Duncan BA CAN 2020

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Business Associations Case + Legislation Index - Prof Note: principals are the people who can give agency to persons - Partnerships - Prof Note : Partners can contractually change the default rules except for: o Liability to 3 rd parties, and o Core fiduciary duties between parties Forming Partnerships Partnership Act S 1 – Definitions - ( g ) Partnership : the relationship between persons carrying on a business in common with a view to profit o PROF NOTES: What is “In Common” Some kind of agreement that the parties are taking on business together o Can be oral, written, or implied by their conduct Is determined objectively o Can be characterized as partners without their knowledge o Even contrary to the parties wishes Equal levels of effort committed is not necessary, just need to be contributing View to profit Does not require you to succeed in making a profit Just can’t be a venture for charitable, social, or cultural purposes - ( h ) Partnership Property : property and rights and interest (i.e. contributions of assets) in a property originally brought into the partnership S 2 – Definition of a firm; Firm Name - Persons who entered into a partnership are collectively a firm, and the name under which their business is carried out is a firm name S 4 – Elements of Forming a Partnership - The following factors inform whether a partnership exists o ( a ) Joint tenancy/tenants in common o ( b ) Sharing of gross returns, or o ( c ) Receipt by person of receiving a share of the profits of the business - But these are not in of themselves enough to establish a partnership
S 6-7 – Agency of Partners (CAN BE CONTRACTED OUT OF) S 6 – Each partner is an agent of the partnership S 7 – Have the power to bind the firm, unless - ( a ) partner does not have the authority to act for a firm (something that can be provided for in a partnership agreement), and - ( b ) the person dealing with the unauthorized partner knows the partner lacks authority or does not know or believe them to be a partner o PROF NOTE : these rules are used to protect third-parties, hence assumption that unless they know or believe them to be a partner there is no binding S 8 – Partners Bound to Acts of Firm and Other Partners When… - ( 1 ) o An act or instrument relating to the business of the firm and done or executed in the firm name, or in another manner showing an intention to bind the firm, o by a person authorized in that behalf, o whether a partner or not, binds the firm and the partners. - ( 2 ) Subsection (1) does not affect any general rule of law relating to the execution of deeds, instruments or documents affecting land or negotiable instruments. S 11; 15 – Liability of Partners - s 11(2) – Partners as jointly and severally liable for the debts and obligations of the partnership ( - s 15 – Partners are severally liable S 22; 28 – Can Contract Out of Certain Partnership Act Provisions… - s 22 – Can change the mutual rights and duties of partners by contract - s 28 – Unless otherwise changed in partnership agreement (aka: the following can be contracted out of) … o ( a ) All partners entitled to share equally in the capital and profits of the business and shall contribute equally to the loses o ( b ) Firm shall indemnify each partner in respect to debts of the partnership – will pay them back o ( e ) Each partner can participate in mgmt. o ( g ) cannot introduced into firm as a partner without consent of all existing partners o ( h ) differences arising from ordinary matters connected with the partnership business matters are to be decided by majority of partners o ( i ) no change can be made in the nature of the partnership business without consent of all existing partners o ( j ) each partner may have access to and inspect any copy of the books. S 32 – each partner can call for an accounting to ensure that all books are properly kept S 35 – Assignment of a Partnership to Another Person S 35(1) – Assignee Cannot…. (limitations of assignee) - ( a ) Interfere with the management or admin of the partnership business or affairs, - ( b ) Require accounts of the partnership transactions, or
- ( c ) Inspect the partnership books S 35(2-3) – Assignee Can… (rights of an assignee) - ( 2 ) While Partnership is carrying on business… o ( a ) entitled receive the share of profits to which the assigning partner would otherwise be entitled, and o ( b ) shall accept the account of profits agreed to by the partners. - ( 3 ) If Partnership is dissolved assignee is entitled to o ( a ) receive the share of the partnership assets to which the assigning partner is entitled, and o ( b ) an account as from the date of the dissolution of the partnership, for the purpose of ascertaining the share referred to in clause (a) . Khan v Miah – Business need not be open to be “Carrying on a business” - A business does not need to be open to be deemed carrying on a business Continental Banking Leasing Corp v Canada – Factors indicating existence of a partnership o Contribution of money, property, effort o Mutual right or control of mgmt. o Joint property interest - Partnership agreement does not necessarily mean that there is a partnership ( Continental ) o Need the three elements from the Act - Don’t need to be in business – indica of carrying on business can include: o Necessary CPs for carrying on the business (e.g. signing the lease for the store) o Entering into contracts and entering into obligations for this purpose Spire Freezers Ltd v The Queen – Partnerships can be one off arrangements - Carrying on business usually means the need for an enduring relationship, however, partnership may arise even in relation to a single, time-limited activity o Unless for specific endeavour, it lasts for as long as all the partners stay involved and want partnership to continue Fiduciary Duties of Partnerships Partnership Act S 6 – Presumption that all Partners are agents of the partnership - Partners are always agents of the others unless partnership agreement specifies otherwise ( s 6 ) o Also must provide partnership accounts on demand ( s 32 ) S 33; 34 – Accountability of Partners for private profits - EXEC SUM : If you use partnership property to make money, then you must report that to the partnership – high standard of trust and confidence
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- S 33(1) : Each partner must account to the firm any benefit derived by a partner without the consent of the other partners from o ( a ) any transaction concerning the partnership, or o ( b ) any use by the partner of Partnership property, name, or business connection - 33(2 ) sub ( 1 ) also applies to transactions after dissolution but before winding up. - S 34 : if you start competing business without the consent of the other partners, that partner breaches FD and must pay over to the firm the profits made by the new business (essentially make the former partners partners) Thorne v New Brunswick Compensation Board – Distinguishing Between a Partner and an Employee - Facts o Thorne and Robinchaud – go into business together at sawmill earning salary Notify the NB Workers compensation board and start paying in Workers compensation Board issues payment of workers compensation to an injured employee who has been paying in o Thorne is injured and applies for WC, and is denied because he is a partner and a partner cannot be an employee Claimed that the fact that a grouping of partners is called a firm means that it is a separate entity meaning that a partner could be separate entity - Issue o If you’re a partner of a partnership, can you also be an employee of a partnership? - Analysis o It is possible to use a common law to change the common law, but that is not what happened here The fact that two partners are called a firm, there is no distinction between partners and the firms Partnership is not a separate legal entity - Ratio o An employee cannot also be a partner of a firm (and vice versa) Meinhart v Salmon (US CASE) – FDs of Partners (duty not to compete without consent + duty to disclose opportunities); Cannot Pursue an Opportunity Without Extending it to Existing Partners - Facts o Two parties in hotel business in NYC o Lease was running out, and so Salmon was given opportunity to open hotel with another partner Figured partnership was over and didn’t think he needs to share opportunity with partner opportunity, and partner alleges breach of FD - Analysis o Salmon failed his obligation not to compete without consent o Salmon failed to discharge his duty to disclose
Must disclose all material facts is required as a partner who plans to undertake a COI, or creates liability for the business outside the scope of its normal business Even if other partner does not demand disclosure, you have to give sufficient details about the opportunity for them to understand it If other partner demands disclosure, then you must give a true and full account of what you have done - Ratio o When opportunity comes to one of the partners, they have a duty to extend/disclose the same opportunity to that partner (Duty of Full Disclosure) On demand: partner must provide true and full info on all things affecting the partnership Without demand: partner must provide info concerning the partnerships business reasonably required for the proper exercise of other partner’s rights and duties McKnight v Hutchinson – Private benefit from partnership = profits belong to partnership not you; Application of PA s 33 - Facts o Hutchinson is using partnership client relationships to profit personally (e.g. got appointed to a BOD) – aka: using his position in the partnership to get invitations to be involved with other companies Partnership agreement said that parties could conduct business other than practice of law upon notice to the other partners and as long as it doesn’t impair partnership Hutchinson got: 1. Honoraria paid by gov Board 2. Fees paid for services as trustee 3. Director fees as director of several companies 4. Full accounting of profits from a condo designated as a firm asset o McKnight learns about Hutchinson activities, and McKnight demands payments b/c Hutchinson didn’t provide notice before taking these opportunities Hutch said he didn’t have to disclose - Issue o Did Hutch need to provide notice to McKnight for these benefits? - Analysis o Hutch said that he would be on Board, but didn’t disclose Honoraria S 33(1) notice required for any benefit derived by any transaction due to connection to the partnership SO YES o Trustee fees paid Trust was client to the firm, and payments made to firm and then delegated to the Hutch Trustee is something that lawyers do, and this is a client of the firm need to get consent or give an accounting
Hutchinson received fees from trust while firm was suffering due to his billing practices o Directorship fees Relationship with firm existed before firm, but then company became clients Lots of unbilled legal work If partnership work did suffer (which it did) must disclose Other directorship fees Used firm letterhead, affiliation, and did legal work All of these benefits are captured under 33(1) – beyond compensatory damages. Full accounting was required, and must give all partners a pro rata amount of these profits - Ratio o All of these activities are captured by s 33(1) o When you get benefits by virtue of your partnership, you may need to disclose them to the partnership (e.g. board salaries, honorariums) If you don’t then you may be forced to disgorge all financial benefits and pay them to the firm o Cannot limit or contract out of FDs – it is inseparably linked with partnerships Rochwerg v Truster – Absence of Partnership Agreement Does Not Change Partnership Obligations - Facts o Partners at ACCT firm Told partners that he was taking director role, but didn’t say that he was getting a share and equity interest (he put this in his wife’s name) One partner got fees from a client company o No partnership agreement o After Company went public, he left partnership Before this he got IPO options and whatnot but they were escrowed Said that he only had to disclose equity earned during partnership - Issues - Analysis o By exercising options and paying for them before leaving partnership, he had a duty to make an accounting (include the IPO ones, because although he didn’t have access to them during P, he owned them) He didn’t make an accounting, so he must pay them under pro rata as prescribed in the act - Ratio o Absence of partnership agreement does not change FDs (e.g. duty to disclosure, or the penalty of an accounting of profits + disgorgement) Applies regardless of whether shares are in escrow or otherwise vesting AKA: If you had a benefit you had a right to during the partnership, but you timed it so that it wasn’t triggered during the partnership, that can eb sufficient to trigger the duty to disclose and make an accounting
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Green v Harnum – Continued use of partnership assets post partner-exit; entitlement to profits post-exit; valuating partnership assets - Facts o Both fished together on the same ship o Worked together from 1987 to 1999 o NL found that they were in partnership, and that accounting was required o Green is forced out and Harnum continues to use the boat Partnership was never wound up and the boat was continued to be use Boat was partnership asset, and so continued use requires Harnum to pay Green for share of partnership stake - Issue o Does Harnum owe Green an interest in the profits made from the boat? YES, and since Harnum cannot afford to pay, Green gets proceeds from boat sale - Ratio o Partnership assets must be valued as of the time that the distribution takes place Not at the time the partnership is dissolved If there is continued use of the asset, you owe partner shares of profits from use of partnership assets If you cannot pay, then partnership assets may need to be sold to cover the differences o If you dissolve but don’t wind up, you can continue to create obligations to each other. Must wind up file a notice to third parties for a partnership to end the obligations o Using partnership property here creates an obligation to disclose/consent or pay to the other partner Partnership Relationships to Third Parties Partnership Act S 7-8 – 3 rd Party Presumption of partners being agents of the firm - See S 7 here - See S 8 here S 9 – Pledging Credit - (1) the firm is not bound if one partner pledges the credit of the firm for a purpose apparently not connected with the ordinary course of business of the firm, o unless the partner is in fact especially authorized by the other partner or partners to do such an act. S 10 – Rebuttal of the 3 rd Party Presumption of Agency - If 3rd party knows or ought to have known that the partner did not have the authority to bind the firm then there is no agency S 11 – Several Liability of Partners + Limitations of that Liability - 11(2) – Every partner is jointly and severally liable, and this cannot be changed by contract - 11(3) – Estate of partner is only severally liable (for pro rata share) but not jointly o i.e. cannot hold an estate jointly liable
S 13-14 – Firm vicariously liable for the wrongs committed by agents of the firm - PROF NOTE : Vicariously liable for the wrongs committed by non-partner agents of the firm s 13 – Firm just as liable for wrongdoings as Partners who committed the wrong - Firm is liable to the same extent as the liable partner s 14 – Firm Liable for Misapplication of a 3 rd Party’s Money - Firm is liable for money when property or money of third person is misapplied Ernst & Young v Falconi – Legality of Business Irrelevant to Whether Partnership Meets “Carrying on Business” Requirement - Facts o NOTE: this case predates the creation of LLPs o Falconi in firm with Klein o Falconi pleaded guilty to hiding bankrupt client assets from creditors (fraud) Klein had no involvement with the fraud Attempted to set aside declaration that he was liable for action of Falconi EY argued that Klein was liable as a partner - Issue o Does the illegality of the legal advice affect whether this is “ordinary business” for the firm rendering the innocent partner liable for the wrongs of the other? NO, if its done in the capacity of a lawyer then its captured under this definition and the innocent party is liable - Analysis o Every partner is an agent of the firm, and so any partner carrying on business in the usual way binds the firm Each partner is liable for the wrongful act or omission of a partner acting in the ordinary course of the business of the firm where loss or damages is caused to a person Hiding assets was done in Falconi’s capacity as a lawyer o Fact that legal advice is illegal does not mean that the info was not offered in capacity as a lawyer (still within the ordinary course of business) Sufficient to just have used the facilities of the law firm to perform services normally performed by a law firm (e.g. carrying out the transactions which resulted in losses for the client’s creditors) - Ratio o Quality or legality of business carried on by a partner does not affect whether it is conduct “in the ordinary course of business” for the firm. o Ordinary course of business can be broad: Sufficient to just have used the facilities of the law firm to perform services normally performed by a law firm (e.g. carrying out the transactions which resulted in losses for the client’s creditors) Strother v 3464920 Canada Inc – Agency of Lawyer to Firm Doesn’t End With End of Retainer - Facts
o Lawyer was providing services as part of a partnership to film companies, and eventually starts competing with clients by starting is own company Leaves partnership to start this company - Issue o On the client retainer is over, does your FD to a client end? NO - Analysis o Not an issue of a breach of contract because the contract ended, but it is a breach of the FD There is a conflict of interest here When he starts giving some advantageous advice to some clients and not others, then he is competing with his clients Not the partnership that Strother is competing with – he breached his FD to the client Not dependent on the existence of the contract but of the parties o If breach of duty is to a client, then you don’t get same disgorgement remedy. It must be an amount based on relationship between lawyer and the client Only Strother had to pay here, not the partnership - Ratio o Once your retainer is over, your FD to a client does not end o As a lawyer or accountant, you don’t just owe FD to other partners but also to the client Can breach firm FD by breaching FD to client Limited Partnerships (LPs) + LLPs NOTE : Only specific groups (“eligible professionals”) can form an LLP (e.g. Accts and Lawyers) ( s 81 ) Partnership Act s 12 – LLP Liability - If partner creates liability, partnership still liable, but you cannot go after each partner to pay for the liability UNLESS o negligent supervision or training by a partner, or o partner knew or ought to know it was happening and failed to stop it, S 51 – Requirements to Form a LP - ( 1 ) Must file if you want to create an LP (cannot arise at common law) - ( 2 ) Only need 1 GP and 1 LP to form a limited partnership S 55 – Limitation of LP’s role in the LP - ( 1 ) LPs can provide facilities, cash, and other property to the partnership BUT NOT SRVICES o E.g. they can provide connections to get services, but not the services themselves S 58 – General Rights of LPs in a LP - LPs can o Inspect and take extracts from books o To get formal account of partnership o Obtain dissolution and winding up of the LPs by court order (don’t jump in to save it)
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S 57 – Limited Liability of an LP - LP liability is limited to capital they committed to the partnership S 59 – Rights of LP to Profits - ( 1 ) LPs have right to have a share of profits or other compensation by way of income or an equity stake and to have capital contribution returned Dissolving a Partnership - PROF NOTE : If secured creditors feel like the windup is not happening fast enough, they can push for bankruptcy proceedings which is a much more complex (and potentially expensive) Partnership Act – Generally S 36; 38; 39 – Triggering a Partnership Dissolution S 36(1) subject to PA, partnership is dissolved when - ( a ) fixed term of partnership expires, - ( b ) specific undertaking of the partnership is completed, or - ( c ) partner provides notice to others with intention to dissolve o ( 36(2) ) dissolved on the date of the notice, if no date in notice, then on date of communication of the notice PROF NOTE : very important to know the date of dissolution, because from that point onwards the partnership cannot accumulate more debt S 37(1) subject to PA, partnership is dissolved upon - ( a ) Death of partner, - ( b ) Bankruptcy of partner, - ( c ) Decision to dissolve/leave firm S 38 Illegal business activity automatically dissolves a partnership - If partnership becomes illegal then it dissolves, and if your business was always illegal, then there was never a partnership S 39 – Requirements to Get Court Order for Dissolution of Partnership - PROF NOTE : Overall the factors are that partners want to separate themselves from a partner they no longer wish to be associated with, but who will not leave the partnership - S 39(1 ) – Can obtain court order to dissolve partnership under certain circumstances… o ( a ) when a partner is shown to the satisfaction of the Court to be of permanently unsound mind ; o ( b ) when a partner other than the partner suing becomes in any way, other than through permanent unsoundness of mind, permanently incapable of performing that partner’s part of the partnership contract ; o ( c ) when a partner other than the partner suing has been guilty of conduct that in the opinion of the Court, regard being had to the nature of the business, is calculated to affect prejudicially the carrying on of the business ;
