Corporate Law Summary

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I – INTRODUCTION What is a Business?

All businesses carry on some kind of commercial activity.
One of major concerns of business organizations law is the relationship of owners and managers to the business and to each other.
Second major concern is the responsibility of the business organization, the owners, and the managers to other stakeholder groups. This mostly involves other areas of law such as contract, tort, property, commercial and criminal law. When is the business organization liable for the obligations created under these other categories of law?

Basic Forms of Business Organization Sole Proprietorships

Oldest and simplest form – one owner who has the prerogative and responsibility of all decisions.
Both legally and practically, no separation between the sole proprietorship business organization and the person who is the sole proprietor.
Sole proprietor is exclusively responsible for performing all contracts.
Sole proprietor is exclusively responsible for all torts committed by her personally and vicariously liable for torts committed by employees.
All sole proprietor’s personal assets may be seized in fulfilment of business obligations
For income tax purposes, the income or loss from the business is included with the income or loss from other sources in calculating tax liability.
May be easily commenced and dissolved and modest start up expenses.
Less wide range of investment possibilities – can’t divide up ownership so have to borrow directly.
Name may have to be registered under the business names legislation in each province.
Incentives for registering: offence and fine if do not register when required (OBNA, s. 10(2)); if fail to register, may not sue for an obligation incurred in connection with the business except with leave of the court (OBNA s. 7). Court must grant leave if failure was inadvertent, there is not evidence that the public has been deceived or misled, and at the time of application to the court you have registered (OBNA s. 7(2)).
Right to statutory damages up to $500 against any person who registers a name that is deceptively similar to yours and that causes injury to you (OBNA s. 6).
In order to commence certain types of businesses, a sole-proprietor must obtain a licence.
None of the advantages of a business corporation – fully liable for all debts and other obligations; no separate personality.

Partnerships

Partnerships come into being when two or more persons carry on business together with a view to a profit (OPA, s. 2).
Partnerships subdivided into three categories: (a) General Partnerships, (b) Limited Partnerships, and (c) Limited Liability Partnerships.
The provincial partnerships Acts all define a partnership as the relationship subsisting between two or more persons carrying on business with a view to profit.
OPA sets out framework of rules as to how responsibility will be allocated if thins go wrong (OPA ss. 20-31). Not mandatory.
Ease of formation and dissolution, general lack of formalities with respect to these, flexibility in designing internal managerial structure of the business.
Same weaknesses as sole proprietorship, including unlimited liability of each partner jointly or jointly and severally for all the debts and other obligations (e.g. torts) of the partnership.
Can limit liability by becoming limited partner, but this involves scrupulous abstention from playing any part in the direction of the business.
Partnerships in qualifying professional firms can exclude their liability for the negligent or other described wrongful acts of a partner by registering as a Limited Liability Partnership (LLP), and meeting the statutory requirements, without losing their right to remain active partners.
Partnership statutes create codes governing liability of partnerships to third parties (OPA ss. 6-19).
All partnerships in Ontario must register their names (OBNA s. 2(3)).
Disadvantages of unlimited liability partnerships can also be avoided by forming a partnership between incorporated companies.

Corporations

Corporation has own legal personality separate from that of its shareholders, directors and officers. Can sue and be sued in own name. Can enter into contracts even with its own shareholders.
Corporation has perpetual succession and is not affected by changes in its members.
Shareholders are not liable for the debts or other obligations of the corporation. Said to have limited liability because their maximum loss is limited to the value of money, property, or services they have transferred to the corporation in return for their shares.
Incorporation must be sought from government agency/official. Requires filing of documents, adoption of corporate constitution. If wishes to do business in more than one province will have to incorporate federally or obtain an extra-provincial licence.
Incorporation may be under federal CBCA, or under the corporate statute of a province or territory.
Rights and obligations of managers and those with interests represented by shares of the corporation are legally distinct. Corporations are managed by a board of directors, elected by shareholders by majority vote, and officers who are appointed and delegated responsibilities by the directors. In many corporations, especially small ones, these legally distinct roles may be played by the same people.
Corporate law mechanisms providing management accountability to shareholders:

o Corporate democracy – shareholders have collective power to elect directors and to remove them. o Directors’ and officers’ duties – the law imposes duty on managers to act in the best interests of the corporation and to take reasonable care in performing their responsibilities. o Shareholder rights to information. o Shareholder remedies.

Required to hold meetings, elect directors, provide shareholders with information.
Various types of professionals, e.g. lawyers, not allowed to conduct business in incorporated form.
Unincorporated form of business may offer tax advantages.

Other Methods of Carrying on Business

Special forms of corporations – banks can only be incorporated and operated under the federal Bank Act. Insurance businesses must be incorporated and are governed by either federal or provincial legislation regulating the insurance business.
Joint ventures – no precise legal meaning. Refers to a wide variety of legal arrangements in which two or more parties combine their resources for some limited purpose, for a limited time, or both. May be established by a contract in which they agree that they will do certain things to carry out their common purpose.
Strategic alliances – again no precise legal meaning. Refers to a wide variety of relationships between business organizations involving more or less legal formality and greater or lesser degrees of co-operation.
Licences – a purely contractual relationship under which one party agrees to permit another person to use something. E.g. agreement by trade-mark owner to permit someone else, such as a franchisee to use its trade-mark in the franchisee’s business.
Franchise – purely contractual relationship in which the franchisor gives the franchisee the right to operate its business system in return for a set of fees. Duties imposed on franchisor by legislation in Alberta and Ontario – duty of fair dealing; disclosure; withdrawal rights; damages for misrepresentation; right to organize.
Distributorships – no precise legal meaning. Exists when one business agrees to sell another’s product.
Business trusts – mutual funds and real estate investment funds are set up in the form of trusts. Trust may be set up to have many of the features of a corporation. Settlor gives title to property to trustee to be held for benefit of beneficiary on terms specified by settlor. So investors could e.g. five money to trustees for the purpose of acquiring assets to be used to carry on a business for the benefit of the investors. No rules provided by statute; everything must be created in the declaration of trust document. Tax changes to Income Tax Act, effective 1 January 2007 treat income trust a as corporation.

Casebook pp. 1-4

Legal form in which enterprise is to be conducted; three principal types; see subheadings above.

VanDuzer pp. 1-24

Much of discussion focuses on most common type of corporation – corporations with few shareholders and carrying on a small business; see subheadings above.

II – PARTNERSHIPS (a) What is a Partnership? Casebook pp. 4-24

English LLP has corporate personality and does not constitute a partnership under the Partnership Act 1890.
All provinces have copied 1890 Act and have also adopted a limited partnerships Act.
s. 2 Partnerships Act defines a partnership.
S. 3 – guidelines in determining whether or not a partnership exists.
Prior to this issue was whether a person’s entitlement to a share of the profits of another’s business was sufficient to make him a partner – affirmative proposition from Grace v. Smith (1775).
Cox and Wheatcroft v. Hickman (1860) – House of Lords repudiated this doctrine. Cox and Wheatcroft were creditors of original partners. Business was assigned to them and others as trustees. Other trustees incurred trade debts and firm was sued. The measure of the interest of each creditor… is the amount of his debt” – limited and defined. Where two or more persons are engaged as partners, each has the implied authority from the others to bind all by contracts entered into according to the usual course of business. The same thing that entitles them to the profits makes them liable to the debts.
When is joint ownership of property deemed to make the owners partners?
A.E. LePage Ltd. v. Kamex Developments Ltd. (1977) – appellants purchased property under name of one of them in trust; defendant incorporation incorporated to hold property in trust. Appellants met monthly in order to discuss operation of property. One of the appellant signed an agreement on behalf of all the other appellants with the respondent. He had not been authorized to do so by the appellants and his act had not been approved by them. Was it a partnership?
The mere fact that property is owned in common and that profits are derived therefrom does not in itself constitute the co-owners as partners (s. 3 Partnerships Act). Whether or not position becomes that of partners depends on intention. Despite the fact that the co-owners intended to acquire, hold and sell the building for profit they were not partners; the intention of the parties to maintain their rights as co-owners is clear from the documents. They wished to identify and keep separate their beneficial interests for income tax purposes – intention would have been defeated if regarded as partnership.
Lansing Building Supply (Ontario) Ltd. v. Ierullo (1989) – distinguished Kamex on two grounds – terms of co-ownership agreement had many of the attributes of a partnership (property to be held as tenants in common, profits to be distributed, right of co-owners to deal in their interests severely restricted); and conduct of parties consistent with existence of a partnership.
Where a person purports to act as agent for another, he is deemed to warrant his authority to do so.

Legal Personality of Partnership

Thorne v. New Brunswick (Workmen’s Compensation Board) (1962) – oral agreement to carry on partnership. Agreed that the would receive remuneration, termed “wages”. Thorne suffered injuries – question was whether he was a workman employed by the partnership within the meaning of the Workmen’s Compensation Act so as to entitle him to compensation. Contended that Legislature had given partnerships rights, powers and attributes and imposed on them duties and liabilities not previously possessed which had resulted in their establishment under the law as legal entities. Firm is not an artificial person distinct from the members composing it, although treated so by practice. A partnership is not a legal entity separate and distinct from the individuals composing it.
Aggregate view of common law partnership remains substantially intact.

VanDuzer pp. 28-49

Legal relationship that exists between two or more people carrying on business together.
Partnership law – determines when a partnership is created and the resulting legal consequences.
Originally common law.
Provinces have constitutional jurisdiction to enact laws regulating partnerships under s. 92(13) Constitution Act, 1867 (property and civil rights).
In Quebec governed by Civil Code

Legal Nature of Partnership

Partnerships Act s. 4 – a partnership exists any time there are “persons carrying on a business in common with a view to profit”.
If a partner leaves the partnership it is terminated.
A partner may not be an employee of the partnership business (Thorne v. New Brunswick (1962)).
A partner cannot be a creditor of the partnership.
However, partnership often called a “firm” for convenience.
For income tax purposes, income/loss is calculated at the firm level; however not taxed as separate entity – allocated to partners in accordance with entitlements.
Actions against partnership may be commenced and must be defended using the firm name. Any order made against a partnership may be enforced against the property of the partnership and also against the property of any person served personally and did not deny being a partner/adjudged to be a partner (Ontario Rules of Civil Procedure).

Definition of Partnership

General – being found to be a partner may have unanticipated financial consequences. Issue of partnership usually arises where partnership insolvent and creditor looking for someone with assets to claim against.
Two or more people carrying on a business in common with a view to a profit.
Carrying on a Business – business is defined as every trade, occupation and profession.
Thrush v. Read (1950) – encompasses any ongoing activity or even a single transaction.
Khan v. Miah (2001) – restaurant business that never opened its doors was a partnership.
Scragg v. Lotzkar (2005) – simple agreement to carry on a business at a future time not sufficient; issue is whether the parties have done enough to justify a conclusion that they have commenced the business they wish to carry on.
View to a Profit – not for charitable/social/cultural purposes. No need to actually make profits.
Spire Freezers Ltd. v. The Queen – partnership established to develop condominium project and operate low-rent apartment complex. Spire acquired interest in partnership. Main purpose – to deduct share of that loss against other income and reduce income tax. Revenue Canada refused to deduct the loss – it argued spire was not a partner because it was never carrying on the business with a view to a partnership. SCC held Spire was a partner – even if main purpose to deduct losses, also intended to carry on business of apartment complex.
Backman v. The Queen – again business invested in partnership to take advantage of deductibility of partnership losses. However, remaining assets nominal and little management required – SCC found no partnership because no business being carried on with a view to a profit.
In Common – carrying on business together based on written/oral/implied agreement.
Agreement must demonstrate intention to participate in relationship that fits within definition of partnership.
Lansing Building Supply Ltd. v. Ierullo (1990) – express descriptions that they are partners/express provisions in written agreement denying partners intend to partners not conclusive. Regard must be had to all the facts, including rights and obligations created by agreement, conduct, any other relevant circumstances.
Green v. Harnum – no agreement as such, but both signed all documents relating to acquisition of primary asset of business, borrowed in equal amounts, set up bank account for business, both had signing authority on account, signed declaration of partnership.
Red Burrito Ltd. v. Hussain – letter of understanding provided they would incorporate a corporation to carry on business under Hussain’s management. Red Burrito advanced substantial sum of money. Corporation never incorporated, no bank account set up. Restaurant did open, but Hussain then locked out Red Burrito which then received no income or benefit from restaurant. Court found that even though the parties had not fully implemented their agreement, it was clear they planned to carry on business together and did so.
Cressman, Foster Health Facility Inc. v. Furniss – where partnership agreement drafted but not signed insufficient evidence of partnership; however did find partnership with respect to sharing of profits from business.
No formal agreement necessary, but inferred agreement must be given effect through actions directed to carrying on a business and must extend to all the essential elements of a partnership.
Waugh v. Carver, s. 3.3 Ontario Partnerships Act – principal indicia or carrying on a business in common is whether profits are shared. However sharing profits alone not conclusive – something more is required.
Cox v. Hickman – fundamental characteristic of the relationship of a partnership is mutual agency.
Ss. 3.3(a) – (e) Ontario Partnerships Act – list of relationships that should not give rise to inference of partnership even though there is a sharing of profits.
S. 3.3(a) – distinguishing partnership from debtor/creditor relationship has proved difficult.
Cox v. Hickman – entered into a arrangement with creditors under which property transferred to certain trustees appointed to operate the business. The debtors retained beneficial ownership. Creditors given right to make rules for conduct of business and could choose to wind it up. Several creditors appointed trustees, including Cox. Hickman sued Cox alleging that he was a partners in the business. HL held not partners – true relationship was debtor and creditor. Trustees were carrying on business on behalf of debtors who received benefit of profits but had agreed to have them applied for the exclusive purpose of paying of the creditors.
Pooley v. Driver – partnership agreement provided that the capital of the partnership would be split between partners and lenders, and profits would be paid out to partners and lenders in accordance with interests in the capital. Separate agreement with Lenders repeated many of provisions of partnership agreement. Complex agreement designed to fit Lenders in provision that specified the advance of money by way of a loan does not itself make the lender a partner. Court concluded Lenders were partners when looking at whole relationship.

o Alleged partners had interest in capital just like interest of acknowledged partners. o Lenders could enforce covenants of partnership agreement – degree of participation and control in business. o Return on Lenders’ investment varied with aggregate amount invested. o Provision terminating the relationship of any Lender who goes bankrupt not unusual for partnership in which solvent partners would not want trustee in bankruptcy succeeding to the rights of a partner, but highly unusual for lender. o Unusual for lender to be required to pay back profits as well as original investment if insufficient partnership assets to pay off all other creditors. o Coincidence of loan and partnership agreements.

Court made it clear that provisions of 3.3(a) to (e) are examples but court must still decide if based on all the circumstances the most accurate characterization of the relationship is one of partnership.
S. 3.1 Ontario Partnerships Act – co-ownership does not of itself create partnership in relation to property.
Co-owners cannot bind each other – at liberty to deal in own interest in common property. Ability of partner to transfer interest limited in absence of agreement of all partners. Property held jointly as assets of business – no partner has right to deal with property separately.
A.E. LePage Ltd. v. Kamex Developments – was the intention of the co-owners to carry on a business or simply to provide by an agreement for the regulation of their rights and obligations as co-owners of a property. Not partners although profits paid in proportion to interests, other co-owners had right of first refusal if selling interest, sale or other dealing with property required approval by majority vote of co-owners.

o Court held ability to deal with individual interests was incompatible with intention that property become part of a partnership. Also individual treatment of respective interests for income tax purposes.

Volzke Construction v. Westlock Foods Ltd. – where in addition to co-ownership, sharing profits, there is substantial participation in management activates partnership will likely be found. Use of a common bank account, agreement to share costs of developing business, common participation in financing and dealing with tenants concerns all indicative of partnership.
Agreeing to be a Partner –
W. v. M.N.R. – widows and daughters of deceased partners claimed they were partners. Did not contribute or participate in business of firm. Revenue Canada objected – court held that it was sufficient for finding of partnership that they had entered into an agreement in which they were identified as partners and acknowledged that they were liable for losses as well as entitled to receive profits.

Some Factors Suggesting Partnership Relationship o Sharing profits o Sharing responsibility for losses o Jointly owning property o Controlling business o Participating in management o Stating intention to form partnership in contract o Making government filings showing partnership o Access to information regarding the business o Signing authority for contracts, bank accounts o Holding oneself out as a partner o Contributing money, services or property as capital o Full-time involvement in the business o Use of a firm name o Firm having its own personnel and address

Managing the Risk of Being Found a Partner – contractual provisions stating the nature of the relationship and structural changes to relationship taking into account factors above. Steps may be taken to minimize the consequences of being found a partner, such as holding the partnership interest in a corporation and creating indemnification provisions.

Partnerships Act, ss. 1-5, 45 1. (1) Definitions – In this Act, “business” includes every trade, occupation and profession; “court” includes every court and judge having jurisdiction in the case; “extra-provincial limited liability partnership” means a limited liability partnership formed under the laws of another jurisdiction but does not include an extra-provincial limited partnership within the meaning of the Limited Partnerships Act; “limited liability partnership” means a partnership, other than a limited partnership, that is formed or continued as a limited liability partnership under section 44.1 or that is an extra-provincial limited liability partnership. (2) Idem – A person is deemed to be “insolvent” within the meaning of this Act if the person is adjudged a bankrupt under the Bankruptcy Act (Canada) or if the person makes an assignment for the general benefit of his or her creditors, and “insolvency” has a meaning corresponding with “insolvent”. Nature of Partnership 2. Partnership – Partnership is the relation that subsists between persons carrying on a business in common with a view to profit, but the relation between the members of a company or association that is incorporated by or under the authority of any special or general Act in force in Ontario or elsewhere, or registered as a corporation under any such Act, is not a partnership within the meaning of this Act. 3. Rules for determining existence of partnership – In determining whether a partnership does or does not exist, regard shall be had to the following rules: 1. Joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof. 2. The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived. 3. The receipt by a person of a share of the profits of a business is proof, in the absence of evidence to the contrary, that the person is a partner in the business, but the receipt of such a share or payment, contingent on or varying with the profits of a business, does not of itself make him or her a partner in the business, and in particular, (a) the receipt by a person of a debt or other liquidated amount by installments or otherwise out of the accruing profits of a business does not of itself make him or her a partner in the business or liable as such; (b) a contract for the remuneration of a servant or agent or a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such; (c) a person who, was married to a deceased partner immediately before the deceased partner died, was living with a deceased partner in a conjugal relationship outside marriage immediately before the deceased partner died, or is a child of a deceased partner, and who receives by way of annuity a portion of the profits made in the business in which the deceased partner was a partner is not by reason only of such receipt a partner in the business or liable as such; (d) the advance of money by way of loan to a person engaged or about to engage in a business on a contract with that person that the lender is to receive a rate of interest varying with the profits, or is to receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such, provided that the contract is in writing and signed by or on behalf of all parties thereto; (e) a person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by him or her of the goodwill of the business, is not by reason only of such receipt a partner in the business or liable as such. 4. Insolvency – In the event of a person to whom money has been advanced by way of loan upon such a contract as is mentioned in section 3, or of a buyer of the goodwill in consideration of a share of the profits of the business, becoming insolvent or entering into an arrangement to pay his or her creditors less than 100 cents on the dollar or dying in insolvent circumstances, the lender of the loan is not entitled to recover anything in respect of the loan, and the seller of the goodwill is not entitled to recover anything in respect of the share of profits contracted for, until the claims of the other creditors of the borrower or buyer, for valuable consideration in money or money’s worth, are satisfied. 5. Meaning of “firm” – Persons who have entered into partnership with one another are, for the purposes of this Act, called collectively a firm, and the name under which their business is carried on is called the firm name. 45. Saving as to rules of equity and common law – The rules of equity and of common law applicable to partnership continue in force, except so far as they are inconsistent with the express provisions of this Act.

Business Names Act, ss. 1, 2, 6, 7, 10 1. Definitions – In this Act, “business” includes every trade, occupation, profession, service or venture carried on with a view to profit; “corporation” means a corporation wherever or however incorporated; “Minister” means the Minister of Consumer and Business Services; “Ministry” means the Ministry of the Minister; “person” includes an individual, sole proprietorship, partnership, limited partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate, and an individual in his or her capacity as trustee, executor, administrator or other legal representative; “prescribed” means prescribed by the regulations; “Registrar” means the Registrar appointed under section 3; “registered” means registered under this Act; “regulations” means the regulations made under this Act. 2. (1) Registering name – No corporation shall carry on business or identify itself to the public under a name other than its corporate name unless the name is registered by that corporation. (2) Idem – No individual shall carry on business or identify his or her business to the public under a name other than his or her own name unless the name is registered by that individual. (3) Same – No persons associated in partnership shall carry on business or identify themselves to the public unless the firm name of the partnership is registered by all of the partners. (3.1) Same – No persons associated in partnership shall carry on business or identify themselves to the public under a name other than a firm name registered under subsection (3) unless the name is registered by all of the partners. (3.2) Non-application Subsection (1) does not apply to prohibit a corporation from carrying on business or identifying itself to the public by a name other than its corporate name if the name is set out in a partnership registration under subsection 4 (1) or a declaration under the Limited Partnerships Act. (3.3) Same – Subsection (3) does not apply to prohibit persons associated in a limited partnership from carrying on business under the firm name in accordance with the Limited Partnerships Act. (4) Exception – Subsection (3) does not apply to prohibit persons associated in partnership from carrying on business or identifying themselves to the public under a name that is composed of the names of the partners. (5) Idem – This section does not apply to prohibit the use of a name that contains characters from an alphabet other than the Roman alphabet if the name is used in conjunction with the registered name. (6) Name to be set out – A corporation and such other persons as are prescribed carrying on business under a registered name or, in the case of a corporation, identifying itself to the public under a registered name, shall set out both the registered name and the person’s name in all contracts, invoices, negotiable instruments and orders involving goods or services issued or made by the person. 6. (1) Liability for damages – A person who suffers damages by reason of the registration of a name that is the same as or deceptively similar to another person’s registered name is entitled to recover compensation from the registrant for damages suffered because of the registration. (2) Idem – For the purposes of subsection (1), the compensation is limited to the greater of $500 and the actual amount of damages incurred. (3) Cancelling registration – In giving a judgment for a plaintiff in an action brought under subsection (1), the court shall order the Registrar to cancel the registration that was the cause of the action. R.S.O. 1990, c. B.17, s. 6 (3). 7. (1) Ability to sue – A person carrying on business in contravention of subsection 2 (1), (2) or (3) or subsection 4 (4) or (6) is not capable of maintaining a proceeding in a court in Ontario in connection with that business except with leave of the court. (2) Idem – The court shall grant leave if the person seeking to maintain the proceeding satisfies the court that, (a) the failure to register was inadvertent; (b) there is no evidence that the public has been deceived or misled; and (c) at the time of the application to the court, the person is not in contravention of this Act or the regulations. (3) Contracts valid – No contract is void or voidable by reason only that it was entered into by a person who was in contravention of this Act or the regulations at the time the contract was made. 10. (1) Offence – Every person who, without reasonable cause, contravenes section 2 or 2.1 or subsection 4 (4) or (6) or submits a statement in an application for a registration under this Act that is false or misleading with respect to any material fact is guilty of an offence and on conviction is liable to a fine of not more than $2,000 or, if the person is a corporation, to a fine of not more than $25,000. (2) Idem – If a corporation is guilty of an offence under subsection (1), every director or officer of the corporation and every person acting as its representative in Ontario who authorized, permitted or acquiesced in such an offence is also guilty of an offence and on conviction is liable to a fine of not more than $2,000.

(b) How Does a Partnership Carry on Business? (i) Relations Between Partners Casebook pp. 24-26

Ss. 20-31 Partnerships Act contain statutory presumptive rules governing the partners’ relationship towards one another.
Equality:

o s. 24.1 – share equally in profits and losses. o s. 24.5 – right to participate in the management of the business (this right explains reciprocal agency basis of partnership and s. 6 rule that the acts of every partner binds the firm. o s. 24.9 – right to have access to partnership books. o s. 28 – duty to render to each other true accounts and full information of all things affecting the partnership.

Consensualism:

o s. 20 – mutual rights and duties of partners may be varied with consent of all partners. o s. 24.7 – unanimity regarding admission of new partners. o s. 24.8 – unanimity regarding any changes in the fundamental character of the business. o s. 26(1) – unless otherwise agreed, any partner may determine partnership at any time by giving notice of intention to do so. o s. 25 – no majority of partners can expel a partner to do so unless power to do so expressly conferred in partnership agreement. o s. 24.8 – deviation from unanimity rule – majority opinion may prevail in “ordinary matters”.

Fiduciary Character:

o Meinhard v. Salmon (1928) (N.Y.) – co-parnters owe each other the duty of finest loyalty. o Ss. 28, 29, 30.

VanDuzer pp. 49-54

In most cases specified in partnership agreement.
Ss. 20-31 Ontario Partnerships Act – default rules to govern relations.
Default Rules – OPA contemplates small number of partners all of whom are equal in financial interests and right to participate in business.
Typically changes to default rules are made by express agreement, but may also be displaced by conduct if conduct shows clear intention to displace the rules.
Fiduciary Duty – in addition, partners owe each other a fiduciary duty. No general expression of this OPA, but established in common law that fiduciary duty is a guiding principle of partnership law (Hitchcock v. Sykes).
Provisions consistent with this:
S. 28 – each partner required to render to the others “true accounts and full information” regarding all matters affecting the partnership.
Dockrill V. Coopers & Lybrand Chartered Accountants (1994) – each partner has a right to access documents prepared by and for the partnership.
McKnight v. Hutchinson – a partner must make full and accurate disclosure of any activities what may affect the partnership.
S. 29(1) – each partner must account to the partnership for certain benefits obtained without the consent of the other partners and any profits made by competing with the partnership business (s. 30).
Rochwerg v. Truster – became director of one of partnership’s clients and purchased shares. Disclosed directorship but not investment. Duty under s. 28 required him to disclose the directorship because it effected the partnership; required to account for profits because benefit derived from partnership business connection for purposes of s. 29. Not necessary to show the partnership had suffered a loss.
Mohammadamin v. Zameni – non-competition obligation extended beyond termination of partnership – setting up competing business nearby a breach of fiduciary duty not to damage goodwill of partnership.
Olson v. Gullo – partner who sold property owned by partnership had to pay profits of sale over to partnership under s. 29(1) and common law principles of fiduciary duty.
McKnight – by agreement, partners may exclude certain activities from full operation of fiduciary duty.
Partnership Property – all property contributed to the partnership; all property acquired on behalf of the partnership or for the purpose, and in the course of the partnership business, esp. where property is bought with money belonging to the partnership (OPA s. 21(1)).
Where property is treated a partnership property, it becomes partnership property even if title is retained by an individual partner.
Partnership property must be held and used exclusively for the purposes of the partnership and in accordance with the terms of the partnership agreement. In effect, partner loses individual beneficial interest in property contributed to partnership.
Rules with respect to partnership property may be changed by agreement.

Partnerships Act ss. 20-31 Relation of Partners to One Another 20. Variation by consent of terms of partnership – The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either expressed or inferred from a course of dealing. 21. (1) Partnership property – All property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm, or for the purposes and in the course of the partnership business, are called in this Act “partnership property”, and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement. (2) Devolution of land – The legal estate or interest in land that belongs to a partnership devolves according to the nature and tenure thereof and the general rules of law thereto applicable, but in trust, so far as necessary, for the persons beneficially interested in the land under this section. (3) Co-owners of land – Where co-owners of an estate or interest in land, not being itself partnership property, are partners as to profits made by the use of that land or estate, and purchase other land or estate out of the profits to be used in like manner, the land or estate so purchased belongs to them, in the absence of an agreement to the contrary, not as partners, but as co-owners for the same respective estates and interests as are held by them in the land or estate first mentioned at the date of purchase. 22. Property bought with partnership money – Unless the contrary intention appears, property bought with money belonging to the firm shall be deemed to have been bought on the account of the firm. 23. Conversion of land bought with partnership money into personalty – Where land or any heritable interest therein becomes partnership property, unless the contrary intention appears, it is to be treated as between the partners, including the representatives of a deceased partner, and also as between the heirs of a deceased partner and his or her executors or administrators as personal or movable and not real or heritable estate. 24. Rules as to interests and duties of partners – The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement express or implied between the partners, by the following rules: 1. All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm, but a partner shall not be liable to contribute toward losses arising from a liability for which the partner is not liable under subsection 10 (2). 2. The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him or her, (a) in the ordinary and proper conduct of the business of the firm; or (b) in or about anything necessarily done for the preservation of the business or property of the firm. 2.1 A partner is not required to indemnify the firm or other partners in respect of debts or obligations of the partnership for which a partner is not liable under subsection 10 (2). 3. A partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital that he or she has agreed to subscribe is entitled to interest at the rate of 5 per cent per annum from the date of the payment or advance. 4. A partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by the partner. 5. Every partner may take part in the management of the partnership business. 6. No partner is entitled to remuneration for acting in the partnership business. 7. No person may be introduced as a partner without the consent of all existing partners. 8. Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners. 9. The partnership books are to be kept at the place of business of the partnership, or the principal place, if there is more than one, and every partner may, when he or she thinks fit, have access to and inspect and copy any of them. 25. Expulsion of partner – No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners. 26. (1) Retirement from partnership at will – Where no fixed term is agreed upon for the duration of the partnership, any partner may determine the partnership at any time on giving notice of his or her intention to do so to all the other partners. (2) Notice of retirement – Where the partnership was originally constituted by deed, a notice in writing, signed by the partner giving it, is sufficient for that purpose. 27. (1) Presumption of continuance after expiry of term – Where a partnership entered into for a fixed term is continued after the term has expired and without any express new agreement, the rights and duties of the partners remain the same as they were at the expiration of the term, so far as is consistent with the incidents of a partnership at will. (2) Arises from continuance of business – A continuance of the business by the partners or such of them as habitually acted therein during the term without any settlement or liquidation of the partnership affairs shall be presumed to be a continuance of the partnership. 28. Duty as to rendering accounts – Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or the partner’s legal representatives. 29. (1) Accountability for private profits – Every partner must account to the firm for any benefit derived by the partner without the consent of the other partners from any transaction concerning the partnership or from any use by the partner of the partnership property, name or business connection. (2) Extends to survivors and representatives of deceased – This section applies also to transactions undertaken after a partnership has been dissolved by the death of a partner and before its affairs have been completely wound up, either by a surviving partner or by the representatives of the deceased partner. 30. Duty of partner not to compete with firm – If a partner, without the consent of the other partners, carries on a business of the same nature as and competing with that of the firm, the partner must account for and pay over to the firm all profits made by the partner in that business. 31. (1) Rights of assignee of share in partnership – An assignment by a partner of the partner’s share in the partnership, either absolute or by way of mortgage or redeemable charge, does not, as against the other partners, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any accounts of the partnership transactions, or to inspect the partnership books, but entitles the assignee only to receive the share of profits to which the assigning partner would otherwise be entitled, and the assignee must accept the account of profits agreed to by the partners. (2) On dissolution – In the case of a dissolution of the partnership, whether as respects all the partners or as respects the assigning partner, the assignee is entitled to receive the share of the partnership assets to which the assigning partner is entitled as between the assigning partner and the other partners, and, for the purpose of ascertaining that share, to an account as from the date of the dissolution.

(ii) Relationships with Third Parties Casebook pp. 26-34

Five types of situation:

(i) Pre-partnership Liabilities

PA s. 18(1) – a person is not liable for anything done before he became a partner. Conversely, retirement does not exonerate from obligations incurred before retirement (s. 18(2)).

(ii) Liability as a Partner

Jointly liable for all debts and obligations incurred while a partner (s. 10).
This is independent of rights of contribution and indemnity under ss. 24.1 and 24.2.
Firm and partners will be liable if a partner “does an act for carrying on in the usual way business of the kind carried on by the firm of which he is a member” (s. 6).
Will only have valid defence for acts performed by other agents if he can show third party knew the person had no authority to bind the firm or did not know/believe him to be a partner.
s. 10 – joint liability, s. 13 – joint and several liability. Distinction between two types is anomalous. Difficulties largely overcome by s. 6(b).

(iii) “Holding out” Liability

A person may be held liable as a partner even if never a partner. S. 15.
See Tower Cabinet Co. v. Ingram (1949).

(iv) Liability of Apparent Partner

Person may continue to remain liable after retirement (PA, s. 36)
See Domination Sugar Co. v. Warrell.

(v) Registration Requirements

Partnerships Registration Act replaced with Business Names Act.

(vi) Procedural Aspects of Joint Liability

Kendall v. Hamilton – if a joint creditor of a firm obtains judgment in an action brought against one partner only, he loses his remedy against the other partners, although he did not know of the other partners when he recovered judgment and the judgment remains unsatisfied. Rule abolished in England but appears to still be in force in Ontario. However, under Rules of practice, proceedings gains two or more persons as partners may be commenced using firm name and order can be enforced against partner even if person not previously served with proceedings. See also s. 139 Courts of Justice Act.

Tower Cabinet Co. v. Ingram

Partner left firm and arranged that other partner should notify those dealing with firm of this. New notepaper was prepared without partners name on it. Order was sent out on old notepaper, despite the fact that remaining partner had no authority to use it. S. 14 not available, as Ingram did not knowingly suffer himself to be held out as a partner. S. 36 – where person deals with firm after a change in its constitution, he is entitled to treat all apparent members of the old firm as still being members of the firm until he has notice of the change; a partner who, not having been know to the person dealing with the firm to be a partner, retires from the firm, is not liable. The date from which this operates is the date of the dissolution – if person had no knowledge at or before that time that retiring person was a partner, s. 3 relieves from liability.

VanDuzer pp. 54-63

Unlike default rules governing relationships between partners, rules governing relationships between relationships between partnerships and third parties are mandatory.
Partnerships become liable in contract when someone who is an agent of the firm enters into a contract on its behalf.
Each partner is considered an agent of the firm (OPA, s. 6). Does not apply where partner has no authority to act and person with whom dealing knows this or does not know/believe her to be a partner.
No partnership liability for acts outside the usual scope of the partnership business.
OPA s. 11 – a partnership is liable for the torts and other wrongful acts/ omissions of its agents/ employees. Liability arise where partnerhip authorized/ratified wrong; firm is liable where the wrong was committed in the ordinary course of business. Firm is responsible for all damages to same extent as partner herself.
Partners may be liable for fraudulent acts of other partners.
Ernst & Young Inc. v. Falconi – estate of a partner in a law firm held liable for acts of another partner who helped clients with fraudulently disposing of their property. Held to be done in ordinary course of business – test is whether the unlawful acts are of the sort that would be within the scope of the partnership if done for legitimate as opposed to illegitimate purposes as seen from the perspective of the overall business of the partnership. Sufficient that assets and facilities of law firm used to performs services normally performed.
Dubai Aluminium Co. Ltd. v. Salaam – law firm partnership was liable for dishonest acts of one of the partners; question was not whether the dishonest conduct was specifically authorized by the firm, but whether the partner was authorized to engage in conduct of the same general kind as the dishonest conduct.
3464920 Canada Inc. v. Strother – liability of firm under the partnerships statutes is not limited to common law torts; includes breach of fiduciary duty etc.
All obligations of the firm are obligations of every partner who was a member of the firm at the time the obligation arose. Liability for torts is joint and several (s. 11, s. 13) while liability for debts and obligations is only joint (s. 10). However, distinctions between these two kinds of liability have been all but eliminated.
A partner is liable even though she may have a right to be indemnified by the partner who incurred the obligation; indemnification where a partner has paid a partnership obligation is provided for in the OPA.
Any right to indemnification is irrelevant because the purpose of imposing liability is to ensure that the third party is compensated. Liability for obligations continues after the partner leaves the firm (s. 18(2) and binds her estate (s. 10).

Holding out and related sources of liability

OPA s. 15 – a person may be held liable for the obligations of a partnership even though he was never a partner/not a partner at the time, if he was held out as a partner. E.g. use of person’s name in the firm name, on sign at premises, on invoices/letterhead. Person must knowingly permit – negligence or carelessness insufficient. Does not have to know that holding out was to particular person.
National Building Society v. Lewis – to establish liability, person who advanced credit must have relied on holding out in doing so. Client had relied on opinion, not on particular employee being a partner.
One of the most common situations in which this may occur is when a partner retires.
OPA – a retired partner is liable to every person who dealt with the firm prior to his retirement for obligations of the firm incurred after retirement unless (s. 36(1)) actual notice was given to the person; (s. 36(2)) the person never knew that the retiring partner was a partner; (s. 36(3) the partner left the firm because he became insolvent or died.
Persons who deal with a firm for the first time after a partner retires are entitled to hold liable any person who is an apparent member of the firm including a retired partner (s. 36(1)). However, retired partner not liable if a notice that the partner retired has been published in the Ontario Gazette (s. 36(2)). Also not liable to any person who did not know he was a partner (s. 36(3)).
Tower v. Ingram – name used on firm letterhead after retirement but without permission and contrary to express instructions – could not be held liable because no holding out for the purposes of s. 15, and in the absence of holding out s. 36(3) had the effect of insulating Ingram for all obligations occurred after his retirement to all persons who did not have knowledge that he was a partner prior to the date of his retirement – the plaintiff could have succeeded only if, prior to retirement, he had known that he was a partner in the firm. Being an apparent partner at the time the plaintiff first dealt with the firm was not enough.
Retiring person should make sure that all persons who had dealings with the firm prior to the date of retirement have actually received notice of departure; document instructions to remaining partners that notice is to be given to ensure liability based on holding out cannot be claimed; ensure that notice of retirement is published in the Ontario Gazette and the partnership’s registration under the OBNA is amended. Have name removed from firm name.

Partnerships Act ss. 6-19 Relation of Partners to Persons Dealing with Them 6. Power of partner to bind firm – Every partner is an agent of the firm and of the other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he or she is a member, bind the firm and the other partners unless the partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom the partner is dealing either knows that the partner has no authority, or does not know or believe him or her to be a partner. 7. Partners bound by acts on behalf of firm – An act or instrument relating to the business of the firm and done or executed in the firm name, or in any other manner showing an intention to bind the firm by a person thereto authorized, whether a partner or not, is binding on the firm and all the partners, but this section does not affect any general rule of law relating to the execution of deeds or negotiable instruments. 8. Partner using credit of firm for private purposes – Where one partner pledges the credit of the firm for a purpose apparently not connected with the firm’s ordinary course of business, the firm is not bound, unless he or she is in fact specially authorized by the other partners, but this section does not affect any personal liability incurred by an individual partner. 9. Effect of notice that firm not bound by act of partner – If it is agreed between the partners to restrict the power of any one or more of them to bind the firm, no act done in contravention of the agreement is binding on the firm with respect to persons having notice of the agreement. 10. (1) Liability of partners – Except as provided in subsection (2), every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while the person is a partner, and after the partner’s death the partner’s estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied, but subject to the prior payment of his or her separate debts. (2) Limited liability partnerships – Subject to subsections (3) and (3.1), a partner in a limited liability partnership is not liable, by means of indemnification, contribution or otherwise, for, (a) the debts, liabilities or obligations of the partnership or any partner arising from the negligent or wrongful acts or omissions that another partner or an employee, agent or representative of the partnership commits in the course of the partnership business while the partnership is a limited liability partnership; or (b) any other debts or obligations of the partnership that are incurred while the partnership is a limited liability partnership. 2006, c. 34, s. 19. (3) Limitations – Subsection (2) does not relieve a partner in a limited liability partnership from liability for, (a) the partner’s own negligent or wrongful act or omission; (b) the negligent or wrongful act or omission of a person under the partner’s direct supervision; or (c) the negligent or wrongful act or omission of another partner or an employee of the partnership not under the partner’s direct supervision, if, (i) the act or omission was criminal or constituted fraud, even if there was no criminal act or omission, or (ii) (ii) the partner knew or ought to have known of the act or omission and did not take the actions that a reasonable person would have taken to prevent it. (3.1) Same – Subsection (2) does not protect a partner’s interest in the partnership property from claims against the partnership respecting a partnership obligation. (4) Partner not proper party to action – A partner in a limited liability partnership is not a proper party to a proceeding by or against the limited liability partnership for the purpose of recovering damages or enforcing obligations arising out of the negligent acts or omissions described in subsection (2). (5) Extra-provincial limited liability partnerships – This section does not apply to an extra-provincial limited liability partnership. 11. Liability of firm for wrongs – Where by any wrongful act or omission of a partner acting in the ordinary course of the business of the firm, or with the authority of the co-partners, loss or injury is caused to a person not being a partner of the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act. 12. Misapplication of money or property received for or in custody of the firm – In the following cases, namely, (a) where one partner, acting within the scope of the partner’s apparent authority, receives the money or property of a third person and misapplies it; and (b) where 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, the firm is liable to make good the loss. R.S.O. 1990, c. P.5, s. 12. 13. Liability for wrongs joint and several – Except as provided in subsection 10 (2), every partner is liable jointly with the co-partners and also severally for everything for which the firm, while the person is a partner therein, becomes liable under section 11 or 12. 14. Improper employment of trust property for partnership purposes – If a partner, being a trustee, improperly employs trust property in the business or on the account of the partnership, no other partner is liable for the trust property to the persons beneficially interested therein, but, (a) this section does not affect any liability incurred by any partner by reason of the partner having notice of a breach of trust; and (b) nothing in this section prevents trust money from being followed and recovered from the firm if still in its possession or under its control. 15. (1) Persons liable by “holding out” – Every person, who by words spoken or written or by conduct represents himself or herself or who knowingly suffers himself or herself to be represented as a partner in a particular firm, is liable as a partner to any person who has on the faith of any such representation given credit to the firm, whether the representation has or has not been made or communicated to the persons so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made. (2) Continuing business after death of partner – Where after a partner’s death the partnership business is continued in the old firm name, the continued use of that name or of the deceased partner’s name as part thereof does not of itself make his or her executor’s or administrator’s estate or effects liable for any partnership debts contracted after his or her death. 16. Admissions and representations of partners – An admission or representation made by a partner concerning the partnership affairs and in the ordinary course of its business is evidence against the firm. 17. Notice to acting partner to be notice to the firm – Notice to a partner who habitually acts in the partnership business of any matter relating to partnership affairs operates as notice to the firm, except in the case of a fraud on the firm committed by or with the consent of that partner. 18. (1) Liability commences with admission to firm – A person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before the person became a partner. (2) Liability for debts, etc., incurred before retirement – A partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before the partner’s retirement. R.S.O. 1990, c. P.5, s. 18 (2). (3) Agreement discharging retiring partner – A retiring partner may be discharged from any existing liabilities by an agreement to that effect between the partner and the members of the firm as newly constituted and the creditors, and this agreement may be either express or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted. 19. Revocation of continuing guaranty by change in firm – A continuing guaranty or cautionary obligation given either to a firm or to a third person in respect of the transactions of a firm is, in the absence of agreement to the contrary, revoked as to future transactions by any change in the constitution of the firm to which, or of the firm in respect of the transaction of which, the guaranty or obligation was given. (c) Dissolution of the Partnership

VanDuzer pp. 66-68

May be dissolved in many ways under OPA – many of the provisions may be varied by agreement, changed to make the partnership more stable.
Under OPA, partnership will be terminated in the following circumstances:
If formed for a fixed term, on the expiry of the term (s. 32(a)).
If not formed for a fixed term, on notice by one partner to all the others (ss. 26 and 32(c))
If formed for a single venture or undertaking, on its termination (s. 32(b)) and
On the death or insolvency of any partner (s. 33(a)).
s. 33(b) contemplates that partners may agree that dissolution should occur if any partner permits his share of the partnership property to be charged for his personal debts.
s.34 termination occurs if it becomes illegal for the business of the partnership to be carried on or carried on by members of partnership.
Court may order dissolution on wide variety of grounds including mental incapacity of a partner, persistent breaches of partnership agreement, or when court is of opinion it is just and equitable to do so.
Landford Greens Ltd. v. 746470 Ontario Inc. (1993) – relatively high standard for exercise of court’s discretion to dissolve partnership on last ground – might so order where there has been a complete breakdown of mutual trust and confidence such as would preclude all hope of reconciliation or future cooperation or where the partners were deadlocked on how to operate the partnership.
s. 44 Ontario Act – skeleton process to deal with the settlement of claims needing to be dealt with on dissolution. Debts and liabilities to persons who are not partners are paid first out of the assets of the firm, then advances of partners, finally capital is returned. If any assets still remain, distributed to partners in proportion to claims to share in capital. Anything left over distributed to partners in accordance with entitlement to profits.

Partnerships Act, ss. 26, 32-44 26. (1) Retirement from partnership at will – Where no fixed term is agreed upon for the duration of the partnership, any partner may determine the partnership at any time on giving notice of his or her intention to do so to all the other partners. (2) Notice of retirement – Where the partnership was originally constituted by deed, a notice in writing, signed by the partner giving it, is sufficient for that purpose. Dissolution of Partnership 32. Dissolution by expiry of term or notice – Subject to any agreement between the partners, a partnership is dissolved, (a) if entered into for a fixed term, by the expiration of that term; (b) if entered into for a single adventure or undertaking, by the termination of that adventure or undertaking; or (c) if entered into for an undefined time, by a partner giving notice to the other or others of his or her intention to dissolve the partnership, in which case the partnership is dissolved as from the date mentioned in the notice as the date of dissolution, or, if no date is so mentioned, as from the date of the communication of the notice. 33. (1) Dissolution by death or insolvency of partner – Subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or insolvency of a partner. (2) Where partner’s share charged for separate debt – A partnership may, at the option of the other partners, be dissolved if any partner suffers that partner’s share of the partnership property to be charged under this Act for that partner’s separate debt. 34. By illegality of business – A partnership is in every case dissolved by the happening of any event that makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership. 35. By the court – On application by a partner, the court may order a dissolution of the partnership, (a) when a partner is found mentally incompetent by inquisition or is shown to the satisfaction of the court to be of permanently unsound mind, in either of which cases the application may be made as well on behalf of that partner by his or her committee or litigation guardian or person having title to intervene as by any other partner; (b) when a partner, other than the partner suing, becomes in any other way permanently incapable of performing the partner’s part of the partnership contract; (c) when a partner, other than the partner suing, has been guilty of such conduct as, in the opinion of the court, regard being had to the nature of the business, is calculated to prejudicially affect the carrying on of the business; (d) when a partner, other than the partner suing, wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself or herself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with the partner; (e) when the business of the partnership can only be carried on at a loss; or (f) when in any case circumstances have arisen that in the opinion of the court render it just and equitable that the partnership be dissolved. 36. (1) Rights of persons dealing with firm against apparent members – Where a person deals with a firm after a change in its constitution, the person is entitled to treat all apparent members of the old firm as still being members of the firm until the person has notice of the change. (2) Notice – An advertisement in The Ontario Gazette shall be notice as to persons who had not dealings with the firm before the dissolution or change so advertised. (3) Estate of dead or insolvent partner, how far liable – The estate of a partner who dies, or who becomes insolvent, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable for partnership debts contracted after the date of the death, insolvency, or retirement. 37. Right to give notice of dissolution – On the dissolution of a partnership or retirement of a partner, any partner may publicly give notice of the same, and may require the other partner or partners to concur for that purpose in all necessary or proper acts, if any, that cannot be done without his, her or their concurrence. 38. Continuing authority of partners for purposes of winding up – After the dissolution of a partnership, the authority of each partner to bind the firm and the other rights and obligations of the partners continue despite the dissolution so far as is necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise; provided that the firm is in no case bound by the acts of a partner who has become insolvent; but this proviso does not affect the liability of a person who has, after the insolvency, represented himself or herself or knowingly suffered himself or herself to be represented as a partner of the insolvent. 39. Rights of partners as to application of partnership property – On the dissolution of a partnership every partner is entitled, as against the other partners in the firm and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm, and for that purpose any partner or the partner’s representative may, on the termination of the partnership, apply to the court to wind up the business and affairs of the firm. 40. Apportionment of premium on premature dissolution – Where one partner paid a premium to another on entering into a partnership for a fixed term and the partnership is dissolved before the expiration of that term otherwise than by the death of a partner, the court may order the repayment of the premium, or of such part thereof as it thinks just, having regard to the terms of the partnership contract and to the length of time during which the partnership has continued, unless, (a) the dissolution is, in the judgment of the court, wholly or chiefly due to the misconduct of the partner who paid the premium; or (b) the partnership has been dissolved by an agreement containing no provision for a return of a part of the premium. 41. Rights where partnership dissolved for fraud or misrepresentations – Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled, (a) to a lien on, or right of retention of, the surplus of the partnership assets, after satisfying the partnership liabilities, for any sum of money paid by the party for the purchase of a share in the partnership and for any capital contributed by him or her; and (b) to stand in the place of the creditors of the firm for any payments made by the party in respect of the partnership liabilities; and (c) to be indemnified by the person guilty of the fraud or making the representation against all the debts and liabilities of the firm. 42. (1) Right of outgoing partner as to share in profits after dissolution – Where any member of a firm dies or otherwise ceases to be a partner and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his or her estate, then, in the absence of an agreement to the contrary, the outgoing partner or his or her estate is entitled, at the option of the outgoing partner or his or her representatives, to such share of the profits made since the dissolution as the court finds to be attributable to the use of the outgoing partner’s share of the partnership assets, or to interest at the rate of 5 per cent per annum on the amount of his or her share of the partnership assets. (2) Proviso as to option of remaining partners to purchase share – Where by the partnership contract an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner and that option is duly exercised, the estate of the deceased partner, or the outgoing partner or his or her estate, as the case may be, is not entitled to any further or other share of profits, but if any partner, assuming to act in exercise of the option, does not in all material respects comply with the terms thereof, he or she is liable to account under the foregoing provisions of this section. 43. Retiring or deceased partner’s share to be a debt – Subject to any agreement between the partners, the amount due from surviving or continuing partners to an outgoing partner or the representatives of a deceased partner in respect of the outgoing or deceased partner’s share, is a debt accruing at the date of the dissolution or death. 44. Rules for distribution of assets on final settlement of accounts – In settling accounts between the partners after a dissolution of partnership, the following rules shall, subject to any agreement, be observed: 1. Losses, including losses and deficiencies of capital, are to be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits, but a partner is not required to pay any loss arising from a liability for which the partner is not liable under subsection 10 (2). 2. The assets of the firm, including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, are to be applied in the following manner and order, (a) in paying the debts and liabilities of the firm to persons who are not partners therein; (b) in paying to each partner rateably what is due from the firm to him or her for advances as distinguished from capital; (c) in paying to each partner rateably what is due from the firm to him or her in respect of capital. 3. After making the payments required by paragraph 2, the ultimate residue, if any, is to be divided among the partners in the proportion in which profits are divisible.

(d) Partnership Agreements

VanDuzer pp. 68-76

Commonplace for partners to enter into written agreements to flesh out their relationship, to modify default provisions of provincial partnership legislation, to respond to mandatory provisions of the provincial partnership legislation, especially those providing for liability to third parties, by structuring the relations among partners to address liability and to create reporting monitoring and control mechanisms to manage liability risk.

Selected Elements of Partnership Agreements and Commentary

Name – a partnership may carry on business using any name it likes. Name raises issues in addition to question of whose name appears in the firm name.
Ownership issues – name of partnership forms part of the goodwill of the business and belongs to the partners. In the absence of some provision in the partnership agreement, each partner may be entitled to use the firm name in the event that there is a change in membership or dissolution of the partnership.
Liability Issues – use of person’s name as part of the firm name with his knowledge constitutes holding that person out as a partner within the meaning of provincial partnership statutes. If a person’s name is going to be used after she leaves, the remaining partners of the firm should agree to indemnify her against any such liability. This agreement will have no effect on her liability to third parties, but gives a right to recover any amount from former partners. No need for indemnity in case where partner dies because deceased’s estate not liable for obligations of the partnership after partner leaves.
Registration Issues – under some provincial laws e.g. Ontario Business Names Act, partners must register firm name. Advisable to make sure similar name not already in use (loss of goodwill if name-change, liability for passing-off/trade-mark infringement). Registration of same/deceptively similar name can give rise to claim for damages under the Ontario Business Names Act (s. 6).

Description of Business

Each partner is agent of partnership capable of binding the firm to obligations within the usual course of the firm’s business. Authority as an agent thus limited by nature of business. Scope of authority will be determined by what partnership actually does rather than by any limit in the partnership agreement (unless third party has knowledge).
But describing business in partnership agreement makes clear what activities are considered to be carried on – will help avoid disagreements in the future. Gives specific content to partner’s obligation to account for all benefits derived from any use by a partner of the partnership property, name or business connection and helps to avoid conflicts over what is personal and what is partnership income.
May also provide that partner will not engage in any other business without consent of other partners.
Legally, permitting activities that would otherwise be a breach of fiduciary duty allows the partner to engage in them without fear of being required to account for any profits made.
Describing business gives substance to non-competition obligations (s. 29 OPA – fiduciary obligation obliges partner not to compete with partnership business).
Partnership agreement can also provide that partners will not compete with business for period of time/in geographic area after they leave the partnership. So long as obligation is reasonable (limited to protecting legitimate commercial interests off the firm – Reservoir Group Partnership v. 1304613 Ontario Ltd. (2007)) it will be enforced.
Describing scope of the partnership business also provides the basis for the firm to claim against a partner for liabilities imposed on the firm as a result of unauthorized actions by the partner outside the firm’s defined business.

Membership of Partnership

OPA s. 24.7 unanimity requirement for admission of new partner often changed to some lesser degree of agreement. Also common to articulate criteria for admission.
Issues such as what capital contribution new partners will be required to make and how to determine the new partner’s interest in capital and share in profits should be addressed in the agreement.
OPA s. 25 prohibits expulsion of partner – agreement may provide for expulsion on the vote of a specified majority. May also set out other rules governing circumstances in which partners must leave, e.g. on breaching partnership agreement or becoming incapable of working full time. For each kind of withdrawal, should be provided that partnership is not dissolved and formula for payment of capital and profits established.

Capitalization

The amount contributed by the partners to the firm is called capital. In the absence of a specific agreement all partners share equally (OPA s. 24.1). Capital contributions and entitlements should be dealt with in partnership agreement.
Every partnership needs money for setting up, ongoing operating expenses. May be needed to e.g. buy new equipment, expand business. Partners need to agree on initial contributions and provide basis on which additional amounts will be contributed. Also circumstances in which capital may be withdrawn, process by which partner receives share of capital on leaving partnership.
OPA s. 24.3 and 24.4 – not entitlement to interest on capital, but 5% interest on capital over and above what they are committed to advance in partnership agreement unless otherwise agreed.

Arrangements regarding Profits and their Distribution

OPA s. 24.1: all profits are to be divided equally. This provision may be changed to allocate to each partner a share commensurate with the contribution to the firm both direct and indirect. Contributions typically considered include: capital, billable hours, non-billable hours, fees billed and collected, total billings to new clients introduced to the firm by the partner, total billings to clients of which the partner is in charge and business development. Most firms make an evaluation on an annual basis.

Management

OPA ss. 24.5 and 24/8: all partners entitled to participate in management including access to partnership books and decisions on ordinary matters to be made by majority, but decisions relating to nature of business must be unanimous.
These requirements usually replaced by decision-making structure reflecting economic interests of partners. Routine decision making typically delegated to committee/single partner/professional manager who is not a partner.
Rules regarding notice and quorum requirements for meeting swill usually be included in a partnership agreement.
Potential for creating liability may be reduced by authorization and reporting requirements, internal monitoring and control mechanisms.

Dissolution

Provincial laws permit partnerships to be dissolved easily and in a variety of ways. Partners may agree dissolution will not occur in many of the circumstances contemplated e.g. death, insolvency of partner, notice from a partner. May be replaced by provision requiring unanimous consent/specified majority. May agree on other events that will result in dissolution.
s. 44 OPA – deals with settlement of claims on dissolution. May be fleshed out in partnership agreement.

(e) Other Relationships (i) Joint Ventures Casebook pp. 34-40 Central Mortgage & Housing Corp. v. Graham

Joint adventures may be defined as an association of two or more individuals/corporations/partnerships for the purpose of carrying on a business venture. Almost invariably concerned with a single undertaking that does not continuously require the attention of every participant.
Joint venture founded entirely on an agreement between the parties – intention.
Central Mortgage was involved in the project from the start – proposed the idea, provided financing contribution by both parties of money, property, skill or knowledge to a common undertaking; there was a joint property interest in the subject matter of the joint venture (evidenced in mortgages); parties had mutual control and management; the arrangement was limited to one project; while there was not a mutual sharing of profits, there was a financial interest at stake. Therefore to the extent that one party in carrying on the venture incurred liabilities, both parties bound.
Later cases attempting to characterise relationship between mortgagor and mortgagee as amounting to joint venture have failed.

