BUSINESS ASSOCIATIONS FLOW CHART – FALL 2009

Corporations

The Canadian Constitution

 Citizens Insurance Co. of Canada v. Parsons (1881)(Ont. J.C.P.C.)
- It can be said that the federal government does have the right to make laws in respect of all matters
not specifically assigned to the provinces. It follows that the BNA Act assigns to the federal
government jurisdiction over corporations that have objects that are to be carried out in more than
one province. It is not necessary for the validity of a federal incorporation that the company in fact be
carrying on business in more than one province.
- The federal powers of incorporation are not limited to corporations having objects confined to the
enumerated powers of the federal government.

 NOTE: Any legislature can restrict the behavior of a corporation it has created (subject to Charter arguments)

 John Deere Plow Co. v. Wharton (1914)(B.C.J.C.P.C.)

- A federal company is endowed with the capacity to undertake business wherever it is so permitted
worldwide. A province has no authority to prevent a federal company from undertaking its business
within its boundaries. It does have the authority to impose rules of a general nature on that federal
corporation
- Test: As long as you are not depriving the company of their status and power, then it is okay. So
long as you are not discriminating a corporation from other corporations (can’t single out extra-
provincial corporations), then it is okay
- Provinces cannot single out federal corporations and attempt to render them inoperative vis-à-vis their
legal rights. However, if they were to license all corporations generally that are operating within the
province, then that would be a valid exercise of the provincial power over property and civil rights.

 NOTE: While provincial governments may not impose licenses as a requirement for extra-provincial corporations
that wish to do business within the province, a province may impose monetary penalties of a federal corporation
that fails to pay a license fee to qualify as an extra-provincial corporation.
 While provincial legislation that prohibits federal corporations from carrying on businesses would
generally be considered to be ultra vires, provincial legislation that restricts a particular line of
business in non-discriminatory fashion for all corporations would be considered intra vires.

 Multiple Access Ltd. v. McCutcheon (1982)(SCC) - If provincial and federal operations do come into conflict
with one another, the federal rules do take precedence over the provincial rules.
- As the authors note, this case shows a judicial reluctance to find that federal and provincial legislation are
in conflict unless the conclusion is inescapable.

 NOTE: Federal corporations do enjoy limited immunity from provincial extra-provincial licensing.
Incorporation under the CBCA may be of some assistance in preserving the corporate name throughout
Canada. Moreover, those doing significant business abroad might choose to incorporate under the CBCA in the
expectation that a federal corporation might attract more prestige than a provincial one.

 The question remains as to what the status of extra-provincial licensing statutes is. Outside of its province of
incorporation, a provincially incorporated company may exercise such powers as the hold province allows it to
exercise.

 The term “carrying on business” is defined in the Ontario Extra-Provincial Corporations Act as follows:

 s. (2) Carrying on business in Ontario: For the purposes of this Act, an extra-provincial
corporation carries on its business in Ontario if,
(a) it has a resident agent, representative, warehouse, office or place where it carries
on its business in Ontario;
(b) it holds an interest, otherwise than by way of security, in real property situate in
Ontario; or
 (c) it otherwise carries on its business in Ontario
(3)  Idem: An extra-provincial corporation does not carry on its business in Ontario by reason
only that,
(a) it takes orders for or buys or sells goods, wares and merchandise; or
(b) offers or sells services of any type,
by use of travellers or through advertising or correspondence.
 In most cases, registration entails that a corporation pay a fee, make public filings of certain rudimentary
corporate documents and, most importantly, appoint a local agent (who may be the provincial director of
corporations) for service of process.

. Consider s. 20 (1) of the Ontario Extra Provincial Corporations Act:

 s. 20 (1) Idem:  Every person who, without reasonable cause,

(a) contravenes this Act or the regulations;
(b) contravenes a condition of a licence; or
(c) fails to observe or comply with an order, direction or other requirement made under
this Act or the regulations,
is guilty of an offence and on conviction is liable to a fine of not more than $2,000 or if such
person is a corporation to a fine of not more than $25,000.

 s. 20 (2) Idem: Where an extra-provincial corporation is guilty of an offence under subsection

(1), every director or officer of the corporation and every person acting as its representative in
Ontario who authorized, permitted or acquiesced in such offence is also guilty of an offence and
on conviction is liable to a fine of not more than $2,000.

 The federal Interpretation Act, s. 35 (1) states that “In every enactment, … “person”, or any word or
expression descriptive of a person, includes a corporation.”
- Note however that it has been held that the Interpretation Act does not apply to the Charter of Rights
since the Charter is a constitutional document (see Law Society of Upper Canada v. Skapinker [1984] 1
S.C.R. 357).

 R. v. Agat Laboratories Ltd. [1998](Prov. Ct.): One can fairly conclude the following:
1. Section 7 of the Charter protects, among other things, the right to make full answer and defence being one
of the principles of fundamental justice;
2. All accused (whether they are human beings or corporations) have an identical interest in being able to
make full answer and defence when charged with an offence;
3. It follows that a corporate accused has an interest (the right to full answer and defence) which falls within
s. 7 of the Charter and may invoke s. 7 to protect that interest.
- Test: What constitutional value a given provision protects and whether this value requires that
right to be available to corporations
- Corporations can rely on s. 7 in a limited manner (here, it was in the interest of persecuting criminal
matters)

 15 (1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural
person - the federal CBCA is more circumspect in giving corporations rights and privileges that are equivalent to a
natural person. Notice that the federal Act that states that corporate capacity remains subject to the act, meaning
that there may be exceptions to the full capacity rule outlined above.

