Law 451 (O’Byrne) Chapter 1: Choosing the Form of Business Vehicle ______7 Types of Business Vehicles ______7 ______8 ______9 Unlimited Liability Corporation (ULC) ______10 ______10 General ______10 Ordinary Partnership ______10 (“LP”) ______11 Partnership (“LLP”) ______11 Joint Ventures ______12 Agency ______12 Agency and Business Law ______12 Types of Authority ______12 Liability ______13 Duties ______13 Partnership ______13 Volzke Construction v Westlock Foods (ABCA 1986) – functional test for determining partnership existence ______13 McDonic Estate v Hetherington (ONCA 1997) – liability of partners in an ordinary partnership (not LLP) law firm for misconduct of one partner – Tests for Authority ______14 Chapter 2: A Background to Corporation ______15 Salomon v Salomon (1897 ENG HL) - liability of directors is protected under a corporation – individuals can incorporate ____ 16 History of Corporations ______17 Corporate Constitution ______18 Purpose ______19 Corporate Structure ______19 Methods of Creating Corporate Constitutions ______19 Letters Patent (only applies in PEI & Quebec) ______20 Memorandum of Association (MoA) ______20 Articles of Incorporation ______20 Canadian Jorex Ltd v 477749 Alberta Ltd (ABCA 1991) – residuary power held by corporate directors - power to cancel special meetings - shareholder remedies ______20 Chapter 3: The Process of Incorporation ______22 Procedures ______22 Choosing Where to Incorporate ______22 How does one incorporate under the ABCA? ______22 Who can incorporate?: ______22 Required Incorporation Documents ______23 Restricting the transfer of shares upon incorporation: (why do it?) ______23 Consequences of Incorporation ______23 Corporate Records and other matters ______23

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Unanimous Shareholder Agreements (USAs) ______24 Cicco v 609940 Ontario Inc (Trustee of) – U.S.A not binding on 3rd party with no notice of restrictive authority of directors – Bankpructy assignment not annulled by USA ______24 Corporate By-Laws ______25 Directors’ Organizational Meeting ______25 Kinds of Corporations ______26 Loss Prevention – Code of Professional Conduct______26 Corporate Names ______27 Common Law and Statutory Requirements ______27 Paws Pet Food and Accessories Ltd v Paws and Shop Inc (1992 ABQB) - Misleading corporate name – Court order to change ______28 Stenner v Scotia Capital Inc (2007 BCSC) – elements of a Passing Off Action – Subsequent use of family name with goodwill attached not permitted ______28 Share Capital ______30 Equity Financing ______30 Classification of Shares ______30 Pre-Incorporation ______31 Conflicting Common Law ______32 Kelner v Baxter (1866 UK) – promoter liable when entering into Pre-Incorp. ______32 Black v Smallwood (1966 Australia HC) – Promoter not necessarily liable in pre-incorp. contract – look to intentions _____ 32 Statutory Reform: e.g. CBCA s. 14 ______32 Judicial Treatment of Statutory Rules ______32 Westcom Radio Group Ltd v MacIsaac (1989 ONCA) – Poor Decision – promoter not held liable ______32 Sherwood Design Services Inc v 872935 Ontario Ltd (1998 ONCA) – conduct required for corporation to adopt contract (dissent in obiter) ______33 Practice Considerations: ______34 Szecket v Huang (ONCA 1998) – liability of promoter/agent to be determined by statutory rules, not old CL ______34 Measure of Damages ______34 Wickberg v Shatsky et al (1969 BCSC) – breach of warranty of authority – must be cause of loss to third party - damage measurement ______34 Pre-Incorporation Contracts in Alberta – ABCA s. 15 ______35 Chapter 4: The Corporation as a Legal Person ______36 Summary ______36 One-Person Corporation ______37 Lee v Lee’s Air Farming Ltd (1961 Privy Council) – director and shareholder of corporation can employ themselves – WCB claim by wife after husband’s death 37 Grounds for Liability of those Behind the Corporation ______37 Liability based on lifting the corporate veil ______37 Kosmopoulos v Constitution Insurance Co of Canada (1987 SCC) - Salomon principle is not enforced when it yields result too flagrantly opposed to justice ______38 Big Bend Hotel Ltd v Security Mutual Casualty Co (1980 BCSC) – corporate veil lifted for corporation being used as a “sham and a cloak” ______38 Performance Industries Ltd v Sylvan Lake Golf & Tennis Club Ltd (2000 ABCA; aff’d by SCC) – lifting the corporate veil for “fraudulent, dishonest, and deceitful” action ______38

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Jin v Ren (2015 ABQB, aff’d by the ABCA) – unjust enrichment claim – investments retained for improper purpose by director – corporate veil lifted ______39 Wildman v Wildman (2006 ONCA) – corporate veil lifted against corporation for spousal and child support ______40 Rockwell Developments Ltd v Newtonbrook Plaza Ltd (1972 ONCA) – corporate veil not lifted to force shareholder to pay costs for lititagion between your corp and another corp ______40 Sun Sudan Oil Co v Methanex Corp (1992 ABQB) - Liability of parent for subsidiary – corporate veil not lifted – rule and test for holding parent liable ______41 Liability based on total disregard of formality ______42 Wolfe v Moir (1969 Alta Sup. Ct.) – individual liable for not identifying corp on tickets, contracts, etc. – roller rink ______42 Vallis v Prairie Alternative Energy Solutions Ltd (2013 SKPC) – failure to identify working as a corporation – personally liable ______43 Liability of Directors for their Own Torts ______43 McFadden v 481782 Ontario Ltd (Ont HCJ 1984) - director always liable for their tortious actions – inducing breach of contract outside the scope of the director’s authority ______43 369413 Alberta Ltd v Pocklington (2000 ABCA) –Elements of inducing breach of contract ______44 Liability in the area of Trust Law ______44 Citadel General Assurance Co v Lloyds Bank Canada (SCC 1997) – liability for knowing assistance or knowing receipt of trust property – both are breach of trust ______45 Air Canada v M & L Travel Ltd (SCC 1993) – directors held liable for knowing assistance of breach of trust ______45 Liability Based on Thin Capitalization ______46 Walkovszky v Carleton (1966 NYCA) – thin capitalization not enough to lift corporate veil ______46 Henry Browne v Ocean Charters (ENG case) – thin capitalization is not on its own actionable and it is insufficient to lift the corporate veil ______47 Chapter 5: Tortious, Criminal, Regulatory & Contractual Liability of Corporations ______47 Individual v Corporate Liability ______47 Criminal and Tortious Liability ______48 Attributing Liability to a Corporate Body ______48 The “Rhone” v the “Peter AB Widener” (1993 SCC) - Directing mind doctrine – employee with gov’ing executive authority to design & supervise the implementation of corp. policy ______48 Corporate Defense to Liability ______49 R v Canadian Dredge & Dock Co (1985 SCC) - Corporations criminally liable – Directing Mind & identification Doctrine – action within scope of authority in ordinary course of business, not totally in fraud of corp, & partly for benefit of corp __ 49 Statutory Criminal Liability ______50 Regulatory Offences ______51 R v Bata Industries (1992 ONPC) – defence - Onus on Accused to show on BOP – Scope of Duties taken into account in Determining Reas. Care ______51 R v Bata Industries (1995 ONCA) – indemnification of directors and officers must be in accordance with ABCA, s 124 ____ 52 R v Syncrude Canada (2010 ABPC) – Birds killed landing on tailings pond – strict liability – due diligence defence factors __ 53 Contractual Liability – Currently Governed by Indoor Mgmt Rule & Agency ______54 Re: Jon Beauforte (London) (1953) - : contracts void ab initio b/’s actions didn’t correspond to limitations set out in corporate bylaws/constituting documents ______55 Communities Economic Development Fund v Canadian Pickles (1991 SCC) – ultra vires doctrine abolished by ABCA/CBCA except for special acts corporations ______56 Contracting with Agents of the Corporation ______57

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Actual Authority ______57 Panorama Developments v Fidelis Furnishing (1971 HL) - Actual (implied) auth. may flow from a job title or position – corp secretary renting fancy cars under his employer’s name, renting them out for personal gain ______57 Apparent Authority ______58 Freeman v Buckhurst (1964 UK) - test for apparent (ostensible) authority – 4 requirements – definitions for ostensible and actual authority - architechts perform work for Buckhurst (through rogue agent, Kapoor) and are not paid ______58 Doiron v Manufacturers Life Insurance (2002 ABQB) - principle liable for acts of agent so long as agent acting within scope of actual/ostensible authority ______59 Doiron v Manufacturers Life Insurance (2003 ABCA) - Ostensible auth. doesn’t require explicit representation of authorization – can be implied, but it must be reasonable for 3rd party to rely on apparent authority ______60 Canadian Laboratory Supplies v Engelhard Industries (1979 SCC) commercial realities – 3rd parties can rely on representations of lower level employees (as long as reasonable and sufficient authority) –– employee buying and selling platinum behind company’s back for personal gain ______61 Chapter 5 Summary ______62

Chapter 6 – Corporate Social Responsibility ______62 Sub-Prime Mortgage Crisis ______63 Corporate Social responsibility ______63 Two Theories of Corporate Social Responsibility ______63 Property Conception – aka “Shareholder Primacy Model” (Milton Friedman’s approach) ______63 Social Institution View (Ralph Nader’s approach) ______64 Alternative: Our Values Approach (The Body Shop) ______64 The Law ______64 Case Study: Talisman Energy Inc [bad communication/PR team; CSR; corps will be readily held accountable due to the internet] ______64 Corporate Citizenship and Social License ______65 Re Varity Corp and Jesuit Fathers of Upper Canada et al (1987 ONPC) – Apartheid – proposal to withdraw investments in S.A. – Varity not required to distribute proposal to stakeholders because it is primarily for general social/racial/political purpose - s 131(5)(b) CBCA ______66 The Body Shop – Case Study ______66 Dodge v Ford Motor Company (Michigan Sup Ct 1919) – cororation is primarily carried on to maximize shareholder profits, not benefit the public – property conception theory ______67 Chapter 7 – ______67 Introduction ______67 Comparison of Public and Closely-Held Corporations ______69 Statutory Source of Directors’ Powers ______69 Director Positions ______69 Qualifications of Directors ______70 Election and Appointment of Directors ______70 Removal of Directors ______70 Note: CBCA amendments on Gender Equity (Bill C-25) ______71 Statutory Duties of Directors and Officers ______71 1. Introduction to Directors’ Fiduciary Duty & Duty of Care + the ______71

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Peoples Department Stores (Trustee of) v Wise (SCC 2004) - Business judgment rule - fiduciary duty of directors to corporation (CBCA s 122(a)) – duty of care owed to corporation and other parties and standard of care (s 122(b)) – Test for challenging business decisions ______72 Peoples and Alternative Remedies ______74 BCE Inc v 1976 Debentureholders (2008 SCC) - If directors give due consideration to competing views of multiple stakeholders, they won’t be held liable for decisions that prejudice some stakeholders’ interests at the expense of others ______75 Smith v Van Gorkom (Delaware SC 1985) – business judgment rule in delaware; duty of care (s 122(b) equivalent) – board failed to act in an informed manner amounting to gross negligence ______76 2. Fiduciary Duties ______78 (A) Introduction and Main Categories ______78 (B) Taking Corporate Opportunities______78 Cooks v Deeks (JCPC 1916) - fiduciary duty will be violated by directors taking opportunity rightfully belonging to their corporation; that is fraud on the minority by the majority ______78 Canadian Aero Service v O’Malley (SCC 1974) – senior officers taking a corporation’s opportunity after resignation - modern Cook v Deeks; fiduciary duty owed by director after they leave the corporation based on Laskin’s factors – Test for whom the corporate opportunity belongs ______79 Torcana Valve Services Inc v Anderson (2007 ABQB) - fiduciary duty of key employees/directors/managers – principles in determining scope of a fiduciary’s obligations ______81 (C) Self-Dealing Transactions ______81 Common Law ______81 Aberdeen Railway Co v Blaikie Bros (1843 HL) - self-dealing contracts are invalid and impermissible on principle ____ 82 The Prohibition Against Self-Dealing Softens ______82 North-West Transportation Company v Beatty (1887 JCPC) - where K is essential to corporation’s and price/process is reasonable, a self-dealing K may be ratified by the s/hs where there’s no fraud on the minority – director can vote their own shares ______82 Legislative Response to Self-Dealing K’s – ABCA s. 120 ______83 Dimo Holdings v H Jager (ABQB 1998) - dealings between director’ and another controlled by family member not a “material interest” (although it arguably extends to family relationships) – self-dealing transaction (ABCA, s 120 application) ______83 Zysko v Thorarinson (2003 ABQB) – potential expansion of what constitutes material interest  familial interests in other corporation may be included – but fair, reasonable contract and disclosure insulates K from attack ______85 Black v Hollinger International (Delaware 2005) – passing bylaws to overpower other directors with inequitable purpose – bylaws to approve transaction not agreed to by shareholders/directors – self-dealing and diverting corporate opportunity ______85 (D) Competing Director ______86 London & Mashonaland Exploration v New Mashonaland Exploration (1891) – common law very deferential to sitting on competing board - don’t rely on this ______86 Sports Villas Resort Inc (Re) (2000 NFCA) - fiduciary duty does not preclude director from sitting on multiple boards – But director likely breaches fid. duty and creates conflicts of interest if being a director for two competing corps – no direct competition found here ______86 (E) Takeover Bids and Defensive Tactics by Management ______88 Maple Leaf foods v Schneider Corporation (1998 ONCA) - hostile takeover - to determine whether Board acted in best interest of corporation, look at the Business judgment rule – decision making process and reasonableness of decision ______88 (F) Other Sources of Fiduciary Obligation ______90

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Tongue v Vencap Equities Alta (1994 ABQB, aff’s by ABCA) - fiduciary duties arise when directors act outside their ordinary duties – breach of fiduciary duties and insider training provisions – director buying and selling shares from the corporation’s shareholders ______90 (G) Shareholder Ratification of a Breach of Fiduciary Duty ______91 (H) Lawyer Sitting on a Client’s ______91 (I) Dissenting Director – Dealt with by the s 123 of CBCA and ABCA ______92 3. Other Statutory Duties e.g. Income Tax ______93 Zwierschke v MNR (1991 CTC) - statutory duty of care under Income Tax Act – failure to pay taxes ______93 4. Directors’ and Officers’ Liability in Tort to Third Parties ______93 London Drugs v Kuehne (SCC 1992) – employees can be held negligent to client of employer, Dependning on circumstance ______94 Montreal Trust v ScotiaMcLeod (1995 ONCA) – absence of fraud, directors/officers not liable for tortious conduct unless actions take them outside scope of duties – tortious conduct must exhibit separate identity ______95 ADGA Systems v Valcom (1999 ONCA) - Directors may be liable for torts committed, even if acting bona fide in the best interests of the corporation ______96 NBD Bank Canada v Dofasco Inc (ONCA 1996) – director liable for negligent misrepresentation with EGREGIOUS CONDUCT – follows ADGA – Anns Test for Negligent Misrepesentation ______97 Hogarth v Rocky Mountain Slate Inc (2013 ABCA) - the law in Alberta is ScotiaMcLeod – intentional torts where separate identity or interest is shown attract liability - legitimate expectations of parties go to whether director is liable for promotions – negligent misrepresentation against director fails here ______98 Kent v Postmedia (2015 ABQB) – follows ScotiaMcleod & Hogarth – personal liaiblity of a director in tort requires actions exhibiting separate identity or interest from the corporation – some interest in Slatter concurring opinion _ 101 Review of Liability of Directors to Third Parties ______101 Review of Chapter 7 ______103

Chapter 8 – Shareholder Rights and Remedies ______104 Chapter Objectives ______104 Introduction to Shareholder Rights ______105 Introduction to Shareholder Remedies ______109 Kinds of personal rights as a shareholder: ______109 Oppression v Derivative Action ______109 Oppression Remedy – For Direct Harms ______109 Test for Oppression Action: ______110 Derivative Action – For Indirect Harms ______110 Steps for bringing a derivative action (Moloo v Pathak) ______110 Relief from Oppression or Unfairness ______111 Hercules Management v Ernst & Young (1997 SCC) – Negligence by financial auditors - Anns test – prima facie Duty to shareholders obviated by policy reasons – rule in Foss v Harbottle - DERIVATIVE action could have been brought on behalf of corp ______111 Deluce Holdings Inc v Air Canada (1992 ONt Gen Div) - oppression: unfair prejudice/unfair disregard of minority interests; don’t need a legal right, just an interest with a reasonable expectation – oppression can be carrie out by majority shareholders ______113 Judicial Interpretation ______114 What is Oppressive or Unfair Conduct ______114 6

BCE Inc v 1979 Debentureholders (2008 SCC) - test for oppression; oppression is an equitable remedy and fact specific; factors for unfair and prejudicial conduct; failure to protect against a potential oppression may obviate duty owed by corporation ______114 Re Ferguson and Imax Systems Corp (ONCA 1983) - fundamental change in corporation - majority s/hs make decision to disadvantage min s/hr (squeeze-out) - oppression looks at whole business conduct, fairness – procedures followed, but they were to hurt Ms. Ferguson – resolution by s/hs denied ______117 Downtown Eatery v Ontario (2001 ONCA) – bad faith intention by directors is not a requirement of oppression action – wrongfully dismissed employee can succeed in oppressive action for outstanding judgment (only statement of claim at time of re-organization) ______118 Oppression or Derivative Actions? If distinction unclear, apply for leave to bring Derivative Action! – Steps for dericative action (Moloo v Pathak) & rationales for leave applciation ______119 Pappas v Acan Windows (Nfld SC 1991) - strict/traditional approach; leave needed for derivative action where the wrong is against the corporation – disallowed oppression claim in place of a derivative action where personal harm was indirect ______120 Rea v Wildeboer (2015 ONCA) – Oppression action fails – no direct harm to individual that differs from loss of other shareholders or the harm to the corporation – misappropriation of corporate assets by directors ______121 Malata Group (HK) v Jung (ONCA 2008) - flexible approach to derivative vs oppressive actions – no bright line distinction between the actions – closely held corporation exception AND complainant was creditor ______122 Shefsky (ABCA) – traditional, strict distinction between oppression and derivative action ______123 Icahn Partners v Lions Gate (BCCA 2011) – directors dilute shares to avoid takeover bid while reducing debt – met reasonable expectations of fairness held by the shareholder/bidder by considering interests, but protected by business judgment Rule - acting in the best interest of the corporation ______123 Scope of Relief Available for Oppression/Derivative ACtions ______124 Naneff v Con-Crete Holdings (1993 ONGDCt) – Remedies for oppression are vast and within the judge’s discretion to find an equitable and fair outcome – order for family companies to be sold to highest bidder ______124 Naneff v Concrete Holdings (ONCA 1994) - oppression remedy must not go beyond what is required to rectify the oppression – must not go so far as to give something that would not be reasonable expected ______125

CHAPTER 1: CHOOSING THE FORM OF BUSINESS VEHICLE Introduction • 3 basic forms: (1) Sole proprietorship; (2) Partnership (ordinary, ltd, ltd liability); (3) Corporation • The main considerations in choosing the form of business enterprises are: o Creation and Other Formalities o Risk of Loss Involved o Power of Control o Participation in Profit/Distribution of Assets o Dissolution – How is the business terminated or brought to an end?

TYPES OF BUSINESS VEHICLES Characteristic Sole Proprietorship Partnership Corporation Creation At will of owner By agreement or By incorporation conduct of parties documents Duration Limited by life of Terminated by death or Perpetual unless owner agreement dissolved Liability of owners Unlimited Unlimited Limited Taxation Net income taxed at Net income taxed at Income tax to the personal rate personal rate corporation; dividends 7

and salary taxed to shareholders Transferability Only assets may be Transferrable by Transferable unless transferred agreement incorporating documents restrict transferability Management Owner manages All partners manage Shareholders elect a equally unless board to manage the otherwise specified in affairs of the agreement corporation; officers can also be hired • Note: A franchise is a method of doing business, not a business vehicle SOLE PROPRIETORSHIP • carried out by a natural person (individual), rather than an artificial person • no legal separation between sole proprietor and sole proprietor • all risks are to the sole proprietor and all obligations are personal obligations Creation and Other Formalities: o Simple and low cost to start up and operate o Not governed by legislation specifically built for sole proprietorships o Not a separate legal entity – No separation between the sole proprietorship and the sole proprietor o Simplest form of business organization o Still some formalities: ▪ Partnership Act s.110(1) restricts sole proprietorships and requires registration in some cases • Must register trade name if engaged in trading, manufacturing, contracting or mining, not in a partnership, and using business name other than own name or includes your name plus “and company” • If there is a failure to register when required by law to do so, their action in any court in AB (e.g. action for breach of contract against customer) can be stayed upon application by the defendant (PA s 113) o Note: struck different from stayed; stayed means held in abeyance; struck means the action is eliminated • Note: odd that there are provisions for sole proprietorship naming found in the Partnership Act ▪ Municipal bylaws may require licensing by the sole proprietorship; may also be required by condominium bylaws; zoning requirements may also be a limitation ▪ May need provincial license (e.g. real estate broker) or federal license (interprovincial trucking), depending on the nature of the business Risk of Loss Involved: • Sole proprietor has unlimited personal liability – because sole proprietorship does not have separate legal existence o Liability extends to the individual’s personal assets o The sole proprietor also assumes the risk of contractual and tortious liability o Another exposure is through employment relationships • Sole proprietor holds the entire risk o Example: judgment creditor (person who is entitled to payment because of a court decision) wants to be paid; the bank (creditor here) can enforce the debt by going after the judgment debtor – if the debtor is a sole proprietorship, the creditor can pursue both their business and personal assets (because the sole proprietor and proprietorship is one and the same) o Example: employer has vicarious liability for employee; but insurance can be purchased for protection ▪ Insurance is important for any business vehicle

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Power of Control: The sole proprietor has full control of the operation of the business

Participation in Profit/Distribution of Assets: All the benefit of the business goes to the sole proprietor

Dissolution: • Sole proprietor winds up business or stops conducting business • Partnership Act, S 111: if you registered your name as a business, can notify that the business under that name has discontinued • Death of proprietor ends the enterprise (different from life of corporation – extends beyond life of shareholders)

CORPORATION - Three types of corps: o 1/ Business corp under ABCA/CBCA o 2/ Professional corp under ABCA and Legal Profession Act (for example) o 3/ Unlimited Liability Corps Creation and Other Formalities o A corporation is a distinct legal entity created & regulated by statute. The governing statutes are the ABCA & CBCA o Corporations are separate legal entities: Can sue and be sued in its own name. o Separate from its directors, shareholders, and officers (even true of one person corporations) o There are specific filing and registration requirements to create a corporation o Extra administration required in running a corporation (separate personal and corporate finances, returns, etc.) Risk of Loss Involved • The shareholder is not responsible for a corporation’s torights, breach of contract, etc… (limited liability) o Shareholder liability is limited to their investment in the corporations (all they can lose is the money they put in). • There are exceptions to the principle of limited liability: o E.g. Personal guarantees ▪ Individual can be held liable for corporate debt if they personally guarantee the debt (enters into a contract of guarantee with the creditor bank) to guarantee the primary debtor (the corporation) ▪ But: creditor cannot take the entirety of a debtor’s assets (some minimal assets that a debtor can hold onto e.g. dental appliances) o Losses resulting from a shareholder’s negligence o Directors and officers can be liable for wrongs committed Power of Control o Corporate business is done by a relatively independent managerial group including directors & officials o There is a specific group empowered to make corporate decisions & the majority rule principle governs o There are rules, though, that protect the minority from abuse by the majority ▪ Ex: majority of s/hs cannot vote to take away one person’s shares w/o compensation Participation in Profit/Distribution of Assets o A corporation has many options in how profits & assets are distributed o Can choose to distribute profits to s/hs or keep profits in the corporation’s name for future business opportunities. Dissolution o Has a perpetual existence independent of whether shares change hands or a s/h dies o Can be dissolved by the filing of proper forms

• Lawyers can practice through a professional corporation for tax reasons o Still have unlimited personal liability (like you would as an individual) to your clients as per the Legal Professions Act

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UNLIMITED LIABILITY CORPORATION (ULC) • Exception to the principle that corporations afford limited liability to their shareholders; shareholders hold unlimited liability jointly and severally • Commonly used by US corps as a tax effective vehicle to hold business assets in Canada; they are taxed in Canada as corporations but treated as flow-through entities for tax purposes (like )

PARTNERSHIP • Partnerships in Alberta: • Ordinary p/ship: unlimited personal liability per the P/ship Act (Volzke and McDonic) • LLP: unlimited personal liability subject to s. 12 of the P/ship Act (many law firms operate as LLPs) • Limited P/ships: the general partner has unlimited liability; the limited partner has liability limited to the amount of its investment, subject to s. 64 of the P/ship Act. o often seen in oil and gas GENERAL • Governed by the Partnership Act, and also by the rules of equity and CL • Definitions: o "Partnership" [PA s.1(g)] = A relationship that exists between or among persons carrying on a business in common with a view to profits ▪ It’s a functional test: Partnership is how you’re acting (ex: sharing of profits? Shared bank account? etc) o "Business" [PA s.1(c)] = Includes every trade, occupation or profession • Indicia of Partnerships o Examine the intention of the parties and the effect of any agreement between them o Joint ownership of property & sharing of gross returns does not automatically equal a Partnership o Receipt of a share of the profits is prima facie proof that a person is a partner in the business • Each partner is an agent of the firm and of the other partner for the purpose of the business of the Partnership [PA s.6] o Each partner has a reciprocal duty of loyalty and good faith toward his or her partners (Hitchcock v Sykes) • Mutual Rights of Partners [PA ss 22 – 48] o PA s 28(e); Volzke Consruction Ltd v Westlock Foods: each partner has right to manage and control the partnership, but that is not an essential characteristic of a partnership • Partnership Agreements: Most partnerships governed by an agreement which sets out the rights and obligations of the partners • Not distinct legal entities from the shareholders/owners (unlike corporations): o “Partnership” is a reference to each individual partner, so there’s the same consequence of personal liability o But the personal liability is magnified because partners are also responsible for the other partners’ mistakes • Joint and Several Liability o Joint Liability: Where each partner has 100% liability for a judgment (this is found in partnerships) ▪ But the partner who pays 100% has a right of indemnity against other partner who did not pay o Several Liability: each separate and distinct partner can be held liable

ORDINARY PARTNERSHIP Creation and Other Formalities o Nothing required to create a partnership, it exists because people are conducting themselves together with a view to a profit (exceptions for certain ventures) o PA has default rules subject to agreement, you can K out of these rules if you so wish [PA s.28] o Partnership is not a separate legal entity from the partners. (No existence distinct from the individuals comprising it)

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o Persons associated in partnership required to file a declaration at Corporate Registry for partnership involved in “trading, manufacturing, contracting, or mining purposes in Alberta” Risk of Loss Involved • Can have elevated liability because you can be held liable for negligence of another partner o If there is a negligent partner, a plaintiff can sue all or even just one of the innocent partners. o The innocent partner has a right of indemnity against the other partners, so that the partners can share the burden of the judgment equally. • Each partner is liable jointly with the other partners to the full extent of that partner’s personal assets for all debts and obligations of the firm while they are a partner [PA s 11] • Liability for firm wrongs, the whole firm, meaning all of the partners, are liable [PA s 13] • Each partner is liable jointly, as well as severally, for anything for which the firm becomes liable [PA s 15] Power of Control: PA s.6 (see above) – Each partner is an agent of the firm and for other partners

Participation in Profit/Distribution of Assets: o [PA s.28(a)] Partners are entitled to share equally in the capital & profits of the business & must contribute equally to the losses ▪ but this default rule of equal sharing can be changed through a Partnership agreement • Dissolution: P can be dissolved upon the death of a partner [PA s.37(1)] or by illegality of the partnership [PA s.38] o Can also be dissolved by other ways (ss.36-•‐39). Also depends on the agreement made between the parties.

LIMITED PARTNERSHIP (“LP”) Creation and Other Formalities o Creature of statute o Special certificate must be filed to the registry o Consists of one or more general partners and one or more limited partners ▪ The surname of a ltd partner cannot appear in the firm name, if it does he will be liable to any creditor unless the creditor knew the ltd partner was not a general partner o Only general partners may be shown on title for any real property owned by the limited partnership o Governed by the PA through ss.49-•‐80 Risk of Loss Involved • Only the general partner has unlimited liability like in an ordinary partnership (PA s. 56) • Ltd partners are only liable for what they contribute [PA s.57] • The limited partners are investors (like shareholders) and are therefore not personally liable (except for the amount that they have invested), unless they become involved in the control of the company (pursuant to PA s. 64) o This is because when you take a level of control beyond that of a simple investor, you should stand to lose more than just your investment Power of Control o Consists of 1+ persons who are gen partners & any # of persons who are ltd partners [PA ss.51(2),(3),(4)] o General partners are allowed to take part in duties concerning governance and control o Ltd partners should not be taking part in control of the partnership or liability may ensue

LIMITED LIABILITY PARTNERSHIP (“LLP”) Creation and Other Formalities o Strict formality to setting up an LLP. Not following procedures outlined in the legislation results in just having an ordinary partnership. o LLPs can only be created in an “eligible profession” w/in the meaning of PA s.81 o LLP is basically an ordinary partnership with increased protection from liability for partners Risk of Loss Involved

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o Innocent non‐involved partners do not have personal liability to the wrongdoings of their fellow partners, subject to s. 12 of the PA o A partner is still liable to the extent of their capital contribution to the firm o Also still liable for normal debts e.g. leases • LLP Shield [PA s.12] o Partners are shielded from vicarious personal liability for the wrongful acts of other partners o The shield is not applicable to all partnerships; the Partnership Act limits the professions that can operate as an LLP (e.g. dentistry, law, accounting, etc.) ▪ Investment advisors are not eligible [McDonic] ▪ Investing is not an eligible profession for conducting business through an LLP, so the section 12 shield only protects from liability the legal work carried out by the firm’s partners, and not investing done by a partner o Shield does not apply when the partner knew of the negligent or wrongful act and failed to take reasonable steps to stop it [PA s.12(2)]

JOINT VENTURES • No definition under the Income Tax Act • Persons join together to pursue common project or business undertaking • Venturers are not agents of each other unless the specifically agree; they are also free to compete with each other • Liability is several; not joint or joint and several • Venturers are direct owners of assets used in the venture, although they may be held by a bare trustee AGENCY • Definition of Agency (Bowstead and Reyolds): o Agency is the fiduciary relationship which exists between persons, one of whom (the Principal) expressly or impliedly consents that the other should act on his behalf so as to affect his relations with third parties, and the other of whom (the Agent) similarly consents so to act or so acts. Any person other than the principal & agent are referred to as a third parties • Agency is the fiduciary relationship which enables one party (agent) to affect the legal relations of a second party (principal) • Agency requires 3 essential components: o (1) Assent – agent and principle must agree to form an agency relationship, whether express or implied o (2) Benefit – the agent must be acting for the benefit of the principal o (3) Control – the principal must have the right to exercise control over the agent. • Agency by Agreement can arise in 2 ways: o Out of a specific agreement for the agent to act for the principal in a single matter in exchange for remuneration o Out of a relationship established in a broader K (ex. Employment K where employee must enter into Ks on behalf of employer)

AGENCY AND BUSINESS LAW TYPES OF AUTHORITY o Actual Authority ▪ Can be either express or implied ▪ Both equally strong and robust ▪ Can have actual authority by way of express authority (oral or written authority directly from principal) or implied authority (implicit in the agent’s position or the specific duties that the agent is asked to perform or something that goes to the standard practice in the industry). o Apparent/Ostensible Authority (McDonic) ▪ where a person is held out as an agent when that person is not an agent, or agent is held out to possess an extent of authority greater than that which has actually been conferred.

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▪ Occurs where a third party reasonably perceives the agent to be acting w/in their authority (the agent does not have actual authority). This is because the principal has cloaked them with the authority to do something. ▪ Ostensible authority is the product of the principal’s conduct. • impression of authority that the principal has created o Agency by Ratification ▪ When a party holds themselves out as an agent where no agency exists, the principal may later adopt the agent’s acts, thus forming an agency relationship after the fact. • Implied vs. Ostensible o Implied -•‐ Actually have the authority / Ostensible -•‐ Principal leads the third party to believe that agent has this authority • If there is actual or ostensible authority, then the agent binds the principal to their actions as an agent • Why does it matters whether there is actual or apparent authority? o It matters because it will impact whether the principal can recover from the agent o BUT for either type of authority, it does not matter as to liability to a third party because the principal is bound as liable in either case LIABILITY • Agent is personally liable for any torights they commit even though the agent is acting on behalf of the principal • Principal may be vicariously liable for agent’s torights while the agent is acting w/in actual authority or apparent authority • To hold the principal vicariously liable: o (1) An agency relationship must exist o (2) The agent must have been acting for the benefit of the principal, and o (3) The agent must have acted w/in the scope of their express, implied, or apparent authority

DUTIES • Duties of Agent o Agent owes fiduciary duty to principal & must show utmost good faith to principal. A fiduciary must not personally profit from their position nor place their interests in conflict with those of the principal. Duties include: ▪ Full disclosure of material info that would affect the principal’s position ▪ Avoiding conflicts of interest or multi-•‐representation (representing two principals in the same trans) ▪ Avoiding secret commissions or profit from transactions • Duties of Principal o Usually set out in K creating agency relationship (ex: indemnify A against losses incurred while carrying out duties)

PARTNERSHIP • Alberta Partnership Act [ss 13 – 15] o Each partner is an agent of the firm (s 6) o Firm can be held responsible for agent’s actions if there was express or implied authority [s.13] or apparent authority [s.14] o All partners are jointly and severally liable for any liabilities arising under ss. 13 & 14 [s.15] VOLZKE CONSTRUCTION V WESTLOCK FOODS (ABCA 1986) – FUNCTIONAL TEST FOR DETERMINING PARTNERSHIP EXISTENCE Ratio: Functional test for determining partnership – people are partners because they act like partners. Facts: W (mall) was co-•‐owned by Bonel Properties (80%) & Westlock Foods (20%) & Dave Shefsky (dead) was the main s/h in WF (Defendant). • V was the gen K’er who did work on W. It had not been paid its final acct. • V sued WF alleging that they were partners with BP & thus jointly and severally liable for the unpaid balance. 13

• At trial: respondent held not liable Issue: Are WF and BP partners or mere co-owners? Held (Moir JA): Court of Appeal overruled the trial judge; They were partners & thus WF was 100% liable for the unpaid balance ($76,928.88 plus interest) with a right of indemnity against BP. • There are many indicia of partnership (especially in relation to the statutory definition) • Functional test for determining partnership – people are partners because they act like partners. o There was intention to be partners & control is not a necessary element of a partnership ▪ Parties had agreed to share the costs of developing the business o Profit sharing, loss sharing (agreement to share costs of renovation), shared bank account, and they spoke of themselves as partners MCDONIC ESTATE V HETHERINGTON (ONCA 1997) – LIABILITY OF PARTNERS IN AN ORDINARY PARTNERSHIP (NOT LLP) LAW FIRM FOR MISCONDUCT OF ONE PARTNER – TESTS FOR AUTHORITY Ratio: Must determine the nature of the partner’s activities as compared to the nature of that specific business and then examine whether express, implied, or apparent authority was granted to that partner; partners are vicarious liable for the investments made for clients by another partner, without clients’ approval and without protecting their interests when it is in the ordinary course of the firm’s business • Tests for authority: o Per court, EXPRESS [actual] authority flows from the authorization of the other partners; IMPLIED [actual] authority flows from acts done in the ordinary course of the business of the firm. o Per court, APPARENT authority flows from a consideration of whether a person dealing with the partner would reasonably regard the partner as acting on behalf of the partnership. [Put another way, have the other Partners clothed Watts with the apparent authority to do what he did?] Facts: Ms. McDonic and Ms. Cooper retained Watt (rogue partner who dealt badly) to make their investments; McDonic estate sued the firm (H), who could in turn sue the rogue partner • The sisters sued Watt and the partners for negligence • The rogue partner was disbarred by the Law Society of Upper Canada so could not afford to pay the liability, he was broke; similar instances could arise where the rogue partner leaves the country • Trial Court: Watt was acting as an investment agent, which is not within the ordinary business of the law firm, so the firm’s partners are not liable o So there was no actual authority (not within the ordinary business of the firm) and not apparent authority because the other partners did not know what Watt was doing Relevant Legislative Provisions (AB Partnership Act): • Liability of firm for wrongs 13 When, by a wrongful act or omission of a partner acting in the ordinary course of the business of the firm or with the authority of the partner’s co-partners, loss or injury is caused to a person not being a partner in the firm, or a penalty is incurred, the firm is liable for it to the same extent as the partner so acting or omitting to act. • [Note: This provision is the equiv. of s. 11 on the Ontario PA referred to in McDonic] • Misapplication of money 14 The firm is liable to make good any loss when (a) one partner acting within the scope of the partner’s apparent authority receives the money or property of a third person and misapplies it, or (b) a firm in the course of its business receives money or property of a third person, and the money or property so received is misapplied by one or more of the partners while it is in the custody of the firm. • [Note: This provision is the equiv. of s. 12 on the OPA referred to in McDonic Issue: Are Watt’s partners liable to the plaintiffs for their loss based on actual or apparent authority? Held: -•‐ Appeal allowed; Partners liable for acts of Watt. Watt acted under implied authority, or at the very least under apparent authority; judgment granted against each of the partners

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• PA s.6 -•‐ Every partner is an agent of the firm and his other partners for the purpose of the business of the P and all partners are liable for the acts of other partners for anything done in the usual way of business, unless the partner had no authority to act for the firm in the particular matter. Tests for authority: • Per court, EXPRESS [actual] authority flows from the authorization of the other partners; IMPLIED [actual] authority flows from acts done in the ordinary course of the business of the firm. • Per court, APPARENT authority flows from a consideration of whether a person dealing with the partner would reasonably regard the partner as acting on behalf of the partnership. [Put another way, have the other partners clothed Watts with the apparent authority to do what he did?] Application to the facts: • Express authority: In this case, there was no express actual authority • Implied authority – question is whether Watt’s activities were within the scope of his implied authority as partner – Was it within the ordinary course of business of the firm to provide investment advice? o Watt’s activities were the same as those carried on by the firm for other clients. It did not matter that law firms typically do not provide investment advice, as doing so was in the ordinary course of business for this firm. o Nature of activity, not the manner in which that activity is performed, will determine whether that activity falls within the scope of the firm’s ordinary business • Does not matter that the other partners were not negligent in how they provided investment advice • Apparent authority o The representation by the principals (H) of Watt’s apparent authority is by allowing him to be member of the firm, to have an office, and conduct business as a partner with the firm o The sisters were dealing with Watt and reasonably assumed that he was operating on behalf of the law firm Note: In McDonic, if the firm was an LLP rather than an ordinary partnership, they would still likely have been held liable CHAPTER 2: A BACKGROUND TO CORPORATION • Corporations can be created either in a province (ABCA) or federally (CBCA) • The ABCA and CBCA are comparable but differences do exist between the two. • Considerations when incorporating: Advantages Disadvantages • Limited liability • Expensive to start • Extra financing through shares • Closely regulated • Differing degrees of participation • Extensive record keeping • Tax advantages • Possibility for double taxation. • Prestige of being a corporation • Transferability of shares. • Qs to ask your client when deciding whether to incorporate: o Is there a need for limited liability? What are the risks involved w K and tort liability? o Is there a need for perpetual existence? o Where will the financing come from? o What degree of participation is envisaged? o Are there any tax advantages associated with incorporation? o Should they incorporate provincially or federally? ▪ Federal corporations may be perceived as more prestigious but is it necessary? ▪ Federal fees are slightly higher than provincial fees ▪ Although ABCA & CBCA are very similar, the difference may be important

Three Categories of Corporations

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• Business Corporations - To create a business corporation you have to follow the rules in the ABCA and CBCA • Professional corporations under the ABCA and the Legal Profession Act (for example) (ie. Doctors, lawyers, dentists, accountants, etc…) ▪ If practicing law through a PC, client is still able to sue for personal assets of the lawyer ▪ Other professions have similar legislation to the Legal Profession Act ▪ If the professional is neg, there is unlimited liability, however there are tax benefits • Unlimited Liability Corporation - shareholders have unlimited liability but there are tax advantages

Debentures • Special type of debt for a corporation • Come in two forms: o (1) secured (debt is secured against a specific interest) o (2) unsecured (simply a mass of debt) • Secured debentures can be secured in two ways: o Fixed security debenture – A loan is secured against a specific item ▪ subject matter under security interest stays the same (e.g. piece of personal property) o Floating charge debenture – deployed where subject matter of security does not stay the same (this was the case in Salomon) ▪ on default, the debtor clamps down on all the current assets SALOMON V SALOMON (1897 ENG HL) - LIABILITY OF DIRECTORS IS PROTECTED UNDER A CORPORATION – INDIVIDUALS CAN INCORPORATE Ratio: In the absence of any fraud, a corporation, properly incorporated under the Act, will protect the directors from liability arising upon bankruptcy; If you want to shelter yourself from unlimited liability, you as an individual are free to incorporate • A corporation is a separate legal entity; a shareholder can give a loan to the corporation in which it holds shares; a corporation is not an agent for a (principal) shareholder Facts: Aron Salomon was running a shoe business as a sole proprietor, & wanted to get rid of the unlimited personal liability by incorporating (note that if you want to do this now, there can be personal tax liabilities associated unless you do it correctly) • 1 rule at the time for creating corps was that you must have 7 s/hs. So, AS gave 1 share to each family member • AS Ltd. then agrees to purchase the assets of AS the individual for the purchase price of £39,000 (which seemed like a large amount) • The corporation pays this purchase price by: o issuing more shares (AS gets 20K shares) which are valued at £1 each. o issuing a debenture (a legal I.O.U.) in the amount of 10,000 pounds to Aron. [Note: a debenture is a document that evidences a debt and in this case provided for a floating charge.] ▪ Remember: debtors are paid before shareholders so they are a priority interest o providing a few other benefits. • AS is now a creditor for his own corporation for £10K (and also a highly protected secured creditor to his own co) • Soon thereafter, Salomon Ltd. started to experience financial reversals due to a depression in the boot and shoe trade and o To help Salomon Ltd., Aron lent money to the company. He also got his debentures cancelled and reissued to Mr. Broderip as security for a 5000 pound loan to Aron the proceeds of which Aron gave to the company. o When Salmon Ltd. failed to make a required interest payment to Mr. Broderip under the debenture, Broderip had a receiver appointed to force the sale of corporate assets. • The corporation had trouble keeping its payments to B, an investor, and the corporation went into bankruptcy. • Claims filed with the liquidator of Salomon Ltd. were as follows: 16

o Broderip on the debenture; o Aron on the balance of what was left on the debenture once Broderip was paid out; and o Unsecured creditors ▪ ***Once Broderip was paid off, there would only be about 1055 pounds left and, if Aron were to receive this amount as the next secured creditor in line, there would be absolutely nothing left for the unsecureds. • B was paid out (because he held the debentures, and was therefore a secured creditor) but the unsecured Creditors were not paid o The unsecured creditors wish to go after Salomon directly to satisfy the debts • Appeal Court determined that AS was guilty of fraud and personally liable to the creditors Issue: Is AS the individual personally liable for the debts of AS Ltd? Was AS a legitimate creditor of AS Ltd? Held: Appeal allowed decision; AS is not personally liable for the debts of the corp and he remains a legitimate creditor of the co. • Creditor Argument 1: AS Ltd. was not properly constituted under the Act o HL said the Act only asks for 7 shareholders and this was complied with (doesn’t matter if they’re related) o There were no other requirements under the Act (those requirements were being added by the courights below) • Creditor Argument 2: The formation of the corporation was a “scheme” to allow AS to carry on business in the name of the corporation o There is nothing wrong, immoral, or illegal with the one-person corporation o It is the legal right of an individual to protect themselves from personal liability by incorporating o the Act does not say that small corporations would be treated differently • Creditor Argument 3: The corporation was being used as Aron Salomon’s agent, as such, AS, as the principal, has to indemnify the corporation o Either the ltd corporation was a legal entity or it was not. If it was, then the corporation owns its own assets, the business belongs to the corporation and not to Aron Salomon, the individual. o If the corporation was not a legal entity, then it cannot be an agent o The corporation is not an agent of AS the individual, because it is running its own business and is a separate legal entity. • Creditor Argument 4: Aron Salomon defrauded the corporation because he charged too much when the corporation purchased the assets of the sole proprietor o No fraud here because the shares are worth what the market says they’re worth, not necessarily £1 per share o It is not a fraud on the other shareholders because they knew exactly what the transaction would be and agreed to it o It is not a fraud on the creditors because there is a corporate registry whereby the creditors could find the debentures; they were not misled or defrauded Comments: Shareholders can lend to the corporation and be a very high level secured creditor (and that is not impeachable) • ABCA s.46: Shareholders of a corporation are not as shareholders liable for any liability, act or default of the corporation except… (all they stand to lose is what they invested in the corporation) • ABCA s.16: Corporation is a separate legal entity • It is up to the shareholders to determine from whom and how they receive loans or debentures from other parties HISTORY OF CORPORATIONS Kinds of business vehicles prior to the 1862 Act, per Palmer, Palmer's Company Law, 2nd ed. (1898): 1. ORDINARY P/SHIPS 2. COMPANIES INCORPORATED BY ROYAL CHARTER

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*originally, members had no personal liability but this was changed by 7 Will. 4, c. 73 which attached liability to the shares in capital, and sometimes with an additional liability of the like or double the amount in the event of a winding up" • This was a costly approach to corporations 3. COMPANIES INCORPORATED BY SPECIAL ACT OF PARLIAMENT (for larger undertakings, such as canal construction) • In many cases, liability of members is limited to amount of their shares (at 4) • an impracticable approach for most business interests – would have to lobby the government for a special Act 4. UNINCORPORATED COMPANIES CONSTITUTED BY CONTRACT (common law companies) o these companies became common until the early 18th century; they were frequently fraudulent o An unincorporated company has always been regarded by the law as a partnership with special features; one of these special features was the transferability of its shares. o Response in Britain by the Bubble Act: ▪ This Act made it unlawful to create common law companies, which would buy and sell stock ▪ South Sea Company – told by the King that they could trade in the seas off the coast of South America • Shortly after the Bubble Act, the company collapsed and revealed that it was a ponzi scheme; many people were ripped off and were not paid back for their investments • Operating a ponzi scheme – investor is taking money as investments, paying off early and top investors, so the lower level investors will never be paid; the money goes into the pockets of people at the top of the pyramid o Example: Bre-X reporting the finding of gold and reporting high estimates with fraudulent test results ▪ No actual gold was taken out of the ground, while the company had a 6 billion dollar value o People kept buying Bre-X’s shares and massive investments were made by nearly everyone o when the gold tests were found to be fraudulent, the company collapsed and the investors lost their money 5. Subsequent Events • 1825 Repeal of Bubble Act • Enactment of the Joint Stock Companies Act 1844 (facilitated legal proceedings and the holding of property but did not confer limited liability per Palmer at 7). • Companies Act, 1855 o Per SKO [some footnotes omitted], thirty years after the Bubble Act’s repeal -- Parliament took another step commensurate with laissez-faire ideology. o It legislatively granted limited liability to corporations in 1855. • The Companies Acts, 1862 to 1898 o Per Palmer, at 8, the main object of the Act of 1862 was to throw open to all the coveted privilege of carrying on business with limited liability. 6. In sum, modern statutes are classically identified as providing for: • Limited liability • Incorporation as of right subject to the paper work being done properly (versus being discretionary) • Requirement or registration/public disclosure of documents • Provisions to protect members such as the requirement of periodic meetings and the auditing requirement CORPORATE CONSTITUTION • Why corporate constitutions important: o Corporation must act in accordance with its constituting documents o Govern how disputes are resolved between shareholders, directors, etc.

