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Joshua Krane
BUSINESS ASSOCIATIONS ................................................................................. 1
1. Partnerships ................................................................................................. 5
2. Cooperatives ................................................................................................ 7
3. Corporations ................................................................................................ 7
4. Normative theories of corporate law .......................................................... 10
Legal Personality ............................................................................................... 11
Saloman v. Saloman Inc. (1897) HL ......................................................... 11
Lee v. Lee’s Air Farming (1961) HL......................................................... 12
ACCOUNTABILITY ............................................................................................ 15
Corporate Governance – How do we balance authority and accountability?
............................................................................................................................ 15
The Duty of Care - Informed Business Decisions .......................................... 16
R. v. Soper (1997) FCA ............................................................................. 17
Smith v. Van Gorkom (1985) Del. S.C. .................................................... 19
Fiduciary Duty – Duty to the Company .......................................................... 22
Martel – Duties of Loyalty in Quebec ....................................................... 23
1. Interested Party Transactions .................................................................... 25
Nozetz c. Habitations CJC Inc. (1986) S.C. .............................................. 25
Gray v. New Augarita Porcupine Mines Ltd. (1952) HL .......................... 26
2. Benefiting from Corporate Assets .............................................................. 27
Bank of Montreal v. Ng (1989) SCC ......................................................... 27
Perlman v. Feldman (1954) C.A. 2nd Cir. ................................................. 28
3. Taking Corporate Opportunities ................................................................ 29
Regal (Hastings) Ltd. v. Gulliver et. Al (1941) HL ................................... 30
Peso Silver Mines v. Cropper (1966) SCC ................................................ 31
Canadian Aero Services Ltd. v. O’Malley (1973) SCC ............................ 32
4. Generalized Fiduciary Duty ....................................................................... 34
Peoples v. Wise (2004) SCC ..................................................................... 34
TAKEOVERS ........................................................................................................ 37
1. Acting in the Interest of the Corporation (Leave it to the directors) .......... 39
Teck v. Millar (1972) BCSC ..................................................................... 39
Unocal v. Mesa (1985) Del. S.C. ............................................................... 40
2. Acting in the Interests of Shareholders ...................................................... 42
347883 Alberta Ltd. v. Producers Pipelines Inc. (1991) SCA ................... 42
Revlon v. McAndrews (1986) Del. S.C. .................................................... 43
3. Where the Two Interests Converge (The shareholders and directors want
the same thing) ............................................................................................... 44
Maple Leaf Foods v. Schneider (1998) OCA ............................................ 44
SHAREHOLDERS ................................................................................................ 47
Participation ...................................................................................................... 48
1. Direct participation - voting....................................................................... 48
2. USAs ........................................................................................................... 49
3. Indirect Participation – Shareholder Proposals ........................................ 49
Dodge v. Ford (1919) Mich. Sup. Ct. ........................................................ 50
Paramount v. Time (1990) Del. Sup. Ct. ................................................... 51
JUDICIAL SUPERVISION .................................................................................. 55
Derivative Action .............................................................................................. 55
Daniels v. Daniels (1977) Ch. Div., UK .................................................... 56
Oppression Remedy .......................................................................................... 58
1. No breach of the legal duty required .......................................................... 59
2. Broad Remedial Powers ............................................................................. 59
3. Justifying the Oppression Remedy ............................................................. 59
4. Development of Standards ......................................................................... 60
Naneff v. Con-Crete Holdings Ltd. (1995) O.C.A. ................................... 61
5. Bringing an Oppression Claim to Court .................................................... 62
6. Distinguishing Between the Two Remedies ................................................ 64
First Edmonton Place v. 315888 Alberta Ltd. (1988) Alta. Q.B. .............. 64
Personal Liability of the Directors in an Oppression Claim ......................... 66
Budd v. Gentra (1998) O.C.A.................................................................... 66
Winding Up in Quebec: The Corporate Death Penalty ................................. 68
Candiac v. Combest (1993) Qc. C.A. ........................................................ 69
Lutfy v. Lutfy (1996) Qc. Sup. Ct. ............................................................ 70
PIERCING THE CORPORATE VEIL ............................................................... 73
1. Impleading persons behind the corporate veil ........................................... 74
Transamerica Life v. Canada Life Assurance (1996) OCGD .................... 74
Walkovszky v. Carlton (1966) N.Y.C.A. .................................................. 76
2. Accessing the assets of the corporation...................................................... 76
National Bank v. Houle (1990) SCC ......................................................... 76
Kosmopoulos v. Constitution Insurance Co. (1987) SCC ......................... 78
Marzell v. Greater London Council (1975) Lands Tribunal ...................... 80
What is the study of business Associations? It is the study of
entrepreneurial activity involving more than one individual. Business
structures distribute risk of contractual or extra-contractual liability,
return on the investment, and authority over the business in
different ways.
Business associations/corporate law is truly a trans-systemic study
because legal tradition has only a marginal effect on the development
of the corporate form (Hansmann & Krakman). Modern, capital
markets with liberalized economies and political institutions all share
the corporate form. The differences between Ontario and Quebec,
too, are marginal. Although, for example, Ontario has legislated an
“oppression remedy” for persons with an interest in the corporation,
Quebec civil law uses the civil procedure to achieve the same result
(see art. 33 CCP).
SOLE PROPRIETORSHIP – one person going into business for
himself; the proprietor bears all of the risk, gets all of the return, and
has all of the authority. He does not need to conform to a “legal form”
but does have to comply with other laws (incl. business name
registration laws, intellectual property laws, etc.).
1. Partnerships
A partnership forms when the partners (1) contribute to the
enterprise, (2) share the profits, and (3) have an intention to
cooperate (Art. 2186 C.C.Q.). In the common law, a partnership
forms when the partners carry on a business (1) involving the
provision of goods or services for remuneration, (2) “in common” and
(3) with a view to a profit. In reality, there is not much of a difference
between these characterizations.
GENERAL PARTNERSHIP – every partner bears the risk, gets the
returns, and shares the authority. Partners are agents/mandataries
for each other and therefore, they can bind other partners in contract
(and in tort).1 The law presumes that the partners share the profits
A limited liability partnership places the risk of contractual liability on the general
partners, but the risk of extra-contractual liability on the individual partner. This
helps to promote checks and balances between the partners and reduces the risk of
and losses equally, although the default rules of partnership are
subject to contractual change.
Partnerships are not legal persons. They have “legal individuality”
which allows them to gain standing before a court and to hold
property in the name of the partnership and not necessarily in the
name of the partners.
As to issues of liability, that depends upon the legal system.
Common Law
Joint liability
YES (Partnership Act
(Ont.) s. 10)
YES, if the partner
dies, then the estate is
YES (s. 13)
The reverse is true in civil law.
Civil Law
Joint liability
Solidarity liability
NO (Art. 1525 C.C.Q.)
Other activities
LIMITED PARTNERSHIP – only the general partners have authority,
but they also take the risk of liability. The limited partners trade off
control for reduced risk. Both general and limited partners share the
returns. Limited partnerships require at least one general partner.
This form of business association closely approximates a
LIMITED LIABILITY PARTNERSHIP – for professionals only;
protects professionals’ personal assets from the extra-contractual
liability of their partners. These partnerships emerged in the U.S. and
have spread to Ont., Que. (not in the C.C.Q.), and B.C. Lawyers use
LLPs to protect personal assets against the negligence of other
partners; the firm’s assets are still vulnerable, though.
purposes, the partners are acting in a partnership, though the
partnership is not named legally.
A key difference between a partnership and a corporation involves
the liability of the stakeholders. Another difference is that
partnerships have few mandatory rules. The rules primarily deal with
allocation of liability.
2. Cooperatives
COOPERATIVE – has legal personality but the system of voting is
detached from the system of shareholding. Cooperatives have
“members” with an interest in the profits of the enterprise. Unlike a
corporation where votes are determined generally by proportion of
the shares, in a cooperative, every member has one vote. A person
may have a different membership status depending upon the amount
of capital invested in the cooperative. This gives the member a larger
share of the profit. The members of the cooperative often tend to be
the consumers of the business (see e.g. Desjardins Bank, Mountain
Equipment Coop, Co-operators Insurance.)
In a cooperative income should equal expenses. Any profits can be
remitted to the members in the form of a patronage refund or they
are reinvested in the cooperative. The cooperative is intended to
generate savings, and not profit.
One problem with cooperatives is that the absence of a profit motive
reduces the incentive for their creation. The voting structure also
prejudices the interests of those who invest more in the cooperative.
In part, cooperatives reflect an ideology that people should share the
costs and benefits of a certain product or service and that profit
should not cycle through the market.
3. Corporations
CORPORATION – the authority vests with the directors and officers.
The return goes to the shareholders, but the corporation itself bears
the risk of loss. A limited liability company allows entrepreneurs to
encourage capital flow, because the shareholders are not
responsible for the company’s civil fault. This is a passive form of
business, because all of the management functions vest with the
directors and officers.
The corporation is a “relatively” new investment vehicle. Until the
1850s, only people with a lot of capital could invest in the market,
because an investor was prohibited from collecting interest on a loan
with a fixed rate of return (usury). Therefore, an investor had to have
a proprietary stake in an enterprise to make a profit, and this the
return was variable. This also meant that the investor bore the risk of
liability created by the enterprise (set up generally as a partnership).
Corporate law, therefore, emerged from partnership law – and many
of the ideas in partnership law still linger as historical anachronisms
in the jurisprudence.
Partnerships are not adequate for raising massive sums of capital.
Corporations allow entrepreneurs to tap smaller investors on the
promise of return with no risk beyond the invested amount. This
allowed Western capitalist economies to develop large scale
infrastructure and commercial projects. As a result, corporate law is
concerned only with the relationship between the investors, the
managers, and the corporate entity; the other social questions
involving employment, the environment, and business practices are
left to other areas of law.
One unanswered question that persists in the study of corporate law:
how do you define the “interests of the corporation”? Is it the
interests of the employees? The shareholders? The community at
large? The corporation is a piece of paper; yet, it has rights and
interests (i.e. the right to be free from unreasonable search and
seizure), as well as obligations (i.e. to pay taxes). Consider the
example of the unprofitable manufacturing plant. Although closing the
plant might save money for the company, it would put some of the
employees out of work. Cost savings might render the company more
profitable, which increases share value.
When considering risk and the corporation, voluntary creditors (such
as in Saloman v. Saloman Inc. discussed below) are aware that
shareholders have limited liability. They choose to lend money or
goods at their own risk. Involuntary creditors, that is those people
injured by the tortuous actions of corporations, are not better off,
because the shareholders have no authority to supervise or manage
the company.
Are shareholders the “owners” of the corporation? Scholars will often
refer to shareholders as “owners”, although this is a misnomer. A
corporation is a legal person and by law, one legal person cannot
own another. This is a legal impossibility. Shareholders have rights
against the corporation, called shares, which entitles the
shareholders to vote at the annual general meeting, to dividends (if
issued), and to collect on the sale of corporate assets on windup. A
share is a speculative piece of property, in that it cannot generally
be redeemed against the corporation itself, but is traded.
Shareholders benefit by virtue of an increased price per share (“buy
low, sell high”). Today, shares are often held by professional
investment firms, and “shareholders” have units in the investments
(which are often set up as trusts).
A share confers three basic rights, which are discussed below:
(1) The right to the remaining property on windup (creditors take first,
because otherwise shareholders could pull property out of the
(2) The right to vote for directors and at meetings
(3) The right to dividends if they are issued.
4. Normative theories of corporate law
(1) Nexus of contracts: the corporation provides an “off the
shelf” legal device that allows thousands of individual
investors to transact together without thousands of contracts.
Corporate law provides a default set of rules, knowable to all
of the parties in advance, which reflects the implicit bargain
made by the shareholders, directors, and to some extent, the
creditors. Corporate law, therefore, should enable implicit
(2) Shareholder primacy: the shareholders “own” the
corporation and therefore they are protected in case of default
by the corporation. Corporate law, therefore, should promote
the interests of the shareholders (return).
(3) Stakeholder theory: corporations are more than business
entities; they impact how people live their lives. The directors
must make decisions that reflect the interests of members of
the community, including consumers. Corporate law,
therefore, should strive to ensure that corporations are goods
(4) Team production: the corporation is a collaborative project;
the shareholders and creditors provide the capital, the
employees provide labour, the directors provide management.
Corporate law, therefore, should strive to promote team
building between interested parties (see Stout below).