VanDuzer pp. 76-79

Used to describe relationship among persons who agree to combine their money, property, knowledge, skills, experience, time or other resources for some common purpose.
Set up for limited time, limited purpose, or both.
Used loosely to refer to all sorts of legal arrangements given effect in corporations, partnerships, contractual relationships.
Main issue – to what extent are the legal consequences associated with the joint venture outside those specifically provided for in the agreement creating the relationship.
Central Mortgage & Housing Corp. v. Graham – in a joint venture with the following characteristics, each of the joint venturers is responsible for all obligations of the joint venture, just as each partner is responsible for all obligations of a partnership:

o Contribution by both parties of money, property, skill or knowledge to a common undertaking; o Joint interest in the subject matter of the joint venture; o Mutual control and management; o Arrangement limited to one project; o Expectation of profit; and o Mutual sharing of profit.

NB this is the only Canadian case outside Nova Scotia in which a joint venture has been found to have partnership-like legal characteristics attributed to it. May be because if incidents of joint venture are present a partnership will be found in most cases.
Even if legal position not appropriately analogized to partnership, joint ventures may have more limited legal consequences.
Hogar Estates Ltd. v. Shebron Holdings Ltd. – may owe a fiduciary relationship to each other in relation to the activities of the joint venture. Means that joint venturers cannot put individual interests ahead of joint venture or disclose confidential information.
Wonsch Construction Co. v. Danzig Enterprises Ltd. – joint venture agreement to build and operate complex. Wonsch incurred debt during construction. Danzig negotiated assignment of debt owed by Wonsch and sued for full amount. Danzig owed a fiduciary duty to Wonsch which precluded it from, in effect, trying to make a profit from dealing in Wonsch’s debt incurred for the purposes of the joint venture.
Finding of fiduciary duty will be rare – only where one party is vulnerable in some way to the unilateral power or discretion of the other. Some inequality of bargaining power resulting in unfair agreement (Visagie v. TVX Gold Inc.).

Partnerships Act, ss. 2, 3, 32(b) 2. Partnership – Partnership is the relation that subsists between persons carrying on a business in common with a view to profit, but the relation between the members of a company or association that is incorporated by or under the authority of any special or general Act in force in Ontario or elsewhere, or registered as a corporation under any such Act, is not a partnership within the meaning of this Act. R.S.O. 1990, c. P.5, s. 2. 4. Rules for determining existence of partnership – In determining whether a partnership does or does not exist, regard shall be had to the following rules: 1. Joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof. 2. The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived. 3. The receipt by a person of a share of the profits of a business is proof, in the absence of evidence to the contrary, that the person is a partner in the business, but the receipt of such a share or payment, contingent on or varying with the profits of a business, does not of itself make him or her a partner in the business, and in particular, (a) the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make him or her a partner in the business or liable as such; (b) a contract for the remuneration of a servant or agent or a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such; (c) a person who, (i) was married to a deceased partner immediately before the deceased partner died, (ii) was living with a deceased partner in a conjugal relationship outside marriage immediately before the deceased partner died, or (iii) is a child of a deceased partner, and who receives by way of annuity a portion of the profits made in the business in which the deceased partner was a partner is not by reason only of such receipt a partner in the business or liable as such; (d) the advance of money by way of loan to a person engaged or about to engage in a business on a contract with that person that the lender is to receive a rate of interest varying with the profits, or is to receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such, provided that the contract is in writing and signed by or on behalf of all parties thereto; (e) a person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by him or her of the goodwill of the business, is not by reason only of such receipt a partner in the business or liable as such. R.S.O. 1990, c. P.5, s. 3; 1999, c. 6, s. 52; 2005, c. 5, s. 55. 32. Subject to any agreement between the partners, a partnership is dissolved… (b) if entered into for a single adventure or undertaking, by the termination of that adventure or undertaking… (ii) Limited Partnerships Casebook pp. 41-51

General Features of Ontario Limited Partnerships Act – partnership consisting of at least one general partner and one limited partner (s. 2(2)).
Formed by filing declaration under s. 3 LPA. Declaration need only set out name and address of firm and the names of the general and limited partners, the general nature of the business and the contributions made by each partner (s. 3(2)).
Declaration expires after 5 years but limited partnership not thereby dissolved – only have to pay extra fee (s. 3(4)).
Limited partner only liable to extend of his contribution (s. 9)
This protection is lost if he takes part in the control of the business (s. 13(1)).
Limited partner may advise as to the firm’s management (s. 12(2)(a)).
Transferability – s. 18 gives right to limited partner to assign his interest, but assignee only has limited rights unless all the other partners consent in writing to the assignment or the partnership agreement gives the assignor that power.
Withdrawal – s. 15 gives right to limited partner to receive the return of his contribution from the firm in four situations: (1) on dissolution; (2) if partnership agreement provides for it; (3) if no other procedure specified in partnership agreement, then on six months notice or (4) if all the partners consent to the return. However not entitled to withdraw contribution unless sufficient partnership assets to cover all or the partnership liabilities.
Dissolution – a limited partnership is dissolved upon the death, retirement or mental incompetence of a general partner or dissolution of a corporate general partner.
s. 21(a) and (b) – remaining general partners can continue the business.
s. 23(1)(b) – dissolution also occurs when all or the limited partners have withdrawn from the partnership.
s. 15(4) – limited partner can have partnership dissolved if return of contribution is not forthcoming on demand despite entitlement or if partnership assets are insufficient under s. 14(2)(a) and he would otherwise be entitled to be repaid his contribution.
Limited Partnerships and Taxation – under Income Tax Act, individual partners take their share of the partnership income or loss into account when computing their personal income for tax purposes. Where corporate investment vehicle is used, corporation pays tax on its actual/imputed profit, and shareholders pay taxes on dividends received by them from the corporation, often resulting in double taxation.
Special incentives – basic incentive in these schemes is the allowance of a rapid expensing for tax purposes of the cost of items which would otherwise be capitalized and offset against income over a much longer period of time, and by allowing any resulting tax losses to offset income of the taxpayer from other sources.
The Proper Law of Limited Partnerships – an LP formed under the laws of another jurisdiction will be recognized in Ontario subject to compliance with the statutory provisions (s. 25(1-4)) and must be kept up-to-date (s. 25(5-7)). NB s. 35 (penalties) and 27(1) (limited partner not liable as general partner if partnership carries on business without filling declaration and power of attorney) and s. 27(2) (laws of jurisdiction in which particular extra-provincial partnership was organized governs the liability of limited partners).
Apparently, nothing to prevent a limited partner from going “forum” shopping.
Investor Protection – s. 9-10 LPA purport to provide some basic protection for limited partners. Provincial securities commissions have imposed additional requirements – Ontario Securities Commission considers a limited partnership unit to be a “security”. Thus if there is a distribution and there is not exemption under the Act, compliance with the rigorous prospectus disclosure requirements will be necessary.

Haughton Graphic Ltd. v. Zivot

Sued two limited partners on the ground that in addition to exercising their rights and powers as limited partners, each took part in the control of the business within the meaning of s. 63 Alberta PA.
Zivot incorporated corporate general partner and thereafter controlled it. Masthead of limited partnership showed him as “president”. He was also a limited partner. Marshall was “executive vice-president”.
Zivot was responsible for all mamnagerial decisions; Marshall made many of the mamagerial decisions in sales and administration. Both had authority ot sign cheques. They were in complete control of the partnership.
No specific requirement of reliance.

Nordile Holdings Ltd. v. Breckenridge (1992)

Similar facts in that defendants operated dual positions as limited partners and as shareholders and officers of the general partners.
Clearly took part in management.
Also rejected “specific reliance” analysis.
Trial judge exonerated defendants because of an exclusionary provision in a statutory disclosure statement supplied to the plaintiff before the transaction.
Court of Appeal held that defendants had acted in management of the limited partnership “solely” in their capacities as directors and officers of the general partner.

VanDuzer pp. 79-86

Specialized vehicle for those who want to be able to share in partnership profits but limit their liability for partnership losses. Generally passive investment.
In Ontario, governed by Limited Partnerships Act (OLPA) and, to the extent that it is silent, but the OPA (ss. 45 and 46) and common law.
Must consist of at least one general partner with unlimited liability and one limited partner with limited liability (OLPA, s. 2(2)).
Do not come into existence simply by virtue of persons carrying on business; a declaration must be filed with the registrar appointed under the Business Names Act (OLPA, s. 3). Declaration expires after five years unless renewed. Expiry does not terminate the limited partnership, but an additional fee must be paid for renewal (OLPA, s. 3(3)).
The limited partnership does not have separate legal existence.
General partner has all the rights and powers and subject to same restrictions and unlimited personal liability as a partner in a general partnership, subject to constraints designed to protect limited partners (OLPA, s. 8).
Limited partners have narrowly defined rights. Liability limited to extent of contribution (OLPA, s.9).
Limited partners have right to share in profits and have contribution returned (OLPA, ss. 11 and 15).
Same rights as general partner to inspect books, get full and true information and be given complete and formal account of partnership affairs, obtain dissolution by court order.
If interests are to be distributed to public for purposes of provincial securities laws, requirements of such laws must be met e.g. prospectus prepared.
Limited partner cannot hold security interest in assets, receive anything from limited partnership if it’s insolvent.
Limited partner may be employee (OLPA, s. 12).
Participation in management is subject to restrictions – may enquire into state of progress and advise as to management (OLPA, s. 12(2)(a)), but if takes part in control (s. 13(1)) or allows name to be used in firm name (s. 6(2)), loses limited liability.
Haughton Graphic Ltd. v. Zivot – general partner was corporation, limited partner was president of corporation and shareholder. In capacity as president, acted as manager of limited partnership. Court held he was liable as general partner because took part in control of limited partnership business. Any time a limited partner was an employee/officer/director of corporate general partner and took control in business, would be liable as general partner. Has not been followed.
Nordile Holdings Ltd. v. Breckenbridge – where individual limited partners act only in capacities as directors/officers of corporate general partner, they are not liable as general partners.
Limited partners interest is transferable, but transferee only has full rights as substituted limited partner if all partners consent or transfer is in accordance with partnership agreement (s. 18).
Limited partner has right to repayment of investment on dissolution of limited partnership; at time specified in partnership agreement; on six months notice if no time specified; with unanimous consent of all partners (s. 15(1)).
No return of investment may occur if not enough assets to pay all creditors (s. 15(2)).
Dissolution occurs in same circumstances as general partnership (death, incompetence, retirement of general partner) unless at least one general partner remains, the partnership agreement provides for continuation, and all partners agree to continue (s. 21).
Limited partner is entitled to have partnership dissolved if (i) limited partner’s contribution is not returned when it is required to be or (ii) the liabilities of the limited partnership are not paid or the assets are not enough to pay the liabilities (s. 15(4)).
Declaration of dissolution must be filed when dissolved/on withdrawal of all limited partners (s. 23).
Dissolution may occur by court order under s. 35 OPA.
Person can be both general and limited partner (s. 5(1).
Limited partnerships formed under laws of one province must register if they carry on business in another (s. 25).
Penalties if do not register e.g. s. 35 but do not lose limited liability (s. 27).

Tax Effects

Common reason to invest in limited partnership is to receive a share of the tax losses.

Limited Partnerships Act, ss. 2-5, 8-12, 14, 17, 22, 24-6, 32 2. (1) Limited partnership - A limited partnership may, subject to this Act, be formed to carry on any business that a partnership without limited partners may carry on. (2) Whom to consist - A limited partnership shall consist of one or more persons who are general partners and one or more persons who are limited partners.

3. (1) Formation - A limited partnership is formed when a declaration is filed with the Registrar in accordance with this Act.

(2) Declaration - A declaration shall be signed by all of the general partners desiring to form a limited partnership and shall state the prescribed information.

(3) Expiry of declaration - Every declaration filed under subsection (1), including a declaration filed by an extra-provincial limited partnership, expires five years after its date of filing unless the declaration is cancelled by filing a declaration of dissolution or the declaration is replaced by filing a new declaration before the expiry date.

(4) Subsequent filing - A limited partnership is not dissolved if a declaration expires, but an additional fee in the required amount is payable for the subsequent filing of a new declaration.

3.1 Repealed: 2004 4. (1) Record of limited partners - The general partners of every limited partnership other than an extra-provincial limited partnership shall maintain a current record of the limited partners stating, for each limited partner, the prescribed information.

(2) Where record to be kept - The record of limited partners shall be kept at the limited partnership’s principal place of business in Ontario. R.S.O. 1990, c. L.16, s. 4 (2). (3) Rights to inspect - Upon request and without charge, any general partner must permit any person to inspect the record of limited partners during the normal business hours of the limited partnership and to make copies or take extracts from them.

(4) Registrar may require copy of record - The Registrar may at any time by written notice require any general partner to provide to the Registrar or any other person a copy of the record of limited partners.

(5) Copy of record to be provided - Upon receipt of the Registrar’s notice, the general partner to whom it is directed shall, within the time specified in the notice, provide a copy of the record of limited partners to the Registrar or any other person specified in the notice.

5. (1) General and limited partners - A person may be a general partner and a limited partner at the same time in the same limited partnership. Idem (2) A person who is at the same time a general partner and a limited partner in the same limited partnership has the rights and powers and is subject to the restrictions and liabilities of a general partner except that in respect of the person’s contribution as a limited partner the person has the same rights against the other partners as a limited partner. R.S.O. 1990, c. L.16, s. 5 (2). 8. Rights of general partners - A general partner in a limited partnership has all the rights and powers and is subject to all the restrictions and liabilities of a partner in a partnership without limited partners except that, without the written consent to or ratification of the specific act by all the limited partners, a general partner has no authority to, (a) do any act in contravention of the partnership agreement; (b) do any act which makes it impossible to carry on the ordinary business of the limited partnership; (c) consent to a judgment against the limited partnership; (d) possess limited partnership property, or assign any rights in specific partnership property, for other than a partnership purpose; (e) admit a person as a general partner; (f) admit a person as a limited partner, unless the right to do so is given in the partnership agreement; or (g) continue the business of the limited partnership on the death, retirement or mental incompetence of a general partner or dissolution of a corporate general partner, unless the right to do so is given in the partnership agreement. R.S.O. 1990, c. L.16, s. 8. 9. Liability of limited partner - Subject to this Act, a limited partner is not liable for the obligations of the limited partnership except in respect of the value of money and other property the limited partner contributes or agrees to contribute to the limited partnership, as stated in the record of limited partners.

10. Rights of limited partner - A limited partner has the same right as a general partner, (a) to inspect and make copies of or take extracts from the limited partnership books at all times; (b) to be given, on demand, true and full information concerning all matters affecting the limited partnership, and to be given a complete and formal account of the partnership affairs; and (c) to obtain dissolution of the limited partnership by court order.

11. (1) Share of profits - A limited partner has, subject to this Act, the right, (a) to a share of the profits or other compensation by way of income; and (b) to have the limited partner’s contribution to the limited partnership returned.

(2) When profit may not be paid - No payment of a share of the profits or other compensation by way of income shall be made to a limited partner from the assets of the limited partnership or of a general partner if the payment would reduce the assets of the limited partnership to an amount insufficient to discharge the liabilities of the limited partnership to persons who are not general or limited partners.

12. (1) Business dealings by limited partner with partnership - A limited partner may loan money to and transact other business with the limited partnership and, unless the limited partner is also a general partner, may receive on account of resulting claims against the limited partnership with general creditors a prorated share of the assets, but no limited partner shall, in respect of any such claim, (a) receive or hold as collateral security any of the limited partnership property; or (b) receive from a general partner or the limited partnership any payment, conveyance or release from liability if at the time the assets of the partnership are not sufficient to discharge partnership liabilities to persons who are not general or limited partners. 14. (1) Limited partners’ rights as between themselves - Subject to subsection (2), limited partners, in relation to one another, share in the limited partnership assets, (a) for the return of contributions; and (b) for profits or other compensation by way of income on account of their contributions, in proportion to the respective amounts of money and other property actually contributed by the limited partners to the limited partnership. R.S.O. 1990, c. L.16, s. 14 (1). (2) Priority agreement - Where there are several limited partners, the partners may agree that one or more of the limited partners is to have priority over other limited partners, (a) as to the return of contributions; (b) as to profits or other compensation by way of income; or (c) as to any other matter, but the terms of this agreement shall be set out in the partnership agreement. (3) Idem - Where the partnership agreement does not contain an agreement referred to in subsection (2), the shares of the limited partners in the partnership assets shall be determined in accordance with subsection (1).

17. Admission of additional limited partners - After the formation of the limited partnership, additional limited partners may be admitted by amendment of the record of limited partners.

22. (1) Death of limited partner - The executor or administrator of the estate of a limited partner has, (a) all the rights and powers of a limited partner for the purpose of settling the estate of the limited partner; and (b) whatever power the limited partner had under the partnership agreement to constitute the limited partner’s assignee a substituted limited partner. 24. Settling accounts on dissolution - In settling accounts after the dissolution of a limited partnership, the liabilities of the limited partnership to creditors, except to limited partners on account of their contributions and to general partners, shall be paid first, and then, unless the partnership agreement or a subsequent agreement provides otherwise, shall be paid in the following order: 1. To limited partners in respect of their share of the profits and other compensation by way of income on account of their contributions. 2. To limited partners in respect of their contributions. 3. To general partners other than for capital and profits. 4. To general partners in respect of profits. 5. To general partners in respect of capital. R.S.O. 1990, c. L.16, s. 24. 25. (1) Declaration - No extra-provincial limited partnership shall carry on business in Ontario unless it has filed a declaration with the Registrar that sets forth the information required by subsection 3 (2) and states the jurisdiction in which the extra-provincial limited partnership is organized.

(2) Carry on business - For the purposes of this section, an extra-provincial limited partnership carries on business in Ontario if, (a) it solicits business in Ontario; (b) its name is listed in a telephone directory for any part of Ontario; (c) its name is included in any advertisement in which an address in Ontario is given for the limited partnership; (d) it has a resident agent or representative or a warehouse, office or place of business in Ontario; (e) it owns real property situate in Ontario; (f) it effects a distribution of securities in Ontario by way of a prospectus or offering memorandum in compliance with the Securities Act and the regulations made thereunder; or (g) it otherwise carries on business in Ontario. (3) Signing of declaration - The declaration filed under subsection (1) shall be signed by all of the general partners.

(4) Power of attorney - An extra-provincial limited partnership shall execute a power of attorney in the prescribed form appointing a person resident in Ontario or a corporation having its head or registered office in Ontario to be the attorney and representative in Ontario of the extra-provincial limited partnership.

(5) Same - The attorney and representative in Ontario of the extra-provincial limited partnership shall keep the power of attorney referred to in subsection (4) at its address set out in the declaration filed under subsection (1). (6) Same - Upon request and without charge, the attorney and representative shall permit any person to inspect the power of attorney during the normal business hours of the attorney and representative and to make a copy of it.

(6.1) Change of firm name - Where there is a change in the firm name of an extra-provincial limited partnership, a new declaration shall be filed with the Registrar under this section.

(6.2) Exemption - Subsections (4), (5) and (6) do not apply to an extra-provincial limited partnership formed in another Canadian jurisdiction that has an office or other place of business in Ontario.

(7) Declaration of change - An extra-provincial limited partnership shall file a declaration of change with the Registrar for every change in the information, other than a change in the firm name, contained in the declaration filed under subsection (1) and the declaration shall be signed in the manner described in section 19.

(8) Declaration of withdrawal - An extra-provincial limited partnership may cancel the declaration and the power of attorney by filing with the Registrar a declaration of withdrawal signed by at least one of the general partners.

26. (1) Record of limited partners - The general partners of every extra-provincial limited partnership that has filed a declaration under subsection 25 (1) shall maintain a current record of the limited partners stating, for each limited partner, the prescribed information.

(2) Where record to be kept - Subject to subsection (3), the record of limited partners shall be kept at the limited partnership’s principal place of business in Ontario.

(3) Idem - If an extra-provincial limited partnership does not have a principal place of business in Ontario, the record of limited partners shall be kept by the attorney and representative in Ontario of the extra-provincial limited partnership at the address stated in the power of attorney filed under subsection 25 (4).

(4) Right to inspect - Any person may inspect the record of limited partners during the normal business hours of the limited partnership or the limited partnership’s attorney and representative and may make copies of and take extracts from it.

(5) Registrar may require copy of record - The Registrar may at any time by written notice require any general partner or a limited partnership’s attorney and representative to provide to the Registrar or any other person a copy of the record of limited partners.

(6) Copy of record to be provided - Upon receipt of the Registrar’s notice, the person to whom it is directed shall, within the time specified in the notice, provide a copy of the record of limited partners to the Registrar or other person specified in the notice.

32. (1) Authority to sign - A general or limited partner may give written authority to any other person to sign on the partner’s behalf any document referred to in this Act.

(2) Idem - A person who signs a document to be filed with the Registrar under an authority referred to in subsection (1) shall indicate in the document that the person signs on behalf of a general or limited partner. (iii) Limited Liability Partnerships Casebook pp. 51-53

In UK, LLP has separate legal personality and unlimited capacity.
In Ontario partners continue to have joint and several liability for the partnerships contractual debts, for liability arising out of a partner’s fraudulent conduct or breach of trust or fiduciary obligations and for strict liabilities arising by operation of law.
Provisions in Alberta more expansive. S. 44.4 provides that an extra-provincial LLP will be recognized in Ontario and governed by the partnership law under which it was formed but must register its name under the BNA.
Four pre-conditions – ss. 44.1-44.3 – (a) there must be a written agreement between two or more persons designating their partnership as an LLP to be governed by the OPA; (b) the partnership is formed to carry on a profession governed by an act that permits practice of the profession by an LLP, and the governing body of which profession requires its members to maintain a minimum amount of liability insurance; (c) the LLP’s name is registered under the OBNA; and (d) the LLP’s name must include the words “LLP”, “L.L.P.” or “s.r.l.” as a suffix to the partnership’s name.

VanDuzer pp. 63-66

Most Canadian jurisdictions have amended partnership laws to allow some professional partnerships to limit the liability of individuals.
Alberta approach is that individuals are not personally liable unless wrong committed under supervision/ inadequate supervision/knew of act omission. The firm remains liable for such acts or omissions.
In an Ontario limited liability partnership, an individual partner is not liable for “debts obligations and liabilities of the partnership or any partner arising out of negligent or wrongful acts or omissions that another partner, employee, agent, or representative commits in the course of the partnership business (s. 10(2) OPA) or any other “debts or obligations” of the partnership. Does not relieve liability for own negligent/ wrongful act/ omission; nor does it apply to actions of a person under the partner’s general supervision. Even if not under direct supervision, partner may be liable in two circumstances:

o The act of omission of the partner/employee is criminal/constitutes fraud (even if no criminal act/omission); or o The partner knew or ought to have known of the act/omission and did not take the actions that a reasonably prudent person would have taken to prevent it (s. 10(3) OPA).

Person must take following actions to become LLP:

o Partners must sign agreement designating the partnership as a limited liability partnership; o The business of the partnership is the practice of a profession governed by a statute which permits a LLP to practice the profession; o The governing body of the profession requires the partnership to carry a minimum amount of liability insurance; o The partnership is registered under the Business Names Act; and o The partnership name contains the words “limited liability partnership”, “LLP”, “L.L.P.”, or French equivalents.

Partnerships Act ss. 10, 44.1-44.4 10. (1) Liability of partners - Except as provided in subsection (2), every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while the person is a partner, and after the partner’s death the partner’s estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied, but subject to the prior payment of his or her separate debts.

(2) Limited liability partnerships - Subject to subsections (3) and (3.1), a partner in a limited liability partnership is not liable, by means of indemnification, contribution or otherwise, for, (a) the debts, liabilities or obligations of the partnership or any partner arising from the negligent or wrongful acts or omissions that another partner or an employee, agent or representative of the partnership commits in the course of the partnership business while the partnership is a limited liability partnership; or (b) any other debts or obligations of the partnership that are incurred while the partnership is a limited liability partnership. (3) Limitations - Subsection (2) does not relieve a partner in a limited liability partnership from liability for, (a) the partner’s own negligent or wrongful act or omission; (b) the negligent or wrongful act or omission of a person under the partner’s direct supervision; or (c) the negligent or wrongful act or omission of another partner or an employee of the partnership not under the partner’s direct supervision, if, (i) the act or omission was criminal or constituted fraud, even if there was no criminal act or omission, or (ii) the partner knew or ought to have known of the act or omission and did not take the actions that a reasonable person would have taken to prevent it. (3.1) Same - Subsection (2) does not protect a partner’s interest in the partnership property from claims against the partnership respecting a partnership obligation.

(4) Partner not proper party to action - A partner in a limited liability partnership is not a proper party to a proceeding by or against the limited liability partnership for the purpose of recovering damages or enforcing obligations arising out of the negligent acts or omissions described in subsection (2).

(5) Extra-provincial limited liability partnerships - This section does not apply to an extra-provincial limited liability partnership.

Limited Liability Partnerships 44.1 (1) Formation - A limited liability partnership that is not an extra-provincial limited liability partnership is formed when two or more persons enter into a written agreement that, (a) designates the partnership as a limited liability partnership; and (b) states that this Act governs the agreement.

(2) Continuance - A partnership may be continued as a limited liability partnership that is not an extra-provincial limited liability partnership if all of the partners, (a) enter into an agreement that continues the partnership as a limited liability partnership and states that this Act governs the agreement; or (b) if there is an existing agreement between the partners that forms the partnership, amend the agreement to designate the partnership as a limited liability partnership and to state that this Act governs the agreement.

(3) Effect of continuance - Upon the continuance of a partnership as a limited liability partnership under subsection (2), (a) the limited liability partnership possesses all the property, rights, privileges and franchises and is subject to all liabilities, including civil, criminal and quasi-criminal, and all contracts, disabilities and debts of the partnership which were in existence immediately before the continuance; and (b) all persons who were partners immediately before the continuance remain liable for all debts, obligations and liabilities of the partnership or all partners with respect to the other partners that arose before the continuance.

44.2 Limitation on business activity - A limited liability partnership may carry on business in Ontario only for the purpose of practising a profession governed by an Act and only if, (a) that Act expressly permits a limited liability partnership to practise the profession; (b) the governing body of the profession requires the partnership to maintain a minimum amount of liability insurance; and (c) the partnership complies with section 44.3 if it is not an extra-provincial limited liability partnership or section 44.4 if it is an extra-provincial limited liability partnership.

44.3 (1) Business name - No limited liability partnership formed or continued by an agreement governed by this Act shall carry on business unless it has registered its firm name under the Business Names Act.

(2) Amendments, cancellations and renewals - To amend, renew or cancel a registration of its firm name, a limited liability partnership mentioned in subsection (1) shall register an amendment, renewal or cancellation of a registration in accordance with the requirements of the Business Names Act.

(3) Firm name - The firm name of a limited liability partnership mentioned in subsection (1) shall contain the words “limited liability partnership” or “société à responsabilité limitée” or the abbreviations “LLP”, “L.L.P.” or “s.r.l.” as the last words or letters of the firm name.

(3.1) Same - A limited liability partnership mentioned in subsection (1) may have a firm name that is in, (a) an English form only; (b) a French form only; (c) a French and English form, where the French and English are used together in a combined form; or (d) a French form and an English form, where the French and English forms are equivalent but are used separately.

(3.2) Same - A limited liability partnership mentioned in subsection (1) that has a firm name described in clause (3.1) (d) may be legally designated by the French or English version of its firm name.

(4) Use of registered name only - No limited liability partnership mentioned in subsection (1) shall carry on business under a name other than its registered firm name.

(5) Right to carry on business outside of Ontario - Nothing in this Act prevents a limited liability partnership mentioned in subsection (1) from carrying on its business and exercising its powers in any province or territory of Canada or any other country.

44.4 (1) Extra-provincial limited liability partnerships - No extra-provincial limited liability partnership shall carry on business in Ontario unless it has registered its firm name under the Business Names Act.

(2) Amendments, cancellations and renewals - To amend, renew or cancel a registration of its firm name, an extra-provincial limited liability partnership shall register an amendment, renewal or cancellation of a registration in accordance with the requirements of the Business Names Act.

(3) Use of registered name only - No extra-provincial limited liability partnership shall carry on business under a name other than its registered firm name.

(4) Laws of other jurisdiction - The laws of the jurisdiction under which an extra-provincial limited liability partnership is formed shall govern, (a) its organization and internal affairs; and (b) the liability of its partners for debts, obligations and liabilities of or chargeable to the partnership or any of its partners.

(5) Service - A person may serve a notice or document on an extra-provincial limited liability partnership at its Ontario place of business, if any, or its address required to be maintained under the laws of the jurisdiction of formation or its principal office address. III – The Corporation (a) Introduction (i) General VanDuzer pp. 90-98

History – registration v. letters patent approach (discretionary act of Crown).
In 1967 Ontario legislature abandoned letters patent system in favour of a registration system, effected by filing simple document called “articles of incorporation”.
In 1975 federal government implemented its own new corporate law statute: the Canada Business Corporations Act (CBCA). Articles of incorporation approach like Ontario but greater protection of minority shareholders.
In 1982 Ontario enacted legislation which mostly mirrored federal legislation.
Ontario made substantial changes to its Business Corporations Act effective 1 August 2007.
Incorporation upon registration of certain documents – no exercise of government discretion.
Articles of incorporation approach – much of structure of corporation provided by statute c.f. memorandum and articles of association in which these are considered to be contract between corporation and shareholders.
Shareholders of corporations incorporated under the articles of incorporation statutes may not commence a civil suit for breach of the articles but must rely on the statutory remedies provided.
Securities law forms a fundamentally important complement to corporate law, especially for corporations whose shares are traded in public markets. Securities laws deal with requirements for corporate governance structures, standards for director behaviour, and disclosure of information to shareholders.

(ii) Constitutional Matters (Division of Powers, The Charter)

Casebook pp. 62-64, 160-162

No specific provision in Constitution Act 1867-2002 generally enabling the federal government to incorporate companies.
Citizens Insce. Co. of Canada v. Parsons (1881-2) – Privy Council found the jurisdiction in the “Peace, Order and Good Government” clause of s. 91 Constitution Act. Since provinces restricted in their jurisdiction to the “incorporation of companies with provincial objects (s. 92(11)), it followed that the incorporation of companies for objects other than provincial falls within the general powers of the parliament of Canada.
Apart from residuary power, federal government also has ancillary incorporation powers under several of the specific heads of s. 91, e.g. s. 91(15) relating to banks and banking.
Provinces enjoy express incorporation powers by virtue of s. 92(11) Constitution Act.
Bonanza Creek Gold Mining Co. v. R. – meaning of “with provincial objects” – a province could not endow a provincial corporation with the right to carry on its activities in another jurisdiction but that it did not preclude a province from conferring to tohe corporation the capacity or power to carry on business elsewhere if the extra-provincial jurisdiction was willing to allow it to do so.
Thus provincially incorporated company enjoys almost as much mobility as federally incorporated one.
However, federally incorporated companies cannot be prevented from commencing business in a province before they have complied with provincial registration or filing requirements and paid a fee.
Extent to which federal corporations are subject to provincial regulation depends on characterization of provincial legislation – if solely of corporate character, will be ineffectual, but if has double character (e.g. affects property or civil rights) it will be valid so long as it does not conflict with the federal legislation.
Multiple Access Ltd. v. McCutcheon – a mere duplication or overlap is not sufficient: there must be actual conflict to trigger paramountcy doctrine.
Can. Indemnity Co. v. A.G. B.C. – provincial legislation can sterilize the business activity of a federal corporation assuming the legislation is otherwise a legitimate exercise of provincial power under s. 92(13), so long as the laws do not enter the field of company law and in that field encroach upon the status and powers of a federal company as such.

Impact of the Charter

Can corporations invoke the protection of the Charter, and to what extent?
Charter refers to “everyone” (ss. 2, 7, 8, 9, 10, 12, 17), “every citizen” (ss. 3, 6), “every person who has the status of a permanent resident” (s. 6(2)), “any person” (ss. 11, 19), “individual” (s. 15) and “anyone” (s. 24).
Sapinker v. Law Society of Upper Canada – SCC held that federal and provincial interpretation do not apply to the Charter.
Hogg – many rights contained in the Charter “would be seriously attenuated if they did not apply to corporations”.
S. 2(b) right to “freedom of the press and other media” seems particularly applicable to corporations; would also seem irrational to restrict to natural persons the right to a fair trial (s. 11) or the right against unreasonable search and seizure (s. 8).
Some rights by nature inapplicable to corporations.
R. v. Big M Drug Mart Ltd. – right to “freedom of conscience and religion (s. 2(a)) does not apply to corporations.
Irwin Toy Ltd. c. Quebec (Procureur general) – s. 7 right of everyone not to be deprived of “life, liberty and security of the person” contrary to the tenets of fundamental justice relates to the interests of individual human beings.
Corporations cannot be arrested, detained, asked to testify (no protection against arbitrary imprisonment under s. 9, arrest-related rights under s. 10 or procedural rights under s. 11).
Equality right in s. 15 conferred on every individual have been understood to be restricted to natural persons; however SCC has avoided deciding whether corporations are entitled to invoke equality rights and has usually decided such cases on other grounds.
Standing – a corporation will have standing to invoke the Charter if rights infringed by legislation/actions of the Crown.
Big M Drug Mart – defendant corporation successfully challenged a law prohibiting the selling of goods on a Sunday by invoking right to freedom of religion. Held that although s. 2(a) did not apply to corporations, the corporation could invoke the right as a defence to a criminal charge because “no one can be convicted of an offence under an unconstitutional law.
Irwin Toy – court distinguished Big M Drug Mart since this was a civil suit and no criminal charge pending.
Canadian Egg Marketing Agency v. Richardson – federal agency brought a civil suit requesting injunction against two corporations violate federal law by selling eggs outside the territory of production. SCC held that the defendant corporations had standing to invoke mobility rights (right to peruse gaining of livelihood in any province”) and freedom of association (s. 2(d)) in defending the suit, although such rights not enjoyed by corporations. Even though the corporations did not face criminal charges, they were brought to court involuntarily and faced with coercive power of the state and therefore should be permitted to make the constitutional arguments.

VanDuzer 98-112

s. 92(11) Constitution Act, 1867 – provinces have jurisdiction over the “Incorporation of Companies with Provincial Objects”.
Provinces can and do incorporate corporations with no restriction on what they can do or where – but not capable of granting right to carry on business in another jurisdiction, just capacity. But routinely granted under extra-provincial licensing regimes. Discretionary, but rarely refused.
Constitution Act, 1867, grants federal government limited powers to incorporate corporations operating in specific fields such as banks, but no express general power of incorporation.
Citizens Insurance Co. of Canada v. Parsons – such a power was implicit in residual jurisdiction to make “Laws for the Peace, Order and good Government of Canada”.
Federally incorporated corporations have a right to carry on business in each province – cannot be barred for any reason. However, required to file information similar to that required of a provincial corporation in an application for an extra-provincial licence, so in practice often little difference.
Provinces cannot legislate solely in relation to the status or powers of a federal corporation. They can legislate to affect directly the way in which federal corporations exercise their powers if (i) the legislation can be justified as primarily in relation to a provincial head of jurisdiction ins s. 92 Constitution Act, 1867 and (ii) the legislation is not inconsistent with federal law.
If second requirement not met, provincial law will be ineffective to extend of inconsistency based on doctrine of paramountcy.
E.g. name registration statutes can be valid (Reference Re Constitution Act).
If laws are within one of the enumerated heads of s. 92 they may indirectly affect the way a federal corporation carries on business even if the indirect effects extend to sterilizing the federal corporation.
E.g. scheme that precluded private insurance companies from offering automobile insurance in the province (Canadian Indemnity Co. v. British Columbia (Attorney General).
Provinces can regulate most aspects of business activities, including the ability to sell securities, relations with employees and contracts.
Hogg – federal government may not regulate provincial corporations directly in relation to their corporate status or characteristics. It may, however, directly affect the way in which provincial corporations exercise their powers if the legislation can be justified as primarily in relation to an area of jurisdiction assigned to the federal government.
Both provincial and federal governments have broad jurisdiction to regulate corporations operating outside the Canadian province or foreign jurisdiction in which they were incorporated. Provincial government competent to legislate in ways that affect the status and characteristics of extra-provincial corporation for the purposes of its operations within the province. Federal government may legislate so as to affect status and characteristics of foreign/provincial corporation operating outside its jurisdiction of incorporation. In each case legislation would have to be otherwise within the constitutional power of the legislating government.

Application of the Charter to Corporations

To what extent does the corporations separate legal personality mean that a corporate person has rights under the Charter?
Charter refers to “everyone” (ss. 2, 7, 8, 9, 10, 12, 17 – fundamental freedoms; life, liberty security of person; unreasonable search and seizure; arbitrary detention/imprisonment; rights on arrest; right not to be subject to cruel and unusual treatment), “every citizen” (ss. 3, 6 – voting, right to enter/leave Canada), “every person who has the status of a permanent resident” (s. 6(2) – mobility rights), “any person” (ss. 11, 19 – rights on being charged, language used in court), “individual” (s. 15 – equality rights) and “anyone” (s. 24 – right to seek a remedy).
Courts ask first whether corporation falls within defined class or right holders. If so, purposive analysis to determine if right is one that can be exercised by a corporation. Then s. 1 analysis.
Corporation cannot obtain citizenship so cannot benefit from rights conferred on citizens.
Parkdale Hotel Ltd. v. Canada (A.G.) – person in s. 6(2) did not include corporation on the basis that purpose of provision was not protection of corporations.
Some courts have held s. 11 rights can be exercised by corporations, but content of the rights is weaker.
R. v. Big M Drug Mart Ltd. – cannot enjoy freedom of religion.
Irwin Toy Ltd. v. Quebec (Attorney General) – but do enjoy freedom of expression.
Canadian Egg Marketing Agency v. Richardson – right to associate was treated as a right that could be exercised by the corporation, but egg marketing found not to be protected by that right.
Irwin Toy – because cannot be imprisoned, lose life, no right to life, liberty, security.
R. v. Agat Laboratories Ltd. – corporate accused does have right to make full answer and defence under s. 7.
Southam – corporations are entitled to protection against unreasonable search and seizure, s. 8.
Several judicial statements have suggested that balancing under s. 1 should be different if the person whose rights have been infringed is a corporation, e.g. Reference Re S. 94(2) of the Motor Vehicle Act (British Columbia), obiter.
Even where a particular Charter provision has no application to corporations, a corporation may argue that a government measure is unconstitutional because it would violate the rights of an individual in certain circumstances (Big M, applied in R. v. Metro News Ltd. and Wholesale Travel).

(iii) Incorporation Process VanDuzer pp. 112-116

These statutes apply to business corporations – Charitable and other not-for-profit entities are governed under separate statutory regimes.
CBCA also does not apply to banks, insurance companies, trust and loan companies or an association under the Cooperative Credit Associations Act.
Must choose to incorporate either federally or provincially.
Then must file certain prescribed material with the branch of the government in the chosen jurisdiction that has responsibility for incorporations.
Under CBCA must file with Corporations Canada (part of Industry Canada):

o Articles of Incorporation (s. 6, Form 1) o Initial Registered Office Address and First Board of Directors (ss. 19(2), 106(1), Form 2) o A name-search report on the proposed name of the corporation o A fee of $250 (reduced if done online)

Articles are the most important of these documents because they set out the fundamental characteristics of the corporation: name, class and number of shares authorized to be issued, the number of directors, any restrictions on transferring shares, any restrictions on the business the corporation may carry on.
After filing, Director appointed to administer the CBCA issues a certificate, tow which the articles are attached, certifying that the corporation was incorporated on the date of the certificate (CBCA, ss. 8 and 9).
The directors named in the Initial Registered Office Address and First Board of Directors hold office until the first meeting of the shareholders at which an election of directors is held (CBCA, s. 106(2).
Provisions in the articles may be changed only by articles of amendment filed with the director after approval by a special resolution of shareholders.
On incorporation, corporation may commence carrying on business, but no need for it to do so.
Directors should have a meeting and pass a resolution to issue shares to the shareholders; they will generally also adopt arrangements for carrying on the formal legal business of the corporation, including how notice of meetings of directors and shareholders will be given, what constitutes a quorum for meetings, who may sign contracts on behalf of the corporation, and what the offices of the corporation (e.g. president and secretary) will be.
These arrangements usually set out in a by-law, which must be passed by the directors to take effect and continues in effect only if passed by shareholders at their next meeting following the approval by the directors (CBCA s. 103).
At first meeting directors will also pass resolutions dealing with other organizational matters, such as appointing officers and making banking arrangements, including authorizing certain people to sign cheques on behalf of the corporation.
After shares are issued it is common to have shareholders meeting at which any by-laws approved by the directors are voted on and an auditor is appointed.
Final organizational step that often occurs in corporations with few shareholders is that shareholders enter into an agreement to govern their relationships with each other. May wish to alter the rights and obligations provided for in the CBCA, such as how voting rights can be exercised and rules for share transfer.
In order to determine what rules govern a corporation, it is necessary to take into account not just the governing corporate statute and caselaw, but also elements of corporate constitution, articles of incorporation, by-laws, directors’ resolutions, shareholders’ resolutions, and any shareholders’ agreement.
All documents other than directors’ resolutions/minutes of directors’ meetings) must be maintained by corporation at its registered office (CBCA, s. 20), usually in a “minute book”.
Shareholders and creditors must be given access (CBCA, s. 21).
Articles and any other document filed with the Director appointed under the CBCA, such as the Initial Registered Office Address and First Board of Directors, are placed in a publicly accessible record.

Canada Business Corporations Act, ss. 5, 6, 8, 9, 15

5. (1) Incorporators - One or more individuals not one of whom (a) is less than eighteen years of age, (b) is of unsound mind and has been so found by a court in Canada or elsewhere, or (c) has the status of bankrupt, may incorporate a corporation by signing articles of incorporation and complying with section 7.

(2) Bodies corporate - One or more bodies corporate may incorporate a corporation by signing articles of incorporation and complying with section 7.

6. (1) Articles of incorporation - Articles of incorporation shall follow the form that the Director fixes and shall set out, in respect of the proposed corporation, (a) the name of the corporation; (b) the province in Canada where the registered office is to be situated; (c) the classes and any maximum number of shares that the corporation is authorized to issue, and (i) if there will be two or more classes of shares, the rights, privileges, restrictions and conditions attaching to each class of shares, and (ii) if a class of shares may be issued in series, the authority given to the directors to fix the number of shares in, and to determine the designation of, and the rights, privileges, restrictions and conditions attaching to, the shares of each series; (d) if the issue, transfer or ownership of shares of the corporation is to be restricted, a statement to that effect and a statement as to the nature of such restrictions; (e) the number of directors or, subject to paragraph 107(a), the minimum and maximum number of directors of the corporation; and (f) any restrictions on the businesses that the corporation may carry on.

(2) Additional provisions in articles - The articles may set out any provisions permitted by this Act or by law to be set out in the by-laws of the corporation.

(3) Special majorities - Subject to subsection (4), if the articles or a unanimous shareholder agreement require a greater number of votes of directors or shareholders than that required by this Act to effect any action, the provisions of the articles or of the unanimous shareholder agreement prevail.

(4) Idem - The articles may not require a greater number of votes of shareholders to remove a director than the number required by section 109.

8. (1) Certificate of incorporation - Subject to subsection (2), on receipt of articles of incorporation, the Director shall issue a certificate of incorporation in accordance with section 262.

(2) Exception — failure to comply with Act - The Director may refuse to issue the certificate if a notice that is required to be sent under subsection 19(2) or 106(1) indicates that the corporation, if it came into existence, would not be in compliance with this Act.

9. Effect of certificate - A corporation comes into existence on the date shown in the certificate of incorporation. 15. (1) Capacity of a corporation - A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.

(2) Idem - A corporation may carry on business throughout Canada.

(3) Extra-territorial capacity - A corporation has the capacity to carry on its business, conduct its affairs and exercise its powers in any jurisdiction outside Canada to the extent that the laws of such jurisdiction permit.

Interpretation Act, s. 20 21. (1) Powers vested in corporations - Words establishing a corporation shall be construed (a) as vesting in the corporation power to sue and be sued, to contract and be contracted with by its corporate name, to have a common seal and to alter or change it at pleasure, to have perpetual succession, to acquire and hold personal property for the purposes for which the corporation is established and to alienate that property at pleasure; (b) in the case of a corporation having a name consisting of an English and a French form or a combined English and French form, as vesting in the corporation power to use either the English or the French form of its name or both forms and to show on its seal both the English and French forms of its name or have two seals, one showing the English and the other showing the French form of its name; (c) as vesting in a majority of the members of the corporation the power to bind the others by their acts; and (d) as exempting from personal liability for its debts, obligations or acts individual members of the corporation who do not contravene the provisions of the enactment establishing the corporation.

(2) Corporate name - Where an enactment establishes a corporation and in each of the English and French versions of the enactment the name of the corporation is in the form only of the language of that version, the name of the corporation shall consist of the form of its name in each of the versions of the enactment.
(3) Banking business - No corporation is deemed to be authorized to carry on the business of banking unless that power is expressly conferred on it by the enactment establishing the corporation.

Ontario Business Corporations Act, ss. 4, 5, 6, 7, 15 4. (1) Articles of incorporation - One or more individuals or bodies corporate or any combination thereof may incorporate a corporation by signing articles of incorporation and complying with section 6. (2) Idem - Subsection (1) does not apply to an individual who, (a) is less than eighteen years of age; (b) has been found under the Substitute Decisions Act, 1992 or under the Mental Health Act to be incapable of managing property or who has been found to be incapable by a court in Canada or elsewhere; or (c) has the status of bankrupt. 5. (1) Contents of articles - Articles of incorporation shall follow the prescribed form and shall set out the prescribed information. (2) Director’s consent - The corporation shall keep at its registered office address the consent, in the prescribed form, to act as a first director, (a) of each individual who is named in the articles as a first director and who is not an incorporator; and (b) of each individual who is named in the articles as a first director and who is an incorporator, if the articles are sent to the Director in a prescribed electronic format and the electronic signature of the individual is not set out on the articles under clause 273 (4) (a) because the regulations provide that the signature is not required. (2.1) Inspection of consent - Upon request and without charge, the corporation shall permit a director, shareholder or creditor to inspect a consent mentioned in subsection (2) during the normal business hours of the corporation and to make a copy. (3) Provisions in articles - The articles may set out any provisions permitted by this Act or permitted by law to be set out in the by-laws of the corporation. (4) Where articles, etc., prevail - Subject to subsection (5), if a greater number of votes of directors or shareholders are required by the articles or a unanimous shareholder agreement than are required by this Act to effect any action, the provisions of the articles or of the unanimous shareholder agreement prevail. (5) Votes to remove director - The articles shall not require a greater number of votes of shareholders to remove a director than the number specified in section 122. 6. Certificate of incorporation - An incorporator shall send to the Director articles of incorporation and, upon receipt of the articles, the Director shall endorse thereon, in accordance with section 273, a certificate which shall constitute the certificate of incorporation. 7. Certificate of incorporation - A certificate of incorporation is conclusive proof that the corporation has been incorporated under this Act on the date set out in the certificate, except in a proceeding under section 240 to cancel the certificate for cause. Interpretation Act, s. 27 27. (1) Clear days - Where there is a reference to a number of clear days or “at least” a number of days between two events, in calculating that number of days the days on which the events happen are excluded.

(2) Not clear days - Where there is a reference to a number of days, not expressed to be clear days, between two events, in calculating that number of days the day on which the first event happens is excluded and the day on which the second event happens is included.
(3) Beginning and ending of prescribed periods - Where a time is expressed to begin or end at, on or with a specified day, or to continue to or until a specified day, the time includes that day.
(4) After specified day - Where a time is expressed to begin after or to be from a specified day, the time does not include that day.
(5) Within a time - Where anything is to be done within a time after, from, of or before a specified day, the time does not include that day.

(iv) Function of Corporate Law VanDuzer pp. 116-125

Basic corporate finance model for investment decision making holds that people make decisions to invest based on evaluation of the returns expected and the risk associated with those returns.
Returns may take the form of interest on a loan, dividends on shares, an increase in the price of shares or something else.
Risk is likelihood that the expected returns will be received in light of the range of possible returns the investor could receive.
Corporate law increases returns by decreasing costs – certain presumptive or default rules apply to govern the relationship between the corporation and its shareholders in the absence of some other rule being agreed upon by the corporation and its shareholders and expressed in the articles/by-laws/shareholders’ agreement.
Corporate law provides a sort of standard-form contract that parties may adopt in whole or part. Availability of standard form will save money – reduces transaction costs of setting up a corporation.
Corporate law decreases shareholders risk – “limited liability” – the most a shareholder can lose is the amount of her investment. Does not eliminate risk but shifts it to other stakeholders, such as employers and creditors.
There are mandatory rules protecting all shareholders from abuse by management. In addition to giving shareholders the power to determine collectively who becomes a director, corporate law:

o Imposes standards of behaviour on directors and officers such as fiduciary duty to act in best interests of corporation (CBCA, s. 122(1)(a)). o Facilitates shareholder monitoring of directors and officers, such as by requiring disclosure of financial information (CBCA, s. 155(1)) o Provides a variety of remedial procedures for shareholders to obtain relief in the event that directors and officers misbehave (e.g. s. 247).

There are also mandatory rules protecting minority shareholders from exploitation by the majority. Mandatory rules require shareholder approval by a two-thirds majority for what are deemed fundamental changes to the corporation, such as the sale of all or substantially all the property of a corporation (CBCA, s. 189(3)) and give minority shareholders a right to be bought out if they disagree with the outcome of a vote approving such changes (CBCA, s. 190).
Minority shareholders are entitled to seek relief if directors/corporation act in ways that are “oppressive or unfairly prejudicial to or that unfairly disregards” their interests (CBCA, s. 241).
Corporate law also has certain mandatory rules protecting non-shareholder stakeholders – despite the express statutory grant of limited liability (CBCA, s. 45), the courts have arrogated to themselves the power to disregard the separateness of corporate legal personality. However, the cases “illustrate no consistent principle”.
Other rules circumscribe effectiveness of limited liability – directors and officers may be held liable for torts committed in connection with the corporation’s business where they have some involvement in the activity constitution the tort.
Directors are liable for unpaid wages in certain limited circumstances (CBCA, s. 119).
Directors may also incur liability under other federal and provincial statutes such as liability for amounts withheld from employee wages that the corporation has failed to remit to the Canada Revenue Agency.
CBCA and other corporate statutes (OBCA, s. 10) require all corporations to have as part of their name a word or abbreviation which indicates that the business is being carried on by an entity with limited liability.

o CBCA – every corporation’s name must include Corporation (or Corp.) or Limited (or Ltd.), or Incorporated (or Inc.) or the French equivalents of these terms (s. 10(1))

Each corporation must set out its full legal name, including the legal part, on all “contracts, invoices, negotiable instruments and orders for goods or services made by or on behalf of the corporation” (CBCA, s. 10(5)).
A corporation may use another name, but that name must not include one of the listed elements and full corporate name must appear as well – e.g. “123456 Canada Inc. doing business as Landco Real Estate Development.” Failing to comply with requirement to set out full corporate name is an offence (CBCA, ss. 10(5) and 251).
Canadian corporate statutes impose rules designed to prevent certain uses of a corporation’s assets that will render it unable to pay its obligations. E.g. shares can only be issued for money or property that has a value not less than the fair equivalent of what the corporation could have got if it has issued shares for money. Shares cannot be issued on credit (CBCA, s. 25(3)).
CBCA also restricts distributions to shareholders: the corporation cannot pay dividends, redeem or repurchase shares, or make payments on the exercise of certain shareholder remedies if the directors had reasonable grounds to believe that the corporation is insolvent or would be made insolvent by the distribution (CBCA, ss. 34, 35, 36, 190(26) and 241(6). CBCA also restricts commissions paid in connection with the purchase of shares (s. 41) and indemnities paid to directors and officers (s. 124). Directors are personally responsible for any payment made in contravention of these rules (s. 118).
Corporation/Directors may be liable if they act in a manner that is “oppressive to or is unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer (CBCA, s. 241(2)). The class of persons who may seek relief includes shareholders and “any other person who, in the discretion of the court, is a proper person to make an application” (CBCA, s. 238).
Each director and officer has a fiduciary duty to act in the best interests of the corporation and a duty to exercise reasonable care, diligence, and skill in discharging her obligations (e.g. CBCA s. 122(1)). The fiduciary duty is owed exclusively to the corporation but includes obligation to take stakeholder interests into account.
Public filings of articles, initial registered address and First Board of Directors mean that people dealing with corporation can find out something about its activities. New filing must be made when information in these documents changes. Certain annual filings must also be made e.g. annual return under CBCA s. 263, Form 22 and initial return and annual return under Ontario Corporations Information Act ss. 3 and 3.1. Corporations that have distributed their shares to the public must file their financial statements under CBCA, s. 160.

(v) Corporate Law and Securities Law VanDuzer pp. 464-473

Securities legislation in each province regulates both the issuance of securities by businesses, and the marketplace in which securities are traded once they are issued.
Goal – to promote the fair and efficient operation of securities markets with a view to encouraging investors to make their money available to businesses by buying their securities.
The CBCA contains a few provisions that parallel some of the provisions of provincial securities laws. If a CBCA-incorporated corporation offers its shares for sale in a province, both the CBCA and the provincial securities laws will apply.
Five main areas of securities regulation –

o The way that professional participants in the securities markets e.g. investment advisers/ securities dealers are regulated to ensure that they meet standards for integrity, competence and financial solvency. Registration requirements and regulation to ensure high standards of competence and responsibility. Provincial regulators oversee the activities of certain self-regulating organizations (SROs) that regulate practice standards of members. SROs in Ontario include the Investment Dealers Association (securities dealers and brokers must be members) and the Mutual Fund Dealers Association ( mutual fund dealers must be members). o The manner in which securities legislation seeks to protect investors by requiring public disclosure of timely and accurate information regarding the business of issuers of securities and the securities they are offering, when the securities are first offered for sale and thereafter on a regular basis. o The rules governing securities trading by insiders of corporations. o Regulation of bids to takeover control of a public corporation by buying its shares. o Securities law standards for corporate governance.

Securities are shares or debt obligations like bonds, or other claims on a business organization.
Each province has a law concerned with regulating the marketplace for the trading of securities with a view to protecting investors from unfair, improper and fraudulent practices and ensuring that securities markets function fairly and efficiently so that investors will have confidence in their operation and be encouraged to invest (Ontario Securities Act (OSA), s. 1.1).
Main approach – require disclosure. Balance between sufficient disclosure for investors and burdensome disclosure for corporations.
Administration and enforcement of securities laws of each province is responsibility of a specialized government agency – e.g. Ontario Securities Commission (OSC).
Range of enforcement powers – prosecution of offences under OSA, court applications for a declaration that there has been non-compliance, wide discretion to make orders relating to marketplace activities where it determines some action is in the public interest. In most cases, there will be a hearing first.
OSC may order that – a person’s registration as a securities market participant be terminated; trading cease in the shares of a particular corporation or by a particular person; or a person resign as director/officer of a corporation and be prohibited from becoming a director/officer of a public corporation in Ontario in the future.
To be responsive to changes in the marketplace, securities regulators have augmented provincial legislation and regulations with policy statements that can be more quickly modified to address new conditions. National Policy Statements are issued by the Canadian Securities Administrators (CSA) an unofficial body to which all provincial and territorial regulators belong.
In 1990s the authority of the OSC to enforce its policy statements was successfully challenged in the courts. In response, the Ontario government gave the OSC power to make binding rules. OSC Rules have the same legal effect as regulations. Before they can be enacted, rules must be published in the OSC Bulletin and interested persons must be given a reasonable opportunity to comment within at least 90 days of publication. Minister of finance has a residual power to reject rules.
The CSA also issues National Instruments that are to be adopted and implemented by provincial jurisdictions either as rules or regulations having binding legal effect. Where some but not all provinces have agreed to an instrument, they are called Multilateral Instruments.
Summary of sources of law and policy: the OSA, regulations under that Act, national and Ontario rules and policies, OSC and judicial decisions.

The Relationship between Corporate Law and Securities Law Scope of Application – corporate and securities law differ in their scope of application. Corporate laws of a jurisdiction apply to corporations incorporated in that jurisdiction whether or not the corporation operates there or the shareholders are resident there. Securities laws are concerned with all business organizations as well as corporations that sell or offer to sell securities to investors within the jurisdiction regardless or where incorporated. Enforcement – securities regulators, such as the OSC, have broad discretionary powers to ensure that participants in the securities markets are acting in the public interest. The enforcement of corporate law rules is generally left to the parties affected. Substantive Law – corporate law addresses a significant number of areas not dealt with in securities law. Securities laws are typically mandatory in nature and deal with a number of areas not covered in corporate statutes. There is overlap in the interests of investor protection; e.g. disclosure that must be made to shareholders in connection with meetings, ensuring corporate decisions are made in ways that are fair to minority shareholder interests. Securities regulators have been increasingly involved in other aspects of corporate governance, such as the composition of boards of directors and board committees. Thus many corporations, especially those with shareholders in more than one province, are subject to multiple, sometimes different requirements. So far proposals to create a single national regulator administering a single set of securities rules have floundered.

