REVIEW UNIT

REVIEW UNIT: Some Review Maps

Please note there is redundancy with material already included in the course. The intent is to highlight what may be most useful overall understanding of the course. 

 CORPORATE LAW – INTRODUCTORY NOTES

1. What is company law about?
2. A company is the most successful among a variety of organizational forms – including, for example, partnerships –recognized by law to coordinate the activities required to carry on a business designed to earn profits.
3. The persons whose activities are necessary to this end are shareholders, directors and senior managers who are not directors, creditors. employees, suppliers, and customers (i.e. users of the company’s products or services).
4. In general company law is not interested in the activities of employees, suppliers, and customers.  It focuses on shareholders, directors and, to some extent, creditors.
5. The questions as to why company law is concerned with shareholders, directors and creditors, but for the most part uninterested in employees, suppliers, and customers are, therefore, important questions.
6. As to those groups with whom company law is concerned, it focuses on:

• how one becomes a member of one of these groups;
• how one ceases to be a member;
• regulating the relations between them (e.g., shareholders as against directors; creditors as against shareholders) and
• regulating the relationships within the groups, for example, between majority and minority shareholders and between secured and unsecured creditors.

Shareholders

1. Become a shareholder by acquiring shares¹either from

• the company itself in exchange for cash, property or services; or
• an existing shareholder – generally, but not invariably, for cash.

1. Cease to be a shareholder by disposing of shares

• to another investor.  The ease with which this may be done is, from the perspective of company law, principally a function of the existence of a public market for the shares – if there is such a market, exit may be easy; if there is no market, exit could be difficult.
• rarely to the company itself, and then only subject to restrictions and limitations designed to protect creditors and/or other shareholders,.

1. Rights acquired by shareholders not, generally speaking, defined by law. Contained in a contractbetween the investor and the company.  The content of the contract is generally not limited in any way.²  Telus Corporation, for example, has created and sold First Preferred, Second Preferred and Common shares, each with different rights.  Teck Cominco has Class A common shares without par value, Class B subordinate voting shares and preferred shares. Bombardier has Class A (Multiple Voting) Shares, Class B (Subordinate Voting) Shares, Series 2 Cumulative Redeemable Preferred Shares, Series 3 Cumulative Redeemable Preferred Shares and Series 4 Cumulative Redeemable Preferred Shares.
2. “Common” share is the most basic form of share.  Generally no financial entitlements.  While shareholder may expect, or hope for, dividends or capital gains arising out of an increase in market price there is not generally an enforceable right to any of this.  To compensate for this shareholder will generally (but not invariably) have the right to vote, i.e. theoretically at least to exercise control over corporate affairs.
3. Contrast “special” shares, e.g. preferred, which are generally accorded defined financial entitlements which can be of various kinds, e.g. assured dividends at defined rate, liquidation rights (otherwise than through sale to another investor) and financial priorities of one sort or another.  Generally, in recognition of financial entitlements, no right to control through votes.

Directors

1. Typically manage, or arrange for management, – generally a “board”.
2. If shareholders numerous, generally little overlap between authority of shareholders and of directors.  Efficiency requires that decision-making be in hands of a small group.

iii. If few shareholders distinction between them and directors, although formally required, may be quite trivial and artificial.

1. There is some flexibility in allocating power and authority as between shareholders and directors.

Creditors

1. Relationship between a company and creditors (a comprehensive term covering various relationships, e.g. customer who has pre-paid for goods, employee who is owed salary or the maker of a [long-term] loan, holder of a judgment enforceable against company) is, as with shareholders, primarily contractual.
2. But creditors’ rights quite different from shareholders.  While in principle no limit to variety of rights.  But customarily borrower obliged to repay loan at a fixed future date so investment locked for a period rather than, at least in the absence of a public market for shares, is the case for shareholder. Normally an entitlementto periodic return in form of interest.  Contrast shareholder.

iii. Lenders’ claims against company rank ahead of claims of shareholders’. Extent of claims determined by contract.  Lender may have security for repayment of loan and payment of interest in form of charge against assets; rarely have voting rights, though not impossible.  Because of creditor priority, common shareholders often described as “risk” or “equity” shareholders.

1. Company law regulates shareholder/company relationships quite extensively, presumably because both are creatures of that law.  It has a far narrower interest in creditor/company relationships.
2. Why?  A corporate party, whether creditor or debtor, is not intrinsic to the existence of a debtor/creditor relationship.  Many such relationships do not involve companies.  So generally they may be left to be regulated by general law.  This may also possibly explain, partly at least, company law’s relative disinterest in other groups such as employees and customers. Their rights and obligations cannot turn on whether the party with whom they contract is a company and so can safely left to regulation by general commercial and consumer law. This proposition has been generally accepted, though, at least in connection with the position of employees, it is considered controversial.
3. Other legal systems have different approach – German law, e.g. has special rules requiring employee representation on the boards of large companies.
4. But why does company law have anything to sayabout relations between creditors and corporations?

• limited liability – corporate creditor can only proceed against assets of company, separate from those of shareholders and hence creditor cannot ordinarily pursue claims against members.

2. The central principles or policies underlying company law
3. Five core characteristics at the heart of company law

• the company an entity distinct from all its shareholders.
• limited liability for shareholders.
• specialized management, separate from the shareholders.
• freely transferable shareholder interests
• shareholder control.

Query whether there might be a sixth core characteristic at the heart of company law being that “for profit” is the sole legally permissible motive?

Separate personhood (or, commonly, “separate personality”)

1. Unavoidable, inevitable consequence of incorporation – true of every company, whether large or small. Fundamental to conceptual structure of company law.
2. While personhood facilitates other core features – e.g. limited liability and transferable shares – it sometimes complicates legal analysis – an additional “person” has to be taken into account.

iii. Relations between the key groups – directors/managers, shareholders and creditors – not generally directly contractual but mediated through the “company” e.g. directors obligations are owed to company, not individual shareholders; and individual shareholders generally do not have rights against directors – their rights are against “company”.

1. “Company” acts as a sort of ‘focal point’ for all these relationships.  Functionally, this eliminates need for individual contracts among multiple parties in interest and the further need to re-do contracts whenever there is a change in personnel..
2. Conferring legal personality sometimes a temptation to treat company as if it were a natural legal person instead of an artificial one  – attribute ‘interests’ to it which, in the nature of the case, it cannot possibly have.
3. “Interests of the company” shorthand for interests of one or more groups of natural persons who have legal relations with it, e.g. directors owe fiduciary duties to “the company”.  Meaning? In our law, typically, members/shareholders.

Limited liability

1. Refers to the liability of the company and the fact that creditors’ rights are against company assets only, not against personal assets of the shareholders. “Limited liability company” a common but misleading expression.  The liability of the company is not limited at all – company assets available to full extent to creditors.  It is the liability of the shareholders that is limited.
2. Separate personhood facilitates limited liability –  easy to distinguish business assets (owned by the company) from personal assets (owned by the shareholders/directors).  It guarantees limited liability. If a third party has a contract with company as a separate legal person, liability on the contract is confined to the company and its assets  – does not extend to natural persons – directors/shareholders – and their assets.

iii. Guarantee particularly significant if company “insolvent” – i.e. assets insufficient to meet claims of creditors – shareholders not liable to contribute.

1. Policy reason for limited liability – encourages investment by those who do not wish to be involved in management.
2. Countervailing consideration –  limited liability may permit, or even encourage, opportunistic behaviour by controllers of company as against its creditors, for example, by disposing of assets which the company was represented as owning when credit extended. This not in interest of shareholders generally: may increase cost of credit – higher interest than if shareholders’ liability not limited.
3. Challenge for company law is not simply to implement limited liability but design a set of rules which achieves the desired benefits of limited liability (encouraging shareholder investment) and at the same time reduces or even eliminates opportunistic behaviour as against creditors.

Centralized management

1. In companies of any size not surprising that management is not left with the shareholders but entrusted to a small group of managers – reasons flexibility, cost, expertise.  Main occupation of individual investors may be entirely unrelated to business. Partly, also, motivation or rather lack of it.  Shareholder who is one of, 1,000 shareholders may have no motivation to invest much time in working out the correct answer to a question confronting shareholders, but rather to free-ride on the efforts of the others.  If all behave this way, none will prepare properly. The dynamics of small group decision-making, which will govern decisions of the managers, are entirely different.
2. But law does not requirea centralized management structure.  In general there is considerable freedom to develop appropriate structures and to divide powers between the shareholders and the board in the most convenient fashion, e.g. a company with few shareholders can decide that it does not need a centralized management structure – shareholders may be few enough that they could also be directors/managers.

iii. Strangely, company law in Canada says relatively little about the qualifications (and disqualifications) of directors, at least in the case of private companies.  The Jim Pattison Group, based in Vancouver, is described on its website as “the second largest private company in Canada”, with sales in 2012 of $7.5 billion and more than 35,000 employees working at almost 500 different locations worldwide and engaged in the automotive, media, packaging, food sales and distribution, magazine distribution, entertainment, export and financial industries.  The Group does in fact have a board of directors all of whom seem to have impressive credentials.  But this is not required by law.  Should this be a matter of concern?

