Instructions Specific to This Exam

1. This examination contains four questions worth a total of 100 marks. The questions are not of equal value.

2. Suggested time allocations are provided for guidance only. Candidates remain responsible for managing their examination time.

3. You will be assessed primarily on your knowledge of the relevant cases, statutory provisions and principles contained in the assigned Business Organizations materials, together with your ability to identify the legal issues raised by the facts, apply the governing law and assess the competing arguments available to the parties.

4. No marks are awarded for merely reproducing or summarizing the facts. Use the facts in your legal analysis.

5. Each question is independent. Facts from one question should not be imported into another.

6. Unless otherwise stated, assume that every corporation referred to in this examination is incorporated under the Canada Business Corporations Act (“CBCA”) and is not a distributing corporation.

7. Where a statutory provision governs the issue, identify and apply it. Full citations are unnecessary. The relevant section number and statute are sufficient.

8. Do not assume that the legal effect of an agreement depends upon its title. Where appropriate, characterize an agreement or transaction according to its substance.

9. In considering directors’ and officers’ duties, distinguish among:

   • the fiduciary duty;

   • the statutory duty of care;

   • conflict-of-interest requirements;

   • statutory compliance obligations; and

   • any applicable reliance or other statutory defence.

10. In considering shareholder disputes, distinguish between:

• harm personal to the shareholder;

• harm suffered by the corporation;

• the oppression remedy;

• a derivative action; and

• any other statutory remedy that may be appropriate.

11. Where a corporate transaction requires shareholder approval, consider both the voting rights created specifically by the CBCA and any dissent rights arising from the transaction.

12. Do not address securities regulation, taxation, insolvency, employment law, competition law or the substantive law of contract except where necessary to characterize a corporate-law issue expressly raised by the facts.

13. Write clear and organized answers in complete sentences.

QUESTION ONE

25 marks — suggested time: 45 minutes

FACTS

Pelorus Robotics Inc. (“Pelorus”) designs robotic inspection equipment for mines and hydroelectric facilities.

Pelorus was incorporated federally in 2021 by three founders:

• Maren Sloane, who owns 40% of the common shares;

• Quentin Aubry, who owns 35%; and

• Noor Fenwick, who owns 25%.

All common shares carry one vote per share.

Maren and Quentin are directors.

The third director is Hugh Redfern, an experienced technology executive who owns no shares.

Shortly after incorporation, Maren, Quentin and Noor signed a document entitled:

Founders Governance Agreement

The agreement provides:

“The board of directors shall manage the ordinary business of Pelorus.”

It then states:

“Notwithstanding the foregoing, the following decisions shall require approval of shareholders holding not less than 80% of the issued voting shares:

(a) the appointment or removal of the Chief Executive Officer;

(b) any acquisition having a value exceeding $1 million;

(c) any capital expenditure exceeding $1.5 million; and

(d) the issuance of additional voting shares.”

The agreement further provides:

“To the extent that authority over the foregoing matters is reserved to the shareholders, the directors shall have no authority to make those decisions independently.”

The agreement does not use the words “unanimous shareholder agreement.”

Pelorus’s articles and by-laws do not refer to the agreement.

For the first four years, everyone treated it as binding.

In January 2026, Noor decided to reduce her investment.

She sold 15% of Pelorus’s outstanding shares to Granite Arch Ventures Ltd. (“Granite Arch”) and retained the remaining 10%.

The share certificate delivered to Granite Arch did not refer to the Founders Governance Agreement.

Neither Noor nor Pelorus provided Granite Arch with a copy.

Before purchasing the shares, Granite Arch reviewed Pelorus’s articles, by-laws, financial statements and minute book.

The minute book contained several resolutions referring generally to:

“shareholder approval pursuant to the Founders Agreement,”

but no copy of the agreement itself was included.

Granite Arch’s lawyer noticed the references and asked Pelorus’s chief financial officer whether there was:

“anything unusual affecting the rights attached to these shares.”

The CFO responded:

“Nothing in the articles. The founders have some old understandings about major decisions, but the shares are ordinary voting common shares.”

Granite Arch completed the purchase.

Two months later, Pelorus’s board decided that the company required more experienced leadership.

Maren and Hugh voted to remove Quentin as CEO and appoint Sasha Devlin in his place.

Quentin opposed the change.

No shareholder vote was held.

Maren said:

“The board appoints officers under the CBCA. A private founders’ document cannot permanently stop directors from doing their statutory job.”

One week later, the board approved the purchase of a manufacturing facility for $3.2 million.

Again, no shareholder approval was obtained.

Noor objected to both decisions.

She said the board had breached the Founders Governance Agreement.

Maren responded that, even if the agreement had originally restricted the directors, Noor’s sale to Granite Arch meant that it was no longer an agreement among all shareholders and therefore could no longer operate as a unanimous shareholder agreement.

Granite Arch first received a complete copy of the agreement five days ago.

It is unhappy with the restrictions and says that, had it known shareholders could exercise direct control over major corporate decisions, it would not have purchased the shares.

It wants to know whether it may unwind its purchase from Noor.

A further dispute has arisen concerning responsibility for the manufacturing-facility acquisition.

Maren and Noor had previously participated directly in shareholder votes approving two earlier acquisitions under the Founders Governance Agreement.

Noor now says:

“We are shareholders, not directors. Even if shareholders vote on an acquisition, directors remain legally responsible for whether the decision is in Pelorus’s best interests.”

Pelorus has requested advice before taking further action.

QUESTION

Advise Pelorus, Noor and Granite Arch concerning the legal effect of the Founders Governance Agreement, the respective management powers and responsibilities of Pelorus’s directors and shareholders, the validity of the board’s recent decisions, and Granite Arch’s position following its acquisition of the shares.

25 MARKS

BRICKAM EXPLANATION — QUESTION ONE

1. The Agreement Must Be Characterized by Substance Rather Than Label

The first issue is whether the Founders Governance Agreement is a unanimous shareholder agreement (“USA”) within CBCA s. 146.

Its title is not determinative.

Section 146 applies to an otherwise lawful written agreement among all shareholders that restricts, wholly or partly, the directors’ powers to manage or supervise the management of the corporation’s business and affairs.

