Table of Contents

CHECKLIST.............................................................................................................................................. 3
Introduction........................................................................................................................................... 4
What is a business? Basic forms of Business Organization..............................................................4
Sole Proprietorships – Key Features..................................................................................................................... 4
Partnerships – Key Features.................................................................................................................................... 4
Corporations – Key Features.................................................................................................................................... 5
Partnerships.......................................................................................................................................... 6
Partnership Act.............................................................................................................................................. 6
What is a partnership?................................................................................................................................ 6
Relations with Third Parties –Section 6- 19......................................................................................... 8
Retired Partners......................................................................................................................................................... 10
Relations between partners – Section 20-31..................................................................................... 10
Dissolution of a Partnership – section 24 and 25............................................................................. 11
Other relationships.................................................................................................................................... 12
Joint Ventures.............................................................................................................................................................. 12
Limited Liability Partnership – ss. 10, 44.1-44.4, Ontario Partnership Act........................................12
Limited Partnerships................................................................................................................................................ 12
Limited Partner Rights, ss. 11 and s. 15............................................................................................................ 13
Taxes and Limited Partnerships, s. 5(1)........................................................................................................... 13
Partnership Agreements – Things to Include.................................................................................... 13
The Corporation................................................................................................................................. 14
Function of Corporate Law...................................................................................................................... 14
Investing in a Corporation....................................................................................................................... 14
Rules to Protect Non-Shareholder Stakeholders.............................................................................. 14
Methods of Incorporation........................................................................................................................ 14
Constitutional Matters.............................................................................................................................. 14
Provincial Powers...................................................................................................................................................... 14
Federal Power............................................................................................................................................................. 15
Nature of a Corporation............................................................................................................................ 15
Piercing the Corporate Veil..................................................................................................................... 15
Statutory Exceptions to Shareholder Immunity/ Limited Liability.......................................................15
Judicial Exceptions..................................................................................................................................... 17
Agency............................................................................................................................................................................ 17
Objectionable Purpose............................................................................................................................................. 17
Tax Avoidance............................................................................................................................................................. 17
Interests of Justice..................................................................................................................................................... 17
Incorporation.............................................................................................................................................. 17
Articles of Incorporation – S. 6, CBCA................................................................................................................ 18
Corporate Names – s. 10, CBCA............................................................................................................................ 18
Registered Office........................................................................................................................................................ 19
Class & Number of Shares....................................................................................................................................... 19
Number of Directors................................................................................................................................................. 20
Restrictions on the business the corporation can carry on......................................................................20
Process of Incorporation......................................................................................................................................... 21

1
 Unanimous Shareholder Agreement.................................................................................................................. 21
Distributing corporations....................................................................................................................................... 21
Pre-Incorporation Contracts................................................................................................................... 21
Statutory Reform, Pre-Incorporation Contracts – s. 14, CBCA & s. 21, OBCA....................................22
The Corporation in Action.............................................................................................................. 22
Tort Liability................................................................................................................................................ 22
Criminal Liability........................................................................................................................................ 22
Criminal Code Amendments – s. 22.2, Criminal Code................................................................................. 24
Criminal Negligence Based Offences, ss. 22.1, CC.......................................................................................... 24
Contractual Liability.................................................................................................................................. 24
Apparent Authority, S. 17 & 18, CBCA............................................................................................................... 25
Shares and Shareholders................................................................................................................ 26
General Rules, Part 5 of CBCA................................................................................................................. 26
Issuance of shares, s. 25, CBCA............................................................................................................... 26
Names of Classes of Shares...................................................................................................................... 27
Common Shares.......................................................................................................................................... 27
Preferred Shares......................................................................................................................................... 27
Dividends...................................................................................................................................................... 27
Rights arising on dissolution.................................................................................................................. 28
Voting............................................................................................................................................................. 28
Cumulative Voting...................................................................................................................................... 28
Dissent and Appraisal Remedy, s. 190, CBCA..................................................................................... 28
Par value vs non-par value...................................................................................................................... 28
Series in respect of class of shares........................................................................................................ 28
Pre-emptive rights- s. 28, CBCA.............................................................................................................. 29
Stated Capital............................................................................................................................................... 29
Redemption of Shares............................................................................................................................... 29
Redeeming shares vs Retracting shares.............................................................................................. 29
Management and Control of the Corporation...........................................................................30
Situations where classical model doesn’t work................................................................................ 30
How Shareholders Exercise Power....................................................................................................... 30
Annual Meetings......................................................................................................................................................... 30
Special Meetings......................................................................................................................................................... 30
Requisition Meeting.................................................................................................................................................. 31
Notice of Meetings..................................................................................................................................................... 31
Place of Meeting.......................................................................................................................................................... 31
Proxies and Proxy Solicitation – Part 13, CBCA............................................................................................. 31
Management Proxy Circular, S. 150, CBCA...................................................................................................... 31
Dissident Proxy Circular......................................................................................................................................... 31
Restraining Order...................................................................................................................................................... 32
Quorum.......................................................................................................................................................................... 32
Voting.............................................................................................................................................................................. 32
Shareholder Proposals............................................................................................................................................. 32
Access to Information – Auditors and Financial Disclosure.....................................................................32
Directors and How they Exercise Power............................................................................................. 32
Qualifications............................................................................................................................................................... 32
Number of Directors................................................................................................................................................. 33
Election and appointment of directors.............................................................................................................. 33

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 Power of Directors..................................................................................................................................................... 33
Quorum.......................................................................................................................................................................... 33
Signed resolutions..................................................................................................................................................... 33
Directors’ liability – Dissent by Director.......................................................................................................... 33
Officers........................................................................................................................................................... 33
Remuneration and Indemnification of Directors and Officers.....................................................33
Shareholders Agreements and USA...................................................................................................... 33
Directors’ and Officers’ Duties to the Corporation.................................................................34
Duty of Care.................................................................................................................................................. 34
Fiduciary Duties.......................................................................................................................................... 34
Conflicts of Interests.................................................................................................................................. 34
Self dealing – where director has a personal interest in the transactions..........................................35
Corporate Opportunities......................................................................................................................................... 36
Competition.................................................................................................................................................................. 37
Takeover Bids.............................................................................................................................................................. 37
Ratification................................................................................................................................................... 38
Statute............................................................................................................................................................................ 38
Where ratification cannot occur.......................................................................................................................... 39
Corporate Governance..................................................................................................................... 39
Shareholder Remedies..................................................................................................................... 39
Five Categories of Protection for SH: CBCA........................................................................................ 39
1) Right of Access to Corporate Information.................................................................................................. 39
2) Right to degree of participation in management of corporation.......................................................39
3) Right to have ones shares purchased at fair value when fundamental change in corporation
– s. 190............................................................................................................................................................................ 39
4) Right of action on behalf of the corp where corp interests are affected........................................40
5) Oppression Remedy, s. 241.............................................................................................................................. 40
Categories in which oppressive conduct divided............................................................................. 40
Exclusion from participation in closely held corporation.........................................................................40
Issuance of shares for non-corp purpose to disadvantage of minority................................................41
Where the majority treat the corporation as if it were the majority’s private company..............41
Denial of legitimate or reasonable expectations of minority SH.............................................................41
Takeover Bids..................................................................................................................................... 41

CHECKLIST

3
Introduction
What is a business? Basic forms of Business Organization

Sole Proprietorships – Key Features

1. Comes into existence when someone starts to carry on a business
2. No separation between the owner and manager
3. Unlimited liability for the debts of the business
4. Beneficiary of all the benefits of the business

Two Requirements
 1. Register name under the Business Names Act when you carry on the business in a
name other than your own;
o Registration of business name:
 You can be sued; but you can’t sue someone else if you fail to register
your business – S 2(2); s. 2(3) of Business Names Act