o ( d ) when a partner other than the partner suing wilfully or persistently commits a breach of the partnership agreement or otherwise so behaves in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with that partner ; o ( e ) when the business of the partnership can only be carried on at a loss ; o ( f ) when circumstances have arisen that in the opinion of the Court render it just and equitable that the partnership be dissolved . S 40 – 3 rd Parties Entitled to Presumption of Non-Dissolution Until Notice of Dissolution Provided - (1) – Unless person has notice that partnership has been dissolved, they are entitled to assume that it hasn’t been o When a partnership is dissolved, partners can and should sign and file with registrar that partnership no longer exists – put 3 rd parties on notice to prevent accumulation of debts ( s 116 ) - (2) – Persons of old firm can be treated as members of the firm until notice of change is published in at least 2 consecutive issues of AB Gazette - (3) – Estate of partner who exited the Firm isn’t liable for partnership debts incurred after date of existing the firm. Exit means: o (a) dies, o (b) makes an assignment for the benefit of the partner’s creditors, Cannot use your partnership interest to pay a debt, and so if you do this it automatically dissolves a partnership PROF NOTE : Only do this if you want an end to the partnership or have no other choice o (c) becomes bankrupt, or o (d) not having been known to the person dealing with the firm to be a partner, retires from the firm. - ( 4 ) S 40 subject to the Bankruptcy and Insolvency Act S 41 – Providing Adequate Notice of Dissolution - any partner may give notice of dissolution or retirement, and can require other partner(s) to undertake actions necessary for the dissolution S 42 – Partners remain agents of the firm while winding up, BUT - Partners remain agents of the Firm during dissolution o but only to the extent necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution S 43 – Partners Are Entitled to their Share of Assets and Debt of the Firm - ( 1 ) Each partner is entitled to their share of the assets and debts of the firm – partnership pays for all outstanding debts o If after partnership is dissolved and all outstanding debts are paid there are surplus assets, partners have rights to receive portion of those proceeds
S 46 – Outgoing Partner Entitled to Profits Made Since Dissolution - outgoing partner is entitled to profits made since dissolution, or interest on the amount of outgoing partner’s share of partnership assets o If a partnership does not dissolve and winding up when one of the partners leave, it can make that partner entitled to your profits once partner has left PROF NOTE : should windup and re-establish business after S 48 – Order of Distribution of assets on final settlement of accounts - ( a ) Must follow the order in which debts and liabilities must be paid in dissolution of partnership - ( b ) The order of distribution is: o ( i ) must paid debts and liabilities o ( ii ) pay rateably cash advances back to the partners (money partners paid personally to cover anticipated partnership costs) o ( iii ) pay rateably liquidated partnership property and capital that was sold o ( iv ) pay remaining proceeds in accordance to partnership agreement, if no agreement, then divide equally S 116 – Content Requirements for a “Dissolution of Partnership” - ( a ) name of partnership - ( b ) partnership address - ( c ) the fact that partnership is dissolve and the date it was dissolved in the presence of a witness - PROF NOTE : All partnerships should file a dissolution of partnership to avoid possible continuation of liability accumulation Partnership Act – Limited Partner Specific Provisions S 67 – GP Exit’s Impact on LP - The retirement, death or mental incompetence of a general partner dissolves a limited partnership unless the business is continued by the remaining general partners o ( a ) pursuant to a right to do so stated in the certificate, or o ( b ) with the consent of all the remaining partners. S 68 – LP Exit’s impact on LP - if LP dies o ( 1) Estate gets all rights and powers of LP for the purpose o selling the estate and right to assign powers (to the extent the LP had those) o ( 2 ) Estate is liable for all deceased LP’s liabilities as a LP - PROF NOTE : generally have to dissolve with death of LP unless partnership can pay LP for all contributions and continue S 69 – How to Dissolve LP (and presumably an LLP) - (1) Cancellation of LP or LLP Certificate will end the partnership o Certificate of LP (and presumably LLP) keeps partnership alive even after exit - ( 1 ) A certificate shall be cancelled when
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o ( a ) the limited partnership is dissolved, or o ( b ) all limited partners cease to be limited partners. - ( 2 ) The notice to cancel a certificate shall be signed by all the partners. Red Burrito – Must dissolve partnership to end it - Facts o Tries to expel partners by preventing them from entering the building Blocked partners are still partners - Analysis o Still a partner Because partnership is the partners, we assume that all profits are shared equally pro rata – 50% for 2 partners these are the damages Called disgorgement when you have to give up profits owed to other partner - Ratio o If you don’t dissolve your partnership, you could be liable for the disgorgement if you generate future revenues using any of its assets or by continuing the business Must wind-up to complete the dissolution this is super harsh, but it’s the way it is Cannot have indemnity Sometimes have to sell the business to dissolve it Franchises - PROF NOTE: o Franchisee often attracts people who lack knowledge and experience with business, o There is a presumption by the Courts that franchisees rely on info from franchisor A LOT and that there is significant unequal bargaining power between the franchisor, and o This justifies a very paternalistic legislative framework for franchises where the main theme is about protecting the franchisee. Disclosure Requirements Franchise Act S 1 – Key Definitions: Franchisees, Franchisors, Material Changes ( i ) franchisee ” means a person to whom a franchise is granted and includes (i) a subfranchisor with regard to that subfranchisor’s relationship with a franchisor, and (ii) a subfranchisee with regard to that subfranchisee’s relationship with a subfranchisor; ( j ) franchisor ” means one or more persons who grant a franchise and includes a subfranchisor with regard to its relationship with a subfranchisee; ( n ) material change ” means
( i ) a change in the business, operations, capital or control of the franchisor or its associate, or ( ii ) a change in the franchise system, 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 and includes a decision to implement the change made by the board of directors of the franchisor or its associate or by senior management of the franchisor or its associate who believe that confirmation of the decision by the board of directors is probable; S 4 –Disclosure documents to franchisee requirements (timeline and contents) – NOT NEGOTIABLE ( 1 ) A franchisor must give every prospective franchisee a copy of the franchisor’s disclosure document. ( 2 ) The disclosure document must be received by the prospective franchisee at least 14 days before (a) the signing by the prospective franchisee of any agreement relating to the franchise , or (b) the payment of any consideration by the prospective franchisee relating to the franchise , whichever is earlier. ( 3 ) A disclosure document must (a) comply with the requirements of the regulations, (b) contain copies of all proposed franchise agreements, and (c) contain financial statements, reports and other documents in accordance with the regulations. ( 4 ) The franchisor must provide, in writing , to the prospective franchisee a description of any material change . ( 5 ) The prospective franchisee must receive the description of the material change as soon as practicable after the change has occurred and before ( a ) the signing by the prospective franchisee of any agreement relating to the franchise, or ( b ) the payment of any consideration by the prospective franchisee relating to the franchise, whichever is earlier .
S 13 – Ability for Franchisee to Rescind FA if Statutory Disclosure Reqs Not Met - If you fail to give disclosure doc, then prospective franchisee can rescind all franchise agreements by giving notice of cancellation on the earlier of o (a) no later than 60 days after receiving disclosure, or o (b) no later than 2yrs after the franchisee is granted the franchise Rocha v Panda Flowers Franchisors must provide sufficient disclosure of franchise to franchisees + strictly meet statutory reqs - Facts o Rocha lacks business experience and lacks money couldn’t afford to buy into Tim Hortons o Olasker has been at this for a while, Rocha signed onto franchise agreement without seeing the Panada flowers financials Disclosure of financials wouldn’t have even been possible because most recent financials weren’t prepared until after the signing o Rocha admits to not doing any research or DD before signing o Disclosure req and provision of financial statements provision was crossed out o This is a turnkey franchise once you hand over the fee, the franchisor takes care of everything in terms of setting up the space (show up with key on first day and then there’s your business) o Paid $35k in installments of the $55k , things don’t seem to be progressing o Olasker and Rocha have major falling out, starts looking for way out, and found another lawsuit against PF by another person suing for failure to disclose under the FA - Analysis o FA s 4(1) every franchisor must provide prospective franchisee with copy of franchisor’s disclosure doc (2) must be done before payment and within 14 days (3) must Comply with regs, contain all copies of proposed franchise agreements, and financial statements, reports, and other docs in accordance with regs (4) franchisor must provide, in writing, give description of any material change o FA s 13 if you fail to give disclosure doc, then prospective franchisee can rescind all franchise agreements by giving notice of cancellation on the earlier of (a) no later than 60 days after receiving disclosure, or (b) no later than 2yrs after the franchisee is granted the franchise o AB Regs for Disclosure: Must have disclosure cert signed and dated by at least 2 officers, the financial docs prepared in accordance with GAAP for the jurisdiction where franchisor is based Franchisor has Burden of proof Proper disclosure was not given o Not 14 days prior to signing of agreement, prior to lit o Disclosure docs did not meet statutory agreements, and there was no was the financials could have been given to Rocha - Ratio o Making forecasts on profits, earning, costs, or losses are subject to specific statutory reqs
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Doesn’t matter if franchisee asks or understands the information Only thing that could matter if franchisor knows that the disclosure was insufficient and went ahead anyways o Additional damages can be awarded if you can show that you were mislead by the financials provided by the franchisor o If franchisor is providing financing either directly or indirectly to franchisee (includes companies owned by same person who owned the franchise) it must be disclosed to franchisee along with T&C of that financing o As long as you can find a technical detail where standard was not met, then you can use that detail to get out of the franchise even if the detail isn’t the “real” motivator to exit the contract ( Panda Flowers; Holiday Inn ) Hi Hotel Ltd Partnership v Holiday Hospitality Franchising Inc Franchisors require exact compliance with FA disclosure requirements; Motive for Franchisee raising compliance issue is irrelevant - Facts o Partnership bought hotel that was previously part of franchise o Franchisor says that they provided disclosure doc for AB and ON, and certificate missing signatures o Franchisee says they only got ON docs and no certificate - Analysis/Ratio o There was improper disclosure – lack of certificate, this is appealed So such thing as substantial compliance – must have exact compliance o Real reason they wanted to get out was disagreement over reno costs, and improper disclosure gives them a way out – Franchisee can do this; real motive for rescinding is immaterial 1448244 Alberta Inc v Asian Concepts Franchising Corp Absence of signatures = lack of sufficient disclosure - Facts o Jovia seeks to rescind franchise agreement with Asian concepts over lack of disclosure o There was a disclosure doc, but it lacked 2 signatures required from franchisor o Jovia argues that sigs are required, and that failure to sign means sufficient disclosure was not made and he can rescind the agreement - Issue o Does the absence of signatures mean lack of sufficient disclosure? - Analysis/Ratio o Jovia is right! Absence of signatures = lack of sufficient disclosure and he can rescind Essa v Mediterranean Franchise Inc (MFI) Examples of specific things that must be disclosed to meet sufficient disclosure obligation - Facts o MFI does business in multiple provinces, Essa operated franchise for 9mo and then it closed o Pres and Director of MFI met with Essa originally in 2009 and disclosure doc was sent
Essa not ready to sign, so nothing happened Essa later brings in business partner with money to begin franchise, and enter agreement in 2010 NO new disclosure at this time o Pres and Director could not prove that there was any second disclosure o Later in 2010, OG partner was bought out and replaced by Essa’s wife No disclosure doc provided to wife entering venture o Business failed later in 2010, action brought against MFI saying they never got disclosure in 2010 President/Director of MFI could not prove that he provided disclosure - Issue - Analysis o Failure to provide telephone numbers of extra provincial franchises is grounds to rescind, even if you can find this stuff without it being provided in the disclosure docs o When info is given to create expectations about earnings (sales, costs, income, or profit) from franchisee outlets required to include with this info Material assumptions underling its preparation and presentation Indicate place where substantiating info is available for inspection by franchisee STATEMENT that food costs were typically 33% of food selling price is captured in these expectation reqs o Franchisor is required to disclose T&C of financing provided directly or directly from franchisor to franchisee Only available financing provided was through pres/dir owned company (not MFI) indirectly provided by MFI, and this financing was never disclosed in the disclosure doc, but appeared in franchise agreement o Recission was valid Statutory damages under 14(2 ) must comp franchisee for losses incurred by franchisee for any losses incurred in acquiring, setting up and operating the franchised business - Ratio o Failure to provide telephone numbers of extra provincial franchises is grounds to rescind, even if you can find this stuff without it being provided in the disclosure docs o When info is given to create expectations about earnings (sales, costs, income, or profit) from franchisee outlets required to include with this info in franchise agreement o Franchisor is required to disclose T&C of financing provided directly or directly from franchisor to franchisee o Statutory damages under 14(2) must comp franchisee for losses incurred by franchisee for any losses incurred in acquiring, setting up and operating the franchised business
Good Faith Requirements Franchise Act S 7 – The duty of good faith and fair dealing attaches to every franchise agreement Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement. S 9 – Causes of action against franchisor and their agents (1) If a franchisee suffers a loss because of a misrepresentation contained in a disclosure document , the franchisee has a right of action for damages against any or all of the following: (a) the franchisor; (b) every person who signed the disclosure document. (2 ) If a disclosure document contains a misrepresentation , a franchisee who purchases a franchise to which the disclosure document relates is deemed to have relied on the misrepresentation . S 10 – Defence to Liability (1) A person is not liable in an action under section 9 if the person proves that the franchisee purchased the franchise with knowledge of the misrepresentation . (2) A person other than the franchisor is not liable in an action under section 9 if the person proves (a) that the disclosure document was given without the person’s knowledge or consent and that on becoming aware of its having been given the person promptly gave notice as prescribed by the regulations that it was given without that person’s knowledge and consent , (b) that, after the giving of the disclosure document and before the purchase of the franchise by the franchisee , on becoming aware of any misrepresentation in the disclosure document the person withdrew consent to it and gave notice as prescribed by the regulations of the withdrawal and the reasons for it, (c) that, with respect to any part of the disclosure document purporting to be made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, the person had no reasonable grounds to believe and did not believe that (i) there was a misrepresentation , (ii) the part of the disclosure document did not fairly represent the report, opinion or statement of the expert , or (iii) the part of the disclosure document was not a fair copy of or extract from the report, opinion or statement of the expert , Or (d) that, with respect to a false statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document ,
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(i) it was a correct and fair representation of the statement or a copy of or extract from the document, and (ii) the person had reasonable grounds to believe and did believe that the statement was true . Katotikidis v Mr. Submarine Ltd When can franchisee win punitive damages against franchisor? - Facts o Working at Eaton centre location, but starts to demise because anchor store (Eatons) is going bankrupt Looking to open store at new location nearby since that mall is doing well o Essentially lead to believe that they’ll get the new location at the mall that’s doing well Been told this by Mr. Sub, and Mr. Sub has policy of giving new locations to nearest operating franchisee o Demise of mall accelerates and P incurs lots of losses but feel okay b/c they have been promised location Mr. Sub provides no support to help their business o Mr. Sub gives the mall location to someone else while Eaton store is still open Breaches promise (oral agreement) Breaches policy - Issue o - Analysis o Court finds that lack of support and giving other mall location to someone else breached duty of fair dealing Courts so concerned about trust and reliance of franchisees on franchisors Not the same as FD o Very damning list of reasons justifying that there was a duty of good faith and fair dealing its clear that there is major power imbalance here, and that without a check on their behaviour, there would likely be oppressive consequences Mr. Sub made franchisees very reliant on it - Ratio o Rare example of awarding punitive damages in a business case unless a statute allowing punitive damages permits it o HOWEVER, you can see it in franchises if there is a breach of duty of good faith – requires meeting the following test from Whiten v Pilot Insurance : Plaintiff can demonstrate that Def committed an independent or separate action or wrong causing damage to the Ps; and Def’s conduct was sufficiently harsh, vindictive, reprehensible, oppressive, high- handed, that it offends the court’s sense of decency o PRACTICE NOTE : the stronger the franchise, the more extreme the culture of reliance, and the more protective the courts will become of franchisees (and more likely there will be punitive damages for breaches of duty of good faith)
Bagai v Sure Corp Duty to Mitigate Damages Applies to Franchisees; Wrong D-Docs = Misrep - Facts o Ps were induced to enter franchise for Sure Copy Store by failing to comply with disclosure docs by: Misrepresenting the financial benefits of having a sure copy franchise, and Franchisor failed to provide adequate training and support o P had business experience, and disagrees with Sure Copy’s instructions and misreps He said they he was only buying a copy store, not a copy-print They provided copy-print documents which contained the wrong projections for earnings and costs for copy store knew this and never corrected it - Analysis o There was misrep in disclosure docs because they provided the wrong docs o Damages are mitigated because of Bagai’s negligence Could have cut his loses in numerous ways: Moving from red deer, market in red deer, make connections Refused advice from Sure Copy Claimed they didn’t train him properly, but he left early from training sessions Damages reduced o Payments of franchise agreement will be paid back for recission - Ratio o Provision of incorrect disclosure documents = improper disclosure and basis to rescind o If you want other losses however, there is a duty to mitigate your own loses Failure to mitigate your losses can cut into your own damages Refusing advice from franchisor suggests mitigation issue – if you do everything that franchisor says, you likely wont have a mitigation problem Corporations Charter Rights of Corporations - PROF NOTE : The corporation is treated as a legal person – it can incur and pay debts, lease property, and can essentially do anything that a natural person can and even have charter rights in some cases Canadian Egg Marketing Agency v Richardson – Corporations Have Charter Rights - Facts o Richardson was Egg producer in NWT and wanted to sell eggs in rest of CAN despite NWT not being party to the federal-provincial egg marketing agreement o R argued that preventing his company from selling eggs outside NWT was a violation of its charter rights Specifically freedom of mobility and association o APP says that corporations do not have charter rights - Issue o Do Corporations have charter rights?