When the agreement was made:

• Maren;

• Quentin; and

• Noor

were all of Pelorus’s shareholders.

Each signed it.

The agreement expressly removed certain decisions from the directors and reserved those decisions to the shareholders.

That is precisely the type of restriction contemplated by s. 146.

It is therefore very likely a USA despite being called a “Founders Governance Agreement.”

2. This Is More Than an Ordinary Voting Agreement

Not every agreement among all shareholders is necessarily a USA.

Shareholders may agree among themselves how they will vote without restricting directors’ statutory management authority.

This agreement goes further.

It expressly says:

“the directors shall have no authority to make those decisions independently.”

The shareholders therefore did not merely promise one another how they would vote.

They transferred part of the corporate decision-making function away from the board.

The USA characterization is strong.

3. The Board Remains Responsible for Matters Not Restricted by the USA

CBCA s. 102 ordinarily places management of the corporation’s business and affairs with the directors, subject to a USA.

The Founders Governance Agreement expressly leaves:

“ordinary business”

with the board.

Accordingly, the directors retain ordinary management authority except to the extent the USA restricts it.

This is important because a USA need not transfer all management authority.

It may carve out only specified decisions.

4. Appointment and Removal of the CEO Were Reserved to the Shareholders

The agreement specifically requires 80% shareholder approval for appointment or removal of the CEO.

The board nevertheless removed Quentin and appointed Sasha without such approval.

If the agreement is a valid USA, the directors lacked the unilateral authority to make that decision.

The fact that directors ordinarily have authority concerning officers does not permit them to disregard a valid USA that expressly restricts that authority.

CBCA s. 122(2) also requires directors and officers to comply with any USA.

Maren’s argument therefore reverses the statutory relationship.

The CBCA itself recognizes the ability of a USA to restrict directors’ management powers.

5. The Manufacturing-Facility Acquisition Presents the Same Problem

The acquisition was worth $3.2 million.

The agreement requires shareholder approval for any acquisition exceeding $1 million.

The board approved it alone.

Internally, that is inconsistent with the USA.

Noor therefore has a strong basis to challenge the board’s compliance with Pelorus’s governance arrangements.

Depending upon what relief is required, statutory compliance or restraining remedies may be relevant.

The question does not require the consequences for an outside seller that may have contracted with Pelorus, and those consequences should not be confused with the board’s internal breach of the USA.

6. Noor’s Sale Does Not Automatically Destroy the USA

Maren argues that once Granite Arch became a shareholder, the agreement ceased to involve all shareholders.

That argument overlooks CBCA s. 146.

A transferee of shares subject to a USA is deemed to be a party to the agreement.

Accordingly, the statutory regime is designed specifically to prevent an ordinary share transfer from automatically destroying the USA.

Granite Arch can therefore become bound even though it never signed the original agreement.

7. But Lack of Notice Gives Granite Arch a Significant Statutory Protection

The CBCA also recognizes the unfairness that could arise if a purchaser acquires shares without notice that a USA materially restricts corporate governance.

Where the purchaser or transferee was not given the required notice of the USA, s. 146 provides a statutory right to rescind the transaction within the prescribed period after becoming aware of the USA.

Granite Arch first obtained the agreement five days ago.

If it did not previously have legally sufficient notice, it may still be within the statutory rescission period.

8. The Minute-Book References Complicate Granite Arch’s Notice Argument

Granite Arch was not entirely unaware that some founders’ arrangement existed.

Its lawyer saw resolutions referring to:

“shareholder approval pursuant to the Founders Agreement.”

The lawyer then specifically asked about unusual share rights.

That fact assists Noor if Granite Arch seeks rescission.

She can argue that Granite Arch:

• knew an agreement existed;

• was professionally advised;

• had reason to inquire further; and

• nevertheless completed the purchase.

Granite Arch will respond that the corporation’s own CFO minimized the arrangement and represented it merely as:

“old understandings”

rather than a formal agreement transferring board powers.

The share certificate also apparently did not disclose the USA.

The issue is therefore whether Granite Arch received the notice contemplated by the statute, not merely whether it encountered facts that might have encouraged more investigation.

Granite Arch has a substantial rescission argument.

9. The Timing of Granite Arch’s Action Matters

A purchaser without the required notice cannot retain a rescission option indefinitely.

The statutory period runs from awareness of the USA.

Granite Arch received the complete agreement only five days ago and is acting immediately.

If that is when it legally became aware of the USA, its position is materially stronger than if it had possessed the agreement for several months.

10. Transferring Management Power Also Transfers Corresponding Duties and Liabilities

Noor’s statement that shareholders can never bear director-type responsibility is incorrect.

CBCA s. 146 expressly addresses what happens when a USA removes management power from directors and gives it to shareholders.

To the extent parties to the USA are given the power to manage or supervise management, they acquire the corresponding:

• rights;

• powers;

• duties; and

• liabilities

of directors in relation to that transferred authority.

The directors are relieved to the same extent.

Power and responsibility therefore move together.

11. The Shift Is Limited to the Power Actually Transferred

The shareholders do not become directors for every corporate purpose merely because the USA exists.

Their statutory responsibility extends only to the management authority transferred to them.

For example, if shareholders are given the ultimate decision over a $3 million acquisition, those exercising that authority cannot insist that:

“the directors bear all responsibility because we are technically only shareholders.”

Conversely, directors remain responsible for powers the USA leaves with them.

12. The Earlier Acquisition Votes Illustrate Why Section 146(5) Matters

Maren and Noor previously exercised the acquisition power reserved to shareholders.

When doing so, they were performing a management function ordinarily belonging to directors.

Their decisions therefore must be analyzed with the duties attached to that transferred function.

That may include acting honestly and in good faith with a view to Pelorus’s best interests and exercising the required care in the circumstances.

The USA cannot be used to obtain managerial power while avoiding the legal responsibilities ordinarily attached to managerial authority.

13. The Best Overall Advice

The Founders Governance Agreement is very likely a valid USA.

The board’s unilateral CEO decision and $3.2 million acquisition therefore contravened the internal allocation of authority established by that agreement.

Noor’s sale did not automatically terminate the USA because Granite Arch may be deemed a party as transferee.

Granite Arch nevertheless has a serious statutory rescission argument if it was not given the required notice and acts within the statutory period.

