remedies, oppression is fact-specific. What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive in one situation may not be in another.

Against this background, we turn to the first prong of the inquiry, the principles underlying the remedy of oppression. In Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360 (H.L.), at p. 379, Lord Wilberforce, interpreting s. 222 of the U.K. Companies Act, 1948, described the remedy of oppression in the following seminal terms:

‘The words [“just and equitable”] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure.’

Lord Wilberforce spoke of the equitable remedy in terms of the “rights, expectations and obligations” of individuals. “Rights” and “obligations” connote interests enforceable at law without recourse to special remedies, for example, through a contractual suit or a derivative action under <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec239">s. 239 </a> of the CBCA. It is left for the oppression remedy to deal with the “expectations” of affected stakeholders. The reasonable expectations of these stakeholders is the cornerstone of the oppression remedy.

As denoted by “reasonable”, the concept of reasonable expectations is objective and contextual. The actual expectation of a particular stakeholder is not conclusive. In the context of whether it would be “just and equitable” to grant a remedy, the question is whether the expectation is reasonable having regard to the facts of the specific case, the relationships at issue, and the entire context, including the fact that there may be conflicting claims and expectations.

Particular circumstances give rise to particular expectations. Stakeholders enter into relationships, with and within corporations, on the basis of understandings and expectations, upon which they are entitled to rely, provided they are reasonable in the context: see 820099 Ontario; Main v. Delcan Group Inc. (1999), 47 B.L.R. (2d) 200 (Ont. S.C.J.). These expectations are what the remedy of oppression seeks to uphold.

Determining whether a particular expectation is reasonable is complicated by the fact that the interests and expectations of different stakeholders may conflict. The oppression remedy recognizes that a corporation is an entity that encompasses and affects various individuals and groups, some of whose interests may conflict with others. Directors or other corporate actors may make corporate decisions or seek to resolve conflicts in a way that abusively or unfairly maximizes a particular group’s interest at the expense of other stakeholders. The corporation and shareholders are entitled to maximize profit and share value, to be sure, but not by treating individual stakeholders unfairly. Fair treatment — the central theme running through the oppression jurisprudence — is most fundamentally what stakeholders are entitled to “reasonably expect”.

Section 241(2) speaks of the “act or omission” of the corporation or any of its affiliates, the conduct of “business or affairs” of the corporation and the “powers of the directors of the corporation or any of its affiliates”. Often, the conduct complained of is the conduct of the corporation or of its directors, who are responsible for the governance of the corporation. However, the conduct of other actors, such as shareholders, may also support a claim for oppression: see Koehnen, at pp. 109-10; GATX Corp. v. Hawker Siddeley Canada Inc. (1996), 27 B.L.R. (2d) 251 (Ont. Ct. (Gen. Div.)). In the appeals before us, the claims for oppression are based on allegations that the directors of BCE and Bell Canada failed to comply with the reasonable expectations of the debentureholders, and it is unnecessary to go beyond this.

The fact that the conduct of the directors is often at the centre of oppression actions might seem to suggest that directors are under a direct duty to individual stakeholders who may be affected by a corporate decision. Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debentureholders in these appeals. This is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen. However, the directors owe a fiduciary duty to the corporation, and only to the corporation. People sometimes speak in terms of directors owing a duty to both the corporation and to stakeholders. Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases (such as these appeals) may arise where these interests do not coincide. In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation.

Having discussed the concept of reasonable expectations that underlies the oppression remedy, we arrive at the second prong of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a>oppression remedy. Even if reasonable, not every unmet expectation gives rise to claim under s. 241. The section requires that the conduct complained of amount to “oppression”, “unfair prejudice” or “unfair disregard” of relevant interests. “Oppression” carries the sense of conduct that is coercive and abusive, and suggests bad faith. “Unfair prejudice” may admit of a less culpable state of mind, that nevertheless has unfair consequences. Finally, “unfair disregard” of interests extends the remedy to ignoring an interest as being of no importance, contrary to the stakeholders’ reasonable expectations: see Koehnen, at pp. 81-88. The phrases describe, in adjectival terms, ways in which corporate actors may fail to meet the reasonable expectations of stakeholders.

In summary, the foregoing discussion suggests conducting two related inquiries in a claim for oppression: (1) Does the evidence support the reasonable expectation asserted by the claimant? and (2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest?” (Emphasis added)

In the end the Supreme Court of Canada approved the arrangement as fair and dismissed the claim for oppression. Of particular note, though of some frustration to those who want hard and fast “rights based” rules, is the acknowledgment that the court made that oppression is fact-specific: 

“What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive in one situation may not be in another.”

Blog Activity 8.3: 

In the “Introduction” to this unit you were invited to “…stay on the lookout in this unit…for situations where the relative “equality’ of the parties has some impact on the law evolving in a murkier rather then clearer way”. Does the stress on facts as dictating legal consequences embodied by the court’s approach in BCE Inc. v. 1976 Debentureholders serve to reinforce the subjectivity of “oppression” as a remedy and effectively prevent it from ever being used as a “right” that can truly reform corporate conduct? Please blog your views on this question and your reasons in less than one page under the heading “Oppression: Remedy v. Right”.

 

Finally on the subject of “Minority Protection” let’s look (once again) at the cases of First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) 60 Alta. L.R. (2d) 122 (Q.B.) at pages 511-519 of the Casebook; and Hercules Managements Ltd. v. Ernst & Young [1997] 2 S.C.R. 165 at pages 519-522 of the Casebook.

As you will recall First Edmonton Place Ltd. v. 315888 Alberta Ltd. involved three lawyers and their landlord, and the question focussed upon earlier was what sort of “interest” a creditor would have to have in order to achieve standing in a “derivative” or “oppression” action. In the present context what is noteworthy about the decision in First Edmonton Place Ltd. v. 315888 Alberta Ltd. is what might be thought of as the “impact-oriented focus on harm” taken by the Court of Queen’s Bench of Alberta. In the end leave to bring a “derivative action” was granted but First Edmonton Place Ltd. was not permitted to bring an “oppression” action.

McDonald J. made these observations:

“Assuming the absence of fraud, in what other circumstances would a remedy under s. 234 be available? In deciding what is unfair, the history and nature of the corporation, the essential nature of the relationship between the corporation and the creditor, the type of rights affected and general commercial practice should all be material. More concretely, the test of unfair prejudice or unfair disregard should encompass the following considerations: the protection of the underlying expectation of a creditor in its arrangement with the corporation, the extent to which the acts complained of were unforeseeable or the creditor could reasonably have protected itself from such acts, and the detriment to the interests of the creditor. The elements of the formula and the list of considerations as I have stated them should not be regarded as exhaustive. Other elements and considerations may be relevant, based upon the facts of a particular case…

CONCLUSION

In the case of the application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a>, the applicant was not a holder of a security or a "creditor" at the time of use of the cash inducement money by the three directors. However, there is some evidence that the cash inducement money was not used for purposes of the corporation and that its use might have been a fraud upon the corporation. If it was a fraud upon the corporation, and if the corporation were entitled to recover the money from the three directors, the applicant may have a genuine interest in advancing the claim to such recovery because the corporation might be liable in damages to the applicant. Therefore the applicant is in my opinion a proper person to make an application under s. 232 and should be granted leave to bring an action in the name and on behalf of the corporation in respect of the payment of the cash inducement money to or for the benefit of the three lawyers.

Moreover, as for the three lawyers, as directors of the corporation, permitting themselves as lawyers to occupy the leased premises without paying rent or entering into a lease, whether that conduct constituted a wrong to the corporation is a matter that should be tried. Once again, if there was a wrong, the applicant might ultimately stand to benefit from any recovery by the corporation. Therefore the applicant is in my opinion a proper person to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> in regard to this head of claim and should be granted leave in the same action to advance a claim in the name and on behalf of the corporation in respect of the occupation of the premises by the directors for their own personal purposes and in respect of the failure of the directors to obtain from themselves personally (or their law firm) a sublease for the term of the lease.

Granting leave to bring the statutory derivative action under s. 232 does not in any way imply that on the basis of the evidence placed before me I am of the view that the action is likely to succeed. As to that, of course, I offer no opinion…

In the case of the application under s. 234, leave to bring an action in regard to either claim is denied because the applicant was not a creditor at the time of the act or conduct complained of.” (Emphasis added)

These two cases do not add all that much to what we are already familiar with from the decision in Robak Industries Ltd. v. Gardner, 2007 BCCA 61 discussed in Unit 2.

 

In Robak Industries Ltd. v. Gardner, (<a href="http://www.110.com/panli/panli_87908.html">http://www.110.com/panli/panli_87908.html</a>) you may recall that the B.C. Court of Appeal considered the case of Mr. Gardner, a director of Getty Copper Incorporated, a public company. Mr. Gardner was alleged to have conspired with others to injure John Lepinski and the company he wholly owned, Robak Industries Ltd., by "unlawful means" including seizing control of a public company, “Getty Copper Incorporated”, and its board; discrediting and ousting Mr. Lepinski; setting aside a development agreement and acquiring 100% of Getty South a company related to Getty Copper Incorporated; "applying economic duress to Getty" and "inducing Blake Cassels & Graydon to breach their duties to Getty". There were also allegations of defamation in connection with the affairs of Getty Copper Incorporated. Robak Industries Ltd.’s claim for damages for the defamatory statements included a "loss in the value of…a substantial interest in the shares of Getty".

 

Madam Justice Levine dealt with an appeal from a lower court decision striking out certain portions of the Statement of Claim in the case on the ground that the allegations and claims made in those portions disclosed no reasonable cause of action. Excerpts from her decision follow:

 

“The appellants do not contest the principle that a shareholder cannot claim a loss that is the direct result of wrongs to the company. They do not dispute that if the value of the shares of the company diminishes because of damage to the company, the loss in share value is "reflective" of the company’s loss. The appellants claim, however, that their loss is not reflective of a loss to Getty. The loss they claim is the loss of the value of their shares in the marketplace, which, they say, Getty could not claim. The appellants allege that the market forces which caused the fall in value of their shares are separate and independent from any losses which Getty may have suffered from the wrongdoings alleged. In other words, they deny that the loss in value of their Getty shares is a "reflective loss".

 

The appellants argue that in Hercules, the Supreme Court left the door open to actions by shareholders, even where the corporation may also have a separate and distinct cause of action. Justice LaForest wrote (at para. 62):

One final point should be made here. Referring to the case of Goldex Mines Ltd. v. Revill (1974), 7 O.R. (2d) 216 (C.A.), the appellants submit that where a shareholder has been directly and individually harmed, that shareholder may have a personal cause of action even though the corporation may also have a separate and distinct cause of action. Nothing in the foregoing paragraphs should be understood to detract from this principle. In finding that claims in respect of losses stemming from an alleged inability to oversee or supervise management are really derivative and not personal in nature, I have found only that shareholders cannot raise individual claims in respect of a wrong done to the corporation. Indeed, this is the limit of the rule in Foss v. Harbottle. Where, however, a separate and distinct claim (say, in tort) can be raised with respect to a wrong done to a shareholder qua individual, a personal action may well lie, assuming that all the requisite elements of a cause of action can be made out…

 

The appellants say that the English cases provide other examples of cases where shareholders were allowed to bring claims in respect of wrongs also done to the companies in which they owned shares. They argue that new and novel approaches to legal principles should not be struck out at the pleadings stage, but should be allowed to proceed to trial to be tested on evidence and full argument.

 

The respondents’ answer is that under Canadian law the appellants have no claim, and that the English cases are at best equivocal about the circumstances in which a shareholder may be permitted to claim a loss in value of the shares of a company for wrongs done to the company…

 

The appellants suggest that Goldex Mines Ltd. v. Revill et al. (1974), 7 O.R. (2d) 216 (Ont. C.A.), mentioned in Hercules, supports their claim to a separate cause of action for a wrong done to Getty. In Goldex, the Ontario Court of Appeal considered the distinction between a personal action by a shareholder for a personal wrong and a derivative action brought on behalf of the corporation for a wrong done to the corporation. The Court pointed out that an action may be brought by several shareholders for the same personal wrong. It stated:

In Farnham v. Fingold, supra, this Court was not required, on the facts of that case, to consider a situation where the same wrongful act is both a wrong to the company and a wrong to each individual shareholder. In one sense every injury to a company is indirectly an injury to its shareholders. On the other hand, if one applies the test: "Is this wrongful act one in respect of which the company could sue?", a shareholder who is personally and directly injured must surely be entitled to say, as a matter of logic, "the company cannot sue for my injury; it can only sue for its own."

 

The converse is, of course, also true. Where the company is injured, an individual shareholder cannot sue for the company’s injury; the shareholder can only sue for its own. Loss reflective of a loss suffered by the company is not the shareholder’s personal loss.

 

There are good reasons for not allowing a shareholder to claim the loss in value of its shares where a wrong has been done to the company. As explained by Laskin J.A. in Meditrust (at para. 13); La Forest J. in Hercules (at para. 59), and McKenzie J. in Rogers at 78-81 (citing Prudential Assurance and Green v. Victor Talking Mach. Co., 24 F. 2d 378 (1928) (C.A. 2nd Circ.)), the rule avoids a multiplicity of actions. Further, and consistent with the legal theory of Foss v. Harbottle, the loss in value of shares of a company is a loss of all of the shareholders, not just one or some of them. There is no logic that would allow only one shareholder to claim that loss, where the claim relates to wrongs done to the company, and all of the shareholders have suffered the loss in value. A single shareholder cannot claim that the loss in value of the shares, per se, is a personal, direct loss…

 

Summary and Conclusion

 

The appellants’ arguments, based on the consideration of the rule in Foss v. Harbottle in other jurisdictions, does not reveal that the chambers judge made any error in striking out the portions of the Further Amended Statement of Claim. She did not apply the wrong test for striking pleadings; she considered whether the appellants had a reasonable cause of action, including a valid claim for damages. She applied binding Canadian law, which has been considered and affirmed in a persuasive judgment of the Ontario Court of Appeal in Meditrust. In both Rogers and Meditrust, shareholders claimed losses in the value of their shares as the result of an alleged conspiracy against them involving wrongs done to the company, and in both cases the claims were dismissed. The chambers judge did not decide, contrary to the appellants’ arguments, that a shareholder may never bring a claim for the diminution in the value of the shareholder’s shares, but confirmed, by reference to Hercules and Haig, that a shareholder may have a cause of action for loss in the value of shares where the shareholder has both an "independent relationship" with the wrongdoer and an "independent loss" from that of the company to whom the wrong has been done. She decided that in this case, the appellants had not shown that they have a cause of action for an "independent loss" in respect of wrongs done to Getty. I agree with her conclusion.”

 

 

 

 

 

TOPIC 5: DISTINGUISHING “OPPRESSION” CLAIMS & “DERIVATIVE” ACTIONS 

 

As can be seen from the cases canvassed above it can be somewhat challenging to tell when a particular set of facts is appropriate for a derivative action and when a claim for oppression is the way to go. Because, as can be readily seen from the cases, these sorts of determinations by the courts are highly reliant on the facts and tend at the same time to be reluctant to impose hard an fast rules, you are legitimately entitled to some degree of confusion. That said a number of general distinctions between oppression claims and derivative actions can be divined (changes as always TBA by the courts).

 

The source of the following list is an excellent short article called “Distinguishing Oppression Claims and Derivative Actions” by Tracey M. Cohen, T. Mark Pontin, and Graeme Hooper which can be found here: 

<a href="http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf">http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf</a>

 
<ul>
<li>Oppression claims are personal to the shareholder, while derivative claims involve harm to the company. </li>
</ul>
 
<ul>
<li>The substantive standard for a finding of liability is different. The issue when it comes to oppression proceeding is whether a complainant’s reasonable expectation has been inequitably violated in an oppressive or unfairly prejudicial manner. A derivative action requires proof of a legal wrong.</li>
</ul>
 
<ul>
<li>Oppression remedies are broad and flexible while those in derivative actions tend to be standard remedies tied to the precise cause of action.</li>
</ul>
 
<ul>
<li>Timing: Oppression proceedings must be brought in a timely manner, while it is not particularly a factor when it comes to derivative actions.</li>
</ul>
 
<ul>
<li>Costs: Generally speaking successful derivative action claimants will recover costs on a “solicitor-client basis, while successful oppression claimants will only recover tariffed costs.</li>
</ul>
 
<ul>
<li>Leave of the court is required to commence a derivative action but not an oppression action. </li>
</ul>
 
<ul>
<li>Oppression claim are generally commenced by way of court petition proceeding, while derivative claims are standard civil claims. </li>
</ul>
 

 

TOPIC 6: “WITH GREAT POWER…”

 

All of this fussing about with the rules of corporate law (as mundane or fascinating as you may find them) can be seen as missing a larger and more disturbing point. That is that the “product” of the practice of corporate law - corporations themselves - have been known to perpetrate dastardly deeds on a not insignificant number of occasions. More disturbing to the legal practitioner is that (arguably) on many of these occasions the lawyers involved were just doing their jobs, being creating companies or facilitating the legal continuation of a corporations existence, or the expression of its independent corporate personality. Surely we don’t bear responsibility for the nefarious outcomes that can flow from “limited liability”, separate corporate personhood, the lack of accountability of subsidiaries, or the politics of board/shareholder approvals? Or do we? Should we?

 

What follows are a series of sources to help remind you of the scandals and more importantly of the role lawyers and the law have in both contributing to the conditions which formed evil, and hopefully in constructively addressing those issues and the problems that they contributed to. As you review each, ask yourself:
<ul>
<li>Were there lawyers around?</li>
<li>What were they doing?</li>
<li>Did they know things were going awry?</li>
<li>Did they try and do anything about it?</li>
</ul>
 
<ol>
<li> Conrad Black </li>
</ol>
For some background on the Black saga, please read:

The Wall Street Journal Article entitled “Report Slams Hollinger's Black For a 'Corporate Kleptocracy'”, which you may find at: <a href="http://online.wsj.com/news/articles/SB109395499363105646">http://online.wsj.com/news/articles/SB109395499363105646</a>

 

Please review but not read in detail: Catalyst Fund General Partner Inc. v. Hollinger Inc., 2004 CanLII 40665 (ON SC) <a href="http://canlii.ca/t/1j6qd">http://canlii.ca/t/1j6qd</a>

 

Please watch the BBC program “The Fall of Conrad Black” which you can find at <a href="http://www.youtube.com/watch?v=CIRRUvjkLJo">http://www.youtube.com/watch?v=CIRRUvjkLJo</a>

 

Finally, please read, “Law Society of Upper Canada appeals exoneration of two Conrad Black lawyers” at: <a href="http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html">http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html</a>
<h1></h1>
 
<ol>
<li> Garth Drabinsky </li>
</ol>
 

Please read “Livent co-founders Drabinsky, Gottlieb convicted of fraud and forgery” here: <a href="http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convicted-of-fraud-and-forgery-1.778879">http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convicted-of-fraud-and-forgery-1.778879</a>

 

Please read “Livent case turns spotlight on Canada’s undramatic whitecollar prosecutions” at: <a href="http://www.thespec.com/news-story/2272130-livent-case-turns-spotlight-on-canada-s-undramatic-white-collar-prosecutions/">http://www.thespec.com/news-story/2272130-livent-case-turns-spotlight-on-canada-s-undramatic-white-collar-prosecutions/</a>

 

Please read “Law society revokes Garth Drabinsky’s licence over fraud convictions” at: <a href="http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html">http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html</a>
<h1></h1>
Please read “The six most outrageous quotes from Garth Drabinsky’s day parole hearing” especially this: “I never directed anyone to cross over the line knowingly. I obviously did do that by the dynamic of my character—the force of my character coupled with my role in the organization.” The article can be found here: <a href="http://www.torontolife.com/informer/toronto-business/2012/10/29/garth-drabinsky-day-parole-quotes/#more-173802">http://www.torontolife.com/informer/toronto-business/2012/10/29/garth-drabinsky-day-parole-quotes/#more-173802</a>

 
<ol>
<li> Enron Corporation</li>
</ol>
Please be acquainted with “Lawyers, Ethics, and Enron” here. It is an important piece of perspective on what we actually do and ought to as lawyers:

<a href="http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf">http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf</a>

 

FINALLY PLEASE READ:

Code of Professional Conduct for British Columbia, sections 3.2-3, 3.2-7, 3.2-8, 3.7, 3.3-1, 3.3-2. Available at: <a href="http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3">http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3</a>

 

 

UNIT WRAP UP: 

We have arrived at the end of our course, so of course we begin again with a review of certain subjects in the hope of fortifying your knowledge as you prepare for the final exam.

Course:Business Organizations - LAW 459

2016-08-16T09:37:34Z

DavidHeinrich: /* Unit 8 */

Course:Business Organizations - LAW 459/Unit 7

2016-08-16T09:34:17Z

DavidHeinrich:

UNIT 7 (WEEKS 10 & 11): THE (FIDUCIARY) OBLIGATIONS OF CORPORATE MANAGEMENT 

http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Unit-7-360x270.jpg

Figure 7: Corporate Management
ALT: A large duck leads a group of smaller ducks through a pond.

Source of image – Morguefile <a href="http://www.morguefile.com/archive/#/?q=leadership&sort=pop&photo_lib=morgueFile">http://www.morguefile.com/archive/#/?q=leadership&sort=pop&photo_lib=morgueFile</a>

Image URI: <a href="http://mrg.bz/KRHGCA">http://mrg.bz/KRHGCA</a>

 

UNIT OVERVIEW: 

In this unit the legal and fiduciary obligations of management and directors; the scope of those obligations and to whom they are owed; and the constraints on those powers and limitations shall be examined.

 

UNIT OUTCOME:

One of the realities inherent to separate corporate personhood is the strange asymmetry that the corporate person can only act as a result of and through human action and interaction. Corporate takeovers and changes of control highlight how vested interests and other frailties of the human condition complicate corporate life. You will be introduced to the kind of legal mechanisms and maneuvers used to resist takeovers (including “poison pills”) as well as the limits of the legitimate use of such tactics. Conflicts of interest situations as well as personal opportunities that arise through the corporation are other situations where similar factors of human frailty come into play. By the end of this unit you will develop an understanding of what it means for directors and officers to act “in the best interests of the corporation” when changes are happening.

 

UNIT READINGS:

Please read the following materials:

Casebook pages 303-426

BCBCA sections 136-137, 142, 157; CBCA sections 122-123, 147-153; Securities act (B.C.) sections 57.2

Parke v. Daily News Ltd. [1962] 2 All E.R. 929

Re. W and M Roith Ltd. [1967] 1 All E.R. 427

CW Shareholdings Inc. v. WIC Western International Communications Ltd. (1998), 39 O.R. (3d) 755 (Ont. S.C.) <a href="http://www.canlii.org/en/on/onsc/doc/1998/1998canlii14838/1998canlii14838.html">http://www.canlii.org/en/on/onsc/doc/1998/1998canlii14838/1998canlii14838.html</a>

 

TOPIC 1: LEGAL OBLIGATIONS OF MANAGEMENT: THE STANDARD OF CARE, DILIGENCE AND SKILL

Please read pages 303-426 of the Casebook 

 
<ol>
<li> Statutory Provisions</li>
</ol>
BCBCA section 142(1): “A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case may be, must . . . (b) exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances.”

CBCA section 122(1): “Every director and officer of a corporation in exercising their powers and discharging their duties shall . . . (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”

 
<ol>
<li> The Common Law Background</li>
</ol>
Please refer to the judgment in Peoples Department Stores Inc. v. Wise, a case we have already visited in this course. There you will find the following (also at page 326 of the Casebook):

“That directors must satisfy a duty of care is a long-standing principle of the common law, although the duty of care has been reinforced by statute to become more demanding. Among the earliest English cases establishing the duty of care were Dovey v. Cory, [1901] A.C. 477 (H.L.); In re Brazilian Rubber Plantations and Estates, Ltd., [1911] 1 Ch. 425; and In re City Equitable Fire Insurance Co., [1925] 1 Ch. 407 (C.A.). In substance, these cases held that the standard of care was a reasonably relaxed, subjective standard. The common law required directors to avoid being grossly negligent with respect to the affairs of the corporation and judged them according to their own personal skills, knowledge, abilities and capacities. See McGuinness, supra, at p. 776: “Given the history of the case law in this area, and the prevailing standards of competence displayed in commerce generally, it is quite clear that directors were not expected at common law to have any particular business skill or judgment.” (Emphasis added)

 

Also quoted in Peoples Department Stores Inc. v. Wise (at page 326 of the Casebook) was the 1971 Dickerson Report “Proposals for a New Business Corporations Law for Canada”, authored by Robert W.V. Dickerson, John L. Howard and Leon Getz, and which preceded the enactment of the CBCA by four years. 

The Dickerson Report:
<ul>
<li>Described the common law standard as being the degree of care, skill and diligence that could reasonably be expected from someone having the directors knowledge and experience;</li>
<li>Recommended at II, ap. 74 the creation of an objective standard requiring directors and officers to meet the standard of a “reasonably prudent person”</li>
</ul>
This was obviously an attempt to raise the standard of directors. As can readily be seen from CBCA section 122(1) the objective standard was rejected and “reasonable prudence” was put in the context of “comparable circumstances”. This subjective test prevailed and remains with us.

However the jurisprudence does not actually seem to follow the statutory words, and insists on an objective standard. Again please refer to Peoples Department Stores Inc. v. Wise (at page 327 of the Casebook) where the following is said:

“The words “in comparable circumstances”, modify the statutory standard by requiring the context in which a given decision was made to be taken into account. This is not the introduction of a subjective element relating to the competence of the director, but rather the introduction of a contextual element into the statutory standard of care. It is clear that <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec122subsec1_smooth">s. 122(1)</a>(b) requires more of directors and officers than the traditional common law duty of care outlined in, for example, Re City Equitable Fire Insurance, supra.

The standard of care embodied in <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec122subsec1_smooth">s. 122(1)</a>(b) of the <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html">CBCA</a> is . . . an objective standard. The factual aspects of the circumstances surrounding the actions of the director or officer are important . . . as opposed to the subjective motivation of the director or officer.” (Emphasis added)

Now please read Soper v. Canada [1998] 1 F.C. 124 (C.A.) at pages 319-320 of the Casebook and note how the court wrestles with the question of standard to be applied to directors. 

Under the Income Tax Act the directors of a corporation are not liable for the failure to make employee remittances if the directors show they exercised the degree of care, diligence and skill of a reasonably prudent person in the circumstances.

Robertson J.A. made the following observations on the law: 

“The second proposition that I wish to discuss is the following: a director need not exhibit in the performance of his or her duties a greater degree of skill and care than may reasonably be expected from a person of his or her knowledge and experience… 

Third, a director is not obliged to give continuous attention to the affairs of the company, nor is he or she even bound to attend all meetings of the board. However when, in the circumstances, it is reasonably possible to attend such meetings, a director ought to do so. Subsequent English cases, though, went to more of an extreme, permitting a director to avoid liability despite having missed all board meetings for a period of several years…

Fourth, in the absence of grounds for suspicion, it is not improper for a director to rely on company officials to perform honestly duties that have been properly delegated to them. Further to this point, it is the exigencies of business and the company's articles of association that, together, will determine whether it is appropriate to delegate a duty. The larger the business, for instance, the greater will be the need to delegate…

Hence, in the event that the reasonably prudent person is unskilled (which possibility is discussed above), the statute requires only the exercise of a degree of care which is commensurate with that person's level of skill. It is in this manner that skill and care are clearly interconnected. That being said, it is worth emphasizing that it is insufficient for a director to assert simply that he or she did his or her best if, having regard to that individual's level of skill and business experience, he or she failed to act reasonably prudently.” (Emphasis added)

[Please note that the final two paragraphs quoted above are not contained in the Casebook version.]

 

Some further points with respect to Peoples Department Stores Inc. v. Wise:

 
<ol>
<li>Note the very important distinction drawn below in BCE v. 1976 Debentureholders (discussed earlier in this course), concerning the distinction in the direction of the duty of care and the fiduciary duties:</li>
</ol>
“A second remedy lies against the directors in a civil action for breach of duty of care. As noted, <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec122subsec1">s. 122(1) </a>(b) of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a> requires directors and officers of a corporation to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”. This duty, unlike the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec122subsec1">s. 122(1) </a>(a) fiduciary duty, is not owed solely to the corporation, and thus may be the basis for liability to other stakeholders in accordance with principles governing the law of tort and extra-contractual liability: Peoples Department Stores. <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec122subsec1">Section 122(1) </a>(b) does not provide an independent foundation for claims. However, applying the principles of The Queen in right of Canada v. Saskatchewan Wheat Pool, [1983] 1 S.C.R. 205, courts may take this statutory provision into account as to the standard of behavior that should reasonably be expected.” (Emphasis added)
<ol start="2">
<li>The business judgment rule is well described in at page 332 of the Casebook in terms of the court not second-guessing “business judgments, as long as they are made in an informed way (and in accordance with fiduciary obligations. It is really just a statement of the principle of curial deference to managerial decisions, which only makes sense since the court has no authority to make such decisions.”</li>
<li>The point is made in Peoples Department Stores Inc. v. Wise that directors may rely on others in certain ways, as statutorily permitted. This is not entirely a simple and straightforward rule as the following excerpt illustrates:</li>
</ol>
 

“When faced with the serious inventory management problem, the Wise brothers sought the advice of the vice-president of finance, David Clément. The Wise brothers claimed as an additional argument that in adopting the solution proposed by Clément, they were relying in good faith on the judgment of a person whose profession lent credibility to his statement, in accordance with the defence provided for in <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec123subsec4">s. 123(4) </a>(b) (now s.123(5)) of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>. The Court of Appeal accepted the argument. We disagree. 

The reality that directors cannot be experts in all aspects of the corporations they manage or supervise shows the relevancy of a provision such as <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec123subsec4">s. 123(4) </a>(b). At the relevant time, the text of <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec123subsec4">s.123(4) </a>read:

“123. (4) A director is not liable under section 118, 119 or 122 if he relies in good faith on

(a) financial statements of the corporation represented to him by an officer of the corporation or in a written report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or

(b) a report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by him.

Although Clément did have a bachelor’s degree in commerce and 15 years of experience in administration and finance with Wise, this experience does not correspond to the level of professionalism required to allow the directors to rely on his advice as a bar to a suit under the duty of care. The named professional groups in <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec123subsec4">s. 123(4) </a>(b) were lawyers, accountants, engineers, and appraisers. Clément was not an accountant, was not subject to the regulatory overview of any professional organization and did not carry independent insurance coverage for professional negligence. The title of vice-president of finance should not automatically lead to a conclusion that Clément was a person “whose profession lends credibility to a statement made by him”. It is noteworthy that the word “profession” is used, not “position”. Clément was simply a non-professional employee of Wise. His judgment on the appropriateness of the solution to the inventory management problem must be regarded in that light. Although we might accept for the sake of argument that Clément was better equipped and positioned than the Wise brothers to devise a plan to solve the inventory management problems, this is not enough. Therefore, in our opinion, the Wise brothers cannot successfully invoke the defence provided by <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec123subsec4">s. 123(4) </a>(b) of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a> but must rely on the other defences raised.” (Emphasis added)

Please also read the brief discussion on all this at Note 6 on pages 332-333 of the Casebook. As well please refer to section 157 of the BCBCA:

“157. (1) A director of a company is not liable under section 154 and has complied with his or her duties under section 142 (1) if the director relied, in good faith, on

(a) financial statements of the company represented to the director by an officer of the company or in a written report of the auditor of the company to fairly reflect the financial position of the company,

(b) a written report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by that person,

(c) a statement of fact represented to the director by an officer of the company to be correct, or

(d) any record, information or representation that the court considers provides reasonable grounds for the actions of the director, whether or not

(i) the record was forged, fraudulently made or inaccurate, or

(ii) the information or representation was fraudulently made or inaccurate.

(2) A director of a company is not liable under section 154 if the director did not know and could not reasonably have known that the act done by the director or authorized by the resolution voted for or consented to by the director was contrary to this Act.”

 

Blog Activity 7.1:

A number of questions present themselves:
<ol>
<li> Consider, in the context of Peoples Department Stores Inc. v. Wise the impact of board meetings by telephone.</li>
<li> Are the principles enunciated in Soper v. Canada consistent with those in Peoples Department Stores Inc. v. Wise?</li>
<li> Is requiring that a report come from a “professional” before it can be relied on in good faith by directors without potential liability as set out in Peoples Department Stores Inc. v. Wise going too far? What are the core justifications for such a requirement of “professionalism”? Why does that requirement apply to reports in section 123(4)(b) but not to financial statements in section 123(4)(a)</li>
</ol>
Please blog your views on these questions and your reasons in less than one page under the heading “Soper/Peoples”.

 
<ol>
<li> Insider Trading</li>
</ol>
Please read the short section on “Insider Trading Rules” at page 333 of the casebook.
<h2> </h2>
<h2>Please read the following relevant provisions of the Securities Act [RSBC 1996] Chapter 418 which provide:</h2>
 

“57.2 (1) In this section, "issuer" means

(a) a reporting issuer, or

(b) any other issuer whose securities are publicly traded.

(2) A person must not enter into a transaction involving a security of an issuer, or a related financial instrument of a security of an issuer, if the person

(a) is in a special relationship with the issuer, and

(b) knows of a material fact or material change with respect to the issuer, which material fact or material change has not been generally disclosed.

(3) An issuer or a person in a special relationship with an issuer must not inform another person of a material fact or material change with respect to the issuer unless

(a) the material fact or material change has been generally disclosed, or

(b) informing the person is necessary in the course of business of the issuer or of the person in the special relationship with the issuer.

(4) A person who proposes to

(a) make a take over bid, as defined in section 92, for the securities of an issuer,

(b) become a party to a reorganization, amalgamation, merger, arrangement or similar business combination with an issuer, or

(c) acquire a substantial portion of the property of an issuer,

must not inform another person of a material fact or material change with respect to the issuer unless

(d) the material fact or material change has been generally disclosed, or

(e) informing the person is necessary to effect the take over bid, business combination or acquisition.

(5) If a material fact or material change with respect to an issuer has not been generally disclosed, the issuer, or a person in a special relationship with the issuer with knowledge of the material fact or material change, must not recommend or encourage another person to enter into a transaction involving a security of the issuer or a related financial instrument of a security of the issuer.

Liability for insider trading, tipping and recommending
<ol start="136">
<li> (1) If an issuer, or a person in a special relationship with an issuer, contravenes section 57.2, a person referred to in subsection (2) of this section has a right of action against the issuer or the person in a special relationship with the issuer.</li>
</ol>
(2) A person may recover losses incurred in relation to a transaction involving a security of the issuer, or a related financial instrument of a security of the issuer, if the transaction was entered into during the period

(a) starting when the contravention occurred, and

(b) ending at the time the material fact or material change is generally disclosed.

(3) If a court finds a person liable in an action under subsection (1), the amount payable to the plaintiff by the person is the lesser of

(a) the losses incurred by the plaintiff, and

(b) an amount determined in accordance with the regulations.

(4) For the purposes of subsection (1), in determining the losses incurred by a plaintiff, a court must not include an amount that the defendant proves is attributable to a change in the market price of the security that is unrelated to the material change or the material fact.

Accounting for benefits

136.1 (1) If a person is an insider, affiliate or associate of an issuer, and if the person contravenes section 57.2, the person must pay to the issuer an amount equal to

(a) the benefit that the person received as a result of the contravention, and

(b) the benefit that all persons received as a result of the contravention.

(2) If a person contravenes section 57.3, the person must pay to the investor, as defined in that section, an amount equal to

(a) the benefit that the person received as a result of the contravention, and

(b) the benefit that all persons received as a result of the contravention.

Due diligence defence for insider trading

136.2 A person is not liable under section 136 or 136.1 (1) if, after a reasonable investigation occurring before the person

(a) entered into the transaction,

(b) informed another person of the material fact or material change, or

(c) recommended or encouraged a transaction,

the person had no reasonable grounds to believe that the material fact or material change had not been generally disclosed.

Action by commission on behalf of issuer
<ol start="137">
<li> (1) On application by</li>
</ol>
(a) the commission, or

(b) any person who

(i) was, at the time of a transaction referred to in section 136, or

(ii) is, at the time of the application,

a security holder of the issuer,

the Supreme Court may, if satisfied that

(c) the applicant has reasonable grounds for believing that the issuer has a cause of action under section 136.1 (1), and

(d) the issuer has

(i) refused or failed to commence an action under section 136.1 (1) within 60 days after receipt of a written request from the applicant to do so, or

(ii) failed to prosecute diligently an action commenced by it under section 136.1 (1),

make an order, on any terms as to security for costs or otherwise that it considers proper, requiring the commission or authorizing the person or the commission to commence or continue an action in the name of, and on behalf of, the issuer to enforce the liability created by section 136.1 (1).

(2) On application by

(a) the commission, or

(b) any person who

(i) was, at the time of a transaction referred to in section 136.1 (2), or

(ii) is, at the time of the application,

a security holder of the investor,

the Supreme Court may, if satisfied that

(c) the applicant has reasonable grounds for believing that the investor has a cause of action under section 136.1 (2), and

(d) the investor has

(i) refused or failed to commence an action under section 136.1 (2) within 60 days after receipt of a written request from the applicant to do so, or

(ii) failed to prosecute diligently an action commenced by it under section 136.1 (2),

make an order, on any terms as to security for costs or otherwise that it considers proper, requiring the commission or authorizing the person or the commission to commence or continue an action in the name of, and on behalf of, the investor to enforce the liability created by section 136.1 (2).

(3) If an action under section 136.1 (1) or (2) is commenced or continued by the directors of the issuer, the Supreme Court may order the issuer to pay all costs properly incurred by the directors in commencing or continuing the action, as the case may be, if it is satisfied that the action is in the best interests of the issuer and its security holders.

(4) If an action under section 136.1 (1) or (2) is commenced or continued by a person who is a security holder of the issuer, the Supreme Court may order the issuer to pay all costs properly incurred by the security holder in commencing or continuing the action, as the case may be, if it is satisfied that

(a) the issuer refused or failed to commence the action or, having commenced it, failed to prosecute it diligently, and

(b) the action is in the best interests of the issuer and its security holders.

(5) If an action under section 136.1 (1) or (2) is commenced or continued by the commission, the Supreme Court must order the issuer to pay all costs properly incurred by the commission in commencing or continuing the action, as the case may be.

(6) In determining whether an action or its continuance is in the best interests of an issuer and its security holders, the court must consider the relationship between the potential benefit to be derived from the action by the issuer and its security holders and the cost involved in the prosecution of the action.

(7) Notice of every application under subsection (1) or (2) must be sent to the commission and the issuer, or the investor, as the case may be, and each of them may appear and be heard.

(8) An order made under subsection (1) or (2) requiring or authorizing the commission to commence or continue an action must provide that the issuer or investor, as the case may be,

(a) cooperate fully with the commission in the commencement or continuation of the action, and

(b) make available to the commission all records and other material or information relevant to the action and known to, or reasonably ascertainable by, the issuer or investor.” (Emphasis added)

 
<ol>
<li> Miscellaneous Duties</li>
</ol>
<h1>Please read the section of the Casebook titled “Miscellaneous Statutory Duties” at pages 333-335. This short section deals with particular obligations on managers that are not capable of being sorted or organized in a simple way. It would not be surprising if these sorts of miscellaneous duties and obligations grow as the power of what managers actually do and their compensation continues to grow.</h1>
 

 

TOPIC 2: MANAGERS’ FIDUCIARY OBLIGATIONS
<ol>
<li> Nature & Source</li>
</ol>
Please carefully read pages 335-337 of the Casebook and especially the extract from Sealy on “Fiduciary Relationships” on pages 336-337.

In this context we revisit the case of Peoples Department Stores v. Wise [2004] 3 S.C.R. 461 at pages 337-347 of the Casebook.

 

Note first the following statutory provisions:

CBCA 122. (1): “Every director and officer of a corporation in exercising their powers and discharging their duties shall (a) act honestly and in good faith with a view to the best interests of the corporation;”

BCBCA 142. (1): “A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case may be, must (a) act honestly and in good faith with a view to the best interests of the company,”

Of note are some of the phrases used in the judgment in Peoples Department Stores v. Wise.

At page 337 of the Casebook the “duty of loyalty” is used:

“The first duty has been referred to in this case as the “fiduciary duty”. It is better described as the “duty of loyalty”.

At page 338 of the Casebook:

“The statutory fiduciary duty requires directors and officers to act honestly and in good faith vis-à-vis the corporation. They must respect the trust and confidence that have been reposed in them to manage the assets of the corporation in pursuit of the realization of the objects of the corporation. They must avoid conflicts of interest with the corporation. They must avoid abusing their position to gain personal benefit. They must maintain the confidentiality of information they acquire by virtue of their position. Directors and officers must serve the corporation selflessly, honestly and loyally…” 

Note that the fiduciary duty owed by directors and officers imposes rather strict obligations per Canadian Aero Services Ltd. v. O’Malley, [1974] S.C.R. 592

In the light of this language, what are the components of the duty of loyalty?

Of interest is the following index which form part of the “UK Companies Act 2006 (c.46)”:

“171. Duty to act within powers
<ol start="172">
<li> Duty to promote the success of the company</li>
<li> Duty to exercise independent judgment</li>
<li> Duty to exercise reasonable care, skill and diligence</li>
<li> Duty to avoid conflicts of interest</li>
<li> Duty not to accept benefits from third parties</li>
<li> Duty to declare interest in proposed transaction or arrangement</li>
</ol>
183 Offence of failure to declare interest”

Please read the notes at pages 342-344 of the Casebook and especially consider the “paradox” discussed in the final paragraph of page 343 and continuing onto page 344.

 
<ol>
<li> To Whom Are Duties Owed?</li>
</ol>
Read the Note at beginning in the middle of page 345 of the Casebook and continuing to page 346.

It is clear from Peoples Department Stores v. Wise that the duty is owed to the corporation, and not for example to creditors. That said what is not yet clear are the methodology and considerations a manager ought to employ when determining what is in “the best interests of the corporation”. How broad may that consideration be? Does it include only “the best interests of the shareholders of the corporation” or does it go beyond to include all of the myriad factors and actors who might be relevant to corporate existence, including creditors and others. In other words even if a fiduciary duty is not owed by a corporate officer to creditors of the corporation, should that corporate officer still consider the position of creditors (and others) in exercising their fiduciary duty “in the best interests of the corporation”. The clear answer seems to be “yes”. As esoteric as this question may sound, it is actually a very practical and common one in the day-to-day exercise of management duties.

 
<h1> C. Judicial Review of Exercise of Managerial Power</h1>
 

Please read pages 348-358 of the Casebook.

Please read the decision in Hogg v. Cramphorn Ltd. [1966] 3 All E.R. 420 (Ch.D.) at pages 348-350 of the Casebook.

The board of Cramphorn Ltd. had company shares issued to a trust for the benefit of its employees in order to prevent the take-over of the company. There was a genuine belief among the board and the chairman and managing director of Cramphorn Ltd., Colonel Cramphorn, that such a take-over was bad for company; that it would change the business and unsettle employees. The Court found the new shares issued by the board to be invalid. The purpose of preventing the takeover, however sincerely motivated, was found not be a valid one, and accordingly the directors had violated their duties by issuing the shares. Buckley J. found that “…The power to issue shares was a fiduciary power and if as I think, it was exercised for an improper motive, the issue of these shares is liable to be set aside…”

 

Please note the contents of BC Standard Articles paragraph 3.1 as they are not dissimilar from the articles in issue in Hogg v. Cramphorn Ltd.

“Subject to the Business Corporations Act and the rights, if any, of the holders of issued shares of the Company, the Company may issue, allot, sell or otherwise dispose of the unissued shares and issued shares held by the Company, at the times, to the persons, including directors, in the manner, on the terms and conditions and for the issue prices (including any premium at which shares with par value may be issued) that the directors may determine. The issue price for a share with par value must be equal to or greater than the par value of the share.”

Please also note that the improper issuance of shares could only be validated if the decision was to be <a href="http://en.wikipedia.org/wiki/Ratified">ratified</a> by the shareholders at a <a href="http://en.wikipedia.org/wiki/General_meeting">general meeting</a>. Validating mistakes and miscue’s through shareholder ratification at a general meeting is actually quite a practical and logical step when you on it. In many situations (though probably not in the case of a takeover bid) it may not even be a necessarily difficult step.

Please consider for your-self the question raised in Note 1 on page 350 of the Casebook.

 

Please read the case of Teck Corp. v. Millar (1972), 33 DLR (3d) 288 (BCSC) at pages 350-357 of the Casebook. The question to ask while reading Teck Corp. v. Millar is why was Hogg v. Cramphorn was not followed by Teck Corp. v. Millar?

 

Similar to Hogg v. Cramphorn, Teck Corp. v. Millar, (1972), 33 DLR (3d) 288 (BCSC) deals the <a href="http://en.wikipedia.org/wiki/Fiduciary_duty">fiduciary duty</a> of corporate directors in the context of a <a href="http://en.wikipedia.org/wiki/Takeover">takeover</a> bid.

Teck Corp. argued that the board of Afton Mines Ltd. had entered into a deal with Canadian Exploration Ltd (“Canex”) and Placer Development Ltd. to prevent Teck from gaining control of Afton Mines Ltd. and had thereby acted for an improper purpose. In fact Teck had over time come to acquire a majority of Afton’s shares. Afton Mines Ltd. argued that it believed it was in the best interests of Afton to make a deal with Canex and not Teck. Accordingly they argued that the board of Afton had acted in that company’s interest despite the adverse effect on Teck, Teck’s shares in Afton, and Teck’s desire to own Afton. The court found that it was unnecessary for the board to act pursuant to a majority shareholder’s wishes in order for it to be acting in the best interests of the company. That applied even if the actions of the board prevented the majority shareholder from taking control of the company.

The court found that the board had a reasonable belief that a deal with Canex was better for the company than would have been a deal with Teck. The board therefore acted in good faith in entering into the agreement with Canex. Accordingly Afton’s actions in hindering Teck’s efforts to obtain control of Afton were not improper. In summary the court concluded that hostile take-overs may be resisted by corporate directors provided they are acting in good faith, and that they have reasonable grounds to believe that the take-over will cause substantial harm to the interests of the company’s shareholders. In the words Berger J. of the BC Supreme Court:

“A classical theory that once was unchallengeable must yield to the facts of modern life. In fact, of course, it has. If today the directors of a company were to consider the interests of its employees no one would argue that in doing so they were not acting bona fide in the interests of the company itself. Similarly, if the directors were to consider the consequences to the community of any policy that the company intended to pursue, and were deflected in their commitment to that policy as a result, it could not be said that they had not considered bona fide the interests of the shareholders. 

I appreciate that it would be a breach of their duty for directors to disregard entirely the interests of a company's shareholders in order to confer a benefit on its employees: Parke v. Daily News Ltd. But if they observe a decent respect for other interests lying beyond those of the company's shareholders in the strict sense, that will not, in my view, leave directors open to the charge that they have failed in their fiduciary duty to the company.”

Perhaps it is a bit more obtuse then the direct approach taken by the learned trial judge in Teck Corp. v. Millar, but there is a different, more psychological way, the two cases may be rationalized at least somewhat. That is by more closely examining who was being protected and with what intention. In Hogg v. Cramphorn the directors of Cramphorn Ltd. seemed essentially to feel that the takeover was bad for company in that it would change the business and unsettle employees. Thus the best interests of the shareholders might be seen as perhaps being somewhat of a less direct factor in their deliberations. However in Teck v. Millar the interests of the shareholders seems far more of a central factor to the decision making of the board. It is of course a great irony of the somewhat strange fact pattern in Teck v. Millar that Teck was already a majority holder of the shares in the company it was trying to take over – and despite that fact the best interests of the company was not defined by the identity of the majority shareholder of that company’s stock.

 

We now turn to the cases of Parke v. Daily News Ltd. [1962] 2 All ER 92 & Re W & M Roith Ltd. [1967] 1 All ER 427. Please read them:

 

In Parke v. Daily News Ltd. the Daily News Ltd. published two newspapers that were running at a loss over a number of years. The board entered into a contract to sell the newspapers disposing of substantially all company’s assets. The result of the transaction would be the “redundancy” and termination of an overwhelming majority of employees. The directors proposed to use balance of the sale proceeds to provide give compensatory payments to those who were going to lose their jobs. The minority shareholders challenged this saying that such payments would be “ultra vires” the company.

 

Plowman J. quoted Bowen L.J. in Hutton v. West Cork Ry Co (1883), 23 ChD at p 670:

 

“Bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational. The test must be what is reasonably incidental to, and within the reasonable scope of carrying on, the business of the company.”

 

Plowman J. went on to say:

 

“The conclusions which, I think, follow from these cases are: first, that a company's funds cannot be applied in making ex gratia payments as such; secondly, that the court will inquire into the motives actuating any gratuitous payment, and the objectives which it is intended to achieve; thirdly, that the court will uphold the validity of gratuitous payments if, but only if, after such inquiry it appears that the tests enumerated by Eve J are satisfied; fourthly, that the onus of upholding the validity of such payments lies on those who assert it…

 

In my judgment, therefore, the defendants were prompted by motives which, however laudable, and however enlightened from the point of view of industrial relations, were such as the law does not recognise as a sufficient justification. Stripped of all its side issues, the essence of the matter is this, that the directors of the defendant company are proposing that a very large part of its funds should be given to its former employees in order to benefit those employees rather than the company, and that is an application of the company's funds which the law, as I understand it, will not allow. If this is right, then it appears to me to follow from Hutton v West Cork Ry Co that the proposal to pay compensation is one which a majority of shareholders is not entitled to ratify.”

 

In Re W & M Roith Ltd. Mr. Roith, the controlling director had provided many years services to W & M Roith Ltd. without a service contract. He was then given a service agreement providing for payment of a pension to his widow if he died while still a director. Mr. Roith was already in poor health at time of agreement. He died two months later. The pension was paid for several years and then the company went into liquidation. Mr. Roith’s executors put in a claim in the liquidation for the capitalized value of the pension. The liquidator rejected the claim.

It was held (again by Plowman J.) that the claim for the pension could not be supported. This was because the pension was not for the benefit of the company, nor incidental to the carrying on of the company’s business.

 

CONSIDER THE FOLLOWING TWO QUESTIONS AND THEIR RELATIONSHIP:

 
<ol>
<li>How should charitable and political contributions be treated? Are they for the benefit of the company or the individuals from the company who may want to go to fancy dinners and associate with the powerful or self aggrandize in some other way? As a shareholder how might you reconcile the issue of the fiduciary duties of directors to what is in the best interests of the corporation and the “rights” of the corporation as a corporate person to act in the way it feels is best?</li>
</ol>
 

Please read the following story from ars technica which can be found here: <a href="http://arstechnica.com/apple/2014/03/at-apple-shareholders-meeting-tim-cook-tells-off-climate-change-deniers/">http://arstechnica.com/apple/2014/03/at-apple-shareholders-meeting-tim-cook-tells-off-climate-change-deniers/</a>
<h1>“At Apple shareholder’s meeting, Tim Cook tells off climate change deniers: “If you want me to do things only for ROI reasons, you should get out of this stock."</h1>
<h1> </h1>
by <a href="http://arstechnica.com/author/megan-geuss/">Megan Geuss</a> - Mar 1 2014, 1:30pm PST

Apple's Maiden, North Carolina data center will be largely powered by Apple's own solar panel arrays and methane-powered fuel cells.

Apple, Inc.

At a shareholders meeting on Friday, CEO Tim Cook <a href="http://www.macrumors.com/2014/02/28/tim-cook-angrily-rejects-ncppr-proposal/">angrily defended</a> Apple's environmentally-friendly practices against a request from the conservative National Center for Public Policy Research (NCPPR) to drop those practices if they ever became unprofitable.

NCPPR put forward a shareholder's proposal asking Apple to disclose how much it spends on sustainability programs. If those costs detracted from Apple's bottom line, the NCPPR demanded that Apple discontinue the programs and commit only to projects that are explicitly profitable. Cook apparently became angry at the group's request. According to an account from <a href="http://www.macobserver.com/tmo/article/tim-cook-soundly-rejects-politics-of-the-ncppr-suggests-group-sell-apples-s">MacObserver</a>:

What ensued was the only time I can recall seeing Tim Cook angry, and he categorically rejected the worldview behind the NCPPR's advocacy. He said that there are many things Apple does because they are right and just, and that a return on investment (ROI) was not the primary consideration on such issues.

"When we work on making our devices accessible by the blind," he said, "I don't consider the bloody ROI." He said that the same thing about environmental issues, worker safety, and other areas where Apple is a leader.

…

He didn't stop there, however, as he looked directly at the NCPPR representative and said, "If you want me to do things only for ROI reasons, you should get out of this stock."

For the better part of the last decade, Apple has taken on a number of sustainability projects and adopted practices to reduce waste and carbon emissions. In 2012, it <a href="http://arstechnica.com/apple/2012/02/apple-confirms-plans-for-oregon-data-center-outlines-green-initiatives/">broke ground</a> on a <a href="http://arstechnica.com/apple/2012/10/apple-breaks-ground-on-mammoth-colossal-gargantuan-oregon-data-center/">data center</a>in Oregon in order to take advantage of low-cost renewable energy and <a href="http://arstechnica.com/apple/2012/05/what-it-takes-to-make-a-green-apple/">has plans</a> to make all of its facilities reliant on green energy. It generally <a href="http://ww2.epeat.net/publicsearchresults.aspx?stdid=1&return=searchoptions&epeatcountryid=1&rating=3&ProductType=3">scores highly</a> with <a href="http://arstechnica.com/apple/2012/07/apple-leaving-green-product-registry-epeat-was-a-mistake/">EPEAT</a>, a federal environmental group that keeps a registry of “green” digital devices. And in May 2013, it <a href="http://arstechnica.com/apple/2013/05/apple-hires-former-epa-head-to-handle-environmental-issues/">hired Lisa Jackson</a>, who formerly ran the Environmental Protection Agency, to help Apple with sustainability.

NCPPR later issued a blustery <a href="http://www.nationalcenter.org/PR-Apple_Tim_Cook_Climate_022814.html">press release</a> about how Apple's desire to “combat so-called climate change” would destroy shareholder value. It accused "the Al gore contingency in the room" of greeting its questions "with boos and hisses."

According to the press release, Justin Danhof, director of the National Center's Free Enterprise Project, said "Mr. Cook made it very clear to me that if I, or any other investor, was more concerned with return on investment than reducing carbon dioxide emissions, my investment is no longer welcome at Apple."

It seems clear that Apple won't halt its projects for climate change deniers, and the rest of its shareholders weren't troubled by that at all. The NCPPR's proposal received just 2.95 percent of the vote.”

 

Blog Activity 7.2:

Assume Apple is a Canadian company and you are their counsel. Do you have any advice for Mr. Cook regarding his view of corporate ethics in a company law context? 

Please blog your views on these two questions and your reasons in less than three pages under the heading “Social Responsibility & Legal Duty”.

 

 

 

D: Conflicts of Interest and Duty

 

Please read pages 358-363 of the Casebook.

There you will find that the strict principle respecting conflicts of interest was set out as follows in the 1854 decision of Aberdeen Railway Co. v. Blaikie Bros. [1843-60] All E.R. Rep 249:

“A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the interest of the <a href="http://en.wikipedia.org/wiki/Cestui_que">cestui que</a> trust, which it was possible to obtain. It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interest of those for whom he is a trustee, have been as good as could have been obtained from any other person - they may even at the time have been better. But still so inflexible is the rule that no inquiry on that subject is permitted…”

Then please read the penultimate paragraph on page 358 of the Casebook.

Then please turn to and read North-West Transportation Co. v. Beatty (1887), 12 App. Cas. 589 (Ont. J.C.P.C.) at pages 359-361 of the Casebook.

The facts were that James H. Beatty, one of the directors of the North-West Transportation Co. sold that company a ship that he owned. The shareholders, including James H. Beatty, voted to approve transaction. However another director of the North-West Transportation Co., Henry Beatty, sued the North-West Transportation Co. and certain defendant directors on behalf of himself and all other shareholders to set aside the sale.

The following general principles emerge from the case:
<ul>
<li>A vote of the majority of the shareholders on some issue as to which they are competent binds the minority and the corporation.</li>
<li>A shareholder’s vote is not disqualified by a private interest being at stake.</li>
<li>So in the absence of fraud or oppression a breach of director’s duty to avoid conflict can be “ratified” by a majority of shareholders including the vote of the conflicted director.</li>
</ul>
Two points worthy of note about this case.

First it is worthy of mention that the court makes a clear distinction between the conflicted party as a director exercising their rights as a director and the same individual exercising their shareholder rights. Mr. J.H. Beatty quite rightly was absent from the directors meeting that approved the transaction. Accordingly his vote as a director was never made or considered in the equation. However Mr. Beatty did vote his shares as shareholder to ratify the directors’ decision and that was judged to be perfectly valid by the Judicial Committee of the Privy Council (though not by the court below). This is an excellent illustration of how the roles of directors and shareholders are – at least in theory.

Secondly, apart from the point immediately above the principles set out in the case would appear to constitute rather austere rules for what is often a very complex (and even unavoidable) subject in the “real world”.

Blog Activity 7.3:

All of this raises the question of to whom did James H. Beatty owe a duty? Did the shareholder vote relieve him of that duty? How or why would that be? Could the North-West Transportation Co. Have maintained contract with James H. Beatty and also have sued to recover any profit he benefitted from as a result of the transaction?

Please blog your views on these questions and your reasons in less than one page under the heading “Conflict of Interest and Duty”.

 

 
<ol>
<li> Statutory Conflict of Interest Protocols </li>
</ol>
Section 147 and following of the BCBCA essentially create a code of the procedures that must be followed to avoid the application of the strict conflict of interest rules set out above and define the consequences of a failure to do so. The protocol is that the board of directors may approve a transaction in which a director has a “disclosable interest” if the interest has in fact been disclosed. However the interested director may not vote on any such approval resolution per <a href="http://www.canlii.org/en/bc/laws/stat/sbc-2002-c-57/latest/sbc-2002-c-57.html#sec149_smooth">section 149</a> of the BCBCA. If a director fails to disclose his or her interest in a transaction, the director may be liable to account to the company for any profit he or she receives per <a href="http://www.canlii.org/en/bc/laws/stat/sbc-2002-c-57/latest/sbc-2002-c-57.html#sec149_smooth">section 149</a> of the BCBCA.

What is a “Disclosable Interest”? Section 147 (1) helps us:

 

“147 (1) For the purposes of this Division, a director or senior officer of a company holds a disclosable interest in a contract or transaction if

(a) the contract or transaction is material to the company,

(b) the company has entered, or proposes to enter, into the contract or transaction, and

(c) either of the following applies to the director or senior officer:

(i) the director or senior officer has a material interest in the contract or transaction;

(ii) the director or senior officer is a director or senior officer of, or has a material interest in, a person who has a material interest in the contract or transaction.” (Emphasis added)

Note that neither what is “material to the company” nor what is a “material interest” is actually defined.

In the case of Zysko v. Thorarinson, 2003 ABQB 911 the Honourable Mr. Justice P. Chrumka, quoted (inter alia), Professor B.L. Welling from Corporate Law in Canada: The Governing Principles, 2nd ed. (Vancouver: Butterworths, 1991), on the issue of what interests are "material":

 

“…it seems clear that the statute also addresses the problem of a director or officer who has no monetary interest in a person on the other side, yet who is likely to have an emotional involvement. Thus, a deal in which the corporation is negotiating with a close relative, or even a close personal friend, of one of the directors or officers ought to be suspect. ...one can assume that the courts will address their attention to the blood relation question... the only question will be to what degree of relationship the section extends. The answer is once again, subsumed under the requirement that the interest itself be "material".

 

What is meant by "material"... In the context of conflict of interest contracts, the meaning of "material contract" and "material interest" is conditioned by the purpose behind the section. The purpose is to identify those negotiations in which a corporate manager's ability to bargain effectively on behalf of the corporation may be inhibited by some interest he has in the other side. Any personal relationship or monetary interest he may have in the other side that might be thought to be an inhibiting factor is a material interest if disclosure of the relationship or interest might be relevant to the corporate decision whether to involve the particular manager in the negotiations. Whether to participate in a proposed contract is a corporate decision and the corporation is entitled to full disclosure from its fiduciaries of all facts that might affect that decision.” (Emphasis added)

 

The full decision in Zysko v. Thorarinson can be found here: <a href="http://caselaw.canada.globe24h.com/0/0/alberta/court-of-queen-s-bench/2003/11/07/zysko-v-thorarinson-2003-abqb-911.shtml">http://caselaw.canada.globe24h.com/0/0/alberta/court-of-queen-s-bench/2003/11/07/zysko-v-thorarinson-2003-abqb-911.shtml</a>

Zysko v. Thorarinson was approved in <a href="http://www.canlii.org/en/bc/bcsc/doc/2013/2013bcsc941/2013bcsc941.html?searchUrlHash=AAAAAAAAAAEAFjIwMDMgQUJRQiA5MTEgKENhbkxJSSkAAAABADEvZW4vYWIvYWJxYi9kb2MvMjAwMy8yMDAzYWJxYjkxMS8yMDAzYWJxYjkxMS5odG1sAQ">Mikulic v Peter</a>, 2013 BCSC 941 (BCSC).

Finally please note the “notice exclusions” from disclosable interest in sections 147 (2) and (4) of the BCBCA as well as the approval mechanism after disclosure in BCBCA section149. For your convenience the relevant provisions are reproduced below:

 

“Division 3 — Conflicts of Interest

Disclosable interests

 
<ol start="147">
<li> (1) For the purposes of this Division, a director or senior officer of a company holds a disclosable interest in a contract or transaction if</li>
</ol>
(a) the contract or transaction is material to the company,

(b) the company has entered, or proposes to enter, into the contract or transaction, and

(c) either of the following applies to the director or senior officer:

(i) the director or senior officer has a material interest in the contract or transaction;

(ii) the director or senior officer is a director or senior officer of, or has a material interest in, a person who has a material interest in the contract or transaction.

(2) For the purposes of subsection (1) and this Division, a director or senior officer of a company does not hold a disclosable interest in a contract or transaction if

(a) the situation that would otherwise constitute a disclosable interest under subsection (1) arose before the coming into force of this Act or, if the company was recognized under this Act, before that recognition, and was disclosed and approved under, or was not required to be disclosed under, the legislation that

(i) applied to the corporation on or after the date on which the situation arose, and

(ii) is comparable in scope and intent to the provisions of this Division,

(b) both the company and the other party to the contract or transaction are wholly owned subsidiaries of the same corporation,

(c) the company is a wholly owned subsidiary of the other party to the contract or transaction,

(d) the other party to the contract or transaction is a wholly owned subsidiary of the company, or

(e) the director or senior officer is the sole shareholder of the company or of a corporation of which the company is a wholly owned subsidiary.

(3) In subsection (2), "other party" means a person of which the director or senior officer is a director or senior officer or in which the director or senior officer has a material interest.

(4) For the purposes of subsection (1) and this Division, a director or senior officer of a company does not hold a disclosable interest in a contract or transaction merely because

(a) the contract or transaction is an arrangement by way of security granted by the company for money loaned to, or obligations undertaken by, the director or senior officer, or a person in whom the director or senior officer has a material interest, for the benefit of the company or an affiliate of the company,

(b) the contract or transaction relates to an indemnity or insurance under Division 5,

(c) the contract or transaction relates to the remuneration of the director or senior officer in that person's capacity as director, officer, employee or agent of the company or of an affiliate of the company,

(d) the contract or transaction relates to a loan to the company, and the director or senior officer, or a person in whom the director or senior officer has a material interest, is or is to be a guarantor of some or all of the loan, or

(e) the contract or transaction has been or will be made with or for the benefit of a corporation that is affiliated with the company and the director or senior officer is also a director or senior officer of that corporation or an affiliate of that corporation.

 

Obligation to account for profits
<ol start="148">
<li> (1) Subject to subsection (2) and unless the court orders otherwise under section 150 (1) (a), a director or senior officer of a company is liable to account to the company for any profit that accrues to the director or senior officer under or as a result of a contract or transaction in which the director or senior officer holds a disclosable interest.</li>
</ol>
(2) A director or senior officer of a company is not liable to account for and may retain the profit referred to in subsection (1) of this section in any of the following circumstances:

(a) the disclosable interest was disclosed before the coming into force of this Act under the former Companies Act that was in force at the time of the disclosure, and, after that disclosure, the contract or transaction is approved in accordance with section 149 of this Act, other than section 149 (3);

(b) the contract or transaction is approved by the directors in accordance with section 149, other than section 149 (3), after the nature and extent of the disclosable interest has been disclosed to the directors;

(c) the contract or transaction is approved by a special resolution in accordance with section 149, after the nature and extent of the disclosable interest has been disclosed to the shareholders entitled to vote on that resolution;

(d) whether or not the contract or transaction is approved in accordance with section 149,

(i) the company entered into the contract or transaction before the director or senior officer became a director or senior officer of the company,

(ii) the disclosable interest is disclosed to the directors or the shareholders, and

(iii) the director or senior officer does not participate in, and, in the case of a director, does not vote as a director on, any decision or resolution touching on the contract or transaction.

(3) The disclosure referred to in subsection (2) (b), (c) or (d) of this section must be evidenced in a consent resolution, the minutes of a meeting or any other record deposited in the company's records office.

(4) A general statement in writing provided to a company by a director or senior officer of the company is a sufficient disclosure of a disclosable interest for the purpose of this Division in relation to any contract or transaction that the company has entered into or proposes to enter into with a person if the statement declares that the director or senior officer is a director or senior officer of, or has a material interest in, the person with whom the company has entered, or proposes to enter, into the contract or transaction.

(5) In addition to the records that a shareholder of the company may inspect under section 46, that shareholder may, without charge, inspect

(a) the portions of any minutes of meetings of directors, or of any consent resolutions of directors, that contain disclosures under this section, and

(b) the portions of any other records that contain those disclosures.

(6) In addition to the records a former shareholder of the company may inspect under section 46, that former shareholder may, without charge, inspect the records referred to in subsection (5) (a) and (b) of this section that are kept under section 42 and that relate to the period when that person was a shareholder.

(7) Sections 46 (7) and (8), 48 (1) and (3) and 50 apply to the portions of minutes, resolutions and records referred to in subsections (5) and (6) of this section.

 

Approval of contracts and transactions
<ol start="149">
<li> (1) A contract or transaction in respect of which disclosure has been made in accordance with section 148 may be approved by the directors or by a special resolution.</li>
</ol>
(2) Subject to subsection (3), a director who has a disclosable interest in a contract or transaction is not entitled to vote on any directors' resolution referred to in subsection (1) to approve that contract or transaction.

(3) If all of the directors have a disclosable interest in a contract or transaction, any or all of those directors may vote on a directors' resolution to approve the contract or transaction.

(4) Unless the memorandum or articles provide otherwise, a director who has a disclosable interest in a contract or transaction and who is present at the meeting of directors at which the contract or transaction is considered for approval may be counted in the quorum at the meeting whether or not the director votes on any or all of the resolutions considered at the meeting.

 

Powers of court
<ol start="150">
<li> (1) On an application by a company or by a director, senior officer, shareholder or beneficial owner of shares of the company, the court may, if it determines that a contract or transaction in which a director or senior officer has a disclosable interest was fair and reasonable to the company,</li>
</ol>
(a) order that the director or senior officer is not liable to account for any profit that accrues to the director or senior officer under or as a result of the contract or transaction, and

(b) make any other order that the court considers appropriate.

(2) Unless a contract or transaction in which a director or senior officer has a disclosable interest has been approved in accordance with section 148 (2), the court may, on an application by the company or by a director, senior officer, shareholder or beneficial owner of shares of the company, make one or more of the following orders if the court determines that the contract or transaction was not fair and reasonable to the company:

(a) enjoin the company from entering into the proposed contract or transaction;

(b) order that the director or senior officer is liable to account for any profit that accrues to the director or senior officer under or as a result of the contract or transaction;

(c) make any other order that the court considers appropriate.

 

Validity of contracts and transactions
<ol start="151">
<li> A contract or transaction with a company is not invalid merely because</li>
</ol>
(a) a director or senior officer of the company has an interest, direct or indirect, in the contract or transaction,

(b) a director or senior officer of the company has not disclosed an interest he or she has in the contract or transaction, or

(c) the directors or shareholders of the company have not approved the contract or transaction in which a director or senior officer of the company has an interest.

 

Limitation of obligations of directors and senior officers
<ol start="152">
<li> Except as is provided in this Division, a director or senior officer of a company has no obligation to</li>
</ol>
(a) disclose any direct or indirect interest that the director or senior officer has in a contract or transaction, or

(b) subject to section 192, account for any profit that accrues to the director or senior officer under or as a result of a contract or transaction in which the director or senior officer has a disclosable interest.

 

Disclosure of conflict of office or property
<ol start="153">
<li> (1) If a director or senior officer of a company holds any office or possesses any property, right or interest that could result, directly or indirectly, in the creation of a duty or interest that materially conflicts with that individual's duty or interest as a director or senior officer of the company, the director or senior officer must disclose, in accordance with this section, the nature and extent of the conflict.</li>
</ol>
(2) The disclosure required from a director or senior officer under subsection (1)

(a) must be made to the directors promptly

(i) after that individual becomes a director or senior officer of the company, or

(ii) if that individual is already a director or senior officer of the company, after that individual begins to hold the office or possess the property, right or interest for which disclosure is required, and

(b) must be evidenced in one of the ways referred to in section 148 (3).”

 

Blog Activity 7.4:

All of which leaves us with a rather vexing question. If the rather austere and harsh rules set rule in in the 1854 decision of Aberdeen Railway Co. v. Blaikie Bros. Have been mitigated by statute when it comes to “material” conflicts of interest, what are we to conclude with respect to “non-material” contracts or transactions? They are not mentioned in the statute. Are “non-material” contracts or transactions then subject to the rules set out in Aberdeen Railway Co. v. Blaikie Bros.? Would this make any sense?

Please blog your views on these questions and your reasons in less than one page under the heading “Aberdeen & Non-materiality”.

 
<ol>
<li> Corporate Opportunities </li>
</ol>
Please read pages 363-392 of the Casebook.

The Canadian case of Cook v. Deeks [1916] 1 A.C. 554 (Ont. J.C.P.C.) provides a useful fact pattern from which to proceed.

 

The facts were that the Toronto Construction Co. (“TCC”) had four shareholders (each holding a quarter of the company's shares) each of whom who were also the directors of that company. TCC helped with railway construction for the CPR. Three of the directors wanted to exclude the fourth, Mr. Cook, from the business and accordingly agreed to a contract with the CPR for building a line at the <a href="http://en.wikipedia.org/wiki/Guelph_Junction_Railway">Guelph Junction</a> and <a href="http://en.wikipedia.org/wiki/Hamilton,_Ontario">Hamilton</a> branch in their own three names, and not in the name of TCC. They then passed a shareholder resolution declaring that the company had no interest in that contract between the three and the CPR. Mr. Cook sued arguing that the contract did indeed belong to the Toronto Construction Co. and that the shareholder resolution ratifying the actions of the three other shareholder directors was not valid.

The Judicial Committee of the <a href="http://en.wikipedia.org/wiki/Privy_Council">Privy Council</a> found that the three directors had breached their duty of loyalty to the company. Perhaps the more challenging point was how the court would deal with the issue of the shareholder ratification that had occurred given their previous decision in North-West Transportation v. Beatty (1887), 12 APP. CAS. 589 (ONT. J.C.P.C.) where it was decided that in the absence of fraud or oppression a breach of director’s duty to avoid conflict can be “ratified” by a majority of shareholders including the vote of the conflicted director. The Judicial Committee of the <a href="http://en.wikipedia.org/wiki/Privy_Council">Privy Council</a> accomplished feat in Cooks v. Deeks by drawing a distinction between contracting with the corporation as was the case in North-West Transportation v. Beatty (where Mr. Beatty was selling his boat to North-West Transportation), and contracting outside the corporation as was the case in Cook v. Deeks (where TCC was not directly involved in the transaction). Does this really make sense on a principled basis, or is it a “distinction without a difference”?

In the end the three director/shareholders had to account to TCC for the profits they had made on the contractual opportunity, and those were held in trust for the Toronto Construction Co. (of which you will recall Mr. Cook had a one-quarter interest).

Please read the fascinating case of Regal (Hastings) Ltd. v. Gulliver [1942] 1 All E.R. 378 at pages 365-369 of the Casebook which deals with what happens when directors (and a lawyer) acting in good faith and in the best interests of their company follow through personally on a “corporate opportunity”. The entire case can be found here: <a href="http://www.bailii.org/uk/cases/UKHL/1942/1.html">http://www.bailii.org/uk/cases/UKHL/1942/1.html</a>

In this case the defendants were the directors of Regal (Hastings) Ltd., a company which operated a movie theatre. Regal (Hastings) Ltd. created Hastings Amalgamated Cinemas Limited, intending it to be a subsidiary to acquire two nearby movie theatres the Elite and the De Luxe.

Because of a lack of money at the time in Regal (Hastings) Ltd., the directors and solicitors of Regal (Hastings) Ltd. personally paid for 60% of the shares in Hastings Amalgamated Cinemas Limited. Regal (Hastings) Ltd. had the remaining 40%. Please note that “it was assumed throughout that the defendants acted in the best interests of Regal” as stated at the bottom of the note introducing the case and which appears at page 365 of the Casebook.

Ultimately the shares in Regal (Hastings) Ltd. and the 3,000 shares in Hastings Amalgamated Cinemas Limited not owned by Regal (Hastings) Ltd. were sold to Oxford & Berkshire Cinemas Ltd. Part of the consideration was for the 3,000 shares Hastings Amalgamated Cinemas Limited not owned by Regal (Hastings) Ltd. and as a result, the defendants (the directors and solicitors of Regal (Hastings) Ltd. who personally paid for 60% of the shares in Hastings Amalgamated Cinemas Limited) made a profit.

Oxford & Berkshire Cinemas Ltd. now in control of Regal (Hastings) Ltd., causes Regal (Hastings) Ltd. to sue its former directors seeking an account of profits made on the sale of their personal shares in Hastings Amalgamated Cinemas Limited.

As an aside, leading counsel for the defendant Gulliver was Denning, Q.C.

 

The House of Lords reversed the High Court and the Court of Appeal, finding that the defendants had profited “by reason of the fact that they were directors of Regal and in the course of the execution of that office”. Accordingly they were made to account for their profits to Regal (Hastings) Ltd. and therefore ultimately to Oxford & Berkshire Cinemas Ltd.

Per Lord Russell:

“The rule of equity which insists on those who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon questions or considerations as whether the property would or should otherwise have gone to the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having in the stated circumstances been made…

In the result I am of opinion that the directors standing in a fiduciary relationship to Regal in regard to the exercise of their powers as directors, and having obtained these shares by reason and only by reason of the fact that they were directors of Regal and in the course of the execution of that office, are accountable for the profits which they have made out of them. The equitable rule laid down in Keech v. Sandford, ex parte James and similar authorities applies to them in full force. It was contended that these cases were distinguishable by reason of the fact that it was impossible for Regal to get the shares owing to lack of funds, and that the directors in taking the shares were really acting as members of the public. I cannot accept this argument. It was impossible for the cestui quo trust in Keech v. Sandford to obtain the lease, nevertheless the trustee was accountable: and the suggestion that the directors were applying simply as members of the public is a travesty of the facts. They could, had they wished, have protected themselves by a resolution (either antecedent or subsequent) of the Regal share-holders in general meeting. In default of such approval, the liability to account must remain.”

 

Per Lord Wright: "The Court of Appeal held that, in the absence of any dishonest intention, or negligence, or breach of a specific duty to acquire the shares for the appellant company, the respondents as directors were entitled to buy the shares themselves. Once, it was said, they came to a bona fide decision that the appellant company could not provide the money to take up the shares, their obligation to refrain from acquiring those shares for themselves came to an end. With the greatest respect, I feel bound to regard such a conclusion as dead in the teeth of the wise and salutary rule so stringently enforced in the authorities. It is suggested that it would have been mere quixotic folly for the four respondents to let such an occasion pass when the appellant company could not avail itself of it; Lord King, L.C., faced that very position when he accepted that the person in the fiduciary position might be the only person in the world who could not avail himself of the opportunity."

Per Lord Porter: “In these circumstances it is to my mind immaterial that the directors saw no way of raising the money save from amongst themselves and from the solicitor to the company, or indeed that the money could in fact have been raised in no other way. The legal proposition may, I think, be broadly stated by saying that one occupying a position of trust must not make a profit which he can acquire only by use of his fiduciary position, or if he does he
must account for the profit so made. For this proposition the cases
of Keech v. Sandford (1726), Sel. Cas. Temp. King. 61, and exparte
James (1803) 8 Ves. jun. 337 are sufficient authority…

… To treat the problem in this way is, in my view, to look at it as involving a claim for negligence or misfeasance and to neglect the wider aspect. Directors, no doubt, are not trustees, but they occupy a fiduciary position towards the company whose board they form. Their liability in this respect does not depend upon breach of duty but upon the proposition that a director must not make a profit out of property acquired by reason of his relationship to the company of which he is director. It matters not that he could not have acquired the property for the company itself—the profit which he makes is the company's, even though the property by means of which he made it was not and could not have, been acquired on its behalf. Adopting the words of Lord Eldon in ex parte James (supra), " the general interests of justice require it, "as no Court is equal to the examination and ascertainment of the truth in much the greater number of cases."

Blog Activity 7.5:

In this way the court chose to affirm the duty of good faith and in effect embrace the strict principle respecting conflicts of interest set out Aberdeen Railway Co. v. Blaikie Bros. (though that case is never directly mentioned). Perhaps this makes sense if you consider that no matter what may be the conscious or stated intention, a directors’ subjective judgement may well be (subconsciously) clouded by the existence of a countervailing interest, usually that of self-interest.

Was this the right answer?

We might begin by wondering what was the practical effect of the decision? It was that the ultimate purchaser of the companies (Oxford & Berkshire Cinemas Ltd.) Effectively received a rebate of their purchase price. Is this result a concern? Is it logical? How is it that something seemed perfectly legitimate (even necessary and desirable) when done by Regal (Hastings) Ltd., which apparently created value for Regal (Hastings) Ltd. And which arguably could have been done in no other way, can be revisited ex post facto in this way? Should regal be denied a claim just because its shareholders change? Why should the effects of corporate personality distort the general law of fiduciary duties?

Please blog your views on these questions and your reasons in less than one page under the heading “Not So Regal (Hastings)”.

 

Lord Russell concluded his judgment in Regal (Hastings) Ltd. v. Gulliver with the following statement:

 

“One final observation I desire to make. In his judgment the
Master of the Rolls stated that a decision adverse to the directors
in the present case involved the proposition that if directors bona
fide decide not to invest their company's funds in some proposed
investment, a director who thereafter embarks his own money
therein is accountable for any profits which he may derive there-
from. As to this, I can only say that to my mind the facts
of this hypothetical case bear but little resemblance to the story
with which we have had to deal.”

 

We now come to a case that renders the hypothetical real.

Please read Peso Silver Mines v. Cropper [1966] S.C.R. 673 at pages 369-371 of the Casebook.

 

The facts were that a prospector, Mr. Dickson, owned a number of mineral claims one of which was adjacent to claims held by Peso Silver Mines. Mr. Dickson offered to sell them to Peso silver mines, but the offer was rejected by the Peso Silver Mines board. Subsequently, three other investors approached Mr. Cropper who was the managing director of Peso Silver Mines and member of its board, and the four of them formed a private company that acquired Mr. Dickson’s claims and developed them. Later still, control of Peso Silver Mines changed hands and the newly reconstituted Peso Silver Mines sued Mr. Cropper seeking to purchase his holdings in the now profitable mine at Mr. Cropper’s cost, or to account for the proceeds of the transaction.

Significantly the defendants in Peso Silver Mines v. Cropper had acted entirely in good faith in connection with the board’s decision not to pursue an opportunity. Therefore the Supreme Court of Canada found that they could arrange for their own separate company to take the opportunity represented by Mr. Dickson’s claims perfectly lawfully. And they could keep the resulting profits. There had been a valid rejection of a business opportunity by Peso Silver Mines (as it was then controlled), subject to procedural constraints, and which the board in good faith duly exercised. Accordingly a director acting in his personal capacity could take the opportunity perfectly lawfully at a later time.

Cartwright J. stated:
<table width="0">
<tbody>
<tr>
<td width="27"></td>
<td>“On the facts of the case at bar I find it impossible to say that the respondent obtained the interests he holds in Cross Bow and Mayo by reason of the fact that he was a director of the appellant and in the course of the execution of that office.

When Dickson, at Dr. Aho's suggestion, offered his claims to the appellant it was the duty of the respondent as director to take part in the decision of the board as to whether that offer should be accepted or rejected. At that point he stood in a fiduciary relationship to the appellant. There are affirmative findings of fact that he and his co-directors acted in good faith, solely in the interests of the appellant and with sound business reasons in rejecting the offer. There is no suggestion in the evidence that the offer to the appellant was accompanied by any confidential information unavailable to any prospective purchaser or that the respondent as director had access to any such information by reason of his office. When, later, Dr. Aho approached the appellant it was not in his capacity as a director of the appellant, but as an individual member of the public whom Dr. Aho was seeking to interest as a co-adventurer.”</td>
</tr>
</tbody>
</table>
Are Peso Silver Mines v. Cropper and Regal (Hastings) Ltd. v. Gulliver really that similar? In Regal (Hastings) Ltd. v. Gulliver all of Regal (Hastings) Ltd.’s directors were interested in the relevant opportunity. They could not have passed a board resolution that would effectively waive the opportunity and so allow the directors to take it for their own benefit. Since they were all interested parties there would not have been anyone to pass such a resolution – all of the directors would have had to be “outside the room”. In Peso Silver Mines v. Cropper there was a fully functioning board that could do and did do their job.

 

 

Please read the case of Industrial Development Consultants Ltd. v. Cooley [1972] 2 All E.R. 162 (Eng. Birmingham Assizes) at pages 372-376 of the Casebook. 

 

Mr. Cooley was a distinguished architect who was employed as the managing director of Industrial Development Consultants Ltd., the plaintiff. Mr. Cooley tried on behalf of Industrial Development Consultants Ltd. to negotiate a contract in respect of lucrative pending project to design a depot in <a href="http://en.wikipedia.org/wiki/Letchworth">Letchworth</a> with the <a href="http://en.wikipedia.org/w/index.php?title=Eastern_Gas_Board&action=edit&redlink=1">Eastern Gas Board</a>. The negotiation was unsuccessful and <a href="http://en.wikipedia.org/w/index.php?title=Eastern_Gas_Board&action=edit&redlink=1">Eastern Gas Board</a> advised Mr. Cooley that they did not want to contract with Industrial Development Consultants Ltd., but only with him. Mr. Cooley then told the board of Industrial Development Consultants Ltd., that he was unwell and asked to resign from his job on early notice. The board of Industrial Development Consultants Ltd. agreed to this request and accepted Mr. Cooley’s resignation. Mr. Cooley then took on the work of design a depot in <a href="http://en.wikipedia.org/wiki/Letchworth">Letchworth</a> for the <a href="http://en.wikipedia.org/w/index.php?title=Eastern_Gas_Board&action=edit&redlink=1">Eastern Gas Board</a> on his own account. Industrial Development Consultants Ltd. subsequently discovered this and sued Mr. Cooley for breach of his duty of loyalty.

Mr. Cooley was found liable. Why? There were a number of reasons that emerge from the case:

 
<ul>
<li>When Mr. Cooley acquired knowledge of the Eastern Gas Board interest in him as the designer of the depot in <a href="http://en.wikipedia.org/wiki/Letchworth">Letchworth</a>, Industrial Development Consultants Ltd. did not have that knowledge and would have wanted it.</li>
<li>The information came to Mr. Cooley at a time when Mr. Cooley had only one single capacity – as a director of Industrial Development Consultants Ltd.</li>
<li>The information was of interest to Industrial Development Consultants Ltd. and Mr. Cooley had the obligation to pass it on.</li>
<li>The fact that Industrial Development Consultants Ltd. could not or would not have obtained the benefit (i.e. because the Eastern Gas Board would not have been willing to deal with Industrial Development Consultants Ltd.) is irrelevant.</li>
<li>It is irrelevant that if Mr. Cooley is found liable to Industrial Development Consultants Ltd. the net effect would be that Industrial Development Consultants Ltd. would obtain a benefit that, by definition, it could not otherwise have obtained – authority for this being found in Regal (Hastings) Ltd. v. Gulliver as well as subsequent cases.</li>
</ul>
Please read the English translation of the decision in Gravino v. Enerchem Transport Inc. [2008] J.Q. NO 9347 (QUE. C.A.) at pages 377-389 of the Casebook. You can find the full decision in French here if that is in any way helpful to you: <a href="http://www.canlii.org/fr/qc/qcca/doc/2008/2008qcca1820/2008qcca1820.html">http://www.canlii.org/fr/qc/qcca/doc/2008/2008qcca1820/2008qcca1820.html</a>

The facts were that a company called Ultramar began negotiations with Enerchem Transport Inc. (“ETI”), for the subchartering by ETI of three Ultramar tankers. Nicholas Gravino and Richard Carson were at the time shareholders and directors of ETI and actively participated in the negotiations with Ultramar. No agreement was reached. Subsequently Mr. Gravino and Mr. Carson sold their ETI shares and a few months later they ended their employment with ETI. For a variety for reasons not directly relevant Mr. Gravino and Mr. Carson were not bound by a non-compete clause. Following their departure, Mr. Gravino and Mr. Carson founded Petro-Nav Inc., a company that competed directly with ETI. They also recruited from ETI its then vice president marketing, Marian Zaremba, to join Petro-Nav Inc. Almost a year later, Ultramar assigned its lease agreement over the tankers Mr. Gravino and Mr. Carson had previously attempted to negotiate for while directors and shareholders of ETI, to a subsidiary of Petro-Nav Inc.

ETI alleged that its former directors and officers had appropriated to themselves a business opportunity they had developed on behalf of their former employer, and that accordingly Mr. Gravino and Mr. Carson had breached their duty of loyalty to ETI.

The reasons for judgment in this case are not exceptionally helpful except, perhaps, as to:
<ul>
<li>Duty of loyalty owed to ETI by its ex-officers in this case was all the greater given the high level of responsibility associated with the positions they had held in ETI.</li>
<li>On the topic of a “maturing business opportunity” it is clear that a director cannot use for their own profit or that of a third party any information obtained by reason of their duties, unless authorized to do so.</li>
<li>In effect, four main factors must be weighed in order to determine whether misappropriation of a maturing business opportunity has taken place:</li>
</ul>
<ol>
<li>i) the degree to which the interests of the director and the interests of the company were in conflict,</li>
<li>ii) the degree to which the business opportunity had, at the time in question, acquired its own specific and identifiable character,</li>
</ol>
iii) the proximity in time between the emergence of the business opportunity and its exploitation, and
<ol>
<li>iv) the proximity in character between the business opportunity pursued by the company and the contract or business concluded by the director for his own profit or the profit of a third party.</li>
</ol>
Please read the excerpts from D.D. Prentice and J. Payne on “The Corporate Opportunity Doctrine” at pages 389-392 of the Casebook. This article represents a succinct and important summary of the application of the duty of loyalty to corporate opportunities.

As you have perhaps come to appreciate the three most important factors when it comes to the application of the duty of loyalty to corporate opportunities are:
<ul>
<li>The facts;</li>
<li>The facts; and</li>
<li>The facts.</li>
</ul>
 
<ol>
<li> Conflict of Duty and Duty </li>
</ol>
Please read pages 393-394 of the Casebook. 

As you will see the issue of having duties of loyalty to two different companies of which one is a board member is not unknown. Nor, apart from resignation from one the companies with competing interests, and possibly both depending on the circumstances, does it have easy solutions. The most useful and prophylactic strategic mechanism is to employ the principle of “informed consent” as liberally as possible. This could go even as far as obtaining written acknowledgment and form of waiver from the companies respecting any potential conflict (much as lawyers must when they are asked to advise different parties who might have divergent interests in the same matter).

 

 
<ol>
<li> Ratification </li>
</ol>
Please read pages 396-400 of the Casebook.

Ratification by the shareholders is a tool often used to retroactively remedy mistakes that have been made. You will recall the case of Regal (Hastings) Ltd. v. Gulliver where the directors and solicitors of Regal (Hastings) Ltd., acting indisputably in the best interests of Regal (Hastings) Ltd., personally paid for 60% of the shares to acquire two movie houses because Regal (Hastings) Ltd. did not at the time have the funds to do so. In that case Lord Russell observed that the directors “could, had they wished, have protected themselves by a resolution (either antecedent or subsequent) of the Regal shareholders in general meeting.” (Emphasis added) 

Also relevant are the words of Harman L.J. in Bamford v. Bamford [1969] 1 All E.R. 969 (C.A.):

"It is trite law, I had thought, that if directors do acts, as they do every day, especially in private companies, which, perhaps because there is no quorum, or because their appointment was defective, or because some- times there are no directors properly appointed at all, or because they are actuated by improper motives, they go on doing for years, carrying on the business of the company in the way in which, if properly constituted, they should carry it on, and then they find that everything has been so to speak wrongly done because it was not done by a proper board, such directors can, by making a full and frank disclosure and calling together the general body of the shareholders, obtain absolution and forgiveness of their sins; and provided the acts are not ultra vires the company as a whole everything will go on as if it had been all right from the beginning. I cannot believe that is not a commonplace of company law. It is done every day. Of course, if the majority of the general meeting will not forgive and approve, then the directors must pay for it." 

Note as well the statutory provisions relevant to the question of ratification whereby evidence of shareholder approval is admissible but not decisive. BCBCA section 233(6) and CBCA Section 242 of the CBCA provide as follows: 
<ol start="233">
<li>(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.</li>
</ol>
 
<ol start="242">
<li>(1) An application made or an action brought or intervened in under this Part shall not be stayed or dismissed by reason only that it is shown that an alleged breach of a right or duty owed to the corporation or its subsidiary has been or may be approved by the shareholders of such body corporate, but evidence of approval by the shareholders may be taken into account by the court in making an order...”</li>
</ol>
 

 

TOPIC 3: TAKE-OVER BIDS AND DEFENSIVE TACTICS 

Please read the notes at pages 400-402 of the Casebook.

The (multi-million dollar ;) question is what is the duty of directors to their corporation when confronted with a take-over? And do the directors owe any duties to shareholders?

In this regard please read the case of Olympia and York Enterprises Ltd. v. Hiram Walker Resouces Ltd. (1986), 59 O.R. (2d) 254 (H.C.J.) at pages 402-406 of the Casebook.

The facts are that Gulf Canada decided it wished to acquire a majority shareholder interest in Hiram Walker Resources Ltd. It offered $32 per share for 39% of the shares. The directors of Hiram Walker Resources Ltd. decide to employ a defensive tactic to stop Gulf Canada by selling the liquor business of Hiram Walker Resources Ltd. representing 40% of the company’s total assets to Allied Lyons plc for $2.6 billion. Hiram Walker Resources Ltd. used that money to pay for 49% of the shares in a new subsidiary, “Fingas” which then proceeds to bid $40 per share for 48% of Hiram Walker Resources Ltd. (a significant improvement in price and percentage over the Gulf Canada bid).

Olympia &York Enterprises Ltd. was the parent company of Gulf Canada and sought to enjoin sale of the liquor business of Hiram Walker Resources Ltd. to Allied Lyons plc. They argued that the directors of Hiram Walker Resources Ltd. were using corporate assets for the purpose of entrenching themselves in the management of the corporation, and accordingly were in breach of their fiduciary duties.

Montgomery J. dismissed the application of Olympia &York Enterprises Ltd.

On the question of whether the directors proposed to buy back the shares of Hiram Walker Resources Ltd. with corporate assets so as to entrench themselves the court answered in the negative. Montgomery J. found that on the evidence the directors acted prudently, properly, reasonably and fairly on the advice of their legal and financial advisors, the opinion of management and their collective store of business acumen. It was also seen as a legitimate objective to ensure that as much as possible of all “economic value” be distributed to all of the shareholders and not just Gulf Canada/Olympia & York Enterprises Ltd. Montgomery J. said: “I am satisfied on the basis of the affidavits of Mr. Downing and Mr. Lambert that the sole purpose of the conduct of the directors of Hiram Walker was to maximize the position of all their shareholders after Gulf’s takeover bid…”

The principles that emerge from Olympia & York Enterprises Ltd. v. Hiram Walker Resouces Ltd. are:

 
<ul>
<li>When directors act in the best interests of the company and in good faith, it matters not that they also benefit from their action (in this case by becoming more entrenched in the company). In other words self-entrenchment will not necessarily be inferred where retaining control is secondary to the more important purpose of acting in good faith and in the company best interests.</li>
<li>It is the duty of the directors in a take-over battle to take all reasonable steps to maximize shareholders value. In maximizing shareholder value directors may rely on professional advice as to the adequacy of a bid, and that such reliance will be evidence of acting in good faith and on reasonable grounds.</li>
</ul>
 

In considering the proper actions to be taken by directors in takeover bid scenarios, it is of some importance to come to grips with the principle that emerges from the U.S. case of Revlon Inc. v. MacAndrews & Forbes Holdings Inc. 506 A.2d 173 (Del. 1986) which states that once defensive measures taken by the directors are moot , the role of directors changes from defenders of the corporation to auctioneers trying to get the best sale price for the company to benefit the shareholders. The exact words of Justice Moore of the Supreme Court of Delaware were:

“However, when Pantry Pride increased its offer to $50 per share, and then to $53, it became apparent to all that the break-up of the company was inevitable. The Revlon board's authorization permitting management to negotiate a merger or buyout with a third party was a recognition that the company was for sale. The duty of the board had thus changed from the preservation of Revlon as a corporate entity to the maximization of the company's value at a sale for the stockholders' benefit. This significantly altered the board's responsibilities under the Unocal standards. It no longer faced threats to corporate policy and effectiveness, or to the stockholders' interests, from a grossly inadequate bid. The whole question of defensive measures became moot. The directors' role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.”

The Ontario Court of Appeal soundly rejected this so-called “Revlon Duty” for Ontario (at least) in Maple Leaf Foods Inc. v. Schneider Corp., (1998) 42 O.R. (3d) 177 (Ont. C.A.). Weiler J.A. for the Court of Appeal held:

“The decision in [Revlon] stands for the proposition that if a company is up for sale, the directors have an obligation to conduct an auction of the company’s shares. Revlon is not the law in Ontario. In Ontario, an auction need not be held every time there is a change in control of a company.

 

An auction is merely one way to prevent the conflicts of interest that may arise when there is a change of control by requiring that directors act in a neutral manner toward a number of bidders…The more recent Paramount decision in the United States …has recast the obligation of directors when there is a bid for change of control as an obligation to seek the best value reasonably available to shareholders in the circumstances. This is a more flexible standard, which recognizes that the particular circumstances are important in determining the best transaction available, and that a board is not limited to considering only the amount of cash or consideration involved as would be the case with an auction…There is no single blueprint that directors

must follow… 

 

When it becomes clear that a company is for sale and there are several bidders, an auction is an appropriate mechanism to ensure that the board of a target company acts in a neutral manner to achieve the best value reasonably available to shareholders in the circumstances. When the board has received a single offer and has no reliable grounds upon which to judge its adequacy, a canvass of

the market to determine if higher bids may be elicited is appropriate, and may be necessary….”

 

So where does our law stand on the duty of the corporation to the shareholders?

Please note carefully the discussion in middle paragraph of page 407 of the Casebook. Not only does it constitute an important summary of the prevailing situation but also offers a very useful formulation to try and reconcile the divergent strands: “One way to make sense of this is that the Supreme Court of Canada’s interpretation [in BCE v. 1976 Debentureholders discussed earlier] of the duty of loyalty is such that directors may consider the interests of creditors and other stakeholders, but not that they must do so. Moreover, the rejection of Revlon can also be understood as the rejection of an idea that directors are confined to a short time frame when deciding what is in the best interests of the corporation.”

 

Finally please read the cases of: 
<ol>
<li>347883 Alberta Ltd. v. Producers Pipelines Inc. (1991) 3 B.L.R. (2d) 237 (C.A.) at pages 409-419 of the Casebook; </li>
</ol>
 
<ol start="2">
<li>Brant Investments Ltd. v. Keeprite Inc. (1991) 3 O.R. (3d) 289 (C.A.) at pages 421-426 of the Casebook; and</li>
</ol>
 
<ol start="3">
<li>CW Shareholdings Inc.WIC Western International Communications Ltd. (1998), 39 O.R. (3d) 755 (Ont. SC) which can be found here: <a href="http://www.canlii.org/en/on/onsc/doc/1998/1998canlii14838/1998canlii14838.html">http://www.canlii.org/en/on/onsc/doc/1998/1998canlii14838/1998canlii14838.html</a></li>
</ol>
 

These cases involve illustrations of courts wrestling with how to give relevant context to the duty of loyalty. That is that Directors must act honestly, in good faith, and with a view to the best interests of the corporation and furthermore exercise the care, diligence and skill that a reasonable person would exercise in like circumstances. Such specific responsibilities of the directors become considerably more challenging to navigate in change of control situations where the corporation can be said to be “in play”.

 

347883 Alberta Ltd. v. Producers Pipelines Inc. dealt with a “shareholder’s rights agreement”, also known as a poison pill defence. A “Poison pill” is a defensive strategy against corporate takeovers. It can broadly be defined as an extra-ordinary manoeuvre by the directors and/or shareholders of the company to be acquired designed to make that target company less attractive to the hopeful acquirer, often by adding burdensome costs if the takeover succeeds. In 347883 Alberta Ltd. v. Producers Pipelines Inc. the directors of Producers Pipelines Inc., a public company that the parent company of 347883 Alberta Ltd. wished to acquire, enacted a “shareholders rights agreement”. That shareholders rights agreement would give each of the fewer than 200 shareholders of Producers Pipelines Inc. 10 shares for the price of $75. The offer was crafted in such a way that 347883 Alberta Ltd. (as a subsidiary of the putative acquirer) would not receive these rights and the acquirer’s own shares would be greatly diluted. In dealing with the appropriate conduct of directors Sherstobitoff J.A. reviewed the state of the law extensively and concluded:

“In summary, when a corporation is faced with susceptibility to a take-over bid or an actual take-over bid, the directors must exercise their powers in accordance with their overriding duty to act bona fide and in the best interests of the corporation even though they may find themselves, through no fault of their own, in a conflict of interest situation. If, after investigation, they determine that action is necessary to advance the best interests of the company, they may act, but the onus will be on them to show that their acts were reasonable in relation to the threat posed and were directed to the benefit of the corporation and its shareholders as a whole, and not for an improper purpose such as entrenchment of the directors. 

Since the shareholders have the right to decide to whom and at what price they will sell their shares, defensive action must interfere as little as possible with that right. Accordingly, any defensive action should be put to the shareholders for prior approval where possible, or for subsequent ratification if not possible. There may be circumstances where neither is possible, but that was not so in this case. Defensive tactics that result in shareholders being deprived of the ability to respond to a takeover bid or to a competing bid are unacceptable.”

The end result was that the Ontario Court of Appeal determined that the shareholder’s rights agreement in this particular case was to be set aside.

 

The facts in Brant Investments Ltd. v. KeepRite Inc. involved a complex corporate transaction where the board of the parent company Inter-City Gas purchased 64% of the shares in KeepRite Inc. a company that sold air conditioning equipment. Then Inter-City Gas transferred the shares it had acquired in Keeprite Inc. to Inter-City Manufacturing, a subsidiary of Inter-City Gas, which made heating equipment. Thereafter, following the recommendation of an independent committee of the board of KeepRite Inc., KeepRite Inc. purchased $20 million of assets from two companies that were subsidiaries of Inter-City Manufacturing. An issue of rights to existing shareholders financed this purchase. Of note was that this rights offering required an amendment to the articles of KeepRite Inc. that was passed by a special resolution of the shareholders. The minority shareholders of Keeprite Inc. objected to the transaction, brought an oppression action, and applied for an order to fix the fair value of their shares to be put to the corporation.

In simplified form this was essentially a transaction where the board of a parent proposed to purchase the assets of a subsidiary, and the shareholders of the parent company objected.

McKinlay J.A. agreed with the lower court that section 234 (now section 241) of the CBCA was not offended by the actions of KeepRite Inc. Accordingly the action of the minority shareholders of KeepRite Inc. against that company failed. The court found:

“There can be no doubt that on application under s. 234 the trial judge is required to consider the nature of the impugned acts and the method in which they were carried out. That does not mean that the trial judge should substitute his own business judgment for that of managers, directors, or a committee such as the one involved in assessing this transaction. Indeed, it would generally be impossible for him to do so, regardless of the amount of evidence before him. He is dealing with the matter at a different time and place; it is unlikely that he will have the background knowledge and expertise of the individuals involved; he could have little or no knowledge of the background and skills of the persons who would be carrying out any proposed plan; and it is unlikely that he would have any knowledge of the specialized market in which the corporation operated. In short, he does not know enough to make the business decision required. That does not mean that he is not well equipped to make an objective assessment of the very factors which s. 234 requires him to assess. Those factors have been discussed in some detail earlier in these reasons.

It is important to note that the learned trial judge did not say that business decisions honestly made should not be subjected to examination. What he said was that they should not be subjected to microscopic examination…Having carefully reviewed the major aspects of the appellants’ criticisms of the transaction, he came to the conclusion that in no way, either substantively or procedurally, offended the provisions of s. 234. Having carefully reviewed all of the exhibits and transcribed evidence to which we were referred, I have no hesitation in agreeing with the correctness of his assessment…” 

One of the key points about Brant Investments Ltd. v. KeepRite Inc. is that the case illustrates well the sense of “protection” (real or imagined) that “independent committees” can provide in a corporate setting, particularly in a takeover scenario. The key factor would appear to be the appearance of objectivity and focus which an independent committee is capable of bring to business judgments regarding what would be in the best interests of the corporation. Accordingly it has become fairly standard practice for independent committees to be formed and convened at an early stage of takeover issues (and others as well) that might prove contentious. Given that most, if not almost all takeovers meet these criteria, “independent committees” are unlikely to be going out of style any time soon.

 

CW Shareholdings Inc. v. WIC Western International Communications Ltd. involved an offer made by CanWest Global Communications Corp. (“CanWest”) to acquire all of the Class A voting shares of WIC Western International Communications Ltd. (“WIC”) and all of the publicly traded Class B non-voting shares of WIC at a price of $39 per share. At the relevant time the Class A voting shares of WIC were held approximately 49.96% by Shaw Communications Inc. and 50% by Cathton Holdings.

In response to the offer from CanWest, the board of WIC created a “special committee”, which included the CEO, to consider the offer. The board of WIC subsequently recommended through a “Directors’ Circular” that the shareholders of WIC not accept the offer from CanWest. The board of WIC also passed without the approval of its shareholders a “shareholders rights plan”.

In its various decisions dealing with the WIC matter the Ontario Securities Commission identified certain challenges with the non-independence of WIC’s “special committee” relating to the participation of John Lacey the CEO of WIC at the relevant time and of another director, Robert Manning, who represented Cathton Holdings, the largest holder of the Class A shares of WIC, who was at first allowed to attend meetings of the special committee but without voting rights. The OSC considered the special committee not to truly be an independent committee:

“From the evidence of Messrs. Lacey, Eyton and Spafford, it appears clear to us that the Special Committee was set up for purposes of convenience only, and not as an independent committee. In our view, in a take-over bid context a committee which includes as an active participant the president and chief executive officer of the corporation and, as an observer and resource, a representative of a shareholder which has 50% of the votes, is not an independent committee. The fact that Mr. Lacey has a "golden parachute" agreement, does not in our view change this position.

