Table of Contents

1. AGENCY

ELEMENTS OF THE AGENCY RELATIONSHIP

GORTON V. DOTY [1937]
UNDISCLOSED PRINCIPAL
FRIEDMANN EQUITY DEVELOPMENTS INC. V. FINAL NOTE LTD [2000]
DISTINCTION BETWEEN ACTUAL, APPARENT, AND OSTENSIBLE AUTHORITY
FREEMAN & LOCKYER V. BUCKHURST PARK PROPERTIES (MANGAL LTD.) [1964]
WATTEAU V. FENWICK [1893]
DISTINCTION BETWEEN AGENCY AND EMPLOYMENT: QUESTION OF VICARIOUS
LIABILITY OF MASTER (EMPLOYER) FOR THE TORTS OF ITS SERVANT (EMPLOYEE)

5
5
5
5
6
6
7

DISTINGUISHED FROM AGENCY

671122 ONTARIO LTD. V. SAGAZ INDUSTRIES

7
7

2. PARTNERSHIPS

CANADA INC. [2001]

NATURE AND EXISTENCE OF PARTNERSHIP RELATIONSHIP

8
KHAN V. MIAH [2000]
8
HURST V. BYRK [2002]
8
INDICA OF THE PARTNERSHIP RELATIONSHIP
8
PARTNERSHIP ACT, R.S.O. 1990 (SS. 1-3)
8
POOLEY V. DRIVER [1876]
9
A.E. LAPAGE LTD V. KAMEX DEVELOPMENTS LTD. (AND MARCH) [1977]
10
LEGAL NATURE OF THE PARTNERSHIP
10
RE THORNE AND NEW BRUNSWICK WORKMANS COMPENSATION BOARD
10
PARTNERSHIP ACT, R.S.O 1990 SS. 1, 2, 3 (PA)
11
RELATIONSHIP AND NATURE OF THE RELATIONSHIP BETWEEN THE PARTNERS
11
MEINHARD V. SALMON [1928]
11
OLSON V. GULLO [1994]
11
RELATIONSHIP OF THE PARTNERS TO THE OUTSIDE WORLD
12
STROTHER V. 3464920 CANADA INC. [2007] (BBCA AND SCC)
12
DISSOLUTION OF THE PARTNERSHIP
13
HURST V. BYRK, [2000]
13
PARTNERSHIP ACT, SS. 6, 7, 11, 13, 24, 28-30, 33-35
14
WRAPPING UP PARTNERSHIPS & LIMITED PARTNERSHIPS AND THE QUESTION OF
CONTROL BY LIMITED PARTNERSHIPS
14
HAUGHTON GRAPHIC LTD. V. ZIVOT [1986]
14
LIMITED PARTNERSHIP ACT, R.S.O. 1990, S.13(1)
14
3. CORPORATIONS

14

(A) GENERAL CONSIDERATIONS

14

CONSTITUTIONAL CONSIDERATIONS OF CORPORATE LAW IN CANADA. CONCURRENT

PROVINCIAL AND FEDERAL POWER OF INCORPORATION. LIMITS OF PERMISSIBLE
PROVINCIAL INTERFERENCE WITH FEDERALLY-INCORPORATED CORPORATIONS
14
REFERENCE IN THE MATTER OF THE INCORPORATION OF COMPANIES IN CANADA [1913] 14
BONANZA GOLD MINING CO., LTD. V. THE KING [1916]
15

ABILITY BY INCORPORATING JURISDICTIONS TO GRANT EXTRATERRITORIAL CAPACITY

TO ITS CORPORATIONS
15
JOHN DEERE PLOW CO., LTD. V. WHARTON [1915]
15
APPLICATION OF THE CHARTER TO CORPORATIONS AND THE STANDING OF
CORPORATIONS TO CHALLENGE LEGISLATION ON THE BASIS OF THE CHARTER
16
CANADIAN EGG MARKETING AGENCY V. RICHARDSON [1998]
16
CONSTITUTION ACT, 1867, SS.91 (POGG), 91(15) AND 92(11)
17
CBCA, R.S.C. 1985 SS.3(4)-(5) AND 15(2)-(3)
17
(B) THE PROCESS OF CREATION OF A CORPORATION AND ITS EFFECT
17
PRE-INCORPORATION CONTRACTS
KELNER V. BAXTER [1866]
SHERWOOD DESIGN SERVICES INC. V. 872935 ONTARIO LTD. [1998]
MECHANICS OF CREATING A CORPORATION; DATE ON WHICH A CORPORATION IS
CREATED; QUESTIONING THE VALIDITY OF INCORPORATION
C.P.W. VALVE AND INSTRUMENTS LTD. V. SCOTT
EFFECT OF INCORPORATION
SALOMON V. SALOMON CO.
BASIC CORPORATE STRUCTURE: DISTINCTION BETWEEN ARTICLES AND BYLAWS;
THE DEATH OF THE ULTRA VIRES DOCTRINE
ATTORNEY GENERAL OF BELIZE V. BELIZE TELECOM LTD.
CBCA SS.9, 14, 15-18, 102-3(1) ET (2), 104-106, 109,

CORPORATE PURPOSE: THESIS

FORD V. DODGE
ANTI-THESIS
SHLENSKY V. WRIGLEY
CANADIAN SOLUTION
BCE INC. V. 1976 DEBENTUREHOLDERS [2008]
RECENT LEGISLATIVE DEVELOPMENTS IN BC AND NS
BC FINANCE STATUTES AMENDMENT ACT, 2012
NS COMMUNITY INTEREST COMPANIES ACT, 2012
(C) SHAREHOLDERS

17
17
17
18
18
18
18

19
19
115-116, 121, AND 256(2)
20
20
20
20
20
21
21
21
21
21
21

SOURCES OF FINANCING AVAILABLE TO A CORPORATION. BASIC DISTINCTION: DEBT

AND EQUITY. WHAT IS A SHARE: THE BASIC NATURE OF A SHARE AND BASIC RIGHTS
ON A SHAREHOLDER
21
SPARLING V. QUEBEC (CAISSE DE DPOT ET PLACEMENT DU QUBEC)
21
ATCO LTD. V. CALGARY POWER LTD.
22
BOWATER CANADIAN LIMITED V. R.L. CRAIN AND CRAISEC LTD.
22
BASIC LIMITATION OF THE POWER OF A SHAREHOLDER
23
KELLY V. ELECTRICAL CONSTRUCTION CO [1907]
23
AUTOMATIC SELF-CLEANING FILTER SYNDICATE CO. LTD. V. CUNINGHAME [1906]
23
THE MECHANICS OF ISSUING SHARES AND WHAT ASSUMPTIONS CORPORATE LAW
MAKES ABOUT THE NATURE OF SHAREHOLDERS AND ARE THEY STILL VALID (THE
CONTINUING VALIDITY OF THE DISPERSED OWNERSHIP ASSUMPTION
24
CBCA SS.6(1)(C)-(D), 24, 25, 26, 30, 34, 49(8), 50, 118, 189
24
SHAREHOLDERS RIGHTS TO DIVIDENDS AND THEIR RIGHTS UPON LIQUIDATION 24

INTERNATIONAL POWER CO. V. MCMASTER UNIVERSITY [1946]

24
THE MECHANICS OF DIVIDEND DECLARATION AND DIVIDEND PAYMENT
24
R. V. MCCLURG [1990]
24
CBCA SS. 42, 45, 211(7)(D)
25
SHAREHOLDERS THE CORPORATE FRANCHISE (1) WHEN CAN SHAREHOLDERS
VOTE (REGULAR AND SPECIAL MEETINGS); ON WHAT CAN SHAREHOLDERS VOTE;
AND THE PROCESS OF ORGANIZING SHAREHOLDER VOTES PROXY SOLICITATION 25
GOODWOOD INC. V. CATHAY FOREST PRODUCTS CORP [2012]
25
GOODWOOD INC. V. CATHAY FOREST PRODUCTS CORP [2013] (COSTS)
27
CBCA SS. 109, 133-135, 137, 139-143, 146, 173, 176, 183, 190, 210-211
27
SHAREHOLDERS THE CORPORATE FRANCHISE (2) OBLIGATIONS SHAREHOLDERS
HAVE TO THE CORPORATION AND TO OTHER SHAREHOLDERS; LIMITS ON THE RIGHT
TO VOTE IN THE ARTICLES/BYLAWS
27
JACOBSEN V. UNITED CANSO OIL & GAS LTD. (ALBERTA QB)
27
JACOBSEN V. UNITED CANSO OIL & GAS LTD. (NOVA SCOTIA SC)
28
BOWATER CANADIAN LIMITED V. R.L. CRAIN AND CRAISEC LTD. (REPEAT)
28
AND ON EXERCISE OF THE SHAREHOLDER FRANCHISE
28
TELUS CORPORATION V. MASON CAPITAL MANAGEMENT LLC (BCCA)
28
MANAGEMENT OF A CORPORATION

29

INTRODUCTION TO THE STRUCTURE OF CORPORATE MANAGEMENT

29
MERIDIAN GLOBAL FUNDS MANAGEMENT ASIA LTD V. SECURITIES COMMISSION
29
DIRECTORS AND OFFICERS; CURRENT STRUCTURE AND MAKE-UP OF THE BOARD;
AND THE EFFECT OF IMPROPER APPOINTMENT OF DIRECTORS
29
MORRIS V. KANSSEN [1946]
29
CORPORATE CRIMINAL LIABILITY
30
RHNE (THE) V. PETER A.B. WIDENER (THE)
30
CBCA SS.102(1), 115, 116, 118, 119, 121, AND 122(1)(B), SEE ALSO CRIMINAL
CODE SS.2 (DEFINITION OF ORGANIZATION, REPRESENTATIVE, AND SENIOR OFFICER), 22.2
30
DIRECTORS DUTIES OF CARE
30
PEOPLES DEPARTMENT STORES INC. (TRUSTEE OF) V. WISE
30
FIDUCIARY DUTIES INTRODUCTION BASIC STATUTORY DUTY
31
PEOPLES DEPARTMENT STORES INC. (TRUSTEE OF) V. WISE
31
THE DUTY OF SUPERVISION
31
IN RE CAREMARK INTERNATIONAL INC.
31
CBCA, S.122(1)(A)
32
MANAGERS FIDUCIARY DUTIES I CONFLICT OF INTEREST AND DUTY
32
NORTH-WEST TRANSPORTATIONS CO. V. BEATTY [1887]
32
AFFIRMING OR APPROVING INTERESTED TRANSACTIONS
33
CBCA S.120
33
MANAGERS FIDUCIARY DUTIES II CORPORATE OPPORTUNITY DOCTRINE
33
REGAL (HASTINGS) LTD. V. GULLIVER [1942]
33
PESO SILVER MINES LTD. V. CROPPER
33
CAN. AERO V. OMALLEY
34
BROZ V. CELLULAR INFORMATION SYSTEMS, INC.
35
MANAGERS FIDUCIARY DUTIES III CHANGE OF CONTROL TRANSACTIONS.
35
INTRODUCTION TO THE RISE OF TAKEOVERS; EARLY ATTEMPTS TO CONTROL THE
PROCESS: REVIEWING THE EXERCISE OF POWERS BY DIRECTORS FOR AN IMPROPER
PURPOSE
35

HOGG V. CRAMPHORN LTD.

35
TECK CORP. V. MILLAR
36
THE NEW APPROACH
37
BCE INC. V. 1976 DEBENTUREHOLDERS [2008]
37
MANAGERS FIDUCIARY DUTIES IV CHANGE OF CONTROL TRANSACTIONS II;
PROTECTING DIRECTORS: D & O INSURANCE AND INDEMNIFICATION OF DIRECTORS
39
CYTRYNBAUM V. LOOK COMMUNICATIONS INC. [2013]
39
CBCA S.124
39
REASONS FOR SETTING THE BASIC CORPORATE RISK ALLOCATION:
VEIL-PIERCING AND REVERSE VEIL-PIERCING
39
LEE V. LEES AIR FARMING LTD.
39
TRANSAMERICA LIFE INSURANCE CO. OF CANADA V. CANADA LIFE ASSURANCE CO.
40
VTB CAPITAL PLC V. NUTRITEK INTERNATIONAL CO.
41
THIRD PARTIES SUING DIRECTORS, EMPLOYEES, AND SHAREHOLDERS DIRECTLY OF
A CORPORATION FOR CONSEQUENCES OF THEIR INTERACTION WITH THE
CORPORATION. SUING SHAREHOLDERS
THE THIN CAPITALIZATION ARGUMENT
WALKOVSKY V. CARLTON
PROBLEM OF SUING DIRECTORS FOR INDUCING THE BREACH OF CONTRACT INTO
WHICH A CORPORATION THEY ARE DIRECTORS OF AND THE SCOPE THE SAID V.
BUTT DEFENCE
SAID V. BUTT
ADGA SYSTEMS INTERNATIONAL INC. V. VALCOM LTD.
HOGARTH V. ROCKY MOUNTAIN SLATE INC.
OTHER WAYS DIRECTORS CAN BE PERSONALLY LIABLE
AIR CANADA V. M & L TRAVEL LTD
SHAREHOLDERS SUING TO DIRECTLY ENFORCE RIGHTS THAT BELONG TO THE
CORPORATION SHAREHOLDERS INSURABLE INTEREST
MACAURA V. NORTHERN ASSURANCE CO.
KOSMOPOULOS V. CONSTITUTION INSURANCE CO. OF CANADA
HERCULES MANAGEMENTS LTD. V. ERNST & YOUNG
HOULE V. BANQUE CANADIENNE NATIONALE
SMITH, STONE AND KNIGHT LTD. V. BIRMINGHAM CORP. [1939]

41
41
41
42
42
43
44
45
45
46
46
46
47
49
50

REMEDIES

50

THE REPRESENTATIVE/DERIVATIVE ACTION

HERCULES MANAGEMENTS LTD. V. ERNST AND YOUNG
APPRAISAL REMEDY; AND INVESTIGATION
CBCA SS. 104, 162, 167, 190, 238-240
OPPRESSION REMEDY I WHO IS ENTITLED TO SUE UNDER THE OPPRESSION
REMEDY?
FIRST EDMONTON PLACE LTD. V. 315888 ALBERTA LTD. [1988]
DOWNTOWN EATERY (1993) LTD. V. ONTARIO [2001]
DISTINCTION BETWEEN THE OPPRESSION REMEDY AND THE DERIVATIVE ACTION
PASNAK V. CHURA [2003]
CBCA SS. 238, 241-242
OPPRESSION REMEDY II

50
50
51
51
51
51
52
53
53
54
54

BCE INC. V. 1976 DEBENTUREHOLDERS [2008]

54

1. Agency
Elements of the Agency Relationship
Gorton v. Doty [1937]
Facts:
Teacher tells football coach that he can use her car to drive team to their game as
long as he was the one driving. Accident causes injury to one of the players, and
player is now suing the teacher as the principal of the coach, who was the agent.
Issue:
Was the coach acting as an agent of the teacher?
Reasoning:
Agency denotes the relationship where one person acts for another.
- The manifestation of consent by one person to another that the other shall
act on his behalf and subject to his control, and consent by the other so to act.
For this relationship to exist, a contract or compensation are not necessary
1. The appellant consented that the coach should act for her and in her behalf
in driving the car to and from the football game by volunteering her vehicle
with the express stipulation that he should drive it
2. The coach consented to so act for the appellant by his act driving the car
The relationship of principal and agent existed
Dissent:
There is insufficient evidence showing that the coach was (a) acting as an agent of
the teacher, and (b) acting within the scope of his authority
- Agency involves more than passive permission; requires request, instruction,
or command
- This was nothing more than a kindly gesture and the statement that only the
coach should drive was not instruction, it was a mere precaution
Holding:
The relationship of principal and agent existed; the player can pursue the teacher for
damages.

Undisclosed Principal
Friedmann Equity Developments Inc. v. Final Note Ltd [2000]
Facts:
FE is trying to sue the principals of FN (doctors) because FN doesnt have enough
money to pay back the loan defaulted upon. The contract, though, was made under
seal, which prevents action against anyone but the signatories.
Issue:
Will FE be permitted to do away with the sealed K rule?
Reasoning: (SCC, Bastarache)
An undisclosed principal cannot be sued on a K executed by his or her agent when
that K is executed under seal (also does not need consideration)
- Courts should not interfere with established rules of law without clear
evidence that it is necessary to change the law to be in step with commercial
reality and that a change in the rule will not have unwarranted ramifications
In a simple K this would not be a problem, but here it was clearly under seal
Harmer v. Armstrong:

- In the case of a trust, the sealed K rule doesnt apply because it involved a
breach of trust; was an equitable remedy as opposed to the CML sealed
contract rule (doesnt apply here)
- Provides the means for beneficiaries to enforce those agreements entered
into by their trustees when they refuse to do so.
The sealed K rule applies to corporations equally as to individuals
- The application of the seal must be conscious and deliberate; must
examine the instrument/circumstances surrounding its creation to
determine intention to officially seal
No principled reason for getting rid of the sealed K rule; would create uncertainty in
the law
Holding:
FE cannot sue the principals of FN because they were not parties disclosed on the K,
which was signed under seal.