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PURPOSE • Corporate Constitutions are basic documents that govern the corporation. o They are essentially derived from the regulations (ABCA, CBCA) • The fundamental terms governing the corporation concerned. • Come into existence by either special acts or general acts of incorporation

Corporate Constitution Includes: o Articles of incorporation ▪ These “contains only the most basic provisions concerning the corporation: its name, the structure of its share capital, the place of its registered office, the size of the board of directors, and any restriction on the business in which it may engage.” o Bylaws. ▪ These are rules “adopted by a company for the regulation of its own actions and concerns, and of the rights and duties of members among themselves.” o Unanimous Shareholder Agreements (USAs) under s. 146 of the ABCA (s/h rights defined w/in a corporation) CORPORATE STRUCTURE • Corporation o Separate personality o Perpetual existence • Shareholders o Equity claimants that invest for a return o Claims or rights in terms of voting rights, dividend rights, and rights on liquidation o Liability limited to amount of investment o Generally do not have any managerial power o Elect the board of directors based on a majority vote (if they hold a voting share) ▪ One of their most important powers • Directors o Appoint officers to manage the corporation o Make major decisions on corporate policy (could consist of just one director) o Oversee corporate strategy o Are elected by shareholders o The duty of the directors is to the corporation, not to the s/hs [ABCA s.122] o Main job of the directors is to keep an eye on the CEO (the Board of Directors has the ability to fire officers) • Officers o CEO, President, Vice-•‐President, Secretary, Treasurer, etc... o Manage the corporation and hire others to assist in management and carry on business of the corporation o Act in the best interest of the corporation (not the s/hs if there is a conflict) o Are hired or fired by the Board of Directors o The CEO is responsible for everything at the firm (must hire and fire senior executive team etc…) • The three groups often have disputes – part of what the corporate Constitution does is sort out the outcome of these disputes • Employees ▪ Mostly governed by employment law ▪ S 119 of ABCA – directors have liability for employee wages in some situations • Groups external to the corporation: o Creditors ▪ Certain rights granted under the ABCA METHODS OF CREATING CORPORATE CONSTITUTIONS

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• Corporation comes into existence via: o Special acts of incorporation: ▪ Legislation creates corporations for specific purposes (e.g. telephone companies, universities, Crown corporations) ▪ Not available to regular businessmen o General acts of incorporation (ABCA, CBCA): ▪ Generic piece of legislation whereby if you follow the rules, you will be a corporation ▪ Sets up global set of rules on all corporations created under these acts ▪ Used to create corporations that engage in business of all kinds and descriptions ▪ This is so for the majority of business corporations • Kinds of General Acts of Incorporation (in Canada, there are 3 basic models that the generic Acts adopt): o Letters patent, memorandum of association, articles of incorporation LETTERS PATENT (ONLY APPLIES IN PEI & QUEBEC) • Involves an application being made to the Crown's representative who issues a document known as the letters patent • Letters patent is the constitution of the new corporation and includes its name, purpose and share structure (By-•‐ laws are in a separate doc) MEMORANDUM OF ASSOCIATION (MOA) • Patterned after the English general act system • In AB only used for not-•‐for-•‐profits • Achieved by registering a Memorandum of Association & Articles of Association (in-•‐house rules like by-•‐ laws) with the registrar of the appropriate gov’t office • Memorandum sets out the constitution, name, share capital, restrictions. • Articles set out the day-to-day operating rules • Note: BC has new legislation which is a hybrid between this and articles of incorporation ARTICLES OF INCORPORATION • Articles of Incorporation are filed with the appropriate gov’t body which issues a certificate of incorporation • Recites the corporation’s name, purpose, capital structure and general matters • Constituting Docs: o Articles: General matters (name of company, corporate structure) o By-•‐laws: day to day operating rules/internal governance (are not filed with the corporate registry) o Statute o Unanimous Shareholders Agreement (USA) (Usually in smaller companies)

CANADIAN JOREX LTD V 477749 ALBERTA LTD (ABCA 1991) – RESIDUARY POWER HELD BY CORPORATE DIRECTORS - POWER TO CANCEL SPECIAL MEETINGS - SHAREHOLDER REMEDIES Ratio: s.102 CBCA (s.101 ABCA) confers residuary power on the board where power not expressly limited by a corporation’s by-•laws. Facts: Directors called a special meeting and before the meeting they cancelled it • 477749 Alberta (a shareholder of Jorex) sought a declaration that the cancellation of the meeting was of no force and effect • S/hs wanted to examine the auditor & they argued that they would lose the right to do so if the meeting was cancelled • At trial, the trial judge found that the federal corporation could not cancel a special meeting that they called in advance of its scheduled date; it was ruled that the cancellation was of no force or effect Issue: Do the directors of a federal corporation have power to cancel a special meeting called by them ahead of its scheduled date? Held (Fraser JA): Appeal allowed; directors can cancel a special meeting of s/hs.

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Reasoning: • Jorex’s argument: o Unless the CBCA or the bylaws expressly prohibit the directors’ cancellation of special meetings, the directors’ residual powers under s. 102 include the right to do so o Residual power to manage a corporation’s affairs rests with the directors • Respondent (shareholder) argument: o Bylaws do not provide for the cancellation of a meeting, nor does the CBCA o The bylaws do outline that the adjournment of a meeting must be conducted by the shareholders, the directors therefore lack the authority to a cancel a meeting once it is called • Reasons why the Court rejected the narrow approach to restricting the power of directors: o Under the Canadian system, ABCA s. 101 gives power to manage to the directors; if that power is not taken away by the corporation’s constituting documents (e.g. bylaws or USA), then the power continues to lie with the directors, rather than the shareholders ▪ Directors’ powers to manage a corporation’s affairs are unlimited except to the extent that powers have been circumscribed by a USA or by bylaws ▪ The Court did not follow the British precedent (Smith) because Canada does not follow the same model of incorporation (memorandum of association) on this particular point of residual powers o A rigid approach to cancellation of meetings would lead to unreasonable results ▪ unreasonable to say that directors can call a special meeting but cannot cancel it. o Directors have to use their powers for the best interests of the corporation; there are no events or allegations to the contrary here (otherwise oppression remedies are unavailable) o The shareholders have other methods of calling a special meeting and upholding their right to a meeting Remedies which s/hs in this case could have pursued instead: o S.142 ABCA [meeting requisition]-•‐ Requisition the calling of a meeting ▪ The s/hs can requisition a meeting. The directors cannot cancel this meeting (not incl’d in their residual power) because the general power to cancel is read in the light of statutory provisions limiting it. o S.242 ABCA – Oppression remedy ▪ Can argue the way the directors are using their power to run the business & affairs of the corporation is oppressive. ▪ Oppressive behaviour is that which unfairly disregards or is unfairly prejudicial or denies a reasonable expectation of a s/h. • The court had broad authority to provide various remedies o S.143 ABCA [meeting called by court] – Can apply for a court order directing meeting proceed when it has been cancelled (s 144 of the CBCA) o S.132 ABCA [AGMs and special meetings] – Director’s power is limited by statute that AGM must be held every 15 months (or 18 months after creation) ▪ Do not have the power to cancel an AGM that would contravene s.132 (the financial statutes of the corporation are presented at the AGM and this is where the auditor automatically comes) ▪ Two kinds of meetings (AGMs and special meetings) o S.109 ABCA [removal of directors by ordinary resolution] – Vote out the directors ▪ Can do this by ordinary resolution at a special meeting (subject to a USA) ▪ Presumptive rule, you can vote out the directors on a majority vote. • Problem – minority shareholders won’t have the power the remove the directors because a majority is needed to remove the directors by this strategy o S.146 ABCA Enter into a USA ▪ Pursuant to a USA, the parties could remove the directors power to cancel o s 102(5) ABCA [bylaw proposal] – Bylaws ▪ Could put a bylaw in place that removes the directors’ power to cancel

Note: there are two different kinds of meetings 21

▪ AGM – s 132(1)(a) ▪ Special Meeting – s 132(1)(b) • Note: if the directors are treating the minority shareholders improperly, the shareholders can seek remedies for oppression o This was not the case in this scenario

CHAPTER 3: THE PROCESS OF INCORPORATION PROCEDURES

• Corporations are creatures of statute and have to be incorporated to come into existence • None of these acts requires the people incorporating to be resident of the place in which they are incorporating

CHOOSING WHERE TO INCORPORATE • In Canada, most jurisdictions use the Articles of Incorporation model and are largely similar. • The corporate law statutes are similar in different jurisdictions across Canada o However, only AB and Nova Scotia allow for unlimited liability corporations (important for tax purposes) o Delaware is the state of choice for incorporating in the United States • Federal (CBCA) v Provincial (ABCA) o Incorporate provincially if you will conduct business only in that province o Incorporate federally (CBCA) if your corporation will conduct business in multiple provinces o A fed incorporated corporation cannot be obliged to change its name because it conflicts with a provincial incorporated corporation ▪ The CBCA may give you superior name protection (because you cannot be compelled to change it) but the CBCA corporation can be sued in tort for confusing the public (called passing off). • Continuance o When corporation is established in 1 jurisdiction would like to enter another, this is not the same as doing business in another jurisdiction o The effect of continuance is the same as if the corporation had been dissolved in its home jurisdiction & simultaneously reincorporated in another. ▪ S.189(4) ABCA: Must be approved by special resolution (2/3 of the votes cast) ▪ S.189(1)(b) ABCA: Need the registrar’s approval to proceed. ▪ S.191 ABCA: S/hs have a right to dissent; have appraisal right (entitled to be bought out at fair market value) HOW DOES ONE INCORPORATE UNDER THE ABCA? • If incorporating under alphabetic or word name, search the proposed name for availability o ABCA s. 12(3) (naming requirements) o If available, the search service will issue NUANS and reserve it for 90 days (not guaranteed though) o A NUANS report is required when granting new corporate names. It lists similar existing names; used to determine availability of a proposed name. ▪ Ensures that new names don’t create confusion with others that are already existing o Have a registered office address in AB [s.20(1) ABCA] o Follow procedures as outlined in s.7 of the ABCA ▪ File documents & fees (articles of incorporation, notice of address, notice of directors, NUANS (if applicable)) with registrar ▪ When sending documents to registrar, also send a ‘notice of directors’ [s.106 ABCA] o On receipt of the documents required under s.7 & the requisite fees, the Registrar shall issue a certificate of incorporation [s.8 ABCA]

WHO CAN INCORPORATE?:

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• 1+ persons may incorporate by signing the articles of incorporation [s.5 ABCA]

REQUIRED INCORPORATION DOCUMENTS • Under the CBCA, the following forms are required, plus a $500 fee. 1. NUANS search results (name search) 2. Articles of Incorporation - Form 1: (most important) ▪ You want a lot of flexibility in the articles of incorporation. ▪ According to ss. 9, a corporation comes into existence on the date of its incorporation ▪ Corporate Name: You can have a numbered name to eliminate hassle ▪ Province where registered office located ▪ Class of Shares and max number of shares corp is authorized to issue • Defines corporate share structure • The default is no restrictions on share transfer (usually not a good idea) ▪ Number of directors: Number of min and max (ss.107: if a corporation is to have cumulative voting, it must have a fixed number of directors) ▪ Restrictions on share transfers: Often this space is left blank to allow for flexibility ▪ Miscellaneous Rules: Can leave this blank • E.g. borrowing powers, quorum for directors’ meetings ▪ Signatures: You cannot transfer these electronically 3. Form 2 – Notice of address (Initial Registered Office) ▪ Must have registered office in Alberta (s 20(1)) 4. Notice of Directors (First Board of Directors) and Change of Directors: ▪ Whenever directors change, must file the changes within 15 days (s. 113(1)) ▪ s.106(1) ABCA – At time of sending articles, incorporators send the Registrar a notice of directors ▪ s.106(1) CBCA – At time of sending articles, incorporators send the directors a notice of directors & the director files it • s.104(1) after issuance of certificate of incorporation meetings are held to hammer out details

RESTRICTING THE TRANSFER OF SHARES UPON INCORPORATION: (WHY DO IT?) o Often used in small corporations where the s/hs are the directors, officers, managers, etc… o Ensures that shares are not transferred to someone you do not want o When you have a share transfer restriction it helps you meet the definition of a “private issuer” & qualify for the private corporation exemption which provides for less burden by the Securities Act

CONSEQUENCES OF INCORPORATION • if not incorporated properly, you will have personal liability • Corporation name must be prominent on cards, Ks, and cheques to avoid personal liability. • If using a separate trade name, it should always appear in conjunction with the corporation’s full name • May be necessary to register the trade name in accordance with s.110 of the Partnership Act • Client should understand the separate roles of the directors, officers, and s/hs • Directors subject to duties and liabilities laid out in the ABCA, CBCA • AGM must be held and annual returns must be filed to keep the corporation in good standing • Licensing & Registration: Requires both municipal & provincial business license (Some licensing under specific legislation may be required as well) CORPORATE RECORDS AND OTHER MATTERS • S.21 ABCA (s.20 CBCA) – States what must be kept at the Corporation’s office o corporation shall prepare and maintain certain documents o e.g. minutes of meetings, notice of directors, notice of change of directors, security registrar, copies of financial statements, registrar of disclosure (s. 120), resolutions of directors

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• S.23 ABCA (s.21 CBCA) – States which corporate records are open for examination and which are not UNANIMOUS SHAREHOLDER AGREEMENTS (USAS)

• Generally found in closely held or small corporations • Device by which closely held corporations (with restricted share transfer) can act like a partnership while having the standing of a corporation • What can be accomplished by a U.S.A: o Can restrict the power of directors to manage (ABCA s. 101(1)) o Often deals with circumstances by which shares can be transferred ▪ E.g. right of first refusal (other shareholders will have option to purchase chares before they are sold to the public) o Can outline dispute resolution ▪ Can affect entitlement of shareholders to demand dissolution of the corporation (s. 215(1)(b) o Rules for special resolution and general resolution meetings ▪ Through a USA, you can change/tighten the rules to allow something to happen under a special resolution (2/3) instead of under a general resolution (simple majority) ▪ Example: Removal of directors by shareholders (s. 109(1)) • s.109(1) ABCA requires ordinary resolution to remove directors, USA could modify this o Can affect the powers of the s/hs (some ABCA provisions give s/hs rights subject to losing them in USA) ▪ Ex: in ABCA only, s.109 – ‘subject to a USA’, s/hs may by ordinary resolution, remove directors…” o Entitlement of shareholders to demand dissolution of the corporation (s. 215(1)(b)) • Governed by provisions in the ABCA (and the CBCA). Difference between USA under ABCA and CBCA: o ABCA ▪ S.146: Broad scope of what a USA can encompass (much broader than CBCA); restricts the powers of directors to manage the affairs of a corporation ▪ S.146(7): If s/hs take directors’ powers, they also take the liabilities that come along with that management power ▪ S.101(1): Subject to the USA, the directors can manage a corporation o CBCA ▪ s 146(1): allows for restriction of directors’ powers to manage or supervise management of the corporation ▪ more limited in what can be accomplished by a USA • USA is governed by the ABCA; it is part of the corporation’s constituting documents o Must be complied with by directors and shareholders o Can get a court order to enforce o S.248 ABCA: Can go to court and get a compliance order if someone is not following a USA • What is the difference between a USA and an ordinary s/h agreement? o USA is part of the Act and ranks on par with articles of incorporation and bylaws o Since directors are obliged to abide by the USA, s/hs have power to oblige abidance (ex: s.248 ABCA) • s 146(8) ABCA: USA can only be amended with the written consent of all those who are s/hs at the effective date of the amendment

CICCO V 609940 ONTARIO INC (TRUSTEE OF) – U.S.A NOT BINDING ON 3RD PARTY WITH NO NOTICE OF RESTRICTIVE AUTHORITY OF DIRECTORS – BANKPRUCTY ASSIGNMENT NOT ANNULLED BY USA Ratio: A USA may not operate to bind a third party dealing with the corporation who has no notice of the restrictive authority of its directors • Anytime a dispute arises check: (1) Articles of Incorporation, (2) USAs, (3) CBCA or ABCA Facts: Cicco and Bertucci are directors who each owned 50 % of shares in a company & entered into a unanimous shareholder agreement (USA) which said that all decisions affecting the corporation needs both of their consent

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• In breach of USA, Bertucci adopted a directors’ resolution that the corporation makes an assignment in bankruptcy • Upon learning of the assignment, Cicco moved for an annulment of the assignment. He claims that because director's resolution enabling the assignment was in breach of the U.S.A., the assignment was unauthorized. Issue: Should the assignment into bankruptcy be annulled due to it contravening the USA? Held: No. Bankruptcy assignment will not be annulled. Breach of the USA gives Cicco a right of action, but because the corporation was insoluble, the assignment should hold Reasoning: • Test for annulment of assignment in bankruptcy: o Court must conclude that the assignment ought not to have been made or filed (a wide ranging and flexible test) • Assessed in terms of the bankruptcy context with policy considerations o Effect of USA was to limit the authority of the director, but that is entirely an internal matter between the director and the share holders o Bertucci may be accountable to shareholders for failure to comply with the agreement, but that does not render the assignment void. o Assignment is for the benefit of the creditors and the function of the trustee is to protect their interest o It is the policy of the BCA that assets of an insolvent company be distributed to the creditors according to the scheme of priorities there described o So the USA is binding on the parties within the USA, but does not dislodge proceedings such as an assignment in bankruptcy CORPORATE BY- LAWS • Provide global in-•‐house rules & responds to rules suggested by ABCA o Provides for general rules & sets up regulations for managerial action • Generally deal with the inner workings of a corporation including s/h rights, who the auditor will be, etc… o These must be adopted by the s/hs under s.104(2) ABCA. • Not required to have bylaws & ABCA does give some guidance but does not provide details for all areas of the corporation • By-•‐laws will trump the legislation so where legislation says its okay for directors to do something and this is forbidden under the by-•‐laws, the s/hs can sue the directors • New bylaws or amended bylaws: must be submitted by the director at the next meeting where the s/hs who vote on whether or not to adopt them [s 102(2) ABCA] o S. 102(4) - if bylaw repeal or amendment is not submitted properly or shareholder refuse to consent, then the action fails • E.g. bylaws: S. 131(3) o Subject to limitation, shareholder entitled to attend meeting can attend by electronic or other means of participation o Can do this if the bylaws so provide or all shareholders at the meeting consent • Two perspectives on bylaws o 1) make them lengthy and detailed – including content that is already recited in the ABCA ▪ Problem – if the ABCA changes, have to go back and change the bylaws o 2) only including bylaws needed to address specific issues that are of concern and not reciting provisions of the ABCA • Under s.163 ABCA, s/hs can vote not to appoint an auditor (good for small corporation) and make themselves responsible for the audit DIRECTORS’ ORGANIZATIONAL MEETING • Once bylaws are drafted, the certificate of incorporation is obtained & there must be an organizational meeting [ss.104] • S 104(1) – directors can adopt a corporate seal at an organizational meeting (although not required as per s 25)

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KINDS OF CORPORATIONS

o The classification of the corporation dictates the degree to which it must comply with disclosure requirements and certain other restrictive provisions of the ABCA • (1) Distributing Corporation ▪ A corporation which is a reporting issuer for the purposes of the Securities Act, and in general terms is a corporation, any of whose issued shares or securities were part of a distribution to the public, and which has more than 15 shareholders ▪ This kind of corporation is more regulated by the ABCA than its non-distributing counterpart. ▪ Ex: a distributing corporation may not dispense with an auditor [s.163(1) ABCA] and must have no fewer than 3 directors [s.101(2) ABCA] • (2) Non-•Distributing Corporation o non-distributing means not selling shares to the public o Certain provisions in the ABCA relax requirements for this type of corporation ▪ E.g. corporation that is non-distributing can dispense with an auditor (idea is that auditor is not needed for a small company) and need only have one director o Corporation with fewer than 15 shareholders ▪ These corporations are most common and have the least amount of regulation; they, by definition are not a distributing corporation ▪ Excluded from requirements of the ABCA pertaining to non-distributing corporations with more than 15 shareholders • reason: small corporation does not need the same level of protections built in to limit large numbers of shareholders o Corporation with more than 15 shareholders ▪ Must comply with proxy solicitation requirements and must prepare a list of shareholders for shareholders’ meetings ▪ More heavily regulated LOSS PREVENTION – CODE OF PROFESSIONAL CONDUCT

• S.2 of the Code of Professional Conduct -•‐ A lawyer must not act for more than one party in a conflict or potential conflict situation unless all such parties consent and it is in the best interests of the parties that the lawyer so act o Conflict = a situation where the parties are prima facie different in interest but there is no dispute among the parties in fact e.g. estranged spouses, lessor and lessee o Potential Conflict = situation where the parties are prima facie aligned in interest & there is no dispute among them in fact, but the circumstances are such that there is a possibility of differences developing e.g. co-plaintiffs, co-defendants, co-insured, beneficiaries under a will • Acting in a conflict or potential conflict situation increases a lawyer's vulnerability to charges of professional misconduct • Consent includes having to let all the parties know that you are being retained to act for all of them (and the pros/cons of this situation). o Ultimately if they go forward, must underscore that you are acting for all of them, no info received in relation to the matter is confidential as between all the parties, and if a conflict develops which cannot be resolved, you might have to cease acting for some or even all of them. • Not mandatory that disclosure or consent is in writing, but lawyer has onus of establishing adequate disclosure and consent, so getting it in writing is better. • 3 things to put in writing when acting for more than one shareholder: o That you are being retained to act for all of them o No confidentiality amongst the shareholders o If a conflict develops which cannot be resolved, the lawyer may have to withdraw completely

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CORPORATE NAMES

COMMON LAW AND STATUTORY REQUIREMENTS

• One of the requirements for incorporation is an acceptable corporate name • All Canadian jurisdictions restrict the registration of corporate names that are likely to deceive the public o Reason for requiring distinct company names is so that persons know exactly who they are conducting business with • A corporation or extra-provincial corporation may not have a name similar to the name of a corporate person unless that person consents in writing to the use of that name (ABCA s. 4(1)) • A name may not: o Be likely to mislead the public o Be obscene o Lack distinctiveness o Be likely to cause confusion with another business o Be deceptively misdescriptive o Connote government sponsorship or the business of trust, loan, insurance, or banking where it does not actually carry out those features of business

3 Elements of a Corporate Name: o (1) Distinctive Element: ▪ A unique identifier of the name ▪ Regulations prohibit names that are too general (ex: “Dry Cleaners Ltd.”) ▪ Ss. 12: “Prohibited Names” – no obscene or scandalous words ▪ S.12(1)(c) ABCA – no corporation shall have a name that is similar to that of another corporation if it’s misleading ▪ E.g. Telefax o (2) Descriptive Element: ▪ Describes the line of business ▪ May not be absolutely necessary, but makes approval more likely ▪ E.g. Commercial Communications o (3) Legal Element: s 10(1) ABCA: Requires Ltd. to be included in the name. ▪ Indicates the legal status of the corporation as an incorporated body ▪ E.g. Ltd o Ex: Paws (Distinctive Element) Pet Food and Accessories (Descriptive Element) Ltd. (Legal Element)

For alphabetical names (not numbered names), corporations are required to submit a NUANS report in order to be incorporated: • NUANs search (Newly Upgraded Automated Name Search): o A NUANS corporate name search report is required by the federal and most provincial / territorial governments when granting new corporate names for use. o The reports list similar existing corporate names and trademarks; they are used to determine the availability of a new proposed name. o This ensures that new corporate names do not create confusion with others and is intended to protect Canadian businesses and consumers. o Reserves the name for 90 days; the report has a life of 90 days from the date it was requested • Corporate Registries makes final decision on whether your name is permitted. o Another corporation can complain that your name is too similar, and if the Registrar agrees, you can be forced to change your name

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o If the registry is wrong, you have no shield against a passing-•‐off action o Provincially (ABCA) there is a Registrar, and Federally (CBCA) there is a Director • Can also be assigned a #’d name which avoids all the hassles of choosing a fancier name. o Law firms also use numbered companies as “shelf companies” for clients who need a corporation immediately Trademark vs trade name • Trademark - word, symbol, design or any combination that distinguishes one’s product or services from those of another • Trade name – name under which a business is conducted, whether a sole proprietorship, partnership, or corporation; s. 110 of the Partnership Act

PAWS PET FOOD AND ACCESSORIES LTD V PAWS AND SHOP INC (1992 ABQB) - MISLEADING CORPORATE NAME – COURT ORDER TO CHANGE Facts: Paws Pet Food (est. 1987) wants court to order Paws and Shop (est. 1991) to change its name because it’s confusing/misleading. • PPF had put significant resources into estimating its resources and PS was drawing upon that goodwill, especially the “Paws” part of the name o The Registrar approved the Paws and Shop name • PPF argues: similar name, in the same kind of work, both operate in Calgary, customers were confused and thought the stores were affiliated • PPF asked the Registrar to change PS’s corporate name (Registrar has power to do so under s. 13 ABCA) • PPF brings application under 247(1)(b) ABCA because Registrar refused to change its decision • S. 6 of the Regulations – corporation and extra-provincial corporation registered in AB shall not have a name similar to a corporate person unless that person consents o Name must not reasonably lead the interference that the corporation bearing the name is associated or affiliated with the corporate person • PPF could have also sued PS for “passing off” at common law, but they did not in this situation Issue: Should application be granted on basis that PS’ name is “confusing or misleading” contrary to s.12 of the ABCA and the regulations? Held (Prowse J.): Court ordered Registrar to order PS to change their name. It was confusing/misleading because it was too similar to the plaintiff’s business name. Reasons: • Customers believed PS was a second store of PPF, which surely indicated that some people were misled and confused by PS’ name o There was a belief by customers that the business’ were affiliated • Effect on PS: They need to change their signs, business cards, invoices, stationary, etc (big expenses) o Also, PS had begun to establish its own business name, and now it has to change its name and restart the advertising of its name and reestablish good will • Note: if you are at fault for the name of the company and you, as a director, direct or permit a trademark infringement, you have personal liability if you were “knowing or willing” o You do not have protection from liability from your own wrongful actions connected with your corporation

STENNER V SCOTIA CAPITAL INC (2007 BCSC) – ELEMENTS OF A PASSING OFF ACTION – SUBSEQUENT USE OF FAMILY NAME WITH GOODWILL ATTACHED NOT PERMITTED Ratio: Elements required to prove tort of passing-•off (when you take on a corporate name that is too close to another): o (1) Existence of good will o (2) Deception of the public due to a misrepresentation o (3) Actual loss of profit or defendant’s gain (P can choose which to claim for) Facts (Background):- Gordon Stenner (GS) is the plaintiff. Defendants are Vanessa Stenner----Campbell (GS’s 28

daughter), Raymond Campbell (son-•‐in-•‐law), Laura O’Connell (Plaintiff’s former administrative assistant), and Scotia McLeod (the defendants’ employer) o GS is a financial consultant/investment advisor at National Bank Financial. ▪ His team was comprised of the defendants o The team was highly successful, with the daughter (Vanessa) being an important member o GS did a lot of the promoting & Vanessa was more responsible for providing advice & service to the clients o GS promised to sell his Book of business (book of clients) to his daughter with a phased retirement plan for GS o There was a falling out & GS did not sell his Book of business to Vanessa. He eventually sold to a third party in 2003. o Seeing no viable alternative, Vanessa, RC & LO moved to Scotia McLeod (a competitor) and terminated their employment with National Bank Financial w/o notice Name Use: o The domain name "stennerteam" was registered by GS in 2000 and renewed in 2002 o Upon her marriage, the daughter took the name “Stenner---Campbell” for business purposes. o On joining Scotia McLeod, Vanessa used the name “Stenner/Campbell” to represent herself & RC & used it in advertising o Vanessa started her own radio show at same station GS used & employed the name ‘Stenner’ in broadcasts o GS sued in January 2003, & included a claim for passing off and breah of fiduciary duty. ▪ GS also applied for registration of the name "Stenner" as a TM in the financial services industry based, among other things, on use of the name since Dec 1988. • His application for registration of “Stenner” was successful and the trademark was registered on May 16, 2005. ▪ He sought an injunction against the use of the word “Stenner” and any of the words “Team,” Investment,” or “Financial” in relation to the word “Stenner” o Upon her divorce in late 2006, Vanessa used her birth name, Vanessa Stenner, for business purposes. o The defendant ScotiaMcLeod’s position was that the defendants marketed themselves legally and did not cause confusion amongst the public as to the names that they marketed Issue: Does GS have a valid claim for passing-•‐off against Vanessa? Held: Yes, Court found in favour of the plaintiff for his action in passing off against the defendants; the Court gave GS 10% of Vanessa’s profit (because not all of her business was gained because of the Stenner name) & some future earning; damages for the plaintiff’s loss of goodwill and trademark valued at $1 million • Court also granted permanent injunction against her using the name “stenner team.ca”; the plaintiff’s application for injunction against the use of the word “Stenner” and any of the words “Team,” Investment,” or “Financial” in relation to the word “Stenner” was dismissed as it was too broad Reasons: • Passing Off o Common law action protects the goodwill associated with a trade mark or a trade name ▪ Goodwill – means the benefit and advantage of the good name, reputation and connection of a business; the attractive force that brings in business ▪ Essence of passing off: representation of the defendant’s goods as being those of the plaintiff • One way of passing off is for the defendant to use a name that resembles that of the plaintiff or giving the impression that the plaintiff is involved with the enterprise o Plaintiff must prove: ▪ the existence of goodwill, ▪ deception of the public sue to misrepresentation, and ▪ actual or potential damage to the plaintiff • Trademark Infringement o Registration of a trade mark creates an exclusive right to use 29

o The plaintiff need not prove that the mark was known to anyone in the market, whereas in an action for passing off, the plaintiff must show that the mark or name was known and generally recognized in the market • Application to the Facts: o No doubt that the plaintiff had acquired a reputation of goodwill and reputation and that Vanessa and her husband were aware of such goodwill ▪ The use of the name “Stenner-Campbell” did not identify a specific Stenner so it would cause confusion; Stenner/Campbell was even worse as it indicated two people were involved, one of them being a Stenner, and therefore causing confusion between the daughter and father • the use of the name “Vanessa Campbell” is fine because it identifies a specific Stenner; therefore it would not cause the same confusion ▪ The defendants were aware of the potential for confusion and the potential to mislead was exacerbated by the defendants using the same advertising media as the plaintiff o Defendants raised the “same name” defence because she shared the same family name of Stenner ▪ Use of Stenner where it does not signify a specific individual is not permitted in this situation though ▪ When the surname is already established, Christian name must be used to give it the necessary ditinctiveness • ScotiaMcLeod was liable for the actions of their employees in this circumstance • Damages: o look at percentage of earnings that resulted from the passing off tort; 10% of Vanessa’s earnings were deemed to have been derived from use of the Stenner name/dad’s reputation o Also granted accounting for 5 years after the decision, where there would be a gradual decrease in proportion of earnings payable to the dad

SHARE CAPITAL EQUITY FINANCING • Note: there are two ways of capitalizing your corporation: o 1) Debt o 2) Equity • Debt ranks ahead of equity when a corporation dissolves o Debt is paid off first, and then share-holders receive their return on their capital invested

• Corporate Share: A common, divided, participation interest in the corporation’s business connected to an investment of money made in the corporation • Share ownership does not represent a proportionate share in the assets owned by the corporation and does not equate to ownership of the corporation o Only the corporation owns those assets, so when a corporation is dissolved, s/hs do not have any right to receive a distribution of those specific assets. o S/hs are entitled only to receive a proportionate distribution of the value of those assets after the corporation’s debts & liabilities have been satisfied [United Fuel Investments Ltd v Union Gas Company of Canada Ltd] • Authorized Capital: The maximum number of shares a corporation can issue

CLASSIFICATION OF SHARES • Share Classes: A corporation can issue as many classes of shares that they want o Differences between the classes can include voting rights, dividends, and participation on wind-•‐up o Shares are designated, identified, and described their rights, terms, conditions, and restrictions on a class by class basis • Where there is only one class of shares, the rights of the holders are equal in all respects and include 30

the right to vote at meetings, and an unrestricted right to participate in dividends • Where the articles provide for more than one class of shares, the rights, privileges and restrictions and conditions attaching to each class of shares must be set out in the articles. • The right to vote and the right to receive the remaining property of the corporation upon dissolution must be attached to at least one class of shares, but both rights need not be attached to the same class • Typical classes used are: common, preferred, special, restricted

Common Shares (aka equity shares) • Shares that confer a full right of participation in the corporation that issues them, and thus unrestricted rights to participate in dividends & in distribution of the remaining property upon dissolution • Generally more risky than loans or other forms of debt investment o May only be paid dividends or repaid capital after the satisfaction of other claims against the company • Give an unlimited right to share in the growth and profits of the company

Preferred shares • Special shares which have some preferential right which causes the share to rank ahead of the common share • Typical preferences: o A prior right to receive a dividend o priority in the repayment of capital upon winding up o right of redemption or retraction o conversion rights o poison pill rights (augments the rights attached to shares in the event of a take-over bid)

Non-Preference Special Shares • In some cases, a share will be subject to a limitation rather than a right: o Deferred shares (right to receive income or capital comes after the ordinary shares of the company) o Non-voting shares o Shares with limited voting rights o Employee shares

PRE-INCORPORATION CONTRACTS

Pre-incorporation contract: A contract entered into, in the name of, or on behalf of, or in trust for a corporation that is not yet incorporated o Promoter (person who enters into the contract on behalf of the to-be-incorporated corporation) does not want any liability on the K so they enter into K with a third party as an agent for a corporation to be created (the principal) o The intent is to incorporate a corporation following the signing of the K and to have the newly incorporated corporation adopt the K and thereby be bound by its terms

Original rules at common law: 1. A legal entity that does not exist at the time of a contract being formed cannot later ratify the contract at common law ▪ When a corporation comes into existence and purports to adopt a K, it is a nullity 2. Person who signed a contract on behalf of a corporation to be incorporated was personally liable on the contract o Kelner v Baxter (1866): Promoter has personal liability on the contract because he acted for a non- existent principal. Adjustment made to the common law (prior to legislative intervention):

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• Black v Smallwood (1966): Any liability on the promoter depends on the parties’ intentions. If the agent was not intended to be held liable, then they would not be liable.

CONFLICTING COMMON LAW

KELNER V BAXTER (1866 UK) – PROMOTER LIABLE WHEN ENTERING INTO PRE-INCORP. CONTRACT Ratio: The person who signs the K on behalf of the corporation to be incorporated is personally liable on the K • Once incorporated, the corporation cannot ratify the K and thereby relieve that person of liability (because a K cannot be ratified by someone who did not exist at the time the contract was made) Facts: There was a pre-•‐incorporation K with a promoter/agent (defendant). A 3rd party (P) provided wine for the principal corporation who ratified the contract but was never paid by the corporation (who went bankrupt), so the 3rd party sued the promoter Issue: Is the promoter/agent personally liable for the K? Held: Yes. Agency law says when you act for a non-•‐existent principal (the corporation) the agent is personally liable

BLACK V SMALLWOOD (1966 AUSTRALIA HC) – PROMOTER NOT NECESSARILY LIABLE IN PRE- INCORP. CONTRACT – LOOK TO INTENTIONS Ratio: Where both the third party & the promoter believe the corporation (principal) has been incorporated & is in fact in existence and the intention is not to hold the promoter liable, then the promoter is not liable • Fundamental question was as to the parties’ intentions for whether personal liability of the agent was intended

STATUTORY REFORM: E.G. CBCA S. 14

• Under the CBCA, the promoter is deemed to be a party to the K and is liable unless the corporation adopts the contract within a reasonable time after incorporation (s. 14(1)) o Once the corporation is created and the K is adopted by the corporation, then the promoter is no longer a party (and no longer has personal liability) (s. 14(2)) o The promoter can also expressly contract out of personal liability (s. 14(4)) • CBCA, s 14 (similar to s 15 ABCA) o S. 14(1) – deems the agent a party to a pre-incorporation contract, and is therefore liable ▪ a person who enters into or purports to enter into a contract on behalf of a corporation before it comes into existence is personally bound y the contract and is entitled to its benefits o S. 14(2) – corporation not incorporated at the time of the pre-incorporation contract can adopt the contract, after which the agent will no longer be liable o S. 14(3): Ability for a corporation to enforce a pre-•‐incorporation contract through court application o S. 14(4) – the agent can avoid liability if it is expressly stated as such in the pre-incorporation contract • ABCA model is deemed warranties (not deemed parties), in respect of promoters to pre-•‐incorporation Ks (s.15) o Neither the promoter or the 3P intend the promoter to be a party to the K o The promoter is only liable to the other party for damages for a breach of the warranty in s.15(2)(a)

JUDICIAL TREATMENT OF STATUTORY RULES WESTCOM RADIO GROUP LTD V MACISAAC (1989 ONCA) – POOR DECISION – PROMOTER NOT HELD LIABLE Ratio: a scenario involving failed attempt to contract is not caught by the legislative provision that deems promoters to be parties to a contact. If no contract exists (because not intended that promoter would be liable), there is nothing to which the statute can apply.