We can take a trans-systemic approach to corporate law by looking
at features characteristic of corporations in all legal systems. For
example, corporations have legal personality, and can have “extrapatrimonial rights” as well. Corporations provide for asset
partitioning or limited liability for creditors. They have transferable
shares, which makes this a more flexible investment vehicle than a
partnership.2 Corporations also have boards of directors, which are
statutorily defined bodies set up to run the corporation. Lastly,
corporations are funded by institutional investors to promote large
scale economic activity.
How do you start a corporation? During the 19th century,
entrepreneurs required letters patent from the government granting
permission to start a corporation. The government was worried that
corporations would be used to defraud creditors. Now, anyone can
start a corporation, provided they fill out the appropriate paperwork
and pay the start-up fee. The board of directors can issue shares that
are either privately traded or traded publicly on the stock exchange.
Legal Personality
Sections 41 and 123.29 of the Quebec Companies Act confer legal
personality on corporations (rights and shareholder immunity).
Section 298 of the C.C.Q. also recognizes legal personality. Sections
15 and 45 of the Canada Business Corporations Act do the same.
Does the law take the issue of legal personality seriously? Yes.
Saloman v. Saloman Inc. (1897) HL
Facts: Saloman set up a corporation, where he, and six of his family
members owed shares. Saloman was the majority shareholder,
owning 20000 of the 20006 shares. He also held debentures in the
company. The business was a going concern when he incorporated;
however, the business went into financial difficulty and became
insolvent. Saloman redeemed his debentures, leaving little capital left
to pay off the unsecured creditors. The creditors sued Saloman
Issues: Is Saloman personally liable for the debts of the corporation?
Holding: No. Saloman, as a shareholder, is immune from liability.
Reasoning: The legislation provides that a corporation is a legal
person, which means that it is solely responsible for its own
obligations. Saloman made no effort to disguise the nature of his
Joint stock corporations did not have transferable shares, because there were no
stock markets in the 1860s.
business nor did he attempt to defraud his creditors. The creditors
knew the risk of contracting with an incorporated entity without too
many assets. It did not matter whether Saloman held the debentures
himself, or someone else did. It is up to the creditors to determine the
risk of loss.
Rationale: A shareholder is not liable for breach of contract by a
Companies must give notice to creditors that they are incorporated
entitles (such as LLC, Inc., or Corp.).
Lee v. Lee’s Air Farming (1961) HL
Facts: Lee was the director, sole shareholder, and employee of
Lee’s 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 Lee’s wife, explaining that Lee was a director and
not an employee.
Issues: Can Lee be both a director and employee of a corporation?
Holding: Yes. A person can have multiple offices/roles.
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. It is up to the creditor, the insurance company,
to determine the risk of Lee’s death.
In this case, Lee was a contractual employee of the corporation. He
earned a living by piloting for the business.
Rationale: A person can hold multiple roles in a corporation.
Additional Notes:
 What do you do about the 1-person corporation? Nothing.
Although this may be conceptually problematic because an
“association” should include more than one person, at what
number do we set the minimum?
One-person corporations are inconsistent with the idea of a
corporation, which is a joint-economic enterprise.
If we invest authority in the directors and officers to manage the
corporation, there is a risk that they will use that power for their own
benefit (“agency cost”, see Hansmann & Kraakman). However, if we
impose too many rules on the directors and officers then we simply
shift accountability elsewhere (i.e. to the shareholders). There are
advantages to centralizing decision-making: lower transaction costs,
concentrated information, use of specialized expertise, etc.
Notwithstanding any liability that the law provides, there are other
forms of accountability: peer influences, media, share price, auditors,
lawyers, etc.
We have to recognize that business decisions get made quickly and
with limited information. The law should not constrain directors so
much that they will not take advantage of business opportunities (see
Van Gorkom and the Delaware legislature’s response, below).
Corporate Governance – How do we balance authority and
The decision-making process for a corporation is confined generally
to its directors and officers. At the first shareholders’ meeting, the
shareholders compile a list of directors, who then appoint officers.
For smaller and more concentrated corporations, however, the
shareholders can dispense with the board of directors under a
Unanimous Shareholders Agreement.
The Board will meet periodically to discuss the affairs of the
corporation. The purpose of the Board is to supervise the officers.
The problem, though, is that members of the Board are not always
versed in the affairs of the corporation (or in business altogether).
Sometimes Board members are officers of the corporation, who also
may engage in unlawful acts. The Enron example demonstrates how
officers can mislead the Board into believing that the company is in a
better financial state than it actually is.
The shareholders will elect the directors, who appoint the officers.
The directors cannot have unconstrained power. The judicial branch
enforces and monitors the “elected” officials, when they act beyond
the scope of their authority. There are other constraints, including the
market, reputation effects, and consumers.
Auditors and lawyers used to also serve as “gatekeepers.” Auditors
would examine the company’s financial statements to see if those
statements accurately represented the company’s earnings.
Following Enron, however, US legislation restricted auditors from
acting as consultants for the corporation, so as to limit conflicts of
No longer is it that law firms act on behalf of a corporation in relation
to all of its legal needs. Firms compete for contracts and as such,
they cannot determine whether a particular transaction is part of an
overall corporate fraud scheme.
The Directors have two bases for liability: the duty of care
(negligence) and the duty of loyalty/fiduciary duty. The duty of care is
secondary liability since the directors, themselves, are often not the
direct causes of the loss. It is by virtue of their negligent supervision
of the officers that they can be held liable.
The Duty of Care - Informed Business Decisions
Either the legislature can set down specific powers ex ante
(inflexible) or set a standard of care ex post.
It used to be that the courts held Directors to a subjective standard of
care: what is the best that you could have done? This standard
lowered the obligation for Directors, who could rely upon officers of
the corporation to act honestly. The standard was so low that
Delaware abolished monetary liability for the negligence of Directors.
Under Arts. 321-322 C.C.Q., directors and officers have same
obligations (see also s. 122(1)(b) CBCA). A subjective standard,
which was applied by the common law, is really no standard at all.
There must be an intentional disregard of the obligation.
Until the Peoples decision, the standard in common law Canada was
a modified objective standard: the directors must act like a
reasonably prudent person bearing in mind the characteristics of the
director him or herself (how well did you use the skill that you have?).
This places a greater obligation on a skilled director than on an
unskilled one and creates a disincentive for skilled directors to
join boards.
The problem with this standard is that highly skilled directors will
leave Boards at the earliest signs of trouble, because they could be
held liable if the situation worsens. The standard should be objective
(as it is in Quebec): what would the reasonable director do in the
same situation? This would allow the courts to apply a professional
standard to the management of larger corporations and a reduced
standard for “ma-and-pa” businesses.
When you create a system of accountability, who is the director
accountable to? (1) Shareholders (2) Creditors (3) Employees (4)
Public, or (5) Corporation. The corporation is owed the duty, because
the corporation is a legal person. In practice, however, the
shareholders stand in for the corporation. Shareholders may bring a
DERIVATIVE ACTION or they can seek a personal remedy.
There are several defences available to directors. The directors can
demonstrate that they took due diligence. The QCA deems a director
diligent if the director relied, in good faith, on someone credible who
gave professional advice.
The court will determine whether a director is liable by looking at
whether the director informed himself. The courts will review the
process, not the result, although sometimes the court will conflate the
two. The court does not care whether the idea was good, only that
the process in coming to the conclusion was sound.3
You can justify the objective standard because less experienced
directors will be required to get help.
R. v. Soper (1997) FCA
Facts: Soper was indicted for failing to remit employee’s taxes
contrary to the Income Tax Act. Soper became a director when the
company was in financial difficulty. Directors are liable under the act
for remitting employees’ taxes, unless they can show that they were
Consider the Ford Pinto example. Ford considered the losses to the company
because of the exploding engines. They considered the cost to the company.
Therefore, they probably would not be liable for this decision in negligence.
diligent in the execution of this duty. This tempers the severity of the
Issues: Was Soper diligent?
Holding: No.
Reasoning: Robertson JA reviews the development of the duty of
 Judges have adopted a “subjective standard”, although
Robertson explains that the language of the CBCA does not
justify this standard. He cites City Equitable to outline the three
propositions of the subjective standard: (1) a director is expected
to perform his duties based on his own level of knowledge and
expertise, (2) the director is not bound to give continuous
attention to the affairs of the company, and (3) absent grounds for
suspicion, the director can rely on the advice of experts.
Robertson explains that the statutory standard is a modified
objective one (in which the director is held to act in accordance
with the reasonable person, in light of the director’s own
competencies). Although Robertson explains that the standard
does not benefit less experienced directors, that reasoning is hard
to justify – especially in light of the holding in this case.
The committee in charge of drafting and revising the CBCA
selected the “prudent person” and not “prudent director” standard,
which demonstrates that the court is not placing a professional
standard of care on directors. Directors lobbied Parliament not to
change the standard.
In this case, Soper merely relied on the assurances of others that the
taxes were remitted; however, he was told that the company was in
arrears to Revenue Canada. Soper took no further efforts to find out
how much money was owed and why. The court distinguished R. v.
Sanford, to explain that the director in that case asked for a cheque
to be remitted to Revenue Canada and she took “active steps” to
ensure that the agency received payment.
Soper could have asked for regular financial reports, confirmed
regular remittance with the accountants, or made further inquiries to
ensure that RBI remitted its taxes. Instead Soper did nothing.
Soper was an experienced business person (unlike Sanford),
who should have known about the tax problem. As an
experienced business person, he should have taken steps to
ensure payment. There was no evidence that Soper’s fellow
board members conspired not to tell him about the tax liability.
Rationale: A modified objective standard applies to corporate
director’s liability under the Income Tax Act (and CBCA).
Smith v. Van Gorkom (1985) Del. S.C.
Facts: Transunion (TU) could not make use of its tax credits since it
did not generate enough income. The company was a going concern,
but in order to benefit from the tax credits it would have to “merge”
with other businesses. The chairman, Van Gorkom, consulted
Pritzker on the possibility of a leveraged buyout. This would allow
Pritzker to buy the company with funds from a loan. The value of the
company would be determined by how much debt the acquirer can
carry (basically, how well TU could finance the loan with its profits).
TU’s shares traded at about $30/share, and the buyout would pay the
shareholders, $55/share. Smith complained that Van Gorkom
undersold the company.
Issues: Did the directors make an informed business decision?
Holding: No.
The directors did not have an independent
valuation/appraisal of the company’s assets and therefore the
decision was not informed.
The Board’s only source of information was Van Gorkom. The court
discounted Van Gorkom and the Board’s expertise. “Experienced”
directors should have gotten other appraisals.
The Board never opened up the sale to competition in the market.
They did not solicit other offers. They relied on the advice of their
legal counsel not to (the actual agreement was never admitted, which
would seem to support the majority and contradict the directors’
Although the shareholders of the sale, the proxy information was
inaccurate. It did not tell the shareholders about how the valuation of
the company was made.
Rationale: Under Delaware common law, the directors must
obtain an independent valuation of a company before selling it.
Critique: The majority is effectively questioning the business rationale
of an expert board of directors. No one knew TU better than the
directors. An independent valuation was unnecessary. This was a
simple transaction which did not require much time.
The dissent accepted the directors’ evidence that they had agreed to
solicit offers and put the company on the market.
Van Gorkom raises questions about how much weight the court
places on the information that the directors considered, how deep
their investigation/contemplation was, the amount of information
considered, etc.
Delaware responded – allowing corporations to exempt directors
from liability. They deferred to the market, which is what corporate
law aims to do.
Final thoughts on the duty of care: is it really necessary?
Arguments in favour of removing the duty of care
The duty has been abolished as mandatory law in Delaware and
by virtue of the number of corporations who have opted out in
their articles of incorporation, it shows that it is a preferred model.
If the directors of the corporation represent the interests of the
shareholders and if in fact they are the shareholders, then any
liability for their negligence is borne principally by them. The
market can provide an alternative source of regulation.
There are other mechanisms to hold the directors accountable;
namely, loss of profits, corporate reputation, the media, investors,
etc. The duty of care, however, provides a “legal face” to this
problem. It shows that the law cares how directors and officers
make their decisions. This adds symbolic value, but does not
necessarily have practical effects.
To meet their “duty” directors and officers may over-compensate
by requiring the production of too much information, that they
either cannot process or that takes time to process. This
production carries costs. If the net cost to society under this
production/valuation rule is greater than the costs incurred for
liability for truly negligent decisions, then the policy makes little
sense in economic terms.
Too much liability also constrains risk-taking behaviour of the
Perhaps as an alternative legislation can encourage whistleblowing behaviour.
Directors can be removed by election.