- Analysis o SCC already said in Big M Drugmart that corporations could evoke the charter Generally the charter only applies to natural persons and not to corporations However if a corporation is accused to be violating a law, it can challenge the constitutionality of the law This is because the statute is in contravention of the Charter ALMOST as a defence o Exception from Big M Drugmart can be applied in the civil context - Ratio o Generally, the charter only applies to natural persons and not to corporations o However, if a corporation is accused of violating a statutory scheme it can raise the unconstitutionality of that scheme as a defence This extends to charter rights infringements Can only raise charter arguments when the law is impacting your corporation directly RJR MacDonald v Canada Need to justify infringement of corporate charter rights - Facts o RJR MacDonald and Imperial Tobacco challenged the Tobacco Products Control Act’s constitutionality Specifically that the Act’s prohibition on advertising and unattributed health warnings is violation of their freedom of expression This was done because the statutes impacted the company’s ability to advertise - Analysis o Court agreed that these sections of the Act were inconsistent with s 2(b) of the charter o This infringement could not be justified as there was not a causal link between the limitation and the legitimate objectives of the gov + the Act - Ratio o Restriction’s on a corporation’s charter rights must be reasonably justifiable (savable under s 1) for the limitations on its charter rights to be upheld Forming A Corporation ABCA S 5 – Need 1+ people and AOI to incorporate - One or more persons may incorporate a corporation by signing articles of incorporation and complying with section 7. S 6(1) – List of AOI requires contained here - (a) the name of the corporation, - (b) the classes and any maximum number of shares that the corporation is authorized to issue, and o (i) if there are 2 or more classes of shares, the special rights, privileges, restrictions and conditions attaching to each class of shares, and
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o (ii) if a class of shares may be issued in series, the authority given to the directors to fix the number of shares in, and to determine the designation of each series, and the rights, privileges, restrictions and conditions attaching to the shares of each series, - (c) if the right to transfer shares of the corporation is to be restricted, a statement that the right to transfer shares is restricted and either o (i) a statement of the nature of the restrictions, or o (ii) a statement that the nature of the restrictions appears in a unanimous shareholder agreement, - (d) the number of directors or, subject to section 107(a) , the minimum and maximum number of directors of the corporation, and - (e) any restrictions on the businesses that the corporation may carry on. S 9(1) – Corporation comes into being on the date of the Certificate of Incorporation - A corporation comes into existence on the date shown in the certificate of incorporation. Corporate Names ABCA S 10 – Must contain the following in Corporation name - ( 1 ) Must include one of: “Limited, Ltd., Corporation, Corp., Inc.” or the French versions thereof - ( 3 ) Only corporations can use these naming conventions - ( 5 ) Breach (3) and you’re liable for a fine of up to $5000 - Various provisions talking about professional corporations – see here S 12 – Corporations cannot have confusing/identical names (DISTINCT from TM Law) - (1)(a) Corporations cannot have a prohibited name, which includes: o - (1)(b-c) Corporations cannot have confusing/identical names (DISTINCT from TM Law) - (1)(d) Name must comply with the regulations - (2) Where corporate incorporated undertakes to dissolve or change its name and the undertaking is not carried out within the time specified , the Registrar may, by notice in writing, giving the Registrar’s reasons, direct the body corporate to change its name to one that the Registrar approves within 60 days after the date of the notice. - ( 3 ) Must send name docs to the Registrar Alberta Business Corporations Regulations (ABCR) S 15 – Criteria to determine whether the corporate name contravenes the Act - In determining whether a name contravenes the Act or this Regulation, the Registrar may, without limitation, consider the following: o ( a ) the distinctiveness of the name or any element of it and the extent to which the name has become known; o ( b ) the length of time the name has been in use ; o ( c ) the nature of the business carried on under or associated with the name , including the likelihood of any competition among businesses using such a name ;
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o ( d ) the nature of the trade with which a name is associated , including the nature of the goods or services and the means by which they are offered or distributed ; o ( e ) the degree of similarity between the name and another name in appearance or sound; o ( f ) the geographic area in Alberta in which the name is likely to be used . Paws Pet Food & Accessories v Paws and Shop Inc – Evidence of Customer Confusion is Sufficient to Cancel a corporate Name for Similarity - Facts o PPF Incorporated first, then later on PS was successfully incorporated o PPF became aware of PS because customers communicated their confusion to PPF o PPF seeks an order to compel the AB registrar to demand that PS change its name to remove the word paws PPF has established good rep under its name, and 4 yrs later PS incorped and PPF asked the Registrar to require a name change Argued that customers where believing the stores to be related o PROF NOTE : pretty common for there to be confusing names, and mitigating this risk is the very reason for the ban on identical names - Issue - Analysis o If there is evidence that the customers are actually being confused that is enough Clear evidence of that in this case, so courts sided with PFF - Ratio o If customers are confused – and you can prove it – that is sufficient to have the name changed PROF NOTE : NOT THE SAME STANDARD as likelihood of confusion standard in TM law Merchant Commercial Real Estate Services v Alberta (Registrar of Corporations) – All that matters in instance of name confusion is whether there is confusion; no special rights to use your own name - Facts o Realty company in AB since 1989 using name “Merchant Realty Ltd” o In 1991 APP (Peter Merchant) starts doing business under Merchant Consulting Later uses the name Merchant Commercial Real Estate Services” for its corporate form in 1995 o Both companies provide commercial real estate services in DT Calgary There is evidence that customers are confused between the two names o Merchant Realty Ltd requests that the Registrar change the name of APP Registrar rejects APP’s proposed Merchant Commercial Inc for being too general o APP argues that he has right to use his own name o MRL argues that all that matters is whether the name is causing simple confusion - Issue
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o - Analysis/Ratio o All that matters is simple confusion Both parties use the name, have offices close to each other, and there is evidence of confusion this is enough to require the name change o No special rights to a use a name just because its your own name Pre-Incorporation Corporate Contracts - EXEC SUM : o Business may enter into contracts before the corporation actually exists (e.g. hiring key employees, signing leases, etc.), o These contracts are executed by promoters who are personally liable for the contents of the contracts unless they explicitly excluded personal liability in the contract, and o Corporation must formally adopt the contract to be bound by the contract. - PROF NOTE : No FD by being a promoter, despite existing as something that looks like an agent o This is because the corporation does not exist, and you cannot owe FD to non-existent entity o If you continue in “promoter” capacity post incorporation, you likely become an agent and then you owe FD ABCA (s 15) – Do Not Worry About Baxter Rule, this legislation replaces it S 15(2) person who made contract is liable for the contract - Entering into Pre-Incorp = representation that company will exist - A person making this warranty that o (i) the body corporate will come into existence within a reasonable time, and o (ii) the contract will be adopted within a reasonable time after the body corporate comes into existence, - is liable for breaches of that warranty. S 15(3) Corporation can adopt pre-Incorp Contracts and assumes ownership - Corporation can ratify re-incorp contract expressly or by implied conduct as to assume ownership of the contract S 15(4) If Corp refuses to adopt, can ask court to direct Corp to remedy losses of promoter - Depending on the circumstances, promoter can ask court to direct corp to o Adopt the contract o Remedy some or all the loses of the promoter from the contract S 15(5) If its becomes clear that promoter reasonably believed that Corp was going to adopt Pre-I doc, may be able to apportion liability for contract between promoter and corp - Sort of operates as an extension between 15(4)
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S 15(6) – Promoter can avoid personal liability for contract if there is express waiver - Need to have very clear and very specific provision that if: o Corp doesn’t come into existence, or o Corp refuses to ratify the contract - You (promoter) will not be liable. Kelner v Baxter – OLD LAW FOR CONTEXT, CITE LEGISLATION: Pre- Incorporation Contracts non-binding on the Company - Facts o Group of promoters for a hotel what wasn’t incorporated yet o Entered into contract for wine, contract was ratified by the company o Wine was consumed before the money was paid, and the company went bankrupt o Promoters sued for outstanding amount Promoters argue that contract belonged to the company and so they cannot be sued - Issues o - Analysis o Company existed, and tried to assume the contract Company did not sign the contract Because contract was signed before Incorp, the court ruled that the contract had nothing to do with the corp o Company can only become liable for pre-corporation agreement if pre-incorp agreement was cancelled and identical one was signed - Ratio o No pre-incorporation contract is binding upon a company Company can only become liable for pre-corporation agreement if pre-incorp agreement was cancelled and identical one was signed o Overtime this approach moved further and further from the business reality Black v Smallwood (AUS) – Pleeeeease let the common law evolve past Baxter - Facts o Resp promoters signed in name of the company and signed as directors of the company o At the time of the signing, they thought that the corp did exist but were wrong o Resp argue Kelner should not apply because they honestly believed it existed - Issues o COURT AGREES – contract is binding on corp - Analysis - Ratio (Obiter) o Shows how desperate courts were to move past kelner Maybe a defence to honestly believe your corp existed to avoid liability from non-incorporation w/ Pre-Incorp Agree
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Sherwood Design Services Inc v 872935 Ontario Limited – a corporation falling under new ownership/with new promoters does not change it liability for Pre-Incop Agreements - Facts o People executed agreement of purchase and sale in trust to be incorporated Solicitor handling transaction (“ASSOC”) notified corporate department of law his law firm saying he needed number corp Corp law clerk assigned him a numbered corp made after the agreement date Corporation was made using name of partner of law firm as sole director and officer This is common practice Made client officer and clerk made preparations This transaction did not go ahead (client doesn’t make purchase sale, and doesn’t go ahead with shelf corp) transfer of ownership never ratified But asset purchase/sale was assigned to this corporation o This numbered corp was then transferred to a different client at the firm PROF NOTE : numbered corp = shelf corp, and this above practice of assigning shelf corps to facilitate transactions is common practice o Vendors sue people who wanted to execute agreement, and sued this number corp which is now assigned to another client of the law firm - Issue o Is the numbered corporation liable despite the new ownership? YES - Analysis/Ratio o Individuals who backed out of asset purchase/sale were supposed to be directors Since they were suppose to be directors and officers of this corporation, and corporation intended to adopt, then corporation is liable o Asset purchase sale agreement was assigned to the corporation – which existed – intended to adopt the agreement Despite being different promoters, the corporation is still liable o Unclear whether lawsuit would succeed on going after the corporation o PROF NOTE : law firm would end up paying for this outcome 1394918 Ontario Ltd v 1310210 Ontario Inc – can adopt pre-incorp doc by suing to enforce benefits granted under it; cannot adopt repudiated contract - Facts o 1 shelf corp agrees to sell land to corporation-to-be-incorporated Shelf corp sells to Ray in trust Amending agreement extended time to waive conditions signed by Ray and Cohen (officer of Shelf) Cohen dies a few weeks later
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Lawyer for shelf sent letter says that amendment was null because it was never signed by authorized officers, and Rayment knew this Rayment says this is a repudiation of the contract and he has a cause for action Prospective corporation becomes incorporated, and Ray assigns his legal rights in the contract to the corporation - Issue o Does the new corporation have a cause of action against the shelf for the repudiation? YES – can sue for breach of contract, but Shelf cannot adopt repudiated contract so promoter who repudiated it is liable - Analysis o Under statute, promoter is usually bound to contract this is not true if promoter specifically refuses such liability o Repudiation kills contract before contract was born, if this contract was repudiated then new corp cannot become party o S 21 – if company adopts pre-incop contract, it is entitled to benefits of the agreement from the date it was signed INCLUDING RIGHTS FROM OTHERWISE REPUDIATED CONTRACT o Since contract was for the benefit of the company (as Ray didn’t sign in personal capacity), commencing of lawsuit by new company counts as adoption of the contract No personal liability on the promoter - Ratio o Promoter is not personally liable once contract is adopted by the company o Company can adopt pre-incorp doc by suing to enforce benefits granted under it o If Promoter had repudiated a contract, corporation cannot adopt that corporation – corporation must recreate the contract Szecket v Huang – require express waiver of personal liability in Pre-Incorp Agree to avoid personal risk of liability if corporation isn’t formed - Facts o S and associate invented tech, and H hired them into his to-be-formed corporation to commercialize this tech o S and associate quit jobs and move to Taiwan to work for corporation Corporation does not go ahead since H does not incorporate the company S and Assoc sue H personally for breach of contract - Issue o Is H personally liable? YES - Analysis o Pre-Incop could never be adopted by the corporation since corporation was never formed o The agreement actually said “on behalf of company to be incorporated” This is not an express waiver of personal liability - Ratio
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o If you want to avoid risk of personal liability as promoter of corporation not coming into existence, you must expressly state that you cannot be held personally liable in this circumstance in the agreement Corporate Legal Personality ABCA 16(1) Capacity of a corporation = natural person - A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person. 46(1) Shareholder Immunity - The shareholders of a corporation are not, as shareholders, liable for any liability , act or default of the corporation except under o section 38(4) ( creditor special circumstances ), o 146(7) ( when managerial powers are exercised under a USA ) or o 227(4) ( liabilities at dissolution ) o or Part 2.1 ( Ignore this ). Salomon v A Salomon & Co – Corporation is a Separate Legal Entity; cannot sue shareholders personally for corporation liabilities - Facts o Aron Salomon (Shoemaker) operated business with his sons and then incorporated Wife and children became shareholders, 2 sons working as directors (Sometimes called a private or closely held corporation) o Aron gave loan to Corp and part of loan was issued with security to Boderip o Company went bankrupt, Aron repaid Boderip and used remaining assets to repay himself for the loan Other creditors of Corp sued Aron arguing that Aron should not be paid and be personally liable for corporation’s debts - Issue o Is Aron liable for the corporation’s debts? - Analysis o Under rules of partnership, the creditor’s argument is correct, however this is not a partnership Trail court decided in favour of creditors, and House of Lords overturned o Being a decision-maker does not make them the corporation the company is at law a different person all together from the [shareholders]; and though it may be that after incorporation the business is precisely the same as it was before… the company is not in law the agent of the [shareholders] or trustee of them . Nor are the [shareholders] as members liable, in any shape or form, except to the extent and in the manner provided by the Act.” - Ratio o Even when corporation goes bankrupt, the only recovery is from the corporation itself (unless you can pierce the corporate veil)
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o Nature of a corporation is fundamentally different from a partnership – this case establishes the fact that corporations are a separate legal entity Piercing the Corporate Veil - PROF NOTE : there is no Brightline test for this in Canada, and piercing/lifting the corporate veil is VERY VERY hard to achieve. Generally, must be a closely held or private corporation. Generally able to lift/pierce corporate veil the shareholder must do something inequitable. Examples of when corporate veil can be lifted: Sham or a fraud You’ve created affiliate corporations (e.g. a chain of holding companies that tries to put a buffer between shareholder and company to facilitate wrongdoing) Thinly capitalized corporations o Not automatic though – require shady intent Avoidance of statutory requirements (in particular taxes); and Incorporated to avoid tort claims: o This is where you really see the issues of equity come up very fact driven though and no clear corporate test - PROF NOTE : Basic tests to assist in whether the corporate veil should be pierced o General : “if we don’t pierce the corporate veil, will it leave someone without any address or recourse?” Generally looking for indications that upholding corporate veil would create unjust result o Undercapitalized: “Is it reasonable for the owner of a business transfer all risk of loss or injury to members of the general public through the device of a marginally financed limited liability entity” IF corp deliberating undercapitalized in this case and cannot pay for tort, it may be pierced - PROF NOTE: There are other ways to hold shareholders liable without piercing the corporate veil: o When shareholder voluntarily guarantees the performance of a corporation’s obligation; o Where a shareholder executes a doc such as a promissory note in a way that makes it appear that they are acting as a co-obligator rather than an agent acting on behalf of the corp E.g. co-signing a loan or other agreement o Where a shareholder is actually acting as a principal in its own name and the corporation is acting as their agent; or o Where shareholder is personally involved in the commission of a tort while acting as an agent for their corporation
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Kosmopoulos v Constitution Insurance Co of Canada – Cannot Pierce Corporate Veil to Try and Ignore Burdens of Corporation While Getting benefits - Facts o Entered into a lease for premises in Toronto where operated a SP o He then was incorporated, but kept acting as though he was still a SP Insurance on tools as if they were his own (in his own name) Lease in his name Kept operating as an SLG (designation for sole proprietor) o Insurance company new that Kosmo was a Corp rather then SP o Fire destroyed his shop and destroys contents of store covered by insurance policy When Kosmo seeks coverage, insurance says it only covers personal property and not the tools of the shop Insurance cites Salomon Kosmo is trying to pierce the corporate veil himself since he wants the insurance to extend to his business assets o TJ held that Kosmo could recover assets in his name, but not in corporation - Issue - Analysis/Ratio o Kosmo incorporated on advice of his lawyer, which he did to protect him from liability He cannot pick and choose what aspects of the corporate form to honour You must “bear the corresponding burdens” of incorporation o You don’t get to pierce the corporate veil as a shareholder (or even as the only director and shareholder) because you made a mistake Big Bend Hotel Ltd v Security Mutual Casualty Co – incorporating purely to avoid negative liabilities may be grounds to pierce - Facts o Kumar was president and sole shareholder of BB Hotel acquired shares in 1975 where sole asset of hotel in Golden o Prior to acquisition of Golden hotel, his previous corporation (where he was president and sole shareholder) owned and operated hotel that burned down and claimed insurance for in Langley BC o To acquire insurance for new hotel, had to disclose if he had previously made a claim and if so what for and amount Did not report anything since claim was made by different corporation that he owned and operated Argues that this is not an appropriate case to lift the corporate veil - Issue o Is this an appropriate circumstance to pierce the corporate veil? - Analysis o Lifting the corporate veil is a very rare thing to do, but there are exceptions: 1 reason is to use corporate form to perpetuate a fraud
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Had to get fire insurance to operate the hotel, but if you’ve claimed fire insurance before the premiums are higher Only reason why BB was created was to file for insurance policy for hotel as to get a cheaper policy/acquire policy Only reason he created a new corporation was to avoid listing insurance loss not a valid reason to incorporate o The applicant is REALLY Kumar in this case, and so piercing the corporate piercing - Ratio o Key question: are you using the corporation just to commit insurance fraud Using a corporation just to avoid the negative liabilities associated with a business venture by obscuring the details of the past is a basis to lift the corporate veil 642947 Ontario Ltd v Fleischer – Expressly directing wrong doing to be done through Corp? May be grounds to pierce - Facts o Property owned by N and F leased property to Sweet Dreams (controlled by H and K) Lease contained ROFR should property come up for sale o Numbered company agreed to buy the property for $2MM and Sweet Dreams decides to exercise ROFR Sweet Dreams exercised ROFR but later terminated the agreement 1mo later numbered corp resubmits OG offer to F&N with position that ROFR has been exercised Sweet Dreams obtains interlocutory injunction restraining sale and undertaking to pay any damages caused by inunction Numbered corp requested and granted extension of the closing Real estate market collapse during meantime and both companies lose interest in buying o SD dissolves in Nov 1990 o New closing date for numbered corp set for Dec 1990 o Numbered corp refuses to close citing downturn and sued for declaration that agreement between F&N was had been terminated and for return of deposit F&N counterclaim for damages and breach of agreement Numbered corp seeks indemnification from SD, H and K on undertaking to pay o SD is undercapitalized and so numbered corp seeks to pierce corporate veil TJ agreed with this and says that SD is H&K’s alter ego and akin to fraud - Issue o H&F are liable - Analysis o SD never had enough capital to cover liabilities this was intentional Only purpose was to hold property
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o Shareholders of SD are other corporations, and most of the ownership of those corporations was H&K o Veil usually not pierced unless conduct amounting to fraud has occurred Can also be pierced where “those in control expressly direct a wrongful thing to be done” o H&K are sophisticated parties and so when they named SD in the lawsuit when it had no assets to pay, they knew what they were doing Tried to perpetuate fraud on other parties and the court - Ratio o Veil usually not pierced unless conduct amounting to fraud has occurred Can also be pierced where “those in control expressly direct a wrongful thing to be done o Can probably cite this case for undercapitalization or general piercing CV tests in Prof Notes Corporate Financial Structure: Ownership of the Corporation ABCA – Shares 26 – Shares and Classes of Shares - (1) Shares of a corporation shall be in registered form and shall be without nominal or par value . - (3) If a corporation has only one class of shares, the rights of the holders of those shares are equal in all respects and include the rights o (a) to vote at any meeting of shareholders of the corporation, o (b) to receive any dividend declared by the corporation, and o (c) to receive the remaining property of the corporation on dissolution. - (4) The articles may provide for more than one class of shares and, if they so provide, o (a) the rights, privileges, restrictions and conditions attaching to the shares of each class shall be set out in the articles, and o (b) the rights set out in subsection (3) shall be attached to at least one class of shares but all of those rights are not required to be attached to one class. - (5) Subject to section 29, if a corporation has more than one class of shares, the rights of the holders of the shares of any class are equal in all respects . 27 – Issue of Shares (CBCA, s 25) - (1) Subject to the articles, the bylaws and any unanimous shareholder agreement and to section 30, shares may be issued at the times and to the persons and for the consideration that the directors determine . - (3) A share shall not be issued until the consideration for the share is fully paid in money or in property or past service that is not less in value than the fair equivalent of the money that the corporation would have received if the share had been issued for money.