Finally, management duties follow the management authority transferred under the USA. Shareholders exercising reserved managerial powers cannot assume that directors remain exclusively responsible for those decisions.

Brickam’s Suggested Marking Approach — Question One

Issue	Marks
Characterization of the Founders Governance Agreement as a USA; substance over label; all original shareholders signed; actual restriction of director powers	6
Effect of the USA on board authority; CBCA ss. 102 and 122; CEO decision and $3.2 million acquisition	5
Effect of Noor’s transfer; Granite Arch deemed party rather than automatic termination of USA	3
Granite Arch’s lack-of-notice and rescission argument; timing; effect of minute-book references and CFO response	6
Transfer of director rights, powers, duties and liabilities to shareholders exercising restricted management powers under s. 146	4
Overall synthesis and practical conclusion	1
TOTAL	25

QUESTION TWO

25 marks — suggested time: 45 minutes

FACTS

Orchardline BioStorage Inc. (“Orchardline”) operates temperature-controlled warehouses used by pharmaceutical and biotechnology companies.

Its board has five directors.

One director, Anouk Ferrier, has extensive experience in industrial real estate.

Unknown to the other directors, Anouk owns 40% of Polar Reach Logistics Ltd. (“Polar Reach”) through a private holding company.

Her brother owns another 35%.

Polar Reach owns a specialized cold-storage warehouse outside Montréal.

In November 2025, Anouk proposed that Orchardline acquire the warehouse.

She told the board:

“I know Polar Reach’s management well and I am confident this facility is exactly what Orchardline needs.”

She did not disclose her ownership interest.

Polar Reach asked $9.2 million.

Orchardline had previously retained an independent commercial appraiser.

The appraiser valued the property between $7.7 million and $8.1 million.

Its report also stated that the building’s refrigeration roof system would likely require approximately $1.1 million in replacement work within three years.

Anouk prepared a two-page summary for the board.

The summary referred to the $7.7 million to $8.1 million appraisal range but did not mention the anticipated roof work.

It stated:

“A strategic premium is justified because comparable cold-storage properties rarely become available.”

The full appraisal was included electronically with the meeting materials.

Three directors read only Anouk’s summary.

The fifth director, Graham Iles, read the complete report and raised concerns about the price.

Anouk responded:

“You can always find reasons not to grow. This opportunity will disappear if we overthink it.”

The board voted four to one to approve the acquisition.

Anouk voted in favour.

Graham voted against and requested that his dissent be recorded in the minutes.

The purchase closed.

Six months later, Orchardline shareholders discovered Anouk’s ownership interest.

By then the refrigeration problems had become more serious and the warehouse required approximately $1.4 million in repairs.

Polar Reach had distributed much of the purchase money to its shareholders, including Anouk.

A separate issue concerns an adjoining industrial parcel known as Parcel 17.

Before Orchardline purchased the warehouse, its management had spent approximately $90,000 investigating Parcel 17 as a possible expansion site.

A consultant retained by Orchardline concluded that Parcel 17 would allow the corporation to construct a highly profitable second cold-storage building.

The board discussed the parcel during the same period.

Because Orchardline was concentrating its cash resources on the Polar Reach transaction, the directors decided:

“not to pursue Parcel 17 at this time.”

Anouk did not tell the board that she personally wanted the property.

Nine days later, a corporation wholly owned by Anouk purchased Parcel 17 for $2 million.

She used Orchardline’s consultant report when deciding what to offer.

Four months later, a competing logistics company agreed to lease the planned facility from Anouk’s corporation under a 15-year lease.

The expected value of Anouk’s interest increased substantially.

Anouk says she did nothing wrong.

She argues:

“The board rejected Parcel 17. Once Orchardline chose not to buy it, the opportunity was available to anyone.”

She also says the other directors cannot complain about the Polar Reach purchase because they had an independent professional appraisal and voluntarily approved the deal.

The shareholders have requested advice.

QUESTION

Advise Orchardline and its shareholders concerning the duties and potential liabilities of Anouk and the other directors arising from the Polar Reach transaction and Parcel 17.

25 MARKS

BRICKAM EXPLANATION — QUESTION TWO

1. The Polar Reach Transaction Engages the CBCA’s Conflict-of-Interest Regime

Anouk had a substantial economic interest in the seller.

She indirectly owned 40% of Polar Reach and stood to benefit financially when Orchardline paid the purchase price.

The acquisition was plainly a material transaction.

CBCA s. 120 therefore required Anouk to disclose the nature and extent of her interest.

Saying merely:

“I know Polar Reach’s management well”

is not disclosure of a 40% ownership interest.

The statutory problem is strong.

2. Anouk Also Should Not Have Voted

A director required to disclose an interest under s. 120 ordinarily may not vote on the resolution approving the transaction, subject to specified statutory exceptions.

None of the facts places this purchase within the obvious exceptions.

Anouk nevertheless voted in favour.

Her participation therefore compounds the disclosure failure.

3. The Transaction Does Not Become Proper Merely Because Four Directors Approved It

The CBCA provides circumstances in which an interested transaction will not be invalid merely because of the director’s interest.

Those protections depend upon compliance with the statutory requirements, including proper disclosure, appropriate approval and the transaction being reasonable and fair to the corporation when approved.

Here:

• Anouk did not disclose;

• she voted;

• the price materially exceeded the independent appraisal range; and

• a significant anticipated repair expense was omitted from her summary.

The argument that the transaction was nevertheless reasonable and fair is therefore difficult.

4. Court Relief May Include Setting Aside the Transaction or an Accounting

Where the conflict provisions are breached, the CBCA permits court intervention.

Potential relief can include:

• setting aside the transaction on appropriate terms;

• requiring Anouk to account for profit or gain;

• or both.

Practical relief may become more complicated because the acquisition has closed and money has been distributed.

That does not eliminate the underlying breach.

5. Later Shareholder Confirmation Would Not Automatically Cure Everything

Anouk might seek shareholder confirmation after full disclosure.

But statutory confirmation is not simply a vote authorizing self-dealing after the fact.

The statutory conditions include meaningful disclosure and the transaction being reasonable and fair to the corporation.

Given the valuation evidence and omitted repair issue, fairness remains genuinely contested.

