LAW 603 Lecture Notes - Lecture 2: Determinative, Transfer Tax, Legal Fiction
28 May 2018
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Lecture 2 - Legal Rules for Corporate Governance
Tuesday, January 23, 2018
3:03 PM
The Core Concern
• In the aftermath of Enron, WorldCom, Nortel Networks, Lehman Brothers, etc., corporate
governance has become a prime business and political concern.
• The essential complaint was that the Nortel board agreed to an incentive payment plan for
CEO Frank Dunn based on profits that he achieved by fraudulent accounting.
• This resulted in a series of restatements of Nortel's financial reporting and payment of
approximately $2.5 million in settlement of class action law suits.
• This was instrumental in the ultimate demise of Nortel.
o The article concludes: "But the principal culprit is a Nortel board of blue-chip luminaries
so easily gulled into thinking Nortel was in vastly better shape than it was."
• A corporation is a legal person, but it can act only through real persons.
o This simple, inescapable fact is at the heart of the issue of corporate governance
• Who is responsible for the management of corporations, how do they exercise that
responsibility, and who is liable when things go wrong?
Management of the Corporation
• Bylaws describe the corporate structure (directors, officers, shareholders), the authority for
each, and the procedures to be followed in undertaking their respective responsibilities
ules fo dietos’ ad shaeholdes’ eetigs, uou ad otig euieets, et..
• Corporate Policies
o The board of directors establishes the rules for the day-to-day management of the
corporation (e.g., policies on signing authority, banking authority, and employee
conduct, hiring, discipline, etc.)
• Shareholders cannot tell the board what to do. The board has to exercise independent
judgement in the interest of the corporation.
How Directors and Officers Exercise Power
• Directors
o Directors operate collectively, usually at meetings of the board of directors;
• The formal mechanism for a board of director' decision is a resolution passed by
the board.
o The delegate the day-to-day management of the corporation to the officers. Not all
directors' powers can be delegated (e.g., a decision to issue shares or declare a
dividend);
o The corporate bylaws set out the ground rules for holding directors' meetings, the
minimum number in attendance to conduct business (quorum), the necessary
majority for certain decisions, etc.;
o Subject to a Unanimous Shareholders' Agreement, directors are legally responsible for
the management of the corporation. [CBCA s. 102 (1)]
• Officers
o Officers exercise powers delegated by the board of directors;
o Corporate law statutes (e.g., CBCA or OBCA) do not prescribe the required corporate
officers, nor their corporate responsibilities;
find more resources at oneclass.com
find more resources at oneclass.com
o Accepted corporate governance provides, at a minimum, for a chief executive officer
(CEO) responsible for day-to-day management, a chief financial officer (CFO)
responsible for finances, and a corporate secretary;
o There may be numerous other corporate officers (chief operating officer, vice-
presidents, etc.).
Fiduciary Duty
• Fiduciary duty is a concept that exists at common law as well as in statute.
o Eah dieto ad offie i eeisig his poes ad dishagig his duties shall . . . at
honestly and in good faith with a view to the best interests of the corporation. . . .
[CBCA, s. 122 (1) (a)]
• The OBCA has a comparable provision. [s. 134]
• Not everyone is a fiduciary.
• Who is a fiduciary?
o The term is most often attached to corporate officers and directors;
o However, the corporate position is not determinative;
o The critical characteristic is that it is soeoe ho is i a positio to use a opoatio’s
information or opportunity for his or her own personal benefit, but is trusted not to
do so;
o Typically, key decision-makers in the company are fiduciaries.
• . . . A dieto o a seio offie . . . is precluded from obtaining for himself, either secretly
or without the approval of the company (which would have to be properly manifested upon
full disclosure of the facts), any property or business advantage either belonging to the
company or for which it has ee egotiatig. . . .
• Transacting with the Corporation
o It is presumptively a breach of duty for a director or officer to personally engage in or
participate in a commercial transaction with the corporation;
o This is deemed on the face of it to be a conflict of interest;
o The CBCA permits it where:
• An officer or director provides advance notice of his or her personal interest;
• An officer or director does not participate in the corporate decision;
• The transaction is objectively in the best interests of the corporation. [CBCA
s.120]
o Conflicts of interest are typically addressed in a conflict of interest policy.
• Taking Corporate opportunities
o The critical factors in determining if a fiduciary duty has been breached:
• The corporate opportunity was significant;
• The corporate opportunity was not public;
• The corporate opportunity had not been rejected by the corporation
What Do You Think?
• Class 2 Fact Scenario
• Aquafor v. Whyte, Dainty and Calder, 2010 ONSC
• In dismissing the claim the court determined:
• They were fiduciaries;
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Lecture 2 - legal rules for corporate governance. In the aftermath of enron, worldcom, nortel networks, lehman brothers, etc. , corporate governance has become a prime business and political concern: the essential complaint was that the nortel board agreed to an incentive payment plan for. Shareholders cannot tell the board what to do. The board has to exercise independent judgement in the interest of the corporation. [cbca, s. 122 (1) (a): the obca has a comparable provision. What do you think: class 2 fact scenario, aquafor v. whyte, dainty and calder, 2010 onsc. In dismissing the claim the court determined: they were fiduciaries, they had roles and responsibilities beyond simply those of an employee (hiring, determining compensation, marketing, etc. In regard to notice of their departure, it is not per se a fiduciary duty. Employees, however, are to provide reasonable notice of leaving.
