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Termination of the corporation

ō A corporation can be dissolved in many ways, some voluntary, some involuntary
ō The dissolution of a corporation has legal consequences that may not be reversible
even if the corporation is revived
ō The legal effect of selling a corporation’s shares is different than that of selling
its assets

QUESTIONS FOR REVIEW

1. What is meant by a corporation having a separate legal identity?

2. Explain how the liability of a shareholder is limited.

3. Explain under what circumstances a court will “lift the corporate veil.”

4. Why are the principles of agency law relevant to corporations?

5. Explain how a personal guarantee reduces the limited liability of the principals of a
closely held corporation.

6. Explain the advantages of free transferability of shares and how and why this right is
often modified by shareholder agreement.

7. Set out and explain some of the disadvantages associated with the corporate
method of carrying on business.

8. Distinguish among companies and corporations that have been created by special
acts of Parliament, by royal charter, by registration, by letters patent, and by filing
articles of incorporation.

9. Explain the significance of the memorandum of association in a registration

jurisdiction. Contrast it with articles of incorporation and articles of association.

10. What is a “society” and how does it compare to a corporation?

11. What is the capacity of most corporations? What is the exception to this rule?

12. Explain why the concept of a par-value share is misleading and why the use of such
shares has declined.

13. What is meant by a “preferred” share? Contrast this with the “common” share.
Explain why the term preferred shares is misleading.

14. Does a shareholder, whether preferred or common, have a right to a dividend?

Explain.

15. What is the significant difference between a bondholder and a preferred shareholder,
both of whom are entitled to a specified payment each year?

16. Distinguish between closely held and broadly held corporations and explain the
differences in terms of the provisions in place in your jurisdiction.

17. Set out the nature of the duties owed by a director of a corporation. To whom are
these duties owed? Who else in the corporate organization owes similar duties?

18. Explain why it is becoming increasingly difficult to get prominent individuals to serve
as directors of Canadian corporations.

19. Who is usually responsible for running the affairs of the corporation?

20. How can a promoter avoid personal liability for pre-incorporation contracts?

21. Explain any duties shareholders assume. Summarize the rights of the shareholders in
relationship to other shareholders, the management, and the directors of the corporation.

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22. Explain what is meant by a “proxy” and why proxies can be so important at a
corporation’s annual general meeting.

23. Distinguish among a derivative action, dissent, and oppression. Explain when it
would be appropriate to use each of them.

24. Explain the purpose of a shareholders’ agreement and why it is important.

25. How can a corporation be terminated?

CASES AND DISCUSSION QUESTIONS

1. Dynasty Kitchen Cabinets v. Soheili, 2011 BCPC 414 (CanLII)
The corporate defendant consented to a judgment against it. The issue was whether its
owner/director, Soheili, was personally liable. Dynasty provided cabinets for Soheili’s per-
sonal residence. The transaction was with the corporate defendant. The house went into
foreclosure, but Dynasty was owed $250 000. Soheili did not give a personal guarantee; he
owed $250 000 to the corporate defendant for the cabinets.
Is this a case in which the Court would “lift the corporate veil”? Why or why not?

2. BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, 2008 SCC 69

Bell Canada debentureholders opposed a buyout of BCE, a large Canadian telecommuni-
cations corporation, by a group headed by the Ontario Teachers’ Pension Plan board. The
buyout was financed in part by the assumption, by Bell Canada, a wholly owned subsidiary
of BCE, of $30 billion of debt. This would reduce the value of the Bell Canada debentures
by about 20 percent. The value of the BCE shares would, on the other hand, increase by
about 40 percent as a result of the buyout. The debentureholders therefore opposed court
approval of the buyout and claimed that they were entitled to relief under the oppression
remedy. The Quebec Supreme Court approved the buyout, but the Court of Appeal allowed
the debentureholders’ appeal and disallowed the buyout. The case went to the Supreme
Court of Canada.
To whom do corporate directors owe a fiduciary duty? What should the directors do if the
interests of the corporation and of particular stakeholders do not coincide? What reme-
dies do these stakeholders have if they believe that they have not been treated fairly?
Does the law require that business decisions be perfect or they will be overturned by the
courts if subsequent events showed that the decisions were not correct?