(b) Nature of the Corporation (i) Separate Existence and Limited Liability Casebook pp. 68-95

Interpretation Act s. 21 – see above.
Salomon v. Salomon – see below. A body corporate made capable by statute cannot lose its individuality by issuing the bulk of its capital to one person. The company is at law a different persona altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the act.
Lee v. Lee’s Air Farming Ltd. – see below. Husband owned all shares but one; died; wife claimed compensation; New Zealand Court of Appeal held not entitled to compensation because he was governing director in whom was vested the full government and control of the company. Issue – was the deceased a worker? Had he entered into a contract of service with an employer? The deceased was one legal person who was willing to work for and make a contract with the company, which was another legal entity.
Kosmopoulos v. Constitution Insurance Co. – see below. Insurance company argued that K had no insurable interest in the assets of the corporation. Court of Appeal: definition of insurable interest from Lucena v. Craufurd – a man is interested in a thing to whom advantage may arise or prejudice happen from the circumstances which may attend it; interest does not necessarily imply a right to the whole, or a part of a thing, but some relation which by the happening of the perils insured against may be so affected as to produce a damage to the person insuring. However – Macaura v. Northern Ass’ce Co., Ltd. – situation becomes more complicated if asset lost is only one of innumerable assets and the shareholding interest is spread over a large number of individual shareholders – thus one shareholder of three had no insurable interest in the assets of the corporation. A single shareholder fits well within the Lucena definition. Supreme Court: law on when the corporate veil may be lifted follows no consistent principle. The best that can be said is that the “separate entities” principle is not enforced when it would yield a result “too flagrantly opposed to justice, convenience or the interests of the Revenue. Rejected rule in Macaura, followed rule in Lucena.
Requirement to use companies legal name. Officer or director or a corporation may be held personally liable for non-disclosure of the fact that he was contracting on behalf of a corporation, especially where he had previously dealt with the other company in an individual capacity. Turi v. Swanick – lawyer who incorporates for a small business is under a contractual and common law duty to warn client of need to use legal name and consequences for not doing so.
Wolfe v. Moir – see below – shareholder and director of company acted as manager of ice rink with his name in advertisement. Failed to register the name of the ice rink under the Partnership Act or Companies Act.
Directors and officers are generally liable for failing to exercise reasonable care, diligence and skill in the discharge of their obligations and for breach of their fiduciary duties. Also liable for breach of specific prohibitions and exceptionally, for unpaid wages (CBCA s. 119 and OBCA s. 131).
Plaintiffs increasingly seek to overcome the hurdle of limited liability by suing in tort alleging that they were personally implicated in the wrongdoing. Representative character of defendant does not shield him from personal liability for such traditional torts as trespass, assault, libel and at least some types of negligence even if acting in normal course of duties. Said v. Butt – officer of company could not be sued for procuring breach of contract.
Creditors have sought relief under the oppression remedy (CBCA, s. 241, OBCA, s. 247.)
Directors have a duty to act in the best interests of the corporation and in the discharge of their duties must act in good faith and exercise such skill and care as a reasonably prudent person would exercise in comparable circumstances. Allegiance shifts to protection of creditor interests when the corporation is insolvent or near insolvency.

VanDuzer pp. 125-129

Incorporation brings into existence a new legal person whose rights and obligations are analogous in many but not all ways to those of a human person.
S. 15(1) CBCA – a corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.
Salomon v. Salomon & Co. – sole-proprietor transferred leather-boot business to a corporation in which he and six of his family members were shareholders. As part of the consideration paid for transfer of the business, the corporation issued debentures to him that represented a claim against the corporation for £10000 secured against the assets of the business. Also issued shares. Afterwards was in effective control of corporation as well as being a secured creditor. Corporation ran into financial difficulty and liquidator appointed. If secured claim of A was paid first there would have been no assets left out of which to pay other (unsecured) creditors. Liquidator claimed that the corporation was a sham – it was acting on A’s behalf as agent. House of Lords rejected the claim – all the requirements of the Companies Act had been complied with. No requirement in the act that the shareholders have a mind of their own.
Separate legal existence of corporation means that shareholder may be creditor/secured creditor – permitted under Canadian corporate law. The only restriction is that a corporation may not grant a security interest in its assets in favour of a shareholder as security for a loan from the shareholder if the purpose of doing so is to defeat the claims of existing creditors (Ontario Fraudulent Conveyances Act, federal Bankruptcy and Insolvency Act).
A corporation (not shareholders) owns its own property.
In general, shares represent a claim to the residual value of the corporation after the claims of all creditors have been paid.
Kosmopoulos v. Constitution Insurance Co. of Canada – Kosmopoulos was the sole shareholder in and the only director of a corporation. Insurance on the assets of the corporation’s business was taken out in his name rather than that or the corporation. When fire damaged assets, insurance company refused to pay on the ground that Kosmopoulos did not have an “insurable interest” in the assets. Supreme court held that even though no ownership interest in the assets, his interest as the sole shareholder in the residual value of the corporation’s assets gave him a substantial stake that could amount to an insurable interest.
Shareholder may be employee of corporation.
Lee v. Lee’s Air Farming Ltd. – person was held to be capable of entering into a contract of employment with a corporation of which he held all but one of the shares and was appointed “governing director… for life”. Privy Council held it id not matter that this would mean he would negotiate his employment contract with himself acting on behalf of the corporation.
Corporation may need to be provided with legal advice separately from the shareholders. Interests of shareholders and corporation may sometimes conflict.

Canada Business Corporations Act, ss. 6, 10, 15, 45(1), 212 6. (1) Articles of incorporation - Articles of incorporation shall follow the form that the Director fixes and shall set out, in respect of the proposed corporation, (a) the name of the corporation; (b) the province in Canada where the registered office is to be situated; (c) the classes and any maximum number of shares that the corporation is authorized to issue, and (i) if there will be two or more classes of shares, the rights, privileges, restrictions and conditions attaching to each class of shares, and (ii) if a class of shares may be issued in series, the authority given to the directors to fix the number of shares in, and to determine the designation of, and the rights, privileges, restrictions and conditions attaching to, the shares of each series; (d) if the issue, transfer or ownership of shares of the corporation is to be restricted, a statement to that effect and a statement as to the nature of such restrictions; (e) the number of directors or, subject to paragraph 107(a), the minimum and maximum number of directors of the corporation; and (f) any restrictions on the businesses that the corporation may carry on.

(2) Additional provisions in articles - The articles may set out any provisions permitted by this Act or by law to be set out in the by-laws of the corporation.

(3) Special majorities - Subject to subsection (4), if the articles or a unanimous shareholder agreement require a greater number of votes of directors or shareholders than that required by this Act to effect any action, the provisions of the articles or of the unanimous shareholder agreement prevail.

(4) Idem - The articles may not require a greater number of votes of shareholders to remove a director than the number required by section 109.

10. (1) Name of corporation - The word or expression “Limited”, “Limitée”, “Incorporated”, “Incorporée”, “Corporation” or “Société par actions de régime fédéral” or the corresponding abbreviation “Ltd.”, “Ltée”, “Inc.”, “Corp.” or “S.A.R.F.” shall be part, other than only in a figurative or descriptive sense, of the name of every corporation, but a corporation may use and be legally designated by either the full or the corresponding abbreviated form.

(1.1) Saving for “S.C.C.” - Subsection (1) does not apply to a corporation that has a corporate name that, immediately before the day on which this subsection comes into force, included, other than only in a figurative or descriptive sense, the expression “Société commerciale canadienne” or the abbreviation “S.C.C.”, and any such corporation may use and be legally designated by either that expression or that abbreviation.

(2) Exemption - The Director may exempt a body corporate continued as a corporation under this Act from the provisions of subsection (1).

(3) Alternate name - Subject to subsection 12(1), the name of a corporation may be set out in its articles in an English form, a French form, an English form and a French form, or a combined English and French form, so long as the combined form meets the prescribed criteria. The corporation may use and may be legally designated by any such form.

(4) Alternative name outside Canada - Subject to subsection 12(1), a corporation may, for use outside Canada, set out its name in its articles in any language form and it may use and may be legally designated by any such form outside Canada.

(5) Publication of name - A corporation shall set out its name in legible characters in all contracts, invoices, negotiable instruments and orders for goods or services issued or made by or on behalf of the corporation.

(6) Other name - Subject to subsections (5) and 12(1), a corporation may carry on business under or identify itself by a name other than its corporate name if that other name does not contain, other than in a figurative or descriptive sense, either the word or expression “Limited”, “Limitée”, “Incorporated”, “Incorporée”, “Corporation” or “Société par actions de régime fédéral” or the corresponding abbreviation.

15. (1) Capacity of a corporation - A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.

(2) Idem - A corporation may carry on business throughout Canada.

(3) Extra-territorial capacity - A corporation has the capacity to carry on its business, conduct its affairs and exercise its powers in any jurisdiction outside Canada to the extent that the laws of such jurisdiction permit.

45. (1) Shareholder immunity - The shareholders of a corporation are not, as shareholders, liable for any liability, act or default of the corporation except under subsection 38(4), 118(4) or (5), 146(5) or 226(4) or (5).

212. (1) Subject to subsections (2) and (3), the Director may (a) dissolve a corporation by issuing a certificate of dissolution under this section if the corporation (i) has not commenced business within three years after the date shown in its certificate of incorporation, (ii) has not carried on its business for three consecutive years, (iii) is in default for a period of one year in sending to the Director any fee, notice or document required by this Act, or (iv) does not have any directors or is in the situation described in subsection 109(4); or (b) apply to a court for an order dissolving the corporation, in which case section 217 applies.

(2) Publication - The Director shall not dissolve a corporation under this section until the Director has

(a) given one hundred and twenty days notice of the decision to dissolve the corporation to the corporation and to each director thereof; and (b) published notice of that decision in a publication generally available to the public.

(3) Certificate of dissolution - Unless cause to the contrary has been shown or an order has been made by a court under section 246, the Director may, after the expiration of the period referred to in subsection (2), issue a certificate of dissolution in the form that the Director fixes.

(3.1) Exception — non-payment of incorporation fee - Despite anything in this section, the Director may dissolve a corporation by issuing a certificate of dissolution if the required fee for the issuance of a certificate of incorporation has not been paid.
(4) Effect of certificate - The corporation ceases to exist on the date shown in the certificate of dissolution.

Forms 1, 2, 3, 6 Form 1 – Articles of Incorporation Form 2 – Initial Registered Office Address and First Board of Directors Form 3 – Change of Registered Office Address Form 6 – Changes Regarding Directors

Ontario Business Corporations Act ss. 10, 92(1) 10. (1) Restrictions on corporate name - The word “Limited”, “Limitée”, “Incorporated”, “Incorporée” or “Corporation” or the corresponding abbreviations “Ltd.”, “Ltée”, “Inc.” or “Corp.” shall be part, in addition to any use in a figurative or descriptive sense, of the name of every corporation, but a corporation may be legally designated by either the full or the abbreviated form. (2) Languages - Subject to this Act and the regulations, a corporation may have a name that is in, (a) an English form only; (b) a French form only; (c) a French and English form, where the French and English are used together in a combined form; (d) a French form and an English form, where the French and English forms are equivalent but are used separately. (2.1) Same - A corporation that has a form of name described in clause (2) (d) may be legally designated by the French or English version of its names.

(3) Other restrictions - For the purposes of subsections (1) and (2), only letters from the Roman alphabet or Arabic numerals or a combination thereof, together with such punctuation marks and other marks as are permitted by regulation, may form part of the name of a corporation.

(4) Other languages - Subject to the provisions of this Act and the regulations, a corporation may have in its articles a special provision permitting it to set out its name in any language and the corporation may be legally designated by that name.

(5) Legibility - Despite subsection (4), a corporation shall set out its name in legible characters in all contracts, invoices, negotiable instruments and orders for goods or services issued or made by or on behalf of the corporation and in all documents sent to the Director under this Act.

Business Names Act, ss. 1, 2, 6, 7, 10 1. Definitions – In this Act, “business” includes every trade, occupation, profession, service or venture carried on with a view to profit; “corporation” means a corporation wherever or however incorporated; “Minister” means the Minister of Consumer and Business Services; “Ministry” means the Ministry of the Minister; “person” includes an individual, sole proprietorship, partnership, limited partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate, and an individual in his or her capacity as trustee, executor, administrator or other legal representative; “prescribed” means prescribed by the regulations; “Registrar” means the Registrar appointed under section 3; “registered” means registered under this Act; “regulations” means the regulations made under this Act. 2. (1) Registering name – No corporation shall carry on business or identify itself to the public under a name other than its corporate name unless the name is registered by that corporation. (2) Idem – No individual shall carry on business or identify his or her business to the public under a name other than his or her own name unless the name is registered by that individual. (3) Same – No persons associated in partnership shall carry on business or identify themselves to the public unless the firm name of the partnership is registered by all of the partners. (3.1) Same – No persons associated in partnership shall carry on business or identify themselves to the public under a name other than a firm name registered under subsection (3) unless the name is registered by all of the partners. (3.2) Non-application Subsection (1) does not apply to prohibit a corporation from carrying on business or identifying itself to the public by a name other than its corporate name if the name is set out in a partnership registration under subsection 4 (1) or a declaration under the Limited Partnerships Act. (3.3) Same – Subsection (3) does not apply to prohibit persons associated in a limited partnership from carrying on business under the firm name in accordance with the Limited Partnerships Act. (4) Exception – Subsection (3) does not apply to prohibit persons associated in partnership from carrying on business or identifying themselves to the public under a name that is composed of the names of the partners. (5) Idem – This section does not apply to prohibit the use of a name that contains characters from an alphabet other than the Roman alphabet if the name is used in conjunction with the registered name. (6) Name to be set out – A corporation and such other persons as are prescribed carrying on business under a registered name or, in the case of a corporation, identifying itself to the public under a registered name, shall set out both the registered name and the person’s name in all contracts, invoices, negotiable instruments and orders involving goods or services issued or made by the person. 6. (1) Liability for damages – A person who suffers damages by reason of the registration of a name that is the same as or deceptively similar to another person’s registered name is entitled to recover compensation from the registrant for damages suffered because of the registration. (2) Idem – For the purposes of subsection (1), the compensation is limited to the greater of $500 and the actual amount of damages incurred. (3) Cancelling registration – In giving a judgment for a plaintiff in an action brought under subsection (1), the court shall order the Registrar to cancel the registration that was the cause of the action. R.S.O. 1990, c. B.17, s. 6 (3). 7. (1) Ability to sue – A person carrying on business in contravention of subsection 2 (1), (2) or (3) or subsection 4 (4) or (6) is not capable of maintaining a proceeding in a court in Ontario in connection with that business except with leave of the court. (2) Idem – The court shall grant leave if the person seeking to maintain the proceeding satisfies the court that, (a) the failure to register was inadvertent; (b) there is no evidence that the public has been deceived or misled; and (c) at the time of the application to the court, the person is not in contravention of this Act or the regulations. (3) Contracts valid – No contract is void or voidable by reason only that it was entered into by a person who was in contravention of this Act or the regulations at the time the contract was made. 10. (1) Offence – Every person who, without reasonable cause, contravenes section 2 or 2.1 or subsection 4 (4) or (6) or submits a statement in an application for a registration under this Act that is false or misleading with respect to any material fact is guilty of an offence and on conviction is liable to a fine of not more than $2,000 or, if the person is a corporation, to a fine of not more than $25,000. (2) Idem – If a corporation is guilty of an offence under subsection (1), every director or officer of the corporation and every person acting as its representative in Ontario who authorized, permitted or acquiesced in such an offence is also guilty of an offence and on conviction is liable to a fine of not more than $2,000.

(ii) Disregard of Corporate Legal Personality Casebook pp. 110-120, 123-132, 138-145

Extent to which courts have been willing to pierce the coporate veil. Helpful to distinguish between five types of case:

(i) those involving allegations of fraudulent conduct on the part of the company’s principles; (ii) those where the company was clearly undercapitalized to meet its foreseeable financial needs; (iii) those involving tort claims against the company; (iv) cases where the company was not incorporated for bona fide business reasons but for other reasons, typically to take advantage of tax loopholes; and (v) non-arm’s length transactions between parent and subsidiary companies.

Clarkson Co. Ltd. v. Zhelka – Selkirk incorporated and controlled several companies. One (Industrial) bought land which was conveyed for promissory note to Selkirk’s sister, Zhelka. Zhelka mortgaged the land. Part was sold off to pay off mortgage. Interest adjustment’s paid to Zhelka found their way into one of the other company’s bank accounts. Selkirk became a bankrupt; the trustee in bankruptcy sought a declaration that the land was held by Zhelka as trustee for Selkirk alleging the company was a mere agent of Selkirk.
Held: the conveyance to Zhelka was without consideration and entered into with the intention of protecting the lands against resort thereto by the creditors. There is a resulting trust in Industrial and it was never intended that she take any beneficial interest in the property.
Evidence demonstrates that Selkirk always had complete control over all the relevant companies. They were one-man companies. Selkirk received some comparatively minor benefits from the operation of his companies and at times in a manner which, so far as regularity is concerned, is questionable. But the question remains, in what way has his association with his corporate offspring injured, defeated, or prejudiced his personal creditors? It is not a case where a debtor has transferred his own assets to a corporation for the purpose of avoiding existing personal liabilities or obligations; not has he personally made a secret or clandestine profit by such a transfer. The evidence falls short of establishing fraud upon Selkirk’s personal creditors.
The cases in which Courts have seen fit to disregard the corporate personality fall within a narrow compass. No consistent principle except that form Salomon v. Salomon: the legal persona created by incorporation is an entity distinct from its shareholders and directors. The exceptions appear to represent refusals to apply this principle where it would be flagrantly opposed to justice.
If a company is formed for the express purpose of doing a wrongful or unlawful act, or if when formed those in control expressly direct a wrongful thing to be done, the individuals as well as the company are responsible to those to whom liability is legally owed.
Where an individual has constituted the company his agent is a question of fact in each case.
In the instant case, the plaintiff failed to satisfy the court that Industrial was a mere agent.
Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd. – no basis for finding that Kelner was the actual contracting party. He was undoubtedly the individual who would ultimately benefit from the contract, but the contract was made with the company alone – he could not have sued upon it nor could he himself have been sued.
De Salaberry Realties Ltd. v. Minister of National Revenue – see below – way of proceeding was to cause to have a company incorporated per one or few purchases. Each company sells one or a few parcels of land but group sells many. Tax reasons. Court cannot confine itself to the conduct of appellant company but must resort to the one of the groups. Looked at level of decision making etc. Did regard the appellant as a separate legal entity distinct from he other companies of each group, but looked at each group to find the course of conduct which stamps the one of the appellant an instrument of the group. Also looked at share capital etc. Applied criteria from Smith, Stone, and Knight: Were the profits treated as profits of the parent 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 adventure, decide what should be done and what capital should be embarked on the venture? Did the company make the profits by its skill and direction? Was the company in effectual and constant control?
Applying those criteria it could be said that the profits were treated as profits of the parent company. The parent companies carry on the business of the appellant.
In this case pyramid of corporations and the appellant is but one of the groups of companies. Essential unity of group enterprise. Courts are more ready to treat the company as the agent of its controlling shareholder where the shares are held by another company.
Stubart Investments v. R. – argued that a corporate affiliate, established solely for tax planning purposes, should be ignored on the ground that the new corporate structure served no bona fide business purpose. The Supreme Court refused to accept business purpose test on the grounds that a taxpayer’s right to organize its affairs was deeply entrenched in Canadian law and implicitly recognized in the Income Tax Act.
S. 245 Income Tax Act contained provides that if a transaction is an “avoidance transaction” the “tax consequences” will be determined as is reasonable in the circumstances to deny the tax benefit. Not an avoidance transaction if undertaken for bona fide purposes.
Walkovsky v. Carlton – ownership of taxi fleet vested in many corporations, each owning only one or two cabs. Complainant was run down by negligently operated taxicab. Defendant claimed to be stockholder of 10 corporations each with two cabs registered in its name. Courts will disregard the corporate form to prevent fraud or achieve equity. In determining whether liability should be extended to reach assets beyond those belonging to the corporation, guided by general rules of agency – whenever anyone uses the control of the corporation to further his own rather than the corporation’s business, he will be liable for the corporation’s acts upon the principle of respondeat superior applicable even where the agent is a natural person. But one thing to hold larger corporate entity financially responsible and another to claim that corporation is a dummy for its individual stockholders. No allegations that the defendant was conducting business in his individual capacity. If single corporation, would force formidable barriers in attempting to establish personal liability. The fact that the fleet ownership has been split up does not decrease the plaintiff’s burden in that respect.
Dissent – corporations were intentionally undercapitalized for the purpose of avoiding responsibility. If a corporation is organized and carries on business without substantial capital in such a way that the corporation is likely to have no sufficient assets to meet its debts it is inequitable that shareholders should escape personal liability. Abuse of separate entity. Looked at American cases whereby shareholders of undercapitalized companies have been held responsible. Minimum insurance provision could not have intended to shield those who organized corporations with the specific intent of avoiding responsibility to the public.

VanDuzer pp. 129-139

Sometimes referred to as piercing the corporate veil.
It Is Just Not Fair – courts have held that they can ignore separate existence of corporation where to fail to do so would yield a result which is “flagrantly opposed to justice”.
Transamerica Life Insurance Company of Canada v. Canada Life Assurance Company – it will be difficult to define precisely when the corporate veil is to be lifted, but that lack of a precise test does not mean that a court is free to act as it pleases on some loosely defined “just and equitable standard”.
Courts are more likely to be sympathetic to claims by third parties than to those by shareholders who benefit from separate corporate personality.
Meditrust Healthcare Inc. v. Shoppers Drug Mart – court refused to disregard the separate existence of corporations to allow the parent to claim for injuries to the subsidiaries.
DHN Food Distributors Ltd. v. London Borough of Tower Hamlets – court disregarded separate existence of the corporation for the benefit of shareholders.
De Salaberry Realites Ltd. v. M.N.R. – court more likely to disregard separate personality if doing so results in liability being imposed on another corporation as the shareholder rather than on an individual.
Objectionable Purpose – where corporation has been incorporated in order to do something that would be illegal or improper for individual shareholders or in order to reduce taxes, courts have been willing to disregard separate legal personality in some circumstances.
Big Bend Hotel – fraud has been held to be a basis e.g. where shareholder uses corporation to effect purpose she could not effect on her own. Fire-loss insurance was cancelled as result of previous claim; incorporated corporation and had it apply for fire insurance. Failed to disclose previous fire-loss. Insurance company refused to pay. Court held failure to disclose was fraudulent.
Gilford Motor Co. Ltd. v. Horne – agreed not to solicit customers of former employer, then incorporated a corporation, which did so. Even though no shares in corporate, court held that the corporation could not be used to permit the defendant to avoid his contractual obligations.
Rogers Cantel Inc. v. Elbanna Sales Inc. – contractual non-compete obligation. Elbanna became involved in a second corporation including soliciting customers on behalf of a competitor of Rogers. The action violated the non-competition obligation.
Fidelity Electronics of Canada Ltd. v. Fuss – fraud also arises where assets are transferred to a shareholder for the purpose of rendering the corporation incapable of performing an obligation that is owed to a third party.
Misrepresentation as to identity of corporation (but not as to an attribute such as assets) may be a fraud whereby the court will disregard the separate existence of the corporation.
B.G. Preeco I (Pacific Coast) Ltd. v. Bon Street Holdings Ltd. – two individuals negotiated contract on behalf of company with substantial assets called “Bon Street Developments Ltd.” then changed its name and gave its name to a company with no assets. The individuals were liable for fraud, but the company was not liable as the fraud related not to the identity of the corporation but only to its assets.
Thus fraudulent representations as to corporation’s assets will result in personal liability for fraud for the director/officer/shareholder.
De Salaberry – interests of the Revenue have been considered to be a special case in need of protection. Court disregarded separate existence of one corporation in a large corporate group. It was argued that sale of land by a corporation should be characterised as a capital gain – not subject to tax – but when one disregarded separate existence of the corporation, it became clear that the sale was part of a business of buying and selling lands, so the proceeds were income from a business and fully taxed.
Stubart Investments Ltd. v. M.N.R. – SCC signalled that the courts should be less willing to disregard the separateness of corporate personality in the interests of imposing tax liability even where no business purpose for the corporation is shown other than minimizing tax liability.
Courts are likely to be reluctant to disregard separate corporate personality on the basis of the interests of the revue following the introduction of General Anti-avoidance Rule in a 1988 amendment to Income Tax Act.
Courts have also disregarded separate corporate existence in certain other circumstances where a corporation is being used to avoid other statutory requirements, but judicial intervention of this kind has been relatively rare.
Wildman v. Wildman – sole shareholder of corporation prevented assets from flowing to his spouse and children by determining when and how money was paid to him by the corporation. Court held that corporation could also be made responsible for spousal and child support.
Agency – third basis on which courts have purported to disregard separate corporate personality is by finding that the corporation is merely acting as the agent of someone else. The main test for the existence of this peculiar form of agency is whether there is extensive control by the shareholder over the corporation. Factors are from:
Smith, Stone and Knight Ltd. v. Birmingham Corp. –

o Were the profits treated as profits of the shareholder? o Was the person conducting the business appointed by the shareholder? o Was the shareholder the head and brain of the trading venture? o Did the shareholder govern the adventure and decide what should be done and what capital should be committed to the venture? o Did the shareholder make the profits by its skill and direction? o Was the shareholder in effectual and constant control?

Extensive and constant control is permitted under the CBCA so control satisfying Smith cannot be conclusive.
Alberta Gas Ethylene Co. v. M.N.R. – even when six criteria are met, must ask for what purpose the corporation was incorporated and used, and consider the overall context in which the obligation to the third party arose.
Gregorio v. Intrans-Corp. – the policy behind holding a parent corporation liable is “to prevent conduct akin to fraud that would otherwise unjustly deprive claimants of their rights”. Where the court finds that subsidiary had been set up for a legitimate purpose, disregarding its separate existence is inappropriate.
Other Factors – lack of respect for corporate form.
Wolfe v. Moir – business was advertised using a name incorporating the officer’s name, and not the corporation’s name.
In other decisions, lack of corporate authorization/use of shareholder funds not found to be sufficient reasons for piercing the corporate veil.

CBCA ss. 45(1) SEE ABOVE

OBCA ss. 92(1) SEE ABOVE

(c) Incorporation (i) Considerations and Process Casebook pp. 163-173

Absence of a Canadian Deleware (US race to the bottom).
Extra-provincial licensing and filing requirements – under the Ontario Extra-Provincial Corporations Act, provinces incorporated in another Canadian province (“Class 1 Corporations”) or under CBCA (“Class 2 Corporations”) are not required to obtain a licence under the act to carry on business in Ontario. Corporations incorporated under the laws of a jurisdiction outside Canada are subject to the full force of the provincial requirements.
It is an offence for extra-provincial corporations to carry on business in the province without a licence.
An unlicensed extra-provincial corporation is usually not capable of maintaining an action or other proceeding before a provincial court or tribunal in respect of a contract made by it. (Ont. EPCA s. 21(1)). Defect can usually be cured retroactively.
The granting of the licence is usually discretionary with the designated official and the official is authorized to attach conditions (s. 5(5)).
Extra-provincial corporations are usually required to annual filings of pertinent information (Ont. Corporations Information Act s. 4)
Licensing requirements are triggered only if extra-provincial corporation is carrying on business in the province. Under s. 1(2) Ont. EPCA extra-provincial corporation will be deemed to carry on business if it has a resident agent, representative, warehouse, office or place where it carries on its business in Ontario. But (s. 1(3)) it does not carry on its business by reason only that (a) it takes orders for or buys or sells goods, wares or merchandise; or (b) offers or sells services of any type, by use of travellers or through advertising or correspondence.
Continuance under the law of another jurisdiction – CBCA and provincial counterparts allow a corporation to “continue” its existence under the law of another jurisdiction (CBCA ss. 187-8, OBCA s. 180-1).
Two step procedure: (1) obtain consent of authorities in the jurisdiction of its incorporation (2) meet requirements of federal/provincial Act under which it seeks to be continued.
Does not effect prior obligations/property rights/proceedings pending before continuance (CBCA s. 187(7); OBCA s. 181(9)).
Classification of corporations – OBCA distinguishes between a offering corporation (s. 1(1) a corporation offering its shares to the public under s. 1(6)) and non-offering corporation.
CBCA does not provide a single distinction for all purposes but relies on distinctions in different contexts. E.g. distributing corporation, corporation engaged in distribution to the public.
General corporate law rule is that meeting requires two or more persons (Cowichan Leader Ltd., Re). Most acts accordingly provide that where a corporation has only one shareholder/director he/she alone may constitute a meeting (CBCA s. 139(4), OBCA s. 101(4), CBCA s. 114(8), OBCA s. 126(12). Should be read in conjunction with the provisions recognizing validity of unanimous resolutions in writing (CBCA s. 142(1); OBCA s. 104(1)).
Constrained Share Corporations - federal and provincial legislation permit corporations with publicly issued shares to restrict their transfer to comply with Canadian ownership and control requirements (CBCA s. 174, Res., Pt. 9 and OBCA s. 42(2)).
Professional Corporations – OBCA s. 3.1(2) permits a professional corporation to practise a profession governed by an act if that act expressly permits the practise of that profession by a corporation or if the act is one of those listed in s. 3.1(2)(b) (includes accountants, lawyers). Does not effect professional liability.
Unlimited liability corporations – Nova Scotia.
Incorporation Techniques – Ontario and most other former letters-patent jurisdictions have all now moved towards a system involving a minimum of administrative discretion with respect to the grant of corporate status.
Incorporation is effected by delivering to the incorporating officer a document called “articles of incorporation” (CBCA ss. 6-8; OBCA s. 5(3)). As in memorandum jurisdictions, if documents are in order the incorporating officer is required to issue a certificate of incorporation. An appeal lies from the officer’s refusal to do so. (CBCA s. 246; OBCA ss. 251-2).

VanDuzer pp. 146-147; 161-185

Under most Canadian corporate statutes, a corporation may be incorporated by one or more corporations/individuals/both. Individual incorporators cannot be:

o Less than 18 years of age; o Of unsound mind as found by a court in Canada or elsewhere; or o Have the status of a bankrupt (CBCA, s. 5)

Under CBCA incorporators must file certain prescribed material with Corporations Canada:

o Articles of incorporation (s. 6, Form 1); o Initial registered office address and first board of directors (ss.19(2) and 106, Form 2); o A name-search report on the proposed name of the corporation, along with certain supporting information; and o The fee of $250.

Articles are the most important of the documents because they set out the fundamental characteristics of the corporation: its name; the province or territory where registered office is to be situated; the class, number and characteristics of shares it is authorized to issue; the number of directors; any restrictions of shares it is authorized to issue; the number of directors; any restrictions on transferring shares; and any restrictions on the business the corporation may carry on.

Registered Office

Under CBCA, corporation must identify in its articles the province or territory in Canada where the registered office of the corporation is to be situated.
The street address of the registered office is set out in the Initial Registered Office Address and the First Board of Directors (Form 2).
Need not be head office, but only a place within the jurisdiction at which the records of the corporation are kept (CBCA, s. 254).
The province specified for the registered office may be changed only by amending the articles (CBCA, s. 173(1)(b)). This requires approval by a special resolution of shareholders and filing articles of amendment (Form 4).
A change in address within the province specified in the articles may be made with the approval of the directors.
Where the directors approve such a change, a Notice of Change of Registered Office must be filed with the director within fifteen days of the date of the change (CBA, s. 19(4), Form 3).
The registered office of a provincial corporation must be located inside the incorporating province in the municipality or township specified in the articles (OBCA, s. 14).
The municipality or township may be changed by special resolution of the shareholders (OBCA, s. 14(3)).
Articles of amendment need not be filed. A notice of change is required under Corporations Information Act.
The address of the registered office within the municipality may ne changed by the directors without shareholder approval (OBCA, s. 14(3)).

Class and Number of Shares

The articles define the classes of shares the corporation is to issue and names by which to be identified as well as the “rights, privileges, restrictions and conditions” of each class (e.g. dividends, share in residual assets after dissolution). Investors may want a class of shares that e.g. offers fixed annual dividend and entitled to receive back amount invested before any payment to other shareholders (“preferred shares”).
In many small corporations, only one class of shares (usually common shares).
Must specify number of shares that corporation may issue. Additional shares may be issued only after amending articles to raise/remove limit – requires shareholder by special resolution.

Number of Directors

Under CBCA it is necessary to specify in articles number of directors or minimum and maximum (CBCA s. 6(1)(e)).
Where minimum and maximum chosen, number of directors may be determined from time to time by special resolution of the shareholders.
Under CBCA, corporations that have distributed their shares to the public must have three directors at least two of whom are not officers or employees of the corporation or affiliated corporations. Similarly, OBCA s. 115. All other corporations need to have only one director (CBCA s. 102(2)).
The number of directors stated in the articles may be changed only by amendment of the articles.

Restrictions on Issuing, Transferring, or Owning Shares

In the absence of a restriction on share transfer, presumed to be freely transferable. Commonplace for corporations with few shareholders to have some kind of transfer restriction in the articles.
In the articles, the usual restriction is a short provision requiring the directors or some specified majority of shareholders to consent.
People to whom shares are transferred are not subject to any restriction on transfer unless they are actually aware of the restriction or the restriction or reference to is noted conspicuously on the face of the share certificates (CBCA, s. 49(8)) (OBCA s. 56(8) requires notice of transfer restrictions to appear on the face of the certificate).
Restrictions may also be imposed on issuance of shares – CBCA model corporate statutes permit the inclusion in the articles of a right for each existing shareholder of a corporation to purchase any new shares to be issued in proportion to his holdings of shares (CBCA s. 28).
Another kind of restriction defines the class of acceptable shareholders. E.g. restrictions to ensure a minimum level of Canadian ownership. Such restrictions for ensuring a minimum level of Canadian ownership so that the corporation meets the requirements for a licence to carry on its business and is eligible to receive other government benefits/meet other government requirements are expressly contemplated in the CBCA (ss. 32, 49(8)(9), 174) and OBCA (ss. 29, 42, 45). Must be conspicuously noted on share certificates (CBCA, s. 49 (10)). But restriction is effective even if not noted (CBCA, s. 49(11)).
Where such restrictions have been included, procedure to force the sale of any shares that become owned in contrary manner (CBCA, ss. 46-7, 49(8), OBCA, s. 45).

Restrictions on the Business the Corporation May Carry On

Under CBCA, not necessary for the corporation to describe the activities in which it will engage – has all the rights, powers, privileges of natural person (CBCA s. 15). In order to avoid the risk of ultra vires activities, common not to include any restriction in articles.
If a restriction is included in the articles, corporation is forbidden to act in a manner contrary to the restriction (CBCA s. 16(2)). But if corporation does something contrary to the restriction, the act is not invalid by reason only that it is contrary to the articles (CBCA s. 16(3)). No third party should be predjudiced.
However, shareholders may seek relief from any contravention of such a prvision if its effect on the shareholders is “oppressive, unfairly prejudical to or unfialry disregards their interests” (CBCA, s. 241(2)).
Both shareholders and creditors may apply to a court for an order restraining the corporation or anyone acting on its behalf, from acting in a manner contrary to the articles or directing compliance with the articles (CBCA s. 247).

Other Provisions

CBCA contemplates that articles may deal with:

o Requirements for super majorities of directors or shareholders to approve certain decisions (ss. 6(3) and (4)); o Limitations on the corporations right to purchase its own shares (ss. 34 and 35); o Liens on the shares of shareholders who are indebted to the corporation (s. 45(2)); and o The required notice and location of directors’ meetings and the quorum for such meetings (ss. 114(1) and (2)). o See equivalents in OBCA ss. 5(4) (5), 30, 31, 40, and 126(3).

Any provision permitted by the CBCA to be included in a by-law may be included in the articles (s. 6(2) and see OBCA s. 5(3)). What may be included in a by-law is virtually unrestricted (s. 103(1) and see OBCA s. 116).
Articles v. by-laws: Articles can be amended only by special resolution; by-laws require approval by simple majority only. Articles are a matter of public record, by-laws are not.

Other Documents Required to Be Filed on Incorporation

Initial Registered Office Address and First Board of Directors. Street address at which registered office is located and lists directors, addresses, whether resident Canadians. CBCA requires that at least 25% of directors be resident Canadians (s. 105(3) and OBCA s. 118(3)).
Update notices to be filed each time the information on directors/address of registered office changes (CBCA, ss. 19(3) and 113).
Under the OBCA, address of registered office and the identity, address and residency status of directors are contained in the articles. But no need to amend articles when these change. File information document called Notice of Change under the Corporations Information Act s. 4. Under OBCA each director must have consented to act as a director and copy of signed consent must be kept at registered office (OBCA s. 5(2)).
Fee charged on incorporation. $250 under CBCA, $360 under OBCA or 300 if electronically.
Completion of Incorporation
Once documents filed along with fee, director appointed to administer the CBCA issues a certificate certifying that the corporation, the articles of which are attached, was incorporated on the date of the certificate (CBCA, ss. 8 and 9). The corporation comes into existence on the date of the certificate (CBCA s. 9).
The directors named in the Initial Registered Office Address and First Board of Directors hold office until the first meeting of shareholders (CBCA, s. 106(2)).
See OBCA, ss. 6, 7, 119.
The provisions in the articles may be changed only by articles of amendment filed with the director after approval by a special resolution of shareholders. See infra.

Post-Incorporation Organization

On incorporation may commence carrying on business, but further steps required before fully organized.
Directors should have meeting and pass resolution to issue shares.
In instances where directors have resigned or been removed and not replaced, any person who manages the corporation is deemed to be a director (CBCA, s. 109(4) and (5); OBCA s. 115(4)).
No requirement for any minimum amount to be paid for shares to be issued.
At first meeting directors will typically adopt arrangements for carrying on the formal legal business of the corporation including:

o Requirements for directors; o Procedure for meetings of directions (notice, quorum); o Remuneration and indemnification of directors; o Designation and specification of duties of officers; o Procedure for meetings of shareholders; o Procedure for payment of dividends; o Financial year of the corporation; o Designation of persons who may sign documents. o Similarly, OBCA, s. 117.

Arrangements usually set out in a by law.
CBCA provides that certain elements of its default rules may be changed only by a by-law: location, notice of, quorum for directors meetings (s. 114); location of shareholder meetings (s. 132); quorum (s. 139) and voting procedures (s. 141).
All other matters may be dealt with in directors’ resolution.
To take effect, a by-law must be passed by directors; to continue in effect must be passed by shareholders at next meeting following approval of by-law by directors (CBCA s. 103, OBCA, s. 116). Including arrangements in a by-law entrenches more than simple directors’ resolution.
At first meeting directors will pass resolutions dealing with other organizational matters such as appointing officers, banking arrangements, including authorizing opening of bank account and designating people to sign cheques (CBCA, s. 104(1)).
Corporate seal may be approved, though not required (CBCA s. 23).
No need for a corporation to issue share certificates, though shareholders have a right to receive one on request (CBCA, s. 49(1)).
Once shares issues, shareholders’ meeting usually held at which by-laws approved by directors are voted on. Must be approved by simple majority of shareholder votes represented at the meeting (CBCA s. 103(2)).
Final step that often occurs in corporations with few shareholders is shareholders agreement; e.g. may agree to vote their shares for certain people as directors; circumstances in which shares may be transferred.
Articles, by-laws, directors’ resolutions, shareholders’ resolutions and any shareholders’ agreement must be maintained by the corporation at registered office/any other place in Canada designated by the directors (CBCA s. 20). Records may be kept outside Canada if access provided in Canada (CBCA s. 20(5.1)). Shareholders and creditors must be given access, except for minutes of meetings and resolutions of directors (CBCA s. 21). Access includes a limited right to make copies.
Considerations Relating to the Scale of the Corporation
Both federal and provincial Acts address the problems arising from differences in scale in a modest way e.g. OBCA distinguishes between “offering” and “non-offering” corporations. Essentially, offering corporations are those that have offered their shares to the public. Non-offering corporations are all the rest.
A corporation may obtain an order from the Ontario Securities Commission that it is deemed not to be an offering corporation if the OSC determines that such an order would not be prejudicial to the public interest.
Provisions that apply to offering corporations:

o Management’s obligation to facilitate the exercise of shareholders’ right to vote by sending information about corporation, items on agenda for shareholders meeting, form of proxy (sending of information is called mandatory proxy solicitation) (s. 111). o Minimum number of directors is 3 (s. 115(2)). o At least 1/3 of directors must not be officers/employees of corporation/its affiliates (s. 115(3); 1(4), (5) (definition of affiliate)). o Offering corporations must have their financial statements audited, and filed with the OSC (ss. 149, 156). o Offering corporations must appoint an audit committee of the board of directors, a majority of whom are not officers or employees of the corporation or any affiliated corporation, responsible for reviewing the financial statements of the corporation and reporting to the board (s. 158(1) and (2)).

None of these requirements except for audit applies to non-offering corporations. But shareholders of non-offering corporations may dispense with audit if unanimously agree (OBCA ss. 148 and 149).
Under CBCA if a corporation has distributed securities to the public (CBCA Regulations, s. 2(1)) and they remain outstanding and held by more than one person it becomes subject to a more onerous set of obligations that mirror many of those under OBCA. Similarly, may also apply to the director to be deemed not to be distributing securities when few shareholders. Director may grant such an order provided it would not prejudice the public interest (ss. 1(6) and (7)).
All distributing corporations must:

o Have three directors at least two of whom must not be officers/employees of corporation/its affiliates (s. 102(2), s. 2(2)). o Appoint an auditor and an audit committee of at least three directors, a majority of whom are not officers/employees of the corporation/its affiliates (ss. 162 and 171). o File financial statements with Corporations Canada (ss. 155, 160 and 171(8)).

Insiders of such corporations must comply with rules regarding their trades in shares (CBCA, ss. 126 and 130). Provincially insider trading is governed by securities laws.
All corporations with more than 50 shareholders and all distributing corporations must comply with mandatory proxy-solicitation requirements (s. 149(1) and (2)).
If contemplated at the time of incorporation that a corporation will be a public corporation, there are certain implications for the incorporation and organization of the corporation:

o Articles will not contain a restriction on share transfer o No shareholders’ agreement necessary (too many shareholders) o By-laws will have to contain more elaborate provisions regarding shareholder meetings. Factors Affecting Choice of Jurisdiction Disclosure Obligations

Each jurisdiction imposes certain obligations to disclose information regarding the corporation and the people in it.
Basic federal and Ontario disclosure requirements:

o CBCA: Filing: Annual return, s. 263, Form 22

Corporate name
Corporation number (assigned on incorporation)
Taxation year end
Date of last annual meeting (or written resolutions in lieu of annual meeting)
Whether the corporation is a distributing corporation
Whether there are more than fifty shareholders
Whether a unanimous shareholders agreement is in place
Jurisdictions in which the corporation carries on business.

o At any time there is a change in directors or a change in the address of the registered office, a notice must be filed (Change of Registered Office Address (Form 3), Change Regarding Directors (Form 6)). o OBCA: Filing: Initial Return and annual return Corporations Information Act ss. 2(1) and 3.1:

Corporate name
Ontario Corporation number (assigned on incorporation)
Date of incorporation (or amalgamation if later)
Name and addresses fro service of documents for the directors and the five most senior officers of the corporation.
Date of election or appointment of directors and the five most senior officers and Canadian residency status of directors
Name of anyone ceasing to be a director or officer and date of departure
Any change in any of this information since the last return filed.
As well, a corporation must make filings in every province where it carries on business outside its jurisdiction of incorporation. E.g. upon commencing business in Ontario must file an initial return under the Corporations Information Act (s.3(1)). In addition to information above, must disclose:

o Name of jurisdiction where incorporated/continued/amalgamated (most recent); o Address of the corporation’s head or registered office; o Date on which the corporation commenced or ceased activities in Ontario; o Name and office address of the corporation’s chief officer or manager in Ontario and the date the person assumed or ceased to hold this position; o Address of the corporation’s principle office in Ontario; o Any immediate former names of the corporation; o If the corporation is required to have an agent of service, the address of the agent (only foreign corporations).

Under Ontario Corporations Information Act s. 3.1 must also file annual return confirming the same information. Whenever any information in an initial or annual filing changes, a new filing indicating the change is required within 15 days (CIA s. 4).
Failure to make the required filings and filing untrue or misleading information are offences under the CBCA ss. 250, 251 and CIA ss. 13, 14. Under CIA s. 18 also deprives the corporation of the right to sue in the province in connection with the business being carried on by the corporation except with leave of the court.

Where the Corporation Will Carry on Business

Federal incorporation gives right to carry on business in all provinces, whereas provincial incorporation gives right to carry on business only incorporation – need licence under extra-provincial licensing legislation otherwise.
Under Ontario Extra-Provincial Corporations Act, corporations incorporated under the laws of other provinces are exempt from the requirement to obtain a licence.
Where required to obtain licence, must submit application name-search report, certificate setting out that corporation is a valid and subsisting corporation under the laws of its governing jurisdiction, an appointment of an agent for service (someone authorized to accept service of documents on behalf of the corporation in connection with any lawsuit) in the province and the required fee.
Obligation to obtain licence arises when corporation begins to carry on business in the provinces. In Ontario, a corporation carries on business if it has a place of business in Ontario, holds an interest in real property there, or otherwise engages in business in the province (OEPCA s. 1(2)). A corporation is deemed not to carry on business if it is only taking orders or buying or selling goods or services through travelling representatives, advertisements or the mail (OEPCA, s. 1(3)).
Failure to obtain a licence when required to do so is an offence. Liability extends to “any person who contravenes this act” – includes corporation, any person who carries on its business in the province, directors and officers who authorized/permitted the offence (OEPCA s. 20). An unlicensed extra-provincial corporation cannot sue before any provincial tribunal in respect of any contract made by it (OEPCA s. 21). An unlicensed extra-provincial corporation may not own land (OEPCA s. 22). Licences may be cancelled by the provincial official responsible for administering the extra-provincial licensing regime (OEPCA s. 7).

Liability for Provincial Tax

Provincial income tax is based on income earned in the province regardless of jurisdiction of incorporation. As a result, usually not a significant factor.

Provisions of Corporate Law

Uniformity is one of the express objectives of the CBCA (s. 4).
Ontario reforms of 2007 track many of 2001 amendments to the federal act. However some represent a different approach. E.g. OBCA now specifies that the statutory duty of care owed by directors is solely for the benefit of the corporation. Under CBCA, following Peoples Department Stores Inc. (Trustee of) v. Wise, duty may benefit creditors and other corporate stakeholders.
Recognition – if business is to be carried on outside Canada, may be preferable to incorporate under CBCA.

Canada Business Corporations Act ss. 2(6), 2(7), 2(8), 102(2), 114(8), 117(1), 126(1), 139(4), 142(1), 149(2), 160, 174(1), 263 2. (6) Exemptions — on application by corporation - On the application of a corporation, the Director may determine that the corporation is not or was not a distributing corporation if the Director is satisfied that the determination would not be prejudicial to the public interest.

(7) Exemptions — classes of corporations - The Director may determine that a class of corporations are not or were not distributing corporations if the Director is satisfied that the determination would not be prejudicial to the public interest.
(8) Infants - For the purposes of this Act, the word “infant” has the same meaning as in the applicable provincial law and, in the absence of any such law, has the same meaning as the word “child” in the United Nations Convention on the Rights of the Child, adopted in the United Nations General Assembly on November 20, 1989.

102. (2) A corporation shall have one or more directors but a distributing corporation, any of the issued securities of which remain outstanding and are held by more than one person, shall have not fewer than three directors, at least two of whom are not officers or employees of the corporation or its affiliates. 114. (8) Where a corporation has only one director, that director may constitute a meeting. 117. (1) Resolution in lieu of meeting - A resolution in writing, signed by all the directors entitled to vote on that resolution at a meeting of directors or committee of directors, is as valid as if it had been passed at a meeting of directors or committee of directors.

126. (1) In this Part, “business combination” means an acquisition of all or substantially all the property of one body corporate by another, or an amalgamation of two or more bodies corporate, or any similar reorganization between or among two or more bodies corporate; “distributing corporation” [Repealed, 2001, c. 14, s. 52] “insider” means, except in section 131, (a) a director or officer of a distributing corporation; (b) a director or officer of a subsidiary of a distributing corporation; (c) a director or officer of a body corporate that enters into a business combination with a distributing corporation; and (d) a person employed or retained by a distributing corporation; “officer” means the chairperson of the board of directors, the president, a vice-president, the secretary, the treasurer, the comptroller, the general counsel, the general manager, a managing director, of an entity, or any other individual who performs functions for an entity similar to those normally performed by an individual occupying any of those offices; “share” means a share carrying voting rights under all circumstances or by reason of the occurrence of an event that has occurred and that is continuing, and includes (a) a security currently convertible into such a share, and (b) currently exercisable options and rights to acquire such a share or such a convertible security. 139. (4) One shareholder meeting - If a corporation has only one shareholder, or only one holder of any class or series of shares, the shareholder present in person or by proxy constitutes a meeting.

142. (1) Resolution in lieu of meeting - Except where a written statement is submitted by a director under subsection 110(2) or by an auditor under subsection 168(5), (a) a resolution in writing signed by all the shareholders entitled to vote on that resolution at a meeting of shareholders is as valid as if it had been passed at a meeting of the shareholders; and (b) a resolution in writing dealing with all matters required by this Act to be dealt with at a meeting of shareholders, and signed by all the shareholders entitled to vote at that meeting, satisfies all the requirements of this Act relating to meetings of shareholders.

149. (2) Exception - The management of the corporation is not required to send a form of proxy under subsection (1) if it (a) is not a distributing corporation; and (b) has fifty or fewer shareholders entitled to vote at a meeting, two or more joint holders being counted as one shareholder. 160. (1) Copies to Director - A distributing corporation, any of the issued securities of which remain outstanding and are held by more than one person, shall send a copy of the documents referred to in section 155 to the Director (a) not less than twenty-one days before each annual meeting of shareholders, or without delay after a resolution referred to in paragraph 142(1)(b) is signed; and (b) in any event within fifteen months after the last preceding annual meeting should have been held or a resolution in lieu of the meeting should have been signed, but no later than six months after the end of the corporation’s preceding financial year.

(2) Subsidiary corporation exemption - A subsidiary corporation is not required to comply with this section if

(a) the financial statements of its holding corporation are in consolidated or combined form and include the accounts of the subsidiary; and (b) the consolidated or combined financial statements of the holding corporation are included in the documents sent to the Director by the holding corporation in compliance with this section.

(3) Offence - A corporation that fails to comply with this section is guilty of an offence and is liable on summary conviction to a fine not exceeding five thousand dollars.

174. (1) Constraints on shares - Subject to sections 176 and 177, a distributing corporation, any of the issued shares of which remain outstanding and are held by more than one person, may by special resolution amend its articles in accordance with the regulations to constrain (a) the issue or transfer of shares of any class or series to persons who are not resident Canadians; (b) the issue or transfer of shares of any class or series to enable the corporation or any of its affiliates or associates to qualify under any prescribed law of Canada or a province (i) to obtain a licence to carry on any business, (ii) to become a publisher of a Canadian newspaper or periodical, or (iii) to acquire shares of a financial intermediary as defined in the regulations; (c) the issue, transfer or ownership of shares of any class or series in order to assist the corporation or any of its affiliates or associates to qualify under any prescribed law of Canada or a province to receive licences, permits, grants, payments or other benefits by reason of attaining or maintaining a specified level of Canadian ownership or control; (d) the issue, transfer or ownership of shares of any class or series in order to assist the corporation to comply with any prescribed law. (e) the issue, transfer or ownership of shares of any class or series to enable the corporation to be a registered labour-sponsored venture capital corporation under Part X.3 of the Income Tax Act. 263. Every corporation shall, on the prescribed date, send to the Director an annual return in the form that the Director fixes and the Director shall file it. Form 22 Annual return under s. 263 above. Ontario Business Corporations Act ss. 1(6), 1(1)(27), 101(4), 104(1), 111, 115(2), 125(12) 1(6) – Offering securities to the public – if (a) prospectus has been filed under Securities Act or Corporations Information Act or (b) any securities have since 1 May 1967 been listed on any stock exchange in Ontario – except if on application of a corporation the Commission is satisfied that it would not be prejudicial to the public interest, subject to discretionary terms and conditions, the corporation shall be deemed to have ceased to be offering its securities to the public. s. 27(1) – conversion privileges/options/rights to acquire securities may be issued and set out in certificates. s. 101(4) – if only one shareholder, that shareholder may constitute a meeting. s. 104(1) – resolution in lieu of meeting – a resolution in writing signed by all shareholders entitled to vote on that resolution at a shareholders meeting is as valid as if passed at a meeting and satisfies all requirements of the Act relating to that meeting of shareholders. s. 111 – mandatory solicitation of proxy – management of offering corporation must send form of proxy to each shareholder entitled to receive notice of the meeting. s. 115(2) – non-offering corporation must have at least one individual on board of directors and offering corporation must have at least three. s. 126(12) – where a corporation has only one director, that director may constitute a meeting. Business Names Act, ss. 2(1), (6), 7 S. 2(1) – no corporation shall carry on business or identify itself to the public by a name other than its corporate name unless the name is registered. s. 2(6) – person/corporation carrying on business under registered name must set out both registered name and person’s name in all contracts, invoices, negotiable instruments and orders involving goods or services. s. 7(1) – if not registered under s. 2(1) cannot maintain proceeding in court of Ontario without leave of the court. s. 7(2) – court shall grant leave if satisfied that the failure to register was inadvertent; there is no evidence that the public has been deceived or misled and at the time of the application the person is not in contravention of the Act. s. 7(3) – no contract is void just because it was entered into in contravention of the Act.

Corporations Information Act, ss. 2, 3 s. 2(1) – all corporations (unless extra-provincial/exempted by regulations) must file initial return. s. 2(2) – the initial return must be filed within sixty days of incorporation/amalgamation/continuation of the corporation. s. 3(1) – every extra-provinical corporation that begins to carry on business in Ontario must file an intila return. s. 3(2) – must file within sixty days after beginning to carry on business in Ontario.

(ii) Corporate Names Casebook pp. 173-175

Common theme is the protection of the public against deception (OBCA ss. 9(1)(b) and CBCA s. 12(1) and Regs., Part 2.

VanDuzer pp. 148-161

Name may come to have goodwill. Use by someone else may be damaging to goodwill associated with name. Regulation protects legitimately created goodwill and seeks to prevent confusion.

Corporate Law Rules Regarding Names

CBCA, s. 12(1)(a) – a corporation may not be incorporated with or carry on business using a name that is “prescribed, prohibited or deceptively misdescriptive”. Otherwise director who administers CBCA may refuse to incorporate or order that the name be changed (s. 12(2)). In practice, hearings are held before name change is ordered and this is required under OBCA s. 12(1).
CBCA sets out both absolute and qualified prohibitions on the use of names for the purposes of s. 12. Names that may never be used are those that are obscene (CBCA regs. s. 23) or those that contain phrases that others are exclusively entitled to (regs. s. 21). Ss. 22 and 26 prohibit the use of certain names without consent e.g. a name that suggests a business is affiliated with the government of Canada, a university, or a professional association; consent required for use of person’s family name.
Name cannot be used if not distinctive enough/confusing. S. 24. A name is not distinctive and cannot be used if it is;

o Only descriptive, in any language, of the business of the corporation or the goods or services in which the corporation deals or intends to deal or the quality function or other characteristic of these goods/services. o Primarily or only the name or surname, of an individual who is living or died in last thirty years. o Primarily or only a geographic name used alone. o Exception permits the use of names that are not inherently distinctive but through use have acquired a secondary meaning

It is the whole name that must be distinctive (CBCA Regulations s. 19).
CBCA Regulations also address confusion with other names and trade-marks. Other names include all names under which a business is carried on (referred to as trade-names). A corporate name is confusingly similar to a trade-name or trade-ark if its use would likely lead to the inference that the business carried on under the corporate name and the business carried on under the trade-name/trade-mark are the same (s. 18).
CBCA Regs s. 25 – factors to be considered in assessing whether a corporate name is confusingly similar:

o The inherent distinctiveness of the whole or any element of the corporate name and the trade-mark/name, and the extent to which either has become known; o The length of time the corporate name and the trade-mark/name have been in use and which was used first; o The nature of the goods, services, or business associated with the corporate name and with the trade-mark/name including the likelihood of any competition between the corporation proposing to use the name and other business using the trade-mark/name; o The nature of the trade with the corporate name and the trade-mark/name is associated, including the nature of the products or services and the means by which they are offered/distributed (e.g. wholesale/retail); o The degree of resemblance between the corporate name and the trade-mark/name in appearance/sound/ideas suggested; and o The territorial area in Canada in which the corporate name or the trade-name is likely to be used.

