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ESSENTIALS OF CANADIAN

THE LAW OF AND THIRD EDITION

J. ANTHONY VANDUZER Faculty of Law University of Ottawa DETAILED TABLE OF CONTENTS

FOREWORD TO THE FIRST EDITION xix

ACKNOWLEDGMENTS xxi

LIST OF , , AND ABBREVIATIONS xxii

CHAPTER 1: INTRODUCTION i A. Introduction to this Book J B. What Is a and How Does Law Apply to Business ? 4 C. Basic Forms of Business Organizations 7 1) Sole Proprietorships 7 2) Partnerships 10 a) Introduction 10 b) Characteristics 10 3) Corporations 13 a) Formation 13 b) Characteristics 13 i) Separate Legal Existence 13 ii) Separation of Ownership and 15 4) Other Forms and Methods of Carrying on Business 19 a) Special Forms of Corporations 19 b) Joint Ventures 20 c) Strategic Alliances 20 d) Licences 20 viii THE LAW OF PARTNERSHIPS AND CORPORATIONS

e) Franchises 21 f) Distributorships 22 g) Business Trusts 22 D. Chapter Summary 24 Further Readings 26

CHAPTER 2: PARTNERSHIPS 28

A. Introduction 28 B. What Is a ? 28 1) Partnership Law 28 2) The Legal Nature of Partnership 31 3) Definition of Partnership 33 a) General 33 b) Debtor/ Relationships 40 c) Co-ownership 45 d) Agreeing to be a Partner 47 e) Managing the Risk of Being Found a Partner 48 C. The Relationship of Partners to Each Other 49 1) General 49 2) Default Rules 50 3) 51 4) Partnership 53 D. Liability of the Partnership to Third Parties 54 1) Basic Rules 54 2) Holding Out and Related Sources of Liability 58 3) in Partnerships 62 4) Partnerships for Professionals 63 E. Dissolution of the Partnership 66 F. Partnership Agreements 68 1) General 68 2) Selected Elements of Partnership Agreements and Commentary 69 a) Name 69 b) Description of Business 70 c) Membership of Partnership 72 d) Capitalization 73 e) Arrangements Regarding Profits and Their Distribution 74 f) Management 75 g) Dissolution 76 Detailed Table of Contents ix

G. Joint Ventures 76 H. Limited Partnerships 79 1) General 79 2) Effects 84 I. Chapter Summary 86 Further Readings 88

CHAPTER 3: INTRODUCTION TO CORPORATE LAW 90

A. Introduction 90 B. A Brief Historical Note on 90 C. Constitutional Matters: Division Of Powers 98 1) Introduction 98 2) to Incorporate 99 a) Provincial 99 b) Federal Incorporation 100 3) Jurisdiction to Regulate 100 a) Provincial of Federal Corporations 100 b) Federal Regulation of Provincial Corporations 103 c) Regulation of Extra-provincial Corporations 103 D. Application of the of and Freedoms to Corporations 104 1) Introduction 104 2) Overview of Charter Cases on the Rights of Corporations 104 E. Incorporation and 112 1) What Is a Business ? J12 2) The Incorporation Process 113 F. Function of Corporate Law 116 1) Introduction 116 2) Corporate Law Increases Returns by Decreasing Costs 117 3) Corporate Law Decreases Risk 118 a) Limited Liability 118 b) Mandatory Rules Protecting All 119 c) Mandatory Rules Protecting Minority Shareholders 120 4) Balancing Mandatory Rules Protecting Non-shareholder Stakeholders 120 a) Limits on Limited Liability 121 b) Other Rules Protecting Non-shareholder Stakeholders 122 G. The Nature of the Corporation 125 x THE LAW OF PARTNERSHIPS AND CORPORATIONS

1) Separate Legal Existence and Limited Liability 125 H. Disregard of the Separate Personality of Corporations 129 1) Introduction 129 2) It Is Just Not Fair 130 3) Objectionable Purpose 131 4) Agency 136 5) Other Factors 138 I. Special Corporations without Limited Liability 139 J. Chapter Summary 141 Further Readings 143

