Camille Chisholm

Hawes (December 2010)

Corporations Law 230

Contents

INTRODUCTION

WHAT IS A CORPORATION:

Dodge v Ford

WHY INCORPORATE:

TYPES OF CORPORATIONS:

WHERE TO INCORPORATE – Federal or Provincial:

Federal Versus Provincial Incorporation

Bonanza Creek Gold Mining Co. v. The King (1916 PC)

SEPARATE LEGAL ENTITY

Salomon v. Salomon & Co, Ltd [1895-1899] ER

Lee v. Lee’s Air Farming Ltd. (1961) PC

LIFTING THE CORPORATE VEIL

Macaura v. Northern Assurance Co Ltd and others (1925) HL

Big Bend Hotel Ltd. v. Security Mutual Casualty Co. (1980) BCSC

Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd. (1972) Ont CA

642947 Ont. Ltd. v. Fleischer (2001) Ont CA

Parent and Subsidiary Companies and the Veil

Adams v Cape Industries [General Rule]

Smith, Stone & Knight [Agency Exception]

De Salaberry Realties Ltd v Minister of National Revenue [Parent LIABLE]

Transamerica Life v Canada Life (Ont Gen Div; aff’d Ont CA) [Parent NOT liable]

Thin Capitalization

Walkovszky v Carlton (US case)

Use Company’s Name when Dealing with Outsiders

Wolfe v Wolfe (AB) [Personal liability without lifting veil]

Statutory Lifting the Veil

CORPORATE CAPITAL STRUCTURE - Shares

What is a Share

Atco v. Calgary Power Ltd. (1982) SCC

Rights Attached to Shares

Power to Issue Shares

Edmonton Country Club v Case

Shares Terminology

Classes of Shares

International Power Co. v. McMaster University (1946) Que CA

In re The Isle of Thanet Electric Supply Co (Eng CA)

Variation of Class Rights of Shareholders

Special Resolution

Limitations on Share Classes

Re Bowater Canadian Ltd. v. R.L. Crain Inc. (1987) Ont CA

Jacobsen v. United Canso Oil & Gas Ltd. (1980) Alta QB

Dividends

Dodge v Ford (US case)

The Queen v McClurg (SCC)

CORPORATE STRUCTURE - Debt

Debts and Shares Compared

Institutional Investors

Directors Decisions

Baron – you have to agree you are in a meeting for it to be considered a meeting

Shareholders Decisions – Voting Rights

Shareholder Meetings

Shareholder Ordinary and Special Resolutions [BCBCA s 1; CBCA s 2(1)]

Notice Requirements – Shareholders Meetings

Proxy Voting

Challenging a Shareholder Resolution

Division of powers between shareholders and Directors

Automatic Self-Cleansing Filter Syndicate Co. v. Cunninghame (1906) CA

Hollinger Inc v Hollinger International Inc (US case) [What is “substantially all” of co’s assets]

MEETINGS

Shareholder Meeting - Chairperson

Blair v. Consolidated Enfield Corp. (1993) Ont CA [Good Faith Duties of the Meeting Chair]

Re Marshall (1981) Ont HC

Warring Board Factions – How Far Should Courts Intervene

Re Canadian Javelin Ltd. (1976) Que SC [Court calls s/holder meeting]

Charlebois v. Bienvenu (1968) Ont CA

sHAREHOLDER pROPOSALS:

CONTRACTS WITH OUTSIDERS

Actual Authority

Hely-Hutchinson v Brayhead [Implied Actual Authority]

Ostensible/Apparent Authority

Canlab Supplies v Engelhard Industries Ltd (1979) SCC

When will an Outsider not have Protection under s 146(1) Assumptions

1394918 Ontario Ltd v 1310210 Ontario Inc [when does an outside “know”/ “ought to know”]

DIRECTORS AND OFFICERS DUTIES

WHO IS A DIRECTOR OR OFFICER

DIRECTOR DUTIES

Duty of Care & FIduciary Duty

Peoples Department Stores Inc. (Trustee of) v. Wise (2004 SCC)

Smith v. Van Gorkom (US case 1985)

Avoiding Liability for Breach of Duties

Business Judgment Rule

Peoples Department Stores Inc. (Trustee of) v. Wise (2004 SCC)

Smith v. Van Gorkom (US case 1985)

Reliance

Indemnification and Insurance

Conflicts of Interest

Aberdeen Ry. Co. v. Blaikie Brothers (1854) HL

Taking Advantage of Corporate Opportunities [‘Secret Profits’]