Similarly, see OBCA Reg s. 3.
Unitel International Inc. v. Unitel Communications Inc. – court refused to overturn decision of director refusing to grant order requiring Unitel Communications to change its name. Great deference should be shown to Director’s decisions regarding names.
I. Browns Packaging Inc. v. Canada (Consumer and Corporate Affairs) – appeal from decision of director that the name I. Browns Packaging Inc. was not confusingly similar to Brown’s Bottle (Canada) Ltd. The court found that I. Browns Packaging designed packaging products for a small number of industrial customers, whereas Browns Bottle (Canada) acted as a distributor for packaging products. Court determined some overlap in that bought from some of same suppliers, sold to some of same customers. Although might find themselves in competition, the market was specialized, few purchasers – little likelihood of confusion and no actual confusion established. The descriptive elements of the names were different. And at common law, a person has a right to use his own name and the assessment should take I. Browns’s right to use his name into account.
S. 27 – 31 of the CBCA Regulations contain further rules about the possible confusion of names, including what a corporation must do to use a name that is confusingly similar to the name of another corporation where it has not carried on business for at least 2 years (s. 28) or where a corporation is taking over the business of another corporation and intends to use the name that corporation used (s. 30). In general, must get corporation to (i) consent and (ii) undertake to dissolve or to change its name.
Names are prohibited if they are deceptively misdescriptive. Under s. 32 CBCA Regs a name is deceptively misdescriptive if it misdescribes in any language:

o The business, goods or services with which it is proposed to be used; o The conditions under which the goods or services will be produced/supplied or the persons to be employed; or o The place of origin of the goods/services.

Corporation may use and be legally designated by name in English form and/or French form, or third language for use outside Canada (CBCA ss. 10(3) and (4)).
Final requirement is that each name has legal part consisting of Limited, Incorporated, Corporation corresponding abbreviation or their French equivalents (CBCA, s. 10(1)).
Corporation must use its full legal name on all “contracts, invoices, negotiable instruments and orders for goods or services issued or made by or on behalf of the corporation” CBCA s. 10(5).
Individual who fails to do so may be found personally liable for obligations of the business.
Commercial Tire Supply Ltd. v. Tanney – failure to indicate corporation was responsible for credit obligation led to imposition of personal liability on shareholder.
But liability is not automatic. It depends on the facts of each case.

Provincial Registration and Licensing Rules Regarding Names

Most sole proprietorships and all partnerships must register their names under the Ontario Business Names Act. A corporation carrying on business in Ontario using a name other than its full corporate name must also register its other name. Failure means that defaulting party cannot maintain an action in the courts of Ontario in connection with an obligation of the business.
Action may be permitted to proceed with consent of court if (i) the failure to register was inadvertent, (ii) there is no evidence that the public has been deceived or misled, and (iii) at the time of the application to court, the name has been registered (OBNA s. 7).
Failure to register is also an offence under s. 10 but enforcement is rare.
A person who has registered a name may claim compensation up to $500 for damages suffered as a result of another person registering a name same/deceptively similar to his own (s. 6 OBNA). If successful, court must order Registrar to cancel offending registration.
Provinces also regulate the use of corporate names by corporations incorporated outside the province through their extra-provincial licensing regime. Licences are not granted where the name of the extra-provincial corporation is confusingly similar to the name of a business already being carried on in the province.
Reference Re Constitution Act, 1867, ss. 91 & 92 – province has no jurisdiction to refuse to permit federal corporation to use its corporate name. Provincial power to regulate the use of a business name depends on whether the province conducts business interprovincially or wholly within the province. Only in the latter case may the province regulate the use of a name. Power to order change of name could not be applied to a federal corporation carrying on an interprovincial business. Provisions of the Act that require only registration of a business name were within the constitutional competence of the province regardless of the nature of the corporation’s business. Province has no jurisdiction to restrict the use of a trade-mark out of concern that the trade-mark is similar to a business name in use in the province – trade-marks are a matter within federal jurisdiction. But it can restrict the use of the trade-mark in a name used by the corporation other than its corporate name in accordance with the rules above.
Trade-marks Act Rules Regarding Names
A trade-mark is a word/phrase/symbol. Use of a mark in association with goods or services in the marketplace gives the owner certain rights to use the mark exclusively, including the right to claim damages against anyone who infringes the mark.
Registration not required but provided for under the Trademarks Act – gives benefits including presumption that trade-mark is valid.
Under s. 20 a trade-mark is infringed by the use of a confusing trade-mark/name. Confusion defined s. 6.
A trade-name for the purposes of the Trade-marks Act is simply a name used by a business. A trade-name is not a trade-mark unless also used to identify goods/services of the business.
No cases address the extent to which confusion for the purposes of trade-mark infringement and for the purposes of corporate statutes.
The remedies are different – trade-mark infringement action may entitle the plaintiff to damages and an injunction, under corporate statutes only a direction to corporation to change its name.
Federal Court has jurisdiction of trade-mark matters, corporate names disputes under the CBCA must be resolved before the Director and on appeal in provincial superior courts.

Passing Off

A person carrying on a business has a common law right to seek damages against someone selling products in a manner likely to deceive purchasers into thinking they are the first person’s products thereby depriving her of profit (Ciba-Geigy Canada Ltd. v. Apotex Inc.). Injunction may also be claimed. Passing-off actions may also be brought under s. 7(b) Trade-marks Act.
To succeed in passing-off action, plaintiff must show:

o Plaintiff’s business has a reputation or goodwill at the relevant time; o The defendant has made a misrepresentation in the course of trade to prospective customers to the effect that there is a connection between the business of the plaintiff and that of the defendant. No requirement that the misrepresentation be deliberate, no proof of intent to injure required, so long as injury was a reasonably foreseeable consequence of the misrepresentation; and o The misrepresentation must cause actual damage to a business or the goodwill of the plaintiff or be likely to do so.

Greystone Capital Management Inc. v. Greystone Properties Ltd. – court found that Greysone Capital had established a reputation in the investment community in BC. The adoption of corporate names incorporating the word “Greystone” constituted a misrepresentation that business was connected to Capital’s and some people had confused the businesses. Court ordered defendant corporations to change their names.
C.f. trade-mark infringement, where no need to prove market reputation and once registered right to use trade-mark is recognized across Canada.
Names and the Incorporation Process
As part of incorporation process, name search must be obtained and submitted. The federal agency, Corporations Canada, carefully reviews name searches and will not permit incorporation if it has concerns about the name. Thus advisable to pre-clear the name by reserving name for up to ninety days in advance of incorporation (CBCA s. 11).
Name search may be obtained from commercial search firms or Corporations Canada and is conducted in NUANS database, owned by Corporations Canada.
Name search not required if incorporates are content simply to have a name assigned by the corporate regulator. Corporation with number name may use another name so long as it complies with provincial registration requirements and corporate law rules requiring the use of the full corporate name on documents.
In addition to name search, must submit a Corporate Name Information Form or otherwise provide certain information to assist with assessment of whether the name is available:

o What type of business will the corporation carry on? o Where will the corporation’s business be carried on? o What type of clients will the corporation’s business shave? o What is the derivation of any distinctive element of the name? o Will the corporation be related to businesses with similar names? o Will the corporation have a foreign parent corporation with a similar name?

Canada Business Corporations Act ss. 6(1)(a), 10-13

s. 6(1)(a) – articles of incorporation – must set out name of corporation. s. 10(1) – the word “Limited”, “Limitée”, “Incorporated”, “Incorporée”, “Corporation” or “Société par actions de régime fédéral” or the corresponding abbreviation “Ltd.”, “Ltée”, “Inc.”, “Corp.” or “S.A.R.F.” must be part of the name of every corporation. s. 10(1.1) – subsection (1) does not apply to corporations with name S.C.C. before the subsection came into force. s. 10(2) – the Director may exempt a corporation from the requirements of (1). s. 10(3) – subject to s. 12(1) the name of the corporation may be English and/or French. s. 10(3) – subject to s. 12(1) the corporation may use any language for its name outside Canada. s. 10(5) – name must be set out in all contracts, invoices, negotiable instruments and orders for goods or services. s. 10(6) – subject to s. 10(5) and s. 12(1) a corporation may identify itself by another name so long as does not contain legal bit from s. 10(1). s. 11(1) – Director may reserve a name for ninety days for intended corporation/corporation about to change name. s. 11(2) – on request, Director may assign number to the corporation as its name. s. 12(1) – corporation cannot have a name that is prohibited, deceptively misdescriptive or reserved for another corporation/intended corporation. s. 12(2) – if a corporation has a name that contravenes this section the Director may direct it to change its name under s. 173. s. 12(4) – if corporation has a number a its name, Director may direct it to change its name to a name other than a number under s. 173. s. 12(4.1) – where a corporation obtains a name as a result of an undertaking to change name, and the undertaking is not honoured, the Director may direct the corporation to change its name in accordance with s. 173. s. 12(5) – where a corporation directed to change its name does not do so within sixty days, the director may revoke its name and assign a name to it. s. 13(1) – when a name is revoked and new name assigned, Director shall issue a certificate of amendment and notify in publication available to the public. s. 13(2) – the articles of the corporation are amended on the date shown in the certificate of amendment.

Reg. 17-34 Selection and use of corporate names.

Ontario Business Corporations Act ss. 8-12 s. 8(1) – every corporation shall be assigned a number by the Director. s. 8(2) – where no name is specified in the articles, the corporation shall be assigned a number name. s. 8(3) – if the Director assigns a number/number name the same as one previously assigned, he may issue a certificate of amendment to the articles of the corporation changing the number/name without a hearing. s. 8(4) – if the Director endorses a certificate on the articles that sets out the number incorrectly, he may substitute a corrected certificate with the date of the one it replaces. s. 8(5) – file number assigned before 29 July 1983 will be deemed to be corporation’s number. s. 9(1) – the corporation shall not have a name that (a) contains a word or expression prohibited by the regulations; (b) is the same as or, except where a number name is proposed, similar to, the name of a known body corporate, trust, association, partnership, sole proprietorship, or individual, whether in existence or not, or the known name under which any body corporate, trust, association, partnership, sole proprietorship, or individual, carries on business or identifies himself, herself or itself if the use of that name would be likely to deceive. s. 9(2) – exception – corporation may have a name described in clause (1)(b) upon complying with the regulations. s. 9(3) – must file with Director documents relating to name of corporation prescribed in regulations. s. 10(1) – the word “Limited”, “Limitée”, “Incorporated”, “Incorporée” or “Corporation” or the corresponding abbreviations “Ltd.”, “Ltée”, “Inc.” or “Corp.” shall be part of the name of every corporation. s. 10(2) – Corporation may have English or French name or both combined or separately. s. 10(2.1) – if it has both separately it may be legally designated by either. s. 10(3) – only letters from the Roman alphabet, Arabic numerals and such punctuation/other marks as are permitted by regulation are allowed. s. 10(4) – a corporation may have a provision in its articles permitting it to set out its name in any language. s. 10(5) – despite (4), a corporation must set out its name in legible charaters in all contracts, invoices, negotiatble instruments, orders for goods or services and documents sent to the Director. s. 11(1) – can’t use “Limited” or “Incorporated” or “Corporation” if not incorporated in any language. s. 11(2) – if a corporation uses a name other than as provided by the articles that name can’t include “Limited” or “Incorporated” or “Corporation in any language. s. 12(1) – if a Corporation acquires a name contrary to s. 9 or 10 the Director may, after a hearing, issue a certificate of amendment to the articles changing the name of the corporation. s. 12(1.1) – a hearing under (1) shall be in writing in accordance with rules made by the Director under the Statutory Powers Procedure Act. s. 12(2) – if a corporation undertakes to dissolve/change its name and the undertaken is not carried out within the specified time, the Director may, after a hearing, issue a certificate of amendment to the articles changing the name of the corporation. s. 12(3) – if a person who is not a corporation undertakes to dissolve/change its name and does not do so within time specified, the Director may, after giving the corporation that acquired the name by virtue of the undertaking an opportunity to be heard, issue a certificate of amendment to the articles changing the name of the corporation.

Reg. 1-22 Selection and use of corporate names.

Business Names Act, s. 6 s. 6(1) – a person who suffers damages because a name is registered that is the same/deceptively similar to another person’s registered name is entitled to recover compensation. s. 6(2) – the compensation is limited to the greater of $500/actual damages incurred. s. 6(3) – in giving judgment for a plaintiff in an action under (1) the court shall order the Registrar to cancel the registration that was the cause of the action.

(iii) Pre-incorporation Contracts Casebook pp. 180-181, 195-206

Useful to consider three situations: only promoter knows company not yet incorporated, both parties know not yet incorporate, neither party knows not yet incorporated.
Effect of common law is that no pre-incorporation contract is binding upon a company – new contract must be made.
Bank of N.S. v. Williams – s. 14(3) CBCA – third party was not mislead nor did the agent or company mislead her as to who would be responsible for payment.
According to Federal Proposals, fraudulent promoter may become jointly liable if he seeds to evade his obligations by hiding behind a corporation that he in fact dominates.
Guido v. Swail – draft purchase agreement evidenced plaintiffs’ intention to contract on behalf of corporation to be incorporated without incurring personal liability. Defendants repudiated agreement. Court held that having excluded their personal liability, the plaintiff’s could not rely on OBCA ss. 21(1) and (2) to make the contract binding where no incorporation had occurred.
Westcom Radio Group Ltd. v. MacIsaac – notwithstanding s. 21(1) OBCA, held that since there was no company that the plaintiff purported to contract on behalf of the contract was a nullity and the wording of the act did not include such contracts.
Szecket v. Huang – declined to overrule Westcom but stated that it was one of the problems of common law that legislature had intended to overcome.
1080409 Ontario Ltd. v. Hunter – resolved dilemma of two previous cases based on state of knowledge – in former case neither party knew not incorporated, in latter case both parties knew not incorporated. Reached analysis consistent with the latter following what he described as the undeniable legislative intent.
Landmark Inns of Canada v. Horeak – interpretation of Saskatchewan Business Corporations Act, section similar to OBCA s. 21. Person claiming to be chairman of company not yet incorporated signed offer to lease and affixed seal purporting to be corporate seal. Plaintiff had work done to premises at defendants behest. Defendant did not proceed with lease. Company was later incorporated. Plaintiff commenced action for damages resulting form the refusal to pay proceed with the lease.
Defendant personally bound unless provisions of act apply – defendant says purported adoption by company of lease ceases to make him bound. However, lease was repudiated before purported adoption; contract was at an end and could not be adopted by company at a later date. No provision that defendant would not be personally bound.
Solomon v. Cedar Acres East, Inc. – plaintiff and promoter entered into contract for architectural services on piece of land on which promoter held an option. Company was incorporated and option assigned to it. Plaintiff argued ratification could be inferred because corporation benefitted from plans. But corporation did not know all the material facts of the agreement and knowledge possessed by a single promoter having only a minority interest cannot bind the corporate defendant.

VanDuzer pp. 186-192

Effect of contracts entered into on behalf of a corporation before the date of its incorporation. A person (typically referred to as agent or promoter) will purport to enter into a contract with a third party on behalf of a corporation that has not yet come into existence. Is the agent liable? Is the corporation liable if it adopts the contract? In which case, does the agent cease to be liable?

Common Law

Kelner v. Baxter – corporation was not liable and could not be made so by adoption or acceptance. For it to be liable, there had to be a new contract with a post-incorporation exchange of promises between the corporation and third party.
Less clear whether agent would be liable – depended on intention of the parties as determined by the courts based on all the circumstances.
Generally: if parties both knew that the corporation was not in existence, presumption that the parties intended that the agent would be personally liable (Kelner v. Baxter).
Black v. Smallwood – if parties both thought corporation was in existence no such presumption arose. If both parties believed corporation was in existence, could not have intended Smallwood to be personally liable.
Where agent knew no corporation, but third party believed there was, courts have often (not always) held agent liable; even if contract cannot be enforced against the agent, third party may be able to claim damages where she can show a misrepresentation by the agent that the agent was acting for a corporation which induced her to enter the contract to her detriment.

Statutory Reform

S. 14 CBCA, s. 21 OBCA:

o A person who purports to enter into a contract with a third party by or on behalf of a corporation before it comes into existence is personally bound to perform the contract and is entitled to its benefits; o If a corporation comes into existence and adopts the contract, the corporation is bound by and is entitled to the benefits of the contract and the agent is no longer bound by or entitled to the benefits; o The third party may apply to the court for an order fixing both the corporation and the agent with liability (joint, joint and several, or apportioned) regardless of whether the corporation has adopted the contract or not; and o The third party and the agent may agree in the contract that the agent is not bound by the contract in any event.

CBCA applies only to written contracts – old common law rules apply to oral contracts.
OBCA does not distinguish between written and oral contracts.
If corporation is never incorporated unclear what rules should apply – arguable that the provisions of a corporate statue come into play only when there has been incorporation under the statute since they refer to contracts made before the corporation comes into existence.
The language used in some of the corporate statutes is problematic – OBCA s. 21(1) says agent is liable if “enters into an oral or written contract in the name of or on behalf of a corporation before it comes into existence…” Seems to suggest necessary to determine that a contract exists in order for the section to apply – effective contract means parties must have intended agent to be bound. Similarly, s. 21(2) permitting the corporation to adopt a contract made for its benefit applies only if there is a contract, suggesting that adoption is permitted only where the agent is bound personally to a contract under the common law rules.
Westcom Radio Group Ltd. v. MacIsaac adopted this interpretation but effectively overruled in:
Szecket v. Huang – intention of s. 21 was to replace the common law and not appropriate to ask if common law contract before applying statutory scheme.
Courts have been reluctant to grant relief under provision permitting court to hold agent liable after contract has been adopted by corporation.
Bank of Nova Scotia v. Williams – court refused to exercise its discretion because the third party entering the contract was not mislead regarding identity of person with whom it was really contracting and who would be responsible for performing obligations.
Sherwood Design Services Inc. v. 872935 Ontario Ltd. – client signed agreement signed “on behalf of corporation to be incorporated”. His law firm instead of incorporating new corporation used a shelf corporation. Sent documents to vendor’s lawyer for comments and a letter indicating the shelf corporation would complete the purchase. Client backed out and never took control of shelf corporation. Subsequently the one share in the shelf corporation was transferred to another client. The vendor sued the shelf corporation. Ontario Court of Appeal held that the communication was sufficient evidence of the corporation’s intention to be bound. It is within lawyer’s usual authority to advise as to identity of corporation that would close transaction and as policy matter important for people to be able to rely on a lawyer’s communications (NB strong dissent).
Design Home Associations v. Raviv – court had to interpret the words “any action or conduct signifying an intention to be bound”, the test for what constitutes adoption for purposes of CBCA and OBCA. Corporation had adopted lease based on a subsequent request to have correspondence relating to the lease directed to it, paying the rent under the lease and requesting an assignment of the lease.
TMD Investments Led. V. Fiddleheads Café Inc – under both CBCA and OBCA adoption must be within a reasonable time following incorporation. Starting to pay rent under a lease almost one year after incorporation did not signify intention to be bound within a reasonable time.

Canada Business Corporations Act s. 14 s. 14(1) – a person who enters into/purports to enter into a written contract on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to its benefits. (2) – a corporation may within a reasonable time after it comes into existence by action/conduct adopt a written contract made on its behalf and on adoption: the corporation is bound by the contract and entitled to its benefits; and the person who purported to act on behalf of the corporation ceases to be bound. (3) – except even if contract is adopted, a party to it may apply to the court for an order respecting the extent of the liability of the person and corporation and the court may make any order it thinks fit. (4) – exemption from personal liability – if expressly provided in the written contract, the person is not bound or entitled to its benefits.

Ontario Business Corporations Act s. 21 s. 21 (1) – a person who enters into/purports to enter into a written contract on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to its benefits. (2) – a corporation may within a reasonable time after it comes into existence by action/conduct adopt a written contract made on its behalf and on adoption: the corporation is bound by the contract and entitled to its benefits; and the person who purported to act on behalf of the corporation ceases to be bound. (3) – except: even if contract is adopted, a party to it may apply to the court for an order fixing obligations under the contract as joint/joint and several/apportioning liability between the person and the corporation and the court may make any order it thinks fit. (4) – exemption from personal liability – if expressly provided in the written contract, the person is not bound or entitled to its benefits.

(d) The Corporation in Action (i) Liability of Corporation for Crimes and Torts Casebook pp. 147-159

For offences requiring a mens rea only the mental state of those directing the corporation’s affairs will be ascribed to the corporation.
Canadian Dredge & Dock Co. Ltd. v. The Queen – a number of corporations charged with conspiracy to defraud.
Absolute liability offences – corporations and individuals stand on same footing; corporation is treated as a natural person.
Strict liability offences – guilt not predicated upon automatic breach of statue but upon the establishment of the actus reus subject to the defence of due diligence. Liability is primary and again in same position as natural defendant.
Offences requiring a mens rea – at common law corporate entity could not be convicted of a criminal offence since criminal activities by corporate agents were ultra vires. Three approaches whereby criminal intent could be said to reside in corporate entity:
(i) a total vicarious liability for the conduct of any agents so long as within scope of employment.
(ii) no criminal liability unless acts are committed on direction/at request of corporation as expressed through board of directors;
(iii) median rule whereby criminal conduct including the state of mind of employees and agents is attributed to the corporation so long as the employee/agent is of such a position that he or she represents its de facto directing mind.
Applied R. v. Fane Robinson Ltd. – if the act complained of can be treated as that of the company, the corporation is responsible for all acts such as it is capable of committing and for which the prescribed punishment is one which it can be made to endure.
“identification theory” – identity between directing mind and corporation which results in the corporation being found guilty for the act of the natural person, the employee.
The principle only operates where the directing mind is acting within the scope of his authority, in the sense of acting in the course of the corporation’s business.
The identity doctrine merges the board of directors, the managing director, the superintendant, the manager or anyone else delegated by the board of directors to whom is delegating the governing executive of the corporation and the conduct of any of the merged entities is thereby attributed to the corporation. It may therefore have more than one directing mind.
The outer limit of the delegation is reached and exceeded when the directing mind ceases completely to act, in fact or in substance, in the interests of the corporation.
The identification doctrine only operates where the Crown demonstrates that the action taken by the directing mind (a) was within the field of operation assigned to him; (b) was not totally in fraud of the corporation, and (c) was by design or result partly for the benefit of the company.
Acting in violation of express orders irrelevant to mens rea but could be relevant with reference to offences of strict liability.

VanDuzer pp. 195-207 Liability of Corporations for Crimes: Absolute Liability Offences

Requires that accused engaged in certain proscribed behaviour. No state of mind needs to be shown and no defence is available once the behaviour is proven.
Corporate liability for an absolute liability offence arises when a person who engages in the behaviour does so on behalf to the corporation. All acts of employees in the course of their employment will give rise to corporate liability.
Reference re: Section 94(2) of the Motor Vehicles Act (1985) – absolute liability offences punishable by imprisonment violate s. 7 Charter and are unconstitutional.
But corporations do not have s. 7 rights. But may challenge offence if would violate rights of individual accused. Many absolute liability offences now treated as strict liability.

Liability of Corporations for Crimes: Strict Liability Offences

Liability arises on commission of proscribed act and it is sufficient to impose liability on corporation if person was acting on behalf of corporation.
But subject to defence that the accused acted reasonably in the circumstances (“due diligence defence”). In effect, fault required is negligence. Once act proven, burden on accused to show not negligent on balance of probabilities.
Offences should be presumed to be strict liability (not absolute) unless due diligence defence is expressly negated by the legislative provocation.
R. v. MacMillan Bloedel – case involving a fuel spill caused by pipe corrosion that contravened environmental law. Corporate accused could avoid liability either where the cause of the events constituting the offence (corrosion) was not reasonably foreseeable, or, if the accused knew or ought to have known of the hazard, where the accused took all reasonable steps to avoid committing the offence; in this case was not aware of and could not have foreseen corrosion.
R. v. Petro-Canada – accused need not prove cause of spill to take advantage of the defence – if cause is unknown, show took all reasonable care to avoid any reasonable cause.
R. v. Sault Ste. Marie (City) – the person who needs to exercise due diligence is someone who can be considered to be the directing mind and will of the corporation such that she may be considered to be the corporation itself.

Liability of Corporations for Crimes: Offences Requiring Mens Rea

Liability for mens rea offences has been found on the basis of the “identification theory”. Criminal liability may attach if the person having the necessary mental state and committing the crime has the identity of the corporation. Typically, the natural person will be criminally responsible as well. Criminal law rules under criminal code amend the common law rules.
Common Law Test:
Is the human actor who committed the crime a vital organ or a directing mind and will of the corporation?
There may be many directing minds; no need to have general decision-making power over all aspects of the corporation’s business. Each person responsible for a discrete aspect of the corporation’s business ay incur criminal liability.
R. v. Waterloo Mercury Sales Ltd. – liability imposed as a result of the used car sale’s manager fraudulently causing odometers to be turned back. He was the directing mind for the purposes of the criminal activity.
“Rhone” (The) v. “Peter A.B. Widner” (The) – test is whether an employee has been delegated, expressly or by implication, the authority to design and supervise the implementation of corporate policy as opposed to only the authority to carry out such policy.
R. v. Safety-Kleen Canada Inc. – truck driver who was only representative in large geographical area and responsible for collecting waste, billing , documentation, maintenance not the directing mind and will of the corporation.
Actions by employees giving rise to corporate liability are not limited to those taken in the course of their employment. Corporation is responsible for any act by a directing mind in the general are of her responsibility even if not specifically authorised by a corporate rule/policy. A corporate rule/policy prohibiting the action is no defence to liability.
Waterloo Mercury sales – policy against turning back odometers was not a defence.
Liability may be imposed if has corporate authority due to practice, even if not in accordance with express provisions of corporate constitution or formally authorized.
R. v. Canadian Dredge and Dock Ltd. – can there be corporate liability where the person alleged to be the directing mind was acting in his own interests and against the interests of the corporation? Where a person ceases completely to act in the interests of the corporation and acts totally in fraud of the corporate employer, appropriating to himself all the benefits that should have gone to the corporation, the identification theory should not operate. In this case, not depriving corporations of all benefits.
Oger v. Chiefscope Inc. – requirements for exclusion were met. The two individuals stripped the corporation of all its assets.
The New Standard for Corporate Criminal Liability in the Criminal Code:
No longer necessary for criminal act to be committed by a person who is the directing mind of the corporation.
A corporation is deemed to be a party to a criminal offence committed by one of its “representatives” (i) where a “senior officer” was knowingly involved in the offence in specified ways even where the senior officer did not actually commit the offence and (ii) where the senior officer was aware of the offence and knowingly failed to take all reasonable measures to stop the representative’s participation in the offence.
Liability is no longer limited to situations in which a single person commits the act and has the mens rea; may be split between multiple representatives.
Same liability rules for non-corporate forms of organizations including partnerships.
Representative is defined as a “director, officer, partner, employee, member, agent or contractor of the organization”.
Senior officer means any person who either plays an important role in setting the corporations policies or is responsible for managing an important aspect of the corporation’s activities. It may be that inclusion of all people responsible for management means that liability may be imposed even if a manager did not have authority to create policy. The term senior officer is also defined to include a director, chief executive officer and chief financial officer of a corporation (Criminal Code s. 2).
Corporate liability for fault-based offences is now triggered in three distinct circumstances:

o A senior officer, acting within the scope of their authority, is a party to an offence; o A senior officer, having the mental state required to be a party to an offence and acting within the scope of their authority, directs the work of other representatives of the corporation so that they commit the act or omission specified in the offence; and o A senior officer, knowing that a representative is or is about to be party to an offence, does not take all reasonable measures to stop them from being a party to an offence (s. 22).

As well, a senior officer with knowledge that an offence will be committed must act to prevent corporate liability form arising. The amendments retain the common law qualification that there must be some benefit to the corporation in order for liability to attach (s. 22.2).
For negligence based offences, a corporation is a party to an offence if (i) one of its representatives is party to the offence or two or more of its representatives engage in conduct that, if the conduct had been engaged in by a single representative, would have made that person a party to the offence and (ii) a senior officer responsible for an aspect of the corporation’s activities relevant to the offence departs markedly from the standard of care that, in the circumstances, could reasonably be expected to prevent a representative from being party to the offence.
Criminal Code amendments identify a number of unique sentencing criteria for corporations and other organizations; including whether the corporation realized any advantage and whether any regulatory penalties were imposed. The impact of the sentence on the viability of the corporation and the continued employment of employees (typically innocent) must also be taken into account. Measures taken by the corporation to reduce the likelihood of recurrence including penalties imposed on representative for role in offence must also be considered.

Liabilities of Corporations in Tort

May be liable in tort both vicariously and directly.
Vicarious Liability:
Corporation may be vicariously liable where two criteria are met:

o There is a master and servant relationship between the person and the corporation. In other words, the person must have the legal status of an employee, not an independent contractor; and o The person committing the tort was acting in the course of her employment and not on a frolic of her own.

Vicarious liability is broad – key question is whether person was acing within the course of her employment. Vicarious liability will catch most situations where direct liability could have been found because person who is a “directing mind” will usually also be an employee.
Director or officer of corporation is not an employee simply for that reason.
Direct liability:
Corporation may be liable if person committing the tort is not merely an employee but can be considered the directing mind and will of the corporation. Similar basis as to criminal law.
Nelitz v. Dyck – insurer made an appointment for injured person to visit chiropractor and directed her to submit to an examination; did not obtain consent or advise her she had right to refuse. She sued chiropractor and insurance company for battery. Ontario Court of Appeal held insurance company not vicariously liable for chiropractor because he was an independent contractor.

(ii) Corporate Agency (Liability of Corporation in Contract) Casebook pp. 249-262

Unless corporate powers are explicitly restricted, it is assumed that the corporation has the powers of a natural person (CBCA ss. 15 and 16).
A natural principle is liable for the acts of an agent if the agent had actual, usual or apparent authority to commit the acts of the principle.
Ernest v. Nicholls – constructive notice rule.
Royal British Bank v. Turquand – indoor management rule; outsider not required to satisfy himself that the internal regulations of the corporation had actually been complied with.

Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd.

Kapoor, Hoon and a nominee of each formed a company and were appointed directors. The articles of association contained power to appoint a managing director but none was appointed. K. instructed a firm of architects to do some work. Actual authority and apparent authority are quite independent of each other although may coincide.
Actual authority is a legal relationship – its scope is to be ascertained by applying ordinary rules of construction.
Apparent authority is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted on by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the apparent authority so as to render the principal liable to perform any obligations imposed upon him.
Contractor can hardly ever rely on actual authority – information must be derived from either the principal or the agent or both.
Commonest form of representation is conduct – the principal permits the agent to act in some way in the conduct of its business with other persons.
No representation can operate to estop the corporation from denying the authority of the agent to do on behalf of the corporation an act which the corporation is not permitted by its constitution to do itself.
Nor can it be estopped from denying that it has conferred upon a particular agent authority to do acts which by its constitution it is incapable of delegating to that particular agent.
The representation as to apparent authority must be made by some person who has actual authority to make the representation. Contractor cannot rely on agents own representation as to his apparent authority.
Principal may permit agent to act in management or conduct of principal’s business.
Summary of four conditions that must be fulfilled to entitle a contractor to enforce against a company a contract entered into on behalf of the company by an agent who had no actual authority to do so. Must be shown that:

o A representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor; o That such representation was made by a person or persons who had “actual” authority to manage the business of the company either generally or in respect of those matters to which the contract relates; o That the contractor was induced by such representation to enter into that contact, that is, that he in fact relied upon it; and o That under its memorandum or articles of association the company 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.

In this case the county court judge found that the board knew that K. had throughout been acting as managing director; they permitted him to do so and thus represented that he had authority to enter into contracts of a kind with a managing director would in the normal course be authorized to enter into (condition 1). The articles of association conferred full powers of management on the board (condition 2). The plaintiffs were induced to believe that he was authorized to enter into contracts on behalf of the company for their services (condition 3). The articles of association did not deprive the company of capacity to delegate authority to a director to enter into contracts of that kind on behalf to f the company (condition 4).

Statutory Reform: ss. 17 and 18 CBCA Sherwood Design Services Inc. v. 872935 Ontario Ltd

Case on s. 19 OBCA (equivalent to s. 18 CBCA).
See facts above.
Concurring judgment relied on s. 17 OBCA.
Dissent – indoor management rule did not apply because the corporation did not exist at the time of the contract. Rather, s. 21(2) applies.

VanDuzer pp. 207-221

When is a corporation liable to perform contracts as a result of commitments made by persons purporting to act on its behalf?
The law dealing with the ability of a person to bind the corporation in contract is a branch of the law of agency.
In large corporations could be many people who could be considered to be an agent – officers and directors but sales people and clerks may be considered agents for particular purposes. Lines not always clearly drawn.
Law of agency must balance interests of corporation with interests of third parties. If the third party reasonably relies on commonly accepted indicators of authority, such as a letter from the president on the corporation’s letterhead indicating a person’s title, in entering into a contract, transactions will be encouraged if the law respects that reliance rather than forcing further enquiries into authority.
In large transactions, parties will do a significant amount of investigation to satisfy themselves that the person executing the agreements has authority to do so, but most transactions do not justify this.

Common Law Rules

Where person has no connection with the principal, the principle is not liable. The person who falsely represents that he has authority may be liable for breach of warranty of authority (Yonge v. Toynbee) or fraudulent misrepresentation.
Where there is a connection general rule is that agent cannot bind corporation unless he has some kind of authority to do so.

o Actual authority – actually authorized by corporation. Legal relationship that may arise as a result of powers being conferred on the agent by statute, the articles, the by-laws, a resolution of the board of directors, the terms of an employment contract, or some other permitted delegation within the organization of the business. Includes both express and implied authority. o Apparent authority – or ostensible authority, created where someone represents to a third party on behalf of the corporation that the person has authority to bind the corporation. It is the authority of the agent as it reasonably appears to the third party.

Actual Authority:
Board of directors has full power and responsibility to manage or supervise the management of the corporation – CBCA s. 102(1); OBCA s. 115. Where the authority is delegated to a position or office, the person will have the authority of that position so long as properly appointed.
SMC Electronics Ltd. v. Akhter Computers Ltd. – person with job title “Director of Sales” had implied authority to conclude a significant commission-splitting arrangement with another supplier since such an agreement was reasonably incidental to a job with this title.
May be difficult for third parties to satisfy themselves actual authority is present because will not have access to internal corporate records.
Apparent Authority:
A legal relationship between the corporation and the third party created by a representation on behalf of the corporation that the agent has authority to contract with the third party. The representation ay be express on implied from conduct.
Canadian Laboratory Supplies Ltd. v. Engelhard Industries of Canada Ltd. – defendant claimed plaintiff had clothed the agent with apparent authority through a representation by a purchasing agent. The purchasing agent when contacted had said that he did not know anything about the purchases and referred them to the agent. This amounted to a representation that the agent had authority to act on behalf of the corporation in relation to contracts.
Acquiescence may also constitute a sufficient representation of authority.
Rockland Industries, Inc. v. Amerada Minerals Corporation of Canada – failure to advise third party that agent’s actual authority had been terminated two days before entered into contract was found to be a representation that agent had authority.
Putting a person is a particular position constitutes a representation that the person has the authority usual for that position (usual authority). What is usual is a question of fact in each case – determined by reference to authority of agents in similar positions in similar corporations.
In order for third party to rely on apparent authority, representation creating it must be made by someone with actual authority to make such a representation. Actual authority may exist as a result of general authority to manage the entire business, such as is held by board of directors, or authority over specific area of business within which the obligation arises.
Final requirement that must be satisfied before a third party may rely on apparent authority is that the representation creating the apparent authority must have induced the third party to enter into the contract. Not hard to prove.
Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. – one of the directors acted as managing director with the knowledge of the board although not so appointed. Architects not paid – corporation denied responsibility. By permitting him to act as managing director, the board had represented that he had authority to enter into contracts of a kind that a managing director would, in the normal course, be authorized to enter into. Since the articles of association conferred full management powers on the board, it had actual authority to make this representation. The architects had relied on authorization to contract on behalf of the corporation when they entered into the agreement.
At common law, claim could not succeed if third party knew of some restriction on the authority of the agent. All persons dealing with a corporation were deemed to have knowledge of any restriction on the authority contained in any publicly filed documents.
In order to balance the risks that this rule of constructive notice created for third parties, the courts developed a qualification referred to as the “indoor management rule” of the “rule in Turquand’s case”. Under this rule, person dealing with a corporation has no obligation to ensure a corporation has gone through any procedures required by its articles to authorize transaction/give authority. This rule does not relieve the third party from having to establish actual or apparent authority in order to enforce its claim. The rule limits the effect of the constructive notice rule y making clear that it is only actual restrictions on authority of agents in public documents that will defeat a third party’s claim. If a provision in a public document grants authority only on certain conditions or if certain procedures are followed, the third party does not need to enquire into whether the conditions have been satisfied/procedures complied with.
Statutory Reform:
CBCA abolished constructive notice and codified and supplemented common law rules (CBCA ss. 17 and 18)
S. 17 – no person is deemed to have knowledge of any document by reason only that it has been filed with the director.
S. 18 – denies the corporation the ability to rely on certain kinds of defects in the agent’s authority.
S. 18(d) – codifies an aspect of the common law rules – if corporation makes a representation to a third party by holding someone out as a director, officer or agent, the corporation cannot deny that the person is duly appointed/has authority customary or usual. Section does not expressly require that the holding out be by someone with actual authority to do so but no case has interpreted the provision as ousting the pre-existing common law rule to that effect and there would seem to be nothing in the language which would suggest legislative intention to make such a change.
The balance of s. 18 deals with specific situation in which corporation cannot rely on defects in actual authority to defeat claims by third parties that the corporation is bound by a contract.
S. 18(a) – any provision in corporation’s articles/by-laws/shareholders’ agreement that restricts authority of any person to bind the corporation or requires procedure to be followed cannot be raised as a defence.
S. 18(b) – if a person appears as a director in most recently filed Initial Registered Office Address and First Board of Directors or Notice Regarding Change of Directors, the corporation cannot deny that person is a director.
S. 18(c) – third party may rely on registered office being that identified.
All these provisions based on same policy as common law indoor management rule: third parties should not have to worry about whether internal corporate housekeeping is in order.
S. 18(f) protects third parties against claims by corporations that one specific kind of transaction was entered into by a corporation in a manner contrary to the CBCA – a sale, lease or exchange of all or substantially all the property of a corporation other than in the ordinary course of business must be authorized by a special resolution of the shareholders.
S. 18(e) – addresses the situation in which a person who is authorized to “issue” a signed document (to deliver a signed copy to the other party indicating that the person on behalf of whom the document is delivered has agreed to the terms) is not the person with authority to sign the document. E.g. president signs but leasing manager issues. The delivery of the lease indicates agreement. Third party can rely on document issued by person who has actual/usual authority to issue it. Corporation cannot say not signed by proper person.
S. 18(e) also reverses common law rule that share certificate fraudulently issued by person responsible for issuing certificates is invalid.
All the provisions of s. 18 are subject to the qualification that third parties cannot benefit from the protections if aware of the defect in authority or ought to have known of it due to their relationship with the corporation. Essentially codifies common law position that third party must have relied on the authority of the person they were dealing with in entering the contract.
An act of a director or officer is valid notwithstanding any irregularity in his election/appointment/defect in qualifications (CBCA, s. 116; OBCA, s. 128). The section does not apply where no appointment at all as opposed to an irregular one (Morris v. Kanssen). Where the action of a director or officer is not saved under this provision, may still be found to have apparent authority under principles above. Not clear how this section relates to s. 11(d).
NB the statutory scheme does not address restrictions on authority in various private and internal arrangements like employment contracts that may in some cases prevent a third party from being able to claim successfully that the person with whom they were dealing with had either actual or apparent authority.

Canada Business Corporations Act ss. 16(3), 17-8 s. 16(3) – no act/transfer of property to a corporation is invalid by reason only that the act or transfer is contrary to its articles/this Act. s. 17 – no person is deemed to have constructive notice of a document just because it has been filed by the Director or is available for inspection at an office of the corporation. s. 18(1) – no corporation/guarantor of obligation of corporation may assert against a person dealing with it/who acquired rights from it that:

the articles/by-laws/USA have not been complied with;
the persons named in the most recent notice to the Director are not the directors;
the place named in the most recent notice to the Director is not the registered office;
a person held out by the corporation as director/officer/agent has not been duly appointed/has no authority to perform customary duties;
a document issued by anyone with actual/usual authority to issue it is not genuine;
a property dealing under s. 189(3) was not authorized.

s. 18(2) – s. 18(1) does not apply to a person who has or ought to have knowledge of a situation in s. 18(1) by virtue of their relationship to the corporation.

Ontario Business Corporations Act ss. 17(3), 18-9 s. 17(3) – no act/transfer of property to a corporation is invalid by reason only that the act or transfer is contrary to its articles/by-laws/USA/this Act. s. 18 – no person is deemed to have constructive notice of a document just because it has been filed by the Director or is available for inspection at an office of the corporation. s. 19(1) – no corporation/guarantor of obligation of corporation may assert against a person dealing with it/who acquired rights from it that:

the articles/by-laws/USA have not been complied with;
the persons named in the most recent notice filed under the Corporations Information Act/named in Articles (whichever is more current) are not the directors;
the location named in the most recent notice filed under s. 14(3)/named in Articles (whichever is more current) is not the registered office;
a person held out by the corporation as director/officer/agent has not been duly appointed/has no authority to perform customary duties;
a document issued by anyone with actual/usual authority to issue it is not genuine;
a property dealing under s. 184(3) was not authorized.

Except where the person has or ought to have, by virtue of their relationship to the corporation, knowledge to that effect.

(e) Shares and Shareholders (i) Introduction to Shares Casebook pp. 696-713

Common shares – equity shares with voting rights exercisable in all circumstances.
Equity shares – shares with residual right to participate in dividends, assets on liquidation.
Non-voting shares – share without right to vote except in circumstances mandated by law.
Preference shares – shares with a right over another class of shares.
Restricted shares – equity shares that are not common shares.
Restricted voting shares – carry a right to vote subject to restriction on number or percentage of shares that may be voted.
Jacobsen v. United Canso Oil & Gas Ltd. – by-law providing no person entitled to vote more than 1000 shares. CBCA distinguishes between situation where only one class of shares (must be assumed no rights, restrictions etc.) and situation where two or more classes requiring the setting forth of rights etc. (s. 134(1)). Clear that Parliament has specified that it is only when there is more than one class of shares that different rights, privileges, restrictions, conditions may arise.
Bowater Canadian Limited v. R.L. Crain and Craisec Ltd. – provision that “special common shares” would carry ten votes per share in the hands of Craisec but only one in the hands of a transferee. On liquidation special common shares would share equally, and all shareholders share equally in dividends. S. 24 CBCA – where corporation has only one class of shares, the rights of holders are equal in all respects. Step down provision was severable.

VanDuzer pp. 225-228

One of the primary ways in which corporations finance their activities is by issuing shares. Sometimes referred to as equity financing (as opposed to debt financing).
A share is personal property. It represents a bundle of rights against a corporation – not ownership in corporation or corporation’s property. Characteristics (subject to a few statutory/common law limitations) restricted only by imagination of person drafting articles.
Characteristics of share determine the risks and returns associated with the holder’s investment, including degree of control over corporation through voting rights, right to share in profits.
Basic rights associated with shares:

o To vote at any meeting of shareholders; o To receive dividends declared by the board of directors; and o On dissolution of the corporation, to receive the property of the corporation remaining after creditors and other persons with claims against the corporation are paid.

Where a corporation has only one class of shares, the rights of each shareholder are equal in all respects and must include each of the three basic rights listed above (CBCA, s. 24(3); OBCA s. 22 – does not require that shares have right to receive dividends).
If the articles provide for more than one class of shares, then each of the basic rights must be possessed by at least one class of shares, although all three rights need not be attached to the same class (CBCA, s. 24(4)).
If articles are silent on right to vote, each share has one vote (CBCA, s. 140(1); OBCA s. 102(1)).
Where a corporation has multiple classes of shares, all such shares are presumed to have equal rights, regardless of class, except to the extent specifically provided in the articles.
Each owner of a share is entitled to a share certificate; if more than one class or series of shares, the characteristics of the class or series must appear on the certificate or a notice must appear stating that there are particular characteristics and that copies of the text of such characteristics may be obtained from the corporation (CBCA, ss. 19(1)(13)).
No need to issue share certificate unless shareholder requests one. Under OBCA ss. 56(2),(3), directors can determine that shares of any class are “uncertified”. If they do so, they must send written notice to shareholders with the information that would otherwise be required to be on the certificate.
A record of ownership of all shares issued called securities register must be maintained as part of the corporate records at registered office/any other place in Canada designated by directors (CBCA, ss. 20, 50; OBCA ss. 140, 141, 144).
An entry in a securities register or a share certificate issued by a corporation is proof, in absence of evidence to the contrary, that the person in whose name the share is registered/holder of certificate is the owner of the shares described in the register/in the certificate (CBCA, s. 257(3); OBCA s. 266(3)).
Directors can treat whoever is recorded in the share register as the shareholders for most purposes.

Canada Business Corporations Act ss. 24, 25, 48, 49, 50, 51, 55, 60, 257 24(1) – shares of a corporation shall be in registered form and shall be without nominal or par value. 24(2) – when a corporation is continued under this act, its shares are deemed to be without nominal or par value. 24(3) – where a corporation only has one class of shares, the rights of the shareholders are equal in all respects and include the rights:

to vote at any meeting of shareholders
to receive any dividend
to receive the remaining property of the corporation on dissolution.

24(4) – the articles may provide for more than one class of shares and if so the rights/privileges/restrictions/conditions attaching to the shares of each class shall be set out in the articles and the rights set out in (3) must be attached to at least one class of shares, but all such rights are not required to be attached to one class. 25(1) – subject to articles/by-laws/USA shares may be issued at such times, to such persons, for such consideration as the directors may determine. 25(2) – shares issued by a corporation are non-assessable. 25(3) – a share shall not be issued until the consideration is fully paid in money or in property/past services not less in value than the fair equivalent of money the corporation would have received if issued for money. 25(4) – in determining whether property/past services are fair equivalent, directors may take into account reasonable charges and expenses of organization and payments for property and past services reasonably expected to benefit the corporation. 25(5) – for the purposes of this section, property does not include a promissory not or a promise to pay. 48 – definitions 49(1) – every security holder is entitled to a security certificate. (2) – a corporation may charge a fee not exceeding the prescribed amount for a security certificate issued in respect of a transfer. (3) – joint holders. (4) – security certificate must be signed/signature mechanically reproduced by at least one of: director/officer of corporation; registrar/transfer agent of corporation; trustee. (5) – repealed (6) – mechanically reproduced signature valid even if person has left corporation. (7) contents of share certificate – must state:

name of corporation;
words “Incorporation under the Canada Business Corporations Act” or subject to the CBCA;
name of person to whom issued;
number and class of shares, designation of any series.

(8) – restrictions which are not valid on transferee, if issued before continuation under this Act, who has no actual knowledge of them, unless noted conspicuously on certificate: restriction on transfer other than under s. 174; charge in favour of corporation; USA; endorsement under s. 190(10). (9) – distributing corporation with outstanding shares held by more than one person cannot have restrictions on transfer/ownership except under s. 174. (10) – if articles constrain ownership in order to help the corporation to qualify under prescribed law the constraint must be noted on every security certificate. (11) – failure to note does not invalidate share or render constraint ineffective. (12) – the words “private company” are sufficient for s. 49(8) in the case of a company continued under this Act. (13) – if corporation issues shares of more than one class/series it must state on certificate:

the rights, privileges, restrictions, conditions attached to the shares of each class/series or
that the class/series has rights/privileges/restrictions/conditions attached and that corporation will furnish shareholder with relevant information without charge.

(14) – and if the certificate does state that will furnish with information then must do so. (15) – may issue certificate/scrip certificates for fractional share. (16) – conditions that may be attached to scrip certificates. (17) – fractional share normally does not have voting rights/dividend. 50(1) – corporation must maintain securities register showing names and addresses, number of securities held, date and particulars of issue/transfer. (2) – may appoint agent to maintain securities registers. (3) – securities register must be kept at registered office/any other place in Canada designated by directors. (4) – registration of issue/transfer of security in securities register is complete and valid for all purposes. (5) – branch register only to contain particulars of securities issued/transferred at that branch. (6) – and there must be a central register as well. (7) – corporation not required to produce a cancelled security register. 51 (1) – a corporation may treat the registered owner of a security ast he person exclusively entitled to vote, to receive notices, to receive interest/dividend/payments and otherwise to exercise rights of owner. (2) – despite (1), corporation with restrictions on transfer must, and other corporations may, treat as registered owner any person who produces evidence that he is the heir of a deceased holder; personal representative security holder who is infant/incompetent/missing; liquidator or trustee in bankruptcy. (3) – if person becomes owner by operation of law otherwise than in (2) and furnishes proof of authority to exercise rights, corporation shall treat them as entitled to exercise them. (4) – corporation not required to see to any duty owed to third party by registered holder of any securities. (5) – persons less than eighteen years of age. (6) – joint holders. (7) – transmission of securities – those entitled to become registered holders. (8) – excepted transmissions. (9) – if documents required by (7) or (8) deposited, transfer agent can record in securities register transmission of security from deceased holder. 55 (1) – even against a purchaser for value without notice the terms of the security include those stated on the security. (2) – a security is valid in the hands of a purchaser for value without notice of any defect going to its validity. (3) – but if the security is not genuine this is defence even against purchaser for value without notice. (4) – all other defences are ineffective. 60 (1) – purchaser acquires title on delivery unless a party to fraud. (2) – a bona fide purchaser acquires the security free from any adverse claim. 257 (1) – a certificate stating any fact from articles/by-laws/USA/minutes of meetings may be signed by director/officer/transfer agent. (2) – when introduced as evidence in any proceeding, a fact stated in a certificate as in (1), a certified extract from securities register, a certified copy of minutes is proof of facts so certified without proof of signature. (3) – security certificate/ an entry in a securities register is in the absence of evidence to the contrary proof that the person in whose name the security is registered id owner of the securities described in the register/certificate.

Ontario Business Corporations Act ss. 22, 23, 53, 54, 56, 67, 143, 266 22(1) – shares of a corporation shall be in registered form and shall be without nominal or par value. (2) – shares of a corporation incorporated prior to 29 July 1983 are deemed to be without nominal or par value. (3) – where a corporation only has one class of shares, the rights of the shareholders are equal in all respects and include the rights:

to vote at any meeting of shareholders
to receive the remaining property of the corporation on dissolution.

(4) – the articles may provide for more than one class of shares and if so the rights/privileges/restrictions/conditions attaching to the shares of each class shall be set out in the articles and the rights set out in (3) must be attached to at least one class of shares, but all such rights are not required to be attached to one class. (5) – despite (4) the right to one vote per share at all meetings of shareholders of that class or to receive remaining property on dissolution need not be set out in articles. (6) – except in the case of series, each share of a class shall be the same in all respects as every other share. (7) – articles may provide that two or more classes/series of share may have same rights etc. 23(1) – subject to articles/by-laws/USA shares may be issued at such times, to such persons, for such consideration as the directors may determine. (2) – shares issued by a corporation are non-assessable. (3) – a share shall not be issued until the consideration is fully paid in money or in property/past services not less in value than the fair equivalent of money the corporation would have received if issued for money. (4) – if share not issued for money, directors must determine the amount of money the corporation would have received if issued for money and either the fair value of the property/past service or that it is not less in value than the amount of money. (5) – in determining the value of property/past service may take into account reasonable charges and expenses of organization and payments for property and past services reasonably expected to benefit the corporation. (6) – for the purposes of (3) property does not include a document evidencing indebtedness of a person to whom shares are to be issued. 53 – transmission of securities is governed by securities transfer act. 54(1) – a security may be certificated or uncertificated. (2) – unless otherwise provided, directors may provide by resolution that any/all classes/series of shares shall be uncertificated. (3) – within reasonable time after issue/transfer of uncertificated security, corporation must send written notice to owner containing information pursuant to s. 56. (4) – except as otherwise provided/authorized by law, rights and obligations of owners of uncertificated and certificated securities shall be identical. (5) – a corporation may charge a fee not exceeding the prescribed amount for a security certificate issued in respect of a transfer. (6) – joint holders. 55 (1) – security certificate must be signed/signature mechanically reproduced by at least one of: director/officer of corporation; registrar/transfer agent of corporation; trustee. (2) – signature may be printed/mechanically reproduced on certificate. (3) – mechanically reproduced signature valid even if person has left corporation. 56 (1) contents of share certificate – must state:

name of corporation;
words “Incorporation under the law of the Province of Ontario” or subject to the OBCA or words of like effect;
name of person to whom issued;
number and class of shares, designation of any series.

(2) – if corporation issues shares of more than one class/series it must state on certificate: a. the rights, privileges, restrictions, conditions attached to the shares of each class/series or b. that the class/series has rights/privileges/restrictions/conditions attached and the authority of the directors to fix rights etc. of subsequent series. (3); (4); (5) – repealed. (6) – a share certificate issued prior to 29 July 1983 or prior to date of certificate of continuance by a corporation continued under s. 180 does not contravene the Act just because it refers to the share(s) as having a nominal or par value. (7) – where certificate contains statement from (2)(b), corporation must furnish to shareholder on demand and without charge a full copy of the text of rights etc. and authority to fix. (8) – where articles restrict issue, transfer, ownership of shares the restriction or reference to it must be noted on every share certificate and that corporation will furnish on demand and without charge full copy of text of restriction. (9) – and in that case must do so. 67 (1) – may treat the registered holder of security as person exclusively entitled to vote, receive notices, receive interest/dividend/payments in respect of security and otherwise to exercise rights and powers of holder. (2) – despite (1), corporation with restrictions on transfer must, and other corporations may, treat as registered owner any person who produces evidence that he is the heir of a deceased holder; personal representative security holder who is minor/incompetent/missing; liquidator or trustee in bankruptcy. (3) – if person becomes owner by operation of law otherwise than in (2) and furnishes proof of authority to exercise rights, corporation shall treat them as entitled to exercise them. (4) – corporation not required to see to any duty owed to third party by registered holder of any securities. (5) – repudiation by minor. (6) – joint holders. (7) – registration of person in (2)(a). (8) – excepted transmissions. (9) – if documents required by (7) or (8) deposited, transfer agent can record in securities register transmission of security from deceased holder. 143 (1) – securities register and register of transfers must be kept at registered office/any other place in Ontario designated by directors. (2) – registration of issue/transfer of security in securities register is complete and valid for all purposes. (3) – branch register only to contain particulars of securities issued/transferred at that branch. (4) – particulars of every transfer of securities in every branch register shall be recorded in register of transfers. (5) – documents not required to be produced – any certificate not in registered form; any certificate in registered form six years after date of cancellation. 266 (1) – a certificate issued on behalf of a corporation stating any fact set out in articles/by-laws/USA/minutes may be signed by director/officer/transfer agent. (2) – when introduced as evidence in any proceeding, a fact stated in a certificate as in (1), a certified extract from securities register, a certified copy of minutes is proof of facts so certified without proof of signature. (3) – security certificate/ an entry in a securities register is in the absence of evidence to the contrary proof that the person in whose name the security is registered is owner of the securities described in the register/certificate.

(ii) Characteristics of Shares A. General VanDuzer pp. 228-244 Classes

In practice, it is usual to designate one class of shares as “common shares” and give then the three basic rights. Usually, no dividend may be paid on common shares until the dividend entitlements of any other classes of shares are paid, and no payment on dissolution may occur before all other claimants have been paid.
Some corporations have non-voting (do not vote) and subordinate voting (fewer votes) common shares.
May also have “preferred” or “preference” shares – usually do not vote but have preference as to receiving fixed dividend paid first and on dissolution.
If a corporation has more than one class of shares with identical characteristics, they will be treated as a single class (McClurg v. Canada).
But OBCA since amended to provide (s. 22(7) that a corporation may have classes of shares that have identical characteristics.

