Law 451 Corporations (O’Byrne)

Chapter 1: Choosing the Form of Business Vehicle _______________________________________________ 7

Types of Business Vehicles ________________________________________________________________________ 7
Sole Proprietorship _______________________________________________________________________________________ 8
Corporation _____________________________________________________________________________________________ 9
Unlimited Liability Corporation (ULC) _____________________________________________________________________ 10
Partnership ____________________________________________________________________________________________ 10
General _____________________________________________________________________________________________ 10
Ordinary Partnership __________________________________________________________________________________ 10
Limited Partnership (“LP”) ______________________________________________________________________________ 11
Limited Liability Partnership (“LLP”) ______________________________________________________________________ 11
Joint Ventures __________________________________________________________________________________________ 12

Agency _______________________________________________________________________________________ 12
Agency and Business Law _________________________________________________________________________________ 12
Types of Authority ____________________________________________________________________________________ 12
Liability _____________________________________________________________________________________________ 13
Duties ______________________________________________________________________________________________ 13
Partnership ____________________________________________________________________________________________ 13
Volzke Construction v Westlock Foods (ABCA 1986) – functional test for determining partnership existence ______________ 13
McDonic Estate v Hetherington (ONCA 1997) – liability of partners in an ordinary partnership (not LLP) law firm for misconduct
of one partner – Tests for Authority ________________________________________________________________________ 14

Chapter 2: A Background to Corporation _____________________________________________________ 15

Salomon v Salomon (1897 ENG HL) - liability of directors is protected under a corporation – individuals can incorporate ____ 16
History of Corporations __________________________________________________________________________________ 17

Corporate Constitution ____________________________________________________________________________ 18

Purpose _______________________________________________________________________________________________ 19
Corporate Structure _____________________________________________________________________________________ 19
Methods of Creating Corporate Constitutions _______________________________________________________________ 19
Letters Patent (only applies in PEI & Quebec) _____________________________________________________________ 20
Memorandum of Association (MoA) ____________________________________________________________________ 20
Articles of Incorporation ______________________________________________________________________________ 20
Canadian Jorex Ltd v 477749 Alberta Ltd (ABCA 1991) – residuary power held by corporate directors - power to cancel
special meetings - shareholder remedies __________________________________________________________________ 20

Chapter 3: The Process of Incorporation ______________________________________________________ 22

Procedures ___________________________________________________________________________________ 22
Choosing Where to Incorporate __________________________________________________________________________ 22
How does one incorporate under the ABCA? ________________________________________________________________ 22
Who can incorporate?: ________________________________________________________________________________ 22
Required Incorporation Documents _______________________________________________________________________ 23
Restricting the transfer of shares upon incorporation: (why do it?) ___________________________________________ 23
Consequences of Incorporation ___________________________________________________________________________ 23
Corporate Records and other matters _____________________________________________________________________ 23

1
 Unanimous Shareholder Agreements (USAs) ________________________________________________________________ 24
Cicco v 609940 Ontario Inc (Trustee of) – U.S.A not binding on 3rd party with no notice of restrictive authority of directors –
Bankpructy assignment not annulled by USA _______________________________________________________________ 24
Corporate By-Laws ______________________________________________________________________________________ 25
Directors’ Organizational Meeting __________________________________________________________________________ 25
Kinds of Corporations ___________________________________________________________________________________ 26
Loss Prevention – Code of Professional Conduct_____________________________________________________________ 26
Corporate Names ______________________________________________________________________________________ 27
Common Law and Statutory Requirements _______________________________________________________________ 27
Paws Pet Food and Accessories Ltd v Paws and Shop Inc (1992 ABQB) - Misleading corporate name – Court order to change
___________________________________________________________________________________________________ 28
Stenner v Scotia Capital Inc (2007 BCSC) – elements of a Passing Off Action – Subsequent use of family name with goodwill
attached not permitted ________________________________________________________________________________ 28
Share Capital ___________________________________________________________________________________________ 30
Equity Financing _____________________________________________________________________________________ 30
Classification of Shares ________________________________________________________________________________ 30

Pre-Incorporation Contracts ______________________________________________________________________ 31

Conflicting Common Law ________________________________________________________________________________ 32
Kelner v Baxter (1866 UK) – promoter liable when entering into Pre-Incorp. Contract ______________________________ 32
Black v Smallwood (1966 Australia HC) – Promoter not necessarily liable in pre-incorp. contract – look to intentions _____ 32
Statutory Reform: e.g. CBCA s. 14 __________________________________________________________________________ 32
Judicial Treatment of Statutory Rules ______________________________________________________________________ 32
Westcom Radio Group Ltd v MacIsaac (1989 ONCA) – Poor Decision – promoter not held liable ______________________ 32
Sherwood Design Services Inc v 872935 Ontario Ltd (1998 ONCA) – conduct required for corporation to adopt contract
(dissent in obiter) _____________________________________________________________________________________ 33
Practice Considerations: ____________________________________________________________________________ 34
Szecket v Huang (ONCA 1998) – liability of promoter/agent to be determined by statutory rules, not old CL ____________ 34
Measure of Damages ___________________________________________________________________________________ 34
Wickberg v Shatsky et al (1969 BCSC) – breach of warranty of authority – must be cause of loss to third party - damage
measurement ________________________________________________________________________________________ 34
Pre-Incorporation Contracts in Alberta – ABCA s. 15 __________________________________________________________ 35

Chapter 4: The Corporation as a Legal Person _________________________________________________ 36

Summary _____________________________________________________________________________________ 36
One-Person Corporation _________________________________________________________________________ 37
Lee v Lee’s Air Farming Ltd (1961 Privy Council) – director and shareholder of corporation can employ themselves – WCB claim by wife after husband’s death 37

Grounds for Liability of those Behind the Corporation _______________________________________________ 37

Liability based on lifting the corporate veil _________________________________________________________________ 37
Kosmopoulos v Constitution Insurance Co of Canada (1987 SCC) - Salomon principle is not enforced when it yields result too
flagrantly opposed to justice ____________________________________________________________________________ 38
Big Bend Hotel Ltd v Security Mutual Casualty Co (1980 BCSC) – corporate veil lifted for corporation being used as a “sham
and a cloak” _________________________________________________________________________________________ 38
Performance Industries Ltd v Sylvan Lake Golf & Tennis Club Ltd (2000 ABCA; aff’d by SCC) – lifting the corporate veil for
“fraudulent, dishonest, and deceitful” action _______________________________________________________________ 38

2
 Jin v Ren (2015 ABQB, aff’d by the ABCA) – unjust enrichment claim – investments retained for improper purpose by director
– corporate veil lifted __________________________________________________________________________________ 39
Wildman v Wildman (2006 ONCA) – corporate veil lifted against corporation for spousal and child support ____________ 40
Rockwell Developments Ltd v Newtonbrook Plaza Ltd (1972 ONCA) – corporate veil not lifted to force shareholder to pay
costs for lititagion between your corp and another corp ______________________________________________________ 40
Sun Sudan Oil Co v Methanex Corp (1992 ABQB) - Liability of parent for subsidiary – corporate veil not lifted – rule and test
for holding parent company liable________________________________________________________________________ 41
Liability based on total disregard of formality _______________________________________________________________ 42
Wolfe v Moir (1969 Alta Sup. Ct.) – individual liable for not identifying corp on tickets, contracts, etc. – roller rink _______ 42
Vallis v Prairie Alternative Energy Solutions Ltd (2013 SKPC) – failure to identify working as a corporation – personally
liable _______________________________________________________________________________________________ 43
Liability of Directors for their Own Torts ___________________________________________________________________ 43
McFadden v 481782 Ontario Ltd (Ont HCJ 1984) - director always liable for their tortious actions – inducing breach of
contract outside the scope of the director’s authority ________________________________________________________ 43
369413 Alberta Ltd v Pocklington (2000 ABCA) –Elements of inducing breach of contract ___________________________ 44
Liability in the area of Trust Law __________________________________________________________________________ 44
Citadel General Assurance Co v Lloyds Bank Canada (SCC 1997) – liability for knowing assistance or knowing receipt of trust
property – both are breach of trust _______________________________________________________________________ 45
Air Canada v M & L Travel Ltd (SCC 1993) – directors held liable for knowing assistance of breach of trust _____________ 45
Liability Based on Thin Capitalization ______________________________________________________________________ 46
Walkovszky v Carleton (1966 NYCA) – thin capitalization not enough to lift corporate veil ___________________________ 46
Henry Browne v Ocean Charters (ENG case) – thin capitalization is not on its own actionable and it is insufficient to lift the
corporate veil ________________________________________________________________________________________ 47

Chapter 5: Tortious, Criminal, Regulatory & Contractual Liability of Corporations ____________________ 47

Individual v Corporate Liability __________________________________________________________________________ 47

Criminal and Tortious Liability ____________________________________________________________________ 48

Attributing Liability to a Corporate Body _____________________________________________________________________ 48
The “Rhone” v the “Peter AB Widener” (1993 SCC) - Directing mind doctrine – employee with gov’ing executive authority to
design & supervise the implementation of corp. policy _______________________________________________________ 48
Corporate Defense to Liability _____________________________________________________________________________ 49
R v Canadian Dredge & Dock Co (1985 SCC) - Corporations criminally liable – Directing Mind & identification Doctrine –
action within scope of authority in ordinary course of business, not totally in fraud of corp, & partly for benefit of corp __ 49
Statutory Criminal Liability ________________________________________________________________________________ 50
Regulatory Offences _____________________________________________________________________________________ 51
R v Bata Industries (1992 ONPC) – due diligence defence - Onus on Accused to show on BOP – Scope of Duties taken into
account in Determining Reas. Care _______________________________________________________________________ 51
R v Bata Industries (1995 ONCA) – indemnification of directors and officers must be in accordance with ABCA, s 124 ____ 52
R v Syncrude Canada (2010 ABPC) – Birds killed landing on tailings pond – strict liability – due diligence defence factors __ 53

Contractual Liability – Currently Governed by Indoor Mgmt Rule & Agency ________________________________ 54
Re: Jon Beauforte (London) (1953) - ultra vires: contracts void ab initio b/c corporation’s actions didn’t correspond to
limitations set out in corporate bylaws/constituting documents _______________________________________________ 55
Communities Economic Development Fund v Canadian Pickles (1991 SCC) – ultra vires doctrine abolished by ABCA/CBCA
except for special acts corporations ______________________________________________________________________ 56
Contracting with Agents of the Corporation __________________________________________________________________ 57

3
 Actual Authority ______________________________________________________________________________________ 57
Panorama Developments v Fidelis Furnishing (1971 HL) - Actual (implied) auth. may flow from a job title or position – corp
secretary renting fancy cars under his employer’s name, renting them out for personal gain ______________________ 57
Apparent Authority ___________________________________________________________________________________ 58
Freeman v Buckhurst (1964 UK) - test for apparent (ostensible) authority – 4 requirements – definitions for ostensible and
actual authority - architechts perform work for Buckhurst (through rogue agent, Kapoor) and are not paid __________ 58
Doiron v Manufacturers Life Insurance (2002 ABQB) - principle liable for acts of agent so long as agent acting within scope
of actual/ostensible authority _________________________________________________________________________ 59
Doiron v Manufacturers Life Insurance (2003 ABCA) - Ostensible auth. doesn’t require explicit representation of
authorization – can be implied, but it must be reasonable for 3rd party to rely on apparent authority _______________ 60
Canadian Laboratory Supplies v Engelhard Industries (1979 SCC) commercial realities – 3rd parties can rely on
representations of lower level employees (as long as reasonable and sufficient authority) –– employee buying and selling
platinum behind company’s back for personal gain ________________________________________________________ 61

Chapter 5 Summary _____________________________________________________________________________ 62

Chapter 6 – Corporate Social Responsibility ___________________________________________________ 62

Sub-Prime Mortgage Crisis ________________________________________________________________________________ 63

Corporate Social responsibility ____________________________________________________________________ 63

Two Theories of Corporate Social Responsibility ______________________________________________________________ 63
Property Conception – aka “Shareholder Primacy Model” (Milton Friedman’s approach) ___________________________ 63
Social Institution View (Ralph Nader’s approach) ____________________________________________________________ 64
Alternative: Our Values Approach (The Body Shop) ________________________________________________________ 64
The Law _______________________________________________________________________________________________ 64
Case Study: Talisman Energy Inc [bad communication/PR team; CSR; corps will be readily held accountable due to the
internet] __________________________________________________________________________________________ 64
Corporate Citizenship and Social License ________________________________________________________________ 65
Re Varity Corp and Jesuit Fathers of Upper Canada et al (1987 ONPC) – Apartheid – proposal to withdraw investments in
S.A. – Varity not required to distribute proposal to stakeholders because it is primarily for general social/racial/political
purpose - s 131(5)(b) CBCA ___________________________________________________________________________ 66
The Body Shop – Case Study __________________________________________________________________________ 66
Dodge v Ford Motor Company (Michigan Sup Ct 1919) – cororation is primarily carried on to maximize shareholder
profits, not benefit the public – property conception theory ________________________________________________ 67

Chapter 7 – Corporate Governance __________________________________________________________ 67

Introduction ___________________________________________________________________________________ 67
Comparison of Public Companies and Closely-Held Corporations _________________________________________________ 69
Statutory Source of Directors’ Powers _______________________________________________________________________ 69

Director Positions ______________________________________________________________________________ 69

Qualifications of Directors ________________________________________________________________________________ 70
Election and Appointment of Directors ______________________________________________________________________ 70
Removal of Directors ____________________________________________________________________________________ 70
Note: CBCA amendments on Gender Equity (Bill C-25)__________________________________________________________ 71

Statutory Duties of Directors and Officers ___________________________________________________________ 71

1. Introduction to Directors’ Fiduciary Duty & Duty of Care + the Business Judgment Rule _____________________________ 71

4
 Peoples Department Stores (Trustee of) v Wise (SCC 2004) - Business judgment rule - fiduciary duty of directors to
corporation (CBCA s 122(a)) – duty of care owed to corporation and other parties and standard of care (s 122(b)) – Test
for challenging business decisions _____________________________________________________________________ 72
Peoples and Alternative Remedies ___________________________________________________________________ 74
BCE Inc v 1976 Debentureholders (2008 SCC) - If directors give due consideration to competing views of multiple
stakeholders, they won’t be held liable for decisions that prejudice some stakeholders’ interests at the expense of others
_________________________________________________________________________________________________ 75
Smith v Van Gorkom (Delaware SC 1985) – business judgment rule in delaware; duty of care (s 122(b) equivalent) – board
failed to act in an informed manner amounting to gross negligence __________________________________________ 76
2. Fiduciary Duties_______________________________________________________________________________________ 78
(A) Introduction and Main Categories _____________________________________________________________________ 78
(B) Taking Corporate Opportunities_______________________________________________________________________ 78
Cooks v Deeks (JCPC 1916) - fiduciary duty will be violated by directors taking opportunity rightfully belonging to their
corporation; that is fraud on the minority by the majority __________________________________________________ 78
Canadian Aero Service v O’Malley (SCC 1974) – senior officers taking a corporation’s opportunity after resignation -
modern Cook v Deeks; fiduciary duty owed by director after they leave the corporation based on Laskin’s factors – Test
for whom the corporate opportunity belongs ____________________________________________________________ 79
Torcana Valve Services Inc v Anderson (2007 ABQB) - fiduciary duty of key employees/directors/managers – principles in
determining scope of a fiduciary’s obligations ____________________________________________________________ 81
(C) Self-Dealing Transactions ____________________________________________________________________________ 81
Common Law ______________________________________________________________________________________ 81
Aberdeen Railway Co v Blaikie Bros (1843 HL) - self-dealing contracts are invalid and impermissible on principle ____ 82
The Prohibition Against Self-Dealing Softens _________________________________________________________ 82
North-West Transportation Company v Beatty (1887 JCPC) - where K is essential to corporation’s and price/process is
reasonable, a self-dealing K may be ratified by the s/hs where there’s no fraud on the minority – director can vote their
own shares ______________________________________________________________________________________ 82
Legislative Response to Self-Dealing K’s – ABCA s. 120 _____________________________________________________ 83
Dimo Holdings v H Jager (ABQB 1998) - dealings between director’s corporation and another controlled by family
member not a “material interest” (although it arguably extends to family relationships) – self-dealing transaction
(ABCA, s 120 application) __________________________________________________________________________ 83
Zysko v Thorarinson (2003 ABQB) – potential expansion of what constitutes material interest  familial interests in
other corporation may be included – but fair, reasonable contract and disclosure insulates K from attack _________ 85
Black v Hollinger International (Delaware 2005) – passing bylaws to overpower other directors with inequitable
purpose – bylaws to approve transaction not agreed to by shareholders/directors – self-dealing and diverting
corporate opportunity_____________________________________________________________________________ 85
(D) Competing Director ________________________________________________________________________________ 86
London & Mashonaland Exploration v New Mashonaland Exploration (1891) – common law very deferential to sitting
on competing board - don’t rely on this _______________________________________________________________ 86
Sports Villas Resort Inc (Re) (2000 NFCA) - fiduciary duty does not preclude director from sitting on multiple boards –
But director likely breaches fid. duty and creates conflicts of interest if being a director for two competing corps – no
direct competition found here ______________________________________________________________________ 86
(E) Takeover Bids and Defensive Tactics by Management _____________________________________________________ 88
Maple Leaf foods v Schneider Corporation (1998 ONCA) - hostile takeover - to determine whether Board acted in best
interest of corporation, look at the Business judgment rule – decision making process and reasonableness of decision
_______________________________________________________________________________________________ 88
(F) Other Sources of Fiduciary Obligation __________________________________________________________________ 90

5
 Tongue v Vencap Equities Alta (1994 ABQB, aff’s by ABCA) - fiduciary duties arise when directors act outside their
ordinary duties – breach of fiduciary duties and insider training provisions – director buying and selling shares from the
corporation’s shareholders _________________________________________________________________________ 90
(G) Shareholder Ratification of a Breach of Fiduciary Duty ____________________________________________________ 91
(H) Lawyer Sitting on a Client’s Board of Directors ___________________________________________________________ 91
(I) Dissenting Director – Dealt with by the s 123 of CBCA and ABCA _____________________________________________ 92
3. Other Statutory Duties e.g. Income Tax ____________________________________________________________________ 93
Zwierschke v MNR (1991 CTC) - statutory duty of care under Income Tax Act – failure to pay taxes _______________ 93
4. Directors’ and Officers’ Liability in Tort to Third Parties _______________________________________________________ 93
London Drugs v Kuehne (SCC 1992) – employees can be held negligent to client of employer, Dependning on
circumstance ____________________________________________________________________________________ 94
Montreal Trust v ScotiaMcLeod (1995 ONCA) – absence of fraud, directors/officers not liable for tortious conduct
unless actions take them outside scope of duties – tortious conduct must exhibit separate identity ______________ 95
ADGA Systems v Valcom (1999 ONCA) - Directors may be liable for torts committed, even if acting bona fide in the best
interests of the corporation ________________________________________________________________________ 96
NBD Bank Canada v Dofasco Inc (ONCA 1996) – director liable for negligent misrepresentation with EGREGIOUS
CONDUCT – follows ADGA – Anns Test for Negligent Misrepesentation _____________________________________ 97
Hogarth v Rocky Mountain Slate Inc (2013 ABCA) - the law in Alberta is ScotiaMcLeod – intentional torts where
separate identity or interest is shown attract liability - legitimate expectations of parties go to whether director is liable
for promotions – negligent misrepresentation against director fails here ____________________________________ 98
Kent v Postmedia (2015 ABQB) – follows ScotiaMcleod & Hogarth – personal liaiblity of a director in tort requires
actions exhibiting separate identity or interest from the corporation – some interest in Slatter concurring opinion _ 101
Review of Liability of Directors to Third Parties __________________________________________________________ 101

Review of Chapter 7 ___________________________________________________________________________ 103

Chapter 8 – Shareholder Rights and Remedies ________________________________________________ 104

Chapter Objectives ____________________________________________________________________________ 104
Introduction to Shareholder Rights _______________________________________________________________ 105
Introduction to Shareholder Remedies ____________________________________________________________ 109
Kinds of personal rights as a shareholder: ___________________________________________________________________ 109
Oppression v Derivative Action ___________________________________________________________________________ 109
Oppression Remedy – For Direct Harms __________________________________________________________________ 109
Test for Oppression Action: __________________________________________________________________________ 110
Derivative Action – For Indirect Harms ___________________________________________________________________ 110
Steps for bringing a derivative action (Moloo v Pathak) ___________________________________________________ 110

Relief from Oppression or Unfairness _____________________________________________________________ 111

Hercules Management v Ernst & Young (1997 SCC) – Negligence by financial auditors - Anns test – prima facie Duty to
shareholders obviated by policy reasons – rule in Foss v Harbottle - DERIVATIVE action could have been brought on behalf of
corp _______________________________________________________________________________________________ 111
Deluce Holdings Inc v Air Canada (1992 ONt Gen Div) - oppression: unfair prejudice/unfair disregard of minority interests;
don’t need a legal right, just an interest with a reasonable expectation – oppression can be carrie out by majority
shareholders ________________________________________________________________________________________ 113
Judicial Interpretation ___________________________________________________________________________________ 114
What is Oppressive or Unfair Conduct ___________________________________________________________________ 114
6
 BCE Inc v 1979 Debentureholders (2008 SCC) - test for oppression; oppression is an equitable remedy and fact specific;
factors for unfair and prejudicial conduct; failure to protect against a potential oppression may obviate duty owed by
corporation ______________________________________________________________________________________ 114
Re Ferguson and Imax Systems Corp (ONCA 1983) - fundamental change in corporation - majority s/hs make decision to
disadvantage min s/hr (squeeze-out) - oppression looks at whole business conduct, fairness – procedures followed, but
they were to hurt Ms. Ferguson – resolution by s/hs denied _______________________________________________ 117
Downtown Eatery v Ontario (2001 ONCA) – bad faith intention by directors is not a requirement of oppression action –
wrongfully dismissed employee can succeed in oppressive action for outstanding judgment (only statement of claim at
time of re-organization) _____________________________________________________________________________ 118
Oppression or Derivative Actions? If distinction unclear, apply for leave to bring Derivative Action! – Steps for dericative
action (Moloo v Pathak) & rationales for leave applciation ___________________________________________________ 119
Pappas v Acan Windows (Nfld SC 1991) - strict/traditional approach; leave needed for derivative action where the wrong
is against the corporation – disallowed oppression claim in place of a derivative action where personal harm was indirect
________________________________________________________________________________________________ 120
Rea v Wildeboer (2015 ONCA) – Oppression action fails – no direct harm to individual that differs from loss of other
shareholders or the harm to the corporation – misappropriation of corporate assets by directors _________________ 121
Malata Group (HK) v Jung (ONCA 2008) - flexible approach to derivative vs oppressive actions – no bright line distinction
between the actions – closely held corporation exception AND complainant was creditor _______________________ 122
Shefsky (ABCA) – traditional, strict distinction between oppression and derivative action ________________________ 123
Icahn Partners v Lions Gate (BCCA 2011) – directors dilute shares to avoid takeover bid while reducing debt – met
reasonable expectations of fairness held by the shareholder/bidder by considering interests, but protected by business
judgment Rule - acting in the best interest of the corporation ______________________________________________ 123
Scope of Relief Available for Oppression/Derivative ACtions __________________________________________________ 124
Naneff v Con-Crete Holdings (1993 ONGDCt) – Remedies for oppression are vast and within the judge’s discretion to find
an equitable and fair outcome – order for family companies to be sold to highest bidder ________________________ 124
Naneff v Concrete Holdings (ONCA 1994) - oppression remedy must not go beyond what is required to rectify the
oppression – must not go so far as to give something that would not be reasonable expected ____________________ 125

CHAPTER 1: CHOOSING THE FORM OF BUSINESS VEHICLE

Introduction
• 3 basic forms: (1) Sole proprietorship; (2) Partnership (ordinary, ltd, ltd liability); (3) Corporation
• The main considerations in choosing the form of business enterprises are:
o Creation and Other Formalities
o Risk of Loss Involved
o Power of Control
o Participation in Profit/Distribution of Assets
o Dissolution – How is the business terminated or brought to an end?

TYPES OF BUSINESS VEHICLES

Characteristic Sole Proprietorship Partnership Corporation
Creation At will of owner By agreement or By incorporation
conduct of parties documents
Duration Limited by life of Terminated by death or Perpetual unless
owner agreement dissolved
Liability of owners Unlimited Unlimited Limited
Taxation Net income taxed at Net income taxed at Income tax to the
personal rate personal rate corporation; dividends
7
 and salary taxed to
shareholders
Transferability Only assets may be Transferrable by Transferable unless
transferred agreement incorporating
documents restrict
transferability
Management Owner manages All partners manage Shareholders elect a
equally unless board to manage the
otherwise specified in affairs of the
agreement corporation; officers
can also be hired
• Note: A franchise is a method of doing business, not a business vehicle
SOLE PROPRIETORSHIP
• carried out by a natural person (individual), rather than an artificial person
• no legal separation between sole proprietor and sole proprietor
• all risks are to the sole proprietor and all obligations are personal obligations
Creation and Other Formalities:
o Simple and low cost to start up and operate
o Not governed by legislation specifically built for sole proprietorships
o Not a separate legal entity – No separation between the sole proprietorship and the sole proprietor
o Simplest form of business organization
o Still some formalities:
▪ Partnership Act s.110(1) restricts sole proprietorships and requires registration in some cases
• Must register trade name if engaged in trading, manufacturing, contracting or mining, not in
a partnership, and using business name other than own name or includes your name plus
“and company”
• If there is a failure to register when required by law to do so, their action in any court in AB
(e.g. action for breach of contract against customer) can be stayed upon application by the
defendant (PA s 113)
o Note: struck different from stayed; stayed means held in abeyance; struck means
the action is eliminated
• Note: odd that there are provisions for sole proprietorship naming found in the Partnership
Act
▪ Municipal bylaws may require licensing by the sole proprietorship; may also be required by
condominium bylaws; zoning requirements may also be a limitation
▪ May need provincial license (e.g. real estate broker) or federal license (interprovincial trucking),
depending on the nature of the business
Risk of Loss Involved:
• Sole proprietor has unlimited personal liability – because sole proprietorship does not have separate legal
existence
o Liability extends to the individual’s personal assets
o The sole proprietor also assumes the risk of contractual and tortious liability
o Another exposure is through employment relationships
• Sole proprietor holds the entire risk
o Example: judgment creditor (person who is entitled to payment because of a court decision) wants to be
paid; the bank (creditor here) can enforce the debt by going after the judgment debtor – if the debtor is a
sole proprietorship, the creditor can pursue both their business and personal assets (because the sole
proprietor and proprietorship is one and the same)
o Example: employer has vicarious liability for employee; but insurance can be purchased for protection
▪ Insurance is important for any business vehicle

8
Power of Control: The sole proprietor has full control of the operation of the business

Participation in Profit/Distribution of Assets: All the benefit of the business goes to the sole proprietor

Dissolution:
• Sole proprietor winds up business or stops conducting business
• Partnership Act, S 111: if you registered your name as a business, can notify that the business under that name has
discontinued
• Death of proprietor ends the enterprise (different from life of corporation – extends beyond life of shareholders)

CORPORATION
- Three types of corps:
o 1/ Business corp under ABCA/CBCA
o 2/ Professional corp under ABCA and Legal Profession Act (for example)
o 3/ Unlimited Liability Corps
Creation and Other Formalities
o A corporation is a distinct legal entity created & regulated by statute. The governing statutes are the ABCA &
CBCA
o Corporations are separate legal entities: Can sue and be sued in its own name.
o Separate from its directors, shareholders, and officers (even true of one person corporations)
o There are specific filing and registration requirements to create a corporation
o Extra administration required in running a corporation (separate personal and corporate finances, returns, etc.)
Risk of Loss Involved
• The shareholder is not responsible for a corporation’s torights, breach of contract, etc… (limited liability)
o Shareholder liability is limited to their investment in the corporations (all they can lose is the money they
put in).
• There are exceptions to the principle of limited liability:
o E.g. Personal guarantees
▪ Individual can be held liable for corporate debt if they personally guarantee the debt (enters into a
contract of guarantee with the creditor bank) to guarantee the primary debtor (the corporation)
▪ But: creditor cannot take the entirety of a debtor’s assets (some minimal assets that a debtor can
hold onto e.g. dental appliances)
o Losses resulting from a shareholder’s negligence
o Directors and officers can be liable for wrongs committed
Power of Control
o Corporate business is done by a relatively independent managerial group including directors & officials
o There is a specific group empowered to make corporate decisions & the majority rule principle governs
o There are rules, though, that protect the minority from abuse by the majority
▪ Ex: majority of s/hs cannot vote to take away one person’s shares w/o compensation
Participation in Profit/Distribution of Assets
o A corporation has many options in how profits & assets are distributed
o Can choose to distribute profits to s/hs or keep profits in the corporation’s name for future business
opportunities.
Dissolution
o Has a perpetual existence independent of whether shares change hands or a s/h dies
o Can be dissolved by the filing of proper forms

• Lawyers can practice through a professional corporation for tax reasons

o Still have unlimited personal liability (like you would as an individual) to your clients as per the Legal
Professions Act

9
UNLIMITED LIABILITY CORPORATION (ULC)
• Exception to the principle that corporations afford limited liability to their shareholders; shareholders hold
unlimited liability jointly and severally
• Commonly used by US corps as a tax effective vehicle to hold business assets in Canada; they are taxed in
Canada as corporations but treated as flow-through entities for tax purposes (like partnerships)

PARTNERSHIP
• Partnerships in Alberta:
• Ordinary p/ship: unlimited personal liability per the P/ship Act (Volzke and McDonic)
• LLP: unlimited personal liability subject to s. 12 of the P/ship Act (many law firms operate as LLPs)
• Limited P/ships: the general partner has unlimited liability; the limited partner has liability limited to the amount
of its investment, subject to s. 64 of the P/ship Act.
o often seen in oil and gas
GENERAL
• Governed by the Partnership Act, and also by the rules of equity and CL
• Definitions:
o "Partnership" [PA s.1(g)] = A relationship that exists between or among persons carrying on a business in
common with a view to profits
▪ It’s a functional test: Partnership is how you’re acting (ex: sharing of profits? Shared bank
account? etc)
o "Business" [PA s.1(c)] = Includes every trade, occupation or profession
• Indicia of Partnerships
o Examine the intention of the parties and the effect of any agreement between them
o Joint ownership of property & sharing of gross returns does not automatically equal a Partnership
o Receipt of a share of the profits is prima facie proof that a person is a partner in the business
• Each partner is an agent of the firm and of the other partner for the purpose of the business of the Partnership
[PA s.6]
o Each partner has a reciprocal duty of loyalty and good faith toward his or her partners (Hitchcock v Sykes)
• Mutual Rights of Partners [PA ss 22 – 48]
o PA s 28(e); Volzke Consruction Ltd v Westlock Foods: each partner has right to manage and control
the partnership, but that is not an essential characteristic of a partnership
• Partnership Agreements: Most partnerships governed by an agreement which sets out the rights and
obligations of the partners
• Not distinct legal entities from the shareholders/owners (unlike corporations):
o “Partnership” is a reference to each individual partner, so there’s the same consequence of personal liability
o But the personal liability is magnified because partners are also responsible for the other partners’ mistakes
• Joint and Several Liability
o Joint Liability: Where each partner has 100% liability for a judgment (this is found in partnerships)
▪ But the partner who pays 100% has a right of indemnity against other partner who did not pay
o Several Liability: each separate and distinct partner can be held liable

ORDINARY PARTNERSHIP
Creation and Other Formalities
o Nothing required to create a partnership, it exists because people are conducting themselves
together with a view to a profit (exceptions for certain ventures)
o PA has default rules subject to agreement, you can K out of these rules if you so wish [PA s.28]
o Partnership is not a separate legal entity from the partners. (No existence distinct from the individuals
comprising it)

10
 o Persons associated in partnership required to file a declaration at Corporate Registry for partnership
involved in “trading, manufacturing, contracting, or mining purposes in Alberta”
Risk of Loss Involved
• Can have elevated liability because you can be held liable for negligence of another partner
o If there is a negligent partner, a plaintiff can sue all or even just one of the innocent partners.
o The innocent partner has a right of indemnity against the other partners, so that the partners can share
the burden of the judgment equally.
• Each partner is liable jointly with the other partners to the full extent of that partner’s personal assets for all
debts and obligations of the firm while they are a partner [PA s 11]
• Liability for firm wrongs, the whole firm, meaning all of the partners, are liable [PA s 13]
• Each partner is liable jointly, as well as severally, for anything for which the firm becomes liable [PA s 15]
Power of Control: PA s.6 (see above) – Each partner is an agent of the firm and for other partners

Participation in Profit/Distribution of Assets:

o [PA s.28(a)] Partners are entitled to share equally in the capital & profits of the business & must contribute
equally to the losses
▪ but this default rule of equal sharing can be changed through a Partnership agreement
• Dissolution: P can be dissolved upon the death of a partner [PA s.37(1)] or by illegality of the partnership [PA
s.38]
o Can also be dissolved by other ways (ss.36--‐39). Also depends on the agreement made between the parties.

LIMITED PARTNERSHIP (“LP”)

Creation and Other Formalities
o Creature of statute
o Special certificate must be filed to the registry
o Consists of one or more general partners and one or more limited partners
▪ The surname of a ltd partner cannot appear in the firm name, if it does he will be liable to any creditor
unless the creditor knew the ltd partner was not a general partner
o Only general partners may be shown on title for any real property owned by the limited partnership
o Governed by the PA through ss.49--‐80
Risk of Loss Involved
• Only the general partner has unlimited liability like in an ordinary partnership (PA s. 56)
• Ltd partners are only liable for what they contribute [PA s.57]
• The limited partners are investors (like shareholders) and are therefore not personally liable (except for the amount
that they have invested), unless they become involved in the control of the company (pursuant to PA s. 64)
o This is because when you take a level of control beyond that of a simple investor, you should stand to lose more
than just your investment
Power of Control
o Consists of 1+ persons who are gen partners & any # of persons who are ltd partners [PA ss.51(2),(3),(4)]
o General partners are allowed to take part in duties concerning governance and control
o Ltd partners should not be taking part in control of the partnership or liability may ensue

LIMITED LIABILITY PARTNERSHIP (“LLP”)

Creation and Other Formalities
o Strict formality to setting up an LLP. Not following procedures outlined in the legislation results in just having
an ordinary partnership.
o LLPs can only be created in an “eligible profession” w/in the meaning of PA s.81
o LLP is basically an ordinary partnership with increased protection from liability for partners
Risk of Loss Involved

11
 o Innocent non‐involved partners do not have personal liability to the wrongdoings of their fellow partners,
subject to s. 12 of the PA
o A partner is still liable to the extent of their capital contribution to the firm
o Also still liable for normal debts e.g. leases
• LLP Shield [PA s.12]
o Partners are shielded from vicarious personal liability for the wrongful acts of other partners
o The shield is not applicable to all partnerships; the Partnership Act limits the professions that can operate
as an LLP (e.g. dentistry, law, accounting, etc.)
▪ Investment advisors are not eligible [McDonic]
▪ Investing is not an eligible profession for conducting business through an LLP, so the section 12
shield only protects from liability the legal work carried out by the firm’s partners, and not
investing done by a partner
o Shield does not apply when the partner knew of the negligent or wrongful act and failed to take
reasonable steps to stop it [PA s.12(2)]

JOINT VENTURES
• No definition under the Income Tax Act
• Persons join together to pursue common project or business undertaking
• Venturers are not agents of each other unless the specifically agree; they are also free to compete with each other
• Liability is several; not joint or joint and several
• Venturers are direct owners of assets used in the venture, although they may be held by a bare trustee
AGENCY
• Definition of Agency (Bowstead and Reyolds):
o Agency is the fiduciary relationship which exists between persons, one of whom (the Principal) expressly or
impliedly consents that the other should act on his behalf so as to affect his relations with third parties, and the
other of whom (the Agent) similarly consents so to act or so acts. Any person other than the principal & agent
are referred to as a third parties
• Agency is the fiduciary relationship which enables one party (agent) to affect the legal relations of a second party
(principal)
• Agency requires 3 essential components:
o (1) Assent – agent and principle must agree to form an agency relationship, whether express or implied
o (2) Benefit – the agent must be acting for the benefit of the principal
o (3) Control – the principal must have the right to exercise control over the agent.
• Agency by Agreement can arise in 2 ways:
o Out of a specific agreement for the agent to act for the principal in a single matter in exchange for remuneration
o Out of a relationship established in a broader K (ex. Employment K where employee must enter into Ks on
behalf of employer)

AGENCY AND BUSINESS LAW

TYPES OF AUTHORITY
o Actual Authority
▪ Can be either express or implied
▪ Both equally strong and robust
▪ Can have actual authority by way of express authority (oral or written authority directly from principal) or
implied authority (implicit in the agent’s position or the specific duties that the agent is asked to perform
or something that goes to the standard practice in the industry).
o Apparent/Ostensible Authority (McDonic)
▪ where a person is held out as an agent when that person is not an agent, or agent is held out to possess an
extent of authority greater than that which has actually been conferred.

12
 ▪ Occurs where a third party reasonably perceives the agent to be acting w/in their authority (the agent does
not have actual authority). This is because the principal has cloaked them with the authority to do
something.
▪ Ostensible authority is the product of the principal’s conduct.
• impression of authority that the principal has created
o Agency by Ratification
▪ When a party holds themselves out as an agent where no agency exists, the principal may later adopt the
agent’s acts, thus forming an agency relationship after the fact.
• Implied vs. Ostensible
o Implied --‐ Actually have the authority / Ostensible --‐ Principal leads the third party to believe that agent has
this authority
• If there is actual or ostensible authority, then the agent binds the principal to their actions as an agent
• Why does it matters whether there is actual or apparent authority?
o It matters because it will impact whether the principal can recover from the agent
o BUT for either type of authority, it does not matter as to liability to a third party because the principal is bound
as liable in either case
LIABILITY
• Agent is personally liable for any torights they commit even though the agent is acting on behalf of the principal
• Principal may be vicariously liable for agent’s torights while the agent is acting w/in actual authority or apparent
authority
• To hold the principal vicariously liable:
o (1) An agency relationship must exist
o (2) The agent must have been acting for the benefit of the principal, and
o (3) The agent must have acted w/in the scope of their express, implied, or apparent authority

DUTIES
• Duties of Agent
o Agent owes fiduciary duty to principal & must show utmost good faith to principal. A fiduciary must not
personally profit from their position nor place their interests in conflict with those of the principal. Duties
include:
▪ Full disclosure of material info that would affect the principal’s position
▪ Avoiding conflicts of interest or multi--‐representation (representing two principals in the same trans)
▪ Avoiding secret commissions or profit from transactions
• Duties of Principal
o Usually set out in K creating agency relationship (ex: indemnify A against losses incurred while carrying out
duties)

PARTNERSHIP
• Alberta Partnership Act [ss 13 – 15]
o Each partner is an agent of the firm (s 6)
o Firm can be held responsible for agent’s actions if there was express or implied authority [s.13] or apparent
authority [s.14]
o All partners are jointly and severally liable for any liabilities arising under ss. 13 & 14 [s.15]
VOLZKE CONSTRUCTION V WESTLOCK FOODS (ABCA 1986) – FUNCTIONAL TEST FOR
DETERMINING PARTNERSHIP EXISTENCE
Ratio: Functional test for determining partnership – people are partners because they act like partners.
Facts: W (mall) was co--‐owned by Bonel Properties (80%) & Westlock Foods (20%) & Dave Shefsky (dead) was the
main s/h in WF (Defendant).
• V was the gen K’er who did work on W. It had not been paid its final acct.
• V sued WF alleging that they were partners with BP & thus jointly and severally liable for the unpaid balance.
13
 • At trial: respondent held not liable
Issue: Are WF and BP partners or mere co-owners?
Held (Moir JA): Court of Appeal overruled the trial judge; They were partners & thus WF was 100% liable for the
unpaid balance ($76,928.88 plus interest) with a right of indemnity against BP.
• There are many indicia of partnership (especially in relation to the statutory definition)
• Functional test for determining partnership – people are partners because they act like partners.
o There was intention to be partners & control is not a necessary element of a partnership
▪ Parties had agreed to share the costs of developing the business
o Profit sharing, loss sharing (agreement to share costs of renovation), shared bank account, and they
spoke of themselves as partners
MCDONIC ESTATE V HETHERINGTON (ONCA 1997) – LIABILITY OF PARTNERS IN AN
ORDINARY PARTNERSHIP (NOT LLP) LAW FIRM FOR MISCONDUCT OF ONE PARTNER –
TESTS FOR AUTHORITY
Ratio: Must determine the nature of the partner’s activities as compared to the nature of that specific business and then
examine whether express, implied, or apparent authority was granted to that partner; partners are vicarious liable for the
investments made for clients by another partner, without clients’ approval and without protecting their interests when it is
in the ordinary course of the firm’s business
• Tests for authority:
o Per court, EXPRESS [actual] authority flows from the authorization of the other partners; IMPLIED
[actual] authority flows from acts done in the ordinary course of the business of the firm.
o Per court, APPARENT authority flows from a consideration of whether a person dealing with the partner
would reasonably regard the partner as acting on behalf of the partnership. [Put another way, have the
other Partners clothed Watts with the apparent authority to do what he did?]
Facts: Ms. McDonic and Ms. Cooper retained Watt (rogue partner who dealt badly) to make their investments; McDonic
estate sued the firm (H), who could in turn sue the rogue partner
• The sisters sued Watt and the partners for negligence
• The rogue partner was disbarred by the Law Society of Upper Canada so could not afford to pay the liability, he
was broke; similar instances could arise where the rogue partner leaves the country
• Trial Court: Watt was acting as an investment agent, which is not within the ordinary business of the law firm, so
the firm’s partners are not liable
o So there was no actual authority (not within the ordinary business of the firm) and not apparent authority
because the other partners did not know what Watt was doing
Relevant Legislative Provisions (AB Partnership Act):
• Liability of firm for wrongs
13 When, by a wrongful act or omission of a partner acting in the ordinary course of the business of the firm
or with the authority of the partner’s co-partners, loss or injury is caused to a person not being a partner in the
firm, or a penalty is incurred, the firm is liable for it to the same extent as the partner so acting or omitting to
act.
• [Note: This provision is the equiv. of s. 11 on the Ontario PA referred to in McDonic]
• Misapplication of money
14 The firm is liable to make good any loss when
(a) one partner acting within the scope of the partner’s apparent authority receives the money or
property of a third person and misapplies it, or
(b) a firm in the course of its business receives money or property of a third person, and the money
or property so received is misapplied by one or more of the partners while it is in the custody of the
firm.
• [Note: This provision is the equiv. of s. 12 on the OPA referred to in McDonic
Issue: Are Watt’s partners liable to the plaintiffs for their loss based on actual or apparent authority?
Held: --‐ Appeal allowed; Partners liable for acts of Watt. Watt acted under implied authority, or at the very least under
apparent authority; judgment granted against each of the partners

14
 • PA s.6 --‐ Every partner is an agent of the firm and his other partners for the purpose of the business of the P and
all partners are liable for the acts of other partners for anything done in the usual way of business, unless the
partner had no authority to act for the firm in the particular matter.
Tests for authority:
• Per court, EXPRESS [actual] authority flows from the authorization of the other partners; IMPLIED [actual]
authority flows from acts done in the ordinary course of the business of the firm.
• Per court, APPARENT authority flows from a consideration of whether a person dealing with the partner would
reasonably regard the partner as acting on behalf of the partnership. [Put another way, have the other partners
clothed Watts with the apparent authority to do what he did?]
Application to the facts:
• Express authority: In this case, there was no express actual authority
• Implied authority – question is whether Watt’s activities were within the scope of his implied authority as
partner – Was it within the ordinary course of business of the firm to provide investment advice?
o Watt’s activities were the same as those carried on by the firm for other clients. It did not matter that law
firms typically do not provide investment advice, as doing so was in the ordinary course of business for this
firm.
o Nature of activity, not the manner in which that activity is performed, will determine whether that activity
falls within the scope of the firm’s ordinary business
• Does not matter that the other partners were not negligent in how they provided investment
advice
• Apparent authority
o The representation by the principals (H) of Watt’s apparent authority is by allowing him to be member of the
firm, to have an office, and conduct business as a partner with the firm
o The sisters were dealing with Watt and reasonably assumed that he was operating on behalf of the law firm
Note: In McDonic, if the firm was an LLP rather than an ordinary partnership, they would still likely have been held
liable
CHAPTER 2: A BACKGROUND TO CORPORATION
• Corporations can be created either in a province (ABCA) or federally (CBCA)
• The ABCA and CBCA are comparable but differences do exist between the two.
• Considerations when incorporating:
Advantages Disadvantages
• Limited liability • Expensive to start
• Extra financing through shares • Closely regulated
• Differing degrees of participation • Extensive record keeping
• Tax advantages • Possibility for double taxation.
• Prestige of being a corporation
• Transferability of shares.
• Qs to ask your client when deciding whether to incorporate:
o Is there a need for limited liability? What are the risks involved w K and tort liability?
o Is there a need for perpetual existence?
o Where will the financing come from?
o What degree of participation is envisaged?
o Are there any tax advantages associated with incorporation?
o Should they incorporate provincially or federally?
▪ Federal corporations may be perceived as more prestigious but is it necessary?
▪ Federal fees are slightly higher than provincial fees
▪ Although ABCA & CBCA are very similar, the difference may be important