Corporate Constitution

 CBCA s. 119 (1) Directors of a corporation are jointly and severally, or solidarily liable to
employees of the corporation for all debts not exceeding six months wages payable to each such
employee for services performed for the corporation while they are such directors respectively.
(2) imposes significant limitations on the employee’s ability to sue a director successfully.
(3) provides for a two-year limitation period from the date of resignation of the director.
 Creditors can have a great deal of involvement in a corporation’s affairs when it is in financial difficulties.
This may occur if a secured creditor (or the court) appoints a “receiver” or “receiver-manager” to take control of
property for the benefit of that creditor. The appointment of a receiver is usually made pursuant to the terms of an
agreement but can also occur through the operation of statute.
- Receiver – management gets fired and the receiver is then put in charge for the day-to-day operations and
run in the best interest of the creditors  May decide to keep the business running or sell it and return
funds to creditor to pay for debt

 Creditors also effectively take over a corporation’s property if the corporation becomes bankrupt. A
bankruptcy can arise from the bankrupt’s own “assignment” or from a creditor’s “petition.”
- The effect either way is to transfer the bankrupt’s assets to a “trustee in bankruptcy” who holds them for
the benefit of the unsecured creditors of the bankrupt.

 Since the shareholders are the economic proprietors of the corporate enterprise, they are entitled to
information. This includes lists of shareholders (CBCA s. 21) and disclosures of management conflicts of interest
(CBCA s. 120 (6.1)). Shareholders are also entitled to periodic financial reporting by management, which usually
constitutes part of the business of the annual meeting of the shareholders. It is at this meeting that the
shareholders elect an auditor whose role it is to certify that the financial information provided by
management presents a fair picture of the corporation’s financial situation.

 CBCA: s. 122 (4) duties of directors and officers: In determining whether a particular transaction or course of
action is in the best interests of the corporation, a director, if he is elected or appointed by [shareholders or
creditors] may give special, but not exclusive, consideration to the interests of those who elected or appointed the
director

Corporate constitution in action

 Hollinger Inc. v. Hollinger International Inc. (Del. Ch. 2004)

- The reality is that controlling shareholders have no inalienable right to usurp the
authority of boards of directors that they elect.
- That the majority of a company’s voting power is concentrated in one stockholder does
not mean that the stockholder must be given a veto (right to reject) over board decisions
when such a veto would not also be afforded to dispersed stockholders, a controlling
stockholder must live with the informed (i.e. sufficiently careful) and good faith (i.e.
loyal) business decisions of the directors unless the [Delaware General Corporation
Law] requires a vote.
- Stockholder must live with the informed and good faith business decisions of the
directors unless legislation requires a vote.

 Canadian Jorex Ltd. v. 477749 Alberta Ltd. [1991](Alta. L.R.)

- Under the CBCA, the residual power to manage the corporation’s affairs is with the directors (s. 102 of
CBCA) so long as it coincides with other sections of the Act - Keeping with the fundamental principles of
corporate law, the directors’ powers must be exercised for proper purposes
- Directors have the power to manage the affair of the corporation and unless there is something in
the bylaws or the corporation constitution that restricts them from doing so, they may do what they
need to do in order to manage the affairs of the corporation including calling and cancelling
meetings.
- Several avenues remain open to shareholders.
- First, they have the oppression remedies under the CBCA which may be relied upon where the
directors breach their duties in exercising their power to cancel a meeting - It empowers the
shareholders to bring an action against the corporation in which they own shares when the conduct
of the company has an effect that is oppressive, unfairly prejudicial, or unfairly disregards the
interests of a shareholder
- Second, the shareholders can requisition the calling of a meeting.
- Third, the shareholders have the right to apply to court under s. 144 of the CBCA for an order
directing that a meeting proceed even though cancelled by the directors. The court’s powers in this
regard are broad. It may order a meeting for any reason the court thinks fit.
 - Fourth, the directors’ power to cancel a general meeting is limited by the statutory requirement
that an annual general meeting be held no later than 15 months from the preceding general
meeting. Thus, the directors have no power to cancel a general meeting where the effect of doing
so would be to contravene this provision.
- Fifth, at the annual general meeting, the shareholders may remove the directors.
- Sixth, and most importantly, the shareholders retain the right to eliminate the directors’ power to
cancel meetings called by them by including a provision to this effect in the bylaws or unanimous
shareholders agreement.
- Reading s. 102 in conjunction with s. 143 arguably means that the directors’ residual powers under s. 102
would not extend to the unilateral cancellation of any meeting properly convened on the shareholders’
request.