Regal (Hastings) Ltd. v. Gulliver (1942) HL

Ways For Directors and Officers to Avoid Liability

Disclosure of Interest

Shareholder Ratification

Peso Silver Mines Ltd. v. Cropper (1966) SCC

Irving Trust Co. v. Deutsch 1935 US case

Business Opportunities that Arise After Director Leaves Company

Canadian Aero Service Ltd. v. O’Malley (1974 SCC)

Competing with the Company

PUBLIC COMPANIES –Q about Director’s duties in public co consider whether they have fulfilled duty to public (also consider insider trading)

Exemptions

Policy Behind Exemptions

Exemption Categories

CONTINUOUS DISCLOSURE REQUIREMENTS

“Material Change” in Continuous Disclosure

Pezim v BC

Kerr v Danier Leather

Consequences for Breach of Securities Law

Available Defences

Re YBM Magnex International Inc. (2003) Ontario Securities Commission

Insider Trading

REMEDIES

dERIVATIVE aCTION

Primex Investments v. Northwest Sports Enterprises Ltd. (1995) BCSC [Test for leave to bring derivative action (under BCBCA)]

Re Northwest Forest Products Ltd. (1975) BCSC [“Reasonable efforts to cause co to bring action”]

First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) Alta QB [“Proper Person” to Bring the Application]

Oppression Remedy [first remedy you should apply for]

BCE Inc. v 1976 Debentureholders (S.C.C. 2008) [“Reasonable Expectations” of parties]

Clitheroe v. Hydro One Inc. (2002) Ont SCJ [“Any other person” (CBCA)]

Downtown Eatery (1993) Ltd. v. Ontario (2001) Ont CA [“Any other person” (CBCA)]

West v. Edson Packaging Machinery Ltd. (1993) ON [“Any other person” (CBCA)]

First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) Alta QB [“Any other person” (CBCA)]

Oppression Remedy: Family Disputes

Ferguson v. Imax (1983) ONCA

Naneff v. Con-Crete Holdings Ltd. (1993) ON [Oppression is a remedy not a punishment]

Oppression Remedy: Public Companies

Ford Motor Co. of Canada v. Ontario Municipal Employees Retirement Board (2006) ONCA

Some Typical Situations Where ‘Oppression’ Remedy Has Been Given

Compliance and Restraining Order

Compulsory Liquidation (Winding Up) Order

“Just and Equitable”

Ebrahimi v. Westbourne Galleries Ltd (1973) HL

Dissent and Appraisal Right

Remedies for Public Company Stakeholders

PARTNERSHIPS

Partnership vs Corporation

Existence of Partnership

A.E. LePage Ltd. v. Kamex Development Ltd. (1977) ONCA [do co-owners of property = partners]

Volzke Construction v. Westlock Foods (1986) ABCA

Lansing Building Supply (Ontario) Ltd. v. Ierullo (1989) Ont Dist Ct

Backman v Canada

Liability of Partners

Ernst & Young Inc v Falconi (1994) Ont Gen Div

Fiduciary Duties / Liability to other Partners

Olson v Gullo (1994) Ont CA

Limited Liability Partnership (LLP)

Limited Partnership (LP)

Haughton Graphic Ltd. v. Zivot (1986) Ont HC

INTRODUCTION

WHAT IS A CORPORATION:

- Legal person/entity

- Bundle of rights: including own property, make contracts, hire people, sue or be sued

- Limited liability for shareholders

- Exist in perpetuity (unless dissolved)

- Can include non-profits

Dodge v Ford (USA) – can’t ignore interests of shareholders to benefit society

Purpose of corporation is to benefit shareholders – benefit to society might be ok as a secondary goal

WHY INCORPORATE:

Investors (shareholders) get limited liability
Corporation is separate legal entity – can make contracts, sue, be sued
Perpetual Existence
A shareholder acting alone has no power to bind the corporation (different than partnerships)
Ability to buy and sell shares – can sell shares to get rid of interest in corporation
Business expands a lot – selling shares is an efficient way to raise money from many people
Has additional facilities for raising additional capital (including shares and debentures)
“Debentures” – evidence of indebtedness; anyone can produce a debenture and sell it to another person
May be some tax benefits – many places have lower corporate tax rate (than high income tax rate)
Can leave funds in corporation and have them taxed at lower rate – instead of paying out and having them taxed as your income
Double-taxation aspect of incorporation – corporation is taxed on income, then that same income is taxed again in the hands of the shareholders when distributed
Partnership – partners are taxed based on individual income from partnership
Flowthrough of losses in partnership/sole proprietorship is not available with a corporation
Keep in mind: incorporation has a bit more regulation than partnership – but now it is pretty simple and cheap to set up a corporation; there is a cost to incorporation but it is small

