Ali_s Business Associations FRAMEWORK - Fall 2018
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1 Business Associations Fall 2018 –
Oshionebo Table of Contents PARTNERSHIPS ......................................................................................................................
3 Is there a partnership? ............................................................................................................................................
3
Step 1: Carrying on a Business (s. 1(g))
.....................................................................................................................
3
Step 2: In Common (s. 1(g)) .....................................................................................................................................
3
Step 3: With a View to Profit (s. 1(g))
.......................................................................................................................
3
Assignment of a Partner’s Interest under Section 35 ................................................................................................
4
Debtor-Creditor Relationships .................................................................................................................................
4
Co-Ownership of Property ......................................................................................................................................
4
Indicia of a Partnership: Continental Bank Leasing Corp. v Canada
...........................................................................
4
Formal Written Partnership Agreements .................................................................................................................
4
Types of Partnerships .............................................................................................................................................
5
A.
Ordinary Partnership (General Partnership) ...........................................................................................................................
5
B.
Limited Partnership .....................................................................................................................................................................
5
C.
Limited Liability Partnership ........................................................................................................................................................
6
Legal Status of a Partnership ...................................................................................................................................
6
Usual Contents of a Partnership Agreement ............................................................................................................
6
Default Rules under the Partnership Act
..................................................................................................................
7
Fiduciary Duty Between Partners ............................................................................................................................
7
Relationship Between Partnerships & 3
rd
Parties .....................................................................................................
8
Liability of Partners in Alberta LLPs .........................................................................................................................
9
Dissolution of Partnerships .....................................................................................................................................
9
A.
Dissolution of Ordinary/General Partnerships and LLPs .........................................................................................................
9
B.
Dissolution of Limited Partnerships ..........................................................................................................................................
10
C.
Dissolution Notification for LPs and General Partnerships .......................................................................................................
10
Franchises ...........................................................................................................................
11 Meaning of Franchise
............................................................................................................................................
11
Purpose of the Franchises Act ...............................................................................................................................
11
Contents of the Franchisor’s Agreement
................................................................................................................
11
A.
Franchisor’s Obligations
........................................................................................................................................................
11
Corporations! ......................................................................................................................
15 Constitution .........................................................................................................................................................
15
Jurisdiction to Regulate
.........................................................................................................................................
15
Application of the Charter .....................................................................................................................................
15
Methods of Incorporation .....................................................................................................................................
15
2 A.
Pre-Incorporation Contracts ..................................................................................................................................................
17
B.
Nature of the Corporation .........................................................................................................................................................
18
C.
Lifting the Corporate Veil ..........................................................................................................................................................
18
D.
Corporate Share Structure ....................................................................................................................................................
19
E.
Corporate Governance ..............................................................................................................................................................
22
F.
Fiduciary Duties .........................................................................................................................................................................
23
G.
The Duty of Care ....................................................................................................................................................................
26
H.
Limitations and Defences ......................................................................................................................................................
27
Shareholder Remedies ..........................................................................................................................................
28
3 PARTNERSHIPS Is there a partnership? I.
Section 1(g)
–
partnership elements (persons carrying on business with a view to profit). II.
Section 4 –
negative rules, what doesn’t create a partnership: a.
4(a): Joint tenancy, tenancy in common, joint property/common property. b.
4(b): Sharing of gross returns c.
4(c): Sharing of profit is prima facie
proof of partnership absence evidence to the contrary. d.
Need to satisfy 3-step test. Step 1: Carrying on a Business (s. 1(g)) Miah v Khan (agreed to open a restaurant, did the renos and signed contracts including linen, began advertising). I.
RULE: The partnership doesn’t begin until the persons who agree to carry on a business activity in common actually embark on the activity
. II.
Embarking:
Satisfied where the parties took positive preparatory steps to establish the business. III.
Broad definition of “carrying on a business” –
think film analogy. a.
Miah v Khan –
parties become partners when they embark on the activity in question (e.g. getting joint bank accounts, arranging to borrow money, buying linens. Step 2: In Common (s. 1(g)) I.
Acting in common = going into business together, with or without an agreement (
Red Burrito
–
opening new restaurant). II.
Factors to consider from Red Burrito
: a.
Both acted on the parties’ plans.
b.
Both contributed effort, knowledge, skills
. c.
Both involved in the management
of the joint venture. d.
Parties’ intentions
. e.
Things that didn’t matter:
i.
Didn’t incorporate Newco as agreed, didn’t assign lease.
III.
Other factors from Westlock Foods
(building a mall, unpaid invoice to Contractor): a.
Contribution of capital. b.
Executed debenture together. c.
Joint bank account. d.
Represented themselves as partners –
shows intention
. e.
Things that didn’t matter:
i.
Not all property titles assigned to partnership; only one party had signing authority; ii.
Control over the business –
control has nothing to do with the existence of a partnership. IV.
Cases: a.
Red Burrito –
acting in common means everyone contributes something; start-up capital, leasehold interest, etc. b.
Westlock Foods
–
elements included buying share in mall, sharing a bank account, dealing with prospective tenants Step 3: With a View to Profit (s. 1(g)) I.
The parties must intend to make a profit. It is an objective and subjective test: a.
Courts look at the objective evidence of the surrounding facts –
what the parties actually did
; and b.
Whether the objective evidence is consistent with the subjective intention to carry on a business in common with a view to profit (
Backman
). II.
It is enough to show there was an ancillary profit-making purpose (
Backman
). a.
It does not have to be the dominant intention, just an intention (
Backman
). III.
No requirement of actual profit/net gain
to establish that the activity has a view to profit (
Spire Freezers
). IV.
Indicia of a Partnership (Continental Bank
): a.
Contribution of money, property, effort, knowledge, skill, etc. b.
Joint property interest in subject-matter of the adventure; c.
Sharing of profits or losses; d.
Joint bank accounts; e.
Formal agreement between the parties; i.
Does the agreement contain the kinds usually found in a Partnership Agreement? ii.
Was it acted upon?
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4 iii.
Did it govern their affairs? V.
Case Examples: a.
Backman
: The Canadians disposed of the condo building right away –
thus there was no partnership because there was “no business being carried on in common with a view to profit.”
b.
Spire Freezers
: Canadians continued to run the condo building and make profit, then eventually declare a loss. This counted as running a business with a view to profit. Assignment of a Partner’s Interest under Section 35 I.
Under s. 35, an assignee has the right to: a.
Receive their share of the partnership profit (s. 35(2)(a)); b.
Accept accounting of profit as agreed to by the partners (s. 35(2)(b)); and c.
When winding-up happens, to receive a share of the assets (s. 35(3)(a)) and an account from the date of dissolution (s. 35(3)(b)). II.
An assignee is not entitled to: a.
Interfere in the management of the partnership (s. 35(1)(a)); b.
Require accounts of partnership transactions (s. 35(1)(b)); c.
Inspect the partnership books (s. 35(1)(c)). III.
Rules from Thrush v Read
:
a.
Assignment of shares doesn’t make somebody a partner;
b.
Partners only have the duty to disclose material factors to other partners; c.
Assignees rights are limited to s. 35 PA rights (i.e. share of profits, rights on dissolution. IV.
The transfer/assignment of partnership interest from partner to assignee does not make the assignee a partner: Thrush v Read –
as a result, there was a fiduciary duty from manager (Read) to Thrush. Debtor-Creditor Relationships I.
A debtor-creditor relationship does not itself create a partnership (s. 4(c)(iv)), but: II.
It could be a partnership where the parties intend
it to have that effect and the 3 elements are satisfied (
Pooley
). Co-Ownership of Property I.
Partnership Act
, s. 4(a): joint tenancy, joint property, common property etc. does not of itself create a partnership
–
depends on the intention, all facts of the case, and 3 elements (
AE Luggage Ltd
.). Indicia of a Partnership: Continental Bank Leasing Corp. v Canada
I.
The three “essential ingredients” are:
a.
A business; b.
Carried on in common; c.
With a view to profit. II.
Dependent on the facts and circumstances
of each case, and what the parties actually intended
(subjective intent). III.
Indicia: a.
Contribution by the parties of money, property, effort, knowledge, skill or “other asset” to a common undertaking;
b.
Joint property interest in the subject-matter of the adventure; c.
The sharing of profits and losses; d.
Mutual right of control or management of the enterprise; e.
Filing of income tax returns as partnership; f.
Joint bank accounts. Formal Written Partnership Agreements I.
Continental Bank
: If there is a formal written agreement
to “govern the relationship” and “hold themselves out as partners”
ask: a.
Are the provisions the kinds usually found in a partnership agreement? b.
Was the agreement acted upon? c.
Did it actually govern the affairs of the parties?
5 Types of Partnerships A.
Ordinary Partnership (General Partnership) General Partners I.
Have a right to participate in management
(s. 56);
II.
Are jointly
liable
for debts and obligations of the partnership (s. 11(2)).
III.
Are jointly and severally liable (s. 15) for loss or injury caused by the partnership (s. 13) and misapplication of money (s. 14).
B.
Limited Partnership An LP Consists Of I.
One or more persons who are general partners AND one or more persons who are ltd. partners (s. 51(2)). II.
May have any number of limited partners (s. 51(3)). Formation I.
Filing of Certificate
with the Registrar (s. 52(1)); II.
Certificate must be signed by all partners
(s. 52(3)); III.
Content
of the Certificate (s. 52(3)): a.
Firm name under which LP partnership will be conducted; b.
Character of the business; c.
Name & residential address of each partner; d.
Term of existence of LP; e.
Value of cash & property contributed by each LP; f.
And mooooore. General Partners in an LP I.
A person can be a general partner and limited partner at the same time in the same LP (s. 53(1)). II.
Consequences (s. 53(2)): a.
You have the same rights, powers, restrictions as a general partner except
in respect to contributions as a limited partner –
then you have the rights, etc. of a limited partner. III.
Real property
owned by an LP are registered only in the names of general partners (s. 55(3)). IV.
Rights and liabilities of GPs in an LP (s. 56): a.
GP in an LP is the same as a partner in an ordinary partnership (s. 56). i.
Involved in the day-to-day management, subject to restrictions
in s. 56, e.g.: 1.
Can’t act in contravention of the Certificate;
2.
Can’t do anything making it impossible to carry on the LP’s ordinary business;
3.
Can’t admit a person as a GP, or as a LP unless all
owed under the Certificate; 4.