Dividends

Board of directors may distribute profits y declaring a dividend – resolution is passed identifying amount of dividend, class of shares on which it will be paid, and payment date. Dividend then becomes debt of corporation owed to shareholders (Re Severn & Wye and Severn Bridge Railway Co.).
Under CBCA dividends are paid to a person who is registered as a shareholder at a certain date referred to as a record date. If no record date is fixed by the directors, the record date is the close of business on the day the directors pass the resolution declaring the dividend (CBCA, s. 134; OBCA s. 95). Effects what happens e.g. if you sell/purchase shares before record date.
Each share has an equal right to receive any dividend; although qualification permits a common form of dividend provision under which directors are allowed to allocate dividends to one or more classes of shares at their discretion. The apparent intent of OBCA s. 22(7) is to ensure that discretionary dividend provisions could be used to allow directors to sprinkle dividends among various classes that all have the same characteristics.
Two invariable rules as to dividends:

o The declaration of dividends is a matter within the discretion of the directors. This rule has two corollaries:

The power to declare dividends cannot be delegated by the board of directors (CBCA, s. 115(3)(d)), although, like any other power of the directors, it can be assumed by shareholders in a unanimous shareholders’ agreement; and
No provision of the articles or any shareholders’ agreement can compel the directors to declare and pay dividends (Burland v. Earle).

o Dividends cannot be declared or paid if there are reasonable grounds for believing that the corporation cannot meet either of the following financial tests:

The corporation is, or would after the payment be, unable to pay its liabilities as they become due (the “solvency test”); or
The realizable value of the corporation’s assets would, after the payment, be less than the aggregate of its liabilities and stated capital of all classes (the “capital impairment test”).
CBCA, s. 42; OBCA, s. 38(3)).
Stated capital consists of the historical total of all money or other forms of value paid into the corporation in return for shares. If dividends are paid in contravention of these requirements, the directors who consented to the declaration of the dividend are personally liable to pay the amount of the dividend back to the corporation (CBCA s. 118(2)(c); OBCA s. 130(2)(c)).
Directors may be compelled to declare dividends if failure to do so would be oppressive to shareholders (CBCA, s. 241; OBCA, s. 248) or would breach the directors’ fiduciary duty.
Ferguson v. Imax Systems Corp. – failure to pay dividends was oppressive when it was part of a concerted effort by management to prevent one shareholder from receiving any benefit from the corporation.
Because directors have discretion not to pay dividends, one of the most important characteristics of dividends is whether they are cumulative or not – i.e. if not paid whether entitlement continues until it is. Cumulative dividend provisions typically state that no dividends may be paid on other classes of shares until they have been paid. If a dividend is not cumulative and is not paid when it is supposed to be, the entitlement continues until it is paid. If a dividend is not cumulative and is not paid when it is supposed to be the shareholder has not claim to it. For a dividend to be cumulative the amount must be fixed.
If a share is entitled to a dividend in priority and the entitlement is not expressly described as non-cumulative it is presumed to be cumulative (Ferguson & Forester Ltd. v. Buchanan). Not clear if fixed dividend without preference gives rise to the presumption.
Where only a fixed dividend is specified for a particular class of shares, the courts have held that holders of shares o that class are not entitled to participate equally with the holders of shares of othe classes in any other dividend declared (Re Porto Rico Power Co.).
Dividends need not be paid in cash – can be paid in form of specific assets (dividends in specie) including shares. Share or stock dividends do not reduce the assets of the corporation when they are paid. But if more than one class of shares, a stock dividend could confer a benefit on the class receiving the dividend in the form of increased votes or larger claim to dividends/assets on dissolution.
No reason to apply solvency and capital impairment tests in this case, but nothing in language of statutes excludes them.

Rights on Dissolution

CBCA requires that at least one class of shares be entitled to receive remaining property of corporation on dissolution (see above).
Preferred shares frequently given the right to receive only their capital back before payment to common shareholders but do not otherwise participate. Share provisions must define capital; could be amount paid for shares plus all unpaid dividends or average amount paid for a share over time or a portion of the stated capital for the class (NB the stated capital for a class is the total amount contributed to the corporation in return for shares of that class).
Voting
Voting to elect directors and voting on matters requiring shareholder approval are probably the most important shareholder rights. All shares carry right to one vote unless articles provide otherwise.
Possible to provided that votes arse only in certain circumstances, such as failure to ply dividends, only on certain issues, or that voting rights are different on different issues.
Because of principle of equality of shares, all shares within a class must have the same voting rights (Jacobsen v. United Canso Oil & Gas Ltd.).
Shareholders can agree to vote their shares in a particular way in shareholders’ agreements, otherwise can vote as they like.
Possible for corporation to have classes of shares that do not vote.
CBCA provides voting rights in some circumstances as mandatory protection:
Special vote – all shares vote on certain fundamental changes including:

o An amalgamation under which one corporation is combined with another corporation (s. 183(3)). o The sale, lease or exchange of all or substantially all of the assets of the corporation other than in the ordinary course of business (s. 189(6)); o The continuance of a corporation incorporated under the CBCA under some other corporate law with the result that it is governed by that law (s. 188(4)). o The liquidation and dissolution of the corporation (s. 211(3)). o OBCA does not follow this model.

Class Vote – all shares of a class that are entitled to vote have a right to vote separately as a class on certain fundamental changes if shares of that class will be prejudicially affected by the change in ways different form the ways that shares of other classes will be affected as specifically defined in the Act (s. 176). These changes include:

o An amalgamation (s. 183(4)); o A sale, lease or exchange of all or substantially all the assets of the corporation other than in the ordinary course of business (s. 189(7)); o Certain amendments to the articles (CBCA, s. 176). o See OBCA ss. 127, 176.

Since these changes must all be approved by special resolution, where a class vote is required, the necessary two-thirds majority fo shares must be obtained from all shares entitled to vote and from each class entitled to vote separately as a class. If one class does not approve the change it cannot proceed.
Any shareholder who disagrees with the outcome of such a vote may opt out of the corporation by requiring the corporation to buy her shares at their fair value (CBCA, s. 190(3); OBCA s. 185(4)).

Cumulative Voting

In usual situation (one share one vote), majority shareholder can determine directors. Cumulative voting is mechanism to ensure minority shareholders can elect directors to represent them.
The number of votes each shareholder has is equal to the number of shares held multiplied by the number of directors to be directed.
In order to set up a scheme of cumulative voting it must be provided for in a corporation’s articles; there must be a fixed number of directors and each director’s term must end at the close of the first annual meeting held after their election.
If directors have staggered terms purpose of cumulative voting is defeated.
Some provisions to prevent cumulative voting from being defeated: e.g. any motion to remove a director is defeated if the number of votes against the removal would have been sufficient to ensure that the director was elected under cumulative voting (CBCA, ss. 107(g),(h))
Alternatives to cumulative voting that would ensure that minority shareholder would be able to have board representation. E.g. class of shares that allow shareholder to elect director, shareholders’ agreements.

No Par Value

CBCA and OBCA abolished par value.

Series of Shares

Corporation must have more than one class of shares if it wants to give different rights to different shareholders.
The only circumstance in which shares within a class may be given different rights is when shares in that class are subdivided into different “series”.
S. 27 CBCA, s. 25 OBCA – articles may authorize the issue of any class of shares in one or more series and fix or authorize the directors to fix the following characteristics attaching to the shares of each series:

o The number of shares in the series; o The designation of the shares (name); o The other characteristics of the shares (rights privileges, restrictions, conditions).

In order to issue shares in series, articles must expressly permit it.
If the characteristics are not fixed in the articles then a directors’ resolution must bye passed setting them.
The directors must send articles of amendment to the Director under the CBCA setting out the number, designation and characteristics o the shares in the series before they may be issued (s. 27(4) CBCA).
Issuing shares in series is quicker and cheaper than if corporation had to amend shares in usual way to create a new class of shares.
The only restriction on the use of series is that all shares of the same class must have the same priority in relation to receiving dividends and return of capital, even if they are in different series (CBCA, s. 27(3)). If any cumulative dividends or amounts payable on return of capital to a series are not paid in full when they are required to be, the shares of all series of the same class participate rateably in respect of accumulated dividends and return of capital (s. 27(2)).

Pre-emptive Rights

Articles may contain a pre-emptive right (CBCA, s. 28; OBCA, s. 27).
If articles contain such a right, then a corporation desiring to issue shares must offer them first to the existing shareholders as a condition of being able to issue the shares.
Under CBCA purchase is in proportion to existing holdings; under OBCA no such restriction and corporation may set up the scheme as it likes in its articles.
Attractive to shareholders because;

o Avoids dilution of proportionate interest in corporation. o Constrains inappropriate issuance of shares e.g. to defeat takeover bid. o Prevents issuance of shares at under value (this would likely be a breach of fiduciary duty in any event).

Courts have recognized that requiring shareholders to buy additional shares or face dilution of their proportionate interest will sometimes be unfair to shareholders who cannot afford to participate and may give rise to a claim for relief under the oppression remedy (Re Sabex International Ltd.).

Canada Business Corporations Act ss. 24(3), (4), 42, 43, 115(3)(d), 118 24(3) – where a corporation only has one class of shares, the rights of the shareholders are equal in all respects and include the rights:

to vote at any meeting of shareholders
to receive any dividend
to receive the remaining property of the corporation on dissolution.

24(4) – the articles may provide for more than one class of shares and if so the rights/privileges/restrictions/conditions attaching to the shares of each class shall be set out in the articles and the rights set out in (3) must be attached to at least one class of shares, but all such rights are not required to be attached to one class. 42 – dividends – a corporation shall not declare or pay a dividend if there are reasonable grounds for believing that the corporation is or after the payment would be unable to pay its liabilities as they become due; or the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities and stated capital of all classes. 43 (1) – form of dividend – may pay dividend by issuing shares, in money, or property. (2) – if shares are issued in payment of dividend, the declared amount of the dividend stated as an amount of money shall be added to the stated capital account for the shares of the class/series issued in payment. 115(3)(d) – no managing director or committee of directors has authority to declare a dividend. 118 – directors who vote for/consent to the issue of a share under s. 25 for a value other than in money are jointly and severally liable to the corporation to make good any amount by which the consideration received is less than the fair equivalent of the money it would have received. (2) – directors who vote for/consent to resolution authorizing purchase of shares contrary to 34/35/36; commission contrary to 41; dividend contrary to 42; indemnity contrary to 124 or payment to shareholder contrary to 190/241 are jointly and severally liable to restore to the corporation any amounts paid and not otherwise recovered. (3) – a director who satisfies a judgement under this section is entitled to a contribution from other directors who voted for or consented to the unlawful act. (4) a director liable under (2) is entitled to apply for order compelling recipient to deliver to director money/property delivered to him. (5) court may make such order if satisfied that the payment was unlawful, order a corporation to return or issue shares to a person from whom it has acquired shares or make any other order it thinks fit. (6) a director who proves he did not know and could not reasonably have known that the share was issued for a consideration less than the fari equivalent of the money that the corporation would have received if issued for money is not liable under (1). (7) two year limitation period.

Ontario Business Corporations Act ss. 22(3), (4), 38, 127(3)(d), 130 22(3) – where a corporation has only one class of shares, the rights of the holders are equal in all respects and include the rights to vote at all meetings and to receive the remaining property of the corporation on dissolution. 22(4) – the articles may provide for more than one class of shares and if so the rights/privileges/restrictions/conditions attaching to the shares of each class shall be set out in the articles and the rights set out in (3) must be attached to at least one class of shares, but all such rights are not required to be attached to one class. 38 (1) – declaration of dividends – subject to articles/USA directors may declare dividend by issuing shares, in money, or property. (2) - if shares are issued in payment of dividend, corporation may add all or part of the value of those shares to the stated capital account for the shares of the class/series issued in payment. (3) – dividend not to be declared if there are reasonable grounds for believing that the corporation is or after the payment would be unable to pay its liabilities as they become due; or the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities and stated capital of all classes. 127(3)(d) – no managing director or committee of directors has authority to declare a dividend. 130 – directors who vote for/consent to the issue of a share contrary to s. 23 for a value other than in money are jointly and severally liable to the corporation to make good any amount by which the consideration received is less than the fair equivalent of the money it would have received. (2) – directors who vote for/consent to resolution authorizing purchase of shares contrary to 30/31/32; commission contrary to 37; dividend contrary to 38; indemnity contrary to 136 or payment to shareholder contrary to 185/248 are jointly and severally liable to restore to the corporation any amounts paid and not otherwise recovered. (3) – a director who satisfies a judgement under this section is entitled to a contribution from other directors who voted for or consented to the unlawful act. (4) a director liable under (2) is entitled to apply for order compelling recipient to deliver to director money/property delivered to him. (5) court may make such order if satisfied that the payment was unlawful, order a corporation to return or issue shares to a person from whom it has acquired shares or make any other order it thinks fit. (6) a director who proves he did not know and could not reasonably have known that the share was issued for a consideration less than the fair equivalent of the money that the corporation would have received if issued for money is not liable under (1).

B. No Par Value Canada Business Corporations Act s. 24(1), (2) 24(1) – shares of a corporation shall be in registered form and shall be without nominal or par value. 24(2) – when a corporation is continued under this act, its shares are deemed to be without nominal or par value.

Ontario Business Corporations Act s. 22(1), (2) 22(1) – shares of a corporation shall be in registered form and shall be without nominal or par value. (2) – shares of a corporation incorporated prior to 29 July 1983 are deemed to be without nominal or par value.

C. Series Canada Business Corporations Act ss. 24(4), 27 24(4) – the articles may provide for more than one class of shares and if so the rights/privileges/restrictions/conditions attaching to the shares of each class shall be set out in the articles and the rights set out in (3) must be attached to at least one class of shares, but all such rights are not required to be attached to one class. 27(1) – articles may authorize the issue of any class or shares in one or more series and may fix or authorize the directors to fix the number of shares in and determine the designation, rights, privileges, restrictions attaching to the shares of each series. (2) – if any amount of cumulative dividends or amount payable on return of capital in respect of shares is not paid in full, the shares of all series of the same class shall participate rateably in respect of all accumulated cumulative dividends and return of capital. (3) – no conditions attached to a series of shares shall confer upon the shares a priority in respect of dividends or return of capital over shares of the same class. (4) – where the directors exercise the authority under (1)(b), they shall, before the issue of shares of the series, send to the Director articles of amendment in the form the Director fixes designating such series. (5) – on receipt the Director shall issue a certificate of amendment in accordance with s. 262. (6) – the articles are amended on the date shown on the certificate.

Ontario Business Corporations Act ss. 22(4), 25 22(4) – the articles may provide for more than one class of shares and if so the rights/privileges/restrictions/conditions attaching to the shares of each class shall be set out in the articles and the rights set out in (3) must be attached to at least one class of shares, but all such rights are not required to be attached to one class. 25(1) – articles may authorize the issue of any class or shares in one or more series and may fix or authorize the directors to fix the number of shares in and determine the designation, rights, privileges, restrictions attaching to the shares of each series. (2) – if any amount of cumulative dividends whether or not declared, or declared non-cumulative dividends or amount payable on return of capital in respect of shares is not paid in full, the shares of the series shall participate rateably with the shares of all other series of the same class in respect of all accumulated cumulative dividends and declared non-cumulative dividends or all amounts payable on return of capital. (3) – no conditions attached to a series of shares shall confer upon the shares a priority in respect of dividends or return of capital over shares of the same class. (4) – where in respect of a series of shares the directors exercise the authority conferred on them, before the issue of shares of such series, the directors shall send to the Director articles of amendment in the prescribed form designating such series. (5) – on receipt the Director shall endorse thereon a certificate which will constitute the certificate of amendment.

D. Pre-emptive Rights Casebook pp. 687-690

Corporation must offer existing shareholders opportunity to subscribe for new share offering in proportion that their shareholdings bear to total number of shares issued and outstanding.
Prevents directors from issuing shares to defeat takeover bid, dilution of interests.
Even if no pre-emptive right, test of acting honestly on reasonable grounds (Teck v. Millar).
Re Sabex Int. Ltee – shareholders objected to rights offering under s. 234 (now s. 241) CBCA on the ground that the offering was oppressive because it forced them to participate in order to avoid diluting their interests. Court granted injunction.
Ontario Securities Commission National Instrument 45-101 – steps to combat potential abuses associated with non-pro rata share offerings. Any additional subscription privilege must be granted to all holder of rights.
S. 26 OBCA, s. 28 CBCA expressly allows pre-emption restriction to be written into company’s constitution.

Canada Business Corporations Act s. 28 28(1) – if the articles so provide, no shares of a class shall be issued unless they have first been offered to the shareholders holding shares of that class, and those shareholders have a pre-emptive right to acquire the offered shares in proportion to their shareholdings at such price/terms as the shares are to be offered to others. (2) – no pre-emptive right in respect of shares to be issued for a consideration other than money, a share dividend, or pursuant to exercise of conversion privileges, options, rights.

Ontario Business Corporations Act s. 26 26(1) – if the articles or USA provide, no shares of a class or series shall be issued unless they have first been offered to the shareholders holding shares of that class or series, or of another class or series on such terms as provided in articles/USA.

(iii) Issuing and Paying for Shares and the Stated Capital Amount VanDuzer pp. 244-247

No requirement to set a maximum number of shares of a class that may be issued, although articles may provide one. The number of shares authorized to be issued is called the “authorized capital”.
Directors have the power to issue shares, and this power cannot be delegated to anyone else (CBCA s. 115(3)(c); OBCA s. 127(3)(c)). In exercising this power, the directors must act in the best interests of the corporation as required by their fiduciary duty.
Usual process: subscription in which prospective shareholder offers to buy a specified number of shares for a price. The directors pass a resolution accepting the subscription and issuing them to the shareholder. On incorporation/in small businesses the subscription is a simple offer expressed in a few lines. Where public corporation, subscription may have to be more complex due to provincial securities laws.
Subject to articles, by-laws, an unanimous shareholders agreement, shares can be issued to any person for whatever consideration the directors determine is appropriate (CBCA s. 25(1); OBCA s. 23(1)).
Shares may be issued for money, property or past services; if not money, directors must ensure that whatever is received is not worth less than the “fair equivalent of the money that the corporation would have received if the shares had been issued for money” (CBCA, s. 25(4)).
Pursuant to s. 118(1) CBCA, if the directors fail to get the “fair equivalent” they are personally liable to make up the shortfall, unless they could not reasonably have known that the value of the property was insufficient (CBCA s. 118(6)) or if they exercised the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances, including relying on professional opinion (CBCA s. 123(4), OBCA s. 23).
Whatever the consideration, it must be paid in full at the time the shares are issued; only fully paid shares can be issued (CBCA, s. 25(3); OBCA s. 23)).
A promissory note or promise to pay is not property for which shares can be issued (s. 25(5)). However, certain debt obligations owed by a third party to the person who wants to buy shares can be transferred to the corporation by that person in return for shares (s. 25(5)).
All shares are now “non-assessable” (CBCA, s. 25(2)).

Stated Capital Account

A corporation must maintain a separate account for each class and series of shares it issues, recording the “stated capital” for that class and series (CBCA, s. 26(1); OBCA s. 24). This is simply the historic total of the amount paid into the corporation in return for the issuance of shares of that class or series. Stated capital must be adjusted whenever shares are issued, including the payment of a dividend in the form of a share, or reacquired by the corporation.
Stated capital is relevant for calculating whether the capital impairment test has been satisfied.
It is possible to adjust stated capital with approval of shareholders by special resolution subject to certain limits (CBCA ss. 26(5) and 38; OBCA s. 34).
A corporation might want to reduce stated capital where it exceeds realizable value of corporation’s assets and capital impairment test cannot be satisfied, or where it wants to distribute capital. Except where reduction is to match a shortfall in realizable assets, a corporation cannot reduce its stated capital if there are reasonable grounds for believing that:

o The corporation is, or after the reduction would be, unable to pay its liabilities as they become due; or o The realizable value of the corporation’s assets would thereby be less than its total liabilities.

Canada Business Corporations Act ss. 25, 26, 30, 41, 118(1), (6), 123(4) 25(1) – directors determine issue of shares subject to articles et. (2) – shares are non-assessable (3) – pay consideration first; money or not less in value than fair equivalent. (4) – in determining equivalence may take into account reasonable charges etch. (5) property does not include promise to pay. 26(1) – must maintain stated capital account. (2) add consideration for shares to it. (3) – but if shares not issued for money may add the whole or any part of the amount of the consideration. (4) – but mustn’t add amount greater than consideration received. (5) – constraint on addition to stated capital account (6) – other additions to stated capital. (7) – s. (2) does not apply on continuance unless share is issued after corporation is continued. (8) – any amount unpaid on continuance and paid after must be added. (9) – more about continuance (10) – stated capital not to be reduced except in accordance with act. (11) but all of this doesn’t apply to open-end mutual fund. 30 (1) – corporation can’t hold shares in itself nor can subsidiaries acquire shares in it. (2) – subsidiary must sell/dispose of shares in parent within five years of becoming subsidiary/continuance under this act. 41. – Commission for sale of shares. 118(1) – directors liable to corporation to make good any amount by which consideration received is less that fair equivalent of money corporation would have received. (6) – unless did not know and could not have reasonably have known. 123(4) – director not liable under s. 118, 119, 122(2) if exercised care, diligence and skill that reasonably prudent person would have exercised in comparable circumstances including reliance in good faith on financial statements by officer/reports by professionals. Ontario Business Corporations Act ss. 23, 24, 37, 130(1), (6), 135(4) 23(1) – directors determine issue of shares subject to articles etc. (2) – shares are non-assessable (3) – pay consideration first; money or not less in value than fair equivalent. (4) – value determined by directors (5) – in determining equivalence may take into account reasonable charges etc. (6) property does not include promise to pay. 24(1) – must maintain separate capital account. (2) add consideration for shares to it. (3) – but if shares not issued for money may add the whole or any part of the amount of the consideration. (4) – but mustn’t add amount greater than consideration received. (5) – stated capital at time of coming into force or continuance. (6) – additions to stated capital to be approved by special resolution. (7) – shareholders entitled to vote separately. (8) – expressed in one or more currencies. (9) – more about continuance (10) – stated capital not to be reduced except in accordance with act. (11) but all of this doesn’t apply to open-end mutual fund. (12) definition of open-end mutual fund. 37 – Commission for sale of shares. 130(1) – directors jointly and severally liable to corporation to make good any amount by which consideration received is less that fair equivalent of money corporation would have received. (6) – unless did not know and could not have reasonably have known. 135(4) – director not liable under s. 118, 119, 122(2) if exercised care, diligence and skill that reasonably prudent person would have exercised in comparable circumstances including reliance in good faith on financial statements by officer/reports by professionals/officers/employees.

(iv) Redemption and Repurchase of Shares VanDuzer pp. 247-251

A corporation may not hold shares in itself or a corporation that controls it (CBCA s. 30; OBCA s. 28).
Two exceptions: it may hold its own shares as security or as a trustee or for the purpose of maintaining any licence, permit or other benefit conditional on Canadian ownership (CBCA, s. 32; OBCA s. 29).
A corporation may acquire its own shares by purchase or redemption although the shares must then me cancelled in most cases (CBCA, s. 39(6)).

Holding Shares as Security or as a Trustee

A corporation may hold shares in itself or its parent corporation as a trustee/security if it is acting in the ordinary course of a business that includes the lending of money (CBCA s. 31). It may also hold a lien on its own shares as security for any debt owed to it by a shareholder (CBCA, s. 45(2), (3); OBCA ss. 40(2),(3)).
If a corporation does hold shares as security/trustee it cannot vote them unless the corporation is acting as a trustee and then only in accordance with written instructions from beneficiary (CBCA, s. 33; OBCA ss. 29(8)).

Purchase or Redemption of Shares

A corporation may buy back shares to return capital to shareholders. Under CBCA it may do so on any terms negotiated so long as doing so would not breach the financial tests in the CBCA (ss. 34 and 35). For most purposes, these are the same financial tests as for solvency and impairment of capital which must be satisfied for payment of dividends (CBCA s. 35).
The capital impairment test is relaxed however if the purchase is:

o To settle or compromise a debt claimed by or against the corporation; o To eliminate fractional shares; or o To fulfil the terms of a contract between the corporation and a director, officer or employee.

In such a case, the realizable value of the assets of the corporation after the payment need only exceed its liabilities plus the amount required to be paid on a liquidation or redemption of all the shares held by holders who have the right to be paid prior to the holders of the shares to be purchased (CBCA, s. 35(1) and (3).
If the repurchase is to satisfy the claim of a shareholder who has dissented from some fundamental change (s. 190 CBCA) or to comply with a court order to purchase shares where court has found oppression (s. 241) test is can complete purchase if realizable value of assets exceeds liabilities (CBCA ss. 35(2), 190(26) and 241(6); OBCA ss. 30, 31, 185(3), 248(6)).
If a corporation does buy its own shares, it must either cancel them or restore them to the status of authorized but unissued (CBCA, s. 39(6); OBCA s. 35)).
Redemption –
A corporation may redeem its own shares = buying them in accordance with an express term in the corporation’s articles that permits such purchases (CBCA s. 36; OBCA s. 32). Redemption of shares is another way to return invested capital to shareholders. The articles should define the circumstances in which redemption is permitted and specify price. Usually price is issue price + unpaid cumulative dividends.
Redemption may be at the option of the corporation – redeemable at option of shareholder, retractable or putable on occurrence of specified event.
Before corporation may redeem any of its shares, the directors must have reasonable grounds for believing that the basic financial tests for solvency and impairment of capital are satisfied, subject to one modification: for capital impairment test, need only to have reasonable grounds to believe that the realizable value of the corporation’s assets exceeds its liabilities plus the stated capital for classes of shares with a right to be paid on redemption or liquidation ranking with or ahead of the shares to be redeemed (see also OBCA s. 32).

Adjustments to Stated Capital

Whenever a corporation repurchases, redeems or otherwise acquires its shares, it must deduct from its stated capital account the stated capital per share before the transaction, multiplied by the number of shares acquired (CBCA ss. 37 and 39; OBCA ss. 33 and 35).

Canada Business Corporations Act ss. 30-40 30. – Corporation holding its own shares, subsidiary holding shares of parent. 31(1) – exception if acting as legal representative. (2) – exception if holding shares as security. (3) – may permit subsidiary to acquire shares as legal representative or as security. (4) – exception – conditions precedent. (5) – after acquisition under s. (4) conditions prescribed must be met. (6) – non-compliance with conditions. 32(1) – exception if trying to qualify under prescribed law of Canada/receive licences etc. by having specified level of Canadian ownership. (2) – transfers under s.(1) prohibited unless will have desired effect. (3) – corporation that does not comply guilty of offence. (4) – directors involved also guilty of offence. (6) – transfer not void. 33.(1) a corporation holding shares in itself shall not vote unless legal representative/s. 153. (2) – ditto for subsidiaries. 34. - corporation may acquire shares issued by it. (2) – but must not make payment if reasonable grounds for believing it would be unable to pay liabilities/realizable value of corporation’s assets would after the payment be less than the aggregate of its liabilities and stated capital of all classes. 35. (1) – but notwithstanding this may acquire own shares to settle debt/claim, eliminate fractional shares or fulfil terms of non assignable agreement, or (2) dissent and appraisal or compliance with order (3) but not if unable to pay liabilities or realizable value of assets would be less than liabilities + amount required for payment on redemption of all shares that have right to be paid before holders of shares to be purchased/acquired. 36 (1) – redemption price no to exceed formula in articles. (2) but must not pay if it would be unable to pay liabilities as they become due or value of assets would be less than liabilities + amount required to pay holders of shares that have right to be paid rateably with or before holders of shares to be purchased. 37 – donated shares. 38 (1) – purposes for which corporation may by special resolution reduce stated capital. (2) – contents of special resolution. (3) – but not if would be unable to pay liabilities or realizable value of assets would be less than aggregate of liabilities. (4) – recovery. (5) – limitation on recovery. 39(1) – amount to be deducted from stated capital account on purchase, redemption, other acquisition. (2) – amount of payment made to shareholder under 241 to be deducted. (3) – adjustment of stated capital account in accordance with special resolution. (4) – adjustment on conversion of shares. (5) – stated capital of shares that have right to be converted. (6) – shares acquired by corporation must be cancelled or restored to unissued status. (7) – unless holding shares in itself as permitted in 31. (8) – or as permitted in 32, but will be deemed to be acquired after 2 years. (9) – conversion of shares. (10) – effect of change of shares on number of unissued shares if authorized number of shares limited by articles. (11) – repayment of debt obligations. (12) – acquisition and reissue of debt obligations. 40. (1) – enforcement of contract to buy shares, unless contrary to ss. 34-36. (2) – status of contracting party. Ontario Business Corporations Act ss. 28-36 28. – Corporation holding its own shares, subsidiary holding shares of parent. 29(1) – exception if acting as legal representative. (2) – ditto for subsidiary. (3) – corporation may hold shares in itself as security. (4) – exception if trying to qualify under prescribed law of Canada/receive licences etc. by having specified level of Canadian ownership. (5) – transfers under s.(1) prohibited unless will have desired effect. (6) – where shares are transferred ss. 23, 127, 130 apply. (7) – transfer not void. (8) – a corporation holding shares in itself shall not vote unless legal representative/s. 49 Securities Act. (9) – exception, conditions precedent (10) – conditions precedent must be met. (11) – if not met then prescribed consequences apply. 30. - corporation may acquire shares issued by it. (2) – but must not make payment if reasonable grounds for believing it would be unable to pay liabilities/realizable value of corporation’s assets would after the payment be less than the aggregate of its liabilities and stated capital of all classes. 31. (1) – but notwithstanding this may acquire own shares to settle debt/claim, eliminate fractional shares or fulfil terms of non assignable agreement, or (2) dissent and appraisal or compliance with order (3) but not if unable to pay liabilities or realizable value of assets would be less than liabilities + amount required for payment on redemption of all shares that have right to be paid before holders of shares to be purchased/acquired. 32 (1) – redemption price not to exceed formula in articles. (2) but must not pay if it would be unable to pay liabilities as they become due or value of assets would be less than liabilities + amount required to pay holders of shares that have right to be paid rateably with or before holders of shares to be purchased. 33 – donated shares. 34 (1) – purposes for which corporation may by special resolution reduce stated capital. (2) – differently affected class or series entitled to vote separately. (3) – account to be reduced must be specified. (4) – but no reduction if would be unable to pay liabilities or realizable value of assets would be less than aggregate of liabilities. (5) – application for order where improper reduction. (7) – class action (8) – shareholder holding shares in fiduciary capacity not liable. (9) – liability under s. 130 not effected. 35(1) – amount to be deducted from stated capital account on purchase, redemption, other acquisition. (2) – amount of payment made to shareholder under 241 to be deducted. (3) – adjustment of stated capital account in accordance with special resolution. (4) – adjustment on conversion of shares. (5) – stated capital of shares that have right to be converted. (6) – shares acquired by corporation must be cancelled or restored to unissued status. (7) – unless holding shares in itself as permitted in 29, but will be deemed to be acquired after 2 years. (8) – conversion of shares. 40. (1) – enforcement of contract to buy shares, unless contrary to ss. 30, 31, 32. (2) – corporation bears burden of proving it would be contrary to those sections. (3) – other party retains status of claimant.

IV – MANAGEMENT AND CONTROL OF THE CORPORATION: THE BASIC LEGAL FRAMEWORK (a) Introduction – Shareholders, Directors and Officers Casebook p. 207

How to counterbalance considerable scope for unfettered discretion that managers of large corporations enjoy.

VanDuzer pp. 254-257

Shareholders are the residual claimants to the assets of the corporation. They elect directors who have the power and responsibility to manage or supervise the management of the business and affairs corporation.
Directors appoint officers and delegate some of their powers and responsibilities relating to management to them – they serve at the pleasure of the board.
CBCA, ss. 102, 115, 121; OBCA.
Shareholders passive role is enhanced in several ways. Approval by shareholders is required before certain significant changes can occur to the corporation.
Shareholder have limited scope for actively initiating corporate action: CBCA gives shareholders certain rights to access corporate information.
CBCA improves ability of shareholders to seek relief from the behaviour of management through broad range of remedial options.
Situations in which CBCA specifically requires shareholder approval:

o Amendment of articles (CBCA, s. 173), o Creation, amendment and repeal of by-laws (CBCA, s. 103), o “sale, lease or exchange of all or substantially all of the property of a corporation other than in the ordinary course of business” (CBCA, s. 189(3)), o Amalgamation with another corporation (CBCA, s. 183) and o Dissolution of the corporation (CBCA, s. 211).

In some cases non-voting shares get voting rights and particular classes of shares may have the right to vote separately as a class.
CBCA also provides an active role for shareholders in two ways:

o Proposals: shareholders can have matters put on the agenda for discussion at shareholders’ meetings, including making, amending, or repealing by-laws (CBCA, ss. 137 and 103(5)); and o Unanimous shareholders’ agreements (USAs): shareholders can assume all powers of the board of directors, completely altering the allocation of powers between directors and shareholders if they unanimously agree (CBCA, s. 146). Such an agreement may the allocate the assumed powers among the shareholders.

Rights of access to information:

o Information about past meetings of shareholders and financial records (CBCA, ss. 20, 21, 143, 160, 243; Part XIX).

Remedies provided by the CBCA for abuse of directors’ power to manage include:

o A right to apply to have the corporation’s existence terminated (s. 214); o A right to bring an action on behalf of the corporation, with permission of the court, for breach by directors or officers of duties owed to the corporation (a “derivative action,” s. 239); o A right to seek relief from “oppression” of the interests of shareholders or others by the corporation or the directors (s. 241); o A right to seek an order directing directors and officers to comply with or to restrain them from breaching the CBCA, the articles, by-laws, or any unanimous shareholders’ agreement (s. 247); o A right to seek rectification of corporate records (s. 243).

If a majority of shareholders are unhappy with the board of directors’ management, they can replace the board at the next annual meeting or can requisition a special meeting for this purpose (CBCA, s. 143 (requisition); s. 109 (removal by ordinary resolution).

Canada Business Corporations Act ss. 103, 108, 173 103 (1) – directors may by resolution make/amend/repeal by-laws unless contrary to articles/by-laws/USA. (2) – if they do, must submit for approval at next meeting of shareholders. (3) – by-law is effective from date of resolution until confirmed/rejected by shareholders or ceases to be effective under (4). (4) – ceases to be effective if not submitted and no by-law with substantially same purpose/effect is effective until confirmed by shareholders. (5) – shareholder may make a proposal to make/amend/repeal by-law. 108(1) – director ceases to hold office when dies, resigns, is removed, is disqualified. (2) – effective date of resignation. 173 (1) amendment of articles – things corporation may amend articles by special resolution to do. (2) – if authorized may revoke special resolution before acted on without further approval. (3) – but can amend articles to change number name to verbal name at will.

Ontario Business Corporations Act ss. 115, 119, 121, 122, 168 115(1) – directors manage/supervise management of business and affairs of corporation. (2) - private company to have at least one director, offering corporation at least 3. (3) – at least 1/3 directors of offering corporation not to be officers/employees. (4) – deemed directors. (5) – exceptions to deemed directors. 119 (1) – directors named in articles hold office until first shareholders meeting. (2) – until then resignation will not be effective unless successor has been elected/appointed. (3) – first directors have all powers, duties, liabilities of directors. (4) – shareholders shall elect at first meeting and each succeeding annual meeting at which election required directors to hold office for term expiring not later than close of third annual meeting following election. (5) – don’t all need to hold office for same term. (6) – unless term is stated, it’s till end of first annual meeting following election. (7) – but if no one is elected, incumbent directors continue in office until successors elected. (8) – if required number not elected, the ones that are have all the powers if a quorum until holding of meeting of shareholders. (9) – election not effective unless person consents in writing before or within 10 days of election. (10) – but if consents later, election is valid. (11) – (9) does not apply to re-elected director where no break in term. 121(1) – director ceases to hold office when dies, resigns, is removed, is disqualified. (2) – effective date of resignation. 122 (1) – directors may be removed by ordinary resolution. (2) where holders of any class or series have exclusive right to elect one/more directors, may only be removed by that class/series. (3) – vacancy may be filled at meeting where removed or under 124. 168 (1) amendment of articles – non-inclusive list of things corporation may amend articles to do. (3) – if authorized may revoke special resolution before acted on without further approval. (4) – but can amend articles to change number name to verbal name at will. (5) – authorization under (1) to be by special resolution and under (2) or (4) to be by resolution of directors. (6) – section does not apply to special Act incorporations.

(b) How Shareholders Exercise Power – Shareholder Meetings and Resolutions – Annual and Special Meetings; Calling Meetings; Notice of Meetings; Proxies and Proxy Solicitation; Shareholder Proposals; Quorum; Voting; Access to Information – Auditors and Financial Disclosure; Signed Resolutions Casebook pp. 747, 755-770, 772-779, 798-803

Shareholder meeting is a key instrument of managerial accountability to shareholders.
Two types: annual, special.
Must have annual meeting each year within 15 months of last annual meeting (CBCA s. 133(a); OBCA s. 94(a).
At least three items of business must be transacted at annual meeting: election of directors (CBCA s. 106(3); OBCA s. 119(4)) (although directors may hold office for as long as three years so may be none to elect); appointment of auditors (CBCA s. 162(1); OBCA s. 149(1)); presentation of financial statements and auditors report to shareholders (CBCA s. 155(1); OBCA s. 154(1)).
If business arises directors may call a special meeting of the shareholders (CBCA s. 133(b); OBCA s. 94(b)).
Holders of not less than 5% of issued shares tat carry the right to vote at a meeting may requisition a shareholders’ meeting (CBCA s. 143, OBCA s. 105).
Where meeting ay be held (CBCA s. 132; OBCA s. 93)
Notice of meetings (CBCA s. 135; OBCA s. 96)
Quorum (CBCA s. 139; OBCA s. 101).
Wall v. London and Northern Assets Corp. – discussion interrupted by cries of vote; chairman put a motion that debate should close; majority voted in favour; chairman put resolution, which was carried by majority. Shareholder complained this had prevented him from speaking; commenced action for declaration that the special resolution was ultra vires, void and invalid. Held that it was ok to put down minority bent on obstructing business and resolved on talking forever.
National Dwellings Society v. Sykes – chairman does not have authority to stop the meeting at his own will and pleasure.
Notes –
S. 137(1)(b) CBCA and s. 99(1)(b) OBCA provide for shareholder right of discussion. CBCA applies to shareholders entitled to vote at annual meetings (may still be common law right of discussion at special meetings), OBCA applies to every shareholder entitled to vote at meetings.
Re Bomac Batten Ltd. and Pozhke – reaffirmed right of shareholders to be heard at annual shareholders’ meeting. Chairman has a duty to act quasi judicially.
Canadian Express Ltd. v. Blair – shareholder designees who hold blank proxies are recognized as having full discretion to vote as they see fit. Chairman failed to meet quasi-judicial standard – acted in his own personal interests, and failed to accord dissenting shareholders the right to be heard. Reliance on legal advice no excuse. Damages awarded jointly and severally against Blair and Enfield; Canadian Express now controlled Enfield so decided to collect solely from Blair. Blair sought indemnity from Enfield in:
Blair v. Consolidated Enfield Corp. – issue; application of facts to by-law which grants rights of indemnity in terms authorized by s. 136 OBCA. Held that the language “acted… with a view to the best interests of the corporation” referred back to the conduct of the meeting not the conduct of the litigation. Had he acted honestly and in good faith with a view to the best interests of the corporation? Legal advice does not automatically sanctify conduct based upon it but should be considered. Satisfied that the evidence shows that he properly performed his duty as chairman of the meeting. He then acted reasonably in defending the litigation; appeal allowed.
Shareholder Proposals –
Shareholders can make proposals to be considered at shareholders’ meetings (CBCA s. 137; OBCA s. 99).
Four categories of proposal that a shareholder might make:

o That articles be amended (CBCA ss. 175(1); OBCA ss. 169(1)) o That a by-law be made, amended, repealed (CBCA s. 103(5); OBCA s. 116(5)) o Shareholders holding at least 5% shares/class of shares may make nominations for the election of directors (CBCA s. 137(4); OBCA s. 99(4)). o Residual category. If proposal does not relate to business or affairs of corporation managers may refuse to circulate it. Fourth category is those proposals that fall outside this limit and do not fall foul of the technical limitations in CBCA s. 137(5); OBCA s. 99(5).

Proposal is circulated at corporations expense with management proxy circular; shareholder may also request that management circulate supporting statement of not more than 200 words under OBCA s. 199, 500 words under CBCA (Regs s. 49).
Proposals may be made by registered or beneficial shareholders. To be eligible to submit proposal shareholder must continuously hold prescribed minimum number of shares for prescribed amount of time before submitting proposal. Support from other shareholders can be counted towards this (CBCA s. 137(1.1)(b)). The corporation has the right to demand proof that the shareholder meets the eligibility requirements (s. 137(1.4)).
Effect of proposals: under OBCA s. 116(5) if a shareholder to make/amend/repeal by-law is adopted at shareholders meeting the by law is effective from the date of its adoption. No such provision in reatlion to proposal to change articles. S. 169(2) suggests by implication that if a proposal is passed, it is effective.
CBCA does not expressly deal with effect of shareholder proposal either. S. 175(2) suggests by clear implication that a properly passed proposal to amend the articles is binding.
Fourth category unclear – might trench on authority of directors to manage corporation (CBCA s. 102; OBCA s. 115).
Varity Corp. v. Jesuit Fathers of Upper Canada – application by company not to include in mailing proposal that company end its investments in South Africa. The provision of the Act at the time allowed corporation not to comply with shareholders request if it clearly appeared that the proposal was submitted for the purpose of promoting general economic, political, racial religious, social or similar causes. The language of the proposal left no doubt that its primary purpose is the abolition of apartheid. Court put onus of proof on applicant to make out its case.
Greenpeace Foundation of Canada v. Inco Ltd. – rejected application in part because similar proposal had been voted on the previous year and only received 1.6% of the votes cast.

Right to Corporate Information and to appoint Auditor

Ss. 19 to 22 and 138 CBCA, ss. 139 to 147 OBCA.
Statutes also require preparation of and accessibility to prescribed financial information.
Directors have both common law and statutory rights to inspect the books of the company.
Johnston v. West Fraser Timber Corp. – shareholder not disentitled to this right because of some alleged improper purpose.
CBCA s. 20(2) requires corporation to “prepare and maintain adequate accounting records and records containing minutes of meetings and resolutions of the directors and any committee thereof”. S. 20(4) requires that these records be open to inspection by directors at all reasonable times.
Shareholders have right to appoint/remove auditor (OBCA s. 149; CBCA s. 162). Auditor assesses financial statements which the corporation proposes to place before the shareholders and reports on the preparation and accuracy of those statements.
Exemption and waiver, mainly for non-reporting companies, those whose gross revenues do not exceed certain limits (CBCA s. 163; OBCA s. 148).
Statutes disqualify persons from acting as auditors who are not “independent (CBCA, s. 161; OBCA, s. 152).
CBCA s. 170; OBCA s. 153 gives auditor right to demand information and explanation from the directors, officers, employees, agents of a corporation and access to various documents of corporation/subsidiaries in his opinion necessary to enable him to make the examination and give the report.
Auditor must state whether statement is in accordance with generally accepted accounting principles consistent with that period (OBCA s. 153; CBCA s. 169).
In addition auditor is under a duty to attend certain shareholders meetings and answer any questions. Director also has right to require auditor to attend shareholders’ meeting (CBCA s. 168(2); OBCA s. 151(2)).
Duties of auditor may be enforced by application to the court (s. 247 CBCA, s. 253 OBCA).
Auditor has right to attend any general meeting and to be heard on any matter which concerns him (OBCA s. 151(1); CBCA s. 168(1)).
Any written report/statement made by auditor pursuant to duties attracts qualified privilege (CBCA s. 172; OBCA s. 151(7)).
Removal – may be removed on application to the court by interested party, or shareholders may pass ordinary resolution at special/general meeting called for that purpose (CBCA ss. 161(4), 165(1); OBCA ss. 149(4), 152(4)).
If corporation is reporting company, notice of removal must be given in information circular with name of management’s new nominee placed on proxy form (CBCA ss. 168(5),(6); OBCA s. 149(5)).
External oversight of auditors by Canadian Public Accountability Board.

VanDuzer 258-273 Shareholders’ Meetings and Resolutions

CBCA rules regarding shareholders’ meetings and how they may be changed.
The first annual meeting of shareholders must be held within eighteen months of incorporation.
Thereafter each annual meeting must be held no later than fifteen months after the previous one or six months after the end of the corporations preceding year (CBCA s. 133).
Annual meetings are identified and defined by the occurrence of three items of business:

o The election of directors; o The receipt of financial statements and the auditor’s report on the statements; o The reappointment of the incumbent auditor (unless dispensed with by unanimous agreement of shareholders in certain circumstances) (CBCA, s. 135(5)).

Meetings to conduct any business other than these three items are called “special meetings” (CBCA, s. 135(5)). The directors may call a special meeting at any time (CBCA, s. 133(2)).
To the extent that any special business is carried on at an annual meeting it is called an annual and special meeting.
Calling meetings:
Directors are responsible for calling annual and special meetings of shareholders, but shareholders holding at least 5% of voting shares may require the directors to call a meeting (CBCA s. 143).
This is called a requisition. The requisition must state the business to be transacted and be sent to each director as well as the corporation’s registered office.
If the directors fail to call a meeting within twenty-one days of any such requisition, any shareholder who signed the requisition may call a meeting and the corporation must reimburse the shareholder for the expenses of doing so (CBCA s. 143(4).
Directors are not obliged to call a meeting if they have already called a meeting or the business identified in the requisition is improper (CBCA s. 143(4)). It would be improper if it could not be the subject of a shareholder proposal under CBCA, s. 137.
Any director or shareholder entitled to vote may apply to a court to have a meeting called if it is impracticable to call a meeting within the time, or in the ways mentioned, or to have a meeting conducted as prescribed in the by-laws or the CBCA (S. 144).
McEwen v. Goldcorp. Inc. – courts should be reluctant to interfere in affairs of corporations; meetings only to be ordered in exceptional cases.
Place of Meetings:
Shareholders’ meetings must be at the place specified in the by-laws; if none specified, Canadian location specified by directors or a place outside Canada if unanimously consent to by shareholders or permitted in articles (CBCA, s. 132) (OBCA does not impose any territorial limitation).
If permitted by by-laws, whoever calls meeting may decide that it will be held by any “telephonic, electronic or other communication facility”, so long as the facility permits all participants to communicate adequately with each other during the meeting (CBCA, s. 132(5)).
Notice of Meetings:
Maximum notice is sixty days; minimum is twenty-one days (CBCA, s. 135; CBCA Reg. s. 44).
For non-distributing corporations may be shorter if so provided in articles or by-laws (CBCA, s. 135(1)).
Notice must go to:

o Each shareholder entitled to vote; o Each director; o The auditor of the corporation (CBCA, s. 135(1)).

Those shareholders entitled to notice are the ones who appear in shareholders’ register on record date (s. 135).
Directors may fix record date by resolution no more than sixty days or less than twenty-one days before the meeting (CBCA s. 134; CBCA Regs s. 43). If directors do not fix it, the CBCA provides that the record date is at the close of business on the day immediately preceding the day on which notice is given (s. 134(2)(a)).
Directors need only send notice to shareholders listed in the records of the corporation or its transfer agent.
Where shares are registered in name of intermediary, obligation to send notice to beneficial owner; intermediary not permitted to vote except in accordance with instructions from owner (CBCA s. 153).
Directors may set a separate record date for determining the voting rights of shareholders. If not, record date is same as for meeting. If shareholder acquires shares after the voting record date, no right to attend and vote unless he has validly executed proxy from transferor (CBCA s. 138(3) and (3.1)). Shares issued after record date cannot vote. (NB under OBCA transferor who acquires shares after record date can still vote if able to prove ownership based on certain requirements (s. 100(1)).
In corporations with few shareholders notice is often waived and attendance is deemed to be a waiver of notice, except when shareholder attends to object to a transaction on the grounds that the meeting has not been lawfully called (CBCA s. 136).
Special meeting – the notice must state the nature of the business and the text of any special resolution that will be voted on (CBCA s. 135(6)).
Proxies and Proxy Solicitation
Any shareholder may appoint proxy to represent and vote at meeting (CBCA, s. 148(1)).
The proxy must be in writing and signed by shareholder.
May be revoked at any time before meeting.
Proxy has all the powers of a shareholder at the meeting, but authority limited to that conferred by proxy; must vote in accordance with any direction given by the shareholder; failure is an offence (CBCA, s. 152(4)).
Proxy holder can vote on amendments so long as does not contravene instructions of shareholder.
New matter not identified in notice cannot be voted on (Montreal Trust of Canada v. Call-Net Enterprises Inc.).
All CBCA corporations with 50+ shareholders/distributing corporations must send shareholders a “management proxy circular” and a form of proxy (CBCA, ss. 148, 149, 150). Form of proxy lists matters to be voted and permits shareholders to identify person to represent at meeting by checking box indicating how shares should be voted. If does not nominate, management nominee is selected by default in forms of proxy sent out by management; if does not indicate how shares should be voted, default is in favour of managements proposals.
Management is required to send annual financial statements to shareholders in connection with annual meetings, report of auditor, any other information regarding financial position of corporation required by articles/by-laws/USA (CBCA s. 155).
Under CBCA management proxy circular must include the following categories of information, among others:

o A description of shareholders’ rights to appoint a proxy and the procedure for doing so; o Transactions with insiders of the corporation (e.g. affiliated corporations, defined CBCA s. 2, significant shareholders, directors, officers); o Disclosure regarding principal shareholders holding more than 10% of the issued shares of the corporation; o Details about the directors who are proposed for election; o Details about any special business.

Information regarding matters to be dealt with must be sufficient to permit shareholders to make a reasoned judgement – Pacifica Papers Inc. v. Johnstone.
Shareholders may solicit votes – entitled to obtain list of sharholdrs, shares, addresses and to contact to influence voting (CBCA, s. 21(3), (9)).
If shareholder does solicit proxies, must send out “dissident’s proxy circular” (CBCA s. 150(1)(b)).
Solicitations can be by public broadcast, speech, publication in prescribed circumstances (CBCA Reg, s. 67).
Communications regarding business that do not contain form of proxy do not trigger obligation to send out dissident proxy circular (CBCA Regs, s. 68).
Rules about proxies and proxy solicitation may be enforced in the same way as other shareholder rights – may seek court order under s. 247.
Shareholder may apply to a court to restrain the distribution of a proxy circular that contains an untrue statement of material fact/omits to state material fact necessary to make statement not misleading – s. 154 CBCA.
Court can restrain implementation passed at meeting held after distribution of such circular or make any other order it sees fit.
Under OBCA sched. F proxies and revocation of may be signed electronically.
Under CBCA any notice or document required to be created or provided to shareholders or anyone else is satisfied by the creation or provision of an electronic document, so long as articles/by-laws do not provide otherwise (s. 252.4).
Notices/documents ay be send electronically only if addressee has consented and has system to receive (e.g. email) (CBCA, s. 252.3).
Documents must be accessible.
Documents may be posted on website so long as eah shareholder individually notified via designated information system (CBCA Regs s. 7(2)).
Electronic signatures permitted (CBCA s. 252.7).
Shareholder Proposals
Limited right for shareholders to add items to agenda (CBCA s. 137) including creation, amendment, repeal of by-laws, amendment of articles (CBCA ss. 103(5) and 175(1)).
Any shareholder entitled to vote may submit proposal of any matter she proposes to discuss. If management proxy circular required (CBCA s. 150), proposal and supporting statement not exceeding 500 words must be included.
In general, proposals not binding on corporation if approved.
Appears that CBCA contemplates that shareholders may use proposal mechanism to make amend or repeal by-laws or amend articles, though Act does not clearly state that shareholder approval is sufficient to effect the change. (OBCA is clearer – s. 116(5) – once approved by shareholders the change is effective).
There are certain limits on the content of a proposal.
May include director nominations only if signed by 5% shareholders.
To be eligible to submit any proposal, a shareholder must:

o Hold voting shares equal to at least 1% total voting shares outstanding at the date the proposal is submitted or worth at leas$2000 close of business day before submitted; and o Must have held the shares for at least 6 months (CBCA, s. 137(1.1), CBCA Regulations, s. 46). o OBCA – requirements regarding minimum amount and value of shares and 6 month holding period not imposed.

Corporation may require proof that these requirements are met (CBCA, s. 137(1.4)).
Beneficial holder of shares who is not registered holder may submit proposal.
Corporation does not have to circulate proposal if:

o The proposal is not submitted at least ninety days before the anniversary date of the notice of the last annual meeting; o It clearly appears that the proposal is:

Primarily for the purpose of enforcing a personal claim or redressing a personal grievance against the corporation, the directors, officers, security holders; or
Does not relate in any significant way to the business or affairs of the corporation;

o the proposing shareholder made a proposal within the last two years then failed to show up to speak to it at the meeting; o substantially the same proposal was submitted within the last five years (OBCA – 2 years) to a meeting of shareholders and prescribed level of support not obtained (3% of total shares voted at first annual meeting at which proposal is presented); o the right to make a proposal is being abused to secure publicity (CBCA s. 137(5) and CBCA Regs ss. 49-51).

These limits also apply to shareholder-requisitioned meeting.
Conduct of Meetings
Shareholder is entitled to discuss any matter with respect to which she could have submitted a proposal at an annual meeting (CBCA s. 137(1)(b)). Under OBCA, discussion right at both special and annual meetings (s. 99(1)(b)).
Shareholders have right to speak to matters on agenda – chair cannot arbitrarily terminate meeting to prevent shareholders discussing/voting on agenda item (Canadian Express Ltd. v. Blair).
Right to discuss may be terminated by chair if he determines in good faith it is being abused (Wall v. London and Northern Assets Corp.).
Directors or shareholders calling a meeting may determine that it shall be held electronically if the by-laws allow it, and the communications facility permits all participants to communicate with each other adequately (CBCA s. 132(5)).
Unless by-laws provide otherwise, any person entitled to attend may so participate if available (CBCA, s. 132(4)) (OBCA s. 94(2)).
Quorum
A majority of shares entitled to vote, represented in person or by proxy at the meeting, constitute a quorum unless the by-laws provide otherwise (CBCA, s. 139; OBCA s. 101).
Voting
One share, one vote. Matters decided by majority.
Special resolutions (e.g. for amendments to articles) must be passed by two-thirds of votes cast at meeting (CBCA, ss. 140, 173, 183, 189).
Voting by share of hands unless by-laws provide otherwise, but any shareholder may require a ballot (CBCA s. 141; OBCA s. 103).
Unless by-laws provide otherwise, any vote may be held by electronic or other means of communication. Any person participating electronically and entitled to vote may vote electronically (CBCA s. 141(3), (4) and CBCA Regs s. 45).
CBCA Regs. – electronic voting subject to two requirements; gathering of votes must be verifiable, and then the tally of votes is presented to the corporation it must not be able to identify how the shareholder who voted electronically voted her shares.

Access to Information

Corporation must maintain certain records and allow access to certain people including shareholders, directors, officers, creditors.
Articles, by-laws, USA, minutes of shareholders meetings, Initial Registered Office Address and First Board of Directors, all notices of Changes Regarding Directors and notices of Change of registered Office Address and share register must be maintained by corporation at registered office or wherever directors decide (CBCA, s. 20(1)).
All documents may be examined and copied by shareholders, creditors, legal representatives during business hours without charge (CBCA s. 21(1)).
If distributing corporation, other persons must be able to obtain access and make copies, though reasonable charge may be imposed.
All shareholders entitled to one copy of articles, by-laws, USA free of charge (CBCA, ss. 21(1), (2); OBCA ss. 140, 144-146.1 and 258).
Any list of shareholders/information from share register cannot be used except (i) in effort to influence voting (ii) in connection with offer to acquire shares (ii) for any other purpose relating to affairs of corporation.
To examine securities register/obtain list of shareholders – make request to corporation accompanied by affidavit stating these restrictions will be restricted (CBCA s. 21(1.1), (3), (7)(a)).
Offence to use shareholder information contrary to restriction (CBCA s. 21(10)).
Corporation has no discretion to refuse to provide information upon receipt of request complying with statutory requirements (EnCana Corp v. Douglas).
All other inspection rights may be used for any purpose (Johnston v. West Fraser Timber Co.).
Additional rights include right to requisition meetings and to ask questions (CBCA s. 143); right to have inspectors and auditors appointed (CBA part XIX).
Auditors must meet certain standards to ensure independent of corporations management (CBCA s. 161).
Directors must present audited annual financial statements and auditors report to shareholders (CBCA, s. 155, 159).
Shareholders of every corporation must appoint auditor although can agree to dispense with if not distributing (CBCA s. 163).
Corporation must maintain adequate accounting records, records containing minutes of directors’ meetings and any resolutions passed (CBCA s. 20(2)).
Directors must have access to these records at reasonable times (CBCA s. 20(4)).
Not right for others to inspect (except portions that relate to directors’ disclosure of conflicts of interest CBCA s. 120(6.1)).
Corporation also required to make certain limited disclosures to public. Must file:

o Articles (including all amendments); o Initial Registered Office Address and First Board of Directors, Changes Regarding Directors and Change of Registered Office Address filings; o Annual information returns (CBCA, s. 263, Form 22); and o Annual financial statements (distributing corporations only) (CBCA s. 160).