In these circumstances, it is our view that we must place less reliance on the review by the Special Committee of the Bid, and possible alternative methods of achieving a more beneficial result to shareholders, than we would if the Special Committee had been truly an independent committee.”

As well in its reasons to cease trade the shareholder rights plan, the Ontario Securities Commission stated in relation to the testimony of Rhys Eyton, the Chair of the “special committee” that:

“We should also note that Mr. Eyton's apparent view that the board of a target company, as well as its shareholders, are entitled to take part in the decision as to whether to accept the bid is not correct, based on previous decisions of the Commission, if by his statement to that effect Mr. Eyton meant any more than that the board of the target company is entitled to advise the shareholders and attempt to provide them with alternatives.”

The rights plan was cease-traded by securities regulators, and thereafter negotiations began between WIC and Shaw Communications Inc., who made a cash and share offer valued at $43.50 per share for all of the outstanding Class B nonvoting shares. Related to this offer WIC and Shaw Communications Inc. entered into a “pre-acquisition agreement” which granted Shaw Communications:
<ul>
<li>An irrevocable option to purchase WIC’s radio assets (which were said to have been underperforming) at a fixed price of $160 million. Note that these radio assets only represented 0.6% of WIC’s total income in 1997.</li>
</ul>
 
<ul>
<li>A break fee of $30 million if certain events transpired within a limited time; and</li>
</ul>
 
<ul>
<li>A covenant which would prevent WIC from soliciting or encouraging any other “acquisition proposals”, but which did allow WIC to negotiate, approve and recommend unsolicited bona fide acquisition proposals.</li>
</ul>
 

Subsequently CanWest increased its bid to $43.50 on condition that the Court setting aside the pre-acquisition agreement. Over and above the various proceedings Canwest had started before securities commissions, it also applied to the Ontario courts to set aside the pre-acquisition agreement and for relief from “oppression” in accordance section 241 of the CBCA. The issue before the courts was whether WIC’s Board had breached its fiduciary duties by approving the pre-acquisition agreement with Shaw. In the end while the Ontario Court (General Division) can be said to have been somewhat critical of certain aspects of the pre-acquisition agreement and might be seen as questioning to some degree the independence of the special committee, it did not set aside the pre-acquisition agreement and concluded that the WIC Board had acted in accordance with its fiduciary duties.

Mr. Justice Blair contextualized the concept of a corporation being “in play” and described the duties of directors in such circumstances:

“The law as it relates to the general duties of the directors of Canadian corporations is not controversial. The directors must exercise the common law fiduciary and statutory obligations (a) to act honestly and in good faith with a view to the best interests of the corporation, and (b) in doing so, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances: see the Canada Business Corporations Act, R.S.C. 1985, c. C-37, s.122. In the context of a hostile takeover bid situations where the corporation is “in play” (i.e., where it is apparent there will be a sale of equity and/or voting control) the duty is to act in the best interests of the shareholders as a whole and to take active and reasonable steps to maximize shareholder value by conducting an auction…

In assessing whether or not directors have met their fiduciary and statutory obligations, as outlined earlier in these Reasons, Canadian courts have generally approached the subject on the basis of what has become known as the "business judgment rule". This rule is an extension of the fundamental principle that the business and affairs of a corporation are managed by or under the direction of its board of directors. It operates to shield from court intervention business decisions which have been made honestly, prudently, in good faith and on reasonable grounds. In such cases, the board’s decisions will not be subject to microscopic examination and the Court will be reluctant to interfere and to usurp the board of director’s function in managing the corporation. …

The directors’ actions are not to be judged against the perfect vision of hindsight, and should be measured against the facts as they existed at the time the impugned decision was made. In addition, the court should be reluctant to substitute its own opinion for that of the directors where the business decision was made in reasonable and informed reliance on the advice of financial and legal advisors appropriately retained and consulted in the circumstances. See Rogers Communications Inc. v. MacLean Hunter Ltd., supra, at p. 245; Armstrong World Industries Inc. v. Arcand (1997), 36 B.L.R. (2d) 171 (Ont. Gen. Div. [Commercial List]); Olympia & York Enterprises Ltd. v. Hiram Walker Resources Ltd., supra at pp. 270-273.”

 

UNIT WRAP UP:

Now having achieved some appreciation of how the “mind” of the corporation is operated and managed by directors and management, we come to the rest of the world. What rights and remedies do shareholders and others have?

 

ASSIGNMENT #2

You are a young corporate lawyer at the well-known British Columbia law firm Wie, Haight, Raye & Darr. The firm’s client Gates Williams makes an appointment to meet with you. He arrives at your office with J.O.B. Steves whom he introduces as his partner in a new venture. Mr. Williams asks you to incorporate a new company under the BCBCA.

They tell you that the company is being formed to exploit a potentially highly profitable new business opportunity that has arisen as the result a decision by the Canadian International Development Agency (“CIDA”) an agency of Canada’s Department of External Affairs to invite tenders from private sector companies for contracts to provide services that CIDA wishes to have provided in Guatemala. Mr. Williams mentions that Mr. Steves’ son-in-law is a very senior official at CIDA.

Mr. Williams that the shareholdings in the new company will be as follows:
<ol>
<li>Gates Williams 1000 Class A Voting common shares to be paid for in cash</li>
<li>O.B. Steves 1000 Class A Voting common shares to be paid for in cash</li>
<li>C. Ahn 100 Class A Voting common shares (who is not at the meeting) to be paid for in cash</li>
</ol>
Mr. Williams asks you whether Wie, Haight, Raye & Darr would take 200 Class A Voting common shares in lieu of fees.

Since Mr. Williams and Mr. Steves are in rather a rush they tell you that the company should have standard form articles along the lines of the model BC Articles (on TWEN), that Mr. Williams will be the sole officer and director of the company and that Mr. Steves will call later with additional instructions and information. Later the same day Mr. Williams (not Mr. Steves) calls and asks you prepare an employment agreement between Mr. Williams as President & CEO, and the new company. The employment agreement will have a term of two years and provide a salary of $500,000 per year.

Please identify briefly any legal or, in the light of the following provisions of the Law Society of BC Code of Professional Conduct, any ethical issues: s. 1.1-1 (definition of “conflict of interest”); s. 3.2-7; s. 3.2-8; s. 3.4-1; s. 3.4-28.

Please answer in three pages or less (one and half spacing). It is not necessary to repeat the facts.

 

 

UNIT 8 (WEEKS 12 & 13): MAJORITY RULE & PROTECTING MINORITY INTERESTS

 

Figure 8: Walmart shareholders meeting (By Walmart [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons)

ALT: A huge crowd at an annual meeting of Walmart shareholders.

Source of image – <a href="http://commons.wikimedia.org/wiki/File:Crowd_shot_Walmart_Shareholders%27_Meeting_2010.jpg">http://commons.wikimedia.org/wiki/File:Crowd_shot_Walmart_Shareholders%27_Meeting_2010.jpg</a>

 

 

 

 

UNIT OVERVIEW:

In this unit the variety of statutory provisions enacted with a view to protecting minority interests will be examined. There will be reference to some contractual arrangements that might be adopted towards this end. You will also consider the role of government and the securities regulatory authorities.

 

UNIT OUTCOME: 

Through this unit you will come to an understanding of the limits of corporate democracy and the rights that shareholders (and occasionally others) have in the face of a corporations’ actions. You will come to appreciate the differences between a “derivative action” and the “oppression remedy”. You should by the end of unit understand their similarities and differences. You should also be in a position to see why these legal tools are important to shareholders as you briefly examine and review some of the more notorious corporate scandals over the recent years. Finally you should be able to begin thinking about what a lawyer’s role in preventing corporate abuses might look like.

 

UNIT READINGS:

Please read the following materials:

Casebook pages 427-567.

BCBCA sections 227-228, 232-236; CBCA section 241.

“Distinguishing Oppression Claims and Derivative Actions” by Tracey M. Cohen, T. Mark Pontin, and Graeme Hooper: <a href="http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf">http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf</a>

“Report Slams Hollinger's Black For a 'Corporate Kleptocracy'”: <a href="http://online.wsj.com/news/articles/SB109395499363105646">http://online.wsj.com/news/articles/SB109395499363105646</a>

Catalyst Fund General Partner Inc. v. Hollinger Inc., 2004 CanLII 40665 (ON SC) <a href="http://canlii.ca/t/1j6qd">http://canlii.ca/t/1j6qd</a>

“The Fall of Conrad Black” <a href="http://www.youtube.com/watch?v=CIRRUvjkLJo">http://www.youtube.com/watch?v=CIRRUvjkLJo</a>

“Law Society of Upper Canada appeals exoneration of two Conrad Black lawyers” <a href="http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html">http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html</a>

“Livent co-founders Drabinsky, Gottlieb convicted of fraud and forgery” <a href="http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convicted-of-fraud-and-forgery-1.778879">http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convictedof-fraud-and-forgery-1.778879</a>

“Law society revokes Garth Drabinsky’s licence over fraud convictions” <a href="http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html">http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html</a>

“Lawyers, Ethics, and Enron” <a href="http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf">http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf</a>

Code of Professional Conduct for British Columbia, sections 3.2-3, 3.2-7, 3.2-8, 3.7, 3.3-1, 3.3-2. <a href="http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3">http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3</a>

Stephen M. Bainbridge, “Corporate Lawyers as Gatekeepers” <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1980975">http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1980975</a>

 

 

TOPIC 1: INTRODUCTION/LOOKING BACK

The exploration of corporate personhood, the legal conundrums caused by it and the legal reactions to it are a significant underlying theme of this course. Another consistent theme can be identified just below the surface of many of the cases explored in the previous unit and in this final substantive unit; the problems of “equality”. How can “equality” be a problem in law you may rightly wonder? To answer that it is important to define the meaning being ascribed to equality in this particular instance and then examine the lack of legal clarity that may flow in the circumstances.

To begin with, you may have noticed that many of the cases we have explored in this course involve, plainly put, wealthy and privileged people. They are often (though by no means always) situations where individuals or companies are suing other individuals or companies alleging that they are entitled to more money (or a shareholding that they believe will equate to more money) in one way or another. This should be no surprise given that legal precedent continuously reinforces that the “best interests” of companies and shareholders is a concept aligned primarily and ultimately with profit.

It is the consequences attendant to this core set of dynamics that is perhaps the most fascinating. For one thing it means not only that “the fight” is usually about making more money as a philosophical starting point, but also that the combatants often are equally matched in both purpose and resources – in other words they are often equal, especially if for example there is a takeover battle at stake. It would be naive to think that this equality does not impact the nature of the legal proceedings. Where so much of what you learn in law school is about rights that have evolved to redress inequalities or grant liberty, the corporate law principles that have evolved that in the real world tend to be mere tools in the hands of often more or less equal litigants. No doubt principle is argued with great ferocity by highly skilled counsel in corporate law, but the fact that in the end it is all mostly just about money surely has an impact (if only below the surface). After all in corporate law we are generally not talking about basic rights (detention without trial; equality before the law; personal discrimination etc.). Is it unfair to wonder whether the relative inconsistency of corporate law principles is one product of this confluence of “equality” and also a product of not dealing with issues of true importance to the human condition, such as personal liberty?

So whether you agree or not, stay on the lookout in this unit (and feel free to look backwards at previous units) for situations where the relative “equality’ of the parties has some impact on the law evolving in a murkier rather then clearer way.

 

TOPIC 2: MAJORITY RULE

Please read pages 427-452 of the Casebook.

This section of the course is about the power of shareholder majorities. In this regard there are two questions that commend themselves:

Question 1:

What sorts of things must be done by shareholders?

The more important aspects of this question are discussed at pages 443-448 of the Casebook. You should read these pages to get a general sense of the situation. The details are not overly important for any present purpose but you should note that the BCBCA contains provisions which, in one way or another, are comparable to those of the CBCA that are referred to. We have already visited some of these subjects in detail (for example, the removal of directors).

Question 2:

Are there any limitations on shareholders when they are doing what they are authorized to do?

To begin answering this question please read Allen v. Gold Reefs Of West Africa, Ltd. [1900-1903] All E.R. Rep. 746 (Eng. C.A.) at pages 448-449 of the Casebook as well as the Notes following at pages 449-451 of the Casebook.

In Allen v. Gold Reefs of West Africa, Ltd. the company had altered its articles giving itself a lien on paid up shares which, in effect, addressed the failure of a shareholder, Mr. Zuccani, to pay what was owed in respect of other shares he had that had not been fully paid up. Gold Reefs of West Africa, Ltd.’s articles gave the company a lien on all partly paid shares held by any shareholder in respect of any debt owed to the company. Mr. Zuccani held some partly paid up shares and some fully paid up shares. Mr. Zuccani died insolvent. Gold Reefs of West Africa, Ltd. subsequently decided to alter its articles through special resolution to create a lien on all fully paid shares. This in effect changed the rights of the now deceased shareholder (as well as in theory the rights of all other shareholders going forward). Mr. Allen, who was an executor of Mr. Zuccani’s estate brought action get the fully paid shares’ value.

Lindley M.R. found that the altering of the articles of Gold Reefs of West Africa, Ltd. to be valid as long as the special resolution was done bona fide for the benefit of the company as a whole:

“ The power thus conferred on companies to alter the regulations contained in their articles is limited only by the provisions contained in the statute and the conditions contained in the company’s memorandum of association. Wide, however, as the language of s. 50 is, the power conferred by it must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded. These conditions are always implied, and are seldom, if ever, expressed. But if they are complied with I can discover no ground for judicially putting any other restrictions on the power conferred by the section than those contained in it. How’s shares shall be transferred, and whether the company shall have any lien on them, are clearly matters of regulation properly prescribed by a company’s articles of association…” (Emphasis added)
<table width="53">
<tbody>
<tr>
<td width="27"></td>
<td width="27"></td>
</tr>
</tbody>
</table>
The willingness of courts to deal with shareholder amendments and decisions and the extent to which the court’s would interfere resulted in some uncertainty, which was addressed in the case of Greenhalgh v. Arderne Cinemas Ltd. [1950] 2 ALL E.R. 1120 (Eng. C.A.). Please read the case at page 451 of the Casebook.

In Greenhalgh v. Arderne Cinemas Ltd. the original articles of association of Arderne Cinemas Ltd. provided that no sale of shares to an outsider would occur if an existing shareholder was willing to buy those shares. The articles provided: "No shares in the company shall be transferred to a person not a member of the company so long as a member of the company may be willing to purchase such shares at a fair value to be ascertained in accordance with sub-clause (b) hereof".

The majority shareholder, Mr. Mallard wanted to sell control of Arderne Cinemas Ltd. to a third party. Mr. Greenhalgh was a minority shareholder in Arderne Cinemas and wished to prevent any such sale of control. The articles of Arderne Cinemas Ltd. were amended by special resolution to permit sale to an outsider, if approved, by simple majority. Mr. Greenhalgh argued that the article change was invalid.

Evershed M.R. had the following observations:

“… Certain principles, I think, can be safely stated as emerging from those authorities. In the first place, I think it is now plain that "bona fide for the benefit of the company as a whole" means not two things but one thing. It means that the shareholder must proceed upon what, in his honest opinion, is for the benefit of the company as a whole. The second thing is that the phrase, “the company as a whole”, does not (at any rate in such a case as the present) mean the company as a commercial entity, distinct from the corporators: it means the corporators as a general body. That is to say, the case maybe taking of an individual hypothetical member and it may be asked whether what is proposed is, in the honest opinion of those who voted in its favor, for that person’s benefit.

I think that the matter can, in practice, be more accurately and precisely stated by looking at the converse and by saying that a special resolution of this kind would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and the minority shareholders, so as to give to the former an advantage of which the latter were deprived. When the cases are examined in which the resolution has been successfully attacked, it is on that ground. It is therefore not necessary to require that persons voting for a special resolution should, so to speak, dissociate themselves altogether from their own prospects and consider whether what is thought to be for the benefit of the company as a going concern. If, as commonly happens, an outside person makes an offer to buy all the shares, prima facie, if the corporators think it a fair offer and vote in favour of the resolution, it is no ground for impeaching the resolution that they are considering their own position as individuals.”

 

Blog Activity 8.1:

Do you see a test here? How are shareholders to act when voting on special resolutions? What can they consider? What must they not do? Is it clear? 

Please blog your views on these questions and your reasons in less than one page under the heading “Arderne Cinemas Ltd.”

 

 

TOPIC 3: MINORITY PROTECTIONS 

 

On the subject of “Statutory Intervention” please read pages 453-460 of the Casebook.

Welling in the excerpt from “Corporate Law in Canada: The Governing Principles” makes the noteworthy point the: “The common law courts…failed to find any principled approaches to the problem of minority shareholder protection.” What has evolved instead is a statutory codification of remedies as a bulwark against the oppressions that directors, management, and even other shareholders can be complicit in.

The relevant section of the BCBCA can be found in Part 8 “Proceedings”. They include sections 227-228 and 232-236 that broadly corresponds to the CBCA provisions referenced in the Casebook (but note that there are differences). The BCBCA sections are reproduced below:
<h4> </h4>
<h4> “Complaints by shareholder</h4>
<ol start="227">
<li>(1) For the purposes of this section, "shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) A shareholder may apply to the court for an order under this section on the ground

(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or

(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.

(3) On an application under this section, the court may, with a view to remedying or bringing to an end the matters complained of and subject to subsection (4) of this section, make any interim or final order it considers appropriate, including an order

(a) directing or prohibiting any act,

(b) regulating the conduct of the company's affairs,

(c) appointing a receiver or receiver manager,

(d) directing an issue or conversion or exchange of shares,

(e) appointing directors in place of or in addition to all or any of the directors then in office,

(f) removing any director,

(g) directing the company, subject to subsections (5) and (6), to purchase some or all of the shares of a shareholder and, if required, to reduce its capital in the manner specified by the court,

(h) directing a shareholder to purchase some or all of the shares of any other shareholder,

(i) directing the company, subject to subsections (5) and (6), or any other person, to pay to a shareholder all or any part of the money paid by that shareholder for shares of the company,

(j) varying or setting aside a transaction to which the company is a party and directing any party to the transaction to compensate any other party to the transaction,

(k) varying or setting aside a resolution,

(l) requiring the company, within a time specified by the court, to produce to the court or to an interested person financial statements or an accounting in any form the court may determine,

(m) directing the company, subject to subsections (5) and (6), to compensate an aggrieved person,

(n) directing correction of the registers or other records of the company,

(o) directing that the company be liquidated and dissolved, and appointing one or more liquidators, with or without security,

(p) directing that an investigation be made under Division 3 of this Part,

(q) requiring the trial of any issue, or

(r) authorizing or directing that legal proceedings be commenced in the name of the company against any person on the terms the court directs.

(4) The court may make an order under subsection (3) if it is satisfied that the application was brought by the shareholder in a timely manner.

(5) If an order is made under subsection (3) (g), (i) or (m), the company must pay to a person the full amount payable under that order unless there are reasonable grounds for believing that

(a) the company is insolvent, or

(b) the payment would render the company insolvent.

(6) If reasonable grounds exist for believing that subsection (5) (a) or (b) applies,

(a) the company is prohibited from paying the person the full amount of money to which the person is entitled,

(b) the company must pay to the person as much of the amount as is possible without causing a circumstance set out in subsection (5) to occur, and

(c) the company must pay the balance of the amount as soon as the company is able to do so without causing a circumstance set out in subsection (5) to occur.

(7) If an order is made under subsection (3) (o), Part 10 applies.

 
<h4>Compliance or restraining orders</h4>
<ol start="228">
<li>(1) In this section, "complainant" means, in relation to a company referred to in subsection (2), a shareholder of the company or any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) If a company or any director, officer, shareholder, employee, agent, auditor, trustee, receiver, receiver manager or liquidator of a company contravenes or is about to contravene a provision of this Act or the regulations or of the memorandum, notice of articles or articles of the company, a complainant may, in addition to any other rights that that person might have, apply to the court for an order that the person who has contravened or is about to contravene the provision comply with or refrain from contravening the provision.

(3) On an application under this section, the court may make any order it considers appropriate, including an order

(a) directing a person referred to in subsection (2) to comply with or to refrain from contravening a provision referred to in that subsection,

(b) enjoining the company from selling or otherwise disposing of property, rights or interests, or from receiving property, rights or interests, or

(c) requiring, in respect of a contract made contrary to section 33 (1), that compensation be paid to the company or to any other party to the contract…
<h4> </h4>
<h4>Derivative actions</h4>
<ol start="232">
<li>(1) In this section and section 233,</li>
</ol>
"complainant" means, in relation to a company, a shareholder or director of the company;

"shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.

(2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company

(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or

(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.

(3) Subsection (2) applies whether the right, duty or obligation arises under this Act or otherwise.

(4) With leave of the court, a complainant may, in the name and on behalf of a company, defend a legal proceeding brought against the company.
<h4> </h4>
<h4>Powers of court in relation to derivative actions</h4>
<ol start="233">
<li>(1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if</li>
</ol>
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,

(b) notice of the application for leave has been given to the company and to any other person the court may order,

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.

(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.

(3) While a legal proceeding prosecuted or defended under this section is pending, the court may,

(a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and

(b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate.

(4) On the final disposition of a legal proceeding prosecuted or defended under this section, the court may make any order it considers appropriate, including an order that

(a) a person to whom costs are paid under subsection (3) (b) repay to the company some or all of those costs,

(b) the company or any other party to the legal proceeding indemnify

(i) the complainant for the costs incurred by the complainant in prosecuting or defending the legal proceeding, or

(ii) the person controlling the conduct of the legal proceeding for the costs incurred by the person in controlling the conduct of the legal proceeding, or

(c) the complainant or the person controlling the conduct of the legal proceeding indemnify one or more of the company, a director of the company and an officer of the company for expenses, including legal costs, that they incurred as a result of the legal proceeding.

(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.

(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.
<h4> </h4>
<h4>Relief in legal proceedings</h4>
<ol start="234">
<li> If, in a legal proceeding against a director, officer, receiver, receiver manager or liquidator of a company, the court finds that that person is or may be liable in respect of negligence, default, breach of duty or breach of trust, the court must take into consideration all of the circumstances of the case, including those circumstances connected with the person's election or appointment, and may relieve the person, either wholly or partly, from liability, on the terms the court considers necessary, if it appears to the court that, despite the finding of liability, the person has acted honestly and reasonably and ought fairly to be excused.</li>
</ol>
<h4> </h4>
<h4>Applications to court under this Act</h4>
<ol start="235">
<li>(1) Subject to subsection (2), an application to the court under this Act may be brought without notice unless notice is specifically required under subsection (2) or otherwise under this Act.</li>
</ol>
(2) The court may direct that notice of any application under this Act be served on those persons the court requires.
<h4> </h4>
<h4>Court may order security for costs</h4>
<ol start="236">
<li> If a corporation is the plaintiff in a legal proceeding brought before the court, and if it appears that the corporation will be unable to pay the costs of the defendant if the defendant is successful in the defence, the court may require security to be given by the corporation for those costs, and may stay all legal proceedings until the security is given.”</li>
</ol>
 

 

TOPIC 2: STANDING

 

Now we arrive at the question of “standing”, that being “who” can sue?

Please read the case of First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) 60 Alta. L.R. (2d) 122 (Q.B.) at pages 453-459 of the Casebook.

Note first, that the definition of complainant in that case applies to both oppression and derivative actions.

In B.C., however, there are different definitions:
<ul>
<li>For “complaints by a shareholder (i.e. oppression) see section 227 (1) where “shareholder” can mean beneficial (registered) owner of a share or “any other person whom the court considers to be an appropriate person…”</li>
</ul>
 
<ul>
<li>In respect of “derivative actions” see section 232 (1) where "complainant" “means, in relation to a company, a shareholder or director of the company”.</li>
</ul>
 

The essential legal question in First Edmonton Place Ltd. v. 315888 Alberta Ltd. was whether a creditor of the company was a proper person in the opinion of the court under the Alberta Business Corporations Act? In First Edmonton Place Ltd. v. 315888 Alberta Ltd. a landlord (First Edmonton Place) sued three lawyers through their company” 315888 Alberta Ltd. for an alleged debt arising from the occupancy of the landlord’s premises.

McDonald J. framed thoroughly reviewed the legislative history of the relevant provisions before coming to the conclusion that First Edmonton Place Ltd. was indeed had standing as a proper plaintiff but not because it was a simple creditor:

“Is the applicant a "complainant" entitled to apply for leave to bring an action under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> or <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a>?

In order to obtain leave to bring an action under either of these sections, the applicant must be found to be a "complainant" as defined in s. 231. As the applicant is clearly not within s. 231(b)(ii), First Edmonton Place can satisfy this requirement only if it can come within s. 231(b)(i) or (iii).

Is the applicant a "complainant" within the meaning of s. 231(b)(i)?

It will be recalled that s. 231(b)(i) defines a "complainant" as "a registered holder or beneficial owner, or a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates"… 

This plain meaning reflects the meaning of "bonds, debentures and notes" in the world of corporate financing. In Securities Law and Practice (1984), vol. 1, by V.P. Alboini, bonds and debentures are stated to be the "traditional debt instruments issued by corporations" while notes are "issued by any issuer including individuals" (at pp. 0-33, 0-34).

Is the applicant a "complainant" under s. 231(b)(iii)?

Under s. 231(b)(iii), a person may be a "complainant" if he is a person "who, in the discretion of the Court, is a proper person to make an application under this Part."

This is not so much a definition as a grant to the court of a broad power to do justice and equity in the circumstances of a particular case, where a person who otherwise would not be a "complainant" ought to be permitted to bring an action under either <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> or <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a> to right a wrong done to the corporation which would not otherwise be righted, or to obtain compensation himself or itself where his or its interests have suffered from oppression by the majority controlling the corporation or have been unfairly prejudiced or unfairly disregarded, and the applicant is a "security holder, creditor, director or officer"…

In the case of a creditor who claims to be a "proper person" to make a <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> application, in my view the criterion to be applied would be whether, even if the applicant did not come within s. 231(b)(î) or (ii), he or it would nevertheless be a person who could reasonably be entrusted with the responsibility of advancing the interests of the corporation by seeking a remedy to right the wrong allegedly done to the corporation. The applicant would not have to be a security holder (as I have defined that notion), director or officer of the corporation. The applicant could be a creditor. The applicant might even be a person who at the time of the act or conduct complained of was not a creditor but was a person toward whom the corporation might have a contingent liability. No good purpose would be served in saying more than that now.

I turn now to an application by a person who claims to be a "proper person" to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a>. As in the case of an application made under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a>, an applicant for leave to bring an action under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a> does not have to be a security holder, director or officer. The applicant could be a creditor, or even a person toward whom the corporation had only a contingent liability at the time of the act or conduct complained of. However, it is important to note that he would not be held to be a "proper person" to make the application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a>unless he satisfied the court that there was some evidence of oppression or unfair prejudice or unfair disregard for the interests of a security holder, creditor, director or officer…

 

There are two circumstances in which justice and equity would entitle a creditor to be regarded as "a proper person". (There may be other circumstances; these two are not intended to exhaust the possibilities.) The first is if the act or conduct of the directors or management of the corporation which is complained of constituted using the corporation as a vehicle for committing a fraud upon the applicant. (In the present case there is no evidence suggesting such fraud, although there is some evidence of the directors having used the money paid as a cash inducement for their own personal investment purposes, and that, as I shall later explain, may constitute fraud against the corporation… 

Second, the court might hold that the applicant is a "proper person to make an application" for an order under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a> if the act or conduct of the directors or management of the corporation which is complained of constituted a breach of the underlying expectation of the applicant arising from the circumstances in which the applicant's relationship with the corporation arose. For example, where the applicant is a creditor of the corporation, did the circumstances which gave rise to the granting of credit include some element which prevented the creditor from taking adequate steps, when he or it entered into the agreement, to protect his or its interests against the occurrence of which he or it now complains? Did the creditor entertain an expectation that, assuming fair dealing, its chances of repayment would not be frustrated by the kind of conduct which subsequently was engaged in by the management of the corporation? Assuming that the evidence established the existence of such an expectation, the next question would be whether that expectation was, objectively, a reasonable one.

Thus, in the present case, an inquiry would properly be directed at trial toward whether the lessor, First Edmonton Place, at the time of entering into the lease, consciously and intentionally decided to contract only with the numbered company, and not to obtain personal guarantees from the three lawyers. A further proper inquiry would be into whether the lessor entered into the lease fully aware that it was not protecting itself against the possibility that the corporation might pay out the cash advance to the lawyers, leaving no other assets in the corporation, and that the corporation might permit the lawyers to occupy the space without entering into a sublease either for ten years or for any lesser period. In the absence of evidence establishing at least a prima facie case that an injustice would be done to the lessor or that there would be inequity if the lessor were not allowed to bring its action and go to trial, leave to bring the action ought not to be granted. There is, in the present case, no evidence showing that there was an expectation on the part of the lessor that the lessee corporation would retain the funds in its hands for any set period of time or any time at all. Nor is there any evidence that there was an expectation that the lessee corporation would grant a lease for a term of ten years or any other set term beyond the rent-free period, to the law firm or any other person or persons. It is true that the lease contemplated the possibility that the corporation would enter into a lease with the lawyers, for it specified that the lessee could do so. That falls far short of evidencing the existence of an expectation that there would be a lease for the entire ten-year period or for any set term longer than the rent-free period and less than ten years. Nor does the evidence establish any inequality of bargaining power between First Edmonton Place on the one hand and the three lawyers and their corporation on the other, at the time the lease was being negotiated. If there were some circumstances evidencing such inequality of bargaining power, the result might be different…

CONCLUSION

In the case of the application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a>, the applicant was not a holder of a security or a "creditor" at the time of use of the cash inducement money by the three directors. However, there is some evidence that the cash inducement money was not used for purposes of the corporation and that its use might have been a fraud upon the corporation. If it was a fraud upon the corporation, and if the corporation were entitled to recover the money from the three directors, the applicant may have a genuine interest in advancing the claim to such recovery because the corporation might be liable in damages to the applicant. Therefore the applicant is in my opinion a proper person to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> and should be granted leave to bring an action in the name and on behalf of the corporation in respect of the payment of the cash inducement money to or for the benefit of the three lawyers.

Moreover, as for the three lawyers, as directors of the corporation, permitting themselves as lawyers to occupy the leased premises without paying rent or entering into a lease, whether that conduct constituted a wrong to the corporation is a matter that should be tried. Once again, if there was a wrong, the applicant might ultimately stand to benefit from any recovery by the corporation. Therefore the applicant is in my opinion a proper person to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> in regard to this head of claim and should be granted leave in the same action to advance a claim in the name and on behalf of the corporation in respect of the occupation of the premises by the directors for their own personal purposes and in respect of the failure of the directors to obtain from themselves personally (or their law firm) a sublease for the term of the lease.” (Emphasis added)

Note that section 227 (1) of the BCBCA is an oppression provision comparable to that in First Edmonton Place Ltd. v. 315888 Alberta Ltd. However also note that section 233 (1) of the BCBCA dealing with “derivative actions”, being those where you are suing essentially “on behalf the corporation” is very different. In section 233 (1) of the BCBCA there is no discretionary category; only shareholders (legal or beneficial) or directors have standing to sue.

 

TOPIC 3: STATUTORY REPRESENTATIVE ACTIONS: “DERIVATIVE ACTIONS” 

Please read pages 461-463 of the Casebook.

Please read the following passage from the Supreme Court of Canada’s 2008 decision in BCE Inc. v. 1976 Debentureholders regarding the background and purpose of “derivative actions”.

 

“The first remedy provided by the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>is the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec239">s. 239 </a> derivative action, which allows stakeholders to enforce the directors’ duty to the corporation when the directors are themselves unwilling to do so. With leave of the court, a complainant may bring (or intervene in) a derivative action in the name and on behalf of the corporation or one of its subsidiaries to enforce a right of the corporation, including the rights correlative with the directors’ duties to the corporation. (The requirement of leave serves to prevent frivolous and vexatious actions, and other actions which, while possibly brought in good faith, are not in the interest of the corporation to litigate.)”

Please also reflect on the notion that the need for “derivative actions” arises, at least in part, from the concentration of power and attendant conflicts of interest that often flows from corporate managers overstepping their legal boundaries. Ironically, and sadly, because they are the usual representatives of the “corporate legal personality”, it is often those wrong-doing corporate managers who are cast as the representatives of the corporation which should be investigating them and seeking redress from them on behalf of the corporation and its shareholders. As the author of the casebook points out:

“…however, enforcing these fiduciary duties is difficult if the only actors who can represent the corporation are the very managers who have violated those duties. This explains why other individuals (“complainants”) are permitted to represent the corporation’s interests via the derivative action in circumstances where management fails to assume such responsibility. Since the derivative action is a representative action on behalf of the corporation that seeks recompense for harm done to the corporation, any proceeds awarded from the litigation logically flows to the corporation and not to the complainant.” 

Now please note that per the decision in Shield Development Co. v. Snyder, [1976] 3 W.W.R. 44 (B.C.S.C.) it was found that the B.C. statute limited common law “derivative” actions:

“The legislation does not expressly prohibit the bringing of a common-law derivative action but, in my view, such an action is prohibited by necessary implication. I am unable to see how the two remedies could exist side-by-side without creating confusion to an intolerable degree.”

In this light it may also be worthwhile to revisit section 232 and section 233 of the BCBCA:
<h4>“Derivative actions</h4>
<ol start="232">
<li>(1) In this section and section 233,</li>
</ol>
"complainant" means, in relation to a company, a shareholder or director of the company;

"shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.

(2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company

(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or

(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.

(3) Subsection (2) applies whether the right, duty or obligation arises under this Act or otherwise.

(4) With leave of the court, a complainant may, in the name and on behalf of a company, defend a legal proceeding brought against the company.
<h4> </h4>
<h4>Powers of court in relation to derivative actions</h4>
<ol start="233">
<li>(1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if</li>
</ol>
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,

(b) notice of the application for leave has been given to the company and to any other person the court may order,

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.

(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.

(3) While a legal proceeding prosecuted or defended under this section is pending, the court may,

(a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and

(b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate.

(4) On the final disposition of a legal proceeding prosecuted or defended under this section, the court may make any order it considers appropriate, including an order that

(a) a person to whom costs are paid under subsection (3) (b) repay to the company some or all of those costs,

(b) the company or any other party to the legal proceeding indemnify

(i) the complainant for the costs incurred by the complainant in prosecuting or defending the legal proceeding, or

(ii) the person controlling the conduct of the legal proceeding for the costs incurred by the person in controlling the conduct of the legal proceeding, or

(c) the complainant or the person controlling the conduct of the legal proceeding indemnify one or more of the company, a director of the company and an officer of the company for expenses, including legal costs, that they incurred as a result of the legal proceeding.

(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.

(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.”

 

Please read the cases of Farnham v. Fingold (1973) 2 O.R. 132 (Ont. C.A.) and Goldex Mines Ltd. v. Revill (1974), 7 O.R. (2D) 216. Please also remember the case of First Edmonton Place Ltd. v. 315888 Alberta Ltd. that you read not too long ago. Note that these cases all help define, in one way or another, the distinctions between “derivative” and “oppression” actions.

In Farnham v. Fingold, the Ontario Court of Appeal dealt with an interlocutory motion to strike out a statement of claim for disclosing no reasonable cause of action. The background facts involved the sale of a majority interest in a company for a premium. The same offer was not made to the minority shareholders. The claim alleged that the majority shareholders had a fiduciary obligation to share the premium with the minority shareholders. The decision was among the first Canadian cases to analyze and distinguish between a personal action and a derivative action in consideration of the requirements the Ontario Business Corporations Act.

Jessup J.A. stated:

“Certain parts of the statement of claim in particular all or parts of paras. 22, 23, 29, 32, 34, 36 and 37E are concerned with rights, duties or obligations owed to the defendant Slater Steel Industries Limited or with damage alleged to be suffered by the corporation as a result of the actions of the other defendants. Such matters are properly the subject of a derivative action rather than a class action.” 

On the particular claims at issue the Ontario Court of Appeal dismissing the action as a “derivative action” under the statute, but preserving the possibility of an “oppression action” being validly brought forth.

Goldex Mines Ltd. v. Revill involved the pleadings in a longstanding shareholder battle and again was concerned with the distinction between derivative actions and oppression claims.

The Ontario Court of Appeal dealt with the distinction:

“Where a legal wrong is done to shareholders by directors or other shareholders, the injured shareholders suffer a personal wrong, and may seek redress for it in a personal action. That personal action may be by one shareholder alone, or (as will usually be the case) by a class action in which he sues on behalf of himself and all other shareholders in the same interest (usually, all other shareholders save the wrongdoers). Such a class action is nevertheless a personal action. 

A derivative action, on the other hand, is one in which the wrong is done to the company. It is always a class action, brought in representative form, thereby binding all the shareholders…”

A bit later in the decision the Ontario Court of Appeal quoted with approval from the judgment of Traynor C.J. in the California case of Jones v. H.F. Ahmanson & Co. where the case of Shaw v. Empire Savings & Loan Assoc. was cited:

“…the court [in Shaw] noted the "well established general rule that a stockholder of a corporation has no personal or individual right of action against third persons, including the corporation's officers and directors, for a wrong or injury to the corporation which results in the destruction or depreciation of the value of his stock, since the wrong suffered by the stockholder is merely incidental to the wrong suffered by the corporation and affects all stockholders alike." From this the court reasoned that a minority shareholder could not maintain an individual action unless he could demonstrate the injury was somehow different from that suffered by other minority shareholders. In so concluding the court erred. The individual wrong necessary to support a suit by a shareholder need not be unique to that plaintiff. The same injury may affect a substantial number of shareholders. If the injury is not incidental to an injury to the corporation, an individual cause of action exists.” 

 

In the end the cases of Farnham v. Fingold, Goldex Mines Ltd. v. Revill and First Edmonton Place Ltd. v. 315888 Alberta Ltd. emphasize the necessity for a careful analysis of the nature of the complaint, in particular whether the class of the complaint corporate or individual (personal)? If it is not corporate, a derivative action is not appropriate.

All of this should now become somewhat clearer in looking yet again at section 232(2) of the BCBCA:

 

 “Derivative actions
<ol start="232">
<li> (2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company</li>
</ol>
(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or

(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.”

Please also read he notes on “Prerequisite Steps at pages 471-472 of the Casebook. In relation to that please also read again section 233 of the BCBCA: 

 

“Powers of court in relation to derivative actions
<ol start="233">
<li> (1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if</li>
</ol>
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,

(b) notice of the application for leave has been given to the company and to any other person the court may order,

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.

 

(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.

 

(3) While a legal proceeding prosecuted or defended under this section is pending, the court may,

(a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and

(b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate.

 

(4) On the final disposition of a legal proceeding prosecuted or defended under this section, the court may make any order it considers appropriate, including an order that

(a) a person to whom costs are paid under subsection (3) (b) repay to the company some or all of those costs,

(b) the company or any other party to the legal proceeding indemnify

(i) the complainant for the costs incurred by the complainant in prosecuting or defending the legal proceeding, or

(ii) the person controlling the conduct of the legal proceeding for the costs incurred by the person in controlling the conduct of the legal proceeding, or

(c) the complainant or the person controlling the conduct of the legal proceeding indemnify one or more of the company, a director of the company and an officer of the company for expenses, including legal costs, that they incurred as a result of the legal proceeding.

 

(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.

 

(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.”

 

 

Blog Activity 8.2:

As you review and break down the component elements in section 233 (1) of the BCBCA please also notice the provisions of the OBCA referred to in Armstrong v. Gardner (1978), 20 O.R. (2d) 648 (H.C.) at page 472-473 of the Casebook. What do you think is the explanation for OBCA section 99 (3) (a) requiring that “the shareholder was a shareholder of the corporation at the time of the transaction or other event giving rise to the cause of action…”? Might it be an effective tool to prevent speculation on “derivative actions”? Note that the same sort of limitation does not appear in the bcbca.

 

In this regard it is worth knowing that a “strike suit” is a nuisance legal action. It is brought by a small shareholder with a virtually insignificant interest in a corporation with a view to achieving a profitable settlement before actually going to court. Such actions frequently appeared in the U.S. when the defendant corporation was much larger than the plaintiff and for that reason a settlement amount could be less than what the defendant's legal costs might have been. Strike suits were never common in Canada. A 2005 decision of U.S. Supreme Court (Dura Pharmaceuticals, Inc. v. Broudo, (2005) 544 U.S. 336) made them much more difficult and accordingly they have become less common in the present day.

Are such protections as OBCA section 99 (3) (a) or an analogous decision to the that of the U.S. Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo necessary? Or are such protections subsumed within the potential interpretations of sections 233 (1) (c) and (d) of the BCBCA?:

 

“233. (1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if…

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.”

Please blog your views on these questions and your reasons in less than one page under the heading “Abusive Derivative Actions”.

 

Finally we conclude this part of the discussion with section 233 (6) of the BCBCA, which states:

 

“233. (6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.”

You will recall that we previously studied the possibly salutary impacts of both advance and subsequent shareholder approval to deal contentious issues or remedy errors where not involving fraud or bad faith. It is useful to reflect on how section 233(6) reserves considerable discretion to the court to deal with a special resolution as it sees fit. 

 

TOPIC 4: THE OPPRESSION REMEDY 

Please read pages 490-540 of the Casebook. You will find that you are already familiar with a number of the cases (and even the principles) that you will be reading.

Please note the Casebook authors’ somewhat disconcerting words at the bottom of page 490 of the Casebook:

“Most Canadian jurisdictions have followed the C.B.C.A. lead and enacted an “oppression” remedy. There is a relatively large volume of cases in Canada since the statutory change. One reason for the volume is lack of theory: the remedy is relatively new to Canada. Moreover, precedent is not particularly helpful: the remedy is invoked in a wide variety of circumstances and judges are statutorily empowered to do whatever they want in each case.”

Beginning to sound familiar?

Now please read sections 227 (1) (2) and (3) of the BCBCA:

 

“Complaints by shareholder
<ol start="227">
<li> (1) For the purposes of this section, "shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) A shareholder may apply to the court for an order under this section on the ground

(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or

(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.

 

(3) On an application under this section, the court may, with a view to remedying or bringing to an end the matters complained of and subject to subsection (4) of this section, make any interim or final order it considers appropriate, including an order

(a) directing or prohibiting any act,

(b) regulating the conduct of the company's affairs,

(c) appointing a receiver or receiver manager,

(d) directing an issue or conversion or exchange of shares,

(e) appointing directors in place of or in addition to all or any of the directors then in office,

(f) removing any director,

(g) directing the company, subject to subsections (5) and (6), to purchase some or all of the shares of a shareholder and, if required, to reduce its capital in the manner specified by the court,

(h) directing a shareholder to purchase some or all of the shares of any other shareholder,

(i) directing the company, subject to subsections (5) and (6), or any other person, to pay to a shareholder all or any part of the money paid by that shareholder for shares of the company,

(j) varying or setting aside a transaction to which the company is a party and directing any party to the transaction to compensate any other party to the transaction,

(k) varying or setting aside a resolution,

(l) requiring the company, within a time specified by the court, to produce to the court or to an interested person financial statements or an accounting in any form the court may determine,

(m) directing the company, subject to subsections (5) and (6), to compensate an aggrieved person,

(n) directing correction of the registers or other records of the company,

(o) directing that the company be liquidated and dissolved, and appointing one or more liquidators, with or without security,

(p) directing that an investigation be made under Division 3 of this Part,

(q) requiring the trial of any issue, or

(r) authorizing or directing that legal proceedings be commenced in the name of the company against any person on the terms the court directs.” (Emphasis added)

Now please note differences between sections 227 (1) (2) and (3) of the BCBCA and the equivalent sections of the CBCA section 241:

 

“Application to court re oppression
<ol start="241">
<li>(1) A complainant may apply to a court for an order under this section.</li>
</ol>
 

Grounds

 

(2) If, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates

 (a) any act or omission of the corporation or any of its affiliates effects a result,

 (b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or

 (c) the powers of the directors of the corporation or any of its affiliates 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, the court may make an order to rectify the matters complained of.

 

 Powers of court

 

(3) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,

(a) an order restraining the conduct complained of;

(b) an order appointing a receiver or receiver-manager;

(c) an order to regulate a corporation’s affairs by amending the articles or by-laws or creating or amending a unanimous shareholder agreement;

(d) an order directing an issue or exchange of securities;

(e) an order appointing directors in place of or in addition to all or any of the directors then in office;

(f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder;

(g) an order directing a corporation, subject to subsection (6), or any other person, to pay a security holder any part of the monies that the security holder paid for securities;

(h) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract;

(i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested person financial statements in the form required by section 155 or an accounting in such other form as the court may determine;

(j) an order compensating an aggrieved person;

(k) an order directing rectification of the registers or other records of a corporation under section 243;

(l) an order liquidating and dissolving the corporation;

(m) an order directing an investigation under Part XIX to be made; and

(n) an order requiring the trial of any issue.

 Duty of directors 

(4) If an order made under this section directs amendment of the articles or by-laws of a corporation,

 (a) the directors shall forthwith comply with subsection 191(4); and

 (b) no other amendment to the articles or by-laws shall be made without the consent of the court, until a court otherwise orders.

 

Exclusion

 

 (5) A shareholder is not entitled to dissent under section 190 if an amendment to the articles is effected under this section.

 

Limitation

 

(6) A corporation shall not make a payment to a shareholder under paragraph (3)(f) or (g) if there are reasonable grounds for believing that

 (a) the corporation is or would after that payment be unable to pay its liabilities as they become due; or

 (b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities.

Alternative order 

(7) An applicant under this section may apply in the alternative for an order under section 214.”

 

All of which somewhat begs the question: What is the meaning of “Oppression”? Or put another way what is the standard of what will be considered “Oppression” defined?

To focus on this question this please begin by reading Westfair Foods Ltd. v. Watt [1991] A.J. No. 321 at pages 492-494 of the Casebook.

The facts were that Westfair Foods Ltd. had Class A shares carrying a $2 dividend in priority to the common shares. There were many Class A shareholders and only a single holder of the common shares. The Class A shares were also entitled to share in surplus assets including retained earning in the event of a liquidation. Historically all profits beyond the dividend attached to the class A shares would be retained by Westfair Foods Ltd. as earnings. At a certain point the directors of Westfair Foods Ltd. decided to change the policy and after paying the fixed dividend to the holders of Class A shares, the company paid all of its net earnings to the single common shareholder. The Class A shareholders claimed the new policy was oppressive to their interests.

Kearns J.A. of the Alberta C.A. found the new policy to be oppressive to the Class A shareholders. The logic, reasoning and common sense displayed by the learned judge in examining “oppressive conduct” is well worth reproducing here:

 

“I turn then to the substantial rights conferred by the provision. Obviously, they turn on effect not intent. Equally obviously, they govern all the activities of the corporation. The rights conferred upon shareholders are that they, at any time and in any way during their relationship with the company, are to be insulated from anything oppressive, unfairly prejudicial, or that unfairly disregards their interests. For the relations among shareholders, this is a major modification of majority rule.

In my view, the provisions were and remain a compendious way for Parliament to say to the courts that the classes mentioned in the Act are to be treated fairly in the sense of justly by corporations. For example, both parties cite and rely on Ebrahimi v. Westbourne Galleries, [1973] A.C. 360. Lord Wilberforce there said at p. 379:

... there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the company structure.

I agree with a similar sentiment by McDonald J. in First Edmonton Place v. 315888 Alberta Ltd. 1988 168 (AB QB), (1988), 40 B.L.R. 28 at pp. 59-60, 60 Alta. L.R. (2d) 122, 10 A.C.W.S. (3d) 268 (Q.B.).

I cannot put elastic adjectives like "unfair", "oppressive" or "prejudicial" into watertight compartments. In my view, this repetition of overlapping ideas is only an expression of anxiety by Parliament that one or the other might be given a restrictive meaning… 

Having concluded that the words charge the courts to impose the obligation of fairness on the parties, I must admit that the admonition offers little guidance to the public, and Parliament has left elucidation to us. I have elsewhere said that I take this sort of indirection as legislative delegation: see Transalta Utilities Corp. v. Alberta Public Utilities Board 1986 ABCA 64 , (1986), 43 Alta. L.R. (2d) 171 at p. 180, 68 A.R. 171, 36 A.C.W.S. (2d) 376 (C.A.).

We fail in that duty of elucidation, I think, if we merely say "this is fair" or "that is not fair" without ever explaining why we think this or that is fair. Thus I, and I dare say others, am not much helped by cases and comments that simply announce that I am to enforce "fair play" or "fair dealing": see, for example, Dickerson, op. cit. , para. 48.

On the other hand, I do not understand that the delegation of this duty permits a judge to impose personal standards of fairness. Let me illustrate what is probably obvious by two extreme examples. A judge who firmly believes in the virtues of unrestricted private enterprise might say that fairness requires that people protect themselves to their best capacity, and that the courts not protect those who fail to protect themselves. On the other hand, a judge who firmly believes that private property is a trust held for the benefit of society as a whole might say that what is fair is what best benefits society.

The role of a judge in our society limits the impulses of both my mythical judges. We must not make rules unless we can tie them to values that seem to have gained wide acceptance. We do that largely by testing any proposed rule against other legal rules, which by long tradition seem accepted. In short we seek precedent, or we seek to argue from what we consider to be principles adopted in precedent… 

I will not attempt to catalogue all the rules generated by the words in the statute. For example, the courts have imposed the duty on directors to protect the interests of all shareholders, not just those who elect them. I will later deal with that rule. The authorities also impose upon the majority interest the obligation not to use their electoral power to profit themselves at the expense of minority shareholders. The principal complaint here does not engage that rule. The complaint is not by a minority who has been outvoted. It is by an entire class of shares in competition with another class of shares.

It is said for the shareholders that yet another rule exists. This is that the directors must have due regard for, and deal fairly with, the "interests" of all shareholders. I have concern about over-use of the word interests. This example serves to express it: a thief is very interested in my watch, and will get it if he can. A law about fairness will not, however, show any respect for his interest. The real question is whether the law should accept his obvious interest in financial gain as, in all the circumstances, one that deserves protection. I do not accept that all ambition to acquire property deserves protection. I do accept that our tradition is that a hope for profit, as opposed to a mere desire, sometimes deserves protection.

One deserving case is where the person to whom the profit will go has nourished that hope. The company and the shareholders entered voluntarily, not by duty or chance, into a relationship. Our guides are the rules in other contexts, such as contract law, equity, and partnership law, where the courts have also considered just rules to govern voluntary relationships. In very general terms, one clear principle that emerges is that we regulate voluntary relationships by regard to the expectations raised in the mind of a party by the word or deed of the other, and which the first party ordinarily would realize it was encouraging by its words and deeds. This is what we call reasonable expectations, or expectations deserving of protection. Regard for them is a constant theme, albeit variously expressed, running through the cases on this section or its like elsewhere. I emphasize that all the words and deeds of the parties are relevant to an assessment of reasonable expectations, not necessarily only those consigned to paper, and not necessarily only those made when the relationship first arose.

I do not for a moment suggest that that analysis about expectations deserving protection is the sole basis for rules under the statute. I think, for example, of totally unforeseen windfalls or calamities. This is not such a case, but I dare say that even in those cases the expectations of the parties are a sound starting point. And the test will always be helpful in cases where mere interests collide.

The test then is always facts-specific, and cases decided on other facts offer only a limited guide. Unfortunately, no other reported case offers the same facts as this.” (Emphasis added)

 

As a footnote it is well worth drawing your attention to a fuller version of the classic statement made by Lord Wilberforce in Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360 at 379 which was quoted by Kearns J.A. immediately above:

“The foundation of it all lies in the words ‘just and equitable’ and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own; that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Company Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The ‘just and equitable’ provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.”

 

Next please read again, but from a somewhat different perspective, the case of Deluce Holdings Inc. v. Air Canada (1992) 98 D.L.R. 94th) 509 (Gen. Div.) at pages 494-502 of the Casebook.

In this case Air Canada owned 75% of the shares of Air Ontario and De Luce Holdings Ltd. (controlled by the De Luce family) owned the remaining 25%. The interests of both Air Canada and De Luce Holdings Ltd. were held in a numbered company, 152160 Canada Inc. The board of directors of Air Ontario was comprised of 7 nominees of Air Canada and 3 nominees from De Luce. William De Luce was named president of Air Ontario. At a certain point Air Canada changed its business strategy to seek 100% control of its regional carriers. Despite apparently doing a good job William De Luce was asked to resign by the Air Canada board representatives. He refused and was terminated by the board of Air Ontario, which in turn was controlled by Air Canada nominees. The “Unanimous Shareholders Agreement” of 152160 Canada Inc. governed the relationship between Air Canada and the De Luce family interests. That agreement provided Air Canada with an option to acquire the De Luce shareholdings in Air Ontario at “fair market value” (to be arbitrated if not agreed upon) upon termination either by Air Ontario or 152160 Canada Inc. of the employment of the last of William De Luce of his father Stanley De Luce. Apparently, termination could be “for any reason”. In February 1989 the employment of Stanley De Luce ended and not renewed. In October 1991 William De Luce terminated by a decision of the board of 152160 Canada Inc.

 

De Luce Holdings Ltd alleged oppression. They argued that since the since the oppressive actions of Air Canada to the De Luce Family as shareholders in Air Ontario were the foundation of the arbitration that sought to determine the value of the shares which the De Luce family were required to sell to Air Canada, the arbitration should be stopped.

Blair J. noted that the motivation for terminating William De Luce as president of Air Ontario was the pursuit of a perfectly legitimate corporate objective on the part of Air Canada. However two questions commended themselves:
<ol>
<li>Was Air Canada entitled to its use majority position on the board of Air Ontario for the predominant purpose of carrying out Air Canada’s corporate objective (as opposed to the corporate objective of Air Ontario), or whether such conduct was “oppressive” of the minority shareholders in Air Ontario?;</li>
<li>If oppressive, then does that oppressiveness undercut the apparent right under the Unanimous Shareholders Agreement to terminate William De Luce “for any reason” (and thus triggering Air Canada’s call on the De Luce family shares)?</li>
</ol>
 

The Court decided to use its discretion to stay the arbitration proceedings. Air Canada’s nominee directors had too obviously disregarded the interests of other stakeholders. Whether there were sufficient reasons to terminate Mr. De Luce, it was obvious to the court that the nominee directors had failed to conduct such any legitimate and focused analysis and were in fact guided by Air Canada's corporate agenda. This sort of behavior was deemed oppressive and in breach of the nominees' fiduciary duty to Air Ontario.

Ironically (and unusually) invoking the arbitration clause might be said to have been oppressive in itself. The Court reasoned that the majority shareholder "visited oppression upon a minority shareholder" and the majority’s conduct was found to be unfairly prejudicial and to have unfairly disregarded the interests of the minority shareholder.

Blair J. had the following to say on the subject of “Oppression”:

“In my view, the conduct of Air Canada and its nominee directors, as outlined above, could be found, after a trial, to constitute "oppression” of Deluceco’s interests as a minority shareholder in Air Ontario. While the conduct may not constitute “oppression” in the classic sense of conduct which is “lacking in probity” or “burdensome, harsh and wrongful”, it may nonetheless be conduct which is “unfairly prejudicial” to or which “unfairly disregards” the interests of Deluceco as a minority shareholder, contrary to s. 241 of the C.B.C.A. The authorities make it clear that this distinction exists and that the latter sort of conduct constitutes grounds that are “less rigorous” than oppression…”

On the subject of the distinction between “legal rights” and the interests or expectations of shareholders Blair J. said the following:

“Cases dealing with oppression remedy situations have emphasized the distinction between the strict "legal rights" of shareholders and their “interests”. For instance, in Westfair Foods Ltd. v. Watt…[1990] 4 W.W.R. 685…Moore C.J.Q.B stated at page 59: 

An examination of the leading cases dealing with the C.B.C.A. and in particular s. 241, is worthwhile. In enacting s. 241, Parliament obviously intended that strict attention should be paid to the interests of all shareholders, not just the legal rights of shareholders.

(Emphasis in original.)

Mr. Justice Farley elaborated on this distinction in 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R (2d) at p.123… by commenting on the connection between shareholder “interests” and shareholder “expectations”. At pp. 185–6 he said:

Shareholder interests would appear to be intertwined with shareholder expectations. It does not appear to me that the shareholder expectations which are to be considered are those that a shareholder has as his own individual “wish list”. They must be expectations which could be said to have been (or ought to have been considered as) part of the compact of the shareholders…”

Please read the very useful notes and questions at pages 502-507 of the Casebook. In particular please note the useful summary set out by Killeen J. In Krynen v. Bugg (2003) 64 O.R. (3d) 393 (S.C.J.):

 

“A summary of the leading principles and guiding rules which has come out of that case law would include the following:

(1) The overriding lodestar principle of oppression law is that, 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. The cases on this issue have been helpfully collected and reviewed by Farley J. in 8200099 Ontario Inc. v. Harold E. Ballard Ltd. (1992) 3 B.L.R. (2d) 123 (Ont. Gen. Div.) where he said this at pp. 185-86:

Shareholder interests would appear to be intertwined with shareholder expectations. It does not appear to me that the shareholder expectations which are to be considered are those that a shareholder has as his own individual “wish list”. They must be expectations which could be said to have been (or ought to have been considered as) part of the compact of the shareholders.

This statement of principle by Farley J. was expressly approved of by the Ontario Court of Appeal in its important judgment in Naneff v. Con-Crete Holdings Limited et. al. 1995 959 (ON CA), (1995), 23 O.R. (3d) 481 (C.A.) at p. 490.

(2) The term “oppression” connotes an inequality of bargaining power while “unfairness” connotes an obligation to act equitably and impartially in the exercise of power and authority: Re Alldrew Holdings Ltd. v. Nibro Holdings 1993 5509 (ON SC), (1993), 16 O.R. (3d) 718 at p. 732. (Ont. Gen. Div.)

(3) The terms, “unfair prejudice to” and “unfair disregard of the interests of” require less rigorous tests than oppression. Where on the totality of the evidence the actions and conduct complained of go beyond mere inconvenience and lack of information, and the interests of the complainant have been unfairly disregarded, the complainant will be entitled to a remedy: Re Mason and Intercity Properties Ltd. 1987 173 (ON CA), (1987), 59 O.R. (2d) 631, at p. 635. (Ont. C.A.)

(4) There is no requirement that bad faith must be shown before an order to rectify a complaint may be made in an oppression case: Re Sidaplex-Plastic Suppliers Inc. v. Elta Group Inc. 1998 5847 (ON CA), (1998), 40 O.R. (3d) 563 at p. 567 (C.A.); Loveridge Holdings v. King-Pin Ltd. reflex, (1992), 5 B.L.R. (2d) 195, at p. 203 (Ont.Gen. Div.)

(5) Where expectations are apparently reasonable on their face but where there is a contract dealing with these expectations, the reasonableness of these expectations cannot prevail over the contract.

(6) Reasonable expectations are not necessarily “static” or frozen expectations and may evolve or change as the principals adapt their arrangements from time to time: 820099 Ontario Inc. v. Harold Ballard Ltd., supra, at p. 191.

(7) The business and affairs of a corporation are managed by or under the direction of its board of directors. The “business judgment rule” operates to shield from court intervention business decisions which have been made honestly, prudently, in good faith and on reasonable grounds. In such cases, the board’s decisions will not be subject to microscopic examination and the court will be reluctant to interfere with and usurp the board’s function in managing the corporation: Re C.W. Shareholdings Inc. v. WIC Western International Communications Ltd. 1998 14838 (ON SC), (1998), 39 O.R. (3d) 755 at para. 57 (Ont.Gen. Div.); Brant Investments Ltd. v. Keeprite Inc. 1991 2705 (ON CA), (1991), 3 O.R. (3d) 289, at pp. 320-21. (C.A.) A useful three-part test or approach has been suggested for the application of the business judgment rule:

(1) Was the impugned conduct outside the range of reasonable business judgment?

(2) Was the impugned conduct inconsistent with the reasonable expectations of the complainant?

(3) Did the impugned conduct cause prejudice to the complainant?

 Main v. Delcan Group Inc.(1999), 47 B.C.R. (2d) 200 at para. 31 (Ont. S.C.J.).

The Ontario Court of Appeal has also considered the rule in Pente Investment Management Ltd. v. Schneider Corp., 1998 5121 (ON CA), (1998), 44 B.L.R. (2d) 115, at para. 36 (C.A.):

The law as it has evolved in Ontario and Delaware has the common requirements that the court must be satisfied that the directors have acted reasonably and fairly. The court looks to see that the directors made a reasonable decision not a perfect decision. Provided the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board’s determination. As long as the directors have selected one of several reasonable alternatives, deference is accorded to the board’s decision…. This formulation of deference to the decision of the Board is known as the “business judgment rule”. The fact that alternative transactions were rejected by the directors is irrelevant unless it can be shown that a particular alternative was definitely available and clearly more beneficial to the company than the chosen transaction….”

See, also, Themadel Foundation v. Third Can. General Investment Trust 1998 973 (ON CA), (1998), 38 O.R. (3d) 749 at 754 (C.A.).

(8) Actual or material loss is not a prerequisite to a finding either of oppression, unfair prejudice or unfair disregard of interest. The object of the remedies available under s.248(3) is to prevent the continuation of the misconduct in question if it is established that a harm or detriment, in the sense of infringement of rights or privileges, will follow in the absence of restraining such misconduct. On this issue, the concept of detriment as a prerequisite to obtaining a remedy is similar to the concept inherent in a quia timet injunction – even if there is no material loss or damage at the time but reasonable grounds are established to apprehend the same occurring if there is no relief granted, the applicant for the quia timet remedy will be entitled to the relief sought. Thus, in establishing unfair disregard of the applicant’s interests as a result of misconduct, there is no requirement that there be actual detriment or loss to the applicant: Sahota v. Basra 1999 14945 (ON SC), (1999), 45 B.L.R. (2d) 143, at para. 30 (Ont. General Div.).

(9) Wrongful dismissal, standing alone, will not justify a finding of oppression. It is only where the interests of the employee are closely intertwined with his interests as a shareholder, and where the dismissal is part of a pattern of conduct to exclude the complainant from participation in the corporation, that the dismissal can be found to be an act of oppression: Naneef v. Con-Crete Holding Ltd. reflex, (1993) 11 B.L.R. (2d) 218 at para. 125; Koehner, “The Oppression Remedy: Reasonable Expectations” (1994) 73 Can. Bar. Rev. 274 at 278.”

 

You are already acquainted with the case of BCE Inc. v. 1976 Debentureholders [2008] 3 S.C.R. 560. In that case the Supreme Court of Canada made the following observations concerning the remedy of “oppression”:

“ B. The <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">Section 241 </a> Oppression Remedy

 The debentureholders in these appeals claim that the directors acted in an oppressive manner in approving the sale of BCE, contrary to <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a> of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>.

Security holders of a corporation or its affiliates fall within the class of persons who may be permitted to bring a claim for oppression under <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a> of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>. The trial judge permitted the debentureholders to do so, although in the end he found the claim had not been established. The question is whether the trial judge erred in dismissing the claim.

We will first set out what must be shown to establish the right to a remedy under <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a>, and then review the conduct complained of in the light of those requirements. 

(1) The Law

Section 241(2) provides that a court may make an order to rectify the matters complained of where

(a) any act or omission of the corporation or any of its affiliates effects a result,

(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or

(c) the powers of the directors of the corporation or any of its affiliates 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…

<a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">Section 241 </a> jurisprudence reveals two possible approaches to the interpretation of the oppression provisions of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>: M. Koehnen, Oppression and Related Remedies (2004), at pp. 79-80 and 84. One approach emphasizes a strict reading of the three types of conduct enumerated in <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a> (oppression, unfair prejudice and unfair disregard): see Scottish Co-operative Wholesale Society Ltd. v. Meyer, [1959] A.C. 324 (H.L.); Diligenti v. RWMD Operations Kelowna Ltd. (1976), 1 B.C.L.R. 36 (S.C.); Stech v. Davies, [1987] 5 W.W.R. 563 (Alta. Q.B.). Cases following this approach focus on the precise content of the categories “oppression”, “unfair prejudice” and “unfair disregard”. While these cases may provide valuable insight into what constitutes oppression in particular circumstances, a categorical approach to oppression is problematic because the terms used cannot be put into watertight compartments or conclusively defined. As Koehnen puts it (at p. 84), “[t]he three statutory components of oppression are really adjectives that try to describe inappropriate conduct…The difficulty with adjectives is they provide no assistance in formulating principles that should underlie court intervention.”

Other cases have focused on the broader principles underlying and uniting the various aspects of oppression: see First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988), 40 B.L.R. 28 (Alta. Q.B.), var’d (1989), 45 B.L.R. 110 (Alta. C.A.); 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 113 (Ont. Div. Ct.); Westfair Foods Ltd. v. Watt (1991), 79 D.L.R. (4th) 48 (Alta. C.A.).

In our view, the best approach to the interpretation of <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241subsec2">s. 241(2) </a> is one that combines the two approaches developed in the cases. One should look first to the principles underlying the oppression remedy, and in particular the concept of reasonable expectations. If a breach of a reasonable expectation is established, one must go on to consider whether the conduct complained of amounts to “oppression”, “unfair prejudice” or “unfair disregard” as set out in <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241subsec2">s. 241(2) </a> of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA</a>.

We preface our discussion of the twin prongs of the oppression inquiry by two preliminary observations that run throughout all the jurisprudence.

First, oppression is an equitable remedy. It seeks to ensure fairness — what is “just and equitable”. It gives a court broad, equitable jurisdiction to enforce not just what is legal but what is fair: Wright v. Donald S. Montgomery Holdings Ltd. (1998), 39 B.L.R. (2d) 266 (Ont. Ct. (Gen. Div.)), at p. 273; Re Keho Holdings Ltd. and Noble (1987), 38 D.L.R. (4th) 368 (Alta. C.A.), at p. 374; see, more generally, Koehnen, at pp. 78-79. It follows that courts considering claims for oppression should look at business realities, not merely narrow legalities: Scottish Co-operative Wholesale Society, at p. 343.

Second, like many equitable remedies, oppression is fact-specific. What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive in one situation may not be in another.

Against this background, we turn to the first prong of the inquiry, the principles underlying the remedy of oppression. In Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360 (H.L.), at p. 379, Lord Wilberforce, interpreting s. 222 of the U.K. Companies Act, 1948, described the remedy of oppression in the following seminal terms:

‘The words [“just and equitable”] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure.’

Lord Wilberforce spoke of the equitable remedy in terms of the “rights, expectations and obligations” of individuals. “Rights” and “obligations” connote interests enforceable at law without recourse to special remedies, for example, through a contractual suit or a derivative action under <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec239">s. 239 </a> of the CBCA. It is left for the oppression remedy to deal with the “expectations” of affected stakeholders. The reasonable expectations of these stakeholders is the cornerstone of the oppression remedy.

As denoted by “reasonable”, the concept of reasonable expectations is objective and contextual. The actual expectation of a particular stakeholder is not conclusive. In the context of whether it would be “just and equitable” to grant a remedy, the question is whether the expectation is reasonable having regard to the facts of the specific case, the relationships at issue, and the entire context, including the fact that there may be conflicting claims and expectations.

Particular circumstances give rise to particular expectations. Stakeholders enter into relationships, with and within corporations, on the basis of understandings and expectations, upon which they are entitled to rely, provided they are reasonable in the context: see 820099 Ontario; Main v. Delcan Group Inc. (1999), 47 B.L.R. (2d) 200 (Ont. S.C.J.). These expectations are what the remedy of oppression seeks to uphold.

Determining whether a particular expectation is reasonable is complicated by the fact that the interests and expectations of different stakeholders may conflict. The oppression remedy recognizes that a corporation is an entity that encompasses and affects various individuals and groups, some of whose interests may conflict with others. Directors or other corporate actors may make corporate decisions or seek to resolve conflicts in a way that abusively or unfairly maximizes a particular group’s interest at the expense of other stakeholders. The corporation and shareholders are entitled to maximize profit and share value, to be sure, but not by treating individual stakeholders unfairly. Fair treatment — the central theme running through the oppression jurisprudence — is most fundamentally what stakeholders are entitled to “reasonably expect”.

Section 241(2) speaks of the “act or omission” of the corporation or any of its affiliates, the conduct of “business or affairs” of the corporation and the “powers of the directors of the corporation or any of its affiliates”. Often, the conduct complained of is the conduct of the corporation or of its directors, who are responsible for the governance of the corporation. However, the conduct of other actors, such as shareholders, may also support a claim for oppression: see Koehnen, at pp. 109-10; GATX Corp. v. Hawker Siddeley Canada Inc. (1996), 27 B.L.R. (2d) 251 (Ont. Ct. (Gen. Div.)). In the appeals before us, the claims for oppression are based on allegations that the directors of BCE and Bell Canada failed to comply with the reasonable expectations of the debentureholders, and it is unnecessary to go beyond this.

The fact that the conduct of the directors is often at the centre of oppression actions might seem to suggest that directors are under a direct duty to individual stakeholders who may be affected by a corporate decision. Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debentureholders in these appeals. This is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen. However, the directors owe a fiduciary duty to the corporation, and only to the corporation. People sometimes speak in terms of directors owing a duty to both the corporation and to stakeholders. Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases (such as these appeals) may arise where these interests do not coincide. In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation.

Having discussed the concept of reasonable expectations that underlies the oppression remedy, we arrive at the second prong of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a>oppression remedy. Even if reasonable, not every unmet expectation gives rise to claim under s. 241. The section requires that the conduct complained of amount to “oppression”, “unfair prejudice” or “unfair disregard” of relevant interests. “Oppression” carries the sense of conduct that is coercive and abusive, and suggests bad faith. “Unfair prejudice” may admit of a less culpable state of mind, that nevertheless has unfair consequences. Finally, “unfair disregard” of interests extends the remedy to ignoring an interest as being of no importance, contrary to the stakeholders’ reasonable expectations: see Koehnen, at pp. 81-88. The phrases describe, in adjectival terms, ways in which corporate actors may fail to meet the reasonable expectations of stakeholders.

In summary, the foregoing discussion suggests conducting two related inquiries in a claim for oppression: (1) Does the evidence support the reasonable expectation asserted by the claimant? and (2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest?” (Emphasis added)

In the end the Supreme Court of Canada approved the arrangement as fair and dismissed the claim for oppression. Of particular note, though of some frustration to those who want hard and fast “rights based” rules, is the acknowledgment that the court made that oppression is fact-specific: 

“What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive in one situation may not be in another.”

Blog Activity 8.3: 

In the “Introduction” to this unit you were invited to “…stay on the lookout in this unit…for situations where the relative “equality’ of the parties has some impact on the law evolving in a murkier rather then clearer way”. Does the stress on facts as dictating legal consequences embodied by the court’s approach in BCE Inc. v. 1976 Debentureholders serve to reinforce the subjectivity of “oppression” as a remedy and effectively prevent it from ever being used as a “right” that can truly reform corporate conduct? Please blog your views on this question and your reasons in less than one page under the heading “Oppression: Remedy v. Right”.

 

Finally on the subject of “Minority Protection” let’s look (once again) at the cases of First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) 60 Alta. L.R. (2d) 122 (Q.B.) at pages 511-519 of the Casebook; and Hercules Managements Ltd. v. Ernst & Young [1997] 2 S.C.R. 165 at pages 519-522 of the Casebook.

As you will recall First Edmonton Place Ltd. v. 315888 Alberta Ltd. involved three lawyers and their landlord, and the question focussed upon earlier was what sort of “interest” a creditor would have to have in order to achieve standing in a “derivative” or “oppression” action. In the present context what is noteworthy about the decision in First Edmonton Place Ltd. v. 315888 Alberta Ltd. is what might be thought of as the “impact-oriented focus on harm” taken by the Court of Queen’s Bench of Alberta. In the end leave to bring a “derivative action” was granted but First Edmonton Place Ltd. was not permitted to bring an “oppression” action.

McDonald J. made these observations:

“Assuming the absence of fraud, in what other circumstances would a remedy under s. 234 be available? In deciding what is unfair, the history and nature of the corporation, the essential nature of the relationship between the corporation and the creditor, the type of rights affected and general commercial practice should all be material. More concretely, the test of unfair prejudice or unfair disregard should encompass the following considerations: the protection of the underlying expectation of a creditor in its arrangement with the corporation, the extent to which the acts complained of were unforeseeable or the creditor could reasonably have protected itself from such acts, and the detriment to the interests of the creditor. The elements of the formula and the list of considerations as I have stated them should not be regarded as exhaustive. Other elements and considerations may be relevant, based upon the facts of a particular case…

CONCLUSION

In the case of the application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a>, the applicant was not a holder of a security or a "creditor" at the time of use of the cash inducement money by the three directors. However, there is some evidence that the cash inducement money was not used for purposes of the corporation and that its use might have been a fraud upon the corporation. If it was a fraud upon the corporation, and if the corporation were entitled to recover the money from the three directors, the applicant may have a genuine interest in advancing the claim to such recovery because the corporation might be liable in damages to the applicant. Therefore the applicant is in my opinion a proper person to make an application under s. 232 and should be granted leave to bring an action in the name and on behalf of the corporation in respect of the payment of the cash inducement money to or for the benefit of the three lawyers.

Moreover, as for the three lawyers, as directors of the corporation, permitting themselves as lawyers to occupy the leased premises without paying rent or entering into a lease, whether that conduct constituted a wrong to the corporation is a matter that should be tried. Once again, if there was a wrong, the applicant might ultimately stand to benefit from any recovery by the corporation. Therefore the applicant is in my opinion a proper person to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> in regard to this head of claim and should be granted leave in the same action to advance a claim in the name and on behalf of the corporation in respect of the occupation of the premises by the directors for their own personal purposes and in respect of the failure of the directors to obtain from themselves personally (or their law firm) a sublease for the term of the lease.

Granting leave to bring the statutory derivative action under s. 232 does not in any way imply that on the basis of the evidence placed before me I am of the view that the action is likely to succeed. As to that, of course, I offer no opinion…

In the case of the application under s. 234, leave to bring an action in regard to either claim is denied because the applicant was not a creditor at the time of the act or conduct complained of.” (Emphasis added)

These two cases do not add all that much to what we are already familiar with from the decision in Robak Industries Ltd. v. Gardner, 2007 BCCA 61 discussed in Unit 2.

 

In Robak Industries Ltd. v. Gardner, (<a href="http://www.110.com/panli/panli_87908.html">http://www.110.com/panli/panli_87908.html</a>) you may recall that the B.C. Court of Appeal considered the case of Mr. Gardner, a director of Getty Copper Incorporated, a public company. Mr. Gardner was alleged to have conspired with others to injure John Lepinski and the company he wholly owned, Robak Industries Ltd., by "unlawful means" including seizing control of a public company, “Getty Copper Incorporated”, and its board; discrediting and ousting Mr. Lepinski; setting aside a development agreement and acquiring 100% of Getty South a company related to Getty Copper Incorporated; "applying economic duress to Getty" and "inducing Blake Cassels & Graydon to breach their duties to Getty". There were also allegations of defamation in connection with the affairs of Getty Copper Incorporated. Robak Industries Ltd.’s claim for damages for the defamatory statements included a "loss in the value of…a substantial interest in the shares of Getty".

 

Madam Justice Levine dealt with an appeal from a lower court decision striking out certain portions of the Statement of Claim in the case on the ground that the allegations and claims made in those portions disclosed no reasonable cause of action. Excerpts from her decision follow:

 

“The appellants do not contest the principle that a shareholder cannot claim a loss that is the direct result of wrongs to the company. They do not dispute that if the value of the shares of the company diminishes because of damage to the company, the loss in share value is "reflective" of the company’s loss. The appellants claim, however, that their loss is not reflective of a loss to Getty. The loss they claim is the loss of the value of their shares in the marketplace, which, they say, Getty could not claim. The appellants allege that the market forces which caused the fall in value of their shares are separate and independent from any losses which Getty may have suffered from the wrongdoings alleged. In other words, they deny that the loss in value of their Getty shares is a "reflective loss".

 

The appellants argue that in Hercules, the Supreme Court left the door open to actions by shareholders, even where the corporation may also have a separate and distinct cause of action. Justice LaForest wrote (at para. 62):

One final point should be made here. Referring to the case of Goldex Mines Ltd. v. Revill (1974), 7 O.R. (2d) 216 (C.A.), the appellants submit that where a shareholder has been directly and individually harmed, that shareholder may have a personal cause of action even though the corporation may also have a separate and distinct cause of action. Nothing in the foregoing paragraphs should be understood to detract from this principle. In finding that claims in respect of losses stemming from an alleged inability to oversee or supervise management are really derivative and not personal in nature, I have found only that shareholders cannot raise individual claims in respect of a wrong done to the corporation. Indeed, this is the limit of the rule in Foss v. Harbottle. Where, however, a separate and distinct claim (say, in tort) can be raised with respect to a wrong done to a shareholder qua individual, a personal action may well lie, assuming that all the requisite elements of a cause of action can be made out…

 

The appellants say that the English cases provide other examples of cases where shareholders were allowed to bring claims in respect of wrongs also done to the companies in which they owned shares. They argue that new and novel approaches to legal principles should not be struck out at the pleadings stage, but should be allowed to proceed to trial to be tested on evidence and full argument.

 

The respondents’ answer is that under Canadian law the appellants have no claim, and that the English cases are at best equivocal about the circumstances in which a shareholder may be permitted to claim a loss in value of the shares of a company for wrongs done to the company…

 

The appellants suggest that Goldex Mines Ltd. v. Revill et al. (1974), 7 O.R. (2d) 216 (Ont. C.A.), mentioned in Hercules, supports their claim to a separate cause of action for a wrong done to Getty. In Goldex, the Ontario Court of Appeal considered the distinction between a personal action by a shareholder for a personal wrong and a derivative action brought on behalf of the corporation for a wrong done to the corporation. The Court pointed out that an action may be brought by several shareholders for the same personal wrong. It stated:

In Farnham v. Fingold, supra, this Court was not required, on the facts of that case, to consider a situation where the same wrongful act is both a wrong to the company and a wrong to each individual shareholder. In one sense every injury to a company is indirectly an injury to its shareholders. On the other hand, if one applies the test: "Is this wrongful act one in respect of which the company could sue?", a shareholder who is personally and directly injured must surely be entitled to say, as a matter of logic, "the company cannot sue for my injury; it can only sue for its own."

 

The converse is, of course, also true. Where the company is injured, an individual shareholder cannot sue for the company’s injury; the shareholder can only sue for its own. Loss reflective of a loss suffered by the company is not the shareholder’s personal loss.

 

There are good reasons for not allowing a shareholder to claim the loss in value of its shares where a wrong has been done to the company. As explained by Laskin J.A. in Meditrust (at para. 13); La Forest J. in Hercules (at para. 59), and McKenzie J. in Rogers at 78-81 (citing Prudential Assurance and Green v. Victor Talking Mach. Co., 24 F. 2d 378 (1928) (C.A. 2nd Circ.)), the rule avoids a multiplicity of actions. Further, and consistent with the legal theory of Foss v. Harbottle, the loss in value of shares of a company is a loss of all of the shareholders, not just one or some of them. There is no logic that would allow only one shareholder to claim that loss, where the claim relates to wrongs done to the company, and all of the shareholders have suffered the loss in value. A single shareholder cannot claim that the loss in value of the shares, per se, is a personal, direct loss…

 

Summary and Conclusion

 

The appellants’ arguments, based on the consideration of the rule in Foss v. Harbottle in other jurisdictions, does not reveal that the chambers judge made any error in striking out the portions of the Further Amended Statement of Claim. She did not apply the wrong test for striking pleadings; she considered whether the appellants had a reasonable cause of action, including a valid claim for damages. She applied binding Canadian law, which has been considered and affirmed in a persuasive judgment of the Ontario Court of Appeal in Meditrust. In both Rogers and Meditrust, shareholders claimed losses in the value of their shares as the result of an alleged conspiracy against them involving wrongs done to the company, and in both cases the claims were dismissed. The chambers judge did not decide, contrary to the appellants’ arguments, that a shareholder may never bring a claim for the diminution in the value of the shareholder’s shares, but confirmed, by reference to Hercules and Haig, that a shareholder may have a cause of action for loss in the value of shares where the shareholder has both an "independent relationship" with the wrongdoer and an "independent loss" from that of the company to whom the wrong has been done. She decided that in this case, the appellants had not shown that they have a cause of action for an "independent loss" in respect of wrongs done to Getty. I agree with her conclusion.”

 

 

 

 

 

TOPIC 5: DISTINGUISHING “OPPRESSION” CLAIMS & “DERIVATIVE” ACTIONS 

 

As can be seen from the cases canvassed above it can be somewhat challenging to tell when a particular set of facts is appropriate for a derivative action and when a claim for oppression is the way to go. Because, as can be readily seen from the cases, these sorts of determinations by the courts are highly reliant on the facts and tend at the same time to be reluctant to impose hard an fast rules, you are legitimately entitled to some degree of confusion. That said a number of general distinctions between oppression claims and derivative actions can be divined (changes as always TBA by the courts).

 

The source of the following list is an excellent short article called “Distinguishing Oppression Claims and Derivative Actions” by Tracey M. Cohen, T. Mark Pontin, and Graeme Hooper which can be found here: 

<a href="http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf">http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf</a>

 
<ul>
<li>Oppression claims are personal to the shareholder, while derivative claims involve harm to the company. </li>
</ul>
 
<ul>
<li>The substantive standard for a finding of liability is different. The issue when it comes to oppression proceeding is whether a complainant’s reasonable expectation has been inequitably violated in an oppressive or unfairly prejudicial manner. A derivative action requires proof of a legal wrong.</li>
</ul>
 
<ul>
<li>Oppression remedies are broad and flexible while those in derivative actions tend to be standard remedies tied to the precise cause of action.</li>
</ul>
 
<ul>
<li>Timing: Oppression proceedings must be brought in a timely manner, while it is not particularly a factor when it comes to derivative actions.</li>
</ul>
 
<ul>
<li>Costs: Generally speaking successful derivative action claimants will recover costs on a “solicitor-client basis, while successful oppression claimants will only recover tariffed costs.</li>
</ul>
 
<ul>
<li>Leave of the court is required to commence a derivative action but not an oppression action. </li>
</ul>
 
<ul>
<li>Oppression claim are generally commenced by way of court petition proceeding, while derivative claims are standard civil claims. </li>
</ul>
 

 

TOPIC 6: “WITH GREAT POWER…”

 

All of this fussing about with the rules of corporate law (as mundane or fascinating as you may find them) can be seen as missing a larger and more disturbing point. That is that the “product” of the practice of corporate law - corporations themselves - have been known to perpetrate dastardly deeds on a not insignificant number of occasions. More disturbing to the legal practitioner is that (arguably) on many of these occasions the lawyers involved were just doing their jobs, being creating companies or facilitating the legal continuation of a corporations existence, or the expression of its independent corporate personality. Surely we don’t bear responsibility for the nefarious outcomes that can flow from “limited liability”, separate corporate personhood, the lack of accountability of subsidiaries, or the politics of board/shareholder approvals? Or do we? Should we?

 

What follows are a series of sources to help remind you of the scandals and more importantly of the role lawyers and the law have in both contributing to the conditions which formed evil, and hopefully in constructively addressing those issues and the problems that they contributed to. As you review each, ask yourself:
<ul>
<li>Were there lawyers around?</li>
<li>What were they doing?</li>
<li>Did they know things were going awry?</li>
<li>Did they try and do anything about it?</li>
</ul>
 
<ol>
<li> Conrad Black </li>
</ol>
For some background on the Black saga, please read:

The Wall Street Journal Article entitled “Report Slams Hollinger's Black For a 'Corporate Kleptocracy'”, which you may find at: <a href="http://online.wsj.com/news/articles/SB109395499363105646">http://online.wsj.com/news/articles/SB109395499363105646</a>

 

Please review but not read in detail: Catalyst Fund General Partner Inc. v. Hollinger Inc., 2004 CanLII 40665 (ON SC) <a href="http://canlii.ca/t/1j6qd">http://canlii.ca/t/1j6qd</a>

 

Please watch the BBC program “The Fall of Conrad Black” which you can find at <a href="http://www.youtube.com/watch?v=CIRRUvjkLJo">http://www.youtube.com/watch?v=CIRRUvjkLJo</a>

 

Finally, please read, “Law Society of Upper Canada appeals exoneration of two Conrad Black lawyers” at: <a href="http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html">http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html</a>
<h1></h1>
 
<ol>
<li> Garth Drabinsky </li>
</ol>
 

Please read “Livent co-founders Drabinsky, Gottlieb convicted of fraud and forgery” here: <a href="http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convicted-of-fraud-and-forgery-1.778879">http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convicted-of-fraud-and-forgery-1.778879</a>

 

Please read “Livent case turns spotlight on Canada’s undramatic whitecollar prosecutions” at: <a href="http://www.thespec.com/news-story/2272130-livent-case-turns-spotlight-on-canada-s-undramatic-white-collar-prosecutions/">http://www.thespec.com/news-story/2272130-livent-case-turns-spotlight-on-canada-s-undramatic-white-collar-prosecutions/</a>

 

Please read “Law society revokes Garth Drabinsky’s licence over fraud convictions” at: <a href="http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html">http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html</a>
<h1></h1>
Please read “The six most outrageous quotes from Garth Drabinsky’s day parole hearing” especially this: “I never directed anyone to cross over the line knowingly. I obviously did do that by the dynamic of my character—the force of my character coupled with my role in the organization.” The article can be found here: <a href="http://www.torontolife.com/informer/toronto-business/2012/10/29/garth-drabinsky-day-parole-quotes/#more-173802">http://www.torontolife.com/informer/toronto-business/2012/10/29/garth-drabinsky-day-parole-quotes/#more-173802</a>

 
<ol>
<li> Enron Corporation</li>
</ol>
Please be acquainted with “Lawyers, Ethics, and Enron” here. It is an important piece of perspective on what we actually do and ought to as lawyers:

<a href="http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf">http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf</a>

 

FINALLY PLEASE READ:

Code of Professional Conduct for British Columbia, sections 3.2-3, 3.2-7, 3.2-8, 3.7, 3.3-1, 3.3-2. Available at: <a href="http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3">http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3</a>

 

 

UNIT WRAP UP: 

We have arrived at the end of our course, so of course we begin again with a review of certain subjects in the hope of fortifying your knowledge as you prepare for the final exam.

Course:Business Organizations - LAW 459/Unit 7

2016-08-16T09:32:48Z

DavidHeinrich: Created page with "UNIT 7 (WEEKS 10 & 11): THE (FIDUCIARY) OBLIGATIONS OF CORPORATE MANAGEMENT <img class="alignnone wp-image-215 aligncenter" src="http://bizorg..."

UNIT 7 (WEEKS 10 & 11): THE (FIDUCIARY) OBLIGATIONS OF CORPORATE MANAGEMENT 

 <img class="alignnone wp-image-215 aligncenter" src="http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Unit-7-360x270.jpg" alt="Unit 7" width="492" height="369" />
Figure 7: Corporate Management
ALT: A large duck leads a group of smaller ducks through a pond.

Source of image – Morguefile <a href="http://www.morguefile.com/archive/#/?q=leadership&sort=pop&photo_lib=morgueFile">http://www.morguefile.com/archive/#/?q=leadership&sort=pop&photo_lib=morgueFile</a>

Image URI: <a href="http://mrg.bz/KRHGCA">http://mrg.bz/KRHGCA</a>

 

UNIT OVERVIEW: 

In this unit the legal and fiduciary obligations of management and directors; the scope of those obligations and to whom they are owed; and the constraints on those powers and limitations shall be examined.

 

UNIT OUTCOME:

One of the realities inherent to separate corporate personhood is the strange asymmetry that the corporate person can only act as a result of and through human action and interaction. Corporate takeovers and changes of control highlight how vested interests and other frailties of the human condition complicate corporate life. You will be introduced to the kind of legal mechanisms and maneuvers used to resist takeovers (including “poison pills”) as well as the limits of the legitimate use of such tactics. Conflicts of interest situations as well as personal opportunities that arise through the corporation are other situations where similar factors of human frailty come into play. By the end of this unit you will develop an understanding of what it means for directors and officers to act “in the best interests of the corporation” when changes are happening.

 

UNIT READINGS:

Please read the following materials:

Casebook pages 303-426

BCBCA sections 136-137, 142, 157; CBCA sections 122-123, 147-153; Securities act (B.C.) sections 57.2

Parke v. Daily News Ltd. [1962] 2 All E.R. 929

Re. W and M Roith Ltd. [1967] 1 All E.R. 427

CW Shareholdings Inc. v. WIC Western International Communications Ltd. (1998), 39 O.R. (3d) 755 (Ont. S.C.) <a href="http://www.canlii.org/en/on/onsc/doc/1998/1998canlii14838/1998canlii14838.html">http://www.canlii.org/en/on/onsc/doc/1998/1998canlii14838/1998canlii14838.html</a>

 

TOPIC 1: LEGAL OBLIGATIONS OF MANAGEMENT: THE STANDARD OF CARE, DILIGENCE AND SKILL

Please read pages 303-426 of the Casebook 

 
<ol>
<li> Statutory Provisions</li>
</ol>
BCBCA section 142(1): “A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case may be, must . . . (b) exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances.”

CBCA section 122(1): “Every director and officer of a corporation in exercising their powers and discharging their duties shall . . . (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”

 
<ol>
<li> The Common Law Background</li>
</ol>
Please refer to the judgment in Peoples Department Stores Inc. v. Wise, a case we have already visited in this course. There you will find the following (also at page 326 of the Casebook):

“That directors must satisfy a duty of care is a long-standing principle of the common law, although the duty of care has been reinforced by statute to become more demanding. Among the earliest English cases establishing the duty of care were Dovey v. Cory, [1901] A.C. 477 (H.L.); In re Brazilian Rubber Plantations and Estates, Ltd., [1911] 1 Ch. 425; and In re City Equitable Fire Insurance Co., [1925] 1 Ch. 407 (C.A.). In substance, these cases held that the standard of care was a reasonably relaxed, subjective standard. The common law required directors to avoid being grossly negligent with respect to the affairs of the corporation and judged them according to their own personal skills, knowledge, abilities and capacities. See McGuinness, supra, at p. 776: “Given the history of the case law in this area, and the prevailing standards of competence displayed in commerce generally, it is quite clear that directors were not expected at common law to have any particular business skill or judgment.” (Emphasis added)

 

Also quoted in Peoples Department Stores Inc. v. Wise (at page 326 of the Casebook) was the 1971 Dickerson Report “Proposals for a New Business Corporations Law for Canada”, authored by Robert W.V. Dickerson, John L. Howard and Leon Getz, and which preceded the enactment of the CBCA by four years. 

The Dickerson Report:
<ul>
<li>Described the common law standard as being the degree of care, skill and diligence that could reasonably be expected from someone having the directors knowledge and experience;</li>
<li>Recommended at II, ap. 74 the creation of an objective standard requiring directors and officers to meet the standard of a “reasonably prudent person”</li>
</ul>
This was obviously an attempt to raise the standard of directors. As can readily be seen from CBCA section 122(1) the objective standard was rejected and “reasonable prudence” was put in the context of “comparable circumstances”. This subjective test prevailed and remains with us.

However the jurisprudence does not actually seem to follow the statutory words, and insists on an objective standard. Again please refer to Peoples Department Stores Inc. v. Wise (at page 327 of the Casebook) where the following is said:

“The words “in comparable circumstances”, modify the statutory standard by requiring the context in which a given decision was made to be taken into account. This is not the introduction of a subjective element relating to the competence of the director, but rather the introduction of a contextual element into the statutory standard of care. It is clear that <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec122subsec1_smooth">s. 122(1)</a>(b) requires more of directors and officers than the traditional common law duty of care outlined in, for example, Re City Equitable Fire Insurance, supra.

The standard of care embodied in <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec122subsec1_smooth">s. 122(1)</a>(b) of the <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html">CBCA</a> is . . . an objective standard. The factual aspects of the circumstances surrounding the actions of the director or officer are important . . . as opposed to the subjective motivation of the director or officer.” (Emphasis added)

Now please read Soper v. Canada [1998] 1 F.C. 124 (C.A.) at pages 319-320 of the Casebook and note how the court wrestles with the question of standard to be applied to directors. 

Under the Income Tax Act the directors of a corporation are not liable for the failure to make employee remittances if the directors show they exercised the degree of care, diligence and skill of a reasonably prudent person in the circumstances.

Robertson J.A. made the following observations on the law: 

“The second proposition that I wish to discuss is the following: a director need not exhibit in the performance of his or her duties a greater degree of skill and care than may reasonably be expected from a person of his or her knowledge and experience… 

Third, a director is not obliged to give continuous attention to the affairs of the company, nor is he or she even bound to attend all meetings of the board. However when, in the circumstances, it is reasonably possible to attend such meetings, a director ought to do so. Subsequent English cases, though, went to more of an extreme, permitting a director to avoid liability despite having missed all board meetings for a period of several years…

Fourth, in the absence of grounds for suspicion, it is not improper for a director to rely on company officials to perform honestly duties that have been properly delegated to them. Further to this point, it is the exigencies of business and the company's articles of association that, together, will determine whether it is appropriate to delegate a duty. The larger the business, for instance, the greater will be the need to delegate…

Hence, in the event that the reasonably prudent person is unskilled (which possibility is discussed above), the statute requires only the exercise of a degree of care which is commensurate with that person's level of skill. It is in this manner that skill and care are clearly interconnected. That being said, it is worth emphasizing that it is insufficient for a director to assert simply that he or she did his or her best if, having regard to that individual's level of skill and business experience, he or she failed to act reasonably prudently.” (Emphasis added)

[Please note that the final two paragraphs quoted above are not contained in the Casebook version.]

 

Some further points with respect to Peoples Department Stores Inc. v. Wise:

 
<ol>
<li>Note the very important distinction drawn below in BCE v. 1976 Debentureholders (discussed earlier in this course), concerning the distinction in the direction of the duty of care and the fiduciary duties:</li>
</ol>
“A second remedy lies against the directors in a civil action for breach of duty of care. As noted, <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec122subsec1">s. 122(1) </a>(b) of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a> requires directors and officers of a corporation to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”. This duty, unlike the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec122subsec1">s. 122(1) </a>(a) fiduciary duty, is not owed solely to the corporation, and thus may be the basis for liability to other stakeholders in accordance with principles governing the law of tort and extra-contractual liability: Peoples Department Stores. <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec122subsec1">Section 122(1) </a>(b) does not provide an independent foundation for claims. However, applying the principles of The Queen in right of Canada v. Saskatchewan Wheat Pool, [1983] 1 S.C.R. 205, courts may take this statutory provision into account as to the standard of behavior that should reasonably be expected.” (Emphasis added)
<ol start="2">
<li>The business judgment rule is well described in at page 332 of the Casebook in terms of the court not second-guessing “business judgments, as long as they are made in an informed way (and in accordance with fiduciary obligations. It is really just a statement of the principle of curial deference to managerial decisions, which only makes sense since the court has no authority to make such decisions.”</li>
<li>The point is made in Peoples Department Stores Inc. v. Wise that directors may rely on others in certain ways, as statutorily permitted. This is not entirely a simple and straightforward rule as the following excerpt illustrates:</li>
</ol>
 

“When faced with the serious inventory management problem, the Wise brothers sought the advice of the vice-president of finance, David Clément. The Wise brothers claimed as an additional argument that in adopting the solution proposed by Clément, they were relying in good faith on the judgment of a person whose profession lent credibility to his statement, in accordance with the defence provided for in <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec123subsec4">s. 123(4) </a>(b) (now s.123(5)) of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>. The Court of Appeal accepted the argument. We disagree. 

The reality that directors cannot be experts in all aspects of the corporations they manage or supervise shows the relevancy of a provision such as <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec123subsec4">s. 123(4) </a>(b). At the relevant time, the text of <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec123subsec4">s.123(4) </a>read:

“123. (4) A director is not liable under section 118, 119 or 122 if he relies in good faith on

(a) financial statements of the corporation represented to him by an officer of the corporation or in a written report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or

(b) a report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by him.

Although Clément did have a bachelor’s degree in commerce and 15 years of experience in administration and finance with Wise, this experience does not correspond to the level of professionalism required to allow the directors to rely on his advice as a bar to a suit under the duty of care. The named professional groups in <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec123subsec4">s. 123(4) </a>(b) were lawyers, accountants, engineers, and appraisers. Clément was not an accountant, was not subject to the regulatory overview of any professional organization and did not carry independent insurance coverage for professional negligence. The title of vice-president of finance should not automatically lead to a conclusion that Clément was a person “whose profession lends credibility to a statement made by him”. It is noteworthy that the word “profession” is used, not “position”. Clément was simply a non-professional employee of Wise. His judgment on the appropriateness of the solution to the inventory management problem must be regarded in that light. Although we might accept for the sake of argument that Clément was better equipped and positioned than the Wise brothers to devise a plan to solve the inventory management problems, this is not enough. Therefore, in our opinion, the Wise brothers cannot successfully invoke the defence provided by <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec123subsec4">s. 123(4) </a>(b) of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a> but must rely on the other defences raised.” (Emphasis added)

Please also read the brief discussion on all this at Note 6 on pages 332-333 of the Casebook. As well please refer to section 157 of the BCBCA:

“157. (1) A director of a company is not liable under section 154 and has complied with his or her duties under section 142 (1) if the director relied, in good faith, on

(a) financial statements of the company represented to the director by an officer of the company or in a written report of the auditor of the company to fairly reflect the financial position of the company,

(b) a written report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by that person,

(c) a statement of fact represented to the director by an officer of the company to be correct, or

(d) any record, information or representation that the court considers provides reasonable grounds for the actions of the director, whether or not

(i) the record was forged, fraudulently made or inaccurate, or

(ii) the information or representation was fraudulently made or inaccurate.

(2) A director of a company is not liable under section 154 if the director did not know and could not reasonably have known that the act done by the director or authorized by the resolution voted for or consented to by the director was contrary to this Act.”

 

Blog Activity 7.1:

A number of questions present themselves:
<ol>
<li> Consider, in the context of Peoples Department Stores Inc. v. Wise the impact of board meetings by telephone.</li>
<li> Are the principles enunciated in Soper v. Canada consistent with those in Peoples Department Stores Inc. v. Wise?</li>
<li> Is requiring that a report come from a “professional” before it can be relied on in good faith by directors without potential liability as set out in Peoples Department Stores Inc. v. Wise going too far? What are the core justifications for such a requirement of “professionalism”? Why does that requirement apply to reports in section 123(4)(b) but not to financial statements in section 123(4)(a)</li>
</ol>
Please blog your views on these questions and your reasons in less than one page under the heading “Soper/Peoples”.

 
<ol>
<li> Insider Trading</li>
</ol>
Please read the short section on “Insider Trading Rules” at page 333 of the casebook.
<h2> </h2>
<h2>Please read the following relevant provisions of the Securities Act [RSBC 1996] Chapter 418 which provide:</h2>
 

“57.2 (1) In this section, "issuer" means

(a) a reporting issuer, or

(b) any other issuer whose securities are publicly traded.

(2) A person must not enter into a transaction involving a security of an issuer, or a related financial instrument of a security of an issuer, if the person

(a) is in a special relationship with the issuer, and

(b) knows of a material fact or material change with respect to the issuer, which material fact or material change has not been generally disclosed.

(3) An issuer or a person in a special relationship with an issuer must not inform another person of a material fact or material change with respect to the issuer unless

(a) the material fact or material change has been generally disclosed, or

(b) informing the person is necessary in the course of business of the issuer or of the person in the special relationship with the issuer.

(4) A person who proposes to

(a) make a take over bid, as defined in section 92, for the securities of an issuer,

(b) become a party to a reorganization, amalgamation, merger, arrangement or similar business combination with an issuer, or

(c) acquire a substantial portion of the property of an issuer,

must not inform another person of a material fact or material change with respect to the issuer unless

(d) the material fact or material change has been generally disclosed, or

(e) informing the person is necessary to effect the take over bid, business combination or acquisition.

(5) If a material fact or material change with respect to an issuer has not been generally disclosed, the issuer, or a person in a special relationship with the issuer with knowledge of the material fact or material change, must not recommend or encourage another person to enter into a transaction involving a security of the issuer or a related financial instrument of a security of the issuer.

Liability for insider trading, tipping and recommending
<ol start="136">
<li> (1) If an issuer, or a person in a special relationship with an issuer, contravenes section 57.2, a person referred to in subsection (2) of this section has a right of action against the issuer or the person in a special relationship with the issuer.</li>
</ol>
(2) A person may recover losses incurred in relation to a transaction involving a security of the issuer, or a related financial instrument of a security of the issuer, if the transaction was entered into during the period

(a) starting when the contravention occurred, and

(b) ending at the time the material fact or material change is generally disclosed.

(3) If a court finds a person liable in an action under subsection (1), the amount payable to the plaintiff by the person is the lesser of

(a) the losses incurred by the plaintiff, and

(b) an amount determined in accordance with the regulations.

(4) For the purposes of subsection (1), in determining the losses incurred by a plaintiff, a court must not include an amount that the defendant proves is attributable to a change in the market price of the security that is unrelated to the material change or the material fact.

Accounting for benefits

136.1 (1) If a person is an insider, affiliate or associate of an issuer, and if the person contravenes section 57.2, the person must pay to the issuer an amount equal to

(a) the benefit that the person received as a result of the contravention, and

(b) the benefit that all persons received as a result of the contravention.

(2) If a person contravenes section 57.3, the person must pay to the investor, as defined in that section, an amount equal to

(a) the benefit that the person received as a result of the contravention, and

(b) the benefit that all persons received as a result of the contravention.

Due diligence defence for insider trading

136.2 A person is not liable under section 136 or 136.1 (1) if, after a reasonable investigation occurring before the person

(a) entered into the transaction,

(b) informed another person of the material fact or material change, or

(c) recommended or encouraged a transaction,

the person had no reasonable grounds to believe that the material fact or material change had not been generally disclosed.

Action by commission on behalf of issuer
<ol start="137">
<li> (1) On application by</li>
</ol>
(a) the commission, or

(b) any person who

(i) was, at the time of a transaction referred to in section 136, or

(ii) is, at the time of the application,

a security holder of the issuer,

the Supreme Court may, if satisfied that

(c) the applicant has reasonable grounds for believing that the issuer has a cause of action under section 136.1 (1), and

(d) the issuer has

(i) refused or failed to commence an action under section 136.1 (1) within 60 days after receipt of a written request from the applicant to do so, or

(ii) failed to prosecute diligently an action commenced by it under section 136.1 (1),

make an order, on any terms as to security for costs or otherwise that it considers proper, requiring the commission or authorizing the person or the commission to commence or continue an action in the name of, and on behalf of, the issuer to enforce the liability created by section 136.1 (1).

(2) On application by

(a) the commission, or

(b) any person who

(i) was, at the time of a transaction referred to in section 136.1 (2), or

(ii) is, at the time of the application,

a security holder of the investor,

the Supreme Court may, if satisfied that

(c) the applicant has reasonable grounds for believing that the investor has a cause of action under section 136.1 (2), and

(d) the investor has

(i) refused or failed to commence an action under section 136.1 (2) within 60 days after receipt of a written request from the applicant to do so, or

(ii) failed to prosecute diligently an action commenced by it under section 136.1 (2),

make an order, on any terms as to security for costs or otherwise that it considers proper, requiring the commission or authorizing the person or the commission to commence or continue an action in the name of, and on behalf of, the investor to enforce the liability created by section 136.1 (2).

(3) If an action under section 136.1 (1) or (2) is commenced or continued by the directors of the issuer, the Supreme Court may order the issuer to pay all costs properly incurred by the directors in commencing or continuing the action, as the case may be, if it is satisfied that the action is in the best interests of the issuer and its security holders.

