LAW 451 CORPORATIONS

O’Byrne

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CHAPTER 1: CHOOSING THE FORM OF BUSINESS ENTERPRISE A. Introduction The Main Factors 5 Questions help to determine what business vehicle is being utilized:

1. Creation of business organization How is the organization set up? 2. Risk of loss Who carries the financial risk of the operation? 3. Power of control Who makes the decisions? 4. Participation in profits and distribution of assets Who gets the money the business

makes? 5. Dissolution How is the business dissolved?

B. Types of Business Vehicles

i) Sole Proprietorship A natural person (a single human being) carries on the business

No formalities to creation – you just start doing business

o Except complying w/ municipal bylaws, licenses, etc. Risk of loss to the owner only - both business and personal assets at risk Single owner sets policies and make personnel decisions Owner can re-invest profits or put into his pocket Owner ends the business at will; owner dies, business ends

ii) Partnership Relationship that subsists b/w persons carrying on a business in common with a

view to profit (s.1(g) PA) o In addition to terms of PA, common law and equity apply o Agency law and fiduciary relationship law govern partnerships o Partners owe fiduciary duties to each other one partner is an agent for

another (s.6 PA)

a) Ordinary (or general) – No separate legal existence from the individuals who compose it (ex. Bennett Jones = the partners; not its own entity)

Pl can go after one or all partners for a judgment – might be responsible for actions of a partner you had nothing to do with (s.13 amd 15 PA) – i.e. jointly and severally liable

a. Jointly: partners liable to full extent of obligation/debt b. Severally: separate, distinct liability

b) Limited – Involves at least 1 general partner and 1 limited partner c) Limited Liability

iii) Corporation A distinct legal entity that assumes its own obligations and is analogous to a

human being

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Basic Organizing Principles of Corporate Law

1. Corporate Personality - Corp is separate from shareholders, directors and officers - Can sue and be sued in its own name - Can enter contracts - Perpetual succession b/c corp continues although shareholders may die - Sh’s not liable for corp debt 2. Managerial Power - Daily business operations done by independent managerial group (generally day

to day management separate from sh’s) 3. Majority Rule - Corp decisions made democratically among those entitled to vote 4. Minority Protection - Majority shareholder inclinations are restrained from injuring minority holders

C. Agency 1. Overview – Agency and Business Law

- Fiduciary relationship an individual (agent)that acts on behalf of a second party (the principle) to legally affect the principle’s relationships

- Principle bound by agent’s actions if the agent acts with either:

a) Actual authority i) express written or oral authority granted directly ii) implied implicit authority in the agent’s position and duties; or,

implicit authority based on standard practice in a particular industry b) Apparent (ostensible) authority

o Agent deals with third party o An authority the agent “appears to have” b/c of something they’ve

represented - Also, must show agent was acting within their authority AND acting for the

benefit of the principle 2. Partnership Volzke Construction Ltd. v. Westlock Foods Ltd. (ABCA) An example of how the courts determine whether a partnership exists or not F: Contractor V did work on shopping centre and didn’t get paid. He alleges a partnership b/w 2 corps that own it. If so, he can satisfy judgment against either. I: Were the 2 corps that were co-owners of the mall in fact a partnership? H: Trial – no parnterhsip. Westlock didn’t have requisite aspect of control. D: Partnership exists. Control not required in the PA. A: Many factors pointed towards a partnership – common view to make a profit.

- Cost sharing arrangement - Profit sharing arrangement based on their ownership percentage

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- Parties called themselves partners - Bank account and cheques - Both signed a debenture - Both signed mortgage

Nothing in PA required control – just b/c Westlock couldn’t sign cheques or choose tenants doesn’t mean a partnership doesn’t exist. McDonic Estate v. Hetherington (Litigation Guardian Of) (ONCA) Classic example where an agent perpetrates a wrongful act in relation to a 3rd party F: 2 elderly women retain partner (Watts) in a law firm - he gives them investment advice. Makes investments in form of loans that were unsecured or insufficiently secured. Bad advice – loans not repaid. Watts is sued along with partners in his law firm. I: Did the agent have actual or apparent authority to invest so that the partners are liable for the agent’s wrongdoing now? H: Trial – Partners not liable for Watts’ actions. His actions (i.e. investing) don’t flow from normal business of a law firm. D: Partners liable for agent’s actions based on implied authority. A: No express authority on the facts. Court looked to see if there was any implied authority – looked at scope of the firm’s business to see if investing was within their scope. The firm permitted Watts to run the whole transaction through the firm – it was in their record books. Partners’ argument 1: investment advice fell outside their ordinary scope of business. Rejected – although it might not be ordinary for a law firm to invest, it WAS ordinary for THIS LAW FIRM to do this. Firm not able to do something “on the side” and not be liable for it. Partners’ argument 2: it was ordinary to give ‘sound’ investment advice only! Rejected – the nature of the activity important, not the manner; also, vicarious liability would be almost zero if the partners could rely on this argument. If the court was wrong firm liable b/c of apparent authority too! They allowed the transaction to be run through the firm; acknowledged women as clients; firm held money; was in the books. There was a definite representation by the firm giving Watts authority. Liability pursuant to section 13 of PA AB’s equivalent (liability for firm wrongs). Limited Liability Partnership (LLP)

- Different from ordinary partnership b/c belief that there should be a shield for innocent partners

- Section 12 PA – provides a shield o Innocent partner has no liability for debts, obligations or liabilities of the

partnership or any other partner by way of negligence, wrongful acts, omissions, malpractice or misconduct of another partner

o Claimants have access to the partnership’s insurance and assets to satisfy a judgment but not personal assets of innocent partners (only the personal assets of culpable partners)

o Eligible profession aspect Only in the ordinary course of carrying on practice in an eligible

profession

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Law, chartered accountants McDonic case – ordinary course of professional law practice

• Had the firm been LLP – result still the same. Why? • No shield b/c misconduct occurred in investing – not in

legal work which is the eligible profession. Limited Partnership (LP)

- Characteristics of ordinary partnership BUT only general partner liable for obligations of partnership

- Hybrid b/w ordinary partnership and corporation o Ordinary general partner liable for entire partnership o Corporation limited partners have no liability beyond their investment

into the partnership (like shareholder investing in company) - Section 64 PA – if they don’t conduct themselves properly, LP can be liable like a

general partnership where limited partner takes part in control of business Business Vehicles in ABCA

- ABCA specifies 2 types of corporations o Business corporation - follow incorporation steps to have a corporation; or o Professional corporation (PC) - still have liability as a sole practitioner

- Unlimited Liability Corporation – sh’s have unlimited liability o Used by American companies in Canada for tax purposes

D. Business Arrangements HYPOTHETICAL: Vehicle is the car; Arrangement is the way you drive the car (the road)

1. Franchise – contractual relationship b/w manufacturer, wholesaler or service organization w/ an independent business who buys rights to operate the franchise unit.

2. Joint Venture – association of business entities that unite for a specific project 3. Strategic Alliance – cooperative arrangement among businesses. 4. Distributorship or Dealership – contract where manufacturer agrees to provide products

and distributor or dealer agrees to carry products or perform services. 5. Sales Agency – Manufacturer or distributor contracts w/ agent to sell goods or services

on principal/agent basis. 6. Product Licensing – Licensee granted right to manufacture and distribute products

associated w/ licensor’s trademarks or other proprietary rights (usually geographic area) CHAPTER 2: BACKGROUNDER TO CORPORATIONS A. Introduction Salomon v. Salomon (HL) – leading corporation law case. F: Aron Salomon incorporated company and sold his sole proprietorship to the corporation. Aron has debenture (secured credit) over inventory in the company. Corp losing money assigns debenture to Broderip to make some money and save corp. Corp enters bankruptcy – B gets paid as a secured creditor first. Aron sued by other creditors claim he secured debentures through

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fraud. I: Is Aron liable for debts of the corp? Was Aron a legitimate creditor of the company? H: Trial and CA he was liable as individual. D: Not liable. A: A corporation is a separate legal entity. Pl’s arguments:

1. Corp not properly constituted pursuant to legislation rejected; Act said needed 7 sh’s but didn’t say they had to be independent; okay for Aron to make family his sh’s

2. Company was Aron’s agent; Aron is the principle rejected; company was doing business on its own – Aron not a principle

3. Company was scheme permitting Aron to do business as a corp true – statute offers this right – purpose of the Act

4. Aron defrauded sh’s/the company rejected; unsecured creditors took risk in lending money to the company – they could have checked registry to see Aron was a secured creditor before loaning

Corporate Law History Four principles

1. Corporation as of right 2. Requirement of registration and public disclosure 3. Periodic meetings of members and auditing 4. Limited liability

B. Corporate Constitution 1. Purpose A basic charter of documents that gives terms that bind the company and everyone associated with it. The company must stay within the boundaries of the constitution. The nature of the documents depends on the statute by which a corporation is created. 2. Groups in Interest:

Internal Groups: 1. Shareholders – people who hold shares in a corporation 2. Directors – manage the business affairs of the corporation; elected by shareholders;

must act in best interest of the corporation (s.122 ABCA); board of director’s is the watchdog to the CEO

3. Officers – supervise corporate operations; upper end management (CEO’s, VP’s) Corporate law sorts out conflicts b/w the 3 internal groups to a corporation

External Groups:

1. Government 2. Public 3. Creditors

3. Methods of Creating Corporate Constitutions:

a. Special act corporations

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- Used by Federal and Provincial governments - Create corporations for specific purposes - Government passes a special act that creates the corporation - Ex: crown corporations, telephone companies, Canadian National Railway

b. Letters patent - Descendent of Royal Charter - Letters patent forms part of constitution of new company - Gives rules for the day to day operation in a separate document of bylaws - PEI and Quebec

c. Articles of incorporation - Incorporating document = articles of incorporation - In house rules = bylaws

d. Memorandum jurisdictions (Memorandum of Association) - Articles of association are the in house rules for the new company - BC and NS

Canadian Jorex v. 477749 Alberta Ltd. F: Directors of corp call special meeting to allow shareholders to examine their auditor. Directors cancel the meeting prior to its scheduled date. Shareholders ask the court for declaration that directors don’t have the power to cancel. They don’t want to lose their opportunity to examine. I: Do the directors of a corporation have the power to cancel a special meeting called by them before its scheduled date? D: The directors had the power to cancel. A: Two types of meetings can be called (s.132 ABCA)

1. Annual General Meeting (AGM) 2. Special Meeting

Shareholder argument: Unless BCA or bylaws give express right, the board doesn’t have it (UK case that court didn’t put much emphasis on). Also, a bylaw stated shareholders can adjourn meeting sh’s felt Director’s couldn’t cancel a meeting b/c that was an ultimate adjournment and this power belonged to them. BOD argument: S.101(1) – directors shall manage the business and affairs of corp. S.17 – not necessary for bylaw to be passed to confer power on BOD. No bylaw or shareholder agreement stating the board did not have this power. Management of the affairs includes the right to cancel. Sh’s had many rights available to them: USA saying only they could cancel; Requisition a Sh meeting; Remove D’s at AGM; Court order for meeting to proceed; Oppression application, etc. CHAPTER 3: THE PROCESS OF INCORPORATION A. Procedures (see statute book) 1. Introduction

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Where to incorporate? Generally, you incorporate in the province you intend to do business in If you intend to do business in many provinces, then incorporate federally

Who can incorporate?

S.5 1 or more people may get certificate of incorporation provided that the provisions of s.7 are complied with (sending articles of incorporation and documents)

The person does not need to be connected to Canada or a natural person. How to incorporate? S.7 send articles of incorporation and supporting documents to Registrar S.6 what articles of incorporation have to have

relevant material for day to day operations o corp name; classes and max # shares corp can issue o share restrictions o no. directors

S.12 prohibited names S.106 D’s that will hold office until first meeting of sh’s Bylaws – address gaps in the statute. Two approaches to bylaws:

1. Comprehensive – repeat what is within statute 2. Brief – covers gaps that aren’t addressed in statute

2. How to Act When Not Acting – Drafting USA’s – Loss Prevention Bulletin People who request that a lawyer draft a USA must be informed:

1. That the drafting lawyer is not advising them 2. To get independent advice 3. The agreement drafted is the result of implementing provided instructions without

comment or advice as to the interests or obligations of the parties

This info should be: - in writing - acknowledged by the recipients - effective way is to include this as a provision in the agreement

3. Kinds of Corporations 3 Basic Kinds under the ABCA:

1. Distributing - Highest regulation; involves members of public

i) Corporation whose shares are distributed to public ii) Has more than 5 shareholders iii) Cannot dispense w/ auditor iv) Governed by Securities Act

2. Non-Distributing with more than 15 s/h’s 3. Non-Distributing with less than 15 s/h’s

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4. Unanimous Shareholder Agreements (USA’s) - Section 146 CBCA differences b/w CBCA and ABCA

o CBCA can only modify D’s powers - USA’s based on idea that dominant interests to be served by decision maker’s in corp are

the s/h’s - Statutory intervention to allow s/h’s to choose corp control and management structure Difference b/w a USA and a regular shareholders agreement:

- AB Definition of USA – agreement that does any of the following (s.146(1) ABCA): a) Regulates rights and liabilities of shareholders, as shareholders, among themselves

and any other party to the agreement b) Regulates election of directors c) Provides management of business and affairs of the corp, including restriction or

abrogation of the powers of the directors d) Includes any other matter that may be contained in a USA pursuant to any other

provision of the ABCA

B. Corporate Names 1. Common Law and Statutory Requirements s.10 ABCA

Last word of name – Limited, Incorporated, Corporations, etc. Professional corporations must have this in their name

s.12 ABCA – prohibited names Cannot use identical name to another AB corp or extra-provincial corp registered in AB Cannot use similar name to another corp if confusing or misleading

1. Distinctive Element – “Smith” 2. Descriptive Element – “Holdings” 3. Legal Element – “Ltd.”

Corporate Registry System – names

- NUANS report w/r/t the name you want - Suggests whether it will be approved or not

Paws Pet Food and Accessories Ltd. v. Paws and Shop Inc. (ABQB) F: Paws Pet Food was incorporated. Registrar of Corporations allowed Df to be registered with the name Paws Shop. Pl applied to Registrar to have Df name changed (s.247 ABCA) wrote letter saying the name would only be ordered to be changed if specific evidence of customer confusion could be shown. I: Did the Registrar err in permitting the registration of the Df’s corporate name? D: Yes. Application to have Df corporate name change granted. A: Evidence was shown that customers thought the Pet Food store had opened a new branch, they both sold similar products, name is similar on the face, both operated in the same city, affidavit evidence of customer confusion. Registrar’s approval of a corp name can be overruled.