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Facts: defendant (promoter) and plaintiff (3rd party) entered into a series of Ks with respect to placing radio advertisements on behalf of a corporation which both the plaintiff and the defendant mistakenly believed to have been incorporated and to be in existence, when it was in fact not in existence • The plaintiff claimed that the defendant was personally liable on the Ks. • There was no sign that the plaintiff had entered into the K in her personal capacity. • Under the OBCA, it appeared that the promoter (defendant) was deemed a party to contract, and therefore should be liable Held: In favour of the defendant promoter, no liability found for the pre-incorporation contract, because there was no valid contract Reasons: • There was no valid K. The Court applied the CL rules before the statutory rules and found that there was no intention on the part of the defendant to have personal liability. o Following the statute, the promoter would have been deemed party to the contract and therefore liable • The Court examined the equivalent of CBCA s.14(1) (OBCA s. 21) & focused on the word "K" in the provision. o Since the K was nullified (because the defendant intended to contract exclusively with the non-existent corporation), the Court determined that the provision did not apply and the promoter was therefore not liable. o Reasoning of the Court: The legislative provision would only be applied if there was an actual contract formed; if there was a failure to form a valid contract, then the legislation that deems the promoter liable does not apply o Because they failed to find a K, there could be no liability because the statute doesn’t apply Commentary: A very poor decision. The intention of the legislation to deal with these situations where there was no K at CL; the Court misinterpreted the application of the statutory provisions by applying a literal interpretation (using the common law as a gatekeeper for what would be considered under the legislation – requiring for there to be a valid K at common law for the statute to apply) • S. 21 of the OBCA should have been read to include “purported contract” in the meaning of the word contract used in the provision and should have applied to hold the promoter liable ABCA s. 15(2): Anti-Westcom provision; deems someone as liable and bound to a contract if they enter into, or purport to enter a written contract in the name of or on behalf of a corporation before is comes into existence

SHERWOOD DESIGN SERVICES INC V 872935 ONTARIO LTD (1998 ONCA) – CONDUCT REQUIRED FOR CORPORATION TO ADOPT CONTRACT (DISSENT IN OBITER) Facts: An agreement to buy the plaintiff’s assets was signed by the individual defendants in trust for a corporation to be incorporated; the individual defendants’ (promoter’s) lawyer assigned the corporation to a shelf corporation and informed the plaintiff’s lawyer • The deal failed/nothing happened so the lawyer returned the corporation to the shelf and subsequently assigned the shelf company to another client • The plaintiff then argued that the corporation had breached the contract, as the purchase and sale agreement had been adopted by the corporate defendant, by virtue of the defendants’ lawyer’s letter to the plaintiff’s lawyer Issue: Did the defendant corporation "adopt" the pre-•‐incorporation K within the meaning of s 21(2) OBCA (CBCA s.14(1) equivalent)? Held (majority): The corporation was held liable for $200,000. • The act of the solicitor as agent for the corporation and on instructions from the individual defendants was sufficient to evidence an intention on the part of the corporation to adopt & be bound by the agreement • Court says all they need is some act or conduct signifying an intention to be bound Dissent: Disagrees with the majority that the K had been adopted and decries Westcom as a bad decision • Section 21 of the OBCA should be looked at for its remedial intention • Held that the defendants’ lawyer’s letter was not sufficient to evidence the adoption of the agreement by the

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corporation; rather, what was required to make the corporation liable was an action or conduct by the corporation itself • Would have held the individual defendants liable

PRACTICE CONSIDERATIONS: • Do not recycle numbered shelf companies (even if initial company does not use it, do not recycle it) • Make it clear that draft documents are just that; they’re only drafts and nothing is to be construed as adoption o State expressly in the document that the letter/document does not constitute adoption by the corporation

SZECKET V HUANG (ONCA 1998) – LIABILITY OF PROMOTER/AGENT TO BE DETERMINED BY STATUTORY RULES, NOT OLD CL Ratio: the legislative provisions that deems promoters to be parties to a contract applies to purported or failed contracts; courts are to directly apply the legislative provision rather than to first apply the common law rules Facts: Plaintiffs entered into a contract with the defendant (on behalf of a company to be formed); The corporation was never formed. The plaintiff claims that the individual defendant, as the promoter/agent, is personally liable Held: The individual defendant, the promoter, is liable for the breach Reasons: • The trial judge followed the two-step approach set out in Westcom: 1) is there a contract at common law? 2) if so, what does the statute say about liability of the corporation or promoter? o The trial judge found that there was a contract, and so applied the statute to find the promoter liable as a deemed party to the contract o This approach was found to be wrong by the Court of Appeal: all that needs to be applied is the statutory rule; Westcom is not the state of the law • The Court of Appeal did not look at the common-law rules on pre-incorporation contracts; The Court applied OBCA s. 21 (equivalent of CBCA s. 14) and held that the defendant was personally liable • The defendant was not excused from liability because the contract did not expressly provide that he should not liable • The ONCA effectively overruled Westcom, and said that the liability of promoter is to be determined on basis of the statutory rules alone

MEASURE OF DAMAGES WICKBERG V SHATSKY ET AL (1969 BCSC) – BREACH OF WARRANTY OF AUTHORITY – MUST BE CAUSE OF LOSS TO THIRD PARTY - DAMAGE MEASUREMENT Ratio: Under ABCA, s.15, a third party will not be able to recover unless they show that the breach in warranty of authority by the promoter/agent caused the loss Facts: Shatsky’s company, RAS, sells & services business machine & sells supplies. • The defendants decide to incorporate Rapid Data (RD) but never did, although they carried on business under that name (improperly) • Wickberg was hired to be new manager for the new 'corporation’ for an annual salary of $15,000 & his written employment K was provided to him on RD letterhead, signed by Shatsky as president of RD • The business was not successful & Wickberg was terminated for refusing to work on straight commission. • Wickberg sued for wrongful termination and breach of warranty of authority Issue: Are the individual defendants personally liable? Held: Yes, but only for nominal damages and costs; Wickberg did not demonstrate that any loss was a result of the promoters’ breach of warranty Reasons: • Note: statutory revision was not made at this point in time so the decision was determined on the basis of

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common law o Shatsky, as a promoter, was never intended to be party to the contract, so he cannot be held personally liable (as per Black v Smallwood) • If Wickberg wanted to be paid under K, he must be able to show that the losses experienced were a result of the breach of warranty. o The fact that the business was not actually incorporated was not the reason for Wickberg’s loss o Wickberg was unable to show that the loss was the result of the breach, as he suffered the loss for an unrelated reason, that being that the business was bad, and no revenues resulted o The same situation would have occurred even if the business had incorporated o Also, Wickberg became aware that the corporation was not actually incorporated and nevertheless continued to work there Comments: An ordinary claim under s. 15 of the ABCA may only net you nominal damages unless the warrantor indicates not only that the corporation will be incorporated, but that it will also be well capitalized and able to pay for its obligations and liabilities • If the promoter said we are starting a corporation & we want you to handle it, & represented that the corporation was going to be well funded, & funding is not provided, then the situation is different and the loss could be connected to the breach of warranty of authority

PRE-INCORPORATION CONTRACTS IN ALBERTA – ABCA S. 15 • ABCA Approach vs. CBCA Approach: o Two Approaches: ▪ ABCA: Promoter is not deemed a party to the contract but is instead deemed a warrantor ▪ CBCA: Promoter is deemed a party • In AB, the promoter is not a deemed party, rather they are deemed a warrantor o Why AB takes this approach rather than deeming the promoter a party to the contract: ▪ Don’t like the idea of making the promoter a deemed party because this is not actually what is intended by two contracting parties ▪ To reflect the reality, the better view is that the promoter is giving a warranty • s 15(1) ABCA: If the corporation in question is intended to be an ABCA corporation or the parties believe that the corporation is incorporated under the ABCA, then s 15 applies. • s 15(2)(a) ABCA: Makes it such that the promoter is “deemed to warrant” that the corporation will come into existence w/in a reasonable time and will adopt the pre-incorporation K w/in a reasonable time. o Applies when the contract is written o The promoter is thus liable to the third party for damages for breach of warranties. • s 15 ABCA: Allows ratification by a newly incorporated corporation, codifies unjust enrichment, allows disputes to go to court • s 15(6): express contracting out of liability o allows the promoter to contract out of warranty liability if done expressly in the contract • Measure of Damages o s 15(2)(c) ABCA: The measure of damages for breach of warranty shall be the same as if the corporation existed when the K was made, the promoter had no authority to do so and the corporation refused to ratify the K. • Written vs Oral Pre-incorporation Contracts: o The CBCA only deems parties to a contract and the ABCA only deems warranties in the case of written contracts o Therefore, in the case of oral contracts, the common law rules will apply

ABCA Pre-incorporation contracts

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15(1) This section applies unless the person referred to in subsection (2) and all parties to the contract referred to in that subsection (a) believe that the body corporate exists and is incorporated under, or (b) intend that the body corporate is to be incorporated under the laws of a jurisdiction other than Alberta. (2) Except as provided in this section, if a person enters or purports to enter into a written contract in the name of or on behalf of a body corporate before it comes into existence, (a) that person is deemed to warrant to the other party to the contract (i) that the body corporate will come into existence within a reasonable time, and (ii) that the contract will be adopted within a reasonable time after the body corporate comes into existence, (b) that person is liable to the other party to the contract for damages for a breach of that warranty, and (c) the measure of damages for that breach of warranty shall be the same as if the body corporate existed when the contract was made, the person who made the contract on behalf of the body corporate had no authority to do so and the body corporate refused to ratify the contract. (3) A corporation may, within a reasonable time after it comes into existence, by any act or conduct signifying its intention to be bound by it, adopt a written contract made before it came into existence in its name or on its behalf, and on the adoption (a) the corporation is bound by the contract and is entitled to the benefits of the contract as if the corporation had been in existence at the date of the contract and had been a party to it, and (b) a person who purported to act in the name of or on behalf of the corporation ceases, except as provided in subsection (5), to be liable under subsection (2) in respect of the contract. (4) If a person enters or purports to enter into a contract in the name of or on behalf of a corporation before it comes into existence and the contract is not adopted by the corporation within a reasonable time after it comes into existence, that person or the other party to the contract may apply to the Court for an order directing the corporation to restore to the applicant, in specie or otherwise, any benefit received by the corporation under the contract. (5) Except as provided in subsection (6), whether or not a written contract made before the coming into existence of a corporation is adopted by the corporation, a party to the contract may apply to the Court for an order (a) fixing obligations under the contract as joint or joint and several, or (b) apportioning liability between or among the corporation and a person who purported to act in the name of or on behalf of the corporation, and on the application the Court may make any order it thinks fit. (6) A person who enters or purports to enter into a written contract in the name of or on behalf of a body corporate before it comes into existence is not in any event liable for damages under subsection (2) if the contract expressly provides that the person is not to be so liable.

CHAPTER 4: THE CORPORATION AS A LEGAL PERSON SUMMARY • A corporation is treated in law as a legal person with a persona separate from that of its founders and s/hs • General rule: a corporation has the same rights/obligations of a natural person & s/hs are only liable for an amount equal to their investment (Salomon) o a director and shareholder can still be an employee of the corporation (Lee) o You can have a one-person corporation [Lee] Exceptions to the rule from Salomon (limited personal liability): o Lifting the corporate veil ▪ Corporate veil will be lifted: • where the corporation is being used as a shield for an improper or fraudulent purpose (TransAmerica; Big Bend Hotel; Jin v Ren) • When not to lift the veil would be too flagrantly opposed to justice (Kosmopolous) • Cannot hide behind corporation if being deceitful (Sylvan Lake) 36

o Total disregard for legislative formalities [Wolfe] ▪ Wolf v Moir - Moir failed to set corporate name out in advertisements, as required by legislation and he held himself out as owner o Directors committing their own torts ▪ Directors and officers may also be held liable for torts committed while conducting business affairs in the name of the corporation ▪ Inducing breach of contract [McFadden] • Subject to Said v Butt defence o Knowing receipt of trust or knowing assistance of breach of trust (Citadel) ▪ Personal liability will flow if directors of company knowingly assist their corporation to breach a trust (M & L Travel) o Parent subsidiary relationship [Sun Sudan] ▪ Court will not lift unless there is fraud ▪ Parent will usually not be held liable for subsidiary (Sun Sudan) o Thin Capitalization [Walkovszky; Henry Brown v Ocean Charters] ▪ Thin capitalization, in and of itself, does not support a finding of personal liability

ONE-PERSON CORPORATION

LEE V LEE’S AIR FARMING LTD (1961 PRIVY COUNCIL) – DIRECTOR AND SHAR EHOLDER OF CORPORATION CAN EMPL OY THEMSELVES – WCB CLAIM BY WIFE AFTER HUSBAND’S DEA TH Ratio: A position in a corporation as a director and controlling shareholder does not preclude the same person from acting in the capacity of an employee. • Compensation in the event of an accident may depend on their capacity at the time they were so acting. Facts: Lee was an employee, controlling shareholder, & director of his own corporation; Lee died on the job & wife looked to WCB for compensation. • WCB claimed that it was impossible for Lee to be both an employee and the controlling shareholder/director (Lee cannot be an employee to himself) Issue: Is the corporation separate from Lee so that Lee can be an employee of his own corporation? Held: Yes, Lee can be an employee of his own corporation (and a “worker” under the WCB definition) because the corporation is a separate legal entity; Lee can enter into a contract of service with the corporation despite the fact that he was a director of the corporation Reasons: The corporation and Lee are two separate legal entities (Salomon) • Lee was doing the physical work of the corporation, and not acting as a director or shareholder, so he could be “worker” as defined under the WCB • Lee was not in a contract with himself; he was contracting with the corporation; one person can function in more than one capacity (e.g. employee and managing director) • Limitation is that a corporation cannot be used for nefarious (evil) purposes (Littlewood)

GROUNDS FOR LIABILITY OF THOSE BEHIND THE CORPORATION LIABILITY BASED ON LIFTING THE CORPORATE VEIL

• Very rarely done in Canada o Salomon says that the corporation is a separate legal entity from directors and shareholders • Corporate veil will be lifted (first two points are key and should be applied together as the rule): o Where the corporation is being used with an improper or fraudulent purpose (TransAmerica) o When not to lift the veil would be too flagrantly opposed to justice (Kosmopolous) o In narrow situations in the case of a parent-subsidiary relationship

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• Practice point: If trying to lift the veil to sue individuals personally, also articulate a specific cause of action against the individual (ie. tort of deceit, breach of K, etc) o Have a backup as to why the person has individual liability

KOSMOPOULOS V CONSTITUTION INSURANCE CO OF CANADA (1987 SCC) - SALOMON PRINCIPLE IS NOT ENFORCED WHEN IT YIELDS RESULT TOO FLAGRANTLY OPPOSED TO JUSTICE Ratio: The Salomon principle is not enforced when it would yield a result too flagrantly opposed to justice, convenience, or the interests of the Revenue Facts: Kosmopolous is a sole proprietor & incorporates & became a sole s/h; He entered into a contract but did not include the full corporation name in the contract (fire & property insurance not included in the corporate name as written in the contract) Issue: Does the corporation have access to the insurance, despite it not being in the corporate name? Held: No, corporate veil will not be lifted to give the corporation access to the insurance • Kosmopolous may be able to sue his lawyer for not advising him of the insurance aspects.

BIG BEND HOTEL LTD V SECURITY MUTUAL CASUALTY CO (1980 BCSC) – CORPORATE VEIL LIFTED FOR CORPORATION BEING USED AS A “SHAM AND A CLOAK” Ratio: In cases of improper conduct or fraud, or where the corporation is being used as a "sham and a cloak" the corporate veil can be lifted to place liability on the individual behind the corporation Facts: Kumar, president & sole s/h of a corporation (only asset is the Big Bend hotel), failed to disclose on his insurance application that he had owned other hotels that burned down • The Big Bend hotel also burns down & the insurance corporation refused to pay out the insurance benefits. Big Bend Hotel (the plaintiff) sued the insurance corporation (for the policy benefits) and the insurance brokers (Reed Shaw) for failing to exercise due care and diligence • The defendant insurers claimed that if there had been full disclosure, they would not have provided the insurance policy • The plaintiff Hotel argued that even if Kumar had failed to disclose the previous fire out of “wickedness of mind,” the owner of the other hotel that had burned down was K & S Enterprises, and since that corporation was a separate legal entity from Kumar (who had applied for insurance on behalf of the Big Bend hotel), the corporate veil should not be lifted to refuse a policy pay out, as per Salomon Issue: Did the failure to disclose constitute an event that would justify lifting the corporate veil? Held: Yes, the corporate veil will be lifted to disallow the Big Bend hotel from receiving the insurance pay-out because Kumar had a duty to disclose material details to the insurance provider in the utmost good faith, and he had hidden behind the guise of a new corporation in gaining the insurance policy Reasons: • Courts have lifted the veil to take into account the actions of the individuals controlling a corporation in cases of improper conduct or fraud o Here, Big Bend was created as a sham to hide behind & Kumar clearly omitted disclosing material facts (fraud) • Equity will not allow an individual to use a corporation as a shield for improper conduct or fraud. • Two reasons why Kumar loses: o Insurance Law – a party has positive obligations to fully disclose material facts in good faith; a higher standard of conduct is required. o Lifting the corporate veil – Kumar acted fraudulently Note: This case was approved by the ABCA in Sylvan (which was aff’d by the SCC)

PERFORMANCE INDUSTRIES LTD V SYLVAN LAKE GOLF & TENNIS CLUB LTD (2000 ABCA; AFF’D BY SCC) – LIFTING THE CORPORATE VEIL FOR “FRAUDULENT, DISHONEST, AND DECEITFUL” ACTION 38

Ratio: Where the actions of the principal are "fraudulent, dishonest, and deceitful" the corporate veil will be lifted Facts: Performance Industries (defendant) & Sylvan Lake Golf (plaintiff) enter into a joint venture to acquire a golf course as tenants in common; title was to be held by Performance; • Sylvan was to have sole possession of property for 5 years at which point Performance would buy out Sylvan; o deal was that either corp. could develop some of the course into a residential development if lands could be sold to a third party developer for at least $400K • The written contract did not reflect the oral agreement made between the parties; O’Connor (sole s/h of Performance Industries) had snuck clause 18 into the agreement which had the effect of drastically limiting any development opportunity o Clause 18 limited development around the 18th hole area to 110 feet by 480 yards (instead of 110 yards by 480 yards, as was verbally agreed) o Fred Bell (Sylvan Lake’s sole s/h) had not read the written contract and wanted to develop but was limited by clause 18. • Sylvan Lake Golf wanted to rectify the agreement or sought damages in lieu of rectification (correction of contract in writing to reflect agreed upon terms); Sylvan sought to lift the corporate veil and place liability on O’Connor • The trial judge found O’Connor acted deceitfully & dishonestly, and did not want him to benefit from his misconduct o The trial judge awarded punitive damages making him personally liable for his own conduct (lifted the corporate veil) Issue: Can the plaintiff secure rectification of the contract? Should the corporate veil be lifted to place liability on the principle s/h of Performance Industries? Held: Appeal dismissed; O’Connor is jointly liable with Performance Industries (corporate veil lifted) • O’Connor acted fraudulently, dishonestly and deceitfully, which provides the necessary support for lifting the corporate veil o O’Connor also committed the tort of deceit & so would have independent liability regardless of lifting the corporate veil ▪ Elements required for the tort of deceit: • false representation -- whether oral or written and whether as a direct lie or via incomplete disclosure, active concealment, or other forms of misrepresentation; • made by the defendant knowing it was false or with reckless disregard per Derry v Peek; • made with the intention to deceive; and • there was a material inducement causing damage ▪ if you can show that the individual committed a tort personally, the individual can be held liable for the damages they caused o Could also argue fraudulent misrepresentation • Compensatory damages awarded against O’Connor were upheld but punitive damages were denied on appeal because both punishment and deterrence had already been served by the generous compensatory damages Note: If compensatory damages are high, the court is less likely to award punitive damages • First argument here should be tort of deceit, and use corporate veil in the alternative.

JIN V REN (2015 ABQB, AFF’D BY THE ABCA) – UNJUST ENRICHMENT CLAIM – INVESTMENTS RETAINED FOR IMPROPER PURPOSE BY DIRECTOR – CORPORATE VEIL LIFTED Ratio: the corporate veil can be lifted where the controlling mind of a corporation (e.g. sole director) retains investments for an improper or fraudulent purpose Facts: Ren (defendant) was a director of the corporation, Hart Fibre; he promoted an investment of $300,000 in an Alberta based hemp business to Jin (plaintiff), who agreed to invest in 2006; Jin delivered on his investment but Ren delivered nothing in return; Jin sued Hart Fibre and Ren as the director of the corporation in unjust enrichment Issue: Can the corporate veil be lifted for unjust enrichment?

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Decision: in favour of the plaintiff; Ren found personally liable in unjust enrichment Reason: • Salomon stands for the proposition that one cannot go behind a legitimately incorporated company or lift the corporate veil to reach the incorporators o However, lifting the corporate veil can be done where a corporation is completely dominated and controlled and being used as a shield for fraudulent or improper conduct (TransAmerica) • Although the evidence fell short of showing that Hart Fibre was a mere shield or façade in order to improperly attract investment, Ren was the controlling mind of Hart Fibre as its sole director and had retained Jin’s investment for an improper purpose o Therefore, an unjust enrichment claim is not precluded against Ren

WILDMAN V WILDMAN (2006 ONCA) – CORPORATE VEIL LIFTED AGAINST CORPORATION FOR SPOUSAL AND CHILD SUPPORT Ratio: A corporate veil can be lifted to hold a corporation liable for it’s controlling individual’s liabilities for spousal and child support • The following circumstance must be present: 1. The individual exercises complete control of the finances, policy, and business practices of the company 2. That control must have been used by the individual to commit a fraud or wrong that would unjustly deprive a claimant of his or her rights 3. The misconduct must be the reason for the third party’s loss Facts: The appellant (Mr. Wildman) and the respondent (Ms. Wildman) ended a ten year marriage and the respondent gained full custody of their two children; the appellant owes the respondent $800,00 in spousal and child support; he appeals not the amount of money owed but the fact that the trial judge lifted the corporate veil to order that the money owed is secured and enforceable not only against the appellant personally, but also against the company of which he is the sole director and shareholder Issue: Can the corporate veil be lifted to impose liability for money owed against an individual upon the individual’s corporation? Decision: Appeal dismissed; the corporation was liable for the individual’s owed finances; it would be flagrantly opposed to justice to allow the appellant to hide behind a corporate veil that he does not himself respect Reason: the corporate veil can be lifted when the company is incorporated for an illegal, fraudulent or improper purpose; it can also be lifted if, when incorporated, those in control expressly direct a wrongful thing to be done • Both federal and provincial Child Support Guidelines contemplate piercing the corporate veil in appropriate cases • The following circumstance must be present to look behind the corporate veil for liability: 1. The individual exercises complete control of the finances, policy, and business practices of the company 2. That control must have been used by the individual to commit a fraud or wrong that would unjustly deprive a claimant of his or her rights 3. The misconduct must be the reason for the third party’s loss • Application to the facts 1. Appellant was the sole owner of and exercises complete control over his business enterprises; they are not distinct from him and have no connection to any third party 2. No question that the appellant controlled his business and assets in a way that diverts money from his ow personal use 3. The losers are the spouse and the children; they have not received the amounts that various courts have held that they should receive • A company need not have been created with an improper purpose in mind to justify a piercing of the corporate veil; it is sufficient that the corporation is used for an improper purpose

ROCKWELL DEVELOPMENTS LTD V NEWTONBROOK PLAZA LTD (1972 ONCA) – CORPORATE VEIL NOT LIFTED TO FORCE SHAREHOLDER TO PAY COSTS FOR LITITAGION BETWEEN YOUR CORP AND ANOTHER CORP

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Ratio: A third party cannot collect from s/hs just because the corporation cannot pay. Facts: Kelner holds one Rockwell share in trust for Planet Ltd and & is director of Rockwell; there were other shareholders and directors but Kelner was the main controller of the corporation • Rockwell entered into a real estate transaction with Newtonbrook but the transaction failed; Rockwell sued Newtonbrook for breach of contract but Rockwell was unsuccessful. • Newtonbrook was awarded costs for the failed action by Rockwell, but since Rockwell had no money as a corporation, the trial judge awarded costs against Kelner as director of Rockwell • Kelner appealed that decision to award costs against him personally • Note that Kelner was entering into many different real estate transactions and was incorporating as a new corporation in each transaction (to protect himself from liability and to try to stay “judgment proof” by keeping each corporation thinly capitalized) Issue: Should Kelner be responsible for costs awarded to the successful Newtonbrook Ltd. in litigation brought against it by Rockwell Ltd (of which Kelner is a director)? Held: Appeal allowed; Kelner was not responsible for the costs of Rockwell’s failed action Reasons: • The real litigant in the original action for breach of contract was Rockwell, not Kelner. o The contract made with Newtonbrook was made with the corporation (Rockwell) alone, and not Kelner o Kelner could not have sued upon the contract, or be sued upon it • There was no evidence of fraud or misconduct on Kelner’s part that would support the lifting of the corporate veil • Note: Newtonbrook should have asked for a personal guarantee from Kelner because it turns out that Kelner created a corporation for every new transaction in which he engaged in

SUN SUDAN OIL CO V METHANEX CORP (1992 ABQB) - LIABILITY OF PARENT FOR SUBSIDIARY – CORPORATE VEIL NOT LIFTED – RULE AND TEST FOR HOLDING PARENT COMPANY LIABLE Ratio: Subsidiaries can be used for shielding the parent from liability. The corporate veil will not be lifted without some type of improper purpose held by the parent corporation (two stage for lifting the corporate veil to hold the parent company liable for its subsidiary) Facts: SW is the parent company of Sun Sudan Oil. OI is the parent of ORI; ORI wholly owns Ocelot Sudan (indirectly owned by OI). • Sun Sudan Oil & Ocelot Sudan are parties to a joint operating agreement, of which Ocelot Sudan is in breach. Further, Ocelot Sudan is undercapitalized. • ORI fails to pay what it owes under the agreement (has no assets to pay). Sun Sudan Oil wants to sue parent company of ORI, OI (now Methanex Corporation) • Note: a company is the parent of a subsidiary when it owns enough shares to control the outcome of the meeting so of the Board of Director or when it has complete ownership over the subsidiary Issue: Is parent (MC) liable for the subsidiary’s breach? Can SSO sue MC as the indirect owner of OS? Held: No; plaintiff failed on both their arguments (that it’s industry practice & that OS is an agent for the parent so corporate veil should be lifted) Reasons: • Industry Practice as to a Parent funding a Subsidiary: o Test: It must be so well recognized and known among everyone in the industry and so prevalent as to justify a presumption that everyone who enters into a contract does so with the intention of being bound by that practice ▪ It must be notorious that the parent will fund its subsidiary (so notorious that it need not be expressly stated in the contract) ▪ It was argued that in the international petroleum industry, the common practice was that a parent company would be liable for debts of its subsidiary • Evidence did not support such a finding in this case

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• Rule for holding a parent company liable for a subsidiary (TransAmerica): o 1) company is completely dominated and controlled by a parent company o 2) The subsidiary is being used a shield for fraud or improper conduct • Test for Lifting Corporate Veil because the Subsidiary is a Puppet of the Parent o 1) Smith Stone v Birmingham factors (even when all factors are met, must proceed to Kosmopolous test): ▪ Were the profits treated as the profits of the company? ▪ Were the persons conducting the business appointed by the parent company? ▪ Was the company the head and brain of the trading venture? ▪ Did the company govern the venture, decide what should be done & what capital should be embarked on? ▪ Did the company make the profit by its skill and direction? ▪ Was the company in effectual and constant control? o 2) Kosmopolous Test: Would maintaining the corporate veil be too flagrantly opposed to justice or convenience? • All 6 factors from Stone v Birmingham were met in this case, but the plaintiffs failed on the Kosmopolous test o MC was likely using subsidiary for legitimate business purposes of limiting exposure of assets of MC (this is not fraud) and for maximizing tax benefits o The parties to the contract were sophisticated business parties who could have taken other steps to protect themselves Practice Points • Do not treat your clients and their parent companies as the same entity o Cannot bill the person behind the corporation if the corporation is your client (your client is not Mr. X who is behind Mr. X Co.) • Ensure that a parent corporation gives a guarantee to fund the subsidiary for liabilities that may arise or that such a term is express in the contract between your client and the subsidiary • Note that it is possible to steal from a one-•‐person corporation o Issues arise with taxes and creditors may come after you.

LIABILITY BASED ON TOTAL DISREGARD OF FORMALITY WOLFE V MOIR (1969 ALTA SUP. CT.) – INDIVIDUAL LIABLE FOR NOT IDENTIFYING CORP ON TICKETS, CONTRACTS, ETC. – ROLLER RINK Ratio: If you do not comply with the formal legislative requirements for a corporation, an individual cannot rely on the protection that a corporation affords (can be held personally liable) • If you advertise & hold yourself out to the public w/o identifying the name of a corporation with which you’re associated, you run the risk of being held personally liable. Facts: Wolfe is injured at a roller-•‐rink (Fort Whoop Up) and he sues Moir (defendant) personally. Moir argues that he does not own the rink, the corporation does (“Chinook Sport Shop”). • Moir was secretary for the corporation and his wife was the president; Moir was advertising the roller rink as Moir’s Sportsland or Fort Whoop Up (there was no mention of the Chinook Sport Shop corporation on tickets sold for the roller skating) Issue: Is Moir personally liable for Wolfe’s injuries? Held: Defendant was held personally liable Reasons: The legislation says you must show the corporation name on all corporation contracts, tickets, invoices, etc. [currently ABCA, s. 10(8)] • Moir could not rely on the principle in Salomon to avoid personal liability because he was not following the formalities required to carry out business as a corporation • If a person chooses to advertise and hold themselves out to the public without identifying the name of the corporation with which they are associated, they can be held personally liable for obligations incurred

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o Moir held himself out as the owner of the rink, and liability may attach in that regard ▪ Moir referred to the manager at the roller rink as “my manager.” Problem: it doesn’t matter that Moir spoke in that way – you as a lawyer could object and say that it is just a matter a speech • Wolfe was not required to demonstrate that he believed that Moir was the owner and not the corporation Commentary: Lawyers must advise clients in writing to spell out the corporation’s name in full on all legal Ks, invoices and document.

VALLIS V PRAIRIE ALTERNATIVE ENERGY SOLUTIONS LTD (2013 SKPC) – FAILURE TO IDENTIFY WORKING AS A CORPORATION – PERSONALLY LIABLE Ratio: an individual can be held personally liable if they do not comply with the Business Corporations Act in properly identifying the corporation under which they are carrying on business Facts: Karras was the president, shareholder and the director of the corporation Prairie Alternative Energy Solutions Ltd; he entered into a contract with the plaintiffs to install a geothermal heating system; Karras never gave any indication to the plaintiffs that he was anything more than a sole proprietor (did not have business cards, no business name on his truck, never informed the plaintiffs that he was incorporated, documents exchanged did not include the “Ltd” part of the corporation name) Issue: Can Karras be held personally liable for failing to identify that he was carrying out business as a corporation? Decision: Karras was held personally liable for damages Reasons: Karras failed to comply with the provisions of the Business Corporations Act under which he was carrying on business and can therefore be held personally liable - Even though K wasn’t dishonest, the law is very clear o He didn’t have the indicator “.ltd” in his communications with the plaintiffs, and they structured their affairs under the assumption that they were dealing with a corporation - Reliance by the plaintiff isn’t really necessary; it may be a stronger case, but it isn’t necessary o If the defendant isn’t clear that he’s operating through a corporate vehicle, it’s on him (Wolfe v Moir) o There’s reliance here, Vallis (P) seems to have structured affairs based on assumption they were dealing with a sole proprietorship, but that isn’t necessarily a material fact in order to secure this outcome Corporate Solicitor Held Negligent in Failing to Give Written Advice – Lawyers Weekly; p 151. - Tell your client, in writing, to put the full corporate name on all written corporate communications o Failure to do so may be a breach of your DOC as a lawyer and you may be found negligent

LIABILITY OF DIRECTORS FOR THEIR OWN TORTS

• Under s.122 ABCA, the director owes a duty of care to the corporation. But here, we’re concerned with directors’ duty owed to third parties. • Core Idea: If a director commits a tort, we must determine if the director should be personally liable even though they were acting on behalf of the corporation

MCFADDEN V 481782 ONTARIO LTD (ONT HCJ 1984) - DIRECTOR ALWAYS LIABLE FOR THEIR TORTIOUS ACTIONS – INDUCING BREACH OF CONTRACT OUTSIDE THE SCOPE OF THE DIRECTOR’S AUTHORITY Ratio: As a general rule, an agent is always liable personally for his tortious actions, notwithstanding that his acts may in law also be those of the corporation (corporation is still primarily liable). • For a director or officer of a corporation to be relieved as agent for his tortious acts, he must be acting under duty or compulsion of a duty to the corporation • Where an officer or director of a corporation induces the corporation to breach a contract, he will be personally liable if he is acting bona fide outside of the scope of his authority – corporation is insulated from the legal consequences because the officer or director acted outside of their legal authority as corporate executives

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Facts: McFadden (plaintiff) was employed by PMAI on a fixed term K. After the fixed term, termination required 60 days notice. • PMAI sold their Canadian operation to PMAC; McFadden continued to work for PMAC; Mr. and Mrs. Taylor (the defendants) are the directors and s/hs of PMAC • The Taylors took $32,000 ($22,000 improperly) from PMAC for themselves personally when they sold their inventory and corporate name to PMAI, leaving PMAC with no assets or cash to pay McFadden’s salary • PMAC then dismissed McFadden with no notice and McFadden sued for wrongful dismissal and for inducing a breach of contract Issue: Are Taylors personally liable for inducing breach of K? Held: Defendants held personally liable for inducing a breach of contract; the Taylors were trying to drain their corporation of all its assets so that there was nothing for McFadden to sue the corporation for (acting outside their scope of authority and duty to the corporation) Reasons: • Tort of Inducing Breach of Contract: o Committed when: the defendant, knowing of a contract between plaintiff and a third party, and intending to procure a breach of that contract to the injury of the plaintiff, induces the breach w/o justification to break that contract (Said v Butt) and the plainiff suffer damages • Defence to tort of inducing breach of contract: o If an officer or director for a corporation, acting bona fide within the scope of their authority, procures or causes the breach of a contract between his employer and a third party, he does not thereby become liable to an action of tort (Said v Butt) o BUT where the director does not act within the scope of their duty, they become liable for their actions ▪ In this case, the Taylors were not acting within the scope of their authority to do what is best for PMAC - instead they were acting to secure the transfer of the greatest possible amount of PMAC's funds to themselves to shield those funds from the obligations PMAC owed to McFadden ▪ This would be a defense in the event that they breached a contract in the best interest of the corp. For example, you break a contract in order to save the corp money. You need a GOOD REASON to use this defense. • A principal may be relieved of the liability for the tortious acts of his agent where the act is outside the agent’s scope of authority, real or implied, though the agent himself remains liable. • Vicarious liability: If an employee commits a tort in the course of employment, the co is vicariously liable.

369413 ALBERTA LTD V POCKLINGTON (2000 ABCA) –ELEMENTS OF INDUCING BREACH OF CONTRACT • 7 elements of the tort of Inducement of Breach of Contract: (directors can be held personally liable for this) o (1) The existence of a K o (2) Knowledge or awareness by the defendant of the K o (3) A breach of the K by a contracting party o (4) The defendant induced the breach o (5) The defendant, by his conduct, intended to cause the breach o (6) The defendant acted without justification o (7) The plaintiff suffered damages • If you are the director of a corporation and you induce (through your corporation) another corporation to breach a contract for the benefit of your corporation, then that can also incur liability

LIABILITY IN THE AREA OF TRUST LAW

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CITADEL GENERAL ASSURANCE CO V LLOYDS BANK CANADA (SCC 1997) – LIABILITY FOR KNOWING ASSISTANCE OR KNOWING RECEIPT OF TRUST PROPERTY – BOTH ARE BREACH OF TRUST Ratio: Liability can be imposed by proving either knowing assistance or knowing receipt of trust property Facts: Citadel General is the beneficiary of a trust. Insurance Agent Co is the trustee & sells/collects insurance premiums on behalf of the insurer, Citadel General • Insurance Agent Co has a bank account for holding premiums & other funds at Lloyd’s Bank (the defendant). • The defendant accepted instructions from the parent of Insurance Agent Co to transfer funds from the account to another account of the parent • This reduced the parent’s overdraft at the defendant bank. The defendant knew the money was being held in trust for Citadel General Issue: Is the defendant bank liable for breach of trust, either through knowing assistance, or knowing receipt? Held: Appeal allowed; Lloyd’s bank held liable for “knowing receipt” • Knowing Assistance: (for breach of a trust due to dishonest & fraudulent conduct) o Defendant must have actual knowledge, recklessness or wilful blindness (Constructive knowledge is not sufficient) to be held liable o Must have a high standard of culpability here because you are merely assisting, not receiving the benefit yourself – actual knowledge is required • Knowing Receipt: o receipt of trust property for one’s own benefit o Plaintiff must prove: ▪ (1) Either of the following: • (a) The trustee took the trust property for its own use and benefit; OR • (b) The trustee had constructive knowledge that the subject of the trust was misappropriated. ▪ (2) An unjust enrichment o Mental state is less culpable than for knowing assistance because you are receiving the benefit of your wrongful actions, so there is a lower standard to find you guilty of the tort. o Constructive Knowledge: Knowledge of facts sufficient to put a reasonable person on notice or inquiry • In this case, there is knowing receipt because the bank knew that the money in the account was being held in trust for the plaintiff, and by reducing the overdraft of the parent corporation, the bank is enriched (unjust enrichment: enrichment of the defendant, a corresponding deprivation of the plaintiff, and a lack of juristic reason)

AIR CANADA V M & L TRAVEL LTD (SCC 1993) – DIRECTORS HELD LIABLE FOR KNOWING ASSISTANCE OF BREACH OF TRUST Ratio: corporate directors can be held liable for knowing assistance of breach of trust if there has been a dishonest, fraudulent breach of trust by the corporation and the directors knowingly assisted the corporation to do so Facts: Martin and Valliant were 2 shareholders and directors of their travel agency corporation (M & L); their travel agency was in a trust relationship with Air Canada, whereby they sold Air Canada tickets, held the fares in trust for Air Canada, and paid Air Canada the collected funds twice a month • M & L deposited all of their money into a general operating account and when the directors began disputing over the corporation and the corporation’s assets & the bank froze the account • Air Canada wanted to hold both of the directors individually liable for the money owing on its ticket sales for knowing assistance in the breach of trust • The Court of Appeal entered judgment against the directors Issue: Was the director personally liable for the breach of trust by the corporation? Held: Appeal dismissed; Directors liable for knowing assistance Reasoning: • Whether there was a trust relationship: 45

o To constitute a trust, there must be: ▪ 1) certainty of intent (intention to create a trust), ▪ 2) certainty of subject (funds collected), and ▪ 3) certainty of object (beneficiary) o There was a trust relationship present between M & L and Air Canada • Knowing receipt: o Not present in this situation because knowing receipt requires the stranger to the trust to have received trust property in his or her personal capacity • Knowing assistance: o Persons who assist with knowledge in a dishonest and fraudulent design on the part of the trustees will be liable for breach of trust ▪ Knowledge required: both actual knowledge of the trust’s existence and actual knowledge that what is being done is improperly in breach of that trust (or willful blindness or recklessness) o M & L was in breach of trust & this breach was dishonest & fraudulent (because it was supposed to put money into a trust account to hold for Air Canada); the corporation took a risk to the prejudice of the rights of the beneficiary, which risk was known to be one which there was no right to take ▪ M&L put trust funds in general account, which made them liable to seizure by the Bank, which prejudices the rights of the beneficiary; A third party (the bank) benefited from the breach; Martin was aware or at least recklessly blind to the fact that the bank could seize the funds, as it was subject to the demand loan o The directors assisted with that breach of trust and are liable as constructive trustees ▪ Mental state: The directors assisted in the breach because their conduct precipitated seizure by the bank of Air Canada’s money

LIABILITY BASED ON THIN CAPITALIZATION

• Thin capitalization: Company has high debt to credit ratio, thin capital investment from shareholders o Thin capitalization alone will not result in the lifting of the corporate veil (there must be other factors or conduct involved) o No statutory requirement that corporation must be funded to be able to pay for liabilities

WALKOVSZKY V CARLETON (1966 NYCA) – THIN CAPITALIZATION NOT ENOUGH TO LIFT CORPORATE VEIL Ratio: Thin capitalisation is never enough on its own to lift the corporate veil Facts: Carleton is a shareholder in 10 cab corporations, and each cab carried only the minimum $10,000 required third party liability insurance. The plaintiff was injured by 1 company & sued all 10 companies & Carlton as an individual. Issue: Should the corporate veil be pierced and have liability attach to C? Held: Defendant not liable; • Cannot argue that the corporations are under-•‐insured because that’s the statutory minimum. It would be the government’s responsibility to change the minimum. • There were no signs of fraudulent behaviour or activity; Thin capitalization isn’t admirable, but it’s not fraudulent in an of itself (would have to have been tortious or a greater degree of improper conduct) • Walkovzky’s argument that all 10 corporations are a single entity and there should therefore be liability failed Dissent: these corporations were intentionally undercapitalized to avoid responsibility for acts bound to arise in the operation of taxi companies; all income was drained from the corporations for the same purpose of avoiding the payment of liabilities that would arise • Shareholders should be held individually liable in these situations where the corporations are designed solely to abuse the corporate privilege at the expense of public interest

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Note: if there is other improper conduct that supports the lifting of the corporate veil, still mention the thin capitalization of the company, as it looks the defendant look bad; it is relevant but it cannot support the lifting of the corporate veil on its own HENRY BROWNE V OCEAN CHARTERS (ENG CASE) – THIN CAPITALIZATION IS NOT ON ITS OWN ACTIONABLE AND IT IS INSUFFICIENT TO LIFT THE CORPORATE VEIL Ratio: The fact that a corporation is thinly capitalized will not affect the liability of the corporation in Ks it enters into. Facts: Henry Brown entered into contract with Ocean Charters; Henry Brown provided a steering wheel for a yacht and received no payment in return; Henry Brown then discovered that Ocean Charters was created by two shareholders, each of whom had invested $1 in the company • Ocean Charters was liable for breach of contract, but it had no money to pay for the liability • Henry Brown sued the shareholders individually Issue: Who did Henry Brown enter into a K with and does the fact that the corporation was thinly capitalized have any effect on holding the corporation’s shareholders liable? Held: HB contracted with OC and the fact that OC was thinly capitalized has no effect. Reasons: • The Court relied upon Salomon to deny a finding of personal liability against the shareholders • It is the risk of the contracting party to ensure that the party they are contracting with can and will pay for their liabilities o When a party is consensually entering into contract relations, they cannot hold the individual shareholders of the other party personally liable • No fraudulent activity on the part of OC was discovered

CHAPTER 5: TORTIOUS, CRIMINAL, REGULATORY & CONTRACTUAL LIABILITY OF CORPORATIONS Basics: • Corporations, as separate legal entities, can sue and be sued • A corporation faces tortious, criminal, contractual, and regulatory liability • Through the principles of agency, a corporation can be bound to perform contracts entered into by its agents

INDIVIDUAL V CORPORATE LIABILITY Individual Liability - Liability without agency. o 1/ Contract - X enters into a contract. X has primary, personal liability o 2/ Tort - X commits a tort. X has primary, personal liability o 3/ Crime - X commits a crime. X has primary, personal liability - Liability through agency o 1/ Contract - Ms X’s agent, at X’s request, enters into a contract ▪ Ms X has primary, consensual liability ▪ (Ms. X can also have liability based on her agent’s ostensible authority) o 2/ Tort – Ms X’s agent, who is also her employee, commits a tort in the ordinary scope of employment ▪ Ms X has non-consensual, vicarious liability o 3/ Crime – Ms X’s agent commits a crime (not at Ms. X’s request) ▪ Ms X has no liability (there is no vicarious liability in criminal law) Corporate Liability - Liability without agency (although this is a bit fictional because a corporation always requires agents to facilitate business activity) o 1/ Contract – NA: corporate liability in contract is only established via agency law o 2/ Tort – Corporation X commits a tort

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▪ Corp X has primary liability established by the directing mind doctrine o 3/ Crime – Corp X commits a crime ▪ Corp X has primary liability established through directing mind doctrine as augmented by recent amendments to the Criminal Code - Liability through agency o 1/ Contract – The corporation is bound if its agent has actual or ostensible authority o 2/ Tort – the corporation’s employee commits a tort in the ordinary course of employment ▪ The corporation’s liability is non-consensual and vicarious o 3/ Crime – there’s no vicarious liability in crime, so this is NA

CRIMINAL AND TORTIOUS LIABILITY

ATTRIBUTING LIABILITY TO A CORPORATE BODY

THE “RHONE” V THE “PETER AB WIDENER” (1993 SCC) - DIRECTING MIND DOCTRINE – EMPLOYEE WITH GOV’ING EXECUTIVE AUTHORITY TO DESIGN & SUPERVISE THE IMPLEMENTATION OF CORP. POLICY Ratio: In order to hold a company liable for a crime committed by an employee, the employee must be a directing mind of the corporation (Directing Mind Doctrine): - A “directing mind” is found when the discretion conferred on an employee amounts to an express or implied delegation of “governing executive authority” to “design and supervise” the implementation of corporate policy, rather than simply carrying out such a policy Facts: Rhone is a ship owned by the plaintiff; the ship was struck by a tug boat flotilla, being captained by Captain Kelch; the plaintiff sued Captain Kelch and his employer, Great Lakes Shipping - Captain Kelch, the flotilla master, was a partial cause of the accident due to his negligence o Kelch had some non-navigational functions as well, as an “incident of his employment” o Captain Kelch was an employee of Great Lakes shipping, who owned two of the flotilla tugs. - The Shipping Act contained a specialized defense, and it states that the owner of a ship has the benefit of limited liability concerning acts or omissions in the navigation of the ships that occur without the owner’s actual fault or privity - At trial, the judge found that Captain Kelch was a directing mind of the corporation of Great Lakes, and therefore Great Lakes could not limit its liability under the Shipping Act (as it was at fault, as per the fault of one of its directing mind); the decision was affirmed by the FCA Issue: Is Captain Kelch a “directing mind” of Great Lakes? Did the collision occur without the actual fault or privity of Great Lakes, as per s 647(2) of the Shipping Act or not? (are Captain Kelch’s faults the faults of the corporation by reason of his position)? Decision: Appeal allowed; Captain Kelch was not a directing mind of the corporation, and therefore the collision did not occur with the actual fault of Great Lakes Analysis: - Question is at what point in the hierarchy of a company is the fault of a person employed in the organization to be treated as the fault of the corporation itself? o For a corporation to be criminally liable for an act of an employee, the employee must be a directing mind of the corporation - For determining if a person is a directing mind of a corporation: o Focus of inquiry must be whether impugned individual has been delegated the “governing executive authority” within the scope of his/her authority; this discretion should include the ability to design and supervise implementation of corporate policy o Although Kelch was considered a decision maker, one “must look behind the labels and consider the responsibilities and functions performed” by Kelch within the corporate hierarchy of Great Lakes

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▪ In light of that, Kelch was clearly just a port captain with some additional responsibilities owing to his experience, but he’s an employee, not a member of the corporate design and supervisory functions ▪ Kelch was entirely subject to supervision of Captain Lloyd. Did he have governing authority over management and operation of the fleet? • No! He did whatever “rotten job” he was given - A limited decision-making role won’t render a person a “directing mind” of a corporation if the governing authority over management and operation of corporation resides elsewhere

CORPORATE DEFENSE TO LIABILITY R V CANADIAN DREDGE & DOCK CO (1985 SCC) - CORPORATIONS CRIMINALLY LIABLE – DIRECTING MIND & IDENTIFICATION DOCTRINE – ACTION WITHIN SCOPE OF AUTHORITY IN ORDINARY COURSE OF BUSINESS, NOT TOTALLY IN FRAUD OF CORP, & PARTLY FOR BENEFIT OF CORP Ratio: Identification Theory operates to find a corporation liable where the action taken by the directing mind of the corporation was: (1) Within the scope of authority in the ordinary course of business, (2) Not totally in fraud of the corporation, and (3) By design or result, partly for the benefit of corporation (corporation got something out of it, either by design or intent) Facts: Corporations were convicted under Criminal Code for contracts/RFPs between public authorities and appellants where the bids were tendered on a collusive basis; managers were getting kickbacks and there was fraud o So it’s a criminal collusion ring getting bids for government contracts - Each corporation had a manager who conducted the business of the corporation relating to the submission of bids for tender - The corporations denied criminal liability, notwithstanding the position of the managers, because the managers were acting: o In fraud of the corporation; or o Wholly or partly for their own benefit; or o Contrary to instructions that they not engage in illegal behavior on behalf of the corporation Issues: Is a corporation liable for criminal actions of their managers/directors? What is the “appropriate outer limit of the attribution of criminal conduct of a directing mind when he undertakes certain activities in fraud of the corporation or for his own benefit?” Decision: Corporation found criminally liable in the circumstances by operation of the identification theory Analysis: - Court breaks down how criminal liability can be attributed to a corporation: o a/ Absolute liability and strict liability (no MR needed) o b/ Mens rea offenses ▪ At CL, corporations couldn’t be convicted of criminal offenses. Why: • a/ Criminal law abhors vicarious liability or respondeat superior • b/ The doctrine of ultra vires, which holds that criminal activities by corporate agents beyond their capacity do not attract corporate liability o Even in mens rea offences: if the court finds the officer or managerial level employee to be its directing mind in the sphere of duty assigned him so that his actions and intent are the action and intent of the corporation itself, the corporation can be held criminally liable. - Identification theory: that the corporation and person committing the crime have become one in the same, so as to unite actus reus and mens rea o If a directing mind acts outside of the field assigned to them, was totally in fraud of the corporation, and the corporation received no benefit, the corporation DOESN’T have criminal responsibility.