(4) If an action under section 136.1 (1) or (2) is commenced or continued by a person who is a security holder of the issuer, the Supreme Court may order the issuer to pay all costs properly incurred by the security holder in commencing or continuing the action, as the case may be, if it is satisfied that

(a) the issuer refused or failed to commence the action or, having commenced it, failed to prosecute it diligently, and

(b) the action is in the best interests of the issuer and its security holders.

(5) If an action under section 136.1 (1) or (2) is commenced or continued by the commission, the Supreme Court must order the issuer to pay all costs properly incurred by the commission in commencing or continuing the action, as the case may be.

(6) In determining whether an action or its continuance is in the best interests of an issuer and its security holders, the court must consider the relationship between the potential benefit to be derived from the action by the issuer and its security holders and the cost involved in the prosecution of the action.

(7) Notice of every application under subsection (1) or (2) must be sent to the commission and the issuer, or the investor, as the case may be, and each of them may appear and be heard.

(8) An order made under subsection (1) or (2) requiring or authorizing the commission to commence or continue an action must provide that the issuer or investor, as the case may be,

(a) cooperate fully with the commission in the commencement or continuation of the action, and

(b) make available to the commission all records and other material or information relevant to the action and known to, or reasonably ascertainable by, the issuer or investor.” (Emphasis added)

 
<ol>
<li> Miscellaneous Duties</li>
</ol>
<h1>Please read the section of the Casebook titled “Miscellaneous Statutory Duties” at pages 333-335. This short section deals with particular obligations on managers that are not capable of being sorted or organized in a simple way. It would not be surprising if these sorts of miscellaneous duties and obligations grow as the power of what managers actually do and their compensation continues to grow.</h1>
 

 

TOPIC 2: MANAGERS’ FIDUCIARY OBLIGATIONS
<ol>
<li> Nature & Source</li>
</ol>
Please carefully read pages 335-337 of the Casebook and especially the extract from Sealy on “Fiduciary Relationships” on pages 336-337.

In this context we revisit the case of Peoples Department Stores v. Wise [2004] 3 S.C.R. 461 at pages 337-347 of the Casebook.

 

Note first the following statutory provisions:

CBCA 122. (1): “Every director and officer of a corporation in exercising their powers and discharging their duties shall (a) act honestly and in good faith with a view to the best interests of the corporation;”

BCBCA 142. (1): “A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case may be, must (a) act honestly and in good faith with a view to the best interests of the company,”

Of note are some of the phrases used in the judgment in Peoples Department Stores v. Wise.

At page 337 of the Casebook the “duty of loyalty” is used:

“The first duty has been referred to in this case as the “fiduciary duty”. It is better described as the “duty of loyalty”.

At page 338 of the Casebook:

“The statutory fiduciary duty requires directors and officers to act honestly and in good faith vis-à-vis the corporation. They must respect the trust and confidence that have been reposed in them to manage the assets of the corporation in pursuit of the realization of the objects of the corporation. They must avoid conflicts of interest with the corporation. They must avoid abusing their position to gain personal benefit. They must maintain the confidentiality of information they acquire by virtue of their position. Directors and officers must serve the corporation selflessly, honestly and loyally…” 

Note that the fiduciary duty owed by directors and officers imposes rather strict obligations per Canadian Aero Services Ltd. v. O’Malley, [1974] S.C.R. 592

In the light of this language, what are the components of the duty of loyalty?

Of interest is the following index which form part of the “UK Companies Act 2006 (c.46)”:

“171. Duty to act within powers
<ol start="172">
<li> Duty to promote the success of the company</li>
<li> Duty to exercise independent judgment</li>
<li> Duty to exercise reasonable care, skill and diligence</li>
<li> Duty to avoid conflicts of interest</li>
<li> Duty not to accept benefits from third parties</li>
<li> Duty to declare interest in proposed transaction or arrangement</li>
</ol>
183 Offence of failure to declare interest”

Please read the notes at pages 342-344 of the Casebook and especially consider the “paradox” discussed in the final paragraph of page 343 and continuing onto page 344.

 
<ol>
<li> To Whom Are Duties Owed?</li>
</ol>
Read the Note at beginning in the middle of page 345 of the Casebook and continuing to page 346.

It is clear from Peoples Department Stores v. Wise that the duty is owed to the corporation, and not for example to creditors. That said what is not yet clear are the methodology and considerations a manager ought to employ when determining what is in “the best interests of the corporation”. How broad may that consideration be? Does it include only “the best interests of the shareholders of the corporation” or does it go beyond to include all of the myriad factors and actors who might be relevant to corporate existence, including creditors and others. In other words even if a fiduciary duty is not owed by a corporate officer to creditors of the corporation, should that corporate officer still consider the position of creditors (and others) in exercising their fiduciary duty “in the best interests of the corporation”. The clear answer seems to be “yes”. As esoteric as this question may sound, it is actually a very practical and common one in the day-to-day exercise of management duties.

 
<h1> C. Judicial Review of Exercise of Managerial Power</h1>
 

Please read pages 348-358 of the Casebook.

Please read the decision in Hogg v. Cramphorn Ltd. [1966] 3 All E.R. 420 (Ch.D.) at pages 348-350 of the Casebook.

The board of Cramphorn Ltd. had company shares issued to a trust for the benefit of its employees in order to prevent the take-over of the company. There was a genuine belief among the board and the chairman and managing director of Cramphorn Ltd., Colonel Cramphorn, that such a take-over was bad for company; that it would change the business and unsettle employees. The Court found the new shares issued by the board to be invalid. The purpose of preventing the takeover, however sincerely motivated, was found not be a valid one, and accordingly the directors had violated their duties by issuing the shares. Buckley J. found that “…The power to issue shares was a fiduciary power and if as I think, it was exercised for an improper motive, the issue of these shares is liable to be set aside…”

 

Please note the contents of BC Standard Articles paragraph 3.1 as they are not dissimilar from the articles in issue in Hogg v. Cramphorn Ltd.

“Subject to the Business Corporations Act and the rights, if any, of the holders of issued shares of the Company, the Company may issue, allot, sell or otherwise dispose of the unissued shares and issued shares held by the Company, at the times, to the persons, including directors, in the manner, on the terms and conditions and for the issue prices (including any premium at which shares with par value may be issued) that the directors may determine. The issue price for a share with par value must be equal to or greater than the par value of the share.”

Please also note that the improper issuance of shares could only be validated if the decision was to be <a href="http://en.wikipedia.org/wiki/Ratified">ratified</a> by the shareholders at a <a href="http://en.wikipedia.org/wiki/General_meeting">general meeting</a>. Validating mistakes and miscue’s through shareholder ratification at a general meeting is actually quite a practical and logical step when you on it. In many situations (though probably not in the case of a takeover bid) it may not even be a necessarily difficult step.

Please consider for your-self the question raised in Note 1 on page 350 of the Casebook.

 

Please read the case of Teck Corp. v. Millar (1972), 33 DLR (3d) 288 (BCSC) at pages 350-357 of the Casebook. The question to ask while reading Teck Corp. v. Millar is why was Hogg v. Cramphorn was not followed by Teck Corp. v. Millar?

 

Similar to Hogg v. Cramphorn, Teck Corp. v. Millar, (1972), 33 DLR (3d) 288 (BCSC) deals the <a href="http://en.wikipedia.org/wiki/Fiduciary_duty">fiduciary duty</a> of corporate directors in the context of a <a href="http://en.wikipedia.org/wiki/Takeover">takeover</a> bid.

Teck Corp. argued that the board of Afton Mines Ltd. had entered into a deal with Canadian Exploration Ltd (“Canex”) and Placer Development Ltd. to prevent Teck from gaining control of Afton Mines Ltd. and had thereby acted for an improper purpose. In fact Teck had over time come to acquire a majority of Afton’s shares. Afton Mines Ltd. argued that it believed it was in the best interests of Afton to make a deal with Canex and not Teck. Accordingly they argued that the board of Afton had acted in that company’s interest despite the adverse effect on Teck, Teck’s shares in Afton, and Teck’s desire to own Afton. The court found that it was unnecessary for the board to act pursuant to a majority shareholder’s wishes in order for it to be acting in the best interests of the company. That applied even if the actions of the board prevented the majority shareholder from taking control of the company.

The court found that the board had a reasonable belief that a deal with Canex was better for the company than would have been a deal with Teck. The board therefore acted in good faith in entering into the agreement with Canex. Accordingly Afton’s actions in hindering Teck’s efforts to obtain control of Afton were not improper. In summary the court concluded that hostile take-overs may be resisted by corporate directors provided they are acting in good faith, and that they have reasonable grounds to believe that the take-over will cause substantial harm to the interests of the company’s shareholders. In the words Berger J. of the BC Supreme Court:

“A classical theory that once was unchallengeable must yield to the facts of modern life. In fact, of course, it has. If today the directors of a company were to consider the interests of its employees no one would argue that in doing so they were not acting bona fide in the interests of the company itself. Similarly, if the directors were to consider the consequences to the community of any policy that the company intended to pursue, and were deflected in their commitment to that policy as a result, it could not be said that they had not considered bona fide the interests of the shareholders. 

I appreciate that it would be a breach of their duty for directors to disregard entirely the interests of a company's shareholders in order to confer a benefit on its employees: Parke v. Daily News Ltd. But if they observe a decent respect for other interests lying beyond those of the company's shareholders in the strict sense, that will not, in my view, leave directors open to the charge that they have failed in their fiduciary duty to the company.”

Perhaps it is a bit more obtuse then the direct approach taken by the learned trial judge in Teck Corp. v. Millar, but there is a different, more psychological way, the two cases may be rationalized at least somewhat. That is by more closely examining who was being protected and with what intention. In Hogg v. Cramphorn the directors of Cramphorn Ltd. seemed essentially to feel that the takeover was bad for company in that it would change the business and unsettle employees. Thus the best interests of the shareholders might be seen as perhaps being somewhat of a less direct factor in their deliberations. However in Teck v. Millar the interests of the shareholders seems far more of a central factor to the decision making of the board. It is of course a great irony of the somewhat strange fact pattern in Teck v. Millar that Teck was already a majority holder of the shares in the company it was trying to take over – and despite that fact the best interests of the company was not defined by the identity of the majority shareholder of that company’s stock.

 

We now turn to the cases of Parke v. Daily News Ltd. [1962] 2 All ER 92 & Re W & M Roith Ltd. [1967] 1 All ER 427. Please read them:

 

In Parke v. Daily News Ltd. the Daily News Ltd. published two newspapers that were running at a loss over a number of years. The board entered into a contract to sell the newspapers disposing of substantially all company’s assets. The result of the transaction would be the “redundancy” and termination of an overwhelming majority of employees. The directors proposed to use balance of the sale proceeds to provide give compensatory payments to those who were going to lose their jobs. The minority shareholders challenged this saying that such payments would be “ultra vires” the company.

 

Plowman J. quoted Bowen L.J. in Hutton v. West Cork Ry Co (1883), 23 ChD at p 670:

 

“Bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational. The test must be what is reasonably incidental to, and within the reasonable scope of carrying on, the business of the company.”

 

Plowman J. went on to say:

 

“The conclusions which, I think, follow from these cases are: first, that a company's funds cannot be applied in making ex gratia payments as such; secondly, that the court will inquire into the motives actuating any gratuitous payment, and the objectives which it is intended to achieve; thirdly, that the court will uphold the validity of gratuitous payments if, but only if, after such inquiry it appears that the tests enumerated by Eve J are satisfied; fourthly, that the onus of upholding the validity of such payments lies on those who assert it…

 

In my judgment, therefore, the defendants were prompted by motives which, however laudable, and however enlightened from the point of view of industrial relations, were such as the law does not recognise as a sufficient justification. Stripped of all its side issues, the essence of the matter is this, that the directors of the defendant company are proposing that a very large part of its funds should be given to its former employees in order to benefit those employees rather than the company, and that is an application of the company's funds which the law, as I understand it, will not allow. If this is right, then it appears to me to follow from Hutton v West Cork Ry Co that the proposal to pay compensation is one which a majority of shareholders is not entitled to ratify.”

 

In Re W & M Roith Ltd. Mr. Roith, the controlling director had provided many years services to W & M Roith Ltd. without a service contract. He was then given a service agreement providing for payment of a pension to his widow if he died while still a director. Mr. Roith was already in poor health at time of agreement. He died two months later. The pension was paid for several years and then the company went into liquidation. Mr. Roith’s executors put in a claim in the liquidation for the capitalized value of the pension. The liquidator rejected the claim.

It was held (again by Plowman J.) that the claim for the pension could not be supported. This was because the pension was not for the benefit of the company, nor incidental to the carrying on of the company’s business.

 

CONSIDER THE FOLLOWING TWO QUESTIONS AND THEIR RELATIONSHIP:

 
<ol>
<li>How should charitable and political contributions be treated? Are they for the benefit of the company or the individuals from the company who may want to go to fancy dinners and associate with the powerful or self aggrandize in some other way? As a shareholder how might you reconcile the issue of the fiduciary duties of directors to what is in the best interests of the corporation and the “rights” of the corporation as a corporate person to act in the way it feels is best?</li>
</ol>
 

Please read the following story from ars technica which can be found here: <a href="http://arstechnica.com/apple/2014/03/at-apple-shareholders-meeting-tim-cook-tells-off-climate-change-deniers/">http://arstechnica.com/apple/2014/03/at-apple-shareholders-meeting-tim-cook-tells-off-climate-change-deniers/</a>
<h1>“At Apple shareholder’s meeting, Tim Cook tells off climate change deniers: “If you want me to do things only for ROI reasons, you should get out of this stock."</h1>
<h1> </h1>
by <a href="http://arstechnica.com/author/megan-geuss/">Megan Geuss</a> - Mar 1 2014, 1:30pm PST

Apple's Maiden, North Carolina data center will be largely powered by Apple's own solar panel arrays and methane-powered fuel cells.

Apple, Inc.

At a shareholders meeting on Friday, CEO Tim Cook <a href="http://www.macrumors.com/2014/02/28/tim-cook-angrily-rejects-ncppr-proposal/">angrily defended</a> Apple's environmentally-friendly practices against a request from the conservative National Center for Public Policy Research (NCPPR) to drop those practices if they ever became unprofitable.

NCPPR put forward a shareholder's proposal asking Apple to disclose how much it spends on sustainability programs. If those costs detracted from Apple's bottom line, the NCPPR demanded that Apple discontinue the programs and commit only to projects that are explicitly profitable. Cook apparently became angry at the group's request. According to an account from <a href="http://www.macobserver.com/tmo/article/tim-cook-soundly-rejects-politics-of-the-ncppr-suggests-group-sell-apples-s">MacObserver</a>:

What ensued was the only time I can recall seeing Tim Cook angry, and he categorically rejected the worldview behind the NCPPR's advocacy. He said that there are many things Apple does because they are right and just, and that a return on investment (ROI) was not the primary consideration on such issues.

"When we work on making our devices accessible by the blind," he said, "I don't consider the bloody ROI." He said that the same thing about environmental issues, worker safety, and other areas where Apple is a leader.

…

He didn't stop there, however, as he looked directly at the NCPPR representative and said, "If you want me to do things only for ROI reasons, you should get out of this stock."

For the better part of the last decade, Apple has taken on a number of sustainability projects and adopted practices to reduce waste and carbon emissions. In 2012, it <a href="http://arstechnica.com/apple/2012/02/apple-confirms-plans-for-oregon-data-center-outlines-green-initiatives/">broke ground</a> on a <a href="http://arstechnica.com/apple/2012/10/apple-breaks-ground-on-mammoth-colossal-gargantuan-oregon-data-center/">data center</a>in Oregon in order to take advantage of low-cost renewable energy and <a href="http://arstechnica.com/apple/2012/05/what-it-takes-to-make-a-green-apple/">has plans</a> to make all of its facilities reliant on green energy. It generally <a href="http://ww2.epeat.net/publicsearchresults.aspx?stdid=1&return=searchoptions&epeatcountryid=1&rating=3&ProductType=3">scores highly</a> with <a href="http://arstechnica.com/apple/2012/07/apple-leaving-green-product-registry-epeat-was-a-mistake/">EPEAT</a>, a federal environmental group that keeps a registry of “green” digital devices. And in May 2013, it <a href="http://arstechnica.com/apple/2013/05/apple-hires-former-epa-head-to-handle-environmental-issues/">hired Lisa Jackson</a>, who formerly ran the Environmental Protection Agency, to help Apple with sustainability.

NCPPR later issued a blustery <a href="http://www.nationalcenter.org/PR-Apple_Tim_Cook_Climate_022814.html">press release</a> about how Apple's desire to “combat so-called climate change” would destroy shareholder value. It accused "the Al gore contingency in the room" of greeting its questions "with boos and hisses."

According to the press release, Justin Danhof, director of the National Center's Free Enterprise Project, said "Mr. Cook made it very clear to me that if I, or any other investor, was more concerned with return on investment than reducing carbon dioxide emissions, my investment is no longer welcome at Apple."

It seems clear that Apple won't halt its projects for climate change deniers, and the rest of its shareholders weren't troubled by that at all. The NCPPR's proposal received just 2.95 percent of the vote.”

 

Blog Activity 7.2:

Assume Apple is a Canadian company and you are their counsel. Do you have any advice for Mr. Cook regarding his view of corporate ethics in a company law context? 

Please blog your views on these two questions and your reasons in less than three pages under the heading “Social Responsibility & Legal Duty”.

 

 

 

D: Conflicts of Interest and Duty

 

Please read pages 358-363 of the Casebook.

There you will find that the strict principle respecting conflicts of interest was set out as follows in the 1854 decision of Aberdeen Railway Co. v. Blaikie Bros. [1843-60] All E.R. Rep 249:

“A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the interest of the <a href="http://en.wikipedia.org/wiki/Cestui_que">cestui que</a> trust, which it was possible to obtain. It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interest of those for whom he is a trustee, have been as good as could have been obtained from any other person - they may even at the time have been better. But still so inflexible is the rule that no inquiry on that subject is permitted…”

Then please read the penultimate paragraph on page 358 of the Casebook.

Then please turn to and read North-West Transportation Co. v. Beatty (1887), 12 App. Cas. 589 (Ont. J.C.P.C.) at pages 359-361 of the Casebook.

The facts were that James H. Beatty, one of the directors of the North-West Transportation Co. sold that company a ship that he owned. The shareholders, including James H. Beatty, voted to approve transaction. However another director of the North-West Transportation Co., Henry Beatty, sued the North-West Transportation Co. and certain defendant directors on behalf of himself and all other shareholders to set aside the sale.

The following general principles emerge from the case:
<ul>
<li>A vote of the majority of the shareholders on some issue as to which they are competent binds the minority and the corporation.</li>
<li>A shareholder’s vote is not disqualified by a private interest being at stake.</li>
<li>So in the absence of fraud or oppression a breach of director’s duty to avoid conflict can be “ratified” by a majority of shareholders including the vote of the conflicted director.</li>
</ul>
Two points worthy of note about this case.

First it is worthy of mention that the court makes a clear distinction between the conflicted party as a director exercising their rights as a director and the same individual exercising their shareholder rights. Mr. J.H. Beatty quite rightly was absent from the directors meeting that approved the transaction. Accordingly his vote as a director was never made or considered in the equation. However Mr. Beatty did vote his shares as shareholder to ratify the directors’ decision and that was judged to be perfectly valid by the Judicial Committee of the Privy Council (though not by the court below). This is an excellent illustration of how the roles of directors and shareholders are – at least in theory.

Secondly, apart from the point immediately above the principles set out in the case would appear to constitute rather austere rules for what is often a very complex (and even unavoidable) subject in the “real world”.

Blog Activity 7.3:

All of this raises the question of to whom did James H. Beatty owe a duty? Did the shareholder vote relieve him of that duty? How or why would that be? Could the North-West Transportation Co. Have maintained contract with James H. Beatty and also have sued to recover any profit he benefitted from as a result of the transaction?

Please blog your views on these questions and your reasons in less than one page under the heading “Conflict of Interest and Duty”.

 

 
<ol>
<li> Statutory Conflict of Interest Protocols </li>
</ol>
Section 147 and following of the BCBCA essentially create a code of the procedures that must be followed to avoid the application of the strict conflict of interest rules set out above and define the consequences of a failure to do so. The protocol is that the board of directors may approve a transaction in which a director has a “disclosable interest” if the interest has in fact been disclosed. However the interested director may not vote on any such approval resolution per <a href="http://www.canlii.org/en/bc/laws/stat/sbc-2002-c-57/latest/sbc-2002-c-57.html#sec149_smooth">section 149</a> of the BCBCA. If a director fails to disclose his or her interest in a transaction, the director may be liable to account to the company for any profit he or she receives per <a href="http://www.canlii.org/en/bc/laws/stat/sbc-2002-c-57/latest/sbc-2002-c-57.html#sec149_smooth">section 149</a> of the BCBCA.

What is a “Disclosable Interest”? Section 147 (1) helps us:

 

“147 (1) For the purposes of this Division, a director or senior officer of a company holds a disclosable interest in a contract or transaction if

(a) the contract or transaction is material to the company,

(b) the company has entered, or proposes to enter, into the contract or transaction, and

(c) either of the following applies to the director or senior officer:

(i) the director or senior officer has a material interest in the contract or transaction;

(ii) the director or senior officer is a director or senior officer of, or has a material interest in, a person who has a material interest in the contract or transaction.” (Emphasis added)

Note that neither what is “material to the company” nor what is a “material interest” is actually defined.

In the case of Zysko v. Thorarinson, 2003 ABQB 911 the Honourable Mr. Justice P. Chrumka, quoted (inter alia), Professor B.L. Welling from Corporate Law in Canada: The Governing Principles, 2nd ed. (Vancouver: Butterworths, 1991), on the issue of what interests are "material":

 

“…it seems clear that the statute also addresses the problem of a director or officer who has no monetary interest in a person on the other side, yet who is likely to have an emotional involvement. Thus, a deal in which the corporation is negotiating with a close relative, or even a close personal friend, of one of the directors or officers ought to be suspect. ...one can assume that the courts will address their attention to the blood relation question... the only question will be to what degree of relationship the section extends. The answer is once again, subsumed under the requirement that the interest itself be "material".

 

What is meant by "material"... In the context of conflict of interest contracts, the meaning of "material contract" and "material interest" is conditioned by the purpose behind the section. The purpose is to identify those negotiations in which a corporate manager's ability to bargain effectively on behalf of the corporation may be inhibited by some interest he has in the other side. Any personal relationship or monetary interest he may have in the other side that might be thought to be an inhibiting factor is a material interest if disclosure of the relationship or interest might be relevant to the corporate decision whether to involve the particular manager in the negotiations. Whether to participate in a proposed contract is a corporate decision and the corporation is entitled to full disclosure from its fiduciaries of all facts that might affect that decision.” (Emphasis added)

 

The full decision in Zysko v. Thorarinson can be found here: <a href="http://caselaw.canada.globe24h.com/0/0/alberta/court-of-queen-s-bench/2003/11/07/zysko-v-thorarinson-2003-abqb-911.shtml">http://caselaw.canada.globe24h.com/0/0/alberta/court-of-queen-s-bench/2003/11/07/zysko-v-thorarinson-2003-abqb-911.shtml</a>

Zysko v. Thorarinson was approved in <a href="http://www.canlii.org/en/bc/bcsc/doc/2013/2013bcsc941/2013bcsc941.html?searchUrlHash=AAAAAAAAAAEAFjIwMDMgQUJRQiA5MTEgKENhbkxJSSkAAAABADEvZW4vYWIvYWJxYi9kb2MvMjAwMy8yMDAzYWJxYjkxMS8yMDAzYWJxYjkxMS5odG1sAQ">Mikulic v Peter</a>, 2013 BCSC 941 (BCSC).

Finally please note the “notice exclusions” from disclosable interest in sections 147 (2) and (4) of the BCBCA as well as the approval mechanism after disclosure in BCBCA section149. For your convenience the relevant provisions are reproduced below:

 

“Division 3 — Conflicts of Interest

Disclosable interests

 
<ol start="147">
<li> (1) For the purposes of this Division, a director or senior officer of a company holds a disclosable interest in a contract or transaction if</li>
</ol>
(a) the contract or transaction is material to the company,

(b) the company has entered, or proposes to enter, into the contract or transaction, and

(c) either of the following applies to the director or senior officer:

(i) the director or senior officer has a material interest in the contract or transaction;

(ii) the director or senior officer is a director or senior officer of, or has a material interest in, a person who has a material interest in the contract or transaction.

(2) For the purposes of subsection (1) and this Division, a director or senior officer of a company does not hold a disclosable interest in a contract or transaction if

(a) the situation that would otherwise constitute a disclosable interest under subsection (1) arose before the coming into force of this Act or, if the company was recognized under this Act, before that recognition, and was disclosed and approved under, or was not required to be disclosed under, the legislation that

(i) applied to the corporation on or after the date on which the situation arose, and

(ii) is comparable in scope and intent to the provisions of this Division,

(b) both the company and the other party to the contract or transaction are wholly owned subsidiaries of the same corporation,

(c) the company is a wholly owned subsidiary of the other party to the contract or transaction,

(d) the other party to the contract or transaction is a wholly owned subsidiary of the company, or

(e) the director or senior officer is the sole shareholder of the company or of a corporation of which the company is a wholly owned subsidiary.

(3) In subsection (2), "other party" means a person of which the director or senior officer is a director or senior officer or in which the director or senior officer has a material interest.

(4) For the purposes of subsection (1) and this Division, a director or senior officer of a company does not hold a disclosable interest in a contract or transaction merely because

(a) the contract or transaction is an arrangement by way of security granted by the company for money loaned to, or obligations undertaken by, the director or senior officer, or a person in whom the director or senior officer has a material interest, for the benefit of the company or an affiliate of the company,

(b) the contract or transaction relates to an indemnity or insurance under Division 5,

(c) the contract or transaction relates to the remuneration of the director or senior officer in that person's capacity as director, officer, employee or agent of the company or of an affiliate of the company,

(d) the contract or transaction relates to a loan to the company, and the director or senior officer, or a person in whom the director or senior officer has a material interest, is or is to be a guarantor of some or all of the loan, or

(e) the contract or transaction has been or will be made with or for the benefit of a corporation that is affiliated with the company and the director or senior officer is also a director or senior officer of that corporation or an affiliate of that corporation.

 

Obligation to account for profits
<ol start="148">
<li> (1) Subject to subsection (2) and unless the court orders otherwise under section 150 (1) (a), a director or senior officer of a company is liable to account to the company for any profit that accrues to the director or senior officer under or as a result of a contract or transaction in which the director or senior officer holds a disclosable interest.</li>
</ol>
(2) A director or senior officer of a company is not liable to account for and may retain the profit referred to in subsection (1) of this section in any of the following circumstances:

(a) the disclosable interest was disclosed before the coming into force of this Act under the former Companies Act that was in force at the time of the disclosure, and, after that disclosure, the contract or transaction is approved in accordance with section 149 of this Act, other than section 149 (3);

(b) the contract or transaction is approved by the directors in accordance with section 149, other than section 149 (3), after the nature and extent of the disclosable interest has been disclosed to the directors;

(c) the contract or transaction is approved by a special resolution in accordance with section 149, after the nature and extent of the disclosable interest has been disclosed to the shareholders entitled to vote on that resolution;

(d) whether or not the contract or transaction is approved in accordance with section 149,

(i) the company entered into the contract or transaction before the director or senior officer became a director or senior officer of the company,

(ii) the disclosable interest is disclosed to the directors or the shareholders, and

(iii) the director or senior officer does not participate in, and, in the case of a director, does not vote as a director on, any decision or resolution touching on the contract or transaction.

(3) The disclosure referred to in subsection (2) (b), (c) or (d) of this section must be evidenced in a consent resolution, the minutes of a meeting or any other record deposited in the company's records office.

(4) A general statement in writing provided to a company by a director or senior officer of the company is a sufficient disclosure of a disclosable interest for the purpose of this Division in relation to any contract or transaction that the company has entered into or proposes to enter into with a person if the statement declares that the director or senior officer is a director or senior officer of, or has a material interest in, the person with whom the company has entered, or proposes to enter, into the contract or transaction.

(5) In addition to the records that a shareholder of the company may inspect under section 46, that shareholder may, without charge, inspect

(a) the portions of any minutes of meetings of directors, or of any consent resolutions of directors, that contain disclosures under this section, and

(b) the portions of any other records that contain those disclosures.

(6) In addition to the records a former shareholder of the company may inspect under section 46, that former shareholder may, without charge, inspect the records referred to in subsection (5) (a) and (b) of this section that are kept under section 42 and that relate to the period when that person was a shareholder.

(7) Sections 46 (7) and (8), 48 (1) and (3) and 50 apply to the portions of minutes, resolutions and records referred to in subsections (5) and (6) of this section.

 

Approval of contracts and transactions
<ol start="149">
<li> (1) A contract or transaction in respect of which disclosure has been made in accordance with section 148 may be approved by the directors or by a special resolution.</li>
</ol>
(2) Subject to subsection (3), a director who has a disclosable interest in a contract or transaction is not entitled to vote on any directors' resolution referred to in subsection (1) to approve that contract or transaction.

(3) If all of the directors have a disclosable interest in a contract or transaction, any or all of those directors may vote on a directors' resolution to approve the contract or transaction.

(4) Unless the memorandum or articles provide otherwise, a director who has a disclosable interest in a contract or transaction and who is present at the meeting of directors at which the contract or transaction is considered for approval may be counted in the quorum at the meeting whether or not the director votes on any or all of the resolutions considered at the meeting.

 

Powers of court
<ol start="150">
<li> (1) On an application by a company or by a director, senior officer, shareholder or beneficial owner of shares of the company, the court may, if it determines that a contract or transaction in which a director or senior officer has a disclosable interest was fair and reasonable to the company,</li>
</ol>
(a) order that the director or senior officer is not liable to account for any profit that accrues to the director or senior officer under or as a result of the contract or transaction, and

(b) make any other order that the court considers appropriate.

(2) Unless a contract or transaction in which a director or senior officer has a disclosable interest has been approved in accordance with section 148 (2), the court may, on an application by the company or by a director, senior officer, shareholder or beneficial owner of shares of the company, make one or more of the following orders if the court determines that the contract or transaction was not fair and reasonable to the company:

(a) enjoin the company from entering into the proposed contract or transaction;

(b) order that the director or senior officer is liable to account for any profit that accrues to the director or senior officer under or as a result of the contract or transaction;

(c) make any other order that the court considers appropriate.

 

Validity of contracts and transactions
<ol start="151">
<li> A contract or transaction with a company is not invalid merely because</li>
</ol>
(a) a director or senior officer of the company has an interest, direct or indirect, in the contract or transaction,

(b) a director or senior officer of the company has not disclosed an interest he or she has in the contract or transaction, or

(c) the directors or shareholders of the company have not approved the contract or transaction in which a director or senior officer of the company has an interest.

 

Limitation of obligations of directors and senior officers
<ol start="152">
<li> Except as is provided in this Division, a director or senior officer of a company has no obligation to</li>
</ol>
(a) disclose any direct or indirect interest that the director or senior officer has in a contract or transaction, or

(b) subject to section 192, account for any profit that accrues to the director or senior officer under or as a result of a contract or transaction in which the director or senior officer has a disclosable interest.

 

Disclosure of conflict of office or property
<ol start="153">
<li> (1) If a director or senior officer of a company holds any office or possesses any property, right or interest that could result, directly or indirectly, in the creation of a duty or interest that materially conflicts with that individual's duty or interest as a director or senior officer of the company, the director or senior officer must disclose, in accordance with this section, the nature and extent of the conflict.</li>
</ol>
(2) The disclosure required from a director or senior officer under subsection (1)

(a) must be made to the directors promptly

(i) after that individual becomes a director or senior officer of the company, or

(ii) if that individual is already a director or senior officer of the company, after that individual begins to hold the office or possess the property, right or interest for which disclosure is required, and

(b) must be evidenced in one of the ways referred to in section 148 (3).”

 

Blog Activity 7.4:

All of which leaves us with a rather vexing question. If the rather austere and harsh rules set rule in in the 1854 decision of Aberdeen Railway Co. v. Blaikie Bros. Have been mitigated by statute when it comes to “material” conflicts of interest, what are we to conclude with respect to “non-material” contracts or transactions? They are not mentioned in the statute. Are “non-material” contracts or transactions then subject to the rules set out in Aberdeen Railway Co. v. Blaikie Bros.? Would this make any sense?

Please blog your views on these questions and your reasons in less than one page under the heading “Aberdeen & Non-materiality”.

 
<ol>
<li> Corporate Opportunities </li>
</ol>
Please read pages 363-392 of the Casebook.

The Canadian case of Cook v. Deeks [1916] 1 A.C. 554 (Ont. J.C.P.C.) provides a useful fact pattern from which to proceed.

 

The facts were that the Toronto Construction Co. (“TCC”) had four shareholders (each holding a quarter of the company's shares) each of whom who were also the directors of that company. TCC helped with railway construction for the CPR. Three of the directors wanted to exclude the fourth, Mr. Cook, from the business and accordingly agreed to a contract with the CPR for building a line at the <a href="http://en.wikipedia.org/wiki/Guelph_Junction_Railway">Guelph Junction</a> and <a href="http://en.wikipedia.org/wiki/Hamilton,_Ontario">Hamilton</a> branch in their own three names, and not in the name of TCC. They then passed a shareholder resolution declaring that the company had no interest in that contract between the three and the CPR. Mr. Cook sued arguing that the contract did indeed belong to the Toronto Construction Co. and that the shareholder resolution ratifying the actions of the three other shareholder directors was not valid.

The Judicial Committee of the <a href="http://en.wikipedia.org/wiki/Privy_Council">Privy Council</a> found that the three directors had breached their duty of loyalty to the company. Perhaps the more challenging point was how the court would deal with the issue of the shareholder ratification that had occurred given their previous decision in North-West Transportation v. Beatty (1887), 12 APP. CAS. 589 (ONT. J.C.P.C.) where it was decided that in the absence of fraud or oppression a breach of director’s duty to avoid conflict can be “ratified” by a majority of shareholders including the vote of the conflicted director. The Judicial Committee of the <a href="http://en.wikipedia.org/wiki/Privy_Council">Privy Council</a> accomplished feat in Cooks v. Deeks by drawing a distinction between contracting with the corporation as was the case in North-West Transportation v. Beatty (where Mr. Beatty was selling his boat to North-West Transportation), and contracting outside the corporation as was the case in Cook v. Deeks (where TCC was not directly involved in the transaction). Does this really make sense on a principled basis, or is it a “distinction without a difference”?

In the end the three director/shareholders had to account to TCC for the profits they had made on the contractual opportunity, and those were held in trust for the Toronto Construction Co. (of which you will recall Mr. Cook had a one-quarter interest).

Please read the fascinating case of Regal (Hastings) Ltd. v. Gulliver [1942] 1 All E.R. 378 at pages 365-369 of the Casebook which deals with what happens when directors (and a lawyer) acting in good faith and in the best interests of their company follow through personally on a “corporate opportunity”. The entire case can be found here: <a href="http://www.bailii.org/uk/cases/UKHL/1942/1.html">http://www.bailii.org/uk/cases/UKHL/1942/1.html</a>

In this case the defendants were the directors of Regal (Hastings) Ltd., a company which operated a movie theatre. Regal (Hastings) Ltd. created Hastings Amalgamated Cinemas Limited, intending it to be a subsidiary to acquire two nearby movie theatres the Elite and the De Luxe.

Because of a lack of money at the time in Regal (Hastings) Ltd., the directors and solicitors of Regal (Hastings) Ltd. personally paid for 60% of the shares in Hastings Amalgamated Cinemas Limited. Regal (Hastings) Ltd. had the remaining 40%. Please note that “it was assumed throughout that the defendants acted in the best interests of Regal” as stated at the bottom of the note introducing the case and which appears at page 365 of the Casebook.

Ultimately the shares in Regal (Hastings) Ltd. and the 3,000 shares in Hastings Amalgamated Cinemas Limited not owned by Regal (Hastings) Ltd. were sold to Oxford & Berkshire Cinemas Ltd. Part of the consideration was for the 3,000 shares Hastings Amalgamated Cinemas Limited not owned by Regal (Hastings) Ltd. and as a result, the defendants (the directors and solicitors of Regal (Hastings) Ltd. who personally paid for 60% of the shares in Hastings Amalgamated Cinemas Limited) made a profit.

Oxford & Berkshire Cinemas Ltd. now in control of Regal (Hastings) Ltd., causes Regal (Hastings) Ltd. to sue its former directors seeking an account of profits made on the sale of their personal shares in Hastings Amalgamated Cinemas Limited.

As an aside, leading counsel for the defendant Gulliver was Denning, Q.C.

 

The House of Lords reversed the High Court and the Court of Appeal, finding that the defendants had profited “by reason of the fact that they were directors of Regal and in the course of the execution of that office”. Accordingly they were made to account for their profits to Regal (Hastings) Ltd. and therefore ultimately to Oxford & Berkshire Cinemas Ltd.

Per Lord Russell:

“The rule of equity which insists on those who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon questions or considerations as whether the property would or should otherwise have gone to the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having in the stated circumstances been made…

In the result I am of opinion that the directors standing in a fiduciary relationship to Regal in regard to the exercise of their powers as directors, and having obtained these shares by reason and only by reason of the fact that they were directors of Regal and in the course of the execution of that office, are accountable for the profits which they have made out of them. The equitable rule laid down in Keech v. Sandford, ex parte James and similar authorities applies to them in full force. It was contended that these cases were distinguishable by reason of the fact that it was impossible for Regal to get the shares owing to lack of funds, and that the directors in taking the shares were really acting as members of the public. I cannot accept this argument. It was impossible for the cestui quo trust in Keech v. Sandford to obtain the lease, nevertheless the trustee was accountable: and the suggestion that the directors were applying simply as members of the public is a travesty of the facts. They could, had they wished, have protected themselves by a resolution (either antecedent or subsequent) of the Regal share-holders in general meeting. In default of such approval, the liability to account must remain.”

 

Per Lord Wright: "The Court of Appeal held that, in the absence of any dishonest intention, or negligence, or breach of a specific duty to acquire the shares for the appellant company, the respondents as directors were entitled to buy the shares themselves. Once, it was said, they came to a bona fide decision that the appellant company could not provide the money to take up the shares, their obligation to refrain from acquiring those shares for themselves came to an end. With the greatest respect, I feel bound to regard such a conclusion as dead in the teeth of the wise and salutary rule so stringently enforced in the authorities. It is suggested that it would have been mere quixotic folly for the four respondents to let such an occasion pass when the appellant company could not avail itself of it; Lord King, L.C., faced that very position when he accepted that the person in the fiduciary position might be the only person in the world who could not avail himself of the opportunity."

Per Lord Porter: “In these circumstances it is to my mind immaterial that the directors saw no way of raising the money save from amongst themselves and from the solicitor to the company, or indeed that the money could in fact have been raised in no other way. The legal proposition may, I think, be broadly stated by saying that one occupying a position of trust must not make a profit which he can acquire only by use of his fiduciary position, or if he does he
must account for the profit so made. For this proposition the cases
of Keech v. Sandford (1726), Sel. Cas. Temp. King. 61, and exparte
James (1803) 8 Ves. jun. 337 are sufficient authority…

… To treat the problem in this way is, in my view, to look at it as involving a claim for negligence or misfeasance and to neglect the wider aspect. Directors, no doubt, are not trustees, but they occupy a fiduciary position towards the company whose board they form. Their liability in this respect does not depend upon breach of duty but upon the proposition that a director must not make a profit out of property acquired by reason of his relationship to the company of which he is director. It matters not that he could not have acquired the property for the company itself—the profit which he makes is the company's, even though the property by means of which he made it was not and could not have, been acquired on its behalf. Adopting the words of Lord Eldon in ex parte James (supra), " the general interests of justice require it, "as no Court is equal to the examination and ascertainment of the truth in much the greater number of cases."

Blog Activity 7.5:

In this way the court chose to affirm the duty of good faith and in effect embrace the strict principle respecting conflicts of interest set out Aberdeen Railway Co. v. Blaikie Bros. (though that case is never directly mentioned). Perhaps this makes sense if you consider that no matter what may be the conscious or stated intention, a directors’ subjective judgement may well be (subconsciously) clouded by the existence of a countervailing interest, usually that of self-interest.

Was this the right answer?

We might begin by wondering what was the practical effect of the decision? It was that the ultimate purchaser of the companies (Oxford & Berkshire Cinemas Ltd.) Effectively received a rebate of their purchase price. Is this result a concern? Is it logical? How is it that something seemed perfectly legitimate (even necessary and desirable) when done by Regal (Hastings) Ltd., which apparently created value for Regal (Hastings) Ltd. And which arguably could have been done in no other way, can be revisited ex post facto in this way? Should regal be denied a claim just because its shareholders change? Why should the effects of corporate personality distort the general law of fiduciary duties?

Please blog your views on these questions and your reasons in less than one page under the heading “Not So Regal (Hastings)”.

 

Lord Russell concluded his judgment in Regal (Hastings) Ltd. v. Gulliver with the following statement:

 

“One final observation I desire to make. In his judgment the
Master of the Rolls stated that a decision adverse to the directors
in the present case involved the proposition that if directors bona
fide decide not to invest their company's funds in some proposed
investment, a director who thereafter embarks his own money
therein is accountable for any profits which he may derive there-
from. As to this, I can only say that to my mind the facts
of this hypothetical case bear but little resemblance to the story
with which we have had to deal.”

 

We now come to a case that renders the hypothetical real.

Please read Peso Silver Mines v. Cropper [1966] S.C.R. 673 at pages 369-371 of the Casebook.

 

The facts were that a prospector, Mr. Dickson, owned a number of mineral claims one of which was adjacent to claims held by Peso Silver Mines. Mr. Dickson offered to sell them to Peso silver mines, but the offer was rejected by the Peso Silver Mines board. Subsequently, three other investors approached Mr. Cropper who was the managing director of Peso Silver Mines and member of its board, and the four of them formed a private company that acquired Mr. Dickson’s claims and developed them. Later still, control of Peso Silver Mines changed hands and the newly reconstituted Peso Silver Mines sued Mr. Cropper seeking to purchase his holdings in the now profitable mine at Mr. Cropper’s cost, or to account for the proceeds of the transaction.

Significantly the defendants in Peso Silver Mines v. Cropper had acted entirely in good faith in connection with the board’s decision not to pursue an opportunity. Therefore the Supreme Court of Canada found that they could arrange for their own separate company to take the opportunity represented by Mr. Dickson’s claims perfectly lawfully. And they could keep the resulting profits. There had been a valid rejection of a business opportunity by Peso Silver Mines (as it was then controlled), subject to procedural constraints, and which the board in good faith duly exercised. Accordingly a director acting in his personal capacity could take the opportunity perfectly lawfully at a later time.

Cartwright J. stated:
<table width="0">
<tbody>
<tr>
<td width="27"></td>
<td>“On the facts of the case at bar I find it impossible to say that the respondent obtained the interests he holds in Cross Bow and Mayo by reason of the fact that he was a director of the appellant and in the course of the execution of that office.

When Dickson, at Dr. Aho's suggestion, offered his claims to the appellant it was the duty of the respondent as director to take part in the decision of the board as to whether that offer should be accepted or rejected. At that point he stood in a fiduciary relationship to the appellant. There are affirmative findings of fact that he and his co-directors acted in good faith, solely in the interests of the appellant and with sound business reasons in rejecting the offer. There is no suggestion in the evidence that the offer to the appellant was accompanied by any confidential information unavailable to any prospective purchaser or that the respondent as director had access to any such information by reason of his office. When, later, Dr. Aho approached the appellant it was not in his capacity as a director of the appellant, but as an individual member of the public whom Dr. Aho was seeking to interest as a co-adventurer.”</td>
</tr>
</tbody>
</table>
Are Peso Silver Mines v. Cropper and Regal (Hastings) Ltd. v. Gulliver really that similar? In Regal (Hastings) Ltd. v. Gulliver all of Regal (Hastings) Ltd.’s directors were interested in the relevant opportunity. They could not have passed a board resolution that would effectively waive the opportunity and so allow the directors to take it for their own benefit. Since they were all interested parties there would not have been anyone to pass such a resolution – all of the directors would have had to be “outside the room”. In Peso Silver Mines v. Cropper there was a fully functioning board that could do and did do their job.

 

 

Please read the case of Industrial Development Consultants Ltd. v. Cooley [1972] 2 All E.R. 162 (Eng. Birmingham Assizes) at pages 372-376 of the Casebook. 

 

Mr. Cooley was a distinguished architect who was employed as the managing director of Industrial Development Consultants Ltd., the plaintiff. Mr. Cooley tried on behalf of Industrial Development Consultants Ltd. to negotiate a contract in respect of lucrative pending project to design a depot in <a href="http://en.wikipedia.org/wiki/Letchworth">Letchworth</a> with the <a href="http://en.wikipedia.org/w/index.php?title=Eastern_Gas_Board&action=edit&redlink=1">Eastern Gas Board</a>. The negotiation was unsuccessful and <a href="http://en.wikipedia.org/w/index.php?title=Eastern_Gas_Board&action=edit&redlink=1">Eastern Gas Board</a> advised Mr. Cooley that they did not want to contract with Industrial Development Consultants Ltd., but only with him. Mr. Cooley then told the board of Industrial Development Consultants Ltd., that he was unwell and asked to resign from his job on early notice. The board of Industrial Development Consultants Ltd. agreed to this request and accepted Mr. Cooley’s resignation. Mr. Cooley then took on the work of design a depot in <a href="http://en.wikipedia.org/wiki/Letchworth">Letchworth</a> for the <a href="http://en.wikipedia.org/w/index.php?title=Eastern_Gas_Board&action=edit&redlink=1">Eastern Gas Board</a> on his own account. Industrial Development Consultants Ltd. subsequently discovered this and sued Mr. Cooley for breach of his duty of loyalty.

Mr. Cooley was found liable. Why? There were a number of reasons that emerge from the case:

 
<ul>
<li>When Mr. Cooley acquired knowledge of the Eastern Gas Board interest in him as the designer of the depot in <a href="http://en.wikipedia.org/wiki/Letchworth">Letchworth</a>, Industrial Development Consultants Ltd. did not have that knowledge and would have wanted it.</li>
<li>The information came to Mr. Cooley at a time when Mr. Cooley had only one single capacity – as a director of Industrial Development Consultants Ltd.</li>
<li>The information was of interest to Industrial Development Consultants Ltd. and Mr. Cooley had the obligation to pass it on.</li>
<li>The fact that Industrial Development Consultants Ltd. could not or would not have obtained the benefit (i.e. because the Eastern Gas Board would not have been willing to deal with Industrial Development Consultants Ltd.) is irrelevant.</li>
<li>It is irrelevant that if Mr. Cooley is found liable to Industrial Development Consultants Ltd. the net effect would be that Industrial Development Consultants Ltd. would obtain a benefit that, by definition, it could not otherwise have obtained – authority for this being found in Regal (Hastings) Ltd. v. Gulliver as well as subsequent cases.</li>
</ul>
Please read the English translation of the decision in Gravino v. Enerchem Transport Inc. [2008] J.Q. NO 9347 (QUE. C.A.) at pages 377-389 of the Casebook. You can find the full decision in French here if that is in any way helpful to you: <a href="http://www.canlii.org/fr/qc/qcca/doc/2008/2008qcca1820/2008qcca1820.html">http://www.canlii.org/fr/qc/qcca/doc/2008/2008qcca1820/2008qcca1820.html</a>

The facts were that a company called Ultramar began negotiations with Enerchem Transport Inc. (“ETI”), for the subchartering by ETI of three Ultramar tankers. Nicholas Gravino and Richard Carson were at the time shareholders and directors of ETI and actively participated in the negotiations with Ultramar. No agreement was reached. Subsequently Mr. Gravino and Mr. Carson sold their ETI shares and a few months later they ended their employment with ETI. For a variety for reasons not directly relevant Mr. Gravino and Mr. Carson were not bound by a non-compete clause. Following their departure, Mr. Gravino and Mr. Carson founded Petro-Nav Inc., a company that competed directly with ETI. They also recruited from ETI its then vice president marketing, Marian Zaremba, to join Petro-Nav Inc. Almost a year later, Ultramar assigned its lease agreement over the tankers Mr. Gravino and Mr. Carson had previously attempted to negotiate for while directors and shareholders of ETI, to a subsidiary of Petro-Nav Inc.

ETI alleged that its former directors and officers had appropriated to themselves a business opportunity they had developed on behalf of their former employer, and that accordingly Mr. Gravino and Mr. Carson had breached their duty of loyalty to ETI.

The reasons for judgment in this case are not exceptionally helpful except, perhaps, as to:
<ul>
<li>Duty of loyalty owed to ETI by its ex-officers in this case was all the greater given the high level of responsibility associated with the positions they had held in ETI.</li>
<li>On the topic of a “maturing business opportunity” it is clear that a director cannot use for their own profit or that of a third party any information obtained by reason of their duties, unless authorized to do so.</li>
<li>In effect, four main factors must be weighed in order to determine whether misappropriation of a maturing business opportunity has taken place:</li>
</ul>
<ol>
<li>i) the degree to which the interests of the director and the interests of the company were in conflict,</li>
<li>ii) the degree to which the business opportunity had, at the time in question, acquired its own specific and identifiable character,</li>
</ol>
iii) the proximity in time between the emergence of the business opportunity and its exploitation, and
<ol>
<li>iv) the proximity in character between the business opportunity pursued by the company and the contract or business concluded by the director for his own profit or the profit of a third party.</li>
</ol>
Please read the excerpts from D.D. Prentice and J. Payne on “The Corporate Opportunity Doctrine” at pages 389-392 of the Casebook. This article represents a succinct and important summary of the application of the duty of loyalty to corporate opportunities.

As you have perhaps come to appreciate the three most important factors when it comes to the application of the duty of loyalty to corporate opportunities are:
<ul>
<li>The facts;</li>
<li>The facts; and</li>
<li>The facts.</li>
</ul>
 
<ol>
<li> Conflict of Duty and Duty </li>
</ol>
Please read pages 393-394 of the Casebook. 

As you will see the issue of having duties of loyalty to two different companies of which one is a board member is not unknown. Nor, apart from resignation from one the companies with competing interests, and possibly both depending on the circumstances, does it have easy solutions. The most useful and prophylactic strategic mechanism is to employ the principle of “informed consent” as liberally as possible. This could go even as far as obtaining written acknowledgment and form of waiver from the companies respecting any potential conflict (much as lawyers must when they are asked to advise different parties who might have divergent interests in the same matter).

 

 
<ol>
<li> Ratification </li>
</ol>
Please read pages 396-400 of the Casebook.

Ratification by the shareholders is a tool often used to retroactively remedy mistakes that have been made. You will recall the case of Regal (Hastings) Ltd. v. Gulliver where the directors and solicitors of Regal (Hastings) Ltd., acting indisputably in the best interests of Regal (Hastings) Ltd., personally paid for 60% of the shares to acquire two movie houses because Regal (Hastings) Ltd. did not at the time have the funds to do so. In that case Lord Russell observed that the directors “could, had they wished, have protected themselves by a resolution (either antecedent or subsequent) of the Regal shareholders in general meeting.” (Emphasis added) 

Also relevant are the words of Harman L.J. in Bamford v. Bamford [1969] 1 All E.R. 969 (C.A.):

"It is trite law, I had thought, that if directors do acts, as they do every day, especially in private companies, which, perhaps because there is no quorum, or because their appointment was defective, or because some- times there are no directors properly appointed at all, or because they are actuated by improper motives, they go on doing for years, carrying on the business of the company in the way in which, if properly constituted, they should carry it on, and then they find that everything has been so to speak wrongly done because it was not done by a proper board, such directors can, by making a full and frank disclosure and calling together the general body of the shareholders, obtain absolution and forgiveness of their sins; and provided the acts are not ultra vires the company as a whole everything will go on as if it had been all right from the beginning. I cannot believe that is not a commonplace of company law. It is done every day. Of course, if the majority of the general meeting will not forgive and approve, then the directors must pay for it." 

Note as well the statutory provisions relevant to the question of ratification whereby evidence of shareholder approval is admissible but not decisive. BCBCA section 233(6) and CBCA Section 242 of the CBCA provide as follows: 
<ol start="233">
<li>(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.</li>
</ol>
 
<ol start="242">
<li>(1) An application made or an action brought or intervened in under this Part shall not be stayed or dismissed by reason only that it is shown that an alleged breach of a right or duty owed to the corporation or its subsidiary has been or may be approved by the shareholders of such body corporate, but evidence of approval by the shareholders may be taken into account by the court in making an order...”</li>
</ol>
 

 

TOPIC 3: TAKE-OVER BIDS AND DEFENSIVE TACTICS 

Please read the notes at pages 400-402 of the Casebook.

The (multi-million dollar ;) question is what is the duty of directors to their corporation when confronted with a take-over? And do the directors owe any duties to shareholders?

In this regard please read the case of Olympia and York Enterprises Ltd. v. Hiram Walker Resouces Ltd. (1986), 59 O.R. (2d) 254 (H.C.J.) at pages 402-406 of the Casebook.

The facts are that Gulf Canada decided it wished to acquire a majority shareholder interest in Hiram Walker Resources Ltd. It offered $32 per share for 39% of the shares. The directors of Hiram Walker Resources Ltd. decide to employ a defensive tactic to stop Gulf Canada by selling the liquor business of Hiram Walker Resources Ltd. representing 40% of the company’s total assets to Allied Lyons plc for $2.6 billion. Hiram Walker Resources Ltd. used that money to pay for 49% of the shares in a new subsidiary, “Fingas” which then proceeds to bid $40 per share for 48% of Hiram Walker Resources Ltd. (a significant improvement in price and percentage over the Gulf Canada bid).

Olympia &York Enterprises Ltd. was the parent company of Gulf Canada and sought to enjoin sale of the liquor business of Hiram Walker Resources Ltd. to Allied Lyons plc. They argued that the directors of Hiram Walker Resources Ltd. were using corporate assets for the purpose of entrenching themselves in the management of the corporation, and accordingly were in breach of their fiduciary duties.

Montgomery J. dismissed the application of Olympia &York Enterprises Ltd.

On the question of whether the directors proposed to buy back the shares of Hiram Walker Resources Ltd. with corporate assets so as to entrench themselves the court answered in the negative. Montgomery J. found that on the evidence the directors acted prudently, properly, reasonably and fairly on the advice of their legal and financial advisors, the opinion of management and their collective store of business acumen. It was also seen as a legitimate objective to ensure that as much as possible of all “economic value” be distributed to all of the shareholders and not just Gulf Canada/Olympia & York Enterprises Ltd. Montgomery J. said: “I am satisfied on the basis of the affidavits of Mr. Downing and Mr. Lambert that the sole purpose of the conduct of the directors of Hiram Walker was to maximize the position of all their shareholders after Gulf’s takeover bid…”

The principles that emerge from Olympia & York Enterprises Ltd. v. Hiram Walker Resouces Ltd. are:

 
<ul>
<li>When directors act in the best interests of the company and in good faith, it matters not that they also benefit from their action (in this case by becoming more entrenched in the company). In other words self-entrenchment will not necessarily be inferred where retaining control is secondary to the more important purpose of acting in good faith and in the company best interests.</li>
<li>It is the duty of the directors in a take-over battle to take all reasonable steps to maximize shareholders value. In maximizing shareholder value directors may rely on professional advice as to the adequacy of a bid, and that such reliance will be evidence of acting in good faith and on reasonable grounds.</li>
</ul>
 

In considering the proper actions to be taken by directors in takeover bid scenarios, it is of some importance to come to grips with the principle that emerges from the U.S. case of Revlon Inc. v. MacAndrews & Forbes Holdings Inc. 506 A.2d 173 (Del. 1986) which states that once defensive measures taken by the directors are moot , the role of directors changes from defenders of the corporation to auctioneers trying to get the best sale price for the company to benefit the shareholders. The exact words of Justice Moore of the Supreme Court of Delaware were:

“However, when Pantry Pride increased its offer to $50 per share, and then to $53, it became apparent to all that the break-up of the company was inevitable. The Revlon board's authorization permitting management to negotiate a merger or buyout with a third party was a recognition that the company was for sale. The duty of the board had thus changed from the preservation of Revlon as a corporate entity to the maximization of the company's value at a sale for the stockholders' benefit. This significantly altered the board's responsibilities under the Unocal standards. It no longer faced threats to corporate policy and effectiveness, or to the stockholders' interests, from a grossly inadequate bid. The whole question of defensive measures became moot. The directors' role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.”

The Ontario Court of Appeal soundly rejected this so-called “Revlon Duty” for Ontario (at least) in Maple Leaf Foods Inc. v. Schneider Corp., (1998) 42 O.R. (3d) 177 (Ont. C.A.). Weiler J.A. for the Court of Appeal held:

“The decision in [Revlon] stands for the proposition that if a company is up for sale, the directors have an obligation to conduct an auction of the company’s shares. Revlon is not the law in Ontario. In Ontario, an auction need not be held every time there is a change in control of a company.

 

An auction is merely one way to prevent the conflicts of interest that may arise when there is a change of control by requiring that directors act in a neutral manner toward a number of bidders…The more recent Paramount decision in the United States …has recast the obligation of directors when there is a bid for change of control as an obligation to seek the best value reasonably available to shareholders in the circumstances. This is a more flexible standard, which recognizes that the particular circumstances are important in determining the best transaction available, and that a board is not limited to considering only the amount of cash or consideration involved as would be the case with an auction…There is no single blueprint that directors

must follow… 

 

When it becomes clear that a company is for sale and there are several bidders, an auction is an appropriate mechanism to ensure that the board of a target company acts in a neutral manner to achieve the best value reasonably available to shareholders in the circumstances. When the board has received a single offer and has no reliable grounds upon which to judge its adequacy, a canvass of

the market to determine if higher bids may be elicited is appropriate, and may be necessary….”

 

So where does our law stand on the duty of the corporation to the shareholders?

Please note carefully the discussion in middle paragraph of page 407 of the Casebook. Not only does it constitute an important summary of the prevailing situation but also offers a very useful formulation to try and reconcile the divergent strands: “One way to make sense of this is that the Supreme Court of Canada’s interpretation [in BCE v. 1976 Debentureholders discussed earlier] of the duty of loyalty is such that directors may consider the interests of creditors and other stakeholders, but not that they must do so. Moreover, the rejection of Revlon can also be understood as the rejection of an idea that directors are confined to a short time frame when deciding what is in the best interests of the corporation.”

 

Finally please read the cases of: 
<ol>
<li>347883 Alberta Ltd. v. Producers Pipelines Inc. (1991) 3 B.L.R. (2d) 237 (C.A.) at pages 409-419 of the Casebook; </li>
</ol>
 
<ol start="2">
<li>Brant Investments Ltd. v. Keeprite Inc. (1991) 3 O.R. (3d) 289 (C.A.) at pages 421-426 of the Casebook; and</li>
</ol>
 
<ol start="3">
<li>CW Shareholdings Inc.WIC Western International Communications Ltd. (1998), 39 O.R. (3d) 755 (Ont. SC) which can be found here: <a href="http://www.canlii.org/en/on/onsc/doc/1998/1998canlii14838/1998canlii14838.html">http://www.canlii.org/en/on/onsc/doc/1998/1998canlii14838/1998canlii14838.html</a></li>
</ol>
 

These cases involve illustrations of courts wrestling with how to give relevant context to the duty of loyalty. That is that Directors must act honestly, in good faith, and with a view to the best interests of the corporation and furthermore exercise the care, diligence and skill that a reasonable person would exercise in like circumstances. Such specific responsibilities of the directors become considerably more challenging to navigate in change of control situations where the corporation can be said to be “in play”.

 

347883 Alberta Ltd. v. Producers Pipelines Inc. dealt with a “shareholder’s rights agreement”, also known as a poison pill defence. A “Poison pill” is a defensive strategy against corporate takeovers. It can broadly be defined as an extra-ordinary manoeuvre by the directors and/or shareholders of the company to be acquired designed to make that target company less attractive to the hopeful acquirer, often by adding burdensome costs if the takeover succeeds. In 347883 Alberta Ltd. v. Producers Pipelines Inc. the directors of Producers Pipelines Inc., a public company that the parent company of 347883 Alberta Ltd. wished to acquire, enacted a “shareholders rights agreement”. That shareholders rights agreement would give each of the fewer than 200 shareholders of Producers Pipelines Inc. 10 shares for the price of $75. The offer was crafted in such a way that 347883 Alberta Ltd. (as a subsidiary of the putative acquirer) would not receive these rights and the acquirer’s own shares would be greatly diluted. In dealing with the appropriate conduct of directors Sherstobitoff J.A. reviewed the state of the law extensively and concluded:

“In summary, when a corporation is faced with susceptibility to a take-over bid or an actual take-over bid, the directors must exercise their powers in accordance with their overriding duty to act bona fide and in the best interests of the corporation even though they may find themselves, through no fault of their own, in a conflict of interest situation. If, after investigation, they determine that action is necessary to advance the best interests of the company, they may act, but the onus will be on them to show that their acts were reasonable in relation to the threat posed and were directed to the benefit of the corporation and its shareholders as a whole, and not for an improper purpose such as entrenchment of the directors. 

Since the shareholders have the right to decide to whom and at what price they will sell their shares, defensive action must interfere as little as possible with that right. Accordingly, any defensive action should be put to the shareholders for prior approval where possible, or for subsequent ratification if not possible. There may be circumstances where neither is possible, but that was not so in this case. Defensive tactics that result in shareholders being deprived of the ability to respond to a takeover bid or to a competing bid are unacceptable.”

The end result was that the Ontario Court of Appeal determined that the shareholder’s rights agreement in this particular case was to be set aside.

 

The facts in Brant Investments Ltd. v. KeepRite Inc. involved a complex corporate transaction where the board of the parent company Inter-City Gas purchased 64% of the shares in KeepRite Inc. a company that sold air conditioning equipment. Then Inter-City Gas transferred the shares it had acquired in Keeprite Inc. to Inter-City Manufacturing, a subsidiary of Inter-City Gas, which made heating equipment. Thereafter, following the recommendation of an independent committee of the board of KeepRite Inc., KeepRite Inc. purchased $20 million of assets from two companies that were subsidiaries of Inter-City Manufacturing. An issue of rights to existing shareholders financed this purchase. Of note was that this rights offering required an amendment to the articles of KeepRite Inc. that was passed by a special resolution of the shareholders. The minority shareholders of Keeprite Inc. objected to the transaction, brought an oppression action, and applied for an order to fix the fair value of their shares to be put to the corporation.

In simplified form this was essentially a transaction where the board of a parent proposed to purchase the assets of a subsidiary, and the shareholders of the parent company objected.

McKinlay J.A. agreed with the lower court that section 234 (now section 241) of the CBCA was not offended by the actions of KeepRite Inc. Accordingly the action of the minority shareholders of KeepRite Inc. against that company failed. The court found:

“There can be no doubt that on application under s. 234 the trial judge is required to consider the nature of the impugned acts and the method in which they were carried out. That does not mean that the trial judge should substitute his own business judgment for that of managers, directors, or a committee such as the one involved in assessing this transaction. Indeed, it would generally be impossible for him to do so, regardless of the amount of evidence before him. He is dealing with the matter at a different time and place; it is unlikely that he will have the background knowledge and expertise of the individuals involved; he could have little or no knowledge of the background and skills of the persons who would be carrying out any proposed plan; and it is unlikely that he would have any knowledge of the specialized market in which the corporation operated. In short, he does not know enough to make the business decision required. That does not mean that he is not well equipped to make an objective assessment of the very factors which s. 234 requires him to assess. Those factors have been discussed in some detail earlier in these reasons.

It is important to note that the learned trial judge did not say that business decisions honestly made should not be subjected to examination. What he said was that they should not be subjected to microscopic examination…Having carefully reviewed the major aspects of the appellants’ criticisms of the transaction, he came to the conclusion that in no way, either substantively or procedurally, offended the provisions of s. 234. Having carefully reviewed all of the exhibits and transcribed evidence to which we were referred, I have no hesitation in agreeing with the correctness of his assessment…” 

One of the key points about Brant Investments Ltd. v. KeepRite Inc. is that the case illustrates well the sense of “protection” (real or imagined) that “independent committees” can provide in a corporate setting, particularly in a takeover scenario. The key factor would appear to be the appearance of objectivity and focus which an independent committee is capable of bring to business judgments regarding what would be in the best interests of the corporation. Accordingly it has become fairly standard practice for independent committees to be formed and convened at an early stage of takeover issues (and others as well) that might prove contentious. Given that most, if not almost all takeovers meet these criteria, “independent committees” are unlikely to be going out of style any time soon.

 

CW Shareholdings Inc. v. WIC Western International Communications Ltd. involved an offer made by CanWest Global Communications Corp. (“CanWest”) to acquire all of the Class A voting shares of WIC Western International Communications Ltd. (“WIC”) and all of the publicly traded Class B non-voting shares of WIC at a price of $39 per share. At the relevant time the Class A voting shares of WIC were held approximately 49.96% by Shaw Communications Inc. and 50% by Cathton Holdings.

In response to the offer from CanWest, the board of WIC created a “special committee”, which included the CEO, to consider the offer. The board of WIC subsequently recommended through a “Directors’ Circular” that the shareholders of WIC not accept the offer from CanWest. The board of WIC also passed without the approval of its shareholders a “shareholders rights plan”.

In its various decisions dealing with the WIC matter the Ontario Securities Commission identified certain challenges with the non-independence of WIC’s “special committee” relating to the participation of John Lacey the CEO of WIC at the relevant time and of another director, Robert Manning, who represented Cathton Holdings, the largest holder of the Class A shares of WIC, who was at first allowed to attend meetings of the special committee but without voting rights. The OSC considered the special committee not to truly be an independent committee:

“From the evidence of Messrs. Lacey, Eyton and Spafford, it appears clear to us that the Special Committee was set up for purposes of convenience only, and not as an independent committee. In our view, in a take-over bid context a committee which includes as an active participant the president and chief executive officer of the corporation and, as an observer and resource, a representative of a shareholder which has 50% of the votes, is not an independent committee. The fact that Mr. Lacey has a "golden parachute" agreement, does not in our view change this position.

In these circumstances, it is our view that we must place less reliance on the review by the Special Committee of the Bid, and possible alternative methods of achieving a more beneficial result to shareholders, than we would if the Special Committee had been truly an independent committee.”

As well in its reasons to cease trade the shareholder rights plan, the Ontario Securities Commission stated in relation to the testimony of Rhys Eyton, the Chair of the “special committee” that:

“We should also note that Mr. Eyton's apparent view that the board of a target company, as well as its shareholders, are entitled to take part in the decision as to whether to accept the bid is not correct, based on previous decisions of the Commission, if by his statement to that effect Mr. Eyton meant any more than that the board of the target company is entitled to advise the shareholders and attempt to provide them with alternatives.”

The rights plan was cease-traded by securities regulators, and thereafter negotiations began between WIC and Shaw Communications Inc., who made a cash and share offer valued at $43.50 per share for all of the outstanding Class B nonvoting shares. Related to this offer WIC and Shaw Communications Inc. entered into a “pre-acquisition agreement” which granted Shaw Communications:
<ul>
<li>An irrevocable option to purchase WIC’s radio assets (which were said to have been underperforming) at a fixed price of $160 million. Note that these radio assets only represented 0.6% of WIC’s total income in 1997.</li>
</ul>
 
<ul>
<li>A break fee of $30 million if certain events transpired within a limited time; and</li>
</ul>
 
<ul>
<li>A covenant which would prevent WIC from soliciting or encouraging any other “acquisition proposals”, but which did allow WIC to negotiate, approve and recommend unsolicited bona fide acquisition proposals.</li>
</ul>
 

Subsequently CanWest increased its bid to $43.50 on condition that the Court setting aside the pre-acquisition agreement. Over and above the various proceedings Canwest had started before securities commissions, it also applied to the Ontario courts to set aside the pre-acquisition agreement and for relief from “oppression” in accordance section 241 of the CBCA. The issue before the courts was whether WIC’s Board had breached its fiduciary duties by approving the pre-acquisition agreement with Shaw. In the end while the Ontario Court (General Division) can be said to have been somewhat critical of certain aspects of the pre-acquisition agreement and might be seen as questioning to some degree the independence of the special committee, it did not set aside the pre-acquisition agreement and concluded that the WIC Board had acted in accordance with its fiduciary duties.

Mr. Justice Blair contextualized the concept of a corporation being “in play” and described the duties of directors in such circumstances:

“The law as it relates to the general duties of the directors of Canadian corporations is not controversial. The directors must exercise the common law fiduciary and statutory obligations (a) to act honestly and in good faith with a view to the best interests of the corporation, and (b) in doing so, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances: see the Canada Business Corporations Act, R.S.C. 1985, c. C-37, s.122. In the context of a hostile takeover bid situations where the corporation is “in play” (i.e., where it is apparent there will be a sale of equity and/or voting control) the duty is to act in the best interests of the shareholders as a whole and to take active and reasonable steps to maximize shareholder value by conducting an auction…

In assessing whether or not directors have met their fiduciary and statutory obligations, as outlined earlier in these Reasons, Canadian courts have generally approached the subject on the basis of what has become known as the "business judgment rule". This rule is an extension of the fundamental principle that the business and affairs of a corporation are managed by or under the direction of its board of directors. It operates to shield from court intervention business decisions which have been made honestly, prudently, in good faith and on reasonable grounds. In such cases, the board’s decisions will not be subject to microscopic examination and the Court will be reluctant to interfere and to usurp the board of director’s function in managing the corporation. …

The directors’ actions are not to be judged against the perfect vision of hindsight, and should be measured against the facts as they existed at the time the impugned decision was made. In addition, the court should be reluctant to substitute its own opinion for that of the directors where the business decision was made in reasonable and informed reliance on the advice of financial and legal advisors appropriately retained and consulted in the circumstances. See Rogers Communications Inc. v. MacLean Hunter Ltd., supra, at p. 245; Armstrong World Industries Inc. v. Arcand (1997), 36 B.L.R. (2d) 171 (Ont. Gen. Div. [Commercial List]); Olympia & York Enterprises Ltd. v. Hiram Walker Resources Ltd., supra at pp. 270-273.”

 

UNIT WRAP UP:

Now having achieved some appreciation of how the “mind” of the corporation is operated and managed by directors and management, we come to the rest of the world. What rights and remedies do shareholders and others have?

 

ASSIGNMENT #2

You are a young corporate lawyer at the well-known British Columbia law firm Wie, Haight, Raye & Darr. The firm’s client Gates Williams makes an appointment to meet with you. He arrives at your office with J.O.B. Steves whom he introduces as his partner in a new venture. Mr. Williams asks you to incorporate a new company under the BCBCA.

They tell you that the company is being formed to exploit a potentially highly profitable new business opportunity that has arisen as the result a decision by the Canadian International Development Agency (“CIDA”) an agency of Canada’s Department of External Affairs to invite tenders from private sector companies for contracts to provide services that CIDA wishes to have provided in Guatemala. Mr. Williams mentions that Mr. Steves’ son-in-law is a very senior official at CIDA.

Mr. Williams that the shareholdings in the new company will be as follows:
<ol>
<li>Gates Williams 1000 Class A Voting common shares to be paid for in cash</li>
<li>O.B. Steves 1000 Class A Voting common shares to be paid for in cash</li>
<li>C. Ahn 100 Class A Voting common shares (who is not at the meeting) to be paid for in cash</li>
</ol>
Mr. Williams asks you whether Wie, Haight, Raye & Darr would take 200 Class A Voting common shares in lieu of fees.

Since Mr. Williams and Mr. Steves are in rather a rush they tell you that the company should have standard form articles along the lines of the model BC Articles (on TWEN), that Mr. Williams will be the sole officer and director of the company and that Mr. Steves will call later with additional instructions and information. Later the same day Mr. Williams (not Mr. Steves) calls and asks you prepare an employment agreement between Mr. Williams as President & CEO, and the new company. The employment agreement will have a term of two years and provide a salary of $500,000 per year.

Please identify briefly any legal or, in the light of the following provisions of the Law Society of BC Code of Professional Conduct, any ethical issues: s. 1.1-1 (definition of “conflict of interest”); s. 3.2-7; s. 3.2-8; s. 3.4-1; s. 3.4-28.

Please answer in three pages or less (one and half spacing). It is not necessary to repeat the facts.

 

 

UNIT 8 (WEEKS 12 & 13): MAJORITY RULE & PROTECTING MINORITY INTERESTS

 

Figure 8: Walmart shareholders meeting (By Walmart [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons)

ALT: A huge crowd at an annual meeting of Walmart shareholders.

Source of image – <a href="http://commons.wikimedia.org/wiki/File:Crowd_shot_Walmart_Shareholders%27_Meeting_2010.jpg">http://commons.wikimedia.org/wiki/File:Crowd_shot_Walmart_Shareholders%27_Meeting_2010.jpg</a>

 

 

 

 

UNIT OVERVIEW:

In this unit the variety of statutory provisions enacted with a view to protecting minority interests will be examined. There will be reference to some contractual arrangements that might be adopted towards this end. You will also consider the role of government and the securities regulatory authorities.

 

UNIT OUTCOME: 

Through this unit you will come to an understanding of the limits of corporate democracy and the rights that shareholders (and occasionally others) have in the face of a corporations’ actions. You will come to appreciate the differences between a “derivative action” and the “oppression remedy”. You should by the end of unit understand their similarities and differences. You should also be in a position to see why these legal tools are important to shareholders as you briefly examine and review some of the more notorious corporate scandals over the recent years. Finally you should be able to begin thinking about what a lawyer’s role in preventing corporate abuses might look like.

 

UNIT READINGS:

Please read the following materials:

Casebook pages 427-567.

BCBCA sections 227-228, 232-236; CBCA section 241.

“Distinguishing Oppression Claims and Derivative Actions” by Tracey M. Cohen, T. Mark Pontin, and Graeme Hooper: <a href="http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf">http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf</a>

“Report Slams Hollinger's Black For a 'Corporate Kleptocracy'”: <a href="http://online.wsj.com/news/articles/SB109395499363105646">http://online.wsj.com/news/articles/SB109395499363105646</a>

Catalyst Fund General Partner Inc. v. Hollinger Inc., 2004 CanLII 40665 (ON SC) <a href="http://canlii.ca/t/1j6qd">http://canlii.ca/t/1j6qd</a>

“The Fall of Conrad Black” <a href="http://www.youtube.com/watch?v=CIRRUvjkLJo">http://www.youtube.com/watch?v=CIRRUvjkLJo</a>

“Law Society of Upper Canada appeals exoneration of two Conrad Black lawyers” <a href="http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html">http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html</a>

“Livent co-founders Drabinsky, Gottlieb convicted of fraud and forgery” <a href="http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convicted-of-fraud-and-forgery-1.778879">http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convictedof-fraud-and-forgery-1.778879</a>

“Law society revokes Garth Drabinsky’s licence over fraud convictions” <a href="http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html">http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html</a>

“Lawyers, Ethics, and Enron” <a href="http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf">http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf</a>

Code of Professional Conduct for British Columbia, sections 3.2-3, 3.2-7, 3.2-8, 3.7, 3.3-1, 3.3-2. <a href="http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3">http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3</a>

Stephen M. Bainbridge, “Corporate Lawyers as Gatekeepers” <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1980975">http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1980975</a>

 

 

TOPIC 1: INTRODUCTION/LOOKING BACK

The exploration of corporate personhood, the legal conundrums caused by it and the legal reactions to it are a significant underlying theme of this course. Another consistent theme can be identified just below the surface of many of the cases explored in the previous unit and in this final substantive unit; the problems of “equality”. How can “equality” be a problem in law you may rightly wonder? To answer that it is important to define the meaning being ascribed to equality in this particular instance and then examine the lack of legal clarity that may flow in the circumstances.

To begin with, you may have noticed that many of the cases we have explored in this course involve, plainly put, wealthy and privileged people. They are often (though by no means always) situations where individuals or companies are suing other individuals or companies alleging that they are entitled to more money (or a shareholding that they believe will equate to more money) in one way or another. This should be no surprise given that legal precedent continuously reinforces that the “best interests” of companies and shareholders is a concept aligned primarily and ultimately with profit.

It is the consequences attendant to this core set of dynamics that is perhaps the most fascinating. For one thing it means not only that “the fight” is usually about making more money as a philosophical starting point, but also that the combatants often are equally matched in both purpose and resources – in other words they are often equal, especially if for example there is a takeover battle at stake. It would be naive to think that this equality does not impact the nature of the legal proceedings. Where so much of what you learn in law school is about rights that have evolved to redress inequalities or grant liberty, the corporate law principles that have evolved that in the real world tend to be mere tools in the hands of often more or less equal litigants. No doubt principle is argued with great ferocity by highly skilled counsel in corporate law, but the fact that in the end it is all mostly just about money surely has an impact (if only below the surface). After all in corporate law we are generally not talking about basic rights (detention without trial; equality before the law; personal discrimination etc.). Is it unfair to wonder whether the relative inconsistency of corporate law principles is one product of this confluence of “equality” and also a product of not dealing with issues of true importance to the human condition, such as personal liberty?

So whether you agree or not, stay on the lookout in this unit (and feel free to look backwards at previous units) for situations where the relative “equality’ of the parties has some impact on the law evolving in a murkier rather then clearer way.

 

TOPIC 2: MAJORITY RULE

Please read pages 427-452 of the Casebook.

This section of the course is about the power of shareholder majorities. In this regard there are two questions that commend themselves:

Question 1:

What sorts of things must be done by shareholders?

The more important aspects of this question are discussed at pages 443-448 of the Casebook. You should read these pages to get a general sense of the situation. The details are not overly important for any present purpose but you should note that the BCBCA contains provisions which, in one way or another, are comparable to those of the CBCA that are referred to. We have already visited some of these subjects in detail (for example, the removal of directors).

Question 2:

Are there any limitations on shareholders when they are doing what they are authorized to do?

To begin answering this question please read Allen v. Gold Reefs Of West Africa, Ltd. [1900-1903] All E.R. Rep. 746 (Eng. C.A.) at pages 448-449 of the Casebook as well as the Notes following at pages 449-451 of the Casebook.

In Allen v. Gold Reefs of West Africa, Ltd. the company had altered its articles giving itself a lien on paid up shares which, in effect, addressed the failure of a shareholder, Mr. Zuccani, to pay what was owed in respect of other shares he had that had not been fully paid up. Gold Reefs of West Africa, Ltd.’s articles gave the company a lien on all partly paid shares held by any shareholder in respect of any debt owed to the company. Mr. Zuccani held some partly paid up shares and some fully paid up shares. Mr. Zuccani died insolvent. Gold Reefs of West Africa, Ltd. subsequently decided to alter its articles through special resolution to create a lien on all fully paid shares. This in effect changed the rights of the now deceased shareholder (as well as in theory the rights of all other shareholders going forward). Mr. Allen, who was an executor of Mr. Zuccani’s estate brought action get the fully paid shares’ value.

Lindley M.R. found that the altering of the articles of Gold Reefs of West Africa, Ltd. to be valid as long as the special resolution was done bona fide for the benefit of the company as a whole:

“ The power thus conferred on companies to alter the regulations contained in their articles is limited only by the provisions contained in the statute and the conditions contained in the company’s memorandum of association. Wide, however, as the language of s. 50 is, the power conferred by it must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded. These conditions are always implied, and are seldom, if ever, expressed. But if they are complied with I can discover no ground for judicially putting any other restrictions on the power conferred by the section than those contained in it. How’s shares shall be transferred, and whether the company shall have any lien on them, are clearly matters of regulation properly prescribed by a company’s articles of association…” (Emphasis added)
<table width="53">
<tbody>
<tr>
<td width="27"></td>
<td width="27"></td>
</tr>
</tbody>
</table>
The willingness of courts to deal with shareholder amendments and decisions and the extent to which the court’s would interfere resulted in some uncertainty, which was addressed in the case of Greenhalgh v. Arderne Cinemas Ltd. [1950] 2 ALL E.R. 1120 (Eng. C.A.). Please read the case at page 451 of the Casebook.

In Greenhalgh v. Arderne Cinemas Ltd. the original articles of association of Arderne Cinemas Ltd. provided that no sale of shares to an outsider would occur if an existing shareholder was willing to buy those shares. The articles provided: "No shares in the company shall be transferred to a person not a member of the company so long as a member of the company may be willing to purchase such shares at a fair value to be ascertained in accordance with sub-clause (b) hereof".

The majority shareholder, Mr. Mallard wanted to sell control of Arderne Cinemas Ltd. to a third party. Mr. Greenhalgh was a minority shareholder in Arderne Cinemas and wished to prevent any such sale of control. The articles of Arderne Cinemas Ltd. were amended by special resolution to permit sale to an outsider, if approved, by simple majority. Mr. Greenhalgh argued that the article change was invalid.

Evershed M.R. had the following observations:

“… Certain principles, I think, can be safely stated as emerging from those authorities. In the first place, I think it is now plain that "bona fide for the benefit of the company as a whole" means not two things but one thing. It means that the shareholder must proceed upon what, in his honest opinion, is for the benefit of the company as a whole. The second thing is that the phrase, “the company as a whole”, does not (at any rate in such a case as the present) mean the company as a commercial entity, distinct from the corporators: it means the corporators as a general body. That is to say, the case maybe taking of an individual hypothetical member and it may be asked whether what is proposed is, in the honest opinion of those who voted in its favor, for that person’s benefit.

I think that the matter can, in practice, be more accurately and precisely stated by looking at the converse and by saying that a special resolution of this kind would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and the minority shareholders, so as to give to the former an advantage of which the latter were deprived. When the cases are examined in which the resolution has been successfully attacked, it is on that ground. It is therefore not necessary to require that persons voting for a special resolution should, so to speak, dissociate themselves altogether from their own prospects and consider whether what is thought to be for the benefit of the company as a going concern. If, as commonly happens, an outside person makes an offer to buy all the shares, prima facie, if the corporators think it a fair offer and vote in favour of the resolution, it is no ground for impeaching the resolution that they are considering their own position as individuals.”

 

Blog Activity 8.1:

Do you see a test here? How are shareholders to act when voting on special resolutions? What can they consider? What must they not do? Is it clear? 

Please blog your views on these questions and your reasons in less than one page under the heading “Arderne Cinemas Ltd.”

 

 

TOPIC 3: MINORITY PROTECTIONS 

 

On the subject of “Statutory Intervention” please read pages 453-460 of the Casebook.

Welling in the excerpt from “Corporate Law in Canada: The Governing Principles” makes the noteworthy point the: “The common law courts…failed to find any principled approaches to the problem of minority shareholder protection.” What has evolved instead is a statutory codification of remedies as a bulwark against the oppressions that directors, management, and even other shareholders can be complicit in.

The relevant section of the BCBCA can be found in Part 8 “Proceedings”. They include sections 227-228 and 232-236 that broadly corresponds to the CBCA provisions referenced in the Casebook (but note that there are differences). The BCBCA sections are reproduced below:
<h4> </h4>
<h4> “Complaints by shareholder</h4>
<ol start="227">
<li>(1) For the purposes of this section, "shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) A shareholder may apply to the court for an order under this section on the ground

(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or

(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.

(3) On an application under this section, the court may, with a view to remedying or bringing to an end the matters complained of and subject to subsection (4) of this section, make any interim or final order it considers appropriate, including an order

(a) directing or prohibiting any act,

(b) regulating the conduct of the company's affairs,

(c) appointing a receiver or receiver manager,

(d) directing an issue or conversion or exchange of shares,

(e) appointing directors in place of or in addition to all or any of the directors then in office,

(f) removing any director,

(g) directing the company, subject to subsections (5) and (6), to purchase some or all of the shares of a shareholder and, if required, to reduce its capital in the manner specified by the court,

(h) directing a shareholder to purchase some or all of the shares of any other shareholder,

(i) directing the company, subject to subsections (5) and (6), or any other person, to pay to a shareholder all or any part of the money paid by that shareholder for shares of the company,

(j) varying or setting aside a transaction to which the company is a party and directing any party to the transaction to compensate any other party to the transaction,

(k) varying or setting aside a resolution,

(l) requiring the company, within a time specified by the court, to produce to the court or to an interested person financial statements or an accounting in any form the court may determine,

(m) directing the company, subject to subsections (5) and (6), to compensate an aggrieved person,

(n) directing correction of the registers or other records of the company,

(o) directing that the company be liquidated and dissolved, and appointing one or more liquidators, with or without security,

(p) directing that an investigation be made under Division 3 of this Part,

(q) requiring the trial of any issue, or

(r) authorizing or directing that legal proceedings be commenced in the name of the company against any person on the terms the court directs.

(4) The court may make an order under subsection (3) if it is satisfied that the application was brought by the shareholder in a timely manner.

(5) If an order is made under subsection (3) (g), (i) or (m), the company must pay to a person the full amount payable under that order unless there are reasonable grounds for believing that

(a) the company is insolvent, or

(b) the payment would render the company insolvent.

(6) If reasonable grounds exist for believing that subsection (5) (a) or (b) applies,

(a) the company is prohibited from paying the person the full amount of money to which the person is entitled,

(b) the company must pay to the person as much of the amount as is possible without causing a circumstance set out in subsection (5) to occur, and

(c) the company must pay the balance of the amount as soon as the company is able to do so without causing a circumstance set out in subsection (5) to occur.

(7) If an order is made under subsection (3) (o), Part 10 applies.

 
<h4>Compliance or restraining orders</h4>
<ol start="228">
<li>(1) In this section, "complainant" means, in relation to a company referred to in subsection (2), a shareholder of the company or any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) If a company or any director, officer, shareholder, employee, agent, auditor, trustee, receiver, receiver manager or liquidator of a company contravenes or is about to contravene a provision of this Act or the regulations or of the memorandum, notice of articles or articles of the company, a complainant may, in addition to any other rights that that person might have, apply to the court for an order that the person who has contravened or is about to contravene the provision comply with or refrain from contravening the provision.

(3) On an application under this section, the court may make any order it considers appropriate, including an order

(a) directing a person referred to in subsection (2) to comply with or to refrain from contravening a provision referred to in that subsection,

(b) enjoining the company from selling or otherwise disposing of property, rights or interests, or from receiving property, rights or interests, or

(c) requiring, in respect of a contract made contrary to section 33 (1), that compensation be paid to the company or to any other party to the contract…
<h4> </h4>
<h4>Derivative actions</h4>
<ol start="232">
<li>(1) In this section and section 233,</li>
</ol>
"complainant" means, in relation to a company, a shareholder or director of the company;

"shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.

(2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company

(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or

(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.

(3) Subsection (2) applies whether the right, duty or obligation arises under this Act or otherwise.

(4) With leave of the court, a complainant may, in the name and on behalf of a company, defend a legal proceeding brought against the company.
<h4> </h4>
<h4>Powers of court in relation to derivative actions</h4>
<ol start="233">
<li>(1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if</li>
</ol>
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,

(b) notice of the application for leave has been given to the company and to any other person the court may order,

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.

(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.

(3) While a legal proceeding prosecuted or defended under this section is pending, the court may,

(a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and

(b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate.

(4) On the final disposition of a legal proceeding prosecuted or defended under this section, the court may make any order it considers appropriate, including an order that

(a) a person to whom costs are paid under subsection (3) (b) repay to the company some or all of those costs,

(b) the company or any other party to the legal proceeding indemnify

(i) the complainant for the costs incurred by the complainant in prosecuting or defending the legal proceeding, or

(ii) the person controlling the conduct of the legal proceeding for the costs incurred by the person in controlling the conduct of the legal proceeding, or

(c) the complainant or the person controlling the conduct of the legal proceeding indemnify one or more of the company, a director of the company and an officer of the company for expenses, including legal costs, that they incurred as a result of the legal proceeding.

(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.

(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.
<h4> </h4>
<h4>Relief in legal proceedings</h4>
<ol start="234">
<li> If, in a legal proceeding against a director, officer, receiver, receiver manager or liquidator of a company, the court finds that that person is or may be liable in respect of negligence, default, breach of duty or breach of trust, the court must take into consideration all of the circumstances of the case, including those circumstances connected with the person's election or appointment, and may relieve the person, either wholly or partly, from liability, on the terms the court considers necessary, if it appears to the court that, despite the finding of liability, the person has acted honestly and reasonably and ought fairly to be excused.</li>
</ol>
<h4> </h4>
<h4>Applications to court under this Act</h4>
<ol start="235">
<li>(1) Subject to subsection (2), an application to the court under this Act may be brought without notice unless notice is specifically required under subsection (2) or otherwise under this Act.</li>
</ol>
(2) The court may direct that notice of any application under this Act be served on those persons the court requires.
<h4> </h4>
<h4>Court may order security for costs</h4>
<ol start="236">
<li> If a corporation is the plaintiff in a legal proceeding brought before the court, and if it appears that the corporation will be unable to pay the costs of the defendant if the defendant is successful in the defence, the court may require security to be given by the corporation for those costs, and may stay all legal proceedings until the security is given.”</li>
</ol>
 

 

TOPIC 2: STANDING

 

Now we arrive at the question of “standing”, that being “who” can sue?

Please read the case of First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) 60 Alta. L.R. (2d) 122 (Q.B.) at pages 453-459 of the Casebook.

Note first, that the definition of complainant in that case applies to both oppression and derivative actions.

In B.C., however, there are different definitions:
<ul>
<li>For “complaints by a shareholder (i.e. oppression) see section 227 (1) where “shareholder” can mean beneficial (registered) owner of a share or “any other person whom the court considers to be an appropriate person…”</li>
</ul>
 
<ul>
<li>In respect of “derivative actions” see section 232 (1) where "complainant" “means, in relation to a company, a shareholder or director of the company”.</li>
</ul>
 

The essential legal question in First Edmonton Place Ltd. v. 315888 Alberta Ltd. was whether a creditor of the company was a proper person in the opinion of the court under the Alberta Business Corporations Act? In First Edmonton Place Ltd. v. 315888 Alberta Ltd. a landlord (First Edmonton Place) sued three lawyers through their company” 315888 Alberta Ltd. for an alleged debt arising from the occupancy of the landlord’s premises.

McDonald J. framed thoroughly reviewed the legislative history of the relevant provisions before coming to the conclusion that First Edmonton Place Ltd. was indeed had standing as a proper plaintiff but not because it was a simple creditor:

“Is the applicant a "complainant" entitled to apply for leave to bring an action under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> or <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a>?

In order to obtain leave to bring an action under either of these sections, the applicant must be found to be a "complainant" as defined in s. 231. As the applicant is clearly not within s. 231(b)(ii), First Edmonton Place can satisfy this requirement only if it can come within s. 231(b)(i) or (iii).

Is the applicant a "complainant" within the meaning of s. 231(b)(i)?

It will be recalled that s. 231(b)(i) defines a "complainant" as "a registered holder or beneficial owner, or a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates"… 

This plain meaning reflects the meaning of "bonds, debentures and notes" in the world of corporate financing. In Securities Law and Practice (1984), vol. 1, by V.P. Alboini, bonds and debentures are stated to be the "traditional debt instruments issued by corporations" while notes are "issued by any issuer including individuals" (at pp. 0-33, 0-34).

Is the applicant a "complainant" under s. 231(b)(iii)?

Under s. 231(b)(iii), a person may be a "complainant" if he is a person "who, in the discretion of the Court, is a proper person to make an application under this Part."

This is not so much a definition as a grant to the court of a broad power to do justice and equity in the circumstances of a particular case, where a person who otherwise would not be a "complainant" ought to be permitted to bring an action under either <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> or <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a> to right a wrong done to the corporation which would not otherwise be righted, or to obtain compensation himself or itself where his or its interests have suffered from oppression by the majority controlling the corporation or have been unfairly prejudiced or unfairly disregarded, and the applicant is a "security holder, creditor, director or officer"…

In the case of a creditor who claims to be a "proper person" to make a <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> application, in my view the criterion to be applied would be whether, even if the applicant did not come within s. 231(b)(î) or (ii), he or it would nevertheless be a person who could reasonably be entrusted with the responsibility of advancing the interests of the corporation by seeking a remedy to right the wrong allegedly done to the corporation. The applicant would not have to be a security holder (as I have defined that notion), director or officer of the corporation. The applicant could be a creditor. The applicant might even be a person who at the time of the act or conduct complained of was not a creditor but was a person toward whom the corporation might have a contingent liability. No good purpose would be served in saying more than that now.

I turn now to an application by a person who claims to be a "proper person" to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a>. As in the case of an application made under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a>, an applicant for leave to bring an action under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a> does not have to be a security holder, director or officer. The applicant could be a creditor, or even a person toward whom the corporation had only a contingent liability at the time of the act or conduct complained of. However, it is important to note that he would not be held to be a "proper person" to make the application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a>unless he satisfied the court that there was some evidence of oppression or unfair prejudice or unfair disregard for the interests of a security holder, creditor, director or officer…

 

There are two circumstances in which justice and equity would entitle a creditor to be regarded as "a proper person". (There may be other circumstances; these two are not intended to exhaust the possibilities.) The first is if the act or conduct of the directors or management of the corporation which is complained of constituted using the corporation as a vehicle for committing a fraud upon the applicant. (In the present case there is no evidence suggesting such fraud, although there is some evidence of the directors having used the money paid as a cash inducement for their own personal investment purposes, and that, as I shall later explain, may constitute fraud against the corporation… 

Second, the court might hold that the applicant is a "proper person to make an application" for an order under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec234_smooth">s. 234</a> if the act or conduct of the directors or management of the corporation which is complained of constituted a breach of the underlying expectation of the applicant arising from the circumstances in which the applicant's relationship with the corporation arose. For example, where the applicant is a creditor of the corporation, did the circumstances which gave rise to the granting of credit include some element which prevented the creditor from taking adequate steps, when he or it entered into the agreement, to protect his or its interests against the occurrence of which he or it now complains? Did the creditor entertain an expectation that, assuming fair dealing, its chances of repayment would not be frustrated by the kind of conduct which subsequently was engaged in by the management of the corporation? Assuming that the evidence established the existence of such an expectation, the next question would be whether that expectation was, objectively, a reasonable one.

Thus, in the present case, an inquiry would properly be directed at trial toward whether the lessor, First Edmonton Place, at the time of entering into the lease, consciously and intentionally decided to contract only with the numbered company, and not to obtain personal guarantees from the three lawyers. A further proper inquiry would be into whether the lessor entered into the lease fully aware that it was not protecting itself against the possibility that the corporation might pay out the cash advance to the lawyers, leaving no other assets in the corporation, and that the corporation might permit the lawyers to occupy the space without entering into a sublease either for ten years or for any lesser period. In the absence of evidence establishing at least a prima facie case that an injustice would be done to the lessor or that there would be inequity if the lessor were not allowed to bring its action and go to trial, leave to bring the action ought not to be granted. There is, in the present case, no evidence showing that there was an expectation on the part of the lessor that the lessee corporation would retain the funds in its hands for any set period of time or any time at all. Nor is there any evidence that there was an expectation that the lessee corporation would grant a lease for a term of ten years or any other set term beyond the rent-free period, to the law firm or any other person or persons. It is true that the lease contemplated the possibility that the corporation would enter into a lease with the lawyers, for it specified that the lessee could do so. That falls far short of evidencing the existence of an expectation that there would be a lease for the entire ten-year period or for any set term longer than the rent-free period and less than ten years. Nor does the evidence establish any inequality of bargaining power between First Edmonton Place on the one hand and the three lawyers and their corporation on the other, at the time the lease was being negotiated. If there were some circumstances evidencing such inequality of bargaining power, the result might be different…

CONCLUSION

In the case of the application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a>, the applicant was not a holder of a security or a "creditor" at the time of use of the cash inducement money by the three directors. However, there is some evidence that the cash inducement money was not used for purposes of the corporation and that its use might have been a fraud upon the corporation. If it was a fraud upon the corporation, and if the corporation were entitled to recover the money from the three directors, the applicant may have a genuine interest in advancing the claim to such recovery because the corporation might be liable in damages to the applicant. Therefore the applicant is in my opinion a proper person to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> and should be granted leave to bring an action in the name and on behalf of the corporation in respect of the payment of the cash inducement money to or for the benefit of the three lawyers.

Moreover, as for the three lawyers, as directors of the corporation, permitting themselves as lawyers to occupy the leased premises without paying rent or entering into a lease, whether that conduct constituted a wrong to the corporation is a matter that should be tried. Once again, if there was a wrong, the applicant might ultimately stand to benefit from any recovery by the corporation. Therefore the applicant is in my opinion a proper person to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> in regard to this head of claim and should be granted leave in the same action to advance a claim in the name and on behalf of the corporation in respect of the occupation of the premises by the directors for their own personal purposes and in respect of the failure of the directors to obtain from themselves personally (or their law firm) a sublease for the term of the lease.” (Emphasis added)

Note that section 227 (1) of the BCBCA is an oppression provision comparable to that in First Edmonton Place Ltd. v. 315888 Alberta Ltd. However also note that section 233 (1) of the BCBCA dealing with “derivative actions”, being those where you are suing essentially “on behalf the corporation” is very different. In section 233 (1) of the BCBCA there is no discretionary category; only shareholders (legal or beneficial) or directors have standing to sue.

 

TOPIC 3: STATUTORY REPRESENTATIVE ACTIONS: “DERIVATIVE ACTIONS” 

Please read pages 461-463 of the Casebook.

Please read the following passage from the Supreme Court of Canada’s 2008 decision in BCE Inc. v. 1976 Debentureholders regarding the background and purpose of “derivative actions”.

 

“The first remedy provided by the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>is the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec239">s. 239 </a> derivative action, which allows stakeholders to enforce the directors’ duty to the corporation when the directors are themselves unwilling to do so. With leave of the court, a complainant may bring (or intervene in) a derivative action in the name and on behalf of the corporation or one of its subsidiaries to enforce a right of the corporation, including the rights correlative with the directors’ duties to the corporation. (The requirement of leave serves to prevent frivolous and vexatious actions, and other actions which, while possibly brought in good faith, are not in the interest of the corporation to litigate.)”

Please also reflect on the notion that the need for “derivative actions” arises, at least in part, from the concentration of power and attendant conflicts of interest that often flows from corporate managers overstepping their legal boundaries. Ironically, and sadly, because they are the usual representatives of the “corporate legal personality”, it is often those wrong-doing corporate managers who are cast as the representatives of the corporation which should be investigating them and seeking redress from them on behalf of the corporation and its shareholders. As the author of the casebook points out:

“…however, enforcing these fiduciary duties is difficult if the only actors who can represent the corporation are the very managers who have violated those duties. This explains why other individuals (“complainants”) are permitted to represent the corporation’s interests via the derivative action in circumstances where management fails to assume such responsibility. Since the derivative action is a representative action on behalf of the corporation that seeks recompense for harm done to the corporation, any proceeds awarded from the litigation logically flows to the corporation and not to the complainant.” 

Now please note that per the decision in Shield Development Co. v. Snyder, [1976] 3 W.W.R. 44 (B.C.S.C.) it was found that the B.C. statute limited common law “derivative” actions:

“The legislation does not expressly prohibit the bringing of a common-law derivative action but, in my view, such an action is prohibited by necessary implication. I am unable to see how the two remedies could exist side-by-side without creating confusion to an intolerable degree.”

In this light it may also be worthwhile to revisit section 232 and section 233 of the BCBCA:
<h4>“Derivative actions</h4>
<ol start="232">
<li>(1) In this section and section 233,</li>
</ol>
"complainant" means, in relation to a company, a shareholder or director of the company;

"shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.

(2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company

(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or

(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.

(3) Subsection (2) applies whether the right, duty or obligation arises under this Act or otherwise.

(4) With leave of the court, a complainant may, in the name and on behalf of a company, defend a legal proceeding brought against the company.
<h4> </h4>
<h4>Powers of court in relation to derivative actions</h4>
<ol start="233">
<li>(1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if</li>
</ol>
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,

(b) notice of the application for leave has been given to the company and to any other person the court may order,

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.

(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.

(3) While a legal proceeding prosecuted or defended under this section is pending, the court may,

(a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and

(b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate.

(4) On the final disposition of a legal proceeding prosecuted or defended under this section, the court may make any order it considers appropriate, including an order that

(a) a person to whom costs are paid under subsection (3) (b) repay to the company some or all of those costs,

(b) the company or any other party to the legal proceeding indemnify

(i) the complainant for the costs incurred by the complainant in prosecuting or defending the legal proceeding, or

(ii) the person controlling the conduct of the legal proceeding for the costs incurred by the person in controlling the conduct of the legal proceeding, or

(c) the complainant or the person controlling the conduct of the legal proceeding indemnify one or more of the company, a director of the company and an officer of the company for expenses, including legal costs, that they incurred as a result of the legal proceeding.

(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.

(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.”

 

Please read the cases of Farnham v. Fingold (1973) 2 O.R. 132 (Ont. C.A.) and Goldex Mines Ltd. v. Revill (1974), 7 O.R. (2D) 216. Please also remember the case of First Edmonton Place Ltd. v. 315888 Alberta Ltd. that you read not too long ago. Note that these cases all help define, in one way or another, the distinctions between “derivative” and “oppression” actions.

In Farnham v. Fingold, the Ontario Court of Appeal dealt with an interlocutory motion to strike out a statement of claim for disclosing no reasonable cause of action. The background facts involved the sale of a majority interest in a company for a premium. The same offer was not made to the minority shareholders. The claim alleged that the majority shareholders had a fiduciary obligation to share the premium with the minority shareholders. The decision was among the first Canadian cases to analyze and distinguish between a personal action and a derivative action in consideration of the requirements the Ontario Business Corporations Act.

Jessup J.A. stated:

“Certain parts of the statement of claim in particular all or parts of paras. 22, 23, 29, 32, 34, 36 and 37E are concerned with rights, duties or obligations owed to the defendant Slater Steel Industries Limited or with damage alleged to be suffered by the corporation as a result of the actions of the other defendants. Such matters are properly the subject of a derivative action rather than a class action.” 

On the particular claims at issue the Ontario Court of Appeal dismissing the action as a “derivative action” under the statute, but preserving the possibility of an “oppression action” being validly brought forth.

Goldex Mines Ltd. v. Revill involved the pleadings in a longstanding shareholder battle and again was concerned with the distinction between derivative actions and oppression claims.

The Ontario Court of Appeal dealt with the distinction:

“Where a legal wrong is done to shareholders by directors or other shareholders, the injured shareholders suffer a personal wrong, and may seek redress for it in a personal action. That personal action may be by one shareholder alone, or (as will usually be the case) by a class action in which he sues on behalf of himself and all other shareholders in the same interest (usually, all other shareholders save the wrongdoers). Such a class action is nevertheless a personal action. 

A derivative action, on the other hand, is one in which the wrong is done to the company. It is always a class action, brought in representative form, thereby binding all the shareholders…”

A bit later in the decision the Ontario Court of Appeal quoted with approval from the judgment of Traynor C.J. in the California case of Jones v. H.F. Ahmanson & Co. where the case of Shaw v. Empire Savings & Loan Assoc. was cited:

“…the court [in Shaw] noted the "well established general rule that a stockholder of a corporation has no personal or individual right of action against third persons, including the corporation's officers and directors, for a wrong or injury to the corporation which results in the destruction or depreciation of the value of his stock, since the wrong suffered by the stockholder is merely incidental to the wrong suffered by the corporation and affects all stockholders alike." From this the court reasoned that a minority shareholder could not maintain an individual action unless he could demonstrate the injury was somehow different from that suffered by other minority shareholders. In so concluding the court erred. The individual wrong necessary to support a suit by a shareholder need not be unique to that plaintiff. The same injury may affect a substantial number of shareholders. If the injury is not incidental to an injury to the corporation, an individual cause of action exists.” 