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C. Pre-Incorporation Contracts (PIC’s) 1. Introduction

A contract entered into in the name of, or on behalf of, or in trust for, a corporation not yet incorporated

Purpose to enter a contract and have the newly incorporated company adopt it and be bound by it - Promoter = person entering contract for corp - Third party = the other party to the contract

Common Law

The adoption of a contract by a corp is a nullity b/c the corp never existed at the time the contract was made. Common law was unpredictable in where liability would rest. Kelner v. Baxter F: Corp owed money to third party b/c of contract entered into by promoter (he acted as agent for non-existent principal). D: Promoter personally liable. A: 2 basic rules about liability at CL:

1. Person who signed as promoter for corp personally liable 2. Once incorporated, corp couldn’t ratify contract and relieve the promoter of personal

liability Court was constrained by the following CL principles:

1. Agent contracting on behalf of non-existent corp principle is personally liable 2. There must be 2 parties to a contract and they have to exist at the time of contract 3. A corp only comes into existence on incorporation 4. Extrinsic evidence is inadmissible where intentions of parties and terms of bargain are

clear on the face of the agreement Black v. Smallwood F: PIC entered into by promoter and third party where both falsely believed the company had already been incorporated. D: Corp liable - promoter not. A: The case marginalized Kelner. Intentions of parties important for liability. Common law in uncertain state: difficulty predicting where liability would rest.

Statutory Reform Starting point: Promoter is a party to the contract. If the corp adopts the contract after incorporation, the promoter is no longer bound as a party. An express clause stating a promoter is not liable will be respected. Westcom Adopted interpretation of s.21 OBCA contrary to common sense POOR DECISION F: Df entered contracts w/ Pl for radio ads on behalf of corp that both falsely thought was

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incorporated. No evidence promoter intended to be a party to the contract. D: The situation did not fall within s.21 of OBCA b/c no real contract ever existed. A: Court applied CL rules although statute was purposely drafted to do away with the CL!! Court got held up with the words chosen for the provision – speak of contracts but nothing about ‘purported contracts’. The act was read in its literal sense only, although the legislators intended the provision to cover purported contracts as well. Sherwood Design F: An agreement to purchase Pl’s assets was signed by individual Df’s in trust for a company to be incorporated. Lawyer for Df used shelf company and wrote letter to Pl lawyer saying the company had been assigned to the shelf corp. Deal didn’t go through. Lawyer re-assigned the shelf company to another client. Pl brought action for breach of contract – said corp adopted agreement – evidence was Df lawyer’s letter. I: Did Df corp ‘adopt’ the contract within s.21(2) of the OBCA? D: Yes. Innocent corp liable. A: The letter was enough to prove adoption of the agreement. Szecket v. Huang Gets rid of Westcom. F: PIC entered into but corporation fell apart and was never incorporated. A: The court read the legislation as it was intended by the legislature and didn’t look at the CL. ABCA contains anti-Westcom provisions. Dryco Building Supplies Inc. v. Wasylishyn (ABQB) F: A line of credit with Dryco was opened by a corp. 2 individuals (Df’s) signed agreement to be liable for any debts owing on the line of credit. At the time of the contract, corp had been struck from corporate registry for not filing annual returns. I: Can the agents of a non-existent corp be liable for the obligations of the corp? D: Yes. Agents liable. A: Before individuals will be responsible, there must be evidence that they intended to be personally bound. Funduk didn’t go to s.15 of ABCA – he didn’t see this as a PIC problem.

o Df were principles of corp – indirectly benefited from materials supplied o Pl employee did not make any representations – no evidence of misrepresentation o Corp cannot adopt contract – cannot use PIC rules w/r/t company thought to be in

existence NOTE: O’Byrne thinks it is a PIC issue use s.15 ABCA. S.15 ABCA makes promoter liable for breach of warranty as opposed to breach of contract

- Promoter not normally intending to be party to contract - Promoter warranting that co. will come into existence - Problem: damages to Pl will be miniscule!!

2. Measure of Damages Wickberg v. Shatsky et al. (BCSC) Predates CBCA provisions on PIC’s – court applies CL principles.

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F: Df had company Rapid Addressing; decided to create new company Rapid Data. The company was never incorporated, yet they approached Pl and asked him to manage the new company. Pl sued individual promoter for breach of warranty – said co. existed when it didn’t. I: Is the individual promoter liable in damages to the Pl? D: No. A: Pl’s loss wasn’t caused by the breach of warranty that the company existed – was caused by the unsuccessful business. S.15 doesn’t always provide a great remedy to a plaintiff. Won’t get much in damages unless a corp of some substance has been promised. CHAPTER 4: CORPORATION AS A LEGAL PERSON A. Nature of Corporate Personality Lees v. Lee’s Air Farming Ltd. (NZ) F: Lee is employee of Lee’s Ltd.; also is D and controlling s/h. He is killed while piloting a plane. Lee’s Ltd. has to pay widow if he is an employee only. CA said Lee couldn’t be an employee and a director. He can’t both give and take instructions. I: Was Lee an employee of the corporation although he was also a director for the company? D: Yes. His widow gets paid. A: Corp is a separate legal entity. When Lee acts as director and gives instructions, it is actually the corp speaking. He can be in 2 capacities. B. Grounds for Liability of those Behind the Corporation Corporate veil can be lifted in the following categories:

1. Deliberate wrongdoing 2. Parent subsidiary 3. Thinly capitalized

1. Liability Based on Lifting the Corporate Veil Kosmopoulos v. Constitution Insurance Co. of Canada (SCC)

The law on when a court can disregard the principle that a corporation is a legal entity distinct from its shareholders follows no consistent principle

“Separate entities” principle not followed when it would be “too flagrantly opposed to justice”

Big Bend Hotel Ltd. v. Security Mutual Casualty Co. (BCSC) F: Kumar was sole s/h of Pl, Big Bend. Was previous s/h in K&S who was denied insurance coverage many times. Kumar applied for insurance for BB and did not disclose any previous policy cancellations or fire loss to insurer. Hotel burned down and he was denied coverage. Insurers claim he fraudulently failed to disclose material info (the cancellations). Kumar’s defence he didn’t have anything to reveal – the previous loss was related to different corporation. I: Should the corporate veil be lifted, making Kumar liable for the corporate loss?

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D: Yes. There was evidence of fraud by Kumar. A: Test for material info that needed to be disclosed was what a reasonable insurer would need to know. Kumar failed to disclose previous losses b/c he knew he would have been denied coverage. He created the corporation to avoid questions about loss w/r/t insurance. Courts may lift corporate veil where there is improper conduct or fraud by individuals behind the corporation. Equity will not allow an individual to use a company as a shield. Note: O’Byrne says you should always have another reason to win; can’t just rely on lifting the corporate veil. Here, he would have won on 2 grounds:

1. Failure to disclose material risk; 2. Lifting the corporate veil. Performance Industries Ltd. v. Sylvan Lake Golf F: Sylvan was owned by Bell who wanted to buy a property. He agreed to purchase with O’Connor as joint venture in a verbal agreement. O’Connor’s solicitor drafted a written agreement which Bell signed. Later, Bell tried to develop property as had been verbally agreed and it was determined that the written agreement didn’t reflect the verbal. I: Should the corporate veil be lifted making O’Connor liable? D: Yes. O’Connor and his corporation liable. A: O’Connors actions were fraudulent and dishonest. Court satisfied that O’Connor knew the written agreement didn’t reflect the verbal one, and intended to rely on that fact. O’Connor tried to say that Bell should have been more careful – but court held in context of fraud, carelessness won’t ruin your case. O’Connor planted a time bomb. Two grounds for losing: 1. Committed fraud; deceit damages in tort; 2. Lifting corp veil. Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd. (ONCA) F: Rockwell negotiated real estate deal with Newtonbrook. N later said they weren’t going through with the deal so R sues. Court agrees with N that the contract no longer existed; R loses. N was to get their costs from R, but found out R company was worth nothing. They tried to go after Kelner, who was owner of the company that was major shareholder in R. I: Is this an appropriate situation to lift the corporate veil and make Kelner liable? D: No. A: Kelner entered contract on behalf of corp – he wasn’t the contracting party. There was no wrongdoing by him; no fraud or misconduct. N should have got a personal guarantee from Kelner if they wanted to hold him liable for R. 2. Total Disregard of Formality Wolfe v. Moir (ABSC – Trial) Nothing in Act says if you don’t comply w/ formalities you will be liable personally – but, in a way, court lifted the corp veil b/c of the non-compliance w/ s.10(8). F: Pl injured at roller rink. Df is individual Moir. Df claimed he was not liable b/c rink was operated by corp Chinook; says wrong party was sued as Pl should be suing the corporation. I: Is Df Moir personally liable? D: Yes.

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A: Moir didn’t comply with the provisions of s.10(8) so he can’t claim protection by it. He was supposed to set corp name out legibly on all documents. He held himself out as the owner of the rink – advertised as ‘Moir’s Sportsland’. If person holds himself out to public without identifying the company to which he’s associated, he runs the risk of being held personally liable. Article – Corp solicitor held negligent in failing to give written advice

o Solicitor needs to provide written instructions that full company name must be outlined on all legal documents

o Breach of SOC for not advising client of personal liability risk 3. Liability of Directors for Their Own Torts

a. Inducing Breach of Contract McFadden v. 481782 Ontario Ltd. (ON High Court Justice) F: Pl McFadden employed by PMAI. PMAI sold to PMAC – Taylors were the sole sh’s and D’s. Pl began working for PMAC implied employment contract on same terms as w/ PMAI. Business not successful so Taylors began winding up the corp. Transferred assets to themselves directly so PMAC’s assets reduced. Pl terminated and he sued for wrongful dismissal. Problem no money left in corp. I: Are the Taylors personally liable for the wrongful dismissal judgment awarded against PMAC? D: Yes. They made the corp judgment proof by transferring assets. A: Transfers done with express intention to defeat Pl’s claim against the corporation. Acts of inducement by D and O are only justified when taken as a duty of the corporation – there was nothing in sale of assets of PMAC back to PMAI that required Pl to be terminated. Taylors induced corp to breach contract with Pl. They were not within the Said v. Butt defence. NOTE: Solicitor for Pl was trying to get money back into PMAC – reason? If the Taylors were not personally liable, could still collect on judgment from corp.

Inducing breach of contract = Df knows of a contract b/w Pl and 3rd party o Df intends to bring breach to contract by inducing 3rd party to breach without

justification Said v. Butt Defence:

o If a servant acting bona fide within the scope of his authority procures or causes the breach of a contract b/w his employer and a 3rd party, he does not thereby become liable to an action of tort at the suit of the person whose contract has been broken.

b. Interfering with Contractual Relations

Einhorn v. Westmount Investments Ltd. (Sask QB) F: Einhorn is Pl real estate agent who provided services to Westmount. Westmount never paid him; instead sent money to Regina Ltd. Westmount controlled by Belzberg brothers – they didn’t induce breach of contract just prevented Westmount from executing their contract with Pl.