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- TEST for Identification Doctrine: If these conditions are met, the corporation has PRIMARY criminal liability. o Identification doctrine only operates where the Crown demonstrates that the action taken by the directing mind was: 1. within the field of operation assigned to him 2. was not totally in fraud of the corporation 3. was by design or result partly for the benefit of the corporation - Application: o In this case, the managers were trying to benefit the corporations, as well as take a bit for themselves. They weren’t acting wholly for their own personal benefit. They remain directing minds of the corporation. - Note: Criminal Code amendments have broadened who can be considered to be a directing mind of a corporation for the purposes of finding a corporation criminally liable o This case continues to state the test for finding a corporation liable in tort, but not for criminal liability

STATUTORY CRIMINAL LIABILITY - Historically, corporations were rarely convicted of criminal offences o Because actus reus and mens rea had to occur in one directing mind for the corporation to be held liable - And then, the Westray mining disaster occurred o Public inquiry showed that explosion could have been prevented if managers had paid attention to repeated warnings about the safety of the mine o But in the end, no one was imprisoned or convicted for the deaths. This really highlighted some of the problems in the Criminal Code and issues with the directing mind theory in the criminal context - Criminal Code amendments: Bill C-45 o Bill C-45 Distinguishes Between: ▪ Crimes requiring the Crown to prove negligence (s 22.1); and ▪ Crimes requiring the Crown to prove knowledge or intent (s 22.2) o Highlights of Bill C‐45 ▪ The actus reus and mens rea of criminal officers attributable to corporation will no longer need to be derived from the same individual (can be committed by different individuals) ▪ The class of personnel whose acts or omissions can supply the physical element of a crime (actus reus) attributable to a corporation or other organization will be expanded to include all employees, agents and contractors ▪ For negligence based crimes, the mental element of the officer (mens rea) can be attributable to corporation through the aggregate fault of the organization’s “senior officers” (includes members of management with operational, as well as policy-making authority). ▪ For crimes of intent or recklessness, criminal intent will be attributable to a corporation where a senior officer is a party to the offence, or where a senior officer has knowledge of the commission of the offence by other members of the organization & fails to take all reasonable steps to prevent or stop the commission of the offence ▪ To satisfy the Defence of due diligence, corporation should have workplace policies & loss/risk management systems ▪ Bill C‐45 expands scope on who can be included as a directing mind (includes senior officers & people who meet the CL test) o S. 22.1 Criminal Code - Offences of Negligence for Organizations ▪ A corporation is a party to an offense if: • A representative of the corporation is acting w/in the scope of his authority and

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• There is a marked departure from the standard of care that, in the circumstances, could reasonably be expected to prevent a representative of the organization from being a party to the offence o S. 22.2 Other Offences for Organizations ▪ A corporation is a party to the offence if any senior officer has the intention to benefit the corporation in part and is • Acting w/in the scope of their authority is a party to the offence, • Having the mental state required for the offence directs representatives to commit the prohibited act or make an omission or • Knowing that a representative of the organization is or is about to be a party to the offence, does not take all reasonable measures to stop them from being a party to the offence - Metron case – example of a corporation being convicted under the new provisions o Defendant corporation wanted to restore some balconies. The defendant hired a project manager, who in turn hired a site supervisor. Platform collapsed because too many construction workers were on it. Platform wasn’t properly constructed. ¾ of the deceased had marijuana in their bloodstream. o Defendant corporation pled guilty to negligence; conceded that the site manager was a senior officer, and therefore mens rea for the criminal offence is attributable to the corporation.

REGULATORY OFFENCES • Often, convictions are for breach of environmental regulations. Directors and officers will often be prosecuted.

Regulatory Offences - Not criminal in a real sense; sometimes called statutory offences, public welfare offences; the idea is that there’s some public purpose - There are three types of offences (R v Sault Ste Marie): o Absolute liability – The actus reus alone will impose liability (no mental component to the offence) o Strict liability – due diligence offence; Once the accused is proven to have committed the actus reus, liability will be found unless the defendant proves a due diligence defense on a balance of probabilities (proof that defendant took all reasonable care) o Mens rea offence – requires a guilty mind (intent or recklessness) - Regulatory offences are usually strict liability (permitting the due diligence defence)

R V BATA INDUSTRIES (1992 ONPC) – DUE DILIGENCE DEFENCE - ONUS ON ACCUSED TO SHOW ON BOP – SCOPE OF DUTIES TAKEN INTO ACCOUNT IN DETERMINING REAS. CARE Ratio: The onus is on the party raising the defence of due diligence to show on a balance of probabilities that they acted with reasonable care. The scope of an employee’s duties is taken into account when determining the level of “reasonable care” expected of them. Facts: Chemical storage bins were left in the yard of a shoe manufacturing plant, and they were leaking into the ground - This contravened Ontario’s Environmental Protection Act; Directors were charged with strict liability offences Issue: Can directors be prosecuted? Did they meet the actus reus of the offence? Any defenses available? Decision: Merchant and Weston were convicted and received fines, the order was also made that they could not be indemnified by the corporation for their fines; Bata Corporation was also fined Analysis: - Sets out factors for due diligence in this case: o Did board establish “pollution prevention” system? Was there supervision or inspection? o Did each director ensure that corporate officers have been instructed to set up a system that was consistent with industry practice in ensuring compliance with environmental laws? o Did directors review environmental compliance reports, or at least get info from subordinates on the matter?

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o Are directors ensuring that environmental concerns are being promptly addressed? o Are directors aware of industry standards for dealing with these pollutants? o Did directors immediately and personally react when they had notice that the environmental safeguards failed? - Principle of delegation in environmental matters o According to EPA, environmental protection is too important to delegate entirely in the corporation; not acceptable for corporate directors to insulate themselves from all responsibility - CEO (Mr. Brata): not guilty; his behaviour indicated due diligence o His responsibilities were primarily global, no evidence that he was aware or willfully blind of the problem & he took action once he found out about the problem; he was also entitled to rely on his directors who had more involvement with the plant - Douglas Merchant: convicted; he knew about the environmental non-compliance for about six months, and did nothing to deal with it. Lack of paper trail and delay in cleanup shows lack of due diligence - Keith Weston – convicted; worked as “on-site” director, high degree of responsibility; did not take reasonable steps to avoid harm o His responsibilities as the on-site director make him more vulnerable to prosecution o E.g. Weston received a quote of $58,000 for environmental clean-up, and did nothing to begin the clean- up (Weston was being incentivized in his personal salary to cut company costs)

R V BATA INDUSTRIES (1995 ONCA) – INDEMNIFICATION OF DIRECTORS AND OFFICERS MUST BE IN ACCORDANCE WITH ABCA, S 124 Ratio: A corporation can only indemnify a corporation’s directors/officers pursuant to legislation (s 124 ABCA) Facts: Appeal from the above case; trial judge fined Bata Corporation $120,000; fined Marchant and Weston $12,000 each personally o Further, Bata Corp was prohibited to indemnify Marchant and Weston for the costs of their fines – they had to pay them fines out of pocket. Order was punitive in nature. - Bata Corporation, Marchant, and Weston appealed their sentences, and they were reduced in all cases by significant amounts. - Trial Judge noted that if Marchant and Weston were to be indemnified by Bata Corporation, “the viable sentencing options of the Trial Judge are limited and incarceration gains prominence” o E.g., only way to punish them in a meaningful way would be prison - Also, by-laws of Bata Corporation say that to qualify for indemnification, the litigation had to have been substantially successful, and Weston and Merchant were obviously not successful Issue: Was the TJ’s prohibition on indemnification correct in law? Decision: No, the order of the trial judge was improper. Probation terms against Bata Corporation must be directed at the rehabilitation of the corporation; The indemnification order was not directed at this goal, as it sought to punish the directors; ability to indemnify officers must be found in statute (ABCA, s. 124) Analysis: - Prohibition on indemnification was improper because s 72(3)(c) specifies deterrence and rehabilitation of the defendant, who was BATA, the corporation – but the penalty was levied not against Bata Corporation, but against Marchant and Weston o “A term of probation is inappropriate if it represents an additional punishment exceeding the proper scope of the probation order” - The trial judge also ignored s 136 of the OBCA [very similar to Alta provision, s 124 ABCA], which establishes when a corporation may or must indemnify a corporate officer or director, and when it must not. o So long as the officers acted in good faith and under reasonable belief their conduct was lawful, they may be indemnified. - The trial judge noted that the corporate bylaws prevented indemnification – if that’s true, this whole discussion is superfluous o BUT there was an error in law.

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- Court agrees that there may be deterrent reasons for preventing indemnification, but the statutes simply don’t work that way. - s 124 of ABCA o Ensures that employees within the corporation are indemnified by the corporation only in circumstances where it would be fair to do so o Officers must have reasonable belief that their conduct was lawful and must have acted in good faith o So, even without the court order, it is unlikely that the directors could be indemnified, as per the legislation

R V SYNCRUDE CANADA (2010 ABPC) – BIRDS KILLED LANDING ON TAILINGS POND – STRICT LIABILITY – DUE DILIGENCE DEFENCE FACTORS Ratio: Defense of due diligence will be available in the prosecution of a strict liability offence if the agent reasonably believed in a mistaken set of facts which, if true, would render the act/omission innocent, or if they took all reasonable steps to avoid committing the offence Facts: 1650 birds died that landed on Aurora tailings pond that had a layer of bitumen on top. Tailings pond in area where migratory birds convene and in a spot where they land. Syncrude was charged under EPEA and the Migratory Birds Convention Act. EPEA Section 155 A person who keeps, stores or transports a hazardous substance or pesticide shall do so in a manner that ensures that the hazardous substance or pesticide does not directly or indirectly come into contact with or contaminate any animals, plants, food or drink. Migratory Birds Convention Act, 1994 5.1 (1) No person or vessel shall deposit a substance that is harmful to migratory birds, or permit such a substance to be deposited, in waters or an area frequented by migratory birds or in a place from which the substance may enter such waters or such an area. Issues: Is Syncrude liable for violating environmental legislation? Can Syncrude prove it took all reasonable care to avoid the contraventions as a defence? Decision: Syncrude guilty of both the provincial and federal offences; fined $3,000,000 Analysis: - Crown must prove that Syncrude breached the legislative provisions beyond a reasonable doubt, and once shown, Syncrude must prove on a BOP that it took all reasonable care in order to avoid liability - Defense of Due Diligence: if the accused reasonably believed in a mistaken set of facts which, if true, would render the act or omission innocent; or if it took all reasonable steps to avoid the particular event. Determined on the balance of probabilities (R v Sault Ste. Marie) o Not held to a standard of perfection, just have to take all reasonable steps o Factors: ▪ Nature & gravity of the adverse effect, foreseeability, alternative solutions, industry standards, complexity of the problem, preventative system, efforts to address problem, promptness of response, matters beyond control of the actor, legislative or regulatory compliance, skill levels expected of the accused, economic considerations, character of the neighbourhood

o Syncrude’s approach: ▪ Delayed set-up of the deterrence system ▪ Head of team had little training or experience, no credentials ▪ The bird team had experienced cutbacks ▪ There was lack of oversight ▪ Lack of documentation ▪ Other companies were doing a better job (not meeting industry standards) ▪ Few man hours were being invested ▪ Little money was invested 53

Other defenses used by Syncrude: 1) Technical readings of both offences (paras. 48-49) 2) Impossibility in avoiding bird deaths (para. 132) • Not impossible, as due diligence could have been used to deter birds from landing and it was not used at the material point in time 3) Act of God defense (para. 134 & 142) • convergence of bad weather and seasonal timing was argued. • Court said to use this defence, would have to prove it was not foreseeable and then that you took every precaution and third there were no human intervention in the force of nature. Syncrude failed on the second part. • Foreseeable that weather events could have arisen that would lead birds to land on the pond at that time of the year 4) Abuse of process (paras. 150-151) • Can still be in compliance with terms of approval while violating legislation and Syncrude can still be prosecuted for those violations • compliance and abuse of process to prosecute/offends public’s sense of decency or fair play – nothing like this present 5) Officially induced error (para. 158) • Would have to point to actual comments from an official that told them that they would be immune from punishments 6) Defense of de minimus (para. 165) • Argument that law does not concern itself with trifling matters • This argument was not very tasteful, not very well grounded, was seen negatively by the judge and by media

Note: when a company is thinking about whether to fight charges, they should also think about how their reputation will suffer by dragging out the process

CONTRACTUAL LIABILITY – CURRENTLY GOVERNED BY INDOOR MGMT RULE & AGENCY - At common law, the contractual liability of the company is tied to: o The ultra vires rule [largely repealed by s 16 and 17(3) ABCA] ▪ Per McGuiness: The Latin term ultra vires describes a class of acts that were beyond a body’s powers or jurisdiction ▪ Essentially, if a corporation contracted outside of the objects listed in its memorandum of association, it could not be held liable as those contracts were unenforceable (Jon Beauforte) • E.g. a corporation created to carry out mining activities becomes involved in operating a ski hill ▪ This rule is only still relevant for companies created by special act o The constructive notice doctrine [repealed by s. 18 of the ABCA] ▪ McGuiness: constructive notice is knowledge of a fact that is presumed or imputed by law. At CL, a person who dealt with a corporate body was deemed to have notice of the contents of all documents that the corporation was required to file with, and did file with, a public office that were open to public inspection • Doctrine of ultra vires works hand in glove with the constructive notice doctrine because if you went down to corporate registry, you would have seen the MOA that says that the company does X. It’s on you to know the terms of the MOA and other things about the corporation.

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▪ After repealing of the rule: you are not deemed to know something just because it is publicly available o The indoor management rule [reflected in ABCA, s 19] ▪ Those dealing with a corporation are entitled to assume the internal procedures of a corporation have been complied with, except when they are notified otherwise ▪ Section 19 of ABCA: Assume that the internal procedures were complied with unless you hear otherwise ▪ McGuiness: Even during the heyday of the doctrine of ultra vires, the courts were loath to require third parties dealing with a corporation to inquire into compliance by a corporation or its directors and officers with the internal rules of management governing the conduct of the business ▪ Company cannot rely on its own internal rules not being followed to avoid the finding that a contract they entered into is valid and enforceable • E.g. contracts must be approved by board resolution o Agency ▪ Agent purports to contract on behalf of principal with a third party ▪ Principal can be bound to fulfill contracts entered into on their behalf by agent if the agent had actual or ostensible authority • Actual authority – principal has consented to the agent having authority o Can be express (agent can do this thing at this time with this party) or implied (e.g. the agent can do what they are normally expected to do) • Ostensible authority o Representation by the principal (by someone of actual authority) to the third party that the agent has authority to enter into contracts (giving the appearance of authority) o Must be represented by someone with sufficient actual authority (e.g. someone high enough up the ladder at the corporation, like an authorized officer) ▪ Party intentions: Look at whether the person who has been defrauded knew that they were dealing with an agent of the corporation, or if they thought they were dealing with the person in their personal capacity • If they should have reasonably known that the person was acting as an agent, then that may be sufficient to protect the agent from liability.

RE: JON BEAUFORTE (LONDON) (1953) - ULTRA VIRES: CONTRACTS VOID AB INITIO B/C CORPORATION’S ACTIONS DIDN’T CORRESPOND TO LIMITATIONS SET OUT IN CORPORATE BYLAWS/CONSTITUTING DOCUMENTS Ratio: A contract that is outside the articles of association of a company is ultra vires that company, and is void and unenforceable Facts: A company was authorized by its memorandum of association to carry on the business of costumiers, gown- makers and related activities”; the company then decided to undertake the business of making veneered panels, without amending the objects clause in its MOA; The company then fell on hard times and went into compulsory liquidation • A number of proofs of debt were lodged by creditors and were rejected by the liquidator on the ground that the contracts to which they related were ultra vires • Three creditors appealed that rejection by the liquidator, claiming that they had not had actual knowledge that the veneer business was ultra vires the company Issue: Are the three contracts at issue (i.e. contract for construction of the veneer factory and contract for veneer) unenforceable? Decision: The contracts are unenforceable. The company does not need to fulfill the contracts which facilitate something falling outside of the corporation’s objects (as laid out in its memorandum of articles) Analysis:

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- The fuel supplier (one of the parties to whom money was owed) was deemed to have had constructive notice of the corporate objects; they had sufficient notice that the transaction was ultra vires the corporation o The fuel supplier knew that the fuel was to be used for running a veneer business o Constructive notice says that you are fixed with knowledge of publicly available documents ▪ So in this case, the fuel supplier should have known the objects of the corporation, and therefore known that making veneer was outside of those objects - Unjust enrichment does not work in this instance o Jon Beufort is enriched (because it receives fuel), the supplier is deprived, but there is a juristic reason for the transaction (because of the ultra vires doctrine which restricts a corporation to its stated objects) - The purpose of the ultra vires doctrine is to protect corporations to ensure that they’re only operating in the area that they said they would o This leaves suppliers high and dry, and puts the onus on them to read all the corporate documentation of other parties before entering into contracts. This is a business efficacy problem.

COMMUNITIES ECONOMIC DEVELOPMENT FUND V CANADIAN PICKLES (1991 SCC) – ULTRA VIRES DOCTRINE ABOLISHED BY ABCA/CBCA EXCEPT FOR SPECIAL ACTS CORPORATIONS Ratio: Doctrine of ultra vires no longer operates under general Acts (ABCA & CBCA) for policy and common sense reasons - Ultra vires can still apply with respect to Special Acts corporation (corporation created by special act for government purposes) - The guarantee also contemplates that if the loan is ultra vires, then the guarantees don’t apply Facts: Communities Economic Development Fund (CEDF) was a corporation created by statute (incorporation via SPECIAL ACT); the statute provided that the Fund is mandated to encourage economic development of remote and isolated communities in Manitoba; the legislation prohibited the CEDF from making a loan which contravenes any part of the legislation - CEDF loaned money to a corporate borrower, Canadian Pickles, who was not located in a remote area; they were 20km out of Winnipeg; on this basis, the loan is ultra vires because the fund only has the powers it’s granted under the legislation - Pickles goes bankrupt, and CEDF tries to collect from the individuals who made the guarantees - The trial judge found that Canadian Pickles was liable for the full amount of the loan; the Court of Appeal allowed the appeal and held that the guarantee of the loan was not enforceable Issue: Is the doctrine of ultra vires applicable to a corporation created by statute? What is the liability of a guarantor to repay a loan which is ultra vires the lender? Decision: Appeal dismissed; the doctrine of ultra vires is applicable to a corporation created by statute and since the corporation issued a loan outside its stated purpose in the statute, it is ultra vires; the guarantee on the loan is unenforceable because a guarantee cannot backstop a loan that is ultra vires Analysis: - “In my opinion, the general abolition of the doctrine of ultra vires is in accordance with sound policy and common sense” [215] - However, the doctrine may apply in the case of corporations created by special act for public purposes & the loans in this case were ultra vires the special act o Logic behind the rule: that the public will be protected (ensuring that the public purpose will be followed) o Guarantees made on loans that are ultra vires are not enforceable o A corporation created by a special act doesn’t have the power to do things that are not in furtherance of its purpose ▪ Its PURPOSE creates the ultra vires rule. ▪ even though the ultra vires doctrine is abolished by statute, a corporation created by special act will have to follow its statutory mandate - If the loan is ultra vires, which is the case in this instance, the guarantee on repayment of the loan fails (is unenforceable)

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CONTRACTING WITH AGENTS OF THE CORPORATION - Actual authority: o Can be express or implied. Requires representation by the principal, but this does not need to be express o Usual authority (example of implied authority): authority within the usual scope of that office ▪ Representation here has to do with the handing over of the title o If the agent enters into a contract pursuant to actual authority, it creates contractual rights and liabilities between the principal and third party - Ostensible “Apparent” authority: o When principal creates situation where its reasonable for a third party to infer the agent has authority – must be a real representation. ▪ I.e. “estoppel by agency;” by his conduct, the principal is estopped from denying the agent’s authority o An agent can work for an undisclosed principal and bind that principal to a contract - If you can establish either actual or ostensible authority, you win. It’s best to argue both in practice.

ACTUAL AUTHORITY

PANORAMA DEVELOPMENTS V FIDELIS FURNISHING (1971 HL) - ACTUAL (IMPLIED) AUTH. MAY FLOW FROM A JOB TITLE OR POSITION – CORP SECRETARY RENTING FANCY CARS UNDER HIS EMPLOYER’S NAME, RENTING THEM OUT FOR PERSONAL GAIN Ratio: Actual, implied authority can flow from a job title or position, such as corporate secretary; As long as either actual or ostensible authority can be shown, the principal will be bound to the contract entered into by its agent Facts: Bayne, the corporate secretary of Fidelis, rents luxury cars from the plaintiff, Panorama; there’s an agent-principal relationship existing with Bayne as the agent and Fidelis as the principal; Panorama made luxury vehicles available to Bayne on corporate credit to Fidelis • Mr. Bayne would have the fancy cars, rent them out to other people, and personally pocket the money – this is fraud - The principal, Fidelis, argues that they should not be forced to pay because: o The contracts were between Panorama and Bayne, personally, not with Fidelis o The Bayne, as a company secretary, did not have the authority to enter into contracts on behalf of Fidelis - Bayne’s job title – is it a communication of actual authority to the world? Was Bayne, as a corporate secretary, held out to Panorama as someone who could bind them as an agent? - The trial judge found Fidelis liable for the outstanding payments Issue: Does Mr. Bayne have authority to bind Fidelis to a contract with Panorama? Will Fidelis have to pay Panorama? Decision: Appeal dismissed; Fidelis liable for outstanding debt owed to Panorama Reasons (Lord Denning): - As long as either actual or ostensible authority can be shown, principal will be bound to the contract - Denning takes a different approach: says that Bayne could have had either ostensible or actual authority o Argument for ostensible authority: ▪ Bayne is an officer of the corporation and the nature of the officer position comes with extensive responsibilities, including agreements to lease vehicles ▪ The principal therefore clothed Bayne as someone with authority, so Bayne had ostensible authority. ▪ Representation was made by the appointment of Bayne to position of corporate secretary • So, Bayne has actual authority by virtue of that title to do what corporate secretaries do. And there’s a representation by the principal, by virtue of that title, that the authority exists. - It could also be argued that Bayne had actual, implied authority to enter into contracts for the hire of cars (Note: courts usually focus on ostensible authority, rather than actual authority)

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o Baynes was a corporate secretary, and along with that fairly high position comes the ability to rent cars. o This looks to be actual, implied authority, by virtue of his position. ▪ The ability to rent cars accompanies his position as a facet of his job.

APPARENT AUTHORITY

FREEMAN V BUCKHURST (1964 UK) - TEST FOR APPARENT (OSTENSIBLE) AUTHORITY – 4 REQUIREMENTS – DEFINITIONS FOR OSTENSIBLE AND ACTUAL AUTHORITY - ARCHITECHTS PERFORM WORK FOR BUCKHURST (THROUGH ROGUE AGENT, KAPOOR) AND ARE NOT PAID Ratio: Test for Apparent Authority (all four must be met) 1. A representation was made to the third party that the agent had the authority to enter into these types of contracts on behalf of the corporation 2. Such representation was made by a person who had actual authority to manage the business (ie, the principal) 3. The contractor was induced by such representation to enter into the contract (ie. that he in fact relied upon it) 4. That under its memorandum of association, the corporation was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent (This part of the test only applies to corporations incorporated via special acts, as per the ultra vires doctrine (s 17(3) overrides ultra vires doctrine) Facts: Freeman (plaintiffs) are architects who perform work for Buckhurst (defendant); Buckhurst has a rogue agent, Kapoor, who acts as a managing director. However, Kapoor was never appointed to that position -> never completed the paperwork to finish his promotion; The plaintiff does work on Kapoor’s instructions and never gets paid. Kapoor leaves the corporation, and Freeman sues Buckhurst. • The trial judge held Buckhurst liable Issue: Is Kapoor an agent of Buckhurst despite not having filed the proper paperwork to solidify his position as managing director? Is Buckhurst liable for the contract? Decision: appeal dismissed; Buckhurst held liable as Kapoor was acting with ostensible authority in entering into a contract with the plaintiffs Reasons: - Intention by the parties from the outset was that Buckhurst and Freeman were the parties to the contract, not Kapoor - Buckhurst is liable, because Kapoor was acting with ostensible authority; o Board knew that Kapoor was acting as managing director, even though there was no resolution giving him such power (so he didn’t have actual authority); They acquiesced to this o Kapoor was acting as an agent for Buckhurst, so the contract was between Buckhurst and the third party contractors. A valid contract had been formed • Test for Apparent (Ostensible) Authority (all four must be met) 1. A representation was made to the third party that the agent had the authority to enter into these types of contracts on behalf of the corporation a. The board permitted Kapoor to act as though he was a managing director in employing agents and taking steps to find a purchaser; this conduct represented that Kpoor had the authority to into such contracts 2. Such representation was made by a person who had actual authority to manage the business (ie, the principal) a. Representation was being made by the board of directors, who had full powers of management in the corporation 3. The contractor was induced by such representation to enter into the contract (ie. that he in fact relied upon it)

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a. The plaintiffs were induced to believe that Kapoor was authorized by the defendant company to enter into contracts on its behalf 4. That under its memorandum of association, the corporation was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent ( This part of the test only applies to corporations incorporated via special acts, as per the ultra vires doctrine (s 17(3) overrides ultra vires doctrine) - Definitions of actual and ostensible authority: o Actual authority – “legal relationship between principal and agent created by a consensual agreement to which they are alone parties.” ▪ A note on actual authority: By virtue of Mr. Kapoor’s position as managing director, he would have actual authority, would he not? ▪ You could argue that the Board permitted him to act as managing director, so in that respect, you could argue he had actual authority on that basis. o Ostensible authority – “A legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted on by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the “apparent” authority, so as to render the principal liable to perform any obligations imposed on him by such contract” a. The articles of association did not deprive the company of capacity to delegate authority to a director to act as their agent and into contracts of this kind • Unjust Enrichment could play a role in these situations. On the facts above, you wouldn’t need UE because agency law is enough o Arguably, there’s a juristic reason in that there may not be authority for the agent o Freeman’s requirements on ostensible/apparent authority have been approved by SCC (Canadian Laboratory Supplies) and ABCA (Doiron)

DOIRON V MANUFACTURERS LIFE INSURANCE (2002 ABQB) - PRINCIPLE LIABLE FOR ACTS OF AGENT SO LONG AS AGENT ACTING WITHIN SCOPE OF ACTUAL/OSTENSIBLE AUTHORITY Ratio: A principal is liable for the acts of an agent so long as the agent is acting within the scope of their actual/ostensible authority Facts: The Doirons had money to invest, and they approached William Demmers for investment advice on no-risk ventures with a high rate of return; Demmers suggests some low-risk, low-return investments but Doiron’s didn’t like the rate of return and wanted something else; Demmers suggested that they invest in the Devon Capital Corporation venture instead because it has an 8% rate of return. The Devon product was not a Manulife product. It turned out to be a fraud and the Doirons lose their money. - Demmers worked in Manulife’s office, sold Manulife’s products, was supplied with Manulife business cards, and was encouraged to use Manulife letterheads in communications with clients, but Demmers wasn’t an employee of Manulife (was classified as an independent contractor); Demmers also sold the investment products of other companies o Clause 3(b) of the contract between Demmers and Manulife limited the scope of authority granted to Demmers: He was not authorized to enter into contracts on behalf of Manulife unless authorized in writing and he was not permitted to amend contracts - Demmer invested Dorions money into a fraudulent investment, and as a result the Dorions lost all their money o The Dorions have a judgment against the Devon Capital Corporation, but they haven’t received any money, so they’re now trying to determine whether Manulife should indemnify them Issue: Was Demmers an ostensible agent of Manulife? Is Manulife bound and liable as a result? Decision: Manulife held liable, as Demmers was found to be an agent of Manulife, acting with ostensible authority Reasons: - Actual authority: o Demmers had no actual authority to enter into contracts on behalf of Manulife (as per the agreement between Manulife and Demmers) 59

- Ostensible authority: o Operates as estoppel, precluding the principal from asserting that he is not bound o The Dorians thought he was a Manulife employee, so there was ostensible authority ▪ Demmers had business cards, letterheads office location, you could redirect from Manulife phones to him, logos in Demmers’ office ▪ all of this represents that Demmers was an agent of Manulife, even if the contract between Manulife and Demmers says he is not ▪ however, the point overlooked by the court was the Doirons’ had received a letter from Devon that outlined their investment (and should have made clear that the product was not connected to Manulife); the court overlooked this because at that point, the Doirons would not likely have received their money back (but O’byrne is hesitant on this, because it’s about liability and who the Doirons are dealing with, not so much about ability to get their money back at that time) - All of the criteria from the Freeman case are present, and thus ostensible authority is found: 1. A representation was made to the third party that the agent had the authority to enter into these types of contracts on behalf of the corporation a. Manulife office, letterhead use, business cards, Manulife promoting people who were selling its product, redirecting phone calls to Demmers from the Manulife phone number b. Manulife knew of Demmers’ mode of conduct that held him out as an agent of Manulife, and acquiesced to it 2. Such representation was made by person who had actual authority to manage the business (ie, the principal) a. Representation was being made by Manulife 3. The contractor was induced by such representation to enter into the contract (ie. that he in fact relied upon it) a. The Doirons relied upon the strength of the representations that Demmers was an agent for Manulife b. The plaintiffs were induced to believe that Demmers was authorized by the Manulife to enter into contracts on its behalf and was selling a Manulife product 4. There was no issue with the ultra vires doctrine (corporation was not deprived of the capacity either to enter into a contract of the kind sought to be enforced)

DOIRON V MANUFACTURERS LIFE INSURANCE (2003 ABCA) - OSTENSIBLE AUTH. DOESN’T REQUIRE EXPLICIT REPRESENTATION OF AUTHORIZATION – CAN BE IMPLIED, BUT IT MUST BE REASONABLE FOR 3RD PARTY TO RELY ON APPARENT AUTHORITY Ratio: Ostensible authority doesn’t require an explicit representation of authority; ostensible authority is found where the principal has created a situation such that it is reasonable to infer and rely upon the apparent authority of the agent Facts: Manulife appealed the decision that found it liable for the acts of Demmers, on the basis that Demmerss was acting as an agent with ostensible authority; Manulife argued that Demmers had ostensible authority, but that he had sold a non- Manulife product, never saying that it was Manulife’s; Manulife claimed that for them to be liable, Demmers, as the agent, must have specifically represented that the agreement being made was with the principal (Manulife) Decision: Appeal dismissed; Manulife is liable because Demmers had ostensible authority to enter into contracts in its behalf; it was reasonable for the Doroins to think that Demmers was acting on behalf of Manulife Reasons: • Ostensible authority is found where the principal created a situation such that it is reasonable to infer and rely upon the apparent authority of the person o Another statement of the test for ostensible authority is that there must be: a representation, a reliance on the representation, and an alteration of your position resulting from such reliance (Rama cCorp v Proved Tin & General Investments) • The mere belief on the part of a third party that they are contracting with the principal, absent some representation to that effect, either express or implied, can’t support a claim of ostensible authority so as to bind the principal o The surrounding circumstances in this case suggest that the principal gave an implied representation 60

CANADIAN LABORATORY SUPPLIES V ENGELHARD INDUSTRIES (1979 SCC) COMMERCIAL REALITIES – 3RD PARTIES CAN RELY ON REPRESENTATIONS OF LOWER LEVEL EMPLOYEES (AS LONG AS REASONABLE AND SUFFICIENT AUTHORITY) –– EMPLOYEE BUYING AND SELLING PLATINUM BEHIND COMPANY’S BACK FOR PERSONAL GAIN Ratio: Lower level employees can act with apparent authority to indicate what the company is bound to; 3rd parties can rely on representations of lower level employees; don’t need a senior officer to sign off on everything for there to be apparent authority Facts: CanLab often bought platinum from Engelhard, and would sell the scrap back to Engelhard - Cook was an employee in CanLab’s sales department - Cook contacted Engelhard, saying that CanLab was doing “secret experiments” to be carried out by Giles; Giles is purportedly a secret scientist working with platinum. In actuality, Giles is a fictitious person being used for Cook’s personal benefit. - Engelhard agreed to ship platinum ordered by CanLab, accept scrap returns directly from Giles, and pay Giles directly. Giles (actually Cook) pockets the money. o O’Byrne: These facts are ridiculous. Secret scientists? Paying people directly? No. Englehard should have asked to talk to a supervisor. - Cook began operating his fraudulent scheme in 1962 - In 1966, Engelhard spoke to purchasing agent Snook, who held out Cook as an agent for CanLab who should be dealt with when addressing the “Giles” customer - In 1968, Engelhard called the vice president of CanLab to ask about the work of the secret scientist and the platinum sales Issue: Is Engelhard liable to CanLab in conversion (that is, it converted CanLab’s platinum to its own use)? o If so, at what point does its liability end, or is it liable for CanLab’s entire loss? - Did CanLab represent to Engelhard that Cook had the authority to set up the arrangement? Decision: Engelhard held liable for conversion up until 1966, when Cook was held out as having authorization to purchase by another employee, after which Cook had ostensible authority to carry out the platinum transactions (Cook did not have ostensible authority before 1966) Reasons: - Engelhard is liable up until 1966, when CanLab talked to a person (Snook) who has actual authority o Cook did not have actual authority because he was a lower level employee, so Engelhard was liable for conversion from 1962-1966 o Snook would have to actual authority to hold Cook out as having authority in 1966 for liability to shift to CanLab at that time - Lower level employees can act with APPARENT authority to indicate what the company is bound to. o Representation that creates apparent authority can be in form of knowledge and acquiescence by someone at the company who hold actual authority o Again, must look at whether it is reasonable in the circumstances to rely on the representation made by lower level employees o Identification of the persons whose knowledge and acquiescence constitute knowledge and acquiescence of the company depends on the fact of the case - Commercial realities dictate that third parties can rely on representations of lower level employees (especially when a contract is initiated by a third party). o You do not always need to have the senior officers confirm everything that lower level employees are representing. - Indoor management rule applies here o Indoor management rule: persons need not inquire into the regularity of the internal proceedings of a corporation; they may assume that everything is being done regularly and in accordance with the company’s public documents o CanLab was held to have affirmatively held out Cook’s status through a responsible and appropriate representative (Snook) when questioned about who had the authority to deal with expediting payments 61

Dissent (Laskin J): - Found that in 1968, Engelhard’s liability would end because they finally spoke to VP of operations at CanLab, which should have put Canlab on inquiry and notice o After that point, Canlab is solely liable for their losses o Engelhard’s liability continues past 1966 because Snook had no managerial authority. Snook isn’t a manager, so he doesn’t have actual authority to be arranging the purchase of platinum and the resale of scrap platinum to Engelhard o Cutting off Engelhard’s liability in 1966 splits the loss in a fair way… but Laskin can’t accept that as correct, because Cook doesn’t have actual authority. - Reason why Engelhard is liable up to 1968: o It is impossible to equate the position of a mere clerk with that of the managing partner of the company sought to be bound by the agent’s representation o Representation by an agent himself as to the extent of his authority cannot amount to a holding out by the principal ▪ representation must made by person who had actual authority to manage the business (as per the Freeman test)

CHAPTER 5 SUMMARY - Primary tortious liability flows through the directing mind theory [The Rhone, Canadian Dredge & Dock] o Court says there’s a limit to when directing mind will apply – and this is where the criminal/tortious act is totally in fraud of the corporation and where the act is intended to and does result in benefit exclusively to the directing mind, the DM ceases to be a directing mind (this is the defence as stated in Canadian Dredge) - Criminal liability through the directing mind theory [Canadian Dredge], same as for tortious liability, except as modified through Criminal Code (which expanded criminal liability) o Amendments to CC make conviction more likely (actus reus and mens rea can be in different people; also broader sense of who you can get the mens rea from – you can get it from senior officers, for example) o Defense [Canadian Dredge] - Liability pursuant to regulatory offences o Defense of due diligence – taking all reasonable care to avoid the AR [Sault Ste Marie, Bata, Syncrude] ▪ Directors can also be charged and convicted - Contractual liability o Doctrines to consider: ▪ Ultra vires [Jon Beauforte, Pickles Corp] – repealed by s 16 & 17(3) of ABCA ▪ Constructive notice – repealed by s 18 ▪ Indoor mgmt. rule – maintained by s 19 ▪ Agency • Actual authority [Panorama, Freeman] • Ostensible/Apparent Authority [Panorama, Freeman, Doiron, CanLab] o Test for Ostensible Authority - Freeman o How to establish ostensible? Two ways: ▪ 1/ Representation by virtue of the office/apparently held by the Agent (Panorama/Freeman/Doiron). • The representation must be made by someone who has true, actual authority e.g. Board of Directors ▪ 2/ Representation as to Agent’s authority by a corporate representative with actual authority to make such a representation (CanLab)

CHAPTER 6 – CORPORATE SOCIAL RESPONSIBILITY

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SUB-PRIME MORTGAGE CRISIS • Not many unconscionable loans/predatory loans, just ill advised. • Borrowers (buyers) (unsophisticated): o Put no money down with a small initial payment (no down payment, low interest rates) o Adjustable rate mortgages: Small teaser rate to start out, but rate reset two years later to double or triple • Buyers given very complicated mortgages to review. The deferred cost is emphasized, long term cost is buried. • Mortgage lenders Agree to mortgage deals. Appeals to borrower’s emotions (pay less now but more later) • Mortgage brokers Earns fee by selling a loan on behalf of a lender. Only cares about closing the deal • Mortgage underwriters Determine the risk of lending to a certain buyer. Used relaxed controls. • Client Appraisers Valued property. Responded to systemic pressure to appraise properties at higher value than worth • Sub-•‐Prime Borrowers Some of these were dishonest as well by over stating income, yet still some honest people • Originate-•‐to-•‐Distribute Mortgages (aka securitization) o Lender didn’t care about the risk/credit worthiness of buyers since the mortgages would be sold to investors o Originating lender sells its mortgages (including sub-•‐primes) to SPVs (“special purpose vehicles”) o Transforms these mortgages into Mortgage Backed Securities (MBSs) & other structured finance products o Sells to investors who are paid out interest and principal on the pooled loans • Because of securitization, the lender & broker could & did hype emotion of the buyer • O’Byrne: Two Negative Acts o Hiding actual cost of mortgage, then readjusting the interest rate and consequences associated with this o Complexity of the sub-•‐prime mortgage. Industry intentionally made the K complex (unsophisticated buyers)

CORPORATE SOCIAL RESPONSIBILITY - Corporate Social Responsibility: calls for accountability in the context of corporation’s economic, social, and environmental actions o Idea that corporations must assess obligations to broader range of stakeholders other than just shareholder profits - CSR is generally understood to be the way a company achieves balance or integration of economic, environmental and social imperatives while at the same time addressing shareholder and stakeholder expectations o Synonymous with concepts such as accountability, corporate sustainability, corporate citizenship, corporate stewardship etc. o See: Gov’t of Canada’s CSR Implementation Framework on 241 - SCC in BCE: Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders o This is what we mean when we speak of a director being required to act in the best interests of the corporation, viewed as a good corporate citizen

TWO THEORIES OF CORPORATE SOCIAL RESPONSIBILITY

PROPERTY CONCEPTION – AKA “SHAREHOLDER PRIMACY MODEL” (MILTON FRIEDMAN’S APPROACH) - Corporation is the property of the shareholders and the job of the board of directors is to maximize the return on investments to the shareholders o Corporation can’t really be spoken of to HAVE CSR, they’re giving away money that should go to the s/hrs

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- Milton: CEO’s role is to maximize the shareholders’ return/value & make a profit (shouldn’t be concerned with CSR) o Friedman thinks that if corporate executives start to use corporate $ for CSR, it’s like stealing from the corporation & s/hs o In this view, philanthropic undertakings are only okay if they do not have a purely philanthropic purpose (e.g. needs to be a money-making motive) - With an ultra-property view of the corporation, it is likely that the corporation will forsake some of its customers and stakeholders and end up hurting itself

SOCIAL INSTITUTION VIEW (RALPH NADER’S APPROACH) - Corporations are created by statute & are quasi-public, and are thus tinged with a public purpose o A corporation is not strictly private (William Allen) - Corporations couldn’t be a legal entity without the government’s concurrence and statute that allows for its creation - Corporation is a social entity, and must have purposes besides simply making money (like contributing to public life, entertainment, etc.)

