Shareholders Under The Draft Canada Business
Corporations Act
Frank Iacobucci *
I. Introduction
Recently there has been a deluge of corporate legislation reform,
as illustrated by the new statute of Ontario, the proposed corpo-
ration statute for British Columbia and the proposals for a Draft
Canada Business Corporations Act.” The purpose of this article
is to discuss generally the provisions of the Draft Act dealing with
shareholders. The discussion will not cover all the shareholder
provisions in the Draft Act, however, nor will it be exhaustive of
those provisions which are selected for discussion 2 Moreover,
there are very important provisions dealing with security certifi-
cates, registers and transfers (Part 6.00 of the Draft Act), pro-
Professor, Faculty of Law, University of Toronto.
Ontario’s statute is: The Business Corporations Act, S.O. 1970, c. 25,
amended by S.O. 1971, c. 26 (hereinafter referred to as the “Ontario BCA”);
see also: Bill 180, An Act to Amend The Business Corporations Act, 2nd Sess.,
29th Legis., 21 Eliz. II, 1972 (1st reading, June 15, 1972). For comments on
the BCA, see: Lavine, The Business Corporations Act, 1970: An Analysis (1971);
The Business Corporations Act 1970, Special One-Day Programme of The Law
Society of Upper Canada (1970); Getz, Corporation Law, (1971) 5 Ottawa L.
Rev. 154; Iacobucci, The Business Corporations Act, 1970: Creation and Finan-
cing of a Corporation, (1971) 21 U. of Tor. LJ. 416, and Management and
Control of a Corporation, (1971) 21 U. of Tor. L.J 543; Salter, The Business
Corporations Act – One Year Later, [1972] Special Lectures of The Law
Society of Upper Canada 1 (hereinafter cited as “Special Lectures”).
British Columbia’s proposed statute is: Companies Act, Bill No. 66 (1972).
See also the related Departmental Study Report of the Department of the
Attorney-General of B.C. (Dec. 21, 1971).
The proposed Canadian legislation is in two volumes: Proposals For a New
Business Corporations Law for Canada (1971), Commentary (vol. 1) and
Draft Canada Business Corporations Act (vol. 2), (hereinafter referred to as
“Commentary” and “Draft Act”, respectively).
2 See: Howard, The Proposals for a New Business Corporations Act for
Canada: Concepts and Policies, in Special Lectures, op. cit., at p. 17; Willis,
A New Canadian Business Corporations Law?, (1971) 99 Canadian Chartered
Accountant 442; Hornstein, Perspectives in Corporation Law, in 1971/72 Annual
Survey of American Law 131.
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
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spectus qualifications (Part 15.00) and take-over bids (Part 16.00)
which affect shareholders directly but which will not be discussed.
The Draft Act has been selected for comment by the author
simply because it represents the best Canadian attempt to deal
realistically and sensibly not only with shareholders but also with
the corporation itself.
II. Provisions Affecting Shareholders
A. Financial Aspects
(1) Share Capital
Many provisions of the Draft Act dealing with corporate finance
and corporate securities generally are very innovative. The Draft
Act has also introduced related rules dealing with security certifi-
cates, registers and transfers, and trustees and trust indentures
which were initially enacted by the Ontario BCA.3
Under the Draft Act, there is no mandatory requirement for
a corporation to have stated clearly in its articles of incorporation
its authorized capital. Section 2.02(1)(c) prescribes simply that
any maximum number of shares which the corporation is author-
ized to issue shall be set out in the articles of incorporation.
Consequently the concept of authorized shares is optional, and
most corporations will not provide for authorized capital, thereby
avoiding extra legal fees and time in not having to file a charter
amendment whenever a proposed share issuance would exceed
their authorized shares.
An extremely welcome provision is section 5.01(1), which re-
quires that shares be without par value since, as mentioned in
the Commentary, the concept of par value is not only arbitrary
but also quite misleading.4 In my opinion the best reason for
abolishing par value shares is that such terms as “paid-in” and
“contributed surplus” will also disappear. These terms have-caused
considerable confusion and scope for abuse, since the surplus
3Security certificates, registers and transfers are dealt with in Part 6.00
of the Draft Act; compare Ontario BCA, sections 63-97. Trustees under trust
indentures are dealt with in Part 7.00 of the Draft Act; compare Ontario BCA,
sections 57-62. Parts 6.00 and 7.00, like their Ontario counterparts, are based
on U.S. legislation: Article 8 of the Uniform Commercial Code, and the Trust
Indenture Act of 1939.
4″What matters to an investor is the proportionate size of his investment
in a corporation, not the arbitrary monetary denomination attributed to that
investment”: Commentary, para. 98.
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arising on the issuing of shares in excess of par value could be
used for distribution as dividends. The effect of abolishing par
value shares will be that all of the consideration received by the
corporation will be allocated to the share capital account and
thereby locked in, subject to the rules relating to return of capital.6
The Draft Act also allows shares to be redeemed as long as the
redemption price or the manner in which such price will be de-
termined upon redemption is specified in the articles.’
The Draft Act also makes no formal distinction between types
of shares, that is, common and preference (or special shares in the
Ontario BCA). The Draft Act simply provides that if a corporation
has more than one class of shares, the rights, privileges, restrictions,
and conditions applying to the different classes are to be set forth
in the articles. If there is one class of shares, then the shares must
confer on the holders thereof the right to vote at all shareholders’
meetings; if there is more than one class of shares, at least one
class must be fully voting.7 The draftsmen apparently feel there is
not much to be gained from describing shares as “common” or
“preferred” since such description assumes each type of share has a
precise meaning, an assumption which the draftsmen argue is
misleading. This may be true, but calling all types of shares by the
same designation may prove to be more misleading than the present
common-preferred distinction. Perhaps the statute should provide
that where there is more than one class of shares the shares should
be designated by some term which indicates the class difference, for
example, voting or non-voting.
A useful mechanism is provided in section 5.04 of the Draft Act
with respect to the issue of a series of shares of a class. Subsection
(1) provides that the articles may authorize the issue of any class
of shares in one or more series, and may authorize the directors to
fix the number of shares in the series and the rights and conditions
attaching thereto, subject to the articles. This means that, if the
shareholders so desire, the directors may be given considerable
5The abolition of par value shares will, of course, also eliminate the diffi-
culty of not being able to issue shares at less than par value. See also
section 5.03 of the Draft Act which requires a corporation to maintain a
separate stated capital account for each class and series of shares issued;
it also provides that the consideration received for shares is to be added
to the stated capital account. The latter requirement is analogous to section
13(9) of the present Canada Corporations Act, R.S.C. 1970, c. C-32 (hereinafter
referred to as “the present Act”).
B Section 5.10. This is similar to section 35(1)(a) of the Ontario BCA.
7 Section 5.01(2), (3), (4).
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
249
flexibility in issuing shares in series –
useful in order to meet
changing market conditions. The provision giving added discretion
to the directors (who could, for example, issue preferred shares
with different dividend or conversion rights) is basically fair since
the shareholders must authorize such discretion by their approval
of the articles.”
(2) Purchase By a Company of Its Own Shares
The Draft Act reverses the rule in Trevor v. Whitworth,9 which
prohibited a corporation from purchasing its own shares. The
treatment of a company purchasing its own shares is distinguished
from a redemption of redeemable shares. Anything beyond such
a definition of a purchase or redemption is subject to the provisions
dealing with a reduction in capital.
The basic section dealing with this subject is section 5.07(1),
which expressly prohibits a company from purchasing its own
shares, or shares in its holding body corporate, and renders such a
purchase void;10 but several exceptions are provided. The first two
exceptions allow a corporation to hold its own shares as a legal
representative, and as security for a transaction entered into by it
in the ordinary course of business that includes the lending of
money.1
sThe Commentary points out that some jurisdictions (for example, North
Carolina) allow the directors to vary only certain terms, for example, the
dividend rate, amounts payable on redemption or liquidation, sinking fund
provisions, and conversion privileges. See section 5541 of the North Carolina
Business Corporation Act, which section also provides that each series must
be designated to distinguish the shares thereof from the shares of all other
series and classes.
9 (1887), 12 App. Cas. 409 (H.L.). Not much is said in the Draft Act as to
why a corporation should be able to acquire its own common shares. The
Commentary mentions that the objections of impairment of capital to the
detriment of creditors, consolidation of control by the directors, and market
manipulation have been covered by the rules of the Draft Act. See: Com-
mentary, paras. 123-26, 136. One may doubt whether the provisions of the
Draft Act fully meet the above objections, however. For example, the Com-
mentary says since shares acquired by the corporation are cancelled, this
reduces the opportunity for directors to use the votes of those shares. But
if the directors own a near majority of the shares, they could cause the
corporation to purchase enough shares to give them control. This possibility
does not seem specifically removed by the Draft Act. See the discussion of
section 5.08, below.