TYPES OF CORPORATIONS:

Letters Patent

Main documents = letters patent and bylaws
Government has discretion whether to approve incorporation (may impose conditions on incorporation)

Memorandum and Articles of Association

In BC and Nova Scotia; create “companies”
BC: main documents = notice of articles and articles of association
Documents form a contract between shareholders, directors and company
When you buy shares in the company you are deemed to have agreed to this contract – can be sued for any breach of the articles
Memorandum and articles set out terms of contract and incorporation is in effect by registration of that agreement with the government
Basic allocation of powers between directors and shareholders is set out in the incorporating documents
complete freedom to include in the memorandum and articles any conditions not in conflict with the statute

Division of Powers Corporations

Based on USA model
Main documents = articles of incorporation and by-laws
Articles and by-laws are not a contract
May adopt unanimous shareholder agreement (“usa”) – to give shareholders more control over management, to entrench control and give contractual rights
Makes setting up these corporations more difficult – requires an extra legal agreement
Includes all other provinces and the Canada Business Corporations Act (CBCA)
CBCA contains rules regarding how corporation can be structured and run (instead of allowing corporations to decide themselves – like in BC)
By-laws are easier to change than in BC – only requires 50% of shareholders
Directors of the company can change by-laws and later seek shareholder approval
Leads to less stable by-laws than in BC

WHERE TO INCORPORATE – Federal or Provincial:

Under the Constitution Act the power to incorporate is given to both the federal and provincial governments
s.92(11) Constitution Act – allows provincial legislatures to incorporate companies with “provincial objects”
Different types of corporations because of competition
Governments competing to attract business to their provinces by offering easier incorporation, clearer rules, etc.
Province by province legislation may also be better able to address localized interests of corporations in each area

Federal Versus Provincial Incorporation

Each province has legislation requiring a corporation incorporated outside of the province to register with an official in order to carry on business in the province – a CBCA corporation will have to register in each province it wishes to do business
Issuance of license is at official’s discretion
Most common ground for denial of registration is confusion of corporate names between the applicant and a corporation already qualified to do business within the province
Certain provinces have reciprocal agreements allowing companies incorporated in either province to carry on business in the other without a license
“Extra-provincial corporation” includes corporations organized outside Canada – but non-Canadian corporations will usually not do business here without incorporating into a Canadian subsidiary (see Income Tax Act s.219)

Because BCBCA is unique, it might be more difficult for business people/corporations from other provinces to understand it
If doing inter-provincial business it might be better to use the CBCA for convenience
Under CBCA – once name is approved you are allowed to use it throughout Canada (without reapplying for name in different provinces)
Under BCBCA – name is only protected in BC (have to apply to use that name in other provinces)
CBCA is simpler act to read and understand
If doing BC only business = use BCBCA; if doing business nationally = use CBCA
BCBCA:
Don’t have to have resident Canadians as directors in corporation (to attract foreign business to BC)
Under CBCA – have to have at least ¼ of directors as Canadian residents (and at least 1 if you have fewer than 4 directors)
Articles are more stable in BC company – more difficult to change them
CBCA – bylaws are easier to change; can use USA to fix the bylaws in place
BCBCA gives more flexibility in customizing rights and powers of people (more flexibility in structuring company)
CBCA – much more fixed in terms of what you can do
There aren’t large differences – it is up to the client what they wish to do

Bonanza Creek Gold Mining Co. v. The King (1916 PC)

Provincial incorporated companies – don’t have right to do business in other provinces
But provincial companies have capacity to do business extra-provincially – need permission from provinces doing business in

SEPARATE LEGAL ENTITY

BCBCA s 13; CBCA s 9 – company comes into existence on date of filing application, or date specified in incorporation application

BCBCA s 30; CBCA s 15 – legal capacity and powers of company/corporation are the same as an individual person

Salomon v. Salomon & Co, Ltd [1895-1899] ER

1. Ensure that the company was set up in accordance with the legislation (BCBCA or CBCA)

2. Ensure there was no fraud when the company was set up

The company is a separate legal entity
Unless fraud is proven, once the company is legally incorporated it must be treated like any other independent person with rights and liabilities appropriate to itself, and the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are
The creditors have notice that they are dealing with a company the liability of the members of which is limited, and the register of shareholders informs them how the shares are held, and that they are substantially in the hands of one person, if this be the fact

Lee v. Lee’s Air Farming Ltd. (1961) PC

Application of Salomon – the company is a separate legal entity
Lee and company were separate legal entities – therefore could contract with each other
Lee and company were separate legal entities - so company could give an order to Lee
It is possible to have a position in the company and also be a worker for the company – as long as when you sign the contract it is clear that it is the company that is signing

