Corporate Personhood - Some Specific Issues & Problems - PowerPoint Presentation

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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@jonfestingerjon@fblawstrategy.comSlide2

Hello LAW

459 003BUSINESS ORGANIZATIONSSlide3

Lecture Capture MondaysSlide4

Today

Corporate Personhood – Some Specific Issues & Problems Part 3Slide5

But 1st

Assignments Please…Slide6

And remember…Posting

5+5 is now 3+3Slide7

Now Back to Our Regularly Scheduled Programming…Slide8
Slide9

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)

Gainers was a significant Canadian meat-packing company. In acute financial distress, Gainers breached an agreement it had not to sell or dispose of its assets without the prior written consent of the Province of Alberta. Peter Pocklington owned Pocklington Foods Inc. which held shares in Gainers and was Gainer’s sole director.The Province sued Pocklington alleging that Pocklington 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, Pocklington Holdings Ltd., for $100. The Court awarded the Province $4.7 million in damages as against Pocklington.Slide17

Think about the distinctions…

Gainers liable for breach in any event.Provable through Pocklington’s actions as agent or Director?Is Pocklington liable as Director if outside the narrow exemption of the principle in Said v. Butt (servant acting bona fide within the scope of his authority procures or causes the breach of a contract)? Note that Agda indicates liability is possible even if acting bona fides.Pocklington always could be liable personally for inducing breach of contract by Gainers.Which fits best?Slide18

THREE NOTES…

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

Fruman J.A. set out them out:In order to find that a defendant intentionally induced a breach of contract, seven elements must be established:i) the existence of a contract;ii) knowledge or awareness by the defendant of the contract;iii) a breach of the contract by a contracting party;iv) the defendant induced the breach;v)  the defendant, by his conduct, intended to cause the breach;vi)  the defendant acted without justification; andvii) the plaintiff suffered damages…Slide20

“Justification” is possible (just not this time)

…“In some situations, a defendant’s plea of justification may avoid liability…The defence of justification is available when the defendant caused the breach while acting under a duty imposed by law…Directors of companies owe duties to the corporation; they are obliged both at common law and under Statute to act in the best interests of the company…Therefore, 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”… Slide21

The decision…

Pocklington 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, Pocklington 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 Pocklington’s act was aimed at depriving Alberta of the benefits of its contract. Pocklington’s position as director cannot provide justification for his actions.”Slide22

Alternate Reading (just for fun)…

Pocklington has not demonstrated any legitimate… interest of the Oilers that could have been served by the Gretzky… transfer…By transferring Gretzky…Pocklington was not discharging his ownership duty to act honestly and in good faith with a view to the best interests of the Oilers; he was acting solely in his own interests. As no legitimate interest of the Oilers could possibly be served by the transaction, the court need not go on to consider whether Pocklington’s act was aimed at depriving the fans of the benefits of the Gretzky contract. Pocklington’s

position as

owner

cannot provide justification for his

actions

..Slide23

Postscript…Slide24
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Adga Systems International Inc. v. Valcom Ltd. 

(1999) 43 O.R. (3d) 101 (Ont. C.A.) Adga sued their competitor Valcom Ltd., as well as Valcom’s sole director in his personal capacity and two senior employees of Valcom in their personal capacity. Adga alleged that Valcom had raided its employees and caused Adga economic damage. Adga sought damages for inducing breach of contract and inducing breach of fiduciary duty. Ontario Div. Ct. dismissed the claim against the personal defendants holding that since they were not furthering their own interests and were

pursuing the

interests of their employer

,

no cause of action

was

revealed.