CHAPTER 4: INCORPORATION: CONSIDERATIONS AND PROCESS we

A. Introduction 146 B. The Process of Incorporation and Organization 146 1) Incorporation 146 a) Articles 147 i) Names 148 ii) Registered Office 161 iii) Class and Number of Shares 162 iv) Number of Directors 163 v) Restrictions on Issuing, Transferring, or Owning Shares 164 vi) Restrictions on the Business the Corporation May Carry On 166 vii) Other Provisions 167 b) Other Documents Required to Be Filed on Incorporation 168 c) Completion of Incorporation 169 d) Post-Incorporation Organization 170 e) Considerations Relating to the Scale of the Corporation 174 C. Jurisdiction of Incorporation 178 1) Introduction 178 2) Factors Affecting Choice of Jurisdiction 178 a) Disclosure Obligations 178 b) Where the Corporation Will Carry on Business 180 c) Liability for Provincial Tax 182 d) Provisions of Corporate Law 182 e) Recognition 185 3) Continuance 185 D. Pre-Incorporation 186 Detailed Table of Contents xi

1) Introduction 186 2) 186 3) Statutory Reform 188 E. Chapter Summary 192 Further Readings 193

CHAPTER 5: THE CORPORATION IN ACTION 195

A. Introduction 195 B. Liability Of Corporations For 196 1) Introduction 196 2) Absolute Liability Offences 197 3) Strict Liability Offences 198 4) Offences Requiring Mens Rea 199 a) Introduction 199 b) The Common Law Test—The Identification Theory 200 c) The New Standard for Corporate Criminal Liability in the Criminal Code 203 C. Liability of Corporations in 205 1) Introduction 205 2) Vicarious Liability 205 3) Direct Liability 207 D. Liability of Corporations in 207 1) Introduction 207 2) Common Law Rules 209 3) Statutory Reform 215 a) Introduction 215 b) Constructive Notice Abolished 216 c) Common Law Rules Codified and Expanded 216 E. Chapter Summary 222 Further Readings 223

CHAPTER 6: SHARES 225

A. Introduction 225 B. Basic Rules 226 C. Common Characteristics of Shares 22H xii THE LAW OF PARTNERSHIPS AND CORPORATIONS

1) Classes 228 2) 231 3) Rights on Dissolution 235 4) Voting 236 a) Introduction 236 b) Special Vote 237 c) Class Vote 237 5) Cumulative Voting 238 6) No Par Value 240 7) Series of Shares 240 8) Pre-emptive Rights 242 D. Issuing and Paying for Shares 244 1) Introduction 244 2) Stated Account 246 E. Redemption and Repurchase of Shares 247 1) Introduction 247 2) Holding Shares as or as a Trustee 248 3) Purchase or Redemption of Shares 249 a) Purchase 249 b) Redemption 250 4) Adjustments to Stated Capital 250 F. Chapter Summary 251 Further Readings 252

CHAPTER 7: MANAGEMENT AND CONTROL OF THE CORPORATION: THE BASIC LEGAL FRAMEWORK 254

A. Introduction: Shareholders, Directors, and Officers—The Legal Scheme of 254 B. Management and Control under the CBCA 255 C. Shareholders and How They Exercise Power 258 I) Shareholders' Meetings and Resolutions 258 a) Introduction 258 b) Types of Meetings 258 c) Calling Meetings 259 d) Place of Meetings 260 e) Notice of Meetings 260 0 Proxies and Proxy Solicitation 262 g) Shareholder Proposals 265 h) Conduct of Meetings 269 Detailed Table of Contents xiii