Three Categories of Corporations

15
 • Business Corporations - To create a business corporation you have to follow the rules in the ABCA and
CBCA
• Professional corporations under the ABCA and the Legal Profession Act (for example) (ie. Doctors, lawyers,
dentists, accountants, etc…)
▪ If practicing law through a PC, client is still able to sue for personal assets of the lawyer
▪ Other professions have similar legislation to the Legal Profession Act
▪ If the professional is neg, there is unlimited liability, however there are tax benefits
• Unlimited Liability Corporation - shareholders have unlimited liability but there are tax advantages

Debentures
• Special type of debt for a corporation
• Come in two forms:
o (1) secured (debt is secured against a specific interest)
o (2) unsecured (simply a mass of debt)
• Secured debentures can be secured in two ways:
o Fixed security debenture – A loan is secured against a specific item
▪ subject matter under security interest stays the same (e.g. piece of personal property)
o Floating charge debenture – deployed where subject matter of security does not stay the same (this was
the case in Salomon)
▪ on default, the debtor clamps down on all the current assets
SALOMON V SALOMON (1897 ENG HL) - LIABILITY OF DIRECTORS IS PROTECTED UNDER A
CORPORATION – INDIVIDUALS CAN INCORPORATE
Ratio: In the absence of any fraud, a corporation, properly incorporated under the Act, will protect the directors
from liability arising upon bankruptcy; If you want to shelter yourself from unlimited liability, you as an individual
are free to incorporate
• A corporation is a separate legal entity; a shareholder can give a loan to the corporation in which it holds shares; a
corporation is not an agent for a (principal) shareholder
Facts: Aron Salomon was running a shoe business as a sole proprietor, & wanted to get rid of the unlimited personal
liability by incorporating (note that if you want to do this now, there can be personal tax liabilities associated unless you
do it correctly)
• 1 rule at the time for creating corps was that you must have 7 s/hs. So, AS gave 1 share to each family
member
• AS Ltd. then agrees to purchase the assets of AS the individual for the purchase price of £39,000 (which seemed
like a large amount)
• The corporation pays this purchase price by:
o issuing more shares (AS gets 20K shares) which are valued at £1 each.
o issuing a debenture (a legal I.O.U.) in the amount of 10,000 pounds to Aron. [Note: a debenture is a
document that evidences a debt and in this case provided for a floating charge.]
▪ Remember: debtors are paid before shareholders so they are a priority interest
o providing a few other benefits.
• AS is now a creditor for his own corporation for £10K (and also a highly protected secured creditor to his own co)
• Soon thereafter, Salomon Ltd. started to experience financial reversals due to a depression in the boot and shoe
trade and
o To help Salomon Ltd., Aron lent money to the company. He also got his debentures cancelled and
reissued to Mr. Broderip as security for a 5000 pound loan to Aron the proceeds of which Aron gave to
the company.
o When Salmon Ltd. failed to make a required interest payment to Mr. Broderip under the debenture,
Broderip had a receiver appointed to force the sale of corporate assets.
• The corporation had trouble keeping its payments to B, an investor, and the corporation went into bankruptcy.
• Claims filed with the liquidator of Salomon Ltd. were as follows:
16
 o Broderip on the debenture;
o Aron on the balance of what was left on the debenture once Broderip was paid out; and
o Unsecured creditors
▪ ***Once Broderip was paid off, there would only be about 1055 pounds left and, if Aron were to
receive this amount as the next secured creditor in line, there would be absolutely nothing left for
the unsecureds.
• B was paid out (because he held the debentures, and was therefore a secured creditor) but the unsecured
Creditors were not paid
o The unsecured creditors wish to go after Salomon directly to satisfy the debts
• Appeal Court determined that AS was guilty of fraud and personally liable to the creditors
Issue: Is AS the individual personally liable for the debts of AS Ltd? Was AS a legitimate creditor of AS Ltd?
Held: Appeal allowed decision; AS is not personally liable for the debts of the corp and he remains a legitimate creditor of the
co.
• Creditor Argument 1: AS Ltd. was not properly constituted under the Act
o HL said the Act only asks for 7 shareholders and this was complied with (doesn’t matter if they’re
related)
o There were no other requirements under the Act (those requirements were being added by the
courights below)
• Creditor Argument 2: The formation of the corporation was a “scheme” to allow AS to carry on
business in the name of the corporation
o There is nothing wrong, immoral, or illegal with the one-person corporation
o It is the legal right of an individual to protect themselves from personal liability by incorporating
o the Act does not say that small corporations would be treated differently
• Creditor Argument 3: The corporation was being used as Aron Salomon’s agent, as such, AS, as the
principal, has to indemnify the corporation
o Either the ltd corporation was a legal entity or it was not. If it was, then the corporation owns its own
assets, the business belongs to the corporation and not to Aron Salomon, the individual.
o If the corporation was not a legal entity, then it cannot be an agent
o The corporation is not an agent of AS the individual, because it is running its own business and is a
separate legal entity.
• Creditor Argument 4: Aron Salomon defrauded the corporation because he charged too much when
the corporation purchased the assets of the sole proprietor
o No fraud here because the shares are worth what the market says they’re worth, not necessarily £1 per
share
o It is not a fraud on the other shareholders because they knew exactly what the transaction would be and
agreed to it
o It is not a fraud on the creditors because there is a corporate registry whereby the creditors could find
the debentures; they were not misled or defrauded
Comments: Shareholders can lend to the corporation and be a very high level secured creditor (and that is not
impeachable)
• ABCA s.46: Shareholders of a corporation are not as shareholders liable for any liability, act or default of the
corporation except… (all they stand to lose is what they invested in the corporation)
• ABCA s.16: Corporation is a separate legal entity
• It is up to the shareholders to determine from whom and how they receive loans or debentures from other parties
HISTORY OF CORPORATIONS
Kinds of business vehicles prior to the 1862 Act, per Palmer, Palmer's Company Law, 2nd ed. (1898):
1. ORDINARY P/SHIPS
2. COMPANIES INCORPORATED BY ROYAL CHARTER

17
 *originally, members had no personal liability but this was changed by 7 Will. 4, c. 73 which attached liability to
the shares in capital, and sometimes with an additional liability of the like or double the amount in the event of a
winding up"
• This was a costly approach to corporations
3. COMPANIES INCORPORATED BY SPECIAL ACT OF PARLIAMENT (for larger undertakings, such as canal construction)
• In many cases, liability of members is limited to amount of their shares (at 4)
• an impracticable approach for most business interests – would have to lobby the government for a special
Act
4. UNINCORPORATED COMPANIES CONSTITUTED BY CONTRACT (common law companies)
o these companies became common until the early 18th century; they were frequently fraudulent
o An unincorporated company has always been regarded by the law as a partnership with special features;
one of these special features was the transferability of its shares.
o Response in Britain by the Bubble Act:
▪ This Act made it unlawful to create common law companies, which would buy and sell stock
▪ South Sea Company – told by the King that they could trade in the seas off the coast of South
America
• Shortly after the Bubble Act, the company collapsed and revealed that it was a ponzi
scheme; many people were ripped off and were not paid back for their investments
• Operating a ponzi scheme – investor is taking money as investments, paying off early and
top investors, so the lower level investors will never be paid; the money goes into the
pockets of people at the top of the pyramid
o Example: Bre-X reporting the finding of gold and reporting high estimates with
fraudulent test results
▪ No actual gold was taken out of the ground, while the company had a 6
billion dollar value
o People kept buying Bre-X’s shares and massive investments were made by nearly
everyone
o when the gold tests were found to be fraudulent, the company collapsed and the
investors lost their money
5. Subsequent Events
• 1825 Repeal of Bubble Act
• Enactment of the Joint Stock Companies Act 1844 (facilitated legal proceedings and the holding of property but
did not confer limited liability per Palmer at 7).
• Companies Act, 1855
o Per SKO [some footnotes omitted], thirty years after the Bubble Act’s repeal -- Parliament took another step
commensurate with laissez-faire ideology.
o It legislatively granted limited liability to corporations in 1855.
• The Companies Acts, 1862 to 1898
o Per Palmer, at 8, the main object of the Act of 1862 was to throw open to all the coveted privilege of
carrying on business with limited liability.
6. In sum, modern corporate law statutes are classically identified as providing for:
• Limited liability
• Incorporation as of right subject to the paper work being done properly (versus being discretionary)
• Requirement or registration/public disclosure of documents
• Provisions to protect members such as the requirement of periodic meetings and the auditing requirement
CORPORATE CONSTITUTION
• Why corporate constitutions important:
o Corporation must act in accordance with its constituting documents
o Govern how disputes are resolved between shareholders, directors, etc.

18
PURPOSE
• Corporate Constitutions are basic documents that govern the corporation.
o They are essentially derived from the regulations (ABCA, CBCA)
• The fundamental terms governing the corporation concerned.
• Come into existence by either special acts or general acts of incorporation

Corporate Constitution Includes:

o Articles of incorporation
▪ These “contains only the most basic provisions concerning the corporation: its name, the structure of its
share capital, the place of its registered office, the size of the board of directors, and any restriction on the
business in which it may engage.”
o Bylaws.
▪ These are rules “adopted by a company for the regulation of its own actions and concerns, and of the rights
and duties of members among themselves.”
o Unanimous Shareholder Agreements (USAs) under s. 146 of the ABCA (s/h rights defined w/in a
corporation)
CORPORATE STRUCTURE
• Corporation
o Separate personality
o Perpetual existence
• Shareholders
o Equity claimants that invest for a return
o Claims or rights in terms of voting rights, dividend rights, and rights on liquidation
o Liability limited to amount of investment
o Generally do not have any managerial power
o Elect the board of directors based on a majority vote (if they hold a voting share)
▪ One of their most important powers
• Directors
o Appoint officers to manage the corporation
o Make major decisions on corporate policy (could consist of just one director)
o Oversee corporate strategy
o Are elected by shareholders
o The duty of the directors is to the corporation, not to the s/hs [ABCA s.122]
o Main job of the directors is to keep an eye on the CEO (the Board of Directors has the ability to fire
officers)
• Officers
o CEO, President, Vice--‐President, Secretary, Treasurer, etc...
o Manage the corporation and hire others to assist in management and carry on business of the corporation
o Act in the best interest of the corporation (not the s/hs if there is a conflict)
o Are hired or fired by the Board of Directors
o The CEO is responsible for everything at the firm (must hire and fire senior executive team etc…)
• The three groups often have disputes – part of what the corporate Constitution does is sort out the outcome of
these disputes
• Employees
▪ Mostly governed by employment law
▪ S 119 of ABCA – directors have liability for employee wages in some situations
• Groups external to the corporation:
o Creditors
▪ Certain rights granted under the ABCA
METHODS OF CREATING CORPORATE CONSTITUTI ONS

19
 • Corporation comes into existence via:
o Special acts of incorporation:
▪ Legislation creates corporations for specific purposes (e.g. telephone companies, universities, Crown
corporations)
▪ Not available to regular businessmen
o General acts of incorporation (ABCA, CBCA):
▪ Generic piece of legislation whereby if you follow the rules, you will be a corporation
▪ Sets up global set of rules on all corporations created under these acts
▪ Used to create corporations that engage in business of all kinds and descriptions
▪ This is so for the majority of business corporations
• Kinds of General Acts of Incorporation (in Canada, there are 3 basic models that the generic Acts
adopt):
o Letters patent, memorandum of association, articles of incorporation
LETTERS PATENT (ONLY APPLIES IN PEI & QUEBEC)
• Involves an application being made to the Crown's representative who issues a document known as the letters
patent
• Letters patent is the constitution of the new corporation and includes its name, purpose and share structure (By--‐
laws are in a separate doc)
MEMORANDUM OF ASSOCIATION (MOA)
• Patterned after the English general act system
• In AB only used for not--‐for--‐profits
• Achieved by registering a Memorandum of Association & Articles of Association (in--‐house rules like by--‐
laws) with the registrar of the appropriate gov’t office
• Memorandum sets out the constitution, name, share capital, restrictions.
• Articles set out the day-to-day operating rules
• Note: BC has new legislation which is a hybrid between this and articles of incorporation
ARTICLES OF INCORPORATION
• Articles of Incorporation are filed with the appropriate gov’t body which issues a certificate of incorporation
• Recites the corporation’s name, purpose, capital structure and general matters
• Constituting Docs:
o Articles: General matters (name of company, corporate structure)
o By--‐laws: day to day operating rules/internal governance (are not filed with the corporate registry)
o Statute
o Unanimous Shareholders Agreement (USA) (Usually in smaller companies)

CANADIAN JOREX LTD V 477749 ALBERTA LTD (ABCA 1991) – RESIDUARY POWER HELD BY
CORPORATE DIRECTORS - POWER TO CANCEL SPECIAL MEETINGS - SHAREHOLDER REMEDIES
Ratio: s.102 CBCA (s.101 ABCA) confers residuary power on the board where power not expressly limited
by a corporation’s by--laws.
Facts: Directors called a special meeting and before the meeting they cancelled it
• 477749 Alberta (a shareholder of Jorex) sought a declaration that the cancellation of the meeting was of no force
and effect
• S/hs wanted to examine the auditor & they argued that they would lose the right to do so if the meeting was
cancelled
• At trial, the trial judge found that the federal corporation could not cancel a special meeting that they called in
advance of its scheduled date; it was ruled that the cancellation was of no force or effect
Issue: Do the directors of a federal corporation have power to cancel a special meeting called by them ahead of its
scheduled date?
Held (Fraser JA): Appeal allowed; directors can cancel a special meeting of s/hs.

20
 Reasoning:
• Jorex’s argument:
o Unless the CBCA or the bylaws expressly prohibit the directors’ cancellation of special meetings,
the directors’ residual powers under s. 102 include the right to do so
o Residual power to manage a corporation’s affairs rests with the directors
• Respondent (shareholder) argument:
o Bylaws do not provide for the cancellation of a meeting, nor does the CBCA
o The bylaws do outline that the adjournment of a meeting must be conducted by the shareholders, the
directors therefore lack the authority to a cancel a meeting once it is called
• Reasons why the Court rejected the narrow approach to restricting the power of directors:
o Under the Canadian system, ABCA s. 101 gives power to manage to the directors; if that power is not
taken away by the corporation’s constituting documents (e.g. bylaws or USA), then the power continues
to lie with the directors, rather than the shareholders
▪ Directors’ powers to manage a corporation’s affairs are unlimited except to the extent that powers
have been circumscribed by a USA or by bylaws
▪ The Court did not follow the British precedent (Smith) because Canada does not follow the same
model of incorporation (memorandum of association) on this particular point of residual powers
o A rigid approach to cancellation of meetings would lead to unreasonable results
▪ unreasonable to say that directors can call a special meeting but cannot cancel it.
o Directors have to use their powers for the best interests of the corporation; there are no events or
allegations to the contrary here (otherwise oppression remedies are unavailable)
o The shareholders have other methods of calling a special meeting and upholding their right to a meeting
Remedies which s/hs in this case could have pursued instead:
o S.142 ABCA [meeting requisition]--‐ Requisition the calling of a meeting
▪ The s/hs can requisition a meeting. The directors cannot cancel this meeting (not incl’d in their
residual power) because the general power to cancel is read in the light of statutory provisions
limiting it.
o S.242 ABCA – Oppression remedy
▪ Can argue the way the directors are using their power to run the business & affairs of the
corporation is oppressive.
▪ Oppressive behaviour is that which unfairly disregards or is unfairly prejudicial or denies a
reasonable expectation of a s/h.
• The court had broad authority to provide various remedies
o S.143 ABCA [meeting called by court] – Can apply for a court order directing meeting proceed when it
has been cancelled (s 144 of the CBCA)
o S.132 ABCA [AGMs and special meetings] – Director’s power is limited by statute that AGM must be
held every 15 months (or 18 months after creation)
▪ Do not have the power to cancel an AGM that would contravene s.132 (the financial statutes of
the corporation are presented at the AGM and this is where the auditor automatically comes)
▪ Two kinds of meetings (AGMs and special meetings)
o S.109 ABCA [removal of directors by ordinary resolution] – Vote out the directors
▪ Can do this by ordinary resolution at a special meeting (subject to a USA)
▪ Presumptive rule, you can vote out the directors on a majority vote.
• Problem – minority shareholders won’t have the power the remove the directors because
a majority is needed to remove the directors by this strategy
o S.146 ABCA Enter into a USA
▪ Pursuant to a USA, the parties could remove the directors power to cancel
o s 102(5) ABCA [bylaw proposal] – Bylaws
▪ Could put a bylaw in place that removes the directors’ power to cancel

Note: there are two different kinds of meetings

21
 ▪ AGM – s 132(1)(a)
▪ Special Meeting – s 132(1)(b)
• Note: if the directors are treating the minority shareholders improperly, the shareholders can seek remedies for
oppression
o This was not the case in this scenario

CHAPTER 3: THE PROCESS OF INCORPORATION

PROCEDURES

• Corporations are creatures of statute and have to be incorporated to come into existence
• None of these acts requires the people incorporating to be resident of the place in which they are incorporating

CHOOSING WHERE TO IN CORPORATE

• In Canada, most jurisdictions use the Articles of Incorporation model and are largely similar.
• The corporate law statutes are similar in different jurisdictions across Canada
o However, only AB and Nova Scotia allow for unlimited liability corporations (important for tax purposes)
o Delaware is the state of choice for incorporating in the United States
• Federal (CBCA) v Provincial (ABCA)
o Incorporate provincially if you will conduct business only in that province
o Incorporate federally (CBCA) if your corporation will conduct business in multiple provinces
o A fed incorporated corporation cannot be obliged to change its name because it conflicts with a provincial
incorporated corporation
▪ The CBCA may give you superior name protection (because you cannot be compelled to change it) but
the CBCA corporation can be sued in tort for confusing the public (called passing off).
• Continuance
o When corporation is established in 1 jurisdiction would like to enter another, this is not the same as doing
business in another jurisdiction
o The effect of continuance is the same as if the corporation had been dissolved in its home jurisdiction
& simultaneously reincorporated in another.
▪ S.189(4) ABCA: Must be approved by special resolution (2/3 of the votes cast)
▪ S.189(1)(b) ABCA: Need the registrar’s approval to proceed.
▪ S.191 ABCA: S/hs have a right to dissent; have appraisal right (entitled to be bought out at fair market
value)
HOW DOES ONE INCORPORATE UNDER THE ABCA?
• If incorporating under alphabetic or word name, search the proposed name for availability
o ABCA s. 12(3) (naming requirements)
o If available, the search service will issue NUANS and reserve it for 90 days (not guaranteed though)
o A NUANS report is required when granting new corporate names. It lists similar existing names;
used to determine availability of a proposed name.
▪ Ensures that new names don’t create confusion with others that are already existing
o Have a registered office address in AB [s.20(1) ABCA]
o Follow procedures as outlined in s.7 of the ABCA
▪ File documents & fees (articles of incorporation, notice of address, notice of directors, NUANS (if
applicable)) with registrar
▪ When sending documents to registrar, also send a ‘notice of directors’ [s.106 ABCA]
o On receipt of the documents required under s.7 & the requisite fees, the Registrar shall issue a certificate of
incorporation [s.8 ABCA]

WHO CAN INCORPORATE?:

22
 • 1+ persons may incorporate by signing the articles of incorporation [s.5 ABCA]

REQUIRED INCORPORATI ON DOCUMENTS

• Under the CBCA, the following forms are required, plus a $500 fee.
1. NUANS search results (name search)
2. Articles of Incorporation - Form 1: (most important)
▪ You want a lot of flexibility in the articles of incorporation.
▪ According to ss. 9, a corporation comes into existence on the date of its incorporation
▪ Corporate Name: You can have a numbered name to eliminate hassle
▪ Province where registered office located
▪ Class of Shares and max number of shares corp is authorized to issue
• Defines corporate share structure
• The default is no restrictions on share transfer (usually not a good idea)
▪ Number of directors: Number of min and max (ss.107: if a corporation is to have cumulative voting, it
must have a fixed number of directors)
▪ Restrictions on share transfers: Often this space is left blank to allow for flexibility
▪ Miscellaneous Rules: Can leave this blank
• E.g. borrowing powers, quorum for directors’ meetings
▪ Signatures: You cannot transfer these electronically
3. Form 2 – Notice of address (Initial Registered Office)
▪ Must have registered office in Alberta (s 20(1))
4. Notice of Directors (First Board of Directors) and Change of Directors:
▪ Whenever directors change, must file the changes within 15 days (s. 113(1))
▪ s.106(1) ABCA – At time of sending articles, incorporators send the Registrar a notice of directors
▪ s.106(1) CBCA – At time of sending articles, incorporators send the directors a notice of directors &
the director files it
• s.104(1) after issuance of certificate of incorporation meetings are held to hammer out details

RESTRICTING THE TRANSFER OF SHARES UPON INCORPORATION: (WHY DO IT?)

o Often used in small corporations where the s/hs are the directors, officers, managers, etc…
o Ensures that shares are not transferred to someone you do not want
o When you have a share transfer restriction it helps you meet the definition of a “private issuer” &
qualify for the private corporation exemption which provides for less burden by the Securities Act

CONSEQUENCES OF INCORPORATION
• if not incorporated properly, you will have personal liability
• Corporation name must be prominent on cards, Ks, and cheques to avoid personal liability.
• If using a separate trade name, it should always appear in conjunction with the corporation’s full name
• May be necessary to register the trade name in accordance with s.110 of the Partnership Act
• Client should understand the separate roles of the directors, officers, and s/hs
• Directors subject to duties and liabilities laid out in the ABCA, CBCA
• AGM must be held and annual returns must be filed to keep the corporation in good standing
• Licensing & Registration: Requires both municipal & provincial business license (Some licensing under
specific legislation may be required as well)
CORPORATE RECORDS AND OTHER MATTERS
• S.21 ABCA (s.20 CBCA) – States what must be kept at the Corporation’s office
o corporation shall prepare and maintain certain documents
o e.g. minutes of meetings, notice of directors, notice of change of directors, security registrar, copies of financial
statements, registrar of disclosure (s. 120), resolutions of directors

23
 • S.23 ABCA (s.21 CBCA) – States which corporate records are open for examination and which are not
UNANIMOUS SHAREHOLDE R AGREEMENTS (USAS)

• Generally found in closely held or small corporations

• Device by which closely held corporations (with restricted share transfer) can act like a partnership while having the
standing of a corporation
• What can be accomplished by a U.S.A:
o Can restrict the power of directors to manage (ABCA s. 101(1))
o Often deals with circumstances by which shares can be transferred
▪ E.g. right of first refusal (other shareholders will have option to purchase chares before they are sold to the
public)
o Can outline dispute resolution
▪ Can affect entitlement of shareholders to demand dissolution of the corporation (s. 215(1)(b)
o Rules for special resolution and general resolution meetings
▪ Through a USA, you can change/tighten the rules to allow something to happen under a special
resolution (2/3) instead of under a general resolution (simple majority)
▪ Example: Removal of directors by shareholders (s. 109(1))
• s.109(1) ABCA requires ordinary resolution to remove directors, USA could modify this
o Can affect the powers of the s/hs (some ABCA provisions give s/hs rights subject to losing them in USA)
▪ Ex: in ABCA only, s.109 – ‘subject to a USA’, s/hs may by ordinary resolution, remove directors…”
o Entitlement of shareholders to demand dissolution of the corporation (s. 215(1)(b))
• Governed by provisions in the ABCA (and the CBCA). Difference between USA under ABCA and CBCA:
o ABCA
▪ S.146: Broad scope of what a USA can encompass (much broader than CBCA); restricts the powers of
directors to manage the affairs of a corporation
▪ S.146(7): If s/hs take directors’ powers, they also take the liabilities that come along with that
management power
▪ S.101(1): Subject to the USA, the directors can manage a corporation
o CBCA
▪ s 146(1): allows for restriction of directors’ powers to manage or supervise management of the
corporation
▪ more limited in what can be accomplished by a USA
• USA is governed by the ABCA; it is part of the corporation’s constituting documents
o Must be complied with by directors and shareholders
o Can get a court order to enforce
o S.248 ABCA: Can go to court and get a compliance order if someone is not following a USA
• What is the difference between a USA and an ordinary s/h agreement?
o USA is part of the Act and ranks on par with articles of incorporation and bylaws
o Since directors are obliged to abide by the USA, s/hs have power to oblige abidance (ex: s.248 ABCA)
• s 146(8) ABCA: USA can only be amended with the written consent of all those who are s/hs at the
effective date of the amendment

CICCO V 609940 ONTARIO INC (TRUSTEE OF) – U.S.A NOT BINDING ON 3 RD PARTY WITH NO
NOTICE OF RESTRICTIVE AUTHORITY OF DIRECTORS – BANKPRUCTY ASSIGNMENT NOT
ANNULLED BY USA
Ratio: A USA may not operate to bind a third party dealing with the corporation who has no notice of the
restrictive authority of its directors
• Anytime a dispute arises check: (1) Articles of Incorporation, (2) USAs, (3) CBCA or ABCA
Facts: Cicco and Bertucci are directors who each owned 50 % of shares in a company & entered into a unanimous
shareholder agreement (USA) which said that all decisions affecting the corporation needs both of their consent

24
 • In breach of USA, Bertucci adopted a directors’ resolution that the corporation makes an assignment in
bankruptcy
• Upon learning of the assignment, Cicco moved for an annulment of the assignment. He claims that because
director's resolution enabling the assignment was in breach of the U.S.A., the assignment was unauthorized.
Issue: Should the assignment into bankruptcy be annulled due to it contravening the USA?
Held: No. Bankruptcy assignment will not be annulled. Breach of the USA gives Cicco a right of action, but
because the corporation was insoluble, the assignment should hold
Reasoning:
• Test for annulment of assignment in bankruptcy:
o Court must conclude that the assignment ought not to have been made or filed (a wide ranging and
flexible test)
• Assessed in terms of the bankruptcy context with policy considerations
o Effect of USA was to limit the authority of the director, but that is entirely an internal matter
between the director and the share holders
o Bertucci may be accountable to shareholders for failure to comply with the agreement, but that does
not render the assignment void.
o Assignment is for the benefit of the creditors and the function of the trustee is to protect their interest
o It is the policy of the BCA that assets of an insolvent company be distributed to the creditors
according to the scheme of priorities there described
o So the USA is binding on the parties within the USA, but does not dislodge proceedings such as an
assignment in bankruptcy
CORPORATE BY-LAWS
• Provide global in--‐house rules & responds to rules suggested by ABCA
o Provides for general rules & sets up regulations for managerial action
• Generally deal with the inner workings of a corporation including s/h rights, who the auditor will be, etc…
o These must be adopted by the s/hs under s.104(2) ABCA.
• Not required to have bylaws & ABCA does give some guidance but does not provide details for all areas of
the corporation
• By--‐laws will trump the legislation so where legislation says its okay for directors to do something and this is
forbidden under the by--‐laws, the s/hs can sue the directors
• New bylaws or amended bylaws: must be submitted by the director at the next meeting where the s/hs who vote
on whether or not to adopt them [s 102(2) ABCA]
o S. 102(4) - if bylaw repeal or amendment is not submitted properly or shareholder refuse to consent, then
the action fails
• E.g. bylaws: S. 131(3)
o Subject to limitation, shareholder entitled to attend meeting can attend by electronic or other means of
participation
o Can do this if the bylaws so provide or all shareholders at the meeting consent
• Two perspectives on bylaws
o 1) make them lengthy and detailed – including content that is already recited in the ABCA
▪ Problem – if the ABCA changes, have to go back and change the bylaws
o 2) only including bylaws needed to address specific issues that are of concern and not reciting provisions
of the ABCA
• Under s.163 ABCA, s/hs can vote not to appoint an auditor (good for small corporation) and make
themselves responsible for the audit
DIRECTORS’ ORGANIZAT IONAL MEETING
• Once bylaws are drafted, the certificate of incorporation is obtained & there must be an organizational
meeting [ss.104]
• S 104(1) – directors can adopt a corporate seal at an organizational meeting (although not required as per s 25)

25
KINDS OF CORPORATIONS

oThe classification of the corporation dictates the degree to which it must comply with disclosure
requirements and certain other restrictive provisions of the ABCA
• (1) Distributing Corporation
▪ A corporation which is a reporting issuer for the purposes of the Securities Act, and in general
terms is a corporation, any of whose issued shares or securities were part of a distribution to the
public, and which has more than 15 shareholders
▪ This kind of corporation is more regulated by the ABCA than its non-distributing counterpart.
▪ Ex: a distributing corporation may not dispense with an auditor [s.163(1) ABCA] and must have
no fewer than 3 directors [s.101(2) ABCA]
• (2) Non--Distributing Corporation
o non-distributing means not selling shares to the public
o Certain provisions in the ABCA relax requirements for this type of corporation
▪ E.g. corporation that is non-distributing can dispense with an auditor (idea is that auditor is not
needed for a small company) and need only have one director
o Corporation with fewer than 15 shareholders
▪ These corporations are most common and have the least amount of regulation; they, by
definition are not a distributing corporation
▪ Excluded from requirements of the ABCA pertaining to non-distributing corporations with
more than 15 shareholders
• reason: small corporation does not need the same level of protections built in to limit
large numbers of shareholders
o Corporation with more than 15 shareholders
▪ Must comply with proxy solicitation requirements and must prepare a list of shareholders for
shareholders’ meetings
▪ More heavily regulated
LOSS PREVENTION – CODE OF PROFESSIONAL CO NDUCT

• S.2 of the Code of Professional Conduct --‐ A lawyer must not act for more than one party in a conflict or
potential conflict situation unless all such parties consent and it is in the best interests of the parties that the
lawyer so act
o Conflict = a situation where the parties are prima facie different in interest but there is no dispute among the
parties in fact e.g. estranged spouses, lessor and lessee
o Potential Conflict = situation where the parties are prima facie aligned in interest & there is no dispute
among them in fact, but the circumstances are such that there is a possibility of differences developing
e.g. co-plaintiffs, co-defendants, co-insured, beneficiaries under a will
• Acting in a conflict or potential conflict situation increases a lawyer's vulnerability to charges of professional
misconduct
• Consent includes having to let all the parties know that you are being retained to act for all of them (and
the pros/cons of this situation).
o Ultimately if they go forward, must underscore that you are acting for all of them, no info received in
relation to the matter is confidential as between all the parties, and if a conflict develops which cannot
be resolved, you might have to cease acting for some or even all of them.
• Not mandatory that disclosure or consent is in writing, but lawyer has onus of establishing adequate
disclosure and consent, so getting it in writing is better.
• 3 things to put in writing when acting for more than one shareholder:
o That you are being retained to act for all of them
o No confidentiality amongst the shareholders
o If a conflict develops which cannot be resolved, the lawyer may have to withdraw completely

26
CORPORATE NAMES

COMMON LAW AND STATUTORY REQUIREMENTS

• One of the requirements for incorporation is an acceptable corporate name

• All Canadian jurisdictions restrict the registration of corporate names that are likely to deceive the public
o Reason for requiring distinct company names is so that persons know exactly who they are conducting
business with
• A corporation or extra-provincial corporation may not have a name similar to the name of a corporate person
unless that person consents in writing to the use of that name (ABCA s. 4(1))
• A name may not:
o Be likely to mislead the public
o Be obscene
o Lack distinctiveness
o Be likely to cause confusion with another business
o Be deceptively misdescriptive
o Connote government sponsorship or the business of trust, loan, insurance, or banking where it does not
actually carry out those features of business

3 Elements of a Corporate Name:

o (1) Distinctive Element:
▪ A unique identifier of the name
▪ Regulations prohibit names that are too general (ex: “Dry Cleaners Ltd.”)
▪ Ss. 12: “Prohibited Names” – no obscene or scandalous words
▪ S.12(1)(c) ABCA – no corporation shall have a name that is similar to that of another corporation if it’s
misleading
▪ E.g. Telefax
o (2) Descriptive Element:
▪ Describes the line of business
▪ May not be absolutely necessary, but makes approval more likely
▪ E.g. Commercial Communications
o (3) Legal Element: s 10(1) ABCA: Requires Ltd. to be included in the name.
▪ Indicates the legal status of the corporation as an incorporated body
▪ E.g. Ltd
o Ex: Paws (Distinctive Element) Pet Food and Accessories (Descriptive Element) Ltd. (Legal Element)

For alphabetical names (not numbered names), corporations are required to submit a NUANS report
in order to be incorporated:
• NUANs search (Newly Upgraded Automated Name Search):
o A NUANS corporate name search report is required by the federal and most provincial /
territorial governments when granting new corporate names for use.
o The reports list similar existing corporate names and trademarks; they are used to determine the
availability of a new proposed name.
o This ensures that new corporate names do not create confusion with others and is intended to
protect Canadian businesses and consumers.
o Reserves the name for 90 days; the report has a life of 90 days from the date it was requested
• Corporate Registries makes final decision on whether your name is permitted.
o Another corporation can complain that your name is too similar, and if the Registrar agrees, you can be
forced to change your name

27
 o If the registry is wrong, you have no shield against a passing--‐off action
o Provincially (ABCA) there is a Registrar, and Federally (CBCA) there is a Director
• Can also be assigned a #’d name which avoids all the hassles of choosing a fancier name.
o Law firms also use numbered companies as “shelf companies” for clients who need a corporation
immediately
Trademark vs trade name
• Trademark - word, symbol, design or any combination that distinguishes one’s product or services from those of
another
• Trade name – name under which a business is conducted, whether a sole proprietorship, partnership, or
corporation; s. 110 of the Partnership Act

PAWS PET FOOD AND ACCESSORIES LTD V PAWS AND SHOP INC (1992 ABQB) - MISLEADING
CORPORATE NAME – COURT ORDER TO CHANGE
Facts: Paws Pet Food (est. 1987) wants court to order Paws and Shop (est. 1991) to change its name because it’s
confusing/misleading.
• PPF had put significant resources into estimating its resources and PS was drawing upon that goodwill, especially
the “Paws” part of the name
o The Registrar approved the Paws and Shop name
• PPF argues: similar name, in the same kind of work, both operate in Calgary, customers were confused and
thought the stores were affiliated
• PPF asked the Registrar to change PS’s corporate name (Registrar has power to do so under s. 13 ABCA)
• PPF brings application under 247(1)(b) ABCA because Registrar refused to change its decision
• S. 6 of the Regulations – corporation and extra-provincial corporation registered in AB shall not have a name
similar to a corporate person unless that person consents
o Name must not reasonably lead the interference that the corporation bearing the name is associated or
affiliated with the corporate person
• PPF could have also sued PS for “passing off” at common law, but they did not in this situation
Issue: Should application be granted on basis that PS’ name is “confusing or misleading” contrary to s.12 of the
ABCA and the regulations?
Held (Prowse J.): Court ordered Registrar to order PS to change their name. It was confusing/misleading because it
was too similar to the plaintiff’s business name.
Reasons:
• Customers believed PS was a second store of PPF, which surely indicated that some people were misled and
confused by PS’ name
o There was a belief by customers that the business’ were affiliated
• Effect on PS: They need to change their signs, business cards, invoices, stationary, etc (big expenses)
o Also, PS had begun to establish its own business name, and now it has to change its name and restart the
advertising of its name and reestablish good will
• Note: if you are at fault for the name of the company and you, as a director, direct or permit a trademark
infringement, you have personal liability if you were “knowing or willing”
o You do not have protection from liability from your own wrongful actions connected with your
corporation

STENNER V SCOTIA CAPITAL INC (2007 BCSC) – ELEMENTS OF A PASSING OFF ACTION –
SUBSEQUENT USE OF FAMILY NAME WITH GOODWILL ATTACHED NOT PERMITTED
Ratio: Elements required to prove tort of passing--off (when you take on a corporate name that is too close to another):
o (1) Existence of good will
o (2) Deception of the public due to a misrepresentation
o (3) Actual loss of profit or defendant’s gain (P can choose which to claim for)
Facts (Background):- Gordon Stenner (GS) is the plaintiff. Defendants are Vanessa Stenner----Campbell (GS’s
28
daughter), Raymond Campbell (son--‐in--‐law), Laura O’Connell (Plaintiff’s former administrative assistant), and Scotia
McLeod (the defendants’ employer)
o GS is a financial consultant/investment advisor at National Bank Financial.
▪ His team was comprised of the defendants
o The team was highly successful, with the daughter (Vanessa) being an important member
o GS did a lot of the promoting & Vanessa was more responsible for providing advice & service to the
clients
o GS promised to sell his Book of business (book of clients) to his daughter with a phased retirement
plan for GS
o There was a falling out & GS did not sell his Book of business to Vanessa. He eventually sold to a third
party in 2003.
o Seeing no viable alternative, Vanessa, RC & LO moved to Scotia McLeod (a competitor) and
terminated their employment with National Bank Financial w/o notice
Name Use:
o The domain name "stennerteam" was registered by GS in 2000 and renewed in 2002
o Upon her marriage, the daughter took the name “Stenner---Campbell” for business purposes.
o On joining Scotia McLeod, Vanessa used the name “Stenner/Campbell” to represent herself & RC &
used it in advertising
o Vanessa started her own radio show at same station GS used & employed the name ‘Stenner’ in
broadcasts
o GS sued in January 2003, & included a claim for passing off and breah of fiduciary duty.
▪ GS also applied for registration of the name "Stenner" as a TM in the financial services
industry based, among other things, on use of the name since Dec 1988.
• His application for registration of “Stenner” was successful and the trademark was
registered on May 16, 2005.
▪ He sought an injunction against the use of the word “Stenner” and any of the words “Team,”
Investment,” or “Financial” in relation to the word “Stenner”
o Upon her divorce in late 2006, Vanessa used her birth name, Vanessa Stenner, for business purposes.
o The defendant ScotiaMcLeod’s position was that the defendants marketed themselves legally and did not
cause confusion amongst the public as to the names that they marketed
Issue: Does GS have a valid claim for passing--‐off against Vanessa?
Held: Yes, Court found in favour of the plaintiff for his action in passing off against the defendants; the Court gave
GS 10% of Vanessa’s profit (because not all of her business was gained because of the Stenner name) & some
future earning; damages for the plaintiff’s loss of goodwill and trademark valued at $1 million
• Court also granted permanent injunction against her using the name “stenner team.ca”; the plaintiff’s application
for injunction against the use of the word “Stenner” and any of the words “Team,” Investment,” or “Financial” in
relation to the word “Stenner” was dismissed as it was too broad
Reasons:
• Passing Off
o Common law action protects the goodwill associated with a trade mark or a trade name
▪ Goodwill – means the benefit and advantage of the good name, reputation and connection of a
business; the attractive force that brings in business
▪ Essence of passing off: representation of the defendant’s goods as being those of the plaintiff
• One way of passing off is for the defendant to use a name that resembles that of the
plaintiff or giving the impression that the plaintiff is involved with the enterprise
o Plaintiff must prove:
▪ the existence of goodwill,
▪ deception of the public sue to misrepresentation, and
▪ actual or potential damage to the plaintiff
• Trademark Infringement
o Registration of a trade mark creates an exclusive right to use
29
 o The plaintiff need not prove that the mark was known to anyone in the market, whereas in an action for
passing off, the plaintiff must show that the mark or name was known and generally recognized in the
market
• Application to the Facts:
o No doubt that the plaintiff had acquired a reputation of goodwill and reputation and that Vanessa and her
husband were aware of such goodwill
▪ The use of the name “Stenner-Campbell” did not identify a specific Stenner so it would cause
confusion; Stenner/Campbell was even worse as it indicated two people were involved, one of
them being a Stenner, and therefore causing confusion between the daughter and father
• the use of the name “Vanessa Campbell” is fine because it identifies a specific Stenner;
therefore it would not cause the same confusion
▪ The defendants were aware of the potential for confusion and the potential to mislead was
exacerbated by the defendants using the same advertising media as the plaintiff
o Defendants raised the “same name” defence because she shared the same family name of Stenner
▪ Use of Stenner where it does not signify a specific individual is not permitted in this situation
though
▪ When the surname is already established, Christian name must be used to give it the necessary
ditinctiveness
• ScotiaMcLeod was liable for the actions of their employees in this circumstance
• Damages:
o look at percentage of earnings that resulted from the passing off tort; 10% of Vanessa’s earnings were
deemed to have been derived from use of the Stenner name/dad’s reputation
o Also granted accounting for 5 years after the decision, where there would be a gradual decrease in
proportion of earnings payable to the dad

SHARE CAPITAL
EQUITY FINANCING
• Note: there are two ways of capitalizing your corporation:
o 1) Debt
o 2) Equity
• Debt ranks ahead of equity when a corporation dissolves
o Debt is paid off first, and then share-holders receive their return on their capital invested

• Corporate Share: A common, divided, participation interest in the corporation’s business connected to an
investment of money made in the corporation
• Share ownership does not represent a proportionate share in the assets owned by the corporation and
does not equate to ownership of the corporation
o Only the corporation owns those assets, so when a corporation is dissolved, s/hs do not have
any right to receive a distribution of those specific assets.
o S/hs are entitled only to receive a proportionate distribution of the value of those assets after the
corporation’s debts & liabilities have been satisfied [United Fuel Investments Ltd v Union Gas
Company of Canada Ltd]
• Authorized Capital: The maximum number of shares a corporation can issue

CLASSIFICATION OF SHARES
• Share Classes: A corporation can issue as many classes of shares that they want
o Differences between the classes can include voting rights, dividends, and participation on wind--‐up
o Shares are designated, identified, and described their rights, terms, conditions, and restrictions on a
class by class basis
• Where there is only one class of shares, the rights of the holders are equal in all respects and include
30
 the right to vote at meetings, and an unrestricted right to participate in dividends
• Where the articles provide for more than one class of shares, the rights, privileges and restrictions and
conditions attaching to each class of shares must be set out in the articles.
• The right to vote and the right to receive the remaining property of the corporation upon dissolution must
be attached to at least one class of shares, but both rights need not be attached to the same class
• Typical classes used are: common, preferred, special, restricted

Common Shares (aka equity shares)

• Shares that confer a full right of participation in the corporation that issues them, and thus unrestricted rights
to participate in dividends & in distribution of the remaining property upon dissolution
• Generally more risky than loans or other forms of debt investment
o May only be paid dividends or repaid capital after the satisfaction of other claims against the
company
• Give an unlimited right to share in the growth and profits of the company

Preferred shares
• Special shares which have some preferential right which causes the share to rank ahead of the common share
• Typical preferences:
o A prior right to receive a dividend
o priority in the repayment of capital upon winding up
o right of redemption or retraction
o conversion rights
o poison pill rights (augments the rights attached to shares in the event of a take-over bid)

Non-Preference Special Shares

• In some cases, a share will be subject to a limitation rather than a right:
o Deferred shares (right to receive income or capital comes after the ordinary shares of the company)
o Non-voting shares
o Shares with limited voting rights
o Employee shares

PRE-INCORPORATION CONTRACTS

Pre-incorporation contract: A contract entered into, in the name of, or on behalf of, or in trust for a corporation
that is not yet incorporated
o Promoter (person who enters into the contract on behalf of the to-be-incorporated corporation) does not
want any liability on the K so they enter into K with a third party as an agent for a corporation to be
created (the principal)
o The intent is to incorporate a corporation following the signing of the K and to have the newly
incorporated corporation adopt the K and thereby be bound by its terms

Original rules at common law:

1. A legal entity that does not exist at the time of a contract being formed cannot later ratify the contract at common
law
▪ When a corporation comes into existence and purports to adopt a K, it is a nullity
2. Person who signed a contract on behalf of a corporation to be incorporated was personally liable on the contract
o Kelner v Baxter (1866): Promoter has personal liability on the contract because he acted for a non-
existent principal.
Adjustment made to the common law (prior to legislative intervention):

31
 • Black v Smallwood (1966): Any liability on the promoter depends on the parties’ intentions. If the agent was not
intended to be held liable, then they would not be liable.