Consent to a judgment against the firm; 5.
Possess/assign rights to firm property, other than for a partnership purpose; 6.
Continue the LP after losing a GP, unless in the certificate. ii.
Jointly liable
for debts/obligations of the LP (s. 11(2)); iii.
Jointly and severally liable
(s. 15) for loss or injury
caused by the LP (s. 13) or misapplication of money
(s. 14). Limited Partners in an LP I.
The surname
of an LP can’t appear
in the firm name (s. 54(1)). II.
Can’t contribute services
to the LP (s. 55(1)) –
but can contribute cash & other property
(s. 55(1)). III.
An LP’s interest in the LP is personal property
(s. 55(2)). IV.
Rights of a limited partner in an LP (s. 58): a.
Can look at the books and receive info on demand/accounting when reasonable & just (s. 58). b.
Can obtain dissolution and winding-up of the firm by court order (s. 58). c.
Share of profits and return of contribution (s. 59):
6 i.
Subject to s. 62(1), LP contributions are paid out before GP contributions but not before anyone else (creditors, etc). ii.
Need consent of all partners
to return contributions (s. 62). d.
On death of an LP, executor has deceased’s power to constitute an assignee of LP (
s. 68). e.
Priority settlement of accounts on dissolution (s. 73). Liability of Limited Partners in an LP I.
Liability of limited partners is limited to the amount of property they’ve contributed to the capital of the LP (s. 57). II.
They’re liable to creditors as a GP if they “take part in the control of the business” (
s. 64). a.
Haughton Graphic v Zivot
–
if an LP takes part i
n the control of the business he’s liable as a GP even if the 3
rd
party did not rely on him as being personally liable. (Statute silent on reliance.) III.
Liable to creditors as GP if their surname appears in the name of the LP
AND the creditor did not know the person was not a GP (s. 54(1)). C.
Limited Liability Partnership General Overview of LLPs I.
Designed for “eligible professions”
(ss. 81, 82(1)). II.
Requires registration
with the Registrar –
begin first as an ordinary partnership (s. 82). The content of the application for registration must include (s. 82(4)): a.
Name
of the partnership; b.
Eligible profession
the partners practice; c.
Name and address
of partner designated as firm representative
; d.
Address of registered office
of the firm; e.
Statement by a person authorized by governing body of the profession certifying: i.
The partners have insurance
; ii.
The partners meet all the other requirements
. III.
Effect of registration (s. 84): a.
Subject to any agreement between the partners
, the registration of a partnership as an Alberta LLP doesn’t cause the dissolution of the partnership –
the LLP continues as the same one that existed prior to registration. IV.
An LP may not be registered as an Alberta LLP (s. 82(3)). V.
Notice must be sent to clients explaining the change in liability of partners as a result of registration as an Alberta LLP (s. 85). Legal Status of a Partnership I.
Partnerships DO NOT HAVE A SEPARATE LEGAL EXISTENCE FROM INDIVIDUALS a.
Thorne –
cannot be an employee of your own partnership, because you are your partnership and thus cannot get WCB coverage. II.
As a result, cannot contract between partnership and partner. Usual Contents of a Partnership Agreement I.
Firm Name: a.
Part of the goodwill of the business; b.
Belongs to all partners; c.
Registration required if partnership for trading, manufacturing, contracting, mining
(s. 106); d.
Cannot contain the surname of a limited partner (s. 54). i.
If it does & client doesn’t know they’re an LP, the LP will be treated like a GP (
s. 54(1)). II.
Description of Business: a.
Scope of the partner’s authority to bind other partners by his acts depends on the nature of the partnership business. It’s good to be specific, to avoid being bound unintentionally. III.
Membership: Admission/expulsion of partners. IV.
Capitalization: Who contributes what/when. V.
Partners’ Interests: Formula for sharing of profits/losses.
VI.
Partnership Property. VII.
Management: a.
Who is in charge?
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7 b.
How are decisions made? c.
Majority or consent of all partners? d.
Any remuneration? VIII.
Dissolution: Methods/process. IX.
Distribution of Assets on Dissolution: Priority after paying creditors? Default Rules under the Partnership Act
I.
Mutual rights/duties
of partnerships under the Partnership Act may be varied by partner consent (s. 22). II.
Act’s d
efault rules apply if no agreement by the partners to the contrary. III.
Default rules under Alberta’s Partnership Act
: a.
Property bought w/ partnership money belongs to firm unless contrary intention shown (s. 24). b.
Partnership real property is personal moveable property, not real property, unless contrary intention shown (s. 25). c.
Determination of partner’s interest (
s. 28): i.
All partners entitled to share equally in profits/losses sustained by the firm; ii.
Each partner may take part in the management
of the firm; iii.
No new partners
without consent of all other partners; iv.
Ordinary differences between partners decided by majority vote
; v.
No change in nature of the business
without consent of all partners; vi.
Firm shall indemnify partners for payments
made by a partner: 1.
Made in the ordinary/proper conduct of the firm’s business;
2.
For anything done necessarily to preserve the firm’s business/property.
d.
Expulsion of a partner (s. 29). e.
Dissolution (ss. 36, 37). f.
Distribution of assets on final settlement of accounts (s. 48). Fiduciary Duty Between Partners I.
A partnership is a relationship of utmost good faith and loyalty: II.
Partners must avoid conflicts of interest –
prior disclosure is the best way to avoid this. III.
The fiduciary duty is obligatory
and strict
–
as well as codified
: a.
Partnership property
must be applied for the exclusive purposes of the partnership
, and in accordance with the Partnership Agreement (s. 23(1) and Green
). b.
Duty to account to partnership re all things affecting the partnership (s. 32): i.
Income earned as a partner must be disclosed to the partnership (
McKnight
).
ii.
Strict duty of disclosure
for partners, concerning full information of all things affecting the partnership (
Rochwerg
).
c.
Accountability
for partners of private profits (s. 33).
i.
“
s. 32(1) –
Each partner shall account to the firm for a benefit derived by the partner without the consent of the other partners
from:
1.
Any transaction concerning the partnership, or
2.
Any use by the partner of the partnership property, name or business connection
.”
ii.
Income earned by a partner due to their role in the partnership is to be treated as income for the partnership (
McKnight
).
iii.
Must account for income earned through partnership connections (
Rochwerg, McKnight
).
iv.
Shares, stock options, director fees
are matters affecting and concerning the partnership (
Rochwerg, McKnight
).
v.
SURVIVAL
: 1.
This rule survives after dissolution if using partnership assets
(
Green
);
2.
Partnership assets are valued at distribution, not dissolution
unless contrary agreement is shown (
Green
, s. 33(2)).
IV.
Cases: a.
McKnight v Hutchison
: i.
Business activities and payments received from partnership connections are matters affecting the partnership. ii.
Partners must disclose these activities/earnings to the partnership! Otherwise, breaching fiduciary duty. iii.
Breaching the fiduciary duty requires accounting for profits to the partnership. b.
Rochwerg v Truster
8 i.
Partners owe the partnership the duties of loyalty, good faith, and avoidance of conflict and self-interest. ii.
Partners are subject to a strict duty of disclosure concerning all things affecting the partnership. iii.
If you profit from a partnership asset –
including business connection –
you must (1) disclose fully and (2) account for profits. c.
Green v Harnum
i.
Partners must account to the other partners for any benefit derived from the use of partnership assets. ii.
Valuation is based on time of distribution. iii.
Duty to account survives the partnership. Relationship Between Partnerships & 3
rd
Parties I.
Note that you CANNOT contract out of these provisions –
they exist to protect the public/consumers. II.
A partner is an agent of the firm
and of the other partners
(s. 6). III.
Power to Bind the Firm (s. 7)
:
a.
The partner’s power to bind the firm exists if carrying on firm business
(s. 7). b.
The partner’s act must be in line with the usual way of business
. c.
Will bind the firm UNLESS
: i.
The partner has no authority to act for the firm in that particular matter, AND ii.
The 3
rd
party either KNOWS the partner has no authority, or DOES NOT BELIEVE the partner to be a partner. d.
Improper Purposes: Acts normally part of the business, even for improper purposes, can still attract liability (
Ernst & Young v Falconi
). e.
Vicarious Liability:
Acts of a single partner, done in the ordinary course of business, can create liability for the rest of the partnership (vicarious liability) –
Strother
. IV.
Partners Bound by Acts on Behalf of the Firm (s. 8)
:
a.
An act relating to the business of the firm, done in the firm name, or in another manner showing an intention to bind the firm, by an agent of the firm, binds the firm
. V.
Using the Firm’s Credit for Purposes not Connected to Firm’s Business (s. 9): a.
Firm not bound unless the partner is specifically authorized by other partners. VI.
Notice that Firm Not Bound by Acts of Partner
(s. 10): a.
Where partners agree to restrict the power of another partner to bind the firm, the then act of the partner will not bind the firm with respect to persons who have NOTICE
of the agreement. VII.
Liability of Partnership to 3
rd
Parties is Joint and Several
(s. 15): a.
Wrongs occurring in the ordinary course of business (i.e. loss, injury, or penalty suffered by 3
rd
parties –
s. 13). i.
Includes acts done for improper purposes
(fraud) if done in the nature of acts normally performed by the firm in its usual business (
Ernst & Young v Falconi
). 1.
JOINT AND SEVERAL LIABILITY for wrongs against 3
rd
parties. b.
Misapplication of money (s. 14). VIII.
Debts and Obligations (s. 11) –
joint liability! IX.
Improper Employment of Trust Money (s. 16): a.
Only the partner is responsible. X.
Persons Liable by Holding Out (s. 17): a.
Each person who by spoken or written words or by conduct represents that person, or who knowingly permits that person to be represented, as a partner in a particular firm is liable as a partner to anyone who has on the faith of that representation given credit to the firm
. XI.
Liability of Incoming or Outgoing Partners (s. 20): a.
Partners are not liable to creditors for anything done before the person became a partner. b.
Partners who retire do not cease to be liable for partnership debts incurred before retirement. c.
A retiring partner can be discharged for existing liabilities by an agreement between: i.
That partner, and ii.
The members of the firm, as newly constituted, and iii.
The creditors. iv.
Such an agreement may be expressed
or can be inferred
as a fact
from the course of dealing between the creditors and the newly-constituted firm. XII.
Rights of People Dealing w/ Firm After Chang
e in Firm’s Constitution/Make
-up
(s. 40): a.