6. Section 120 Does Not Exhaust Anouk’s Fiduciary Obligations

Technical compliance with conflict rules and the general fiduciary duty are related but distinct.

Anouk also owed the statutory fiduciary duty under CBCA s. 122 to act honestly and in good faith with a view to Orchardline’s best interests.

Using her board position to advance a transaction from which she secretly benefited is highly difficult to reconcile with that obligation.

Her withholding of the repair issue is especially damaging because it affected the quality of the board’s decision.

7. The Other Directors Face a Duty-of-Care Question

The remaining directors did not possess Anouk’s undisclosed financial conflict.

Their problem is different.

They were required to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances.

Three directors received a full independent appraisal but read only Anouk’s summary.

The summary disclosed that the asking price exceeded the appraisal range but did not reveal the $1.1 million projected repair cost.

A major acquisition at a substantial premium should have prompted meaningful attention to the professional material supplied to the board.

Simply receiving a report is not necessarily the same thing as reasonably relying upon it.

8. Professional Reliance Can Protect Directors, but It Must Be Genuine and in Good Faith

The CBCA recognizes good-faith reliance upon qualifying professional reports.

The directors will argue that:

• Orchardline commissioned an independent appraiser;

• the report supported a substantial property value;

• Anouk had recognized industrial-property experience; and

• strategic properties may rationally command premiums.

Those facts assist them.

But a statutory reliance defence is strongest where directors actually rely on the professional work.

Three directors did not read the material containing one of its most important warnings.

Their position is therefore less secure.

9. Graham Is Differently Situated

Graham read the full appraisal.

He raised concerns.

He voted against the acquisition and had his dissent recorded.

His conduct is materially different from that of directors who approved the transaction.

The statutory rules concerning recorded dissent exist precisely because board responsibility should not necessarily be imposed identically on a director who properly objects to an impugned resolution.

Graham therefore has the strongest position among the directors.

Parcel 17

10. Parcel 17 Raises the Corporate-Opportunity Aspect of the Fiduciary Duty

Orchardline itself:

• identified the parcel;

• spent $90,000 investigating it;

• retained a consultant;

• received favourable commercial analysis; and

• considered the opportunity at board level.

Anouk learned the relevant information through her corporate position.

She then purchased the property for herself almost immediately after the board decided not to proceed.

Those facts strongly support the conclusion that this was not an opportunity that came to her independently.

11. The Board’s Decision Not to Proceed Gives Anouk a Real Defence

Anouk’s strongest argument is straightforward.

Orchardline considered Parcel 17 and rejected it.

A director is not necessarily prohibited from ever pursuing an opportunity a corporation has genuinely abandoned.

The board’s resolution therefore matters.

If Orchardline made a fully informed, independent decision that it did not want the parcel, Anouk’s argument would become considerably stronger.

12. The Circumstances of the Rejection Undermine That Defence

The board did not conclude that Parcel 17 was unattractive.

It decided:

“not to pursue Parcel 17 at this time”

because cash was being devoted to the Polar Reach acquisition.

That wording suggests deferral rather than permanent abandonment.

More importantly, the cash constraint was itself produced by a transaction from which Anouk secretly benefited.

Anouk did not disclose:

• that she personally intended to purchase Parcel 17;

• that she would use Orchardline’s consultant work;

• or that her interests could influence the board’s treatment of the opportunity.

The purported corporate rejection was therefore not made against a fully disclosed factual background.

13. Use of Orchardline’s Consultant Report Strengthens the Corporation’s Claim

Anouk did not simply notice a property after Orchardline lost interest.

She used work product funded by Orchardline to assess and capture the opportunity.

That reinforces the connection between:

• the opportunity;

• her office; and

• Orchardline’s prior pursuit.

It also strengthens the argument that the resulting gain should belong to the corporation rather than to Anouk.

14. The Long-Term Lease Demonstrates a Potentially Accountable Profit

Anouk’s company secured a valuable 15-year lease.

The relevant remedy for fiduciary breach need not be limited to Orchardline’s original $90,000 investigation cost.

Equitable and corporate remedies can focus upon the benefit obtained by the fiduciary through the breach.

An accounting for profits or other relief designed to strip the improper gain may therefore be available.

The precise relief depends upon the proceedings brought and the circumstances when judgment is given.

15. Overall Assessment

Anouk faces serious liability on both branches of the problem.

The Polar Reach transaction involves a direct undisclosed conflict, prohibited voting, a questionable price and omitted information.

Parcel 17 presents a strong corporate-opportunity claim because Orchardline had actively investigated the asset and Anouk appropriated it without full disclosure.

The other directors do not share her conflict, but those who approved the acquisition without meaningfully reviewing the professional material face a genuine duty-of-care issue.

Graham’s informed objection and recorded dissent place him in a materially stronger position.

Brickam’s Suggested Marking Approach — Question Two

Issue	Marks
Anouk’s material interest in Polar Reach; disclosure requirements under CBCA s. 120; inadequacy of her disclosure	5
Voting prohibition; statutory protection/confirmation requirements; fairness of transaction; potential setting aside/accounting	5
Fiduciary duty arising from secret self-interest and incomplete presentation to board	3
Duty of care of other directors; adequacy of their review; professional reliance; distinction between receipt and genuine reliance	4
Graham’s dissent and materially different position	2
Parcel 17 as corporate opportunity; Orchardline’s prior pursuit; alleged abandonment; absence of full disclosure; use of corporate information	5
Overall conclusion and remedial consequences	1
TOTAL	25

QUESTION THREE

30 marks — suggested time: 54 minutes

FACTS

Selborne Health Data Inc. (“Selborne”) develops software used by hospitals to manage patient scheduling and laboratory records.

It was founded eight years ago by:

• Jonas Harcourt, who owns 55% of the common shares;

• Sima Deneau, who owns 25%; and

• Etta Calhoun, who originally owned 20%.

All three initially worked full-time for Selborne.

Jonas became chief executive officer.

Sima became chief financial officer.

Etta became chief technology officer.

For the first six years, all three also served as directors.

There was no formal unanimous shareholder agreement.