CONFLICTING COMMON LAW

KELNER V BAXTER (1866 UK) – PROMOTER LIABLE WHEN ENTERING INTO PRE-INCORP.
CONTRACT
Ratio: The person who signs the K on behalf of the corporation to be incorporated is personally liable on the K
• Once incorporated, the corporation cannot ratify the K and thereby relieve that person of liability (because a K
cannot be ratified by someone who did not exist at the time the contract was made)
Facts: There was a pre--‐incorporation K with a promoter/agent (defendant). A 3rd party (P) provided wine for the
principal corporation who ratified the contract but was never paid by the corporation (who went bankrupt), so the
3rd party sued the promoter
Issue: Is the promoter/agent personally liable for the K?
Held: Yes. Agency law says when you act for a non--‐existent principal (the corporation) the agent is personally
liable

BLACK V SMALLWOOD (1966 AUSTRALIA HC) – PROMOTER NOT NECESSARILY LIABLE IN PRE-
INCORP. CONTRACT – LOOK TO INTENTIONS
Ratio: Where both the third party & the promoter believe the corporation (principal) has been incorporated & is in
fact in existence and the intention is not to hold the promoter liable, then the promoter is not liable
• Fundamental question was as to the parties’ intentions for whether personal liability of the agent was
intended

STATUTORY REFORM: E.G. CBCA S. 14

• Under the CBCA, the promoter is deemed to be a party to the K and is liable unless the corporation adopts
the contract within a reasonable time after incorporation (s. 14(1))
o Once the corporation is created and the K is adopted by the corporation, then the promoter is no
longer a party (and no longer has personal liability) (s. 14(2))
o The promoter can also expressly contract out of personal liability (s. 14(4))
• CBCA, s 14 (similar to s 15 ABCA)
o S. 14(1) – deems the agent a party to a pre-incorporation contract, and is therefore liable
▪ a person who enters into or purports to enter into a contract on behalf of a corporation before it
comes into existence is personally bound y the contract and is entitled to its benefits
o S. 14(2) – corporation not incorporated at the time of the pre-incorporation contract can adopt the
contract, after which the agent will no longer be liable
o S. 14(3): Ability for a corporation to enforce a pre--‐incorporation contract through court application
o S. 14(4) – the agent can avoid liability if it is expressly stated as such in the pre-incorporation contract
• ABCA model is deemed warranties (not deemed parties), in respect of promoters to pre--‐incorporation Ks (s.15)
oNeither the promoter or the 3P intend the promoter to be a party to the K
oThe promoter is only liable to the other party for damages for a breach of the warranty in s.15(2)(a)

JUDICIAL TREATMENT OF STATUTORY RULES

WESTCOM RADIO GROUP LTD V MACISAAC (1989 ONCA) – POOR DECISION – PROMOTER NOT
HELD LIABLE
Ratio: a scenario involving failed attempt to contract is not caught by the legislative provision that deems
promoters to be parties to a contact. If no contract exists (because not intended that promoter would b e liable),
there is nothing to which the statute can apply.

32
 Facts: defendant (promoter) and plaintiff (3rd party) entered into a series of Ks with respect to placing radio
advertisements on behalf of a corporation which both the plaintiff and the defendant mistakenly believed to have
been incorporated and to be in existence, when it was in fact not in existence
• The plaintiff claimed that the defendant was personally liable on the Ks.
• There was no sign that the plaintiff had entered into the K in her personal capacity.
• Under the OBCA, it appeared that the promoter (defendant) was deemed a party to contract, and therefore should
be liable
Held: In favour of the defendant promoter, no liability found for the pre-incorporation contract, because there was no
valid contract
Reasons:
• There was no valid K. The Court applied the CL rules before the statutory rules and found that there was no
intention on the part of the defendant to have personal liability.
o Following the statute, the promoter would have been deemed party to the contract and therefore liable
• The Court examined the equivalent of CBCA s.14(1) (OBCA s. 21) & focused on the word "K" in the provision.
o Since the K was nullified (because the defendant intended to contract exclusively with the non-existent
corporation), the Court determined that the provision did not apply and the promoter was therefore not
liable.
o Reasoning of the Court: The legislative provision would only be applied if there was an actual
contract formed; if there was a failure to form a valid contract, then the legislation that deems the
promoter liable does not apply
o Because they failed to find a K, there could be no liability because the statute doesn’t apply
Commentary: A very poor decision. The intention of the legislation to deal with these situations where there was no K
at CL; the Court misinterpreted the application of the statutory provisions by applying a literal interpretation (using the
common law as a gatekeeper for what would be considered under the legislation – requiring for there to be a valid K at
common law for the statute to apply)
• S. 21 of the OBCA should have been read to include “purported contract” in the meaning of the word contract
used in the provision and should have applied to hold the promoter liable
ABCA s. 15(2): Anti-Westcom provision; deems someone as liable and bound to a contract if they enter into, or purport to
enter a written contract in the name of or on behalf of a corporation before is comes into existence

SHERWOOD DESIGN SERVICES INC V 872935 ONTARIO LTD (1998 ONCA) – CONDUCT REQUIRED
FOR CORPORATION TO ADOPT CONTRACT (DISSENT IN OBITER)
Facts: An agreement to buy the plaintiff’s assets was signed by the individual defendants in trust for a corporation to be
incorporated; the individual defendants’ (promoter’s) lawyer assigned the corporation to a shelf corporation and
informed the plaintiff’s lawyer
• The deal failed/nothing happened so the lawyer returned the corporation to the shelf and subsequently assigned
the shelf company to another client
• The plaintiff then argued that the corporation had breached the contract, as the purchase and sale agreement
had been adopted by the corporate defendant, by virtue of the defendants’ lawyer’s letter to the plaintiff’s
lawyer
Issue: Did the defendant corporation "adopt" the pre--‐incorporation K within the meaning of s 21(2) OBCA (CBCA
s.14(1) equivalent)?
Held (majority): The corporation was held liable for $200,000.
• The act of the solicitor as agent for the corporation and on instructions from the individual defendants was
sufficient to evidence an intention on the part of the corporation to adopt & be bound by the agreement
• Court says all they need is some act or conduct signifying an intention to be bound
Dissent: Disagrees with the majority that the K had been adopted and decries Westcom as a bad decision
• Section 21 of the OBCA should be looked at for its remedial intention
• Held that the defendants’ lawyer’s letter was not sufficient to evidence the adoption of the agreement by the

33
 corporation; rather, what was required to make the corporation liable was an action or conduct by the
corporation itself
• Would have held the individual defendants liable

PRACTICE CONSIDERATIONS:
• Do not recycle numbered shelf companies (even if initial company does not use it, do not recycle it)
• Make it clear that draft documents are just that; they’re only drafts and nothing is to be construed as adoption
o State expressly in the document that the letter/document does not constitute adoption by the
corporation

SZECKET V HUANG (ONCA 1998) – LIABILITY OF PROMOTER/AGENT TO BE DETERMINED BY

STATUTORY RULES, NOT OLD CL
Ratio: the legislative provisions that deems promoters to be parties to a contract applies to purported or failed
contracts; courts are to directly apply the legislative provision rather than to first apply the common law rules
Facts: Plaintiffs entered into a contract with the defendant (on behalf of a company to be formed); The
corporation was never formed. The plaintiff claims that the individual defendant, as the promoter/agent, is
personally liable
Held: The individual defendant, the promoter, is liable for the breach
Reasons:
• The trial judge followed the two-step approach set out in Westcom: 1) is there a contract at common law? 2) if
so, what does the statute say about liability of the corporation or promoter?
o The trial judge found that there was a contract, and so applied the statute to find the promoter liable as a
deemed party to the contract
o This approach was found to be wrong by the Court of Appeal: all that needs to be applied is the
statutory rule; Westcom is not the state of the law
• The Court of Appeal did not look at the common-law rules on pre-incorporation contracts; The Court applied
OBCA s. 21 (equivalent of CBCA s. 14) and held that the defendant was personally liable
• The defendant was not excused from liability because the contract did not expressly provide that he should not
liable
• The ONCA effectively overruled Westcom, and said that the liability of promoter is to be determined on basis of
the statutory rules alone

MEASURE OF DAMAGES
WICKBERG V SHATSKY ET AL (1969 BCSC) – BREACH OF WARRANTY OF AUTHORITY – MUST
BE CAUSE OF LOSS TO THIRD PARTY - DAMAGE MEASUREMENT
Ratio: Under ABCA, s.15, a third party will not be able to recover unless they show that the breach in warranty of
authority by the promoter/agent caused the loss
Facts: Shatsky’s company, RAS, sells & services business machine & sells supplies.
• The defendants decide to incorporate Rapid Data (RD) but never did, although they carried on business under that
name (improperly)
• Wickberg was hired to be new manager for the new 'corporation’ for an annual salary of $15,000 & his
written employment K was provided to him on RD letterhead, signed by Shatsky as president of RD
• The business was not successful & Wickberg was terminated for refusing to work on straight commission.
• Wickberg sued for wrongful termination and breach of warranty of authority
Issue: Are the individual defendants personally liable?
Held: Yes, but only for nominal damages and costs; Wickberg did not demonstrate that any loss was a result of the
promoters’ breach of warranty
Reasons:
• Note: statutory revision was not made at this point in time so the decision was determined on the basis of

34
 common law
o Shatsky, as a promoter, was never intended to be party to the contract, so he cannot be held personally
liable (as per Black v Smallwood)
• If Wickberg wanted to be paid under K, he must be able to show that the losses experienced were a result of
the breach of warranty.
o The fact that the business was not actually incorporated was not the reason for Wickberg’s loss
o Wickberg was unable to show that the loss was the result of the breach, as he suffered the loss for an
unrelated reason, that being that the business was bad, and no revenues resulted
o The same situation would have occurred even if the business had incorporated
o Also, Wickberg became aware that the corporation was not actually incorporated and nevertheless
continued to work there
Comments: An ordinary claim under s. 15 of the ABCA may only net you nominal damages unless the warrantor
indicates not only that the corporation will be incorporated, but that it will also be well capitalized and able to pay
for its obligations and liabilities
• If the promoter said we are starting a corporation & we want you to handle it, & represented that the
corporation was going to be well funded, & funding is not provided, then the situation is different and the
loss could be connected to the breach of warranty of authority

PRE-INCORPORATION CONTRACTS IN ALBERTA – ABCA S. 15

• ABCA Approach vs. CBCA Approach:
o Two Approaches:
▪ ABCA: Promoter is not deemed a party to the contract but is instead deemed a warrantor
▪ CBCA: Promoter is deemed a party
• In AB, the promoter is not a deemed party, rather they are deemed a warrantor
o Why AB takes this approach rather than deeming the promoter a party to the contract:
▪ Don’t like the idea of making the promoter a deemed party because this is not actually what is
intended by two contracting parties
▪ To reflect the reality, the better view is that the promoter is giving a warranty
• s 15(1) ABCA: If the corporation in question is intended to be an ABCA corporation or the parties believe that
the corporation is incorporated under the ABCA, then s 15 applies.
• s 15(2)(a) ABCA: Makes it such that the promoter is “deemed to warrant” that the corporation will
come into existence w/in a reasonable time and will adopt the pre-incorporation K w/in a reasonable
time.
o Applies when the contract is written
o The promoter is thus liable to the third party for damages for breach of warranties.
• s 15 ABCA: Allows ratification by a newly incorporated corporation, codifies unjust enrichment, allows
disputes to go to court
• s 15(6): express contracting out of liability
o allows the promoter to contract out of warranty liability if done expressly in the contract
• Measure of Damages
o s 15(2)(c) ABCA: The measure of damages for breach of warranty shall be the same as if the
corporation existed when the K was made, the promoter had no authority to do so and the
corporation refused to ratify the K.
• Written vs Oral Pre-incorporation Contracts:
o The CBCA only deems parties to a contract and the ABCA only deems warranties in the case of written
contracts
o Therefore, in the case of oral contracts, the common law rules will apply

ABCA Pre-incorporation contracts

35
15(1) This section applies unless the person referred to in subsection (2) and all parties to the contract referred to in that
subsection
(a) believe that the body corporate exists and is incorporated under, or
(b) intend that the body corporate is to be incorporated under
the laws of a jurisdiction other than Alberta.
(2) Except as provided in this section, if a person enters or purports to enter into a written contract in the name of or on
behalf of a body corporate before it comes into existence,
(a) that person is deemed to warrant to the other party to the contract
(i) that the body corporate will come into existence within a reasonable time, and
(ii) that the contract will be adopted within a reasonable time after the body corporate comes into
existence,
(b) that person is liable to the other party to the contract for damages for a breach of that warranty, and
(c) the measure of damages for that breach of warranty shall be the same as if the body corporate
existed when the contract was made, the person who made the contract on behalf of the body corporate
had no authority to do so and the body corporate refused to ratify the contract.
(3) A corporation may, within a reasonable time after it comes into existence, by any act or conduct signifying its
intention to be bound by it, adopt a written contract made before it came into existence in its name or on its behalf, and on
the adoption
(a) the corporation is bound by the contract and is entitled to the benefits of the contract as if the
corporation had been in existence at the date of the contract and had been a party to it, and
(b) a person who purported to act in the name of or on behalf of the corporation ceases, except as
provided in subsection (5), to be liable under subsection (2) in respect of the contract.
(4) If a person enters or purports to enter into a contract in the name of or on behalf of a corporation before it comes into
existence and the contract is not adopted by the corporation within a reasonable time after it comes into existence, that
person or the other party to the contract may apply to the Court for an order directing the corporation to restore to the
applicant, in specie or otherwise, any benefit received by the corporation under the contract.
(5) Except as provided in subsection (6), 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 the Court for an order
(a) fixing obligations under the contract as joint or joint and several, or
(b) apportioning liability between or among the corporation and a person who purported to act in the
name of or on behalf of the corporation,
and on the application the Court may make any order it thinks fit.
(6) A person who enters or purports to enter into a written contract in the name of or on behalf of a body corporate before
it comes into existence is not in any event liable for damages under subsection (2) if the contract expressly provides that
the person is not to be so liable.

CHAPTER 4: THE CORPORATION AS A LEGAL PERSON

SUMMARY
• A corporation is treated in law as a legal person with a persona separate from that of its founders and s/hs
• General rule: a corporation has the same rights/obligations of a natural person & s/hs are only liable for an
amount equal to their investment (Salomon)
o a director and shareholder can still be an employee of the corporation (Lee)
o You can have a one-person corporation [Lee]
Exceptions to the rule from Salomon (limited personal liability):
o Lifting the corporate veil
▪ Corporate veil will be lifted:
• where the corporation is being used as a shield for an improper or fraudulent purpose
(TransAmerica; Big Bend Hotel; Jin v Ren)
• When not to lift the veil would be too flagrantly opposed to justice (Kosmopolous)
• Cannot hide behind corporation if being deceitful (Sylvan Lake)
36
 o Total disregard for legislative formalities [Wolfe]
▪ Wolf v Moir - Moir failed to set corporate name out in advertisements, as required by legislation
and he held himself out as owner
o Directors committing their own torts
▪ Directors and officers may also be held liable for torts committed while conducting business
affairs in the name of the corporation
▪ Inducing breach of contract [McFadden]
• Subject to Said v Butt defence
o Knowing receipt of trust or knowing assistance of breach of trust (Citadel)
▪ Personal liability will flow if directors of company knowingly assist their
corporation to breach a trust (M & L Travel)
o Parent subsidiary relationship [Sun Sudan]
▪ Court will not lift unless there is fraud
▪ Parent will usually not be held liable for subsidiary (Sun Sudan)
o Thin Capitalization [Walkovszky; Henry Brown v Ocean Charters]
▪ Thin capitalization, in and of itself, does not support a finding of personal liability

ONE-PERSON CORPORATION

LEE V LEE’S AIR FARM ING LTD (1961 PRIVY COUNCIL) – DIRECTOR AND SHAREHOLDER OF
CORPORATION CAN EMPL OY THEMSELVES – WCB CLAIM BY WIFE AFTER HUSBAND’S DEATH
Ratio: A position in a corporation as a director and controlling shareholder does not preclude the same person
from acting in the capacity of an employee.
• Compensation in the event of an accident may depend on their capacity at the time they were so acting.
Facts: Lee was an employee, controlling shareholder, & director of his own corporation; Lee died on the job &
wife looked to WCB for compensation.
• WCB claimed that it was impossible for Lee to be both an employee and the controlling shareholder/director (Lee
cannot be an employee to himself)
Issue: Is the corporation separate from Lee so that Lee can be an employee of his own corporation?
Held: Yes, Lee can be an employee of his own corporation (and a “worker” under the WCB definition) because
the corporation is a separate legal entity; Lee can enter into a contract of service with the corporation despite the
fact that he was a director of the corporation
Reasons: The corporation and Lee are two separate legal entities (Salomon)
• Lee was doing the physical work of the corporation, and not acting as a director or shareholder, so he
could be “worker” as defined under the WCB
• Lee was not in a contract with himself; he was contracting with the corporation; one person can function
in more than one capacity (e.g. employee and managing director)
• Limitation is that a corporation cannot be used for nefarious (evil) purposes (Littlewood)

GROUNDS FOR LIABILIT Y OF THOSE BEHIND THE CORPORATION

LIABILITY BASED ON LI FTING THE CORPORATE VEIL

• Very rarely done in Canada

o Salomon says that the corporation is a separate legal entity from directors and shareholders
• Corporate veil will be lifted (first two points are key and should be applied together as the rule):
o Where the corporation is being used with an improper or fraudulent purpose (TransAmerica)
o When not to lift the veil would be too flagrantly opposed to justice (Kosmopolous)
o In narrow situations in the case of a parent-subsidiary relationship

37
 • Practice point: If trying to lift the veil to sue individuals personally, also articulate a specific cause of action
against the individual (ie. tort of deceit, breach of K, etc)
o Have a backup as to why the person has individual liability

KOSMOPOULOS V CONSTITUTION INSURANCE CO OF CANADA (1987 SCC) - SALOMON

PRINCIPLE IS NOT ENFORCED WHEN IT YIELDS RESULT TOO FLAGRANTLY OPPOSED TO
JUSTICE
Ratio: The Salomon principle is not enforced when it would yield a result too flagrantly opposed to justice,
convenience, or the interests of the Revenue
Facts: Kosmopolous is a sole proprietor & incorporates & became a sole s/h; He entered into a contract but did not
include the full corporation name in the contract (fire & property insurance not included in the corporate name as
written in the contract)
Issue: Does the corporation have access to the insurance, despite it not being in the corporate name?
Held: No, corporate veil will not be lifted to give the corporation access to the insurance
• Kosmopolous may be able to sue his lawyer for not advising him of the insurance aspects.

BIG BEND HOTEL LTD V SECURITY MUTUAL CASUALTY CO (1980 BCSC) – CORPORATE VEIL
LIFTED FOR CORPORATION BEING USED AS A “SHAM AND A CLOAK”
Ratio: In cases of improper conduct or fraud, or where the corporation is being used as a "sham and a cloak" the
corporate veil can be lifted to place liability on the individual behind the corporation
Facts: Kumar, president & sole s/h of a corporation (only asset is the Big Bend hotel), failed to disclose on his
insurance application that he had owned other hotels that burned down
• The Big Bend hotel also burns down & the insurance corporation refused to pay out the insurance benefits. Big
Bend Hotel (the plaintiff) sued the insurance corporation (for the policy benefits) and the insurance brokers (Reed
Shaw) for failing to exercise due care and diligence
• The defendant insurers claimed that if there had been full disclosure, they would not have provided the insurance
policy
• The plaintiff Hotel argued that even if Kumar had failed to disclose the previous fire out of “wickedness of mind,”
the owner of the other hotel that had burned down was K & S Enterprises, and since that corporation was a
separate legal entity from Kumar (who had applied for insurance on behalf of the Big Bend hotel), the corporate
veil should not be lifted to refuse a policy pay out, as per Salomon
Issue: Did the failure to disclose constitute an event that would justify lifting the corporate veil?
Held: Yes, the corporate veil will be lifted to disallow the Big Bend hotel from receiving the insurance pay-out because
Kumar had a duty to disclose material details to the insurance provider in the utmost good faith, and he had hidden behind
the guise of a new corporation in gaining the insurance policy
Reasons:
• Courts have lifted the veil to take into account the actions of the individuals controlling a corporation in cases of
improper conduct or fraud
o Here, Big Bend was created as a sham to hide behind & Kumar clearly omitted disclosing material facts
(fraud)
• Equity will not allow an individual to use a corporation as a shield for improper conduct or fraud.
• Two reasons why Kumar loses:
o Insurance Law – a party has positive obligations to fully disclose material facts in good faith; a higher
standard of conduct is required.
o Lifting the corporate veil – Kumar acted fraudulently
Note: This case was approved by the ABCA in Sylvan (which was aff’d by the SCC)

PERFORMANCE INDUSTRIES LTD V SYLVAN LAKE GOLF & TENNIS CLUB LTD (2000 ABCA;
AFF’D BY SCC) – LIFTING THE CORPORATE VEIL FOR “FRAUDULENT, DISHONEST, AND
DECEITFUL” ACTION
38
Ratio: Where the actions of the principal are "fraudulent, dishonest, and deceitful" the corporate veil will be lifted
Facts: Performance Industries (defendant) & Sylvan Lake Golf (plaintiff) enter into a joint venture to acquire a golf
course as tenants in common; title was to be held by Performance;
• Sylvan was to have sole possession of property for 5 years at which point Performance would buy out Sylvan;
o deal was that either corp. could develop some of the course into a residential development if lands could
be sold to a third party developer for at least $400K
• The written contract did not reflect the oral agreement made between the parties; O’Connor (sole s/h of
Performance Industries) had snuck clause 18 into the agreement which had the effect of drastically limiting any
development opportunity
o Clause 18 limited development around the 18th hole area to 110 feet by 480 yards (instead of 110 yards by
480 yards, as was verbally agreed)
o Fred Bell (Sylvan Lake’s sole s/h) had not read the written contract and wanted to develop but was
limited by clause 18.
• Sylvan Lake Golf wanted to rectify the agreement or sought damages in lieu of rectification (correction of
contract in writing to reflect agreed upon terms); Sylvan sought to lift the corporate veil and place liability
on O’Connor
• The trial judge found O’Connor acted deceitfully & dishonestly, and did not want him to benefit from his
misconduct
o The trial judge awarded punitive damages making him personally liable for his own conduct (lifted
the corporate veil)
Issue: Can the plaintiff secure rectification of the contract? Should the corporate veil be lifted to place liability on
the principle s/h of Performance Industries?
Held: Appeal dismissed; O’Connor is jointly liable with Performance Industries (corporate veil lifted)
• O’Connor acted fraudulently, dishonestly and deceitfully, which provides the necessary support for lifting the
corporate veil
o O’Connor also committed the tort of deceit & so would have independent liability regardless of lifting
the corporate veil
▪ Elements required for the tort of deceit:
• false representation -- whether oral or written and whether as a direct lie or via
incomplete disclosure, active concealment, or other forms of misrepresentation;
• made by the defendant knowing it was false or with reckless disregard per Derry v
Peek;
• made with the intention to deceive; and
• there was a material inducement causing damage
▪ if you can show that the individual committed a tort personally, the individual can be held
liable for the damages they caused
o Could also argue fraudulent misrepresentation
• Compensatory damages awarded against O’Connor were upheld but punitive damages were denied on appeal
because both punishment and deterrence had already been served by the generous compensatory damages
Note: If compensatory damages are high, the court is less likely to award punitive damages
• First argument here should be tort of deceit, and use corporate veil in the alternative.

JIN V REN (2015 ABQB, AFF’D BY THE ABCA) – UNJUST ENRICHMENT CLAIM – INVESTMENTS
RETAINED FOR IMPROPER PURPOSE BY DIRECTOR – CORPORATE VEIL LIFTED
Ratio: the corporate veil can be lifted where the controlling mind of a corporation (e.g. sole director) retains investments
for an improper or fraudulent purpose
Facts: Ren (defendant) was a director of the corporation, Hart Fibre; he promoted an investment of $300,000 in an
Alberta based hemp business to Jin (plaintiff), who agreed to invest in 2006; Jin delivered on his investment but Ren
delivered nothing in return; Jin sued Hart Fibre and Ren as the director of the corporation in unjust enrichment
Issue: Can the corporate veil be lifted for unjust enrichment?

39
Decision: in favour of the plaintiff; Ren found personally liable in unjust enrichment
Reason:
• Salomon stands for the proposition that one cannot go behind a legitimately incorporated company or lift the
corporate veil to reach the incorporators
o However, lifting the corporate veil can be done where a corporation is completely dominated and
controlled and being used as a shield for fraudulent or improper conduct (TransAmerica)
• Although the evidence fell short of showing that Hart Fibre was a mere shield or façade in order to improperly
attract investment, Ren was the controlling mind of Hart Fibre as its sole director and had retained Jin’s
investment for an improper purpose
o Therefore, an unjust enrichment claim is not precluded against Ren

WILDMAN V WILDMAN (2006 ONCA) – CORPORATE VEIL LIFTED AGAINST CORPORATION FOR
SPOUSAL AND CHILD SUPPORT
Ratio: A corporate veil can be lifted to hold a corporation liable for it’s controlling individual’s liabilities for spousal and
child support
• The following circumstance must be present:
1. The individual exercises complete control of the finances, policy, and business practices of the company
2. That control must have been used by the individual to commit a fraud or wrong that would unjustly
deprive a claimant of his or her rights
3. The misconduct must be the reason for the third party’s loss
Facts: The appellant (Mr. Wildman) and the respondent (Ms. Wildman) ended a ten year marriage and the respondent
gained full custody of their two children; the appellant owes the respondent $800,00 in spousal and child support; he
appeals not the amount of money owed but the fact that the trial judge lifted the corporate veil to order that the money
owed is secured and enforceable not only against the appellant personally, but also against the company of which he is the
sole director and shareholder
Issue: Can the corporate veil be lifted to impose liability for money owed against an individual upon the individual’s
corporation?
Decision: Appeal dismissed; the corporation was liable for the individual’s owed finances; it would be flagrantly opposed
to justice to allow the appellant to hide behind a corporate veil that he does not himself respect
Reason: the corporate veil can be lifted when the company is incorporated for an illegal, fraudulent or improper purpose;
it can also be lifted if, when incorporated, those in control expressly direct a wrongful thing to be done
• Both federal and provincial Child Support Guidelines contemplate piercing the corporate veil in appropriate cases
• The following circumstance must be present to look behind the corporate veil for liability:
1. The individual exercises complete control of the finances, policy, and business practices of the company
2. That control must have been used by the individual to commit a fraud or wrong that would unjustly
deprive a claimant of his or her rights
3. The misconduct must be the reason for the third party’s loss
• Application to the facts
1. Appellant was the sole owner of and exercises complete control over his business enterprises; they are not
distinct from him and have no connection to any third party
2. No question that the appellant controlled his business and assets in a way that diverts money from his ow
personal use
3. The losers are the spouse and the children; they have not received the amounts that various courts have
held that they should receive
• A company need not have been created with an improper purpose in mind to justify a piercing of the corporate
veil; it is sufficient that the corporation is used for an improper purpose

ROCKWELL DEVELOPMENTS LTD V NEWTONBROOK PLAZA LTD (1972 ONCA) – CORPORATE

VEIL NOT LIFTED TO FORCE SHAREHOLDER TO PAY COSTS FOR LITITAGION BETWEEN YOUR
CORP AND ANOTHER CORP

40
 Ratio: A third party cannot collect from s/hs just because the corporation cannot pay.
Facts: Kelner holds one Rockwell share in trust for Planet Ltd and & is director of Rockwell; there were other
shareholders and directors but Kelner was the main controller of the corporation
• Rockwell entered into a real estate transaction with Newtonbrook but the transaction failed; Rockwell sued
Newtonbrook for breach of contract but Rockwell was unsuccessful.
• Newtonbrook was awarded costs for the failed action by Rockwell, but since Rockwell had no money as a
corporation, the trial judge awarded costs against Kelner as director of Rockwell
• Kelner appealed that decision to award costs against him personally
• Note that Kelner was entering into many different real estate transactions and was incorporating as a new
corporation in each transaction (to protect himself from liability and to try to stay “judgment proof” by
keeping each corporation thinly capitalized)
Issue: Should Kelner be responsible for costs awarded to the successful Newtonbrook Ltd. in litigation brought
against it by Rockwell Ltd (of which Kelner is a director)?
Held: Appeal allowed; Kelner was not responsible for the costs of Rockwell’s failed action
Reasons:
• The real litigant in the original action for breach of contract was Rockwell, not Kelner.
o The contract made with Newtonbrook was made with the corporation (Rockwell) alone, and not
Kelner
o Kelner could not have sued upon the contract, or be sued upon it
• There was no evidence of fraud or misconduct on Kelner’s part that would support the lifting of the
corporate veil
• Note: Newtonbrook should have asked for a personal guarantee from Kelner because it turns out that Kelner
created a corporation for every new transaction in which he engaged in

SUN SUDAN OIL CO V METHANEX CORP (1992 ABQB) - LIABILITY OF PARENT FOR SUBSIDIARY
– CORPORATE VEIL NOT LIFTED – RULE AND TEST FOR HOLDING PARENT COMPANY LIABLE
Ratio: Subsidiaries can be used for shielding the parent from liability. The corporate veil will not be lifted
without some type of improper purpose held by the parent corporation (two stage for lifting the corporate
veil to hold the parent company liable for its subsidiary)
Facts: SW is the parent company of Sun Sudan Oil. OI is the parent of ORI; ORI wholly owns Ocelot Sudan (indirectly
owned by OI).
• Sun Sudan Oil & Ocelot Sudan are parties to a joint operating agreement, of which Ocelot Sudan is in breach.
Further, Ocelot Sudan is undercapitalized.
• ORI fails to pay what it owes under the agreement (has no assets to pay). Sun Sudan Oil wants to sue parent
company of ORI, OI (now Methanex Corporation)
• Note: a company is the parent of a subsidiary when it owns enough shares to control the outcome of the meeting
so of the Board of Director or when it has complete ownership over the subsidiary
Issue: Is parent (MC) liable for the subsidiary’s breach? Can SSO sue MC as the indirect owner of OS?
Held: No; plaintiff failed on both their arguments (that it’s industry practice & that OS is an agent for the parent so
corporate veil should be lifted)
Reasons:
• Industry Practice as to a Parent funding a Subsidiary:
o Test: It must be so well recognized and known among everyone in the industry and so prevalent
as to justify a presumption that everyone who enters into a contract does so with the intention of
being bound by that practice
▪ It must be notorious that the parent will fund its subsidiary (so notorious that it need
not be expressly stated in the contract)
▪ It was argued that in the international petroleum industry, the common practice was that a
parent company would be liable for debts of its subsidiary
• Evidence did not support such a finding in this case

41
 • Rule for holding a parent company liable for a subsidiary (TransAmerica):
o 1) company is completely dominated and controlled by a parent company
o 2) The subsidiary is being used a shield for fraud or improper conduct
• Test for Lifting Corporate Veil because the Subsidiary is a Puppet of the Parent
o 1) Smith Stone v Birmingham factors (even when all factors are met, must proceed to Kosmopolous
test):
▪ Were the profits treated as the profits of the company?
▪ Were the persons conducting the business appointed by the parent company?
▪ Was the company the head and brain of the trading venture?
▪ Did the company govern the venture, decide what should be done & what capital should be
embarked on?
▪ Did the company make the profit by its skill and direction?
▪ Was the company in effectual and constant control?
o 2) Kosmopolous Test: Would maintaining the corporate veil be too flagrantly opposed to justice or
convenience?
• All 6 factors from Stone v Birmingham were met in this case, but the plaintiffs failed on the Kosmopolous
test
o MC was likely using subsidiary for legitimate business purposes of limiting exposure of assets of MC
(this is not fraud) and for maximizing tax benefits
o The parties to the contract were sophisticated business parties who could have taken other steps to
protect themselves
Practice Points
• Do not treat your clients and their parent companies as the same entity
o Cannot bill the person behind the corporation if the corporation is your client (your client is not Mr. X who
is behind Mr. X Co.)
• Ensure that a parent corporation gives a guarantee to fund the subsidiary for liabilities that may arise or that
such a term is express in the contract between your client and the subsidiary
• Note that it is possible to steal from a one--‐person corporation
o Issues arise with taxes and creditors may come after you.

LIABILITY BASED ON TOTAL DISREGARD OF FOR MALITY

WOLFE V MOIR (1969 ALTA SUP. CT.) – INDIVIDUAL LIABLE FOR NOT IDENTIFYING CORP ON
TICKETS, CONTRACTS, ETC. – ROLLER RINK
Ratio: If you do not comply with the formal legislative requirements for a corporation, an individual cannot rely on the
protection that a corporation affords (can be held personally liable)
• If you advertise & hold yourself out to the public w/o identifying the name of a corporation with which
you’re associated, you run the risk of being held personally liable.
Facts: Wolfe is injured at a roller--‐rink (Fort Whoop Up) and he sues Moir (defendant) personally. Moir argues that he
does not own the rink, the corporation does (“Chinook Sport Shop”).
• Moir was secretary for the corporation and his wife was the president; Moir was advertising the roller rink
as Moir’s Sportsland or Fort Whoop Up (there was no mention of the Chinook Sport Shop corporation on
tickets sold for the roller skating)
Issue: Is Moir personally liable for Wolfe’s injuries?
Held: Defendant was held personally liable
Reasons: The legislation says you must show the corporation name on all corporation contracts, tickets, invoices, etc.
[currently ABCA, s. 10(8)]
• Moir could not rely on the principle in Salomon to avoid personal liability because he was not following the
formalities required to carry out business as a corporation
• If a person chooses to advertise and hold themselves out to the public without identifying the name of the
corporation with which they are associated, they can be held personally liable for obligations incurred

42
 o Moir held himself out as the owner of the rink, and liability may attach in that regard
▪ Moir referred to the manager at the roller rink as “my manager.” Problem: it doesn’t matter that
Moir spoke in that way – you as a lawyer could object and say that it is just a matter a speech
• Wolfe was not required to demonstrate that he believed that Moir was the owner and not the corporation
Commentary: Lawyers must advise clients in writing to spell out the corporation’s name in full on all legal Ks,
invoices and document.

VALLIS V PRAIRIE ALTERNATIVE ENERGY SOLUTIONS LTD (2013 SKPC) – FAILURE TO

IDENTIFY WORKING AS A CORPORATION – PERSONALLY LIABLE
Ratio: an individual can be held personally liable if they do not comply with the Business Corporations Act in properly
identifying the corporation under which they are carrying on business
Facts: Karras was the president, shareholder and the director of the corporation Prairie Alternative Energy Solutions Ltd;
he entered into a contract with the plaintiffs to install a geothermal heating system; Karras never gave any indication to
the plaintiffs that he was anything more than a sole proprietor (did not have business cards, no business name on his truck,
never informed the plaintiffs that he was incorporated, documents exchanged did not include the “Ltd” part of the
corporation name)
Issue: Can Karras be held personally liable for failing to identify that he was carrying out business as a corporation?
Decision: Karras was held personally liable for damages
Reasons: Karras failed to comply with the provisions of the Business Corporations Act under which he was carrying on
business and can therefore be held personally liable
- Even though K wasn’t dishonest, the law is very clear
o He didn’t have the indicator “.ltd” in his communications with the plaintiffs, and they structured their
affairs under the assumption that they were dealing with a corporation
- Reliance by the plaintiff isn’t really necessary; it may be a stronger case, but it isn’t necessary
o If the defendant isn’t clear that he’s operating through a corporate vehicle, it’s on him (Wolfe v
Moir)
o There’s reliance here, Vallis (P) seems to have structured affairs based on assumption they were dealing
with a sole proprietorship, but that isn’t necessarily a material fact in order to secure this outcome
Corporate Solicitor Held Negligent in Failing to Give Written Advice – Lawyers Weekly; p 151.
- Tell your client, in writing, to put the full corporate name on all written corporate communications
o Failure to do so may be a breach of your DOC as a lawyer and you may be found negligent

LIABILITY OF DIRECTORS FOR THEIR OWN TORTS

• Under s.122 ABCA, the director owes a duty of care to the corporation. But here, we’re concerned with
directors’ duty owed to third parties.
• Core Idea: If a director commits a tort, we must determine if the director should be personally liable even
though they were acting on behalf of the corporation

MCFADDEN V 481782 ONTARIO LTD (ONT HCJ 1984) - DIRECTOR ALWAYS LIABLE FOR THEIR
TORTIOUS ACTIONS – INDUCING BREACH OF CONTRACT OUTSIDE THE SCOPE OF THE
DIRECTOR’S AUTHORITY
Ratio: As a general rule, an agent is always liable personally for his tortious actions, notwithstanding that his acts
may in law also be those of the corporation (corporation is still primarily liable).
• For a director or officer of a corporation to be relieved as agent for his tortious acts, he must be acting under
duty or compulsion of a duty to the corporation
• Where an officer or director of a corporation induces the corporation to breach a contract, he will be personally
liable if he is acting bona fide outside of the scope of his authority – corporation is insulated from the legal
consequences because the officer or director acted outside of their legal authority as corporate executives

43
 Facts: McFadden (plaintiff) was employed by PMAI on a fixed term K. After the fixed term, termination required 60
days notice.
• PMAI sold their Canadian operation to PMAC; McFadden continued to work for PMAC; Mr. and Mrs. Taylor
(the defendants) are the directors and s/hs of PMAC
• The Taylors took $32,000 ($22,000 improperly) from PMAC for themselves personally when they sold their
inventory and corporate name to PMAI, leaving PMAC with no assets or cash to pay McFadden’s salary
• PMAC then dismissed McFadden with no notice and McFadden sued for wrongful dismissal and for inducing
a breach of contract
Issue: Are Taylors personally liable for inducing breach of K?
Held: Defendants held personally liable for inducing a breach of contract; the Taylors were trying to drain their
corporation of all its assets so that there was nothing for McFadden to sue the corporation for (acting outside their
scope of authority and duty to the corporation)
Reasons:
• Tort of Inducing Breach of Contract:
o Committed when: the defendant, knowing of a contract between plaintiff and a third party, and
intending to procure a breach of that contract to the injury of the plaintiff, induces the breach w/o
justification to break that contract (Said v Butt) and the plainiff suffer damages
• Defence to tort of inducing breach of contract:
o If an officer or director for a corporation, acting bona fide within the scope of their authority,
procures or causes the breach of a contract between his employer and a third party, he does not
thereby become liable to an action of tort (Said v Butt)
o BUT where the director does not act within the scope of their duty, they become liable for their
actions
▪ In this case, the Taylors were not acting within the scope of their authority to do what is best for
PMAC - instead they were acting to secure the transfer of the greatest possible amount of
PMAC's funds to themselves to shield those funds from the obligations PMAC owed to
McFadden
▪ This would be a defense in the event that they breached a contract in the best interest of the corp.
For example, you break a contract in order to save the corp money. You need a GOOD REASON
to use this defense.
• A principal may be relieved of the liability for the tortious acts of his agent where the act is outside the
agent’s scope of authority, real or implied, though the agent himself remains liable.
• Vicarious liability: If an employee commits a tort in the course of employment, the co is vicariously liable.

369413 ALBERTA LTD V POCKLINGTON (2000 ABCA) –ELEMENTS OF INDUCING BREACH OF

CONTRACT
• 7 elements of the tort of Inducement of Breach of Contract: (directors can be held personally liable for this)
o (1) The existence of a K
o (2) Knowledge or awareness by the defendant of the K
o (3) A breach of the K by a contracting party
o (4) The defendant induced the breach
o (5) The defendant, by his conduct, intended to cause the breach
o (6) The defendant acted without justification
o (7) The plaintiff suffered damages
• If you are the director of a corporation and you induce (through your corporation) another corporation to breach
a contract for the benefit of your corporation, then that can also incur liability

LIABILITY IN THE AREA OF TRUST LAW

44
CITADEL GENERAL ASSURANCE CO V LLOYDS BANK CANADA (SCC 1997) – LIABILITY FOR
KNOWING ASSISTANCE OR KNOWING RECEIPT OF TRUST PROPERTY – BOTH ARE BREACH OF
TRUST
Ratio: Liability can be imposed by proving either knowing assistance or knowing receipt of trust property
Facts: Citadel General is the beneficiary of a trust. Insurance Agent Co is the trustee & sells/collects insurance
premiums on behalf of the insurer, Citadel General
• Insurance Agent Co has a bank account for holding premiums & other funds at Lloyd’s Bank (the defendant).
• The defendant accepted instructions from the parent of Insurance Agent Co to transfer funds from the account to
another account of the parent
• This reduced the parent’s overdraft at the defendant bank. The defendant knew the money was being held in trust
for Citadel General
Issue: Is the defendant bank liable for breach of trust, either through knowing assistance, or knowing receipt?
Held: Appeal allowed; Lloyd’s bank held liable for “knowing receipt”
• Knowing Assistance: (for breach of a trust due to dishonest & fraudulent conduct)
o Defendant must have actual knowledge, recklessness or wilful blindness (Constructive knowledge is
not sufficient) to be held liable
o Must have a high standard of culpability here because you are merely assisting, not receiving the
benefit yourself – actual knowledge is required
• Knowing Receipt:
o receipt of trust property for one’s own benefit
o Plaintiff must prove:
▪ (1) Either of the following:
• (a) The trustee took the trust property for its own use and benefit; OR
• (b) The trustee had constructive knowledge that the subject of the trust was
misappropriated.
▪ (2) An unjust enrichment
o Mental state is less culpable than for knowing assistance because you are receiving the benefit of
your wrongful actions, so there is a lower standard to find you guilty of the tort.
o Constructive Knowledge: Knowledge of facts sufficient to put a reasonable person on notice or inquiry
• In this case, there is knowing receipt because the bank knew that the money in the account was being held in
trust for the plaintiff, and by reducing the overdraft of the parent corporation, the bank is enriched (unjust
enrichment: enrichment of the defendant, a corresponding deprivation of the plaintiff, and a lack of juristic
reason)

AIR CANADA V M & L TRAVEL LTD (SCC 1993) – DIRECTORS HELD LIABLE FOR KNOWING
ASSISTANCE OF BREACH OF TRUST
Ratio: corporate directors can be held liable for knowing assistance of breach of trust if there has been a dishonest,
fraudulent breach of trust by the corporation and the directors knowingly assisted the corporation to do so
Facts: Martin and Valliant were 2 shareholders and directors of their travel agency corporation (M & L); their travel
agency was in a trust relationship with Air Canada, whereby they sold Air Canada tickets, held the fares in trust for
Air Canada, and paid Air Canada the collected funds twice a month
• M & L deposited all of their money into a general operating account and when the directors began disputing over
the corporation and the corporation’s assets & the bank froze the account
• Air Canada wanted to hold both of the directors individually liable for the money owing on its ticket sales for
knowing assistance in the breach of trust
• The Court of Appeal entered judgment against the directors
Issue: Was the director personally liable for the breach of trust by the corporation?
Held: Appeal dismissed; Directors liable for knowing assistance
Reasoning:
• Whether there was a trust relationship:
45
 o To constitute a trust, there must be:
▪ 1) certainty of intent (intention to create a trust),
▪ 2) certainty of subject (funds collected), and
▪ 3) certainty of object (beneficiary)
o There was a trust relationship present between M & L and Air Canada
• Knowing receipt:
o Not present in this situation because knowing receipt requires the stranger to the trust to have received
trust property in his or her personal capacity
• Knowing assistance:
o Persons who assist with knowledge in a dishonest and fraudulent design on the part of the trustees will be
liable for breach of trust
▪ Knowledge required: both actual knowledge of the trust’s existence and actual knowledge that
what is being done is improperly in breach of that trust (or willful blindness or recklessness)
o M & L was in breach of trust & this breach was dishonest & fraudulent (because it was supposed to
put money into a trust account to hold for Air Canada); the corporation took a risk to the prejudice of
the rights of the beneficiary, which risk was known to be one which there was no right to take
▪ M&L put trust funds in general account, which made them liable to seizure by the Bank, which
prejudices the rights of the beneficiary; A third party (the bank) benefited from the breach; Martin
was aware or at least recklessly blind to the fact that the bank could seize the funds, as it was
subject to the demand loan
o The directors assisted with that breach of trust and are liable as constructive trustees
▪ Mental state: The directors assisted in the breach because their conduct precipitated seizure by the
bank of Air Canada’s money

LIABILITY BASED ON THIN CAPITALIZATION

• Thin capitalization: Company has high debt to credit ratio, thin capital investment from shareholders
o Thin capitalization alone will not result in the lifting of the corporate veil (there must be other factors or conduct
involved)
o No statutory requirement that corporation must be funded to be able to pay for liabilities

WALKOVSZKY V CARLETON (1966 NYCA) – THIN CAPITALIZATION NOT ENOUGH TO LIFT

CORPORATE VEIL
Ratio: Thin capitalisation is never enough on its own to lift the corporate veil
Facts: Carleton is a shareholder in 10 cab corporations, and each cab carried only the minimum $10,000 required
third party liability insurance. The plaintiff was injured by 1 company & sued all 10 companies & Carlton as an
individual.
Issue: Should the corporate veil be pierced and have liability attach to C?
Held: Defendant not liable;
• Cannot argue that the corporations are under--‐insured because that’s the statutory minimum. It would be the
government’s responsibility to change the minimum.
• There were no signs of fraudulent behaviour or activity; Thin capitalization isn’t admirable, but it’s not fraudulent
in an of itself (would have to have been tortious or a greater degree of improper conduct)
• Walkovzky’s argument that all 10 corporations are a single entity and there should therefore be liability failed
Dissent: these corporations were intentionally undercapitalized to avoid responsibility for acts bound to arise in the
operation of taxi companies; all income was drained from the corporations for the same purpose of avoiding the payment
of liabilities that would arise
• Shareholders should be held individually liable in these situations where the corporations are designed solely to
abuse the corporate privilege at the expense of public interest