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30 – May Include Shareholder’s Pre-Emptive Right - 30(1) If the articles or a unanimous shareholder agreement so provides, no shares of a class shall be issued unless the shares have first been offered to the shareholders holding shares of that class , and those shareholders have a pre - emptive right to acquire the offered shares in proportion to their holdings of the shares of that class, at the same price and on the same terms as those shares are to be offered to others . - (2) Notwithstanding that the articles provide the pre - emptive right referred to in subsection (1), shareholders have no pre - emptive right in respect of shares to be issued o (a) for a consideration other than money , o (b) as a share dividend , or o (c) pursuant to the exercise of conversion privileges, options or rights previously granted by the corporation . 34 – Acquisition by Corporation of Its Own Shares - (1) Subject to subsection (2) and to its articles, a c orporation may purchase or otherwise acquire shares issued by it . - (2) A corporation shall not make any payment to purchase or otherwise acquire shares issued by it if there are reasonable grounds for believing that o (a) the corporation is, or would after the payment be, unable to pay its liabilities as they become due, or o (b) the realizable value of the corporation’s assets would after the payment be less than the aggregate of its liabilities and stated capital of all classes. PROF NOTE : if buying back shares would cause corp to go into financial instability, it can’t repurchase 136 – Shareholder Proposals (more common in recent years) - (1) A registered holder of shares entitled to vote at an annual meeting of shareholders, or a beneficial owner of shares, may [submit a proposal]. o PROF NOTE : directors don’t have to do what shareholders have asked in proposal, but usually directors do (and should) if BOD ignores these, directors can be voted out Not binding on the corporation these have become increase common lately as shareholders want company to have higher ethical standards or obligations 146 – Unanimous Shareholder Agreements (USAs) - (1) A unanimous shareholder agreement may provide for any or all of the following: o (a) the regulation of the rights and liabilities of the shareholders , as shareholders, among themselves or between themselves and any other party to the agreement ; o (b) the regulation of the election of directors ; o (c) the management of the business and affairs of the corporation , including the restriction or abrogation, in whole or in part, of the powers of the directors ; o (d) any other matter that may be contained in a unanimous shareholder agreement pursuant to any other provision of this Act.
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- PROF NOTE : generally only apply to small public corps or private corps since this does not work for large companies ABCA – Fundamental Changes 1 – Definitions (ii) Special Resolution - means a resolution passed by a majority of not less than 2/3 of the votes cast by the shareholders who voted in respect of that resolution or signed by all the shareholders entitled to vote on that resolution; 173 – Amending Articles of Incorporation (FUNDAMENTAL CHANGES) - (1) Subject to sections 176 and 177, the articles of a corporation may by special resolution be amended to o (a) change its name , subject to section 12, o (b) add, change or remove any restriction on the business or businesses that the corporation may carry on , o (c) change any maximum number of shares that the corporation is authorized to issue, o (d) create new classes of shares , o (e) change the designation of all or any of its shares , and add, change or remove any rights, privileges, restrictions and conditions, including rights to accrued dividends, in respect of all or any of its shares, whether issued or unissued, o (f) change the shares of any class or series , whether issued or unissued, into a different number of shares of the same class or series or into the same or a different number of shares of other classes or series, o (g) divide a class of shares , whether issued or unissued, into series and fix the number of shares in each series and the rights, privileges, restrictions and conditions of that series, o (h) cancel a class or series of shares where there are no issued or outstanding shares of that class or series , o (i) authorize the directors to divide any class of unissued shares into series and fix the number of shares in each series and the rights, privileges, restrictions and conditions of that series, o (j) authorize the directors to change the rights, privileges, restrictions and conditions attached to unissued shares of any series , o (k) revoke, diminish or enlarge any authority conferred under clauses (i) and (j), o (l) increase or decrease the number of directors or the minimum or maximum number of directors , subject to sections 107 and 112, o (m) subject to section 48(8), add, change or remove restrictions on the transfer of shares , o (m.1) add or remove an express statement establishing the unlimited liability of shareholders as set out in section 15.2, or o (n) add, change or remove any other provision that is permitted by this Act to be set out in the articles.
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183 – Amalgamation Agreement - (4) The holders of shares of a class or series of shares of an amalgamating corporation are entitled to vote separately as a class or series in respect of an amalgamation if the amalgamation agreement contains a provision that , if contained in a proposed amendment to the articles, would entitle those holders to vote as a class or series under section 176. - (5) Subject to subsection (4), an amalgamation agreement is adopted when the shareholders of each amalgamating corporation have approved of the amalgamation by special resolutions . o PROF NOTE: both corporations that are amalgamating must approve the amalgamation by special resolution. 190 – Extraordinary Sale, Lease, or Exchange - (1) A sale, lease or exchange of all or substantially all the property of a corporation other than in the ordinary course of business of the corporation requires the approval of the shareholders in accordance with subsections (2) to (6) . - - (2) A notice of meeting of shareholders complying with section 134 shall be sent in accordance with that section to each shareholder and shall [ include all relevant information about the deal – see s 190(2)(a-b) ] - (3) At the meeting referred to in subsection (2), the shareholders may authorize the sale, lease or exchange and may fix or authorize the directors to fix any of its terms and conditions . - - (4) Each share of the corporation carries the right to vote in respect of a sale , lease or exchange referred to in subsection (1) whether or not it otherwise carries the right to vote . - (6) A sale, lease or exchange referred to in subsection (1) is adopted when the holders of each class or series entitled to vote on it have approved of the sale, lease or exchange by a special resolution. 211 – Voluntary Dissolution of Corporation - (1) A corporation that has not issued any shares and that has no property and no liabilities may be dissolved at any time by resolution of all the directors . - (2) A corporation that has no property and no liabilities may be dissolved by special resolution of the shareholders or , if it has issued more than one class of shares, by special resolutions of the holders of each class whether or not they are otherwise entitled to vote . - (3) A corporation that has property or liabilities, or both, may be dissolved by special resolution of the shareholders or, if it has issued more than one class of shares, by special resolutions of the holders of each class whether or not they are otherwise entitled to vote, if o (a) by the special resolution or resolutions the shareholders authorize the directors to cause the corporation to distribute all property and discharge all liabilities, and o (b) the corporation has distributed all property and discharged all liabilities before it sends articles of dissolution to the Registrar pursuant to subsection (4).
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- (4) Articles of dissolution in prescribed form shall be sent to the Registrar. - (5) On receipt of articles of dissolution, the Registrar shall issue a certificate of dissolution in accordance with section 267. - (6) The corporation ceases to exist on the date shown in the certificate of dissolution . ABCA – Corporation Buying Its Own Shares CBCA – Corporation Buying Its Own Shares, But it Cannot Become a Shareholder in Itself 30 – Corporations Cannot Hold Shares in Itself - (1) Subject to (2) Can do a buyback, but it must either cancel those shares or hold them as unreleased shares until it chooses to re-release them o The corporation cannot become a majority shareholder in itself - (2) Sub can hold and sell those shares within 5 years from the date of o (a) the body corporate became a subsidiary of the corporation; or o (b) the corporation was continued under this Act. 31 – Subsidiary can acquire shares in parent company or itself for the purposes of: - (1) Corporation can hold shares in itself as a rep of someone (holding shares, not an owner) so long as neither has a beneficial interest in those shares - (2) Corporation can hold and use its shares as security for a loan, or - (3) Subsidiary can hold shares of Corporation under conditions in (1) or (2) - (4) CP: can allow sub to acquire and hold shares prior to acquisition provided that conditions in this section are met - (5) CS: Sub can hold shares following acquisition provided that conditions in this section are met - (6) if non complaint with (4) or (5) the shares will be extinguished by Court Order o I.e. if Corp creates sub to buy itself, Court can order the shares extinguished 32 – Exception relating to CAN ownership - (1) subject to (2) and s 39(8) Corp can hold shares to Sub or affiliate for purpose of establishing requisite level CAN ownership o E.g. Sub can do this to establish requisite level CAN ownership of its parent - (2) Corp cannot transfer shares unless Corp is satisfied on reasonable grounds that transfer of shares would result in achieving the purpose of (1) (i.e. establishing CAN ownership) - For the purpose of a normal buy back and in compliance with section 30 McClurg v Canada (MNR) – Must say in AOI whether certain shares do not have the same rights as others (focus on dividend rights) - Facts o Resp is pres of Northland Trucks
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o AOI for Northland – had 3 classes of shares A: common with voting and participate B: common with nonvoting and participation right C: Pref, non-voting with right to receive dividends exclusive of the CS if authorized by unanimous director approval o AOI: each class of shares has the right to receive dividends exclusive of other classes of shares in the company Only shareholders were Resp, his business partner Ellis, and their wives o Business was successful, and so directors elected to give dividend to their wives only since it was beneficial from a tax perspective o Director has discretion to give dividend or not and to whom MNR said that this business arrangement went against equality of the shareholders - Issue o Is the description of PF a valid derogation of the common law of equality in the distribution of dividends - Analysis o Common law presumption that all shares have equal rights (including rights to dividends) unless AOI state otherwise o Issuance of D to Class B is not issue if AOI permit that exclusive right, provided that dividends are not being issued for purpose of tax avoidance or would place corp in insolvent position o Only issuing D to certain shareholders is permitted by AOI, and so it’s a permissible transfer - Ratio o Must say in AOI whether certain shares do not have the same rights as others Can state in AOI that Directors reserve the right in the share descriptions to pay dividends exclusively to one class at their discretion o If statute is passed, to the extent is displaces the common law, the statute replaces the common law (true for the principal of equality for the shareholders) International Power Co v McMaster University – Must expressly state differences in rights across share classes, otherwise common law prevails and classes get equal rights (focus on liquidation rights) - Facts o Porto Rico Power Co is being wound up Liquidator directed court to distribute $500k to holders of common stock in corp Owners of CS already paid value of their shares pre-liquidation + dividends o McMaster (Institutional Investor) was holder of substantial number of PSs, and claimed that there would be equalization between CS and PS In terms of pre-liquidation payment and residual amount McMaster Claim dismissed at TJ and affirmed at CA o OG bylaws of Porto entitled PS to cumulative D at rate of 7%, Ds were issued accordingly while corp was in business
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- Issue o Should McMaster get same liquidation rights as CSs? - Analysis o McMaster argued common law of equity – bylaws don’t provided for surplus of residual, and so it should go according to common law o CSs argue that surplus should go exclusively to them o Right to priority dividends are distinct from right to residual This does not restrict other rights, especially as it pertains to liquidation o Since there is nothing specific regarding dividing of liquidation proceeds, the common law prevails the gap created by silence is filled in by the common law $500k is not revenue of a going concern, it is not a dividend If Corporation intended distinction between rights of PSs and CSs with respect to liquidated capital, then it needed to specify that - Ratio o If Corporation wants a distinction between rights of PSs and CSs with respect to a right, then it needs to expressly specify that in the descriptions of the share classes in its AOI - Obiter o Some judges thought that 7% did limit what PSs are limited to and inferred intent that was meant to apply to distributions of capital under liquidation i.e. they got what they deserved because they already walked away with a bunch of money, so common shareholders are justified in their claim Bowater Canadian Ltd v RL Crane Inc – must treat all members of a share class the same - Facts - 2 classes of common shares Regular voting stock with 1 vote per share Have super-voting stock (SVS) Each share comes with 10 votes - Has stepdown provision SVS has 10 votes per share UNLESS they are conveyed/sells to an original owner, in which case they only get 1 vote per share (despite having the same class) Shares are still SVS, but they have reduced rights compared to other SVS PROF NOTE : not common Can convert this stock to common stock (at discretion of the Director) PROF NOTE : this is very common - BW: saying that stepdown is inconsistent with CBCA stating that all members of the same class of shares must eb treated the equally Step down is not a conversion – allows common stock to change its rights based on whose owning it (unequal treatment of same members of class) - Issues - - Analysis - Can have some deviations from CBCA in AOI, but this is not one of them
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- All members of a class of shares must be treated the same - Creation of 2 classes, conversion right, and liquidation prefs are all permissible Still have special common stock and reg common stock, but the rights on these shares don’t change depending on who owns them PROF NOTE : open yourself to risk of oppression remedy if you are targeting certain shareholders of a class and not others of the same class - Ratio - Must treat all shareholders of a given class the same – cannot treat them differently Step-down provisions that result in people of the same class being treated differently to other members of the same class (changing their rights) - Conversion right is okay, because you’re moving shareholders to another class and so Jacobsen v United Canso Oil & Gas Ltd – cannot have different rights on shareholders due to different sizes of share holdings - Facts - Corp formed by letters patent Got letter of continuance, and so now subject to CBCA - Bylaw 6 limited number of votes one could have: Every share is worth 1 vote, but if you have more than 1000 shares, then you get no votes - Argument that everyone was being treated the same way There is only one class of stock, and so everyone is subject to this right No one is being singled out because everyone subject to this requirement - Counterargument – members of the class are treated unequally if they have more shares - Analysis - Court: argument fails – you are treating 1000+ share shareholders differently from all others This creates inequality of rights among people of the same class of shares which is impermissible - Does not apply equally to people over 1000 shares - Ratio - Cannot have different rights among members of the same class - Same idea as you see in Bowater Edmonton Country Club Ltd v Case – Cannot charge fee for transferability of Shares - Facts - Organized under letters patent – later bound under CBCA Issued 250 PS and 250 CS Had AOI which stated No offerings to the public Shareholders playing membership was at another fee Fee would not be assessed against the shares of a non playing members o LATER REMOVED
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If SH has not paid fee, then Directors can force the sale of shares or have them sold at a fixed price Allowed to enforce punitive fee on shareholders who do not pay the fee are fined, or forced to sell - Try to force all shareholder to buy memberships in the country club Tied the price of this membership to the value of the given shareholder’s holdings in the company - Country club seems to be having issues with membership – rathe than get more memberships trying to force SHs to get memberships in the country club - MR. Case has PS saying that these are non-assessable - Issue - Analysis - Person distinguished between members or shareholders, because if not a member they’re tying to fine shareholder into being a member Doesn’t matter if you play golf or not - Cannot levy fines to get more money from shareholders SHs cannot be held liable for the debts of the corporation This provision is invalid - Cannot change rights on shares without fundamental change - Cannot charge a large price on transferring fees to prevent shareholders from transferring shares - Appears that Directors have unlimited discretion in the director’s ability to block transfer Now in CBCA era: Even though they aren’t sharing any shares to the public, they are public and are limited to ROFRs on transferability - Ratio - Cannot charge shareholders based on their shares to cover financial shortfalls of the corporation - Corporation can attach limitations on transferability of shares in its AOI Typically, don’t see a fee for transferability Can put on however many restrictions you wish PROF NOTE : generally, if you have too many restrictions on transferability, you will have a hard time attracting SHs - Cannot attach requirement after the fact Nelson v Rentown Enterprises – Stock Buybacks and Liquidity Test - Facts - Corporation makes agreement to buy stock from shareholder in exchange to give shareholder land Delayed executing buy-back until it went insolvent and then only cashed out a couple of shareholders in management positions Detriment to creditors who are bringing the action - S 34 CBCA – corporation can buyback its shares if it does not go bankrupt as a result - Rent town – liquidation test applies when the contract was executed, but not when it was exercised
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- Issue - If Corporation waits to execute stock buyback pursuant to an agreement until its insolvent, can it still go through with the buyback? - Analysis - Statute prevents the execution of the agreement, and so executing the agreement would be illegal - Liquidated portion is the last part of the assets that are to be divided up and be sent to the shareholders – if you use stock buyback to ensure that select shareholders get money, then you are depriving other shareholders of this value Treating some shareholders preferentially over others to the other shareholder’s expense Cannot give preferential treatment to some shareholders over others on account of delayed stock buybacks - In order to gives effect to policy behind solvency test, solvency test must apply at time of contract and at time the transaction takes place Must curb risk of liquidity vanishing due to delayed buyback - CBCA 34 solvency test still should apply at two times - ABCA s 42 (now 45): Company can give financial assistance to shareholder and contains a liquidity test, but it is not applicable here ABCA s 45 : was later amended it is possible to use stock buybacks to provide financial assistance to shareholders, provided that it is disclosed to all shareholders PROF NOTE : No case interpreting this section yet, so if there was a question about this specifically, we’d want to look to CBCA s 34 - Ratio - Solvency test applies first when agreement is made, and again when the buyback is to be executed ( CBCA, s 34 ) This is done to prevent a corporation from entering an agreement when solvent, and then buying back when insolvent only to prevent unequal treatment of SHs - S 34 extends to stock buybacks regardless of the nature of consideration (money or assets – it doesn’t matter) Governance of the Corporation: Directors and Officers and their FDs ABCA Directors and Officers 122(1) Duty of Care - (1) Identical to CBCA 122(1); see here - (2) Every director and officer of a corporation shall comply with this Act , the regulations, articles, bylaws and any USA. - (3) Subject to section 146(7) , no provision in a contract, the articles, the bylaws or a resolution relieves a director or officer from the duty to act in accordance with this Act or the regulations or relieves the director or officer from liability for a breach of that duty .