 Exception: S. 2(4):
 Partnership doesn’t need to be registered if carried out in the
names of the partners

 Section 7(2): if not register, can still bring action if conditions are
met:
 a) Failure to register was inadvertent
 b) No evidence that public was misled

 Section 7(3): if not registered, contracts are still valid

 Fines: section 10(1),(2)

 Amount of fines: depend on whether the registrant is an
individual partnership or corporation

 2. Licensing requirements: if there are licensing requirements, you must comply

with those requirements

Partnerships – Key Features

1. Section 2: Partnership Act: Comes into existence when two or more persons carry
on business in common with a view to profit
 “Carry on a business”  just carrying on one transaction can be sufficient
for a partnership to exist
 View to profit: profit does not need to arise; simply need to carry on
business with a view to profit
 Intention is important: must have intention to carry on business

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 2. Partnership governance:
 Partnership agreement: sets out rights among the partners
i. Third parties: Agreement cannot set out rights and obligations
between the partners and third parties

 Partnership Act: Two sets of rules

i. Default rules
1. Apply when the partnership agreement is silent in respect of
internal relations among partners
ii. Mandatory rules
1. Apply to third parties

3. Liability
 Unlimited personal liability among partners

 If partner enters the partnership and the partnership has a debt [before he
entered]
i. Example: If ‘A’ had an interest of $10,000 but discovered the
partnership had an outstanding liability that existed before they
entered the partnership  their interest would decrease b/c the
partnership is liable for a previous debt that reduces the assets of the
partnership
ii. ‘A’ can protect herself by seeking indemnification from the other
parties

 Mutual agency: carrying on business ‘in common’ with a view to profit 

creates the notion of mutual agency [each partner is an agent of the
partnership and to the other partners]
i. Thus, acting on behalf of one partner can subject all of the other
partners to liability [including the partners’ personal assets]

Corporations – Key Features

1. Separate legal entity: created by statute as a separate legal entity

2. Liability:
 Corporation – not the owners – are liable for the debts; and the corporation
is the beneficiary of the gains
 Shareholders – only liable up to amount invested

3. Conflict of interest:
 Remuneration: SHs will want to keep managers’ pay low vs the managers
who want to be paid
 Takeovers: a third party wants to take over the corporation and the potential
conflict that arises between managers vs stakeholders [who don’t want to
sell]

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 4. Mechanisms to reduce conflicts of interest [accountability mechanisms]
 Shareholders have a right to vote
 Shareholders have a right to information [including financial information]
 Directors owe a FD to the corporation [must put corporation interests ahead
of themselves]
 Host of shareholder remedies available

Partnerships

Partnership Act
 Composed of two parts:
o Section 20-31: Rules that relate to partners when dealing with one another
 Default rules apply if partnership agreement does not speak to these
issues

o Section 6-19: Rules that deal with third parties

 Mandatory and cannot be changed by partnership agreement
 BUT partnership agreement can address consequences which flow
from the rules

What is a partnership?

 1. What is a partnership?
o Definition: section 2 of Partnership Act
 A relationship between persons carrying on a business in common
with a view to profit
 Carrying on business: one transaction is sufficient to satisfy
this criterion [Continental Bank]
 With a view to profit: profit does NOT have to be earned
 Carry on a business in common: ‘in common’ suggests an
agreement [does not need to be an express agreement; can be
inferred by conduct]

o Liability: not a separate entity

 Partners themselves are agents of the firm and to each other [mutual
agency]
 2. Factors that do NOT CREATE partnership, Section 3, Partnership Agreement
o Joint tenancy, tenancy in common, joint property, common property or
part ownership

o Sharing of gross returns [does not by itself]

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 o Receipt of a share in the profits does not itself make a person a partner
including:
 Receipt of debt or other liquidated amount by installments out of
the accruing profits of a business
 Contract for remuneration of a servant or agent or person engaged in
a business by a share of the profits of the business
 Any person below was receives a portion of the profits made in the
business in which the deceased was a partner
 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;
 ii) is a child of a deceased partner

o Sharing of profits/ entitlement of shares:

 Being entitled to the shares does not itself give the result of a status of
a partner: Cox & Wheatcroft v Hickman

o Advance of money by way of loan where the lendor receives interest that
varies with the profits, or receives a share of the profits

o A person receiving a portion of the profits in consideration of the sale of their

goodwill in a business

o Disposing property interest is contrary to a partnership: KamEx

Developments

 3. Factors that DO HELP determine partnership: Volske Construction v Westlock

o Sharing of profits: The receipt of a share of the profits of a business is proof
that a person is a partner in the business
o Joint and several liability w/ respect to financing
o How they represent themselves to third parties [if they speak of
themselves as partners]

o Control is not a requirement for a partnership to be formed: Volske

 Can have a silent partner in agreement: No 41 v MNR

 4. Losses
o Every person who has a share of profits ought to bear their share of losses:
Grace v Smith
o Responsibility for losses: Cox & Wheatcroft v Hickman

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  TEST: On whose behalf is the partnership carried on for  this tells
you who is responsible for the loss

 5. Co-ownership vs Partnership
o Co-ownership itself does not create a partnership – even if a degree of
management
o TEST: What is the intention of the parties involved?

 6. Meaning of “firm” – Section 5, Partnership Act

o Allows a firm to bring an action in the name of the firm or respond in the
name of the firm
o S. 5 does not create a distinct entity/organization: Thorn v Workman’s
Compensation Act

Relations with Third Parties –Section 6- 19

 Mandatory rules that apply to third parties

 Section 6: Power of partner to bind firm

o Every partner is an agent of the firm and the other partners for the purpose
of the business of the partnership
 If a partner enters into a transaction and no restriction on that
partner  binds the partners
 If outside the scope of the partnership business, BUT had
authority to enter the transaction  binds the partners

o Appearance of authority
 The acts of every partner in the usual way in the kind carried on by
the firm binds the firm and other partners UNLESS
 i) the partner has no authority; AND
 ii) the third party knows the person not to be a partner

 Section 7: Partners bound by acts on behalf of firm

o Where a person, need not be a partner, authorized by the firm to enter into a
transaction  bind the firm
o Third parties need to ask for some type of warranty that person has
authority

 Section 8: Partner using credit of firm for private purposes

o Where a partner pledges the credit of a firm for a matter not connected with
the usual business of the partnership
o If you have permission from the other partners to enter into
transaction  firm will be bound
 Section 9: Effect of notice that firm not bound by act of partner

8
 o If you have notice that a firm is not bound by the Act of a partner, then you
are taken to have notice of that when entering into a transaction

 Section 10: Liability of partners

o With respect to debts and obligations, every partner is jointly liable with the
other partners incurred while they are a partner

o After death of a partner: the estate is severally liable while that person is a
partner

o Joint liability vs several liability:

 Joint: all parties are each liable up to the full amount of the relevant
obligation [only one kick at the can]
 Several: parties are liable only for their respective obligations

 Section 11: Liability of firm for wrongs

o Need to show that individual had authority OR was acting in ordinary course
of business to attach his action to the other partners
o TEST: Whether the unlawful acts are of the sort that would be within the
scope of the partnership

 Section 13: Liability for wrongs joint and several

o Where the firm is liable, every partner is liable jointly and severally for which
the firm becomes liable: illustrated in Kortz
 Kortz: Partner held liable for the actions of their partner b/c act was
carried out in the usual course of business and liablility was attached
to the firm

o Where persons are jointly liable  a release of one of them does not
preclude judgment against any person in the same or separate proceedings
[s. 139(1), Courts of Justice Act]