46
Note: if there is other improper conduct that supports the lifting of the corporate veil, still mention the thin capitalization
of the company, as it looks the defendant look bad; it is relevant but it cannot support the lifting of the corporate veil on its
own
HENRY BROWNE V OCEAN CHARTERS (ENG CASE) – THIN CAPITALIZATION IS NOT ON ITS OWN
ACTIONABLE AND IT IS INSUFFICIENT TO LIFT THE CORPORATE VEIL
Ratio: The fact that a corporation is thinly capitalized will not affect the liability of the corporation in Ks it enters
into.
Facts: Henry Brown entered into contract with Ocean Charters; Henry Brown provided a steering wheel for a yacht
and received no payment in return; Henry Brown then discovered that Ocean Charters was created by two shareholders,
each of whom had invested $1 in the company
• Ocean Charters was liable for breach of contract, but it had no money to pay for the liability
• Henry Brown sued the shareholders individually
Issue: Who did Henry Brown enter into a K with and does the fact that the corporation was thinly capitalized have
any effect on holding the corporation’s shareholders liable?
Held: HB contracted with OC and the fact that OC was thinly capitalized has no effect.
Reasons:
• The Court relied upon Salomon to deny a finding of personal liability against the shareholders
• It is the risk of the contracting party to ensure that the party they are contracting with can and will pay for their
liabilities
o When a party is consensually entering into contract relations, they cannot hold the individual shareholders
of the other party personally liable
• No fraudulent activity on the part of OC was discovered

CHAPTER 5: TORTIOUS, CRIMINAL, REGULATORY & CONTRACTUAL LIABILITY OF

CORPORATIONS
Basics:
• Corporations, as separate legal entities, can sue and be sued
• A corporation faces tortious, criminal, contractual, and regulatory liability
• Through the principles of agency, a corporation can be bound to perform contracts entered into by its agents

INDIVIDUAL V CORPORATE LIABILITY

Individual Liability
- Liability without agency.
o 1/ Contract - X enters into a contract. X has primary, personal liability
o 2/ Tort - X commits a tort. X has primary, personal liability
o 3/ Crime - X commits a crime. X has primary, personal liability
- Liability through agency
o 1/ Contract - Ms X’s agent, at X’s request, enters into a contract
▪ Ms X has primary, consensual liability
▪ (Ms. X can also have liability based on her agent’s ostensible authority)
o 2/ Tort – Ms X’s agent, who is also her employee, commits a tort in the ordinary scope of employment
▪ Ms X has non-consensual, vicarious liability
o 3/ Crime – Ms X’s agent commits a crime (not at Ms. X’s request)
▪ Ms X has no liability (there is no vicarious liability in criminal law)
Corporate Liability
- Liability without agency (although this is a bit fictional because a corporation always requires agents to facilitate
business activity)
o 1/ Contract – NA: corporate liability in contract is only established via agency law
o 2/ Tort – Corporation X commits a tort

47
 ▪ Corp X has primary liability established by the directing mind doctrine
o 3/ Crime – Corp X commits a crime
▪ Corp X has primary liability established through directing mind doctrine as augmented by recent
amendments to the Criminal Code
- Liability through agency
o 1/ Contract – The corporation is bound if its agent has actual or ostensible authority
o 2/ Tort – the corporation’s employee commits a tort in the ordinary course of employment
▪ The corporation’s liability is non-consensual and vicarious
o 3/ Crime – there’s no vicarious liability in crime, so this is NA

CRIMINAL AND TORTIOUS LIABILITY

ATTRIBUTING LIABILITY TO A CORPORATE BODY

THE “RHONE” V THE “PETER AB WIDENER” (1993 SCC) - DIRECTING MIND DOCTRINE –
EMPLOYEE WITH GOV’ING EXECUTIVE AUTHORITY TO DESIGN & SUPERVISE THE
IMPLEMENTATION OF CORP. POLICY
Ratio: In order to hold a company liable for a crime committed by an employee, the employee must be a directing mind
of the corporation (Directing Mind Doctrine):
- A “directing mind” is found when the discretion conferred on an employee amounts to an express or implied
delegation of “governing executive authority” to “design and supervise” the implementation of corporate policy,
rather than simply carrying out such a policy
Facts: Rhone is a ship owned by the plaintiff; the ship was struck by a tug boat flotilla, being captained by Captain Kelch;
the plaintiff sued Captain Kelch and his employer, Great Lakes Shipping
- Captain Kelch, the flotilla master, was a partial cause of the accident due to his negligence
o Kelch had some non-navigational functions as well, as an “incident of his employment”
o Captain Kelch was an employee of Great Lakes shipping, who owned two of the flotilla tugs.
- The Shipping Act contained a specialized defense, and it states that the owner of a ship has the benefit of limited
liability concerning acts or omissions in the navigation of the ships that occur without the owner’s actual fault or
privity
- At trial, the judge found that Captain Kelch was a directing mind of the corporation of Great Lakes, and therefore
Great Lakes could not limit its liability under the Shipping Act (as it was at fault, as per the fault of one of its
directing mind); the decision was affirmed by the FCA
Issue: Is Captain Kelch a “directing mind” of Great Lakes? Did the collision occur without the actual fault or privity of
Great Lakes, as per s 647(2) of the Shipping Act or not? (are Captain Kelch’s faults the faults of the corporation by reason
of his position)?
Decision: Appeal allowed; Captain Kelch was not a directing mind of the corporation, and therefore the collision did not
occur with the actual fault of Great Lakes
Analysis:
- Question is at what point in the hierarchy of a company is the fault of a person employed in the organization to be
treated as the fault of the corporation itself?
o For a corporation to be criminally liable for an act of an employee, the employee must be a directing mind
of the corporation
- For determining if a person is a directing mind of a corporation:
o Focus of inquiry must be whether impugned individual has been delegated the “governing executive
authority” within the scope of his/her authority; this discretion should include the ability to design and
supervise implementation of corporate policy
o Although Kelch was considered a decision maker, one “must look behind the labels and consider the
responsibilities and functions performed” by Kelch within the corporate hierarchy of Great Lakes

48
 ▪ In light of that, Kelch was clearly just a port captain with some additional responsibilities owing
to his experience, but he’s an employee, not a member of the corporate design and supervisory
functions
▪ Kelch was entirely subject to supervision of Captain Lloyd. Did he have governing authority over
management and operation of the fleet?
• No! He did whatever “rotten job” he was given
- A limited decision-making role won’t render a person a “directing mind” of a corporation if the governing
authority over management and operation of corporation resides elsewhere

CORPORATE DEFENSE TO LIABILITY

R V CANADIAN DREDGE & DOCK CO (1985 SCC) - CORPORATIONS CRIMINALLY LIABLE –
DIRECTING MIND & IDENTIFICATION DOCTRINE – ACTION WITHIN SCOPE OF AUTHORITY IN
ORDINARY COURSE OF BUSINESS, NOT TOTALLY IN FRAUD OF CORP, & PARTLY FOR BENEFIT
OF CORP
Ratio: Identification Theory operates to find a corporation liable where the action taken by the directing mind of the
corporation was:
(1) Within the scope of authority in the ordinary course of business,
(2) Not totally in fraud of the corporation, and
(3) By design or result, partly for the benefit of corporation (corporation got something out of it, either by design
or intent)
Facts: Corporations were convicted under Criminal Code for contracts/RFPs between public authorities and appellants
where the bids were tendered on a collusive basis; managers were getting kickbacks and there was fraud
o So it’s a criminal collusion ring getting bids for government contracts
- Each corporation had a manager who conducted the business of the corporation relating to the submission of bids
for tender
- The corporations denied criminal liability, notwithstanding the position of the managers, because the managers
were acting:
o In fraud of the corporation; or
o Wholly or partly for their own benefit; or
o Contrary to instructions that they not engage in illegal behavior on behalf of the corporation
Issues: Is a corporation liable for criminal actions of their managers/directors? What is the “appropriate outer limit of the
attribution of criminal conduct of a directing mind when he undertakes certain activities in fraud of the corporation or for
his own benefit?”
Decision: Corporation found criminally liable in the circumstances by operation of the identification theory
Analysis:
- Court breaks down how criminal liability can be attributed to a corporation:
o a/ Absolute liability and strict liability (no MR needed)
o b/ Mens rea offenses
▪ At CL, corporations couldn’t be convicted of criminal offenses. Why:
• a/ Criminal law abhors vicarious liability or respondeat superior
• b/ The doctrine of ultra vires, which holds that criminal activities by corporate agents
beyond their capacity do not attract corporate liability
o Even in mens rea offences: if the court finds the officer or managerial level employee to be its
directing mind in the sphere of duty assigned him so that his actions and intent are the action and
intent of the corporation itself, the corporation can be held criminally liable.
- Identification theory: that the corporation and person committing the crime have become one in the same, so as
to unite actus reus and mens rea
o If a directing mind acts outside of the field assigned to them, was totally in fraud of the corporation,
and the corporation received no benefit, the corporation DOESN’T have criminal responsibility.

49
 - TEST for Identification Doctrine: If these conditions are met, the corporation has PRIMARY criminal
liability.
o Identification doctrine only operates where the Crown demonstrates that the action taken by the directing
mind was:
1. within the field of operation assigned to him
2. was not totally in fraud of the corporation
3. was by design or result partly for the benefit of the corporation
- Application:
o In this case, the managers were trying to benefit the corporations, as well as take a bit for themselves.
They weren’t acting wholly for their own personal benefit. They remain directing minds of the
corporation.
- Note: Criminal Code amendments have broadened who can be considered to be a directing mind of a corporation
for the purposes of finding a corporation criminally liable
o This case continues to state the test for finding a corporation liable in tort, but not for criminal
liability

STATUTORY CRIMINAL LIABILITY

- Historically, corporations were rarely convicted of criminal offences
o Because actus reus and mens rea had to occur in one directing mind for the corporation to be held liable
- And then, the Westray mining disaster occurred
o Public inquiry showed that explosion could have been prevented if managers had paid attention to
repeated warnings about the safety of the mine
o But in the end, no one was imprisoned or convicted for the deaths. This really highlighted some of the
problems in the Criminal Code and issues with the directing mind theory in the criminal context
- Criminal Code amendments: Bill C-45
o Bill C-45 Distinguishes Between:
▪ Crimes requiring the Crown to prove negligence (s 22.1); and
▪ Crimes requiring the Crown to prove knowledge or intent (s 22.2)
o Highlights of Bill C‐45
▪ The actus reus and mens rea of criminal officers attributable to corporation will no longer need to
be derived from the same individual (can be committed by different individuals)
▪ The class of personnel whose acts or omissions can supply the physical element of a crime (actus
reus) attributable to a corporation or other organization will be expanded to include all
employees, agents and contractors
▪ For negligence based crimes, the mental element of the officer (mens rea) can be attributable to
corporation through the aggregate fault of the organization’s “senior officers” (includes members
of management with operational, as well as policy-making authority).
▪ For crimes of intent or recklessness, criminal intent will be attributable to a corporation where a
senior officer is a party to the offence, or where a senior officer has knowledge of the commission
of the offence by other members of the organization & fails to take all reasonable steps to prevent
or stop the commission of the offence
▪ To satisfy the Defence of due diligence, corporation should have workplace policies & loss/risk
management systems
▪ Bill C‐45 expands scope on who can be included as a directing mind (includes senior officers &
people who meet the CL test)
o S. 22.1 Criminal Code - Offences of Negligence for Organizations
▪ A corporation is a party to an offense if:
• A representative of the corporation is acting w/in the scope of his authority and

50
 • There is a marked departure from the standard of care that, in the circumstances, could
reasonably be expected to prevent a representative of the organization from being a party
to the offence
o S. 22.2 Other Offences for Organizations
▪ A corporation is a party to the offence if any senior officer has the intention to benefit the
corporation in part and is
• Acting w/in the scope of their authority is a party to the offence,
• Having the mental state required for the offence directs representatives to commit the
prohibited act or make an omission or
• Knowing that a representative of the organization is or is about to be a party to the
offence, does not take all reasonable measures to stop them from being a party to the
offence
- Metron case – example of a corporation being convicted under the new provisions
o Defendant corporation wanted to restore some balconies. The defendant hired a project manager, who in
turn hired a site supervisor. Platform collapsed because too many construction workers were on it.
Platform wasn’t properly constructed. ¾ of the deceased had marijuana in their bloodstream.
o Defendant corporation pled guilty to negligence; conceded that the site manager was a senior officer, and
therefore mens rea for the criminal offence is attributable to the corporation.

REGULATORY OFFENCES
• Often, convictions are for breach of environmental regulations. Directors and officers will often be prosecuted.

Regulatory Offences
- Not criminal in a real sense; sometimes called statutory offences, public welfare offences; the idea is that there’s
some public purpose
- There are three types of offences (R v Sault Ste Marie):
o Absolute liability – The actus reus alone will impose liability (no mental component to the offence)
o Strict liability – due diligence offence; Once the accused is proven to have committed the actus reus,
liability will be found unless the defendant proves a due diligence defense on a balance of probabilities
(proof that defendant took all reasonable care)
o Mens rea offence – requires a guilty mind (intent or recklessness)
- Regulatory offences are usually strict liability (permitting the due diligence defence)

R V BATA INDUSTRIES (1992 ONPC) – DUE DILIGENCE DEFENCE - ONUS ON ACCUSED TO SHOW
ON BOP – SCOPE OF DUTIES TAKEN INTO ACCOUNT IN DETERMINING REAS. CARE
Ratio: The onus is on the party raising the defence of due diligence to show on a balance of probabilities that they acted
with reasonable care. The scope of an employee’s duties is taken into account when determining the level of “reasonable
care” expected of them.
Facts: Chemical storage bins were left in the yard of a shoe manufacturing plant, and they were leaking into the ground
- This contravened Ontario’s Environmental Protection Act; Directors were charged with strict liability offences
Issue: Can directors be prosecuted? Did they meet the actus reus of the offence? Any defenses available?
Decision: Merchant and Weston were convicted and received fines, the order was also made that they could not be
indemnified by the corporation for their fines; Bata Corporation was also fined
Analysis:
- Sets out factors for due diligence in this case:
o Did board establish “pollution prevention” system? Was there supervision or inspection?
o Did each director ensure that corporate officers have been instructed to set up a system that was consistent
with industry practice in ensuring compliance with environmental laws?
o Did directors review environmental compliance reports, or at least get info from subordinates on the
matter?

51
 o Are directors ensuring that environmental concerns are being promptly addressed?
o Are directors aware of industry standards for dealing with these pollutants?
o Did directors immediately and personally react when they had notice that the environmental safeguards
failed?
- Principle of delegation in environmental matters
o According to EPA, environmental protection is too important to delegate entirely in the corporation; not
acceptable for corporate directors to insulate themselves from all responsibility
- CEO (Mr. Brata): not guilty; his behaviour indicated due diligence
o His responsibilities were primarily global, no evidence that he was aware or willfully blind of the problem
& he took action once he found out about the problem; he was also entitled to rely on his directors who
had more involvement with the plant
- Douglas Merchant: convicted; he knew about the environmental non-compliance for about six months, and did
nothing to deal with it. Lack of paper trail and delay in cleanup shows lack of due diligence
- Keith Weston – convicted; worked as “on-site” director, high degree of responsibility; did not take reasonable
steps to avoid harm
o His responsibilities as the on-site director make him more vulnerable to prosecution
o E.g. Weston received a quote of $58,000 for environmental clean-up, and did nothing to begin the clean-
up (Weston was being incentivized in his personal salary to cut company costs)

R V BATA INDUSTRIES (1995 ONCA) – INDEMNIFICATION OF DIRECTORS AND OFFICERS MUST BE

IN ACCORDANCE WITH ABCA, S 124
Ratio: A corporation can only indemnify a corporation’s directors/officers pursuant to legislation (s 124 ABCA)
Facts: Appeal from the above case; trial judge fined Bata Corporation $120,000; fined Marchant and Weston $12,000
each personally
o Further, Bata Corp was prohibited to indemnify Marchant and Weston for the costs of their fines – they
had to pay them fines out of pocket. Order was punitive in nature.
- Bata Corporation, Marchant, and Weston appealed their sentences, and they were reduced in all cases by
significant amounts.
- Trial Judge noted that if Marchant and Weston were to be indemnified by Bata Corporation, “the viable
sentencing options of the Trial Judge are limited and incarceration gains prominence”
o E.g., only way to punish them in a meaningful way would be prison
- Also, by-laws of Bata Corporation say that to qualify for indemnification, the litigation had to have been
substantially successful, and Weston and Merchant were obviously not successful
Issue: Was the TJ’s prohibition on indemnification correct in law?
Decision: No, the order of the trial judge was improper. Probation terms against Bata Corporation must be directed at the
rehabilitation of the corporation; The indemnification order was not directed at this goal, as it sought to punish the
directors; ability to indemnify officers must be found in statute (ABCA, s. 124)
Analysis:
- Prohibition on indemnification was improper because s 72(3)(c) specifies deterrence and rehabilitation of the
defendant, who was BATA, the corporation – but the penalty was levied not against Bata Corporation, but
against Marchant and Weston
o “A term of probation is inappropriate if it represents an additional punishment exceeding the proper scope
of the probation order”
- The trial judge also ignored s 136 of the OBCA [very similar to Alta provision, s 124 ABCA], which establishes
when a corporation may or must indemnify a corporate officer or director, and when it must not.
o So long as the officers acted in good faith and under reasonable belief their conduct was lawful, they may
be indemnified.
- The trial judge noted that the corporate bylaws prevented indemnification – if that’s true, this whole discussion is
superfluous
o BUT there was an error in law.

52
 - Court agrees that there may be deterrent reasons for preventing indemnification, but the statutes simply don’t
work that way.
- s 124 of ABCA
o Ensures that employees within the corporation are indemnified by the corporation only in circumstances
where it would be fair to do so
o Officers must have reasonable belief that their conduct was lawful and must have acted in good faith
o So, even without the court order, it is unlikely that the directors could be indemnified, as per the
legislation

R V SYNCRUDE CANADA (2010 ABPC) – BIRDS KILLED LANDING ON TAILINGS POND – STRICT
LIABILITY – DUE DILIGENCE DEFENCE FACTORS
Ratio: Defense of due diligence will be available in the prosecution of a strict liability offence if the agent reasonably
believed in a mistaken set of facts which, if true, would render the act/omission innocent, or if they took all reasonable
steps to avoid committing the offence
Facts: 1650 birds died that landed on Aurora tailings pond that had a layer of bitumen on top. Tailings pond in area where
migratory birds convene and in a spot where they land. Syncrude was charged under EPEA and the Migratory Birds
Convention Act.
EPEA
Section 155
A person who keeps, stores or transports a hazardous substance or pesticide shall do so in a manner that ensures
that the hazardous substance or pesticide does not directly or indirectly come into contact with or contaminate any
animals, plants, food or drink.
Migratory Birds Convention Act, 1994
5.1 (1) No person or vessel shall deposit a substance that is harmful to migratory birds, or permit such a
substance to be deposited, in waters or an area frequented by migratory birds or in a place from which the
substance may enter such waters or such an area.
Issues: Is Syncrude liable for violating environmental legislation? Can Syncrude prove it took all reasonable care to avoid
the contraventions as a defence?
Decision: Syncrude guilty of both the provincial and federal offences; fined $3,000,000
Analysis:
- Crown must prove that Syncrude breached the legislative provisions beyond a reasonable doubt, and once shown,
Syncrude must prove on a BOP that it took all reasonable care in order to avoid liability
- Defense of Due Diligence: if the accused reasonably believed in a mistaken set of facts which, if true, would
render the act or omission innocent; or if it took all reasonable steps to avoid the particular event. Determined on
the balance of probabilities (R v Sault Ste. Marie)
o Not held to a standard of perfection, just have to take all reasonable steps
o Factors:
▪ Nature & gravity of the adverse effect, foreseeability, alternative solutions, industry standards,
complexity of the problem, preventative system, efforts to address problem, promptness of
response, matters beyond control of the actor, legislative or regulatory compliance, skill levels
expected of the accused, economic considerations, character of the neighbourhood

o Syncrude’s approach:
▪ Delayed set-up of the deterrence system
▪ Head of team had little training or experience, no credentials
▪ The bird team had experienced cutbacks
▪ There was lack of oversight
▪ Lack of documentation
▪ Other companies were doing a better job (not meeting industry standards)
▪ Few man hours were being invested
▪ Little money was invested
53
Other defenses used by Syncrude:
1) Technical readings of both offences (paras. 48-49)
2) Impossibility in avoiding bird deaths (para. 132)
• Not impossible, as due diligence could have been used to deter birds from landing and it
was not used at the material point in time
3) Act of God defense (para. 134 & 142)
• convergence of bad weather and seasonal timing was argued.
• Court said to use this defence, would have to prove it was not foreseeable and
then that you took every precaution and third there were no human intervention
in the force of nature. Syncrude failed on the second part.
• Foreseeable that weather events could have arisen that would lead birds to land on the
pond at that time of the year
4) Abuse of process (paras. 150-151)
• Can still be in compliance with terms of approval while violating legislation and
Syncrude can still be prosecuted for those violations
• compliance and abuse of process to prosecute/offends public’s sense of decency or fair
play – nothing like this present
5) Officially induced error (para. 158)
• Would have to point to actual comments from an official that told them that they would
be immune from punishments
6) Defense of de minimus (para. 165)
• Argument that law does not concern itself with trifling matters
• This argument was not very tasteful, not very well grounded, was seen negatively by the
judge and by media

Note: when a company is thinking about whether to fight charges, they should also think about how their reputation will
suffer by dragging out the process

CONTRACTUAL LIABILIT Y – CURRENTLY GOVERNED BY INDOOR MGMT RULE & AGENCY

- At common law, the contractual liability of the company is tied to:
o The ultra vires rule [largely repealed by s 16 and 17(3) ABCA]
▪ Per McGuiness: The Latin term ultra vires describes a class of acts that were beyond a body’s
powers or jurisdiction
▪ Essentially, if a corporation contracted outside of the objects listed in its memorandum of
association, it could not be held liable as those contracts were unenforceable (Jon Beauforte)
• E.g. a corporation created to carry out mining activities becomes involved in operating a
ski hill
▪ This rule is only still relevant for companies created by special act
o The constructive notice doctrine [repealed by s. 18 of the ABCA]
▪ McGuiness: constructive notice is knowledge of a fact that is presumed or imputed by law. At
CL, a person who dealt with a corporate body was deemed to have notice of the contents of all
documents that the corporation was required to file with, and did file with, a public office that
were open to public inspection
• Doctrine of ultra vires works hand in glove with the constructive notice doctrine because
if you went down to corporate registry, you would have seen the MOA that says that the
company does X. It’s on you to know the terms of the MOA and other things about the
corporation.

54
 ▪ After repealing of the rule: you are not deemed to know something just because it is publicly
available
o The indoor management rule [reflected in ABCA, s 19]
▪ Those dealing with a corporation are entitled to assume the internal procedures of a
corporation have been complied with, except when they are notified otherwise
▪ Section 19 of ABCA: Assume that the internal procedures were complied with unless you hear
otherwise
▪ McGuiness: Even during the heyday of the doctrine of ultra vires, the courts were loath to require
third parties dealing with a corporation to inquire into compliance by a corporation or its directors
and officers with the internal rules of management governing the conduct of the business
▪ Company cannot rely on its own internal rules not being followed to avoid the finding that a
contract they entered into is valid and enforceable
• E.g. contracts must be approved by board resolution
o Agency
▪ Agent purports to contract on behalf of principal with a third party
▪ Principal can be bound to fulfill contracts entered into on their behalf by agent if the agent had
actual or ostensible authority
• Actual authority – principal has consented to the agent having authority
o Can be express (agent can do this thing at this time with this party) or implied
(e.g. the agent can do what they are normally expected to do)
• Ostensible authority
o Representation by the principal (by someone of actual authority) to the third
party that the agent has authority to enter into contracts (giving the appearance of
authority)
o Must be represented by someone with sufficient actual authority (e.g. someone
high enough up the ladder at the corporation, like an authorized officer)
▪ Party intentions: Look at whether the person who has been defrauded knew that they were dealing
with an agent of the corporation, or if they thought they were dealing with the person in their
personal capacity
• If they should have reasonably known that the person was acting as an agent, then that
may be sufficient to protect the agent from liability.

RE: JON BEAUFORTE (LONDON) (1953) - ULTRA VIRES: CONTRACTS VOID AB INITIO B/C
CORPORATION’S ACTIONS DIDN’T CORRESPOND TO LIMITATIONS SET OUT IN CORPORATE
BYLAWS/CONSTITUTING DOCUMENTS
Ratio: A contract that is outside the articles of association of a company is ultra vires that company, and is void and
unenforceable
Facts: A company was authorized by its memorandum of association to carry on the business of costumiers, gown-
makers and related activities”; the company then decided to undertake the business of making veneered panels, without
amending the objects clause in its MOA; The company then fell on hard times and went into compulsory liquidation
• A number of proofs of debt were lodged by creditors and were rejected by the liquidator on the ground that the
contracts to which they related were ultra vires
• Three creditors appealed that rejection by the liquidator, claiming that they had not had actual knowledge that the
veneer business was ultra vires the company
Issue: Are the three contracts at issue (i.e. contract for construction of the veneer factory and contract for veneer)
unenforceable?
Decision: The contracts are unenforceable. The company does not need to fulfill the contracts which facilitate something
falling outside of the corporation’s objects (as laid out in its memorandum of articles)
Analysis:

55
 - The fuel supplier (one of the parties to whom money was owed) was deemed to have had constructive notice of
the corporate objects; they had sufficient notice that the transaction was ultra vires the corporation
o The fuel supplier knew that the fuel was to be used for running a veneer business
o Constructive notice says that you are fixed with knowledge of publicly available documents
▪ So in this case, the fuel supplier should have known the objects of the corporation, and therefore
known that making veneer was outside of those objects
- Unjust enrichment does not work in this instance
o Jon Beufort is enriched (because it receives fuel), the supplier is deprived, but there is a juristic reason for
the transaction (because of the ultra vires doctrine which restricts a corporation to its stated objects)
- The purpose of the ultra vires doctrine is to protect corporations to ensure that they’re only operating in the area
that they said they would
o This leaves suppliers high and dry, and puts the onus on them to read all the corporate documentation of
other parties before entering into contracts. This is a business efficacy problem.

COMMUNITIES ECONOMIC DEVELOPMENT FUND V CANADIAN PICKLES (1991 SCC) – ULTRA VIRES
DOCTRINE ABOLISHED BY ABCA/CBCA EXCEPT FOR SPECIAL ACTS CORPORATIONS
Ratio: Doctrine of ultra vires no longer operates under general Acts (ABCA & CBCA) for policy and common sense
reasons
- Ultra vires can still apply with respect to Special Acts corporation (corporation created by special act for
government purposes)
- The guarantee also contemplates that if the loan is ultra vires, then the guarantees don’t apply
Facts: Communities Economic Development Fund (CEDF) was a corporation created by statute (incorporation via
SPECIAL ACT); the statute provided that the Fund is mandated to encourage economic development of remote and
isolated communities in Manitoba; the legislation prohibited the CEDF from making a loan which contravenes any part of
the legislation
- CEDF loaned money to a corporate borrower, Canadian Pickles, who was not located in a remote area; they were
20km out of Winnipeg; on this basis, the loan is ultra vires because the fund only has the powers it’s granted
under the legislation
- Pickles goes bankrupt, and CEDF tries to collect from the individuals who made the guarantees
- The trial judge found that Canadian Pickles was liable for the full amount of the loan; the Court of Appeal
allowed the appeal and held that the guarantee of the loan was not enforceable
Issue: Is the doctrine of ultra vires applicable to a corporation created by statute? What is the liability of a guarantor to
repay a loan which is ultra vires the lender?
Decision: Appeal dismissed; the doctrine of ultra vires is applicable to a corporation created by statute and since the
corporation issued a loan outside its stated purpose in the statute, it is ultra vires; the guarantee on the loan is
unenforceable because a guarantee cannot backstop a loan that is ultra vires
Analysis:
- “In my opinion, the general abolition of the doctrine of ultra vires is in accordance with sound policy and
common sense” [215]
- However, the doctrine may apply in the case of corporations created by special act for public purposes & the loans
in this case were ultra vires the special act
o Logic behind the rule: that the public will be protected (ensuring that the public purpose will be followed)
o Guarantees made on loans that are ultra vires are not enforceable
o A corporation created by a special act doesn’t have the power to do things that are not in
furtherance of its purpose
▪ Its PURPOSE creates the ultra vires rule.
▪ even though the ultra vires doctrine is abolished by statute, a corporation created by special act
will have to follow its statutory mandate
- If the loan is ultra vires, which is the case in this instance, the guarantee on repayment of the loan fails (is
unenforceable)

56
CONTRACTING WITH AGENTS OF THE CORPORATION
- Actual authority:
o Can be express or implied. Requires representation by the principal, but this does not need to be express
o Usual authority (example of implied authority): authority within the usual scope of that office
▪ Representation here has to do with the handing over of the title
o If the agent enters into a contract pursuant to actual authority, it creates contractual rights and liabilities
between the principal and third party
- Ostensible “Apparent” authority:
o When principal creates situation where its reasonable for a third party to infer the agent has authority –
must be a real representation.
▪ I.e. “estoppel by agency;” by his conduct, the principal is estopped from denying the agent’s
authority
o An agent can work for an undisclosed principal and bind that principal to a contract
- If you can establish either actual or ostensible authority, you win. It’s best to argue both in practice.

ACTUAL AUTHORITY

PANORAMA DEVELOPMENTS V FIDELIS FURNISHING (1971 HL) - ACTUAL (IMPLIED) AUTH. MAY
FLOW FROM A JOB TITLE OR POSITION – CORP SECRETARY RENTING FANCY CARS UNDER HIS
EMPLOYER’S NAME, RENTING THEM OUT FOR PERSONAL GAIN
Ratio: Actual, implied authority can flow from a job title or position, such as corporate secretary; As long as either actual
or ostensible authority can be shown, the principal will be bound to the contract entered into by its agent
Facts: Bayne, the corporate secretary of Fidelis, rents luxury cars from the plaintiff, Panorama; there’s an agent-principal
relationship existing with Bayne as the agent and Fidelis as the principal; Panorama made luxury vehicles available to
Bayne on corporate credit to Fidelis
• Mr. Bayne would have the fancy cars, rent them out to other people, and personally pocket the money – this is
fraud
- The principal, Fidelis, argues that they should not be forced to pay because:
o The contracts were between Panorama and Bayne, personally, not with Fidelis
o The Bayne, as a company secretary, did not have the authority to enter into contracts on behalf of Fidelis
- Bayne’s job title – is it a communication of actual authority to the world? Was Bayne, as a corporate secretary,
held out to Panorama as someone who could bind them as an agent?
- The trial judge found Fidelis liable for the outstanding payments
Issue: Does Mr. Bayne have authority to bind Fidelis to a contract with Panorama? Will Fidelis have to pay Panorama?
Decision: Appeal dismissed; Fidelis liable for outstanding debt owed to Panorama
Reasons (Lord Denning):
- As long as either actual or ostensible authority can be shown, principal will be bound to the contract
- Denning takes a different approach: says that Bayne could have had either ostensible or actual authority
o Argument for ostensible authority:
▪ Bayne is an officer of the corporation and the nature of the officer position comes with extensive
responsibilities, including agreements to lease vehicles
▪ The principal therefore clothed Bayne as someone with authority, so Bayne had ostensible
authority.
▪ Representation was made by the appointment of Bayne to position of corporate secretary
• So, Bayne has actual authority by virtue of that title to do what corporate secretaries do.
And there’s a representation by the principal, by virtue of that title, that the authority
exists.
- It could also be argued that Bayne had actual, implied authority to enter into contracts for the hire of cars (Note:
courts usually focus on ostensible authority, rather than actual authority)

57
 o Baynes was a corporate secretary, and along with that fairly high position comes the ability to rent cars.
o This looks to be actual, implied authority, by virtue of his position.
▪ The ability to rent cars accompanies his position as a facet of his job.

APPARENT AUTHORITY

FREEMAN V BUCKHURST (1964 UK) - TEST FOR APPARENT (OSTENSIBLE) AUTHORITY – 4

REQUIREMENTS – DEFINITIONS FOR OSTENSIBLE AND ACTUAL AUTHORITY - ARCHITECHTS
PERFORM WORK FOR BUCKHURST (THROUGH ROGUE AGENT, KAPOOR) AND ARE NOT PAID
Ratio: Test for Apparent Authority (all four must be met)
1. A representation was made to the third party that the agent had the authority to enter into these types of
contracts on behalf of the corporation
2. Such representation was made by a person who had actual authority to manage the business (ie, the
principal)
3. The contractor was induced by such representation to enter into the contract (ie. that he in fact relied upon
it)
4. That under its memorandum of association, the corporation was not deprived of the capacity either to enter
into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to
the agent (This part of the test only applies to corporations incorporated via special acts, as per the ultra
vires doctrine (s 17(3) overrides ultra vires doctrine)
Facts: Freeman (plaintiffs) are architects who perform work for Buckhurst (defendant); Buckhurst has a rogue agent,
Kapoor, who acts as a managing director. However, Kapoor was never appointed to that position -> never completed the
paperwork to finish his promotion; The plaintiff does work on Kapoor’s instructions and never gets paid. Kapoor leaves
the corporation, and Freeman sues Buckhurst.
• The trial judge held Buckhurst liable
Issue: Is Kapoor an agent of Buckhurst despite not having filed the proper paperwork to solidify his position as managing
director? Is Buckhurst liable for the contract?
Decision: appeal dismissed; Buckhurst held liable as Kapoor was acting with ostensible authority in entering into a
contract with the plaintiffs
Reasons:
- Intention by the parties from the outset was that Buckhurst and Freeman were the parties to the contract, not
Kapoor
- Buckhurst is liable, because Kapoor was acting with ostensible authority;
o Board knew that Kapoor was acting as managing director, even though there was no resolution giving
him such power (so he didn’t have actual authority); They acquiesced to this
o Kapoor was acting as an agent for Buckhurst, so the contract was between Buckhurst and the third party
contractors. A valid contract had been formed
• Test for Apparent (Ostensible) Authority (all four must be met)
1. A representation was made to the third party that the agent had the authority to enter into these types of
contracts on behalf of the corporation
a. The board permitted Kapoor to act as though he was a managing director in employing agents and
taking steps to find a purchaser; this conduct represented that Kpoor had the authority to into such
contracts
2. Such representation was made by a person who had actual authority to manage the business (ie, the
principal)
a. Representation was being made by the board of directors, who had full powers of management in the
corporation
3. The contractor was induced by such representation to enter into the contract (ie. that he in fact relied upon
it)

58
 a. The plaintiffs were induced to believe that Kapoor was authorized by the defendant company to enter
into contracts on its behalf
4. That under its memorandum of association, the corporation was not deprived of the capacity either to enter
into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to
the agent ( This part of the test only applies to corporations incorporated via special acts, as per the ultra
vires doctrine (s 17(3) overrides ultra vires doctrine)
- Definitions of actual and ostensible authority:
o Actual authority – “legal relationship between principal and agent created by a consensual agreement to
which they are alone parties.”
▪ A note on actual authority: By virtue of Mr. Kapoor’s position as managing director, he would
have actual authority, would he not?
▪ You could argue that the Board permitted him to act as managing director, so in that respect, you
could argue he had actual authority on that basis.
o Ostensible authority – “A legal relationship between the principal and the contractor created by a
representation, made by the principal to the contractor, intended to be and in fact acted on by the
contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within
the scope of the “apparent” authority, so as to render the principal liable to perform any obligations
imposed on him by such contract”
a. The articles of association did not deprive the company of capacity to delegate authority to a director
to act as their agent and into contracts of this kind
• Unjust Enrichment could play a role in these situations. On the facts above, you wouldn’t need UE because
agency law is enough
o Arguably, there’s a juristic reason in that there may not be authority for the agent
o Freeman’s requirements on ostensible/apparent authority have been approved by SCC (Canadian
Laboratory Supplies) and ABCA (Doiron)

DOIRON V MANUFACTURERS LIFE INSURANCE (2002 ABQB) - PRINCIPLE LIABLE FOR ACTS OF
AGENT SO LONG AS AGENT ACTING WITHIN SCOPE OF ACTUAL/OSTENSIBLE AUTHORITY
Ratio: A principal is liable for the acts of an agent so long as the agent is acting within the scope of their actual/ostensible
authority
Facts: The Doirons had money to invest, and they approached William Demmers for investment advice on no-risk
ventures with a high rate of return; Demmers suggests some low-risk, low-return investments but Doiron’s didn’t like the
rate of return and wanted something else; Demmers suggested that they invest in the Devon Capital Corporation venture
instead because it has an 8% rate of return. The Devon product was not a Manulife product. It turned out to be a fraud and
the Doirons lose their money.
- Demmers worked in Manulife’s office, sold Manulife’s products, was supplied with Manulife business cards, and
was encouraged to use Manulife letterheads in communications with clients, but Demmers wasn’t an employee of
Manulife (was classified as an independent contractor); Demmers also sold the investment products of other
companies
o Clause 3(b) of the contract between Demmers and Manulife limited the scope of authority granted to
Demmers: He was not authorized to enter into contracts on behalf of Manulife unless authorized in
writing and he was not permitted to amend contracts
- Demmer invested Dorions money into a fraudulent investment, and as a result the Dorions lost all their money
o The Dorions have a judgment against the Devon Capital Corporation, but they haven’t received any
money, so they’re now trying to determine whether Manulife should indemnify them
Issue: Was Demmers an ostensible agent of Manulife? Is Manulife bound and liable as a result?
Decision: Manulife held liable, as Demmers was found to be an agent of Manulife, acting with ostensible authority
Reasons:
- Actual authority:
o Demmers had no actual authority to enter into contracts on behalf of Manulife (as per the agreement
between Manulife and Demmers)
59
 - Ostensible authority:
o Operates as estoppel, precluding the principal from asserting that he is not bound
o The Dorians thought he was a Manulife employee, so there was ostensible authority
▪ Demmers had business cards, letterheads office location, you could redirect from Manulife
phones to him, logos in Demmers’ office
▪ all of this represents that Demmers was an agent of Manulife, even if the contract between
Manulife and Demmers says he is not
▪ however, the point overlooked by the court was the Doirons’ had received a letter from Devon
that outlined their investment (and should have made clear that the product was not connected to
Manulife); the court overlooked this because at that point, the Doirons would not likely have
received their money back (but O’byrne is hesitant on this, because it’s about liability and who
the Doirons are dealing with, not so much about ability to get their money back at that time)
- All of the criteria from the Freeman case are present, and thus ostensible authority is found:
1. A representation was made to the third party that the agent had the authority to enter into these types
of contracts on behalf of the corporation
a. Manulife office, letterhead use, business cards, Manulife promoting people who were selling
its product, redirecting phone calls to Demmers from the Manulife phone number
b. Manulife knew of Demmers’ mode of conduct that held him out as an agent of Manulife, and
acquiesced to it
2. Such representation was made by person who had actual authority to manage the business (ie, the
principal)
a. Representation was being made by Manulife
3. The contractor was induced by such representation to enter into the contract (ie. that he in fact relied
upon it)
a. The Doirons relied upon the strength of the representations that Demmers was an agent for
Manulife
b. The plaintiffs were induced to believe that Demmers was authorized by the Manulife to enter
into contracts on its behalf and was selling a Manulife product
4. There was no issue with the ultra vires doctrine (corporation was not deprived of the capacity either to
enter into a contract of the kind sought to be enforced)

DOIRON V MANUFACTURERS LIFE INSURANCE (2003 ABCA) - OSTENSIBLE AUTH. DOESN’T

REQUIRE EXPLICIT REPRESENTATION OF AUTHORIZATION – CAN BE IMPLIED, BUT IT MUST BE
REASONABLE FOR 3 RD PARTY TO RELY ON APPARENT AUTHORITY
Ratio: Ostensible authority doesn’t require an explicit representation of authority; ostensible authority is found where the
principal has created a situation such that it is reasonable to infer and rely upon the apparent authority of the agent
Facts: Manulife appealed the decision that found it liable for the acts of Demmers, on the basis that Demmerss was acting
as an agent with ostensible authority; Manulife argued that Demmers had ostensible authority, but that he had sold a non-
Manulife product, never saying that it was Manulife’s; Manulife claimed that for them to be liable, Demmers, as the
agent, must have specifically represented that the agreement being made was with the principal (Manulife)
Decision: Appeal dismissed; Manulife is liable because Demmers had ostensible authority to enter into contracts in its
behalf; it was reasonable for the Doroins to think that Demmers was acting on behalf of Manulife
Reasons:
• Ostensible authority is found where the principal created a situation such that it is reasonable to infer and rely
upon the apparent authority of the person
o Another statement of the test for ostensible authority is that there must be: a representation, a reliance on
the representation, and an alteration of your position resulting from such reliance (Rama cCorp v Proved
Tin & General Investments)
• The mere belief on the part of a third party that they are contracting with the principal, absent some representation
to that effect, either express or implied, can’t support a claim of ostensible authority so as to bind the principal
o The surrounding circumstances in this case suggest that the principal gave an implied representation
60
CANADIAN LABORATORY SUPPLIES V ENGELHARD INDUSTRIES (1979 SCC) COMMERCIAL
REALITIES – 3 RD PARTIES CAN RELY ON REPRESENTATIONS OF LOWER LEVEL EMPLOYEES (AS
LONG AS REASONABLE AND SUFFICIENT AUTHORITY) –– EMPLOYEE BUYING AND SELLING
PLATINUM BEHIND COMPANY’S BACK FOR PERSONAL GAIN
Ratio: Lower level employees can act with apparent authority to indicate what the company is bound to; 3rd parties can
rely on representations of lower level employees; don’t need a senior officer to sign off on everything for there to be
apparent authority
Facts: CanLab often bought platinum from Engelhard, and would sell the scrap back to Engelhard
- Cook was an employee in CanLab’s sales department
- Cook contacted Engelhard, saying that CanLab was doing “secret experiments” to be carried out by Giles; Giles is
purportedly a secret scientist working with platinum. In actuality, Giles is a fictitious person being used for
Cook’s personal benefit.
- Engelhard agreed to ship platinum ordered by CanLab, accept scrap returns directly from Giles, and pay Giles
directly. Giles (actually Cook) pockets the money.
o O’Byrne: These facts are ridiculous. Secret scientists? Paying people directly? No. Englehard should have
asked to talk to a supervisor.
- Cook began operating his fraudulent scheme in 1962
- In 1966, Engelhard spoke to purchasing agent Snook, who held out Cook as an agent for CanLab who should be
dealt with when addressing the “Giles” customer
- In 1968, Engelhard called the vice president of CanLab to ask about the work of the secret scientist and the
platinum sales
Issue: Is Engelhard liable to CanLab in conversion (that is, it converted CanLab’s platinum to its own use)?
o If so, at what point does its liability end, or is it liable for CanLab’s entire loss?
- Did CanLab represent to Engelhard that Cook had the authority to set up the arrangement?
Decision: Engelhard held liable for conversion up until 1966, when Cook was held out as having authorization to
purchase by another employee, after which Cook had ostensible authority to carry out the platinum transactions (Cook did
not have ostensible authority before 1966)
Reasons:
- Engelhard is liable up until 1966, when CanLab talked to a person (Snook) who has actual authority
o Cook did not have actual authority because he was a lower level employee, so Engelhard was liable for
conversion from 1962-1966
o Snook would have to actual authority to hold Cook out as having authority in 1966 for liability to shift to
CanLab at that time
- Lower level employees can act with APPARENT authority to indicate what the company is bound to.
o Representation that creates apparent authority can be in form of knowledge and acquiescence by someone
at the company who hold actual authority
o Again, must look at whether it is reasonable in the circumstances to rely on the representation made by
lower level employees
o Identification of the persons whose knowledge and acquiescence constitute knowledge and acquiescence
of the company depends on the fact of the case
- Commercial realities dictate that third parties can rely on representations of lower level employees (especially
when a contract is initiated by a third party).
o You do not always need to have the senior officers confirm everything that lower level employees are
representing.
- Indoor management rule applies here
o Indoor management rule: persons need not inquire into the regularity of the internal proceedings of a
corporation; they may assume that everything is being done regularly and in accordance with the
company’s public documents
o CanLab was held to have affirmatively held out Cook’s status through a responsible and appropriate
representative (Snook) when questioned about who had the authority to deal with expediting payments
61
Dissent (Laskin J):
- Found that in 1968, Engelhard’s liability would end because they finally spoke to VP of operations at CanLab,
which should have put Canlab on inquiry and notice
o After that point, Canlab is solely liable for their losses
o Engelhard’s liability continues past 1966 because Snook had no managerial authority. Snook isn’t a
manager, so he doesn’t have actual authority to be arranging the purchase of platinum and the resale of
scrap platinum to Engelhard
o Cutting off Engelhard’s liability in 1966 splits the loss in a fair way… but Laskin can’t accept that as
correct, because Cook doesn’t have actual authority.
- Reason why Engelhard is liable up to 1968:
o It is impossible to equate the position of a mere clerk with that of the managing partner of the company
sought to be bound by the agent’s representation
o Representation by an agent himself as to the extent of his authority cannot amount to a holding out
by the principal
▪ representation must made by person who had actual authority to manage the business (as per the
Freeman test)

CHAPTER 5 SUMMARY
- Primary tortious liability flows through the directing mind theory [The Rhone, Canadian Dredge & Dock]
o Court says there’s a limit to when directing mind will apply – and this is where the criminal/tortious act is
totally in fraud of the corporation and where the act is intended to and does result in benefit exclusively to
the directing mind, the DM ceases to be a directing mind (this is the defence as stated in Canadian
Dredge)
- Criminal liability through the directing mind theory [Canadian Dredge], same as for tortious liability, except as
modified through Criminal Code (which expanded criminal liability)
o Amendments to CC make conviction more likely (actus reus and mens rea can be in different people; also
broader sense of who you can get the mens rea from – you can get it from senior officers, for example)
o Defense [Canadian Dredge]
- Liability pursuant to regulatory offences
o Defense of due diligence – taking all reasonable care to avoid the AR [Sault Ste Marie, Bata, Syncrude]
▪ Directors can also be charged and convicted
- Contractual liability
o Doctrines to consider:
▪ Ultra vires [Jon Beauforte, Pickles Corp] – repealed by s 16 & 17(3) of ABCA
▪ Constructive notice – repealed by s 18
▪ Indoor mgmt. rule – maintained by s 19
▪ Agency
• Actual authority [Panorama, Freeman]
• Ostensible/Apparent Authority [Panorama, Freeman, Doiron, CanLab]
o Test for Ostensible Authority - Freeman
o How to establish ostensible? Two ways:
▪ 1/ Representation by virtue of the office/apparently held by the Agent
(Panorama/Freeman/Doiron).
• The representation must be made by someone who has true,
actual authority e.g. Board of Directors
▪ 2/ Representation as to Agent’s authority by a corporate representative
with actual authority to make such a representation (CanLab)

CHAPTER 6 – CORPORATE SOCIAL RESPONSIBILITY

62
SUB-PRIME MORTGAGE CRISIS
• Not many unconscionable loans/predatory loans, just ill advised.
• Borrowers (buyers) (unsophisticated):
o Put no money down with a small initial payment (no down payment, low interest rates)
o Adjustable rate mortgages: Small teaser rate to start out, but rate reset two years later to double or triple
• Buyers given very complicated mortgages to review. The deferred cost is emphasized, long term cost is buried.
• Mortgage lenders Agree to mortgage deals. Appeals to borrower’s emotions (pay less now but more later)
• Mortgage brokers Earns fee by selling a loan on behalf of a lender. Only cares about closing the deal
• Mortgage underwriters Determine the risk of lending to a certain buyer. Used relaxed controls.
• Client Appraisers Valued property. Responded to systemic pressure to appraise properties at higher value
than worth
• Sub--‐Prime Borrowers Some of these were dishonest as well by over stating income, yet still some honest
people
• Originate--‐to--‐Distribute Mortgages (aka securitization)
o Lender didn’t care about the risk/credit worthiness of buyers since the mortgages would be sold to
investors
o Originating lender sells its mortgages (including sub--‐primes) to SPVs (“special purpose vehicles”)
o Transforms these mortgages into Mortgage Backed Securities (MBSs) & other structured finance products
o Sells to investors who are paid out interest and principal on the pooled loans
• Because of securitization, the lender & broker could & did hype emotion of the buyer
• O’Byrne: Two Negative Acts
o Hiding actual cost of mortgage, then readjusting the interest rate and consequences associated with this
o Complexity of the sub--‐prime mortgage. Industry intentionally made the K complex (unsophisticated
buyers)

CORPORATE SOCIAL RESPONSIBILITY

- Corporate Social Responsibility: calls for accountability in the context of corporation’s economic, social, and
environmental actions
o Idea that corporations must assess obligations to broader range of stakeholders other than just shareholder
profits
- CSR is generally understood to be the way a company achieves balance or integration of economic,
environmental and social imperatives while at the same time addressing shareholder and stakeholder
expectations
o Synonymous with concepts such as accountability, corporate sustainability, corporate citizenship,
corporate stewardship etc.
o See: Gov’t of Canada’s CSR Implementation Framework on 241
- SCC in BCE: Directors, acting in the best interests of the corporation, may be obliged to consider the impact of
their decisions on corporate stakeholders
o This is what we mean when we speak of a director being required to act in the best interests of the
corporation, viewed as a good corporate citizen

TWO THEORIES OF CORPORATE SOCIAL RESPONSIBILITY

PROPERTY CONCEPTION – AKA “SHAREHOLDER PRIMACY MODEL” (MILTON FRIEDMAN’S

APPROACH)
- Corporation is the property of the shareholders and the job of the board of directors is to maximize the
return on investments to the shareholders
o Corporation can’t really be spoken of to HAVE CSR, they’re giving away money that should go to the
s/hrs

63
 - Milton: CEO’s role is to maximize the shareholders’ return/value & make a profit (shouldn’t be concerned with
CSR)
o Friedman thinks that if corporate executives start to use corporate $ for CSR, it’s like stealing from the
corporation & s/hs
o In this view, philanthropic undertakings are only okay if they do not have a purely philanthropic purpose
(e.g. needs to be a money-making motive)
- With an ultra-property view of the corporation, it is likely that the corporation will forsake some of its customers
and stakeholders and end up hurting itself

SOCIAL INSTITUTION VIEW (RALPH NADER’S APPROACH)

- Corporations are created by statute & are quasi-public, and are thus tinged with a public purpose
o A corporation is not strictly private (William Allen)
- Corporations couldn’t be a legal entity without the government’s concurrence and statute that allows for its
creation
- Corporation is a social entity, and must have purposes besides simply making money (like contributing to public
life, entertainment, etc.)

