LAW 315 | business associations - UVic LSS | The … - LAW 315 - Final.pdf · · 2013-12-28LAW 315 | business associations final outline ... Nordile’Holdings’Ltd.’v.’Breckenridge’(1992)

LAW 315 | business associations

final outline | 2013-2014

John Bullock

this outline has been put together with class notes in addition to a number of other outlines

Business Associations

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TABLE OF CONTENTS Introduction .......................................................................................................................................................... 6 Agency ..................................................................................................................................................................... 6 Relationships Between Principal and Agent ................................................................................................................. 6 Actual Authority ................................................................................................................................................................. 7 Express Actual Authority .................................................................................................................................................................. 7 Implied Actual Authority: Usual & Implied ............................................................................................................................... 7 Freeman & Lockyer v. Buckhurst Park Properties, 1964 ...................................................................................................... 7

Duties of the Agent to the Principal ............................................................................................................................. 8 Duties of the Principal to the Agent ............................................................................................................................. 9 Termination of the Agency Relationship ................................................................................................................... 9

Relationships with Others ................................................................................................................................................ 10 Ostensible Authority ...................................................................................................................................................... 10

Lloyd v. Greysmith ............................................................................................................................................................................... 10 Freeman & Lockyer v. Buckhurst Park Properties, 1964 (architect case above) .................................................... 11

Reasons Behind Ostensible Authority ...................................................................................................................................... 11 Breach of Warranty of Authority ................................................................................................................................................ 11

Ratification ........................................................................................................................................................................ 12 Undisclosed Principal .................................................................................................................................................... 13

Said v. Butt .............................................................................................................................................................................................. 13 Policy Reasons for Law Concerning Undisclosed Principals .......................................................................................... 13

Liability of Principal for Agent’s Torts ..................................................................................................................... 14 Lloyd v. Grace, Smith, 1912 (law firm conveyancing clerk case above) ...................................................................... 14 Ernst & Young v. Falconi, 1994 ...................................................................................................................................................... 14

Policy Reasons for Tort Liability of Principal ........................................................................................................................ 14 Sole Proprietorship .......................................................................................................................................... 15 Structure ............................................................................................................................................................................ 15 Formation .......................................................................................................................................................................... 15 Funding ............................................................................................................................................................................... 15 Legal Status and Liability of SP ................................................................................................................................... 15 Name & Registration Requirements ......................................................................................................................... 15 Purposes Served by the Registry ............................................................................................................................... 16 Why Use Sole Proprietorship? .................................................................................................................................... 16

Partnership ......................................................................................................................................................... 17 The Relationship Between the Partners ..................................................................................................................... 17 Formation: An Introduction ........................................................................................................................................ 17 Definitions and Vocabulary ........................................................................................................................................................... 17 Backman v. Canada (2001), 196 D.L.R. (4th) 193 (S.C.C.) ................................................................................................. 19 Gordon v. The Queen, [1961] S.C.R. 592 ..................................................................................................................................... 19

The Legal Status of Partnership ................................................................................................................................. 20 Re Thorne and New Brunswick Workmen’s Compensation Board (1962), 33 D.L.R. (2d) 167 ......................... 20 Re Kucor Construction v. Canada Life (1997), 32 O.R. (3d) 548 (Ont. Gen. Div.) ..................................................... 20 McCormick v. Fasken Martinueau DuMoulin LLP (2012), 352 D.L.R. (4th) 294 (B.C.C.A.) (leave to appeal to S.C.C. granted March 7, 2013) ........................................................................................................................................................ 20

Name Registration and Actions Against Partnerships ....................................................................................... 21 Governance ....................................................................................................................................................................... 21 Fiduciary Duties of Partners ......................................................................................................................................................... 22


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Rochwerg v. Truster (2002), 23 B.L.R. (3d) 107 ..................................................................................................................... 23 McKnight v. Hutchinson (2002), 28 B.L.R. (2d) 269 ............................................................................................................. 24

Funding ............................................................................................................................................................................... 24 Dissolution of Partnership ........................................................................................................................................... 24

Relationships Between the Partners and Other Persons ...................................................................................... 25 Liability of Partners in Contract and Tort .............................................................................................................. 25 Liability in Tort ................................................................................................................................................................................... 26 Ernst & Young Inc. v. Falconi (1994), 17 O.R. (3d) 512 (Gen. Div.) ................................................................................ 26

The Existence of Partnership & in the Context of Third Party Relations ..................................................... 26 Policy/Values in Partnership Law ............................................................................................................................. 28

A.E. Lepage v. Kamex Developments (1977), 78 D.L.R. (3d) 223, aff’d (1979) 105 D.L.R. (3d) 84n ................ 28 Cox v. Hickman (1860), 8 H.L. Cas. 268 ...................................................................................................................................... 28 Pooley v. Driver (1876), 5 Ch. D. 458 (C.A.) .............................................................................................................................. 29 Martin v. Peyton 158 N.E. 77 (1927 N.Y. Court of Appeals) .............................................................................................. 29

Subordination of Lenders for a Share of the Profits ............................................................................................ 29 Re Fort, [1897] 2 Q.B. 495 ................................................................................................................................................................ 29 Canada Deposit Insurance Corp. v. Canadian Commercial Bank (1992), 97 D.L.R. (4th) 385 (S.C.C.) ........... 29 Sukloff v. Rushforth, [1964] S.C.R. 459 ....................................................................................................................................... 29

Retirement of Partners ................................................................................................................................................. 30 Why Use This Form of Association ............................................................................................................................ 30

Limited Partnership ......................................................................................................................................... 30 Separation of Ownership & Control .......................................................................................................................... 31 Why Limited Partnership? ........................................................................................................................................... 31

Haughton Graphic v. Zivot (1986), 33 B.L.R. 125 (Alta. H.C.) ........................................................................................... 31 Nordile Holdings Ltd. v. Breckenridge (1992), 66 B.C.L.R. (2d) 183 (B.C.C.A.) ......................................................... 32

Limited Liability Partnership ........................................................................................................................ 32 Corporations ....................................................................................................................................................... 32 The Nature of the Corporation: Essential Characteristics ..................................................................................... 32 The Benefits of Limited Liability .................................................................................................................................... 33 The History of the Corporation in England and Canada ......................................................................................... 34 The Constitutional Position ............................................................................................................................................. 34 Provincial Legislation: Impact on Federal Corporations .................................................................................. 35 Implications of the Constitutional Positions ......................................................................................................... 35 Extra-‐Provincial Registration ..................................................................................................................................... 35

Bonanza Creek Gold Mining v. The King, [1916] 1 A.C. 566 (P.C.) ................................................................................. 36 John Deere Plow Co. v. Warton, [1915] A.C. 330 (P.C.) ........................................................................................................ 36 A.G. Canada v. A.G. Manitoba, [1929] 1 D.L.R. 369 (P.C.) ................................................................................................... 36 Lymburn v. Mayland, [1932] A.C. 318 (P.C.) ............................................................................................................................ 36 Canadian Indemnity Co. v. A.G. British Columbia, [1977] 2 S.C.R. 504 ......................................................................... 36 Multiple Access v. McCutcheon, [1982] 2 S.C.R. 161 ............................................................................................................. 37

The Incorporation Process .............................................................................................................................................. 37 Steps in the Incorporation Process ........................................................................................................................... 37 Names of Corporations .................................................................................................................................................. 38 Post-‐Incorporation Steps ............................................................................................................................................. 38 Directors ................................................................................................................................................................................................ 39 Officers ................................................................................................................................................................................................... 40

Why Incorporate? ........................................................................................................................................................... 40


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Which Jurisdiction – CBCA or BC BCA? ..................................................................................................................... 41 Reincorporation .............................................................................................................................................................. 42 Continuance: In & Out of the CBCA ............................................................................................................................ 42

Legal Status of Corporations ............................................................................................................................................ 43 Provisions ............................................................................................................................................................................................. 43 Salomon v. A. Salomon & Co., [1897] A.C. 22 (H.L.) ............................................................................................................... 44 Lee v. Lee's Air Farming Ltd., [1961] A.C. 12 (P.C.) ............................................................................................................... 44 Macaura v. Northern Assurance Co., [1925] A.C. 619 (H.L.) ............................................................................................. 45

Pre-‐Incorporation Contracts ........................................................................................................................................... 45 Common Law Position ..................................................................................................................................................................... 45 CBCA s. 14 ............................................................................................................................................................................................. 46 When Will CBCA Provisions Apply? .......................................................................................................................................... 46 BC BCA s. 20 ......................................................................................................................................................................................... 47 Kelner v. Baxter (1866), L.R. 2 C.P. 174 (Common Pleas) .................................................................................................. 47 Newborne v. Sensolid (Great Britain) Ltd., [1953] 1 All E.R. 708 ................................................................................... 47 Black v. Smallwood & Cooper (1966), 117 C.L.R. 52 (High Court of Australia) ....................................................... 48 Wickberg v. Shatsky (1969), 4 D.L.R. (3d) 540 (B.C.S.C.) .................................................................................................... 48 Landmark Inns of Canada Ltd. v. Horeak, [1982] 2 W.W.R. 377 .................................................................................... 48 Bank of Nova Scotia v. Williams (1976), 12 O.R. (2d) 709 (H.C.J.) (class note) ........................................................ 49

Liability for Corporate Acts: Piercing the Corporate Veil ...................................................................................... 49 Kosmopolous v. Constitution Insurance Co. of Canada, [1987] 1 S.C.R. 2 ................................................................... 50

Gap-‐Filling/Implied Contractual Terms .................................................................................................................. 51 Gilford Motors Company Ltd. v. Horne [1933] Ch. 935 (C.A.) ........................................................................................... 51 Saskatchewan Economic Development Corp. v. Patterson-‐Boyd Mfg. Corp. [1981] 2 W.W.R. 40 (Sask. C.A.) ..................................................................................................................................................................................................................... 51

Corporations Formed to Avoid Statutory Requirements .................................................................................. 52 British Merchant Merchandise Transport Ltd. v. British Transport Commission [1961] 3 All E.R. 495 ....... 52

Affiliated Corporations ................................................................................................................................................. 52 Smith, Stone and Knight Ltd. v. Birmingham Corp., [1939] 4 All E.R. 116 (K.B.) ..................................................... 52 Alberta Gas Ethylene Co. v. M.N.R., [1989] 41 B.L.R. 117 (Fed. T.D., Aff’d [1990] 2 C.T.C. 171 (Fed. C.A.) .... 52 Gregorio v. Intrans-‐Corp. (1984), 18 O.R. (3d) 527 (C.A.) .................................................................................................. 52 Walkovsky v. Carlton, 223 N.E. 2d 6 (1966 N.Y.A.D.) ........................................................................................................... 53 Mangen v. Terminal Cabs Ltd., 272 N.Y. 676 (1936 N.Y.A.D.) .......................................................................................... 53

Representations of Unlimited Liability ................................................................................................................... 53 Corporate Naming Requirement ................................................................................................................................................. 53 Gelhorn Motors Ltd. v. Yee (1969), 71 W.W.R. 526 (Man.C.A.) ........................................................................................ 53 Chaing v. Heppner (1978), 85 D.L.R. (3d) 487 (B.C.S.C.) ..................................................................................................... 53 Tato Enterprises Ltd. v. Rode (1979), 17 A.R. 432 (Alta. Dist. Ct.) ................................................................................. 54 Roydent Dental Products Inc. v. Inter-‐dent Int’l Dental Supply Co. of Canada, [1993] O.J. 708 ........................ 54

Non-‐Consensual Claimants .......................................................................................................................................... 54 Wolfe v. Moir, CB 106-‐08 .................................................................................................................................................................. 54

Other Means of Getting Around the Corporate Entity Concept ....................................................................... 54 Direct Tort Claims ............................................................................................................................................................................. 54 Berger v. Willowdale A.M.C. (1983), D.L.R. (3d) 247 ............................................................................................................ 54 Said v. Butt, [1920] 3 K.B. 497 ........................................................................................................................................................ 55 McFadden v. 481782 Ont. Ltd. (1984), 47 O.R. (2d) 134 .................................................................................................... 55 ADGA Systems International Ltd. v. Valcom Ltd. (1999), 43 O.R. (3d) 101 (Ont. C.A.) .......................................... 55 Rafiki Properties Ltd. v. Integrated Housing Development Ltd. (1999), 45 B.L.R. (2d) 316 (B.C.S.C.) ........... 55


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Better Off Dead Productions Inc. v. Pendulum Pictures Inc. (2002), 22 B.L.R. (3d) 122 ...................................... 55 The Oppression Remedy ................................................................................................................................................................ 55 PCM Construction Control Consultants Ltd. v. Heeger, [1989] 5 W.W.R. 598 ........................................................... 56 2082825 Ontario Inc. v. Platinum Wood Finishing Inc. (2009), 96 O.R. (3d) 467 (Ont. Div. Ct.) ...................... 56 Glasscell Isofab Inc. v. Thompson (2012), 2012 ONSC 6423 (Ont. S.C.J.) ..................................................................... 56

Knowing Assistance in Breach of Trust ................................................................................................................................... 56 Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787 ........................................................................................................... 56

Statutory Provisions where directors/shareholders can be liable ............................................................... 57 CBCA s. 118 ........................................................................................................................................................................................... 57 Unpaid Wages ...................................................................................................................................................................................... 57

Financing ................................................................................................................................................................................ 57 Shares .................................................................................................................................................................................. 57 Further Share Provisions and Definitions .............................................................................................................................. 59 International Power Co. v. McMaster University, [1946] S.C.R. 178 .............................................................................. 60 Dodge v. Ford Motor Co., 170 N.W. 668 (1919 Michigan Supreme Ct.) ....................................................................... 60 Fergusson v. Imax (1983), 43 O.R. (2d) 128 (C.A.) ................................................................................................................ 60 Bushell v. Faith, [1970] A.C. 1099 (H.L.) .................................................................................................................................... 61 Jacobsen v. United Canso Oil & Gas Ltd. (1980) 11 B.L.R. 313 (Alta. Q.B.) .................................................................. 61 Bowater Canadian Ltd. v. R.L. Crain Inc. & Craisec Ltd. (1987), 62 O.R. (2d) 752 .................................................. 61

Debt Securities ................................................................................................................................................................. 61 The Distribution of Securities ..................................................................................................................................... 62

Governance ............................................................................................................................................................................ 63 Powers of the Corporation and Authority of Directors and Officers ............................................................. 63 The Ultra Vires Doctrine ................................................................................................................................................................. 63 Ashbury Ry. Carriage & Iron Co. v. Riché ................................................................................................................................... 63 Re Introductions Ltd. [1970] Ch. 199 .......................................................................................................................................... 63

Authority of Agents to Contract for Corporation: Constructive Notice & Indoor Management Rule ........... 64 Directors and Officers ................................................................................................................................................... 65 Authority and Powers of Directors ............................................................................................................................................ 65 Scope of Power to Delegate Powers .......................................................................................................................................... 66 Removal of Officers ........................................................................................................................................................................... 66 Directors’ Meetings ........................................................................................................................................................................... 67 Role of Directors of Public Corporations ................................................................................................................................. 67

Shareholder Voting Rights ........................................................................................................................................... 68 Fundamental Changes ..................................................................................................................................................................... 68 Class Voting .......................................................................................................................................................................................... 68 Significance of Voting Rights ........................................................................................................................................................ 69

Shareholder Meetings ................................................................................................................................................... 69 Conduct of Meetings ......................................................................................................................................................................... 69 Duties of the Chair ............................................................................................................................................................................. 70 Wall v. London and Northern Assets Corporation, [1898] 2 Ch. 469 (C.A.) ............................................................... 70 Re Marshall (1981), 129 D.L.R. (3d) 378 ................................................................................................................................... 70 Re United Canso Oil and Gas Ltd. (1980), 41 N.S.R. (2d) 282 ........................................................................................... 70 Blair v. Consolidated Enfield Corp. (1993), 15 O.R. (3d) 783 ........................................................................................... 70

Shareholder Requisitioned Meetings ........................................................................................................................................ 70 Court Ordered Meetings ................................................................................................................................................................. 71 Re El Sombrero, [1958] Ch. 900 (Eng. Ch. Div.) ...................................................................................................................... 71 Re Opera Photographic Ltd., [1989] 1 W.L.R. 634 (Ch.D.) ................................................................................................. 71


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Re Morris Funeral Service Ltd. (1957), 7 D.L.R. (2d) 642 (Ont. C.A.) ............................................................................ 71 Re Barsh and Feldman (1986), 54 O.R. (2d) 340 (Ont. H.C.) ............................................................................................. 71 Re Routley's Holdings Ltd., [1960] O.W.N. 160 ....................................................................................................................... 72 Re Canadian Javelin Ltd. (1977) 69 D.L.R. (3d) 439 (Que. Sup. Crt.) ............................................................................ 72 Charlebois v. Bienvenue, [1968] 2 O.R. 217 (Ont. C.A.) ........................................................................................................ 72

Proxy Solicitation ............................................................................................................................................................................... 72 Shareholder Proposals .................................................................................................................................................................... 73 Medical Committee for Human Rights v. SEC, 432 F.2d 659 (1970) ............................................................................. 73 Re Varity Corp. and Jesuit Fathers of Upper Canada (1987), 59 O.R. (2d) 459, affd (1987), 60 O.R. 640 (C.A.) .......................................................................................................................................................................................................... 73

Financial Disclosure ......................................................................................................................................................................... 73 Access to Records .............................................................................................................................................................................. 73 List of Shareholders .......................................................................................................................................................................... 74 State Ex. Rel. Pillsbury v. Honeywell Inc., 191 N.W. 2d 406 (1971 Minnesota Supreme Crt) ............................. 74 Cooper v. Premier Trust Co. [1945] O.R. 35, [1945] 1 D.L.R. 376 .................................................................................... 74

Closely-‐Held Corporations ........................................................................................................................................... 74 Shareholder Agreements ................................................................................................................................................................ 75 Share Transfer Provisions & Restrictions ............................................................................................................................... 75


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INTRODUCTION

• What is a business? Involves the provision of goods or services, usually have to obtain funds in order to acquire assets that will be used to provide the goods or services, can include profit or non-‐profit activities, anything that occupies time, labour, energy of a person for the purpose of profit

• Stakeholders: various persons may be affected by the conduct of a business, equity investors, creditors, managers, employees, concerned with legal framework that governs the relationship between stakeholders in particular forms of business associations

• Primary Forms of Business Association o Closely Held Private Corporation: corporation where all the shares are held by individuals and not

listed on a stock exchange or publicly exchanged o Publicly Traded Corporation: governed by securities regulation, shares listed on stock exchange in

Canada or elsewhere o Crown Corporations: public but not publicly traded, special purpose corporations incorporated

under special provincial or federal statute, all shares owned by government, covered and governed by certain statute, BC Hydro

o Partnerships: general, limited, limited liability, each of provinces/territories has partnership act • Other Forms of Business Organizations

o Cooperative Corporations: credit unions o Business Trusts: mutual fund trusts, private trust structures, hedge funds o Unlimited Liability Companies o Limited Liability Companies o Joint Ventures: persons combining resources for common objective, no precise legal meaning

• Non-‐Commercial Entities o Societies, non-‐profit and charitable activities, associations, unions, social enterprise organizations

AGENCY

RELATIONSHIPS BETWEEN PRINCIPAL AND AGENT • Agent: person who affects the legal relationship of another person called the “principal,” agent

represents the principal and can affect their relationship in respect to a 3rd party, can make Ks that bind them, deal with their assets (Fridman definition)

• Principal can be vicariously liable for torts committed by principal’s agent • Fiduciary Obligations: principal will only choose agent who they trust and will want that particular

person to carry out the agency -‐ confidence, confidentiality and trust • No agency act, has been developed through the common law • Agency and Other Legal Relationships

o Agency and Employment ! Employee does not necessarily have the right to enter into contractual relations on behalf of the

employer and may not owe the same fiduciary duties to the employer ! Could be employee and agent at the same time

o Agency and Trust ! Both agents and trustees owe fiduciary duties ! Agent: acts bind principal, trustee: acts do not bind settlor or beneficiaries ! Agent: personal creditors have access to all property held by agent even if agent is holding that

property for transfer to the principal, trustee: persons who have advanced credit to trustee in


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situations not involving trustee’s activities in connection with the trust do not have access to the trust assets

! Agent: enter into contractual relations on behalf of principal, trustee: hold legal title to property for benefit of beneficiary

ACTUAL AUTHORITY • Where principal intended to give agent authority to affect legal relations, or where principal and agent

would have reasonably expected agent to have authority, agent is said to have actual authority (can be express or implied, does not require consideration)

• Principal is liable to a 3rd party who enters into a K with principal through agent who has actual authority to act on behalf of that principal (Freeman)

EXPRESS ACTUAL AUTHORITY • Principal has expressly stated what the agent’s authority is-‐oral or written • Includes authority that can be inferred from written or oral words expressing scope of agent’s authority-‐

interpretation of contract

IMPLIED ACTUAL AUTHORITY: USUAL & IMPLIED • Authority that principal and agent would have expected the agent to have in the circumstances • Note: distinction from apparent authority, concerned with legal relationship between principal and agent

created by consensual agreement to which they alone are parties

(A) USUAL AUTHORITY o What was agent allowed to do in the past, what this principal has allowed this agent to do in the past o Certain acts may not have been in contemplation of principal at the time, but if they continued and the

principal did not stop them, it was within the agent’s authority

Freeman & Lockyer v. Buckhurst Park Properties, 1964 • Kapoor engaged architect firm on behalf of Buckhurst company, said was managing director • Firm not paid for work and sued Buckhurst,

o Buckhurst said never authorized Kapoor to engage firm • Held: had implied usual authority, had contracted on a number of occasions and every time payment was

ok’d o Had no written or oral grant of authority, but board of directors were aware that Kapoor was acting

in this capacity

(B) CUSTOMARY AUTHORITY o Look at authority agents of that type normally have o Whatever is usual in marketplace for agents of that type, unless expressly limited by agreement o Stockbroker sold customer’s shares on credit, court looked to kind of authority that stockbrokers

normally have, concluded that while normally have authority to sell shares, not normally on credit (Wiltshire v. Sims)


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DUTIES OF THE AGENT TO THE PRINCIPAL

• Agent owes certain fiduciary duties to the principal-‐implied terms of the relationship between the principal and agent, can vary by express agreement, or implication from the circumstances

• (1) To Perform Agency Obligations o Perform tasks assigned to agent by terms of agreement with principal or according to instructions of

principal-‐do what they were asked or empowered to do by the principal o This is breached where agent fails due to their own fault o Failure to perform-‐can render agent liable in damages o Example: ship lost, principal tells agent to buy insurance for ship, they forget and don’t obtain proper

insurance, principal would sue agent for failure to perform obligation, but if no insurance available then no failure because made all the efforts

o Important that agent does not go beyond their authority-‐example: lawyers accepting settlements without permission of client

o Agents not liable when what they were asked to do was illegal-‐example: asked to place bet on behalf of principal

• (2) To Perform with Reasonable Care o Degree of skill and diligence that agent in his or her position would normally possess or exercise o Standard of care: agent of this type in their position would normally possess o Principal: bring action in damages