Distinction between Actual, Apparent, and Ostensible

Authority
Freeman & Lockyer v. Buckhurst Park Properties (Mangal Ltd.)
[1964]
Facts:
K. represented to F. (contractors) that B. would hire and pay them for a surveying job.
There was a default, and F. is now seeking payment from B., who is saying that K.
didnt have authority and they cant be bound. B. says liability is K.s not theirs.
Issue:
Did B. confer authority on K. to enter into contracts on their behalf?
Reasoning:
Actual Authority:
- Legal relationship between principal and agent created by a consensual
agreement to which they alone are parties
- If the agent enters into a K pursuant to the actual authority, contractual
rights/liabilities are created between the principal and the contractor
Apparent/Ostensible Authority:
- Legal relationship between the principal and the contractor created by a
representation made by the principal to the contractor intended to be, and
actually, acted upon that the agent has authority to enter into a K so as to
render the principal liable to perform any obligations imposed upon him by
such a K.
* Capacity of a corporation is limited by its constitution
A corporation cannot do any act, or make any representation, except through its
agent (Doctrine of ultra vires)
In order to create an estoppel between the corporation and the contractor,
the representation must be made by some persons who have actual
authority from the corporation to make such representations
- Can be conferred by the constitution of the corp. namely the board of
directors
Criteria to entitle a contractor to enforce a representation made by an
agent:
1. Representation that the agent had authority to enter on behalf of the
company into a K of the kind sought to be enforced was made to the
contractor
2. Representation was made by a person who had actual authority to
manage the business of the company
3. The contractor was induced by representation to enter into the K, and that
he relied on that representation

4. That under its constitution the company was not deprived of the capacity
either to enter into a K of the kind sought to be enforced, or to delegate
authority to enter into a K of that kind to the agent
* The only actual authority that matters is that of the person making the
representation relied upon (this is ostensible authority doctrine)
Application:
1. Board knew that K. had been acting as managing director, permitted him to do so,
and by such conduct represented that he had authority to enter into Ks.
2. The constitution of the corporation conferred full powers of management on the
board (actual authority)
3. F. was induced to believe that K. was authorized to enter into Ks on
behalf of F., and relied on those representations.
4. The articles of the constitution do not deprive the company of capacity to delegate
authority to K. to enter into Ks on behalf of the company.
Holding:
K. had was legitimately delegated authority by B. to enter into Ks on their behalf.
Therefore they are liable. Ruled for F.

Watteau v. Fenwick [1893]

Facts:
W. suing for price of cigars sold to F. W. dealt with H. the entire time, when the
business actually belonged to F.
Issue:
Was H. acting within the authority of his agency?
Reasoning:
Once it is established that the defendant was the real principal and H. the
agent, the principal is liable for all the acts of the agent which are within the
authority usually confided to an agent of that character, notwithstanding limitations,
as between the principal and the agent, put upon that authority
- holding out of authority is not strictly necessary; otherwise undisclosed
principals wouldnt exist
Holding:
The plaintiff can sue the defendant for price of the unpaid cigars.

Distinction between Agency and Employment: Question of

Vicarious Liability of master (employer) for the torts of its
servant (employee) distinguished from agency
671122 Ontario Ltd. v. Sagaz Industries Canada Inc. [2001]
Facts:
O. suffered serious loss when it was replaced as supplier to Canadian Tire by S. This
happened because a bribe was paid by A. to CT. O. brings this action.
Issue:
Is S. vicariously liable for the tortious conduct of the consultant A.?
Reasoning: (SCC Major J.)
Agency does not create vicarious liability; requires a much stronger
connection (one of employment)
Criteria of an employee relationship:
1. Control over the worker
2. Ownership of the tools/equipment used
3. Chance of profit remains with the employer
4. Risk of loss remains with the employer
* Not an exhaustive list
Application:
- A. was in control of his job functions

- He worked on his own commission rates

- His chances of profit/risk of loss depended completely on his own initiative
Holding:
A. was an independent contractor and not an employee of S., therefore S. cannot be
held vicariously liable for A.s actions.

2. Partnerships
Nature and Existence of Partnership Relationship
Khan v. Miah [2000]
Facts:
K. and M. were partners with the goal of running a restaurant. K. were the cooks and
M. were the financiers. The location/stock/other things were acquired but the
relationship broke down before the actual restaurant started business. Was there
ever a partnership?
Issue:
Do parties to a joint venture become partners only when the actual trading
commences?
Reasoning:
CA said that partnership only starts once the actual venture commences
- Impossibly narrow view of the enterprise
- The acquisition, conversion, fitting out of the location were all part
of the joint venture, were undertaken with a view of ultimate profit, and
formed part of the business which the parties were in the partnership for
The rule is that persons who agree to carry on business as a joint venture
do not become partners until they actually embark on the activity in
question; obtaining the things necessary for the carrying on of that
business counts as embarking on the activity (starting the trading is secondary)
Holding:
Trial judges orders restored. Ruled for M.

Hurst v. Byrk [2002]

Facts:
H. and defendants B. became partners in a firm of solicitors. All save H. served
retirement notices, sought early termination despite H.s objections. H. then sought
declaration that he was discharged from contributing towards the partnership
liabilities accruing after the early termination due to the alleged repudiation of the K
through the early termination.
Issue:
Is the innocent partner discharged from further liability to contribute to the
debts/obligations of the partnership after a fundamental breach terminating the
partnership?
Reasoning:
H. contends that by accepting his partners repudiatory breach, he was discharged
from his contractual obligation to contribute to the deficit.
- H.s obligations are not contractual but equitable
- However much an individual partner may have been wronged by his
fellow partners, he remains jointly liable with them for the debts of
the firm
- * His liability accrued before the breach occurred, and was in no way caused
by his partners breach; they accrued while he was still a partner, so he is
equally responsible for them

H. is entitled to damages based on the breach if he can show that damages occurred
(which he cant)
Partnerships are governed by equity not the CML; you cant walk away from
your partnership obligations or unilaterally rescind the partnership even
because of a material breach
Holding:
Ruled for B. H.s obligations to the partnership remain after the dissolution.

Indica of the Partnership Relationship

Partnership Act, R.S.O. 1990 (ss. 1-3)
3. In determining whether a partnership does or does not exist, regard shall be had
to the following rules:
3.1. Joint tenancy, tenancy in common, joint property, common property, or part
ownership does not of itself create a partnership as to anything so held or owned,
whether the tenants or owners do or do not share any profits made by the use
thereof.
3.2. The sharing of gross returns does not of itself create a partnership, whether the
persons sharing such returns have or have not a joint or common right or interest in
any property from which or from the use of which the returns are derived.
3.3. The receipt by a person of a share of the profits of a business is proof, in the
absence of evidence to the contrary, that the person is a partner in the business, but
the receipt of such a share or payment, contingent on or varying with the profits of a
business, does not of itself make him or her a partner in the business, and in
particular,
(a) the receipt by a person of a debt or other liquidated amount by instalments or
otherwise out of the accruing profits of a business does not of itself make him or her
a partner in the business or liable as such;
(b) a contract for the remuneration of a servant or agent or a person engaged in a
business by a share of the profits of the business does not of itself make the servant
or agent a partner in the business or liable as such;
(c) a person who,
(i) was married to a deceased partner immediately before the deceased
partner died,
(ii) was living with a deceased partner in a conjugal relationship outside
marriage immediately before the deceased partner died, or
(iii) is a child of a deceased partner,
and who receives by way of annuity a portion of the profits made in the
business in which the deceased partner was a partner is not by reason only of
such receipt a partner in the business or liable as such;
(d) the advance of money by way of loan to a person engaged or about to engage in
a business on a contract with that person that the lender is to receive a rate of
interest varying with the profits, or is to receive a share of the profits arising from
carrying on the business, does not of itself make the lender a partner with the person
or persons carrying on the business or liable as such, provided that the contract is in
writing and signed by or on behalf of all parties thereto;
(e) a person receiving by way of annuity or otherwise a portion of the profits of a
business in consideration of the sale by him or her of the goodwill of the business, is
not by reason only of such receipt a partner in the business or liable as such.

Pooley v. Driver [1876]

Facts:

Under a deed B. and H. agreed to enter into a trade partnership agreement. The
defendant D. was to provide financing for 500L as a creditor and would then share
in the profits realized by the partnership indefinitely. However, if it turned out that the
profits of any years which had been paid exceeded the total profits made from the
business, the contributors were to pay back the excess, never exceeding the amount
they had contributed. B. and H. went bankrupt, P. is seeking to collect against D. as a
partner of B. and H.
Issue:
Despite being described in the deed as a quasi-creditor, is D. in fact a partner against
which P. can seek satisfaction of the partnerships outstanding debts?
Reasoning:
State of the Law
As a general rule, a partnership involves a commercial business carried on with a
view to profit and for division of profits between the partners
- Generally, each partner contributes something, but it isnt an absolute rule;
there can be silent partners (see Watteau v. Fenwick)
There is a prima facie presumption that a partnership exists where a
person participates in the profits of a joint endeavor
- Rebuttable where different circumstances exist
- Participating in the profits entails participation in the liabilities
* Participating in profits is a proper test for partnership where nothing
exists to rebut it
Application
The intention on the face of the document was to extend to D. all the benefits of the
partnership, while protecting them from the liabilities
* The lending of a sum of money on a bona fide contract to receive a rate of
interest varying with the profits does not make the lender a partner; simple
sharing of the profits in this way does not a partner make. BUT:
- D. got ALL the benefits of the deed of partnership
- D. became entitled to shares of the capital, but ALSO entitled to
compel the partners to employ that capital in the regular course of
trade
- There is a provision that if D. were to go bankrupt, the partnership would
terminate (this covenant is very strange for someone in the position of a
lender, but not so strange for someone acting as a partner)
Not only profit but control; not the position of an ordinary lender
Holding:
Ruled for P. The defendants, D., were acting as partners and are liable as such.

A.E. LaPage Ltd v. Kamex Developments Ltd. (and March) [1977]

Facts:
M. mistakenly put up an exclusive listing agreement with A., a real estate agent, then
sold through someone else. K. refusing to pay commission. Did M. have authority to
do so, and was he a partner signing on behalf of the partnership?
Issue:
Was M. a partner of K. and did he sign on behalf of the partnership?
Reasoning:
Keywords of definition of partnership in Partnerships Act are persons carrying on
a business in common with a view to profit
- Mere fact that property is owned in common and that profits are derived
therefrom does not of itself constitute the co-owners as partners
- Depends on whether the intention of the co-owners was to carry on
a business or simply provide for an agreement for the regulation of
their rights and obligations as co-owners of a property
Application

10

It is clear from the documents that the parties wanted to maintain their
separate rights as co-owners of the property
- No partnership existed, and therefore M.s signature did not bind them
- M. was a co-owner not a partner
Did M. then incur personal liability thereby?
- No. M. signed as an agent to the knowledge of the employees of the
respondent with whom he dealt. He is not personally liable.
- M. was acting on behalf of K. as an agent, but outside of his
authority; A. could have sued M. for breach of warranty, but didnt
bring it up so they dont get it
Holding:
There was no partnership. Ruled for K.

Legal Nature of the Partnership

Re Thorne and New Brunswick Workmans Compensation Board
Facts:
T. and another entered into oral agreement to carry on partnership of
lumbering/sawmill business. They filed all the proper stuff with the Board. T. suffered
injuries in the course of his job. Applied for compensation alleging he was a workman
within the meaning of the Act, and entitled to benefits thereunder.
Issue:
Was T., on the day of the accident, a workman employed by the partnership within
the meaning of the Workmans Compensation Act, and so entitled to benefits?
Reasoning:
Under the Partnership Act, no person can enter into a contract with himself or be his
own employer
- Partnerships regarded as having no legal existence distinct from the
individuals composing it, no person could be an employee of a firm to
which he is a member
O. contends that partnerships should be regarded as legal entities distinct from their
component members, and therefore that the firm was capable of entering a K of
employment with him
The firm name (partnership name) is a mere expression, not a legal
entity
Holding:
The firm is not a legal entity, and therefore T. cannot seek compensation as an
employee.

Partnership Act, R.S.O 1990 ss. 1, 2, 3 (PA)

Relationship and nature of the relationship between the

partners
Meinhard v. Salmon [1928]
Facts:
S. was manager and had lease of building for 20yrs with M. joint adventurer. Near the
end of the lease, S. organized to renew the lease to a company which he owned and
controlled without telling M. M. now seeking holding that the lease part of the
partnership.
Issue:
Does M. have a right to half of the lease as was his interest in the joint venture with
S.?
Reasoning: (Cardozo)

11

Joint adventurers, like partners, owe each other, while the enterprise continues, the
duty of the finest loyalty
S. excluded M. from any chance to enjoy the opportunity for benefit
- This is an Equity question
The exclusive managerial role held by S. charged him even more with a duty of
disclosure
- S. obtained his opportunity for the venture while he was a partner,
and was thus bound not to separate his interest from M.s
- There can be no abuse of special opportunities growing out of a
special trust as manager or agent
M.s interest should be equal to his contribution to the joint adventure (1/2)
Dissent: (Andrews)
Fair dealing and honesty is required, but nothing more
When the partner takes no new lease but buys the reversion in good faith,
there is no offshoot of the original lease
- Must show Fraud, dishonesty, or unfairness
The new lease started after the end of the partnership, covered additional property,
and had new terms
- Was not a renewal; was the purchase of the reversion
M. had an equitable interest in the original lease, but it ended when the
joint adventure did
Holding:
S. breached duty of honesty to his joint adventurer, M. owes him half the value of the
lease.

Olson v. Gullo [1994]

Facts:
O. and G. were equal partners in the development of a tract of land. G. bought and
sold for his own profit a piece of the land owned by the partnership and made a
bunch of money. O. suing for his share.
JH:
Trial judge awarded O. disgorgement of entire profit made by G.
Issue:
Is the proper remedy disgorgement or half?
Reasoning:
No question that the parties were partners and G. purposefully tried to screw O.
G. must not be allowed to profit from his breach
- The proper remedy is to give 50% of the profits to O. not the entire amount
* This puts O. in the same position which he would have occupied if there
had been no wrongdoing (had G. not done the sale in secret)
- The remedy is in Equity; should not be penal in nature, which it would be if
disgorgement were ordered
* Fact that G. tried to hire a hit-man to kill O. doesnt factor in (he was already
convicted for that)
Holding:
The proper remedy is 50% of the profits to O., not disgorgement (accounting of
profits).

Relationship of the partners to the outside world

Strother v. 3464920 Canada Inc. [2007]
Facts:
S. was a rainmaker in tax law at Davis LLP. Manipulated Canadian tax credits to make
big bucks, finance movies, etc. Monarch (346) was a client of S.s, he was giving
them tax advice, billing them for his own work, giving the other lawyers at Davis side-

12

work on the file. New tax ruling came out with big implications for M. Instead of
telling them, S. incorporates his own company (against the instruction of the firm),
and took all of M.s business (made about 65M$). M. sues S. as well as Davis.
JH:
CA Allowed appeal, ordered S. to disgorge to M. all benefits/profits received or
receivable from S.s new company Sentinel. Also ordered Davis to disgorge profits it
earned in the form of legal fees from acting for Sentinel in breach of duty to M. from
January 1, 1998 and return to M. all fees paid by it from that date.
Issues:
Who is liable and for what?
Reasoning: (SCC Binnie J.)
Equitable remedies are always subject to the discretion of the court
Disgorgement can serve two different equitable purposes:
1. * Prophylactic Purpose: give to the person whose fiduciary duty
was violated any profits/benefits made through the breach
2. Restitutionary: Return to the beneficiary profits which were wrongly
appropriated by the fiduciary in breach of its duty
Relevant causation is the breach of fiduciary duty and the defendants gain (not the
plaintiffs loss)
Legal Fees Paid by Monarch to Davis
There must be a causal relationship between the fiduciary breach and the profits
earned
- D. committed no breach of fiduciary duty to M. and is not
responsible for S.s breach. There can be no equitable relief against D.
here.
Legal Fees Paid by Sentinel to D.
CA ordered D. to disgorge profits earned from acting for Sentinel in breach of its duty
to M.
- There was no conflict known to D. that prevented it from acting for both
Sentinel and M.
- Therefore legal fees paid by Sentinel to D. cannot be said to be in
consequence of breaches of fiduciary duties owed by D. to M.
Profits Earned by S.
S. must account for profit earned from the personal financial opportunity he pursued
in Sentinel in breach of his fiduciary duty to M.
- Sentinel advanced S. 1M$ before he quit D.
- S. cannot be permitted to profit from the money made through his
breach of fiduciary duty to M.
Period for which S. has to disgorge
S. denied M. the opportunity to find other counsel and take advantage of the new tax
ruling
Also failed to notify M. of the new tax ruling which came out October 6, 1998
- S. should disgorge all profits received during his time with D. between
January 1998 and March 1999 (when M. and S. severed links with D.)
Is D. liable for S.s fiduciary breach? If so to what extent?
No only was D. unaware of S.s financial interest, but D. ordered S. to not take any
interests in Sentinel; no reason for them to believe that he didnt comply
BUT M. contends that D. is still statutorily liable under the BC Partnership
Act:
11. A partner in a firm is liable jointly with the other partners for all debts and
obligations of the firm incurred while he or she is a partner
12. If, by any wrongful act or omission of any partner acting in the ordinary
course of the business of the firm or with authority of his or her partners, loss
or injury is caused to any person who is not a partner in the firm or any

13

penalty is incurred, the firm is liable for that loss, injury or penalty to the
same extent as the partner so acting or omitting to act.
An injury, even without loss, is sufficient
- Doesnt say anywhere that prior knowledge of the delinquency is a condition
precedent to liability
Requires S.s wrong to be so connected with the partnership business that
it can be said that D. introduced the risk of the wrong that befell M.
- CA said no
- SCC says Yes
Holding:
D. is vicariously liable for the profits that S. billed to M. directly, but nothing else. S. is
liable for all the profits he made in breach of the fiduciary duty owed to M.

