(Part 3). Talk 12. LAW 459 003. BUSINESS ORGANIZATIONS. Allard School of Law, UBC. Fall, 2016. Jon . Festinger Q.C. .. Festinger Law & Strategy . http://bizorg.allard.ubc.ca. @. jonfestinger. firstname.lastname@example.org. ID: 576529
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Corporate Personhood - Some Specific Issues & Problems (Part 3)
Talk 12LAW 459 003BUSINESS ORGANIZATIONSAllard School of Law, UBCFall, 2016Jon Festinger Q.C.Festinger Law & Strategy http://bizorg.allard.ubc.ca@email@example.comSlide2
Lecture Capture MondaysSlide4
Corporate Personhood – Some Specific Issues & Problems Part 3Slide5
5+5 is now 3+3Slide7
Now Back to Our Regularly Scheduled Programming…Slide8Slide9
Issue is accountability for driving someone else’s car ?Slide10
The Problem Of Piercing the VeilSlide11
Piercing the Veil #1
“…where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct…”Sharpe J. in Transamerica Life v. Canada Life (1996) The “evasion principle” per Lord Sumption in Prest v. Petrodel (2013)Slide12
Or is it this kind of veil ???
Veiled Rebecca – Giovanni BenzoniSlide13
Piercing (???) the Veil #2
Lord Denning in DHN Food Distributors Ltd. v Tower Hamlets London Borough Council“Reverse Piercing” (1976 Eng. CA) Treated as one group/economic entity since “These subsidiaries are bound hand and foot to the parent company and must do what the parent company says”But where was the “conduct akin to fraud”? How was this “a mere facade concealing the true facts”?Slide14
Most of the cases though are…
Within the “banal” concealment principle per Lord Sumption in Prest v. Petrodel (2013) “Tracking” not “Piercing”?Slide15
Back to:369413 Alberta Ltd v. Pocklington (2000) 194 D.L.R. (4th) 109 (Alta. C.A.)Slide16
Nothing to do with #99 (directly)
a significant Canadian meat
acute financial distress,
Gainers breached an agreement it
not to sell or dispose of its assets
without the prior written consent of the Province of Alberta
Gainers and was Gainer’s
The Province sued
had “induced” the breach by
signing a director’s resolution
transferring certain shares
in another company owned by Gainers (
valued in the millions
to another of his own companies,
Holdings Ltd., for $100.
awarded the Province $4.7 million
in damages as against
Think about the distinctions…
in any event
liable as Director
if outside the narrow exemption of the principle in
Said v. Butt
acting bona fide within the scope of his authority procures or causes the breach of a
contract)? Note that
indicates liability is possible even if acting bona fides.
always could be
for inducing breach of contract by Gainers.
Which fits best?Slide18
None of the methods on the previous slide are really piercing the corporate veil.Seems that “inducing breach of contact” is a favorite method of achieving a similar result as to liability without piercing.The paucity of actual “piercing” cases and the lack of clarity around the doctrine makes alternative methods arguably more attractive.Slide19
Elements of Inducing Breach of Contract
J.A. set out
In order to find that a defendant
intentionally induced a breach of contract
, seven elements must be established:
) the existence of a
ii) knowledge or
awareness by the defendant of the contract
breach of the contract
by a contracting party;
defendant induced the breach
, by his conduct,
intended to cause the breach
vi) the defendant acted
plaintiff suffered damages
“Justification” is possible (just not this time)…
In some situations, a defendant’s plea of justification may avoid
defence of justification is
available when the defendant caused the breach while acting under a duty imposed by
to the corporation; they are obliged both at common law and under Statute
to act in the best interests of the
when the interests of the company are best served by breaking its contractual commitments, the director’s act of inducement is justified because it is “taken as a duty”
has not demonstrated any legitimate business interest of Gainers that could have been served
by the 350151 share transfer…
By transferring the 350151 shares to his own company,
was not discharging his legal duty to act honestly and in good faith with a view to the best interests of Gainers; he was acting solely in his own interests. As no legitimate interest of Gainers could possibly be served by the transaction, the court need not go on to consider whether
act was aimed at depriving Alberta of the benefits of its contract.
position as director cannot provide justification for his actions
Alternate Reading (just for fun)…
has not demonstrated any
that could have been served by the
was not discharging
to act honestly and in good faith with a view to the best interests of
he was acting solely in his own interests. As no legitimate interest of
could possibly be served by the transaction, the court need not go on to consider whether
act was aimed at depriving
of the benefits of
cannot provide justification for his
Adga Systems International Inc. v. Valcom Ltd. (1999) 43 O.R. (3d) 101 (Ont. C.A.)