i) Quorum 270 j) Voting 270 2) Access to Information 270 a) Introduction 270 b) Specific Requirements 271 3) Signed Resolutions and Single Shareholder Meetings 273 D. Directors and How They Exercise Power 273 1) Qualifications 273 2) and Appointment of Directors 275 a) General 275 b) Filling Vacancies on the Board 276 3) Number of Directors 277 4) Directors' Meetings 277 a) Place 278 b) Notice 278 c) Conducting Meetings 278 d) Dissent by a Director 279 e) Signed Resolutions and Single Director Meetings 280 E. Officers 280 1) General 280 2) 282 a) Delegation within the Corporation 282 b) Delegation outside the Corporation 283 F. Remuneration and Indemnification of Directors and Officers 284 1) Remuneration 284 2) Indemnification 285 G. Shareholders' Agreements 290 1) Introduction 290 2) Voting and Management 291 3) Transfer 292 4) Dispute Settlement 294 5) Unanimous Shareholders' Agreements 295 6) Enforcing USAs and Other Shareholders' Agreements 297 H. Chapter Summary 299 Further Readings 301 CHAPTER 8: CORPORATE CHANGES AND REORGANIZATIONS \oi

A. Introduction 302 xiv THE LAW OF PARTNERSHIPS AND CORPORATIONS

B. Changes in Corporate Characteristics 303 1) Amendment of Articles 303 2) Changes to Stated Capital 306 3) By- 308 C. Continuance 309 1) Introduction 309 2) 310 3) 311 D. Amalgamation 313 1) Introduction 313 2) Long Form 315 3) Short Form 317 a) Introduction 317 b) Vertical 318 c) Horizontal 318 4) Procedure after Approval of Long- and Short-Form Amalgamations 319

E. Arrangements 321

F. Sale of All or Substantially All of the Corporation's Assets 324

G. Going-Private Transactions 325 1) Introduction 325 2) Approval Process 327 H. Termination of the Corporation's Existence 329 1) Introduction 329 2) Voluntary Dissolution 330 3) Involuntary Dissolution 332 a) By Order 332 b) Dissolution by the Director 332 4) Effect of Dissolution 333 I. Chapter Summary 334 Further Readings 337

CHAPTER 9: DUTIES AND LIABILITIES OF DIRECTORS AND OFFICERS 338

A. Introduction 338 B. Fiduciary Duty 340 Detailed Table of Contents xv

1) Introduction 340 2) The "Best Interests of the Corporation" 342 3) Transacting with the Corporation 345 4) Taking Corporate Opportunities 352 5) Competition by Directors and Officers 362 6) Bids 363 7) Other Breaches of Fiduciary Duty 371 8) Reliance on Management and Others 373 9) Shareholder Ratification of Breach of Fiduciary Duty 373 C. Duty of Care 375 1) Introduction 375 2) The Standard of Care 377 3) The Business Rule 382 4) Other Duties Imposed On Directors and Officers 384 D. Liability of Directors and Officers for 389 E. Chapter Summary 397 Further Readings 399

CHAPTER 10: SHAREHOLDER REMEDIES 402

A. Introduction 402 B. Personal Actions by Shareholders 404 C. Actions on behalf of the Corporation 406 D. Oppression Remedy 412 1) Introduction 412 2) The Statutory Scheme 413 3) Interim Costs 414 4) Who May Claim Relief from Oppression: The Complainant 416 a) Introduction 416 b) Statutory Complainants 417 i) Security Holder, Section 238(a) 417 ii) Directors and Officers and the Director, Sections 238(b) & (c) 422 c) Discretionary Complainants, Section 238(d) 423 i) General 423 ii) 423 iii) The Corporation 428 d) Summary 429 5) The Substantive Standard 430 a) Introduction 430 xvi THE LAW OF PARTNERSHIPS AND CORPORATIONS

b) General Principles 431 i) General Approach to Interpretation 431 ii) The Statutory Language 434 iii) Indicia of Oppressive Conduct 437 iv) Actions of Directors 437 v) Personal and Derivative Claims 438 vi) What Interests Are Protected? 440 vii) Actions against Shareholders 443 viii) Oppression and Shareholders' Agreements 444 ix) Oppression and Business Judgements 446 6) Remedies 447 a) Introduction 447 b) Share Purchase 448 c) and Dissolution 449 d) Remedies against Shareholders and Others 449 e) Compliance 450 f) Other Kinds of Relief 450 7) Summary 450 E. Compliance and Restraining Orders 451 F. Rectification of Corporate Records 452 G. Investigations 453 H. Corporate Purchase of Shares of Dissenting Shareholders 454 I. Termination of the Corporation: Winding Up and Dissolution 458 J. Chapter Summary 460 Further Readings 462