Dissolution of the partnership

Hurst v. Byrk, [2000]
Facts:
H. and defendants B. became partners in a firm of solicitors. All save H. served
retirement notices, sought early termination despite H.s objections. H. then sought
declaration that he was discharged from contributing towards the partnership
liabilities accruing after the early termination due to the alleged repudiation of the K
through the early termination.
Issue:
Is the innocent partner discharged from further liability to contribute to the
debts/obligations of the partnership after a fundamental breach terminating the
partnership?
Reasoning:
H. contends that by accepting his partners repudiatory breach, he was discharged
from his contractual obligation to contribute to the deficit.
- H.s obligations are not contractual by equitable
- However much an individual partner may have been wronged by his
fellow partners, he remains jointly liable with them for the debts of
the firm
- His liability accrued before the breach occurred, and was in no way
caused by his partners breach; they accrued while he was still a
partner, so he is equally responsible for them
H. is entitled to damages based on the breach if he can show that damages occurred
(which he cant)
Partnerships are governed by equity not the CML; you cant walk away from
your partnership obligations or unilaterally rescind the partnership even
because of a material breach
Holding:
Ruled for B. H.s obligations to the partnership remain after the dissolution.

Partnership Act, ss. 6, 7, 11, 13, 24, 28-30, 33-35

Wrapping up Partnerships & Limited Partnerships and the

Question of Control by Limited Partnerships
Haughton Graphic Ltd. v. Zivot [1986]
Facts:
H. suing Z. for the payment of an outstanding printing debt incurred by Z.s magazine
before going under. Printcast (Ltd partnership), Lifestyle (General partner), and Z.

14

and M. (limited partners). Z. was known to suppliers as the president, used the title to
introduce himself, used Printcast business cards, etc.
Issue:
Can Z. be held liable as a general partner?
Reasoning:
Z.s relationship with Printcast
Alberta Partnership Act:
63. A limited partner does not become liable as a general partner unless, in
addition to exercising his rights and powers as a limited partner, he takes part
in the control of the business.
* If a limited partner takes part in the control of the business, he becomes liable
under the statute as a general partner, which entails unlimited liability to the extent
of his assets
Holding:
Z. took a direct role in controlling/managing Printcast, and is therefore a general
partner according to s.63, entailing unlimited liability towards creditors.

Limited Partnership Act, R.S.O. 1990, s.13(1)

3. Corporations
(A) General Considerations
Constitutional Considerations of Corporate Law in Canada.
Concurrent Provincial and Federal power of incorporation.
Limits of permissible provincial interference with federallyincorporated corporations
Reference in the Matter of the Incorporation of Companies in Canada
[1913]
Facts:
Reference as to the nature and extent of the restrictions upon the power of provincial
legislatures in regard to the incorporation of companies.
Issue:
Can a provincially incorporated company operate within its charter outside the
jurisdiction in which it was incorporated?
Reasoning: (SCC Anglin J.)
Has to do with the division of powers between ss. 91/92 of the BNA
- s.92(11): gives prov power to incorporate companies with provincial
objects
- s.91(15): gives fed exclusive power to incorporate banks
Clause at s.92 doesnt negative the provincial power of incorporating other provincial
corporations to which it doesnt apply
- Incorporation Federally falls under Peace Order and Good Government (POG)
- Incorporation can be done either fed/prov
Understood that incorporation of companies with fed objects is prohibited for the
provs and vice versa for fed
But nothing to suggest that a provincially incorporated company cans seek
the Comity of another state/prov to enable it to operate within its
borders
- Permission, registration, license giving right to operate

15

- A province cant give a corporation powers outside of the province because it

would be ultra vires the legislatures power
A fed incorporated company is a domestic company in all parts of Canada; exercises
its powers as of right in all Canadian provinces
Holding:
Both Prov and Fed can incorporate.

Bonanza Gold Mining Co., Ltd. v. The King [1916]

Facts:
B. created as corporation with Letters Patent giving it same powers, etc. as natural
person. B. signed leases with the Crown for mines/mining rights. B. wants to expand,
K. denies B.s status as a corporation, it being incorporated outside of Ontario and
therefore operating outside of its area of jurisdiction.
Issue:
Can a provincially incorporated company operate outside of the jurisdiction in which
it was created?
Reasoning: (Viscount Haldane)
No words in Letters Patent limit the area of operation or prohibit the company from
carrying out its objects beyond the provincial borders
- Companies created by statue may very well be limited by the terms which
serve to create the company, but letters patent create natural persons with
the freedoms of movement inherent in such
- The company derives its existence from the act of the Sovereign and not
merely from the words of a statute
However, the prov doesnt have the power to GIVE rights/powers outside of the
jurisdiction
- However, the Co does have the power to ACCEPT extraterritorial
powers from another jurisdiction where they are offered/given
B. had the capacity to accept, and was given, the authority to carry out its mining
operations in Ontario
Holding:
Ruled for B.

Ability by incorporating jurisdictions to grant extraterritorial

capacity to its corporations
John Deere Plow Co., Ltd. v. Wharton [1915]
Facts:
J. sells machines to W. then W. refuses to pay because under BC legislation it isnt
officially a corporation, even though fed incorporated.
Issue:
Can a prov legislation limit the powers of a federally incorporated company?
Reasoning: (Viscount Haldane)
Concerns provisions of the BC Companies Act that 1. Prohibit companies not
incorporated in BC from taking action in BC courts unless they have a license, 2.
Impose penalties on companies operating without license in BC
Was it within the Provs powers to legislate as to interfere with the carrying on of
business of a fed incorporated company?
- The provincial ability to incorporate cannot affect J., it being a
company incorporated under the Peace Order and Good Government
of the fed powers
- Fed can confer power to trade everywhere in Canada, but not to infringe on
prov rights under s.92

16

The prov provisions compelling J. to get a prov license/register in the prov

as a condition of exercising its powers or suing in the courts are
inoperative
Prov cannot interfere with the status/corporate capacity of a Dominion
company in so far as powers conferred by the Parliament of Canada
Holding:
Provincial legislature cannot restrict fed company powers directly conferred upon it
by the fed government; it can, however, tax all companies equally through the
vehicle of a license, just not in a way that targets fed companies.

Application of the Charter to Corporations and the Standing of

Corporations to Challenge Legislation on the basis of the
Charter
Canadian Egg Marketing Agency v. Richardson [1998]
Facts:
C. attacking R.s right to challenge legislative provisions in question on the grounds
that C. is a corporation with monopoly over egg production in NWT and as a
corporation cannot claim constitutional rights under s.2(d) and s.6 of the Charter,
which protect individuals only.
Issue:
Can a corporation claim Charter protection as an individual?
Reasoning: (SCC Iacobucci and Bastarache JJ)
Corporations can invoke the Charter under the Big M Drug Mart exception
(corporation allowed to invoke s.2(a) religious freedom in face of mandatory religious
closure on Sundays)
- Time to expand the rule to allow corporations to invoke the Charter
when they are defendants in civil proceedings instigated by the state
or a state organ pursuant to a regulatory scheme
Generally a party seeking to invoke the Charter can be granted standing:
1. As of right
2. The Big M Drug Mart exception
3. Public interest standing
4. Under Residuary Discretion
Big M Drug Mart Exception
Created an exception that granted standing as of right to an accused charged under
legislation alleged to be unconstitutional; Big M extended this right to an
accused whose own rights are not in fact violated (corporation doesnt have
religious freedom), but who alleges that legislation under which the
accused is being prosecuted is unconstitutional
* Same principle applies here and gives standing as of right to R.
R. isnt before the court voluntarily, it was forced there by a state organ, C.
- If the foundations of the remedies sought by C. is an
unconstitutional law, it would be ridiculous to bar R. from challenging
them merely because R. is a corporation
Holding:
If a corporation is involuntarily brought before the court by a state agency pursuant
to a regulatory regime that the corporation believes is unconstitutional, then that
corporation can invoke the Charter as a defense under standing as of right. Ruled for
R.
* Sidebar: For Big M exception to apply (give corporation recourse to Charter as of
right):
1. Must be corporation

17

2. Must be defendant brought before court involuntarily

3. Plaintiff must be the state or a state agency

Constitution Act, 1867, ss.91 (POGG), 91(15) and 92(11)

CBCA, R.S.C. 1985 ss.3(4)-(5) and 15(2)-(3)

(B) The Process of Creation of a Corporation and its

Effect
Pre-Incorporation Contracts
Kelner v. Baxter [1866]
Facts:
K. was wine merchant with property, it was suggested that a joint stock company be
formed for management of the property. Directors: B. (and others) and K. with K. as
manager. Obtained certificate of incorporation. Before Incorporation, sale of some
goods by K. to defendants on behalf of the proposed Gravesend Hotel.
Issue:
Are the defendants personally liable where the company had not yet been
incorporated?
Reasoning: (Erle C.J.)
If the company had been an existing company at the time of the sale, the persons
who signed the agreement would have signed as agents of the company; as there
was no company existing at the time, the agreement would be wholly inoperative
unless its held binding on the defendants personally
Where a K is signed by one who professes to be signing as an agent,
but who has no principal existing at the time, and the K would be
inoperative unless binding upon the person who signed it, he is
bound thereby
Companies are not liable for obligations that arose before their creation
Holding:
The defendants are personally liable for the K that they signed; companies arent
liable for obligations arising before their creation.

Sherwood Design Services Inc. v. 872935 Ontario Ltd. [1998]

Facts:
O. entered into a pre-incorporation K of purchase/sale for assets of S. Law firm taking
care of transaction took a shelf-company under name of Fuller, partner, to assign to
O. The transaction failed to close in time. The new directors of the company never
signed any of the documents taking control of the company, so partner, Fuller,
remained sole director. Later, they passed the same shelf-company off to a new
client, without realizing the liabilities to S. that this legal person still had for the past
breach, which S. is suing for.
JH:
Trial judge found that corporation wasnt bound, but that the individuals were.
Issue:
Can O. be held liable for a K entered into before incorporation?
Reasoning: (ONCA Borins J) DISSENTING
Obvious that S. doesnt care about getting decision against individual respondents;
no money. They are directly going after the corporation in its new form, whether or
not it has a new directorship

18

Provisions of s. 21 of the OBCA: holds that persons who enter Ks on behalf of

a corporation before it comes into existence are personally bound by the K
and entitled to the benefits/consequences thereof
However, a corporation can signify its intention to be bound by a preincorporation K through an act or conduct (OBCA s.21(2))
In making the corporation available to the use of the respondents, Fuller was only
acting as partner in charge of the shelf companies, not on behalf of the corporation
Therefore letter sent by the associate at the law firm did not
constitute any action or conduct of the corporation for the purposes
of OBCA
o The action must be that of the corporation
General Principles
A company has no existence before its incorporation
See Kelner v. Baxter
A K made by promoters of a company before incorporation binds only
the promoters; after, a company by its unilateral act may take the
benefit and assume the liabilities of a K made in its name or on its
behalf before incorporation
CBCA s.14 supports this
For action/conduct to show intention of corporation to adopt pre-incorporation K:
1. Must be performed by the corporation
2. Must be performed with the knowledge of the terms of the K
In entering into pre-incorporation K, S. took the risk that O. may not be incorporated
Holding:
[Appeal allowed by majority]

Mechanics of creating a corporation; date on which a

corporation is created; questioning the validity of
incorporation
C.P.W. Valve and Instruments Ltd. v. Scott
Facts:
Involves a distributorship K between parties. Pre-incorporation K based on the fact
that S. wasnt actually incorporated on the date the deal was to go through since the
articles of incorporation showed it had incorporated on June 15 th, when it was actually
back-dated, and was really registered on the 16th, so C. refused the order, sued for
breach.
Issue:
Does a corporation become a legal entity on the date listed on certificate of
incorporation or the date of registration?
Reasoning: MAJORITY (Clement J.)
Companies Act of Canada s.133:
Also states that the date on the certificate is conclusive proof of legal
capacity/existence
However, the existence of the company on the date listed is a presumption
that is rebuttable by proof that registrar had not in fact finished his duties
In this case, the burden has been met; the registrar hadnt finished his duties
until the 16th, so that day is when S. became a company
Dissent: (ABCA McDermid J)
Alberta Corporations Act s.28:
States that the date on the certificate is what counts
If the certificate (charter of the company) bears a date earlier than
that upon which the Seal was affixed, then the company acquires
status as of the earlier date

19

Therefore the company did have capacity to enter into Ks on the 15 th

Holding:
S.s corporation didnt become a legal entity until the 16th; ruled for C.

Effect of incorporation
Salomon v. Salomon Co.
Facts:
A father decided to include his family members in his business by incorporating the
buisness and dividing the shares between them. However, he held almost all the
shares for himself, giving one share to each of the other 6 shareholders to give them
a basic interest. Business went out the window, creditors (S. Co.) going after S.
personally saying the company wasnt actually a company
Issue:
Was this a validly constituted corporation?
Reasoning: (Lord Halsbury)
Argued here that it cant be a company simply having 6 minimal shareholders
enabling the 7th to carry on a corporation for the purpose of protecting himself from
liability
Nothing in statute dictating the proportion of interest that each
shareholder must have
One share is enough to make someone a shareholder
Absent fraud/misconduct, theres nothing to limit him from doing this
Impossible to deny the validity of the transactions into which it has entered
if it was validly incorporated
Concurring: Lord MacNaghten
A company cannot lose its individuality by issuing the bulk of its capital to one person
over the others
Limiting personal liability is one of the main attractions of incorporation along
with borrowing money; the Co and the shareholders are separate legal
entities
The unsecured creditors of S. Co. may be entitled to sympathy, but they have only
themselves to blame for their misfortunes
Holding:
S. had a legitimate company.

Basic Corporate Structure: distinction between articles and

bylaws; the death of the ultra vires doctrine
Attorney General of Belize v. Belize Telecom Ltd.
Facts:
Gov wanted to sell its financial interests in Belize Telecommunications Authority to
the new company, B. Articles of incorporation include a Golden Share which can
only be transferred to a minister of the gov of Belize which confers no economic
authority; just an instrument of control. Article exists which gives special shareholder
power to require company to redeem/extinguish the special share. Articles protect
the special shareholder on three levels: 1. Special rights to appoint/remove directors
2. Restrictions on what majority of board can do without the special shareholders
consent 3. Restrictions on what shareholders in general meetings can do without
special shareholders consent (this case challenges #1). Holder of special share can
only appoint directors if it also holds 37.5% of C ordinary shares.
Issue:
What is the meaning of the articles?
Reasoning:

20

Only person who has power to remove directors is special shareholder with 37.5% of
common shares
Because of default and seizure of assets, there was no such person in
existence
Nothing in articles dealing with situation of special share holder without
enough common shares
B. says that result is that directors are irremovable
A. says this is ridiculous
Court has no power to improve the document, just to determine what it means
Intention of the parties
For a term to be implied in a K:
1. Must be reasonable/equitable
2. Must be necessary to give business efficacy to the K
3. Must be so obvious that it goes without saying
4. Must be capable of clear expression
5. Must not contradict any express terms
Application
Board constructed to reflect interests of the parties
Political/Economic interest of gov, economic interest of ordinary shareholders
Problem is that articles dont deal with a change in shareholding that
results in board no longer reflecting appropriate shareholder interests,
without enabling this to be corrected
Terms must be read to mean that when the special share goes, the
government appointed directors go with it; so when the special share is
redeemed, the gov official is out
Also, upon redemption of the special share, the special C directors cease to
hold office
Holding:
The company was part of a privatization scheme, and the intent of the parties would
not seek to keep the gov officials as perpetual directors.