 

In the end the cases of Farnham v. Fingold, Goldex Mines Ltd. v. Revill and First Edmonton Place Ltd. v. 315888 Alberta Ltd. emphasize the necessity for a careful analysis of the nature of the complaint, in particular whether the class of the complaint corporate or individual (personal)? If it is not corporate, a derivative action is not appropriate.

All of this should now become somewhat clearer in looking yet again at section 232(2) of the BCBCA:

 

 “Derivative actions
<ol start="232">
<li> (2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company</li>
</ol>
(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or

(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.”

Please also read he notes on “Prerequisite Steps at pages 471-472 of the Casebook. In relation to that please also read again section 233 of the BCBCA: 

 

“Powers of court in relation to derivative actions
<ol start="233">
<li> (1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if</li>
</ol>
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,

(b) notice of the application for leave has been given to the company and to any other person the court may order,

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.

 

(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.

 

(3) While a legal proceeding prosecuted or defended under this section is pending, the court may,

(a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and

(b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate.

 

(4) On the final disposition of a legal proceeding prosecuted or defended under this section, the court may make any order it considers appropriate, including an order that

(a) a person to whom costs are paid under subsection (3) (b) repay to the company some or all of those costs,

(b) the company or any other party to the legal proceeding indemnify

(i) the complainant for the costs incurred by the complainant in prosecuting or defending the legal proceeding, or

(ii) the person controlling the conduct of the legal proceeding for the costs incurred by the person in controlling the conduct of the legal proceeding, or

(c) the complainant or the person controlling the conduct of the legal proceeding indemnify one or more of the company, a director of the company and an officer of the company for expenses, including legal costs, that they incurred as a result of the legal proceeding.

 

(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.

 

(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.”

 

 

Blog Activity 8.2:

As you review and break down the component elements in section 233 (1) of the BCBCA please also notice the provisions of the OBCA referred to in Armstrong v. Gardner (1978), 20 O.R. (2d) 648 (H.C.) at page 472-473 of the Casebook. What do you think is the explanation for OBCA section 99 (3) (a) requiring that “the shareholder was a shareholder of the corporation at the time of the transaction or other event giving rise to the cause of action…”? Might it be an effective tool to prevent speculation on “derivative actions”? Note that the same sort of limitation does not appear in the bcbca.

 

In this regard it is worth knowing that a “strike suit” is a nuisance legal action. It is brought by a small shareholder with a virtually insignificant interest in a corporation with a view to achieving a profitable settlement before actually going to court. Such actions frequently appeared in the U.S. when the defendant corporation was much larger than the plaintiff and for that reason a settlement amount could be less than what the defendant's legal costs might have been. Strike suits were never common in Canada. A 2005 decision of U.S. Supreme Court (Dura Pharmaceuticals, Inc. v. Broudo, (2005) 544 U.S. 336) made them much more difficult and accordingly they have become less common in the present day.

Are such protections as OBCA section 99 (3) (a) or an analogous decision to the that of the U.S. Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo necessary? Or are such protections subsumed within the potential interpretations of sections 233 (1) (c) and (d) of the BCBCA?:

 

“233. (1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if…

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.”

Please blog your views on these questions and your reasons in less than one page under the heading “Abusive Derivative Actions”.

 

Finally we conclude this part of the discussion with section 233 (6) of the BCBCA, which states:

 

“233. (6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.”

You will recall that we previously studied the possibly salutary impacts of both advance and subsequent shareholder approval to deal contentious issues or remedy errors where not involving fraud or bad faith. It is useful to reflect on how section 233(6) reserves considerable discretion to the court to deal with a special resolution as it sees fit. 

 

TOPIC 4: THE OPPRESSION REMEDY 

Please read pages 490-540 of the Casebook. You will find that you are already familiar with a number of the cases (and even the principles) that you will be reading.

Please note the Casebook authors’ somewhat disconcerting words at the bottom of page 490 of the Casebook:

“Most Canadian jurisdictions have followed the C.B.C.A. lead and enacted an “oppression” remedy. There is a relatively large volume of cases in Canada since the statutory change. One reason for the volume is lack of theory: the remedy is relatively new to Canada. Moreover, precedent is not particularly helpful: the remedy is invoked in a wide variety of circumstances and judges are statutorily empowered to do whatever they want in each case.”

Beginning to sound familiar?

Now please read sections 227 (1) (2) and (3) of the BCBCA:

 

“Complaints by shareholder
<ol start="227">
<li> (1) For the purposes of this section, "shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) A shareholder may apply to the court for an order under this section on the ground

(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or

(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.

 

(3) On an application under this section, the court may, with a view to remedying or bringing to an end the matters complained of and subject to subsection (4) of this section, make any interim or final order it considers appropriate, including an order

(a) directing or prohibiting any act,

(b) regulating the conduct of the company's affairs,

(c) appointing a receiver or receiver manager,

(d) directing an issue or conversion or exchange of shares,

(e) appointing directors in place of or in addition to all or any of the directors then in office,

(f) removing any director,

(g) directing the company, subject to subsections (5) and (6), to purchase some or all of the shares of a shareholder and, if required, to reduce its capital in the manner specified by the court,

(h) directing a shareholder to purchase some or all of the shares of any other shareholder,

(i) directing the company, subject to subsections (5) and (6), or any other person, to pay to a shareholder all or any part of the money paid by that shareholder for shares of the company,

(j) varying or setting aside a transaction to which the company is a party and directing any party to the transaction to compensate any other party to the transaction,

(k) varying or setting aside a resolution,

(l) requiring the company, within a time specified by the court, to produce to the court or to an interested person financial statements or an accounting in any form the court may determine,

(m) directing the company, subject to subsections (5) and (6), to compensate an aggrieved person,

(n) directing correction of the registers or other records of the company,

(o) directing that the company be liquidated and dissolved, and appointing one or more liquidators, with or without security,

(p) directing that an investigation be made under Division 3 of this Part,

(q) requiring the trial of any issue, or

(r) authorizing or directing that legal proceedings be commenced in the name of the company against any person on the terms the court directs.” (Emphasis added)

Now please note differences between sections 227 (1) (2) and (3) of the BCBCA and the equivalent sections of the CBCA section 241:

 

“Application to court re oppression
<ol start="241">
<li>(1) A complainant may apply to a court for an order under this section.</li>
</ol>
 

Grounds

 

(2) If, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates

 (a) any act or omission of the corporation or any of its affiliates effects a result,

 (b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or

 (c) the powers of the directors of the corporation or any of its affiliates 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, the court may make an order to rectify the matters complained of.

 

 Powers of court

 

(3) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,

(a) an order restraining the conduct complained of;

(b) an order appointing a receiver or receiver-manager;

(c) an order to regulate a corporation’s affairs by amending the articles or by-laws or creating or amending a unanimous shareholder agreement;

(d) an order directing an issue or exchange of securities;

(e) an order appointing directors in place of or in addition to all or any of the directors then in office;

(f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder;

(g) an order directing a corporation, subject to subsection (6), or any other person, to pay a security holder any part of the monies that the security holder paid for securities;

(h) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract;

(i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested person financial statements in the form required by section 155 or an accounting in such other form as the court may determine;

(j) an order compensating an aggrieved person;

(k) an order directing rectification of the registers or other records of a corporation under section 243;

(l) an order liquidating and dissolving the corporation;

(m) an order directing an investigation under Part XIX to be made; and

(n) an order requiring the trial of any issue.

 Duty of directors 

(4) If an order made under this section directs amendment of the articles or by-laws of a corporation,

 (a) the directors shall forthwith comply with subsection 191(4); and

 (b) no other amendment to the articles or by-laws shall be made without the consent of the court, until a court otherwise orders.

 

Exclusion

 

 (5) A shareholder is not entitled to dissent under section 190 if an amendment to the articles is effected under this section.

 

Limitation

 

(6) A corporation shall not make a payment to a shareholder under paragraph (3)(f) or (g) if there are reasonable grounds for believing that

 (a) the corporation is or would after that payment be unable to pay its liabilities as they become due; or

 (b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities.

Alternative order 

(7) An applicant under this section may apply in the alternative for an order under section 214.”

 

All of which somewhat begs the question: What is the meaning of “Oppression”? Or put another way what is the standard of what will be considered “Oppression” defined?

To focus on this question this please begin by reading Westfair Foods Ltd. v. Watt [1991] A.J. No. 321 at pages 492-494 of the Casebook.

The facts were that Westfair Foods Ltd. had Class A shares carrying a $2 dividend in priority to the common shares. There were many Class A shareholders and only a single holder of the common shares. The Class A shares were also entitled to share in surplus assets including retained earning in the event of a liquidation. Historically all profits beyond the dividend attached to the class A shares would be retained by Westfair Foods Ltd. as earnings. At a certain point the directors of Westfair Foods Ltd. decided to change the policy and after paying the fixed dividend to the holders of Class A shares, the company paid all of its net earnings to the single common shareholder. The Class A shareholders claimed the new policy was oppressive to their interests.

Kearns J.A. of the Alberta C.A. found the new policy to be oppressive to the Class A shareholders. The logic, reasoning and common sense displayed by the learned judge in examining “oppressive conduct” is well worth reproducing here:

 

“I turn then to the substantial rights conferred by the provision. Obviously, they turn on effect not intent. Equally obviously, they govern all the activities of the corporation. The rights conferred upon shareholders are that they, at any time and in any way during their relationship with the company, are to be insulated from anything oppressive, unfairly prejudicial, or that unfairly disregards their interests. For the relations among shareholders, this is a major modification of majority rule.

In my view, the provisions were and remain a compendious way for Parliament to say to the courts that the classes mentioned in the Act are to be treated fairly in the sense of justly by corporations. For example, both parties cite and rely on Ebrahimi v. Westbourne Galleries, [1973] A.C. 360. Lord Wilberforce there said at p. 379:

... there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the company structure.

I agree with a similar sentiment by McDonald J. in First Edmonton Place v. 315888 Alberta Ltd. 1988 168 (AB QB), (1988), 40 B.L.R. 28 at pp. 59-60, 60 Alta. L.R. (2d) 122, 10 A.C.W.S. (3d) 268 (Q.B.).

I cannot put elastic adjectives like "unfair", "oppressive" or "prejudicial" into watertight compartments. In my view, this repetition of overlapping ideas is only an expression of anxiety by Parliament that one or the other might be given a restrictive meaning… 

Having concluded that the words charge the courts to impose the obligation of fairness on the parties, I must admit that the admonition offers little guidance to the public, and Parliament has left elucidation to us. I have elsewhere said that I take this sort of indirection as legislative delegation: see Transalta Utilities Corp. v. Alberta Public Utilities Board 1986 ABCA 64 , (1986), 43 Alta. L.R. (2d) 171 at p. 180, 68 A.R. 171, 36 A.C.W.S. (2d) 376 (C.A.).

We fail in that duty of elucidation, I think, if we merely say "this is fair" or "that is not fair" without ever explaining why we think this or that is fair. Thus I, and I dare say others, am not much helped by cases and comments that simply announce that I am to enforce "fair play" or "fair dealing": see, for example, Dickerson, op. cit. , para. 48.

On the other hand, I do not understand that the delegation of this duty permits a judge to impose personal standards of fairness. Let me illustrate what is probably obvious by two extreme examples. A judge who firmly believes in the virtues of unrestricted private enterprise might say that fairness requires that people protect themselves to their best capacity, and that the courts not protect those who fail to protect themselves. On the other hand, a judge who firmly believes that private property is a trust held for the benefit of society as a whole might say that what is fair is what best benefits society.

The role of a judge in our society limits the impulses of both my mythical judges. We must not make rules unless we can tie them to values that seem to have gained wide acceptance. We do that largely by testing any proposed rule against other legal rules, which by long tradition seem accepted. In short we seek precedent, or we seek to argue from what we consider to be principles adopted in precedent… 

I will not attempt to catalogue all the rules generated by the words in the statute. For example, the courts have imposed the duty on directors to protect the interests of all shareholders, not just those who elect them. I will later deal with that rule. The authorities also impose upon the majority interest the obligation not to use their electoral power to profit themselves at the expense of minority shareholders. The principal complaint here does not engage that rule. The complaint is not by a minority who has been outvoted. It is by an entire class of shares in competition with another class of shares.

It is said for the shareholders that yet another rule exists. This is that the directors must have due regard for, and deal fairly with, the "interests" of all shareholders. I have concern about over-use of the word interests. This example serves to express it: a thief is very interested in my watch, and will get it if he can. A law about fairness will not, however, show any respect for his interest. The real question is whether the law should accept his obvious interest in financial gain as, in all the circumstances, one that deserves protection. I do not accept that all ambition to acquire property deserves protection. I do accept that our tradition is that a hope for profit, as opposed to a mere desire, sometimes deserves protection.

One deserving case is where the person to whom the profit will go has nourished that hope. The company and the shareholders entered voluntarily, not by duty or chance, into a relationship. Our guides are the rules in other contexts, such as contract law, equity, and partnership law, where the courts have also considered just rules to govern voluntary relationships. In very general terms, one clear principle that emerges is that we regulate voluntary relationships by regard to the expectations raised in the mind of a party by the word or deed of the other, and which the first party ordinarily would realize it was encouraging by its words and deeds. This is what we call reasonable expectations, or expectations deserving of protection. Regard for them is a constant theme, albeit variously expressed, running through the cases on this section or its like elsewhere. I emphasize that all the words and deeds of the parties are relevant to an assessment of reasonable expectations, not necessarily only those consigned to paper, and not necessarily only those made when the relationship first arose.

I do not for a moment suggest that that analysis about expectations deserving protection is the sole basis for rules under the statute. I think, for example, of totally unforeseen windfalls or calamities. This is not such a case, but I dare say that even in those cases the expectations of the parties are a sound starting point. And the test will always be helpful in cases where mere interests collide.

The test then is always facts-specific, and cases decided on other facts offer only a limited guide. Unfortunately, no other reported case offers the same facts as this.” (Emphasis added)

 

As a footnote it is well worth drawing your attention to a fuller version of the classic statement made by Lord Wilberforce in Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360 at 379 which was quoted by Kearns J.A. immediately above:

“The foundation of it all lies in the words ‘just and equitable’ and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own; that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Company Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The ‘just and equitable’ provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.”

 

Next please read again, but from a somewhat different perspective, the case of Deluce Holdings Inc. v. Air Canada (1992) 98 D.L.R. 94th) 509 (Gen. Div.) at pages 494-502 of the Casebook.

In this case Air Canada owned 75% of the shares of Air Ontario and De Luce Holdings Ltd. (controlled by the De Luce family) owned the remaining 25%. The interests of both Air Canada and De Luce Holdings Ltd. were held in a numbered company, 152160 Canada Inc. The board of directors of Air Ontario was comprised of 7 nominees of Air Canada and 3 nominees from De Luce. William De Luce was named president of Air Ontario. At a certain point Air Canada changed its business strategy to seek 100% control of its regional carriers. Despite apparently doing a good job William De Luce was asked to resign by the Air Canada board representatives. He refused and was terminated by the board of Air Ontario, which in turn was controlled by Air Canada nominees. The “Unanimous Shareholders Agreement” of 152160 Canada Inc. governed the relationship between Air Canada and the De Luce family interests. That agreement provided Air Canada with an option to acquire the De Luce shareholdings in Air Ontario at “fair market value” (to be arbitrated if not agreed upon) upon termination either by Air Ontario or 152160 Canada Inc. of the employment of the last of William De Luce of his father Stanley De Luce. Apparently, termination could be “for any reason”. In February 1989 the employment of Stanley De Luce ended and not renewed. In October 1991 William De Luce terminated by a decision of the board of 152160 Canada Inc.

 

De Luce Holdings Ltd alleged oppression. They argued that since the since the oppressive actions of Air Canada to the De Luce Family as shareholders in Air Ontario were the foundation of the arbitration that sought to determine the value of the shares which the De Luce family were required to sell to Air Canada, the arbitration should be stopped.

Blair J. noted that the motivation for terminating William De Luce as president of Air Ontario was the pursuit of a perfectly legitimate corporate objective on the part of Air Canada. However two questions commended themselves:
<ol>
<li>Was Air Canada entitled to its use majority position on the board of Air Ontario for the predominant purpose of carrying out Air Canada’s corporate objective (as opposed to the corporate objective of Air Ontario), or whether such conduct was “oppressive” of the minority shareholders in Air Ontario?;</li>
<li>If oppressive, then does that oppressiveness undercut the apparent right under the Unanimous Shareholders Agreement to terminate William De Luce “for any reason” (and thus triggering Air Canada’s call on the De Luce family shares)?</li>
</ol>
 

The Court decided to use its discretion to stay the arbitration proceedings. Air Canada’s nominee directors had too obviously disregarded the interests of other stakeholders. Whether there were sufficient reasons to terminate Mr. De Luce, it was obvious to the court that the nominee directors had failed to conduct such any legitimate and focused analysis and were in fact guided by Air Canada's corporate agenda. This sort of behavior was deemed oppressive and in breach of the nominees' fiduciary duty to Air Ontario.

Ironically (and unusually) invoking the arbitration clause might be said to have been oppressive in itself. The Court reasoned that the majority shareholder "visited oppression upon a minority shareholder" and the majority’s conduct was found to be unfairly prejudicial and to have unfairly disregarded the interests of the minority shareholder.

Blair J. had the following to say on the subject of “Oppression”:

“In my view, the conduct of Air Canada and its nominee directors, as outlined above, could be found, after a trial, to constitute "oppression” of Deluceco’s interests as a minority shareholder in Air Ontario. While the conduct may not constitute “oppression” in the classic sense of conduct which is “lacking in probity” or “burdensome, harsh and wrongful”, it may nonetheless be conduct which is “unfairly prejudicial” to or which “unfairly disregards” the interests of Deluceco as a minority shareholder, contrary to s. 241 of the C.B.C.A. The authorities make it clear that this distinction exists and that the latter sort of conduct constitutes grounds that are “less rigorous” than oppression…”

On the subject of the distinction between “legal rights” and the interests or expectations of shareholders Blair J. said the following:

“Cases dealing with oppression remedy situations have emphasized the distinction between the strict "legal rights" of shareholders and their “interests”. For instance, in Westfair Foods Ltd. v. Watt…[1990] 4 W.W.R. 685…Moore C.J.Q.B stated at page 59: 

An examination of the leading cases dealing with the C.B.C.A. and in particular s. 241, is worthwhile. In enacting s. 241, Parliament obviously intended that strict attention should be paid to the interests of all shareholders, not just the legal rights of shareholders.

(Emphasis in original.)

Mr. Justice Farley elaborated on this distinction in 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R (2d) at p.123… by commenting on the connection between shareholder “interests” and shareholder “expectations”. At pp. 185–6 he said:

Shareholder interests would appear to be intertwined with shareholder expectations. It does not appear to me that the shareholder expectations which are to be considered are those that a shareholder has as his own individual “wish list”. They must be expectations which could be said to have been (or ought to have been considered as) part of the compact of the shareholders…”

Please read the very useful notes and questions at pages 502-507 of the Casebook. In particular please note the useful summary set out by Killeen J. In Krynen v. Bugg (2003) 64 O.R. (3d) 393 (S.C.J.):

 

“A summary of the leading principles and guiding rules which has come out of that case law would include the following:

(1) The overriding lodestar principle of oppression law is that, 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. The cases on this issue have been helpfully collected and reviewed by Farley J. in 8200099 Ontario Inc. v. Harold E. Ballard Ltd. (1992) 3 B.L.R. (2d) 123 (Ont. Gen. Div.) where he said this at pp. 185-86:

Shareholder interests would appear to be intertwined with shareholder expectations. It does not appear to me that the shareholder expectations which are to be considered are those that a shareholder has as his own individual “wish list”. They must be expectations which could be said to have been (or ought to have been considered as) part of the compact of the shareholders.

This statement of principle by Farley J. was expressly approved of by the Ontario Court of Appeal in its important judgment in Naneff v. Con-Crete Holdings Limited et. al. 1995 959 (ON CA), (1995), 23 O.R. (3d) 481 (C.A.) at p. 490.

(2) The term “oppression” connotes an inequality of bargaining power while “unfairness” connotes an obligation to act equitably and impartially in the exercise of power and authority: Re Alldrew Holdings Ltd. v. Nibro Holdings 1993 5509 (ON SC), (1993), 16 O.R. (3d) 718 at p. 732. (Ont. Gen. Div.)

(3) The terms, “unfair prejudice to” and “unfair disregard of the interests of” require less rigorous tests than oppression. Where on the totality of the evidence the actions and conduct complained of go beyond mere inconvenience and lack of information, and the interests of the complainant have been unfairly disregarded, the complainant will be entitled to a remedy: Re Mason and Intercity Properties Ltd. 1987 173 (ON CA), (1987), 59 O.R. (2d) 631, at p. 635. (Ont. C.A.)

(4) There is no requirement that bad faith must be shown before an order to rectify a complaint may be made in an oppression case: Re Sidaplex-Plastic Suppliers Inc. v. Elta Group Inc. 1998 5847 (ON CA), (1998), 40 O.R. (3d) 563 at p. 567 (C.A.); Loveridge Holdings v. King-Pin Ltd. reflex, (1992), 5 B.L.R. (2d) 195, at p. 203 (Ont.Gen. Div.)

(5) Where expectations are apparently reasonable on their face but where there is a contract dealing with these expectations, the reasonableness of these expectations cannot prevail over the contract.

(6) Reasonable expectations are not necessarily “static” or frozen expectations and may evolve or change as the principals adapt their arrangements from time to time: 820099 Ontario Inc. v. Harold Ballard Ltd., supra, at p. 191.

(7) The business and affairs of a corporation are managed by or under the direction of its board of directors. The “business judgment rule” operates to shield from court intervention business decisions which have been made honestly, prudently, in good faith and on reasonable grounds. In such cases, the board’s decisions will not be subject to microscopic examination and the court will be reluctant to interfere with and usurp the board’s function in managing the corporation: Re C.W. Shareholdings Inc. v. WIC Western International Communications Ltd. 1998 14838 (ON SC), (1998), 39 O.R. (3d) 755 at para. 57 (Ont.Gen. Div.); Brant Investments Ltd. v. Keeprite Inc. 1991 2705 (ON CA), (1991), 3 O.R. (3d) 289, at pp. 320-21. (C.A.) A useful three-part test or approach has been suggested for the application of the business judgment rule:

(1) Was the impugned conduct outside the range of reasonable business judgment?

(2) Was the impugned conduct inconsistent with the reasonable expectations of the complainant?

(3) Did the impugned conduct cause prejudice to the complainant?

 Main v. Delcan Group Inc.(1999), 47 B.C.R. (2d) 200 at para. 31 (Ont. S.C.J.).

The Ontario Court of Appeal has also considered the rule in Pente Investment Management Ltd. v. Schneider Corp., 1998 5121 (ON CA), (1998), 44 B.L.R. (2d) 115, at para. 36 (C.A.):

The law as it has evolved in Ontario and Delaware has the common requirements that the court must be satisfied that the directors have acted reasonably and fairly. The court looks to see that the directors made a reasonable decision not a perfect decision. Provided the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board’s determination. As long as the directors have selected one of several reasonable alternatives, deference is accorded to the board’s decision…. This formulation of deference to the decision of the Board is known as the “business judgment rule”. The fact that alternative transactions were rejected by the directors is irrelevant unless it can be shown that a particular alternative was definitely available and clearly more beneficial to the company than the chosen transaction….”

See, also, Themadel Foundation v. Third Can. General Investment Trust 1998 973 (ON CA), (1998), 38 O.R. (3d) 749 at 754 (C.A.).

(8) Actual or material loss is not a prerequisite to a finding either of oppression, unfair prejudice or unfair disregard of interest. The object of the remedies available under s.248(3) is to prevent the continuation of the misconduct in question if it is established that a harm or detriment, in the sense of infringement of rights or privileges, will follow in the absence of restraining such misconduct. On this issue, the concept of detriment as a prerequisite to obtaining a remedy is similar to the concept inherent in a quia timet injunction – even if there is no material loss or damage at the time but reasonable grounds are established to apprehend the same occurring if there is no relief granted, the applicant for the quia timet remedy will be entitled to the relief sought. Thus, in establishing unfair disregard of the applicant’s interests as a result of misconduct, there is no requirement that there be actual detriment or loss to the applicant: Sahota v. Basra 1999 14945 (ON SC), (1999), 45 B.L.R. (2d) 143, at para. 30 (Ont. General Div.).

(9) Wrongful dismissal, standing alone, will not justify a finding of oppression. It is only where the interests of the employee are closely intertwined with his interests as a shareholder, and where the dismissal is part of a pattern of conduct to exclude the complainant from participation in the corporation, that the dismissal can be found to be an act of oppression: Naneef v. Con-Crete Holding Ltd. reflex, (1993) 11 B.L.R. (2d) 218 at para. 125; Koehner, “The Oppression Remedy: Reasonable Expectations” (1994) 73 Can. Bar. Rev. 274 at 278.”

 

You are already acquainted with the case of BCE Inc. v. 1976 Debentureholders [2008] 3 S.C.R. 560. In that case the Supreme Court of Canada made the following observations concerning the remedy of “oppression”:

“ B. The <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">Section 241 </a> Oppression Remedy

 The debentureholders in these appeals claim that the directors acted in an oppressive manner in approving the sale of BCE, contrary to <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a> of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>.

Security holders of a corporation or its affiliates fall within the class of persons who may be permitted to bring a claim for oppression under <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a> of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>. The trial judge permitted the debentureholders to do so, although in the end he found the claim had not been established. The question is whether the trial judge erred in dismissing the claim.

We will first set out what must be shown to establish the right to a remedy under <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a>, and then review the conduct complained of in the light of those requirements. 

(1) The Law

Section 241(2) provides that a court may make an order to rectify the matters complained of where

(a) any act or omission of the corporation or any of its affiliates effects a result,

(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or

(c) the powers of the directors of the corporation or any of its affiliates 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…

<a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">Section 241 </a> jurisprudence reveals two possible approaches to the interpretation of the oppression provisions of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA </a>: M. Koehnen, Oppression and Related Remedies (2004), at pp. 79-80 and 84. One approach emphasizes a strict reading of the three types of conduct enumerated in <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a> (oppression, unfair prejudice and unfair disregard): see Scottish Co-operative Wholesale Society Ltd. v. Meyer, [1959] A.C. 324 (H.L.); Diligenti v. RWMD Operations Kelowna Ltd. (1976), 1 B.C.L.R. 36 (S.C.); Stech v. Davies, [1987] 5 W.W.R. 563 (Alta. Q.B.). Cases following this approach focus on the precise content of the categories “oppression”, “unfair prejudice” and “unfair disregard”. While these cases may provide valuable insight into what constitutes oppression in particular circumstances, a categorical approach to oppression is problematic because the terms used cannot be put into watertight compartments or conclusively defined. As Koehnen puts it (at p. 84), “[t]he three statutory components of oppression are really adjectives that try to describe inappropriate conduct…The difficulty with adjectives is they provide no assistance in formulating principles that should underlie court intervention.”

Other cases have focused on the broader principles underlying and uniting the various aspects of oppression: see First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988), 40 B.L.R. 28 (Alta. Q.B.), var’d (1989), 45 B.L.R. 110 (Alta. C.A.); 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 113 (Ont. Div. Ct.); Westfair Foods Ltd. v. Watt (1991), 79 D.L.R. (4th) 48 (Alta. C.A.).

In our view, the best approach to the interpretation of <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241subsec2">s. 241(2) </a> is one that combines the two approaches developed in the cases. One should look first to the principles underlying the oppression remedy, and in particular the concept of reasonable expectations. If a breach of a reasonable expectation is established, one must go on to consider whether the conduct complained of amounts to “oppression”, “unfair prejudice” or “unfair disregard” as set out in <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241subsec2">s. 241(2) </a> of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en">CBCA</a>.

We preface our discussion of the twin prongs of the oppression inquiry by two preliminary observations that run throughout all the jurisprudence.

First, oppression is an equitable remedy. It seeks to ensure fairness — what is “just and equitable”. It gives a court broad, equitable jurisdiction to enforce not just what is legal but what is fair: Wright v. Donald S. Montgomery Holdings Ltd. (1998), 39 B.L.R. (2d) 266 (Ont. Ct. (Gen. Div.)), at p. 273; Re Keho Holdings Ltd. and Noble (1987), 38 D.L.R. (4th) 368 (Alta. C.A.), at p. 374; see, more generally, Koehnen, at pp. 78-79. It follows that courts considering claims for oppression should look at business realities, not merely narrow legalities: Scottish Co-operative Wholesale Society, at p. 343.

Second, like many equitable remedies, oppression is fact-specific. What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive in one situation may not be in another.

Against this background, we turn to the first prong of the inquiry, the principles underlying the remedy of oppression. In Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360 (H.L.), at p. 379, Lord Wilberforce, interpreting s. 222 of the U.K. Companies Act, 1948, described the remedy of oppression in the following seminal terms:

‘The words [“just and equitable”] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure.’

Lord Wilberforce spoke of the equitable remedy in terms of the “rights, expectations and obligations” of individuals. “Rights” and “obligations” connote interests enforceable at law without recourse to special remedies, for example, through a contractual suit or a derivative action under <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec239">s. 239 </a> of the CBCA. It is left for the oppression remedy to deal with the “expectations” of affected stakeholders. The reasonable expectations of these stakeholders is the cornerstone of the oppression remedy.

As denoted by “reasonable”, the concept of reasonable expectations is objective and contextual. The actual expectation of a particular stakeholder is not conclusive. In the context of whether it would be “just and equitable” to grant a remedy, the question is whether the expectation is reasonable having regard to the facts of the specific case, the relationships at issue, and the entire context, including the fact that there may be conflicting claims and expectations.

Particular circumstances give rise to particular expectations. Stakeholders enter into relationships, with and within corporations, on the basis of understandings and expectations, upon which they are entitled to rely, provided they are reasonable in the context: see 820099 Ontario; Main v. Delcan Group Inc. (1999), 47 B.L.R. (2d) 200 (Ont. S.C.J.). These expectations are what the remedy of oppression seeks to uphold.

Determining whether a particular expectation is reasonable is complicated by the fact that the interests and expectations of different stakeholders may conflict. The oppression remedy recognizes that a corporation is an entity that encompasses and affects various individuals and groups, some of whose interests may conflict with others. Directors or other corporate actors may make corporate decisions or seek to resolve conflicts in a way that abusively or unfairly maximizes a particular group’s interest at the expense of other stakeholders. The corporation and shareholders are entitled to maximize profit and share value, to be sure, but not by treating individual stakeholders unfairly. Fair treatment — the central theme running through the oppression jurisprudence — is most fundamentally what stakeholders are entitled to “reasonably expect”.

Section 241(2) speaks of the “act or omission” of the corporation or any of its affiliates, the conduct of “business or affairs” of the corporation and the “powers of the directors of the corporation or any of its affiliates”. Often, the conduct complained of is the conduct of the corporation or of its directors, who are responsible for the governance of the corporation. However, the conduct of other actors, such as shareholders, may also support a claim for oppression: see Koehnen, at pp. 109-10; GATX Corp. v. Hawker Siddeley Canada Inc. (1996), 27 B.L.R. (2d) 251 (Ont. Ct. (Gen. Div.)). In the appeals before us, the claims for oppression are based on allegations that the directors of BCE and Bell Canada failed to comply with the reasonable expectations of the debentureholders, and it is unnecessary to go beyond this.

The fact that the conduct of the directors is often at the centre of oppression actions might seem to suggest that directors are under a direct duty to individual stakeholders who may be affected by a corporate decision. Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debentureholders in these appeals. This is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen. However, the directors owe a fiduciary duty to the corporation, and only to the corporation. People sometimes speak in terms of directors owing a duty to both the corporation and to stakeholders. Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases (such as these appeals) may arise where these interests do not coincide. In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation.

Having discussed the concept of reasonable expectations that underlies the oppression remedy, we arrive at the second prong of the <a href="https://zoupio.lexum.com/calegis/rsc-1985-c-c-44-en#!fragment/sec241">s. 241 </a>oppression remedy. Even if reasonable, not every unmet expectation gives rise to claim under s. 241. The section requires that the conduct complained of amount to “oppression”, “unfair prejudice” or “unfair disregard” of relevant interests. “Oppression” carries the sense of conduct that is coercive and abusive, and suggests bad faith. “Unfair prejudice” may admit of a less culpable state of mind, that nevertheless has unfair consequences. Finally, “unfair disregard” of interests extends the remedy to ignoring an interest as being of no importance, contrary to the stakeholders’ reasonable expectations: see Koehnen, at pp. 81-88. The phrases describe, in adjectival terms, ways in which corporate actors may fail to meet the reasonable expectations of stakeholders.

In summary, the foregoing discussion suggests conducting two related inquiries in a claim for oppression: (1) Does the evidence support the reasonable expectation asserted by the claimant? and (2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest?” (Emphasis added)

In the end the Supreme Court of Canada approved the arrangement as fair and dismissed the claim for oppression. Of particular note, though of some frustration to those who want hard and fast “rights based” rules, is the acknowledgment that the court made that oppression is fact-specific: 

“What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive in one situation may not be in another.”

Blog Activity 8.3: 

In the “Introduction” to this unit you were invited to “…stay on the lookout in this unit…for situations where the relative “equality’ of the parties has some impact on the law evolving in a murkier rather then clearer way”. Does the stress on facts as dictating legal consequences embodied by the court’s approach in BCE Inc. v. 1976 Debentureholders serve to reinforce the subjectivity of “oppression” as a remedy and effectively prevent it from ever being used as a “right” that can truly reform corporate conduct? Please blog your views on this question and your reasons in less than one page under the heading “Oppression: Remedy v. Right”.

 

Finally on the subject of “Minority Protection” let’s look (once again) at the cases of First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) 60 Alta. L.R. (2d) 122 (Q.B.) at pages 511-519 of the Casebook; and Hercules Managements Ltd. v. Ernst & Young [1997] 2 S.C.R. 165 at pages 519-522 of the Casebook.

As you will recall First Edmonton Place Ltd. v. 315888 Alberta Ltd. involved three lawyers and their landlord, and the question focussed upon earlier was what sort of “interest” a creditor would have to have in order to achieve standing in a “derivative” or “oppression” action. In the present context what is noteworthy about the decision in First Edmonton Place Ltd. v. 315888 Alberta Ltd. is what might be thought of as the “impact-oriented focus on harm” taken by the Court of Queen’s Bench of Alberta. In the end leave to bring a “derivative action” was granted but First Edmonton Place Ltd. was not permitted to bring an “oppression” action.

McDonald J. made these observations:

“Assuming the absence of fraud, in what other circumstances would a remedy under s. 234 be available? In deciding what is unfair, the history and nature of the corporation, the essential nature of the relationship between the corporation and the creditor, the type of rights affected and general commercial practice should all be material. More concretely, the test of unfair prejudice or unfair disregard should encompass the following considerations: the protection of the underlying expectation of a creditor in its arrangement with the corporation, the extent to which the acts complained of were unforeseeable or the creditor could reasonably have protected itself from such acts, and the detriment to the interests of the creditor. The elements of the formula and the list of considerations as I have stated them should not be regarded as exhaustive. Other elements and considerations may be relevant, based upon the facts of a particular case…

CONCLUSION

In the case of the application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a>, the applicant was not a holder of a security or a "creditor" at the time of use of the cash inducement money by the three directors. However, there is some evidence that the cash inducement money was not used for purposes of the corporation and that its use might have been a fraud upon the corporation. If it was a fraud upon the corporation, and if the corporation were entitled to recover the money from the three directors, the applicant may have a genuine interest in advancing the claim to such recovery because the corporation might be liable in damages to the applicant. Therefore the applicant is in my opinion a proper person to make an application under s. 232 and should be granted leave to bring an action in the name and on behalf of the corporation in respect of the payment of the cash inducement money to or for the benefit of the three lawyers.

Moreover, as for the three lawyers, as directors of the corporation, permitting themselves as lawyers to occupy the leased premises without paying rent or entering into a lease, whether that conduct constituted a wrong to the corporation is a matter that should be tried. Once again, if there was a wrong, the applicant might ultimately stand to benefit from any recovery by the corporation. Therefore the applicant is in my opinion a proper person to make an application under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec232_smooth">s. 232</a> in regard to this head of claim and should be granted leave in the same action to advance a claim in the name and on behalf of the corporation in respect of the occupation of the premises by the directors for their own personal purposes and in respect of the failure of the directors to obtain from themselves personally (or their law firm) a sublease for the term of the lease.

Granting leave to bring the statutory derivative action under s. 232 does not in any way imply that on the basis of the evidence placed before me I am of the view that the action is likely to succeed. As to that, of course, I offer no opinion…

In the case of the application under s. 234, leave to bring an action in regard to either claim is denied because the applicant was not a creditor at the time of the act or conduct complained of.” (Emphasis added)

These two cases do not add all that much to what we are already familiar with from the decision in Robak Industries Ltd. v. Gardner, 2007 BCCA 61 discussed in Unit 2.

 

In Robak Industries Ltd. v. Gardner, (<a href="http://www.110.com/panli/panli_87908.html">http://www.110.com/panli/panli_87908.html</a>) you may recall that the B.C. Court of Appeal considered the case of Mr. Gardner, a director of Getty Copper Incorporated, a public company. Mr. Gardner was alleged to have conspired with others to injure John Lepinski and the company he wholly owned, Robak Industries Ltd., by "unlawful means" including seizing control of a public company, “Getty Copper Incorporated”, and its board; discrediting and ousting Mr. Lepinski; setting aside a development agreement and acquiring 100% of Getty South a company related to Getty Copper Incorporated; "applying economic duress to Getty" and "inducing Blake Cassels & Graydon to breach their duties to Getty". There were also allegations of defamation in connection with the affairs of Getty Copper Incorporated. Robak Industries Ltd.’s claim for damages for the defamatory statements included a "loss in the value of…a substantial interest in the shares of Getty".

 

Madam Justice Levine dealt with an appeal from a lower court decision striking out certain portions of the Statement of Claim in the case on the ground that the allegations and claims made in those portions disclosed no reasonable cause of action. Excerpts from her decision follow:

 

“The appellants do not contest the principle that a shareholder cannot claim a loss that is the direct result of wrongs to the company. They do not dispute that if the value of the shares of the company diminishes because of damage to the company, the loss in share value is "reflective" of the company’s loss. The appellants claim, however, that their loss is not reflective of a loss to Getty. The loss they claim is the loss of the value of their shares in the marketplace, which, they say, Getty could not claim. The appellants allege that the market forces which caused the fall in value of their shares are separate and independent from any losses which Getty may have suffered from the wrongdoings alleged. In other words, they deny that the loss in value of their Getty shares is a "reflective loss".

 

The appellants argue that in Hercules, the Supreme Court left the door open to actions by shareholders, even where the corporation may also have a separate and distinct cause of action. Justice LaForest wrote (at para. 62):

One final point should be made here. Referring to the case of Goldex Mines Ltd. v. Revill (1974), 7 O.R. (2d) 216 (C.A.), the appellants submit that where a shareholder has been directly and individually harmed, that shareholder may have a personal cause of action even though the corporation may also have a separate and distinct cause of action. Nothing in the foregoing paragraphs should be understood to detract from this principle. In finding that claims in respect of losses stemming from an alleged inability to oversee or supervise management are really derivative and not personal in nature, I have found only that shareholders cannot raise individual claims in respect of a wrong done to the corporation. Indeed, this is the limit of the rule in Foss v. Harbottle. Where, however, a separate and distinct claim (say, in tort) can be raised with respect to a wrong done to a shareholder qua individual, a personal action may well lie, assuming that all the requisite elements of a cause of action can be made out…

 

The appellants say that the English cases provide other examples of cases where shareholders were allowed to bring claims in respect of wrongs also done to the companies in which they owned shares. They argue that new and novel approaches to legal principles should not be struck out at the pleadings stage, but should be allowed to proceed to trial to be tested on evidence and full argument.

 

The respondents’ answer is that under Canadian law the appellants have no claim, and that the English cases are at best equivocal about the circumstances in which a shareholder may be permitted to claim a loss in value of the shares of a company for wrongs done to the company…

 

The appellants suggest that Goldex Mines Ltd. v. Revill et al. (1974), 7 O.R. (2d) 216 (Ont. C.A.), mentioned in Hercules, supports their claim to a separate cause of action for a wrong done to Getty. In Goldex, the Ontario Court of Appeal considered the distinction between a personal action by a shareholder for a personal wrong and a derivative action brought on behalf of the corporation for a wrong done to the corporation. The Court pointed out that an action may be brought by several shareholders for the same personal wrong. It stated:

In Farnham v. Fingold, supra, this Court was not required, on the facts of that case, to consider a situation where the same wrongful act is both a wrong to the company and a wrong to each individual shareholder. In one sense every injury to a company is indirectly an injury to its shareholders. On the other hand, if one applies the test: "Is this wrongful act one in respect of which the company could sue?", a shareholder who is personally and directly injured must surely be entitled to say, as a matter of logic, "the company cannot sue for my injury; it can only sue for its own."

 

The converse is, of course, also true. Where the company is injured, an individual shareholder cannot sue for the company’s injury; the shareholder can only sue for its own. Loss reflective of a loss suffered by the company is not the shareholder’s personal loss.

 

There are good reasons for not allowing a shareholder to claim the loss in value of its shares where a wrong has been done to the company. As explained by Laskin J.A. in Meditrust (at para. 13); La Forest J. in Hercules (at para. 59), and McKenzie J. in Rogers at 78-81 (citing Prudential Assurance and Green v. Victor Talking Mach. Co., 24 F. 2d 378 (1928) (C.A. 2nd Circ.)), the rule avoids a multiplicity of actions. Further, and consistent with the legal theory of Foss v. Harbottle, the loss in value of shares of a company is a loss of all of the shareholders, not just one or some of them. There is no logic that would allow only one shareholder to claim that loss, where the claim relates to wrongs done to the company, and all of the shareholders have suffered the loss in value. A single shareholder cannot claim that the loss in value of the shares, per se, is a personal, direct loss…

 

Summary and Conclusion

 

The appellants’ arguments, based on the consideration of the rule in Foss v. Harbottle in other jurisdictions, does not reveal that the chambers judge made any error in striking out the portions of the Further Amended Statement of Claim. She did not apply the wrong test for striking pleadings; she considered whether the appellants had a reasonable cause of action, including a valid claim for damages. She applied binding Canadian law, which has been considered and affirmed in a persuasive judgment of the Ontario Court of Appeal in Meditrust. In both Rogers and Meditrust, shareholders claimed losses in the value of their shares as the result of an alleged conspiracy against them involving wrongs done to the company, and in both cases the claims were dismissed. The chambers judge did not decide, contrary to the appellants’ arguments, that a shareholder may never bring a claim for the diminution in the value of the shareholder’s shares, but confirmed, by reference to Hercules and Haig, that a shareholder may have a cause of action for loss in the value of shares where the shareholder has both an "independent relationship" with the wrongdoer and an "independent loss" from that of the company to whom the wrong has been done. She decided that in this case, the appellants had not shown that they have a cause of action for an "independent loss" in respect of wrongs done to Getty. I agree with her conclusion.”

 

 

 

 

 

TOPIC 5: DISTINGUISHING “OPPRESSION” CLAIMS & “DERIVATIVE” ACTIONS 

 

As can be seen from the cases canvassed above it can be somewhat challenging to tell when a particular set of facts is appropriate for a derivative action and when a claim for oppression is the way to go. Because, as can be readily seen from the cases, these sorts of determinations by the courts are highly reliant on the facts and tend at the same time to be reluctant to impose hard an fast rules, you are legitimately entitled to some degree of confusion. That said a number of general distinctions between oppression claims and derivative actions can be divined (changes as always TBA by the courts).

 

The source of the following list is an excellent short article called “Distinguishing Oppression Claims and Derivative Actions” by Tracey M. Cohen, T. Mark Pontin, and Graeme Hooper which can be found here: 

<a href="http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf">http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf</a>

 
<ul>
<li>Oppression claims are personal to the shareholder, while derivative claims involve harm to the company. </li>
</ul>
 
<ul>
<li>The substantive standard for a finding of liability is different. The issue when it comes to oppression proceeding is whether a complainant’s reasonable expectation has been inequitably violated in an oppressive or unfairly prejudicial manner. A derivative action requires proof of a legal wrong.</li>
</ul>
 
<ul>
<li>Oppression remedies are broad and flexible while those in derivative actions tend to be standard remedies tied to the precise cause of action.</li>
</ul>
 
<ul>
<li>Timing: Oppression proceedings must be brought in a timely manner, while it is not particularly a factor when it comes to derivative actions.</li>
</ul>
 
<ul>
<li>Costs: Generally speaking successful derivative action claimants will recover costs on a “solicitor-client basis, while successful oppression claimants will only recover tariffed costs.</li>
</ul>
 
<ul>
<li>Leave of the court is required to commence a derivative action but not an oppression action. </li>
</ul>
 
<ul>
<li>Oppression claim are generally commenced by way of court petition proceeding, while derivative claims are standard civil claims. </li>
</ul>
 

 

TOPIC 6: “WITH GREAT POWER…”

 

All of this fussing about with the rules of corporate law (as mundane or fascinating as you may find them) can be seen as missing a larger and more disturbing point. That is that the “product” of the practice of corporate law - corporations themselves - have been known to perpetrate dastardly deeds on a not insignificant number of occasions. More disturbing to the legal practitioner is that (arguably) on many of these occasions the lawyers involved were just doing their jobs, being creating companies or facilitating the legal continuation of a corporations existence, or the expression of its independent corporate personality. Surely we don’t bear responsibility for the nefarious outcomes that can flow from “limited liability”, separate corporate personhood, the lack of accountability of subsidiaries, or the politics of board/shareholder approvals? Or do we? Should we?

 

What follows are a series of sources to help remind you of the scandals and more importantly of the role lawyers and the law have in both contributing to the conditions which formed evil, and hopefully in constructively addressing those issues and the problems that they contributed to. As you review each, ask yourself:
<ul>
<li>Were there lawyers around?</li>
<li>What were they doing?</li>
<li>Did they know things were going awry?</li>
<li>Did they try and do anything about it?</li>
</ul>
 
<ol>
<li> Conrad Black </li>
</ol>
For some background on the Black saga, please read:

The Wall Street Journal Article entitled “Report Slams Hollinger's Black For a 'Corporate Kleptocracy'”, which you may find at: <a href="http://online.wsj.com/news/articles/SB109395499363105646">http://online.wsj.com/news/articles/SB109395499363105646</a>

 

Please review but not read in detail: Catalyst Fund General Partner Inc. v. Hollinger Inc., 2004 CanLII 40665 (ON SC) <a href="http://canlii.ca/t/1j6qd">http://canlii.ca/t/1j6qd</a>

 

Please watch the BBC program “The Fall of Conrad Black” which you can find at <a href="http://www.youtube.com/watch?v=CIRRUvjkLJo">http://www.youtube.com/watch?v=CIRRUvjkLJo</a>

 

Finally, please read, “Law Society of Upper Canada appeals exoneration of two Conrad Black lawyers” at: <a href="http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html">http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html</a>
<h1></h1>
 
<ol>
<li> Garth Drabinsky </li>
</ol>
 

Please read “Livent co-founders Drabinsky, Gottlieb convicted of fraud and forgery” here: <a href="http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convicted-of-fraud-and-forgery-1.778879">http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convicted-of-fraud-and-forgery-1.778879</a>

 

Please read “Livent case turns spotlight on Canada’s undramatic whitecollar prosecutions” at: <a href="http://www.thespec.com/news-story/2272130-livent-case-turns-spotlight-on-canada-s-undramatic-white-collar-prosecutions/">http://www.thespec.com/news-story/2272130-livent-case-turns-spotlight-on-canada-s-undramatic-white-collar-prosecutions/</a>

 

Please read “Law society revokes Garth Drabinsky’s licence over fraud convictions” at: <a href="http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html">http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html</a>
<h1></h1>
Please read “The six most outrageous quotes from Garth Drabinsky’s day parole hearing” especially this: “I never directed anyone to cross over the line knowingly. I obviously did do that by the dynamic of my character—the force of my character coupled with my role in the organization.” The article can be found here: <a href="http://www.torontolife.com/informer/toronto-business/2012/10/29/garth-drabinsky-day-parole-quotes/#more-173802">http://www.torontolife.com/informer/toronto-business/2012/10/29/garth-drabinsky-day-parole-quotes/#more-173802</a>

 
<ol>
<li> Enron Corporation</li>
</ol>
Please be acquainted with “Lawyers, Ethics, and Enron” here. It is an important piece of perspective on what we actually do and ought to as lawyers:

<a href="http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf">http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf</a>

 

FINALLY PLEASE READ:

Code of Professional Conduct for British Columbia, sections 3.2-3, 3.2-7, 3.2-8, 3.7, 3.3-1, 3.3-2. Available at: <a href="http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3">http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3</a>

 

 

UNIT WRAP UP: 

We have arrived at the end of our course, so of course we begin again with a review of certain subjects in the hope of fortifying your knowledge as you prepare for the final exam.

Course:Business Organizations - LAW 459

2016-08-16T09:32:32Z

DavidHeinrich: /* Unit 7 */

{{Infobox_New_Course

|title=Business Organizations

|picture=Image:wiki.png

|subject code=LAW

|course number=459

|section number=003

|instructor=Jon Festinger

|email=zenracer@mail.ubc.ca

|office=

|office hours=

|schedule=

|classroom=Allard Hall Room 104

}}


=== Course Materials ===
===== Unit 1: INTRODUCING BUSINESS ORGANIZATIONS & THEIR REAL WORLD CONTEXTS =====
[[Course:Business Organizations - LAW 459/Unit 1]]

===== Unit 2: THE BASIC CONCEPTS OF BUSINESS ORGANIZATIONS =====
[[Course:Business Organizations - LAW 459/Unit 2]]

===== Unit 3: PARTNERSHIPS =====
[[Course:Business Organizations - LAW 459/Unit 3]]

===== Unit 4: CORPORATE PERSONHOOD – SOME SPECIFIC ISSUES AND PROBLEMS =====
[[Course:Business Organizations - LAW 459/Unit 4]]

===== Unit 5: CORPORATE OBLIGATIONS =====
[[Course:Business Organizations - LAW 459/Unit 5]]

===== Unit 6: THE LEGAL ARCHITECTURE OF BUSINESS GOVERNANCE =====
[[Course:Business Organizations - LAW 459/Unit 6]]

===== Unit 7: THE (FIDUCIARY) OBLIGATIONS OF CORPORATE MANAGEMENT =====
[[Course:Business Organizations - LAW 459/Unit 7]]

===== Unit 8 =====
[[Course:Business Organizations - LAW 459/Unit 8]]

===== Unit 9 =====
[[Course:Business Organizations - LAW 459/Unit 9]]

===== Unit Review =====

Course:Business Organizations - LAW 459/Unit 6

2016-08-16T09:25:42Z

DavidHeinrich:

UNIT 6 (weeks 8 & 9): THE LEGAL ARCHITECTURE OF BUSINESS GOVERNANCE

http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Unit-6-360x265.jpg

Figure 6: A ballot sheet
ALT: A ballot with a pencil lying on top. The ballot contains two choices, “Bad Choice” or “Worse Choice”.

 

Source of image – Morguefile <a href="http://www.morguefile.com/archive/display/578770">http://www.morguefile.com/archive/display/578770</a> Image URI: <a href="http://mrg.bz/TX0sAT">http://mrg.bz/TX0sAT</a>

 

 

 

 

UNIT OVERVIEW:

In this unit the general structure of the board/ management-shareholder relationship and, in particular, how and to what extent management is subject to the direction of, and accountable to, the shareholders will be considered. These issues involve investigations of the nature of the corporate constitution and the internal architecture contemplated as the norm by corporate law. The extent to which, by contract or otherwise, that architecture may be modified will also be considered.

The student will also go into some detail about corporate directors, their qualifications, disqualifications, election and removal and their compensation; and the “principle” of “majority rule” as well as its limits.

 

UNIT OUTCOME:

By the end of this unit you will appreciate that in a sense we have come back to where we started in our look at company law. That is a reliance on the human personality to determine corporate outcomes. However you will comes to understand how the law imposes governance processes that seek to constrain, at least in theory, the excesses of how humans use corporate vehicles. In particular, you will be in a position to reflect on the roles and responsibilities of directors, shareholders and management on the life of a company. You will notice where those roles can overlap as well as the governance vulnerabilities that the doctrine of separate corporate personality inevitably imposes.

 

UNIT READINGS:

Casebook pages 95-105; 110-126 paying particular attention to the judgment in the Canadian Jorex case on CB pages103-105; 304-308; 311; 314-426; 429-432; 438 to 444; 494-502.

BCBCA sections 1(1), 2(b), 120-122, 124, 128, 130-138, 140-142 166-191, 259, 301; CBCA sections 2(1), 102, 105, 106, 107, 109-110, 114, 121-122, 137, 143, 146, 173; BC Partnership Act section 27(e); BC Securities Act sections 1(1), 161(1).

Northern Minerals Investment Corp. v. Mundoro Capital Inc, 2012 BCSC 1090 <a href="http://canlii.ca/t/fs46d">http://canlii.ca/t/fs46d</a>

Official Receiver v Wadge, Rapps & Hunt [2003] UKHL 49.

Chell v. The Queen, 2013 TCC 29 <a href="http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/31073/index.do">http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/31073/index.do</a>

You will also examine portions of the standard B.C. Articles of Incorporation.

You may also find it useful, as well, to look at the sort of documentation that a publicly listed corporation must send to its shareholders in connection with a meeting at which directors are to be elected.

For a recent example, see: “Information Circular” of Absolute Software Corporation

<a href="http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Ccirc.pdf">http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Ccirc.pdf</a>

“Proxy” of Absolute Software <a href="http://www.sedar.com/GetFile.do?lang=EN&docClass=13&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Cproxy.pdf">http://www.sedar.com/GetFile.do?lang=EN&docClass=13&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Cproxy.pdf</a>

National Policy 58-101 <a href="http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp">http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp</a>

National Instrument 52-110 <a href="https://www.bcsc.bc.ca/Securities_Law/Policies/Policy5/PDF/52-110_Audit_Committees__NI_/">https://www.bcsc.bc.ca/Securities_Law/Policies/Policy5/PDF/52-110_Audit_Committees__NI_/</a>

Financial Post article dated April 25, 2013 “Shareholder proposals declining in Canada” <a href="http://business.financialpost.com/2013/04/25/shareholder-proposals-trending-downwards/?__federated=1">http://business.financialpost.com/2013/04/25/shareholder-proposals-trending-downwards/?__federated=1</a>

You will also be asked to work through in a semi-guided manner an exercise intended to provide some context to the mechanics of company meetings. For this purpose some hypothetical facts are provided so that you can explore some of the procedural implications of those facts, and their variations.

 

 

TOPIC 1: Introduction TO GoVERNANCE

Please read pages 98 - 105 of the Casebook. You will see that the corporate governance model common in Canada is now virtually universal.

Some of its important elements:
<ol>
<li>Day-to-day business decisions are generally within the exclusive authority of the directors/management. Shareholders do not have a role.</li>
</ol>
Contrast this to partnership. See section 27 (e) of the Partnership Act, RSBC 1996, c. 348 which provides:

“27. Subject to any agreement express or implied between the partners, the interests of partners in the partnership property and their rights and duties in relation to the partnership must be determined by the following rules:…

(e) every partner may take part in the management of the partnership business;”

Thus absent contrary agreement every partner may take part in the management of the partnership business. Entitlement flows from being a partner. Shareholders do not have a comparable right simply because they are shareholders.

 
<ol>
<li> The Board of Directors chooses and supervises executives and management. </li>
</ol>
See BCBCA section 141(1):

“141. (1) Subject to subsection (3) and to the memorandum and articles of a company, the directors may appoint officers and may specify their duties.”

There is a similar provision in CBCA section 121: 

“121. Subject to the articles, the by-laws or any unanimous shareholder agreement,

(a) the directors may designate the offices of the corporation, appoint as officers persons of full capacity, specify their duties and delegate to them powers to manage the business and affairs of the corporation, except powers to do anything referred to in <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/#sec115subsec3_smooth">subsection 115(3)</a>;”

Note that the word “officer” is defined in section 2(1) of the CBCA as anyone appointed under section 121, and can include a number of specific offices – president, secretary, managing director etc.

 
<ol>
<li>The role of shareholders is to elect directors and to remove them. As well there are certain powers expressly reserved to them by statute, e.g., amendments to constitution, other “fundamental” changes such as approving sale of undertaking. See as partial examples BCBCA section 259; CBCA section 173 (reproduced below):</li>
</ol>
 

 “Alteration to articles
<ol start="259">
<li>(1) A company may resolve to alter its articles</li>
</ol>
(a) by the type of resolution specified by this Act,

(b) if this Act does not specify the type of resolution, by the type of resolution specified by the articles, or

(c) if neither this Act nor the articles specify the type of resolution, by a special resolution.

(2) A company may alter its articles to specify or change the majority of votes that is required to pass a special resolution, which majority must be at least 2/3 and not more than 3/4 of the votes cast on the resolution, if the shareholders resolve, by a special resolution, to make the alteration.

(3) A company may alter its articles to specify or change the majority of votes that is required for shareholders holding shares of a class or series of shares to pass a special separate resolution, which majority must be at least 2/3 and not more than 3/4 of the votes cast on the resolution, if

(a) the shareholders resolve, by a special resolution, to make the alteration, and

(b) shareholders holding shares of that class or series of shares consent by a special separate resolution of those shareholders…”

 

“PART XV

FUNDAMENTAL CHANGES

Amendment of articles
<ol start="173">
<li>(1) Subject to <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/#sec176_smooth">sections 176</a>and <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/#sec177_smooth">177</a>, the articles of a corporation may by special resolution be amended to</li>
</ol>
(a) change its name;

(b) change the province in which its registered office is situated;

(c) add, change or remove any restriction on the business or businesses that the corporation may carry on;

(d) change any maximum number of shares that the corporation is authorized to issue;

(e) create new classes of shares;

(f) reduce or increase its stated capital, if its stated capital is set out in the articles;

(g) change the designation of all or any of its shares, and add, change or remove any rights, privileges, restrictions and conditions, including rights to accrued dividends, in respect of all or any of its shares, whether issued or unissued;

(h) change the shares of any class or series, whether issued or unissued, into a different number of shares of the same class or series or into the same or a different number of shares of other classes or series;

(i) divide a class of shares, whether issued or unissued, into series and fix the number of shares in each series and the rights, privileges, restrictions and conditions thereof;

(j) authorize the directors to divide any class of unissued shares into series and fix the number of shares in each series and the rights, privileges, restrictions and conditions thereof;

(k) authorize the directors to change the rights, privileges, restrictions and conditions attached to unissued shares of any series;

(l) revoke, diminish or enlarge any authority conferred under paragraphs (j) and (k);

(m) increase or decrease the number of directors or the minimum or maximum number of directors, subject to <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/#sec107_smooth">sections 107</a> and<a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/#sec112_smooth"> 112</a>;

(n) add, change or remove restrictions on the issue, transfer or ownership of shares; or

(o) add, change or remove any other provision that is permitted by this Act to be set out in the articles.

province to receive licences, permits, grants, payments or other benefits by reason of attaining or maintaining a specified level of Canadian ownership or control;

(d) the issue, transfer or ownership of shares of any class or series in order to assist the corporation to comply with any prescribed law.

(e) the issue, transfer or ownership of shares of any class or series to enable the corporation to be a registered labour-sponsored venture capital corporation under Part X.3 of the <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-1-5th-supp/latest/rsc-1985-c-1-5th-supp.html">Income Tax Act</a>.”

 
<ol>
<li> What/who is a shareholder?</li>
</ol>
The definition in BCBCA section 1(1):

"shareholder"…means a person whose name is entered in a securities register of a company as a registered owner of a share of the company…” (emphasis added)

Oddly there is no comparable provision in CBCA but the essential proposition seems to effectively operate in the same way.

 
<ol>
<li> Shareholders have a right to receive certain basic information relevant to the conduct of the corporation’s business by the directors – e.g. annual and, in the case of publicly traded corporations, quarterly financial information.</li>
</ol>
We will come back to this.

 

TOPIC 2: Division of powers between directors and shareholders – THE “BOARD CENTRIC” MODEL

For a preliminary introduction to subject please read page 102 of the Casebook.

BCBCA section 136(1) provides:
<h4> “Powers and functions of directors</h4>
136 (1) The directors of a company must, subject to this Act, the regulations and the memorandum and articles of the company, manage or supervise the management of the business and affairs of the company.”

 

The standard form BC Articles provide:

“16.1 Powers of Management 

The directors must, subject to the Business Corporations Act and these Articles, manage or supervise the management of the business and affairs of the Company and have the authority to exercise all such powers of the Company as are not, by the Business Corporations Act or by these Articles, required to be exercised by the shareholders of the Company.”

The CBCA deals with the duty to manage or supervise management

“102. (1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.”

The standard form Federal Bylaws provide:

“4.1 Duties of Directors 

The board must manage or supervise the management of the business and affairs of the Corporation.”

Please read Canadian Jorex Ltd. v. 477749 Alberta Ltd. (1991) 85 Alta. L.R. (2d) 313 at pages 103-105 of the Casebook.

The case determined that the directors of a federal corporation could cancel a special meeting called by them in advance of its scheduled date.

Canadian Jorex Ltd. argued that nothing in the company’s bylaws, the CBCA or any Unanimous Shareholders Agreement (USA) restricted the ability of the directors to cancel special meetings called by them. Accordingly, given corporate model embraced by the <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html">CBCA</a>, they claimed to have this power. In particular, see s<a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec102_smooth">ection 2(1) and 102</a>(1) of the CBCA:

“2. (1) “affairs” means the relationships among a corporation, its affiliates and the shareholders, directors and officers of such bodies corporate but does not include the business carried on by such bodies corporate;
<ol start="102">
<li>(1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.”</li>
</ol>
The Petitioners argued that unless the <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html">CBCA</a> or the company’s bylaws contained an express power to cancel meetings, such a power does not exist. Their position was that there are elaborate procedures prescribed for meetings and the only powers of the directors on the subject of meetings can be those expressly stipulated.

Under the CBCA corporate model - residual power to manage the corporation's affairs rests with the directors. This power is given by statute and is not derived from the delegation of powers by the shareholders. This must be contrasted with the British model of corporate law under which the directors enjoy only those powers delegated to them by the shareholders.

 

Now please read Northern Minerals Investment Corp. v. Mundoro Capital Inc. 2012 BCSC 1090 which flows from Canadian Jorex Ltd. v. 477749 Alberta Ltd. and can be found here: <a href="http://www.canlii.org/en/bc/bcsc/doc/2012/2012bcsc1090/2012bcsc1090.html">http://www.canlii.org/en/bc/bcsc/doc/2012/2012bcsc1090/2012bcsc1090.html</a>

The Facts in this case were that there was a notice of the Annual General Meeting to be held on June 26 of a BC Company, “Mundoro Capital Inc.”. The “record date” was of the meeting was to be May 22. The business of the Annual General Meeting was to receive financial statements, elect directors and reappoint auditors.

A June 11 press release announced that the directors of Mundoro Capital Inc. had adopted an “Advance Notice Policy” by which shareholders were required to submit nominations for directors had to do so by a deadline. Only such nominated persons would be eligible to be elected as directors. Others were not eligible for election.

A June 14 press release announced that the Annual General Meeting was being postponed to August 27, with the record date changed to July 27. The business of the meeting was to also include shareholder approval of “Advance Notice Policy”.

Northern Minerals Investment Corp., a shareholder in Mundoro Capital Inc. sought to restrain the postponement or adjournment of the June 26 AGM, and an order from the court preventing any change to the record date.

The shareholder, Northern Minerals Investment Corp., argued that under the BCCA directors have only those powers granted to them by the articles of the company. In other words, that directors’ powers must be expressly conferred and that directors under the British Columbia Business Corporations Act have no residual powers. Because the scheme of the Canada Business Corporation Act is different by giving directors residual powers the decision in Canadian Jorex ltd. v. 477749 Alberta Ltd. would be inapplicable.

The company, Mundoro Capital Inc., argued that section 15.1 of the articles of Mundoro Capital Inc. specifically and expressly reserved to the directors of Mundoro Capital Inc. all residual powers. Those powers are those that are not required to be exercised by the shareholders either by the British Columbia Business Corporations Act or the articles of Mundoro Capital Inc. See refer to section 16.1 of the model articles to same effect provided in Unit 2 and also reproduced below:

 

“16.1 Powers of Management 

The directors must, subject to the Business Corporations Act and these Articles, manage or supervise the management of the business and affairs of the Company and have the authority to exercise all such powers of the Company as are not, by the Business Corporations Act or by these Articles, required to be exercised by the shareholders of the Company.”

Mr. Justice Punnett found the articles and Act, and the residual “basket clause” in the articles and the Act are to be read as was done the case in Canadian Jorex ltd. v. 477749 Alberta Ltd. and the case of

Oppenheimer & Co. v. United Grain Growers Ltd. (1997), 120 Man. R (2d) 281, 2 W.W.R. 9 (Q.B.). The court held that as a matter of contractual interpretation the directors’ powers flow from the Act and articles in which the directors are in fact granted residual powers. The court thus treats BC and CBCA models as substantially similar. Both are accordingly, essentially, board centric.

 

TOPIC 3: LIMITATIONS OF BOARD-CENTRIC MODEL AND RE-DESIGNING THE ARCHITECTURE 
<ol>
<li> Close Corporations</li>
</ol>
In the realities of the corporate world the same people are shareholders, directors and officers. In a corporation with few shareholders, they will tend to elect themselves as directors and, instead of the board choosing officers who may or may not be directors and shareholders, shareholder/directors will typically select themselves as officers. So shareholders often view themselves as running the business as owners – just as with partners.

Which bridges directly to the question - do board’s serve any purpose? Why do I need a board if I’m an owner/shareholder/officer?

Corporate law has largely given up on attempting to impose board centred model on close corporations except as a default rule. Some (very few) statutes allow shareholders in close corporations to dispense with a board. More common however, is to allow shareholders to make agreements which dictate who will be directors and what decisions the directors shall make.

 
<ol>
<li> Publicly Held Corporations</li>
</ol>
Publicly traded corporations or those with a large number of shareholders.

The theoretical model: Power flows from the shareholders, who decide who will be directors, to directors, who choose officers and set policies, to the officers who implement the policies.

The reality: In practice, the officers, particularly the chief executive officer (CEO), commonly decide who will be the directors and what policies the corporation will pursue.

In relation to this please read the excerpt from “Mace, Directors: Myth and Reality” at pages 304-308 of the Casebook.

All of which really just begs the question: Why does the theoretical model and the reality diverge?

Three possible reasons:

(i) Shareholders in publicly held corporations are typically “rationally apathetic”; i.e. they tend to think it is not worthwhile to spend much time or effort worrying about control over the corporations they are shareholders in.

(ii) The cost of changing management is quite high, largely because support must be sought from numerous other scattered other shareholders. Moreover the rewards to changing management are quite low, since the other shareholders will reap most of the gains. In the end it is usually just cheaper and easier to sell ones shares.

(iii) Incumbent shareholders, directors and officers effectively control the “voting machinery”. For example, consider:

(a) the “Advance Notice Policy” in Northern Minerals Investment Corp. v. Mundoro Capital Inc.

(b) that the company bears costs of management’s legal and other fees – while challengers must bear own costs (unless they win);

Accordingly there is a significant financial disincentive for anyone to challenge the incumbent board. 

(iv) There is also one other reason. Just as is the case in Close Corporations, even in large public traded companies there is often at least one person who is at the same time a shareholder, a director and an officer. That person is the C.E.O – fact that may be interpreted as either a cause for, or a reaction to, the “rock star” status that CEO’s have often been cloaked with in the present corporate age. The cultish status of the powerful superstar CEO is a significant counterweight to the theoretical model where the locus of the power of appointment is intended to be in the shareholders. Arguably CEO’s in public companies have more real world impact on their shareholders, then their shareholders would have on them (though most CEO’s would conveniently deny that suggestion).

 

TOPIC 4: Re-designing the architecture OF GOVERNANCE

Read BCBCA section 137 (1):

“…the articles of a company may transfer, in whole or in part, the powers of the directors to manage or supervise the management of the business and affairs of the company to one or more other persons.” (Emphasis added).

What is the effect of such a provision? See 137 (2) of the BCBCA states: 

 

“(2) If the whole or any part of the powers of the directors is transferred in the manner contemplated by subsection (1),

(a) the persons to whom those powers are transferred have all the rights, powers, duties and liabilities of the directors of the company, whether arising under this Act or otherwise, in relation to and to the extent of the transfer, including any defences available to the directors, and

(b) the directors are relieved of their rights, powers, duties and liabilities to the same extent.”

 

Blog Activity 6.2:

Please consider the following two questions:
<ol>
<li> Why do you think section 137(2)(b) of the BCBCA is necessary and worded the way it is? </li>
<li> What would be the effect of an agreement to transfer powers of the directors to manage or supervise the management of the business to one or more other persons if that agreement was not included in articles?</li>
</ol>
Please blog your views on these questions and your reasons in less than one page under the heading “Transferring Directors Powers”.

 

 

Turning now to the similar provisions of the CBCA:
<ol>
<li>“146.(1) An otherwise lawful written agreement among all the shareholders of a corporation, or among all the shareholders and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation is valid.</li>
</ol>
(2) If a person who is the beneficial owner of all the issued shares of a corporation makes a written declaration that restricts in whole or in part the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation, the declaration is deemed to be a unanimous shareholder agreement…

(5) To the extent that a unanimous shareholder agreement restricts the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation, parties to the unanimous shareholder agreement who are given that power to manage or supervise the management of the business and affairs of the corporation have all the rights, powers, duties and liabilities of a director of the corporation, whether they arise under this Act or otherwise, including any defences available to the directors, and the directors are relieved of their rights, powers, duties and liabilities, including their liabilities under section 119, to the same extent.

(6) Nothing in this section prevents shareholders from fettering their discretion when exercising the powers of directors under a unanimous shareholder agreement.” (Emphasis added).

Note in particular that under the CBCA there is no requirement that “the articles of a company may transfer” as under section 137 (1) of the BCBCA. Rather, the CBCA allows that a “lawful written agreement among all the shareholders” will do the trick.

 

 

TOPIC 5: Directors

 

Before starting into this topic please read the following short Huffington Post article: “Venture Capital Firm Hires Artificial Intelligence To Its Board Of Directors” at <a href="http://www.huffingtonpost.co.uk/2014/05/15/artificial-intelligence-board-directors_n_5329370.html">http://www.huffingtonpost.co.uk/2014/05/15/artificial-intelligence-board-directors_n_5329370.html</a>

Please reflect on whether you think this is a good idea, as well as why or why not? Armed with those thoughts lets tackle the legal rules, procedures and limitations respecting Directors.

 
<ol>
<li>Must a Company Have Directors?</li>
</ol>
BCBCA s. 120; CBCA 102 (2)

Public/distributing company (publicly distributed or traded) have to have at least 3 directors; others only1.

Why must “public” companies have at least 3 directors?

 
<ol>
<li>What is a Director?</li>
</ol>
Statutory definitions not helpful:

CBCA section 2 (1): “a person occupying the position of director by whatever name called”. 

BCBCA Section 1 (1): “an individual who is a member of the board of directors of the company as a result of having been elected or appointed to that position”. 

 

Are we assisted in our understanding by either BCBCA 136 (1) or CBCA 102 (1) which set out that directors “must…manage or supervise the management of the business and affairs of the company” (BCBCA); “the directors shall manage, or supervise the management of, the business and affairs of a corporation” (CBCA)? Probably not.

BCBCA s. 138 (1) provides:

 

“138. (1) Without limiting section 137 but subject to subsection (2) of this section, if a person who is not a director of a company performs functions of a director of the company, sections 142, 231, 234, 251, 335, 347 and 354 and Divisions 3 to 5 of this Part apply to that person

(a) as if that person were a director of the company, and

(b) in relation to, and only to the extent of, those functions.”

 

If a person who is not a director of a company performs functions of a director of the company, sections 142, 231, 234, 251, 335, 347 and 354 and Divisions 3 to 5 of this Part apply to that person

(a) as if that person were a director of the company, and

(b) in relation to, and only to the extent of, those functions”

Does this add anything to the definition in section 1(1)?

It probably does because of the limitation in the definition to persons elected or appointed.

 
<ol>
<li>Categories or Kinds of Directors</li>
</ol>
There are many different types of directors. They can be characterised either:

(I) by reference to some legal status, e.g. de jure, de facto, nominee, shadow; or

(II) reference to function e.g. inside, outside, executive, non-executive.

Exact name or title is actually immaterial. They are all directors.

With respect to the legal status of directors consider the following terms:

(a) De jure director

A “de jure” director is one who has been elected or appointed by a proper procedure. In comparison consider those performing the functions of directors per BCBCA s. 138(1).

In Chell v. The Queen, 2013 TCC 29 (<a href="http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/31073/index.do">http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/31073/index.do</a>) the following definition was provided by the court:

 

“A de jure director is an individual who has been appointed as such pursuant to the corporate law of the jurisdiction in which the corporation was created or continued, as the case may be.” 

(b) De facto director

A de facto director is one who has not been legally appointed but acts as if they have been or assumes the position. A de facto director openly acts as though validly appointed despite a lack of authority and right to act. A director whose appointment is irregular falls into this category; also a person who is not appointed at all but is held out as a director.

(c) Shadow director

In British Columbia Securities Commission v. Alexander, 2013 BCCA 111 per Madam Justice D. Smith:

 

“The legal test for a finding that an individual acted as a de facto director or officer is “’whether, under the particular circumstances, the alleged director is an integral part of the mind and management of the company, taking into account the entirety of the alleged director’s involvement within the context of the business activities at issue. In Re IMAGIN Diagnostic Centres Inc., 2010 LNONOSC 632, the Ontario Securities Commission said (at para. 138) that a de facto director is one “...who maintains control over the affairs of the company and exercises the powers of a director and/or officer...”.

This suggests a slightly different understanding of “de facto directors”, generally referred to in England as “shadow directors” – statutorily defined as “a person in accordance with whose directions or instructions the directors of the company are accustomed to act.”

A shadow director is different from “de facto directors” because they do not purport to act as directors. On the contrary, they claim not to be directors and so seek to hide behind those who are. In that sense, they “lurk in the shadows". They are persons "in accordance with whose directions or instructions the directors of the company are accustomed to act”. 

(d) Nominee director

This is someone who represents the interests of a “stakeholder”.

For a discussion of the duties of a nominee director, please read Deluce Holdings Inc. v. Air Canada, 98 D.L.R. (4th) 509 (1992) at pages 494-502 of the Casebook.

In Deluce Holdings v. Air Canada, the conduct of Nominee Directors was found to be unacceptable. The facts were that Air Ontario was owned 75% by Air Canada and 25% by Deluce Holdings. Air Canada had seven nominee directors on the board of directors of Air Ontario and Deluce Holdings had 3 nominee directors on that board. When Air Canada acquired an interest in Air Ontario an Agreement had been entered into which included the employment of Mr. Deluce who was the owner of Deluce Holdings, which itself was the previous owner of Air Ontario. The agreement also provided that on the expiration of Mr. Deluce’s employment contract, Air Canada would be granted an option to purchase the remaining shares of Air Ontario. The Board of Air Ontario, comprised as mentioned of a majority of Air Canada nominee directors terminated Mr. Deluce’s employment contract and Air Canada exercised its option to purchase the remaining shares. It is important to note that at some point before the dismissal of Mr. Deluce, Air Canada changed it’s internal policies determining it would henceforth would fully own without minority shareholders all regional carriers including Air Ontario.

The court found that Air Canada’s nominees were carrying out Air Canada’s agenda. Interestingly there was scant reference to what might have been in the actual best interests of Air Ontario. Accordingly the law has become reasonably clear. A nominee director must always put the best interest of the company they are a director of first, ahead of the company that may have nominated them. Notwithstanding this constraint, you should probably not expect that the practice of placing nominee directors on boards would go away any time soon.

 

(e) Alternate director

Here is what the standard form BC articles says about “Alternate Directors”: 

“15.1 Appointment of Alternate Director 

Any director (an “appointor”) may by notice in writing received by the Company appoint any person (an “appointee”) who is qualified to act as a director to be his or her alternate to act in his or her place at meetings of the directors or committees of the directors at which the appointor is not present unless (in the case of an appointee who is not a director) the directors have reasonably disapproved the appointment of such person as an alternate director and have given notice to that effect to his or her appointor within a reasonable time after the notice of appointment is received by the Company.”

 
<ol>
<li>Qualifications and Disqualifications of Directors</li>
</ol>
In general there are few prescribed qualifications to be a director. It is felt that the shareholders are best equipped to decide who ought to be a director.

(I) Individuals and corporations

 BCBCA 124 (1): “an individual who is qualified” to act.

 CBCA 105. (1): “person who is not an individual” is disqualified.

Blog Activity 6.3:

Consider whether a corporation can be a “Shadow Director” of another corporation? Please blog your views on these questions and your reasons in less than one page under the heading “Shadow Directors”.

 

(II) Qualifications – residency

CBCA section 105 (3) requires that at least 25% of a company’s directors must be “resident Canadians” (defined in section 2 (1)) though in certain prescribed businesses a majority of resident Canadians is required.

There used to be similar requirement in the BCBCA, but no longer.

Note that under CBCA s. 114, subject to certain exceptions, directors may not transact business unless at least 25% or a majority, as the case may be, of the directors present satisfy the residency requirement.

What is the justification for residency requirements? Consider how you feel about them.

Avoiding residency requirements:
<ol>
<li>Incorporate in, say, B.C., which has none.</li>
<li>Adopt USA - transfer directors' duties to manage and supervise the management of the corporation to shareholders. Number of Canadians on the board becomes irrelevant.</li>
</ol>
 

(III) Qualifications – competence

Corporate legislation is generally silent on experience or competence that must be satisfied as a condition of eligibility to become a director.

Why would this be (especially given the many corporate scandals witnessed over the years)?

There are several possible answers. When it comes to publicly traded corporations the stock exchange must be satisfied that corporate management, including board of directors, have adequate experience and technical expertise relevant to the company's business and industry as well as adequate public company experience.

There is also the training available through the Institute of Directors that has become a prestigious thing to do and in some cases is a practical requirement for anyone aspiring to be a “professional” director. See: <a href="http://www.iod.com">http://www.iod.com</a> for more information.

 

The notion of competence must obviously be somehow connected to the statutory duty of care and skill…doesn’t it? 

BCBCA section 142 provides: 

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

 (b) exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances,…”

 

Note that the CBCA 122 is nearly identical in its wording:

“122. (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall…

 (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”

Emphasis added. Underling added to show subtle differences in wording. Can you envision any situations where these differences might be relevant?

The implications of the standard of care, diligence and skill are discussed in the cases of Soper v. Canada (we will get there shortly) & Peoples Department Stores Inc. v. Wise (the “three Wise brothers” case where we have already visited) at pages 319-330 of the Casebook.

 

(IV) Qualifications – independence.

(a) Selection

For publicly traded companies, directors are to be selected by a nominating committee composed of non-management directors. In 1994, a committee sponsored by the Toronto Stock Exchange published a report entitled “Where Were the Directors?” (also known as the “Dey Report”). The Dey Report contained 14 recommendations relating to corporate governance, including the following:

“Guideline 4 

The board of directors of every corporation should appoint a committee of directors composed exclusively of outside, i.e., non-management, directors, a majority of whom are unrelated directors, with the responsibility for proposing to the full board new nominees to the board and for assessing directors on an ongoing basis. 

Guideline 5 

Every board of directors should implement a process to be carried out by the nominating committee or other appropriate committee, for assessing the effectiveness of the board as a whole, the committees of the board and the contribution of individual directors. 

Guideline 6 

Every corporation, as an integral element of the process for appointing new directors, should provide an orientation and education program for new recruits to the board.”

 

Also relevant is National Policy 58-101 of the Ontario Securities Commission which is referred to at page 316 of the Casebook and which can be found here: <a href="http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp">http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp</a>

 

(b) Credentials
<h3>The securities regulators recommend publicly traded companies have a certain number of independent directors. Please read pages 307-308 of the Casebook where there is a discussion of the relevant requirements can be found.</h3>
<h3>National Instrument 58-101 “Disclosure Of Corporate Governance Practices” defines “Independence” as follows:</h3>
 

“1.2 Meaning of Independence --

(1) In a jurisdiction other than British Columbia, a director is independent if he or she would be independent within the meaning of section 1.4 of NI 52-110.

(2) In British Columbia, a director is independent if

(a) a reasonable person with knowledge of all the relevant circumstances would conclude that the director is independent of management of the issuer and of any significant security holder, or

(b) the issuer is a reporting issuer in a jurisdiction other than British Columbia, and the director is independent under subsection (1).”

 

Section 1.4 of National Instrument 52-110 provides:

 

“1.4 Meaning of Independence

 

(1) An audit committee member is independent if he or she has no direct or indirect material relationship with the issuer.

 

(2) For the purposes of subsection (1), a “material relationship” is a relationship which could, in the view of the issuer's board of directors, be reasonably expected to interfere with the exercise of a member's independent judgement.

 

(3) Despite subsection (2), the following individuals are considered to have a material relationship with an issuer:

 

(a) an individual who is, or has been within the last three years, an employee or executive officer of the issuer;

 

(b) an individual whose immediate family member is, or has been within the last three years, an executive officer of the issuer;

 

(c) an individual who:

 

(i) is a partner of a firm that is the issuer's internal or external auditor,

(ii) is an employee of that firm, or

(iii) was within the last three years a partner or employee of that firm 

 

and personally worked on the issuer's audit within that time;

 

(d) an individual whose spouse, minor child or stepchild, or child or stepchild who shares a home with the individual:

 

(i) is a partner of a firm that is the issuer's internal or external auditor,-5-

(ii) is an employee of that firm and participates in its audit, assurance or tax compliance (but not tax planning) practice, or

(iii) was within the last three years a partner or employee of that firm 

 

and personally worked on the issuer's audit within that time;

 

(e) an individual who, or whose immediate family member, is or has been within the last three years, an executive officer of an entity if any of the issuer's current executive officers serves or served at that same time on the entity's compensation committee; and

 

(f) an individual who received, or whose immediate family member who is employed as an executive officer of the issuer received, more than $75,000 in direct compensation from the issuer during any 12 month period within the last three years.

 

(4) Despite subsection (3), an individual will not be considered to have a material relationship with the issuer solely because 

 

(a) he or she had a relationship identified in subsection (3) if that relationship ended before March 30, 2004; or 

 

(b) he or she had a relationship identified in subsection (3) by virtue of subsection (8) if that relationship ended before June 30, 2005.

 

(5) For the purposes of clauses (3)(c) and (3)(d), a partner does not include a fixed income partner whose interest in the firm that is the internal or external auditor is limited to the receipt of fixed amounts of compensation (including deferred compensation) for prior service with that firm if the compensation is not contingent in any way on continued service.

 

(6) For the purposes of clause (3)(f), direct compensation does not include:

 

(a) remuneration for acting as a member of the board of directors or of any board committee of the issuer, and

 

(b) the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the issuer if the compensation is not contingent in any way on continued service.

 

(7) Despite subsection (3), an individual will not be considered to have a material relationship with the issuer solely because the individual or his or her immediate family member

 

(a) has previously acted as an interim chief executive officer of the issuer, or

 

(b) acts, or has previously acted, as a chair or vice-chair of the board of directors or of any board committee of the issuer on a part-time basis.

 

(8) For the purpose of section 1.4, an issuer includes a subsidiary entity of the issuer and a parent of the issuer.”

 

 

National Instrument 58-101 can be found here: <a href="http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp">http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp</a>

National Instrument 52-110 can be found here: <a href="https://www.bcsc.bc.ca/Securities_Law/Policies/Policy5/PDF/52-110_Audit_Committees__NI_/">https://www.bcsc.bc.ca/Securities_Law/Policies/Policy5/PDF/52-110_Audit_Committees__NI_/</a>

 

Blog Activity 6.4:

In short all of this tends to come down to a meaning of “independence” which translates into there being no direct or indirect material relationship with the issuer. That is no relationship that could, in the view of the board, be reasonably expected to interfere with the exercise of a member's independent judgement. A whole series of relationships that are deemed material e.g. family relationships, are specifically proscribed.

Note that these requirements do not apply to private companies.

Please read the short paragraph on “Qualifications: (a) Minimum Standards” at page 311 of the Casebook. What in your view are the justifications for these “independence” requirements? If justified why should they not also apply to private companies?

Please blog your views on these questions and your reasons in less than one page under the heading “Why Independent Directors?”

 

(V) Disqualifications

BCBCA section 124 (2) and CBCA section 105 (1) set out who are those persons disqualified to act as a director.

Note BCBCA 124 (2) (d) which disqualifies a person: “convicted in or out of British Columbia of an offence in connection with the promotion, formation or management of a corporation or unincorporated business, or of an offence involving fraud, unless...”

Note in particular that there is nothing comparable in CBCA. Why not?

Section 161 (1)(d) of the BC Securities Act [RSBC 1996] CHAPTER 418 – BCSC provides:

“161. (1) If the commission or the executive director considers it to be in the public interest, the commission or the executive director, after a hearing, may order one or more of the following:…

(d) that a person

(i) resign any position that the person holds as a director or officer of an issuer or registrant,

(ii) is prohibited from becoming or acting as a director or officer of any issuer or registrant,

(iii) is prohibited from becoming or acting as a registrant or promoter,

(iv) is prohibited from acting in a management or consultative capacity in connection with activities in the securities market,…”

 

 

“Issuer” is defined in section 1(1) of the BC Securities Act:

"issuer" means a person who

(a) has a security outstanding,

(b) is issuing a security, or

(c) proposes to issue a security;”

Note that this definition of “issuer” in fact applies to any corporation, not just “public” companies who trade their shares on stock exchanges. The BC Securities Commission has forced the resignation of individuals as directors even of companies whose securities are not traded in the public markets, but generally only where they have been guilty of some misconduct in connection with the affairs of publicly traded companies. There is no known case of forcing a director of a purely private company to resign, absent some connection with the affairs of a publicly traded company.

Is this ok?

By way of contrast, the UK Directors Disqualification Act, 1986 does permit disqualification of a director of a purely private company, even absent a public company connection. Grounds include “conduct as a director . . . makes him unfit to be concerned in the management of a company”. There is no comparable provision in any Canadian legislation.

 

TOPIC 6: Becoming a director – The PROCESS OF election and appointment

 
<ol>
<li> General</li>
</ol>
Please read pages 314-316 of the Casebook; BCBCA sections 121 to 122, 130 to 135; and CBCA sections 106 and 107. These are all largely technical provisions - detailed familiarity not required.

(I) The Beginning of Directorship:

One becomes a member of board as a result of having been elected or appointed.

 

BCBCA section 122 (1): “Directors…must be elected or appointed in accordance with this Act and with the memorandum and articles of the company.”

 

(II) The End of Directorship:

BCBCA section 128: 

“128. (1) A director ceases to hold office when

(a) the term of office of that director expires in accordance with

(i) this Act or the memorandum or articles, or

(ii) the terms of his or her election or appointment,

(b) the director dies or resigns, or

(c) the director is removed in accordance with subsection (3) or (4).” (Emphasis added)

 

As a general matter, directors are elected at a meeting of shareholders. In private companies, the election of directors is either identified in notice of the meeting or nominations are called for and then the election proceeds. In public companies, the election of directors is identified in the notice of meeting and accompanying information circular.

 

(III) Extended and Staggered Terms:

BCBCA section 128 (1) (a) permits a term of more than one year, so that annual election of that director is not required. Extended terms are thus permissible without any maximum. CBCA section 106 (3) limits each term a director can serve to a maximum of 3 years per term (although they may of course be re-elected to additional terms). Longer terms are not common in private companies where annual election of directors tends to be the more common practice. The Act also permits staggered terms – i.e. where not all directors resign at the same time. This is seen as enhancing the stability of boards. Again this is not an especially common in private companies.

In case of publicly listed companies, the TSX now requires each director to stand for election annually.

 

(IV) Actual Election Process – how voting takes place:

In the case of private companies, generally straightforward because rarely a contest.

In publicly traded companies, plurality or slate voting was common until recently.

(a) Slate voting - Shareholders may vote for all of the directors nominated by management (i.e. a slate of directors), but not for individual directors.

This obstructs shareholders from voting against individual directors for performance issues such as poor board attendance or poor decision-making on a specific board committee. The only option in such cases is to vote against the whole board, or conduct a costly proxy fight.

(b) Plurality voting

You vote for or withhold vote. So: 5 candidates:
<table>
<tbody>
<tr>
<td width="213"> </td>
<td width="213">For</td>
<td width="213">Withhold</td>
</tr>
<tr>
<td width="213">A</td>
<td width="213">60</td>
<td width="213">40</td>
</tr>
<tr>
<td width="213">B</td>
<td width="213">55</td>
<td width="213">30</td>
</tr>
<tr>
<td width="213">C</td>
<td width="213">51</td>
<td width="213">40</td>
</tr>
<tr>
<td width="213">D</td>
<td width="213">36</td>
<td width="213">30</td>
</tr>
<tr>
<td width="213">E</td>
<td width="213">36</td>
<td width="213">45</td>
</tr>
</tbody>
</table>
Accordingly directors can be elected without receiving a majority of shareholder votes. Indeed, a single vote in favour of a director nominee is all that is required for election. Where director nominees are also shareholders, they can be elected on the basis of their own votes.

“Plurality voting” prevents shareholders from voting against specific under-performing directors.

The TSX prohibits slate voting. Voting on director candidates should be conducted on an individual basis.

The TSX mandates majority voting. Any nominee for director who receives a greater number of votes ‘withheld' from than ‘for' their election, would be required to tender their resignation as a director. The remaining board members would, absent unusual circumstances, generally accept such resignation.

So in the above noted scenario, E would be required to tender their resignation.

(c) Cumulative voting

Please read the middle paragraph of page 315 of the Casebook; the middle paragraph of page 441 of the Casebook; and CBCA section 107.

Generally speaking a shareholder only has one vote per share and may not give more than the one vote per share you to any single nominee. For example, if there are 4 board positions and you hold 500 shares (with one vote per share), under the regular method you could vote a maximum of 500 shares for any one candidate (giving you 2,000 votes total - 500 votes per each of the four candidates). “Cumulative Voting” allows a shareholder to cast all of their votes for a single nominee. Accordingly you could choose to vote all of your (cumulative) 2,000 votes (500 shares x 4 board positions) for one candidate, or 1,000 each to two candidates, or otherwise divide your votes whichever way you want.

Intended to allow minority shareholders to elect some directors in rough proportion to voting strength.

CBCA section 107 provides:

 

“Cumulative voting
<ol start="107">
<li>Where the articles provide for cumulative voting,</li>
</ol>
(a) the articles shall require a fixed number and not a minimum and maximum number of directors;

(b) each shareholder entitled to vote at an election of directors has the right to cast a number of votes equal to the number of votes attached to the shares held by the shareholder multiplied by the number of directors to be elected, and may cast all of those votes in favour of one candidate or distribute them among the candidates in any manner;

(c) a separate vote of shareholders shall be taken with respect to each candidate nominated for director unless a resolution is passed unanimously permitting two or more persons to be elected by a single resolution;

(d) if a shareholder has voted for more than one candidate without specifying the distribution of votes, the shareholder is deemed to have distributed the votes equally among those candidates;

(e) if the number of candidates nominated for director exceeds the number of positions to be filled, the candidates who receive the least number of votes shall be eliminated until the number of candidates remaining equals the number of positions to be filled;

(f) each director ceases to hold office at the close of the first annual meeting of shareholders following the director’s election;

(g) a director may be removed from office only if the number of votes cast in favour of the director’s removal is greater than the product of the number of directors required by the articles and the number of votes cast against the motion; and

(h) the number of directors required by the articles may be decreased only if the votes cast in favour of the motion to decrease the number of directors is greater than the product of the number of directors required by the articles and the number of votes cast against the motion.”

 
<ol>
<li> Calling and Convening Meetings</li>
<li> With respect to notices of meetings generally see BCBCA section 169 (1).</li>
</ol>
The “company” must send notice of date, time and location. Who is the company for this purpose? Compare to the scenario we encountered earlier, for example in the case of Canadian Jorex Ltd. v. 477749 Alberta Ltd. 
<ol>
<li> Location, date and time of the meeting must be specified in accordance with BCBCA section 169 (1). BCBCA section 166 (a) provides that the meeting must take place in British Columbia, unless certain conditions met.</li>
</ol>
As an example what if the meeting were called for “Sunday, 11.30 p.m. at xxx, Atlin B.C.” Is that a problem in your mind? What if the company in question is a massive public company like “Teck Corporation” and they decide to hold their Annual General Meeting in Logan Lake B.C. (which is in the southern interior of British Columbia and not necessarily terribly convenient to many of their shareholders?

III. Business to be transacted? The directors also ultimately control this though it is often planned by management. All of which begs the question of what exactly are the opportunities for “dissidents”?

Recall the “Advance Notice Policy” which was upheld in the case of Northern Minerals Investment Corp. v. Mundoro Capital Inc., which we examined earlier. Any person proposing to nominate a director for election at a meeting of shareholders must provide the company with advance notice (typically between 30-65 days) of, and prescribed details concerning, any such proposed nominee. Unless proper notice is given to the company any such proposed nominee is ineligible for election at the shareholders meeting. This sort of policy (assuming it is either in the articles of the company or is ratified by the shareholders) eliminates the risk of an ambush proxy contest.

There are other opportunities for shareholders. For example meetings can be requisitioned pursuant to BCBCA section 167 (CBCA section 143). Shareholders holding at least 5% of the issued voting shares may requisition a meeting for the purpose of transacting any business that may be transacted at a general meeting.

Consider the scope of this power. What does it mean in practical terms?

If shareholders holding at least 5% of the issued voting shares do call such a meeting, the directors of the company must give notice of a meeting to be held within 4 months of date of requisition to be held for the specified purpose.

There are exceptions:

(a) if they have called a general meeting to be held after date of requisition and have given notice thereof;

(b) if substantially the same business was submitted to shareholders at a meeting held not more than 5 years ago and received less than 3% of the vote if it was tried once, less than 6% of the vote of it was tried twice, and less than 10% of the vote if tried 3 times.

(c) the business stated in the requisition does not relate in a significant way to the business or affairs of the company,

(d) it clearly appears that the primary purpose for the requisition is (i) securing publicity, or (ii) enforcing a personal claim or redressing a personal grievance against the company or any of its directors, officers or security holders,

(e) the business stated in the requisition has already been substantially implemented.

If none of these conditions are fulfilled the directors must call a meeting (to be held within 4 months) within 21 days after receipt of requisition and if they do not the requisitioning shareholders, or any one or more of them holding, in the aggregate, more than 1/40 of the issued shares of the company that carry the right to vote at general meetings, may do so. If this happens they may be reimbursed for their expenses unless the shareholders by an ordinary resolution decide otherwise.

The full text of BCBCA section 167 follows:

 

“Requisitions for general meetings
<ol start="167">
<li> (1) Shareholders referred to in subsection (2) may requisition a general meeting for the purpose of transacting any business that may be transacted at a general meeting.</li>
</ol>
(2) A requisition under this section may be made by shareholders who, at the date on which the requisition is received by the company, hold in the aggregate at least 1/20 of the issued shares of the company that carry the right to vote at general meetings.

 

(3) A requisition under this section

(a) must, in 1 000 words or less, state the business to be transacted at the meeting, including any special resolution or exceptional resolution to be submitted to the meeting,

(b) must be signed by, and include the names and mailing addresses of, all of the requisitioning shareholders,

(c) may be made in a single record or may consist of several records, in similar form and content, each of which is signed by one or more of the requisitioning shareholders, and

(d) must be delivered to the delivery address of, or mailed by registered mail to the mailing address of, the registered office of the company.

 

(4) If a requisition under this section consists of more than one record, the requisition is received by the company on the first date by which the company has received requisition records that comply with subsection (3) from shareholders who, in the aggregate, hold at least the number of shares necessary to qualify under subsection (2).

 

(5) On receiving a requisition that complies with subsections (2) and (3), the directors must, regardless of the memorandum or articles, call a general meeting to be held not more than 4 months after the date on which the requisition is received by the company to transact the business stated in the requisition and must, subject to subsection (7),

(a) send notice of the date, time and location of that meeting at least the prescribed number of days, but not more than 4 months, before the meeting

(i) to each shareholder entitled to attend the meeting, and

(ii) to each director, and

(b) send, in accordance with subsection (6), to the persons entitled to notice of the meeting, the text of the requisition referred to in subsection (3) (a).

 

(6) The text referred to in subsection (5) (b) must be sent

(a) in, or within the time set for the sending of, the notice of the requisitioned meeting, or

(b) in the company's information circular or equivalent, if any, sent in respect of the requisitioned meeting.

 

(7) The directors need not comply with subsection (5) if

(a) the directors have called a general meeting to be held after the date on which the requisition is received by the company and have sent notice of that meeting in accordance with section 169,

(b) substantially the same business was submitted to shareholders to be transacted at a general meeting that was held not more than the prescribed period before the receipt of the requisition, and any resolution to transact that business at that earlier meeting did not receive the prescribed amount of support,

(c) it clearly appears that the business stated in the requisition does not relate in a significant way to the business or affairs of the company,

(d) it clearly appears that the primary purpose for the requisition is

(i) securing publicity, or

(ii) enforcing a personal claim or redressing a personal grievance against the company or any of its directors, officers or security holders,

(e) the business stated in the requisition has already been substantially implemented,

(f) the business stated in the requisition, if implemented, would cause the company to commit an offence, or

(g) the requisition deals with matters beyond the company's power to implement.

 

(8) If the directors do not, within 21 days after the date on which the requisition is received by the company, send notice of a general meeting in accordance with subsection (5) of this section, the requisitioning shareholders, or any one or more of them holding, in the aggregate, more than 1/40 of the issued shares of the company that carry the right to vote at general meetings, may send notice of a general meeting to be held to transact the business stated in the requisition.

 

(9) A general meeting called, under subsection (8), by the requisitioning shareholders must

(a) be called in accordance with subsection (5),

(b) be held within 4 months after the date on which the requisition is received by the company, and

(c) as nearly as possible, be conducted in the same manner as a general meeting called by the directors.

 

(10) Unless the shareholders resolve otherwise by an ordinary resolution at the general meeting called, under subsection (8), by the requisitioning shareholders, the company must reimburse the requisitioning shareholders for the expenses actually and reasonably incurred by them in requisitioning, calling and holding that meeting.”

 

 
<ol>
<li> Shareholder Proposals</li>
</ol>
 

Please read pages 439-440 of the Casebook; BCBCA sections 187-191; and CBCA section 137.

A qualified shareholder may send the company a notice setting out a matter that they wish to have considered at the next AGM. A “qualified shareholder” is one who holds a voting share and has held it for at least two years, unless within the preceding two years they had failed to present an earlier shareholder proposal of some kind (in other words – if they previously were a “no show” after sending a notice to the company).

To be valid, a proposal must be supported by qualified shareholders (i.e. those meeting the same 2 year test) holding at least 1% of the issued voting shares or shares with a “fair market value” of at least $2000. A brief written explanatory statement may support the shareholders proposal.

 

If a proposal is received the company must send it, and any explanatory statement as part of the Annual General Meeting materials and must allow the shareholder to present it at the meeting.

 

The obligation to send proposal to shareholders not applicable if the Annual General Meeting has already been called; if substantially the same proposal was submitted within the preceding two years and did not achieve the support thresholds applicable in relation to requisitions; or if one of the other requisition exclusions applies.

 

Check out the Financial Post article dated April 25, 2013 “Shareholder proposals declining in Canada” <a href="http://business.financialpost.com/2013/04/25/shareholder-proposals-trending-downwards/?__federated=1">http://business.financialpost.com/2013/04/25/shareholder-proposals-trending-downwards/?__federated=1</a>

<a href="http://www.tumblr.com/share/link?url=http%3A%2F%2Fbusiness.financialpost.com%2F2013%2F04%2F25%2Fshareholder-proposals-trending-downwards%2F&name=Shareholder+proposals+declining+in+Canada&description=According+to+Kingsdale+Shareholders+Services+Inc.%2C+the+downward+trend+in+the+number+of+shareholders%27+proposals+over+the+past+few+years+is+continuing">Tumblr</a>
<ul>
<li><a href="http://pinterest.com/pin/create/button/?url=http%3A%2F%2Fbusiness.financialpost.com%2F2013%2F04%2F25%2Fshareholder-proposals-trending-downwards%2F%20rel=">Pinterest</a></li>
<li><a href="http://reddit.com/submit?url=http%3A%2F%2Fbusiness.financialpost.com%2F2013%2F04%2F25%2Fshareholder-proposals-trending-downwards%2F&title=Shareholder+proposals+declining+in+Canada">Reddit</a></li>
<li><a href="http://digg.com/submit?url=http%3A%2F%2Fbusiness.financialpost.com%2F2013%2F04%2F25%2Fshareholder-proposals-trending-downwards%2F&title=Shareholder+proposals+declining+in+Canada">Digg</a></li>
<li><a href="http://www.fark.com/cgi/farkit.pl?u=http%3A%2F%2Fbusiness.financialpost.com%2F2013%2F04%2F25%2Fshareholder-proposals-trending-downwards%2F&h=Shareholder+proposals+declining+in+Canada">FarkIt</a></li>
<li><a href="http://www.stumbleupon.com/submit?url=http%3A%2F%2Fbusiness.financialpost.com%2F2013%2F04%2F25%2Fshareholder-proposals-trending-downwards%2F&title=Shareholder+proposals+declining+in+Canada">StumbleUpon</a></li>
</ul>
 
<ol>
<li> Executive Compensation</li>
</ol>
 

Please read pages 317-318 of the casebook.

 

The concept of “say on pay” is a non-binding, advisory vote by shareholders “for” or “against” the compensation paid to executives as described in a proxy circular. Shareholders can express approval or disapproval of a company’s compensation policies. Mandatory “say on pay” voting has been implemented in various forms in numerous countries.

However “say on pay” is not mandatory in Canada. By mid-2013, 129 Canadian companies had voluntarily added annual say on pay resolutions to their AGM proxies, either as a matter of good governance or in response to shareholder proposals.

 
<h1>See “Say-on-pay movement on the rise in Canada, but is it changing anything?”</h1>
<a href="http://business.financialpost.com/2014/03/12/say-on-pay-movement-on-the-rise-in-canada-but-is-it-changing-anything/">http://business.financialpost.com/2014/03/12/say-on-pay-movement-on-the-rise-in-canada-but-is-it-changing-anything/</a>

 

 
<ol>
<li> Removing Directors</li>
</ol>
Please read BCBCA section 128(3) and CBCA sections 109 and 110.

BCBCA 128 (3) allows for the removal of directors by special resolution, or as specified in the memorandum or articles of the company, provided that a director may be removed by a resolution of the shareholders entitled to vote at general meetings passed by less than a special majority or may be removed by some other method, by the resolution or method specified in the memorandum or articles of the company.

 

BCBCA 128 (4) provides comparable provisions for classes of shareholders holding shares of a class or series of shares of a company removing those directors whom they have the exclusive right to elect or appoint. These would be resolutions of a specific class of shareholders depending on the specific type of shares they own (as opposed to all of the shareholders).

Note that in these sections of the legislation no provision is made for a right to attend or a right to circulate a statement.

 
<ol>
<li> Quorum and Enhanced Quorum By-Laws</li>
</ol>
What is quorum for a shareholders meeting? The normal quorum requirements are set out in BCBCA section 172.

Quorum for a shareholders meeting will be established by having the number of shareholders present established by the Memorandum and Articles of the company or, if no quorum is set out by the Memorandum and Articles of the company, then two shareholders present in person or by proxy regardless of number of shares represented will establish quorum for a shareholders meeting.

