Business Associations Chapter 4
Corporation
as a Legal
Person
What is a corporation
 An artificial person
 Treated as a person in legal analysis, but
not as a person outside
 Can do things that humans do
- hold property, commit torts, contract
with others etc
- distinguished from a natural person
(human being or individuals)
 Common law has always taken the view
that the creation of a corporation is
privilege deriving form the power of the
state
 As power passed from crown to
legislature, corporations were created by
special statutes
 Purpose of co was a vehicle to pull
resources together for a collective venture
 Soloman indicated two things business
people twanted
 Personal assets from that of the
corporation
 Limited their liability
 Wanted any liability they were
responsible for was limited to
their investment in the
corporation
 19th Century saw the adoption of
registration statutes which granted civil
servants the authority to create
corporations on the application of
members of the public
 A legal fiction, treated as a person for the
purpose for legal analysis
Theoretical Basis
 Consequence of incorporation = Creation of a new legal person, separate in LAW from its shareholders
 Basic principle of corporate personality was settled in Salomon
o
Most significant feature of incorporation is the segregation of business and profits and losses from the
personal accounts of the individual participants
 Corporations cannot be owned
 The form of property acquired upon becoming a shareholder is called a corporate share
 Corporate share like any other property is a legal relationship
o
Share defines the set of legal relations between the shareholder and the corporation, determining how each
will be legally required to behave in various circumstances
Practical Consequences of Co as Legal Person
 Corporations can make decisions, hold property and complete legal transactions
 Some physical acts and transactional details that we think are done by individuals can be legally attributed to a
corporation
 Corporate intent in Bolton (Engineering) Co. v. Graham and Sons
o Directors and managers represent the directing mind and will of the company and control what it does
o State of mind of the managers = state of mind of the company
o Intention of managers or intention of company depends on the nature of the matter under consideration,
the relative position of the officer or agent and the other relevant facts in the circumstances of the case

Daimler Co. v. Continental Tyre and Rubber Co.,
o Act’s of a company’s directors, managers, secretary, functioning within the scope of their authority are the
company’s act
Salomon v.
 S decides to incorporate after running
 Is there an implied agency relation from the mere fact of
Salomon
business as sole proprietor for many yrs.
being the sole proprietor of a corporation?
[1897 A.C. 22,  Leg requires 7 s/h, so S gives his wife & kids
66 L.J. Ch. 35,
CA said he was using the corporate firm as a scam
1 share each, and keeps the rest himself
75
20000+1 and other shares and was really just
20,001
masquerading as a corporation and was a sole proprietor
 S lends corp $ & becomes a secured creditor
(debenture).
 B loaned money to co and Salomon was
given the right to that loan, and B didn’t pay
interest.
 Co goes bankrupt, unsecured creditors are
upset that S is first in line.
 Co is liquidated, but not even enough $ to pay
total owed to S.
 Liquidator argues on behalf of creditors that
it’s not a real corp, it’s a puppet b/c it does
whatever S says. S should be liable to other
creditors for their debts - as a Principal would
be liable for debts of its Agent (corp). Trial,
CA agreed.
 Statute says nothing as to the extent or interest that one or
a majority of shareholders over the other
 Company is clearly a person and as a separate person is
liable for its own debts.
 As a secured creditor, S is first in line for payment.
 Can’t make an agency relation from control that comes
from being the controlling shareholder
 Either a corporation or its not, cant be a both a
corporation and have Mr. Salomon as an agent, separate
legal entities
 Can’t read into the act of parliament limitations that are
not there
 Court doesn’t care about the motive behind becoming a
shareholder, just fulfil regulations
 Statute was something for economic growth and nothing
more
A corporation’s legal personality is separate and
independent from its shareholders.
Notes:
1) Practice of issuing partly
paid shares has been
abandoned

Full price is paid at the
time of purchase, vendor
cannot subsequently
compel the holder to pay
more

Liability used to be
limited to just the amount
the shareholders had paid
for the shares (not at full
price)
 Secured Creditors are protected,
unsecured not protected
 Bank if Co goes under and
whatever assets are available,
liquidates them, banks will seek
personal guarantees from
investors (goes under, bank takes
house, uses money to pay loan)
 Unsecured creditors are people
who don’t have securities
 In practical terms if you are a
family or a single person which
wants to start a corporation,
lenders will seek personal
guarantees from the investor
 Not easy when corporation is
small to obtain full benefits of
separate identify
 Employee acting for the
corporation can generate tort on
Corporate registration statutes mean what they say (statute
behalf of the corporation
said 7 and the court read into it 7 substantial shareholders  Law gives individuals to establish
which HOL said there is no reason to read in.
the corporation for whatever
purpose they see fit, difficult to
Economic development worth the downside of damaging
see how courts grab the right to
unsecured creditors
go behind that corporate identity
Corporations shield investors from corporate liabilities
and some creditors may suffer as a result of that separate
identity
Macaura v.
 Appellant owns an estate, and took insurance
Northern
with respect to timber and wood goods
Assurance Co.
situated in the open on the said domain.
Ltd. and
 The insurance ks were made with the
others, (1925
respondents (5 insurance companies),
Eng. HL
subsequently he assigned the whole goods to
another company, receiving as part of the
payment shares in the comp, but the goods
remained on his land.
 The goods were later on destroyed in a fire.
Subsequently the insurance companies
declined to accept liability. Case went to
arbitration and arbitrator held that appellant
had no insurable interest in the timberupheld in first instance and by the CA
 Did the appellant have any insurable interest in the goods
subject to the policies? NO
 In the circumstances were the respondents at liberty to
raise the contention that he had no interest in the manner
in which it was raised in the course of proceedings?

Kosmopoulos  K was a Greek immigrant that operated a
v. Constitution
leather goods store, that he had incorporated
Insurance co
and was its sole shareholder and director.
of Canada
Following this operation K still believed that
(CA), 1983
he owns the biz, even though the lease and
OVERRULE
insurance policies remained in his name. The
D
store suffered damage from fire and the
insurance companies denied K’s claim for
damages


Kosmopoulos  K was a Greek immigrant that operated a
v. Constitution
leather goods store, that he had incorporated
Insurance co
and was its sole shareholder and director.
of Canada
Following this operation K still believed that
(SCC),
he owns the biz, even though the lease and
insurance policies remained in his name. The
store suffered damage from fire and the
insurance companies denied K’s claim for
damages.



 A shareholder has no legal or equitable interest in the
property of the corp.
 In order to insure, would have to calculate the extent to
which his share in the ultimate distribution would be
diminished by the loss of the asset - almost impossible to
calculate.
 Sh is entitled to a share of the profits while the comp
continues to carry biz, and a share of the surplus of assets
when the comp is wound up.
 Insurable interest is to make it not
gambling
 Can’t just insure other peoples
property because you have no
interest in whether other peoples
property survives
 Corporation ensures the life of
CEO
Neither a simple creditor nor a shareholder in a
company has any insurable interest in a particular
asset which a company holds
Note:
Later in General accident fire life assurance corp. v.
Midland Bank ltd [1940] held that a parent corp holding
a controlling interest in the shares of a subsidiary corp
had a “business interest” in the subsidiary’s assets not an
“insurable interest”.
Does K have an insurable interest?
 Insurance law in Canada- “insurable interest” concept
the validity of the insurance k is dependent on the interest
NO
the insured has in the subject matter of the k.
 K benefited from the existence of the store and was
prejudiced by its destruction, in contrast with the ptf. in
Macaura, in this case the ptf is the sole owner, so no
problem of calculating the insurable interest of
shareholders.
 Zuber JA concludes that the SCC has accepted the rule in
Macaura only to the extent needed to decide Aqua Land
case (one sh of three had no insurable interest)- therefore
the issue of whether a sole sh has such an interest remains
open.
 There no reason to impose the rigidity of Macaura rule to
the recent development in ON company law (ie: allowing
of corp with a single director/ shareholder)

Does K have an insurable interest?
 Wilson J was willing to ignore the corp, if necessary.
 Not a salmon problem, an
Upholds corporate personality point from Macaura but
insurance problem
Yes…but on different grounds
broadens insurance law point. A sole s/h, though
 No risk he would be ensuring
Concept of insurable interest was broader than earlier
lacking any proprietary interest in the corp’s assets,
someone else property for
grounds
had an “insurable interest” in them.
gamble cause he was 100%
 Those who have chosen the benefits of incorporation
shareholder
must bear the corresponding burdens, so that if the veil is
to be lifted at all that should be done in the interests of
third parties who would otherwise suffer as a result of
that choice, in addition if the application of the rule leads
to harsh justice then should examine the rule itself rather
than affirm it and ameliorate it on case by case basis
 Court wanted to avoid distinguishing between companies
with one shareholder and more than one shareholder
 For these reasons the corporate veil should be lifted in
this case.
Lee v. Lee’s
Air Farming
LTD. [1960]
 L = controlling s/h, managing director &
employee. Terrible plane crash, L dies.
Widow sues co for compensation & wages
for his death. Corp says L wasn’t really an
employee b/c you can’t employ yourself, this
was a one-man show.

 Was the deceased an employee within the meaning of the
Workers’ Compensation Act 1922 and its amendments?
 Yes
 Appeal allowed- deceased was an employee within the
meaning of the act
Affirmed Because:
 K as a sole sh was so placed as to have benefit from the
assets’ existence and suffer prejudice from their
destruction- had moral certainty of advantage but for the
fire- had an insurable interest, therefore can recover. [in
the case of the sole sh there’s identity with the comp]
 A sole shareholder, though lacking any proprietary
interest in the corporations assets, had an insurable
interest in them
 Court says that Lee can act in different capacities, wear
different hats within the corp structure
 What needs to be ascertained is the capacity in which
the individual in question is acting, which hat is he
wearing at the relevant point in time in order to
determine liability.
 ex facie L had a contract of services with the corp, so the
real issue is whether L’s position as sole governing
director made it impossible for him to be the servant of
the comp.
 Fact that as long as L continued to be a governing
director with lots of powers, it would be for him to act as
the agent of the company to give orders
 Does not alter the fact that the company and L are two
different and distinct legal persons
 Deceased had a contact of service with the company and
the company has the right of control
 In light of the above there’s no such impossibility.
Note:
Case shows that just because an individual is the
controlling shareholder/director of a corp this doesn’t
mean he has to forfeit his individual personality.
Doctrine of Lifting the Corporate Veil
 Used to describe situations in which judges have presumed to simply ignore the existence of the corporate person and fix liability on the managers or the shareholders
 Clarkson Co. Ltd. v. Zhelka – exceptions to Soloman appear to be cases where to refusal to apply the rigid principle only where it would be flagrantly opposed to justice
o
Eg. If a company formed for the express purpose of doing a wrongful act or unlawful act, or those in power expressly direct a wrongful thing to be done, individuals as well
as company are responsible to those who liability is legally owed
o
Legislature in the fields of taxation and revenue have made much greater departure in the lifting of the veil
o
In cases like the one above, the company is a mere agent of a controlling corporator (sham , cloak or alter ego)
 Littlewoods Mail Order Stores Ltd v. Inland Revenue Commissioners – courts can and often to draw aside the veil. Look to see what really lies behind. Legislature has shown the way
with group accounts and the rest and the courts should follow suit.
 Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. – Courts will disregard the separate legal personality of a corporate entity where it is completely
dominated and controlled and being used as a shield for fraudulent or improper conduct
o
Must be shown that there is a complete domination and that the subsidiary company does not function independently
o
Is there conduct akin to fraud that would otherwise unjustly deprive claimants of their rights
Corporate Character Traits

Just because corporation has separate legal identity does not mean that one is expected to ignore the identity of individual shareholders and managers

Fact that a corporation is likely to bear familial resemblance to its founders or dominant managerial group has influence judicial attitudes
Big Bend Hotel Ltd. v.
 Kumar president and sole
 Does insurance co have to pay out fire insurance - or is this a material
 The test is not what is material to the ptf.
Security Mutual
shareholder of the plaintiff
fact not disclosed?
But what a reasonable insurer would have
Casualty Co. [1980]
corporation and contracted
done or how he would have reacted to the
 Material non-disclosure. It’s appropriate to lift the corp veil here b/c
B.C.J. No. 1427, 19
insurance contract with defendant
true facts- K knew info from prior loss had
equity will not allow an individual to use a co as a shield for improper
B.C.L.E. 102 (S.C)
to insure hotel as sole asset. Hotel
to be disclosed- his failure to do so was to
conduct or fraud.
burned and Kumar had don’t the
mislead or deceive the insurers- concludes

same thing with another hotel who
that insurers would have decline to take the
had burned less than three years
risk if would have known.
earlier.
 There exceptions to the general rule when
 Insurers denied coverage n the
courts have lifted the corp veil, eg
basis that plaintiff at the time of
improper conduct or fraud (Gilford motor
application for insurance
v. Horne 1933- Eng. CA)- in the case at
fraudulently omitted to
bar due to circumstances it is appropriate
 Corporation and LE were two
separate legal entities
 Corporation hired Lee as a an
employee, not Lee
 Nothing in the case to cause the
court to question the validity of
allowing Mrs. Lee to recover
 Common for corporations to form
groups
 Limited responsibility to disclose
information that is detrimental to
our side
 Not a positive duty to disclose
things that are not beneficial to
you
 Insurance policies are on the few
circumstances where you have to
declare information that is
negative to you and beneficial to
insurance company
 Have to declare matters that are

Hercules Managements 
Ltd. v. Ernst and Young
[1997] S.C.J. No. 15,
[1997] 2 S.C.R.