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I: Are the Belzberg brothers individually liable? D: Yes. They met the test for the tort of interference w/ contractual relations. A: Belzberg brothers interfered with Westmount’s performance of their contract. Each of the parties to a contract have a right to performance on it. Three ingredients to the tort:

1. Interference in execution of contract Not confined to breach of contract; extends to case where 3rd person

prevents/hinders one party from performing the contract 2. Interference must be deliberate 3. Interference must be direct

NOTE: O’Byrne says to argue individual liability based on tort; BUT, also argue lifting corp veil b/c it seems to work as a backup. 4. Liability in the Area of Trust Law Air Canada v. M&L Travel Ltd. (SCC)

- Travel agent held money in trust for Air Canada (for tickets) - Money collected ended up in pockets of 2 D’s of the agency - D’s liable for knowing receipt of trust property must prove:

1) Actual receipt of property; and 2) Mental state of the individual

- Alleged intermingling stranger is agent of trustees (banker, broker, lawyer) – if acts outside legal powers can become personally liable

- Two distinct kinds of personal liability

• Knowing Receipt - Df personally liable on basis of receipt of trust property - Citadel General Assurance Co. v. Lloyds Bank Canada

o Insurance co was agent who held money from insurance proceeds in bank account

o Parent company contacted bank and told them to direct money from insurance co’s account to theirs

o Parent co’s account was in overdraft so bank was getting a benefit o Bank had constructive knowledge of breach of trust in ordering the transfer,

but failed to inquire why funds were being transferred o Stranger to the trust (bank) received trust property (insurance proceeds)

for his own benefit and having knowledge that would put an ordinary person on inquiry, fails to inquire as to the possible misapplication of trust property

o Constructive knowledge was enough

• Knowing Assistance - You don’t benefit by getting the trust property, but you assist someone - Need a higher degree of knowledge; constructive knowledge doesn’t suffice

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5. Liability of Parent for Subsidiary - Salomon principle should apply to the parent-subs. relationship - Parent and subs. are 2 separate entities so parent co. not responsible for debts of subs. - This distinction preserved unless innocent 3rd parties involved or the structure has been

used as a sham or to perpetuate fraud Sun Sudan Oil Co. v. Methanex Corp. (ABQB) Court asked to pierce the corp veil and recognize parent as liable although not a party to the contract they are being sued on. F: 2 companies agreed by letter to enter joint venture. Signatories were subs. of parties to the letter agreement. Df defaulted on agreement; Pl seeks reimbursement from parent co. Pl: Sunmark Worldwide (parent) Sun Sudan Oil (subsid.) Df: Ocelot Industries (became Methanex) (parent) Oil Resources (subsid.) they wholly own Ocelot Sudan. Went after parent co. b/c subs. had no money to pay a judgment. I: Is the parent co. liable for the contractual debts of its subs. co? D: No. Parties to agreement used subs. companies to shield parent co. from any debts. This is legitimate business reason. A: Pl Argument: It was never represented that subsid was for any purpose other than sheltering parent from foreign tax claims. In oil and gas industry, parent co. carries debt (industry practice). Df Argument: They never represented the parent would be responsible. Nothing in contract. Argument involves 2 analyses: 1) Need to show agency relationship; 2) Kosmopoulos application Court uses analysis from Smith Stone and Knight Ltd. v. City of Birmingham to determine who was carrying on business: the subsid. or parent co?

1. Were the profits treated as profits of the co? 2. Were the persons conducting business appointed by the parent co? 3. Was the parent co the brain of the venture? 4. Did the parent co govern the adventure? 5. Did the parent co make the profits by its skill and direction? 6. Was the parent co in constant control?

- This analysis seems to help Pl’s case – then look at overall context

Kosmopoulos: separate entities principle not enforced when it would yield a result too “flagrantly opposed to justice, convenience or the interest of the Revenue” Conclusion: Df parent co using subsid. as part of legitimate business practice; Pl was sophisticated corp and had great legal advice available - should have secured guarantee. Insufficient evidence to show industry practice showing parent responsible for subsids. 6. Liability Based on Thin Capitalization

- Situation where company has very low initial capital fund distribution

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- No requirement that a company have a certain amount of capital Henry Browne Case

- Pl, HB, delivered steering device to Ocean Charters – owned by the Smiths - Pl was never paid; wants to sue the Smiths on idea of thin capitalization that

the corp was a cloak and a sham - Ocean Charters had absolutely no money - Court held for Df b/c Pl never took any precautions to ensure they’d be paid - Salomon principle affirmed by court – Pl took business risk on their own that

didn’t work out – they were consensual claimant If Claimant non-consensual more sympathy for them

Walkovszky v. Carlton (NYCA) F: Pl injured – ran over by cab owned by Df, Seon Cab Corp. Individual Df, Carlton owns 10 corps., each owning only 1-2 cabs and having the minimum liability insurance. Pl Claims: 1) Carlton should be liable personally as the multiple corp structure set up was for the purpose of defrauding people who were injured by the cabs. 2) Individual corps acting as single unit – assets commingled so shouldn’t be treated as separate entities. I: Does the Pl have a cause of action against Carlton personally? D: No. Pl didn’t provide enough evidence to support a cause of action. A: 1) Corp’s set up in this way to avoid personal liability – “grow up” – this is okay; 2) Courts respect separate entities principle usually – no evidence they weren’t acting separately. CHAPTER 5: TORTIOUS, CRIMINAL, REGULATORY AND CONTRACTUAL LIABLITY OF THE CORPORATION B. Criminal and Tortious Liability 1. Attributing Liability to a Corporate Body

o Applying Directing Mind doctrine in tortious context The “Rhone” v. The “Peter A.B. Widener” (SCC) F: Vessel being towed by tugs collided with another vessel. Tug master’s negligence responsible for collision. Under Canada Shipping Act, owner of ship has limited liability w/r/t acts in navigation of ship where they occur without the owner’s actual “fault or privity”. Trial: Df company liable – acts of tug master were acts of the company. No protection from CSA I: Is the tug master a ‘directing mind’ of the Df corporation so that they are liable? D: Appeal allowed. A: First, need to determine if tug master’s acts should be attributed to the corp. To answer – determine who has been left w/ decision making power in relevant sphere of corp activity.

o Canadian Dredge and Dock – does the tug master have governing executive authority? o If no owners can rely on limited liability provision.

Tug master had some managerial authority but he was not a directing mind. Owner can rely on statute as a scapegoat.

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2. Corporate Defence to Liability R. v. Canadian Dredge & Dock Co. (SCC) F: Corporations submitting collusive bids for gov’t contract. Charged with conspiracy to fraud for “bid rigging”. For corp not to be liable, have to show break b/w directing mind and corp. I: Did the corporations commit a crime? D: No. A: Corp defence: Officers submitting bids on their own - corp’s knew nothing about it. Test: if the Crown could prove the following, the corp. was responsible for the crime:

1. Acting taken by the officer was within the field of operation assigned to them 2. The action was not totally in fraud of the corp. 3. Action was by design or result partly for the benefit of the company

3. Statutory Criminal Liability Westray Mine Disaster

- Could have been prevented if corp had listened to safety warnings - No one was ever convicted for the deaths!! - Gov’t passed BILL C-45

i. Directing mind (from CL) now called “senior officer” ii. Senior officer is individual who plays an important role in establishing

policy or is involved in managing an aspect of the corp’s activities iii. Something less than directing mind included; can be higher up manager iv. Guilty act and intent no longer have to come from same person can be

a combination of actors (more successful prosecutions) v. Senior officer under positive obligation to act when they believe an

offence is or will be committed 4. Vicarious Liability

o Employer can be liable for the torts of its employees o Reasoning: employer makes profits and should carry burden when an employee acts

negligently o Intentional torts committed by employees more problematic – shouldn’t they be on own?

a. Negligent Torts

Salmond Test

Employer liable if they authorize a wrongful act. Also liable for wrongful or unauthorized mode of doing an act authorized by the

employer. o Test works well for negligent torts; problematic for intentional torts.

o Think of employee assaulting children in child care business

b. Intentional Torts Blackwater v. Plint (SCC) Basically eliminates Salmond Test.

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F: Liability of Gov’t of Canada and United Church of Canada in question. Test: Liability attaches if there is a significant connection b/w conduct authorized by the employer or controlling agent and the wrong.

Blackwater v. Plint applied in a commercial context Intercon - Company provided security systems and employed Hornett - Intercon had contract with Royal Bank to provide security service - Hornett went to bank and accessed ATM that contained combination to main safe - Question: Was Intercon vicarious liable for the tort of employee Hornett? - Decision: No. - Hornett wasn’t on shift; wasn’t authorized to be on the premises and have a key; not

authorized to carry out thefts - No significant connection b/w creation or enhancement of the risk of theft and the

thefts that were actually committed o If court wrong Company still not liable b/c Bank provided means to achieve

the thefts by leaving main safe combo in ATM C. Regulatory Offences (Statutory or public welfare offences)

o Prohibited in the public interest ; not criminal though Sault St. Marie

o Established 3 types of offences 1. Absolute liability offence

Doing act constitutes immediate offence Criminal offence (need intent or recklessness)

2. Strict liability offence Doing act constitutes offence subject to due diligence defence Stat offences usually fit in here

3. Mens Rea offence No defence at all if you have actus reus and intent

R. v. Bata Industries Ltd. (Ont. Prov. Div.) F: Bata Industries was holding chemical in rusting barrels. Corporation and senior officers prosecuted for breach of environmental legislation. Bata – CEO; Marchant – President; Weston – on site director. I: Who is liable for the breach? D: Bata Industries (the corp) AND individuals Marchant and Weston. A:

o Corp - liable for permitting the discharge of chemicals could not establish any due diligence b/c had no system in place for prevention of these environmental problems.

Crown had to prove actus reus – then see if there was any due diligence offence for D’s:

o Bata - not liable as he allocated money to solve the problem once he became aware of it. o Marchant – was more involved in daily operations; aware of problem and did nothing.

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o Weston – this was his direct responsibility; wasn’t interested in fixing problem b/c salary based on reducing costs.

R. v. Bata Industries Ltd. (ONCA)

- Bata Industries couldn’t indemnify Marchant and Weston for their fines - appealed - Trial judge wanted to inflict some punishment on them this was improper - Section 124(1) of Ontario Act – deals with indemnities – same as ABCA

124(1) where corp isn’t plaintiff – can indemnify for a) D or O acting in best interest of corp; b) D or O had reasonable grounds to believe their conduct was lawful

124(3) where corp isn’t plaintiff, must indemnify D or O if a) the person was substantially successful on merits of defence; b) fulfills 124(1)(a) and (b); and c) is fairly and reasonably entitled to indemnity.

Conclusion: the corp WAS ABLE to indemnify them. NOTE: Although indemnified, incentive to doing things right is risk of imprisonment. D. Contractual Liability Four concepts at CL:

1. Ultra vires rule 2. Constructive notice 3. Indoor management 4. Agency

1. Doctrine of Ultra Vires

- Can a corp avoid obligations under contract by claiming such a contract was beyond the powers of the corp to enter into and must therefore be void?

- Principle: certain corp bodies have no power to perform actions beyond those for which they were originally incorporated.

o Corps come into existence in limited capacity; can’t act outside those boundaries - BUT, unfair for corp to avoid contractual obligations and third party to shoulder loss

based on corp’s carelessness S. 18 ABCA – repeals constructive notice idea

o Idea that company’s documents are filed in registry and as a creditor you know company is acting ultra vires

Indoor Management Rule that people dealing w/ company entitled to assume all in house rules are being complied with, unless you have actual notice

o Nicholls – s.19 prevents corp from raising their ‘objects clause’ as a reason to not follow through on contract

Communities Economic Development Fund v. Canadian Pickles Corp. F: CEDF was special act corp that was to encourage development in isolated communities. Statute stated that borrower had to be from remote area. CEDF lent money to company Pickles who were in a non-remote area. Couple behind Pickles gave personal guarantee. Pickles

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defaulted on payments and CEDF sues the couple. I: Was the loan to Pickles ultra vires of the corp? D: Yes. Loans prohibited that contravene the statute provisions. A: CEDF was acting outside the scope of their authority – committed an ultra vires loan. Pickles got off didn’t have to pay loan back. Public ended up carrying the burden!! NOTE: UV doctrine still applies to special act corps b/c they are created for specific purposes – protect public interest by not allowing them to further alternate interests. O’Byrne says this really isn’t protecting the public interest if they end up carrying the burden. Iacobucci says abolition of ultra vires doctrine is common sense.

