Consider whether a corporation can be a “Shadow Director” of another corporation.
From our notes we know that a “de facto” or “shadow director” is “a person in accordance with whose directions or instructions the directors of the company are accustomed to act”. A “shadow director” can be distinguished form a “de facto director” because they claim not to be directors and seek to hide behind those who are.
In theory, it seems possible that a “shadow director” could be another corporation. I could especially see this scenario playing out between a parent company and its subsidiary. In unit 4 we learned briefly about the relationship of a parent company and its subsidiary, and the idea of an “agency” relationship between corporations. Can the parent be held liable for the actions of its subsidiary?
I guess I’m trying to draw an analogy between a situation where one corporation is really just acting as an agent for another, and this situation where one corporation is hiding as a “shadow director” of another. In both situations you have the company that’s truly in control and making the important decisions, attempting to shield themselves from liability through a secondary “buffer” company. Is there anything wrong with that? Legally, maybe not.
A court finding that one company is actually the “shadow director” of another company wouldn’t be directly piercing the corporate veil, but rather going around it, or lifting it up to take a peak and see who the real actors are. It could be an example of courts using the “concealment principle” from Prest v Petrodel. However section 105(1) of the CBCA states that “a person who is not an individual is disqualified” from being a director. I’m not sure how the courts could get around this to hold the hypothetical parent company, acting as a de facto/shadow director of its subsidiary, liable for the actions of a subsidiary….
Great post Cait! While reading it I couldn’t help but analogize it to the political world and the fears of many that a certain VP elect will actually control the decisions made by a certain President elect. Something that is also interesting about “shadow directors” is that sometimes they don’t realize they are acting as such, which means that liability could sneak up on them. Like yourself, I am also intrigued about the CBCA s 105(1) limitation that a corporation cannot act as director and how that would play out with the readings that support a shadow director being in fact a corporation.
Great post and comments! 🙂 In terms of liability sneaking up on a corporation as a shadow director, I think that is likely something that corporations may think about and try to prevent. I wonder if there is some way that a parent company, when advising or giving input on the decision-making of a subsidiary’s directors, can have a disclaimer or something like that in writing that they are merely just giving advice, not direction or instruction. Like at every meeting/decision? I’m not sure. I’m just trying to think of some way that they could avoid liability sneaking up on them if they do not want to act as a shadow director.
Very insightful post and interesting discussion! I definitely see the theoretical rationale for how a parent company could be seen as a shadow director of its subsidiary through the agency doctrine. I like the idea of providing the court with another avenue for finding the parent company liable for creating a sham subsidiary simply to further pursue its own interests and avoid liability. As you rightly point out though, Cait, there is this problem of s. 105(1) of the CBCA requiring that a director be an individual. This might be a total stretch, but could it be possible for the court to argue that a corporation is an individual once incorporated? After all, a corporation is provided separate legal personhood. However, this argument would likely fail because although a corporate is considered a legal person, this can be distinguished from the legal understanding of an individual. While this argument might be weak, the court could try to further argue that since shadow directors are effectively claiming they aren’t directors at all, s. 105(1) would be inapplicable because shadow directors exist under a different category.