ALTERNATIVE: OUR VALUES APPROACH (THE BODY SHOP)

- Business is a form of human enterprise; corporations want to support their employees.
- Sustainable product is part of the brand, CSR is woven into the product itself and is a selling point
o S/hrs who buy into the corporation KNOW that their philanthropic endeavours are part of the company.
o Shareholders know that going in before they invest their money. It’s not stealing from the corporation to
invest in CSR, it’s PART of the investment itself.
- Milton would probably like this – if it helps your returns, then great

THE LAW
CASE STUDY: TALISMAN ENERGY INC [BAD COMMUNICATION/PR TEAM; CSR; CORPS WILL BE
READILY HELD ACCOUNTABLE DUE TO THE INTERNET]
- Talisman was subject to strong international criticism because it was drilling oil in Sudan; public perception was
that this was fueling the civil war
o Through royalties paid to the Sudan government on extracted oil and gas, it was functionally fueling the
civil war (allowing the military government to keep fighting with rebel forces)
o Various groups assert Talisman was involved with the regime, alleging that they had turned a blind eye to
a regime that violated human rights.
o People in Sudan were being mistreated by the government and reportedly being displaced by oil and gas
activity
o Either they weren’t corporately responsible, OR they didn’t communicate their CSR well. Either way, it
was hurting their share price.
o Both public and shareholders were angry
- Talisman couldn’t recover from the criticism of its activities in Sudan and so it pulled out of Sudan altogether in
2002
o It’s the power of public opinion/public interest that precipitated this movement
- Talisman was sued in US under Alien Tort Statute (this allows foreigners to sue in the US for overseas violations
of human rights). It was an unsuccessful lawsuit, but public pressure mounted against Talisman operating in
Sudan
NOTE: Especially with social media and the internet, corporations are going to be much more readily held to account for
actions perceived to be contrary to public interest and human rights
• Concern: pulling out of the consortium does little to lead the consortium to be more responsible in their operations
in Sudan

64
CORPORATE CITIZENSHIP AND SOCIAL LICENSE
License
- Social license to operate
o Social: source of the license that we are referring to is not government or a regulator but society
o License: consent or permission is in “some sense required”
o “Let’s stop pretending ‘social license’ is an actual thing”

Case Study on the Legal Application of the Good Corporate Citizenship and Social Licence:
• Northern Oil Inc Canada’s largest oil and gas producer in Alberta’s oil sands
• Company pledged in 2010 to accelerate reclamation of tailings in its oil sands operation
• Developed Tailings Reduction Operations (TRO) technology that reduces traditional oil sands reclamation down
from 30 years to 10 years
• Positives:
o The TRO program provides the oil company with the support of socially responsible shareholders,
impacted communities, and the public
• Problems:
o Downside is that the technology is very expensive
o Largely untested
o Northern Oil can meet their legal obligations without continuing to invest in and implement the TRR
technology
• Findings:
o Directors do not have a legal obligation to follow through with TRO
o However, directors can favor sustainability over profit if that decision is made

Considerations:
• Corporate fiduciary duties under CBCA s. 122(1):
o Every director and officer of a corporation in exercising their powers and discharging their duties shall:
▪ A) act honestly and in good faith to the best interests of the corporation and
▪ B) exercise the care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances
• Corporate fiduciary duties in Delaware:
o Directors of Delaware corporations charged with a fiduciary duty to the corporation and the corporation’s
shareholders as trustee
• BCE Inc v 1976 Debentureholders, SCC:
o If conflict between the corporation and other stakeholders, the director’s duty is clearly to the corporation
o Court interpreted the best interest of the corporation to be the long-term interests of the corporation
o Court linked directors’’ and officers’ fiduciary duties with good corporate citizenship
▪ Related idea of social licence: generally means a business receives a privilege to operate from
society at large
o Promotes somewhat of a director primacy model: decisions for corporate responsibility do not just need to
be focused on shareholders

“With respect to litigation risks in companies’ voluntary [CSR] reporting, plaintiffs are becoming sophisticated in
the legal claims they have been asserting, taking square aim at companies’ CSR statements.”

Examples of liability being found for not following through with Corporate Social Responsibility policy:
- Kasky v Nike – Nike attacked critics who claimed that they used sweatshops; but they knew that they were lying
o They attempted to defend themselves by claiming that it was protected corporate speech
o They were sued in California and held liable
- Class Action suit against BP in Texas FC; Deepwater oil spill.

65
 o Claim is based on what BP had in their advertising at the time, supposedly a leader in CSR
- Jablonowski v Chiquita – Chiquita says they’re such a great company, but it’s not totally true.
• Canadian Examples
o Choc v Hudbay trilogy
▪ Company working in foreign country being sued for violating humanitarian standards and human
rights
o Tahoe Resources
▪ Mining company working in South America; making money and paying royalties to a dictator
▪ The company was also forced by the government to hire a contractor that used slave labour
▪ Negligence principle used to hold the parent company in Canada liable for the actions of its
subsidiary
• These actions are based on negligence in the corporations’ statements.

RE VARITY CORP AND JESUIT FATHERS OF UPPER CANADA ET AL (1987 ONPC) – APARTHEID –
PROPOSAL TO WITHDRAW INVESTMENTS IN S.A. – VARITY NOT REQUIRED TO DISTRIBUTE
PROPOSAL TO STAKEHOLDERS BECAUSE IT IS PRIMARILY FOR GENERAL
SOCIAL/RACIAL/POLITICAL PURPOSE - S 131(5)(B) CBCA
Facts: Varity applied for a court order so that it doesn’t have to circulate a shareholder proposal about ending investments
in apartheid South Africa. Jesuit Fathers of Upper Canada put forward the proposal.
- S 131(5)(b) of CBCA says that a corporation is not required to comply with s/hrs request to circulate a proposal if
the proposal is primarily for the purpose of promoting general economic, political, racial, religious, social or
similar causes
o Note: a shareholder proposal is a way in which minority shareholders can demand that a proposal be
circulated to all shareholders
- Proposal talks about business issues, but primarily about fighting apartheid.
Issue: Can Varity deny circulation of the proposal for the company to end its investments in South Africa?
Decision: Yes. The order that relieves Varity of the requirement to distribute the minority proposal was granted under
CBCA s. 131(5)(b); the decision was affirmed by the ONCA on appeal.
Reasons:
- The people who wanted to circulate the proposal say that they’re not trenching on 131(5)(b):
o They have something specific and exact in mind, rather than something general: e.g. get out of apartheid
South Africa.
▪ That is specific, not general, notwithstanding that some of the proposal is general in wording.
Based on wording of legislation they should be fine.
▪ But that argument is denied by the court and by the majority of the ONCA
- The Court found that: the primary purpose of the proposal is one of the purposes listed in the CBCA provision,
so Varity can refuse to distribute it
o Therefore, the company cannot be compelled to circulate the proposal (O’byrne thinks that the decision
was wrong)
• CBCA Amendments were made following Varity
o ABCA uses the same wording as the old CBCA provision
▪ So the way the CBCA is interpreted in Varity is the way the law still works in Alta
o Would an Alta court come to the same view as in Varity? Tough to say, but very possible.
▪ There is an argument that corporations have a duty to be “good corporate citizens,” and have
corporate social responsibility (as shown by the SCC in BCE)
▪ Maybe Varity would have succeeded if the proposal used more business speech – focused less on
apartheid?

THE BODY SHOP – CASE STUDY

- Idea behind the Body Shop:

66
 o How do you add value to a skin and hair company? We sell things people don’t really need, so we need to
add value:
▪ This is done by committing to social and environmental change
o Committing to environmental, social, as well as economic objectives and advertising the projects
undertaken by the company such as protecting the planet, sustainability, defending human rights, focusing
on self esteem of clients, and supporting community trade, refusing animal testing
▪ E.g. paying first world prices in third world countries
o Having quality assurance through an Assurance Standard – an example of branding/certification that
can be further advertised to customers
o The Body Shop made a large amount of profits because of its branding and corporate social responsibility
▪ There were selling corporate social responsibility as its product; this distinguished them in the
market
- But Body Shop eventually hit the skids in the mid 2000s and experienced significant losses
o There were copycat stores promoting the same kind of social responsibility brand
o Eventually Body Shop was bought out by L’oreal and things went downhill from there

DODGE V FORD MOTOR COMPANY (MICHIGAN SUP CT 1919) – CORORATION IS PRIMARILY

CARRIED ON TO MAXIMIZE SHAREHOLDER PROFITS, NOT BENEFIT THE PUBLIC – PROPERTY
CONCEPTION THEORY
Facts: Ford Motor is doing really well and is flush with cash; Henry Ford controls the Board but decided not to declare
any more special dividends; Ford wished to re-invest, increase employment, reduce cost of cars, and ensure all Americans
could afford cars; Dodge brothers (minority shareholders) object to not receiving dividends in 1916. They believed that
there must be special dividends based on the financial success.
• The trial court ordered a declaration of a dividend of approx. $19,000,000
Issue: Can Ford stop paying dividends to fulfill a public purpose?
Decision: No; appeal dismissed and order of the trial judge affirmed
Reasons:
- The business corporation’s primary duty is to earn profit for the s/hs, NOT a duty to the public [property
conception theory]
o Ford can’t run a charity and meet specific duties owed to the s/hs, namely, to make a profit
o Cannot take a for profit co and make it a charity
- Ford is entitled to their business plan, but they went too far and some dividend has to be declared
o Director cannot use their power to declare dividends for a collateral purpose
- An INCIDENTAL HUMANITARIAN EXPENDITURE may be allowed, but this is not present in this case
o There is a difference between an incidental humanitarian expenditure for the benefit of employees,
and a general purpose and plan to benefit “mankind” in general
Note: Gives us the common-law view that corporations are not philanthropic entities, and you can’t treat them this
way.
• The court manifests the “property conception theory” here.
• But maybe Ford wasn’t being philanthropic – perhaps he was trying to limit the competitiveness of the Dodge
brothers’ by not paying out dividends?

CHAPTER 7 – CORPORATE GOVERNANCE

INTRODUCTION
Director Responsibilities
- Directors are given the task of operating the business affairs of the corporation by the ABCA and are elected by
the s/hs
- The ABCA imposes certain qualifications on directors before they are eligible to take office
- Directors may be personally liable for torts committed while conducting the affairs of the corporation

67
 - S 101 – Directors are to supervise management of the business and affairs of the business, subject to a USA
- 2 legal requirements that a director must fulfill (ABCA, s 122):
(1) Directors must act honestly and in good faith (fiduciary obligation)
(2) Directors must exercise the care & skill that a reasonably prudent person would exercise under the
circumstances (duty of care)

The Board has five basic responsibilities:

- 1/ Appointing and supervising the CEO and other officers
o This includes appointing, setting the terms of employment, supervising, evaluating, compensating and, if
necessary, removing all corporate officers, beginning with the CEO.
o It also involves approving major organizational changes, and ensuring that adequate plans are in place for
management succession
o Number one job: keep an eye on the CEO
▪ E.g. Conrad Black (CEO of Hollinger) was convicted of fraud for accepting monies that should
have been paid to the corporation
▪ Special board committee was created to review the conduct of Conrad Black; the special
committee advisor claimed that Black was highly confrontational and threatened litigation against
all directors and board committee members
▪ Note: inside vs outside directors:
• Inside directors – directors are also executives of the company
• Outside directors – no connection with the company other than their position on the
Board
▪ Lesson: Board must do what is in the interest of the corporation and not be controlled by the CEO
- 2/ Directing and evaluating strategy
o Strategic management is the integrated planning and implementation of the major changes needed to
improve corporate performance. The board should oversee an action program based on the purpose,
strategy, operations, results, organization, resources and environment of the company.
o Supervision focuses on keeping mgmt. accountable for performance in implementing plans, meeting
objectives, competing successfully and satisfying the requirements necessary to merit the continuing
support of s/hrs and other stakeholders
- 3/ Representing shareholders and maintaining shareholder relations
o Tasks include reflecting s/hr concerns to management, reporting to shareholders as legally required and
otherwise communicating to them directly or indirectly through the financial press, analysts and others as
to plans and results
- 4/ Protecting and enhancing the company’s assets
o When major issues arise in management, ownership, investments, acquisitions, divestments or raids, or
insolvency, the board must be fully involved
- 5/ Fulfilling fiduciary and [other] legal requirements
o The board is responsible for adherence to the laws, regulatory requirements and the preparation and
maintenance of necessary minutes, documents, contracts and records

Business Roundtable Guiding Principles of Corporate Governance (re publicly traded corporations) (from
PowerPoint slide):
• Board of Directors is to select and oversee the CEO and senior management
• Management, under board oversight, is to operate corporation “in an effective and ethical manner to produce
long-term value for shareholders”
• Management, under board oversight, is “to develop and implement the corporation’s strategic plans, and to
identify, evaluate and manage the risks inherent in the corporation’s strategy”
o Management, under board oversight, is to produce financial statements and make related disclosures

68
 • Board to secure an outside audit of management’s financial statements and oversee the relationship with that
outside auditor
• Board to lead in corporate governance, including a regular assessment of the “composition and leadership of the
board” including succession planning
• Board to establish performance-based compensation policies and goals in relation to CEO and senior management
• Corporation to engage long-term shareholders via the board and management
• Corporation, in its dealings, to “exemplify the high standards of corporate citizenship”

COMPARISON OF PUBLIC COMPANIES AND CLOSELY-HELD CORPORATIONS

Public Company
Separation between ownership and management
Large number of s/hrs with shares traded in the securities One or limited number or shareholders with no public
market
Unrestricted transferability of shares
Profits are retained or paid out as dividends
Most shareholders are passive investors
Most investors have diversified portfolios
No familial or personal relations between shareholders
Financial through a mixture of debt and equity
Defined roles and high degree of formality in decision-
making
Closely-Held Corporation
Ownership and management are often identical
trading of shares
Restrictions on transfer of shares
Profits distributed as salaries and dividends
Shareholders often consider themselves partners
Most personal wealth invested in enterprise
Familial/other personal relationships among shareholders
in addition to business dealings
Debt most common form of financing
Loosely defined roles and informal decision-making

STATUTORY SOURCE OF DIRECTORS’ POWERS

Directors
- Section 105 ABCA – basic qualifications
o A director must not be a corporation, because it’s difficult to place sanctions on a corporation
o Elected by shareholders who have voting shares.
o Directors are responsible for overall DIRECTION of a corporation
- There are two types of directors -> inside and outside
o Outside director -> if you are a director who is not also an employee of the corporation
o Inside director -> they sit on the board AND are also part of the mgmt. team which establishes corporate
strategies
▪ They’d be an employee, officer, or other stakeholder as well, essentially.
- Section 101(1) ABCA – subject to a USA, directors shall manage or supervise the management of the business
and the affairs of the corporation
Officers
- Appointed by the board, responsible for the day-to-day operations of the business (Top executive = CEO, and so
on)

Shareholders
- Difference between voting shares (the ability to vote for the Board of Directors) and non-voting shares
- Shareholders can pass unanimous shareholders agreement (USA) in order to transfer directors’ powers to
themselves, HOWEVER:
o Section 146(7) ABCA – shareholders assume the liability as directors if they take the directors power
via USA

DIRECTOR POSITIONS

69
QUALIFICATIONS OF DIRECTORS
- Section 101 ABCA – gives authority to directors to supervise and manage business and affairs of corporation
(subject to USA)
- Section 105(1) ABCA - the following people are DISQUALIFIED from being a director of a corporation
o a/ Anyone under 18 years of age
o b/ Anyone with mental capacity issues (people of unsound mind/Mental Health Act/etc)
o c/ A person who is not an individual (ie. a corporation)
▪ rationale: director must be someone who can be held liable and punished/imprisoned
o d/ A person who has the status of a bankrupt
- Section 105(3) ABCA: at least 1/4 of the directors of a corporation must be Canadian residents

ELECTION AND APPOINTMENT OF DIRECTORS

- Section 101(2) ABCA: A corporation can have more than one director.
o However, a distributing corporation whose shares are held by more than 1 person MUST HAVE at least
three directors, two of whom are not employees or officers (they can’t be inside directors)
- Section 106: In application for incorporation, you appoint your directors. Then, subsequent directors are elected
following the terms of the statute
o Procedure for election and appointment:
▪ Section 106(2) – Each director name in the ‘Notice of Directors’ holds office from the issuing of
the certificate of incorporation until the first meeting of the shareholders
▪ Section 106(3) – Shareholders elect directors by ordinary resolution, via a simple majority, at the
first meeting (and every subsequent annual meeting)
• directors to hold office for a term expiring not later than the close of the third annual
meeting of shareholders following the election
- Section 107 ABCA: CUMULATIVE VOTING
o Each s/hr has the right to vote the # of shares she holds, multiplied by the # of directors to be elected.
o Cumulative voting gives the minimum shareholder the chance of getting at least one director they want
elected to the board, because they can concentrate their votes by using all of them for one director
o Section 107(g) – A simple majority isn’t sufficient to remove a director who has been elected using a
cumulative voting scheme
o NOTE: the articles must provide for cumulative voting (you must identify the exact number of directors –
s 107(a))
- Section 6(1)(d) – Articles of incorporation must state minimum and maximum numbers of directors
- Section 111 – filling vacancies
- Section 112 – Change in the number of the directors – shareholders can amend the articles to increase or decrease
the number or minimum/maximum of directors
- Section 116 – Validity of acts of directors, officers and committees (a curative section)
o An act of a director is valid notwithstanding an irregularity in his election or appointment or a defect in
his qualification
- Section 132(1) – CALLING MEETINGS
o Annual meetings MUST BE HELD within 18 months of incorporation (this ensures an election), and then
every 15 months thereafter. Shareholders vote by ordinary resolution (simple majority) for the directors
- Section 136(4) – A shareholder proposal can include nominations for the election of directors (there are
requirements in the section)
- Section 144 – Gives courts the jurisdiction to review elections as well as appointments of directors

REMOVAL OF DIRECTORS
- Section 109 – removal of directors
o General rule: Subject to a USA or s 107(g), director may be removed by ordinary resolution at a special
meeting

70
 ▪ The court can also order the removal of a director
▪ Section 109(2): if any of the class of shares has the right to elect a director, they can only be
removed on an ordinary resolution of the class selected to elect that director
- Section 108 – Director ceases to hold office if:
o They die or resign
o They are removed under s 109
o They are disqualified under s 105(1)
- Alternatives:
o Section 242(3)(f) - If you can establish “oppression” the court can order the removal of a director
▪ Court can give any remedy they see fit, including punting a director
o Derivative action – an action not brought on your behalf by a s/hr, but on behalf of the corporation,
against the directors to hold them to account
▪ Remedy: punt the director

NOTE: CBCA AMENDMENTS ON GENDER EQUITY (BILL C-25)

- Only applies to publicly traded corporations with many shareholders (essentially a corporation trading on the
stock exchange)
- Encourages representation of women on the board
o Will require disclosure of diversity/identify gender representation on the corporation’s board of directors
OR explain why you haven’t done this
o “comply or explain” – there’s no penalty in the legislation, but it’s sort of “phase 1”; phase 2 likely will
come, with penalties for failure to comply
- Phase 2 political issues; human rights issues; how much should rights influence private-sector decision making

STATUTORY DUTIES OF DIRECTORS AND OFFICERS

1. INTRODUCTION TO DIRECTORS’ FIDUCIARY DUTY & DUTY OF CARE + THE BUSINESS
JUDGMENT RULE
- Common law level of competence is extremely low – directors can get away with a lot! (Re City Equitable Fire
Insurance)
o Re City Equitable Fire Insurance
▪ Company went bankrupt and had to be liquidated
▪ The directors had poorly discharged of their duties in managing the corporation
▪ The liquidator sought to hold the directors liable
▪ The Court refused to hold the directors liable; it said that the standard merely required directors to
do the best they could with the skills they had (the amiable idiot standard – a reasonably prudent
person)
- The statute upgrades the common-law standard of competence for directors and officers (key provision is ABCA,
s 122)
- In Canada, the Business Judgment Rule is called the duty of care:
o As long as the process or procedure followed by the Board of Directors is fair, honest, and done with
reasonable care, courts will defer to the judgment of the Board of Directors
o Section 122(1) – Every director and officer of a corporation in exercising the director’s powers and
discharging the director’s duties shall..
▪ a/ Act honestly and in good faith with a view to the best interests of the corporation
▪ b/ Exercise the care, diligence & skill that a reasonably prudent person would exercise in
comparable circumstances [duty of care]
o Contracting out of the duty of care?
▪ In Delaware YES! – After Van Gorkum, Delaware amended its code to allow contracting out
▪ BUT you can’t do this in Alberta.
71
 •
Section 122(3) of the ABCA – “no provision in a contract, the articles, the bylaws or a
resolution relieves a director or officer from the duty to act in accordance with this Act or
the regulations or relieves the director or officer from liability for a breach of that duty.”
- NOTE: the Business Judgment Rule applies to BOTH s 122(1)(a) and (b).

PEOPLES DEPARTMENT STORES (TRUSTEE OF) V WISE (SCC 2004) - BUSINESS JUDGMENT RULE -
FIDUCIARY DUTY OF DIRECTORS TO CORPORATION (CBCA S 122(A)) – DUTY OF CARE OWED TO
CORPORATION AND OTHER PARTIES AND STANDARD OF CARE (S 122(B)) – TEST FOR
CHALLENGING BUSINESS DECISIONS
Ratio: The directors’ duty to act in the interest of the corporation isn’t equivalent to always acting in the exclusive
interests of shareholders and creditors. The Directors are free to consider the interests of a variety of stakeholders in
making decisions and determinations.
- Duty of care (s 122(b)) is owed by directors to creditors, but can be satisfied by making decisions on an informed
basis in a reasonable & prudent manner
Facts: Wise brothers owned Wise department store company and they were on the board of directors. The brothers
acquired Peoples, which was owned by a British parent company, and thereafter, the Wise brothers sat on the board of
directors for Wise and Peoples; due to financing conditions, Peoples could not amalgamate with Wise stores until
payment was made in full
- The purchase agreement was for Wise to pay the parent company the purchase prices over a 8 year period
- The Directors of Wise adopted a joint inventory procurement strategy whereby Peoples would make all purchases
from North American suppliers and Wise would make all purchases from overseas suppliers
- The strategy was unsuccessful and Peoples and Wise were declared bankrupt; more inventory had been purchased
from North American suppliers, putting Peoples in debt because Wise had yet to pay
- People’s Trustee claimed that the Wise brothers, as directors of Peoples, had favoured the interests of Wise over
Peoples to the detriment of Peoples’ creditors, and was in breach of their duties under s 122(1) CBCA
o Peoples argues that a specific fiduciary duty was owed to Peoples’ creditors under s 122(a)
o It also argued that there was a duty of care were owed under s 122(b)
- At trial, it was held that Wise had failed to fulfill their duties to the company creditors under s. 122 of the CBCA
- The Wise bothers were successful in their appeal to the Quebec Court of Appeal
Issue: Did the Wise Brothers breach their duty under s 122(1) and, if so, are they liable for the loss?
Decision: Appeal dismissed; Wise brothers made honest, good faith efforts to redress the corporation’s financial
difficulties and acted with reasonable prudence in exercising their business judgment; the directors had therefore not
breached their s. 122 duties and their decision was protected by the Business Judgment Rule
Reasons:
- Two distinct duties established by s 122(1) of the CBCA:
o Fiduciary duty: act honestly and in good faith with a view to the best interests of the corporation
o Duty of Care: exercise the care, diligence, and skill of a reasonably prudent person in the circumstances
- Duty 1:– Fiduciary Duty (Section 122(1)(a))
o Requires the directors to act honestly and in good faith, with a view to the best interests of the corporation
o Power to manage and supervise corporation:
▪ For directors: this power originates in s 102 CBCA (s 101(1) ABCA)
▪ For officers: this power comes from the power delegated to them by the directors
o 1) Fiduciary Duty to the corporation was not breached:
▪ Directors are obligated to:
o avoid conflicts of interest,
o not abuse their position for personal gain,
▪ NOTE – in some cases, directors may innocently benefit from gains
made by the corporation (for example, if they’re s/hrs, or compensation
for being directors)
o must maintain confidentiality of info they acquire due to their position and

72
 o must serve the corporation selflessly, honestly, and loyally
▪ In this case, the Wise brothers just made a goof faith attempt to relieve financial problems, which
was unsuccessful; they did not benefit personally
• No breach of the fiduciary duty
o 2) Fiduciary duty is restricted to the corporation, not the shareholders or creditors
▪ Directors’ duty doesn’t change when the corporation is in the “vicinity of insolvency”
• As corporation is moving into insolvency, interests of s/hrs and creditors may divide.
o S/hrs have already lost their money – s/hs may get some scraps if they’re lucky.
▪ So, since their chances at recouping their investment are sunk,
shareholders will want to do something risky that could pay off.
o Creditors may want to just stay the course to maximize the value of their claims
against the assets of the company.
▪ They don’t want anything worse to happen.
• In Delaware it’s different – when corporation approaches insolvency, the interests of the
creditors and s/hrs diverge and the interests of creditors must be PRIORITIZED
▪ Creditor’s have other avenues in Canada:
• they could bring an oppression action (s 238) or an action under breach of duty of care
under s 122(1)(b)
• The availability of broad oppression remedies to creditors undermines any perceived
need to extend the fiduciary duty under s 122(a) of the CBCA to include creditors (rather
than the corporation)
▪ Best interests of corporation should not be confused with best interests of the s/hs
• It may be legitimate for the board to consider the interests of corporation as well as the
interests of shareholders, creditors, employers, the government, the environment, etc.
• Duty 2: duty of care (Section 122(1)(b))
o Does not specifically refer to an identifiable party as the beneficiary of the duty (as s. 122(a) does in
stating that the duty is only owed to the corporation)
▪ Court says that it appears obvious that this duty of care includes creditors – this can be owed to
third parties such as creditors;
▪ you have to show the duty of care is in place, and then the statutory standard of care as declared
in s 122(b) is applied.
o Requirements of the duty of care:
▪ it’s an objective standard (reasonably prudent person), modified by the context of the
circumstances (in similar circumstances)
o In order for a plaintiff to succeed in challenging a business decision, they must establish that (as an
action in negligence):
▪ 1/ There was a duty of care owed
▪ 2/ That the directors breached that duty of care [use the standard in s 122(b)]
▪ 3/ The breach caused injury/damages to the plaintiff
o Application: The plaintiffs failed here because the Wise brothers had acted as a reasonably prudent
would in the same circumstances
▪ There was a duty of care owed but there was no breach of the applicable standard of care
o The duty of care is essentially the Business Judgment Rule

• Business Judgment Rule (BJR) – subject to 2 conditions

o Rule: Judges ought to defer to the business decision made by the board and shouldn’t second guess the
substance of business decisions made by the directors
▪ This rule is subject to TWO CONDITIONS:
• 1/ Decision making process – directors acted prudently and on a reasonably informed
basis

73
 • 2/ Reasonableness of the decision made – The decision must be a reasonable business
decision in light of all the circumstances about which the directors knew or ought to have
known
▪ In this case, the Wise Brothers pass the BJR – they were doing what they thought was in the best
interests of corporation
▪ BJR applies to both a and b of 122, although the decision doesn’t make that clear
▪ The court doesn’t carefully delineate the scope of the business judgment rule

PEOPLES AND ALTERNATIVE REMEDIES

- Creditors sued directors under ss 122(1)(a) and (b) – O’Byrne finds this very odd – why would they even try?

Alternative remedies:
o The more NATURAL thing to do would be to bring an oppression remedy
▪ S 242 ABCA – Creditors sue the Ds/corporation for conduct that is “oppressive”, unfairly
prejudicial or unfairly disregards the interests of creditors.
▪ So, the creditors could argue that they have a “reasonable expectation” that Wise and Peoples
would share debt exposure MORE EQUALLY.
• Peoples was loaded up with a ton of debt, Wise comes out well from debt perspective.
• SCC actually suggests this in the case
o Section 240 DERIVATIVE ACTION – creditors could seek to bring an action on behalf of Peoples for a
wrong done to the corporation. They didn’t do this either.

Section 122(b) doesn’t provide creditors with a cause of action on its own
• S. 122 doesn’t found a cause of action
o The s 122(b) duty is subsumed by negligence; it provides a suggestion as to the standard of care that
should be reasonably expected
o Therefore, a plaintiff must show that there was a duty of care owed (via the Anns test), that there was a
breach of a standard of care, and that the breach caused damage
• This rule also applies in Alberta to s. 122 of the ABCA
Test for negligence (Anns Test):
- Step 1: does the defendant owe the plaintiff a duty of care
o Stage 1: is there a prima facie duty of care?
▪ A) is the harm that occurred a reasonably foreseeable?
▪ B) Is the relationship of sufficient proximity?
o Stage 2: Are there policy considerations that negative the prima facie duty of care?
- Step 2: did the defendant breach the standard of care?
o Standard of care informed by standard in statute
Section 123(3) of the ABCA
- A director is not liable under s 122 if the director is reasonably prudent and that standard may be met by relying in
good faith on advice from professionals noted in s 123
o Make sure that if you are getting outside advice, that the person is one of those listed under s 123
o (3) A director has complied with the director’s duties under section 122, if the director exercises the
care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances,
including reliance in good faith on
▪ (a) financial statements of the corporation represented to the director by an officer of the
corporation or in a written report of the auditor of the corporation to reflect fairly the financial
condition of the corporation, or
▪ (b) an opinion or report of a lawyer, accountant, engineer, appraiser or other person whose
profession lends credibility to a statement made by that person.

74
BCE INC V 1976 DEBENTUREHOLDERS (2008 SCC) - IF DIRECTORS GIVE DUE CONSIDERATION TO
COMPETING VIEWS OF MULTIPLE STAKEHOLDERS, THEY WON’T BE HELD LIABLE FOR
DECISIONS THAT PREJUDICE SOME STAKEHOLDERS’ INTERESTS AT THE EXPENSE OF OTHERS
Ratio: Under the business judgment rule, deference should be given to business decisions of directors taken in good
faith and in the performance of the functions they were elected to perform by the s/hrs; directors are not liable for making
a transaction that, while in the best interests of the corporation, would benefit some groups at the expense of others
- Business judgment can be used as a defense to a claim that they breached either fiduciary duty and/or duty of care
Facts: Ontario Teachers Pension Plan proposed a leveraged buyout of all BCE shares; leveraged buyout means they’re
borrowing the money for the purchase
- Bell Canada, a wholly-owned subsidiary of BCE, agreed to guarantee the $30 billion of the debt BCE would incur
to support the purchase
- Bell Canada’s debentureholders (D) resisted because, they contend, Bell Canada’s increased liability would
downgrade the value of their debentures (by 20%) while conferring a benefit on the s/hrs by way of a premium (of
40%)
o Bell Canada is a lot less attractive because they would have all this debt they’re guaranteeing
- Before it could be implemented, the buy-out first had to be approved by the court as “fair and reasonable” under s
192 of the CBCA
- D brought an oppression action under s 241 CBCA and challenged the approval of the plan of arrangement under
s 192 as not being “fair and reasonable”
- Trial judge held in favour of BCE, denying oppression action and finding that the deal was fair and reasonable
under s 192 of the CBCA
o Court of Appeal reversed the decision, finding that BCE failed to show that the transaction was fair and
reasonable under s 192 of the CBCA
Issue: What is required to establish “oppression” of debentureholders in a situation where a corporation is facing a change
of control? How should a judge on an application for approval of an action under s 192 treat claims such as D’s in these
actions?
Decision: Appeal allowed; Debentureholders failed to establish grounds to have the arrangement reversed under either s
241 or 192 – BCE did nothing wrong just because shareholders benefitted while other stakeholders stood to lose form the
transaction
Reasons:
- Just because s/hs stood to benefit while the D’s were prejudiced doesn’t mean that there was a breach of
the statutory fiduciary duty
o Normally, the duty to the corporation coincides with shareholders' interests, but if they do not coincide,
the directors' duty falls squarely with what is best for the corporation.
o Directors must consider the best interests of the corporation and it may also be appropriate, although not
mandatory, to consider the impact of corporate decisions on particular groups of stakeholders and the
environment
o Courts should give appropriate deference to the business judgment of the directors who take into account
ancillary interests of other stakeholders.
▪ Decision must simply be "within a range of reasonable alternatives."
- In this case, the trial judge recognized that the directors have a fiduciary duty to act in the best interests of
the corporation; the content of this duty was affected by the various interests at stake in the context of the
auction process BCE was undergoing.
o The directors, facing conflicting interests, might have no choice but to approve transactions that, while in
the best interests of the corporation, would benefit some groups at the expense of others.
o Deference should be afforded to the directors in this case, pursuant to the business judgment rule.
o The ONLY duty that the directors owe to the creditors is what is required via the debt contract.
▪ The creditors COULD HAVE included a clause in the debt contract stating that no other debt
could be prioritized over theirs (but they did not do so in this case - that's their problem).

75
 o All 3 competing bids for BCE would have required Bell Canada to assume additional debt, so any
decision would have impacted the defendants no matter what (and the decision made in the best interests
of the corporation, weighing the interests of different stakeholders)
- Normally, only the beneficiary of a duty can enforce the fiduciary duty. However, directors are unlikely to
bring an action against themselves. To solve this, there are special remedies to protect the interests of the
stakeholders:
o S 239 CBCA Derivative action -> stakeholders can enforce the director’s duty when directors are
unwilling to do so
▪ You would essentially say that this a breach of their s. 122 duties
o S 122(1)(b) Civil action for breach of Duty of Care -> owed to all stakeholders and third parties, covers
tort and extra-contractual liability
▪ This provision can be used to demonstrate the “standard of care” that is expected
• S. 122 (b) does not provide an independent foundation for claims, but it can be used to
argue the standard of care reasonably expected
▪ Debenture holders go here, and say just like Peoples, we will establish a duty of care which was
breached
o S 242 CBCA: Oppression Action
▪ Harm to the stakeholder’s legal and equitable interests affected by oppressive acts of a
corporation/directors
▪ Debentureholders had a reasonable expectation that the directors would choose the deal which
maintained the investment grade of the investors, or at least more equitably dealt with the risk on
Bell’s behalf
o S 192 CBCA: where corporations are seeking to affect fundamental changes
▪ Court will approve the plan of arrangement if satisfied that:
• The statutory procedures have been met (special resolution -> 2/3 majority vote)
• The application has been put forth in good faith
• The arrangement is fair and reasonable
Note:
- Other debentureholder remedies?
o Derivative actions
o Allege a breach of DOC under the common law (Re City Equitable Fire Insurance) – use s 122 for the
standard of care
o Oppression
o Follow “additional remedial” provisions
o Torts
- There’s no cause of action for breach of statute
o So, you subsume it into the common law of negligence
o There can be a duty of care to creditors and outsides, but you need to demonstrate that:
▪ You have to go through the modified Anns test and show that there’s a novel DOC (or rely on an
established duty of care at common law)
▪ THEN, you go to the legislation for the standard of care. The common law standard is laughably
low – the standard of the amiable idiot, so go to the statute, which upgrades it (s 122(b)).

SMITH V VAN GORKOM (DELAWARE SC 1985) – BUSINESS JUDGMENT RULE IN DELAWARE;

DUTY OF CARE (S 122(B) EQUIVALENT) – BOARD FAILED TO ACT IN AN INFORMED MANNER
AMOUNTING TO GROSS NEGLIGENCE
Ratio: A board of directors in Delaware must act in an informed manner to avail itself from protection form liability
provided by the business judgment rule; unlike in Canada, there is a presumption that the business judgment of a board is
informed

76
Facts: Trans union was a publicly traded company with large cash flow, however it had difficulty generating sufficient
taxable income to offset increasingly large investment tax credits; Van Gorkam is the chair and CEO of Trans Union
• The Board of directors of Tran Union decided to sell the company, using a cash out merger
o Cash out merger: a merger in which the acquiring company [New T] buys the outstanding shares or stock
of the target company [Trans Union], including those held by dissenting shareholders for cash, thereby
“cashing out” the shares or stock of the target company.
o The shareholders of the target company are paid out for their shares
• Van Gorkom met with Pritzker, a well known corporate takeover specialist; he proposed a share price for sale of
the Company without consulting the Board of directors
• Van Gorkom had said that he was willing to accept $55/share arbitrarily (shares are worth between 50-60); The
deal was put to the board for a vote and the Board approved the deal whereby everyone’s shares would be
purchased at that price
o No study done to ascertain the market price. Van Gorkom knew it was between $50-60 and just picked
$55.
• Shares were undervalued, although the Board thought it was an appropriate deal
o Problems in the meeting: Some mistakes were made by the board (as per s 122(b))
▪ No director read the merger agreement prior to its signing
▪ There was no clear explanation of valuation on the $55 figure – Van Gorkom may have spoke to
the Board, but he knew very little
▪ Meeting to determine the sale was very short and based on little information
• Shareholders believe they were ripped off, and sued the Board for not discharging due diligence in determining
value of shares before approving their sale
• The Court of Chancery held that the Board of Directors had acted in an informed manner so as to be protected by
the business judgment rule
Issue: Was the decision of the directors protected by the business judgment rule?
Decision: Appeal allowed; the business judgment rule does not shield the directors in this case because they did not act in
an informed manner – they were grossly negligent
Reasons:
- Under Delaware law:
o the business and affairs of a Delaware corporation are managed by or under its Board of Directors.
▪ In carrying out their managerial roles, directors are charged with an unyielding fiduciary duty to
the corporation and its shareholders.
o The "business judgment rule" exists to protect and promote the full and free exercise of the managerial
power granted to Delaware directors.
▪ The Rule is to DEFER to the decisions of the Board of Directors provided that the Board:
• Followed proper procedures and
• The decision is reasonable
o The rule itself is a presumption that in making a business decision, the directors of a corporation acted
on an informed basis, in good faith and in the honest belief that the action taken was in the best interests
of the company.
▪ The party attacking a board decision as uninformed must rebut the presumption that its business
judgment was an informed one
▪ NOTE: there is no presumption in Canada
o Standard of care in Delaware:
▪ Gross negligence is the proper standard in determining whether the business judgment reached by
a board of directors was an informed one
- Business Judgment Rule in Canada:
o have to show that decision was reasonable and the proper process was followed (in the United States, it’s
presumed)
▪ we don’t have a presumption in Canada

77
 o If you haven’t acted on an informed basis, neither version (US or Canada) of the rule will protect you
- Court ruled that the Board didn’t act on an informed basis:
o In this case, there was no report by a professional that the directors relied upon; they only had a two-hour
meeting, only a 20 minute presentation made by Van Gorkom describing the sale, the Board didn’t read
the merger agreement and didn’t question VG on how he came up with the $55 figure, there was an
urgent time constraint placed on accepting the offer, they didn’t know the true value of the corporation,
and the Board didn’t inform themselves about VG
▪ The only thing they really have in their favour is that the shares were trading at $38/share on the
market. But at the same time, the Board knew that the shares were vastly undervalued.
o Therefore, the board was grossly negligent and couldn’t rely on statutory equivalent of s 123(3) of ABCA
Damages:
- All ten directors held jointly and severally liable for $23.5 million
- Insurance covered some of this, but $13 million still fell on the directors.
Dissent: wants an even more deferential business judgment rule
- View is that these directors knew what they were doing and should have been protected by the BJR.