We don’t want the courts questioning business decisions of the
directors; they are not experts in business.
Arguments in favour of adding/maintaining the duty of care
The duty of care has a symbolic function. It makes directors
conscious of their obligations. It also provides another source of
deep pockets for shareholders who have lost their investments
following a poorly planned decision.
A duty of care is fine if it actually provides accountability. A
subjective standard does little to hold directors accountable,
because they are not held to any meaningful standard. A modified
objective standard has the effective of creating a disincentive
against talented directors staying on corporate boards when the
corporation is in trouble.
This encourages directors to consult professionals. It also
encourages directors to solicit opinions from the staff. This
essentially shift the risks from directors to professionals with
liability insurance (instead of the market).
A due diligence defence would otherwise be required, so that
directors have a sense of their obligations.
Fiduciary Duty – Duty to the Company
Martel says that the common law can provide a source of
reasoning/jurisprudence for the civil law to use. The civil law and
common law share underlying concepts of “loyalty”. Whereas in the
common law the inspiration for the jurisprudence was the law of
trusts, in the civil law it is the mandate. This approach is favourable to
using the common law to build civil law concepts or applying common
law concepts director in the civil law.
What is loyalty? Loyalty forms in relationships of trust, where one
person relies on another for care, advice, or support. A disloyal
person is someone who takes advantage of an interest when the
other party intends to act on that interest. In such cases, full
disclosure if important to sanitize the risk of disappointment, hurt, etc.
The duty of loyalty is the core duty. Surrounding the core duty are
other duties which can help to prove a disloyal act. First, if the
fiduciary puts himself in a CONFLICT OF INTEREST, the court
presumes disloyalty. Second, if the fiduciary PROFITS from a
transaction, there is a further presumption.
There are two groups of people who will litigate breaches of loyalty.
The first is the shareholders, often the minority shareholders. They
want to ensure that the transactions made by directors fairly
represent their interests. The second is creditors. Although voluntary
creditors can account for the risk of a disloyal action by the directors
when loaning money, involuntary creditors rely on the director’s
integrity to keep the corporate assets in the corporation.
Martel – Duties of Loyalty in Quebec
Martel explains that the evolution of a director’s duty of loyalty in
Quebec is the product of relatively recent legislative changes.
Quebec courts were first confronted with the integration of this duty
into civil law in 1975, when Parliament amended the CBCA to
include s. 122(1)(a).
Common law judges looked to trust law for a model within which to
develop corporate director responsibility. Wilson J explained in
Frame v. Smith that fiduciary relationships share three things in
common: (1) the fiduciary exercises discretionary powers (2) which
affect the interests of the beneficiary (3) that is particularly
vulnerable. As such fiduciaries must act loyally and honestly toward
beneficiaries, they must not profit at the beneficiary’s expense, or
act in a manner that furthers their interests at the expense of the
If the beneficiary proves a conflict of interest or profit, the burden
shifts to the fiduciary to show that he acted loyally. The beneficiary
need not prove fraud/bad faith or injury to his patrimony.
In Quebec, and under the C.C.L.C., the trust institution was quite
limited. The civil law had a developed law on mandate, from which
Quebec courts drew inspiration. The mandatary also owed a “duty
of loyalty” to the beneficiary, although this duty was not as
developed or as strict as in common law. Both the mandatary and
the common law trustee were under an obligation to account for
profits and losses related to the management of their beneficiary’s
property. The courts had to bring in officers under a. 2138 C.C.Q.
because they were not included in a. 322 C.C.Q.
Mandate is the analogous concept that civilian judges have used to
build the jurisprudence on director responsibility. Mandate is not
enough, which is why a. 322 C.C.Q. enlarges the duty and allows
for a growth of the duty of loyalty outside of the scope of mandate.
After the court’s decision in Nozetz, Quebec civil law incorporated
fiduciary duties based on the notion that directors were mandataries
of the corporation. As such the director had to act as a “bon père de
famille” and not profit at the company’s expense. After the Ng
decision, the courts recognized that this duty of loyalty attached to
officers and senior employees of the corporation as well.
Martel recognizes the weakness of the mandatary analogy: that
mandate is a contractual relationship, but the director-corporation
relationship is a product of statute. He says that courts should now
look to the statutes for guidance as to how to set out the appropriate
duties. The jurisprudence on mandate and even the common law
cases are still useful sources of interpretation.
Although Martel feels that Quebec courts should harmonize their
interpretation of the CBCA with the rest of common law Canada, he
fails to recognize that the other provincial courts may have slightly
varying interpretations of the provisions.
It is all too easy when handling another’s property to use that
property for your own interests. The corporation has no voice, and
therefore, the shareholders will step in and act on behalf of the
corporation. There are three common situations which give rise to
fiduciary claims:
1. Interested party transactions
2. Benefiting from the unauthorized use of corporation
3. Taking of a corporate opportunity.
Each of these will be discussed in the cases below.
One should note, however, that these are examples of breaches
of the prophylactic duties. Proof of bad faith is not required
since there is a presumption of disloyalty. The directors can
also be found to have acted disloyally even when they do not
profit or are not in conflict (see discussion in Peoples, infra).
There are limitless situations in which such breaches can arise.
1. Interested Party Transactions
To be an interested party, the director has to be a party to the
transaction and has to have a material interest in the transaction.
Nozetz c. Habitations CJC Inc. (1986) S.C.
Facts: Sauvé was the director of Rock. Rock had acquired the rights
to purchase some land at a low price and was going to resell the land
to Braindvert for a large profit. Instead, Sauvé arranged for CJC to
purchase the land and then sell it back to Rock. The result was that
CJC would profit substantially at Rock’s expense.
Issues: Is Sauvé responsible for accounting for the profits lost?
Holding: Yes.
Reasoning: Sauvé redirected profit that belonged to Rock for
personal gain. He deprived Rock of a business opportunity which he
was supposed to secure for that company.
There is no such thing as a “fiduciary” duty in civil law (yet) but the
analogous situation is one of mandate. A mandatary must act as a
“bon père de famille” and a reasonable BPdF would not have acted in
the way that Sauvé did. The rule in Canadian Aero, infra, applies in
civil law to protect corporate assets from being stolen or misused by
Rationale: As a mandatary of the company, a director will have
to account for profits denied to the company for breaches of its
duty of loyalty.
Gray v. New Augarita Porcupine Mines Ltd. (1952) HL
Facts: Gray used the company as a personal savings account. He
issued shares to himself at a heavily discounted rate and then sold
them at full value in the market, keeping the profit for himself. Gray
attracted the attention of the Ontario Securities Commission who
installed a new board of directors. The new board wanted to
regularize the accounts and proposed a settlement to Grey. Gray
proposed a settlement to the Board and voted for its approval.
Issues: Can the board accept the settlement?
Holding: No.
Reasoning: Per Lord Radcliffe: a director is not entitled to put himself
in a position where he can absolve himself of a conflict of interest.
Gray was the only person with the relevant information about how
much he stole. The new Board did not arrive at the settlement
amount using the full information about how much Gray stole. (Like in
Van Gorkom, the amount represented a “guess”)
Gray is not allowed to advance a defence which provides that the
directors would otherwise have accepted the settlement amount. This
is not an ends-related inquiry: how much does the company feel that
it is injured because of its director’s actions; it is a means-related
inquiry. If there is a breach, the director must account for the value of
the breach to the company and disclose the relevant information.
This leaves the question open: what is relevant information?
Rationale: A director cannot continue to place himself in a
position of conflict after he breached the duty of loyalty. In such
cases, the director must disclose all relevant information about
the breach and cannot vote to approve a settlement afterward.
In some situations, the director is the best person to obtain a product
or service from. The director may be a party to the corporation’s
contract if it (1) provides full disclosure, (2) secures informed consent
from the board of directors, (3) does not vote on the transaction, and
(4) ensures that the transaction is reasonable and fair when it was
approved. If the director fails to meet all 4 conditions, he must
account for the profits personally.
Points to consider:
Under s. 120(7.1) CBCA, the shareholders at a special meeting
can forgive the director’s breach and confirm the otherwise
voidable contract. This is an open question: why can the
shareholders forgive the director if the duty is owed to the
corporation? Under a. 326 C.C.Q., the corporation can go to court
within 1 year and seek to annul the contract (relative nullity).
Does “legal personality” mean more than a debtor-creditor
relationship? If so, why should shareholders step in on behalf of
the corporation or on behalf of their own interests, as we will see
below in Feldman? We cannot necessarily equate the interests of
the corporation with the interests of the shareholders. The
shareholders may have a plurality of interests.
Shareholder ratification by the majority may oppress the
minority; it also may be hard to get in widely-held
2. Benefiting from Corporate Assets
If a. 322 C.C.Q. is new law, then officers and senior employees
should not be subject o a duty of loyalty. The jurisprudence, however,
says otherwise (see Ng, below).
Bank of Montreal v. Ng (1989) SCC
Facts: Ng was a securities trader with the Bank. He was an
employee and not a director or officer. The Bank authorized him to
make up to $40M in trades daily. Ng, however, used client funds to
make his own trades and earn a profit. He also dealed with some of
the Bank’s clients directly and split the profits on trades with them.
Although the Bank did not lose money, it did lose opportunity.
Issues: Is Ng responsible to account for the profits to the Bank?
Holding: Yes.
Reasoning: The court explained that when someone uses someone
else’s property to make a profit, the user is liable for the gains (per
the duty of loyalty). Ng was akin to a “possessor in bad faith” and
therefore he was not entitled to keep the profit from the transactions.
With respect to the second group of transactions, the court could not
locate a direct codal provision in Quebec law which circumscribed the
duty of loyalty. The silence of the C.C.Q. is not dispositive. It looked
to French law to explain that in some contracts of employment, the
employee can owe such a duty. The duty of loyalty varies with the
degree of trust and authority vested in the employee. The more
authority, the more the authority must be constrained.
Ng would not have had access to the clients had it not been through
his position with the Bank. Furthermore, a person should not be able
to benefit from his own wrongdoing (“ex turpi causa “ rule).
Rationale: Employees in senior positions owe a duty of loyalty
to the employers and may have to account for profits gained in
breach of that duty.
This case raises another question not addressed by the court: does
an employee owe his or her entire economic potential to the
employer? Why should Ng have to account for money that he made –
that the employer could not make or that he made off company time?
Another troublesome point is that the Bank disgorged the profits and
not the clients. It was their money that Ng used. Maybe the Bank
would have made the profits from those transactions or maybe the
Bank received a mandate from the clients to sue Ng.
Perlman v. Feldman (1954) C.A. 2nd Cir.
Facts: Feldman was the majority shareholder in Newport, a steel
company. The steel company was not a viable concern, however, the
government’s demand for steel during the war drove up prices. As a
result, the company could inflate its prices. Feldman sold his shares
to another company, Wilport. Wilport, therefore, would not have to
pay the inflated prices for the steel since it would acquire it directly
from Newport (effectively its own subsidiary). The minority
shareholders sued Feldman for part of the sale price, arguing that
they had to forego part of their profits because the new purchase
would not have to pay a premium on steel.
Issues: Is Feldman liable to the minority shareholders?
Holding: Yes.
Reasoning: Per Clarke J: The court said that Feldman as director
and shareholder stood in a fiduciary relationship. Although Feldman
was entitled to benefit from the sale of his shares, he also had a duty
as the director. Because he is also the majority shareholder, his
behaviour has to conform to a higher standard of conduct.
The sale necessarily amounts to a sacrifice of “corporate good will”
and therefore Feldman has to account for the gains that he took from
the corporation. Hence, part of the sale proceeds must go to the
other shareholders (or back to the corporation).
Rationale: A majority shareholder must ensure that if he sells
his shares at a premium and it costs the company money, the
shareholder may be accountable for part of the proceeds of the
Critique: Per Swan J: A majority shareholder is privileged to sell his
shares at the best possible price. The shareholder is not under a duty
to assist the minority shareholders; he is in business for himself. The
minority shareholders should be aware of this risk. Furthermore,
there is no proof that Newport suffered any damage from the
This idea is problematic, since the majority shareholder not only has
to be fair to the minority shareholders, but actually has to account for
their interests when they act.
3. Taking Corporate Opportunities
As the duty of loyalty finds its origins in trust law, the courts have
relied on trust law rules to frame corporate governance. One such
rule is the prohibition against taking an opportunity available to a
beneficiary even if the beneficiary cannot benefit from the opportunity
itself (see Keech v. Sanford). If this happens, the shareholders must
approve the transaction.