ALTERNATIVE: OUR VALUES APPROACH (THE BODY SHOP) - Business is a form of human enterprise; corporations want to support their employees. - Sustainable product is part of the brand, CSR is woven into the product itself and is a selling point o S/hrs who buy into the corporation KNOW that their philanthropic endeavours are part of the company. o Shareholders know that going in before they invest their money. It’s not stealing from the corporation to invest in CSR, it’s PART of the investment itself. - Milton would probably like this – if it helps your returns, then great

THE LAW CASE STUDY: TALISMAN ENERGY INC [BAD COMMUNICATION/PR TEAM; CSR; CORPS WILL BE READILY HELD ACCOUNTABLE DUE TO THE INTERNET] - Talisman was subject to strong international criticism because it was drilling oil in Sudan; public perception was that this was fueling the civil war o Through royalties paid to the Sudan government on extracted oil and gas, it was functionally fueling the civil war (allowing the military government to keep fighting with rebel forces) o Various groups assert Talisman was involved with the regime, alleging that they had turned a blind eye to a regime that violated human rights. o People in Sudan were being mistreated by the government and reportedly being displaced by oil and gas activity o Either they weren’t corporately responsible, OR they didn’t communicate their CSR well. Either way, it was hurting their share price. o Both public and shareholders were angry - Talisman couldn’t recover from the criticism of its activities in Sudan and so it pulled out of Sudan altogether in 2002 o It’s the power of public opinion/public interest that precipitated this movement - Talisman was sued in US under Alien Tort Statute (this allows foreigners to sue in the US for overseas violations of human rights). It was an unsuccessful lawsuit, but public pressure mounted against Talisman operating in Sudan NOTE: Especially with social media and the internet, corporations are going to be much more readily held to account for actions perceived to be contrary to public interest and human rights • Concern: pulling out of the consortium does little to lead the consortium to be more responsible in their operations in Sudan

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CORPORATE CITIZENSHIP AND SOCIAL LICENSE License - Social license to operate o Social: source of the license that we are referring to is not government or a regulator but society o License: consent or permission is in “some sense required” o “Let’s stop pretending ‘social license’ is an actual thing”

Case Study on the Legal Application of the Good Corporate Citizenship and Social Licence: • Northern Oil Inc Canada’s largest oil and gas producer in Alberta’s oil sands • Company pledged in 2010 to accelerate reclamation of tailings in its oil sands operation • Developed Tailings Reduction Operations (TRO) technology that reduces traditional oil sands reclamation down from 30 years to 10 years • Positives: o The TRO program provides the oil company with the support of socially responsible shareholders, impacted communities, and the public • Problems: o Downside is that the technology is very expensive o Largely untested o Northern Oil can meet their legal obligations without continuing to invest in and implement the TRR technology • Findings: o Directors do not have a legal obligation to follow through with TRO o However, directors can favor sustainability over profit if that decision is made

Considerations: • Corporate fiduciary duties under CBCA s. 122(1): o Every director and officer of a corporation in exercising their powers and discharging their duties shall: ▪ A) act honestly and in good faith to the best interests of the corporation and ▪ B) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances • Corporate fiduciary duties in Delaware: o Directors of Delaware corporations charged with a fiduciary duty to the corporation and the corporation’s shareholders as trustee • BCE Inc v 1976 Debentureholders, SCC: o If conflict between the corporation and other stakeholders, the director’s duty is clearly to the corporation o Court interpreted the best interest of the corporation to be the long-term interests of the corporation o Court linked directors’’ and officers’ fiduciary duties with good corporate citizenship ▪ Related idea of social licence: generally means a business receives a privilege to operate from society at large o Promotes somewhat of a director primacy model: decisions for corporate responsibility do not just need to be focused on shareholders

“With respect to litigation risks in companies’ voluntary [CSR] reporting, plaintiffs are becoming sophisticated in the legal claims they have been asserting, taking square aim at companies’ CSR statements.”

Examples of liability being found for not following through with Corporate Social Responsibility policy: - Kasky v Nike – Nike attacked critics who claimed that they used sweatshops; but they knew that they were lying o They attempted to defend themselves by claiming that it was protected corporate speech o They were sued in California and held liable - Class Action suit against BP in Texas FC; Deepwater oil spill.

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o Claim is based on what BP had in their advertising at the time, supposedly a leader in CSR - Jablonowski v Chiquita – Chiquita says they’re such a great company, but it’s not totally true. • Canadian Examples o Choc v Hudbay trilogy ▪ Company working in foreign country being sued for violating humanitarian standards and human rights o Tahoe Resources ▪ Mining company working in South America; making money and paying royalties to a dictator ▪ The company was also forced by the government to hire a contractor that used slave labour ▪ Negligence principle used to hold the parent company in Canada liable for the actions of its subsidiary • These actions are based on negligence in the corporations’ statements.

RE VARITY CORP AND JESUIT FATHERS OF UPPER CANADA ET AL (1987 ONPC) – APARTHEID – PROPOSAL TO WITHDRAW INVESTMENTS IN S.A. – VARITY NOT REQUIRED TO DISTRIBUTE PROPOSAL TO STAKEHOLDERS BECAUSE IT IS PRIMARILY FOR GENERAL SOCIAL/RACIAL/POLITICAL PURPOSE - S 131(5)(B) CBCA Facts: Varity applied for a court order so that it doesn’t have to circulate a shareholder proposal about ending investments in apartheid South Africa. Jesuit Fathers of Upper Canada put forward the proposal. - S 131(5)(b) of CBCA says that a corporation is not required to comply with s/hrs request to circulate a proposal if the proposal is primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes o Note: a shareholder proposal is a way in which minority shareholders can demand that a proposal be circulated to all shareholders - Proposal talks about business issues, but primarily about fighting apartheid. Issue: Can Varity deny circulation of the proposal for the company to end its investments in South Africa? Decision: Yes. The order that relieves Varity of the requirement to distribute the minority proposal was granted under CBCA s. 131(5)(b); the decision was affirmed by the ONCA on appeal. Reasons: - The people who wanted to circulate the proposal say that they’re not trenching on 131(5)(b): o They have something specific and exact in mind, rather than something general: e.g. get out of apartheid South Africa. ▪ That is specific, not general, notwithstanding that some of the proposal is general in wording. Based on wording of legislation they should be fine. ▪ But that argument is denied by the court and by the majority of the ONCA - The Court found that: the primary purpose of the proposal is one of the purposes listed in the CBCA provision, so Varity can refuse to distribute it o Therefore, the company cannot be compelled to circulate the proposal (O’byrne thinks that the decision was wrong) • CBCA Amendments were made following Varity o ABCA uses the same wording as the old CBCA provision ▪ So the way the CBCA is interpreted in Varity is the way the law still works in Alta o Would an Alta court come to the same view as in Varity? Tough to say, but very possible. ▪ There is an argument that corporations have a duty to be “good corporate citizens,” and have corporate social responsibility (as shown by the SCC in BCE) ▪ Maybe Varity would have succeeded if the proposal used more business speech – focused less on apartheid?

THE BODY SHOP – CASE STUDY - Idea behind the Body Shop:

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o How do you add value to a skin and hair company? We sell things people don’t really need, so we need to add value: ▪ This is done by committing to social and environmental change o Committing to environmental, social, as well as economic objectives and advertising the projects undertaken by the company such as protecting the planet, sustainability, defending human rights, focusing on self esteem of clients, and supporting community trade, refusing animal testing ▪ E.g. paying first world prices in third world countries o Having quality assurance through an Assurance Standard – an example of branding/certification that can be further advertised to customers o The Body Shop made a large amount of profits because of its branding and corporate social responsibility ▪ There were selling corporate social responsibility as its product; this distinguished them in the market - But Body Shop eventually hit the skids in the mid 2000s and experienced significant losses o There were copycat stores promoting the same kind of social responsibility brand o Eventually Body Shop was bought out by L’oreal and things went downhill from there

DODGE V FORD MOTOR COMPANY (MICHIGAN SUP CT 1919) – CORORATION IS PRIMARILY CARRIED ON TO MAXIMIZE SHAREHOLDER PROFITS, NOT BENEFIT THE PUBLIC – PROPERTY CONCEPTION THEORY Facts: Ford Motor is doing really well and is flush with cash; Henry Ford controls the Board but decided not to declare any more special dividends; Ford wished to re-invest, increase employment, reduce cost of cars, and ensure all Americans could afford cars; Dodge brothers (minority shareholders) object to not receiving dividends in 1916. They believed that there must be special dividends based on the financial success. • The trial court ordered a declaration of a dividend of approx. $19,000,000 Issue: Can Ford stop paying dividends to fulfill a public purpose? Decision: No; appeal dismissed and order of the trial judge affirmed Reasons: - The business corporation’s primary duty is to earn profit for the s/hs, NOT a duty to the public [property conception theory] o Ford can’t run a charity and meet specific duties owed to the s/hs, namely, to make a profit o Cannot take a for profit co and make it a charity - Ford is entitled to their business plan, but they went too far and some dividend has to be declared o Director cannot use their power to declare dividends for a collateral purpose - An INCIDENTAL HUMANITARIAN EXPENDITURE may be allowed, but this is not present in this case o There is a difference between an incidental humanitarian expenditure for the benefit of employees, and a general purpose and plan to benefit “mankind” in general Note: Gives us the common-law view that corporations are not philanthropic entities, and you can’t treat them this way. • The court manifests the “property conception theory” here. • But maybe Ford wasn’t being philanthropic – perhaps he was trying to limit the competitiveness of the Dodge brothers’ by not paying out dividends?

CHAPTER 7 – CORPORATE GOVERNANCE INTRODUCTION Director Responsibilities - Directors are given the task of operating the business affairs of the corporation by the ABCA and are elected by the s/hs - The ABCA imposes certain qualifications on directors before they are eligible to take office - Directors may be personally liable for torts committed while conducting the affairs of the corporation

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- S 101 – Directors are to supervise management of the business and affairs of the business, subject to a USA - 2 legal requirements that a director must fulfill (ABCA, s 122): (1) Directors must act honestly and in good faith (fiduciary obligation) (2) Directors must exercise the care & skill that a reasonably prudent person would exercise under the circumstances (duty of care)

The Board has five basic responsibilities: - 1/ Appointing and supervising the CEO and other officers o This includes appointing, setting the terms of employment, supervising, evaluating, compensating and, if necessary, removing all corporate officers, beginning with the CEO. o It also involves approving major organizational changes, and ensuring that adequate plans are in place for management succession o Number one job: keep an eye on the CEO ▪ E.g. Conrad Black (CEO of Hollinger) was convicted of fraud for accepting monies that should have been paid to the corporation ▪ Special board committee was created to review the conduct of Conrad Black; the special committee advisor claimed that Black was highly confrontational and threatened litigation against all directors and board committee members ▪ Note: inside vs outside directors: • Inside directors – directors are also executives of the company • Outside directors – no connection with the company other than their position on the Board ▪ Lesson: Board must do what is in the interest of the corporation and not be controlled by the CEO - 2/ Directing and evaluating strategy o Strategic management is the integrated planning and implementation of the major changes needed to improve corporate performance. The board should oversee an action program based on the purpose, strategy, operations, results, organization, resources and environment of the company. o Supervision focuses on keeping mgmt. accountable for performance in implementing plans, meeting objectives, competing successfully and satisfying the requirements necessary to merit the continuing support of s/hrs and other stakeholders - 3/ Representing shareholders and maintaining shareholder relations o Tasks include reflecting s/hr concerns to management, reporting to shareholders as legally required and otherwise communicating to them directly or indirectly through the financial press, analysts and others as to plans and results - 4/ Protecting and enhancing the company’s assets o When major issues arise in management, ownership, investments, acquisitions, divestments or raids, or insolvency, the board must be fully involved - 5/ Fulfilling fiduciary and [other] legal requirements o The board is responsible for adherence to the laws, regulatory requirements and the preparation and maintenance of necessary minutes, documents, contracts and records

Business Roundtable Guiding Principles of Corporate Governance (re publicly traded corporations) (from PowerPoint slide): • Board of Directors is to select and oversee the CEO and senior management • Management, under board oversight, is to operate corporation “in an effective and ethical manner to produce long-term value for shareholders” • Management, under board oversight, is “to develop and implement the corporation’s strategic plans, and to identify, evaluate and manage the risks inherent in the corporation’s strategy” o Management, under board oversight, is to produce financial statements and make related disclosures

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• Board to secure an outside audit of management’s financial statements and oversee the relationship with that outside auditor • Board to lead in corporate governance, including a regular assessment of the “composition and leadership of the board” including succession planning • Board to establish performance-based compensation policies and goals in relation to CEO and senior management • Corporation to engage long-term shareholders via the board and management • Corporation, in its dealings, to “exemplify the high standards of corporate citizenship”

COMPARISON OF PUBLIC COMPANIES AND CLOSELY-HELD CORPORATIONS Public Company Closely-Held Corporation Separation between ownership and management Ownership and management are often identical Large number of s/hrs with shares traded in the securities One or limited number or shareholders with no public market trading of shares Unrestricted transferability of shares Restrictions on transfer of shares Profits are retained or paid out as dividends Profits distributed as salaries and dividends Most shareholders are passive investors Shareholders often consider themselves partners Most investors have diversified portfolios Most personal wealth invested in enterprise No familial or personal relations between shareholders Familial/other personal relationships among shareholders in addition to business dealings Financial through a mixture of debt and equity Debt most common form of financing Defined roles and high degree of formality in decision- Loosely defined roles and informal decision-making making

STATUTORY SOURCE OF DIRECTORS’ POWERS Directors - Section 105 ABCA – basic qualifications o A director must not be a corporation, because it’s difficult to place sanctions on a corporation o Elected by shareholders who have voting shares. o Directors are responsible for overall DIRECTION of a corporation - There are two types of directors -> inside and outside o Outside director -> if you are a director who is not also an employee of the corporation o Inside director -> they sit on the board AND are also part of the mgmt. team which establishes corporate strategies ▪ They’d be an employee, officer, or other stakeholder as well, essentially. - Section 101(1) ABCA – subject to a USA, directors shall manage or supervise the management of the business and the affairs of the corporation Officers - Appointed by the board, responsible for the day-to-day operations of the business (Top executive = CEO, and so on)

Shareholders - Difference between voting shares (the ability to vote for the Board of Directors) and non-voting shares - Shareholders can pass unanimous shareholders agreement (USA) in order to transfer directors’ powers to themselves, HOWEVER: o Section 146(7) ABCA – shareholders assume the liability as directors if they take the directors power via USA

DIRECTOR POSITIONS

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QUALIFICATIONS OF DIRECTORS - Section 101 ABCA – gives authority to directors to supervise and manage business and affairs of corporation (subject to USA) - Section 105(1) ABCA - the following people are DISQUALIFIED from being a director of a corporation o a/ Anyone under 18 years of age o b/ Anyone with mental capacity issues (people of unsound mind/Mental Health Act/etc) o c/ A person who is not an individual (ie. a corporation) ▪ rationale: director must be someone who can be held liable and punished/imprisoned o d/ A person who has the status of a bankrupt - Section 105(3) ABCA: at least 1/4 of the directors of a corporation must be Canadian residents

ELECTION AND APPOINTMENT OF DIRECTORS - Section 101(2) ABCA: A corporation can have more than one director. o However, a distributing corporation whose shares are held by more than 1 person MUST HAVE at least three directors, two of whom are not employees or officers (they can’t be inside directors) - Section 106: In application for incorporation, you appoint your directors. Then, subsequent directors are elected following the terms of the statute o Procedure for election and appointment: ▪ Section 106(2) – Each director name in the ‘Notice of Directors’ holds office from the issuing of the certificate of incorporation until the first meeting of the shareholders ▪ Section 106(3) – Shareholders elect directors by ordinary resolution, via a simple majority, at the first meeting (and every subsequent annual meeting) • directors to hold office for a term expiring not later than the close of the third annual meeting of shareholders following the election - Section 107 ABCA: CUMULATIVE VOTING o Each s/hr has the right to vote the # of shares she holds, multiplied by the # of directors to be elected. o Cumulative voting gives the minimum shareholder the chance of getting at least one director they want elected to the board, because they can concentrate their votes by using all of them for one director o Section 107(g) – A simple majority isn’t sufficient to remove a director who has been elected using a cumulative voting scheme o NOTE: the articles must provide for cumulative voting (you must identify the exact number of directors – s 107(a)) - Section 6(1)(d) – Articles of incorporation must state minimum and maximum numbers of directors - Section 111 – filling vacancies - Section 112 – Change in the number of the directors – shareholders can amend the articles to increase or decrease the number or minimum/maximum of directors - Section 116 – Validity of acts of directors, officers and committees (a curative section) o An act of a director is valid notwithstanding an irregularity in his election or appointment or a defect in his qualification - Section 132(1) – CALLING MEETINGS o Annual meetings MUST BE HELD within 18 months of incorporation (this ensures an election), and then every 15 months thereafter. Shareholders vote by ordinary resolution (simple majority) for the directors - Section 136(4) – A shareholder proposal can include nominations for the election of directors (there are requirements in the section) - Section 144 – Gives courts the jurisdiction to review elections as well as appointments of directors

REMOVAL OF DIRECTORS - Section 109 – removal of directors o General rule: Subject to a USA or s 107(g), director may be removed by ordinary resolution at a special meeting

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▪ The court can also order the removal of a director ▪ Section 109(2): if any of the class of shares has the right to elect a director, they can only be removed on an ordinary resolution of the class selected to elect that director - Section 108 – Director ceases to hold office if: o They die or resign o They are removed under s 109 o They are disqualified under s 105(1) - Alternatives: o Section 242(3)(f) - If you can establish “oppression” the court can order the removal of a director ▪ Court can give any remedy they see fit, including punting a director o Derivative action – an action not brought on your behalf by a s/hr, but on behalf of the corporation, against the directors to hold them to account ▪ Remedy: punt the director

NOTE: CBCA AMENDMENTS ON GENDER EQUITY (BILL C-25)

- Only applies to publicly traded corporations with many shareholders (essentially a corporation trading on the stock exchange) - Encourages representation of women on the board o Will require disclosure of diversity/identify gender representation on the corporation’s board of directors OR explain why you haven’t done this o “comply or explain” – there’s no penalty in the legislation, but it’s sort of “phase 1”; phase 2 likely will come, with penalties for failure to comply - Phase 2 political issues; human rights issues; how much should rights influence private-sector decision making

STATUTORY DUTIES OF DIRECTORS AND OFFICERS 1. INTRODUCTION TO DIRECTORS’ FIDUCIARY DUTY & DUTY OF CARE + THE BUSINESS JUDGMENT RULE - Common law level of competence is extremely low – directors can get away with a lot! (Re City Equitable Fire Insurance) o Re City Equitable Fire Insurance ▪ Company went bankrupt and had to be liquidated ▪ The directors had poorly discharged of their duties in managing the corporation ▪ The liquidator sought to hold the directors liable ▪ The Court refused to hold the directors liable; it said that the standard merely required directors to do the best they could with the skills they had (the amiable idiot standard – a reasonably prudent person) - The statute upgrades the common-law standard of competence for directors and officers (key provision is ABCA, s 122) - In Canada, the Business Judgment Rule is called the duty of care: o As long as the process or procedure followed by the Board of Directors is fair, honest, and done with reasonable care, courts will defer to the judgment of the Board of Directors o Section 122(1) – Every director and officer of a corporation in exercising the director’s powers and discharging the director’s duties shall.. ▪ a/ Act honestly and in good faith with a view to the best interests of the corporation ▪ b/ Exercise the care, diligence & skill that a reasonably prudent person would exercise in comparable circumstances [duty of care] o Contracting out of the duty of care? ▪ In Delaware YES! – After Van Gorkum, Delaware amended its code to allow contracting out ▪ BUT you can’t do this in Alberta. 71

• Section 122(3) of the ABCA – “no provision in a contract, the articles, the bylaws or a resolution relieves a director or officer from the duty to act in accordance with this Act or the regulations or relieves the director or officer from liability for a breach of that duty.” - NOTE: the Business Judgment Rule applies to BOTH s 122(1)(a) and (b).

PEOPLES DEPARTMENT STORES (TRUSTEE OF) V WISE (SCC 2004) - BUSINESS JUDGMENT RULE - FIDUCIARY DUTY OF DIRECTORS TO CORPORATION (CBCA S 122(A)) – DUTY OF CARE OWED TO CORPORATION AND OTHER PARTIES AND STANDARD OF CARE (S 122(B)) – TEST FOR CHALLENGING BUSINESS DECISIONS Ratio: The directors’ duty to act in the interest of the corporation isn’t equivalent to always acting in the exclusive interests of shareholders and creditors. The Directors are free to consider the interests of a variety of stakeholders in making decisions and determinations. - Duty of care (s 122(b)) is owed by directors to creditors, but can be satisfied by making decisions on an informed basis in a reasonable & prudent manner Facts: Wise brothers owned Wise department store company and they were on the board of directors. The brothers acquired Peoples, which was owned by a British parent company, and thereafter, the Wise brothers sat on the board of directors for Wise and Peoples; due to financing conditions, Peoples could not amalgamate with Wise stores until payment was made in full - The purchase agreement was for Wise to pay the parent company the purchase prices over a 8 year period - The Directors of Wise adopted a joint inventory procurement strategy whereby Peoples would make all purchases from North American suppliers and Wise would make all purchases from overseas suppliers - The strategy was unsuccessful and Peoples and Wise were declared bankrupt; more inventory had been purchased from North American suppliers, putting Peoples in debt because Wise had yet to pay - People’s Trustee claimed that the Wise brothers, as directors of Peoples, had favoured the interests of Wise over Peoples to the detriment of Peoples’ creditors, and was in breach of their duties under s 122(1) CBCA o Peoples argues that a specific fiduciary duty was owed to Peoples’ creditors under s 122(a) o It also argued that there was a duty of care were owed under s 122(b) - At trial, it was held that Wise had failed to fulfill their duties to the company creditors under s. 122 of the CBCA - The Wise bothers were successful in their appeal to the Quebec Court of Appeal Issue: Did the Wise Brothers breach their duty under s 122(1) and, if so, are they liable for the loss? Decision: Appeal dismissed; Wise brothers made honest, good faith efforts to redress the corporation’s financial difficulties and acted with reasonable prudence in exercising their business judgment; the directors had therefore not breached their s. 122 duties and their decision was protected by the Business Judgment Rule Reasons: - Two distinct duties established by s 122(1) of the CBCA: o Fiduciary duty: act honestly and in good faith with a view to the best interests of the corporation o Duty of Care: exercise the care, diligence, and skill of a reasonably prudent person in the circumstances - Duty 1:– Fiduciary Duty (Section 122(1)(a)) o Requires the directors to act honestly and in good faith, with a view to the best interests of the corporation o Power to manage and supervise corporation: ▪ For directors: this power originates in s 102 CBCA (s 101(1) ABCA) ▪ For officers: this power comes from the power delegated to them by the directors o 1) Fiduciary Duty to the corporation was not breached: ▪ Directors are obligated to: o avoid conflicts of interest, o not abuse their position for personal gain, ▪ NOTE – in some cases, directors may innocently benefit from gains made by the corporation (for example, if they’re s/hrs, or compensation for being directors) o must maintain confidentiality of info they acquire due to their position and

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o must serve the corporation selflessly, honestly, and loyally ▪ In this case, the Wise brothers just made a goof faith attempt to relieve financial problems, which was unsuccessful; they did not benefit personally • No breach of the fiduciary duty o 2) Fiduciary duty is restricted to the corporation, not the shareholders or creditors ▪ Directors’ duty doesn’t change when the corporation is in the “vicinity of insolvency” • As corporation is moving into insolvency, interests of s/hrs and creditors may divide. o S/hrs have already lost their money – s/hs may get some scraps if they’re lucky. ▪ So, since their chances at recouping their investment are sunk, shareholders will want to do something risky that could pay off. o Creditors may want to just stay the course to maximize the value of their claims against the assets of the company. ▪ They don’t want anything worse to happen. • In Delaware it’s different – when corporation approaches insolvency, the interests of the creditors and s/hrs diverge and the interests of creditors must be PRIORITIZED ▪ Creditor’s have other avenues in Canada: • they could bring an oppression action (s 238) or an action under breach of duty of care under s 122(1)(b) • The availability of broad oppression remedies to creditors undermines any perceived need to extend the fiduciary duty under s 122(a) of the CBCA to include creditors (rather than the corporation) ▪ Best interests of corporation should not be confused with best interests of the s/hs • It may be legitimate for the board to consider the interests of corporation as well as the interests of shareholders, creditors, employers, the government, the environment, etc. • Duty 2: duty of care (Section 122(1)(b)) o Does not specifically refer to an identifiable party as the beneficiary of the duty (as s. 122(a) does in stating that the duty is only owed to the corporation) ▪ Court says that it appears obvious that this duty of care includes creditors – this can be owed to third parties such as creditors; ▪ you have to show the duty of care is in place, and then the statutory standard of care as declared in s 122(b) is applied. o Requirements of the duty of care: ▪ it’s an objective standard (reasonably prudent person), modified by the context of the circumstances (in similar circumstances) o In order for a plaintiff to succeed in challenging a business decision, they must establish that (as an action in negligence): ▪ 1/ There was a duty of care owed ▪ 2/ That the directors breached that duty of care [use the standard in s 122(b)] ▪ 3/ The breach caused injury/damages to the plaintiff o Application: The plaintiffs failed here because the Wise brothers had acted as a reasonably prudent would in the same circumstances ▪ There was a duty of care owed but there was no breach of the applicable standard of care o The duty of care is essentially the Business Judgment Rule

• Business Judgment Rule (BJR) – subject to 2 conditions o Rule: Judges ought to defer to the business decision made by the board and shouldn’t second guess the substance of business decisions made by the directors ▪ This rule is subject to TWO CONDITIONS: • 1/ Decision making process – directors acted prudently and on a reasonably informed basis

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• 2/ Reasonableness of the decision made – The decision must be a reasonable business decision in light of all the circumstances about which the directors knew or ought to have known ▪ In this case, the Wise Brothers pass the BJR – they were doing what they thought was in the best interests of corporation ▪ BJR applies to both a and b of 122, although the decision doesn’t make that clear ▪ The court doesn’t carefully delineate the scope of the business judgment rule

PEOPLES AND ALTERNATIVE REMEDIES - Creditors sued directors under ss 122(1)(a) and (b) – O’Byrne finds this very odd – why would they even try?

Alternative remedies: o The more NATURAL thing to do would be to bring an oppression remedy ▪ S 242 ABCA – Creditors sue the Ds/corporation for conduct that is “oppressive”, unfairly prejudicial or unfairly disregards the interests of creditors. ▪ So, the creditors could argue that they have a “reasonable expectation” that Wise and Peoples would share debt exposure MORE EQUALLY. • Peoples was loaded up with a ton of debt, Wise comes out well from debt perspective. • SCC actually suggests this in the case o Section 240 DERIVATIVE ACTION – creditors could seek to bring an action on behalf of Peoples for a wrong done to the corporation. They didn’t do this either.

Section 122(b) doesn’t provide creditors with a cause of action on its own • S. 122 doesn’t found a cause of action o The s 122(b) duty is subsumed by negligence; it provides a suggestion as to the standard of care that should be reasonably expected o Therefore, a plaintiff must show that there was a duty of care owed (via the Anns test), that there was a breach of a standard of care, and that the breach caused damage • This rule also applies in Alberta to s. 122 of the ABCA Test for negligence (Anns Test): - Step 1: does the defendant owe the plaintiff a duty of care o Stage 1: is there a prima facie duty of care? ▪ A) is the harm that occurred a reasonably foreseeable? ▪ B) Is the relationship of sufficient proximity? o Stage 2: Are there policy considerations that negative the prima facie duty of care? - Step 2: did the defendant breach the standard of care? o Standard of care informed by standard in statute Section 123(3) of the ABCA - A director is not liable under s 122 if the director is reasonably prudent and that standard may be met by relying in good faith on advice from professionals noted in s 123 o Make sure that if you are getting outside advice, that the person is one of those listed under s 123 o (3) A director has complied with the director’s duties under section 122, if the director exercises the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances, including reliance in good faith on ▪ (a) financial statements of the corporation represented to the director by an officer of the corporation or in a written report of the auditor of the corporation to reflect fairly the financial condition of the corporation, or ▪ (b) an opinion or report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by that person.

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BCE INC V 1976 DEBENTUREHOLDERS (2008 SCC) - IF DIRECTORS GIVE DUE CONSIDERATION TO COMPETING VIEWS OF MULTIPLE STAKEHOLDERS, THEY WON’T BE HELD LIABLE FOR DECISIONS THAT PREJUDICE SOME STAKEHOLDERS’ INTERESTS AT THE EXPENSE OF OTHERS Ratio: Under the business judgment rule, deference should be given to business decisions of directors taken in good faith and in the performance of the functions they were elected to perform by the s/hrs; directors are not liable for making a transaction that, while in the best interests of the corporation, would benefit some groups at the expense of others - Business judgment can be used as a defense to a claim that they breached either fiduciary duty and/or duty of care Facts: Ontario Teachers Pension Plan proposed a leveraged buyout of all BCE shares; leveraged buyout means they’re borrowing the money for the purchase - Bell Canada, a wholly-owned subsidiary of BCE, agreed to guarantee the $30 billion of the debt BCE would incur to support the purchase - Bell Canada’s debentureholders (D) resisted because, they contend, Bell Canada’s increased liability would downgrade the value of their debentures (by 20%) while conferring a benefit on the s/hrs by way of a premium (of 40%) o Bell Canada is a lot less attractive because they would have all this debt they’re guaranteeing - Before it could be implemented, the buy-out first had to be approved by the court as “fair and reasonable” under s 192 of the CBCA - D brought an oppression action under s 241 CBCA and challenged the approval of the plan of arrangement under s 192 as not being “fair and reasonable” - Trial judge held in favour of BCE, denying oppression action and finding that the deal was fair and reasonable under s 192 of the CBCA o Court of Appeal reversed the decision, finding that BCE failed to show that the transaction was fair and reasonable under s 192 of the CBCA Issue: What is required to establish “oppression” of debentureholders in a situation where a corporation is facing a change of control? How should a judge on an application for approval of an action under s 192 treat claims such as D’s in these actions? Decision: Appeal allowed; Debentureholders failed to establish grounds to have the arrangement reversed under either s 241 or 192 – BCE did nothing wrong just because shareholders benefitted while other stakeholders stood to lose form the transaction Reasons: - Just because s/hs stood to benefit while the D’s were prejudiced doesn’t mean that there was a breach of the statutory fiduciary duty o Normally, the duty to the corporation coincides with shareholders' interests, but if they do not coincide, the directors' duty falls squarely with what is best for the corporation. o Directors must consider the best interests of the corporation and it may also be appropriate, although not mandatory, to consider the impact of corporate decisions on particular groups of stakeholders and the environment o Courts should give appropriate deference to the business judgment of the directors who take into account ancillary interests of other stakeholders. ▪ Decision must simply be "within a range of reasonable alternatives." - In this case, the trial judge recognized that the directors have a fiduciary duty to act in the best interests of the corporation; the content of this duty was affected by the various interests at stake in the context of the auction process BCE was undergoing. o The directors, facing conflicting interests, might have no choice but to approve transactions that, while in the best interests of the corporation, would benefit some groups at the expense of others. o Deference should be afforded to the directors in this case, pursuant to the business judgment rule. o The ONLY duty that the directors owe to the creditors is what is required via the debt contract. ▪ The creditors COULD HAVE included a clause in the debt contract stating that no other debt could be prioritized over theirs (but they did not do so in this case - that's their problem).

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o All 3 competing bids for BCE would have required Bell Canada to assume additional debt, so any decision would have impacted the defendants no matter what (and the decision made in the best interests of the corporation, weighing the interests of different stakeholders) - Normally, only the beneficiary of a duty can enforce the fiduciary duty. However, directors are unlikely to bring an action against themselves. To solve this, there are special remedies to protect the interests of the stakeholders: o S 239 CBCA Derivative action -> stakeholders can enforce the director’s duty when directors are unwilling to do so ▪ You would essentially say that this a breach of their s. 122 duties o S 122(1)(b) Civil action for breach of Duty of Care -> owed to all stakeholders and third parties, covers tort and extra-contractual liability ▪ This provision can be used to demonstrate the “standard of care” that is expected • S. 122 (b) does not provide an independent foundation for claims, but it can be used to argue the standard of care reasonably expected ▪ Debenture holders go here, and say just like Peoples, we will establish a duty of care which was breached o S 242 CBCA: Oppression Action ▪ Harm to the stakeholder’s legal and equitable interests affected by oppressive acts of a corporation/directors ▪ Debentureholders had a reasonable expectation that the directors would choose the deal which maintained the investment grade of the investors, or at least more equitably dealt with the risk on Bell’s behalf o S 192 CBCA: where corporations are seeking to affect fundamental changes ▪ Court will approve the plan of arrangement if satisfied that: • The statutory procedures have been met (special resolution -> 2/3 majority vote) • The application has been put forth in good faith • The arrangement is fair and reasonable Note: - Other debentureholder remedies? o Derivative actions o Allege a breach of DOC under the common law (Re City Equitable Fire Insurance) – use s 122 for the standard of care o Oppression o Follow “additional remedial” provisions o Torts - There’s no cause of action for breach of statute o So, you subsume it into the common law of negligence o There can be a duty of care to creditors and outsides, but you need to demonstrate that: ▪ You have to go through the modified Anns test and show that there’s a novel DOC (or rely on an established duty of care at common law) ▪ THEN, you go to the legislation for the standard of care. The common law standard is laughably low – the standard of the amiable idiot, so go to the statute, which upgrades it (s 122(b)).

SMITH V VAN GORKOM (DELAWARE SC 1985) – BUSINESS JUDGMENT RULE IN DELAWARE; DUTY OF CARE (S 122(B) EQUIVALENT) – BOARD FAILED TO ACT IN AN INFORMED MANNER AMOUNTING TO GROSS NEGLIGENCE Ratio: A board of directors in Delaware must act in an informed manner to avail itself from protection form liability provided by the business judgment rule; unlike in Canada, there is a presumption that the business judgment of a board is informed

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Facts: Trans union was a publicly traded company with large cash flow, however it had difficulty generating sufficient taxable income to offset increasingly large investment tax credits; Van Gorkam is the chair and CEO of Trans Union • The Board of directors of Tran Union decided to sell the company, using a cash out merger o Cash out merger: a merger in which the acquiring company [New T] buys the outstanding shares or stock of the target company [Trans Union], including those held by dissenting shareholders for cash, thereby “cashing out” the shares or stock of the target company. o The shareholders of the target company are paid out for their shares • Van Gorkom met with Pritzker, a well known corporate takeover specialist; he proposed a share price for sale of the Company without consulting the Board of directors • Van Gorkom had said that he was willing to accept $55/share arbitrarily (shares are worth between 50-60); The deal was put to the board for a vote and the Board approved the deal whereby everyone’s shares would be purchased at that price o No study done to ascertain the market price. Van Gorkom knew it was between $50-60 and just picked $55. • Shares were undervalued, although the Board thought it was an appropriate deal o Problems in the meeting: Some mistakes were made by the board (as per s 122(b)) ▪ No director read the merger agreement prior to its signing ▪ There was no clear explanation of valuation on the $55 figure – Van Gorkom may have spoke to the Board, but he knew very little ▪ Meeting to determine the sale was very short and based on little information • Shareholders believe they were ripped off, and sued the Board for not discharging due diligence in determining value of shares before approving their sale • The Court of Chancery held that the Board of Directors had acted in an informed manner so as to be protected by the business judgment rule Issue: Was the decision of the directors protected by the business judgment rule? Decision: Appeal allowed; the business judgment rule does not shield the directors in this case because they did not act in an informed manner – they were grossly negligent Reasons: - Under Delaware law: o the business and affairs of a Delaware corporation are managed by or under its Board of Directors. ▪ In carrying out their managerial roles, directors are charged with an unyielding fiduciary duty to the corporation and its shareholders. o The "business judgment rule" exists to protect and promote the full and free exercise of the managerial power granted to Delaware directors. ▪ The Rule is to DEFER to the decisions of the Board of Directors provided that the Board: • Followed proper procedures and • The decision is reasonable o The rule itself is a presumption that in making a business decision, the directors of a corporation 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 a board decision as uninformed must rebut the presumption that its business judgment was an informed one ▪ NOTE: there is no presumption in Canada o Standard of care in Delaware: ▪ Gross negligence is the proper standard in determining whether the business judgment reached by a board of directors was an informed one - Business Judgment Rule in Canada: o have to show that decision was reasonable and the proper process was followed (in the United States, it’s presumed) ▪ we don’t have a presumption in Canada

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o If you haven’t acted on an informed basis, neither version (US or Canada) of the rule will protect you - Court ruled that the Board didn’t act on an informed basis: o In this case, there was no report by a professional that the directors relied upon; they only had a two-hour meeting, only a 20 minute presentation made by Van Gorkom describing the sale, the Board didn’t read the merger agreement and didn’t question VG on how he came up with the $55 figure, there was an urgent time constraint placed on accepting the offer, they didn’t know the true value of the corporation, and the Board didn’t inform themselves about VG ▪ The only thing they really have in their favour is that the shares were trading at $38/share on the market. But at the same time, the Board knew that the shares were vastly undervalued. o Therefore, the board was grossly negligent and couldn’t rely on statutory equivalent of s 123(3) of ABCA Damages: - All ten directors held jointly and severally liable for $23.5 million - Insurance covered some of this, but $13 million still fell on the directors. Dissent: wants an even more deferential business judgment rule - View is that these directors knew what they were doing and should have been protected by the BJR.