Corporations as Agents
and Partners
communicate circumstances that
were known to be material to the
insurers in order to enable them to
judge of the risk to be undertaken
Plaintiffs counsel argued that
although big bend hotel and other
company were personally
controlled by Kumar they were
separate entity
NGA and NGH wee lending and
 Can accountants who perform an audit of a corporations financial
investing money on the security of
statements owe a duty of care in tort to shareholders of the corporation
real property mortgages.
who claim to have suffered losses in reliance on such statements
Hercules were shareholders in
 Can certain types of claims against auditors may be properly brought by
NGA
shareholders as individuals or whether they must be brought by the
corporation in the form of a derivative action
Ernst was the auditor of both
companies
NGA and NGH went into
receivership and Hercules sought a
determination that the audit reports
were negligently prepared and
wanted damages for financial
losses for reliance
to lift the corp veil, as equity will not allow
an individual to use a comp as a shield for
improper conduct or fraud.
 Court is saying from insurance law
perspective you had a positive obligation
to disclose that a corporation that you were
a primary shareholder of cashed in an
insurance policy
 The purpose for which the audit reports
were prepared in this case was the standard
statutory one of allowing shs. as a group to
supervise management and to take
decisions with respect to matters
concerning the proper overall
administration of the corporation.
 Therefore the purpose might be said to
have been a “collective” one, not aimed at
protecting the interests of individual shs,
but rather enabling the shs. acting as a
group to safeguard the interests of the corp
themselves. (fufill their duties as
shareholders as a group AGM/Meetings for
receiving information)
 Nature of duty was owed to shareholders
as a group for the purpose of managing the
corporation
 In so far as it must concern the interest of
each individual sh. the appellants’ claim in
this regard can be no different from the
other “investment purposes” in respect of
which respondents owe no duty of care.
 In supervising management the shs must
be seen as acting like a body in respect of
the corp interests- they assume a
managerial role collectively.
 Respect of this aspect of the shs’s
functions, then would be owed not to shs
individually but to all shs as a group acting
in the interests of the corp.
 In such case if the decisions with respect to
the corp affairs were taken collectively in
reliance on negligently prepared audit
reports then this would result in a wrong to
the corp for which the shs cannot recover
as individuals
 Corporations can act as agents, like other legal people
 Agency can arise by express agreement between principal and agent or by implication from their dealings
 Agent’s authority can bind his principal to a contract
 Principal is liable for torts committed by his agent within the scope of the agency
 If you can show the corporation was acting as the agent of another person you will have the prospect of making that person liable for what the
corporation has done
 Salomon says the relationship of controlling shareholder and corporation does not in general constitute a relationship of principal agent
 If the courts use the agency concept to circumvent Salomon, they must distinguish between the situation where the corporation is acting as an agent of its
controlling interest from that where the controlling interest is merely exercising the prerogative of control
o
Look at the capacity in which the shareholder acting. (unless the shareholder was acting in personal capacity, only corporation is involved)
 Deciding that an individual is acting in a personal capacity?
o
Only periodically courts have used agency concepts to treat corporation as agent
o
Attempt made in Smith Stone and Knight LTD. v. Birmingham Corp
regarded as material to the
insurance company
Smith, Stone
and Knight
LTD. v.
Birmingham
Corp
 Corp held interest in land, which it
rented to subsidiary corp.
 City expropriated land under a
statute which required compensation
to be paid to estate holders doing
business on the land, but city evicted
tenants without compensation
 P claimed compensation saying it,
not the subsidiary was carrying on
business on the and
 P had run the business itself prior to
turning operation to subsidiary
Corporate
Personality:
Some
Innovative
Approaches
 Judges aren’t clear when explaining how corporate personality works (because they can lift the veil and disregard separate existence
 Some cases illustrate well known remedies (tort, sometimes equity)
a) Inducing Breach of Contract
 A contractor who violates a term can be sued for breach of contract
 Anyone who knowingly induced the breach of contract can be sued in tort
 Gets complicated when a corporation is this person
 Court will not attack Salomon head on
 Respect for separation between corporations and investors
 Respect for separation between parent and subsidiary
 If it seems fair to treat co as one, in particularly in expropriation cases, courts will do so (treat these as separate, courts don’t look favourable and want to protect people
from expropriation)
 If individual setting up Co for protect from liability, not much scrutiny by courts
 When actions of directors seem geared towards breaking contracts they will get zapped by the court
Garbutt
Business
College LTD.
v. Henderson
Secretarial
School LTD.
 School teacher had restrictive
covenant which restrained him
from engaging in or managing a
rival business college in
Calgary for 5 years.
 Teacher resigned and
incorporated a rival business
college that used his surname as
part of the corporate name and
taught there
 All the shares were held by H
except for wife and daughter
who had 3
 Einhorn was a realtor with a
commission contract for
obtaining property with
Westmount controlled by
Belzbergs.
 Westmount transferred the
property to another Belzberg
company making it impossible
for them to pay commission
under contract
Einhorn v.
Westmount
Investments
LTD. (1969),
6 D.L.R. (3d)
72, 69
W.W.R. 31
SKQB
 Was there an
Agency Relation?
YES
 No agreement between companies and business was never assigned to subsidiary
 Simply because corporation as
set up to avoid liability did not
 Nothing was done to transfer the beneficial ownership to the subsidiary
take away the division between
 If physically or technically subsidiary was in occupation, it was for the services it was doing for
the two corporations
the parent
 Reasonable to treat as a group
 Occupation of the subsidiary was occupation of the parent company
because concern about
 Questions to be asked
compensation
 1) Were the profits treated as profits of the parent company?
 Sometimes treat groups of
 2) Were the persons conducting the business appointed by the parent company?
corporations as one and thereby
 3) Was the company the head and the brain of the trading venture?
ignore the separate legal
 4) Did the company govern the venture, decide what should be done and what capital should be
identity of the parent or
embarked on the venture
subsidiary
 5) Did the company make the profits by its skill and direction
 6) Was the company effectual and constant control?
 Is defendant corporation liable for inducing H to
breach his contract
YES
 Are the Belzbergs liable for inducing breach of
contract between Westmount and Einhorn?
 Damages are awarded against H for breach of contract, but company is a
separate entity and no contract with plaintiff and can’t be held for damages
(must be found in tort)
 Company and all his officers knew that employing H was a breach of an
agreement with plaintiff
 Wilfulness beyond knowledge is not essential
 Defendant company committed a tort
 Court uses principle in Lumley v. Gye “each of the parties to a a contract has a
right to the performance of it and it is wrong for another to procure one of the
parties to break it or not perform it”
 Rely on the principle to extend inducing to deliberate and direct interference
in the execution of a contract
 Three Elements
o
First: Must be interference in the execution of a contract (not
confined to procurement of a breach of K)(Extends to a case where
a third person prevents or hinders one party from performing K)
o
Second: interference must be deliberate (person must know of the
contract, or at any rate turn a blind eye to it and intend to interfere
with it)
o
Third: interference must be direct (indirect interference will not
do)(indirect interference is only unlawful if unlawful means are
used)

Have to have a
reasonable belief that
McFadden v.
481782
Ontario Ltd
(1984), 47
O.R. (2d 134,
 P had K with work for PMAI.
PMAI sold its business to
PMAC. NT and MT were sole
shareholders and directors of
PMAC. P worked for PMAC.
TJ found an implied contract of
employment between PMAC
and P. PMAC didn’t do well,
PMAI offered bought back. Nt
told P he had no job which
judge found was a breach by
PMAC. NT and MT took all
PMACS money thus depriving
P of settlement
 Are NT and MT liable for inducing PMAC to break
its contract to P YES
 Are NT and MT personally liable to P? Yes
369413
Alberta LtD.
v.
Pocklington
 D’s company was in trouble,
worked out complicated scheme
with Alberta government.
 Shell corporation was created to
ease the moving of assets
around and D transferred
Gainer’s shares in the shell to
his own Pocklington holdings
for 100$. Because P holdings
had not guaranteed gainer’s
debts, the shares could not be
seized as per agreement. Alberta
argues the transfer of shares
violated master loan agreement
where Gainers had agreed not to
sell or otherwise dispose of its
assets without prior written
consent which was not given.
 Did Pocklington in transferring piece of real estate
that Albeta gov had security to another corporation
induce Gainers to breach the loan agreement? Yes
Adga System
International
INC. v.
Valcom Ltd.
 Two corporations, ADGA
Systems International Ltd. and
Valcom Ltd., submitted
competing tenders for a contract
with a third party, Correctional
Services Canada, to provide
technical support and
maintenance of security systems
in federal prisons.
 As part of the tender process,
the tendering party had to
provide the names of 25 senior
technicians with their
qualifications, to show that the
tendering company would be
competent to perform the work
required under the contract.
Given ADGA’s previous
contracts with Correction
 1. Can the director and two employees be sued for
their actions as individuals, assuming those actions
were genuinely directed to the best interests of the
corporate employer?
 2. Would the allowance of individual liability in this
context constitute a piercing of the corporate veil?
 (b) No. Court does not find that this is a case in
which the corporate veil would be pierced in the
event that the director/employees were to be found
personally liable.
 Payments were unauthorized by bylaws or statute and in breach of MT and
NTs statutory obligations as directors and officers of the company
 Payments also made with the intention of defeating any claim P had against
CO
 Acting with a view to their own interests and not the companies
 P as contract creditor must sue on behalf of himself and other creditors so
will have to amend his style of cause
 NT + MT induced PMAC to breach its contract to plaintiff
 If officer or director of corporation is to be relieved as an agent of the
consequences of otherwise tortious conduct, it is so because he acts under a
compulsion of duty to company
 If he does not act under a compulsion of duty to the company, or bona
fide within the scope of his authority, his act is no longer justified and he
becomes liable
 In procuring a breach they were not acting in furtherance of any duties or
obligations (acting to secure transfer of funds from PMAC to themselves)
(NO protection as n Said v. Butt)
 Seven Elements satisfied for inducement of breach
1. Existence of a contract
2. Knowledge or awareness by the defendant of a contract
3. Breach of the contract by a contracting party
4. Defendant induced the breach
5. Defendant by his conduct intended to cause the breach
6. Defendant acted without justification
7. Plaintiff suffered damages
 Intent can also be inferred when the consequences of the conduct were
necessary or reasonably foreseeable result (intention to bring about breach
need not be the primary object
 Can also be established when the defendant was reckless or wilfully blind to
a breach
 For a mistaken belief to be bona fide, some basis for the belief must exist
and some reasonable effort must have been made by the defendant to learn
the truth
 Evidence indicates that D didn’t care about whether his actions were a
breach
 Admitted he was acting in his own interests and trying to defeat the
mortgage
 On Justification – D acquired an asset of value for nominal consideration at
the expense of Gainer’s creditors.
 Since Gainers was insolvent, creditors interests were the interests of the
company and promoting the interest of one shareholder at the expense of
creditors is not the best interest of the company (no justification for his
deeds)
Carthy J said that the precedent in Said v.
 The fact that the director/employees were acting “in
pursuance of the interests of the corporation” does not, Butt [ 1920] provides an exception to the
general rule that “ in all events, officers,
in itself, constitute a defence to personal liability for
directors and employees of corps are
tortious conduct. Although the Court recognizes that
responsible for their tortious conduct even
there is a potential policy concern (as expressed in
tough that conduct was directed in bona fide
previous jurisprudence) relating to potential inhibition
manner to the best interests of the company”.
of efficient business functioning, Carthy J.A.
maintains that “where, as here, the plaintiff relies
upon establishing an independent cause of action
 Normally you would add corporation to a
against the principals of the company, the corporate
cause of action as a defendant
veil is not threatened and the Salomon principle
 Even though directors could say they were
remains intact.”
acting to the best interests of the company,
 The Said v. Butt exception applies where an employee
they were not freed from tort of inducement
induces a breach of contract between his (corporate)  Policy argument behind this is because
employer and a third party. In this situation, the
dealing with competitors, court not able to
employee would not be individually liable in tort
protect them in this case
should the person whose contract has been breached
brings forth a suit.
Air Canada
v. M & L
Travel LTD.
[1993] 3
S.C.R. 787,
108 D.L.R.
(4th) 592
Transameric
a Life
Insurance co.
of Canada v.
Canada life
Assurance co
(1996), 28
O.R. (3d) 423
(Gen. Div)
Services Canada, the company
had the requisite number of
qualified technicians.
 In an attempt to submit a more
competitive bid for the contract
in question, a director and two
employees of Valcom
convinced almost all of
ADGA’s technical employees to
agree to allow their names to be
included in Valcom’s bid
package and to promise to join
Valcom if the bid was
successful. The court has
assumed that these practices
(employee “poaching”)
constitutes a tort on the part of
the defendant (Valcom) against
the appellant (ADGA).

 MT ran a travel agency with
directors and shareholders M
and V.
 Co was to hold proceeds of
ticket sales in trust for P but
instead put them into general
operating account, where
general expenses paid
 Airline was owed money for
sales and commenced action
against directors personally for
amount owed
 Trans made 54 mortgage (mtg)
loans arranged by the CLMS, a
number of them have fallen into
default causing losses to ptf.
Trans alleges breach of k,
breach of fiduciary duty
(underwriting should have been
done with due diligence, risk
assessment and analysis), fraud,
misrepresentation and
negligence. Trans sues also
Canada life as being liable by
virtue of an agency relation with
CLMS, its subsidiary.

 Was the relationship between corporation and
airline a trust?
 If so is appellant director personally liable for the
breach of trust by the relationship
 Can liability be attached to Canada life as the sole
shareholder of CLMS? NO
 Is there basis for holding Canada life liable as an
accessory to a breach of fiduciary duty by CLMS?
 Is there a basis for “piercing the corporate veil” and
holding Canada life liable for the acts of its wholly
owned subsidiary, CLMS?