Shareholder ratification, itself, can be problematic. Although the
director would not have been told about the opportunity but for his
position, the shareholders can hold the director hostage for a
percentage on the deal even though the shareholders could not
There are two reasons for not allowing the taking of corporate
opportunities. The first is tradition (see Keech). The second is the
evidentiary issue. The courts cannot get required information
because the directors have control over the information. This is
why when a taking can be prima facie established, the director must
disprove a breach of the duty of loyalty.
Regal (Hastings) Ltd. v. Gulliver et. Al (1941) HL
Facts: The parent corporation owed a theatre. The company sought
to acquire the lease of two more theatres, although it didn’t have
enough capital to finance the transaction. The directors could have
guaranteed the leases; instead, they supplied the subsidiary
corporation with the capital. 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?
Holding: Yes.
Reasoning: Directors and officers cannot make use of a corporate
opportunity “by reason of and in the course of” their position as
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.
The directors could manipulate the corporation in order to limit the
opportunities that the corporation could avail itself of. As such, the
courts have placed a bar against this. However, some economists
argue that if the directors cannot take an opportunity, no one might
take it. The rule does not account for business reality. There is a
perverse incentive for corporations to stand by and wait for
directors to assume the risk of the transaction, and should the
directors profit, disgorge the directors.
Peso Silver Mines v. Cropper (1966) SCC
Facts: Cropper was the director of the plaintiff company. He had
years of business experience in the mining experience. Cropper was
an active director. 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.
Cropper and Dickson formed a company to manage the claim.
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?
Holding: No.
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, however, 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 Cropper’s acceptance (“forgot all
about it”) – which evidenced the fact that that the opportunity was no
longer a “corporate opportunity”.4
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.
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.
The court in Peso seemed to be doing what the House of Lords in
Regal said was an impossible task: that is, the Peso court was trying
to inquire into factual situations in which a director can take
advantage of a corporate opportunity while still in the employ of the
corporation. 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. Again, like in Ng, the court takes a functional analysis to
define the duty of loyalty. The more control that a person has over
the corporation, the greater the need for accountability and
Canadian Aero Services Ltd. v. O’Malley (1973) SCC
Facts: O’Malley and his co-defendants held executive and directorial
positions in Canadian Aero. The defendant, while controlling
Canadian Aero, met with Guyanese officials to secure a mapping
contract. The project was funded by the Canadian government –
which solicited proposals from other mapping companies. Canadian
Aero bid on the deal. O’Malley the others, however, left Canadian
Aero to start their own company, Terra, which also bid. The Terra bid
was accepted.
Issues: Is O’Malley liable to cede the profits to Canadian Aero?
Holding: Yes.
Reasoning: Per Laskin J: O’Malley and his colleagues stood in a
fiduciary relationship with Canadian Aero (functional analysis). The
law would be reduced to absurdity if on the simple resignation of the
defendants, they could take a corporate opportunity available to their
former company. 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:
 The position or office held,
 The nature of the opportunity,
 Ripeness/timing,
 Knowledge possessed, and
 Status of the fiduciary relationship, among others.
Also, what distinguishes this case from Peso is that the defendants
used the company’s confidential information – which they gathered in
the course of their position. They took advantage of this information
to capitalize on the Guyana 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.
When the directors of a company leave, their
fiduciary duty does not expire at that moment.
For interested party transactions, the scope of abuse is confined
to single directors. The Board, therefore, can constrain behaviour.
For taking of corporate opportunities, any director is susceptible
to a breach of the duty. Therefore, a non-interested party, like the
shareholders should have to approve the transaction either ex
post or ex ante.
Shareholders may be apathetic to the transaction or may be
The reasons that a corporation cannot take an opportunity
include: financial inability, legal inability, rejection of the
opportunity. If a director takes an opportunity, because the
director controls the information needed to show why the
corporation could not have taken the opportunity, the burden
should be on him to prove loyalty (how they did not manage the
company in a way that the company could not take an
Would it make sense to have a rule as with interested party
transactions (Board vote, transition period, etc.)
4. Generalized Fiduciary Duty
Peoples v. Wise (2004) SCC
Facts: Wise and Peoples were clothing retail companies competing
in a highly competitive market. Marks and Spencer, which owed
Peoples, looked to sell the company. Wise bought it under a
leveraged buyout. To protect its interests, Marks and Spencer placed
strict conditions on the management of Peoples and took security in
the assets of that corporation. As a results, Peoples and Wise were
forced to run two separate operations and could not consolidate fully.
This caused serious problems for both companies.
The directors of Wise (who were also the directors of Peoples)
initiated a new arrangement for acquiring and partitioning
merchandise. As a result of this arrangement, Peoples would buy the
bulk of the merchandise and Wise would owe a credit to peoples.
Peoples was put into bankruptcy proceedings and the trustee
petitioned the court to include the director’s personal assets as a
result of a breach of their fiduciary duty.
Issues: Do the directors of a corporation owe creditors a fiduciary
Holding: No.
Reasoning: Per Major and Deschamps JJ.: The creditors claimed
that the inventory policy was detrimental to Peoples, because
Peoples had merchandise, while Wise controlled the cash.
The fiduciary duty is owed to the corporation and not to the creditors.
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 director’s breach of the generalized duty of loyalty to the
company; that is, the directors did not act in the company’s best
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 directors had no personal interest in this
policy. They implemented the policy in the hopes that it would solve
some of the management and accounting difficulties that Peoples
(and Wise) faced.
The creditors can sue personally under the oppression remedy
if the directors acted in a way that affected their interests or
expectations. 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
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.
Again, we are forced to confront the question: what is the interest of
the corporation? In order to answer that we have to try and figure out
how we view the corporation. It is a “moving target”; that is, in
situations of insolvency, the interests may centre around the creditors
(who want to preserve their assets vs. the shareholders who want to
grow them). In takeovers, the shareholders may want to maximize
the return on their shares, while the employees may want to keep
their jobs.
Additional Notes:
A TAKEOVER is a complete change of control of a company. They
are regulated primarily by securities regulators, but the jurisprudence
does show how the courts are not yet settled on their understanding
of the corporation. Although the duty of loyalty is defined clearly in
the context of the “prophylactic” duties (strict liability for fiduciary
breaches), determining the content of the duty of loyalty in the
context of takeovers is more difficult.
A company may want to purchase another corporation for several
reasons: (1) to break up and sell off the assets of the corporation
(Revlon), (2) to eliminate competition, (3) to acquire a supplier
(Feldman), or (4) to increase the value of shares.
Directors may try to resist takeovers. They might put out an issuer
bid, where the corporation buys back its own shares to reduce its
capital. They might also effect shareholders’ rights agreements
(SRAs) or “poison pills” to raise the cost of acquiring the corporation.
Directors might also invoke defensive tactics to preserve their own
jobs (see e.g. Pipeline which is why this is a conflict situation).
Management may resist a take-over of an inefficient corporation
in order to save their jobs.
The jurisprudence demonstrates two trends:
1. “Just Say No”/Entity Model – directors and officers have a
duty to manage the corporation and if control is threatened by
an unsolicited offer, they can take defensive measures to
undermine the takeover if they think that the takeover will
harm the corporation. Unless it is inevitable that the
corporation will be sold off (see e.g. Revlon, infra), the
directors can take defensive measures.
This model follows the “entity” model or “stakeholder”
model. Shareholders are simply investors and there
are other constituencies affected during a takeover.
2. Shareholder Choice Model – a takeover is simply an offer
for shares to the shareholders. The shareholders can
therefore decide whether to accept an offer. Defensive tactics
cannot interfere with the outcome, but the directors can use
them to encourage competing bids and/or delay the decisionmaking process.
Corporate governance is a mechanism to
maximize shareholder returns. Labour law will
protect employees, while secured transactions law
will protect creditors. All that is at stake is the value
of the shareholders’ investment.
The fundamental problem facing the courts is how to decide what the
interest of the corporation is.
Another question arises: do we really need these rules? As with the
duty of care, the market can regulate corporate governance, because
people will sell shares in poorly managed corporations and other
shareholders will look to acquire those corporations, replace the
management, and try to turn a profit.
In Canada, unlike in the United States, securities law carefully
regulates hostile takeovers, such that there is less of a need for the
directors to take extreme action to thwart a bid. Therefore more
discretion can be left to the shareholders to decide amongst the
competing bids without the pressure of an unfair tender.
From a trans-systemic point-of-view, we have to ask ourselves:
(1) Who has the authority to make the decision – the
management or the shareholders? If the shareholders decide,
then we have to limit the authority of the directors to use
poison pills to let the shareholders make the decision.
(2) If it lies with management, whose interests are favoured – the
company or the shareholders?
Remember, corporate law is about balancing authority and
accountability. If we leave the decision-making process to the
directors, they can entrench themselves. If we leave it to the
shareholders, they may not do what is best for the company.
How do we balance the two?
1. Acting in the Interest of the Corporation (Leave it to the
Teck v. Millar (1972) BCSC
Facts: 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. Afton’s 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 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 Teck’s majority interest in Afton.
Issues: Were the directors’ defensive tactics disloyal?
Holding: No.
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
“The corporation has become almost the unit of organization of
our economic life. Whether for good or ill, the stubborn fact is that
in our present system the corporation carries on the bulk of
production and transportation, is the chief employer of both
labour and capital, pays a large part of our taxes ,,,, “
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
Millar’s actions. The court will assess the director’s good faith.
However, the directors must perceive a substantial risk of harm to the
corporation to justify their actions.
In this case, Millar was weary of Teck. He had misgivings about its
financial capacity, its technical expertise, managerial strength, and
marketing experience.
Interests of the Shareholders – the court did say thought that it was in
Teck’s interest as a shareholder to have the bid go to Canex (albeit
not as a competitor to Canex).
Rationale: The directors can use defensive tactics if they
reasonably believe that the acquiring company would
substantially harm the corporation.
What we learn from this case is that the motive of the directors is
important. The previous loyalty cases that involve breach of the
prophylactic rules required proof of the breach (strict liability). Motive
did not factor into the reasoning. This is because the courts will
presume improper motive. In the takeover context, the directors’
motives must still be constrained by a reasonableness criterion. They
cannot take defensive measures unless the threat to the interests of
the company is substantial.
The judgment does not shed much light on the “interest of the
Unocal v. Mesa (1985) Del. S.C.
Facts: Mesa, a minority shareholder of Unocal made an offer to
acquiring the controlling interest of the company. The offer provided
that some of the shares would be acquired at a high rate, but those
acquired later on would be at a lower rate, hence the bid was
coercive. The Board met to discuss the offer and considered that it
was too low. The Board decided to make a self-tender (Issuer Bid) for
its own stock by incurring additional debt.
Issues: Were the Unocal directors entitled to take defensive
Holding: Yes.
Reasoning: Directors may deal selectively with shareholders so long
as they do not use their powers to entrench themselves. The
directors also have the power to repurchase shares from
shareholders. Although the court will not substitute its own decisionmaking for the directors, it will examine how the directors made their
decision.5 The presumptions afforded by the business judgment rule
are not as strong in the take over context, because of the risk of
The directors have a duty to protect the corporation from threats that
originate from third parties or even from shareholders themselves.
The directors, however, cannot use any “draconian” means available
to defeat a perceived threat. The directors must have a reasonable
belief that the offer is threatening to the company and take
reasonable measures to respond.
The directors will look at the following:
(1) Inadequacy of the bidding price,
(2) The timing of the offer,
(3) Impact on the “constituencies”
The directors would pay out the same value for all of the shares,
including Mesa’s. They were not treated any differently than the other
shareholders (like in Pipelines, supra). If Mesa is discontent with the
decision, they can vote to replace the Board of Directors.
Rationale: Where the directors reasonably perceive an offer to
be threatening to the company’s interests, they can take
proportionate measures to defeat the bid.
The directors are often in a position to decide how to maximize
shareholder value. They can dissuade coercive bids. They have the
responsibility and the wherewithal to analyze the strength of the
competing bids. The risk, again, is that management might try to
entrench itself. But that risk is alleviated by oppression actions
Recall, the business judgment rule applies to exercises of the fiduciary duty in the
United States as well. American case law uses the term “fiduciary duty” to apply in
the duty of care context but also in cases of loyalty as between the directors and the
company and as between the majority and minority shareholders (see e.g.
Feldman). The directors are presumed to act in good faith and to have informed
and because the directors bear the burden of proving that their
defensive tactics were reasonable.