- Original purpose: to protect creditors by ensuring company’s funds were not dissipated in authorized activities and to protect investors by allowing them to know their money was going to be used as they anticipated

- Limited parts of doctrine still apply to corp’s created by special act for public purpose 2. Contracting with Agents of the Corporation

a. Common Law – Actual Authority o Between agent and principle – principle manifests consent to the agent o Can be express (you were authorized) or implied (an agent of a certain type would

normally have the authority) o Usual Authority another type of actual authority

Authority that flows from your type of work

o Ostensible Authority is a separate type of authority where principle creates a situation in that it is reasonable for 3rd party to infer the agent has authority

Leading definition: Legal relationship b/w principal and agent created by consensual agreement to which they alone are parties. Panorama Developments (Guildford) Ltd. v. Fidelis Furnishing Fabrics Ltd. (All ER, CA) Court had to decide which of 2 innocent parties was to suffer from fraud. F: Pl Panorama rent cars through company called Belgravia. Df Fidelis is company whose secretary was Bayne. B entered contracts w/ Belgravia on behalf of Fidelis but used cars for personal use. Fidelis didn’t pay. I: Is Fidelis liable for the fraud of its secretary Bayne? D: Yes. Company put Bayne in position to commit the frauds had either actual or ostensible authority from Fidelis. A: Fidelis arguments: 1) Contracts made with Bayne personally and not company. 2) Company not bound by letters signed by Bayne b/c secretaries have no authority to enter contracts on behalf of the company (humble role in company). Court’s analysis: 1) Agreements were part of larger correspondence – when you look at everything, it was clear that Fidelis was set out as the contracting party. 2) Company secretaries have important roles –

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entering these contracts is the type of responsibility a secretary would have today.

b. Common Law – Apparent Authority

Leading definition: Legal relationship b/w the principal and the contractor created by a representation made by the principal to the contractor, intended to be and in fact acted on by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the apparent authority, so as to render the principal liable to perform any obligations imposed on him by such contract. Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd. (English CA) F: Kapoor and Hoon formed limited liability corp to purchase property. Kapoor acted as managing director to find purchaser for the estate, although wasn’t appointed. He employed architects and they claim fees for their work. The board knew Kapoor was doing this. I: Is Df corp or individual Kapoor liable for the fees for the work that was done? D: Df corp liable. A: Kapoor had no actual authority to hire architects, but court looked to see if he had apparent. Four conditions must be satisfied for the contractors to enforce a contract against a company when it was entered into by an agent who had no actual authority:

1. Representation the agent had authority to enter a contract on behalf of company 2. The representation was made by a person who had actual authority to manage the business

of the company generally or in respect to those matters to which the contract relates 3. Contractor was induced by representation to enter the contract 4. Under its memorandum or articles of association, the company was not deprived of the

capacity to enter into a contract of the kind sought to be enforced or to delegate this authority to that kind to the agent

By not objecting to Kapoor acting as managing director, BOD gave him apparent authority. Canadian Laboratory Supplies Ltd. v. Engelhard Industries of Canada Ltd. (SCC) F: Engelhard buys scrap metal belonging to CanLab. Cook (rogue) contacts E to tell him to pay Giles (secret scientist) directly. E contacts Snook at CanLab to inquire about the process – is told to talk to Cook. CanLab loses money and sues E for conversion. I: Did CanLab represent to E that Cook had authority to set up the arrangement? D: CanLab responsible for losses after the point of representation. A: 1962 – E told to pay Giles – no actual or ostensible authority at this point. 1966 – E contacts CanLab; speaks to Snook was this representation that Cook had authority? 1968 – E spoke to CanLab’s VP Operations – an actual authority – said E couldn’t do this. Court finds E liable up to 1966 – Snook had actual authority – Indoor management rule applies. DISSENT – thought E’s responsibility continued to 1968. Snook didn’t have authority. CHAPTER 6: CORPORATE GOALS AND SOCIAL RESPONSIBILITIES

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A. Introduction Idea that corps are supposed to enhance society and the community.

2 competing views about how corp’s should be bound by social responsibility:

1. Property Conception o Corp belongs to sh’s o Milton Friedman corp’s social obligation is to make money and responsibility

is only to the sh’s CEO should dedicate his own money; can’t force charity on sh’s

2. Social Entity View o Corp has responsibility to the sh’s as well as to advancing general public welfare o Ralph Nader; Body Shop

Talisman Energy Inc. – Case Study F: Sh’s of Talisman proposed the company not aid Sudanese gov’t in its civil war. They believed operating in Sudan posed risk to Talisman and their financial interests as owners were best served if the company avoided the situation. Asked for compliance with that commitment. Company refused to include the proposal in its management proxy. Federal gov’t sent investigator to look into the situation. Report Talisman was fueling war in Sudan by allowing military to use an airstrip in their oil fields. Talisman forced to live up to its human rights commitments and take a role in helping Sudan solve their problems. Re Varity Corp. and Jesuit Fathers of Upper Canada et al. (ON HCJ) F: Varity asked for court order permitting them to not have to include in their AGM sh proposal that company end its investments in South Africa. S.131(5)(b) of CBCA states that corp not required to comply with sh requests if the proposal submitted primarily for “promoting general economic, political, racial, religious or social causes”. I: Does Varity have to include the proposal in their mailing to sh’s? D: No. Varity’s application is granted. A: Sh’s who created proposal argued that it was directed at Varity’s involvement in SA – this was specific purpose that didn’t fall within s.131 CBCA. This was true, but language showed primary purpose was abolition of apartheid which was an “economic, political….cause”. NOTE: O’Byrne - legislation was read in very narrow way – does not agree w/ decision. Re Varity Corp. and Jesuit Fathers of Upper Canada et al. (ONCA) D: Appeal dismissed. Trial judge correctly interpreted the CBCA. DISSENT – Issue of apartheid must be considered specific – should have been put forward.

o CBCA s.137 – Shareholder Proposals Changed since Varity decision o Company does not have to circulate proposals if the primary purpose is a personal

claim or grievance or it clearly appears the proposal doesn’t relate in a significant way to the business of the corp

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o ABCA s.136 – still has Varity style language B. Common Law Dodge v. Ford Motor Company F: Ford had been distributing dividends to sh’s. Henry Ford decided profits should go into company and stopped the dividend payments. Reason: to increase employment and help Americans by selling cars at lower prices. Minority sh’s brought action to compel board to declare additional dividends. I: Is the board compelled to declare dividends to it’s sh’s? D: Yes. Appeal dismissed. A: Court took property conception of corp - wouldn’t interfere if the profits were going into expanding business. Here, they did interfere b/c profits were used for humanitarian purposes. CHAPTER 7: CORPORATE MANAGEMENT A. Introduction Directors – elected by s/h responsible for overall management of the corp

1. Appoint and supervise the CEO 2. Direct and evaluate strategy 3. Represent shareholders and maintain shareholder relations 4. Protect and enhance company assets 5. Fulfill fiduciary and other legal requirements (duty of competition, fiduciary duty)

2. Statutory Sources of Directors’ Power s.101 D’s manage or supervise management of business and affairs of corp (subject to any USAs) B. DIRECTOR POSITIONS 1. Qualification of Directors

- Following people disqualified (s.105) o Persons under 18 o Dependent adults, formal patients, persons of unsound mind o Person not an individual (I.e. A corp) o Person who is bankrupt

- ¼ must be resident Canadian 2. Election and Appointment of Directors

- No requirement for number – but must have at least 1 (s.101) - Special rules for distributing corps – at least 3 – 2 can’t be officers or employees of corp - Election of directors (s.106) - Cumulative voting (s.107)

o Taking your votes and putting them all on one candidate (minority sh’s use it to get at least 1 person on board that will represent their interests)

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o Each Sh has right to vote number of shares he holds x number of D’s to be elected

3. Removal of Directors

- Sh’s can remove directors at any time by simple majority or ordinary resolution - If CV – different rule (s.109) – for protection of minority sh’s s.107(g) – D cannot be

removed if votes cast against would be sufficient to elect a person - Other exception – 109(2) if there’s an exclusive right to elect a member (by a group of

sh’s) the director so elected can only be removed by ordinary resolution of THAT class C. DUTIES OF DIRECTORS AND OFFICERS 1. Duty of Care, Diligence and Skill

- Historically there was a very low CL standard - S.122 is the response – elevates the duty

Every director and officer of a corp in exercising their powers and duties shall: a) Act honestly and in good faith w/ view to best interests of the corp; and b) Exercise care, diligence and skill that a reasonably prudent person would exercise

in the same circumstances

Re City Equitable Fire Insurance Company Limited (English QB) F: Company wound up – investigation into affairs revealed shortage of 1.2 million pounds. Losses attributable to the managing director – stealing from co. Liquidator thought directors should be accountable for breaching duty of care owed to the corp. I: Were the other directors of the company properly discharging the duties they owed to the corp? D: Yes. A: Director is bound to take ‘reasonable care’ - measured by the care an ordinary man might be expected to take in the circumstances. General propositions to take into account in determining if directors of company were guilty of negligence:

1. Director need not exhibit a greater degree of skill than may reasonably be expected from a person of his knowledge or experience in the performance of his duties

Has been changed by statute now 2. Director not bound to give continuous attention to the affairs of his company 3. A director is in the absence of grounds for suspicion justified in trusting that official to

perform such duties honestly A Brief Review of Some Recent Cases (& Statutes) Concerning Officer & Director Liability from Canada and the U.S. Business Judgment Rule (BJR) – a presumption that in making a business decision, the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company

• The party attacking the board decision as uninformed must rebut the presumption

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• There has to be evidence that the Directors were diligent and showed best judgment in reaching their decision in order to use the protection of this rule

Peoples (SCC)

Wise stores acquired Peoples Directors of W came up w/ inventory system – P bought in NA, W bought internationally

– sold inventory to each other – P sold more to W (took on more risk) W owed money to P – retail market collapsed and both co’s went bankrupt Trustee in bankruptcy for P sued Ds of W – claim: they breached fiduciary duty and DOC

to creditors of P in favour of W S.122(1) CBCA – directors and officers of corp in exercising powers and performing

duties shall a) act honestly and in good faith with view to the best interests of the corp b) exercise care, diligence and skill that a reasonably prudent person would exercise in

comparable circumstances TRIAL – W brothers breached DOC and fiduciary duty CA – reversed; SCC – agreed w/ CA – no

- Court not willing to find breach of fiduciary duty (a) without fraud - Court rejected idea that when corp was close to insolvency the directors’ fiduciary

duties shift from corp to creditors since they were protected by other provisions in the CBCA

- Court held directors owed creditors a duty of care (b) - But, directors didn’t breach duty to creditors b/c of BJR - Directors acted in a reasonable manner, although not the perfect manner - Business Judgment Rule – prevents courts from second guessing business

decisions of co’s Disney (SCC) SHOWS POWER OF BJR

E wanted to hire friend O as Disney’s president Chair of compensation committee negotiated package guaranteeing O large payments if

terminated without cause Board approved hiring and package – not aware of details until immediately prior to

approving it O terminated – triggered compensation clause – owed millions Sh’s sued O, E and other board members HELD: For Df’s – but board didn’t perform according to best standards but were

sheltered by BJR Danier (SCC)

Danier going public – issued prospectus and financials Forecast inaccurate – sales were not as high as presented b/c of warmer weather D’s didn’t disclose until after closing of share offering Sh’s sued management – accused of prospectus misrepresentation HELD: For Df’s D’s were to notify the securities commission of any material changes (not material facts) Trial judge held weather was material fact, not a change – so did not need to be disclosed

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Smith v. Van Gorkom (Delaware Supreme Court) F: VG – chairman & CEO of TransUnion. TU didn’t have enough income to take advantage of its tax credits – so, board considered sale of co. CFO gave approximation of share value ($50-60). VG said he would take $55. At board meeting, cash out merger approved in 2 hrs; VG didn’t explain how he came up w/ value. Board sued by sh’s for approving the deal. I: Did the D’s reach an informed decision to sell the co. at $55 per share? D: No. Board did not reach informed decision – could not rely on BJR. A: At time of approval, market was undervaluing TU’s chares ($38). Board argument: 1) Offer was good increase considering the market value of shares; 2) board were experts and didn’t need much time to make decision; 3) lawyer told them they’d be sued if they didn’t agree to merger. Court’s response: 1) Board aware shares were undervalued – should have undertaken valuation study; 2) cannot rely on credentials – also, if experts, they should have asked for paperwork supporting offer; 3) mere advice is meaningless; fear of litigation not a defence. The Pl shareholders rebutted the presumption that the decision was informed. What was wrong with what board did?

1. Short “report” by CEO 2. Quick meeting – only 2 hours 3. No notice of this as an agenda item 4. There were no documents or they came late; no written summary of what was presented 5. No valuation (this was a key problem) 6. No questions were asked

The Business Judgment Rule People’s Department Stores Ltd. (1992) Inc., Re (SCC)

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

o In order to challenge business decision, Pl has to establish the directors acted: a) in breach of the duty of care b) in a way that caused injury to the Pl

Excerpt from Nicholls on BJR

- Many reasons for judges to not interfere with decisions of corporate managers o Judges aren’t appointed on the basis of their business experience o There would be danger of hindsight bias if judges given free reign to challenge

decisions o If manager’s expected their decisions to be mercilessly dissected, cost to business

efficacy would be horrendous o In absence of unlawful behaviour, courts generally have no jurisdiction to second

guess decisions of corporate directors - BJR been used by Canadian courts in 2 situations:

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1. Generally to show that courts ought not to second guess substance of decisions taken by corporate directors and officers

Delaware BJR is more formal as a rebuttable presumption that director’s decisions have been made honestly and in good faith by a disinterested board of directors exercising due care

That presumption doesn’t form part of Canadian BJR 2. To refer to principle of judicial deference to the substance of director’s decisions

that is preconditioned on the establishment of certain conditions that decision was made honestly, prudently, in good faith and on reasonable grounds

If business decision has been made in this way, the substance of that decision will not be challenged

At present, D’s need to establish these pre-conditions have been met to use BJR in Canada

What if there are flaws in the process established by the board in coming to a business decision? CW Shareholdings Inc. v. WIC Western International Communications Ltd. F: Committee assembled to discuss takeover offer – supposed to be independent. CEO placed on committee. Pl claim board has to show substance of decision was good b/c flaw in procedure. I: Could the D’s use the BJR? D: Yes. A: BJR was still applied – D’s just have to prove decision made honestly, prudently and in good faith. Don’t need to prove the substance of the decision was good b/c of the flaw. Avoiding Personal Liability: Practical Suggestions and Guidelines

- Make all decisions informed decisions - Ensure reliable professional advice

o If you think you need to hear from chartered accountant, go to CEO and tell them – put the onus on them

- Attendance at meetings and due diligence o Directors should be prepared to challenge or direct if they are inadequately

informed even if there is pressure against them - Indemnification and insurance

o VanGworkin – had good insurance but it wasn’t enough o Work out that there is sufficient insurance or that the company will indemnify you

- Bata Industries Case o Mr. Bata demonstrated due diligence in his environmental alert o If you create operational and reporting policy, need to comply w/ it or else setting

yourself up for lack of due diligence argument o Good idea to appoint officer to ensure industry standards complied with

Should you sit on your client’s board of directors?