Paragraph 11.3 of the standard form BC articles establishes quorum if there are present at the shareholders meeting two persons who are, or who represent by proxy, shareholders who, in the aggregate, hold at least 5% of the issued shares entitled to be voted at the meeting. The same mechanic is provided in paragraph 8.5 of the standard form of Federal Bylaws. 

An “Enhanced Quorum” is where the articles or bylaws of a company require that a minimum of two shareholders holding at least a majority of the issued and outstanding common shares are required to be present or represented by proxy at any meeting at which a shareholder will be seeking to replace half or more of the board of directors, before the meeting can be held and business validly transacted.

 

 

TOPIC 7: shareholder meetings and the election and removal of directorS: A CONTEXTUAL EXERCISE

What follows is an exercise for you to work through in a semi-guided manner that is intended to provide some context to the mechanics of company meetings. For this purpose some hypothetical facts are provided so that you can explore some of the procedural implications of those facts. In order to expand the possibilities various changes can be made to the facts as you work through them.

First we deal with “private” companies; and then with publicly traded companies. While the core corporate mechanisms involved in each case are substantially similar, in the case of publicly traded companies they have been significantly elaborated through the intervention of provincial securities regulators and the stock exchanges.
<ol>
<li>“Private” Companies</li>
</ol>
Some assumed facts

At its last annual general meeting held about six months ago the 8 shareholders of Longwood Industries Inc., a “private” company incorporated under the British Columbia Business Corporations Act, unanimously adopted a resolution fixing the number of directors at 3 and elected 3 individuals, all shareholders, to the board.

The 3 directors have decided that it would be to the company’s advantage to increase the number of directors to 4 and, sooner rather than later, to add John Dewar, who is not a shareholder, to the board. He is qualified to be a director and agrees to become one. The five non-director shareholders are generally supportive of the board of directors and have indicated that they favour Dewar’s appointment.

The question is: what are the appropriate mechanisms to achieve the desired result.
<ol>
<li> Appointment by the Directors</li>
</ol>
Since everyone seems supportive of Dewar’s early appointment, the most expeditious way of proceeding would be for the 3 existing directors to appoint him a director. Section 122 of the BCBCA allows this. The directors might proceed in one of 3 ways:

* Hold a meeting, either in person or, as permitted by BCBCA section 140 (1) (a), by telephone, at which Dewar is appointed. The appointment would be recorded in the minutes of the meeting. There is no legal requirement that all directors be present at a meeting of this kind

* By a resolution consented to in writing by each of the directors, pursuant to section 140 (3)

Suppose, however, that contrary to what has been assumed above, one of the directors, say X, objects to the appointment of Dewar so that:

* A consent resolution under section 140 (3) will not work, and

* For practical reasons, (e.g. that the 2 directors who favor Dewar’s appointment are not comfortable imposing their will on X, or because two of the directors are unreachable so that neither an in person nor a telephone meeting is possible).

Since appointment by the directors under section 122 of the BCBCA will not work, the authority shifts to the shareholders, who will have to do two things: (a) increase the number of directors to 4 and (b) elect or appoint Dewar to fill the resulting vacancy.
<ol>
<li> Election/Appointment by the Shareholders</li>
</ol>
Both decisions can be made by ordinary resolution. This is defined in the BCBCA as a resolution that is either:

* passed at an actual meeting of shareholders by a simple majority (i.e. 50% + 1) of the votes cast (that is, actually voted) by shareholders voting shares that carry the right to vote at general meetings, or

* if not passed at an actual meeting, passed, after being submitted to all the shareholders holding shares that carry the right to vote at general meetings, by being consented to in writing by shareholders holding shares that carry the right to vote at general meetings who, in the aggregate, hold shares carrying at least a special majority of the votes entitled to be cast on the resolution. A “special majority” means. Depending on what the articles provide, a majority of at least 2/3 and not more than 3/4 of the votes cast.

If an actual meeting is to be held, there are two possibilities:

* wait until the next annual meeting of shareholders;

* convene a special meeting of shareholders for the purpose.

III. Annual Meeting

If, as seems likely, it is decided that the matter should be dealt with at the next annual meeting:
<ul>
<li>* this must be held, by virtue of BCBCA s. 182 (1), in the calendar year following the year in which the last annual meeting was held, but not later than 15 months after the last annual meeting – so, if the last annual meeting was held on June 30, 2013 the next annual meeting must be held no later than July 31, 2014;</li>
<li></li>
<li>* the directors must prepare and send out a notice of the annual meeting.</li>
</ul>
Length of notice:

The period of notice for an annual meeting of a “private” company is the period, being not less than 10 days, prescribed by the articles and if no period is prescribed, then 21 days.

Content of notice:

Standard requirements;

The notice must specify the date, time and place (which must, in the absence of contrary provision in the articles, be in British Columbia).

Additional requirements in certain cases (special business):

The standard form of articles in common use for British Columbia companies includes provisions comparable to the following:

“10.9 Notice of Special Business at Meetings of Shareholders 

If a meeting of shareholders is to consider special business . . . the notice of meeting must state the general nature of the special business.

11.1 Special Business 

At a meeting of shareholders, the following business is special business: 
<ol>
<li>at a meeting of shareholders that is not an annual general meeting, all business is special business except business relating to the conduct of or voting at the meeting; </li>
<li>at an annual general meeting, all business is special business except for the following: </li>
</ol>
(a) business relating to the conduct of or voting at the meeting; 

(b) consideration of any financial statements of the Company presented to the meeting; 

(c) consideration of any reports of the directors or auditor; 

(d) the setting or changing of the number of directors; 

(e) the election or appointment of directors; 

(f) the appointment of an auditor;

(h) business arising out of a report of the directors not requiring the passing of a special resolution or an exceptional resolution; 

(i) any other business which, under these Articles or the Business Corporations Act, may be transacted at a meeting of shareholders without prior notice of the business being given to the shareholders.” 

Since, under Article 11.1 (2) (d) and (e), neither an increase in the number of directors nor the election of directors is considered “special business” there will be no additional requirements as to the content of the notice of the annual meeting.

If, however, the notice did identify something to be done at the meeting that is “special business” Article 10.9 requires that the notice must state “the general nature” of that business. The essence of that requirement is that the notice (or some document accompanying the notice) should provide enough information about the special business to enable a shareholder to form an intelligent conclusion as to how he/she will vote on it. You will find some illustrations of this requirement that would be required by the common law even if there were no Article 10.9. See the judgment in Garvie v. Axmith, at pages 430-432 of the Casebook.

Any matter that requires a “special resolution” of the shareholders, generally, “out of the ordinary” transactions such as a resolution for the removal of a director, will be “special business”. The definition of “special resolution” is unnecessarily complicated but the nub of it is that it must be passed by a majority of not less than 2/3 (and, depending on the Articles, not more than 3/4) of the votes cast to be voted in favor.

Assuming, then, that the only matters to be dealt with at the annual meeting fall within the scope of Article 11.1 (2), i.e. there will be no “special business”, the notice of meeting will look something like this:

 NOTICE OF ANNUAL GENERAL MEETING OF

ABC CORPORATION

NOTICE IS HEREBY GIVEN that the annual general meeting of shareholders of the Company will be held (address, date and time) for the following purposes:
<ol>
<li>to receive the financial statements of the Company for the year ended -------;</li>
<li>to appoint auditors and to authorize the directors to fix their remuneration;</li>
<li>to fix the number of directors of the Company at four (4):</li>
<li>to elect directors;</li>
<li>to consider such other matters as may properly come before the meeting.</li>
</ol>
BY ORDER OF THE BOARD OF DIRECTORS

By: ________________________

Secretary

Dated:

---------------------------------------------

You will see that the Notice does not identify the people who are to be proposed for election as directors. It is not required to do so, nor, in contrast to the position in public companies (as to which see below) must this information be provided in any other document sent to shareholders in connection with the meeting. The shareholders may only learn who the nominees are when, and if, they turn up at the meeting.

Voting at meetings:

Although it is not common, it is certainly possible to create a class of shares that does not have the right to vote at a meeting of shareholders. Even in that case, however, such shares may have the right to vote in certain extraordinary circumstances.

Where a class of shares does have the right to vote (which would be the case if there is only one class of [“common”] shares), in most cases that right may be exercised in one of two ways [BCBCA s. 173 (1)]:

(a) in person; or

(b) by proxy

Voting in person by show of hands or ballot:

To exercise the right to vote “in person”, the shareholder must be present at the meeting. Assuming that he/she is present, there are two methods for tallying the vote: (i) by “show of hands” and (ii) by a ballot.

In the former case, the shareholders present are asked to raise a hand to indicate their vote, which is then counted. Effectively, this means that each shareholder voting has one vote only, regardless of the number of votes attached to all the shares owned by that shareholder.

To avoid this, it is common for the articles to permit a “ballot” vote by which each shareholder present is invited to complete a ballot form indicating how he/she is voting on a particular resolution and the number of votes which that shareholder is entitled to cast. The voting result will then reflect the number of votes, not the number of shareholders. In the ordinary course of events, absent some unusual circumstances (such as, some matter as to which there is a difference of opinion), there will generally only be a vote by show of hands, though a shareholder generally has the right to demand that a ballot or poll be held. See BCBCA sectiom 173 (1).

Voting by proxy:

Simply put, voting by proxy is a procedure by which a shareholder appoints another person to vote his/her shares. More often than not, shareholders who, for one reason or another, are unable to attend a meeting in person use this procedure. Sometimes, a shareholder who, although able to attend a meeting and intending to be present, wishes to be accompanied by an advisor such as a lawyer uses it. In that case, for example, a shareholder with 100 votes (shares) might give the lawyer his/her proxy in respect of 1 share, and vote the remaining shares himself/herself.

Proxy voting at common law and under the standard form articles:

At common law, a shareholder did not have the right to appoint a proxy. (The word, “proxy” is, by the way, used both to describe the document by which someone is given the right to vote on one’s behalf and, sometimes, the person (proxyholder or nominee) who is given that right). If there is to be a right to vote by proxy, this has to be found in the memorandum or articles of the company. Under section 173 of the BCBCA a shareholder has the right to vote by proxy unless that memorandum or articles provide otherwise.

In fact, it is commonplace to find a provision permitting proxy voting in the articles of “private” companies. Article 12.8 of the standard articles is a good example:

“Every shareholder of the Company, including a corporation that is a shareholder but not a subsidiary of the Company, entitled to vote at a meeting of shareholders may, by proxy, appoint one or more proxyholders to attend and act at the meeting in the manner, to the extent and with the powers conferred by the proxy.”

The articles also commonly specify the (relatively simple) form of proxy. See, forexample, Article 12.12 of the standard articles which says:

A proxy, whether for a specified meeting or otherwise, must be either in the following form or in any other form approved by the directors or the chair of the meeting:

[name of company] (the “Company”)

The undersigned, being a shareholder of the Company, hereby appoints [name] or, failing that person, [name], as proxyholder for the undersigned to attend, act and vote for and on behalf of the undersigned at the meeting of shareholders of the Company to be held on [month, day, year] and at any adjournment of that meeting.

Number of shares in respect of which this proxy is given (if no number is specified, then this proxy is given in respect of all shares registered in the name of the undersigned):

Signed [month, day, year] 

[Signature of shareholder] 

[Name of shareholder—printed]

For obvious reasons, the BCBCA requires a ballot vote where proxy voting is permitted. See BCBCA section 173 (2) (a) in this regard.

If proxy voting is provided for it is common, though not required, to include language in the notice of an AGM to the effect that proxy voting is permissible, to provide a form of proxy, and instructions as to how it is to be completed.
<ol>
<li>Special Meeting</li>
</ol>
On the facts about Longwood that are assumed, it is highly unlikely as a practical matter that a special meeting of shareholders of a “private” company would ever be convened for the purpose of appointing an additional director, whether on the initiative of the directors or, by means of a requisition, by Dewar or one of his supporters. This is much more likely (although not commonplace) in the case of a publicly traded company.
<ol>
<li> Court Ordered Meetings</li>
</ol>
Under section 186 of the BCBCA if for some reason it is “impracticable” for a company to call or conduct a meeting of shareholders in the prescribed manner, or for any other reason the court considers appropriate, it may, on the application of a director or shareholder, order that a meeting be called, held and conducted in the manner the court considers appropriate, and give appropriate directions to this end. Although this section is equally applicable to private and publicly traded companies it is rarely used in relation to the latter. The sort of circumstance in which it might be used in connection with a private company is where there is an internal dispute and a shareholder tries to exert leverage over his adversary by refusing to attend shareholder meetings thus preventing a quorum being reached and thus preventing the meeting from doing anything.
<ol>
<li> PUBLICLY TRADED COMPANIES</li>
</ol>
Assume some slightly different facts from those indicated above.

Longwood Industries Inc.:

* Is not a private company but a publicly traded company, with its common shares (each of which carries one vote) traded on the Toronto Stock Exchange;

* Has several thousand shareholders scattered across Canada;

* Has a board consisting of 5 directors;

* Held its last AGM in January 2014 (i.e. the next AGM need only be held before the end of April 2015 [see above II.A. (i)];

* In March 2014 completes an agreement with “Zillion$ Financing Inc” under which the latter invests about $25 million by the purchase of common shares by way of a “private placement” (i.e. a private transaction). Effectively, this gives Zillion$ slightly under 4% of the total outstanding shares (and hence votes) of Longwood, making it the largest single shareholder. Suppose that the agreement entitles Zillion$, upon request, to appoint 2 nominees to Longwood’s board of directors.

* Zillion$ has indicated to Longwood that it has no present intention of exercising its right to appoint nominees to Longwood’s board and is content to wait until the next AGM. It also indicates that it presently contemplates that its 2 nominees will be in addition to the 5 existing directors and not by way of replacement of two of them.

ANNUAL MEETING OF LONGWOOD IN APRIL 2015

The basic procedure:

The basic procedure for convening the AGM to be held in April 2015 will be essentially the same as that outlined in II.A above in connection with the AGM of the private company. Some of the details will, however, differ.

On the basis of the facts assumed, the “appointment by directors” procedure outlined above is not relevant. We are dealing, then, with the subject of appointment/election by the shareholders.

Notice of meeting and information circular:

A notice of meeting will have to be sent out, slightly more elaborate but not unlike that outlined above for a private company. On the next page you will find a recent example:

 

 ABSOLUTE SOFTWARE CORPORATION

Suite 1600, Four Bentall Centre

1055 Dunsmuir Street

Vancouver, British Columbia, V7X 1K8

NOTICE OF ANNUAL GENERAL MEETING

TO OUR SHAREHOLDERS:

Our Annual General Meeting (the “Meeting”) will be held at the Metropolitan Hotel Vancouver, 645 Howe St, Vancouver, British Columbia on Wednesday, December 11, 2013 at 4:00 p.m. (local time) for the following purposes:
<ol>
<li>To receive the report of our directors;</li>
<li>To receive our audited financial statements of the financial year ended June 30, 2013, and the accompanying report of the auditors;</li>
<li>To fix the number of persons to be elected to our board of directors;</li>
<li>To elect our directors for the ensuing year;</li>
<li>To appoint our auditor for the ensuing year and to authorize the directors to fix the auditor’s remuneration;</li>
<li>To consider any amendment to or variation of a matter identified in this Notice; and</li>
<li>To transact such other business as may properly come before the Meeting or any adjournment thereof.</li>
</ol>
Our Information Circular, which includes a detailed description of the matters to be dealt with at the Meeting, along with a copy of our 2013 Annual Report, accompanies this Notice. Our consolidated financial statements for the year ended June 30, 2013 and the report of the auditors thereon are included in the Annual Report.

If you are unable to attend the Meeting in person and wish to ensure that your shares will be voted at the Meeting, you must complete, date and execute the enclosed form of proxy, or another suitable form of proxy, and deliver it by hand or by mail in accordance with the instructions set out in the form of proxy and in the Information Circular. If you are an unregistered shareholder and want to attend the Meeting, you must follow the instructions set out in the Information Circular to ensure that your shares will be voted at the Meeting.

DATED at Vancouver, British Columbia, November 6, 2013.

BY ORDER OF THE BOARD

“John Livingston”

Chairman and Chief Executive Officer

 

As in the case of the notice of meeting of the private company, Absolute Software’s Notice of Annual Meeting itself gives virtually no information about the various agenda items to be considered at the meeting.

Much of this information is (and must be) contained in the “Information Circular” referred to as accompanying the Notice of Meeting. This is an elaborate disclosure document the contents of which are prescribed in a Form published by the various provincial securities commissions. It does not apply in connection with meetings of “private” companies.

It is too long to include here but if you wish to see Absolute Software’s Information Circular, the following link will take you to it:

<a href="http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Ccirc.pdf">http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Ccirc.pdf</a>

If you do look at the Absolute Software Information Circular you will notice that, in contrast to the position in connection with private companies, it identifies each of the proposed nominees for election as a director and provides detailed information about their background and experience and their compensation. All of this information, and a great deal else besides, is prescribed in the relevant Form and the Policy under which it has been developed. In addition, you should note that the Form says:

“If action is to be taken on any matter to be submitted to the meeting of securityholders other than the approval of annual financial statements, briefly describe the substance of the matter, or related groups of matters, except to the extent described under the foregoing items, in sufficient detail to enable reasonable securityholders to form a reasoned judgment concerning the matter. Without limiting the generality of the foregoing, such matters include alterations of share capital, charter amendments, property acquisitions or dispositions, reverse takeovers, amalgamations, mergers, arrangements or reorganizations and other similar transactions.”

You will see that the language used here is a slightly more elaborate (and perhaps more informative) version of what is contemplated by the disclosure required under the standard form articles in respect of “special business”.

Voting procedure:

As in the case of “private” companies, voting at the meeting both by “show of hands” and by ballot so that proxy votes (calculated by shares not shareholders) are counted is possible. The securities regulators require that an opportunity to vote by proxy be given to each shareholder entitled to vote at a meeting of a “public” company. In practical terms, “show of hands” voting is used, if at all, only on relatively uncontroversial matters.

Proxy voting:

In general, only registered shareholders are entitled to vote, i.e. those whose names are entered on the company’s shareholders register. In the case of publicly traded companies, this gives rise to two problems. First, a registered shareholder might be unable to attend the meeting; and second, it is almost invariably the case that there are shareholders in public companies who, for reasons of convenience or otherwise, do not wish to have their shares registered in their own names, but instead to hold them through nominees such as investment dealers or banks.

To deal with these problems there is an elaborate and complex set of rules concerning the process of “soliciting” proxies (i.e. asking shareholders (or, viewed from another perspective, giving them the opportunity) to exercise their right to vote. This is achieved through the proxy regulation system the rules of which are sometimes found in corporate legislation (see, for example, Part XIII of the CBCA) but more often in published policies of the provincial securities regulators.

There are two major components of this system:

* Every time the management of a public company gives notice of a meeting of shareholders it is deemed to engage in a “solicitation”<a href="#_ftn1" name="_ftnref1">[1]</a> of proxies and must give shareholders:

- An information circular (see above) containing certain mandated disclosure. The information circular must include certain specific information and, in addition, if the shareholders are asked to take action on some specific matter, the substance of that matter must be described “in sufficient detail to permit security holders to form a reasoned judgment concerning the matter”;

- A form of proxy (i.e. the document appointing the proxy nominee) that permits them to specify that their shares shall be voted for or against on every matter to be voted on and, in connection with an election of directors or appointment of auditors, that permits them to vote or be withheld from voting.

* A complex set of rules designed to enable beneficial shareholders such as those who hold their shares through banks or investment dealers as nominees, the opportunity to have their votes cast. Simply put, these rules require the nominees to solicit voting instructions from those on whose behalf they act. If you look at the Absolute Software information circular you will see that it contains detailed information about these procedures.

 

 

On the assumption that the April 2015 Annual Meeting of Longwood Industries Inc. is going to be in all respects routine, conducted in accordance with its agreement with Zillion$. On that assumption, the form of proxy would look something like this:

 

ANNUAL GENERAL MEETING OF SHAREHOLDERS OF
LONGWOOD INDUSTRIES INC. (the “Company”)
TO BE HELD AT ●, British Columbia, Canada

on ●, April ●, 2015, at 10:00 a.m. (Pacific Time)

The undersigned shareholder (“Registered Shareholder”) of the Company hereby appoints ●, a director and the President and Chief Executive Officer of the Company, or failing him, ●, the Chief Financial Officer and Corporate Secretary of the Company, or, in the place of the foregoing, ______________________________ as proxyholder for and on behalf of the Registered Shareholder with the power of substitution to attend, act and vote for and on behalf of the Registered Shareholder in respect of all matters that may properly come before the Meeting of the Registered Shareholders of the Company and at every adjournment thereof, to the same extent and with the same powers as if the undersigned Registered Shareholder were present at the said Meeting, or any adjournment thereof.

The Registered Shareholder hereby directs the proxyholder to vote the securities of the Company registered in the name of the Registered Shareholder as specified herein.

The undersigned Registered Shareholder hereby revokes any proxy previously given to attend and vote at said Meeting.
SIGN HERE:_______________________________ 

 

Please Print Name: _________________________ 

 

Date: ____________________________________ 

 

Number of Shares Represented by Proxy:______ 

 

THIS PROXY FORM IS NOT VALID UNLESS IT IS SIGNED AND DATED. SEE IMPORTANT INFORMATION AND INSTRUCTIONS ON REVERSE. 

 

Resolutions (For full detail of each item, please see the enclosed Notice of

Meeting and Information Circular)
<table width="472">
<tbody>
<tr>
<td width="307"> </td>
<td width="48">For</td>
<td width="54">Against</td>
<td width="63">Withhold</td>
</tr>
<tr>
<td width="307">· To set the number of directors at seven (7)</td>
<td width="48"> </td>
<td width="54"> </td>
<td width="63">N/A</td>
</tr>
<tr>
<td width="307">· To elect as a director, ●</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
<tr>
<td width="307">· To elect as a director, ●</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
<tr>
<td width="307">· To elect as a director, ●</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
<tr>
<td width="307">· To elect as a director, ●</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
<tr>
<td width="307">· To elect as a director, ●</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
<tr>
<td width="307">· To elect as a director, ●</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
<tr>
<td width="307">· To elect as a director, ●</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
<tr>
<td width="307">· To appoint ●, Chartered Accountants, as auditor of the Company</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
</tbody>
</table>
INSTRUCTIONS FOR COMPLETION OF PROXY 
<ul>
<li>This Proxy is solicited by the Management of the Company. </li>
<li>This form of proxy (“Instrument of Proxy”) must be signed by you, the Registered Shareholder, or by your attorney duly authorized by you in writing, or, in the case of a corporation, by a duly authorized officer or representative of the corporation; and if executed by an attorney, officer, or other duly appointed representative, the original or a notarial copy of the instrument so empowering such person, or such other documentation in support as shall be acceptable to the Chairman of the Meeting, must accompany the Instrument of Proxy.</li>
<li>If this Instrument of Proxy is not dated in the space provided, authority is hereby given by you, the Registered Shareholder, for the proxyholder to date this proxy the date on which it was mailed to you, the Registered Shareholder, by Olympia Trust Company.</li>
<li>A Registered Shareholder who wishes to attend the Meeting and vote on the resolutions in person, may simply register with the scrutineers at the Meeting before the Meeting begins.</li>
<li>A Registered Shareholder who is not able to attend the Meeting in person but wishes to vote on the resolutions, may do one of the following:</li>
</ul>
 (a) appoint one of the management proxyholders named on this Instrument of Proxy, by leaving the wording appointing a nominee as is (i.e. do not strike out the management proxyholders shown and do not complete the blank space provided for the appointment of an alternate proxyholder). Where no choice is specified by a Registered Shareholder with respect to a resolution set out herein, a management appointee acting as a proxyholder will vote in favour of each matter identified on this Instrument of Proxy and for the nominees of management for directors and auditor as identified in this Instrument of Proxy; OR (b) appoint another proxyholder, who need not be a Registered Shareholder of the Company, to vote according to the Registered Shareholder’s instructions, by striking out the management proxyholder names shown and inserting the name of the person you wish to represent you at the Meeting in the space provided for an alternate proxyholder. If no choice is specified with respect to the matters to be voted on at the Meeting, the proxyholder has discretionary authority to vote as the proxyholder sees fit.
<ul>
<li>The securities represented by this Instrument of Proxy will be voted or withheld from voting in accordance with the instructions of the Registered Shareholder on any poll of a resolution that may be called for and, if the Registered Shareholder specifies a choice with respect to any matter to be acted upon, the securities will be voted accordingly. Further, the securities will be voted by the appointed proxyholder with respect to any amendments or variations of any of the resolutions set out on the Instrument of Proxy or matters which may properly come before the Meeting as the proxyholder in its sole discretion sees fit.</li>
</ul>
If a Registered Shareholder has submitted an Instrument of Proxy, the Registered Shareholder may still attend the Meeting and may vote in person. To do so, the Registered Shareholder must record his/her attendance with the scrutineers before the commencement of the Meeting and revoke, in writing, the prior votes by proxy.

To be represented at the Meeting, this Instrument of Proxy must be received by Olympia Trust Company no later than forty eight (48) hours (excluding Saturdays, Sundays and holidays) prior to the time of the Meeting, or adjournment thereof, or may be accepted by the Chairman of the Meeting prior to the commencement of the Meeting. 
<ol>
<li>VOTING METHODS</li>
</ol>
INTERNET VOTING 24 Hours a Day, 7 days a week: If a WEB VOTING ID NUMBER appears on the face of this Instrument of Proxy in the address box (see example below), you can complete internet voting at https://secure.olympiatrust.com/proxy/
<table>
<tbody>
<tr>
<td width="85">Example:</td>
<td width="246">123456 9999 1000 123F45K
JOHN DOE
123 MAIN STREET
CALGARY AB T1A 1A1</td>
<td width="336">o 123F45K would be your WEB VOTING ID NUMBER</td>
</tr>
</tbody>
</table>
 

RETURN YOUR PROXY BY MAIL, FACSIMILE OR E-MAIL TO Olympia Trust Company:

Olympia Trust Company, Proxy Department, 1003 – 750 West Pender Street, Vancouver, British Columbia V6C 2T8

Facsimile: (604) 484-8638 E-mail: proxy@olympiatrust.com I

Do not mail the printed Instrument of Proxy if you have voted via the Internet.




It was noted in the hypothetical facts that Zillion$ owns slightly less than 4% of the outstanding Longwood shares. To achieve its objectives, therefore, it is likely that it will have to secure the support of other shareholders including, having regard to its investment agreement, the present directors of Longwood. This will generally be achieved through the proxy system.

[Suppose, however, that some other shareholder has a different view about the desirability of the 5 nominees and has some candidates of its own to put forward. In that event, it will probably decide to put up its own nominees for election and solicit proxies for those candidates. To do this, it will need to obtain a copy of a list of shareholders. Its rights in this respect are governed by section 49 of the BCBCA. Essentially, that section provides that an application must be made to the company or its transfer agent for a copy of the list. The application must include an affidavit to the effect that the list will only be used for a permitted purpose. The permitted purposes include an effort to influence the voting of shareholders of the company at any meeting of shareholders and to acquire or sell securities of the company.]

It is likely that, if Longwood has not previously done so, it will take the opportunity at its 2015 annual meeting to adopt certain changes to its articles affecting the election of directors that are now required under various policies of the Stock Exchange. These are:
<ol>
<li> Preventing slate voting</li>
</ol>
Until fairly recently a minority of publicly traded companies used to employ a voting system – “slate voting” which only allowed shareholders to vote for all of the directors nominated by management (i.e. a slate of directors), but not for individual directors. This effectively prevented shareholders from voting against individual directors for performance reasons such as poor board attendance. The only option in such case was to vote against the whole board, or to conduct a costly proxy fight. Slate voting is no longer permitted. As is apparent from Longwood’s form of proxy, it provides for individual and not slate voting
<ol start="2">
<li> Plurality and majority voting</li>
</ol>
Under the “for-withhold” plurality voting system for directors contemplated by the Longwood form of proxy it is possible for someone to be elected without receiving a majority of the votes. So: assume 7 candidates for election and 100 possible votes, cast as follows:

 

 

 

 
<table>
<tbody>
<tr>
<td width="213"> </td>
<td width="213">For</td>
<td width="213">Withhold</td>
</tr>
<tr>
<td width="213">A</td>
<td width="213">60</td>
<td width="213">40</td>
</tr>
<tr>
<td width="213">B</td>
<td width="213">55</td>
<td width="213">30</td>
</tr>
<tr>
<td width="213">C</td>
<td width="213">51</td>
<td width="213">40</td>
</tr>
<tr>
<td width="213">D</td>
<td width="213">40</td>
<td width="213">43</td>
</tr>
<tr>
<td width="213">E</td>
<td width="213">36</td>
<td width="213">45</td>
</tr>
<tr>
<td width="213">F</td>
<td width="213">25</td>
<td width="213">35</td>
</tr>
<tr>
<td width="213">G.</td>
<td width="213">20</td>
<td width="213">30</td>
</tr>
</tbody>
</table>
Despite the facts that each of D, E, F and G received less than a majority of the possible votes and that more shareholders withheld voting for them than voted in their favour, each of them will be elected.

Under a Policy recently adopted by the Toronto Stock Exchange, however, any nominee for director who receives a greater number of votes ‘withheld' from him than ‘for' his or her election, would be required to tender his or her resignation as a director and the remaining directors would have to consider whether – as is likely to be the case – those resignations should be accepted.

The remaining board members would, absent unusual circumstances, generally accept such resignation.

Most publicly traded companies are also subject to a requirement that they publish the results of voting at a shareholders’ meeting.
<ol start="3">
<li>3. Advance notice policy</li>
</ol>
It is becoming increasingly common for publicly traded companies to adopt what is referred to as an “advance notice” policy under which anyone (effectively anyone who is not part of management) proposing to nominate a director for election at a meeting of shareholders must provide the company with advance notice (typically between 30-65 days) of, and prescribed details concerning, any such proposed nominee. Unless proper notice is given to the company any such proposed nominee is ineligible for election at the shareholders meeting. The policy is intended to the risk of ambush proxy contests.
<ol start="4">
<li> An “enhanced quorum” policy</li>
</ol>
A “quorum” is the minimum number of participants who must be present at a meeting in order to permit it to proceed to do the business for which it has been called. This number is commonly found in the Articles of a company and may be measured either by reference to shareholders present in person or by a combination of shareholders present in person and shareholders represented by proxy. Article 11.3 of the “model” articles, for example, says that subject to certain qualifications, the quorum for the transaction of business at a meeting of shareholders is two persons who are, or who represent by proxy, shareholders who, in the aggregate, hold at least 5% of the issued shares entitled to be voted at the meeting. Section 172 of the Business Corporations Act contains a “default” provision if the company’s articles are silent on the point.

A number of public traded companies have recently adopted an “enhanced quorum” provision. Essentially, this provides that at any meeting at which a shareholder will be seeking to replace half or more of the board of directors a minimum of two shareholders holding at least a majority of the issued and outstanding common shares must be present or represented by proxy before the meeting can be held and business validly transacted.

The matters identified above are all “special business” within the meaning of Articles 10.9 and 11.1 of Longwoods Articles and of the requirements for disclosure in its Information Circular. The relevant provisions have been quoted earlier.

----------------

A SLIGHT CHANGE IN THE ASSUMED FACTS ABOUT LONGWOOD AND ZILLION$ - REQUISITIONING A SPECIAL MEETING IN AUGUST 2014

Suppose that within a short time after Zillion$ completes its investment in Longwood it starts becoming progressively more disenchanted with the policies and competence of the Longwood directors to the point that it considers that it cannot afford to wait until the April 2015 AGM to reconstitute the Longwood board.

Up for consideration by Zillion$ is to requisition a meeting of Longwood shareholders to
<ul>
<li>Increase the number of directors to 7 and elect two Zillion$ nominees to fill the vacancies; or</li>
<li>Remove two existing directors and replace them with 2 Zillion$ nominees; or</li>
<li>Remove all 5 existing directors and replace them with 5 Zillion$ nominees</li>
</ul>
The procedure for requisitioning a meeting of Longwood shareholders is set out in section 167 of the British Columbia Business Corporations Act.

In summary, a requisition must be:
<ul>
<li>For the purpose of transacting any business that may be transacted at a general meeting – the removal and election of directors both qualify:</li>
<li>Served on Longwood and signed by shareholders who, at the date on which the company receives it, hold in the aggregate at least 1/20 of the issued shares. Since Zillion$ only holds 4% of the shares, it will have to find other shareholders to join it;</li>
<li>State in 1,000 words or less, the business to be transacted at the meeting, including (the text of) any special resolution to be voted on.</li>
</ul>
Note that the removal of a director can only happen if the shareholders pass a special resolution to this effect. If a requisition meeting these requirements is received the directors must call a general meeting for the purpose set out in the requisition, to be held not more than 4 months after the date on which it is received. They are relieved of this obligation, however, if:
<ul>
<li>They have already called a general meeting to be held after the receipt of the requisition and have sent out notice of that meeting;</li>
<li>Substantially the same business was submitted to shareholders to be transacted at a general meeting that was held within the preceding 5 years and was only supported by a certain threshold number of votes which varies according to the number of times it has been submitted;</li>
<li>It clearly appears that the business stated in the requisition does not relate in a significant way to the business or affairs of the company or that the primary purpose for the requisition is securing publicity, or enforcing a personal claim or redressing a personal grievance against the company or any of its directors, officers or security holders;</li>
<li>The business stated in the requisition has already been substantially implemented or, if implemented, would cause the company to commit an offence, or</li>
<li>The requisition deals with matters beyond the company's power to implement.</li>
</ul>
None of the actions contemplated by Zillion$ seems to fall within any of the grounds for rejection specified. It seems, then, that the Longwood directors will have to respond to the requisition by calling a meeting to be held within 4 months.

If they do not do so within 21 days, then Zillion$ (and its friends) will be able to call a meeting to be held within the prescribed 4 months. The notice and proxy requirements described generally above if the meeting were to be called by the directors, will apply to Zillion$ and its friends (because, almost by definition, they are engaged in a “solicitation”) and, unless at the requisitioned meeting the shareholders, by an ordinary resolution, decide otherwise, those making the requisition will be entitled to be reimbursed for their expenses.

Assuming that Longwood has adopted the “enhanced quorum” provision referred to above, it may be difficult for Zillion$ to achieve its objectives without a vigorous proxy battle to ensure that the enhanced quorum is satisfied.

SHAREHOLDER PROPOSALS

It is possible, though as a practical matter unlikely, that Zillion$ might seek to achieve its objectives by means of a so-called “shareholder proposal”. Essentially, this involves a non-management shareholder or shareholders taking steps to try and get the actions that they wish to have taken, included in management’s notice of meeting and proxy materials. Shareholder proposals are more likely to be used to raise structural issues, such as the reconstitution of the board of directors, than issues that are not essentially structural but relate to the opportunities to scrutinize management in ways that are not readily amenable to the requisition procedure.

Examples might be to persuade a reluctant board of directors to adopt the sort of changes that have now been mandated by the Stock Exchange, relating to slate and majority voting, etc. In fact, what has happened is that the original initiative for the adoption of mechanisms of this kind came in the form of shareholder proposals, not binding on the directors, but attracting a level of support that made it increasingly difficult to resist these ideas. Eventually, the pressure from “activist” shareholders caused the exchange to act.

An example of a shareholder proposal that is becoming increasingly common is the so-called “say on pay” proposition. Essentially, this involves giving shareholders the opportunity to vote on an advisory resolution on executive compensation. Among the items identified in the Notice of the 2009 Annual Meeting of National Bank of Canada was “to examine the shareholder proposals, as set out in Schedule A to the Management Proxy Circular”. That Schedule advised that the Bank had received a proper proposal “that the board of directors adopt a governance rule stipulating that a shareholder advisory vote be held on the compensation policy for their executive officers; set out the proposer’s rationale for its proposal and the Bank’s response which was, in essence, to oppose adoption of the proposal. Despite this, the shareholders supported the proposal with 56.85% of the votes being cast in favour of it and 43.15% voting against. The board of National Bank has since changed somewhat its approach to the subject of “say on pay” but the matter continues to arise as a topic at annual meetings. See, for example, the Bank’s 2014 Notice of Annual Meeting and Information Circular, at <a href="http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00002236&fileName=/csfsprod/data149/filings/02172923/00000001/g%3A%5CSEDAR%5CNational-Bank%5CNBC%5C2014%5CAGM%5CCircular-Eng.pdf">http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00002236&fileName=/csfsprod/data149/filings/02172923/00000001/g%3A%5CSEDAR%5CNational-Bank%5CNBC%5C2014%5CAGM%5CCircular-Eng.pdf</a>

The provisions governing shareholder proposals are found in sections 187 to 191 of the BC Business Corporations Act. Nothing is to be gained from a detailed examination of those provisions here.

 

 

UNIT WRAP UP:

Understanding that this (sort of) separate entity known as the corporation functions and has legally defined rights, powers and constraints; we cannot avoid the truth that it is human beings who actually animate those rights, powers and constraints. They are “Oscar Zoroaster Phadrig Isaac Norman Henkle Emmannuel Ambroise Diggs”, the human being of flesh and bones who pretended to be the Great and Powerful Oz in “The Land of Oz” by Frank Baum that served as the basis of the film “The Wizard of Oz”. So although companies are separate, they need people. The next Unit is about what those people, known as management (and in limited circumstances shareholders), can and cannot do.

<a href="#_ftnref1" name="_ftn1">[1]</a> There is an elaborate definition of “solicit” and solicitation. The essence of a solicitation is that it involves a request to a shareholder to execute and deliver a form of proxy.

Course:Business Organizations - LAW 459/Unit 6

2016-08-16T09:25:08Z

DavidHeinrich: Created page with "UNIT 6 (weeks 8 & 9): THE LEGAL ARCHITECTURE OF BUSINESS GOVERNANCE <img class="alignnone wp-image-207 aligncenter" src="http://bizorgl..."

UNIT 6 (weeks 8 & 9): THE LEGAL ARCHITECTURE OF BUSINESS GOVERNANCE

<img class="alignnone wp-image-207 aligncenter" src="http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Unit-6-360x265.jpg" alt="" width="448" height="330" />
Figure 6: A ballot sheet
ALT: A ballot with a pencil lying on top. The ballot contains two choices, “Bad Choice” or “Worse Choice”.

 

Source of image – Morguefile <a href="http://www.morguefile.com/archive/display/578770">http://www.morguefile.com/archive/display/578770</a> Image URI: <a href="http://mrg.bz/TX0sAT">http://mrg.bz/TX0sAT</a>

 

 

 

 

UNIT OVERVIEW:

In this unit the general structure of the board/ management-shareholder relationship and, in particular, how and to what extent management is subject to the direction of, and accountable to, the shareholders will be considered. These issues involve investigations of the nature of the corporate constitution and the internal architecture contemplated as the norm by corporate law. The extent to which, by contract or otherwise, that architecture may be modified will also be considered.

The student will also go into some detail about corporate directors, their qualifications, disqualifications, election and removal and their compensation; and the “principle” of “majority rule” as well as its limits.

 

UNIT OUTCOME:

By the end of this unit you will appreciate that in a sense we have come back to where we started in our look at company law. That is a reliance on the human personality to determine corporate outcomes. However you will comes to understand how the law imposes governance processes that seek to constrain, at least in theory, the excesses of how humans use corporate vehicles. In particular, you will be in a position to reflect on the roles and responsibilities of directors, shareholders and management on the life of a company. You will notice where those roles can overlap as well as the governance vulnerabilities that the doctrine of separate corporate personality inevitably imposes.

 

UNIT READINGS:

Casebook pages 95-105; 110-126 paying particular attention to the judgment in the Canadian Jorex case on CB pages103-105; 304-308; 311; 314-426; 429-432; 438 to 444; 494-502.

BCBCA sections 1(1), 2(b), 120-122, 124, 128, 130-138, 140-142 166-191, 259, 301; CBCA sections 2(1), 102, 105, 106, 107, 109-110, 114, 121-122, 137, 143, 146, 173; BC Partnership Act section 27(e); BC Securities Act sections 1(1), 161(1).

Northern Minerals Investment Corp. v. Mundoro Capital Inc, 2012 BCSC 1090 <a href="http://canlii.ca/t/fs46d">http://canlii.ca/t/fs46d</a>

Official Receiver v Wadge, Rapps & Hunt [2003] UKHL 49.

Chell v. The Queen, 2013 TCC 29 <a href="http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/31073/index.do">http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/31073/index.do</a>

You will also examine portions of the standard B.C. Articles of Incorporation.

You may also find it useful, as well, to look at the sort of documentation that a publicly listed corporation must send to its shareholders in connection with a meeting at which directors are to be elected.

For a recent example, see: “Information Circular” of Absolute Software Corporation

<a href="http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Ccirc.pdf">http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Ccirc.pdf</a>

“Proxy” of Absolute Software <a href="http://www.sedar.com/GetFile.do?lang=EN&docClass=13&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Cproxy.pdf">http://www.sedar.com/GetFile.do?lang=EN&docClass=13&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Cproxy.pdf</a>

National Policy 58-101 <a href="http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp">http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp</a>

National Instrument 52-110 <a href="https://www.bcsc.bc.ca/Securities_Law/Policies/Policy5/PDF/52-110_Audit_Committees__NI_/">https://www.bcsc.bc.ca/Securities_Law/Policies/Policy5/PDF/52-110_Audit_Committees__NI_/</a>

Financial Post article dated April 25, 2013 “Shareholder proposals declining in Canada” <a href="http://business.financialpost.com/2013/04/25/shareholder-proposals-trending-downwards/?__federated=1">http://business.financialpost.com/2013/04/25/shareholder-proposals-trending-downwards/?__federated=1</a>

You will also be asked to work through in a semi-guided manner an exercise intended to provide some context to the mechanics of company meetings. For this purpose some hypothetical facts are provided so that you can explore some of the procedural implications of those facts, and their variations.

 

 

TOPIC 1: Introduction TO GoVERNANCE

Please read pages 98 - 105 of the Casebook. You will see that the corporate governance model common in Canada is now virtually universal.

Some of its important elements:
<ol>
<li>Day-to-day business decisions are generally within the exclusive authority of the directors/management. Shareholders do not have a role.</li>
</ol>
Contrast this to partnership. See section 27 (e) of the Partnership Act, RSBC 1996, c. 348 which provides:

“27. Subject to any agreement express or implied between the partners, the interests of partners in the partnership property and their rights and duties in relation to the partnership must be determined by the following rules:…

(e) every partner may take part in the management of the partnership business;”

Thus absent contrary agreement every partner may take part in the management of the partnership business. Entitlement flows from being a partner. Shareholders do not have a comparable right simply because they are shareholders.

 
<ol>
<li> The Board of Directors chooses and supervises executives and management. </li>
</ol>
See BCBCA section 141(1):

“141. (1) Subject to subsection (3) and to the memorandum and articles of a company, the directors may appoint officers and may specify their duties.”

There is a similar provision in CBCA section 121: 

“121. Subject to the articles, the by-laws or any unanimous shareholder agreement,

(a) the directors may designate the offices of the corporation, appoint as officers persons of full capacity, specify their duties and delegate to them powers to manage the business and affairs of the corporation, except powers to do anything referred to in <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/#sec115subsec3_smooth">subsection 115(3)</a>;”

Note that the word “officer” is defined in section 2(1) of the CBCA as anyone appointed under section 121, and can include a number of specific offices – president, secretary, managing director etc.

 
<ol>
<li>The role of shareholders is to elect directors and to remove them. As well there are certain powers expressly reserved to them by statute, e.g., amendments to constitution, other “fundamental” changes such as approving sale of undertaking. See as partial examples BCBCA section 259; CBCA section 173 (reproduced below):</li>
</ol>
 

 “Alteration to articles
<ol start="259">
<li>(1) A company may resolve to alter its articles</li>
</ol>
(a) by the type of resolution specified by this Act,

(b) if this Act does not specify the type of resolution, by the type of resolution specified by the articles, or

(c) if neither this Act nor the articles specify the type of resolution, by a special resolution.

(2) A company may alter its articles to specify or change the majority of votes that is required to pass a special resolution, which majority must be at least 2/3 and not more than 3/4 of the votes cast on the resolution, if the shareholders resolve, by a special resolution, to make the alteration.

(3) A company may alter its articles to specify or change the majority of votes that is required for shareholders holding shares of a class or series of shares to pass a special separate resolution, which majority must be at least 2/3 and not more than 3/4 of the votes cast on the resolution, if

(a) the shareholders resolve, by a special resolution, to make the alteration, and

(b) shareholders holding shares of that class or series of shares consent by a special separate resolution of those shareholders…”

 

“PART XV

FUNDAMENTAL CHANGES

Amendment of articles
<ol start="173">
<li>(1) Subject to <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/#sec176_smooth">sections 176</a>and <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/#sec177_smooth">177</a>, the articles of a corporation may by special resolution be amended to</li>
</ol>
(a) change its name;

(b) change the province in which its registered office is situated;

(c) add, change or remove any restriction on the business or businesses that the corporation may carry on;

(d) change any maximum number of shares that the corporation is authorized to issue;

(e) create new classes of shares;

(f) reduce or increase its stated capital, if its stated capital is set out in the articles;

(g) change the designation of all or any of its shares, and add, change or remove any rights, privileges, restrictions and conditions, including rights to accrued dividends, in respect of all or any of its shares, whether issued or unissued;

(h) change the shares of any class or series, whether issued or unissued, into a different number of shares of the same class or series or into the same or a different number of shares of other classes or series;

(i) divide a class of shares, whether issued or unissued, into series and fix the number of shares in each series and the rights, privileges, restrictions and conditions thereof;

(j) authorize the directors to divide any class of unissued shares into series and fix the number of shares in each series and the rights, privileges, restrictions and conditions thereof;

(k) authorize the directors to change the rights, privileges, restrictions and conditions attached to unissued shares of any series;

(l) revoke, diminish or enlarge any authority conferred under paragraphs (j) and (k);

(m) increase or decrease the number of directors or the minimum or maximum number of directors, subject to <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/#sec107_smooth">sections 107</a> and<a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/#sec112_smooth"> 112</a>;

(n) add, change or remove restrictions on the issue, transfer or ownership of shares; or

(o) add, change or remove any other provision that is permitted by this Act to be set out in the articles.

province to receive licences, permits, grants, payments or other benefits by reason of attaining or maintaining a specified level of Canadian ownership or control;

(d) the issue, transfer or ownership of shares of any class or series in order to assist the corporation to comply with any prescribed law.

(e) the issue, transfer or ownership of shares of any class or series to enable the corporation to be a registered labour-sponsored venture capital corporation under Part X.3 of the <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-1-5th-supp/latest/rsc-1985-c-1-5th-supp.html">Income Tax Act</a>.”

 
<ol>
<li> What/who is a shareholder?</li>
</ol>
The definition in BCBCA section 1(1):

"shareholder"…means a person whose name is entered in a securities register of a company as a registered owner of a share of the company…” (emphasis added)

Oddly there is no comparable provision in CBCA but the essential proposition seems to effectively operate in the same way.

 
<ol>
<li> Shareholders have a right to receive certain basic information relevant to the conduct of the corporation’s business by the directors – e.g. annual and, in the case of publicly traded corporations, quarterly financial information.</li>
</ol>
We will come back to this.

 

TOPIC 2: Division of powers between directors and shareholders – THE “BOARD CENTRIC” MODEL

For a preliminary introduction to subject please read page 102 of the Casebook.

BCBCA section 136(1) provides:
<h4> “Powers and functions of directors</h4>
136 (1) The directors of a company must, subject to this Act, the regulations and the memorandum and articles of the company, manage or supervise the management of the business and affairs of the company.”

 

The standard form BC Articles provide:

“16.1 Powers of Management 

The directors must, subject to the Business Corporations Act and these Articles, manage or supervise the management of the business and affairs of the Company and have the authority to exercise all such powers of the Company as are not, by the Business Corporations Act or by these Articles, required to be exercised by the shareholders of the Company.”

The CBCA deals with the duty to manage or supervise management

“102. (1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.”

The standard form Federal Bylaws provide:

“4.1 Duties of Directors 

The board must manage or supervise the management of the business and affairs of the Corporation.”

Please read Canadian Jorex Ltd. v. 477749 Alberta Ltd. (1991) 85 Alta. L.R. (2d) 313 at pages 103-105 of the Casebook.

The case determined that the directors of a federal corporation could cancel a special meeting called by them in advance of its scheduled date.

Canadian Jorex Ltd. argued that nothing in the company’s bylaws, the CBCA or any Unanimous Shareholders Agreement (USA) restricted the ability of the directors to cancel special meetings called by them. Accordingly, given corporate model embraced by the <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html">CBCA</a>, they claimed to have this power. In particular, see s<a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec102_smooth">ection 2(1) and 102</a>(1) of the CBCA:

“2. (1) “affairs” means the relationships among a corporation, its affiliates and the shareholders, directors and officers of such bodies corporate but does not include the business carried on by such bodies corporate;
<ol start="102">
<li>(1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.”</li>
</ol>
The Petitioners argued that unless the <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html">CBCA</a> or the company’s bylaws contained an express power to cancel meetings, such a power does not exist. Their position was that there are elaborate procedures prescribed for meetings and the only powers of the directors on the subject of meetings can be those expressly stipulated.

Under the CBCA corporate model - residual power to manage the corporation's affairs rests with the directors. This power is given by statute and is not derived from the delegation of powers by the shareholders. This must be contrasted with the British model of corporate law under which the directors enjoy only those powers delegated to them by the shareholders.

 

Now please read Northern Minerals Investment Corp. v. Mundoro Capital Inc. 2012 BCSC 1090 which flows from Canadian Jorex Ltd. v. 477749 Alberta Ltd. and can be found here: <a href="http://www.canlii.org/en/bc/bcsc/doc/2012/2012bcsc1090/2012bcsc1090.html">http://www.canlii.org/en/bc/bcsc/doc/2012/2012bcsc1090/2012bcsc1090.html</a>

The Facts in this case were that there was a notice of the Annual General Meeting to be held on June 26 of a BC Company, “Mundoro Capital Inc.”. The “record date” was of the meeting was to be May 22. The business of the Annual General Meeting was to receive financial statements, elect directors and reappoint auditors.

A June 11 press release announced that the directors of Mundoro Capital Inc. had adopted an “Advance Notice Policy” by which shareholders were required to submit nominations for directors had to do so by a deadline. Only such nominated persons would be eligible to be elected as directors. Others were not eligible for election.

A June 14 press release announced that the Annual General Meeting was being postponed to August 27, with the record date changed to July 27. The business of the meeting was to also include shareholder approval of “Advance Notice Policy”.

Northern Minerals Investment Corp., a shareholder in Mundoro Capital Inc. sought to restrain the postponement or adjournment of the June 26 AGM, and an order from the court preventing any change to the record date.

The shareholder, Northern Minerals Investment Corp., argued that under the BCCA directors have only those powers granted to them by the articles of the company. In other words, that directors’ powers must be expressly conferred and that directors under the British Columbia Business Corporations Act have no residual powers. Because the scheme of the Canada Business Corporation Act is different by giving directors residual powers the decision in Canadian Jorex ltd. v. 477749 Alberta Ltd. would be inapplicable.

The company, Mundoro Capital Inc., argued that section 15.1 of the articles of Mundoro Capital Inc. specifically and expressly reserved to the directors of Mundoro Capital Inc. all residual powers. Those powers are those that are not required to be exercised by the shareholders either by the British Columbia Business Corporations Act or the articles of Mundoro Capital Inc. See refer to section 16.1 of the model articles to same effect provided in Unit 2 and also reproduced below:

 

“16.1 Powers of Management 

The directors must, subject to the Business Corporations Act and these Articles, manage or supervise the management of the business and affairs of the Company and have the authority to exercise all such powers of the Company as are not, by the Business Corporations Act or by these Articles, required to be exercised by the shareholders of the Company.”

Mr. Justice Punnett found the articles and Act, and the residual “basket clause” in the articles and the Act are to be read as was done the case in Canadian Jorex ltd. v. 477749 Alberta Ltd. and the case of

Oppenheimer & Co. v. United Grain Growers Ltd. (1997), 120 Man. R (2d) 281, 2 W.W.R. 9 (Q.B.). The court held that as a matter of contractual interpretation the directors’ powers flow from the Act and articles in which the directors are in fact granted residual powers. The court thus treats BC and CBCA models as substantially similar. Both are accordingly, essentially, board centric.

 

TOPIC 3: LIMITATIONS OF BOARD-CENTRIC MODEL AND RE-DESIGNING THE ARCHITECTURE 
<ol>
<li> Close Corporations</li>
</ol>
In the realities of the corporate world the same people are shareholders, directors and officers. In a corporation with few shareholders, they will tend to elect themselves as directors and, instead of the board choosing officers who may or may not be directors and shareholders, shareholder/directors will typically select themselves as officers. So shareholders often view themselves as running the business as owners – just as with partners.

Which bridges directly to the question - do board’s serve any purpose? Why do I need a board if I’m an owner/shareholder/officer?

Corporate law has largely given up on attempting to impose board centred model on close corporations except as a default rule. Some (very few) statutes allow shareholders in close corporations to dispense with a board. More common however, is to allow shareholders to make agreements which dictate who will be directors and what decisions the directors shall make.

 
<ol>
<li> Publicly Held Corporations</li>
</ol>
Publicly traded corporations or those with a large number of shareholders.

The theoretical model: Power flows from the shareholders, who decide who will be directors, to directors, who choose officers and set policies, to the officers who implement the policies.

The reality: In practice, the officers, particularly the chief executive officer (CEO), commonly decide who will be the directors and what policies the corporation will pursue.

In relation to this please read the excerpt from “Mace, Directors: Myth and Reality” at pages 304-308 of the Casebook.

All of which really just begs the question: Why does the theoretical model and the reality diverge?

Three possible reasons:

(i) Shareholders in publicly held corporations are typically “rationally apathetic”; i.e. they tend to think it is not worthwhile to spend much time or effort worrying about control over the corporations they are shareholders in.

(ii) The cost of changing management is quite high, largely because support must be sought from numerous other scattered other shareholders. Moreover the rewards to changing management are quite low, since the other shareholders will reap most of the gains. In the end it is usually just cheaper and easier to sell ones shares.

(iii) Incumbent shareholders, directors and officers effectively control the “voting machinery”. For example, consider:

(a) the “Advance Notice Policy” in Northern Minerals Investment Corp. v. Mundoro Capital Inc.

(b) that the company bears costs of management’s legal and other fees – while challengers must bear own costs (unless they win);

Accordingly there is a significant financial disincentive for anyone to challenge the incumbent board. 

(iv) There is also one other reason. Just as is the case in Close Corporations, even in large public traded companies there is often at least one person who is at the same time a shareholder, a director and an officer. That person is the C.E.O – fact that may be interpreted as either a cause for, or a reaction to, the “rock star” status that CEO’s have often been cloaked with in the present corporate age. The cultish status of the powerful superstar CEO is a significant counterweight to the theoretical model where the locus of the power of appointment is intended to be in the shareholders. Arguably CEO’s in public companies have more real world impact on their shareholders, then their shareholders would have on them (though most CEO’s would conveniently deny that suggestion).

 

TOPIC 4: Re-designing the architecture OF GOVERNANCE

Read BCBCA section 137 (1):

“…the articles of a company may transfer, in whole or in part, the powers of the directors to manage or supervise the management of the business and affairs of the company to one or more other persons.” (Emphasis added).

What is the effect of such a provision? See 137 (2) of the BCBCA states: 

 

“(2) If the whole or any part of the powers of the directors is transferred in the manner contemplated by subsection (1),

(a) the persons to whom those powers are transferred have all the rights, powers, duties and liabilities of the directors of the company, whether arising under this Act or otherwise, in relation to and to the extent of the transfer, including any defences available to the directors, and

(b) the directors are relieved of their rights, powers, duties and liabilities to the same extent.”

 

Blog Activity 6.2:

Please consider the following two questions:
<ol>
<li> Why do you think section 137(2)(b) of the BCBCA is necessary and worded the way it is? </li>
<li> What would be the effect of an agreement to transfer powers of the directors to manage or supervise the management of the business to one or more other persons if that agreement was not included in articles?</li>
</ol>
Please blog your views on these questions and your reasons in less than one page under the heading “Transferring Directors Powers”.

 

 

Turning now to the similar provisions of the CBCA:
<ol>
<li>“146.(1) An otherwise lawful written agreement among all the shareholders of a corporation, or among all the shareholders and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation is valid.</li>
</ol>
(2) If a person who is the beneficial owner of all the issued shares of a corporation makes a written declaration that restricts in whole or in part the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation, the declaration is deemed to be a unanimous shareholder agreement…

(5) To the extent that a unanimous shareholder agreement restricts the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation, parties to the unanimous shareholder agreement who are given that power to manage or supervise the management of the business and affairs of the corporation have all the rights, powers, duties and liabilities of a director of the corporation, whether they arise under this Act or otherwise, including any defences available to the directors, and the directors are relieved of their rights, powers, duties and liabilities, including their liabilities under section 119, to the same extent.

(6) Nothing in this section prevents shareholders from fettering their discretion when exercising the powers of directors under a unanimous shareholder agreement.” (Emphasis added).

Note in particular that under the CBCA there is no requirement that “the articles of a company may transfer” as under section 137 (1) of the BCBCA. Rather, the CBCA allows that a “lawful written agreement among all the shareholders” will do the trick.

 

 

TOPIC 5: Directors

 

Before starting into this topic please read the following short Huffington Post article: “Venture Capital Firm Hires Artificial Intelligence To Its Board Of Directors” at <a href="http://www.huffingtonpost.co.uk/2014/05/15/artificial-intelligence-board-directors_n_5329370.html">http://www.huffingtonpost.co.uk/2014/05/15/artificial-intelligence-board-directors_n_5329370.html</a>

Please reflect on whether you think this is a good idea, as well as why or why not? Armed with those thoughts lets tackle the legal rules, procedures and limitations respecting Directors.

 
<ol>
<li>Must a Company Have Directors?</li>
</ol>
BCBCA s. 120; CBCA 102 (2)

Public/distributing company (publicly distributed or traded) have to have at least 3 directors; others only1.

Why must “public” companies have at least 3 directors?

 
<ol>
<li>What is a Director?</li>
</ol>
Statutory definitions not helpful:

CBCA section 2 (1): “a person occupying the position of director by whatever name called”. 

BCBCA Section 1 (1): “an individual who is a member of the board of directors of the company as a result of having been elected or appointed to that position”. 

 

Are we assisted in our understanding by either BCBCA 136 (1) or CBCA 102 (1) which set out that directors “must…manage or supervise the management of the business and affairs of the company” (BCBCA); “the directors shall manage, or supervise the management of, the business and affairs of a corporation” (CBCA)? Probably not.

BCBCA s. 138 (1) provides:

 

“138. (1) Without limiting section 137 but subject to subsection (2) of this section, if a person who is not a director of a company performs functions of a director of the company, sections 142, 231, 234, 251, 335, 347 and 354 and Divisions 3 to 5 of this Part apply to that person

(a) as if that person were a director of the company, and

(b) in relation to, and only to the extent of, those functions.”

 

If a person who is not a director of a company performs functions of a director of the company, sections 142, 231, 234, 251, 335, 347 and 354 and Divisions 3 to 5 of this Part apply to that person

(a) as if that person were a director of the company, and

(b) in relation to, and only to the extent of, those functions”

Does this add anything to the definition in section 1(1)?

It probably does because of the limitation in the definition to persons elected or appointed.

 
<ol>
<li>Categories or Kinds of Directors</li>
</ol>
There are many different types of directors. They can be characterised either:

(I) by reference to some legal status, e.g. de jure, de facto, nominee, shadow; or

(II) reference to function e.g. inside, outside, executive, non-executive.

Exact name or title is actually immaterial. They are all directors.

With respect to the legal status of directors consider the following terms:

(a) De jure director

A “de jure” director is one who has been elected or appointed by a proper procedure. In comparison consider those performing the functions of directors per BCBCA s. 138(1).

In Chell v. The Queen, 2013 TCC 29 (<a href="http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/31073/index.do">http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/31073/index.do</a>) the following definition was provided by the court:

 

“A de jure director is an individual who has been appointed as such pursuant to the corporate law of the jurisdiction in which the corporation was created or continued, as the case may be.” 

(b) De facto director

A de facto director is one who has not been legally appointed but acts as if they have been or assumes the position. A de facto director openly acts as though validly appointed despite a lack of authority and right to act. A director whose appointment is irregular falls into this category; also a person who is not appointed at all but is held out as a director.

(c) Shadow director

In British Columbia Securities Commission v. Alexander, 2013 BCCA 111 per Madam Justice D. Smith:

 

“The legal test for a finding that an individual acted as a de facto director or officer is “’whether, under the particular circumstances, the alleged director is an integral part of the mind and management of the company, taking into account the entirety of the alleged director’s involvement within the context of the business activities at issue. In Re IMAGIN Diagnostic Centres Inc., 2010 LNONOSC 632, the Ontario Securities Commission said (at para. 138) that a de facto director is one “...who maintains control over the affairs of the company and exercises the powers of a director and/or officer...”.

This suggests a slightly different understanding of “de facto directors”, generally referred to in England as “shadow directors” – statutorily defined as “a person in accordance with whose directions or instructions the directors of the company are accustomed to act.”

A shadow director is different from “de facto directors” because they do not purport to act as directors. On the contrary, they claim not to be directors and so seek to hide behind those who are. In that sense, they “lurk in the shadows". They are persons "in accordance with whose directions or instructions the directors of the company are accustomed to act”. 

(d) Nominee director

This is someone who represents the interests of a “stakeholder”.

For a discussion of the duties of a nominee director, please read Deluce Holdings Inc. v. Air Canada, 98 D.L.R. (4th) 509 (1992) at pages 494-502 of the Casebook.

In Deluce Holdings v. Air Canada, the conduct of Nominee Directors was found to be unacceptable. The facts were that Air Ontario was owned 75% by Air Canada and 25% by Deluce Holdings. Air Canada had seven nominee directors on the board of directors of Air Ontario and Deluce Holdings had 3 nominee directors on that board. When Air Canada acquired an interest in Air Ontario an Agreement had been entered into which included the employment of Mr. Deluce who was the owner of Deluce Holdings, which itself was the previous owner of Air Ontario. The agreement also provided that on the expiration of Mr. Deluce’s employment contract, Air Canada would be granted an option to purchase the remaining shares of Air Ontario. The Board of Air Ontario, comprised as mentioned of a majority of Air Canada nominee directors terminated Mr. Deluce’s employment contract and Air Canada exercised its option to purchase the remaining shares. It is important to note that at some point before the dismissal of Mr. Deluce, Air Canada changed it’s internal policies determining it would henceforth would fully own without minority shareholders all regional carriers including Air Ontario.

The court found that Air Canada’s nominees were carrying out Air Canada’s agenda. Interestingly there was scant reference to what might have been in the actual best interests of Air Ontario. Accordingly the law has become reasonably clear. A nominee director must always put the best interest of the company they are a director of first, ahead of the company that may have nominated them. Notwithstanding this constraint, you should probably not expect that the practice of placing nominee directors on boards would go away any time soon.

 

(e) Alternate director

Here is what the standard form BC articles says about “Alternate Directors”: 

“15.1 Appointment of Alternate Director 

Any director (an “appointor”) may by notice in writing received by the Company appoint any person (an “appointee”) who is qualified to act as a director to be his or her alternate to act in his or her place at meetings of the directors or committees of the directors at which the appointor is not present unless (in the case of an appointee who is not a director) the directors have reasonably disapproved the appointment of such person as an alternate director and have given notice to that effect to his or her appointor within a reasonable time after the notice of appointment is received by the Company.”

 
<ol>
<li>Qualifications and Disqualifications of Directors</li>
</ol>
In general there are few prescribed qualifications to be a director. It is felt that the shareholders are best equipped to decide who ought to be a director.

(I) Individuals and corporations

 BCBCA 124 (1): “an individual who is qualified” to act.

 CBCA 105. (1): “person who is not an individual” is disqualified.

Blog Activity 6.3:

Consider whether a corporation can be a “Shadow Director” of another corporation? Please blog your views on these questions and your reasons in less than one page under the heading “Shadow Directors”.

 

(II) Qualifications – residency

CBCA section 105 (3) requires that at least 25% of a company’s directors must be “resident Canadians” (defined in section 2 (1)) though in certain prescribed businesses a majority of resident Canadians is required.

There used to be similar requirement in the BCBCA, but no longer.

Note that under CBCA s. 114, subject to certain exceptions, directors may not transact business unless at least 25% or a majority, as the case may be, of the directors present satisfy the residency requirement.

What is the justification for residency requirements? Consider how you feel about them.

Avoiding residency requirements:
<ol>
<li>Incorporate in, say, B.C., which has none.</li>
<li>Adopt USA - transfer directors' duties to manage and supervise the management of the corporation to shareholders. Number of Canadians on the board becomes irrelevant.</li>
</ol>
 

(III) Qualifications – competence

Corporate legislation is generally silent on experience or competence that must be satisfied as a condition of eligibility to become a director.

Why would this be (especially given the many corporate scandals witnessed over the years)?

There are several possible answers. When it comes to publicly traded corporations the stock exchange must be satisfied that corporate management, including board of directors, have adequate experience and technical expertise relevant to the company's business and industry as well as adequate public company experience.

There is also the training available through the Institute of Directors that has become a prestigious thing to do and in some cases is a practical requirement for anyone aspiring to be a “professional” director. See: <a href="http://www.iod.com">http://www.iod.com</a> for more information.

 

The notion of competence must obviously be somehow connected to the statutory duty of care and skill…doesn’t it? 

BCBCA section 142 provides: 

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

 (b) exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances,…”

 

Note that the CBCA 122 is nearly identical in its wording:

“122. (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall…

 (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”

Emphasis added. Underling added to show subtle differences in wording. Can you envision any situations where these differences might be relevant?

The implications of the standard of care, diligence and skill are discussed in the cases of Soper v. Canada (we will get there shortly) & Peoples Department Stores Inc. v. Wise (the “three Wise brothers” case where we have already visited) at pages 319-330 of the Casebook.

 

(IV) Qualifications – independence.

(a) Selection

For publicly traded companies, directors are to be selected by a nominating committee composed of non-management directors. In 1994, a committee sponsored by the Toronto Stock Exchange published a report entitled “Where Were the Directors?” (also known as the “Dey Report”). The Dey Report contained 14 recommendations relating to corporate governance, including the following:

“Guideline 4 

The board of directors of every corporation should appoint a committee of directors composed exclusively of outside, i.e., non-management, directors, a majority of whom are unrelated directors, with the responsibility for proposing to the full board new nominees to the board and for assessing directors on an ongoing basis. 

Guideline 5 

Every board of directors should implement a process to be carried out by the nominating committee or other appropriate committee, for assessing the effectiveness of the board as a whole, the committees of the board and the contribution of individual directors. 

Guideline 6 

Every corporation, as an integral element of the process for appointing new directors, should provide an orientation and education program for new recruits to the board.”

 

Also relevant is National Policy 58-101 of the Ontario Securities Commission which is referred to at page 316 of the Casebook and which can be found here: <a href="http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp">http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp</a>

 

(b) Credentials
<h3>The securities regulators recommend publicly traded companies have a certain number of independent directors. Please read pages 307-308 of the Casebook where there is a discussion of the relevant requirements can be found.</h3>
<h3>National Instrument 58-101 “Disclosure Of Corporate Governance Practices” defines “Independence” as follows:</h3>
 

“1.2 Meaning of Independence --

(1) In a jurisdiction other than British Columbia, a director is independent if he or she would be independent within the meaning of section 1.4 of NI 52-110.

(2) In British Columbia, a director is independent if

(a) a reasonable person with knowledge of all the relevant circumstances would conclude that the director is independent of management of the issuer and of any significant security holder, or

(b) the issuer is a reporting issuer in a jurisdiction other than British Columbia, and the director is independent under subsection (1).”

 

Section 1.4 of National Instrument 52-110 provides:

 

“1.4 Meaning of Independence

 

(1) An audit committee member is independent if he or she has no direct or indirect material relationship with the issuer.

 

(2) For the purposes of subsection (1), a “material relationship” is a relationship which could, in the view of the issuer's board of directors, be reasonably expected to interfere with the exercise of a member's independent judgement.

 

(3) Despite subsection (2), the following individuals are considered to have a material relationship with an issuer:

 

(a) an individual who is, or has been within the last three years, an employee or executive officer of the issuer;

 

(b) an individual whose immediate family member is, or has been within the last three years, an executive officer of the issuer;

 

(c) an individual who:

 

(i) is a partner of a firm that is the issuer's internal or external auditor,

(ii) is an employee of that firm, or

(iii) was within the last three years a partner or employee of that firm 

 

and personally worked on the issuer's audit within that time;

 

(d) an individual whose spouse, minor child or stepchild, or child or stepchild who shares a home with the individual:

 

(i) is a partner of a firm that is the issuer's internal or external auditor,-5-

(ii) is an employee of that firm and participates in its audit, assurance or tax compliance (but not tax planning) practice, or

(iii) was within the last three years a partner or employee of that firm 

 

and personally worked on the issuer's audit within that time;

 

(e) an individual who, or whose immediate family member, is or has been within the last three years, an executive officer of an entity if any of the issuer's current executive officers serves or served at that same time on the entity's compensation committee; and

 

(f) an individual who received, or whose immediate family member who is employed as an executive officer of the issuer received, more than $75,000 in direct compensation from the issuer during any 12 month period within the last three years.

 

(4) Despite subsection (3), an individual will not be considered to have a material relationship with the issuer solely because 

 

(a) he or she had a relationship identified in subsection (3) if that relationship ended before March 30, 2004; or 

 

(b) he or she had a relationship identified in subsection (3) by virtue of subsection (8) if that relationship ended before June 30, 2005.

 

(5) For the purposes of clauses (3)(c) and (3)(d), a partner does not include a fixed income partner whose interest in the firm that is the internal or external auditor is limited to the receipt of fixed amounts of compensation (including deferred compensation) for prior service with that firm if the compensation is not contingent in any way on continued service.

 

(6) For the purposes of clause (3)(f), direct compensation does not include:

 

(a) remuneration for acting as a member of the board of directors or of any board committee of the issuer, and

 

(b) the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the issuer if the compensation is not contingent in any way on continued service.

 

(7) Despite subsection (3), an individual will not be considered to have a material relationship with the issuer solely because the individual or his or her immediate family member

 

(a) has previously acted as an interim chief executive officer of the issuer, or

 

(b) acts, or has previously acted, as a chair or vice-chair of the board of directors or of any board committee of the issuer on a part-time basis.

 

(8) For the purpose of section 1.4, an issuer includes a subsidiary entity of the issuer and a parent of the issuer.”

 

 

National Instrument 58-101 can be found here: <a href="http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp">http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp</a>

National Instrument 52-110 can be found here: <a href="https://www.bcsc.bc.ca/Securities_Law/Policies/Policy5/PDF/52-110_Audit_Committees__NI_/">https://www.bcsc.bc.ca/Securities_Law/Policies/Policy5/PDF/52-110_Audit_Committees__NI_/</a>

 

Blog Activity 6.4:

In short all of this tends to come down to a meaning of “independence” which translates into there being no direct or indirect material relationship with the issuer. That is no relationship that could, in the view of the board, be reasonably expected to interfere with the exercise of a member's independent judgement. A whole series of relationships that are deemed material e.g. family relationships, are specifically proscribed.

Note that these requirements do not apply to private companies.

Please read the short paragraph on “Qualifications: (a) Minimum Standards” at page 311 of the Casebook. What in your view are the justifications for these “independence” requirements? If justified why should they not also apply to private companies?

Please blog your views on these questions and your reasons in less than one page under the heading “Why Independent Directors?”

 

(V) Disqualifications

BCBCA section 124 (2) and CBCA section 105 (1) set out who are those persons disqualified to act as a director.

Note BCBCA 124 (2) (d) which disqualifies a person: “convicted in or out of British Columbia of an offence in connection with the promotion, formation or management of a corporation or unincorporated business, or of an offence involving fraud, unless...”

Note in particular that there is nothing comparable in CBCA. Why not?

Section 161 (1)(d) of the BC Securities Act [RSBC 1996] CHAPTER 418 – BCSC provides:

“161. (1) If the commission or the executive director considers it to be in the public interest, the commission or the executive director, after a hearing, may order one or more of the following:…

(d) that a person

(i) resign any position that the person holds as a director or officer of an issuer or registrant,

(ii) is prohibited from becoming or acting as a director or officer of any issuer or registrant,

(iii) is prohibited from becoming or acting as a registrant or promoter,

(iv) is prohibited from acting in a management or consultative capacity in connection with activities in the securities market,…”

 

 

“Issuer” is defined in section 1(1) of the BC Securities Act:

"issuer" means a person who

(a) has a security outstanding,

(b) is issuing a security, or

(c) proposes to issue a security;”

Note that this definition of “issuer” in fact applies to any corporation, not just “public” companies who trade their shares on stock exchanges. The BC Securities Commission has forced the resignation of individuals as directors even of companies whose securities are not traded in the public markets, but generally only where they have been guilty of some misconduct in connection with the affairs of publicly traded companies. There is no known case of forcing a director of a purely private company to resign, absent some connection with the affairs of a publicly traded company.

Is this ok?

By way of contrast, the UK Directors Disqualification Act, 1986 does permit disqualification of a director of a purely private company, even absent a public company connection. Grounds include “conduct as a director . . . makes him unfit to be concerned in the management of a company”. There is no comparable provision in any Canadian legislation.

 

TOPIC 6: Becoming a director – The PROCESS OF election and appointment

 
<ol>
<li> General</li>
</ol>
Please read pages 314-316 of the Casebook; BCBCA sections 121 to 122, 130 to 135; and CBCA sections 106 and 107. These are all largely technical provisions - detailed familiarity not required.

(I) The Beginning of Directorship:

One becomes a member of board as a result of having been elected or appointed.

 

BCBCA section 122 (1): “Directors…must be elected or appointed in accordance with this Act and with the memorandum and articles of the company.”

 

(II) The End of Directorship:

BCBCA section 128: 

“128. (1) A director ceases to hold office when

(a) the term of office of that director expires in accordance with

(i) this Act or the memorandum or articles, or

(ii) the terms of his or her election or appointment,

(b) the director dies or resigns, or

(c) the director is removed in accordance with subsection (3) or (4).” (Emphasis added)

 

As a general matter, directors are elected at a meeting of shareholders. In private companies, the election of directors is either identified in notice of the meeting or nominations are called for and then the election proceeds. In public companies, the election of directors is identified in the notice of meeting and accompanying information circular.

 

(III) Extended and Staggered Terms:

BCBCA section 128 (1) (a) permits a term of more than one year, so that annual election of that director is not required. Extended terms are thus permissible without any maximum. CBCA section 106 (3) limits each term a director can serve to a maximum of 3 years per term (although they may of course be re-elected to additional terms). Longer terms are not common in private companies where annual election of directors tends to be the more common practice. The Act also permits staggered terms – i.e. where not all directors resign at the same time. This is seen as enhancing the stability of boards. Again this is not an especially common in private companies.

In case of publicly listed companies, the TSX now requires each director to stand for election annually.

 

(IV) Actual Election Process – how voting takes place:

In the case of private companies, generally straightforward because rarely a contest.

In publicly traded companies, plurality or slate voting was common until recently.

(a) Slate voting - Shareholders may vote for all of the directors nominated by management (i.e. a slate of directors), but not for individual directors.

This obstructs shareholders from voting against individual directors for performance issues such as poor board attendance or poor decision-making on a specific board committee. The only option in such cases is to vote against the whole board, or conduct a costly proxy fight.

(b) Plurality voting

You vote for or withhold vote. So: 5 candidates:
<table>
<tbody>
<tr>
<td width="213"> </td>
<td width="213">For</td>
<td width="213">Withhold</td>
</tr>
<tr>
<td width="213">A</td>
<td width="213">60</td>
<td width="213">40</td>
</tr>
<tr>
<td width="213">B</td>
<td width="213">55</td>
<td width="213">30</td>
</tr>
<tr>
<td width="213">C</td>
<td width="213">51</td>
<td width="213">40</td>
</tr>
<tr>
<td width="213">D</td>
<td width="213">36</td>
<td width="213">30</td>
</tr>
<tr>
<td width="213">E</td>
<td width="213">36</td>
<td width="213">45</td>
</tr>
</tbody>
</table>
Accordingly directors can be elected without receiving a majority of shareholder votes. Indeed, a single vote in favour of a director nominee is all that is required for election. Where director nominees are also shareholders, they can be elected on the basis of their own votes.

“Plurality voting” prevents shareholders from voting against specific under-performing directors.

The TSX prohibits slate voting. Voting on director candidates should be conducted on an individual basis.

The TSX mandates majority voting. Any nominee for director who receives a greater number of votes ‘withheld' from than ‘for' their election, would be required to tender their resignation as a director. The remaining board members would, absent unusual circumstances, generally accept such resignation.

So in the above noted scenario, E would be required to tender their resignation.

(c) Cumulative voting

Please read the middle paragraph of page 315 of the Casebook; the middle paragraph of page 441 of the Casebook; and CBCA section 107.

Generally speaking a shareholder only has one vote per share and may not give more than the one vote per share you to any single nominee. For example, if there are 4 board positions and you hold 500 shares (with one vote per share), under the regular method you could vote a maximum of 500 shares for any one candidate (giving you 2,000 votes total - 500 votes per each of the four candidates). “Cumulative Voting” allows a shareholder to cast all of their votes for a single nominee. Accordingly you could choose to vote all of your (cumulative) 2,000 votes (500 shares x 4 board positions) for one candidate, or 1,000 each to two candidates, or otherwise divide your votes whichever way you want.

Intended to allow minority shareholders to elect some directors in rough proportion to voting strength.

CBCA section 107 provides:

 

“Cumulative voting
<ol start="107">
<li>Where the articles provide for cumulative voting,</li>
</ol>
(a) the articles shall require a fixed number and not a minimum and maximum number of directors;

(b) each shareholder entitled to vote at an election of directors has the right to cast a number of votes equal to the number of votes attached to the shares held by the shareholder multiplied by the number of directors to be elected, and may cast all of those votes in favour of one candidate or distribute them among the candidates in any manner;

(c) a separate vote of shareholders shall be taken with respect to each candidate nominated for director unless a resolution is passed unanimously permitting two or more persons to be elected by a single resolution;

(d) if a shareholder has voted for more than one candidate without specifying the distribution of votes, the shareholder is deemed to have distributed the votes equally among those candidates;

(e) if the number of candidates nominated for director exceeds the number of positions to be filled, the candidates who receive the least number of votes shall be eliminated until the number of candidates remaining equals the number of positions to be filled;

(f) each director ceases to hold office at the close of the first annual meeting of shareholders following the director’s election;

(g) a director may be removed from office only if the number of votes cast in favour of the director’s removal is greater than the product of the number of directors required by the articles and the number of votes cast against the motion; and

(h) the number of directors required by the articles may be decreased only if the votes cast in favour of the motion to decrease the number of directors is greater than the product of the number of directors required by the articles and the number of votes cast against the motion.”

 
<ol>
<li> Calling and Convening Meetings</li>
<li> With respect to notices of meetings generally see BCBCA section 169 (1).</li>
</ol>
The “company” must send notice of date, time and location. Who is the company for this purpose? Compare to the scenario we encountered earlier, for example in the case of Canadian Jorex Ltd. v. 477749 Alberta Ltd. 
<ol>
<li> Location, date and time of the meeting must be specified in accordance with BCBCA section 169 (1). BCBCA section 166 (a) provides that the meeting must take place in British Columbia, unless certain conditions met.</li>
</ol>
As an example what if the meeting were called for “Sunday, 11.30 p.m. at xxx, Atlin B.C.” Is that a problem in your mind? What if the company in question is a massive public company like “Teck Corporation” and they decide to hold their Annual General Meeting in Logan Lake B.C. (which is in the southern interior of British Columbia and not necessarily terribly convenient to many of their shareholders?

III. Business to be transacted? The directors also ultimately control this though it is often planned by management. All of which begs the question of what exactly are the opportunities for “dissidents”?

Recall the “Advance Notice Policy” which was upheld in the case of Northern Minerals Investment Corp. v. Mundoro Capital Inc., which we examined earlier. Any person proposing to nominate a director for election at a meeting of shareholders must provide the company with advance notice (typically between 30-65 days) of, and prescribed details concerning, any such proposed nominee. Unless proper notice is given to the company any such proposed nominee is ineligible for election at the shareholders meeting. This sort of policy (assuming it is either in the articles of the company or is ratified by the shareholders) eliminates the risk of an ambush proxy contest.

There are other opportunities for shareholders. For example meetings can be requisitioned pursuant to BCBCA section 167 (CBCA section 143). Shareholders holding at least 5% of the issued voting shares may requisition a meeting for the purpose of transacting any business that may be transacted at a general meeting.

Consider the scope of this power. What does it mean in practical terms?

If shareholders holding at least 5% of the issued voting shares do call such a meeting, the directors of the company must give notice of a meeting to be held within 4 months of date of requisition to be held for the specified purpose.

There are exceptions:

(a) if they have called a general meeting to be held after date of requisition and have given notice thereof;

(b) if substantially the same business was submitted to shareholders at a meeting held not more than 5 years ago and received less than 3% of the vote if it was tried once, less than 6% of the vote of it was tried twice, and less than 10% of the vote if tried 3 times.

(c) the business stated in the requisition does not relate in a significant way to the business or affairs of the company,

(d) it clearly appears that the primary purpose for the requisition is (i) securing publicity, or (ii) enforcing a personal claim or redressing a personal grievance against the company or any of its directors, officers or security holders,

(e) the business stated in the requisition has already been substantially implemented.

If none of these conditions are fulfilled the directors must call a meeting (to be held within 4 months) within 21 days after receipt of requisition and if they do not the requisitioning shareholders, or any one or more of them holding, in the aggregate, more than 1/40 of the issued shares of the company that carry the right to vote at general meetings, may do so. If this happens they may be reimbursed for their expenses unless the shareholders by an ordinary resolution decide otherwise.

The full text of BCBCA section 167 follows:

 

“Requisitions for general meetings
<ol start="167">
<li> (1) Shareholders referred to in subsection (2) may requisition a general meeting for the purpose of transacting any business that may be transacted at a general meeting.</li>
</ol>
(2) A requisition under this section may be made by shareholders who, at the date on which the requisition is received by the company, hold in the aggregate at least 1/20 of the issued shares of the company that carry the right to vote at general meetings.

 

(3) A requisition under this section

(a) must, in 1 000 words or less, state the business to be transacted at the meeting, including any special resolution or exceptional resolution to be submitted to the meeting,

(b) must be signed by, and include the names and mailing addresses of, all of the requisitioning shareholders,

(c) may be made in a single record or may consist of several records, in similar form and content, each of which is signed by one or more of the requisitioning shareholders, and

(d) must be delivered to the delivery address of, or mailed by registered mail to the mailing address of, the registered office of the company.

 

(4) If a requisition under this section consists of more than one record, the requisition is received by the company on the first date by which the company has received requisition records that comply with subsection (3) from shareholders who, in the aggregate, hold at least the number of shares necessary to qualify under subsection (2).

 

(5) On receiving a requisition that complies with subsections (2) and (3), the directors must, regardless of the memorandum or articles, call a general meeting to be held not more than 4 months after the date on which the requisition is received by the company to transact the business stated in the requisition and must, subject to subsection (7),

(a) send notice of the date, time and location of that meeting at least the prescribed number of days, but not more than 4 months, before the meeting

(i) to each shareholder entitled to attend the meeting, and

(ii) to each director, and

(b) send, in accordance with subsection (6), to the persons entitled to notice of the meeting, the text of the requisition referred to in subsection (3) (a).

 

(6) The text referred to in subsection (5) (b) must be sent

(a) in, or within the time set for the sending of, the notice of the requisitioned meeting, or

(b) in the company's information circular or equivalent, if any, sent in respect of the requisitioned meeting.

 

(7) The directors need not comply with subsection (5) if

(a) the directors have called a general meeting to be held after the date on which the requisition is received by the company and have sent notice of that meeting in accordance with section 169,

(b) substantially the same business was submitted to shareholders to be transacted at a general meeting that was held not more than the prescribed period before the receipt of the requisition, and any resolution to transact that business at that earlier meeting did not receive the prescribed amount of support,

(c) it clearly appears that the business stated in the requisition does not relate in a significant way to the business or affairs of the company,

(d) it clearly appears that the primary purpose for the requisition is

(i) securing publicity, or

(ii) enforcing a personal claim or redressing a personal grievance against the company or any of its directors, officers or security holders,

(e) the business stated in the requisition has already been substantially implemented,

(f) the business stated in the requisition, if implemented, would cause the company to commit an offence, or

(g) the requisition deals with matters beyond the company's power to implement.

 

(8) If the directors do not, within 21 days after the date on which the requisition is received by the company, send notice of a general meeting in accordance with subsection (5) of this section, the requisitioning shareholders, or any one or more of them holding, in the aggregate, more than 1/40 of the issued shares of the company that carry the right to vote at general meetings, may send notice of a general meeting to be held to transact the business stated in the requisition.

 

(9) A general meeting called, under subsection (8), by the requisitioning shareholders must

(a) be called in accordance with subsection (5),

(b) be held within 4 months after the date on which the requisition is received by the company, and

(c) as nearly as possible, be conducted in the same manner as a general meeting called by the directors.

 

(10) Unless the shareholders resolve otherwise by an ordinary resolution at the general meeting called, under subsection (8), by the requisitioning shareholders, the company must reimburse the requisitioning shareholders for the expenses actually and reasonably incurred by them in requisitioning, calling and holding that meeting.”

 

 
<ol>
<li> Shareholder Proposals</li>
</ol>
 

Please read pages 439-440 of the Casebook; BCBCA sections 187-191; and CBCA section 137.

A qualified shareholder may send the company a notice setting out a matter that they wish to have considered at the next AGM. A “qualified shareholder” is one who holds a voting share and has held it for at least two years, unless within the preceding two years they had failed to present an earlier shareholder proposal of some kind (in other words – if they previously were a “no show” after sending a notice to the company).

To be valid, a proposal must be supported by qualified shareholders (i.e. those meeting the same 2 year test) holding at least 1% of the issued voting shares or shares with a “fair market value” of at least $2000. A brief written explanatory statement may support the shareholders proposal.

 

If a proposal is received the company must send it, and any explanatory statement as part of the Annual General Meeting materials and must allow the shareholder to present it at the meeting.

 

The obligation to send proposal to shareholders not applicable if the Annual General Meeting has already been called; if substantially the same proposal was submitted within the preceding two years and did not achieve the support thresholds applicable in relation to requisitions; or if one of the other requisition exclusions applies.

 

Check out the Financial Post article dated April 25, 2013 “Shareholder proposals declining in Canada” <a href="http://business.financialpost.com/2013/04/25/shareholder-proposals-trending-downwards/?__federated=1">http://business.financialpost.com/2013/04/25/shareholder-proposals-trending-downwards/?__federated=1</a>

<a href="http://www.tumblr.com/share/link?url=http%3A%2F%2Fbusiness.financialpost.com%2F2013%2F04%2F25%2Fshareholder-proposals-trending-downwards%2F&name=Shareholder+proposals+declining+in+Canada&description=According+to+Kingsdale+Shareholders+Services+Inc.%2C+the+downward+trend+in+the+number+of+shareholders%27+proposals+over+the+past+few+years+is+continuing">Tumblr</a>
<ul>
<li><a href="http://pinterest.com/pin/create/button/?url=http%3A%2F%2Fbusiness.financialpost.com%2F2013%2F04%2F25%2Fshareholder-proposals-trending-downwards%2F%20rel=">Pinterest</a></li>
<li><a href="http://reddit.com/submit?url=http%3A%2F%2Fbusiness.financialpost.com%2F2013%2F04%2F25%2Fshareholder-proposals-trending-downwards%2F&title=Shareholder+proposals+declining+in+Canada">Reddit</a></li>
<li><a href="http://digg.com/submit?url=http%3A%2F%2Fbusiness.financialpost.com%2F2013%2F04%2F25%2Fshareholder-proposals-trending-downwards%2F&title=Shareholder+proposals+declining+in+Canada">Digg</a></li>
<li><a href="http://www.fark.com/cgi/farkit.pl?u=http%3A%2F%2Fbusiness.financialpost.com%2F2013%2F04%2F25%2Fshareholder-proposals-trending-downwards%2F&h=Shareholder+proposals+declining+in+Canada">FarkIt</a></li>
<li><a href="http://www.stumbleupon.com/submit?url=http%3A%2F%2Fbusiness.financialpost.com%2F2013%2F04%2F25%2Fshareholder-proposals-trending-downwards%2F&title=Shareholder+proposals+declining+in+Canada">StumbleUpon</a></li>
</ul>
 
<ol>
<li> Executive Compensation</li>
</ol>
 

Please read pages 317-318 of the casebook.

 

The concept of “say on pay” is a non-binding, advisory vote by shareholders “for” or “against” the compensation paid to executives as described in a proxy circular. Shareholders can express approval or disapproval of a company’s compensation policies. Mandatory “say on pay” voting has been implemented in various forms in numerous countries.

However “say on pay” is not mandatory in Canada. By mid-2013, 129 Canadian companies had voluntarily added annual say on pay resolutions to their AGM proxies, either as a matter of good governance or in response to shareholder proposals.

 
<h1>See “Say-on-pay movement on the rise in Canada, but is it changing anything?”</h1>
<a href="http://business.financialpost.com/2014/03/12/say-on-pay-movement-on-the-rise-in-canada-but-is-it-changing-anything/">http://business.financialpost.com/2014/03/12/say-on-pay-movement-on-the-rise-in-canada-but-is-it-changing-anything/</a>

 

 
<ol>
<li> Removing Directors</li>
</ol>
Please read BCBCA section 128(3) and CBCA sections 109 and 110.

BCBCA 128 (3) allows for the removal of directors by special resolution, or as specified in the memorandum or articles of the company, provided that a director may be removed by a resolution of the shareholders entitled to vote at general meetings passed by less than a special majority or may be removed by some other method, by the resolution or method specified in the memorandum or articles of the company.

 

BCBCA 128 (4) provides comparable provisions for classes of shareholders holding shares of a class or series of shares of a company removing those directors whom they have the exclusive right to elect or appoint. These would be resolutions of a specific class of shareholders depending on the specific type of shares they own (as opposed to all of the shareholders).

Note that in these sections of the legislation no provision is made for a right to attend or a right to circulate a statement.

 
<ol>
<li> Quorum and Enhanced Quorum By-Laws</li>
</ol>
What is quorum for a shareholders meeting? The normal quorum requirements are set out in BCBCA section 172.

Quorum for a shareholders meeting will be established by having the number of shareholders present established by the Memorandum and Articles of the company or, if no quorum is set out by the Memorandum and Articles of the company, then two shareholders present in person or by proxy regardless of number of shares represented will establish quorum for a shareholders meeting.

Paragraph 11.3 of the standard form BC articles establishes quorum if there are present at the shareholders meeting two persons who are, or who represent by proxy, shareholders who, in the aggregate, hold at least 5% of the issued shares entitled to be voted at the meeting. The same mechanic is provided in paragraph 8.5 of the standard form of Federal Bylaws. 

An “Enhanced Quorum” is where the articles or bylaws of a company require that a minimum of two shareholders holding at least a majority of the issued and outstanding common shares are required to be present or represented by proxy at any meeting at which a shareholder will be seeking to replace half or more of the board of directors, before the meeting can be held and business validly transacted.

 

 

TOPIC 7: shareholder meetings and the election and removal of directorS: A CONTEXTUAL EXERCISE

What follows is an exercise for you to work through in a semi-guided manner that is intended to provide some context to the mechanics of company meetings. For this purpose some hypothetical facts are provided so that you can explore some of the procedural implications of those facts. In order to expand the possibilities various changes can be made to the facts as you work through them.

First we deal with “private” companies; and then with publicly traded companies. While the core corporate mechanisms involved in each case are substantially similar, in the case of publicly traded companies they have been significantly elaborated through the intervention of provincial securities regulators and the stock exchanges.
<ol>
<li>“Private” Companies</li>
</ol>
Some assumed facts

At its last annual general meeting held about six months ago the 8 shareholders of Longwood Industries Inc., a “private” company incorporated under the British Columbia Business Corporations Act, unanimously adopted a resolution fixing the number of directors at 3 and elected 3 individuals, all shareholders, to the board.

The 3 directors have decided that it would be to the company’s advantage to increase the number of directors to 4 and, sooner rather than later, to add John Dewar, who is not a shareholder, to the board. He is qualified to be a director and agrees to become one. The five non-director shareholders are generally supportive of the board of directors and have indicated that they favour Dewar’s appointment.

The question is: what are the appropriate mechanisms to achieve the desired result.
<ol>
<li> Appointment by the Directors</li>
</ol>
Since everyone seems supportive of Dewar’s early appointment, the most expeditious way of proceeding would be for the 3 existing directors to appoint him a director. Section 122 of the BCBCA allows this. The directors might proceed in one of 3 ways:

* Hold a meeting, either in person or, as permitted by BCBCA section 140 (1) (a), by telephone, at which Dewar is appointed. The appointment would be recorded in the minutes of the meeting. There is no legal requirement that all directors be present at a meeting of this kind

* By a resolution consented to in writing by each of the directors, pursuant to section 140 (3)

Suppose, however, that contrary to what has been assumed above, one of the directors, say X, objects to the appointment of Dewar so that:

* A consent resolution under section 140 (3) will not work, and

* For practical reasons, (e.g. that the 2 directors who favor Dewar’s appointment are not comfortable imposing their will on X, or because two of the directors are unreachable so that neither an in person nor a telephone meeting is possible).

Since appointment by the directors under section 122 of the BCBCA will not work, the authority shifts to the shareholders, who will have to do two things: (a) increase the number of directors to 4 and (b) elect or appoint Dewar to fill the resulting vacancy.
<ol>
<li> Election/Appointment by the Shareholders</li>
</ol>
Both decisions can be made by ordinary resolution. This is defined in the BCBCA as a resolution that is either:

* passed at an actual meeting of shareholders by a simple majority (i.e. 50% + 1) of the votes cast (that is, actually voted) by shareholders voting shares that carry the right to vote at general meetings, or

* if not passed at an actual meeting, passed, after being submitted to all the shareholders holding shares that carry the right to vote at general meetings, by being consented to in writing by shareholders holding shares that carry the right to vote at general meetings who, in the aggregate, hold shares carrying at least a special majority of the votes entitled to be cast on the resolution. A “special majority” means. Depending on what the articles provide, a majority of at least 2/3 and not more than 3/4 of the votes cast.

If an actual meeting is to be held, there are two possibilities:

* wait until the next annual meeting of shareholders;

* convene a special meeting of shareholders for the purpose.

III. Annual Meeting

If, as seems likely, it is decided that the matter should be dealt with at the next annual meeting:
<ul>
<li>* this must be held, by virtue of BCBCA s. 182 (1), in the calendar year following the year in which the last annual meeting was held, but not later than 15 months after the last annual meeting – so, if the last annual meeting was held on June 30, 2013 the next annual meeting must be held no later than July 31, 2014;</li>
<li></li>
<li>* the directors must prepare and send out a notice of the annual meeting.</li>
</ul>
Length of notice:

The period of notice for an annual meeting of a “private” company is the period, being not less than 10 days, prescribed by the articles and if no period is prescribed, then 21 days.

Content of notice:

Standard requirements;

The notice must specify the date, time and place (which must, in the absence of contrary provision in the articles, be in British Columbia).

Additional requirements in certain cases (special business):

The standard form of articles in common use for British Columbia companies includes provisions comparable to the following:

“10.9 Notice of Special Business at Meetings of Shareholders 

If a meeting of shareholders is to consider special business . . . the notice of meeting must state the general nature of the special business.

11.1 Special Business 

At a meeting of shareholders, the following business is special business: 
<ol>
<li>at a meeting of shareholders that is not an annual general meeting, all business is special business except business relating to the conduct of or voting at the meeting; </li>
<li>at an annual general meeting, all business is special business except for the following: </li>
</ol>
(a) business relating to the conduct of or voting at the meeting; 

(b) consideration of any financial statements of the Company presented to the meeting; 

(c) consideration of any reports of the directors or auditor; 

(d) the setting or changing of the number of directors; 

(e) the election or appointment of directors; 

(f) the appointment of an auditor;

(h) business arising out of a report of the directors not requiring the passing of a special resolution or an exceptional resolution; 

(i) any other business which, under these Articles or the Business Corporations Act, may be transacted at a meeting of shareholders without prior notice of the business being given to the shareholders.” 

Since, under Article 11.1 (2) (d) and (e), neither an increase in the number of directors nor the election of directors is considered “special business” there will be no additional requirements as to the content of the notice of the annual meeting.

If, however, the notice did identify something to be done at the meeting that is “special business” Article 10.9 requires that the notice must state “the general nature” of that business. The essence of that requirement is that the notice (or some document accompanying the notice) should provide enough information about the special business to enable a shareholder to form an intelligent conclusion as to how he/she will vote on it. You will find some illustrations of this requirement that would be required by the common law even if there were no Article 10.9. See the judgment in Garvie v. Axmith, at pages 430-432 of the Casebook.

Any matter that requires a “special resolution” of the shareholders, generally, “out of the ordinary” transactions such as a resolution for the removal of a director, will be “special business”. The definition of “special resolution” is unnecessarily complicated but the nub of it is that it must be passed by a majority of not less than 2/3 (and, depending on the Articles, not more than 3/4) of the votes cast to be voted in favor.

Assuming, then, that the only matters to be dealt with at the annual meeting fall within the scope of Article 11.1 (2), i.e. there will be no “special business”, the notice of meeting will look something like this:

 NOTICE OF ANNUAL GENERAL MEETING OF

ABC CORPORATION

NOTICE IS HEREBY GIVEN that the annual general meeting of shareholders of the Company will be held (address, date and time) for the following purposes:
<ol>
<li>to receive the financial statements of the Company for the year ended -------;</li>
<li>to appoint auditors and to authorize the directors to fix their remuneration;</li>
<li>to fix the number of directors of the Company at four (4):</li>
<li>to elect directors;</li>
<li>to consider such other matters as may properly come before the meeting.</li>
</ol>
BY ORDER OF THE BOARD OF DIRECTORS

By: ________________________

Secretary

Dated:

---------------------------------------------

You will see that the Notice does not identify the people who are to be proposed for election as directors. It is not required to do so, nor, in contrast to the position in public companies (as to which see below) must this information be provided in any other document sent to shareholders in connection with the meeting. The shareholders may only learn who the nominees are when, and if, they turn up at the meeting.

Voting at meetings:

Although it is not common, it is certainly possible to create a class of shares that does not have the right to vote at a meeting of shareholders. Even in that case, however, such shares may have the right to vote in certain extraordinary circumstances.

Where a class of shares does have the right to vote (which would be the case if there is only one class of [“common”] shares), in most cases that right may be exercised in one of two ways [BCBCA s. 173 (1)]:

(a) in person; or

(b) by proxy

Voting in person by show of hands or ballot:

To exercise the right to vote “in person”, the shareholder must be present at the meeting. Assuming that he/she is present, there are two methods for tallying the vote: (i) by “show of hands” and (ii) by a ballot.

In the former case, the shareholders present are asked to raise a hand to indicate their vote, which is then counted. Effectively, this means that each shareholder voting has one vote only, regardless of the number of votes attached to all the shares owned by that shareholder.

To avoid this, it is common for the articles to permit a “ballot” vote by which each shareholder present is invited to complete a ballot form indicating how he/she is voting on a particular resolution and the number of votes which that shareholder is entitled to cast. The voting result will then reflect the number of votes, not the number of shareholders. In the ordinary course of events, absent some unusual circumstances (such as, some matter as to which there is a difference of opinion), there will generally only be a vote by show of hands, though a shareholder generally has the right to demand that a ballot or poll be held. See BCBCA sectiom 173 (1).

Voting by proxy:

Simply put, voting by proxy is a procedure by which a shareholder appoints another person to vote his/her shares. More often than not, shareholders who, for one reason or another, are unable to attend a meeting in person use this procedure. Sometimes, a shareholder who, although able to attend a meeting and intending to be present, wishes to be accompanied by an advisor such as a lawyer uses it. In that case, for example, a shareholder with 100 votes (shares) might give the lawyer his/her proxy in respect of 1 share, and vote the remaining shares himself/herself.

Proxy voting at common law and under the standard form articles:

At common law, a shareholder did not have the right to appoint a proxy. (The word, “proxy” is, by the way, used both to describe the document by which someone is given the right to vote on one’s behalf and, sometimes, the person (proxyholder or nominee) who is given that right). If there is to be a right to vote by proxy, this has to be found in the memorandum or articles of the company. Under section 173 of the BCBCA a shareholder has the right to vote by proxy unless that memorandum or articles provide otherwise.

In fact, it is commonplace to find a provision permitting proxy voting in the articles of “private” companies. Article 12.8 of the standard articles is a good example:

“Every shareholder of the Company, including a corporation that is a shareholder but not a subsidiary of the Company, entitled to vote at a meeting of shareholders may, by proxy, appoint one or more proxyholders to attend and act at the meeting in the manner, to the extent and with the powers conferred by the proxy.”

The articles also commonly specify the (relatively simple) form of proxy. See, forexample, Article 12.12 of the standard articles which says:

A proxy, whether for a specified meeting or otherwise, must be either in the following form or in any other form approved by the directors or the chair of the meeting:

[name of company] (the “Company”)

The undersigned, being a shareholder of the Company, hereby appoints [name] or, failing that person, [name], as proxyholder for the undersigned to attend, act and vote for and on behalf of the undersigned at the meeting of shareholders of the Company to be held on [month, day, year] and at any adjournment of that meeting.

Number of shares in respect of which this proxy is given (if no number is specified, then this proxy is given in respect of all shares registered in the name of the undersigned):

Signed [month, day, year] 

[Signature of shareholder] 

[Name of shareholder—printed]

For obvious reasons, the BCBCA requires a ballot vote where proxy voting is permitted. See BCBCA section 173 (2) (a) in this regard.

If proxy voting is provided for it is common, though not required, to include language in the notice of an AGM to the effect that proxy voting is permissible, to provide a form of proxy, and instructions as to how it is to be completed.
<ol>
<li>Special Meeting</li>
</ol>
On the facts about Longwood that are assumed, it is highly unlikely as a practical matter that a special meeting of shareholders of a “private” company would ever be convened for the purpose of appointing an additional director, whether on the initiative of the directors or, by means of a requisition, by Dewar or one of his supporters. This is much more likely (although not commonplace) in the case of a publicly traded company.
<ol>
<li> Court Ordered Meetings</li>
</ol>
Under section 186 of the BCBCA if for some reason it is “impracticable” for a company to call or conduct a meeting of shareholders in the prescribed manner, or for any other reason the court considers appropriate, it may, on the application of a director or shareholder, order that a meeting be called, held and conducted in the manner the court considers appropriate, and give appropriate directions to this end. Although this section is equally applicable to private and publicly traded companies it is rarely used in relation to the latter. The sort of circumstance in which it might be used in connection with a private company is where there is an internal dispute and a shareholder tries to exert leverage over his adversary by refusing to attend shareholder meetings thus preventing a quorum being reached and thus preventing the meeting from doing anything.
<ol>
<li> PUBLICLY TRADED COMPANIES</li>
</ol>
Assume some slightly different facts from those indicated above.