However, shortly before incorporation, Jonas wrote to Etta and Sima:

“The three of us built this together. As long as each of us remains committed full-time, each founder will have a seat at the board table and a meaningful role in running Selborne.”

A second email stated:

“We are keeping salaries reasonable and sharing success through dividends so ownership means something.”

For the first six years:

• each founder remained a director;

• their salaries were broadly similar;

• Selborne paid annual dividends equal to approximately 30% to 40% of after-tax profits; and

• major strategic decisions were ordinarily discussed among all three before formal board approval.

Selborne became highly profitable.

By 2025, it had annual revenue of approximately $38 million.

A private-equity investor offered to purchase Selborne for approximately $62 million.

Etta supported the sale.

Jonas and Sima opposed it because they believed the business could become much more valuable.

Relations deteriorated.

Three months later, Jonas and Sima terminated Etta’s employment as chief technology officer.

For purposes of this examination, do not address employment law.

Jonas and Sima then used their voting control to remove Etta from the board.

They told her:

“Share ownership never guaranteed you a management job or a board seat forever.”

Selborne remained profitable.

The following year, however, the board stopped paying dividends.

Jonas’s annual compensation increased from $290,000 to $820,000.

Sima’s increased from $250,000 to $690,000.

The board recorded the increases as:

“market retention compensation reflecting the exceptional value of senior management.”

An independent compensation report obtained several months later estimated competitive compensation for comparable positions at approximately:

• $400,000 to $475,000 for Jonas; and

• $325,000 to $390,000 for Sima.

The board also approved an issue of 600,000 new common shares.

Before the issue, Selborne had 1,000,000 common shares outstanding.

The new shares were issued only to Jonas and Sima at $1.25 per share.

Six months earlier, an arm’s-length investor had offered to subscribe for common shares at $4 per share.

The board minutes state:

“Additional permanent capital is prudent in light of market uncertainty.”

Selborne had $9 million in cash and no significant long-term debt.

No external financing was sought.

After the share issue, Etta’s percentage interest fell substantially.

Approximately one month after receiving the $750,000 subscription proceeds, Selborne paid Jonas and Sima combined:

“founder retention bonuses”

of $610,000.

Etta says the share issue had no genuine financing purpose and was intended to dilute her while giving Jonas and Sima inexpensive additional equity.

Jonas denies this.

He says:

“We put additional capital at risk when Etta would not. Dilution is what happens when one shareholder does not participate in a financing.”

Etta was never offered the opportunity to subscribe.

She has now learned of another transaction.

Selborne paid Arcfield Strategy Group Ltd. $900,000 for two years of management consulting.

Arcfield is owned by Jonas’s adult daughter.

Its only other client paid approximately $80,000 per year for comparable services.

Jonas disclosed that his daughter owned Arcfield.

He did not vote on the board resolution approving the contract.

Sima and the corporation’s two newer independent directors approved it.

Etta believes the price is grossly excessive.

She wants:

1. to be bought out at the value her shares would have had immediately before the disputed share issuance;

2. repayment to Selborne of excessive compensation and bonuses;

3. recovery from Arcfield or Jonas in relation to the consulting payments; and

4. an order preventing Jonas and Sima from using their voting control to exclude her from the economic benefits of Selborne.

Jonas responds:

“Etta is unhappy because she lost a corporate power struggle. That is not oppression. Majority shareholders are allowed to control a corporation.”

QUESTION

Advise Etta concerning the shareholder remedies potentially available to her under the CBCA, the distinction among the different claims she wishes to advance, the principal requirements she must satisfy, and the relief a court could realistically grant.

30 MARKS

BRICKAM EXPLANATION — QUESTION THREE

1. Majority Control Is Lawful, but Its Exercise Is Not Beyond Review

Jonas is correct about one proposition.

A 55% shareholder ordinarily possesses significant voting power.

Corporate law does not guarantee that minority shareholders will prevail whenever shareholders disagree.

The question is whether that power was exercised in a manner that:

• oppressed;

• unfairly prejudiced; or

• unfairly disregarded

interests protected by the CBCA.

The oppression remedy is not triggered merely because Etta dislikes a valid majority decision.

Nor is it limited to conduct that is independently unlawful.

2. Etta Is a “Complainant”

As a current shareholder, Etta falls comfortably within the CBCA definition of a complainant.

She therefore has standing to seek the oppression remedy under s. 241.

She may also potentially seek leave to bring a derivative action where the cause of action properly belongs to Selborne.

The critical task is to distinguish the nature of each complaint.

Oppression

3. The Analysis Centres on Etta’s Reasonable Expectations

The oppression analysis asks what reasonable expectations arose from the parties’ relationship and whether corporate conduct violated those expectations in a manner that was oppressive, unfairly prejudicial or unfairly disregarded her interests.

Reasonable expectations are factual and contextual.

They may be informed by:

• agreements;

• representations;

• established practices;

• the nature of the corporation;

• the relationships among the parties;

• commercial norms; and

• the claimant’s own conduct.

Etta cannot simply assert whatever expectation now benefits her.

It must have been objectively reasonable.

4. The Founder Relationship Supports Some Expectations Beyond Bare Voting Rights

Selborne was not created as a passive investment by strangers.

It was founded by three people who:

• worked in the business;

• served together on the board;

• shared management responsibilities; and

• repeatedly distributed profits through dividends.

Jonas expressly wrote that each committed full-time founder would have:

“a seat at the board table and a meaningful role.”

That representation matters.

The long course of conduct reinforces it.

Etta therefore has a credible argument that she reasonably expected continuing participation while she remained committed to the enterprise.

5. But Her Board Seat Was Not Legally Irremovable Merely Because of the Emails

There was no USA or other formal arrangement preventing shareholders from exercising the statutory power to remove a director.

Jonas and Sima therefore have an argument that the board change was legally authorized.

That does not end the oppression analysis.

A transaction can be formally lawful and still violate reasonable expectations unfairly.

But the absence of a formal governance agreement is relevant when assessing how absolute Etta’s claimed expectation could reasonably have been.

6. The Removal Becomes More Significant When Viewed With the Later Economic Conduct

If Etta had merely been removed from management following a genuine breakdown in working relationships, her oppression claim would be less compelling.

The later events change the picture.