A person is entitled to treat apparent members of the old firm as still being members of the firm until that person has notice of the change.
9 b.
The estate
of a partner who dies
, assigns his interest to his creditors, becomes bankrupt
, or was not known
to the person dealing with the firm and then retires
is not liable for debts contracted after the date of above incidents. Liability of Partners in Alberta LLPs i.
An LLP partner is not individually liable for the wrongful acts, negligence, omissions, malpractice, or misconduct of: a.
Another partner, or b.
An employee, agent or representative of the LLP Occurring in the ordinary course of carrying on practice in an eligible profession (s. 12(1)). ii.
EXCEPTIONS
:
a.
Negligence combined with (s. 12(2)): i.
Knowledge
of the negligence and failure to take reasonable steps
to prevent its commission
. ii.
Negligence
by a person under the partner’s supervision
and where the partner failed to competently supervise that person
. Dissolution of Partnerships A.
Dissolution of Ordinary/General Partnerships and LLPs Dissolution of Ordinary Partnerships and LLPs 1.
Subject to any Partnership Agreement (ss. 36 and 37). 2.
Expiration of Notice (s. 36). a.
If a fixed term, by expiration of term. b.
If a single undertaking, by termination of the undertaking. c.
If undefined period, then by partner giving notice of intention to dissolve. 3.
Death, assignment in trust, or bankruptcy (s. 37). 4.
Illegality of partnership (s. 38) –
mandatory provision. a.
E.g. if it becomes unlawful to carry on the business. 5.
Application to Court to dissolve partnership (s. 39). a.
Permanent unsoundness of mind (s. 39(1)(a)); b.
Permanent incapacity to perform partner’s obligation (
s. 39(1)(b)); c.
Partner guilty of conduct that prejudicially affects the business (s. 39(1)(c)); d.
Willful or persistent breaches of the partnership agreement (s. 39(1)(d)); e.
Partnership only carried on at a loss (s. 39(1)(e)); f.
Just and equitable that the partnership be dissolved (s. 39(1)(f)); i.
Complete breakdown of the partnership relationship (
Red Burrito
). 6.
Note that rights and obligations of partners continue during winding-up (s. 42). Notice of Dissolution by Partner i.
s. 41 –
any partner may publicly give notice of dissolution/retirement and require the other partners to agree where needed.
Property Rights/Distribution of Assets i.
Distribution of assets governed by s. 48 subject to agreement
. ii.
Assets to be used in following manner & order: a.
1) Pay debts and liabilities to third parties first (i.e. not partners). b.
2) Pay the partners any loans or advances made to partnership. c.
3) Pay each ratably partner the amount due from the capital. d.
4) Use residue to pay partners in the proportion the profits are divisible. Cancellation by Registrar of LLP i.
The Registrar may cancel the registration of an Alberta LLP if (s. 90(1)) if: a.
The LLP is in default in complying with s. 89; b.
The LLP files a request to have its registration cancelled; c.
If the Registrar receives notice from an authorized representative of the governing body of the eligible profession stating the LLP or one or more partners don’t comply with s. 82(4)(b).
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10 ii.
THIS DOES NOT DISSOLVE THE PARTNERSHIP –
it just becomes an ordinary partnership. Otherwise, the same rules apply in order to dissolve the (now) ordinary partnership. B.
Dissolution of Limited Partnerships Dissolution of Limited Partnerships i.
An LLP is dissolved, subject to agreement
, upon: a.
Retirement; b.
Death; c.
Mental incompetence Of a general partner
unless business is continued by the remaining general partners (s. 67). ii.
Cancellation of certificate (s. 69). Settling of Accounts on Dissolution i.
Under s. 73, accounts are settled in the following order: a.
Liability to creditors (except LPs and GPs); b.
Limited Partners; c.
General Partners. C.
Dissolution Notification for LPs and General Partnerships There must be a declaration of dissolution
, and the Registrar must be informed under s. 116 for dissolution of both LPs
and General/Ordinary Partnerships
.
11 Franchises Meaning of Franchise i.
Section 1(d) of Alberta Franchises Act
, a franchise is a right to engage in a business: a.
In which goods or services are sold or offered for sale or distributed under a marketing or business plan prescribed in a substantial part by the franchisor/associate; b.
Substantially associated with a trademark, service mark, trade name, logotype, or advertising of the franchisor or its associate or designating the franchisor/associate; and c.
That involves: i.
A continuing financial obligation to the franchisor/associate by the franchisee and significant continuing operational controls by the franchisor/associate; ii.
The payment of a franchise fee. Includes a master franchise and subfranchise. Purpose of the Franchises Act i.
Section 2 –
purpose is to help franchisees make informed investment decisions by requiring timely disclosure of necessary info; to provide civil remedies to deal with breaches; and to provide a means for franchisors/ees to govern themselves and promote fair dealing. ii.
Goal is to protect franchisees
. iii.
You can’t contract out of the Franchises Act
! (
Hi Hotel
). Contents of the Franchisor’s Agreement
1.
Obligations of the Franchisee
a.
Royalties/rents/fees; b.
Obligations to sell only authorized products/services; c.
Obligations to comply with operating procedures; d.
Insurance; e.
Maintenance of equipment/premises. 2.
Obligations of the Franchisor a.
Training of Franchisee;
b.
Provision of business advice;
c.
Advertising and marketing.
3.
Bookkeeping and business records 4.
Audit clauses 5.
Restrictive covenants a.
Non-compete clause (for reasonable amount of time);
b.
Non-disclosure;
c.
Non-solicitation (designed to survive franchise relationship –
can’t solicit clients for a reasonable amount of time).
6.
Use of IP 7.
Term/renewal clause 8.
Territory granted 9.
Termination 10.
Releases 11.
Transfer 12.
Incapacity/Death of a Franchisee 13.
Guarantees and indemnities 14.
Etc. a.
The Franchisee and Franchisor cannot contract out of the Act!
A.
Franchisor’s Obligations
The Duty to Disclose: Disclosure Documents i.
Disclosure documents are required under s. 4(1) of the Act. ii.
The DD must be received by the franchisee at least 14 days
prior to (s. 4(2)) –
whichever is earlier: a.
Signing the Franchise Agreement; or b.
The payment of any consideration related to the franchise by the franchisee.
12 iii.
Contents
(s. 4(3)): a.
Financial statements
; i.
Panda Flowers –
screenshots on a computer screen are insufficient. b.
Copies of the proposed franchise agreement
; c.
Requirements by the Regulations
(
Franchises Regulation
, AB): i.
Reg. 2(1) –
disclosure of all material facts
including material facts set out in Schedule 1. ii.
Reg. 2(2) –
different jurisdiction requirements. iii.
Reg. 2(3) –
certificate vouching for the disclosure document. 1.
Certificate must be signed and dated
by the Franchisor; number of signatories under Reg 2(3). 2.
If it doesn’t comply with the Act, then this is fatal.
a.
Asian Concepts –
certificate didn’t comply with number of signatures and was held invalid (not substantially compliant). iv.
Material Change
: Franchisor must provide a description of any material change (s. 4(4-5)). a.
‘Material change’ means (
s. 1(1)(n)
): “
(a change) that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be sold or the decision to purchase the franchise
.”
v.
Cases:
a.
Panda Flowers
–
signed FA before getting proper DD, was only shown screenshots of the franchisor’s finances.
i.
Disclosure didn’t comply with the Act, was not given in time, and did not contain financial statements.
Result? Notice of cancellation –
timely and properly implemented –
causes the FA to be cancelled. b.
Hi Hotel
–
given Ontario disclosure document, no certificate, to AB document. i.
Failure to provide accurate and complete information is fatal to an agreement
. ii.
Provisions of the Franchises Act
are mandatory
! c.
Essa v Mediterranean Franchise Inc
–
signed agreement and started fast food restaurant which failed after 9 months; Essa sued for deficient disclosure. i.
DD did not comply with several sections of the Reg. and so was not substantially complete
. The s. 13 clock did not run. d.
672341 Canada
–
DD missing tons of stuff. i.
Even though information may be called
disclosure, it must contain the substantive elements required –
“calling something a disclosure document doesn’t
make it one.”
Exemptions from Section 4 Disclosure Requirements i.
Exemptions apply to things that are not material changes
. a.
Sale of a franchise by the Franchisee (3
rd
party sale, caveat emptor
). b.
Sale of a franchise to a person who is an officer or director of the franchisor for at least 6 months (they would know relevant info). c.
Sale of an additional franchise to an existing Franchisee. d.
Renewal or extension of an existing FA. e.
Further exemption by the Minister under s. 6. Failure to Provide the Disclosure Document i.
Under section 13, the Franchisee has the right to rescind the agreement by giving notice of cancellation but only within (whichever is first): a.
60 days of receiving the Disclosure Document, or b.
2 years after the Franchisee is granted the franchise. ii.
Note that SUBSTANTIAL COMPLIANCE WILL SUFFICE per Reg. 2(4). a.
But –
if there is no
substantial compliance
, there is effectively no disclosure
and the s. 13 clock does not start to run (
Hi Hotel
, Essa
). Effect of Section 14 Notice of Cancellation i.
This CANCELS THE AGREEMENT
under s. 14(1) and TRIGGERS COMPENSATION under s. 14(2). ii.
Per section 14(1), a notice of cancellation
given under s. 13 operates to: a.
Cancel the franchise agreement, or b.
Withdraw the offer to purchase (whichever is applicable). iii.
Cases:
a.
Panda Flowers –
Notice of cancellation, when timely and properly implemented, will cause the franchise agreement to be cancelled
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13 b.
Hi Hotel –
Franchisee not required to establish that they were misled or suffered damages –
they have entitlement to rescind c.
Asian Concepts –
Entitled to rescind for lack of signatures
d.
Essa –
Essa was entitled to rescind
and get compensation
for running the restaurant/contract Note that the Remedies in the Act are NOT EXHAUSTIVE •
Remedies in the Franchises Act
are NOT exhaustive and the parties can sue for other common law remedies. •
The rights of action are in addition to FA remedies and don’t derogate from any other right the franchee/or migh
t have at law (s. 15). Duty of Fair Dealing i.
Every party is subject to the duty of fair dealing (s. 7). ii.
This means that they must act: a.
In good faith
; and b.
In accordance with reasonable commercial standards
. iii.
Cases:
a.
Essa
–
franchisor failed to adhere to agreement which obligated it to provide all supplies (and obligated franchisee to only get supplies from approved suppliers) by causing delays. i.