In Ontario, additional filings required under Ontario Corporations Information Act and Ontario Securities Act (public corporations only).

Signed Resolutions and Single Shareholder Meetings

If class or series has single shareholder he can constitute meeting (CBCA, s. 139(4)).
Where each shareholder entitled to vote signs written resolution, it will be just as effective as if it had been passed at a meeting (CBCA s. 142).

Canada Business Corporations Act ss. 20-22, 132-44, 147-158, 160 20 – corporate records 21 – access to corporate records 22 – form of records 132 – place of meetings, electronic meetings 133 – first annual meeting within 18 months then every 15 months but within 6 months of end of financial year. 134 – fixing a record date. 135 – notice of meeting 136 – attendance is waiver of notice unless to object. 137 – proposals. 138 – list of shareholders entitled to receive notice. 139 – quorum, one shareholder meeting. 140 – one share, one vote; representatives of corporations; joint shareholders. 141 – voting by show of hands, but shareholder may demand ballot. 142 – resolution signed by all shareholders in lieu of meeting. 143 – 5% or more of shares may requisition directors to call meeting. 144 – meeting called by court. 147 – definitions. 148 – appointing proxyholder. 149 – mandatory solicitation. 150 – soliciting proxies. 151 – exemption form requirements of 149/150(1) by Director. 152 – person who solicits proxy and is appointed must attend. 153 – duty of intermediary. 154 – restraining order where form of proxy/dissident’s proxy circular contains untrue statement/omission. 155 – annual financial statements. 156 – exemption by director. 157 – statements to be kept at registered office, and examination. 158 – approval of financial statements by directors. 160 – copies to be sent to director.

Reg. ss. 32-43 Form 22 Annual Return Ontario Business Corporations Act ss. 93-106, 109-114, 139, 140, 144-6, 154-7, 159, Reg. ss. 27-37 93 – place of meetings 94 – first meeting within 18 months, 15 months thereafter. 95 – record date. 96 – notice, not more than 50 days not less than 21 (offering) or 10 (otherwise). 97 – majority voting, adjournments 98 – waiving notice 99 - proposals 100 – list of shareholders entitled to receive notice. 101 – quorum, one shareholder meeting. 102 – one share one vote, representatives of corporations. 103 – voting by show of hands, shareholder may demand ballot. 104 – resolution in lieu of meeting. 105 – 5% + shareholder can requisition meeting 106 – requisition by court. 109 – definitions. 110 – proxies. 111 – mandatory solicitation of proxy by offering corporation. 112 – information circulars when soliciting proxies. 113 – application to commission for exemption order. 114 – proxyholder must attend, has rights of shareholder. 139 – form of records. 140 – records to be kept at registered office, other designated place. 144 – records open to examination by directors. 145 – examination by shareholders and creditors. 146 – list of shareholders. 154 – information to be laid before annual meeting. 155 – preparation of annual statements. 156 – offering corporation to file financial statements. 157 – financial statements of subsidiaries.

(c) Directors and How They Exercise Power (i) Introduction – The Power to Manage Casebook pp. 230-235

Kelly v. Electrical Construction Co.
Shareholders represented by proxy not allowed to vote according to by-law requiring instruments appointing proxies to be deposited at head office at least one day before. By-law adopted 1897, not confirmed at next meeting, confirmed 1905.
By-law ceased to have effect at next shareholder annual meeting and since not in force not capable of confirmation
Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuninghame
Articles of association provided that the management would be vested in the directors subject to such regulations as may be made by extraordinary resolution.
Resolution was passed approving sale by simple majority.
Directors refused to carry out transaction on basis not for good of company
If mandate of directors was to be altered, it could only be done under machinery of articles.

Canada Business Corporations Act ss. 103, 108, 173, 190, 211 103 – by-laws by directors. 108 – ceasing to hold office. 173 – amendment of articles. 190 – dissent and appraisal. 211 – liquidation and dissolution.

Ontario Business Corporations Act ss. 115, 119, 121, 122, 168, 185, 207, 208 115 – directors to manage/supervise management subject to USA 119 – first directors; resignation; election; consent 121 – when director ceases to hold office. 122 – removal of directors. 168 – amendment of articles. 185 – rights of dissenting shareholders; dissent, to be paid fair value, must send written objection (proxy doesn’t count), notice must set out dissent and appraisal rights, must send written notice containing demand for payment within 20 days, send in certificate within 30 days; then ceases to have any writes other than right to be paid fair value unless withdraws notice before corporation makes offer; corporation must within 7 days send written offer to pay; application to court to fix fair value; grounds on which not to make payment. 207 – winding up by court. 208 – who may apply.

(ii) Qualifications VanDuzer pp. 273-275

A person is not qualified to be a director if she is:

o Less than eighteen years of age; o Of unsound mind as found by a court of Canada or elsewhere; o An undischarged bankrupt; or o Not an individual (although corporation may be incorporator (CBCA, s. 5; OBCA s. 4(1)). o CBCA s. 105.

No statutory requirement for directors to hold shares, although articles may so provide (CBCA s. 105(2)).
25% of directors must be resident Canadians (CBCA s. 105(3);OBCA s. 118(3)). Although in certain sectors (uranium mining, book publishing/distribution, book sales, film distribution majority must be (s. 105; Reg. s. 16).
Resident Canadian is defined s. 1(1) to include Canadian citizens and permanent residents ordinarily resident in Canada.
Director ceases to hold office on becoming disqualified (CBCA s. 108(1)(c)). However any act after disqualification still valid notwithstanding (CBCA s. 116; OBCA ss. 121(1)(c), 128).
Individuals cannot be made directors of CBCA corporations without consent. People elected/appointed are deemed not to be directors unless

o They were at the meeting at which the election/appointment took place and did not refuse; o They consented in writing before/within ten days of appointment; or o They acted as directors pursuant to the election/appointment (CBCA s. 106(9); 119(9)-(11) OBCA)

Canada Business Corporations Act ss. 2(1) (definition of director), 2(5) (definition of resident Canadian), 102(2), 105, 108(1)(c), 116; Reg. s. 11 2(1) – director – person occupying the position of director by whatever name called; resident Canadian – Canadian citizen ordinarily resident in Canada, permanent resident. 102(2) – at least one director, unless distributing in which case at least three. 105 – under 18s, unsound mind, legal persons and bankrupts not qualified to be directors; when must majority of directors be resident Canadians. 108(1)(c) – ceasing to hold office. Reg. s. 13 – classes of persons counted as resident Canadians.

Ontario Business Corporations Act ss. 1(1)(16)(37), 118, 121(1)(c), 143; Reg. s. 26 1 – definitions. 118 – persons disqualified from being director. 121(1)(c) – ceasing to hold office. 143 – where registers to be kept. Reg. s. 26 – class of persons prescribed as resident Canadians. (iii) Election and Appointment of Directors VanDuzer pp. 275-277

The first directors are those listed in the Initial Registered Office Address and First Board of Directors filed with the articles.
They become directors at time certificate of incorporation is issued (CBCA s. 106(2); under OBCA first directors are named in articles, s. 119).
These directors hold office until first meeting of shareholders, which must be held not more than eighteen months after incorporation (CBCA s. 133). At that meeting and each subsequent annual meeting at which an election is required, shareholders must elect directors.
Election is by simple majority vote unless some higher level of support is required by articles (CBCA s. 6(3)).
Term of directors cannot extend past date of third annual meeting following election; also possible to have staggered terms. If no term specified on election, directors stay in office until annual meeting following their election (CBCA s. 106(3)). If shareholders fail to elect, incumbents remain in place until replacements elected (CBCA s. 106(6); OBCA s. 119(8)).
When directors are changed, corporation must file a Change Regarding Directors form with Corporations Canada within fifteen days (CBCA s. 113).
Where a corporation has no directors, any person who manages/supervises management is deemed to be director (CBCA s. 109(4)). Exceptions are an officer acting under the direction of a shareholder, lawyers and accountants providing professional services and creditor representatives (CBCA s. 109(5); OBCA ss. 115(4) and (5)).
Shareholders have power to remove director by passing an ordinary resolution to that effect at a special meeting of shareholders called, at least in part, for that purpose (CBCA, s. 109).
Where director is elected by particular class or series, cannot be removed without their approval.
If vacancy occurs (resignation, removal, disqualification) and no quorum, or if minimum number of directors not elected, remaining directors must call a shareholders’ meeting to fill the vacancy (CBCA s. 111(2)). If a quorum remains in place, the remaining directors may fill the vacancy by appointing a new director for the unexpired term (CBCA s. 111(10).
The articles may provide that all vacancies must be filled by shareholders (CBCA s. 111(4); OBCA s. 124).
As long as a quorum remains, the board can act as a board.
Significant changes including wholesale replace of board may be effected without shareholder approval if cooperation of departing and incoming directors by process of sequential resignations and appointments.

Canada Business Corporations Act ss. 106, 107, 108(2), 111(1), 116, 132(1), 133(a), (b), 135(5), 143-5 106 – notice of directors, election 107 – cumulative voting. 108(2) – effective date of resignation. 111(1) – filling a vacancy. 116 – acts of directors/officers valid notwithstanding irregularity in election etc. 132(1) – place of meeting. 133(a) – first annual meeting within 18 months. (b) – then within 15 months/6 months of end of financial year. 135 – notice of meeting. 143 – requisition of meeting 145 – court review of election. Ontario Business Corporations Act ss. 93, 94, 96(5), 100, 101, 104-7, 119, 120, 124, 128

(iv) Number of Directors VanDuzer p. 277

Under CBCA, only one restriction on number of directors; if distributing corporation with outstanding shares held by more than one person, the corporation must have three directors at least two of whom are not officers/employees of corporation (CBCA, s. 102(2); OBCA s. 115(2)).
The number of directors, or a maximum and minimum number of directors must be specified in the articles (CBCA s. 6(1)(e)). The corporation may change the number by articles of amendment (requires approval of shareholders by special resolution).

Canada Business Corporations Act ss. 6(1)(e), 20(1), 102(2), 106(7), 107(a), 109(3), 111-4, 213(1)(b) Ontario Business Corporations Act ss. 5(1)(c), 120, 124-6, 128, 140, 145

(d) Directors Meetings VanDuzer pp. 277-280

At meetings directors act by resolution. These are recorded in minutes included in minute book.
Code for directors meetings set out in CBCA s. 114 and OBCA s. 93.
Place – may be held at whatever place directors decide (CBCA s. 114(1); NB under OBCA a majority of meetings must be in Canada (s. 126(2)).
Notice – must be as specified in by-laws. No default provision in CBCA. Under OBCA in absence of provision in by-laws, ten days’ notice must be given (OBCA s. 126(9)). Notice may be waived and is deemed waived by attendance at meeting, except if director attends for the purpose of objecting to the meeting on the basis that it is not lawfully called (CBCA s. 114(6)). Waiver of notice only effective if obtained from all directors. Otherwise meeting not valid.
Conducting meetings – quorum must be present. Quorum may be set out in articles or by-laws. In default of provision, quorum consists of majority of directors (if fixed number) or majority of minimum number of directors (CBCA s. 114(2); under OBCA quorum cannot be less than two-fifths of the directors/minimum number of directors (s. 126(3)).
Regardless of quorum, directors may not carry on business unless 25% present are resident Canadians (CBCA s. 114(3)). In those industries where majority of board must be resident, majority of directors present must be resident Canadians (and see OBCA s. 126). These requirements may be satisfied if after a meeting the requisite numbers of resident Canadians approve any business transacted at the meeting.
If all directors consent, may participate electronically (CBCA s. 114(9)).
Business must be approved by number of directors specified in articles/by-laws – usually majority.
Directors can transact whatever business they like, except in first meeting (agenda specified (CBCA s. 104).
Directors must call annual meeting of shareholders at least every fifteen months and must approve financial statements annually.
Directors must meet to pass resolutions and authorize certain actions (shareholders’ meetings, issuing shares, declaring dividend (CBCA s. 115(3)).
Dissent by director – director is deemed to consent to any resolution unless expresses dissent by:

o Requesting it be recorded and it is recorded in minutes of meeting; o Sending written dissent to secretary of meeting before it is adjourned; o Sending dissent by registered mail or delivers it to office immediately after meeting is adjourned (CBCA, s. 123; OBCA s. 135).

If director votes for, cannot dissent after meeting.
Signed resolutions and single director meetings – where corporation has only one director, that director may constitute a meeting.
Instead of meeting, directors may act by resolution signed by all directors (CBCA s. 117; OBCA s. 129) (eliminates notice requirements). Becomes effective when signed by last director.

Canada Business Corporations Act ss. 6(3), 18, 103, 104, 114, 117, 120(2), 123(1), (2), (3) OBCA ss. 5(4), 19, 116, 117, 126, 129, 132(2), 135

(e) Officers (i) General VanDuzer pp. 280-282

Nothing in CBCA addresses what officers a corporation should have or duties.
Directors have power to designate offices and to specify duties of those offices. Usually done by by-law. After setting up offices, may appoint officers to fill them (CBCA s. 121).
Definition (CBCA s. 2(1); OBCA s. 1(1)): Officer means an individual appointed as an officer under section 121, the chairperson of the board of directors, the president, vice president, secretary, treasurer, general manager etc. any other individual who performs functions for a corporation similar to those normally performed by an individual occupying any of those offices.
No qualifications except must be of full capacity (CBCA s. 121(a)).
Managing director must be resident Canadian (CBCA s. 115(1)).
An act of officer is not invalid solely because of defect in qualification/irregularity in appointment (CBCA s. 116; OBCA s. 128).
Officers subject to same duty of care as directors (CBCA s. 122; OBCA s. 134).
An officer can always be removed by corporation – common to provide in by-laws that they serve at the pleasure of the board. But employment contract may only be terminated for cause or on reasonable notice.

Canada Business Corporations Act ss. 16(1), 102(1), 104(1)(d), 115(1), 116, 121 Ontario Business Corporations Act ss. 17(1), 115, 117(d), 127, 128, 133

(ii) Delegation Casebook pp. 239-241

Kennerson v. Burbank Amusement Co.
Inasmuch as directors must exercise and maintain control over corporate affairs in good faith, they are prohibited from delegating such control and management to others and any contract so providing is void.
Sole asset was theatre. Management was transferred. Full and uncontrolled authority over books, policies admission prices and personnel granted.
Duty to make periodic reports to Board did not constitute sufficient retention of control over discretionary corporate policy to comply with the rule.

VanDuzer pp. 282-284

Statutory code for delegation – ss. 115 and 121 CBCA, OBCA s. 129.
Directors have power and responsibility to manage/supervise management of corporation (CBCA s. 102(1)).
Can delegate power to manage to managing director (must be Canadian)/committee of directors/one or more officers.
Directors can delegate all power subject to two limitations – cannot delegate power to supervise management, cannot delegate specific powers listed in s. 115(3).
External delegation is not dealt with in statutes but little doubt that it is permitted.
However: board of directors may not completely delegate its control over the day-to-day management of corporation’s business – must retain power to supervise the delegate (Kennerson v. Burbank Amusement Co. – delegation subject only to duty to report permitted no possibility of control by the board). Length of delegation is also relevant to determining whether board has retained sufficient control.
In all cases of choosing delegate and supervising delgate, directors are bound by duty of care and fiduciary duty to act in best interests of corporation (R. v. Bata Industries Ltd.).

Canada Business Corporations Act s. 115 Ontario Business Corporations Act s. 127

(f) Remuneration and Indemnification Casebook pp. 368-373

Rationale for indemnification and insurance arrangements tied to impact of lawsuits on legitimate business decisions.
Arrangements that allow a corporation to furnish compensation for suits brought by or on behalf of the corporation against directors and officers without judicial supervision

VanDuzer pp. 284-290 Remuneration

Unless otherwise provided in articles/by-laws/USA, directors may set their own remuneration and that of officers and employees (CBCA s. 125; OBCA s. 137).
This is a conflict of interest with that of corporation which they have a fiduciary duty to put first (CBCA s. 122). However, directors are expressly permitted to vote on the terms of their compensation (CBCA s. 120(5)(b); OBCA s. 132(5)(b)).
However, still required to act in best interests of corporation in setting remuneration – Radtke v. Machel.
Where excessive compensation is prejudicing the interests of one or more shareholders, shareholder’s best remedy is likely to be to sue for relief from oppression (CBcA s. 241; Stech v. Davies).

Indemnification

In response to liability concerns, practice developed of indemnifying directors and officers. Statutory scheme set out in CBCA s. 124 and OBCA s. 136.
Corporation must (i) indemnify directors and officers in certain circumstances, (ii) may indemnify in additional circumstances, (iii) may obtain insurance for the benefit of directors/officers in a still broader range of circumstances.
Mandatory indemnification – must indemnify direct or officer or anyone acting in such a capacity in a partnership/trust/other entity against any costs reasonably incurred by him in connection with the defence of any civil/criminal/administrative/investigative proceeding in which involved because of association with corporation/other entity if the individual:

o Was not judged by the court/other competent authority to have committed any fault or omitted to do anything that the individual ought to have doen; o Complied with his fiduciary duty to act honestly and in good faith with a view to the best interests of the corporation or the other entity for which the individual acted as a director/officer or in a similar capacity; and o In the case of criminal/administrative proceeding had reasonable grounds for believing his conduct was lawful.

Discretionary Indemnity – even where director/officer/other person does not meet corporation, corporation may still indemnify so long as other two criteria met.
Subject to court approval, corporation may advance litigation costs in action against director/officer initiated by shareholder on behalf of corporation.
Consolidated Enfield Corp. v. Blair – Blair stood for election; Canadian Express nominated candidate to replace him; before meeting Blair advised by legal counsel that Canadian Express could only use proxies to vote for management nominees. Again advised by legal counsel after election. Blair ruled management slate was elected. In subsequent proceedings, court ruled the votes in favour of Canadian Express nominee were valid. Court held that corporation had obligation to establish that Blair had not acted in good faith with a view to the best interests of the corporation in connection with vote to avoid obligation to indemnify. While reliance on legal advice is not a guarantee that indemnification will be available, where reliance is reasonable and in good faith court will conclude the director acted in compliance with his fiduciary duty. Indemnification in these circumstances also consistent with broad policy goals.
Catalyst Fund General Partner I Inc. v. Hollinger Inc. – director was subject to conflicts of interest and not acting with view to best interests of corporation in resisting action to remove him.
Bennett v. Bennett Environmental Inc. – even though failure to disclose material change under Ontario Securities Act was wrongful, the CEO had an informed, honest, good-faith belief that the matter would be resolved in the corporations favour and that as a result there was on duty to disclose and his conduct was lawful.
Insurance – under CBCA corporation may obtain insurance for the benefit of a director, officer, any other individual eligible to be indemnified against liability incurred acting for corporation (CBCA, s. 126(6)).
May obtain insurance against liabilities involving a failure to comply with the person’s fiduciary duty (see also OBCA s. 136(4.3)).
R. v. Bata Industries Ltd. – trial judge had no authority to order that corporation not indemnify wrongdoers, despite fact that indemnity would defeat purpose of statutory scheme.

Canada Business Corporations Act ss. 120(5)(b), 124(1)-(5), 125 Ontario Business Corporations Act ss. 132(5)(b), 136, 137

(g) Shareholders’ Agreements and Unanimous Shareholders’ Agreements Casebook pp. 835-850

Common law – agreements among shareholders as to the manner in which they will vote their shares are lawful (Ringuet v. Bergeron, Greenwell v. Porter).
CBCA s. 145.1; OBCA s. 108(1) – agreements between shareholders as to how shares shall be voted are permitted.
Agreements must be for a lawful purpose (Motherwell v. Schoof).
Clark v. Dodge
Clark owned 25%, Dodge 75%. Both directors but Clark managed. Entered into agreement that Clark would remain in management and control so long as remained faithful, efficient and competent. Also agreed that Clark would share his formula and in return would remain director, manager, receive ¼ income of the corporations and no unreasonable salaries would be paid to other officers so as to materially affect Clark’s profits. Dodge didn’t keep his word. Was the contract illegal as contrary to principle that business of corporation should be managed by board of directors?
Where directors are sole stockholders, no objection to enforcing agreement among them to vote for certain people as officers. The agreement was legal – any invasion of powers of directorate was slight as to be negligible.
Ringuet v. Bergeron
Agreement between three shareholders to vote for themselves to be elected as directors, to elect Ringuet as vice-president and general manger and Bergeron as secretary-treasurer and assistant general manager at stated and agreed salaries and to vote unanimously at all meetings of the company. Later agreement included another shareholder, and agreed to buy out rest of shareholders. They then began to take steps to oust Bergeron – did not vote him director, excluded him from management.
While majority shareholders may agree to vote their shares for certain purposes, they cannot by this agreement tie the hands of the directors and compel them to exercise the power of management of the company in a particular way.
Shareholders have the right to combine their interests and voting powers to secure such control of a company and to ensure that the company will be managed by certain persons in a certain manner. Such an arrangement is not prohibited by law, good morals or public order.
The agreement was legal.
Unanimous Shareholder Agreements
At common law, shareholders could enter shareholders’ agreements which could contain covenants e.g. as to voting of shares of parties to agreement, and specifically enforceable. But murky jurisprudence on extent to which shareholders could agree to fetter or interfere with the discretion of the directors.
USAs are constitutional documents akin to articles of incorporation, by-laws but contractual in nature so can govern shareholder’s personal or individual rights as well.
Numerous provisions of the CBCA are made subject to the USA including:

o Management of the business and affairs of the company (s. 102). o Passing of by-laws (s. 103). o Appointment of officers and delegation of powers (s. 121). o The power to borrow and give security (s. 189). o Situations in which complaining shareholder can request dissolution of the company (s. 214(1)(b)).

A written agreement entered into by all the shareholders, or all shareholders and another person, and which restricts the powers of the directors to manage the business and affairs of the corporation is valid (s. 146(1)).
The shareholders are, to the extend that they have taken on the directors’ duties and powers, liable as directors would be (s. 146(5)).
Court can order the company and its directors and officers to comply with a USA and restrain them from acting in breach of it.
Restrictions on transferability of shares are a common feature or shareholders’ agreements (CBCA s. 6(1)(d) – restrictions on transfer must be put into articles).
Provisions are found in ss. 2(1) and 146 CBCA and ss. 1(1) and 108 )BCA.
Transferee of shares with notice of a common law agreement is not bound due to absence of privity of contract – Greenhalgh v. Mallard.
Transferee of shares subject to USA is bound, subject to limitations: CBCA s. 146(3), 49(8); OBCA s. 108(4), 56(3)).
OBCA s. 108(6)(b) provides that disputes arising under USA may be referred to arbitration.
Court has authority under oppression remedy to make an order “creating or amending a unanimous shareholder agreement – CBCA s. 241(3)(c); OBCA s. 248(3)(c).

VanDuzer pp. 290-299 Voting and Management

Shareholders expressly permitted to contract regarding how they will vote and may even assume powers of directors through a USA.
E.g. three shareholders could agree to vote shares to elect all three as directors (s. 146(1) CBCA; s. 108(1) OBCA). May also agree that all decisions regarding shareholder approval must be made unanimously. Or create different classes of shares with different voting rights, but may not wish to include in articles.
One limitation to ability of shareholders to agree on decision making structures is that shareholders may not by contract require directors to vote in a certain way (Ringuet v. Bergeron).
This constraint does not apply to USAs involving CBCA corporations. Under USA, all shareholders agree that certain matters ordinarily falling to directors will be decided only by shareholders. CBCA expressly provides that, where shareholders have taken directors’ powers under a USA they can fetter their discretion as to how they exercise them (s. 146(6)).

Share Transfer

Problems with selling shares in closely held corporations.
Common to set up mechanism in a shareholders’ agreement to restrict share transfers.
In addition to approval by directors/shareholders a variety of mechanisms are used.
Transfers may be prohibited except as permitted in agreement – e.g. compliance with a right of first refusal.
Transfers may be permitted in certain circumstances without triggering transfer mechanisms; e.g. transfers to financial institutions as security for loans, transfers to family members, transfers to corporations controlled by shareholder. May want transferee to commit to obligations in shareholders’ agreement.
May require shareholder to transfer shares to other shareholders/corporation in come circumstances e.g. death, retirement form active participation, ceasing to be able to perform duties, breaching shareholders’ agreement.
May also include pre-emptive right.

Dispute Settlement

Shareholders’ agreements may include some form of dispute mechanism e.g. arbitration, mediation.

Unanimous Shareholders’ Agreements

CBCA permits decision-making power to be transferred from directors to shareholders through a USA (s. 146; OBCA s. 108).
A USA under the CBCA may restrict in whole or in part the powers of the directors to manage the business and affairs of the corporation. A shareholder party to such an agreement has all the rights, powers, duties, liabilities of a director to the extent of the restriction and directors are relieved of duties, liabilities to same extent.
Shareholders may agree as to how they will exercise the powers they have taken from the directors.

Enforcing USAs and Other Shareholders’ Agreements

Range of remedial options in addition to going to court to enforce shareholders’ agreement as a contract.
Breach of shareholders’ agreement may be held to constitute oppression under s. 241 CBCA.
Enforcement of rights under shareholders’ agreement may also constitute oppression (Deluce Holdings Inc. v. Air Canada).
Many of default rules in CBCA may be changed by an USA (Nicholls).
Shareholder may make summary application to have provisions of any USA enforced under CBCA s. 247/OBCA s. 253.
Failure to comply with the terms of an USA may be grounds for the dissolution of the corporation. Court may dissolve corporation if some specified event has occurred that, under a USA entitled a complaining shareholder to demand dissolution (CBCA s. 214; OBCA s. 207).
A shareholders’ agreement that is not a USA is binding on a transferee/person issued shares only if the transferee signs it.
Any purchaser/transferee of shares is deemed to be a party to any USA in effect; but if transferee received not notice of USA and is not aware of it, she is entitled to rescind contract within 30 days of finding out about it (CBCA ss. 49(8), 146(3),(4)). Notice is deemed to be given if there is a notice on the share certificate (CBCA s. 49(8)).
Rules under OBCA similar but more comprehensive. USA is enforceable against person acquiring shares from shareholder whether transferee is aware of the USA or not.
If the transferee’s share certificate did not contain a reference to the agreement, the transferee may rescind/demand transferor pay fair value for the shares (OBCA ss. 108(4), (8), (9), (10), (11)).
To exercise this right, transferor must send notice of objection to transferor within sixty days of receiving a copy of the agreement.
A person who is issued a new share who is not aware of the existence of the USA is also deemed to be party to the agreement but may rescind within sixty days of receiving a copy of the USA (OBCA s. 108(7)).
Seems that under CBCA/OBCA only shareholders\ agreements that transfer directors’ power to the shareholders are USAs. Sometimes may be hard to tell – agreement reserving power to issue shares to shareholders was not an USA (Duha Printers).

Canada Business Corporations Act s. 146 Ontario Business Corporations Act s. 108

V - CORPORATE CHANGES (a) Amendment of Articles, By-laws and Changes to Stated Capital Casebook pp. 179-180

CBCA ss. 173-80; OBCA ss. 168-70.
Three general characteristics;

o Special procedure required, generally in form of a shareholder’s resolution that must be agreed to by more than majority. o If rights are attached to shares of particular group/class, provision generally made for shareholders holding those shares to give their consent separately. o Shareholders who disagree with and vote against certain alterations are entitled to have their shares bought from them at a valuation.

Substantive limitations:

o Shareholder cannot, without consent, be required to take or subscribe for more shares or have liability to contribute to assets of company increased (Edmonton Country Club Ltd. v. Case). o A majority may not exercise its powers in fraud of or so as to oppress a minority operates to limit power to alter the constitution.

VanDuzer pp. 302-309 Amendment of Articles

Articles of a corporation must be amended to add, change, or remove any provision contained in the articles (CBCA ss. 173-79; OBCA ss. 168-172, 273(3)). Amendment is required to do any of the following:

o Change the corporate name; o Change the province of the corporation’s registered office; o Add, change, or remove any restriction on the issue, transfer, ownership of shares; o Change the number or minimum or maximum of directors; o Add, change, remove any restriction on any business corporation may carry on/powers corporation may exercise; o Add any provision that might have been set out in articles or by-laws at the time of incorporation but was not included at that time.

Subject to exceptions, amendment of articles requires approval by special resolution = resolution passed at meeting of shareholders by a majority of not less than two-thirds of the votes cast/consented to in writing by all shareholders entitled to vote. A level of approval higher than two-thirds may be specified in USA/articles.
Notice of meeting to consider a resolution to amend the articles must be sent to shareholders. The notice must state the nature of the proposed amendment and must include text of the special resolution on which will be asked to vote (CBCA s. 135(6)).
If corporation has more than fifty shareholders, the management must send shareholders a form of proxy and a management proxy circular that provide further information (CBCA s. 149(1)).
Shareholders may initiate amendments to articles by making shareholder proposal (CBCA s. 175(1)).
At the meeting, shareholders who would otherwise be entitled to vote are permitted to do so. Additionally, any class/series of shares affected by the amendment under s. 176 CBCA are entitled to vote separately as a class.
S. 176 lists specific circumstances when class vote is required; whenever it will be prejudicially affected by adoption of the amendment in comparison to the other classes or series. E.g. where new class entitled to receive dividends first.
Separate vote required even if class/series would not otherwise have right to vote (CBCA s. 176(5)).
If separate vote required, amendment is not passed unless it is approved by a special resolution of the class/series in addition to any other required approval (CBCA s. 176(6)).
If amendment is approved in these circumstances, shareholders of the class/series who voted against the amendment are entitled to have the corporation buy their shares for “fair value” (dissent and appraisal right) – available to all shareholders who vote against certain amendments that are nevertheless approved by the requisite special resolution. E.g. amendments to add, change, remove any provision (i) restricting the issue, transfer or ownership of shares of the class held by them or (ii) restricting the business the corporation is permitted to carry on/powers it may exercise (CBCA s. 190).
The resolution authorizing an amendment may provide that the directors may revoke the resolution before they file articles of amendment without any further authorization from shareholders (CBCA s. 173(2)).
Once amendment is approved, must file articles of amendment (CBCA Form 4; OBCA Form 3) along with requisite fee. If name being changed, must also file name-search report for new name.
Filing may be online/by fax/mail/courier/in person. On receipt Director issues certificate of amendment.
Two kinds of amendments to articles may be made without approval of shareholders. A corporation with a number name may adopt an new name (CBCA s. 173(3)); director approval is all that is required. Fixing the rights, privileges, conditions, restrictions of a series of shares within a class may be done by directors alone if authorized in articles (CBCA s. 27)

Changes to Stated Capital

Stated capital account must be maintained for each class/series of shares authorized in articles that records full amount of consideration received in return for issuing shares.
Stated capital account must be reduced when the corporation acquires/redeems its own shares.
Corporation may reduce its stated capital for any reason subject to certain limits (CBCA s. 38; OBCA ss. 34, 35). This may happen e.g. in connection with dividend that is to constitute a repayment of invested capital, where value of assets has declined.
If corporation’s stated capital is set out in its articles, reduction can be accomplished only by articles of amendment (CBCA s. 173(1)(f))). In all other circumstances must be approved by special resolution of shareholders (CBCA s. 38(1)).
Corporation cannot reduce stated capital if reasonable grounds or believing that it is insolvent, or the realizable value of tits assets will be less than its liabilities after the reduction (CBCA s. 38(3)). Reduction permitted even if these tests not satisfied where it reflects decline in realizable value of corporations assets.
Where shares are redeemed/purchased stated capital account for class/series redeemed/acquired must be reduced accordingly (CBCA s. 39; OBCA s. 35). Stated capital is multiplied by number of shares redeemed/purchased. This is divided by total number of issued shares in class prior to redemption or purchase. No shareholders’ resolution required. Directors must pass resolution authorizing redemption/purchase.
Corporation must increase stated capital account for a class/series if it pays a stock dividend on them. The declared amount of the dividend in money must be added (CBCA s. 43(2); OBCA s. 38(2)).
Stated capital may need to be adjusted in other circumstances including amalgamations and arrangements, conversion of shares from one class into another (CBCA s. 39(4)).

By-laws

May deal with e.g. procedures for meetings, offices and their powers.
Directors have power to make, amend, repeal by-laws. Effective as soon as directors’ resolution is passed, but directors must submit their action to shareholders at next meeting.
Shareholders may confirm, reject, or amend directors’ action.
If rejected/directors fail to submit to shareholders action ceases to have effect on date of rejection/meeting when it should have been submitted. In such a case, no subsequent resolution of directors to make/amend/repeal by-law having substantially the same purpose or effect is effective until confirmed by shareholders (CBcA s. 103).
Wells v. Melynk – major shareholder reduced his proxy; directors immediately convened meeting and passed by-law reducing quorum so that required quorum would be met at meeting. Then immediately held shareholders meeting. Could not have put by-law amendment to shareholders because too late to send new notice; but by-law ceased to have effect because the CBCA requires that by-laws be put to shareholders at next meeting and inability of directors to do so in a manner that would comply with notice requirements did not mean that they could put off submitting by-law until next meeting.
New by-laws/attempts to change or repeal can also be initiated by shareholders in a shareholder proposal (CBCA s. 103(5)). Such an action becomes effective as son as approved by shareholders; no action from directors needed.
Regardless of who initiates, shareholder approval need be ordinary resolution only (CBCA s. 103(2)). Greater majority may be specified in corporation’s articles/USA.

Canada Business Corporations Act ss. 173-80, 190, 241 Ontario Business Corporations Act ss. 168-72, 185, 248

(b) Continuation under the Law of Another Jurisdiction Casebook pp. 167-168

CBCA ss. 187-188; OBCA ss. 180-81.
Two step procedure: obtain consent of authorities in jurisdiction of incorporation (export step); meet requirements of federal or provincial Act under which it seeks to be continued (import step).
Easier to meet requirements of immigrating jurisdiction than emigrating jurisdiction.
Continuance under the law of another jurisdiction does not affect the migrating corporation’s prior obligations, property rights, involvement in proceedings pending before continuance (CBCA, s. 187(7); OBCA s. 181(9).
Canada (Director appointed under s. 260 of the Business Corporations Act), Re – CBCA export provisions were successfully evaded by “three-cornered amalgamation”.

VanDuzer pp. 309-313

CBCA s. 187, 188; OBCA ss. 180, 181.
Basic requirement is permission of exporting jurisdiction and shareholder approval.
In order to permit amalgamation, all corporations usually must be governed under the same corporate law.

Import

If corporation wants to become governed by CBCA, it must make an application to the Director in the form of articles of continuance (CBCA, Form 11) – requires information similar to that required in articles of incorporation (CBCA, s. 187).
The articles of continuance become the articles of incorporation on continuance.
They require some additional information: any previous name of corporation, name of exporting jurisdiction, date of incorporation in exporting jurisdiction.
In articles also necessary to make any changes needed to conform the characteristics of the corporation to the CBCA.
Any other amendments desired may also be made to corporation’s characterises, so long as they have received the same shareholder approval as would be required under the CBCA for such a change (CBCA s. 187(2).
In addition to articles must also file:

o A letter of satisfaction of some other document issued by exporting jurisdiction indicating that the corporation is authorized to apply for continuance under the CBCA; o Initial Registered Office Address and First Board of Directors (Form 2); o A list of the provinces in which the corporation is registered as an extra-provincial corporation; o Required fee ($200); o Name-search report.

Unless incorporated under (most of the Canadian provinces) also necessary to file a legal opinion that (i) the laws of the exporting jurisdiction allow the corporation to apply for continuance under CBCA, (ii) upon continuance, the foreign law will cease to apply, and (iii) if the other jurisdiction does not issue any form of authorization, whatever authorization is required under the law of that jurisdiction has been obtained.
Copy of relevant parts of legislation under which incorporated must also be provided.
CBCA director refers question of whether continuance is properly authorized and meets requirements of CBCA to federal Department of Justice.
If favourable opinion received, continuance allowed to proceed.
Director issues certificate of continuance, takes place of articles of incorporation; copy will be sent to authority in exporting jurisdiction that authorized the continuance.
Export
Under CBCA, export must be authorized by special resolution of shareholders (CBCA s. 188(5)).
Resolution should contain authority for directors to:

o Apply for continuance under laws of importing jurisdiction; o Apply to director under CBCA to authorize the continuance; o Make all necessary amendments to conform to the laws of the importing jurisdiction.

All shareholders have right to vote on a resolution authorizing continuance even if they do not otherwise have the right to vote (CBCA s. 188(4)) (this right does not exist under OBCA).
Shareholders also have the right to have their shares bought by the corporation for fair value if they vote against the continuance but it is nevertheless adopted (CBCA s. 190(1)(d)).
Notice of meeting in which vote on continuance will take place must refer to this right to dissent and be bought out (CBCA, s. 188(3)).
Resolution may permit directors to abandon continuance.
Once shareholders have approved, directors must file application for permission to continue. Letter to director is sufficient.
In Ontario, under OBCA, must file:

o Form 7; o Filings under Corporations Information Act must be up to date; o Consent must be obtained from Ontario Ministry of Finance; o If offering corporation, consent must be obtained form Ontario Securities Commission o If continuing in foreign jurisdiction, legal opinion that requirements of the Act regarding the continuation of rights and liabilities are met (s. 181(9)).

In order to approve export continuance, director must be satisfied that the continuance “will not adversely affect creditors or shareholders of the corporation” (CBCA s. 188(1)(b)) (no such requirement under OBCA).
In exercising this discretion, Director will consider whether material sent to shareholders for purposes of meeting at which continuance approved provided shareholders with sufficient information to form a reasoned judgment and the quality of protection afforded to creditors and shareholders under the laws of the importing jurisdiction.
CBCA prohibits continuance under the laws of another jurisdiction unless they provide that:

o The property of the corporation continues to be the property of the corporation; o The body corporate continues to be liable for the obligations of the corporation; o An existing cause of action, claim or liability to prosecution is unaffected; o A civil, criminal, or administrative action or proceeding pending by or against the corporation may be continued to be prosecuted by or against the corporation; and o A conviction against or ruling, order, or judgement in favour of/against the corporation may be enforced by/against it (CBCA s. 188(1)).

Director recognizes that laws of (most provinces) have suitable import provisions. For all other jurisdictions legal opinion must be provided.
A copy of law of importing jurisdiction must be filed along with affidavit attesting that the shareholders/creditors will not be adversely effected and shareholders have approved after full disclosure.
Fee of $200 must be paid.
Director then issues “letter of satisfaction” which is submitted to importing jurisdiction. If not submitted, ceases to have effect after ninety days.
Once importing jurisdiction gives effect to continuance, corporation must file notice of continuance with the director.
Director then issues certificate of discontinuance (Form 14) dated retroactively to date of continuance in importing jurisdiction.
CBCA ceases to apply on that date (CBCA s. 188(9); OBCA s. 181)

Canada Business Corporations Act ss. 187-8, 190(1)(d), 190(7), 190(8), 268(2)(b) Ontario Business Corporations Act ss. 180-1

(c) Amalgamation VanDuzer pp. 313-321

CBCA ss. 181-186; OBCA ss. 174-79.
Under CBCA, OBCA all of the amalgamating corporations must be governed by the same corporate law, although court supervised arrangement could also be used to achieve amalgamation between corporations incorporated in different jurisdictions.
Where amalgamating corporations have different shareholders, long form amalgamation is required.
Where corporations are affiliated (one is a subsidiary of the other or they are controlled by the same person/corporation – CBCA ss. 2(2)-(5); OBCA ss. 1(1) and (4)), short-form amalgamation is permitted in some circumstances.
Old amalgamating corporations do not cease to exist but continue in amalgamated corporation which is subject to all liabilities, owns all property, has all rights of each amalgamating corporation; articles of amalgamation are deemed to be articles of incorporation (CBCA s. 186; OBCA s. 179).

Long Form

Corporations enter into amalgamation agreement setting out terms.
Agreement is in form of contract, but some items that must be addressed are stipulated (CBCA s. 182).
The agreement must set out:

o Provisions of articles of amalgamation = elements of articles of incorporation + names and address of directors of amalgamated corporation; o The basis on which holders of shares will receive money/securities in amalgamated corporation in return for shares. o Any shares of one amalgamating corporation held by another must be cancelled upon amalgamation (CBCA s. 182(2)). o Arrangements for management and operation including by-laws – if new ones proposed must be set out (CBCA s. 182(1)(f) and (g)).

Amalgamating corporations may insist or representations and warranties.
Each board must approve the amalgamation on the terms of the amalgamation agreement and then submit the agreement to the shareholders for approval by special resolution (CBCA s. 183(1)).
All shareholders have right to vote even if do not otherwise have right to vote (CBCA s. 183(3) – no such provision in OBCA).
Where more than one class of shares, there must be class vote if amalgamation agreement contains a provision would require a class vote under s. 176 CBCA if in articles of amendment (S. 183(4) CBCA).
Notice of shareholder’s meeting must include a copy of amalgamation agreement or summary of it (CBCA s. 183(2)(a)).
All shareholders have dissent and appraisal rights (CBCA s. 190(1)(c)).
Availability of dissent and appraisal right must be described in notice of meeting (CBCA s. 183(2)(b)).

Short Form

Approval is required from directors only. No amalgamation necessary (CBCA ss. 184(1)(a) and (2)(a); OBCA s. 177).
No dissent and appraisal rights.
Vertical – Short-form vertical amalgamation may be effected between a corporation and one or more subsidiaries that are either wholly owned by corporation/only shares not held by corporation are owned by other amalgamating subsidiaries.
Shares of each amalgamating subsidiary are cancelled without any repayment of capital to shareholders. No securities issued. No assets distributed. Stated capital remains the same (CBCA s. 184(1)).
Articles of amalgamation must be the same as articles of parent corporation (CBCA s. 184(1)(b)(ii)).
Horizontal – Short-form horizontal amalgamation may be effected between subsidiaries either wholly owned by parent corporation/any shares not owned are held by other amalgamating subsidiaries.
Shares of all but one of the subsidiaries are cancelled without repayment of capital.
Stated capital of shares of amalgamating subsidiaries whose shares are cancelled must be added to stated capital of remaining subsidiary (CBCA s. 184(2)).
Articles of amalgamation must be the same as articles of amalgamating subsidiary whose shares are not cancelled (CBCA s. 184(2)(b)(ii)).
Procedure after Approval of Amalgamations
Articles of amalgamation (CBCA, Form 9) must be filed with director, along with $200 fee and Initial Registered Office Address and First Board of Directors (Form 2) (CBCA s. 185(1)).
Articles must include all elements that must be included in articles of incorporation.
Name search report must be filed if new name.
Articles of amalgamation must have attached a statutory declaration by an officer/director of each amalgamating corporation, dated no more than two weeks before filing, establishing to satisfaction of director that there are reasonable grounds to believe that:

o Each amalgamating corporation is and the amalgamated corporation will be solvent; o The realizable value of the amalgamated corporation’s assets will be not less than its liabilities plus the stated capital of its shares.

Risk of prejudice to creditors. Declaration must state either:

o Reasonable grounds for believing that no creditor will be prejudiced by the amalgamation or o That adequate notice has been given to all known creditors and no creditor objects, except on grounds that are frivolous or vexations (CBCA, s. 185(2)).

Adequate notice to creditors – CBCA requires that:

o Notice be given to each creditor with a claim exceeding $1000; o Notice be published once in a newspaper published or distributed in the place where the corporation has its registered office; o Each notice names the corporations with which the corporation intends to amalgamate and indicates that a creditor may object to the amalgamation within thirty days from the date of the notice (CBCA s. 185(3)).

Under OBCA, only creditors owed $2500+ are entitled to notice; notice must also state that creditor has the status of complainant for the purpose of seeking relief from oppression (OBCA s. 178(2)(d)(ii)) (under CBCA creditor would have to apply to court to be granted standing as complainant.
Once documents filed, CBCA director will issue a certificate of amalgamation.
Corporation will then have to be organized in a way similar to newly incorporated corporation: new by-laws may be required; certificate recording amalgamation should be filed in any land registry office where any land held by the corporation is register.
Refer to contracts for anything that needs to be done on amalgamation.
Give notice to governmental authorities, including Employment Insurance Commission and Canada Pension Plan.
File tax returns for amalgamating corporations – under Income Tax Act, a year-end is deemed to occur for tax purposes immediately before amalgamation.

Canada Business Corporations Act ss. 181-6 Ontario Business Corporations Act ss. 174-9

(d) Arrangements and Reorganizations VanDuzer pp. 321-324

An arrangement is a procedure used to effect certain fundamental changes to the corporation where it is not practicable to follow the procedure contemplated in the Act (CBCA s. 192).
E.g. an amalgamation between corporations in different jurisdictions; reorganization of share capital of two corporations where some share interests in one are exchanged for interests in another.
Complex reorganizations may be effected through arrangements where there would be simply too many corporate steps to complete reorganization under CBCA in timely way or no way to implement it at all.
Under OBCA not necessary to show that other procedures are not practicable.
“not practicable” requirement does not mean impossible. Sufficient if usual procedure inconvenient/less advantageous.
Necessary to obtain court approval to implement arrangement.
Court may make any order it thinks fit, including requiring arrangement to be approved by shareholders/ that shareholders be granted dissent and appraisal rights (CBCA s. 192(4)).
Under OBCA, subject to court order, an arrangement must be approved by special resolution of shareholders (OBCA s. 182). Also each class entitled to class vote if arrangement contains anything that, if in articles, would require class vote under s. 170 OBCA.
Articles of arrangement (CBCA Form 14.1) must be prepared and filed with director along with $200 fee and notice of change of registered office/change regarding directors if relevant.
Arrangement not permitted where corporation insolvent (CBCA s. 192(2)).
For purposes of arrangement, a corporation is insolvent when it cannot meet its liabilities as they become due or realizable value of assets is less than the aggregate of its liabilities and stated capital. In which cas must proceed under Bankruptcy and Insolvency Act or Companies’ Creditors Arrangement Act.
In some cases permitted arrangements permitted where applicant is solvent but other corporations involved are not (Savage v. Amoco Acquisition Co.).
Ontario does not impose insolvency test (OBCA s. 182).
Corporation seeking court approval of arrangement makes application to court for interim order dealing with issues such as:

o Who needs to receive notice o What approvals are required from shareholders/stakeholders o Whether dissent and appraisal rights need to be given.

BCE Inc. v. 1976 Debenture Holders – in order to grant approval, court has to be satisfied by corporation that:

o The statutory procedures have been met; o The application is being put forward in good faith; o The arrangement is fair and reasonable. In particular, to conclude fair and reasonable test is met, court must be satisfied that:

The arrangement has a valid business purpose: court must be satisfied that any negative effects on security holders are justified by furthering “the interests of the corporation as a going concern.” The court must ask if the arrangement is necessary to the continued operations of the corporation in light of the technological, regulatory, and competitive conditions in which the corporation finds itself. The degree of judicial scrutiny of a plan of arrangement and its effects on security holders increases as the importance of the arrangement to the continued operation of the corporation declines.
The objections of those whose legal rights are being arranged are being resolved in affair and balanced way: a wide variety of factors may be relevant, including the overall fairness of the arrangement as well as its fairness to individual stakeholders. Other factors include whether security holders have approved the arrangement and by what majority and the proportionality of the compromise between security holders.
All parties must be treated fairly, but only security holders whose legal rights are likely to be affected need to be considered absent exceptional circumstances.
Notice to CBCA director must be given when a corporation makes an application for approval of an arrangement. The director may appear in court to propose (CBCA s. 192(5)).
Policy of Director under CBCA indicates that he will scrutinize arrangement more closely if all shareholders/security rights holders whose rights are affected are not entitled to vote or if they are not provided with sufficient information to make reasoned decision; of if shareholders not permitted to exercise dissent and appraisal rights.

Canada Business Corporations Act ss. 191-2 Ontario Business Corporations Act ss. 182-3, 186

(e) Sales of Assets or Shares VanDuzer p. 324-325

The “sale, lease or exchange of all or substantially all the property of a corporation other than in the ordinary course of business of the corporation” cannot be completed without the approval of the shareholders by special resolution (CBCA ss. 189(3)-(9); OBCA ss. 184(3)-(9)).
With respect to whether particular sale meets standard, courts must consider (i) whether the assets being disposed of are quantitatively substantial compared to the total assets of the corporation and (ii) whether the assets are integral to the transferring corporation’s core business, such that the disposition strikes at the heart of the business (Canadian Broadcasting Corporation Pension Plan (Trustee of) v. BF Realty Holdings Ltd.).
Notice of shareholders’ meeting to vote on disposition of assets must include copy/summary of agreement giving effect to transaction and that shareholders are entitled to dissent from the resolution approving the transaction and to require the corporation to buy their shares for fair value.
At meeting shareholders may authorize and may fix/authorize directors to fix any terms and conditions of the transaction. Shareholders may authorize directors to abandon transaction without further approval of shareholders.
On such resolution, each class/series of shares has right to vote whether or not it otherwise has right to vote. Also, class/series entitled to class vote if affected differently from another class/series.

Canada Business Corporations Act s. 183 Ontario Business Corporations Act s. 176

(f) Going Private Transactions VanDuzer pp. 325-329

Transactions that result in the extinguishing of a shareholder’s interest in an offering corporation (s. 190).
There are similar procedures under Securities Act (Ontario).
Shareholders prejudiced by going-private transactions may be able to claim relief under oppression remedy.
OBCA – going-private transaction defined as any amalgamation, arrangement, amendment of articles or other transaction carried out under that Act that would cause the interest of a holder of a participating security to be terminated without the consent of the holder and without the substitution of an interest of equivalent value in another participating security (OBCA s. 190).
CBCA provides that such transactions involving CBCA corporation s must meet the requirements of applicable provincial securities laws (CBCA s. 193).
CBCA also provision dealing with squeeze-out transactions (going-private transactions involving non-distributing corporations (CBCA ss. 2(1) and 194). In most cases not subject to provincial securities laws. Special approval process.
Approval Process under OBCA:

o Obtain independent valuation of securities effected, indicating value/range of values per security (OBCA s. 190(2)). If exchange for securities, is value of greater or lesser than affected security (OBCA s. 190(2)(c)). o Each class of effected securities must approve transaction (OBCA s. 190(4)). o Approval need only be by ordinary resolution of each class of affected securities unless non-cash consideration is being offered to shareholders whose interests are being extinguished/price offered is less than price established by valuation – in which case special resolution required. o Votes of certain security holders with an interest in the transaction not counted. o Affiliates of corporation and any shareholder who would receive greater consideration/superior rights compared to other shareholders in class also not entitled to vote (OBCA s. 190(4)). o Management must send notice of meeting and management information circular to shareholders not less than forty days before the meeting. Circular must contain:

Summary of the valuation;
Statement that valuation may be inspected at registered office and shareholder may obtain a copy;
Certificate that no material fact relevant to valuation was not disclosed to valuer;
What shareholder approval is required;
What securities are effected;
What votes will not be taken into account (OBCA s. 190(3)).

o Ontario Securities Commission may grant exemption from the application of this procedure (OBCA s. 190(6)). o If approved by shoulders, any dissenting shareholder may exercise right to have shares bought by the corporation for fair value (OBCA s. 190(7)). o Shareholder not precluded from claiming transaction is oppressive even if corporation complies with procedure (OBCA s. 248).

CBCA approval process for squeeze-out transactions:

o Must be approved by simple majority of each class of shares affected by transaction voting separately as class regardless to whether otherwise have right to vote. o Similar rules as to who is entitled to vote (CBCA s. 194). o Affiliates of corporation that hold corporation’s shares such as controlling holder that is corporation and anyone receiving greater consideration/superior rights/privileges than other shareholders not permitted to vote. o This is in addition to any other approval under Act. o Since definition of squeeze-out transactions limits them to transactions requiring amendment of articles, approval by special resolution of all shareholders entitled to vote also required. o Shareholder who votes against entitled to dissent hand have shares bought for fair value (CBCA s. 190(1)(f)). o Nothing prevents a squeezed-out shareholder from seeking relief under oppression remedy (CBCA s. 241).

Canada Business Corporations Act ss. 2(1) (definition of “squeeze-out”), 193-194 Ontario Business Corporations Act s. 190

(g) Termination of the Corporation’s Existence VanDuzer pp. 329-334

If reason for termination is that corporation is insolvent, corporate law procedures may not be used (CBCA s. 208). Must use Bankruptcy and Insolvency Act or Winding Up Act.
If corporation inactive/in default of some requirement under legislation, existence may be terminated by corporate regulators.
Options available under CBCA (see also OBCA 191-244):

Voluntary Dissolution

If it has never issued any shares, may be dissolved at any time by directors (CBCA s. 210(1)).
If has issued shares, but no property and no liabilities, may be dissolved by special resolution of shareholders, or if more than one class of shares, special resolutions of shareholders of each class, whether otherwise entitled to vote or not (CBCA s. 210(2)).
If corporation has assets/liabilities may be dissolved with same level of approval if shareholders authorize directors to discharge liabilities and distribute any remaining assets (CBCA s. 210(3)).
In these three cases, once appropriate approval obtained, liabilities discharged, assets distributed, articles of dissolution (Form 17) may be sent to Corporations Canada.
CBCA Director then issues certificate of dissolution (CBCA ss. 210(4)-(6)). No fee charged.
Services of professional liquidator may be desirable.
Other alternatives (CBCA s. 211).
Proposal to dissolve corporation by director/shareholder entitled to vote at annual meeting of shareholders.
Special meeting of shareholders’ held to consider dissolution.
If approved by special resolution/special resolution of holders of shares of each class (whether or not otherwise entitled to vote) corporation must send Statement of Intent to Dissolve (Form 19) to Corporations Canada.
CBCA Director must issue Certificate of Intent to dissolve.
From date of certificate corporation may not carry on business except to complete liquidation/dissolution.
Corporation must then:

o Send notice to each known creditor; o Take reasonable steps to give public notice of intention to dissolve in each province in which ti does business; o Liquidate the business by collecting all the corporation’s property, discharging liabilities, selling off remaining assets not to be distributed in kind to shareholders; o Distribute remaining assets include cash to shareholders.

Any interest party may apply to have liquidation supervised by court (CBCA ss. 211(8) and 215).
Corporation may then prepare and file articles of dissolution with the Corporations Canada. No fee required.
On receipt, the director issues certificate of dissolution.
Advisable to obtain consent of Canada Revenue Agency, otherwise directors personally liable for unpaid corporate tax. Also provincial taxation authorities in provinces where it carried on business.

Involuntary Dissolution

By Court Order –
Any shareholder, CBCA director, other interested person (e.g. creditor) may apply to have corporation liquidated and dissolved on variety of grounds (CBCA ss. 213-4) including:

o Failing to comply with certain provisions of the act o Occurrence of event that entitles complaining shareholder to demand dissolution in accordance with USA o Circumstances in which it is just and equitable to dissolve corporation.

CBCA also expressly provides that a court may order dissolution in the same circumstances as relief for oppression under s. 241 – oppression remedy provision provides that liquidation and dissolution may be ordered if oppression found in an application under that section (CBCA s. 241(3)(1)).
Court may make any order it thinks fit in connection with liquidation/dissolution including appointing liquidator and directing notice be given/payments made (CBCA s. 217).
Liquidators have powers (retaining professionals, bringing lawsuits etc.) and duties including giving notice to creditors, preparing financial statements (CBCA ss. 221 and 222).
Once liquidation process complete, court must order that articles of dissolution be filed (CBCA s. 223(5)).
Liquidator prepares and files articles.
CBCA Director issues certificate of dissolution (CBCA ss. 223(6) and (8)).
Dissolution by the Director –
Can issue certificate on own initiative and dissolve corporation on three grounds:

o Corporation has not carried on business for three years; o Corporation is in default in filing any document required to be filed under the Act for one year o Corporation has no directors (s. 212).

Before dissolving, must give at least 120 days’ notice to corpraotion and include the notice in a bulletin published by Corporations Canada under director’s authority (CBCA s. 212(2)).
Under OBCA dissolution may be ordered by director appointed to administer that Act, but only where corporation is in default with respect to filings under a number of provincial statues including Securities Act, Corporations Information Act, various tax legislation (OBCA s. 241).