2. FIDUCIARY DUTIES

(A) INTRODUCTION AND MAIN CATEGORIES - Directors and officers have a fiduciary obligation to act honestly and in good faith, with a view to the best interests of the corporation [s 122(1)(a) ABCA] o Even if you are not properly elected as a director, if you act like a director, you are one for these purposes. That is, you attract those fiduciary duties o Law gives the directors the benefit of the doubt: people are assumed to have acted in good faith unless the opposite is proven o Note: there is fiduciary duty both in common law and statute; the statute is merely codification of the common law duty Categories of holding director liable for breach of fiduciary duty: 1. Taking corporate opportunity • Directors must avoid a conflict between duty to the corporation and self interest • When a director/officer pursued a business opportunity that properly “belonged” to the corporation instead 2. Self-Dealing • When a director is on both sides of a transaction (buyer and seller) • A director of XYZ who enters into contract on behalf of XYZ to buy something the director themselves owns. Inherent conflict of interest. 3. Competing director • Extent to which director can be on boards of two corporations that are in competition 4. Proper Purpose • Breach of duty because the director is using their powers for an improper purpose 5. Hostile take-over bids • when director/officer rejects takeover bid that is good for the corporation because they’re afraid of losing their job (B) TAKING CORPORATE OPPORTUNITIES

COOKS V DEEKS (JCPC 1916) - FIDUCIARY DUTY WILL BE VIOLATED BY DIRECTORS TAKING OPPORTUNITY RIGHTFULLY BELONGING TO THEIR CORPORATION; THAT IS FRAUD ON THE MINORITY BY THE MAJORITY Ratio: Directors can’t pursue interests of their own at the expense of the corporation; Subsequent ratification by a vote of the shareholders will not validate a breach of this fiduciary duty – this is a fraud on the minority 78

• Directors must disclose their interest and receive proper approval from the Board (not in fraud of the minority) in order to take a maturing corporate opportunity Facts: Directors of Deeks were trying to get rid of Cook (Cook was one of 4 directors of Toronto Construction Co). - The three other directors created a contract with CPR in their own names; the contract was obtained under circumstances that amounted to breach of trust by the directors and the directors received benefits that should have belonged to the corporation o The directors threw everything they had into an existing CPR project, so they would have good chances at winning the new contract, but told the CPR officials to award the contract to a new corporation they created that didn’t include Cook - By their votes as holders of ¾ of the issued shares of the corporation, the 3 directors subsequently passed a resolution at a general meeting of the shareholders declaring that the company had no interest in the contract Issue: Have the 3 defendant directors appropriated a corporate opportunity? Decision: Yes – all the profits of the new corporation were directed to be paid to Toronto Construction Reasons: - The 3 directors breached their fiduciary duty by giving a business opportunity that belonged to the corporation (which included Cook) to their new company - However, allowing the contract to go to the new company was ratified by shareholders at a general meeting. 75% to 25%, and Cook was outvoted. o We usually side with majority rule as a default, but what we have here is fraud on the minority ▪ Fraud on the Minority: majority shareholders are directly or indirectly, taking for themselves money or other form of opportunity that rightly belongs to the corporation or that all the s/hs should participate in o So, this vote will not insulate the transaction o Ratification of the new deal was done by the directors but the court found this could not save the breach because the ratification was oppressing Cook and was a gift to themselves (you can’t vote to make a gift to yourself) o This was an OPPRESSIVE act against the minority – you can’t vote your shares in pursuit of a fraud o The 3 directors were appropriating benefits that the minority would have received Note: Directors could have either bought Cook’s shares out or had an exit strategy

CANADIAN AERO SERVICE V O’MALLEY (SCC 1974) – SENIOR OFFICERS TAKING A CORPORATION’S OPPORTUNITY AFTER RESIGNATION - MODERN COOK V DEEKS; FIDUCIARY DUTY OWED BY DIRECTOR AFTER THEY LEAVE THE CORPORATION BASED ON LASKIN’S FACTORS – TEST FOR WHOM THE CORPORATE OPPORTUNITY BELONGS Ratio: Fiduciary duties of senior officers and directors survives resignation from a company when the resignation is prompted or influenced by a wish to acquire for themselves the opportunity sought by the company; • Test for who the opportunity belongs to is whether, in fairness and in the factual context, the opportunity reasonably belongs to the corporation o there is a multi-factual determination for whether the fiduciary duty continues to apply • On an Exam: state the test, and then analyze the facts on the basis of Laskin’s factors Facts: Plaintiff Canaero asserts that defendants had improperly taken the fruits of a corporate opportunity in which Can Aero had a prior and continuing interest - O’Malley (president/CEO) and Zarzycki (VP), while directors or officers, had devoted effort and planning in respect of the particular corporate opportunity as representatives of Can Aero, but had subsequently wrongfully taken the benefit of that in breach of their fiduciary duty o When the project is put up for tender, O and Z had resigned from Can Aero, started a new corporation (Terra Surveys Ltd), and put in a bid for that tender - Wells, who had been a director of Can Aero but never an officer, was brought into the action as an associate of the other individual defendants as party to a scheme to deprive Can Aero of the corporate opportunity developed by O and Z.

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o Another defendant, Terra Surveys, was joined as the vehicle through which the individual defendants obtained the benefit for which Can Aero had been negotiating • Court of Appeal: Said O and Z were “mere employees” and didn’t have a fiduciary duty to Can Aero; A mere employee doesn’t owe very much on exiting the employment relationship (although this rule is subject to contract) Issue: Did the individual defendants breach their fiduciary duties to Can Aero and take a corporate opportunity that belonged to it? Decision: Appeal allowed; O and Z held liable - Can Aero awarded $125,000 in damages, equal to the value of the contract lost; Wells held not liable Reasons: - Senior officers owe a much broader duty than mere employees – they owe a fiduciary duty o O and Z were more than mere employees o They acted respectively as president and vice president for two years prior to their resignations, regardless of whether or not they had been properly appointed o They acted in those positions and received remuneration and responsibilities in accordance with those roles o Their responsibilities and roles removed them from obedient roles as servants o As such, they owed fiduciary duties to the corporation - Fiduciary duty includes at least: o Loyalty; o Good faith o Avoidance of conflict of duty and self interest - Ethic of the duty disqualifies senior officers and directors from: o Diverting to themselves or an associated corporation or person a maturing business opportunity that their company is actively pursuing; o they are also precluded from so acting even after their resignation where the resignation is prompted or influenced by a wish to acquire for themselves the opportunity sought by the company - If O and Z asked the Board for permission to start a new company and compete for the tender, and they got the approval of the board, it’d be okay. o But they didn’t do that. - O and Z defend themselves: ▪ 1/ Fiduciary duty expired once they resigned? • No, your fiduciary duty persists and follows you to some extent • The duty does not terminate upon resignation nor can it be renounced at will • You cannot pursue a maturing business opportunity that your former company was employing just y resigning ▪ 2/ Bid was different from Can Aero’s • not sufficiently different; can’t just change portions of bid to avoid liability ▪ 3/ Can Aero would never have been awarded contract in any event • The Court rejected this argument • Liability does not depend upon proof by Can Aero that, but for the intervention, they would have received the contract • As long as the time of the fiduciary misconduct, Can Aero was still pursuing the tender, liability can be found for the employees that resigned and entered their own bid - Test is whether, in fairness and in the factual context, the opportunity reasonably belongs to the corporation o To determine whether and to what degree a fiduciary duty is owed by a senior manager when they leave the corporation, a comprehensive factual assessment is needed ▪ Laskin lists relevant factors: • Position or office held • Nature of the corporate opportunity

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• Its ripeness, its specificness and the directors’ or managerial officer’s relation to it • The amount of knowledge possessed • Circumstances in which it was obtained and whether it was special, or indeed, even private • Factor of time in the continuation of the fiduciary duty where the alleged breach occurs after termination with the relationship of the company • Circumstances under which relationship was terminated: retirement, resignation, or discharge? - Note: Laskin denied the stricter test that was followed in Regal Hastings o Regal Hastings said that liability would arise any time employees quit and took an opportunity available to its employing corporation o Liability was found, even though the employer corporation did not have the ability to pursue the opportunity (impossible to pursue because of financial limitations) - Damages: o Can Aero need not show that they would have won the bid to hold the employees liable o Damages will be based on disgorgement of profits or value of the contract to Can Aero

TORCANA VALVE SERVICES INC V ANDERSON (2007 ABQB) - FIDUCIARY DUTY OF KEY EMPLOYEES/DIRECTORS/MANAGERS – PRINCIPLES IN DETERMINING SCOPE OF A FIDUCIARY’S OBLIGATIONS Issues: whether Mr. Anderson was a key employee which accords a fiduciary duty to Torcana and what fiduciary duties are owed? • Certain employees may become fiduciaries by virtue of their unique positions of power and trust within the employer’s organization • Senior managers and “key” employees will be precluded from exploiting the particular vulnerability that flows from the unique relationship they have with their employer for their own business interests Fiduciary duties of an employee (or ex-employee) to their employer: • The essential duty of a fiduciary is to act in the principal’s interest and not to put themselves in a position where their own interests compete with the principal’s interests [Canadian Aero Service] • The scope of the fiduciary’s duties needs to be analyzed in each individual case and “will depend on the nature of the relationship & the expectations of the parties.” • Principles in determining the scope of a fiduciary’s obligations: o Cannot take a maturing opportunity either before or after employment terminated o Must be a misuse of the fiduciary’s power before liability attaches o Competition after employment does not of itself constitute a breach o The right to compete is qualified; must not solicit business of specific customers of employer for a reasonable time o Must not use or disclose confidential info learned in the course of employment o Will breach obligations to employer when they take a confidential customer list & use trade secrets in a competing company

(C) SELF-DEALING TRANSACTIONS - Situation where a director or officer, directly or indirectly, sells an asset to his/her own corporation - The director is on both sides of the contract - The insider has an interest on the outcome of the transaction - Self-dealing transactions may or may not be unfair in actuality, but the concern is that it might be

COMMON LAW

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ABERDEEN RAILWAY CO V BLAIKIE BROS (1843 HL) - SELF-DEALING CONTRACTS ARE INVALID AND IMPERMISSIBLE ON PRINCIPLE Ratio: You cannot be on both sides of a contract; when a particular transaction leads to a conflict in interest, the director who has the conflict should recuse themselves from participating in that decision Facts: Aberdeen entered into a contract for purchase/sale of chairs by Blaikie Bros; Blaikie is a director of Aberdeen, acting as a purchaser of the chairs, but he’s also a member of the Blaikie Bros partnership; Therefore, he’s self-dealing (on both sides of the transaction) Issue: Is being on both sides of the contract impermissible? Decision: contract set aside on the grounds that Blaikie was self dealing, indicating a conflict of interests between Blaikie’s personal interest and the interest of the Aberdeen Railway company Reasons: - Rule that no one having duties to the corporation as a director shall be allowed to enter into engagements in which he has a personal interest conflicting or which possibly may conflict with the interests of those whom he is bound to protect - There’s no allegation that Blaikie ripped off the corporation, overcharged, etc., but it’s the principle of the self dealing transaction o Court doesn’t need to determine whether the conflict adversely affected the terms of the contract o No one cares whether the contract was in actuality fair and reasonable: pretty harsh rule

The Prohibition Against Self-Dealing Softens - Initial common law stance: o No self-dealing is permissible by a director - Response: o If the articles of association authorize directors to enter into self-dealing contracts, such contracts are permissible ▪ Typically, these clauses stipulate that director needs to disclose the conflict of interest ▪ The self-dealing director can vote on the matter in a shareholder vote to approve the transaction (Beatty) ▪ If there is a fraud on the minority, a shareholder vote to approve of a self-dealing transaction is not adequate and not permissible

NORTH-WEST TRANSPORTATION COMPANY V BEATTY (1887 JCPC) - WHERE K IS ESSENTIAL TO CORPORATION’S AND PRICE/PROCESS IS REASONABLE, A SELF-DEALING K MAY BE RATIFIED BY THE S/HS WHERE THERE’S NO FRAUD ON THE MINORITY – DIRECTOR CAN VOTE THEIR OWN SHARES Ratio: A director may acquire a majority of shares and use a shareholders vote to ratify a transaction that would otherwise violate his fiduciary duty as a director to the company, as long as the director does not act in an unfair and improper manner Facts: James, as an individual, sells a steamer to NWT, and he is also a s/hr and director with NW Transport o James voted his own shares in a shareholder vote to ratify the sale - Henry Beatty, a shareholder at NWT, sued on behalf of all other shareholders to set aside the sale made to the company by James - The defendants are 5 shareholders who were also directors at the material time Issues: Is this self-dealing contract voidable or insulated by ratification? Did selling the steamer that was personally owned by a company director violate the fiduciary duty owed to the corporation? Decision: Contract for sale held valid and enforceable. Reasons: - The contract for sale is insulated by ratification by way of a shareholders vote: o the dealing was affirmed/adopted by the other directors and shareholders, and the vote was not brought about by any unfair or improper means

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o If not ratified by other directors and shareholders, or if the vote was improper in some way, it may be prohibited - There was no evidence that Transport company didn’t need a steamer, or that the purchase price was unfair

LEGISLATIVE RESPONSE TO SELF-DEALING K’S – ABCA S. 120

Section 243 ABCA –re: shareholder ratification - Evidence of approval by the s/hs can be taken into account where the court makes orders, although the court isn’t bound by this evidence

Section 120 of ABCA - Self-dealing contract is enforceable, as long as three criteria in s 120 are met: o 1/ Contract and director’s interest must be disclosed (in writing or entry into the minutes) (s 120(1)) o 2/ The appropriate body must approve the contract ▪ If the body is the Board the self-dealing director cannot vote ▪ If the body is the s/hs the self-interested party can vote ▪ S 120(5) – if the K is one that would not ordinarily require approval by a body, then the director shall disclose in writing the extent and nature of their interest ▪ S 120(7) – A general notice to the directors is sufficient disclosure of the interest o 3/ Contract must be fair and reasonable at the time it was approved • If s. 120 requirements see compliance, contract is insulated from attack on the basis of self dealing under s. 120(8). o If there is a failure to comply, court has jurisdiction under s. 120 (9) to set aside the contract or require an accounting or both. • s. 120(7): the general disclosure provision • Section 120(8.1) – the “whoops” provision o if the conditions aren’t met, a director and officer acting honestly and in good faith is not accountable to the corporation or s/hs even if it doesn’t meet criteria of s 120(8)

“Material Interest” in s 120(1)(b) – What’s Material? - S 120 only addresses self-dealing transactions where the director involved has a material interest in the transaction o So, in a transaction between corporation A and corporation B, where a director is a director of both corporation A and corporation B, OR the director of corporation A had a material interest in corporation B, there will be self dealing transaction that must meet the requirements under s 120 of the ABCA - Situation #1: Conflict is Direct o Beatty for example. - Situation #2: Conflict is indirect o Joe is a director/officer of corporation A ▪ Transaction between corporation A and B o Joe is director/officer of corporation OR has a material interest in corporation B o What is a material interest? ▪ Financial interest that is more than insignificant ▪ Relationship or emotion based?

DIMO HOLDINGS V H JAGER (ABQB 1998) - DEALINGS BETWEEN DIRECTOR’S CORPORATION AND ANOTHER CONTROLLED BY FAMILY MEMBER NOT A “MATERIAL INTEREST” (ALTHOUGH IT ARGUABLY EXTENDS TO FAMILY RELATIONSHIPS) – SELF-DEALING TRANSACTION (ABCA, S 120 APPLICATION)

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Ratio: Dealings between a director's corporation and another corporation controlled by a family member of the director does not constitute a "material interest" that requires disclosure under s 120 of the ABCA; material interest requiring disclosure must be a personal financial interest; BUT: O’byrne argues that material interest may include family relationships - Also, if the contract is otherwise reasonable and was entered into in good faith, then it should be allowed. Facts: Henry Moeller is director of Jager. Jager borrows from Dimo Holdings, whose sole director, officer, and s/hr is Diane Moeller (HM’s wife) - Dimo loaned Jager $50,000 to put on a music concert, part of which remains unpaid; Dimo sued Jager to recover the remaining debt - No disclosure was made by Henry Moeller that there may be a material interest involved. - Jager defaults on the loan and tried to get out of paying it back o Dimo sued and received summary judgment, on the basis that a trial isn’t necessary because there’s no defense - Jager is fighting back against this summary judgment, arguing that Herb Moeller should have disclosed interest under s 120 o Moeller had an interest in the contract due to his relationship with Dimo - Massive interest on the loan (50%) – an appalling rate of interest, bordering on criminal o This was dropped down to 5.5% Issue: Is husband’s relation with wife a material interest, and should the contract be unenforceable? Decision: appeal dismissed and loan upheld as enforceable; there was no material interest and contract was reasonable and fair Reasons: • At common law, there is no requirement to disclose interests in corporations held by family members. • Section 115(1)(b) of the ABCA (now s. 120 of the ABCA) o Requires the director of a corporation who has a material interest in any person who is party to a material contract, to disclose in writing to the corporation, the nature and extent of his or her interest o Where there is a material interest in the other corporation in a transaction, s. 120 applies as to it being a self-dealing transaction • Material interest o Material interest denotes a financial interest, and it must be more than insignificant o Court is tepid towards anything other than a financial reason constituting a material interest ▪ Problem: • O’byrne argues that a marital relationship should be a material interest requiring disclosure (there is a relationship that could impact Moeller’s ability to negotiate for the corporation’s interests and Moeller has an indirect financial interest) o Application to the facts: ▪ In this case, court found that Moeller is neither a director, officer or has a material interest in Dimo. ▪ Material denotes a financial interest, and Henry Moeller has no financial interest in Dimo (no ownership in the other corporation) ▪ Mr. Moeller is only required to disclose his material interest, not that of his wife • When s 120 is violated by lack of disclosure, it is within the power of a court to set aside the contract o If the contract is fair and reasonable, the court cans decide to uphold the contract ▪ If the contract is fair and reasonable to the corporation at time it was approved, courts will be pretty reluctant to set it aside • Jager needed money, was desperate or it, and there was no duress or unconscionability – they got the cash and spent it, and now they owe on it • However, a 50% interest rate is not reasonable – that rate was lowered to 5.5% • Other than the interest rate, the loan as fair and reasonable and should therefore be enforceable

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o If the contract is not fair, the court could order accounting or a setting aside of the contract • Even in the absence of an enforceable contract, Jager would be obliged to repay the debt under principles of unjust enrichment o Unjust enrichment: ▪ 1/ Show enrichment • Jager got the money ▪ 2/ Corresponding deprivation • Dimo is out their money ▪ 3/ Absence of a juristic reason justifying the enrichment • no juristic reason

ZYSKO V THORARINSON (2003 ABQB) – POTENTIAL EXPANSION OF WHAT CONSTITUTES MATERIAL INTEREST  FAMILIAL INTERESTS IN OTHER CORPORATION MAY BE INCLUDED – BUT FAIR, REASONABLE CONTRACT AND DISCLOSURE INSULATES K FROM ATTACK Facts: ESJ Equities wants to buy and develop land. The land is owned by 3 individuals, who are later told to run the corporation through holding costs. Class notes: - Quote about “what interests are material” o “the statute also addresses the problem of a director or officer who has no monetary interest in a person on the other side, yet who is likely to have an emotional involvement. Thus, a deal in which the corporation is negotiating with a close relative, or even a close personal friend, of one of the directors or officers ought to be suspect.” - Material interest disclosure: o should be disclosure whenever there is connection with the other company that could potentially amount to a conflict of interest (emotional or financial interests) - Dimo is probably wrong, Zysko is likely right - But, even in the event of a material conflict, if there is disclosure and the contract is fair and reasonable, you’ve insulated it from attack.

BLACK V HOLLINGER INTERNATIONAL (DELAWARE 2005) – PASSING BYLAWS TO OVERPOWER OTHER DIRECTORS WITH INEQUITABLE PURPOSE – BYLAWS TO APPROVE TRANSACTION NOT AGREED TO BY SHAREHOLDERS/DIRECTORS – SELF-DEALING AND DIVERTING CORPORATE OPPORTUNITY Ratio: Using a voting majority to pass bylaws to overpower other directors and shareholders and to approve a transaction that otherwise violates the self-dealing prohibition is not permitted. Facts Hollinger International Inc. is suing Hollinger Inc. and Conrad Black for breach of fiduciary duty. International is controlled by Hollinger; Conrad Black owns and controls Hollinger and serves as CEO and Chairman. • In 2003, $70 million was paid out to Black and other International executives purportedly in connection with non- compete covenants - this was challenged by another shareholder claiming that these payments violated the duty of loyalty owed by the directors, and that they were hidden from the board and were thus not properly approved. • Realizing the problems that a full investigation might present, Black agreed to repay the $70 million, resign as CEO, and agree to a reconstituted structure that would see independent directors take a solid majority on the board. o Black diverted an opportunity to himself ▪ As soon as the restructuring was complete, Black violated it - he diverted to himself a valuable business opportunity (Hollinger International selling the Daily Telegraph) by encouraging the purchasers to purchase his controlling interest in the company [instead of buying it from International directly]. ▪ So he encouraged the purchaser to buy ownership in Hollinger Inc from him, rather than buying from Hollinger International

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o Black also used confidential information for his own purposes contrary to the company's best interests. • Black then threatened to remove any directors through his voting majority who attempted to subvert his effort to sell to Barclay's, and he used his voting majority to impose new rules requiring the Board to disclose all meetings etc. to him. Issues: Did Hollinger Inc. and Conrad Black violate their fiduciary duties towards International by self-dealing? Decision: trial decision against Black and Holligner Inc. upheld; fiduciary duties were breached • The Court of Chancery found that the bylaw amendments were invalid in equity because they were adopted for an inequitable purpose o that is, to allow Black to subvert the rights of other shareholders and directors. • He took a corporate opportunity and diverted it to himself o Black violated his duty of loyalty by denying the International board its prerogative to consider fairly and responsibly the strategic opportunity presented by selling the Telegraph and by diverting that opportunity to himself. • He also misled other directors about his intentions re: the Telegraph and did not disclose his dealings with Barclay's to the Board. • He improperly used confidential information to further his own personal interests, and he urged Barclays to make improper inducements to International's investment banker to betray his client International. • He also violated material terms of the restructuring agreement (which he had signed) by failing to repay the non- compete payments as promised, not devoting his energies to affecting the strategic process, entering into the Barclay's transaction and not giving the Board notice of that transaction.

(D) COMPETING DIRECTOR - Occurs where a director sits on the board of two competing companies - Historically, common law was fine with such a scenario (New Mashonaland) o Today, sitting on the Board of a competing corporation is contrary to a stakeholders reasonable expectations and would raise an action for oppression. o OR a derivative action

LONDON & MASHONALAND EXPLORATION V NEW MASHONALAND EXPLORATION (1891) – COMMON LAW VERY DEFERENTIAL TO SITTING ON COMPETING BOARD - DON’T RELY ON THIS Ratio: Damages to the corporation must be proven for a director sitting on boards of competing corporations to be removed - If the bylaws do not prohibit a director from holding positions on other boards, then they will be permitted to hold those positions. Facts: Lord Mayo was sitting on the board of a competing corporation, and the other corporation took offence, applying for an injunction that would bar the other corporation from naming Lord Mayo as a director Issue: Can a director of one corporation be restrained from acting as a director for a competing corporation? Decision: No – a director will not be removed from an opposing company’s board of directors if there’s no evidence of damage to the corporation (no sufficient damage was shown in this case) • Note: there is some tolerance for competing directors although it’s likely best not to engage in this practice o Dangers of having competing directors: action for a breach of fiduciary duty, a derivative action, oppression actions • Example: it was fine for Sobeys to sit on the board for Provigo and Empire Foods when those corporations did not both operate in Quebec; when Empire Foods moved into Quebec, Sobeys left Provigo’s board to avoid a competing directors situation

SPORTS VILLAS RESORT INC (RE) (2000 NFCA) - FIDUCIARY DUTY DOES NOT PRECLUDE DIRECTOR FROM SITTING ON MULTIPLE BOARDS – BUT DIRECTOR LIKELY BREACHES FID. DUTY AND CREATES CONFLICTS OF INTEREST IF BEING A DIRECTOR FOR TWO COMPETING CORPS – NO DIRECT COMPETITION FOUND HERE

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Ratio: A director may, in certain circumstances, engage in a competing business but his fiduciary obligations require avoidance of actions which would conflict with the interests of the businesses (O’byrne says that a competing director situation is likely a breach) • IF there is no evidence to show that the other business is in direct competition with the existing business, then no breach of fiduciary duty will be found. Facts: Pardy (a director of Sport Villas) sought an order to disqualify Dobbin (and his daughter) from being directors at Sports Villas because Dobbin is a sole stakeholder in a competing corporation • Dobbin’s solely-owned corporation, Clovelly Golf Course Inc (CGC) wanted to open a golf course in St. Johns (that would compete with Pardy’s course outside of St. Johns) • Pardy claimed that Dobbin is a competing director and needs to be removed, along with his daughter; Pardy also claims that Dobbin was taking a corporate opportunity that belonged to Sports Villa o Problem Pardy had with Dobbins’ daughter: notional conflict of interest • Dobbin argued that because the two courses are so far from each other, they aren’t competing • The trial judge rejected Pardy’s application for disqualification Issue: Is there a conflict of some sort between Dobbin’s duties to Sports Villas and the other corporation? Decision: Appeal dismissed; There was no evidence that Dobbin used any confidential info of Sports Villas and not sufficient evidence of direct competition; when there is no competition between the corporations, there is no situation of competing directors Reasons: - Fiduciary duty does NOT preclude membership on boards of multiple companies o Corporate fiduciary duty exacts from directors a strict ethic to act honestly and in good faith to a corporation’s best interest o Must look at particular facts of the case; the fiduciary duties of a director are not intended to act as a “straightjacket”; o Look at all the factors contextually from the perspective of fairness ▪ Public interest requires strict application of the standards precluding directors placing themselves in positions of potential conflict between fiduciary duties and their personal interests, but there is also societal interest in not applying the standard beyond what is necessary to achieve that end • Therefore, any assessment of whether a fiduciary duty has been breached by involvement on another corporation’s board of directors will require a balancing of those interests with the circumstances of the case at hand - Competition argument; the corporations are not in competition o Corporate fiduciary duty doesn’t prevent one from having multiple memberships on the boards of different corporations o Directors shouldn’t place themselves in positions of potential conflict between corporate fiduciary duties and own personal interests ▪ BUT, societal interest in not applying standard beyond what’s necessary to meet that end o Factual context: ▪ The distance between the courses: In this case, the golf courses are 266km away – they’re not competing. ▪ Minimal negative impact is expected from he opening of the new golf course ▪ No direct competition - Proprietary interest argument o If the contemplated scope of Sport Villas’ activities had been to acquire all future golf developments, the argument might hold that Dobbin took an opportunity belonging to Sprots Villa and was in conflict ▪ However, there’s no evidence that Sports Villas intended to acquire all future golf developments ▪ Also, no evidence that Dobbin took any information, confidential or otherwise o Corporate opportunity ▪ The opportunity to open the new golf course was something that came to Dobbins as an individual, not within his role of director of Sports Villas

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• O’byrne thinks this is just one factor though, and it is not determinative of what constitutes a taking of a corporate opportunity ▪ No evidence that Dobbin took a maturing corporate opportunity that was the target of Sports Villas Note: there is possibility for the following actions against someone who is a director for competing corporations: - Derivative action: the director’s actions have harmed the corporation in some way - Oppression: the way the corporation is being managed or run by directors is prejudicing the interests of a stakeholder - Also, if these corporations had been competing, it likely would have been found that Dobbins had breached a fiduciary duty by sitting as a competing director

(E) TAKEOVER BIDS AND DEFENSIVE TACTICS BY MANAGEMENT Introduction: - What is a hostile takeover? When shareholders are directly targeted/bought out and mgmt. is replaced o Board may, during this event, make decisions that aren’t in the best interest of the corporation to preserve their position o When this occurs, a special committee is appointed to handle the takeover bid ▪ Why? Because the board, in assessing the takeovers, must act in accordance with their fiduciary duty to the corporation Defensive Tactics • Defensive tactics can include: o Poison Pill: give existing shareholders the right to buy new shares at very low prices if an event is triggered, such as the acquiring firm buying more than X% of the firm. • This makes the acquisition of the firm costly, because they have to buy all the new shares. o Break out fee: Solicit rival friendly bids but allow the rival bidder to receive a huge fee if their bid is unsuccessful. This essentially means that the rival friendly bidder will receive all (or substantially all) of the company's cash if the unwanted purchaser is successful • These tactics MAY be a breach of fiduciary duty, but the courts have not conclusively pronounced on this yet

MAPLE LEAF FOODS V SCHNEIDER CORPORATION (1998 ONCA) - HOSTILE TAKEOVER - TO DETERMINE WHETHER BOARD ACTED IN BEST INTEREST OF CORPORATION, LOOK AT THE BUSINESS JUDGMENT RULE – DECISION MAKING PROCESS AND REASONABLENESS OF DECISION Ratio: When a corporation is in the process of an unsolicited takeover bid, directors must act in the best interests of the corporation - Ask: did the directors take the steps necessary to avoid a conflict of interest? - Decision will be accorded respect under the business judgment rule as long as there is adequateness in the: o 1/ Decision making process – directors acted prudently and on a reasonably informed basis o 2/ Reasonableness of the decision made Facts: Maple Leaf, a competitor of Schneider, announced its intention to buy Schneider out through an unsolicited bid - Schneider’s Board created a “special committee” to deal with it; the special committee was supposed to be independent of Schneider o Rationale is that board members have a personal stake in the decision – their employment is possibly on the line, so a special committee can be appointed to ensure that the transaction is carried out in the corporation’s best interest - Schnieder’s Board told the special committee that the only offer they’d accept is from Smithfield Foods at $25/share o Maple Leaf’s highest offer was at $22/share

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o The special committee chose Smithfield Foods without considering the higher bid then placed by Maple Leaf (Maple Lead wanted to increase bid to $29/share) ▪ Given tax implications, the bid would have been equal to Smithfield’s bid, not better - Maple Leaf and minority shareholders at Schneiders argued: o 1) that the special committee was not independent ▪ The special committee used Schneider’s CEO, Dodds, to facilitate negotiations ▪ appeared that the special committee deferred to what Smithfield Foods wanted at the expense of the minority shareholders o 2) that the advice given by the special committee to the Board was not in the best interests of Schneider and its shareholders - Trial judge dismissed the action of the minority shareholder and Maple Leaf, finding that the special committee and directors had exercised the care, diligence, and skill that a reasonable and prudent person would exercise in comparable circumstances and had fulfilled their fiduciary duty of honesty and good faith with a view of the best interest of the corporation Issues: Did the special committee act in the best interests of the corporation? Were they truly independent? Decision: Appeal dismissed; the special committee was sufficiently independent and it acted in the best interest of the corporation; Schneider’s Board took steps to avoid conflict of interests; the business judgment rule applies in such a circumstance Reasons: - Key point: o Directors have special duties that arise upon takeover bids o Work backwards from the business judgment rule to ensure that those duties are met: a good process and a reasonable decision - Duties of directors dealing with a takeover bid o Real question is whether the directors of the target company successfully took steps to avoid a conflict of interest o If a board of directors has acted on the advice of a committee composed of persons having no conflict of interest, and that committee has acted independently, in good faith, and made an informed recommendation as to the best available transaction for the shareholders in the circumstances, the business judgment rule applies o Fiduciary duty and standard of care owing: ▪ S 122(1)(a)+(b) - act in the best interests of the corporation - Business Judgment Rule o The Court looks to see that the directors made a reasonable decision, not a perfect decision o As long as the directors have selected one of several reasonable alternatives, deference is accorded to the board’s decision ▪ In that way, the court is deferential to the decision of the Board, and that deference is known as the business judgment rule ▪ Decision will be accorded respect under the rule as long as there is adequateness in (Peoples): • 1/ Decision making process – directors acted prudently and on a reasonably informed basis o E.g. independent special committee • 2/ Reasonableness of the decision made o E.g. pecial committee was informed - Independence of the special committee o “Special committees” are a common method of attempting to alleviate concerns of conflicts of interests amongst directors o Ultimately, Dodds needed to be involved because he brought useful context and information ▪ He pressed negotiations with the bidders diligently and did nothing inappropriate ▪ The committee was independent and Dodds’ presence was not a problem. 89

o Duty for an open auction: There was no public expectation of an open auction - Conclusion: o The board of directors acted on the advice of a committee composed of persons having no conflict of interest, and that committee acted independently, in good faith, with honesty, and made an informed recommendation - OBCA s. 248: o Protects reasonable, legitimate expectations of shareholders o Infringed by conduct of directors that disregards the interests of any shareholder

(F) OTHER SOURCES OF FIDUCIARY OBLIGATION • A fiduciary relationship can be found between directors and shareholders if the directors are also shareholders and are seeking to purchase shares from others (who are not directors) • they will be privy to information that give them an unfair advantage in negotiations regarding the price (Tongue v Vencap)

TONGUE V VENCAP EQUITIES ALTA (1994 ABQB, AFF’S BY ABCA) - FIDUCIARY DUTIES ARISE WHEN DIRECTORS ACT OUTSIDE THEIR ORDINARY DUTIES – BREACH OF FIDUCIARY DUTIES AND INSIDER TRAINING PROVISIONS – DIRECTOR BUYING AND SELLING SHARES FROM THE CORPORATION’S SHAREHOLDERS Ratio: Under s 122 of the ABCA, a director owes a fiduciary duty to the corporation; no provision in a contract, articles, bylaws or resolution can release directors from that fiduciary duty; fiduciary duties also arise when directors act outside of ordinary duties and when directors purchase shares from a shareholder - Ideally, you want to hold directors jointly and severally liable because you want to be able to go after solvent defendants (who can then sue their co-defendants later); Insider trading contemplates several liability under s 130(1)(a) ABCA. Facts: The plaintiffs, Tongue and Harrap, are minority shareholders of Synerlogic Inc and want to sell their shares at $0.60 each to the defendants • The defendants, who are directors (Vencap, Negin et al) buy the shares, knowing that they’re really worth $1.97, and then resell them at a profit • Plaintiffs find out they’re duped, but they signed a release that relinquished any right to action against shareholders or directors • The plaintiffs sued for breach of the insider trading provisions of s. 131 of the CBCA and breach of fiduciary duty Issue: Are the defendants liable under the insider trading provisions of the ABCA? Are the defendants liable for breach of fiduciary duty? Decision: Action allowed; Defendants are liable for breached fiduciary duty and insider trading under s 131 of the CBCA (equivalent of ABCA s 130) Reasons: - Fiduciary duty o Statutory fiduciary duty ▪ Section 122: Fiduciary duty is owed to a corporation only; consistent with BCE and Peoples • So, it’s true that fiduciary duty isn’t owed here, by virtue of the act o Fiduciary duty can arise in other circumstances: ▪ 1) Fiduciary duties arise when directors act outside of their ordinary duties. • A fiduciary duty was owed to Tongue and Harrap because Negin et al were acting outside ordinary duties • Directors breached their fiduciary duty here by buying shares without disclosing another offer to buy the shares after for more money ▪ 2) Fiduciary duties arise when directors purchase shares from the shareholders ▪ 3) Fiduciary duties arising on other grounds – the category of fiduciary duty is never closed

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• Defendants had information that the plaintiffs required to make an informed decision, but they did not disclose that information • There was a duty here to disclose the relevant information to the shareholders - Effect of the Release Agreements o Directors got the plaintiffs to sign a release of action saying that they would not sue ▪ Court will read these sorts of releases in context. The releases are contractual documents. o Plaintiffs can only release what the parties had in contemplation at the time of signing the contract ▪ The causes of action here, for several breaches of fiduciary duty and breach of s. 131 of the CBCA (insider trading) were not in contemplation of the parties o As stated in the CBCA, parties are also unable to contract out of liability under s 131, and out of a fiduciary duty o Although the plaintiff had independent legal advice prior to signing, there was incomplete disclosure by defendants - Insider trading – breach of section 131 o CBCA S 131 (ABCA s 130) – gives a cause of action for people ripped off by insider trading ▪ Insiders (directors) are entitled to trade in corporation’s shares, except when acting on insider information ▪ Directors may not use information that is not available to the public in their transactions of shares o Apportioning liability between directors who have been found liable (as Plaintiff, you want a finding of joint and several liability) ▪ The court found several liability, so each director is responsible for the extent of their personal involvement ▪ Court said that the “direct” loss in section 131 is referring to several liability (not joint and several), so there is a direct loss that each defendant is liable for • So the defendants are held liable for an amount equal to the proportion of the shares they purchased from the plaintiffs as individuals and resold for profit - However, directors are also liable as: o A fiduciary under trust law (joint and several liability) o Concurrent tortfeasors, they acted in concert (fraud and deceit) (joint and several liability)

(G) SHAREHOLDER RATIFICATION OF A BREACH OF FIDUCIARY DUTY - Problem: shareholders could ratify breaches of fiduciary duty EXCEPT in instances of fraud on the minority (Cook v Deeks). o However, the fiduciary duty is owed to the corporation not to the shareholders, so why should the s/hs be able to ratify it? - Under s 120 of the CBCA, a shareholder resolution approving a breach of fiduciary duty doesn’t cure a breach or relieve the fiduciary of liability for the breach (equivalent – s 122(3) ABCA) o With the ONLY exception being for self-dealing contracts. o The only legal effect of such a resolution is that it must be considered by the court in deciding whether to grant a s/h the right to bring a derivative action on behalf of a corporation for breach of fiduciary duty or determining if an action was oppressive

(H) LAWYER SITTING ON A CLIENT’S BOARD OF DIRECTORS “Should You Sit on Your Client’s Board of Directors?” [346] - A lawyer might start talking during the meeting and give legal advice at that particular meeting; it might end up in the minutes and then that could result in an inadvertent waiver of client confidentiality - Professional liability insurance that you receive as a lawyer excludes acts done as an officer or director - Officer/director liability insurance excludes acts done outside the scope of duties of a directors - The fear is that you fall between two stools, because between your officer/director liability insurance and your professional liability insurance, you as a lawyer may end up PERSONALLY liable

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- So.. maybe don’t sit on Board

“Lawyer’s Liability as a Director of a Corporation” [347] - At the very least, a lawyer must help clients understand and evaluate the serious risks in having their corporate lawyer serve on the board. Failure to do so might itself be a source of a malpractice claim - Can create problems, like inadvertently breaching client confidentiality - If you’re acting in a non-legal capacity, you’re not going to be covered under professional liability insurance o But there are pros: ▪ You can better understand/be informed about client’s business; can identify emerging problems; can build a better relationship with client o And yet there are serious negatives: ▪ Waivers of client confidentiality; conflicts of interest; exposure to increased liability for you, your firm, and questions about your insurance coverage; increases likelihood you’ll be named as a defendant if sued; and you’re going to be held to a higher standard of care than either non-lawyer director OR a lawyer not on the board. Probably a bad idea! - But: arguable that a lawyer may be acting in ordinary course of the law firm’s business in sitting on a client corporation’s board, and therefore may be protected under the professional liability insurance o It is probably possible to receive coverage

(I) DISSENTING DIRECTOR – DEALT WITH BY THE S 123 OF CBCA AND ABCA • If, as a director, you wish to dissent from a decision of the board, you have to check the statute to make sure that you do it in the proper manner and at the proper time o NOTE** BIG DIFFERENCE BETWEEN CBCA and ABCA here!!!

Section 123 ABCA - 123(1) director who is present at a board meeting is deemed to have consented to any resolution passed unless: o A) Request a dissent to be entered into the minutes o B) Sent a written dissent to secretary before the meeting was adjourned o C) Sent a dissent by registered mail or to office o D) Otherwise PROVE that you did not consent - (2) Loss of right of consent – a director who votes or consents to a resolution or action ISN’T ENTITLED to dissent o Note: if you vote yes, you can’t say you’re dissenting - 123(2) - (3) A director is not liable under section 118, and has complied with the director’s duties under section 122, if the director exercises the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances, including reliance in good faith on: o (a) financial statements of the corporation from officers or auditors to reflect fairly the financial condition of the corporation or o (b) an opinion/report of a lawyer, accountant, or others whose profession lends credibility to a statement made by them

Section 123 CBCA – different - 123(1) director who is present at a board meeting is deemed to have consented to resolutions passed unless: o A) Request a dissent to be entered into the minutes o B) Sent a written dissent to secretary before the meeting was adjourned o C) Sent a dissent by registered mail or to office o Note: More or less the same wording for when a director present at a meeting is deemed to have dissented, but there’s no “otherwise prove” provision (as was the case in the ABCA) - (2) Loss of right of consent – a director who votes or consents to a resolution or action ISN’T ENTITLED to dissent

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- (3) when the director is absent : A director not present, is deemed to have consented unless within 7 days after becoming aware, cause a dissent to be placed in the minutes or sends a dissent by mail or delivers it to the corporation o There is no congruous provision in the ABCA

3. OTHER STATUTORY DUTIES E.G. INCOME TAX ZWIERSCHKE V MNR (1991 CTC) - STATUTORY DUTY OF CARE UNDER INCOME TAX ACT – FAILURE TO PAY TAXES Ratio: Statutory duties of care will apply to directors; they may go beyond the regular duty of care Facts: Zwierschke appealed from an assessment by the CRA under the Income Tax Act; appellant was born in 1925 and left school before he completed grade 9 • 1964, he started a business doing trenching and construction; hired 3-4 employees who he’d supervise while his wife did most of the paperwork for the business • Business was transferred to a corporation of which the appellant was the only director in 1978. Business all the while was using Niagra Credit Union to finance equipment purchases. • The business had a line of credit with Niagra (manager was Mr. Disley), which was used to pay wages, purchase materials, and pay for other business expenses • Company went way into overdraft on its line of credit, its assets were ultimately seized, and the corporation was liquidated. Zwierschke still owes $17,000 to the Credit Union. • When the proceeds of sale of the company were remitted to the Credit Union, there was not enough in excess to pay the amount owing by the company in income tax • The appellant claimed that he had exercised the required degree of skill diligence, and care under s 227.1(3) of the Income Tax Act Issue: Can the appellant defend himself by virtue of s 227.1(3)? Decision: No defense; appellant was the person who managed the business and knew the most about its affairs Reasoning: - S 227.1(3) requires directors to exercise a degree of care, diligence and skill. In this case, the directors exercised no care, diligence or skill. o The appellant managed the company’s business and knew more about the business affairs than any other person o He knew that his company’s line of credit was in overdraft and that he would have collect enough receivables in order to cover the cheque sent to the CRA to cover outstanding tax liabilities ▪ He just wrote the cheque and hoped it wouldn’t bounce. - Section 227(4) of the Income Tax Act provides that amounts withheld from salaries and wages for taxation purposes are deemed to be held in trust for the Crown in right of Canada. o This imposes a duty to ensure that those funds are properly paid to the Crown.

4. DIRECTORS’ AND OFFICERS’ LIABILITY IN TORT TO THIRD PARTIES Introduction - We know that under s 122 the director has a duty of care to the corporation (and possibly to a third party like a creditor under s. 122(b)) - But to what extent is a director liable to third parties outside the corporation in tort?

Director and Officer Liability for Torts Inducement of Breach of Contract - Directors are liable for the inducement of breach of contract, with the exception of the rule from Said v Butt - The rule in Said v Butt (only for the tort of inducing breach of contract) o If an officer or director for a corporation, acting bona fide within the scope of their authority, procures or causes the breach of a contract between his employer and a third party, he does not thereby become liable

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to an action of tort. The claim lies against the corporation. [Remember, the elements of inducing breach in Pocklington p 154] o It’s a good rule – if breach of contract and the damages that come with it are in best interests of the corporation, directors are basically obligated to breach - The rule in London Drugs v Kuehne. o Privity of contract and liability in negligence for employees o Employees may owe a duty of care to someone to whom their employer is providing services by contract.