Court held the Fr “failed to deal fairly … respecting the supply of food products.”
ii.
Franchisor had an independent ground
for treating the Franchise Agreement as at an end (plus disclosure deficiencies). b.
Katakidis
–
encroachment on franchisee’s territory by building a Mr. Sub was a breach of the duty of fair dealing!
i.
Court held Franc
hisor “
breached their implied duty of fair dealings and good faith
by opening a competing franchise within close proximity to the plaintiff’s existing store during the currency of the plaintiff’s franchise agreement.”
Liability for Misrepresentation in the Disclosure Document i.
The Franchisee has a right of action against (s. 9(1)): a.
The franchisor; and b.
Every person who signed the disclosure document. i.
Liability is joint and several (s. 12). ii.
DEFENCE: A person is not liable under s. 9 if they prove that the franchisee purchased the franchise with knowledge of the misrepresentation
(s. 10(1)). a.
A person other than the franchisor is not liable if: i.
The DD was given without their knowledge and consent and the person gives notice
to that effect (s. 10(2)(a)); ii.
Before the purchase of the Franchise, the person gives notice of the withdrawal of their consent
on becoming aware of the misrepresentation in the document (s. 10(2)(b)). 1.
NOTICE must comply with Regulation 7(1-4): a.
Must be given to Franchisor and Franchisee; b.
Must be published in a daily newspaper circulated in Calgary and Edmonton; c.
Must contain: i.
A statement that the DD was given without their consent; ii.
A statement that the person has withdrawn his consent to the disclosure of the DD and the reasons for doing so. iii.
DON’T NEED TO PROVE RELIANCE: If there is a misrepresentation in the DD, the franchisee who purchases the franchise is deemed to have relied
on the misrep. (s. 9(2)). iv.
TEST: A misrepresentation is (s. 1(1)(q)): a.
(i) an untrue statement
of material fact; b.
(ii) an omission to state a material fact that is required to be stated; c.
(iii) an omission
to state a material fact that must be stated for a statement to not be misleading. v.
Cases:
a.
Bagai
–
Franchise was going to open a copy shop, franchisee gave misleading projection numbers that inflated profits. i.
Can’t have misrepresentations in the DD to indu
ce a FA to be executed. ii.
Projections were inaccurate, untrue, misleading.
14 iii.
Damages -> cost of the franchise plus interest.
b.
Machias
–
Earning projections severely and recklessly misinterpreted, Franchisor liable for misrepresentation. i.
Remedy -> rescission.
Franchisee’s Right to Associate with Other Franchises
i.
Per the Franchises Act, s. 8: a.
(1) A franchisor/its associate can’t prohibit or restrict a franchisee from forming an organization or franchisees from associating with other franchisees in any organization of the franchisees. b.
(2) Franchisor/its associate can’t directly or indirectly penalize
a franchisee for engaging in the activities in subsection (1). ii.
If a franchisor contravenes s. 8, the franchisee has a right of action for damages against the franchisor or its associate, as the case may be (s. 11). Other Considerations •
Can’t choose a different jurisdiction than Alberta or restrict application of AB laws (
s. 17). •
Can’t contract out of any requirements in the Act! (s. 18). o
Midas Canada –
liability release declared void because it contracted out of Franchises Act requirements.
15 Corporations! Constitution •
Constitution Act, 1867 s. 92(11) gives the provinces power over “companies with provincial objects.”
•
Federal power over: o
Companies with objects other than provincial (i.e. banks, telecom, companies incorporated under the CBCA). •
Citizens Insurance Co v Parson
. Jurisdiction to Regulate •
Federal:
o
Limited to a few areas within the legislative competence of the federal gov’t.
•
Provincial:
o
Federal corporations are subject to provincial laws if the laws are inconsistent with federal law. o
NOTE: Province can’t legislate to deprive a dominion company of its status/powers: John Deere
•
Extra-provincial:
o
Regulated by both federal and provincial governments. o
Regulation must be within the constitutional power of the regulating gov’t.
Application of the Charter •
Corporations can have standing as persons to challenge constitutionality of legislation applied to them. o
Big M Drug Mart –
freedom of religion. •
Corporations can invoke the Charter when they’re defendants in civil proceedings instigated by the state or a state organ pursuant to a law or regulatory scheme (
CEMA
). •
Corporations enjoy certain rights like the freedom of expression
guaranteed by the Charter (
RJR
). Methods of Incorporation Articles of Incorporation i.
Must be filed with designated gov’t official (the Registrar
in Alberta). ii.
Contents of Articles of Incorporation must include (s. 6 ABCA): a.
Name. b.
Number of Directors. c.
Registered Office. d.
Capital structure. e.
If 2 or more classes of shares, the rights and privileges
attached to each class of share. f.
Any restriction
on share transfer or the business of the company. iii.
Articles of Incorporation used by ABCA, CBCA, and almost all provinces. iv.
Bylaws:
a.
The rules governing the daily operation of the company are set out in the bylaws. b.
Not filed with the government normally. c.
ABCA allows Articles to include matters usually set out in the bylaws (s. 6(2) ABCA). Other Forms of Incorporation •
Letters patent (PEI). •
Special acts of parliament (Crown Corporations). •
Memorandum of association and articles of association (Nova Scotia). Incorporation: Sections •
Federal, CBCA ss. 5-13. •
Alberta, ABCA ss. 5-14. •
Who can incorporate? o
ABCA s. 5 o
CBCA s. 5
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16 Process of Incorporation 1.
Choose a corporate Name. 2.
Obtain a NUANS report (Newly Upgraded Automated Name Search). a.
Reserves the proposed name for 90 days. b.
Not required for numbered names. c.
Owned and operated by Industry Canada. 3.
Compete the following forms (s. 7 A/CBCA): a.
Articles of Incorporation. b.
Notice of Address. c.
Notice of Directors (s. 106 A/CBCA). i.
Directors must be adults. ii.
At least ¼ of directors must be resident in Canada. 1.
ABCA s. 105; CBCA s 105. Effect of Certificate of Incorporation •
Corporation comes into existence on the date shown in the COI
(s. 9(1) A/CBCA). •
COI is conclusive proof
that (s. 9(2) A/CBCA): o
The incorporation provisions of the Act have been complied with; o
The corporation was incorporated under the Act as of the date on the certificate. Corporate Names •
Prohibited names (s. 12 A/CBCA): o
Prohibited names; o
Identical names; o
Similar names causing confusion. ▪
Paws Pet Food
–
people were going to the other pet store (after applicant built significant good will on its name), thinking it was a related company. •
Court notes that there does not need to be
actual evidence of confusion; just a reasonable chance
that confusion could arise. ▪
Merchant –
mail was going to the wrong address because both were corporate real estate agent with similar names. •
Court: “There is evidence that the applicant’s use of its name is confusing and misleading and is thus prohibited.”
o
Names not meeting the requirements prescribed by the regulations (s. 12(1) A/CBCA). ▪
Business Corporations Regulation
(Alberta): •
Similar and identical names (s. 4) •
EXCEPTIONS (s. 5.1) –
ALL MUST APPLY: o
The body has ceased to use the name; o
The name is not a number name; o
The body corporate and the corporation were affiliated
at the time the body corporate ceased to use the name; o
The body corporate consented
in writing to the use of the name; AND o
The corporation undertakes to amend all titles and public registrations
in the name of the body corporate to reflect the change within 6 months. •
Minor differences in names (s. 5). •
General or descriptive names/names of a living person/geographic names (s. 6) o
EXCEPTION (s. 6): “Unless the name has through use acquired a meaning that r
enders the name distinctive
.”
•
Family names (s. 7). •
Names exceeding 200 characters (s. 10). •
Year in name (s. 12). •
Obscene, scandalous, or immoral names –
in any language (s. 13). •
Other prohibited affiliations (s. 14): o
E.g. Governments, public agencies, universities, Olympic Games, etc. •
Registrar’s powers, s. 13 ABCA.
▪
Similar rules in CBCA:
17 •
s. 12 and Regulations ss. 18-32. A.
Pre-Incorporation Contracts NOTE: If the pre-incorporation K is oral -> common law applies. If the pre-incorporation K is written -> statute rules apply.
Pre-Incorporation Ks at Common Law •
The corporation is not liable for pre-incorporation contracts at common law
. o
Kelner
–
contract to sell wine signed on behalf of future corporation that would run hotel; defendant was an agent
of the future hotel. ▪
Court says the contract is binding on the defendant personally
, and “a stranger cannot by subsequent ratification relieve him from that responsibility.”
o
Black v Smallwood
–
contract written with name of future company and future directors; held not to be responsible for K because they had “no intention” of being bound by the contract at any point.
▪
Artificial distinction from Kelner
–
look for intention and the way the K was signed. Pre-Incorporation K Statutory Reform How to complete a pre-incorporation K in Alberta: 1.
Personal Liability:
a.
A person who enters/purports to enter into a written K in the name of or on behalf of a corporation before it comes into existence is personally bound by the contract and entitled to its benefits
(s. 14(1) ABCA). b.
WARRANTIES
: If a person enters into a written K in the name of or on behalf of a body corporate before it comes into existence, that person is deemed to warrant
to the other party (s. 15 ABCA): i.
That the body corporate will come into existence within a reasonable time; and ii.
The K will be adopted within a reasonable time after the company comes into existence. 2.
Manner of Adoption:
a.
K adopted by any act or conduct signifying an intention to be bound (s. 15(3) ABCA): i.
Solicitor’s letter will qualify –
Sherwood Design
. 1.
Lawyer might need to be working as agent for the company, not the individual signors however (dissent in Sherwood
, approved of in Huang
)! ii.
Commencing an action on the K –
1394918 Ontario
. 3.
Effect of Adoption:
a.
Once adopted (s. 15(3) ABCA): i.
Corporation is bound by the contract. ii.
Corporation is entitled to the benefits of the K as if it was in existence at the date of the K and had been party to the K. 1.
1394918 Ontario
. iii.
Agent ceases to be liable. 4.
Application to Court for Joint/Joint and Several Liability (s. 15(5) ABCA)). 5.
Express Provision Required in Contract:
a.
In order to exempt personal liability, an express provision MUST be included in the contract (s. 15(6) ABCA). i.
If pre-incorporation K is written and signor wishes to be excluded from personal liability, an express term must be included. ii.