 Found in section 146 of the CBCA, the unanimous shareholder agreement provision provides:

1. Pooling agreement -- A written agreement between two or more shareholders may provide that in
exercising voting rights the shares held by them shall be voted as therein provided.
2. Unanimous shareholder agreement -- An otherwise lawful written agreement among all the
shareholders of a corporation, or among all the shareholders and a person who is not a shareholder, that
restricts, in whole or in part, the powers of the directors to manage the business and affairs of the
corporation is valid.
3. Declaration by single shareholder -- Where a person who is the beneficial owner of all the issued shares
of a corporation makes a written declaration that restricts in whole or in part the powers of the directors to
manage the business and affairs of a corporation, the declaration is deemed to be a unanimous shareholder
agreement.
4. Constructive party -- Subject to subsection 49(8), a transferee of shares subject to a unanimous
shareholder agreement is deemed to be a party to the agreement.
5. Rights of shareholder -- A shareholder who is a party to a unanimous shareholder agreement has all the
rights, powers and duties of a director of the corporation in question to the extent that the agreement
restricts the powers of the directors to manage the business and affairs of the corporation, and the directors
are thereby relieved of their duties and liabilities, including any liabilities under section 119, to the same
extent.
 Section 146(2) can be used to restrict the powers of the directors of a corporation. The board of directors
continues in place, however, despite its lack of power.
 Roles v. 306972 Saskatchewan Ltd. [1992](S.J.)
- Whether or not the statutory right exists after a director has been removed from office, it is, at the very least,
incumbent on a person in Roles’ position, who is no longer a director, to demonstrate that the reason for
wanting access is for the benefit of the company. The reason for Roles’ desire to have access to the records
remain unclear.
- The right which Roles seeks to enforce is the right of a “director” to enable him to carry out his duties as a
director. While a director, it would be rare that a court would require him to state the reason for wanting to
peruse the records. It would be presumed that his purpose would be consistent with his responsibility as a
director. But it is not sufficient to say that the chambers judge should have allowed the exercise of the
right when Roles was no longer a director
- s. 149 of the SBCA. That section requires the directors to place before the shareholders at every annual
meeting “comparative financial statements.” Yet, s. 20 of the SBCA gives directors, but not shareholders,
the right to inspect accounting records. Accordingly, the accounting records which a director has the
right to inspect must be more extensive than financial statements which are prepared from
accounting records. Accordingly we find that the chambers judge erred in denying access to the
accounting records on the basis that access had been or would have been given by granting access to
the financial statements alone.
- We are unable to see how access would help him to fulfill any obligations that may rest upon him
as a past director of the company. In the affidavit material before the chambers judge, Roles stated
the reason for having lobbied for further information was to monitor the company’s performance.
Apparently this was to enable him to evaluate the annual payments received from Sherrit Gordon
which were part of the sale price and dependent on the performance of the company. We cannot
see that this purpose can assist the company at this time.
 Corporation as a Legal Person

 Salomon v. Salomon [1897](Eng. H.L.)

- The Act appears to me to give a company a legal existence with rights and liabilities of its own,
whatever may have been the idea or schemes of those who brought it into existence – A corporation is a
legal person separate from the shareholders, officers, employees, creditors etc.
- One should not enter into a business relationship unless there is due diligence performed – here, the
creditors should not complain
- The lenders cannot look beyond the corporation to recover their debts as the corporation is a separate
juridical entity
- The proposition that flows from Salomon is commonly reinforced by sections in the C.B.C.A.
- s. 15(1): A corporation has the capacity and, subject to this Act, the rights, power and privileges of
a natural person
- s. 45(1): The shareholders of a corporation are not, as shareholders, liable for any liability, act or
default of the corporation except under subsection 38(4), 118(4) or (5), 146(5) or 226(4) or (5).

 Macura v. Northern Assurance Co. (1925)(Eng. H.L.)

- A creditor or shareholder in a company has no insurable interest in a particular asset that a company
holds.
- The corporator even if he holds all the shares is not the corporation, and that neither he nor any creditor of
the company has any property legal or equitable in the assets of the corporation.
- Now, no shareholder has the right to any item of property owned by the company, for he has no legal or
equitable interest therein. He is entitled to a share in the profits while the company continues to carry on
business and a share in the distribution of the surplus assets when the company is wound up.

 Kosmopoulos v. Constitution Insurance Company of Canada (1983)(Ont. C.A.)

- Macura does not necessarily apply when there is a sole shareholder. A sole shareholder may have an
insurable interest in the assets of the corporation.
- Mr. Kosmopoulos had an insurable interest as a sole shareholder

 Kosmopoulos v. Constitution Insurance Company of Canada (1987)(SCC) – Veil Talk

- If the veil is to be lifted, it should only be done for the interests of a third party whom would otherwise
suffer. Having chosen to receive the benefits of incorporation, he should not be allowed to escape its burdens
- He was sufficiently close to the assets and livelihood depended on it (had a stake in the economic
outcome) – so this is enough to have insurance on assets that is not his own but belongs to the
corporation
- The corporate veil will be pierced when it is “just and equitable” to do so.
- Mr. Kosmopoulos was advised by a competent solicitor to incorporate his business in order to protect his
personal assets and there is nothing in the evidence to indicate that his decision to secure the benefits of
incorporation was not a genuine one. Having chosen to receive the benefits of incorporation, he should
not be allowed to escape its burdens. He should not be allowed to “blow hot and cold” at the same time.
- For all of these reasons, I would not lift the corporate veil in this case. The company was a legal entity
- Mr. Kosmopoulos, as sole shareholder of the company, was so placed with respect to the assets of the
business so as to have the benefit of their existence and prejudice from their destruction. He had a moral
certainty of advantage or benefit from those assets but for the fire. He had, therefore an insurable interest
in them capable of supporting the insurance policy and is entitled to recover under it - You have to have
some sort of economic state in the property
- As the authors, this case stands for the proposition that a sole shareholder, though lacking any
proprietary interest in the corporation’s assets, had an “insurable interest” in them.
- Since Kosmopoulos was the sole shareholder, he was held to have a valid insurable interest for the purposes
of the Insurance Act. This is the basis upon which the decision in Macaura was distinguished.