Negligence and Other Torts - The case law is less clear and somewhat uncertain. - Two lines of authority for liability of officers and directors for their own actions: o 1/ Corporation as a broad shield for officers and directors. ▪ Absent fraud, deceit, dishonesty or want of authority, Directors and Officers of the corporation will rarely be held liable for their tortious conduct unless their actions have taken them outside of the scope of their duties (ScotiaMcLeod) ▪ Only where a tortious action takes a director or officer out of their role of directing mind of the corporation, exhibiting a separate identity or interest from the corporation, will the conduct attract personal liability • Example: Where president of corporation punches a shareholder for making him angry. It’s a separateness that attracts personal liability. o 2/ Corporation as a very narrow shield of protection for officers and directors. ▪ Directors and officers of the corporation are responsible for their tortious conduct, even if the conduct is directed in a bona fide manner in the best interests of the corporation; • But, liability is STILL subject to Said v Butt exception for inducing breach of contract (ADGA). ▪ This line of authority suggests that personal liability in tort will be found more commonly for directors and officers • Ordinary negligence of corporate directors: o No liability will be found (ScotiaMcLeod) ▪ This is closer to the law as it stands in Alberta – exceptions to the protection from director liability are defined narrowly ▪ There must be a separateness in the actions of the director apart from the corporation (some level of intent that is not present in normal negligence) o Liability will likely be found (ADGA) o Middle route: liability may be found, following the same process for establishing whether a duty of care exists in the circumstances of a regular employee (Slatter’s concurring opinion in Hogarth) • Liability for intentional torts or fraud: o Will be found following either ScotiaMcLeod or ADGA o In jurisdictions following ScotiaMcLeod, it is not enough to correctly plead the tort, because liability will only be found for specific torts

LONDON DRUGS V KUEHNE (SCC 1992) – EMPLOYEES CAN BE HELD NEGLIGENT TO CLIENT OF EMPLOYER, DEPENDNING ON CIRCUMSTANCE Ratio: employee can be liable in negligence to someone to whom the employer is providing services by contract • In performing the very essence of the employer’s contractual obligations, employees may owe a duty of care to the customer depending on the circumstances Decision: - London drugs is owed a duty of care by Dennis and Hank, London Drug employees, which they breached by dropping the transformer; they’re liable, except that they can shelter under the exclusion clause in the contract between London Drugs and Kuehne.

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o BUT FOR that exclusion clause, they’d be personally liable for $40,000! o As employees, there’s no special deal. You have personal liability. ▪ Why should directors and officers be any different? - Employees are liable in negligence to the customer

MONTREAL TRUST V SCOTIAMCLEOD (1995 ONCA) – ABSENCE OF FRAUD, DIRECTORS/OFFICERS NOT LIABLE FOR TORTIOUS CONDUCT UNLESS ACTIONS TAKE THEM OUTSIDE SCOPE OF DUTIES – TORTIOUS CONDUCT MUST EXHIBIT SEPARATE IDENTITY Ratio: In the absence of findings of fraud, deceit, dishonesty or want of authority, directors and officers as the directing minds of the corporation will rarely attract liability for their tortious conduct unless their actions have taken them outside of the scope of their duties. • The tortious conduct itself must exhibit a SEPARATE IDENTITY to take the directors and officers out of their roles as directing minds of the corporation for there to be personal liability found Facts: Montreal Trust (MT) and Credit Lyonnais (CL) are plaintiffs against ScotiaMcLeod (SM) [an underwriter – facilitates placements of debentures in the market; they’re an intermediate between the sellers and buyers of the debentures], Wood (senior VP of SM), and Davies (law firm who acted for the plaintiffs and Peoples Jewelers at the material times) • MT/CL bought unsecured debentures of Peoples for $17 million (thereby financing Peoples) o Peoples owned Zale Holding, which owned Zale Corp, which owned Gordon Jewelry as well o To induce purchase of debentures, Peoples gave MT/CL a “prospectus” with financial info. ▪ But this prospectus was no good! o At the time MT/CL bought the debentures, Peoples was party to other agreements to which it was conditionally liable – the “Zale liabilities”; the prospectus did not contain info about the Zale Liabilities • There were two groups of directors of Peoples (9 in one pile that weren’t particularly involved, and 2 – Gill and Irving Gerstein – that were intimately involved) • MT/CL claim that the Zale liabilities were crucial to their decision to purchase the debentures; they also claim that they relied on the information provided to them by Peoples in making their financing decision o They argue that the conduct of the directors at Peoples constituted an intentional or negligent misrepresentation o Seems to be fraudulent misrepresentation – MT/CL asked Gill and Irving Gerstein, president and CEO of Peoples, if Peoples had contingent liabilities, and they said no • NOTE – this is an application by the directors to strike the action, not actual proceedings. Issues: Does a tortious misrepresentation give rise to personal liability for officers and directors? Decision: Action dismissed against group of 9 directors who were not intimately involved; action was maintained against the two directors who had been more involved in the misrepresentations Reasons: - The corporate veil protects the 9 directors of Peoples who weren’t intimately involved – Court STRIKES this action. o Just because the “directing mind” did something unsavoury, doesn’t mean you can pierce the corporate veil o In the absence of findings of fraud, deceit, dishonesty, the corporate veil will not be lifted to hold the officers and directors liable o Officers and directors are shielded from personal liability unless it can be shown that their actions were themselves tortious or exhibit a separate identity or interest from that of the company ▪ Must be some part of their activity that takes them outside the role of directing minds of the corporation o The actions of these directors were not sufficiently exhibit a separate identity or interest from that of the corporation - However, Gill and Irving’s misrepresentations were clearly negligent misrepresentation o The court notes the bar is VERY low for merely sustaining a cause of action against a motion to strike.

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▪ They indicate that the action will be unsuccessful, but they let the action proceed. ▪ This was just an application to strike, so it doesn’t mean they get convicted, but the action goes forward and will be heard on the facts. - Ultimately, ScotiaMcleod says three things: o Pleadings must be particular (specific tort alleged) ▪ Not every tort, successfully alleged, will result in personal liability (must be fraud, deceit, dishonesty, or want of authority) o The director must make the tort their own, meaning that they must be separate in interest from the corporation o Liability will be rare without dishonesty, deceit, fraud, want of authority

ADGA SYSTEMS V VALCOM (1999 ONCA) - DIRECTORS MAY BE LIABLE FOR TORTS COMMITTED, EVEN IF ACTING BONA FIDE IN THE BEST INTERESTS OF THE CORPORATION Ratio: An officer or director will not be entitled to the Said v Butt defense if he is not acting bona fide in the interests of the company • But Officers, directors and employees may still be held responsible for their tortious conduct even though that conduct was in pursuance of a corporate purpose and directed in a bona fide manner to the best interests of the company o Directors are not immune, even from economic torts like negligent misrepresentation Facts: ADGA complains that Valcom, a competitor, poached its employees and caused the plaintiff economic damage; Valcom was named generally but in particular, Valcom’s director (MacPherson) and two of its employees were named • Valcom’s directors and officers approached the employees of ADGA, saying that they were going to bid on a prison services contract, and ask if they can use the employees’ names in their bid and whether the employees will come work for Valcom if their tender is successful? o The employees agree, and Valcom got the contract. • This is an extreme case of employee poaching o ADGA started a business day, only to realize all of their employees are gone. • Valcom committed the tort of inducing breach of contract. o All employees at ADGA breached their employment contracts. This is perfectly clear – no dispute. • Question here at the Court of Appeal is whether a cause of action exists to allow for a trial (summary judgment to dismiss was granted at the lower court) Issues: Can MacPherson be sued as an individual, assuming his actions were genuinely directed to the best interests of his corporate employer? The corporation definitely has liability – but do the directors? Decision: appeal allowed; original motion for summary judgment against ADGA dismissed; action is sustained Reasons: - The Court found the pleadings against the directors to be particular and clear o Problem: ScotiaMcLeod did not say only that the pleadings must be particular, they must also be for specific torts - The Court says that Salomon doesn’t say anything about liability of the directors for their torts; Salomon is about establishing the corporation as a separate legal entity and saying that shareholders are not liable for the actions of the corporation o The court starts with principle in tort that an individual, including a director or officer, is responsible for their own conduct; ▪ The Court said that the one key exception to the general liability in tort as a director is Said v Butt: • Directors of a corporation are not liable for inducing that corporation to breach its contract when they are performing bona fide their functions as corporate officers ▪ Problem: this is a case where the director is inducing the breach of contract by employees of another corporation, he is not inducing the breach of contract of his own corporation (which was the case in McFadden)

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• Therefore, the Said v Butt defence is not applicable in the kind of induced breach of contract that is present in this case - Court says that the “consistent line of authority holds … officers and directors and employees are responsible for their tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the company” o Court is saying that: the conduct of the director is not necessarily excused if the interests of the company are being served and there is conduct in bona fide interest of the company o Problem: ▪ That’s the EXACT OPPOSITE of ScotiaMcLeod, even though the court is purporting to follow that decision ▪ Scotia says that liability is rare  you must sufficiently make the tort your own to separate the director from the corporation for there to be personal liability - The Court dispatches ScotiaMcLeod o They make the net for liability of directors bigger. Scotia says liability is rare, but ADGA says it’s common and directors will be found liable.

NBD BANK CANADA V DOFASCO INC (ONCA 1996) – DIRECTOR LIABLE FOR NEGLIGENT MISREPRESENTATION WITH EGREGIOUS CONDUCT – FOLLOWS ADGA – ANNS TEST FOR NEGLIGENT MISREPESENTATION Ratio: following ADGA, liability in tort for directors will be common if the tort is properly pleaded (wrong though…. must also be separateness of tort and tort must be a specific tort such as fraud) Facts: Dofasco made several telephone calls and sent a number of letters to NBD in 1991, inducing them to finance credit for Algoma steel (a subsidiary of Dofasco) - The Dofasco directors made made some misleading statements which helped induce NBD to grant the credit sought. o The directors made statements indicating that certain assets could be used as security for the debt (they could not, as these assets were already pledged as security for other debts), and misrepresenting Algoma’s financial state o NBD agreed to lend $4 million to Algoma - Two weeks after the purchase, both Algoma and Dofasco went bankrupt, resulting in significant losses to NBD - Dofasco Inc and a director, Melville, were held jointly and severally liable for negligent misrepresentation at trial Issue: Can the directors be held personally liable for misrepresentations they made on behalf of the corporation which eventually caused NBD economic damages? Decision: Appeal dismissed; Melville found liable in negligent misrepresentation as a director of Algoma ( Court applied ADGA; had court applied ScotiaMcLeod, he would not be liable because he didn’t make the tort his own) Reasons: - The appellants contend that the director, Mr. Melville, should not be held personally liable for acts done in furtherance of the corporation's best interests. o ScotiaMcLeod: absent fraud, deceit, dishonesty, or want of authority it is rare for officers to be held personally liable for actions carried out under a corporate name unless it can be shown that their actions are themselves tortious or exhibit separate identity or interest from that of the company o ADGA: Officers can be held liable for their own tortious acts – but only if they’re separate from the corporation o So, Melville is not protected from liability for his tortious acts just because he may have been acting in pursuance of the interests of the corporation - Duty of Care: o Melville claims that he does not owe a duty of care because it was not reasonably foreseeable that NBD would be relying on his representations in a personal capacity. ▪ Anns test for duty of care: • 1. Is there a prima facie duty of care that the defendant owes to the plaintiff?

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o This prima facie duty is based on the concept of the special relationship, which exists when: ▪ A) the defendant ought to have reasonably foreseen that the advisee would rely on the advice and ▪ B) where that reliance by the plaintiff would be reasonable. • 2. If yes, are there residual policy considerations outside the relationship of the parties that negate the imposition of the duty of care? o The scope of the duty, o The class of persons to whom it is owed, or o The damages which a breach of it may give rise to? • 3. Assuming a special relationship, plaintiff must go on to establish: o (a) An inaccurate or misleading statement was made o (b) The Defendant must have acted negligently in making the statement (ie. statement was not made with reasonable care); o (c) The Plaintiff must have reasonably relied on the misrepresentation; and o (d) The reliance must have resulted in financial detriment (damage) • Anns Test Applied: o There is a prima facie duty of care here. ▪ (a) the defendant ought reasonably to foresee that the plaintiff will rely on his or her representation, and • Melville was a senior officer of Algoma, and was the bank's primary contact. He held himself out as capable of making decisions on Algoma's behalf. • He must have known that carelessness on his part could give rise to damage to the plaintiff. ▪ (b) reliance by the plaintiff would, in the particular circumstances of the case, be reasonable. • Reliance by NBD Bank upon Melville was reasonable ▪ This will give rise to a prima facie duty that can otherwise be negated for policy considerations. o Policy Reasons for not attributing personal liability ▪ Allowing for liability would not erode the effectiveness of the CCAA ▪ No reason to immunize Melville from liability for negligent misrepresentation by reason of reallocation of risks • But argument is that deal was between the corporation and the bank, and seeking out the directors for liability is not justified (not intended to be liable) ▪ No issue of indeterminate liability because Melville was aware of the identity of the plaintiff and his statements were used for the very purpose and transaction for which they were made - Note: the Court here found that the misrepresentations and conduct went beyond mere carelessness or mere negligence, it was closer to an intentional tort (borderline intent) o The conduct was egregious here, which provides some support for this outcome o If there had been fraud here, liability also would be found following ScotiaMcLeod

HOGARTH V ROCKY MOUNTAIN SLATE INC (2013 ABCA) - THE LAW IN ALBERTA IS SCOTIAMCLEOD – INTENTIONAL TORTS WHERE SEPARATE IDENTITY OR INTEREST IS SHOWN ATTRACT LIABILITY - LEGITIMATE EXPECTATIONS OF PARTIES GO TO WHETHER DIRECTOR IS LIABLE FOR PROMOTIONS – NEGLIGENT MISREPRESENTATION AGAINST DIRECTOR FAILS HERE Ratio: For a director to be liable in tort, the acts of the director must be tortious in and of itself or exhibit the separate identity or interest necessary to make the act the director’s own

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• The expectations of the parties can help inform whether it is appropriate to hold directors personally liable for torts committed by the corporation. • For negligent misrepresentations, there must be a causal nexus between the misrepresentation and damage for liability to be found; the plaintiff must show some independence of the tort on behalf of the director – relying on the director, rather than the corporation for which the director is working Facts: Plaintiffs (limited partners) invested in a limited partnership (Rocky Mountain Slate Ltd Partnership) to excavate a slate deposit, relying on representations from a general partner (Rocky Mountain Slate Inc) and the general partner’s director, Simonson; Simonson was the president of the limited partnership • The defendant directors developed three documents designed to encourage investors to invest in the project. o This included a "future oriented financial information" document which includes forecasts and projections of business opportunities. • Simonson, Powell and Suhan are all directors who are being sued, and who were involved in creating the promotional literature and making presentations to potential investors, including Hogarth. • The quarry was not successful, and the plaintiffs lost their investments. • The defendants contend that there was no negligent misrepresentation because the quarry failed for reasons beyond their control (i.e. bad weather for mining). • At trial, the judge found Mr. Simonson personally liable Issue: Can plaintiffs successfully sue Simonson personally for negligent misrepresentation? Decision: Appeal allowed; Simonson not liable • The Court was not satisfied that the conduct of Simonson was tortious in and of itself or exhibited the separate identity or interest necessary to make the act his own; the statements were made for the purposes of raising funds for the corporation and for its benefit, having a shareholding or financial interest in the corporation does not translate into a separate personal interest • The tort for negligent misrepresentation was also unsuccessful because no causation was shown between the damages and the misrepresentations and the facts do not support the finding that negligent misrepresentations were made Reasons (Slatter J., Concurring): • Five part test for negligent misrepresentation: o Must be a duty of care based on a “special relationship” ▪ Reasonably foreseeable that statement would be relied upon and reliance by the plaintiff on the statement would be reliable o Representation must be inaccurate, untrue, or misleading o Representor must have acted negligently in making the representation o Representee must have relied on the misrepresentation, and it must have been reasonable to so rely on the misrepresentation o Reliance must have been detrimental to the representee in that damage was caused ▪ But for the representation, the investment would not have been made and the losses would not have been incurred if the representation had been accurate Question of negligent misrepresentations: At trial, the judge found three actionable negligent misrepresentations in the promotional materials: 1. the expertise of the management team • They represented that the officers and senior management possessed the requisite knowledge, expertise and competence to take the existing quarry to a commercially operable quarry. o At trial, it was found that the promoters did not have expertise in managing slate mines, nor to make projections about anticipated output. • ABCA finds that this position is unreasonable. o The promotional materials correctly conveyed each director's expertise and background. o It is unreasonable to infer that entrepreneurs promoting a quarry are representing that they know how to operate specialized equipment in the quarry.

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o It is not unreasonable for the promoters to advertise their general management experience, which is truthful. o Making a representation about skills in management is insufficient to create personal liability if mistakes are made in the management of the corporation 2. the involvement of a mining engineer o The promotional materials indicate that a mining engineer will be an integral part of the quarry operation. o Kucera did have extensive experience as a mining engineer o There was a personal falling out between Kucera and the other directors, so that by the time the promotional materials were distributed, he was only peripherally involved in the operation o There is no evidence to show that the absence of the engineer was a cause in fact of the quarry's failure. ▪ Therefore, even if this is a misrepresentation, it does not give rise to damages. 3. compliance with regulatory requirements o Trial judge found that the representation to comply with regulatory requirements was inaccurate because the quarry only had a permit to produce 10,000 tonnes of shale, not the 22,000 tonnes promised in the promotional documents o When the representation was made in 2001, the quarry was not yet in full operation. ▪ The 10,000 limit was a "bulk sampling" limit used to prove the viability of the mine. ▪ It was never intended to be an operating limit. o Therefore, there is no misrepresentation here. They eventually did receive a permit for 22,000 tonnes. o Also, no causal links have been established here. Question 2: Personal Liability of a director: • Said v Butt: no personal liability in tort if a human agent of the corporation acting in the best interests of the corporation caused it to breach one of its contracts… unless the person’s actions exhibit separate identity or interest from that of the company (this exception is only for the tort of inducing breach of contract!!!!) o Where a corporation prepares promotional documents to induce investments, corporation is presumptively responsible; individual liability should be exceptional and secondary • Separate legal existence of corporations is not a loophole, technicality, or mischievous stratagem - it is an essential tool of social and economic policy • In this case, it is reasonable for the investors to rely on representations made in the promotional materials and presentations, but it is NOT reasonable to assume that the authors of the promotional materials were personally warranting the information • The legitimate "expectations" of the parties are a valid consideration in determining whether liability should attach. o The investors were all experienced, and knew that they were dealing with a limited liability corporation. • On the facts, it is difficult to find any "independent tort" on the part of the defendants - they were at all times acting within their authority as directors

Slatter’s main point: • For there to be liability in negligent misrepresentation, the director must give his personal guarantee for his statements and it must be reliable for the plaintiffs to rely on the statements made in his personal capacity, and not in his capacity as a director o This is an argument that a director has no special treatment compared to normal employees (can be found liable if there is a duty of care, which will occur when the director gives a personal guarantee) • Why Slatter’s right about ScotiaMcLeod not being good law: o ScotiaMcLeod says that there is not liability for a director in ordinary negligence dealing with a third party because there is not duty owed to third parties (it is owed to ▪ BUT: SCC said in Peoples that directors can owe a duty of care to third parties, as per s. 122 of the CBCA o Look at London Drugs: there is no special deal for employees (can be liable in negligence), so why would there be a special deal for directors (only liable for torts that show a separateness of identity and interest)

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KENT V POSTMEDIA (2015 ABQB) – FOLLOWS SCOTIAMCLEOD & HOGARTH – PERSONAL LIAIBLITY OF A DIRECTOR IN TORT REQUIRES ACTIONS EXHIBITING SEPARATE IDENTITY OR INTEREST FROM THE CORPORATION – SOME INTEREST IN SLATTER CONCURRING OPINION Ratio: Personal liability in tort for a director of a corporation requires the director’s actions be themselves tortious or exhibit a separate identity or interest from that of the corporation so as to make the act or conduct complained of their own • There must be some activity on the part of the directors to take them out of the role of directing minds of the corporation Facts: Arthur Kent was a well-known journalist; he commenced action against Postmedia Network, National Post, Fisher (publisher of NP), and Mr. Godfrey (CEO and director), alleging defamation based on an article they published, and that they continued to publish and republish the alleged defamatory article after receiving notices setting out its defamatory nature • Fisher and Godfrey had control over the corporate defendant and could have directed that it ceased publishing of the defamatory article; they are allegedly responsible because they allowed the distribution of the article to continue • Fisher and Godfrey both deny that they’re proper parties to the action; they say that they had nothing to do with the situation o Fisher and Godfrey are seeking summary dismissal of all claims made against them personally Decision: Application for summary dismissal/judgment granted; no personal liability of the directors Reasons: - Personal liability in tort for a director of a corporation requires the director’s actions be themselves tortious or exhibit a separate identity or interest from that of the corporation so as to make the act or conduct complained of their own o There must be some activity on the part of the directors to take them out of the role of directing minds of the corporation - To succeed in the defamation, claim against the directors personally, it must be proven that they, by any ACT, communicated defamatory words to a third-party recipient; the act must be a deed of their own, and not that of the corporation o Counsel for Kent was trying to show that the defendants knew the article was defamatory, and that they stepped out of their corporate role in their conduct ▪ ScotiaMcLeod: the tort must exhibit a separateness for the directors to be held personally liable o There was no evidence of any deliberate act on the part of either Godfrey or Fisher that would constitute defamation and no evidence that any actions by the directors were their own deeds, rather than that of the corporations - Note – Court says it was “guided by Slatter’s statement in Hogarth” o attributing personal liability to the directors here would amount in granting personal guarantees for Postmedia and National Post’s tort liabilities – and that’s not appropriate REVIEW OF LIABILITY OF DIRECTORS TO THIRD PARTIES Discussion points: I. How values associated with tort law, on the one hand, and corporate law, on the other, collide in the area of D/O liability to third parties. II. How judicial responses to that collision create inconsistent lines of authority. See: • Montreal Trust v ScotiaMcLeod Inc 1995 CanLII 1301 (ON CA), leave to appeal refused (“SM”) • ADGA Systems International v Valcom Ltd 1999 CanLII 1527 (ON CA), leave to appeal to the SCC refused (“ADGA”) III. How the concurring decision in Hogarth v Rocky Mountain Slate Inc 2013 ABCA 57, leave to appeal to the SCC refused (“Hogarth”), might prove to be a highly promising way forward. Focus

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• Focus is not on D/O liability to the corporation under s. 122 (1)(b) of the CBCA/ABCA whereby D/Os must, in relation to the corporation, “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.” • The focus, instead, is on the D/O’s personal liability to third parties for torts committed in a business context or otherwise while pursuing a corporate purpose.

ScotiaMcLeod (Ont CA) favours the corporate law view. Accordingly: • Absent “fraud, deceit, dishonesty or want of authority,” personal liability in D/Os “is rare.” • Only extreme misconduct is captured as where directors have “shed their identity with the corporation”; or as where the impugned actions “are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own.” Disadvantages: • Creates moral hazard because SM assumes that D/Os do not have liability for ordinary negligence; that is, negligence does not generally exhibit the requisite separateness. Could encourage carelessness. • Conflicts with the subsequent decision of Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68 which states that D/Os can owe a duty of care to third parties, pursuant to s. 122(1)(b). • Is inconsistent, at least somewhat, with the previous decision of London Drugs Limited v Kuehne & Nagel International Ltd, [1992] 3 SCR 299 which says that junior employees are liable for their own negligence. That is, SM creates a two tiered system. Advantages of SM: • Helps ensure that D/Os do not become functional guarantors of corporate operations. (See Slatter JA in Hogarth) • Is arguably more consistent with with Salomon v Salomon & Co, [1897] AC 22 (HL), including that the corporation is a separate legal entity.

ADGA (Ont CA), by way of contrast, favors the tort law view. Accordingly: • the “consistent line of authority in Canada holds simply that, in all events, officers, directors and employees of corporations are responsible for their tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the company, always subject to the Said v. Butt exception.”[Said v Butt concerns a defense to inducing breach of contract only.] Disadvantages • Forces D/O’s to backstop corporate operations. D/Os essentially face concurrent liability with the corporation (per Slatter JA), thereby compromising aspects of Salomon. • Might make D/Os conduct themselves with undue caution out of fear of liability. Advantages • Consistent with the SCC in Peoples (there can be liability in negligence) and London Drugs (ie: ADGA ensures there is no longer any special deal for D/Os in a tortious context).

Slatter JA threads the needle between SM and ADGA by: • Acknowledging that D/Os can be liable for ordinary negligence and not just for torts that exhibit a separateness, such as fraud. It is thereby somewhat consistent with ADGA. • Introducing corporate law values in assessing policy so as to make it more difficult for plaintiff to establish liability. It is thereby somewhat consistent with SM’s reluctance to find D/Os liable to third parties in tort. • Slatter JA’s concurring decision also has the advantage of being consistent with the SCC’s decision in London Drugs such that D/O’s no longer get a special break on tortious liability over that offered to the junior employee. • On a related front, Slatter JA implicitly critiques London Drugs for being too quick to find a duty of care was owed by the employees who caused damage to the plaintiff’s property.

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What follows the bright line offered by Slatter JA in the context of a director acting in the best interests of the corporation with parties who have voluntarily dealt with a limited liability vehicle: • absent a personal guarantee or other circumstance indicating that the director (or officer) has assumed personal responsibility for his words, there is no duty to the plaintiff and therefore no liability for negligence causing pure economic loss in an investment context.

Note: Matter has not been ruled on by the SCC to provide ultimate clarity

REVIEW OF CHAPTER 7

- We’ve looked at duties of directors under section 122 of ABCA (subject to the BJR) o Duty of care – s 122(1)(b)  major upgrade from common law, which was the standard of the amiable idiot o Fiduciary duty – s 122(1)(a)  - Peoples  Duty of care can be owed to third parties; then apply standard of care in statute. o BJR: if action against director/officer under s 122, a go-to defence is the BJR. ▪ Need 2 things to rely on BJR: • a/ Good process • b/ Reasonable decision (doesn’t have to be a perfect decision, just reasonable) o Van Gorkum case  they didn’t have the documents in front of them, terrible decision. Evidence showed their process was bad. - Fiduciary Duty – s 122 ABCA o Taking a corporate opportunity ▪ Cook [ganging up on defendant, breach of fid duty, also fraud on minority, contaminated attempted ratification]

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▪ CanAero [leading case; fairness is touchstone in terms of corporate opportunity. Can director/officer take an opportunity that belongs to corporation? Fairness is the deciding principle; get away from “straightjackets” and formula. Elements to assess? Court delineates a few] ▪ Black [Black took corporate opportunity for himself; was supposed to sell Int’l or a newspaper. The buyers walk up to him, and he takes the opportunity for himself instead of advancing it on behalf of the corporation he was serving] o Self-Dealing ▪ Some corporate history leading up to s 120  • Dimo (only financial)/Zysko (could be emotional) -> how courts will approach s 120. ▪ Aberdeen - o Competing Director ▪ Mashonaland -> CL has surprising tolerance for competing director; but this case isn’t great anymore, especially with the rise of oppression actions. If a director serves on a competing board, they’ll be subject to an oppression action and it’d probably be successful. ▪ Sports Villas: Court was prepared to say that if Dobbin was a competing director that would be a breach of fid duty, but Dobbin was able to show that the business weren’t competing. If the two businesses aren’t competing, you can’t be a competing director. o Takeovers ▪ Disgruntled min shareholders may take the wrong bid. It’s very important to have the best procedure because you’ll go under the microscope here. ▪ Maple Leaf -> Court agreed that special committee and board had exercised their business judgement, it was reasonable, and there was no breach of fid duty o Other Sources of Fiduciary Duty ▪ Tongue -> Even though directors don’t owe fid duty to s/hrs under s 122, they might owe a fiduciary duty under other circumstances via common law o Other statutory duties where dirs./offs can have liability ▪ Zwierschke -> Personal liability for failing to remit source deductions pursuant to tax legislation.

- Liability in tort to 3rd parties o Inducing breach of K (McFadden, Pocklington – if the director’s conduct meets the test for inducement of breach of contract, the director will be liable subject to the exception in Said v Butt) o In negligence to creditors (Peoples)  under s 122, it can be owed to third parties such as creditors. ▪ We don’t assume that it’s owed, you have to show there’s a duty of care as a plaintiff, then go to statute as articulating a standard. o See the ADGA v SM debate; as well as discussion in Hogarth and Kent

- Liability writ derivative and oppression actions per Chapter 8. o Directors can have personal liability in context of derivative action (action that shareholders bring on behalf of corporation – if corporation suffered an injury due to the directors doing something wrong) ▪ Logistically difficult. Imagine you’re a min s/hr. Directors wronged the corporation, say, by breaching fid duty. If they breach the fid duty, what are they supposed to do? Sue themselves! Are they going to do that? Of course not! So, the purpose of a der action is to allow min shareholders to bring an action on behalf of the corporation to hold the directors to account. o Oppression action ▪ Personal action shareholders have against dirs. or others, depending on who the culprit is ▪ If the s/hr is oppressed by conduct of directors, there’ll be personal liability.

CHAPTER 8 – SHAREHOLDER RIGHTS AND REMEDIES CHAPTER OBJECTIVES - Shareholders can exercise control over the corporation by asserting numerous rights under the ABCA 104

- An interested party may be able to bring an action in the name of the corporation in certain circumstances o E.g. a derivative action - The ABCA provides other remedies for the minority shareholders, including ordering a valuation and repurchase of the shares by the company or the dissolution of the company. o E.g. an oppression action

INTRODUCTION TO SHAREHOLDER RIGHTS Categories of Rights Examples Sources Statute Case Law Basic Vote at any corporate ABCA ss 26(3), 139 shareholders meeting Participate in profit though dividends Participate in distribution of assets upon “winding up” Ordinarily maj rule, but sometimes you need “special maj” (2/3) Shareholder Control S/hs elect & remove dirs. ABCA ss 106, 109, 122(4), Over By ordinary resolution. 145, 147 Directors/Officers (51% v 49%) AGM (to review ABCA s 155 performance of officers & examine financial statements) Shareholder proposals ABCA s 135; although (Varity Corp) limited by s 136(5) and CBCA s 137 Control Over the Access to corporate records ABCA ss 23(1), 23(2) Corporation Power to appt. an auditor ABCA ss 162, 163 Shareholder initiatives (i) Proposals for corporate ABCA ss 102, 142 bylaws (ii) Unanimous ABCA s 146; CBCA s 146 Shareholder Agreements (USAs) – s/hs gain control (iii) Requisition a meeting ABCA s 142; CBCA s 143 Control Over Minority Notice and conduct of ABCA ss 131, 132, 134(1) - Even an unintentional failure Shareholders meetings to comply with statutory CBCA ss 132, 135(1),(1.1) requirements is impermissible [Re Upper Canada Resources; Minister of Consumer and Commercial Relations - Entitled to “full, fair, and plain disclosure,” s/hs must be able to base decisions on the most recent financial & other important info available about

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the corp [Imperial Trust Co v Canbra Foods] - Whether s/h votes with the majority or minority, an individual s/h has the right to have her vote recorded [Pender v Lushington] Rights of discussion ABCA s 136(1)(b) - The chairman of the meeting CBCA s 137(1)(b) can’t end the meeting as his own will/pleasure. [National Dwellings v Sykes] Special Rights in Special resolution (ie 2/3 ABCA ss 189(4), 173(1), Event of Fundamental majority) 183(50, 190(6) Changes (continuance; All shares vote ABCA ss 189(3), 176(3), alteration in corporate 183(3), 190(4) constitution; Right to dissent and to be ABCA ss 191(1)(a)-(e) amalgamation; bought out and exit the extraordinary corporation sale/lease/exchange) Class vote ABCA s 176

Shareholder rights available: (contingent on nature of the share owned) • Right to vote, right to participate in profits • right to assets distribution on dissolution (after creditors are paid) • right (default) to transfer shares (unless the shares are otherwise constrained) • right to participate in meetings

Shares: - Customized to whatever you want - Common shares are voting shares - Preferred shares are non-voting but may have other advantages - S 139(1) ABCA: unless Articles provide, you get one vote per share at shareholder meeting - Often a majority rule for resolutions, unless otherwise defined (special resolution = 2/3 majority) - Cumulative voting: s 107 ABCA o Cumulative voting may be authorized by either the statute or the corporate constitution. o The idea is giving minority shareholders a shot at having someone voted in who represents their interests. o “The cumulative voting procedure allows the minority s/hr to concentrate her votes.” ▪ Cumulative voting ensures that A has at least one person on the Board

Shareholders control - Election and removal of directors o S 108, 109, 119(6) o S 109: removed by ordinary resolution at a special meeting via simple majority; Shareholders can also review - Election by ordinary resolution, simple majority [s 106(3)] - Type of voting: cumulative or class (ie. employees hold right to vote in 1 director) - Shareholders have a substantial ability to control the corporation as directors are accountable to shareholders; o They have to place financial statements on the table (which is a strong indicator of personal performance; is the corporation making money, and how much?) o Often done at an AGM [s 155] - Shareholder Proposals: [s 136 ABCA] – Entitled to vote at AGM, may submit a proposal and the corporation must circulate it

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o S 136(5): corporation doesn’t need to comply if (b) s/h is addressing personal claim, or purpose of proposal is for general economic, political, racial, religious, or social causes [Varity Corp] Class Voting: - Sometimes, shareholders of a certain class get to elect a director. - Classes of shares can be made so that you can vote for more than one director [ss 111(3), 122(4)] - Employees holding shares in the corporation have the right to elect one director - Duty is ultimately to the corporation, but can also act for these shareholders (special but not exclusive consideration)

Voting (Pooling) Contracts • Written agreements between 2 or more s/hs on how to vote shares [s 145] – ie, A and B have a voting contract: A votes all shares for B to be director, and B votes all shares to A to be a director. o Could sue other side if they don’t comply (Clark v Dodge -> can bring an action for specific performance); ABCA s. 145 o These are binding agreements (confirmed by case law) Removal of Directors: o s 108, 109, 119(6) o s 109: removed by ordinary resolution at a special meeting via simple majority o Shareholders can also review

Proxy and Proxy Solicitation: o Sometimes shareholders will vote in person, but sometimes by proxy o S. 131(3)  can participate in a meeting over the phone if: ▪ (a) the articles/bylaws so provide or ▪ (b) if all the s/hs who are entitled to vote at the meeting consent

Control over the corporation - By accessing information; accessing financial information at the AGM - Limited access to corporate information provided for in legislation, but common law may give rights o You are only entitled to information relevant to your position in the corporation - ABCA, s. 23– access to corporate documents - Shareholders can also appoint an auditor to review a corporation [ss 162, 163] o Small corporations do not have to have an auditor, but distributing corporations must - Proposal of corporate bylaws o S 102(1): director may make, amend, repeal by-laws but they need s/h approval via a general resolution o S 102(5): Shareholder is entitled to vote in accordance with s 136 and may put forward a proposal to make, amend, or repeal any bylaws o S 23: Provides a list of who gets to see what, and what shareholders are entitled to access o S 163: shareholders (other than those of a distributing corporation) may resolve not to appoint an auditor (should be a small corporation) - USAs o Give shareholders some control. This is important especially in a smaller corporation. ▪ A statutory agreement amongst s/hs [s 146] o The USA becomes part of the internal constitution of the corporation o S 101: Directors manage corporations, subject to the USA o Courts not bound by USAs. Under s 242, they can make rulings they see fit under the oppression action: ▪ Restrictions on the right of the directors to manage ▪ Evaluation process to set the price of shares ▪ Restrictions on the transfer of shares (ex: a right of first refusal) ▪ Shotgun clause (private companies): 107

• When shareholder A offers to buy Shareholder B’s shares, shareholder B has the power to say now, and purchase A’s shares at the price that A offered for B’s shares • Put incentives on shareholder to come up with a fair price. - Minority shareholders: o Procedural protections are in place: notice and conduct in meetings o S 131: Deals with convening a proper meeting: Even an unintentional failure to comply with these restrictions will result in a failed meeting. ▪ Majority rule works but if you don’t follow the statutory provisions, the meetings and any resolutions passed at them are VOID.

Special rights in the event of fundamental changes: o What are fundamental changes? ▪ Continuance; alteration; amalgamation; extraordinary sale; lease of exchange o Continuance: ▪ Corporation is incorporated in one jurisdiction and moves to another ▪ You have to examine whether it’s permitted (ABCA s 189); it is permitted SUBJECT to the exceptions in the act • You must have a vote, which must be carried by special resolution (2/3 majority) [189(4)] • Each and every share has a vote (not just voting shares, even non-voting shares) [189(3)] • There is a right to dissent (dissenting s/hs have a right to dissent, and then their shares are bought out at FMV) [191(1)(d)] • You need to continue your debt o Extraordinary sale, lease or exchange ▪ Section 190 ▪ there must be a vote carried by special resolution (190(6)) • When you’re making big changes to the corporation, need to have special protections for people who don’t want to go along with it ▪ All shares vote (s 190(4)) o Alteration: Corporate constitution can be amended o Amalgamation: ▪ A procedure under corporate statute where co A & B combine into one ▪ Amalgamations can be motivated for business/tax reasons (Van Gorken)

4 Kinds of Fundamental Special Resolution (2/3 All Shares Vote Right to Dissent and to be Changes Majority) Bought Out Continuance S 189(4) S 189(3) S 191(1)(d) Amending articles S 173(1) S 176(3) S 191(1)(a)(b) Amalgamation S 183(5) S 183(3) S 191(1)(c) Extraordinary Sale, Lease, S 190(6) S 190(4) S 191(1)(e) or Exchange - Dissolution: o Dissolving a corporation means terminating the existence of the corporation o If the reason is insolvency, use the Bankruptcy and Insolvency Act, otherwise there are provisions in ABCA which guide the process o Relevant statutory sections: ▪ S 207: Stay of dissolution and/or liquidation if corporation is found to be insolvent ▪ S 211: Director/shareholders can seek dissolution ▪ S 212: Proposal for voluntary dissolution and sale (really just means of terminating the corporation)

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▪ S 268: Annual reporting  if you fail to file the annual returns document, the registrar of the corporation can dissolve the corporation

INTRODUCTION TO SHAREHOLDER REMEDIES KINDS OF PERSONAL RIGHTS AS A SHAREHOLDER: o Right to vote o Right to timely and informative notice of company meetings o Right to have proxies, if properly executed counted o Right to inspect records o Shareholder proposals o Right to appoint and auditor o Bylaws: propose, amend, repeal o Right to requisition meetings o Right to enter into USAs o Rights triggered on fundamental change and to participate in the meeting o right to sue for breach of fiduciary duty (Tongue) o right to sue in oppression o right to advance a derivative action ▪ Note: the derivative action can be brought by an individual but is not on behalf of the shareholder - Whether there is an oppression action or a derivative action, you need to qualify as a complainant [s 239(a)]

OPPRESSION V DERIVATIVE ACTION The derivative action • allows a complainant to sue on behalf of the corporation for a wrong done to the corporation. • Individual must receive leave to bring a derivative action o Because it allows individual complainants to represent the corporation, and because any successful claim is binding on all shareholders, Canadian corporate statutes require a complainant to first obtain leave of the court before bringing a derivative action. o The leave requirement ensures that not just anyone can bring a claim on behalf of the company, and that any such claim is brought in good faith. o It thereby prevents both a multiplicity of proceedings as well as unmeritorious suits. • The action belongs to the corporation • Harm to the individual shareholder is indirect (e.g. share value dropping) • Not a personal action

The oppression remedy • allows a complainant to sue on behalf of him or herself for a wrong he or she suffers personally as a result of corporate conduct. • Canadian corporate statutes do not require leave before seeking relief under the oppression remedy. • Under the oppression remedy the complainant is not seeking to represent all shareholders, only him or herself, and any remedy granted by a court is not binding on all shareholders. o There is also no concern about a multiplicity of proceedings. • The absence of a leave requirement, and the broad, flexible nature of the oppression remedy make it in some respects more appealing to litigants seeking a remedy for alleged corporate malfeasance.