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- (4) In determining whether a particular transaction or course of action is in the best interests of the corporation, a director, if the director is elected or appointed by the holders of a class or series of shares or by employees or creditors or a class of employees or creditors, may give special , but not exclusive, consideration to the interests of those who elected or appointed the director. 124 – Indemnification of Directors and Officer by Corporation - (1) Indemnification cannot be obtained for breach of FD - Corporation may indemnify any of its agents against all costs, charges, and expenses if (a) the director or officer acted honestly and in good faith with a view to the best interests of the corporation , and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the director or officer had reasonable grounds for believing that the director’s or officer’s conduct was lawful . CBCA – Directors and Officers 105 – Requirements of a Director (1) Must not meet these criteria: a. (a) anyone who is less than eighteen years of age; b. (b) anyone who is incapable; c. (c) a person who is not an individual; or d. (d) a person who has the status of bankrupt. (2) Not required to hold shares (3) Board must be at least ¼ CAN 106 – Notice of Directors - (3) Election of Directors - Subject to 107(b) Shareholders shall, at each first shareholder meeting and each subsequent annual shareholders meeting elect directors - Directors cannot have a term >3yrs - (4) Don’t need all directors to be appointed at the same time or elected for the same term (i.e. staggered boards are permissible) - (5) If director not elected for an expressly stated term, then they are deemed to have a 1yr term 107 – Cumulative Director Voting - 107 Corporations can have cumulative voting by providing for it in their AOI, and if they elect to do so, the rules in 107(a-h) apply Rules from 107(a-h) - (a) the articles shall require a fixed number and not a minimum and maximum number of directors , - (b) each shareholder entitled to vote at an election of directors has the right to cast a number of votes equal to the number of votes attached to the shares held by the shareholder multiplied by the number of directors to be elected , and the shareholder may cast all those votes in favour of one candidate or distribute them among the candidates in any manner,
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- (c) a separate vote of shareholders shall be taken with respect to each candidate nominated for director unless a resolution is passed unanimously permitting 2 or more candidates to be elected by a single resolution, - (d) if a shareholder votes for more than one candidate without specifying the distribution of the shareholder’s votes among the candidates, the shareholder is deemed to have distributed the votes equally among the candidates for whom the shareholder voted, - (e) if the number of candidates nominated for director exceeds the number of positions to be filled, the candidates who receive the least number of votes shall be eliminated until the number of candidates remaining equals the number of positions to be filled, - (f) each director ceases to hold office at the close of the first annual meeting of shareholders following the director’s election , - (g) a director may not be removed from office if the votes cast against the director’s removal would be sufficient to elect the director , and those votes could be voted cumulatively, at an election at which the same total number of votes were cast and the number of directors required by the articles were then being elected, and - (h) the number of directors required by the articles may not be decreased if the votes cast against the motion to decrease would be sufficient to elect a director , and those votes could be voted cumulatively, at an election at which the same total number of votes were cast and the number of directors required by the articles were then being elected. Overview of Cumulative Voting: - Cumulative voting enables this voting: - Formula: Number of voting shares allocatable*number of open positions on the BOD ( 107(b) ) - Enables one to allocate all cumulative votes on one candidate to improve their odds of being elected ( 107(b)) Can enable minority shareholders to band together and appoint a director - Cannot use Cumulative Voting for matters other than appointing directors 108 – Ceasing to Hold Office - (1) ceases to hold office when: - (a) dies or resigns; - (b) is removed in accordance with section 109; or - (c) becomes disqualified under subsection 105(1). - (2) resignation becomes effective at the time a written resignation is sent to the corporation, or at the date specified in the letter (whichever is later) 109 – Removal of Directors - Generally, need resolution to remove: - (1) Subject to s 107(g) (cumulative voting) or a USA, the shareholders of a corporation may by ordinary resolution at a special meeting remove any director or directors from
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office. - (2) 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. - (3) Subject to section 107(b) to (e), a vacancy created by the removal of a director may be filled at the meeting of the shareholders at which the director is removed or, if not so filled, may be filled under section 111 . - (4) A director elected or appointed under section 106(9) may be removed only by those persons having the power to elect or appoint that director. 121 – Officers - Subject to the articles, the by-laws or any USA, - (a) the directors may designate the officers of the corporation , appoint as officers persons of full capacity , specify their duties and delegate to them powers to manage the business and affairs of the corporation, except powers to do anything referred to in subsection 115(3) ; - (b) a director may be appointed to any office of the corporation; and - (c) two or more offices of the corporation may be held by the same person . PROF NOTE: However, CEO and Secretary cannot be the same person, because secretary must be impartial 122 – DOC (FD) of Directors and Officers - ABCA/CBCA - (1) every director and officer of a corporation in exercising their power and discharging their duties must - 1(a) Duty of loyalty (THE MURKY ONE): act honestly and in good faith with a view to the best interests of the corporation; and Act in bad faith or not in bests interest of corp and cause injury to corp - 2(b) Duty of Care : exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances Falling below SOC 122(1.1) Best Interests of the Corporation - CBCA - When acting with a view to act in the best interests of the corporation under s 122(1)(a) , the directors and officer may consider – but are not limited to – the following factors: - (a) Best interests of (i) shareholders, (ii) employees, (iii) retirees and pensioners, (iv) creditors, (v) consumers, and (vi) governments; - (b) the environment, and - (c) The long-term interests of the corporation.
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124 – Indemnification of Directors by Corporation - 137 – Shareholder Proposal - A shareholder may vote at an AGM of shareholders - Non-binding proposals indicating shareholder concerns or wanting affirmation that BOD has taken steps to ameliorate (reflective - Often put forward by institutional investors 146 – USAs (CBCA) - (1) An otherwise lawful written agreement among all the shareholders of a corporation, or among all the shareholders and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation is valid . o PROF NOTE: can change the governance of the corporation through a USA Automatic Self-Cleaning Filter Syndicate Co Ltd v Cunninghame Require Special Resolution to Sell Substantially All Assets (NOW CODIFIED IN ABCA/CBCA) - Facts - Company in the business of purifying and storing strong liquids Organized under Companies Act (UK) Had 2700 shares outstanding, with McDiarmid (M) had 1202 shares - M wanted the company to sell its assets to a new company that he created just for that purpose - Jan 2 1906, M presented his proposal and 1502 votes supported with 1198 opposed Practically all the 1502 was given by him or his friends - BOD against this and refuses to sell M brings suit against the corporation (shareholder derivative suit) seeking the court to order the sale BOD truly believes that this is a bad decision - At trial Shareholders can only do this via special resolution, and this was a special resolution CA agrees - Issues - Did the BOD have the right to block the sale of substantially all the corp’s assets pursuant to a bear majority approval of the transaction? YES - Analysis - Control is with the directors and they may - Removal of directors can be done by special resolution – need more than a simple majority - AOI don’t say that the you need special resolution to approve extraordinary sale, but there is provision that says that you can only remove directors with special resolution If you can overpower directors by ordinary resolution, this renders the above provision worthless, and so must imply that special reso is required
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- Ratio - Need to pass a special resolution to allow for an extraordinary sale (NOW CODIFIED IN STATUTE) Duha Printers (Western) Ltd v Canada – Power of a USA – it’s a hybrid of constitutional and contractual law which vests control powers in shareholders over directors - Facts - - Issue - What is the nature of a USA – should it be given the same weight as other shareholder resolutions, or is it a constating document - Analysis - De jure control – legal control of control, held by the shareholders - De facto control – the people who have effective control - COMMON LAW Directors had de jure power, but USA has the power to strip power away from directors - USA is a corporate law hybrid – contractual and constitutional USA must be included in registration of corporation CBCA reinforces this idea - Ordinary and special shareholder resolutions not carry the same weight as USA, and are not part of the de jure control test - Buckerfield’s test – establishes de jure control as standard of control If majority of shareholders can vote to elect directors, then majority of shareholders is the controlling party of the corporation, and they have de jure USA is an expression of de jure control, and is binding on BOD - USA include majority shareholders – not representative of minority shareholder control - If shareholders have de jure control of corporation, they have the right to limit the powers of directors They can make fundamental changes to the BOD - Ratio - At common law, directors have de jure control but a USA can strip that away and vest it in Shareholders Limits the rights of the directors - In closely held corporation where shareholders have USA, they are the ones who have control of the corporation The USA controls the corporation Only the shareholder primacy model matters as they are the ones in control International Corona Resources v Lac Minerals – Identifies what FDs are and why they’re important - Issue o Is it possible for a corporation to owe another corporation FDs? - Analysis
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o The corporation depends on the good faith, care, and loyalty of its directors to be successful It cannot defend itself against the acts of its BOD, and so this duty exists to protect it o SCC says that the vulnerability is the most important factor in finding a relationship This is why FDs are imposed on officers and directors, even before it was in the statute o FDs are breached when directors or officers have acted in bad faith or not in the best interests of the corporation (now embedded in the statute and in modern case law) Evidence needed to ID when there has been bad faith (e.g. competition, self- dealing, etc.) Need evidence of injury to corp – generally financial, but can also be reputational o Breach of DOC occurs when procedure has been deviated from E.g. deviating from the procedures outlined in AOI, bylaws, etc. - Ratio o Don’t need this test, because its embedded in CBCA/ABCA Won’t be asked on exam to ID whether a FD exists using this test Statute creates the duty, no need for a test o Read this case to understand where the FD came from and why they are important in corporate law FD used to hold directors and officers to a high standard People’s Department Stores v Wise – FD is owed to corporation at all times; irrespective of financial status of the corporation (including during bankruptcy) - Facts o Wise and Peoples are both department stores competing in highly competitive market – Wise owned by wise Bros and Peoples was owned by Marks and Spencer Wise bought Peoples from M&S via LBO with M&S being paid out over 8yr period o Wise bros now running 2 companies Peoples and Wise – two competing stores o M&S restricted terms and conditions of purchase, and so the stores cannot be merged, including their inventory Peoples and Wise could not be combined to eliminate efficiencies because Marks and Spencer’s required Peoples to be kept from Wise as security to ensure payout – using assets of peoples as security, cannot let it be combined Imposed these conditions despite each store’s financial hardships o Required separate inventory, employees Must continue this until M&S are fully paid o Consulting with employees and managers to find solution to loses in both stores that are technically competing
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Try to get all inventory go through Wise stores to remove double expense streams, and get Peoples to buy from Wise Peoples ended up owing $18MM in inventory to wise o M&S demand this this be changed, and both companies suffered – TD threatened to cut off funding to the businesses and accelerate loans In response M&S initiated bankruptcy proceedings against both companies Enough assets to satisfy TD and M&S, but not the trade creditors o Creditors of Peoples bring action against wise saying that Wise favoured Wise over people and breached their FD to Peoples Obiter about whether creditors are the people to bring this case Can the creditors bring a FD action on behalf of a corporation? Court never answers this b/c Wise didn’t breach FD o TJ said that CBCA 122 duties do extend to creditors when company is insolvent or near insolvency This case comes from Quebec TJ is confused in describing “near insolvency” as changing the FD says that interests of creditors are the best interests of corporation But creditors cannot bring a derivative suit - Issue o Do directors owe FD to the creditors of a corporation? - Analysis o No breach of SCC Fact that M&S required that Peoples be kept separate made an untenable situation whereby the Wise bros did not make unreasonable decisions They did the best they could given the limitations imposed by M&S Creditors cannot bring breach of FD claim here FD to corporation means injury to shareholders, not others (e.g. creditors) FDs are restricted to the corporation – and so only shareholders can bring this action o BJR protects wise brothers in this case Actions may not have been ideal, but they were reasonable – was a reasonable decision among a series of bad options No departure from procedures or deviation from best interests of corporation - Ratio o Breach of FD is more than business decision that didn’t work out o Only duty of faith is a FD to the corporation (the duty explained in 122(1)(a)) Often called the duty of loyalty (called duty of loyalty at common law – Prof says that we can use these terms interchangeably) o DOES NOT STAND FOR IDEA THAT creditors are a part of the corporation o PROF NOTE: saying that no need to consider whether creditors are the right people to bring FD action, and so People’s case is designed to show us how a failure of a corporation is not a breach of FD – does not tell us whether corp means more than shareholders
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TJ did say that FD owed to shareholders when company was in place close to liquidation, but this is obiter o Without evidence of bad faith, cannot investigate substance of the decision Governance of the Corporation: Breach of FD – Duty of Loyalty to Corp Re Sports Villas Resort Inc – Breach of FD: Competition; need direct competition to trigger - Facts o Sports Villas was incorporated to acquire a NFL golf course and has a Small BOD SV is a tourist destination for those inside and outside the province Pardy is another director of SV o One director of SV (Dobbin) is also a manager at corporation which plans to run a different NFL golf courses (Cabot) Cabot announces to build a new golf course Pardy wrote memo saying that was a major COI for Dobbin and demanded that Dobbin resign from BOD of Villa Dobbin declined to resign and argued that Cabot’s activities were complimentary and not competitive with SV Dobbin sat on BOD for Cabot and voted to approve purchase of land for golf course, also creates company to undertake dev of new golf course Pardy brought a lawsuit to have Dobbin and his daughter removed from Villa’s BOD, and order deeming them unauthorized to serve on SV BOD in the future o Pardy’s position: there can be only one, and Dobbin is using info from SV to setup a competing corporation Facts may be indicative of breach of FD via competing with corporation - Issue - Analysis o No evidence of direct competition, and so there is no breach of FD Must show that Director is serving on BOD of a company in direct competition My company’s success means your company’s loss o E.g. must show that Villa lost customers to Villa Not enough to show that company is in the same line of business o PROF NOTE: almost impossible to show with MNC o Growing awareness that there must be a fair dealing by directors However, equally important not to prescribe too tight a net o Just because you’re on the BOD of two corporations in the same line of business is not enough to create a conflict – need to see evidence that there is bad faith on part of director E.g. using position on first corporation to help second one compete
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Must have demonstrable proof that D has competed with SV, such as people leaving membership at corporation one and moving to corporation 2 for golf o No evidence offered that there is direct competition, so no breach of FD - Ratio o There must be direct competition between the corporations that the person is a director of for there to be a breach of FD ABCA/CBCA 120(1-6) – Disclosure of Interest to avoid Self-Dealing (Disclosure Reqs for Safe Harbour Provision) - (1) Require full disclosure in writing (Officers and Directors fully informed about the COI) - (2) Disclosure timing must be met o (a) disclosure must be made at the time of the meeting when proposed contract is first considered o (b) if not interested at timing in (a), then director must disclose interest at first meeting after director becomes so interested o (c) if director becomes interested after contract/transaction, must disclose at first meeting after the director becomes interested o (d) if person who IS interested in contract/transaction becomes director, must disclose at first meeting after director becomes interested - (4) If officer, must disclose in same manner that a director would - (5) if the contract/transaction is not something to vote on , then director/officer must disclose in writing or have entered into Director minutes the nature and extent of the interest as soon as director/officer becomes aware of the contract/transaction - (6) If interested, then cannot vote on whether to approve contract or transaction 120(8) - Safe Harbour Provision: Steps to Cure COI in a Self-Dealing Contract so that it becomes permissible - If you follow these directions, then no breach of FD (Safe Harbour triggered) - (8) if contract/transaction made and director/officer disclosed interest, contract/transaction approved by directors or shareholders, and contract/transaction was reasonable and fair to corporation at time of approval o (a) transaction not void or voidable b/c director is present or counted to determine quorum at meeting which authorized the transaction (provided they personally didn’t vote), and o (b) director/officer not liable to account to corp for profits from contract/transaction merely b/c they are holding office as director/officer of the corporation 120(8.1) – Even if Safe Harbour Steps Not Taken Pursuant to (8), can still not be FD if… - (8.1) Even if the conditions of subsection (8) are not met, a director or officer acting honestly and in good faith is not accountable to the corporation or to its shareholders for any profit
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realized from a material contract or material transaction for which disclosure is required under subsection (1), and the material contract or material transaction is not void or voidable by reason only of the interest of the director or officer in the material contract or material transaction, if o (a) the material contract or material transaction was approved or confirmed by special resolution at a meeting of the shareholders, o (b) disclosure of the interest was made to the shareholders in a manner sufficient to indicate its nature before the material contract or material transaction was approved or confirmed , and o (c) the material contract or material transaction was reasonable and fair to the corporation when it was approved or confirmed . 120(9-10) – If Safe Harbour Not Triggered - (9) If a director or an officer of a corporation fails to comply with this section, a Court may, on application of the corporation or any of its shareholders, set aside the material contract or material transaction on any terms that it thinks fit , or require the director or officer to account to the corporation for any profit or gain realized on it, or both . - (10) This section is subject to any USA. Aberdeen Railway v Blaikie Bros – Common Law Approach to Self- Dealing/COI (illustrates harshness of the Common Law approach) - Facts o Blaikie (B) is director and chairman of Aberdeen o Entered into contract on behalf of Aberdeen with his own firm to purchase large quantities of chairs at set price B profited from this transaction - Issue - Analysis o Self-dealing = automatic breach of FD Subject matter of the contract is irrelevant, all that matters is the fiduciary character of the contracting parties o B had FD to Aberdeen and entered into contract which brought him personal benefit Had to get best deal possible for company (lowest personal price) Personal interest would lead him in the opposite direction Not possible to reconcile finding the best deal against party which wants to maximize profits o Contract is struck down by virtue of his relationship - Ratio o Corp can cancel contract brought about by self-dealing and there is an accounting and disgorgement of financial benefits to the corporation Corporation can do this at any point after learning about self-dealing o Self-dealing = automatic breach of FD