 Intent of agreement is to create a trust from wording
“all money less applicable commissions …shall be
property of airline and held in trust”
 Object of the trust is the respondent airline and subject
matter is fund collected for the ticket sales
 Having found trust, M&L’s actions were breach of
trust
 Two general bases where a stranger to the trust can be
held liable as constructive trustee for breach of trust.
o
Can be liable as trustees de son tort
o
Can be liable for breach of trust if they
knowingly participate in breach of trust
“knowing assistances
 Knowledge requirement is actual knowledge;
recklessness or wilful blindness
 If stranger received a benefit as a result of the brach
this may ground inference that stranger knew of the
breach but not a necessary or sufficient condition to
draw inference
 Constructive notice is insufficient to bind someone to
give rise to personal liability
 Appellants knew of the trust (signed agreement),
knew the funds were being deposited in bank =
actual knowledge of breach of trust
 The courts will disregard the separate legal
personality of a corp entity where it is completely
dominated and controlled and being used as a
shield for fraudulent or improper conduct.
 No case since Kosmopoulous has applied preferred
just and equitable test
 a. “complete control”- requires more than ownership,
must show that the subsidiary doesn’t function
independently- in the case at bar the evidence
indicates a typical parent- subsidiary relation, no
evidence to show that CLMS is the puppet of Canada
life.
 The nature of the conduct: there is no evidence to
suggest that Canada life has any involvement in the
alleged fraud, apart from the fact that CLMS is its
wholly owned subsidiary.
 Principle affirmed in Air Canada v. ML Travel ltd.
case- a stranger to a trust may become personally
Can be liable for breach of trust if they
knowingly participate in breach of trust –
knowing assistance
Knowledge requirement is actual
knowledge; recklessness or wilful
blindness
Walkovszky
v. Carlton 18
N.Y. 2d 414,
223 N.E.2d 6
 Involves a common practice of
vesting the ownership of a taxi
fleet in many corps, each
owning one or two cabs. Ptf. is
injured by one of the cabs
registered in dft’s name as a
sub-corp part of a multiple corp
structure that operated as a
single entity, unit.
 Can the ptf. hold personally liable the sub-corps
stockholder for damages sought because the
multiple corporate structure constitutes an unlawful
attempt “to defraud the members of the public” who
might be injured by the cabs?
 The action is dismissed because cause of action
hasn’t been properly framed.

Henry
Browne &
Sons Ltd. v.
Smith [1964]
2 Lloyd’s
Rep. 476
(Eng Q.B)
 An individual who owned a
yacht transferred it to a
corporation and ordered work to
be done
 Work was not paid for and the
worker sued the individual and
was told he could not recover
because the corporation had no
assets

liable for a breach of trust committed by the trustee,
but in this case the directors were personally and
directly involved in the misappropriation of the trust
funds- the stranger involved in the breach must have
actual knowledge, be reckless or wilfully blind- in the
case at bar Canada life is in a mere innocent breach of
trust which is not enough. Therefore, no genuine issue
for a trial against it.
 To support claim of accessory, plaintiff must show a
breach of trust of a fraudulent or dishonest nature
(innocent breach wont suffice)
 Law does not impose equitable liability because the
defendant is the owner of a corporate entity which
committed the equitable wrong
 Courts will pierce the corporate veil whenever
necessary in order to prevent fraud or to achieve
equity- as per Cardozo J- whenever anyone uses
control of the corp to further his own rather than the
corp biz, he will be liable for the corp’s action “ upon
the principle of respondent superior applicable
whenever the agent is a natural person”.
 It is different to claim that the corp is a “dummy” for
its individual stockholders who in reality are carrying
out the biz in their personal capacities for purely
personal rather than corporate ends. In fact the
principle relied upon in the complaint to sustain the
imposition of personal liability is not agency but
fraud- it is not fraudulent for the owner-operator of a
single cab corp to take out only the minimum required
liability insurance, the enterprise doesn’t become
illicit or fraudulent merely because it consists of many
such corporations.
 Whatever rights the ptf. can assert against parties
other than the registered owner of the vehicle, are
justified not because he has been defrauded, but
because according to the principle of respondent
superior (vicarious liability) he is entitled to hold the
whole enterprise responsible for the acts of its agents.
 Other:
 Keating J dissenting:
 - a participating sh of a corporation vested with a
public interest organized with insufficient capital
in order to meet liabilities which are certain to
arise in the ordinary course of corp’s business,
may be held personally responsible for such
liabilities.
 As a result corporate enterprises, such as the one
in the case at bar, designed solely to abuse the
corporate privilege at the expense of the public
interest will be discouraged.
 There is no evidence to support the proposition that
Ocean Charters Ltd. was acting as an agent to Smith.
Corporate
Purpose




Dodge v.
Ford Motor
Co. 204
Mich. 459,
170 N.W.
Shlensky . v.
Wrigely 237
N.E.D.2d 776
Peoples
Department
Stores Inc.
(Trustee of)
v. Wise
[2004] S.C.J.
No. 64,
[2004] 3
S.C.R.
Corporations provide a vehicle for investment that insulates investors from the form of liability incurred by sole proprietors and partners
in partnerships
Aim of for profit corporations is to make a profit, Subject to contention over which process the co make seek out profits, whose benefit
profits are for and to whom corporation may be found liable
Contractarian vision of the corporation – shareholders are regarded as having primacy among the various corporate stakeholders
Sometimes shareholders are characterized as the principals or “owners of the firm”
 Defendant corporation was the
dominant manufacturer of cars
when this case was initiated. At
one point, the cars were sold for
$900, but the price was slowly
lowered to $440 – and finally,
Defendant lowered the price to
$360. The head of Defendant
corporation, Henry Ford,
admitted that the price
negatively impacted short-term
profits, but Ford defends his
decision altruistically, saying
that his ambition is to spread the
benefits of the industrialized
society with as many people as
possible. Further, he contends
that he has paid out substantial
dividends to the shareholders
ensuring that they have made a
considerable profit, and should
be happy with whatever return
they get from this point
forward. Instead of using the
money to pay dividends, Ford
decided to put the money into
expanding the corporation.
 Plaintiff (minority shareholder)
sought damages and an order
that defendants cause the
installation of lights in Wrigley
Field and the scheduling of
night baseball games.
 The issue is whether Plaintiff shareholders can force
Defendant to increase the cost of the product and
limit the money invested into expansion in order to
pay out a larger dividend.
 Held:
 Plaintiffs are entitled to a more equitable-sized
dividend, but the court will not interfere with
Defendant’s business judgments regarding the price
set on the manufactured products or the decision to
expand the business. The purpose of the corporation
is to make money for the shareholders, and
Defendant is arbitrarily withholding money that
could go to the shareholders. Notably, Ford did not
deny himself a large salary for his position with the
company in order to achieve his ambitions.
However, the court will not question whether the
company is better off with a higher price per
vehicle, or if the expansion is wise, because those
decisions are covered under the business judgment
rule
 The purpose of a corporation is to make a profit
for the shareholders, but a court will not interfere
with decisions that come under the business
judgment of directors.
 a business corporation is organized primarily for the
profit of the stockholders, as opposed to the
community or its employees. The discretion of the
directors is to be exercised in the choice of means to
attain that end, and does not extend to the reduction of
profits or the nondistribution of profits among
stockholders in order to benefit the public, making the
profits of the stockholders incidental thereto.
 Because this company was in business for profit, Ford
could not turn it into a charity. This was compared to
a spoilation of the company's assets.
 The court therefore upheld the order of the trial court
requiring that directors declare an extra dividend of
$39 million.

 Is there a cause of action?
 . In 1992 they acquired Peoples
Department Store, a competitor.
From 1994 their business
interests went through a
difficult time. To cut down on
costs they developed a scheme
where certain inventory would
be purchased through Peoples
and then given to Wise on
credit. Soon, Wise owed more
than 18 million dollars to
Peoples. By 1995, both Wise
and Peoples declared
bankruptcy. The creditors for
Peoples bought an action
against the Wise brothers for
breach of their fiduciary duties
as directors under section
122(1) of the CBCA by
 Did the Wise brothers breach their duty under s. 122
of the CBCA NO
 The judgment of the directors of corporations enjoys
the benefit of a presumption that it was formed in
good faith and was designed to promote the best
interests of the corporation they serve.
 There must be a fraud or a breach of that good faith
which directors are bound to exercise toward the
stockholders in order to justify the courts entering
into the internal affairs of the corporations

 There is no fiduciary duty owed by directors to
creditors when a corporation is in the nebulous
vicinity of insolvency, directors can owe a duty of
care to creditors
 The implementation of the new policy was a
reasonable business decision that was made with a
view to rectifying a serious and urgent business
problem in circumstances in which no solution may
have been possible.
 Directors and officers owe their fiduciary
obligation to the corporation
 Interests of the corporation are not to e confusd with
the interests of the creditors or those of any other
stakeholders
 Residual rights of shareholders will generally
become worthless if the corporation is declared
bankrupt
 Courts judgement explicitly states that
purpose of for-profit corporations is to
maximize profit for shareholders, it
determines that courts may interfere
with business decisions where profit
maximaization is not the primary
motivation of directors
 Court doesn’t interfere with FMC
infrastructure improvement plan.
 Fords motives not altruistic purely
 The lead plaintiffs, the Dodge brothers,
had a motive outside of their position as
minority shareholders. Their own business
competed with Defendant, and larger
dividends would have helped finance their
business while draining resources from
Defendant. There could then be an
argument that Ford’s decision was in the
best interests of Defendant corporation.
 Upon bankruptcy the directors of the corporation
transfer control to trustee who administers the
corporations assets for benefit of creditors
 Directors fiduciary duty doesn’t change when
corporation is in the vicinity of insolvency
 Any honest and good faith attempt to redress the
corporations financial problems, will if successful
both retain value for shareholders and improve the
position of creditors, if unsuccessful, it will not
qualify as a breach
 Duty of care will be satisfied where the director acts
"prudently and on a reasonably informed basis
implementing the credit
scheme.
 The Trustees argued that the
Wise brothers favoured the
interests of Wise Stores over
that of Peoples.
BCE INC. v.
1976
Debenturehol
ders [2008]
S.C.J. No. 37,
[2008] 3
S.C.R. 560
 BCE Inc. was the subject of
multiple offers involving a
leveraged buyout, for which an
an auction process was held and
offers were submitted by three
groups.
 All three offers contemplated
the addition of a substantial
amount of new debt for which
Bell Canada, a wholly owned
subsidiary of BCE, would be
liable.
 One of the offers, which
involved a consortium of three
investors, was determined by
BCE's directors to be in the best
interests of BCE and BCE’s
shareholders.
 This was to be implemented by
a plan of arrangement under s.
192 of the Canada Business
Corporations Act,[2] which was
approved by 97.93% of BCE’s
shareholders, but was opposed
by a group of financial and
other institutions that held
debentures issued by Bell
Canada.
 These debentureholders sought
relief under the oppression
remedy under s. 241 of the
CBCA.[3]
 They also alleged that the
arrangement was not “fair and
reasonable” and opposed s. 192
approval by the court.
 Their main complaint was that,
upon the completion of the
arrangement, the short‑ term
trading value of the debentures
would decline by an average of
20 percent and could lose
investment grade status.
 Did directors breach their fiduciary duty to
shareholders? NO, Peoples expanded
 Fiduciary duty of the directors to corporation
originated in common law and it is a duty to act in
the best interests of the corporation
 Often, the interests of stakeholders and shareholders
coincide, but if they conflict, duty of directors is to
the corporation peoples
 Fiduciary duty of the directors is broad and
contextual concept, not confined to short term profit
or share value.
 Directors must look to the best interests of the
corporation
 Courts should also give appropriate deference to the
business judgement of directors who take into
account these ancillary interests as reflected by the
business judgement rule.
 Business judgement rule accords deference to
business decision so long as it lies within a range of
reasonable alternatives
 Fundamental rule is that duty of the directors
cannot be confined to particular priority rules,
but is rather a function of business judgment of
what is in the best interests of the corporation, in
the particular situation it faces
 Best interests of the corporation arguably favoured
the acceptance of the offer at the time
 Directors decision is found to have been within the
range of reasonable choices that they could have
made in weighing conflicting interests, courts will
NOT go on to determine whether their decision was
the perfect one
Corporate
Obligations
The Rhone v.
The Peter
A.B. Widener
[1993] S.C.J.
No. 19,
[1993] 1
S.C.R. 497,
101 D.L.R.
(4th) 188
 Person can incur obligation in three ways:
1. May incur obligations to other people based on on duties recognized in tort law to other people based on duties recognized in tort law or
contracts
2. Agency: if an agent contracts according to your instructions, then you are bound to a contract (liability is CONSENSUAL) in the send
you authorized your agent to bind you, agent generally not a party to contract)
3. If your agent commits a tort within the scope of the agency then you are liable to the victim on the basis of vicarious liability respondeat
superior (liability is NON consensual, agent liable in tort as well)
 Two Theories on Corporate Obligation
o
1) Concerned with identifying a particular human brain that could be said to have been operating as the corporate mind in particular
circumstances Brain WAS the corporate brain so corporation incurred liability personally (used in criminal and tort law cases)
DIRECTING MIND
o
2) Individuals acting as corporate agents (concerned with the scope of the corporations ability to avoid external liabilities by pleading
limitations on its agents powers (used in contract and most tort situations) AGENCY
B. Crime and Tort: Establishing Corporate Mens rea
 A corporation has an existence and can be summoned before the courts
 Corporation is vicariously liable like any other employer for torts of its agents
 Vicarious liability does not apply to situations of criminal liability (can’t be criminally liable for acts of another)
 Many prohibited acts are criminal only if mens rea the elusive guilty mind can be proved on part of accused
 Liability in tort does not usually depend on any state of mind, and so vicarious liability reasoning usually provides a solution
 Common Law Test
o
Proving someone’s mens rea is a criminal law problem
o
Corporate law problem is whether the guilty mind of some individual can be proved to have been the corporate mind in the circumstances
 The peter caused a shipping
 Is the maser of the tug the directing mind of the
 Onus is on the ship owner claiming the limitation to
accident, under Captain Kelch
corporation (to limit liability?) NO
establish a complete absence of actual fault or privity
who worked for the
 Are Captain Kelch’s faults essentially the actual
on its part
corporation that owned the
faults of Great lakes by reason of his position
 Not discharged by showing merely that the owner
vessel
within the corporate hierarchy of appellant
was not the sole or principal cause of the mishap
 Great Lakes Towing Co.