CBCA ss.9, 14, 15-18, 102-3(1) et (2), 104-106, 109, 115-116, 121,
and 256(2)

Corporate Purpose: Thesis

Ford v. Dodge
Facts:
This is argument between shareholders of Ford (D.) and director of Ford (F.). F.
building up funds for big expansion of the plant, and instead of giving dividends to
shareholders, he gave employees big wage increase. D. arguing that he is acting
against the corporate purpose (profit/wellbeing of shareholders) by not paying
dividends.
Issue:
Is F. acting against corporate purpose?
Reasoning:
1. The whole plan of expansion is part of a business plan carefully formulated to
provide more profits in the long run (no problem)
2. Raising employees wages in huge amount without paying dividends not so much
Goes against the interests of the company as well as the shareholders
Discretion of the directors will not be interfered with unless there has been
bad faith, willful neglect, or abuse of discretion

21

* However, the agents of a corporation cannot arbitrarily withhold profits

earned by the company or apply them to a use which is not authorized by
the companys charter
Cannot devote to companys purpose to public good on a whim; purpose of
the company is profit
[ all Ford had to do to win was convince the court that benefitting the public would
benefit the company; he was too big of a megalomaniac dick to phrase it properly at
trial]
Holding:
Expansion project is ok, salary increases arent; directors had duty to distribute
dividends to stockholders.

Anti-Thesis
Shlensky v. Wrigley
Facts:
Shareholder is bringing action against director of Wrigley for not hosting night-games
at Wrigley baseball stadium. S. claims that night games would produce more profits,
and that the only reason W. doesnt host them is because of a personal dislike for
them. S. alleges this amounts to direction against the corporate purpose la Dodge
v. Ford.
Issue:
Was W. acting negligently/mismanaging as a director by not having night games?
Reasoning:
S. alleges that the reason the Chicago Cubs arent making as much profit is because
they arent having night-games.
W. has admitted that he has not refused night games because of any interests in the
economic wellbeing of the company, but because of his concern for the neighborhood
Fraud, illegality, conflict of interest not the only bases for stockholders action
against director
S. argues that this establishes arbitrary/capricious use of directors
discretion, which under Dodge v. Ford is another actionable instance
Application
Clear that in Ford, court felt there must be fraud, etc. to ground an action against a
director; made clear when they refused to interfere with expansion
Taking potential patrons of the stadium (neighbourhood) into
consideration is a logical business move
Question is not whether it was right or wrong
Also no grounds to show that any damage has occurred to the company based on
W.s actions
Holding:
Burden of proof of S. hasnt been met; there were business justifications for W.s
decision, and not clear evidence of any detriment to the company resulting from
them.

Canadian Solution
BCE Inc. v. 1976 Debentureholders [2008]

(See p37)

22

Recent Legislative developments in BC and NS

BC Finance Statutes Amendment Act, 2012
NS Community Interest Companies Act, 2012

(C) Shareholders
Sources of financing available to a corporation. Basic
distinction: debt and equity. What is a share: the basic nature
of a share and basic rights on a shareholder
Sparling v. Quebec (Caisse de dpt et placement du Qubec)
Facts:
Q. is an agent of the Crown, therefore according to s.16 of the Interpretation Act, can
put itself outside the purview of the CBCA because of immunity provisions. Q.
became an insider of Domtar according to CBCA s.122 (2),(4) by owning more than
10% (22.7%) of its common shares. According to that article, Q. was supposed to
submit an insider report, which it refused to do under immunity. Director of Domtar,
S., filed for motion for declaration that CBCA applies to Q.
Issue:
Does the CBCA apply to Q., a Crown agent?
Reasoning: (SCC La Forest J)
Normally, a Crown agent is exempt from the application of state legislation
However, exception under the Benefit/Burden Exception to Crown
immunity (waiver exception)
Q.: By purchasing shares, Q. did nothing but exercise a right conferred by the charter
* The issue is not whether the benefit and burden arise under the same statute, but
whether there exists a sufficient nexus between the benefit and burden.
A share is not an isolated piece of property; it is a bundle of
interrelated rights and liabilities
Statute, common sense, and common law indicate that this bundle
cant be apportioned piecemeal at the whims of the Crown (taking
only benefits not liabilities)
* The very act of purchasing is an implicit acceptance of the benefits AND liabilities
Holding:
There was a close nexus between the benefit/burden to trigger the exception to
Crown immunity. By buying the shares, the Crown implicitly agreed to be governed by
the CBCA.

Atco Ltd. v. Calgary Power Ltd.

Facts:
A. owns majority shares of Canadian Utilities, which in turn owns all the shares of
three Alberta public utilities. A. attempted a takeover of C., which applied to Public
Utilities Board of Alberta for interim order restraining the takeover. Under the Public
Utilities Board Act s.98, Board found A. to be an owner of a public utility for
purposes of the Act, therefore subject to its jurisdiction.
Issue:
Does a parent company own the public utility of its subsidiary for the purposes of the
Public Utilities Board Act of Alberta?
Reasoning: (SCC Wilson J): DISSENTING
The public utility is the physical plant and associated services:

23

Shareholders have no proprietary interests in the assets of the

company in which they hold shares; their interest is in the shares
only
* Must distinguish between Control as a corporate law term and Control in its
dictionary sense which is what the legislator meant here; control of the physical
assets
The company continues to own, operate, manage and control its assets
regardless of who owns or controls it: Salomon v. Salomon and Co.
Application:
If the acceptance of A.s offer gives it de facto control over the companies, it does not
give the shareholders control over its public utility assets; companies retain this:
Obligations of owners more appropriately discharged by people having day
to day control of physical plant
The owners are the operating companies or public utility companies themselves
A. might obtain de facto control of the public utility companies, but it will
not acquire de facto control of the assets of Canadian Utilities and its
subsidiaries
* Shareholders do not own OR control the assets of the companies in which
they hold shares

Bowater Canadian Limited v. R.L. Crain and Craisec Ltd.

Facts:
B. filed application challenging voting provisions in C.s articles of incorporation;
offended the CBCA. Had step down provision whereby the special common shares
were worth 10 votes in the hands of C. but only 1 vote in the hands of any potential
transferee.
Issue:
Does the voting provision offend the CBCA and how can it be remedied?
Reasoning: (ONCA Houlden J)
The holders of special common shares share equally with other shareholders in
winding-up of corporation
All shareholders share equally in distribution of dividends
No express prohibition of this in CBCA s.24(4), but should be interpreted in
accordance with general principles of corporate law
Rights which are attached to a class of shares must be provided
equally to all shares of that class; rights attach to the share and not
the shareholder
The step down provision can be severed; so special common shares are worth 10
votes to whoever gets them.
Holding:
The voting provision does offend the CBCA; however severable.

Basic Limitation of the power of a shareholder

Kelly v. Electrical Construction Co [1907]
Facts:
Action to set aside the election of the board of directors of E. K. was not allowed to
use proxy votes conferred upon them in the voting, and contend that they would
have been elected had they not been barred from using the proxies.
Issue:
Did this constitute an usurpation of office?
Reasoning:
The election of directors is a matter under control of a majority of shareholders

24

In respect of acts within the powers of the company, and thus capable of
confirmation by the majority of the shareholders, the Court will not interfere at the
instance of individual shareholders
Plaintiffs have to obtain the consent of the company to sue in the companys
name
By-law respecting proxies passed by BoD 1897:
According to Companies Act s.47, directors have power to pass by-laws
regulating proxy votes, but for this By-Law to be valid, it had to be confirmed
at the next general meeting
This by-law was not confirmed, thus it ceased to have force
Annual Shareholders meeting 1905:
Purported to pass a by-law of the exact same language
Companies Act giving power to directors to pass by-laws concerning
proxy votes impliedly withholds it from general shareholders
Therefore, when the election of the directors happened, there was no by-law
regulating proxies in existence (BoD failed to do it, the shareholders cant do it)
Those proxy votes produced at the meeting were sufficient authorization, and
should have entitled those votes to count
However, no reasonable certainty who they would have voted for
* The election should be set aside and a new vote had
Holding:
There should be a new vote for directors.

Automatic Self-Cleaning Filter Syndicate Co. Ltd. v. Cuninghame

[1906]
Facts:
C. is a majority shareholder of A. and is trying to force the directors to effect a sale of
all the assets of the company which the directors dont agree with.
Issue:
Can a simple majority of shareholders order the directors to effect a sale that they
dont agree with?
Reasoning: (Warrinton J)
Depends on the construction of the articles of incorporation
On the true construction of the articles the management of the business/control of
the company are vested in the directors
To remove control of any particular transaction from them would require an
alteration of the articles, which would require a special resolution
The special resolution article wouldnt exist if they had wanted the possibility
of compelling the directors by simple majority
Directors cant be bound by the simple majority vote
Reasoning: (Collins)
If the shareholders want to compel the directors it has to be done by extraordinary
resolution, not simple majority vote
It is by consensus of all the individuals in the company that directors became
agents and hold their rights as agents; this is not a simple Principal-Agent
relationship
Reasoning: (Cozens-Hardy)
Articles of association are a K between the members of the company
Once there is a stipulation for a special resolution vote requirement, what
right is there to interfere with the K apart from in situations of misconduct on
part of directors?
Not a simple Principal-Agent relationship; directors are in position of
managing partners appointed to fill the post by a mutual agreement
between the shareholders

25

Holding:
The shareholders can only bind the directors according to the articles of
incorporation; in this case by a special resolution.

The mechanics of issuing shares and what assumptions

corporate law makes about the nature of shareholders and are
they still valid (the continuing validity of the dispersed
ownership assumption
CBCA ss.6(1)(c)-(d), 24, 25, 26, 30, 34, 49(8), 50, 118, 189

Shareholders rights to dividends and their rights upon

liquidation
International Power Co. v. McMaster University [1946]
Facts:
A company, is being liquidated. I. is a substantial owner of common shares, and M. is
a substantial owner of preference shares. Dispute over rights upon liquidation of the
different shareholders. Also side dispute about difference in dividend distribution
(common gets 10% while preferred get 7%).
Issue:
Are preferred share owners only entitled to their dividend plus repayment of their
shares at par upon liquidation, or are they entitled to equal sharing of surplus with
holders of common shares?
Reasoning: (SCC Taschereau J.)
The decision must depend upon the true construction of the essential words of the
letters patent + by-laws of the company
Under the Dominion Companies Act, preferred shareholders prima facie have
all the rights and liabilities of a common shareholder
* Can be limited by the by-laws, but in the absence of anything to the
contrary, then preferred shareholders have equal right to surplus as common
shareholders
After discharging the debts/liabilities and repaying to ordinary/preference
holders the capital paid on their shares, the surplus assets ought to be
divided amongst all the shareholders in proportion to the shares held
The rights of all classes of shareholders are on a basis of equality, unless they
have been modified by the by-laws or the letters patent of the company
In this case, there is nothing in the articles to limit the preferred
shareholders rights to share equally in the liquidation
The right to dividend and the right to capital and surplus assets in the winding up are
distinct
Preferred shareholders dividend rights are defined in the articles, and they
have no right to equality in this since they Kd into it
Holding:
Common and preferred shareholders prima facie have equal rights unless modified
by the by-laws or articles of the company.

The Mechanics of dividend declaration and dividend payment

R. v. McClurg [1990]
Facts:
Articles of incorporation of M. are divided into A Common (husbands): voting only, B
Common (wives): participating where authorized by the directors, and C Preferred:

26

preferred. The directors have discretion in the articles to allocate dividends among
classes of shares as they see fit. Crown saying that dividends in past years should
have been properly attributed to all the common shares notwithstanding the
discretionary provision; rights attach to the shares, not the people holding them.
Issue:
Is the discretionary dividend clause valid?
Reasoning: (Dickson CJ)
Decision to declare a dividend lies within the discretion of the directors, subject to
any restrictions included in the articles of incorporation
The rights carried by all shares to receive a dividend declared by a company
are equal unless otherwise provided in the articles of incorporation
The presence of a discretionary dividend clause can only be interpreted as creating
differences between share classes; rebuts the equality presumption
The fact that directors may consider the identity of shareholders doesnt
necessarily render the declaration invalid on the basis of a conflict of
duty/self-interest
The limitation on the duty is based on a Fiduciary Duty owed by
directors to the corporation (Canadian Aero Service Ltd. v. OMalley);
no breach here
Represents a legitimate exercise of the K rights between parties
Dissenting: (La Forest)
Directors do not have the power to discriminate between different classes of shares
when determining how a dividend should be distributed
All shares of a type must be treated equally
Even when more than one class of shares is created, the directors are not
free to discriminate arbitrarily between the classes when awarding a
dividend (just how much each will get)
Cites Jacobsen and Bowater as authority that even shareholders themselves
may not agree to circumvent the principle that rights attach to shares not the
individuals
This discretionary dividend clause contravenes principle that directors cant
favour one class at the expense of another
Shareholders cannot agree to give directors discretion to interfere with their
right to dividends/return of capital by choosing to give another series priority
Holding:
The potential of each type of share to receive dividends in different amounts is
sufficient to differentiate the A/B/C shares. It is valid exercise of incorporation powers.

CBCA ss. 42, 45, 211(7)(d)

Shareholders The Corporate franchise (1) When can

shareholders vote (regular and special meetings); on what can
shareholders vote; and the process of organizing shareholder
votes proxy solicitation
Goodwood Inc. v. Cathay Forest Products Corp [2012]
Facts:
G. is shareholder of C. applying for multiple orders against C. (i) order directing
holding of shareholder meeting; (ii) orders requiring C. to comply with provisions of
CBCA; (iii) order restraining C. from transacting certain types of business without
court approval prior to constitution of new BoD.
Current BoD lacks Quorum of directors (4/7; only has 3) according to Company
By-Law 1.

27

By law s.10: no business can be transacted until quorum is met, majority are
resident Canadians
o CBCA 105(3): directors cant transact business unless 25% of BoD are
resident Canadians
Ontario Securities Act ss.77, 78: C. has failed to file financial statements for
period after Sept. 30, 2010 = violation
CBCA 133(1): BoD of C. required to hold annual general meeting no later than
June 30, 2011; failure = violation
Issues:
Does the shareholder have the rights to force the BoDs position in this way?
Reasoning:
G. hired shareholder advisory firm VC&Co. to represent them
Submitted outline of plan to reconstitute companys BoD
Wrote to C. about CBCA s.111(2)
o Failing quorum of BoD/failure of remaining BoD to call meeting, special
meeting can be called by any shareholder
o C. BoD refused; called it a bad-faith move
Also requested pursuant to CBCA s.21 to see records of company and
shareholders list
o BoD hasnt complied
Mr. Chan (C. BoD) blames all problems on BoD members who left
Mr Miller (C. BoD) also divulged that business was still being carried out by them
Also, ~900K$ frozen in C.s Canadian account (no signatories; CFO
terminated)
Analysis:
(i.a) Calling a shareholder meeting
CBCA s.144 authorizes the court to call a shareholder meeting where other
means of calling it are impracticable
Courts have interpreted impracticable narrowly, ordering shareholder
meetings only in exceptional circumstances
G. is entitled to call a shareholder meeting
1. Current directors have failed to do so, contravening CBCA s.111(2)
2. Shareholders have lodged requisition with the BoD under CBCA 143(1); its
clear the BoD has no intention of responding by calling a meeting
Under CBCA 111(2) and 143(4) shareholders can call meeting where
board refuses or neglects to act
It is appropriate for the court to call the meeting in these extraordinary
circumstances
C. lacks a BoD with authority to manage business affairs of C.
Mr. Chan (C. BoD) called the request for meeting bad-faith; shows
fundamental misunderstanding of their duties; his comments raise concerns of
past mismanagement
(i.b) Directions for conduct of the meeting
Meeting must be held in accordance with timetable accommodating C.s shareholders
time decide who to vote for
Proxies will go through Equity Financial Trust Company
Distributing notice of meeting will be task of applicants (BoD not trustworthy)
C. is entitled to have access to funds to retain counsel to provide advice in
respect of ordered shareholder meeting (can apply to have funds unfrozen)
(ii) Compliance Orders
CBCA s.247 allows shareholders to apply to the court for orders in situations where
BoD does not comply with this act; the court can make any further order it sees
fit

28

1. List of shareholders; 2. List of beneficial owners; 3. Name/contact of

companys share transfer agent
Applicant is entitled to all three
(iii) Restrictions on powers of current BoD
G. seeks to prevent C. BoD from transacting any business other than that necessary
to convene the meeting; specifically preventing them from spending money, entering
Ks, hiring/terminating employees, etc.
Court must tailor remedy under CBCA s.247 to the specific issue
Must be proportionate
G.s orders should be granted pursuant to CBCA s.247
Serious doubt that C. BoD will comply with ordinary course of business
stipulation
Temporary receiver and manager should be named to deal in the meantime
Holding:
Yes to all three of G.s requests.

