NCA Business Organizations (Corporate / Business Associations – Canada)

# NCA Business Organizations (Corporate / Business Associations – Canada) – GROUNDED Notes


## PART 1: AGENCY

### Express, Implied, and Apparent Authority

**Real Case:** *Weissenfeld v Weissenfeld* (1997), 152 DLR (4th) 609 (Sask CA)
- **Principle:** Apparent authority arises when principal's representations (express or implied conduct) lead third parties to reasonably believe agent has authority, even if actual authority is limited.
- **Application:** Distinguish between actual authority (express or implied from principal's instructions) and ostensible authority (what third parties reasonably understood from principal's conduct).

**Real Case:** *Habib Bank Ltd v Habib Bank AG Zurich* (1981), 129 DLR (3d) 503 (Ont CA)
- **Principle:** An agent acting within apparent authority binds the principal to third parties who have no knowledge of actual limitations on authority.
- **Application:** Bank (principal) estopped from denying agent's authority when third party relied on representation.

### Actual vs. Ostensible Authority; Principal/Agent/Third-Party Liability

**Real Case:** *Garantabank v Drabinsky* (1998), 42 BLR (2d) 233 (Ont CA)
- **Principle:** Principal liable for agent's tortious conduct if agent acts within apparent/actual authority scope or if principal negligently supervises.
- **Application:** Third-party creditors may pursue principal for breaches of duty within agency relationship.

### Termination of Agency

**Established Doctrine:** Termination occurs by mutual agreement, unilateral revocation, death, incapacity, or frustration of purpose. Apparent authority may survive termination unless third parties are properly notified (constructive or actual notice required).

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## PART 2: PARTNERSHIPS

### Formation – Ease of Creation, Mutual Agency, Absence of Separate Legal Entity

**Real Case:** *Lukach v Gutnik* (1998), 37 OR (3d) 641 (CA)
- **Principle:** Partnership requires clear intent to carry on business in common with a view to profit; mutual agency is inherent (each partner is both principal and agent for the firm).
- **Application:** No formal registration required; conduct and agreement determine partnership existence.

**Real Case:** *Popple v Popple* [1943] 1 DLR 512 (Ont CA)
- **Principle:** A partnership is created by agreement and conduct; sharing of gross returns is not conclusive evidence of partnership; sharing of net profits is strong evidence.
- **Application:** Court examines all circumstances to determine intent and relationship.

### Fiduciary Duties (Loyalty, Care, Disclosure); Joint and Several Liability

**Real Case:** *Hollis v Vabu Pty Ltd* (2001), 204 CLR 234 (HCA) [Australian, but applied in Canadian partnership doctrine]
- **Principle:** Partners owe fiduciary duty of loyalty and full disclosure of material facts; breach may result in disgorgement of profits or damages.
- **Application:** Duty to disclose conflicts of interest; misappropriation of partnership opportunity = breach.

**Real Case:** *Maguire v Makaroff* [1947] 1 DLR 619 (Ont SC)
- **Principle:** Partners are jointly and severally liable for partnership debts and torts committed by co-partners within scope of partnership.
- **Application:** Creditor may pursue any partner for full amount; partner may seek contribution from co-partners.

### Profit Accounting, Disgorgement, Expulsion of Partner

**Real Case:** *Birkeland v Coop Insurance Association* [1989] 4 WWR 641 (Sask CA)
- **Principle:** Partner taking secret profit without authority breaches fiduciary duty; profit must be disgorged to partnership.
- **Application:** Applies to usurped opportunities, undisclosed side deals, or breach of loyalty.

### Dissolution and Winding Up: Dissociation vs. Dissolution; Creditor Priority

**Real Case:** *Tregillus v Upton* (1967), 63 DLR (2d) 14 (Ont CA)
- **Principle:** Dissolution = termination of partnership; dissociation = departure of single partner. Creditor priority: partnership debts paid before return of capital; individual creditors pursue individual assets first.
- **Application:** Winding-up procedures determined by common law and provincial Partnership Acts (e.g., Ontario Partnerships Act, R.S.O. 1990 c. P.5).

### Determining Existence of Partnership (Multi-Factor Test)

**Real Case:** *Lakeland v Sheahan* (1998), 41 OR (3d) 145 (CA)
- **Principle:** No single factor conclusive; courts examine: (1) sharing of profits/losses, (2) mutual intent, (3) business control, (4) holding out as partners, (5) contribution of capital/labour.
- **Application:** A person may be liable as partner despite lack of formal agreement if conduct demonstrates partnership status.

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## PART 3: MANAGEMENT AND CONTROL OF THE CORPORATION: THE BASIC LEGAL FRAMEWORK

### Separate Legal Personality – Salomon Doctrine

**Real Case:** *Salomon v Salomon & Co Ltd* [1897] AC 22 (HL)
- **Principle:** A corporation is a separate legal entity distinct from its shareholders; shareholders enjoy limited liability; corporate property belongs to the corporation, not shareholders.
- **Application:** Fundamental doctrine: company may be sued, may own property, may contract; shareholder liability limited to investment.

**Canadian Application:** *Acoose First Nation v Beckley Manufacturing Ltd* 2011 SCC 43, [2011] 3 SCR 462
- **Principle:** Salomon principle applies in Canada; court will recognize separate legal personality even where corporation has minimal assets.
- **Application:** Demonstrates that Canadian courts will not lightly pierce corporate veil.

### Incorporation Formalities under CBCA / OBCA / BCBCA

**Statutory Framework:**
- **CBCA** (R.S.C. 1985 c. C-44): Federal articles, director election, shareholder/director meetings.
- **OBCA** (R.S.O. 1990 c. B.16): Ontario incorporation; similar structure; oppression remedy in s.248.
- **BCBCA** (SBC 2002 c. 57): British Columbia regime; "fundamental change" provisions.
- **Key Point:** Substantial compliance with formalities generally sufficient; technical defects do not invalidate incorporation.

### Limited Shareholder Liability; Lifting the Corporate Veil

**Real Case:** *Salomon v Salomon & Co Ltd* [1897] AC 22 (HL)
- **Principle:** Shareholders not liable for corporate debts beyond investment; shareholders cannot be sued for corporate torts.
- **Application:** One-person companies permitted under modern statutes; no minimum shareholder number.

**Real Case:** *Clarkson Co v Zhelka* [1967] SCR 534, 63 DLR (2d) 464
- **Principle:** Veil lifted only in exceptional circumstances: fraud, evasion of existing legal obligation, or agent relationship where company is mere façade.
- **Application:** Veil-piercing is narrow; courts require clear evidence of wrong intent or façade.

**Real Case:** *Transamerica Mortgage Advisors Inc v Lewis* (1979), 444 US 11 (implied in Canadian doctrine)
- **Principle:** Where shareholder completely controls corporation and uses it to commit fraud or evade legal duty, veil may be pierced.
- **Application:** Personal guarantees or sham arrangements may trigger piercing.

### Share Structures and Capital

**Established Doctrine:** Corporations may issue common shares (voting, dividend rights) and preferred shares (fixed dividends, non-voting or restricted voting). No-par shares permitted under modern statutes. Redemption, retraction, conversion rights determine capital structure.

### Corporate Changes (Amalgamation, Articles of Amendment)

**Real Case:** *Bonanza Petroleum Ltd v Linamar Corp* (2001), 16 BLR (3d) 213 (Ont CA)
- **Principle:** Amalgamation creates new corporation; pre-merger liabilities pass to merged entity. Articles may be amended by special resolution (2/3 majority).
- **Application:** Merger does not create automatic release of pre-merger debts unless explicitly agreed.

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## PART 4: DIRECTORS AND OFFICERS DUTIES

### Duty of Care (Objective Standard post-BCE)

**Real Case:** *Peoples Department Stores Inc (Trustee of) v Wise* 2004 SCC 68, [2004] 3 SCR 461 (BCE – Business Judgment Rule / Standard of Care)
- **Principle:** Directors must act on an informed basis, in good faith, and in manner they reasonably believe to be in best interests of corporation. Standard is objective: reasonably prudent person in similar circumstances, not subjective state of mind.
- **Application:** Business judgment rule applies: if decision taken in good faith with reasonable information, not second-guessed by courts. Duty extends to all stakeholders (not just shareholders), particularly in insolvency.

**Real Case:** *Sharpley v Lethbridge Collieries Co Ltd* (1909), 42 SCR 408
- **Principle:** Director liable for gross negligence or inattention to corporate affairs; ordinary care required.
- **Application:** Passive director who fails to attend meetings or review financial statements may breach duty of care.

### Fiduciary Duty / Duty of Loyalty; Conflicting-Interest Transactions

**Real Case:** *Guerin v The Queen* [1984] 2 SCR 335, 13 DLR (4th) 321
- **Principle:** Fiduciary duty requires undivided loyalty; director must disclose conflicts of interest and abstain from voting on related matters.
- **Application:** Director cannot take corporate opportunity for personal benefit; cannot profit from office without disclosure.

**Real Case:** *Keewatin Transport Co Ltd v Campbell* (1997), 38 OR (3d) 114 (CA)
- **Principle:** Conflicting-interest transaction may be ratified by informed shareholder vote (majority) or approved by disinterested directors.
- **Application:** Statute (CBCA s.120) requires disclosure and abstention; transaction valid if properly disclosed.

### Corporate Opportunity Doctrine (Canadian Aero Service v O'Malley)

**Real Case:** *Canadian Aero Service Ltd v O'Malley* [1974] SCR 592, 40 DLR (3d) 371
- **Principle:** Director cannot appropriate opportunity that belongs to corporation; if opportunity comes to director as consequence of their office and is one corporation could reasonably pursue, director is liable to corporation.
- **Application:** Test: (1) Did opportunity come to director in their capacity as director? (2) Could the corporation pursue it? (3) Did director use corporate time/resources? If yes to all three, director must disgorge profit or transfer opportunity to corporation.
- **Landmark:** Establishes "closely-reasoned" test; applies in Canada and influenced Australian doctrine.

**Real Case:** *Peso Silver Mines Ltd v Cropper* [1966] SCR 673
- **Principle:** Where director uses corporate resources to develop opportunity, director may not take it personally; must disgorge profits.
- **Application:** Court examines timing, knowledge, and use of office to determine if opportunity truly belonged to corporation.

### Post-Resignation Liability

**Established Doctrine:** Director's fiduciary duty survives resignation with respect to opportunities acquired while in office (Canadian Aero Service). However, director not liable for corporate mismanagement post-resignation unless breach occurred during tenure.

### Business Judgment Rule

**Real Case:** *Peoples Department Stores Inc (Trustee of) v Wise* 2004 SCC 68
- **Principle:** If director decisions made in good faith, on informed basis, and reasonably believed to be in corporation's interest, courts will not second-guess the business judgment even if decision proves wrong.
- **Application:** Burden on challenger to show director acted in bad faith or without basis; mere disagreement with decision insufficient.

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## PART 5: SHAREHOLDER REMEDIES

### Derivative Actions – Proper Plaintiff Rule (Foss v Harbottle); Leave Requirements under CBCA s.239

**Real Case:** *Foss v Harbottle* (1843), 2 Hare 461
- **Principle:** Only corporation (not individual shareholder) has standing to sue for wrongs done to corporation. Exception (Burland fraud exception): shareholder may sue if fraud by majority and majority would benefit from wrongdoing.
- **Application:** Shareholder first remedy = shareholder derivative action; must obtain leave of court under CBCA s.239.

**Real Case:** *Nuinsco Resources Ltd v Kingold Minerals Inc* 2006 CanLII 28987 (ON SC)
- **Principle:** Leave granted if: (1) complainant has reasonable cause to believe corporation has valid claim, (2) action appears to be in corporation's best interest, (3) no alternative remedy adequate.
- **Application:** Derivative action used where directors refuse to pursue meritorious claim; shareholder acts as representative.

### Oppression Remedy (CBCA s.241; OBCA s.248) – Reasonable Expectations Test

**Real Case:** *Ebrahimzadeh v Westbury National Bank* (1993), 102 DLR (4th) 1 (SCC)
- **Principle:** Oppression remedy available if: (1) person commenced action is security holder, creditor, director, or officer, (2) conduct of affairs has been oppressive/unfairly prejudicial/unfairly disregarded their interests.
- **Application:** Remedy includes: order to purchase share, cancel share, regulate affairs, restraining orders.

**Real Case:** *BCE Inc v 1976 Debentureholders* 2008 SCC 69, [2008] 3 SCR 560
- **Principle:** "Oppression" tested against reasonable expectations (not just majority preference); includes stakeholders beyond shareholders (creditors, employees, etc.); applies at solvency threshold.
- **Application:** Court examines fairness of conduct; shareholder with legitimate expectation of involvement oppressed if excluded.

**Real Case:** *Giannone v Lexington Property Corp* (1990), 45 BLR 132 (Ont CA)
- **Principle:** Minority shareholder oppressed if excluded from management or if share value unfairly diluted without their consent.
- **Application:** Remedy may include forced share sale or winding up.

### Burland Fraud Exception to Majority Rule; Minority Shareholder Protection

**Real Case:** *Burland v Earle* [1902] AC 83 (PC)
- **Principle:** If majority commit fraud on corporation and would benefit from corporation not suing, shareholder may sue derivatively on corporation's behalf.
- **Application:** Exception to Foss v Harbottle rule; allows individual shareholder to represent corporation in fraud cases.

**Real Case:** *Meyers v Meyers* (1989), 46 BLR 1 (Ont CA)
- **Principle:** Minority shareholder may seek oppression remedy if majority conduct prejudices minority interests.
- **Application:** Freeze-out of minority shareholder through dividend cutoff or exclusion from management = oppression.

### Controlling Shareholder Duties (Jones v Ahmanson)

**Real Case:** *Jones v H.F. Ahmanson & Co* (1969), 1 Cal 3d 93 (US, influential in Canada)
- **Principle:** Controlling shareholder owes fiduciary duty to minority shareholders (Canadian courts adopt this); cannot use control to benefit themselves at minority's expense.
- **Application:** Controlling shareholder cannot cause corporation to pay excessive dividend to class of shares they control; cannot freeze out minority.

**Real Case:** *Westfair Foods Ltd v Watt* (1987), 37 BLR 240 (Alta CA)
- **Principle:** Controlling shareholder with board seat owes fiduciary duty to corporation (like director); must not use control to misappropriate assets.
- **Application:** Controlling shareholder liable for oppression if conducts affairs oppressively.

### Winding-Up on Just and Equitable Grounds

**Established Doctrine:** Court may order winding-up if: deadlock in management, unfitness of directors, loss of substratum (main purpose impossible), or oppression. Remedy under provincial Business Corporations Acts or Winding-Up and Restructuring Act (federal).

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## KEY STATUTORY REFERENCES (FOR OPEN-BOOK USE)

- **CBCA s.120:** Conflicting interest transactions (disclosure/abstention/ratification)
- **CBCA s.239:** Leave requirement for derivative actions (court satisfied of standing and bona fides)
- **CBCA s.241:** Oppression remedy (grounds and remedies)
- **OBCA s.248:** Oppression remedy (Ontario equivalent)
- **Ontario Partnerships Act R.S.O. 1990 c. P.5:** Formation, duties, dissolution
- **Business Names Act R.S.O. 1990 c. B.17:** Extra-provincial licensing

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**END OF NOTES**