Longwood Industries Inc.:

* Is not a private company but a publicly traded company, with its common shares (each of which carries one vote) traded on the Toronto Stock Exchange;

* Has several thousand shareholders scattered across Canada;

* Has a board consisting of 5 directors;

* Held its last AGM in January 2014 (i.e. the next AGM need only be held before the end of April 2015 [see above II.A. (i)];

* In March 2014 completes an agreement with “Zillion$ Financing Inc” under which the latter invests about $25 million by the purchase of common shares by way of a “private placement” (i.e. a private transaction). Effectively, this gives Zillion$ slightly under 4% of the total outstanding shares (and hence votes) of Longwood, making it the largest single shareholder. Suppose that the agreement entitles Zillion$, upon request, to appoint 2 nominees to Longwood’s board of directors.

* Zillion$ has indicated to Longwood that it has no present intention of exercising its right to appoint nominees to Longwood’s board and is content to wait until the next AGM. It also indicates that it presently contemplates that its 2 nominees will be in addition to the 5 existing directors and not by way of replacement of two of them.

ANNUAL MEETING OF LONGWOOD IN APRIL 2015

The basic procedure:

The basic procedure for convening the AGM to be held in April 2015 will be essentially the same as that outlined in II.A above in connection with the AGM of the private company. Some of the details will, however, differ.

On the basis of the facts assumed, the “appointment by directors” procedure outlined above is not relevant. We are dealing, then, with the subject of appointment/election by the shareholders.

Notice of meeting and information circular:

A notice of meeting will have to be sent out, slightly more elaborate but not unlike that outlined above for a private company. On the next page you will find a recent example:

 

 ABSOLUTE SOFTWARE CORPORATION

Suite 1600, Four Bentall Centre

1055 Dunsmuir Street

Vancouver, British Columbia, V7X 1K8

NOTICE OF ANNUAL GENERAL MEETING

TO OUR SHAREHOLDERS:

Our Annual General Meeting (the “Meeting”) will be held at the Metropolitan Hotel Vancouver, 645 Howe St, Vancouver, British Columbia on Wednesday, December 11, 2013 at 4:00 p.m. (local time) for the following purposes:
<ol>
<li>To receive the report of our directors;</li>
<li>To receive our audited financial statements of the financial year ended June 30, 2013, and the accompanying report of the auditors;</li>
<li>To fix the number of persons to be elected to our board of directors;</li>
<li>To elect our directors for the ensuing year;</li>
<li>To appoint our auditor for the ensuing year and to authorize the directors to fix the auditor’s remuneration;</li>
<li>To consider any amendment to or variation of a matter identified in this Notice; and</li>
<li>To transact such other business as may properly come before the Meeting or any adjournment thereof.</li>
</ol>
Our Information Circular, which includes a detailed description of the matters to be dealt with at the Meeting, along with a copy of our 2013 Annual Report, accompanies this Notice. Our consolidated financial statements for the year ended June 30, 2013 and the report of the auditors thereon are included in the Annual Report.

If you are unable to attend the Meeting in person and wish to ensure that your shares will be voted at the Meeting, you must complete, date and execute the enclosed form of proxy, or another suitable form of proxy, and deliver it by hand or by mail in accordance with the instructions set out in the form of proxy and in the Information Circular. If you are an unregistered shareholder and want to attend the Meeting, you must follow the instructions set out in the Information Circular to ensure that your shares will be voted at the Meeting.

DATED at Vancouver, British Columbia, November 6, 2013.

BY ORDER OF THE BOARD

“John Livingston”

Chairman and Chief Executive Officer

 

As in the case of the notice of meeting of the private company, Absolute Software’s Notice of Annual Meeting itself gives virtually no information about the various agenda items to be considered at the meeting.

Much of this information is (and must be) contained in the “Information Circular” referred to as accompanying the Notice of Meeting. This is an elaborate disclosure document the contents of which are prescribed in a Form published by the various provincial securities commissions. It does not apply in connection with meetings of “private” companies.

It is too long to include here but if you wish to see Absolute Software’s Information Circular, the following link will take you to it:

<a href="http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Ccirc.pdf">http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Ccirc.pdf</a>

If you do look at the Absolute Software Information Circular you will notice that, in contrast to the position in connection with private companies, it identifies each of the proposed nominees for election as a director and provides detailed information about their background and experience and their compensation. All of this information, and a great deal else besides, is prescribed in the relevant Form and the Policy under which it has been developed. In addition, you should note that the Form says:

“If action is to be taken on any matter to be submitted to the meeting of securityholders other than the approval of annual financial statements, briefly describe the substance of the matter, or related groups of matters, except to the extent described under the foregoing items, in sufficient detail to enable reasonable securityholders to form a reasoned judgment concerning the matter. Without limiting the generality of the foregoing, such matters include alterations of share capital, charter amendments, property acquisitions or dispositions, reverse takeovers, amalgamations, mergers, arrangements or reorganizations and other similar transactions.”

You will see that the language used here is a slightly more elaborate (and perhaps more informative) version of what is contemplated by the disclosure required under the standard form articles in respect of “special business”.

Voting procedure:

As in the case of “private” companies, voting at the meeting both by “show of hands” and by ballot so that proxy votes (calculated by shares not shareholders) are counted is possible. The securities regulators require that an opportunity to vote by proxy be given to each shareholder entitled to vote at a meeting of a “public” company. In practical terms, “show of hands” voting is used, if at all, only on relatively uncontroversial matters.

Proxy voting:

In general, only registered shareholders are entitled to vote, i.e. those whose names are entered on the company’s shareholders register. In the case of publicly traded companies, this gives rise to two problems. First, a registered shareholder might be unable to attend the meeting; and second, it is almost invariably the case that there are shareholders in public companies who, for reasons of convenience or otherwise, do not wish to have their shares registered in their own names, but instead to hold them through nominees such as investment dealers or banks.

To deal with these problems there is an elaborate and complex set of rules concerning the process of “soliciting” proxies (i.e. asking shareholders (or, viewed from another perspective, giving them the opportunity) to exercise their right to vote. This is achieved through the proxy regulation system the rules of which are sometimes found in corporate legislation (see, for example, Part XIII of the CBCA) but more often in published policies of the provincial securities regulators.

There are two major components of this system:

* Every time the management of a public company gives notice of a meeting of shareholders it is deemed to engage in a “solicitation”<a href="#_ftn1" name="_ftnref1">[1]</a> of proxies and must give shareholders:

- An information circular (see above) containing certain mandated disclosure. The information circular must include certain specific information and, in addition, if the shareholders are asked to take action on some specific matter, the substance of that matter must be described “in sufficient detail to permit security holders to form a reasoned judgment concerning the matter”;

- A form of proxy (i.e. the document appointing the proxy nominee) that permits them to specify that their shares shall be voted for or against on every matter to be voted on and, in connection with an election of directors or appointment of auditors, that permits them to vote or be withheld from voting.

* A complex set of rules designed to enable beneficial shareholders such as those who hold their shares through banks or investment dealers as nominees, the opportunity to have their votes cast. Simply put, these rules require the nominees to solicit voting instructions from those on whose behalf they act. If you look at the Absolute Software information circular you will see that it contains detailed information about these procedures.

 

 

On the assumption that the April 2015 Annual Meeting of Longwood Industries Inc. is going to be in all respects routine, conducted in accordance with its agreement with Zillion$. On that assumption, the form of proxy would look something like this:

 

ANNUAL GENERAL MEETING OF SHAREHOLDERS OF
LONGWOOD INDUSTRIES INC. (the “Company”)
TO BE HELD AT ●, British Columbia, Canada

on ●, April ●, 2015, at 10:00 a.m. (Pacific Time)

The undersigned shareholder (“Registered Shareholder”) of the Company hereby appoints ●, a director and the President and Chief Executive Officer of the Company, or failing him, ●, the Chief Financial Officer and Corporate Secretary of the Company, or, in the place of the foregoing, ______________________________ as proxyholder for and on behalf of the Registered Shareholder with the power of substitution to attend, act and vote for and on behalf of the Registered Shareholder in respect of all matters that may properly come before the Meeting of the Registered Shareholders of the Company and at every adjournment thereof, to the same extent and with the same powers as if the undersigned Registered Shareholder were present at the said Meeting, or any adjournment thereof.

The Registered Shareholder hereby directs the proxyholder to vote the securities of the Company registered in the name of the Registered Shareholder as specified herein.

The undersigned Registered Shareholder hereby revokes any proxy previously given to attend and vote at said Meeting.
SIGN HERE:_______________________________ 

 

Please Print Name: _________________________ 

 

Date: ____________________________________ 

 

Number of Shares Represented by Proxy:______ 

 

THIS PROXY FORM IS NOT VALID UNLESS IT IS SIGNED AND DATED. SEE IMPORTANT INFORMATION AND INSTRUCTIONS ON REVERSE. 

 

Resolutions (For full detail of each item, please see the enclosed Notice of

Meeting and Information Circular)
<table width="472">
<tbody>
<tr>
<td width="307"> </td>
<td width="48">For</td>
<td width="54">Against</td>
<td width="63">Withhold</td>
</tr>
<tr>
<td width="307">· To set the number of directors at seven (7)</td>
<td width="48"> </td>
<td width="54"> </td>
<td width="63">N/A</td>
</tr>
<tr>
<td width="307">· To elect as a director, ●</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
<tr>
<td width="307">· To elect as a director, ●</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
<tr>
<td width="307">· To elect as a director, ●</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
<tr>
<td width="307">· To elect as a director, ●</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
<tr>
<td width="307">· To elect as a director, ●</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
<tr>
<td width="307">· To elect as a director, ●</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
<tr>
<td width="307">· To elect as a director, ●</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
<tr>
<td width="307">· To appoint ●, Chartered Accountants, as auditor of the Company</td>
<td width="48"> </td>
<td width="54">N/A</td>
<td width="63"> </td>
</tr>
</tbody>
</table>
INSTRUCTIONS FOR COMPLETION OF PROXY 
<ul>
<li>This Proxy is solicited by the Management of the Company. </li>
<li>This form of proxy (“Instrument of Proxy”) must be signed by you, the Registered Shareholder, or by your attorney duly authorized by you in writing, or, in the case of a corporation, by a duly authorized officer or representative of the corporation; and if executed by an attorney, officer, or other duly appointed representative, the original or a notarial copy of the instrument so empowering such person, or such other documentation in support as shall be acceptable to the Chairman of the Meeting, must accompany the Instrument of Proxy.</li>
<li>If this Instrument of Proxy is not dated in the space provided, authority is hereby given by you, the Registered Shareholder, for the proxyholder to date this proxy the date on which it was mailed to you, the Registered Shareholder, by Olympia Trust Company.</li>
<li>A Registered Shareholder who wishes to attend the Meeting and vote on the resolutions in person, may simply register with the scrutineers at the Meeting before the Meeting begins.</li>
<li>A Registered Shareholder who is not able to attend the Meeting in person but wishes to vote on the resolutions, may do one of the following:</li>
</ul>
 (a) appoint one of the management proxyholders named on this Instrument of Proxy, by leaving the wording appointing a nominee as is (i.e. do not strike out the management proxyholders shown and do not complete the blank space provided for the appointment of an alternate proxyholder). Where no choice is specified by a Registered Shareholder with respect to a resolution set out herein, a management appointee acting as a proxyholder will vote in favour of each matter identified on this Instrument of Proxy and for the nominees of management for directors and auditor as identified in this Instrument of Proxy; OR (b) appoint another proxyholder, who need not be a Registered Shareholder of the Company, to vote according to the Registered Shareholder’s instructions, by striking out the management proxyholder names shown and inserting the name of the person you wish to represent you at the Meeting in the space provided for an alternate proxyholder. If no choice is specified with respect to the matters to be voted on at the Meeting, the proxyholder has discretionary authority to vote as the proxyholder sees fit.
<ul>
<li>The securities represented by this Instrument of Proxy will be voted or withheld from voting in accordance with the instructions of the Registered Shareholder on any poll of a resolution that may be called for and, if the Registered Shareholder specifies a choice with respect to any matter to be acted upon, the securities will be voted accordingly. Further, the securities will be voted by the appointed proxyholder with respect to any amendments or variations of any of the resolutions set out on the Instrument of Proxy or matters which may properly come before the Meeting as the proxyholder in its sole discretion sees fit.</li>
</ul>
If a Registered Shareholder has submitted an Instrument of Proxy, the Registered Shareholder may still attend the Meeting and may vote in person. To do so, the Registered Shareholder must record his/her attendance with the scrutineers before the commencement of the Meeting and revoke, in writing, the prior votes by proxy.

To be represented at the Meeting, this Instrument of Proxy must be received by Olympia Trust Company no later than forty eight (48) hours (excluding Saturdays, Sundays and holidays) prior to the time of the Meeting, or adjournment thereof, or may be accepted by the Chairman of the Meeting prior to the commencement of the Meeting. 
<ol>
<li>VOTING METHODS</li>
</ol>
INTERNET VOTING 24 Hours a Day, 7 days a week: If a WEB VOTING ID NUMBER appears on the face of this Instrument of Proxy in the address box (see example below), you can complete internet voting at https://secure.olympiatrust.com/proxy/
<table>
<tbody>
<tr>
<td width="85">Example:</td>
<td width="246">123456 9999 1000 123F45K
JOHN DOE
123 MAIN STREET
CALGARY AB T1A 1A1</td>
<td width="336">o 123F45K would be your WEB VOTING ID NUMBER</td>
</tr>
</tbody>
</table>
 

RETURN YOUR PROXY BY MAIL, FACSIMILE OR E-MAIL TO Olympia Trust Company:

Olympia Trust Company, Proxy Department, 1003 – 750 West Pender Street, Vancouver, British Columbia V6C 2T8

Facsimile: (604) 484-8638 E-mail: proxy@olympiatrust.com I

Do not mail the printed Instrument of Proxy if you have voted via the Internet.




It was noted in the hypothetical facts that Zillion$ owns slightly less than 4% of the outstanding Longwood shares. To achieve its objectives, therefore, it is likely that it will have to secure the support of other shareholders including, having regard to its investment agreement, the present directors of Longwood. This will generally be achieved through the proxy system.

[Suppose, however, that some other shareholder has a different view about the desirability of the 5 nominees and has some candidates of its own to put forward. In that event, it will probably decide to put up its own nominees for election and solicit proxies for those candidates. To do this, it will need to obtain a copy of a list of shareholders. Its rights in this respect are governed by section 49 of the BCBCA. Essentially, that section provides that an application must be made to the company or its transfer agent for a copy of the list. The application must include an affidavit to the effect that the list will only be used for a permitted purpose. The permitted purposes include an effort to influence the voting of shareholders of the company at any meeting of shareholders and to acquire or sell securities of the company.]

It is likely that, if Longwood has not previously done so, it will take the opportunity at its 2015 annual meeting to adopt certain changes to its articles affecting the election of directors that are now required under various policies of the Stock Exchange. These are:
<ol>
<li> Preventing slate voting</li>
</ol>
Until fairly recently a minority of publicly traded companies used to employ a voting system – “slate voting” which only allowed shareholders to vote for all of the directors nominated by management (i.e. a slate of directors), but not for individual directors. This effectively prevented shareholders from voting against individual directors for performance reasons such as poor board attendance. The only option in such case was to vote against the whole board, or to conduct a costly proxy fight. Slate voting is no longer permitted. As is apparent from Longwood’s form of proxy, it provides for individual and not slate voting
<ol start="2">
<li> Plurality and majority voting</li>
</ol>
Under the “for-withhold” plurality voting system for directors contemplated by the Longwood form of proxy it is possible for someone to be elected without receiving a majority of the votes. So: assume 7 candidates for election and 100 possible votes, cast as follows:

 

 

 

 
<table>
<tbody>
<tr>
<td width="213"> </td>
<td width="213">For</td>
<td width="213">Withhold</td>
</tr>
<tr>
<td width="213">A</td>
<td width="213">60</td>
<td width="213">40</td>
</tr>
<tr>
<td width="213">B</td>
<td width="213">55</td>
<td width="213">30</td>
</tr>
<tr>
<td width="213">C</td>
<td width="213">51</td>
<td width="213">40</td>
</tr>
<tr>
<td width="213">D</td>
<td width="213">40</td>
<td width="213">43</td>
</tr>
<tr>
<td width="213">E</td>
<td width="213">36</td>
<td width="213">45</td>
</tr>
<tr>
<td width="213">F</td>
<td width="213">25</td>
<td width="213">35</td>
</tr>
<tr>
<td width="213">G.</td>
<td width="213">20</td>
<td width="213">30</td>
</tr>
</tbody>
</table>
Despite the facts that each of D, E, F and G received less than a majority of the possible votes and that more shareholders withheld voting for them than voted in their favour, each of them will be elected.

Under a Policy recently adopted by the Toronto Stock Exchange, however, any nominee for director who receives a greater number of votes ‘withheld' from him than ‘for' his or her election, would be required to tender his or her resignation as a director and the remaining directors would have to consider whether – as is likely to be the case – those resignations should be accepted.

The remaining board members would, absent unusual circumstances, generally accept such resignation.

Most publicly traded companies are also subject to a requirement that they publish the results of voting at a shareholders’ meeting.
<ol start="3">
<li>3. Advance notice policy</li>
</ol>
It is becoming increasingly common for publicly traded companies to adopt what is referred to as an “advance notice” policy under which anyone (effectively anyone who is not part of management) proposing to nominate a director for election at a meeting of shareholders must provide the company with advance notice (typically between 30-65 days) of, and prescribed details concerning, any such proposed nominee. Unless proper notice is given to the company any such proposed nominee is ineligible for election at the shareholders meeting. The policy is intended to the risk of ambush proxy contests.
<ol start="4">
<li> An “enhanced quorum” policy</li>
</ol>
A “quorum” is the minimum number of participants who must be present at a meeting in order to permit it to proceed to do the business for which it has been called. This number is commonly found in the Articles of a company and may be measured either by reference to shareholders present in person or by a combination of shareholders present in person and shareholders represented by proxy. Article 11.3 of the “model” articles, for example, says that subject to certain qualifications, the quorum for the transaction of business at a meeting of shareholders is two persons who are, or who represent by proxy, shareholders who, in the aggregate, hold at least 5% of the issued shares entitled to be voted at the meeting. Section 172 of the Business Corporations Act contains a “default” provision if the company’s articles are silent on the point.

A number of public traded companies have recently adopted an “enhanced quorum” provision. Essentially, this provides that at any meeting at which a shareholder will be seeking to replace half or more of the board of directors a minimum of two shareholders holding at least a majority of the issued and outstanding common shares must be present or represented by proxy before the meeting can be held and business validly transacted.

The matters identified above are all “special business” within the meaning of Articles 10.9 and 11.1 of Longwoods Articles and of the requirements for disclosure in its Information Circular. The relevant provisions have been quoted earlier.

----------------

A SLIGHT CHANGE IN THE ASSUMED FACTS ABOUT LONGWOOD AND ZILLION$ - REQUISITIONING A SPECIAL MEETING IN AUGUST 2014

Suppose that within a short time after Zillion$ completes its investment in Longwood it starts becoming progressively more disenchanted with the policies and competence of the Longwood directors to the point that it considers that it cannot afford to wait until the April 2015 AGM to reconstitute the Longwood board.

Up for consideration by Zillion$ is to requisition a meeting of Longwood shareholders to
<ul>
<li>Increase the number of directors to 7 and elect two Zillion$ nominees to fill the vacancies; or</li>
<li>Remove two existing directors and replace them with 2 Zillion$ nominees; or</li>
<li>Remove all 5 existing directors and replace them with 5 Zillion$ nominees</li>
</ul>
The procedure for requisitioning a meeting of Longwood shareholders is set out in section 167 of the British Columbia Business Corporations Act.

In summary, a requisition must be:
<ul>
<li>For the purpose of transacting any business that may be transacted at a general meeting – the removal and election of directors both qualify:</li>
<li>Served on Longwood and signed by shareholders who, at the date on which the company receives it, hold in the aggregate at least 1/20 of the issued shares. Since Zillion$ only holds 4% of the shares, it will have to find other shareholders to join it;</li>
<li>State in 1,000 words or less, the business to be transacted at the meeting, including (the text of) any special resolution to be voted on.</li>
</ul>
Note that the removal of a director can only happen if the shareholders pass a special resolution to this effect. If a requisition meeting these requirements is received the directors must call a general meeting for the purpose set out in the requisition, to be held not more than 4 months after the date on which it is received. They are relieved of this obligation, however, if:
<ul>
<li>They have already called a general meeting to be held after the receipt of the requisition and have sent out notice of that meeting;</li>
<li>Substantially the same business was submitted to shareholders to be transacted at a general meeting that was held within the preceding 5 years and was only supported by a certain threshold number of votes which varies according to the number of times it has been submitted;</li>
<li>It clearly appears that the business stated in the requisition does not relate in a significant way to the business or affairs of the company or that the primary purpose for the requisition is securing publicity, or enforcing a personal claim or redressing a personal grievance against the company or any of its directors, officers or security holders;</li>
<li>The business stated in the requisition has already been substantially implemented or, if implemented, would cause the company to commit an offence, or</li>
<li>The requisition deals with matters beyond the company's power to implement.</li>
</ul>
None of the actions contemplated by Zillion$ seems to fall within any of the grounds for rejection specified. It seems, then, that the Longwood directors will have to respond to the requisition by calling a meeting to be held within 4 months.

If they do not do so within 21 days, then Zillion$ (and its friends) will be able to call a meeting to be held within the prescribed 4 months. The notice and proxy requirements described generally above if the meeting were to be called by the directors, will apply to Zillion$ and its friends (because, almost by definition, they are engaged in a “solicitation”) and, unless at the requisitioned meeting the shareholders, by an ordinary resolution, decide otherwise, those making the requisition will be entitled to be reimbursed for their expenses.

Assuming that Longwood has adopted the “enhanced quorum” provision referred to above, it may be difficult for Zillion$ to achieve its objectives without a vigorous proxy battle to ensure that the enhanced quorum is satisfied.

SHAREHOLDER PROPOSALS

It is possible, though as a practical matter unlikely, that Zillion$ might seek to achieve its objectives by means of a so-called “shareholder proposal”. Essentially, this involves a non-management shareholder or shareholders taking steps to try and get the actions that they wish to have taken, included in management’s notice of meeting and proxy materials. Shareholder proposals are more likely to be used to raise structural issues, such as the reconstitution of the board of directors, than issues that are not essentially structural but relate to the opportunities to scrutinize management in ways that are not readily amenable to the requisition procedure.

Examples might be to persuade a reluctant board of directors to adopt the sort of changes that have now been mandated by the Stock Exchange, relating to slate and majority voting, etc. In fact, what has happened is that the original initiative for the adoption of mechanisms of this kind came in the form of shareholder proposals, not binding on the directors, but attracting a level of support that made it increasingly difficult to resist these ideas. Eventually, the pressure from “activist” shareholders caused the exchange to act.

An example of a shareholder proposal that is becoming increasingly common is the so-called “say on pay” proposition. Essentially, this involves giving shareholders the opportunity to vote on an advisory resolution on executive compensation. Among the items identified in the Notice of the 2009 Annual Meeting of National Bank of Canada was “to examine the shareholder proposals, as set out in Schedule A to the Management Proxy Circular”. That Schedule advised that the Bank had received a proper proposal “that the board of directors adopt a governance rule stipulating that a shareholder advisory vote be held on the compensation policy for their executive officers; set out the proposer’s rationale for its proposal and the Bank’s response which was, in essence, to oppose adoption of the proposal. Despite this, the shareholders supported the proposal with 56.85% of the votes being cast in favour of it and 43.15% voting against. The board of National Bank has since changed somewhat its approach to the subject of “say on pay” but the matter continues to arise as a topic at annual meetings. See, for example, the Bank’s 2014 Notice of Annual Meeting and Information Circular, at <a href="http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00002236&fileName=/csfsprod/data149/filings/02172923/00000001/g%3A%5CSEDAR%5CNational-Bank%5CNBC%5C2014%5CAGM%5CCircular-Eng.pdf">http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00002236&fileName=/csfsprod/data149/filings/02172923/00000001/g%3A%5CSEDAR%5CNational-Bank%5CNBC%5C2014%5CAGM%5CCircular-Eng.pdf</a>

The provisions governing shareholder proposals are found in sections 187 to 191 of the BC Business Corporations Act. Nothing is to be gained from a detailed examination of those provisions here.

 

 

UNIT WRAP UP:

Understanding that this (sort of) separate entity known as the corporation functions and has legally defined rights, powers and constraints; we cannot avoid the truth that it is human beings who actually animate those rights, powers and constraints. They are “Oscar Zoroaster Phadrig Isaac Norman Henkle Emmannuel Ambroise Diggs”, the human being of flesh and bones who pretended to be the Great and Powerful Oz in “The Land of Oz” by Frank Baum that served as the basis of the film “The Wizard of Oz”. So although companies are separate, they need people. The next Unit is about what those people, known as management (and in limited circumstances shareholders), can and cannot do.

<a href="#_ftnref1" name="_ftn1">[1]</a> There is an elaborate definition of “solicit” and solicitation. The essence of a solicitation is that it involves a request to a shareholder to execute and deliver a form of proxy.

Course:Business Organizations - LAW 459

2016-08-16T09:24:53Z

DavidHeinrich: /* Unit 6 */

{{Infobox_New_Course

|title=Business Organizations

|picture=Image:wiki.png

|subject code=LAW

|course number=459

|section number=003

|instructor=Jon Festinger

|email=zenracer@mail.ubc.ca

|office=

|office hours=

|schedule=

|classroom=Allard Hall Room 104

}}


=== Course Materials ===
===== Unit 1: INTRODUCING BUSINESS ORGANIZATIONS & THEIR REAL WORLD CONTEXTS =====
[[Course:Business Organizations - LAW 459/Unit 1]]

===== Unit 2: THE BASIC CONCEPTS OF BUSINESS ORGANIZATIONS =====
[[Course:Business Organizations - LAW 459/Unit 2]]

===== Unit 3: PARTNERSHIPS =====
[[Course:Business Organizations - LAW 459/Unit 3]]

===== Unit 4: CORPORATE PERSONHOOD – SOME SPECIFIC ISSUES AND PROBLEMS =====
[[Course:Business Organizations - LAW 459/Unit 4]]

===== Unit 5: CORPORATE OBLIGATIONS =====
[[Course:Business Organizations - LAW 459/Unit 5]]

===== Unit 6: THE LEGAL ARCHITECTURE OF BUSINESS GOVERNANCE =====
[[Course:Business Organizations - LAW 459/Unit 6]]

===== Unit 7 =====
[[Course:Business Organizations - LAW 459/Unit 7]]

===== Unit 8 =====
[[Course:Business Organizations - LAW 459/Unit 8]]

===== Unit 9 =====
[[Course:Business Organizations - LAW 459/Unit 9]]

===== Unit Review =====

Course:Business Organizations - LAW 459/Unit 5

2016-08-16T09:23:34Z

DavidHeinrich:

UNIT 5 (weeks 6 & 7): CORPORATE OBLIGATIONS 

http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Unit-5-2-e1468620835852-225x300.jpg

Figure 5: Two old large seals that once were necessary parts of how corporations bound them selves in law. Generally they are no longer required.
ALT: Two old large seals that once were necessary parts of how corporations bound them selves in law. Generally they are no longer required.

Source of image: Jon Festinger

 

UNIT OVERVIEW:

In this section of the course we consider the parameters by which corporations become obligated or incur liability (criminally or civilly), given that they are not “flesh and blood” but have the rights of a “natural person”.

More specifically, we will consider several questions:
<ol>
<li>How does a corporation become liable in tort?</li>
<li>How does a corporation commit an offence and does the answer to this question depend on whether the offence is, or is not, one requiring a “guilty mind” (mens rea)?</li>
<li>How does a corporation incur contractual obligations?</li>
</ol>
 

UNIT OUTCOME:

In this unit you will learn how to approach the problem of how a company, which you now understand to be an abstract concept, can obligate itself to another person or company. You will come to an understanding of the cases that wrestle with notions and limitations of the “directing mind” of the corporation. You will be able to understand when in the real world the acts of employees may or may not bind the company, either in contract or otherwise under the law, criminal or statutory.

 

UNIT READINGS:

Please read the following materials:

Casebook pages 227-277

BCBCA sections 13 (1) & (2), 17-19, 30-33

Beverly Corners Liquor Store Ltd. v. British Columbia (Liquor Control and Licensing Branch), 2012 BCSC 1851 <a href="http://www.pssg.gov.bc.ca/lclb/enforcements/pdf/2012/EH11-077A.pdf">http://www.pssg.gov.bc.ca/lclb/enforcements/pdf/2012/EH11-077A.pdf</a>

Meridian Global Funds Management Asia Limited v. Securities Commission [1995] UKPC 5 <a href="http://www.bailii.org/uk/cases/UKPC/1995/5.html">http://www.bailii.org/uk/cases/UKPC/1995/5.html</a>

Northern Minerals Investment Corp. v. Mundoro Capital Inc, 2012 BCSC 1090 <a href="http://canlii.ca/t/fs46d">http://canlii.ca/t/fs46d</a>

 

 

TOPIC 1: INTRODUCTION TO CORPORATE OBLIGATIONS

Let us begin with some elementary stuff.

If I do an act, or think a thought, that amounts to a crime or a tort I am responsible for that act or thought and will incur a legal liability as a result.

My liability is personal and direct (as opposed to vicarious or through agency).

But I may also incur a liability indirectly, not for my own acts but for the acts of another – my agent or employee.

This is a result of applying the doctrine of “vicarious liability”.

Vicarious liability is not a distinct tort. It is, rather, as Major J pointed out in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59, [2001] 2 SCR 983:

“…a theory that holds one person responsible for the misconduct of another because of the relationship between them.”

It does not depend on proof of personal wrongdoing on the part of the person who is subject to it.

What are the policy considerations that justify vicarious liability?
<ol>
<li>Vicarious Liability is a practical remedy for people who are harmed by wrongs of employees or agents of a corporation.</li>
<li>Vicarious Liability is “only fair” in that someone who employs others to advance their own economic interests should be liable for losses incurred in the course of the enterprise. The employer is often best placed to spread losses (often through insurance and higher prices).</li>
<li>Vicarious Liability facilitates the deterrence of future harm – makes employers better able to reduce accidents and intentional wrongs through efficient organization and supervision.</li>
</ol>
Vicarious liability however is not a substitute for the personal liability of an employee or agent. 

In most tort cases, vicarious liability can be applied without difficulty to situations where employer is a corporation, not an individual. Occasionally, however, an analysis of whether vicarious liability applies in a particular case can run into significant challenges.

 

TOPIC 2: COMMON LAW PRINCIPLES 

Please read The “Rhône” v. The “Peter A.B. Widener” [1993] 1 S.C.R. 497 (SCC) at pages 229-234 of the Casebook.

This is an example of a case where the analysis of whether vicarious liability applies in circumstances was difficult. See if you believe the outcome was fair.

The Peter Widener, a barge owned by Great Lakes Towing Co., collided with the Rhône, a ship at the time moored in Port of Montreal. The Peter Widener was under command of Captain Kelch, who worked for Great Lakes Towing Co.

The owners of the Rhône sued Great Lakes Towing Co. for breach of its towage contract. Great Lakes Towing Co. pleaded a section of Canada Shipping Act that in essence said that in the absence of “his actual fault or privity” the owner of a ship is not in the circumstances liable beyond a certain amount. The section in effect would render the doctrine of vicarious liability irrelevant in the circumstances

The question, then, was whether Great Lakes Towing Co. was guilty of “actual fault or privity”?

The Federal Court of Appeal found there was “actual fault” because Captain Klech was a “directing mind” of Great Lakes Towing Co. The Supreme Court of Canada reversed holding in favour of Great Lakes Towing Co.

Before the Supreme Court of Canada the question seemed to come down to at what point in the hierarchy of a company is the fault of a person employed in the organization to be treated as or identified with the fault of the company itself? 

Before delving deeper into how this question ought to be answered, Mr. Justice Iacobucci quoted Viscount Haldane’s decision Lennard's Carrying Co. v. Asiatic Petroleum Co. [1915] A.C. 705:

 

“My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. That person may be under the direction of the shareholders in general meeting; that person may be the board of directors itself, or it may be, and in some companies it is so, that that person has an authority co‑ordinate with the board of directors given to him under the articles of association, and is appointed by the general meeting of the company, and can only be removed by the general meeting of the company.”

That said the court’s analysis of at what point in the hierarchy of a company is the fault of a person employed in the organization to be treated as or identified with the fault of the company itself can perhaps be broken down to the following process:

 
<ul>
<li>Has the impugned individual been delegated the "governing executive authority" of the company within the scope of his or her authority?</li>
<li>That is to say does the discretion conferred on an employee amount to an express or implied delegation of executive authority to design and supervise the implementation of corporate policy rather than simply to carry out such policy.</li>
<li>Captain Klech’s negligence in performing navigational duties did not amount to actual fault or privity on the part of corporate owner, Great Lakes Towing Co.</li>
<li>It was not sufficient to show that the owner appointed a competent Master of the “Peter A.B. Widener” in Captain Klech – there is also an overall duty of supervision.</li>
<li>Were Captain Klech’s faults essentially those of Great Lakes Towing Co. by reason of his position in the hierarchy?</li>
</ul>
On the facts, the answer to the last question was “no”. Captain Klech was not the directing mind. Perhaps the most compelling answer to this question is in the following quote from Mr. Justice Iacobucci:

 

“With respect, I think that the courts below overemphasized the significance of sub‑delegation in this case. The key factor which distinguishes directing minds from normal employees is the capacity to exercise decision-making authority on matters of corporate policy, rather than merely to give effect to such policy on an operational basis, whether at head office or across the sea. While Captain Kelch no doubt had certain decision-making authority on navigational matters as an incident of his role as master of the tug Ohio and was given important operational duties, governing authority over the management and operation of Great Lakes' tugs lay elsewhere. Therefore, I am of the view that the courts below erred in holding that Captain Kelch was part of the directing mind and will of Great Lakes. As a result, the collision between the Rhône and the Widener did not occur with the actual fault or privity of Great Lakes.”

The case is interesting on two counts: first, as a rare example, dictated by the language of the Canada Shipping Act, of the solution to a corporate tort problem that does not involve application of principles of vicarious liability.

Secondly, as will be seen, it is important in the context of criminal liability of corporations as expounding the “directing mind test”.

 

 

TOPIC 3: CORPORATE CRIMINAL LIABILITY - MENS REA OFFENCES
<h1>Please read pages 234-236 of the Casebook.</h1>
For true criminal offences (i.e. those requiring proof of guilty intent), corporations in Canada have been traditionally held liable based on the “identification theory”. That is based on the actions and intent of the senior officers and directors considered to be the “directing minds” of the corporation. The fault of those senior officers and directors is identified with that of the corporation.

Canadian Dredge & Dock Co.v. The Queen [1985] 1 S.C.R. 662 cited in The “Rhone” v. The “Peter A.B. Widener” [1993] 1 S.C.R. 497 accepts a corporate defence where the employee is acting entirely on their own and against the best interests of the company:

“Where the criminal act is totally in fraud of the corporate employer and where the act is intended to and does result in benefit exclusively to the employee‑manager, the employee‑directing mind, from the outset of the design and execution of the criminal plan, ceases to be a directing mind of the corporation and consequently his acts could not be attributed to the corporation under the identification doctrine.”

In Canadian Dredge & Dock Co. v. The Queen the defence raised was that individuals involved in bid-rigging conspiracy were engaged on a frolic of their own, in fraud of their corporate employer and for their own benefit. The Supreme Court of Canada held (at paragraph 43 of <a href="http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/59/index.do">http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/59/index.do</a>) that in and of itself the fact that those employees were acting in breach of instructions is no defence:

“…If the law recognized such a defence, a corporation might absolve itself from criminal consequence by the simple device of adopting and communicating to its staff a general instruction prohibiting illegal conduct and directing conformity at all times with the law. That is not to say that such an element is without relevance when considering corporate liability with reference to offences of strict liability, supra. Where, however, the court is concerned with those mens rea offences which can in law be committed by a corporation, the presence of general or specific instructions prohibiting the conduct in question is irrelevant. The corporation and its directing mind became one and the prohibition directed by the corporation to others is of no effect in law on the determination of criminal liability of either the directing mind or the corporation itself by reason of the actions of the directing mind. This accords with the result reached in other courts.” 

HOWEVER, don’t stop reading there. Go on to paragraph 66 of the same judgment to get the full picture:

“Where the criminal act is totally in fraud of the corporate employer and where the act is intended to and does result in benefit exclusively to the employee‑manager, the employee‑directing mind, from the outset of the design and execution of the criminal plan, ceases to be a directing mind of the corporation and consequently his acts cannot be attributed to the corporation under the identification doctrine. Thus, the identification doctrine only operates where the Crown demonstrates that the action taken by the directing mind (a) was within the field of operation assigned to him; (b) was not totally in fraud of the corporation; and (c) was by design or result partly for the benefit of the company.”

Please note the following amendments to Canada’s Criminal Code made in 2004:

 

“22.1 In respect of an offence that requires the prosecution to prove negligence, an organization is a party to the offence if

(a) acting within the scope of their authority

 (i) one of its representatives is a party to the offence, or

 (ii) two or more of its representatives engage in conduct, whether by
act or omission, such that, if it had been the conduct of only one
representative, that representative would have been a party to the
offence; and

(b) the senior officer who is responsible for the aspect of the organization’s activities that is relevant to the offence departs — or the senior officers, collectively, depart — markedly from the standard of care that, in the circumstances, could reasonably be expected to prevent a representative of the organization from being a party to the offence.

22.2 In respect of an offence that requires the prosecution to prove fault — other than negligence — an organization is a party to the offence if, with the intent at least in part to benefit the organization, one of its senior officers

(a) acting within the scope of their authority, is a party to the offence;

(b) having the mental state required to be a party to the offence and acting within the scope of their authority, directs the work of other representatives of the organization so that they do the act or make the omission specified in the offence; or

(c) knowing that a representative of the organization is or is about to be a party to the offence, does not take all reasonable measures to stop them from being a party to the offence.”

 

The definitions relating to these provisions are:

“organization” means

(a) a public body, body corporate, society, company, firm, partnership, trade union or municipality, or

(b) an association of persons that

 (i) is created for a common purpose,

 (ii) has an operational structure, and

 (iii) holds itself out to the public as an association of
persons;

“representative”, in respect of an organization, means a director, partner, employee, member, agent or contractor of the organization;

 

“senior officer” means a representative who plays an important role in the establishment of an organization’s policies or is responsible for managing an important aspect of the organization’s activities and, in the case of a body corporate, includes a director, its chief executive officer and its chief financial officer;”

It is worth nothing that the definition of “senior officers” seems to avoid the difficulty of proving fault at the level of a corporation’s board of directors or directing mind while at the same time avoiding holding the corporation vicariously responsible for the wrongs of every employee or contractor. The bottom line is that it will no longer be necessary for prosecutors to prove fault in the boardrooms or at the highest levels of a corporation - the fault even of middle managers may suffice.

 

TOPIC 4: Criminal Liability: Non Mens Rea – (Srict/Absolute Liability) - Offences 
<h1>Please read pages 239-243 of the Casebook.</h1>
Please read the interesting case of R. v. Fitzpatrick’s Fuel Ltd. [2001] N.J. No. 149 (Prov. Ct.) at pages 239-242 of the Casebook.

 

This case involved the sale of beer to a minor who bought six bottles of beer. The employee who sold the beer was aware of restriction on selling beer to a minor. He followed the required practice of asking for identification and proof of age where any doubt.

The Liquor Control Act created a strict liability offence. Only proof of actus reus was required (subject only to the company showing it had taken reasonable care, or exercised due diligence, to avoid the commission of the offence).

Actus reus was proven. The ensuing question was whether the actions should be attributed to the corporation, Fitzpatrick’s Fuel Ltd.?

The legal answer to this question involves consideration of “identification” of the corporation with actual persons acting on its behalf.

Handrigan Prov. Ct. J. quotes Justice Estey in Canadian Dredge & Dock Co. v. The Queen:

“The corporation is but a creature of statute, general or special, and none of the provincial corporation statutes and business corporations statutes, or the federal equivalents, contain any discussion of criminal liability or liability in the common law generally by reason of the doctrine of identification. It is a court‑adopted principle put in place for the purpose of including the corporation in the pattern of criminal law in a rational relationship to that of the natural person. The identity doctrine merges the board of directors, the managing director, the superintendent, the manager or anyone else delegated by the board of directors to whom is delegated the governing executive authority of the corporation, and the conduct of any of the merged entities is thereby attributed to the corporation.” (At paragraph 32 <a href="http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/59/index.do">http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/59/index.do</a>)

The Crown argued that the employee was a “directing mind” of Fitzpatrick’s Fuel Ltd. and for that reason the identity of corporation merges with the identity of the employee when that employee was performing duties delegated to him “[e]ven though he was no more than an employee of the Company filling the position of gas attendant/cashier...”

Handrigan Prov. Ct. J. suggests, “at first blush, this position suffers from the doubt that it is pushing the concept of “directing mind” too far”. In the end though the learned judge does find it appropriate to go that far and accepts that the charge against the defendant Fitzpatrick’s Fuel Ltd. to be proven beyond a reasonable doubt.

Blog Activity 5.1

Ask yourself whether the decision in R. v. Fitzpatrick’s Fuel Ltd. Is consistent with the decision in the “Rhone” v. The “Peter A.B. Widener”. If Captain Kelch was not part of the directing mind and will of great lakes towing co. Then how is it that a gas attendant/cashier was a “directing mind” of Fitzpatrick’s Fuel Ltd.? In your view how can the two decisions be reconciled (or can they)?

Please blog your views on this question and your reasons in less than one page under the heading “Fitzpatrick’s Fuel & The Rhone”.

 

Now please read the case of Beverly Corners Liquor Store Ltd. v. British Columbia (Liquor Control and Licensing Branch), 2012 BCSC 1851 which can be found here: <a href="http://www.pssg.gov.bc.ca/lclb/enforcements/pdf/2012/EH11-077A.pdf">http://www.pssg.gov.bc.ca/lclb/enforcements/pdf/2012/EH11-077A.pdf</a>

 

In this case Beverly Corners Liquor Store Ltd. operated a private retail liquor Sore. A six-pack of beer was sold to a minor and no identification was requested. The female cashier who sold the liquor to the minor had been fully trained and signed off on all policy and practice manuals; regularly got performance reviews, and was the supervisor on duty on the night in question. She had been found to comply with policy, practices, and systems related to minors. She had been observed to faithfully check on young customers who came to her till. Her failure to follow policies and training on May 11, 2011 was inexplicable.

 

The court noted that:

 

“Supervisors are not part of management. They do not manage or have authority over staff. Their duties are to ensure that the store is cleaned at the end of the night and ready for business the following day. They put the money into the safe and ensure that the store is locked upon leaving. If they have a problem with staff or another issue, they are to call a manager. 

 

There is a store manager and a general manager. The store manager reports to the general manager but is responsible to manage staff. Managers do not usually work night shifts unless it is expected to be unusually busy. A manager would not normally be expected to be working on a normal Wednesday night. However, they are available on-call. Managers train employees such as the cashier who sold the liquor to the minor on May 11, 2011. Through policy manuals and training, staff learn to record cancelled sales because of failure to produce identification and to maintain a system of alerts for suspected minors in the store. Employees who are trained by the managers are required to sign off on training and policy manuals. 

The general manager is responsible for day to day operations and receives reports from the store and other managers. The general manager is also a shareholder in the business that owns the licensee retail store…” 

 

 

There had been no previous compliance issues at Beverly Corners Liquor Store Ltd. In fact management stressed to employees a no tolerance policy when it came to sale of liquor to minors and took pride in being the toughest store on requiring identification in the area. By all accounts, the policies, manuals, training, procedures, and compliance oversight above standard practice for the industry and went beyond that of most operators. The policies implemented erred on the side of caution for checking identification and there were multiple systems in place to remind staff of their duties in this regard. Staff and management were regularly reminded of their obligations with respect to minors through various means, including in pay envelopes and on buttons worn on their uniforms.

The Liquor Control Branch argued that the cashier was the directing mind of the licensee: “She had the authority to make a determination whether the customer was of legal age and if not satisfied in that regard to refuse the sale.”

Madam Justice Dillon of the Supreme Court of British Columbia considered how to apply the “due diligence” defence (as it pertains to the requirement that the defence prove on a balance of probabilities that the employee was not the directing mind of the licensee Beverly Corners Liquor Store Ltd.)

In the end the learned judge essentially accepted the argument of the defendant Beverly Corners Liquor Store Ltd. that an individual must have sufficient authority in respect of the sphere of relevant operations to be worthy of the appellation - “directing mind”. This in turn required consideration of whom on the premises of Beverly Corners Liquor Store Ltd. “at the time was the directing mind in the establishment as far as supervision was concerned and whether that individual on site at the time took reasonable steps.”

 

It is worth pausing to note that the test set out in The “Rhône” v. The “Peter A.B. Widener” of whether the impugned individual has been delegated governing executive authority of the company within the scope of her or his authority in the design and supervision of the implementation of corporate policy? If the employee merely carries out such policy, then they are not a directing mind of the corporation.

In the end the court in Beverly Corners Liquor Store Ltd. v. British Columbia (Liquor Control and Licensing Branch) made the following observations:

“In this case, the general manager found as a fact that the supervisor was not part of management, did not set store policies, and was not in charge of other employees. Similar to the truck driver/geographical representative in Safety-Kleen, the supervisor did not have any managerial or supervisory function in the sense of governing executive authority. While she did have authority over the performance of the tasks assigned to her, including preventing the sale of liquor to minors, she did not have authority to devise or develop corporate policy or make corporate decisions which went beyond the individual sale in question. The authority to determine whether a customer was of legal age and then to refuse sale, as necessary, was part of the discretion given to exercise responsibility in the performance of her job function. This was an operational matter. It does not establish governing authority for a corporation. While she had discretion and certain responsibility on the night in question to close the Sore and perform individual sales, she was not a directing mind of the licensee as it related to the sale of liquor to minors. As found by the General Manager, she had no authority to design or supervise the implementation of corporate policy. She merely was supposed to carry it out.”

 

Accordingly the decision of the General Manager under the Liquor Control and Licensing Act against Beverly Corners Liquor Store Ltd. was quashed. 

Please read the case of Meridian Global Funds Management Asia Limited v. Securities Commission [1995] UKPC 5 which can be found here: <a href="http://www.bailii.org/uk/cases/UKPC/1995/5.html">http://www.bailii.org/uk/cases/UKPC/1995/5.html</a> With the benefit of hindsight this seems a particularly interesting case in the real-life context of the financial scandals that have impacted the world financial system within the last decade.

This case was an appeal to The Judicial Committee of the Privy Council from The Court of Appeal of New Zealand.

The facts were that Mr. Koo, Mr. Ng and others concocted a scheme to gain a 49% controlling interest in a cash rich publicly traded New Zealand company, Euro-National Corporation Ltd. ("ENC") for NZ $18,200,000. Ultimately the purchase was to be financed out of ENC’s assets.

Mr. Koo was Chief Investment Officer of Meridian Global Funds Management Asia Limited (“Meridian”) and Mr. Ng a senior portfolio manager employed by it. The shares were acquired on November 9, 1990 using Meridian’s funds. Ultimately, however, the scheme collapsed for reasons that are irrelevant here.

New Zealand legislation required that any person who becomes a substantial security holder in a publicly traded company must give notice of the fact as soon as they know or ought to know that they are a substantial security holder. If this notice is not given, the Securities Commission may apply for a court order to deal with the situation. The orders available included one to forfeit the shares in question.

The Securities Commission applied for such an order involving forfeiture of the shares.

The New Zealand Court of Appeal found that Meridian knew on November 9, 1990 that they were a substantial security holder of ENC because Mr. Koo’s knowledge of that fact should be attributed to Meridian.

The Judicial Committee of the Privy Council accepted the following facts. Members of Meridian’s board lived partly in Hong Kong and partly in Australia and met only once a year for formal business. This meeting was in advance of the Meridian annual general meeting. Other matters, which required a board resolution, were circulated by mail. Mr. Koo had been managing director but was replaced by Mr. Armour on the first of August 1990. Although Mr. Koo thereafter in theory reported to Mr. Armour, in the matter of buying and selling securities he continued on in the same way as he had before. The ENC purchases and sales were openly recorded in the books of Meridian but Mr. Koo did not specifically report them to Mr. Armour, who only found out about them after Mr. Koo had left Meridian. Nor did Mr. Koo report anything else, nor was there evidence that Mr. Armour or the other members of the board tried to supervise what Mr. Koo was doing.

Meridian claimed that its “only directing mind and will” was that of its board, or possibly of Mr. Armour, but not Mr. Koo, who after all had been the correctly described by the New Zealand Court of Appeal as "under Mr. Armour" in the corporate hierarchy.

Lord Hoffman’s judgment constitutes a clear review of certain corporate principles and a thoughtful application of those principles. He sets out the following points.
<ol>
<li>1. It is a necessary part of corporate personality that there should be rules by which acts are attributed to the company. These may be called "the rules of attribution". </li>
<li>The primary rules of attribution are:</li>
</ol>
<ul>
<li>Generally to be found in the company’s constitution, typically the articles of association, and will say things such as "for the purpose of appointing members of the board, a majority vote of the shareholders shall be a decision of the company”.</li>
<li>Implied by company law, such as "the unanimous decision of all the shareholders in a solvent company about anything which the company under its memorandum of association has power to do shall be the decision of the company":</li>
<li>General rules of attribution equally available to natural persons, namely, the principles of agency. The company will appoint servants and agents whose acts, by a combination of the general principles of agency and the company's primary rules of attribution, count as the acts of the company.</li>
</ul>
<ol start="3">
<li>And having done so, the company will also make itself subject to the general rules by which liability for the acts of others can be attributed to natural persons, such as estoppel or ostensible authority in contract and vicarious liability in tort.</li>
</ol>
Lord Hoffman’s conclusions can be found at paragraphs 22 & 23 of the Judgment. 

To paraphrase they are that when considering the case of a corporate security holder, the person whose knowledge for this purpose is to count as the knowledge of the company is surely the person who, with the authority of the company, acquired the relevant interest. Otherwise the policy of the Act would be defeated. Companies would be able to allow employees to acquire interests on their behalf that made them substantial security holders but would not have to report them until the board or someone else in senior management got to know about it. This would put a premium on the board paying as little attention as possible to what its investment managers were doing. Their Lordships would therefore hold that upon the true construction of the relevant statutory provision, the company knows that it has become a substantial security holder when that is known to the person who had authority to do the deal. At that point the company is obliged to give the relevant statutory notice that they are a substantial security holder. The fact that Mr. Koo did the deal for a corrupt purpose and did not give such notice because he did not want his employers to find out could not in their Lordships' view affect the attribution of knowledge and the consequent duty to notify. It was therefore not necessary in this case to inquire into whether Koo could have been described in some more general sense as the "directing mind and will" of the company. 

However Lord Hoffman noted that this does not mean that whenever a servant of a company has authority to do an act on its behalf, knowledge of that act will for all purposes be attributed to the company. It is a question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company. Sometimes . . . it will be appropriate. On the other hand, the fact that a company's employee is authorised to drive a lorry does not in itself lead to the conclusion that if he kills someone by reckless driving, the company will be guilty of manslaughter. There is no inconsistency. Each is an example of an attribution rule for a particular purpose, tailored, as it always must be to the terms and policies of the substantive rule.

Blog Activity 5.2

Would Lord Hoffman’s analysis lead to different conclusions in The “Rhone” v. The “Peter A.B. Widener” or R. v. Fitzpatrick’s Fuel Ltd.? Please blog your views on this question and your reasons in less than one page under the heading “Lord Hoffman In Meridian Global Funds Management Asia Limited v. Securities Commission”.

 

 

 

TOPIC 5: CONTRACTS - AGENTS, OUTSIDERS & CORPORATE LIABILITY

Please read pages 243-277 of the Casebook. Please begin by reading about restrictions in the corporate constitution on the creation of contractual obligations at pages 243-253 of the Casebook.

Ultra vires

Mr. Justice Iacobucci’s judgment in Communities Economic Development Fund v. Canadian Pickles Corp. [1991] 3 S.C.R. 388 at pages 244-248 of the Casebook is concerned with the common law doctrine of ultra vires. The doctrine of ultra vires is at least in the case of commercial corporations now a historical artifact. You should read the description of that doctrine for background.

For present purposes, the principal value of the judgment is in the material that appears under the heading “Abolition of the Doctrine of Ultra Vires” on pages 247-248 of the Casebook

In particular please read carefully and think about notes 4 and 5 on page 249 of the Casebook and the section on statutory reform at pages 250-252 of the Casebook.

Also please read carefully sections 13(1) and (2), 17 to 19 and 30 to 33 of the BCBCA, which follow:

“Incorporation
<ol start="13">
<li>(1) A company is incorporated</li>
</ol>
(a) on the date and time that the incorporation application applicable to it is filed with the registrar, or

(b) subject to sections 14 and 410, if the incorporation application specifies a date, or a date and time, on which the company is to be incorporated that is later than the date and time on which the incorporation application is filed with the registrar,

(i) on the specified date and time, or

(ii) if no time is specified, at the beginning of the specified date.

(2) After a company is incorporated under this Part, the registrar must issue a certificate of incorporation for the company and must record in that certificate the name and incorporation number of the company and the date and time of its incorporation.

Effect of incorporation
<ol start="17">
<li> On and after the incorporation of a company, the shareholders of the company are, for so long as they remain shareholders of the company, a company with the name set out in the notice of articles, capable of exercising the functions of an incorporated company with the powers and with the liability on the part of the shareholders provided in this Act.</li>
</ol>
Evidence of incorporation
<ol start="18">
<li> Whether or not the requirements precedent and incidental to incorporation have been complied with, a notation in the corporate register that a company has been incorporated is conclusive evidence for the purposes of this Act and for all other purposes that the company has been duly incorporated on the date shown and the time, if any, shown in the corporate register.</li>
</ol>
Effect of notice of articles and articles
<ol start="19">
<li> (1) Subject to subsection (2), a company and its shareholders are bound by the company's articles and notice of articles in the manner contemplated by subsection (3) from the time at which the company is recognized.</li>
</ol>
(2) A pre-existing company and its shareholders are bound, in the manner contemplated by subsection (3),

(a) by the company's notice of articles, if any,

(b) by the company's articles, and

(c) subject to section 373 (3) or 439 (3), as the case may be, by the company's memorandum.

(3) A company and its shareholders are bound by the company's articles and notice of articles or by its memorandum and articles, as the case may be, and by any alterations made to those records under this Act or a former Companies Act, to the same extent as if those records

(a) had been signed and sealed by the company and by each shareholder, and

(b) contained covenants on the part of each shareholder and the shareholder's successors and personal or other legal representatives to observe the articles and notice of articles or memorandum and articles, as the case may be

Capacity and powers of company
<ol start="30">
<li> A company has the capacity and the rights, powers and privileges of an individual of full capacity.</li>
</ol>
Joint tenancy in property
<ol start="31">
<li> (1) Every corporation is capable of acquiring and holding property, rights and interests in joint tenancy in the same manner as an individual, and, if a corporation and one or more individuals or other corporations become entitled to property, rights or interests under circumstances or by virtue of an instrument that would, if the corporation had been an individual, have created a joint tenancy, they are entitled to the property, rights or interests as joint tenants.</li>
</ol>
(2) Despite subsection (1), acquiring and holding property, rights or interests by a corporation in joint tenancy is subject to the same conditions and restrictions as attach to acquiring and holding property, rights or interests by a corporation in severalty.

(3) On the dissolution of a corporation that is a joint tenant of property, rights or interests, the property, rights or interests devolve on the other joint tenant.

Extraterritorial capacity
<ol start="32">
<li> Unless restricted by its charter or by an Act, each British Columbia corporation has the capacity</li>
</ol>
(a) to carry on its business, conduct its affairs and exercise its powers in any jurisdiction outside British Columbia, and

(b) to accept from any lawful authority outside British Columbia powers and rights concerning the corporation's business and powers.

Restricted businesses and powers
<ol start="33">
<li> (1) A company must not</li>
</ol>
(a) carry on any business or exercise any power that it is restricted by its memorandum or articles from carrying on or exercising, or

(b) exercise any of its powers in a manner inconsistent with those restrictions in its memorandum or articles.

(2) No act of a company, including a transfer of property, rights or interests to or by the company, is invalid merely because the act contravenes subsection (1).”

 

Blog Activity 5.3

Please read section 33(1) & section 33(2) carefully (preferably several times). In your view what is the effect of a breach of section 33 (1)? Please blog your views on this question and your reasons in less than one page under the heading “Section 33 – Say What? ”

 

Please read pages 254-277 of the Casebook dealing with contracting through corporate agents. There is a helpful introductory note at the top of page 254 of the Casebook:

“At the beginning of the 20th century, corporations were arguably a protected species . . . However by the mid 20th century – doctrines relating to ostensible authority changed matters. In the 21S century what some might argue is a form of discrimination against corporate principals and favouring interested groups outside traditional corporate boundaries have further evolved issues relating to agents, outsiders and corporate liability for contracts.”

Please read and note the discussion of “Actual Authority at Common Law” at pages 254-255 of the Casebook.

Now please read the “Ostensible Authority” case of SCHWARTZ v. MARITIME LIFE ASSURANCE CO., [1997] N.J. No. 77, 149 Nfld. & P.E.I.R. 234 (C.A.) at pages 256-268 of the Casebook. We will go into some detail in analyzing this decision as it contains fulsome arguments on both sides of the “Ostensible Authority” coin (not to mention discussion of “Actual Authority” principles as well. The full version of this intriguing and complicated of case can be found at <a href="http://caselaw.canada.globe24h.com/0/0/newfoundland-and-labrador/supreme-court-of-newfoundland-and-labrador-court-of-appeal/1997/04/10/schwartz-v-maritime-life-assurance-co-1997-14706-nl-ca.shtml">http://caselaw.canada.globe24h.com/0/0/newfoundland-and-labrador/supreme-court-of-newfoundland-and-labrador-court-of-appeal/1997/04/10/schwartz-v-maritime-life-assurance-co-1997-14706-nl-ca.shtml</a>

The facts were that in 1971 the Maritime Life Assurance Co. and George Rideout & Associates Limited entered into a 'General Agency Agreement'. Mr. Rideout was the principal shareholder of George Rideout & Associates. Under the General Agency Agreement, George Rideout & Associates became a general agent and George Rideout a sub-agent. George Rideout & Associates was given the right to solicit insurance business on behalf of Maritime Life Assurance Co. but had no right to bind or commit Maritime Life Assurance Co. in any way to any person. Maritime Life Assurance Co. could accept or reject any application for an insurance policy or contract submitted by George Rideout or by George Rideout & Associates. George Rideout was free to do business with other companies as well.

The initial investment, which was the subject of the case, was made by Mr. Harold Schwartz with the Maritime Life Assurance Co., through George Rideout and/or George Rideout & Associates Limited. It was a form of annuity insurance policy. In January 1984 George Rideout and the Mr. Schwartz met to discuss the further investment of monies that Mr. Schwartz had on short term investment in a bank. Because an interest rate of 11% could be obtained, it was agreed between them that Mr. Schwartz would invest $100,000 as an add-on to the policy in question. Mr. Schwartz instructed Mr. Rideout that the investment was to be made immediately. He then provided Mr. Rideout with a cheque for $100,000, payable to George Rideout & Associates Limited. That cheque was deposited to the credit of George Rideout & Associates Limited at its bank in Corner Brook, Newfoundland. A receipt was issued by George Rideout & Associates Limited dated January 31, 1984.

Other facts included that Mr. Schwartz knew that Mr. Rideout could not issue a policy, and that any policies had to be issued by the Maritime Life Assurance Co. Of note is that as a result of business relationship between Mr. Schwartz and George Rideout & Associates, Maritime Life Assurance Co. had issued nine policies to Mr. Schwartz and his company.

Mr. Schwartz waited for the policy in respect of the $100,oo and in spring 1984 he asked Mr. Rideout about it. Mr. Rideout said he would have to look into the matter. In late summer 1984 Mr. Schwartz asked again and was given essentially the same answer.

In late October 1984 Mr. Rideout telephoned Mr. Schwartz and advised he had received the relevant policy from the Maritime Life Assurance Co. but that there was an error in it so he had sent it back for correction. Mr. Rideout also sent a letter to Mr. Schwartz to the same effect enclosing a copy of the purported policy with a policy number.

In January 1985 Mr. Rideout delivered to Mr. Schwartz a document purportedly issued by Maritime Life Assurance Co. acknowledging receipt of $111,000, signed by “D. Pellerine, Policy Administrator". The top was dated January 10, 1985, but the bottom was dated February 25, 1985. There were in fact discrepancies in both the dates and policy numbers but Mr. Schwartz did not notice.

In summer or early fall of 1986 Mr. Schwartz asked his auditors to write to the Maritime Life Assurance Co. to ascertain the status of his investments. The Maritime Life Assurance Co. responded to Mr. Schwartz’s accountants, confirming certain information but saying that the 100K had not been received from Rideout.

It turned out that Mr. Schwartz had provided Rideout with $100,000 for investment that Rideout misappropriated. Schwarz sued Maritime Life Assurance Co. contending that Rideout was the agent of Maritime Life Assurance Co. for the purpose of receiving monies for investment. The trial judge found that Mr. Rideout had no authority, actual or ostensible, to bind the Maritime Life Assurance Co.

Mr. Schwartz was not aware of the restrictions on Mr. Rideout and George Rideout & Associates in the Agency Agreement between George Rideout & Associates and Maritime Life Assurance Co. On the other hand the trial judge found no evidence that Mr. Rideout had held himself out to be an exclusive agent of the Maritime Life Assurance Co. or that the Maritime Life Assurance Co. held him out as its agent. The judge found that by giving Mr. Rideout $100,000 with the authority to invest that money for him, Mr. Schwartz put Mr. Rideout in a position to bind him in an investment contract but George Rideout had no authority to bind the Maritime Life Assurance Co.

The issue before the Newfoundland Court of Appeal was whether George Rideout was an agent or representative of the Maritime Life Assurance Co. when he received the $100,000 from Mr. Schwartz?

The majority decision was delivered by Gushue, C.J.N. The Court’s observations on the law of agency are particularly important: 

“However, an agency may also arise by operation of law without any contract, express or implied, having been entered into. Thus, where a person who by his or her words or conduct has allowed another to appear to the outside world to be his agent, with the result that third parties deal with him in this capacity, that person cannot thereafter repudiate this apparent agency if, by doing so, injury would be caused to those third parties. In other words, the principle of estoppel would apply. As stated by Fridman,

"...the agent's authority in agency by estoppel is not an actual or real authority at all. That is to say it does not result from consent on the part of the principal, whether express, or implied according to the rules already discussed, that the agent should have any authority at all, or the kind of authority which he has purported to exercise. The agent's authority here is the product of the principal's conduct, his representation that the agent is authorized to act on his behalf. It is an authority which 'apparently' exists having regard to the conduct of the parties. In fact it does not exist. But as a matter of law, arising out of the factual position, the agent is said to have authority."

The court observed that the relationship between Rideout and the Maritime Life Assurance Co. throughout the full course of their dealings with each other did not permit Rideout to enter into contracts of life insurance on behalf of the Maritime Life Assurance Co. He was entitled to solicit life insurance business from third parties and to that extent, but to that extent only, he was an “agent” of the Maritime Life Assurance Co. Rideout was not granted by the Maritime Life Assurance Co. the authority to enter into any insurance contracts on behalf of the Maritime Life Assurance Co., any such contracts taking legal effect only after approval by the Maritime Life Assurance Co. itself.

No express authority was ever granted by the Maritime Life Assurance Co. to Rideout to bind the Maritime Life Assurance Co. Thus, Mr. Schwartz must establish that the Maritime Life Assurance Co. has done something that would allow him, or lead him, to believe that Rideout did indeed have the authority to bind the Maritime Life Assurance Co. by Rideout’s actions and, further, that there was reliance on such belief by Mr. Schwartz, to his detriment.

So the question becomes did Rideout in any way hold himself out to Mr. Schwartz as being authorized to enter into a legal relationship with Mr. Schwartz on behalf of the Maritime Life Assurance Co.? The simple answer is that, with one exception, there was no evidence that Rideout had done so. As found by the trial judge, Rideout operated almost exclusively as an investment broker. In his judgment, the judge details the relevant evidence in this regard, as follows:

“Rideout did not advertise himself or his company as agents of the defendant. What is more important, Maritime did not advertise or in any other way hold out Rideout or his company as its agent.” 

In each case policies were issued by the Maritime Life Assurance Co. and forwarded directly to Mr. Schwartz. Mr. Schwartz acknowledged in his testimony that he knew that the policies themselves were to be issued by Maritime Life Assurance Co. In Mr. Justice Gushue’s view, this arrangement could not convey to Mr. Schwartz that Rideout had any authority to bind Maritime Life Assurance Co.

The court went on to cite Freeman and Lockyer (A Firm) v. Buckhurst Park Properties (Mangal), [1964] 1 All E.R. 630 (C.A.), Pearson, L.J., said:

"An 'apparent' or 'ostensible' authority, on the other hand, is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted on by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the 'apparent' authority, so as to render the principal liable to perform any obligations imposed on him by such contract. The representation, when acted on by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract.

"In ordinary business dealings the contractor at the time of entering into the contract can in the nature of things hardly ever rely on the "actual" authority of the agent. His information as to the authority must be derived either from the principal or from the agent or from both, for they alone know what the agent's actual authority is. All that the contractor can know is what they tell him, which may or may not be true. In the ultimate analysis he relies either on the representation of the principal, i.e., apparent authority, or on the representation of the agent, i.e., warranty of authority. The representation which creates 'apparent' authority may take a variety of forms of which the commonest is representation by conduct, i.e., by permitting the agent to act in some way in the conduct of the principal's business with other persons. By so doing the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal's business has normally 'actual' authority to enter into." 

(Emphasis added.)

 

Based on all of the foregoing Gushue, C.J.N. then marshalled facts and logic that perhaps will come as a surprise:
<h1>“If one speculates as to what the legal position would have been as between the appellant and the respondent had Rideout misappropriated the funds in 1979 or 1980, rather than in 1984, the ready answer seems to me to be that the respondent would have been responsible to the appellant for those funds. The respondent had appointed Rideout as its Regional Superintendent for Atlantic Canada and had provided him with company stationary which indicated that the regional office for Atlantic Canada was at P.O. Box 387, Corner Brook, Newfoundland. Unquestionably, it must have been intended by the respondent that Rideout utilize this stationary in the sense of communicating with persons in Atlantic Canada having dealings with Rideout as "agent" of Maritime Life. Whatever the contract as between Rideout and the respondent might have been, this letterhead and the designation of Rideout as Regional Superintendent must be deemed to have been intended by the respondent to be communicated to members of the general public - including the appellant. Thus, not only did Rideout hold himself out as representing the respondent, but further the respondent must be taken to have agreed that he do so. It could not be expected that members of the public, and in particular for our purposes the appellant, would be aware that Rideout did not hold the authority to bind the respondent. In my view, in light of the above receipt, Rideout would be held to have accepted the $110,000 on behalf of, and as if he were, the respondent. In any subsequent legal proceeding, the appellant would have been found entitled to recover the money from the respondent.</h1>
The next question is what, if anything, changed between 1978 and 1984 which would alter the above situation? While the appellant held only a receipt from Rideout for the $100,000 paid in 1984, he was, subsequent to 1978, legitimately of the belief that Rideout was the respondent's legal representative. He did not expect the issuance of any new policy. There is absolutely no evidence of anything occurring in that time frame as between Rideout and the appellant or as between the respondent and the appellant which would or should have disabused the appellant of that conviction. He was never informed that Rideout was no longer employed by the respondent, nor that he was no longer its Regional Superintendent or, indeed, with respect to the entering into contracts, that Rideout was now merely an agent for the purpose of soliciting applications for life insurance and no more. Indeed, the appellant stated in evidence that, as far as he was concerned, Rideout was still in the same position with the respondent in 1984 that he had been in 1978. In my considered view, the respondent would have been estopped in 1979 from denying that Rideout had the legal authority to bind it and, in the absence of any actual or imputed knowledge on the part of the appellant that Rideout's position vis-a-vis the respondent had changed, the respondent is equally estopped from denying that Rideout had such apparent or ostensible authority in 1984.”

Mr. Schwartz was therefore entitled to recover the monies paid over to Mr. Rideout in 1984.

Marshall, J.A. dissented coming to the opposite conclusion. In the following paragraphs an attempt will be made to distill Marshall. J.A.’s reasoning to some extent.

The learned Justice noted that Mr. Schwartz claimed that the responsibility of the Maritime Life Assurance Co. arose because it had cloaked Rideout with authority to act as it’s agent. The policy of the Maritime Life Assurance Co. was that throughout the relationship, Rideout was always regarded as "an independent franchise dealer", as distinguished from a career agent who was "tied to one company". In this vein, Rideout is described as always making "quite a point of positioning himself as being an independent".

There was one period, however, when Rideout was not only operating as owner of a company general agency, but also as an employee of the Maritime Life Assurance Co. That was a fifteen-month period between January of 1978 and March of the following year. During that time Rideout held the title of Regional Superintendent for the Atlantic Provinces. His general duties in that capacity were to appoint, train and supervise agents; to conserve business; and, to further the company's interests in Atlantic Canada. It was in this context that Rideout was provided with letterheads of the Maritime Life Assurance Co. with his name and capacity emblazoned on them. That aspect of their relationship was terminated some fifteen months later by mutual consent, as there was a joint feeling that it was not working out very well.

The $100,000 that Mr. Schwartz paid to George Rideout & Associates that was intended for investment with the Maritime Life Assurance Co., never reached the insurance company. The funds never arrived at their destination, having been stolen by Rideout. This case attempts to resolve, as between the Maritime Life Assurance Co. and Mr. Schwartz, which of the two innocent parties must bear the loss occasioned by Rideout's dishonesty.

“ In any event, Mr. Schwartz agreed to make the investment. He must be taken to have known that one of that magnitude was contingent on Maritime's acceptance as under the terms of the annuity plan, to which the $100,000 was destined as an additional premium, Maritime had reserved the right to refuse any additions exceeding $50,000. He, himself, also placed two conditions on the deposit of the money by Rideout with the company, viz.: that it be accepted for a one year term at the 11% rate which Rideout had quoted as being available.

In the spring of 1984, not having received a reply, Mr. Schwartz telephoned Rideout asking for the whereabouts of Maritime's acknowledgement of his investment. Mr. Schwartz was given assurances there was no problem with the policy. This was followed by other communications between the two men when finally, in January 1985, the unscrupulous Rideout delivered to Mr. Schwartz a document purporting to be Maritime's acknowledgment of the additional deposit to the annuity plan, but which subsequently turned out to be a forgery.”

 

Marshall, J.A. then turned to the impugned decision where the trial judge dismissed Mr. Schwartz’s claim suggesting the trial judge was influenced by the facts that Rideout and his company were not held out as the agent of the Maritime Life Assurance Co., either by Rideout himself or by the Maritime Life Assurance Co. Thus, after noting that their agreement, while enabling the placing of business with the Maritime Life Assurance Co., did not restrict Rideout from transacting business with others, the trial judge finds: “Rideout and his company operated an investment counselling service, offering many types of investments and other financial services to clients but he did not advertise himself or his company as agents of the defendant. What is more important, the defendant did not advertise or in any way hold out Rideout or his company as its agent."

 

Moreover, the trial judge made another key finding of fact regarding Mr. Schwartz's knowledge of the extent of the relationship of Rideout and the Maritime Life Assurance Co.: "Rideout could not issue a policy. The plaintiff knew that. There was no evidence to suggest that Rideout purported to have authority to issue policies."

Returning to the actual words of Marshall, J.A.:

 

“At this stage of the judgment, therefore, the judge is indicating that his appraisal of the evidence led him to conclude that Rideout outwardly conducted his business as an independent operation; it was treated by Maritime as such; and, Mr. Schwartz knew Rideout had no authority to issue a policy. These three findings are key to the decision's outcome.

Next, adverting to the evidence reflecting the importance of independence to Rideout, and the absence of evidence of his being held out as an agent by Maritime, the judge answers the question posed in the foregoing passage by holding that Rideout:

"...might be better described as a broker who acted in that manner in investing the plaintiff's money with the defendant. Granted, the plaintiff regarded Rideout and his company as agents of the defendant and he was justified in doing that, but that did not make Rideout or his company the defendant's agents. On the contrary, if Rideout and his company were the agents of anybody, it was of the plaintiff."

Then, the judge explains why Rideout could not be considered the agent of Maritime with respect to the transaction involving the stolen money. With the agency agreement explicitly prohibiting Rideout from binding Maritime, he reasons there was no actual authority. Thus, there would be no basis for argument that he was explicitly empowered to accept the money in return for the desired annuity commitment. Neither could ostensible authority be imputed to Rideout because, the judge holds, there were no representations by Maritime that he was invested with authority. To the contrary, the judge states that in giving Rideout "$100,000 with the authority to invest that money for him", Mr. Schwartz put him in a position to bind him in an investment contract. Hence, as he reasoned in the foregoing passage, if Rideout was anyone's agent, it was of Mr. Schwartz, not Maritime. With Maritime not being Rideout's principal in the transaction, Mr. Schwartz's claim to recover his loss from the insurance company was dismissed.”

 

Regarding the approach to appeal Marshall, J.A. in his dissent observed that there was ample evidence to support the trial judge’s finding that Rideout, through his company, was a salesman and as such agent of the Maritime Life Assurance Co. for the purpose of soliciting business on its behalf, but without any authority to bind the Maritime Life Assurance Co. contractually to customers. There was equally proof supporting the trial judge’s conclusion that Rideout was Mr. Schwartz's investment counsellor who purchased and placed investments on his behalf with the Maritime Life Assurance Co. over a period of time.

MacGillivray and Parkington's text On Insurance Law, 8th ed., Sweet & Maxwell makes the following commentary at p. 420, para. 419 was quoted as follows: "It must not be assumed that an agent of the insurers necessarily acts on their behalf for the whole of the time while he is working on insurance business. An agent employed to solicit proposals is not ordinarily the insurers' agent to fill up the proposed form, and, if he does so, he becomes the agent of the assured for that purpose."

 

This recognition of Rideout's dual agency role lies at the crux of the case under appeal. Marshall, J.A. felt it important to underscore that the trial judge found Rideout to be an agent of both the Maritime Life Assurance Co. and of Mr. Schwartz. The existence of this dual agency is what renders it imperative to determine whose agent Rideout was when he accepted and held the $100,000 inasmuch as the answer to who should bear the loss of Rideout's criminal duplicity hinges upon whose behalf he was holding the money, i.e. who was Rideout’s principal at the time of the theft.

Marshall, J.A. felt that the trial judge nonetheless found in effect that in the circumstances, Rideout was Mr. Schwartz's agent at the time of loss. The judge clearly regarded that, in giving the funds to Rideout with authority to invest them on stipulated terms, Mr. Schwartz constituted his investment counsellor as his agent to apply for the additional investment on the terms he was seeking from the Maritime Life Assurance Co. Hence Mr. Schwartz should not be able to recover a loss occasioned by his own agent's dishonesty.

Marshall J.A. then turned to the question of Rideout's “Actual Authority”.

He observes that Mr. Schwartz takes the position that the actual authority conferred by the Maritime Life Assurance Co. on Rideout to receive moneys on its behalf constituted him its agent for that purpose and was sufficient to ground its liability for the stolen money. Thus, Mr. Schwartz argues that apart altogether from ostensible authority, Rideout's actual authority from the Maritime Life Assurance Co. entitled Mr. Schwartz to recover his loss on the basis that the theft was not Mr. Schwartz’s problem since the money became part of the Maritime Life Assurance Co.'s funds on its payment to Rideout as the insurance company's designated agent.

Marshall J.A. observed that this argument overlooks that the Maritime Life Assurance Co.'s agency delegation to Rideout was to act as its salesperson. It is true, as Mr. Schwartz's counsel pointed out, that as such the agreements authorized applications and money to be received on the Maritime Life Assurance Co.'s behalf. However, that must be construed as related to the mandate conferred to solicit business. The judge's factual finding, however, was that the money in the circumstances of this case was received, not as salesman for the Maritime Life Assurance Co., but as agent for Mr. Schwartz incidental to his placing Rideout "in a position to bind him in an investment contract", i.e. as his representative.

Each of the arguments alleging Rideout had actual authority to receive the stolen money as agent for Mr. Schwartz relied upon Rideout to negotiate the terms of the investment and placed the money with him as Mr. Schwartz’s agent to negotiate the deal. It follows therefore according to Marshall, J.A., that the agency between Mr. Schwartz and Rideout was operative and that Rideout necessarily had to be holding the money on Mr. Schwartz's behalf pending the negotiation of the investment in accordance with his explicit instructions.

In contrast, as already noted, the agreements expressly stipulated that Rideout had no authority to bind the Maritime Life Assurance Co. Likewise, the annuity plan explicitly reserved the right to refuse additional premiums of the magnitude Mr. Schwartz was offering and did not bind itself to accept the terms he was seeking. As a result, it is clear that Rideout had no express authority that would allow him to affect the Maritime Life Assurance Co.'s legal position, but did have such power insofar as Mr. Schwartz was concerned.

Accordingly Mr. Schwartz gave Rideout authority to enter into a binding agreement, while the Maritime Life Assurance Co. had not empowered him to bind it. Therefore, when the money was turned over to Rideout, it must be understood to have been held by him on Mr. Schwartz's behalf pending Rideout obtaining the investment on the prescribed terms. At the time of the theft, there was no contract relating to the money with the Maritime Life Assurance Co. and the insurance company could lay no claim to entitlement to it. By contrast Mr. Schwartz could have claimed the right to its return, at least up until acceptance of his conditions by the Maritime Life Assurance Co. As Mr. Schwartz’s offer to the Maritime Life Assurance Co. through his agent Rideout was never accepted, it not having been communicated, he could have demanded at any time return of the money by simply withdrawing the offer made through his intermediary.

Marshall, J.A. reasoned that being the principal of Rideout at the time of the theft, it follows that, as between himself and the Maritime Life Assurance Co., Mr. Schwartz should bear the loss resulting from his own agent's criminal act.

Marshall J.A. then turned to the question of Rideout's “Ostensible Authority”.

The trial judge went on to hold that Mr. Schwartz "cannot rely on any suggestion that Rideout had ostensible authority as an agent" of the Maritime Life Assurance Co. That is because a third party may only be influenced by representations made by the alleged principal. As the trial judge stated: "In the present case, neither Rideout nor his company was vested with the authority to issue policies on behalf of the defendant and the defendant did not place either of them in a position where it could be held responsible for the acts or defaults of Rideout or his company.

The legal foundation for ostensible authority must rest on reliance by the third party on representations of the principal. Then the trial judge goes on to find in effect that the Maritime Life Assurance Co. had done nothing to warrant any such reliance by Mr. Schwartz because the Maritime Life Assurance Co. had placed neither Rideout nor his company in a position to issue policies and Mr. Schwartz ought to have known this.

Thus Marshall, J.A. felt that the evidence affords ample support for the judge's findings of irregularities in Rideout's conduct of his business dealings that should have put Mr. Schwartz on alert. This in the dissenting Justice’s itself was sufficient to preclude any reliance on ostensible authority.

In Marshall, J.A.’s own words:

“These statements encapsulate in a nutshell the response to the attempt to hold Maritime liable on the basis of Rideout's ostensible authority. If a third party does not deal with the intermediary as agent of the principal, an agency relationship cannot be deemed to have any causal connection with the third party's complaint against the intermediary's actions. Moreover, there cannot have been any causal connection if the third party did not believe the putative agent had authority, despite the appearance of authority. There was clearly no belief in this case by Mr. Schwartz in Rideout's authority from Maritime as he engaged him to negotiate on his behalf. Thus, there was no causal connection between any holding out of Rideout by Maritime as its agent and Mr. Schwartz's dealing with him. Accordingly, he cannot hold Maritime liable for his loss.

Counsel for Mr. Schwartz is nonetheless arguing the judgment should be reversed because the judge erred in his rejection of Rideout's ostensible authority from Maritime. He bases his contention on the fact that Rideout was actually an employee around the time when the original annuity policy was issued. He points out that Rideout had been then given the title of Atlantic Regional Superintendent of Maritime and furnished with letterhead, on one of which he issued to Mr. Schwartz a receipt dated March 20, 1978, for the original $110,000 that ultimately was followed with delivery to Mr. Schwartz of the annuity policy. Laying stress on the receipt having been typed on Maritime's letterhead, counsel argues this represented a holding out by Maritime of Rideout as the insurance agent with authority to accept an add-on to the existing policy. In this vein, counsel points out there was no attempt on termination of Rideout's status as Regional Superintendent to make known that he no longer held that post, with the result that it was reasonable for Mr. Schwartz to assume no change in his ostensible authority as reflected in the 1978 receipt, when Mr. Schwartz paid the $100,000 to him as an additional premium on the policy.

This argument overlooks that the judge, in effect, found there was no more reliance upon the former employee status of Rideout than there was on his position as its salesman in the instant transaction in which the loss was sustained. It essentially fails to come to grip with the law's holding, whatever the ostensible authority, that no liability can be ascribed, to borrow from the foregoing passage from Bowstead and Reynolds, in the absence of "causal connection between the representation" and consequential loss and the dealing with the alleged agent. It also reflects once more the weakness recurring throughout this whole appeal of counsel's ignoring of Rideout's dual agency role and likewise evades the reality that the relevant inquiry in this appeal is which function Rideout was fulfilling when receiving the money and for which principal he was holding it.

In any event, the argument that Mr. Schwartz assumed Rideout was an employee of Maritime as a result of his awareness of his Regional Superintendent post in 1978 rests on somewhat shaky ground. The evidence shows that post was vacated in the first quarter of 1979, and in the five years between then and the payment of the stolen money Mr. Schwartz had had constant contact with Rideout. During that time, he too, would have had a chance to observe what the judge found to be the situation, viz: that Rideout was taking pains to hold himself out as an independent broker. This would tend to detract from any claim he was relying on Rideout as an employee of Maritime in 1984, and from support that he was by then treating him as his own investment counsellor.

The 1978 receipt makes no less tenuous the claim of reliance on Rideout's employee status in 1984. This is because in the six year interval, as the judge found and the evidence supports, Rideout was outwardly conducting his business as an independent operation; Maritime was not holding him out as its agent; and, more importantly, Mr. Schwartz knew Rideout had no authority to issue a policy and was relying on Rideout to place his investments.

Nevertheless, despite the slender ground upon which rests the claim that Mr. Schwartz was operating under the impression that Rideout was Atlantic Regional Superintendent in 1984, the judgment arguably leaves scope to infer that the judge, whether as a result of the 1978 receipt or Mr. Schwartz's long time dealings, might have accepted Mr. Schwartz was operating under such an impression in 1984. This possibility arises out of his noting that in 1984 Mr. Schwartz "still regarded Rideout as the defendant's Regional Superintendent for the Atlantic Region". He does not go on to say whether he accepts such an impression as reasonable. This is logically attributable to it being irrelevant to his decision since there could be no causal connection arising from any relationship between Maritime and Rideout in view of the central holding that Mr. Schwartz was dealing with Rideout and his company in the transaction involving the deposit of the subsequently missing money. In such circumstances, it clearly mattered not what capacity Mr. Schwartz may have assumed Rideout to hold with Maritime by reason of a receipt given six years earlier, or otherwise. It not having been demonstrated that the judge erred in his appreciation of those circumstances, the treatment as irrelevant of any vestige of ostensible authority flowing out of Rideout's actions as Regional Superintendent is quite understandable.

In this case the judge reviewed all of the facts and concluded that "(t)he course of conduct between the plaintiff and Rideout suggests that Rideout was acting as investment counsellor, not necessarily as an agent of the defendant". That Mr. Schwartz had made a substantial investment through Rideout with another company supports this holding as does the judge's overview of the facts which indicated that Mr. Schwartz treated Rideout as his independent investment broker whom he trusted and to whom "he left the matter of his investments". The judge found that Mr. Schwartz placed no reliance upon whatever ostensible authority with which Maritime might have cloaked Rideout. With no reasonable basis to believe Rideout was empowered to issue annuity commitments for Maritime, Mr. Schwartz could not possibly found his claim to recovery through an agency relationship between Maritime and Rideout on the latter's apparent or ostensible authority.

Having found no basis to the claims of error on the judge's part in failing to allow recovery of the stolen money on the footing of agency based on either actual or ostensible authority, this discussion will now turn to the final challenge mounted by Mr. Schwartz i.e. Maritime's negligence.”

Marshall, J.A.’s “Summary and Conclusion” in dissent was:

“There was ample evidence supporting the trial judge's finding that Mr. Schwartz did not provide the $100,000 stolen by Rideout to him in his capacity as a representative of Maritime. To the contrary, he provided the funds to Rideout as his agent with explicit instructions to invest them with Maritime on terms and conditions which he knew Rideout had no authority to accept for the insurance company. He knew they would require acceptance by Maritime. Until so accepted, the money belonged to Mr. Schwartz. Since it was his money that was stolen, he must bear its loss and cannot look to Maritime to assume responsibility for money remitted to his own agent to negotiate an investment for him. Moreover, Maritime owed no duty of care to Mr. Schwartz to exercise supervision and control over these funds which he had elected to give to his investment broker whom he engaged on his own behalf.

In summary, it is well to reiterate that this is a case of an insurance broker who exercised a dual agency role. The trial judge fully recognized this and concluded from his analysis of "the events and circumstances" in this case that the intermediary was acting as broker of Mr. Schwartz to invest the money on his behalf. He made no error of law in arriving at this conclusion. Counsel for Mr. Schwartz has mounted his claim of error by stressing the agency relationship established by Maritime to solicit business on its behalf. The judgment shows that relationship was fully appreciated but decides that in the circumstances that the stolen money was given to the broker in his capacity as representative of Mr. Schwartz in the parallel.

To now accept the contrary view put forth by Mr. Schwartz's counsel and hold the money was delivered to Rideout in his role as Maritime's agent would require this court to substitute its view of the facts for that of the trial judge. This cannot be done in the absence of overriding and palpable error in the judge's appreciation of the evidence. A review of the transcript not only shows no such misapprehension, but it reveals the judge had ample evidence upon which to found his decision. Therefore, the disposition is beyond the purview of appellate review.

Accordingly, this appeal should be dismissed with costs and the judge upheld in his holding that, as between the two innocent parties involved in this appeal, Mr. Schwartz should suffer "the unhappy consequences" of the embezzlement. It was he who had the misfortune to select a thief as his agent in placing the investment and, as a result in all the circumstances obtaining, ought to absorb the loss.”

 

UNIT WRAP UP: 

We have established that corporations are by legal means ascribed characteristics of independence that can be proscribed, or result in binding action and attendant consequences. Accordingly we now turn to the mechanics of how the corporate “being” actually operates and governs itself.

 

ASSIGNMENT #1 

 

It is the present day. You are a young corporate lawyer at the well know British Columbia law firm Wie, Haight, Raye & Darr whose primary practice is maritime insurance litigation. In fact you are the only one in the firm with any knowledge of corporate law. One of the senior partners Sonny Raye comes to your office (proving this is all fictional because he would never come to your office) and says:

“We have just been retained by the giant worldwide conglomerate Hexxon Oil & Gas because their oil tanker the Hexxon Valdez struck a reef in Prince William Sound, Alaska this morning at 12:04 a.m. local time. Our information is that the ship was carrying approximately 55 million gallons of oil of which approximately 11 million gallons (approximately 250,000 barrels) are going to be spilled into Prince William Sound over the next few days. 

It gets worse. The Master of the Hexxon Valdez Captain Joe Hazelwode was widely reported to have been drinking heavily last night and was asleep in his bunk when the ship hit the reef. The third mate was at the helm. You might think he would not have hit the reef if only he had looked at the ships radar. Except that the radar wasn’t even turned on. Our client has told us that they have known for the past year that the Hexxon Valdez’s radar has been broken and disabled. It was in our client’s view just too expensive to fix and have operational.

Our client Hexxon’s full name is the “Hexxon Trading Corporation” and it was originally chartered on May 2, 1670 in London, England but became a Canadian company in 1965 and is currently a Company under the Canada Business Corporations Act (R.S.C., 1985, c. C-44). 

The ship “Hexxon Valdez” was registered in the country of Liberia. It is owned by “Valdez Ltd.” a Liberian Corporation. 

The shares of “Valdez Ltd.” are held in equal proportion (50% interest each) by two entities. The first is a limited liability partnership known as the “666 Limited Liability Partnership”. The Managing Director of “666 Limited Liability Partnership” is ”Hexxon Experts Inc.”, a 100% owned subsidiary of “Hexxon Trading Corporation”. The partners of the “666 Limited Liability Partnership” are four international investment firms and the “Hexxon Trading Corporation” in equal proportions (20% interest each). The other 50% shareholder in “Valdez Ltd.” is “Hexxon Trading Corporation B.C. Inc.”, a B.C. Company incorporated pursuant to the Business Corporations Act [SBC 2002] Chapter 57. “Hexxon Trading Corporation B.C. Inc.” is a wholly owned subsidiary of “Hexxon Trading Corporation”. The Board of Directors of “Valdez Ltd.” is comprised of 6 Directors, 3 appointed by the “666 Limited Liability Partnership” and 3 appointed by “Hexxon Trading Corporation B.C. Inc.”. The Directors appointed by “666 Limited Liability Partnership” are all “independent directors” having no connections to Hexxon, its subsidiaries or affiliates. The three directors appointed by “Hexxon Trading Corporation B.C. Inc.” are comprised of the CEO of the “Hexxon Trading Corporation”, the VP Finance of the “Hexxon Trading Corporation” and one “independent director” having no connection to Hexxon, its subsidiaries or affiliates. “Valdez Ltd.” has never made a profit, but before the accident “Valdez Ltd.” was projected to become profitable in fiscal 2015.

There is one further fact. Captain Hazelwode is an independent contractor, not an employee of Valdez Inc. He is the sole shareholder and sole director of “Hazelwode Captainry Ltd.”, another Liberian company.

Our client Hexxon knows that it is going to be sued in British Columbia for negligence by individuals and businesses who have been disrupted by the spill including the Alaskan seafood industry, property owners and environmental groups. We are expecting approximately 38,000 plaintiffs. Hexxon’s overall strategy is to blame Captain Hazelwode as much as possible. 

The firm and our client would like your preliminary assessment of what corporate law defenses we might have. We know that you are not very experienced in the area so all we really need is a point form list of questions and observations regarding the corporate law principles that might apply to provide us with some defenses based on corporate structure, and/or deny us those defenses.

If you think that there may be further facts that it would be either helpful or important to know, indicate briefly what they are. As well, please try and limit your memo to no more than five pages (one and half spacing).”

Course:Business Organizations - LAW 459/Unit 5

2016-08-16T09:22:20Z

DavidHeinrich: Created page with "UNIT 5 (weeks 6 & 7): CORPORATE OBLIGATIONS <img class="alignnone wp-image-204 aligncenter" src="http://bizorglaw.sites.olt.ubc.ca/fil..."

UNIT 5 (weeks 6 & 7): CORPORATE OBLIGATIONS 

<img class="alignnone wp-image-204 aligncenter" src="http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Unit-5-2-e1468620835852-225x300.jpg" alt="Unit 5" width="321" height="428" />
Figure 5: Two old large seals that once were necessary parts of how corporations bound them selves in law. Generally they are no longer required.
ALT: Two old large seals that once were necessary parts of how corporations bound them selves in law. Generally they are no longer required.

Source of image: Jon Festinger

 

UNIT OVERVIEW:

In this section of the course we consider the parameters by which corporations become obligated or incur liability (criminally or civilly), given that they are not “flesh and blood” but have the rights of a “natural person”.

More specifically, we will consider several questions:
<ol>
<li>How does a corporation become liable in tort?</li>
<li>How does a corporation commit an offence and does the answer to this question depend on whether the offence is, or is not, one requiring a “guilty mind” (mens rea)?</li>
<li>How does a corporation incur contractual obligations?</li>
</ol>
 

UNIT OUTCOME:

In this unit you will learn how to approach the problem of how a company, which you now understand to be an abstract concept, can obligate itself to another person or company. You will come to an understanding of the cases that wrestle with notions and limitations of the “directing mind” of the corporation. You will be able to understand when in the real world the acts of employees may or may not bind the company, either in contract or otherwise under the law, criminal or statutory.

 

UNIT READINGS:

Please read the following materials:

Casebook pages 227-277

BCBCA sections 13 (1) & (2), 17-19, 30-33

Beverly Corners Liquor Store Ltd. v. British Columbia (Liquor Control and Licensing Branch), 2012 BCSC 1851 <a href="http://www.pssg.gov.bc.ca/lclb/enforcements/pdf/2012/EH11-077A.pdf">http://www.pssg.gov.bc.ca/lclb/enforcements/pdf/2012/EH11-077A.pdf</a>

Meridian Global Funds Management Asia Limited v. Securities Commission [1995] UKPC 5 <a href="http://www.bailii.org/uk/cases/UKPC/1995/5.html">http://www.bailii.org/uk/cases/UKPC/1995/5.html</a>

Northern Minerals Investment Corp. v. Mundoro Capital Inc, 2012 BCSC 1090 <a href="http://canlii.ca/t/fs46d">http://canlii.ca/t/fs46d</a>

 

 

TOPIC 1: INTRODUCTION TO CORPORATE OBLIGATIONS

Let us begin with some elementary stuff.

If I do an act, or think a thought, that amounts to a crime or a tort I am responsible for that act or thought and will incur a legal liability as a result.

My liability is personal and direct (as opposed to vicarious or through agency).

But I may also incur a liability indirectly, not for my own acts but for the acts of another – my agent or employee.

This is a result of applying the doctrine of “vicarious liability”.

Vicarious liability is not a distinct tort. It is, rather, as Major J pointed out in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59, [2001] 2 SCR 983:

“…a theory that holds one person responsible for the misconduct of another because of the relationship between them.”

It does not depend on proof of personal wrongdoing on the part of the person who is subject to it.

What are the policy considerations that justify vicarious liability?
<ol>
<li>Vicarious Liability is a practical remedy for people who are harmed by wrongs of employees or agents of a corporation.</li>
<li>Vicarious Liability is “only fair” in that someone who employs others to advance their own economic interests should be liable for losses incurred in the course of the enterprise. The employer is often best placed to spread losses (often through insurance and higher prices).</li>
<li>Vicarious Liability facilitates the deterrence of future harm – makes employers better able to reduce accidents and intentional wrongs through efficient organization and supervision.</li>
</ol>
Vicarious liability however is not a substitute for the personal liability of an employee or agent. 

In most tort cases, vicarious liability can be applied without difficulty to situations where employer is a corporation, not an individual. Occasionally, however, an analysis of whether vicarious liability applies in a particular case can run into significant challenges.

 

TOPIC 2: COMMON LAW PRINCIPLES 

Please read The “Rhône” v. The “Peter A.B. Widener” [1993] 1 S.C.R. 497 (SCC) at pages 229-234 of the Casebook.

This is an example of a case where the analysis of whether vicarious liability applies in circumstances was difficult. See if you believe the outcome was fair.

The Peter Widener, a barge owned by Great Lakes Towing Co., collided with the Rhône, a ship at the time moored in Port of Montreal. The Peter Widener was under command of Captain Kelch, who worked for Great Lakes Towing Co.

The owners of the Rhône sued Great Lakes Towing Co. for breach of its towage contract. Great Lakes Towing Co. pleaded a section of Canada Shipping Act that in essence said that in the absence of “his actual fault or privity” the owner of a ship is not in the circumstances liable beyond a certain amount. The section in effect would render the doctrine of vicarious liability irrelevant in the circumstances

The question, then, was whether Great Lakes Towing Co. was guilty of “actual fault or privity”?

The Federal Court of Appeal found there was “actual fault” because Captain Klech was a “directing mind” of Great Lakes Towing Co. The Supreme Court of Canada reversed holding in favour of Great Lakes Towing Co.

Before the Supreme Court of Canada the question seemed to come down to at what point in the hierarchy of a company is the fault of a person employed in the organization to be treated as or identified with the fault of the company itself? 

Before delving deeper into how this question ought to be answered, Mr. Justice Iacobucci quoted Viscount Haldane’s decision Lennard's Carrying Co. v. Asiatic Petroleum Co. [1915] A.C. 705:

 

“My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. That person may be under the direction of the shareholders in general meeting; that person may be the board of directors itself, or it may be, and in some companies it is so, that that person has an authority co‑ordinate with the board of directors given to him under the articles of association, and is appointed by the general meeting of the company, and can only be removed by the general meeting of the company.”

That said the court’s analysis of at what point in the hierarchy of a company is the fault of a person employed in the organization to be treated as or identified with the fault of the company itself can perhaps be broken down to the following process:

 
<ul>
<li>Has the impugned individual been delegated the "governing executive authority" of the company within the scope of his or her authority?</li>
<li>That is to say does the discretion conferred on an employee amount to an express or implied delegation of executive authority to design and supervise the implementation of corporate policy rather than simply to carry out such policy.</li>
<li>Captain Klech’s negligence in performing navigational duties did not amount to actual fault or privity on the part of corporate owner, Great Lakes Towing Co.</li>
<li>It was not sufficient to show that the owner appointed a competent Master of the “Peter A.B. Widener” in Captain Klech – there is also an overall duty of supervision.</li>
<li>Were Captain Klech’s faults essentially those of Great Lakes Towing Co. by reason of his position in the hierarchy?</li>
</ul>
On the facts, the answer to the last question was “no”. Captain Klech was not the directing mind. Perhaps the most compelling answer to this question is in the following quote from Mr. Justice Iacobucci:

 

“With respect, I think that the courts below overemphasized the significance of sub‑delegation in this case. The key factor which distinguishes directing minds from normal employees is the capacity to exercise decision-making authority on matters of corporate policy, rather than merely to give effect to such policy on an operational basis, whether at head office or across the sea. While Captain Kelch no doubt had certain decision-making authority on navigational matters as an incident of his role as master of the tug Ohio and was given important operational duties, governing authority over the management and operation of Great Lakes' tugs lay elsewhere. Therefore, I am of the view that the courts below erred in holding that Captain Kelch was part of the directing mind and will of Great Lakes. As a result, the collision between the Rhône and the Widener did not occur with the actual fault or privity of Great Lakes.”

The case is interesting on two counts: first, as a rare example, dictated by the language of the Canada Shipping Act, of the solution to a corporate tort problem that does not involve application of principles of vicarious liability.

Secondly, as will be seen, it is important in the context of criminal liability of corporations as expounding the “directing mind test”.

 

 

TOPIC 3: CORPORATE CRIMINAL LIABILITY - MENS REA OFFENCES
<h1>Please read pages 234-236 of the Casebook.</h1>
For true criminal offences (i.e. those requiring proof of guilty intent), corporations in Canada have been traditionally held liable based on the “identification theory”. That is based on the actions and intent of the senior officers and directors considered to be the “directing minds” of the corporation. The fault of those senior officers and directors is identified with that of the corporation.

Canadian Dredge & Dock Co.v. The Queen [1985] 1 S.C.R. 662 cited in The “Rhone” v. The “Peter A.B. Widener” [1993] 1 S.C.R. 497 accepts a corporate defence where the employee is acting entirely on their own and against the best interests of the company:

“Where the criminal act is totally in fraud of the corporate employer and where the act is intended to and does result in benefit exclusively to the employee‑manager, the employee‑directing mind, from the outset of the design and execution of the criminal plan, ceases to be a directing mind of the corporation and consequently his acts could not be attributed to the corporation under the identification doctrine.”

In Canadian Dredge & Dock Co. v. The Queen the defence raised was that individuals involved in bid-rigging conspiracy were engaged on a frolic of their own, in fraud of their corporate employer and for their own benefit. The Supreme Court of Canada held (at paragraph 43 of <a href="http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/59/index.do">http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/59/index.do</a>) that in and of itself the fact that those employees were acting in breach of instructions is no defence:

“…If the law recognized such a defence, a corporation might absolve itself from criminal consequence by the simple device of adopting and communicating to its staff a general instruction prohibiting illegal conduct and directing conformity at all times with the law. That is not to say that such an element is without relevance when considering corporate liability with reference to offences of strict liability, supra. Where, however, the court is concerned with those mens rea offences which can in law be committed by a corporation, the presence of general or specific instructions prohibiting the conduct in question is irrelevant. The corporation and its directing mind became one and the prohibition directed by the corporation to others is of no effect in law on the determination of criminal liability of either the directing mind or the corporation itself by reason of the actions of the directing mind. This accords with the result reached in other courts.” 

HOWEVER, don’t stop reading there. Go on to paragraph 66 of the same judgment to get the full picture:

“Where the criminal act is totally in fraud of the corporate employer and where the act is intended to and does result in benefit exclusively to the employee‑manager, the employee‑directing mind, from the outset of the design and execution of the criminal plan, ceases to be a directing mind of the corporation and consequently his acts cannot be attributed to the corporation under the identification doctrine. Thus, the identification doctrine only operates where the Crown demonstrates that the action taken by the directing mind (a) was within the field of operation assigned to him; (b) was not totally in fraud of the corporation; and (c) was by design or result partly for the benefit of the company.”

Please note the following amendments to Canada’s Criminal Code made in 2004:

 

“22.1 In respect of an offence that requires the prosecution to prove negligence, an organization is a party to the offence if

(a) acting within the scope of their authority

 (i) one of its representatives is a party to the offence, or

 (ii) two or more of its representatives engage in conduct, whether by
act or omission, such that, if it had been the conduct of only one
representative, that representative would have been a party to the
offence; and

(b) the senior officer who is responsible for the aspect of the organization’s activities that is relevant to the offence departs — or the senior officers, collectively, depart — markedly from the standard of care that, in the circumstances, could reasonably be expected to prevent a representative of the organization from being a party to the offence.

22.2 In respect of an offence that requires the prosecution to prove fault — other than negligence — an organization is a party to the offence if, with the intent at least in part to benefit the organization, one of its senior officers

(a) acting within the scope of their authority, is a party to the offence;

(b) having the mental state required to be a party to the offence and acting within the scope of their authority, directs the work of other representatives of the organization so that they do the act or make the omission specified in the offence; or

(c) knowing that a representative of the organization is or is about to be a party to the offence, does not take all reasonable measures to stop them from being a party to the offence.”

 

The definitions relating to these provisions are:

“organization” means

(a) a public body, body corporate, society, company, firm, partnership, trade union or municipality, or

(b) an association of persons that

 (i) is created for a common purpose,

 (ii) has an operational structure, and

 (iii) holds itself out to the public as an association of
persons;

“representative”, in respect of an organization, means a director, partner, employee, member, agent or contractor of the organization;

 

“senior officer” means a representative who plays an important role in the establishment of an organization’s policies or is responsible for managing an important aspect of the organization’s activities and, in the case of a body corporate, includes a director, its chief executive officer and its chief financial officer;”

It is worth nothing that the definition of “senior officers” seems to avoid the difficulty of proving fault at the level of a corporation’s board of directors or directing mind while at the same time avoiding holding the corporation vicariously responsible for the wrongs of every employee or contractor. The bottom line is that it will no longer be necessary for prosecutors to prove fault in the boardrooms or at the highest levels of a corporation - the fault even of middle managers may suffice.

 

TOPIC 4: Criminal Liability: Non Mens Rea – (Srict/Absolute Liability) - Offences 
<h1>Please read pages 239-243 of the Casebook.</h1>
Please read the interesting case of R. v. Fitzpatrick’s Fuel Ltd. [2001] N.J. No. 149 (Prov. Ct.) at pages 239-242 of the Casebook.

 

This case involved the sale of beer to a minor who bought six bottles of beer. The employee who sold the beer was aware of restriction on selling beer to a minor. He followed the required practice of asking for identification and proof of age where any doubt.

