Liability for breaching duty of loyalty - CI

Question 1

CI transaction

Answer 1

At least one director is on both sides of a transaction

Question 2

Common law

Answer 2

Contracts made with a conflict of interest were void or voidable at the election of the company (Aberdeen RR Co. v. Blaikie Brothers)

One exception: The shareholders of the company could adopt or ratify (approve) the contract. Oddly, even the “conflicted shares” would count towards that approval. (North-West Transportation v. Beatty)

Rationale: sometimes these k are beneficial to the corp + successful business people of the type are likely to be put on board will have multiple financial interest.

So the rigid common-law rule had to give way to modern reality and CBCA § 120

Question 3

See Aberdeen RR Co. v. Blaikie Bros

Answer 3

B is chairman of railway and a partner at BB. A contracted with BB to buy chairs. Some were delivered, and A refused to accept delivery for the rest. A argued that K is void b/c its chairman had a conflict of interest. BB sued for specific performance.

Court: directors have FD to the corp based on agency relationship. Nobody with this duty can enter into agreement where he has a personal interest that may conflict with his FD.

• This is a strict principle - No defense that K was fair
• B as the chairman of board may also have an undue influence on the board.

Question 4

North-West Transportation v Beatty

Answer 4

Note that at that time there was an exception to the strict CL approach: SH, on full disclosure of the facts of a CI transaction, could adopt or ratify the K - conflicted shares would still count toward ratification of transaction. [changed today]

Facts: NW was in search of another ship; Corp was unable to find a suitable ship; SH resolution was passed to approve this purchase and price was not excessive. B, a director, sold his ship to the corp. SH brought action against corp and directors to set aside the sale, claiming that B’s involvement breached his FD.

SCC: interested director’s contract could be ratified only by a disinterested majority of shareholders - no ratification here.

HL: all votes count, even the conflicted ones - this is effective ratification even if he didn’t give his shares away.
- Articles didn’t prevent B from acquiring voting power

Question 5

Statutory provision

Answer 5

s120 procedure
- Full disclosure of the existence of a material interest in a K or transaction is required by the interested director or officer.
[def of interested director/officer]
- Interested director shall not vote on the k or transaction
- To approve: the K or transaction is valid if passed by directors with a majority of minority; if failed, must be passed by SH with a special resolution.
- Even if the procedure was followed perfectly, directors would still need to prove that the k was “reasonable and fiar to the corp” if challenged in litigation
- More rigorous review than duty of care litigations, where court only screen for bad procedures.