 Lee v. Lee’s Air Farming Ltd. (1961)(New Zealand J.C.P.C)

 - One individual may undertake any number of roles within a corporation – “A man acting in one
capacity can give orders to himself in another capacity… a man acting in one capacity can make a contract
within himself in another capacity”
- Lee demonstrates that what needs to be ascertained is the capacity in which the individual in question
is acting, or which “hat” the individual is wearing, at the relevant point in time in order to determine
liability.

 s. 10 of Act requires that corporations identify themselves by adding the additional parts (i.e. Limited) – to
make notice to the world of who you are dealing with. We want to protect third parties.
- s. 10(5) Publication of name: A corporation shall set out its name in legible characters in all contracts,
invoices, negotiable instruments and orders for goods or services issued or made by or on behalf of the
corporation.

 Berger v. Willowdale (1983)(Ont. C.A.)

- Even though your actions are that of the corporation, they are your personal actions as well (so both
the corporation and the individual guiding mind can be held liable) – Actions of the executive officer can
still be understood as negligence under tort
- The factors in determining liability of an executive officer of a corporation will depend on the facts of
an individual case:
i) Size of the company, particularly the number of employees and the nature of the business;
ii) Whether or not the danger or risk was or should have been readily apparent to the executive
officer;
iii) the length of time the dangerous situation was or should have been apparent to the executive
officer;
iv) whether that officer has the authority and ability to control the situation; and
v) whether they had ready access to the means to rectify the danger
- Liability cannot be imposed on such an officer simply because they have an administrative responsibility.
Rather, they must owe a personal duty to the employee. The officer may delegate the duty to a
subordinate and thereby escape liability but only if
(a) they are not personally at fault in creating the unsafe condition, or
(b) they can show that they did not personally know or should not be charged with constructive
knowledge of the fact that the delegated duty is not being carried out.
- The matter will be considered on a case-by-case basis. The test that this case is setting out is this idea
of there being a co-duty of care on the part of an executive officer of a corporation that is in close
proximity to their employees. As such, in order to prove the case, one has to establish that the executive
did owe the employee a duty of care and that the duty was breached personally by the executive as a result
of their own personal fault either by malfeasance or non-feasance.

Corporate veil

- This term refers to describe situations where judges have presumed to simply ignore the existence of the
corporate person and fix liability on the managers or the shareholders.
- Generally speaking, veil piercing cases revolve around disregarding the corporation as an entity and holding
the individuals behind it – managers / shareholders personally liable for the actions of the corporations
- If a company is formed for the express purpose of doing a wrongful or unlawful act,
or, if when formed, those in control expressly direct a wrongful thing to be done, the
individuals as well as the company are responsible to those to whom liability is legally
owed.
- In such cases, or where the company is a mere agent of a controlling corporator, it may be said that the
company is a sham, cloak, or alter ego, but otherwise it should not be termed so

 In Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co., [1996](Gen. Div.) Sharpe J.
formulated the following criteria as bases for disregarding the notion of a separate legal personality: The courts
will disregard the corporate legal personality of a corporate entity where it is completely dominant and
controlled and being used as a shield for fraudulent or improper conduct.
- The first element “complete control,” requires more than ownership. It must be shown that there is
complete domination and that the subsidiary company does not, in fact, function independently…
 - The second element refers to the nature of the conduct: is there “conduct akin to fraud that would
otherwise unjustly deprive claimants of their rights?
- This test is difficult to apply

 The cases suggest that a court will intervene when a corporation is not used for a bona fide purpose but
rather is being used as a shield in the performance of a fraudulent or unlawful act.

 Big Bend Hotel Ltd. v. Security Mutual Casualty Co. (1980)(S.C.) (Fraud)
- The test to be followed in this case is not whether the fact is material to the insurer per se, but rather what a
reasonable insurer would have done or how a reasonable insurer would have reacted to the true facts.
- Here Vincent Kumar clearly omitted to disclose a fact, which he knew was material to the insurers and such
failure to disclose is fraudulent. In these circumstances, it is appropriate to lift the corporate veil; equity will
not allow an individual to use a company as a shield for improper conduct or fraud.
- Courts have lifted the corporate veil to take into account the actions of the individual members
particularly in cases of improper conduct or fraud
- The court may attribute the personality of the principal officer to the corporation

 Houle v. Canadian National Bank [1990] (SCC) (Corporate veil not lifted)
- Silverman v. Heap, [1967]: The shareholder of a company has no action against the person who causes
damage to the company. One cannot limit his responsibility by investing in a company and still
consider as a personal damage caused to such company; the shareholder’s damage is indirect.

 Hercules Managements Ltd. v. Ernst & Young (1997)(SCC) - can’t sue as individual shareholder but needs to be
the collective (when corporation no longer existing)
- Any duty owed by auditors in respect of this aspect of the shareholders’ functions, then, would be
owed not to shareholders as individuals, but rather to all shareholders as a group, acting in the
interests of the corporation.
- And if the decisions taken by the collective shareholders are in respect of the corporation’s affairs,
then the shareholders’ reliance on negligently prepared reports in taking such decisions will result
in a wrong to the corporation for which the shareholders as individuals cannot recover.