After excluding her:

• dividends ceased;

• Jonas and Sima dramatically increased their compensation;

• Etta was diluted through a selective low-priced share issuance; and

• corporate funds were substantially returned to Jonas and Sima through bonuses.

The court is entitled to consider the pattern rather than artificially isolating each corporate act.

7. The Dividend Change Is Not Automatically Oppressive

Shareholders do not ordinarily possess an unconditional right to dividends merely because the corporation is profitable.

Directors must determine whether declaring dividends is appropriate.

Selborne can legitimately retain earnings for corporate needs.

But historical practice matters.

For six years Selborne consistently distributed a meaningful portion of profits while founder salaries remained moderate.

Stopping dividends while dramatically increasing payments to the controlling shareholders may support the inference that economic value is being redirected away from Etta rather than retained for Selborne.

8. The Compensation Evidence Strengthens Etta’s Position

Jonas and Sima are entitled to reasonable compensation for their work.

The court should not set executive compensation merely because another number might have been preferable.

However, their compensation substantially exceeds the later independent market ranges.

That becomes more significant because:

• they control the corporation;

• dividends ceased;

• Etta is no longer receiving management compensation; and

• the historical understanding was that profits would be shared through ownership.

The apparent substitution of excessive compensation for dividends therefore supports an oppression theory.

It may also give rise to claims belonging to Selborne itself.

The Share Issue

9. The Selective Share Issue Is One of Etta’s Strongest Oppression Facts

Issuing shares for legitimate corporate financing can dilute existing shareholders.

Dilution by itself is not oppression.

But the circumstances here are suspicious.

Selborne:

• had substantial cash;

• had little debt;

• did not approach outside investors;

• issued shares only to Jonas and Sima;

• charged $1.25 despite a recent arm’s-length offer at $4; and

• shortly afterward paid most of the subscription proceeds back to Jonas and Sima through bonuses.

Those facts permit a strong inference that the issue was designed primarily to alter control and economics rather than raise genuinely required capital.

10. Etta Was Not Given an Opportunity to Participate

The absence of a general statutory pre-emptive right should not be confused with the oppression question.

Even if Etta did not possess an automatic statutory entitlement to subscribe proportionately, the selective issuance may still be assessed against:

• purpose;

• fairness;

• reasonable expectations; and

• its practical effect.

The board’s failure even to offer Etta participation strengthens the argument that the issue was designed to dilute her specifically.

11. A Buyout Is a Realistic Oppression Remedy

CBCA s. 241 gives the court unusually broad remedial authority.

A common practical remedy in a closely held shareholder dispute is an order requiring:

• the corporation; or

• another shareholder

to purchase the complainant’s shares.

Etta expressly seeks a buyout.

That is realistic if the relationship has become unworkable and the court concludes oppression occurred.

12. Valuation Date Can Be Central to Making the Remedy Fair

Etta seeks valuation immediately before the disputed share issuance.

That request has a coherent remedial basis.

If the dilution itself was oppressive, valuing her interest only after the wrongful dilution could allow Jonas and Sima to benefit from the very conduct being remedied.

The court’s remedial discretion is directed toward rectifying the oppression.

The valuation method and date should therefore neutralize, rather than reward, the oppressive effect.

The exact valuation would require evidence.

Derivative Claims

13. Not Every Wrong Etta Describes Is Primarily Her Personal Wrong

Etta seeks repayment of excessive compensation and consulting payments.

If corporate money was improperly paid away, the immediate financial loss was suffered by Selborne.

A shareholder generally cannot simply recover the corporation’s loss personally because her shares became less valuable.

That distinction is why the derivative action exists.

14. Excessive Compensation and Bonuses May Support a Derivative Action

If Jonas and Sima caused Selborne to pay compensation that breached duties owed to the corporation, the cause of action ordinarily belongs to Selborne.

Etta may therefore seek leave under CBCA s. 239 to bring proceedings in the corporation’s name.

The principal statutory conditions include:

• the required notice to the directors, subject to any court-ordered variation;

• Etta acting in good faith; and

• it appearing to be in Selborne’s interests that the action be brought.

15. The Board’s Control Structure Is Relevant to Whether a Derivative Proceeding Is Necessary

Jonas and Sima control a substantial portion of the voting shares and are beneficiaries of the impugned compensation.

That creates an obvious practical concern about expecting existing management voluntarily to cause Selborne to sue them.

Etta’s good-faith position is strengthened if she is genuinely trying to restore corporate assets rather than use the derivative procedure merely to obtain personal leverage.

16. The Arcfield Payments Also Primarily Affect Selborne

Arcfield received $900,000 of corporate money.

If the services were worth dramatically less, the corporation is the party whose assets were depleted.

That points strongly toward a derivative claim or other corporate remedy.

The fact that Jonas disclosed his daughter’s ownership and did not vote helps him.

It means this is not as straightforward as a concealed conflict.

The remaining directors approved the contract.

The legal question therefore includes whether:

• the statutory conflict procedures were adequately followed;

• the transaction was reasonable and fair; and

• any director duties were breached despite formal disclosure.

The market-value evidence creates a serious concern.

17. Disclosure Does Not Make an Unfair Transaction Automatically Immune

A conflicted transaction is not validated merely because the interested director says:

“My relative owns the other company.”

The statutory regime also places importance on proper approval and fairness.

A $900,000 payment for services apparently available for a small fraction of that amount may support corporate relief even though Jonas abstained.

The independent directors’ decision-making would require close examination.

Oppression and Derivative Relief Can Overlap

18. Etta Should Not Treat the Remedies as Mutually Exclusive Doctrines

The same conduct can sometimes:

• harm the corporation; and

• unfairly prejudice a particular shareholder.

For example, excessive salaries reduce Selborne’s assets but may also form part of a scheme to divert returns away from Etta.

The court will examine the true nature of the complaint and the relief sought.

Etta should therefore plead and structure her claims carefully rather than assume that every allegation must fit exclusively into one box.

19. The Destination of the Remedy Helps Distinguish the Claims

If the objective is:

restore $600,000 improperly paid out of Selborne,

the corporate nature of the claim points toward derivative relief.

If the objective is:

compensate Etta for being unfairly diluted and excluded,

the oppression remedy is more naturally personal.

That distinction is often more useful than simply asking whether the same facts appear in both claims.