2. FIDUCIARY DUTIES

(A) INTRODUCTION AND MAIN CATEGORIES

- Directors and officers have a fiduciary obligation to act honestly and in good faith, with a view to the best
interests of the corporation [s 122(1)(a) ABCA]
o Even if you are not properly elected as a director, if you act like a director, you are one for these purposes.
That is, you attract those fiduciary duties
o Law gives the directors the benefit of the doubt: people are assumed to have acted in good faith unless
the opposite is proven
o Note: there is fiduciary duty both in common law and statute; the statute is merely codification of the
common law duty
Categories of holding director liable for breach of fiduciary duty:
1. Taking corporate opportunity
• Directors must avoid a conflict between duty to the corporation and self interest
• When a director/officer pursued a business opportunity that properly “belonged” to the corporation
instead
2. Self-Dealing
• When a director is on both sides of a transaction (buyer and seller)
• A director of XYZ who enters into contract on behalf of XYZ to buy something the director
themselves owns. Inherent conflict of interest.
3. Competing director
• Extent to which director can be on boards of two corporations that are in competition
4. Proper Purpose
• Breach of duty because the director is using their powers for an improper purpose
5. Hostile take-over bids
• when director/officer rejects takeover bid that is good for the corporation because they’re afraid of
losing their job
(B) TAKING CORPORATE OPPORTUNITIES

COOKS V DEEKS (JCPC 1916) - FIDUCIARY DUTY WILL BE VIOLATED BY DIRECTORS TAKING
OPPORTUNITY RIGHTFULLY BELONGING TO THEIR CORPORATION; THAT IS FRAUD ON THE
MINORITY BY THE MAJORITY
Ratio: Directors can’t pursue interests of their own at the expense of the corporation; Subsequent ratification by a vote of
the shareholders will not validate a breach of this fiduciary duty – this is a fraud on the minority
78
 • Directors must disclose their interest and receive proper approval from the Board (not in fraud of the minority) in
order to take a maturing corporate opportunity
Facts: Directors of Deeks were trying to get rid of Cook (Cook was one of 4 directors of Toronto Construction Co).
- The three other directors created a contract with CPR in their own names; the contract was obtained under
circumstances that amounted to breach of trust by the directors and the directors received benefits that should
have belonged to the corporation
o The directors threw everything they had into an existing CPR project, so they would have good chances at
winning the new contract, but told the CPR officials to award the contract to a new corporation they
created that didn’t include Cook
- By their votes as holders of ¾ of the issued shares of the corporation, the 3 directors subsequently passed a
resolution at a general meeting of the shareholders declaring that the company had no interest in the contract
Issue: Have the 3 defendant directors appropriated a corporate opportunity?
Decision: Yes – all the profits of the new corporation were directed to be paid to Toronto Construction
Reasons:
- The 3 directors breached their fiduciary duty by giving a business opportunity that belonged to the corporation
(which included Cook) to their new company
- However, allowing the contract to go to the new company was ratified by shareholders at a general meeting. 75%
to 25%, and Cook was outvoted.
o We usually side with majority rule as a default, but what we have here is fraud on the minority
▪ Fraud on the Minority: majority shareholders are directly or indirectly, taking for themselves
money or other form of opportunity that rightly belongs to the corporation or that all the s/hs
should participate in
o So, this vote will not insulate the transaction
o Ratification of the new deal was done by the directors but the court found this could not save the breach
because the ratification was oppressing Cook and was a gift to themselves (you can’t vote to make a gift
to yourself)
o This was an OPPRESSIVE act against the minority – you can’t vote your shares in pursuit of a fraud
o The 3 directors were appropriating benefits that the minority would have received
Note: Directors could have either bought Cook’s shares out or had an exit strategy

CANADIAN AERO SERVICE V O’MALLEY (SCC 1974) – SENIOR OFFICERS TAKING A

CORPORATION’S OPPORTUNITY AFTER RESIGNATION - MODERN COOK V DEEKS; FIDUCIARY
DUTY OWED BY DIRECTOR AFTER THEY LEAVE THE CORPORATION BASED ON LASKIN’S
FACTORS – TEST FOR WHOM THE CORPORATE OPPORTUNITY BELONGS
Ratio: Fiduciary duties of senior officers and directors survives resignation from a company when the resignation is
prompted or influenced by a wish to acquire for themselves the opportunity sought by the company;
• Test for who the opportunity belongs to is whether, in fairness and in the factual context, the opportunity
reasonably belongs to the corporation
o there is a multi-factual determination for whether the fiduciary duty continues to apply
• On an Exam: state the test, and then analyze the facts on the basis of Laskin’s factors
Facts: Plaintiff Canaero asserts that defendants had improperly taken the fruits of a corporate opportunity in which Can
Aero had a prior and continuing interest
- O’Malley (president/CEO) and Zarzycki (VP), while directors or officers, had devoted effort and planning in
respect of the particular corporate opportunity as representatives of Can Aero, but had subsequently wrongfully
taken the benefit of that in breach of their fiduciary duty
o When the project is put up for tender, O and Z had resigned from Can Aero, started a new corporation
(Terra Surveys Ltd), and put in a bid for that tender
- Wells, who had been a director of Can Aero but never an officer, was brought into the action as an associate of the
other individual defendants as party to a scheme to deprive Can Aero of the corporate opportunity developed by O
and Z.

79
 o Another defendant, Terra Surveys, was joined as the vehicle through which the individual defendants
obtained the benefit for which Can Aero had been negotiating
• Court of Appeal: Said O and Z were “mere employees” and didn’t have a fiduciary duty to Can Aero; A mere
employee doesn’t owe very much on exiting the employment relationship (although this rule is subject to
contract)
Issue: Did the individual defendants breach their fiduciary duties to Can Aero and take a corporate opportunity that
belonged to it?
Decision: Appeal allowed; O and Z held liable - Can Aero awarded $125,000 in damages, equal to the value of the
contract lost; Wells held not liable
Reasons:
- Senior officers owe a much broader duty than mere employees – they owe a fiduciary duty
o O and Z were more than mere employees
o They acted respectively as president and vice president for two years prior to their resignations, regardless
of whether or not they had been properly appointed
o They acted in those positions and received remuneration and responsibilities in accordance with those
roles
o Their responsibilities and roles removed them from obedient roles as servants
o As such, they owed fiduciary duties to the corporation
- Fiduciary duty includes at least:
o Loyalty;
o Good faith
o Avoidance of conflict of duty and self interest
- Ethic of the duty disqualifies senior officers and directors from:
o Diverting to themselves or an associated corporation or person a maturing business opportunity that their
company is actively pursuing;
o they are also precluded from so acting even after their resignation where the resignation is prompted or
influenced by a wish to acquire for themselves the opportunity sought by the company
- If O and Z asked the Board for permission to start a new company and compete for the tender, and they got the
approval of the board, it’d be okay.
o But they didn’t do that.
- O and Z defend themselves:
▪ 1/ Fiduciary duty expired once they resigned?
• No, your fiduciary duty persists and follows you to some extent
• The duty does not terminate upon resignation nor can it be renounced at will
• You cannot pursue a maturing business opportunity that your former company was
employing just y resigning
▪ 2/ Bid was different from Can Aero’s
• not sufficiently different; can’t just change portions of bid to avoid liability
▪ 3/ Can Aero would never have been awarded contract in any event
• The Court rejected this argument
• Liability does not depend upon proof by Can Aero that, but for the intervention, they
would have received the contract
• As long as the time of the fiduciary misconduct, Can Aero was still pursuing the tender,
liability can be found for the employees that resigned and entered their own bid
- Test is whether, in fairness and in the factual context, the opportunity reasonably belongs to the corporation
o To determine whether and to what degree a fiduciary duty is owed by a senior manager when they
leave the corporation, a comprehensive factual assessment is needed
▪ Laskin lists relevant factors:
• Position or office held
• Nature of the corporate opportunity

80
 • Its ripeness, its specificness and the directors’ or managerial officer’s relation to it
• The amount of knowledge possessed
• Circumstances in which it was obtained and whether it was special, or indeed, even
private
• Factor of time in the continuation of the fiduciary duty where the alleged breach occurs
after termination with the relationship of the company
• Circumstances under which relationship was terminated: retirement, resignation, or
discharge?
- Note: Laskin denied the stricter test that was followed in Regal Hastings
o Regal Hastings said that liability would arise any time employees quit and took an opportunity available
to its employing corporation
o Liability was found, even though the employer corporation did not have the ability to pursue the
opportunity (impossible to pursue because of financial limitations)
- Damages:
o Can Aero need not show that they would have won the bid to hold the employees liable
o Damages will be based on disgorgement of profits or value of the contract to Can Aero

TORCANA VALVE SERVICES INC V ANDERSON (2007 ABQB) - FIDUCIARY DUTY OF KEY
EMPLOYEES/DIRECTORS/MANAGERS – PRINCIPLES IN DETERMINING SCOPE OF A FIDUCIARY’S
OBLIGATIONS
Issues: whether Mr. Anderson was a key employee which accords a fiduciary duty to Torcana and what fiduciary duties
are owed?
• Certain employees may become fiduciaries by virtue of their unique positions of power and trust within the
employer’s organization
• Senior managers and “key” employees will be precluded from exploiting the particular vulnerability that flows
from the unique relationship they have with their employer for their own business interests
Fiduciary duties of an employee (or ex-employee) to their employer:
• The essential duty of a fiduciary is to act in the principal’s interest and not to put themselves in a position
where their own interests compete with the principal’s interests [Canadian Aero Service]
• The scope of the fiduciary’s duties needs to be analyzed in each individual case and “will depend on the
nature of the relationship & the expectations of the parties.”
• Principles in determining the scope of a fiduciary’s obligations:
o Cannot take a maturing opportunity either before or after employment terminated
o Must be a misuse of the fiduciary’s power before liability attaches
o Competition after employment does not of itself constitute a breach
o The right to compete is qualified; must not solicit business of specific customers of employer for a
reasonable time
o Must not use or disclose confidential info learned in the course of employment
o Will breach obligations to employer when they take a confidential customer list & use trade secrets in
a competing company

(C) SELF-DEALING TRANSACTIONS

- Situation where a director or officer, directly or indirectly, sells an asset to his/her own corporation
- The director is on both sides of the contract
- The insider has an interest on the outcome of the transaction
- Self-dealing transactions may or may not be unfair in actuality, but the concern is that it might be

COMMON LAW

81
ABERDEEN RAILWAY CO V BLAIKIE BROS (1843 HL) - SELF-DEALING CONTRACTS ARE INVALID
AND IMPERMISSIBLE ON PRINCIPLE
Ratio: You cannot be on both sides of a contract; when a particular transaction leads to a conflict in interest, the director
who has the conflict should recuse themselves from participating in that decision
Facts: Aberdeen entered into a contract for purchase/sale of chairs by Blaikie Bros; Blaikie is a director of Aberdeen,
acting as a purchaser of the chairs, but he’s also a member of the Blaikie Bros partnership; Therefore, he’s self-dealing
(on both sides of the transaction)
Issue: Is being on both sides of the contract impermissible?
Decision: contract set aside on the grounds that Blaikie was self dealing, indicating a conflict of interests between
Blaikie’s personal interest and the interest of the Aberdeen Railway company
Reasons:
- Rule that no one having duties to the corporation as a director shall be allowed to enter into engagements in which
he has a personal interest conflicting or which possibly may conflict with the interests of those whom he is bound
to protect
- There’s no allegation that Blaikie ripped off the corporation, overcharged, etc., but it’s the principle of the self
dealing transaction
o Court doesn’t need to determine whether the conflict adversely affected the terms of the contract
o No one cares whether the contract was in actuality fair and reasonable: pretty harsh rule

The Prohibition Against Self-Dealing Softens

- Initial common law stance:
o No self-dealing is permissible by a director
- Response:
o If the articles of association authorize directors to enter into self-dealing contracts, such contracts are
permissible
▪ Typically, these clauses stipulate that director needs to disclose the conflict of interest
▪ The self-dealing director can vote on the matter in a shareholder vote to approve the transaction
(Beatty)
▪ If there is a fraud on the minority, a shareholder vote to approve of a self-dealing transaction is
not adequate and not permissible

NORTH-WEST TRANSPORTATION COMPANY V BEATTY (1887 JCPC) - WHERE K IS ESSENTIAL TO

CORPORATION’S AND PRICE/PROCESS IS REASONABLE, A SELF-DEALING K MAY BE RATIFIED
BY THE S/HS WHERE THERE’S NO FRAUD ON THE MINORITY – DIRECTOR CAN VOTE THEIR
OWN SHARES
Ratio: A director may acquire a majority of shares and use a shareholders vote to ratify a transaction that would otherwise
violate his fiduciary duty as a director to the company, as long as the director does not act in an unfair and improper
manner
Facts: James, as an individual, sells a steamer to NWT, and he is also a s/hr and director with NW Transport
o James voted his own shares in a shareholder vote to ratify the sale
- Henry Beatty, a shareholder at NWT, sued on behalf of all other shareholders to set aside the sale made to the
company by James
- The defendants are 5 shareholders who were also directors at the material time
Issues: Is this self-dealing contract voidable or insulated by ratification? Did selling the steamer that was personally
owned by a company director violate the fiduciary duty owed to the corporation?
Decision: Contract for sale held valid and enforceable.
Reasons:
- The contract for sale is insulated by ratification by way of a shareholders vote:
o the dealing was affirmed/adopted by the other directors and shareholders, and the vote was not brought
about by any unfair or improper means

82
 o If not ratified by other directors and shareholders, or if the vote was improper in some way, it may be
prohibited
- There was no evidence that Transport company didn’t need a steamer, or that the purchase price was unfair

LEGISLATIVE RESPONSE TO SELF-DEALING K’S – ABCA S. 120

Section 243 ABCA –re: shareholder ratification

- Evidence of approval by the s/hs can be taken into account where the court makes orders, although the court isn’t
bound by this evidence

Section 120 of ABCA

- Self-dealing contract is enforceable, as long as three criteria in s 120 are met:
o 1/ Contract and director’s interest must be disclosed (in writing or entry into the minutes) (s 120(1))
o 2/ The appropriate body must approve the contract
▪ If the body is the Board the self-dealing director cannot vote
▪ If the body is the s/hs the self-interested party can vote
▪ S 120(5) – if the K is one that would not ordinarily require approval by a body, then the director
shall disclose in writing the extent and nature of their interest
▪ S 120(7) – A general notice to the directors is sufficient disclosure of the interest
o 3/ Contract must be fair and reasonable at the time it was approved
• If s. 120 requirements see compliance, contract is insulated from attack on the basis of self dealing under s.
120(8).
o If there is a failure to comply, court has jurisdiction under s. 120 (9) to set aside the contract or require an
accounting or both.
• s. 120(7): the general disclosure provision
• Section 120(8.1) – the “whoops” provision
o if the conditions aren’t met, a director and officer acting honestly and in good faith is not accountable to
the corporation or s/hs even if it doesn’t meet criteria of s 120(8)

“Material Interest” in s 120(1)(b) – What’s Material?

- S 120 only addresses self-dealing transactions where the director involved has a material interest in the
transaction
o So, in a transaction between corporation A and corporation B, where a director is a director of both
corporation A and corporation B, OR the director of corporation A had a material interest in corporation
B, there will be self dealing transaction that must meet the requirements under s 120 of the ABCA
- Situation #1: Conflict is Direct
o Beatty for example.
- Situation #2: Conflict is indirect
o Joe is a director/officer of corporation A
▪ Transaction between corporation A and B
o Joe is director/officer of corporation OR has a material interest in corporation B
o What is a material interest?
▪ Financial interest that is more than insignificant
▪ Relationship or emotion based?

DIMO HOLDINGS V H JAGER (ABQB 1998) - DEALINGS BETWEEN DIRECTOR’S CORPORATION

AND ANOTHER CONTROLLED BY FAMILY MEMBER NOT A “MATERIAL INTEREST” (ALTHOUGH
IT ARGUABLY EXTENDS TO FAMILY RELATIONSHIPS) – SELF-DEALING TRANSACTION (ABCA, S
120 APPLICATION)

83
Ratio: Dealings between a director's corporation and another corporation controlled by a family member of the director
does not constitute a "material interest" that requires disclosure under s 120 of the ABCA; material interest requiring
disclosure must be a personal financial interest; BUT: O’byrne argues that material interest may include family
relationships
- Also, if the contract is otherwise reasonable and was entered into in good faith, then it should be allowed.
Facts: Henry Moeller is director of Jager. Jager borrows from Dimo Holdings, whose sole director, officer, and s/hr is
Diane Moeller (HM’s wife)
- Dimo loaned Jager $50,000 to put on a music concert, part of which remains unpaid; Dimo sued Jager to recover
the remaining debt
- No disclosure was made by Henry Moeller that there may be a material interest involved.
- Jager defaults on the loan and tried to get out of paying it back
o Dimo sued and received summary judgment, on the basis that a trial isn’t necessary because there’s no
defense
- Jager is fighting back against this summary judgment, arguing that Herb Moeller should have disclosed interest
under s 120
o Moeller had an interest in the contract due to his relationship with Dimo
- Massive interest on the loan (50%) – an appalling rate of interest, bordering on criminal
o This was dropped down to 5.5%
Issue: Is husband’s relation with wife a material interest, and should the contract be unenforceable?
Decision: appeal dismissed and loan upheld as enforceable; there was no material interest and contract was reasonable
and fair
Reasons:
• At common law, there is no requirement to disclose interests in corporations held by family members.
• Section 115(1)(b) of the ABCA (now s. 120 of the ABCA)
o Requires the director of a corporation who has a material interest in any person who is party to a material
contract, to disclose in writing to the corporation, the nature and extent of his or her interest
o Where there is a material interest in the other corporation in a transaction, s. 120 applies as to it being a
self-dealing transaction
• Material interest
o Material interest denotes a financial interest, and it must be more than insignificant
o Court is tepid towards anything other than a financial reason constituting a material interest
▪ Problem:
• O’byrne argues that a marital relationship should be a material interest requiring
disclosure (there is a relationship that could impact Moeller’s ability to negotiate for the
corporation’s interests and Moeller has an indirect financial interest)
o Application to the facts:
▪ In this case, court found that Moeller is neither a director, officer or has a material interest in
Dimo.
▪ Material denotes a financial interest, and Henry Moeller has no financial interest in Dimo (no
ownership in the other corporation)
▪ Mr. Moeller is only required to disclose his material interest, not that of his wife
• When s 120 is violated by lack of disclosure, it is within the power of a court to set aside the contract
o If the contract is fair and reasonable, the court cans decide to uphold the contract
▪ If the contract is fair and reasonable to the corporation at time it was approved, courts will
be pretty reluctant to set it aside
• Jager needed money, was desperate or it, and there was no duress or unconscionability –
they got the cash and spent it, and now they owe on it
• However, a 50% interest rate is not reasonable – that rate was lowered to 5.5%
• Other than the interest rate, the loan as fair and reasonable and should therefore be
enforceable

84
 o If the contract is not fair, the court could order accounting or a setting aside of the contract
• Even in the absence of an enforceable contract, Jager would be obliged to repay the debt under principles of
unjust enrichment
o Unjust enrichment:
▪ 1/ Show enrichment
• Jager got the money
▪ 2/ Corresponding deprivation
• Dimo is out their money
▪ 3/ Absence of a juristic reason justifying the enrichment
• no juristic reason

ZYSKO V THORARINSON (2003 ABQB) – POTENTIAL EXPANSION OF WHAT CONSTITUTES

MATERIAL INTEREST  FAMILIAL INTERESTS IN OTHER CORPORATION MAY BE INCLUDED –
BUT FAIR, REASONABLE CONTRACT AND DISCLOSURE INSULATES K FROM ATTACK
Facts: ESJ Equities wants to buy and develop land. The land is owned by 3 individuals, who are later told to run the
corporation through holding costs.
Class notes:
- Quote about “what interests are material”
o “the statute also addresses the problem of a director or officer who has no monetary interest in a person
on the other side, yet who is likely to have an emotional involvement. Thus, a deal in which the
corporation is negotiating with a close relative, or even a close personal friend, of one of the directors
or officers ought to be suspect.”
- Material interest disclosure:
o should be disclosure whenever there is connection with the other company that could potentially amount
to a conflict of interest (emotional or financial interests)
- Dimo is probably wrong, Zysko is likely right
- But, even in the event of a material conflict, if there is disclosure and the contract is fair and reasonable,
you’ve insulated it from attack.

BLACK V HOLLINGER INTERNATIONAL (DELAWARE 2005) – PASSING BYLAWS TO OVERPOWER

OTHER DIRECTORS WITH INEQUITABLE PURPOSE – BYLAWS TO APPROVE TRANSACTION NOT
AGREED TO BY SHAREHOLDERS/DIRECTORS – SELF-DEALING AND DIVERTING CORPORATE
OPPORTUNITY
Ratio: Using a voting majority to pass bylaws to overpower other directors and shareholders and to approve a transaction
that otherwise violates the self-dealing prohibition is not permitted.
Facts Hollinger International Inc. is suing Hollinger Inc. and Conrad Black for breach of fiduciary duty. International is
controlled by Hollinger; Conrad Black owns and controls Hollinger and serves as CEO and Chairman.
• In 2003, $70 million was paid out to Black and other International executives purportedly in connection with non-
compete covenants - this was challenged by another shareholder claiming that these payments violated the duty of
loyalty owed by the directors, and that they were hidden from the board and were thus not properly approved.
• Realizing the problems that a full investigation might present, Black agreed to repay the $70 million, resign as
CEO, and agree to a reconstituted structure that would see independent directors take a solid majority on the
board.
o Black diverted an opportunity to himself
▪ As soon as the restructuring was complete, Black violated it - he diverted to himself a valuable
business opportunity (Hollinger International selling the Daily Telegraph) by encouraging the
purchasers to purchase his controlling interest in the company [instead of buying it from
International directly].
▪ So he encouraged the purchaser to buy ownership in Hollinger Inc from him, rather than buying
from Hollinger International

85
 o Black also used confidential information for his own purposes contrary to the company's best interests.
• Black then threatened to remove any directors through his voting majority who attempted to subvert his effort to
sell to Barclay's, and he used his voting majority to impose new rules requiring the Board to disclose all meetings
etc. to him.
Issues: Did Hollinger Inc. and Conrad Black violate their fiduciary duties towards International by self-dealing?
Decision: trial decision against Black and Holligner Inc. upheld; fiduciary duties were breached
• The Court of Chancery found that the bylaw amendments were invalid in equity because they were adopted for
an inequitable purpose
o that is, to allow Black to subvert the rights of other shareholders and directors.
• He took a corporate opportunity and diverted it to himself
o Black violated his duty of loyalty by denying the International board its prerogative to consider fairly and
responsibly the strategic opportunity presented by selling the Telegraph and by diverting that opportunity
to himself.
• He also misled other directors about his intentions re: the Telegraph and did not disclose his dealings with
Barclay's to the Board.
• He improperly used confidential information to further his own personal interests, and he urged Barclays to
make improper inducements to International's investment banker to betray his client International.
• He also violated material terms of the restructuring agreement (which he had signed) by failing to repay the non-
compete payments as promised, not devoting his energies to affecting the strategic process, entering into the
Barclay's transaction and not giving the Board notice of that transaction.

(D) COMPETING DIRECTOR

- Occurs where a director sits on the board of two competing companies
- Historically, common law was fine with such a scenario (New Mashonaland)
o Today, sitting on the Board of a competing corporation is contrary to a stakeholders reasonable
expectations and would raise an action for oppression.
o OR a derivative action

LONDON & MASHONALAND EXPLORATION V NEW MASHONALAND EXPLORATION (1891) –

COMMON LAW VERY DEFERENTIAL TO SITTING ON COMPETING BOARD - DON’T RELY ON THIS
Ratio: Damages to the corporation must be proven for a director sitting on boards of competing corporations to be
removed
- If the bylaws do not prohibit a director from holding positions on other boards, then they will be permitted to hold
those positions.
Facts: Lord Mayo was sitting on the board of a competing corporation, and the other corporation took offence, applying
for an injunction that would bar the other corporation from naming Lord Mayo as a director
Issue: Can a director of one corporation be restrained from acting as a director for a competing corporation?
Decision: No – a director will not be removed from an opposing company’s board of directors if there’s no evidence of
damage to the corporation (no sufficient damage was shown in this case)
• Note: there is some tolerance for competing directors although it’s likely best not to engage in this practice
o Dangers of having competing directors: action for a breach of fiduciary duty, a derivative action,
oppression actions
• Example: it was fine for Sobeys to sit on the board for Provigo and Empire Foods when those corporations did not
both operate in Quebec; when Empire Foods moved into Quebec, Sobeys left Provigo’s board to avoid a
competing directors situation

SPORTS VILLAS RESORT INC (RE) (2000 NFCA) - FIDUCIARY DUTY DOES NOT PRECLUDE
DIRECTOR FROM SITTING ON MULTIPLE BOARDS – BUT DIRECTOR LIKELY BREACHES FID.
DUTY AND CREATES CONFLICTS OF INTEREST IF BEING A DIRECTOR FOR TWO COMPETING
CORPS – NO DIRECT COMPETITION FOUND HERE

86
Ratio: A director may, in certain circumstances, engage in a competing business but his fiduciary obligations require
avoidance of actions which would conflict with the interests of the businesses (O’byrne says that a competing director
situation is likely a breach)
• IF there is no evidence to show that the other business is in direct competition with the existing business,
then no breach of fiduciary duty will be found.
Facts: Pardy (a director of Sport Villas) sought an order to disqualify Dobbin (and his daughter) from being directors at
Sports Villas because Dobbin is a sole stakeholder in a competing corporation
• Dobbin’s solely-owned corporation, Clovelly Golf Course Inc (CGC) wanted to open a golf course in St. Johns
(that would compete with Pardy’s course outside of St. Johns)
• Pardy claimed that Dobbin is a competing director and needs to be removed, along with his daughter; Pardy also
claims that Dobbin was taking a corporate opportunity that belonged to Sports Villa
o Problem Pardy had with Dobbins’ daughter: notional conflict of interest
• Dobbin argued that because the two courses are so far from each other, they aren’t competing
• The trial judge rejected Pardy’s application for disqualification
Issue: Is there a conflict of some sort between Dobbin’s duties to Sports Villas and the other corporation?
Decision: Appeal dismissed; There was no evidence that Dobbin used any confidential info of Sports Villas and not
sufficient evidence of direct competition; when there is no competition between the corporations, there is no situation of
competing directors
Reasons:
- Fiduciary duty does NOT preclude membership on boards of multiple companies
o Corporate fiduciary duty exacts from directors a strict ethic to act honestly and in good faith to a
corporation’s best interest
o Must look at particular facts of the case; the fiduciary duties of a director are not intended to act as a
“straightjacket”;
o Look at all the factors contextually from the perspective of fairness
▪ Public interest requires strict application of the standards precluding directors placing themselves
in positions of potential conflict between fiduciary duties and their personal interests, but there is
also societal interest in not applying the standard beyond what is necessary to achieve that end
• Therefore, any assessment of whether a fiduciary duty has been breached by involvement
on another corporation’s board of directors will require a balancing of those interests with
the circumstances of the case at hand
- Competition argument; the corporations are not in competition
o Corporate fiduciary duty doesn’t prevent one from having multiple memberships on the boards of
different corporations
o Directors shouldn’t place themselves in positions of potential conflict between corporate fiduciary duties
and own personal interests
▪ BUT, societal interest in not applying standard beyond what’s necessary to meet that end
o Factual context:
▪ The distance between the courses: In this case, the golf courses are 266km away – they’re not
competing.
▪ Minimal negative impact is expected from he opening of the new golf course
▪ No direct competition
- Proprietary interest argument
o If the contemplated scope of Sport Villas’ activities had been to acquire all future golf developments, the
argument might hold that Dobbin took an opportunity belonging to Sprots Villa and was in conflict
▪ However, there’s no evidence that Sports Villas intended to acquire all future golf developments
▪ Also, no evidence that Dobbin took any information, confidential or otherwise
o Corporate opportunity
▪ The opportunity to open the new golf course was something that came to Dobbins as an
individual, not within his role of director of Sports Villas

87
 • O’byrne thinks this is just one factor though, and it is not determinative of what
constitutes a taking of a corporate opportunity
▪ No evidence that Dobbin took a maturing corporate opportunity that was the target of Sports
Villas
Note: there is possibility for the following actions against someone who is a director for competing corporations:
- Derivative action: the director’s actions have harmed the corporation in some way
- Oppression: the way the corporation is being managed or run by directors is prejudicing the interests of a
stakeholder
- Also, if these corporations had been competing, it likely would have been found that Dobbins had breached a
fiduciary duty by sitting as a competing director

(E) TAKEOVER BIDS AND DEFENSIVE TACTICS BY MANAGEMENT

Introduction:
- What is a hostile takeover? When shareholders are directly targeted/bought out and mgmt. is replaced
o Board may, during this event, make decisions that aren’t in the best interest of the corporation to preserve
their position
o When this occurs, a special committee is appointed to handle the takeover bid
▪ Why? Because the board, in assessing the takeovers, must act in accordance with their fiduciary
duty to the corporation
Defensive Tactics
• Defensive tactics can include:
o Poison Pill: give existing shareholders the right to buy new shares at very low prices if an event is triggered,
such as the acquiring firm buying more than X% of the firm.
• This makes the acquisition of the firm costly, because they have to buy all the new shares.
o Break out fee: Solicit rival friendly bids but allow the rival bidder to receive a huge fee if their bid is
unsuccessful. This essentially means that the rival friendly bidder will receive all (or substantially all) of the
company's cash if the unwanted purchaser is successful
• These tactics MAY be a breach of fiduciary duty, but the courts have not conclusively pronounced on
this yet

MAPLE LEAF FOODS V SCHNEIDER CORPORATION (1998 ONCA) - HOSTILE TAKEOVER - TO

DETERMINE WHETHER BOARD ACTED IN BEST INTEREST OF CORPORATION, LOOK AT THE
BUSINESS JUDGMENT RULE – DECISION MAKING PROCESS AND REASONABLENESS OF
DECISION
Ratio: When a corporation is in the process of an unsolicited takeover bid, directors must act in the best interests of the
corporation
- Ask: did the directors take the steps necessary to avoid a conflict of interest?
- Decision will be accorded respect under the business judgment rule as long as there is adequateness in the:
o 1/ Decision making process – directors acted prudently and on a reasonably informed basis
o 2/ Reasonableness of the decision made
Facts: Maple Leaf, a competitor of Schneider, announced its intention to buy Schneider out through an unsolicited bid
- Schneider’s Board created a “special committee” to deal with it; the special committee was supposed to be
independent of Schneider
o Rationale is that board members have a personal stake in the decision – their employment is possibly on
the line, so a special committee can be appointed to ensure that the transaction is carried out in the
corporation’s best interest
- Schnieder’s Board told the special committee that the only offer they’d accept is from Smithfield Foods at
$25/share
o Maple Leaf’s highest offer was at $22/share

88
 o The special committee chose Smithfield Foods without considering the higher bid then placed by Maple
Leaf (Maple Lead wanted to increase bid to $29/share)
▪ Given tax implications, the bid would have been equal to Smithfield’s bid, not better
- Maple Leaf and minority shareholders at Schneiders argued:
o 1) that the special committee was not independent
▪ The special committee used Schneider’s CEO, Dodds, to facilitate negotiations
▪ appeared that the special committee deferred to what Smithfield Foods wanted at the expense of
the minority shareholders
o 2) that the advice given by the special committee to the Board was not in the best interests of Schneider
and its shareholders
- Trial judge dismissed the action of the minority shareholder and Maple Leaf, finding that the special committee
and directors had exercised the care, diligence, and skill that a reasonable and prudent person would exercise in
comparable circumstances and had fulfilled their fiduciary duty of honesty and good faith with a view of the best
interest of the corporation
Issues: Did the special committee act in the best interests of the corporation? Were they truly independent?
Decision: Appeal dismissed; the special committee was sufficiently independent and it acted in the best interest of the
corporation; Schneider’s Board took steps to avoid conflict of interests; the business judgment rule applies in such a
circumstance
Reasons:
- Key point:
o Directors have special duties that arise upon takeover bids
o Work backwards from the business judgment rule to ensure that those duties are met: a good process and
a reasonable decision
- Duties of directors dealing with a takeover bid
o Real question is whether the directors of the target company successfully took steps to avoid a conflict of
interest
o If a board of directors has acted on the advice of a committee composed of persons having no conflict of
interest, and that committee has acted independently, in good faith, and made an informed
recommendation as to the best available transaction for the shareholders in the circumstances, the
business judgment rule applies
o Fiduciary duty and standard of care owing:
▪ S 122(1)(a)+(b) - act in the best interests of the corporation
- Business Judgment Rule
o The Court looks to see that the directors made a reasonable decision, not a perfect decision
o As long as the directors have selected one of several reasonable alternatives, deference is accorded
to the board’s decision
▪ In that way, the court is deferential to the decision of the Board, and that deference is known as
the business judgment rule
▪ Decision will be accorded respect under the rule as long as there is adequateness in
(Peoples):
• 1/ Decision making process – directors acted prudently and on a reasonably informed
basis
o E.g. independent special committee
• 2/ Reasonableness of the decision made
o E.g. pecial committee was informed
- Independence of the special committee
o “Special committees” are a common method of attempting to alleviate concerns of conflicts of interests
amongst directors
o Ultimately, Dodds needed to be involved because he brought useful context and information
▪ He pressed negotiations with the bidders diligently and did nothing inappropriate
▪ The committee was independent and Dodds’ presence was not a problem.
89
 o Duty for an open auction: There was no public expectation of an open auction
- Conclusion:
o The board of directors acted on the advice of a committee composed of persons having no conflict of
interest, and that committee acted independently, in good faith, with honesty, and made an informed
recommendation
- OBCA s. 248:
o Protects reasonable, legitimate expectations of shareholders
o Infringed by conduct of directors that disregards the interests of any shareholder

(F) OTHER SOURCES OF FIDUCIARY OBLIGATION

• A fiduciary relationship can be found between directors and shareholders if the directors are also shareholders and
are seeking to purchase shares from others (who are not directors)
• they will be privy to information that give them an unfair advantage in negotiations regarding the price
(Tongue v Vencap)

TONGUE V VENCAP EQUITIES ALTA (1994 ABQB, AFF’S BY ABCA) - FIDUCIARY DUTIES ARISE
WHEN DIRECTORS ACT OUTSIDE THEIR ORDINARY DUTIES – BREACH OF FIDUCIARY DUTIES
AND INSIDER TRAINING PROVISIONS – DIRECTOR BUYING AND SELLING SHARES FROM THE
CORPORATION’S SHAREHOLDERS
Ratio: Under s 122 of the ABCA, a director owes a fiduciary duty to the corporation; no provision in a contract, articles,
bylaws or resolution can release directors from that fiduciary duty; fiduciary duties also arise when directors act outside of
ordinary duties and when directors purchase shares from a shareholder
- Ideally, you want to hold directors jointly and severally liable because you want to be able to go after solvent
defendants (who can then sue their co-defendants later); Insider trading contemplates several liability under s
130(1)(a) ABCA.
Facts: The plaintiffs, Tongue and Harrap, are minority shareholders of Synerlogic Inc and want to sell their shares at
$0.60 each to the defendants
• The defendants, who are directors (Vencap, Negin et al) buy the shares, knowing that they’re really worth $1.97,
and then resell them at a profit
• Plaintiffs find out they’re duped, but they signed a release that relinquished any right to action against
shareholders or directors
• The plaintiffs sued for breach of the insider trading provisions of s. 131 of the CBCA and breach of fiduciary duty
Issue: Are the defendants liable under the insider trading provisions of the ABCA? Are the defendants liable for breach of
fiduciary duty?
Decision: Action allowed; Defendants are liable for breached fiduciary duty and insider trading under s 131 of the
CBCA (equivalent of ABCA s 130)
Reasons:
- Fiduciary duty
o Statutory fiduciary duty
▪ Section 122: Fiduciary duty is owed to a corporation only; consistent with BCE and Peoples
• So, it’s true that fiduciary duty isn’t owed here, by virtue of the act
o Fiduciary duty can arise in other circumstances:
▪ 1) Fiduciary duties arise when directors act outside of their ordinary duties.
• A fiduciary duty was owed to Tongue and Harrap because Negin et al were acting outside
ordinary duties
• Directors breached their fiduciary duty here by buying shares without disclosing another
offer to buy the shares after for more money
▪ 2) Fiduciary duties arise when directors purchase shares from the shareholders
▪ 3) Fiduciary duties arising on other grounds – the category of fiduciary duty is never closed

90
 • Defendants had information that the plaintiffs required to make an informed decision, but
they did not disclose that information
• There was a duty here to disclose the relevant information to the shareholders
- Effect of the Release Agreements
o Directors got the plaintiffs to sign a release of action saying that they would not sue
▪ Court will read these sorts of releases in context. The releases are contractual documents.
o Plaintiffs can only release what the parties had in contemplation at the time of signing the contract
▪ The causes of action here, for several breaches of fiduciary duty and breach of s. 131 of the
CBCA (insider trading) were not in contemplation of the parties
o As stated in the CBCA, parties are also unable to contract out of liability under s 131, and out of a
fiduciary duty
o Although the plaintiff had independent legal advice prior to signing, there was incomplete disclosure by
defendants
- Insider trading – breach of section 131
o CBCA S 131 (ABCA s 130) – gives a cause of action for people ripped off by insider trading
▪ Insiders (directors) are entitled to trade in corporation’s shares, except when acting on insider
information
▪ Directors may not use information that is not available to the public in their transactions of shares
o Apportioning liability between directors who have been found liable (as Plaintiff, you want a
finding of joint and several liability)
▪ The court found several liability, so each director is responsible for the extent of their personal
involvement
▪ Court said that the “direct” loss in section 131 is referring to several liability (not joint and
several), so there is a direct loss that each defendant is liable for
• So the defendants are held liable for an amount equal to the proportion of the shares they
purchased from the plaintiffs as individuals and resold for profit
- However, directors are also liable as:
o A fiduciary under trust law (joint and several liability)
o Concurrent tortfeasors, they acted in concert (fraud and deceit) (joint and several liability)

(G) SHAREHOLDER RATIFICATION OF A BREACH OF FIDUCIARY DUTY

- Problem: shareholders could ratify breaches of fiduciary duty EXCEPT in instances of fraud on the minority
(Cook v Deeks).
o However, the fiduciary duty is owed to the corporation not to the shareholders, so why should the s/hs
be able to ratify it?
- Under s 120 of the CBCA, a shareholder resolution approving a breach of fiduciary duty doesn’t cure a breach or
relieve the fiduciary of liability for the breach (equivalent – s 122(3) ABCA)
o With the ONLY exception being for self-dealing contracts.
o The only legal effect of such a resolution is that it must be considered by the court in deciding whether
to grant a s/h the right to bring a derivative action on behalf of a corporation for breach of fiduciary
duty or determining if an action was oppressive

(H) LAWYER SITTING ON A CLIENT’S BOARD OF DIRECTORS

“Should You Sit on Your Client’s Board of Directors?” [346]
- A lawyer might start talking during the meeting and give legal advice at that particular meeting; it might end up in
the minutes and then that could result in an inadvertent waiver of client confidentiality
- Professional liability insurance that you receive as a lawyer excludes acts done as an officer or director
- Officer/director liability insurance excludes acts done outside the scope of duties of a directors
- The fear is that you fall between two stools, because between your officer/director liability insurance and your
professional liability insurance, you as a lawyer may end up PERSONALLY liable

91
 - So.. maybe don’t sit on Board

“Lawyer’s Liability as a Director of a Corporation” [347]

- At the very least, a lawyer must help clients understand and evaluate the serious risks in having their corporate
lawyer serve on the board. Failure to do so might itself be a source of a malpractice claim
- Can create problems, like inadvertently breaching client confidentiality
- If you’re acting in a non-legal capacity, you’re not going to be covered under professional liability insurance
o But there are pros:
▪ You can better understand/be informed about client’s business; can identify emerging problems;
can build a better relationship with client
o And yet there are serious negatives:
▪ Waivers of client confidentiality; conflicts of interest; exposure to increased liability for you, your
firm, and questions about your insurance coverage; increases likelihood you’ll be named as a
defendant if sued; and you’re going to be held to a higher standard of care than either non-lawyer
director OR a lawyer not on the board. Probably a bad idea!
- But: arguable that a lawyer may be acting in ordinary course of the law firm’s business in sitting on a client
corporation’s board, and therefore may be protected under the professional liability insurance
o It is probably possible to receive coverage

(I) DISSENTING DIRECTOR – DEALT WITH BY THE S 123 OF CBCA AND ABCA
• If, as a director, you wish to dissent from a decision of the board, you have to check the statute to make sure that
you do it in the proper manner and at the proper time
o NOTE** BIG DIFFERENCE BETWEEN CBCA and ABCA here!!!

Section 123 ABCA

- 123(1) director who is present at a board meeting is deemed to have consented to any resolution passed unless:
o A) Request a dissent to be entered into the minutes
o B) Sent a written dissent to secretary before the meeting was adjourned
o C) Sent a dissent by registered mail or to office
o D) Otherwise PROVE that you did not consent
- (2) Loss of right of consent – a director who votes or consents to a resolution or action ISN’T ENTITLED to
dissent
o Note: if you vote yes, you can’t say you’re dissenting - 123(2)
- (3) A director is not liable under section 118, and has complied with the director’s duties under section 122, if the
director exercises the care, diligence and skill that a reasonably prudent person would exercise in comparable
circumstances, including reliance in good faith on:
o (a) financial statements of the corporation from officers or auditors to reflect fairly the financial condition
of the corporation or
o (b) an opinion/report of a lawyer, accountant, or others whose profession lends credibility to a statement
made by them

Section 123 CBCA – different

- 123(1) director who is present at a board meeting is deemed to have consented to resolutions passed unless:
o A) Request a dissent to be entered into the minutes
o B) Sent a written dissent to secretary before the meeting was adjourned
o C) Sent a dissent by registered mail or to office
o Note: More or less the same wording for when a director present at a meeting is deemed to have
dissented, but there’s no “otherwise prove” provision (as was the case in the ABCA)
- (2) Loss of right of consent – a director who votes or consents to a resolution or action ISN’T ENTITLED to
dissent

92
 - (3) when the director is absent : A director not present, is deemed to have consented unless within 7 days after
becoming aware, cause a dissent to be placed in the minutes or sends a dissent by mail or delivers it to the
corporation
o There is no congruous provision in the ABCA

3. OTHER STATUTORY DUTIES E.G. INCOME TAX

ZWIERSCHKE V MNR (1991 CTC) - STATUTORY DUTY OF CARE UNDER INCOME TAX ACT –
FAILURE TO PAY TAXES
Ratio: Statutory duties of care will apply to directors; they may go beyond the regular duty of care
Facts: Zwierschke appealed from an assessment by the CRA under the Income Tax Act; appellant was born in 1925 and
left school before he completed grade 9
• 1964, he started a business doing trenching and construction; hired 3-4 employees who he’d supervise while his
wife did most of the paperwork for the business
• Business was transferred to a corporation of which the appellant was the only director in 1978. Business all the
while was using Niagra Credit Union to finance equipment purchases.
• The business had a line of credit with Niagra (manager was Mr. Disley), which was used to pay wages, purchase
materials, and pay for other business expenses
• Company went way into overdraft on its line of credit, its assets were ultimately seized, and the corporation was
liquidated. Zwierschke still owes $17,000 to the Credit Union.
• When the proceeds of sale of the company were remitted to the Credit Union, there was not enough in excess to
pay the amount owing by the company in income tax
• The appellant claimed that he had exercised the required degree of skill diligence, and care under s 227.1(3) of the
Income Tax Act
Issue: Can the appellant defend himself by virtue of s 227.1(3)?
Decision: No defense; appellant was the person who managed the business and knew the most about its affairs
Reasoning:
- S 227.1(3) requires directors to exercise a degree of care, diligence and skill. In this case, the directors exercised
no care, diligence or skill.
o The appellant managed the company’s business and knew more about the business affairs than any other
person
o He knew that his company’s line of credit was in overdraft and that he would have collect enough
receivables in order to cover the cheque sent to the CRA to cover outstanding tax liabilities
▪ He just wrote the cheque and hoped it wouldn’t bounce.
- Section 227(4) of the Income Tax Act provides that amounts withheld from salaries and wages for taxation
purposes are deemed to be held in trust for the Crown in right of Canada.
o This imposes a duty to ensure that those funds are properly paid to the Crown.

4. DIRECTORS’ AND OFFICERS’ LIABILITY IN TORT TO THIRD PARTIES

Introduction
- We know that under s 122 the director has a duty of care to the corporation (and possibly to a third party like a
creditor under s. 122(b))
- But to what extent is a director liable to third parties outside the corporation in tort?

Director and Officer Liability for Torts

Inducement of Breach of Contract
- Directors are liable for the inducement of breach of contract, with the exception of the rule from Said v Butt
- The rule in Said v Butt (only for the tort of inducing breach of contract)
o If an officer or director for a corporation, acting bona fide within the scope of their authority, procures or
causes the breach of a contract between his employer and a third party, he does not thereby become liable

93
 to an action of tort. The claim lies against the corporation. [Remember, the elements of inducing breach in
Pocklington p 154]
o It’s a good rule – if breach of contract and the damages that come with it are in best interests of the
corporation, directors are basically obligated to breach
- The rule in London Drugs v Kuehne.
o Privity of contract and liability in negligence for employees
o Employees may owe a duty of care to someone to whom their employer is providing services by contract.