• (3) Fiduciary Obligations o (a) Duty of Loyalty (duty to act in best interests of principal)

! To act in the best interest of the principal ! (i) Avoid Conflict of Interest

• Not to put oneself in position where one’s personal interest conflicts with the interests of the principal

• Agent must never look to their own betterment or advancement at expense of the principal • Example: principal engages agent to buy goods for principal, agent cannot buy goods from

himself on behalf of the principal, agents interests-‐sell goods at highest possible price, principal’s interest-‐gain goods at lowest possible price

• Even if principal cannot show loss-‐can terminate agreement, have breach of fiduciary duty • Remedies: transaction is void, agent required to account to principal for any profits made in

transaction, damages, injunction ! (ii) Not to Make Secret Profits

• Example: stockbroker asked to sell shares for certain price but sold shares for more and pocketed the difference, was required to account to the principal for the extra profit that was made (Thompson v. Meade)

• Kickbacks: make purchase with particular supplier or bribery taken by agent • Remedy: accounting for secret profit

o (b) Duty Not to Delegate ! Principal trusts that particular agent, have qualities and abilities they want to carry out the

agency obligations ! Confidentiality and trust placed in agent, can’t just delegate to someone else ! Exception: not considered to be reasonable implied term ! Example: ship carrying rotting perishable goods, captain put into shore and engaged agent to sell

goods, held that captain had authority to delegate, implied authority to delegate to someone who


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could carry out necessary acts, ship damaged, captain engaged agent in Japan to arrange for repairs because didn’t speak Japanese, considered to be implied

! Task so simple or miniscule that principal couldn’t possibly care who did it-‐no fiduciary/confidential aspect

! Remedies: damages and possibly injunction o (c) Duty to Keep Proper Accounts

! Agent must maintain proper books of account of transactions on behalf of principal ! If are holding money/property for the principal, shouldn’t be in your personal account ! If fail to keep proper accounts, evidentiary presumption against the agent, all belongs to the

principal, burden falls onto the agent to show is not the principals ! If agent does not keep proper records of expenses, the principal can refuse to reimburse the agent ! Documents and other property must be returned to the principal at the end of the contract

o (d) Duty to Perform with Reasonable Care ! Degree of skill or diligence that an agent in that position would normally exercise

DUTIES OF THE PRINCIPAL TO THE AGENT • (a) Requirement to Pay Remuneration

o Generally requires an express agreement on how much the agent is to be paid o If circumstances show that agent would not have acted for free then the court will award

remuneration to the agent on quantum meruit basis “what one has earned” o No express agreement: court will reward value of work, when it is clear they did not act gratuitously,

court will look at value of services and award an amount based on that o Agent must be performing obligations required of agent under agreement o If paid by commission on sales-‐must be the effective cause of sale, exception for exclusive agents-‐paid

whether or not is effective cause of sale • (b) Requirement to Pay Expenses and Indemnify Against Losses

o Principal is obligated to reimburse the agent for reasonable expenses incurred on behalf of the agency, or for any loss

o Expenses must be necessary and reasonable in the context o Agent must be acting within scope of authority o Agent will not be reimbursed for illegal acts and for acts which the agent knows or ought to know are

illegal o Example: campaign manager, engaged sub-‐agent, made number of payments to others which were

contrary to the Elections Act, when sub-‐agent asked for expenses, were not reimbursed

TERMINATION OF THE AGENCY RELATIONSHIP • (a) By Act of Parties

o Where agency agreement provides for the termination of the agency relationship o Where there is no term-‐can unilaterally terminate on notice o No requirement of reasonable notice period

• (b) By Operation of Law o (i) Principal or Agent Becomes Bankrupt

! Agent often looks to principal for payment, agents often hold money/property for principal ! Agent’s creditors could access that money/property as long as it is in the possession of the agent ! Bankrupts could not carry out these obligations

o (ii) Frustration


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! Where whole purpose of relationship no longer exists, agency relationship is presumed to have come to an end

! Not just more difficult-‐has become impossible/illegal/so different from the original obligation that would be unjust to ask agent to carry it out

! Example: person engaged to do something as agent and drafted/sent overseas, becomes completely unable to perform what they had agreed to do

o (iii) Death of Either Agent or Principal ! Presumption ! Can be overridden by express terms or by circumstances that indicate it would not have been

what principal or agent would have wanted

RELATIONSHIPS WITH OTHERS

• Actual Authority and Relationship Between Principal and 3rd Party o If agent has actual authority to enter into particular contract with another person on behalf of the

principal, then a contract, if otherwise valid, will be binding contract between principal and 3rd party o Principal can enforce that contract against the 3rd party and 3rd party can enforce against principal o Agent will not be a party to the contract: drops out of the picture, just give evidence in lawsuit

OSTENSIBLE AUTHORITY

• Can arise even though agent did not have actual authority-‐even though principal never expressly or impliedly gave agent authority to act in the way the agent did

• Agent has no authority as matter of law, but principal by their actions or representations are estopped from denying the agent authority

• Purpose-‐protects the reliance interest of 3rd parties who are led to reasonably believe the person acting as agent had authority to act as agent

• *Note: concerned with legal relationship between principal and 3rd party created by representation, depends upon representation made by principal intended to be acted upon by the 3rd party

• Elements of Ostensible Authority o (i) Alleged principal must have made a representation, or permitted a representation, that the

alleged agent had authority to act on behalf of the alleged principal o (ii) The 3rd party reasonably relies on the representation to his or her detriment

• Representation could be express or implied from words, conducts or circumstances

Lloyd v. Greysmith

• Conveyancing clerk at law firm fraudulently arranged for widow to sign documents that he said discharged mortgage, actually transferred to clerk, absconded

• Widow-‐long term client of firm, knew he worked there, felt she could trust him • Widow sued law firm-‐agent committed tort in course of his duties • Held: firm liable on principle of ostensible authority-‐employed clerk, allowed to run front office,

represented self as having authority of preparing documents o (i) Firm represented that this person was their agent for doing real property transactions o (ii) Widow relied on that representation to her detriment

• Never had actual authority to do what he had done, but firm had clothed him with apparent authority to do acts which were similar


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Freeman & Lockyer v. Buckhurst Park Properties, 1964 (architect case above)

• Some judges-‐found instead of actual usual authority, was ostensible authority • Board of directors allowed K to make contracts with 3rd parties for number of years, by such conduct

represented that he had actual authority to enter into contracts of this kind, anyone who relied on that representation to their detriment could argued company was estopped from denying that K was their agent

• Board of directors knew or ought to have know that he was purporting to have this authority, harder for 3rd party to investigate

• “Actual authority and apparent authority are quite independent of one another, generally they coexist and coincide but either may exist without the other and their respective scope may be different”

REASONS BEHIND OSTENSIBLE AUTHORITY

• Protection of Reliance by 3rd Party o Where principal could readily have taken steps to avoid potential reliance by 3rd parties on

reasonably perceived authority of alleged agent, then alleged principal should not be unfairly surprised

o If didn’t have this redress, people would insist on seeing original credentials every time you deal with someone (not efficient)

• Least Cost Avoidance o Puts the obligation to avoid the loss on the person who can avoid it at least cost o Give that person an incentive to avoid the loss o Principal can: check agent’s trustworthiness, monitor behaviour, terminate agency relationship o If on 3rd party-‐would have to contact principal to confirm agent’s authority, would defeat purpose of

relationship o Protection for principals, party’s reliance must be reasonable

BREACH OF WARRANTY OF AUTHORITY

• Claim by 3rd party against agent, relied on person’s assertion to their detriment • Where agent warranted that she or he had authority but in fact did not have actual or ostensible

authority, was never an agent, tort action • Elements

(i) Agent represents that he/she has authority (ii) Representation is false (iii) 3rd party acts on representation to his or her detriment

• 3rd party: (1) claim against principal on basis agent had authority, (2) claim against agent for breach of warranty of authority, court decides if authority was present

• Measure of damages o For negligent misrepresentation: reliance based, o For breach of warranty of authority: expectation damages, could include lost expected profits, what

was to be expected if representation was true


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RATIFICATION

• Where agent acts beyond authority, principal may accept what agent has done by “ratifying” the act of the agent, want to take the benefit of the K, also will take on burdens

• A person can ratify a K entered into by another person on their behalf if: o (i) A person purported to act on behalf of another person who seeks to ratify o (ii) Person who seeks to ratify was in existence and was ascertainable at the time the other person

purported to act as agent (corporation not incorporated at time) o (iii) Person who seeks to ratify must have had legal capacity to do the act, at time other person acted

and at time of ratification (corporation not incorporated yet) • Requirements for Ratification

o 1) Ratification can be Express, by Conduct, or by Acquiescence ! a) Express-‐can be oral or in writing, expressly say are going to enforce the K ! b) Conduct-‐K calls for principal to provide services and principal begins to provide those services,

any performance or part performance of terms of K may be sufficient ! c) Acquiescence-‐wait to see what happens once learn of someone entering into K on your behalf,

K-‐purchase of goods by principal, might wait few weeks to see what happens to price, have positive duty to advise 3rd party are not principal within reasonable time

o 2) Ratification Must be Based on Knowledge of all Relevant Facts ! Principal needs to know nature of deal being accepted, probably alright if did not know minor

aspect of the deal • Consequences of Ratification

o (i) Relates back to time of offer and acceptance between agent and 3rd party-‐3rd party can’t revoke offer or acceptance

o (ii) Principal can sue the 3rd party and can be sued by the 3rd party o (iii) Agent no longer liable for breach of warranty of authority, although at time they acted were

committing this tort, ratification reaches back o (iv) Agent no longer liable to principal for exceeding authority o (v) Principal liable to agent for reasonable remuneration and to indemnify for expenses o (vi) Will be clothed with usual or ostensible authority if principal continually ratifies

• Policy Reasons for Ratification o 1) Mutual Benefit

! At time of offer and acceptance, 3rd party determined some benefit, at time of ratification ! Principal determined some benefit at time of ratification ! Courts facilitating mutually beneficial transactions

o 2) Unjust Enrichment of the Principal at the Expense of the Agent ! If no principle of ratification-‐acting beyond actual authority, agent would be liable to principal for

any loss to the principal caused by the transaction, not indemnified, paid ! Principal would have potential for gain with little or no downside risk

o 3) Unjust Enrichment of Principal at Expense of 3rd Party ! a) Ratification by Acquiescence: don’t want speculation at someone else’s expense ! b) Ratification by Conduct: if principal could perform parts of K and not bound, might perform

until no longer beneficial ! c) Principal in Existence: promoters of corporation could wait to see if deal was good then

incorporate and ratify, if bad-‐choose not to incorporate ! d) Principal Ascertainable: principal could only come forward and ratify if were beneficial

o 4) Unjust Enrichment of 3rd Party at Expense of Principal


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! 3rd party could wait and see if contract was favourable and then choose to enforce it against the principal (ostensible authority), but if before principal ratified and turned out unfavourable could revoke offer

o 5) Cure Minor Defects in Grant of Authority ! Reduce litigation over scope of authority

UNDISCLOSED PRINCIPAL

• Agent acts on behalf of principal without disclosing to the 3rd party that they are doing so, have authority to act, but do so without disclosing are not acting on own behalf

• Discussion may not disclose a principal, existence is unknown to 3rd party • Principal can still sue 3rd party in some circumstances • Circumstances in Which Undisclosed Principal can Sue 3rd Party

o Generally have right to enforce K, not if 3rd party was looking particularly to agent to perform the K o Objective test, 3rd party looking to agent to perform alone if:

! (i) Terms of K require that only agent perform terms of K agreed to by agent ! (ii) Circumstances indicate that 3rd party clearly intended to K with agent alone (services of agent,

personal aspect, 3rd party would not have contracted with principal if id known) • Need corroborating circumstances-‐previous relations between principal and 3rd party

• Rights of 3rd Party o (i) On learning of agency relationship, can sue the principal o (ii) Can still sue the agent (as party to K) o (iii) In action by principal against 3rd party, 3rd party can set off any rights 3rd party would have

against agent and can use any defence 3rd party would have against agent: if 3rd party had given deposit of goods to agent, and goods not delivered, principal has to refund

• Example: principal claiming payment of 10 000 for goods delivered to 3rd party, 3rd party paid agent 4000, could set off 4000 payment to agent against claim for 10 000, just owe 6000

• If agent were to sue 3rd party, might have defence like misrepresentation, could use in action by principal

Said v. Butt

• Plaintiff wanted to attend first performance of play in London, knew if he tried to buy ticket they wouldn’t deal with him, got friend to purchase ticket for him

• Friend acted as if was going to use ticket, plaintiff went to theatre, refused entry • Plaintiff sued, said there was a breach of contract by not letting him in, was undisclosed principal of

friend that bought the ticket • Defence said they would never have dealt with plaintiff if had known he was principal • Held: no breach of K, thought were dealing only with agent and would never have dealt with principal if

had known about agency relationship

POLICY REASONS FOR LAW CONCERNING UNDISCLOSED PRINCIPALS

• (1) Mutual Benefit o 3rd party still getting expected benefit from K, facilitate mutually beneficial Ks

• (2) Potential Unjust Enrichment of 3rd Party o Principal may perform K, 3rd party could avoid performance on basis of undisclosed agency

relationship-‐enriched


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• (3) Potential Unjust Enrichment of the Principal o 3rd party upon discovering the relationship, can sue the principal on the K o Example: 3rd party delivers goods to agent, passes to undisclosed principal, not paid for, agent gone,

principal unjustly enriched if could just say not party to K

LIABILITY OF PRINCIPAL FOR AGENT’S TORTS

• Agent can affect legal relations of principal by committing torts while acting on behalf of the principal o Legal Test: Principal is liable for tort committed by principal’s agent if agent committed tort while

acting within scope of authority, whether actual or ostensible

Lloyd v. Grace, Smith, 1912 (law firm conveyancing clerk case above)

• MacKay: assume principals do not authorize agents to act wrongfully, cannot have this narrow a sense • Barwick: did not authorize act, but put agent in place to do that class of acts • Clerk did have authority to receive deeds and carry through sales and conveyances, fraud occurred in

carrying through a business within his delegated power and entrusted to him in that capacity

Ernst & Young v. Falconi, 1994

• Partnership context-‐are agents for one another and liable for torts of fellow partners committed within scope of authority

• F, lawyer in firm of KFA-‐pled guilty to assisting bankrupt persons in making fraudulent dispositions of their property, K had no personal involvement

• Each of transactions used legal services of KFA • Sufficient if partner used facilities of firm to perform services normally performed by law firm in carrying

out transactions as result of which creditors of firm’s clients suffered loss • Fact that various actions were for improper purposes and with intent to defraud did not take acts out of

ordinary course of business of firm if are in nature of acts normally performed by law firm in carrying on its usual business

POLICY REASONS FOR TORT LIABILITY OF PRINCIPAL

• 1) Deterrence/Least Cost Avoidance o Impose cost of harm on person who could have avoided the harm at the least cost, gives principal

incentive to take steps to avoid loss o Lloyd-‐Smith could have avoided loss, been more careful in choosing person, monitor carefully,

terminate, insurance • 2) Allocation of Loss to Activity Causing the Loss

o Increase in price of goods or services provided through particular activity-‐added cost of harm prevention, price reflect full cost to society

o Lloyd-‐cost of law firms exercising better control should be reflected in cost of legal services • 3) Concern for Compensation of Victim

o Particular D maybe only source of compensation o Lloyd-‐widow, only asset taken, law firm-‐well paid profession, not left destitute, insurance

• 4) Other Concerns o Lloyd-‐important that people feel comfortable seeking legal advice, don’t want people afraid of being

defrauded


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SOLE PROPRIETORSHIP

STRUCTURE

o Sole proprietor owns the assets of the business and is the ultimate decision maker o Unincorporated business “owned” by single individual, carrying on commercial activity o SP management structure can be complex-‐several managers, each given authority to engage others to

assist in doing required work o Typically used by farmers, fishers, other small informal family enterprise, professionals o SP has ultimate control over decisions concerning the business-‐may be constraints if have lenders

involved-‐put restrictions on business o Dissolution-‐SP simply stops carrying on the business o No need to register dissolution

FORMATION

• Other than complying with licencing requirements that may exist at federal/provincial/municipal levels for carrying on particular types of business, possible requirement for registration of business name-‐can simply start carrying on business

FUNDING

• Usually investment by SP • “Trade credit”: may buy goods to be used or sold in business or may engage services, suppliers may

provide on credit • Bank loan: required to pay interest at regular intervals, provisions intended to provide protection to

bank, may take “security interest” in one or more assets of business, SP has to maintain certain ratios in running business, can trigger “acceleration clause”-‐treat entire amount as due immediately, can seize security

LEGAL STATUS AND LIABILITY OF SP

• Not a legally recognized separate entity • Assets: assets are owned directly by the SP, legal ownership of business assets is not separate from the

individuals personal assets-‐both available to satisfy claims of creditors • SP will be the contracting party, directly liable for performance of contracts • SP vicariously liable for any torts committed by employees committed in the course of employment • Persons who obtain judgments against SP based on claims arising out of conduct of business can satisfy

claims not just from assets of the business but out of SP’s other assets

NAME & REGISTRATION REQUIREMENTS

• Business Name Registration Requirement o Can carry on business as SP in own name without having to register o If use name other than one’s own name or use names indicating plurality of persons-‐then must

register


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• s. 1 of PA-‐“business name” means (b) in case of SP, name under which its business is carried on or is to be carried on, “SP”-‐means a person who under s. 88(1) is required to file a registration statement

• s. 88(1) of PA-‐duty of SP to file registration statement-‐a person who is engaged in business for trading, manufacturing or mining purpose and who is not associated in partnership but who uses business name some name or designation other than own name or who uses name with addition of “and Company” or some other word indicating plurality of members in business, must file with registrar within 3 months after day when business name is first used, note: “trading, manufacturing, mining”-‐not much jurisprudence, note: registration requirement also applies to corporation that carries on business using a name other than its own name, is “person” within meaning, if carrying on business other than using full corporate name

• s. 89 of PA (1)-‐registrar must not file certificate under 88 that contains business name that is name by which corporation is incorporated, registered or continued in BC, or so nearly resembles is likely to confuse or mislead, (2)-‐can file if other company consents in writing, or business name used by applicant for registration before corporation first used its name

• s. 90 of PA-‐indices-‐must keep declarations filed under firm index and individual index, firm-‐styles of respective firms, names of person composing the firm, date of receipt by registrar, individual-‐names of each member in and date of receipt in respect of which declaration filed

• s. 90.3 of PA-‐anyone can search register based on name of firm or partner, inspect records and make copies of all documents

• s. 90.4 offence to knowingly or assist in making false statements, (2) if corporation that does this, director/officer is liable

• s. 90.5 person who commits offence under s. 90.4 is liable to a fine of not more than 5 000 or 2 000 if individual

• Failure to Register at all? o Offence Act o s. 5 person who contravenes an enactment by doing an act that it forbids or omitting to do an act that

it requires to be done, commits an offence against the enactment o s. 4 unless otherwise specified in enactment, liable to fine of not more than 2000 or prison for not

more than 6 months, or both

PURPOSES SERVED BY THE REGISTRY

• 1) Identifying SP for Credit Check Purposes o May help track down who is behind a particular business

• 2) Identifying SP for Purpose of Starting an Action o Determine who real person is that can be sued o Rule 20-‐1 Rules of Court: allows for SP to be sued in name of business and for service to be effected

by leaving true copy of relevant document at place of business with person who appears to manage or control the business

• 3) Avoid Deception of Name Indicating Plurality of Persons o Where in fact only one person behind the business

WHY USE SOLE PROPRIETORSHIP?

• Non-‐Tax Considerations o Easy to form, no formal process o Easy to dissolve


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o Not worth it to incorporate if small enterprise operating locally, don’t need to raise capital o Why wouldn’t choose it-‐corporation can limit liability, personal assets not available

• Tax Considerations o Profits in SP business taxed directly in hands of SP o Can deduct losses from business source against income from other sources such as other businesses,

property or employment o Shareholder in corporation cannot deduct corporation’s business losses from other income because

business losses are not his losses

PARTNERSHIP

THE RELATIONSHIP BETWEEN THE PARTNERS

FORMATION: AN INTRODUCTION

• Origins and the Partnership Act o From Middle Ages, developed by merchant courts, CL courts, courts of equity o Extension of contract law and agency law, in England partnership law codified 1890 o 1890 English Act enacted in BC in 1894, Parts I and II of PA are the same as 1894 Act o PA-‐preserve rules of equity and CL applicable to partnership except to extent are inconsistent with

the Act (s. 91), CL and equity can continue to develop o Critical about partnerships-‐partners are personally liable for the debts of the firm, creditor could go

to any one partner and demand all from them • Use of Partnership

o 1) Professionals ! Previously-‐provincial legislation stopped most licenced professionals from carrying on business

through a corporation, even with relaxation of restrictions-‐still use partnerships, more now using LLPs

o 2) Joint Ventures ! Two or more corporations might engage in joint venture, could organize as partnership ! Two or more “persons” carrying on business ! s. 29 of Interpretation Act-‐“persons” includes corporations, tax advantages

o 3) Tax Reasons ! ITA does not treat partnership as separate entity, only looks at partnership income (or loss) for

purpose of determining each partner’s share of the partnership income (or loss) ! Then used by individual partner in calculating taxable income, can use share of partnership losses

against sources of income ! Makes sensible choice where will have more than one equity investor, likely to be some start up

losses o 4) Default

! May be in partnership without knowing it-‐no formalities to partnership formation ! As between the partners, PA sets out essentially a default contract

DEFINITIONS AND VOCABULARY

• PA s. 1 o “Business name” means (a) in case of firm, its firm name


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o “Firm” is collective term for persons who have entered into partnership with one another o “Firm name” means name under which business of firm is carried on or is to be carried on o “General partnership” means a partnership that (a) has BC as its governing jurisdiction, and (b) is not

limited partnership nor LLP • PA s. 2-‐Partnership Defined

o Partnership is the relation which subsists between persons (includes corporations) carrying on business in common with a view of profit

o Four Elements: ! (1) Persons

• s. 29 IA-‐includes “a corporation, partnership or party, and personal or other legal representatives of a person to whom the context can apply according to law”

• Corporation can be partner, two or more corporations can be partners, partnership can be partner in another partnerships

! (2) Carrying on Business • Ordinary meaning-‐“trade, profession, usual occupation, buying and selling, trade, commercial

firm, shop” • (i) Occupation of time, attention, labour, (ii) incurring of liabilities to other persons, (iii)

purpose of livelihood or profit (Gordon v. The Queen) • Does not depend on creation of new business (Backman)

o May be for single transaction or single venture-‐don’t need to carry on business for long period of time (Backman)

o Business may be established where sole business activity is passive receipt of rent (Backman)

o Machinery rented out, core operations may be limited to accepting rental revenue and assuming business risk and other obligations (Hickman Motors)

! (3) In Common • Carrying on business together in some way • s. 4: Some guidelines • Common purpose will usually exist where the parties entered into a valid partnership

agreement setting out respective rights and obligations as partners (Backman) • Partners can play different roles (Backman) • Fact that management of partnership rests with single partner does not mean is not “in

common” (Backman) • Control has nothing to do with partnership-‐not every partner has to participate in

management (Westlock) • Can be relevant to look at whether parties held themselves out to 3rd parties as partners or

did not hold themselves out as partners (Backman) • “Contribution of skill, knowledge or assets to a common undertaking; joint property interest;

sharing of profits and losses, filing of income tax returns as partnership, financial statements and joint bank accounts, correspondence with 3rd parties” (Backman)

! (4) View of Profit • Non-‐profit associations not treated as partnerships under the PA • Profit means revenues less expenses • Tax motivation will not derogate from validity of partnership, can taxpayer establish

intention to make a profit (Backman) • Profit does not have to be overriding intention, can be ancillary (Backman) • Business can incur losses (Backman)


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• Objective test-‐what is reasonable conclusion to be drawn from the circumstances (Backman) • No evidence of intention to make profit, became partners, disposed of everything partnership

owned, apartment never operated, no expectation of profit (Backman) ! (5) Weighing of Factors – (Backman)

• Must weigh all relevant factors in context of all the surrounding circumstances • Have to show facts on ground sufficient to constitute partnership • Taken by themselves, partnership agreement and other documentation-‐intention to form a

partnership but alone not sufficient (Backman) • PA s. 3 Persons Who are Not a Partnership (Exclusion of Corporations)

o Relation between members of company or association that is (a) incorporated under an Act for time being in force and relating to incorporation of joint stock companies, or licensed or registered under Act relating to licensing or registration of extra-‐provincial companies, or (b) formed or incorporated by or under any other statute or letters patent or Royal Charter, is not a partnership within the meaning of this Act

o Where business is carried on through a corporation, then the particular corporate statute applies and PA does not apply

o However, remember corporation can be a partner in a partnership

Backman v. Canada (2001), 196 D.L.R. (4th) 193 (S.C.C.)