sued their competitor
Ltd., as well as
two senior employees
had raided its employees
damages for inducing breach of contract and inducing breach of fiduciary duty
Ontario Div. Ct.
dismissed the claim against
personal defendants holding
were not furthering their own interests and were
interests of their employer
no cause of action
appealed to the Ontario Court of Appeal.Slide26
Carthy J.A., Ont. C.A…
whether, on the assumption that the defendant
committed a tort
against the appellant,
the sole director and employees of
can be accountable for the same tort as a consequence of their personal involvement
directed to the perceived best interests of the corporation…
where, as her
, the plaintiff relies upon establishing an independent cause of action against the principals of the company,
the corporate veil is not threatened and the
principle remains intact
Do you agree?
is my conclusion that there
was no principled basis for protecting the director and employees of
from liability for their alleged conduct
on the basis that such conduct was in pursuance of the interests of the corporation
. It may be that for policy reasons the law as to the allocation of responsibility for tortious conduct should be adjusted to provide some protection to employees, officers or directors in the limited circumstances where, for instance, they are acting in the best interests of the corporation
with parties who have voluntarily chosen to accept the ambit of risk of a limited liability
The issue is liability to a third (external) party, not liability internally to the company or its shareholders…Slide29
Confirmed by SCC in London Drugs v. Kuehne & Nagel  3 S.C.R. 299
company negligently permitted a
that had been delivered by the plaintiff
to topple over
, causing extensive damage. T
was a contractual relationship between the company and the
the majority held in favour of the claim against the employee.
is no general rule in Canada to the effect that an employee acting in the course of his or her employment and performing the “very essence” of his or her employer’s contractual obligations with a customer does not owe a duty of care,
whether one labels it “independent” or otherwise
, to the employer’s customer. . . .
…The mere fact that the employee is performing the “very essence” of a contract between the plaintiff and his or her employer does not, in itself, necessarily preclude a conclusion that a duty of care was present.”Slide30
Before you feel too bad…
Practical issue was whether employees could take advantage of agreement between the parties that included a $40 limitation of liability (where the transformer was valued at $32,000). SCC upheld the applicability of the limitation, while allowing for the the possibility of liability even in the bona fides course of duty…Slide31
Air Canada v. M & L Travel Ltd.  3 S.C.R. 787
M&L Travel Ltd., the directors of which were
. Martin and Valliant,
was a travel agency.
had an agreement with Air Canada
under which M&L Travel Ltd. was
to hold proceeds of ticket sales in trust for Air Canada
&L Travel Ltd
did not hold the proceeds in trust
them for general operating
expenses as M&L found itself in financial difficulties.
the travel agency,
both directors personally
for the money owed to it for ticket sales.Slide32
A trusts case, not a directors liability case
breach of trust by the travel agency
was dishonest and fraudulent from an equitable standpoint.
&L Travel Ltd. knew that the Air Canada monies were held in trust, and were not for the general use of the travel agency.
placing the trust monies in the general account that was then subject to seizure by the Bank, the travel agency took a risk to the prejudice of the rights of the beneficiary, Air Canada. It had no right to take this risk.
directors had clearly
participated or assisted in the breach of
in the way they had at various times dealt
with the funds in
and a constructive trust was imposed
on them by the court.
for this “knowing assistance” type of liability is actual
recklessness or wilful
Transamerica Life Insurance Co. v. Canada Life Assurance Co. (1996), 28 O.R. (3d) 423
The defendant Canada Life Mortgage Services Ltd.
(“CLMS”) was a wholly owned subsidiary of the defendant
Canada Life Assurance
was incorporated by
had its own head office and branch offices distinct from those of the
CLMS was managed
and operated independently of
A number of the mortgage loans made by the plaintiff Transamerica Life Insurance Company of Canada that had been arranged by CLMS fell into
The terms of the Master Agreement that governed the relationship of the plaintiff Transamerica Life and CLMS did not specifically provide that CLMS was to perform any underwriting function on Transamerica Life’s behalf,
and CLMS took the position that the agreement excluded this duty
Transamerica Life sued
for damages for breach of contract, breach of fiduciary duty, fraud, misrepresentation and negligence.