 Section 15: ‘Holding Out’

o Every person who by words spoken or written or by conduct represents
himself as a partner is liable as a partner to any person relying on such a
representation
o Personal assets are at stake if treated as a partner of the firm

 Section 15(2): Continuing business after death of partner

o After a partner’s death, if the partnership is continued in the old’ firms name
 does not itself render the deceased partner still liable

 Section 18: Liability commences with admission to firm

o Partner is not responsible for the debts and obligations of the firm BEFORE
they become a partner

9
  Section 18(2): Retirement
o A partner who retires from a firm does not cease to be liable before the
partner’s retirement

 Section 18(3): Agreement discharging retiring partner

o Can be released from obligations through an agreement between the
creditors, retiring partner and other partners

Retired Partners
 Section 36(1): Right of persons dealing with firms against apparent members
o Where a person deals with a firm after a change of its constitution, the
person is entitled to treat all apparent partners as still being members of the
firm until the person has notice of the change

 Section 36(2): Notice

o You can give adequate notice to those who have not previously dealt with the
firm by posting the notice in the Ontario Gazette
o For those who have dealt with your firm  need to give actual notice

 Section 36(3): Estate of dead or insolvent partner, how far liable

o Estate of a deceased partner or insolvent is not liable for the debts of the
partnership after the death or insolvency
o Retirement: not liable for debts of partnership if he was not previously
known to the person dealing with the firm to be a partner

o If third party did not have knowledge that an individual was a partner
prior to the date of retirement  in the absence of holding out [s. 15], s.
36(3) has the effect of insulating a previous partner from all liability for
obligations of the partnership incurred after the retirement: Tower Cabinet v
Ingram

Relations between partners – Section 20-31

 Rules are based around principles of:
o Equality [among partners]
o Consensualism [in terms of approach]
o Fiduciary duty [from one to the other]
o Personal interest

 Section 20: Variation by consent of terms in partnership

o Mutual rights and duties of partners cannot be varied unless you have
consent of al the partners

 Section 24: Rules as to interests and duties of partners

10
 o 1. Equal share in profits, and must contribute equally to the losses
o 2. The firm must indemnify any partner in respect of payments made on
behalf of the firm
o 3. If you contribute capital to the firm, anything above that, you are entitled
to interest on that amount
o 4. A partners is not entitled, before the ascertainment of profits, to interest
on the capital subscribed by the partner
o 5. Every partner may take part in the management of the business
o 6. No partner is entitled to remuneration
o 7. No person may be introduced as a partner without consent of all partners
o 8. Any differences arising out of ordinary matters may be dealt with by the
majority of partners; anything dealing with the nature of the business has to
be dealt with by all partners
o 9. Must be a location for partnership books and available to all partners

 Section 28: Duty as to rendering accounts

o Partners are bound to render true accounts and full information of all things
that affect the partnership

 S. 29: Accountability for private profits

o Every partner must account to the firm for any benefit derived that takes
any advantage of the partnership’s name etc.
 i.e. McGregor teaching the class and using Osler’s name in the course
of teaching. Can either keep the monies himself, or Osler will require
him to give it to the firm.

 S. 31: Rights of assignee of share in partnership

o A personal interest cannot be transferred, subject to the partnership
agreement
 However, s. 31 allows you to assign your share of profits
 The assignee does not have a right to look at the partnership’s
statements and internal documents NOR a right to be a
partner.

Dissolution of a Partnership – section 24 and 25

 Section 25: Expulsion of partner
o No majority of the partners can expel any partner UNLESS a power has been
conferred by an express agreement [i.e. if partnership agreement speaks to
it]

 Section 26: Retirement from partnership at will

o Partnership terminated if partner gives notice of retirement

 Section 32: Three situations where partnership dissolves:

11
 o 1. Where entered into for a fixed term  at end of term
o 2. If created for an express undertaking
o 3. Where an undefined term, through notice by one or more of the partners

 Section 33: Dissolution by death or insolvency of partner

o Subject to any agreement between the partners, every partnership is
dissolved if death or insolvency

 Section 34: By illegality of business

o If carrying on an unlawful business, this will dissolve a partnership

 Section 35: Dissolution by the court

o Partnership can be dissolved on application by a partner to the court if:
 a) partner is found incapable
 b) partner incapable of performing his/her role
 c) prejudicial to continue to carry on business
 d) partnership continues to breach the agreement
 e) business of the partnership can only be carried on at a loss
 f) it is just and equitable that partnership be dissolved

Other relationships
Joint Ventures
 Definition: Refers to a relationship among persons agreeing to combine resources
for some common purpose
o Resources include capital, knowledge, skills, experience, etc  accomplishing
a common purpose

 Characteristics of a JV: CHMC v Graham

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

 Each of the JVs are responsible for all obligations of the JV: similar to how
partners are responsible for all obligations of a partnership

 Fiduciary duty among JVs -> one cannot take advantage of another: Wonch
Construction v Danzig

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Limited Liability Partnership – ss. 10, 44.1-44.4, Ontario Partnership Act
 See page 22 of summary

Limited Partnerships
 Definition: limited partner is limited to their capital contribution

 Relevant legislation: Limited Partnership Act, OBCA

 Section 2(2): Whom to Consist

o A limited partnership shall consist of one or more general partners and one
or more persons who are limited partners.
o General partner: has unlimited liability
 To avoid having a general partner liable  make the general partner a
corporation with no assets

 Section 3: Formation
o (1) Formed when a declaration [under the Business Names Act] is filed with
the Registrar.

 Section 9: Liability of limited partner

o 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

 Section 12: Business dealings by limited partner with partnership

o Allows limited partner to advise on business dealings

 Section 13: Limited partner in control of business

o A limited partner is not liable as a general partner unless, in addition to
exercising rights and powers as a limited partner, the limited partner takes
part in the control of the business

o Limited partnerships and control of the business: If limited partner

engages in control or management of business  limited partner is taking on
the role of general partner and can be held fully liable : Haughton Graphics v
Zivot

Limited Partner Rights, ss. 11 and s. 15

 See page 24 of summary

Taxes and Limited Partnerships, s. 5(1)

 A general partner can also be a limited partner

13
 o WHY?
 Profits are shared among the limited partners
 THUS, the general partner may want to be a limited partner to receive
a share of losses and profits for tax purposes

Partnership Agreements – Things to Include

 See list on page 24 of summary

The Corporation

Function of Corporate Law

 See page 25 of summary

Investing in a Corporation
 1. By way of equity as a shareholder;
o Shares = no right to dividend; depends on directors

 2. By way of debt through loans to the corporation

o Through bonds = right to receive interest

Rules to Protect Non-Shareholder Stakeholders

 See page 25- 26 of summary

Methods of Incorporation
 See page 26 of summary

 Current method: Incorporation through filing of articles of corporation

o Articles are filed  set out key criteria with respect to corporation
o When filed  obtain certificate of incorporation

o Capacity of Corporation:
 Section 15(1), CBCA: Corp has the capacity and the rights, powers
and privileges of a natural person
 Section 15, OBCA: Corp has the capacity and the rights, powers and
privileges of a natural person

14
Constitutional Matters
Provincial Powers
 Section 92(11): provinces can provide incorporation of companies with “provincial
objects”
o Provinces can create corporations with powers exercisable within the
province
o Provinces can grant the capacity of a corporation to carry on business
outside the province  but need to get authority to carry on business extra-
provincially from that other province
o A reason to preclude registration: trademarks

 Province cannot regulate federal company

o Cannot regulate the powers of a federal corporation; or intra-corporate
affairs such as those between shareholders and directors
o However, province can regulate where the matters fall under the
provincial heads and not inconsistent with the federal law

Federal Power
 Section 91: grants incorporation for certain defined companies [i.e. banks,
insurance companies, telecommunications]
 The general power to incorporate is not found in any express provision  found in
POGG
 If federally incorporated  can carry on the business across all the provinces
despite any name/trademark confusions

Nature of a Corporation
1. Statutory Creature
a. Given powers of a natural person  thus doctrine of ultra vires does not
apply
2. Corporations are subject to a division of power
3. Corporations are subject to Charter
a. See page 28 of summary
4. Separate existence : as per Saloman v Saloman

Piercing the Corporate Veil

 Shareholder Immunity – S. 45(1), CBCA
o The shareholders of a corp 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).