• Clarification around definition of partnership in PAs, taxpayer-‐was partnership, tax authority-‐was not partnership

• Facts: American limited partnership established, had land in Dallas with apartment building on it, cost of land exceeded fair market value-‐loss in assets of partnership, appellant and other Canadians wanted to take advantage and deduct from their Canadian income taxes, bought out American interests, 99.975% interest, and then sold back to Americans to realize capital loss, could deduct loss from individual sources of income as long as relationship was in fact a partnership

• Issue: whether appellant was member of valid partnership such that he could deduct partnership losses from his income pursuant to s. 96 of the ITA o Where taxpayer trying to deduct Canadian partnership losses, taxpayer must satisfy definition of

partnership that exists under relevant provincial or territorial law-‐two or more persons carrying on business in common with a view of profit

• Decision: appellant was not a member of a partnership because was no business being carried on in common with view to profit o Distinguished Spire Freezers-‐considerable investment in pre-‐existing business which continued to

operate, required more than nominal management effort, valid partnership agreement, were earning income from other apartment building

Gordon v. The Queen, [1961] S.C.R. 592

• Not necessary to show business was carried on for long • Considerations:

o 1) Occupation of time/attention/labour, 2) incurring liabilities to others, 3) purpose of livelihood/profit (doesn’t need to be only/main motive)


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THE LEGAL STATUS OF PARTNERSHIP

• Partnerships are a relationship not a separate entity • Partnership has no separate existence apart from the partners • Partners are not employees of the business • Consequences of Partnerships Not Being Recognized as Separate Legal Entities

o Each partner liable to full extent of personal assets for debt and other liabilities of partnership business

o Partner may not be an employee of the partnership business o Partner cannot be creditor of partnership (some exceptions)

Re Thorne and New Brunswick Workmen’s Compensation Board (1962), 33 D.L.R. (2d) 167

o Partnership is not recognized in law as a separate legal entity o Facts: T and R partners in tree-‐felling and sawmilling operation, oral agreement between two

partners, each receive weekly wages, really share of profits, registered partner with Workers Compensation Board, T injured in sawmill and sought worker’s compensation, WCB refused-‐T was not an employee because was partner, T-‐by virtue of statute law, partnerships should be regarded as legal entities or persons distinct from component members, rules of court-‐could sue partnership in firm name-‐procedural purpose

o Held: partnership not a separate legal entity, T was performing duties as owner of business, was not an employee, not in master-‐servant relationship with himself, suing term wages-‐not conclusive

Re Kucor Construction v. Canada Life (1997), 32 O.R. (3d) 548 (Ont. Gen. Div.)

• Law regards as persons with distinct and separate legal rights only individuals and corporations • Partnership-‐association of persons with certain distinctive characteristics and one which is entitled to

commence proceedings or have proceedings commenced against it in the name of the partnership

McCormick v. Fasken Martinueau DuMoulin LLP (2012), 352 D.L.R. (4th) 294 (B.C.C.A.) (leave to appeal to S.C.C. granted March 7, 2013)

• Issue: whether partner in LLP is employee of partnership for purpose of claiming protection of human rights legislation from age discrimination o BCHRT and SC chambers judge-‐for purposes of HR legislation, partnership treated as separate legal

entity from its partners and as employer of partner • Decision: HRT did not have jurisdiction to hear complaint, principles of HRC did not change underlying

legal relationships to the extent found by the HRT and chambers judge, do not override fundamental principle of law that partnership is not separate entity

• Facts: M, 65 years old, lawyer and one of 60 equity partners in FM-‐extra-‐provincial LLP registered under PA, party to PA that governed partnership relationship, s. 9.2-‐addressed retirement, absent individual arrangement, had to retire in 2011, filed complaint with HRT tribunal alleging age discrimination, ownership interest-‐income is share of profits of firm, had capital account, participated in meetings of partners, voted on various matters, management-‐governed by board of 13 equity partners, exerted control over other equity partners

• HRC: broad, liberal and purposive interpretation, term “employment” broader meaning o Firm cannot sue partner for indebtedness of partnership o Partner cannot be employee of partnership-‐cannot employ self


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• s. 22-‐partners owe fiduciary duties, procedurally may sue each other-‐part of relationship of partners between each other

• Rule 20-‐1-‐firm may be named as defendant, procedural shorthand • s. 27(j)-‐arbitration of disputes, procedural mechanisms, not separate legal entity • LLP, limited liability, chambers judge-‐new form of partnership which eroded CL concept that applied to

general partnership, BCCA-‐overreaching • s. 29 of IA-‐“person” includes partnership, only means under HRC partnerships can be employers • Legally impossible for partner to be “employed” by partnership, management of firm by partners-‐does

not change relationship between partners (Continental Bank)

NAME REGISTRATION AND ACTIONS AGAINST PARTNERSHIPS

• Registration requirement for general partnerships but general partnership can exist without ever complying with the registration requirement

• Failure to register, does not mean partnership ceases to exist, failure to file-‐offence under Offence Act-‐fine of up to 2000

• s. 80.1 “Registration statement” means (a) a registration statement in the prescribed form or (b) prescribed information submitted to the registrar in the prescribed manner

• s. 81 requires persons associated in partnership for trading, manufacturing or mining purposes to file a registration statement with the Registrar (within three months after formation of firm per s. 82) o Remember-‐filing does not make partnership come into existence, just need to meet definition of s. 2

• s. 83(1)-‐must file subsequent registration statement anytime any change or alteration takes place in membership of firm or in firm name

• s. 84 registration statement not conclusive evidence, just some evidence, may be rebutted by other evidence, evidence of (a) existence of firm, (b) persons identified as partners are partners, (c) any other information

• s. 85(2) just because aren’t listed as partner does not mean are not one, not exempted from liability, (3)-‐may be sued jointly, or sued alone

• s. 86(1) on dissolution of firm, may submit to registrar notice of dissolution • s. 87(1) if persons associated as partners and no registration statement filed, any action that might be

brought against all members of firm may also be brought against any one or more of them, without naming those others in the writ or other process, under name and style of partnership, (2)-‐if judgment is recovered against person referred to in (1), any other partner or partners may be sued jointly or severally on original cause of action

• s. 90.3 any person may conduct search of info maintained by registrar, inspect records and info maintained by registrar, obtain copy

• s. 90.4 misleading statements an offence, unless did not know statement was false and misleading, with exercise of reasonable diligence, could not have known it was

• s. 90.5 commit offence under 90.4, individual-‐2000 fine, other than individual-‐5000

GOVERNANCE

• PA set of default rules (ss. 21-‐34) that will govern the relationship between the partners to the extent they have not either explicitly or implicitly agreed otherwise o Default rules are based on assumption of equality (contribution to capital, rights to participate in

management of the business and share in the profits)


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o If default rules are not overridden by express written agreement there is a risk that the partners will be stuck with terms they didn’t want

• Facilitates the formation of partnerships by allowing persons to create a partnership without having to create their own set of rules to govern their relationship

• s. 21 can vary rights and duties by consent either express or implied, can be inferred from a course of dealing-‐makes partnership a flexible form of business association o Obligation to i.e. account may be avoided by the simple devices of recording the mutual rights and

duties of the partners in a written agreement or by establishing consensual practice • s. 23(2) land held in the name of an individual partner or one or more partners is held in trust for the

partnership • s. 24 property bought with firm money is deemed to be partnership property, belongs to partners

collectively and none of them own it individually • s. 27 rules for determining the rights and duties of partners in relation to a partnership, subject to any

agreement express or implied between the partners o (a) all partners entitled to share equally in capital and profits of business, must contribute equally to

towards the losses, example: if there are 5 partners, each are 20% owners o (b) firm must indemnify every partner in respect of payments made and personal liabilities incurred

by him or her (i) in ordinary and proper conduct of business of firm, (ii) in or about anything necessarily done for the preservation of the business or property of the firm

o (e) every partner may take part in management of business o (f) not entitled to remuneration, entitled to share of profits o (g) person may not be introduced as partner without consent of all existing partners, LePage-‐could

not just sell interest and force former partners to accept that person o (h) any difference arising as to ordinary matters-‐majority of partners, no change to nature of

business without consent of all o partnership books must be kept at place of business, disclosure o (j) any difference concerning agreement goes to arbitration

• s. 28 no majority can expel any partner unless power to do so conferred by express agreement and power is exercised in good faith

• s. 29(1) ending partnership, if no set term agreed on any partner may end partnership at any time on giving notice of intention to do so

• s. 30 continuation of partnership after expiry without express new agreement, rights and duties remain the same, continued by consent

• s. 91 rules of equity and common law continue in force except where inconsistent with express provision of Act

• Statute is not complete codification of the law of partnership, adopt and continue rules of equity and of CL save as they are inconsistent with express provisions (Rochwerg)

FIDUCIARY DUTIES OF PARTNERS

• s. 22 CL presumption codified, (1) partner must act with utmost fairness and good faith towards other members of firm in business of firm, (2) duties imposed are in addition to any enactment or rule of law or equity

• Fiduciary duty arises also from duty of utmost good faith which each partner owes to the other (Rochwerg)

• s. 31 partners must render accounts, similar to agency requirement that agent keep proper records o Strict duty of disclosure concerning full info of all things affecting the partnership (Rochwerg)


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o Every partner is bound to disclose to his/her partners any facts which are material to the partnership and its business, generally a partner’s dealings with a client are matters which may affect the partnership (Rochwerg)

o General rule-‐all relevant materials must be produced, any claim for privilege must be strictly proved by person claiming it (Dockrill)

o Documents relating to dispute between partnership and one of its partners which are prepared by or for the partnership cannot be privileged as against that partner at least until dispute known to both parties

• s. 32(1) partners must account for benefits derived without consent of others resulting from transactions dealing with partnership or use of partnership property, name or business connection, obligation not to take secret profits or benefits o Obligation to account under s. 32(1) without proof of competing activity (Rochwerg) o (a) obligation to account wherever benefit derived by partner, without consent, from any transaction

concerning partnership, or (b) from any use of the partnership property, name or business connection

o First branch-‐transactions need not relate to transactions or dealings falling within scope of partnership’s activities or services, so long as “concerns” partnership, liability to account can relate to benefits from dealings outside scope of the partnership (Rochwerg)

o Rochwerg had duty to account under both branches of s. 32(1) • s. 33 no competition with partners, partners must account for profits made from engaging in competing

businesses, without consent of others o Requires proof of competition (Rochwerg) o Does not require proof of any use of the partnership assets (Rochwerg)

• Long established that partners owe a fiduciary duty to each other, equitable principles hold fiduciaries to a strict standard of conduct-‐duties of loyalty, utmost good faith, avoidance of conflict of duty and self-‐interest (Rochwerg)

• One partner must not use partnership assets for his own private benefit, must not, in anything connected with partnership, take any profit for himself, nor must he carry on business of partnership similar to the business of the partnership in his own or another name separate from it (Dean v. MacDowell)

• No principle which entitles a firm to benefits derived by partner from use of info for purposes which are wholly without the scope of the firm’s business (Aas v. Benham)

• Liability arises from mere fact of profit having been made, profiteer however honest and well-‐intentioned cannot escape the risk of being called to account (Regal v. Gulliver)

• Obligation to account is to partnership as a whole (Rochwerg) • Remedy for breach of fiduciary duty by realization of secret profits or benefits requires that the fiduciary

be prevented from retaining any gain from activity which arose from the breach of duty (Rochwerg) • s. 34 Assignment of Partnership Interests

o Can assign partnership interest but this does not result in the assignee becoming a partner o Assignee-‐entitled to share of profits and share of partnership assets on dissolution, not entitled to

participate in management or administration of business

Rochwerg v. Truster (2002), 23 B.L.R. (3d) 107

• Facts: R was CA and partner from 1993-‐1996 in partnership firm of RTZ, 1996-‐partnership dissolved, 1995-‐director of Teklogix and subsidiary who were both clients of RTZ, wanted large firm signing off on documents, had long relationship with R, disclosed directorships to partners and remitted first year’s directors’ fees, *did not tell partners of entitlement to certain shares and stock options in Teklogix, when they found out demanded accounting of secret benefit that R was taking without telling the firm


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• Issue: whether other partners were entitled to an accounting for R’s shares and stock options in Teklogix o R-‐different from providing services by sitting on board, used own money for stock options o Had no written partnership agreement among partners of RTZ, mutual rights and duties were

governed by the PA • s. 33-‐R did not have obligation to account under s. 33, no competition, role of partner in professional

services partnership and director of public or private company are not inherently competitive • First branch of s. 32-‐shares and stock options constituted compensatory benefits in a matter “affecting”

and “concerning” the partnership which was obliged to disclose under s. 31 and for which must account • Second branch of s. 32-‐became director only because of previous role through RTZ, “business

connection” • Bad faith, fraud or deliberate withholding of info are not necessary to found liability to account • Decision: required to compensate individual appellants for their proportionate share of the worth of the

benefits represented by the shares and stock options

McKnight v. Hutchinson (2002), 28 B.L.R. (2d) 269

• Facts: law firm partnership ended when M learned H had received earnings from part ownership in private company, Article 2.8 of their agreement-‐partners may conduct business other than practice of law upon notice to other partners, provided activities would not compromise practice of law

• H received honoraria from position on government board, fees for service as trustee of private trust, director’s fees, earnings on shares-‐*did not disclose o Stringent disclosure obligations

FUNDING

• Funding of a partnership is very similar to the funding of a sole proprietorship • The partners are the equity investors • Where the partners say nothing about their contributions of their shares, the presumption in s. 27(a) is

that they share equally in the capital, profits, and losses • While rare, a partnership interest may be considered a “security” under provincial securities legislation

and if so it would be subject to provincial securities legislation o Loans to the partnership may also be considered “securities” o If found to be securities, a prospectus would then be required for the sale of the securities and other

requirements of the legislation would follow unless an exemption from the requirement was available

DISSOLUTION OF PARTNERSHIP

• s. 29(1) under governance above • s. 35(1) subject to any agreement between the partners, a partnership is dissolved, (a) if for set term, by

expiration of that term (b) if for single adventure or undertaking, by termination of that event, (c) undefined time, any partner giving notice of intention to dissolve, (2)-‐(1)(c)-‐date mentioned in notice as date of dissolution, or from date of communication of notice

• s. 36(1) on death, bankruptcy, or dissolution of partner, (a) partnership of 2 partners is dissolved, and (b) subject to agreement, more than 2 partners is dissolved as between bankrupt/dead/dissolved partner and other partners

• s. 37(1) partnership is in every case dissolved by the happening of any event which makes it unlawful for the business of the firm to be carried on, or for members of firm to carry it on-‐not subject to agreement


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• s. 38 power of court to decree dissolution in certain cases, (a) incapable of managing affairs, (b) permanently incapable of performing part of contract, (c) guilty of conduct calculated to affect prejudicially the carrying on of business, (d) not reasonably practicable for other partner to carry on business in partnership, wilful or persistent breach of partnership agreement, (e) business can only be carried on at a loss, (f) just and equitable circumstances, (2)-‐if 3 or more partners, partnership may be dissolved as between partner whose condition or conduct gave rise to application and remaining partners

RELATIONSHIPS BETWEEN THE PARTNERS AND OTHER PERSONS

LIABILITY OF PARTNERS IN CONTRACT AND TORT

• s. 6 “partnership property” means property brought into the partnership, property acquired on account of firm or property acquired for purposes of and in course of partnership business, once partner contributes property, it becomes partnership property, owner in common with other partners

• s. 7(1) every partner is an agent of the firm and other partners for the purposes of the partnering business o (2) where partner does act for “carrying on in the usual way business of the kind carried on by the

firm,” it binds the firm and her or his partners unless ! (i) Partner had no authority to act for the firm in the particular matter, and ! (ii) 3rd party either knew the person dealt with had no authority or did not know or believe

the person he dealt with to be a partner • Parallels ostensible authority in agency law-‐3rd party might rely on apparent authority of partner to bind

fellow partners because particular partner was carrying on business of the kind carried on by the firm in the usual way

• s. 9 no pledge of credit for non-‐firm business, if pledge credit, not connected with firms ordinary business firm not bound unless authorized by other partners-‐no ostensible authority so partners not bound unless particular partner had actual authority, 3rd party would have no reason to believe the partner has authority

• s. 10 3rd party notice of restriction on authority of partner, if 3rd party has notice of restriction on power of partner then partner’s actions in contravention of restriction do not bind the firm

• s. 11 liability of partners for firm debts, joint and several, after death estate is still liable, personal assets available to creditors of the firm, contractual

• s. 12 firm liable for wrongful acts or omissions of partner, where a partner, (i) acted with authority of co-‐partners or (ii) acted in ordinary course of business of the firm

• s. 13 liability for misapplication, (a) if one partner acting within scope of apparent authority receives the money or property of a 3rd person and misapplies, (b) if firm in course of business receives money or property of 3rd person, and is misapplied

• s. 14 joint and several liability under ss. 12 and 13 • s. 19 time limits because composition of partnership can change, (1) don’t incur debts before you were

partner, (2) once you retire, still liable for debts incurred before retirement, (3) can be freed upon retirement if you have agreement with other members and creditors-‐would want express agreement


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LIABILITY IN TORT

• s. 12 = Firm liable for wrongful acts/omissions where partner: o 1) acted with authority, or o 2) acted in ordinary course of business

! Specific act doesn’t need to be condoned, so long as it was in course of performing normal business activities (Ernst & Young v. Falconi)

! Wrongful act/omission includes equitable wrong (e.g. breach fiduciary duty), injury includes harm from secret profit (Strother)

• Victims of wrongful act under s. 12 can claim judgment against any partner because they are jointly/severally liable (s. 14) o -‐ Partner can seek indemnification from other partners (joint & several liability)

! Breach of contract – partners only jointly liable, ! s. 11 (practically limited because you can sue partnership)

o Example: If C has a claim against A and B, C can proceed against either A or B, or both. Even if it was only B that dealt with C. If A pays the full amount, would normally be able to seek a contribution from B (though that is a separate matter between A and B).

Ernst & Young Inc. v. Falconi (1994), 17 O.R. (3d) 512 (Gen. Div.)

