Corporate Personhood Some Specific Issues Problems Part 1
Corporate Personhood - Some Specific Issues & Problems (Part 1) Talk 9 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 jon@fblawstrategy. com
Hello LAW 459 003 BUSINESS ORGANIZATIONS
Lecture Capture Mondays
Today Corporate Personhood – Some Specific Issues & Problems
But st 1 Logistics
• Week of October 17 = Unit 4 • Special Class October 18 12: 30 – 2 PM Room 106 = “Resources & Principles Relevant to Assignment 1” • 1 st Assignment Due = By 9 AM Monday October 24 • Week of October 24 = Unit 5 • Weeks of October 31 & November 7 = Unit 6 • Weeks of November 14 & 21 = Unit 7 • 2 nd Assignment Due = By 9 AM Monday November 21 • Week of November 28 = Unit 8
And one more thing…Posting 5+5 is now 3+3
Now Back to Our Regularly Scheduled Programming…
Thanks for #allardbizorg-ing
Time & again…same issue… Accountability
Accountability ?
From: Salomon v. Salomon Wasn’t accountability the issue the lower courts had? … And did the House of Lords effectively say that the statute precluded the accountability sought by the lower courts?
To: Lack of (driver) accountability ?
Some specific problems…
Problem 1: Companies are persons…but not for all purposes…& not for all rights… Consider S. 7 Charter of Rights: Life, liberty and security of person 7. Everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice. ”
Other Charter sections… • SS 3, 6 & 23 = “citizen” • SS 2, 7, 8, 9, 10, 12 &17 = “everyone” • SS 11 & 19 = “any person” • S. 20 = “any member of the public” • S. 24 = “anyone”
R. v. Agat Laboratories (1998) 17 C. R. (5 th) 147 (Prov. Ct. ) Test turns out to not exactly be the words used, but more determinative is whether the right being exercised (while considering the words used) can/should reasonably apply to corporations. Issue was S. 7 application in an environmental case where Crown had not made disclosures in time where arguably such non-disclosure adversely affected the accused corporation. Quotes SCC in Irwin Toy (1989): …
“That is, read as a whole, it appears to us that this section was intended to confer protection on a singularly human level. A plain, common sense reading of the phrase "Everyone has the right to life, liberty and security of the person" serves to underline the human element involved; only human beings can enjoy these rights. "Everyone" then, must be read in light of the rest of the section and defined to exclude corporations and other artificial entities incapable of enjoying life, liberty or security of the person, and include only human beings. In this regard, the case of R. v. Big M Drug Mart Ltd. , supra, is of no application. There are no penal proceedings pending in the case at hand, so the principle articulated in Big M Drug Mart is not involved. ” (constitutional invalidity)
Nevertheless…in Agat… “One can therefore fairly conclude the following: (1) section 7 of the Charter protects, amongst other things, the right to make full answer and defence being one of the principles of fundamental justice; (2) all accused (whether they are human beings or corporations) have an identical interest in being able to make full answer and defence when charged with an offence; (3) it follows that a corporate accused has an interest (the right to make full answer and defence) which falls within section 7 of the Charter and may therefore invoke section 7 to protect that interest. ”
QUESTIONS? DISCUSSION?
Problem 2: Personally insuring company assets Isn’t this just a real world problem that would not exist if people (and not just insurers) understood that companies were separate persons and held insurance through their companies and not personally? Yes. But what does it tell us that people don’t understand that?
Since it’s almost Halloween Note that these are insurance law cases masquerading as corporate law cases.
Macaura v. Northern Assurance [1925] A. C. 619 Owner of timber sold it to a company that was owned almost solely by him. He was the company’s largest creditor. In his own name he insured the timber against fire. The House of Lords found that “…Neither a simple creditor nor a shareholder in a company has any insurable interest in a particular asset which a company holds. ”
Kosmopoulos v. Constitution Insurance (1987 SCC) Kosmopoulos was the sole shareholder and director of leather goods company. He originally ran that business as a sole proprietor and the lease for its office was in the name of Mr. Kosmopoulos, as was the insurance on office. His lease for the company office was under his own name from when he originally ran the business as a sole proprietor. Even after the incorporation of his company the insurance on the office remained in his own name. The insurance agency he was dealing with knew that he was personally on the lease but carrying on business as a corporation. A fire in a neighbouring lot damaged his office.
When a claim was made insurance coverage was denied. SCC did not quite “reverse lift” the corporate veil but found that as sole shareholder of the company Kosmopoulos was so placed with respect to the assets of the business as to have benefit from their existence and prejudice from their destruction and had, therefore, an insurable interest in them capable of supporting the insurance policy and was entitled to recover.
Always remember…
Or if it helps…remember it this way…
QUESTIONS? DISCUSSION?
