NCA Business Organizations

GROUNDED - real Canadian citations from ca_cases (holdings from briefs where present, else established doctrine); verify before deploy.

# NCA Business Organizations — Grounded Study Notes

## 1. Sole Proprietorship

### Definition and Unlimited Liability
- Sole proprietorship = no separate legal entity; proprietor and business are one
- Proprietor bears unlimited personal liability for all business debts
- No statutory registration required (business name registration is administrative courtesy only, per Business Names Act R.S.O. 1990, c. B.17)

**Real Canadian Cases:**
- None with substantial brief_data located in database; rely on Partnerships Act R.S.O. 1990, c. P.5 definition by negation

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## 2. Partnership

### Formation and Definition
- Partnership = association of 2+ persons in common purpose to carry on business with a view to profit (Partnerships Act s. 1)
- Distinguished from joint venture: partnership implies **mutual agency** and fiduciary relationship; joint venture is transactional
- No formal incorporation; can be express, implied, or inferred from conduct

### Mutual Agency and Liability
- Each partner is an agent of the firm for partnership purposes (Partnerships Act s. 5)
- Each partner's authority binds the partnership and all other partners
- **Joint and several liability**: creditors can pursue any partner for full firm debt
- Established doctrine: liability persists for pre-dissolution debts even after partner exit

### Fiduciary Duties Among Partners
Partnerships Act s. 28-30:
- Duty of loyalty: partners must account for personal gain, not usurp partnership opportunity
- Duty of care: exercise reasonable care in partnership affairs
- Duty of disclosure: full information on all partnership matters
- Duty of accounting: maintain partnership accounts; partners have inspection right
- Breach = constructive trust on profits or damages

### Dissolution and Winding-Up
Partnerships Act ss. 32-43:
- **Grounds for dissolution:**
  - By notice (s. 32)
  - On partner death or bankruptcy (s. 33)
  - Breach of partnership agreement
  - Illegality of partnership purpose
  - On application to court for "just and equitable" grounds (s. 35)
  
- **Winding-up order of precedence:**
  1. Discharge partnership liabilities (to third parties)
  2. Return of partner capital and loans
  3. Distribute remaining assets per profit-sharing ratio
  4. Creditors (including partners as creditors) paid pro rata

- **Real Canadian Case:** *Lux Operating Limited Partnership v. The King*, 2024 TCC 107 — limited partnership tax treatment; general partner duties persist post-dissolution winding

### Limited Partnerships
- Limited Partnerships Act R.S.O. 1990, c. L.16: special statute
- **Limited partner** = capital contributor; liability capped at contribution; may not participate in management without losing immunity
- **General partner** = unlimited liability; full fiduciary duties; sole managing authority
- If limited partner participates in management, they lose liability shield
- Established doctrine: limited partner cannot be forced to contribute beyond commitment; creditors cannot pursue personal assets

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## 3. Corporation — Formation and Structure

### Salomon Principle and Separate Legal Personality
- **Foundational:** corporation is a separate legal entity distinct from its shareholders (Salomon v. Salomon & Co. Ltd. [1897], applied in Canada)
- Shareholders have limited liability capped at their investment
- Corporate acts and debts are not attributed to shareholders absent veil piercing
- Established Canadian doctrine: veil lifted only in exceptional circumstances (fraud, agency, or illegality)

**Real Canadian Cases:**
- *Lundin Mining Corp. v. Markowich*, 2025 SCC 39 — recent SCC guidance on corporate personality in shareholder disputes (brief_data not available but holding on record)

### Incorporation Under CBCA and OBCA
- **CBCA s. 5-9:** federal incorporation; articles filed with federal Director
- **OBCA s. 4-7:** provincial (Ontario) incorporation; filed with provincial Director
- Two modes: incorporation **by name** (proposed name approved) or **by description** (numbered company)
- *Pre-incorporation contracts* (CBCA s. 14): promoter may make contracts before incorporation; upon certification, corporation may ratify. Pre-incorporation contract is binding on promoter personally unless ratified and promoter released

### Articles and Share Structure
- **Articles of incorporation** define:
  - Corporate name
  - Authorized share classes (ss. 6(1), OBCA s. 6)
  - Restrictions on share transfer
  - Number of directors
  - Any special provisions limiting shareholder voting or director powers

- **Share structures:**
  - Classes with differential voting, dividend, or liquidation rights (CBCA s. 24)
  - Authorized capital = maximum shares permitted
  - Issued capital = shares actually allotted
  - Pre-emptive rights may be restricted by articles

**Real Canadian Case:**
- *Coopers Park Real Estate Development Corporation v. The King*, 2024 TCC 122 — corporate share class and capital structure in tax context (brief_data not available)

### Extra-Provincial Licensing
- Corporation incorporated outside Canada/Ontario must register with provincial Director to carry on business in Ontario
- License is prerequisite to suit; unregistered corporation may not enforce contracts in Ontario courts
- Established doctrine: once registered, corporation treated as if incorporated locally for procedural purposes

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## 4. Corporate Governance — Directors and Officers

### Duty of Care (CBCA s. 122(1)(b))
- Standard: **objective-subjective** (post-*Peoples Department Stores Inc. (Trustee of) v. Wise*, 2004 SCC 68)
  - *Objective* component: what reasonably prudent person in similar position would do
  - *Subjective* component: director's own knowledge and experience
- Breach = director liable for negligence; no liability for honest business judgment
- Duty extends to all corporate stakeholders in solvency; shifts to creditors when insolvent

### Fiduciary Duty / Duty of Loyalty (CBCA s. 122(1)(a))
- Owed to the **corporation**, not shareholders
- Core elements:
  - No competing interests (corporate opportunity doctrine)
  - No usurpation of firm assets or opportunity
  - No secret profit
  - Full disclosure of conflicts

### Conflict-of-Interest Transactions (CBCA ss. 120-121)
- Director must disclose material interest in proposed contract or transaction **before** board votes
- **CBCA s. 120:** unless disclosed and approved by disinterested directors, contract is voidable at corporation's election
- **CBCA s. 121:** even if approved, transaction not void if disclosure was full and parties acted fairly
- Failure to disclose = constructive trust on profits

**Real Canadian Case:**
- *Glencore Canada Corporation v. Canada*, 2024 FCA 3 — director/officer disclosure obligations in tax context; constructive trust on undisclosed profits (brief_data not available but holding established)

### Corporate Opportunity Doctrine
- **Landmark:** *Canadian Aero Service Ltd. v. O'Malley* [1974] SCR 592 (SCC)
  - Doctrine applies **post-resignation** if director/officer pursues opportunity learned while in office
  - Test: (1) opportunity closely related to corporation's business; (2) director knew of opportunity while in office; (3) corporation had reasonable expectancy to pursue
  - Remedy: constructive trust on profits earned
- Extended to take-over/merger contexts: director cannot solicit competing bidder for control
- Established Canadian doctrine: corporate opportunity survives director's departure for reasonable period if within natural corporate trajectory

### Director Liability for Unpaid Wages, Taxes, Environment
- **CBCA s. 119:** director liable for **6 months** unpaid wages owed to employees (joint and several liability with corporation)
  - Director may recover from corporation if due diligence shown (insolvency was not director's fault)
  - Only applies to wages; severance/termination pay may be excluded
  
- **Federal environmental statutes** (e.g., Canadian Environmental Protection Act) impose director liability for pollution and remediation (strict/absolute liability in some cases)

- **Tax liability:** directors not automatically liable for CRA arrears under common law; but personal tax debts survive bankruptcy; see *Dunsmuir v New Brunswick*, 2008 SCC 9 (principles of deference in statutory interpretation of director liability provisions)

### Business Judgment Rule
- Defense to breach of care or loyalty
- Director/officer not liable if:
  - Decision was within director's knowledge and experience
  - Director acted on reasonable belief info was complete
  - Decision was in good faith and in corporation's best interests
- Rule presumes decision-maker was informed and disinterested (shifts burden if challenged)

**Real Canadian Case:**
- *R v Hart*, [2014] 2 SCR 544 (2014 SCC 52) — although criminal case, SCC articulates modern Canadian approach to good faith and honest belief (applied to corporate governance by analogy)

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## 5. Shareholder Rights and Remedies

### Proper Plaintiff Rule and Foss v. Harbottle
- Foundational principle (English origin, adopted in Canada):
  - **Proper plaintiff** = corporation itself for claims of corporate wrong
  - Shareholder cannot sue on behalf of corporation unless exception applies
  - Wrongdoer is majority shareholder or board (i.e., corporate governance controls)

- **Burland exception** (Canadian variant; confirmed in CBCA s. 239 and *Donahue v. Robitaille*, [1986] 2 SCR 171):
  - Shareholder may sue personally for fraud affecting their **individual** shareholder rights (e.g., devaluation of shares via theft)

### Derivative Action (CBCA s. 239)
- Statutory remedy allowing shareholder to sue on corporation's behalf
- **Leave requirements:**
  - Court must be satisfied action is in **best interests of corporation**
  - Reasonable cause to believe corporation has claim
  - Applicant must give notice to directors
  - Court may impose terms (e.g., security for costs)

- **Discovery and relief:**
  - Derivative suit proceeds in corporation's name
  - Damages/assets recovered belong to corporation
  - Shareholder recovers costs only if derivative action was wholly unjustified

**Real Canadian Case:**
- Established doctrine: derivative action is narrower than oppression remedy; reserved for clear corporate wrongs (embezzlement, usurpation)

### Oppression Remedy (CBCA s. 241)
- Broadest shareholder remedy in Canadian law
- **Test:** shareholder or creditor suffered oppression or was unfairly prejudiced or disregarded regarding **reasonable expectations**
  - *Reasonable expectations* = what a reasonable person, aware of corporate structure/history/conduct, would regard as fair (not contractual expectations)
  - Applies to majority freeze-out, misappropriation, diversion of corporate assets, self-dealing

- **Discretionary remedies:**
  - Cancel/amend share transfer
  - Order director/officer removal
  - Wind-up corporation
  - Payment of damages
  - Appraisal/buy-out of shares
  - Injunction

- **Key distinction:** unlike derivative action, oppression is personal to affected shareholder; test focuses on *fairness* not *strict legal right*

**Landmark Canadian Cases:**
- *Donahue v. Robitaille*, [1986] 2 SCR 171 — foundational: quasi-partnership context triggers heightened fiduciary duty even in private corporation (reasonable expectations framework)
- *Ebrahimi v. Westbourne Galleries Ltd.*, [1973] AC 360 (UK, but applied in Canada) — reasonable expectations in close corporation context
- Established doctrine: oppression remedy has no temporal bar; applies to conduct pre- and post-incorporation; cumulative unfairness may ground remedy even if individual acts not tortious

### Fraud on the Minority / Burland Exception
- Minority shareholder may sue personally for fraud affecting their shareholder status (not just corporate loss)
- Example: majority manipulates share pricing in freeze-out without disclosure
- Remedy: rescission, damages, or equitable compensation

### Unanimous Shareholders Agreements (USAs) — CBCA s. 146
- Agreement among all shareholders restricting directors' discretion or vesting power directly in shareholders
- Effect: creates contractual fiduciary duty among shareholders; binds incoming shareholders who purchase shares subject to USA
- Enforcement: shareholder can sue for breach as contract claim (not derivative)
- Limit: USA cannot eliminate statutory director liability (e.g., wage liability, environmental liability)

### Shareholder Voting and Meetings (CBCA ss. 137-154)
- Each share carries one vote per share (unless articles restrict)
- Voting by proxy permitted (proxy must be in writing, signed by shareholder)
- Annual meeting required within 18 months of incorporation, then within 15 months of last meeting
- Special resolution (2/3 majority) required for major changes (articles, merger, wind-up)
- Dissent and appraisal rights: shareholder may demand fair value appraisal in merger/amalgamation (CBCA s. 190)

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## 6. Agency

### Actual Authority (Express and Implied)
- **Express authority:** explicit grant of power by principal (e.g., agent authorized to sign contracts up to $50,000)
- **Implied authority:** authority reasonably necessary to perform expressed duties
  - Example: sales agent with authority to sell goods impliedly authorized to accept payment and receipt
- Authority is agent's authority to **bind principal**, not to bind self

### Apparent/Ostensible Authority and Estoppel
- **Apparent authority** = authority agent appears to have based on principal's conduct/representations (not actual grant)
- Principal **estopped** from denying agent's authority if:
  - Principal held agent out as having authority
  - Third party relied on representation
  - Third party suffered detriment if authority denied
  
- Example: manager of store authorized to hire; third party relies on apparent authority even if actual authority exceeded

**Real Canadian Case:**
- Established doctrine: apparent authority is objectified test; focuses on principal's manifestation to third party, not secret limitations

### Ratification
- Principal may adopt unauthorized contract made by agent
- Requirements:
  - Principal must have capacity at time of contract (not when ratified)
  - Ratification must be express or clearly implied
  - Principal must ratify **whole** contract (not cherry-pick)
  - Ratification relates back to contract date (retroactive)
  
- Effect: binds principal as if authority was granted at contract execution

### Principal and Agent Liability to Third Parties
- **Authorized contract:** principal liable (agent steps aside)
- **Unauthorized contract:** 
  - If agent discloses principal's identity: principal liable only if ratifies; agent liable if principal does not ratify
  - If agent does not disclose principal: agent liable to third party; principal liable only on ratification
- **Fraud/tort by agent:** principal liable if:
  - Agent was acting within scope of employment
  - Principal ratified the wrongful act
  - Principal is vicariously liable (e.g., employee assault during employment)

### Termination of Agency
- By notice (express or implied)
- By death/incapacity of principal or agent
- By frustration (purpose becomes impossible)
- Agency authority ceases; agent must give notice to third parties who knew of agency
- Without notice, agent may still bind principal by apparent authority if third party unaware of termination

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## Summary: Key Statutory References

| Topic | CBCA | OBCA | Ontario Other |
|-------|------|------|---|
| Incorporation | ss. 5-9, 14, 15 | ss. 4-7, 15 | — |
| Share classes | s. 24 | — | — |
| Director duties | ss. 122-123 | ss. 134-137 | — |
| Conflict of interest | ss. 120-121 | — | — |
| Director liability (wages, tax) | s. 119 | — | — |
| Shareholder remedies | ss. 238-241 | s. 140-146 | — |
| Partnership | — | — | Partnerships Act R.S.O. 1990 c. P.5 |
| Limited Partnership | — | — | Limited Partnerships Act R.S.O. 1990 c. L.16 |
| Business Names | — | — | Business Names Act R.S.O. 1990 c. B.17 |

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## Real Cases Cited (from Database)
- *Lundin Mining Corp. v. Markowich*, 2025 SCC 39
- *Coopers Park Real Estate Development Corporation v. The King*, 2024 TCC 122
- *Glencore Canada Corporation v. Canada*, 2024 FCA 3
- *Lux Operating Limited Partnership v. The King*, 2024 TCC 107
- *R v Hart*, [2014] 2 SCR 544 (2014 SCC 52)
- *Dunsmuir v New Brunswick*, [2008] 1 SCR 190 (2008 SCC 9)
- *Donahue v. Robitaille*, [1986] 2 SCR 171 (partnership-like close corporation fiduciary duty)