1. Contrast companies traded on public markets, which are subject to increasing regulation of who their directors are and what they do.³

Shareholder control

Traditional company law view – shareholders are ultimate repository of authority.  This is reflected in control over the company’s:

• constitution;
• management; and
• surplus assets.

Control over constitution

1. The key (but not the only) constitutional document is in British Columbia called the ‘articles of association’ or “articles” (or, in the case of corporations incorporated federally or in Ontario, the bylaws).  They deal with the internal governance of a company.
2. Their content is not generally prescribed by law.  Instead, because of the primacy accorded to freedom of contract, the law tends to contain default rules only, that is, rules that apply unless the interested parties make a contrary or different agreement.  The articles are thus a critical source of the governance rules for the company.  In British Columbia the legislation includes a “model” set of articles that apply except to the extent that different provision is made.

iii. Articles under control of shareholders.  Content, and changes to content, require shareholder approval.

Control over management

1. Intimately related to control of constitution.
2. Company law does not generally prescribe in detail and minutely the way in which power and authority is to be distributed as between shareholders and directors. This is in general left to shareholders to decide but the law also allows shareholders to remove directors from office by following certain special procedures.

Control over surplus assets

1. In general, directors may only distribute surplus assets to shareholders, or to satisfy a legal claim against the company, or otherwise to further the company’s business.
2. The shareholders’ primary entitlement to surplus results from the combination of two features of company law:

• in the case of a company that is a going concern their contracts will define their rights – though common shareholders rarely have a rightto participate while the company is a going concern – depends on discretion of directors who are obligated to act “in the best interests of the company”;
• in the case of a company going out of business, law does not allow a payment to anyone that is not in satisfaction of a legal claim.
• company to make voluntary severance payments to its employees – no legal claim and no claim based on goodwill Since the payments are not in satisfaction of any legal claim on the company and a company which is ceasing to trade has no need to generate goodwill amongst its workforce, such payments were held to be unlawful at common law.
• The entitlement of shareholders to a participate in a surplus while the company is a going concern depends In fact, companies tend to be extremely cautious in granting legally enforceable entitlements to dividends to ordinary shareholders.

iii. Assets must be used to further business of legal person (i.e. in “company’s best interests”).

1. Our corporate law deeply committed to principle of shareholder control (i.e. the shareholders and their interests are the virtually exclusive objects of legal affection.
2. But the principle is, at least in the minds of some, controversial and has been challenged.  They advance a “stakeholder” argument the nub of which is that the economic power of corporations and their impact or influence over the lives and work of citizens, demands a reconsideration of shareholder primacy.  This discussion continues – most often in connection with the relationship between corporations and their employees.

Transferability of shares

1. Transferability crucial for two reasons:

• flexibility and liquidity for investors.
• governance considerations – the company may function more smoothly if a dissatisfied investor (or one who simply needs cash) is able to leave the company rather than remain as a carping minority.

1. Generally, corporate funds may not be used to provide liquidity to investors.  Investment, once made, is “locked in”, i.e. investor loses control over funds contributed.

iii. Use of corporate funds to provide liquidity only available, in the absence of contractual entitlement, in limited circumstances narrowly defined to protect interests of other shareholders and of creditors.

• promotes stability in the resources available to the company. If the funds used to provide liquidity for its investors, there would have to be a higher degree of liquidity of corporate assets to ensure corporate development
• note: separate legal personhood facilitates liquidity through the market for shares. Disposition of the investor’s interest in the company, (i.e. a share), does not involve a transfer of underlying business assets which are owned by the company and not by the shareholders
• One can contract for liquidity – redeemable shares – but precisely because they weaken the company’s control over its assets they tend to be rare.

1. Despite importance of market and liquidity, company law does not guarantee:

• existence of a market; or
• outside a market, that shares may be transferred freely – consents, restrictions, may apply which reflect valid purposes.

SOME GENERAL COMMENTS

1. Only separate personhood is inevitable and unavoidable.  The other core features can be avoided by appropriate provisions in a company’s constitution or contracts with the company or its shareholders.

Relationship between core features and corporate size

1. Very small companies most likely notto display the four optional core features.

iii. For example:  Ms Smith and Mr Jones incorporate Smith & Jones (Home Renovations) Ltd, to run a small home renovation business.

• Each agrees to subscribe for one share for which each pays $1.  There are no other shareholders.  They control the company.
• Business financed with funds borrowed from bank which insists on personal guarantees from Smith and Jones.  To this extent anyway, they do not have the benefit of limited liability.
• They appoint themselves the only directors.  Indifferent to whether they make decisions as shareholders or as directors. There is complete unity of shareholding, board membership, and management in this company.  No centralized management separate from the shareholders.
• The articles require (a) consent of all existing shareholders to admission of new shareholders and (b) if an existing shareholder wishes to sell his or her shares, they must first be offered to the other existing shareholders.  No free transferability of shares.
• Smith and Jones in total control disposition of surplus funds.

1. Smith and Jones have acquired control not because they have made a major financial investment but because they are the people who will get and do the work which the company is set up to carry on.
2. Contrast, at the other end of the size spectrum, companies such as Telus, Teck, Bell and Rogers, all with shares traded on public markets, each of which has thousands of shareholders, none of whom has given any personal guarantee of the company’s debts or liabilities; the board of each is clearly distinct from both the shareholders and the senior management of the company; and the shares are freely transferable from both the shareholders’ and the company’s point of view. As far as the law is concerned, the shareholders also control the company in the ways defined above – at least in theory. However, by way of contrast with Smith & Jones Ltd, the sheer number of the shareholders raises a serious question whether the difficulties the shareholders will face in coordinating their actions mean that in fact they are incapable of exercising the control the law confers upon them.
3. Nearly all public companies and a substantial number of private companies, display the five core features.

Interaction among core features

1. Sometimes compete – so a solution that implements one feature may impair attainment of another, e.g
2. placing broad range of decisions in hands of shareholders would expand their control but at a likely cost of efficiencies derived from centralized management, so more likely to be found in small private rather than large public companies.
3. Consequently, for public companies there is likely to be a search for techniques which provide the benefits of shareholder control without at the same time imposing greater costs by way of loss of the benefits of centralized management.
4. Correlation between corporate size and presence of all five core features not accidental.
5. As companies grow, capital needs of business likely to increase – invite public participation through risk (common) capital;
6. Public shareholders:
   1. more likely to invest if they can subsequently dispose of their shares on a market and if they benefit from limited liability
   2. unlikely to want or have ability to manage, leading to centralized management;.
   3. having provided investment with no legal guarantee of a return, are likely to want the power to remove the management if business unsuccessful.

 

¹  Certain aspects of the process of acquiring and disposing of shares are regulated by company law; other aspects by securities law.

 

²  Stock exchanges or other public markets may, however, impose certain restrictions as a condition of permitting the shares to be traded through the facilities of the exchange.  For example, certain exchanges prohibit or limit the use of shares without voting rights.

 

³  This regulation is generally found in the securities laws administered by regulatory bodies such as the stock exchanges and provincial securities commissions and not in company law.

 

 PARTNERSHIP

 

1. Much (but not all) of the material on Partnership in the Casebook is fairly straightforward and not especially challenging.  It does not lend itself to useful class discussion and is best read on your own time. To assist you, here are some more detailed guidelines.

 

WHEN DOES A PARTNERSHIP EXIST?

2. You should read CB1 on this subject against the background of the following sections of the BC Partnership Act (which correspond to the provisions of the Ontario Act referred to):

BCPA sections:

2. nature of partnership
3. exclusion of companies

6(a). definition of business

4. rules for determination whether a partnership exists
5. The cases excerpted on CB2-15 do not involve any principle not embraced by the above sections.  Although you are not expected to read them you might find it helpful to do so as illustrations of the way courts approach the question: when does a partnership exist?
6. You should read the decision in Miah & Others v. Khan, listed on the Syllabus.  It deals with an interesting question about preparations to carry on a business in partnership.

 

THE LEGAL NATURE AND CHARACTERISTICS OF PARTNERSHIP

5. Thorne v. New Brunswick(CB 16-20) and Fasken Martineau DuMoulin LLP v. British Columbia (Human Rights Tribunal) establish the important proposition that partnerships are not separate legal entities.
6. Read the Notes on CB 20-21 against the background of the following BCPA provisions which correspond to the provisions of the Ontario Act referred to:

BCPA sections 1 “partnership property” and 23 [which together correspond to Ontario s. 21 (1)] and “firm” and “firm name” [which together correspond to Ontario s. 5]

BC Supreme Court Rules 20-1 (corresponding to Ontario Rule 8.01 (1)

HOW PARTNERSHIPS CONDUCT BUSINESS

1. The relationship of partners to each other

(a) The personal nature of the relationship (CB22-23)

7. Read these notes against the background of BCPA sections 34 and 36.

(b) Fiduciary Character (CB 25-35)

8. Read CB 22 -37, including the decision in Olson v. Gullo(CB25-33) and the Notes on CB 33-5.  The relevant provisions of the BCPA are sections 22, 27, 31-33, 36 and 91.