20. A Personal Action Is Less Central Here

A direct personal action would require Etta to identify a legal right owed to her personally and breached directly.

Some of her complaints concern her own shareholder interests, but the CBCA oppression remedy already provides a powerful statutory vehicle for those matters.

Corporate losses should not be relabelled as personal damages merely to avoid the derivative-action requirements.

Available Oppression Orders

21. The Court’s Remedial Powers Are Broad

If oppression is established, possible orders include:

• restraining the conduct;

• regulating Selborne’s affairs;

• directing an issue or exchange of securities;

• appointing directors;

• requiring the corporation or another person to purchase Etta’s shares;

• setting aside transactions;

• compensating affected persons; and

• other relief necessary to rectify the matters complained of.

The remedy should be tailored to the reasonable expectation that was violated.

22. Reinstatement to Management Is Not Necessarily the Best Final Remedy

Etta may have expected meaningful participation.

But the founders’ relationship has now collapsed.

Ordering three hostile founders to resume intimate management together may be impractical.

A buyout at a fair value that eliminates the effect of the impugned dilution may better rectify the dispute.

This illustrates why oppression remedies are flexible rather than mechanically tied to reversing each corporate decision.

23. Overall Assessment

Etta has a strong oppression claim when the facts are considered cumulatively.

The most persuasive features are:

• the founder relationship;

• longstanding board and dividend practices;

• subsequent exclusion;

• unusually high insider compensation;

• cessation of dividends;

• selective low-priced dilution; and

• rapid return of much of the supposed new capital to Jonas and Sima.

Her claims seeking restoration of excessive payments to Selborne should, however, be distinguished from her personal oppression claim.

Derivative proceedings are particularly relevant to corporate losses.

The strongest practical outcome may be a buyout valuing Etta’s interest in a manner that removes the effect of the oppressive share issuance, together with appropriate corporate recovery proceedings concerning improper payments.

Brickam’s Suggested Marking Approach — Question Three

Issue	Marks
Etta’s standing as complainant; oppression statutory framework; majority control not inherently oppressive	3
Reasonable expectations arising from founder communications, course of dealing, management participation and dividends	6
Removal from office/board; lawful corporate power versus possible frustration of reasonable expectations	3
Dividend cessation and excessive insider compensation as part of oppression analysis	4
Selective low-priced share issue; financing justification; lack of participation opportunity; dilution and purpose	5
Derivative action distinction; corporate nature of excessive compensation/bonus and Arcfield losses; s. 239 notice, good faith and corporate-interest requirements	4
Arcfield conflict/fairness issues and effect of Jonas’s disclosure/abstention	2
Oppression remedies, derivative remedies, buyout and valuation approach; avoidance of converting corporate loss into personal damages	2
Overall synthesis	1
TOTAL	30

QUESTION FOUR

20 marks — suggested time: 36 minutes

FACTS

Cinderlake Diagnostics Inc. (“Cinderlake”) manufactures laboratory-imaging equipment and licenses diagnostic software.

It has two classes of shares:

• 600,000 Class A common shares, which ordinarily carry one vote per share; and

• 400,000 Class B participating shares, which ordinarily carry no voting rights.

Class A and Class B shares participate equally, share for share, in dividends and in the remaining property of Cinderlake upon dissolution.

Cinderlake operates through two divisions.

Its Imaging Division:

• owns Cinderlake’s manufacturing plant;

• employs 220 of Cinderlake’s 250 employees;

• generates approximately 82% of annual revenue;

• accounts for approximately 74% of the corporation’s asset value; and

• produces approximately 88% of operating profit.

Its Software Division:

• employs 30 people;

• owns several valuable patents and software licences;

• generates approximately 18% of annual revenue; and

• is expected by management to grow substantially over the next five years.

The board has negotiated a transaction under which Lattice Peak Medical Ltd. will purchase:

• the manufacturing plant;

• all Imaging Division inventory;

• the division’s equipment;

• its customer contracts;

• its trademarks; and

• substantially all other assets used by the Imaging Division

for $54 million.

Cinderlake will retain:

• the Software Division;

• approximately $11 million in cash; and

• several patents unrelated to the Imaging Division.

The board intends to use part of the sale proceeds to expand the Software Division.

The directors say no shareholder approval is required because:

“Cinderlake is not selling all of its assets and will continue operating a real business after closing.”

Several Class A shareholders disagree.

The board nevertheless schedules a shareholder meeting.

It sends notice only to Class A shareholders and states that the proposed transaction will be approved if two-thirds of the votes cast by Class A shareholders favour the transaction.

No materials are sent to Class B shareholders because their shares are described in the articles as non-voting.

Cora Lindell owns 80,000 Class B shares.

She learns of the transaction from another shareholder.

Three days before the scheduled meeting, she emails Cinderlake’s corporate secretary:

“I object to the sale of the Imaging Division and demand all rights available to me as a shareholder if the company proceeds.”

Cora attends the meeting and asks to vote.

The chair refuses.

He says:

“Your shares are non-voting. You bought them knowing that.”

The Class A shareholders approve the sale by more than two-thirds of the votes cast.

Cinderlake tells Cora that:

• her objection has no legal effect;

• she has no right to vote;

• she has no dissent right; and

• if she dislikes the company’s new direction she may sell her shares privately.

The transaction has not yet closed.

Cora seeks immediate advice.

QUESTION

Advise Cinderlake and Cora concerning the shareholder approvals required for the proposed transaction and Cora’s statutory rights if Cinderlake proceeds with the sale.

20 MARKS

BRICKAM EXPLANATION — QUESTION FOUR

1. The First Question Is Whether CBCA s. 189(3) Applies

Shareholder approval is required for a sale, lease or exchange of all or substantially all of a corporation’s property outside the ordinary course of business.

The board’s argument focuses too narrowly on the word:

“all.”

The statute expressly reaches transactions involving substantially all property.

The corporation may therefore retain meaningful assets and still fall within the provision.

2. “Substantially All” Requires More Than Mechanical Arithmetic

The financial figures are highly relevant.

The Imaging Division represents approximately:

• 74% of asset value;

• 82% of revenue;

• 88% of operating profit; and

• 220 of 250 employees.