 Shareholders’ liability limited: s. 92(1), OBCA

15
 o The shareholders of a corporation are not, as shareholders, liable for any act,
default, obligation or liability of the corporation except under subsection
34(5), subsection 108(5) and section 243.

Statutory Exceptions to Shareholder Immunity/ Limited Liability

1. Creditor recovery through shareholders or others
 Section 38(4), CBCA
o Speaks to reduction in stated capital [the consideration shareholders pays for
shares]
o A creditor is entitled to apply to the court for an order compelling the
shareholder to:
 a) pay the corporation an amount equal to liability of shareholder that
was extinguished contrary to the section
 b) pay or deliver to the corp any money or property that was paid or
distributed to the shareholder as a consequence of a reduction of
capital made contrary to this section

o S. 38(1): Reduction of Stated Capital - Allows a corporation by special

resolution to reduce its stated capital for the purpose of:
a) extinguishing or reducing a liability in respect of an amount
unpaid on any share;
a. HIGHLY UNLIKELY b/c shares can only be issued if full
paid
b) distribute to a shareholder an amount not exceeding the stated
capital of the class of shares
c) declaring its stated capital to be reduced by an amount that is
not represented by realizable assets

o S. 38(3): Limitation on Reducing Stated Capital - Corporation shall not

reduce it stated capital if reasonable grounds for believing that the corp may
be unable to pay its debts, or the realizable value of the assets is less than the
liabilities

2. Where payment to a shareholder in inappropriate circumstances –S. 118(4) and

(5)
 Where an inappropriate payment has been made  can apply to the court to have
the SH return that amount

3. Parties to USA given power are liable similar to directors – s. 146(5)

 Where shareholders agree to usurp certain powers of the directors  shareholders
become liable as directors

4. Recovery of property from shareholders when corp is dissolved but is subject to

unresolved litigation- s. 226(4)

16
  S. 226(2): Continuance of Actions - Where a company has dissolved – both actions
in place prior to dissolution and actions commenced after dissolution can be
continued [civil, admin and criminal actions]
 Time limitation: for continuation of action that has not been commenced before
dissolution, must be brought within two years after dissolution

 S. 226(4): Reimbursement - Where a SH has received a distribution of property;

and where that SH is liable to a person claiming under subsection 2, the SH must
return the property
 Time limitation: An action to enforce liability has a two year limitation

Judicial Exceptions
1. Agency – where corp is agent of another
2. Objectionable purpose
3. Interests of revenue – tax avoidance
4. Interests of justice – where to uphold the corporation as a separate legal person
would be flagrantly opposed to interests of justice

Agency

 TEST: To determine if separate corporate entity or acting as an agent:

Aluminum Company of Canada
o Parent and subsidiary: If the parent has intimate and immediate
domination of the subsidiary  it can be said that the sub has no true
functioning of its own
 IF YES Agency

 No agency just b/c a SH has total or controlling interest in a corporation: Clarkson &
Company v Zhelka

 One person corporation IS NOT identical to a single shareholder: Rockwell

Developments v Newtonbrook Plaza

Objectionable Purpose
 Equity will not allow an individual to use a company as a shield for an improper
conduct or fraud: Big Ben Hotel

 Consider if company is doing indirectly what it cannot do directly: Gilford

Motors (UK)

17
Tax Avoidance
 CRA can to some extent lift the corporate veil  can look at how sister corporations
carried on their business: De Salaberry Realties
 No business purpose test in Canada: Stubart

Interests of Justice
 Veil to be lifted when the result is otherwise “too flagrantly opposed to justice,
convenience of interests of revenue”: Kosmopolous

Incorporation
 Most important document: Articles of corporation

 Section 5(1), CBCA: Incorporators

o a) cannot be less than 18 years of age
o b) is of sound mind
o c) not bankrupt

Articles of Incorporation – S. 6, CBCA

 Section 6: Articles of incorporation – must include:
o a) the name of the corporation
o b) the province in Canada where the registered office is to be situated
o c) the classes and any maximum number of shares that the corporation is
authorized to issue
 i) if 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 determining the
designation of, and the rights, privileges, restrictions and conditions
attaching to, the shares of each series.
o d) if the issue, transfer or ownership of shares of the corp is to be
restricted, a statement to that effect and a statement to the nature of such
restriction
o e) the number of directors or the minimum and maximum number of
directors of the corporation; and
o f) any restrictions on the business that the corporation may carry on

Corporate Names – s. 10, CBCA

 Section 10: Name of Corporation
o (1) requires use Ltd or Inc or Corp at end of name [notice of incorp – 3 rd party
protection]
o (5) requires that name be on all docs used by the company [i.e. invoices,
receipts etc]

18
 o (6) requires that if COB has another name, must still comply with sub 5 and s.
12(1) [below]

 Section 11: Reserving name

o Cannot incorporate a name that is reserved for another company

 Section 12: Prohibited Names

o Cannot incorporate with a name that is “proscribed, prohibited, or
descriptively misdescriptive”

 Regulations under the CBCA (Part II Regulations)

o Reg 20: Where a business has not carried on for 2 years, there is
considerable liberty given for using the name of that company
o Reg 26: cannot incorporate with a name that suggests an association with
universities or gov’t organizations or int’ organizations without express
consent
o Reg 27: cannot incorporate with an obscene name

o Reg 30(1):
 Cannot use names that are not sufficiently distinctive [i.e. names
which are too general in scope that it can apply to any product or
service such as Goods Corporation] AND names that are only
descriptive of quality of function or other characteristics of goods
or service, such as manufacturing ink
 Cannot use name or surname of living person [or someone who has
died in the last 30 days]
 Cannot use a geographic alone [i.e. Canada Inc]
 Cannot use names that are too general – name needs a distinctive +
descriptive element to it
 i.e. Burger King – burger = descriptive; King = distinctive.
 Exception: where a name has been used for a lengthy period of time
and has acquired a distinction recognition [i.e. General Motors]

o Reg 31: Names that are deceptively misdescriptive: if misdescription of

the goods or services; the conditions or production or place of origin [i.e. if
manufactured sparkling wine and labeled bottle w/ champagne]

o Reg 19: addresses name confusion where such a name would cause
confusion with a trademark
 Number of factors need to be taken into account if proposed
corporation name will be confusing:
 Inherent distinctiveness of mark/name
 Length of time mark has been used
 Goods associated with name/mark
 Territoriality of use name/mark

19
Registered Office
 Section 20(1): Corporate records
o Articles must identify where a registered office is and where records are kept

 Section 14, OBCA

o Registered office must be located within incorporating province for
provincial incorporation

Class & Number of Shares

 Private vs public corporation: public corp lists shares on a publice exchange

 Corporation can issue a number of shares with different rights

 Common shares:
o Right to vote
o Right to dividends; which must be declared by the directors of a corporation
o Right to interest if company winds up

 Preferred shares
o Shares which are preferred in respect of one of the above rights

o If preferred as to dividend: where the directors declare a dividend, it must

be declared to that class first

 Number of shares directors are authorized to issue in respect of each class:

o NOT necessary; BUT if limited  and directors want to issue shares above
that limit  need to seek a special resolution to allow them to do that