(c) Agency (CB 35-36)

9. Read these Notes and BCPA section 10.

(d) Presumptive equality (CB36)

10. Read these Notes and BCPA section 27 (e)

(e) Consensual nature (CB36-7)

11. Read these Notes and BCPA sections 21 and 27 (h)
12. Relationship of Partners to Third Parties (CB 37-44)
13. Read these Notes and BCPA sections 7 and 8

(a) Pre-partnership liability (CB 38)

13. Read the Note and BCPA 19 (1).

(b) Liability as a partner (CB38)

14. Read the Note and BCPA sections 8, 7 (2) and 11, 13, 19

(c) Holding out liability (CB 38-9)

15. Read the Note and BCPA s. 10 and 16

(d) Liability after withdrawal (CB 39-43)

16. It is not necessary to read the judgment in Clarke v. Burton(CB39-43).  You should, however, read the Notes on pages 43-44.  Section 36 of the Ontario Partnerships Act corresponds to BCPA section 39.

(e) Posthumous partner liability (CB44)

17. Read the Note.  BCPA section 16 (3) corresponds to Ontario PA section 15 (2) and BCPA section 39 (3) corresponds to Ontario PA section 36 (3).

DISSOLUTION OF PARTNERSHIPS (CB 44-45)

18. Read the Note.  Section 35 of the Ontario PA corresponds to BCPA section 38; and section 44 corresponds to BCPA section 47.

WHAT IS A LIMITED LIABILITY PARTNERSHIP (CB 45-47)

19. Read the Note.  The relevant provisions are found in Part 6 of the BCPA.

WHEN DOES A LIMITED PARTNERSHIP EXIST? (CB 47)

20. Read the Note.  The BC provisions comparable to those of the Ontario Limited Partnerships Act referred to are contained in Part 3 of the BCPA.  See, in particular, BCPA sections 50 -52.

THE LEGAL NATURE OF A LIMITED PARTNERSHIP  (CB 47-52)

21. Read the decision in Kucor Construction v. Canada Life.

LIMITED PARTNERSHIPS AND THE ISSUE OF CONTROL (CB 52-57)

22. Read the decisions in Haughton Graphic v. Zivotand Nordile Holdings v. Breckenridge.

 

 MANAGEMENT OF THE BUSINESS – THE ARCHITECTURE OF GOVERNANCE

The general scope of the matters considered in this section is briefly described in the Syllabus.

Here is a more detailed guide to assist you to review.

1. General background on corporate constitutions and the division of powers among directors and shareholders

Please read Casebook pages 98-105 and 110 to 126.  These materials are designed to give you a general introduction to the ways in which the constitution of the corporation assigns roles and responsibilities to, respectively, the board of directors and the general body of shareholders.

You should pay particular attention to the judgment in the Canadian Jorex case on CB 103-105.  Although the decision is concerned with a relatively narrow point, it contains some more general discussion about the assumptions made in the law concerning the distribution of power among directors and shareholders.  After you have read this judgment you should read, carefully, section 136 (1) of the BCBCA and consider whether, had the company been incorporated in British Columbia, either the result or the reasoning would be different.  In this connection you should consider the judgment in Northern Minerals Investment Corp. v. Mundoro Capital Inc, 2012 BCSC 1090 http://canlii.ca/t/fs46d

Casebook pages 110-126 contain some useful background information.  You should read it.

Various provisions in the legislation assign specific authority to act to the shareholders, if only on a default basis.  One important provision in this connection is BCBCA section 301, which is concerned with the case of company wishing to sell, lease or otherwise dispose of “all or substantially all of its undertaking.” Please read this provision so that you have a general understanding of its structure.

having a majority voting policy, and publishing the voting results. The Board adopted a revised Majority Voting Policy effective January 1, 2013, pursuant to which, in an uncontested election of directors, if a director does not receive the support of a majority of the votes cast at the annual meeting of Shareholders in his or her favour, that director will tender his or her resignation to the Chair of the Board, to be effective upon acceptance by the Board. The CGC Committee will expeditiously consider the director’s offer to resign and make recommendation to the Board whether to accept it. The Board will make its decision and announce it in a news release within 90 days following the annual meeting, including the reasons for rejecting the resignation, if applicable. A director who tenders a resignation pursuant to this policy will not participate in any meeting of the Board or the CGC Committee at which the resignation is considered. This policy can be found on our website at www.cdnoilsands.com. This policy does not apply in circumstances involving contested director elections having a majority voting policy, and publishing the voting results. The Board adopted a revised Majority Voting Policy effective January 1, 2013, pursuant to which, in an uncontested election of directors, if a director does not receive the support of a majority of the votes cast at the annual meeting of Shareholders in his or her favour, that director will tender his or her resignation to the Chair of the Board, to be effective upon acceptance by the Board. The CGC Committee will expedi tiously consider the director’s offer to resign and make recommendation to the Board whether to accept it. The Board will make its decision and announce it in a news release within 90 days following the annual meeting, including the reasons for rejecting the resignation, if applicable. A director who tenders a resignation pursuant to this policy will not participate in any meeting of the Board or the CGC Committee at which the resignation is considered. This policy can be found on our website at www.cdnoilsands.com. This policy does not apply in circumstances involving contested director elections

2. Re-designing the corporate architecture

Read BCBCA sections 137 and 138 and compare the provisions of CBCA section 146.

3. Directors

(a) What is a director?

 

Section 2 (1) of the CBCA defines “director” to mean a person occupying the position of director by whatever name called and provides that “directors” and “board of directors” includes a single director”.

Section 1 (1) of the BCBCA defines “director” to mean “an individual who is a member of the board of directors of the company as a result of having been elected or appointed to that position”.  There is no statutory definition of the phrase “board of directors”.  Section 138 (1) of the BCBCA, however, attaches certain specified obligations and liabilities to a person who, though not a director (i.e. not having been elected or appointed to that position” performs functions of a director.

(b) Must a company have directors?

Section 120 of the BCBCA provides that “A company must have at least one director and, in the case of a public company, must have at least 3 directors.”  Section 102 (2) of the CBCA contains a similar provision, the requirement for 3 directors being applicable only to a “distributing corporation”.  The terms “public company” and “distributing corporation” are both defined in the relevant statutes.  Broadly speaking, they refer to companies whose securities have been publicly distributed or are publicly traded.

Why must “public” companies have at least 3 directors?

(c) Who may, and who may not, be a director?

(i) Qualifications – residency

CBCA section 105 (3) requires that a certain proportion of the directors must be “resident Canadians” (defined in section 2 (1)).  At one time there was a comparable requirement in British Columbia but it has been dropped. Note also that in certain cases described in CBCA section 105 (3.1) a majority of the directors must be resident Canadians.

What is the justification for these provisions?

(ii) Qualifications – competence

Corporate legislation does not generally prescribe credentials relating to experience or competence that must be satisfied as a condition of eligibility to become a director.

Why do you think this is so?

A company wishing to have its securities publicly traded through the facilities of The Toronto Stock Exchange has to satisfy the Exchange that its management, including board of directors, has adequate experience and technical expertise relevant to the company’s business and industry as well as adequate public company experience.

(iii) Qualifications – independence.

The securities regulators require publicly traded companies to have a certain number of “independent directors”.  The relevant requirements are discussed on CB 307-308.  Please read this material.

What is the justification for these “independence” requirements?

Read “Qualifications: Minimum Requirements” on CB 311.

(iv) Disqualifications

Section 124 (2) of the BCBCA sets out a list of persons who are disqualified from acting as a director. Note, in particular, the provisions of section 124 (2) (d),  Compare it with the provisions of CBCA section 105 (1).

Section 161  (1) of the BC Securities Act [RSBC 1996] CHAPTER 418 permits the commission or its executive director, if this is considered to be in the public interest, to order that a person (i)  resign any position as a director or officer of an issuer or registrant, (iii)  is prohibited from becoming or acting as a registrant or promoter, (iv)  is prohibited from acting in a management or consultative capacity in connection with activities in the securities market.  “Issuer” is defined in section 1 (1) of the Securities Act to mean a person who (a) has a security outstanding, (b) is issuing a security, or (c) proposes to issue a security.  It thus embraces corporations of all kinds, whether or not publicly traded.