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Exide Canada Inc v Hilts – Self-Dealing/COI can be due to non-financial personal connection between companies - Facts o Director of Exide (named Hilts) signed very lucrative contract with Ryad Director of Exide (Hilts) and owner of 85% of Ryad (Prijatelj or “P”) Were also personally connected in an affair P was also exec secretary of Hilts, and MAY have been director of Exide o H never disclosed personal relationship to Ryad or their relationship with P o Both H and P withdrew $1.35MM and made the transfer to Ryad o Shareholders brought action arguing that H and P mis appropriated $1.35MM from Exide, $300k of which was directed to Ryad o - Issue - Analysis o Hilts had personal relationship with P, and so even through H doesn’t have financial interest in Ryad, had an interest in P This is sufficient to establish a self-interest that must be disclosed o Contract is material because its almost for $2MM – should have been disclosed, and it wasn’t Breach of FD, must disgorge and undo the project - Ratio o Nature of the self interest does not require directorship in both corporations Personal relationship between corporations that creates a COI an be a basis for self-dealing can be a personal benefit UPM-Kymmene Corp v UPM Kymmene Miramachi Inc – Factors Indicating a Breach of Loyalty; Threshold of Adequate Disclosure - Facts o UPM in financial difficulty and they need new CEO to help them go in a new direction they hire Berg o Berg is former shareholder of UPM and becomes Chairman of the Board and becomes Senior Executive Officer Originally wanted to turn the penny stock into a homerun, after being appointed, sees opportunity to make millions another way Approved compensation plan that had compensation and perks that could – eventually almost did – put the corporation out of business. Such provisions included: Multimillion share issuances and generous damages for termination Massive signing bonus Market cap bonus Renewals Ultimately the type of agreement you’d offer to an Elon Musk Claims $27MM USD in benefits under this agreement He was not an experienced exec
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Didn’t know most of the directors, didn’t talk to the CEO, never visited head office, etc. Did not consult the BOD about changing counsel, and most of counsel’s time was dedicated towards constructing the contract Former CEO (Larson) started taking notes about how the compensation contract put company at risk of negotiating from remaining liquid, being able to negotiate with workers o Past chairman did not have a salary o Berg has nothing to do with turn around UPM didn’t need Berg to solve its products o Berg just kind of wrote the compensation plan Sought out advice of lawyer (paid by UPM) to help draft this agreement Berg hired person for fairness opinion (paid by UPM), but she did Fortune 500 and American companies, not small CAN natural resource ones o Success of business tied to price of wood pulp Company had very limited cash and does not need more costs – Larson notes Shareholders did not want further dilution o Berg took multiple steps that were only in his best interest Tried to maximize the amount of compensation he could get Never consulted the BOD BOD failed to discharge their FDs o Within 8mo Berg terminated himself triggering generous termination provisions - Issue o Did Berg breach his FD to the corporation? YES - Analysis o Court looks at past cases Grey v New Augarita Porcupine Mines – Standard for Adequate Disclosure there is no precise formula to determine how much disclosure is sufficient to declare self-interest Amount of detail depends on the nature of the contract and arranged proposed in each case (rarely enough just to say “I am interested”) Must fully inform colleges of the real state of things o If material to colleague’s judgement that they must not just know about interest, but what it is and how far it goes, then interested person must disclose to that extent o Berg’s conduct falls short of what was required Directors were not fully informed of the real state of things Material to their judgement that agreement was different from the agreement previously shared with the, Duty of loyalty – doesn’t matter if directors should have uncovered this themselves, Berg was obligated to disclose it and didn’t Duty to disclose is an absolute one o Disclosure is just the first step – doing it isn’t enough to discharge FD
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Must always place interests of corporation ahead of their own Typically Corps acquire independent legal and financial advisors to establish independent and special director committees Berg retains a law firm and oversees his own contract – improper to instruct lawyer on terms of contract without conferring with the company o Berg failed to disclose and so breached FD - Ratio o When determining whether safe harbour is invoked: is the disclosure sufficient? Depending on circumstances, may require a lot of disclosure about the conflict For Statute does not create a specific formula to ID sufficiency, disclosure must be enough to disclose the true state of things (the scope of the conflict), Fact dependent analysis, but info that should be included in disclosure to make it sufficient may include: o Level of experiences o Basis for making the decisions o Undertakings made pursuant to and relating to the issue at hand o Relationship to other stakeholders o Interests in the outcomes, etc. Cooks v Deeks – Breach FD: Taking Corporate Opportunities - Facts o Corp is small Toronto construction company with railroads Got some lucrative contracts recently Directors (GSD, GMD, H, C) also shareholders o Belief that C isn’t doing much Want to exclude C from bidding on the contract so that opportunity only goes to the other directors o BOD wants to do the work, but not with Cook, but Cook is on the BOD Ds and H take the contract themselves without informing Cook Ds and H hold vote that Corporation and use their majority power to state that Corporation was not interested Cannot vote out of FD o BOD says that company could not win that contract BOD conceals it negotiations for contract from C - Issue - Analysis o There is intentional concealment of this opportunity from C Facts show that D and H don’t want C to have the opportunity, and so Corp cannot have this opportunity Corp as a legal entity demands loyalty to be presented with this opportunity o Cannot use majority vote to try and cure taking a corporate opp that should have been put forth to Toronto Construction
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If company had renounced its interest under majority vote, then it may have been remedied - Ratio o Even if you have provisions in AOI/Bylaws/USA that say you can vote out of or contract out of FD, YOU CANNOT o FD cannot be contracted out of, and taking a corporate opportunity is a breach of FD Must bring COs to attention of corporation first, cannot conceal from BOD members Regal (Hastings) Ltd v Gulliver (UK) – Taking Corp Opp: When is an action “Taking Corp Opp”? - Facts o Regal was a corporation that owned a cinema Gulliver (G) suggested that it buy 2 more regal created wholly owned subsidiary (Hastings) to lease the cinemas with the plan to sell those cinemas back to Regal eventually Hastings had 5 directors, all of whom were also on BOD of regal Incorporated with 5000 shares o Regal was suppose to wholly own subsidiary, but Directors decided otherwise: Regal owned 2000, rest of the shares were owned by directors of Regal and corporations affiliated by Gulliver and lawyer o Directors of Regal (also of Hastings) Make decisions for themselves rather than for the benefit Hastings (plan to bring all cinemas back to Regal eventually o Attempt to sell Regal no go, but Director’s shares in Regal and Hasting sold at profit for directors, while there was no profit for Regal o New BOD of Regal brought action against old BOD claiming breach of FD Court agrees - Issues - Analysis o Breached good faith because they made decisions that they could only make by virtue of their directorship Subsidiary was suppose to be owned by Regal, but Directors were all shareholders in subsidiary Selling shares in Sub and regal was not a benefit to Regal, but it helped the directors They profited o Opportunity to make money off the share sale was owed to Regal, and so that opportunity needed to be provided to Regal Since share sales cannot be undone, can force former Directors to disgorge and corporations that G had a financial interest in G nor Solicitor are liable as they didn’t breach FD
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- Ratio o If there is an opportunity for a company that you owe FD to make money, you have an obligation to bring that opportunity to that company Cannot profit while company does not; cannot abuse your position for personal gain by taking opportunities owed to Corp Peso Silver Mines v Cropper – Taking Corp Opp: What isn’t taking a corp opportunity? - Facts o Dickson (D) owned a number of mining claims, and Peso and Cropper (C) decided not to pursue these claims because they were too expensive No evidence that C had any interest in the claims at time of vote o C later formed a new company with others to purchase mining claims from D Aho (A) approach C about this pursuing this opp – not C’s idea Bought mining claims from Dickson after Peso decided not to buy the shares because they were to expensive o Peso acquired interest in another company and had to increase BOD size and as a part of that process required all Directors to disclose any other mining interests C disclosed his interests in crossbow Corp ordered disgorgement, and C refused C argues that Peso refused, and it was fair game - Analysis o Because opp came before the board and they chose no for valid business reasons, the opportunity was no longer belonging to the corporation Can then take the opportunity o Refusal of opp made the opportunity free for C to take Not C’s idea to take the claims, and felt that it was safe to say yes since Peso said no - Ratio o Not being able to financially take an opportunity is only a defence if the corporation has considered and rejected the opportunity including the reason of finances o Need to have an irreconcilable conflict between the companies Canadian Aero Service v O’Malley – Can breach FD after leaving Corp; Criteria Indicating Breach of DOL after leaving Corp - Fact o CANAERO is in topo-map business and most work is gov contracts – very competitive business and every source of income requires winning a bid CANAERO pursuing opportunity for gov-funded work in Guyana O/Malley (O) was President and CEO of CANAERO Zarzycki (Z) was Chief Engineer and VP of CANAERO Wells (W) was lawyer and former employee of CANAERO o O and Z are fiduciaries of CANAERO, and privy to all the info about what the contract offer wants to see in the company that wins the contract Had both worked on the bid and were quite familiar with the details of the bid
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o Wells used to worked for CANAERO, but he was not working for company during this bid o Before bids were submitted, they O and Z form company Terra and win Did not disclose this to CANAERO One of the reasons they win is because of the detail in their bid (because of work they did for CANAERO) o O and Z left the company before the bids were made – took opportunity after they were fiduciaries of CANAERO o CANAERO sues for breach of FD o Lower courts say: Defs were just employees of CANAERO and didn’t owe duties - Issue o Did O and Z owe a FD to CANAERO after they left? o Was the seizure of this opp a breach of FD - Analysis o SCC disagreed with lower courts Leadership roles of defs as top management made them fiduciaries There was a more exacting duty which was similar to that of directors Managers owe FDs o When you take info you only have from corp, and use it to compete with former Corp, you are breaching your FD Had to gather info while at CANAERO, and opportunity to breach was presented while they were still there (approached by Wells while they were still Fs) Cannot do this – cannot pursue a maturing business opportunity which their company is still pursuing This preclusion applies even after their resignation when: o Resignation may fairly be said to have been prompted or influenced by a wish to acquire the company’s opportunity for themselves, or o Where their position with the company rather than a fresh initiative, lead the to the opportunity they later acquired. o Generally FD ends when you are no longer an officer Distinct from Peso, as C rejected the claim in good faith and company interest in the opp had ceased O and Z formed a company to directly compete with former employer, FDs apply even though they left the company o Various factors indicating whether standard of loyalty owed contained in ratio - Ratio o CBCA HAD NOT BEEN ENACTED YET – analysis of whether key officers owe fiduciary duties does not need to be considered, as CBCA legislates this Officers and Directors owe FDs o Need to see highly analogous facts to this case for Court to deem that FD follows you after you left corp, specifically: Preclusion to pursue corporate opportunity applies even after their resignation when:
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Resignation may fairly be said to have been prompted or influenced by a wish to acquire the company’s opportunity for themselves, or Where their position with the company rather than a fresh initiative, lead the to the opportunity they later acquired. o Factors indicating whether person who left corp and subsequently took a corp opportunity is still in breach of FD: Position held (if CFO, you had particularized knowledge of finances) Nature of the corporate opportunity (its ripeness, its specificity) and Fiduciary’s relationship to that opportunity, Amount of knowledge possessed, circumstances in which it was obtained and whether that knowledge was special or private, Time in the continuation of FD where the alleged breach occurs after terminated of the relationship w/ the company How soon after did they seize the opportunity? The circumstances under which the relationship was terminated If you fire key people, then they compete and you weren’t planning it all along, FD not breached (generally) NOTE: above factors do not apply to taking all corporate opportunities generally – these are specific to taking corp opps post exit Governance of the Corporation: Breach of FD – Duty of Care Business Judgement Rule – Generally Comes up in DOC - INCLUDE EXPLAINATION OF THIS ON FINAL EXAM (Cite Peoples; CW ) o Def: judges will generally defer to the decisions of D or O provided that they fall within a range of reasonable alternatives If you (a) behaved reasonably (b) in the circumstances, then motives of D&O does not matter BJR prevents court from looking at the decision any further No breach of DOC, and cannot keep going into the DOC analysis If not reasonable behaviour, BJR does not apply and court can decide that there was a breach of DOC and dive further into subjective nature of decisions o Only protects the BOD (doesn’t protect the managers) o Typically, only see it when claim brought against entire BOD in breach of DOC - PROF NOTE : It’s a defence in CAN, but in UK and US it’s a rebuttable presumption ABCA/CBCA 122(1) – Defining the DOC - See here 123 – Defences to DOC Allegations - (4) Reasonable Diligence o A director is not liable under section 118 or 119 , and has complied with his or her duties under subsection 122(2) , if the director exercised the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances, including reliance in good faith on
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(a) financial statements of the corporation represented to the director by an officer of the corporation or in a written report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or (b) a report of a person whose profession lends credibility to a statement made by the professional person . - (5) Defence of Good [Reliance in] Faith o A director has complied with his or her duties under subsection 122(1) if the director relied in good faith on (a) financial statements of the corporation represented to the director by an officer of the corporation or in a written report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or (b) a report of a person whose profession lends credibility to a statement made by the professional person. 146 – USA’s Impact on Duty of Care - (1) See here - PROF NOTE : If you saw facts where decision of BOD was restrained by provisions of USA, and decision harms the org, you must consider USA o If USA forbids certain types of decisions, then failure of directors to take a particular course of action cannot be claimed to have been due to a breach of DOC Peoples Department Stores Inc (Trustee of) v Wise – DOC not breached if decision was a reasonable one irrespective of the outcome of the decision - Facts (reminder) o M&S placed restrictions on how Wise could handle the finances of Peoples as to maintain security of its assets until LBO paid off Couldn’t more effectively merge the two companies o People keeps buying inventory from Wise as to avoid costs of double inventory Causes Peoples to become very indebted - Analysis o Decision to implement inventory procurement policy was not a breach od DOC May not have been the ideal decision, but it was reasonable in the circumstances (M&S limited options to pursue alternatives) Reliance on an expert can be raised as a defence to DOC CBCA 123(4) – gives list of experts who can give rise to this Wise relied on VP Finance, which isn’t enumerated under this list, but that’s okay since Court still deems inventory strategy to be reasonable - Ratio o DOC not breached as long as the Directors and officers acted prudently and on a reasonably informed basis The decisions must be reasonable business decisions in light of all the circumstances that the D&Os knew or aught to have known
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CW Shareholdings Inc v WIC Western International Communications Ltd – BJR creates reasonable standard; If you cannot defeat BJR then no breach of DOC; Poison pills to hold out for better offer can be reasonable - Facts o CanWest and Shaw are locked in a takeover bid battle for WIC Both companies own a significant amount of shares in the company CanWest ups its commitment to buy by putting forward a takeover bid o WIC advises its shareholders to vote no on CanWest takeover, and advocate for shareholders to vote in favour of a poison pill Poison Pill : BOD resolution which grants shareholders right to buy more shares at discount if certain conditions met - these conditions were designed to fend off CanWest PPs used to prevent takeovers PP struck down in this case (not approved) Based on recco of the board, the takeover bid doesn’t go through o Shaw not forthcoming with new offer, but it appears that WIC suspects that Shaw is coming with an offer (hence its basis for rejecting CanWest) Takes a while, but then Shaw comes through with bigger bid than CanWest Successfully fends off CanWest WIC accepts offer from Shaw o CanWest shareholders bring the claim against WIC for oppression remedy as WIC’s decision to decline CanWest’s offer prejudicially affects CanWest as a shareholder Oppression Remedy: when a specific group of shareholders have been treated unfairly compared to other shareholders Injury must be distinguishable and distinct from that experienced by other shareholders to bring this claim Oppression Remedy sort of an alternative to Shareholder derivative suit where all shareholders must be harmed - Issues - Analysis o Starts with BJR it shields BOD from court intervention as long as the decisions have been made honestly, prudently, and on reasonable and rational basis Balanced with need to protect minority shareholders – may be acceptable to have somewhat disproportionately impact minority shareholders if benefit for majority Unless decision can be shown to be unreasonable in the circumstances, then BJR protects decision Substance of the decision protected by BJR o Shaw made aggressive purchase of shares in anticipation of bids, and fact that CanWest jumped ahead to bid early, its not unreasonable for corp to do this While not to CanWest’s advantage to wait on CanWest’s offer, not unreasonable to wait for better offer Better offer came and higher price was offered which was technically to the financial benefit of all shareholders, though benefit was less for CanWest
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o Injury to CanWest didn’t really happen because their share holdings in WIC increased No injury to corp or really to shareholders - Ratio o BJR shields BOD from court intervention as long as the decisions have been made honestly, prudently, and on reasonable and rational basis Unless decision can be shown to be unreasonable in the circumstances, then BJR protects substance of the decision UPM Case – Exemplifies unreasonable nature of a decision and breach of DOC; Criteria indicative of breach of DOC - Facts o See more here o Essentially Berg came up with compensation plan that was very detrimental to finances of corporation, deviated from normal procedures, and BOD was never informed of conflict, investigated possible conflicts, undertook diligence, or took steps to ensure independence in plan formation o BOD - Issues - Analysis o BJR must be reasonable decision, but need not be perfect Only protected to the extent that Director actions reflect their business judgement and demonstrate their diligence Courts can exam substance of decisions when BJR failed o BOD hasn’t breached DOL no breach under 122(1)(a); mistakes not evidence of bad faith However, failure to act carefully, diligently, and skillfully in best interests of corporation is a breach of DOC BOD must make decisions ( CW Shareholdings ) in informed and independent fashion, after a reasonable analysis of the situation, and acting or a rational basis with reasonable grounds for believing that their actions will promote and maximize shareholder value Proper exercise of the DOC by a director in informing themself of material information and overseeing the outside advice that they might properly rely is a CP to acting in good faith and protecting best interests of the corp ( Hanson trust PLC v ML SCM Acquisition Inc (US CASE)) o Not reasonable to approve the compensation plan under BJR Compensation committee exercised no oversight role (which was their job) No instructions to drafting lawyer No consultation with legal or expert advice No steps to inform itself of the prior deliberations or comments of the previous compensation committee