10 This is similar to section 19 of the present Act; for a recent case on this
section, see Schiowitz v. I.O.S. Ltd., [1972] 3 O.R. 262 (C.A.).
“Section 5.07(2), (3).
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A major exception is found in section 5.08, which provides that,
notwithstanding the basic prohibition mentioned above, but subject
to a solvency test (mentioned below) and to any provisions in its
articles, a corporation may for any reason purchase its own shares.
Presumably under section 2.02 a corporation could include a provi-
sion in its articles prohibiting it from purchasing its own shares.
It is interesting to speculate on the meaning of “for any reason”.
Literally it could mean a corporation could purchase shares to in-
crease the voting strength of the directors and officers of the corpo-
ration through the cancellation of the shares so purchased. In other
words, “for any reason” implies that a purchase can be made not-
withstanding that it is not in the best interests of the corporation.
Hopefully this would not in the end be the case, however, as the
purchase would presumably be subject to the duty of directors
prescribed by section 9.19 of the Draft Act.
This raises another point which remains obscure under the
provisions: the Draft Act does not specify whether the directors of
the corporation must authorize the purchase, and if so whether a
separate resolution is required. Section 9.16(2)(a), which holds
liable those directors who vote for or consent to a resolution in
contravention of section 5.08, at least implies that the directors
may pass a resolution authorizing such a purchase. But the proce-
dure for a purchase of shares should be set out clearly in the en-
abling provision and not left to inference from the liability section,
especially since many questions are unanswered; for example, can
the directors buy from “friends”, or is there any obligation to give
all shareholders an equal chance to sell their shares.’2
Under section 5.08(2) a corporation cannot purchase its own
shares or shares of its parent “if there are reasonable grounds for
believing that (a) the corporation is or would after the purchase
or acquisition be unable to pay its liabilities as they become due,
or (b) the value of the corporation’s assets would thereby be less
than the aggregate of its liabilities and stated capital of all classes.”
Basically, then, a two-fold solvency test is applicable to a purchase
of shares by a corporation, expressed in terms of the two usual
12 Compare Ontario BCA, section 39. I do not mean to suggest that the
federal act’s procedure should necessarily be as restrictive as that found
in section 39, but it might be worthwhile to specify certain requirements.
For example, the directors must authorize the purchase of a prescribed
amount (not each specific purchase), and must do so in good faith for certain
purposes connected with benefitting the corporation; and perhaps the directors
should be required to disclose to the shareholders the specific purpose of the
purchase. See: North Carolina Business Corporation Act, section 55-52.
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
251
definitions of solvency. Note that the corporation may purchase if
there are reasonable grounds for believing the corporation is solvent.
Presumably the directors have reasonable grounds for such belief if
they rely in good faith on financial statements to determine that the
company is solvent, since this defence for directors is expressly pro-
vided in section 9.16(9).1
Subsection (3) of section 5.08 provides that for the purposes of
subsection (2), “… account may be taken of an unrealized incre-
ment in the value of any marketable asset, and no allowance is
required to be made for depletion of a wasting asset.” This subsec-
tion has been added because in the view of the draftsmen it is
“absurdly conservative” to require the calculation of the value of
assets based on historical cost.’4 Several questions come to mind,
however. First, if one is concerned about protecting creditors from
improper dissipation of capital, perhaps an abundance of caution is
worthwhile, especially since some of the terms used in subsection (3)
are not defined (for example, what is a marketable asset, or what
is the unrealized increment at any given time15). This means a
considerable reliance will be placed on the accountants by the direc-
tors. The Commentary mentions that the directors’ potential personal
liability under section 9.16 will ensure that the financial position of
the corporation will receive close scrutiny in considering a purchase
of its own shares. However, as already mentioned, the directors can
successfully defend such an attack if they can show they have relied
and acted in good faith on financial statements prepared by an officer
or the auditor of the corporation.
Section 5.09 outlines some specific purposes for which a corpo-
ration may purchase its own shares:
(a)
to settle or compromise a debt by or against the corporation
or the holding body corporate;
to eliminate fractional shares;
to “fulfil terms of a non-assignable agreement under which the
corporation or the holding body corporate has an option or is
obliged to purchase shares owned by a director, officer or em-
ployee of the corporation or the holding body corporate”;
to satisfy the claim of a shareholder who dissents from certain
transactions under section 14.17; or
(b)
(c)
(d)
13 By section 9.16(9), the financial statements may be relied upon if they
are represented to be correct by an officer of the corporation or stated to
be accurate in the written report of the auditor.
14See: Commentary, para. 128.
15 On the question of ignoring depletion of wasting assets, see: Commentary,
para. 129.
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(e)
to comply with a court order requiring the corporation to
purchase an aggrieved shareholder’s shares under section 19.04.
The solvency test contained in subsection (2) of section 5.09, which
is applicable to the purchases contemplated in situations (a), (b)
and (c), is somewhat more relaxed than that in section 5.08(2).16
Section 5.10 allows the redemption of shares, subject to a sol-
vency test and to any provision in the articles; but the corporation
cannot redeem at prices exceeding the redemption price stated in
the articles or calculated according to a formula stated in the arti-
cles. Presumably the intent of the emphasized words is that if there
is no redemption price specified, there must be a formula which
determines a fixed price; it would not be a formula to state in the
articles that the shares may be redeemed at whatever price the direc-
tors decide.-”
In a rather complicated and inelegant fashion, section 5.11 deals
with the effect on the stated capital of a purchase, redemption or
other acquisition or conversion of shares, the intention being td’
reduce stated capital by the amount which was credited to the stated
capital when the shares were originally issued. Subsection (6) of
section 5.11 provides that shares purchased, redeemed or otherwise
acquired by it shall be cancelled, or, if the articles include a concept
of authorized shares, shall be restored to authorized but unissued
shares. This makes abundant sense, since by this simple provision
some very nasty problems are eliminated: accounting problems relat-
ing to the purchase, especially those dealing with presenting the
“surplus” arising in the resale of such shares; problems regarding
the dividend or voting rights of reacquired shares; and problems
concerning voting and stock market manipulation.
In this connection, section 10.01 (1) (b) (ii) of the Draft Act defines
an “insider” to include a corporation which is purchasing or other-
16 Section 5.09(2) requires that the value of the corporation’s assets after
the purchase must not be less than the aggregate of its liabilities and the
amounts required for payment on a redemption or in a liquidation of all
shares which carry the right to be paid for prior to the shares purchased
or acquired. The solvency test for situations (d) and (e) are covered
in
sections 14.17(26) and 19.04(6) respectively.
17 Paragraph 131 of the Commentary suggests that the insolvency condition
is really the only one that is necessary, inasmuch as there is “public notice”
of the fact that the corporation is empowered to reduce its capital. Note,
however, that section 3.04 of the Draft Act purports to abolish the doctrine
of constructive notice of the documents filed by the Registrar, which would
include the articles. Compare Ontario BCA, sections 27(2), 35(1)a. See: Salter,
op. cit., at p. 8.
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
253
wise acquiring its own shares, and therefore the corporation is
subject to Part 10.00 of the Draft Act dealing with insider trading.
Accordingly such purchases will become public knowledge, since it
is contemplated that the Registrir will publicize insider information
generally. However, it would be even more desirable for the corpo-
ration to disclose more directly to its shareholders the number and
details concerning such purchases, including the reasons therefor,
perhaps by disclosure in the information circular for the annual
meeting or by balance sheet notation, or both.
Section 5.12 provides that agreements to purchase, redeem or
otherwise acquire shares are specifically enforceable against the
corporation, unless prevented by the provisions of the statute, with
the corporation having the onus of proving that performance is so
prevented.’
(3) Dividends
Section 5.14 attempts to simplify the muddled law relating to the
payment of dividends.’ 9 Briefly, it prohibits the payment of a divi-
dend if there are reasonable grounds for believing that the corpora-
tion is or would be insolvent, with solvency defined in the same
way as for a purchase by a company of its own shares. Again, account
may be taken of the unrealized increment in the value of any market-
able asset, and no allowance is required to be made for depletion of
wasting assets. Section 9.16(2)(c) imposes personal liability on di-
rectors who approve a resolution authorizing payment of a dividend
contrary to section 5.14, but subsection (9) of section 9.16 provides a
defence to directors who rely and act in good faith on the financial
statements of the company.2
Two more aspects of a corporation’s acquisition of its own shares
should be mentioned. First, section 43 of the Ontario BCA gives an
Ontario corporation the power to accept shares by way of gift with-
out any payment of capital in respect thereof. This is not expressly
provided for in the Draft Act. And second, the new income tax
3’8 1t should be noted that section 5.12 refers to sections 5.09 and 5.10 but
omits section 5.08.