 Comparison of Houle and Hercules: Both cases stand for the principle that when one chooses to do
business in a corporate form, individual shareholders cannot hold individuals that commit a tort against the
corporation directly responsible to them. In Houle, individual shareholders were not allowed to sue a bank
that they allege have committed a harm against them. The same logic was applied in Hercules where the
court conceded that the audited financial statements were prepared for shareholders as a class or group
rather than being intended to guide an individual for which they could hold the tortfeasor responsible.

Corporation as agent or partner

 Corporations are also free to act as agents as can any other legal person. As the authors note, within the
scope of an agent’s authority, they may bind their principal to a contract. Moreover, a principal is liable for
torts that are committed by their agent within the scope of the agency. Thus, if you can show that a
corporation was acting as an agent for another person, you will have the prospect of making that person
liable for what the corporation has done. Note that this does not involve ignoring the corporation’s separate
personality. As the House of Lords notes in Salomon, agency is a relationship that requires two legal persons.

 Smith, Stone and Knight Ltd. v. Birmingham Corp (1939)(Eng. K.B.)

- This is the test that you need to apply to IMPLY an agent to a subsidiary - if there was an express
agreement it would fall outside the scope of this test – The court will not treat parent and subsidiary as
separate entities in law if a sufficient nexus can be found between them (using the 6 criteria)
- With respect to the criteria to be applied in determining whether such an agency exists between a
subsidiary corporation and its controlling shareholder, I think that the questions that need to be
asked are as follows:
1. Were the profits treated as profits of the company? When I say “the company” I mean the parent
company.
2. Were the persons conducting the business appointed by the parent company?
3. Was the company the head and brain of the trading venture?
 4. Did the company govern the venture, decide what should be done and what capital should be
embarked on the venture?
5. Did the company make the profits by its skill and direction?
6. Was the company in effectual and constant control

Inducing Breach of Contract - Tort

 From the case of Quinn v. Leathem [1901] A.C. 495 (Eng. H.L.), a breach of contract is defined as: A violation
of legal right committed knowingly is a cause of action and is a violation of a legal right to interfere with
contractual relations recognized by law if there be no sufficient justification for interference.

 A contractor that violates a term can be sued for breach of contract. Anyone that knowingly induced the
breach of contract can be sued in tort. Complications arise when a corporation is alleged to have committed
either of the above.

 Garbutt Business College Ltd. v. Henderson Secretarial School Ltd. (1939)(Alta. C.A.)
- Follows the rule set out in Quinn v. Leathem
- Anyone that knowingly induced the breach of contract can be sued in tort
- I take it that in order to obtain an award of a substantial sum that there must be proof of the actual or real
damages arising from the commission of the tort.
- While it is not possible to define exactly what is meant by inducement, the employing or continuing of the
employment of Henderson by the defendant corporation at a salary or share of profits is clearly an
inducement and a continuing one. I think also that the pleading which alleges that the defendant
corporation “wrongfully employed” its co-defendants is sufficient to put in issue the claim for damages
arising out of the tort committed.
- The court will disregard corporate identity and hold individuals liable where the primary purpose of the
corporation is to avoid restrictive covenants
- The defendant company thereby committed a tort rendering itself liable for damages as per the rule in
Quinn – the company knew that Henderson was breaching his contract with the plaintiff and was
encouraging him to do so and paying him to do so (therefore, liable in tort). Corporation was acting as
agent.
- Garbutt can’t bring any evidence that Henderson is managing the school (can’t prove veil piercing), so they
are suing the corporation for inducing a breach of contract by encouraging him to breach his contract – also
the corporation has a lot of money

 Einhorn v. Westmount Investments Ltd. (1969)(Sask.Q.B.)

- Three elements to the test of inducing breach of contract (Jasperson v. Dominion Tobacco Co. (1923)):
1) There must be interference in the execution of a contract - The interference is not confined to the
procurement of a breach of contract. It extends to a case where a third person prevents or hinders a
party from performing their contract even though it be not a breach
2) The interference must be deliberate - The person must know of the contract or, at any rate, turn a blind
eye to it and intend to interfere with it
3) The interference must be direct
- If you satisfy the test in Jasperson, then the corporation will not be sufficient to shield you from having
personal liability

 McFadden v. 48772 Ontario Ltd. (1964)(Ont. H.C.)

- In short, if an officer or director of a corporation is to be relieved, as an agent, of the consequences of their
otherwise tortious act of inducement, it is because in so acting, they are acting under a duty of compulsion
to a corporation. Their act is thus justified.
- But where they do not act under such a duty, as, for example, where they fail to act bona fide within
the scope of their authority, the act is no longer justified and they become liable. The corporation
remains insulated from the legal consequences of such an act, inasmuch as the director or officer has acted
outside of the scope of their authority.
- Individual defendants are not entitled to claim an immunity by simple reason of acting within the scope of
their authority – if they act in self-interest as opposed to the interest of the corporation, then they can be
held personally liable
 - Since they were not acting in bona fide, they are not protected. By effecting the sale of PMAC’s assets to
PMAI, the defendants sought as well to carry on its business without any of its existing liabilities. They
were not acting under a compulsion of a duty to PMAC. That being the case, they fall outside of the
protections that would otherwise have been afforded to them by the principle enunciated in Said v. Butt.