Actual fault or privity is something personal and
wanted to limit its liability
blameworthy to a shipowner as opposed to a
under vicarious liability
constructive fault arising under the doctrine of
principle in the CSA where a
respondeat superior
provision operates to limit
 In case of corporate ship owner, necessary to
liability only if the damage
consider whether the acts of an individual give rise to
was caused without the actual
liability should be attributed to that of the company
fault or privity of the owner of
itself
the ship
 If owner was at actual fault, it
 Mere fact that a manager exercised limited discretion
bears unlimited liability
in the performance of his assigned role did not render
him part of the directing mind of the company
 Focus of the inquiry must be whether the impugned
individual has been delegated the governing
executive authority of the company within the scope
of his or her authority
 Is the discretion conferred on an employee an
express or implied delegation of executive authority
to design and supervise the implementation of
corporate policy rather than to simply carry it out
 Negligence of master of ship does not amount to
actual fault or privity on ship owner
 From the evidence, CK was a port captain subject to
the supervision and direction of Captain Lloyd
 Key fact which distinguishes directing minds from
normal employees is the capacity to exercise
decisions-making authority on matters of
corporate policy, rather than merely to give effect
to such policy on an operational basis, whether at
head office or across the sea
 Notion that corporation can actually make
a decision to commit a crime is difficult to
grasp (doesn’t have a heart or mind
itself…so how to find requisite intent)
 Courts resolve this by using relationship of
agency, if agent commits a crime in the
course of her duties, then corp could be
responsible for this persons actions as if it
was a criminal act of its own
 Attach vicarious responsibility of acts of
others is through directing mind notion
and through agency relations
 Aggregation theory has not been used in
any of the tort cases and Canadian Dredge
has not been applied to criminal
Notes:
 Privity, so closely involved that they are
part of it
 Pg. 229 (mixed fact and law) save for right
of appeal
 If Iacobucci said it was just a question of
act, he would have to take that fact as a
given, and arrive at decision based on fact
or appeal as an egregious error
 Necessary for appeal courts to provide
themselves with jurisdiction to overturn, if
the facts they don’t like they say mixed
fact and law
 Criticism of Tesco makes it more difficult
to attach criminal responsibility to the
corporation
 More than one directing mind, can
broaden scope of what it means to have a
directing mind
 Very often where corporation is not
particularly responsible, kind of innocent
and person hit or injured is very innocent
 Trying to find the least responsible out of
two not very responsible people
 Generally the actions of someone else who
the corporation will argue it didn’t have
control over and innocent 3rd party will say
they are more responsible than anyone else
 Identity doctrine – all of the people can be
merged into, can get bits of authority, and
can’t quite work out directing mind but
has to be in there somewhere
 Can find a directing mind by adding bits
of a lot of people and finding in those bits
a directing mind somewhere,
 If you can aggregate a number of people it
makes it easier to find a corporation
responsible
 Only going to look and be flexible if they
want them to be responsible for the
criminal act
 In Tesco, courts were more lenient with
corporations saying it was hard to be
control of situation when its so far from
head office
 Elusive notions because they exists solely
to find or not find responsibility
Criminal
Liability:
Mens rea
Offences
 SCC accepted the use of the directing mind and will test but applied it more flexibly than Tesco
 Can we find somewhere in the corporation a directing mind of the corporation such as to attach criminal responsibility to the corporation (how to
resolve criminal issues about corporations and SOME tort questions) (NOT used in contractual responsibility)
 Courts must consider the who has been left with the decision making power in a relevant sphere of corporate activity
 Court held in Canadian Dredge & Dock Co. there could be a defence that the relevant individual was acting entirely for his own account and
against the interests of the corporation (limited defence to situations where the corporation was not intended by the individual to derive any benefit
from the individual’s actions and furthermore did not in fact derive any benefit exclusively them
 Criminal Code provisions s 22.2 stipulate how an organization is to be made criminally liable (negligence and fault other than negligence (mens
rea))
 Difficulty in identifying a single directing mind, if you can identify the potential for more than one could say that in the corporate structure there is a
directing mind – cant pin all on one person but corp as a whole (legislative provision makes it easier to find directing mind
 If you know that somebody in the organization (22.c) is about to commit or has commit an offence and you don’t take all reasonable steps to stop
them, that’s one way corporation will be found responsible
 Provisions 21(1) 22(2) not exactly clear what they achieve (clear what they attempted, but not to what they did achieve)
R v.
Fitzpatrick’s
Fuel Ltd.
[200] N.J.
No. 149
(Prov. CT)
 Corporation was licenced to sell beer and
charged with selling beer to a minor. PF was
sole shareholder, director and officer + two
employees who worked alternating shifts
aloe and unsupervised.
Constitution
al
Restrictions
on a
Corporation’
s Abilities
Communities
Economic
Development
Fund v.
Canadian
Pickles Corp
[1991] S.C.J.
No. 89,
[1991] 3
S.C.R. 388
 Should the company be held liable for the
wrongful actions of the clerk? Yes
 The Act under which the offense was
committed was public welfare legislation –
strict liability offense
 The sole employee acted within the scope of
the criteria set out by Estey – action was
partially to the benefit of the corporation
 Corporations are ‘staples’ in the delivery of
modern congress – essential for that
purpose and must be rigidly controlled –
because of this there is an obligation to
employ trustworthy staff and supervise that
staff
 Constitutional documents whether crown patent, special statute or articles filed under a general enabling statute may expressly or impliedly prohibit
certain corporate endeavors
 Idea was that ultra vires would protect shareholders so they know their investment would be used for a specifically stated purpose (wouldn’t waste
its cash on activities that are outside the corporations power) (protect predators under doctrine of constructive notice are not taken to know powers
of corporation but risking that the corporations powers were being used beyond the corporation because the constitutional document of the
memorandum of association were public )(didn’t read? Didn’t know? Accept risk that they are different)
 Doctrine of constructive notice
 Creditors found themselves in situations where they were not getting paid
 2 possible interpretations of a statutory interpretation
o
Intended result can’t occur – (impossible to contract to murder)
o
Activity sanctioned by criminal punishment: ( no one thinks outlawing murder makes it impossible)
 19th century – any activity beyond corporate objects was described as being ultra vires the corporation
 A special act corporation – the corporation
 Is the loan ultra vires the corporation’s
 The doctrine of ultra vires is applied to
under the statute was directed to make loans to
constitution? YES
common law corporations, those created by
businesses in certain kinds of underdeveloped
statute, memorandum corporations, letters
areas
patent corporations, as well as special act
corporations
 In making the loan, the corporation demanded
personal guarantees be given by the principles
 Special Act – created by a statute of the
of the defendant – there was a default
particular jurisdiction in which they are
Defense – loans had been made and they were
functioning
ultra vires the corporation as the corporation
 Due diligence requires that one undertake to
was engaged in business in a jurisdiction not
uncover how a corporation has been
defined within the corporate constitution
incorporated
Context: constitutional (incorporating)
documents may expressly or impliedly
prohibit certain corporate endeavors
The doctrine of ultra vires has been abolished
by statute for corporations incorporated
under the business corporations legislation in
most Canadian jurisdictions
 The loan was ultra vires.
 However, there was unjust Enrichment
 Courts have consistently applied the
doctrine of ultra vires to special act
corporations if they undertake an act outside
the scope of the legislation
 All cases of ultra vires involves an
interpretation of the instrument that creates
the corporation

Corporation acting outside the scope of it
constitution acts ultra vires
The Canadian
Constitution
Some Residual Problems
 Corporation might be deprived of contractual capacity by a deficiency of legislative power in the incorporating jurisdiction
 Some subject matters are beyond the legislative capacity of the provincial legislature and some are exclusive to the provinces and beyond federal parliaments capacity
 An matter beyond the legislation capacity of a parliamentary body cannot be pursued by a business corporation owing is existence and scope of activities to laws, whether
general or particular passed by the legislative body
Contracting
Through
Corporate Agents
 Corporation has an ongoing relationship with the agent; the outsider negotiates with the agent; the outsider claims that the negotiations created a contract with the
corporation
 Object is to ascertain whether the agent can be proved to have been the appropriate type of agent through whom to arrange contract of that type
 If outsider can’t prove allegation of authority, there is no contract between outsider and corporation
 If can prove authority, corporation is bound as a principal on whose behalf the agent contracted with outsider
Proving Corporate Contracts in Canada
A) Actual authority at common law
 If agent has actual authority to perform function x an outsider may deal with her in respect of that function as if the agent were an extension or manifestation of the
principal’s own personality
 If outsider can prove agent had actual authority they may get to rely on what the agent said as binding on the corporation
Agent may get actual authority from his principal in 3 ways
1. Agent may have express actual authority: Principal may have said in no uncertain terms to the agent “you perform x”
 Not often invoked in cases involving outsiders’ contracts
 Cases in which actual authority has been proved often involved corporate disputes with individuals who had some position with the corporation (not like most
outsiders)
 Often difficult for outsider to get access to evidence concerning the relationship between principal and agent
 Judicially created concept of “ostensible authority” or “apparent authority” is more useful for outsider
2. Agent may have implied actual authority: verbal or non verbal exchanges between principal and agent might have been interpreted by the agent as authorization to do x
3. The agent may have been given actual authority retroactively by the principal’s ratification or adoption of what the agent did in excess of his actual authority
(essentially principal chooses to forgive agent and accept the agreement then breach of authority will be regarded as retroactively healed)
 Ratification is impossible if the unauthorized agent purported to act as a principle
 Freeman and Lockyer (referenced in Schwartz) (the test, but not the clearest statement of principle)
 Apparent or ostensible authority is a legal relationship between principal and contractor created by a representation, made by the principal to the contractor
intended to be and in fact acted on by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a king within the scope of
the apparent authority so as to render the principal liable to perform any obligations imposed on him by such a contract
 Has to be intended to acted upon, and in fact acted upon (holding out has to be done with the purpose that it be acted upon and acted on.
 Representation has to be that the apparent agent has the kind of the authority that an agent in that situation as they normally would
 Certain things are indicated to third person that this agent is an agent, not from a contract (can even say not an agent)
 2nd holding out is by the corporation to Mr. Schwartz to the third party (third party to agent)
 Holding out between Mr. Rideout and Mr. Schwartz (agent to third party)
 Agent doesn’t play a role in the ostensible authority (simply a representation)
 When there is an estoppel they are prevented from denying certain facts.
 Not a rule of substantive law, it’s a procedural matter (rule of evidence)
 Estoppel will arise in agency cases where the plaintiff is asking for the corporation to be estopped from asserting something like (he is your agent)
 Corporation is prevented from denying he is not their agent (not that he IS, but that they can’t deny that he is not an agent)
 If you are faced with an estoppel you can’t deny some contrary statement (plaintiff cannot say you ARE an agent, only that corporation cannot deny)
Statutory Reform
 Whether corporate agent had actual authority will depend on the facts in each particular case
 Whether outsider can establish the perquisites to ostensible authority is also based on facts
 Facts of case is really about what evidence can be presented
 Canadian statutes set up a statutory rule that lists certain types of facts that corporations will not be permitted to assert against an outside
 As result, whether a corporate agent lack actual authority in a case is usually not disputed

 In statutory changes affecting ostensible authority, leg tried restate and qualify Freeman provision
Schwartz v.
Maritime Life
Assurance co.
[1997] N.J. No. 77,
149 Nfld. & P.E.I.R.
234 (C.A)
Ostensible Authority
at Common Law
 P gave Rideout money for
investment, which was
expropriated.
 P wants to go after D saying R
was acting as an agent to bind
the company
 Was Rideout an agent
or representative of he
respondent when he
received the money
from appellant? YES
 Whether principal/agent relationship exists depends on the nature of the authority granted, or deemed to
have been granted, by the principal to the agent
 Apparent or ostensible authority is a legal relationship between principal and contractor created by a
representation, made by the principal to the contractor intended to be and in fact acted on by the
contractor, that the agent has authority to enter on behalf of the principal into a contract of a king within
the scope of the apparent authority so as to render the principal liable to perform any obligations
imposed on him by such a contract
 Agency can also arise by principle of estoppel (where a person by his or her words or conduct has
allowed another to appear to the outside world to be his agent, with the result that third parties deal with
him in this capacity, that person cannot thereafter repudiate this apparent agency if doing so would hurt
third parties)
 No express authority was ever granted by the respondent to Rideout to bind respondent
 Agreements between R and D illustrate non binding (P must establish R did something which would
allow him or lead him to believe he did have the authority and he relied on it)
 Letterhead used by Rideout must be deemed to have been intended by the respondent to be
communicated to members of the general public including the appellant
 Rideout held himself out as representing the respondent and letterhead with respondents name shows
that agreed he did so
 Could not be expected that public would be aware that Rideout did not hold the authority to bind
appellant
 Marshall (Dissenting)
 On whose behalf was Rideout acting in holding the money (Dual agency issue)
 Rideout was an agent of Maritime
 Rideout had no express authority to allow him to affect Maritime’s legal position, but did with
Schwartz
 D gave Rideout authority to enter into a binding agreement while Maritime had not empowered
him to bind it
 When money was turned over to Rideout it was taken to have been held by him on D’s behaf
pending Rideout obtainging the annuity investment on the terms of which the deposit was
conditioned.
 When theft happened, there was no contract with Maritime and insurance company could not
have a claim of entitlement to it.
 D could have claimed right to return up until maritime accepted
 D was owner of the funds and was entitlted to them at the time of the theft and must bear the
consequential loss from agent’s dishonesty
 Apparent authority is not a basis to rely on the ostensible principle
 Case is that there is no belief by D in Rideout’s authority from Maritime and therefore no causal
connection between any holding out of Rideout by Maritime as agents (therefore Maritime isn’t
liable)
Corporate Name
 Prior to all documentation taking place, to incorporate, people interested in forming corporation, person who intends to bring corp to life will go out and do things prior to it being a legal entity (buy photochopy machine,
rent an office, factory, inventory ordered)
 Will do so in personal capacity, or do so purporting to act for a corporation not yet/soon to be incorporated
 What is the nature of this transaction? (made by corporation that does not exist)
 First question – who are the two parties
o
We know one exists (guy selling stuff) (outsider)(third party)
Who is this guy contracting with?
o
Objective intention of the promoter?
BC and CBCA have attempted to deal with ambiguity and uncertainty
Legislation allows corporation to adopt the contract (statutory ratification on the part of the corporation even though it was not in existence at the time the transaction was made)
S.1.14 provides that a promoter before it comes into existence will be personally responsible (as if they were the party) s.2 if the corporation comes into existence and adopts the contract, it takes the benefits and
responsibilities of that contract and the agent comes out of the picture MUST BE CONTRACT TO ADOPT
What if no contract to adopt? Nothing do to!
CBCA permits third party apportioning liability between corporation and promoter regardless if corporation adopt the contract
Case Footnotes:
 A is not liable in a contract where A and O mistakenly thought corporation existed but they are also NOT entitled to the benefit either Newborne v. Sensolid (Great Britain) Ltd
 C.B.C.A. s.14(1) nearly identical to OBCA s.21(1) until 2001 (although CBCA excludes oral contracts) when words were added “enters into or purports to enter to”
 C.B.C.A. s. 14(2) is almost identical to the wording of O.B.C.A. s.21(12)
 CBCA only apply to written contracts, so old common law rules still apply to oral contracts made by or on behalf of the corproation
Welling:




Standard business practice to arrange for goods/services to be supplied between the time of the idea of the corporation and the time of issue of the certificate of incorporation
Whether an agreement concluded prior to the existence of a corporation constitute a contract is a question of law
Can’t label it to make it a contract
When two parties AGREE what will happen following the creation of a third person (corporation),
1.
Ask whether hose two parties or he corporation were INTENDED to incur legal obligations (use points of contract law)

Under Common law, if A acts on behalf of future C to create a contract with O(outsider)
o If A and O are in agreement that contract will be with corporation O, Contract Fails (cant be party to a contract if it doesn’t exist)
o If A seeks a contract between Corporation and O and O seeks a contract with A and O Contract Fails (contract requires agreement to at least its fundamental terms)
o If contract is to be created between A and O, THEY must be parties and a common intention that A is to be personally liable
o Difficult when both parties know the corporation doesn’t exist
Relevant Section

Under both CBCA and OBCA an adoption must be within a reasonable time following incorproation
14. (1) Subject to this section, a person who enters into, or purports to enter into, a written contract in the name of or on behalf of a corporation before it comes into existence is personally bound by the contract
and is entitled to its benefits.
Pre-incorporation and pre-amalgamation contracts
(2) A corporation may, within a reasonable time after it comes into existence, by any action or conduct signifying its intention to be bound thereby, adopt a written contract made before it came into existence
in its name or on its behalf, and on such adoption
(a) the corporation is bound by the contract and is entitled to the benefits thereof as if the corporation had been in existence at the date of the contract and had been a party thereto; and
(b) a person who purported to act in the name of or on behalf of the corporation ceases, except as provided in subsection (3), to be bound by or entitled to the benefits of the contract.
Application to court
(3) Subject to subsection (4), whether or not a written contract made before the coming into existence of a corporation is adopted by the corporation, a party to the contract may apply to a court for an order
respecting the nature and extent of the obligations and liability under the contract of the corporation and the person who entered into, or purported to enter into, the contract in the name of or on behalf of the
corporation. On the application, the court may make any order it thinks fit.
Exemption from personal liability
(4) If expressly so provided in the written contract, a person who purported to act in the name of or on behalf of the corporation before it came into existence is not in any event bound by the contract or
entitled to the benefits thereof.
CBCA
BCBCA
Pre-incorporation contracts

Rather than making A bound by the contract and entitled to the benefits thereof, sections deem A to warrant to O that the corporation will be formed and that it will adopt the contract within a reasonable time

Also say that A will be liable to O if the warranty is breached and that the measures of damages will be the same as if the corporation had existed but had given no authority to A and had refused to ratify the
contract

Sections provide expressly for an unjust enrichment like liability of a corporation that receives a benefit under a pre-incorporation transaction but fails to adopt the transaction within a reasonable time

Doesn’t really add anything to common law of unjust enrichment, in fact more restrictive since it doesn’t provide for any unjust enrichment liability of O or A

Promoter, rather than being liable under contract itself, is liable for breach of warranty of authority if the corporation does not come into existence and adopt the contract within a reasonable time unless the
liability is expressly excluded

Shelf Corporations:
o Corporations created by lawyers but do not carry on a business.
o When a client wants a new corporation the lawyer transfers the shares of an existing “self corporations” to the client as a quick alternative to creating a new corporations
20 (1) In this section:
"facilitator" means a person referred to in subsection (2) who, before a company is incorporated, purports to enter into a contract in the name of or on behalf of the company;
"new company" means a company incorporated after a pre-incorporation contract is entered into in the company's name or on the company's behalf;
"pre-incorporation contract" means a purported contract referred to in subsection (2).
(2) Subject to subsections (4) (b) and (8), if, before a company is incorporated, a person purports to enter into a contract in the name of or on behalf of the company,
(a) the person is deemed to warrant to the other parties to the purported contract that the company will
(i) come into existence within a reasonable time, and
(ii) adopt, under subsection (3), the purported contract within a reasonable time after the company comes into existence,
(b) the person is liable to the other parties to the purported contract for damages for any breach of that warranty, and
(c) the measure of damages for that breach of warranty is the same as if
(i) the company existed when the purported contract was entered into,
(ii) the person who entered into the purported contract in the name of or on behalf of the company had no authority to do so, and
(iii) the company refused to ratify the purported contract.
(3) If, after a pre-incorporation contract is entered into, the company in the name of which or on behalf of which the pre-incorporation contract was purportedly entered into by the facilitator is
incorporated, the new company may, within a reasonable time after its incorporation, adopt that pre-incorporation contract by any act or conduct signifying its intention to be bound by it.
(4) On the adoption of a pre-incorporation contract under subsection (3),
(a) the new company is bound by and is entitled to the benefits of the pre-incorporation contract as if the new company had been incorporated at the date of the preincorporation contract and had been a party to it, and
(b) the facilitator ceases, except as provided in subsections (6) and (7), to be liable under subsection (2) in respect of the pre-incorporation contract.
(5) If the new company does not adopt the pre-incorporation contract under subsection (3) within a reasonable time after the new company is incorporated, the facilitator or any party to that preincorporation contract may apply to the court for an order directing the new company to restore to the applicant any benefit received by the new company under the pre-incorporation contract.
(6) Whether or not the new company adopts the pre-incorporation contract under subsection (3), the new company, the facilitator or any party to the pre-incorporation contract may apply to the
court for an order
(a) setting the obligations of the new company and the facilitator under the pre-incorporation contract as joint or joint and several, or
(b) apportioning liability between the new company and the facilitator.
(7) On an application under subsection (6), the court may, subject to subsection (8), make any order it considers appropriate.
(8) A facilitator is not liable under subsection (2) in respect of the pre-incorporation contract if the parties to the pre-incorporation contract have, in writing, expressly so agreed.
Kelner v.
Baxter (1866)
L.R. 2 C.P.
 K was to be manager of
new hotel, and
contracted for goods
before incorporation
with D's
 D had no
principal…they entered
into K on behalf of the
 - Does entering on behalf of
the hotel prevent the
defendants from being bound
by the K?

 Only those party to contract can sue/have rights that arise out of it
 If the contract is not made with corporation, its out of the picture, only person left is the agent or the
promoter
 Agency principle, a person who is not in existence at the time the agent makes the contract cannot ratify the
contract made by the agent
 Corporation can’t come along later and say its my contract if it didn’t exist at the time
 Objective intention of the parties is that someone should pay and if no corporation, who can pay? Only
agent (uses objective intention)
In later cases point is
asked whether it is a
rule of law that the
agent will be
responsible?
Only in which a
responsible person
 Wine was supplied
 Corporation didn’t exist at the time
hotel

Court relates to agency law:
o Claims that general rule of agency where a K is signed by one who professes to be an agent, but who has
no principal existing at the time, and K would be inoperative unless binding upon the person who signed
it, he is bound thereby
o Cannot be an agent if principal does not exist, and this does not change just because a “principal” later
ratifies the contract
o Must be two parties to a contract, rights and obligations cannot be transferred to a third that does not yet
exist
R: General common law position is that the corporation cannot enter a contract before it is formed;
therefore, if a member signs on behalf of a company that doesn't exist, they may be bound
personally
Black v.
Smallwood
(1966), 117
C.L.R. 52, 39
A.L.J.R.
 Both parties sign K for
the sale of land with
mistaken belief that the
company came into
existence
 Vendors sue for specific
performance

Szecket v.
 H approached S with a
Huang
development proposal in
[1988] O.J.
Taiwan
No. 5197, 168  Agreement signed
th
D.L.R. (4 )
purported to be between S
402 (C.A)
and H(acting on behalf of
the company to be formed)
 Transaction never
completed and proposed
company was never
formed
 S sued for breach of
contract
 H denied personal liability
 TJ found there was
common law contract
between S +H and applies
21 of the OBCA
 Are the purchasers bound?
 Can H be held personally
liable
 Yes! (21.1) applies
 No, for D, contracting party didn't exist, so K was a nullity, and claim for specific performance fails
 No consensus as to the parties to the transactions
 No agreement to who the parties to the contract was
 High Court of Australia holds that Kelner doesn't stand for the proposition where a person on behalf of a
non-existent principal is liable for the contract
o In Kelner, the parties intended that the corporation would pay, but also intended that if the
corporation did not, then the D would pay personally – the D was the buyer of the goods
o Buying “on behalf of” another party does not mean that you are not buying them, you are
o Here it was not the intention of the D to be bound personally…ie: both parties thought the
company existed
 Instead, intention of the parties to be bound is critical
o Court looks for anything in the writing inconsistent with the conclusion that the defendants
should be bound personally
o Here, intention of the parties was not that the individuals would be bound, and since it was with a
corporation, a K with a non-existent entity is no K at all
o Note P may have succeeded in a claim for breach of warranty of authority, but didn't plead it
R: - The fundamental question in pre-incorporation contract cases is what the parties intended or
must be understood to have intended

 H knew and intended that H and his associates were contracting on behalf of a company to be incorporated
 Legislature intended to remedy common law problems with pre incorporation contracts with section s.21(1) of
the O.B.C.A
 Under this, Personal Liability is established and prevails unless either contracted out of pursuant to
s.21(4) or displaced by the adoption of the contract by the company subsequent to its incorporation
pursuant to s.21(2)

would think the
contract is intending
to make an agent
responsible
Differentiated Kelner
1394918
Onario Ltd.
v. 1310210
Ontario Inc.
[2002] O.J.
No. 18, 57
O.R. (3d)
 D co agreed to sell
property in land to R in
trust for company to be
incorporated and not in his
personal capacity
 Agreement was to become
null and void if purchaser
did not complete the
transaction within 120
days
 119 days after the
agreement was signed, D
Co said agreement was
null and void
 R wants damagers for
unlawful repudiation
 After two weeks P co was
incorporated and R
quickly attempted to
assign his rights under the
contract
Sherwood
 Agreement to sell assets of  Did the Corporation adopt the
Design
Sherwood
contract YES
Service Inc v.  Memorandum of
 What constituted any action or
872935
agreement was signed by
conduct signifying the
Ontario Ltd.
the individual defendants
corporations intent to be bound
[1998] O.J.
in trust for corporation to
by the pre-incorporation
No. 1611, 39
be incorporated
transaction?
O.R. (3d) 576  872935 was incorporated
 What is the correct application
(C.A.)
after the agreement was
and interpretation of s.21
signed by a partner at a
law firm acting for the
defendants who was its
first and sole director
 Lawyer indicated by letter
to the Sherwood that they
would complete the
purchase
 No shares were issued and
there were no shareholders
 The issuing of the shares
of the new corp never
happened
 872935 backed out of the
deal and the firm decided
to use it for other purposes
and shares were issued to
other clients of the law
firm
 S.21 of the OBCA was intended to replace common law
 Section should be read on its own terms and in an interpretative context of the purpose it was intended to
fulfill
 Scheme shouldn’t be used to thwart common law on contracts that requires to parties and co-existent liabilities
 If s.21 calls for liability absent those features, those liabilities must flow and the contract referred to must be
treated as a statutory creation
 Commercial business concerns inform 21
 Section is directed at meeting the needs of a party who wishes and has negotiated for liability to be assumed
by a yet - unincorporated corporation
 21.1 binds the promoter personally by the contract and entitled to its benefits, either party can sue on the
other’s breach
 Prior to incorporation and adoption, A is not personally bound or entitled to the benefits of the contract
 He is described as a functionary, performing duties as assuring that any necessary inspections of property or
tittle are pursued and that the deadlines are met and defaults avoided which might excuse the third party from
the obligations
 Corporation does not exist or has not adopted the contract and thus is not bound by it or entitled to its benefits
 Entity called a contract under statute but no one is entitled to sue for its breach (not that the ongoing
obligations can be ignored
 Entitlement of the corporation must depend on its adoption of the contract if there was anything left to adopt
 Position in Canada is that contractual obligations continue to exist after accepted repudiation
 Accepted repudiation terminates the contract (only future obligations under the contract are
extinguished)
 Accrued obligations under the contract still exist in the form of a secondary obligation to pay damages