19 See: Bryden, “The Law of Dividends”, in Studies in Canadian Com-
pany Law, Ziegel ed. (1967), at p. 270 (hereinafter cited as “Studies”).
20 Two more related sections of the Draft Act are section 5.15, which deals
with stock dividends and dividends in kind, and section 5.16, which deals with
loans to shareholders.
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considerations relating to a purchase or redemption by a corporation
of its shares must be kept in mind.2′
B. Shareholders’ Rights
Issuance of Shares and Pre-emptive Rights
(1)
“Securities” of a corporation under the Draft Act may not be
issued until fully paid, which occurs when “the corporation has re-
ceived all the consideration therefor in money, or in property or
past services that is the fair equivalent of the money that the corpo-
ration would have received if the security had been issued for
money.”‘ This provision will eliminate partly-paid shares and the
procedures for calls thereon which have been anachronistic in the
modern setting.
The Draft Act introduces a significant change with respect to pre-
emptive rights. At common law, it is arguable that the issuance of
shares, absent an express provision in the instrument of incorpora-
tion, is not qualified by a pre-emptive restriction requiring the
issuance to be offered to existing shareholders pro rata on the basis
of their existing shareholding.23 But section 5.05(1) of the Draft Act
provides for a pre-emptive right unless the articles of incorporation
have expressly limited the right or excluded it. This is a rather
curious formulation for this provision especially when one examines
the reasons for its enactment.
Pre-emptive rights are designed to prevent dilution of a share-
holder’s interest and strength by the directors exercising their power
of issuance in some improper way, whether to benefit themselves
21 Especially important are the deemed dividend provisions of section 84
of the Income Tax Act, S.C. 1970-71, c. 63. The new Income Tax Act changes
the order of payment made under the former act in that capital is returned
first and any balance is taxable as a dividend, with complicated transitional
provisions. See also section 181 which deals with open market purchases of
common shares.
22 Presumably “shares” should be substituted for “securities” in section
5.02(3). “Security” is defined in section 1.02(1)(u)
to mean “a certificate
evidencing a share of any class or series of shares or a debt obligation [in
turn defined by section 1.02(1)(k)] of a corporation”. Section 5.02(4) provides
that, in determining whether property or past services is the fair equivalent
of a money consideration, the directors may consider “reasonable charges and
expenses of organization and re-organization and payments for property and
past services reasonably expected to benefit the corporation”.
23 See: Harris v. Sumner, (1909) 39 N.B.R. 204 (C.A.). Cf. Martin v. Gibson,
(1908) 15 O.L.R. 623 (H.C.); Bonisteel v. Collis Leather Co. Ltd., (1919) 45 O.L.R.
195 (H.C.).
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
255
personally or to prevent some occurrence, such as a take-over bid,
from happening. 24 Those who advocate the adoption of pre-emptive
rights believe that the general equitable restraints on the directors
in issuing shares –
that is, that they act honestly and in good faith
in the best interests of the corporation –
are too imprecise and lead
to costly and uncertain litigation. But the logical extension of this
view would be to require that pre-emptive rights are mandatory for
all corporations, not what one can call “quasi-mandatory” as in the
Draft Act. This approach smacks of a compromise which, like many
compromises, may prove undesirable. With respect to new corpora-
tions incorporated under the Draft Act, it will mean that most articles
will contain a provision denying pre-emptive rights because most
incorporators will desire the added flexibility gained by not having
such rights. Existing corporations will probably effect a charter
amendment inserting a denial provision in order to gain the same
wanted flexibility.26 But note that in both these cases it will be
necessary for the corporation’s legal adviser to know of the pre-
emptive rights choice in the statute; in practice it is possible that
counsel could overlook the right to insert a clause in the articles
denying pre-emptive rights,”1 an oversight which could lead to a
number of problems thereafter.
In this connection, there is nothing in the Draft Act which des-
cribes expressly or precisely the consequence of failing to comply
with the pre-emptive requirement, apart from general enforcement
provisions. 8 If the consequence is that the issue of shares is thereby
rendered void, this could work a very real injustice on shareholders
24See: Hogg v. Cramphorn Ltd., [1967] 1 Ch. 254; Bamford v. Bamford,
[1969] 2 W.L.R. 1107 (CA.).
25 See paragraph 116 of the Commentary where it is also stated that if a
shareholder is to abandon his right to protection against direct dilution of
his voting power, this should be done by deliberate exclusion of that pro-
tection.
2
6 Under section 20.15, existing federal corporations must apply within three
years after the Draft Act comes into force for a certificate of continuance
dealt with under section 14.14, which requires articles of continuance to be
delivered to the Registrar. A corporation might wish to insert a provision
in its articles of continuance to deny the pre-emptive rights, although the
procedure for this is not clear. It should be noted that if such certificate is
not applied for within the stipulated period, the corporation is deemed to
be dissolved by section 20.15(4).
2 Such oversight seems possible despite the reminder in section 2.02(1)(e)
dealing with a specific pre-emptive provision in the articles of incorporation.
28 Section 19.10, discussed below, provides that a restraining or compliance
order of the court may be obtained to force compliance with, inter alia, the
articles and the Draft Act.
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who have given valuable consideration without knowledge of the
improper issue. However, it may be that the provisions of Part 6.00
of the Draft Act adequately protect such shareholders since those
provisions attempt to reduce the defences which can be used to
invalidate a shareholder’s claim to securities.0
Nevertheless, pre-emptive rights will make it more difficult for
lawyers to give their customary opinion that the outstanding shares
of a corporation have been, inter alia, validly issued. Such an opinion
would require a very careful examination of the corporate records to
ensure that the pre-emptive rule had been duly followed when the
shares in question were originally issued.
(2) Shareholders’ Participation in Decisions
(a) Shareholders’ Meetings
There is a series of technical provisions in the Draft Act which
clarify or change several ambiguous or undesirable common law
rules relating to shareholders’ meetings 0 For example, sections
11.03 and 11.04 call for a fresh notice of an adjourned meeting if the
adjournment is for 30 days or more. Section 11.09 codifies the com-
mon law allowing voting to take place by show of hands unless a
ballot is demanded, and makes it clear that a proxyholder may
demand a ballot at any time without a prior show of hands 1 Section
11.10 introduces the unanimous shareholder resolution as a replace-
ment for the holding of a meeting.32
One very important section affecting shareholders’ rights with
respect to meetings is section 11.05, which is based on section 108.8
of the present Act and on Rule 14a-8 promulgated by the Securities
and Exchange Commission of the U.S. pursuant to the Securities
Exchange Act of 1934. This section gives a shareholder the right to
communicate with all shareholders by requiring corporate manage-
ment to insert his proposal in the proxy circular 33 However, to take
29 In this connection, see: section 6.09, 6.14, 6.15.
30 For a description of these changes, see: Commentary, paras. 266-93.
31 See: Commentary, paras. 285 and 286, and the authorities mentioned
therein.
32See: Commentary, para. 287, which cites Walton v. Bank of Nova Scotia,
[1965] S.C.R. 681, as authority for the rule that the informal consent of all
shareholders is as effective as a formal resolution at a duly convened meeting.
Compare section 9.15 of the Draft Act, which validates a written resolution
signed by all the directors.
33As noted in the Commentary, at common law there is no obligation on
the management of a corporation to refer to non-management documents or
to include in the notice of meeting a proposal other than its own. If it were
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
257
advantage of this right, the shareholder must follow the prescribed
procedures for advance notice.34 More importantly, the right is
subject to the basic condition that, since shareholders are not un-
restricted in the decisions which they can make, any shareholder
proposal must be limited to a matter which the shareholders in a
duly constituted meeting could validly authorize; it is rather un-
fortunate that the Draft Act does not elucidate more specifically
matters which are appropriate for shareholder action. 5 The statute
also provides that the corporation need not send out a shareholder’s
proposal if
it clearly appears that the proposal
…
… primarily
for the purpose of enforcing a personal claim or redressing a personal
grievance against the corporation or its directors, officers, or security
holders, or primarily for the purpose of promoting general economic,
political, racial, religious, social or similar causes.36
is submitted
not for section 11.05, the only alternative open to a shareholder wanting to
discuss his proposal would be to invoke the provision for requisition of a
meeting under section 11.11 of the Draft Act (section 103 of the present Act).