If pre-incorporation contract is oral, then CL applies and verbal opposition to personal liability is enough (i.e. no intention of the parties existed). 1.
Huang –
guys to go Asia to develop their tech based on pre-incorporation contract with the other party; the investor promises them funds but insists that he doesn’t want to be personally bound. No actual term in pre-
incorporation K saying he won’t be bound.
6.
Cases:
a.
Sherwood b.
1394918 Ontario Ltd c.
Huang
18 B.
Nature of the Corporation Separate Legal Personality •
The corporation has a separate legal personality from its shareholders. o
Salomon –
Salomon’s company went under; trustee couldn’t go after him personally because he is a separate person from the company. o
Lee v Lee’s Air Farming
–
sole shareholder’s
(Lee’s)
widow could claim WCB coverage b/c Lee could be both director and employee of company at same time; two distinct legal people. •
A corporation has perpetual existence
–
it exists beyond the lives of its shareholders. •
Has the capacity, rights, powers, and privileges of a natural person (s. 16(1) ABCA): o
Lee
–
can contract to hire employees. •
Can be sued in its own name. Limited Liability •
Shareholder’s liability is limited to their share ownership in the corporation. o
i.e. limited to capital contributed or agreed to contribute. •
NOTE: o
AB law allows Unlimited Liability Corporations –
must have ULC in name (ABCA Part 2.1, ss. 15-1, 15.9). C.
Lifting the Corporate Veil How and When to Lift the Corporate Veil Definition: disregarding the separate legal personality principle. Rule: the separate legal entities principle is not enforced when it would yield an unjust result, “too flagrantly opposed to justice.” (
Kosmopolous
). •
Canadian Courts’ Two Main
Approaches to Determining when Corporate Veil should be lifted on the grounds of agency:
o
1) The Extensive Control Approach
▪
Is the shareholder the head and brain of the corporation? ▪
Consider the following criteria (
Knight
): •
Were the profits treated as the profits of the shareholder? •
Were the persons conducting the business appointed by the shareholders or parent company? •
Was the shareholder the head and brain of the business of the company? •
Did the shareholder govern the venture, decide what should be done, and what capital should be embarked on the venture? •
Did the shareholder make the profits by its skill and direction? •
Was the shareholder in effectual and constant control? o
2) The Purpose of Incorporation/Use Approach (
AB Gas Ethylene Co v MNR
) ▪
Was the company incorporated/used for an improper/illegal purpose? (
Big Bend Hotel
). •
Cases in which the Corporate Veil will be lifted:
o
Where the company is a mere sham, shell, or agent of the controlling shareholder to avoid personal contractual obligations. ▪
Gilford Motor
o
Where the shareholder uses the company as a vehicle to commit fraud. ▪
Big Bend Hotel –
e.g. insurance fraud o
The controlling shareholder uses the company to engage in illegal/objectional conduct. ▪
E.g. Tax avoidance o
Parent and subsidiary company engaging in NAL transaction. o
Controlling shareholders expressly direct a wrongful act to be done –
financial commitment when the corporation has no assets. ▪
Fleischer –
i.e. agreeing to pay damages on an injunction knowing the corporation has no assets! •
EXCEPTION: If the shareholder wants the corporate veil lifted on themselves so they can benefit/for equity reasons (e.g. having the company’s property declared their own to claim insurance payout) this will be blocked where the shareholder should have known that the company was a separate legal person
(because they consulted a lawyer, etc.) –
Kosmopolous
. •
Cases:
o
Macaura v Northern Assurance Co
:
▪
A sole shareholder has no insurable interest in the assets of the company. ▪
Assets belong to the company, not to the shareholder.
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19 o
Kosmopolous
: ▪
Court holds that this could have been a case
in which to lift the corporate veil, except: (1) Mr. K was advised by a competent lawyer, and (2) need to avoid arbitrary outcomes (i.e. between one-owner and multiple-owner companies). So, veil was not lifted.
▪
Sole shareholders may have an insurable interest in the assets of a company. ▪
Greek guy ran leather company –
transferred all of his business assets to it to run the company. Fire insurance was in his name and the storefront name, but was not in the name of the corporation itself. After fire, insurance refused to pay out because the damaged property belonged to the corporation and not Mr. K. o
Big Bend Hotel
: ▪
Principle of separate legal entities
can be disregarded where the shareholder is hiding behind the company for fraud or improper conduct
. ▪
Owner bought a hotel through his company –
it was damaged by fire. When he filled out the insurance forms, didn’t declare that he had previously lost a hotel by fire before.
Insurance wouldn’t pay out due to fraud –
he claimed they were separate and distinct persons! o
Fleischer
: ▪
Court was willing to lift the veil because the owners had control and an improper purpose
(they knew the corporation had no money and used it to do their bidding). However, no order for damages because loss was due to market and not owners. ▪
Sweet Dreams caused a bunch of problems for rival buyer, including seeking an injunction for the sale with an undertaking to pay damages
(even though the company in fact had no assets and the shareholders/directors knew it). Statutory Exceptions for the Corporate Veil 1.
Directors’ liability for wages (s. 119(1) ABCA):
a.
Directors are jointly and severally liable
to employees of the corporation for all debts not exceeding 6 months’ wages payable to each employee for services performed for the corporation while they were directors. 2.
EXCEPTIONS
: Directors are not liable for wages if (s. 119(2-4) ABCA): a.
The director subjectively believes on objective grounds that the corporation can pay the debts as they fall due, or b.
The debts payable are for services performed while the property of the corporation is under the control of a receiver, manager, or liquidator. 3.
Shareholders liable for wages under a Unanimous Shareholder Agreement (USA) –
s. 146(7) ABCA. D.
Corporate Share Structure Share Capital: Outline •
Shares are a bundle of rights against a corporation. o
NOT: a property right in the corporation, or an ownership interest in the corporation. o
While the corporation is ongoing, shares confer no right to its underlying assets (
BCE
). •
Consideration: o
Must be fully paid for shares –
s. 27(3). o
Share can’t be issued until consideration is fully paid in (
s. 27(3)): ▪
Money; ▪
Property; or ▪
Past services. o
Must be in registered form
and be without nominal or par value
–
s. 26(1) ABCA. •
Share (security) certificates: o
Every shareholder/security holder is entitled at their option to (s. 48(1) ABCA): ▪
A security certificate, or ▪
A non-transferable written acknowledgment of their right to obtain such a security certificate from the corporation. Contents of a Share Certificate •
Must contain (s. 48(7)): o
(1) Name of the corporation;
20 o
(2) The words “Incorporated under the [C/ABCA]”
o
(3) Name of the person to whom it was issued; o
(4) Number and class of shares and the designation of any series that the certificate represents; o
(5) Particulars of the class (s. 48(10) ABCA). Rights Attached to Shares i.
Rights attach to the shares
and not the shareholder. a.
Re Bowater –
provision in articles said the share carried 10 votes in original shareholder’s hand, but only carry one vote in the hands of a transferee. This provision was invalid. ii.
A corporation can have: a.
One class of shares –
s. 26(3) ABCA; b.
More than one class/multiple classes –
s. 26(4) ABCA. iii.
Where a corporation has
only one class of shares
, the rights of the holders thereof are equal in all respects and include the following rights (s. 26(3) ABCA): a.
To vote
at any meeting of the shareholders of the corporation; b.
To receive any dividend
declared by the corporation; c.
To receive the remaining property
of the corporation on dissolution. iv.
The articles may provide for more than one class of shares. If so, must provide
: a.
The rights under s. 26(3) (voting, dividends, property) MUST
be attached to at least one
class of shares, but all rights don’t have to be attached to one class (
s. 26(4)). Principle of Equality •
Generally:
o
Shares of the same class are subject to the principle of equality
. •
But, different rights can be attached to different classes of shares (s. 26(4) ABCA) by: o
Provision in articles dividing shares into different classes, with different rights
is a valid way to derogate
from the principle of equality. ▪
McClurg –
husbands owned shares paying no dividends; wives’ shares paid
discretionary dividends. Differences in class rights to dividends set out in Articles, so discretionary dividends A-OK. o
However, if Articles have no provisions for classes of shares: ALL SHARES ARE EQUAL
. ▪
International Power –
no provision for dealing with excess assets amongst different classes of shares on liquidation, and so had to be treated equally. •
Principle of Equality can be derogated from if (
McClurg
):
o
(1) Express provision assigning different rights to different classes under s. 26(4) ABCA. o
(2) Discretionary power is vested in Ds to decide who gets dividends (as long as the decision is made reasonably! •
Shares in the Same Class:
o
If a corporation has more than one class of shares, subject to s. 29, the rights of the holders of the shares within that class are equal in all respects (
Re Bowater
, s. 26(5)). o
Exception: ▪
Classes can be issued in series which means different rights might be attached to different series of the same class of shares. The Right to Vote •
A shareholder’s right to vote is exercised on the basis of the number of shares
they hold (s. 26 ABCA). o
Jacobsen v United Canso –
corporation bylaw capped votes at 1000, regardless of number of shares held; this was an invalid provision, contravening the Act. Transfer of Shares •
Shares are transferable, but Articles can restrict share transfer (s. 6(1)(c) ABCA). •
Restrictions on share transfer must be noted on the share certificate (s. 48(10-11) ABCA). o
For example, requiring the transfer to be approved by the Board of Directors (
Edmonton Country Club
). •
A distributing company CAN’T restrict share transfer except by way of a constraint permitted under s. 174 (
s. 48(9) ABCA). Pre-Emptive Rights •
Shareholders can have a pre-emptive right to acquire shares if provided for by the Articles/USA (s. 30(1) ABCA).
21 •
Shareholders have no pre-emptive right
in respect of shares to be issued (s. 30(2) ABCA). o
For consideration other than money; o
As a share dividend; o
Pursuant to the exercise of conversion privileges, options, or rights previously granted by the corporation. Corporation Acquiring/Holding Its Own Shares •
Corporations can’t hold their own shares
–
s. 32(1) ABCA. o
Subsidiary corporations also cannot hold shares in its parent corporation –
s. 32(1) ABCA. •
Corporations can purchase, acquire or redeem their own shares –
s. 34(1), 35(1-2), 36(1) ABCA. o
PROHIBITED if purchase/acquisition/redemption of its own shares would render the corporation insolvent –
ss. 34(2), 35(3), 36(2) ABCA. o
Test for insolvency:
▪
Inability to pay liabilities as they come due.