Effect of dissolution

Corporation ceases to exist on date of Certificate of Dissolution.
Any property not disposed of vests in Crown.
But legal proceedings may be continued, new proceedings may be commenced within two years.
Each shareholder remains liable for property received on dissolution to satisfy any judgment resulting form such proceedings (CBCA s. 226; OBCA s. 242).
Procedure by which dissolved corporations may be revived in some circumstances on application of interested person (shareholder, director, creditor, contractor) (CBCA s. 209; OBCA ss. 241(5)-(7)).
Director can impose conditions for issuing certificate of revival and retains discretion as to whether to issue. Conditions might include notice to shareholders, directors and requirements to bring filings up to date.
Under OBCA revival only available where dissolution ordered by director.
If revived, any assets vesting in crown are returned, of payment in money equal to value (CBCA s. 228(2)). Otherwise, revived corporation returned to legal position prior to dissolution (CBCA ss. 209(4) and (5)).
Result is that anything purportedly done on behalf of revived corporation while dissolved is just as effective as if it had been in existence (Litemor Distributors (Ottawa) Limited v. W.C. Somers Electric Ltd.).

Canada Business Corporations Act ss. 207-228 Ontario Business Corporations Act ss. 191-204

VI - DIRECTORS’ AND OFFICERS’ DUTIES (a) Fiduciary Duties (i) Introduction Casebook pp. 375-376

CBCA s. 122(1) and OBCA s. 134(1)(a) – directors and officers are required to “act honestly and in good faith with a view to the best interests of the corporation”.
Two principal ways in which a fiduciary complaint can be brought:

o Derivative action – action brought in name of corporation for a wrong done to corporation as a whole. o Personal action – action to vindicate certain rights personal to the shareholder.

Aggrieved party may also vindicate rights under various statutory remedies – oppression application for winding-up, right of dissent and appraisal, investigations, compliance orders.

VanDuzer pp. 338-345

Directors and officers are subject to a fiduciary duty to act “honestly and in good faith with a view to the best interests of the corporation” as well as a duty of care to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”.
Duties developed in common law, codified CBCA s. 122(1); OBCA s. 134(1).
Fiduciary duty is owed to corporation rather than shareholders directly.
OBCA provides that the beneficiary of the duty of care is the corporation (s. 134(1)(b)); but under CBCA, SCC has held statutory duty of care is owed not just to the corporation but is a general standard of behaviour that reflects the standard of care owed by directors and officers to corporate stakeholders (Peoples Department Stores (Trustee of) v. Wise).
Oppression remedy creates not only process for obtaining remedy but also new substantive standard of behaviour for directors and officers.
More specific duties also imposed under statute.
Directors and officers may also be liable in tort in a variety of circumstances where they were acting in the course of their duties.

Fiduciary Duty

No generally accepted theory that assists in deciding what the obligation requires in any particular case.
The fiduciary duty to the corporation is similar to the obligation of a trustee to a beneficiary.
Typical conflict-of-interest situations:

o The director or officer is involved in some transaction with the corporation in his personal capacity. o Director/offer takes advantage of opportunities personally which it was her duty to try to obtain for the corporation. o The director/officer competes with the corporation. o The director/officer stands to benefit personally by blocking take-over bid for control of corporation which would benefit the corporation.

In almost all cases, fiduciary has made some profit/received some advantage at expense of corporation.
Ratification no longer effective to relieve a fiduciary of liability for a breach of fiduciary duty under statutes like CBCA, but shareholder approval may be taken into account for certain purposes including courts decision regarding whether to permit a shareholder to bring an action on behalf of a corporation for breach of a director’s fiduciary duty.
Duty to act honestly seems straightforward – not fraudulently, must not intend to deprive the corporation of some asset or benefit to which it is entitled for their personal gain.
Defining best interests of corporation especially important where not conflict between interests of fiduciary and corporation, but directors must resolve conflicts between the interest of shareholders and other corporate stakeholders.

The “Best Interests of the Corporation”

Owed to company not shareholders/stakeholders.
BCE Inc. v. 1976 Debenture Holders – SCC rejected concept of corporation as coextensive with interests of shareholders. Challenge to acquisition of BCE Inc. by debenture holders – increase in share price but reduction in market value of debentures. Court held board of directors had adequately taken into account their interests.

o Interests of stakeholders often coextensive with interests of corporation, but where they conflict duty is to corporation. o Specific content of duty will depend on situation – may need to consider interests of shareholders, creditors, consumers, governments, the environment. o Not mandatory to take into account the impact of corporate decisions on stakeholders. o Where conflicts arise between the interests of stakeholders as an obligation to treat stakeholders fairly and to resolve conflicts in accordance with their fiduciary duty to act in the best interests of the corporation, viewed as a good corporate citizen”, stakeholder interests must be considered. o Courts reviewing compliance with this duty in cases involving business decisions where no issue regarding a conflict of interest for directors should apply the “business judgement rule” – courts should defer to the business judgment of directors with respect to how they consider and weigh competing stakeholder interests, so long as what the directors did “lies within a range of reasonable alternatives”. o Fiduciary duty does not require directors/officers to promote interests of any particular shareholder (Deluce Holdings Inc. v. Air Canada). But where there is a separate relationship of trust and dependency, special obligation to that shareholder may arise that overlaps with corporate fiduciary duty (Malcolm v. Transtec Holding Co.). Canada Business Corporations Act ss. 102(1), 121, 122(1)(a), (2) and (3), 123(4) Ontario Business Corporations Act ss. 115, 133, 134(1)(a), 135(4)

(ii) Conflicts of Interest - Transactions with the Corporation Casebook pp. 376-386 Self-Dealing Transactions

Contracts between directors/officers directly or though interest in another entity, and the corporation itself.

The Common Law

Aberdeen Railway Co. v. Blaikie Bros. –
Contact to purchase chairs from partnership of which director was member; company was entitled to avoid the contract.
See below.
Tranasvaal Lands Co. v. New Belgium (Transvaal) Land and Development Co. –
Director of company suggested shares should be bought in another company. Abstained from voting because he was director of other company, but did not disclose that he also owned the shares. One of the other two directors present also owned shares, but as a trustee.
Can a director of a company by shares from himself or from a company in which he is materially interested?
Not material that director held as trustee – as trustee it was his duty to do his best and make the most of the trust estate.
A director is precluded from entering into engagements in which he has a personal interest conflicting or which may possibly conflict with the interests of those whom he is bound by fiduciary duty to protect.
Transaction therefore voidable – purchase-money to be repaid and shares returned.
The Liquidators of the Imperial Mercantile Credit Association v. Edward John Coleman and John Watson Knight – mere disclosure of interest not sufficient – needed to disclose nature of interest.
Gray v. New Augarita Porcupine Mines Ltd. –
Gray was vice-president, chairman of the board and the company’s solicitor. Among other transactions, he issued discounted shares to himself, caused the company to purchase mining claims from him at a price he determined, and made drawings from the company’s bank account’s for his own purposes. Made proposal to extinguish his liabilities to Company for a fixed sum without disclosing extent of liability which was accepted at board meeting.
General principle is that a contract between director and company is not binding. Director remains accountable to the company for any profit he may have realized by the deal. According to company’s by-laws, Gray was not as a director precluded from entering into contracts or arrangements with the company, but not entitled to vote on resolution dealing with such contract/arrangement and could only retain profit if he disclosed the nature of his interest.
Gray did not disclose full extent of his liabilities – director’s declaration must make his colleagues fully informed of the real state of things.

VanDuzer pp. 345-352

These transactions are voidable – may be set aside at the option of the corporation. Not relevant whether transaction was a good or bad deal for the corporation.
Aberdeen Railway Co. v. Blaikie Bros. – it is a rule of universal application that no one having such duties to discharge shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with the interests of those whom he is bound to protect. So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into.
Transvaal Lands Co. v. New Belgium (Transvaal) Land and Development Co. – director in one corporation held shares in second corporation as a trustee for the benefit of his wife second corporation sold all shares in a third corporation to first corporation. Court found breach of fiduciary duty – conflict; as trustee, obliged to get highest price for shares, as director obliged to seek to pay lowest possible price.
CBCA and other statutes have modified this rigid rule to permit certain transactions between director/officer and corporation provided beneficial to corporation and certain procedural safeguards are observed. The scheme to be followed is set out in s. 120 CBCA, s. 132 OBCA.
S. 120 applies where a director/officer:

o Is party to a material contract or material transaction whether entered into or proposed with the corporation; o Is a director/officer/individual acting in a similar capacity of a party to such a contract or transaction; or o Has a material interest in a party to such a contract/transaction.

Appears non-material contracts cannot benefit; technically will be breach of fiduciary duty, but in this case neither corporation/fiduciary will have much to gain or lose.
Is director/officer’s interest such that there is a reasonable basis for concern that it may affect his ability to perform his duty?
Zysko v. Thorarinson – a material interest is not just a financial interest but anything more than a de minimus interest. There should be disclosure whenever the interest of the director or officer might be relevant to the corporation’s decision making.
McAteer v. Devoncraft Developments Ltd. – director who was trustee of trust that entered into contract with corporation; he had a material interest even though no beneficial interest.
Exide Canada Inc. v. Hills – close personal interest with person negotiating contract was a material interest that had to be disclosed.
If s. 120 applies, director/officer must give written notice to the corporation of the nature and extent of his interest or request to have this information entered in the minutes of a directors’ meeting (CBCA, s. 129(1)).
Requirements as to when notice must be given – s. 12(2) and (3):

o Officers must disclose immediately after they become interested. o Directors must disclose at the first directors’ meeting after which interest arises or, if interest arises because of what happens at meeting, then should disclose immediately. o If the contract/transaction is not one that would normally be approved by directors/shareholders then the director must disclose her interest as soon as she becomes aware of it.

Disclosure must be sufficiently detailed to disclose the costs incurred and possible profits to be received by director/officer (Wedge v. McNeill).
UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. – board knew of director’s interest but court held he was obliged to provide the board with certain information that would have been relevant to its decision. In particular, should have made the board aware that: (i) at an earlier meeting, a board with different members had opposed the substance of the package; (ii) the senior management of the corporations had opposed giving him the package (iii) the opinion of a compensation consultant was of limited value and (iv) the package was different in some important ways from the one described to the board in a memorandum a few days earlier.
In some cases – e.g. one corporation the customer of another – disclosure would have to be made repeatedly. CBCA and other statutes permit a general notice to be made to the effect that a director or officer is interested in all contracts with a particular corporation (CBCA s. 120(6)).
No express requirement to disclose nature and extent of interest, but would be consistent with s. 120 to do so. Also requirement to disclose any material change in directors’ officers’ interests form time to time.
Under CBCA shareholders have a right to examine minutes of directors meetings relating to these disclosures (s. 120(6.1)).
A contract in which director/officer has interest must be approved by the directors or shareholders to be enforceable (CBCA ss. 120(7) and (8)). Subject to certain limited exceptions, a director is prohibited from voting on a any contract in which she has interest at meeting to approve (CBCA s. 120(5)).
Compliance with technical requirements does not relieve from duty to act honestly in good faith and with view to best interests of corporation (Levy-Russell Ltd v. Tecmotiv Ltd.).
In addition to notice and approval, contract must be fair and reasonable.
If all three requirements are met, contract is neither void or voidable.
Common law remedy of accounting for profits is excluded (CBCA s. 120; OBCA s. 132(7)).
Alternative scheme to save contracts where requirements not complied with. Contract may still be enforceable if:

o Director’s or officer’s interest was disclosed to shareholders in sufficient detail to indicate its nature; o The contract or transaction woa approved by a special resolution of the shareholders; and o The contract or transaction was reasonable and fair to the corporation at the time it was approved (CBCA s. 120(7.1)).

Requirement that contract be fair and reasonable:
Rooney v. Cree Lace Resources Corp. – five year contract with onerous early termination clause not reasonable.
The substance of the contract and the process by which it is negotiate must be considered. Negotiating process not fair and reasonable if engaged in by any parties with conflicts of interest or in undue haste.
If any of these requirements not satisfied, conflict of interest results in breach of fiduciary duty and contract voidable at option of corporation. In some cases, shareholder may initiate derivative action on behalf of corporation to seek relief for breach of fiduciary duty (CBCA s. 239).
Or shareholder may apply directly to court to et aside contact. Court can also make order for director/officer to account for profits (CBCA s. 120(8)).
Court will not exercise its discretion to grant relief where it is satisfied nothing would have turned out differently if the requirements of the act had been complied with (Baranowski v. Binks Manufacturing Co.)
These rules cannot be modified by articles/by-laws (CBCA s. 122(3)).

Canada Business Corporations Act ss. 44, 120, 125, 241 Ontario Business Corporations Act ss. 20, 132, 134, 137

(iii) Corporate Opportunities Casebook pp. 387-400, 410-416, 419-425

When does a transaction belong to the corporation?

The Common Law

Cook v. Deeks –
See below.
Fell out with plaintiff shareholder and decided that they would no continue business relationships with him. Did not dissolve company, but carried on acting as directors and managers. They then contracted on their own behalf.
Two questions – would the company have been at liberty to claim from the defendants the benefit of the contract? And could the three defendants as majority shareholders ratify and approve what was done and thereby release all claim against the directors.
Guilty of a distinct breach of duty in the course they took to secure the contract and cannot retain the benefit of the contract for themselves but hold it on behalf of the company.
Could not be ratified: the contract was entered into under such circumstances that the directors could not retain the benefit of it for themselves so it belonged to the company and ought to be dealt with as an asset of the company. Even supposing that it was not ultra vires of a company to make a present to its directors, it is certain that directors holding the majority of votes could not make a present to themselves – would be allowing majority to oppress minority.
Regal (Hastings) Ltd. v. Gulliver –
See below.
The rule of equity which insists on those who by use of a fiduciary position make a profit being liable to account for that profit in now way depends on fraud or absence of bona fides; the liability arises from the mere fact of profit having been made.
Referred to case in equity – Keech v. Sandford – trustee could not obtain lease for infant but was not allowed to take it for his own benefit.
They made a profit, they acquired the shares by reason and in the course of their office of directors. Therefore accountable for profits.
Peso Silver Mines v. Cropper –
Defendant and associates incorporated Peso. It acquired several claims. It then turned down the offer of three claims due to strained finances. The defendant and Cropper and others formed new private company to take up the claims. Private company then went public, so Walker, president of Peso wrote to B.C. Superintendant of brokers explaining that first interest was for Peso shareholders. Peso purchased by another company which demanded that they turn over their interests in the company that held the claims. All but Cropper did so. Peso dismissed Cropper and commenced action against him.
No question that respondent was in fiduciary duty to appellant and that he acted in good faith with no intent to profit.
Peso had had interest in claims while considering them, but that interest ceased to exist when offer was rejected by bona fide decision.
An out-and-out bona fide rejection by the company is the best evidence that any later dealings with the property by anyone would not be against its interests.
To come within the rule the impugned transactions must be by reason and only by reason of the fact that directors and in the course of execution of that office.
In this case although based on knowledge acquired as directors, the transaction was note done only in capacity as directors.
C.f. Phipps v. Boardman – would be accountable for information or knowledge which he has been employed by principal to discover or which he has otherwise acquired for use of principal, then if he turns it to his own use so as to make a profit – because the knowledge is the property of the principle.
Canadian Aero Services Ltd. v. O’Malley –
See below.
As top management had exacting duty to corporate employer thus stood in fiduciary relationship.
Director or senior officer is precluded from obtaining for himself secretly/without approval of the company (which would have to be properly manifested upon full disclosure of the facts), any property or business advantage either belonging to the company or for which it has been negotiating.
Neither the conflict test or test of accountability for profits acquired by reason only of being directors and in the course of execution of the office should be considered the exclusive touchstones of liability.
No evidence that plaintiff was no longer interested in project.
No fixed rule of liability – general standards of loyalty, good faith and avoidance of a conflict of duty and self-interest to which the conduct of a director or senior officer must conform must be tested in each case by many factors including the position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director’s or managerial officers relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or, indeed, even private, the factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge.

VanDuzer pp. 352-361

Second situation in which conflict arises is when fiduciary considers investing or otherwise taking advantage of some product or opportunity in which the corporation has an interest.
Where a corporation is actively negotiating for an opportunity and has a reasonable prospect of getting it, there is no question that the corporation has a strong interest in the opportunity and a fiduciary is prohibited from exploiting it for her own benefit.
Cook v. Deeks – three directors were negotiating a contract with railway for a corporation, then decided to take contract for themselves. Court held that directors had breached their fiduciary duty to the corporation because they had actively promoted their own interests at the expense of the corporation and had used their positions with the corporation to do so.
Where there is some impediment to the corporation obtaining an opportunity, the courts have held that it nevertheless can belong to the corporation.
Regal (Hastings) Ltd. v. Gulliver – corporation owned one cinema, was seeking to lease two others. Told that they would have to invest £5000 in subsidiary but only had £2000 to invest. So provided remaining £3000 personally. Then sold regal and shares in subsidiary to purchaser, making a profit on the shares of the subsidiary. Court held that the directors had used their positions to make a personal profit which they were obliged to try to obtain for the corporation. No requirement to find that directors had not acted in what they thought was the best interests of the corporation and not relevant whether corporation could otherwise have obtained the leases. House of Lords articulated various tests for determining whether the directors had breached their duties. In essence, had breached duty because they received a profit through the acquisition and resale of their shares only by reason of the fact that they were directors in the course of acting as directors. The opportunity only arose because they were directors; they acted as aboard in conceiving and implementing the financing arrangement from which they benefited.
Peso Silver Mines Ltd. v. Cropper – narrowed this test. Board considered and after receiving professional advice rejected an opportunity. Officer and member of the board later formed a corporation that acquired the opportunity. Company sued alleging breach of fiduciary duty. Court denied relief on two bases: (i) Peso ceased to have an interest in the claims when the board decided not to buy the and (ii) Cropper was not prohibited from taking advantage of the opportunity personally merely because he acquired knowledge of the opportunity by virtue of being director and officer. To be liable, he must have had access to the opportunity only because of his position and, even then, the only thing he could not do was to take personal advantage of the opportunity through some action in his capacity as a director.
Canadian Aero Service Ltd. v. O’Malley – shattered constraint that would have to exploit opportunity in course of acting in capacity as fiduciary. President and executive vice-president where assigned to Guyana for purpose of procuring contract to map the country. They resigned, incorporated new company to perform similar work, won contract with government of Guyana for somewhat different project over proposal of previous company. Court held they did breach their duty.

o It determined that the test from Regal (Hastings) v. Gulliver was too restrictive to be a general test. Requirement that fiduciary received profits by reason only of being directors reflected the facts of the case and was not intended to define exhaustively circumstances in which a fiduciary duty could be breached. o Categories of breach of fiduciary duty are never closed. Developed open-ended analysis based on weighing of non-exhaustive factors. Purpose of analysis is to determine answer to two questions:

Does the opportunity belong to the corporation, considering how closely it is connected to the corporation?
What is the relationship of the fiduciaries to the opportunity?

o In relation to first question, the opportunity was a specific opportunity that the corporation had been actively pursuing through the efforts of the defendants rather than one simply in same area of business. Though different in some respects, it was substantially the sae opportunity. It was also a mature opportunity – defendants had done extensive work preparing for it while with appellant. o Regarding second question, several factors suggested they were directly involved in the opportunity. They did preparatory work and negotiated for it on behalf of corporation, learned about it through their positions, quit for purpose of taking advantage of it. Fact that high-ranking officers imposed a higher duty on them.

Star-Link Entertainment Inc. v. Star-Quest Entertainment Inc. – directors were seeking financing for licence, two other directors became involved in another corporation and sought to have it obtain the licence. Once deal almost in place, they resigned as directors of first corporation and second corporation obtained licence. Court found breach of fiduciary duty.
Summary – a breach of fiduciary duty arises when a fiduciary takes something belonging to the corporation, putting her personal interest ahead of her duty to act in the best interest of the corporation.
Policy – such behaviour should be discouraged by requiring any financial benefit to be turned over to corporation.
Courts will not inquire into whether corporation would have obtained the opportunity or whether the appropriation caused some loss to the corporation.
Relevant factors to determining whether appropriation of an opportunity is a breach of fiduciary duty:

o Nature or strength of corporations interest:

Maturity – had corporation done anything to develop opportunity? How close was it to acquiring the opportunity?
Specificity – was the opportunity identified by the corporation? How precisely? Was it only in the same general business area as the corporation’s business? How closely did the opportunity appropriated resemble the opportunity the corporation was working on?
Significance of opportunity – would the opportunity represent a major component of the corporation’s business if acquired? Was I a unique opportunity or merely one of many?
Public or private opportunity – was it publicly advertised or otherwise widely known? Was it one to which the fiduciaries had access only by virtue of their positions? Was it offered to the corporation?
Rejection – had the opportunity been rejected in good faith by the corporation before the fiduciary acquired it?

o Relationship of fiduciary to the opportunity:

Position of fiduciary – the higher up the higher the level of duty.
Relationship between the fiduciary and the opportunity – was the opportunity in an area of the fiduciary’s responsibility? Did the fiduciary negotiate for the opportunity on behalf of the corporation?
Knowledge as a fiduciary – how much knowledge did the fiduciary acquire about the opportunity though her position?
Use of position – to what extent did the fiduciary accomplish the appropriation of he opportunity through his position?
Time after termination – if the fiduciary took the opportunity after she terminated her relationship with the corporation, how long was it after termination? What were the circumstances of termination? Fired of left voluntarily? Left of purpose of pursuing opportunity she had been working on for corporation?
If relationship has been terminated, fiduciary duty derives not from statute but common law, since statutory duty only applies while director/officer.
Scale of corporation should also be taken into account – stricter standard for public corporations since harder to monitor.

Canada Business Corporations Act s. 122(1)(a) Ontario Business Corporations Act s. 134(1)(a)

(iv) Competition Casebook pp. 433-439

Directors who sit on boards of either vertically or horizontally interlocked companies are clearly in a conflict of interest situation, as often are parent corporations with respect to their subsidiaries. Related problem is that of competition, either directly by engaging in a competing enterprise or indirectly by being interested in such an enterprise.
London as Mashonaland Exploration Company, Limited v. New Mashonaland Exploration Company, Limited –
Two competing companies; the former alleged that Lord Mayo had accepted appointment as director. Wanted to stop him being director of second company. He did not act as director of first company and did not agree expressly/by articles of association, not to become a director of any similar company. Even assuming he had been duly elected chairman and director of plaintiff company there was nothing which required him to give him the whole of his time to the companies business, or to prohibit him from acting as director of another company. No case made out that he was about to disclose confidential information.
Bell v. Lever Bros. Ltd. –
Approved London and Mashonaland as holding that:
If not appearing fro the regulations of the company that a director’s services must be rendered to that company and to no other company, he was at liberty to become a director even of a rival company, and it not being established that he was making to the second company any disclosure of confidential information could not at instance of company be restrained in his rival directorate. What he could do for a rival company he could not of course do for himself.
Notes –
A director who joins a rival concern and prefers its interests to those of the first company would likely face an application under s. 241 CBCA or 248 OBCA.
Abbey Glen Property Corp. v. Stumborg – expressed opinion that London and Mashonaland was not the law.
In Re Thomson –
Did executor have the right to carry on competing business after the death or the testator or after ceasing to take any part in conduct of the testator’s business?
If he had set up the business at the time of the commencement of the action it would have been breach, but fine now.
Fiduciary duty was to carry on business of to testator to best advantage of beneficiaries and he should not be allowed to enter into any engagement in which he has/can have a personal interest conflicting/which possibly may conflict, with the interests of those whom he is bound to protect.

VanDuzer pp. 362-363

In general not a breach of fiduciary duty to terminate one’s relationship with corporation and go into competition with it.
But cannot compete with corporation while remaining in capacity as a fiduciary.
Conflict generally obvious and courts have granted relief whenever competition found (Re Thomson). Fiduciary will be forced to pay over all profits from competing business.
Fiduciary cannot use fiduciary position and opportunities afforded in that position to develop competing business then quit to begin competing (Canadian Aero Service v. O’Malley).
Even where fiduciary has not used position to develop an opportunity in this way, he will have some obligations extending beyond the termination of his relationship with corporation – cannot use confidential information belonging to corporation.
But can use skills, know-how, experience, personal good will acquired during service to corporation (Pizza Pizza Ltd. v. Gillespie).
If departing fiduciary attracts customers or other employees by virtue of personal experience, not breach, but if affirmatively solicits customers or employees relying on relationships developed during time with corporation will be in breach.
Using confidential customer list to solicit customer clear breach.
Competition prohibited by fiduciary duty includes not only competition in personal capacity but also competition by corporation in which fiduciary has an interest (Tran v. Nguyen).
There is no absolute rule regarding multiple directorships; in each case will depend on facts. Relevant question will be whether the fiduciary could act in the best interest of both corporations (Abbey Glen Property Corp v. Stumborg).

Canada Business Corporations Act s. 122(1)(a) Ontario Business Corporations Act s. 134(1)(a)

(v) Takeover Bids Casebook pp. 439-441, 442-450, 465-466, 495-509, 519-526

Hostile takeover bid enables acquirer to obtain control of target corporation without having to obtain assent of target management. Acquirer will make bid (almost always at some premium above the market price of the shares) to the target shareholders.
Management discipline hypothesis for takeovers – companies with bad management get taken over.
However managerial discipline may not always be sole or dominant motive for takeovers.
Should auctions be encouraged – favouring target shareholders over acquirers?
Function of poison pills – shareholder interest hypothesis preventing coercive tactics that effectively force target shareholders to tender into a low bid; or management entrenchment hypothesis by which management may abuse the pill to deter hostile bids. Available information is consistent with the latter hypothesis.

The Common Law

Powers that may be used to react to hostile takeover bid:

o Power to manage or supervise management. o Power to issue shares (CBCA s. 25; OBCA s. 23). o Power to purchase shares of the corporation (CBCA s. 34; OBCA s. 30). o Power to declare dividends, to initiate a takeover or amalgamation, to sell major assets (may require shareholder vote in some circumstances) (CBCA s. 189(3), OBCA s. 184(3)). o Power in a private company to refuse to register a share transfer if such a power is conferred in articles of association (CBCA s. 6(1)(d); OBCA s. 5(1)(d)).

Acts may be challenged if beyond authority conferred/if power exercised without due care and in a negligent fashion/if for an improper purpose.
Bonisteel v. Collis Leather Co. – issuance of shares was in good faith and what directors perceived to be the best interests of the company. Nonetheless, it was made with an improper purpose – of defeating the intended acquisition of a control block by a shareholder that the board did not approve. Thus no breach of fiduciary duty strictly speaking, but still illegal. While in this case issuance was void, in most cases merely voidable.
Pente Investment Management Ltd. v. Schneider Corp. –
Complicated two-tiered share structure – voting common shares of which family owned majority and non-voting A shares. Set up a coattail provision to ensure equal treatment of shares in event of takeover bid, whereby A shares could be converted to common shares in event of exclusionary offer but family still had a veto. Maple Leaf and Smithfield Foods both made offers; family refused to lift certificate of anti-conversion for any other bid than the Smithfield one. Maple Leaf did not meet concerns about employees, suppliers and customer relations.
Various other complicated things went on.
Mandate of directors is to manage the company according to their best judgment; that judgment must be an informed judgment; it must have a reasonable basis.
One way of determining whether the directors acted in the best interests of the company is to ask what was uppermost in the directors’ minds after “a reasonable analysis of the situation”.
Directors are not agents of shareholders; they have absolute power to manage the affairs of the company even if their decisions contravene the express wishes of the majority shareholder.
There may be a conflict between the interests of individual shareholders and the best interests of the company.
Provided that the directors have acted honestly and reasonably, the court ought not to substitute its own business judgement for that of the Board of Directors.
In Delaware, enhanced scrutiny test – judicial determination of adequacy of decision-making process and examination of reasonableness of directors; actions. Some Canadian authorities have adopted a proper purpose test.
In Ontario court must be satisfied that the directors have acted reasonably and fairly – reasonable decision not perfect decision. Provided the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board. As long as the directors have selected one of several reasonable alternatives, deference is accorded to the board’s decision. Known as business judgment rule.
One method of alleviating concerns is creation of special committee from independent members of board who do not have conflict.
Burden of proof may not always rest on same party; real question is whether directors of the target company took steps to avoid conflict of interest. If so rationale for shifting burden of proof to the directors may not exist. E.g. if acted on advice of committee composed of persons having no conflict of interest and that committee acted independently, in good faith and made an informed recommendation as to the best available transaction for the shareholders the business judgment rule applies.
Should members of senior management have been permitted significant role in sale negotiations? – potential conflict was balanced by benefits obtained.
Not obliged to keep bidding alive. No obligation to conduct auction.
Chapters Inc, Re
Chapters Board adopted a shareholder rights plan that was confirmed by shareholders. Trilogy made offer; board initiated search for alternative acquirers.
Offer from Future Shop – Chapters waived its Rights Plan in respect of this offer. 30% of shareholders agreed to lock-up to the proposed offer and only tender to a superior bid if made before January 25, 2001.
Originally rights plan included a waive for one waive for all clause; Chapters agreed not to waive the Plan until Future Shop was ready to take up and pay for the shares.
Trilogy announced intention to enhance offer if Commission cease traded the Rights Plan.
Overriding principle governing the consideration of poison pills – there comes a time when the pill has to go.
If there appears to be a reasonable possibility that given a reasonable period of further time, the board of the target corporation can increase shareholder choice and maximize shareholder value then, absent some other compelling reason requiring the termination of the plan in the interests of shareholders, it seems to us that the Commission should allow the plan to function for a further period.
Implicit in test is balancing of interests.
Factors to consider:

o Whether shareholder approval of the rights plan was obtained; o When the plan was adopted; o Whether there is broad shareholder support for the continued operation of the plan; o The size and complexity of the target company; o The other defensive tactics if any implemented; o The number of potential viable offerors; o The steps taken by the target company to find an alternative bid or transaction that would be better for the shareholders; o The likelihood that, if given further time, the target company will be able to find a better bid or transaction; o The nature of the bid, including whether it is coercive or unfair to the shareholders of the target company; o The length of time since the bid was announced and mad; o The likelihood that the bid will not be extended if the rights plan is not terminated.

In this case: rights plan was approved by shareholders; it was adopted subsequent to meeting where Trilogy interest firs expressed; Chapters was no longer seeking alternative bids; outside locked-up shares no demonstration of broad shareholder support for continuance of pill; Chapters is not large or complex so bidder should be able to assess in short period of time; as a result of the Trilogy Offer, Chapters has engaged in a number of defensive tactics; two major players in book industry already involved so few other potential offerors; plan was in effect for 54 days, Chapters search resulted in emergence of Future shop; given Lock-Up and support agreements, unlikely that extending the pill will result in a better bid; it is argued that Trilogy bid for only 43% of outstanding shares is coercive; rights plan in effect for 54 days, considerably longer than minimum 21 day period required by Act; Trilogy submitted no intention of extending current bid unless pill was cease traded by Commission.

VanDuzer 363-371

Directors may be encouraged to try to defeat takeover bid if they will be replaced, but this will often be against interest of shareholders.
Diverse possible motivations for takeover bids. Thus difficult to develop general rules.
Variety of defensive measures – e.g. issuing new shares, shareholders rights plans.
Case law not consistent. E.g.:
Teck Corp. v. Millar – directors must be able to act in best interests of corporation in responding to a takeover bid. Courts should ask if reasonable grounds for the directors belief that acting in corporation’s best interests.
Olympia & York Enterprises Ltd. v. Hiram Walker Resources Ltd. – court seemed to suggest that fiduciary duty imposed a positive duty to take defensive measures if board believed successful completion of bid would not be in best interests of corporation, even where one of the effects has be incidentally to benefit the directors by maintaining their positions.
Exco Corp. v. Nova Scotia Savings & Loan Co. – more restrictive approach; proper test is whether an action taken by the directors was consistent only with the best interests of the corporation and inconsistent with any other interests, including the directors personal interests.
One guiding principle that has been endorsed by the courts is that shareholders, rather than directors, should have the right to determine to whom and on what terms they may sell their shares (Howard Smith Ltd. v. Ampol Petroleum Ltd.). This principle confirmed by policy issued by Canadian Securities Administrators.
This policy was held to inform the content of directors’ fiduciary duty in 347883 Alberta Ltd. v. Producers Pipelines Ltd. – if directors determine action is necessary to protect the interests of the corporation, they may act despite being in a conflict of interest. But must be able to show reasonable response to risks and for purpose of benefitting corporation and shareholders. If possible, defensive actions should have prior approval of shareholders or be ratified after adoption. Shareholders right to sell shares to bidder should not be impaired.
More recently courts have looked at whether board of corporation acted reasonable in the circumstances, taking reasonable steps to minimize conflict of interest and making informed decision as to best available transaction for shareholders.
Referring question to independent committee that acts reasonably, directors will be found to have fulfilled their duty if they accept recommendations (Pente Investment Management Ltd. v. Schneider Corp.).
Analysis of fiduciary duty in face of takeover bid more complex in wake of decision in BCE, which makes clear that fiduciary duty may require stakeholder interests to be taken into account to some extent.
BCE – court determined that it was sufficient that the board considered the extent to which the legal rights of the debenture holders would be protected. Not obliged to take into account financial interests of debenture holders in maintaining the value of their debentures. So long as board acted reasonably in that there was no particular alternative that was definitely available and clearly more beneficial, then under the business judgment rule, the boards actions would not be second guessed.

Canada Business Corporations Act s. 122(1)(a) Ontario Business Corporations Act s. 134(1)(a)

(vi) Other Breaches of Fiduciary Duty VanDuzer pp. 371-373

Situations may arise in more than one category of breach will be implicated.
The categories of breach are not closed (Canadian Aero Service v. O’Malley).
Directors are expressly permitted to decide their own compensation (CBCA s. 120(5)). But this does not relieve them of duty to act in best interests of corporation.
Situation where interest of majority shareholder and minority shareholders conflict. Because majority shareholder has statutory right to replace directors, tempting for a director to act in the way desired by the majority shareholder rather than in the interests of the corporation as a whole.
Even if elected to represent special constituency, it does not permit hi to favour this constituency.

(vii) Reliance on Management and Others VanDuzer p. 373

In discharging their duty directors in most corporations must rely to some extent on management and other professionals.
A limited defence to an alleged breach of fiduciary duty and the duty of care is available to directors who rely on others.
S. 123(4) CBCA provides that a director is not liable if he relies in good faith on:

o Financial statements of the corporation represented to him by an officer or in a written report by the auditor of the corporation to reflect fairly the financial position of the corporation; or o A report of a person whose profession lends credibility to a statement made by the person.

Defence is limited to specific circumstances in which reliance is permitted. Does not permit directors to avoid liability by demonstrating that they acted reasonably in the circumstances. The fiduciary obligation continues to apply, but is subject to the limited reliance expressly permitted.
OBCA permits reliance by directors on others to comply with other statutory duties in board range of circumstances but not for purposes of complying with fiduciary duty/duty of care (S. 135(4)).

Canada Business Corporations Act s. 123 (4) Ontario Business Corporations Act s. 134(4)

(viii) Sanction by Shareholders of Fiduciary Breach Casebook pp. 526-527

Which breaches should be ratified and which not? What form should ratification take?

VanDuzer pp. 373-375

Before enactment of CBCA, possible in most jurisdictions for shareholders to ratify a breach of fiduciary duty.
CBCA greatly reduced the effect of shareholder approval of fiduciary breaches.
Except in accordance with scheme for rendering self-dealing contracts enforceable under s. 120 CBCA, shareholder resolution approving a breach of fiduciary duty does not cure a breach/relieve liability (CBCA s. 122(3); OBCA s. 134(3)).
Only legal effect of such a resolution is that it may be considered by the court in deciding whether to grant a shareholder the right o bring a derivative action on behalf of the corporation for breach of fiduciary duty (CBCA s. 242(1); OBCA s. 249(1)), in determining whether any action of the corporation/directors is oppressive under s. 241 CBCA and whether to order dissolution under s. 214 CBCA.

Canada Business Corporations Act ss. 120(7), 122(3), 124, 239, 241, 242(1) Ontario Business Corporations Act ss. 132(7), 134(3), 136, 246, 248, 249

(b) Duty of Care (i) Common Law Casebook pp. 301-309

City Equitable Fire Insurance Co. Ltd. –
Order made for winding up – losses were the result of investments in securities which had depreciated and diversion of funds by managing director to another company in which he was interested. Liquidator brought action against directors and auditors alleging negligence and breach of duty.
In order to ascertain duties necessary to consider nature of business and manner in which the work of the company is distributed (so long as reasonable.
Must be honest.
Were there circumstances so manifest that no men with any ordinary degree of prudence, acting on their own behalf, would have entered into such a transaction as they entered into?
A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience – such care as is reasonably to be expected from them having regard to their knowledge and experience.
Director is not bound to give continuous attention to the affairs of his company.
In respect of all duties that having regard to the exigencies of business may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.
Re Brazilian Rubber Plantations and Estates, Ltd. –
The defendants were honest men who performed what they supposed to be their duty as directors whether or not they fell short in fact of the obligations imposed upon them by their office.
So long as act honestly cannot be made responsible unless guilty of gross negligence.
Not bound to take any definite part in business, but so far as does undertake it must use reasonable care in its despatch – the care an ordinary man might be expected to take in the same circumstances on his own behalf.
Selangor United Rubber Estates Ltd. v. Craddock –
Two nominee directors of a company who blindly sanctioned the conveyance of all of the assets of the plaintiff company to another company were liable in equity for the wrongful conversion of the plaintiff company’s funds.

(ii) Statutory Reform Casebook pp. 309-324, 358-368

s. 122(1)(b) CBCA, s. 134(1)(b) OBCA.
Courts use legislative history to support the view that the Ontario and federal statuory provisions essentially adopt the common law standard of care.
S. 123 CBCA (OBCA s. 135) – deemed consent if attend meeting unless dissent entered in minutes or immediately after send written dissent. By contrast, if not present, deemed to consent unless within seven days after becoming aware of the resolution informs company of dissent.
CBCA s. 123(5) – reliance on reports; does not allow for reliance on officials but only financial reports/professionals.
Soper v. R
Case under federal Income Tax Act.
Has the standard of care in City Equitable been upgraded?
Correct to conclude that the subjective standard has not been altered by federal statute – does not refer to reasonably skilled person, so can take into account actual level of skill.
Seems arguable that term diligence is synonymous with term care.
Common law standard while altered slightly has not been significantly upgraded by statute.
Legislative provisions of OBCA almost identical.
The standard of care is inherently flexible; subjective element that takes into account personal knowledge and background of director as well as his or her corporate circumstances including organization, resources, customs and conduct. Thus more expected of persons with superior qualifications.
Not purely subjective; not enough for a director to say he did his best. Honesty is not enough. Bt standard is not a professional one. The objective elements embodied in the reasonable person language – and subjective elements – inherent in individual considerations like “skill” and comparable circumstances.
Inside managers will have the most difficulty in establishing the due diligence defence; difficult to argue convincingly that despite their daily role in corporate management they lacked business acumen.
Director cannot adopt entirely passive approach, but unless there is reason for suspicion it is permissible to rely on the day-to-day corporate manages to be responsible for the payment of debt obligations.
People’s Department Stores Ltd. (1992) Inc., Re –
Marks and Spenser sold Peoples to Wise; contracted that Wise and Peoples would not merge operations until purchase price paid.
Wise in difficulty; vice-president for administration and finance (B.A. in commerce) proposed integration of management of inventories. Peoples would make all purchases.
This resulted in Wise running up large debts to Peoples; both corporations failed and went into bankruptcy proceedings.
Peoples’ trustee in bankruptcy commenced proceedings against Wise brothers qua directors of Peoples. Alleged they had breached both their fiduciary duty under CBCA s. 122(1)(a) (no fraud or dishonest so could be no breach of this duty; fiduciary duty does not refer to quality of directors’ management but to their personal conduct. The law imposes a duty toward those who entrust them with management. This type of duty related more to motivation of directors than to consequences of their actions) and CBCA s. 122(1)(b).
Approved Soper v. Canada.
The adoption of the inventory management policy at the time met both the objective and subjective standards of care as defined in Soper.
And brothers cold rightfully use the defence under s. 123(4)(b) CBCA – reliance in good faith on a report of a person whose profession lends credibility to a statement made by the professional person.
Brant Investments Ltd. v. KeepRite Inc. –
65% subsidiary of ICM; rest of the shares in hands of public shareholders; ICM decided to merge KeepRite with two of its wholly owned subsidiaries. Independent committee reviewed whether terms were fair to public; full board approved transaction on the basis of the changes recommended by the committee. Minority shareholders sued claiming transaction was oppressive to their interests.
Board not required to consider every available alternative transaction. Extent to which directors should inquire as to alternatives is a business decision which, if made honestly in the best interests of the corporation, should not be interfered with.
Burden of proof – where a party who owes a fiduciary duty deals with trust property to his own personal benefit, a burden of proof will rest on the fiduciary; not necessary to decide whether this is one of those cases since respondents assumed from the outset the burden of adducing evidence.
Independent committee – all of its members were outside members of the board of KeepRite. No evidence of any involvement with ICG by any of the individuals.
It is not for minority shareholders to dictate to corporate officers the manner in which they should deal with corporate problems.
There can be no doubt that on an application under s. 234 (now 241) the trial judge is required to consider the nature of the impugned acts and the method in which they were carried out. That does not mean that the trial judge should substitute his own business judgment for that of the directors, managers, or a committee.
Pente Investment Management v. Schneider Corp. –
Maple leaf made takeover bid for Schneider Corp. which was thwarted by lock-up arrangement with another bidder, with express approval of company’s controlling shareholders.
In Brant Investments, the issue whether the burden of proof is on the directors to justify their actions as being int the best interests of the company or on shareholders was raised – did not find it necessary to decide. Also true in present case.
But it may be that the burden of proof may not always rest on the same party when a change of control transaction is challenged. The real question is whether the directors of the target company successfully took steps to avoid a conflict of interest. If so, the rationale for shifting the burden of proof to the directors may not exist.
If a board of directors has acted on the advice of a committee 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. The burden of proof is not an issue in such circumstances.

VanDuzer pp. 375-384

S. 122(1)(b) CBCA (and s. 249(1) OBCA) imposes duty in following terms: every director and officer of a corporation in exercising their powers and discharging their duties shall exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
BCE – objective not subjective standard. There is an objective minimum threshold of competence.
Content of duty is highly dependent on facts.
BCE – confirmed somewhat novel approach from Peoples Department Stores – duty is not obligation wed to corporation, at least not exclusively, but represents a standard of behaviour to be observed in relation to creditors and other stakeholders as well.
BCE – statutory duty of care does not provide an independent foundation for claims, but may be taken into account by courts in determining the standard of behaviour that is required in accordance with principles governing the law of tort and extra-contractual liability.
Conflates traditional conception with tort law
In an effort to avoid this approach, OBCA specifies that duty of care is owed only to the corporation.
However, BCE did not suggest previous caselaw should be rejected.

The Standard of Care

Specific incentive to go to meetings and treat decisions responsibly. Under s. 123 CBCA a director is deemed to consent to all resolutions passed at a meeting at which she was present unless she records her dissent. If misses meeting, deemed to consent unless within seven days of finding out about what was done takes specific steps to record dissent.
Before CBCA, caselaw held directors and officers were entitled to trust employees and others to act honestly in performing obligations and could rely on what they were told. Reliance is now subject to express statutory standard – director not liable if in good faith relies on financial statements and reports of lawyers and other professionals (CBCA s. 123(4)). In Peoples Department Stores, SCC held that this provision did not extend to protect reliance on advice from officers ho are not members of a registered profession.
People’s Department Stores – SCC held that this did not extend to protect reliance on advice from officers who are not members of a recognized profession. Reliance on advice of vice-president of finance (degree in commerce, 15yrs experience, but not accountant) found not to fit within this provision.
Nevertheless, even if reliance does not fall within categories enumerated in statute, where reasonable it may be permitted.
No provision in a contract, the articles, the by-laws or a resolution relieves a director or officer from the statutory duty of care or from liability for breaching it (CBCA s.122(3)).
Apart from these provisions, substance of duty of care governed by caselaw.
Directors must have at least a rudimentary understanding of the business (Francis v. United Jersey Bank).
Being a nominee does not relive a director from observing the standard of care (Selangor United Rubber Estates Ltd. v. Cradock).
Some monitoring of corporation required by duty of care – director must keep himself informed about the business and affairs of the corporation. Does not involve detailed inspection of day-to-day activities, but does include general monitoring, attending board meetings.
Not necessary to audit financial records but do need some general familiarity with financial status of corporation through review of financial statements.
Francis v. United Jersey Bank – director was found to have breached her duty of care where she paid no attention to a problem appearing clearly on the face of the corporation’s balance sheets. There are situations in which it is not enough simply to object and resign if no adequate response made; in some cases director’s duty will require her to take some further positive action, such as attempting to initiate legal action to remedy wrongdoing. This would be required where activity is clearly identifiable and wrongful; if problem is harder to pin down or remedy, such as general managerial incompetence, this response would be inappropriate. What strategy would have reasonable likelihood of success in remedying the breach?
UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. – board approved compensation package for Berg (director and major shareholder). Board acted on recommendation of Compensation Committee (composed of members of the board). Court found Committee had not fulfilled duty of care because did not have or seek sufficient information to provide the basis for a reasonable judgment. In particular the committee:

o Failed to oversee the compensation consultant that the board retained and to ensure that the advice received from the consultant was based on adequate information and was reliable; o Failed to take reasonable steps to inform itself regarding the package before recommending it to the board, including failing to have regard to the report of the consultation consultant or the prior deliberations of the previous Compensation Committee that had expressed serious concerns about the package; and o Allowed the other directors to rely on the Compensation Committee having done a full review of the compensation package when it had failed to do so.

The Board that approved the package were also in breach because they failed to give adequate consideration to the consultant’s report, which raised a number of questions regarding the package.
While duty of care is objective, statutory reference to person “incomparable circumstances” gives subjective/contextual element.
Subjective element appears to be most relevant to determining level of skill person is expected to bring to their conduct as director (Nicholls).
If person has significant skill, will result in a higher standard of care being required (Re Standard Trustco Ltd.).
Standard of care will also vary depending on person’s position – e.g. director who serves on audit committee would be expected to do more in overseeing financial-reporting process and warning other directors about problems with it than would be required of directors who were not on the committee (Re Standard Trustco Ltd.).
Higher standard will also be expected of directors who are also officers of the corporation (often called executive directors) t those who are not because of greater information they have access to (Smith v. Canada).
Duty of care cannot be delegated. Can rely on directors whose specific job area it is, but have to continue to monitor activities and take action if problem (Canada (Attorney General) V. McKinnon).

The Business Judgment Rule

When alleged breach of duty of care relates to business decisions rather than failing to detect/address wrongdoing, courts have been reluctant to second-guess management.

o Lack of judicial expertise. o Chilling effect of too-high standards. o Avoidance of “hindsight bias”.

The rule requires courts to defer to the business judgment of the directors where certain preconditions are met (who bears burden of demonstrating preconditions not clear).
In general decision must have been exercised honestly, prudently , in good faith, and on reasonable grounds before it is entitled to the deference required by the business judgment rule.
Courts have required that the process for making the decision be reasonable in the circumstances. E.g. decision maker must have made reasonable efforts to ensure that she had the information and advice necessary to make the decision (UPM; WIC; BCE).
Actions of directors to be judged not against perfect vision of hindsight, but facts as they existed at the time the decision was made.
Not required to make perfect decision but reasonable one in circumstances – so long as have chosen strategy within the range of reasonable alternatives, the business judgment rule applies. Courts should not substitute their own judgement (WIC; Paramount Communications, Inc. v. QVC Network Inc.).
UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. – court refused to apply business judgment rule because deference required only applies where the board has been scrupulous in its deliberations and demonstrated diligence in arriving at decisions.
Unlike breaches of fiduciary duty, corporation can indemnify officers and directors for breaches of duty of care.

Canada Business Corporations Act ss. 118(2), 119, 122(1)(b), 123 Ontario Business Corporations Act ss. 130, 131, 134(1)(b), 135

(c) Statutory Duties and Oppression Casebook pp. 341-342

CBCA s. 118(1) and OBCA s. 130(1) make directors liable when the corporation sells shares for consideration other than money “to make good any amount by which the consideration received is less than the fair equivalent of the money that the corporation would have received if the share had been issued for money on the date of the resolution”.
CBCA s. 118(2) and OBCA s. 130(2)) prescribe further liabilities relating to various wrongful corporate payments.
CBCA s. 119 and OBCA s. 131 rends directors jointly and severally liable to employees for all debts not exceeding six months’ wages payable to each such employee for services performed for the corporation while they were directors. Must firs have obtained judgment against corporation/proved claim against it. If judgment/claim not satisfied in full, employee is entitled to sue directors personally for the shortfall. CBCA – suit must be initiated within two years of time that director ceased to sere corporation (s. 119(3)); OBCA – suit must be brought within six months (s. 131(2)(a)).
CBCA s. 118(6); OBCA s. 130(6) – director may escape liability if he did not know and could not reasonably have known that the share was issued for a consideration less than the fair equivalent of the money that the corporation would have received if the share had been issued for money.
Pursuant to amendments to CBCA directors have been given a due diligence defence with respect to all of the s. 118 and s. 119 liabilities (in addition to statutory defence of reliance on financial statements/expert reports (CBCA s. 123(4)).
OBCA does not contain a due diligence defence.

VanDuzer pp. 384-389

Directors and officers are subject to a wade additional range of statutory duties.
Risk of discouraging directors.
Directors are liable to employees for up to six months’ unpaid wages if the corporation is bankrupt/in liquidation proceedings/has been successfully sued for debt and judgment remains unpaid (CBCA s. 119; OBCA s. 131).
Directors are not liable unless lawsuit by employee was commenced not more than six months after payment was due.
In the case of corporation that has commenced liquidation and dissolution proceedings/been dissolved the employees claim must be proved within six months of commencement of proceedings.
If the corporation is bankrupt, the claim must be proved within six months of bankruptcy.
A director’s responsibility for unpaid wages ceases two years after he ceases to be a director (CBCA s. 119(3); no similar provision under OBCA).
If a director is required to pay, he becomes entitled to enforce the rights of the employee against the corporation to the extent of the payment and is entitled to contribution from other directors (CBCA ss. 119(5),(6)).
Liability does not extend to an unsatisfied judgment for wrongful dismissal or other severance or termination payments (Barrette v. Crabtree Estate).
Directors are also liable under s. 118 CBCA in various circumstances. They are liable if they vote for or consent to a resolution authorizing the following:

o Purchase or redemption or other acquisition by the corporation of its shares contrary to ss. 34 (realizable value of assets of corporation must be at least equal to its liabilities plus its stated capital for all classes of shares), 35 (e.g. to eliminate fractional shares: realizable value of assets must be at least equal to its liabilities plus amount required to be paid on a redemption or in a liquidation to all holders of shares that have a right to be paid before the holders of the shares to be purchased/acquired), 36 (realizable value of assets must be at least equal to its liabilities plus amount required to be paid on a redemption or in a liquidation to all holders of shares that have a right to be paid rateably with or before the holders of the shares to be purchased/acquired; o Payment of a dividend contrary to s. 42;

realizable value of assets of corporation must be at least equal to its liabilities plus its stated capital for all classes of shares.

o Payment to a shareholder exercising its right under s. 190 to require the corporation to purchase the shareholders shares for fair value when the shareholder dissents from certain fundamental changes approved by shareholders where the payment is contrary to s. 190(26);

realizable value of assets must be at least equal to liabilities;

o Or a payment to a shareholder for the shareholders shares pursuant to a court order made to grant relief from oppression contrary to s. 241(6); o Paying an unreasonable commission on the issuance of shares contrary to s. 41; or o Paying an indemnity where doing so is not permitted under s. 124 (CBCA ss. 118(2)(a),(b),(c),(d),(e)).

The first three of four provisions prohibit making the payment referred to where there are reasonable grounds for believing solvency test not met/version of capital impairment test would be breached.
In each case, directors are responsible for repaying corporation any amounts paid out where these requirements not met; entitled to contribution from other directors who were liable; fight to seek court order compelling recipient to pay any money received to director (CBCA ss. 118(4) and (5); OBCA ss. 130(4) and (5)).
Directors are liable under the CBCA if the vote/consent to resolution authorizing the issuance of shares under s. 25 in return for property that is less than the fair equivalent of money the corporation could have received if shares issued for money. Where liable, must compensate to extent of shortfall (s. 118(1)). Entitled to contribution from other directors. Directors are excused if could not reasonable have known that the share was issued for inadequate consideration.
Due diligence defence under all bases of liability in ss. 118 and 9. Defence also available in relation to alleged breaches of the duty to comply with act regulations articles, by-laws and any USA under s. 122(2).
Director is not liable if exercised care, diligence, skill that a reasonably prudent person would have exercised in comparable circumstances, including reliance in good faith on:

o Financial statements of the corporation represented to him by an officer or in a written report by the auditor of the corporation to reflect fairly the financial position of the corporation; or o A report of a person whose profession lends credibility to a statement made by the person (s. 123, see above).

Ontario recently adopted due diligence defence available in relation to same statutory liabilities (other than liability for employee wages) which permits reliance on the following additional categories of information:

o An interim or other financial report of the corporation represented to her by an officer of the corporation to present fairly the financial position of the corporation in accordance with generally accepted accounting principles; and o A report or advice of an officer or employee of the corporation, where it is reasonable in the circumstances to rely on the report or advice (OBCA s. 135(4)(b),(c)).

By expressly permitting reliance on non-officer employees, Ontario legislature appears to have intended to expand scope of permitted reliance beyond Peoples Department Stores (members of professions only). Does not extend to breaches of duty of care and fiduciary duty.
See table p389.

Canada Business Corporations Act ss. 118, 119, 122(2), 239-242 OBCA ss. 130, 131, 246-249

(d) Liability of Corporate Managers for Torts Casebook pp. 99-107

ADGA Systems International Ltd. v. Valcom Ltd. –
ADGA claimed that Valcom raided its employees; also claims against three employees for breach of fiduciary duty. Can the respondents be sued for their actions as individuals, assuming those actions were genuinely directed to the best interests of their corporate employer.
Distinction between an independent cause of action (corporate veil is not threatened) and looking through the corporate veil.
If a servant acting bona fide within the scope of his authority procures or causes the breach of a contract between his employer and a third person he does not thereby become liable to an action of tort at the suit of the person whose contract has been broken. A director or servant who actually takes part in/authorizes such torts as assault/trespass to property, nuisance or the like may be liable in damages as a joint participant in one of such recognized heads of tortuous wrong.
In all events, officers, directors and employees of corporations are responsible for their tortuous conduct even though it was directed in a bona fide manner to the best interests of the corporation subject to this exception.