Usually solicitors asked to; not litigators Insurance coverage problem

- If you are on board and involved in decision, may not have coverage - Your professional liability insurance does not protect you as a director or officer

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2. Case Study: Directors’ and Officers’ Liability in Tort If D or O acts negligently, are they responsible for their own tort? 2 lines of authority:

1. Scotia Macleod o Absent fraud or deceit, D and O rarely liable for own torts UNLESS they make

them their own o Montreal Trust suing Scotia Macleod o Peoples was issuing debentures to purchasers through intermediary of Scotia o MT purchased debentures o Allegation: D’s gave misleading positive account of co. o Held: D’s did not make the tort their own; not liable o Big shield of protection for D and O

2. Adga

o D and O responsible for their own tortious conduct even if acting bona fide and in best interests of the corp with the exception of Said v. Butt defence

o Adga = Pl; Valcom = corp Df; 2 senior officers = Df directors o Pl and Df were both bidding on gov’t contracts o Valcom and D’s persuaded Pl’s technical employees to let their name stand in bid

package o Adga employees were to go to Valcom if they won the bid o Torts alleged:

o Inducing breach of contract o Interfering w/ economic relations o Inducing breach of fiduciary duty

o D and O’s brought motion for summary judgment – claimed they were furthering corp’s interests so acting bona fide – based on SM, should not be personally liable

o Court has sympathy for non-consensual claimants – Adga was victimized – court willing to expand liability

o Small shield of protection for D and O NOTE: O’Byrne Courts in AB follow Scotia Macleod – not in the clearest way however. Alpha Tires Corp. v. South China Industries (Canada) Inc. F: Torts committed by D’s of SCI – alleged they should be liable personally. I: Should the D’s be personally liable? D: No. Dismissed action based on SM. A: SCI committed the torts – not individual D’s they didn’t make the tort their own. NBD Bank, Canada v. Dofasco Inc. F: VP of co. Algoma misled bank to the co’s true financial state. Bank lent money to Algoma and they became insolvent immediately. I: Should VP be personally liable? D: Yes.

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A: VP’s argument: He didn’t make any tort his own; also, owed no DOC to bank. Court says they are relying on both SM and Adga – really relying on Adga – small shield. Based on Adga, even if VP was committing tortious act on behalf of company, he would still be liable. Court looks at Anns Test: Is there a prima facie duty of care?

- Yes – carelessness on his part can lead to loss for bank Are there special circumstances/policy reasons to eliminate or reduce the duty?

- Reasons for eliminating the DOC 1. Algoma protected from lawsuits – VP not party to the contract so London

Drugs doesn’t apply here VP not protected 2. Bank agreed by contract to deal specifically w/ the corp London Drugs

Dissent Conclusion: Court found there were insufficient reasons for denying the duty VP owed DOC to the Bank Applied Adga. Blacklaws v. Morrow F: Timeshare owned by numbered co. – wholly owned subsid. of M&C – owned by Morrow. Pl is class who bought timeshare. Resort was under-funded and managed poorly. 2 problems: 1) lack of adequate sewage facility; 2) resort excluded from timeshare exchange program. Trial – Morrow and numbered co. liable. I: Is the owner of a company personally liable for non-performance of management contract and negligence? D: No No DOC owed to Pl’s. A: Court begins by citing SM: “some sh’s/D’s will have personal liability for their own torts even if performed in course of duties to the corporation – if they made the tort their own”

o No contract w/ timeshare owners – so breach of contract not available as remedy. o Court looked at tort Did Morrow owe a DOC to the timeshare owners?

NO – so there can be no tort o Morrow could foresee that if he didn’t fix problems, there would be some harm to Pl’s

BUT mere foreseeability of harm does not create a duty – the duty here to the Pl’s was owed by the numbered company and NOT Morrow

o The court is less willing to compensate for pure economic loss (no personal or property damage here)

Morrow doesn’t fall into any of the categories where Pl’s can be compensated for PEL

1. Negligent statements 2. Negligent performance of services 3. Relational economic loss 4. Economic loss caused by defective products or buildings

o It is not negligent for a D or O to fail to inject money into a company – no tort of thin capitalization

o Court not sympathetic to sh’s Pl’s should have engaged in due diligence before purchasing the timeshare

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DISSENT: Combines SM and Adga to come out w/ SM approach. Goes through negligence analysis and doesn’t bring in the issue of PEL. Says Morrow’s conduct was separate from the company – makes his actions his own. Sounds like SM! NOTE: The case highlights that ABCA probably going w/ SM approach. * Analysis follows Scotia Macleod * Nielson (Estate of) v. Epton (ABQB) F: Epton one of 2 D’s at Fabtec. Spreader beam constructed – pin too big to allow safety latch to close – E aware of this. Hook disengaged and beam fell on Nielson and killed him. I: Is Epton liable in negligence for the work place death? D: Yes. A: Personal duty of care of corporation directors towards corporation employees should be found in circumstances where:

a. director has or ought to have personal factual awareness of serious and avoidable or reducible danger to which the corporation’s employees are exposed in relation to corporation related activities

b. it is within the authority of the director to envision, establish and enforce corporate policies which could reasonably avoid or reduce such serious danger, and

c. it is within the reasonable capacity of the director or envision, establish and enforce the actions necessary to carry out such policies and to reasonably avoid or reduce such serious danger

The characteristics giving rise to DOC are personal – so liable personally. Nielson (Estate of) v. Epton (ABCA) D: Only 50% liable. A: E had personal duty to oversee safety and did nothing to implement safety standards. E’s actions tortious b/c he knew of problem. No policy reason for imposing vicarious liability on E - he was not employee or controlling agent. NOTE: The analysis follows SM. 3. Statutory Duties Zwierschke v. Minister of National Revenue (Tax Court of Canada) F: Appellant – owner/D of construction co – used source deductions to run the business. The money was to go to the government and not be used for operational costs. Co. went into receivership – not enough money to pay income tax. Appellant alleged to be personally liable for the debt. I: Is the owner/D personally liable for the debt? D: Yes. A: He relied on 2 defenses:

1. He exercised required degree of care, diligence and skill required of Income Tax Act; and 2. Assessment issued more than 2 yrs after he ceased to be D of company.

Court held - he has no defence under statute because he did not exercise any degree of care, diligence or skill to prevent the failure to remit the source deductions. He knew when line of

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credit was in overdraft and a cheque issued to receiver general for course deductions could easily be returned NSF if he did not collect enough receivables to cover the cheques. 4. Fiduciary Duties

a. Introduction - D and O cannot allow self interest and duty owed to the corp conflict - When you owe a fiduciary duty, you have to act primarily for your principle’s benefit - The status of being a fiduciary gives rise to legal obligations.

1. Corporate opportunity cannot take advantage of them 2. Self dealing D’s cannot be on both sides of a deal 3. Competing directors cannot be D on 2 competing boards; conflicting interests 4. Proper purpose any power D has, has to be used for a proper purpose 5. Hostile takeover

Duty of Loyalty and Good Faith (Nicholls)

D and O’s have fiduciary obligations to act honestly and in good faith w/ view to best interests of the corp

They are subject to this duty at CL, but it is also coming into many corporate statutes o CBCA – s.122(1)(a)

This general duty is transferred into an obligation to put the interests of the corp they serve ahead of their own personal interests

Debate over what the meaning of “best interests of the corporation” means SCC stated it means more than “best interests of the shareholders”

Conflicts become manifest when corp begins to struggle financially Corporations must take special care to attempt to act in the corp’s best

interests by creating a better corp and not to favour the interests of any one group of stakeholders

Another situation is when corp nears insolvency Delaware corporate law Revlon duty Duty to be imposed on corp directors when sale of corp is imminent To maximize the short term value of the corp for the benefit of the current

shareholders Ontario CA declared Revlon is not the law in Ontario, although their

analysis was consistent with the duty

b. Taking Corporate Opportunities Cook v. Deeks (Privy Council) F: 3 D’s of railway construction co. obtained contract in their own names with CPR (to exclude Cook). D’s passed resolution at sh meeting declaring co. as having no interest in the contract. Cook brought action claiming the benefit received by the contract was held in trust for the co. I: Can the co. claim the benefit the D’s obtained from the contract? If so, could the majority of sh’s approve what was done and release all claims by the co. against D’s? D: Yes – D’s held benefit on behalf of co. No – couldn’t release claims against themselves. A: D’s guilty of breach of fid. duty to the corp in securing the contract. They intentionally

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concealed all circumstances related to the negotiations – had duty to protect interests of corp. They could not approve contract and release claims against themselves. A resolution that the rights of the company should be disregarded amounts to forfeiting the interest and property of the minority of shareholders in favour of the majority. The D’s were making a gift to themselves! You cannot ratify a breach of fiduciary duty. Canadian Aero Service Ltd. v. O’Malley (SCC) F: 2 Df’s (VP and CEO) were at centre of Canaero’s attempt to gain mapping contract in Gyanna. Df’s resigned and then bid in tendering process w/ their own new company Terra. Allegation while D and O’s of Canaero, the Df’s devoted effort and planning in respect of the corp opportunity as reps of Canaero but then wrongfully took benefit in breach of fiduciary duty . I: Do the Df’s owe a fiduciary duty to CanAero that they breached? D: Yes. A: Df Claims: They resigned – this terminated their fid. duty. Df’s owed a larger duty than a regular employee b/c of their higher up positions – in fiduciary relationship so owed loyalty, good faith and avoidance of conflict of duty and self interest. Precluded them from obtaining for themselves any property or business advantage belonging to the company of for which it has been negotiating – esp. where D or O is participant in the negotiations on behalf of the company. Court didn’t follow Regal Hastings – says that D and O can’t take any corporate opp. that comes to them in the course of their duties. The test is fairness – after you find out what was going on here, you see that the D’s were planning everything while they were employees of CanAero. Using information and relationships from this employment, they then left to form own company basically stealing which is a breach of fid. duty. McCormick Delisle & Thompson Inc. v. Ballantyne F: Pl had consulting firm w/ 3 employee D’s – they left corp and incorporated own company Process Impact the next day. Ballantyne had signed non-compete. I: Did the D’s owe a fiduciary duty to McCormick that was breached? D: Yes. D’s lost. A: Court held that Process was created for sole purpose of exploiting confidential info from McCormick. Low damages were awarded at trial (from gross loss of income, deducted salaries, commissions, overhead costs, 25% contingency for loss of customers, etc.) CA overturned – restored damage award given egregious conduct of the fiduciaries, McCormick should recover for entire period of the contract. NOTE: Even if Ballantyne hadn’t signed non-compete agreement – still owed fid. duty to corp based on his position – cannot exploit confidential info.

c. Self Dealing Transactions

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I. Common Law Black v. Hollinger Int’l (Delaware SC) The civil matter. F: Black controlled Hollinger International (HI) – sold newspaper business – buyer making “non-compete payments” to Black – money should have been going to HI. Minority sh’s had special committee investigate the payments – Black entered restructuring proposal – agreed to resign as CEO and repay non-compete money to HI. Black immediately violated proposal Barkeley bros. wanted to purchase a newspaper owned by HI; Black gets them to buy his interest instead of proposing the sale to HI. I: Did Black breach fiduciary duties owed to Hollinger Int’l? D: Yes. A: Black’s violations: 1) taking corp opportunity; 2) behaving in his own interests; 3) breached restructuring agreement; 4) taking non-compete money; 5) using confidential info to further his interests – Barkeley deal should have gone to HI. United States of America v. Black The criminal matter. A: Black and management fraudulently inserted themselves as recipients of the non-compete payments – failure to disclose self dealing. Black also took property owned by HI for personal use (jet, vacations, etc.). No explanation for anything. Aberdeen Railway Co. v. Blaikie Bros. Strict, harsh view of self dealing contracts – Stage 1 in development. F: Blaikie is D of Aberdeen; partner in Blaikie Bros. Aberdeen entered contract w/ BB for shares. Appearance of bias in the transaction b/c B was D of purchasing corp. and partner in the firm selling the shares. I: Was there a breach of fiduciary duty? D: Yes. A: Possibility of bias is sufficient – no need to inquire whether there was real bias. Fiduciaries should not put themselves in position of conflict in duty.

o Companies began putting in provisions that D’s could enter into self dealing contracts o Only means to attack the contract – if there was fraud or evidence of oppression on the

minority sh’s o Then it became okay for self dealing contracts as long as they were ratified by D’s at

corporate meeting North West Transportation Company Ltd. v. Beatty Stage 2 in development. F: D proposed to sell steamship he had to company. Minority sh’s attacked transaction. I: Was the transaction a breach of fiduciary duty? D: No.