▪
Value of assets < aggregate of liabilities and amount to be paid for shares.
▪
Test for insolvency must be applied at the time the contract is made and at the time the contract is performed. (
Nelson
). o
Nelson –
Corporation was solvent when it signed a contract but became insolvent before the sale closed. Court held that insolvency test should be applied at formation & performance. •
EXCEPTIONS (s. 32(1)/(2.1)/(2.2) ABCA): o
Temporary holding; o
Corporation acting as legal representative (i.e. holding shares in the capacity of a legal representative without a beneficial interest in the shares). Shareholder Rights Cases i.
McClurg v Canada
: a.
The rights carried by all shares to receive a dividend declared by the company are equal unless otherwise provided in the Articles.
b.
A clause outlining different rights to receive dividends in different classes is enough to rebut the presumption of equality amongst shares.
c.
Husbands and wives both owned shares in company; the husbands received salaries but not dividends, while the wives owned shares that received discretionary dividends.
ii.
International Power v McMaster
: a.
All shares must be treated equally unless there is an express provision in the Articles stating otherwise.
b.
Company had two classes of shares –
common and preferred –
but there was no provision for what was supposed to happen to excess assets after shares paid off on liquidation.
iii.
Re Bowater
: a.
Rights attach to the share
and not the shareholder. b.
Shares of the same class must have equal rights.
c.
There was a provision in Articles stating that the “special common shares” held by C carried ten votes per share in his hands, but only one vote in the hands of a transferee.
iv.
Jacobsen v United Canso
: a.
Bylaw contravened act; votes based on number of shares.
b.
Bylaws stated that no person could vote more than 1000 times, regardless of the number of shares held.
v.
Edmonton Country Club v Case
: a.
Valid to include a provision requiring Board approval for transfer of shares; restriction must be noted on the share certificate.
b.
Articles provided that the Board of Directors must consent to a transfer of shares.
vi.
Nelson v Rentown Enterprises Inc
: a.
The test for insolvency must be applied at the time the K is signed and
at the time the K is executed/performed.
b.
Corporation was solvent at the time of signing a land sale contract, but became insolvent before the sale closed.
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22 E.
Corporate Governance Overview: i.
Active participants = Board of Directors, officers. a.
“Directors shall manage the business and affairs of a corporation, subject to a USA.” –
s. 101(1) ABCA. Qualifications of Directors i.
The following people are disqualified from being directors (s. 105(1) ABCA): a.
Under 18; b.
Of unsound mind and so found to be by a court in Canada or elsewhere. i.
Including mental incapacity under relevant AB statutes. c.
Person who is not an individual. i.
i.e. other corporations. d.
A person who is bankrupt. ii.
Not required to hold shares, unless otherwise provide in Articles: s. 105(2) ABCA. Number and Residency of Directors i.
Corporations must have 1 or more Directors. a.
Distributing corporations (i.e. publicly-traded corporations) must (s. 101(2) ABCA): i.
Have no fewer
than 3 directors; ii.
At least 2 directors
must be independent. ii.
At least ¼ or 25% of the directors must be Canadian residents (s. 105(3) ABCA). Appointment of Directors •
Notice of Directors must be given to Registrar at time of incorporation –
s. 106(1) ABCA •
Each Director in the Notice holds office from issue until first shareholders’ meeting –
s. 106(2) ABCA •
After that, Directors are appointed at annual shareholders’ meet
ing –
s. 106(3) ABCA •
Term of office may be staggered –
s. 106(3) ABCA Election of Directors •
Through ordinary resolution of shareholders
–
s. 106(3) ABCA
•
Directors can appoint additional Directors (
if allowed by the Articles
) –
s. 106(4) ABCA
Removal of Directors •
Directors can be removed at a special meeting
of the shareholders –
s. 109(1) ABCA
o
i.e. through an ordinary resolution.
•
If the holders of any class or series of shares of a corporation have an exclusive right to elect one or more directors, a director so elected may only be removed by an ordinary resolution at a meeting of the shareholders of that class or series
–
s. 109(2) ABCA
Ceasing to Hold Office •
Directors cease to hold office when they (s. 108(1) ABCA): o
Die or resign; o
Are removed in accordance with s. 109 –
i.e. through a resolution at shareholders’ meeting.
o
Become disqualified under s. 105(1) –
i.e. going bankrupt, or of unsound mind. Management Power Vested in Directors i.
Subject to any USA, directors must manage or supervise
the management of the business and affairs
of a corporation (s. 101(1) ABCA). a.
Shareholders cannot compel directors to alter the mandate of the directors at any ordinary meeting. b.
Automatic Self Cleaning –
shareholder tried to force sale of company assets. ii.
Directors may delegate
power to officers –
EXCEPT to do anything in s. 115(3) –
s. 121 ABCA. iii.
NOTE:
a.
Directors’ power to delegate always subject to Articles, bylaws, or USA –
s. 121 ABCA
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23 Shareholders’ Power
1.
Voting Power:
a.
At meeting of shareholders (ss. 139-140 ABCA). b.
Includes power to elect/remove directors, fundamental changes, etc. 2.
Proposals:
a.
Pr
omotes “corporate democracy.”
b.
Can make proposals under s. 136. c.
Eligibility (s. 136(1)/(1.1) ABCA): i.
Must own 1% of voting shares or shares worth at least $2k for at least 6 months. ii.
Can pool shareholding to make eligibility threshold. d.
Exemptions under s. 136(5) ABCA. e.
Prohibition of “general causes” under s. 136(5)(b): i.
“primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes
”
f.
Not binding on the corporation. 3.
Unanimous Shareholders (USA):
a.
Contents under s. 146(1). b.
Effect under s. 146(7). i.
Duha Printers –
a USA is part of the corporate constitution. 1.
Can relieve directors of powers, rights, duties (but not actually remove them). 2.
Shareholders assume powers/rights/duties of directors, directors not removed. 3.
Shareholder incur all liabilities of directors. 4.
Fundamental Changes:
a.
Shareholders have the power to make fundamental changes to the corporation. i.
Amendment of Articles ii.
Amalgamation iii.
Dissolution iv.
Extraordinary sale, lease, exchange of company property b.
Special resolution is required with 2/3 approval
–
ss. 173(1), 181-3, 190, 211 ABCA. 5.
Remedial Powers:
a.
Seek liquidation or dissolution –
s. 215 b.
Derivative action –
s. 240 c.
Oppression remedy –
s. 242 d.
Power to seek rectification of corporate records –
s. 244 e.
Power to seek a court order compelling directors to comply with law –
s. 248 F.
Fiduciary Duties Fiduciary Duties of Directors and Officers •
Every director and officer of a corporation must act (s. 122(1)(a)): o
Honestly;
o
In good faith; and
o
With a view to the best interests of the corporation
. •
“Best Interests of the Corporation” means:
o
Not just the best interests of the shareholders, but can also consider shareholders, employees, suppliers, creditors, consumers, governments and the environment as long as the corporation is the primary consideration (
BCE
, Peoples Department Store
). •
Overview of the duty on Directors (
Peoples
): o
Must respect the trust and confidence placed in them to manage the corporation in pursuit of the objects of the corporation; o
Avoid actual and potential conflicts of interest; o
Avoid abusing their powers to gain personal benefit; o
Maintain the confidentiality of the info they acquire through their position; o
Serve the corporation selflessly, honestly and loyally.
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24 •
Duty on directors and officers to: o
Avoid conflicts of interest
with the corporation; o
Avoid using position to gain a personal benefit
; o
Maintain confidentiality
of info acquired by virtue of position; o
Serve the corporation selflessly, honestly, loyally
. •
The fiduciary duty does not change when the corporation is nearing insolvency (
Peoples
) •
Directors do not owe a fiduciary duty to creditors (
Peoples
). Elements of the Fiduciary Duty of Directors •
Directors must not
: o
Compete
with the corporation (conflict of interest). o
Take or appropriate a corporate business opportunity
for themselves. o
Enter into a transaction with the corporation
(material interest) unless the nature of their interest is disclosed to the corporation. o
Act fraudulently
in relation to the corporation. 1) Competition with the Corporation/Conflict of Interest •
Directors cannot compete with the company while they are a director: o
Includes direct and indirect competition. o
Must avoid actual conflict and potential conflict –
Sports Villas
. •
Determining factor: o
Did the director act in the best interests of both corporations (Multiple Directorships) –
it could be impossible to serve both interests at the same time!
•
Case Law: o
Sports Villas
▪
Court held that t
he director didn’t breach his fiduciary duty because the new golf course was far away and served different clientele (i.e. no real conflict!). ▪
Director of corporation running a gold course opened another golf course in a different city after disclosing his interest to the shareholders. 2) Disclosure of Interest in Material Contract •
DUTY: Directors are under the duty
to disclose interest in a material contract
–
s. 120(1) ABCA
o
Aberdeen Railway –
can’t enter into engagements in which the Director has a personal interest conflicting with the interests of the corporation
. Even though the Director resigned, he signed the K while Director in one company and a partner in another.