sued CLMS’ parent CLAC,
asserting that it was liable for the wrongs of CLMS
moved for summary judgment dismissing the action against it.
parent company, CLAC, was dismissed
Transamerica cited Kosmopolous(insurable interest reverse piercing case)
The company is at law a different person altogether from the subscribers to the memorandum
; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them
. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act
“There seem to be
three circumstances only in which the courts can [pierce the veil]
. These are:
When the court is construing a
or other document;
When the court is satisfied that a
company is a “mere facade” concealing the true
When it can be established that the
company is an authorized agent of its controllers
or its members, corporate or human.”Slide37
Sharpe J.’s conclusion…
courts will disregard the separate legal personality of a corporate entity
where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct
. The first element,
, requires more than ownership. It must be shown that there is complete domination and that the subsidiary company does not, in fact, function independently…. The second element relates to the nature of the conduct: is there “
conduct akin to fraud that would otherwise unjustly deprive claimants of their rights
Speaking of “akin to fraud”…another (but related) topic…
Particular Problem Of
What is Thin Capitalization?
no minimum capitalization requirement
in Canada. Often new corporations are created with one share valued at only $1
refers to the situation where a corporation is established with high debt to equity ratio
is whether thin capitalization, per se, should be a ground for lifting the corporate veil?
Is it legitimate evidence where owners seek the benefit of limited liability without paying for it with adequate capital investment?Slide40
U.S. case of Walkovszky v. Carlton 18 N.Y. 2d 414 (Ct. App. 1966)
was hit by a taxicab
owned by the
Cab Corporation and sued.
was a stockholder of ten corporations
each of which had two cabs registered to its name and only minimal
(a common industry
practice at the
claimed that although seemingly independent, the companies in fact operated as a single entity
with regard to financing, supplies, repairs, employees and garaging and all of the companies
named as defendants.
argued that he was entitled to hold the stockholders
for the damages sought because the multiple corporate structures constituted an unlawful attempt to defraud
who might be injured by the cabs
succeeded in his motion
that if the insurance coverage required by statute was inadequate for the protection of the public,
the remedy was not with the courts but with the Legislature
corporation is not illicit or fraudulent because it consists of other corporations
…From their inception these corporations were intentionally undercapitalized
for the purpose of avoiding responsibility for acts which were bound to arise as a result of the operation of a large taxi fleet…
Keating J. believed the
policy of the law ought to be that shareholders should, in good faith, have enough capital in the business to secure the corporation
. Otherwise grounds exist for denying the privilege associated with being a separate entity.Slide42
Keating J. also observed…
equitable owners of a corporation are personally liable when they treat the company’s assets as their own
and add or withdraw capital at will,
or when they provide inadequate capital and actively participate in the corporation’s affairs
sacrifice of limited liability happens
when public policy
must be defended or upheld
. Fraud is part of this exception.
Obvious inadequacy of capital is also considered to be a reason to deny the defense of limited liability
income is not sufficient to cover unexpected liabilities or extraordinary bad times, obviously the shareholders will not be held liable
However they will be when the corporation was designed solely to abuse the corporate privilege at the expense of public interest
How much capitalization
would be enough
? What is the test? What happens when circumstances change?
Should this “solution” be in the statute to be implemented fairly & consistently?Slide44
Thinking about corporate purposes & Dodge v. Ford Motor Co. (1919)Slide46
Purpose of companies is to do businessPurpose of business is to make $Equals mythology of increasing shareholder value Necessarily true of the Sports business?Slide47
Statute does not help much…
Corporate purpose not requiredCapacity & powers (S. 30 CBCA) includes the rights, powers and privileges of an individuals of full capacity. Is not altruism such a right, power or privilegeDuties of directors and officers (S. 142 CBCA) mention sonly the “best interests of the company” (lower case)Slide49
What about the “Oppression” remedy?
Is the “best interests of the corporation” the “best interests of the shareholders”?Slide50
Is this simply….
A communications issue?
Aligning information and expectations is what
A contractual issue?
he underpinnings of corporate law are, as we have learned,
. So why shouldn’t private companies do whatever they want or don’t want to do.
Not an issue?
The origins of the corporate form were usually more about group effort, often for the
good of a community
, than about profit.Slide51
Dodge v. Ford & An Anthropology of Corporate PurposeUnit 5: Corporate ObligationsSlide52
Am I an LLC (Limited Liability Cat)?