LIFTING THE CORPORATE VEIL

Macaura v. Northern Assurance Co Ltd and others (1925) HL

Assets belong to the corporation and aren’t owned by a shareholder – therefore the shareholder has no insurable interest in those assets
Neither a simple creditor of nor a shareholder in a company has any insurable interest in a particular asset which the company holds

Kosmopoulos v. Constitution Insurance Co. (1987) SCC

Issue: whether a sole shareholder of a corporation has an insurable interest in the assets of that corporation

The law on “lifting the corporate veil” is inconsistent – lack of overarching regime or policy
CA: would lift the veil because they thought this was unfair
SCC: don’t lift the veil because this would go against Salomon
If you choose to incorporate you choose the benefits and also get the burdens
Instead – redefined “insurable interest”
Because Kosmo is only shareholder and would be affected by destruction of company’s assets (loss to him personally as company’s only shareholder) – he has insurable interest in company’s assets

Big Bend Hotel Ltd. v. Security Mutual Casualty Co. (1980) BCSC

Circumstances in which the veil was lifted – equity will not allow an individual to use a company as a shield for improper conduct or fraud
If there is fraud by the people who control the corporation the court will not allow them to get away with this fraud by invoking the separate legal entity concept

Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd. (1972) Ont CA

Shows difficulty of getting courts to lift veil despite informality and total control of corporation by shareholders where no fraud present
Court found no fraud because: company was incorporated properly and Newtonbrook knew they were signing with a company (company name was on contract) – therefore should be aware of limited liability

642947 Ont. Ltd. v. Fleischer (2001) Ont CA

Obiter remarks – but indicates when veil might be lifted
Shareholders made undertaking to pay damages when they knew corporation didn’t have assets
Some kind of fraud or bad behaviour on the part of shareholders creates risk they will lose limited liability – court likely to lift the corporate veil and find them personally liable

Parent and Subsidiary Companies and the Veil

Adams v Cape Industries [General Rule]

General Rule: each company is a separate legal entity
Generally parent companies won’t be liable for debts of subsidiary companies because of limited liability

Smith, Stone & Knight [Agency Exception]

Exception: where one company acts as agent for the other courts will view them as one company
1. Express Agency: one company signs contract “as agent for” other company; by agreement
Parent co will be liable for subsidiary as long as agent is acting within their authority
2. Implied Agency: parent completely dominates and controls subsidiary (subsidiary has no independent decision making power of its own)
6 Elements of Implied Agency:

1. Were the profits treated as profits of the parent co

2. Were the persons conducting the business appointed by the parent co

3. Was the parent co the head and brain of the trading venture

4. Did the parent co govern the adventure, decide what should be done, and what capital should be embarked on the venture

5. Did the parent co make the profits by its skill and direction

6. Was the parent co in effectual and constant control

Very difficult test to meet – most subsidiaries have slight independence from parent co

De Salaberry Realties Ltd v Minister of National Revenue [Parent LIABLE]

Subsidiary co claimed land was purchased for shopping complex, then sold; but subsidiary was part of parent conglomerate that was a realty/land transfer business

Court looked at question of control: was there total domination and control of subsidiary by parent
Two companies each owned 50% of De Salaberry, but they were working together and parent cos made all decisions for De Salaberry
Followed Smith, Stone & Knight – treated subsidiary as part of conglomerate group

**Keep in mind: this is a tax case; courts are more willing to lift veil to ensure taxes are paid**

Transamerica Life v Canada Life (Ont Gen Div; aff’d Ont CA) [Parent NOT liable]

Shows how difficult to make parent co liable for subsidiary
Parent not liable because:
Even though only shareholder and appointed directors – not all directors were same
Evidence that cos had different accounting systems
Evidence that it was more of an arms length relationship between cos
Some difference/distinction between cos – behaved slightly differently

Thin Capitalization

Walkovszky v Carlton (US case)

Taxi case – injured by taxi, sue taxi corp, no assets to pay out settlement

Court maintained separate legal entity principle from Salomon
To hold shareholder personally liable it is not enough to just show that the company has little or no assets
Must have more than thin capitalization to make shareholders personally liable for debts of corp
Ex. intermingling of personal and corp funds, no regard for formality of corp structure, breach of statute (illegality), etc.
Can set up a corporation with virtually no assets as long as at the time you set up you don’t owe money that you are trying to get out of paying = fraud

Use Company’s Name when Dealing with Outsiders

BCBCA s 27 – in all public communications, a company must display its name in legible characters