 Corporation held liable for breach even though it had never been controlled by anyone involved in or aware of
the transaction
 No specified manner of adoption  No need to impose stringent formality
 Letter was sufficient to indicate intention of part of corporation to be bound
 Act of conduct that signifies the intention of the corporation to adopt the contract need not involve
communication with O. (could result in O reaching the contract because O has no idea for whom to perform
the acts specified in the contract)
 Irrelevant that at the moment the letter of intent was sent the company was not actually transferred to the
individual purchasers
 It was in existence and identified as being designated for the purpose of closing purchase and only awaited the
formal documentation transferring the shares
Dissent (Borins J.A)

No evidence that corporate defendant signified an intention to adopt the agreement entered into by
the individual defendants

Corporate defendant was not bound by pre incorporation contract, individual defendants were

Whatever conduct or action signifies intention to be bound must be that of corporation

Letter did not constitute act of corporation, was the lawyers

F was sole directing mind of the corporation and took not action on co’s behalf

Corporation could not have adopted the contract since the draft documents indicated that the control
of the corporation had not yet been transferred to the purchaser

If the corporation was not under purchasers control could not cause it to adopt the contract

Lawyers communication at most would be notice of an intention to transfer control and then to have
the corporation adopt the contract at a future date

Ince adoption never occurred, the corporation could not be liable
NOTES:
 Followed by Gurdev Holdings Ltd. v. Schmidt [2009] B.C.J. – held the adoption by the corporation had
occurred without any formal notice to that effect where O had executed contractual documents identifying
the corporation as the other party to the contract

Notes:
Prior to this case,
courts did not find
that s.21 created a
statutory contract
and continued to
apply the common
law distinction
between Black and
Kelner
Design Home 
Associations
v. Raviv
 What is the meaning of “any
action or conduct signifying an
intention to be bound
 Corporation had adopted a lease signed by some individuals prior to incorporation based on a
subsequent request by the corporation to have correspondence relating to the lease directed to it, paying
the rent called for under the lease and requesting an assignment of the lease

What approach have courts taken in dealing with pre incorporation transactions?
What are they doing with legislation?
Look to intention, look at the fact that legislature was trying to remedy effects of the common law.
Judges have taken this activism out of the legislation which doesn’t really provide for it
What if its pre-incorporated but never established? Do statutory provisions apply?

Eg promoters made contracts on behalf of corporations that are going to be established in the future

If never been incorporated, can’t be a transaction that is a pre-incorporation transaction

Protection to the third party

Corporation, or promoter or both should be responsible for what is seen as misrepresentation (promise that didn’t turn out)

Corporate
Management
Mace + Welling
 Law focus on directors and the role of directors, but not what happens within corporations
 Primarily historical reasons for that
 Only time shareholders focused on when courts considered best interests of corporations from best interest of shareholders
 Know from Hollinger Salomon just because something is in the best interest of the shareholders doesn’t mean the directors must do it
 Rise of institutional investors
 People who look after my investments (pension funds etc)
 California Teachers Pensions Funds  had a lot of money in ENRON
 Decided to pull investment out of Enron, which they did
 Instead of exercising its rights as shareholders it just snuck away
 After Enron, legislative intervention in the US and Canada to try to do something about these situations
Directors




Would think they do objective strategies or policies
Obligation they must perform
Will see lots of that in the videos
Independent director is simply a director that is not a senior manager of the corporation (from outside the corporation) appointed and elected by the shareholders to bring a
different perspective other than senior management

Problem is they are not independent really (directors of other corporations often, CEO of other corporations, same social standing)

Corporations are entities designed to be and established to be profit maximizers, why would they be paying them lots of money to do nothing if they are maximizing
profits

Distinction drawn between practices required by stock exchanges, requiring a certain number of independent directors with the expectation that these directors will pay
more attention and actually act as directors.

How will a corporation work out how much to pay their directors? Whose legal responsibility is that

Directors have the power and responsibility to manage or supervise the management of the corporations (how much they get paid is the decision of the board of directors)

Hard conflict of interest to avoid

Also decide how much officers get paid, and officers have a role in deciding how much they will be paid

Problem not fixed easily unless you have someone outside the corporation

Checks and balances  Market, Market analysts (threat is that they will buy those shares and take over the corporation and run it in such a way to make money)

When exercising fiduciary duties = best interests of the corporations with reasonable grounds for believing so, utmost good faith and loyalty

Will be a tipping point

If you’re a shareholder and you don’t like what is going on in the corporation (LIKELY EXAM QUESTION)
o Duty of care is a statutory duty predicated on common law
o In Quebec, civil law notion of duty of care and negligence and fault is linked in with CBCA provision
o Excepted to act at the standard of a reasonably prudent person
o Peoples from common law perspective, CL says before statutory provision, plainly dragged up duty of care
o Common law was super low, dragged up to reasonable person
o Articulation of the duty of care of members of boards of directors is not designed to ensure that the decision and directors are high as possible
Next time contrast Soper and peoples department
Look at directors fiduciary obligations, (other directors duty issues which allow us to control the quality of actions)
Read most of fiduciary duties materials in one go
North west transportation
Only effective remedy is that they give back the benefit they acquired because it was not rightfully theirs (disgorge profit)
Soper v.
 Corporation went
 Was Soper Liable? Yes
Canada [1997]
bankrupt and directors
F.C.J. No 881
didn’t correctly file
taxes
 Director could avoid
liability if they
exercised care under
s.277.1(3)
 Crown wanted to make
him liable
Duty of Care Owed by
Director…(Subjective/Objective Standard)
 A director need not exhibit in the performance of
his or her duties a greater degree of skill and
care than may reasonably be expected from a
person of his or her knowledge and experience.
 The standard is partly objective (standard of the
reasonable person), and partly subjective in that
the reasonable person is judged on the basis that
he or she has the knowledge and experience of
the particular individual.
 Not enough to say they did their best, but also
not held to professional standard
 Director not obligated to pay continuous
attention to the affairs of company, or attend all
meetings although if its possible they should do
so

Peoples
Department
Stores In .
(Trustee of) v.
Wise [2004]
S.C.J no.64
 The indebtedness of a
number of People’s
creditors went
unsatisfied. In the wake
of the failure of the
chain, People’s trustee
in bankruptcy brought
an action against the
directors of Peoples.
 Whether directors
of a corporation
owe a fiduciary
duty to the
corporation’s
creditors
comparable to the
statutory duty
owed to the
corporation.
 No liability
 Directors owe a duty of care to creditors but NOT a fiduciary duty
 Court acknowledged that s.102 of the CBCA provides that directors elected by the
shareholders are responsible for managing it (shareholders do not actually own the
corporation)
 S.122 of the CBCA establishes two distinct duties to be discharged by directors
and officers –
1.
Fiduciary duty (duty of loyalty) (act honestly and in good faith with a
view to the best interests of the corporation
2. Duty of care – legal obligation upon directors and officers to be diligent
in supervising and managing the corporations affairs
 Wise brothers cannot be held contractually liable because they didn’t guarantee
debts
 Extra-contractual liability is only possibility
 Emphasizes that the standard is objective to make it clear that factual aspects
surrounding the actions of the director or officer are important in the case of the
duty of care.
 Contextual approach of s.122(1)(b) of the CBCA emphasizes primary facts and
also permits taking into account socioeconomic conditions
 Canadian courts have developed rule of deference to business decisions
 In order for a plaintiff to succeed in challenging a business decision have to show
that the directors a) breached their duty of care b) breached the duty in a way that
caused injury to the plaintiff
 Directors will NOT be held liable s.122(1)(b) for breach of duty of care if they act
prudently and on a reasonably informed basis
 Decisions must be reasonable decisions in light of all the circumstance about
which the directors have acted in a manner that breached the duty of care
(perfection not demanded)
 Implementation of the wise brothers procurement policy was a reasonable business
decision with a view to rectifying a serious and urgent business problem that had
no other solutions
 Court discussed the Wise brothers seeking advice of financial VP
 Recognized that courts cannot be experts in all aspects of the corporations they
manage or supervise (illustrated by section 123(4)(b)
 Court said despite his expertise, can’t avoid liability by relying on the VP as is was
not the level of professionalism required to avoid liability (must be accountant,
engineers and appraises)
 Can’t use 123(4)(b) and say you are relying on it because the professional advice
was not suitable and must rely on other defences
 Possible the decision was based on a mistake given that that claim was brought by
the corporation not its creditors and a trustee always represents the creditors
interests but does not enforce rights that belong to someone other than the
bankrupt (Trustee would not have any standing to enforce rights that creditors have
against the directors)
 Court had no jurisdiction to pronounce on rights held by creditors directly against
directors. (creditors were no parties to the litigation and no such rights were
asserted)

More skill – more responsible.
Soper – court was interested in intensifying
the duty,
How you work out if someone has
performed their duty of care is not an easy
question
Soper should have known that when the
business was in trouble that they were
paying the appropriate taxes. Court quite
tough on Soper for inaction as opposed to
peoples where they lenient on them.
Duty to care has nothing to do with loyalty,
good faith
Peoples does talk about those questions
(although wouldn’t make any difference)
Can creditors sue?
All secured creditors were looked after, is
there enough money to pay unsecured
creditors?
In Canada we have no corporate
commercial lawyers as judges…problem?
Distinguish
If your litigating in BC first point is that
it’s a Quebec case, so rely on Soper (more
ardous burden for directors
Not about things fitting together, use
different parts of the case in different ways
depending on what part of the argument
you want to use
Managers
Fiduciary
Obligations
Nature and Source of Obligation
 Fiduciary duty of directors to corporations evolved from trust law (trustees required to act in best interest of beneficiaries)
 Has been recognized that corporate officers owe the same fiduciary duties Canadian Aero Services LTd. v. O’Malley
 Person who administers someone else’s property in fiduciary context have a duty of utmost good faith and loyalty to that person
o
Sealy “ Fiduciary Relationships”
 Law of trusts is recognized as a separate branch of law
 Law of fiduciary relationships not found there but rules and principles governing the relationships are (same as law of trusts)
 Essential Quality of all fiduciary relationships Fry, J “every remedy which can be sought against a fiduciary is one which might be sought against a trustee on the same
grounds
 Mere fact that there is a fiduciary relationship does not mean that a particular fiduciary principle or remedy can be applied because each equitable remedy is available in
only a limited number of fiduciary situations
 Must define fiduciary relationships by class and find out rule or rules that govern each class
 Court has said that the subjective motivation of the director or officer is the central focus of the statutory fiduciary duty
 No Conflict Rule – fiduciary may not put himself or herself in a position in which his or her own interests might conflict with the duty of loyalty to the beneficiary (not even allowed
to put in a position where a duty of loyalty to one beneficiary conflicts with the duty of loyalty to another beneficiary)
 No Profit Rule – may not derive unauthorized profit from his or her position
 Rules are designed to prevent fiduciaries from being in stations where they might not act in the best interest of their beneficiaries
 Self Dealing Rule: constrained in his or her ability to deal in a personal capacity with the beneficiaries or with the trust property
Consequence (renders voidable at the instance of a beneficiary any transaction in which the trustee buys trust property or sells property to the trust
 Fair Dealing Rule: applies where trustee purports to buy not trust property but the interest of a beneficiary in the trust
o
In Corporate law happens when a director or an officer purports to make a contact with the corporation to which he or she owes a duty of loyalty
 No conflict and no profit rules create a paradox
 If fiduciary violates one of those rules by being in conflict of interest and duty then a liability will arise even if the fiduciary was acting in what he or she perceived to be the best
interests of the corporation
 Carelessness or lack of diligence are not the same as disloyalty Lac Minerals Ltd v International Corona Resources
 Brant Investments Ltd v. KeepRite Inc held that majority shareholders do not owe a fiduciary duty to minority shareholders
 Directors have shareholders money to invest and use for corporate purposes, risk they might waste it, pay attention to their responsibility
Law started with an extremely strict view on conflict and the courts have been more flexible (Teck)
This is recognizing the entrepreneurial nature and risk taking decisions that directors do
Judicial Review of the Exercise of Managerial Powers
 Exercise of power is reviewable based on the purpose for which it was exercised
 Understood in two ways
o
Legal power to be implicitly limited as to the purpose for which they may be used (power given for a specific purpose it can’t be used for some other purpose and any
attempt to do so will be legally ineffective
o
Find the limitation in the fiduciary obligation owed by corporate managers  Whether or not power has been effectively exercised requires an examination of the motives
for which it was used for
 If used for what fiduciary thought was in best interest of the corporation, it is effective; otherwise not
Can Arrow – SC of Canada being strict as well
Tension with need to be strict with fiduciaries, (need to keep tabs) and trying to ensure they will take risks needed for economic activity
Proper purose of issuing shares is to raise money for the corporation’s activity  normal reason to issue shares
Hogg, Cramphorn, Teck  shares issued to takeover bid
Fired; Would seem that depending upon the nature of the business, cases will decide when fiduciary duty will end
Courts are concerned when directors leave to exploit corporate opportunity (if they leave for that purpose, cannot get profits as result)
Duties do not consider after leaving for an unlimited time
Peoples
 Same facts
 Whether directors
 DirectorsOfficers
Department
as before
of a corporation
 Power vested in corporation’s directors originates in s.102 of the CBCA
Stores INC.
owe a fiduciary
 For officers, the power comes from power delegated to them by the directors
(Trustee of)
duty to the
 When shareholders decide to invest in they transfer assets to the corporation and then to directors expecting that the directors
v. Wise
corporation’s
and officers will use the corporations resources to make reasonable business decisions for the corporation’s advantages
[2004] S.C.J.
creditors
 Settled in Canadian law that the fiduciary duty owed by director and officers imposes strict obligations
No. 64
comparable to the
 Canadian Aero Service Ltd v. O’Malley – directors and officers may even have to account to the corporation for profits they
statutory duty owed
make that do not come at the corporations expense
to the corporation
 Not required that directors and officers in all cases avoid personal gain as a direct or indirect result of their honest and good
faith supervision or management of the corporation (e.g. if they are shareholders they will naturally make money if the
corporation improves)
 All circumstances may be scrutinized to determine whether the directors and officers have acted honestly and in good faith
with a view to the best interests of the corporation
 TJ’s finding that there was no fraud or dishonesty in the wise brothers attempt to solve the inventory problem stands in the
way of finding a breech of their fiduciary duty
 Best interests of the corporation should not be read as simply best interest of shareholders, often they will align but they are
not the same thing
 Economic perspective - best interests of the corporation mean the maximization of the value of the corporation
 In determining whether they are acting with a view to the best interests of the corporation it may be legitimate, given
the circumstances of a case, for the board of directors to consider the interests of the shareholders, employees,
suppliers, creditors, consumers, governments and the environment
 At all times directors and officers owe fiduciary duty obligation to the corporation
 Shifts in corporations fortunes (rise and fall) do not affect the content of fiduciary duty under s.122(1)(a) of the CBCA
 Residual rights of shareholders become worthless if a corporation’s is declared bankrupt
 In the vicinity of insolvency, residual claims of shareholders is near exhausted
 Director’s fiduciary duty doesn’t change in the vicinity of insolvency
 Any honest and good faith attempt to redress the corporations financial problems will if successful both retain value
for shareholders and improve position of creditors; if not then it will not qualify as a breach of the statutory fiduciary
duty
 Directors must be careful to attempt to act in its best interests of anyone group of stakeholders
 If stakeholders cannot use fiduciary duty statute and sue directors for not taking care of their interest then they have other
methods to do so
 Fact that creditors interests increase in relevancy as corporation goes in the toilet is relevant to the courts use of discretion in
giving a party standing to bring an action under ss.239 and ss. 240 of the CBCA or oppression remedy under s.241 of the
CBCA
 Creditors who are not security holders within the meaning of para (a) can apply for the oppression remedy under (d) by
asking a court to exercise its discretion and grant them status as a complainant
 Other remedies were available to them and no need consequently to read the interests of the creditors into the duty set out in
s.122(1)(a) of the CBCA and they also didn’t breach duty
 Rejects argument that the duty is owed to creditors when the corporation is in the vicinity of insolvency
 Court rejects assumption that the duty is usually owed to shareholders
 Duty is owed the corporation – whether solvent or not
 Effects? Other parties (creditors) do not have the right to sue for breach of fiduciary duty (but can use oppression remedy)
Directors owe fiduciary duty to the corporation
Even though CBCA doesn’t say corp is target
Corporation itself as an entity is owed a fiduciary duty
A legal fiction so what does that mean?
Hogg v.
Cramphorn
[1967] Ch.
254, [1966] 3
All E.R. 420
 Cramphorn faced with takeover
bid and chairman and managing
director thought it would be bad
for business and that the
employees would be unsettled
 Minority shareholder sought to
prevent the share issue scheme
 Articles said that that shares shall
be under the control of the
directors who may issue/dispose
of shares to persons on terms and
times when directors see fit
 Is issuing shares to defeat a
takeover a legitimate act on the
part of the directors
 Jurisprudence (Piercy v. S. Mills & Co. Ltd) – directors are not entitled to use powers of
issuing shares purely for the purpose of maintaining their control or the control of
themselves and their friends over the affairs of the company or merely for the purpose of
defeating the wishes of the existing majority of shareholders
 Court disagrees with this and says unless a majority in a company is acting
oppressively towards the minority, the court should not and will not itself interfere
with the exercise by the majority of its constitutional rights or embark upon an
inquiry into the respective merits of the view held or policies favoured by the
majority and the minority
 Court will not permit directors to exercise powers which have been delegated to
them by the company in circumstances which put the directors in a fiduciary
position when exercising those powers, in such a way as to interfere with the
exercise by the majority of its constitutional rights
 Courts should not investigate the rival merits of the views or policies of the parties
 Issuing of 5707 shares with special voting rights that directors attached to them could not
be justified on the view that the directors genuinely believed that it would benefit the
company if they had a majority of the votes in the general meetings.
 Fact that directors were mistaken in thinking that they could attach those shares is
irrelevant, fact that it was exercised for an improper motive means it should be set aside
Teck Corp v.
Millar (1972)
33 D.L.R.
(3d) 288
REJECTS
HOGG
 Afron Mines Ltd. had
mining properties and two
major corporations were
interested.
 Millar thought it was best
for the company if Canex
a major shareholder got
long term agreement
 Teck had been buying
shares and eventually
owned the majority
position
 Millar purported to
conclude a contract with
Canex and issue Canex
enough shares to frustrate
Teck’s takeover
 Did the directors had
acted for an improper
purpose and that
therefore the shares
could not be issued?
 No dispute that the defendant directors had the power to manage the affairs of
the company
 Articles of the association contain the provisions that clearly give power to
directors to manage the affairs of the business
 Directors had power to enter into contract with Canex and allot shares pursuant
to this
 Teck had the right like any other shareholder to challenge the exercise of power
by saying it was for improper purpose
 Reviewed jurisprudence which say is that if they issue share to retain control for
themselves that it is an improper purpose
 Teck says purpose not important (could have been in the best interest of the
corporation
 Rejects Cramphorn, inconsistent to say that directors have the right to consider
the interest of the company and exercise powers accordingly but say that there is
an exception when it comes to power to issues shares and that they can’t issue
shares to defeat an attempt to gain control
 Impropriety lies in directors purpose
 If their purpose is not to serve the company’s interest then it is an improper
purpose
 Impropriety depends upon the proof that the directors were actuated by a
collateral purpose, doesn’t depend upon the nature of any shareholders’
rights that may be affected by the exercise of the director’s powers
 Said in deciding whether Cramphorn should be followed should take into
account the fact that corporations provide the legal framework for the
development of resources and the generation of wealth in the private sector of
the Canadian economy
 Says it would be a breach for directors to completely disregard entirely the
interests of a company’s shareholders in order to confer a benefit on its
employees Parke
 If they observe a decent respect for other interests beyond the shareholders it
will not leave directors open to liability for failing in their fiduciary duty
 Directors ought to be allowed to consider who is seeking control and why
 If they believe that there will be substantial damage to the company’s
interest if the company is taken over then the exercise of their powers to
defeat those seeking a majority will not necessarily be categorized as
improper
 How to determine purpose?
o
Something more than mere assertion of good faith is required
o
Courts should apply the general rule that they must act in good faith
o
Must be reasonable grounds for their belief
o
No reasonable grounds? Justify that grounds were improper
 Evidence doesn’t show that he was willing to make any deal to frustrate teck
 Question is what did they have uppermost in their minds
 Found there object was to obtain the best agreement they could while still in
control, and to foreclose Teck’s opportunity to get the best deal
 This is not improper purpose – trying to get the best deal he court for Afton (as
far as court should go)
 Directors were elected to exercise best judgement, not bound to the directions
of the majority
 Onus of proof is on the plaintiff
English cases stricter than Canadian cases
Shareholders don’t have duties owed to them at all,
they are owed to the corporation
Shareholders do not owe a duty to other shareholders
(private property argument)
Directors can vote in their own self interest as
shareholders
Voidable  not void
If shareholder vote to sustain the issue it is not
voidable but enforaceable
Teck had to prove there were no reasonable grounds
for belief it was in the best interset
North-West
Transportatio
n v. Beatty
Regal
(Hastings)
Ltd. v.
Gulliver
(1942 HL)
…If director
uses position
to make
personal
profit, conflict
 Corp needs boat. New purchase
approved by director J
(overwhelming maj s/h) and at
s/h meeting. Boat was
appropriate and good price but
owned by J. Min s/hs sue.
 - Company had fleet of
steamships, and needed a
replacement for the Asia ship
 - The company needed another
steamer, and purchased the
United Empire, provided by J.H.
Beatty, which was a good
steamer, the only one available,
and the price wasn't unreasonable
 - While a majority of
shareholders ratified the contract,
John Beatty claims that the
resolution was passed by unfair
and improper means
 - J.H Beatty had a majority of
shares, sold 2 to create other
directors and get just under a
majority of shares to vote under
the articles, and got vote through
with new directors assistance

 - Regal owned cinemas and got
an offer to lease two others but
landlord he wouldn't lease to
them unless the subsidiary had
over $5000 in take up capital

- Since they could only
come up with $2000, all 6
directors had arranged to come
up with $500 each to come up
with the remaining $3000 to get
the leases

- After this, the directors
sold leases and shares of Regal
for $15,000, a 3-time increase in
value

- New owners of Regal
claim that the leases were a
corporate opportunity and the
directors were obligated to
account for the increased
value…D's claims Regal wasn't
in a position to take on leases
 J “oppressive” considering
limited s/h oversight?
 s the shareholder ratification
resolution valid? YES!
Overturns SCC
 Was this a corporate opportunity
that the directors took for
themselves?
 NO. 2 conflicting rules: 1) min s/h bound by maj rule, 2)
directors can’t deal on behalf of corp in matters where
they could possible have a conflict of interest. J could
have acted less objectionably but not oppressive: didn’t
invalidate purchase.
 Other: Cdn situation unsatisfactory: now assume conflicts
inevitable so need to address resulting voidable Ks. So
legislated procedure for corps to handle on their own =
CBCA 120
- Vote of majority must prevail unless the adoption was
brought about by unfair or improper means
- Here, every shareholder, including the vendor,
had a right to vote on this question,
notwithstanding that he might have a personal
interest in the subject-matter in conflict with the
interest of the company itself
- Beatty got the shares in accordance with the
articles
- If court disregards vendor's votes, it would
disregard opinion of the majority
- Also, PC wants rule to have process as simple
as possible
- If only disinterested shareholders were entitled
to vote, great confusion would be introduced into
the affairs of big companies if the circumstances
of shareholders, voting in that character at
general meetings, were to be examined, and their
votes practically nullified, if they also stood in
some fiduciary relation to the company
R: - The fact that a director is also a shareholder does
not entitle the director to exercise their ordinary
rights as a shareholder to ratify any contract
involving a breach of a duty, even if it was his
breach of duty
- Note that securities regulations provide where there's a
publicly traded company, and transaction involves
significant assets, there must be independent analysis and
minority shareholder ratification

 Court holds that the rule of equity, which insists on those,
who by use of a fiduciary position make a profit, being
liable to account for that profit, in no way depends on
fraud, or absence of good faith
 Instead, strict two-part test to determine breach of
fiduciary duty
 a) Fiduciary Relationship
 Directors acting in course of their execution of their office
 b) Profit Made
 Liability arises from the mere fact of a profit having been
made
 Profiteer, however honest and well-intentioned, can't
escape risk of being called to account
 Equitable principle is a rule of general application
 Court would find it difficult to determine good faith afterthe-fact
 Here, this was a corporate opportunity because they
acquired shares in the subsidiary by reason, and only by
reason, of the fact they were directors of Regal and in the
course of their execution of office
 Remedy is that the directors had to pay the profits back
 Thus the new owners of Regal got a windfall of profits
120/
Nothing in here that would surprise after Hogg and
Cramphorn, same basis strict approach
Windfall nature of this action is not regarded as
problematic.
Directors breached duty because opportunity
offered by leases was opportunity presented to the
corporation which they cannot expoit

 R: Directors must not take advantage of a corporate
opportunity, regardless of whether or not it is to the
benefit of the corporation to do so or if the opportunity
would be available to the corporation otherwise
 Corporate opportunity on occasion regards as corporate
property that can’t be used to advantage
Peso Silver
Mines Ltd. v.
Cropper
[1966] S..R.
673
 Peso offered mining property by
Dickson
 D was managing director of
plaintiff
 Board of directors considered
Dickson’s offer and rejected it
 D became involved with a group
that ended up buying those
mining properties from Dickson
 Plaintiff corp changed hands and
they wanted to acquired D’s
interest in the profitable mine
 Is director liable for taking
advantage of opportunity? NO
 Usually got 2-3 offers a week for property
 Peso said that the shares in the new mine are property that
was obtained by him as a result of his position as a
director of the appellant without shareholder approval and
he has to account for that
 D did not obtain the interest in the new mine by reason of
the fact that he was director of Peso in the course of the
execution of that office
 When the offer was in front of the board he had a
fiduciary duty (offer rejected but acted in good faith and
had sound reasons to reject the offer)
 When D was approached to invest it was not in his
capacity of director but member of the public
Industrial
Development
Consultants
Ltd. v. Cooley
[1972] 1
W.L.R. 443,
 D was managing director of P
company.
 D attempted to negotiate
contracts on behalf of company
with Eastern Gas but they didn’t
like P’s corporate set up
 New guy at gas board wants to
do business with defendant in
personal capacity only
 D resigned position saying he
was sick and contracted with gas
board
 P wants the profits for breach of
fiduciary duty
 Does D have to disgorge profits
as a result of opportunity
 D got his contract for himself as a result of work he did in
capacity as managing director
 Substance of the contract was what the plaintiffs would
have like to have and tried to get
 At june 13 meeting D had knowledge and information
which employers didn’t know which they would have
liked to now (about Eastern Gas and their plans)
 D argued that contract was not equally available to the
company and nature of the east gas approach was in a
private citizen setting
1) Consider whether or not the defendant was in a fiduciary
relationship with his principals and plaintiffs
-defendant had one capacity and one capacity only
(managing director of the plaintiffs)
Although the company wouldn’t have likely got the benefit
the principle of equity is that a man must not be allowed to
put himself in a position in which his fiduciary duty and his
interests conflict
What defendant actually did was substitute himself as
individual for the company he was a managing director and
to which he owed a duty
-Opportunity to persuade Eastern gas was there (no matter
how small)
R: Question of whether or not the benefit would have
been obtained but for the breach of trust has always been
treated as irrelevant
Gravino v.
Enerchem
Transport
Inc [2008]
J.Q. no 9347
 D was in small niche market for
petro chemical transport. To take
an advantage of a business
opportunity P exercised a put call
option that led to their shares in
ETI being bought by majority
shareholder.
 P then resigned and made own
corp and persuaded Z to leave
and join them and also got Shell
on board (ETI wanted them
originally)
 Because of this they had enough
work for the vessels in question
 ETI sued P for this and TJ held
them liable
 Did the defendants had
misappropriated a maturing
business opportunity
 Put call agreement in shareholder agreement meant that
non-competition in the same agreement was inapplicable
after P sold their shares (duty of loyalty however did not
become inapplicable)
 Gravino et co could compete with ETI in the small market
but had to do so loyally
 Before concluding misappropriation must identify
something mores specific than a mere lead or working
hypothesis known to those people who have experience in
the relevant market
 Opportunity must have attained such a degree of
specificity or quiddity as to make it almost
independent
 It has to be quite specific and quite similar to the original
plan put forward
 Corporate opportunity taken up by the directors did not
come to them by virtue of their duties
 Evidence doesn’t show that appellants took information
with them which would give them the key to a contract
with Ultramar
 Business opportunity in question is well known
 Opportunity had long been on the horizon
 Unless Gravino abandoned their experience and
knowledge they must have known that is was still possible
to take part of the advantage
 After they left ETI they were under no contractual
obligation and legally free to compete with ETI
Anything covered on assignments NOT covered in
exams
Described Officers and Directors as having
fiduciary duty
Just because it was something the corp was
interested in. doesn’t mean directors had to disgorge
profits
Where the opportunity is significantly different or
more advanced than original one
Relied specifically on canero
1) notion of business opportunity as being mature,
or maturing
Tension between strict application of fiduciary
duties and enhance business efficiency
Vast majority of cases that require directors to prove
they acted bona fide and had reasonable grounds
involve takeover bids
Directors do not have to dedicate 100% of their
time to the activities of the corporation, some will
be explicitly part time and consequently for that
chunk of time they are not expected to be or in
fulfillment of fiduciary duties they are free to do
other things
US Beaches excused if acted on
Bhullar v.
Bhullar
Takeove
r Bids
 2 familes, 1 family had 2
directors on BOD, and other had
3
 Family feuds, trying to separate
 S family directors noticed for
sale on building they owned and
persuaded the seller to sell it to
them
 Other directors said it should
have been offered to corporation,
should not have taken them, corp
should get

