Monday, 30 July 2012

Claims Against Shareholders....Not So Fast!

For over a hundred years, it has been a basic principle of corporate law that shareholders and corporations have distinct legal personalities.  As the House of the Lords explained in the venerable decision in Salomon v. A. Salomon & Co. Ltd., creditors of a company cannot sue its shareholders to recover debts.  However, in certain circumstances, courts will lift the "corporate veil" and will allow a claim against a shareholder for a wrong done by the company.  For example, where the company is in effect shareholder's alter ego or in case of fraud, in the sense that the company "is used to effect a purpose or commit an act which the shareholder could not effect or commit."

Another venerable principle of corporate law - the Said v. Butt rule - is that claims directors are not liable for directing their corporation to commit a wrongful act unless they have committed an independent wrongful act.  To sustain a claim against a director, material facts underlying the independent tort must be specifically pled.

In LaPrairie Crane (Alberta) Ltd. v. Triton Projects Inc., 2012 BCSC 1124, Master Keighley brought these two principles together.  Although without any references to authorities, the Master refused to add a corporate defendant's shareholder as a defendant in the action, finding that no claim against the shareholder was articulated in the pleadings, and no evidence supporting a claim was adduced:

Friday, 27 July 2012

Free iPhone App for Access to Cases and Statutes

As noted in Financial Post, a Toronto lawyer, Garry Wise, developed an iPhone app for easy access to CanLii's collection of cases and statutes.

This is a great development and my only qualm is that there is no iPad version.  

A big thank you to Mr. Wise!

Thursday, 26 July 2012

BCSC Confirms that Directors Have Residual Powers

Shareholders elect directors to manage their company until the next annual general meeting (AGM).  The directors, who may also be removed by the shareholders, must act in accordance with the specific duties and powers set out in the applicable corporate statute (e.g., B.C. Business Corporations Act or the Canada Business Corporations Act) and the company's articles.  For example, directors have the powers to call AGMs every 12 to 15 months and to call special general meetings.  This is, of course, trite law.  

What is not so trite, and was addressed in Northern Minerals Investment Corp. v. Mundoro Capital Inc., 2012 BCSC 1090, is whether directors have residual powers, i.e., powers that are not expressly granted to them or the shareholders by statute or the articles.  In Northern Minerals, the court found that, notwithstanding older authorities suggesting otherwise, directors do have residual powers.  The court's conclusion was based on s. 136 of the BCBCA and s. 102 of the CBCA, which provide that directors must "manage or supervise the management of the business and affairs of a corporation".  

In the circumstances, the court found that the directors' residual powers included the following:
  • the power to postpone an AGM that has already been called (as long as it is held within 15 months of the previous AGM, in accordance with s. 182(1)(b));
  • the power to change the record date for the AGM; and
  • the power to create a nomination policy that sets a deadline by which time shareholders are required to submit nominations for directors.

Tuesday, 24 July 2012

Enforcing Canadian Judgments - Original Court to Decide Whether Judgment Debtor "Took Part" in the Proceeding

Prior to 2006, enforcement of Canadian judgments in B.C. was governed by Part 2 of the Court Order Enforcement Act: the judgment creditor had to apply to register a Canadian judgment and a number of jurisdictional and semi-substantive defences were available to the judgment debtor.  In 2006, the Enforcement of Canadian Judgment and Decrees Act ("ECJDA") implemented the "full faith and credit" doctrine and made registration of Canadian judgments a simple administrative act, unless the judgment was obtained without notice (see s. 6(4)).  The ECJDA also generally removed the court's supervisory role: although s. 6(2) allows a judgment debtor to apply for a stay of enforcement of a registered Canadian judgment, s. 6(3) precludes a B.C. court from inquiring into the substantive, procedural or jurisdictional validity of the judgment.  The only ground of inquiry left to a B.C. court is whether the judgment "is contrary to public policy in British Columbia."

Because the ECJDA presents such a dramatic shift from the previous COEA enforcement process, it includes a transitional provision in s. 10, which provides that the ECJDA applies only to two types of Canadian judgments:
(a) a Canadian judgment made in a proceeding commenced after this Act comes into force, and
(b) a Canadian judgment made in a proceeding commenced before this Act comes into force and in which the party against whom enforcement is sought took part.
In Apollo Real Estate Limited v. Streambank Funding Inc., 2012 BCSC 1088, the court considered the rules applicable to determining whether a judgment creditor "took part" in a proceeding.  The court held that taking part means any participation in a proceeding at any point time.  A withdrawal part way through the proceeding, even if judgment is taken without proper notice afterwards, does not mean that a person did not take part in the proceedings for the purpose of s. 10(b).

However, the court also found that to determine whether a person took part in the proceeding would in effect require the court to determine "whether or not there was a defect in the [other province's] proceeding" in which judgment was granted, and the ECJDA "is designed to remove from B.C. such a supervisory role."  The court held that the proper procedure is for the judgment creditor to apply to the original court to set aside the judgment and for the judgment to be stayed in B.C. meanwhile.