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A: Company needed steamship and D had one (evidence no other ships for purchase, price reasonable). The contract was fine; no fraud. Interested party (D) votes his shares in favour of the contract when put to ratification by the sh’s this was not impeachable. However, court held that they are not bound by the ratification if it occurs w/r/t to a breach of fid. duty – here it didn’t! Harshness of fiduciary duty not to enter self dealing contracts mitigated.

Contrast NW Transport with Cook: In both cases there was self ratification

- Beatty – no evidence of abuse of power or unfairness - Cook – sh’s made gift to themselves

II. Legislative Response – Stage 3 in development. Section 120 (1) – Disclosure by Ds and Os in relation to contracts

- D or O of corp who is party to a material contract/transaction or proposed material contract/transaction

- Or, is D or O of or has a material interest in any person who is a party to a material contract/transaction or a proposed material contract/transaction

Shall: i. Disclose interest in writing to corp ii. Contract must be approved iii. Contract must be fair and reasonable

If you meet these criteria, your transaction cannot be impeached Purpose: to get rid of harshness of Aberdeen case S.120 (8.1) - Even if conditions are not met, d or o acting honestly and in good faith is not accountable to corp for any profit realized from a material contact/transaction for which disclosure is required under subs.1 and the contract/transaction is not void b/c of the interest of the D or O if:

- the transaction confirmed by special resolution, at meeting of sh’s - disclosure of the interest was sufficient to indicate its nature to the sh’s before approval;

and - material contract/transaction was reasonable and fair to corp when approved

S.120 (9) - failure to comply with s.120 – court can decide what to do about the problem – can set it aside or require D/O to account to corp for any profit or gain realized, or both. What types of contracts have to be disclosed?

- Material contract o Not defined in legislation o Suggestion – something not trivial or insignificant

- Material interest – what is it?

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o Some interest in party contracting w/ director o Two possibilities w/r/t direct/indirectness you have to have to be considered a

material interest (Bruce Welling) 1. Financial Interest 2. Emotional Interest

- Divide in case law – some judges think interest has to be financial; others believe it can also be emotional interest

- O’Byrne – likes Welling’s ideas – purpose of s.120 is to identify negotiations where corp manager/D’s ability to bargain on behalf of corp is prohibited by an interest he has on other side

o Nichols says it absolutely DOES NOT include an emotional interest ** Basically, just disclose so your contract is unimpeachable; not jumping through hoops** Dimo Holdings Ltd. v. H. Jager Developments Inc. (ABQB) F: Jager put on concert to increase publicity for resort. Ticket sales poor – D of Jager, Mr. Moeller, asked Dimo to make advance to ensure concert proceeded. Moeller’s wife was D/O/sh of Dimo. Dimo wasn’t repaid entire loan – brought proceedings against Jager for the debt. I: Does Moeller have material interest in Dimo such that he was obligated to disclose the info to Jager? D: No. Jager has no defence. A: Jager Defence: Moeller did not disclose material interest in Dimo as required by the legislation – Jager therefore not bound by the contract. Threshold question: Does s.120 even apply here? Does Mr. Moeller even have a material interest? Court said s.120 only applies to financial interests (Nicholls view). Moeller had no financial interest in Dimo. He was married to D of Dimo – made him her associate but the legislation does not require him to disclose his associate’s material interest. Court went further in case they were wrong, then under s.120 (9), court has discretion to set aside the contract if a D fails to disclose. Court could find no reason why contract should be set aside – Jager benefited b/c concert able to go on; Moeller nor Dimo benefited; would be unjust enrichment if Jager debt forgiven. NOTE: O’Byrne says just err on the side of disclosure so contracts cannot be challenged. Material Contract (in conflict of interest context) – contact where D/O’s ability to bargain effectively for the corp is inhibited by an interest on the other side triggers s.120. Zysko v. Thorarison (ABQB) F: 2 co’s went into venture through co. ESJ Equities. Zysko became 50% sh through his co. ESJ Dev’t. The Thorarisons became 50% sh’s through their co. Bluebird. Parties entered USA – “no financing shall be taken out against project without express consent of all parties”. Thorarisons became concerned – decided to secure investment. They were 2 out of 3 D’s – granted mortgage to Bluebird from Equities. No notice given to Zysko so violation of USA.

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Thorarisons passed resolution allowing mortgage and terminating Zysko’s authority. I: Is the mortgage and security contract a “material contract” that must be disclosed pursuant to s.120? D: Yes. Mortgage therefore invalid. A: Mortgage is a material contract w/in s.120. If there is a possibility the D would benefit beyond de minimus range, transaction should be disclosed. The Thorarisons each had special interest in the mortgage – should have been disclosed to Zysko. Breach of USA Thorirasons’s tried to argue the security interest didn’t fall w/in the meaning of “financing” in the USA. Said this only applied to loans made to Equities by 3rd parties. Court rejected. All parties did not consent to the financing – so Thorarisons actions in breach of USA.

d. Competing Director o People can sit on different boards – is it a violation to sit on 2 competing boards?

London and Mashonaland Exploration Company, Limited v. New Mashonaland Exploration Company, Limited (High Court, Chancery Division) Old case – hard to rely on. F: 2 companies were rivals – incorporated for same object. Pl company – made Lord Mayo a D – applications for shares received based on this info. Df company – also appointed Lord Mayo as a D. Mayo never agreed NOT to become a D of a similar corp when accepting appointment by Pl. I: Was there a breach of fiduciary duty owed to Pl co. when Mayo became D of similar corp? D: No. Mayo could sit on both boards. A: Nothing in articles of association preventing Mayo from acting as D of another co. Also, Pl couldn’t make out case that Mayo would disclose to Df co. any info obtained confidentially as a D of Pl co. NOTE: Broad proposition to say Mayo could sit on both boards – might be different today. Pardy v. Dobbin (Nfld SC – CA) F: Dobbin and daughter were members of Sports Villas Resort’s BODs. 2 other D’s alleged they were disqualified from their positions b/c Dobbin had ownership interest in competing co. SV owned golf course; Dobbin informed other sh’s he would be managing a co. that would be opening another golf course. Other D’s applied to court to force the Dobbins’ off the board. I: Did Dobbin’s breach fiduciary duty to SV? Is there a conflict b/w self interest and duty to the corp here? D: No. No conflict = no breach of fiduciary duty. A: Appellant’s claim: Dobbins have been oppressive, unfairly prejudicial and disregarded best interest of SV and its sh’s. Conflict Argument fiduciary duty does not preclude membership on boards of different co’s. Golf courses were very far apart; catered to different types of customers – no competition. Proprietary Interest Argument any info Dobbin used being a D of SV was general info – he hadn’t used confidential info; no expropriation of corp opportunity that should have gone to SV.

e. Other Sources of Fiduciary Obligation

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Peoples Department Stores Inc. (Trustee of) v. Wise (SCC) F: Creditors for Peoples though inventory system was unfair. After bankruptcy, trustee for People’s sued D’s saying they owed fid. duty to creditors. I: Do D’s owe fiduciary duty to corp’s creditors comparable to stat. duty owed to the corp? D: No. D’s owed duty of care to creditors but NO fiduciary duty. A: S.122 (1) of CBCA (or ABCA) establishes 2 distinct duties to be discharged by D and O in managing the corp.

1. Statutory Fiduciary Duty (S.122(1)(a)) o Requires D and O to act honestly and in good faith with a view to the best

interests of the corp 2. Duty of Care (S.122(1)(b))

o Legal obligation of D and O to be diligent in supervising and managing the corp’s affairs

Stat Fid. Duty Argument: There is a broad oppression remedy available to creditors this makes it difficult to argue D’s owe a fid. duty to creditors. S.239 in ABCA. The court was not going to change corp law b/c creditors here were upset – they had rights in other provisions of the Act. Duty of Care Argument: Here, the court held that there WAS a DOC owed to creditors of the corp. O’Byrne this is puzzling. Implementation of inventory system was reasonable business decision to rectify a problem. No economic incentive for Wise bros. to jeopardize interests of Peoples. So here, Wise brothers didn’t breach the DOC owed to creditors. Tongue v. Vencap Equities Alberta Ltd. (ABQB) Shows breach of fiduciary duty outside of the statute. F: Pl – minority sh’s in Synerlogic. Df’s – sh’s and non-sh’s in Vencap. Df negotiated to buy Pl’s shares at 60 cents but did not disclose that there was an offer for $1.97. Df’s then sold shares for $2.16. Pl sue for: 1) breach of insider trading provisions; 2) breach of fiduciary obligations. I: Did the Df’s breach fiduciary duties owed to the minority sh’s? D: Yes. A: Df argument: Say b.c of s.122 ABCA they only owe duty to the corp. This is correct w/r/t the statute, but fid. duties can arise in other ways:

1. When D’s act outside their ordinary duties - D’s arranged for sale of shares – not ordinary duties – created new relationships b/w D

and sh’s. - Definitely a breach to not disclose the presence of the 1.97 offer (Anderson) 2. When D’s purchase shares from minority sh’s - D’s who were sh’s were liable; non-sh’s were not 3. Fiduciary duties arising on other grounds - D’s gained personal advantage at expense of Pl’s; had info that would have allowed Pl’s

to make an informed decision w/r/t sale of their shares Releases signed by Pls?

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Pl’s had signed releases saying they wouldn’t sue when shares were sold. But, you can’t release something you don’t have in your contemplation; b/c unaware of info – release void. Releases are not magic wands to get Ds out of breach of fid. duty. NOTE: Liability of D’s

1. Insider trading s.130(1)(a) liable for ‘direct’ loss – several 2. Breach of fid. duty under trust law, joint and several 3. Tort of fraud joint and several

f. Shareholder Ratification of a Breach of Fiduciary Duty - Ratification is okay, absent fraud and oppression on minority

o Making a gift to yourself is ALWAYS fraud, oppression (Cook) - Also would be ineffective if ratification had procedural problems - Can’t look at ratification as a way of saving something – court not bound by it

g. Case Study: Governance of the Financially Distressed Corporation

- Financially distressed corp unable to pay obligations as they become due - Imagine as a director: 2 competing pressures:

1. As sh, you’ve already lost your money, you want to go big to turn company around; suggest directors put all the money into it

2. Directors will be cautious; the last thing they should be doing is going for a big deal

- Role of board during insolvency o Board has to put management team in place to get corporate plan and to see that it

is properly executed - typically you create a special committee o Ask them to come to their best solution and bring it to the board

- To whom to directors owe their duty o Corp is owed the fiduciary duty o Best interest of the corp – boards can consider other stakeholders including

creditors o Even though duties don’t change in this period, have to be more weary and

cautious b/c dividends that are paid out, etc. can be subject to attack later

h. Takeover Bids and Defensive Tactics by Management D’s may use powers inappropriately when targeted for acquisition by another

company this unfairly prejudices the minority sh’s D’s want to maintain their positions

Maple Leaf Foods Inc. et al. v. Schneider Corporation et al. (ONCA) Attack decision AND process – hopefully you get a favorable decision somehow. F: ML bid to take over Schneiders - $19/share. Board establishes special committee to study offers (independent; non-family members). Then bid $22 – rejected by family. Family informed committee they would only accept offer from Smithfield Foods – accepted $25 offer. Minority Shareholder Arguments:

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1) Committee not independent; 2) Advice by committee to board not in best interests of corp or sh’s say the process used unfairly disregarded interests of non-family sh’s. I: Should the agreement be set aside b/c process was unfairly prejudicial to non-family sh’s? D: No. Transaction cannot be impeached. A: Committee Independent? – Pl claim Dodd’s (a negotiating D) had conflict of interest b/c had interest in continued employment and his loyalty to the family – would go w/ Smithfield offer b/c wanted to keep his job. Not supported – Family never sought Dodd’s input. D’s acting in corp’s best interest? – Even in possible change of control, Ds have to continue to act in corp’s best interests. D’s have onus of proving they were adequately informed and acted reasonably (not perfect decision). Special committee members DID act in good faith – after tax considerations taken into account, ML offer not any more advantageous. So, they could rely on BJR. Process concerns – 1) Concern that committee’s use of data room a problem – not a problem – it’s a good thing to use info to get multiple offers. 2) Complaint that Board had to do public auction – this was one way to prevent conflict of interest, but can do this in other ways – company canvassed market; didn’t want Smithfield to withdraw offer either.

i. Dissenting Director disassociating yourself from a decision

- CBCA – s.123 o Things you need to do if you want to dissent at a meeting o If you voted or consented to something – you cant say you haven’t o What if you’re not there?