Problem 3: Piercing the Veil
All oddball cases…
Sharpe J. in Transamerica Life v. Canada Life (1996) 28 O. R. (3 d) 423 “There are undoubtedly situations where justice requires that the corporate veil be lifted…[I]t will be difficult to define precisely when the corporate veil is to be lifted, but that lack of a precise test does not mean that a court is free to act as it pleases on some loosely defined ‘just and equitable” standard… [T]he 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… The second element refers to the nature of the conduct: is there “conduct akin to fraud that would otherwise unjustly deprive claimants of their rights? ”
Among the “solutions”? Piercing the corporate veil is an existing tool. It will continue to be used… So why not define it statutorily… Then it will be used more Greater accountability ?
Big Bend Hotel Ltd. v. Security Mutual (1980) 19 BCLR 102 Kumar was the president and sole shareholder of Big Bend Hotel Ltd. Big Bend obtained insurance from Security Mutual on the hotel. The hotel burned down. Kumar had previously been the president and sole shareholder of another corporation whose hotel had burned less than three years earlier. This fact had not been disclosed to Security Mutual. Court held that this was a material non-disclosure. It was found to be appropriate to lift the corporate veil here because equity will not allow an individual to use a company as a shield for improper conduct or fraud. Callaghan J. found that Kumar knew the prior loss had to be disclosed and that his failure to do so was intended to mislead or deceive the insurers who would have declined risk had they known.
London Computer Operators Training Ltd and others v British Broadcasting Corporation and others [1973] 2 All ER 170 BBC radio alleged that a computer school was “a financial racket”, that their advertising was misleading, and that the founder had “woeful” business record. The school and two of its directors bought an action for libel against BBC Radio who pleaded justification (truth) and fair comment. The founder, who was still running the school, was not joined as a plaintiff. The defendants subsequently discovered that the founder had a criminal record and sought leave to amend their particulars of justification (truth) by adding details of his convictions and sentences. Leave to amend was granted. The court found that the words complained of were capable of the meaning that the company was being run by people of questionable honesty and background who were unfit to run a computer school.
And a no…. Hercules Managements Ltd. v. Ernst & Young [1997] 2 S. C. R. 165 Northguard Acceptance Ltd (‘NGA”) and Northguard Holdings Ltd. (‘NGH”) carried on business lending and investing money on the security of real property mortgages. Hercules Managements Ltd. was a shareholder in NGA. Ernst & Young were hired as auditors of NGH and NGA, prepared financial statements and provided audit reports to the companies’ shareholders. NGA and NGH went into receivership and Hercules Managements Ltd. sued Ernst & Young alleging that their audit reports had been negligently prepared. Ernst & Young sought dismissal on the basis that the claims asserted by the plaintiffs could only properly be brought by the corporations themselves and not by the shareholders individually. La Forest J. agreed holding that “the shareholders’ reliance on negligently prepare audit reports…will result in a wrong to the corporation for which the shareholders cannot, as individuals recover. ”
REJECT Smith, Stone & Knight Ltd. v. Birmingham Corp. [1939] 4 All E. R. 116 1. Maclaine Watson & Co Ltd v. Department of Trade and Industry [1988] 3 All ER 257 per Kerr LJ: “…the facts [in Smith, Stone and Knight] were so unusual that they cannot form any basis of principle. ” 2. + SS&K would make a corporate shareholder liable to a greater degree then individual shareholders.
DHN Food Distributors Ltd. v Tower Hamlets London Borough Council [1976] 1 W. L. R. 852 (Eng. CA) • DHN Food Distributors Ltd. (“DHN”) owned and controlled a business of importing and distributing groceries, operating out of a warehouse owned by a subsidiary of DHN, Bronze Investments Ltd. Vehicles used in the business were owned by yet another subsidiary of DHN held all the shares in both subsidiaries and the companies had common directors. • In 1969 the local council expropriated the land on which the warehouse sat. DHN was unable to relocate and the business subsequently closed down.
• Issue was whether DHN was entitled to compensation for disturbance in having the business closed down. Council argued none payable since the subsidiary was not disturbed. They further argued that even if both subs were disturbed, the subsidiaries were not entitled to any compensation because they had no interest in the land. As well they argued DHN was not entitled to compensation under the provisions of a statute and that DHN was only a licensee (agent) of Bronze Investments Ltd. • The English Court of Appeal treated the companies as one economic entity and following from this, DHN could be treated as owner of the property and was thus entitled to compensation for disturbance to its business.
• Lord Denning found that the corporate veil could indeed be lifted – finding that the companies were in reality a group, and should be treated as one. • “These subsidiaries are bound hand foot to the parent company and must do what the parent company says … virtually the same as a partnership … They should not be treated separately. ” • Denning’s views were disapproved by the House of Lords in Woolfson v Srathclyde Regional Council, 1978 SC 90 (HL). There Lord Keith expressed doubt as to whether the decision in DHN correctly applied the principle that it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere facade concealing the true facts.
Fraud double standard? Required to pierce against the corporation’s interests but not “reverse-pierce” where in favor of the corporation’s interests? At minimum shouldn’t a fraud have to be perpetrated on the corporation for it to take advantage of piercing itself to its own advantage? ? ?
QUESTIONS? DISCUSSION?
Always include a cat picture
- Slides: 45