Limited Liability 4: The Liability of Shareholders

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Limited Liability (4) The Liability of
Shareholders

• Timothy N. TaylorClass 5 October 5th 2007

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Liability of Shareholders

• Its just not fair!
• Incorporation for nefarious purposes

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Clarkson Co. Ltd. v. Zhelka(1967), 64 D.L.R.
(2d) 457 (Ont. H.C.)

• No doubt creditors are disappointed at their
  inability to have access to the shareholders
  corporate assets, particularly where he himself
  is reaping financial benefit. But that must of
  necessity be, so long as the Legislature provides
  for and encourages the formation of private
  corporations. Without such, of course,
  enterprise and business adventure would be
  stifled.

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Clarkson Co. Ltd. v. Zhelka(1967), 64 D.L.R.
(2d) 457 (Ont. H.C.)

• If a company is formed for the express purpose
  of doing a wrongful act, or if when formed those
  in control expressly direct a wrongful thing to
  be done, the individuals as well as the company
  are responsible to those to whom liability is
  legally owed.
• In such cases, or where the company is a mere
  agent of the controlling incorporator, it may be
  said that the company is a sham, cloak, or alter
  ego.

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Liability of Shareholders

• Its just not fair!
• Incorporation for nefarious purposes
• Agency relationships
• Corporate group behaviour Enterprise Entity
• Single-shareholder or closely-held corporation

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Analyzing Corporate Behaviour

• De Salaberry Realties Ltd. v. M.N.R. (1974,
  F.C.T.D.)
• pyramiding of corporations ? part of a larger
  group.
• Big Bend Hotel Ltd. v. Security Mutual Casualty
  (1979, B.C.S.C.)
• Prior conduct is material to the risk.
• Past behaviour provides a context for present
  activities

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Parent-Subsidiary Relationships

• Is the business of the sub actually the business
  of the parent?
• Were the profits treated as profits of the
  parent?
• Were the people conducting the business appointed
  by the parent?
• Was the parent the head and brain of the trading
  venture?
• Did the parent govern the adventure, decide what
  should be done and what capital committed?
• Did the parent make the profits by its own skill
  and direction?
• Was the parent in effectual and constant
  control?
• PLUS Purpose and Context

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Liability of Shareholders

• Its just not fair!
• Incorporation for nefarious purposes
• Agency relationships
• Corporate group behaviour Enterprise Entity
• Single-shareholder or closely-held corporation

• Tort Claims
• Misbehaving shareholders
• Undercapitalization