2. Acting in the Interests of Shareholders
347883 Alberta Ltd. v. Producers Pipelines Inc. (1991) SCA
Facts: Pipelines was a closely held corporation. The directors sought
to stop a takeover bid by Saskoil, though its wholly-owned subsidiary
(347883 Alta. Ltd.). Saskoil applied to the court under the oppression
remedy to set aside an SRA that would have made it more difficult for
Saskoil to purchase the majority of the Pipeline shares. The Board
members circulated an Issuer Bid to repurchase Pipeline’s shares.
Saskoil complained that the directors were trying to entrench their
position on the Board.
Issues: Were the directors’ defensive tactics disloyal?
Holding: Yes.
Poison pill rules must balance the interest of
shareholders without entrenching the position of directors. Applying
Teck, directors are charged with making the decision as to who can
take over the company. They can assess and evaluate the bids to do
what is best for the company.
With reference to securities legislation, the securities regulators want
to promote an open and even-handed market for trading shares. The
responsibility of the directors is to advise the shareholders, rather
than to decide the issue for them. The shareholders have the right to
dispose of their shares. The directors failed to show that they acted in
the interests of the corporation when they proposed the Issuer Bid.
The directors were not entitled to deprive shareholders of Saskoil’s
offer and to entrench themselves in the Board.
Because this is a situation that can involve a conflict of interest (i.e.
the directors may want to entrench their position), the onus is on
them to show why their defensive tactics were reasonable.
*What distinguishes this case from Teck, however, is that there are
no competing bids other than the bid manufactured from the directors
themselves. They did not use the poison pill to secure an alternative
bidder or to maximize the return for shareholders and used the SRA
to entrench their own positions on the Board. This demonstrates an
improper motive and a poor assessment of the objective
unreasonableness of the risk of harm to the corporation.
Rationale: Where the directors deploy defensive strategies to
entrench themselves, they are acting disloyally.
Critique: Saskoil must successfully attack the validity of the SRA to
get a remedy. It can attack the “validity” of the SRA (that by its very
nature is illegal) or the effect caused by its “operation” (that the effect
prejudices shareholders). A cause of action under the “operation”
branch requires that Saskoil establish a prejudice, as it cannot attack
the validity of the SRA, which the shareholders had consented to.
The remedy must rectify the matter complained of. Saskoil profited
from the Issuer Bid. It did not, however, gain control over Pipelines. It
is difficult to conceive of granting oppression remedy to a person that
has not been involved with the company for very long; Saskoil is an
outsider. Saskoil’s only prejudice was that it had to wait until the SRA
expired to make a bid.
The SRA did expire and Saskoil could have made a bid then. It did
not and therefore it cannot complain that it lost out because of the
poison pill. Saskoil misunderstood and misrepresented the poison pill
agreement to its own detriment.
The problem with the shareholder-interest hypothesis is that it the
courts may favour the shareholders of the company that is being
acquired, as opposed to the shareholders of the acquiring company.
Revlon v. McAndrews (1986) Del. S.C.
Facts: McAndrews Inc. is the controlling shareholder of Pantry Pride
Inc. PP put in a bid to acquire Revlon in a public “auction” for the
company. The directors took defensive measures to block the sale of
the company and McAndrews sued. The defensive measures
including the pay out of a large dividend to the shareholders. The
directors ultimately proposed the sale of the company to Forstmann,
a competing bidder.
Issues: Were the directors of Revlon entitled to take defensive
Holding: No.
Reasoning: The danger in takeover situations is that the directors
might be acting to entrench their own interests and that they will not
act in the interests of the company or its other stakeholders. As in
Unocal the focus is on (1) purpose/motive/good faith and (2)
reasonableness of that purpose.
The court notes that the Shareholder Rights Plan did cause PP to
raise its bid from $42 to $58 per share. This is consistent with the
implementation of a defensive measure. Because PP’s offer
exceeded what the Board was looking for, it did not need to continue
to exclude PP from bidding.
Because the company was going to be broken up and sold anyway,
the Board had the duty of maximizing returns for the corporation and
its stakeholders. This is why the Board held the auction. The Board
was not interested in preserving the corporate enterprise.
Rationale: Where the company is going to be sold, the Board
should not play favourites with the bidders and should use
defensive strategies only where the bidders undervalue the
shares of the company.
3. Where the Two Interests Converge (The shareholders and
directors want the same thing)
Maple Leaf Foods v. Schneider (1998) OCA
Facts: Maple Leaf Foods is looking to acquire Schneider Corp. Most
of the voting shares in Schneider are held by “the Family”. Maple
Leaf has claimed that the directors truncated the auction process so
that the Smithfield bid would be accepted.
Issues: Did the directors act disloyally?
Holding: No.
Reasoning: Per Weiler JA: The directors must act in the interests of
the company. This means that they are not agents of the
shareholders and that there may be a conflict between different
stakeholders in a corporation. The directors cannot, however, unfairly
disregard the interests of a particular stakeholder.
One way to avoid conflicts of interest in takeover situation is to set up
a “Special Committee” of un-conflicted directors (i.e. outside
directors). The Committee can then evaluate the bids. The
Committee might be compromised if directors, looking to keep their
jobs, influence the Committee’s decision-making process. In this
case, the court found that the Committee was not unduly influenced.
Citing the Paramount decision, infra, the directors are not under an
obligation to hold an auction every time a company is up for sale.
They can rely on other methods to ensure the best transaction
possible. The directors canvassed the market, and the Maple Leaf
bid was not the best one.
The directors consulted with the Family and the family said that they
would not accept MLF’s bid. The directors did not put the bid to the
Family formally (perhaps they should have?). Although the Family
stood to gain the most from the higher bid price, they refused the
offer because it was not best for the company or its corporate values.
“Apart from the financial criteria [which MLF could not match], Maple
Leaf did not meet the Family’s expressed concern about the effect of
a change of control on the continuity of employment of Schneider’s
employees, the welfare of suppliers, and the relationship with its
customers, whereas Smithfield did. […t]he real questions are […]
whether the process undertaken by the special committee was in the
best interest of Schneider and its shareholders in the circumstances.
While Paramount, supra, indicates that non-financial
considerations have a role to play … here it was conceded that
the court should only have regard to financial considerations.”6
Rationale: A selection committee used to procure offers is a
defensive tactic that conforms with the exercise of the directors’
duty of loyalty.
The distinction between the two theories is not all that clear. In some
cases, the employees can be the shareholders looking to take over
the corporation. Furthermore, the interests among the different
shareholders may diverge, or the shareholders may reject short term
profit in lieu of a long term viability for the company (see e.g. Maple
So what is going on here? Is it the shareholders’ financial considerations that
matter or is it their “other” considerations.
Additional Notes:
It is important to realize that takeover situations fall at the
periphery of the discussion about the duty of loyalty. Like a
bankruptcy situation, the corporation, as it has existed, will “end”
with a takeover. The corporation’s vision, its purpose, its mode of
operation can be shaped. It is in this context that the connection
with the shareholders also ends. The shareholders, who by virtue
of their position are being bought out, are left in a vulnerable
position. Without anyone to protect their interests, an acquiring
company can seize control of a corporation at great cost to its
shareholders. This is why corporate law has to preference
shareholder interests – that is, maximizing value on their
investment – during this situation.
It seems to me that the shareholders’ interests are placed in a
paramount position when (1) the company is going be sold
(Revlon) or (2) when there is no threat to the company
(Pipelines). In those circumstances, it makes sense to allow
shareholders to exercise their prerogative to sell their shares.
Otherwise, when a takeover bid threatens to (1) undermine the
long term development of the company (Teck, Paramount) or (2)
is coercive to certain shareholders (Unocal), then the directors
should intervene, as they would in the context of the every day
The directors also owe a duty of loyalty to the corporation while
the takeover occurs. They cannot simply ignore this duty. Is it a
looser duty in Canada than in the US, because of the greater
pressure to put bids to shareholders?
The “hostile takeover” was unheard of until the 1980’s. There was
a frenzy of takeovers and corporate law was placed in a crisis.
The long-term interest of corporations died. The courts could not
longer fudge the shareholder-stakeholder debate.
Maybe the stakeholder-shareholder debate only arises when
the corporation is coming to an end (takeovers and
bankruptcy). It is in these situations where a particular
interest is the most vulnerable.
There are different kinds of shares that a person can buy. Although
some shares have both a voting and a dividend element, a person
can buy Class A voting shares, which gives the shareholder only
control or Class B preferred shares, which gives the shareholder
preference for the dividends. Some commentators have criticized a
dual share structure because the people that contribute the capital,
do not necessarily exercise ultimate control over the corporation.
The market, however, will package shares to meet public demand.
Investors want to trade control for dividends and would pay a
premium to do so. The shareholders know what they are buying at
the IPO (and from subsequent purchases). When there is the
availability of choice in the capital market, the 1 share : 1 vote
proposal becomes largely irrelevant. In fact, it may be in the
shareholders’ interests in centralized control in order to allow the
directors to manage the corporation for the long term.
Is the corporation a democracy?
Bainbridge explains that when we leave it to the institutional investors
or the shareholders to approve decisions, we are simply shifting
authority and accountability to the shareholders and away from the
Hansmann & Kraakman already told us that when you separate
management and benefit, you create “agency costs” (Berle & Means)
may not manage the property to maximize the benefits of the
beneficiaries. They may try to use the property for their own benefit.
But, duplicating decision-making processes can be highly wasteful.
Shareholders can participate in the management of corporations. For
example, in closely-held corporations, shareholders can dispense
with the Board altogether under a USA. In a larger corporation,
institutional investors can supervise or monitor the directors. This is
not always likely to occur in reality, since institutional investors often
lack an incentive to expend resources. They are often “captive funds”
like pension plans, where the clients cannot pull out their money.
With widely diversified holdings, both institutional investors and
shareholders would have to incur too high a cost to supervise boards.
There is also a free-rider problem, because competitors (or other
shareholders) would benefit from the energy and cost expended to
It is also hard to tell the players apart. The major shareholders of the
corporation may be its employees or pensioners.
The shareholders have some ability to control the corporation. If we
adopt a model that confers shareholders control, then we have to ask
ourselves – do we think that the corporation ought to be controlled by
the shareholders. From a social entity perspective, perhaps
shareholders have too many inputs into the system.
1. Direct participation - voting
To exercise voting rights, a shareholder can attend the annual
general meeting (AGM). If the shareholder cannot attend, the
shareholders can submit a proxy vote, to be conducted by an officer.
At the AGM, shareholders must approve by-laws, fundamental
changes to the corporation (i.e. amalgamations), and vote in new
A nominating committee of the Board will put forward a slate of
directors to be voted on at the AGM. The Board will nominate exactly
enough directors as there are spots to ensure that there is no
competition. So long as the director receives one vote (his own, if he
owns a share), the director is eligible to take a seat on the Board.
The Board may have an internal policy to ask directors not to take a
seat if the director does not receive enough support.
Under the CBCA, a shareholder can nominate a director, but the
majority can vote for its own candidate.
Legislative reforms could make the voting process more meaningful.
Although legislation could allow shareholders to nominate their own
director, without the proxies (or the votes), the nominee will not get
elected to the Board.
2. USAs
A USA can dispense with management altogether. This reduces
agency costs completely, but it is practical only in closely-held
corporations. A USA essentially “converts” the corporation into a
limited liability partnership.
3. Indirect Participation – Shareholder Proposals
Shareholders can submit PROPOSALS at the AGM. Proposals are
non-binding, but they are closely followed by the media. They are a
“communication” device more so than a control or monitoring device.
Proposals are also a source of dialogue between investors and
management. They are a source of contention, though, because the
Board of directors cannot be expected to act as a “legislator” not
does it want to deal with the suggestions of shareholders. Proposals
may provide for changes to:
(1) Corporate governance (i.e. salaries of the directors, number
of women on the Board, etc.)
(2) Political/social/environmental activities
The QCA does not have a shareholder proposal provision, but the
CBCA does.
Proposals provide a way for shareholders to voice dissatisfaction with
the management or its policies. It might also encourage management
to invite shareholders to discuss the policy-making process. It still
has “legal” expression even if not binding. Under some
circumstances, management can refuse to put a shareholder
proposal to the shareholders. In the US, management can reject
proposals that (1) are directed toward business matters because
the shareholders should not second guess the business decisions of
the management, or that (2) does not involve a policy questions.
The Canadian approach takes the opposite focus; the CBCA allows
shareholders to make business proposals but excludes public policy
proposals. Shareholders in Canadian corporations risk doing damage
to their message by framing social issues (such as child labour) into
business concerns (such as unfair trade practices). It dilutes the
message. According to Dhir, even after legislative reforms in 2002,
the Canadian approach does not remove the public policy exception.