Those figures strongly support the conclusion that the transaction is extraordinary.

The qualitative effect also matters.

Cinderlake will cease being primarily a manufacturer and become principally a software-licensing enterprise.

That is a major transformation in the nature of its business.

3. The Remaining Software Business Gives Cinderlake a Genuine Counterargument

The sale is not a liquidation disguised as an asset transfer.

Cinderlake retains:

• valuable patents;

• a functioning business;

• 30 employees;

• substantial cash; and

• a plan for future expansion.

The Software Division already produces 18% of revenue and is expected to grow.

Cinderlake can therefore argue that it is selling a major division rather than substantially all of the corporation.

The issue is fact-sensitive.

Still, the combination of quantitative dominance and qualitative transformation makes application of s. 189(3) more likely than not.

4. The Transaction Is Not in the Ordinary Course

Selling the operating assets, customer contracts and manufacturing plant of the division producing most of Cinderlake’s business is not analogous to ordinary inventory sales or routine asset replacement.

The transaction is strategic and transformative.

The ordinary-course exception is therefore unlikely to prevent s. 189 from applying.

Voting Rights

5. If Section 189(3) Applies, Class B Shares Are Not Simply “Non-Voting”

The articles ordinarily deny Class B shares voting rights.

That does not answer the statutory question.

For an extraordinary sale governed by s. 189(3), the CBCA gives each share a vote whether or not that share otherwise carries voting rights.

The chair therefore cannot dispose of Cora’s position by saying:

“You bought non-voting shares.”

The statute creates a transaction-specific voting right.

6. Notice Should Have Been Given to the Class B Shareholders

The statutory procedure requires notice of the meeting to shareholders and requires information concerning the proposed sale.

The notice must also address the applicable dissent right.

Cinderlake sent nothing to Class B shareholders.

If s. 189 applies, that procedure is defective.

7. The Special-Resolution Requirement Applies

An extraordinary sale under s. 189 requires shareholder approval by special resolution in the manner prescribed by the Act.

The board therefore cannot treat ordinary voting rights under the articles as the complete approval framework.

The transaction-specific statutory regime controls.

8. Separate Class Voting Depends Upon Differential Effect

Every share receives a vote on the extraordinary transaction.

That is distinct from whether Class A and Class B vote separately as classes.

A class or series receives a separate class vote where the sale affects it differently from another class or series in the statutory sense.

Here, both classes participate equally, share for share, in the corporation’s economic property.

Nothing in the facts indicates that the sale agreement itself treats Class A and Class B differently.

Accordingly, Cora has a strong argument that her Class B shares must vote, but the facts do not clearly establish an additional entitlement to a separate Class B class vote.

Candidates should distinguish those two propositions.

Dissent

9. An Extraordinary Asset Sale Can Trigger Statutory Dissent Rights

CBCA s. 190 gives shareholders a right to dissent from specified fundamental changes, including a qualifying sale of all or substantially all corporate property under s. 189(3).

If this transaction falls within that provision, Cora cannot be told that dissent is unavailable merely because her shares are normally non-voting.

The statutory dissent regime is linked to the extraordinary transaction.

10. The Dissent Right Ultimately Leads to Fair Value, Not a Veto

Dissent does not ordinarily allow Cora personally to prevent an otherwise properly approved transaction merely because she opposes it.

A shareholder who properly exercises the statutory right is generally entitled to be paid the fair value of the affected shares, determined in accordance with s. 190.

That distinguishes dissent from an injunction or oppression remedy.

Its central function is to permit exit at statutorily determined fair value when specified fundamental changes occur.

11. Procedure Is Critical

The dissent remedy is highly procedural.

A shareholder must comply with the statutory steps and timelines.

Ordinarily those include:

• a written objection before or at the relevant meeting, where required;

• subsequent notices following adoption of the resolution;

• a timely demand for payment; and

• compliance with the remaining statutory steps.

Failure to comply can cause the dissent right to be lost.

12. Cora Has Already Taken a Helpful Step

Cora emailed the corporate secretary three days before the meeting stating that she:

“object[s] to the sale”

and demands available shareholder rights.

That provides a strong argument that she communicated a written objection.

Moreover, Cinderlake failed to give her the statutory notice it says she was not entitled to receive.

The corporation should not assume that its own failure to treat Cora as an eligible shareholder automatically extinguishes her dissent rights.

13. Cinderlake’s Current Approval Process Is Unsafe

If s. 189 applies, Cinderlake has proceeded on a materially mistaken basis by:

• excluding 400,000 Class B shares from the vote;

• failing to send them the required materials;

• refusing Cora’s ballot; and

• denying dissent rights altogether.

The prudent course is not to close the transaction on the basis of the existing vote.

The corporation should correct the statutory approval process before proceeding.

14. Overall Advice

The sale likely qualifies as a disposition of substantially all Cinderlake property outside the ordinary course because the Imaging Division dominates:

• assets;

• revenue;

• profit;

• employment; and

• the corporation’s existing operating identity.

If s. 189 applies, Class B shareholders receive a statutory vote notwithstanding their ordinary non-voting status.

Whether they vote separately as a class is a different question and depends on differential treatment; the present facts do not clearly establish it.

Cora also has a strong basis to invoke the statutory dissent regime and, if she completes the required steps, seek fair value for her shares.

Cinderlake should therefore not close using the approval obtained at the defective meeting.

Brickam’s Suggested Marking Approach — Question Four

Issue	Marks
Whether sale constitutes all or substantially all property; quantitative and qualitative factors; retained Software Division counterargument	7
Ordinary-course issue	2
Statutory voting rights of Class B shares despite ordinary non-voting status; notice and special-resolution requirements	4
Distinction between voting right for every share and separate class voting based on differential effect	2
Cora’s dissent right; fair-value concept; importance of statutory procedure and her written objection	4
Overall practical advice concerning defective approval and closing	1
TOTAL	20

Overall Mark Allocation

Question	Marks
Question One — Shareholder Governance and Unanimous Shareholder Agreements	25
Question Two — Directors’ Conflicts, Duties and Corporate Opportunities	25
Question Three — Oppression, Derivative Actions and Shareholder Remedies	30
Question Four — Fundamental Asset Sale and Dissent Rights	20
TOTAL	100