VanDuzer pp. 389-396

Directors and officers not liable for torts simply by virtue of positions, but may be liable where commit torts in the course of their employment.
Tension between tort principle that each person should be responsible for her own wrongs and the principle of separate corporate personality.
Courts have not been consistent in defining the circumstances in which personal liability will attach or how tort/corporate law principles should be reconciled.
In general, whether director/officer/employee is responsible depends on degree and kind of personal involvement. Where he has performed, ordered, procured, counselled, aided, or abetted the action constituting the tort, he is likely to be found liable (Shihamoto & Co. v. Western Fish Producers Inc. (Trustee of)).
Not a defence to argue tort was committed for benefit of the corporation/in course of duties.
Where a person has only general management responsibilities in the area of operations in which the tort was committed, and know knowledge or involvement, unlikely to be liable (C. Evans & Sons Ltd. v. Spritebrand Ltd.).
Scotia Macleod Inc. v. Peoples Jewellers Inc. – court held that for a claim against directors or officers to succeed, it is necessary to allege that they had committed tortuous behaviour outside their formal decision-making roles in the corporation. The court identified the usual categories of torts giving rise to personal liability as fraud, deceit, dishonest or want of authority. If falls outside these categories, officers and employees usually protected unless it can be shown that their actions are themselves tortuous or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own.
ADGA Systems International Ltd. v. Valcom Ltd. – requirement of “separate identity” did not mean that could not be held liable for torts when acting in the courts of their duties; two senior employees and director of Valcom were personally liable for inducing breach of contract on the grounds that they raided staff of competitor. Fact that acting in corporations interests did not shield them from liability.
Approach of Ontario Court of Appeal: policy of holding someone liable for serious intentional torts outweighs concerns about the sanctity of the separate corporate person. Serious and wrongful nature of intentional behaviour by the manager that constitutes the tort excludes it from being merely an act that can be said to be in the ordinary course of fulfilling ones duty to the corporation. Such a conclusion will be reinforced where the manager has engaged in the behaviour for personal gain.
Harder to characterize a manager’s behaviour as exhibiting a “separate identity” from the corporation’s in relation to negligence and some other torts. Current caselaw appears to be moving towards a standard for liability based less on abstract concepts such as when manager’s behaviour demonstrates separate identity from corporation and more on degree and kind of personal involvement in tort.
Negligence – liability should be imposed only where the alleged tortfeasor has a duty towards the plaintiff arising out of a relationship to her, not simply by virtue of the corporation having a duty arising out of its relationship to plaintiff and tortuous actions occurring in her general area of responsibility. In latter case, tortfeasor could be considered merely a manifestation of the corporation.
Berger v. Willowdale A.M.C. – president was liable when employee slipped on sidewalk: he had a general responsibility to ensure that the workplace was safe, was in a position to know about the danger and to remove it. Personal duty would depend on a variety of factors, including: the size of the corporation; the number of employees; the nature of the business; and whether the danger should have been readily apparent to the manager. Case could be criticised and few have followed it in holding senior managers liable for negligence based only on their management responsibility.
Employees may be held liable for negligent actions in the course of their employment.
London Drugs Ltd. v. Kuehne & Nagel International Ltd. – two employees negligently damaged customer’s property; personal duty to customer because damage to property was a foreseeable consequence of their failing to take the requisite care.
Managers may be liable for negligent misstatement.
NBD Bank, Canada v. Dofasco Inc. – vice-president may oral and written representations to bank regarding financial health of corporation. Officer was held liable; just acting in role as officer, but direct relationship between the officer and the bank was sufficient to give rise to a personal duty.
Williams v. Natural Life Health Foods Ltd. – House of Lords held no liability where plaintiffs relied on advice of individual acting for franchisor. Personal liability will attach only where there is reason to conclude that the victim reasonably relied on an individual undertaking that the individual would be personally liable.
Standard Chartered Bank v. Pakistan National Shipping Corp. – distinguished Williams, holding that it was no defence in an action for fraud (as opposed to negligence) to characterize it as being committed on behalf of the corporation.
Tort of inducing breach of contract – person knowing there is contract between plaintiff and third party, induces the third party, without justification, to break the contract, with the intention of doing so (Quinn v. Leathem).
Where third party is corporation the managers work for, has the potential to eliminate separate corporate legal personality.
Said v. Butt – if a servant acting bona fide within the scope of his authority procures or causes the breach of a contract between his employer and a third person, he does not thereby become liable to an action of tort.
McFadden v. 481782 Ontario Ltd. – the effect of this exception is to excuse directors if acting “under the compulsion of a duty to the corporation.” Authorized payments to themselves as shareholders that put corporation in position where could not fulfil its contractual obligations to the employee. Employee successfully sued.
Aiken v. Regency Homes Inc. – liable where acting outside the scope of their authority. Induced breach of contract in part by directing corporate funds to pay their personal expenses. The court found that their actions were “mala fides and outside the legitimate scope of their authority over the affairs” of the corporation.
ADIGA – compulsion of duty defence is available only where the contract that is breached is one to which the corporation for which the managers work is a party. Never available where contract is between two third parties.
Compulsion of duty defence not applicable in the context of other torts, including deceit and negligent misstatement.
Toronto Dominion Bank v. Leigh Instruments Ltd. (trustee of) – court refused to strike out statement of claim against directors and officers alleging they had fraudulently given false information t the bank. No excuse that obeying orders of the employer/act was expressly ratified by the corporation.

VII - SHAREHOLDERS' REMEDIES (a) Introduction Casebook pp. 859-861

Oppression remedy augments the substantive rights of shareholders by expanding upon the range of matters that would be actionable at common law/under OBCA s. 134/CBCA s. 122 for breach of fiduciary duties.
Derivative actions v. personal actions v. oppression remedies.
Derivative action may be commenced where all shareholders are affected equally and the real plaintiff is the corporation.
Personal action may be commenced where a shareholder(s) have some grievance peculiar to herself and not shared equally by other shareholders.
Oppression remedy straddles the line.
Creditors are given standing under the oppression remedy.

VanDuzer pp. 402-404

Shareholders remedies complement procedural protections for shareholders such as ability to vote for election of directors and to put matters on the agenda for discussion at shareholder meetings through shareholder proposals.
Two main procedures: derivative action, under which shareholder may seek court’s permission to initiate a lawsuit on behalf of the corporation, and the oppression action, which allows shareholders to seek relief where actions of the corporation or its directors oppress the shareholder’s interest.
In addition, there are corporate law rights that belong to shareholders personally. These may be enforced by shareholders through an ordinary civil suit.
Oppression remedy represents emerging substantive standard of behaviour that complements and overlaps with directors’ duties.
Other remedies:

o Orders directing compliance with the Act, a corporation’s articles, or a unanimous shareholders’ agreement, and orders to restrain a breach of these requirements (CBCA s. 247). o Orders requiring the rectification of corporate records (CBCA s. 243). o Orders to investigate the affairs of the corporation (CBCA ss. 229-37). o The right of a shareholder to dissent from certain proposed fundamental changes to the corporation and to have her shares bought by the corporation for “fair value” (CBCA s. 190). o Termination of the corporation’s existence (CBCA s. 214).

(b) Personal Action Casebook pp. 885-892, 897-903

Interference by the company with the rights of certain of the shareholders. Personal action may be more readily granted where one group of shareholders clearly seen as taking action that deprives another of their rights; also where directors, acting for a collateral purpose cause the corporation to act in a manner that deprives a group of shareholders of their rights.
Where the directors cause the company to do certain acts primarily of an internal nature and which primarily affect shareholders (issue shares, refuse transfers, solicit proxies) the directors assume a fiduciary obligation to the company as a whole, that is to the shareholders as a general body to act with an even hand and in good faith. Shareholders may sue in individual capacities for a declaration of their rights/to restrain the company from acting.
Ultra vires or illegal acts – both personal and corporate right of action. Shareholder may properly sue to restrain company, or company may proceed against directors to restrain them from taking the proposed action.
Breaches of proxy solicitation give rise to personal action.
Goldex Mines Ltd. v. Revill –
Goldex Mines was a shareholder of Probe Mines. Goldex alleged breach of duties – did not specify to whom owed.
Where the same acts of directors or of shareholders cause damage to the company, is a shareholder’s cause of action for the wrong done to him derivative?
In one sense, every injury to a company is an injury to its shareholders.
If the injury is not incidental to an injury to the corporation, an individual cause of action exists.

VanDuzer pp. 404-406

Owning a share carries with it right to vote, right to timely and informative notice of meetings, right to inspect books and records of the corporation. Other personal rights may derive from corporate statute, articles, by-laws, common law, shareholder’s agreement.
In some circumstances a shareholder may commence a derivative action on behalf to there corporation for breach of duties or any other obligation to the corporation where corporation is not taking action to pursue its own rights.
General test developed to ascertain whether misconduct was a breach of a personal obligation to shareholders or an obligation to the corporation was to ask if the injury to the shareholders was merely incidental to an injury to the corporation (Goldex Mines Ltd. v. Revill).
However, not possible to draw clear line: as holder to residual claim to assets of corporation, shareholder’s interest will be substantially affected by any injury to the corporation.
Hercules Management Ltd. v. Ernst & Young – negligently prepared audit report on which shareholders had relied to their detriment was not a breach of an obligation owed to the shareholders individually, but collectively, which Court equated with obligation to corporation. As such, could not be the basis of a personal action by shareholders.
With enactment of oppression remedy, need to characterize a claim as personal as a condition of initiating an action on a shareholder’s behalf has been eliminated. Relief from oppression is to be available whether or not the claim is essentially personal or derivative, so long as the prescribed standard of behaviour has been violated. Almost all shareholder claims now brought using oppression remedy.

(c) Derivative Actions on Behalf of the Corporation Casebook pp. 861-867

Where corporation has been injured by some wrongdoing, shareholder arguably also has been injured through diminution in value of his or her shares traceable to corporate injury.
Shareholder can bring action which derives for corporation’s asue of action.

Common Law: The Rule in Foss v. Harbottle

Foss v. Harbottle – two shareholders brought action alleging sale by directors of their own property at inflated values to the company. The wrong alleged was a wrong to the company and the plaintiffs had no standing; corporate pleasure was to be determine by shareholders in a general meeting.
Various other developments occurred which increase power of directors.
Edwards v. Halliwell – exceptions to the rule: ultra vires act; fraud on the minority; special majorities; personal rights.

Statutory Derivative Action

CBCA creates a statutory derivative action in s. 239.
S. 239(1) – complainant can “apply to a court for leave to bring an action in the name and on behalf of a corporation or any of its subsidiaries, or intervene in an action to which any such body corporate is a party for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate.
S. 238 – complainant – a current or former registered holder or beneficial owner of a security of a corporation or any of its affiliates; a current or former director or officer; the Director; anyone else the court considers a proper person.
S. 239(2) – conditions that must be satisfied for the court to allow a derivative action to be brought: 14 days notice to directors; good faith; action must appear to be in interests of corporation.
S. 240 – specific orders the court may make in connection with derivative action – including but not limited to: an order allowing a person to control the action; an order directing the conduct of the action; an order that payment to a defendant go to security holders rather than the corporation; an order requiring the corporation to pay the complainant’s legal fees.
S. 241(1) – shareholder approval not conclusive but may be taken into account.
S. 242(2) – requires court’s approval of any settlement or discontinuation of an action.
S. 242(4) – allows court to order corporation to pay interim costs of complainant.

VanDuzer pp. 406-412

Foss v. Harbottle – general rule that only a corporation may sue for an injury to it. Also interpreted as saying that the shareholders could approve or ratify breaches of duty to the corporation and, as a result, inappropriate for courts to interfere were action could be ratified by majority.
Only four situations in which a minority shareholder could sue for an injury to the corporation:

o Fraud on the minority – limited to situations in which the management of the corporation was giving corporate assets away. o Ultra vires acts – where act complained of was outside limited powers of corporation or was illegal, the majority was not permitted to ratify it and minority shareholders could be permitted to sue on behalf ot the corporation. o Defect in majority approval – in situations where the relevant corporate legislation or the articles of the corporation required approval by a specified majority, and approval at that level not properly obtained. o Personal right – in situations where personal rights of a shareholder were infringed could bring personal action.

Under CBCA automatic curative effect of ratification has been abolished (s. 122(3); OBCA s. 134(3)). Courts may still take shareholder approval into account when deciding whether to permit a shareholder to bring a derivative action. E.g. where majority of disinterested shareholders who have received appropriate disclosure approve and action is not manifestly harmful to corporation.
Conditions in Foss v. Harbottle replaced by a scheme allowing shareholders to proceed with derivative actions subject to court approval. Approval will be given if:

o The complainant gives not less than fourteen days’ notice to the directors of the corporation of her intention to apply for leave to bring an action if the directors fail to do so; o The complainant is acting in good faith; o The action proposed to be initiated by the complainant appears to be in the interests of the corporation (CBCA s. 239).

Notice does not mean specification of all legal bases on which claim might be made, or facts or evidence on which shareholder relies. General information disclosing nature of claim sufficient (Bellman v. Western Approaches Ltd.).
Failure to give notice not necessarily fatal for an application for leave if obvious that directors will fail to act (Winfield v. Daniel).
Application will be considered to meet “good faith” requirement so long as bad faith is not shown. If application is shown to be frivolous or vexatious it will not be granted.
Oppression action and derivative action on same facts does not make it vexatious (Bellman).
Does not matter that complainant has personal interest in outcome so long as that interest is consistent with the corporation’s interest (Archibald v. Sutherland).
Motivation of potential tactical advantage to be gained against directors in another proceeding instead of gain by corporation is not good faith (Vedova v. Garden House Inn Ltd.).
Requirement that action appears to be in best interests of corporation very law threshold of merit. Less onerous than establishing a prima facie case. Leave should be denied only if it appears that action is bound to be unsuccessful (Marc-Jay Investments Inc. v. Levy).
Some recent cases have suggested standard is an “arguable case” (Archibald v. Sutherland).
Claims that a corporate asset has been sold at under value, that the directors were subject to a conflict of interest in relation to a particular transaction, that mortgage should have been found to be held in trust for corporation have all been claims that appear to be in interests of corporation.
See OBCA s. 249.
CBCA expressly provides that shareholder approval/possibility of is not determinative of whether a derivative action may proceed (CBCA s. 242(1)).
Once application is made, it cannot be stayed, discontinued or settled without approval of the court (CBCA s. 242(2)). Approach of court will be to ask if potential rewards of successful litigation with its attendant risks and costs are outweighed by benefits of the proposed settlement (Sparling v. Southam Inc.).
Contrary to usual rules of civil procedure, shareholder making application for leave cannot be required to give security for corporation’s costs (CBCA s. 242(3)).
Court may award impecunious shareholder interim costs to assist her to pay counsel to proceed with an action, though may be required to repay if unsuccessful (CBCA s. 242(4)).
Wilson v. Conley – such costs in derivative actions will routinely be awarded.
Intercontinental Precious Metals v. Cooke – reluctant to order interim costs where doubt regarding merits of complainant’s claim.
Barry Estate v. Barry Estate – whether interim costs should be awarded depended on (i) the strength of the complainant’s case; (ii) whether in the absence of an order the complainant’s financial circumstances would prevent the complainant from bring the case and (iii) a “connection between the conduct complained of and the complainant’s financial inability”.
CBCA permits applications for leave to be brought by a “complainant” (not just shareholders). Defined to mean:

o A current or former registered or beneficial holder of securities of the corporation or any affiliated corporation; o A director or officer of the corporation or any of its affiliates; o The director appointed under the CBCA; and o Any other person whom a court determines is a proper person to make an application (CBCA, s. 238).

Notwithstanding this has been used primarily by shareholders – none to other identified complainants have made a successful application to date.
In several cases, a creditor has sought a court order recognizing it as a complainant but few have succeeded. Committee of trade creditors of a corporation were held to be a proper person to be a complainant in Sammi Atlas Inc., Re. In its 2004 decision in Peoples Department Stores (Trustee of) v. Wise the SCC suggested that a creditor could be a proper person to bring a derivative action. Court noted that, where a corporation is prospering, a creditor’s interests as well as shareholders’ interests coincide with corporation’s interest. But when a corporation approaches insolvency and value of the shareholders claims approaches zero, the interests of creditors become more closely tied to the best interests of the corporation. Then creditors, not shareholders have stake in preserving assets of corporation. Courts should exercise discretion to grant creditors standing to bring derivative action of breach of fiduciary duty more readily in these circumstances.
Once court has given permission, CBCA gives court unlimited remedial discretion with respect to the conduct of the action (CBCA s. 240).
Complainant also defines the class of persons who may seek relief utilizing the oppression remedy. In many oppression remedy cases non-shareholder complainants including CBCA Director and creditors have sought and obtained relief.

Canada Business Corporations Act ss. 238-40, 242 Ontario Business Corporations Act ss. 244-6, 248

(d) Oppression Casebook pp. 909-935, 948-958

Cohen and Jenkins Committees (UK) highlighted four situations where remedy would be appropriate;

o Where controlling directors unreasonably refuse to register transfers of the minority’s holdings to force a reduced sale price for them to take advantage of; o Where directors award themselves excessive remuneration that diminishes the funds available for distribution as dividends; o To prevent the issuing of shares to directors/ others on special/ advantageous terms; o To prevent the refusal to declare non-cumulative preference dividends on shares held by the minority.

S. 241 is supplemented by s. 235.
A complainant may apply to a court for an order and where the court is satisfied that (a) any act or omission of the corporation or its affiliates effects a result, or (b) the business/affairs of corporation/affiliates are or have been exercised in a manner that is “oppressive or unfairly disregards the interests of any security holder, creditor, director or officer”, the court may make an interim or final order it thinks fit.
S. 241(3) – examples of such orders including orders restraining conduct complained of; amending articles/by-laws/USA; directing issue/exchange of securities; directing changes in directors; purchase of securities; payment; varying/setting aside transaction; production of financial records; compensation; rectification of records; liquidating or dissolving corporation; directing investigation; requiring trial.
S. 241(4)(b) – if amendment of articles/by-laws directed, not further amendment without court approval and no right of dissent and appraisal.
S. 241(6) – court may not order corporation to purchase securities of security holder if reasonable grounds to believe after payment corporation would be unable to meet its liabilities or realizable value of assets would be less than aggregate value of liabilities.
S. 242 – four procedural and evidentiary qualifications; fact that complained conduct has been approved by shareholders of corporation is not sufficient grounds to stay/dismiss application for relief, merely factor court may take into account. Court approval is required for any stay/discontinuance/dismissal under s. 241. Complainant is not required to give security or costs when making his application. Court may order corporation to pay complainant’s interim costs, including legal fees and disbursements, but complainant is accountable for these costs upon final disposition of application.
S. 241 – clearly applies to isolated acts. Extends availability of the section to complainants. Court has express power to authorize the bringing of proceedings in the name of the company against a third party on such terms as the court may direct – seen as complementary to derivative action under s. 240.
Ontario’s s. 248 differs in that it allows the applicant to seek relief from threatened acts of the company and thus has a prospective aspect. In addition, in the case of offering corporation, Ontario Securities Commission may apply to the court for a remedy.
There is significant overlap between common law and statutory fiduciary duties and the oppression remedy. Courts have routinely characterized directorial conduct that is a breach of fiduciary duty as oppressive.
Most courts have allowed actions of a derivative character to go forward under the oppression remedy, further confounding the action for breach of fiduciary duty and the action alleging oppression.
It has become common in any action alleging breach of fiduciary duty to also allege oppression.
Because (i) any breach of fiduciary duty is almost certain to be characterized as oppression (ii) the oppression remedy offers a broader substantive cause of action – fairness and no requirement that bad faith be shown – than the law of fiduciary duties (iii) the remedies available under the oppression remedy are broader than those available in an action for breach of fiduciary duty (iv) the courts have allowed derivative-type actions to proceed under the oppression provision, the oppression remedy is, little by little, swallowing up the law of fiduciary duties.
Statutory definition of complainant the same for both an oppression action and application for leave to commence a derivative action – s. 238 CBCA.
First Edmonton Place Ltd. v. 315888 Alberta Ltd. –
Complainant under s. (b)(i)? Contended that lease is a security of the corporation and that the lessor is the beneficial owner of the security. Security includes debt obligation defined as bond, debenture, not or other evidence of indebtedness or guarantee of a corporation whether secured or unsecured”. Creditor can be “complainant” only if it holds or is the beneficial owner of a security of the corporation and if the security is of a type capable of being registered under 88.2(2) or (5).
Complainant under s. (b)(iii)? (a person who in the discretion of the court is a proper person…). In the case of a creditor who claims to be a proper person, the criterion to be applied would be whether he or it would be a person who could reasonably be entrusted with the responsibility of advancing the interests of the corporation by seeking a remedy to right the wrong allegedly done to the corporation.
In terms of oppression remedy, there are two non-exhaustive circumstances in which justice and equity would entitle creditor to be a proper person: first if the act/conduct of the directors/management which is complained of constituted using the corporation as a vehicle to commit a fraud upon the applicant. Second if the act or conduct of the directors or management which is complained of constituted a breach of the underlying expectation of the applicant arising from the circumstances in which the applicant’s relationship with the corporation arose. E.g. did circumstances include an element which prevented the creditor from taking adequate steps when he entered into the agreement to protect his interests against the occurrence of which he now complains? Did he entertain an expectation that assuming fair dealing, his chances of repayment would not be frustrated by the kind of conduct which subsequently was engaged in by the management of the corporation? If evidence established expectation, next question would be whether expectation was, objectively, a reasonable one.
Employees – see below – free standing employees have not been successful but if loss of employment intrinsically related to status as shareholder have been successful.
Substantive scope of oppression action – two English cases on scope of oppression – Elder v. Elder & Watson Ltd. – the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely; Scottish Cooperative Wholesale Society Ltd. v. Meyer – burdensome, harsh and wrongful; conduct that falls short of actual illegality/invasion of legal rights but that can nonetheless be described as reprehensible.
CBCA include not only oppressive actions but also any action that is unfairly prejudicial or that unfairly disregards the interests…
Ferguson v. Imax Systems Corp. –
Founding shareholders were appellant, her husband, two other couples. After divorce, company tried to squeeze-out appellant; she was discharged, refused to declare dividends beyond those required, company proposed to cancel and convert all shares of the class she owned to non-voting, limited-dividend shares.
When dealing with a close corporation, the court may consider the relationship between shareholders and not simply legal rights as such. In addition must consider bona fides of corporate transaction in question. Each case turns on its own facts.
The resolution authorizing the change in capital is the culminating event in a lengthy course of oppressive and unfairly prejudicial conduct to the appellant. The company has not acted bona fides in exercising its powers to amend.
Viewed as family venture, she had investment in shares which she and her husband held.
Diligenti v. RWMD Operations Kelowna Ltd. –
“unfairly prejudicial” is broader in its meaning than oppressive.
Judge was prepared to infer existence of agreement to participate in management from the circumstances of the partnership and the nature of the relationship between the parties.
Thus removal as director constituted unfair prejudice.
Diversion of profits might also fit within oppression provision.
Westfair Foods Ltd. v. Watt
Concept of reasonable expectations.
Change in policy whereby earnings distributed as dividends – claimed oppressive to holders of class A shares who had interest in retained earnings and also on basis of procedural shortcomings surrounding the change in policy.
Provision is a way for Parliament to say that classes mentioned in the act are to be treated fairly in the sense of justly. Adjectives like unfair, oppressive, prejudicial cannot be put into watertight compartments.
One clear principle is that courts regulate voluntary relationships by regard to the expectations raised in the mind of a party by the word or deed of the other, and which the firs party ordinarily would realize it was encouraging by its words and deeds. This is what we call reasonable expectations or expectations deserving of protection. All the words and deeds of the parties are relevant to an assessment of reasonable expectations, not necessarily only those consigned to paper and not necessarily only those made when the relationship first arose.
In this case, the decision on the “substantial” issue was correct, but various matters exemplify an unfair disregard for the shareholders, so forced purchase was an appropriate remedy.
Bad faith – statutory fiduciary duty would appear to require an absence of bona fides e.g. CBCA s. 122(1)(a). If oppression remedy is based on results of conduct rather than motive/intentions, its substantive scope is much broader than the law of fiduciary duties. Bad faith not mentioned in statutory provision.
Brant Investments Ltd. v. KeepRite Inc. – bad faith or want of probity in actions is unnecessary in application under s. 234 – both on literal reading of provision and requirement of lack of bona fides would unnecessarily complicate application of provision and add a judicial gloss that is inappropriate given the clarity of the words used.
Cost Orders Under the Oppression Remedy – courts have power to award interim costs under s. 242(4) CBCA.
Alles v. Maurice – plaintiff was director who had spent a great deal of money on valuators and lawyers in attempting to fulfil her obligations. Indicated she would not continue if company did not pay her interim costs. Judge noted that in Wilson v. Conley three requisites to award of interim costs: (1) that Applicant be in financial difficulty, (2) that financial difficulty arise out of alleged oppressive actions of Respondents, (3) that Applicant has made out strong prima facie case. Blair J. expressly declined to follow second and third criteria – it is inability to fund an otherwise meritorious lawsuit that the power under s. 248(4) OBCA to order costs is directed. So simply need to establish case of sufficient merit to warrant pursuit and applicant genuinely in financial circumstances which but for order would preclude claim form being pursued.
Remedies Under the Oppression Remedy – most common remedy share purchase – order directing corporation or any other person to purchase securities from security holder. E.g. where lost confidence in each other. But where not sufficient funds more appropriate to grant winding-up order.
Second most common remedy residual remedy including specific performance, constructive trust, ordering directors’ meeting and valuation of assets. Some remedies grant compensation of aggrieved person, most often creditor.
Naneff v. Con-Crete Holdings Ltd. –
Father and two sons equal holders of all equity in business; chucked out one of the sons, removed him as officer, excluded him form participation in management, cut off income. Trial judge ordered public sale of business.
Court has broad discretion to make any order it thinks fit. When that broad discretion is given to court of first instance, appellate court’s power of review is quite limited – only entitled to interfere where it has been established that lower court has erred in principle or its decision is otherwise unjust.
Fact that business is family business must be kept in mind as bears directly upon the reasonable expectations of the principles.
Result of exercise of discretion must be rectification of oppressive conduct; if any other result remedy not authorized by law.
Also under s. 248(2) rectification of matter complained of can only be made with respect to person’s interest as a shareholder, creditor, director or officer. Must establish that it is interest as shareholder etc. that is effected, not a personal interest.
Son expected to ultimately control business with brother, but must have expected father to retain control until death/retirement, and could not have expected paternal bounty to continue if father no longer considered him a dutiful son. Moreover, remedy punitive to Mr. Naneff who had retained right to control business. Remedy also wrong in that attempts to preserve son’s interest as family member as well as shareholder, and could not have expected former to be preserved in the circumstances.
Just remedy would be to acquire son’s shares of the companies at fair market value without minority discount.

VanDuzer pp. 412-451

Traditional remedies such as the derivative action for injuries to the corporation have been significantly displaced by the flexible and procedurally simple oppression action.
Not only available to shareholders and CBCA provides that courts have a discretion to allow anyone who it thinks is a “proper person” to be a complainant for the purposes of bringing an oppression action.
Key provisions: CBCA ss. 238, 241, 242; OBCA s. 248.
S. 238 defines complainant (see above).
S. 242 deals with interim costs and other procedural issues (see above).
Substantive standard for oppression is established by s. 241. For convenience, “oppression” will used as a short-hand expression, although standard extends to all conduct “that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer.

Interim Costs

As in derivative actions, complainant may apply for award of interim costs. However, approach much more cautious (complainant seeking relief for itself rather than corporation).
S. 242(4) CBCA – in any application for relief from oppression, the court may at any time order the corporation/its subsidiary to pay to the complainant interim costs including legal fees and disbursements, but complainant may be held accountable for such interim costs on final disposition of action.
Wilson v. Conley – claimed to be oppressed by respondent shareholders as a result of excessive travel, excessive remuneration to respondents, complete discontinuance of dividends despite profit increase.

o Following conditions are applicable:

Applicant is in financial difficulty;
Financial difficulty arises out of the alleged oppressive actions of the respondents;
Applicant has made out a strong prima facie case.

o Based on application and applicant’s affidavit, these requirements had been met.

Alles v. Maurice – minority shareholder complained of similar acts of oppression. First condition was met. With regards to second condition, disagreed that financial situation must be caused in all cases by alleged conduct. Sufficient if financial difficulties resulted from drain on resources due to lawsuit. Third condition also unduly onerous – applicant only need establish that there is a case of sufficient merit to warrant pursuit.
This approach has been followed in subsequent cases, although some uncertainty regarding strength of case.
Peretta v. Telecaribe – “an arguable case with a reasonable chance of success”.
What is clear is that financial difficulty of complainant must be such that would be unable to continue litigation without interim cost order.

Who may Claim Relief

Creditors, employees, even the corporation.
Statutory Complainants – Security Holder s. 238(a).
Registered holder or beneficial owner of a security of the corporation or any of its affiliates.
Beneficial ownership is defined s. 1(1) CBCA to include ownership though any trustee legal representative, agent or other intermediary.
Security means a share of any class or series of shares or a debt obligation of a corporation and includes a certificate evidencing such a share or debt obligation.
Debt obligation means a bond or debenture, note or other evidence of indebtedness or guarantee of a corporation whether secured or unsecured.
Courts have given effect to the express reference to “affiliates” in s. 238(a) – a minority shareholder of an affiliate of the corporation in respect of which oppression was alleged may be a complainant (Moriarity v. Slater).
Former complainants are shareholders within the meaning of s. 238(a) (Private Equity Management Co. v. Vianet Technologies). For former shareholder to be successful, oppression must be occurring at the time the application for relief is brought (Michalak v. Biotech Electronics Ltd.).
A person who was a shareholder continues to have status as a complainant under s. 238(a) even after the person has invoked her dissent and appraisal rights under s. 190(11) CBCA, with the result that by virtue of s. 190(11) the person loses all rights as a shareholder other than the right to be paid fair value for her shares (Brant Investments Ltd. v. KeepRite Inc.).
Several cases have addressed whether applicants claiming a right to become security holders are complainants.
Csak v. Aumon – applicants with a contractual claim to be issued shares, being denied by controlling shareholder of corporation, were beneficial owners of securities for the purposes of s. 238(a).
Csak v. Aumon – in the absence of some reason inherent in the legislation or policy, the meaning of “beneficial owner” should be interpreted broadly. Also definition of security – means more than being the holder of a certificate, and the remedial provisions of CBCA contemplate on a finding of oppression “an order directing an issue… of securities.” (s. 241(3)(d)). Court added that it is not a bar to complainant status that the applicant’s claim to be a beneficial owner of shares is disputed. Status is to be dealt with within the application and not as a condition precedent. Any issues of fact regarding the claim to be issued shares could be dealt with through a process called a “trial of an issue” as part of the oppression proceeding and requiring a party to establish its status would multiply litigation. Person entitled to status as “beneficial owner” under s. 238(a) does have interest protected under s. 241(2), despite the fact that it refres to “security holder” not beneficial owner.
Always possible for court to grant complainant standing to anyone it deems to be proper person to be a complainant (CBCA s. 238(c)).
Nothing precludes majority shareholder from commencing an oppression action as a complainant. Also nothing got limit application of statute to shareholders in public corporations.
Some debt holders are also entitled to bring oppression actions. Reference to registered owners in s. 238(a).
First Edmonton Place – court held that only holders of registerable obligations have status; unpaid landlord was not a security holder.
Debenture holders have been recognized as having standing as security holders (BCE).
Some holders of debt that is not registerable have been successful in getting courts to exercise their discretion under s. 238(d) (Metropolitan Toronto Police Widows and Oprhans Fund v. Telus Communications Inc.).
Directors and Officers and the Director, ss. 238(b) and (c).
Courts have expressed reluctance to consider wrongful-dismissal claims (Naneff v. Con-Crete Holdings Ltd.). Applicant was employee, director, officer and shareholder. Family tried to exclude him due to personal life. Trial judge held that although in normal circumstances wrongful dismissal could not provide standing, in this case dismissal was part of an overall pattern of oppression. Court of appeal rejected this analysis and held that court could only protect interests of complainant in capacity as shareholder/director/officer.
Murphy v. Phillips – general manager of car dealership who was not a shareholder was held to be an officer and given standing to pursue wrongful dismissal claim.
However, Naneff confirmed in Clitheroe v. Hydro One Inc.
Where execution of wrongful dismissal judgment is being frustrated by directors acting in oppressive way, employee may be given standing to pursue an oppression claim (Downtown Eatery (1993) Ltd. v. Ontario).
Discretionary Complainants, s. 238(d).
Any other person who in the discretion of a court is a proper person to make an application.
Most creditors can seek relief against corporations that have obligations to them by suing on their contracts with the corporation. Other creditors may have a judgment against the corporation for some other legal wrong committed by the corporation, like a tort. If creditors already have a legal basis for claim, oppression action appealing due to remedial flexibility.
Courts have been reluctant to exercise their discretion to permit an oppression action to be brought by a creditor, notwithstanding express reference in s. 241(2).
Royal Trust Corp. of Canada v. Hordo – debt actions should not be routinely turned into oppression actions. Courts discretion should not be used where creditor’s interest is too remote, complaints have nothing to do with circumstances giving rise to debt, or not proceeding in good faith. Status should also be refused where creditor is not in a position analogous to that of the minority shareholder and has no particular legitimate interest in the manner in which the affairs of the company are managed”.
First Edmonton Place – to grant complainant status to creditor like landlord there must be some evidence of oppression. Two kinds of circumstances where this would occur (others possible):

o An act of the directors or management of the corporation that constitutes using the corporation as a vehicle for committing fraud upon the applicant creditor; and o An act of the directors or management of the corporation that constitutes a breach of the underlying expectations of the applicant arising from the circumstances in which the applicant’s relationship with the corporation arose (e.g. act of directors in the circumstances in which the credit was granted that prevented the creditor from taking adequate steps t protect its interests against the occurrence of the conduct in respect of which it was now claiming oppression).

Most creditor cases appear to be based simply on difficulty facing the creditor in enforcing its claim. Generally courts have granted relief where there has been some action by the corporation which has had the effect of rendering the corporation unable to perform its obligations.
R. v. Sands Motor Hotel Ltd. – ability of Crown to recover income taxes owed by corporation was impaired by dividends paid to shareholders.
Canadian Opera Co. v. 670800 Ontario Inc. – creditor had purchased car but not obtained possession; funds paid had “gone south” to associate of controlling shareholder.
Prime Computer of Canada Ltd. v. Jeffrey – judgment creditor unable to recover due to excessive salary payments to controlling shareholder.
Some courts have held that creditor must have been creditor at time oppression occurred (Trillium Computer Resources Inc. v. Taiwan Connection Inc.).
Devry v. Atwoods Furniture Showrooms Ltd. – not appropriate to give a judgment creditor standing as complainant where allegedly oppressive dividends paid before creditor became judgment creditor.
Levy-Russell Ltd. v. Shieldings Ltd. – creditor has reasonable expectation that a corporation will not engage in conduct during as well as after the trial of a civil action that would render recovery impossible.
In most cases where complainant status granted creditor has already obtained a civil judgment but this is not an absolute prerequisite. Courts have expressed sympathy to involuntary creditor who could not negotiate contractual protections against oppressive behavior (Levy-Russell).
Peoples Department Stores may herald new openness to granting complainant standing to creditors.
Advantages for creditor of oppression action over complainant action: may be commenced by way of application without pleadings and discovery required for civil action; discretionary powers granted to court are much broader than those available in civil action.
Two Alberta decisions have held that corporation itself may be complainant.
Calmont Leasing Ltd. v. Kredl – held that corporation was a proper person to be complainant where all shareholders except respondent were joined as plaintiffs in action.
Canada (Attorney General) v. Standard Trust Co. – refused to grant leave to trustee in bankruptcy on grounds he succeeded to rights of corporation and transaction had been unanimously approved by board of corporation such that corporation could not have claimed oppression.
Dylex Ltd. (Trustee of) v. Anderson – refused to strike out claim by trustee in bankruptcy alleging oppression of the interests of creditors by action of corporation and directors.
Cases seem to suggest action might be permitted where the corporation is in effect representing the interests of others like shareholders and creditors.
Also, even if the corporation were not permitted to seek relief from oppression directly the remedies expressly enumerated in s. 241(3) include “an order compensating an aggrieved person” which would apparently include the corporation in any event. So shareholder might be able to initiate oppression action and seek relief both for themselves and corporation.
The Substantive Standard
Oppression remedy is intended to protect not just strict legal rights of shareholders but also their interests and expectations (Westfair Foods Ltd. v. Watt).
820099 Ontario Inc. v. Harold E. Ballard Ltd. – shareholder interests would appear to be intertwined with shareholder expectations. Not personal expectations but expectations which could be said to have been (or ought to have been considered as) part of the compact of the shareholders.
Westfair Foods Ltd. v. Watt – reasonable expectations of the shareholders relevant to a determination of oppression should not be limited to those existing when the relationship first arose. They may change with the circumstances. Expectations may be based on public pronouncements, representations in investment agreements, commitments in shareholder agreements.
In assessing reasonable expectations, a court should take into account not just circumstances unique to relationship between parties but also legal rules that govern how directors and corporations are to operate, including majority rule and grant of management power to directors.
BCE v. 1976 Debenture Holders – SCC addressed nature of oppression remedy. Confirmed fundamental role of reasonable expectations in defining when oppression had occurred but provided much more developed, analytical framework for making determinations about oppression.

o Is there evidence to support reasonable expectation asserted by complainant? All stakeholders have reasonable expectation to be treated fairly. Look at following factors:

Commercial practice;
The nature of the corporation including size and structure;
Relationship between the parties including their past practices;
Agreements, like the shareholders’ agreements, and representations to stakeholders or the public such as disclosure made under securities legislation;
Steps the complainant should have taken to protect itself;
The fair resolution of conflicting interests between stakeholders.
Normal business practices; size of corporation relevant to standard applied; in small corporations personal relationships may result in reasonable expectations. Continuation of past practices often will be reasonable expectation but not always. Reasonable to expect directors to resolve conflicts in manner that treats individual stakeholders equitable and fairly.

o Was the expectation breached by conduct that constituted oppression of, unfair prejudice to or unfair disregard of an interest protected under the oppression remedy?

In reviewing how this is done, courts must grant the degree of deference required by the business judgment rule.
Once breach of reasonable expectations is found, the court must determine if the breach is sufficiently serious to constitute oppression considering the statutory language used to define the circumstances in which relief is available.
The statutory language: remedy is available on proof of an at or omission in respect of a corporation that is “oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer.
Scottish Co-operative Wholesale Society Ltd. v. Meyer – meaning of oppression – majority power exercised in a manner burdensome, harsh and wrongful. Oppression takes many forms. It suggests a lack of probity and fair dealing in the affairs of the company to the prejudice of some portion of its members.
More recently courts have determined that unfairly prejudicial and “unfairly disregards” cerate a somewhat lesser standard.
Brant Investments Ltd. v. KeepRite Inc. – finding of bad faith not required although would be highly probative. There will be few cases where there has not been some want of probity on the part of the corporate actor where a remedy will be appropriate.
WindRidge Farms Ltd. v. Quadra Group Investments Ltd. – sufficient if conduct complained of had an effect contemplated in the statute even if not caused intentionally.
BCE – unfair prejudice would include squeezing out minority shareholder and preferring some shareholders with management fees. “unfair disregard” is the least serious of the three injuries and would include improperly reducing a shareholders dividend. But three standards will often overlap in practice.
Westfair Foods Ltd. v. Watt – rejected idea that the different terms could sensibly be given distinctive meanings favoring general fairness standard instead. Standard must be based on values that have gained wide acceptance as principles adopted in precedent. Identified the determination of fairness based on the reasonable expectations of the parties considering all their words and deeds as a principle running through all the cases on oppression.
Principles the courts have developed to determine when conduct of corporation/directors is oppressive.
Indicia of oppressive conduct (Arthur v. Signum communications Ltd.) –

o Lack of a valid corporate purpose for the transaction (paying excessive salaries, directors taking corporate assets); o Failure on the part of the corporation and its controlling shareholders to take reasonable steps to simulate an arm’s-length transaction; o Lack of good faith on the part of the directors of the corporation; o Discrimination among shareholders with the effect of benefitting the majority shareholder to the exclusion/detriment of minority shareholders; o A plan or design to eliminate a minority shareholder.

Actions of directors:

o Essence of oppression remedy is a claim about behavior by the corporation. Directors’ actions are oppressive only when they are acting in their capacity as directors. Claims that directors breached obligations owed personally to the complainant are not properly the subject of an oppression action (Budd v. Gentra Inc.).

Personal and derivative claims:

o Can complainant seek relief from behavior that is breach of the fiduciary duty through the oppression remedy? o Most courts rejected arguments that claims for relief from oppression should be thrown out because the injury to the shareholder was incidental to an injury to the corporation citing broad scope of statutory language creating the oppression standard (see e.g. Waxman v. Waxman). o Contrary view in a few cases e.g. Pappas v. Acan Windows Inc. Where applicant sought derivative and personal relief and leave of the court had not been obtained to commence a derivative action the court had to exercise a discretion regarding whether to permit the claim for personal relief under the oppression remedy to proceed. Claim should not be permitted to proceed if the claim overall was “so saturate by derivative claims that it cannot be allowed to stand”. o This approach inconsistent with clear weight of authority permitting shareholders to claim relief from oppression regardless of whether the conduct could be characterized as injury to corporation. In most cases, courts have asked only if behavior falls within prohibition in statute. o BCE – SCC confirmed no barrier to bringing an oppression claim in relation to actions that are a breach of fiduciary duty. In fact, a director’s fiduciary duty and other duties are relevant to a finding of oppression. Fiduciary duty is a reasonable expectation and consequently a breach can be invoked by complainant in support of oppression claim. Sometimes impact of fiduciary breach contrary to reasonable standards may not rise to the standards set in the oppression provision and may not result in granting of relief. o It may be that reasonable expectation that fiduciary duty be complied with could also function as a limit on reasonable expectations of a particular stakeholder – can’t expect directors to favor its interest where unfair to interests of other stakeholders. At the same time compliance with fiduciary duty does not mean no oppression may be found.

What interests are protected?

o S. 241 identifies the interests that may not be oppressed as those of “any security holder, creditor, director or officer of the corporation”. o Must the interests alleged to be oppressed be those of the complainant? o Themadel Foundation v. Third Canadian Trust Ltd. – complainant must have some legitimate interest in pursuing oppression claim based on some relationship with the people who are oppressed. o Csak v. Aumon – if beneficial owner has status under s. 238(a), interests are deserving of protection under 241, despite use of the words security holder. o PMSM Investments Ltd. v. Bureau – although shareholder of an affiliate of a corporation had status as a complainant under s. 245 OBCA, it could claim relief from oppression only if it had interest as a security holder etc. in the corporation that was oppressed.

Oppression and shareholders’ agreements

o Cases have held that breach of shareholders’ agreement may be oppressive e.g. Lyall v. 147250 Canada Ltd. o Compliance with strict terms of shareholders agreement does not guarantee that no oppression has taken place. o Deluce Holdings Ltd. v. Air Canada – even exercise of a share-purchase option in strict compliance with the terms of a shareholders’ agreement might be oppressive where part of a larger strategy to get rid of minority shareholder without regard to best interests of corporation. o But courts have been unwilling to find oppression where the alleged act of oppression is pursuant to a right accorded to the applicant to the alleged oppressor. o Beazer v. Hodgson Robertson Laing Ltd. – application for order directing purchase of shares was denied on the ground that the parties had addressed share purchases in the circumstances that had arisen in their shareholders’ agreement. o Deluce Holdings Ltd. v. Air Canada – arbitration provision in shareholders’ agreement not relevant because not subject matter of oppression action. But had arbitration been required for any dispute the result might have been different. o Armstrong v. Northern Eyes Inc. – very broad arbitration cause precluding access to oppression remedy upheld.

Oppression and Business Judgments

o Courts reluctant to second guess business decisions. o Brant Investments v. KeepRite – will not subject decision to microscopic examination although will ensure reasonably made. Remedies

Unlimited flexibility granted to court.
S. 241(2) – court is generally empowered to make an order to rectify the matters complained of.
S. 241(3) – court may make any interim or final order it thinks fit. Lenghty shopping list of orders follows.
Share Purchase:

o Appropriate where parties have lost confidence in each other (Redekop v. Robco Construction Ltd.). o May not be appropriate if neither corporation/controlling shareholders in a financial position to purchase. Liquidation may be only option (Millar). o Not appropriate where oppression consisted of failure to comply with various obligations under governing corporate statute – order to comply sufficient (Jackman).

Liquidation and Dissolution:

o Stel-Van Homes Ltd. v. Fortini – winding-up of family business ordered where one party had lost all confidence in other. But reluctant to use; reasons for introducing flexible regime was to permit relief without winding up (Classic Organ Co. v. Artisan Organ Ltd.).

Remedies against Shareholders and Others:

o Courts have been willing to grant remedies directly against shareholders at the instance of creditors or in applications brought by other shareholders. Shareholders have been made to repay money to corporation and to pay creditors directly. o Courts willing to make orders against any person where doing so is necessary to relieve the oppression (Chiu v. Chiu).

Compliance:

o In case where there was a failure to act in way required by governing corporate statue (which effectively precluded shareholder form corporation) compliance with statute has been ordered (Millar). o Compliance orders may also be obtained by application under s. 247 CBCA.

Other kinds of relief:

o Orders directing amendment of by-laws, o Replacement of management, o Appointment of receivers, o Amendment of shareholder agreements, o Investigations, o Creation of pre-emptive right.

Canada Business Corporations Act ss. 239-242 Ontario Business Corporations Act ss. 246-249

(e) Compliance and Restraining Orders Casebook p. 958-965

S. 247 CBCA allows a complainant (as defined in s. 238) or creditor to seek a compliance or restraining order against a variety of persons relating to abrogations of the statute, regulations, articles, by-laws, or a USA. To similar effect is s. 235 OBCA but with noteworthy addition of shareholder to the list of persons against whom a compliance or restraining order may be obtained.
Goldhar v. Quebec Manitou Mines Ltd. –
Sought order declaring void the delegation by board of directors to three of themselves to vote shares; order declaring void proxy exercised by respondent at meeting of another corporation; order directing that votes cast at that meeting be recounted.
Difficulty in that order sought against corporation which was not party to the proceedings.
Can directors of A properly maintain themselves in positions of influence and advantage in B by virtue of A having working control through share ownership of B which has in turn working control of A?
Argued that situation is a breach of directors’ fiduciary duties and duty of care.
Respondents argue that s. 261 was not intended to provide a summary means of trying this kind of question. Court inclined to agree with this proposition.
Claimants who seek to enforce claims of breach of duties must do so in derivative action not compliance order.
Caleron Properties Ltd. v. 510207 Alberta Ltd. – departed from reasoning in Goldhar to say that complainant not precluded from relying on compliance order merely because may have concurrent standing pursuant to other sections.

VanDuzer p. 451-452

CBCA s. 247 (OBCA s. 253) allows complainant as defined in s. 238 CBCA or creditor to apply for a court order requiring compliance with or restraining a breach of the Act, regulations, corporation’s articles or by-laws, or USA. Order may be made against corporation, director, officer, employee, agent, auditor, trustee, receiver, receiver-manager, or liquidator of a corporation (OBCA expressly permits orders against shareholders).
Could be remedy in oppression action.
Provides summary procedure to deal with discrete problems of non compliance e.g. to require corporation to act on statutory rights of a dissenting shareholder to have his shares brought out or to have required disclosure made.
Compliance remedy cannot be used if making a finding of non-compliance requires a determination of complex issues of fact or law, e.g. claim that breach of fiduciary duty.
Creditors have right to make application (unlike derivative action, oppression remedies – need permission of the court).
Extends to wide range of people.

Canada Business Corporations Act s. 247 Ontario Business Corporations Act s. 253

(f) Rectification Orders Casebook pp. 965-967

Register of members is prima facie evidence of matters entered in it and hence of the fact of membership and extent of the holdings.
Under CBCA if name of person is alleged to be or has been wrongly entered or retained in or wrongly deleted or omitted from the register or other records of a corporation, the corporation, a security holder or any aggrieved person may apply to court for order that register be rectified (s. 243).
Director must be given notice of any application under this section and is entitled to appear to be heard.
Court may make any order it thinks fit including requiring the register or record to be rectified; restraining corporation form calling/holding meeting/paying dividend before rectification; determining right of part to have name entered, deleted etc. whether issue arises between tow or more security holders or between corporation and any alleged security holders; compensating a party who has incurred a loss.
S. 250 OBCA similar but does not require notice to director.
Rectification order may be made in connection with oppression action: CBCA s. 241(3)(k); OBCA s. 248(3)(k).
Other provisions provide for correction of other documents.

VanDuzer p. 452

Where person’s name has been wrongly entered or retained in a corporation’s shareholder register or other records, security holder/other aggrieved person may apply to court to have register/record rectified (CBCA, s. 243; OBCA s. 249).
Because records may be used to identify who should be given notice of meetings/receive dividends, court may also restrain calling/holding meeting/payment of dividend until rectified (CBCA, s. 243(3)).
Right to obtain rectification on expeditious summary basis is important because corporate registers and other records are in the absence of evidence to the contrary proof of what they disclose including share ownership (CBCA s. 257).

Canada Business Corporations Act ss. 243, 257 Ontario Business Corporations Act ss. 250, 266

(g) Investigations Required Reading: Casebook pp. 967-974

Effective exercise of shareholder remedies will frequently depend on possessing relevant information.
Report of inspector carrying out court-ordered investigation could provide the basis for further remedies in the form of a derivative action, relief from oppression application, compliance order or winding-up order.
Legal status of investigator’s report not entirely clear. Abraham v. Inter Wide Investments Ltd. and Re Ferguson and Imax Systems Corporation – investigators report supplied key facts relied on by court in oppression action.
Powers of investigator are administrative, not judicial/quasi-judicial.
Protections built in – inspectors may be authorized by court to conduct hearings and examine witnesses under oath. At any hearing, any person being investigated/examined has a right to be represented by counsel (CBCA s. 232(2); OBCA s. 164(2).
Aftex Products (Western) Ltd. v. Rothman (No. 2) – court held that major purpose for which investigation order was sought was to obtain information to be used in the final determination of the action at the expense of the company.
Courts have traditionally been reluctant to order an investigation, especially where it appears that some other source of information is available.
Re Baker and Paddock Inn Peterborough Ltd. – power of court to intervene in affairs of private corporation should be exercised with caution.
Investigation may be authorized in connection with an oppression action (CBCA s. 241(3)(m); OBCA s. 248(3)(m)).
Re Teperman & Sons Ltd. – court has wide discretion to order costs.
Consolidated Enfield Corp. v. Blair – in most cases, costs of investigation to be paid by corporation.

VanDuzer pp. 453-454

Part XIX CBCA – comprehensive scheme under which investigations into business and affairs of corporation/any of its affiliates may be carried out (s. 229-36).
Court may order investigation on application of security holder/CBCA Director where it appears to the court that any of the following grounds have been made out:

o The business of the corporation or any of its affiliates is or has been carried on with intent to defraud any person; o The business or affairs of the corporation or any of its affiliates are or have been carried on or conducted or the powers of the directors are or have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of the security holder; o The corporation or any of its affiliates was formed for a fraudulent or unlawful purpose; o Persons concerned with the formation, business, or affairs of the corporation or any of its affiliates have in connection therewith acted fraudulently or dishonestly (CBCA s. 229(2); OBCA s. 161).

Only necessary to show that it “appears” that any of these grounds exist.
Courts have held they will not exercise discretion lightly. Investigations should not be used to obtain information applicant could have obtained through the regular discovery process in a civil proceeding (Brown v. Maxim Restoration Ltd.).
Provisions regarding powers of inspectors; procedures for hearings; other procedural matters – CBCA ss. 229-36.
Jurisdiction to make rules for conduct of investigation – CBCA s. 230.
Investigators may be given wide range of powers, including power to compel witnesses to attend/be examined under oath.
Purpose of investigation is to find facts, not adjudicate legal issues.
Normally corporation pays (Consolidated Enfield Corp. v. Blair).

Canada Business Corporations Act ss. 229-37 Ontario Business Corporations Act ss. 161-67

(h) Corporate Purchase of Shares of Dissenting Shareholder Casebook pp. 975-977

Also called appraisal remedy.
May be less relevant in public companies.
But forces insider to tailor plans to minimise dissenters.
S. 185 OBCA; s. 190 CBCA.

VanDuzer pp. 454-458

Shareholders who dissent in relation to certain specified matters may require the corporation to buy their shares (CBCA s. 190; OBCA ss. 185, 185).
Votes on following changes trigger dissent and appraisal right:

o Amendment of the corporation’s articles to add, change, or remove: (i) any provision restricting or constraining the issue, transfer or ownership of shares of the class held by the dissenter; or (ii) any restriction on the business or businesses that the corporation may carry on; o Amalgamation with other corporations (other than short form amalgamations involving subsidiaries). o Continuation of the corporation under the laws of another jurisdiction, with the result that the corporation becomes governed under a corporation statue other than the CBCA; o The sale, leas or exchange of all or substantially all of the corporations property other tan in the ordinary course of business; o A going-private transaction or a squeeze-out transaction (CBCA s. 190(1)).

Also, holder of any shares entitled to vote separately as a class on any amendment to the articles in accordance with s. 176 has dissent and appraisal rights in relation to that vote (CBCA ss. 176 and 190(2)).
Court may also order that dissent and appraisal rights be given in connection with its approval of a plan of arrangement.
Dissent and appraisal right gives minority shareholders leverage.
Corporation’s obligation is to purchase at “fair value”. Shareholder may object and request court to determine, or corporation may apply to court. In a proceeding each party should produce evidence to support its position regarding fair value (Ashton Mining of Canada Inc. v. Kwantes).
Fair value is not synonymous with fair market value. Shareholder must be treated equitable, but do not adjust value to take into account past wrongs to shareholder (Ford).
First determine value of entire corporation and then divide by total number of shares. Do not apply minority discount (Brant Investments v. KeepRite Inc.). Also identified four methods for valuing shares of corporation:

o Market value o Asset value o Earnings value o Combination method

No rigid rule as to which method is appropriate. E.g., where shares are widely held the best method may be to take the market value. Where trading is thin and dominated by shareholder this may not be appropriate.
Where corporation has sold most of assets and ceases to carry on as operating business, value may be best determined by value of remaining assets as if sold on a liquidation.
If will be carried on, may be more appropriate to value the assets on a going-concern basis or to use earnings value. If sole asset is landholding with little income this will not be appropriate.
Valuations must be conducted as of a particular date with reference only to the facts as known at that time. Valuation date is as of close of business on day before resolution from which shareholder dissents (CBCA s. 190(3)). Any benefit from transaction dissented not to be taken into account.

Canada Business Corporations Act s. 190 Ontario Business Corporations Act s. 185

(i) Winding Up and Dissolution Casebook pp. 986-989

May take place voluntarily by shareholders’ resolution or involuntarily by court order (ss. 207-228 CBCA, ss. 191-244 OBCA).
Shareholder application on the grounds that it is “just and equitable” to do so – 214(1)(b)(ii) CBCA; s. 207(1)(b)(iv) OBCA.
No fixed rule.

VanDuzer pp. 458-460

Selling off/liquidating all the assets of the corporation, using proceeds to pay off liabilities, paying out any surplus to corporation’s shareholders in accordance with scheme for distribution of assets on dissolution in corporation’s articles.
Preferred shares will be paid first.
Winding up order may be result of oppression action.
Or separate application under CBCA ss. 213 and 4. See above for process.
Winding up may be obtained if oppression is found – defined same way as s. 241.
On application for winding up court can order other relief just as in oppression proceeding (CBCA s. 214(2)).
Court will order only where oppression serious.
May also be ordered where court is satisfied that USA entitles complaining shareholder to demand it.
Court may order when it is just and equitable (CBCA s. 214(b)(ii)).
Courts have been will to order winding up and dissolution where no longer possible for corporation to carry on business for which it was created.
Has been ordered where the shareholder seeking relief has a justifiable lack of confidence in the management of the corporation. Not just disagreement, but serious misbehaviour by management including fraud, deliberate violations of corporate policy.
Has been ordered where corporation is in effect partnership between two or more persons with equalish power who have come to disagree fundamentally on how business should be operated, especially were disagreement has made it impossible for corporation to act.

Canada Business Corporations Act s. 214 Ontario Business Corporations Act s. 207 VIII – CORPORATE GOVERNANCE IN THEORY AND PRACTICE Casebook pp. 207-223

Problems of separation of ownership and control.
Law and economics analysis – conception of corporation as a nexus of contractual relationships among shareholders, creditors, managers, employees, suppliers.
Prospect of agency conflict is enhanced when connection between ownership and management is attenuated.
Two foundations for conclusion that corporations will be structured so as to minimize agency costs – desire to provide investors with assurance that managerial agency problems will be cost-effectively minimized, and legal and market mechanisms.
Voting is at the core of legal and market mechanisms.
Need good information to do this but want to avoid dissemination costs. Shareholders must produce collectively an amount of information commensurate with eh importance of the issue subject to the vote.
Capital market – numerous bond and equity markets. By incorporating consequences of management misconduct into share prices capital markets furnish shareholders with a signal of corporate performance.
Other markets can impact managerial behaviour – the management market (paid less if perform badly), the product market (provides information about performance), the market for corporate control (poorly managed companies more likely to be subject to hostile takeover bids).
The role of corporate law in the contractarian model of the corporation – reduces transaction costs, plays an enabling role that facilitates by offering a set of default rules.
Critique of the contractarian model of the corporation – market imperfections exist.

VanDuzer pp. 519-544

The framework of practices and rules through which a corporation is administered and controlled. We have looked at:

o Bundle of rights that shares represent o Corporate law rules regarding allocation of power o Standards that govern director and officer behaviour o Remedies available o Securities law rules

Different corporate models – allocation of rights/responsibilities is irrelevant when one person is sole shareholder/director.
Costs to shareholders associated with losses due to opportunistic behaviour of managers are called agency costs.
As number of shareholders increases, separation between management and share ownership widens.
Failure of corporate law rules to endure adequate accountability of management to shareholders may be mitigated through the effects of market forces.
Prices of securities reflect publicly available information – market efficiency.
This in turn can facilitate the effective exercise of shareholder voting and other rights.
Managers will want to manage so as to avoid hostile takeover bids.
Nexus-of-contracts approach.
Other factors affecting corporate governance:

o Business practices. o Business ethics. o Criminal rules dealing with corporate fraud. o Independence of auditors from management. o Effectiveness of accounting rules. o Engagement of shareholders.

Questions regarding executive compensation.

Corporate Law Summary

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