Management can exclude proposals if they do not involve business
It is difficult to understand why executives think that it is a good idea
to reject proposals. It just exposes the corporation to greater medial
Paradoxically, proposals are non-binding measures but can
have the greatest impact, while voting is a binding measure and
it does not.
The following two cases are on opposite ends of the corporate law
spectrum. The Dodge case highlights the pre-dominance of the
shareholder primacy model, while Paramount shows the predominance of the entity model.
Dodge v. Ford (1919) Mich. Sup. Ct.
Facts: Dodge invested money in Ford. The Board was paying
dividends at a rate of 60% per year to the shareholders. Dodge
claimed that the dividends were too low. Ford claimed that the
shareholders were already getting a huge dividend, that the company
needed money for its expansion plans, and that the vision of the
company involved employing more Americans at higher wages, to
build the economy and to produce less expensive cars.
Was Ford entitled to withhold dividends from the
shareholders when the profit margins were so large?
Holding: No.
Reasoning: Despite the rule that says that discretion lies with the
directors to declare dividends, the corporation cannot be run so as to
benefit the shareholders incidentally.
Rationale: When corporate profits are very high and there is
money available to invest in the corporation, the Director will
have to exercise its discretion to declare a dividend.
Note: In the early 20th century, governments were still distrustful of
corporations. Their corporate charters limited the industries they
could venture into. They had caps placed on the amount of available
Also, as a subtext to this case, the court might have been aware that
the Dodge brothers wanted to start their own company. They needed
capital to compete with Ford, which might have motivated the court to
pay out more dividends to the Dodges.
This case also might have been informed by notions of partnership
law. Under a partnership, the earnings are split between the partners.
Paramount v. Time (1990) Del. Sup. Ct.
Facts: Time wanted to grow its business and it was looking for a
partner corporation to undertake a merger. It did not want to give up
its journalistic integrity and it wanted to merge its cable services with
compatible services. The Board met over a period of several months
to discuss possible partners. It settled on Warner Brothers.
Paramount, however, made a bid to acquire all of the shares of Time
in an all cash and shares offer. Time management resisted the
takeover and restructured its agreement with WB.
Issues: Was the Time Board required to put the takeover bid to the
Holding: No.
Reasoning: Paramount made two claims: a Unocal claim and a
Revlon claim.
1. Unocal claim
Under the test defined in Unocal, the directors are entitled to resist a
takeover when there is a reasonable belief that the takeover will harm
the corporation. The directors can account for a range of factors, and
the shareholders’ interests are not controlling. They must act
proportionally to the response.
The purpose of the Unocal analysis is not to compare the value of the
ultimately proposed offer and the plaintiff’s proposed offer. The Board
was entitled to consider the other threats posed by Paramount –
including their belief that Paramount could not meet the needs of the
company. The Board had already rejected Paramount as possible
merger candidate.
This case actually identifies what we mean by the interest of the
corporation – distinct from the interests of a particular group.
The interest of the corporation is the preservation of an
independent and credible news service with journalistic
integrity. Paramount was seen as a threat.
2. Revlon claim
When the sale of the company is inevitable, the duty of the directors
is to maximize shareholders’ return (since there is no corporation
anymore). Paramount argued, to no avail, that mergers trigger
Revlon duties. The break up of the company was not inevitable.
“The question of “long-term” versus “short term” values is largely
irrelevant because directors, generally, are obliged to chart a course
for a corporation which is in its best interests without regard to a fixed
Rationale: The Board has the authority to chart the course of the
corporation without thinking constantly about maximizing
shareholder value in the short-term.
Note: Perhaps that the “interest of the corporation” is an instrumental
argument, in which the court is recognizing the interests of the
employees who benefit from large news budgets.
In the takeover context, we do not have a fixed idea of how we
conceptualize the corporation. In a single case, we see both the
shareholder and the stakeholder theories. Sometimes, both are
reconcilable (as in Teck), when in the long-term, the shareholders
are better off when the takeover is resisted to protect (1)
creditors, (2) employees, or (3) corporate vision. In Revlon
situations, there are no long-term interests, because the death
of the corporation is inevitable.
According to Stout, it may be in the shareholders’ own interests to
keep a take-over bid from them. They might be better off in the longterm by a corporation with a vision and a plan for development. Stout
dismisses the shareholder primacy arguments to explain that the
shareholders are not the owners of the corporation; they invest some
of the capital and only hold shares, or personal rights, in the
corporation. The fact that shareholders are residual claimants is a
concern of bankruptcy. In such situations, shareholders likely will get
nothing anyway.
Stout emphasizes the TEAM PRODUCTION MODEL of the
corporation. The fortunes of the shareholders, employees, directors,
and creditors rise and fall with the success of the corporation. This is
a built-in expectation in corporate law. If corporate law was designed
to benefit shareholders only, then there would be less of an incentive
for the other players to participate in contributing to corporations. If
shareholders wanted shareholder models, they would have
emphasized this in enabling statutes. There are few examples where
the authority is given to the shareholders or where their interests are
considered – which should evidence an alternative conception of the
Allen says that the shareholder-stakeholder problem will never be
resolved. We can see the language of both in a given cases, and the
courts will shift back and forth on which theory they will prefer.
Additional Notes:
An underlying tension in this area of the law is the one-size-fits-all
nature of corporate law. We see this with the duty of care and
with legal personality. There may not be a legal difference
between a mom-and-pop corporation and a multinational, but the
two types of companies are functionally different. The
multinational has an identity (Time) and “interests” where with
smaller corporations, the interests of the company and the
principle shareholder may not be distinct (see insurance cases,
Corporations are set up to be self-governing. Within the corporate
governance model, however, there are problems that cannot get
resolved. This is where the courts should intervene. When the
directors do not conform to their obligations, affected parties need
a recourse (the “safety” valve).
Derivative Action
The courts will intervene in the affairs of the corporation when the
directors or officers are abusing their powers and are in breach of
their legal duties. The CBCA spells out in detail the recourses
available to interested parties (“derivative action”). The CCP,
however, has a single provision (Art. 33, the “oblique action”) which
confers authority to the superior court to remedy an abuse of powers.
The difference in results, however, is negligible, given the importation
of common law case authority into Quebec (see Martel).
Interference with corporate affairs has ramifications on legal
personality. The corporation may be harmed by its directors by not
receiving value for an asset (Daniels), but this harm can affect
shareholders because their shares will be devalued, or can affect
creditors because the value of the corporate patrimony is reduced.
For a long time, however, minority shareholders and creditors could
not complain. Although the directors might have abused their rights,
only the majority shareholders could step in on behalf of the
corporation and sue. However, if the majority shareholders controlled
the Board and could confirm the actions of the directors, no one else
could intervene, except in cases of fraud (Foss v. Harbottle).
Corporate law did not have an equivalent bill of rights.
This leads to two concerns:
(1) If we are going to take legal personality seriously, why should
the majority share holders get to absolve the directors of
(2) What do the other interested parties do? Every time the
directors move assets out of the corporation, they deprive
employees, creditors, and shareholders value.
This is ironic because at the time the courts considered shareholder
primacy the norm, but if the corporation is harmed, the shareholders
only suffer indirect harm.
Before you can bring a remedy under the CBCA, you must be a
proper plaintiff. By allowing anyone that the court thinks is a “proper
person” can still bring a complaint on behalf of the corporation. So
far, it has only been used by creditors and prior shareholders. See
section 238 CBCA.
Daniels v. Daniels (1977) Ch. Div., UK
Facts: The plaintiffs, minority shareholders, complained that two of
the directors sold land to one of the company’s directors for less than
market value. The defendants moved to strike on grounds that the
claim does not disclose a reasonable cause of action.
Issues: Can the plaintiffs make a derivative claim?
Holding: Yes.
Reasoning: The persons who hold and control the company will not
permit and action to be brought. The court should not let the harm go
unaddressed. Fraud is not required to allow a minority shareholder to
sue on behalf of the corporation. If directors or officers abuse their
authority and they, or the majority shareholders benefit from the
breach, the other shareholders can act.
Rationale: Minority shareholders can sue the directors on behalf
of the corporation if the majority shareholders or the directors
benefit from the breach.
It is often difficult to distinguish between harm done to the corporation
and harm done to the shareholders. This leads us to question: do we
really need a derivative action? It may be better to complain about
harm to oneself, so that they can get a remedy. Consider Regal
Hastings. The new shareholders received the benefit of the suit,
even though the old shareholders held the shares in the company
when the directors breached their fiduciary duty. As a result, the new
shareholders benefited from a discounted share price.
There are arguments for derivative claims. The plaintiffs do not need
leave from the court and the court can provide remedies for
individuals as well as the corporation. Iacobucci and Davis argue that
there is no procedural reason why a plaintiff should not be able to
bring a derivative action under the oppression remedy. However, the
derivative action and the oppression are different causes of action.
Derivative actions look at the application of legal rules and powers,
whereas the oppression remedy is an “equitable” remedy based on
concepts of good faith.
Oppression Remedy
The court cannot shield plaintiffs from business risk. The oppression
remedy is subject to the same problems as contract law, because the
court may re-write terms to remedy injustice. It is hard to determine
“reasonable expectation”. Consider the following situations:
A, a shareholder, receives dividends for sale of a product.
The government then makes the sale of the product illegal.
What are the reasonable expectations of A? On one hand, the
shareholder should have accepted the risk that the
government would render the sale of the product illegal; or,
the shareholder had an expectation in the share of the profits
and should be entitled to dividends based on the sale of other
A is a bondholder and at the time of issuing the bond the
corporation had little debt. The corporation was bought out in
a leveraged buy out and the value of the bond dropped
significantly. Does A have a remedy based on reasonable
expectation? Before the buyout, bondholders never
anticipated the buyout.
The oppression remedy is akin to the Charter of Rights and
Freedoms of corporate law (see Budd v. Gentra, below)
1. No breach of the legal duty required
Intervening decisions have altered the risk to the plaintiffs, which puts
the plaintiffs in a worse situation. The directors do not need to
breach legal duties. By virtue of a decision, often made within lawful
authority, can have an effect on the “reasonable expectations” of the
parties. The courts are no longer constrained by the powers of
directors and officers and majority rule.
A director may have met the legal duty, but the interests of a party
are harm. The courts had to resolve what happens if the directors
have breached a contract in the interests of the corporation, but they
have affected the interests of protected parties. Unless the
“expectation” is reasonable, then the plaintiff cannot complain. The
complaint must meet an unfairness standard. Directors can be
prejudicial. Every decision will hurt someone’s interests.
The legislature could have created a “duty not to be oppressive” but
instead, it drafted the remedy only. This is because the court cannot
tell in advance when conduct is oppressive – it just knows when a
case comes to court, looking at the facts, that the outcome was
oppressive. This sort of ex post analysis requires that directors take
more time to assess decisions – increasing transaction costs.
2. Broad Remedial Powers
Business flexibility needs to account for an infinite variety of factual
circumstances; but there is an introduction of uncertainty which leads
to higher transaction costs. The plaintiffs must establish that the
actions are “oppressive”, “unfairly prejudicial” or that they “unfairly
disregard interests”.
3. Justifying the Oppression Remedy
Maybe we should limit oppression remedies to family firms. In those
contexts, the parties have not had access to legal advice. There are
family conflicts, which translate into corporate problems. In larger
publicly-traded companies, the shareholders can sell their shares,
which do not always have recourse to sell their shares (capital
contribution with shares no one wants to buy).
Notice how the creditor is the odd-person out. It is not generally
included in the corporate governance triangle, yet creditors are
brought into corporate governance because they can sue the
corporation or its directors for oppression.
4. Development of Standards
Initially, it was thought that the oppression remedy should be limited
to vulnerable parties or to small closely-held corporations. However,
there is a relational aspect to the oppression remedy. The parties
expected things to work a certain way. They didn’t. Now the
complaining party wants to put the situation back to meet their
reasonable expectations. There are situations in which nonvulnerable parties may need the benefit of a remedy (i.e. a
deadlock on the Board)
If the law confers authority on the directors to manage the
corporation, gives the shareholders the right to vote, then the courts
should not interfere unless these mechanisms fail and the directors
did not exercise their authority properly. The corporation is not just
an investment vehicle for the majority shareholders. As in
contract or family law, the courts can intervene when relationships
break down and one party acts in an “unconscionable” manner. The
law is not concerned that other remedies might be available;7 the
remedy is not one of last resort.