Goodwood Inc. v. Cathay Forest Products Corp [2013] (Costs)

Facts:
Pursuant to earlier ruling against C., G. submitted request for costs:
1. Printing notice of meeting/dissidents proxy circular
2. Fees of Court-appointed independent chair of shareholders meeting
3. Fees/disbursements of VC&Co (shareholder advisory consultant)
4. Legal fees (McCarthys)
Issue:
What fees is G. entitled to?
Reasoning:
At the meeting, C.s shareholders voted overwhelmingly to elect the four new
directors supported by G.
CBCA s.143(6) deals with reimbursement of costs of the requisitioning shareholders:
Any costs reasonably incurred by them in requisitioning, calling and
holding the meeting
For meeting called by court, no specific provisions, however court reserves
broad jurisdiction to determine/award costs under the CBCA
G. should recover costs similar to those he would be entitled to if he had
called the meeting himself (according to s.143(6))
1./2. Both recoverable as they represent costs incurred for holding the meeting and
calling the meeting
3. Fixed fee of 400K$ with VC&Co
Different types of work performed
I.
Actual requisitioning
II.
Providing evidence
III.
Discussions with the court-appointed temporary receiver and manager
IV.
Providing strategic advice to G. and shareholders
V.
Providing strategic advice to G.s proposed slate of directors
CBCA s.143(6) covers only those costs under first heading; the rest dont
fall under requisitioning, calling, holding the meeting
4. G. is entitled to legal fees incurred with McCarthys on a straight time basis plus
H.S.T. and disbursements
Fees incurred for calling/holding the meeting, including the application to
court to secure the meeting (falls under CBCA 143(6))
G. is not entitled, however, to bonus paid to McCarthys subject to success
Holding:
C. must reimburse G. on the terms discussed above.

29

CBCA ss. 109, 133-135, 137, 139-143, 146, 173, 176, 183, 190, 210211

Shareholders The Corporate Franchise (2) Obligations

shareholders have to the corporation and to other
shareholders; Limits on the right to vote in the articles/bylaws
Jacobsen v. United Canso Oil & Gas Ltd. (Alberta QB)
Issue:
Does U.s by-law 6 providing that no person can be entitled to vote more than 1000
shares no matter how many shares are owned contravene the CBCA?
Reasoning:
Only one class of shares
Company first incorporated under Companies Act, got supplementary letters patent
for new by-law under Canada Corporations Act, then validly brought forward through
articles of continuance for CBCA
Argued that law establishes a presumption of equality 1 vote for 1 share that cant be
upset
If this is to vary, then different share classes must be established
Analysis:
The provisions of the CBCA must be read as a whole, and not in isolation
CBCA 134(1): unless the articles provide otherwise, each share of a
company gives the holder 1 vote.
This must be read in relation to CBCA 24(3), which specifies that it is
only when there is more than one class of shares that different
rights, etc. attaching to shares may arise
Holding:
By-law 6 contravenes the CBCA and is invalid.

Jacobsen v. United Canso Oil & Gas Ltd. (Nova Scotia SC)
Facts:
Trial judge wasnt aware that U. was switched from Federal to Provincially incorporate
company in Nova Scotia. As such, U. would be under the Nova Scotia Companies Act,
not the CBCA.
Issues:
Is by-law 6 still invalid?
Reasoning:
Independent scrutineers/independent chairman:
A shareholder cannot complain if the company and its directors act within the
confines of those internal regulations in the absence of fraud, illegality or oppressive
conduct
None of those elements are present here
Restraining the use of by-law 6:
Trial judge didnt deal with question of voting restriction under NSCA, only CBCA
Not satisfied that it would be illegal under NSCA; it was approved by shareholders on
a 1 for 1 share-vote basis
For chairman to apply the by-law is not oppressive or unfairly prejudicial to the
plaintiff
Trial decision only decided that by-law was invalid under CBCA, not NSCA; a
trial regarding the by-laws validity under the NSCA must occur to
determine that matter, not at this summary hearing 4 days before the AGM

30

Holding:
The voting restriction should be applied in conformity with the articles of the
corporation.

Bowater Canadian Limited v. R.L. Crain and Craisec Ltd. (Repeat)

(see p22)

And on exercise of the shareholder franchise

TELUS Corporation v. Mason Capital Management LLC (BCCA)
Facts:
Dispute over whether, and at what rate, non-voting shares of TELUS will be converted
to common shares. BoD of T. wants exchange at 1:1. M. opposes this because it has
an interest in keeping the value of common shares higher that that of nonvoting
shares. Would require a 2/3 shareholder vote. M. set about acquiring a whole bunch
of shares by short-sales; ended up owning about 18.7% of the common shares for
voting, with only a 0.21% of the companys capital. T. realized it wouldnt be able to
get the majority needed, so cancelled the vote. They then changed the amendment
so that it would not require a special vote; only 50% + 1 for common voting shares,
still 2/3 of non-voting shares (clearly just a way to get around M.). T. takes position
this does not amend the companys articles. CDS on behalf of M. challenges. CDS
also brought its own changes forward under requisition of shareholder meeting that
T. brings action against asking for higher share exchange rate.
Issue:
Can CDS bring this action on behalf of M.? Does M. have the right to bring an action
with only a minimal economic interest in the Co.?
Reasoning:
TELUS argues only a shareholder can requisition a meeting; CDS isnt a shareholder,
therefore has no standing in the matter
If M. isnt a party to the matter, they shouldnt have named them in the action
Further, CDS has the right to requisition the meeting on behalf of M.
1. It must ensure that it is acting under instructions
2. Those instructions must come from persons who hold requisite number of
shares to requisition a meeting
There is nothing in the BCBCA s.167 that suggests that a requisitioning shareholder
must be the beneficial owner of shares or that he must disclose the name of the
beneficial owner
The Act should be read in its entire context in its ordinary sense
Resolutions brought by CDS
Trial judge also found resolutions put forward by CDS would amend Art. 27 of T.s
bylaws without complying with the requirements set out in that provision
The resolution would not delete, amend, modify, or vary existing provisions
of Art.27 (which would require a 2/3 special vote) since no right to exchange
exists
The articles dont suggest any ability to exchange non-voting shares for voting
ones; therefore no right is being altered by CDSs proposed amendments
* Therefore, CDSs resolutions valid
Empty Voting:
T. argues that M. shouldnt be able to do this because while they hold huge amount of
votes, very little economic interest
Despite its hedged position, M. does hold some economic interest in T.
The lack of economic connection is no reason to deny the voting rights that it
came by legally
Holding:

31

Ruled for M.; CDS can bring the action; M.s voting rights stand despite hedged
interests.

Management of a Corporation
Introduction to the Structure of Corporate Management
Meridian Global Funds Management Asia Ltd v. Securities
Commission

Directors and Officers; current structure and make-up of the

board; and the effect of improper appointment of directors
Morris v. Kanssen [1946]
Facts:
A company was incorporated with the purpose of purchasing a movie theatre. K. and
C. were sole shareholders. They acquired the theatre. C. schemed with S. to get rid of
K. C. and S. falsely claimed that a meeting of directors was held where S. was
fraudulently appointed director, and who then requested K. resign from office of
director. Later, no general meeting held in 1941, so both C. and S. ceased to be
directors according to companys articles. In 1942, S. transferred shares to M. K. then
issued this action, for shares to be declared in only himself and C. as before.
Issue:
What happens to M.s interests?
Reasoning: (Lord Simonds)
C., S., and K. all ceased to be directors in 1941
M. relies on s.143 of the Companies Act and Article 88:
The acts of a director or manager shall be valid notwithstanding any defect that may
afterwards be discovered in his appointment or qualification
Can only be invoked where there is defect afterwards discovered in
appointment or qualification of a director
Vital distinction between (a) appointment where there is a defect, (b) no appointment
at all
(a) Some act is done which purports to be an appointment, but is inadequate
because of some defect
(b) No defect because there is no act at all
Application:
The section does not cover a case in which there has been no genuine attempt to
appoint at all
Section cannot be utilized for the purpose of ignoring the substantive
provisions relating to appointment
It is supposed to cure defects in appointment; here there has been a total lack
of valid appointment = in reality a fraudulent usurpation of authority
An ostensible agent cannot bind his principal to that which the principal cannot
lawfully do
Here M. was acting as director; he cannot presume in his own favour that
things are rightly done if inquiry that he ought to have made would tell him
that they were wrongly done
Holding:
Appeal dismissed.

32

Corporate Criminal Liability

Rhne (The) v. Peter A.B. Widener (The)
CBCA ss.102(1), 115, 116, 118, 119, 121, and 122(1)(b), see also
Criminal Code ss.2 (definition of organization, representative, and
senior officer), 22.2

Directors Duties of Care

Peoples Department Stores Inc. (Trustee of) v. Wise
Facts:
Wise acquired Peoples from Marks and Spencer. L.W., R.W. and H.W. (the Wise
brothers) were majority shareholders, officers and directors of Wise, and the only
directors of Peoples. Because of covenants imposed by M & S, Peoples could not be
merged with Wise until the purchase price had been paid. Almost from the outset,
the joint operation of Wise and Peoples did not function smoothly. Parallel
bookkeeping, combined with shared warehousing arrangements, caused serious
problems for both companies. As a result, their inventory records were increasingly
incorrect. The situation, already unsustainable, was worsening. L.W. consulted the
vice-president of administration and finance of both Wise and Peoples in an attempt
to find a solution. On his recommendation, the Wise brothers agreed to implement a
joint inventory procurement policy whereby the two firms would divide responsibility
for purchasing. Peoples would make all purchases from North American suppliers and
Wise would, in turn, make all purchases from overseas suppliers. Peoples would then
transfer to Wise what it had purchased for Wise, charging Wise accordingly, and vice
versa. The new policy was implemented on February 1, 1994. Before the end of the
year, both Wise and Peoples declared bankruptcy. Peoples trustee filed a petition
against the Wise brothers. The trustee claimed that they had favoured the interests
of Wise over Peoples to the detriment of Peoples creditors, in breach of their duties
as directors under s. 122(1) of the Canada Business Corporations Act (CBCA). Bank
and M&S get paid off, but M&Ss seizable assets disappearing by Wise milking
Peoples assets; this is why unsecured creditors come in through trustees.
Issues:
Do the directors of a corporation owe creditors a fiduciary duty?
Reasoning: (Major and Deschamps JJ)
The creditors claimed that the inventory policy was detrimental to Peoples, because
Peoples had merchandise, while Wise controlled the cash.
Fiduciary Duty:
The fiduciary duty is owed to the corporation and not to the creditors
CBCA s.122(1)(a). No fraud or dishonesty present. The decision to allocate the
inventory in the particular manner was not a situation where the directors
profited or put themselves in conflict of interest. Therefore, any liability would
have to arise by virtue of the directors breach of the generalized duty of
loyalty to the company; that is, the directors did not act in the companys best
interests.
The directors can take the creditors interests into account, but they do not
have to (permissive approach to the entity model).
The court found, to the contrary, that the directors did act in Peoples best
interests by trying to create a more efficient (less costly) procedure for
acquiring, storing, and sharing merchandise between the two companies.
The creditors can sue personally under the Oppression Remedy or Duty of
Care if the directors acted in a way that affected their interests or
expectations.

33

Therefore, there is no need to extend the duty of loyalty to require that the
directors account specifically for the creditors interests when managing the
corporation.
The duty of the directors is to make the company a better company
not necessarily preferencing one group of stakeholders over another .
Duty of Care:
Directors wont be held to be in breach of the duty of care under s.122(1)(b) of
the CBCA if they act prudently and on a reasonably informed basis
Reasonable in light of all circumstances, including prevailing socio-economic
conditions, about which they knew or ought to have known
No breach here; implementation of new policy was business decision trying to
correct serious problem
Rationale:
The duty of loyalty does not extend to creditors. So long as the directors act in the
best interests of the corporation, even if creditors take a loss, the directors are not
personally liable for their decisions.
Holding:
No.

Fiduciary Duties Introduction Basic Statutory Duty

Peoples Department Stores Inc. (Trustee of) v. Wise

The duty of supervision

In re Caremark International Inc.
Facts:
Defendant corporation, Caremark International, Inc., provides health care services
and products to patients who are often referred to them by a physician. Since the
business is reliant on referrals, there is a temptation by companies such as Caremark
to compensate physicians. A federal law, the Anti-Referral Payments Law (ARPL) is
in place to prevent such a system, and in 1991 the Department of Health and Human
Services began investigating potential ARPL violations. The Department of Justice
joined the investigation soon thereafter, and by 1992 Caremark instituted several
new policies and procedures in attempt to find any internal wrongdoings. But in 1994,
Caremark was indicted for violating the ARPL. Plaintiffs initiated this suit that year,
alleging that the Board of Directors did not exercise the appropriate attention to this
problem.
Issues:
Did the Board exercise an appropriate level of attention to the possibility of ARPL
violations?
Reasoning:
A breach of duty to exercise appropriate attention, as the court notes, is more
difficult for Plaintiffs to prove than a breach of the duty of loyalty.
Most decisions that would come under this duty will resemble many
decisions shielded by the business judgment rule.
There was no evidence that the directors knew that there were ARPL
violations, and there was no systemic or sustained failure to exercise
oversight.
Rule to take away:
Directors are potentially liable for a breach of duty to exercise
appropriate attention if they knew or should have known that

34

employees were violating the law, declined to make a good faith effort to
prevent the violation, and the lack of action was the proximate cause of
damages.
Holding:
The terms of the settlement merely required Caremark to institute policies to further
assist in monitoring for violations, which they did. Therefore the settlement was
approved.

CBCA, s.122(1)(a)
122. (1) Every director and officer of a corporation in exercising their powers and
discharging their duties shall
(a) act honestly and in good faith with a view to the best interests of the corporation;

Managers Fiduciary Duties I Conflict of Interest and Duty

North-West Transportations Co. v. Beatty [1887]
Facts:
Plaintiff, B., is shareholder of N., defendants are the company and 5 shareholders who
were directors at the commencement of the action. Company passed by-law to
purchase a new steamship through the defendant J. B. claims that J., one of the
shareholder/director/defendants, breached a fiduciary duty to company through
conflict of interest.
Issue:
Did defendant breach a fiduciary duty to the company through his conflict of interest?
Reasoning: (Privy Council)
Has been proven that the purchase of another steamer was essential to conduct of
the companys business, and the steamer purchase through J. was suited to that
purpose; price was fair/reasonable
Plaintiff argues resolution brought about by unfair/improper means:
J. acquired a majority of the shares of the company then transferred the
necessary amount to become a director to his two buddies
o However no agreement between them about sale of steamer
o They both, however, thought it would be beneficial to the company
Voting power of three was therefore such that they could command a
majority at any meeting of shareholders; so they used it to buy a new
steamer from the director, J.
SCC ruled for B.; based their decision on the fiduciary character of J. as a director and
breach of fiduciary duty by having personal interest in transaction of Co
Privy Council:
In form and content, by-law was adopted by majority of votes which
must prevail unless the adoption was brought about by
unfair/improper means
Constitution of company allowed J. to acquire this voting power; Charter itself
recognized this
He had a perfect right to acquire further shares and to exercise his
voting power as he saw fit to elect directors with similar views as his
Acquisition of steamer was uninfluenced question of policy
Holding:
Defendant was acting within his rights in by-laws/articles in voting as he did. Appeal
allowed.

35

Affirming or Approving Interested transactions

CBCA s.120
120. (1) A director or an officer of a corporation shall disclose to the corporation, in
writing or by requesting to have it entered in the minutes of meetings of directors or
of meetings of committees of directors, the nature and extent of any interest that he
or she has in a material contract or material transaction, whether made or proposed,
with the corporation, if the director or officer
(a ) is a party to the contract or transaction;
(b ) is a director or an officer, or an individual acting in a similar capacity, of a party
to the contract or transaction; or
(c ) has a material interest in a party to the contract or transaction.

Managers Fiduciary Duties II Corporate Opportunity Doctrine

Regal (Hastings) Ltd. v. Gulliver [1942]
Facts:
The parent corporation owned a theatre. The company sought to acquire the lease of
two more theatres, although it didnt have enough capital to finance the transaction.
The directors could have guaranteed the leases; instead, they supplied the subsidiary
corporation with the capital personally. The parent corporation acquired the leases.
When the parent corporation was sold, the directors received a profit. The new
directors, on behalf of the corporation, sought to recover the profit from the former
directors.
Issues:
Are the former directors liable to account for the profits?
Reasoning:
Directors and officers cannot make use of a corporate opportunity by reason of
and in the course of their position as directors.
Per Lord Sankey, at all material times, they [the defendants] were the
directors and in a fiduciary position, and they used and acted upon their
exclusive knowledge acquired as such directors. They framed resolutions by
which they made a profit themselves. They sought no authority from the
company to do so, and by reason of their position they are liable to account
to the company.
Rationale:
By reason of is the knowledge element while in the course of is the time element
of the rule.
Holding:
Yes.

Peso Silver Mines Ltd. v. Cropper

Facts:
Cropper was the director of the plaintiff company. He had years of business
experience in the mining industry. Dickson, a prospector, approached the company
with an offer to acquire a mining claim. The Board considered the offer (in good faith)
but rejected it, because the Board only had a certain amount of money to spend on
speculative claims. Cropper, as an officer and director of the company, received two
to three offers a week. Sometime later, Dickson approached Cropper with the offer
personally. Cropper and Dickson formed a company to manage the claim.