Plaintiff

Adga

appealed to the Ontario Court of Appeal.Slide26

Carthy J.A., Ont. C.A…

“The issue…is whether, on the assumption that the defendant Valcom committed a tort against the appellant, the sole director and employees of Valcom can be accountable for the same tort as a consequence of their personal involvement directed to the perceived best interests of the corporation…However, where, as here, the plaintiff relies upon establishing an independent cause of action against the principals of the company, the corporate veil is not threatened and the Salomon principle remains intact…”Slide27

Do you agree?“It

is my conclusion that there was no principled basis for protecting the director and employees of Valcom 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 company...”Slide28

Remember…

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 [1992] 3 S.C.R. 299

An employee of a warehouse company negligently permitted a transformer that had been delivered by the plaintiff to topple over, causing extensive damage. There was a contractual relationship between the company and the customer. Nevertheless the majority held in favour of the claim against the employee.Iacobucci J.: “There 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.  [

1993] 3 S.C.R. 787 M&L Travel Ltd., the directors of which were Mssrs. Martin and Valliant, was a travel agency.  It had an agreement with Air Canada under which M&L Travel Ltd. was to hold proceeds of ticket sales in trust for Air Canada.  M&L Travel Ltd. did not hold the proceeds in trust but used them for general operating expenses as M&L found itself in financial difficulties.Air Canada sued the travel agency, and both directors personally for the money owed to it for ticket sales.Slide32

A trusts case, not a directors liability case

The breach of trust by the travel agency was dishonest and fraudulent from an equitable standpoint.  M&L Travel Ltd. knew that the Air Canada monies were held in trust, and were not for the general use of the travel agency.  By 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.The appellant directors had clearly participated or assisted in the breach of trust in the way they had at various times dealt with the funds in question and a constructive trust was imposed on them by the court.Requirement for this “knowing assistance” type of liability is actual knowledge, recklessness or wilful blindness.  Slide33

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 Company (“CLAC”). CLMS was incorporated by CLAC to be general financial agent. CLMS had its own head office and branch offices distinct from those of the CLAC.CLMS was managed and operated independently of CLAC.A number of the mortgage loans made by the plaintiff Transamerica Life Insurance Company of Canada that had been arranged by CLMS fell into default. Slide34

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

CLMS (subsidiary) for damages for breach of contract, breach of fiduciary duty, fraud, misrepresentation and negligence. Transamerica Life also sued CLMS’ parent CLAC, asserting that it was liable for the wrongs of CLMS.CLAC moved for summary judgment dismissing the action against it.Action against parent company, CLAC, was dismissed.Slide35

Transamerica cited Kosmopolous

(insurable interest reverse piercing case)Sharpe J.: “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.” Slide36

Gower

“There seem to be three circumstances only in which the courts can [pierce the veil]. These are:When the court is construing a statute, contract or other document;When the court is satisfied that a company is a “mere facade” concealing the true facts; andWhen 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…

“… the 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, “complete control”, 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?” Slide38

Speaking of “akin to fraud”…

another (but related) topic…The Particular Problem Of Thin Capitalization Slide39

What is Thin Capitalization? 

Companies have no minimum capitalization requirement in Canada. Often new corporations are created with one share valued at only $1. Thin capitalization refers to the situation where a corporation is established with high debt to equity ratio. The question 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)

Walkovszky was hit by a taxicab owned by the Seon Cab Corporation and sued. Carlton was a stockholder of ten corporations, including Seon, each of which had two cabs registered to its name and only minimal insurance (a common industry practice at the time).Walkovszky 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 were named as defendants. Walkovszky argued that he was entitled to hold the stockholders personally liable for the damages sought because the multiple corporate structures constituted an unlawful attempt to defraud those who might be injured by the cabs.Carlton’s succeeded in his motion to dismiss Walkovszky’s

personal action

against him

.Slide41

The majority felt 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

.A corporation is not illicit or fraudulent because it consists of other corporations. Dissent (Keating J.): “…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…

The 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.The 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.When corporate 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.Slide43

Think about…

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

QUESTIONS? DISCUSSION?Slide45

Thinking about corporate purposes &

Dodge v. Ford Motor Co. (1919)Slide46

Assumptions…

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

What about?Slide48

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 securities legislation does.A contractual issue? The underpinnings of corporate law are, as we have learned, contractual. 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

Next…

Dodge v. Ford & An Anthropology of Corporate PurposeUnit 5: Corporate ObligationsSlide52

Am I an LLC (Limited

Liability Cat)? Slide53