Find out what the resolutions were and file your dissent within 7 days otherwise you are deemed to have consented

- ABCA – s.123 o Directors present deemed to have consented to resolution passed or action taken

unless: D requests abstention or dissent be entered in minutes D sends written dissent to secretary of meeting before next meeting D send dissent by registered mail or delivers it to registered office of copr

immediately after meeting adjourned D otherwise proves D did not consent to resolution or action

Contrast:

Abstention is sufficient in ABCA but not in CBCA There’s no liability under ABCA if you weren’t there – no deemed consent to the

resolutions. o Why is that?

ALRI gave big report leading up to passing the ABCA Part of what institute did was look at CBCA to see what was in place

already said dissenting director provisions were unfair

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Each director should not be expected to attend every meeting, so why do you have to take specific steps when you don’t attend

5. Indemnification by the Corporation Blair v. Consolidated Enfield Corp. (ONCA) F: Blair was CEO of Enfield and chair of their board. At AGM, vote taken for slate of D’s – majority didn’t include B on that slate. B got legal advice – was told the proxies authorizing ballots against him were invalid b/c proxies restricted voting to management slate only. Trial judge – ballots were legally cast for a Canadian Express nominee – Blair not a D. Damages awarded against B and Enfield – b/c Enfield controlled by Canadian Express – went to B for entire damage award. B asked for indemnification from Enfield – they denied indemnity. I: Were the proxies valid? Should B be indemnified by Enfield? D: Enfield required to indemnify B. A: Under ON legislation a corp may indemnify D if he acted honestly and in good faith w/ a view to the best interests of the corp; also, D not liable if they rely in good faith on a report of a lawyer. Test to determine if B’s decision that the proxies were invalid was correct: was the ruling made w/ the bona fide intent that the company have a lawfully elected board of directors? It was in the best interests of the co. to have a proper procedure for electing D’s. Lower court didn’t approach the case properly – they said B should have asked who was better D – but, this was not the issue. The issue was w/r/t proxies and whether the procedure was valid – was about whether B conducted himself properly and not about his response to litigate (lower court thought litigation was not in best interests of the corp). KEY: Case tells us that powers must be used for proper purpose; if you use them in a context that is not appropriate to the situation, the decision is impeachable. Amendments to the CBCA and the Related Regulations

- 2001 CBCA significantly amended o ABCA reflects some of CBCA amendments but not all

- CBCA amended by Bill S-11 - Allow stronger international rep on boards – directors residency are such that only 25%

has to be resident Canadian now - Other amendments - due diligence defence, security law, sh proposals (Varity case)

CBCA (S.237.3-237.4) - Apportionment of damages - Modified proportionate liability w/r/t providing financial info required under the act - Only liable for portion of damages caused by them - Ordinarily it’s joint and several – here just severally

The Rights and Responsibilities of Auditors to Third Parties: A Call for a Principled Approach

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- Courts hold negligent or fraudulent auditors accountable to corps for whom they work through law of contract, BUT do not hold them accountable to investors and other third parties

- Authors argue powers exercised by auditors come with a public responsibility to protect third parties from auditor negligence or fraud since reliance on audited statements can affect valuable economic interests that ought to be recognized

- New proportionate liability scheme replaces joint and several liability o Applies to claims involving financial loss from error, omissions or

misstatements in financial info o CBCA amendments grant court discretionary authority to override proportionate

liability and impose joint and several liability where it would be “just and reasonable to do so”

- Efforts at law reform have failed to adequately protect interests of investors and third parties that suffer loss as a result of negligent misstatements by auditors

CHAPTER 8: SHAREHOLDER RIGHTS AND REMEDIES A. Introduction to Shareholder Rights

1. Vote - S.26 – some shares non-voting - Typically common shares vote; preferred shares don’t but have dividend priority - Each share = 1 vote (unless otherwise stated) (s.139) - Cumulative voting (see handout)

2. Participate in profits 3. Participate in distribution of assets 4. Transfer 5. Control over D and O

- Elect and appoint D and O i. S.106(3) – typically by ordinary resolution

ii. S.109 – D’s can be removed - Review performance (usually at AGM)

i. S.155 – annual financial statements put before sh’s at AGM – incentive to remove D or O if statements poor

- Can make proposals – s.136 - Access to corp info – S.23 - Power to appoint auditor – S.162

i. Distributing corps MUST (s.163) - Shareholder initiatives – propose bylaws to exert control – s.102 - Requisition a meeting – s.142 - USAs – s.146(1) – what is subject to a USA

i. Restrictions on D’s right to manage ii. Restricting share transfers (don’t necessarily want shares to be freely

transferable) iii. Valuation process (to decide how much a co. is worth) iv. Arbitration clauses

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v. Shotgun Clauses – to resolve disputes; offering sh makes offer and notified sh can purchase at that price or sell

6. Control of minority sh’s - S.136(1)(b) – right to discuss any matter you would have been able to had you

submitted a proposal 7. Special rights in event of fundamental changes

- Continuance into another jurisdiction – special resolution i. Right to dissent to continuance

- Altering corp capital i. Amending articles of association – special resolution

- Amalgamation – 2 corps combine - Extraordinary sale, lease or exchange - Dissolution

i. S.212 1. By Shareholder or D 2. By Registrar – fail to comply w/ requirements 3. By Court order 4. Other grounds

B. Introduction to Shareholder Remedies

1. Personal Remedy - Breach of USAs; breach of fiduciary duty; receiving end of tort - Oppression statutory remedy for shareholders in the legislation

S.242 – complainant may apply for court order S.239 – defines complainant (security holder, D, O, creditor, any person who

is complainant according to the court) o First – must be a complainant o Second – must fall within provisions of s.242

Lots of flexibility for what court can order in this remedy (subs. 3) Oppression IS a personal remedy (lots of debate in this area though)

2. Derivative Remedy

- Sh’s can bring action in name of company against the D’s (usually minority sh’s) - Need leave from court to bring derivative action - Reason: disgruntled sh’s could harass D’s – bring action just to squeeze money

out of them - Corp has the cause of action (right as a sh to sue is derived from the corp’s right) - Indirect loss to sh’s is NOT ENOUGH to bring their own oppression action

NOTE: O’Byrne – problem w/ derivative actions going through as oppression actions to cover yourself, just make your claim as derivative. You can proceed w/ oppression too and are still covered.

1. Standing Application for Leave to Bring Action

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- S.240 - Court must be satisfied that:

1. Pl gave reasonable notice to the D’s of corp of intention to apply to court if D’s do not bring, diligently prosecute, defend or discontinue the action,

2. Pl is acting in good faith, and 3. It appears to be in the interests of the corp that the action be brought,

prosecuted, defended or discontinued (NOTE: doesn’t say best interests) C. Relief from Oppression or Unfairness

1. Introduction Hercules Managements Ltd. v. Ernst & Young (SCC) Pro-accountant case. F: NGA & NGH hired accountants to prepare financial statements – was negligently performed. Hercules was sh – he relied on info and invested money into companies. Sh claims: 1) loss of investment money; 2) loss of opportunity judge management. H sues personally for breach of contract and negligent misrepresentation. I: Was there a breach of contract? Do the accountants owe a DOC to the sh’s? D: No. Action should have proceeded as a derivative action. No Oppression!! A: First, there was no contract b/w sh’s and auditing firm – only corp could sue for breach of contract. Second, all negligence actions must be run through Anns test.

1. Is there a prima facie DOC owed to the sh’s? - DOC exists when: a) Df ought reasonably to have foreseen the Pl would rely on

his representation; and b) the reliance was reasonable. - It was reasonably foreseeable that sh’s would rely on audited financial statements

and may suffer harm if they were prepared negligently 2. Are there policy reasons for limiting liability?

- Use of statements for purposes other than that for which they were prepared would lead to problems of indeterminate liability

- Auditor’s report was supposed to be used for sh’s to judge management’s performance BUT sh’s used it to make personal investment decisions

Rules from Foss v. Harbottle:

1. Individual sh’s have no cause of action for a wrong done to the corp still the law 2. Derivative action has to be dismissed when it could have been ratified by the sh’s

repealed Deluce Holdings Inc. v. Air Canada (ON Gen Div.) F: Air Ontario shares held by Air Canada (75%) and Deluceco (25%). AC wanted to acquire 100% ownership of AO. A USA said when last Deluceco family member left, AC could exercise option to buy their shares. AC terminated Mr. Deluce – he claims oppression. Deluce position: when AC terminated Mr. Deluce’s employment it did so for the sole purpose of enabling it to buy out the Deluceco minority interest this was improper exercise of majority control of the BOD.

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AC position: under provisions agreement, they were entitled to purchase minority shares – if no agreement on price, went to arbitration. I: Was the termination of Mr. Deluce oppressive? D: Yes. A: Clear that motivation behind Deluce’s termination was strategy so AC could exercise its option. W/r/t the USA – wasn’t the intention of the parties when it was created that AC could trigger its right to purchase the shares at will by terminating Deluce’s employment only a termination for purposes in the best interests of AO could be within meaning of the USA (this was Deluce’s expectation – protected under oppression remedy). Finding of oppression destroyed the arbitration proceedings. Oppression action protects legal rights AND reasonable expectations.

2. Judicial Interpretation

a) What is oppressive or unfair conduct? Re Ferguson and Imax Systems Corp. (ONCA) Reasonable expectations. F: Shares issued equally b/w 3 couples (Husbands = 700 voting shares; Wives = 700 non-voting – non-redeemable so couldn’t be forced to sell them back). Appellant separated from husband – he put pressure on others to squeeze her out. Appellant seeks relief under s.234 of CBCA – claims Imax is attempting to amend articles to reorganize capital (forcing her to redeem shares) and acting in oppressive manner to her interests as a sh. She wants an injunction to prevent the special meeting from occurring where the other sh’s will pass a resolution forcing her to redeem her shares. I: Was the company acting oppressively to the appellant as a sh? D: Yes. Company prohibited from passing resolution forcing her shares to be sold. A: Resolution was culminating event in lengthy course of oppression. Failure to declare dividends was also oppressive b/c sh’s had reasonable expectation she would receive them. Ford Motor Co. of Canada v. Ontario Municipal Employees Retirement Board (ONCA) Reasonable expectations. F: Ford Canada owned by Ford US (majority sh) and OMERS (minority sh). In special sh meeting, takeover by FUS approved despite minority dissent. FC urged sh’s to accept buy out offer from FUS. FC brought action to fix fair value of shares – OMERS counterclaimed on oppression. Minority Claim management used transfer pricing policy to shift profits from FC to FUS therefore underreporting FC’s profits to gain tax advantages – policy resulted in undervaluation of FC shares. I: Was there oppression towards the minority sh’s? D: Yes. A: Minority sh’s of FC had reasonable expectation that management would act in the best interests of FC by securing necessary changes. System was not changed when exchange rate went against the Canadian dollar – should have been changed b/c wasn’t in FC’s best interests – losing profits. The system was unfair to minority sh’s.

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Also – just b/c FC was profitable doesn’t mean the system for pricing of shares was fair. Downtown Eatery (1993) Ltd. v. Ontario (ONCA) Employees can have reasonable expectations protected under oppression. F: Grad and Grosman owned nightclub – hired Alouche to manage it. A terminated – brought action against the co. that provided his paycheque (Best Beaver). G&G companies restructured – BB ceased business. A obtained judgment for termination– BB never paid damages. A claims against G&G companies and them personally – sues for oppression. I: Was the conduct of G&G oppressive? D: Yes. G&G insulated BB from impact of a judgment. A: G&G argument: Reorganization was due to loss of union threat – company not necessary any longer – not b/c of pending litigation. A’s argument: Dissolving the company was to prevent A from recovering a judgment. Court held that trial judge failed to appreciate that oppressive conduct doesn’t need to be carried out w/ intention to harm complainant. The statute does not state that intention to harm is a pre-requisite to a finding of oppression. Reasonable expectations: It was reasonable for A to expect G&G would reserve money to satisfy a judgment when they knew of pending litigation. NOTE: Reconcile McFadden (inducing breach of contract) w/ the Downtown Eatery case shows how oppression action could piggy-back onto a tort claim for inducing breach of contract.

- Could argue G&G induced BB to breach contract w/ A – wrongful dismissal - Key Defense = Said v. Butt

i. Did G&G do so bona fide and in best interests of corp, or to feather their own nest?

IN EXAM:

1. Think of oppression 2. Any torts that might have occurred

Mace v. Dirk (ABCA) F: M and D each owned 50% voting shares (held through individual companies); they were sole D’s of TSC. Parties had no agreement w/r/t winding up of business. D decides to leave business. M takes steps to wind up business. M sues claiming damages for: 1) breach of fiduciary duty; and 2) breach of stat duty owed to TSC w/ oppression. Trial – D liable for breach of fid. duty plus oppression (ordered damages co. would have made had it continued to operate for 2 yrs.). D appeals – says M couldn’t have expected business would have continued beyond unilateral termination, and termination didn’t have to be mutual. I: Was there oppressive conduct by Dirk? D: No. D entitled to legally end relationship. A: Trial judge incorrectly held b/c no buy-sell agreement that neither party entitled to end relationship. Evidence that M had accepted the termination. It was foreseeable that one party might want to terminate relationship and the parties did nothing to protect themselves – so nothing oppressive about unilateral termination. No agreement in advance – anyone can unilaterally leave the business.