See: Commentary, paras. 274, 275. For a similar but less generous provi-
sion, see section 102 of the Ontario BCA, where the holders of shares repre-
senting 5% of the outstanding voting rights are given the right to have
proposals circulated to the shareholders by the corporation.
34Section 11.05(5)(a) states that the proposal need not be dealt with if
it is submitted to the corporation after a record date has been determined.
35 Section 11.05(5) (b) puts it negatively by providing that the corporation
need not send out the proposal where it is not a proper subject for share-
holder action or if it relates to the ordinary business operations of the
corporation. See: Re British International Finance (Canada) Ltd., (1968) 68
D.L.R. (2d) 578 (Ont. CA.). In this connection, compare section 101 of the
Ontario BCA which gives shareholders the right to requisition a directors’
meeting to pass any by-law or resolution that the directors could pass. Sub-
section (4) of section 11.05 allows a proposal to include a nomination for
directors if such nomination is signed by the holders of shares representing
not less than 5% of the voting shares. This requirement is arguably too
restrictive in the light of the realities of shareholder dispersal of ownership
in widely-held companies.
36 Section 11.05(5) (c). The corporation also need not send out the proposal
if it had been previously included in a circular within two years and the
shareholder failed to present it at the meeting, or a similar proposal was sent
out within two years, or the shareholder wants “needless publicity for de-
famatory matters”: Section 11.05(5)(d),
(f). Also,, under subsection
(9) the corporation may apply to the court for an order allowing the
corporation to omit the proposal. If a corporation does choose to circulate
a proposal, however, subsection (6) provides that no liability may be incurred
by reason only of circulating a proposal. On the U.S. provisions, see Hornstein,
op. cit., at p. 148.
(e),
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These general statements could be interpreted so widely that a share-
holder could never avail himself of the right to submit a proposal.
On the other hand, there is some protection given since the corpo-
ration must give reasons for refusing to circulate a proposal; and
the shareholder can appeal this refusal to a court which can restrain
the holding of the meeting and may make such further order it
thinks fity7
Fundamentally at issue here is the question of the paramountcy of
the directors of a corporation, and the extent to which the share-
holders may initiate action either sua sponte or to overrule a
directors’ decision. This question is not easy to answer since it
involves defining the roles of the shareholders and directors in the
decision-making processes of the corporation. It would be very help-
ful if the Draft Act were more specific as to its views on this contro-
versial issue rather than leaving it to generalizations. This question
will be dealt with further below.
(b) Shareholders’ Agreements
It has long been recognized that shareholders may enter into
agreements specifying how they will vote on certain matters.38 If the
agreement were otherwise lawful, the shareholders could agree to
vote as they stipulated; but they could not agree as directors to
manage the affairs of the corporation in a certain way, since such
an agreement would be construed as fettering the independent judg-
ment of directors in carrying out their duties. Such an agreement was
stated to be invalid even when all the shareholders of the corpora-
tion were party to it.39
The Draft Act has reduced this rigidity by sensibly providing in
section 11.14 that a “unanimous shareholder agreement” is valid not-
withstanding it restricts the discretion of the directors.4 However,
in that event, the shareholders are, to the extent that and so long
as the restrictions on the directors’ powers exist, deemed to assume
the duties and liabilities imposed upon the directors by the statute
and common law, and the directors are relieved from such duties
37 Section 11.05(7), (8).
8 Greenwell v. Porter, [1902] 1 Ch. 530, 71 LJ. Ch. 243; Puddephatt v. Leith,
[1916] 1 Ch. 200; Motherwell v. Schoof, [1949] 4 D.L.R. 812 (Alta. Sup. Ct.);
Ringuet v. Bergeron, [1960] S.C.R. 672. See generally: Pickering, Shareholders’
Voting Rights and Company Control, (1965) 81 L.Q.R. 248.
39 Atlas Development Co. Ltd. v. Calof and Gold, (1963) 41 W.W.R. 575 (Man.
Q.B.).
40 Section 11.14(2). The agreement may have all shareholders plus a person
not a shareholder as parties to the agreement, presumably to include a trustee
or agent to supervise the terms of the agreement.
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
259
and liabilities.4′ Other subsections provide that: the unanimous
shareholder agreement is void unless its existence is noted conspi-
cuously on every share certificate issued by the corporation; a trans-
feree of shares subject to such an agreement is deemed to be party
thereto; and such an agreement is deemed to confer the pre-emptive
right to purchase additional shares unless that right is expressly
limited or excluded in the agreement. 42 It might be more accurate
to require or deem the corporation to be a party to the unanimous
shareholder agreement, since technically the corporation must act
pursuant to the agreement and therefore should be a party thereto
if for no other reason than to give it formal notice of the terms of
the agreement.43
However, even more fundamental is the question whether the
concept of a unanimous shareholder agreement is the best way to
deal with closely-held corporations and their shareholders. More on
this point will be discussed in the concluding remarks.
(c) Voting Rights
(i) Cumulative voting. Cumulative voting for directors has been
strongly advocated by those who feel that the minority shareholders
of a corporation should be represented on the board.44 By this voting
method, a shareholder is entitled to the number of votes determined
by multiplying the number of shares he owns by the number of
directors to be elected, and he may cast all his votes for one candi-
date or among several as he sees fit. Cumulative voting does not
guarantee minority representation on the board, but it enhances the
possibility of this result by preventing a majority shareholder from
electing all the directors perforce.4 5
41 Section 11.14(5).
42 Section 11.14(3), (4), (6).
43For example, the pre-emptive right given by section 5.05 of the Draft Act
is a right which may be exercised against the corporation. Moreover, section
19.10, discussed below, provides for an order for compliance which may be
obtained in connection with a unanimous shareholder agreement and could
involve requesting the corporation to act in a certain way.
44See: Williams, Cumulative Voting For Directors (1951); Should Cumu-
lative Voting Be Mandatory? A Debate, (1955-1956) 11 Bus. Lawyer 9. The
Select Committee on Company Law of the Ontario Legislature did not re-
commend mandatory cumulative voting because of the “uncertainties” in-
volved: Interim Report of the Select Committee on Company Law 73, (1967),
5th Sess., 27th Legis., 15-16 Eliz. II, 1967.
45See paragraph 216 of the Commentary for the formula which can be
used to calculate the number of votes required to elect a given number of
directors. It is crucial in cumulative voting to know how many shares will
be represented at the meeting and to cast one’s votes accordingly.
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Section 9.06 of the Draft Act requires cumulative voting in the
quasi-mandatory fashion it requires pre-emptive rights to be given to
shareholders: unless the articles expressly exclude cumulative voting,
it applies. The criticism made above with respect to the undesira-
bility of this compromise approach to a basic corporate rule also
applies in this case: if one concludes, and one can argue quite force-
fully to this effect, that cumulative voting is a meritorious reform,
why not make the rule mandatory?4 The draftsmen suggest that
cumulative voting is somewhat controversial, and may be more
appropriate to closely-held corporations where shareholder control
is more important than to large widely-held corporations ” … where
stability and harmony in management are the dominant interest.147
Hence the draftsmen chose not to make cumulative voting manda-
tory. But if the draftsmen felt this way, one wonders why cumulative
voting was not simply made optional, as under the Ontario BCA 8
(ii) Review of directors’ elections. Also related to the election
of directors are the provisions in the Draft Act dealing with the right
of a shareholder (or director) of the corporation to seek judicial
review of a directors’ election. Section 11.13 of the Draft Act is an
attempt to provide the shareholder with quick and simple access to
the courts for review without the legerdemain of the common
law.49 The section gives the court wide discretion to make such order
as it deems fit.
(d) Questions For Shareholder Approval and Dissenting
(i)
Shareholders’ Rights
In general. As mentioned above with regard to shareholders’
meetings, one of the most difficult problems in corporation law re-
form is to define the role of shareholders vis & vis other corporate
organs, notably the directors and officers, in the management of the
business corporation. In general terms, the problem is reflected in
the question as to the voice shareholders should have in the corpora-
tion’s affairs. The question of such shareholder involvement has
traditionally been dealt with by giving to the shareholders the right
Illinois, and North Carolina.
46Several prominent jurisdictions have done so, for example, California,
47 Commentary, para. 206. The Commentary does not explain how cumulative
48Section 127. The Draft Act sections on cumulative voting have several
provisions aimed at preventing the dilution of the right. See: section 9.06(a),
(c), (d), (f), (g), (h). See also: Commentary, paras. 207, 210.
voting necessarily detracts from stability and harmony in management.