 Have to decide to accept or reject, cannot just ignore it
 On reasonable grounds, acting bona fide, have to decide if
it is in the best interest of the corporation
 Court dismissed all strict arguments and held them to
account for profits they made
 No issue about bona fide
 Much tougher test here
 Maturing business argument rejected
 Opportunity that was exploited came as a result of
being a director, came to the directors in their personal
capacity
 Breached obligation, even though it came to them in
personal capacity, and they were directors at the time
 Hostile takeover – don’t want takeover because they are afraid they will lose their positions as officers (people who have an interest in buying shares in the
corporation offer to buy shares that are outstanding from people that own them at a particular price, pay more because they think its worth more
 Focus is on giving the shareholders having enough information
 Have opportunites for them in hostile bids
 Subject to fiduciary duties, whatever they do in response has to be carried out in accordance of fiduciary duties (to the corporation)
 If directors reject the take over bid, that opinion has to be expressed in the context of what is in the view to the best for the corporation
 Directors will establish different techniques to make it more difficult for takeover bid to be successful
 Teck, Millar, giving more shares to canex.
 Issue more shares and then takeover bidder has to get more shares to get more control
 Can go find a white knight, someone they like and offer shares to that person and play around with assets of corporation
 Court is saying responsibility is to the shareholders to make sure they have all the information
 In takeover – owe duties to the shareholders
Good faith = doesn’t matter
Less strict cases say “act in good faith…..nothing
more is required”
Issue is whether there is enough information to
everyone, and shareholders have enough (401) of
the cases) information to decide whether or not to
sell their shares
Olympia
and
York
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Walker
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Produce
rs
pipeline
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Proxy Voting

In large corporations, not likely that shareholders will travel across country to AGM in Halifax or across the country

Corporations are able to (legislatively restrictedly) (s.147-154), board of directors get “right” to vote for these shareholders

Process arose where directors seeking proxies had to send out lots of info ahead of time, say how they were going to vote in a particular way, so
the could make an informed decision (designed to protect shareholders interest)

Shareholders do have rights to bring agenda items at AGM – shareholder proposals/initiates (right to be treated seriously, on the agenda)

Changing the main business of the co, merging, selling assets (critical decisions, substantial, (requires constitutional amendments) require
approval by shareholders and special resolutions (2/3rd and occasionally ¾ majority)

Important to contain potential abuse of corporate action and to provide those shareholders who disagree the opportunity to keep the operation on
the straight and narrow (first in ONTARIO then in CBCA)
3 Potential Remedies available to shareholders
Derivative Action

Minority/dissenting shareholders and others can apply to the court to bring an action on behalf of /in the name of the corporation (Derivative
Action..ish)(shareholders are doing actions that belong to the corporation as shareholders do not derive actual rights from the corporation)
(corporation should sue if they have the right, if they don’t sue and unlikely it will, then SH can seek leave of the court to bring an action for the
corp)

Courts have wide discretion
Just
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Nature of the actions are predicated on notions of justice and equity (not precise)
When leave is being sought, that is NOT a venue for resolving the dispute, just making a prima facie case to proceed on the action
Derivative actions we are seeing is whether or not leave will be granted by the court (doesn’t resolve whether there IS a duty breach only that there
is ENOUGH to go to court)

Sometimes actions by directors involve both breaches to corporations and shareholders and the courts are concerned to keep them separate
Oppression Remedy

Difference between oppression and derivative remedy

This is an action owed to the PLAINTIFF, not for the corporation

No leave required

Oppressive taken to mean “in bad faith, taking advantage of”

Now you worry about interests being unfairly disregarded

Have to assert that the behaviour disregards the interest of the shareholder, creditor, or officer

Courts can make whatever order they see fit

Describes this bad behaviour and who are those that have to be harmed for an oppression remedy to be successful

Nowhere near as open ended as “complainant”

Far less broad for those who are the target of the compliance order

In order to be successful, loss has to be caused to security holder, director or officer, creditor (no one else)
Compliance Order

Order requiring offending persons to do a particular thing/act in a particular way

Fairly broad,

Court can make any order it sees fit

Action on behalf of the complainant or a creditor to require the corporation and the director to comply with the act and comply with the
constitution

Not seen by the courts available to the shareholder to pursuer a director for breach of fiduciary duty (duty is NOT owed to the shareholder)
What is meant by Complainant:

Former shareholder of the corporation or current shareholder, creditor, director or officer (former or current) (includes any affiliates) and
other person in the discretion of the court is a proper person to make an application under the provision (subsection D)

Internal policing device….--> but adds “any other person in the discretion….” (Plainly to refer to a creditor)
Scope of Behaviour that could be oppressive

Behaviour that is oppressive to one or more shareholder

Means person bringing action must be adversely affected by oppressive nature of the behaviour (can’t just be someone enforcing the legislation
and the behaviour of those

Weak provision (unfairly disregardsCBCA)

Easier to enforce behaviour you don’t like under the CBCA
Employee? How would you go about this

Apply under subsection d to be considered an complainant

Ask the court to exercise discretion to say you are able to bring a derivative action or oppression remedy

Whether court exercises discretion to say you have standing and then whether or not you could be a creditor and whether or not your harmed is a
matter of courts discretion
Remedies for Shareholder
o
Remedies blend with statutory that directors have (to the corporation)
o
Form a set of weapons to address corporate activities
o
2 primary ways dissenters can approach problem
o
1) bring an action on behalf of the corporation (derivative, simply palcing themselves as if the shareholders were the corporation)
o
because its asserting an action which is not theirs, but the corporation, need to seek LEAVE from the court
o
2) Oppression Remedy, subsidiary remedies to correct errors in corporate records
o
been looking at WHO can intervene
o
Definition in legislation
o
Range of people who could fit in this category, very broad terminology
o
Large brush by the court to make sure creditors/others are heard
o
Corporation and those who run in are kept on the straight and narrow
o
459, note#4
o
Security holder in one case
o
Richardson Greenfield case  concerned about corporations being run and bought shares in that corporation and then pursued a derivative action,
bought them with knowledge that bad things were going on
o
Court permitted them to bring an action as an complainant, (even though it was not a security holder at the time it still arose (concerns still
existed))
o
Court said that because it was in the public and corporate interest to pursue, then they were allowed to become a complaintiff
o
Court was more focused on trying to get wrong righted as opposed to who gets wrongs righted
o
Newer cases much more open to courts intervention
o
Oppression rmedy
When SH complains that they are being oppressed, there the inquiry is what happened  what were the reasonable expectations of the
complainant and were they thwarted, ends up (was the effect on the plaintiffs fair and reasonable on the circumstances)
o
when there is a claim that directors failed duty (look what the did)
Nobody pursues oppression remedy, argue that your interests were disregarded is easier to argue
Oppression
o
Just have to show that you were affected
o
Can see from the cases that the plaintiff gets so far and doesn’t quite get the result they want (can’t satisfy all the requirements)
o
Courts are being more lenient in allowing to go forward (just whether or not there is reasonable basis, whether or not successful)
o
Because the focus is different, see different approaches taken by the courts in directors duty vs. shareholder remedies
o
Derivative
o
Directors have to be given notice that they are bringing an action and a rejection of that
o
Plaintiff must be acting in good faith
o
Feingold – separate personal for derivative and need leave for derative claims
o
GOldex – identifies that there are some wrongs owed both to the corporation and the shareholders and others (pg 406)
o
If the action pursued is a wrong to the corporation (seek leave) if not (no leave)
o
We are not going to fix it if you mess it up, go fix it and then come back
o
Prerequisite steps, clear that giving notice is not a big deal
o
Olympia….failure to give notice was not regarded as huge problem (not much of a formality)
o
Appears to be in the interest of the corporation, doesn’t seem to be much of an onus
o
Armstrong Gardner – provision of the act shouldn’t be construed in a unduly technical manner
BCE
o
Complex scenario involving different stakeholders, almost impossible for directors to respond equally well to each of the stakeholders
o
Not every claim that your interests have been ignored will be accepted
o
Courts tended to stand behind directors who have acted with a view to the intersts of the corporation
o
Expectations of the DBE was that their interest be considered
Oppression Remedy
o
Issue is that the court has the primary power to rectify the effects of the unacceptable behaviour
o
Naneff v Con-Crete Holdings Ltd. – Alex would only get control of his company once his dad was gone, remedy would have given him more than
he would have expected given his dad was still alive, ended u
o
Remedy has to RECTIFY, not OVERCOMPENSATE, has to be one which addresses the needs of the complainant in the capcity that they are
complaining (shareholder complaining? Has to be a remedy that flows as a shareholder (Can’t give them a remedy that flows from them beng a
family member)
o
If you have/ seek a remedy and the remedy is to buy my shares, there is a whole process that will work out value of those shares
Office had to get standing to
Court said it wasn’t a former shareholder and wasn’t prepared to say it was a security holder
First Edmonton
claim the wrong done to the
Creditor of corporation doesn’t mean you will get standing
Place Ltd. v.
Is the officer tower an
corporation by the directors who
315888 Alberta
appropriate complainant
took the money out.
Reasonable expectations of parties, beyond legal expectations of parties
Ltd.
who in the discretion of the
What first Edmonton place would have in reasonable expectations in dealing with these three lawyers
court can make an
3 lawyers took money out could
Some underlying expectation of the applicant, arising from the circumstance in which the circumstances arose
application?
not be seen as a view to the best
Doesn’t have to be someone part of the corporation
interest of the corporation
Purpose of 232 and 234 is to ensure managerial accountability
Can it bring an application
1st Edmonton place wanted
on behalf of the

Encompasses protection of rights of not only minority shareholders but also creditors an even the public in
money out of this corporation
corporation against the
general.
with who the lease was with (no
directors?

assets, couldn’t do anything)
wanted to get the corporation to
sue the directors for breach
o
First Edmonton said corporation
was manipulated by directors and
I have remedies available to me
to enforce remedy against the
directors
Westfair Foods
Ltd. v. Watt
Corporation had two classes of
shares, A and B
A non voting shares got a fixed
dividend and for years the
appellant had paid the fixed
divdedend and got the rest of the
profit.
It changed its policy and after
paying the fixed dividend it paid
all its net annual earnings to the
single common shareholder.
Daleuce fired members of air
Ontario to get rid of any minority
shareholders in the corporation,
recognition between interplay
between breach of fiduciary
duties and oppression remedy,
very much ok for directors to
pursue this approach, but
nonetheless is the effect on the
daleuces is that it was unjust
Were the actions oppressive
to the shareholder?
Yes. Court upheld order
for corporation to purchase
the class A shares
(oppression)

Provisions remain a way for parliament to say that classes of shareholders in are to be treated fairly and justly
by corporations

Parliament did not want to give it a restrictive meaning so it should be interpreted broadly

Jurisprudence suggests that the courts are to impose the obligation of fairness on the parties

Court went with the rules in contract, equity and partnership law as guides to voluntary relationships
(company and shareholders are voluntary in a relationship)

Reasonable expectations (or expectations deserving of protection) fill this
o Regulate voluntary relationships by regard to the expectations raised in the mind of a party by the
word or deed of the other and which the first party ordinarily would realize it was encouraging by its
words and deeds
o All words and deeds of the parties are relevant to assessment of reasonable expectations, not
necessarily only those consigned to paper and not only those made when relationship first arose
What courts will protect through oppression remedies is the reasonable expectations of the shareholders in their
capacity as shareholders

Effect of the approach taken was unfair to the family
Exam prep
o Consider general interaction between opportunities available to a person who is unhappy with the awy a corp is being run
o What can they do to have their interests protected?
o