If the law imposes too much accountability, however, then the courts
will begin to second guess the decisions of the directors. This is why
the courts will not give remedies based on the wishes, hopes, or
aspirations of the parties. However, there may be situations where
the directors acted in compliance with their duties but they may not
First Edmonton could have filed a claim under the landlord-tenant regime.
have met the reasonable expectations of the parties (see e.g.
Peoples v. Wise).
The good faith of the directors is irrelevant. The oppression
remedy protects the interests of the shareholders, creditors,
directors, and officers against unintentional as well as intentional
'In determining whether reasonable expectations existed and had
been violated a heavy weight was to be given to private ordering by
way of the corporate constitution's allocation of rights or by way of
contract. The courts should be reluctant to alter this balance by
invoking the oppression remedy. To cases which usefully illustrate
this approach are the trial decision in 820099 Ontario Inc. v. Harold
E. Ballard Ltd. and the appeal decision in Westfair Foods v. Watts.'
Naneff v. Con-Crete Holdings Ltd. (1995) O.C.A.
Facts: The father was the founder of the family business. He has two
children, Alex and Boris, both of whom became involved in the family
business. Through an estate freeze, the father made his sons equal
owners of the common shares of the company, while retaining control
of the business through voting shares. Alex, the plaintiff, began to
keep company with a woman whom the parents disapproved. Alex
was removed as an officer and excluded from participation in the
company. He was cut off financially as well.
Issues: Is Alex entitled to a remedy from oppression?
Holding: Yes.
Reasoning: Per Galligan JA: Section 248(3) of the Ontario Business
Corporations Act gives the court broad discretion to fashion a
remedy. The remedy does not seek to punish but seeks to
correct. In determining whether oppressive conduct has occurred,
the court must look at the reasonable expectations of the parties. It is
not a “wish list” of the shareholders.
Because Alex would not have expected control of the company while
his father was alive, he is not entitled to an oppression remedy that
would allow him to do so.8 The appropriate remedy would be to
Blair J, the trial judge, ordered that the corporation be put up for sale. This could
have allowed Alex to secure a loan and buy the firm.
require that Boris and the father acquire Alex’s shares. This would
compensate Alex for his contributions to the family business.
Rationale: A plaintiff seeking an oppression remedy is not
entitled, by virtue of said remedy, to be put in a position that
would have bettered its reasonable expectations.9
5. Bringing an Oppression Claim to Court
As stated above, before you can bring a remedy under the CBCA,
you must be a proper plaintiff. By allowing anyone that the court
thinks is a “proper person” can still bring a complaint on behalf of the
corporation. So far, it has only been used by creditors and prior
shareholders. See section 238 CBCA.
In addition to being a proper The plaintiff must allege that the
exercise of powers has been unfairly prejudicial to the interests of a
(1) security holder, (2) creditor, (3) director, or (4) officer. This means
that standing to bring the action is broader than the nature of the
interests that are affected (section 241 CBCA).
This provision gives access to creditors to bring an oppression claim.
But, quantifying business risk is the work of creditors. Iacobucci and
Davis argue that in cases when the corporation approaches
insolvency, the interests of the shareholders and the creditors are
diametrically opposed. The shareholders will want to gamble all of
the assets – whereas the creditors will want to preserve the assets in
order to get paid; creditors, therefore, are more aligned with the
interests of the shareholders (see e.g. Peoples v. Wise).
Access to the oppression remedy gives stakeholders a stronger role
in corporate governance. This remedy is another entry-point for
shareholders to have control over corporate affairs. The list of
remedies is so long because the legislature wants courts to exercise
their authority to undo harmful transactions.
Does it make sense to allow creditors to make an oppression claim?
To make a successful claim, the creditor must argue (1) that there
In larger corporations, it is easy to sell your shares; it is harder to do so in smaller
family-owed corporations.
was a breach of an underlying expectation or (2) that the directors
used the corporation to commit fraud. The creditors can do so by
arguing inequities beyond the fact that the debtor did not pay its bill. It
needs to allege that there was:
 An inequality of bargaining power (trade or supply creditor)
 Could not have protected themselves in advance; the court is
not going to re-write a bad contract but to fill in the gaps.
 Has the corporation done something legal but prejudicial to
the creditor? It is really hard to think of circumstances
when this is the case. If the reasonable expectations are
reasonable and knowable then the director and the creditors
will know about them in advance.
The oppression remedy is not intended to subsume contract law,
securities law, etc. It must be something else. It would have been
very hard in the Peoples case to argue that the directors frustrated
their expectations in a falling retail market.10 It seems that there has
to be a breach of a legal duty that compelled the creditor to
change its position.
Iacobucci and Davis argue that when the corporation approaches
insolvency, the shareholders don’t care about the corporation – only
their shares. The role for creditors is narrow and only in situations of
insolvency where the risk of malfeasance or gambling with the assets
is high.
Employees, like creditors, are vulnerable too. As the creditors supply
goods and cash, employees supply labour and expertise. Do they
have a reasonable expectation in the profits of the company?
Probably not. They might however have a reasonable expectation to
keep their jobs in good economic times (plant problem). The team
production model (Stout) would expect that the employees could
benefit from the oppression remedy.
Maybe Peoples should not have taken on more debt that it needed – which
undermined its reasonable expectations.
6. Distinguishing Between the Two Remedies
Conceptually, there is a difference between the derivate action (on
behalf of the corporation) and the oppression remedy. The court
made the distinction in the First Edmonton case below.
First Edmonton Place v. 315888 Alberta Ltd. (1988) Alta. Q.B.
Facts: FEP (landlord) transferred approximately $250, 000 to 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.
Issues: Is the landlord, as a creditor, entitled to file a derivative
action or an action in oppression?
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
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 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.
2. Oppression Action
The provision gives the court the authority to remedy conduct that is
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
Board’s power. The exercise of the Board’s power must pass a
threshold of oppressiveness.
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: the closeness of the company and the
nature of the proprietary interests.
3. Application to the case
In this case, the landlord is not a “creditor” under the act because it
dos not hold a debt obligation like a bond. However, the landlords
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
2. The creditors did not have an underlying 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 landlord’s oppression claim on the
grounds that it did not affect the interests of creditors. At the time that
the landlord complained of the actions of the directors, it did not owe
the creditors a present obligation to pay the rent; the landlord had
This shows that the corporation may have an “interest” being protected.
only a future right to the rent. Creditor, when given its plain and
ordinary meaning, does not apply in this circumstance.12
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.
This was a self-dealing transaction and a breach of the duty of
loyalty. In these circumstances, it is easy to see that that the creditor
can claim oppression. The actions of the directors have increased the
risk to the creditor.
Personal Liability of the Directors in an Oppression Claim
Budd v. Gentra (1998) O.C.A.
Facts: The plaintiff-appellant, Budd, is a former shareholder of Royal
Trust Co, and is bringing a class action on behalf of the members of
the Litigation Committee of shareholders. The appellant alleged that
the company’s funds were mismanaged, that the financial disclosure
statements were incomplete and that the sale of assets to Royal
Bank took place at the detriment of the shareholders.
In 1992, the company reported a sharp decline in profits but
projected that its earnings would improve. The next year, the
company took a huge loss and sold off substantially all of its assets
to Royal Bank. The appellant also alleged that the defendant, Gentra,
should have disclosed that another controlling entity was running
Royal Trust Co among other claims.
Issues: Does the claim frame a reasonable cause of action in
Holding: No.
Per Doherty J.A.: Officers of limited liability
companies are protected from personal liability unless their
actions are themselves tortuous or exhibit a separate identity or
interest from the company so as to make the conduct
complained of their own (ScotiaMcLeod v. Peoples Jewellers).
The court narrows the definition of “creditor” in order to restrict the application
of the oppression remedy in this context.
The plaintiffs failed to ground this allegation in their claim and
therefore the claim was rightfully struck.
The language of section 241 pertains to “acts or omissions of the
corporation” and “the powers of the directors of the corporation.”
Actions by directors not attributable to the corporation do not fall
under section 241, therefore. The oppression claim is different from
the Peoples claim; under the former, a person alleges that the
corporation, through the actions of its controlling minds, has acted
However, if a director is implicated in oppressive conduct and
by a personal order against the director, the court can issue said
order under section 241 [This seems somewhat contradictory]. To
make such a claim, the plaintiff must establish:
(1) That the acts of a particular director provided the basis for the
oppressive actions of the corporation;
(2) That the court could rectify the situation by issuing an order
against the director personally.
The plaintiffs failed to allege either ground in their claim.
The case law provides examples of situations when the court should
hold the directors liable personally: when the directors benefited
personally from the conduct, furthered their own control of the
company through their conduct, or the director of a closely held
corporation exercises total control.
Rationale: There is a difference between personal liability (under
Scotia) and making an order against a director. The issue is
whether it is appropriate to rectify the oppression by directing
an order against a director.
It is about making an order to rectify the oppression. The director
does not have to be negligent in private law in order to have to be the
object of the damages.
The impugned activity in Budd involves a breach of the duty of care
and loyalty, but the claim was for oppression.
In Quebec civil law, there is no legislative basis for an oppression
remedy. Like the common law, the courts were reluctant to allow
oppression remedies because the courts regarded corporations as
internal governance mechanisms. The directors had the authority to
manage the affairs of the corporation and they were accountable to
the shareholders through the voting system. Gradually, Quebec
courts recognized that minorities may be disadvantaged by the
actions of the majority. Quebec courts began to apply Art. 33 CCP;
however, questions arose as to whether the courts were
implementing “judicial legislation”. Had the common law not enacted
an oppression remedy – maybe Quebec judges would not have been
so concerned.
Martel and Paquette ask: what explains the reticence of the
commercial courts? The powers under Arts. 6,7 C.C.Q. and 33, 46
CCP are extremely broad.
Can Quebec courts go as far as s. 241 CBCA? In Desautels, the
sister and the brother-in-law tried to squeeze out the plaintiff. The
court could not ignore that Art. 33 CCP is expanding; however, the
court was uncertain as to whether this was possible. Arguably, it is
must less interventionist than to incur the costs to wind up the
Winding Up in Quebec: The Corporate Death Penalty
All that these plaintiffs wanted was an out. They thought that they
would get along, but they didn’t. The corporation is broken up and the
shareholders get a pro-rata share. Why not just give the liquidated
value back to the plaintiff? By destroying the corporation, the order
affects the employees, the contracting parties, trade-creditors. There
is a tremendous sense of economic waste. The value of the going
concern (and its goodwill) is lost.
When these cases were decided there was no oppression remedy in
Quebec. It would have been easier to compel the corporation to buy
out the shares. Instead, the court has to go through the winding up
process and “kill” the corporation.
Candiac v. Combest (1993) Qc. C.A.
Facts: Unahl is the majority shareholder of Candiac, and Combest is
a minority. The property that the corporation holds is going to be
rezoned and increase in value. Combest wanted to divest itself, but
decided not to, because it realized that the value would increase.
Unahl tried to take over the corporation to secure the benefit for itself.
Combest argued that given the sustained practice of abuse by Unahl,
they want out; they are worried that Unahl will transfer all of
Candiac’s value to Unahl.
Issues: Is Candiac entitled to a wind up order?
Holding: Yes.
Reasoning: Per Rousseau-Houle JA: Combest made the following
allegations against Candiac:
1. Insider knowledge that the land was going to be rezoned
(information was kept secret from Combest)
2. Firm paid management fees to another corporation controlled by
FRAM. Given the fact that Candiac is not doing any business,
these management fees are not justified.
Rousseau-Houle struggled with the proper remedy to order. He
looked at the CBCA, which contains an oppression remedy, and
found no such equivalent in Quebec civil law. The judge held that he
was bound to issue the winding up order in this case and even so, he
determined it to be appropriate in light of the abuse by the majority
Winding up a corporation occurs against the wishes of the
corporation. Courts can consider winding up a corporation when it is
“just and equitable” to do so (Winding Up Act, s. 24). Candiac
argued that it should be available as a remedy of last resort. The
court rejected this argument and held that “just and equitable” does
not depend upon the existence of other remedies.
Courts should be very careful about winding up a corporation that is a
going concern, because of the effect on third parties.
There has been a pattern of sustained abuse that will continue. It is
unfair to keep the minority shareholder in a position where it has to
come to court to litigate.
Rationale: When there is no expectation that the situation will
improve the court can order the winding up of the corporation.
Lutfy v. Lutfy (1996) Qc. Sup. Ct.