49For a review of the rules in various jurisdictions, see: Commentary, paras.
294-96.
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
261
to elect directors, who in turn were the primary – or arguably the
only – persons entrusted with the power to manage the affairs of
the corporation.”
However, one other area was open to shareholder action under
the common law: the corporate charter could be amended only by
the unanimous consent of all the shareholders.5 ‘ In time the corpo-
ration statutes reduced this rigidity to allow amendments of the
corporate charter with a specified majority of shareholder approval.
This latter approval has led to cases in which the courts were faced
with situations involving a review of an amendment to the corporate
charter approved by the required majority of shareholders but ob-
jected to by a very strenuous minority. There have been very few
instances where the courts felt the majority action was assailable.
Moreover, the courts enunciated tests which excluded judicial criti-
cism except if fraud or bad faith – both nebulous concepts in this
area of law –
on the part of the majority shareholder were proved
by the minority complainants.52 The judicial reluctance to review the
business decisions effected by majority rule may be explained on
various grounds, but it is difficult to deny that such reluctance has
led to injustice in many cases.5 3
Consequently, as a result of these judicial developments, or lack
of same, corporate law reformers have advocated a legislative remedy
which composes two lines of inquiry: for what matters should share-
holder approval be required, and what alternative should be availa-
ble to those minority shareholders who disagree with the position
approved by the majority.
The first question would require a separate treatise to consider
all the ramifications it raises, and no attempt will be made to cover
it here. One should consider inter alia the nature of the shareholders’
interests in the corporation, whether they are investors or proprie-
50 For a very illuminating discussion and analysis of the roles of share-
holders and directors in the corporation, see: Eisenberg, The Legal Roles of
Shareholders and Management in Modern Corporate Decisionmaking, (1969)
57 Calif. L. Rev. 1.
51 Commentary, para. 344; see also: Gower, The Principles of Modern Com-
pany Law, 3rd ed. (1969), at pp. 301-02.
52 See e.g.: Allen v. Gold Reefs of West Africa Ltd., [1910] 1 Ch. 656 (C.A.Y.
53 See, e.g.: Greenhalgh v. Ardene Cinemas Ltd., [1951] Ch. 286 (C.A.), and
the related cases involving Greenhalgh discussed in Gower, op. cit., at pp.
571-74. The cases demonstrate the tip of the iceberg in that they represent
only those conflicts which have gone to the courts. There have been un-
doubtedly many more disputes which have not surfaced because of an
unwillingness or inability to litigate, perhaps because of procedural road-
blocks in the way of the minority shareholders to bring an action.
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tors or both; the nature of the roles of directors and officers and for
whom they act; and the restrictions to which directors and officers
should be subjected in carrying out their duties. Suffice it to say
that corporation statutes traditionally have given directors and offi-
cers paramount control of corporate affairs, and have given share-
(1) to approve only certain pre-
holders rather limited rights:
scribed transactions, (2) to elect other directors if they disagreed
with the policies introduced by the existing directors, and (3)
to
have access to the courts for a review of the directors’ and officers’
action, although such access and review were rather sharply limited.
Corporate law reform has recently seen some improvements with
regard to the second and third points, resulting in a statutory right
to remove directors prior to the expiration of their term, and an
increased choice of shareholder rights to enforce the responsibilities
of management imposed on directors.”
(ii) Right of appraisal. The Draft Act has gone further in pro-
tecting the dissentient shareholder by introducing to Canada a gen-
eral shareholder right of appraisal, the main features of which have
been adopted in most U.S. jurisdictions.5 The shareholder who
dissents from a “fundamental change” is entitled to leave the cor-
poration by requiring it to pay a fair value for his shares. Such a
right of appraisal is intended to avoid the common law difficulties of
trying to restrict an abuse of power, detrimental to minority share-
holders, by the directors or by majority shareholders where share-
holder approval is required.
There has been considerable debate on whether the appraisal
right is all that effective in modern-day circumstances. 6 It seems
to me, however, that in addition to the traditional arguments made
for appraisal rights, a cogent reason for having them is that such
54 Section 9.08 of the Draft Act gives the right to shareholders to remove
directors before their term expires; the shareholder enforcement provisions
will be discussed below.
55 Apparently all the U.S. jurisdictions except West Virginia have adopted
shareholder appraisal rights. See generally: Skoler, Some Observations on
13 Bus. Lawyer 240; Lattin,
the Scope of Appraisal Statutes, (1957-1958)
Minority and Dissenting Shareholders’ Rights in Fundamental Changes, (1958)
23 Law and Contemp. Problems 307; Manning, The Shareholder’s Appraisal
Remedy: An Essay for Frank Coker, (1962) 72 Yale LJ. 223.
Section 100 of the Ontario BCA gives an appraisal right to shareholders of
a corporation not offering its securities to the public where a resolution has
been passed relating to the sale of the corporation’s assets, the deletion from
the articles of a provision restricting the transfer of shares, and the approval
of an agreement for the amalgamation of the corporation with another.
5RManning, op. cit., is quite critical of the right.
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
263
rights act as a check on the managerial decision being recommended
by the directors. 7 If the directors know that an appraisal right
exists, they will try to ensure a fair settlement of terms for all, since
to do otherwise might occasion sufficient minority dissent to thwart
the transaction because of the cash needed to buy the dissenting
shareholders’ shares.
Section 14.17 of the Draft Act sets forth a statutory code relating
to the right of a shareholder to dissent and claim appraisal of his
shares. The basic ingredients of this right are briefly as follows. First,
the right to dissent is given to shareholders in five situations invol-
ving:
(i)
an amendment to the articles dealing with a restriction on the
right to transfer shares;58
(ii) a statutory amalgamation;59
(iii) continuance of the corporation under the laws of another
(iv)
jurisdiction; 60
a sale, lease or exchange of all the corporation’s property’
and
(v) an amendment to the articles derogating from the rights or
conditions attaching to shares of a class or series having
special rights or conditions.2
Second, the appraisal right is expressly made non-exclusive, meaning
that the shareholder can exercise any other right conferred by statute
or common law with respect to the transaction.6 Third, the section
sets forth a detailed procedure which must be followed in order for
the appraisal right to be exercised.6 Finally, the effect of the ap-
praisal right is that the shareholder who complies with the section
is entitled
… if and when the action approved by the resolution from which he
dissents is effective, to be paid by the corporation the fair value of the
57 Eisenberg, op. cit., at p. 86.
58 Section 14.17(1) (a).
59 Section 14.17(1)(b). Excluded is a “short-form” amalgamation under sec-
tion 14.11, which involves a parent and its wholly-owned subsidiary.
60Section 14.17(1)(c). Continuance of a corporation under another juris-
diction’s laws is dealt with in section 14.15.
01 Section 14.17(1)(d). See section 14.16 for the requirements and procedures
relating to the sale of corporate assets.
62 Section 14.17(2). See also section 14.03(1) for the types of changes covered
by section 14.17(2).
63 Section 14.17(3). See generally: Vorenberg, Exclusiveness of the Dissenting
Stockholder’s Appraisal Right, (1964) 77 Harv. L. Rev. 1189.
4Section 14.17(5)-(27). The section is based on section 623 of the New York
Business Corporation Law.
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shares 65 held by him in respect of which he dissents, determined as
of the day before the resolution was adopted by the shareholders of
the corporation. 66 (Emphasis added.)
* The fairly extensive right of appraisal in the Draft Act is a useful
addition to the statute. One point that should be raised, however, is
that although the Draft Act is quite generous in stipulating the situa-
tions which give rise to the appraisal right, perhaps a corporation
should be free to insert a provision in its articles stipulating other
circumstances in which the appraisal right may be utilized. 7
The special provisions of sections 14.17(2) and 14.03 of the Draft
Act, dealing with shareholders of a prescribed class, stem from the
problem of how to give the holders of a prescribed class of shares
having specific rights protection from unfair elimination or modi-
fication of such rights without at the same time throttling corporate
decision-making by giving too loud a voice to the prescribed class.
Section 14.0368 is an attempt to compromise these conflicting goals
by giving the holders of shares of a class (or shares of a series of a
class if the holders thereof are “… prejudicially affected by an
amendment in a manner different from other shares of the same
class”) a right to vote separately as a class or series on a proposed
amendment that would effect any of certain prescribed changes in
their rights. Notable about this section is that it encompasses the
situation not only where some adverse change is proposed in a
specific class of shares, but also where another class of shares is
given increased rights or privileges which can accomplish the same
result.6 9
(3) Access to Information and Corporate Records
Corporation statutes have not been too generous in giving share-
holders a right to be informed about the management of the affairs
65 Section 14.17(4) provides that a dissenting shareholder must claim ap-
praisal of not less than all of his shares of a given class.