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NOTE: Oppression generally not available as a remedy where 2 D or O are equal sh’s and neither has de facto control But, O’Byrne says don’t go by this strictly.

b) Oppression or Derivative? Meditrust Healthcare Inc. v. Shoppers Drug Mart (ONCA) Clear application of Hercules case – not letting derivative action go through as oppression. F: Meditrust was parent co. of many subsids – owned mail order pharmacy operating through subsids. MT brought action against Shoppers in oppression – claims they had campaign to destroy the co. and eliminate MT as a competitor wrote phony letter by fictitious group of pharmacists alleging MT’s business unsafe; interfered w/ suppliers and potential customers. Shoppers claims real action is derivative – want summary judgment. Motions judge granted it. NOTE: Subsids sold so MT brings action. I: Did motions judge err in holding MT was not the proper plaintiff? D: Partially – allowed appeal only w/r/t personal damages claim. A: MT submitted 4 reasons they were proper complainant:

1. Single economic entity parent and subsid one entity; if subsit hurt – so is parent Court said you take benefits and burdens of corp vehicle you choose – by using the

system of subsids, MT had to accept burden that they were separate entities 2. Principle and agent Subsids are agents for MT.

Confined to contract and property law – not extended to tort law 3. Contractual right to sue MT has security interest w/ subsids.

Subsids not in default of agreement so no basis for this ground 4. Personal damages lost business opportunities, potential investors, value in shares and

loss of goodwill Court considers loss of goodwill an appropriate claim – goes to reputation of parent

company (the others were derivative – Foss v. Harbottle says sh in co. has no independent cause of action due to loss of value in his shares b/c of damage to the co. – this is indirect damage)

The distinction between oppression and derivative action

• Is the essence of the action a violation of some right of the corporation or some personal right to which the S/H is entitled?

• Both produce a loss for the S/H, but the difference is whether the loss is suffered by the S/H directly or indirectly by the reduction in the value of his shares.

Claims clearly derivative in nature

i. claims that deal with loss of value of shares; ii. failure to complete a share purchase transaction; iii. cause of action for breach of a contract or for a tort that damages the company; iv. intermingling of assets and business between two companies prior to completion of the

share purchase transaction; v. where an individual acts to serve his personal objectives to the detriment of a company; vi. claims for damages resulting from the failure to keep proper business and other records,

including financial statements; and

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vii. allegations that the defendant directors made false, misleading and contradictory statements to the public and S/H, giving rise to a loss of confidence in the plaintiff company and negatively affecting the financial interests of the S/Hs

Claims Arguable Personal in Nature ii. those relating to reps by Df directors that transaction had been completed

NPV Management Ltd. v. Anthony (Nfld Lab. CA) F: NPV and Daley Bros. incorporated Storm Seafood – SS acquired shares in Conpak. C and DB entered share purchase agreement – DB assets would be transferred to C. Publicly announced that deal wasn’t going to happen after Terence Daley resigned as D of Conpak. SOC alleges that shares were transferred directly to NPV b/c of representations that that deal would proceed shares in C deflated causing irreparable harm to NPV. Pl’s proceeded w/ oppression action. Pl claim 2 bases for NPV having personal oppression action: 1) Negligence; 2) Oppresion provisions w/in CBCA. I: Was this a derivative action that cannot go through b/c there is no leave from court? D: Yes. No oppression action founded. A: Anns Test: 1) prima facie DOC established; 2) indeterminate liability problem – reports issued in compliance w/ disclosure requirements for public co. – statements not made so NPV could make a personal investment decision. Oppression: Engages s.241 CBCA – any personal claim existing couldn’t be separated from derivative claims – they were too interwoven. Look at claims in SOC:

- Shares lost value in Conpak DRV - Failure to complete transaction DRV - Intermingling of assets prior to transaction Internal management issue DRV - Conflict of interest w/ Daley being CEO Conpak Internal management DRV - Directors failed to keep proper records; de-listed from TSC DRV - False statements to public DRV

Budd v. Gentra Inc. (ONCA) F: Former sh’s of Gentra brought oppression action against D’s. Allegation – affairs of corp were mismanaged, financial disclosure incomplete, sale of assets of corp orchestrated to serve interest of D’s. As a result share’s devalued. I: Did the D’s of Gentra conduct business in oppressive manner? D: No. A: There were no specific claims against specific D’s – to hold them liable must show the particular D’s named did specific acts considered tortious or oppressive. Very shotgun, general SOC. Alvi v. Misir (ONSCJ) Anit-plaintiff perspective. F: Pl’s were 99% sh’s in MedChem. Pl’s claim D’s of MedChem owed CL and fiduciary duties to them as sh’s. Claim CCFL undertook management of the co. to the detriment of the sh’s. The co. lost money. Pl’s claim against CCFL for tort of inducing breach of duties owed to sh’s. I: Should the SOC be struck? D: Yes.

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A: Sh’s have no status to bring the claims against the former D’s of MedChem. - Loss of value of shares DRV - Breach of stat and fid. duty by D’s owe to corp and not sh’s - Sh’s accepted advantages and disadvantages of the corp structure (including limited

liability and separate entity concepts) - No facts justify piercing the corp veil - No leave for DRV action

3. Scope of Relief Available

Naneff v. Con-Crete Holdings Ltd. (ON Gen. Div.) F: Alex was employee, D/O, manager and sh of family business for all his working life. Family doesn’t like his wife – want to remove him from company. A and brother led to expect they’d be taking over family business. I: Is Alex entitled to an oppression remedy? D: Yes. Court ordered business sold entirely. A: A’s reasonable expectations have been disappointed. Other areas oppressive:

a. Refusal of Mr. Naneff to transfer title to residential lot – A given lot as gift but father still held legal title. Court held father held as CT for A.

b. Dismissal from employment - not normally oppressive, but here was part of pattern of oppressive conduct – role as employee wrapped up in sh role

c. Twilight voting right – Estate planning aspect – Mr. Naneff’s shares were voting but on his death to become non-voting and sons were to inherit his shares. Articles were amended to make his shares remain voting on his death – shares would go to brother instead of A.

d. Bonuses paid to Mr. Naneff – Historically profits went to A and brother to re-invest in co – changed to give bonuses only to Mr. Naneff – A didn’t receive his share anymore.

e. Repayment of A’s sh loan – unfair for his loan not to be repaid. f. No proof A was poor employee; excluded from day to day operations.

Court provided 3 possible remedies: 1. Restore A to position he held – remove his father Not fair to get rid of father b/c he

started company. 2. A’s shares acquired at fair market value Naneff’s get exactly what they wanted 3. Company placed on market for sale Court accepts this option – this way any family

member can attempt to purchase the co. Another aspect to case – mishandling A in this way was breach of D’s fiduciary duty to the corp. Cannot use your D powers to discipline son – this is an improper purpose. NOTE: A did too well here – realize the decision will be appealed immediately. Naneff v. Con-Crete Holdings Ltd. (ONCA) D: Trial decision reversed. A’s shares bought at market value. A: The order was an error in principle b/c was unjust to Mr. Naneff who started the company and had put 40 years into the business. Court looked at what was meant by “just and equitable”. Court says they must look at the parties not from a technical legal point of view but from their background (family business

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different than working in normal commercial business). Discretionary powers in the context of oppression are limited in two ways:

i. they must only rectify oppressive conduct; and ii. they may protect only the person’s interest as a S/H, D/O as such

Considerations of the court: 1. A fully understood his father retained full control of co. until death. A’s reasonable

expectations couldn’t include the right to control the business while his father was alive. 2. Family business was built by A’s father. Belief that A would obtain portion of the

business on death was based on belief his father would be bountiful to him in the future – but, could only expect this if his father considered him a good son.

3. Trial judge protected A as a son as well – did more than rectify oppression. D. Derivative Actions

1. Introduction 3 ingredients w/r/t s.240 what you have to show to bring derivative action: Reasonable notice

o No complaint can proceed w/out proof there’s been some communication w/ BOD telling them to take action on the matter you’re complaining about

o Proof can be just by showing written request o Peterson says courts interpreted the requirement as a straightforward communication

to the board and asking for action to be commenced o Don’t have to explain cause of action w/ perfect clarity – but Ds should be able to

determine nature of complainant’s concerns Good faith

o Want to foreclose any personal vendetta Sh’s have against D’s. Interest of company

o Wording doesn’t say IT IS in the best interests o It’s APPEARS TO BE in the best interests o Block actions to recover small amount of money – would cost too much money and not

be in corp’s best interests; block actions where Ds will be embarrassed – gratuitous embarrassment

o As long as you can show action isn’t frivolous – that it could reasonably succeed

2. Commencing an Action Bellman v. Western Approaches Ltd. (BCCA) F: Minority sh’s gave notice to BOD of claim w/r/t wrongdoing by D’s – asked board to commence action in name of corp for damages and breach of fid. duty. Board didn’t take action after counsel said there was no evidence to support the allegations. Minority brought derivative action – leave granted. I: Did trial judge err in providing leave to commence a derivative action? D: No. A: Court looked at conditions precedent:

1. Notice – Provided - failure to specify every cause of action does not invalidate notice as a

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whole 2. Good Faith – Counsel argued the minority shareholders were looking for the same relief

in personal and derivative action – court held this was not so – could not ask for fiduciary duty damages in personal action – different remedies sought

3. Interests of the Corporation – Arguable case must be shown to exist - At common law, if action you complain of is ratified by the corp, cannot start

derivative action - Exceptions include: ultra vires acts, resolutions requiring special minority, invasion of

personal rights and fraud on the minority - Common law rule extinguished in Canada – now just go to the Act – if you meet the

test, you get leave application (ratification is no longer determinative – just 1 factor)

3. Powers of the Court E. Other Statutory Remedies

1. Compliance and Restraining Orders o S.248 of the legislation D or O non compliant w/ legislation – can seek compliance

order o If phrased to restrain a potential breach = restraining order o If trying to mandate compliance (I.e. Do this!) = compliance order

Re Goldhar and Quebec Manitou Mines F: Allegation that D’s in breach of stat duty – asking for compliance order. I: Should the court grant a compliance order? D: No. Looked like a derivative action masquerading as a compliance order. A: The court can order compliance or a restraining order under s. 248. But the violation must be mechanical in nature, and not too complicated. Otherwise, should bring derivative or oppression remedy. Examples – Failure to furnish a list of shareholders; a failure to send proxies or information circulars to shareholders before meetings; or failure to file an insider’s report.

2. Class Veto o S.176 – class votes o 176(3) – w/r/t certain rights recited in s.176 and to extent class is affected differently

they have a vote for this purpose even if they aren’t voting o 176(4) extra protection for holders of share of each class or series

3. Appraisal Remedy

o S.191 – discussion of sh’s right to dissent w/r/t fundamental change o Dissenting director allowed to have their shares bought out o A way of resolving sh’s conflict – somebody is bought out o Another way of doing this by USA (Shepp)

MLH & A Inc. v. Shepp

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F: Pl purchased all shares in BN Shepp & Associates. Under share purchase agreement, clear that Shepp would continue employment. Disagreement – Shepp left company. Under USA, Shepp entitled to have shares that were part of purchase price repurchased by the Pl. Shepp signed non-compete and then incorporated new company – used former clients of BN Shepp. Damages were to be either: 1) greater or ½ of the gross fees Shepp collected from clients during period; or 2) 25% amount Pl is to pay for shares of Df’s when Shepp left. I: How were damages to be assessed? D: The second method. A: Shepp violated non-compete clause in USA. The legislation sets out many remedies for the court but remedies may be enforced by having a USA in place.

4. Investigations o S.230 on – show when court will order investigation o Some deceit against sh’s or books are not properly kept o Dissolution – sub 1(b) – when it is just and equitable

Scozzafava v. Prosperi F: Scozzafavas and Prosperi Brothers incorporated Henri Studio to sell garden statuary. Differences arose -4 lawsuits started. I: Should the company be dissolved b/c of the conflict? D: Yes. A: Court may order dissolution of a company if they believe it is “just and equitable”. Leading case Noble v. Keho Holdings Ltd. 4 Grounds where it would be just and equitable to dissolve a corp

1. Deadlock in management - 2 equal factions of sh’s at odds – no buy out or shotgun style clause so problem can’t

be solved 2. Business akin to partnership – parties described their relationship as partnership 3. Loss of substratum – i.e. has the main object of the company failed? Yes – license

agreement would be terminated – this was main purpose of company. 4. Loss of confidence in management – Prosperi Brothers said lost confidence in Maria (the

managing partner) but court not sure Do NOT need more than 1 of 4 grounds BUT court shouldn’t make order for dissolution where equity can be achieved by an alternate remedy.