Negligence and Other Torts

- The case law is less clear and somewhat uncertain.
- Two lines of authority for liability of officers and directors for their own actions:
o 1/ Corporation as a broad shield for officers and directors.
▪ Absent fraud, deceit, dishonesty or want of authority, Directors and Officers of the corporation
will rarely be held liable for their tortious conduct unless their actions have taken them outside of
the scope of their duties (ScotiaMcLeod)
▪ Only where a tortious action takes a director or officer out of their role of directing mind of the
corporation, exhibiting a separate identity or interest from the corporation, will the conduct
attract personal liability
• Example: Where president of corporation punches a shareholder for making him angry.
It’s a separateness that attracts personal liability.
o 2/ Corporation as a very narrow shield of protection for officers and directors.
▪ Directors and officers of the corporation are responsible for their tortious conduct, even if the
conduct is directed in a bona fide manner in the best interests of the corporation;
• But, liability is STILL subject to Said v Butt exception for inducing breach of contract
(ADGA).
▪ This line of authority suggests that personal liability in tort will be found more commonly for
directors and officers
• Ordinary negligence of corporate directors:
o No liability will be found (ScotiaMcLeod)
▪ This is closer to the law as it stands in Alberta – exceptions to the protection from director
liability are defined narrowly
▪ There must be a separateness in the actions of the director apart from the corporation (some level
of intent that is not present in normal negligence)
o Liability will likely be found (ADGA)
o Middle route: liability may be found, following the same process for establishing whether a duty of care
exists in the circumstances of a regular employee (Slatter’s concurring opinion in Hogarth)
• Liability for intentional torts or fraud:
o Will be found following either ScotiaMcLeod or ADGA
o In jurisdictions following ScotiaMcLeod, it is not enough to correctly plead the tort, because liability will
only be found for specific torts

LONDON DRUGS V KUEHNE (SCC 1992) – EMPLOYEES CAN BE HELD NEGLIGENT TO CLIENT OF
EMPLOYER, DEPENDNING ON CIRCUMSTANCE
Ratio: employee can be liable in negligence to someone to whom the employer is providing services by contract
• In performing the very essence of the employer’s contractual obligations, employees may owe a duty of care to
the customer depending on the circumstances
Decision:
- London drugs is owed a duty of care by Dennis and Hank, London Drug employees, which they breached by
dropping the transformer; they’re liable, except that they can shelter under the exclusion clause in the contract
between London Drugs and Kuehne.

94
 o BUT FOR that exclusion clause, they’d be personally liable for $40,000!
o As employees, there’s no special deal. You have personal liability.
▪ Why should directors and officers be any different?
- Employees are liable in negligence to the customer

MONTREAL TRUST V SCOTIAMCLEOD (1995 ONCA) – ABSENCE OF FRAUD,

DIRECTORS/OFFICERS NOT LIABLE FOR TORTIOUS CONDUCT UNLESS ACTIONS TAKE THEM
OUTSIDE SCOPE OF DUTIES – TORTIOUS CONDUCT MUST EXHIBIT SEPARATE IDENTITY
Ratio: In the absence of findings of fraud, deceit, dishonesty or want of authority, directors and officers as the directing
minds of the corporation will rarely attract liability for their tortious conduct unless their actions have taken them outside
of the scope of their duties.
• The tortious conduct itself must exhibit a SEPARATE IDENTITY to take the directors and officers out of their
roles as directing minds of the corporation for there to be personal liability found
Facts: Montreal Trust (MT) and Credit Lyonnais (CL) are plaintiffs against ScotiaMcLeod (SM) [an underwriter –
facilitates placements of debentures in the market; they’re an intermediate between the sellers and buyers of the
debentures], Wood (senior VP of SM), and Davies (law firm who acted for the plaintiffs and Peoples Jewelers at the
material times)
• MT/CL bought unsecured debentures of Peoples for $17 million (thereby financing Peoples)
o Peoples owned Zale Holding, which owned Zale Corp, which owned Gordon Jewelry as well
o To induce purchase of debentures, Peoples gave MT/CL a “prospectus” with financial info.
▪ But this prospectus was no good!
o At the time MT/CL bought the debentures, Peoples was party to other agreements to which it was
conditionally liable – the “Zale liabilities”; the prospectus did not contain info about the Zale Liabilities
• There were two groups of directors of Peoples (9 in one pile that weren’t particularly involved, and 2 – Gill and
Irving Gerstein – that were intimately involved)
• MT/CL claim that the Zale liabilities were crucial to their decision to purchase the debentures; they also claim that
they relied on the information provided to them by Peoples in making their financing decision
o They argue that the conduct of the directors at Peoples constituted an intentional or negligent
misrepresentation
o Seems to be fraudulent misrepresentation – MT/CL asked Gill and Irving Gerstein, president and CEO of
Peoples, if Peoples had contingent liabilities, and they said no
• NOTE – this is an application by the directors to strike the action, not actual proceedings.
Issues: Does a tortious misrepresentation give rise to personal liability for officers and directors?
Decision: Action dismissed against group of 9 directors who were not intimately involved; action was maintained against
the two directors who had been more involved in the misrepresentations
Reasons:
- The corporate veil protects the 9 directors of Peoples who weren’t intimately involved – Court STRIKES this
action.
o Just because the “directing mind” did something unsavoury, doesn’t mean you can pierce the corporate
veil
o In the absence of findings of fraud, deceit, dishonesty, the corporate veil will not be lifted to hold the
officers and directors liable
o Officers and directors are shielded from personal liability unless it can be shown that their actions were
themselves tortious or exhibit a separate identity or interest from that of the company
▪ Must be some part of their activity that takes them outside the role of directing minds of the
corporation
o The actions of these directors were not sufficiently exhibit a separate identity or interest from that of the
corporation
- However, Gill and Irving’s misrepresentations were clearly negligent misrepresentation
o The court notes the bar is VERY low for merely sustaining a cause of action against a motion to strike.

95
 ▪ They indicate that the action will be unsuccessful, but they let the action proceed.
▪ This was just an application to strike, so it doesn’t mean they get convicted, but the action goes
forward and will be heard on the facts.
- Ultimately, ScotiaMcleod says three things:
o Pleadings must be particular (specific tort alleged)
▪ Not every tort, successfully alleged, will result in personal liability (must be fraud, deceit,
dishonesty, or want of authority)
o The director must make the tort their own, meaning that they must be separate in interest from the
corporation
o Liability will be rare without dishonesty, deceit, fraud, want of authority

ADGA SYSTEMS V VALCOM (1999 ONCA) - DIRECTORS MAY BE LIABLE FOR TORTS
COMMITTED, EVEN IF ACTING BONA FIDE IN THE BEST INTERESTS OF THE CORPORATION
Ratio: An officer or director will not be entitled to the Said v Butt defense if he is not acting bona fide in the interests of
the company
• But Officers, directors and employees may still be held responsible for their tortious conduct even though that
conduct was in pursuance of a corporate purpose and directed in a bona fide manner to the best interests of the
company
o Directors are not immune, even from economic torts like negligent misrepresentation
Facts: ADGA complains that Valcom, a competitor, poached its employees and caused the plaintiff economic damage;
Valcom was named generally but in particular, Valcom’s director (MacPherson) and two of its employees were named
• Valcom’s directors and officers approached the employees of ADGA, saying that they were going to bid on a
prison services contract, and ask if they can use the employees’ names in their bid and whether the employees will
come work for Valcom if their tender is successful?
o The employees agree, and Valcom got the contract.
• This is an extreme case of employee poaching
o ADGA started a business day, only to realize all of their employees are gone.
• Valcom committed the tort of inducing breach of contract.
o All employees at ADGA breached their employment contracts. This is perfectly clear – no dispute.
• Question here at the Court of Appeal is whether a cause of action exists to allow for a trial (summary judgment to
dismiss was granted at the lower court)
Issues: Can MacPherson be sued as an individual, assuming his actions were genuinely directed to the best interests of his
corporate employer? The corporation definitely has liability – but do the directors?
Decision: appeal allowed; original motion for summary judgment against ADGA dismissed; action is sustained
Reasons:
- The Court found the pleadings against the directors to be particular and clear
o Problem: ScotiaMcLeod did not say only that the pleadings must be particular, they must also be for
specific torts
- The Court says that Salomon doesn’t say anything about liability of the directors for their torts; Salomon is about
establishing the corporation as a separate legal entity and saying that shareholders are not liable for the actions of
the corporation
o The court starts with principle in tort that an individual, including a director or officer, is responsible for
their own conduct;
▪ The Court said that the one key exception to the general liability in tort as a director is Said v
Butt:
• Directors of a corporation are not liable for inducing that corporation to breach its
contract when they are performing bona fide their functions as corporate officers
▪ Problem: this is a case where the director is inducing the breach of contract by employees of
another corporation, he is not inducing the breach of contract of his own corporation (which was
the case in McFadden)

96
 • Therefore, the Said v Butt defence is not applicable in the kind of induced breach of
contract that is present in this case
- Court says that the “consistent line of authority holds … officers and directors and employees are responsible for
their tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the
company”
o Court is saying that: the conduct of the director is not necessarily excused if the interests of the company
are being served and there is conduct in bona fide interest of the company
o Problem:
▪ That’s the EXACT OPPOSITE of ScotiaMcLeod, even though the court is purporting to follow
that decision
▪ Scotia says that liability is rare  you must sufficiently make the tort your own to separate the
director from the corporation for there to be personal liability
- The Court dispatches ScotiaMcLeod
o They make the net for liability of directors bigger. Scotia says liability is rare, but ADGA says it’s
common and directors will be found liable.

NBD BANK CANADA V DOFASCO INC (ONCA 1996) – DIRECTOR LIABLE FOR NEGLIGENT
MISREPRESENTATION WITH EGREGIOUS CONDUCT – FOLLOWS ADGA – ANNS TEST FOR
NEGLIGENT MISREPESENTATION
Ratio: following ADGA, liability in tort for directors will be common if the tort is properly pleaded (wrong though….
must also be separateness of tort and tort must be a specific tort such as fraud)
Facts: Dofasco made several telephone calls and sent a number of letters to NBD in 1991, inducing them to finance credit
for Algoma steel (a subsidiary of Dofasco)
- The Dofasco directors made made some misleading statements which helped induce NBD to grant the credit
sought.
o The directors made statements indicating that certain assets could be used as security for the debt (they
could not, as these assets were already pledged as security for other debts), and misrepresenting Algoma’s
financial state
o NBD agreed to lend $4 million to Algoma
- Two weeks after the purchase, both Algoma and Dofasco went bankrupt, resulting in significant losses to NBD
- Dofasco Inc and a director, Melville, were held jointly and severally liable for negligent misrepresentation at trial
Issue: Can the directors be held personally liable for misrepresentations they made on behalf of the corporation which
eventually caused NBD economic damages?
Decision: Appeal dismissed; Melville found liable in negligent misrepresentation as a director of Algoma ( Court applied
ADGA; had court applied ScotiaMcLeod, he would not be liable because he didn’t make the tort his own)
Reasons:
- The appellants contend that the director, Mr. Melville, should not be held personally liable for acts done in
furtherance of the corporation's best interests.
o ScotiaMcLeod: absent fraud, deceit, dishonesty, or want of authority it is rare for officers to be held
personally liable for actions carried out under a corporate name unless it can be shown that their actions
are themselves tortious or exhibit separate identity or interest from that of the company
o ADGA: Officers can be held liable for their own tortious acts – but only if they’re separate from the
corporation
o So, Melville is not protected from liability for his tortious acts just because he may have been acting in
pursuance of the interests of the corporation
- Duty of Care:
o Melville claims that he does not owe a duty of care because it was not reasonably foreseeable that
NBD would be relying on his representations in a personal capacity.
▪ Anns test for duty of care:
• 1. Is there a prima facie duty of care that the defendant owes to the plaintiff?

97
 o This prima facie duty is based on the concept of the special relationship, which
exists when:
▪ A) the defendant ought to have reasonably foreseen that the advisee
would rely on the advice and
▪ B) where that reliance by the plaintiff would be reasonable.
• 2. If yes, are there residual policy considerations outside the relationship
of the parties that negate the imposition of the duty of care?
o The scope of the duty,
o The class of persons to whom it is owed, or
o The damages which a breach of it may give rise to?
• 3. Assuming a special relationship, plaintiff must go on to establish:
o (a) An inaccurate or misleading statement was made
o (b) The Defendant must have acted negligently in making the statement (ie.
statement was not made with reasonable care);
o (c) The Plaintiff must have reasonably relied on the misrepresentation; and
o (d) The reliance must have resulted in financial detriment (damage)
• Anns Test Applied:
o There is a prima facie duty of care here.
▪ (a) the defendant ought reasonably to foresee that the plaintiff will rely on his or her
representation, and
• Melville was a senior officer of Algoma, and was the bank's primary contact. He held
himself out as capable of making decisions on Algoma's behalf.
• He must have known that carelessness on his part could give rise to damage to the
plaintiff.
▪ (b) reliance by the plaintiff would, in the particular circumstances of the case, be reasonable.
• Reliance by NBD Bank upon Melville was reasonable
▪ This will give rise to a prima facie duty that can otherwise be negated for policy considerations.
o Policy Reasons for not attributing personal liability
▪ Allowing for liability would not erode the effectiveness of the CCAA
▪ No reason to immunize Melville from liability for negligent misrepresentation by reason of
reallocation of risks
• But argument is that deal was between the corporation and the bank, and seeking out the
directors for liability is not justified (not intended to be liable)
▪ No issue of indeterminate liability because Melville was aware of the identity of the plaintiff and
his statements were used for the very purpose and transaction for which they were made
- Note: the Court here found that the misrepresentations and conduct went beyond mere carelessness or mere
negligence, it was closer to an intentional tort (borderline intent)
o The conduct was egregious here, which provides some support for this outcome
o If there had been fraud here, liability also would be found following ScotiaMcLeod

HOGARTH V ROCKY MOUNTAIN SLATE INC (2013 ABCA) - THE LAW IN ALBERTA IS
SCOTIAMCLEOD – INTENTIONAL TORTS WHERE SEPARATE IDENTITY OR INTEREST IS SHOWN
ATTRACT LIABILITY - LEGITIMATE EXPECTATIONS OF PARTIES GO TO WHETHER DIRECTOR IS
LIABLE FOR PROMOTIONS – NEGLIGENT MISREPRESENTATION AGAINST DIRECTOR FAILS
HERE
Ratio: For a director to be liable in tort, the acts of the director must be tortious in and of itself or exhibit the separate
identity or interest necessary to make the act the director’s own

98
 • The expectations of the parties can help inform whether it is appropriate to hold directors personally liable for
torts committed by the corporation.
• For negligent misrepresentations, there must be a causal nexus between the misrepresentation and damage for
liability to be found; the plaintiff must show some independence of the tort on behalf of the director – relying on
the director, rather than the corporation for which the director is working
Facts: Plaintiffs (limited partners) invested in a limited partnership (Rocky Mountain Slate Ltd Partnership) to excavate a
slate deposit, relying on representations from a general partner (Rocky Mountain Slate Inc) and the general partner’s
director, Simonson; Simonson was the president of the limited partnership
• The defendant directors developed three documents designed to encourage investors to invest in the project.
o This included a "future oriented financial information" document which includes forecasts and projections
of business opportunities.
• Simonson, Powell and Suhan are all directors who are being sued, and who were involved in creating the
promotional literature and making presentations to potential investors, including Hogarth.
• The quarry was not successful, and the plaintiffs lost their investments.
• The defendants contend that there was no negligent misrepresentation because the quarry failed for reasons
beyond their control (i.e. bad weather for mining).
• At trial, the judge found Mr. Simonson personally liable
Issue: Can plaintiffs successfully sue Simonson personally for negligent misrepresentation?
Decision: Appeal allowed; Simonson not liable
• The Court was not satisfied that the conduct of Simonson was tortious in and of itself or exhibited the separate
identity or interest necessary to make the act his own; the statements were made for the purposes of raising funds
for the corporation and for its benefit, having a shareholding or financial interest in the corporation does not
translate into a separate personal interest
• The tort for negligent misrepresentation was also unsuccessful because no causation was shown between the
damages and the misrepresentations and the facts do not support the finding that negligent misrepresentations
were made
Reasons (Slatter J., Concurring):
• Five part test for negligent misrepresentation:
o Must be a duty of care based on a “special relationship”
▪ Reasonably foreseeable that statement would be relied upon and reliance by the plaintiff on the
statement would be reliable
o Representation must be inaccurate, untrue, or misleading
o Representor must have acted negligently in making the representation
o Representee must have relied on the misrepresentation, and it must have been reasonable to so rely on the
misrepresentation
o Reliance must have been detrimental to the representee in that damage was caused
▪ But for the representation, the investment would not have been made and the losses would not
have been incurred if the representation had been accurate
Question of negligent misrepresentations: At trial, the judge found three actionable negligent misrepresentations in
the promotional materials:
1. the expertise of the management team
• They represented that the officers and senior management possessed the requisite knowledge, expertise and
competence to take the existing quarry to a commercially operable quarry.
o At trial, it was found that the promoters did not have expertise in managing slate mines, nor to make
projections about anticipated output.
• ABCA finds that this position is unreasonable.
o The promotional materials correctly conveyed each director's expertise and background.
o It is unreasonable to infer that entrepreneurs promoting a quarry are representing that they know how to
operate specialized equipment in the quarry.

99
 o It is not unreasonable for the promoters to advertise their general management experience, which is
truthful.
o Making a representation about skills in management is insufficient to create personal liability if mistakes
are made in the management of the corporation
2. the involvement of a mining engineer
o The promotional materials indicate that a mining engineer will be an integral part of the quarry operation.
o Kucera did have extensive experience as a mining engineer
o There was a personal falling out between Kucera and the other directors, so that by the time the
promotional materials were distributed, he was only peripherally involved in the operation
o There is no evidence to show that the absence of the engineer was a cause in fact of the quarry's failure.
▪ Therefore, even if this is a misrepresentation, it does not give rise to damages.
3. compliance with regulatory requirements
o Trial judge found that the representation to comply with regulatory requirements was inaccurate because
the quarry only had a permit to produce 10,000 tonnes of shale, not the 22,000 tonnes promised in the
promotional documents
o When the representation was made in 2001, the quarry was not yet in full operation.
▪ The 10,000 limit was a "bulk sampling" limit used to prove the viability of the mine.
▪ It was never intended to be an operating limit.
o Therefore, there is no misrepresentation here. They eventually did receive a permit for 22,000 tonnes.
o Also, no causal links have been established here.
Question 2: Personal Liability of a director:
• Said v Butt: no personal liability in tort if a human agent of the corporation acting in the best interests of the
corporation caused it to breach one of its contracts… unless the person’s actions exhibit separate identity or
interest from that of the company (this exception is only for the tort of inducing breach of contract!!!!)
o Where a corporation prepares promotional documents to induce investments, corporation is presumptively
responsible; individual liability should be exceptional and secondary
• Separate legal existence of corporations is not a loophole, technicality, or mischievous stratagem - it is an
essential tool of social and economic policy
• In this case, it is reasonable for the investors to rely on representations made in the promotional materials and
presentations, but it is NOT reasonable to assume that the authors of the promotional materials were personally
warranting the information
• The legitimate "expectations" of the parties are a valid consideration in determining whether liability should
attach.
o The investors were all experienced, and knew that they were dealing with a limited liability corporation.
• On the facts, it is difficult to find any "independent tort" on the part of the defendants - they were at all times
acting within their authority as directors

Slatter’s main point:

• For there to be liability in negligent misrepresentation, the director must give his personal guarantee for his
statements and it must be reliable for the plaintiffs to rely on the statements made in his personal capacity, and not
in his capacity as a director
o This is an argument that a director has no special treatment compared to normal employees (can be found
liable if there is a duty of care, which will occur when the director gives a personal guarantee)
• Why Slatter’s right about ScotiaMcLeod not being good law:
o ScotiaMcLeod says that there is not liability for a director in ordinary negligence dealing with a third
party because there is not duty owed to third parties (it is owed to
▪ BUT: SCC said in Peoples that directors can owe a duty of care to third parties, as per s. 122 of
the CBCA
o Look at London Drugs: there is no special deal for employees (can be liable in negligence), so why would
there be a special deal for directors (only liable for torts that show a separateness of identity and interest)

100
KENT V POSTMEDIA (2015 ABQB) – FOLLOWS SCOTIAMCLEOD & HOGARTH – PERSONAL
LIAIBLITY OF A DIRECTOR IN TORT REQUIRES ACTIONS EXHIBITING SEPARATE IDENTITY OR
INTEREST FROM THE CORPORATION – SOME INTEREST IN SLATTER CONCURRING OPINION
Ratio: Personal liability in tort for a director of a corporation requires the director’s actions be themselves tortious or
exhibit a separate identity or interest from that of the corporation so as to make the act or conduct complained of their own
• There must be some activity on the part of the directors to take them out of the role of directing minds of the
corporation
Facts: Arthur Kent was a well-known journalist; he commenced action against Postmedia Network, National Post, Fisher
(publisher of NP), and Mr. Godfrey (CEO and director), alleging defamation based on an article they published, and that
they continued to publish and republish the alleged defamatory article after receiving notices setting out its defamatory
nature
• Fisher and Godfrey had control over the corporate defendant and could have directed that it ceased publishing of
the defamatory article; they are allegedly responsible because they allowed the distribution of the article to
continue
• Fisher and Godfrey both deny that they’re proper parties to the action; they say that they had nothing to do with
the situation
o Fisher and Godfrey are seeking summary dismissal of all claims made against them personally
Decision: Application for summary dismissal/judgment granted; no personal liability of the directors
Reasons:
- Personal liability in tort for a director of a corporation requires the director’s actions be themselves tortious or
exhibit a separate identity or interest from that of the corporation so as to make the act or conduct complained of
their own
o There must be some activity on the part of the directors to take them out of the role of directing minds of
the corporation
- To succeed in the defamation, claim against the directors personally, it must be proven that they, by any ACT,
communicated defamatory words to a third-party recipient; the act must be a deed of their own, and not that of the
corporation
o Counsel for Kent was trying to show that the defendants knew the article was defamatory, and that they
stepped out of their corporate role in their conduct
▪ ScotiaMcLeod: the tort must exhibit a separateness for the directors to be held personally liable
o There was no evidence of any deliberate act on the part of either Godfrey or Fisher that would constitute
defamation and no evidence that any actions by the directors were their own deeds, rather than that of the
corporations
- Note – Court says it was “guided by Slatter’s statement in Hogarth”
o attributing personal liability to the directors here would amount in granting personal guarantees for
Postmedia and National Post’s tort liabilities – and that’s not appropriate
REVIEW OF LIABILITY OF DIRECTORS TO THIRD PARTIES
Discussion points:
I. How values associated with tort law, on the one hand, and corporate law, on the other, collide in the area of D/O
liability to third parties.
II. How judicial responses to that collision create inconsistent lines of authority. See:
• Montreal Trust v ScotiaMcLeod Inc 1995 CanLII 1301 (ON CA), leave to appeal refused (“SM”)
• ADGA Systems International v Valcom Ltd 1999 CanLII 1527 (ON CA), leave to appeal to the SCC refused
(“ADGA”)
III. How the concurring decision in Hogarth v Rocky Mountain Slate Inc 2013 ABCA 57, leave to appeal to the SCC
refused (“Hogarth”), might prove to be a highly promising way forward.
Focus

101
 • Focus is not on D/O liability to the corporation under s. 122 (1)(b) of the CBCA/ABCA whereby D/Os must, in
relation to the corporation, “exercise the care, diligence and skill that a reasonably prudent person would exercise
in comparable circumstances.”
• The focus, instead, is on the D/O’s personal liability to third parties for torts committed in a business context or
otherwise while pursuing a corporate purpose.

ScotiaMcLeod (Ont CA) favours the corporate law view.

Accordingly:
• Absent “fraud, deceit, dishonesty or want of authority,” personal liability in D/Os “is rare.”
• Only extreme misconduct is captured as where directors have “shed their identity with the corporation”; or as
where the impugned actions “are themselves tortious or exhibit a separate identity or interest from that of the
company so as to make the act or conduct complained of their own.”
Disadvantages:
• Creates moral hazard because SM assumes that D/Os do not have liability for ordinary negligence; that is,
negligence does not generally exhibit the requisite separateness. Could encourage carelessness.
• Conflicts with the subsequent decision of Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68 which
states that D/Os can owe a duty of care to third parties, pursuant to s. 122(1)(b).
• Is inconsistent, at least somewhat, with the previous decision of London Drugs Limited v Kuehne & Nagel
International Ltd, [1992] 3 SCR 299 which says that junior employees are liable for their own negligence. That
is, SM creates a two tiered system.
Advantages of SM:
• Helps ensure that D/Os do not become functional guarantors of corporate operations. (See Slatter JA in Hogarth)
• Is arguably more consistent with with Salomon v Salomon & Co, [1897] AC 22 (HL), including that the
corporation is a separate legal entity.

ADGA (Ont CA), by way of contrast, favors the tort law view.
Accordingly:
• the “consistent line of authority in Canada holds simply that, in all events, officers, directors and employees of
corporations are responsible for their tortious conduct even though that conduct was directed in a bona fide
manner to the best interests of the company, always subject to the Said v. Butt exception.”[Said v Butt concerns a
defense to inducing breach of contract only.]
Disadvantages
• Forces D/O’s to backstop corporate operations. D/Os essentially face concurrent liability with the corporation
(per Slatter JA), thereby compromising aspects of Salomon.
• Might make D/Os conduct themselves with undue caution out of fear of liability.
Advantages
• Consistent with the SCC in Peoples (there can be liability in negligence) and London Drugs (ie: ADGA ensures
there is no longer any special deal for D/Os in a tortious context).

Slatter JA threads the needle between SM and ADGA by:

• Acknowledging that D/Os can be liable for ordinary negligence and not just for torts that exhibit a separateness,
such as fraud. It is thereby somewhat consistent with ADGA.
• Introducing corporate law values in assessing policy so as to make it more difficult for plaintiff to establish
liability. It is thereby somewhat consistent with SM’s reluctance to find D/Os liable to third parties in tort.
• Slatter JA’s concurring decision also has the advantage of being consistent with the SCC’s decision in London
Drugs such that D/O’s no longer get a special break on tortious liability over that offered to the junior employee.
• On a related front, Slatter JA implicitly critiques London Drugs for being too quick to find a duty of care was
owed by the employees who caused damage to the plaintiff’s property.

102
What follows the bright line offered by Slatter JA in the context of a director acting in the best interests of the
corporation with parties who have voluntarily dealt with a limited liability vehicle:
• absent a personal guarantee or other circumstance indicating that the director (or officer) has assumed personal
responsibility for his words, there is no duty to the plaintiff and therefore no liability for negligence causing pure
economic loss in an investment context.

Note: Matter has not been ruled on by the SCC to provide ultimate clarity

REVIEW OF CHAPTER 7

- We’ve looked at duties of directors under section 122 of ABCA (subject to the BJR)
o Duty of care – s 122(1)(b)  major upgrade from common law, which was the standard of the amiable
idiot
o Fiduciary duty – s 122(1)(a) 
- Peoples  Duty of care can be owed to third parties; then apply standard of care in statute.
o BJR: if action against director/officer under s 122, a go-to defence is the BJR.
▪ Need 2 things to rely on BJR:
• a/ Good process
• b/ Reasonable decision (doesn’t have to be a perfect decision, just reasonable)
o Van Gorkum case  they didn’t have the documents in front of them, terrible decision. Evidence showed
their process was bad.
- Fiduciary Duty – s 122 ABCA
o Taking a corporate opportunity
▪ Cook [ganging up on defendant, breach of fid duty, also fraud on minority, contaminated
attempted ratification]

103
 ▪ CanAero [leading case; fairness is touchstone in terms of corporate opportunity. Can
director/officer take an opportunity that belongs to corporation? Fairness is the deciding principle;
get away from “straightjackets” and formula. Elements to assess? Court delineates a few]
▪ Black [Black took corporate opportunity for himself; was supposed to sell Int’l or a newspaper.
The buyers walk up to him, and he takes the opportunity for himself instead of advancing it on
behalf of the corporation he was serving]
o Self-Dealing
▪ Some corporate history leading up to s 120 
• Dimo (only financial)/Zysko (could be emotional) -> how courts will approach s 120.
▪ Aberdeen -
o Competing Director
▪ Mashonaland -> CL has surprising tolerance for competing director; but this case isn’t great
anymore, especially with the rise of oppression actions. If a director serves on a competing
board, they’ll be subject to an oppression action and it’d probably be successful.
▪ Sports Villas: Court was prepared to say that if Dobbin was a competing director that would be a
breach of fid duty, but Dobbin was able to show that the business weren’t competing. If the two
businesses aren’t competing, you can’t be a competing director.
o Takeovers
▪ Disgruntled min shareholders may take the wrong bid. It’s very important to have the best
procedure because you’ll go under the microscope here.
▪ Maple Leaf -> Court agreed that special committee and board had exercised their business
judgement, it was reasonable, and there was no breach of fid duty
o Other Sources of Fiduciary Duty
▪ Tongue -> Even though directors don’t owe fid duty to s/hrs under s 122, they might owe a
fiduciary duty under other circumstances via common law
o Other statutory duties where dirs./offs can have liability
▪ Zwierschke -> Personal liability for failing to remit source deductions pursuant to tax legislation.

- Liability in tort to 3rd parties

o Inducing breach of K (McFadden, Pocklington – if the director’s conduct meets the test for inducement of
breach of contract, the director will be liable subject to the exception in Said v Butt)
o In negligence to creditors (Peoples)  under s 122, it can be owed to third parties such as creditors.
▪ We don’t assume that it’s owed, you have to show there’s a duty of care as a plaintiff, then go to
statute as articulating a standard.
o See the ADGA v SM debate; as well as discussion in Hogarth and Kent

- Liability writ derivative and oppression actions per Chapter 8.

o Directors can have personal liability in context of derivative action (action that shareholders bring on
behalf of corporation – if corporation suffered an injury due to the directors doing something wrong)
▪ Logistically difficult. Imagine you’re a min s/hr. Directors wronged the corporation, say, by
breaching fid duty. If they breach the fid duty, what are they supposed to do? Sue themselves!
Are they going to do that? Of course not! So, the purpose of a der action is to allow min
shareholders to bring an action on behalf of the corporation to hold the directors to account.
o Oppression action
▪ Personal action shareholders have against dirs. or others, depending on who the culprit is
▪ If the s/hr is oppressed by conduct of directors, there’ll be personal liability.

CHAPTER 8 – SHAREHOLDER RIGHTS AND REMEDIES

CHAPTER OBJECTIVES
- Shareholders can exercise control over the corporation by asserting numerous rights under the ABCA
104
 - An interested party may be able to bring an action in the name of the corporation in certain circumstances
o E.g. a derivative action
- The ABCA provides other remedies for the minority shareholders, including ordering a valuation and repurchase
of the shares by the company or the dissolution of the company.
o E.g. an oppression action

INTRODUCTION TO SHAREHOLDER RIGHTS

Categories of Rights Examples Sources
Statute Case Law
Basic Vote at any corporate ABCA ss 26(3), 139
shareholders meeting
Participate in profit
though dividends
Participate in distribution
of assets upon “winding
up”
Ordinarily maj rule, but
sometimes you need
“special maj” (2/3)
Shareholder Control S/hs elect & remove dirs. ABCA ss 106, 109, 122(4),
Over By ordinary resolution. 145, 147
Directors/Officers (51% v 49%)
AGM (to review ABCA s 155
performance of officers &
examine financial
statements)
Shareholder proposals ABCA s 135; although
(Varity Corp) limited by s 136(5) and
CBCA s 137
Control Over the Access to corporate records ABCA ss 23(1), 23(2)
Corporation Power to appt. an auditor ABCA ss 162, 163
Shareholder initiatives
(i) Proposals for corporate ABCA ss 102, 142
bylaws
(ii) Unanimous ABCA s 146; CBCA s 146
Shareholder Agreements
(USAs) – s/hs gain control
(iii) Requisition a meeting ABCA s 142; CBCA s 143
Control Over Minority Notice and conduct of ABCA ss 131, 132, 134(1) - Even an unintentional failure
Shareholders meetings to comply with statutory
CBCA ss 132, 135(1),(1.1) requirements is impermissible
[Re Upper Canada Resources;
Minister of Consumer and
Commercial Relations
- Entitled to “full, fair, and
plain disclosure,” s/hs must be
able to base decisions on the
most recent financial & other
important info available about

105
 the corp [Imperial Trust Co v
Canbra Foods]
- Whether s/h votes with the
majority or minority, an
individual s/h has the right to
have her vote recorded [Pender
v Lushington]
Rights of discussion ABCA s 136(1)(b) - The chairman of the meeting
CBCA s 137(1)(b) can’t end the meeting as his
own will/pleasure. [National
Dwellings v Sykes]
Special Rights in Special resolution (ie 2/3 ABCA ss 189(4), 173(1),
Event of Fundamental majority) 183(50, 190(6)
Changes (continuance; All shares vote ABCA ss 189(3), 176(3),
alteration in corporate 183(3), 190(4)
constitution; Right to dissent and to be ABCA ss 191(1)(a)-(e)
amalgamation; bought out and exit the
extraordinary corporation
sale/lease/exchange) Class vote ABCA s 176

Shareholder rights available: (contingent on nature of the share owned)

• Right to vote, right to participate in profits
• right to assets distribution on dissolution (after creditors are paid)
• right (default) to transfer shares (unless the shares are otherwise constrained)
• right to participate in meetings

Shares:
- Customized to whatever you want
- Common shares are voting shares
- Preferred shares are non-voting but may have other advantages
- S 139(1) ABCA: unless Articles provide, you get one vote per share at shareholder meeting
- Often a majority rule for resolutions, unless otherwise defined (special resolution = 2/3 majority)
- Cumulative voting: s 107 ABCA
o Cumulative voting may be authorized by either the statute or the corporate constitution.
o The idea is giving minority shareholders a shot at having someone voted in who represents their interests.
o “The cumulative voting procedure allows the minority s/hr to concentrate her votes.”
▪ Cumulative voting ensures that A has at least one person on the Board

Shareholders control
- Election and removal of directors
o S 108, 109, 119(6)
o S 109: removed by ordinary resolution at a special meeting via simple majority; Shareholders can also review
- Election by ordinary resolution, simple majority [s 106(3)]
- Type of voting: cumulative or class (ie. employees hold right to vote in 1 director)
- Shareholders have a substantial ability to control the corporation as directors are accountable to shareholders;
o They have to place financial statements on the table (which is a strong indicator of personal performance;
is the corporation making money, and how much?)
o Often done at an AGM [s 155]
- Shareholder Proposals: [s 136 ABCA] – Entitled to vote at AGM, may submit a proposal and the corporation must
circulate it

106
 o S 136(5): corporation doesn’t need to comply if (b) s/h is addressing personal claim, or purpose of
proposal is for general economic, political, racial, religious, or social causes [Varity Corp]
Class Voting:
- Sometimes, shareholders of a certain class get to elect a director.
- Classes of shares can be made so that you can vote for more than one director [ss 111(3), 122(4)]
- Employees holding shares in the corporation have the right to elect one director
- Duty is ultimately to the corporation, but can also act for these shareholders (special but not exclusive
consideration)

Voting (Pooling) Contracts

• Written agreements between 2 or more s/hs on how to vote shares [s 145] – ie, A and B have a voting contract: A
votes all shares for B to be director, and B votes all shares to A to be a director.
o Could sue other side if they don’t comply (Clark v Dodge -> can bring an action for specific
performance); ABCA s. 145
o These are binding agreements (confirmed by case law)
Removal of Directors:
o s 108, 109, 119(6)
o s 109: removed by ordinary resolution at a special meeting via simple majority
o Shareholders can also review

Proxy and Proxy Solicitation:

o Sometimes shareholders will vote in person, but sometimes by proxy
o S. 131(3)  can participate in a meeting over the phone if:
▪ (a) the articles/bylaws so provide or
▪ (b) if all the s/hs who are entitled to vote at the meeting consent

Control over the corporation

- By accessing information; accessing financial information at the AGM
- Limited access to corporate information provided for in legislation, but common law may give rights
o You are only entitled to information relevant to your position in the corporation
- ABCA, s. 23– access to corporate documents
- Shareholders can also appoint an auditor to review a corporation [ss 162, 163]
o Small corporations do not have to have an auditor, but distributing corporations must
- Proposal of corporate bylaws
o S 102(1): director may make, amend, repeal by-laws but they need s/h approval via a general
resolution
o S 102(5): Shareholder is entitled to vote in accordance with s 136 and may put forward a proposal to
make, amend, or repeal any bylaws
o S 23: Provides a list of who gets to see what, and what shareholders are entitled to access
o S 163: shareholders (other than those of a distributing corporation) may resolve not to appoint an auditor
(should be a small corporation)
- USAs
o Give shareholders some control. This is important especially in a smaller corporation.
▪ A statutory agreement amongst s/hs [s 146]
o The USA becomes part of the internal constitution of the corporation
o S 101: Directors manage corporations, subject to the USA
o Courts not bound by USAs. Under s 242, they can make rulings they see fit under the oppression action:
▪ Restrictions on the right of the directors to manage
▪ Evaluation process to set the price of shares
▪ Restrictions on the transfer of shares (ex: a right of first refusal)
▪ Shotgun clause (private companies):
107
 • When shareholder A offers to buy Shareholder B’s shares, shareholder B has the power
to say now, and purchase A’s shares at the price that A offered for B’s shares
• Put incentives on shareholder to come up with a fair price.
- Minority shareholders:
o Procedural protections are in place: notice and conduct in meetings
o S 131: Deals with convening a proper meeting: Even an unintentional failure to comply with these
restrictions will result in a failed meeting.
▪ Majority rule works but if you don’t follow the statutory provisions, the meetings and any
resolutions passed at them are VOID.

Special rights in the event of fundamental changes:

o What are fundamental changes?
▪ Continuance; alteration; amalgamation; extraordinary sale; lease of exchange
o Continuance:
▪ Corporation is incorporated in one jurisdiction and moves to another
▪ You have to examine whether it’s permitted (ABCA s 189); it is permitted SUBJECT to the
exceptions in the act
• You must have a vote, which must be carried by special resolution (2/3 majority)
[189(4)]
• Each and every share has a vote (not just voting shares, even non-voting shares) [189(3)]
• There is a right to dissent (dissenting s/hs have a right to dissent, and then their shares are
bought out at FMV) [191(1)(d)]
• You need to continue your debt
o Extraordinary sale, lease or exchange
▪ Section 190
▪ there must be a vote carried by special resolution (190(6))
• When you’re making big changes to the corporation, need to have special protections for
people who don’t want to go along with it
▪ All shares vote (s 190(4))
o Alteration: Corporate constitution can be amended
o Amalgamation:
▪ A procedure under corporate statute where co A & B combine into one
▪ Amalgamations can be motivated for business/tax reasons (Van Gorken)

4 Kinds of Fundamental Special Resolution (2/3 All Shares Vote Right to Dissent and to be
Changes Majority) Bought Out
Continuance S 189(4) S 189(3) S 191(1)(d)
Amending articles S 173(1) S 176(3) S 191(1)(a)(b)
Amalgamation S 183(5) S 183(3) S 191(1)(c)
Extraordinary Sale, Lease, S 190(6) S 190(4) S 191(1)(e)
or Exchange
- Dissolution:
o Dissolving a corporation means terminating the existence of the corporation
o If the reason is insolvency, use the Bankruptcy and Insolvency Act, otherwise there are provisions in
ABCA which guide the process
o Relevant statutory sections:
▪ S 207: Stay of dissolution and/or liquidation if corporation is found to be insolvent
▪ S 211: Director/shareholders can seek dissolution
▪ S 212: Proposal for voluntary dissolution and sale (really just means of terminating the
corporation)

108
 ▪ S 268: Annual reporting  if you fail to file the annual returns document, the registrar of the
corporation can dissolve the corporation

INTRODUCTION TO SHAREHOLDER REMEDIES

KINDS OF PERSONAL RIGHTS AS A SHAREHOLDER:
o Right to vote
o Right to timely and informative notice of company meetings
o Right to have proxies, if properly executed counted
o Right to inspect records
o Shareholder proposals
o Right to appoint and auditor
o Bylaws: propose, amend, repeal
o Right to requisition meetings
o Right to enter into USAs
o Rights triggered on fundamental change and to participate in the meeting
o right to sue for breach of fiduciary duty (Tongue)
o right to sue in oppression
o right to advance a derivative action
▪ Note: the derivative action can be brought by an individual but is not on behalf of the shareholder
- Whether there is an oppression action or a derivative action, you need to qualify as a complainant [s 239(a)]

OPPRESSION V DERIVATIVE ACTION

The derivative action
• allows a complainant to sue on behalf of the corporation for a wrong done to the corporation.
• Individual must receive leave to bring a derivative action
o Because it allows individual complainants to represent the corporation, and because any successful claim
is binding on all shareholders, Canadian corporate statutes require a complainant to first obtain leave of
the court before bringing a derivative action.
o The leave requirement ensures that not just anyone can bring a claim on behalf of the company, and that
any such claim is brought in good faith.
o It thereby prevents both a multiplicity of proceedings as well as unmeritorious suits.
• The action belongs to the corporation
• Harm to the individual shareholder is indirect (e.g. share value dropping)
• Not a personal action

The oppression remedy

• allows a complainant to sue on behalf of him or herself for a wrong he or she suffers personally as a result of
corporate conduct.
• Canadian corporate statutes do not require leave before seeking relief under the oppression remedy.
• Under the oppression remedy the complainant is not seeking to represent all shareholders, only him or herself, and
any remedy granted by a court is not binding on all shareholders.
o There is also no concern about a multiplicity of proceedings.
• The absence of a leave requirement, and the broad, flexible nature of the oppression remedy make it in some
respects more appealing to litigants seeking a remedy for alleged corporate malfeasance.