The Liquor Control Act created a strict liability offence. Only proof of actus reus was required (subject only to the company showing it had taken reasonable care, or exercised due diligence, to avoid the commission of the offence).

Actus reus was proven. The ensuing question was whether the actions should be attributed to the corporation, Fitzpatrick’s Fuel Ltd.?

The legal answer to this question involves consideration of “identification” of the corporation with actual persons acting on its behalf.

Handrigan Prov. Ct. J. quotes Justice Estey in Canadian Dredge & Dock Co. v. The Queen:

“The corporation is but a creature of statute, general or special, and none of the provincial corporation statutes and business corporations statutes, or the federal equivalents, contain any discussion of criminal liability or liability in the common law generally by reason of the doctrine of identification. It is a court‑adopted principle put in place for the purpose of including the corporation in the pattern of criminal law in a rational relationship to that of the natural person. The identity doctrine merges the board of directors, the managing director, the superintendent, the manager or anyone else delegated by the board of directors to whom is delegated the governing executive authority of the corporation, and the conduct of any of the merged entities is thereby attributed to the corporation.” (At paragraph 32 <a href="http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/59/index.do">http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/59/index.do</a>)

The Crown argued that the employee was a “directing mind” of Fitzpatrick’s Fuel Ltd. and for that reason the identity of corporation merges with the identity of the employee when that employee was performing duties delegated to him “[e]ven though he was no more than an employee of the Company filling the position of gas attendant/cashier...”

Handrigan Prov. Ct. J. suggests, “at first blush, this position suffers from the doubt that it is pushing the concept of “directing mind” too far”. In the end though the learned judge does find it appropriate to go that far and accepts that the charge against the defendant Fitzpatrick’s Fuel Ltd. to be proven beyond a reasonable doubt.

Blog Activity 5.1

Ask yourself whether the decision in R. v. Fitzpatrick’s Fuel Ltd. Is consistent with the decision in the “Rhone” v. The “Peter A.B. Widener”. If Captain Kelch was not part of the directing mind and will of great lakes towing co. Then how is it that a gas attendant/cashier was a “directing mind” of Fitzpatrick’s Fuel Ltd.? In your view how can the two decisions be reconciled (or can they)?

Please blog your views on this question and your reasons in less than one page under the heading “Fitzpatrick’s Fuel & The Rhone”.

 

Now please read the case of Beverly Corners Liquor Store Ltd. v. British Columbia (Liquor Control and Licensing Branch), 2012 BCSC 1851 which can be found here: <a href="http://www.pssg.gov.bc.ca/lclb/enforcements/pdf/2012/EH11-077A.pdf">http://www.pssg.gov.bc.ca/lclb/enforcements/pdf/2012/EH11-077A.pdf</a>

 

In this case Beverly Corners Liquor Store Ltd. operated a private retail liquor Sore. A six-pack of beer was sold to a minor and no identification was requested. The female cashier who sold the liquor to the minor had been fully trained and signed off on all policy and practice manuals; regularly got performance reviews, and was the supervisor on duty on the night in question. She had been found to comply with policy, practices, and systems related to minors. She had been observed to faithfully check on young customers who came to her till. Her failure to follow policies and training on May 11, 2011 was inexplicable.

 

The court noted that:

 

“Supervisors are not part of management. They do not manage or have authority over staff. Their duties are to ensure that the store is cleaned at the end of the night and ready for business the following day. They put the money into the safe and ensure that the store is locked upon leaving. If they have a problem with staff or another issue, they are to call a manager. 

 

There is a store manager and a general manager. The store manager reports to the general manager but is responsible to manage staff. Managers do not usually work night shifts unless it is expected to be unusually busy. A manager would not normally be expected to be working on a normal Wednesday night. However, they are available on-call. Managers train employees such as the cashier who sold the liquor to the minor on May 11, 2011. Through policy manuals and training, staff learn to record cancelled sales because of failure to produce identification and to maintain a system of alerts for suspected minors in the store. Employees who are trained by the managers are required to sign off on training and policy manuals. 

The general manager is responsible for day to day operations and receives reports from the store and other managers. The general manager is also a shareholder in the business that owns the licensee retail store…” 

 

 

There had been no previous compliance issues at Beverly Corners Liquor Store Ltd. In fact management stressed to employees a no tolerance policy when it came to sale of liquor to minors and took pride in being the toughest store on requiring identification in the area. By all accounts, the policies, manuals, training, procedures, and compliance oversight above standard practice for the industry and went beyond that of most operators. The policies implemented erred on the side of caution for checking identification and there were multiple systems in place to remind staff of their duties in this regard. Staff and management were regularly reminded of their obligations with respect to minors through various means, including in pay envelopes and on buttons worn on their uniforms.

The Liquor Control Branch argued that the cashier was the directing mind of the licensee: “She had the authority to make a determination whether the customer was of legal age and if not satisfied in that regard to refuse the sale.”

Madam Justice Dillon of the Supreme Court of British Columbia considered how to apply the “due diligence” defence (as it pertains to the requirement that the defence prove on a balance of probabilities that the employee was not the directing mind of the licensee Beverly Corners Liquor Store Ltd.)

In the end the learned judge essentially accepted the argument of the defendant Beverly Corners Liquor Store Ltd. that an individual must have sufficient authority in respect of the sphere of relevant operations to be worthy of the appellation - “directing mind”. This in turn required consideration of whom on the premises of Beverly Corners Liquor Store Ltd. “at the time was the directing mind in the establishment as far as supervision was concerned and whether that individual on site at the time took reasonable steps.”

 

It is worth pausing to note that the test set out in The “Rhône” v. The “Peter A.B. Widener” of whether the impugned individual has been delegated governing executive authority of the company within the scope of her or his authority in the design and supervision of the implementation of corporate policy? If the employee merely carries out such policy, then they are not a directing mind of the corporation.

In the end the court in Beverly Corners Liquor Store Ltd. v. British Columbia (Liquor Control and Licensing Branch) made the following observations:

“In this case, the general manager found as a fact that the supervisor was not part of management, did not set store policies, and was not in charge of other employees. Similar to the truck driver/geographical representative in Safety-Kleen, the supervisor did not have any managerial or supervisory function in the sense of governing executive authority. While she did have authority over the performance of the tasks assigned to her, including preventing the sale of liquor to minors, she did not have authority to devise or develop corporate policy or make corporate decisions which went beyond the individual sale in question. The authority to determine whether a customer was of legal age and then to refuse sale, as necessary, was part of the discretion given to exercise responsibility in the performance of her job function. This was an operational matter. It does not establish governing authority for a corporation. While she had discretion and certain responsibility on the night in question to close the Sore and perform individual sales, she was not a directing mind of the licensee as it related to the sale of liquor to minors. As found by the General Manager, she had no authority to design or supervise the implementation of corporate policy. She merely was supposed to carry it out.”

 

Accordingly the decision of the General Manager under the Liquor Control and Licensing Act against Beverly Corners Liquor Store Ltd. was quashed. 

Please read the case of Meridian Global Funds Management Asia Limited v. Securities Commission [1995] UKPC 5 which can be found here: <a href="http://www.bailii.org/uk/cases/UKPC/1995/5.html">http://www.bailii.org/uk/cases/UKPC/1995/5.html</a> With the benefit of hindsight this seems a particularly interesting case in the real-life context of the financial scandals that have impacted the world financial system within the last decade.

This case was an appeal to The Judicial Committee of the Privy Council from The Court of Appeal of New Zealand.

The facts were that Mr. Koo, Mr. Ng and others concocted a scheme to gain a 49% controlling interest in a cash rich publicly traded New Zealand company, Euro-National Corporation Ltd. ("ENC") for NZ $18,200,000. Ultimately the purchase was to be financed out of ENC’s assets.

Mr. Koo was Chief Investment Officer of Meridian Global Funds Management Asia Limited (“Meridian”) and Mr. Ng a senior portfolio manager employed by it. The shares were acquired on November 9, 1990 using Meridian’s funds. Ultimately, however, the scheme collapsed for reasons that are irrelevant here.

New Zealand legislation required that any person who becomes a substantial security holder in a publicly traded company must give notice of the fact as soon as they know or ought to know that they are a substantial security holder. If this notice is not given, the Securities Commission may apply for a court order to deal with the situation. The orders available included one to forfeit the shares in question.

The Securities Commission applied for such an order involving forfeiture of the shares.

The New Zealand Court of Appeal found that Meridian knew on November 9, 1990 that they were a substantial security holder of ENC because Mr. Koo’s knowledge of that fact should be attributed to Meridian.

The Judicial Committee of the Privy Council accepted the following facts. Members of Meridian’s board lived partly in Hong Kong and partly in Australia and met only once a year for formal business. This meeting was in advance of the Meridian annual general meeting. Other matters, which required a board resolution, were circulated by mail. Mr. Koo had been managing director but was replaced by Mr. Armour on the first of August 1990. Although Mr. Koo thereafter in theory reported to Mr. Armour, in the matter of buying and selling securities he continued on in the same way as he had before. The ENC purchases and sales were openly recorded in the books of Meridian but Mr. Koo did not specifically report them to Mr. Armour, who only found out about them after Mr. Koo had left Meridian. Nor did Mr. Koo report anything else, nor was there evidence that Mr. Armour or the other members of the board tried to supervise what Mr. Koo was doing.

Meridian claimed that its “only directing mind and will” was that of its board, or possibly of Mr. Armour, but not Mr. Koo, who after all had been the correctly described by the New Zealand Court of Appeal as "under Mr. Armour" in the corporate hierarchy.

Lord Hoffman’s judgment constitutes a clear review of certain corporate principles and a thoughtful application of those principles. He sets out the following points.
<ol>
<li>1. It is a necessary part of corporate personality that there should be rules by which acts are attributed to the company. These may be called "the rules of attribution". </li>
<li>The primary rules of attribution are:</li>
</ol>
<ul>
<li>Generally to be found in the company’s constitution, typically the articles of association, and will say things such as "for the purpose of appointing members of the board, a majority vote of the shareholders shall be a decision of the company”.</li>
<li>Implied by company law, such as "the unanimous decision of all the shareholders in a solvent company about anything which the company under its memorandum of association has power to do shall be the decision of the company":</li>
<li>General rules of attribution equally available to natural persons, namely, the principles of agency. The company will appoint servants and agents whose acts, by a combination of the general principles of agency and the company's primary rules of attribution, count as the acts of the company.</li>
</ul>
<ol start="3">
<li>And having done so, the company will also make itself subject to the general rules by which liability for the acts of others can be attributed to natural persons, such as estoppel or ostensible authority in contract and vicarious liability in tort.</li>
</ol>
Lord Hoffman’s conclusions can be found at paragraphs 22 & 23 of the Judgment. 

To paraphrase they are that when considering the case of a corporate security holder, the person whose knowledge for this purpose is to count as the knowledge of the company is surely the person who, with the authority of the company, acquired the relevant interest. Otherwise the policy of the Act would be defeated. Companies would be able to allow employees to acquire interests on their behalf that made them substantial security holders but would not have to report them until the board or someone else in senior management got to know about it. This would put a premium on the board paying as little attention as possible to what its investment managers were doing. Their Lordships would therefore hold that upon the true construction of the relevant statutory provision, the company knows that it has become a substantial security holder when that is known to the person who had authority to do the deal. At that point the company is obliged to give the relevant statutory notice that they are a substantial security holder. The fact that Mr. Koo did the deal for a corrupt purpose and did not give such notice because he did not want his employers to find out could not in their Lordships' view affect the attribution of knowledge and the consequent duty to notify. It was therefore not necessary in this case to inquire into whether Koo could have been described in some more general sense as the "directing mind and will" of the company. 

However Lord Hoffman noted that this does not mean that whenever a servant of a company has authority to do an act on its behalf, knowledge of that act will for all purposes be attributed to the company. It is a question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company. Sometimes . . . it will be appropriate. On the other hand, the fact that a company's employee is authorised to drive a lorry does not in itself lead to the conclusion that if he kills someone by reckless driving, the company will be guilty of manslaughter. There is no inconsistency. Each is an example of an attribution rule for a particular purpose, tailored, as it always must be to the terms and policies of the substantive rule.

Blog Activity 5.2

Would Lord Hoffman’s analysis lead to different conclusions in The “Rhone” v. The “Peter A.B. Widener” or R. v. Fitzpatrick’s Fuel Ltd.? Please blog your views on this question and your reasons in less than one page under the heading “Lord Hoffman In Meridian Global Funds Management Asia Limited v. Securities Commission”.

 

 

 

TOPIC 5: CONTRACTS - AGENTS, OUTSIDERS & CORPORATE LIABILITY

Please read pages 243-277 of the Casebook. Please begin by reading about restrictions in the corporate constitution on the creation of contractual obligations at pages 243-253 of the Casebook.

Ultra vires

Mr. Justice Iacobucci’s judgment in Communities Economic Development Fund v. Canadian Pickles Corp. [1991] 3 S.C.R. 388 at pages 244-248 of the Casebook is concerned with the common law doctrine of ultra vires. The doctrine of ultra vires is at least in the case of commercial corporations now a historical artifact. You should read the description of that doctrine for background.

For present purposes, the principal value of the judgment is in the material that appears under the heading “Abolition of the Doctrine of Ultra Vires” on pages 247-248 of the Casebook

In particular please read carefully and think about notes 4 and 5 on page 249 of the Casebook and the section on statutory reform at pages 250-252 of the Casebook.

Also please read carefully sections 13(1) and (2), 17 to 19 and 30 to 33 of the BCBCA, which follow:

“Incorporation
<ol start="13">
<li>(1) A company is incorporated</li>
</ol>
(a) on the date and time that the incorporation application applicable to it is filed with the registrar, or

(b) subject to sections 14 and 410, if the incorporation application specifies a date, or a date and time, on which the company is to be incorporated that is later than the date and time on which the incorporation application is filed with the registrar,

(i) on the specified date and time, or

(ii) if no time is specified, at the beginning of the specified date.

(2) After a company is incorporated under this Part, the registrar must issue a certificate of incorporation for the company and must record in that certificate the name and incorporation number of the company and the date and time of its incorporation.

Effect of incorporation
<ol start="17">
<li> On and after the incorporation of a company, the shareholders of the company are, for so long as they remain shareholders of the company, a company with the name set out in the notice of articles, capable of exercising the functions of an incorporated company with the powers and with the liability on the part of the shareholders provided in this Act.</li>
</ol>
Evidence of incorporation
<ol start="18">
<li> Whether or not the requirements precedent and incidental to incorporation have been complied with, a notation in the corporate register that a company has been incorporated is conclusive evidence for the purposes of this Act and for all other purposes that the company has been duly incorporated on the date shown and the time, if any, shown in the corporate register.</li>
</ol>
Effect of notice of articles and articles
<ol start="19">
<li> (1) Subject to subsection (2), a company and its shareholders are bound by the company's articles and notice of articles in the manner contemplated by subsection (3) from the time at which the company is recognized.</li>
</ol>
(2) A pre-existing company and its shareholders are bound, in the manner contemplated by subsection (3),

(a) by the company's notice of articles, if any,

(b) by the company's articles, and

(c) subject to section 373 (3) or 439 (3), as the case may be, by the company's memorandum.

(3) A company and its shareholders are bound by the company's articles and notice of articles or by its memorandum and articles, as the case may be, and by any alterations made to those records under this Act or a former Companies Act, to the same extent as if those records

(a) had been signed and sealed by the company and by each shareholder, and

(b) contained covenants on the part of each shareholder and the shareholder's successors and personal or other legal representatives to observe the articles and notice of articles or memorandum and articles, as the case may be

Capacity and powers of company
<ol start="30">
<li> A company has the capacity and the rights, powers and privileges of an individual of full capacity.</li>
</ol>
Joint tenancy in property
<ol start="31">
<li> (1) Every corporation is capable of acquiring and holding property, rights and interests in joint tenancy in the same manner as an individual, and, if a corporation and one or more individuals or other corporations become entitled to property, rights or interests under circumstances or by virtue of an instrument that would, if the corporation had been an individual, have created a joint tenancy, they are entitled to the property, rights or interests as joint tenants.</li>
</ol>
(2) Despite subsection (1), acquiring and holding property, rights or interests by a corporation in joint tenancy is subject to the same conditions and restrictions as attach to acquiring and holding property, rights or interests by a corporation in severalty.

(3) On the dissolution of a corporation that is a joint tenant of property, rights or interests, the property, rights or interests devolve on the other joint tenant.

Extraterritorial capacity
<ol start="32">
<li> Unless restricted by its charter or by an Act, each British Columbia corporation has the capacity</li>
</ol>
(a) to carry on its business, conduct its affairs and exercise its powers in any jurisdiction outside British Columbia, and

(b) to accept from any lawful authority outside British Columbia powers and rights concerning the corporation's business and powers.

Restricted businesses and powers
<ol start="33">
<li> (1) A company must not</li>
</ol>
(a) carry on any business or exercise any power that it is restricted by its memorandum or articles from carrying on or exercising, or

(b) exercise any of its powers in a manner inconsistent with those restrictions in its memorandum or articles.

(2) No act of a company, including a transfer of property, rights or interests to or by the company, is invalid merely because the act contravenes subsection (1).”

 

Blog Activity 5.3

Please read section 33(1) & section 33(2) carefully (preferably several times). In your view what is the effect of a breach of section 33 (1)? Please blog your views on this question and your reasons in less than one page under the heading “Section 33 – Say What? ”

 

Please read pages 254-277 of the Casebook dealing with contracting through corporate agents. There is a helpful introductory note at the top of page 254 of the Casebook:

“At the beginning of the 20th century, corporations were arguably a protected species . . . However by the mid 20th century – doctrines relating to ostensible authority changed matters. In the 21S century what some might argue is a form of discrimination against corporate principals and favouring interested groups outside traditional corporate boundaries have further evolved issues relating to agents, outsiders and corporate liability for contracts.”

Please read and note the discussion of “Actual Authority at Common Law” at pages 254-255 of the Casebook.

Now please read the “Ostensible Authority” case of SCHWARTZ v. MARITIME LIFE ASSURANCE CO., [1997] N.J. No. 77, 149 Nfld. & P.E.I.R. 234 (C.A.) at pages 256-268 of the Casebook. We will go into some detail in analyzing this decision as it contains fulsome arguments on both sides of the “Ostensible Authority” coin (not to mention discussion of “Actual Authority” principles as well. The full version of this intriguing and complicated of case can be found at <a href="http://caselaw.canada.globe24h.com/0/0/newfoundland-and-labrador/supreme-court-of-newfoundland-and-labrador-court-of-appeal/1997/04/10/schwartz-v-maritime-life-assurance-co-1997-14706-nl-ca.shtml">http://caselaw.canada.globe24h.com/0/0/newfoundland-and-labrador/supreme-court-of-newfoundland-and-labrador-court-of-appeal/1997/04/10/schwartz-v-maritime-life-assurance-co-1997-14706-nl-ca.shtml</a>

The facts were that in 1971 the Maritime Life Assurance Co. and George Rideout & Associates Limited entered into a 'General Agency Agreement'. Mr. Rideout was the principal shareholder of George Rideout & Associates. Under the General Agency Agreement, George Rideout & Associates became a general agent and George Rideout a sub-agent. George Rideout & Associates was given the right to solicit insurance business on behalf of Maritime Life Assurance Co. but had no right to bind or commit Maritime Life Assurance Co. in any way to any person. Maritime Life Assurance Co. could accept or reject any application for an insurance policy or contract submitted by George Rideout or by George Rideout & Associates. George Rideout was free to do business with other companies as well.

The initial investment, which was the subject of the case, was made by Mr. Harold Schwartz with the Maritime Life Assurance Co., through George Rideout and/or George Rideout & Associates Limited. It was a form of annuity insurance policy. In January 1984 George Rideout and the Mr. Schwartz met to discuss the further investment of monies that Mr. Schwartz had on short term investment in a bank. Because an interest rate of 11% could be obtained, it was agreed between them that Mr. Schwartz would invest $100,000 as an add-on to the policy in question. Mr. Schwartz instructed Mr. Rideout that the investment was to be made immediately. He then provided Mr. Rideout with a cheque for $100,000, payable to George Rideout & Associates Limited. That cheque was deposited to the credit of George Rideout & Associates Limited at its bank in Corner Brook, Newfoundland. A receipt was issued by George Rideout & Associates Limited dated January 31, 1984.

Other facts included that Mr. Schwartz knew that Mr. Rideout could not issue a policy, and that any policies had to be issued by the Maritime Life Assurance Co. Of note is that as a result of business relationship between Mr. Schwartz and George Rideout & Associates, Maritime Life Assurance Co. had issued nine policies to Mr. Schwartz and his company.

Mr. Schwartz waited for the policy in respect of the $100,oo and in spring 1984 he asked Mr. Rideout about it. Mr. Rideout said he would have to look into the matter. In late summer 1984 Mr. Schwartz asked again and was given essentially the same answer.

In late October 1984 Mr. Rideout telephoned Mr. Schwartz and advised he had received the relevant policy from the Maritime Life Assurance Co. but that there was an error in it so he had sent it back for correction. Mr. Rideout also sent a letter to Mr. Schwartz to the same effect enclosing a copy of the purported policy with a policy number.

In January 1985 Mr. Rideout delivered to Mr. Schwartz a document purportedly issued by Maritime Life Assurance Co. acknowledging receipt of $111,000, signed by “D. Pellerine, Policy Administrator". The top was dated January 10, 1985, but the bottom was dated February 25, 1985. There were in fact discrepancies in both the dates and policy numbers but Mr. Schwartz did not notice.

In summer or early fall of 1986 Mr. Schwartz asked his auditors to write to the Maritime Life Assurance Co. to ascertain the status of his investments. The Maritime Life Assurance Co. responded to Mr. Schwartz’s accountants, confirming certain information but saying that the 100K had not been received from Rideout.

It turned out that Mr. Schwartz had provided Rideout with $100,000 for investment that Rideout misappropriated. Schwarz sued Maritime Life Assurance Co. contending that Rideout was the agent of Maritime Life Assurance Co. for the purpose of receiving monies for investment. The trial judge found that Mr. Rideout had no authority, actual or ostensible, to bind the Maritime Life Assurance Co.

Mr. Schwartz was not aware of the restrictions on Mr. Rideout and George Rideout & Associates in the Agency Agreement between George Rideout & Associates and Maritime Life Assurance Co. On the other hand the trial judge found no evidence that Mr. Rideout had held himself out to be an exclusive agent of the Maritime Life Assurance Co. or that the Maritime Life Assurance Co. held him out as its agent. The judge found that by giving Mr. Rideout $100,000 with the authority to invest that money for him, Mr. Schwartz put Mr. Rideout in a position to bind him in an investment contract but George Rideout had no authority to bind the Maritime Life Assurance Co.

The issue before the Newfoundland Court of Appeal was whether George Rideout was an agent or representative of the Maritime Life Assurance Co. when he received the $100,000 from Mr. Schwartz?

The majority decision was delivered by Gushue, C.J.N. The Court’s observations on the law of agency are particularly important: 

“However, an agency may also arise by operation of law without any contract, express or implied, having been entered into. Thus, where a person who by his or her words or conduct has allowed another to appear to the outside world to be his agent, with the result that third parties deal with him in this capacity, that person cannot thereafter repudiate this apparent agency if, by doing so, injury would be caused to those third parties. In other words, the principle of estoppel would apply. As stated by Fridman,

"...the agent's authority in agency by estoppel is not an actual or real authority at all. That is to say it does not result from consent on the part of the principal, whether express, or implied according to the rules already discussed, that the agent should have any authority at all, or the kind of authority which he has purported to exercise. The agent's authority here is the product of the principal's conduct, his representation that the agent is authorized to act on his behalf. It is an authority which 'apparently' exists having regard to the conduct of the parties. In fact it does not exist. But as a matter of law, arising out of the factual position, the agent is said to have authority."

The court observed that the relationship between Rideout and the Maritime Life Assurance Co. throughout the full course of their dealings with each other did not permit Rideout to enter into contracts of life insurance on behalf of the Maritime Life Assurance Co. He was entitled to solicit life insurance business from third parties and to that extent, but to that extent only, he was an “agent” of the Maritime Life Assurance Co. Rideout was not granted by the Maritime Life Assurance Co. the authority to enter into any insurance contracts on behalf of the Maritime Life Assurance Co., any such contracts taking legal effect only after approval by the Maritime Life Assurance Co. itself.

No express authority was ever granted by the Maritime Life Assurance Co. to Rideout to bind the Maritime Life Assurance Co. Thus, Mr. Schwartz must establish that the Maritime Life Assurance Co. has done something that would allow him, or lead him, to believe that Rideout did indeed have the authority to bind the Maritime Life Assurance Co. by Rideout’s actions and, further, that there was reliance on such belief by Mr. Schwartz, to his detriment.

So the question becomes did Rideout in any way hold himself out to Mr. Schwartz as being authorized to enter into a legal relationship with Mr. Schwartz on behalf of the Maritime Life Assurance Co.? The simple answer is that, with one exception, there was no evidence that Rideout had done so. As found by the trial judge, Rideout operated almost exclusively as an investment broker. In his judgment, the judge details the relevant evidence in this regard, as follows:

“Rideout did not advertise himself or his company as agents of the defendant. What is more important, Maritime did not advertise or in any other way hold out Rideout or his company as its agent.” 

In each case policies were issued by the Maritime Life Assurance Co. and forwarded directly to Mr. Schwartz. Mr. Schwartz acknowledged in his testimony that he knew that the policies themselves were to be issued by Maritime Life Assurance Co. In Mr. Justice Gushue’s view, this arrangement could not convey to Mr. Schwartz that Rideout had any authority to bind Maritime Life Assurance Co.

The court went on to cite Freeman and Lockyer (A Firm) v. Buckhurst Park Properties (Mangal), [1964] 1 All E.R. 630 (C.A.), Pearson, L.J., said:

"An 'apparent' or 'ostensible' authority, on the other hand, is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted on by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the 'apparent' authority, so as to render the principal liable to perform any obligations imposed on him by such contract. The representation, when acted on by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract.

"In ordinary business dealings the contractor at the time of entering into the contract can in the nature of things hardly ever rely on the "actual" authority of the agent. His information as to the authority must be derived either from the principal or from the agent or from both, for they alone know what the agent's actual authority is. All that the contractor can know is what they tell him, which may or may not be true. In the ultimate analysis he relies either on the representation of the principal, i.e., apparent authority, or on the representation of the agent, i.e., warranty of authority. The representation which creates 'apparent' authority may take a variety of forms of which the commonest is representation by conduct, i.e., by permitting the agent to act in some way in the conduct of the principal's business with other persons. By so doing the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal's business has normally 'actual' authority to enter into." 

(Emphasis added.)

 

Based on all of the foregoing Gushue, C.J.N. then marshalled facts and logic that perhaps will come as a surprise:
<h1>“If one speculates as to what the legal position would have been as between the appellant and the respondent had Rideout misappropriated the funds in 1979 or 1980, rather than in 1984, the ready answer seems to me to be that the respondent would have been responsible to the appellant for those funds. The respondent had appointed Rideout as its Regional Superintendent for Atlantic Canada and had provided him with company stationary which indicated that the regional office for Atlantic Canada was at P.O. Box 387, Corner Brook, Newfoundland. Unquestionably, it must have been intended by the respondent that Rideout utilize this stationary in the sense of communicating with persons in Atlantic Canada having dealings with Rideout as "agent" of Maritime Life. Whatever the contract as between Rideout and the respondent might have been, this letterhead and the designation of Rideout as Regional Superintendent must be deemed to have been intended by the respondent to be communicated to members of the general public - including the appellant. Thus, not only did Rideout hold himself out as representing the respondent, but further the respondent must be taken to have agreed that he do so. It could not be expected that members of the public, and in particular for our purposes the appellant, would be aware that Rideout did not hold the authority to bind the respondent. In my view, in light of the above receipt, Rideout would be held to have accepted the $110,000 on behalf of, and as if he were, the respondent. In any subsequent legal proceeding, the appellant would have been found entitled to recover the money from the respondent.</h1>
The next question is what, if anything, changed between 1978 and 1984 which would alter the above situation? While the appellant held only a receipt from Rideout for the $100,000 paid in 1984, he was, subsequent to 1978, legitimately of the belief that Rideout was the respondent's legal representative. He did not expect the issuance of any new policy. There is absolutely no evidence of anything occurring in that time frame as between Rideout and the appellant or as between the respondent and the appellant which would or should have disabused the appellant of that conviction. He was never informed that Rideout was no longer employed by the respondent, nor that he was no longer its Regional Superintendent or, indeed, with respect to the entering into contracts, that Rideout was now merely an agent for the purpose of soliciting applications for life insurance and no more. Indeed, the appellant stated in evidence that, as far as he was concerned, Rideout was still in the same position with the respondent in 1984 that he had been in 1978. In my considered view, the respondent would have been estopped in 1979 from denying that Rideout had the legal authority to bind it and, in the absence of any actual or imputed knowledge on the part of the appellant that Rideout's position vis-a-vis the respondent had changed, the respondent is equally estopped from denying that Rideout had such apparent or ostensible authority in 1984.”

Mr. Schwartz was therefore entitled to recover the monies paid over to Mr. Rideout in 1984.

Marshall, J.A. dissented coming to the opposite conclusion. In the following paragraphs an attempt will be made to distill Marshall. J.A.’s reasoning to some extent.

The learned Justice noted that Mr. Schwartz claimed that the responsibility of the Maritime Life Assurance Co. arose because it had cloaked Rideout with authority to act as it’s agent. The policy of the Maritime Life Assurance Co. was that throughout the relationship, Rideout was always regarded as "an independent franchise dealer", as distinguished from a career agent who was "tied to one company". In this vein, Rideout is described as always making "quite a point of positioning himself as being an independent".

There was one period, however, when Rideout was not only operating as owner of a company general agency, but also as an employee of the Maritime Life Assurance Co. That was a fifteen-month period between January of 1978 and March of the following year. During that time Rideout held the title of Regional Superintendent for the Atlantic Provinces. His general duties in that capacity were to appoint, train and supervise agents; to conserve business; and, to further the company's interests in Atlantic Canada. It was in this context that Rideout was provided with letterheads of the Maritime Life Assurance Co. with his name and capacity emblazoned on them. That aspect of their relationship was terminated some fifteen months later by mutual consent, as there was a joint feeling that it was not working out very well.

The $100,000 that Mr. Schwartz paid to George Rideout & Associates that was intended for investment with the Maritime Life Assurance Co., never reached the insurance company. The funds never arrived at their destination, having been stolen by Rideout. This case attempts to resolve, as between the Maritime Life Assurance Co. and Mr. Schwartz, which of the two innocent parties must bear the loss occasioned by Rideout's dishonesty.

“ In any event, Mr. Schwartz agreed to make the investment. He must be taken to have known that one of that magnitude was contingent on Maritime's acceptance as under the terms of the annuity plan, to which the $100,000 was destined as an additional premium, Maritime had reserved the right to refuse any additions exceeding $50,000. He, himself, also placed two conditions on the deposit of the money by Rideout with the company, viz.: that it be accepted for a one year term at the 11% rate which Rideout had quoted as being available.

In the spring of 1984, not having received a reply, Mr. Schwartz telephoned Rideout asking for the whereabouts of Maritime's acknowledgement of his investment. Mr. Schwartz was given assurances there was no problem with the policy. This was followed by other communications between the two men when finally, in January 1985, the unscrupulous Rideout delivered to Mr. Schwartz a document purporting to be Maritime's acknowledgment of the additional deposit to the annuity plan, but which subsequently turned out to be a forgery.”

 

Marshall, J.A. then turned to the impugned decision where the trial judge dismissed Mr. Schwartz’s claim suggesting the trial judge was influenced by the facts that Rideout and his company were not held out as the agent of the Maritime Life Assurance Co., either by Rideout himself or by the Maritime Life Assurance Co. Thus, after noting that their agreement, while enabling the placing of business with the Maritime Life Assurance Co., did not restrict Rideout from transacting business with others, the trial judge finds: “Rideout and his company operated an investment counselling service, offering many types of investments and other financial services to clients but he did not advertise himself or his company as agents of the defendant. What is more important, the defendant did not advertise or in any way hold out Rideout or his company as its agent."

 

Moreover, the trial judge made another key finding of fact regarding Mr. Schwartz's knowledge of the extent of the relationship of Rideout and the Maritime Life Assurance Co.: "Rideout could not issue a policy. The plaintiff knew that. There was no evidence to suggest that Rideout purported to have authority to issue policies."

Returning to the actual words of Marshall, J.A.:

 

“At this stage of the judgment, therefore, the judge is indicating that his appraisal of the evidence led him to conclude that Rideout outwardly conducted his business as an independent operation; it was treated by Maritime as such; and, Mr. Schwartz knew Rideout had no authority to issue a policy. These three findings are key to the decision's outcome.

Next, adverting to the evidence reflecting the importance of independence to Rideout, and the absence of evidence of his being held out as an agent by Maritime, the judge answers the question posed in the foregoing passage by holding that Rideout:

"...might be better described as a broker who acted in that manner in investing the plaintiff's money with the defendant. Granted, the plaintiff regarded Rideout and his company as agents of the defendant and he was justified in doing that, but that did not make Rideout or his company the defendant's agents. On the contrary, if Rideout and his company were the agents of anybody, it was of the plaintiff."

Then, the judge explains why Rideout could not be considered the agent of Maritime with respect to the transaction involving the stolen money. With the agency agreement explicitly prohibiting Rideout from binding Maritime, he reasons there was no actual authority. Thus, there would be no basis for argument that he was explicitly empowered to accept the money in return for the desired annuity commitment. Neither could ostensible authority be imputed to Rideout because, the judge holds, there were no representations by Maritime that he was invested with authority. To the contrary, the judge states that in giving Rideout "$100,000 with the authority to invest that money for him", Mr. Schwartz put him in a position to bind him in an investment contract. Hence, as he reasoned in the foregoing passage, if Rideout was anyone's agent, it was of Mr. Schwartz, not Maritime. With Maritime not being Rideout's principal in the transaction, Mr. Schwartz's claim to recover his loss from the insurance company was dismissed.”

 

Regarding the approach to appeal Marshall, J.A. in his dissent observed that there was ample evidence to support the trial judge’s finding that Rideout, through his company, was a salesman and as such agent of the Maritime Life Assurance Co. for the purpose of soliciting business on its behalf, but without any authority to bind the Maritime Life Assurance Co. contractually to customers. There was equally proof supporting the trial judge’s conclusion that Rideout was Mr. Schwartz's investment counsellor who purchased and placed investments on his behalf with the Maritime Life Assurance Co. over a period of time.

MacGillivray and Parkington's text On Insurance Law, 8th ed., Sweet & Maxwell makes the following commentary at p. 420, para. 419 was quoted as follows: "It must not be assumed that an agent of the insurers necessarily acts on their behalf for the whole of the time while he is working on insurance business. An agent employed to solicit proposals is not ordinarily the insurers' agent to fill up the proposed form, and, if he does so, he becomes the agent of the assured for that purpose."

 

This recognition of Rideout's dual agency role lies at the crux of the case under appeal. Marshall, J.A. felt it important to underscore that the trial judge found Rideout to be an agent of both the Maritime Life Assurance Co. and of Mr. Schwartz. The existence of this dual agency is what renders it imperative to determine whose agent Rideout was when he accepted and held the $100,000 inasmuch as the answer to who should bear the loss of Rideout's criminal duplicity hinges upon whose behalf he was holding the money, i.e. who was Rideout’s principal at the time of the theft.

Marshall, J.A. felt that the trial judge nonetheless found in effect that in the circumstances, Rideout was Mr. Schwartz's agent at the time of loss. The judge clearly regarded that, in giving the funds to Rideout with authority to invest them on stipulated terms, Mr. Schwartz constituted his investment counsellor as his agent to apply for the additional investment on the terms he was seeking from the Maritime Life Assurance Co. Hence Mr. Schwartz should not be able to recover a loss occasioned by his own agent's dishonesty.

Marshall J.A. then turned to the question of Rideout's “Actual Authority”.

He observes that Mr. Schwartz takes the position that the actual authority conferred by the Maritime Life Assurance Co. on Rideout to receive moneys on its behalf constituted him its agent for that purpose and was sufficient to ground its liability for the stolen money. Thus, Mr. Schwartz argues that apart altogether from ostensible authority, Rideout's actual authority from the Maritime Life Assurance Co. entitled Mr. Schwartz to recover his loss on the basis that the theft was not Mr. Schwartz’s problem since the money became part of the Maritime Life Assurance Co.'s funds on its payment to Rideout as the insurance company's designated agent.

Marshall J.A. observed that this argument overlooks that the Maritime Life Assurance Co.'s agency delegation to Rideout was to act as its salesperson. It is true, as Mr. Schwartz's counsel pointed out, that as such the agreements authorized applications and money to be received on the Maritime Life Assurance Co.'s behalf. However, that must be construed as related to the mandate conferred to solicit business. The judge's factual finding, however, was that the money in the circumstances of this case was received, not as salesman for the Maritime Life Assurance Co., but as agent for Mr. Schwartz incidental to his placing Rideout "in a position to bind him in an investment contract", i.e. as his representative.

Each of the arguments alleging Rideout had actual authority to receive the stolen money as agent for Mr. Schwartz relied upon Rideout to negotiate the terms of the investment and placed the money with him as Mr. Schwartz’s agent to negotiate the deal. It follows therefore according to Marshall, J.A., that the agency between Mr. Schwartz and Rideout was operative and that Rideout necessarily had to be holding the money on Mr. Schwartz's behalf pending the negotiation of the investment in accordance with his explicit instructions.

In contrast, as already noted, the agreements expressly stipulated that Rideout had no authority to bind the Maritime Life Assurance Co. Likewise, the annuity plan explicitly reserved the right to refuse additional premiums of the magnitude Mr. Schwartz was offering and did not bind itself to accept the terms he was seeking. As a result, it is clear that Rideout had no express authority that would allow him to affect the Maritime Life Assurance Co.'s legal position, but did have such power insofar as Mr. Schwartz was concerned.

Accordingly Mr. Schwartz gave Rideout authority to enter into a binding agreement, while the Maritime Life Assurance Co. had not empowered him to bind it. Therefore, when the money was turned over to Rideout, it must be understood to have been held by him on Mr. Schwartz's behalf pending Rideout obtaining the investment on the prescribed terms. At the time of the theft, there was no contract relating to the money with the Maritime Life Assurance Co. and the insurance company could lay no claim to entitlement to it. By contrast Mr. Schwartz could have claimed the right to its return, at least up until acceptance of his conditions by the Maritime Life Assurance Co. As Mr. Schwartz’s offer to the Maritime Life Assurance Co. through his agent Rideout was never accepted, it not having been communicated, he could have demanded at any time return of the money by simply withdrawing the offer made through his intermediary.

Marshall, J.A. reasoned that being the principal of Rideout at the time of the theft, it follows that, as between himself and the Maritime Life Assurance Co., Mr. Schwartz should bear the loss resulting from his own agent's criminal act.

Marshall J.A. then turned to the question of Rideout's “Ostensible Authority”.

The trial judge went on to hold that Mr. Schwartz "cannot rely on any suggestion that Rideout had ostensible authority as an agent" of the Maritime Life Assurance Co. That is because a third party may only be influenced by representations made by the alleged principal. As the trial judge stated: "In the present case, neither Rideout nor his company was vested with the authority to issue policies on behalf of the defendant and the defendant did not place either of them in a position where it could be held responsible for the acts or defaults of Rideout or his company.

The legal foundation for ostensible authority must rest on reliance by the third party on representations of the principal. Then the trial judge goes on to find in effect that the Maritime Life Assurance Co. had done nothing to warrant any such reliance by Mr. Schwartz because the Maritime Life Assurance Co. had placed neither Rideout nor his company in a position to issue policies and Mr. Schwartz ought to have known this.

Thus Marshall, J.A. felt that the evidence affords ample support for the judge's findings of irregularities in Rideout's conduct of his business dealings that should have put Mr. Schwartz on alert. This in the dissenting Justice’s itself was sufficient to preclude any reliance on ostensible authority.

In Marshall, J.A.’s own words:

“These statements encapsulate in a nutshell the response to the attempt to hold Maritime liable on the basis of Rideout's ostensible authority. If a third party does not deal with the intermediary as agent of the principal, an agency relationship cannot be deemed to have any causal connection with the third party's complaint against the intermediary's actions. Moreover, there cannot have been any causal connection if the third party did not believe the putative agent had authority, despite the appearance of authority. There was clearly no belief in this case by Mr. Schwartz in Rideout's authority from Maritime as he engaged him to negotiate on his behalf. Thus, there was no causal connection between any holding out of Rideout by Maritime as its agent and Mr. Schwartz's dealing with him. Accordingly, he cannot hold Maritime liable for his loss.

Counsel for Mr. Schwartz is nonetheless arguing the judgment should be reversed because the judge erred in his rejection of Rideout's ostensible authority from Maritime. He bases his contention on the fact that Rideout was actually an employee around the time when the original annuity policy was issued. He points out that Rideout had been then given the title of Atlantic Regional Superintendent of Maritime and furnished with letterhead, on one of which he issued to Mr. Schwartz a receipt dated March 20, 1978, for the original $110,000 that ultimately was followed with delivery to Mr. Schwartz of the annuity policy. Laying stress on the receipt having been typed on Maritime's letterhead, counsel argues this represented a holding out by Maritime of Rideout as the insurance agent with authority to accept an add-on to the existing policy. In this vein, counsel points out there was no attempt on termination of Rideout's status as Regional Superintendent to make known that he no longer held that post, with the result that it was reasonable for Mr. Schwartz to assume no change in his ostensible authority as reflected in the 1978 receipt, when Mr. Schwartz paid the $100,000 to him as an additional premium on the policy.

This argument overlooks that the judge, in effect, found there was no more reliance upon the former employee status of Rideout than there was on his position as its salesman in the instant transaction in which the loss was sustained. It essentially fails to come to grip with the law's holding, whatever the ostensible authority, that no liability can be ascribed, to borrow from the foregoing passage from Bowstead and Reynolds, in the absence of "causal connection between the representation" and consequential loss and the dealing with the alleged agent. It also reflects once more the weakness recurring throughout this whole appeal of counsel's ignoring of Rideout's dual agency role and likewise evades the reality that the relevant inquiry in this appeal is which function Rideout was fulfilling when receiving the money and for which principal he was holding it.

In any event, the argument that Mr. Schwartz assumed Rideout was an employee of Maritime as a result of his awareness of his Regional Superintendent post in 1978 rests on somewhat shaky ground. The evidence shows that post was vacated in the first quarter of 1979, and in the five years between then and the payment of the stolen money Mr. Schwartz had had constant contact with Rideout. During that time, he too, would have had a chance to observe what the judge found to be the situation, viz: that Rideout was taking pains to hold himself out as an independent broker. This would tend to detract from any claim he was relying on Rideout as an employee of Maritime in 1984, and from support that he was by then treating him as his own investment counsellor.

The 1978 receipt makes no less tenuous the claim of reliance on Rideout's employee status in 1984. This is because in the six year interval, as the judge found and the evidence supports, Rideout was outwardly conducting his business as an independent operation; Maritime was not holding him out as its agent; and, more importantly, Mr. Schwartz knew Rideout had no authority to issue a policy and was relying on Rideout to place his investments.

Nevertheless, despite the slender ground upon which rests the claim that Mr. Schwartz was operating under the impression that Rideout was Atlantic Regional Superintendent in 1984, the judgment arguably leaves scope to infer that the judge, whether as a result of the 1978 receipt or Mr. Schwartz's long time dealings, might have accepted Mr. Schwartz was operating under such an impression in 1984. This possibility arises out of his noting that in 1984 Mr. Schwartz "still regarded Rideout as the defendant's Regional Superintendent for the Atlantic Region". He does not go on to say whether he accepts such an impression as reasonable. This is logically attributable to it being irrelevant to his decision since there could be no causal connection arising from any relationship between Maritime and Rideout in view of the central holding that Mr. Schwartz was dealing with Rideout and his company in the transaction involving the deposit of the subsequently missing money. In such circumstances, it clearly mattered not what capacity Mr. Schwartz may have assumed Rideout to hold with Maritime by reason of a receipt given six years earlier, or otherwise. It not having been demonstrated that the judge erred in his appreciation of those circumstances, the treatment as irrelevant of any vestige of ostensible authority flowing out of Rideout's actions as Regional Superintendent is quite understandable.

In this case the judge reviewed all of the facts and concluded that "(t)he course of conduct between the plaintiff and Rideout suggests that Rideout was acting as investment counsellor, not necessarily as an agent of the defendant". That Mr. Schwartz had made a substantial investment through Rideout with another company supports this holding as does the judge's overview of the facts which indicated that Mr. Schwartz treated Rideout as his independent investment broker whom he trusted and to whom "he left the matter of his investments". The judge found that Mr. Schwartz placed no reliance upon whatever ostensible authority with which Maritime might have cloaked Rideout. With no reasonable basis to believe Rideout was empowered to issue annuity commitments for Maritime, Mr. Schwartz could not possibly found his claim to recovery through an agency relationship between Maritime and Rideout on the latter's apparent or ostensible authority.

Having found no basis to the claims of error on the judge's part in failing to allow recovery of the stolen money on the footing of agency based on either actual or ostensible authority, this discussion will now turn to the final challenge mounted by Mr. Schwartz i.e. Maritime's negligence.”

Marshall, J.A.’s “Summary and Conclusion” in dissent was:

“There was ample evidence supporting the trial judge's finding that Mr. Schwartz did not provide the $100,000 stolen by Rideout to him in his capacity as a representative of Maritime. To the contrary, he provided the funds to Rideout as his agent with explicit instructions to invest them with Maritime on terms and conditions which he knew Rideout had no authority to accept for the insurance company. He knew they would require acceptance by Maritime. Until so accepted, the money belonged to Mr. Schwartz. Since it was his money that was stolen, he must bear its loss and cannot look to Maritime to assume responsibility for money remitted to his own agent to negotiate an investment for him. Moreover, Maritime owed no duty of care to Mr. Schwartz to exercise supervision and control over these funds which he had elected to give to his investment broker whom he engaged on his own behalf.

In summary, it is well to reiterate that this is a case of an insurance broker who exercised a dual agency role. The trial judge fully recognized this and concluded from his analysis of "the events and circumstances" in this case that the intermediary was acting as broker of Mr. Schwartz to invest the money on his behalf. He made no error of law in arriving at this conclusion. Counsel for Mr. Schwartz has mounted his claim of error by stressing the agency relationship established by Maritime to solicit business on its behalf. The judgment shows that relationship was fully appreciated but decides that in the circumstances that the stolen money was given to the broker in his capacity as representative of Mr. Schwartz in the parallel.

To now accept the contrary view put forth by Mr. Schwartz's counsel and hold the money was delivered to Rideout in his role as Maritime's agent would require this court to substitute its view of the facts for that of the trial judge. This cannot be done in the absence of overriding and palpable error in the judge's appreciation of the evidence. A review of the transcript not only shows no such misapprehension, but it reveals the judge had ample evidence upon which to found his decision. Therefore, the disposition is beyond the purview of appellate review.

Accordingly, this appeal should be dismissed with costs and the judge upheld in his holding that, as between the two innocent parties involved in this appeal, Mr. Schwartz should suffer "the unhappy consequences" of the embezzlement. It was he who had the misfortune to select a thief as his agent in placing the investment and, as a result in all the circumstances obtaining, ought to absorb the loss.”

 

UNIT WRAP UP: 

We have established that corporations are by legal means ascribed characteristics of independence that can be proscribed, or result in binding action and attendant consequences. Accordingly we now turn to the mechanics of how the corporate “being” actually operates and governs itself.

 

ASSIGNMENT #1 

 

It is the present day. You are a young corporate lawyer at the well know British Columbia law firm Wie, Haight, Raye & Darr whose primary practice is maritime insurance litigation. In fact you are the only one in the firm with any knowledge of corporate law. One of the senior partners Sonny Raye comes to your office (proving this is all fictional because he would never come to your office) and says:

“We have just been retained by the giant worldwide conglomerate Hexxon Oil & Gas because their oil tanker the Hexxon Valdez struck a reef in Prince William Sound, Alaska this morning at 12:04 a.m. local time. Our information is that the ship was carrying approximately 55 million gallons of oil of which approximately 11 million gallons (approximately 250,000 barrels) are going to be spilled into Prince William Sound over the next few days. 

It gets worse. The Master of the Hexxon Valdez Captain Joe Hazelwode was widely reported to have been drinking heavily last night and was asleep in his bunk when the ship hit the reef. The third mate was at the helm. You might think he would not have hit the reef if only he had looked at the ships radar. Except that the radar wasn’t even turned on. Our client has told us that they have known for the past year that the Hexxon Valdez’s radar has been broken and disabled. It was in our client’s view just too expensive to fix and have operational.

Our client Hexxon’s full name is the “Hexxon Trading Corporation” and it was originally chartered on May 2, 1670 in London, England but became a Canadian company in 1965 and is currently a Company under the Canada Business Corporations Act (R.S.C., 1985, c. C-44). 

The ship “Hexxon Valdez” was registered in the country of Liberia. It is owned by “Valdez Ltd.” a Liberian Corporation. 

The shares of “Valdez Ltd.” are held in equal proportion (50% interest each) by two entities. The first is a limited liability partnership known as the “666 Limited Liability Partnership”. The Managing Director of “666 Limited Liability Partnership” is ”Hexxon Experts Inc.”, a 100% owned subsidiary of “Hexxon Trading Corporation”. The partners of the “666 Limited Liability Partnership” are four international investment firms and the “Hexxon Trading Corporation” in equal proportions (20% interest each). The other 50% shareholder in “Valdez Ltd.” is “Hexxon Trading Corporation B.C. Inc.”, a B.C. Company incorporated pursuant to the Business Corporations Act [SBC 2002] Chapter 57. “Hexxon Trading Corporation B.C. Inc.” is a wholly owned subsidiary of “Hexxon Trading Corporation”. The Board of Directors of “Valdez Ltd.” is comprised of 6 Directors, 3 appointed by the “666 Limited Liability Partnership” and 3 appointed by “Hexxon Trading Corporation B.C. Inc.”. The Directors appointed by “666 Limited Liability Partnership” are all “independent directors” having no connections to Hexxon, its subsidiaries or affiliates. The three directors appointed by “Hexxon Trading Corporation B.C. Inc.” are comprised of the CEO of the “Hexxon Trading Corporation”, the VP Finance of the “Hexxon Trading Corporation” and one “independent director” having no connection to Hexxon, its subsidiaries or affiliates. “Valdez Ltd.” has never made a profit, but before the accident “Valdez Ltd.” was projected to become profitable in fiscal 2015.

There is one further fact. Captain Hazelwode is an independent contractor, not an employee of Valdez Inc. He is the sole shareholder and sole director of “Hazelwode Captainry Ltd.”, another Liberian company.

Our client Hexxon knows that it is going to be sued in British Columbia for negligence by individuals and businesses who have been disrupted by the spill including the Alaskan seafood industry, property owners and environmental groups. We are expecting approximately 38,000 plaintiffs. Hexxon’s overall strategy is to blame Captain Hazelwode as much as possible. 

The firm and our client would like your preliminary assessment of what corporate law defenses we might have. We know that you are not very experienced in the area so all we really need is a point form list of questions and observations regarding the corporate law principles that might apply to provide us with some defenses based on corporate structure, and/or deny us those defenses.

If you think that there may be further facts that it would be either helpful or important to know, indicate briefly what they are. As well, please try and limit your memo to no more than five pages (one and half spacing).”

Course:Business Organizations - LAW 459

2016-08-16T09:19:14Z

DavidHeinrich: /* Unit 5 */

{{Infobox_New_Course

|title=Business Organizations

|picture=Image:wiki.png

|subject code=LAW

|course number=459

|section number=003

|instructor=Jon Festinger

|email=zenracer@mail.ubc.ca

|office=

|office hours=

|schedule=

|classroom=Allard Hall Room 104

}}


=== Course Materials ===
===== Unit 1: INTRODUCING BUSINESS ORGANIZATIONS & THEIR REAL WORLD CONTEXTS =====
[[Course:Business Organizations - LAW 459/Unit 1]]

===== Unit 2: THE BASIC CONCEPTS OF BUSINESS ORGANIZATIONS =====
[[Course:Business Organizations - LAW 459/Unit 2]]

===== Unit 3: PARTNERSHIPS =====
[[Course:Business Organizations - LAW 459/Unit 3]]

===== Unit 4: CORPORATE PERSONHOOD – SOME SPECIFIC ISSUES AND PROBLEMS =====
[[Course:Business Organizations - LAW 459/Unit 4]]

===== Unit 5: CORPORATE OBLIGATIONS =====
[[Course:Business Organizations - LAW 459/Unit 5]]

===== Unit 6 =====
[[Course:Business Organizations - LAW 459/Unit 6]]

===== Unit 7 =====
[[Course:Business Organizations - LAW 459/Unit 7]]

===== Unit 8 =====
[[Course:Business Organizations - LAW 459/Unit 8]]

===== Unit 9 =====
[[Course:Business Organizations - LAW 459/Unit 9]]

===== Unit Review =====

Course:Business Organizations - LAW 459

2016-08-16T09:18:44Z

DavidHeinrich: /* Unit 3 */

{{Infobox_New_Course

|title=Business Organizations

|picture=Image:wiki.png

|subject code=LAW

|course number=459

|section number=003

|instructor=Jon Festinger

|email=zenracer@mail.ubc.ca

|office=

|office hours=

|schedule=

|classroom=Allard Hall Room 104

}}


=== Course Materials ===
===== Unit 1: INTRODUCING BUSINESS ORGANIZATIONS & THEIR REAL WORLD CONTEXTS =====
[[Course:Business Organizations - LAW 459/Unit 1]]

===== Unit 2: THE BASIC CONCEPTS OF BUSINESS ORGANIZATIONS =====
[[Course:Business Organizations - LAW 459/Unit 2]]

===== Unit 3: PARTNERSHIPS =====
[[Course:Business Organizations - LAW 459/Unit 3]]

===== Unit 4: CORPORATE PERSONHOOD – SOME SPECIFIC ISSUES AND PROBLEMS =====
[[Course:Business Organizations - LAW 459/Unit 4]]

===== Unit 5 =====
[[Course:Business Organizations - LAW 459/Unit 5]]

===== Unit 6 =====
[[Course:Business Organizations - LAW 459/Unit 6]]

===== Unit 7 =====
[[Course:Business Organizations - LAW 459/Unit 7]]

===== Unit 8 =====
[[Course:Business Organizations - LAW 459/Unit 8]]

===== Unit 9 =====
[[Course:Business Organizations - LAW 459/Unit 9]]

===== Unit Review =====

Course:Business Organizations - LAW 459

2016-08-16T09:18:09Z

DavidHeinrich: /* Unit 2 */

{{Infobox_New_Course

|title=Business Organizations

|picture=Image:wiki.png

|subject code=LAW

|course number=459

|section number=003

|instructor=Jon Festinger

|email=zenracer@mail.ubc.ca

|office=

|office hours=

|schedule=

|classroom=Allard Hall Room 104

}}


=== Course Materials ===
===== Unit 1: INTRODUCING BUSINESS ORGANIZATIONS & THEIR REAL WORLD CONTEXTS =====
[[Course:Business Organizations - LAW 459/Unit 1]]

===== Unit 2: THE BASIC CONCEPTS OF BUSINESS ORGANIZATIONS =====
[[Course:Business Organizations - LAW 459/Unit 2]]

===== Unit 3 =====
[[Course:Business Organizations - LAW 459/Unit 3]]

===== Unit 4: CORPORATE PERSONHOOD – SOME SPECIFIC ISSUES AND PROBLEMS =====
[[Course:Business Organizations - LAW 459/Unit 4]]

===== Unit 5 =====
[[Course:Business Organizations - LAW 459/Unit 5]]

===== Unit 6 =====
[[Course:Business Organizations - LAW 459/Unit 6]]

===== Unit 7 =====
[[Course:Business Organizations - LAW 459/Unit 7]]

===== Unit 8 =====
[[Course:Business Organizations - LAW 459/Unit 8]]

===== Unit 9 =====
[[Course:Business Organizations - LAW 459/Unit 9]]

===== Unit Review =====

Course:Business Organizations - LAW 459/Unit 4

2016-08-16T09:16:03Z

DavidHeinrich:

UNIT 4 (WEEKS 4 & 5): CORPORATE PERSONHOOD – SOME SPECIFIC ISSUES AND PROBLEMS
 http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Unit-4-360x270.jpg
Figure 4: “Occupy Wall Street” protest
 

ALT: A sign is held up during the “Occupy Wall Street” protests in New York City which began September 17, 2011. The handwritten sign says: “IF CORPORATIONS ARE PEOPLE, THEN WHY CAN’T WE PUT THEM IN JAIL?”

 

Source of image - <a href="http://mulevariations.com/columns/trust-me-im-doctor/occupy-mule">http://mulevariations.com/columns/trust-me-im-doctor/occupy-mule</a>

 

 

 

UNIT OVERVIEW:

 

This unit will be devoted to exploring some of the limitations and conundrums, both legal and practical, which arise out of the assignment of “personhood” to the corporation and how does the law deal with them. What are the limits to this idea? Can other “non-persons” have legal personhood? Can a chimpanzee? Can corporations commit crimes and make contracts? Do corporations have privacy rights, or the right to free speech, or religious freedom or other constitutional protections? Can a corporation be defamed? If you are driving in the HOV lane with only a copy of your certificate of incorporation in the passenger seat, are you violating the requirement that there be two persons in the car? In what circumstances and for what purposes may the personhood of a corporation be disregarded, whether by “piercing” or, as may appeal to some of the more prurient minded among you, “lifting” the “corporate veil’? Are these the same thing?

In the end this unit prepares you to ask in a myriad of ways, what function does “personhood” perform in the analysis of legal problems relating to the corporation?

 

UNIT OUTCOME:

By the end of this unit you should be able to identify the core tensions arising from corporate personhood – and the profound contradictions which arise as a result and which the law must grapple with. The most obvious of these is the tug of war between shareholder financial expectations and management prerogatives. You will also understand, starting from the seminal case of Salomon v. Salomon how tempting it is for the courts to “pierce the corporate veil” and the inevitability of the connection between corporations being separate people and the countervailing force that is the doctrine of “piercing the veil”. Finally you will appreciate that the two forces and how frustrating it is in a legal sense that these two forces working against each other have not yielded and elegant yin and yang, but rather a messy set of legal doctrines that seem more whimsical than principled.

 

UNIT READINGS:

Please read the following material:

Casebook pages 83-91,134-226

BCBCA sections 30, 33, 136, 142, 227

Prest v. Petrodel 2013 UKSC 34 <a href="http://www.bailii.org/uk/cases/UKSC/2013/34.html">http://www.bailii.org/uk/cases/UKSC/2013/34.html</a>

 
<ol start="373">
<li> Todd Henderson, “Everything Old Is New Again: Lessons from Dodge v. Ford Motor Company” (2007) U of Chicago Law & Economics, Olin Working Paper No. 373: <a href="http://www.law.uchicago.edu/files/files/373.pdf">http://www.law.uchicago.edu/files/files/373.pdf</a></li>
</ol>
 

TOPIC 1: CORPORATIONS AND THE CHARTER 

Please read pages 83-91 of the Casebook. The extent to which corporations enjoy the protections of the Charter is considered on these pages. There is little to add.
<ol>
<li> v. Agat Laboratories (1998) 17 C.R. 95th) 147 (Prov.Ct.) which is found at pages 84-88 of the casebook is generally accepted as describing the proper approach. The question in issue is whether s.7 of the Canadian Charter of Rights and Freedoms applies to corporations who, after all, are not natural persons. S.7 provides:</li>
</ol>
“Life, liberty and security of person
<ol start="7">
<li>Everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice.”</li>
</ol>
 

Blog Activity 4.1:

Then please consider the questions in Notes 1 and 2 on page 88 of the Casebook.

How would you answer them? Why would you answer them that way?

Please succinctly summarize the present state of the law on the rights of corporations to use Section 7 of the Charter. Please blog your summary in no more than one page under the heading called “Corporations and the Charter”.

As you should now be able to appreciate, the fiction of corporate personhood can potentially result in some very real confusions and contortions when it comes to legal analysis. Sometimes it feels like the approach is somewhat akin to “Companies are people, except when they are not”.

Query whether such legal stretching and contorting is really necessary to accommodate the fiction of corporate personhood, or whether alternative approaches may be possible.

Blog Activity 4.2

Please consider whether s. 30 of the BC Business Corporations Act could simply be eliminated and replaced by an inclusive list of rights, powers and privileges, but without invoking any form of “personhood”. Would this be advisable or useful? Why or why not?

“Capacity and powers of company

 
<ol start="30">
<li> A company has the capacity and the rights, powers and privileges of an individual of full capacity.”</li>
</ol>
Please blog your views on this question and your reasons in no more than one page under the heading “Eliminating Corporate Personhood?”

 

TOPIC 2: Some practical consequences of “personhood” 

Please read pages 134-143 of the Casebook.

We have previously identified some of the practical consequences of “personhood” – e.g., corporation is the only proper plaintiff for a wrong done to it and that an individual shareholder cannot sue for an alleged pro rata share of losses derived from those suffered by the corporation – as in the Robak case.

Now start to explore some other implications

The material on pages 134-143 of the Casebook deals with some of these. 

Please refer to the questions on page 135 of the Casebook:

Question 1:

Principal shareholder and de facto controller testifies on behalf of corporate plaintiff. Disbelieved. Corporation still wins. Should the corporation be deprived of costs because “it” lied?

Question 2:

Can a corporation be held in contempt of court for failure to comply with a court order? See Northern Counties Securities v. Jackson & Seeple, [1974] 2 All ER. 625 referenced in note 2 on page 135 of the Casebook.

Question 3:

Macaura v. Northern Assurance [1925] A.C. 619 at pages 135-137 of the Casebook.

Owner of timber sold it to a company that was owned almost solely by him. He was the company's largest creditor. In his own name he insured the timber against fire. Timber was in fact destroyed by fire. Insurer denied the claim on the basis that the timber now belonged to the company and not to the previous owner or to the largest shareholder in the company.

Their argument was that the company being in law a legal entity separate from shareholders had an insurable interest but held no policy. Mr. Macaura had a policy, but no insurable interest. This left him with only a debt due by the company as a result of the fire that destroyed the timber he had sold.

The House of Lords held this way, finding that “…Neither a simple creditor nor a shareholder in a company has any insurable interest in a particular asset which a company holds.”

Does this really make policy sense? 

In thinking about this question note the words of Lord Buckmaster on where the benefits and burden lie (at p.136 of the Casebook). In this case all the benefits and burdens effectively fell on Mr. Macaura.

Suppose I am convinced that a building I have no interest in beyond that of any other citizen will collapse within a year. I contract with an insurer to pay me $50K if it does. Isn’t this just betting – my object is to make a windfall gain not to protect against loss. That situation is clearer then the Macaura case.

Might it be suggested that Macaura was wrongly decided because it’s definition of insurable interest is too narrow?

To try and answer you will have to ask yourself what the point of “insurable interest” is?

In an early case on the subject (Lucena v. Crawford (1806) 127 E.R. 471), one judge found that an insured could recover if she suffered “factual expectation of loss”. Unfortunately, another judge in that case required that, in addition to “factual expectation of loss”, the plaintiff must also have a “legal or equitable interest” in the property. The test of “legal or equitable interest” in the property is the one that prevailed. Under it for example, a lender who lent money for a construction project would have no insurable interest unless he had taken out a security interest in the property.

Which bring us to the important case of Kosmopoulos v. Constitution Insurance and how the separate corporate personality doctrine can have unintended and unforeseen consequences. The decision of the Ontario C.A. is found at page 137 of the Casebook. 

Mr. Kosmopoulos was the sole shareholder and director of leather goods company. He originally ran that business as a sole proprietor and the lease for its office was in the name of Mr. Kosmopoulos, as was the insurance on office. His lease for the company office was under his own name from when he originally ran the business as a sole proprietor. Even after the incorporation of his company the insurance on the office remained in his own name. The insurance agency he was dealing with knew that he was personally on the lease but carrying on business as a corporation. A fire in a neighboring lot damaged his office.

When a claim was made insurance coverage was denied.

The trial judge found that Mr. Kosmopoulos could not recover damages as the owner of the assets as the company, and not he, owned them. However he could recover as an insured because of his insurable interest in the building.

The Ontario Court of Appeal agreed, restricting the application of the Macaura precedent to cases involving multiple shareholders.

The Supreme Court of Canada upheld the ruling of the lower courts.

Wilson J. obseved that there was no consistent principle as to when a court may disregard separate personhood by “lifting the corporate veil” and regarding the company as a mere “agent” or a “puppet” of its controlling shareholder or a parent corporation”. Though the corporate veil would not be lifted, Mr. Kosmopoulos as sole shareholder of the company was found to be so placed with respect to the assets of the business as to have benefit from their existence and prejudice from their destruction. He had a moral certainty of advantage or benefit from those assets but for the fire. He had, therefore, an insurable interest in them capable of supporting the insurance policy and is entitled to recover under it.

McIntyre J. preferred the approach of Zuber J. in the Ontario C.A. That is that the Macaura rule should not be accepted to compel a holding that a sole shareholder and sole director of a company could not have an insurable interest in the assets of the Company. Underlying this conclusion is that modern company law permits the creation of companies with one shareholder. The identity then between the Company and that sole shareholder (and director) is such that an insurable interest in the Company's assets may be found in the sole shareholder.

Now please consider questions 2, 3 and 4 on page 140 of the Casebook.

Please read Lee v. Lee’s Air Farming at pages 140-142 of the Casebook which helps bring some clarity to the question of how to separate different roles in a corporate structure, even where they seemingly reside within the same physical being. 

Mr. Lee formed a company, held nearly all its shares, was managing director, and a pilot. Lee appointed himself the chief pilot for the company, and in this way became in effect both employer and worker. The contract of employment was between him and the company, but in effect Mr. Lee both gave orders and obeyed them.

The New Zealand Courts held that the two offices were clearly incompatible. On appeal the Privy Council reversed finding that it was the company who gave the orders, not Mr. Lee personally.

Please read Notes 1-3 on page 142 of the Casebook.

Blog Activity 4.3

Please consider the hypothetical in Note 4 on page 142 of the Casebook. What do you think? Would “x” be able to avoid liability in by “springing out” the corporation in the scenarios provided? Please blog your views on this question and your reasons in less than one page under the heading “Ambiguities of Corporate Personality”.

 

TOPIC 3: QUESTIONING THE PRINCIPLE - THE CORPORATE VEIL THEORY 

Please Read Pages 143-149 Of The Casebook.

It is noteworthy that clear doctrines and explanations of when “the corporate veil” will be lifted are few and far between.

Since the decision in Salomon v. Salomon a steady stream of common law decisions and legislative enactments has eroded the immutability of the separate legal entity doctrine. These decisions and enactments are conveniently seen as ways to “lift or pierce the corporate veil”. Piercing seems to happen freakishly ... rare, severe and unprincipled - almost like lightning. This lack of clarity perhaps suggests that using a fiction such as “personhood” is a poor and impractical fit. This is not just a bit of critical analysis with some normative pedagogic purpose. Rather it may be the unifying thread of virtually all aspects of this course. Because the ethical reasons underlying the principle of separate corporate personality seem to not be particularly present, know or understood, we should perhaps not be surprised at the degree of judicial flailing and uncertainty that many of the cases we are studying seem to manifest.

What Little Is Clear Is That Limited Liability Is No Longer Sacrosanct: The Principle In Salomon's Case No Longer Rules.

See the quotation from Clarkson v. Zhelka [1967] 2 O.R. 565 (H.C.) at page 144 of the casebook:

“The cases in which the Courts…have seen fit to disregard the corporate entity or personality, and instead to consider the economic realities behind the legal façade, fall within a narrow compass. The Legislature, in the fields of revenue and taxation…has made much greater departure in this respect. Such cases as there are illustrate no consistent principle. The only principle laid down is that in the leading case of Salomon v. Salomon & Co. Ltd., [1897] AC 22; and in general such principle has been rigidly applied. Briefly stated, it is that the legal persona created by incorporation is an entity distinct from its shareholders and directors and that even in the case of a one-man company, the company is not an alias for the owner.

The exception would appear to represent refusals to apply the logic of the Salomon case where it would be flagrantly opposed to justice.

…If a company is formed for the express purpose of doing a wrongful or unlawful act, or, if formed, those in control expressly direct a wrongful thing to be done, the individuals as well as the company are responsible to those to whom liability is legally owed.”

Note Welling’s critique of this part of Clarkson as obiter dicta (at page 148 of the Casebook).

Note Sharpe J. statement in Transamerica Life v. Canada Life (1996) 28 O.R. (3d) 423 at 433-434 (which can be found at the pages 144-145 of the Casebook): 

“There are undoubtedly situations where justice requires that the corporate veil be lifted…[I]t will be difficult to define precisely when the corporate veil is to be lifted, but that lack of a precise test does not mean that a court is free to act as it pleases on some loosely defined ‘just and equitable” standard…

[T]he courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct. The first element “complete control”, requires more than ownership. It must be shown that there is complete domination and that the subsidiary company does not, in fact, function independently…

The second element refers to the nature of the conduct: is there “conduct akin to fraud that would otherwise unjustly deprive claimants of their rights?” (References omitted.)

Note Welling at page 149 of the Casebook: 

“Courts in Canada have yet to take the final step and acknowledge that they have no inherent power to pretend that a corporation does not exist. I suspect the reason is simple. Most barristers concede the judgers has power to “pierce the corporate veil”, then argue this is not an appropriate case in which to use the power. They are conceding too much and they are ignoring the clear wording of Canadian corporate statutes. It is time for someone to stand up and say “quo warranto?”

It is clear from commentators and judges that the immense confusion around when the “corporate veil’ is to be pierced relates directly to principle of Salomon v. Salomon and the separate personality of companies. This being so it is quite curious why the fiction of “corporate personhood” does not itself draw as much attention as it might. It is at least arguable that if we chose to dispense with the fiction that corporations are “persons”, we would more easily and clearly be able to identify and define permitted corporate action strictly in terms of what is permissible. 

 

TOPIC 4: corporate personality in practice: some problem areas 
<ol>
<li> Corporate Character Traits</li>
</ol>
Please read extract from Welling at page 150 of the Casebook.

Please note in particular the last three sentences:

“A fully capable corporation may well have been born yesterday. Does the law permit us to look inside of the corporation’s equivalent of a family to establish a pattern of behaviour? A cautious “yes” can be advanced, provided the principle of corporate personality is not sacrificed.”

 

Please read Big Bend Hotel Ltd. v. Security Mutual (1980) 19 BCLR 102 at pages 150-152 of the Casebook.

This is an example of the corporate veil being lifted to prevent improper conduct or fraud.

Vincent Kumar was the president and sole shareholder of Big Bend Hotel Ltd. Big Bend had obtained insurance from Security Mutual on the hotel, its sole asset. The hotel burned down.

Kumar had previously been the president and sole shareholder of another corporation whose hotel had burned less than three years earlier. This fact had not been disclosed to security Mutual.

The court held that this was a material non-disclosure. It was found to be appropriate to lift the corporate veil here because equity will not allow an individual to use a co as a shield for improper conduct or fraud.

Callaghan J. found that Kumar knew the prior loss had to be disclosed and that his failure to do so was intended to mislead or deceive the insurers who would have declined risk had they known.

In other words the fact of a separate corporate entity was not allowed to interfere with the obligation to disclose, and the veil would be pierced to put the sole shareholder corporate president to the same standard he would be held to if no company existed as a shield.

Please read Note 1 at page 152 of the Casebook:

Wasn’t it enough to decide the case to conclude that had they known, the insurer would have declined risk?

Should the insurance company have had an application form that asked for disclosure not only from the company applicant but from all its principals.

Please read Note 3 at page 152 of the Casebook:

London Computer Operators Training Ltd and others v British Broadcasting Corporation and others [1973] 2 All ER 170 deals with how separate corporate existence can have real impact on other legal areas, such as defamation.

Two speakers on BBC radio alleged that a computer school was “a financial racket”, that their advertising was misleading, and that the founder had “woeful” business record. The school and two of its directors bought an action for libel against BBC Radio who pleaded justification (that the statements were in fact true) and fair comment. The founder, who was still running the school, was not joined as a plaintiff. The defendants subsequently discovered that the founder had a criminal record and sought leave to amend their particulars of justification (truth) by adding details of his convictions and sentences. Leave to amend was granted. The court found that the words complained of were capable of the meaning that the company was being run by people of questionable honesty and background who were unfit to run a computer school.

If the company is separate from its shareholder how is the shareholders criminal record of convictions and sentencing relevant to an action involving the company only, and not the shareholder?

Read Hercules Managements Ltd. v. Ernst & Young [1997] 2 S.C.R. 165 at page 155 of the Casebook

Two companies, Northguard Acceptance Ltd (‘NGA”) and Northguard Holdings Ltd. (‘NGH”) carried on business lending and investing money on the security of real property mortgages. Hercules Managements Ltd. was a shareholder in NGA. Ernst & Young were hired as auditors of NGH and NGA, prepared financial statements and provided audit reports to the companies’ shareholders. NGA and NGH went into receivership and Hercules Managements Ltd. sued Ernst & Young alleging that their audit reports had been negligently prepared.

Ernst & Young sought dismissal on the ground, inter alia, that the claims asserted by the plaintiffs could only properly be brought by the corporations themselves and not by the shareholders individually. La Forest J. agreed with Ernst & Young holding that “the shareholders’ reliance on negligently prepare audit reports…will result in a wrong to the corporation for which the shareholders cannot, as individuals, recover.”

Blog Activity 4.4

 

What is the policy justification for this result in your view? Please blog your views on this question and your reasons in less than one page under the heading “Justifying Ernst & Young”.

 
<ol>
<li> Corporations as Agents and Partners </li>
</ol>
Please read pages 157-158 of the Casebook.

The question is: When is it appropriate to treat a company as being the agent or partner of its controlling shareholder? 

Note that the parameters of partnership can be reviewed in Unit 3.

In this regard please read Smith, Stone & Knight Ltd. v. Birmingham Corp. [1939] 4 All E.R. 116 at page 158 of the Casebook.

Birmingham Corporation expropriated premises owned by a wholly‑owned subsidiary of Smith, Stone & Knight Ltd. (“SSK”). 497 of 502 issued shares in the subsidiary were held by SSK; the other 5 shares were held for SSK. The subsidiary had no staff and no separate accounting records. The subsidiary was effectively treated as a department of SSK.

SSK claimed compensation for loss of business as a result of the expropriation. Birmingham Council’s response was that the loss was suffered by subsidiary ‑ a separate legal entity and for that reason SSK’s claim should fail.

It was held that compensation was indeed payable by Birmingham to SSK. The court found that the subsidiary was carrying on no business of its own, but was in fact carrying on SSK’s business as agent.

The court identified six factors to be shown before agency found and veil lifted:
<ul>
<li>Profits of the subsidiary must be treated as profits of the holding company;</li>
<li>Those conducting the subsidiary's business must be appointed by the holding company;</li>
<li>The holding company must be the head and brain of the trading venture;</li>
<li>The holding company must be in control of the venture and must decide what capital should be spent and what should be done;</li>
<li>The profits made by the subsidiary's business must be made by the holding company's skill and direction; and</li>
<li>The holding company must be in constant and effective control.</li>
</ul>
Does this make sense? Are economic realities such that a group of companies trade as a group, raise capital as a group, and are viewed as a group by those dealing with them?

Should one attach obligations and responsibilities to the group and not to individual companies?

Lifting the corporate veil on the basis of agency involves examining the relationship between two or more separate legal entities and attributing the acts of one of the entities as the acts of the other entity.

 

The key issue involved in the case was whether the parent had suffered any loss as a result of the council's compulsory acquisition of the property, causing disturbance to the subsidiary's business. Atkinson J. decided that the relationship between the parent and subsidiary was really an agency relationship, with the business of the subsidiary being carried on an apparent basis only. The relevant facts were:
<ol>
<li>The directors of the parent were also directors of the subsidiary but did not take a salary from their positions on the subsidiary’s board;</li>
<li>The business purportedly carried on by the subsidiary company was purchased by the parent and never formally assigned to the subsidiary;</li>
<li>The subsidiary had no staff apart from a manager;</li>
<li>The subsidiary's books were kept and maintained by the parent and were not the property of the subsidiary or accessible by the manager of the subsidiary;</li>
<li>The work purportedly carried out by the subsidiary was beneficially owned by the parent without any agreement to transfer the business to the subsidiary; and</li>
<li>The subsidiary was treated for accounting purposes as if it were merely a department of the parent, including, significantly, appropriating the profits of the subsidiary for payment to the parent (by direct payment rather than dividend).</li>
</ol>
Smith, Stone & Knight Ltd. v. Birmingham Corp. [1939] 4 All E.R. 116 can be seen as a poor example of lifting the corporate veil on the basis of agency. It is preferable not to use the case for the purpose of lifting the corporate veil for two reasons:
<ol>
<li> Maclaine Watson & Co Ltd v. Department of Trade and Industry [1988] 3 All ER 257 at 310-311 per Kerr LJ:</li>
</ol>
“…the facts [in Smith, Stone and Knight] were so unusual that they cannot form any basis of principle" 
<ol start="2">
<li> See Note 4 on page 159 of the Casebook:</li>
</ol>
“Is there any reason why corporate shareholders should be made to answer for the liabilities of the corporations in which they hold shares, to a greater degree than individual shareholders?”

Read Notes 7 and 8 on pages 159-160 including excerpts from the decision in DHN Food Distributors Ltd. v Tower Hamlets London Borough Council [1976] 1 W.L.R. 852 (Eng. CA).

DHN Food Distributors Ltd. (“DHN”) owned and controlled a business of importing and distributing groceries, operating out of a warehouse owned by a subsidiary of DHN, Bronze Investments Ltd. Vehicles used in the business were owned by yet another subsidiary of DHN. DHN held all the shares in both subsidiaries and the companies had common directors.

In 1969 the local council made a compulsory purchase order to acquire the land on which the warehouse sat. DHN was unable to relocate and the business subsequently closed down.

The question was whether DHN was entitled to compensation for disturbance in having the business closed down. Council argued none payable since the subsidiary was not disturbed. They further argued that even if both subs were disturbed, the subsidiaries were not entitled to any compensation because they had no interest in the land. Moreover the argument continued, DHN itself was not entitled to compensation under the provisions of a statute. The council argued that DHN was only a licensee of Bronze Investments Ltd.

 

The English Court of Appeal treated the companies as one economic entity and following from this, DHN could be treated as owner of the property and was thus entitled to compensation for disturbance to its business.

Lord Denning found that the corporate veil could indeed be lifted – finding that the companies were in reality a group, and should be treated as one. 

“These subsidiaries are bound hand and foot to the parent company and must do what the parent company says … virtually the same as a partnership … They should not be treated separately.”

This notion is not so easily reconcilable with other cases. Denning’s views were disapproved by the House of Lords in Woolfson v Srathclyde Regional Council, 1978 SC 90 (HL). There Lord Keith expressed doubt as to whether the decision in DHN correctly applied the principle that it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere facade concealing the true facts

 

 

TOPIC 5: CORPORATE PERSONALITY - SOME INNOVATIVE APPROACHES 

Please read the short web article “Corporation not person in carpool lanes” which can be found at <a href="http://www.sfgate.com/bayarea/article/Corporation-not-person-in-carpool-lanes-4173366.php">http://www.sfgate.com/bayarea/article/Corporation-not-person-in-carpool-lanes-4173366.php</a>

 

Then please read page 160 of the Casebook:

 

“Judges have rarely been clear when explaining how corporate personality works. This is due in part to the facile notion that they are at liberty to disregard the separate existence of the corporate entity. There are, however, some reported cases that clearly illustrate the application of some well-known remedies, mostly in tort situations, but some from the field of equity. Using them as examples one can formulate a principled approach that treats corporate personality as a solution rather than a problem.”

 
<ol>
<li> Inducing Breach of Contract</li>
</ol>
 

Please read Garbutt Business College Ltd. v. Henderson Secretarial School Ltd. [1939] 4 D.L.R. 151 (Alta. C.A.) at pages 161-162 of the Casebook. It helps illustrate yet another way that “separate” corporate personality might be manipulated in an attempt to evade responsibility.

Henderson a teacher was subject to a restrictive covenant governing employment. It specifically restrained him from engaging in or managing a rival business college for 5 years. He resigned and started a rival college that used his name and employed him to teach. He held all but 3 shares. His wife and daughter held those 3 shares. Garbutt Business College Ltd. lost students to new college.

The court upheld the restrictive covenant against Mr. Henderson but found there could be no corporate liability as against Henderson Secretarial School Ltd. in the contract. Any such liability must be in tort, and accordingly the court found liability against Henderson Secretarial School Ltd. in damages for interference with business relations and inducing breach of contract between Mr Henderson and Garbutt Business College Ltd.

Please note Questions 1 and 3 on pages 162-163 of the Casebook

 

1.This question is in effect: What if Henderson only incorporated a rival entity using his name but did not teach or manage?

 
<ol start="3">
<li>In looking at this question consider the facts in Jones v. Lipman [1962] 1 WLR 832. In that case Mr. Lipman contracted to sell a house to Jones for £5,250. He changed his mind and refused to complete. To try and avoid specific performance, he conveyed the house for £3000 to a company formed for that purpose alone, which he alone owned and controlled. In the end specific performance against Mr. Lipman and his company was ordered: “The defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity.”</li>
</ol>
 

In this regard please consider the following excerpt’s from Lord Sumption’s judgment in Prest v. Petrodel 2013 UKSC 34 (especially paragraph 30 on Jones v. Lipman) which can be found here: <a href="http://www.bailii.org/uk/cases/UKSC/2013/34.html">http://www.bailii.org/uk/cases/UKSC/2013/34.html</a>

 

As you will see Lord Sumpton of the United Kingdom Supreme Court had the following observations:

“27. In my view, the principle that the court may be justified in piercing the corporate veil if a company's separate legal personality is being abused for the purpose of some relevant wrongdoing is well established in the authorities….[T]he recognition of a limited power to pierce the corporate veil in carefully defined circumstances is necessary if the law is not to be disarmed in the face of abuse… 
<ol start="28">
<li> The difficulty is to identify what is a relevant wrongdoing. References to a "facade" or "sham" beg too many questions to provide a satisfactory answer. It seems to me that two distinct principles lie behind these protean terms, and that much confusion has been caused by failing to distinguish between them. They can conveniently be called the concealment principle and the evasion principle. The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the "facade", but only looking behind it to discover the facts which the corporate structure is concealing. The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company's involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement. Many cases will fall into both categories, but in some circumstances the difference between them may be critical. This may be illustrated by reference to those cases in which the court has been thought, rightly or wrongly, to have pierced the corporate veil.”…</li>
<li> Jones v Lipman [1962] 1 WLR 832 was a case of very much the same kind. The facts were that Mr Lipman sold a property to the plaintiffs for £5,250 and then, thinking better of the deal, sold it to a company called Alamed Ltd for £3,000, in order to make it impossible for the plaintiffs to get specific performance. The judge, Russell J, found that company was wholly owned and controlled by Mr Lipman, who had bought it off the shelf and had procured the property to be conveyed to it "solely for the purpose of defeating the plaintiffs' rights to specific performance." About half of the purchase price payable by Alamed was funded by borrowing from a bank, and the rest was left outstanding. The judge decreed specific performance against both Mr Lipman and Alamed Ltd. As against Mr Lipman this was done on the concealment principle. Because Mr Lipman owned and controlled Alamed Ltd, he was in a position specifically to perform his obligation to the plaintiffs by exercising his powers over the company. This did not involve piercing the corporate veil, but only identifying Mr Lipman as the man in control of the company. The company, said Russell J portentously at p 836, was "a device and a sham, a mask which [Mr Lipman] holds before his face in an attempt to avoid recognition by the eye of equity." On the other hand, as against Alamed Ltd itself, the decision was justified on the evasion principle, by reference to the Court of Appeal's decision in Gilford Motor Co. The judge must have thought that in the circumstances the company should be treated as having the same obligation to convey the property to the plaintiff as Mr Lipman had, even though it was not party to the contract of sale. It should be noted that he decreed specific performance against the company notwithstanding that as a result of the transaction, the company's main creditor, namely the bank, was prejudiced by its loss of what appears from the report to have been its sole asset apart from a possible personal claim against Mr Lipman which he may or may not have been in a position to meet. This may be thought hard on the bank, but it is no harder than a finding that the company was not the beneficial owner at all. The bank could have protected itself by taking a charge or registering the contract of sale.” (Emphasis added.)</li>
</ol>
 

The next few cases should help you bring separate corporate personality into focus as applied to the rough and tumble of “modern” business dealings. 

 

 

Please read Einhorn v. Westmount Invesments Ltd. (1969), 6 D.L.R. (3d) 71 at pages 164-166 of the Casebook.

This was an application to strike out a Statement of Claim. Accordingly the facts alleged did not have to be proven in this limited context.

Jacob Einhorn was a licensed real estate agent who provided services to Westmount Investments Ltd. a company that three brothers, Hyman, William and Samuel Belzberg, were “at all material times in complete control” of. Westmount Investments Ltd. never paid Mr. Einhorn what he was owed. It was alleged that instead the Belzberg brothers “siphoned off the assets” of Westmount Investments Ltd. to another company they controlled Regina Midtown Centre Ltd. leaving Westmount an empty shell incapable of satisfying its contract with Mr. Einhorn.

Note that neither the Belzberg’s nor Regina Midtown Centre Ltd. induced a breach of contract (as was the case in Garbutt Business College Ltd. v. Henderson Secretarial School Ltd.), they just prevented Westmount Investments Ltd. from executing their contract with Mr. Einhorn.

The court considered whether the Belzberg brothers could be individually liable. The answer was yes, because they met the test for the tort of interference with contractual relations. This was because it appeared that the Belzberg brothers interfered with Westmount’s performance of the contract and each of the parties to a contract have a right to performance of it. There are three ingredients to the tort:
<ol>
<li>Interference in execution of contract: This interference is not confined to breach of contract; it extends to case where a third person prevents or hinders a party from performing the contract.</li>
<li>The interference must be deliberate.</li>
<li>The interference must be direct.</li>
</ol>
 

Please also read McFadden v. 481782 Ontario Ltd., (1984), 47 O.R. (2d) 134 (H.C.) at page 166 of the Casebook.

In this case two directors authorized payments to themselves as shareholders that put the corporation in a position where it could not fulfill its contractual obligations to an employee. The employee sued the directors on the basis that they induced the corporation to breach its contract with him.

It was held that the directors were liable. They acted with a view to their own interests not those of the company.

 

They are not protected, therefore, by the exception to the rule in Said v. Butt that they would be excused if they were acting "under the compulsion of a duty to the corporation." The court held that the directors could not fall within the exception Said v. Butt [1920] 3 K.B. 497 that: “…if a servant acting bona fide within the scope of his authority, procures or causes me to break a contract that I have made with you, you cannot sue the servant for interference with the contract; for he is my alter ego, and I cannot be sued for inducing myself to break a contract.” This exception effectively ensures officers and directors can terminate employment contracts without fearing personal liability and also that companies can terminate contracts that may no longer be in their best interests to fulfill.

However, in McFadden v. 481782 Ontario Ltd. the exception did not apply since the Directors were acting with a view to their own interests and not those of the corporation. Accordingly they could not be said to be acting under the compulsion of a duty to the corporation. That is to say that for an officer or director to be relieved from the consequences of his act of inducement, it is because he acts under the compulsion of a duty. Where she or he does not, for example because of a failure to act bona fide and hence outside the scope of their authority, liability to that Director will result. The corporation in question ought to be unaffected precisely because the Directors were acting outside the scope of their authority,

 

Please read the Questions at pages 169-170 of the Casebook and then ask yourself the following questions:
<ol>
<li> What was the conduct that induced the breach in McFadden v. 481782 Ontario Ltd.?</li>
<li> Is it a sound principle that a director who fails to act in the best interests of the corporation ceases to act on behalf of the corporation? Should the fact that the Director acts in breach of their obligation to the corporation have any relevance to the rights of an employee?</li>
</ol>
 

Please read 369413 Alberta Ltd v. Pocklington (2000) 194 D.L.R. (4th) 109 (Alta. C.A.) at pages 171-178 of the Casebook.

Gainers was one of Canada’s largest meat-packing companies. In acute financial distress, Gainers breached an agreement it had with the Province of Alberta. Peter Pocklington owned Pocklington Foods Inc. which held shares in Gainers. Alberta opted to sue Gainer’s sole director, Peter Pocklington alleging that Pocklington had “induced” the breach by signing a director’s resolution transferring certain shares in another company owned by Gainers (valued in the millions) to another of his own companies, Pocklington Holdings Ltd., for $100. Gainers had earlier agreed not to sell or dispose of its assets without the prior written consent of the Province of Alberta.

The Court awarded the Province $4.7 million in damages as against Pocklington.

Fruman J.A. set out various elements of the case as follows:

“ELEMENTS OF INDUCING BREACH OF CONTRACT

In order to find that a defendant intentionally induced a breach of contract, seven elements must be established:
<ol>
<li>i) the existence of a contract;</li>
<li>ii) knowledge or awareness by the defendant of the contract;</li>
</ol>
iii) a breach of the contract by a contracting party;
<ol>
<li>iv) the defendant induced the breach;</li>
<li>v) the defendant, by his conduct, intended to cause the breach; </li>
<li>vi) the defendant acted without justification; and</li>
</ol>
vii) the plaintiff suffered damages…

INTENT

The Law

…Therefore, if the breach was a reasonable or foreseeable consequence of that transfer, or alternatively, if Pocklington completed the transfer recklessly, was wilfully blind to its consequences, or was indifferent as to whether or not it caused a breach, the necessary intent element for the tort will be met.

The Evidence

…The clear implication of Ogilvie and Company’s carefully worded letter is that either the lawyers did not share their clients’ views, or they were invited to keep their legal advice to themselves. Pocklington nevertheless signed the documents to give effect to the share transfer, and retained the shares despite Alberta’s early protests and Ogilvie and Company’s apparent reservations. He had the means of knowledge, but chose to act without legal advice. Pocklington was wilfully blind to the consequences of his actions and showed clear indifference to the breach. The intent component of the tort is satisfied.

JUSTIFICATION

 

In some situations, a defendant’s plea of justification may avoid liability: South Wales Miners’ Federation, supra, and Quinn, supra. The defence of justification is available when the defendant caused the breach while acting under a duty imposed by law. The issue in each case is whether, upon consideration of the relative significance of all the factors, the defendant’s conduct should be tolerated despite its detrimental effect on the interests of others: Fleming, supra, at 657.

 

Directors of companies owe duties to the corporation; they are obliged both at common law and under Statute to act in the best interests of the company: Re Cawley & Co. (1889), 42 Ch. 209 at 233 (C.A.). For example, s. 117(1)(a) of the ABCA provides: “Every director and officer of a corporation in exercising his powers and discharging his duties shall act honestly and in good faith with a view to the best interests of the corporation [...] ”.

 

Therefore, when the interests of the company are best served by breaking its contractual commitments, the director’s act of inducement is justified because it is “taken as a duty”… 

But if the director is not complying with that duty, the rationale for relieving personal liability disappears…

 

In order to succeed under the Imperial Oil test, a plaintiff must prove that the director knew the legal rights of others would be jeopardized by the director’s actions, and intended to deprive the aggrieved party of contractual benefits… 

The concerns expressed in Imperial Oil are not misplaced. In order to protect the fine fabric of the corporate veil, courts should refrain from requiring directors to prove the legitimate corporate purpose motivating their actions. However, courts also should not condone inappropriate conduct by automatically placing a difficult onus on a plaintiff, by reason only that the defendant director owed legal duties to the company whose contract he had a hand in breaching. Some balance is required…

 

In this case Pocklington acquired a valuable asset for nominal consideration at the expense of Gainers’ creditors. Since Gainers was insolvent at that time, its creditors’ interests were the interests of the company. Promoting the interests of one shareholder at the expense of the creditors is not in the best interests of the company: Levy-Russell at 169. A director who pursues these objectives is not acting in furtherance of his corporate duty, and there is no justification for his deeds.

Pocklington has not demonstrated any legitimate business interest of Gainers that could have been served by the 350151 share transfer… 

By transferring the 350151 shares to his own company, Pocklington was not discharging his legal duty to act honestly and in good faith with a view to the best interests of Gainers; he was acting solely in his own interests. As no legitimate interest of Gainers could possibly be served by the transaction, the court need not go on to consider whether Pocklington’s act was aimed at depriving Alberta of the benefits of its contract. Pocklington’s position as director cannot provide justification for his actions.”

(Emphasis added.)

Blog Activity 4.5

In your view is the Pocklington decision consistent with, among others, the McFadden decision? Please blog your views on this question and your reasons in less than one page under the heading “Pocklington & McFadden”.

 

Please read Adga Systems International Inc. v. Valcom Ltd. (1999) 43 O.R. (3d) 101 (Ont. C.A.) at pages 178-183 of the Casebook.

Note that this case represents a significant shift in the spectrum of directors’ liability/personal liability imposed on officers and directors for actions taken in the course of their duties.

The plaintiff, Adga Systems sued their competitor Valcom Ltd., as well as Valcom’s sole director in his personal capacity and two senior employees of Valcom in their personal capacity. Adga alleged that Valcom had raided its employees and caused Adga economic damage. Adga sought damages for inducing breach of contract and inducing breach of fiduciary duty. The Ontario Divisional Court dismissed the claim against the three personal defendants holding that, since the employees of Valcom Ltd. were not furthering their own interests and were pursuing their duties of employment to further the interests of their employer, no cause of action was revealed which justified a trial. The plaintiff Adga appealed to the Ontario Court of Appeal.

 

Adga’s appeal was allowed and the three personal defendants, being the Director of Valcom and two employees of Valcom were reinstated as defendants. Carthy J.A. focussed on the issues as follows:

“The issue that I must deal with is whether, on the assumption that the defendant Valcom committed a tort against the appellant, the sole director and employees of Valcom can be accountable for the same tort as a consequence of their personal involvement directed to the perceived best interests of the corporation… 

However, where, as here, the plaintiff relies upon establishing an independent cause of action against the principals of the company, the corporate veil is not threatened and the Salomon principle remains intact…

It is my conclusion that there was no principled basis for protecting the director and employees of Valcom from liability for their alleged conduct on the basis that such conduct was in pursuance of the interests of the corporation. It may be that for policy reasons the law as to the allocation of responsibility for tortious conduct should be adjusted to provide some protection to employees, officers or directors in the limited circumstances where, for instance, they are acting in the best interests of the corporation with parties who have voluntarily chosen to accept the ambit of risk of a limited liability company. However, the creation of such a policy should not evolve from the facts of this case where the alleged conduct was intentional and the only relationship between the corporate parties was as competitors.” (Emphasis added.)

Please read Note 2 at page 183 of the Casebook: What is result if directors must choose between (1) inducing breach of contract because it is in the best interests of the company and (2) acting contrary to the company’s best interests so to avoid inducing breach?

In this regard please note the discussion on page 181 of the Casebook regarding the SCC decision in London Drugs v. Kuehne & Nagel: 

 

“ The Supreme Court of Canada again considered the issue of an employee's liability for acts done in the course of his duties on behalf of the employer in London Drugs Ltd. v. Kuehne & Nagel International Ltd., <a href="http://www.canlii.org/en/ca/scc/doc/1992/1992canlii41/1992canlii41.html">1992 CanLII 41 (SCC)</a>, [1992] 3 S.C.R. 299, 97 D.L.R. (4th) 261. The plaintiff delivered a transformer to a warehouse company for storage. An employee of the warehouse company negligently permitted the transformer to topple over, causing extensive damage. Even though there was a contractual relationship between the company and the customer, the majority held in favour of the claim against the employee.

Iacobucci J. stated at pp. 407-08:

There is no general rule in Canada to the effect that an employee acting in the course of his or her employment and performing the "very essence" of his or her employer's contractual obligations with a customer does not owe a duty of care, whether one labels it "independent" or otherwise, to the employer's customer. . . .

…The mere fact that the employee is performing the "very essence" of a contract between the plaintiff and his or her employer does not, in itself, necessarily preclude a conclusion that a duty of care was present.”

 

Please read Note 6 at page 184 of the Casebook: Is there a different standard of liability of employees and directors where each acts within scope of duties?

 
<ol>
<li> Knowing Assistance in a Breach of Trust </li>
</ol>
Please read Air Canada v. M & L Travel Ltd. [1993] 3 S.C.R. 787 at pages 184-191 of the Casebook.

M&L Travel Ltd., the directors of which were Mssrs. Martin and Valliant, was a travel agency. It had an agreement with Air Canada under which M&L Travel Ltd. was to hold proceeds of ticket sales in trust for Air Canada. M&L Travel Ltd. in fact did not hold the proceeds in trust as agreed but rather used them for general operating expenses as M&L found itself in financial difficulties.

Air Canada sued (1) the travel agency, and (2) both directors personally for the money owed to it for ticket sales.

Air Canada’s action succeeded against M&L Travel Ltd. but failed against the Directors Mssrs. Martin and Valliant. Accordingly Air Canada successfully appealed the decision holding the Directors not to be personally liable and judgment was entered against them as well.

The matter came before the Supreme Court of Canada. At issue was: (1) whether the relationship between M&L Travel Ltd. and Air Canada was one of trust, or one of debtor and creditor? and (2) if of trust, under what circumstances could the directors of a corporation be held personally liable for breach of trust by the corporation - and were those circumstances present here.

Although involving a corporation, the case fell to be resolved on trust principles, and does not raise general questions of the personal liability of directors for the acts of the corporation.

(1) The Supreme Court of Canada held that there was a trust relationship between M&L Travel Ltd. and Air Canada.

(2) With respect to the personal liability of directors the Supreme Court of Canada was of the view that the imposition of personal liability on a stranger to a trust depends on whether the stranger's conscience is sufficiently affected to justify the imposition of personal liability. A stranger to the trust can be held liable as a constructive trustee for breach of trust (trustee de son tort). The stranger, although not appointed a trustee, takes on him or herself to act as trustee and to possess and administer trust property and becomes liable if he or she commits a breach of trust while acting as a trustee. This type of liability was found to be inapplicable in the case of M&L Travel Ltd. v. Air Canada because the directors did not personally take possession of trust property or assume the office or function of trustees.

 

The court pointed out that strangers to a trust could also be personally liable for breach of trust if they knowingly participate in a breach of trust. They either were acting as a trustee in receipt and chargeable with trust property (a constructive trusteeship termed "knowing receipt") or they knowingly assisted in a dishonest and fraudulent design on the part of the trustees (termed "knowing assistance"). Since the "knowing receipt" category did not apply here, the only basis upon which the directors could be held personally liable were as constructive trustees under the "knowing assistance" head of liability. This basis of liability raises two main issues: the nature of the breach of trust and the degree of knowledge required of the stranger.

 

The knowledge requirement for this "knowing assistance" type of liability is actual knowledge; recklessness or wilful blindness will suffice. A person will be deemed to have known of the trust if it was imposed by statute. If the trust was contractually created, then whether the stranger knew of the trust will depend on his or her familiarity or involvement with the contract.

The stranger will be liable if he or she knowingly assisted the trustee in a fraudulent and dishonest breach of trust. Therefore, it is the corporation's actions that must be examined. Where the trustee is a corporation, rather than an individual, the inquiry as to whether the breach of trust was dishonest and fraudulent may be more difficult to conceptualize, because the corporation can only act through human agents who are often the strangers to the trust whose liability is in issue. The actions of the directors were relevant to the examination, given the extent to which the defendant directors controlled the travel agency.

 

The breach of trust by the travel agency was dishonest and fraudulent from an equitable standpoint. The taking of a knowingly wrongful risk resulting in prejudice to the beneficiary is sufficient to ground personal liability. As a party to the contract between itself and Mr. Martin, M&L Travel Ltd. knew that the Air Canada monies were held in trust, and were not for the general use of the travel agency. It set up trust accounts, but never used them. It also knew that any positive balance in its general account was subject to the Bank's demand. By placing the trust monies in the general account that was then subject to seizure by the Bank, the travel agency took a risk to the prejudice of the rights of the beneficiary, Air Canada. It had no right to take this risk.

 

It was found clearly that the appellant directors participated or assisted in the breach of trust. There were dealing with the funds in question ‑‑ stopping payment on all cheques, opening a trust account, and attempting to withdraw the stop payment orders and to transfer the funds into a new trust account. The breach of trust was directly caused by the conduct of the defendant directors. Their actions in stopping payment on the cheques to protect their own interests not only prevented payment on cheques issued to Air Canada but also precipitated the seizure by the Bank of the only funds available in the unprotected general account.

Accordingly the court found that directors personally liable for breach of trust as constructive trustees.

 

Please read Transamerica Life Insurance Co. v. Canada Life Assurance Co. (1996), 28 O.R. (3d) 423 (Ontario Gen. Div.) at pages 192-198 of the Casebook. 

The defendant Canada Life Mortgage Services Ltd. (“CLMS”) was a wholly owned subsidiary of the defendant Canada Life Assurance Company. CLMS was incorporated by Canada Life Assurance Company to carry on the business of mortgage correspondent and general financial agent to deal with both Canada Life Assurance Company as well as other institutional investors. CLMS had its own head office and branch offices distinct from those of the Canada Life Assurance Company. Those offices were managed and operated independently of the Canada Life Assurance Company. The management of CLMS exercised independent discretion in conducting its business.

A number of the mortgage loans made by the plaintiff Transamerica Life Insurance Company of Canada that had been arranged by CLMS fell into default. The plaintiff Transamerica Life Insurance Company of Canada claimed that CLMS owed it a duty to do the underwriting for these loans, that it failed in that regard, and that Transamerica Life had suffered loss as a consequence. The terms of the Master Agreement that governed the relationship of the plaintiff Transamerica Life and CLMS did not specifically provide that CLMS was to perform any underwriting function on Transamerica Life’s behalf, and CLMS took the position that the agreement excluded this duty.

Transamerica Life sued CLMS for damages for breach of contract, breach of fiduciary duty, fraud, misrepresentation and negligence. Transamerica Life also sued Canada Life Assurance Company, asserting that it was liable for the wrongs of CLMS.

Canada Life Assurance Company moved for summary judgment dismissing the action against it.

It was held that the motion should be granted and the action against Canada Life Assurance Company be dismissed.

Transamerica Life relied on Kosmopoulos in arguing that the court should lift the corporate veil whenever it was "just and equitable" to do so. Sharpe J. rejected this approach finding that lifting the corporate veil whenever it was "just and equitable" to do so would represent a significant departure from the following principle established in Salomon:

“The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.” (at page 195 of the Casebook).

Sharpe J. then quotes Gower, Modern Company Law 5th ed. (1992):

“There seem to be three circumstances only in which the courts can [pierce the veil]. These are: 
<ol>
<li> When the court is construing a statute, contract or other document; </li>
<li> When the court is satisfied that a company is a "mere facade" concealing the true facts; and </li>
<li> When it can be established that the company is an authorized agent of its controllers or its members, corporate or human.” (At page 196 of the Casebook)</li>
</ol>
Then Sharpe J. concludes:

“... the courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct. The first element, "complete control", requires more than ownership. It must be shown that there is complete domination and that the subsidiary company does not, in fact, function independently.... The second element relates to the nature of the conduct: is there "conduct akin to fraud that would otherwise unjustly deprive claimants of their rights?” (At page197 of the Casebook)

Accordingly, Transamerica's claim against Canada Life was dismissed

 

TOPIC 6: THE PARTICULAR PROBLEM OF THIN CAPITALIZATION 

Please read pages 198-199 of the Casebook.