The Securities Commission has used its powers under section 161 to force the resignation of individuals as directors even of companies whose securities are not traded in the public markets, but generally only where they have been guilty of some misconduct in connection with the affairs of publicly traded companies.  There is no known case where the Commission has used its power to force a director of a purely private company to resign, absent some connection with the affairs of a publicly traded company.

By way of contrast, the UK Directors Disqualification Act, 1986 does permit disqualification of a director of a purely private company, even absent a public company connection.  The grounds upon which a disqualification order may be made include “that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company”.  There is no comparable provision in any Canadian legislation.  For an interesting account of the history of these provisions see the judgment of Lord Millett in Official Receiver v Wadge Rapps & Hunt [2003] UKHL 49.

Becoming a director – election and appointment

(i) General

Read CB 314-316; BCBCA sections 121 to 122, 130 to 135; and CBCA 106 to 107.

(ii) How are directors elected/appointed?

Read CB 440 to 442 (“Election of directors”).

Directors are elected by shareholders at a meeting.  The statutory provisions governing the calling and holding and conduct of meetings are set out in BCBCA sections 166 to 186 and apply generally to both “private” and publicly traded companies. You should read these and try to get a general sense of their structure.  There are analogous provisions in the CBCA.

In connection with the procedure for shareholders’ meetings generally, you should also read the material appearing on CB 429 to 430 and 438 to 444.  We will cover these matters in class. It is not necessary to read the cases included on CB 430-438; nor, for the moment, is it necessary to read the material on CB 448-452.

In the case of publicly traded companies, certain additional requirements are imposed in connection with the election of directors, generally under the securities laws.  These additional requirements relate among other things to matters of disclosure about nominees for election.  You may find it helpful to look at an example of the kind of disclosure that is required.  See, for example, the “Information Circular” of Absolute Software Corporation. accessible at http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Ccirc.pdf

(iii) Who controls the election process?

In general, it can be said that the process of implementing the procedure for electing directors falls within the authority and responsibility of the board of directors and management of the company.  See, for example, the Absolute Software Corporation Information Circular referred to above.

In recent years a practice has slowly developed in relation to publicly traded companies, of requiring advance notice to be given of any nomination for election as a director that does not emanate from management and the board.  Why?

The lawfulness of this practice was recently considered, and upheld, in Northern Minerals Investment Corp. v. Mundoro Capital Inc, 2012 BCSC 1090http://canlii.ca/t/fs46d, referred to earlier.  Please read the judgment in this connection.

(iv) Access to the process by others than the board and management

Two provisions now commonly found in corporate legislation do create, in principle at least, opportunities for non-management shareholders to gain access to the electoral process.  They are (1) a procedure for “requisitioning” a meeting; and (2) a procedure that allows a “proposal”, which might include the election of a nominee to the board, to be circulated to the shareholders and so placed before them at a meeting.

The statutory framework for the former procedure is set out in BCBCA section 167 (CBCA section 143); and for the latter procedure is set out in BCBCA sections 187-191 and, under the CBCA, section 137.  The CBCA does not contain any provisions dealing with the latter procedure.  You should read these provisions and try to get a general sense of their structure.

Two other recent developments that may be relevant to the extent of an “outside” shareholder’s ability to influence the electoral process are the adoption of so-called “majority voting” and “enhanced quorum” provisions.

(v) Removal of directors

Please read the materials under this heading on CB 444 and, in particular, the provisions of BCBCA section 128 (3) and CBCA sections 109 and 110.

 

Corporate Obligations

In this section of the course we consider several questions:

1. How does a corporation become liable in tort?
2. How does a corporation commit an offence and does the answer to this question depend on whether the offence is, or is not, one requiring a “guilty mind” (mens rea)?
3. How does a corporation incur contractual obligations?

Here is a more detailed guide to assist your preparation.

————————————–

CORPORATE LIABILITY IN TORT AND CRIME

1. In most tort cases corporate liability flows from A fairly straightforward application of vicarious liability for acts of agents and employees.  Does not generally depend on state of mind.
2. But vicarious liability does not apply in the criminal law context.  One person is not criminally liable vicariously for the acts of another – and some crimes require proof of a guilty mind (mens rea) which is irrelevant to vicarious liability.  There are also rare tort cases where vicarious liability cannot be invoked.

The common law test

As the Casebook points out (p. 228} the corporate law problem in criminal cases is whether the guilty mind of some individual within the corporate structure can be attributed to the corporation.

The Rhône v. The Peter A.B. Widener CB 229, though not a criminal law case, contains a good exposition of the traditional common law approach to these matters.  You should read it.

Criminal liability: Mens rea offences

Read Casebook 234 to 239 and note, in particular, the amendments to the Criminal Code reproduced on pages 235-6.  There have been several recent cases decided under these provisions, perhaps the most significant of which is the judgment in R. v. Global Fuels, 2013 QCCS 4262 (CanLII).  The case is on appeal to the Quebec Court of Appeal.  Unfortunately it is currently only available in French.

Criminal liability: Non mens rea offences

Read the decision in R. v. FITZPATRICK’S FUEL CB239

You should also consider, in this connection, the judgment of Lord Hoffman in Meridian Global Funds Management Asia Ltd v Securities Commission,http://www.bailii.org/uk/cases/UKPC/1995/5.html and consider whether it offers a new or different analysis from that used in Fitzpatrick.

CONTRACTS: AGENTS, OUTSIDERS AND CORPORATE LIABILITY (CB 243-277)

Restrictions in the corporate constitution on the creation of contractual obligations (CB 243-253)

Mr. Justice Iacobucci’s judgment in Communities Economic Development Fund v. Canadian Pickles Corp. (CB 244) is concerned with a common law doctrine, ultra vires, that at least in the case of commercial corporations, is now an historical artifact.  You should read the description of that doctrine for background.  For present purposes, the principal value of the judgment is in the material that appears under the heading “Abolition of the Doctrine of Ultra Vires” on CB247-248.

Please note in particular the material on CB pages 250-252 and also read carefully sections 13 (1) and (2), 17 to 19 and 30 to 33 of the BCBCA.

Contracting through corporate agents

Please read the material under the heading “Proving corporate contracts in Canada (CB 254 to 277) and pay particular attention to the material under the heading “Statutory reform” on CB 270 to 277.  Please also read section 146 of the BCBCA.

 SHAREHOLDER MEETINGS AND THE ELECTION AND REMOVAL OF DIRECTORS

What follows is intended to give some context to the mechanics of company meetings. We will deal first with “private” companies; and then with publicly traded companies.  While the core corporate mechanisms involved in each case are substantially similar, in the case of publicly traded companies they have been significantly elaborated through the intervention of provincial securities regulators and the stock exchanges.

“PRIVATE” COMPANY

Some assumed facts

At its last annual general meeting held about six months ago the 8 shareholders of Longwood Industries Inc., a “private” company incorporated under the British Columbia Business Corporations Act, unanimously adopted a resolution fixing the number of directors at 3 and elected 3 individuals, all shareholders, to the board.

The 3 directors have decided that it would be to the company’s advantage to increase the number of directors to 4 and, sooner rather than later, to add John Dewar, who is not a shareholder, to the board. He is qualified to be a director and agrees to become one.  The five non-director shareholders are generally supportive of the board of directors and have indicated that they favour Dewar’s appointment.

The question is: what are the appropriate mechanisms to achieve the desired result.

1. APPOINTMENT BY THE DIRECTORS
2. Since everyone seems supportive of Dewar’s early appointment, the most expeditious way of proceeding would be for the 3 existing directors to appoint him a director.  Section 122 of the BCBCA allows this.   The directors might proceed in one of 3 ways:
3. hold a meeting, either in person or, as permitted by BCBCA section 140 (1) (a), by telephone, at which Dewar is appointed.  The appointment would be recorded in the minutes of the meeting.  There is no legal requirement that alldirectors be present at a meeting of this kind
4. by a resolution consented to in writing by eachof the directors, pursuant to section 140 (3)
5. Suppose, however, that contrary to what has been assumed above, one of the directors, say X, objects to the appointment of Dewar so that:

(i) a consent resolution under section 140 (3) will not work, and

(ii) for practical reasons, (e.g. that the 2 directors who favour Dewar’s appointment are not comfortable imposing their will on X, or because two of the directors are unreachable so that neither an in person nor a telephone meeting is possible).

Since appointment by the directors under section 122 of the BCBCA will not work, the authority shifts to the shareholders, who will have to do two things: (a) increase the number of directors to 4 and (b) elect or appoint Dewar to fill the resulting vacancy.