 Restrictions imposed on issuance or transference of shares:

o If CCPC  will want to impose restrictions on transfer of shares to non-
residents

Number of Directors
 Section 6(1)(e):
o Articles must specify number of minimum and maximum directors

 If distributing corporation need at least 3 directors of which 2 are not officers

or employees

 If private  only need one

20
  If dividend is not paid for three years  preferred share owners can elect a new
director

Restrictions on the business the corporation can carry on

 Section 15: Capacity of a Corporation
o Corporation has all the capacity and rights, powers, privileges of a natural
person
 Section 16(2), CBCA: Restricted business or powers
o If restrictions on business carried out, corporation is forbidden to act in a
manner contrary to the restriction

 Section 16(3): Rights preserved

o If the corp does something contrary to the restriction  the act is not
invalid by reason only that it is contrary to its articles
 Third party can still enforce obligation
 WHY?
o It would be too onerous for a 3rd party to go through the
company’s records

o Section 241, CBCA: Oppression remedy

 Shareholders can seek a compliance order requiring directors to act
within scope of business
 Can seek a restraining order and bring an application for
oppression

Process of Incorporation

Filing Requirements
 See page 40 of summary

First Meeting of the Directors

 See page 40 of summary

First Meeting of the shareholders [once shares have been issued]

 Must be called [by director] not later than 18 months after corp comes into
existence [s. 133(1)(a), CBCA]
 Bylaws must be approved by a majority of SH votes represented at the meeting [s.
103(2), CBCA]

Unanimous Shareholder Agreement

 See page 41 of summary

21
Distributing corporations
 Rigorous conditions on distributing corporations:
o Disclosure to SH
o Must publicly file their financial statements
o Must provide right to vote by proxy [to vote on their behalf]
o Must provide a public auditor
o Must have three directors

Pre-Incorporation Contracts
 If both parties thought corporation was in existence  likely, agent will be held
liable

 If both parties thought corp was not in existence  what was the intention of the
parties at the time?
o Black v Smallwood: Case where contract signed by a supposed director of a
company; and where both the parties [3rd party and signor] though the
contract was in existence
o Agent found not liable [presumption]

 If agent knew there was no corporation  but where 3rd party thought there was
a corporation  no meeting of minds; however, misrep on part of agent

Statutory Reform, Pre-Incorporation Contracts – s. 14, CBCA & s. 21, OBCA

 Section 14: Personal Liability
o A person who enters into, or purports to enter into a written contract in the
name or on behalf of a corporation before it comes into existence is
personally bound by the contract and is entitled to its benefits
 Imposes increased liability on the agent

 Some principles developed:

o 1. Agent is liable, unless there is an agreement to the contrary
o 2. Corporation can adopt the contract, and if so, the agent is released from
liability
o 3. A third party can apply to the court to apportion liability between the
corporation and the agent
 Likely if corporation doesn’t have sufficient assets AND if agent is
trying to use the corporation to make them liable

 Statutory reform issues:

o Not identical in each of the provinces
o The CBCA applies to written contracts; OBCA applies to written and oral
contracts
o Unclear what happens if corporation never forms

22
The Corporation in Action
Tort Liability
 Main issue: vicarious liability + reasons for imposing liability

 Vicarious liability: if tort is committed by an employee or an agent of a natural

person [i.e. a corporation]

 Policy reasons: see page 42 of summary

Criminal Liability
 Three basic types of offences:
o 1. Absolute liability:
 Crown simply must show that act itself was committed

o 2. Strict liability:
 Crown has to show the actus reus
 Defence has to prove due diligence; whether or not reasonable actions
were taken

o 3. Mens rea
 Crown must show actus reus and mens rea

 Defences to strict liability in criminal corporate cases:

o 1. Directing mind defence
 Directing mind was acting in fraudulent manner THROUGH the
company
 All the gains of that fraudulent act went to the person carrying out the
act and NOT the company

 If acting as a rogue employee and benefit accrues to him  law is

clear that this is a defence that imposes liability to employee and
not the corporation: Waterloo Mercury Sales

o 2. Contrary to instructions
 Where act is completely contrary to direction/instruction of
employer, and employer has taken sufficient steps to ensure that
instruction is carried out

 Steps to Determining Liability

o 1. Identify the person who physically committed the offence

23
 o 2. Did that person have a directing mind? [NOTE: No longer needed as per
s. 22.2 of CC – see below]
 Did they have primary responsibility?
 If yes was that primary representative carrying out his/her
functions [or assigned responsibilities in the corporation]?
 If yes That directing mind becomes identified with the
corporation.

 Difference between scope of employment test in tort vs scope of area of work

assigned in criminal context
o Criminal context: narrower
 This is b/c criminal liability is based on primary liability  can’t
have primary liability without that person acting within the scope of
the work assigned
 Criminal law does not have doctrine of vicarious liability
o Tort:
 Have to establish the relationship between employee and employer

Criminal Code Amendments – s. 22.2, Criminal Code

 Places additional liability on corporation

 NEW TEST:
o No longer need concept of a directing mind or ability to set policy  liability
is triggered by specified actions of a senior officer
o Rules impose broader liability than the common law

o Imposes liability on a representative [defined extremely broad]

 Definition of a representative:
 1. Plays an important role in establishing policies
o Doesn’t require that individual have to play a role in
creating policy; or
 2. The representative is responsible for managing an
important part of the corporation’s activities

o Specific actions of a senior officer that give rise to liability:

 Senior officer must act with intent at least in part to benefit the
organization [fault-based offences]
 1. Must act within scope of his/her authority
 2. Acting within the scope of their authority to direct the
work of other representatives so that they commit the offence;
or
 3. If senior officer knows that rep is going to commit an offence
and does not take all reasonable measures to stop them
from committing the offence

24
Criminal Negligence Based Offences, ss. 22.1, CC
 A corporation is a party to an offence if:
o 1. One of its reps is party to the offence [much broader than senior officers]
o 2. Two or more of its reps engage in conduct, whether by act or omission,
such that, if it had been carried out by one person, would have made that
person a party to the offence;
o 3. The senior officer who is responsible for the activities in respect of which
the offence occurred departs markedly from the standard of care that
would be reasonably expected to prevent the representative form being a
party to an offence

Contractual Liability
 Main issue: when can a corporation be bound by a contract entered into by
someone on behalf of the corporation?

 Policy balance: Between not imposing liability for contract entered into on behalf
of corporation by someone without any authority versus protecting third parties

 General Rules:
o If major transaction: 3rd party need to engage in serious due diligence steps
 thus, may want to see corporate resolution that authorizes transactions

o Direct authority: 3rd parties are protected if someone with actual authority
enters the transaction

o Apparent authority: a person with apparent authority may have NO

authority; but the person may be seen as someone with authority
 Corporation will be bound UNLESS 3rd party knew that person
didn’t have authority to enter into K

Apparent Authority, S. 17 & 18, CBCA

 Section 17: No constructive notice
o No person is affected by or deemed to have notice by reason only that the
document concerning the corporation has been filed or available for
inspection

 Section 18: Defences not available to corporation

o a) corporation cannot assert the articles, by-laws or USA have not been
complied with
o b) persons named in recent notice of directors are not directors

25
 o c) the place named in the most recent notice sent to the Director under s. 19
is not registered office of the corp
o d) Where a person is held out by corp as a director, officer, or agent but
has not been duly appointed or has no authority to exercise the powers
and perform the duties that are customary in the business of the
corporation
o e) a document issued by any director, officer, agent or someone usually with
authority to issue the document cannot say that it is not valid b/c they lacked
authority

 Section 116: Validity of acts of directors and officers

o An act of a director or officer is valid notwithstanding an irregularity in
appointment of qualification or election of director or officer

Shares and Shareholders

 Shares: a bundle of rights [right to vote, right dividend, right to surplus upon
dissolution]

 Purpose: to raise money by a corporation

General Rules, Part 5 of CBCA

 Section 24(1): Shares
o Shares of a corporation shall be in registered form and shall be without
nominal or par value

 Section 24(3): Rights attached to shares

o Where a corp has only class of shares, the rights of the holders thereof are
equal in all respects and include the rights:
 a) to vote at any meeting of shareholders of the corporation;
 b) to receive any dividend declared by the corporation; and
 c) to receive the remaining property of the corporation on dissolution.