36

When the plaintiff company asked Cropper to disclose and turn over his
interests in other mining concerns, Cropper refused. He was fired. The plaintiff
company asked Cropper to turn over the shares in the new company.
Issues:
Is the plaintiff company entitled to the shares?
Reasoning:
The Court applied the rule in Regal (Hastings). To succeed, the plaintiff must show
that the director took a corporate opportunity by reason of and in the
course of his employ as director. The plaintiff need not prove bad faith.
The Court distinguished Regal on the basis that Cropper did not rely on
privileged or confidential information. Dickson approached Cropper in his
personal capacity, not in his capacity as a director.
Furthermore, enough time had passed between the rejection of the offer by
the corporation and Croppers acceptance (forgot all about it) which
evidenced the fact that that the opportunity was no longer a corporate
opportunity.1
Rationale:
The duty to avoid taking opportunities does not last indefinitely. After the
proposition is rejected by the company, a director can act on opportunity.
Holding:
No.
* SideBar: The conflict between Peso and Regal seems to be: the more involved
you are as a director, the less likely it is that you can take advantage of
business opportunities in your personal capacity. This seems antithetical to the
rule in Regal.
What happens if the directors or officers resign? Does the duty of loyalty end?
The Court in Canadian Aero held that the duty of loyalty persists.

Can. Aero v. OMalley

Facts:
OMalley and his co-defendants were exec officers of C. The defendant, while
controlling C., met with Guyanese officials to secure a mapping contract. Project
funded by the Canadian government, which solicited proposals from other
companies. Canadian Aero bid on the deal. OMalley and the others, however, left C.
to start their own company, Terra, which also bid. The Terra bid was accepted.
Issues:
Is OMalley liable to cede the profits to Canadian Aero?
Reasoning: (SCC Laskin J)
OMalley and his colleagues stood in a fiduciary relationship with Canadian Aero. The
law would be reduced to absurdity if directors could simply resign then take a deal
from former Co. Canadian Aero never abandoned its hope of getting the bid, which
distinguished this case from Peso.
The acquisition of knowledge about an opportunity while acting as a
director is not enough to impose an absolute prohibition. If the director
can conform to the contextual factors laid out, then the court can absolve the
defendant of liability:
o The position or office held,
o The nature of the opportunity,

1 What would have happened if Cropper had been offered the opportunity before the
corporation? Cropper is not under a duty to give the opportunity to the corporation.
In such a case, there would have been no problem. In this case, however, Cropper
found out about the offer by virtue of his office. Dickson went to the company first
and as such the company had the opportunity to act.

37

o Ripeness/timing,
o Knowledge possessed, and
o Status of the fiduciary relationship, among others.
Also, what distinguishes this case from Peso is that the defendants took advantage
of the companys confidential information, which they gathered in the course of their
position, to snatch the deal
This was a case of flat out deception. The defendants used the
confidential information obtained in the course of their employ to create
their own proposal.
Rationale:
When the directors of a company leave, their fiduciary duty does not expire at that
moment.
Holding:
Yes.

Broz v. Cellular Information Systems, Inc.

Facts:
Broz was President and sole stockholder of RFB Cellular. He was also a board member
of Cellular Information Systems (CIS), a competitor of RFB.
RFB owned a license (Michigan-4) which allowed it to provide cell service to
a portion of rural Michigan. Mackinac Cellular Corp. owned its own license
(Michigan-2) which was immediately adjacent to Michigan-4.
Mackinac wanted to sell Michigan-2, and Broz, after meeting with numerous
CIS directors, went ahead and purchased Michigan-2 for RFB.
Issue:
By purchasing the license for RFB, did Broz breach his fiduciary duties to CIS? More
specifically, did he usurp a corporate opportunity?
Reasoning: (Delaware)
A corporate opportunity exists where:
(1) The corporation is financially able to undertake it;
(2) It is in the line of the corporations business;
(3) It is of practical advantage to it;
(4) It is one in which the corporation has an interest or a reasonable
expectancy; and
(5) By embracing the opportunity, the self-interest of the officer or
director will be brought into conflict with that of the corporation.
Application:
(1) CIS was not financially capable of exploiting the Michigan-2
opportunity it had just emerged from a length and contentious insolvency
reorganization.
(2) CIS had no interest or expectancy in the Michigan-2 opportunity
it was actually in the process of divesting its cellular licenses.
(3) There was no conflict Broz communicated with a number of the
directors prior to moving forward.
Holding:
No.

38

Managers Fiduciary Duties III Change of Control

Transactions.
Introduction to the rise of takeovers; Early attempts to control
the process: Reviewing the exercise of powers by directors for
an improper purpose
Hogg v. Cramphorn Ltd.
Facts:
H. made bid to buy all shares of the defendant company. Directors of C., for various
reasons, didnt believe that it would be in best interests of either the company or its
employees to make the sale, moved to block the purchase. Made allotment of 5,707
preference shares with special 10 votes each which were assigned to trust for benefit
of the employees. The BoD made loan to trustees to enable it to purchase the shares
out of the Employees Pension Fund. Then advanced further 28,293$ to enable
trustees to purchase more preference shares. Thus, the BoD had enough votes to
block H.s takeover. H. became co-owner of 50 ordinary shares, brought action.
Issues:
1. Was the BoD actions attaching 10 votes to each of the 5707 preference shares
ultra vires?; 2. Was allotment of those shares to trustees ultra vires?; 3. Was the
companys execution of the trust deed ultra vires?
Reasoning:
Voting
According to a collective reading of the companys articles s.13/75,
no more than one vote can be attached to each share; could not have
attached the special 10-vote privilege to the 5707 shares = ultra vires BoDs
powers
However, the allotment of new shares itself is perfectly fine
Allotment of shares to trustees/execution of trust
Allotment was made with primary objective of preventing H. from taking over
Directors were using the utmost good faith/acting in what they considered
best interests of the company
However, Directors acted with primary purpose of ensuring their control of
the company, and manipulated the voting positions
BoD is in fiduciary position when exercising its powers and cannot act in such
a way as to interfere with exercise by the majority of its constitutional rights
Good Faith of BoD doesnt factor in; a majority of shareholders in a
GM is entitled to pursue whatever course it wants whether stupid or
not
Power to issue shares was a Fiduciary Power which the BoD exercised for an improper
motive
Had the majority of shareholders approved the issue of shares, it
would be ok
Therefore, this question should be put to the GM, minus the 5707 shares
issued, to decided whether the shareholders want to go along with BoD
The issue of the Trust and their subsequent purchases of shares are integrally
connected to issue of shares; if shares fail, so to does the trust
Holding:
10 vote provision is ultra vires; the question of share issuing to trustee will be
remitted to GM of company
* All the actions of the BoD ratified by shareholders at GM.

Teck Corp. v. Millar

Facts:

39

Afton mines is a junior mining company. It had acquired a stake in land that was rich
in copper. It wanted to develop the land, but lacked the capital, resources, and
expertise. Aftons directors, including Millar, sought out a senior partner to help Afton
with the project. Afton and the senior company would conclude the ultimate deal
where the senior would acquire shares in Afton in exchange for technical assistance
and financial capital.
Teck had shown an interest in doing the ultimate deal with Afton; however, Millar and
the other directors felt that Teck was not a suitable partner. Teck said screw you and
acquired the majority of the shares in Afton so that it could replace Millar and the
other directors (by a special meeting of the shareholders) and conclude the ultimate
deal. Before the Board was dismissed, Millar concluded the ultimate deal with Canex,
thus diluting Tecks majority interest in Afton.
Issues:
Were the directors defensive tactics disloyal?
Reasoning:
The directors are not agents of the shareholders.
Shareholders do not have powers of management; they have powers to vote
at shareholders meetings, to remove directors, to pass amendments to
corporate by-laws, etc.
The court overrules Hogg v. Cramphorn to state that the directors can
consider the interests of the company as a whole, and not just the
interests of the majority shareholders.
Shareholders are not the owners of the corporation
They are passive investors and the directors have to account for the interests
of the other stakeholders as well.
The directors cannot ignore the interests of shareholders, however.
The directors would be acting in good faith even if they considered the
interests of the employees.
The Court applies a modified objective test to assess the fidelity of Millars actions.
The directors must perceive a substantial risk of harm to the
corporation to justify their actions
Must be acting in good faith
Must have reasonable grounds to believe that the takeover is not in
the best interests of the company
In this case, Millar was wary of Teck; he had misgivings about its financial capacity,
its technical expertise, managerial strength, and marketing experience.
Rationale:
The directors can use defensive tactics if they reasonably believe that the acquiring
company would substantially harm the corporation.
Holding:
No.

The New Approach

BCE Inc. v. 1976 Debentureholders [2008]
Facts:
Plan for leveraged buyout of all shares of BCE, which owns Bell Canada, valued at
52B$, but which would seriously water-down the value of bonds (debt) held by
debentureholders of Bell because of the added risk from the extra debt being taken.
B. said it would honour its K terms to D., but would act in best interests of bthe
company. D. brings action under oppression (CBCA s.241) and opposition of court
approval because of lack of fairness and reasonability (CBCA s.192).

40

Issues:
Is the deal void on oppression or fairness/unreasonability?
Reasoning: (SCC, by the court)
The Law
Directors of the corporation (appellants in B.) have (1) fiduciary duty to the company
and (2) a DoC
This case concerns the fair treatment component of the directors fiduciary
duty
It is clear that where the interests of the stakeholders/company conflict, the
directors owe the duty to the corporation (Peoples)
However, in considering what is in the best interests of the corporation, directors
can look to the interests of shareholders, employees, creditors, consumers,
governments, etc.
Business Judgment Rule: Courts must give deference to the business
judgment of directors so long as those decisions lie within a range of
reasonable alternatives
Remedies available to shareholders:
1. CBCA s.239 Derivative Action
Allows stakeholders to bring action on behalf of the Co. to enforce directors
duty to the corporation when directors are unwilling to do so
2. CBCA s.122(1)(b) Civil Action for breach of DoC
Duty not solely owed to corporation (like in fiduciary), thus may be basis for
liability to other stakeholders (Peoples)
3. CBCA s.241 Oppression
Focuses on harm to the legal and equitable interests of stakeholders affected
by oppressive acts of a corporation/its directors (available to a wide range of
stakeholders)
(A) Oppression Remedy
Security holders of a corporation fall within the class who may bring a claim for
oppression
It is a broad equitable jurisdiction to enforce not just what is legal,
but what is fair
Criteria:
1. A breach of a reasonable expectation
a. Some determining factors:
i. General commercial practice; nature of the corporation; past
practice; representations and agreements; nature of the
corporation, relationship between the parties; steps claimant
could have taken to protect themself; etc.
2. Amounting to oppression, unfair prejudice, or unfair disregard
Directors may find themselves in situations where it is impossible to please all
stakeholders
They must decide what is in the best interests of the corporation in
the particular situation it faces
Application
D. asserts that they had:
(A) A reasonable expectation that B. would protect their economic interests as
security holders in Bell Canada by maintaining the investment grade trading value of
their debentures
B. took 3 different bids, all involved serious debt.
No reasonable expectation established here
(B) A reasonable expectation that the directors would consider their economic
interests in maintaining the trading value of the debentures

41

Reasonable expectation established

But directors fulfilled their duty to consider D.s interests; made
commitments to honour K; just decided that while K terms would be
honoured, no other commitments could be made
Criteria at (i) weigh against finding an expectation beyond the K interests
* No breach of reasonable expectation established
(B) The s.192 Approval Process
Is the arrangement, objectively viewed, fair and reasonable from the PoV of parties
whose legal rights are being arranged?
Difference between oppression and approval:
O: onus is on claimant to establish oppression/unfairness
A: onus is on corporation to establish that the arrangement is fair/reasonable
Seeks to ensure a fair balance between conflicting interests during major changes to
corporate structure
* Would only apply to stakeholders whose legal rights could potentially be
affected
So stakeholders with only an economic interest would not fit the
glove
Criteria:
(corporation must satisfy the court that)
1. Statutory procedures have been met
2. Application has been put forward in good faith; and
3. The arrangement is fair and reasonable (Business Judgment Test; as opposed
to Business Judgment Rule)
a. Valid business purpose
b. Resolves objections of those whose rights are being arranged in
fair/balanced way
* Variety of factors can weigh in: necessity of arrangement to corporations
continued existence, approval of majority of shareholders/others entitled to
vote, proportionality of impact on affected group
Application
First and second criteria have been met
D. did not hold any legal powers only economic interests, therefore legal
rights not affected, and they dont fall within an affected class
contemplated by s.192
98% of the shareholders voted in favour of the transaction
The approval of the deal goes through.
Holding:
Appeals allowed.

Managers Fiduciary Duties IV Change of Control Transactions

II; Protecting Directors: D & O Insurance and Indemnification of
directors
Cytrynbaum v. Look Communications Inc. [2013] ONCA
Facts:
C. were directors of L. who adopted a share plan (SARP) as incentive for
officers/employees. Contrary to the terms of the SARP, the BoD authorized payment
of plan at almost twice the market value per share (it was supposed to be at market
value). Payments not disclosed to shareholders until almost a year later. Foreseeing

42

lawsuit, directors then authorized Co to pay 1.5M$ in legal retainers for their legal
fees, then resigned as directors. L. (on behalf of shareholders) commences action
seeking repayment of bonuses for breach of fiduciary duty, etc. Subject of this appeal
is L.s refusal to pay advance funding 1.5M$ in legal fees. C. seeking declaration that
L. has to pay.
Issue:
Is L. required to pay the advance legal fees of former directors?
Reasoning: (Sharpe ONCA)
The Law
In Canada, advance funding for legal costs for a Cos directors requires
court approval according to CBCA s.124(4)
Also, CBCA s.124(3)(a) requires that the directors acted honestly and in good
faith with a view to the best interests of the corporation
Directors benefit from a presumption of good faith which the party bringing
the action can rebut by establishing a strong prima facie case of bad faith
CBCA s.124(4) applies both to actions brought by the corporation and to derivative
actions
Application
1. Advancement of legal fees requires court approval, which should be
withheld if director has not acted in good faith (CBCA s.124(3)-(4))
2. The strong prima facie test for rebuttal of the presumption of good faith of the
directors strikes an appropriate balance between encouraging responsible behavior
and protecting the Co vs. Protecting the directors
3. The trial judge did not err in finding a strong prima facie case of bad
faith against the directors
The share valuation for the SARP plan was twice the actual market value,
resulted in undue profits for directors
C. authorized payment of legal fees without proper legal advice and on their
way out the door
Business Judgment Rule doesnt protect them here; was not within a range of
reasonable alternatives, and was not taken with any legal advice
The retainer payments were part of a pattern of self-interested behavior that
supports finding a strong prima facie case of bad faith
Holding:
Appeals dismissed; C. is screwed.

CBCA s.124

Reasons for setting the basic corporate risk

allocation: veil-piercing and reverse veil-piercing
Lee v. Lees Air Farming Ltd.
Facts:
Lee was the director, sole shareholder, and employee of Lees Air Farming. He took
out employment insurance (as required by law) for the company. Lee died in a plane
crash while doing business for the company. The insurance company refused to pay
the indemnity to Lees wife, explaining that Lee was a director and not an employee.
Issues:
Can Lee be both a director and employee of a corporation?
Reasoning:
Again, what does it matter if Lee died, or someone else did.
A person can have multiple offices; the corporation contracted with
Lee to hire him as an employee (they are separate: Peoples)

43

It is up to the creditor, the insurance company, to determine the risk of Lees

death.
In this case, Lee was a contractual employee of the corporation. He earned a living by
piloting for the business.
Once you have the Co its a separate legal personality
Lee as director enters into K with Lee the worker
From legal analysis, its correct; company is separate legal
personality telling Lee the person what to do
Rationale:
A person can hold multiple roles in a corporation.
Holding:
Yes. A person can have multiple offices/roles.

Transamerica Life Insurance Co. of Canada v. Canada Life Assurance

Co.
Facts:
The plaintiff corporation sued the parent company (parent-co) of its co-contractor, as
the subsidiary (sub-co) did not have sufficient assets to pay its obligations. The
plaintiff contended that the sub-co a mortgage broker -- should have done a risk
assessment of its clients.
Issues:
Should the court allow the claim against parent-co?
Reasoning:
The court described the relationship between parent-co and sub-co as follows:
sub-co had its own head office,
it was managed independently of parent-co, parent-co dealt at arms-length
with sub-co.
Parent-co had not been involved in any dealings with the plaintiff, nor did the
two parties communicate with each other.
* The plaintiff is a sophisticated party that should have known that it was dealing with
a subsidiary corporation that might be under-funded.
The plaintiff should not have considered parent-co to be an underwriter for its
losses.
Applying Salomon, the parent-co and sub-co are distinct persons.
Only where there is a compelling reason to break down the corporate veil will
the courts do so.
The entities must act as a single business entity to merit piercing
the veil in this case. Otherwise, the risk is that the courts will engage in
palm tree justice.
Under the common law, the corporate veil can be pierced when:
(1) Legislation allows it;
(2) The corporation completely dominates another Co. and uses it as a mere
sham used to shield fraudulent or improper conduct [this is problematic];
a. Almost have to show that the basic mechanics of running the
dominated Co. have been set aside
b. Conduct akin to fraud
(3) When the corporation is acting as an agent.
Rationale:
Without evidence of fraud, the court will not pierce the corporate veil and implead a
parent Co.
Holding:
No.