• Facts: lawyer in firm of KFA, trustee for creditors sought order of court that K’s estate is jointly and severally liable for amount that F owed as party to fraud, F pled guilty to charge of assisting bankrupt persons make fraudulent dispositions of property, K had no personal involvement with transactions, but involved use of legal services of KFA by F o s. 11: estate could be liable

• Issue: were F’s acts within the ordinary scope of the business of the firm? • Held: estate was liable, was in ordinary course of business of law firms

o Sufficient if partner used facilities of law firm to perform services normally performed by law firm in carrying out transactions, fact that actions were for improper purposes and with intent to defraud creditors of bankrupts did not take acts out of ordinary course of business

THE EXISTENCE OF PARTNERSHIP & IN THE CONTEXT OF THIRD PARTY RELATIONS

• PA s. 4(a)-‐(c)(v) • In determining whether a partnership does or does not exist, regard must be had to the following rules: • s. 4(a)

o Joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership as to any property that is so held or owned, whether tenants or owners do or do not share any profits made by use of property-‐may be indicator ! Individual partner normally can’t own business property because it would be partnership

property, business asset o Co-‐ownership: (i) co-‐owners are not agents for each other, (ii) co-‐owners can deal with own interests

in property without consent of other co-‐owners o Partnership: (i) partners are agents for each other, (ii) unless agreed otherwise a partner cannot

transfer interest in partnership, without consent of other partners, (iii) normally no partner can deal with an interest in the property itself


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o Where co-‐owners share profits, have involvement in management of property, greater potential for relationship to be considered one of partnership

o Look at construction of agreement, all the circumstances, should be held parties intended to become partners in joint venture (Thrush v. Read)

o Co-‐owners not partners, had in minds binding agreement, which would disable either from dealing with share? Can co-‐owner sell their share of the property? (Robert Porter & Sons)

o Mere fact that co-‐owners intend to acquire, hold, sell building for profit does not make them partners (LePage)

o Look at intent to maintain rights as co-‐owners in agreement-‐separate beneficial interests (LePage) o Co-‐owners who act collaboratively to make best of investment not partners (LePage) o Not partners, if each co-‐owner could sell share to anyone else without permission (LePage)

• s. 4(b) o Sharing of gross returns does not of itself create a partnership (before deduction of expenses),

whether persons sharing returns have or have not a joint or common right or interest in property from which or from use of which the returns are derived

o Example: travelling play company puts on performance in theatre operated by owner, engage own actors, props, costumes, theatre owner maintains theatre, arrangement-‐will share ticket sale proceeds, but businesses are separate

• Opening Words of s. 4(c) o Receipt by person of share of profits of the business is proof in absence of evidence to the

contrary that they are a partner in the business, but receipt of a share, or of payment contingent on or varying with profits of business does not itself make him or her partner in business (salesperson paid 50 000 if manufacturer’s annual profits over a number) ! Basically, receipt of share of profits is prima facie proof, but alone not enough

o Parties agreed would share costs of developing business of Shopping Centre on 80-‐20 basis, would also share profits on this basis (Westlock)

o Key factor is sharing of profits, rebuttable presumption that someone is a partner, in particular: ! (i) Payment of debt or liquidated amount by instalments out of profits does not of itself make a

person a partner-‐method of paying a creditor, agree to take 10% of profits until debt paid off ! (ii) Contract for remuneration of employee or agent by share of profits of business does not of

itself make the person a partner-‐employee gets annual bonus of share of profits ! (iii) Spouse or child of deceased partner who receives annuity out of profits is not partner

merely because of receipt of profits-‐usually no involvement in business ! (iv): 1) A loan, 2) to person engaged/about to be in business, 3) on contract. 4) in writing, 5)

signed by/on behalf of all parties, 6) giving lender share of profits/interest varying with profits: doesn’t itself make partner • Controversial: Can let near equity investor not be partner (get first dibs at partnership in

bankruptcy before partners), 3rd party may think lender is partner • Lenders here could also have security interest in partnership • s. 5 subordinates claims of s. 4(c)(iv) lenders to other creditors, seller of goodwill in exchange

for share of profits (not entitled to recover until other creditors have) • Reason for s. 4(c)(iv): Help businesses rebound from cash-‐flow shortage (hard sell to attract

partner or fixed rate interest loan) ! (v): Receiving payment for goodwill out of profits not necessarily partner

• Partnership Act s. 16: Person represents himself to be partner/allows representation -‐> liable to anyone who gave credit on faith of representation -‐ Doesn’t actually require partnership


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POLICY/VALUES IN PARTNERSHIP LAW

• Reliance: Person dealing with business rely on those involved in it to satisfy obligations -‐> whether you know who they are or not

• Unjust enrichment: Partner gets benefit of profits without bearing burden of expense of debt to creditor o Against possibility that creditor set terms of credit based on number of people he was aware of in

business ! Then making claim against other partners ! Not only reason behind Partner law, because you can sometimes share in profits but not be a

partner • Least cost avoidance: Partners in better position than creditors to avoid losses at least cost -‐> less

expensive for them to assess business risks o This lowers overall cost of credit

A.E. Lepage v. Kamex Developments (1977), 78 D.L.R. (3d) 223, aff’d (1979) 105 D.L.R. (3d) 84n

• Co-‐ownership versus partnership • Group of people purchased property together

o Property held in proportion to their interests in it o Owners share profits/expenses o Decision to sell property needed majority vote o Co-‐owners had right of first refusal

• One co-‐owner granted an exclusive listing to Lepage, property sold by another real estate agent o Lepage wants compensation

• No partnership – just co-‐ownership, right to deal with interests in property individually inconsistent with partnership o Co-‐owners right of first refusal not inconsistent with right to individually deal with interests in

property • Policy: Reliance (Lepage approached co-‐owner, should’ve researched his authority)

o Unjust enrichment (Lepage not responsible for sale of property -‐> no benefit to co-‐owners here) o Least cost avoidance (co-‐owners alone had limited control over property management = Lepage

could’ve checked out arrangement) • Held: No partnership existed, didn’t have authority, owners didn’t ratify

o Ostensible authority might have been argument, but not tried

Cox v. Hickman (1860), 8 H.L. Cas. 268

• Creditors get stake in business – but not partner • Business puts assets in trust in favour of creditors -‐> trust indenture lets creditors access business books,

elect trustees, set rules for business conduct o No partnership – sharing profits doesn’t necessarily mean partnership

• Test of partnership = is there agency relationship? • Policy: Reliance: Hickman (suing a partner, trying to get at creditors) likely didn’t know abut creditors –

no direct reliance o Unjust enrichment: Creditors’ share of profits limited to amount owed, o Least cost avoidance: Probably creditors (had some control/access to business) over Hickman


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o Also allows for arrangements with creditors like this

Pooley v. Driver (1876), 5 Ch. D. 458 (C.A.)

• Lender = partner • 2 partners entered into partnership agreement

o Provided 60 parts of partnership o 2 partners shared 40 of them o Other 20 distributed amongst financiers who loaned money

• Driver advanced money on loan agreement that incorporated partnership agreement o loan agreement had same term as partnership, would end on bankruptcy of lender (like

partnership) • Policy: Reliance: Plaintiff admitted he wasn’t aware of Driver,

o Unjust enrichment: Driver gets share of profits from supplies provided by plaintiff, o Least cost avoidance: Driver in better position to assess/control risk

Martin v. Peyton 158 N.E. 77 (1927 N.Y. Court of Appeals)

• Lender getting share of profits = not partner • Business A got Business B to loan them marketable securities

o In exchange B got 40% of A’s profits (B could also inspect A’s books & veto risky business decisions) o No partnership – A had to return securities to B, A had to turn over their own securities as collateral,

B got interest in loaned securities • Policy: Reliance (3rd parties likely relied on A having partners with equity),

o Unjust enrichment (B got profits while others suffered loss), o Least cost avoidance (B had ability to assess/control A’s decisions to an extent)

! No partnership finding permits this type of financing

SUBORDINATION OF LENDERS FOR A SHARE OF THE PROFITS

• s. 5 -‐ Person who advanced money as mentioned in s. 4, or seller of goodwill in consideration of share of profits = not entitled to recover anything from insolvent debtor until claims of other creditors settled

Re Fort, [1897] 2 Q.B. 495

• s. 5 applies whether contract in writing or not (notwithstanding s. 4) • Policy: Stops partners from saying a wealthy partner’s investment was oral loan

Canada Deposit Insurance Corp. v. Canadian Commercial Bank (1992), 97 D.L.R. (4th) 385 (S.C.C.)

• s. 4(c)(iv) doesn’t apply to cases where payment of debt out of profit is limited to fixed amount • s. 5 doesn’t apply to s. 4(c)(i) since latter doesn’t refer to a “contract” • Policy: S. 5 meant to ensure those who share in profits share in risks

Sukloff v. Rushforth, [1964] S.C.R. 459

• Sukloff loaned $45k for 10% interest + 50% share of profits (behind creditors), later obtained security interest (ahead creditors), further loaned $5k for 10% interest (with creditors)


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• Rationale: Common registration system for security interests lets prospective creditors check to see what security interests haven’t been staked o Thus reliance on availability of security interests already staked unreasonable

RETIREMENT OF PARTNERS

• s. 39(1): Can treat all “apparent” members of firm as partners (even if one retires during your course of business) until you have notice of change in partnership o Many things can make one an apparent partner: notoriety in particular location, name on letterhead,

3rd party’s dealings with firm o “Apparent” = apparent to entity dealing with firm, not general community

• s. 39(2): People without prior dealings with firm = notice in Gazette sufficient o Suggests something more needed for people with past dealings = they need actual notice (Tower

Cabinet) • s. 39(3): Retired partner not liable to those who can be shown not to have known he was a partner • s. 84(b): Failure to file new registration statement on retirement of partner = retired partner still

considered a partner • Policy: Party with past dealings with firm relies on partnership being same

o Notice in registry insufficient for people with past dealings ! Otherwise you’d have to check registry every time you worked with firm (less costly to provide

notice) – (Dominion Sugar) • Partnership Act suggests retiring partner do following:

! 1) Notify those with prior dealings at firm, ! 2) Put notice in Gazette, ! 3) File revised registration

o Wise to check accounts payable in previous years to find out who to notify ! Can also have Partnership Act require notice be given of retirement/have remaining partners

indemnify retired partners

WHY USE THIS FORM OF ASSOCIATION

• Corporation not available for some professions • Easy to form flexible form of association compared to corporation • Tax: losses can offset other personal income (“flow-‐through” taxation) • Disadvantage: Personal liability

LIMITED PARTNERSHIP

• Signalling limited partnership with cautionary suffix o Purpose: Put 3rd parties on notice that some partners are limited partners, reduces cost of

negotiating limited liability in every contract • Limited partnership = 1+ limited partner & 1+ general partner (s. 50)

o Limited partner liability restricted to amount contributed or agreed contribution (ss. 57 & 63) • Limited partnership requires filing certificate (s. 51), “certificate” defined in s. 48

o Must list limited partners & state their contribution/required contribution • Additional limited partnership requirements


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! Name of limited partner not in name of partnership (s. 53) -‐ (a) surname of LP is also surname of GP, (b) business was carried on under LP before admission of that partner

o Limited partner not contribute services (s. 55) ! To not mislead 3rd parties

o Limited partner can’t manage business (s. 64) ! To not mislead 3rd parties ! Liable as GP if he or she takes part in management of the business, overrides ss. 7 and 14 from

Part 2 o No return of capital if it would bankrupt partnership (s. 59)

! Remove assets from grasp of 3rd party creditors

SEPARATION OF OWNERSHIP & CONTROL

• Limited partners can’t manage business (often have too small a stake to want to spend time managing) • Opens possibility for managers (general partner) to take advantage of investors (limited partners)

o Legislation doesn’t facilitate limited partner right to restrict business • Partnership agreements can have provisions to protect limited partners • Partnership Act s. 56: Subject to consent of all partners

o General partners can’t: ! 1) do something to make carrying on business impossible, ! 2) consent to judgment against partnership, ! 3) possess partnership property for other than partnership purpose

• s. 58(1)(c): Limited partner can seek court order to dissolve partnership -‐ Can happen when court finds it’s just and equitable

• s. 58(1)(a): Limited partners have right to inspect/make copies of books • s. 58(1)(b): Right to be given true/full info of things affecting limited partnership

o Not mandatory rights, can be contracted out of (like s. 27 general partner right) • s. 66: Can’t assign limited partnership interest without unanimous consent, subject to other

agreement • s. 56(d): General partner can’t admit new partner unless right given to him in certificate (filed

pursuant to s. 51) • s. 65: Admission of limited partner must follow partnership agreement & update registry of

limited partners (s. 54) • s. 61: Get proportionate share of profits/return of capital – subject to agreement

WHY LIMITED PARTNERSHIP?

• Tax – flow-‐through losses (N/A publically traded units & holds 10%+ equity of particular investment) • Flexibility relative to corporation • May be useful in financing start of business

Haughton Graphic v. Zivot (1986), 33 B.L.R. 125 (Alta. H.C.)

• Limited partners act as officers of general corporate partner • Limited partners liable as general partners

o No defence that the creditors didn’t specifically rely on the “limited” partners


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Nordile Holdings Ltd. v. Breckenridge (1992), 66 B.C.L.R. (2d) 183 (B.C.C.A.)

• BC’s “take part in management” broader than “take part in control” at issue in Haughton o Two limited partners were officers of corporate general partner

! They managed business in capacity as officers, not limited partners o Contact with the limited partners stipulated they wouldn’t be personally liable

LIMITED LIABILITY PARTNERSHIP

• What brought about LLP? (Part 6 of PA) o Lobbying from large accounting firms that were GPs before

! Wanted personal liability of partners of the firms ! 1990s had large negligence actions against partners

o Doesn’t erode CL idea of partnership (Fasken Martineau) • Difference from LPs:

o Full shield protection in BC gives partners equivalent protection from liability that LPs have in LP, but with advantage that partners in LLP can take part in management of partnership business without personal liability

o s. 104(1): Partner not personally liable for partnership obligation only because they are a partner. ! Applies to obligation under an agreement between partnership and third party, and just any

other partnership obligations ! But, under s. 104(2), partner still liable for own negligence, not taking reasonable steps to

prevent a fellow partner’s negligence ! Can opt out, get partial shield liability via an agreement

• Why? Tax. Restricts use of partner’s share of partnership losses to amount of partner’s investment

o BC’s full shield liability offers limited liability but without restriction on management (and not restricted to professions)

o LLP requires registration (s. 94) and cautionary suffix. ! Extends to extra-‐provincial LLPs: otherwise treated as general partnership

o In Alberta, only partial shield, partners not liable for malpractice of fellow partners/employees unless directly supervising them (and still liable for debts of the firm).

o See s. 94 for definitions

CORPORATIONS

THE NATURE OF THE CORPORATION: ESSENTIAL CHARACTERISTICS

• Form of business association that comes into existence through the issuing of a certificate by a government body, becomes a separate legal personality

• Shareholders: equity claimants, invest for a return, possess claims or rights in terms of voting rights and divided rights and rights on liquidation, liability limited to amount of investment, shares: bundle of rights which are specified in the corporate document

• Three Rights (must be provided somewhere in various set of share rights): o Voting rights: right to elect directors who will manage and supervise the corporation


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o Dividend rights: right to receive distributions out of profits of the corporation when directors choose to provide such a distribution

o Liquidation rights: right to receive what remains when the assets of the corporation are sold and liabilities of the corporation are paid off

• Key Features of Corporate Form: o (i) Limited liability: liability of shareholders limited to amount they invested in corporation o (ii) Separate personality: treated as separate legal entity or “person,” can own property, commit

torts, enter into Ks o (iii) Perpetual existence: corporation does not come to an end just because shareholder has died or

has sold shares to another person • BC companies-‐memorandum of articles, members of company, theory-‐members have contracted together

to form a company, contractual relationship amongst members, original statute modelled on UK 1862 Act, BCA-‐into force 2004

• CBCA-‐theory of simply a corporate structure that is statutorily defined, first enacted 1975 • Not-‐for-‐Profit Corporations: Capital structure

o Members instead of shareholders ! Pay fees to provide corporation’s capital ! Members have rights, including right to elect directors

THE BENEFITS OF LIMITED LIABILITY

Unlimited Liability Limited Liability

Valuation Costs Check earning capacity (future cash flow) & investors’ wealth

Only need to check earning capacity

Monitoring Costs Check on changes in wealth of investors -‐ Managers risking wealth

Less need to control managers because potential for loss smaller

Diversification Each investment risks all personal wealth

Can reduce overall risk without putting personal wealth at risk

Liquidity Less: Costs of assessing investment cost & restrictions on moving interests/shares

More liquidity

Optimal Investment Decisions Obstacle to these decisions: accounting for risk to personal wealth

No obstacle to diversification and optimal money making decisions

Market Price No single price for investment, need to check each one

Standard price for units of investment with no personal risk

Economies of Scale Costs rise with more investors (more due diligence to do)

No increased costs with number of investors

• Transaction costs higher with unlimited liability – need to negotiate limited liability into every deal • Tort liability: negligence -‐ don’t negotiate limited/unlimited liability before negligence occurs normally

– what should starting point be?


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THE HISTORY OF THE CORPORATION IN ENGLAND AND CANADA

• England o Medieval times-‐form of corporation used for public and ecclesiastical bodies, given charter from the

Crown, were seen as separate legal persons, but not for business o Merchant guild-‐individuals traded and guild regulated behaviour of individual members, not separate

legal entity o 1600s-‐companies formed for foreign trade, Crown charters given that typically provided monopoly

on trade in given area o Joint stock companies-‐formed without reliance on Crown charter, make investments which would be

used to buy goods for voyage, partnerships with provisions to make shares transferable, not separate legal entity

o 17th/18th centuries-‐Crown charters used to create domestic companies, also separate statutes-‐resembled modern corporations

o 1844 Joint Stock Companies Act-‐incorporation by registration, still personal liability, 1855 Limited Liability Act-‐limited liability to amount of investment

• Canada o Crown Charters-‐earliest forms of organization, granted for projects like railways o 1849 Lower/Upper Canada-‐statutes granted letters patent to create companies for projects o 1850-‐general incorporation statute for mining, shipbuilding, manufacturing

! Limited liability, separate entity o 1864 United Provinces Act-‐grant of letters patent on application to Governor in Council o Memorandum of Association-‐form of contract among shareholders, formed as of right of filing, draft

own articles, BC last jurisdiction to have this type o Letters Patent-‐granted as exercise of Crown prerogative, privilege, more restrictions, only in PEI or

Quebec o Could still be created by grant of Crown charter, formed by separate statute-‐hospitals, general

statute-‐Bank Act, Insurance Companies Act o CBCA-‐“pure registration system” o Courts analogized corporations to partnerships in the past

THE CONSTITUTIONAL POSITION

• Corporation incorporated under provincial statute can do business in other provinces if permitted • Federal incorporation can operate in any number of provinces (John Deere Plow) • s. 92(11): Provinces get “incorporation of companies with provincial objects”

o Feds get all other incorporation power with residual power o “Provincial objects” doesn’t mean province can only incorporate company to work intra-‐province

(Bonanza Creek Gold Mining) o Legislature can give company power to operate outside province, but not the right o Federal power to incorporate isn’t just limited to its other heads of powers (Parsons); it extends

to companies with something more than provincial objects (John Deere Plow) • Provincial legislation requiring extra-‐provincial company get licence to carry on business in province in

order to maintain action n/a to federal company (Great West Saddlery) • Federal company doesn’t need to do business in 2+ provinces (Colonial Building & Investment

Association)


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PROVINCIAL LEGISLATION: IMPACT ON FEDERAL CORPORATIONS

• Provincial securities legislation requiring licence to sell security inapplicable to federal corporation -‐> would prevent selling of shares, thus business (A.G. Can v. A.G. Manitoba) o Feds can’t regulate securities (Reference re Securities Act) o But, requirement that securities be sold through licenced broker didn’t prevent federal company

from selling shares is okay (Lymburn v. Maryland) • Federal incorporation doesn’t give immunity to provincial laws (John Deere Plow) -‐> Province can

require licence to do business there • Provincial legislation preventing corporations from owning land applicable to fed company (Great West

Saddlery) • Canadian Indemnity: Prohibition against selling car insurance in province is okay, can be applied against

federal company (prevents all companies from doing business, not just federal ones) • Following provincial legislation application to federal company

o Insider trading identical to fed laws (Multiple Access v. McCutcheon), o Business name regulation (Reference Re the Constitution Act), o Penalties for failing to obtain extra-‐provincial licence (Re Royalite Oil)

IMPLICATIONS OF THE CONSTITUTIONAL POSITIONS

• Both provincial and federal government can pass valid legislation for incorporation of companies • Corporation incorporated under provincial statute can carry on business throughout the rest of the

country as long as other provinces permit it to do so • Federally incorporated company can operate throughout the country or in one or any number of

provinces o Protection for name (province can’t refuse extra-‐provincial registration because of federal name) o But can still be sued for passing off

EXTRA-‐PROVINCIAL REGISTRATION

• Corporations that are carrying on business in the jurisdiction but are not incorporated in that jurisdiction must register in that jurisdiction-‐provide means through which foreign corporation can be served with legal documents within jurisdiction

• Registration requirement enforced through means including fines against foreign corporation, prohibition against foreign corporation maintaining suit in jurisdiction, prohibition against holding interest in land in jurisdiction

• Transparency, allow people to find out information about corporation, if are operating within BC, should be able to determine who is behind that entity

• CBCA corporation will have to obtain an extra-‐provincial registration in every province in which it carries on business

• Corporation incorporated under provincial statute will have to obtain an extra-‐provincial registration for every province in which it carries on business other than incorporating province o Under BCBCA (s. 375): Must register within 2 months of carrying on business (telephone # listed in

BC directory. (a) advertisement in BC , (b) agent in BC , (c(i)) business location in BC, (c-‐ii) or “otherwise carries on business in BC” – vague)

o Requirements: registration statement – includes name, appoint 1+ attorney (s. 376)


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Bonanza Creek Gold Mining v. The King, [1916] 1 A.C. 566 (P.C.)

• Provinces can give companies that are incorporated under provincial statutes the capacity to carry on the business outside the province but not the right-‐other jurisdiction must grant right to carry on business (virtually never refused)

• Ontario corporation could validly carry on business in the Yukon, up to the Yukon to grant the right to carry on business in the Yukon, being incorporated gave capacity to do so

• Facts: feds granted mining leases to Bonanza Creek company in the Yukon, had right to obtain other licences on relinquished claims, sought some, feds refused, sued, incorporated pursuant to statute of incorporation in Ontario, Yukon government had granted licence to carry on business o Feds: Contract was invalid because had no capacity to operate outside of Ontario, because legislature

only had power to incorporate companies with “provincial objects” • Held: province of Ontario could confer powers to companies to carry on business within the province and

outside the province, could not confer on a company the right to operate in another jurisdiction

John Deere Plow Co. v. Warton, [1915] A.C. 330 (P.C.)

• Facts: Wharton, shareholder in company called John Deere Plow, incorporated in BC, sought to stop federal John Deere Plow Company from also carrying on business in BC o BC legislation allowed company incorporated outside of BC to carry on business in BC if obtained

licence to operate, condition-‐name of company could not be the same or confusingly similar • Held: federal companies have the power and right to carry on business in Canada and registrar in any

province cannot refuse them registration, federal companies get to use their names wherever they do business

• Registrar could not refuse incorporation on basis of name since would have prevented company from carrying on business in BC

A.G. Canada v. A.G. Manitoba, [1929] 1 D.L.R. 369 (P.C.)

• Manitoba: early form of securities legislation concerning sale of shares in the province, required anyone selling issue of shares to public to obtain licence

• Issue: whether this legislation could be validly applied to a federal incorporated company • Held: federally incorporated company could not be refused a licence on the basis that the sale of shares

was necessary to finance a company

Lymburn v. Mayland, [1932] A.C. 318 (P.C.)