66 Section 14.17(3). The italicized words in the text will undoubtedly give
rise to difficulty in interpretation. Subsections (15) and (16) allow a court
application to fix the fair value of the shares; and subsection (21) gives the
court the power to appoint appraisers to assist it in determining the fair
value.
67 This could be very useful in a closely-held corporation especially. Section
55-113 of the North Carolina Business Corporation Act covers certain addi-
tional transactions.
Corporation Act.
68Section 14.03 is based on section 55-102 of the North Carolina Business
69 See paragraph 358 of the Commentary which cites some of the U.K. cases
on the point.
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
265
of the corporation. There appears to be adequate disclosure in the
proxy machinery, prospectus qualification, and timely disclosure
policies, but these are related to specific transactions and do not
cover the case of the shareholder who wants information about the
company’s affairs when no specific transaction is contemplated.
Should, for example, shareholders have the right to demand the
identity of customers and suppliers and the volume of business, if
they feel one particular ethnic or racial group is being privileged
or discriminated against. It would seem that, apart from some few
express statutory provisions, shareholders do not have an inherent
right to know such detailed information.”0
and creditors –
The Draft Act does recognize the rights of shareholders to obtain
shareholder lists, to circularize shareholders with a particular pro-
posal, and even to requisition a shareholders’ meeting.”‘ In addition,
the Draft Act gives shareholders –
the right to
examine basic corporate documents and records, and provides that
shareholders are entitled upon request to a copy of the articles and
by-laws without charge. 2 But these rights still do not provide all
that much information; and, although obviously an unlimited right
to ask for information cannot be provided, it is unfortunate that the
Draft Act did not try to strengthen the rights of shareholders in
obtaining more general information about the company’s affairs.
Quite apart from the interest of shareholders in obtaining informa-
tion because they wish to know the policies of their company, share-
holders should be entitled to have the information available so that
they can effectively use their rights to have the directors and officers
accountable for their actions.
(4)
Investigations
Part 18.00 ‘of the Draft Act, which deals with investigations of
corporate affairs at the instance of the shareholders or the Registrar,
has two objectives: first, to aid shareholders in bringing an action
*10 On information generally available and shareholder access thereto, see:
Harris, “Access to Corporate Information”, in Studies, op. cit., at p. 476. Section
107 of the Ontario BCA gives a shareholder the right to raise any matter
relevant to the affairs and business of the corporation at the annual meeting.
See: Lavine, op. cit., at pp. 199-200.
71 Section 11.06 deals with shareholders’ lists, and section 4.03(3) allows
any person to obtain a copy of such a list. Section 11.05, as discussed above,
allows a shareholder to require the corporation to distribute his proposal with
the management proxy circular. Section 11.11 gives the holders of not less
than 5% of the voting shares to requisition the directors to call a shareholders’
meeting.
72 Section 4.03(1), (2).
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for mismanagement, and second, to protect the public interest in
ensuring the proper conduct of corporate affairs.7 3 Both these objec-
tives are laudable, but the actual wording of the recommended pro-
visions is unduly narrow.
One or more shareholders holding not less than 5% of the issued
shares or of the issued shares of a class, or the Registrar, may apply
to the court ex parte, or upon such notice as the court may require,
for an order directing an investigation of the corporation and any of
its affiliated corporations.. For the court to make such an order,
under section 18.01(2) it must appear (a) that the business of the
corporation or any of its affiliates “has been carried on with intent
to defraud any person”, (b) that the business of the corporation
or any of its affiliates has been carried on or the powers of the
directors have been exercised “in a manner oppressive or unfairly
prejudicial to or in disregard of the interests of a security holder”,
(c) that the corporation or any of its affiliates was formed or is to
be dissolved “for a fraudulent or unlawful purpose”, or (d) that
persons concerned with the corporation or any of its affiliates have
acted “fraudulently or dishonestly”.74 The applicant need not give
security for costs, and the court may order an investigation and
make any other order it thinks fit.75
It is most unfortunate that the right to obtain an investigation
is so severely circumscribed. The requirement that an applicant must
be a shareholder or shareholders owning 5% or more of the issued
shares has been justified on the ground that such a requirement
recognizes the possibility of harassment of management. But harass-
ment could happen with a 5% shareholder too. Giving each share-
holder the right to apply for an investigation order, regardless of
shareholding size, would seem preferable, especially since the
grounds for obtaining the order are so serious, tantamount to fraud
or unlawful dealing. If so serious a charge is involved –
and quaere
whether a prima facie case is to be made out or some other standard
73 Commentary, paras. 464-65.
74Section 18.01(1), (2). Note that “corporation” is defined in section 1.02(1)
(h) to mean a corporation incorporated or continued under the Draft Act.
“Affiliate” is defined in sections 1.02(1)(a) and 1.02(2). Thus section 18.01
investigations may affect only corporations governed by the Draft Act. Com-
pare: Ontario BCA, section 186.
75 Sections 18.01(2), (4), 18.02. The court, inter alia, may appoint an inspector
and authorize him to enter any premises, conduct hearings, and prepare a
report. The court is required to send the Registrar a copy of the inspector’s
report, but the court has discretion whether or not to order the report to be
published or sent to anyone. It is arguable that the shareholders should be
given a copy of the inspector’s report as of right.
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
267
of proof met –
surely each shareholder should have the right to
apply on his own, without gathering more shareholder support or
asking the Registrar to seek an order. If left as presently drafted,
it is doubtful whether the section would be often used.”‘ It also
might be worthwhile to allow the shareholders voluntarily, by a
majority-approved resolution, to appoint an inspector as an alter-
native to a court-appointed one.77
Other sections in Part 18.00 deal with the power of an inspector,
the hearings before an inspector, giving evidence and self-incrimina-
tion, and questions of privilege.78 Another section re-enacts section
114.1 of the present Act which gives the Minister power to determine
the true ownership and control of securities for purposes of the
insider trading and take-over bid provisions. 9
C. Shareholders’ Remedies
In General
(1)
It is fundamental that the corporation statute must not only
provide shareholders’ rights but also contain adequate procedures
for the enforcement of such rights: ubi ius, ibi remedium. The Draft
Act is impressive in the variety of remedies available for share-
holders to enforce their rights. 0
As already discussed, there are several provisions that give
shareholders increased rights. Furthermore, there has been an up-
grading of the duties and responsibilities of directors and officers
in many provisions of the Draft Act. Particularly notable in this
respect are the provisions clarifying the duties owed by directors
and officers to the corporation, and the requirements of directors
regarding contracts in which they are interested.”‘ There is not space
here to discuss these very important provisions; but suffice it to say
that they may provide as much in the way of increased shareholder
protection as the specific rights and remedies given to shareholders
by the Draft Act.
76 Section 186 of the Ontario BCA gives the investigation right to each
shareholder, who must show the court that the application is in good faith
and that it is prima facie in the interests of the corporation or the holders
of its securities to get an order.
77This is provided for in section 187 of the Ontario BCA.
78 Sections 18.03-18.06.
79Under section 18.07 of the Draft Act the Registrar is given this power.
80 It is difficult to divide provisions into exclusive categories of share-
holders’ rights and shareholders’ remedies. For a good list of the share-
holders’ rights of the Draft Act, however, see: Howard, op. cit., at pp. 46-47.
81 Sections 9.16-9.20; Commentary, paras. 223-51. See: Howard, op. cit., at
pp. 43-45.
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Although Part 19.00 of the Draft Act deals generally with reme-
dies, offences and penalties, specific remedies are interspersed
throughout the Draft Act as well. Some of the more important of
these specific remedies are the following: (1) the restraining order
which a court may issue under section 3.03 on the application of a
shareholder or creditor with respect to a contravention by the corpo-
ration of any restrictions on its business activities outlined in its
articles; 2 (2) the civil insider liability under section 10.04; s3 (3) the
restraining order which a court may issue under section 12.08 on the
application of an “interested person” with respect to non-compliance
with the proxy provisions;”‘ (4) the rescission and civil liability
provisions outlined in Part 15.00 of the Draft Act dealing with
prospectus qualification; and (5) the court restraining order relating
to a breach of the take-over bid requirements specified in section
16.11.8
In Part 19.00 several remedies are given to various persons: a
complainant’s derivative action for a wrong done to the corporation
(sections 19.02 and 19.03); a complainant’s action for some wrong
done to specified persons (section 19.04); a security holder’s or ag-
grieved person’s application for a court rectification order (section
19.06); an aggrieved person’s application for a court order compel-
ling the Registrar to reserve a decision (section 19.09); and a com-
plainant’s or creditor’s application for a court order for compliance
with prescribed requirements (section 19.10). Various procedures
are set forth, and, finally, there is a general offence section (19.13)
and a penalty section (19.14).