Companies have no minimum capitalization requirement in Canada. Often new corporations are created with one share valued at only $1. Thin capitalization refers to the situation where a corporation is established with high debt to equity ratio. Assuming that debt is normally secured, if something goes wrong there is no one protected except the secured creditors. In other words, in thinly capitalized companies trade creditors are very much at risk.

The question to be considered is whether thin capitalization, per se, should be a ground for lifting the corporate veil? Is it legitimate evidence where owners seek the benefit of limited liability without paying for it with adequate capital investment?

To understand what thin capitalization can look like in practical terms begin by reading the U.S. case of Walkovszky v. Carlton 18 N.Y. 2d 414 (Ct. App. 1966) at pages 199-204 of the Casebook. 

The facts are that the plaintiff Walkovszky was hit by a taxicab owned by the Seon Cab Corporation and sued. Carlton was a stockholder of ten corporations, including Seon, each of which had two cabs registered to its name and only minimal insurance. This was a rather common practice at the time in the taxicab industry.

Walkovszky claimed that although seemingly independent, the companies in fact operated as a single entity with regard to financing, supplies, repairs, employees and garaging and all of the companies are named as defendants. Walkovszky further argued that he was entitled to hold the stockholders personally liable for the damages sought because the multiple corporate structures constituted an unlawful attempt to defraud members of the general public who might be injured by the cabs.

Carlton’s motion to dismiss Walkovszky’s case was granted.

The issue in the case was whether Carlton could be held personally liable in this case and the majority of the court held that Carlton could not be held personally liable.

Fuld J. observed that incorporation of a business is permitted for the purpose of enabling its proprietors to escape personal liability. However, one can “pierce the corporate veil” when anyone uses control of the corporation to further his own rather than the corporation’s business.

That is to say that the courts will pierce the corporate veil whenever necessary in order to prevent fraud or inequity. In determining whether to lift the veil the court is to be guided by “general rules of agency.” Whenever a person uses the corporation to further his own interests as opposed to those of the corporation, he will be liable for the corporation’s acts. This liability is not just for the corporation’s dealings, but also as regards its negligence.

Here, while the complaint alleges that the separate corporations were undercapitalized and that their assets have been intermingled, it failed to mention that the defendant Carlton and his associates were actually doing business in their individual capacities, shuttling their personal funds in and out of the corporations without regard to formality.

The majority felt that if the insurance coverage required by statute was inadequate for the protection of the public, the remedy was not with the courts but with the Legislature.

In a similar case (Mangan) it was proved that operating companies existed only for the purpose of allowing the defendant to avoid the weight of the financial responsibilities and other liabilities. “However, it is one thing to assert that a corporation is a fragment of a larger corporate combine which actually conducts the business…It is quite another to claim that the corporation is a “dummy” for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends. Either circumstance would justify treating the corporation as agent and piercing the corporate veil to reach the principal but a different result would follow in each case. In the first, only a larger corporate entity would be held financially responsible...while, in the other, the stockholder would be personally responsible…” 

The majority further found that the separate corporations in this case (being Mangan) were undercapitalized and the assets intermingled, with personal funds being shuttled in and out of the corporations without formality and to suit the immediate convenience of the stockholders, then such perversions of the corporate form would justify personal liability on the stockholders.

Accordingly, a corporation is not illicit or fraudulent because it consists of other corporations.

The dissenting opinion of Keating J. went in rather a different direction:

“…From their inception these corporations were intentionally undercapitalized for the purpose of avoiding responsibility for acts which were bound to arise as a result of the operation of a large taxi fleet...”

Keating J. found that not only were the corporations intentionally undercapitalized for the purpose of avoiding liability, income was also drained from the corporations continuously for that same purpose. Keating J. did not believe that the privilege of limited liability through the use of the corporate device should be abused no matter what the cost to the public. In his view if a corporation exists without sufficient capital to pay its debts, it is inequitable that the shareholders should sustain such an organization only to escape personal liability. From this perspective attempting to do business without financial coverage is an abuse of the existence of a separate entity and should not exempt the shareholders from personal liability. Keating J. believed the policy of the law ought to be that shareholders should, in good faith, have enough capital in the business to secure the corporation. Otherwise grounds exist for denying the privilege associated with being a separate entity.

Keating J. also pointed out cases standing for other related propositions:
<ol>
<li>The equitable owners of a corporation are personally liable when they treat the company’s assets as their own and add or withdraw capital at will, or when they provide inadequate capital and actively participate in the corporation’s affairs.</li>
</ol>
 
<ol start="2">
<li>The sacrifice of limited liability happens when public policy must be defended or upheld. Fraud is part of this exception. Obvious inadequacy of capital is also considered to be a reason to deny the defense of limited liability.</li>
</ol>
 
<ol start="3">
<li>When corporate income is not sufficient to cover unexpected liabilities or extraordinary bad times, obviously the shareholders will not be held liable. However they will be when the corporation was designed solely to abuse the corporate privilege at the expense of public interest.</li>
</ol>
 

Please read the Notes and Questions 2 & 4 at page 204 of the Casebook.

 

Blog Activity 4.6

 

In your view: what ought to be the measure of adequate capitalization? 

 

And..

 
<ol>
<li>At which of the following points ought adequacy to be determined?</li>
</ol>
 
<ol>
<li> As of the time of trial?</li>
</ol>
 

It has been widely held that “some ‘wrong’ beyond a creditor’s inability to collect” must be shown before the veil will be pierced. Absent this, time of trial would be tantamount to a rule of unlimited liability. Creditor typically will pursue a veil piercing theory only where corporate assets are inadequate to meet its claim.
<h2>1. At the time of incorporation?</h2>
<h2>2. At an intermediate time?</h2>
<h2>That is to say what if the company had been adequately capitalized at formation, but subsequent developments have left it too thinly capitalized?</h2>
<h1>B. Now suppose that although initial funds at the time of incorporation and for sometime thereafter were adequate to satisfy existing contractual and likely tort obligations: (a) all profits were drained out of the firm in the form of dividends or salaries paid to the controlling shareholders, leaving it with insufficient reserves to meet its likely obligations; or, (b) the nature of the firm has changed, such that the initially adequate capital is no longer adequate.</h1>
Please blog your views on these question and your reasons in less than two pages under the heading “Adequate Capitalization”.

 

 

Now please read Henry Browne & Sons Ltd. v. Smith [1964] 2 Lloyd’s Rep. 476 (Eng. Q.B.) at pages 204-206.

In this case the plaintiffs Henry Browne & Sons Ltd. manufacture, supply and install a navigational device for boats. They installed such a device on an ocean cruiser and were not paid. As a result they sued Mr. Smith.

Mr. Smith’s defence was that the order was placed on behalf of Ocean Charters Ltd., a private limited company with an authorized capital of 3,000 one pound shares, of which two were issued – one held by Mr. Smith and the other held by his wife. Mr. Smith was the sole director of Ocean Charters Ltd.

The plaintiff Henry Browne & Sons Ltd. argued that the company Ocean Charters Ltd. was merely a sham or a name under which Mr. smith traded, or, alternatively, that the order was placed by Ocean Charters Ltd. as agent for Mr. Smith. It was held that the principals to the contract were Henry Browne & Sons Ltd. and Ocean Charters Ltd. only and that there was no liability on the part of Mr. Smith.

Please ask yourself what has this case got to do with “thin capitalization”? Was there any evidence that “thin capitalization” was actually the issue?

 

TOPIC 7: CORPORATE PURPOSE & FIDUCIARY DUTIES 

Please read pages 206-226 of the Casebook.

As a first exercise please:
<ol>
<li> Read the last sentence of first paragraph on page 207 of the Casebook; and</li>
<li> The excerpt from “Rotman, Fiduciary Law” at pages 207 and 208 of the Casebook. </li>
</ol>
Attempt to state for your own benefit the essence of to whom fiduciary duties ought to be owed in a corporate context

Please read the seminal case of Dodge v. Ford Motor Co. 204 Mich. 459 (1919) at pages 208-212 of the Casebook. The facts of this case memorably put into sharp relief the tensions between profit and purpose an a corporate context.

 

Ford was the dominant manufacturer of cars. At one point, the cars were sold for $900, but the price was slowly lowered to $440 – and finally, to $360. Henry Ford admitted that the price negatively impacted short-term profits, but argued that his ambition was to spread the benefits of the industrialized society among as many people as possible. The Dodges, who had recently founded their own firm to compete with Ford, objected to a decision by the Ford board of directors to withhold special dividends and to spend millions of dollars to build the world’s largest auto manufacturing facility instead. Their claim was that the decision was based on Henry Ford’s idiosyncratic preferences about doing social good for workers and customers as opposed to making the greatest amount of money for shareholders.

Ford was emphatic in both his pre-trial comments and in his testimony that the decision to build the factory was about doing “as much good as we can, everywhere, for everybody concerned . . . [a]nd incidentally to make money.” (See Allen Nevins & Frank E. Hill, Ford: Expansion and Challenge, 1915-33, at 99-100 (1957) (quoting interview).

Further, Ford essentially contended that he has paid out substantial dividends to the shareholders ensuring that they have made a considerable profit, and should be happy with whatever return they get from that point forward. Instead of using the money to pay dividends, Ford decided to put the money into expanding the corporation.

The issue was whether the Plaintiff shareholders could force Ford to increase the cost of the product and limit the money invested into expansion in order to pay out a larger dividend.

It was held that the Plaintiffs were entitled to a more equitable-sized dividend, but the court did not interfere with Ford’s business judgments regarding the price set on the manufactured products or the decision to expand the business.

In essence the court determined that the purpose of corporations is to make money for their shareholders, and that Ford was arbitrarily withholding money that could have gone to the shareholders. Notably, Henry Ford did not deny himself a large salary for his position with the company in order to achieve his ambitions. However, the court was not willing to questions whether the company would be better off with a higher price per vehicle, or if the expansion was wise, because those decisions are covered under the business judgment rule.

Let us further analyze the actual decision. Read through the following for a second time and then answer the questions following the quote for yourself:

 

“There should be no confusion (of which there is evidence) of the duties which Mr. Ford conceives that he and the stockholders owe to the general public and the duties which in law he and his codirectors owe to protesting, minority stockholders. A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.

 

There is committed to the discretion of directors, a discretion to be exercised in good faith, the infinite details of business, including the wages which shall be paid to employees, the number of hours they shall work, the conditions under which labor shall be carried on, and the price for which products shall be offered to the public. It is said by appellants that the motives of the board members are not material and will not be inquired into by the court so long as their acts are within their lawful powers. As we have pointed out, […] it is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others, and no one will contend that, if the avowed purpose of the defendant directors was to sacrifice the interests of share-holders, it would not be the duty of the courts to interfere.” (Emphasis added)
<ol>
<li> Were these words necessary to the decision or were they merely dictum?</li>
<li> Does the BCBCA section 227 preclude the result in Dodge v. Ford Motor Co.? Does it authorize it?</li>
</ol>
 

“Restricted businesses and powers
<ol start="33">
<li> (1) A company must not</li>
</ol>
(a) carry on any business or exercise any power that it is restricted by its memorandum or articles from carrying on or exercising, or

(b) exercise any of its powers in a manner inconsistent with those restrictions in its memorandum or articles.

(2) No act of a company, including a transfer of property, rights or interests to or by the company, is invalid merely because the act contravenes subsection (1).

 

 

Powers and functions of directors
<ol start="136">
<li> (1) The directors of a company must, subject to this Act, the regulations and the memorandum and articles of the company, manage or supervise the management of the business and affairs of the company.</li>
</ol>
 

 Duties of directors and officers

142 (1) A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case may be, must
<ul>
<li>act honestly and in good faith with a view to the best interests of the company,</li>
</ul>
 
<ul>
<li>exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances,</li>
</ul>
 
<ul>
<li>act in accordance with this Act and the regulations, and</li>
</ul>
 

(d) subject to paragraphs (a) to (c), act in accordance with the memorandum and articles of the company.

(2) This section is in addition to, and not in derogation of, any enactment or rule of law or equity relating to the duties or liabilities of directors and officers of a company.

(3) No provision in a contract, the memorandum or the articles relieves a director or officer from

(a) the duty to act in accordance with this Act and the regulations, or

(b) liability that by virtue of any enactment or rule of law or equity would otherwise attach to that director or officer in respect of any negligence, default, breach of duty or breach of trust of which the director or officer may be guilty in relation to the company.

 

Complaints by shareholder
<ol start="227">
<li> (1) For the purposes of this section, "shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) A shareholder may apply to the court for an order under this section on the ground

(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or

 

(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.

(3) On an application under this section, the court may, with a view to remedying or bringing to an end the matters complained of and subject to subsection (4) of this section, make any interim or final order it considers appropriate, including an order

(a) directing or prohibiting any act,

(b) regulating the conduct of the company's affairs,

(c) appointing a receiver or receiver manager,

(d) directing an issue or conversion or exchange of shares,

(e) appointing directors in place of or in addition to all or any of the directors then in office,

(f) removing any director,

(g) directing the company, subject to subsections (5) and (6), to purchase some or all of the shares of a shareholder and, if required, to reduce its capital in the manner specified by the court,

(h) directing a shareholder to purchase some or all of the shares of any other shareholder,

(i) directing the company, subject to subsections (5) and (6), or any other person, to pay to a shareholder all or any part of the money paid by that shareholder for shares of the company,

(j) varying or setting aside a transaction to which the company is a party and directing any party to the transaction to compensate any other party to the transaction,

(k) varying or setting aside a resolution,

(l) requiring the company, within a time specified by the court, to produce to the court or to an interested person financial statements or an accounting in any form the court may determine,

(m) directing the company, subject to subsections (5) and (6), to compensate an aggrieved person,

(n) directing correction of the registers or other records of the company,

(o) directing that the company be liquidated and dissolved, and appointing one or more liquidators, with or without security,

(p) directing that an investigation be made under Division 3 of this Part,

(q) requiring the trial of any issue, or

(r) authorizing or directing that legal proceedings be commenced in the name of the company against any person on the terms the court directs.

(4) The court may make an order under subsection (3) if it is satisfied that the application was brought by the shareholder in a timely manner.

(5) If an order is made under subsection (3) (g), (i) or (m), the company must pay to a person the full amount payable under that order unless there are reasonable grounds for believing that

(a) the company is insolvent, or

(b) the payment would render the company insolvent.

(6) If reasonable grounds exist for believing that subsection (5) (a) or (b) applies,

(a) the company is prohibited from paying the person the full amount of money to which the person is entitled,

(b) the company must pay to the person as much of the amount as is possible without causing a circumstance set out in subsection (5) to occur, and

(c) the company must pay the balance of the amount as soon as the company is able to do so without causing a circumstance set out in subsection (5) to occur.

(7) If an order is made under subsection (3) (o), Part 10 applies.

 
<ol start="3">
<li> How do you identify what is to the “benefit of shareholders” in the case of a corporation with more than one shareholder? </li>
</ol>
Different shareholders have different investment time frames, different tax concerns, different attitudes toward firm-level risk due to different levels of diversification, different interests in other investments that might be affected by corporate activities, and different views about the extent to which they are willing to sacrifice corporate profits to promote broader social interests, such as a clean environment or good wages for workers.

Could there be any single, uniform measure of shareholder “wealth” to be “maximized”?

Please now read the excerpt from “Rotman, Fiduciary Law” on pages 212-214 of the Casebook. 

For an interesting article on the background to the case, see M. Todd Henderson, “Everything Old Is New Again: Lessons from Dodge v. Ford Motor Company” (2007) U of Chicago Law & Economics, Olin Working Paper No. 373: <a href="http://www.law.uchicago.edu/files/files/373.pdf">http://www.law.uchicago.edu/files/files/373.pdf</a>

 

Following up on Dodge v. Ford Motor Co. is the equally memorable case (at least if you are a baseball fan) of Shlensky v. Wrigley 237 N.E.2d 776 (Ill. App.1968) at pages 214-218 of the Casebook. 

Mr. Phillip K. Wrigley was a director of the Chicago National League Ball Club (Inc.), which was the company that owned the Chicago Cubs. The Board tended to follow Mr. Wrigley’s lead for a variety of reasons not relevant to the outcome of this case. Although every other major league team had installed lights to allow for night games, Defendant did not install them for the Cubs because he was concerned that night baseball would be detrimental to the surrounding neighborhood.

Mr. Shlensky, a minority shareholder of the Chicago National League Ball Club (Inc.), brought a derivative action against the decision not to install lights. A derivative action is where an action is brought against the corporation in essence in the name of the corporation. Hence the word “derivative” as the right to bring action is derived from the corporation itself, and what is in the best interests of the corporation. Much more on this concept later in this course, but Wrigley v. Shlensky is a useful introduction to the concept. 

In his argument, ostensibly on behalf of the Chicago National League Ball Club (Inc.), Mr. Shlensky pointed out that the team was losing money, and that the other Chicago team, the White Sox, had higher attendance during the weekdays because they played at night. Therefore in his view the Cubs would draw more people with weekday night games. Shlensky argued that Wrigley’s first concern ought to be with the shareholders rather than the neighborhood.

The issue in the case was whether decisions made by Wrigley should be overruled absent a showing of fraud, illegality or a conflict of interest?

The decision was not to overrule Wrigley’s determination on the issue of lights. The court cited some reasons why the light installation could be detrimental, such as lowering the property value of the park itself, a lack of proof that financing would be available for lights and some uncertainty whether the costs would in fact be offset by increasing revenues. In essence the court set out that business decisions should not be disturbed just because a reasonable case can be made that the policy chosen by the company might not be the wisest possible. This was all the more true where there was no evidence of illegality, fraud or a conflict of interest

The court upheld the directors’ decision. Moreover the court reasoned (as the directors themselves had not) that a decline in the quality of life in the local neighbourhoods might in the long run hurt property values around Wrigley Field, harming shareholders’ economic interests.

In many ways this decision on those like it can be seen as a form of abstention by judiciary; an unwillingness to supplant the business judgment of a properly constituted and motivated Board of Directors. This so-called “BUSINESS JUDGMENT RULE” establishes a presumption against judicial review of duty of care claims. 

There are several interesting questions and observations that flow from this case:
<ol>
<li>For one was Wrigley an innovator making a venturesome business decision or an eccentric who was just behind the times? How can we know when the “business judgment rule” precluded Mr. Shlensky from even getting up to bat? </li>
</ol>
 
<ol>
<li>Encouraging risk-taking is part of the story, and the business judgment rule allows for that, but it is only a part of the story. Something else is going on as well. This is because if the business judgment rule is framed as an abstention doctrine, judicial review is more likely to be the exception rather than the rule. That is because the court begins with a presumption against review. It then reviews the facts to determine not the quality of the decision, but rather whether the decision making process was tainted by self-dealing and the like. The requisite questions to be asked are more objective and straightforward: Did the board commit fraud? Did the board commit an illegal act? Did the board self-deal? Whether or not the board exercised reasonable care is irrelevant, as well it should be. The business judgment rule thus builds a prophylactic barrier by which courts pre-commit to resisting the temptation to review the merits of the board’s decision.</li>
</ol>
 
<ol>
<li>A deeper look at Shlensky v. Wrigley also illustrates the malleability of the concept of “the best interests of the company”. It can be all to easy, as Mr. Shlensky’s argument illustrated to define those interests too narrowly, or to directly or indirectly align them with “personal best interests.”</li>
</ol>
 

A classic example of judicial eagerness to protect directors from claims that they failed to maximize shareholder wealth follows. Please read Peoples Department Stores Inc. (Trustee of) v. Wise [2004] 3 S.C.R. 461 (SCC) at pages 219-221 of the Casebook.

The directors of Peoples Department Stores, a federal business corporation wholly owned by Wise Stores Inc. ("WSI"), were the three Wise brothers (editors note: there really were three Wise brothers - no joke), who were also the directors and majority shareholders of WSI.

To rationalize the operations of their two overlapping companies, the Wise brothers adopted a joint inventory procurement policy: Peoples Department Stores bought all its merchandise from North American suppliers (i.e., 86% of the total), and WSI bought its merchandise from overseas suppliers (the other 14%). The merchandise purchased by Peoples Department Stores for WSI was transferred to WSI, but Peoples Department Stores did not seek immediate payment. This resulted in an inter-company loan of $18 million, which WSI were unable to repay. WSI went bankrupt owing $4.44 million. Peoples Department Stores also had to close.

The trustee in bankruptcy of Peoples Department Stores sued the three Wise brothers for that amount of $4.44 million, specifically alleging that the brothers had breached their fiduciary duty and their duty of care under section 122 (1) of the Canada Business Corporations Act ("CBCA") by favouring the interests of WSI over those of Peoples Department Stores while they were corporate directors of Peoples Department Stores.

The relevant statutory provisions provided:

“102. (1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.
<ol start="122">
<li> (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall</li>
</ol>
 (a) act honestly and in good faith with a view to the best interests of the corporation; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.” 

 

The Supreme Court of Canada found the three Wise brothers not to be liable. Following are a number of the court’s observations about the case:
<ol>
<li>The court held that this appeal did not relate to the non-statutory duty directors owe to shareholders. It was concerned only with the statutory duties owed under the <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html">CBCA</a>. Insofar as the statutory fiduciary duty is concerned, it is clear that the phrase the “best interests of the corporation” should not be read simply as the “best interests of the shareholders”. From an economic perspective, the “best interests of the corporation” means the maximizing of the value of the corporation.</li>
<li> The court accepted as an accurate statement of law that in determining whether directors are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment. </li>
<li>The court made the following practical and important observations:</li>
</ol>
“The interests of shareholders, those of the creditors and those of the corporation may and will be seen as consistent with each other if the corporation is profitable and well capitalized and has strong prospects. However, this can change if the corporation starts to struggle financially. The residual rights of the shareholders will generally become worthless if a corporation is declared bankrupt. Upon bankruptcy, the directors of the corporation transfer control to a trustee, who administers the corporation’s assets for the benefit of creditors. 

Short of bankruptcy, as the corporation approaches what has been described as the “vicinity of insolvency”, the residual claims of shareholders will be nearly exhausted. While shareholders might well prefer that the directors pursue high-risk alternatives with a high potential payoff to maximize the shareholders’ expected residual claim, creditors in the same circumstances might prefer that the directors steer a safer course so as to maximize the value of their claims against the assets of the corporation.

The directors’ fiduciary duty does not change when a corporation is in the nebulous “vicinity of insolvency”. That phrase has not been defined; moreover, it is incapable of definition and has no legal meaning. What it is obviously intended to convey is deterioration in the corporation’s financial stability. In assessing the actions of directors it is evident that any honest and good faith attempt to redress the corporation’s financial problems will, if successful, both retain value for shareholders and improve the position of creditors. If unsuccessful, it will not qualify as a breach of the statutory fiduciary duty…

In resolving these competing interests, it is incumbent upon the directors to act honestly and in good faith with a view to the best interests of the corporation. In using their skills for the benefit of the corporation when it is in troubled waters financially, the directors must be careful to attempt to act in its best interests by creating a “better” corporation, and not to favour the interests of any one group of stakeholders. If the stakeholders cannot avail themselves of the statutory fiduciary duty (the duty of loyalty, supra) to sue the directors for failing to take care of their interests, they have other means at their disposal.” (Emphasis added)

 

Next please read an important case you will see referred to on several occasions throughout the course:

BCE Inc. v. 1976 Debentureholders [2008] 2 S.C.R. 560 (SCC) at pages 222 – 225 of the Casebook.

This case arose from challenge by a group of Bell Canada debentureholders to the proposed acquisition of BCE by a consortium headed by the Ontario Teachers’ Pension Plan Board through a $52 billion arrangement under section 192 of the CBCA. For contextual purposes section 192 provides in part:

“192. (1) In this section, “arrangement” includes

(a) an amendment to the articles of a corporation;

(b) an amalgamation of two or more corporations;

(c) an amalgamation of a body corporate with a corporation that results in an amalgamated corporation subject to this Act;

(d) a division of the business carried on by a corporation;

(e) a transfer of all or substantially all the property of a corporation to another body corporate in exchange for property, money or securities of the body corporate;

(f) an exchange of securities of a corporation for property, money or other securities of the corporation or property, money or securities of another body corporate;

(f.1) a going-private transaction or a squeeze-out transaction in relation to a corporation;

(g) a liquidation and dissolution of a corporation; and

(h) any combination of the foregoing…

 

…(3) Where it is not practicable for a corporation that is not insolvent to effect a fundamental change in the nature of an arrangement under any other provision of this Act, the corporation may apply to a court for an order approving an arrangement proposed by the corporation.

 (4) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,

(a) an order determining the notice to be given to any interested person or dispensing with notice to any person other than the Director;

(b) an order appointing counsel, at the expense of the corporation, to represent the interests of the shareholders;

(c) an order requiring a corporation to call, hold and conduct a meeting of holders of securities or options or rights to acquire securities in such manner as the court directs;

(d) an order permitting a shareholder to dissent under section 190; and

(e) an order approving an arrangement as proposed by the corporation or as amended in any manner the court may direct.”

 

The arrangement in question was to have been financed in part through BCE’s assumption of an additional $38.5 billion in debt, of which $30 billion was to have been guaranteed by Bell Canada, a wholly owned subsidiary of BCE. BCE’s common shareholders in fact overwhelmingly approved the transaction. However the debentureholders objected to the arrangement on the grounds that it would diminish the trading value of their debentures by an average of 20 percent, while conferring a premium of approximately 40 percent of the market price to holders of BCE common shares.

The Supreme Court of Canada made the following observations (excerpted not from the Casebook, but rather from the full decision which can be found here: <a href="http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/6238/index.do">http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/6238/index.do</a>):

“ The directors are responsible for the governance of the corporation. In the performance of this role, the directors are subject to two duties: a fiduciary duty to the corporation under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec122subsec1_smooth">s. 122(1)</a>(a) (the fiduciary duty); and a duty to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec122subsec1_smooth">s. 122(1)</a>(b) (the duty of care). The second duty is not at issue in these proceedings as this is not a claim against the directors of the corporation for failing to meet their duty of care… 

The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation. The content of this duty varies with the situation at hand. At a minimum, it requires the directors to ensure that the corporation meets its statutory obligations. But, depending on the context, there may also be other requirements. In any event, the fiduciary duty owed by directors is mandatory; directors must look to what is in the best interests of the corporation… 

In considering what is in the best interests of the corporation, directors may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions. Courts should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule. The “business judgment rule” accords deference to a business decision, so long as it lies within a range of reasonable alternatives: see Maple Leaf Foods Inc. v. Schneider Corp. 1998 CanLII 5121 (ON CA), (1998), 42 O.R. (3d) 177 (C.A.); Kerr v. Danier Leather Inc., 2007 SCC 44 (CanLII), [2007] 3 S.C.R. 331, 2007 SCC 44. It reflects the reality that directors, who are mandated under s. 102(1) of the CBCA to manage the corporation’s business and affairs, are often better suited to determine what is in the best interests of the corporation. This applies to decisions on stakeholders’ interests, as much as other directorial decisions. 

Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debentureholders in these appeals. This is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen. However, the directors owe a fiduciary duty to the corporation, and only to the corporation. People sometimes speak in terms of directors owing a duty to both the corporation and to stakeholders. Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases (such as these appeals) may arise where these interests do not coincide. In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation.”

Accordingly the claim of the debenture-holders failed.

 

Blog Activity 4.7

Please consider questions 2 & 3 of the notes on page 225 of the Casebook. As well please read the excerpt from “Rotman, Fiduciary Law” at pages 225-6 of the Casebook, especially the last paragraph on page 226 of the Casebook.

 

In your view what general conclusions do you draw concerning the law on corporate purpose? Please blog your views on these question and your reasons in less than two pages under the heading “Corporate Purpose”.

 

UNIT WRAP UP: 

By now the contradictions inherent to and consequent upon corporate personhood have been explored (even if not quite capable of ever being fully understood). Moving forward we have no pedagogic alternative to accepting that this “thing” we call a corporation is believed to exist. So what can it do and what can’t it do? How does it commit a crime? How can it commit a crime? And so much more…the following Unit is meant to explore such questions.

Course:Business Organizations - LAW 459/Unit 4

2016-08-16T09:13:31Z

DavidHeinrich: Created page with "UNIT 4 (WEEKS 4 & 5): CORPORATE PERSONHOOD – SOME SPECIFIC ISSUES AND PROBLEMS <img class="alignnone size-medium wp-image..."

UNIT 4 (WEEKS 4 & 5): CORPORATE PERSONHOOD – SOME SPECIFIC ISSUES AND PROBLEMS
<img class="alignnone size-medium wp-image-198" src="http://bizorglaw.sites.olt.ubc.ca/files/2016/07/Unit-4-360x270.jpg" alt="Unit 4" width="360" height="270" />
Figure 4: “Occupy Wall Street” protest
 

ALT: A sign is held up during the “Occupy Wall Street” protests in New York City which began September 17, 2011. The handwritten sign says: “IF CORPORATIONS ARE PEOPLE, THEN WHY CAN’T WE PUT THEM IN JAIL?”

 

Source of image - <a href="http://mulevariations.com/columns/trust-me-im-doctor/occupy-mule">http://mulevariations.com/columns/trust-me-im-doctor/occupy-mule</a>

 

 

 

UNIT OVERVIEW:

 

This unit will be devoted to exploring some of the limitations and conundrums, both legal and practical, which arise out of the assignment of “personhood” to the corporation and how does the law deal with them. What are the limits to this idea? Can other “non-persons” have legal personhood? Can a chimpanzee? Can corporations commit crimes and make contracts? Do corporations have privacy rights, or the right to free speech, or religious freedom or other constitutional protections? Can a corporation be defamed? If you are driving in the HOV lane with only a copy of your certificate of incorporation in the passenger seat, are you violating the requirement that there be two persons in the car? In what circumstances and for what purposes may the personhood of a corporation be disregarded, whether by “piercing” or, as may appeal to some of the more prurient minded among you, “lifting” the “corporate veil’? Are these the same thing?

In the end this unit prepares you to ask in a myriad of ways, what function does “personhood” perform in the analysis of legal problems relating to the corporation?

 

UNIT OUTCOME:

By the end of this unit you should be able to identify the core tensions arising from corporate personhood – and the profound contradictions which arise as a result and which the law must grapple with. The most obvious of these is the tug of war between shareholder financial expectations and management prerogatives. You will also understand, starting from the seminal case of Salomon v. Salomon how tempting it is for the courts to “pierce the corporate veil” and the inevitability of the connection between corporations being separate people and the countervailing force that is the doctrine of “piercing the veil”. Finally you will appreciate that the two forces and how frustrating it is in a legal sense that these two forces working against each other have not yielded and elegant yin and yang, but rather a messy set of legal doctrines that seem more whimsical than principled.

 

UNIT READINGS:

Please read the following material:

Casebook pages 83-91,134-226

BCBCA sections 30, 33, 136, 142, 227

Prest v. Petrodel 2013 UKSC 34 <a href="http://www.bailii.org/uk/cases/UKSC/2013/34.html">http://www.bailii.org/uk/cases/UKSC/2013/34.html</a>

 
<ol start="373">
<li> Todd Henderson, “Everything Old Is New Again: Lessons from Dodge v. Ford Motor Company” (2007) U of Chicago Law & Economics, Olin Working Paper No. 373: <a href="http://www.law.uchicago.edu/files/files/373.pdf">http://www.law.uchicago.edu/files/files/373.pdf</a></li>
</ol>
 

TOPIC 1: CORPORATIONS AND THE CHARTER 

Please read pages 83-91 of the Casebook. The extent to which corporations enjoy the protections of the Charter is considered on these pages. There is little to add.
<ol>
<li> v. Agat Laboratories (1998) 17 C.R. 95th) 147 (Prov.Ct.) which is found at pages 84-88 of the casebook is generally accepted as describing the proper approach. The question in issue is whether s.7 of the Canadian Charter of Rights and Freedoms applies to corporations who, after all, are not natural persons. S.7 provides:</li>
</ol>
“Life, liberty and security of person
<ol start="7">
<li>Everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice.”</li>
</ol>
 

Blog Activity 4.1:

Then please consider the questions in Notes 1 and 2 on page 88 of the Casebook.

How would you answer them? Why would you answer them that way?

Please succinctly summarize the present state of the law on the rights of corporations to use Section 7 of the Charter. Please blog your summary in no more than one page under the heading called “Corporations and the Charter”.

As you should now be able to appreciate, the fiction of corporate personhood can potentially result in some very real confusions and contortions when it comes to legal analysis. Sometimes it feels like the approach is somewhat akin to “Companies are people, except when they are not”.

Query whether such legal stretching and contorting is really necessary to accommodate the fiction of corporate personhood, or whether alternative approaches may be possible.

Blog Activity 4.2

Please consider whether s. 30 of the BC Business Corporations Act could simply be eliminated and replaced by an inclusive list of rights, powers and privileges, but without invoking any form of “personhood”. Would this be advisable or useful? Why or why not?

“Capacity and powers of company

 
<ol start="30">
<li> A company has the capacity and the rights, powers and privileges of an individual of full capacity.”</li>
</ol>
Please blog your views on this question and your reasons in no more than one page under the heading “Eliminating Corporate Personhood?”

 

TOPIC 2: Some practical consequences of “personhood” 

Please read pages 134-143 of the Casebook.

We have previously identified some of the practical consequences of “personhood” – e.g., corporation is the only proper plaintiff for a wrong done to it and that an individual shareholder cannot sue for an alleged pro rata share of losses derived from those suffered by the corporation – as in the Robak case.

Now start to explore some other implications

The material on pages 134-143 of the Casebook deals with some of these. 

Please refer to the questions on page 135 of the Casebook:

Question 1:

Principal shareholder and de facto controller testifies on behalf of corporate plaintiff. Disbelieved. Corporation still wins. Should the corporation be deprived of costs because “it” lied?

Question 2:

Can a corporation be held in contempt of court for failure to comply with a court order? See Northern Counties Securities v. Jackson & Seeple, [1974] 2 All ER. 625 referenced in note 2 on page 135 of the Casebook.

Question 3:

Macaura v. Northern Assurance [1925] A.C. 619 at pages 135-137 of the Casebook.

Owner of timber sold it to a company that was owned almost solely by him. He was the company's largest creditor. In his own name he insured the timber against fire. Timber was in fact destroyed by fire. Insurer denied the claim on the basis that the timber now belonged to the company and not to the previous owner or to the largest shareholder in the company.

Their argument was that the company being in law a legal entity separate from shareholders had an insurable interest but held no policy. Mr. Macaura had a policy, but no insurable interest. This left him with only a debt due by the company as a result of the fire that destroyed the timber he had sold.

The House of Lords held this way, finding that “…Neither a simple creditor nor a shareholder in a company has any insurable interest in a particular asset which a company holds.”

Does this really make policy sense? 

In thinking about this question note the words of Lord Buckmaster on where the benefits and burden lie (at p.136 of the Casebook). In this case all the benefits and burdens effectively fell on Mr. Macaura.

Suppose I am convinced that a building I have no interest in beyond that of any other citizen will collapse within a year. I contract with an insurer to pay me $50K if it does. Isn’t this just betting – my object is to make a windfall gain not to protect against loss. That situation is clearer then the Macaura case.

Might it be suggested that Macaura was wrongly decided because it’s definition of insurable interest is too narrow?

To try and answer you will have to ask yourself what the point of “insurable interest” is?

In an early case on the subject (Lucena v. Crawford (1806) 127 E.R. 471), one judge found that an insured could recover if she suffered “factual expectation of loss”. Unfortunately, another judge in that case required that, in addition to “factual expectation of loss”, the plaintiff must also have a “legal or equitable interest” in the property. The test of “legal or equitable interest” in the property is the one that prevailed. Under it for example, a lender who lent money for a construction project would have no insurable interest unless he had taken out a security interest in the property.

Which bring us to the important case of Kosmopoulos v. Constitution Insurance and how the separate corporate personality doctrine can have unintended and unforeseen consequences. The decision of the Ontario C.A. is found at page 137 of the Casebook. 

Mr. Kosmopoulos was the sole shareholder and director of leather goods company. He originally ran that business as a sole proprietor and the lease for its office was in the name of Mr. Kosmopoulos, as was the insurance on office. His lease for the company office was under his own name from when he originally ran the business as a sole proprietor. Even after the incorporation of his company the insurance on the office remained in his own name. The insurance agency he was dealing with knew that he was personally on the lease but carrying on business as a corporation. A fire in a neighboring lot damaged his office.

When a claim was made insurance coverage was denied.

The trial judge found that Mr. Kosmopoulos could not recover damages as the owner of the assets as the company, and not he, owned them. However he could recover as an insured because of his insurable interest in the building.

The Ontario Court of Appeal agreed, restricting the application of the Macaura precedent to cases involving multiple shareholders.

The Supreme Court of Canada upheld the ruling of the lower courts.

Wilson J. obseved that there was no consistent principle as to when a court may disregard separate personhood by “lifting the corporate veil” and regarding the company as a mere “agent” or a “puppet” of its controlling shareholder or a parent corporation”. Though the corporate veil would not be lifted, Mr. Kosmopoulos as sole shareholder of the company was found to be so placed with respect to the assets of the business as to have benefit from their existence and prejudice from their destruction. He had a moral certainty of advantage or benefit from those assets but for the fire. He had, therefore, an insurable interest in them capable of supporting the insurance policy and is entitled to recover under it.

McIntyre J. preferred the approach of Zuber J. in the Ontario C.A. That is that the Macaura rule should not be accepted to compel a holding that a sole shareholder and sole director of a company could not have an insurable interest in the assets of the Company. Underlying this conclusion is that modern company law permits the creation of companies with one shareholder. The identity then between the Company and that sole shareholder (and director) is such that an insurable interest in the Company's assets may be found in the sole shareholder.

Now please consider questions 2, 3 and 4 on page 140 of the Casebook.

Please read Lee v. Lee’s Air Farming at pages 140-142 of the Casebook which helps bring some clarity to the question of how to separate different roles in a corporate structure, even where they seemingly reside within the same physical being. 

Mr. Lee formed a company, held nearly all its shares, was managing director, and a pilot. Lee appointed himself the chief pilot for the company, and in this way became in effect both employer and worker. The contract of employment was between him and the company, but in effect Mr. Lee both gave orders and obeyed them.

The New Zealand Courts held that the two offices were clearly incompatible. On appeal the Privy Council reversed finding that it was the company who gave the orders, not Mr. Lee personally.

Please read Notes 1-3 on page 142 of the Casebook.

Blog Activity 4.3

Please consider the hypothetical in Note 4 on page 142 of the Casebook. What do you think? Would “x” be able to avoid liability in by “springing out” the corporation in the scenarios provided? Please blog your views on this question and your reasons in less than one page under the heading “Ambiguities of Corporate Personality”.

 

TOPIC 3: QUESTIONING THE PRINCIPLE - THE CORPORATE VEIL THEORY 

Please Read Pages 143-149 Of The Casebook.

It is noteworthy that clear doctrines and explanations of when “the corporate veil” will be lifted are few and far between.

Since the decision in Salomon v. Salomon a steady stream of common law decisions and legislative enactments has eroded the immutability of the separate legal entity doctrine. These decisions and enactments are conveniently seen as ways to “lift or pierce the corporate veil”. Piercing seems to happen freakishly ... rare, severe and unprincipled - almost like lightning. This lack of clarity perhaps suggests that using a fiction such as “personhood” is a poor and impractical fit. This is not just a bit of critical analysis with some normative pedagogic purpose. Rather it may be the unifying thread of virtually all aspects of this course. Because the ethical reasons underlying the principle of separate corporate personality seem to not be particularly present, know or understood, we should perhaps not be surprised at the degree of judicial flailing and uncertainty that many of the cases we are studying seem to manifest.

What Little Is Clear Is That Limited Liability Is No Longer Sacrosanct: The Principle In Salomon's Case No Longer Rules.

See the quotation from Clarkson v. Zhelka [1967] 2 O.R. 565 (H.C.) at page 144 of the casebook:

“The cases in which the Courts…have seen fit to disregard the corporate entity or personality, and instead to consider the economic realities behind the legal façade, fall within a narrow compass. The Legislature, in the fields of revenue and taxation…has made much greater departure in this respect. Such cases as there are illustrate no consistent principle. The only principle laid down is that in the leading case of Salomon v. Salomon & Co. Ltd., [1897] AC 22; and in general such principle has been rigidly applied. Briefly stated, it is that the legal persona created by incorporation is an entity distinct from its shareholders and directors and that even in the case of a one-man company, the company is not an alias for the owner.

The exception would appear to represent refusals to apply the logic of the Salomon case where it would be flagrantly opposed to justice.

…If a company is formed for the express purpose of doing a wrongful or unlawful act, or, if formed, those in control expressly direct a wrongful thing to be done, the individuals as well as the company are responsible to those to whom liability is legally owed.”

Note Welling’s critique of this part of Clarkson as obiter dicta (at page 148 of the Casebook).

Note Sharpe J. statement in Transamerica Life v. Canada Life (1996) 28 O.R. (3d) 423 at 433-434 (which can be found at the pages 144-145 of the Casebook): 

“There are undoubtedly situations where justice requires that the corporate veil be lifted…[I]t will be difficult to define precisely when the corporate veil is to be lifted, but that lack of a precise test does not mean that a court is free to act as it pleases on some loosely defined ‘just and equitable” standard…

[T]he courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct. The first element “complete control”, requires more than ownership. It must be shown that there is complete domination and that the subsidiary company does not, in fact, function independently…

The second element refers to the nature of the conduct: is there “conduct akin to fraud that would otherwise unjustly deprive claimants of their rights?” (References omitted.)

Note Welling at page 149 of the Casebook: 

“Courts in Canada have yet to take the final step and acknowledge that they have no inherent power to pretend that a corporation does not exist. I suspect the reason is simple. Most barristers concede the judgers has power to “pierce the corporate veil”, then argue this is not an appropriate case in which to use the power. They are conceding too much and they are ignoring the clear wording of Canadian corporate statutes. It is time for someone to stand up and say “quo warranto?”

It is clear from commentators and judges that the immense confusion around when the “corporate veil’ is to be pierced relates directly to principle of Salomon v. Salomon and the separate personality of companies. This being so it is quite curious why the fiction of “corporate personhood” does not itself draw as much attention as it might. It is at least arguable that if we chose to dispense with the fiction that corporations are “persons”, we would more easily and clearly be able to identify and define permitted corporate action strictly in terms of what is permissible. 

 

TOPIC 4: corporate personality in practice: some problem areas 
<ol>
<li> Corporate Character Traits</li>
</ol>
Please read extract from Welling at page 150 of the Casebook.

Please note in particular the last three sentences:

“A fully capable corporation may well have been born yesterday. Does the law permit us to look inside of the corporation’s equivalent of a family to establish a pattern of behaviour? A cautious “yes” can be advanced, provided the principle of corporate personality is not sacrificed.”

 

Please read Big Bend Hotel Ltd. v. Security Mutual (1980) 19 BCLR 102 at pages 150-152 of the Casebook.

This is an example of the corporate veil being lifted to prevent improper conduct or fraud.

Vincent Kumar was the president and sole shareholder of Big Bend Hotel Ltd. Big Bend had obtained insurance from Security Mutual on the hotel, its sole asset. The hotel burned down.

Kumar had previously been the president and sole shareholder of another corporation whose hotel had burned less than three years earlier. This fact had not been disclosed to security Mutual.

The court held that this was a material non-disclosure. It was found to be appropriate to lift the corporate veil here because equity will not allow an individual to use a co as a shield for improper conduct or fraud.

Callaghan J. found that Kumar knew the prior loss had to be disclosed and that his failure to do so was intended to mislead or deceive the insurers who would have declined risk had they known.

In other words the fact of a separate corporate entity was not allowed to interfere with the obligation to disclose, and the veil would be pierced to put the sole shareholder corporate president to the same standard he would be held to if no company existed as a shield.

Please read Note 1 at page 152 of the Casebook:

Wasn’t it enough to decide the case to conclude that had they known, the insurer would have declined risk?

Should the insurance company have had an application form that asked for disclosure not only from the company applicant but from all its principals.

Please read Note 3 at page 152 of the Casebook:

London Computer Operators Training Ltd and others v British Broadcasting Corporation and others [1973] 2 All ER 170 deals with how separate corporate existence can have real impact on other legal areas, such as defamation.

Two speakers on BBC radio alleged that a computer school was “a financial racket”, that their advertising was misleading, and that the founder had “woeful” business record. The school and two of its directors bought an action for libel against BBC Radio who pleaded justification (that the statements were in fact true) and fair comment. The founder, who was still running the school, was not joined as a plaintiff. The defendants subsequently discovered that the founder had a criminal record and sought leave to amend their particulars of justification (truth) by adding details of his convictions and sentences. Leave to amend was granted. The court found that the words complained of were capable of the meaning that the company was being run by people of questionable honesty and background who were unfit to run a computer school.

If the company is separate from its shareholder how is the shareholders criminal record of convictions and sentencing relevant to an action involving the company only, and not the shareholder?

Read Hercules Managements Ltd. v. Ernst & Young [1997] 2 S.C.R. 165 at page 155 of the Casebook

Two companies, Northguard Acceptance Ltd (‘NGA”) and Northguard Holdings Ltd. (‘NGH”) carried on business lending and investing money on the security of real property mortgages. Hercules Managements Ltd. was a shareholder in NGA. Ernst & Young were hired as auditors of NGH and NGA, prepared financial statements and provided audit reports to the companies’ shareholders. NGA and NGH went into receivership and Hercules Managements Ltd. sued Ernst & Young alleging that their audit reports had been negligently prepared.

Ernst & Young sought dismissal on the ground, inter alia, that the claims asserted by the plaintiffs could only properly be brought by the corporations themselves and not by the shareholders individually. La Forest J. agreed with Ernst & Young holding that “the shareholders’ reliance on negligently prepare audit reports…will result in a wrong to the corporation for which the shareholders cannot, as individuals, recover.”

Blog Activity 4.4

 

What is the policy justification for this result in your view? Please blog your views on this question and your reasons in less than one page under the heading “Justifying Ernst & Young”.

 
<ol>
<li> Corporations as Agents and Partners </li>
</ol>
Please read pages 157-158 of the Casebook.

The question is: When is it appropriate to treat a company as being the agent or partner of its controlling shareholder? 

Note that the parameters of partnership can be reviewed in Unit 3.

In this regard please read Smith, Stone & Knight Ltd. v. Birmingham Corp. [1939] 4 All E.R. 116 at page 158 of the Casebook.

Birmingham Corporation expropriated premises owned by a wholly‑owned subsidiary of Smith, Stone & Knight Ltd. (“SSK”). 497 of 502 issued shares in the subsidiary were held by SSK; the other 5 shares were held for SSK. The subsidiary had no staff and no separate accounting records. The subsidiary was effectively treated as a department of SSK.

SSK claimed compensation for loss of business as a result of the expropriation. Birmingham Council’s response was that the loss was suffered by subsidiary ‑ a separate legal entity and for that reason SSK’s claim should fail.

It was held that compensation was indeed payable by Birmingham to SSK. The court found that the subsidiary was carrying on no business of its own, but was in fact carrying on SSK’s business as agent.

The court identified six factors to be shown before agency found and veil lifted:
<ul>
<li>Profits of the subsidiary must be treated as profits of the holding company;</li>
<li>Those conducting the subsidiary's business must be appointed by the holding company;</li>
<li>The holding company must be the head and brain of the trading venture;</li>
<li>The holding company must be in control of the venture and must decide what capital should be spent and what should be done;</li>
<li>The profits made by the subsidiary's business must be made by the holding company's skill and direction; and</li>
<li>The holding company must be in constant and effective control.</li>
</ul>
Does this make sense? Are economic realities such that a group of companies trade as a group, raise capital as a group, and are viewed as a group by those dealing with them?

Should one attach obligations and responsibilities to the group and not to individual companies?

Lifting the corporate veil on the basis of agency involves examining the relationship between two or more separate legal entities and attributing the acts of one of the entities as the acts of the other entity.

 

The key issue involved in the case was whether the parent had suffered any loss as a result of the council's compulsory acquisition of the property, causing disturbance to the subsidiary's business. Atkinson J. decided that the relationship between the parent and subsidiary was really an agency relationship, with the business of the subsidiary being carried on an apparent basis only. The relevant facts were:
<ol>
<li>The directors of the parent were also directors of the subsidiary but did not take a salary from their positions on the subsidiary’s board;</li>
<li>The business purportedly carried on by the subsidiary company was purchased by the parent and never formally assigned to the subsidiary;</li>
<li>The subsidiary had no staff apart from a manager;</li>
<li>The subsidiary's books were kept and maintained by the parent and were not the property of the subsidiary or accessible by the manager of the subsidiary;</li>
<li>The work purportedly carried out by the subsidiary was beneficially owned by the parent without any agreement to transfer the business to the subsidiary; and</li>
<li>The subsidiary was treated for accounting purposes as if it were merely a department of the parent, including, significantly, appropriating the profits of the subsidiary for payment to the parent (by direct payment rather than dividend).</li>
</ol>
Smith, Stone & Knight Ltd. v. Birmingham Corp. [1939] 4 All E.R. 116 can be seen as a poor example of lifting the corporate veil on the basis of agency. It is preferable not to use the case for the purpose of lifting the corporate veil for two reasons:
<ol>
<li> Maclaine Watson & Co Ltd v. Department of Trade and Industry [1988] 3 All ER 257 at 310-311 per Kerr LJ:</li>
</ol>
“…the facts [in Smith, Stone and Knight] were so unusual that they cannot form any basis of principle" 
<ol start="2">
<li> See Note 4 on page 159 of the Casebook:</li>
</ol>
“Is there any reason why corporate shareholders should be made to answer for the liabilities of the corporations in which they hold shares, to a greater degree than individual shareholders?”

Read Notes 7 and 8 on pages 159-160 including excerpts from the decision in DHN Food Distributors Ltd. v Tower Hamlets London Borough Council [1976] 1 W.L.R. 852 (Eng. CA).

DHN Food Distributors Ltd. (“DHN”) owned and controlled a business of importing and distributing groceries, operating out of a warehouse owned by a subsidiary of DHN, Bronze Investments Ltd. Vehicles used in the business were owned by yet another subsidiary of DHN. DHN held all the shares in both subsidiaries and the companies had common directors.

In 1969 the local council made a compulsory purchase order to acquire the land on which the warehouse sat. DHN was unable to relocate and the business subsequently closed down.

The question was whether DHN was entitled to compensation for disturbance in having the business closed down. Council argued none payable since the subsidiary was not disturbed. They further argued that even if both subs were disturbed, the subsidiaries were not entitled to any compensation because they had no interest in the land. Moreover the argument continued, DHN itself was not entitled to compensation under the provisions of a statute. The council argued that DHN was only a licensee of Bronze Investments Ltd.

 

The English Court of Appeal treated the companies as one economic entity and following from this, DHN could be treated as owner of the property and was thus entitled to compensation for disturbance to its business.

Lord Denning found that the corporate veil could indeed be lifted – finding that the companies were in reality a group, and should be treated as one. 

“These subsidiaries are bound hand and foot to the parent company and must do what the parent company says … virtually the same as a partnership … They should not be treated separately.”

This notion is not so easily reconcilable with other cases. Denning’s views were disapproved by the House of Lords in Woolfson v Srathclyde Regional Council, 1978 SC 90 (HL). There Lord Keith expressed doubt as to whether the decision in DHN correctly applied the principle that it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere facade concealing the true facts

 

 

TOPIC 5: CORPORATE PERSONALITY - SOME INNOVATIVE APPROACHES 

Please read the short web article “Corporation not person in carpool lanes” which can be found at <a href="http://www.sfgate.com/bayarea/article/Corporation-not-person-in-carpool-lanes-4173366.php">http://www.sfgate.com/bayarea/article/Corporation-not-person-in-carpool-lanes-4173366.php</a>

 

Then please read page 160 of the Casebook:

 

“Judges have rarely been clear when explaining how corporate personality works. This is due in part to the facile notion that they are at liberty to disregard the separate existence of the corporate entity. There are, however, some reported cases that clearly illustrate the application of some well-known remedies, mostly in tort situations, but some from the field of equity. Using them as examples one can formulate a principled approach that treats corporate personality as a solution rather than a problem.”

 
<ol>
<li> Inducing Breach of Contract</li>
</ol>
 

Please read Garbutt Business College Ltd. v. Henderson Secretarial School Ltd. [1939] 4 D.L.R. 151 (Alta. C.A.) at pages 161-162 of the Casebook. It helps illustrate yet another way that “separate” corporate personality might be manipulated in an attempt to evade responsibility.

Henderson a teacher was subject to a restrictive covenant governing employment. It specifically restrained him from engaging in or managing a rival business college for 5 years. He resigned and started a rival college that used his name and employed him to teach. He held all but 3 shares. His wife and daughter held those 3 shares. Garbutt Business College Ltd. lost students to new college.

The court upheld the restrictive covenant against Mr. Henderson but found there could be no corporate liability as against Henderson Secretarial School Ltd. in the contract. Any such liability must be in tort, and accordingly the court found liability against Henderson Secretarial School Ltd. in damages for interference with business relations and inducing breach of contract between Mr Henderson and Garbutt Business College Ltd.

Please note Questions 1 and 3 on pages 162-163 of the Casebook

 

1.This question is in effect: What if Henderson only incorporated a rival entity using his name but did not teach or manage?

 
<ol start="3">
<li>In looking at this question consider the facts in Jones v. Lipman [1962] 1 WLR 832. In that case Mr. Lipman contracted to sell a house to Jones for £5,250. He changed his mind and refused to complete. To try and avoid specific performance, he conveyed the house for £3000 to a company formed for that purpose alone, which he alone owned and controlled. In the end specific performance against Mr. Lipman and his company was ordered: “The defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity.”</li>
</ol>
 

In this regard please consider the following excerpt’s from Lord Sumption’s judgment in Prest v. Petrodel 2013 UKSC 34 (especially paragraph 30 on Jones v. Lipman) which can be found here: <a href="http://www.bailii.org/uk/cases/UKSC/2013/34.html">http://www.bailii.org/uk/cases/UKSC/2013/34.html</a>

 

As you will see Lord Sumpton of the United Kingdom Supreme Court had the following observations:

“27. In my view, the principle that the court may be justified in piercing the corporate veil if a company's separate legal personality is being abused for the purpose of some relevant wrongdoing is well established in the authorities….[T]he recognition of a limited power to pierce the corporate veil in carefully defined circumstances is necessary if the law is not to be disarmed in the face of abuse… 
<ol start="28">
<li> The difficulty is to identify what is a relevant wrongdoing. References to a "facade" or "sham" beg too many questions to provide a satisfactory answer. It seems to me that two distinct principles lie behind these protean terms, and that much confusion has been caused by failing to distinguish between them. They can conveniently be called the concealment principle and the evasion principle. The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the "facade", but only looking behind it to discover the facts which the corporate structure is concealing. The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company's involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement. Many cases will fall into both categories, but in some circumstances the difference between them may be critical. This may be illustrated by reference to those cases in which the court has been thought, rightly or wrongly, to have pierced the corporate veil.”…</li>
<li> Jones v Lipman [1962] 1 WLR 832 was a case of very much the same kind. The facts were that Mr Lipman sold a property to the plaintiffs for £5,250 and then, thinking better of the deal, sold it to a company called Alamed Ltd for £3,000, in order to make it impossible for the plaintiffs to get specific performance. The judge, Russell J, found that company was wholly owned and controlled by Mr Lipman, who had bought it off the shelf and had procured the property to be conveyed to it "solely for the purpose of defeating the plaintiffs' rights to specific performance." About half of the purchase price payable by Alamed was funded by borrowing from a bank, and the rest was left outstanding. The judge decreed specific performance against both Mr Lipman and Alamed Ltd. As against Mr Lipman this was done on the concealment principle. Because Mr Lipman owned and controlled Alamed Ltd, he was in a position specifically to perform his obligation to the plaintiffs by exercising his powers over the company. This did not involve piercing the corporate veil, but only identifying Mr Lipman as the man in control of the company. The company, said Russell J portentously at p 836, was "a device and a sham, a mask which [Mr Lipman] holds before his face in an attempt to avoid recognition by the eye of equity." On the other hand, as against Alamed Ltd itself, the decision was justified on the evasion principle, by reference to the Court of Appeal's decision in Gilford Motor Co. The judge must have thought that in the circumstances the company should be treated as having the same obligation to convey the property to the plaintiff as Mr Lipman had, even though it was not party to the contract of sale. It should be noted that he decreed specific performance against the company notwithstanding that as a result of the transaction, the company's main creditor, namely the bank, was prejudiced by its loss of what appears from the report to have been its sole asset apart from a possible personal claim against Mr Lipman which he may or may not have been in a position to meet. This may be thought hard on the bank, but it is no harder than a finding that the company was not the beneficial owner at all. The bank could have protected itself by taking a charge or registering the contract of sale.” (Emphasis added.)</li>
</ol>
 

The next few cases should help you bring separate corporate personality into focus as applied to the rough and tumble of “modern” business dealings. 

 

 

Please read Einhorn v. Westmount Invesments Ltd. (1969), 6 D.L.R. (3d) 71 at pages 164-166 of the Casebook.

This was an application to strike out a Statement of Claim. Accordingly the facts alleged did not have to be proven in this limited context.

Jacob Einhorn was a licensed real estate agent who provided services to Westmount Investments Ltd. a company that three brothers, Hyman, William and Samuel Belzberg, were “at all material times in complete control” of. Westmount Investments Ltd. never paid Mr. Einhorn what he was owed. It was alleged that instead the Belzberg brothers “siphoned off the assets” of Westmount Investments Ltd. to another company they controlled Regina Midtown Centre Ltd. leaving Westmount an empty shell incapable of satisfying its contract with Mr. Einhorn.

Note that neither the Belzberg’s nor Regina Midtown Centre Ltd. induced a breach of contract (as was the case in Garbutt Business College Ltd. v. Henderson Secretarial School Ltd.), they just prevented Westmount Investments Ltd. from executing their contract with Mr. Einhorn.

The court considered whether the Belzberg brothers could be individually liable. The answer was yes, because they met the test for the tort of interference with contractual relations. This was because it appeared that the Belzberg brothers interfered with Westmount’s performance of the contract and each of the parties to a contract have a right to performance of it. There are three ingredients to the tort:
<ol>
<li>Interference in execution of contract: This interference is not confined to breach of contract; it extends to case where a third person prevents or hinders a party from performing the contract.</li>
<li>The interference must be deliberate.</li>
<li>The interference must be direct.</li>
</ol>
 

Please also read McFadden v. 481782 Ontario Ltd., (1984), 47 O.R. (2d) 134 (H.C.) at page 166 of the Casebook.

In this case two directors authorized payments to themselves as shareholders that put the corporation in a position where it could not fulfill its contractual obligations to an employee. The employee sued the directors on the basis that they induced the corporation to breach its contract with him.

It was held that the directors were liable. They acted with a view to their own interests not those of the company.

 

They are not protected, therefore, by the exception to the rule in Said v. Butt that they would be excused if they were acting "under the compulsion of a duty to the corporation." The court held that the directors could not fall within the exception Said v. Butt [1920] 3 K.B. 497 that: “…if a servant acting bona fide within the scope of his authority, procures or causes me to break a contract that I have made with you, you cannot sue the servant for interference with the contract; for he is my alter ego, and I cannot be sued for inducing myself to break a contract.” This exception effectively ensures officers and directors can terminate employment contracts without fearing personal liability and also that companies can terminate contracts that may no longer be in their best interests to fulfill.

However, in McFadden v. 481782 Ontario Ltd. the exception did not apply since the Directors were acting with a view to their own interests and not those of the corporation. Accordingly they could not be said to be acting under the compulsion of a duty to the corporation. That is to say that for an officer or director to be relieved from the consequences of his act of inducement, it is because he acts under the compulsion of a duty. Where she or he does not, for example because of a failure to act bona fide and hence outside the scope of their authority, liability to that Director will result. The corporation in question ought to be unaffected precisely because the Directors were acting outside the scope of their authority,

 

Please read the Questions at pages 169-170 of the Casebook and then ask yourself the following questions:
<ol>
<li> What was the conduct that induced the breach in McFadden v. 481782 Ontario Ltd.?</li>
<li> Is it a sound principle that a director who fails to act in the best interests of the corporation ceases to act on behalf of the corporation? Should the fact that the Director acts in breach of their obligation to the corporation have any relevance to the rights of an employee?</li>
</ol>
 

Please read 369413 Alberta Ltd v. Pocklington (2000) 194 D.L.R. (4th) 109 (Alta. C.A.) at pages 171-178 of the Casebook.

Gainers was one of Canada’s largest meat-packing companies. In acute financial distress, Gainers breached an agreement it had with the Province of Alberta. Peter Pocklington owned Pocklington Foods Inc. which held shares in Gainers. Alberta opted to sue Gainer’s sole director, Peter Pocklington alleging that Pocklington had “induced” the breach by signing a director’s resolution transferring certain shares in another company owned by Gainers (valued in the millions) to another of his own companies, Pocklington Holdings Ltd., for $100. Gainers had earlier agreed not to sell or dispose of its assets without the prior written consent of the Province of Alberta.

The Court awarded the Province $4.7 million in damages as against Pocklington.

Fruman J.A. set out various elements of the case as follows:

“ELEMENTS OF INDUCING BREACH OF CONTRACT

In order to find that a defendant intentionally induced a breach of contract, seven elements must be established:
<ol>
<li>i) the existence of a contract;</li>
<li>ii) knowledge or awareness by the defendant of the contract;</li>
</ol>
iii) a breach of the contract by a contracting party;
<ol>
<li>iv) the defendant induced the breach;</li>
<li>v) the defendant, by his conduct, intended to cause the breach; </li>
<li>vi) the defendant acted without justification; and</li>
</ol>
vii) the plaintiff suffered damages…

INTENT

The Law

…Therefore, if the breach was a reasonable or foreseeable consequence of that transfer, or alternatively, if Pocklington completed the transfer recklessly, was wilfully blind to its consequences, or was indifferent as to whether or not it caused a breach, the necessary intent element for the tort will be met.

The Evidence

…The clear implication of Ogilvie and Company’s carefully worded letter is that either the lawyers did not share their clients’ views, or they were invited to keep their legal advice to themselves. Pocklington nevertheless signed the documents to give effect to the share transfer, and retained the shares despite Alberta’s early protests and Ogilvie and Company’s apparent reservations. He had the means of knowledge, but chose to act without legal advice. Pocklington was wilfully blind to the consequences of his actions and showed clear indifference to the breach. The intent component of the tort is satisfied.

JUSTIFICATION

 

In some situations, a defendant’s plea of justification may avoid liability: South Wales Miners’ Federation, supra, and Quinn, supra. The defence of justification is available when the defendant caused the breach while acting under a duty imposed by law. The issue in each case is whether, upon consideration of the relative significance of all the factors, the defendant’s conduct should be tolerated despite its detrimental effect on the interests of others: Fleming, supra, at 657.

 

Directors of companies owe duties to the corporation; they are obliged both at common law and under Statute to act in the best interests of the company: Re Cawley & Co. (1889), 42 Ch. 209 at 233 (C.A.). For example, s. 117(1)(a) of the ABCA provides: “Every director and officer of a corporation in exercising his powers and discharging his duties shall act honestly and in good faith with a view to the best interests of the corporation [...] ”.

 

Therefore, when the interests of the company are best served by breaking its contractual commitments, the director’s act of inducement is justified because it is “taken as a duty”… 

But if the director is not complying with that duty, the rationale for relieving personal liability disappears…

 

In order to succeed under the Imperial Oil test, a plaintiff must prove that the director knew the legal rights of others would be jeopardized by the director’s actions, and intended to deprive the aggrieved party of contractual benefits… 

The concerns expressed in Imperial Oil are not misplaced. In order to protect the fine fabric of the corporate veil, courts should refrain from requiring directors to prove the legitimate corporate purpose motivating their actions. However, courts also should not condone inappropriate conduct by automatically placing a difficult onus on a plaintiff, by reason only that the defendant director owed legal duties to the company whose contract he had a hand in breaching. Some balance is required…

 

In this case Pocklington acquired a valuable asset for nominal consideration at the expense of Gainers’ creditors. Since Gainers was insolvent at that time, its creditors’ interests were the interests of the company. Promoting the interests of one shareholder at the expense of the creditors is not in the best interests of the company: Levy-Russell at 169. A director who pursues these objectives is not acting in furtherance of his corporate duty, and there is no justification for his deeds.

Pocklington has not demonstrated any legitimate business interest of Gainers that could have been served by the 350151 share transfer… 

By transferring the 350151 shares to his own company, Pocklington was not discharging his legal duty to act honestly and in good faith with a view to the best interests of Gainers; he was acting solely in his own interests. As no legitimate interest of Gainers could possibly be served by the transaction, the court need not go on to consider whether Pocklington’s act was aimed at depriving Alberta of the benefits of its contract. Pocklington’s position as director cannot provide justification for his actions.”

(Emphasis added.)

Blog Activity 4.5

In your view is the Pocklington decision consistent with, among others, the McFadden decision? Please blog your views on this question and your reasons in less than one page under the heading “Pocklington & McFadden”.

 

Please read Adga Systems International Inc. v. Valcom Ltd. (1999) 43 O.R. (3d) 101 (Ont. C.A.) at pages 178-183 of the Casebook.

Note that this case represents a significant shift in the spectrum of directors’ liability/personal liability imposed on officers and directors for actions taken in the course of their duties.

The plaintiff, Adga Systems sued their competitor Valcom Ltd., as well as Valcom’s sole director in his personal capacity and two senior employees of Valcom in their personal capacity. Adga alleged that Valcom had raided its employees and caused Adga economic damage. Adga sought damages for inducing breach of contract and inducing breach of fiduciary duty. The Ontario Divisional Court dismissed the claim against the three personal defendants holding that, since the employees of Valcom Ltd. were not furthering their own interests and were pursuing their duties of employment to further the interests of their employer, no cause of action was revealed which justified a trial. The plaintiff Adga appealed to the Ontario Court of Appeal.

 

Adga’s appeal was allowed and the three personal defendants, being the Director of Valcom and two employees of Valcom were reinstated as defendants. Carthy J.A. focussed on the issues as follows:

“The issue that I must deal with is whether, on the assumption that the defendant Valcom committed a tort against the appellant, the sole director and employees of Valcom can be accountable for the same tort as a consequence of their personal involvement directed to the perceived best interests of the corporation… 

However, where, as here, the plaintiff relies upon establishing an independent cause of action against the principals of the company, the corporate veil is not threatened and the Salomon principle remains intact…

It is my conclusion that there was no principled basis for protecting the director and employees of Valcom from liability for their alleged conduct on the basis that such conduct was in pursuance of the interests of the corporation. It may be that for policy reasons the law as to the allocation of responsibility for tortious conduct should be adjusted to provide some protection to employees, officers or directors in the limited circumstances where, for instance, they are acting in the best interests of the corporation with parties who have voluntarily chosen to accept the ambit of risk of a limited liability company. However, the creation of such a policy should not evolve from the facts of this case where the alleged conduct was intentional and the only relationship between the corporate parties was as competitors.” (Emphasis added.)

Please read Note 2 at page 183 of the Casebook: What is result if directors must choose between (1) inducing breach of contract because it is in the best interests of the company and (2) acting contrary to the company’s best interests so to avoid inducing breach?

In this regard please note the discussion on page 181 of the Casebook regarding the SCC decision in London Drugs v. Kuehne & Nagel: 

 

“ The Supreme Court of Canada again considered the issue of an employee's liability for acts done in the course of his duties on behalf of the employer in London Drugs Ltd. v. Kuehne & Nagel International Ltd., <a href="http://www.canlii.org/en/ca/scc/doc/1992/1992canlii41/1992canlii41.html">1992 CanLII 41 (SCC)</a>, [1992] 3 S.C.R. 299, 97 D.L.R. (4th) 261. The plaintiff delivered a transformer to a warehouse company for storage. An employee of the warehouse company negligently permitted the transformer to topple over, causing extensive damage. Even though there was a contractual relationship between the company and the customer, the majority held in favour of the claim against the employee.

Iacobucci J. stated at pp. 407-08:

There is no general rule in Canada to the effect that an employee acting in the course of his or her employment and performing the "very essence" of his or her employer's contractual obligations with a customer does not owe a duty of care, whether one labels it "independent" or otherwise, to the employer's customer. . . .

…The mere fact that the employee is performing the "very essence" of a contract between the plaintiff and his or her employer does not, in itself, necessarily preclude a conclusion that a duty of care was present.”

 

Please read Note 6 at page 184 of the Casebook: Is there a different standard of liability of employees and directors where each acts within scope of duties?

 
<ol>
<li> Knowing Assistance in a Breach of Trust </li>
</ol>
Please read Air Canada v. M & L Travel Ltd. [1993] 3 S.C.R. 787 at pages 184-191 of the Casebook.

M&L Travel Ltd., the directors of which were Mssrs. Martin and Valliant, was a travel agency. It had an agreement with Air Canada under which M&L Travel Ltd. was to hold proceeds of ticket sales in trust for Air Canada. M&L Travel Ltd. in fact did not hold the proceeds in trust as agreed but rather used them for general operating expenses as M&L found itself in financial difficulties.

Air Canada sued (1) the travel agency, and (2) both directors personally for the money owed to it for ticket sales.

Air Canada’s action succeeded against M&L Travel Ltd. but failed against the Directors Mssrs. Martin and Valliant. Accordingly Air Canada successfully appealed the decision holding the Directors not to be personally liable and judgment was entered against them as well.

The matter came before the Supreme Court of Canada. At issue was: (1) whether the relationship between M&L Travel Ltd. and Air Canada was one of trust, or one of debtor and creditor? and (2) if of trust, under what circumstances could the directors of a corporation be held personally liable for breach of trust by the corporation - and were those circumstances present here.

Although involving a corporation, the case fell to be resolved on trust principles, and does not raise general questions of the personal liability of directors for the acts of the corporation.

(1) The Supreme Court of Canada held that there was a trust relationship between M&L Travel Ltd. and Air Canada.

(2) With respect to the personal liability of directors the Supreme Court of Canada was of the view that the imposition of personal liability on a stranger to a trust depends on whether the stranger's conscience is sufficiently affected to justify the imposition of personal liability. A stranger to the trust can be held liable as a constructive trustee for breach of trust (trustee de son tort). The stranger, although not appointed a trustee, takes on him or herself to act as trustee and to possess and administer trust property and becomes liable if he or she commits a breach of trust while acting as a trustee. This type of liability was found to be inapplicable in the case of M&L Travel Ltd. v. Air Canada because the directors did not personally take possession of trust property or assume the office or function of trustees.

 

The court pointed out that strangers to a trust could also be personally liable for breach of trust if they knowingly participate in a breach of trust. They either were acting as a trustee in receipt and chargeable with trust property (a constructive trusteeship termed "knowing receipt") or they knowingly assisted in a dishonest and fraudulent design on the part of the trustees (termed "knowing assistance"). Since the "knowing receipt" category did not apply here, the only basis upon which the directors could be held personally liable were as constructive trustees under the "knowing assistance" head of liability. This basis of liability raises two main issues: the nature of the breach of trust and the degree of knowledge required of the stranger.

 

The knowledge requirement for this "knowing assistance" type of liability is actual knowledge; recklessness or wilful blindness will suffice. A person will be deemed to have known of the trust if it was imposed by statute. If the trust was contractually created, then whether the stranger knew of the trust will depend on his or her familiarity or involvement with the contract.

The stranger will be liable if he or she knowingly assisted the trustee in a fraudulent and dishonest breach of trust. Therefore, it is the corporation's actions that must be examined. Where the trustee is a corporation, rather than an individual, the inquiry as to whether the breach of trust was dishonest and fraudulent may be more difficult to conceptualize, because the corporation can only act through human agents who are often the strangers to the trust whose liability is in issue. The actions of the directors were relevant to the examination, given the extent to which the defendant directors controlled the travel agency.

 

The breach of trust by the travel agency was dishonest and fraudulent from an equitable standpoint. The taking of a knowingly wrongful risk resulting in prejudice to the beneficiary is sufficient to ground personal liability. As a party to the contract between itself and Mr. Martin, M&L Travel Ltd. knew that the Air Canada monies were held in trust, and were not for the general use of the travel agency. It set up trust accounts, but never used them. It also knew that any positive balance in its general account was subject to the Bank's demand. By placing the trust monies in the general account that was then subject to seizure by the Bank, the travel agency took a risk to the prejudice of the rights of the beneficiary, Air Canada. It had no right to take this risk.

 

It was found clearly that the appellant directors participated or assisted in the breach of trust. There were dealing with the funds in question ‑‑ stopping payment on all cheques, opening a trust account, and attempting to withdraw the stop payment orders and to transfer the funds into a new trust account. The breach of trust was directly caused by the conduct of the defendant directors. Their actions in stopping payment on the cheques to protect their own interests not only prevented payment on cheques issued to Air Canada but also precipitated the seizure by the Bank of the only funds available in the unprotected general account.

Accordingly the court found that directors personally liable for breach of trust as constructive trustees.

 

Please read Transamerica Life Insurance Co. v. Canada Life Assurance Co. (1996), 28 O.R. (3d) 423 (Ontario Gen. Div.) at pages 192-198 of the Casebook. 

The defendant Canada Life Mortgage Services Ltd. (“CLMS”) was a wholly owned subsidiary of the defendant Canada Life Assurance Company. CLMS was incorporated by Canada Life Assurance Company to carry on the business of mortgage correspondent and general financial agent to deal with both Canada Life Assurance Company as well as other institutional investors. CLMS had its own head office and branch offices distinct from those of the Canada Life Assurance Company. Those offices were managed and operated independently of the Canada Life Assurance Company. The management of CLMS exercised independent discretion in conducting its business.

A number of the mortgage loans made by the plaintiff Transamerica Life Insurance Company of Canada that had been arranged by CLMS fell into default. The plaintiff Transamerica Life Insurance Company of Canada claimed that CLMS owed it a duty to do the underwriting for these loans, that it failed in that regard, and that Transamerica Life had suffered loss as a consequence. The terms of the Master Agreement that governed the relationship of the plaintiff Transamerica Life and CLMS did not specifically provide that CLMS was to perform any underwriting function on Transamerica Life’s behalf, and CLMS took the position that the agreement excluded this duty.

Transamerica Life sued CLMS for damages for breach of contract, breach of fiduciary duty, fraud, misrepresentation and negligence. Transamerica Life also sued Canada Life Assurance Company, asserting that it was liable for the wrongs of CLMS.

Canada Life Assurance Company moved for summary judgment dismissing the action against it.

It was held that the motion should be granted and the action against Canada Life Assurance Company be dismissed.

Transamerica Life relied on Kosmopoulos in arguing that the court should lift the corporate veil whenever it was "just and equitable" to do so. Sharpe J. rejected this approach finding that lifting the corporate veil whenever it was "just and equitable" to do so would represent a significant departure from the following principle established in Salomon:

“The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.” (at page 195 of the Casebook).

Sharpe J. then quotes Gower, Modern Company Law 5th ed. (1992):

“There seem to be three circumstances only in which the courts can [pierce the veil]. These are: 
<ol>
<li> When the court is construing a statute, contract or other document; </li>
<li> When the court is satisfied that a company is a "mere facade" concealing the true facts; and </li>
<li> When it can be established that the company is an authorized agent of its controllers or its members, corporate or human.” (At page 196 of the Casebook)</li>
</ol>
Then Sharpe J. concludes:

“... the courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct. The first element, "complete control", requires more than ownership. It must be shown that there is complete domination and that the subsidiary company does not, in fact, function independently.... The second element relates to the nature of the conduct: is there "conduct akin to fraud that would otherwise unjustly deprive claimants of their rights?” (At page197 of the Casebook)

Accordingly, Transamerica's claim against Canada Life was dismissed

 

TOPIC 6: THE PARTICULAR PROBLEM OF THIN CAPITALIZATION 

Please read pages 198-199 of the Casebook.

Companies have no minimum capitalization requirement in Canada. Often new corporations are created with one share valued at only $1. Thin capitalization refers to the situation where a corporation is established with high debt to equity ratio. Assuming that debt is normally secured, if something goes wrong there is no one protected except the secured creditors. In other words, in thinly capitalized companies trade creditors are very much at risk.

The question to be considered is whether thin capitalization, per se, should be a ground for lifting the corporate veil? Is it legitimate evidence where owners seek the benefit of limited liability without paying for it with adequate capital investment?

To understand what thin capitalization can look like in practical terms begin by reading the U.S. case of Walkovszky v. Carlton 18 N.Y. 2d 414 (Ct. App. 1966) at pages 199-204 of the Casebook. 

The facts are that the plaintiff Walkovszky was hit by a taxicab owned by the Seon Cab Corporation and sued. Carlton was a stockholder of ten corporations, including Seon, each of which had two cabs registered to its name and only minimal insurance. This was a rather common practice at the time in the taxicab industry.

Walkovszky claimed that although seemingly independent, the companies in fact operated as a single entity with regard to financing, supplies, repairs, employees and garaging and all of the companies are named as defendants. Walkovszky further argued that he was entitled to hold the stockholders personally liable for the damages sought because the multiple corporate structures constituted an unlawful attempt to defraud members of the general public who might be injured by the cabs.

Carlton’s motion to dismiss Walkovszky’s case was granted.

The issue in the case was whether Carlton could be held personally liable in this case and the majority of the court held that Carlton could not be held personally liable.

Fuld J. observed that incorporation of a business is permitted for the purpose of enabling its proprietors to escape personal liability. However, one can “pierce the corporate veil” when anyone uses control of the corporation to further his own rather than the corporation’s business.

That is to say that the courts will pierce the corporate veil whenever necessary in order to prevent fraud or inequity. In determining whether to lift the veil the court is to be guided by “general rules of agency.” Whenever a person uses the corporation to further his own interests as opposed to those of the corporation, he will be liable for the corporation’s acts. This liability is not just for the corporation’s dealings, but also as regards its negligence.

Here, while the complaint alleges that the separate corporations were undercapitalized and that their assets have been intermingled, it failed to mention that the defendant Carlton and his associates were actually doing business in their individual capacities, shuttling their personal funds in and out of the corporations without regard to formality.

The majority felt that if the insurance coverage required by statute was inadequate for the protection of the public, the remedy was not with the courts but with the Legislature.

In a similar case (Mangan) it was proved that operating companies existed only for the purpose of allowing the defendant to avoid the weight of the financial responsibilities and other liabilities. “However, it is one thing to assert that a corporation is a fragment of a larger corporate combine which actually conducts the business…It is quite another to claim that the corporation is a “dummy” for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends. Either circumstance would justify treating the corporation as agent and piercing the corporate veil to reach the principal but a different result would follow in each case. In the first, only a larger corporate entity would be held financially responsible...while, in the other, the stockholder would be personally responsible…” 

The majority further found that the separate corporations in this case (being Mangan) were undercapitalized and the assets intermingled, with personal funds being shuttled in and out of the corporations without formality and to suit the immediate convenience of the stockholders, then such perversions of the corporate form would justify personal liability on the stockholders.

Accordingly, a corporation is not illicit or fraudulent because it consists of other corporations.

The dissenting opinion of Keating J. went in rather a different direction:

“…From their inception these corporations were intentionally undercapitalized for the purpose of avoiding responsibility for acts which were bound to arise as a result of the operation of a large taxi fleet...”

Keating J. found that not only were the corporations intentionally undercapitalized for the purpose of avoiding liability, income was also drained from the corporations continuously for that same purpose. Keating J. did not believe that the privilege of limited liability through the use of the corporate device should be abused no matter what the cost to the public. In his view if a corporation exists without sufficient capital to pay its debts, it is inequitable that the shareholders should sustain such an organization only to escape personal liability. From this perspective attempting to do business without financial coverage is an abuse of the existence of a separate entity and should not exempt the shareholders from personal liability. Keating J. believed the policy of the law ought to be that shareholders should, in good faith, have enough capital in the business to secure the corporation. Otherwise grounds exist for denying the privilege associated with being a separate entity.

Keating J. also pointed out cases standing for other related propositions:
<ol>
<li>The equitable owners of a corporation are personally liable when they treat the company’s assets as their own and add or withdraw capital at will, or when they provide inadequate capital and actively participate in the corporation’s affairs.</li>
</ol>
 
<ol start="2">
<li>The sacrifice of limited liability happens when public policy must be defended or upheld. Fraud is part of this exception. Obvious inadequacy of capital is also considered to be a reason to deny the defense of limited liability.</li>
</ol>
 
<ol start="3">
<li>When corporate income is not sufficient to cover unexpected liabilities or extraordinary bad times, obviously the shareholders will not be held liable. However they will be when the corporation was designed solely to abuse the corporate privilege at the expense of public interest.</li>
</ol>
 

Please read the Notes and Questions 2 & 4 at page 204 of the Casebook.

 

Blog Activity 4.6

 

In your view: what ought to be the measure of adequate capitalization? 

 

And..

 
<ol>
<li>At which of the following points ought adequacy to be determined?</li>
</ol>
 
<ol>
<li> As of the time of trial?</li>
</ol>
 

It has been widely held that “some ‘wrong’ beyond a creditor’s inability to collect” must be shown before the veil will be pierced. Absent this, time of trial would be tantamount to a rule of unlimited liability. Creditor typically will pursue a veil piercing theory only where corporate assets are inadequate to meet its claim.
<h2>1. At the time of incorporation?</h2>
<h2>2. At an intermediate time?</h2>
<h2>That is to say what if the company had been adequately capitalized at formation, but subsequent developments have left it too thinly capitalized?</h2>
<h1>B. Now suppose that although initial funds at the time of incorporation and for sometime thereafter were adequate to satisfy existing contractual and likely tort obligations: (a) all profits were drained out of the firm in the form of dividends or salaries paid to the controlling shareholders, leaving it with insufficient reserves to meet its likely obligations; or, (b) the nature of the firm has changed, such that the initially adequate capital is no longer adequate.</h1>
Please blog your views on these question and your reasons in less than two pages under the heading “Adequate Capitalization”.

 

 

Now please read Henry Browne & Sons Ltd. v. Smith [1964] 2 Lloyd’s Rep. 476 (Eng. Q.B.) at pages 204-206.

In this case the plaintiffs Henry Browne & Sons Ltd. manufacture, supply and install a navigational device for boats. They installed such a device on an ocean cruiser and were not paid. As a result they sued Mr. Smith.

Mr. Smith’s defence was that the order was placed on behalf of Ocean Charters Ltd., a private limited company with an authorized capital of 3,000 one pound shares, of which two were issued – one held by Mr. Smith and the other held by his wife. Mr. Smith was the sole director of Ocean Charters Ltd.

The plaintiff Henry Browne & Sons Ltd. argued that the company Ocean Charters Ltd. was merely a sham or a name under which Mr. smith traded, or, alternatively, that the order was placed by Ocean Charters Ltd. as agent for Mr. Smith. It was held that the principals to the contract were Henry Browne & Sons Ltd. and Ocean Charters Ltd. only and that there was no liability on the part of Mr. Smith.

Please ask yourself what has this case got to do with “thin capitalization”? Was there any evidence that “thin capitalization” was actually the issue?

 

TOPIC 7: CORPORATE PURPOSE & FIDUCIARY DUTIES 

Please read pages 206-226 of the Casebook.

As a first exercise please:
<ol>
<li> Read the last sentence of first paragraph on page 207 of the Casebook; and</li>
<li> The excerpt from “Rotman, Fiduciary Law” at pages 207 and 208 of the Casebook. </li>
</ol>
Attempt to state for your own benefit the essence of to whom fiduciary duties ought to be owed in a corporate context

Please read the seminal case of Dodge v. Ford Motor Co. 204 Mich. 459 (1919) at pages 208-212 of the Casebook. The facts of this case memorably put into sharp relief the tensions between profit and purpose an a corporate context.

 

Ford was the dominant manufacturer of cars. At one point, the cars were sold for $900, but the price was slowly lowered to $440 – and finally, to $360. Henry Ford admitted that the price negatively impacted short-term profits, but argued that his ambition was to spread the benefits of the industrialized society among as many people as possible. The Dodges, who had recently founded their own firm to compete with Ford, objected to a decision by the Ford board of directors to withhold special dividends and to spend millions of dollars to build the world’s largest auto manufacturing facility instead. Their claim was that the decision was based on Henry Ford’s idiosyncratic preferences about doing social good for workers and customers as opposed to making the greatest amount of money for shareholders.

Ford was emphatic in both his pre-trial comments and in his testimony that the decision to build the factory was about doing “as much good as we can, everywhere, for everybody concerned . . . [a]nd incidentally to make money.” (See Allen Nevins & Frank E. Hill, Ford: Expansion and Challenge, 1915-33, at 99-100 (1957) (quoting interview).

Further, Ford essentially contended that he has paid out substantial dividends to the shareholders ensuring that they have made a considerable profit, and should be happy with whatever return they get from that point forward. Instead of using the money to pay dividends, Ford decided to put the money into expanding the corporation.

The issue was whether the Plaintiff shareholders could force Ford to increase the cost of the product and limit the money invested into expansion in order to pay out a larger dividend.

It was held that the Plaintiffs were entitled to a more equitable-sized dividend, but the court did not interfere with Ford’s business judgments regarding the price set on the manufactured products or the decision to expand the business.

In essence the court determined that the purpose of corporations is to make money for their shareholders, and that Ford was arbitrarily withholding money that could have gone to the shareholders. Notably, Henry Ford did not deny himself a large salary for his position with the company in order to achieve his ambitions. However, the court was not willing to questions whether the company would be better off with a higher price per vehicle, or if the expansion was wise, because those decisions are covered under the business judgment rule.

Let us further analyze the actual decision. Read through the following for a second time and then answer the questions following the quote for yourself:

 

“There should be no confusion (of which there is evidence) of the duties which Mr. Ford conceives that he and the stockholders owe to the general public and the duties which in law he and his codirectors owe to protesting, minority stockholders. A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.

 

There is committed to the discretion of directors, a discretion to be exercised in good faith, the infinite details of business, including the wages which shall be paid to employees, the number of hours they shall work, the conditions under which labor shall be carried on, and the price for which products shall be offered to the public. It is said by appellants that the motives of the board members are not material and will not be inquired into by the court so long as their acts are within their lawful powers. As we have pointed out, […] it is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others, and no one will contend that, if the avowed purpose of the defendant directors was to sacrifice the interests of share-holders, it would not be the duty of the courts to interfere.” (Emphasis added)
<ol>
<li> Were these words necessary to the decision or were they merely dictum?</li>
<li> Does the BCBCA section 227 preclude the result in Dodge v. Ford Motor Co.? Does it authorize it?</li>
</ol>
 

“Restricted businesses and powers
<ol start="33">
<li> (1) A company must not</li>
</ol>
(a) carry on any business or exercise any power that it is restricted by its memorandum or articles from carrying on or exercising, or

(b) exercise any of its powers in a manner inconsistent with those restrictions in its memorandum or articles.

(2) No act of a company, including a transfer of property, rights or interests to or by the company, is invalid merely because the act contravenes subsection (1).

 

 

Powers and functions of directors
<ol start="136">
<li> (1) The directors of a company must, subject to this Act, the regulations and the memorandum and articles of the company, manage or supervise the management of the business and affairs of the company.</li>
</ol>
 

 Duties of directors and officers

142 (1) A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case may be, must
<ul>
<li>act honestly and in good faith with a view to the best interests of the company,</li>
</ul>
 
<ul>
<li>exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances,</li>
</ul>
 
<ul>
<li>act in accordance with this Act and the regulations, and</li>
</ul>
 

(d) subject to paragraphs (a) to (c), act in accordance with the memorandum and articles of the company.

(2) This section is in addition to, and not in derogation of, any enactment or rule of law or equity relating to the duties or liabilities of directors and officers of a company.

(3) No provision in a contract, the memorandum or the articles relieves a director or officer from

(a) the duty to act in accordance with this Act and the regulations, or

(b) liability that by virtue of any enactment or rule of law or equity would otherwise attach to that director or officer in respect of any negligence, default, breach of duty or breach of trust of which the director or officer may be guilty in relation to the company.

 

Complaints by shareholder
<ol start="227">
<li> (1) For the purposes of this section, "shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.</li>
</ol>
(2) A shareholder may apply to the court for an order under this section on the ground

(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or

 

(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.

(3) On an application under this section, the court may, with a view to remedying or bringing to an end the matters complained of and subject to subsection (4) of this section, make any interim or final order it considers appropriate, including an order

(a) directing or prohibiting any act,

(b) regulating the conduct of the company's affairs,

(c) appointing a receiver or receiver manager,

(d) directing an issue or conversion or exchange of shares,

(e) appointing directors in place of or in addition to all or any of the directors then in office,

(f) removing any director,

(g) directing the company, subject to subsections (5) and (6), to purchase some or all of the shares of a shareholder and, if required, to reduce its capital in the manner specified by the court,

(h) directing a shareholder to purchase some or all of the shares of any other shareholder,

(i) directing the company, subject to subsections (5) and (6), or any other person, to pay to a shareholder all or any part of the money paid by that shareholder for shares of the company,

(j) varying or setting aside a transaction to which the company is a party and directing any party to the transaction to compensate any other party to the transaction,

(k) varying or setting aside a resolution,

(l) requiring the company, within a time specified by the court, to produce to the court or to an interested person financial statements or an accounting in any form the court may determine,

(m) directing the company, subject to subsections (5) and (6), to compensate an aggrieved person,

(n) directing correction of the registers or other records of the company,

(o) directing that the company be liquidated and dissolved, and appointing one or more liquidators, with or without security,

(p) directing that an investigation be made under Division 3 of this Part,

(q) requiring the trial of any issue, or

(r) authorizing or directing that legal proceedings be commenced in the name of the company against any person on the terms the court directs.

(4) The court may make an order under subsection (3) if it is satisfied that the application was brought by the shareholder in a timely manner.

(5) If an order is made under subsection (3) (g), (i) or (m), the company must pay to a person the full amount payable under that order unless there are reasonable grounds for believing that

(a) the company is insolvent, or

(b) the payment would render the company insolvent.

(6) If reasonable grounds exist for believing that subsection (5) (a) or (b) applies,

(a) the company is prohibited from paying the person the full amount of money to which the person is entitled,

(b) the company must pay to the person as much of the amount as is possible without causing a circumstance set out in subsection (5) to occur, and

(c) the company must pay the balance of the amount as soon as the company is able to do so without causing a circumstance set out in subsection (5) to occur.

(7) If an order is made under subsection (3) (o), Part 10 applies.

 
<ol start="3">
<li> How do you identify what is to the “benefit of shareholders” in the case of a corporation with more than one shareholder? </li>
</ol>
Different shareholders have different investment time frames, different tax concerns, different attitudes toward firm-level risk due to different levels of diversification, different interests in other investments that might be affected by corporate activities, and different views about the extent to which they are willing to sacrifice corporate profits to promote broader social interests, such as a clean environment or good wages for workers.

Could there be any single, uniform measure of shareholder “wealth” to be “maximized”?

Please now read the excerpt from “Rotman, Fiduciary Law” on pages 212-214 of the Casebook. 

For an interesting article on the background to the case, see M. Todd Henderson, “Everything Old Is New Again: Lessons from Dodge v. Ford Motor Company” (2007) U of Chicago Law & Economics, Olin Working Paper No. 373: <a href="http://www.law.uchicago.edu/files/files/373.pdf">http://www.law.uchicago.edu/files/files/373.pdf</a>

 

Following up on Dodge v. Ford Motor Co. is the equally memorable case (at least if you are a baseball fan) of Shlensky v. Wrigley 237 N.E.2d 776 (Ill. App.1968) at pages 214-218 of the Casebook. 

Mr. Phillip K. Wrigley was a director of the Chicago National League Ball Club (Inc.), which was the company that owned the Chicago Cubs. The Board tended to follow Mr. Wrigley’s lead for a variety of reasons not relevant to the outcome of this case. Although every other major league team had installed lights to allow for night games, Defendant did not install them for the Cubs because he was concerned that night baseball would be detrimental to the surrounding neighborhood.

Mr. Shlensky, a minority shareholder of the Chicago National League Ball Club (Inc.), brought a derivative action against the decision not to install lights. A derivative action is where an action is brought against the corporation in essence in the name of the corporation. Hence the word “derivative” as the right to bring action is derived from the corporation itself, and what is in the best interests of the corporation. Much more on this concept later in this course, but Wrigley v. Shlensky is a useful introduction to the concept. 

In his argument, ostensibly on behalf of the Chicago National League Ball Club (Inc.), Mr. Shlensky pointed out that the team was losing money, and that the other Chicago team, the White Sox, had higher attendance during the weekdays because they played at night. Therefore in his view the Cubs would draw more people with weekday night games. Shlensky argued that Wrigley’s first concern ought to be with the shareholders rather than the neighborhood.

The issue in the case was whether decisions made by Wrigley should be overruled absent a showing of fraud, illegality or a conflict of interest?

The decision was not to overrule Wrigley’s determination on the issue of lights. The court cited some reasons why the light installation could be detrimental, such as lowering the property value of the park itself, a lack of proof that financing would be available for lights and some uncertainty whether the costs would in fact be offset by increasing revenues. In essence the court set out that business decisions should not be disturbed just because a reasonable case can be made that the policy chosen by the company might not be the wisest possible. This was all the more true where there was no evidence of illegality, fraud or a conflict of interest

The court upheld the directors’ decision. Moreover the court reasoned (as the directors themselves had not) that a decline in the quality of life in the local neighbourhoods might in the long run hurt property values around Wrigley Field, harming shareholders’ economic interests.

In many ways this decision on those like it can be seen as a form of abstention by judiciary; an unwillingness to supplant the business judgment of a properly constituted and motivated Board of Directors. This so-called “BUSINESS JUDGMENT RULE” establishes a presumption against judicial review of duty of care claims. 

There are several interesting questions and observations that flow from this case:
<ol>
<li>For one was Wrigley an innovator making a venturesome business decision or an eccentric who was just behind the times? How can we know when the “business judgment rule” precluded Mr. Shlensky from even getting up to bat? </li>
</ol>
 
<ol>
<li>Encouraging risk-taking is part of the story, and the business judgment rule allows for that, but it is only a part of the story. Something else is going on as well. This is because if the business judgment rule is framed as an abstention doctrine, judicial review is more likely to be the exception rather than the rule. That is because the court begins with a presumption against review. It then reviews the facts to determine not the quality of the decision, but rather whether the decision making process was tainted by self-dealing and the like. The requisite questions to be asked are more objective and straightforward: Did the board commit fraud? Did the board commit an illegal act? Did the board self-deal? Whether or not the board exercised reasonable care is irrelevant, as well it should be. The business judgment rule thus builds a prophylactic barrier by which courts pre-commit to resisting the temptation to review the merits of the board’s decision.</li>
</ol>
 
<ol>
<li>A deeper look at Shlensky v. Wrigley also illustrates the malleability of the concept of “the best interests of the company”. It can be all to easy, as Mr. Shlensky’s argument illustrated to define those interests too narrowly, or to directly or indirectly align them with “personal best interests.”</li>
</ol>
 

A classic example of judicial eagerness to protect directors from claims that they failed to maximize shareholder wealth follows. Please read Peoples Department Stores Inc. (Trustee of) v. Wise [2004] 3 S.C.R. 461 (SCC) at pages 219-221 of the Casebook.

The directors of Peoples Department Stores, a federal business corporation wholly owned by Wise Stores Inc. ("WSI"), were the three Wise brothers (editors note: there really were three Wise brothers - no joke), who were also the directors and majority shareholders of WSI.

To rationalize the operations of their two overlapping companies, the Wise brothers adopted a joint inventory procurement policy: Peoples Department Stores bought all its merchandise from North American suppliers (i.e., 86% of the total), and WSI bought its merchandise from overseas suppliers (the other 14%). The merchandise purchased by Peoples Department Stores for WSI was transferred to WSI, but Peoples Department Stores did not seek immediate payment. This resulted in an inter-company loan of $18 million, which WSI were unable to repay. WSI went bankrupt owing $4.44 million. Peoples Department Stores also had to close.

The trustee in bankruptcy of Peoples Department Stores sued the three Wise brothers for that amount of $4.44 million, specifically alleging that the brothers had breached their fiduciary duty and their duty of care under section 122 (1) of the Canada Business Corporations Act ("CBCA") by favouring the interests of WSI over those of Peoples Department Stores while they were corporate directors of Peoples Department Stores.

The relevant statutory provisions provided:

“102. (1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.
<ol start="122">
<li> (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall</li>
</ol>
 (a) act honestly and in good faith with a view to the best interests of the corporation; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.” 

 

The Supreme Court of Canada found the three Wise brothers not to be liable. Following are a number of the court’s observations about the case:
<ol>
<li>The court held that this appeal did not relate to the non-statutory duty directors owe to shareholders. It was concerned only with the statutory duties owed under the <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html">CBCA</a>. Insofar as the statutory fiduciary duty is concerned, it is clear that the phrase the “best interests of the corporation” should not be read simply as the “best interests of the shareholders”. From an economic perspective, the “best interests of the corporation” means the maximizing of the value of the corporation.</li>
<li> The court accepted as an accurate statement of law that in determining whether directors are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment. </li>
<li>The court made the following practical and important observations:</li>
</ol>
“The interests of shareholders, those of the creditors and those of the corporation may and will be seen as consistent with each other if the corporation is profitable and well capitalized and has strong prospects. However, this can change if the corporation starts to struggle financially. The residual rights of the shareholders will generally become worthless if a corporation is declared bankrupt. Upon bankruptcy, the directors of the corporation transfer control to a trustee, who administers the corporation’s assets for the benefit of creditors. 

Short of bankruptcy, as the corporation approaches what has been described as the “vicinity of insolvency”, the residual claims of shareholders will be nearly exhausted. While shareholders might well prefer that the directors pursue high-risk alternatives with a high potential payoff to maximize the shareholders’ expected residual claim, creditors in the same circumstances might prefer that the directors steer a safer course so as to maximize the value of their claims against the assets of the corporation.

The directors’ fiduciary duty does not change when a corporation is in the nebulous “vicinity of insolvency”. That phrase has not been defined; moreover, it is incapable of definition and has no legal meaning. What it is obviously intended to convey is deterioration in the corporation’s financial stability. In assessing the actions of directors it is evident that any honest and good faith attempt to redress the corporation’s financial problems will, if successful, both retain value for shareholders and improve the position of creditors. If unsuccessful, it will not qualify as a breach of the statutory fiduciary duty…

In resolving these competing interests, it is incumbent upon the directors to act honestly and in good faith with a view to the best interests of the corporation. In using their skills for the benefit of the corporation when it is in troubled waters financially, the directors must be careful to attempt to act in its best interests by creating a “better” corporation, and not to favour the interests of any one group of stakeholders. If the stakeholders cannot avail themselves of the statutory fiduciary duty (the duty of loyalty, supra) to sue the directors for failing to take care of their interests, they have other means at their disposal.” (Emphasis added)

 

Next please read an important case you will see referred to on several occasions throughout the course:

BCE Inc. v. 1976 Debentureholders [2008] 2 S.C.R. 560 (SCC) at pages 222 – 225 of the Casebook.

This case arose from challenge by a group of Bell Canada debentureholders to the proposed acquisition of BCE by a consortium headed by the Ontario Teachers’ Pension Plan Board through a $52 billion arrangement under section 192 of the CBCA. For contextual purposes section 192 provides in part:

“192. (1) In this section, “arrangement” includes

(a) an amendment to the articles of a corporation;

(b) an amalgamation of two or more corporations;

(c) an amalgamation of a body corporate with a corporation that results in an amalgamated corporation subject to this Act;

(d) a division of the business carried on by a corporation;

(e) a transfer of all or substantially all the property of a corporation to another body corporate in exchange for property, money or securities of the body corporate;

(f) an exchange of securities of a corporation for property, money or other securities of the corporation or property, money or securities of another body corporate;

(f.1) a going-private transaction or a squeeze-out transaction in relation to a corporation;

(g) a liquidation and dissolution of a corporation; and

(h) any combination of the foregoing…

 

…(3) Where it is not practicable for a corporation that is not insolvent to effect a fundamental change in the nature of an arrangement under any other provision of this Act, the corporation may apply to a court for an order approving an arrangement proposed by the corporation.

 (4) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,

(a) an order determining the notice to be given to any interested person or dispensing with notice to any person other than the Director;

(b) an order appointing counsel, at the expense of the corporation, to represent the interests of the shareholders;

(c) an order requiring a corporation to call, hold and conduct a meeting of holders of securities or options or rights to acquire securities in such manner as the court directs;

(d) an order permitting a shareholder to dissent under section 190; and

(e) an order approving an arrangement as proposed by the corporation or as amended in any manner the court may direct.”

 

The arrangement in question was to have been financed in part through BCE’s assumption of an additional $38.5 billion in debt, of which $30 billion was to have been guaranteed by Bell Canada, a wholly owned subsidiary of BCE. BCE’s common shareholders in fact overwhelmingly approved the transaction. However the debentureholders objected to the arrangement on the grounds that it would diminish the trading value of their debentures by an average of 20 percent, while conferring a premium of approximately 40 percent of the market price to holders of BCE common shares.

The Supreme Court of Canada made the following observations (excerpted not from the Casebook, but rather from the full decision which can be found here: <a href="http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/6238/index.do">http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/6238/index.do</a>):

“ The directors are responsible for the governance of the corporation. In the performance of this role, the directors are subject to two duties: a fiduciary duty to the corporation under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec122subsec1_smooth">s. 122(1)</a>(a) (the fiduciary duty); and a duty to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances under <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec122subsec1_smooth">s. 122(1)</a>(b) (the duty of care). The second duty is not at issue in these proceedings as this is not a claim against the directors of the corporation for failing to meet their duty of care… 

The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation. The content of this duty varies with the situation at hand. At a minimum, it requires the directors to ensure that the corporation meets its statutory obligations. But, depending on the context, there may also be other requirements. In any event, the fiduciary duty owed by directors is mandatory; directors must look to what is in the best interests of the corporation… 

In considering what is in the best interests of the corporation, directors may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions. Courts should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule. The “business judgment rule” accords deference to a business decision, so long as it lies within a range of reasonable alternatives: see Maple Leaf Foods Inc. v. Schneider Corp. 1998 CanLII 5121 (ON CA), (1998), 42 O.R. (3d) 177 (C.A.); Kerr v. Danier Leather Inc., 2007 SCC 44 (CanLII), [2007] 3 S.C.R. 331, 2007 SCC 44. It reflects the reality that directors, who are mandated under s. 102(1) of the CBCA to manage the corporation’s business and affairs, are often better suited to determine what is in the best interests of the corporation. This applies to decisions on stakeholders’ interests, as much as other directorial decisions. 

Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debentureholders in these appeals. This is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen. However, the directors owe a fiduciary duty to the corporation, and only to the corporation. People sometimes speak in terms of directors owing a duty to both the corporation and to stakeholders. Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases (such as these appeals) may arise where these interests do not coincide. In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation.”

Accordingly the claim of the debenture-holders failed.

 

Blog Activity 4.7

Please consider questions 2 & 3 of the notes on page 225 of the Casebook. As well please read the excerpt from “Rotman, Fiduciary Law” at pages 225-6 of the Casebook, especially the last paragraph on page 226 of the Casebook.

 

In your view what general conclusions do you draw concerning the law on corporate purpose? Please blog your views on these question and your reasons in less than two pages under the heading “Corporate Purpose”.

 

UNIT WRAP UP: 

By now the contradictions inherent to and consequent upon corporate personhood have been explored (even if not quite capable of ever being fully understood). Moving forward we have no pedagogic alternative to accepting that this “thing” we call a corporation is believed to exist. So what can it do and what can’t it do? How does it commit a crime? How can it commit a crime? And so much more…the following Unit is meant to explore such questions.