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No steps to obtain the Mercer Report (the Fortune 500 compensation expert on plan fairness) before formulating a recommendation o No Director actually seen the report Committee did not have sufficient info to make a reasonable judgement about whether to recommend the compensation plan, but the directors relied on the assumption that a full review had been done Enough questions and uncertainties about the Mercer Report on the compensation plan that should have slowed the approval process, but the BOD never did this. Such red flags included o Comparators were all US practice o Could have compared it to other CAN paper companies (not done) o Only compared to highly levered companies in the US o Should have raised a duty to inquire – once enough red flags show up, there is an implied duty to ask more questions o Appraiser was not invited to the BOD meeting and she thought this was strange No attempts to ensure her presence o Grants at high end of US practice, and unheard of in CAN practice BOD know nothing about Mr. Berg, it still approved the contract BOD had a duty to understand why Mr. Berg was at the corp Berg said that he knew why he was there (to fix up the company and sell), but provisions did not line up with this o Change of control would trigger overly generous stock options vesting ($75MM) and payments which were never questioned by the BOD o Change of control provisions is not a form of payment for the job he was suppose to do served as protection from Change of Control Contract created a level of exposure for the corporation that the BOD never turned its minds to (just assumed it was right) Contract drafted in such a way that it would have been virtually impossible to fire Berg On termination with cause there would be a host of payments due Value of termination provisions was $27MM No urgency to approve, yet everything was rushed o No following through on procedures or ask critical questions Generally corps have significant compensation packages, and so need to ensure that advice on fairness and reasonableness is objective Audit committee o Get disinterested directors (people who have no skin int eh game)
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Not done o Get an insider to speak on the value that compensation recipient brings to the corp Insider was the person obtaining the package Fairness report o From relevant companies Got fairness opinion from Fortune 500 person and not from business of comparable size Never sought management’s views on the agreement Never asked why it needed a full time Senior Exec Officer when it already had a CEO and CFO who were performing well Even asked President and CEO to absent himself from the deliberations when he actually should have been there o BJR is overcome when BOD acts on advice of committee that makes uninformed decision Each director was required to understand the terms and understand the meaning of the agreement required to review the Mercer opinion against circumstances of corp at the time Should have been a careful, objective analysis and it was not o o Clear injury on the Corporation In 30min with no questions apart from 1 comment from director who had served 2 months, BOD approved agreement that Gave someone it didn’t know, had not recruited, and had just met o A generous salary with lengthy term of employment o An unprecedented bonus structure o Termination and change of control protection inconsistent with the employment objective, and o Stock options amounting to 13.4% of the company Decision was not informed or reasoned, BJR cannot be applied here - Ratio o If BOD abdicates its responsibility, then its probably a breach of DOC BJR is overcome when BOD acts on advice of committee that makes uninformed decision Each director is required to understand before making a decision No BJR or DD protection? Then hard to withstand DOC o Not about making perfect decisions in hindsight – about making reasonable decisions in the situation o This case is an extreme illustration of breach of DOC consider following criteria ad indicative of breach of DOC Failure to review material reports, opinions, agreements, and expert insights Approval of matters when there is a duty to inquire further on account of red flags Failure to retain proper experts to support the process Failure to take steps to establish/preserve independence of committees
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The approval of matters inconsistent with objectives of org Making decisions with jeopardize the survival of the corporation Remedies: Derivative Suit - PROF NOTE : Emerged as a way for wrongs alleged to been done to a company by the BOD can be brought forward when the BOD refuses to bring an action against itself o If there is a breach of FD and you want to bring a suit, that is generally a D-suit ABCA 239 – Definitions for Derivative Action - (b) “ complainant ” means o (i) a registered holder or beneficial owner, or a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates, o (ii) a director or an officer or a former director or officer of a corporation or of any of its affiliates, o (iii) a creditor , or o (iv) any other person who, in the discretion of the Court, is a proper person to make an application under this Part. 240(1) – Requirements to Commence Derivative Action - Subject to subsection (2) , a complainant may apply to the Court for permission to o (a) bring an action in the name and on behalf of a corporation or any of its subsidiaries, or o (b) intervene in an action to which a corporation or any of its subsidiaries is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the corporation or subsidiary. 240(2) – CP to Commence Derivative Action - No permission may be granted under subsection (1) unless the Court is satisfied that o (a) the complainant has given reasonable notice to the directors of the corporation or its subsidiary of the complainant’s intention to apply to the Court under subsection (1) if the directors of the corporation or its subsidiary do not bring , diligently prosecute, defend or discontinue the action , o (b) the complainant is acting in good faith , and o (c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued. - PROF NOTE : CPs in the D-suit are not designed to be a harsh test 240(3) – Exception to CP in 240(2)(a) - Notwithstanding subsection (2) , when all the directors of the corporation or its subsidiary have been named as defendants, notice to the directors under subsection (2)(a) of the complainant’s intention to apply to the Court is not required. 241 – Powers of Court - In connection with an action brought or intervened in under section 240 or 242(3)(q) , the Court may at any time make any order it thinks fit including , without limiting the generality of the foregoing, any or all of the following:
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o (a) an order authorizing the complainant or any other person to control the conduct of the action; o (b) an order giving directions for the conduct of the action ; o (c) 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 or its subsidiary; o (d) an order requiring the corporation or its subsidiary to pay reasonable legal fees incurred by the complainant in connection with the action. CBCA 238 – Definitions for Derivative Action - NOTE: Definition to the entire CBCA Act with respect to remedies (so for oppression and for derivative actions) - complainant means o ( a ) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates, o ( b ) a director or an officer or a former director or officer of a corporation or any of its affiliates, o ( c ) the Director, or o ( d ) any other person who, in the discretion of a court, is a proper person to make an application under this Part. PROF NOTE : in theory, a stakeholder (such as a creditor) of corp can bring D- action Especially in the context of liquidation or bankruptcy, 239(1) – Commencing Derivative Action - Subject to subsection (2), a complainant may apply to a court for leave to o bring an action in the name and on behalf of a corporation or any of its subsidiaries, or o intervene in an action to which any such body corporate is a party, - for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate. 239(2) – CP to Commence a Derivative Action - (2) No action may be brought and no intervention in an action may be made under sub (1) unless the court is satisfied that o (a) the complainant has given notice to the directors of the corporation or its subsidiary of the complainant’s intention to apply to the court under subsection (1) not less than fourteen days before bringing the application, or as otherwise ordered by the court, if the directors of the corporation or its subsidiary do not bring , diligently prosecute or defend or discontinue the action ; o (b) the complainant is acting in good faith ; and o (c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued. This (c) is the hardest to demonstrate
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- PROF NOTE : either BOD votes to commence the suit (not overly likely as it is being made against them), or you can apply to the court for leave for action o Must prove these 3 elements for court to grant you action 240 – Powers of Court - In connection with an action brought or intervened in under section 239, the court may at any time make any order it thinks fit including, without limiting the generality of the foregoing, o (a) an order authorizing the complainant or any other person to control the conduct of the action ; o (b) an order giving directions for the conduct of the action ; o (c) 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 or its subsidiary; and o (d) an order requiring the corporation or its subsidiary to pay reasonable legal fees incurred by the complainant in connection with the action. - PROF NOTE: types of orders profs can make – more limited options than oppression remedy Foss v Harbottle (1843) – Derivative Actions Belong to the Company - Ratio o Common law rule giving rise to D-suits o Rule in Foss and Harbottle – only corp could bring action against itself due to the wrongdoing of the BOD, as it is the proper claimant o Cannot rely on BOD to bring all actions when BOD can be the cause of the harm Hercules Management Ltd v Ernst & Young – Injury to all shareholders = injury to corporation = D-suit appropriate - Facts o Suit brought on behalf of 2 corps Companies: Northguard Acceptance (NGA) and Northguard Holdings (NGH) Both in the business of lending money on the security of real property finances o Guardian Finance (GF) was sole shareholder of NGH and held Class B shares in NGA o Hercules (H) was shareholder of NGA o EY was hired by NGH and NGA to conduct annual audits of both companies o NGA and NGH go into receivership a couple years later Bringing action against EY for being negligent (breach of DOC) in audits by failing to notify that companies were in financial trouble Shareholders bringing action on behalf of themselves Each shareholder bringing different amount of damages because of the personalized nature of the injury o TJ dismisses the claims No contract between shareholders and EY individually – contract between NGA and NGH and EY No DOC owed to shareholders by EY Proper parties to bring action are the companies since the injury is to them
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o (application of Hardbottle rule) - Issue - Analysis o SCC agrees with TJ o Injury here due to the audits was that all shareholders were injured in same way (but in varying extends) All given wrong info and based their votes on this problematic info Same injury for all shareholders with varying exposure due to share ownership o Should have been brought as D-action; not by individual shareholders Shareholders may have been looking for specific monetary amount – generally not what you get from d-action; rare for shareholders to get money for tort damages PROF NOTE : don’t worry about the torts stuff in this case These are personal actions, torts generally not derivative actions – may be able to have group tort if everyone suffered the same way This DOC isn’t a fiduciary DOC - Ratio o Actions that injury shareholders collectively are injuries to the corporation I.e. if source of damage affects everyone (though in varying degrees b/c of variances in share ownership) then D-action o Shareholders injured individually don’t bring D-actions against the company for things that injury them personally If the injuries are unique and distinct, then can bring oppression remedy PROF NOTE : If everyone hurt but only a minority of shareholders want to bring the claim, you can still bring a D-Action b/c everyone is impacted Don’t need a shareholder vote to bring a D-Action o Policy reason for D-action suits: Some corps of thousands of shareholders, and so need to have avenue to streamline litigation and limit scope of liability o Ratio of Ratio: Damage to corporation/all shareholders = D-Action Damage to indiv shareholders/not to all shareholders = Opp-R O’Fearghail Holdings Ltd v Bignold – When its NOT in bad faith; Flexibility in granting D-suit re answering whether in “Best Interest of Corp” - Facts o O’Fearghail (OH) and Agg-Con (AC) are companies owned by Ferrell (F) o Agg Con Industries Norther Ltd (N) was incorporated by OH, AC, Bignold (B) and B’s and F’s wives B had salary; B’s wife was bookkeeper F provided contacts and knowhow to company o OH and AC seeking leave to bring action against B on behalf of N N is not a successful business With permission of F, B made new company doing same stuff N used to do
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At that point F thinks that B sabotaged N to have personal benefit o Alleges that B overpaid himself and his wife, o breached FD to N, and o interfered with N’s business by using N’s phone number to take calls and conduct business o N stopped doing business, defends B, and brings claims against OH PROF NOTE: Not uncommon for some shareholders trying to bring D- suit to be countersued by BOD as to resists the d-suit This satisfies ABCA 240(2)(a) – just need to prove (b-c) B says that F isn’t in good faith, because o 4 year delay after N stopped doing business then bringing suit o F allegedly signed a release against N waiving his right to bring claims o F was in agreement to close down N o Reason for OH and AC bringing these claims is because they same claims failed against B personally - Issue - Analysis o As stated in statute, three CPs for bring D-Action under ABCA/CBCA 240(2)/239(2) Notice to BOD of D-suit, be in Good Faith, be in best interest of corporation o Court rejects B’s arguments that F isn’t in good faith Delay: app to bring suit after 15 year delay is in bad faith may be unable to bring d-suit if based on facts that occurred too distantly in the past REASON WHY HE WAITED HERE; waited for audited financial statements from N Waiver: no evidence of this Agreement to shutdown business: just because business should stop doesn’t mean you consent to a breach of FD or wrongful acts of SH, Director, of Officer Didn’t originally file as D-suit? Ok, refiling it as such isn’t evidence of bad faith o Best interest Hard to answer this question, so court has discretion to press pause on this Court deemed that this was “Better to determine best interest at trial” Allows D-suit to proceed Fact-intensive – want to see more evidence on May be reluctant to reject d-suit if first 2 threshold questions are met, and this one is a bit unclear - Ratio o Motives for lawsuit can inform bad faith + best interests of the corp E.g. if its just vindicative then that may support bad faith (See RLTV ) o Delay can become evidence of bad faith if D-suit is based on facts that occurred too distantly in the past o Not originally filing lawsuit as a D-suit and then refiling isn’t evidence of bad faith
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o “Best interest of corporation” is fact driven and courts – if satisfied on first 2 threshold tests of ABCA 140 /CBCA 139 – may defer answering this threshold question conclusively until trial/in the future I.e. it is possible to successfully launch D-suit if court isn’t sure about 3 rd CP Bellman v Western Approaches Ltd – Only has to appear to be in best interests of the corp; CP purpose is to screen out vexatious litigants - Facts o 2 groups of shareholders (Bellman (B) and Duke (D)) in Western Approaches Ltd (W) B sought leave to bring D-suit against D, Mr. Asper (A), and TD Bank (TD) Purpose of D-suit: obtain declaration that Def were accountable to W for any benefit as a result of certain share acquisitions order that acquisition of certain shares be rescinded or disposed of or not voted, and damages for breach of FD o TJ granted leave W and D seek to have this decision reversed (BOD resisting to D-suit) Challenging all 3 CPs in CBCA o Notice: OG petition did not include all the claims that Plaintiffs intended to bring o Good faith: Seeking same relief for D-suit and personal suit indicates bad faith o Best interest: this isn’t demonstrably in best interest of corp - Issue - Analysis o Notice req: notice that there will be a D-suit, not a notice of the specific claims therein o Good faith: same relief is not being sought in the personal and D-suit Same facts can give rise to D-suit and personal claims Asking for same relief in both would give rise to question of why are you filing for these remedies in both o Best interest of corp: only has to appear to be in best interest of corp Directors choosing not to go forward with the lawsuit is not in of itself evidence that the action is in bad faith - Ratio o Purpose of the CP test is to screen out vexatious litigants, not block D-actions o Best interest of corp: only has to appear to be in best interest of corp RLTV Investments Inc v Saskatchewan Telecommunications – Bad Faith Indica; Must address injury to the corporation – cannot be a personal claim of the party; TEST FOR D-SUIT - Facts o RLTV appealing court’s refusal of app to file D-suit in name of Yourlink against SKTel Court says claim belongs to YourLink
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o RLTV was sole shareholder of former company (Image Wireless (IW)) IW went into receivership b/c of alleged conduct of SKTel SK was required to guarantee loans of IW and SK breached its contracts RLTV brought action against SKTel SKTel says that claim belongs to Yourlink (Y) successor to IW o Yourlink refuses to bring action RLTV brings D-suit and gave notice to SK and added new claims related to losses under guarantees and SH loans PROF NOTE: not in of itself shady to add new claims b/c you’re considering new stakeholders in the claim o QB denies app b/c RLTV sold all its shares in IW years ago – no benefit will flow to RLTV if suit is successful Only benefit will be vindication – this is bad faith RLTV’s claims were based on injury to IW, and so right to bring D-suit belongs to Y’s shareholders - Issue - Analysis o SC affirms decision of TJ To bring D-suit, App must essentially be in position of minority shareholder: legitimate interest but no power to influence affairs of corp Only benefit to RLTV is vindication which is not in good faith - Ratio o To bring D-suit, App must Have a legitimate interest in the company (i.e. a shareholder), and No power to influence affairs of corp o 2 purposes for D-suit 1. To provide SHs with opportunity to recover property 2. Ensure accountability on behalf of BOD o Bringing D-suit for the purpose of vindication is in bad faith o There must be a nexus between the person bringing the case and the injury they sustain If you were the only SH in a corporation, that company has ceased and its successor is all new people (new BOD and new shareholders), you must have been a shareholder at the time of injury and application for D-suit AKA: somebody needs to get a benefit from the suit Remedies: Oppression Remedy - PROF NOTE : Must show that you have been uniquely injured - PROF NOTE: o PREMISE : Personal action not brought on behalf of all SHs (now not confined to SHs), but only on behalf of the party bringing the suit OppR is broader in CAN than others b/c in CAN Corps are supposed to act as good corporate citizens and are therefor accountable to stakeholders when they fail to do so
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AKA : conduct adversely affects legitimate expectations of stakeholder stakeholder may be entitled to equitable remedy o RATIONALE : To protect reasonable shareholder expectations from oppressive or unfairly prejudicial conduct by Corp, or conduct which unfairly disregards the interests of Sec Holder corporate actions that may otherwise be entirely lawful - PROF NOTE : Once you have established that you have an RE that has ben violated, you must show that in was done in a way that amounts to: o Oppression – Must culpable state of mind Includes conduct that is coercive, abusive, burdensome, harsh, in bad faith, an abuse of power, or some other kind of serious wrong o Unfair Prejudice Includes generally involves benefiting many at loss to the few Wrongfully squeezing out a minority SH Paying dividends without a formal declaration, or Providing certain SHs with a disproportionate economic benefit o Unfair disregard – Least culpable state of mind Occurs when cop ignores the claimants interests in manner that is contrary to RE, such as Favouring a director by failing to properly prosecute claims Improperly reducing a SH dividends, or Failing to deliver property belonging to the claimant of Claimant’s interest. ABCA 242(1) – Can Apply for Relief on the grounds of oppression or unfairness - SAME AS CBCA ( see below ) 242(2) – Grounds for Oppression Remedy - SAME AS CBCA ( see below ) 242(3) – Powers of Court to Grant Oppression Remedy - In connection with an application under this section, the Court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing, any or all of the following: o (a) an order restraining the conduct complained of; o (b) an order appointing a receiver or receiver - manager; o (c) an order to regulate a corporation’s affairs by amending the articles or bylaws; o (d) an order declaring that any amendment made to the articles or bylaws pursuant to clause (c) operates notwithstanding any unanimous shareholder agreement made before or after the date of the order, until the Court otherwise orders; o (e) an order directing an issue or exchange of securities; o (f) an order appointing directors in place of or in addition to all or any of the directors then in office;
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o (g) an order directing a corporation, subject to section 34(2), or any other person, to purchase securities of a security holder; o (h) an order directing a corporation or any other person to pay to a security holder any part of the money paid by the security holder for securities; o (i) an order directing a corporation, subject to section 43, to pay a dividend to its shareholders or a class of its shareholders; o (j) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract; o (k) an order requiring a corporation, within a time specified by the Court, to produce to the Court or an interested person financial statements in the form required by section 155 or an accounting in any other form the Court may determine; o (l) an order compensating an aggrieved person; o (m) an order directing rectification of the registers or other records of a corporation under section 244; o (n) an order for the liquidation and dissolution of the corporation; o (o) an order directing an investigation under Part 18 to be made; o (p) an order requiring the trial of any issue; o (q) an order granting permission to the applicant to (i) bring an action in the name and on behalf of the corporation or any of its subsidiaries, or (ii) intervene in an action to which the corporation or any of its subsidiaries is a party, for the purpose of prosecuting, defending or discontinuing an action on behalf of the corporation or any of its subsidiaries. CBCA 241(1) – Can Apply for Relief on the grounds of oppression or unfairness - A complainant may apply to a court for an order under this section. 241(2) – Grounds for Oppression Remedy - If, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates o (a) any act or omission of the corporation or any of its affiliates effects a result, o (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 o (c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner - that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of. o PROF NOTE: basically a 2 part-test here The Act (a-c); and outcome (bullet 2) this test is articulated in BCE