• Alberta statute that prohibited sale of securities except through licenced broker could be applied to federally incorporated company

• Did not prevent company from selling shares and raising funds to carry on business-‐would not prevent federally incorporated business from carrying on business in the province

Canadian Indemnity Co. v. A.G. British Columbia, [1977] 2 S.C.R. 504

• Facts: province of BC replaced private car insurance with public auto insurance scheme, legislation prohibited sale of insurance by anyone other than ICBC, Canadian Indemnity one of 17 federally incorporated companies that challenged application of legislation to federally incorporated companies

• Held: legislation upheld because not restricted in application to federally incorporated companies but applied to all companies, prevented all companies from carrying on particular type of business


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• Province cannot pass legislation that sterilizes the status and central capacities of federal corporation • Provincial legislature can enact laws of general application in respect of any of the subjects enumerated

in s. 92 • Can’t interfere with federal company law-‐deprive of name, right to carry on business • Can’t undermine essence of corporation-‐impose liability on shareholder’s of the company, abolish

separate legal personality • Provincial legislation may completely paralyze all activities of a federal company so long as it doesn’t

encroach on the power and status of the federal law

Multiple Access v. McCutcheon, [1982] 2 S.C.R. 161

• When two laws intersect, provincial law has to give way to federal to extent of any inconsistency, i.e. securities laws

• Provincial insider trader legislation identical to legislation in the Act under which federal company was incorporated could still be applied to the federal company

• Both sets of legislation were intra vires-‐provincial legislation duplicated but did not contradict the federal legislation

THE INCORPORATION PROCESS

STEPS IN THE INCORPORATION PROCESS

(i) filing articles of incorporation (ss. 5, 6, Form 1) (ii) filing notice of registered office (ss. 7, 19, Form 2) (iii) filing notice of directors (ss. 7, 106, Form 2) (iv) paying the prescribed fee (Reg. s. 97, Schedule 5) (v) if the corporation is to have a name other than a numbered name, filing a NUANS Name Status Report

• s. 5 Incorporators o (1) One or more individuals or bodies corporate (5(2)) may incorporate a corporation by signing

articles of incorporation and complying with s. 7, not one of whom: • (a) is less than 18 • (b) is of unsound mind and has been so found by a court in Canada or elsewhere • (c) has the status of bankrupt

• s. 6 Articles of Incorporation (Form 1)-‐primary constitutional document of the corporation o (1) articles of incorporation shall follow the form that the Director fixes and shall set out:

(a) name of the corporation (b) province in Canada where registered office is to be situated (c) classes and any maximum number of shares that corporation is authorized to issue, (i) if two

or more classes of shares, rights privileges, restrictions and conditions attaching to each class of shares

(d) if issue, transfer or ownership of shares of corporation is to be restricted, statement to that effect and statement as to nature of such restrictions

(e) number of directors, min and max number of directors (f) any restrictions of the businesses that the corporation may carry on

o (2)-‐the articles may set out any provisions permitted by this Act or by law to be set out in the by-‐laws of the corporation-‐normally not done because hard to change


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o (3)-‐subject to (4), if articles require greater number of votes of directors or shareholders than required by Act to effect action, articles prevail

o (4)-‐the articles may not require a greater number of votes of shareholders to remove a director than number required by 109 (ordinary resolution)-‐directors cannot get themselves job security by putting provision in articles by saying cannot be removed except by unanimity or special resolution

• s. 7 Delivery of Articles of Incorporation: an incorporator shall send to the Director articles and the documents required by 19 (notice of registered office) and 106 (notice of directors)

• s. 19(2) a notice of registered office in the form that the Director fixes shall be sent to the Director (Form 3)

• s. 106(1) incorporators shall send to the Director notice of directors, (Form 6) • Reg 97/Schedule 5 pay prescribed fee • s. 8(1) subject to (2), on receipt of the articles, Director shall issue certificate of incorporation in

accordance with s. 262, (2)-‐Director may refuse to issue certificate if notice required under 19(2) or 106(1) indicates that corporation, if came into existence, would not be in compliance with CBCA

• s. 9 a corporation comes into existence on the date shown in the certificate of incorporation

NAMES OF CORPORATIONS

• Names: important because of recognition by consumers • NUANS name search-‐helps ID corporate names that might be confusingly similar • Doing Business As Names: corporation that uses a business name other than its own corporate name

must register that business name o 1234 Canada Inc. carrying on business in BC under trade name, under s. 88 would have to register the

trading name under the PA, and would have to register under BCA because is foreign entity • s. 10(1)-‐“Limited,” “Incorporated,” “Corporation,” or abbreviation shall be part of the name of every

corporation, but corporation may use and be legally designated by either the full or the corresponding abbreviated form, (2) Director may exempt a body corporate continued as a corporation under this Act from (1) o (5) a corporation shall set out its name in legible characters in all contracts, invoices, negotiable

instruments and orders for goods or services issued or made by or on behalf of the corporation o (6) subject to (5) and 12(1), corporation may carry on business under or id self by name other than

its corporate name if that other name does not contain, “Limited” etc. • s. 11(1) Director may reserve for 90 days a name for an intended corporation, (2)-‐if requested, Director

shall assign to the corporation as its name a designating number followed by word “Canada” and word or expression, or abbreviation from 10(1)

• s. 12(1) corporation shall not be incorporated or continued as a corporation under this Act with, have, carry on business or id self by name, (a) that is prohibited or deceptively mis-‐descriptive, or (b) reserved for another corporation under (11)

POST-‐INCORPORATION STEPS

• s. 15(1) a corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person, (2) may carry on business throughout Canada

• s. 106(2) each director named in notice holds office from issue of certificate of incorporation until first meeting of shareholders

• s. 104 Organizational Meeting


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o (1) After issue of certificate of incorporation, a meeting of the directors of the corporation shall be held at which directors may (a) make by-‐laws-‐normally will pass general set of by-‐laws that will deal with matters such as

procedures at directors’ and shareholders’ meetings, for allotment and issuance of shares, declaration and payment of dividends, appointment of officers

(b) adopt forms of security certificates and corporate records (c) authorize issue of securities-‐no shares will have been issued yet, no shareholders, common to

pass resolution allotting shares to persons intend to become shareholders (d) appoint officers (e) appoint an auditor to hold office under first shareholders meeting (f) make banking arrangements (g) transact any other business

o (3) an incorporator or director may call meeting of directors by giving not less than five days notice by mail

• s. 133 first shareholders meeting within 18 months of incorporation • s. 103 By-‐Laws

o (1)-‐unless articles, by-‐laws or USA otherwise provide, the directors may, by resolution, make, amend or repeal any by-‐laws that regulate the business or affairs of the corporation

o (2)-‐directors shall submit a by-‐law, or amendment or repeal of by-‐law made under (1), to the shareholders at the next shareholders meeting, and shareholders may by ordinary resolution confirm, reject or amend the by-‐law, amendment or repeal

o (3)-‐by-‐law, or amendment or repeal, is effective from date of resolution of directors until is confirmed or rejected by shareholders

o (4)-‐if by-‐law approved by directors’ is substantially the same again after being rejected, it is not provisionally effective until the shareholders approve it

o (5)-‐shareholder entitled to vote at annual meeting may in accordance with 137 make a proposal to make, amend or repeal a by-‐law

• s. 263 Every corporation shall, on the prescribed date, send to the Director an annual return, Form 22 • s. 266 (1)-‐a person who has paid required fee is entitled during usual business hours to examine a

document required by this Act or the regulations to be sent to the Director, except report under 230(2) (inspector’s report), o (2) Director shall furnish any person with copy of document required by this Act or regulations

DIRECTORS

• s. 102 Duty to Manage or Supervise Management o (1) Subject to any USA, the directors shall manage or supervise the management of the business and

affairs of a corporation o (2) Corporation shall have one or more directors but a distributing corporation shall have not fewer

than three directors, at least two of whom are not officers or employees o Note: BCA s. 136: powers and functions of directors, directors must manage or supervise

• s. 105(1) Qualifications of Directors-‐certain persons are disqualified: (a) less than 18, (b) found by court to be of unsound mind, (c) not an individual (natural being), (d) bankrupt status, (2)-‐unless articles otherwise provide, director not required to hold shares issued by the corporation o Note: BCA s. 124(1)-‐(d) previous criminal convictions in or outside of BC, offence in connection with

corporate activity or involving fraud unless court order otherwise, five years have elapsed since sentence finished-‐more restrictive


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• s. 105(3) Residency of Directors-‐=: subject to (3.1) at least 25% of directors of corporation must be resident Canadians, however if less than four directors, at least one director must be resident director

• s. 2(1) “resident Canadian” means an individual who is: (a) Canadian citizen ordinarily resident in Canada (b) Canadian citizen not ordinarily resident in Canada who is member of prescribed class of persons

(a) full-‐time employees of federal or provincial governments, of agency of any of those governments, if are acting as employees

(b) full-‐time employees, if principal reason for residence outside Canada is to act as employees of body corporate (i) 50% of voting shares controlled by resident Canadians, (ii) majority of directors are resident Canadians, subsidiary of body corporate in (i) or (ii)

(c) full-‐time students resident outside Canada for less than 10 years (d) full-‐time employees of international organization or association of which Canada is a member (e) persons who at time of reaching 60th birthday, ordinarily resident in Canada, resident outside

for fewer than 10 years (c) permanent resident and ordinarily resident in Canada, except PR who ordinarily resident for more

than one year after time at which eligible to apply for citizenship o Note: BCA has no residency rules

• s. 105(3.1) If corporation engages in activity in Canada in prescribed business sector or is required to engage in activity in particular business sector, to attain or maintain specified level of Canadian ownership or control-‐then majority of directors of corporation must be resident Canadians

OFFICERS

• Officers appointed but almost always also employees-‐salaries, benefits, can see wrongful dismissal suits, day-‐to-‐day affairs

• Fulltime day-‐to-‐day employees at highest point of corporate structure, report to directors-‐President, VP, managing directors, treasurers or chief financial officers, CEO

• s. 121 Subject to articles, by-‐laws or any USA, (a) directors may designate the offices of the corporation, appoint as officers persons of full capacity, specify duties and delegate to them powers to manage the business and affairs of the corporation, except powers in 115(3), (b) directors may be appointed to any office of the corporation, (c) two or more offices of corporation may be held by same person

WHY INCORPORATE?

(i) Provides limited liability for its shareholders as against joint and several liability of partners a. May not provide as much benefit where individuals have to provide personal guarantee to lender,

suppliers b. May end up being protection against personal liability for relatively insignificant amount of trade

credit and protection against personal liability to tort claimants c. Have possibility of courts “piercing the corporate veil”

(ii) Provides perpetual succession of body corporate contrasting with indefinite tenure of partnerships a. When SP sells assets of business, may have to assign to acquirer important business related

contracts, if contracts don’t permit assignment would have to obtain release b. Partnerships-‐reconstituting agreement is usually anticipated in advance in agreement

(iii) Ease of transfer of shares as against difficulty of terminating partnerships to permit changes a. Freely transferable unless express restriction on transfer of shares


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b. But in closely held corporations may have restrictions identical to restrictions on transfer of partnership interests

(iv) Individual partners may bind firm, shareholder alone cannot obligate body corporate (v) Shareholder can contract with or sue body corporate, partner cannot (vi) Facilities to secure additional capital

a. Shares and debentures-‐evidence of indebtedness (vii) Tax advantages

a. May accrue to SP/small partnership that converts to corporation b. Reduced tax rate first $500k income (tax deferral)

i. Control when tax paid, paid later ii. But, no flow-‐through taxation, incorporation costs

(viii) Cost of Incorporation a. Do not arise with either SP or partnership b. Fees for incorporation itself, filing of annual reports, maintaining corporate records, filing of

additional tax return

WHICH JURISDICTION – CBCA OR BC BCA?

• Can incorporate either under federal or provincial legislation and still operate throughout the country-‐statute in particular jurisdiction may be preferable

• Delaware effect-‐most permissive about what can put in articles, powers of directors, was suggestion PEI was going to try to do the same thing

• Why the CBCA? o Name protection: federal corporation can use corporate name throughout the country, but initially

hard to get name you want federally, provincial registrar cannot refuse extra-‐provincial registration to federal company because of its name

o No restriction on maintaining an action: suing or being sued, can be a concern regarding uncertainty with respect to carrying on business

o Familiarity: lawyers/shareholders familiar with it, decided case law o Director qualifications: CBCA not as restrictive as BCA is o International recognition: brand with Canada in name could be beneficial o Neutrality: knowledgeable lawyers drafted it, standard simple rules

• Why the BCA? o Familiarity-‐lawyers in BC more familiar with it o Ease: easier to deal with Victoria than with Ottawa o Cheaper o Small businesses: not going outside of BC, might as well just incorporate in BC o Allows extra-‐provincial mergers: most permissive o Residency: no rules on residency o Tax advantages o Resolutions: special resolutions are different, have three different types


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REINCORPORATION

• Corporation incorporated in one jurisdiction may decide to become incorporated under different statute in another jurisdiction, process of changing statute of incorporation is generally referred to as “reincorporation”

• Process: incorporate new corporation under statute in destination jurisdiction, then have new corporation issue shares to the shareholders of the original jurisdiction corporation in exchange for shares of original jurisdiction corporation, new jurisdiction corporation will own all the shares of the original jurisdiction corporation, original jurisdiction corporation can be wound up with assets transferred to new jurisdiction corporation

CONTINUANCE: IN & OUT OF THE CBCA

• More convenient way of reincorporating • Procedure out of the CBCA (“export”)” • s.188 Subject to (10), a corporation may apply to appropriate official or public body of another

jurisdiction requesting that corporation be continued as if it had been incorporated under the laws of that other jurisdiction if the corporation: o (i) s. 188(1)(a) Obtain resolution from shareholders permitting continuance, (5)-‐application for

continuance becomes authorized when shareholders have approved by special resolution o (ii) s. 188(1)(b) Obtain approval from the Director-‐establish proposed continuance in other

jurisdiction that its proposed continuance in other jurisdiction will not adversely affect creditors or shareholders of the corporation

o (iii) Follow proper procedure ! s. 188(3) Notice of meeting of shareholders complying with s. 135 (special meeting notice), shall

be sent to each shareholder and shall state that dissenting shareholder is entitled to be paid the fair value of their shares in accordance with s. 190, but failure to make that statement does not invalidate a discontinuance under CBCA

! s. 188(4) Each share of the corporation carries the right to vote in respect of a continuance ! s. 188(5) Special resolution, 2/3 ! s. 188(7) On receipt of a notice satisfactory to the Director that corporation has been continued

under laws of another jurisdiction, Director shall file the notice and issue certificate of discontinuance in accordance with s. 262

! s. 188(10) Corporation shall not be continued as body corporate under laws of another jurisdiction unless those laws provide in effect that (a) property of corporation continues to be property of BC, (b) BC continues to be liable for obligations of corporation, (c) existing cause of action is unaffected, (d) civil, criminal or admin action or proceeding pending may continued to be prosecuted, (e) conviction against, ruling, order, judgment may be enforced by or against BC-‐want to make sure under new corporate statute, shareholders, creditors don’t lose any rights

o (iv) Register in the other jurisdiction making amendments to the incorporation documents to make them conform to the requirements of the jurisdiction in which the company is being incorporated

• Procedure into the CBCA (“import”) o s. 187(1) Body corporate incorporated otherwise than by or under Act of Parliament may, if so

authorized by the laws of the jurisdiction where it is incorporated, apply to the Director for a certificate of continuance


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o s. 187(3) Articles of continuance in form Director fixes shall be sent to the Director together with documents required by s. 19 (notice of registered office) and s. 106 (notice of directors)

o s. 187(2) Can make changes in process of bringing BC company to CBCA to the articles provided the CBCA permits the articles to contain the provisions, note: BCA more flexible with articles, some of those provisions might not be permitted in CBCA

o s. 187(4) On receipt of articles of continuance, the Director shall issue a certificate of continuance in accordance with s. 262

o s. 187(5) On date shown in certificate of continuance (a) BC becomes corporation to which CBCA applies, (b) articles of continuance are deemed to be the articles of incorporation of the continued corporation, (c) certificate of continuance is deemed to be the certificate of incorporation of the continued corporation

o s. 187(6) Director shall send copy of certificate of continuance to appropriate official or public body in jurisdiction in which continuance was authorized

o s. 187(7) Same as 188(10): rights preserved, cannot avoid obligations by simply changing jurisdictions

o See extra-‐provincial registration above

LEGAL STATUS OF CORPORATIONS

• Corporation is a distinct person in law (Salomon) o Case recognized 1 person company (CBCA allows for 1 shareholder corporation) o Implications: Corporation can enter contracts, acquire assets, go into debt, sue and be sued

• Shareholder can be creditor of corporation (Salomon) o Ranks equally with other creditors

• Shareholder can be director/officer/employee of corporation (Lee) ! Lee sole shareholder in corporation, corporation “employed” him too

o Directors’ acts are acts of the corporation (Lee), shareholder resolutions can be company acts too • Corporation owns the business assets, not the shareholders (Macaura) • Potential Problems with separate legal status:

o Distributions to shareholders can bankrupt company and deprive creditors o Shareholder ability to contract with company = possible conflict of interest o “Thin capitalization” -‐> detrimental to involuntary creditors (tort victims) o Deceive people into thinking they’re dealing with unlimited liability o Incorporation to avoid personal obligations/restrictions

PROVISIONS

• s. 15 corporation has full legal capacity, a corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person, (2)-‐may carry on business throughout Canada

• s. 45(1) shareholders of corporation are not liable for any liability, act or default of the corporation except under: o s. 38(4) where shareholder received payment from company on reduction of capital, may be

required to repay amount o s. 118(4)(5) director held liable to obtain court order compelling shareholder who has received

payment under resolution to repay amount received, make sure shareholders not receiving money if company about to go bankrupt

o s. 146(5) shareholder may be liable as director when act in place of director under USA


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o s. 226(4)(5) where corporation has been dissolved, creditor taken action before dissolved or within 2 years, (4)-‐shareholder to whom property of corporation distributed liable to creditor to extent of property distributed, (5)-‐action which may be taken by creditor against the shareholders as class to ensure the amounts received by them from corporation are available to pay creditor’s claim

• Exceptions to limited liability, but not making shareholders liable for obligations of corporation, only liable for amount inappropriately received

• Note: s. 87(1) BCA no shareholder is personally liable for debts, obligations, defaults or acts of company except in Part 2.1

• Provisions which protect creditors-‐ensure minimum safeguards against abuse by shareholders of their limited liability:

• ss. 35 and 36 Corporation prohibited from repurchasing or redeeming shares (buying shares back from shareholders), if would make corporation unable to pay creditors

• s. 42 Corporation prohibited from paying dividend if after paying is unable to pay its creditors • s. 44 Corporation prohibited from making a loan, giving financial assistance to shareholders, directors,

related corporations if would be unable to pay creditors

Salomon v. A. Salomon & Co., [1897] A.C. 22 (H.L.)

• “Separate Legal Entity” • A legally incorporated company has a separate legal personality from its shareholders, accordingly

shareholders are not personally liable for the liabilities, debts and obligations of the company • Facts: boot manufacturing business run as SP, sold to company formed, got certificate of incorporation,

father and two eldest sons as board of directors, shares issued as fully paid, economic problems, creditors had liquidators appointed, not all creditors fully paid, liquidator saying Salomon responsible for all debts of the company: debentures fraudulently issued, transfer of business fraudulent, nothing paid for shares

• Held: Salomon not personally responsible for debts of company • Formal compliance is all that is needed in the absence of fraud, complied with Companies Act in all of its

particulars, corporation exists if complied with Act • Company at law is different person altogether from the subscribers • Fraud only existing exception to principle that shareholders cannot be liable for debts of corporation

Lee v. Lee's Air Farming Ltd., [1961] A.C. 12 (P.C.)

• Shareholder can be director/officer/employee • An individual may be sole shareholder, director, officer and employee of company at same time • Individual acts in different capacity in each role and as an employee has different separate interests from

corporation and from corporation’s management • Issue: whether Lee could be a worker within the meaning of workers’ compensation legislation • Facts: was sole shareholder of Lee’s Air Farming Ltd., governing director, only employee, died while

working, wife made claim for WC, resisted-‐could not be worker because was employing himself • Held: not like partnership, not employing himself, company employed him, was worker within meaning

of legislation o Lee and company were not the same person, company giving orders through agent (Lee)


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Macaura v. Northern Assurance Co., [1925] A.C. 619 (H.L.)

• Corporation Owns Assets o Shareholder has no legal or equitable ownership of corporation’s assets-‐shareholder has right to

share in profits of corporation while it is carrying on business and to share in surplus when business is wound up, no insurable interest in assets of corporation

o Corporation can own property, shareholders holding shares not the same as owning assets • Facts: M transferred interest in timber to company, payment-‐shares, title to the asset changed hands to

the company, M signed five insurance Ks on the timber, took property insurance out on timber, timber destroyed by fire

• Held: M could not claim on insurance because he did not have an insurable interest, only company had an insurable interest in the timber because the company owned the timber

• M’s interest as shareholder was interest in distribution of profits by way of dividend and a share in the distribution of the proceeds on the winding up of the company

PRE-‐INCORPORATION CONTRACTS

• CBCA s. 14, BC BCA s. 20 • Promoters of companies will commonly try to enter into Ks on behalf of proposed corporations in order

to secure the K before the time for incorporation or to confirm Ks for corporation before expense of incorporation incurred, normally the promoter does not intend to be personally liable for the contract

• Review of Ratification: o Where agent acts beyond authority, principal may accept what agent has done by “ratifying” the act of

the agent, want to take the benefit of the contract, also will take on burdens o A person can ratify a contract entered into by another person on their behalf if:

! (i) A person purported to act on behalf of another person who seeks to ratify ! (ii) Person who seeks to ratify was in existence and was ascertainable at the time the other

person purported to act as agent (corporation not incorporated at time) ! (iii) Person who seeks to ratify must have had legal capacity to do the act, at time other person

acted and at time of ratification (corporation not incorporated yet) o (ii) and(iii) make it impossible for a corporation to ratify a pre-‐incorporation contract

! not in existence and no capacity to contract

COMMON LAW POSITION

• (i) Corporation cannot ratify a contract that promoter purported to enter into on behalf of the corporation before it came into existence

• (ii) Promoter can be liable on a pre-‐incorporation K but only if it can be said that it was intended in the circumstances that the promoter be a party to the contract

• (iii) Where promoter purported to act on behalf of corporation before it came into existence-‐promoter can be liable for breach of warranty of authority, damages may be nominal o Company cannot ratify a contract entered into on its behalf if the company was not in existence at the

time the person purported to enter into a contract on its behalf (Kelner v. Baxter) o Potential for promoters to be liable on contracts they purport to enter into on behalf of an as yet

unincorporated entity (Kelner v. Baxter)


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o Where individuals who signed the contract on behalf of the corporation, liable because all parties knew the corporation was not in existence at the time, promoters were personally liable, had intention to be bound (Kelner v. Baxter)

o Promoter liability to be based on rule of construction approach, only liable if intended in the circumstances that they were parties to the contract (Newborne v. Sensolid)

o Inference that defendant promoters bound by contract determined according to nature of the contract itself (Black v. Smallwood & Cooper)

• Problems with the Common Law: o Risk for both promoter and 3rd party will be no enforceable contract o Reliance on purported contract will be defeated-‐potential for unjust enrichment of promoters or

3rd parties, and unnecessary costs: both parties have to take precautions o Uncertainty: no way to know what judge will decide

CBCA S. 14

• Modifies the CL position, s. 14(1) subject to this section, a person who enters into, or purports to enter into a written contract in the name of or on behalf of a corporation before it comes into existence is personally bound by the K and is entitled to its benefits

• Note: has to be K in writing, however, oral contracts are just as enforceable-‐weakness • “Purports”-‐would be nullity at CL, could not “enter into,” could only purportedly enter into • s. 14(2) A corporation may, within a reasonable time after it comes into existence, by any action or

conduct signifying its intention to be bound thereby, adopt a written K made before it came into existence in its name or on its behalf, and on such adoption o (a) corporation is bound by K and is entitled to the benefits as if corporation had been in existence

at the date of the contract and had been party o (b) person who purported to act in name of corporation ceases except as provided in (3) to be

bound by or entitled to the benefits of the K • s. 14(3) subject to (4), whether or not written K made before coming into existence of corporation is

adopted by the corporation, a party to the K may apply to court for an order respecting the nature and extent of the obligations and liability under the K of corporation and the person who entered into, or purported to enter into K, court may make any order it thinks fit-‐deals with situation where promoter enters into K, then gets out of liability by incorporating company, adopts K, corporation has no assets

• s. 14(4) if expressly so provided in written K, person who purported to act in name of corporation before it came into existence is not in any event bound by the K or entitled to the benefits thereof o Clearly contemplates that K will be entered into by person in name of or on behalf of corporation, K

must contain something more, express provision that person who enters into written K is not personally bound (Landmark)

• What if no corporation ever incorporated? Go back to CL

WHEN WILL CBCA PROVISIONS APPLY?

• Constitutional Problem: pre-‐incorporation Ks deal with enforceability of Ks, fall within provincial power to regulate with respect to property and civil rights, feds-‐have residual power to incorporate companies and ancillary powers to go along with this, but does fed power to incorporate corporations allow it to alter provincial K law relating to non-‐existent CBCA corporations, is section even valid?