 Section 24(4): Rights to classes of shares

o The articles may provide for more than one class of shares, and if they so
provide:
 a) the rights, privileges, restrictions, and conditions attaching to the
shares of each class be set out therein; and
 b) the rights set out in subsection (3) shall be attached to at least one
class of shares BUT all such rights are not required to be attached
to one class.

26
  Section 140: If articles silent
o Where you have multiple classes of shares, and articles are silent, each
class has equal rights

 Section 49: Evidence of ownership of a share

o A share certificate is evidence of ownership

Issuance of shares, s. 25, CBCA

 Section 25(1): Issue of shares
o Director discretion to offer shares [to whom and what amount]

 Section 25(2): Shares are non-assessable

o Corporation cannot issue shares then subsequently place levies on SHs for
more funds

 Section 25(3): Consideration

o Shares must be fully paid by means of consideration
o Consideration can include property other than money
o Issue: property has to be valued to be at the same value of shares

Names of Classes of Shares

 CBCA refers only to “shares” (s. 24). There are no legal restrictions on what shares
can be called or, with some qualifications, what characteristics they can be given in
the articles

Common Shares
 Definition: represent the residual claims in the company – after the preferred share
dividends and preferred share return of capital is returned

 If company is going bankrupt  shares are worthless b/c any assets are going to
be given to debt holders and preferred shareholders

Preferred Shares
 See page 47 of summary

Dividends
 At discretion of directors
 Declared by the board

 Three important dates:

o 1. Declaration date
o 2. Record date

27
  s. 134(1): dividends are paid to a person who is registered as a SH on
the record date
 s. 134(2): 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
o 3. Payment date

 Right to dividends
o 1. Depends on discretion of directors
 S. 115(3)(d): Power to declare dividends cannot be delegated by
the board, BUT it can assumed by the SHs in a USA
 No provision in the articles or USA can compel the directors to
declare and pay dividends

o 2. Cannot be declared if reasonable grounds to believe that corp cannot

meet either of the following financial tests:
 Section 42(a), CBCA: Solvency test- the corp is, or would after the
payment is made, be unable to pay its liabilities as they become due
 Section 42(b), CBCA: Capital impairment test- the realizable value
of the corp’s assets would, after the payment, be less than the
aggregate of its liabilities and stated capital of all classes

 Director liability re: dividends

o Section 118(2)(c): if dividends are paid in contravention of these
requirements, the directors who consented to the declaration of the
dividends are personally liable to pay the amount of dividend back to the
corp

Rights arising on dissolution

 Section 24: at least one class needs to be entitled to surplus and dissolution

Voting
 All shares carry the right to vote, unless the articles state otherwise

 Non voting shareholders will have right to vote if fundamental changes to the
corporation:
o S. 189(6): sale of all or substantially all of the property or a corp
o S. 183(3): amalgamation
o S. 188(4): where corporation wants to work in another jurisdiction
o S. 211(3): liquidation

 Class of shares may be entitled to vote separately on certain fundamental

changes if uniquely affected

28
 o Corp would need approval from SH as a group + approval from SH in that
class

Cumulative Voting
 See page 49-50

Dissent and Appraisal Remedy, s. 190, CBCA

 See page 50

Par value vs non-par value

 See page 50

Series in respect of class of shares

 Section 27: Shares in series
o To issue shares in series, articles must expressly allow it

 Advantages:
o Permits corporations to create shares w/ particular characteristics faster and
more cheaply than if the corp had to amend its articles in the usual way to
create new class of shares by calling a meeting of shareholders to approve
articles or amendments
o Allows SHs to react to certain market conditions

 Limitations:
o Within the class, each series must have the same priority as to dividends and
return on capital [dividends DO NOT have to be identical, but same priority]

Pre-emptive rights- s. 28, CBCA

 See page 50-51

Stated Capital
 Definition: amount of consideration received by the corporation by selling the
shares

 Example: If you have 100 shares at $10

o Stated capital = 100 shares x $10 per share = $1000
o Stated capital of each share = $1000/ 100 shares = $10

 If Class A shares have fallen in value, but corp issued another 100 Class A
Shares

29
 o Stated capital of class: $1000 + $500 = $1500
o Stated capital of each share: $1500/ 200 shares= $7.50
= Entitlement on dissolution has dropped from $500 to $375

 If entitlement has dropped, need to look at share conditions that attach to class of
shares to determine if you get difference back
o i.e. if upon dissolution, everyone has been paid their stated capital 
conditions must state what shareholders will get [such as whether they share
equally or not]

Redemption of Shares
 see page 51-52 of summary

Redeeming shares vs Retracting shares

 see page 52 of summary

Management and Control of the Corporation

Situations where classical model doesn’t work

 see page 52-52 of summary

How Shareholders Exercise Power

Annual Meetings
 Section 133(1): Calling annual meetings
o a) Directors must call an annual meeting within 18 months of
incorporation
o b) Subsequently, not later than 15 months after holding the last annual
meeting but not later than 6 months after the end of corporation’s preceding
financial year

o At least three items of business are discussed:

 1. Election of directors
 2. Appointment of auditors [need not be appointed if not distributive
company]
 3. Presentation of financial statements
 Includes auditor’s reports that have to be provided to SHs at
least three weeks in advance of meeting

 Section 135(6): Notice of Business

30
 o Must state the nature of the business in sufficient detail to allow SHs to
determine what the business is AND to reach some sort of informed position
as to how to pass judgment

 Section 142: Resolution in lieu of meeting

o Can avoid public meeting through written resolution signed by all
shareholders

 Section 159(1): Copies to shareholders

o Financial statements must be presented to SH at least 21 days before meeting

Special Meetings
 Section 133(2): Calling special meetings
o Directors may at any time call a special meeting of shareholders.