Of fundamental importance in this Part are the definitions of
“action” and “complainant”. In section 19.01, “action” is defined to
mean an action brought under the Draft Act or any other law, and
“complainant” includes:
82Sections 3.01, 3.02, 3.03; Commentary, paras. 29-30, 74-83. The Draft Act
reduces greatly the impact of the ultra vires doctrine, basically by endowing
a corporation with unlimited capacity unless it is otherwise expressly restric-
ted in its articles. Compare section 16 of the Ontario BCA, which unfortunately
retains too much of the ultra vires doctrine.
83 Some changes from the existing insider trading provisions are incorporated
in the Draft Act. See: Commentary, paras. 253-65.
84 For the proxy requirements, see: Part 12.00 of the Draft Act; Commentary,
paras. 303-23.
85 On take-over bids, see: Commentary, paras. 426-38. For a very useful sum-
mary of the remedial techniques used in the Draft Act, see: Commentary,
para. 478. The techniques are categorized in terms of disclosure of informa-
tion, structural techniques (such as pre-emptive rights), civil liability, admin-
istrative action by the Registrar, directors’ liability, and penalties.
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
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(i)
a registered holder or beneficial owner, and a former register-
ed holder or beneficial owner, of a security [defined in section
1.02(1)(u)] of a corporation or any of its affiliates [defined
in section 1.02 (1)(a) and 1.02 (2)],
(ii) a director or officer of a corporation or of any of its affiliates,
(iii)
(iv) any other person, who in the discretion of a court, is a proper
the Registrar, and
person to make an application under this Part.”86
These definitions are obviously extremely wide and deliberately so
since the underlying rationale is that the statute should be ” … self-
enforcing by civil action initiated by the aggrieved party, not by
severe penal sanctions or sweeping investigatory powers. 87
A few comments may be made on these provisions. It is very
realistic to subject affiliates to the actions contemplated, since this
is sensibly treating the corporation and its affiliates as the same
unit for purposes of redress. It is also worthwhile to give the Regis-
trar the status of a complainant to bring an action, although this
will no doubt be viewed as a controversial point. There may be some
question as to whether a security holder other than a shareholder
should be given the same remedies as shareholders. Perhaps credi-
tors, for example, should be given similar rights, but at the very
least it would have been interesting to see some meaningful discus-
sion in the Commentary on why a special class of creditors88 is to be
treated the same as shareholders, especially when such creditors
usually extract fairly wide remedial covenants in their private agree-
ments with the corporation. To add even further breadth to the re-
medies, a former beneficial or registered holder of a security may be
86 Because there is this residual class of persons who may be complainants
at the discretion of the court, the definition should probably be exhaustive by
saying that complainant means certain persons, not includes such persons. It
might also be useful to include specifically in the list of complainants the audi-
tor of the corporation.
87 Commentary, para. 479.
88Arguably, only creditors holding some certificate evidencing the debt
obligation would be included within the term “complainant”, in which case
unsecured creditors would be omitted. Section 19.10 reinforces this interpre-
tation since in that section a complainant or a creditor of the corporation
may seek a restraining order. Paragraph 80 of the Commentary states that
the term “complainant” was broadened on the basis of the recommendation
of the Jenkins Report “paras. 119 to 212” (presumably meant to be paras.
199-212): The Report of the Company Law Committee, (1962) cnd no. 1749
(hereinafter referred to as the “Jenkins Report”). But it is not exactly clear
what recommendation of the Jenkins Report is relied upon to expand the
definition of complainant as is done in the Draft Act.
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a complainant; this appears to be unduly wide. One can see reasons
for allowing a former shareholder to be a complainant, where, for
example, he may have sold his shares at a price which may have
been less than it should have been, owing to some breach of obliga-
tion to the corporation. But except where a former creditor may
have accepted less than full payment for his debt, it is difficult to see
how he retains any interest in the corporation for purposes of bring-
ing an action since, as a former creditor, he will have been paid his
debt ex hypothesi. On the other hand it would make sense for a
former officer or director to be allowed specifically to be a com-
plainant because such persons may have information which is not
generally known and which affects a cause of action covered by
Part 19.00.
Section 19.05 provides some important supplementary rules relat-
ing to Part 19.00 actions. Subsection (1) states that shareholder
ratification of an alleged breach of right, duty or obligation owed to
the corporation is no bar to the action but is only evidence which
the court may consider in making its order. This reduces the trouble-
some issue of shareholder ratification of a breach of duty to saying
basically that its effectiveness as a cure for a breach of duty will
depend on the facts of each case and not according to some attempt
to extrapolate a principle from a maze of cases which basically are
difficult to reconcile. 89
Subsection (2) of section 19.05 provides that any action under
Part 19.00 “…. shall not be stayed, discontinued, settled or dismissed
for want of prosecution without the approval of the court given
upon such terms as the court thinks fit”. This is a copy of U.S.
provisions aimed at preventing “strike suits”, which attempt to
obtain a financial settlement from the corporation. Subsection (3)
provides that a complainant will not be required to give security
for costs, and subsection (4) allows the complainant to apply to
the court for interim costs for which the complainant may be ac-
countable on final disposition of the action.
Finally, by way of general comment on Part 19.00, section 19.11
provides that an application made under that Part may be made
summarily, subject to any order for costs or notice or other order
89 See: Gower, op. cit., at pp. 566-67; Beck, The Saga of Peso Silver Mines:
Corporate Opportunity Reconsidered, (1971) 49 Can. Bar Rev. 80, at pp. 114-19.
90 See also: Ontario BCA, section 99(6). The basis for sections 99(6) and
19.05(2) is section 626 of the New York Business Corporation Law, which in
turn is modelled after Rule 23.1 of the U.S. Federal Rules of Civil Procedure.
See: Commentary, para. 488.
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
271
the court thinks fit;91 and section 19.12 states that an appeal lies
to the court of appeal from any order made by a court under the
Draft Act.
(2) Part 19.00 Remedies
(a) The Derivative Action
Sections 19.02 and 19.03 deal with the shareholder’s (in the
“derivative” be-
Draft Act, the complainant’s) derivative action –
cause the wrong complained of is to the corporation. The sections
obviate the procedural and substantive roadblocks surrounding the
rule in Foss v. Harbottle,9 2 and for the most part are very sound
and beneficial.
Under section 19.02, a complainant may apply to the court for
consent to bring an action in the name and on behalf of the cor-
poration or any of its subsidiaries, or intervene in any action to
which any such body corporate is a party for the purpose of prose-
cuting, defending or discontinuing the action.93 Consent of the
(a) he made
court is conditional on the complainant showing:
reasonable efforts to cause the directors to take the desired action;
it is prima facie in the
(b) he is acting in good faith; and (c)
interests of the corporation or its subsidiary that the action be
brought, maintained or discontinued. Although these conditions
could be difficult to fulfil, the provisions represent a good attempt
to give a useful derivative right to complainants, yet at the same
time retain some control over the exercise of such right through
judicial supervision. This approach is fair and appears to be in-
evitable in settling disputes of corporations. Whether or not the
provision is effective will depend on how the courts respond to
the conditions, which are capable of a very restrictive- interpreta-
tion. Two other provisions might be useful: to require notice to
the corporation of a derivative action, and to give the right to
join the corporation as defendant.
Section 19.03 enumerates the powers of the court in derivative
actions, which are extremely broad and reflect the intention of
the draftsmen to give as much flexibility to the court as possible.
9′ Section 19.11 arguably contradicts section 19.05(3) relating to costs, and
should be expressed subject to that section and to section 19.05(4).
92 (1843) 2 Hare 461. See generally: Beck, “An Analysis of Foss v. Harbottle”,
in Studies, op. cit., at p. 545.
93 The right to intervene is a substantial improvement over the correspond-
ing provisions in section 99 of the Ontario BCA and section 226 of the proposed
British Columbia statute.
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The court may make “any order it thinks fit” including an order
(a) that costs or legal fees of the complainant are to be paid by
the corporation or subsidiary, (b) restraining a breach of duty
owed to the corporation, (c) authorizing the complainant to control
the conduct of the action, (d) giving directions for such conduct,
(e) directing that any amount payable by a defendant in the action
shall be paid to former and present security holders of the cor-
poration or its subsidiary instead of to the corporation or its
subsidiary,94 and (f) requiring the corporation or its subsidiary
to pay the complainant’s legal fees.