• Written Contract: if K is not in writing, section does not apply, appears to leave oral Ks to the CL


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• Conflict of Laws: what happens if pre-‐incorporation K is in a province where CL would normally apply, if CBCA is constitutionally valid, CBCA provision would be paramount

• No corporation: will not help situation where corporation never incorporated

BC BCA S. 20

• s. 20(2) Subject to 4(b) and (8), if, before a company is incorporated, a person purports to enter into a K (oral or written?) in the name of or on behalf of the company, o (a) the person is deemed to warrant to the other parties to the purported K that the company will

! (i) come into existence within reasonable time, and ! (ii) adopt, under (3), the purported K within reasonable time

o (b) person is liable to other parties to purported K for damages for any breach of that warranty, and o (c) measure of damages is same as if (i) company existed when K entered into, (ii) person who

entered into had no authority to do so, (iii) company refused to ratify-‐note will run into same problem as in Wickberg-‐nominal

• s. 20(3) if, after pre-‐incorporation K is entered into, company is incorporated, the new company, may, within reasonable time adopt that K by any act or conduct signifying intention to be bound by it

• s. 20(4) on adoption, company is bound by K, facilitator ceases to be liable under (2) • s. 20(5) if new company does not adopt within reasonable time, facilitator or any party to K may apply to

court for order directing the new company to restore to applicant any benefit received by new company under K-‐addressing possible unjust enrichment

• s. 20(6) whether or not new company adopts, new company, facilitator, or any party to K may apply to court for an order (a) setting obligations of new company and facilitator as joint or joint and several, (b) apportioning liability between new company and facilitator

• s. 20(8) facilitator not liable under (2) if have in writing expressly agreed • Note: doesn’t solve problem if corporation never incorporated or has no assets, no warranty corporation

will have assets, unlikely in BC would lift veil,

Kelner v. Baxter (1866), L.R. 2 C.P. 174 (Common Pleas)

• Common Pleas • Facts: P and Ds were promoters of corporation, P was to be manager of hotel, before incorporation P

offered to sell stock of wine to the proposed company for £900 which was accepted by Ds on behalf of company January 1986, February 1-‐directors ratified agreement, promoters did not receive certificate of incorporation until February 20, directors purported to ratify again on April 11-‐days before assignment in bankruptcy

• Held: ratification of February 1st not valid because company not in existence, ratification of April 11 not valid because of requirement that ratification can only be done by principal having capacity to K at time K was entered into, company was not in existence at time promoters purported to act on its behalf

• Was clearly an intended K, valid K between P and Ds • Note: wasn’t clear if promoters were automatically liable or whether liability depended on whether it

was intended that promoter be a party to the K

Newborne v. Sensolid (Great Britain) Ltd., [1953] 1 All E.R. 708

• Facts: N entered into K with S to supply tinned ham to the company, price of tinned ham fell and S refused to take further deliveries from N, K had been signed by N underneath words Leopold Newborne Ltd., not formally signed “on behalf of,” not incorporated at this time, later was incorporated, brought


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action against S-‐dismissed because not incorporated, N sued in own name seeking to enforce pre-‐incorporation K

• Held: given way in which K was signed by N it was intended to be a K with the company and only the company, not intended that N be party to K himself

Black v. Smallwood & Cooper (1966), 117 C.L.R. 52 (High Court of Australia)

• Facts: B and others had contracted to sell land to Western Suburbs Holding Ltd. signed by Ds underneath company name, not incorporated at the time, had signed thinking it was incorporated and they were directors, Ps wanted to impose personal liability on basis of Kelner-‐K was clearly intended

• Held: Kelner not authority for principle that agent signing for non-‐existent principal is bound, inference that D promoters were bound by K according to nature of K itself, clear here that K with company was intended o Not intended to be bound, K was a nullity

Wickberg v. Shatsky (1969), 4 D.L.R. (3d) 540 (B.C.S.C.)

• Facts: S brothers were shareholders in Rapid Addressing Systems, became directors, decided to incorporate Rapid Data Western to take over old company, but was never formed, later proposed that Celer Data be formed to do the takeover, certificate of incorporation issued May 11, 1966, May 9-‐P hired as manager, terms of employment written in letter on letterhead with name of Rapid Data Western on top (never incorporated), letter signed by L Shatsky, 15 000 per year salary, later asked P to work on straight commission, when he refused was dismissed, P sued for wrongful dismissal-‐had to prove had a employment K o P: (i) S was liable as party to K on basis that K was K on behalf of non-‐existent principal, (ii) L. Shatsky

was liable for breach of warranty of authority • Held: P entitled to nominal damages on basis of breach of warranty of authority

o No personal liability-‐no intention to be bound by K o Breach of warranty-‐had represented existence of non-‐existent company, but no connection between

damage suffered by P and breach, would only have had action against company which was now bankrupt

Landmark Inns of Canada Ltd. v. Horeak, [1982] 2 W.W.R. 377

• Facts: action for damages arising out of alleged breach by D of K to lease certain premises in the P’s Shopping Centre, D and three partners were going to set up a business in Regina, received offer to lease by P, signed, tenant in offer “South Albert Optical and Contact Lenses Ltd.,” D designated self as chairman and affixed seal purporting to be corporate seal, P had requested renovations done, D and partners decided not to lease, P accepted repudiation, mitigated damages, found new tenant, company was incorporated, adopted lease entered into by D, P commenced action against D for damages-‐six months’ lost rental, amount paid to construction firm, corporation had no assets o Using Saskatchewan BCA s. 14 (same as CBCA) o Codifies the law on pre-‐incorporation Ks as stated in Kelner o D, having entered into written K in name of company before it came into existence is personally

bound by the K unless provisions of ss. 14(2) or (4) apply to transaction • Corporation could not adopt the lease, was repudiated, K was at an end, could not be adopted by

company at later date


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• Can Doughnut v. Can Egg Products express declaration by one party made either before or at the date fixed for performance that he refuses to recognize the K as binding discharges the other party from further liability, latter is freed from further performance and may sue for damages

• s. 14(4) clearly contemplates that K will be entered into by person in name of or on behalf of corporation, K must contain something more, express provision that person who enters into written K is not personally bound

• Decision: promoter personally liable, judgment in amount of 12, 419

Bank of Nova Scotia v. Williams (1976), 12 O.R. (2d) 709 (H.C.J.) (class note)

• Facts: Mrs. A put second mortgage on house with Bank of NS, proceeds loaned to company on July 5th, 1973, cheque deposited in account set up for company, certificate of incorporation-‐July 20th, 1973, Mr. A and Williams were promoters of company, became directors and ran business, July 26th, 1973-‐issued promissory note, July 1974-‐insolvent, Mrs. A made claim on loan against Williams asking court to exercise power to apportion liability

• Held: refused to exercise discretion to apportion liability, Mrs. A was not misled as to which party she was advancing money to

LIABILITY FOR CORPORATE ACTS: PIERCING THE CORPORATE VEIL

• Corporate veil is image used to separate shareholders and the corporation, protection of shareholders from liability for corporation’s obligations, to lift veil means to hold shareholders liable for obligations of the corporation, personal assets on the line

• “Law on when court may disregard this principle by “lifting the corporate veil” follows no consistent principle, best that can be said is that separate entities principle is not enforced when it would yield a result too flagrantly opposed to justice, convenience or the interests of the Revenue” (Kosmopoulos)

• 3 Approaches for lifting the corporate veil: o 1) Legal rhetoric in cases

! Agency: Corporation is shareholder/director/officer agent (or alter ego, puppet, sham, cloak) ! Disregard of corporate entity by shareholders or directors themselves: E.g. failure to keep

separate corporate accounting, meetings, etc. ! Conduct akin to fraud: taking away right person otherwise has (Gregorio) ! Affiliated enterprises: E.g. Link parent with subsidiary

• Smith, Stone and Knight factors: o 1) Profits treated as those of parent company o 2) Persons doing business appointed by parent company o 3) Parent company head/brain of trading venture o 4) Parent company governs the trading venture? (Make decisions) o 5) Parent company make profits by skill & direction o 6) Parent company in effectual/constant control?

• Subsidiary generally won’t be found to be alter ego of parent company unless under complete control (Gregorio)

• Just looking at 6 factors insufficient, ask what purpose are you ignoring corporate veil for? (Alberta Gas Ethylene)

o 2) Types of cases courts make exceptions for o 3) Broader policy reasons

• Excerpts:


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• Corporation is separate legal entity, shareholders not personally liable (Salomon) • Company at law is different person altogether from the shareholders, fraud is only existing exception to

principle that shareholders cannot be liable for debts of corporation (Salomon) • Shareholder can also be creditor of the corporation (Salomon) • Company is separate person that acts through its shareholders to the extent they have powers to

authorize certain acts by the company or through its directors to the extent that directors have powers to authorize certain acts (Lee)

• Company is the person that has an interest in the assets not the shareholders (Macaura) • Concept for lifting-‐corporation simply the agent of the shareholder, shareholder-‐agent, corporation-‐

principal-‐Gillen’s Notes • Lifted veil when in attempt to avoid K, first D sold property to second D, company in which first D and

clerk of solicitor were sole shareholders (Jones) • Lifted veil when failed to respect s. 10(5) (Hobby)

o Failure to use corporate name appropriately as required by 10(5), (2) improper conduct of taking inventory and paying creditor who would be able to collect from S personally, made it appropriate to pierce veil (Hobby)

• Courts appear to be more willing to disregard the corporate entity where effect of doing so is to link parent company with its subsidiary, will look at whole “corporate enterprise”-‐Gillen’s Notes

• Determine whether subsidiary was just an agent or alter ego of parent corporation-‐Gillen’s Notes • Generally, subsidiary will not be found to be alter ego of parent unless is under complete control of

parent and is nothing more than conduit used by parent to avoid liability (Gregorio) • Corporate veil not lifted where argument made that Canada Life Mortgage Services, wholly owned

subsidiary of Canada Life Assurance, should be treated as one with Canada Life Assurance, “nothing in facts of case to suggest this would be case where court might be tempted to lift the corporate veil in interest of doing justice between the parties (Transamerica)

• Summary of case law: many different arguments have been made in different fact situations that the separate legal personality of a corporation should be disregarded, so that the shareholder becomes liable to the creditors of the corporation, with few exceptions, courts have affirmed the Salomon principle, in case where company has been used as instrument of fraud or to effect purpose shareholder could not legally achieve personally, and where the company was really the “mere agent” or alter ego of the shareholder, the courts have been willing to impose liability on the controlling shareholder or otherwise disregard the corporate veil

Kosmopolous v. Constitution Insurance Co. of Canada, [1987] 1 S.C.R. 2

• Principle in Salomon should be respected, corporate veil should not be lifted o As matter of insurance law, sole shareholder of company has an insurable interest in the assets of the

company o Also illustration of how limited liability can be quite illusory for small companies-‐lenders insist on

personal guarantees • Issue: did K have an insurable interest in the assets of the company? • Facts: Greek immigrant, started leather goods store as SP, incorporated because wanted to protect

personal assets, sole shareholder and director, bank account was put in trade name-‐bank knew was company and account was personally guaranteed by K, lease for store was in K’s personal name, thought he owned store and its assets, got fire insurance coverage for the store, insurance agent knew business was carried on by the company, for some reason subsequent policies were issued in K’s name, had fire


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and tried to claim on insurance, sued insurance company-‐only person that lost anything, should look through the company

• Held: as a matter of insurance law sole shareholder of corporation who has moral certainty of suffering loss can claim on insurance (insurance law principle), K could recover o Said more clearly: overturned Macaura, didn’t say that shareholders own the assets of a

corporation, just that they have an insurable interest. o NB: Not lifting corporate veil, corporation legal entity distinct from shareholders, veil may be lifted if

company is mere agent of controlling shareholder, only lifted to provide justice for “innocent 3rd parties” who has been deceived or defrauded by use of corporate form, not an instance of shareholder himself trying to take advantage of pros and cons of incorporation

GAP-‐FILLING/IMPLIED CONTRACTUAL TERMS

• Courts may disregard the corporate entity in a way that amounts to filling in the gaps in contracts. o Disregard the entity to achieve what the parties would have agreed to had they turned their minds to

the particular facts that have arisen in the case. • Policy: Trying to anticipate all of the possible creative uses of corporations in advance and then drafting

provisions that protect against those creative uses of corporations to avoid contractual obligations could be very costly.

Gilford Motors Company Ltd. v. Horne [1933] Ch. 935 (C.A.)

• Company de facto controlled by the D was “the channel through which the D carried on his business,” the company was formed as a device to mask carrying on of business (in breach of K) by Horne, the purpose of it was to try to enable him, under what is a cloak or sham to engage in business contrary to his contractual obligation

• Facts: application for injunction against individual, H and company from soliciting customers of Gilford, H had been employed by Gilford, had signed written agreement would not entice away any of customers, when employment was terminated did just this by incorporating company

• Held: granted injunction • Used corporate form inappropriately to avoid his contractual obligations, not going to distinguish

between H and the company, incorporated to protect self from breach of K

Saskatchewan Economic Development Corp. v. Patterson-‐Boyd Mfg. Corp. [1981] 2 W.W.R. 40 (Sask. C.A.)

• Similar in construction to Gilford case • Defendant entered into loan agreement with plaintiff • Defendant then incorporated another company and gave it all of its money as a loan • Plaintiff was supposed to be paid back first, money given by defendant to new company was the money

from the plaintiff • Pierced the corporate veil because defendant did something they said they wouldn’t do, loan to new

company should have been subject to same subordination clause as the defendant was


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CORPORATIONS FORMED TO AVOID STATUTORY REQUIREMENTS

• In some cases the corporation may be used as a means of avoiding a statutory requirement or restriction. • I.e., court is saying that if the legislature had turned its mind to the situation it would surely have dealt

with the matter by putting in a provision that prevented the corporation from doing what they’re trying • Frequently occurs in income tax cases

British Merchant Merchandise Transport Ltd. v. British Transport Commission [1961] 3 All E.R. 495

• Legislation was in place to limit corporations to once licence • Company formed second corporation to get another licence • Held: No veil where sole purpose of corporation is to get around a statutory requirement

AFFILIATED CORPORATIONS

• Idea that you’re not imposing personal liability on the shareholders, making a different corporation liable, all the benefits are still kept with breaching corporate veil in affiliated corporation case.

• The alter ego basis of piercing the corporate veil is applied to prevent conduct akin to fraud that would otherwise unjustly deprive claimants of their rights (Gregorio) o Mere control not enough, parent company was not using subsidiary to avoid liability

Smith, Stone and Knight Ltd. v. Birmingham Corp., [1939] 4 All E.R. 116 (K.B.)

• Plaintiffs all owned shares of a subsidiary company whose land had been expropriated • Sought compensation, as it would have been less if the subsidiary made the claim • Court applied the Smith, Stone and Knight test and found the plaintiffs to be a proper claimant • Answer may seem to be yes for each factor, but there must be something more as below

Alberta Gas Ethylene Co. v. M.N.R., [1989] 41 B.L.R. 117 (Fed. T.D., Aff’d [1990] 2 C.T.C. 171 (Fed. C.A.)

• Just looking at the above six factors is not enough, must also ask what purpose are you ignoring the corporate veil for?

• Plaintiff company set up a shell company in the US to secure loans, paid same interest payments to subsidiary company as it paid its creditors o Asked MNR to lift the corporate veil, court said six factors not enough, what is the purpose?

Gregorio v. Intrans-‐Corp. (1984), 18 O.R. (3d) 527 (C.A.)

• Gregorio buys defective truck from Intrans, which ordered the truck from Peterbilt, a subsidiary of Paccar US. Gregorio argues that all 3 companies should be treated as the same (lift the veil) so he could sue in Canada by suing Intrans.

• Court DOES NOT lift veil because Intrans and Peterbilt not the source of damage, only Paccar. Both companies were not the agents of Paccar.


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Walkovsky v. Carlton, 223 N.E. 2d 6 (1966 N.Y.A.D.)

• 10 cab companies owned by one man, each company had minimum level of coverage • Plaintiff wanted to pierce veil, but would have hit individual, not allowed • Compare to Mangen

Mangen v. Terminal Cabs Ltd., 272 N.Y. 676 (1936 N.Y.A.D.)

• Cab company owned by corporation owned many cab companies • Plaintiff wanted to sue, was allowed because while it affected shareholders’ interests, didn’t affect

individual

REPRESENTATIONS OF UNLIMITED LIABILITY

• If business venture is conducted through a form of association that provides limited liability for equity investors and if the persons who choose to deal with the business are aware of this they can either refuse to deal with the business enterprise or charge a premium that reflects added risk o Depends on whether or not they are aware of the limited liability o Persons operating the business may be inclined to misrepresent the situation o Equity investors personally liable even when inadvertent since it is presumably cheaper for them to

be aware of the legal status of the business enterprise and notify those who deal with the business than vice versa

• Situation where someone may advance credit on thought that it’s a sole proprietor and not LL

CORPORATE NAMING REQUIREMENT

• s. 10(1) Every corporation has to have certain designations that identify it as an incorporated business corporation “limited”, “incorporated”, “corporation”. o (5) Corporation shall set out its name in legible characters in all contracts, invoices, negotiable

instruments and orders for goods or services issued or made on behalf of the corporation o (6) Subject to (5) and 12(1), corporation may carry on business under or id self by a name other than

its corporate name if that other name does not contain 10(1) designation • s. 251 Every person who, without reasonable cause, contravenes a provision of this Act or regulations for

which no punishment is provided is guilty of summary conviction offence

Gelhorn Motors Ltd. v. Yee (1969), 71 W.W.R. 526 (Man.C.A.)

• Person dealt with business before incorporation • Defendants continued to do business under pre-‐incorporated name, didn’t notify plaintiff • Held in plaintiff’s favour

Chaing v. Heppner (1978), 85 D.L.R. (3d) 487 (B.C.S.C.)

• Left a watch for repair, fire destroyed shop • Though incorporated, receipt made it seem like SP (no corporate suffix) • Found personal liability


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Tato Enterprises Ltd. v. Rode (1979), 17 A.R. 432 (Alta. Dist. Ct.)

• Tato enters into contract with SB Ltd, no such company • There was a SB Marketing Ltd., but didn’t have a bank account or assets • SB Marketing Ltd. didn’t ratify the contract • Held: Rode liable, best position to avoid mistakes, carelessly signing without properly incorporating

Roydent Dental Products Inc. v. Inter-‐dent Int’l Dental Supply Co. of Canada, [1993] O.J. 708

• Similar to Tato, P enters into K with D (unregistered) • Behind D was another corporation, D violated s. 10(5) of CBCA where it is an offence not to register name,

subject to penalty under s. 251 o Court uses this violation to pull back the veil

NON-‐CONSENSUAL CLAIMANTS

• Primary example would be the victim of a tort committed in the carrying on of the business enterprise o E.g. Pedestrian hit by a van used by a courier business would not be a voluntary claimant

! Pedestrian would not have been able to choose the courier business to hit him in advance • Policy:

o Compensation: corporate entity may be disregarded in order to compensate a tort victim ! Here the benefits of LL may be surrendered to address consequences of not full compensation

o Incentive Costs and Efficiency: may have been within the control of the managers of the business ! Did managers set up incentive for fast deliveries? Fail to ensure safe equipment? ! Has to be weighed against use of limited liability

o Piercing the veil in these cases: Not always done, as with Walkovsky. Solution in that case would have been to require cab companies to carry higher levels of insurance. ! Most often done when: one-‐person or few shareholder company, or when it leads to claim

against LL parent company rather than shareholders

Wolfe v. Moir, CB 106-‐08

• Ticket purchased for Fort Whoop Up, not for Chinook Sports Ltd. o Didn’t put the corporate name on the tickets, or visible anywhere o Lifted the veil simply for not following the formalities

OTHER MEANS OF GETTING AROUND THE CORPORATE ENTITY CONCEPT

DIRECT TORT CLAIMS

• Since a corporation can only act through humans, a tort committed by a corporation must be committed by a person, so instead of suing the corporation someone could sue the person who did the actual act o Corporation is vicariously liable, but the agent that committed the act is liable as well

Berger v. Willowdale A.M.C. (1983), D.L.R. (3d) 247

• Employees don’t shovel sidewalk • Tort claimant can sue executive officer who had a duty to see that side walk was safe


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Said v. Butt, [1920] 3 K.B. 497

• Said brought a tort action against Butt for inducing breach of contract • Said was an undisclosed principal and it was clear that Butt would not have entered into the contract if he

had known Said was part of it, therefore no contract

McFadden v. 481782 Ont. Ltd. (1984), 47 O.R. (2d) 134

• PMAI US and McFadden have employment contract where they are to pay him to 1982 • PMAI US make a Canadian company, drain out assets from PMAI US but leave liabilities and contract with

PMAI US; it proceeds to fire McFadden • Held: the two shareholders/directors induced breach and so were liable

ADGA Systems International Ltd. v. Valcom Ltd. (1999), 43 O.R. (3d) 101 (Ont. C.A.)

• ADGA enters into contract with Canadian Corrections • Contract includes tech support, security, and 45 senior employees • Valcom submits RFP to Canada Corrections and induces senior employees to jump to Valcom • CC does not renew contract with ADGA and instead choose Valcom • Held: Valcom liable for inducing breach of contract, as it interfered with another’s contract

Rafiki Properties Ltd. v. Integrated Housing Development Ltd. (1999), 45 B.L.R. (2d) 316 (B.C.S.C.)

• P had contracted with D for development management services for hotel • P alleged that it relied to its detriment on false representations of D and its two principals • Court held that a director “can only attracter personal liability if he is acting outside the scope of his

authority in being motivated by advancing a personal interest contrary to the interests of the company, or by fraud, or with malice”.

Better Off Dead Productions Inc. v. Pendulum Pictures Inc. (2002), 22 B.L.R. (3d) 122

• P claimed they relied on misrepresentations in advancing funds to D and extended the claim to the president of the D

• President sought to have claim dismissed, court agreed, saying that individual will only bear personal liability for acts committed on behalf of a company where the torts are those of the individual and the allegations show an identity or interest separate from that of the company

THE OPPRESSION REMEDY

• s. 241 of the CBCA allows the court to make an order for relief on the basis that the conduct of the affairs of the corporation has been oppressive or unfairly prejudicial to, or that unfairly disregarded the interests of, a “complainant” in the “complainant’s” capacity as a “security holder, creditor, director, or officer”.

• Court has wide powers for relief in s. 241(3) o (j) the power to make “an order compensating an aggrieved person”

! Court may then make an order for compensation against a particular director or officer


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PCM Construction Control Consultants Ltd. v. Heeger, [1989] 5 W.W.R. 598

• P was found to be wrongfully dismissed • Corporation had been reduced to a mere shell corporation since that time • P was shareholder and director of the corporation • Court held there were various oppressive acts, ordered other directors to compensate the P s. 241(3)(j)

2082825 Ontario Inc. v. Platinum Wood Finishing Inc. (2009), 96 O.R. (3d) 467 (Ont. Div. Ct.)

• B made an oppression application, had accepted a 30% interest rather than 50% in the D corporation o Did so with expectation would be appointed president with $100k salary o After working for 2.5 years, at such time company was making substantial profits, B was hospitalised

for three months • Two days after returning to work, directors controlling other 70% of corporation voted to remove B from

position • Normally wrongful dismissal wouldn’t be oppressive action, but due to link with shareholder’s

agreement, is in this case • Shareholders of remaining 70% were made directly liable for damages, and were required to buy out B’s

shares

Glasscell Isofab Inc. v. Thompson (2012), 2012 ONSC 6423 (Ont. S.C.J.)