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241(3) – Powers of Court to Grant Oppression Remedy: long list and not a closed list - In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing, any or all of the following : o (a) an order restraining the conduct complained of; o (b) an order appointing a receiver or receiver -manager; o (c) an order to regulate a corporation’s affairs by amending the articles or by-laws or creating or amending a unanimous shareholder agreement ; o (d) an order directing an issue or exchange of securities ; o (e) an order appointing directors in place of or in addition to all or any of the directors then in office; o (f) an order directing a corporation , subject to subsection (6), or any other person, to purchase securities of a security holder; o (g) an order directing a corporation , subject to subsection (6), or any other person, to pay a security holder any part of the monies that the security holder paid for securities o (h) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract; o (i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested person financial statements in the form required by section 155 or an accounting in such other form as the court may determine; o (j) an order compensating an aggrieved person ; o (k) an order directing rectification of the registers or other records of a corporation under section 243 ; o (l) an order liquidating and dissolving the corporation ; o (m) an order directing an investigation under Part XIX to be made; and o (n) an order requiring the trial of any issue . Rea v Wildeboer, 2015 – Same set of facts can give rise to D-suit and Opp R - Ratio o It is possible for the same set of facts to give rise to a D-suit and Opp-R Can have injury to corporation D-suit And specific shareholder or group of shareholders may be harmed in a way distinct from the others Opp-R First Edmonton Place Ltd v 315888 Alberta Ltd – When creditors can bring Opp-R; Acceptance of Promos doesn’t create RE - Facts o Alberta Ltd is founded by 3 lawyers (3L) o First Edmonton Place (FE) is a building owner and sought opp-r or a d-suit against 3L o FE offered 3L an incentive package to rent space in its building 3L took incentives without actually signing a lease Cost FE months in rent and cash payments
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End of promo months, 3L didn’t sign lease o FE suing to get this promo money back for the time it was trying to lure 3L as a tenant FE framing themselves as a creditor (3L owes me money) - Issue o Who is the proper person to bring an Opp-R? - Analysis o Opp-r used to have a narrow application, but now broadened to stakeholders more generally Creditors can bring Opp-R under 2 situations Def used the crop to commit a fraud upon them, or There has been a breach of an underlying reasonable expectation (RE) o FE is not actually a creditor FE offered incentives – only hoping it would lead to a lease, not an obligation to lease The money was never legally owed to you and so there is no RE o Even though corp conduct was unreasonable, there was no RE and so there can be no Opp-R - Ratio o Creditors can bring Opp-R under 2 situations Def used the crop to commit a fraud upon them, or There has been a breach of an underlying reasonable expectation (RE) o A prospective customer accepting promo stuff does not create an RE of the prospective customer becoming an actual customer Just a hope, not a RE o MAYBE (avoid citing this part): Unlike with D-suit, you can bring oppression remedy even if you are no longer a SH Only need to have been SH at the time of the conduct you’re complaining about BCE v 1976 Debentureholders TEST : Is Claimant entitled to Opp-R; Factors indicating existence of RE - Facts o BCE is a public corp but is interested in going private, and have indication that there is interest BCE BOD sets up a committee to handle offers to be purchased, all of them are LBOs LBO: private placement of private company whereby all outstanding shares are bought using debt where the target company is the collateral Bell CAN is the guarantor for the $30B loan, and is a subsidiary o ON Teachers Pension Plan offers to buy at $42.75 (40% above closing market price for 3mo period before speculation of sale), but it’s an LBO Bell CAN has to guarantee $30B of acquisition debt This concerned the debenture holders These people own loans secured by the company’s credit worthiness rather than an actual security
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o Value of their debentures tied to credit worthiness of Bell CAN, and so this LBO will lower the value of Debenture holders BOD has a meeting with Debenture holders, hear their concerns, and decide to proceed anyways 98% of BCE shareholders approve of this transaction o Before making acceptance of the offer… Solicited fairness opinions from several reputable financial advisors Found that offer was in the best interest of BCE and the shareholders Didn’t get a fairness opinion for debenture holders Didn’t think that their rights were at issue in determining whether to accept offer o By accepting the offer, the debentures of Bell CAN went from investment grade to below investment grade Caused decrease in value and forced some holders to sell at a loss o This type of transaction must be deemed by the court to be fair and reasonable o DHs bring a suit against BCE DHs: seeking oppression remedy, and that court should not approve sale as fair an reasonable QCSC: its fair and reasonable, no oppression remedy QCCA: BCE was obligated to consider the interests of the DHs beyond their contractual rights and the BOD failed to do so FDs include the interests of all stakeholders, which in this case includes DHs No oppression remedy because breach of FD covers this injury - Issue o Did FD extend to the DHs? - Analysis o Scope of FD – owed to the corporation, not any one particular stakeholder group Not just the shareholders, but not one group of stakeholder interests rank ahead of shareholders BOD may look to the interests of stakeholders (generally) to inform their decisions of what is in the best interest of the Corp o This was in best interest of Corp and BOD took reasonable steps All offers included LBOs Not like there were options to the BCE BOD that included ensuring interests of DHs and maximizing interests of shareholder Listened to concerns of the DHs, and took steps to ensure that contracts to DHs were kept No guarantee in the contracts to say that credit rating of BCE would be maintained 122(1) – what does corporation mean? o Dependent on the facts of the case o Investor interests usually means SHs, but not always the case
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o Does not automatically change due to things like change of control or bankruptcy FD was met and no special accommodations owed to DHs o Did the DHs have an RE and was this violated due to bad conduct? Expectation : BCE BOD would protect the economic interests of the DHs by structuring a plan that would preserve the investment grade rating of debentures Was it Reasonable? – Various factors to consider (fact specific inquiry) Factors listed in ratio (e.g. common practice, existing reps, etc.) Interests were considered, but BCE debentures specifically stated that BCE never guaranteed that investment grade rating would be maintained Not reasonable to expect that BOD could draft such an expected plan since all offers were LBOs o Commercial practice informs that LBOs almost always have a possible impact on this o Not uncommon in commercial practice to negotiate a right to vote on transactions that could downgrade credit rating of the company BCE DHs never asked for this Nature and size of corporation is relevant Larger corps like publicly traded companies like BCE means there is a higher level of sophistication and there is less leniency in terms of what is an RE o PROF NOTE: Less able to look to personal relationships with large publicly traded Corp, more lenient for small, closely held corps o Bell CAN was acquired by BCE in an LBO, so reasonable that it could happen again DHs try to argue past practice of maintaining CR rating as evidence of RE, but court says no – there is no guarantee of that There was a conflict between best interest of SH and DH, however: Deal is in the best interest of the Corp because privatizing Bell CAN would make it more nimble and competitive, and eventually interest of DHs will be restored o PROF NOTE: primarily use this case for RE + Oppression Remedies Peoples: best interest of corp used to be only shareholders, but now its stakeholders (BCE confirms that its stakeholders) Not good to use this case to ID what is oppressive conduct though, as Court says this didn’t exists in this case - Ratio o Stakeholder interests factor into what is in the best interests of the corporation, however there is no one stakeholder whose interests take precedent over SHs o 2-part test to apply the Opp R 1. Does the evidence support the existence of the reasonable expectation asserted by the claimant?
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1.1 Was that reasonable expectation was violated? 2. Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice”, or “unfair disregard” of a relevant interest o Factors indicating existence of a reasonable expectation (it’s a fact-specific inquiry) General commercial practice Nature of the corporation Relationship between the parties Past practices Steps the claimant could have taken to protect itself Was there an awareness that RE wasn’t going to be met, but you continued anyways? Representations and agreements between the parties Any conflicting interests between corporate stakeholders Were these zero-sum conflicting interests? Westfair Foods Ltd v Watt – The Scope of RE: What is an RE and what isn’t - Facts o Company had 2 classes of shares Class A shares carrying $2 Dividend in priority to CS Quite a lot of SHs in this class Entitled to get dividends and right to liquidated capital Common shares Only one holder of common shares o Change of policies Originally – dividends paid to Class A, and all residual goes to company for retained earnings/reinvestment Directors change it – dividends paid to Class A, and remainder amounts paid to Common Share SHs INSTEAD of going to reinvestment/retained e o Class A shareholders bring oppression against Corp They had RE to a larger liquidated portion We still get our dividend, but if you pay remaining amounts to CS, there will be less money that would be paid out in event of company liquidation This violates our RE of having right to a larger potential liquidated amount - Issue - Analysis o Primary purpose Opp-R is about whether SHs have been treated fairly by Corp While Class A had reasonable expectation to Div, they did not have a RE to gain “x” amount of benefit from the death of the corporation “share in the success or failure” of the company o Still getting your Dividend, but RE of a shareholder is that company will continue Cannot have a RE of getting “x” amount from failure
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o RE to a liquidated portion, there is no way to predict what that will be Cannot have an RE to a set amount when there is no way to accurately ascertain it Corp never promised that SHs would get a certain amount beyond their fair share if the corporation failed o Changing policy to pay out instead of keep retained earnings doesn’t infringe on your reasonable expectation to have liquidation rights Speculative impact on liquidated portion – no certainty that liquidation portion will exist or how much it will be Can’t claim Opp-R just because you don’t like the decision, or it doesn’t maximize your personal value - Ratio o Reasonable expectation Def: an expectation raised in the mind of Party B by the word of Party A where Party A knowingly or ought to have know that its words and deeds encouraged the creation of that expectation o Scope of Reasonable expectation Protects against unfair actions by the company DOES NOT protect against actions that merely impair an unreasoned expectation of advantage Can’t claim Opp-R just because you don’t like the decision, or it doesn’t maximize your personal value If you aren’t entitled to it, then may not be reasonable expectation o Icing on the cake doesn’t mean that its an RE There must be a reasonable connection between what was promised and what was taken away Arthur v Signum Communications – Indica that Reasonable Expectation has been violated - Ratio o Indica that an RE has been violated Lack of a valid corporate purpose for the transaction Failure by corporation or shareholders to take reasonable steps to simulate an arms length transaction Lack of good faith by the directors Discrimination between shareholders whereby majority would benefit to the exclusion or detriment of the minority Lack of adequate or appropriate disclosure of material info to minority SHs Plan or design to eliminate minority of SHs PROF NOTE: Classic oppression remedy case Re Ferguson and Imax Systems Corp – Can infer motives of BOD from personal relationships; Illustrative of what Oppression in Opp-R case looks like - Facts: CLASSIC OPP-R CASE
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o Started by 3 married couples with equal interests in the corporation PROF NOTE: don’t connect personal and professional relationships, because if you do then there is no way to prevent the souring of one relationship with the others o Relationship breaks down between Ferguson (F) and her wife F contributed a huge amount to IMAX’s success She has film background, puts in a lot of sweat equity and only has shares in it no salary F and her husband (H) have problems, and split up Husband is the chair of the BOD o H tries taking away all of the value F can realize from the company Wants F out of IMAX F is fired H tries forcing F to sell her shares to him, and F refuses Called a squeeze out – objective is to kill the value for the person so that they completely exit the company H convinces BOD to withhold all dividends to make being an owner worthless to F BOD and other shareholders tells F to sell her shares so that they can get Dividends again o Please sell so that we can get our money o F still won’t sell Hold special resolution to try and force F out completely o Paid out withheld dividends as Capital Payments to everyone except F Capital Payments: allow BOD to choose who you pay certain amounts to o Changed terms of F’s shares to redeemable from unredeemable so that Corp can buy back the shares at its option o RE of Shareholder include Right to dividends Right to vote - Issue - Analysis o When looking at closely held corps, Courts can look to personal relationships to determine motivations of BOD to determine whether Opp-R applies o Conduct in this case demonstrates the finding creative ways to payout to all but her and withhold dividends This rises to the level of oppression, and so Opp-R applies - Ratio o Ok to look at personal relationships to understand the motivations of the BOD as to determine whether Opp-R applies Especially in the case of closely held private corps
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Naneff v Con-Crete Holdings Ltd – Determining an Appropriate Op-R Remedy - Facts o Con-Crete is a family owned business started by Mr. Naneff Grew it through retained earnings – never had to sought debt financing (very against the idea of borrowing from banks) Really wanted this to be a family business (had 2 sons) But didn’t want his sons to have control, and so used an estate freeze to make his sons equal owners of the company, but did not give them any managerial control over the corp o All managerial control vested in Mr. N o Sons become interested in business and start working, but then issues arise Son (Alex (A)) starts partying and starts seeing a woman he disapproves of him Mr. N kicks him out of the house and out of the business A was an officer and is removed, cut off from most of its income, can no longer participate in the management or decisions of the corp o A is awarded Op-R, and then there is question about what the appropriate remedy is TJ: says there is Op-R, and remedy includes sale of the business as a going concern Open to who can buy it – Ns could or A could o If Alex could buy, it would make him the only owner of the corp - Issue - Analysis (ONCA) o Agrees with TJ that this is a squeeze out b/c of A’s personal decisions o Disagrees with remedy – forcing the sale is an error of principle It was a family business carefully grown by Mr. N and remedy should be cognizant of that A never had an RE that he would control the Corp while Mr. N was alive Changing that, giving A something he never expected, cannot be the right remedy Appropriate remedy is to have Mr. N and other son to buy out A at FMV Also provided some money damages for foregone income due to the squeeze out - - Ratio o Appropriate to look at personal circumstances for establishing Op-R, but not for deciding what the specific remedy will be Can use personal relationship between parties when considering whether RE and oppressive conduct have been met Remedy selection must focus on business relationship between parties and Corp “How should a Corp have treated an officer they wanted to have leave the Corp?” Cannot provide a remedy that is something that was never expected
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Wilson v Alharayeri TEST : Holding Officers and Directors Personally Liable for Op-R - Facts o Alharayeri (A) hired as President and CEO of Wi2Wi Received convertible PS issued to him as performance linked incentives Half of the shares would convert to CSs if Corp met certain financial targets in 2006, and other half would convert to CSs if 2007 targets met A is the only holder of this class of shares A forced to resign after failing to disclose COI, but remains holder of these shares o Wilson (W) hired to replace A Given Class C shares which were also convertible PSs Not the only holder of these shares On audit committee along with Dr. Black (B) o On Sept 2007, Corp decided to issue Private Placement of convertible secured notes to existing CSs Increases number of PS, and those who do not participate in this financing will see their equity holdings diluted Prior to PP, W’s Class C shares were accelerated to CSs Only person in this Class who had all their CSs converted in time for this financing A shares were not converted 2006 audited results indicated that the targets had been met for full conversion of A’s shares W and B elected not to convert A’s PSs because of A’s past behaviour o PP goes ahead and A brings Opp-R against W, B, and 4 other directors in their personal capacities QCSC: oppression exists, A’s shares should have been converted W and B are personally liable for the BOD’s refusal to convert the shares W and B appealed to QCSC - Issue o - Analysis o Uses 2 prong approach to determine whether director of officer can be personally liable 1. Oppressive conduct must be properly attributable to the director because they exercised – or failed to exercise – their powers so as to effect the oppressive conduct 2. Personal liability must “fit” or be just in the circumstances “Fit” is determined by one of 4 principles: o i. Personal liability must be fair – appropriate to limit personal liability in some instances ( e.g. limited to amount of Director’s personal gain ). Instances of when personal liability may be fair include: where the director has derived a personal benefit;
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where the director has breached a personal duty they owe as a director or misused a corporate power; or where a remedy against a corp would unduly prejudice other Sec Holders. o ii. Remedy should go no further than necessary to rectify the oppression Considering personal circumstances to craft a remedy may be going too far o iii. Remedy can only serve to vindicate REs derived from the Indiv’s status as a Sec Holder, CR, director or officer Cannot vindicate familial or personal relationships (also seen in Naneff ) Cannot serve a purely tactical purpose Cannot allow complainant to jump the queue of CRs to the corp to seek money ahead of them Cannot serve as a way to vindicate a personal grudge o iv. Court must consider general corporate law – personal liability cannot be a surrogate for statutory or other forms of relief If you have an alternative to seeking personal liability, that is the option you should take I.e. Personal liability is last resort Bad faith can mitigate in favour of personal liability, but its not required o Seeking a Director or Officer either gaining some personal benefit, or taking a personal role in the oppression Because W and B personally made decisions that oppressed A, there is the basis for Opp-R and holding these Directors personally liable - Ratio o Depending on the claim, you may have a personal action, must apply 2-prong test to verify: 1. Oppressive conduct must be properly attributable to the director because they exercised – or failed to exercise – their powers so as to effect the oppressive conduct 2. Personal liability must “fit” or be just in the circumstances “Fit” is determined by one of 4 principles: o i. Personal liability must be fair – appropriate to limit personal liability in some instances ( e.g. limited to amount of Director’s personal gain ). Instances of when personal liability may be fair include: where the director has derived a personal benefit; where the director has breached a personal duty they owe as a director or misused a corporate power; or where a remedy against a corp would unduly prejudice other Sec Holders.
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o ii. Remedy should go no further than necessary to rectify the oppression Considering personal circumstances to craft a remedy may be going too far o iii. Remedy can only serve to vindicate REs derived from the Indiv’s status as a Sec Holder, CR, director or officer Cannot vindicate familial or personal relationships (also seen in Naneff ) Cannot serve a purely tactical purpose Cannot allow complainant to jump the queue of CRs to the corp to seek money ahead of them Cannot serve as a way to vindicate a personal grudge o iv . Court must consider general corporate law – personal liability cannot be a surrogate for statutory or other forms of relief If you have an alternative course of action, you should take it rather than seek personal liability Bad faith can mitigate in favour of personal liability, but its not required
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