OPPRESSION REMEDY – FOR DIRECT HARMS - A personal right to have your reasonable expectations protected under the legislation - Under ABCA s 242, the court has broad discretion in awarding remedies (not just conventional damages) - In oppression cases, what is important is the unfair result, not the state of mind (no requirement for bad faith)

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o It is fact specific and requires a more rigorous burden of proof

TEST FOR OPPRESSION ACTION: - 1/ Are you a complainant listed under s 239 ABCA (standing question)? o a/ Shareholder o b/ Director or officer o c/ Creditor (under a derivative action [s 240] or under an oppression action [s 242] o d/ “Proper person”: any person who, in the discretion of the court, can be given status as a complainant (basket clause) - 2/ Is the standard met for an oppression action? [BCE] o Two step test: (for establishing oppression) ▪ 1/ Does the evidence support the reasonable expectation by the claimant? ▪ 2/ Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression,” “unfair prejudice,” or “unfair disregard” of a relevant interest? • Must have: wrongful conduct, causation, and establishment of compensable injury - 3/ What remedy is being requested? o s 242 gives broad discretion [Note: Ask for more than one]

DERIVATIVE ACTION – FOR INDIRECT HARMS - Not a personal remedy; shareholder has to bring the action in the name of the corporation, on behalf of the corporation o Where the injury is indirect to the shareholder (ex: lower dividends) it is a derivative action, not a personal right ▪ This is an indirect loss/harm (oppression must be a direct loss) - Only about rights of the corporation that have been violated o For example; directors taking a corporate opportunity. o The directors that are ordinarily commencing actions on behalf of the corporation are refusing to do so, so shareholders can seek to redress an injury to the corporation on behalf of the corporation via an order from the courts - Derivative action as a vehicle o Derivative action is merely a vehicle for actions that arise according on the facts o The shareholders apply for leave to bring a derivative action, but the derivative action is not an action itself, leave granted allows the shareholders to bring an action of e.g. negligent misrepresentation on behalf of the corporation - Shareholder must be granted leave to make a derivative action - Common examples of derivative actions are: o Breach of fiduciary duty o Breach of statutory requirements o Diversion of an asset or a corporate opportunity from the corporation - General rule: when a breach of a duty owed to the corporation and the loss is to the corporation, a derivative action is typically sought o EXCEPTION: ▪ If they can show that they were affected differently than the corporation by the breach, then you can bring your own personal action in oppression (even if its effect is different in terms of indirect loss/effect)

STEPS FOR BRINGING A DERIVATIVE ACTION (MOLOO V PATHAK) - 1) Have standing as a complainant under s. 239 of the ABCA - 2) Bring an application for leave to bring an

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- 3) Three requirements under s 240(2) to commence a derivative action (court must approve the action for it to proceed): o Reasonable notice to the board o Complainant is acting in good faith o The application is in the interests of the corporation ▪ This means there must be a prima facie case

RELIEF FROM OPPRESSION OR UNFAIRNESS - Oppression: conduct that is BURDENSOME, HARSH, or WRONGFUL

HERCULES MANAGEMENT V ERNST & YOUNG (1997 SCC) – NEGLIGENCE BY FINANCIAL AUDITORS - ANNS TEST – PRIMA FACIE DUTY TO SHAREHOLDERS OBVIATED BY POLICY REASONS – RULE IN FOSS V HARBOTTLE - DERIVATIVE ACTION COULD HAVE BEEN BROUGHT ON BEHALF OF CORP Ratio: Shareholders cannot sue auditors for negligent preparation of financial statements on an individual basis if those statements were not intended to act as personal investment advice. • However: shareholders can collectively, under a derivative action, bring an action against auditors for negligence on the basis that it prevented them from collectively exercising their power to supervise management. o When such negligence causes damage to the corporation, the suit is brought on the corporation's behalf (as a derivative action) Issue: Whether and when auditing accountants owe a duty of care in tort to shareholders of the corporation who claim to have suffered losses in reliance on audited financial statements? Is this a matter that should have proceeded by way of derivative action? Facts: Northguard holdings (NGH) and Northguard Acceptance (NGA) carried on business of lending and investing money; • Guardian was the sole s/hr of NGH and it held non-voting shares in NGA; Hercules was also a shareholder in NGA • NGA and NGH hired Ernst to perform audits of their financial statements and the audits were done very poorly • Both NGA and NGH went into receivership in 1984 • Most certainly, NGA and NGH, who hired the accountants, has an action for breach of contract against Ernst, and likely a tort of negligent misstatement. o Incontrovertible that they can advance those claims o They did not, however, make those claims • NGA’s shareholders (including Hercules) brought an action against Ernst, suing for loss of value in their existing shares, breach of contract and negligence o Hercules, the shareholder in NGS, specifically claimed a cause of action in breach of contract and negligence o If Hercules didn’t like the non-action of Northguard against Ernst, what could they DEFINITELY do? ▪ Derivative action – the shareholders faced indirect harms. Issue: Do accountants who perform an audit of a company's financials owe a duty of care to shareholders who claim to have suffered economic loss by relying on these audits? Decision: Action dismissed; There was a prima facie duty of care based on the special relationship between Ernst and Hercules, BUT policy reasons obviated a finding of a duty of care owed to individual shareholders (there was danger of indeterminate lability for a finding of a duty of care because the shareholders here were not using the audited statements for the precise purpose for why they were prepared) Reasons: • Application of the Anns Test for Novel Duty of Care: o 1) Prima facie duty of care ▪ A prima facie duty of care will arise in a negligent misrepresentation action when it can be said that: 111

• A) the defendant ought reasonably to have foreseen that the plaintiff would rely on the representation, and • B) that the plaintiff's reliance was reasonable in the circumstances. ▪ Application to the facts: • In this case, there is no question that the auditors owe the shareholders a prima facie duty of care. o A) It was reasonably foreseeable that shareholders would rely on financial audits and that they would suffer harm if the reports were negligently prepared ▪ This is further reinforced by the fact that audited financial statements are to be placed before the shareholders at each AGM, unless this requirement is dispensed with by a unanimous vote of the shareholders. o B) it was also reasonable for the shareholders to rely on the audited statements o 2) Policy Consideration for negating the prima facie duty of care ▪ One of the main considerations is whether the scope of liability is sufficiently circumscribed (i.e. does not give rise to indeterminate liability) ▪ It is necessary for the scope of the duty to be limited in the class of people it is owed to and the statements it covers (only applies so long as the statement is used for its intended purpose) • The defendant must know the identity of the plaintiff (or the class of the plaintiffs) who would rely on their statements, but it also necessary for the plaintiff to rely on the statements of the defendants for the statement’s intended purpose o Audits are prepared primarily to reflect the company's position to protect the company itself from undetected errors or wrongdoing, and to provide shareholders with reliable intelligence to scrutinise the company's affairs and to help them exercise control over the conduct and composition of the Board. o The audits here were not prepared to assist the shareholders in making personal investment decisions or any purpose other than the standard statutory purpose ▪ The shareholders used the information as a basis to make personal investment decisions. ▪ The shareholders were not using the audited statements for their intended purpose, so the prima facie duty is negated for policy reasons. o 3. Assuming a special relationship, plaintiff must go on to establish: ▪ (a) An inaccurate or misleading statement was made ▪ (b) The Defendant must have acted negligently in making the statement (ie. statement was not made with reasonable care); ▪ (c) The Plaintiff must have reasonably relied on the misrepresentation; and ▪ (d) The reliance must have resulted in financial detriment (damage) - The rule in Foss v Harbottle o The rule in Foss v Harbottle provides that: ▪ Individual shareholders have no cause of action in law for any wrongs done to the corporation and that if an action is to be brought in respect of such losses, it must be brought either by the corporation itself (through management) or by way of a derivative action. • This is a consequence of the fact that corporations are distinct legal entities from their shareholders. o In this case, the appellants allege that they were prevented from exercising their ability to monitor management because the reports painted a misleading picture of the company's financial state. ▪ The shareholders should have brought this claim as a derivative action, but they did not do so. ▪ They are trying to bring an action on their personal behalves as individual shareholders

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• The problem here is that the wrong has been committed against all of the shareholders collectively, because their collective ability to hold management to account was impaired. - Note: o Hercules should have brought a derivative action, not an oppression action o In short, Ernst & Young owed a duty to the CORPORATION AS A WHOLE. ▪ Therefore, a derivative action on behalf of the whole corporation is appropriate. o This prevents management from choosing not to bring an action. o Attorney fees are recoverable if successful. o For an individual to be able to have a personal action, they must have experienced a unique or differential harm ▪ So, if thinking of bringing an action and unsure of whether it is personal or not, you should make a leave application for a derivative action so that you do not miss the limitation period

DELUCE HOLDINGS INC V AIR CANADA (1992 ONT GEN DIV) - OPPRESSION: UNFAIR PREJUDICE/UNFAIR DISREGARD OF MINORITY INTERESTS; DON’T NEED A LEGAL RIGHT, JUST AN INTEREST WITH A REASONABLE EXPECTATION – OPPRESSION CAN BE CARRIE OUT BY MAJORITY SHAREHOLDERS Ratio: Oppression can be found if the majority shareholder takes actions that are unfairly prejudicial to, or unfairly disregard the interests (reasonable expectations) of the minority shareholders. • Oppression is a personal cause of action, so it does not matter whether the corporation itself has been prejudiced or not. • Oppression does not require an injury to a legal right; injuries to interests will suffice; Majority shareholders can act contrary to the oppression section even without ill intent. Facts: Air Canada and Deluceco are 75% and 25% shareholders of Air Ontario. - Air Canada has seven nominees to the Board of directors and Deluceco has three. Members of the Deluce family were to manage the airline, while Air Canada remained arm's length. - In 1991, Air Canada decided to outright acquire Deluceco's interest in Air Ontario. - The Unanimous Shareholders Agreement allowed Air Canada to acquire Deluceco's interest if Stanley and William Deluceco each cease managing the company. o Another clause calls for arbitration in the event of a dispute over the value of the shares. - Air Canada terminated the Deluces’ employment and moved to acquire the Deluceco shares. - The Deluces disputed the valuation of their shares and claimed that Air Canada’s conduct amounted to oppression, by which remedies can be granted under s 241 of the CBCA, and would mean that the purported exercise of the arbitration clause was of no force and effect Issues: Was Air Canada entitled to fire Stanley and William Deluce as managers for the purpose of advancing its own corporate objectives, or does this constitute "oppression" of the minority shareholder Deluceco? Can Deluceco rely on the oppression remedy regarding the valuation of its shares, or must it go through arbitration as provided for in the USA? Decision: Deluceco’s motion to stay the arbitration proceeding was allowed; Air Canada’s conduct was oppressive to Deluceco as minority shareholder Reasons: - True purpose of Air Canada’s conduct was for Air Canada to acquire airlines, NOT because Will Deluce was incompetent as they stated: o Air Canada argues that terminating William Deluce as manager was amply justified and in the best interests of Air Ontario due to his poor oversight of operations and handling of the inquiry into the Air Ontario jet crash at Dryden. ▪ However, the timing is suspect. ▪ Just before Deluce's termination, Air Canada's representative had indicated at a Board meeting that he had confidence in Deluce's managerial abilities.

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▪ A letter was written to Deluce before his termination suggesting that the reason for the termination was to bring into effect Air Canada's policy of acquiring 100% control in regional airlines. o The Court finds that the true purpose for firing Deluce was to enable Air Canada to acquire 100% ownership in the corporation. - Oppression o Reasonable Expectations of Deluceco ▪ A shareholder interest is intertwined with a shareholder’s reasonable expectations; an employer’s actions need not infringe on the shareholder’s personal rights for there to be an action • The oppression action protects the reasonable expectations of the minority shareholders ▪ Intentions at the time the Unanimous Shareholder Agreement was created • It was not the intention of the parties at the time the shareholders agreement was executed to allow Air Canada to unilaterally terminate the Deluces employment for the sole purpose of allowing Air Canada to acquire Deluceco's shares. ▪ Only a termination that has as its main objective ensuring the best interests of Air Ontario will be valid, according to the USA • Deluceco had a reasonable expectation as shareholder, that, in the absence of termination of Bill Deluce’s employment for reasons dealing with the best interests of Air Ontario, the management/shareholder realtinoship between Air Canada and Deluce family would remain as envisaged in the USA • Evidence here strongly indicated that the termination was in the interest of Air Canada’s purposes, and not Air Ontario o Air Canada’s conduct breached the reasonable expectations of the minority shareholders ▪ Air Canada's conduct constitutes oppression against Deluceco's minority shareholder interests. ▪ The conduct is unfairly prejudicial to, or unfairly disregards the interests of Deluceco as a minority - Actions taken in good faith by the majority shareholder in the interests of the corporation may still oppress the minority shareholders. o The minority shareholders could still sue under the oppression remedy if their personal interests are affected • Conduct which, in the first instance, causes harm to the company (supporting a derivative action), will not deprive a plaintiff from seeking a personal remedy for their personal harm by way of an oppressive action Note: - It’s called oppression remedy in legislation, but it’s really the oppression action o You have to establish oppression occurred before you can get the remedy. o Oppression protects the reasonable expectations of the complainant - Another possible argument: breach of the USA [probably want to argue this in the alternative] o S 248: you can get a compliance order = specific performance o What could you argue was a breach of USA here? ▪ Breach of the duty of honesty and good faith in the performance of contracts (Bhasin) o Organizing principle of good faith in performance of contract (Bhasin) ▪ As a result of the principle, there is the rule that parties must act honestly and reasonably in performing their contracts ▪ Duty of honesty and good faith performance JUDICIAL INTERPRETATION WHAT IS OPPRESSIVE OR UNFAIR CONDUCT

BCE INC V 1979 DEBENTUREHOLDERS (2008 SCC) - TEST FOR OPPRESSION; OPPRESSION IS AN EQUITABLE REMEDY AND FACT SPECIFIC; FACTORS FOR UNFAIR AND PREJUDICIAL CONDUCT;

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FAILURE TO PROTECT AGAINST A POTENTIAL OPPRESSION MAY OBVIATE DUTY OWED BY CORPORATION Ratio: Two step test for Establishing Oppression (once standing exists): 1. Does the evidence support the reasonable expects of claimant? 2. Does evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression,” “unfair prejudice,” or “unfair disregard” of a relevant interest? o Must have: wrongful conduct, causation, and establishment of a compensable injury - If aggrieved party could have taken steps to protect themselves, then an oppression claim may fail. Facts: Ontario Teacher’s Pension Plan leveraged a buy-out of all BCE shares. - BC, a wholly owned subsidiary of BCE, agreed to guarantee $30 billion of the debt BCE would incur to support the purchase - BC’s debentureholders (D) resist because, BC’s increased liability would downgrade the value of their debentures (by 20%) while conferring a benefit on the shareholders by way of a premium (40%) - The buy-out first had to be approved by the court as “fair and reasonable” under s 192 of the CBCA - Debentureholders brought an oppression action under s 241 CBCA and challenged the approval of the plan of arrangement under s 192 as not being “fair and reasonable” - Trial judge held in favour of BCE, denying oppression action and finding that the deal was fair and reasonable under s 192 of the CBCA o Court of Appeal reversed the decision, finding that BCE failed to show that the transaction was fair and reasonable under s 192 of the CBCA Issue: Was the decision by BCE oppressive to the debentureholders? Held: Appeal allowed; debentureholders failed to establish oppression under s. 241; they had reasonable expectations that their interests would be considered by the directors in making their decision, but those expectations were fulfilled Reasons: - Preliminary Observations: o 1) Oppression is an equitable remedy - it seeks to ensure fairness. ▪ It gives the court broad jurisdiction to enforce not just what is legal but what is fair. ▪ It also looks to commercial realities o 2) oppression is fact specific ▪ What is just and equitable is judged by the reasonable expectations of the stakeholders in context and in regard to the relationships at play. • The oppression remedy recognizes that a corporation is an entity that affects many different stakeholders whose interests may conflict. • All stakeholders are entitled to "fair treatment" - which means what they can "reasonably expect." - First step to an Oppression Action: o Establish that an individual has standing as a claimant to bring an oppressive action, under s. 239(b) of the ABCA ▪ 239(b): Lists persons who have standing to bring an oppressive action (e.g. registered holder, director, creditor, etc.) • Debentureholders are included within the persons listed in 239 (as registered holders) - Two Prong Test to Showing Oppression if the Claimant is one who qualifies to bring an oppression action under s. 241 of the CBCA: o 1) Evidence supports that the claimant’s reasonable expectations have been breached ▪ Reasonable expectation factors: • General commercial practice; • the nature of the corporation; • the relationship between the parties; • past practice; • steps the claimant could have taken to protect itself;

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• representations and agreements • fair resolution of conflicting interests between corporate stakeholders o 2) Evidence establishes that those reasonable expectations were violated by conduct falling within the terms oppression, unfair prejudice, or unfair disregard - Step 1: Reasonable expectations of shareholders o Directors owe a fiduciary duty to the corporation, and ONLY to the corporation (subject to Tongue exception). ▪ Directors may be required to make decisions that prejudice the interests of some stakeholders relative to others, all in the corporation's interests. ▪ The stakeholders' reasonable expectation, therefore, is that the directors will act in the best interests of the corporation. o Fair treatment is fundamentally what all stakeholders are entitled to reasonably expect - Step 2: Conduct that amounts to unfair prejudice, unfair disregard, or oppression o Those forms of conduct are not watertight compartments, they overlap o Oppression – conduct that is coercive, abusive, and suggests bad faith ▪ Burdensome, harsh, wrongful conduct o Unfair prejudice – “generally seen as involving conduct less offensive than ‘oppression’. Unfair disregard – “least serious of the three injuries, or wrongs, mentioned in s 241. ▪ less culpable state of mind that has unfair consequences ▪ Examples: • squeezing out a minority shareholder, • failing to disclose related party transactions, • changing corporate structure to drastically alter debt ratios, • adopting a "poison pill" to prevent a takeover bid, • paying dividends without formal declaration, • preferring some shareholders with management fees, • paying directors' fees higher than the industry standard o but this is really a breach of fiduciary duty – a derivative action: because the impact on shareholders is only indirect o Unfair disregard – ignoring interests as being of no importance; viewed as the least serious conduct ▪ Examples: • Favouring a director by failing to properly prosecute claims • Improperly reducing a shareholder’s dividend • Failing to deliver property belonging to the claimant - Application to the facts: o What are the claimed breaches of the debentureholders’ reasonable expectations, and do they fall within the words of s 241? ▪ Debentureholders claimed that there was a reasonable expectation that the directors would act to maintain the investment grade of the debentures • The Court found that this was an unreasonable expectation ▪ They also claimed in alternative that they had reasonable expectations that the directors would consider the debentureholders’ interests • The Court found that this was a reasonable expectation, but that the expectation was met by the directors, so there was no breach of reasonable expectations • The best interests of the corporation, even given consideration of the debentureholders’ interests, favoured acceptance of the offer that was given to the directors o The Directors considered the debentureholders’ interests, but made the decision anyway ▪ the directors decided that that they would fulfill legal obligations to the debentureholders, and nothing else. ▪ They did not make any other representations that they would go beyond legal requirements.

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▪ This fulfills the requirement to take their interests properly into consideration. • The debentureholders COULD HAVE protected themselves by insisting that their security interests take precedence over others, but they did not do so. Comments (O’byrne): - Remedy is not limited to being against directors. o The conduct of other actors (ie, shareholders) may also support a claim for oppression - Actual unlawfulness is not required; merely wrongful conduct is sufficient - Unfair Prejudice Factors: o Failing to disclose related party transactions (but may be a breach of fiduciary duties, more supportive of a derivative action) o Poison pills: can be either oppression or derivative o Preferring some shareholders with management fees: can be either oppression or derivative ▪ This can sound in oppression because there is a differential impact o Paying directors fees higher than industry norm: breach of fid duty, therefore it’s derivative action

RE FERGUSON AND IMAX SYSTEMS CORP (ONCA 1983) - FUNDAMENTAL CHANGE IN CORPORATION - MAJORITY S/HS MAKE DECISION TO DISADVANTAGE MIN S/HR (SQUEEZE- OUT) - OPPRESSION LOOKS AT WHOLE BUSINESS CONDUCT, FAIRNESS – PROCEDURES FOLLOWED, BUT THEY WERE TO HURT MS. FERGUSON – RESOLUTION BY S/HS DENIED Ratio: If the majority shareholders deliberately make a business decision that is intended to disadvantage a minority shareholder, then the minority shareholder can sue for oppression Facts: Three husbands (H) and wives (W) behind Imax. For each couple, the husbands got common shares (voting) and the wives got non-voting shares - Ms. Ferguson’s shares are ‘class B non-redeemable shares’ (ie cannot be forced to sell it back to the company) o Ms. Ferguson also received dividends from her shares - Ms. Ferguson (one leaving) was working full time in the business (not for profit) while her husband was working another job - The Fergusons divorced and the shareholders collectively fired Ms. Ferguson from her work for the company, at the ex-husband’s behest (squeezing out’ can be oppressive (BCE)). o Mr. Ferguson said that it was not in the interest of the corporation to have non-working s/hrs (to justify the dismissal). ▪ This seems like a fake reason, as the other wives did not work for the corporation o Imax also wanted to reduce dividends owed to Ms. Ferguson to the minimum amount - Mr. Ferguson and the rest of the s/hs brought a special resolution to make all of the class B shares redeemable (ie effectively to oust Ms. Ferguson by amending the articles). o This is a fundamental change under s 173(1)(e) in the ABCA o fundamental changes require a class vote (ABCA s 176(4)), passed by special resolution (enhanced majority of 2/3) ▪ the procedures were followed so the conduct was strictly legal o This is oppression, because it will put Mrs. Ferguson out of the corporation (out of the growth of the corporation) and affects her differentially from the other couples (because they are still married) - The corporation says they just wanted a cleaner capital structure… but it wasn’t that messy. o They only had Class A and Class B shares. o The Court did not accept that argument - For a remedy, Ms. Ferguson is seeking an injunction to retrain the company from a special meeting to vote on the resolution - The trial judge dismissed Mr. Ferguson’s application Issue: Was this action to amend the articles and recall the class B shares oppressive to Ms. Ferguson? Sufficiently odious?

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Decision: Appeal allowed; Court found that there was oppression by the majority shareholders and ordered that the resolution not be implemented (remedy under s 242(3)) Reasons: - Ms. Ferguson was entitled to reasonable expectations and legal rights o Strict legal rights are not all that matter in the assessment of oppression; idea of fair and equitable principles o Differential impacts of the procedures here: ▪ Mrs. Ferguson was not receiving benefits that would be received by the other wives, who would continue to benefit by way of their marriages - Oppression arose because of: o Wrongful dismissal o Not declaring dividends o The reorganization to redeem class b shares - Reasonable expectations o Even though amending the Articles was done legally, a s/hr is entitled to reasonable expectations, and here Ms. Ferguson was had a reasonable expectation to share in the growth of the corporation (especially given all the unpaid work she did and her strong role in the company) - The case illustrates something very helpful: o We have a fundamental change because it alters the capital structure of the corporation o Amendment is a fundamental change under s 173(1)(e) o Class vote required under s 176(4) o Need a special resolution (2/3 majority of that class) for a fundamental change ▪ Ms Ferguson – votes no, doesn’t want to change rights associated with class B shares ▪ Ms Kerr and Ms Koiter – vote yes, change those rights o You might say, what’s wrong with this? The vote was according to the rules. You lost the vote. ▪ But the oppression remedy doesn’t look just at strict legalities – it looks at the whole business context.

DOWNTOWN EATERY V ONTARIO (2001 ONCA) – BAD FAITH INTENTION BY DIRECTORS IS NOT A REQUIREMENT OF OPPRESSION ACTION – WRONGFULLY DISMISSED EMPLOYEE CAN SUCCEED IN OPPRESSIVE ACTION FOR OUTSTANDING JUDGMENT (ONLY STATEMENT OF CLAIM AT TIME OF RE-ORGANIZATION) Ratio: In an oppression action, provided that it is established that the plaintiff has a reasonable expectation that a corporation’s affairs will be conducted with a view to protecting his interest, the conduct complained of need not be undertaken with the intention of harming the plaintiff Facts: Two people own nightclubs in Toronto. An employee at one, Alouche, is dismissed, and sues for the tort of wrongful dismissal and wins - When he goes to execute his judgment against his prior corporate employer, he finds that the two defendants have reorganized and liquidated the corporation and therefore the employee can’t collect his money o He wasn’t a judgment creditor, he’d only filed a statement of claim (at the time that the former employers reorganized) o Alouche claimed that the conduct of the directors, specifically the corporate reorganizing, was oppressive or unfairly prejudicial - Trial judge found that there was no oppression. o There was no bad purpose behind reorganizing the corporation to hurt the claimant and move the money around to deprive him of his claim; o note – judge is wrong here; you don’t need to show mala fides (bad faith). Issue: Were the actions by D’s oppressive despite the lack of intention? Does oppression require any sort of intention? Decision: Appeal allowed; the oppression action against the employers was successful Reasons: - Standing issue 118

o Alouche is not a s/hr, director, or officer  but Alouche fits into “any other person” as defined in s. 245 of the OBCA o The court has the discretion to grant standing (ABCA s 239(b)) ▪ Also includes basket clause for “any other person” - Oppression o Provided that is established that the complainant has a reasonable expectation that a company’s affair will be conducted with a view of protecting the complainant’s interest: oppressive conduct need not be undertaken with the intention of harming the complainant o Court takes oppression remedy further: ▪ Claims that the plaintiff here had a reasonable expectation that there would be some money retained in a reserve to satisfy the judgment. o The effect of reorganization was unfairly prejudicial or unfairly disregarded Alouche’s interests ▪ The interest was that he stood to obtain judgment against his corporate employer and the employer knew that the litigation was underway ▪ The defendants should have maintained reserve to satisfy the contingency that the plaintiff’s claim may succeed. Failure to do so was a form of oppression. - Also consider the two-step test from BCE: [O’byrne thinks it’s the same result regardless] o BCE – IS the standard met for an oppression act? ▪ 1/ Does the evidence support the reasonable expectation of the claimant? ▪ 2/ Does the evidence establish this reasonable expectation was violated by conduct falling within the terms of oppression, unfair prejudice, or unfair disregard? o While some degree of bad faith is most likely the norm, this isn’t a requirement for oppression o Employees who may become a claimant can have a reasonable expectation

OPPRESSION OR DERIVATIVE ACTIONS? IF DISTINCTION UNCLEAR, APPLY FOR LEAVE TO BRING DERIVATIVE ACTION! – STEPS FOR DERICATIVE ACTION (MOLOO V PATHAK) & RATIONALES FOR LEAVE APPLCIATION Oppression vs Derivative Action: • A shareholder’s “personal” cause of action arises when the corporation itself has no right to sue • A shareholder seeking leave to commence a derivation action, by contrast, must be seeking to redress an injury to the corporation where the corporation is the only person with a cause of action and thus the only person who can sue Steps for bringing a derivative action (Moloo v Pathak) - 1) Have standing as a complainant under s. 239 of the ABCA - 2) Bring an application for leave to bring an - 3) Three requirements under s 240(2) to commence a derivative action (court must approve the action for it to proceed): o Reasonable notice to the board o Complainant is acting in good faith o The application is in the interests of the corporation ▪ This means there must be a prima facie case

Rationales for the requirement of a leave application in Malata: • 1) Preventing strike suits  troublemaker, minority s/hr who wants to bring an action just to force a settlement from the corporation • 2) preventing meritless suits: o The leave requirement ensures that not just anyone can bring a claim on behalf of the company, and that any such claim is brought in good faith. ▪ It thereby prevents both a multiplicity of proceedings as well as unmeritorious suits. • 3) avoiding multiplicity of proceedings

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o Note: concerns that justify forcing applicants to seek a leave for a derivative action are less acute for closely held corporations (Malata) Two views as to whether you can take what is essentially a derivative action and run it as an oppression action. - 1/ Strict Approach o If you have a complaint where there is a wrong done to a corporation, shareholder must apply for leave and must run the case as a derivative action (strict/traditional approach) o Complainant must have distinct harm to them in order to succeed under an oppression action ▪ This is the prevailing approach in Alberta ▪ Pappas v Acan; Hercules Management; Rea v Wildeboer; Icahn - 2/ A more flexible approach (as per Malata) o Overlap between oppression and derivative action; injury to corporation that causes harm to individual can allow for proceeding by way of oppression (Malata) ▪ This was a temporary trend in Ontario (does not appear to be prevailing anymore re: Rea) o If there’s no difference between the actions and can pursue either option, why would anyone bring a derivative claim, which requires a leave application?: ▪ Monetary reason: If you want company to fund the litigation on an ongoing basis, a lot easier to get that order when you proceed by derivative action – see s 241(d) ▪ Careful lawyering: courts may determine that your matter is derivative, and you will have lost your claim if you didn’t apply for leave to bring a derivative action rather than an oppression action (Hercules Managent) Note: • If you have free standing claims, proceed with them as free standing claims (not oppression), but you can also argue that, collectively, the conduct amounts to oppression

PAPPAS V ACAN WINDOWS (NFLD SC 1991) - STRICT/TRADITIONAL APPROACH; LEAVE NEEDED FOR DERIVATIVE ACTION WHERE THE WRONG IS AGAINST THE CORPORATION – DISALLOWED OPPRESSION CLAIM IN PLACE OF A DERIVATIVE ACTION WHERE PERSONAL HARM WAS INDIRECT Ratio: No matter how an action is framed, if relief is sought against a wrong alleged to be done to a corporation, it is DERIVATIVE; Derivative actions are where the damage has primarily been suffered by the corporation, and only incidentally by an associated party. Facts: Pappas, a s/hr, director, and creditor of Acan Windows, complains that the individual shareholders of the company misappropriated corporate funds to the detriment of Pappas by encouraging him to purchase land, buy equipment, and pay for renovations (claims it’s oppression) - This looks like a breach of fiduciary duty (directors should not be misusing the corporation’s resources)… this looks like a derivative action should have been brought o Pappas also alleges beach of a shareholder’s agreement, negligent and fraudulent misrepresentation, and conspiracy to defraud - The defendants challenge the claim, saying that it’s NOT an oppressions action o The defendants want to strike the statement of claim as they claim that this is a derivative matter, and there was no leave application to bring the action - Pappas seeks an order that leave isn’t required, or in the alternative, an order permitting the derivative action Issues: Is the action an oppression action or a derivative action? Can the alleged oppressive actions of the majority s/hs be considered as part of the act of the corporation or affairs of corporation to trigger the oppression provision? Decision: Pappas’ action was dismissed; the damage was to the corporation itself, and there was only indirect harm to Pappas (therefore, a derivative action should have been brought) Reasons: - Two rules from Foss v Harbottle: o (1) an individual s/hr does not have a personal cause of action for a wrong done to the corporation (corporation must pursue action, or s/hr can pursue only via derivative action)

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o (2) Individual s/hr can’t sue for a wrong done to the corporation if the majority has ratified it or if it can be ratified ▪ s 243 repeals rule #2. Ratification is meaningless, but the court can take it into account. • Test for striking a claim o It must be "plain and obvious" that the plaintiff's statement of claim discloses no reasonable cause of action for it to be struck down summarily. • In certain cases, the actions of shareholders have been considered an "act of the corporation." o If the company deliberately conducts its own affairs so as to cause hardship to the minority shareholders, this may be sufficient to trigger the oppression remedy. o Majority hareholders can be guilty of oppression (also seen in Deluce) ▪ Deluce and Imax cases have recognized that majority shareholders have a duty to treat minority shareholders fairly, and to not withhold material information. ▪ Passive conduct may amount to oppression if pertinent information is deliberately withheld from the minority shareholders. • Other cases suggest that a breach of a shareholders agreement is a breach of a private arrangement outside company affairs, and therefore is not oppressive conduct by the company itself (but that point has been overtaken, it is not true) o The fact that Pappas (shareholder) also lent money to the company does not influence the decision - he is treated as an ordinary creditor. o Overall, oppression is not made out here. ▪ Pappas is not being damaged directly, and oppression requires targeted action. • The damage is to the corporation itself, there is no particular damage to Pappas. ▪ The action must be a derivative action. • No matter how an action is framed, if relief is sought against a wrong alleged to be done to a corporation, it is DERIVATIVE. o Derivative actions are where the damage has primarily been suffered by the corporation, and only incidentally by an associated party. o OPPRESSION remedies are to compensate an associated party for losses that they suffer as a result of the unfair and egregious acts of the corporation. ▪ That being said, it is possible for a court to award derivative relief at the same time as relief for oppression. There is some natural overlap between the two remedies. • In some instances, a plaintiff can bring both an oppression action and a derivative action o However, if it is not possible to clearly separate the personal and derivate claims, then both claims should be discontinued o When there is saturation of the claims, you must bring a derivative action

REA V WILDEBOER (2015 ONCA) – OPPRESSION ACTION FAILS – NO DIRECT HARM TO INDIVIDUAL THAT DIFFERS FROM LOSS OF OTHER SHAREHOLDERS OR THE HARM TO THE CORPORATION – MISAPPROPRIATION OF CORPORATE ASSETS BY DIRECTORS Ratio: The two causes of action (derivative and oppression) only overlap where the wrongs asserted have harmed the corporation and also “directly affected the complainant in a manner that [is] different from the indirect effect of the conduct on similarly placed complainants” – this more commonly happens with closely held corporations [this is the case in Malata] Facts: The appellant (Mr Rea), a minority shareholder and director, asserts oppression under s 248 of the CBCA against a number of other directors of Martinrea, • Rea alleged that the directors had misappropriated funds from Martinrea Int’l o Rea was seeking to recover those funds for the corporation – says directors were siphoning money out of the corporation o Mr. Rea does not assert any personal loss.

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• The defendants argue that the action should be dismissed, as it is clearly a derivative action belonging to the corporation (Martinrea), which requires leave from the court • The motion judge struck the claim against the defendants Issue: Should the proceedings be an oppression action or a derivative action? Decision: Appeal dismissed; the shareholder here did not experience a personal wrong different from the loss experienced by the corporation or the other shareholders, so there is no action in oppression Analysis: - Court acknowledges there can be an overlap between the two causes of action o They say the “murky line” between oppression and derivative actions has all but disappeared o Because the distinction can be murky (473)  make a leave application for a derivative action to be on the safe side. - Derivative action vs oppression o A claim must be brought as a derivative action (with leave from the court) where it “seeks to recover solely for wrongs done to a public corporation, the thrust of the relief sought is for the benefit of that corporation, and there is no allegation that the complainant’s individualized personal interests have been affected by the wrongful conduct” o Alternatively, an oppression action, “the impugned conduct must harm the complainants personally, not just the body corporate,” and the harm must be distinct from the harm suffered by all shareholders. o Application: ▪ In this case, there is no overlap between the derivative action and the oppression remedy ▪ The appellants are not asserting that their personal interests as shareholders have been adversely affected in any way other than the type of harm that has been suffered by all shareholders as a collectivity ▪ No type of personal wrong is evident - Impugned transactions o The defendants sold overvalued equipment and land on unfair terms to Martinrea; ▪ You’d think this is definitely derivative because it’s a case of director’s in breach of their fiduciary duties (not acting in the best interest of the corporation) o The harm here is to the shareholders collectively as a whole, and not to any particular shareholder as an individual MALATA GROUP (HK) V JUNG (ONCA 2008) - FLEXIBLE APPROACH TO DERIVATIVE VS OPPRESSIVE ACTIONS – NO BRIGHT LINE DISTINCTION BETWEEN THE ACTIONS – CLOSELY HELD CORPORATION EXCEPTION AND COMPLAINANT WAS CREDITOR Ratio: In some situations (such as a shareholder also being a creditor and the corporation being one that is closely held), there is sufficient overlap between oppression and derivative remedies to allow for a corporation to advance a claim under an oppression remedy, without seeking leave for a derivative action Facts: Malata HK, Jung, and Chen are three shareholders of Malata Canada; Jung, Chen, and Malata HK are also subject to a USA and Chen and Jung are also officers of the Malata Group - Malata HK is a creditor of the Malata corporation - Malata alleges Jung misappropriated funds, breached fiduciary duties as director to the Malata Group, and failed to act honestly and in the best interest of the corporation - Malata alleged that Jung’s conduct rendered the corporation incapable of repaying debt and claimed oppression - The trial judge declined the relief sought by Jung to strike portions of the claim for being derivative in nature, rather than oppression, and therefore requiring leave applications Issue: Does leave always need to be received if there is overlap between oppression and derivative actions in the case of a closely held corporation? Decision: Appeal dismissed; oppression action successful; leave for derivative action not required because Malata was both a shareholder and creditor of the corporation and the corporation was closely held, meaning that there was not the same risk of frivolous law suits Reasons:

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• The presence of a derivative action remedy does not preclude minority shareholders from pursuing personal remedies for oppression • Overlap between derivative and oppression actions can be found in the case of directors in closely held corporations engaged in self dealing to the detriment of the corporation and other shareholders or creditors o In disputes involving closely held corporations, there is less reason to require the plaintiff to seek leave to the court. o The small number of shareholders minimizes the risk of frivolous lawsuits, which is what that requirements seeks to prevent against. SHEFSKY (ABCA) – TRADITIONAL, STRICT DISTINCTION BETWEEN OPPRESSION AND DERIVATIVE ACTION • Harm must impact complainant personally, and not merely impacting the complainant as on of the shareholders of the corporation, collectively • Shefsky follows Rea from the ONCA

ICAHN PARTNERS V LIONS GATE (BCCA 2011) – DIRECTORS DILUTE SHARES TO AVOID TAKEOVER BID WHILE REDUCING DEBT – MET REASONABLE EXPECTATIONS OF FAIRNESS HELD BY THE SHAREHOLDER/BIDDER BY CONSIDERING INTERESTS, BUT PROTECTED BY BUSINESS JUDGMENT RULE - ACTING IN THE BEST INTEREST OF THE CORPORATION Facts: Mr. Icahn, billionaire, wanted to take over Lions Gate through a hostile bid. Mr. Icahn was a shareholder in the company and he thought the board was incompetent and wanted to unseat the existing directors - The board of Lions Gate voted to dilute shares (de-leverage –converting debt to shares by creating and selling more shares) while it had $100m in debt. o Due to the deleveraging transaction, Mr. Icahn’s share stake (proportion of the shares) fell, since there were more shares after dilution. o The shares were sold to parties more friendly to the existing Board of Directors o The Board said they were using their powers for a proper purpose and for the best interests of the corporation o They claimed that it was just a collateral result that Mr. Icahn was diluted - Mr. Icahn alleged oppression; he says the purpose of approving the transaction was to entrench the existing board (improper purposes) - The trial judge dismissed the application because he found that the directors’ primary purpose was to reduce the company’s debt and he found that the transaction was in the best interest of the business o The court found that Icahn did not have a reasonable expectation that his share would not be diluted. o Also found that the oppression remedy does not exist for bidders (only for shareholders). Issue: Does Icahn have standing to bring an action and was there oppression? Decision: Appeal dismissed; no action in oppression and no derivative action Reasons: • Issue of Standing o Chambers judge: Mr. Icahn is a s/hr, but he brought his claim as a bidder launching a hostile takeover bid, and as such, he does not have standing to bring an oppression action ▪ CA disagrees, says he does have standing • For the oppression remedy, primary importance must be given to the complainants' "reasonable expectations" in determining whether corporate conduct should be characterized as oppressive or unfairly prejudicial, emphasizing that the analysis in each case is highly contextual and fact specific. o Corporate directors have a duty to "treat individual stakeholders affected by corporate actions equitably and fairly." • All that was required was to treat Icahn FAIRLY. It would be illogical to find that the directors should have preserved the status quo contrary to the corporation's best interests merely to benefit Icahn. o This is particularly significant since Icahn has a reputation for taking control of companies, extracting vast amounts of money from them, and then leaving them on the verge of bankruptcy in a weakened state.

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o Therefore, actions taken by the Board to prevent Icahn from taking control of the company can be justified as being in the company's best interests. • Oppression and breach of fiduciary duty can overlap. o Directors may breach their fiduciary duty to a corporation with improper purpose of causing harm to the complainant. o Then the complainant could show a separate and distinct claim. o But CA seems intent on keeping the divide between oppression and derivative action ▪ If all you’re saying is that directors have breached fiduciary duties to the corporation, it is ad derivative action that must be brought • Was there an injury to the corporation deserving of a derivative action? o Business Judgement Rule: do not second guess what directors decide to do, but to ask according to Peoples whether they showed an appropriate degree of prudence and reasonableness and came to an appropriate decision o Board was required to treat Icahn fairly, but this does not preclude them from reducing Icahn’s debt. ▪ Where the interest of the corporation and the board collide, the board has to act in the best interest of the corporation SCOPE OF RELIEF AVAILABLE FOR OPPRESSION/DERIVATIVE ACTIONS ABCA 242(3): • Broad remedies for oppression available as listed, and judge has discretion to grant any remedy it sees fit

NANEFF V CON-CRETE HOLDINGS (1993 ONGDCT) – REMEDIES FOR OPPRESSION ARE VAST AND WITHIN THE JUDGE’S DISCRETION TO FIND AN EQUITABLE AND FAIR OUTCOME – ORDER FOR FAMILY COMPANIES TO BE SOLD TO HIGHEST BIDDER Ratio: The remedies available for oppression are vast - and can be very harsh. Facts: Alex was removed as an employee, manager and officer of Naneff family companies. He was excluded from operations for three years. This was due to his parents disagreeing with girl he was dating. • Parents (also directors and majority shareholders of Naneff companies) claim that his dismissal was due to poor performance. • Alex is 34 and had devoted his entire work life to the family business. • Alex and his brother Boris were senior management in conjunction with father, who controlled the company. o He was led to believe that he was intended to take over the business along with his brother when father retired. • Alex brought an oppression claim Issue: Was the removal of Alex as a director and employee (and exclusion from exercising shareholder rights) oppressive? Decision: oppression remedy succeeds; order made that companies are to be put up for sale and sold to the highest bidder Reasons: • If a Court finds that a shareholder has been oppressed via s 248(2) of the Ontario Business Corporations Act (equivalent of 242(2) of the ABCA), the scope of remedies is very broad - the court may order anything it deems just. o There are 14 enumerated types of relief (in ABCA, s 242(3)) o Evidence of bad faith or want of probity is NOT REQUIRED for the oppression remedy to be activated. • Shareholder interests are intertwined with shareholder expectations. o If a legitimate expectation has not been met, that may be sufficient to trigger the oppression remedy. ▪ They must be significant expectations, such that they could be characterized as a compact between the corporation and the shareholder. o There is a difference between shareholder expectations in small, closely held companies, and larger publicly traded companies. ▪ In this case, Alex was led to believe that they would be co-owners, and would be partners in the operation of the business.

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▪ Their roles were consistent with fostering this expectation. ▪ This is a reasonable expectation in this context. • Oppression o Alex has been oppressed. ▪ His removal from his position of employment and his positions as an officer and director, and exclusion from day-to-day operations and from any meaningful participation as a shareholder constitutes oppression; breached the reasonable expectations in an oppressive manner ▪ The other family members have exercised their powers to intentionally deprive him of these abilities. ▪ They also failed to repay loans Alex had made to the company, passed an amendment to the USA affecting his shares but without allowing him to vote on the changes, refusing to pay severance pay, and paying Mr. Naneff a $1.35 million bonus to remove assets from the corporation, and otherwise moving funds around between other companies to frustrate Alex's involvement and his benefits from his ownership interests. • Wrongful dismissal from employment as a manager is only a factor to be considered to determine a pattern of behaviour - it is not part of the oppression analysis itself. o Wrongful dismissal is not grounds for an oppression remedy in and of itself • Alex’s Wrongful Dismissal o Remedy: damages in the form of two years’ salary • 3 Potential Remedies Loss of Alex’s Equity Interest (overall shareholder position in the company): o Restore Alex to the position he was in, as of Christmas 1990, and direct that he be employed on the same terms as his brother. o Order that Naneff companies be placed on the market on a going concern basis to the highest bidder, and pay out Alex's proportionate share from the proceeds. o Order that the other Naneff family members purchase Alex's shares at fair market value, without any minority discount. • Result: o The Court finds that #3 is not possible, because valuation will be very difficult. ▪ Also, that would help the defendants accomplish the very objective they sought to achieve at the outset by removing Alex from involvement in the companies. o It is impractical to order #1 - everyone hates each other and cannot work together going forward. o Therefore, the companies must be sold.

NANEFF V CONCRETE HOLDINGS (ONCA 1994) - OPPRESSION REMEDY MUST NOT GO BEYOND WHAT IS REQUIRED TO RECTIFY THE OPPRESSION – MUST NOT GO SO FAR AS TO GIVE SOMETHING THAT WOULD NOT BE REASONABLE EXPECTED Ratio: When fashioning a remedy under oppression, the remedy must not go beyond what is required to rectify the oppression; a remedy that rectifies cannot be a remedy which gives a shareholder something that even he never could have reasonably expected Facts: Same as above. Issues: Is the remedy ordered by the trial court unjust? Is there a more appropriate remedy? Decision: appeal allowed; correct remedy is for Mr. Naneff and Alex’s brother to purchase Alex’s chares in the companies at fair market value Reasons: • Appellate courts should show high deference to trial courts in carving out remedies under the oppression heading (based on construction of the statute). • However: In the circumstance of this case, ordering the sale of the entire family company to compensate Alex for his equity stake is manifestly unjust. o The fact that this is fundamentally a family matter must be kept in mind when fashioning the remedy.

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o The remedy must be fair to both parties, including the other shareholders and directors that caused the oppression. ▪ If the remedy goes beyond what is required to correct the oppression, then it is not authorized by law. ▪ In this case, the remedy of ordering the sale of the company is punitive to Mr. Naneff, and that goes beyond what the remedy should address. • Giving Alex the opportunity to purchase the company would put Alex in a better position than he ever would reasonably have expected while his father was living ▪ Correct remedy: Mr. Naneff should be given the opportunity to purchase Alex's shares and hence retain control of the company he had spent his entire life building. • Discretionary powers in issuing oppression remedies have two limitations: o 1) they must only rectify the oppressive conduct o 2) they may protect only the person’s interest as a shareholder, director or officer as such ▪ A remedy that rectifies cannot be a remedy which gives a shareholder something that even he never could have reasonably expected

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