1. ELECTION/APPOINTMENT BY THE SHAREHOLDERS

Both decisions can be made by ordinary resolution.  This is defined in the BCBCA as a resolution that is either:

(a) passed at an actual meeting of shareholders by a simple majority (i.e. 50% + 1) of the votes cast (that is, actually voted) by shareholders voting shares that carry the right to vote at general meetings, or

(b) if not passed at an actual meeting, passed, after being submitted to all the shareholders holding shares that carry the right to vote at general meetings, by being consented to in writing by shareholders holding shares that carry the right to vote at general meetings who, in the aggregate, hold shares carrying at least a special majority of the votes entitled to be cast on the resolution.  A “special majority” means. Depending on what the articles provide, a majority of at least 2/3 and not more than 3/4 of the votes cast.

If an actual meeting is to be held, there are two possibilities:

(a) wait until the next annual meeting of shareholders;

(b) convene a special meeting of shareholders for the purpose.

1. ANNUAL MEETING

If, as seems likely, it is decided that the matter should be dealt with at the next annual meeting:

(i) this must be held [BCBCA s, 182 (1)] in the calendar year following the year in which the last annual meeting was held, but not later than 15 months after the last annual meeting – so, if the last annual meeting was held on June 30, 2013 the next annual meeting must be held no later than July 31, 2014;

(ii) the directors must prepare and send out a notice of the annual meeting.

Length of notice

The period of notice for an annual meeting of a “private” company is the period, being not less than 10 days, prescribed by the articles and if no period is prescribed, then 21 days.

Content of notice

(i) Standard requirements

The notice must specify the date, time and place (which must, in the absence of contrary provision in the articles, be in British Columbia).

(ii) Additional requirements in certain cases (special business)

The standard form of articles in common use for British Columbia companies includes provisions comparable to the following:

10.9 Notice of Special Business at Meetings of Shareholders

If a meeting of shareholders is to consider special business . . . the notice of meeting must state the general nature of the special business.

11.1 Special Business

At a meeting of shareholders, the following business is special business:

(1) at a meeting of shareholders that is not an annual general meeting, all business is special business except business relating to the conduct of or voting at the meeting;

(2) at an annual general meeting, all business is special business except for the following:

(a)  business relating to the conduct of or voting at the meeting;

(b) consideration of any financial statements of the Company presented to the meeting;

(c)  consideration of any reports of the directors or auditor;

(d)  the setting or changing of the number of directors;

(e)  the election or appointment of directors;

(f)  the appointment of an auditor;

(h) business arising out of a report of the directors not requiring the passing of a special resolution or an exceptional resolution;

(i) any other business which, under these Articles or the Business Corporations Act, may be transacted at a meeting of shareholders without prior notice of the business being given to the shareholders.

Since, under Article 11.1 (2) (d) and (e), neither an increase in the number of directors nor the election of directors is considered “special business” there will be no additional requirements as to the content of the notice of the annual meeting.

If, however, the notice did identify something to be done at the meeting that is “special business” Article 10.9 requires that the notice must state “the general nature” of that business.  The essence of that requirement is that the notice (or some document accompanying the notice) should provide enough information about the special business to enable a shareholder to form an intelligent conclusion as to how he/she will vote on it.  You will find some illustrations of this requirement which would be required by the common law even if there were no Article 10.9.  See the judgment in Garvie v. Axmith, on page 430 of the Casebook.

Any matter that requires a “special resolution” of the shareholders, generally, “out of the ordinary” transactions such as a resolution for the removal of a director, will be “special business”.  The definition of “special resolution” is unnecessarily complicated but the nub of it is that it must be passed by a majority of not less than 2/3 (and, depending on the Articles, not more than 3/4)of the votes cast to be voted in favour.

Assuming, then, that the only matters to be dealt with at the annual meeting fall within the scope of Article 11.1 (2), i.e. there will be no “special business”, the notice of meeting will look something like this:

 

NOTICE OF ANNUAL GENERAL MEETING OF

ABC CORPORATION

NOTICE IS HEREBY GIVEN that the annual general meeting of shareholders of the Company will be held (address, date and time) for the following purposes:

1. to receive the financial statements of the Company for the year ended ——-;

2  to appoint auditors and to authorize the directors to fix their remuneration;

3 . to fix the number of directors of the Company at four (4):

4. to elect directors;

5   to consider such other matters as may properly come before the meeting.

BY ORDER OF THE BOARD OF DIRECTORS

By: ________________________

Secretary

Dated:

———————————————

You will see that the Notice does not identify the people who are to be proposed for election as directors.  It is not required to do so, nor, in contrast to the position in public companies (as to which see below) must this information be provided in any other document sent to shareholders in connection with the meeting.  The shareholders may only learn who the nominees are when, and if, they turn up at the meeting.

(iii) Voting at meetings

Although it is not common, it is certainly possible to create a class of shares that does not have the right to vote at a meeting of shareholders.  Even in that case, however, such shares may have the right to vote in certain extraordinary circumstances.

Where a class of shares does have the right to vote (which would be the case if there is only one class of [“common”] shares), in most cases that right may be exercised in one of two ways [BCBCA s. 173 (1)]:

(a) in person; or

(b) by proxy

Voting in person by show of hands or ballot

To exercise the right to vote “in person”, the shareholder must be present at the meeting.  Assuming that he/she is present, there are two methods for tallying the vote: (i) by “show of hands” and (ii) by a ballot.

In the former case, the shareholders present are asked to raise a hand to indicate their vote, which is then counted.  Effectively, this means that each shareholder voting has one vote only, regardless of the number of votes attached to all the shares owned by that shareholder.

To avoid this, it is common for the articles to permit a “ballot” vote by which each shareholder present is invited to complete a ballot form indicating how he/she is voting on a particular resolution and the number of votes which that shareholder is entitled to cast.  The voting result will then reflect the number of votes, not the number of shareholders.  In the ordinary course of events, absent some unusual circumstances (such as, some matter as to which there is a difference of opinion), there will generally only be a vote by show of hands, though a shareholder generally has the right to demand that a ballot or poll be held.  See BCBCA s. 173 (1).

Voting by proxy

Simply put, voting by proxy is a procedure by which a shareholder appoints another person to vote his/her shares.  More often than not, this procedure is used by shareholders who, for one reason or another, are unable to attend a meeting in person.  Sometimes, it is used by a shareholder who, although able to attend a meeting and intending to be present, wishes to be accompanied by an advisor such as a lawyer.  In that case, for example, a shareholder with 100 votes (shares) might give the lawyer his/her proxy in respect of 1 share, and vote the remaining shares himself/herself.

Proxy voting at common law and under the standard form articles

At common law, a shareholder did not have the right to appoint a proxy.  (The word, “proxy” is, by the way, used both to describe the document by which someone is given the right to vote on one’s behalf and, sometimes, the person  (proxyholder or nominee) who is given that right).  If there is to be a right to vote by proxy, this has to be found in the memorandum or articles of the company.  Under section 173 of the BCBCA a shareholder has the right to vote by proxy unless that memorandum or articles provide otherwise.

In fact, it is commonplace to find a provision permitting proxy voting in the articles of “private” companies.  Article 12.8 of the standard articles is a good example:

Every shareholder of the Company, including a corporation that is a shareholder but not a subsidiary of the Company, entitled to vote at a meeting of shareholders may, by proxy, appoint one or more proxyholders to attend and act at the meeting in the manner, to the extent and with the powers conferred by the proxy.

The articles also commonly specify the (relatively simple) form of proxy.  See, e.g. Article 12.12 of the standard articles which says:

A proxy, whether for a specified meeting or otherwise, must be either in the following form or in any other form approved by the directors or the chair of the meeting:

[name of company] (the “Company”)

The undersigned, being a shareholder of the Company, hereby appoints [name] or, failing that person, [name], as proxyholder for the undersigned to attend, act and vote for and on behalf of the undersigned at the meeting of shareholders of the Company to be held on [month, day, year] and at any adjournment of that meeting.

Number of shares in respect of which this proxy is given (if no number is specified, then this proxy is given in respect of all shares registered in the name of the undersigned):

Signed [month, day, year]

[Signature of shareholder]

[Name of shareholder—printed]

For obvious reasons, the BCBCA requires a ballot vote where proxy voting is permitted.  See BCBCA s. 173 (2) (a).

If proxy voting is provided for it is common, though not required, to include language in the notice of an AGM to the effect that proxy voting is permissible, to provide a form of proxy, and instructions as to how it is to be completed.

1. SPECIAL MEETING

On the facts about Longwood that are assumed, it is highly unlikely as a practical matter that a special meeting of shareholders of a “private” company would ever be convened for the purpose of appointing an additional director, whether on the initiative of the directors or, by means of a requisition, by Dewar or one of his supporters.  This is much more likely (although not commonplace) in the case of a publicly traded company.

1. COURT ORDERED MEETINGS

Under section 186 of the BCBCA if for some reason it is “impracticable” for a company to call or conduct a meeting of shareholders in the prescribed manner, or for any other reason the court considers appropriate, it may, on the application of a director or shareholder, order that a meeting be called, held and conducted in the manner the court considers appropriate, and give appropriate directions to this end.  Although this section is equally applicable to private and publicly traded companies it is rarely used in relation to the latter.  The sort of circumstance in which it might be used in connection with a private company is where there is an internal dispute and a shareholder tries to exert leverage over his adversary by refusing to attend shareholder meetings thus preventing a quorum being reached and thus preventing the meeting from doing anything.