44

VTB Capital PLC v. Nutritek International Co.

Facts:
V. entered deal through a Russian company RAP to buy six Russian dairy companies,
for 225M$. RAP was to get the loan from V. then buy the companies from Nutritek.
Nutritek was owned by Marshall Capital Holdings, which was owned/controlled by
Konstantin Malofeev (M.). The companies ended up being worth about 40M$, so V.
was in essence an unsecured creditor when RAP went bankrupt. V. trying to pierce
the corporate veil to hold M. and MCH liable.
Issue:
Can V. hold M. and MCH liable for RAPs defaulted debt?
Reasoning: (Lord Neuberger)
V. relied heavily upon false representations as to value of dairy companies when they
approved the loan to RAP.
V. ignored warnings from risk department
Failed to properly vet the borrower
Application
V. wants MCH and M. to be held jointly/severally liable with RAP for
breaches of loan agreements as if they were co-contractants
Alleged that M. used RAPs separate legal status to disguise the ownership
ultimately exercised over RAP by M. and MCH
Is piercing the corporate veil a real thing?
Precise nature, basis, meaning of the principle is obscure
Often accompanied by prejorative expressions (sham, mask, cloak, etc.) which
risk allowing moral indignation to win over legal principle
May be right to allow the veil to be pierced in some circumstances, but cant be
invoked merely where there has been impropriety
It is necessary to show control of the company and impropriety by
the wrongdoer at the time of the relevant transaction
Application of joint/several liability here goes against Salomon
Company should be treated as being a person by the law in the same
way as a human; there were multiple levels of separation between
him and the deal
None of the actual King parties intended to K with M., and he did not K with
them
M. never acted as if he was liable under the agreement
None of the facts involved RAP being used improperly; all of V.s allegations are based
on misrepresentations of Nutritek which RAP had nothing to do with
Holding:
V.s case fails; they cannot pierce the corporate veil to pursue M. or MCH

Third Parties suing directors, employees, and shareholders

directly of a corporation for consequences of their interaction
with the corporation. Suing shareholders
The thin capitalization argument
Walkovsky v. Carlton
Facts:
Walkovsky was hit by a driver employed by Carltons company. Carlton structured the
taxi company so that it would be a conglomerate of smaller sibling corporations. Each
corporation has two cabs and the minimum amount of liability insurance. Walkovsky
sued Carlton as the principal shareholder arguing that the sibling corporation was a

45

sham (suing C. would get more money in this scenario than one of the undercapitalized cab companies).
Issues:
Is Carlton personally liable as a shareholder?
Reasoning:
The court rejects the plaintiffs enterprise theory of liability.
The defendant is entitled to structure the company for tax
advantages and to minimize the risk of liability.
The court also rejects the plaintiffs fraud theory as the corporation was not
set up fraudulently. Had the legislation required that cab companies
assume greater insurance, it would have stated so.
Walkovsky should not be able to win the accident lottery by having access to deeper
pockets.
Dissenting: Per Keating J
In this circumstance, legal personality is being abused.
Carlton is using the right to incorporate as an abuse of rights.
Carlton sets up a flimsy corporation to minimize liability.
The firm was intentionally under-capitalized.
Cab driving involves more than an ordinary risk.
Carlton anticipated the risk, which is why it under-capitalized. This shows
concealment and fraud.
Rationale:
The court was unwilling to disregard legal personality because the debtor was
undercapitalized.
Holding:
No.

Problem of suing directors for inducing the breach of contract

into which a corporation they are directors of and the scope
the Said v. Butt defence
London Drugs
Iacobucci: (majority)
Corporation and employees are separate legal persons
They each owe a duty of care to not commit tort against 3rd parties
The employees breached this DoC
Exception that allows them to have defence to it through exemption clause in
the K
The 3rd party consensually entered into agreement with a LL-Co, and shouldnt
be able to avoid defence
La Forest: (minority)
Hold on
In order to hold them in negligence, have to find a DoC
When employees are acting as the company, they dont owe a DoC separate
from the Co
*Majority reasoning allows obnoxious actions against employees where K is badly
drafted
* First question is always: what is the interaction between the 3rd party and the Co? K
or Tort?
If its K, then look for limitation of liability

46

Said v. Butt
Facts:
B. was chairman/managing director of a theatre which S. often frequented. There was
a falling out between parties, S. began to openly criticize B. There was a big opera
opening, and S. tried to get tickets, but was refused. Instead he bought them through
a friend. B. wouldnt have sold them to him otherwise. At the theatre, B. spotted S.
and had him escorted out, tried to return his money to him. S. brings action for B.
knowingly inducing the theatre company to breach a K.
Issue:
Can an agent be held liable for inducing his principle to breach a K?
Reasoning:
Defendants case rests solely on ground that B. procured the theatre to break its K
with S.
Before S. can succeed at trial, he has to establish that he actually had a K with the
theatre company
Where a person is deceived as to the real person with whom he is King and
that deception induces the K or renders its terms more beneficial for the
deceiving party, the K cannot be enforced against the deceived party
S. knew that B. wouldnt sell him ticket, cannot constitute himself a
contractor simply by going through another person
No K
If there were a K, could S. pursue B. (3rd party) for knowingly procuring a breach of his
K with theatre?
If it were so held, it follows that whenever a managing director/BoD/officer of a
company causes/procures a breach by that company of its K with 3 rd party, they could
be liable to an action for damages in Tort
Not technically piercing the corporate veil; establishing independent
actionable wrong
* An action of this kind has been recognized where the third party is a
stranger
But the acts of a servant/agent are in law the acts of his employer
It would be the master himself, by his agent, breaking the K, and such an
action for the type of dmgs sought must fail
Would open the floodgates of litigation
If a servant acting bona fide within the scope of his authority procures or
causes the breach of a K between his employer and a 3rd party, he does not
thereby become liable to an action of tort at the suit of the person whose K
was thereby broken
Person who deals with Co cannot have available to them actions in breach of K
against the Co AND action in Tort against the individual directors
Holding:
Ruled for B.

ADGA Systems International Inc. v. Valcom Ltd.

Facts:
A. claims that V. raided its employees thus purposefully causing economic harm to A.
The claim is by A. against the director and two employees of V. for their personal
involvement in the recruitment program which induced breach of fiduciary duty.
Issues:
Can the individuals be sued for their actions, assuming those actions were genuinely
directed to the best interests of their corporate employer?
Reasoning:

47

According to Salomon, a company once incorporated must be treated as any other

independent person
1. Where the plaintiff relies upon establishing an independent cause of
action against the principals of the company, the corporate veil is not
threatened and the Salomon principle remains intact
This difference was clearly established in Said v Butt
2. Provides an exception to the general rule that persons are responsible for their
own conduct
People who accept to deal with a limited company and accept the imposition
of limited liability will not be able to claim for breach of K against the company
and tort against the directors
3. Those harmed as strangers to the corporate body may look for liability to the
persons who caused the harm and those who have in some manner accepted limited
liability in their dealings with the company would be limited in recourse to the
company
In Canada, officers of the Co are responsible for their tortious
conduct even though that conduct was directed in a manner to the
best interests of the Co, subject to the exception in Said v Butt
An officer cannot claim the defence of Said v Butt if he isnt acting bona fide in the
interests of the Co
They can be pursued in tort if their actions are themselves tortious
or exhibit a separate identity or interest from that of the Co
Therefore, even in acting in the course of duty, an officer can be liable for
tortious conduct
Holding:
Appeal allowed; A.s case can continue

Hogarth v. Rocky Mountain Slate Inc.

Facts:
H. is pursuing R. and its directors personally for negligent misrepresentations made
through 3 business plans concerning a slate mining opportunity.
Issues:
Was there negligent misrepresentation?
* Can the officers be held personally liable?
Reasoning: (OBrien and Rowbotham)
Where the actions of a director are themselves tortious or exhibit a separate identity
or interest from that of the corporation so as to make the act/conduct their own, they
may attract personal liability
Simonson (S.) didnt exhibit this level of separate identity
Concurring: (Slatter)
Causation for N-M against the company requires two elements
1. But for representations, H. wouldnt have invested the $
2. Damage would not have resulted if the representations had been true
o Where investor suffers losses that are unrelated to the
misrepresentation, defendant is not responsible
Three N-M alleged:
1. Expertise of management team
No N-M; plaintiffs were aware of the lack of experience of promoters
Finding N-M in this case comes close to saying that directors are liable for
negligent management
2. Involvement of mining engineer
* YES N-M; but no sufficient causation
No evidence that the lack of an engineer caused the quarrys
problems

48

3. Compliance with regulatory standards

No N-M; rep was clearly directed towards the future, and M. was in compliance
Personal Liability
ScotiaMcLeod Inc v Peoples Jewellers: directors of a limited liability Co are not
identified with the company for purposes of legal liability
* For liability to be extended to directors, their actions must exhibit a
separate identity or interest from that of the company so as to make the
act their own
Hercules Managements: normal test for establishing a DoC applies to N-M cases
(with some modifications; fundamental concern that indeterminate liability not be
allowed)
Physical or economic damage? Reliance reasonably foreseeable?
Intentional or non-intentional tort? Etc.
ADGA Systems v Valcom: voluntarily dealing with corporation vs. stranger
Stranger should be able to pursue personally, volunteer should not
Cooper v Hobart: foreseeable and reasonable reliance?
* Independent factor runs through almost all of the jurisprudence
Co. should be presumptively responsible for any misrepresentations;
individual liability secondary only
Application
* Cooper acknowledged that expectations of parties are legitimate considerations, in
specific realm of N-M, Hercules held the nature of the relationship, reasonableness
of the reliance on representations were key
It was reasonable for H. to rely on representations, but not to rely on S. as
personal guarantor
Cooper v. Hobart
1. Foreseeability/Proximity (reasonably foreseeable reliance)
a. Involves determining if proximity arises because defendant ought
reasonably to have foreseen that plaintiff would rely on
representations made, and that reliance was reasonable: Hercules
b. Investors knew they were dealing with LLP; any reliance on
personal liability of S. was unreasonable: Hercules
2. Policy Considerations (at both stages)
a. Foreseeability Policy: Tort not sufficiently independent to engage S.
personally; reliance by the respondent on him personally was
unreasonable
b. Residual Policy: Legitimacy of use of limited liability structure
threatened
Holding:
Errors in conclusion that N-M were made. Also, Insufficient proximity to warrant
personal liability: policy considerations at both levels speak against it. Legitimate
expectations of the parties dont support it; S.s appeal allowed.

Other ways directors can be personally liable

Air Canada v. M & L Travel Ltd
Facts:
V. and M. incorporated ML to sell airline tickets, with A. being their biggest sponsor.
M. set up a trust account for the deposit of the airline ticket funds, which, minus
commission, were supposed to all go to A. ML also obtained an operating line of
credit of 15K$ from the bank to finance the operation which was seizable at any time
by bank (demand loan). For unknown reason, trust account was never used and all
monies went into a general account. Falling out between V. and M. led to conflicting

49

stop-payment orders by the two, at which time they owed A. over 25K$. Faced with
conflicting orders, the bank refused further withdrawal attempts, withdrew their 15K$
from the operating account. A. sued ML as well as M. and V. personally for the 25K$
owing.
JH:
Trial: success against ML but not M. or L.
CA: success against all of them
Issues:
1. Was the relationship between ML and A. one of trust?
2. Under what circumstances can directors be held personally liable for breach of
trust by Co?
Reasoning: (SCC Iacobucci)
1. The intent of the agreement creates a constructive trust
1. Certainty of intent
2. Certainty of subject matter
3. Certainty of object
There was clear language that the funds were to be held in trust; express
prohibitions restricting the use of the funds, etc.
2. No question that ML was in breach of trust; personal liability of directors is
appropriate in this case as well
Two general bases where personal liability of directors in equity for breach of trust
will be appropriate:
1. As trustees de son tort
o They take on themselves to act as trustees and to possess and
administer trust property, and commits a breach of trust while so
acting
* 2. Knowingly assisted in a breach of trust
o Barnes v. Addy: strangers who assist with knowledge in a dishonest
and fraudulent design on the part of the trustees will be liable for
breach of trust as constructive trustees
(A) Knowledge:
Requires actual knowledge, recklessness or willful blindness on part
of stranger
(B) Nature of the Breach of Trust:
1st Line of Authority: Barnes: requires (1) assistance by stranger of trustee,
(2) with knowledge, (3) dishonest/fraudulent design on part of trustee
* 2nd Line of Authority: A person who is the controlling/directing mind of
a corporate trustee can be liable for an innocent or negligent breach
of trust if the person knowingly assisted in the breach of trust
Therefore only required that the trustee breached in dishonest and fraudulent way,
and that the directors knew of the trust and assisted
Application
ML placed monies it knew were not for general use in a general
account and made them subject to seizure; risk to the prejudice of A.
the beneficiary that ML knew it had no right to take =
dishonest/fraudulent
Clear that M. and V. participated in the breach of trust; directly caused by
them acting in their own interest to stop payment on cheques; precipitated
the bank seizure; they knew about the trust agreement as directors
(even if no knowledge, was at least willful blindness)
Holding:
Directors are personal liable for the breach of trust in this situation.

50

Shareholders suing to directly enforce rights that belong to

the corporation shareholders insurable interest
Macaura v. Northern Assurance Co.
Facts:
M. felled a bunch of timber kept it on his land. Irish Canadian Saw Mills kept timber
on his land, gave him shares in the company to pay for the timber. M. took out
insurance over the timber; he was only shareholder, timber was pretty much only
asset. Timber burned, N. refuses to pay.
Issue:
Can M. collect insurance over the companys property?
Reasoning: (Lord Buckmaster)
No he cannot
The appellant could only insure as a creditor or as a shareholder
Creditor:
Untenable position: would follow that any person would be at liberty to insure
the furniture of his debtor
Shareholder:
No shareholder has any right to any item of property owned by the
company; no legal/equitable interests therein
Entitled to share in profits/dissolution
Concurring: Lord Sumner
M. stood in no legal or equitable relation to the timer at all
Makes no difference that he was companys only shareholder and wood was
only asset
Holding:
M. fails; appeal dismissed.

Kosmopoulos v. Constitution Insurance Co. of Canada

Facts:
Kosmopoulos purchased insurance for the property of his business. Kosmopoulos
incorporated his sole proprietorship on the advice of his lawyer. All of the documents,
including the insurance papers, referred to Kosmopoulos operating as Spring Leather
Goods. After a fire damaged the premises, Kosmopoulos tried to claim the insurance
proceeds, but the insurance company refused payment. The insurer claimed that the
company needed to insure the premises. Kosmopoulos forgot the little details. This
often happens, especially in small family firms; should have sued the lawyer, but
didnt.
Issues:
Is Kosmopoulos entitled to claim the proceeds?
Reasoning: (SCC Wilson J)
Citing Salomon, a legal entity is distinct from its shareholders. The court will lift the
corporate veil when the company acts as a mere agent or puppet of the controlling
shareholder.
Those who have chosen the benefits of the corporate form have to
assume some of the risk.
This is not a corporate law problem it is an insurance problem. The court held that
Macaura did not apply in this circumstance.
Kosmopoulos had an insurable interest as the sole shareholder of the
company. But for the fire, he was the sole beneficiary of the assets of the
company. He benefited from the existence of the assets and was prejudiced
by their destruction. Wagering was not an issue. It might have been had there
been more shareholders (say 2, 5, 10, etc.).

51

The insurance company is raising a technical objection to deny

insurance when everyone knows that the corporations assets were
meant to be the object of the insurance.
K. had Some relation to or concern in the subject matter of the Cos property
The oppression remedy is always available if some of the shareholders insure the
assets of the corporation and the corporations assets are destroyed (when there are
multiple shareholders). Secured creditors might be able to access those funds.
Rationale:
Sole shareholders retain the benefits of the assets of the corporation and can insure
those assets.
Holding:
Yes. The court did not have to pierce the corporate veil to issue the proceeds.
See also Lees Farming for another example of single shareholder skirting the rules
*Sidebar: This case problematizes the one-shareholder corporation. It conflates the
interests of the sole shareholder with the corporation, even though they are distinct
legal entities.
Courts are reluctant to engage in piercing the corporate veil for 1-person corporation.
It is not enough that there is 1 person. The corporation has to be an instrument to
further the interests of the individual; a sham.