OPPRESSION REMEDY – FOR DIRECT HARMS

- A personal right to have your reasonable expectations protected under the legislation
- Under ABCA s 242, the court has broad discretion in awarding remedies (not just conventional damages)
- In oppression cases, what is important is the unfair result, not the state of mind (no requirement for bad faith)

109
 o It is fact specific and requires a more rigorous burden of proof

TEST FOR OPPRESSION ACTION:

- 1/ Are you a complainant listed under s 239 ABCA (standing question)?
o a/ Shareholder
o b/ Director or officer
o c/ Creditor (under a derivative action [s 240] or under an oppression action [s 242]
o d/ “Proper person”: any person who, in the discretion of the court, can be given status as a complainant
(basket clause)
- 2/ Is the standard met for an oppression action? [BCE]
o Two step test: (for establishing oppression)
▪ 1/ Does the evidence support the reasonable expectation by the claimant?
▪ 2/ Does the evidence establish that the reasonable expectation was violated by conduct falling
within the terms “oppression,” “unfair prejudice,” or “unfair disregard” of a relevant interest?
• Must have: wrongful conduct, causation, and establishment of compensable injury
- 3/ What remedy is being requested?
o s 242 gives broad discretion [Note: Ask for more than one]

DERIVATIVE ACTION – FOR INDIRECT HARMS

- Not a personal remedy; shareholder has to bring the action in the name of the corporation, on behalf of the
corporation
o Where the injury is indirect to the shareholder (ex: lower dividends) it is a derivative action, not a
personal right
▪ This is an indirect loss/harm (oppression must be a direct loss)
- Only about rights of the corporation that have been violated
o For example; directors taking a corporate opportunity.
o The directors that are ordinarily commencing actions on behalf of the corporation are refusing to do so, so
shareholders can seek to redress an injury to the corporation on behalf of the corporation via an order
from the courts
- Derivative action as a vehicle
o Derivative action is merely a vehicle for actions that arise according on the facts
o The shareholders apply for leave to bring a derivative action, but the derivative action is not an action
itself, leave granted allows the shareholders to bring an action of e.g. negligent misrepresentation on
behalf of the corporation
- Shareholder must be granted leave to make a derivative action
- Common examples of derivative actions are:
o Breach of fiduciary duty
o Breach of statutory requirements
o Diversion of an asset or a corporate opportunity from the corporation
- General rule: when a breach of a duty owed to the corporation and the loss is to the corporation, a derivative
action is typically sought
o EXCEPTION:
▪ If they can show that they were affected differently than the corporation by the breach, then you
can bring your own personal action in oppression (even if its effect is different in terms of
indirect loss/effect)

STEPS FOR BRINGING A DERIVATIVE ACTION (MOLOO V PATHAK)

- 1) Have standing as a complainant under s. 239 of the ABCA
- 2) Bring an application for leave to bring an

110
 - 3) Three requirements under s 240(2) to commence a derivative action (court must approve the action for it
to proceed):
o Reasonable notice to the board
o Complainant is acting in good faith
o The application is in the interests of the corporation
▪ This means there must be a prima facie case

RELIEF FROM OPPRESSION OR UNFAIRNESS

- Oppression: conduct that is BURDENSOME, HARSH, or WRONGFUL

HERCULES MANAGEMENT V ERNST & YOUNG (1997 SCC) – NEGLIGENCE BY FINANCIAL

AUDITORS - ANNS TEST – PRIMA FACIE DUTY TO SHAREHOLDERS OBVIATED BY POLICY
REASONS – RULE IN FOSS V HARBOTTLE - DERIVATIVE ACTION COULD HAVE BEEN BROUGHT
ON BEHALF OF CORP
Ratio: Shareholders cannot sue auditors for negligent preparation of financial statements on an individual basis if those
statements were not intended to act as personal investment advice.
• However: shareholders can collectively, under a derivative action, bring an action against auditors for negligence
on the basis that it prevented them from collectively exercising their power to supervise management.
o When such negligence causes damage to the corporation, the suit is brought on the corporation's behalf
(as a derivative action)
Issue: Whether and when auditing accountants owe a duty of care in tort to shareholders of the corporation who claim to
have suffered losses in reliance on audited financial statements? Is this a matter that should have proceeded by way of
derivative action?
Facts: Northguard holdings (NGH) and Northguard Acceptance (NGA) carried on business of lending and investing
money;
• Guardian was the sole s/hr of NGH and it held non-voting shares in NGA; Hercules was also a shareholder in
NGA
• NGA and NGH hired Ernst to perform audits of their financial statements and the audits were done very poorly
• Both NGA and NGH went into receivership in 1984
• Most certainly, NGA and NGH, who hired the accountants, has an action for breach of contract against Ernst, and
likely a tort of negligent misstatement.
o Incontrovertible that they can advance those claims
o They did not, however, make those claims
• NGA’s shareholders (including Hercules) brought an action against Ernst, suing for loss of value in their existing
shares, breach of contract and negligence
o Hercules, the shareholder in NGS, specifically claimed a cause of action in breach of contract and
negligence
o If Hercules didn’t like the non-action of Northguard against Ernst, what could they DEFINITELY do?
▪ Derivative action – the shareholders faced indirect harms.
Issue: Do accountants who perform an audit of a company's financials owe a duty of care to shareholders who claim to
have suffered economic loss by relying on these audits?
Decision: Action dismissed; There was a prima facie duty of care based on the special relationship between Ernst and
Hercules, BUT policy reasons obviated a finding of a duty of care owed to individual shareholders (there was danger of
indeterminate lability for a finding of a duty of care because the shareholders here were not using the audited statements
for the precise purpose for why they were prepared)
Reasons:
• Application of the Anns Test for Novel Duty of Care:
o 1) Prima facie duty of care
▪ A prima facie duty of care will arise in a negligent misrepresentation action when it can be
said that:
111
 • A) the defendant ought reasonably to have foreseen that the plaintiff would rely on the
representation, and
• B) that the plaintiff's reliance was reasonable in the circumstances.
▪ Application to the facts:
• In this case, there is no question that the auditors owe the shareholders a prima facie
duty of care.
o A) It was reasonably foreseeable that shareholders would rely on financial
audits and that they would suffer harm if the reports were negligently prepared
▪ This is further reinforced by the fact that audited financial statements are
to be placed before the shareholders at each AGM, unless this
requirement is dispensed with by a unanimous vote of the shareholders.
o B) it was also reasonable for the shareholders to rely on the audited statements
o 2) Policy Consideration for negating the prima facie duty of care
▪ One of the main considerations is whether the scope of liability is sufficiently circumscribed (i.e.
does not give rise to indeterminate liability)
▪ It is necessary for the scope of the duty to be limited in the class of people it is owed to and the
statements it covers (only applies so long as the statement is used for its intended purpose)
• The defendant must know the identity of the plaintiff (or the class of the plaintiffs)
who would rely on their statements, but it also necessary for the plaintiff to rely on
the statements of the defendants for the statement’s intended purpose
o Audits are prepared primarily to reflect the company's position to protect the
company itself from undetected errors or wrongdoing, and to provide
shareholders with reliable intelligence to scrutinise the company's affairs and to
help them exercise control over the conduct and composition of the Board.
o The audits here were not prepared to assist the shareholders in making
personal investment decisions or any purpose other than the standard
statutory purpose
▪ The shareholders used the information as a basis to make personal
investment decisions.
▪ The shareholders were not using the audited statements for their
intended purpose, so the prima facie duty is negated for policy
reasons.
o 3. Assuming a special relationship, plaintiff must go on to establish:
▪ (a) An inaccurate or misleading statement was made
▪ (b) The Defendant must have acted negligently in making the statement (ie. statement was
not made with reasonable care);
▪ (c) The Plaintiff must have reasonably relied on the misrepresentation; and
▪ (d) The reliance must have resulted in financial detriment (damage)
- The rule in Foss v Harbottle
o The rule in Foss v Harbottle provides that:
▪ Individual shareholders have no cause of action in law for any wrongs done to the
corporation and that if an action is to be brought in respect of such losses, it must be
brought either by the corporation itself (through management) or by way of a derivative
action.
• This is a consequence of the fact that corporations are distinct legal entities from their
shareholders.
o In this case, the appellants allege that they were prevented from exercising their ability to monitor
management because the reports painted a misleading picture of the company's financial state.
▪ The shareholders should have brought this claim as a derivative action, but they did not do so.
▪ They are trying to bring an action on their personal behalves as individual shareholders

112
 • The problem here is that the wrong has been committed against all of the shareholders
collectively, because their collective ability to hold management to account was
impaired.
- Note:
o Hercules should have brought a derivative action, not an oppression action
o In short, Ernst & Young owed a duty to the CORPORATION AS A WHOLE.
▪ Therefore, a derivative action on behalf of the whole corporation is appropriate.
o This prevents management from choosing not to bring an action.
o Attorney fees are recoverable if successful.
o For an individual to be able to have a personal action, they must have experienced a unique or differential
harm
▪ So, if thinking of bringing an action and unsure of whether it is personal or not, you should make
a leave application for a derivative action so that you do not miss the limitation period

DELUCE HOLDINGS INC V AIR CANADA (1992 ONT GEN DIV) - OPPRESSION: UNFAIR
PREJUDICE/UNFAIR DISREGARD OF MINORITY INTERESTS; DON’T NEED A LEGAL RIGHT, JUST
AN INTEREST WITH A REASONABLE EXPECTATION – OPPRESSION CAN BE CARRIE OUT BY
MAJORITY SHAREHOLDERS
Ratio: Oppression can be found if the majority shareholder takes actions that are unfairly prejudicial to, or unfairly
disregard the interests (reasonable expectations) of the minority shareholders.
• Oppression is a personal cause of action, so it does not matter whether the corporation itself has been prejudiced
or not.
• Oppression does not require an injury to a legal right; injuries to interests will suffice; Majority shareholders can
act contrary to the oppression section even without ill intent.
Facts: Air Canada and Deluceco are 75% and 25% shareholders of Air Ontario.
- Air Canada has seven nominees to the Board of directors and Deluceco has three. Members of the Deluce family
were to manage the airline, while Air Canada remained arm's length.
- In 1991, Air Canada decided to outright acquire Deluceco's interest in Air Ontario.
- The Unanimous Shareholders Agreement allowed Air Canada to acquire Deluceco's interest if Stanley and
William Deluceco each cease managing the company.
o Another clause calls for arbitration in the event of a dispute over the value of the shares.
- Air Canada terminated the Deluces’ employment and moved to acquire the Deluceco shares.
- The Deluces disputed the valuation of their shares and claimed that Air Canada’s conduct amounted to
oppression, by which remedies can be granted under s 241 of the CBCA, and would mean that the purported
exercise of the arbitration clause was of no force and effect
Issues: Was Air Canada entitled to fire Stanley and William Deluce as managers for the purpose of advancing its own
corporate objectives, or does this constitute "oppression" of the minority shareholder Deluceco? Can Deluceco rely
on the oppression remedy regarding the valuation of its shares, or must it go through arbitration as provided for in the
USA?
Decision: Deluceco’s motion to stay the arbitration proceeding was allowed; Air Canada’s conduct was oppressive to
Deluceco as minority shareholder
Reasons:
- True purpose of Air Canada’s conduct was for Air Canada to acquire airlines, NOT because Will Deluce
was incompetent as they stated:
o Air Canada argues that terminating William Deluce as manager was amply justified and in the best
interests of Air Ontario due to his poor oversight of operations and handling of the inquiry into the Air
Ontario jet crash at Dryden.
▪ However, the timing is suspect.
▪ Just before Deluce's termination, Air Canada's representative had indicated at a Board meeting
that he had confidence in Deluce's managerial abilities.

113
 ▪ A letter was written to Deluce before his termination suggesting that the reason for the
termination was to bring into effect Air Canada's policy of acquiring 100% control in regional
airlines.
o The Court finds that the true purpose for firing Deluce was to enable Air Canada to acquire 100%
ownership in the corporation.
- Oppression
o Reasonable Expectations of Deluceco
▪ A shareholder interest is intertwined with a shareholder’s reasonable expectations; an employer’s
actions need not infringe on the shareholder’s personal rights for there to be an action
• The oppression action protects the reasonable expectations of the minority shareholders
▪ Intentions at the time the Unanimous Shareholder Agreement was created
• It was not the intention of the parties at the time the shareholders agreement was executed
to allow Air Canada to unilaterally terminate the Deluces employment for the sole
purpose of allowing Air Canada to acquire Deluceco's shares.
▪ Only a termination that has as its main objective ensuring the best interests of Air Ontario
will be valid, according to the USA
• Deluceco had a reasonable expectation as shareholder, that, in the absence of termination
of Bill Deluce’s employment for reasons dealing with the best interests of Air Ontario,
the management/shareholder realtinoship between Air Canada and Deluce family would
remain as envisaged in the USA
• Evidence here strongly indicated that the termination was in the interest of Air Canada’s
purposes, and not Air Ontario
o Air Canada’s conduct breached the reasonable expectations of the minority shareholders
▪ Air Canada's conduct constitutes oppression against Deluceco's minority shareholder interests.
▪ The conduct is unfairly prejudicial to, or unfairly disregards the interests of Deluceco as a
minority
- Actions taken in good faith by the majority shareholder in the interests of the corporation may still oppress
the minority shareholders.
o The minority shareholders could still sue under the oppression remedy if their personal interests are
affected
• Conduct which, in the first instance, causes harm to the company (supporting a derivative action), will not deprive
a plaintiff from seeking a personal remedy for their personal harm by way of an oppressive action
Note:
- It’s called oppression remedy in legislation, but it’s really the oppression action
o You have to establish oppression occurred before you can get the remedy.
o Oppression protects the reasonable expectations of the complainant
- Another possible argument: breach of the USA [probably want to argue this in the alternative]
o S 248: you can get a compliance order = specific performance
o What could you argue was a breach of USA here?
▪ Breach of the duty of honesty and good faith in the performance of contracts (Bhasin)
o Organizing principle of good faith in performance of contract (Bhasin)
▪ As a result of the principle, there is the rule that parties must act honestly and reasonably in
performing their contracts
▪ Duty of honesty and good faith performance
JUDICIAL INTERPRETATION
WHAT IS OPPRESSIVE OR UNFAIR CONDUCT

BCE INC V 1979 DEBENTUREHOLDERS (2008 SCC) - TEST FOR OPPRESSION; OPPRESSION IS AN
EQUITABLE REMEDY AND FACT SPECIFIC; FACTORS FOR UNFAIR AND PREJUDICIAL CONDUCT;

114
FAILURE TO PROTECT AGAINST A POTENTIAL OPPRESSION MAY OBVIATE DUTY OWED BY
CORPORATION
Ratio: Two step test for Establishing Oppression (once standing exists):
1. Does the evidence support the reasonable expects of claimant?
2. Does evidence establish that the reasonable expectation was violated by conduct falling within the terms
“oppression,” “unfair prejudice,” or “unfair disregard” of a relevant interest?
o Must have: wrongful conduct, causation, and establishment of a compensable injury
- If aggrieved party could have taken steps to protect themselves, then an oppression claim may fail.
Facts: Ontario Teacher’s Pension Plan leveraged a buy-out of all BCE shares.
- BC, a wholly owned subsidiary of BCE, agreed to guarantee $30 billion of the debt BCE would incur to support
the purchase
- BC’s debentureholders (D) resist because, BC’s increased liability would downgrade the value of their debentures
(by 20%) while conferring a benefit on the shareholders by way of a premium (40%)
- The buy-out first had to be approved by the court as “fair and reasonable” under s 192 of the CBCA
- Debentureholders brought an oppression action under s 241 CBCA and challenged the approval of the plan of
arrangement under s 192 as not being “fair and reasonable”
- Trial judge held in favour of BCE, denying oppression action and finding that the deal was fair and reasonable
under s 192 of the CBCA
o Court of Appeal reversed the decision, finding that BCE failed to show that the transaction was fair and
reasonable under s 192 of the CBCA
Issue: Was the decision by BCE oppressive to the debentureholders?
Held: Appeal allowed; debentureholders failed to establish oppression under s. 241; they had reasonable expectations that
their interests would be considered by the directors in making their decision, but those expectations were fulfilled
Reasons:
- Preliminary Observations:
o 1) Oppression is an equitable remedy - it seeks to ensure fairness.
▪ It gives the court broad jurisdiction to enforce not just what is legal but what is fair.
▪ It also looks to commercial realities
o 2) oppression is fact specific
▪ What is just and equitable is judged by the reasonable expectations of the stakeholders in context
and in regard to the relationships at play.
• The oppression remedy recognizes that a corporation is an entity that affects many
different stakeholders whose interests may conflict.
• All stakeholders are entitled to "fair treatment" - which means what they can "reasonably
expect."
- First step to an Oppression Action:
o Establish that an individual has standing as a claimant to bring an oppressive action, under s. 239(b) of
the ABCA
▪ 239(b): Lists persons who have standing to bring an oppressive action (e.g. registered holder,
director, creditor, etc.)
• Debentureholders are included within the persons listed in 239 (as registered holders)
- Two Prong Test to Showing Oppression if the Claimant is one who qualifies to bring an oppression action
under s. 241 of the CBCA:
o 1) Evidence supports that the claimant’s reasonable expectations have been breached
▪ Reasonable expectation factors:
• General commercial practice;
• the nature of the corporation;
• the relationship between the parties;
• past practice;
• steps the claimant could have taken to protect itself;

115
 • representations and agreements
• fair resolution of conflicting interests between corporate stakeholders
o 2) Evidence establishes that those reasonable expectations were violated by conduct falling within the
terms oppression, unfair prejudice, or unfair disregard
- Step 1: Reasonable expectations of shareholders
o Directors owe a fiduciary duty to the corporation, and ONLY to the corporation (subject to Tongue
exception).
▪ Directors may be required to make decisions that prejudice the interests of some stakeholders
relative to others, all in the corporation's interests.
▪ The stakeholders' reasonable expectation, therefore, is that the directors will act in the best
interests of the corporation.
o Fair treatment is fundamentally what all stakeholders are entitled to reasonably expect
- Step 2: Conduct that amounts to unfair prejudice, unfair disregard, or oppression
o Those forms of conduct are not watertight compartments, they overlap
o Oppression – conduct that is coercive, abusive, and suggests bad faith
▪ Burdensome, harsh, wrongful conduct
o Unfair prejudice – “generally seen as involving conduct less offensive than ‘oppression’. Unfair
disregard – “least serious of the three injuries, or wrongs, mentioned in s 241.
▪ less culpable state of mind that has unfair consequences
▪ Examples:
• squeezing out a minority shareholder,
• failing to disclose related party transactions,
• changing corporate structure to drastically alter debt ratios,
• adopting a "poison pill" to prevent a takeover bid,
• paying dividends without formal declaration,
• preferring some shareholders with management fees,
• paying directors' fees higher than the industry standard
o but this is really a breach of fiduciary duty – a derivative action: because the
impact on shareholders is only indirect
o Unfair disregard – ignoring interests as being of no importance; viewed as the least serious conduct
▪ Examples:
• Favouring a director by failing to properly prosecute claims
• Improperly reducing a shareholder’s dividend
• Failing to deliver property belonging to the claimant
- Application to the facts:
o What are the claimed breaches of the debentureholders’ reasonable expectations, and do they fall
within the words of s 241?
▪ Debentureholders claimed that there was a reasonable expectation that the directors would act to
maintain the investment grade of the debentures
• The Court found that this was an unreasonable expectation
▪ They also claimed in alternative that they had reasonable expectations that the directors would
consider the debentureholders’ interests
• The Court found that this was a reasonable expectation, but that the expectation was met
by the directors, so there was no breach of reasonable expectations
• The best interests of the corporation, even given consideration of the debentureholders’
interests, favoured acceptance of the offer that was given to the directors
o The Directors considered the debentureholders’ interests, but made the decision anyway
▪ the directors decided that that they would fulfill legal obligations to the debentureholders, and
nothing else.
▪ They did not make any other representations that they would go beyond legal requirements.

116
 ▪ This fulfills the requirement to take their interests properly into consideration.
• The debentureholders COULD HAVE protected themselves by insisting that their
security interests take precedence over others, but they did not do so.
Comments (O’byrne):
- Remedy is not limited to being against directors.
o The conduct of other actors (ie, shareholders) may also support a claim for oppression
- Actual unlawfulness is not required; merely wrongful conduct is sufficient
- Unfair Prejudice Factors:
o Failing to disclose related party transactions (but may be a breach of fiduciary duties, more supportive of
a derivative action)
o Poison pills: can be either oppression or derivative
o Preferring some shareholders with management fees: can be either oppression or derivative
▪ This can sound in oppression because there is a differential impact
o Paying directors fees higher than industry norm: breach of fid duty, therefore it’s derivative action

RE FERGUSON AND IMAX SYSTEMS CORP (ONCA 1983) - FUNDAMENTAL CHANGE IN

CORPORATION - MAJORITY S/HS MAKE DECISION TO DISADVANTAGE MIN S/HR (SQUEEZE-
OUT) - OPPRESSION LOOKS AT WHOLE BUSINESS CONDUCT, FAIRNESS – PROCEDURES
FOLLOWED, BUT THEY WERE TO HURT MS. FERGUSON – RESOLUTION BY S/HS DENIED
Ratio: If the majority shareholders deliberately make a business decision that is intended to disadvantage a minority
shareholder, then the minority shareholder can sue for oppression
Facts: Three husbands (H) and wives (W) behind Imax. For each couple, the husbands got common shares (voting) and
the wives got non-voting shares
- Ms. Ferguson’s shares are ‘class B non-redeemable shares’ (ie cannot be forced to sell it back to the company)
o Ms. Ferguson also received dividends from her shares
- Ms. Ferguson (one leaving) was working full time in the business (not for profit) while her husband was working
another job
- The Fergusons divorced and the shareholders collectively fired Ms. Ferguson from her work for the company, at
the ex-husband’s behest (squeezing out’ can be oppressive (BCE)).
o Mr. Ferguson said that it was not in the interest of the corporation to have non-working s/hrs (to justify
the dismissal).
▪ This seems like a fake reason, as the other wives did not work for the corporation
o Imax also wanted to reduce dividends owed to Ms. Ferguson to the minimum amount
- Mr. Ferguson and the rest of the s/hs brought a special resolution to make all of the class B shares redeemable (ie
effectively to oust Ms. Ferguson by amending the articles).
o This is a fundamental change under s 173(1)(e) in the ABCA
o fundamental changes require a class vote (ABCA s 176(4)), passed by special resolution (enhanced
majority of 2/3)
▪ the procedures were followed so the conduct was strictly legal
o This is oppression, because it will put Mrs. Ferguson out of the corporation (out of the growth of the
corporation) and affects her differentially from the other couples (because they are still married)
- The corporation says they just wanted a cleaner capital structure… but it wasn’t that messy.
o They only had Class A and Class B shares.
o The Court did not accept that argument
- For a remedy, Ms. Ferguson is seeking an injunction to retrain the company from a special meeting to vote on the
resolution
- The trial judge dismissed Mr. Ferguson’s application
Issue: Was this action to amend the articles and recall the class B shares oppressive to Ms. Ferguson? Sufficiently odious?

117
Decision: Appeal allowed; Court found that there was oppression by the majority shareholders and ordered that the
resolution not be implemented (remedy under s 242(3))
Reasons:
- Ms. Ferguson was entitled to reasonable expectations and legal rights
o Strict legal rights are not all that matter in the assessment of oppression; idea of fair and equitable
principles
o Differential impacts of the procedures here:
▪ Mrs. Ferguson was not receiving benefits that would be received by the other wives, who would
continue to benefit by way of their marriages
- Oppression arose because of:
o Wrongful dismissal
o Not declaring dividends
o The reorganization to redeem class b shares
- Reasonable expectations
o Even though amending the Articles was done legally, a s/hr is entitled to reasonable expectations,
and here Ms. Ferguson was had a reasonable expectation to share in the growth of the corporation
(especially given all the unpaid work she did and her strong role in the company)
- The case illustrates something very helpful:
o We have a fundamental change because it alters the capital structure of the corporation
o Amendment is a fundamental change under s 173(1)(e)
o Class vote required under s 176(4)
o Need a special resolution (2/3 majority of that class) for a fundamental change
▪ Ms Ferguson – votes no, doesn’t want to change rights associated with class B shares
▪ Ms Kerr and Ms Koiter – vote yes, change those rights
o You might say, what’s wrong with this? The vote was according to the rules. You lost the vote.
▪ But the oppression remedy doesn’t look just at strict legalities – it looks at the whole business
context.

DOWNTOWN EATERY V ONTARIO (2001 ONCA) – BAD FAITH INTENTION BY DIRECTORS IS NOT A
REQUIREMENT OF OPPRESSION ACTION – WRONGFULLY DISMISSED EMPLOYEE CAN SUCCEED
IN OPPRESSIVE ACTION FOR OUTSTANDING JUDGMENT (ONLY STATEMENT OF CLAIM AT TIME
OF RE-ORGANIZATION)
Ratio: In an oppression action, provided that it is established that the plaintiff has a reasonable expectation that a
corporation’s affairs will be conducted with a view to protecting his interest, the conduct complained of need not be
undertaken with the intention of harming the plaintiff
Facts: Two people own nightclubs in Toronto. An employee at one, Alouche, is dismissed, and sues for the tort of
wrongful dismissal and wins
- When he goes to execute his judgment against his prior corporate employer, he finds that the two defendants have
reorganized and liquidated the corporation and therefore the employee can’t collect his money
o He wasn’t a judgment creditor, he’d only filed a statement of claim (at the time that the former employers
reorganized)
o Alouche claimed that the conduct of the directors, specifically the corporate reorganizing, was oppressive
or unfairly prejudicial
- Trial judge found that there was no oppression.
o There was no bad purpose behind reorganizing the corporation to hurt the claimant and move the money
around to deprive him of his claim;
o note – judge is wrong here; you don’t need to show mala fides (bad faith).
Issue: Were the actions by D’s oppressive despite the lack of intention? Does oppression require any sort of intention?
Decision: Appeal allowed; the oppression action against the employers was successful
Reasons:
- Standing issue
118
 o Alouche is not a s/hr, director, or officer  but Alouche fits into “any other person” as defined in s. 245
of the OBCA
o The court has the discretion to grant standing (ABCA s 239(b))
▪ Also includes basket clause for “any other person”
- Oppression
o Provided that is established that the complainant has a reasonable expectation that a company’s affair will
be conducted with a view of protecting the complainant’s interest: oppressive conduct need not be
undertaken with the intention of harming the complainant
o Court takes oppression remedy further:
▪ Claims that the plaintiff here had a reasonable expectation that there would be some money
retained in a reserve to satisfy the judgment.
o The effect of reorganization was unfairly prejudicial or unfairly disregarded Alouche’s interests
▪ The interest was that he stood to obtain judgment against his corporate employer and the
employer knew that the litigation was underway
▪ The defendants should have maintained reserve to satisfy the contingency that the plaintiff’s
claim may succeed. Failure to do so was a form of oppression.
- Also consider the two-step test from BCE: [O’byrne thinks it’s the same result regardless]
o BCE – IS the standard met for an oppression act?
▪ 1/ Does the evidence support the reasonable expectation of the claimant?
▪ 2/ Does the evidence establish this reasonable expectation was violated by conduct falling within
the terms of oppression, unfair prejudice, or unfair disregard?
o While some degree of bad faith is most likely the norm, this isn’t a requirement for oppression
o Employees who may become a claimant can have a reasonable expectation

OPPRESSION OR DERIVATIVE ACTIONS? IF DISTINCTION UNCLEAR, APPLY FOR LEAVE TO

BRING DERIVATIVE ACTION! – STEPS FOR DERICATIVE ACTION (MOLOO V PATHAK) &
RATIONALES FOR LEAVE APPLCIATION
Oppression vs Derivative Action:
• A shareholder’s “personal” cause of action arises when the corporation itself has no right to sue
• A shareholder seeking leave to commence a derivation action, by contrast, must be seeking to redress an injury to
the corporation where the corporation is the only person with a cause of action and thus the only person who can
sue
Steps for bringing a derivative action (Moloo v Pathak)
- 1) Have standing as a complainant under s. 239 of the ABCA
- 2) Bring an application for leave to bring an
- 3) Three requirements under s 240(2) to commence a derivative action (court must approve the action for it
to proceed):
o Reasonable notice to the board
o Complainant is acting in good faith
o The application is in the interests of the corporation
▪ This means there must be a prima facie case

Rationales for the requirement of a leave application in Malata:

• 1) Preventing strike suits  troublemaker, minority s/hr who wants to bring an action just to force a
settlement from the corporation
• 2) preventing meritless suits:
o The leave requirement ensures that not just anyone can bring a claim on behalf of the company,
and that any such claim is brought in good faith.
▪ It thereby prevents both a multiplicity of proceedings as well as unmeritorious suits.
• 3) avoiding multiplicity of proceedings

119
 o Note: concerns that justify forcing applicants to seek a leave for a derivative action are less acute for
closely held corporations (Malata)
Two views as to whether you can take what is essentially a derivative action and run it as an oppression action.
- 1/ Strict Approach
o If you have a complaint where there is a wrong done to a corporation, shareholder must apply for leave
and must run the case as a derivative action (strict/traditional approach)
o Complainant must have distinct harm to them in order to succeed under an oppression action
▪ This is the prevailing approach in Alberta
▪ Pappas v Acan; Hercules Management; Rea v Wildeboer; Icahn
- 2/ A more flexible approach (as per Malata)
o Overlap between oppression and derivative action; injury to corporation that causes harm to individual
can allow for proceeding by way of oppression (Malata)
▪ This was a temporary trend in Ontario (does not appear to be prevailing anymore re: Rea)
o If there’s no difference between the actions and can pursue either option, why would anyone bring a
derivative claim, which requires a leave application?:
▪ Monetary reason: If you want company to fund the litigation on an ongoing basis, a lot easier to
get that order when you proceed by derivative action – see s 241(d)
▪ Careful lawyering: courts may determine that your matter is derivative, and you will have lost
your claim if you didn’t apply for leave to bring a derivative action rather than an oppression
action (Hercules Managent)
Note:
• If you have free standing claims, proceed with them as free standing claims (not oppression), but you can also
argue that, collectively, the conduct amounts to oppression

PAPPAS V ACAN WINDOWS (NFLD SC 1991) - STRICT/TRADITIONAL APPROACH; LEAVE NEEDED

FOR DERIVATIVE ACTION WHERE THE WRONG IS AGAINST THE CORPORATION – DISALLOWED
OPPRESSION CLAIM IN PLACE OF A DERIVATIVE ACTION WHERE PERSONAL HARM WAS
INDIRECT
Ratio: No matter how an action is framed, if relief is sought against a wrong alleged to be done to a corporation, it is
DERIVATIVE; Derivative actions are where the damage has primarily been suffered by the corporation, and only
incidentally by an associated party.
Facts: Pappas, a s/hr, director, and creditor of Acan Windows, complains that the individual shareholders of the company
misappropriated corporate funds to the detriment of Pappas by encouraging him to purchase land, buy equipment, and pay
for renovations (claims it’s oppression)
- This looks like a breach of fiduciary duty (directors should not be misusing the corporation’s resources)… this
looks like a derivative action should have been brought
o Pappas also alleges beach of a shareholder’s agreement, negligent and fraudulent misrepresentation, and
conspiracy to defraud
- The defendants challenge the claim, saying that it’s NOT an oppressions action
o The defendants want to strike the statement of claim as they claim that this is a derivative matter, and
there was no leave application to bring the action
- Pappas seeks an order that leave isn’t required, or in the alternative, an order permitting the derivative action
Issues: Is the action an oppression action or a derivative action? Can the alleged oppressive actions of the majority s/hs be
considered as part of the act of the corporation or affairs of corporation to trigger the oppression provision?
Decision: Pappas’ action was dismissed; the damage was to the corporation itself, and there was only indirect harm to
Pappas (therefore, a derivative action should have been brought)
Reasons:
- Two rules from Foss v Harbottle:
o (1) an individual s/hr does not have a personal cause of action for a wrong done to the corporation
(corporation must pursue action, or s/hr can pursue only via derivative action)

120
 o (2) Individual s/hr can’t sue for a wrong done to the corporation if the majority has ratified it or if it can
be ratified
▪ s 243 repeals rule #2. Ratification is meaningless, but the court can take it into account.
• Test for striking a claim
o It must be "plain and obvious" that the plaintiff's statement of claim discloses no reasonable cause of
action for it to be struck down summarily.
• In certain cases, the actions of shareholders have been considered an "act of the corporation."
o If the company deliberately conducts its own affairs so as to cause hardship to the minority shareholders,
this may be sufficient to trigger the oppression remedy.
o Majority hareholders can be guilty of oppression (also seen in Deluce)
▪ Deluce and Imax cases have recognized that majority shareholders have a duty to treat minority
shareholders fairly, and to not withhold material information.
▪ Passive conduct may amount to oppression if pertinent information is deliberately withheld from
the minority shareholders.
• Other cases suggest that a breach of a shareholders agreement is a breach of a private arrangement outside
company affairs, and therefore is not oppressive conduct by the company itself (but that point has been
overtaken, it is not true)
o The fact that Pappas (shareholder) also lent money to the company does not influence the decision - he is
treated as an ordinary creditor.
o Overall, oppression is not made out here.
▪ Pappas is not being damaged directly, and oppression requires targeted action.
• The damage is to the corporation itself, there is no particular damage to Pappas.
▪ The action must be a derivative action.
• No matter how an action is framed, if relief is sought against a wrong alleged to be done to a corporation, it
is DERIVATIVE.
o Derivative actions are where the damage has primarily been suffered by the corporation, and only
incidentally by an associated party.
o OPPRESSION remedies are to compensate an associated party for losses that they suffer as a result of the
unfair and egregious acts of the corporation.
▪ That being said, it is possible for a court to award derivative relief at the same time as relief for
oppression. There is some natural overlap between the two remedies.
• In some instances, a plaintiff can bring both an oppression action and a derivative action
o However, if it is not possible to clearly separate the personal and derivate claims, then both claims should
be discontinued
o When there is saturation of the claims, you must bring a derivative action

REA V WILDEBOER (2015 ONCA) – OPPRESSION ACTION FAILS – NO DIRECT HARM TO

INDIVIDUAL THAT DIFFERS FROM LOSS OF OTHER SHAREHOLDERS OR THE HARM TO THE
CORPORATION – MISAPPROPRIATION OF CORPORATE ASSETS BY DIRECTORS
Ratio: The two causes of action (derivative and oppression) only overlap where the wrongs asserted have harmed the
corporation and also “directly affected the complainant in a manner that [is] different from the indirect effect of the
conduct on similarly placed complainants” – this more commonly happens with closely held corporations [this is the case
in Malata]
Facts: The appellant (Mr Rea), a minority shareholder and director, asserts oppression under s 248 of the CBCA against a
number of other directors of Martinrea,
• Rea alleged that the directors had misappropriated funds from Martinrea Int’l
o Rea was seeking to recover those funds for the corporation – says directors were siphoning money out of
the corporation
o Mr. Rea does not assert any personal loss.

121
 • The defendants argue that the action should be dismissed, as it is clearly a derivative action belonging to the
corporation (Martinrea), which requires leave from the court
• The motion judge struck the claim against the defendants
Issue: Should the proceedings be an oppression action or a derivative action?
Decision: Appeal dismissed; the shareholder here did not experience a personal wrong different from the loss experienced
by the corporation or the other shareholders, so there is no action in oppression
Analysis:
- Court acknowledges there can be an overlap between the two causes of action
o They say the “murky line” between oppression and derivative actions has all but disappeared
o Because the distinction can be murky (473)  make a leave application for a derivative action to be on
the safe side.
- Derivative action vs oppression
o A claim must be brought as a derivative action (with leave from the court) where it “seeks to recover
solely for wrongs done to a public corporation, the thrust of the relief sought is for the benefit of that
corporation, and there is no allegation that the complainant’s individualized personal interests have been
affected by the wrongful conduct”
o Alternatively, an oppression action, “the impugned conduct must harm the complainants personally, not
just the body corporate,” and the harm must be distinct from the harm suffered by all shareholders.
o Application:
▪ In this case, there is no overlap between the derivative action and the oppression remedy
▪ The appellants are not asserting that their personal interests as shareholders have been adversely
affected in any way other than the type of harm that has been suffered by all shareholders as a
collectivity
▪ No type of personal wrong is evident
- Impugned transactions
o The defendants sold overvalued equipment and land on unfair terms to Martinrea;
▪ You’d think this is definitely derivative because it’s a case of director’s in breach of their
fiduciary duties (not acting in the best interest of the corporation)
o The harm here is to the shareholders collectively as a whole, and not to any particular shareholder as an
individual
MALATA GROUP (HK) V JUNG (ONCA 2008) - FLEXIBLE APPROACH TO DERIVATIVE VS
OPPRESSIVE ACTIONS – NO BRIGHT LINE DISTINCTION BETWEEN THE ACTIONS – CLOSELY
HELD CORPORATION EXCEPTION AND COMPLAINANT WAS CREDITOR
Ratio: In some situations (such as a shareholder also being a creditor and the corporation being one that is closely held),
there is sufficient overlap between oppression and derivative remedies to allow for a corporation to advance a claim under
an oppression remedy, without seeking leave for a derivative action
Facts: Malata HK, Jung, and Chen are three shareholders of Malata Canada; Jung, Chen, and Malata HK are also subject
to a USA and Chen and Jung are also officers of the Malata Group
- Malata HK is a creditor of the Malata corporation
- Malata alleges Jung misappropriated funds, breached fiduciary duties as director to the Malata Group, and failed
to act honestly and in the best interest of the corporation
- Malata alleged that Jung’s conduct rendered the corporation incapable of repaying debt and claimed oppression
- The trial judge declined the relief sought by Jung to strike portions of the claim for being derivative in nature,
rather than oppression, and therefore requiring leave applications
Issue: Does leave always need to be received if there is overlap between oppression and derivative actions in the case of a
closely held corporation?
Decision: Appeal dismissed; oppression action successful; leave for derivative action not required because Malata was
both a shareholder and creditor of the corporation and the corporation was closely held, meaning that there was not the
same risk of frivolous law suits
Reasons:

122
 •The presence of a derivative action remedy does not preclude minority shareholders from pursuing personal
remedies for oppression
• Overlap between derivative and oppression actions can be found in the case of directors in closely held
corporations engaged in self dealing to the detriment of the corporation and other shareholders or creditors
o In disputes involving closely held corporations, there is less reason to require the plaintiff to seek
leave to the court.
o The small number of shareholders minimizes the risk of frivolous lawsuits, which is what that
requirements seeks to prevent against.
SHEFSKY (ABCA) – TRADITIONAL, STRICT DISTINCTION BETWEEN OPPRESSION AND
DERIVATIVE ACTION
• Harm must impact complainant personally, and not merely impacting the complainant as on of the shareholders of
the corporation, collectively
• Shefsky follows Rea from the ONCA

ICAHN PARTNERS V LIONS GATE (BCCA 2011) – DIRECTORS DILUTE SHARES TO AVOID
TAKEOVER BID WHILE REDUCING DEBT – MET REASONABLE EXPECTATIONS OF FAIRNESS
HELD BY THE SHAREHOLDER/BIDDER BY CONSIDERING INTERESTS, BUT PROTECTED BY
BUSINESS JUDGMENT RULE - ACTING IN THE BEST INTEREST OF THE CORPORATION
Facts: Mr. Icahn, billionaire, wanted to take over Lions Gate through a hostile bid. Mr. Icahn was a shareholder in the
company and he thought the board was incompetent and wanted to unseat the existing directors
- The board of Lions Gate voted to dilute shares (de-leverage –converting debt to shares by creating and selling
more shares) while it had $100m in debt.
o Due to the deleveraging transaction, Mr. Icahn’s share stake (proportion of the shares) fell, since there
were more shares after dilution.
o The shares were sold to parties more friendly to the existing Board of Directors
o The Board said they were using their powers for a proper purpose and for the best interests of the
corporation
o They claimed that it was just a collateral result that Mr. Icahn was diluted
- Mr. Icahn alleged oppression; he says the purpose of approving the transaction was to entrench the existing board
(improper purposes)
- The trial judge dismissed the application because he found that the directors’ primary purpose was to reduce the
company’s debt and he found that the transaction was in the best interest of the business
o The court found that Icahn did not have a reasonable expectation that his share would not be diluted.
o Also found that the oppression remedy does not exist for bidders (only for shareholders).
Issue: Does Icahn have standing to bring an action and was there oppression?
Decision: Appeal dismissed; no action in oppression and no derivative action
Reasons:
• Issue of Standing
o Chambers judge: Mr. Icahn is a s/hr, but he brought his claim as a bidder launching a hostile takeover bid,
and as such, he does not have standing to bring an oppression action
▪ CA disagrees, says he does have standing
• For the oppression remedy, primary importance must be given to the complainants' "reasonable expectations" in
determining whether corporate conduct should be characterized as oppressive or unfairly prejudicial, emphasizing
that the analysis in each case is highly contextual and fact specific.
o Corporate directors have a duty to "treat individual stakeholders affected by corporate actions equitably
and fairly."
• All that was required was to treat Icahn FAIRLY. It would be illogical to find that the directors should have
preserved the status quo contrary to the corporation's best interests merely to benefit Icahn.
o This is particularly significant since Icahn has a reputation for taking control of companies, extracting
vast amounts of money from them, and then leaving them on the verge of bankruptcy in a weakened state.

123
 oTherefore, actions taken by the Board to prevent Icahn from taking control of the company can be
justified as being in the company's best interests.
• Oppression and breach of fiduciary duty can overlap.
o Directors may breach their fiduciary duty to a corporation with improper purpose of causing harm to the
complainant.
o Then the complainant could show a separate and distinct claim.
o But CA seems intent on keeping the divide between oppression and derivative action
▪ If all you’re saying is that directors have breached fiduciary duties to the corporation, it is ad
derivative action that must be brought
• Was there an injury to the corporation deserving of a derivative action?
o Business Judgement Rule: do not second guess what directors decide to do, but to ask according to
Peoples whether they showed an appropriate degree of prudence and reasonableness and came to an
appropriate decision
o Board was required to treat Icahn fairly, but this does not preclude them from reducing Icahn’s debt.
▪ Where the interest of the corporation and the board collide, the board has to act in the best interest
of the corporation
SCOPE OF RELIEF AVAILABLE FOR OPPRESSION/DERIVATIVE ACTIONS
ABCA 242(3):
• Broad remedies for oppression available as listed, and judge has discretion to grant any remedy it sees fit

NANEFF V CON-CRETE HOLDINGS (1993 ONGDCT) – REMEDIES FOR OPPRESSION ARE VAST AND
WITHIN THE JUDGE’S DISCRETION TO FIND AN EQUITABLE AND FAIR OUTCOME – ORDER FOR
FAMILY COMPANIES TO BE SOLD TO HIGHEST BIDDER
Ratio: The remedies available for oppression are vast - and can be very harsh.
Facts: Alex was removed as an employee, manager and officer of Naneff family companies. He was excluded from
operations for three years. This was due to his parents disagreeing with girl he was dating.
• Parents (also directors and majority shareholders of Naneff companies) claim that his dismissal was due to poor
performance.
• Alex is 34 and had devoted his entire work life to the family business.
• Alex and his brother Boris were senior management in conjunction with father, who controlled the company.
o He was led to believe that he was intended to take over the business along with his brother when father
retired.
• Alex brought an oppression claim
Issue: Was the removal of Alex as a director and employee (and exclusion from exercising shareholder rights)
oppressive?
Decision: oppression remedy succeeds; order made that companies are to be put up for sale and sold to the highest bidder
Reasons:
• If a Court finds that a shareholder has been oppressed via s 248(2) of the Ontario Business Corporations Act
(equivalent of 242(2) of the ABCA), the scope of remedies is very broad - the court may order anything it deems
just.
o There are 14 enumerated types of relief (in ABCA, s 242(3))
o Evidence of bad faith or want of probity is NOT REQUIRED for the oppression remedy to be activated.
• Shareholder interests are intertwined with shareholder expectations.
o If a legitimate expectation has not been met, that may be sufficient to trigger the oppression remedy.
▪ They must be significant expectations, such that they could be characterized as a compact
between the corporation and the shareholder.
o There is a difference between shareholder expectations in small, closely held companies, and larger
publicly traded companies.
▪ In this case, Alex was led to believe that they would be co-owners, and would be partners in the
operation of the business.

124
 ▪ Their roles were consistent with fostering this expectation.
▪ This is a reasonable expectation in this context.
• Oppression
o Alex has been oppressed.
▪ His removal from his position of employment and his positions as an officer and director, and
exclusion from day-to-day operations and from any meaningful participation as a shareholder
constitutes oppression; breached the reasonable expectations in an oppressive manner
▪ The other family members have exercised their powers to intentionally deprive him of these
abilities.
▪ They also failed to repay loans Alex had made to the company, passed an amendment to the USA
affecting his shares but without allowing him to vote on the changes, refusing to pay severance
pay, and paying Mr. Naneff a $1.35 million bonus to remove assets from the corporation, and
otherwise moving funds around between other companies to frustrate Alex's involvement and his
benefits from his ownership interests.
• Wrongful dismissal from employment as a manager is only a factor to be considered to determine a pattern of
behaviour - it is not part of the oppression analysis itself.
o Wrongful dismissal is not grounds for an oppression remedy in and of itself
• Alex’s Wrongful Dismissal
o Remedy: damages in the form of two years’ salary
• 3 Potential Remedies Loss of Alex’s Equity Interest (overall shareholder position in the company):
o Restore Alex to the position he was in, as of Christmas 1990, and direct that he be employed on the same
terms as his brother.
o Order that Naneff companies be placed on the market on a going concern basis to the highest bidder, and
pay out Alex's proportionate share from the proceeds.
o Order that the other Naneff family members purchase Alex's shares at fair market value, without any
minority discount.
• Result:
o The Court finds that #3 is not possible, because valuation will be very difficult.
▪ Also, that would help the defendants accomplish the very objective they sought to achieve at the
outset by removing Alex from involvement in the companies.
o It is impractical to order #1 - everyone hates each other and cannot work together going forward.
o Therefore, the companies must be sold.

NANEFF V CONCRETE HOLDINGS (ONCA 1994) - OPPRESSION REMEDY MUST NOT GO BEYOND
WHAT IS REQUIRED TO RECTIFY THE OPPRESSION – MUST NOT GO SO FAR AS TO GIVE
SOMETHING THAT WOULD NOT BE REASONABLE EXPECTED
Ratio: When fashioning a remedy under oppression, the remedy must not go beyond what is required to rectify the
oppression; a remedy that rectifies cannot be a remedy which gives a shareholder something that even he never could have
reasonably expected
Facts: Same as above.
Issues: Is the remedy ordered by the trial court unjust? Is there a more appropriate remedy?
Decision: appeal allowed; correct remedy is for Mr. Naneff and Alex’s brother to purchase Alex’s chares in the
companies at fair market value
Reasons:
• Appellate courts should show high deference to trial courts in carving out remedies under the oppression heading
(based on construction of the statute).
• However: In the circumstance of this case, ordering the sale of the entire family company to compensate Alex for
his equity stake is manifestly unjust.
o The fact that this is fundamentally a family matter must be kept in mind when fashioning the remedy.

125
 o The remedy must be fair to both parties, including the other shareholders and directors that caused
the oppression.
▪ If the remedy goes beyond what is required to correct the oppression, then it is not authorized by
law.
▪ In this case, the remedy of ordering the sale of the company is punitive to Mr. Naneff, and that
goes beyond what the remedy should address.
• Giving Alex the opportunity to purchase the company would put Alex in a better position
than he ever would reasonably have expected while his father was living
▪ Correct remedy: Mr. Naneff should be given the opportunity to purchase Alex's shares and hence
retain control of the company he had spent his entire life building.
• Discretionary powers in issuing oppression remedies have two limitations:
o 1) they must only rectify the oppressive conduct
o 2) they may protect only the person’s interest as a shareholder, director or officer as such
▪ A remedy that rectifies cannot be a remedy which gives a shareholder something that even he
never could have reasonably expected

126