 Section 135(5): Business

o SHs must be given notice of a special meeting – which deals with matters not
dealt with at annual meeting

Requisition Meeting
 Section 143(1): Requisition Meeting
o SHs holding 5% or more of voting shares can call a special meeting
o Must include in the requisition a notification of draft resolution that group is
seeking to have passed

Notice of Meetings
 Notice: must be sent to SHs, directors, and auditor in advance of meeting

 Time requirement: 60 days max or 21 days minimum, s. 135, reg 44

o For non-distributing corps: the notice period may be shorter if provided in
corporation’s articles or bylaws: s. 135(1.1), CBCA

Place of Meeting
 Section 132, CBCA: Place of Meetings
o SH meetings must be at place specified in bylaws or if not specified, must be
in a Canadian location picked by director or with unanimous SH consent, can
be place outside of Canada

Proxies and Proxy Solicitation – Part 13, CBCA

 Objectives:
o 1. Allows SH to have a vote through appointment of another
o 2. Ensure that there is sufficient disclosure of information to SH

31
 o 3. Ensures adequate disclosure of financial information

 Must be submitted in advance of meeting [21 days normally]

 Section 149(1): Mandatory solicitation

o For every meeting of SHs, management must send a proxy to those who are
entitled to vote at the meeting
o Allows SH to appoint another to vote in his/her place

 Section 149(2): Exception

o Requirement not required:
 a) if not a distributive corporation and
 b) less than 50 shareholders

Management Proxy Circular, S. 150, CBCA

 See page 55 of summary

Dissident Proxy Circular

 Shareholders that disagree with management proposals scan solicit votes of other
shareholders

 Dissident proxy circular not required if:

o Attempting to solicit votes from no more than 15 SHs – s. 150(1.1)
o Trying to solicit votes by public broadcast – s. 150(1.2)

Restraining Order
 Section 154: Restraining order
o If the form of the proxy or management circular or dissident proxy circular
contains an untrue or misleading statement b/c of omission or misrep, then
the director or interest person may apply to the court for any order it thinks
fit
 Includes an order restraining solicitation or holding of the meeting or any
action that follows if the resolution passed
 Court can also adjourn the meeting

Quorum
 Section 139: Quorum
o A majority of shares entitled to vote, represented by person or proxy,
constitutes a quorum unless bylaws provide otherwise

Voting
 Section 140(1): unless articles say different, each share gets one vote and matters
decided by majority

32
Shareholder Proposals
 See page 56 of summary

Access to Information – Auditors and Financial Disclosure

 See page 57-58 of summary

Directors and How they Exercise Power

Qualifications
 Section 105: A person is not qualified to be a director if she is:
o a) less than 18
o b) of unsound mind
o c) not an individual
o d) an undischarged bankrupt.

 Section 105(3): Residency

o Where you have 4 or more directors – 25% have to be residents of Canada
 i.e. if you have less than 4 directors  at least one has to be a resident
in Canada

Number of Directors
 See page 58 of summary

Election and appointment of directors

 Section 106(2): Term of office
o At the outset, the directors are named in the articles as incorporating
directors
o Hold office until 1st shareholders’ meeting

 Section 106(3): Election of officers

o Directors are elected at each subsequent annual meeting

 Elected by ordinary resolution at 1st SH meting by majority

o UNLESS some higher level of support is required by articles [s. 6(3), CBCA]

Power of Directors
 See page 59

33
Quorum
 See page 59

Signed resolutions
 See page 59

Directors’ liability – Dissent by Director

 See page 59

Officers
 See page 59-60

Remuneration and Indemnification of Directors and Officers

 See page 60

Shareholders Agreements and USA

 See page 60-61

Directors’ and Officers’ Duties to the Corporation

Duty of Care
 Section 122, CBCA: Duty of care of directors and officers
o (1) Every director and officer of a corporation in exercising their powers and
discharging their duties shall:
 a) act honestly and in good faith with a view to the best interests of
the corporation; and
 b) exercise the care, diligence and skill that a reasonably prudent
person would exercise in comparable circumstances

Duty to Comply
o (2) Every director and officer of a corporation shall comply with this Act, the
regulations, articles, by-laws and any USA

No exculpation
o (3) Subject to subsection 146(5), no provision in a contract, the articles, the
by-laws, or a resolution relieves a director or officer from the duty to act in
accordance with this Act or the regulations or relieves them from liability for
a breach thereof.

34
Fiduciary Duties
 SCC has recognized 3 elements of the FD:
o 1. FD has some elements of discretion;
o 2. Fiduciary holds a position where he or she is able to take advantage of
another or something;
o 3. An element of dependency on fiduciary by another

 Definition: “loyalty, good faith, and avoidance of conflict between one’s duty and
self interest” Canero

 Arises in four ways:

o 1. Self dealing
o 2. Corporate opportunity that the director or officer takes advantage of
o 3. Where director or officer engages in competition with corporation
o 4. Takeover bids – where director/officer cannot put their interests ahead of
the corporation or various stakeholders in the corporation

Conflicts of Interests
1. Self dealing
2. Corporate opportunities
3. Competition

Self dealing – where director has a personal interest in the transactions

 Historical rule: Cannot self-deal with the corporation

o Court will not tolerate those that put themselves in a potential conflict of
interest in the corporation
o Courts will not inquire into whether the deal was fair/unfair: Aberdeen RR
Co.

 Need to know the nature of the interest + the extent of that interest: Gray v
New Augaria Porcupine Mines
o Simply declaring that you have a pecuniary interests is insufficient
o No precise rule about how much directors in all cases must disclose, but it
must be enough to make one’s fellow directors “fully informed of the true
state of things”

Statutory Reform: s. 120, CBCA – Disclosure of interest

 1. Ensure that interest is disclosed
o Section 120 (1): Disclosure of Interest
 A director or officer of a corporation shall disclose to the corporation,
in writing or by requesting to have it entered in the minutes of
meetings of directors or of meetings of committees of directors, the

35
 nature and extent of any interest that he or she has in a material
contract or material transaction whether made or proposed, with
the corporation, if the director or officer:
 a) is a party to the contract or transaction;
 b) is a director or an officer, or an individual acting in a similar
capacity, or a party to the contract or transaction; or
 c) has a material interest in a party to the contract or
transaction.

 2. Timing of disclosure
o Section 120(2),(3),(4):
 Standard: as soon as possible

 3. Shall NOT Vote

o Section 120(5): Voting
 A director or officer who is subject to (1) shall not vote UNLESS the
contract or transaction:
 a) relates primarily to his or her remuneration;
 b) is for indemnity or insurance under section 124; or
 c) is with an affiliate.

 4. Continuing Disclosure
o Section 120(6): Continuing Disclosure
 If subsequent contracts  doesn’t have to declare nature and extent
of his interest
 Exception- S. 130(6)(c): if material change in nature of director’s
interest  then must declare the interest again

 5. If disclosure not made

o Section 120(7): Avoidance standards
 States that a contract or transaction, even though disclosure should
have been made but was not made, is not invalid where conditions
under subsection 7 are met AND where director is not accountable to
corporation for any profit realized because of director’s interest if:
 a) Disclosure of interest by the director was made as required
under subsection 1;
 b) Contract was approved or confirmed;
 c) Contract must be fair and reasonable with respect to the
corporation
 If conditions met  contract valid

 6. Confirmation by Shareholders
o Section 120(7.1): Confirmation by Shareholders

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  Even if s. 120(7) conditions are not met, the SHs can approve the
contract and the director is not accountable for profit if conditions of
s. 120(7.1) are met

 Conditions:
 a) SHs approve by special resolution
 b) Disclosure was made in a manner sufficient so that nature of
the interest was made [prior to vote]
 c) Contract was reasonable and fair to the corporation

 Vote: 2/3 majority

 Purpose: if the contract is profitable for the corporation

 7. If conditions not met

o Section 120(8): Application to court
 Where conditions of s. 120 are not met, either the corporation or SHs
can by application seek to set aside the contract and require director
to account for profits

Corporate Opportunities
 Opportunity of the corporation take by officer or director
 Covered exclusively by common law – no statutory framework

 Directors cannot make a present to themselves: Cook v Deeks

o Cannot ratify a situation where SHs make a present to themselves at the
expense of minority SHs  fraud on minority
 Directors or senior officers are precluded from obtaining for himself either
secretly or without approval of company any property or business advantage
either belonging to company or for which it has been negotiating: Canero

 Factors to determine if there is a breach of duty: Canero

o Position held by the person – the more senior = more FD will exist
o Nature of corporate opportunity
o Rightness of corporate opportunity
o Director or managers’ relation to the opportunity
o Amount of knowledge possessed and where did it come from
o How contract was obtained
o Whether special knowledge was acquired – and if so – how?
o Circumstances surrounding the termination of the relationship
o No obligation on principal corporation to show it would have otherwise
would have got the opportunity  doesn’t matter