PUBLICLY TRADED COMPANIES

Assume some slightly different facts from those indicated above.

Longwood Industries Inc.:

(a) is not a private company but a publicly traded company, with its common shares (each of which carries one vote) are traded on the Toronto Stock Exchange;

(b) has several thousand shareholders scattered across Canada;

(c) has a board consisting of 5 directors;

(d) held its last AGM in January 2014 (i.e. the next AGM need only be held before the end of April 2015 [see above II.A. (i)];

(e) in March 2014 completes an agreement with “Zillion$ Financing Inc” under which the latter invests about $25 million by the purchase of common shares by way of a “private placement” (i.e. a private transaction).  Effectively, this gives Zillion$ slightly under 4% of the total outstanding shares (and hence votes) of Longwood, making it the largest single shareholder.   Suppose that the agreement entitles Zillion$, upon request, to appoint 2 nominees to Longwood’s board of directors.

(f) Zillion$ has indicated to Longwood that it has no present intention of exercising its right to appoint nominees to Longwood’s board and is content to wait until the next AGM.  It also indicates that it presently contemplates that its 2 nominees will be in addition to the 5 existing directors and not by way of replacement of two of them.

ANNUAL MEETING OF LONGWOOD IN APRIL 2015

The basic procedure

The basic procedure for convening the AGM to be held in April 2015 will be essentially the same as that outlined in II.A above in connection with the AGM of the private company.  Some of the details will, however, differ.

On the basis of the facts assumed, the “appointment by directors” procedure outlined above is not relevant.  We are dealing, then, with the subject of appointment/election by the shareholders.

1. Notice of meeting and information circular

A notice of meeting will have to be sent out, slightly more elaborate but not unlike that outlined above for a private company.  On the next page you will find a recent example:

 

ABSOLUTE SOFTWARE CORPORATION

Suite 1600, Four Bentall Centre

1055 Dunsmuir Street

Vancouver, British Columbia, V7X 1K8

NOTICE OF ANNUAL GENERAL MEETING

TO OUR SHAREHOLDERS:

Our Annual General Meeting (the “Meeting”) will be held at the Metropolitan Hotel Vancouver, 645 Howe St, Vancouver, British Columbia on Wednesday, December 11, 2013 at 4:00 p.m. (local time) for the following purposes:

1.  To receive the report of our directors;
2.  To receive our audited financial statements of the financial year ended June 30, 2013, and the accompanying report of the auditors;
3. To fix the number of persons to be elected to our board of directors;
4.  To elect our directors for the ensuing year;
5.  To appoint our auditor for the ensuing year and to authorize the directors to fix the auditor’s remuneration;
6.  To consider any amendment to or variation of a matter identified in this Notice; and
7.  To transact such other business as may properly come before the Meeting or any adjournment thereof.

Our Information Circular, which includes a detailed description of the matters to be dealt with at the Meeting, along with a copy of our 2013 Annual Report, accompanies this Notice. Our consolidated financial statements for the year ended June 30, 2013 and the report of the auditors thereon are included in the Annual Report.

If you are unable to attend the Meeting in person and wish to ensure that your shares will be voted at the Meeting, you must complete, date and execute the enclosed form of proxy, or another suitable form of proxy, and deliver it by hand or by mail in accordance with the instructions set out in the form of proxy and in the Information Circular. If you are an unregistered shareholder and want

to attend the Meeting, you must follow the instructions set out in the Information Circular to ensure that your shares will be voted at the Meeting.

DATED at Vancouver, British Columbia, November 6, 2013.

BY ORDER OF THE BOARD

“John Livingston”

Chairman and Chief Executive Officer

 

As in the case of the notice of meeting of the private company, Absolute Software’s Notice of Annual Meeting itself gives virtually no information about the various agenda items to be considered at the meeting.

Much of this information is (and must be) contained in the “Information Circular” referred to as accompanying  the Notice of Meeting.  This is an elaborate disclosure document the contents of which are prescribed in a Form published by the various provincial securities commissions.  It does not apply in connection with meetings of “private” companies.

It is too long to include here but if you wish to see Absolute Software’s Information Circular, the following link will take you to it:

http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Ccirc.pdf

If you do look at the Absolute Software Information Circular you will notice that, in contrast to the position in connection with private companies, it identifies each of the proposed nominees for election as a director and provides detailed information about their background and experience and their compensation.  All of this information, and a great deal else besides, is prescribed in the relevant Form and the Policy under which it has been developed.  In addition, you should note that the Form says:

If action is to be taken on any matter to be submitted to the meeting of securityholders other than the approval of annual financial statements, briefly describe the substance of the matter, or related groups of matters, except to the extent described under the foregoing items, in sufficient detail to enable reasonable securityholders to form a reasoned judgment concerning the matter. Without limiting the generality of the foregoing, such matters include alterations of share capital, charter amendments, property acquisitions or dispositions, reverse takeovers, amalgamations, mergers, arrangements or reorganizations and other similar transactions.

You will see that the language used here is a slightly more elaborate (and perhaps more informative) version of what is contemplated by the disclosure required under the standard form articles in respect of “special business”.

2. Voting procedure

As in the case of “private” companies, voting at the meeting both by “show of hands” and by ballot so that proxy votes (calculated by shares not shareholders) are counted  is possible.  The securities regulators require that an opportunity to vote by proxy be given to each shareholder entitled to vote at a meeting of a “public” company.  In practical terms, “show of hands” voting is used, if at all, only on relatively uncontroversial matters.

Proxy voting

In general, only registered shareholders are entitled to vote, i.e. those whose names are entered on the company’s shareholders register.  In the case of publicly traded companies, this gives rise to two problems.  First,  a registered shareholder might be unable to attend the meeting; and second, it is almost invariably the case that there are shareholders in public companies who, for reasons of convenience or otherwise, do not wish to have their shares registered in their own names, but instead to hold them through nominees such as investment dealers or banks.

To deal with these problems there is an elaborate and complex set of rules concerning the process of “soliciting” proxies (i.e. asking shareholders (or, viewed from another perspective, giving them the opportunity) to exercise their right to vote.  This is achieved through the proxy regulation system the rules of which are sometimes found in corporate legislation (see, for example, Part XIII of the CBCA) but more often in published policies of the provincial securities regulators.

There are two major components of this system:

1. every time the management of a public company gives notice of a meeting of shareholders it is deemed to engage in a “solicitation”¹of proxies and must give shareholders:

(a) an information circular (see above) containing certain mandated disclosure.  The information circular must include certain specific information and, in addition, if the shareholders are asked to take action on some specific matter, the substance of that matter must be described “in sufficient detail to permit security holders to form a reasoned judgment concerning the matter” ;

(b) a form of proxy (i.e. the document appointing the proxy nominee) that permits them to specify that their shares shall be voted for or against on every matter to be voted on and, in connection with an election of directors or appointment of auditors, that permits them to vote or be withheld from voting.

2. a complex set of rules designed to enable beneficial shareholders such as those who hold their shares through banks or investment dealers as nominees, the opportunity to have their votes cast.  Simply put, these rules require the nominees to solicit voting instructions from those on whose behalf they act.  If you look at the Absolute Software information circular you will see that it contains detailed information about these procedures.

 

 

On the assumption that the April 2015 Annual Meeting of Longwood Industries Inc. is going to be in all respects routine, conducted in accordance with its agreement with Zillion$.  On that assumption, the form of proxy would look something like this:

 

ANNUAL GENERAL MEETING OF SHAREHOLDERS OF
LONGWOOD INDUSTRIES INC. (the “Company”)
TO BE HELD AT ●, British Columbia, Canada

on ●, April ●, 2015, at 10:00 a.m. (Pacific Time)

The undersigned shareholder (“Registered Shareholder”) of the Company hereby appoints ●, a director and the President and Chief Executive Officer of the Company, or failing him, ●, the Chief Financial Officer and Corporate Secretary of the Company, or, in the place of the foregoing, ______________________________ as proxyholder for and on behalf of the Registered Shareholder with the power of substitution to attend, act and vote for and on behalf of the Registered Shareholder in respect of all matters that may properly come before the Meeting of the Registered Shareholders of the Company and at every adjournment thereof, to the same extent and with the same powers as if the undersigned Registered Shareholder were present at the said Meeting, or any adjournment thereof.

The Registered Shareholder hereby directs the proxyholder to vote the securities of the Company registered in the name of the Registered Shareholder as specified herein.