Tuesday, 10 July 2012

Parole Evidence Admissible to Prove a Trust

The "parole evidence" rule is well known: extrinsic evidence of parties' intention "is not admissible to add to, subtract from, vary, or contradict" express contractual terms.  However, there is an exception to every rule and this particular one is said to have a myriad of exceptions, including use of extrinsic evidence to resolve an ambiguity, to establish a term implied by custom, or to establish a collateral contract.

In a recent decision in Bradshaw v. Stenner, 2012 BCCA 296, the court, after reviewing a number of venerable English and Canadian authorities, concluded that another recognized exception to the parole evidence rule is admissibility of extrinsic evidence to prove a trust:
[153]     In my opinion, the parol evidence rule and the entire agreement clause cannot be invoked by the appellant to exclude the oral evidence of the trust because, as in Marlborough ([1894] 2 Ch. 133) with respect to the Statute of Frauds, to do so would permit the parol evidence rule to be used as an instrument of fraud.  In cases in which a trust is alleged and proven, I consider that the correct approach is to conclude that the parol evidence rule has no application.  If the trust is proven, the court must consider any impact its terms may have on title and must also consider any accounting that arises between the parties.  
...
[157]     Because it was the intention of the parties that the appellant would take title to the property as a trustee only, the legal means they employed to achieve that result were of no importance.  Creation of the trust was the overriding purpose.  To borrow a phrase used in Ali, the “form of transfer” cannot be relied upon by the appellant to defeat the trust.  The appellant had obligations under the trust that she cannot avoid by relying on words in the printed-form contract used by the parties out of legal necessity (or what Mr. Stenner saw as legal necessity) in its implementation.  I consider this to be the proper application of the fundamental principle of law stated by Lindley L.J. in Rochefoucauld ([1897] 1 Ch. 196).  That principle, as Professor Waters points out and which the cases I have cited collectively support, has been with us for more than a century.  We have been cited no authority that entertains a contrary view of the law, or in which it is suggested that the principle should not have modern application.  
Notably, the court held that the presence of the "entire contract" clause, which would typically exclude any extra-contractual representations, did not apply to proving a trust.

Friday, 6 July 2012

Oppression Remedy Can Be Assigned to a Purchaser

Under the B.C. Business Corporations Act, the oppression remedy is a statutory cause of action available exclusively to registered and beneficial shareholders and other persons who the court finds "have an interest that is not dissimilar to that of a shareholder."  As previously discussed, the oppression remedy is not available to directors.  

Other provinces have adopted the Canada Business Corporations Act model, under which the oppression remedy is available to a much broader class of persons.  For example, under the Ontario Business Corporations Act, the remedy is available to a current and former "registered holder or beneficial owner ... of a security of a corporation or any of its affiliates, ... a director or an officer or a former director or officer of a corporation or of any of its affiliates, ... any other person who, in the discretion of the court, is a proper person...".

What neither statutory model expressly addresses is whether the oppression remedy, as a cause of action, can be assigned or sold together with the interests of the complainant, such as upon a sale of a minority shareholding.  In other words, can the new owner sue for oppression to the previous owner's shareholder interests?  In Ma v. Ma, 2012 ONCA 408, the Ontario Court of Appeal answered this question with an unequivocal "yes!":
... the assignment of the shares together with the cause of action is valid and the appellant assignee is entitled to proceed with the oppression action. ...
The court grounded its decision in the following passage from Trendtex Trading Corporation and Another v. Credit Suisse, [1980] Q.B. 629, aff'd [1981] 3 All E.R. 520 (H.L.):
The court should look at the totality of the transaction.  If the assignment is of a property right or interest and the cause of action is ancillary to that right or interest [there is no requirement that the property right or interest would have to pre-exist the transfer] or if the assignee had a genuine commercial interest in taking the assignment and in enforcing it for his own benefit [the commercial interest would pre-exist the assignment], I see no reason why the assignment should be struck down as an assignment of a bare cause of action or as savouring of maintenance.

Tuesday, 3 July 2012

BCCA on Interlocutory Injunctions: Difference between Non-Solicitation and Non-Competition Clauses

When seeking an interlocutory injunction, the heaviest burden on the applicant is usually to establish that it will suffer "irreparable harm" if the injunction is not granted - i.e., harm that either cannot be quantified or cannot be compensated.

For a while, there was a suggestion that irreparable harm can be presumed in case of a breach of a non-competition or non-solicitation covenant.  However, the Court of Appeal put this this idea to rest in Belron Canada Inc. v. TCG International Inc., 2009 BCCA 577, holding that "there is no basis for holding that the test [of irreparable harm] is not of general application".

Now, in Edward Jones v. Voldeng, 2012 BCCA 295, the Court of Appeal also rejected the proposition that damages may not be an adequate remedy for a breach of a non-solicitation covenant on the basis that it would be extremely difficult ... to separate damages for loss of business caused by the breach from those resulting from normal, fair competition."  This proposition was based on decisions of the BC Supreme Court in 6180 Fraser Holdings Inc. v. Ali and MDManagement Limited v Dhut.