3. Kaur v. Canada, 2013 TCC 227 (CanLII)

Kaur was assessed liability as the sole director of a corporation for its unremitted GST.
Kaur left the operational and financial matters of the corporation to the general manager,
who did not remit the GST. Kaur claimed that she did not have the expertise, knowledge,
or experience to manage the administrative matters of the corporation.
Explain whether Kaur would be able to avoid liability for the unpaid GST because she had
shown due diligence in respect of payment of the tax.

4. Black Fluid Inc. v. Opulence Clothing Inc., 2014 ABQB 138 (CanLII)
Two brothers, Taleb and Zoul, were equal shareholders in and the only two directors of two
corporations that operated retail clothing businesses. Taleb opened another clothing store.
Zoul’s wife then opened another clothing store. Zoul advised Taleb that he was not going
to order inventory for either of the co-owned stores. Taleb also did not order any inventory
for those stores. The landlord terminated the leases for the two co-owned stores for non-
payment of rent. Taleb obtained leave to commence a derivative action against Zoul, Zoul’s
wife, and their corporations. Zoul asked the Court to add Taleb and his corporation as
defendants in the derivative action.
The Court denied Zoul’s request. On what grounds did it do so?

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380 Part 4 Methods of Carrying on Business

5. Salesco Limited v. Lee Paige (2007), 61 C.C.E.L. (3d) 279, (2007), 36 B.L.R. (4th) 229
(Ont. S.C.), 2007 CanLII 37463 (ON SC), Capobianco v. Paige, 2009 CanLII 29899 (ON SC)
C and P decided to buy their employer, Spray-Pak, which was owned by M. They used
Salesco (of which P was both a director and officer) to do so. Z loaned $20 000 to Salesco.
He received 20 percent of the shares in Salesco, while 40 percent of the shares were
allocated to P and C. Salesco obtained two-thirds of the shares of Spray-Pak. M continued
to own the other one-third of the shares; he was also a director of the corporation. P was
a director and also president of Spray-Pak. He wrote many cheques on Spray-Pak’s bank
account that benefited him personally, including one for $10 000 as a down payment on a
house and another for the purchase of a Jaguar. P, C, and M agreed that each of them
would receive $2300 per week from Spray-Pak, and that Spray-Pak would pay M’s personal
and legal accounting bills.
Spray-Pak experienced financial difficulties, so the payments to M were stopped. P and
M then fired C so that the payments to M could resume. M was not providing services to
Spray-Pak while C was, so there was no just cause for firing C. Meetings of the sharehold-
ers and directors of Salesco were called. P, C, and Z were elected as directors. At a later
meeting, C, Z, and M were elected as directors. M then started a lawsuit, asking for a dec-
laration that P could not be removed as a director of Salesco and that Spray-Pak be wound
up. C counterclaimed, asking for an injunction preventing depletion of Spray-Pak’s assets.
P and M misrepresented Spray-Pak’s financial situation to the CIBC and effectively
asked it to call in its loan to Spray-Pak, which it did. M incorporated New Spray-Pak and
transferred 50 percent of its shares to P. New Spray-Pak acquired the CIBC’s security in
return for an assignment of Spray-Pak’s debt and security. New Spray-Pak continued the
business; the customers of Spray-Pak were not advised that they were now doing business
with New Spray-Pak. C and Z were not advised of these developments. When they discov-
ered what had happened, they began derivative actions on behalf of Spray-Pak and Salesco,
with P, M, and New Spray-Pak as the defendants.
Should the derivative actions succeed? Were the actions of P and M oppressive or unfairly
prejudicial? Did they unfairly disregard the interests of C, Z, Salesco, and Spray-Pak? Did
P and M breach any fiduciary duties?

6. Mundy (E.C.) Ltd. v. Canada Safeway Ltd., 2004 MBCA 143 (CanLII)
Mundy sued Safeway for payment of unpaid invoices. Mundy was dissolved when the
statement of claim was filed because it had failed to file its annual returns. Mundy was
revived as a corporation after the limitation period had expired and after the statement of
claim was filed.
Did the Court allow Mundy’s claim? Explain your reasoning.

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