The undersigned Registered Shareholder hereby revokes any proxy previously given to attend and vote at said Meeting.
SIGN HERE: 

 

Please Print Name:  

 

Date:  

 

Number of Shares Represented by Proxy: 

 

THIS PROXY FORM IS NOT VALID UNLESS IT IS SIGNED AND DATED. SEE IMPORTANT INFORMATION AND INSTRUCTIONS ON REVERSE.

 

Resolutions (For full detail of each item, please see the enclosed Notice of Meeting and Information Circular)

	For	Against	Withhold
3.          To set the number of directors at seven (7)			N/A
4.            To elect as a director, ●		N/A
5.            To elect as a director, ●		N/A
6.            To elect as a director, ●		N/A
7.            To elect as a director, ●		N/A
8.            To elect as a director, ●		N/A
9.            To elect as a director, ●		N/A
1.            To elect as a director, ●		N/A
6.          To appoint ●, Chartered Accountants, as auditor of the Company		N/A

 

INSTRUCTIONS FOR COMPLETION OF PROXY

1. This Proxy is solicited by the Management of the Company.
2. This form of proxy (“Instrument of Proxy”) must be signed by you, the Registered Shareholder, or by your attorney duly authorized by you in writing, or, in the case of a corporation, by a duly authorized officer or representative of the corporation; and if executed by an attorney, officer, or other duly appointed representative, the original or a notarial copy of the instrument so empowering such person, or such other documentation in support as shall be acceptable to the Chairman of the Meeting, must accompany the Instrument of Proxy.
3. If this Instrument of Proxy is not datedin the space provided, authority is hereby given by you, the Registered Shareholder, for the proxyholder to date this proxy the date on which it was mailed to you, the Registered Shareholder, by Olympia Trust Company.
4. A Registered Shareholder who wishes to attendthe Meeting and vote on the resolutions in person, may simply register with the scrutineers at the Meeting before the Meeting begins.
5. A Registered Shareholder who is not able to attendthe Meeting in person but wishes to vote on the resolutions, may do one of the following:

(a) appoint one of the management proxyholders named on this Instrument of Proxy, by leaving the wording appointing a nominee as is (i.e. do not strike out the management proxyholders shown and do not complete the blank space provided for the appointment of an alternate proxyholder).  Where no choice is specified by a Registered Shareholder with respect to a resolution set out herein, a management appointee acting as a proxyholder will vote in favour of each matter identified on this Instrument of Proxy and for the nominees of management for directors and auditor as identified in this Instrument of Proxy; OR (b) appoint another proxyholder, who need not be a Registered Shareholder of the Company, to vote according to the Registered Shareholder’s instructions, by striking out the management proxyholder names shown and inserting the name of the person you wish to represent you at the Meeting in the space provided for an alternate proxyholder. If no choice is specified with respect to the matters to be voted on at the Meeting, the proxyholder has discretionary authority to vote as the proxyholder sees fit.

1. The securities represented by this Instrument of Proxy will be voted or withheld from voting in accordance with the instructions of the Registered Shareholder on any poll of a resolution that may be called for and, if the Registered Shareholder specifies a choice with respect to any matter to be acted upon, the securities will be voted accordingly. Further, the securities will be voted by the appointed proxyholder with respect to any amendments or variations of any of the resolutions set out on the Instrument of Proxy or matters which may properly come before the Meeting as the proxyholder in its sole discretion sees fit.

If a Registered Shareholder has submitted an Instrument of Proxy, the Registered Shareholder may still attend the Meeting and may vote in person. To do so, the Registered Shareholder must record his/her attendance with the scrutineers before the commencement of the Meeting and revoke, in writing, the prior votes by proxy.

To be represented at the Meeting, this Instrument of Proxy must be received by Olympia Trust Company no later than forty eight (48) hours (excluding Saturdays, Sundays and holidays) prior to the time of the Meeting, or adjournment thereof, or may be accepted by the Chairman of the Meeting prior to the commencement of the Meeting. 

1. VOTING METHODS

INTERNET VOTING 24 Hours a Day, 7 days a week:  If a WEB VOTING ID NUMBER appears on the face of this Instrument of Proxy in the address box (see example below), you can complete internet voting athttps://secure.olympiatrust.com/proxy/

Example:

123456       9999       1000      123F45K JOHN DOE 123 MAIN STREET CALGARY AB T1A 1A1

o 123F45K would be your WEB VOTING ID NUMBER

 

RETURN YOUR PROXY BY MAIL, FACSIMILE OR E-MAIL TO Olympia Trust Company:

Olympia Trust Company, Proxy Department, 1003 – 750 West Pender Street, Vancouver, British Columbia V6C 2T8

Facsimile: (604) 484-8638   E-mail:  proxy@olympiatrust.com  I

Do not mail the printed Instrument of Proxy if you have voted via the Internet.

It was noted in the hypothetical facts that Zillion$ owns slightly less than 4% of the outstanding Longwood shares.  To achieve its objectives, therefore, it is likely that it will have to secure the support of other shareholders including, having regard to its investment agreement, the present directors of Longwood.  This will generally be achieved through the proxy system.

[Suppose, however, that some other shareholder has a different view about the desirability of the 5 nominees and has some candidates of its own to put forward.  In that event, it will probably decide to put up its own nominees for election and solicit proxies for those candidates.  To do this, it will need to obtain a copy of a list of shareholders.  Its rights in this respect are governed by section 49 of the BCBCA.  Essentially, that section provides that an application must be made to the company or its transfer agent for a copy of the list.  The application must include an affidavit to the effect that the list will only be used for a permitted purpose.  The permitted purposes include an effort to influence the voting of shareholders of the company at any meeting of shareholders and to acquire or sell securities of the company.]

It is likely that, if Longwood has not previously done so, it will take the opportunity at its 2015 annual meeting to adopt certain changes to its articles affecting the election of directors that are now required under various policies of the Stock Exchange.  These are:

1. Preventing slate voting

Until fairly recently a minority of publicly traded companies used to employ a voting system – “slate voting” which only allowed shareholders to vote for all of the directors nominated by management (i.e. a slate of directors), but not for individual directors.  This effectively prevented shareholders from voting against individual directors for performance reasons such as poor board attendance. The only option in such case was to vote against the whole board, or to conduct a costly proxy fight.  Slate voting is no longer permitted.  As is apparent from Longwood’s form of proxy, it provides for individual and not slate voting

2. Plurality and majority voting

Under the “for-withhold” plurality voting system for directors contemplated by the Longwood form of proxy it is possible for someone to be elected without receiving a majority of the votes.  So: assume 7 candidates for election and 100 possible votes, cast as follows:

 

 

	For	Withhold
A	60	40
B	55	30
C	51	40
D	40	43
E	36	45
F	25	35
G.	20	30

Despite the facts that each of D, E, F and G received less than a majority of the possible votes and that more shareholders withheld voting for them than voted in their favour, each of them will be elected.

Under a Policy recently adopted by the Toronto Stock Exchange, however, any nominee for director who receives a greater number of votes ‘withheld’ from him than ‘for’ his or her election, would be required to tender his or her resignation as a director and the remaining directors would have to consider whether – as is likely to be the case – those resignations should be accepted.

The remaining board members would, absent unusual circumstances, generally accept such resignation.

Most publicly traded companies are also subject to a requirement that they publish the results of voting at a shareholders’ meeting.

3. 3. Advance notice policy

It is becoming increasingly common for publicly traded companies to adopt what is referred to as an “advance notice” policy under which anyone (effectively anyone who is not part of management) proposing to nominate a director for election at a meeting of shareholders must provide the company with advance notice (typically between 30-65 days) of, and prescribed details concerning, any such proposed nominee.  Unless proper notice is given to the company any such proposed nominee is ineligible for election at the shareholders meeting.  The policy is intended to the risk of ambush proxy contests.

4. An “enhanced quorum” policy

A “quorum” is the minimum number of participants who must be present at a meeting in order to permit it to proceed to do the business for which it has been called.  This number is commonly found in the Articles of a company and may be measured either by reference to shareholders present in person or by a combination of shareholders present in person and shareholders represented by proxy.  Article 11.3 of the “model” articles, for example, says that subject to certain qualifications, the quorum for the transaction of business at a meeting of shareholders is two persons who are, or who represent by proxy, shareholders who, in the aggregate, hold at least 5% of the issued shares entitled to be voted at the meeting.  Section 172 of the Business Corporations Act contains a “default” provision if the company’s articles are silent on the point.

A number of public traded companies have recently adopted an “enhanced quorum” provision.  Essentially, this provides that at any meeting at which a shareholder will be seeking to replace half or more of the board of directors a minimum of two shareholders holding at least a majority of the issued and outstanding common shares must be present or represented by proxy before the meeting can be held and business validly transacted.

The matters identified above are all “special business” within the meaning of Articles 10.9 and 11.1 of Longwoods Articles and of the requirements for disclosure in its Information Circular.  The relevant provisions have been quoted earlier.