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Competition
 Courts have not been as rigorous with precluding competition with corporation as
with other areas relating to FD
 If a director sits on two rival boards 
o Historically, courts have not found a conflict by simply occupying this
position [no actual conflict] – London v Mashonaland
o Currently: director cannot sit on boards of rival companies –Abbey Glen

Takeover Bids
 Definition: bidder attempts to bid for shares of SHs

 Issues that arise:

o If friendly  if target corp is happy to be taken over  then no issue
o If hostile  when target corp has no interest in being taken over

 Duty of Care standard: s. 122 (1)(b):

o Exercise the care, diligence and skill that reasonably prudent person
would exercise in comparable circumstances

 Definition: Best Interests of Corporation

o FD to consider all relevant stakeholders: BCE
 Cannot ignore any particular stakeholder – must take into account
ALL stakeholders
 Doesn’t mean that decision must benefit all stakeholders
 If process followed by directors takes into account relevant
stakeholders  court will not interfere

 Definition: care, diligence, and skill

o Common law test:
 Director need not exhibit in the performance of his duties a degree of
care and skill greater than that might be reasonably be expected from
one with his knowledge and experience
 Director is not obliged to give continuous attention to the affairs of the
company or attend all board meetings
 Director is entitled to rely on appropriate corporate officials
 Directors have a positive duty to act

o Statutory test DOES NOT import or advance the common law test: Soper
v Canada
 Stat test codifies the common law – subjective/ objective test
 Objective: ‘reasonably expected’
 Subjective: ‘in comparable circumstances’

 Test: “in comparable circumstances”  OBJECTIVE: People’s Department Store

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 o In applying test  have to look at whether the directors took into account
all circumstances relating to the corporation
 Not subjective: do not consider the competence of director [move
away from common law]
 Statute requires more from directors than the common law duty
of care

 Difference between common law vs statute: People’s Department Store

o Stat version includes the words “comparable circumstances” which requires
context in which the duty is being viewed

 Subjective element is important for FD under s. 122(1)(a)

Ratification
 Section 242: Evidence of shareholder approval not decisive
o Ratification/ SH approval is a factor a court may take into account when a
court is making a decision in regards to sections 214 [liquidation and
dissolution of a corporation], 240 [derivative action provision], or 241
[oppression remedy]

Statute
 Common law has been superseded by statute – where ratification has been allowed

 Section 122(3): No exculpation

o A corp cannot include a provision that effectively reads out breaches of duty
in their articles or corporation

 Section 120(7.1) – exception to above rule

o Where directors have not complied, SHs can ratify the breach where three
conditions are met [special resolution, disclosure and fair & reasonable to the
corporation]

Where ratification cannot occur

1. Fraud of the minority: cannot ratify an act where there has been fraud on the
minority [Cooks v Deeks]
2. Where corp acts ultra vires
3. Defect in majority approval: where certain percentage of SHs needed for
ratification was not met
4. Where SHs effectively had their personal rights violated; such as not receiving
notice or the like that was required pursuant to articles

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Corporate Governance
 Definition: framework of rules and practices that govern how a corporation is
managed
 See page 72-74 of summary

Shareholder Remedies
 Essentially talking about remedies for minority shareholders

Five Categories of Protection for SH: CBCA

1. SHs have right of access to corporate information
2. SHs right to a degree of participation in management
3. SHs right to dissent when fundamental change in corporation  or right to have
shares purchased at fair value
4. SHs right of action on behalf of corporation
5. SHs right to personal action against the corporation, the majority of SHs, or the
directors  oppression remedy under s. 241

1) Right of Access to Corporate Information

 See page 74-75

2) Right to degree of participation in management of corporation

 See page 75-76

3) Right to have ones shares purchased at fair value when fundamental change in
corporation – s. 190
 See page 76-77

4) Right of action on behalf of the corp where corp interests are affected
 See page 77-78
 Derivative actions: to apply for derivative action, SH need not be harmed at time
harm arose: Richards Greenshields

5) Oppression Remedy, s. 241

 Right of personal action against corporation, maj SH or directors

 Who can bring oppression remedy?

o Complainants: s. 238

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  Holder or a former holder of a security of the corporation or any of its
affiliates, director or officer or formers, or any other person who is in
the court’s discretion is a proper person

 Three things to be complained about:

o 1. Any act of corporation that affects the results [results-oriented test]
o 2. Where affairs of corporation are carried out in a certain manner
o 3. Where powers of director are exercised in a certain manner

 Act of corporation affects the result of business if being carried out in a

manner or the powers of directors have been exercised in a manner that is:
o Oppressive; or
o Unfairly prejudicial; or
o Unfairly disregards the interests of any security holder, creditor, director or
officer

Categories in which oppressive conduct divided

1. Exclusion from participation in closely held corporation
2. Issuance of shares to the disadvantage of the minority
3. Treatment of corporation by the majority as a private corporation
4. Denial of legitimate expectations of minority SHs

Exclusion from participation in closely held corporation

 When dealing with a closely held corporation, court may consider relationship
between SHs and not just legal rights: Ferguson v Imax

o Section 241 applied when husband stopped paying dividends to

estranged wife: Ferguson v Imax

 No oppression remedy if corporation stopped paying dividends: Sparling

Issuance of shares for non-corp purpose to disadvantage of minority

 When company is in no need for further capital [no corporate purpose], directors
not entitled to issue shares merely for purpose of maintaining control: Benard v
Valentini

Where the majority treat the corporation as if it were the majority’s private company
 Majority SHs must prove that they considered the interests of the minority SHs
to help show that the majority didn’t treat the company as their own: Palmer v
Carling-O’Keefe

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Denial of legitimate or reasonable expectations of minority SH
 Test for SH expectations re: oppression remedy: BCE
o 1. Is there evidence of a reasonable SH expectation?
 Factors of evidence of SH expectations:
 Commercial practice: was SH expectation reasonable?
 Look to nature of corp and size of corp  smaller the corp
THEN more SH expectations can develop
 Relationships among the parties
 How have parties treated one another historically?
 How are these expectations taken into account vis a vis
expectations of other potential stakeholders?

o 2. Was this expectation breached by conduct that fit within s. 241?

 Oppressive, unfairly prejudicial, unfairly disregarded?

 Not a legitimate expectation to believe that a corp can be held to an existing

dividend policy: West Fair Foods v Watt

 No FD between minority SHs and majority SHs: Bell v Source Data

o SHs do not have obligation to share information about potential buyers:
Bell v Source Data
o Consider: whether SHs have a history of acting collectively [dissenting
opinion by Justice Cory]

Takeover Bids
 Definition: Bidder attempts to bid for shares of SHs
 Issue that arises:
o If friendly  if target corp is happy to be taken over  then no issue
o If hostile  when target corp has no interest in being taken over

 What defensive measures can directors take?

o Can issue shares to a friendly group [that will vote against the takeovers] OR
o Issue legal rights to existing SHs to acquire additional shares of target
company WAY below target price which increases shares outstanding and
dramatically increases the cost of the bidder taking over the company

 Scope of defensive measures permitted?

o Courts have allowed considerable deference to be given to the board
o Focus will be on whether Board acted reasonably to avoid conflict of
interest
 May find a ‘white knight’ to pay fair value for the company

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 Thus, legitimate reasons why defensive measures can be taken [i.e.
want to get a fair value for the company or what the Board feels is a
fair value]
 May seek to set up a board of independent directors [not
an officer of the company]
 May also seek professional advice as to what company is
worth [OBCA and CBCA allow Board to rely on such
professional advice, s. 135(4)]

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