 349413 Alberta Ltd. v. Pocklington (2000)(C.A.)

- Applies McFadden and takes the analysis one step further
- In order to find that a defendant intentionally induced a breach of contract, seven elements must be
established:
i) The existence of a contract;
ii) Knowledge or awareness by the defendant of the contract;
iii) A breach of the contract by a contracting party;
iv) The defendant induced the breach;
v) The defendant, by their conduct, intended to cause the breach;
- Intention: If the breach was a reasonable or foreseeable consequence of the action, or, if the
defendant completed the act recklessly, was wilfully blind to its consequences, or was
indifferent as to whether or not it caused a breach, the necessary element for the tort will be met
vi) The defendant acted without justification; and
vii) The plaintiff suffered damages

- bona fide mistaken belief: If the defendant acted under a bona fide belief that contractual rights would
not be infringed, liability will not be found even though the belief turned out to be mistaken. But for a
mistaken belief to be bona fide, rather than the result of recklessness or wilful blindness, some basis for
the belief must exist, and some reasonable effort must have been made by the defendant to learn the
truth.
- Justification: A director acting in compliance with a duty imposed by law should not be personally liable
because the director’s act induced a breach of the company’s contract. But if the director is not complying
with that duty, the rationale for relieving personal liability disappears.
o Although justification is a defence to the tort, the burden is fairly placed on the plaintiff to
prove that the director was not acting in the best interests of the corporation and therefore
stepped out from under the protective umbrella of the director’s corporate duties (reverse
onus)
- If the court concludes the director’s conduct is capable both of serving the interests of the corporation and
of achieving some less worthy purpose, the court should go on to consider whether the plaintiff has proven
that the director’s act was aimed at depriving the aggrieved party of the benefits of the contract
o But where it is clear that the conduct could only be intended for the director’s benefit – the court
need not address the director’s dominating concern
- In such direct interference cases, proof of intent as it has developed through the case law and proof that
the director was not acting in the best interests of the corporation, will be sufficient to ground liability.

Knowing Assistance in a Breach of trust - Equity

 “Knowing assistance in a fraudulent or dishonest breach of trust.” This indicates the traditional view that this
third party liability cannot arise unless:
(a) the trustee’s breach was fraudulent or dishonest; and
(b) the third party whose liability is in issue must have had knowledge of the trustee’s dishonest scheme.
- Thus, the states of mind of two different people are in issue.

 Air Canada v. M & L Travel Ltd (1993)(SCC)

- There are two general cases upon which a stranger to a trust can be held liable as a constructive trustee
for breach of trust:
1. First, although not directly relevant to this appeal, strangers to the trust can be liable as trustees de son tort.
Such persons, although not appointed trustees, “take on themselves to act as such and to possess and
administer trust property.”
2. Second, strangers to the trust can also be personally liable for breach of trust, if they knowingly participate
in a breach of trust. There were traditionally therefore two ways in which a stranger to a trust could be
held personally liable to the beneficiaries as a participant in a breach of trust:
 - “knowing receipt” or “knowing receipt or dealing”: as one in receipt and chargeable with trust
property, and
- “knowing assistance”: as one who knowingly assisted in a dishonest and fraudulent design on the part of
the trustees.
- The knowledge requirement for this type of liability is actual knowledge; recklessness or wilful
blindness will also suffice. Whether the trust is created by statute or by contract may have an impact on
the question of the stranger’s knowledge of the trust.
o If the trust was imposed by statute, then he or she will be deemed to have known of it.
o If the trust was contractually created, then whether the stranger knew of the trust will depend on
his or her familiarity or involvement with the contract.
- If the stranger received a benefit as a result of the breach of trust, this may ground an inference that the
stranger knew of the breach. The receipt of a benefit will be neither a sufficient nor a necessary condition
for the drawing of such an inference.

- Where the trustee is a corporation, rather than an individual, the inquiry as to whether the breach of
trust was dishonest and fraudulent may be more difficult to conceptualize, because the corporation can
only act through human agents who are often called strangers to the trust whose liability is in issue
o I would therefore “take as a relevant description of fraud “the taking of a risk to the prejudice of
another’s rights, which risk is known to be one which there is no right to take.”” In that respect,
the taking of a knowingly wrongful risk resulting in prejudice (harm) to the beneficiary is
sufficient to ground personal liability. This approach is consistent with both lines of authority
previously discussed.
o With respect to the knowledge requirement, this will not be a difficult hurdle to overcome
in cases involving directors of closely held corporations. Such directors, if active, usually
have knowledge of all of the actions of the corporate trustee.
- The next question is whether the required knowledge is subjective knowledge or objectively determined
knowledge. Courts have been divided on this issue. The courts in England require subjective knowledge.
However, certain appellate courts in Canada have suggested that a subjectively determined standard of
knowledge is not appropriate in the trust context, even for a stranger to the trust, and that where a stranger
should reasonably have known that the trust was being breached by his or her actions, there may be
circumstances where liability may be appropriate

 NOTE: Fraud is a serious allegation – someone actively sought to deceive someone else – and if you are going to
prove this, you are going to have to show that they knew better and that they were actively involved in deceiving
that person – need a lot of concrete evidence to prove this
- You have to show intention and that the state of mind is there to perpetually fraud someone
- The closer you are to the decision making authority – the easier it will be to show that you have
knowingly assisted in the breach of trust  but the test is high – you have to show that the person had
the requisite state of mind to act fraudulently – did this person know when engaged in this action, that
they were taking unnecessary risk and that they were risking losing the property due to these actions – that
it is to the detriment of the corporation
- As in those cases, the liability is premised on the involvement of two persons: a primary wrongdoer
and an inducer or assiter.

 Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996)(Gen. Division)
- According to Gower, Modern Company Law, 5th ed. (1992), there seems to be three circumstances only in
which the courts will lift the corporate veil in accordance with the just and equitable standard. These
are:
(1) When the court is construing a statute, contract or other document.
(2) When the court is satisfied that a company is a “mere façade” concealing the true facts
(3) When it can be established that the company is an authorized agent of its controllers or its members,
corporate or human.
- Courts will disregard the separate legal personality of a corporate entity where it is completely dominated and
controlled and being used as a shield for fraudulent or improper conduct. The first element “complete
control” requires more than ownership. It must be shown that there is complete domination and that
the subsidiary company does not, in fact, function independently
- This area of law was canvassed in Air Canada v. M & L Travel Ltd. That case affirms the principle that a
stranger to a trust may become personally liable for a breach of trust committed by the trustee. On the
surface, this is analogous to the case at bar where Transamerica alleges that Canada Life should be held to
account for a breach of fiduciary duty committed by its wholly owned subsidiary, CLMS. However, it should
be noted that in the Air Canada case, the directors were directly and personally involved in the
misappropriation of trust funds. The Supreme Court of Canada found that to support a claim against an
accessory, the plaintiff must show a breach of trust of a fraudulent or dishonest nature. An innocent
breach of trust will not suffice. The opinion of Iaccobucci J. also makes it clear that the stranger to the
trust must be involved in the breach with actual knowledge, recklessness or wilful blindness. Iacobucci J.
expressly excludes the possibility of liability on the basis of constructive knowledge …
- A corporation will not be protected by a subsidiary created for the sole purpose of avoiding liability. There
must be some valid business purpose.

Thin Capitalization

 Walkovszky v. Carlton (1966)(U.S.C.A.)

- Whenever anyone uses control of the corporation to further their own rather than the corporation’s
business, they will be liable for the corporation’s acts “upon the principle of respondent superior
applicable even where the agent is a natural person.” Such liability, moreover, extends not only to the
corporation’s commercial dealings, but to its negligent acts as well.
- It is one thing to assert that a corporation is a fragment of a larger corporate combine which actually
conducts the business. It is quite another claim to say that the corporation is a “dummy” for its individual
shareholders who are in reality carrying on the business in their personal capacities for purely personal
rather than corporate ends
o Either circumstance would justify treating the corporation as an agent and piercing the
corporate veil to reach the principal but a different result would follow in each case.
o In the first, only a larger corporate entity would be held financially responsible
o While, in the other the stockholder would be personally liable – because of personal capacities
- Either the stockholder is conducting the business in their individual capacity or they are not. If they are,
they will be liable, if they are not, then it does not matter – insofar as their personal liability is concerned –
that the enterprise is being carried on by a larger “enterprise entity.”

Corporate Purpose

 Dodge v. Ford Motor Co. (1919)(U.S.) (Did not follow director)

- Fiduciary duty of director – maximize the profit of shareholder value and it must be your primary
purpose
- There is nothing wrong with your actions having an incidental affect for the benefit humanity – but it can’t
be your primary purpose – if you are a director, you are to act in the best interest of the corporation
- A business corporation is organized and carried on primarily for the profit of the stockholders. The powers
of the directors are to be employed for that end. The discretion of directors is to be exercised in the
choice of means to attain that end and does not extend to a change in the end itself, to the reduction of
profits or to the non-distribution of profits among stockholders in order to devote them to other
purposes.
- There must be fraud or a breach of that good faith that directors are bound to exercise toward the
stockholders in order to justify the courts (of equity) entering into the internal affairs of corporations
(Hunter v. Roberts)
- Business Judgment Rule: A decision may be taken by the directors that appears on the surface that
doesn’t maximize shareholder value, but they may justify that they are exercising their business
judgment that the courts doesn’t have the expertise to interfere – court recognizes that they aren’t
business people - There is commitment to the discretion of directors, a discretion to be exercised in good
faith, the infinite details of business including the wages that shall be paid to employees, the number of
hours they shall work, the conditions under which labour shall be carried on, and the prices for which
products shall be offered to the public. It is said by the appellants that the motives of the board members are
not material and will not be inquired into by the court so long as their acts are within their lawful powers.
 Shlensky v. Wrigley (Ill. App.)(1968) (Followed director)
- Re-enforces the Business Judgment Rule: It cannot be said that directors, even those of corporations that
are losing money, must follow the lead of the other corporations in the field. Directors are elected for
their business capabilities and judgment and the courts cannot require them to forego their judgment
because of the decisions of directors of other companies. Courts may not decide these questions in the
absence of a clear showing of a dereliction (neglect) of duty on the part of the specific directors and
mere failure to “follow the crowd” is not such a dereliction.
- Unless you can show that the directors acted improperly, the courts will defer - The plaintiff has the
burden to show that the directors were not acting in good faith

- Need to ask whether it is sufficient to bring action in this case and that there is fraud, illegality, or
conflict of interest  While all the courts do not insist that one or more of the three elements (fraud,
illegality, and conflict of interest) must be present for a stockholder’s derivative action to lie, nevertheless
we feel that unless the conduct of the defendants at least borders on one of the elements, the courts
should not interfere.