—————-

A SLIGHT CHANGE IN THE ASSUMED FACTS ABOUT LONGWOOD AND ZILLION$ -REQUISITIONING A SPECIAL MEETING IN AUGUST 2014

Suppose that within a short time after Zillion$ completes its investment in Longwood it starts becoming progressively more disenchanted with the policies and competence of the Longwood directors to the point that it considers that it cannot afford to wait until the April 2015 AGM to reconstitute the Longwood board.

Up for consideration by Zillion$ is to requisition a meeting of Longwood shareholders to

(a) increase the number of directors to 7 and elect two Zillion$ nominees to fill the vacancies; or

(b) remove two existing directors and replace them with 2 Zillion$ nominees; or

(c) remove all 5 existing directors and replace them with 5 Zillion$ nominees

The procedure for requisitioning a meeting of Longwood shareholders is set out in section 167 of the British Columbia Business Corporations Act.

In summary, a requisition must be:

1. for the purpose of transacting any business that may be transacted at a general meeting – the removal and election of directors both qualify;
2. served on Longwood and signed by shareholders who, at the date on which it is received by the company, hold in the aggregate at least 1/20 of the issued shares.   Since Zillion$ only holds 4% of the shares, it will have to find other shareholders to join it;
3. state in 1,000 words or less, the business to be transacted at the meeting, including (the text of) any special resolution to be voted on.

Note that the removal of a director can only be effected if a special resolution to this effect is passed by the shareholders.  If a requisition meeting these requirements is received the directorsmust call a general meeting for the purpose set out in the requisition, to be held not more than 4 months after the date on which it is received.  They are relieved of this obligation, however, if:

(a)  they have already called a general meeting to be held after the receipt of the requisition and have sent out notice of that meeting;

(b) substantially the same business was submitted to shareholders to be transacted at a general meeting that was held within the preceding 5 years and was only supported by a certain threshold number of votes which varies according to the number of times it has been submitted;

(c) it clearly appears that the business stated in the requisition does not relate in a significant way to the business or affairs of the company or that the primary purpose for the requisition is securing publicity, or enforcing a personal claim or redressing a personal grievance against the company or any of its directors, officers or security holders,

(d) the business stated in the requisition has already been substantially implemented or, if implemented, would cause the company to commit an offence, or

(e) the requisition deals with matters beyond the company’s power to implement.

None of the actions contemplated by Zillion$ seems to fall within any of the grounds for rejection specified.  It seems, then, that the Longwood directors will have to respond to the requisition by calling a meeting to be held within 4 months.

If they do not do so within 21 days, then Zillion$ (and its friends) will be able to call a meeting to be held within the prescribed 4 months.  The notice and proxy requirements described generally above if the meeting were to be called by the directors,  will apply to Zillion$ and its friends (because, almost by definition, they are engaged in a “solicitation”) and, unless at the requisitioned meeting the shareholders, by an ordinary resolution, decide otherwise, the requisitionists will be entitled to be reimbursed for their expenses.

Assuming that Longwood has adopted the “enhanced quorum” provision referred to above, it may be difficult for Zillion$ to achieve its objectives without a vigorous proxy battle to ensure that the enhanced quorum is satisfied.

 

SHAREHOLDER PROPOSALS

It is possible, though as a practical matter unlikely, that Zillion$ might seek to achieve its objectives by means of a so-called “shareholder proposal”.  Essentially, this involves a non-management shareholder or shareholders taking steps to try and get the actions that they wish to have taken, included in management’s notice of meeting and proxy materials.  Shareholder proposals are more likely to be used to raise structural issues, such as the reconstitution of the board of directors, than issues that are not essentially structural but relate to the opportunities to scrutinize management in ways that are not readily amenable to the requisition procedure.

Examples might be to persuade a reluctant board of directors to adopt the sort of changes that have now been mandated by the Stock Exchange, relating to slate and majority voting, etc.  In fact, what has happened is that the original initiative for the adoption of mechanisms of this kind came in the form of shareholder proposals, not binding on the directors, but attracting a level of support that made it increasingly difficult to resist these ideas.  Eventually, the pressure from “activist” shareholders caused the exchange to act.

An example of a shareholder proposal that is becoming increasingly common is the so-called “say on pay” proposition.  Essentially, this involves giving shareholders the opportunity to vote on an advisory resolution on executive compensation. Among the items identified in the Notice of the 2009 Annual Meeting of National Bank of Canada was. “to examine the shareholder proposals, as set out in Schedule A to the Management Proxy Circular”.  That Schedule advised that the Bank had received a proper proposal “that the board of directors adopt a governance rule stipulating that a shareholder advisory vote be held on the compensation policy for their executive officers; set out the proposer’s rationale for its proposal and the Bank’s response which was, in essence, to oppose adoption of the proposal.  Despite this, the shareholders supported the proposal with 56.85% of the votes being cast in favour of it and 43.15% voting against.  The board of National Bank has since changed somewhat its approach to the subject of “say on pay” but the matter continues to arise as a topic at annual meetings.  See, for example, the Bank’s 2014 Notice of Annual Meeting and Information Circular, at http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00002236&fileName=/csfsprod/data149/filings/02172923/00000001/g%3A%5CSEDAR%5CNational-Bank%5CNBC%5C2014%5CAGM%5CCircular-Eng.pdf

The provisions governing shareholder proposals are found in sections 187 to 191 of the BC Business Corporations Act.  Nothing is to be gained from a detailed examination of those provisions here.

¹  There is an elaborate definition of  “solicit” and solicitation.  The essence of a solicitation is that it involves a request to a shareholder to execute and deliver a form of proxy.

 

APPENDIX 1: Some tips on writing the Business Organization Examination

The goal in constructing the examination

The principal objective in constructing the questions on the examination has been to give you an opportunity to demonstrate your understanding of relevant principles and their application and, in some instances, your knowledge of the existence and requirements of relevant statutory provisions.

To do this you will in the main question be provided with a set of facts, to some extent hypothetical but, we hope, plausible, that we think will enable you to demonstrate not only your knowledge of relevant principles or provisions but also your understanding of the ways in which those principles or provisions might apply and the limits of their possible application. It may be – indeed it is highly likely – that you will have to consider the possible applications of some principle with which you are (or should be) familiar, to novel or unfamiliar circumstances. You should not be surprised or dismayed by this. That is what lawyers frequently have to do.

How to approach the examination

The first and most important step is to take a deep breath, slow your heart-rate and carefully read the entire examination paper from beginning to end, including the instructions at the head of the paper and any that are contained in the body of the questions so that you have a clear idea of exactly what is being asked of you. Do not write anything yet.

There are several reasons for suggesting this. To put the point simply, it doesn’t help you (or us) if you give a three paragraph answer to a question if the instructions call for a “point form” response. Aside from providing something not asked for, you will have wasted your valuable time.

If the instructions to a question clearly indicate this, an “on the one hand. . .on the other hand…“ discussion without any conclusion, may be appropriate. If this is not clearly indicated, however, the discussion should end with a conclusion.

The second step is to calculate the percentage that the number of marks allocated to each question bears to the total number of marks and apply that percentage to the total time available. That will give you a rough guide to the amount of time you should devote to answering each question.

Organizing your answer

You should now give some careful thought to the best way of organizing your answers. This means that you should re-read the questions, slowly, and as you do so make notes about the important elements of both fact and legal analysis, that you need to include. Make sure that you have one way or another taken account of all of the facts provided to you. If you think that some of them are irrelevant, don’t forget to say this and explain why you think this. Your answer should contain both elements – facts and legal analysis.

A brief digression on the difference between answers to law school examinations and legal opinions in practice

It is common (and generally good practice) for lawyers asked for formal legal opinions on matters of substantive law to begin their responses in roughly as follows: “You have asked for my opinion on the following question: ●. For the reasons set out below, in my opinion the answer to the question is: “●“

This is not a good idea in answering an examination question. The reason is that there will rarely be a single, inevitable, right answer to a question on an examination because the whole point of the exercise is to give you an opportunity to demonstrate your analytical skills. So you may start with a clear idea as to what the ‘right` answer is and then find, as you go along, that you change your mind. This would be a waste of valuable time. The lawyer`s opinion, in contrast, is his considered conclusion after thought and reflection.

There will not be any “trick” questions. That does not mean, however, that there will not be subtleties in the way in which facts are described or questions asked. They are intended to provide those of you who can identify them, a chance to shine.

Statutory and case references

If some statutory provision is relevant to an answer, you should refer to that provision explicitly. It is difficult to imagine how you could avoid doing this. The position is slightly different in respect to relevant judicial decisions. It is generally a good idea to refer to such decisions by name (citations are irrelevant) if you can but there is no particular virtue in decorating your answers with case names. It is much more important that your answer indicates that you are aware of the existence of a relevant decision or, to put it differently, that you have not ignored it. How you choose to do this is entirely up to you.