Hercules Managements Ltd. v. Ernst & Young

Facts:
- Co. had K with defendant auditors to prepare financial statements
- Financial statements were prepared negligently. Co. went bust.
- Ptf shareholders (who have a K with the co.) brought action in contract, and in tort
for negligent misrepresentation. The ptfs argued that, had the statements not
been negligently prepared they would have acted differently (i.e. they relied):
they would not have bought additional shares; they would have sold their existing
shares; they would have taken a more active role in supervising management.
- Court rejected contractual action.
Issue:
Do the auditors owe the ptf shareholders a duty of care: (i) the investment loss they
incurred as result of relying on the reports; (ii) the losses in the value of their existing
shareholders that they incurred as a result of reliance?
Reasoning: (SCC LaForest)
Hes trying to carry on, in Lord Atkins fashion, to create a test that can be applied to
all difficult cases of negligence.
2 part Anns test (Kamloops Test) to determine duty of care:
Prima facie duty arises where:
o
(1) sufficient relationship of proximity or neighbourhood such that in the
reasonable contemplation of the wrongdoer, carelessness on his part
might cause damage to the other.
o (2) Policy considerations which negative duty or limit its scope, the class of
person to whom it is owed or the damages to which a breach of it may
give rise.
This general test should not be limited to cases of physical damage; applies to
economic loss cases also [trying to fashion general test!]
Step One Proximity:
There is proximity in negligent misrep cases where the plaintiff reasonably relies:
o (a) the dft ought reasonably to foresee that the ptf will rely on his or her
representation; and
o (b) reliance by the ptf would be reasonable in the circumstances. The

52

combination of these factors creates a special relationship.

Step Two Policy Considerations:
[1] Indeterminate liability might result b/c auditors statements are used by many
people, and it is almost always reasonably foreseeable that they would rely on
them.
[2] Deterrence of negligent conduct (i.e. concern that spectre of tort liability
would be incentive to produce accurate reports) is outweighed by limitless liability
concerns.
[3] Economic inefficiency b/c of costs expended to insulate from liability, litigate,
etc.
* In most cases of negligent misrep involving auditors, the indeterminate
liability concern will negate the prima facie duty. However, there may be
some cases where the indeterminate liability concern doesnt arise, and
thus duty not negated:
o Where the dft knows the identity of the ptf or a class of ptfs and
o Where the dfts statements are used for the specific purpose or
transaction for which they were made.
Application to facts of this case:
1. Was there proximity?
No question that a prima facie duty of care was owed on the facts of this case. It
is reasonably foreseeable that shareholders would rely; in fact, it is a statutory
requirement that audited statements be put before the shareholders.
Reliance was reasonable: [LaF outlines indicia of reasonable reliance and holds
that the first four inhere].
o (1) dft has direct or indirect financial interest in the transaction in respect
of which the rep was made;
o (2) professional, possession of special skill, judgment or knowledge;
o (3) advice or info provided in course of the dfts business;
o (4) information given deliberately and not on a social occasion;
o (5) info or advice given in response to a specific enquiry or request.
2. Policy reasons to negate the duty?
Knowledge of identity: Auditors knew the very identity of the ptf shareholders
(they have been their auditors for many years). No issue of indeterminate
liability.
* Were reports used for purpose of transaction for which prepared? NO. Audited
statements are made for the purposes of assisting ShareHolders (as a collective)
in their task of overseeing management. Auditors did not prepare the audit
reports in order to assist H. or shareholders in making personal investment
decisions.
Foss v. Harbottle and derivative actions
The proper way to have brought this claim would have been as a derivative action
rather than a series of individual actions
Individual shareholders have no cause of action in law for any wrongs
done to the corporation, and if an action is to be brought in respect of
such losses, it must be by the Co itself (through directors) or by way of a
derivative action
o As a derivative action for the shareholders as a cohesive body, the action
is seen to represent the corporations interest, not just the individual
shareholders
Shareholders cannot raise individual claims in respect of a wrong done
to the corporation
o Only by establishing an independent actionable wrong can the individuals

53

bring a claim
Held:
No. Negated by overriding policy considerations. But LaF tries to set out a general
duty of care approach.

Houle v. Banque Canadienne Nationale

Facts:
Houle brothers were shareholders in a family company that had dealt with bank for
over fifty years. The company had a credit line with bank, including a demand loan
(bank has the right to recall with no notice). Just 20 days after signing new trust
deed, bank recalled the loan. They took possession and liquidated Houles assets just
three hours later. The problem was that Houles were in the process of selling their
company (estimated to get $1 million). After this liquidation, they were forced to sell
at only $300,000. Shareholder brothers now taking action against bank, claiming
difference of $700,000 they would have received had it not been for the banks
recall, which they claimed was made in bad faith. Note that it is the shareholders, not
the company (which no longer exists) suing the bank.
JH:
Finding that bank had acted unfairly, both trial and appeal courts lifted the
corporate veil and awarded Houles $250,000 (what they estimate difference to be).
Bank appealed.
Issues:
What are the criteria for abuse of contractual rights? What is the foundation for
liability for abuse of contractual rights?
What are the rights of third parties in this context?
Legal Reasoning: (LHeureux-Dub J.)
Recalling the loan and reasonable delay:
It is not contested by either party that the terms of the demand loan
allowed the bank to recall it on demand and realize its securities without
notice.
In accordance with its rights, the bank did recall its loan and realize its securities.
The question is whether it abused its rights in so doing abuse can arise when
otherwise valid contractual rights are not exercised in a reasonable fashion.
Termination which occurs abruptly or brusquely, that is, without prior
warning and without giving a period of reasonable notice that will allow
debtor to make arrangements, may be abusive.
The recalling of the loan was not in itself an abuse of the banks
contractual rights but now must examine reasonableness of the
delay If the demand to repay is to have any meaning, there must be a
reasonable time given to respond to it. The purpose of reasonable notice is
to give debtor a change to make the repayment.
The bank was unjustified in acting the way it did
Houles had been doing business with the bank for over fifty years, and had
always fulfilled its obligations (no reason to think they wouldnt get it).
It was so unexpected and so abrupt that the bank effectively
prevented any chance of the company meeting its obligation of
repayment.
While the bank had right Not absolute, must be tempered by principle of
reasonable delay. Bank acted wrongfully and committed fault against
Houle company.
* Rights of third parties:
The problem in this case is that the respondents are not the company
they are the shareholders. As such, they are not parties to the
contract in question.

54

Unlike lower courts, SCC refuses to lift the corporate veil the bank
must have committed a fault directly against respondents (independent of
contract) to be held liable.
Where does SCC find liability?
Bank knew about the deal Houles were making to sell their company. In
such circumstances, there is a general legal obligation that a person not
prejudice the parties to a sale when it knows such a sale to be imminent.
Should the sale fail to materialize or the price decrease due to
conduct which constitutes fault, liability can be triggered under
1053 CCLC (now CCQ 1457)
There was a direct relationship between Banks fault and the damage
caused to respondents. They were under a legal obligation (independent of
contract) to act reasonably towards them so as not to prejudice their sale.
Failure to do so resulted in their injury (lower sale).
Holding:
Banks recall constituted an abuse of their rights. Because they knew of the
impending deal and the effect that this would have on respondents, they were under
a general duty to act reasonably towards them and not prejudice the sale. Failure to
do this triggers tort liability, but no K liability. Appeal denied, CA ruling upheld.

Smith, Stone and Knight Ltd. v. Birmingham Corp. [1939]

Facts:
B. wanted to buy property owned by S. In the sale, S. claimed fees for compensation
for disturbance of the business which was carried on at one of the premises where a
subsidiary company of S., W. was established. B. claimed that W. had to, as a
separate legal entity, make those claims itself.
Issue:
Can S. make the claim or must, in law, the claim be made by W. itself?
Reasoning:
This would pretty much allow a piercing of the corporate veil by S.
S. caused W. to be registered, both had same directors who held shares in W.
in trust for S.
W. kept no books, all were kept by S.; S. had complete control over W.
There was no tenancy agreement upon which W. occupied the building; they
were there just in name
Apart from the name, it was really as if the manager was managing
a department of the company
B. argues Salomon (distinct legal entity)
Owning all the shares in a Co doesnt give the person control over the
company or make its property/legal rights theirs
But was the subsidiary carrying on the business as S.s business or its own?
1. Were profits treated as the S.s?
2. Were the persons conducting the business appointed by S.?
3. Was S. the head/brain of the trading venture?
4. Did the company govern make all the decisions?
5. Did S. make the profits by its own skill/direction?
6. Was S. in constant and effective control?
Yes to all these questions
Holding:
Found for S.; W. was in effect only an appendage of S.
* Sidebar: Corporation acting as an agent for the principal

55

Remedies
The Representative/Derivative Action
Hercules Managements Ltd. v. Ernst and Young
(See p46)
Foss v. Harbottle and derivative actions
The proper way to have brought this claim would have been as a derivative action
rather than a series of individual actions
Individual shareholders have no cause of action in law for any wrongs
done to the corporation, and if an action is to be brought in respect of
such losses, it must be by the Co itself (through directors) or by way of a
derivative action
o As a derivative action for the shareholders as a cohesive body, the action
is seen to represent the corporations interest, not just the individual
shareholders
Shareholders cannot raise individual claims in respect of a wrong done
to the corporation
o Only by establishing an independent actionable wrong can the individuals
bring a claim
*Sidebar:
Criteria to get right to Derivative action:
1. Ask management to solve the problem
2. Have to show that their refusal is tainted
3. Have to get a majority of the shareholders behind you

Appraisal Remedy; and Investigation

CBCA ss. 104, 162, 167, 190, 238-240
239. Derivative action

Oppression Remedy I Who is entitled to sue under the

oppression remedy?
CBCA 241(2). Oppression remedy
Key language: activity that is oppressive or unfairly prejudicial to or that
unfairly disregards the interests of (CBCA s.241)
Any security holder (stakeholder), creditor, director or officer
238 who can take advantage
241(1)(2) when can the person have oppression remedy
241(3) what can the court do if it finds oppression?

First Edmonton Place Ltd. v. 315888 Alberta Ltd. [1988]

Facts:
FEP (landlord) transferred approximately $250,000 to the lawyers running the
numbered company as a leasehold improvement allowance and signing bonus. It also
allowed the company to rent the premises for a rent-free period. The company
transferred the money to its directors and vacated the premises after the rent-free
period was up, in violation of the lease. The landlord is suing the directors personally
so that they can recover the bonuses.

56

Issues:
Is the landlord, as a creditor, entitled to file a derivative action or an action in
oppression?
Reasoning:
The purpose of the remedial provisions is to ensure that the rights of creditors,
minority shareholders, and the public are protected within corporate law
[stakeholder model]. The view that the management of the company falls exclusively
within the hands of the directors is no longer current. The wrongdoers should not be
able to prevent others from undoing the effect of the wrongdoing.
1. Derivative Action
It is highly unlikely that a toxic board will bring an action against itself. The
derivative action allows a complainant shareholder to bring an action against the
directors, on behalf of the corporation, with leave of the court. The complainant must
act in good faith and must demonstrate that the case is prima facie in the interests
of the corporation so as not to harass the directors (CBCA s.239).
2. Oppression Action
The provision gives the court the authority to remedy conduct that it considers to be
oppressive with remedies that are just and equitable. The remedy does not purport
to deal with unpopular decisions. It should not supplant the legitimate exercise of the
Boards power. The exercise of the Boards power must pass a threshold of
oppressiveness (CBCA s.241).
The court will gauge the oppressiveness of conduct by looking at the reasonable
expectations of the injured party. The court will assess the following factors: (1) the
protection of the underlying expectation of a creditor in its arrangement
with the Co; (2) extent to which the acts were unforeseeable or the creditor
could reasonably have protected itself; (3) the detriment to the interests of
the creditor
3. Application to the case
In this case, the landlord is not a creditor under the act because it does not
hold a security (debt obligation). However, the landlord does fall within the
generalized category of complainant because it is the proper person to make the
application for a derivative action, but not the proper person to make an oppression
action:
1. There is no evidence that the directors used the corporation as a vehicle for
committing a fraud against the creditors (even though they may have
perpetuated a fraud against the corporation).
2. No breach of any underlying expectations (creditors did not have an
expectation that the signing bonus would remain with the corporation)
The good faith requirement is supposed to prevent private vendettas from being
litigated. The landlord is acting in good faith because it wants to ensure that the
corporation has assets to fulfill the breach of the lease claim (which the landlord will
file/has filed).
The court also rejected the landlords oppression claim on the grounds that it did not
affect the interests of creditors. At the time that the landlord complained of

57

the actions of the directors, it did not owe the creditors a present
obligation to pay the rent; the landlord had only a future right to the rent.
Creditor, when given its plain and ordinary meaning, does not apply in this
circumstance.
Rationale:
A landlord can file a derivative action on behalf of a corporation when the landlord
seeks to recover money used to satisfy rent and when the landlord is doing so in
good faith.
Holding:
The landlord was the proper person to make a derivative claim and the court
granted leave. The landlord did not have a reasonable expectation that the corporate
respondent would retain the signing bonus and therefore it cannot sustain its claim
for oppression.
*Sidebar:
Underlying reasonable expectations criteria carries through to cases afterwards:
see BCE and Downtown Eatery
* See also Peoples for secured vs. unsecured creditors in action

Downtown Eatery (1993) Ltd. v. Ontario [2001]

Facts:
The appellant is an employee who was wrongfully dismissed. The respondents are the
directors of the company he used to work for. He was fired from a managerial
position at the respondents nightclub. He sued the respondents company that was
responsible for paying him, B. Right before the trial, respondents shuffled the
corporate structure of their companies, and B. was left with no money to pay A. A.
now seeking to sue other companies of respondents under common employer
doctrine as well as under oppression remedy.
Issues:
Is the oppression remedy open to A.?
Reasoning: (ONCA)
A. is allowed to pursue the respondents other companies under the common
employer doctrine
Oppression Remedy
s.245 of OBCA (s.241 CBCA) states that a complainant viable to bringing an action
under oppression remedy can be anyone deemed by the court to be a proper
person
G. (defendants) testified that the reorganization of the companies was due to union
activities not the upcoming trial
B. was company in charge of holding money for paying/managing employees
under G.s companies
A. is seeking the oppression remedy absent bad faith to rescue himself from inability
of B. to pay his judgment, which resulted from G.s decision to terminate B.s
business operations/suck all of its funds
Trial judge failed to appreciate that oppressive conduct need not be undertaken with
the intention of harming the complainant
As long as its established that a complainant has a reasonable
expectation that a Cos affairs will be conducted with a view to
protecting his interests, the conduct doesnt require intention to
harm
o See the criteria of protection of underlying expectations enunciated
in First Edmonton Place

58

Restructuring B. right before trial effected a result that was unfairly prejudicial to, or
that unfairly disregarded the interests of, A.; there was nothing A. could have done to
prevent this from occurring: see again criteria in First Edmonton Place
Holding:
A. can recover the amounts owed to him from the defendants companies and the
defendants personally.

Distinction between the Oppression Remedy and the Derivative

Action
Pasnak v. Chura [2003]
Facts:
P. and C. are directors of Fleetwood and indirectly shareholders in it through their
respective personal companies: P.=Double J., C.=Chura Holdings. They also share
interests in a bunch of other companies that they are directors/shareholders in.
Falling out; P. wants to buy C.s shares in companies, but they cant agree on price. P.
thinks he should get the price as before the big drop in share value due to
mismanagement by C. of Fleetwood that amounts to cause of personal action in
oppression for P. through Double J. C. argues that these are claims that only the Co
Fleetwood can bring as a derivative action.
Issue:
Is this properly a derivative action or oppression case?
Reasoning: (BC Supreme Court)
Foss v. Harbottle
A company and its shareholders are distinct entities; only the Co can sue for
wrong done to it
Two different streams of jurisprudence on Derivative vs Oppression
* 1. C. argues the oppression remedy considered to be available to
shareholder only if it is able to demonstrate that it has suffered personal
losses separate and distinct from those suffered by the Co
The only rights of the shareholder affected are his derivative or
corporate rights
Shareholder doesnt suffer any personal loss when share price goes down
The only injuries are the companys and not his own, and can only be
righted by the company
2. P. argues the courts have granted shareholders a remedy for oppression despite
the fact their losses appear to be only consequential/incidental to the companys loss
through their loss in share value
In most cases cited, oppression was only really recognized for wrongs to the
company, and the order was for oppressor to pay to the Co either directly or
indirectly
Application
* An injury incidental to the injury of the Co is properly remedied through
derivative action
* An injury separate and distinct from that of the Co and personal to the
shareholder is properly remedied by action in oppression
It is possible that a directors actions can constitute a breach of fiduciary duty
where Co can sue and the basis of an oppression action based on separate
injuries personal to the shareholder
Wherever P. cannot show a loss other than to his share value in Fleetwood
equal to the loss of share value experienced by C., he cannot bring
oppression; they are properly actions that must be brought by the Co or on
its behalf as derivative
Fleetwood is only Co that oppression is alleged in

59

Even if oppression is found, share value of Fleetwood is nil so reduction of

share price for purchase by P. serves no purpose
o Cannot transfer the remedy to reduce share prices of other companies
C. has interests in; no oppression alleged in other companies, and they
are separate legal entities
Holding:
Ruled in favour of C.

CBCA ss. 238, 241-242

Oppression Remedy II
BCE Inc. v. 1976 Debentureholders [2008]

60