• P had supplied insulation to TSL on credit, P obtained judgment against TSL, only received 10% or so through a garnishment order o D was a shareholder of TSL, also a director

• D had created a numbered company and used all of TSL’s assets and employees to carry on the business of TSL when TSL ceased to carry on business

• Court allowed order for payment of remaining amount directly to D, his wife, and the new company

KNOWING ASSISTANCE IN BREACH OF TRUST

• Director or officer can also be liable on the basis that he or she has knowingly assisted in a breach of trust • To be liable for knowing assistance in a breach of trust a person must have actual knowledge of the

breach or must be reckless or wilfully blind to the breach (Air Canada)

Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787

• D had contract with P to sell tickets on behalf of P • Under contract D was to be a trustee of the proceeds of the sale of P’s tickets

o It was required under the contract to keep the proceeds in separate trust accounts that it had set up o D did not do so, instead kept in its general account

• Bank took money out of D’s general account to pay bills • P sued D and directors

o Court held directors of D liable for their knowing assistance in the breach of trust by D as trustee • “in failing to exercise proper control over the trust funds, both [directors] received a benefit in that their

personal liability to the bank was extinguished”


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STATUTORY PROVISIONS WHERE DIRECTORS/SHAREHOLDERS CAN BE LIABLE

CBCA S. 118

• Provision sets out a number of circumstances in which directors may be found personally liable • (1) for issuing shares without receiving full payment for the shares • (2) for purchasing, redeeming or otherwise acquiring shares, paying commissions for the sale of shares,

paying dividends, providing financial assistance to shareholders, directors, officers or employees, or for paying an indemnity to a director or officer if certain tests of insolvency are not satisfied

• (4) shareholders can be liable to indemnify a director who ahs been held liable under (2) where they have been recipients of any funds paid out pursuant to a resolution of the directors contrary to (2)

UNPAID WAGES

• If wages are left unpaid to stay afloat, employees may capitulate in effort to keep job • CBCA s. 119 overrides any argument that the directors are not liable, says directors are jointly and

severally liable to employees for up to six months of unpaid wages • BC ESA s. 96 provides similar protection for up to 2 months of unpaid employee wages

FINANCING

SHARES

• Shares are a bundle of rights, not a property right to corporations’ assets • Rights/restrictions on shares must be in articles (s. 6(1)(c))

o Default: one class of share with all 3 rights (s. 24(3)) – presumption of equality ! Rights are: (must exist somewhere)

• Right to vote on company matters (including voting for directors) • Right to receive dividends when declared by the board of directors, and • On dissolution, the right to receive the property of the corporation remaining after creditors

and any other persons with claims against the corporation are paid off ! For there to be distinction between classes: (McClurg)

• Must be a distinction in some right between that class and others o Share certificate (shows rights, s. 49(1))

! Shareholder has right to have it (s. 49(1)) or copy of their shares’ rights (s. 49(13)) o Registration requirement: Name/address of shareholders, # of shares held, date & particulars of

each share issue/transfer (s. 50) ! Kept at registered corporate office or records office (s. 20)

o Preferred shares: Get dividends/rights first ! Often/presumptively cumulative (dividends add up each year if not paid out) (Webb v. Earle) ! Unless otherwise provided, generally precluded from a share of dividend after preferred dividend

(not so with dissolution, will be preferred then equal share) (McMaster) • Participation right changes this, allows preferred shareholder to participate in dividends

beyond preferred amount o Convertible: allows conversion of preferred shares to common at a predetermined ratio


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o Retractable: sometimes preferred shares are given this right, allows to sell shares back at a predetermined price

o Redeemable: Company may reserve the right to buy back the preferred shares at predetermined price (a “call”, typically set at a premium to this price at which they were issued “call premium”)

• Types of dividends: Cash, specie (property besides cash), stock (more shares) o Directors issue dividends (subject to unanimous shareholder agreement, s. 102)

! Must do it in corporation’s interest (not oppressive to shareholders) ! If dividend causes corporate debt, shareholder can sue, dividend must be paid out of profit

• Can’t issue dividend if it would make corporation insolvent (s. 42) o Directors can be personally liable if they do this (s. 118-‐2-‐c) o Shareholder liable to pay back dividend if given contrary to s. 42 (s. 118(5))

• Default record date of dividend is close of business day it’s declared (s. 134(3)) o Ex-‐dividend date: Date newly transferred shares won’t receive incoming dividend o (s. 134(1) = gives director power to set record date)

• Pre-‐emptive shareholder rights: Right to purchase newly issued shares – maintain proportionate interest in company (CBCA s. 28 if the articles so provide)

• Directors control issuing shares and consideration for shares (s. 25(1)) o Articles can set limit on total shares (s. 6(1)(c)) o Power that cannot be delegated (s. 115(3))

• Subscription: Application to purchase shares, o Allotment: Deciding which subscriptions to accept, shares must be fully paid for (s. 25(3)) o Directors personally liable for issuing shares at less than market value (s. 118(1))

! (“watered stock” – prohibited s. 25(3)) ! They set consideration for shares (s. 25) ! Defence to watered stock: Director couldn’t reasonably know (s. 118(6))

• Corporation can’t purchase back shares if its assets would become less than liabilities (s. 34(2)) o CBCA corporation can’t own its own shares, must cancel shares it buys back (s. 30(1))

• Series: shares of a class that have more preferable rights o CBCA s. 27(3) prevents a series of a class getting priority for dividends/liquidation over another

series in the same class o Authority to issue series from s. 27, faster than gaining approval for new class with different share

rights o CBCA tries to protect against subsequent shareholders being better treated than holders of earlier

series by providing that no series in a class can be given any priority over any other series with respect to dividends or proceeds on liquidation

• Par value: What a shareholder is required to contribute to company = value attributed to share o Ready source of finance, easy to determine available capital o BUT, par value became meaningless (set arbitrarily low, no relation to amount of capital) o Deceive investors/creditors

! CBCA provides only for shares without par value (s. 24(1)) • Stated capital account: Total amount for which shares of class/series have been issued (s. 26-‐1)

o Just shows amount raised through sale of shares o Shareholders can approve reduction in capital account

! Distribute capital to shareholders (ONLY if it won’t make assets < liabilities) – s. 38(1)


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FURTHER SHARE PROVISIONS AND DEFINITIONS

• Nature of a Share and the Share Register o s. 2(1) “Security” means a share of any class or series of shares or a debt obligation of a corporation

and includes a certificate evidencing such a share or debt obligation o Shares typically described as “bundles of rights”-‐every share carries with it implicit rights that attach

to it by corporate law and also specific rights set out in the articles o Share is not an isolated piece of property, it is a “bundle” of interrelated rights and liabilities

(Sparling v. Caisse de Depot) o Equity investors-‐hold shares, note: share is not property right in assets of corporation, does not

represent a proportionate ownership interest in the corporation itself o s. 49(1) every security holder is entitled at their option to a security certificate that complies with

this Act or a non-‐transferable written acknowledgement of their right to obtain such a security certificate from a corporation in respect of the securities of that corporation held by them

o s. 50(1) a corporation shall maintain a securities register in which it records the securities issued by it in registered form, showing with respect to each class or series of securities (a) names and address of each security holder, (b) number of securities held by each security holder, (c) date and particulars of the issue and transfer of each security

• Issuing and Paying for Shares o s. 25(1) power of directors-‐subject to articles, by-‐laws, and any USA and to 28, shares may be issued

at such times and to such persons and for such consideration as the directors may determine o s. 115(3)(c) no managing director and no committee of directors has authority to issue securities

except as authorized by directors (power cannot be delegated also to officers-‐s. 121(a)-‐directors cannot delegate away power to issue shares

o s. 25(2) shares issued by corporation are non-‐assessable and the holders are not liable to the corporation or to its creditors in respect thereof-‐previously, corporations would subject shares to additional assessments-‐further contributions that shareholders would have to make

o s. 25(3) a share shall not be issued until consideration for share is fully paid in money or in property or past services that are not less in value than the fair equivalent of the money that the corporation would have received if the share had been issued for money

o s. 25(4) in determining whether property or past services are the fair equivalent of a money consideration, directors may taken into account reasonable charges and expenses of organization and reorganization and payments for property and past services reasonably expected to benefit the corporation

o s. 25(5) “property” does not include a promissory note or a promise to pay o Authorised limit-‐common in past to put limit on power of directors to issue shares, “authorized”

amount of shares the directors can issue, could not issue any more without getting extension of authorized limit (amend articles), s. 6(1)(c)-‐can set out authorized amount, don’t have to, common to have unlimited

o Subscription-‐when corporation proposes to issue shares, persons can apply to purchase shares, subscription-‐offer to buy shares, directors will decide which subscriptions to accept and to whom shares will be issued

o “Watered stock” problem-‐directors might accept piece of property in exchange for shares if they overvalue that land and issue share that appear to have value more than what is paid for them, creditors would be successful in claim that shareholders should contribute the difference between actual value and amount at which shares allegedly sold for ! s. 25(3) Prohibition on watered stock


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! s. 118(1) directors of corporation who vote for or consent to resolution authorizing the issue of share under 25 for consideration other than money are jointly and severally liable to corporation to make good any amount by which consideration received is less than fair equivalent of the money that the corporation would have received, (6)-‐defence that did not know and could not have reasonably known that share was issued for consideration less than fair equivalent of money

! Note: if share is to be issued for property-‐should get professional opinion ! s. 251 Directors may also be liable for having breached provision of CBCA

• Share Rights and Restrictions o s. 24(3)-‐where a corporation has only one class of shares, the rights of the holders thereof are equal

in all respects and include the rights-‐presumption ! (a) to vote at any meeting of the shareholders of the corporation ! (b) to receive any dividend declared by the corporation ! (c) to receive the remaining property of the corporation on dissolution

o s. 24(4)-‐articles may provide for more than one class of shares and, if they so provide, ! (a) the rights, privileges, restrictions and conditions attaching to shares of each class shall be set

out therein, and ! (b) rights set out in (3) shall be attached to at least one class of shares but all such rights are not

required to be attached to one class • Separate bundles of rights referred to as classes-‐CBCA allows for different classes of shares with different

rights and restrictions • If more than one class of shares, then each of three rights must appear somewhere in rights attached to

various shares • Shares presumed equal in all respects unless otherwise indicated, shares within a class presumed to have

equal rights

International Power Co. v. McMaster University, [1946] S.C.R. 178

• A priority claim as to dividends implicitly precludes a claim beyond the priority • There is a presumption of equality with respect to preference shares when it comes to a share in the

proceeds on dissolution • If it is not specified that the preferred shares are participating then they are presumed to be non-‐

participating

Dodge v. Ford Motor Co., 170 N.W. 668 (1919 Michigan Supreme Ct.)

• D had amassed substantial retained earnings • D refused to declare a dividend so company could use funds for expansion

o When questioned, said it was for benefit of society not for benefit of shareholders o Duty was to act in interest of the shareholders o Found to be a breach, pretty stupid, should have just said it was for shareholders anyway

Fergusson v. Imax (1983), 43 O.R. (2d) 128 (C.A.)

• Falling out between husband and wife who were both shareholders along with two other couples • Wives held preferred shares, husbands common shares • F used position to see that there were no dividends paid


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• F and other couples got money in form of salary, Mrs. F no longer worked for company, therefore got no return from investment

• Court held this was oppressive, granted a remedy

Bushell v. Faith, [1970] A.C. 1099 (H.L.)

• Special voting rights trump CBCA • Articles allowed a director to have 3 votes per share on any resolution to remove that director • Three shareholders, each with 100 shares • Vote by hands, lost 2 to 1, vote with shares, won 300-‐200 • Court upheld what the vote count was, despite s. 184 (which said director could be removed by ordinary

resolution)

Jacobsen v. United Canso Oil & Gas Ltd. (1980) 11 B.L.R. 313 (Alta. Q.B.)

• Special voting rights do not trump CBCA • Bylaw stating that shareholder could only vote a maximum of 1000 shares • Held that bylaw was invalid, presumption of law that shares confer equal rights and liabilities

o If voting rights are to vary, must be done through classes • Can uphold the two cases on policy, in Bushell there were 3 shareholders, they had all consented to the

rules, would have been removed from making a return on investment by actions of other 2 directors

Bowater Canadian Ltd. v. R.L. Crain Inc. & Craisec Ltd. (1987), 62 O.R. (2d) 752

• All shares in a class need to have equal voting rights, or else potential for fraud, subject to separate series rights

• Craisec held common shares of Crain carrying one vote per share, also held all shares in another class called “special common shares” that were worth 10 votes per share so long as Craisec was holding them

• Held that even after transfer, still had 10 votes per share, within a given class must have equal rights subject to different series

DEBT SECURITIES

• CBCA ss. 82-‐93 • Typical ways of debt finance: Bank loans, commercial paper (promissory note), bonds/debentures

(evidence of indebtedness – pay back principal & specified interest) o Bond typically means payment obligation secured in assets

• Trustee normally appointed to enforce bond/debenture: o Without trustee, bond/debenture holders would need to individually enforce debt obligations (some

may try to free ride) ! Trustee must be incorporated, no conflict interest, access to list of debenture holders, power

to demand evidence of compliance ! Trustee give notice of default, duty of loyalty to interests of debt holders


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THE DISTRIBUTION OF SECURITIES

• Securities under provincial jurisdiction o Canadian Securities Administrators – harmonizes cross-‐province securities law, make national

policy statements • Security is an investment

o To determine if something is a security, use the Howey-‐Foreman test: (Pacific Coast Coin Exchange) ! i) A contract, transaction, or scheme whereby a person invests ! ii) in a common enterprise; and ! iii) the efforts of a promoter or third party are undeniably significant in providing the profits the

person expects from the investment o Distribution Trade of a security of issuer that hasn’t been previously issued

• Exemptions from prospectus: Small businesses under private issuer exemption, can sell to certain people (e.g. director, officer, employee, associate, family, friend accredited investor) o Important because establishing prospectus costly

! Private issuer = Issuer of securities with less than 50 shareholders other than employees & ex-‐employees

! Issuer that have publicly traded securities: Exemption to issuing security to accredited investors (they don’t need protection of prospectus)

• Process for distributing securities under prospectus: Disclosure on enterprise -‐> securities administrator vets the disclosure o Disclosure is continuous obligation for reporting issuer (a normal issuer that distributes securities

under a prospectus) • Insider trading: Can’t trade with issuer when you know info not disclosed, can’t tell others this info

unless it’s required in normal course of business o Applies to people with special relationship with issuer

• Takeover bid rules: Bid must be made to all targets of issuer’s shares, kept open 35 days, shares tendered can be withdrawn within bid period

! Bid for less than all shares handled pro-‐rata ! Directors must send out info on bid to shareholders ! Consideration same for all shareholders

o Applies to an offer that would result in owning 20%+ of equity of securities of a class from issuer • Poison pill plan: Rights of shareholder to buy further shares for less than market value

o Come into effect when you own certain % of voting securities (20%) ! Directors can withdraw these rights ! Poison pill plan holder deals with longer take over bid time

o Securities administrators regulate poison pill plans (use cease trade order if necessary) ! Goal maximize share sale prices – so won’t stop it if it facilitates competing bids that extracts

higher price


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GOVERNANCE

POWERS OF THE CORPORATION AND AUTHORITY OF DIRECTORS AND OFFICERS

THE ULTRA VIRES DOCTRINE

• Raises issue of corporate capacity-‐does the corporation have the capacity to engage in this activity or enter into this K

• Previously, companies were required to state their objects and anything outside them was outside their corporation articles, not common anymore

• Objects of corporation: What business is incorporated to do • Powers: What corporation can do in carrying out its objects • Directors are the operating mind of corporation (not an agent)

! Offers are agents = can be actual or ostensible authority o Corporation can’t grant agent power to do something it can’t do o If corporation enters arrangement outside it’s powers – it’s not legally binding (Ashbury Railway)

• Reasons for ultra vires doctrine: Investor/creditor protection against risk, constrain quasi-‐public corporations to their purpose, control against risk of bankruptcy

• Problems with doctrine: Undermines reliance on contracts, unjust enrichment, costs on checking corporations objects/powers, creates hardships for third parties who have to bear risks

• CBCA approach: o s. 15: Corporation has powers of natural person o s. 16(2): Prohibition on doing business against restrictions in articles o s. 16(3): No act invalid only because it’s contrary to articles

• Can sue directors for breaching objects of corporation o Derivative action: Shareholder sue officer/directors for breaching their corporate authority (s. 238)

• Ultra vires doctrine probably not applicable to Crown Charter or Letters Patent • Ultra vires doctrine still at play in Canadian law as not all incorporating statutes deal with it

Ashbury Ry. Carriage & Iron Co. v. Riché

• Memorandum of association set out “to make, sell or lend or hire, railway plant, fittings, machinery and rolling stock …” and stated a special resolution would be required to change this

• Entered into contract with Riché to build railway in Belgium o Two years later, after construction had started, Ashbury repudiated contract

• Ashbury claimed the contract was ultra vires the company • Court held that it was ultra vires

o Though it could have been changed with special resolution, it was not done at the time the contract was entered into

o Also said it couldn’t be ratified, because there was no contract at all, couldn’t have been

Re Introductions Ltd. [1970] Ch. 199

• Objects clause stated the company was to provide services for visitors to Festival of Britain • The company dealt in deck chairs at the time of the festival • Company later dealt in breeding pigs


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• Memorandum included a power to borrow funds to pursue the objects of the company and a clause that said that the objects clauses were to be construed independently

• Went to bank for loan, bank knew what it was for, gave loan despite it not being in the memorandum • Court didn’t accept argument that clause for borrowing should be seen independently from that of

providing services to visitors of the festival

AUTHORITY OF AGENTS TO CONTRACT FOR CORPORATION: CONSTRUCTIVE NOTICE & INDOOR MANAGEMENT RULE

• Doctrine of constructive notice (now abolished by s. 17) and its corollary, the indoor management rule, relate to authority of the human agents of the corporate principal-‐everyone who dealt with corporation was presumed to know everything about the corporation

• Person dealing with corporation was deemed to be aware of the contents of documents filed in a public office-‐any terms of articles of incorporation, notice of directors, notice of registered office, other constating documents of CBCA corporation filed with Corporations Directorate would be deemed to be known to everyone under doctrine of constructive notice

• Significance-‐persons dealing with corporation through human agents, were deemed to be aware of any restrictions on the human agent’s authority to contract on behalf of the corporation which were set out in the publicly filed documents, even when they did not in fact know about these restrictions o Result-‐where corporation’s agent exceeded his actual authority as restricted by the public

documents, the corporation would not be bound by the K with the 3rd party even though agent acted within usual/customary/ostensible authority, could not claim had these types of authority so as to bind the corporation

• Rule in Turquand’s case/”Indoor management rule” o “But persons contracting with a company and dealing in good faith may assume that acts within its

constitution and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been regular”

o Person dealing with corporation does not need to satisfy self that necessary corporate procedure has been followed to allow corporation to enter into K or do another act, K will be enforceable by the 3rd party even where corporate procedures not validly carried out

o Does not preclude corporate principal from arguing that 3rd party had actual notice of the restriction on the agent’s authority, confines the application of the doctrine of constructive notice to restrictions on the corporate agent’s authority which are set out in the public documents

• s. 17 No person is affected by or is deemed to have notice or knowledge of the contents of a document concerning a corporation by reason only that the document has been filed by the Director or is available for inspection at an office of the corporation o Abolishes doctrine of constructive notice

• s. 18(1) Corporation cannot assert against a person dealing with the corporation that there has been non-‐compliance with its constating documents (18(1)(a)), that its directors or registered office are other than those state din most recent notices to the Director (18(1)(b)(c)), that person held out by corporation as director/officer/agent has not been duly appointed or has no authority to exercise the powers or perform duties that are customary in the business of the corporation or usual for such director/officer/agent (18(1)(d))

• s. 18(2) Person who has or ought to have by virtue of position with or relationship to the corporation, knowledge to the contrary, cannot have the benefit of s. 18(1)-‐insider of corporation, corporation can say knew was not valid


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• s. 116 Acts of directors and officers are valid notwithstanding the irregularities in their election or appointment, or in their qualification

DIRECTORS AND OFFICERS

• Directors manage/supervise management (CBCA s. 102) o They appoint officers (s. 121), determine officer compensation (s. 125)

! Directors determine own compensation (big public corporations often use independent committee)

• Shareholder control directors through election • Director qualifications: (CBCA s. 105)

o Natural person, 18+, not mentally incompetent or bankrupt o No requirement that directors be shareholders

• Minimum directors: 1 for non-‐distributing (s. 102), 3 for distributing (s. 102(2)) o Of 3 directors for distributing corporations, 2 can’t be employee/officer of corporation or affiliates

• 25% directors must be resident Canadians (s. 105(3)), at least 1 (s. 105(3)) [Canadian s.2(1)] • Election of directors: initial directors indicated on notice of incorporation (s. 106(1))

o Then directors elected at first annual meeting (within 18 months) & every subsequent meeting by ordinary resolution (majority shareholder vote) -‐ mandatory provision

• Term of office: Normally till next annual meeting, maximum = 3 years (ss. 106(3), (5)) o No limit on re-‐election o Directors stay in office if shareholders fail to elect directors when they should

• Staggered Board of directors: Not all directors elected at same time (s. 106(4)) • Can apply to court to resolve controversy over election

o Court can make any order it thinks fit • Director ceases to hold office if he dies, resigns, becomes disqualified, removed by ordinary

resolution (s. 108) o Articles can’t require higher majority than CBCA to remove director (50%+1) (s. 109(1), 6(4))

• Filling vacancies: Directors can do it (s. 111(1)), BUT not if it increases board or vacancy results from failure of shareholders to elect board o Can only fill vacancy caused by removal if shareholders don’t (s. 109(3)) o s. 111 gives explicit director power to fill vacancy due to death/resignation

AUTHORITY AND POWERS OF DIRECTORS

• CBCA specifically allocates several powers to the directors under s. 102 • Powers directors can’t delegate (s. 115(3)): Submission of question to shareholders needing their

approval, declaration of dividend, acquisition of shares issued, approval management proxy circular, approval takeover bid, approval financial statements put before shareholders

• Directors have power to adopt/amend/repeal by-‐laws (subject to articles, by-‐laws, unanimous shareholder agreement), also have power to borrow o Changes need approval from shareholders at next meeting to stay effective

• Directors have power to issue shares (s. 25), series (s. 27) • Articles can let directors appoint up to 1/3 (of amount elected at last annual meeting) addition to

Board (s. 106(8)) • Director can fill auditor vacancy – s. 166(1) (shareholders normally appoint auditor at meeting for the

year)


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o Articles may mandate auditor by appointed by shareholder vote (s. 166(3)) • Directors call annual/special shareholder meetings (s. 133)

o Determine agenda

SCOPE OF POWER TO DELEGATE POWERS

• May not delegate all or virtually all of their powers (s. 115(3)) o Such as filling vacancies, issuing securities, etc.