CHAPTER 11: THE PUBLIC CORPORATION AND SECURITIES LAW 464

A. Introduction 464 B. Securities Regulation 466 . 1) Introduction 466 2) The Relationship between Corporate Law and Securities Law 469 3) What Is a Security? 473 4) Regulation of Securities Dealers and Other Professional Participants in the Market 475 5) Regulation of the Distribution of Securities 477 a) Introduction 477 b) Prospectus Requirements 478 c) Exemptions from Prospectus Requirements 483 d) Resale Restrictions 485 Detailed Table of Contents xvii

e) Continuous and Timely Disclosure 486 C. 489 1) Introduction 489 2) The Statutory Scheme 490 a) Overview 490 b) Definition of Insider 491 c) Reporting Obligations 491 d) Regulation of Trading with Inside Information 492 i) Scope of Application 492 ii) Prohibition on Trading with Inside Information 493 iii) Civil Liability 496 D. Takeover Bids 498 1) Introduction 498 2) The Statutory Framework 500 a) The Basic Scheme of Takeover-Bid Regulation 500 b) Exemptions 504 c) Compulsory Acquisitions 505 E. Corporate Governance 507 1) Introduction 507 2) Securities Law Corporate Governance Requirements 510 a) Overview 510 b) 510 c) Mandatory Certification 512 d) Best Practices for Corporate Governance 513 F. Chapter Summary 514 Further Readings 517

CHAPTER 12: CORPORATE GOVERNANCE IN THEORY AND PRACTICE 519

A. Introduction 519 B. Overview of the Problem of Agency Costs 521 C. How Markets Affect Agency Costs 528 D. Other Factors Affecting Corporate Governance 534 E. Rethinking the Legal Model of Corporate Governance for Public Corporations in Light of Enron and Other Corporate Scandals 539 F. Chapter Summary 544 Further Readings 546 xviii THE LAW OF PARTNERSHIPS AND CORPORATIONS

CHAPTER 13: CORPORATE SOCIAL RESPONSIBILITY 54s

A. Introduction 548 B. The Interests of Non-Shareholder Stakeholders in the Corporation 549 1) Introduction 549 2) The Law in Canada and Elsewhere 552 C. The of Corporate Social Responsibility 557 1) Introduction 557 2) Arguments in Favour of Shareholders Being the Exclusive Beneficiaries of Management Duties 558 3) Arguments against Shareholders Being the Exclusive Beneficiaries of Management Duties 560 a) Other Stakeholders Have a Positive Stake in Corporate Performance 560 b) Non-Shareholder Stakeholders Face Impediments to Bargaining to Protect Their Interests 561 c) Other Legal and Market Mechanisms Ensure Management Accountability to Shareholders 564 3) Should Managers be Responsible to Non-shareholder Stakeholders? 567 a) Introduction 567 b) Effect on Management Accountability 567 c) Managers' Competence to Respond to Non-shareholder Interests 571 d) The Ability of the Shareholder-primacy Approach to Accommodate Interests of Other Stakeholders 572 D. Some Other Ways That Legal Rules Can Improve Corporate Social Responsibility 574 1) Introduction 574 2) Shareholder Proposals 575 3) Corporate Disclosure Regarding Social Responsibility 581 E. Chapter Summary 586 Further Readings 587

GLOSSARY 591

TABLE OF CASES 607

INDEX 635

ABOUT THE AUTHOR 645