Disclosure Requirements •
Must disclose the nature and extent of the director’s interest
(s. 120(1)&(5) ABCA). o
In writing; or o
By requesting to have it entered into minutes of meetings of directors; and o
In a timely manner. •
A director required to make disclosure of an interest can’t vote on a resolution
to approve the contract or transaction (except in limited circumstances) –
s. 120(6) ABCA: o
(1) if the Director’s other company is lending money to the corporation; or
o
(2) If the K is related primarily to the Director’s remuneration
. •
Disclosure of a director’s interest does not relieve the director of his duty to act honestly and in good faith with a view to the best interests of the corporation (
UPM
). •
Cases:
o
McAteer
–
Director of company was also trustee of trust where son was beneficiary; can act in good faith but duty is breached by failing to disclose. →
MALA FIDES NOT MANDATORY! What is a Material Interest? •
NOT defined in CBCA or ABCA. •
Includes:
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25 o
Financial interests that are more than insignificant –
Dimo Holdings
o
Director to benefit more than de minimis
–
Zysko
o
Any personal relationship
or monetary interest
the director may have in the other side of the transaction that might be thought to be an inhibiting factor
is a material interest if disclosure of the relationship or interest might be relevant to the corporate decision whether to involve the particular manager in negotiations
–
Professor Welling
Consequences for Failure to Disclose •
Court can (s. 120(2) ABCA): o
Set aside a contract
on any terms it sees fit –
Exide
o
Require the director/officer to account to the corporation
for any profit or gain realized on the contract –
Exide
o
… or both
. •
Corporation or any of its shareholders can apply to the court for relief –
s. 120(9) ABCA. •
NOTE: Section 120 is subject to any USA (s. 120(1) ABCA). Validity of the Contract •
Despite non-disclosure by the Director, a contract is valid if: o
Disclosure made in accordance with s. 120; o
The Board of Directors/shareholders approve the contract after disclosure; and
o
The contract/transaction was fair and reasonable
to the corporation when approved. •
If valid, the Director/officer is not liable to the corporation for the profits they made from the transaction. Confirmation by Shareholders •
Non-compliance with Director disclosure of material interest does not render the contract/transaction invalid if (
Northwest Transportation
): o
The Director acted honestly and in good faith –
s. 120(8.1) ABCA. o
The K/transaction is approved/confirmed by a special resolution at a meeting of the shareholders. •
CONDITIONS PRECEDENT –
ABCA s. 120(8.1(b)/(c): o
1) The FULL NATURE of the D’s interest must be sufficiently disclosed to the shareholders prior to their approval/confirmation; and o
2) The K or transaction was reasonable and fair to the corporation Case Law •
Aberdeen Railway –
K for supply of chairs was signed while D was partner of the supplier; no disclosure, then he resigned his directorship. o
Directors’ fiduciary duties bar them from entering into engagements in which they have a material interest
in the K, causing conflict with the interest of the corporation (
conflict of interest
). •
Exide Canada –
Director was in a relationship with his secretary, who owned a company which his company signed a contract –
did not disclose
. o
Material interest includes where someone NAL with you had a material interest!!! o
The Director had a material interest by virtue of his relationship with her; even if he had no personal monetary interest himself.
o
He breached his fiduciary duty by not disclosing
the nature and extent of the interest. o
He must account for profits! •
UPM –
jerk Director made everyone sign a contract that was detrimental to the company (the place was in financial danger and couldn’t afford the break fee in his contract –
no disclosure, no good faith, hiding versions of the contract, etc). o
Disclosure of a director’s
interest does not relieve the D from his duty to act honestly and in good faith with a view to the best interests of the corporation.
•
McAteer –
director of a company was also a trustee of a trust where her son was a beneficiary; she signed a contract and didn’t disclose, even though she asked a friend to disclose.
o
THE DIRECTOR’S FIDUCIARY DUTY IS STRICT.
o
She had a material interest in the K even though she didn’t have a beneficial interest in the trust; by failing to disclose she failed to fulfill the duty of disclose requirement
under the ABCA. 3) Taking Corporate Opportunities
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26 Directors and Officers CANNOT Take Corporate Opportunities •
Directors and officers are not allowed to divert business properly belonging to the company for their own benefit! –
Cook.
•
Business opportunities belong to the corporation
even if the corporation can’t immediate
ly act on them (
Regal Hastings
) or even if it’s impossible for the company to take the opportunity!
•
This includes former directors! (
Canadian Aero
):
o
1) Where the resignation was prompted by a wish to acquire the opportunity, OR
o
2) Where it was their position with the company, instead of a new initiative, that led to the opportunity.
▪
Consider the following factors to determine if the taking of the corporate opportunity is a breach of the fiduciary duty owed post-resignation:
•
Position or office held;
•
The nature of the corporate opportunity (ripeness/specificity);
•
The Director’s relation to the opportunity;
•
The amount of knowledge possessed;
•
The circumstances in which it was obtained (special/private?);
•
Time elapsed since termination;
•
How the relationship was terminated.
•
BREACH = duty to account to the corporation for profits (
Canadian Aero, Regal Hastings
).
TEST: Directors and Officers may only take Corporate Opportunities If…
1.
The Company’s interest in a claim has ceased based on an informed decision not to take the opportunity; and 2.
The Directors/officers are acting in good faith
as members of the public. a.
Peso Silver
–
acting on mining claim after company has passed it over on informed basis.
b.
Even if both steps are satisfied, the fiduciary duty on Directors and officers is strict enough that they should probably still disclose the interest in the interest of being as transparent as possible!
CASES: •
Cook v Deeks:
Directors negotiated a new contract on their behalf while still acting as directors. o
Directors and officers are not allowed to divert in their own favour business which should properly belong to the company they represent o
Must account. •
Regal Hastings:
Directors made investment, bought shares and made a profit, the company was not able to do the investment. o
TEST: Shares, when acquired by the directors, were acquired by reason and only be reason of the fact that they were directors of the company. *** NOT THE FULL TEST –
MUST LOOK AT HOLISTIC CANADIAN AERO FACTORS***
o
Directors to account for profits •
Peso Silver Mines:
Company was presented with opportunity, consulted a geologist, and considered the opportunity in good faith, then declined it. Directors later formed new company and took the opportunity. o
DID NOT BREACH FIDUCIARY DUTY o
Using the test from Regal Hastings: The transaction here was not made by reason of being directors, neither was it made in the course of execution of the office of the director o
Reasons: ▪
Pesos directors rejected the mining claims in good faith ▪
Their decision was based partly on the professional advice of geologist ▪
Company’s interest in the claims had ceased
•
Canadian Aero:
Directors worked for company for a while, then resigned and started a new company and submitted a bid for a government contract and won. o
Fiduciary duty continues after resignation (see above) o
Factors to be considered (see above) G.
The Duty of Care The Duty of Care for Directors and Officers
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27 •
Directors and officers must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances –
s. 122(1)(b) ABCA. o
This is not a standard of perfection! Just requires the D/Os to consider all of the relevant facts and make a reasonable decision based on it. (
Peoples Department Store
). o
In Alberta, the duty of care is owed to creditors
and other stakeholders (
Peoples Department Store
). •
Special Consideration: o
A Director can give special, but not exclusive, consideration to the interests of those who elected or appointed the Director (s. 144(4) ABCA). o
Why? Because under the ABCA one class of shares can elect a Director if permitted under the Articles of Incorporation
. •
Cannot contract out of statutory obligations!!! (s. 122(3) ABCA). o
Subject to a USA. The Standard of Care •
The directors and officers are not in breach of the DOC if they acted prudently and on a reasonably informed basis
(
Peoples
). o
Must look to the circumstances and relevant facts to determine what’s reasonable (and what they should have known –
e.g. unreasonable decision in UPM
). ▪
If the directors aren’t engaged in any kind of analysis, asking questions, or considering the facts they
should be –
THEY DO NOT MEET THE DOC (
UPM
). o
Perfection not required –
just reasonableness (
Peoples
). o
If it makes sense according to business judgment rule
, then courts won’t pry too far (
Peoples
). •
Imposes a minimum standard of competence
. •
Directors must be diligent by: o
Keeping informed about the affairs of the company; o
Attending board meetings; o
Monitoring how the company is managed (i.e. if delegating to managers); o
Being generally familiar with the financial status of the company (e.g. read audit reports); o
Asking questions and seeking clarification (i.e. what they didn’t do in UPM
). H.
Limitations and Defences Limitations and Defences •
USA Defence (applies to fiduciary & DOC breach): o
Directors are relieved of their duties and liabilities if their powers have been transferred to the shareholders through a USA (ABCA s. 146(7)) but they can’t contract out of duties
. •
Reliance Defence (applies to fiduciary & DOC breach): o
Can rely reasonably
and in good faith
on financial statements presented by an officer or auditor, report by a lawyer, accountant, engineer, etc. (ABCA s. 123(3)). •
Business Judgment Rule (BJR) (applies only to DOC): o
Directors and Officers not in breach of DOC under s. 122(1)(b) if they act prudently and on a reasonably informed basis.
▪
Peoples Department Store –
decision to source product was based on reasonable business judgment; it was a reasonable solution to a product problem that may have had no solution! ▪
Common Law Rule ▪
THE DECISION MUST BE INFORMED. (
UPM
). o
Courts will defer to BJR
when a decision was made honestly, in good faith, prudently, and on reasonable grounds (
CW Shareholdings
–
Directors consulted lawyers and financial experts before accepting deal from Shaw). ▪
If BJR applies, court won’t subject directors’ decisions to microscopic examination (
CW Shareholdings
). Director Indemnification •
Corporations can indemnify Directors against all costs, charges, and expenses of legal proceedings (s. 124(1) ABCA). •
To be indemnified, directors must have (s. 124(1) ABCA): o
(1) Civil Suit –
Acted honestly and in good faith with a view to the best interests of the corporation; and
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28 o
(2) Criminal and Admin Proceedings –
Had reasonable grounds for believing their conduct was lawful (purpose is to protect the rights of other parties). •
Right to indemnity in certain circumstances (s. 124(3) ABCA). •
May apply to court for an order approving the indemnity (s. 124(1) ABCA). Shareholder Remedies DERIVATIVE ACTION OR OPPRESSION REMEDY? 1)
OPPRESSION: a.
Personal claim; b.
Must demonstrate a unique personal harm
; c.
Must affect the complainant in a manner that’s different from the other shareholders.
2)
DERIVATIVE: a.
Brought in the name of the company; b.
Whole corporation
is harmed by the wrongdoing; and c.
Wrong to shareholders is indirect in that it’s a result of harm to the corporation.
3)
BOTH: a.
Claims are not mutually exclusive. b.
One claimant may want/need to claim both. DERIVATIVE ACTION •
Overview (ss. 239-241 ABCA)
:
o
Allows the claimant to enforce fiduciary duty
and duty of care
when Directors unwilling to do so themselves. ▪
e.g. if Directors have committed a wrong and won’t sue themselves.
o
A complainant may apply to the Court for permission to (s. 239-241 ABCA)
: o
Sue in the name of the corporation
:
▪
Must be in the name of the corporation
, not an individual (
Hercules Management
). ▪
Can’t have shareholder name in list of plaintiffs (
RLTV Investments
). ▪
May be the basis for liability to other stakeholders in accordance with law of tort and extra-contractual liability (
BCE
). o
Intervene in an action to prosecute or defend the action on behalf of the corporation.
Framework for Derivative Action 1)
Is the person a complainant (s. 239(b))
?
a.
A shareholder: i.
Registered holder or beneficial owner or former registered holder or beneficial owner of a security of a corporation or any of its affiliates. b.
A director or officer (or former director/officer) of a corporation or any of its complainants. c.
A creditor (under ABCA but not all provinces). d.