• Can’t delegate a new management in lieu of that formally established by shareholders (Hayes v. Canada-‐Atlantic & Plant)

• Can delegate certain management duties to strangers for limited time (Sherman & Ellis) o Can’t be for too long, can’t delegate all powers

• Can delegate authority to act, not to govern (C. Kennerson v. Burbank) o

REMOVAL OF OFFICERS

• Directors may remove officers • Key to the effectiveness of the election and removal of directors as a shareholder control device

o Trade off of shareholder power to remove officers vs. benefits of long term contracts (lower compensation, incentive to build human capital)

• Management is often offered long term Ks to encourage them to invest their human capital in a corporation. These long term Ks make it difficult (actions for wrongful dismissal) to remove management o General approach is to uphold long term Ks. o Managers can be removed, but must be paid, entitled to severance (Shindler v. Northern Raincoat) o A person can be removed from their particular office without consequence. It is only if they are

dismissed entirely does breach of employment K arise (Re Paramount Publix Corp) – ! Could not dismiss manager before end of term without breach of employment

o Constructive firing: employee was general manager with all duties, then president was appointed ! Now subject to supervision of president, was breach of employment (Montreal Public Service)

• Policy o Reasonable expectations of person hired o Encourage managers to invest human capital o Prevent unjust enrichment of companies if managers agree to less salary for a longer term K

• Golden Parachutes and Tin Parachutes o Provisions that give executives lucrative compensation if they are dismissed from their jobs.

! Extravagant ones have been struck down by courts and replaced with more reasonable ones (although still very lucrative), called “tin parachutes”.

! Play an important role " if someone is trying to take over a company and replace management, existing management will try to resist takeover. However, parachutes encourage management to let go, which is important if they’ve been performing poorly.


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DIRECTORS’ MEETINGS

• Controlled mostly by corporate bylaws • CBCA doesn’t say how often they have to be held, but if not often enough could be a breach of s. 122(b) • Can be anywhere on notice by-‐laws require (s. 114(1)), quorum per (2) is majority of board/minimum

number of directors (check articles) o Notice: Must say if matters in s. 115(3) to be dealt with, otherwise no need to say purpose of meeting

• Director can waive notice of meeting (s. 114(6)) attending meeting is waiver except when director attends to object to business because meeting not lawfully called

• Directors meetings can be via electronic means that allow adequate communication (s. 114(9)) • If one director, he may constitute a meeting (s. 114(8)) • Directors can sign written resolution in lieu of meeting (s. 117)

ROLE OF DIRECTORS OF PUBLIC CORPORATIONS

• Conference Board of Canada Reports 1977 & 1984: Management controls Board o Boards hesitant to fire top management

• Eisenberg suggestion: Role of board should be select/monitor president o Do this best with non-‐management outsiders (same with audit committee

• Myles Mace Study (1971): o Directors do not manage corporation o However, sometimes they discipline president or give him suggestions

• Conference Board of Canada Report (1970) o Management controls the Board rather than the other way around o Boards are hesitant to fire top management o A person with a full time job has a hard time adequately fulfilling more than one directorship o Majority of Board members are not affiliated with management

• Eisenberg (1976) o Boards should not be expected to “manage” the corporation and the structure of the law should

change to reflect that. o Board should simply perform the hiring, firing and monitoring of the president.

• American Law Institute Reports (1982) o Heavily influenced by Eisenberg o Controversial and not well received

• Saucier Report (2001) o Suggested 6 core functions of the Board:

! Choosing president ! Setting parameters within which management team operates ! Coaching CEO and management team ! Monitoring and assessing CEO performance ! Setting CEO compensation and approving management compensation ! Providing assurance to stakeholders of corporation’s integrity

• TSX Rules o Recommended that the majority of directors be ‘independent’, which was strictly defined o Rule 473 requires company to provide a description of corporate governance in their annual report o Guidelines are set out in rule 474(1) o Rule 474(2) requires that a majority of directors qualify as “unrelated” directors, i.e. unrelated to

management and free of interests that would interfere with him/her acting in the best interest of the corporation

o Rule 474(4) says that a committee of outsiders should be responsible for electing new directors


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SHAREHOLDER VOTING RIGHTS

• What resolutions of shareholders will be required for particular corporate acts/changes? [for fact pattern]

• Shareholder powers: Elect directors, approve by-‐law changes, approve fundamental changes (articles, amalgamation, continuance, sale/lease/exchange of substantially all assets, dissolution)

• Class voting for both voting and non-‐voting shares o When class of shares would be prejudicially affected

• CBCA sets division of powers between directors and shareholders o Some mandatory (shareholder: elect directors, approve changes in articles, approve fundamental

changes) o Specific powers allocated to directors can often be reallocated to shareholders

! Through articles, by-‐laws, unanimous shareholder agreement – e.g. Appointment of officers (s. 121), borrowing (s. 189(1)), by-‐laws (s. 103)

• Directors not agents of shareholders o Shareholders aren’t principal with power to dictate the directors (Cunninghame) o Example in Barron v. Potter: 2 directors, had a falling out, both wanted to appoint directors

! One via directors’ meeting, other via shareholder extraordinary meeting ! Shareholder extraordinary meeting allowed (but shareholders have power to appoint directors

anyway) • Shareholder power to elect directors important – especially after takeover bid • Amend by-‐laws: Directors have default right but need shareholder approval

o Directors’ default right can be altered in articles, by-‐laws, unanimous shareholder agreement (s. 103) o Default position lets shareholders propose changes to by-‐laws (s. 103(5))

FUNDAMENTAL CHANGES

• Special resolution (2/3 votes cast at shareholder meeting) (only shareholders with voting rights) o Needed to change corporate name, registered office, business restriction, add/subtract directors or

minimum/maximum directors, restrictions on share transfer (and others) (s. 173) o Needed to approve amalgamation of corporations (s. 183), sale/lease substantially all assets (s.

189(3)), continuance (s. 188), dissolution (s. 211) ! Amalgamation: If you vote no, you have right to be bought out

CLASS VOTING

• Arises when changing authorized limit of class of shares, exchange/reclassification/cancellation of shares, change share rights, create new class equal/superior to existing class, make inferior class equal/superior (s. 176(1))

• Series vote: Series is changed in some manner different from other series of the class (s. 176(4)) • Class voting for: Whether class otherwise carries right to vote (s. 176(5))

o Requires separate special resolution of class (s. 176(6)) o Amalgamation (s. 183(4)), Sale/lease substantially all assets (s. 189(7)), Dissolution (s. 211(3))


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SIGNIFICANCE OF VOTING RIGHTS

• Many shareholders leads to free riding, but control blocks overcome this (block holder greater stake in business – incentive to monitor management)

• Market for corporate control: Issue voting shares, put shareholders at risk of takeover bid o Give shareholders incentive to manage well to avoid takeover bid

• Transaction cost theory: Investors spend money in examining whether they should buy shares o Recoup this cost in value from shares

• Voting rights help investors ensure management doesn’t screw up the value of their acquired shares

SHAREHOLDER MEETINGS

• Annual meetings: Held within 18 months on incorporation (s. 133(1)), then annually o Within 15 months of last meeting & not >6 months after end of corporation’s preceding financial year

• Special meetings: Other meetings (s. 133(2)) o “Extraordinary meetings” in memorandum of association jurisdictions

• Ordinary business: (requires ordinary resolutions) o Election directors (s. 106(3)), financial statements, appointment auditors (s. 162(1))

• Special business: (requires special resolutions) o Not ordinary business at shareholder meeting (s. 135(5))

• Place: In Canada, subject to articles/unanimous shareholder (s. 132(2)) o Directors designate place unless articles do (s. 132)

• Quorum: Majority of shares entitled to vote present (s. 139(1)) o Not needed throughout full meeting (s. 139(2)) o Without quorum at start of meeting shareholders can only adjourn (s. 139(3))

• Notice: 21-‐60 days (s. 135(1)) & Regulations s. 44) o Record date not more than 60 days ahead of meeting (s. 134) o Notice of special business must give sufficient detail to vote on (s. 135(6))

CONDUCT OF MEETINGS

• Normal process: o Chair gets report on proof notice & quorum o Approve last meetings min o Annual report/auditor report/vote on financial statement o Election directors o Appoint auditors

• Voting: Show of hands unless poll demanded (s. 141(1)) o Poll can be demanded before/after vote with hands (s. 141(2))

• Minutes must be kept (signed by chair) (s. 20(1)(b)) • Chair of Board/President typically chairs (set by by-‐laws)


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DUTIES OF THE CHAIR

• Chair must: o 1) Act in good faith o 2) Act impartial o 3) Allow shareholders to speak (reasonable debate time) (Wall)

• Chair doesn’t have to check legal title to see if beneficial owner’s instructions followed (Re Marshall) • Chair may be director too – have conflict of interest

o Legal advice doesn’t automatically exonerate them – see if they acted in good faith (Blair)

Wall v. London and Northern Assets Corporation, [1898] 2 Ch. 469 (C.A.)

• Discussion on selling assets of company • Dissenting views were discussed, motion passed to end debate • Vote was challenged on basis that the chair hadn’t allowed adequate time for debate • Court held that chair of the meeting must act in good faith and in impartial manner, must allow

shareholders to speak to matters before the meeting o Expensive to do so though, must be done without undue expense/delay o Can put down minority bent on obstructing business of a meeting

Re Marshall (1981), 129 D.L.R. (3d) 378

• Beneficial owner of shares instructed trust to vote as indicated • Trust didn’t, wasn’t the responsibility of the chair to look behind legal title to see

Re United Canso Oil and Gas Ltd. (1980), 41 N.S.R. (2d) 282

• Maximum of 1000 votes per shareholder struck down • Tried to present facsimile of signatures, found it was allowed so long as there was no evidence that

brought validity into question • Chair cannot adjourn meeting on his or her own

Blair v. Consolidated Enfield Corp. (1993), 15 O.R. (3d) 783

• Blair had to vote proxies, asked company lawyer if he could vote in favour (his position at stake) • Shareholder wasn’t happy, sued • Question of whether Blair acted honestly and in good faith for an order of indemnification

o Legal advice doesn’t automatically sanctify Blair’s actions o Self interest at stake doesn’t automatically make the decision not bona fide

• Held that decision had to be made, no obvious error

SHAREHOLDER REQUISITIONED MEETINGS

• Can requisition meeting if together they carry 5+% of right to vote at meeting (s. 143) • Shareholders must: Prepare document setting meeting’s purpose, sign it, send to directors and

registered corporate office • Directors must call requisitioned meeting unless:


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o 1) already set record date for notice of meeting, 2) gave notice, 3) purpose is one they would refuse under s. 137(5)(b) to (e)

o If directors don’t call meeting within 21 days then shareholder that signed requisition can ! Cost of meeting incurred by corporation unless resolved otherwise

COURT ORDERED MEETINGS

• CBCA s. 144: Can order meeting if impractical to call meeting: o 1) In manner it may be called, o 2) To conduct meeting prescribed by by-‐laws and the Act, or o 3) Any other reason court sees fit

• Application can be made by a director, shareholder or Director under the Act. • In cases of:

DEADLOCK

Re El Sombrero, [1958] Ch. 900 (Eng. Ch. Div.)

• 1 majority shareholder wanted to vote out 2 minority director-‐shareholders o Probable result was lock in of the investment with no say in management o Meeting ordered to overcome quorum -‐ not law here

Re Opera Photographic Ltd., [1989] 1 W.L.R. 634 (Ch.D.)

• Two shareholders, one with 49%, falling out • Majority requisitioned a meeting, but quorum couldn’t be met • Minority argued it was quasi-‐partnership • Court ruled couldn’t prevent majority owner from exercising his right to remove person as director

o Remedy for minority is right to sell out (provided in the articles) or bring an action for oppression or winding-‐up

• Cannot use the deadlock of a quorum as an excuse to prevent a majority SH from exercising his right to remove a director. In such circumstances, courts will vary the quorum

INTERVENING IN BATTLES FOR CONTROL

Re Morris Funeral Service Ltd. (1957), 7 D.L.R. (2d) 642 (Ont. C.A.)

• Cannot ask a court to vary a quorum for the express and sole purpose of placing one’s faction in control of the company’s affairs

• Court refused order by one half of shareholders to vary the quorum to favour their half

Re Barsh and Feldman (1986), 54 O.R. (2d) 340 (Ont. H.C.)

• Three shareholders, one share each, each carried one vote per share • Needed three for quorum • A died, left to son (B), B wanted to develop land but C didn’t

o B asked court to change quorum requirement, wouldn’t because it was not the idea behind original arrangement


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• Solution was to negotiate to agreement or a winding-‐up of company • Court will not exercise discretion to change a quorum where it would have effect of locking one party into

company

INTERVENTION ON BASIS OF FAULT

Re Routley's Holdings Ltd., [1960] O.W.N. 160

• A, B and C were directors, A was president (all shareholders, as well as Corporation D) • No annual meeting for many years, B and D threatened litigation if no meeting • A rejected proxies of B and C, despite validity, continued meeting with no quorum • Court ordered a meeting at which quorum was two shareholders, 50% of shares, at neutral locale • In reasoning, A breaching the law and intervention required to prevent future breaches

WIDELY-‐HELD CORPORATIONS

Re Canadian Javelin Ltd. (1977) 69 D.L.R. (3d) 439 (Que. Sup. Crt.)

• Two different meetings were held, each purporting to be valid, neither were, court ordered the meeting • Noted that the court can order where “for any reason it is impracticable to call a meeting of shareholders”

o Doesn’t mean impossible, just means unlikely looking at circumstances o Did so because current situation was not good for the company for future financing

POWERS OF SHAREHOLDERS AT COURT ORDERED MEETINGS

Charlebois v. Bienvenue, [1968] 2 O.R. 217 (Ont. C.A.)

• Meeting occurred where new directors were elected and appellants (existing directors) were not o Validity of meeting was challenged

• Court ordered meeting because without knowing who was proper board, meeting couldn’t be called o Couldn’t give powers that wouldn’t normally exist o Couldn’t give shareholders power to elect directors at meeting other than annual meeting

PROXY SOLICITATION

• Form signed by a shareholder that appoints a proxyholder, acts on behalf of shareholder (s. 147) • Proxyholder gets same rights as shareholder, can demand poll if they are proxy for shareholders with

different wishes • Management must solicit proxies for each shareholder entitled to vote (s. 149(1))

o Not required for non-‐distributing corporation (s. 149(2)), no prospectus (s. 2(1) & Reg. s. 2) o Failure to solicit offence (s. 149(3) & (4)), enforce via compliance order (s. 247)

• Proxy Form requires: o Clear indication someone besides designated person can be appointed (NI 51-‐102, s. 9.4-‐3), o Person soliciting proxies state who is soliciting (s. 9.4(1)), o Allow voting/indication of how proxyholder will vote (s. 9.4-‐4), o Provide means to vote appointment auditor/director (s. 9.4-‐6)

• Soliciting proxies requires proxy circular (s. 150) o Document with sufficient info for reasoned decisions at meeting


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• Solicitation includes request to execute/not execute/revoke proxy (s. 147(b)) o Sending form of proxy or other communication calculated to result in procurement,

withholding, revocation of proxy (s. 147(c)) • Letter saying “don’t sign any proxy for other guys’ is solicitation (Brown v. Duby (1980))

o But, s. 147(b)(v) to (vii) – effect of letting big shareholders communicate about getting required votes for proposal under s. 137(1.1)

SHAREHOLDER PROPOSALS

• s. 137 allows for a proposal if shareholder is: o Registered/beneficial owner (s. 137(1)(a)) with 1%+ of voting shares/market shares (if over $2k)

held for 6+ months (s. 137(1.1) & Reg 46) • Shareholders with 5%+ can propose to nominate directors (s. 137(4))

o Must be submitted at least 90 days ahead (s. 137(5) & Reg. 49) ! Not for primary purpose of redressing a personal grievance

Medical Committee for Human Rights v. SEC, 432 F.2d 659 (1970)

• MCHR wanted to include a proposal to no longer produce napalm • Court held the corporation couldn’t refuse, may be for social cause, but within powers of shareholders

Re Varity Corp. and Jesuit Fathers of Upper Canada (1987), 59 O.R. (2d) 459, affd (1987), 60 O.R. 640 (C.A.)

• JFUC sought to put an end to Varity’s involvement in South Africa • Couldn’t be refused despite fact it was for political purpose

FINANCIAL DISCLOSURE

• Financial disclosure: put financial statements before shareholders (s. 155), must be formally approved by Directors (s. 158) o Balance sheet, income statement, retained earnings (Reg. s. 72)

• Distributing corporation must appoint auditor (s. 162, 163), o Must have audit committee with min. 3 directors

! 2 not employees/officers (s. 171) that reviews financial statements before directors (s. 171(3)) o Auditor must have no conflict of interest with corporation (s. 161) o Auditor of reporting issuer be public accounting firm with written agreement with Canadian

Public Accountability Board (NI 52-‐108) (set up with letters patent under CCA) ! CEO/CFO sign financial statements of reporting issuer (NI 52-‐109)

ACCESS TO RECORDS

• Under CBCA s. 20(1) corporation is required to prepare and maintain, at its registered office or at a records office designated by directors, the articles and bylaws and all amendments to both, and a copy of any unanimous shareholder agreement, minutes of meetings and resolutions of shareholders, copies of the notices of directors and changes in the directors and their addresses and a securities register.

• s. 20(2) also requires that the corporation prepare and maintain accounting records and minutes of directors’ meetings


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• s. 21(1) provides that for non-‐distributing corporations the shareholders and creditors and the Director can have access to the corporation’s records (other than the records of the directors’ meetings and the accounting records). Section 21(1) also provides that where the corporation is a distributing corporation any person can have access to the records of the corporation (other than the records of the directors’ meetings and the accounting records)

• If corporation has distributed securities under a prospectus, corporation becomes a “reporting issues: and is subject to securities regulation including financial disclosure o Must be in electronic form and is available on SEDAR database

• Summary o Distributing needs to give to everyone o Non-‐distributing, to shareholders, creditors and directors (s. 21(1))

! Not directors’ meetings minutes & accounting info

LIST OF SHAREHOLDERS

• Purpose of obtaining: o Engaging in proxy solicitation, requisitioning a meeting, making a takeover bid

• Under s. 21(3), any person with respect to a “distributing corporation” (s. 126) can request a list of the shareholders of the corporation. o For non-‐distributing corporation, the shareholders and creditors can have a list provided

• How requested? o By paying reasonable fee (s. 21(7)) o Sending affidavit with name/address (s. 21(3))

! List to be provided within 10 days (s. 21(3)) o Can’t use list for purpose besides corporate matter (s. 21(9))

! Effort to influence voting, offer to acquire shares, or any other matter relating to affairs of corp o Can also go to corporation

! Required to keep list there (s. 20(1)(d)) ! Right to inspect during usual business hours (s. 21(1)) with affidavit (s. 21(1.1))

State Ex. Rel. Pillsbury v. Honeywell Inc., 191 N.W. 2d 406 (1971 Minnesota Supreme Crt)

• Person bough share, because registered, in respect of one share being able to get list of shareholders • Purpose of getting list was to convince other shareholders to stop Honeywell from making bombs • Court refused, but in Canada s. 21 of CBCA seems different, may not be able to refuse

Cooper v. Premier Trust Co. [1945] O.R. 35, [1945] 1 D.L.R. 376

• Limited time access of shareholder list, court said one hour in five days was not sufficient • Court will interfere where the right to inspection is unreasonably refused

CLOSELY-‐HELD CORPORATIONS

• No specific number for closely-‐held compared to widely-‐held • Nature of closely-‐held corporations:

o Relatively few shareholders, shareholders are generally active in the management of the business, no established market for the shares of the corporation & usually a restriction on transfer of shares

• Reasons for different treatment:


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o Shareholders have a large stake, more incentive to be involved; separation of ownership and control problem not as severe; and, there is a desire to control who one is in business with

• Global definition: whether the corporation is a “distributing corporation”: o Corporation that has made a distribution of its shares under a prospectus or similar disclosure

document pursuant to provincial securities laws o Non-‐distributing corporation limited to 50 non-‐employee shareholders

• Statutory Modifications for CHCs/Non-‐Distributing Corporation o Waiver of notice to meetings, so long as shareholder has waived right (s. 136) o One shareholder meetings (s. 139(4)) o Unanimous consent in writing to resolutions in lieu of meetings (s. 142) o Dispensing with an auditor (s. 163) o No requirement for an Audit Committee (s. 171) o Avoidance of management proxy solicitation requirement (s. 149)

SHAREHOLDER AGREEMENTS

• Shareholders can enter into agreements constraining how they’ll vote (s. 145.1 & Ringuet v. Bergeron) o Directors can’t constrain their votes via agreement (or can’t ensure in interests of corporation) o Can also use voting trust, but will dispense property every 21 years (capital gains tax)

• Can allow shareholder/director fusion to allocate management powers to shareholders o s. 102 Director management power subject to unanimous shareholder agreement o s. 146 Shareholder agreement restricting director power is valid

! Shareholders can’t delegate non-‐delegable powers if they take it from directors • Approach to reallocating powers (5 Steps):

o Identify power; what provision is power; methods for reallocation; which document most appropriate to reallocate with; how shareholders agree to vote on reallocated matter, and put the terms of agreement into shareholders’ agreement

SHARE TRANSFER PROVISIONS & RESTRICTIONS

• Why? o Control who gets shares

! Avoid undesirable business associates/preserve relative interests o Allowing transfers creates a market for shares o Allow forced buyout of undesirable shareholder o Allow buyouts on particular events

! Death, spousal separation, bankruptcy of shareholder • Restrictions need mechanism to determine fair price

o Wanting to sell, or being forced out, should happen at fair price • Share transfer restrictions generally valid

o Edmonton Country Club v. Case a possible exception to absolute restriction on transfer • Restrictions

o Absolute ! Nada

o Consent ! Allows transfers with consent of certain persons, usually directors ! Advantage of allowing shareholders to sell and get out of the business


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! Shareholders could refuse consent to transfer unless in some way preserved the relative interests o Shot Gun

! Can flip same offer back on offeror ! A makes B offer, B can make same offer to A

• Ensures a fair price o First Option

! Shareholder arranges for an offer from a third party ! Then puts offer in front of existing shareholders, gives same offer (proportional interests)

• Other Options o Forced Buyout

! Allow buyout of undesirable shareholder o Event Options

! Provides for acquisition of a shareholder’s shares on certain events • E.g., bankruptcy, separation or divorce, or death.

! Stop events from letting outside take control of shares o Price Determination

! Shareholder agreement provides for a means of determining a value for the shares for event options or forced buyouts • May involve arbitration, or agreed upon valuators and can describe various methods