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

- The interests of the shareholders, those of the creditors and those of the corporation may and will be
consistent with each other if the corporation is profitable and well capitalized and has strong
prospects. However, this can change if the corporation starts to struggle financially. The residual
rights of the shareholders will generally become worthless if a corporation is declared bankrupt. Upon
bankruptcy, the directors of the corporation transfer control to a trustee, who administers the corporation’s
assets for the benefit of creditors.
- The directors’ fiduciary duty does not change when a corporation is in the nebulous “vicinity of
insolvency.” That phrase has not been defined; moreover it is incapable of definition and has no legal
meaning. What is obviously intended to convey is a deterioration in the corporation’s financial
stability.
o In assessing the actions of directors it is evident that any honest and good faith attempt to redress the
corporation’s financial problems will, if successful, both retain value for shareholders and improve the
position of creditors. If unsuccessful, it will not qualify as a breach of the statutory fiduciary duty.
- In resolving these competing interests, it is incumbent upon the directors to act honestly and in good
faith with a view to the best interests of the corporation. In using their skills for the benefit of the
corporation when it is in troubled waters financially, the directors must be careful to attempt to act in its
best interests by creating a “better” corporation, and not to favour the interests of any one group of
stakeholders. If the stakeholders, cannot avail themselves of the statutory fiduciary duty to sue the
directors for failing to take care of their interests, they have other means at their disposal (such as the
oppression remedy).
- The various shifts in interests that naturally occur as a corporation’s fortunes rise and fall do not, however,
affect the content of the fiduciary duty under s. 122 (1)(a) of the CBCA. At all times, directors and
officers owe their fiduciary obligation to the corporation. The interests of the corporation are not to
be confused with the interests of the creditors or those of any other stakeholders.

The Corporate Capital Structure

 R. v. McClurg (1990)(SCC)
- Common Law presumes that the rights carried by all shares to receive a dividend declared by a
company are equal unless otherwise provided in the Articles of Incorporation
- The concept of share “classes” is the accepted means by which differential treatment of shares is recognized
in the Articles of Incorporation of a company. As Professor Welling explains, “a class is simply a sub-group
of shares with rights and conditions in common which distinguish them from other shares.”
- The discretionary dividend clause is both a valid means of allocating declared dividends and is
sufficient to rebut the presumption of equality amongst shares.
- You are not allowed to treat different people differently – you are only allowed to treat the rights under
the shares differently  Recognizing that you can treat different class differently so long as you are doing it
based on class distinction not individual distinction – the right is attached to the share, not to the individual
holding the share
- The decision to declare a dividend lies within the discretion of the directors of a company, subject to
any restrictions which have been included in the Articles of Incorporation
 - The power to declare dividends is further qualified by the fact that the law has for many years recognized
that the general managerial power, which rests in the directors of a company is fiduciary in nature.
- The declaration of dividends, which is substantially within that power, therefore is limited legally in
that it must be exercised in good faith and in the best interests of the company

 No obligation to pay or right to receive dividends exists until the corporation decides to pay them; the
decision, even if not specifically reserved to the directors, is probably included in the directors’ powers to
manage corporate affairs.

 Bond v. Barrow Haematite Steel Co. (1902)(Eng. Ch.)

 The shareholder has no right to any payment until the corporate body has determined that the
money can be properly paid away. It is urged that this puts the preference shareholders at the mercy of
the company, but the preference shareholders came in on these terms, and this argument does not carry
much weight in an action such as this, where bona fides is conceded.
 The Courts have, no doubt, in many cases, overruled directors who proposed to pay dividends, but I
am not aware of any case in which the Court has compelled them to pay when they have expressed
their opinion that the state of the accounts did not admit of any such payment  it would be a strong
measure for the Courts to override the directors in this manner

Incorporation and Pre-Incorporation Contracts

 CBCA s. 9: The corporate birth date: A corporation shall come into existence on the date that is shown on its
certificate of incorporation.
- The certificate must be signed by the Director to be valid and is returned to the incorporators as proof of
the corporation’s creation (think of it as a birth certificate of sorts).
- It is very important that the date that the certificate bears matches the date that it actually was issued –
otherwise problems may arise.

 C.P.W. Valve and Instrumental Ltd. v. Scott [1978](C.A.)

- Parties will not be bound by a contract made with a corporation prior to its existence
- When considering pre-incorporation transactions, the analysis should begin with a consideration of
whether the parties to a contract between an incorporator and a third party intended for the
corporation to incur the legal liability or whether the incorporator themselves was assuming
liability.

 Kelner v. Baxter (1866)(Eng. Common Pleas)

- Where parties contract with each other directly and intend personal liability – personal liability will
be given
- There must be two parties to a contract; and the rights and obligations which it creates cannot be
transferred by one of them to a third person who was not in a condition to be bound by it at the time
that it was made.
- Pre-incorporation contract made before the existence of the company cannot be ratified by the
company
- If you want to contract as an agent, the corporation must exist at the time

 Black v. Smallwood (1966)

- Reaffirming rule in Kelner v. Baxter – If the corporation does not exist, then it is not bound by the
contract, and the persons who signed the contact, are.
- Where the parties contract in the belief of being under the auspice of corporation, no personal
liability
- Thus the distinction can be drawn that when one or more of the parties knows that the corporation is
not in existence at the time that the contract is entered into, then it can be said that the promoter that
is signing on behalf of the corporation will be the one who must bear responsibility for the corporate
obligation in their own name.

 Note: While they must accept responsibility for the liabilities, they may also take the benefits of the contract as
well. This reflects a policy choice that would be promoters are said to implicitly warrant their authority to sign on
behalf of their yet to be born corporation.