Any other person who, in the discretion of the court, is a proper person. i.
TEST from First Edmonton Place
: 1.
Is there evidence that the Directors committed a fraud upon the corporation? 2.
If yes –
and the corporation is liable to the applicant (lessee) –
then the applicant is a proper person for the purpose of a derivative action (i.e. Directors committed wrong against corporation). 2)
Do they have leave of the court?
a.
To be entitled to leave, the complainant must: i.
Give Proper Notice (s. 240(2) & (3) ABCA)
:
1.
Must give notice to the directors of the corporation or its subsidiary of the complainant’s intention to apply to the court (ABCA requires reasonable notice
, CBCA requires 14 days minimum
). a.
Failure to specify every last cause of action in the notice won’t invalidate the notice as a whole (
Bellman
).
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29 ii.
Complainant Must be Acting in Good Faith (s. 240(2)(b) ABCA): 1.
The complainant must be acting in good faith. 2.
Test: a.
Good faith is absent
if it appears the applicants didn’t truly believe there was merit to their case (
O’Fearghail Holdings
). i.
Justifiable delay in bringing an action, or bringing it as an afterthought after first bringing an application for a different kind of remedy, is not bad faith. b.
Must show that there is a case to be argued
(
Bellman
). iii.
Action in the Interests of the Corporation
(s. 240(2)(c) ABCA): 1.
Must show that it appears to be in the interests of the corporation
or its subsidiary that the action be brought, prosecuted, defended, or discontinued. a.
TEST: must show that there is an arguable case in the interests of the company (
Bellman
). b.
Has to be in the interests of the corporation because the action is in its name! Derivative actions are for righting wrongs against the corporation. REMEDIES IN DERIVATIVE ACTIONS •
Court can order (s. 241 ABCA): o
An order authorizing the complainant or any other person to control the conduct of the action; o
An order giving directions for the conduct of the action; o
An order directing that any amount adjudged payable by a defendant in the action shall be paid, in whole or in part, directly to former and present security holders
of the corporation or its subsidiary instead of to the corporation and its subsidiary; ▪
e.g. in First Edmonton Place
, in which the fees were directly payable to FEP instead of the numbered company which the lawyers had wronged. o
An order requiring the corporation or its subsidiary to pay reasonable legal fees. OPPRESSION REMEDY General Process for Oppression Remedy 1)
Complainants
can apply to court directly (don’t need leave) –
s. 239 ABCA. 2)
s. 242(1)-(2) ABCA –
If, on an application under subsection (1), the Court is satisfied that in respect of a corporation or any of its affiliates that:
a.
(a) Any act or omission
of the corporation or any of its affiliates affects a result; b.
(b) The business or affairs of the corporation
or any of its affiliates are or have been carried on or conducted in a manner, or c.
(c) The powers of the directors
of the corporation or any of its affiliates are or have been exercised in manner i.
… that is oppressive, unfairly prejudicial, or that unfairly disregards the interests of any security holder, creditor, director or officer
(ONLY NEED TO FIND ONE, see BCE
). 3)
Then the court can make an order to RECTIFY
the matters complained of (s. 242(3) ABCA). a.
Shareholder approval of the act/omission/conduct doesn’t defeat an oppression remedy suit or a derivative suit. However, the court may take into consideration approval in making an order (s. 243(1) ABCA). Application and Content of the Remedy •
The oppression remedy protects against unfair actions
, but not against unreasonable expectations of advantage
(
Westfair Foods
). •
It imposes a general standard of fair conduct on the corporation, Directors, officers and shareholders. •
Usually conduct by Directors, who govern corporation (
BCE
). o
BUT, CAN ALSO BRING AGAINST SHAREHOLDERS FOR OPPRESSION (
BCE
). 1)
Is the person a Complainant? a.
See above for criteria under the Act.
b.
A lessor is not a creditor, because a lease is not a security (
First Edmonton Place
).
i.
Although they might be if there is rent owing under the lease at the time of the action.
c.
Is the person a proper person to make an application?
d.
TEST from First Edmonton Place
:
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30 i.
Using the corporation as a vehicle for committing fraud on the applicant;
ii.
A breach of the underlying expectation of the applicant arising from the circumstances in which the appellant’s relationship with the corporation arose.
2)
Determining Oppression –
Two Step Approach from BCE a.
1) What is the reasonable expectation of the party alleging oppression?
i.
Must look at reasonable expectations based on objective and contextual considerations. ii.
What are the expectations? Were there any? iii.
Were they breached? 1.
SHs have reasonable expectation that directors comply with statutory duties
; 2.
Articles of Incorporation; 3.
General commercial practice. a.
i.e. a departure from normal business practice that has the effect of undermining or frustrating the complainant’s exercise of their legal rights.
4.
Nature of the corporation. a.
Size, nature, structure. b.
Courts might give more wiggle room to closely-held, small corps. 5.
Relationship between the parties. a.
Between shareholders based on ties of family or friendship may be governed by different (lax) standard than NAL shareholders. 6.
Past practice; a.
Especially in closely-held corporations! b.
Practices and expectations can change over time. 7.
Steps the claimant could have taken to protect itself. a.
May weigh against claim if shareholder could have prevented the harm. 8.
Representations and agreements. a.
Promotional materials? Prospectuses? Offering circulars? 9.
Fair resolution of conflicting interests between corporate stakeholders. a.
Directors of the corporation must resolve in line with fiduciary duty to act in the best interests of the corporation. b.
2) If there is a breach of RE, does it amount to oppression, unfair prejudice, or unfair disregard? (
BCE
definitions)
i.
s. 242(2) ABCA - if a breach of a reasonable expectation is established, must consider whether the conduct amounts to oppression, unfair prejudice or unfair disregard. ii.
Oppression:
1.
Coercive or abusive conduct, bad faith –
highest standard! (
BCE
). iii.
Unfairly prejudicial:
1.
Conduct with unfair consequences. For example: a.
Pushing out a minority shareholder; b.
Failing to disclose related party transactions; c.
Changing corporate structure after debt ratios; d.
Adopting a poison pill to prevent takeover bid; e.
Paying dividends without a formal declaration; f.
Preferring some shareholders with management fees and paying directors’ fees higher than industry norm; iv.
Unfair disregard:
1.
Ignoring a complainant’s interest as being of no importance.
2.
Favouring a director by failing to properly prosecute claims; 3.
Impr
operly reducing an SH’s dividend; 4.
Failing to deliver property belonging to claimant. v.
INDICIA OF OPPRESSIVE/UNFAIR/PREJUDICIAL CONDUCT
1.
TWO KEY FACTORS for closely-held corporations
especially (
Re Ferguson & IMAX
): a.
1) The relationship between the parties; and
i.
Is there malice or disharmony? e.g. Re Ferguson
, parties romantically separating.
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31 b.
2) The bona fides
of the transaction in question –
is it a valid corporate transaction? Or is it being used for purposes other than acting in the best interest of the corporation?
i.
Was it just done to screw someone over, or was there a valid corporate purpose? 2.
Look for (
Signum Communications
): a.
Failure on the part of the corporation and its controlling shareholders to take reasonable steps t
o simulate an arm’s length transaction;
b.
Lack of good faith on the part of the directors of the corporation; c.
Discrimination between shareholders with the effect of benefitting the majority shareholder to the exclusion or detriment of minority shareholder; d.
Lack of adequate and appropriate disclosure of material information to minority SHs; e.
A plan or design to eliminate the minority SH. 3)
REMEDY FOR OPPRESSION -- **** DON’T FORGET TO DISCUSS ****
a.
Court can order rectification under s. 242(2-3) of the ABCA –
but it cannot punish conduct!!! (
Neneff
) i.
Can award damages for torts (e.g. negligence) but cannot award damages under the oppression remedy. 1.
Cannot be used to advance personal interests (
Neneff
). b.
Court can make any order it thinks fit
including: i.
Restraining the conduct complained of; ii.
Appointing a receiver or receiver-manager; iii.
Amending the company’s Articles/bylaws;
iv.
Purchasing securities of a securities holder (
Neneff
); v.
Setting aside a K or transaction; vi.
Compensating an aggrieved person –
but can only rectify (put them back in the place they would have been); vii.
Liquidating or dissolving a corporation –
very extreme, can’t be used to punish (
Neneff
); viii.
Directing an investigation; ix.
Requiring the trial of any issue; x.
Granting leave to bring a derivative action
(can split matters between derivative and oppression actions –
s. 243(3)(q) ABCA). c.
Any rectification under the oppression remedy can only be made with respect to the complainant’s interest
as a shareholder, creditor, director, or officer (
Neneff
). d.
PERSONAL LIABILITY OF DIRECTORS:
i.
Directors may be personally liable for oppressive conduct where (
Alharayeri
): 1.
The oppressive conduct is attributable to the directors; and 2.
The imposition of personal liability fits the circumstances. Cases: •
First Edmonton Place:
3 lawyers signed lease as directors of company, paid a little then did not pay the rest, vacated the premises, and paid themselves the money out of the corp leaving the corp owing money to the landlord o
A lease is not a security o
Test for proper person…see above
o
Granted leave to bring derivative action o
NOTE: In an oppression remedy suit, the court can grant leave to commence a derivative action (ABCA, s.242(3)(q)) •
Westfair Foods
- two classes of shares, one only get $2 dividends, the company issues all profits as dividends o
No reasonable expectation here: The expectation that the company would retain the surpluses was an unreasonable expectation (because the rights granted to the shares were in the articles). o
The new dividend policy does not amount to oppression, unfair prejudice, or unfair disregard •
Re Ferguson
- Husband trying to squeeze out his ex-wife from the company –
including issuing resolution to convert her shares to redeemable o
In determining whether there is oppression in a close corporation, look to the relationship between the shareholders and the bona fides of the corporate transaction in question (is there a valid corporate transaction) •
UPM: o
The process by which the agreement was negotiated and approved, and the terms of the agreement unfairly disregarded the interests of the TDAM and other shareholders o
Remedy in this case was to set aside the agreement
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32 •
BCE:
Bell Debenture holders sued because their investment-
grade debentures got devalued by CW’s
business moves o
The two-part test o
All the stuff above •
Naneff
–
dad didn’t like kid’s new girlfriend, kicked him out of the corporation
o
Court Rectification cannot be punitive!
o
Proper remedy was that the Appellants should acquire Alex’s shares of the company at FMV; this would protect his interest as a shareholder.
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