Facts: The applicant and the respondent were brothers. Both shared
managerial responsibility for the company. The respondent, however,
held all of the voting shares. The brothers found it increasingly
difficult to work together. The relationship between the brothers
deteriorated to such an extent that they called in a management
consultant to explain to them how to work together. The respondent
moved increasingly into the sphere of the plaintiff. During the
plaintiff’s absence, the business tanked. The brothers were left at a
complete impasse and the applicant applied to wind up the
Issues: Is the applicant entitled to the wind up order?
Holding: Yes.
Reasoning: Winding up is an “equitable remedy” and it need not be
reserved for situations of last resort. It may be ordered when there is
(1) an impasse or deadlock, (2) loss of confidence in management,
(3) the partnership analogy doctrine? or (4) loss of substratum or
Loss of Confidence in Management
The court found the applicant’s contention of loss of confidence
justifiable. Despite the recommendation of the planning consultant,
the respondent continued to involve himself in the planning
processes. He denied the applicant access to financial information.
During the enforced isolation of the applicant, the company suffered
heavy losses. The applicant’s financial position was “locked in” during
that period and he could not realize the interest of his investment.
The court also must consider the effect of the wind-up order on the
interested parties. Although the order would prejudice the current
employees, the court found that it could be possible to keep the
business going as a going-concern by members of the Lutfy family.
Rationale: Where a person holds a substantial portion of the
equity in a company, where that person has established
grounds showing loss of confidence in management and where
the interests of third parties are not unreasonably affected, the
court can order the wind up of the corporation.
Always draft an exit strategy for the termination of corporations.
If we think that the oppression remedy is intrusive, the winding up
action is even more so. There are such high transaction costs.
Arguably, the oppression remedy provides a really simple
solution: buy back the plaintiff’s shares.
Additional Notes:
Reasonable expectations underlie the relationship between
the stakeholders of a corporation. This is a zone of “sub-legal
expectancy” which the parties cannot plan for (see Stout
article). Maybe detrimental reliance is a better test, but it may
be that the courts use detrimental reliance as a limiting tool
Although it is difficult to understand how creditors can have a
breach of legitimate expectations when the corporation is
solvent, under insolvency, the creditors will expect that the
directors do not gamble the assets of the corporation away
and preserve those assets for the creditors.
Minority shareholders, too, have reasonable expectations.
They expect that the majority shareholders will not forego
corporation property or opportunities when they sell their
shares (Perlman).
As for employees, they, like creditors contribute to the
corporation. However, the law makes a distinction between
contributions of labour and capital. It is hard to find a situation
when the corporation would oppress the employees.
Employees are protected by other forms of law
(employment/labour) and by collective agreements in the
case of unionized employees. They are in a position to
negotiate directly with management.
At the beginning of the course, we learned how legal personality was
a fundamental component of the corporation. A person may ask to lift
the corporate veil under two circumstances:
(1) A person has been harmed and wants to get at the assets of
another corporation or person;
(2) A person wants to access the assets of the corporation or
plead on its behalf.
Art. 317 C.C.Q. provides: In no case may a legal person set up
juridical personality against a person in good faith if it is set up to
dissemble fraud, abuse of right or contravention of a rule of public
order. This provision does not create a new obligation. It only
provides a reason to break through legal personality.
The provision has two elements: a “deception” element and the
circumstances (fraud, etc.). When a shareholder uses the corporation
as a “sham” then the justification to protect the corporation’s assets
erodes. Recall the Saloman decision. In that case, the business was
a going-concern when he incorporated. Saloman did not create the
corporation for the purpose of defrauding his creditors. There does
seem to be a higher risk that one-person corporations are more likely
to be the alter-egos of their shareholders. Single-shareholder
corporations should not be a sufficient requirement to pierce the veil.
Fraud is intentional deception for personal gain. Public order rules
are mandatory, and therefore parties cannot deviate from those rules
under contract. Abuse of right is an unreasonable exercise of rights.
Abuse of rights plays a role similar to equity in the common law.
Does “abuse of rights” belong here? Fraud and contravention of a
concealing idea. Shareholders can use the corporation to do
something that they themselves cannot do. Abuse of rights does not
fit well with this, as extra-contractual obligations are imported into
this. We saw an example of this problem under the old code, as the
courts could pierce the corporation veil for a breach of contract and
even in a parent-sub relationship. If there is no underlying
principle, then the provision weakens legal personality.
Abuse of rights has both a subjective and an objective component. 13
A court, therefore, does not need to find bad faith to find an abuse of
rights (see Houle, infra). Because of the objective component, a
shareholder/director could act unreasonably and be found liable
under this theory. Note, though, that under some circumstances it is
necessary for director-shareholders to act unreasonably in order to
protect the corporation.
Martel (majority view) explains that Art. 317 C.C.Q. applies to
shareholders and not to directors or officers. To find directors liable, a
person must use Art. 1457 C.C.Q. Director’s personal actions that
cause injury falls within the scope of private law; they can be sued
separately for their own negligence. A plaintiff, however, could not
get at the shareholders qua shareholders without Art. 317 C.C.Q.
The courts should disregard legal personality exceptionally and the
provision should be narrowly construed.
Crete & Rousseau (minority view) explain that there may be
evidentiary benefits to allowing directors to be impleaded under Art.
317. The purpose behind the provision is to address concealment
and is not concerned with the identity of the actors. If anyone,
including the directors, use the corporation for instrumental
aims, they should be held liable. It creates another basis for
The court is reluctant in the case of contractual breach. It may be
economically inefficient to breach the contract. Sophisticated parties
are aware that corporations will breach their contracts when it is
efficient to do so.
1. Impleading persons behind the corporate veil
Transamerica Life v. Canada Life Assurance (1996) OCGD
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
7. No right may be exercised with the intent of injuring another or in an
excessive and unreasonable manner which is contrary to the requirements of good
Issues: Should the court allow the claim against parent-co?
Holding: No.
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 underfunded. The plaintiff should not have considered parent-co to be an
underwriter for its losses.
Applying Saloman, 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”. Otherwise, the risk is that the courts will engage in “palm tree
Common law jurisdictions do not have statutory provisions that
provide for the piercing of the corporation veil. Rather under the
common law, the corporate veil can be pierced when:
(1) Legislation allows it;
(2) The corporation is a mere sham used to shield fraudulent or
improper conduct [this is problematic];
(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 corporation.
The concept of “improper conduct” is problematic because the
concept can go further than mere abuse of rights. Again, if the
principle under which a court can disregard legal personality is
incoherent, then it undermines legal personality as a foundational
principle of corporate law.
What seems problematic for the courts is that there is a tendency to
find a human person responsible for the corporation’s
misconduct. It is difficult accept that responsibility lies with a
corporation when human persons made decisions that led to the
Walkovszky v. Carlton (1966) N.Y.C.A.
Facts: Walkovsky was hit by a driver employed by Carlton’s
company. Carlton structured the company so that the company 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 sham.
Issues: Is Carlton personally liable as a shareholder?
Holding: No.
Reasoning: The court rejects the plaintiff’s “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 plaintiff’s “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.
Rationale: The court was unwilling to disregard legal personality
because the debtor was undercapitalized.
Critique: Per Keating J: In this circumstance, legal personality is
being abused. Maybe 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.
If we apply Art. 317 to Carlton, it may work.
2. Accessing the assets of the corporation
National Bank v. Houle (1990) SCC
Facts: The Houle Brothers were shareholders in their family
company. The company had a credit line with the Bank with whom
they had a 60-year relationship, which was supported by a security
signed by the shareholders and a trust deed on all the company’s
assets. The loan was a demand loan, thus bank had a right to recall
the prestation on a moment’s notice (similar to Soussice).
Aware of the impending negotiations of sale of the company to new
shareholders, the bank informed company of loan recall and took
possession of the assets three hours later. The Houles closed sale of
company but received $700 000 less than expected and are claiming
this amount from the bank. They ask for a lift of the corporate veil.
Issue: Did the bank abuse its contractual right? If so, can the
respondents as third party shareholders to the contract, ground an
action in contractual liability?
Held: Recall of loan without a reasonable delay amounted to an
abuse of bank’s contractual right to recall loan with no notice. The
Houles, however, could only claim on grounds of extra-contractual
liability, since they were third parties to the contract.
The doctrine of abuse of contractual rights is part of Quebec civil law.
The criteria for the abuse of contractual rights is not malice or bad
faith. A contractual party has an implicit obligation to undertake the
“reasonable exercise” of a contractual right. The support for this is
1053 (the standard for extra-contractual liability is “reasonableness”)
and 1024 CCLC (an implicit obligation of contractual parties to
exercise rights in accordance with rules of equity and fair play).
The abuse of a contractual right gives rise to contractual liability, but
third parties to the contract have no right of action in contractual
liability. There is no privaty of contract between the Houles and the
Bank. This is so to limit risk only to the parties involved. In ECO, the
idea of neighbourliness/duty-of-care fulfills a similar function. The
Houles effectively multiplied the courses of action by filing an
ECO claim.
The bank did not abuse its contractual right to recall the loan (it had
reasonable explanation for doing so), however it abused its
contractual right to realize securities after the demand for payment
was not met. The right was exercised unreasonably (without
sufficient delay) when the bank knew of the impending sale of the
What is the standard of industry practice? It could establish a
reasonable standard of care. The court ruled that people cannot
contract for an abuse of rights: the bank acted in a sudden and
impulsive manner.
The abuse of rights also falls under extra-contractual obligations
(bank committed a delict).
The court did not lift the corporate veil to protect the Houles on
contractual grounds. The bank’s impulsive and detrimental
repossession and sale of the company’s assets after such a short
and unreasonable delay, while fully aware of the respondents’
imminent sale of their shares, was a fault entailing its liability for the
ensuing direct and immediate damage caused to the shareholders.
Rationale: Criteria for abuse of contractual right is not malice or
bad faith but “reasonableness”. The court recognized the
implied obligation to exercise a contractual right in a reasonable
manner (now codified in Article 7 CCQ).
This case provides relief to parties who themselves are not in privity
of contract.
Kosmopoulos is the flip side of Lee’s Air and Saloman. If the
corporate veil is lifted for the benefit of the sole shareholders, then
there would be no principled reason to refuse to lift it for the creditors.
Kosmopoulos v. Constitution Insurance Co. (1987) SCC
Facts: Kosmopoulos purchased insurance for the property of his
business. Kosmopoulos incorporated his sole proprietorship in 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 company claimed that the company needed to insure the
Kosmopoulos forgot the “little details”. This often happens, especially
in small family firms; should have sued the lawyer, but didn’t.
Issues: Is Kosmopoulos entitled to claim the proceeds?
Holding: Yes. The court did not have to pierce the corporate veil to
issue the proceeds.
Reasoning: Per Wilson J: Citing Saloman, 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 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.).
The insurance company is raising a “technical objection” to deny
insurance when everyone knows that the corporation’s assets were
meant to be the object of the insurance.14
The oppression remedy is always available if some of the
shareholders insure the assets of the corporation and the
corporation’s assets are destroyed (when there are multiple
shareholders). Secured creditors might be able to access those
Rationale: Sole shareholders retain the benefits of the assets of
the corporation and can insure those assets.
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 1person 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.
This change to insurance law is a minor problem that will not have wide-spread
implications on the industry.
Marzell is entirely consistent with Kosmopoulos. Reluctantly, rhe
court did not favour Marzell.
Marzell v. Greater London Council (1975) Lands Tribunal
The council expropriated Marzell’s shop. Under the
legislation, compensation is awarded for the property. A second
amount is awarded for the business (disturbing of goodwill).
Issues: Is Marzell entitled to both awards?
Holding: No.
Reasoning: To get the extra payment, the leasehold had to have
been transferred to the corporation or the corporation had to have
paid rent. Marzell had the interest in the house, and the company
received the receipts. Although Marzell could have amended his
statement of claim on behalf of the corporation, the corporation did
not have an interest in the house.
Marzell did not create the corporation as an extension of himself; he
created it for legitimate reasons: for tax advantages and to create
legitimacy to procure suppliers.
Rationale: The court will not pierce the corporate veil simply to
create a financial advantage for the sole shareholder, despite
the fact that third parties are unaffected.
These cases raise a question – should it ever be possible for a
person to stand in for the corporation? People have chosen to create
legal personalities; they should have to accept the costs and benefits
of that choice (Kosmopoulos).
Houle and Kosmopoulos show us that it may not be necessary to
pierce the corporate veil. For example, there are a lot of companion
torts that impose secondary liability (i.e. conspiracy to injure, inducing
breach of contract or trust, vicarious liability). For example, the court
could have found in Transamerica that parent-co induced the breach
of the contract.
Additional Notes: