Transcript Long Catalogues of Facts

Problems in Canadian
Business Law
Pol/Soc Sci 3165 6.0A
Tuesdays, 2:30-5:30
pm
Simon Archer
[email protected]
Test, February 26, 2004
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Testable material
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Income trusts lecture (1 lecture)
Overview of business associations (1/2 lecture)
Law of agency (1/2 lecture)
Law of partnership (1 lecture)
Law of business associations (2 lectures)
*NOT* securities law (ch. 18).
Format
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Same as last test – mixture of
• T/F and why
• Short answer questions
• One fact pattern.
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The test will be shorter in length than the last one, and more time to
write it: 2.0 hours.
Best way to prepare: read text and do problems/questions in the
text.
Last class
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Corporations Part 1
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Historical development of the corporation
Nature of a corporation
Methods of incorporation
The incorporation process
A “typical case”: Salomon v. Salomon
This class
Shareholders
 Introduction to corporate securities
 Division of corporate powers
 Piercing the veil
 Criminal liability
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Nature...
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Principal distinguishing features
Aspects of Control – Board of Directors
 Limited Liability – no general partners
 Separate existence from shareholders
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Shareholder’s Agreements
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Relationship between shareholder and
corporation
Relationship between shareholders
Restriction of power as directors to do
things
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Can also be by constating documents
Fact of a restriction required to be disclosed
Corporate securities
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Can issue shares, (common, preference, in
series, etc.)
bonds & debentures
Division of powers
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Duties and Responsibilities of Directors
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Separation of ownership (shareholder) and
management (director)
• Major changes by SH, policy by D, day to day by
hired CEO/employee
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Fiduciary duty
• Doctrine of Corporate Opportunity, essentially the
profit rule we did last fall
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Insiders
• Massive problem in Canada, virtually unaddressed
• Cowpland, Nova Scotia
Liability in general
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Personal Liability of Directors
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For things listed in statute, e.g., for unpaid
wages in dissolution, for ultra vires actions,
etc.
Shareholder’s Rights
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AGM, elect directors, financial reports, certain
key documents to review
CL minority rights: ultra vires, affects rights,
failure to follow procedure, fraud on minority
Statute: oppression remedy (includes
creditors!)
“Pierce the veil”
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The concept here is to decide when the
court will look through the corporation to
say the shareholders should be treated as
really a party along with the corporation.
Most drastic remedy - makes shareholder
a partner of the corporation, and fully
liable for the corporation’s actions.
Contrary to concept of limited liability
Gower, Modern Company Law,
5th Ed. (1992)
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Three circumstances to pierce veil…
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 the authorized agent of its
controllers or its members, corporate
or human.
Case study 1: Rockwell v.
Newtonbrook
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Kelner used “Rockwell”, of which he was
the 100% owner, to do deals.
“Rockwell” signed an agreement to buy
real estate from “Newtonbrook”.
There was a zoning problem so
“Rockwell” wanted to close with an
abatement (price reduction).
“Newtonbrook” refused.
“Rockwell” registered an assignment of
the offer to purchase against title.
Stuff goes down...
Rockwell sued for abatement and
lost, with costs of $4,800 against it.
 Rockwell only had $31.85 in assets.
 Newtonbrook sues Kelner personally
for its costs...
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The winner is...
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Though Kelner was the individual who would ultimately
benefit, the contract was made by the company alone, and
costs cannot be recovered from Kelner.
• The use of a “one man company” for the carrying
on of business transactions is recognized in Salomon
Kelner was “the person who set this process in motion”, in
the sense that he was the individual who, on behalf of the
company, gave instructions to its solicitors, but this does
not justify a finding that he was “the actual litigant”.
Can a corporation with assets of $31.85 and no debts be a
separate entity?
Key question: When does the company become the agent
of the principal?
Case study 2: Constitution
Insurance Co. v. Kosmopoulos
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Leading case in the SCC - K was a retail leather merchant
who incorporated his business but was the only
shareholder. (What is it about the leather business?)
He transferred business assets to the corporation but kept
insurance on those assets in his own name. Fire destroys
assets, insurer says K not owner, corp was owner, so don’t
have to pay K insurance.
K wants to get insurance so sues arguing was a mere shell
company for his sole benefit, he wanted veil pierced.
SCC said it would not pierce the corporate veil, particularly
at the instance of the shareholder who set up the
corporation.
In CBCA and some provincial jurisdictions, shell companies
permitted, and statute will provide guidance…
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Remember, they are creatures of statute
Comments...
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It restricted the use of piercing the
corporate veil to cases where it would be
clearly “unfair or unjust to do otherwise.”
Newer, looser language, suggesting to
some lawyers that piercing was quite
easy, “unfair” is pretty vague and some
businesses have a hard time
distinguishing that from “hard
bargaining”.
Case Study 3: Transamerica Life
v. Canada Life
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The court will disregard the separate
legal personality of a corporate
entity where
a) it is “completely dominated and
controlled” by parent; and
 b) it is being used as a shield for
fraudulent or improper conduct
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Two part test, very high threshold
Quote, unquote
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“A subsidiary, even a wholly owned
subsidiary, will not be found to be the
alter ego of its parent unless the
subsidiary is under the complete control
of the parent and is nothing more that a
conduit used by the parent to avoid
liability. The alter ego principle is applied
to prevent conduct akin to fraud that
would otherwise unjustly deprive
claimants of their rights.”
Elements...
1.
2.
3.
“Complete control” – requires more
than ownership. Complete
domination must be shown.
“Conduct akin to fraud …” – relates
to the nature of the conduct.
Very stringent test.
The guilt business
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It is obvious that for a corporation to
commit either a criminal act, it will have
to involve a crime on the part of an
individual, often an employee of the
corporation.
Key questions to be addressed:
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when is the corporation liable
when is the individual liable, and
when are both liable?
R. v. Sault Ste. Marie
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Established three types of liability for corporate
criminal conduct...
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Absolute liability - where Crown only has to prove actus
reus and nothing to do with the mental element of the
accused. If employee commits an absolute liability
offence when acting for corporate employer, corporate
employer alone will be liable.
Strict liability - where the accused will be convicted
once the actus reus is shown unless accused can show
that it exercised due diligence to avoid the actus reus.
Due diligence is not of agent but of corporation itself did it establish a proper system?
A “full” criminal offence where Crown must prove mens
rea. Mens rea must be of the “directing mind” in order
to hold the corporation liable.
Soooo
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In Sault Ste. Marie, SCC said the discharge of
toxic waste into a creek was a “strict liability”
offense and City could get off if it showed it was
duly diligent.
In general mens rea does not have to be proven
by the Crown for regulatory offences.
Defendant will avoid liability where it can prove
on a balance of probabilities either that:
a) It had exercised due diligence by taking all
reasonable steps to avoid the offence, or
or...
It believed in a mistaken set of
facts, that, if true, would render the
act or omission innocent.
 Due diligence defense will depend
on whether the directing mind of the
corporation exercised due diligence.
 Action of mere employee is not
enough.
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b)
Test: Canadian Dredge &
Dock, 1985, SCC
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Conspiracy to rig bids for dredging
Hamilton Harbour. How does a rigged bid
work?
“Directing Mind” – the act in question
must be done by the directing mind of a
company when carrying out his or her
assigned function in the corporation. Thus
the senior executive in charge of policy in
the area must be personally implicated.
Then due diligence will not exonerate.
Problems
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Who is the directing mind?
What were they thinking?
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subjective (did know) and objective (ought to
have known) tests for presence of
knowledge…constitutional issues
very difficult to prove, often only by
implication, paper trails (Arthur Anderssen...)
What is likely for a directing mind to do
re: access and availability of knowledge?
Parmalat: first thing out of CEO’s mouth
is “I never knew”.
Criminal penalties
Actual individual who committed the
offense is also guilty, assuming
mens rea established.
 Can only fine the corporation.
 Could put individual in jail.
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Dredge & Dock in context
Long-standing municipal corruption
implicating both organized crime
and cabinet ministers
 Case broken by Economic Crime
Directorate of RCMP, formed about
10 years earlier to stop this stuff,
Rod Stamler was leading
investigator, now works in private
practice
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context...
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Six month investigations at a minimum,
sometimes several years
Very difficult to search for evidence,
corporations resist with lengthy litigation
Forensic accounting hard to understand,
complex training, sophisticated suspects
with lawyers
Unit has some successes, but cannot
bring many cases it would like to, lack of
evidence, lack of resources, and
eventually...
more context
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Mulroney era dawns...1980s = lack of investigatory
independence
See S. Cameron, “On the Take”. Always tip.
New gov’t replaces head of Economic Crime Directorate
(Inkster, now on Bay St.)
Under-funds the unit, Inkster stalls several initiatives, seen
as Mulroney toady
AG denies/declines to pursue some cases, especially those
against government members
Government questions scope and need for unit, many
competent staff leave
Essentially now a shell of its former status
Case against Mulroney (Airbus) dropped after $50M
lawsuit...
The case
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Mulroney successfully sued the
Canadian government in 1997 over
statements from the Department of
Justice that he was involved in "an
ongoing scheme" involving secret
commissions with Mr. Schreiber.
Tuesday, November 11
2003
It turns out after denying for many
years, Mulroney did actually take
300k in payments from Karheinz
Schrieber in a “retirement deal” to
“promote” Schreiber’s “pasta
business”.
 A pasta promoter? Really?
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What’s up with that?
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Why didn’t the information about the deal
not come out at the Airbus trial in 1997?
Mulroney acknowledged at the trial that
he had been in contact with Mr. Schreiber
after leaving office.
Government lawyers did not ask Mr.
Mulroney whether he had ever received
any money from Mr. Schreiber.
"It was the crucial question, and it was
not asked," Prof. Savoie, leading political
scientist in Canada.