(b) Relief From Oppression
Section 19.04 is the Draft Act’s equivalent to section 210 of
the U.K. Companies Act, a section which was rejected by those
primarily responsible for the Ontario BCA.9 5 Section 19.04 deals
with an injury to “any security holder, creditor, director or offi-
cer” –
not to the corporation. Here it does make sense to give
the protection of the section to a broad category of persons, in-
cluding all types of creditors, since they may be subject to abusive
treatment for which the normal common law remedies may be
inadequate or inappropriate.0 6 As stated in the Commentary, sec-
tion 19.04 is based to a large extent on recommendations for
amendments to the U.K. section 210, made by the Jenkins Report
94 The power of the court to direct that any amount payable by a defendant
should be paid to former and present security holders is intended to deal with
situations where, for example, a corporation has been dissolved, and also to
permit the amount recovered to go directly to the shareholders to prevent
the wrongdoers from obtaining any part of the recovery. Compare the decision
in Regal (Hastings) Ltd. v. Gulliver, [1942] 1 All E. R. 378 (H.L.); see also:
Gower, op. cit., at pp. 535-37.
95The Select Committee on Company Law of Ontario said that section 210,
inter alia, abdicated far too much to the courts to deal with on an ad hoc
basis: Interim Report, op. cit., at p. 60. For a criticism of the Select Committee’s
view, see Prentice, (1968) 46 Can. Bar Rev. 163, at pp. 169-70. For the failure
of the Ontario BCA to include a provision similar to section 210, see: Beck,
op. cit., at pp. 599-600. The British Columbia Companies Act has a provision
similar to the English model: S.B.C. 1960, c. 8, s. 15. See also: section 226 of
the proposed B.C. statute.
90 There is a slight inconsistency in the section in that section 19.04(1) says
that a ccomplainant) (defined in section 19.01 as discussed above) may apply
to the court for an order. Section 19.04(2) then speaks in terms of the inter-
ests of, inter alia, a creditor, although unsecured creditors would not be
included in the definition of complainant. There should clearly be a consistent
use of terms for purposes of those who have standing to bring an action
and those who have been unfairly treated.
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
273
in order to make the rights under the section more accessible.97
As presently drafted, section 19.04 allows the court to make an
order where some oppression has already taken place; one wonders
whether the section should also be preventive by stipulating that
where one can show that oppressive conduct will result an order
may be obtained.Y
Once again there is a very wide range of discretionary powers
given to the court, some of which are extraordinary but probably
necessary. 9 Some may balk at the section because it gives too much
power to the court in solving corporate disputes; but if one looks
at the jurisprudence, the courts have been so reluctant to intervene
in such disputes that aggrieved persons have received little assist-
ance. Undoubtedly section 19.04 will be used more often for solving
disputes in small or closely-held corporations, but this does
not deny its application to all corporations regardless of size or
shareholder composition. Critics of provisions like section 19.04,
and
the derivative action sections, overlook the fact
that such provisions may act as deterrents to corporate managers
and controllers and therefore may promote fairer and more har-
monious corporate dealings –
surely a beneficial result. Hopefully
other jurisdictions, notably Ontario, will soon follow suit.
indeed
(c) Rectification Order
Section 19.06, which is based on section 210 of the present
statute and section 116 of the U.K. statute, allows the corporation
97 Commentary, para. 485, citing Jenkins Report, op. cit., para. 212. See also:
Gower, op. cit., at pp. 598-604.
98 Compare section 225(1) (b) of the proposed B.C. statute, which includes as
the basis for a court order an act that the company is threatening to do, or
some proposed shareholder resolution, that is unfairly prejudicial.
99 Under subsection (3) the court may make an order, inter alia, restraining
the conduct complained of, amending the articles or by-laws or creating or
amending a unanimous shareholder agreement, directing an issue, exchange,
or purchase of securities, varying a transaction or contract, and compensating
an aggrieved person. Subsection (4) provides that where the court orders an
amendment of the articles or by-laws, no further amendment may be made
without the court’s consent until a court otherwise orders; and subsection (5)
provides that a shareholder cannot dissent under section 14.17 (appraisal
rights) if an amendment to the articles is ordered under section 19.04. Subsec-
tion (6) provides that moneys cannot be paid to a shareholder if there are
reasonable grounds for believing that the corporation is or would thereby
be insolvent. Subsection (8) provides that an applicant may in the alternative
apply for a liquidation and dissolution order under section 17.07 (discussed
below).
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or a security holder or “aggrieved person” to apply for a court order
to rectify the records of the corporation. As noted in the Commen-
tary, one of the purposes of such a provision was to allow a person
to have his name taken from the list of shareholders where the
shares were assessable, 1 0 a situation which will not arise under
the Draft Act since section 5.02(2) specifies that shares issued under
the Act are non-assessable. But section 19.06 may prove useful in
solving problems arising, for example, from the security transfer
provisions in Part 6.00 of the Draft Act.
(d) Orders For Compliance
Under section 19.10, a complainant or creditor through an applica-
tion for a court order may. compel a director, officer, employee,
agent, or auditor of a corporation, or the corporation itself, to
comply with the Draft Act, regulations, articles, by-laws or a unani-
mous shareholder agreement, or may restrain such persons from
acting in breach of the provisions contained therein. To some extent
this section answers rather neatly the question of whether the by-
laws are enforceable between a shareholder and his corporation, a
question which surprisingly has caused considerable confusion at
common law.10 1 The section should, however, add a shareholder to
the list of persons against whom an order may be obtained since, for
example, he is obviously a party to a unanimous shareholders’ agree-
ment.
(3) Liquidation and Dissolution: Part 17.00
The ultimate remedy of a shareholder is to ask for the liquida-
tion and dissolution of the corporation. The obviously drastic nature
of this remedy requires that clear and fair procedures are provided
conditional to its exercise. Part 17.00 of the Draft Act does much to
simplify the law relating to liquidation and dissolution, and the
changes made are very constructive. Under section 17.07 there are
increased grounds given to a sole shareholder to invoke dissolution
such that this right should be more meaningful to shareholders than
it is at present. 2
100 Commentary, para. 490.
101 For a discussion of some of the authorities, see: Beck, op. cit., at pp.
587-89. There has been even more confusion in interpreting section 20 of the
U.K. statute dealing with the effect of the articles of association. See: Gower,
op. cit., at pp. 261-65. Section 19.10 of the Draft Act is based on section 261 of
the Ontario BCA.
102 Subsection (1)(a) of section 17.07 sets forth grounds similar to those for
obtaining an order under section 19.04. Subsection (1)(b) allows a shareholder
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
275
III. Concluding Remarks
The Draft Act has undoubtedly made considerable advances in
the treatment of shareholders. Nevertheless, as with most statutory
reform, there is room for improvement.
In terms of shareholder treatment, the Draft Act has taken a
traditional approach to the corporation. There is no overall reform
of the corporation itself; in fact, the draftsmen have obviously
decided there need not be such fundamental reform. But the Draft
Act and the Commentary could have reflected far more in the way
of a carefully thought out conclusion as to the nature of a share-
holder of the modern corporation. Admittedly it is facile and mis-
guided merely to assert the popular shibboleth that the corporation
statute should reflect more “corporate democracy” by giving share-
holders more voice in the administration and management of the
corporation. On the other hand, it is also unsatisfactory to reject
rather summarily, as is done in the Commentary, the above assertion
about corporate democracy without presenting more fully one’s
views about the shareholder of a modern corporation. 10 3
The draftsmen acknowledge that structuring techniques designed
to make the corporation an ideal democratic polity are desirable, but
point out that they are not a complete answer to resolving corporate
disputes.10 4 It is also stated that such techniques as pre-emptive
rights and cumulative voting are encouraged; but then the surprising
statement is made that to require such techniques would over-em-
phasize their most useful function, which is as close corporation
planning tools. Surely, as stated previously, that attitude would dic-
tate making these techniques simply optional, not quasi-mandatory.
On the other hand, a good case can be made for making such tech-
niques mandatory in every case, as ways to increase minority share-
holders’ rights.
It might also be desirable to give shareholders directly the right
indeed, perhaps the paramount right –
to pass by-laws, rather than
to prescribe a somewhat exceptional procedure for the exercise of
such a right.105 Power to pass by-laws initially may appear to be
to apply for a liquidation or dissolution pursuant to a unanimous shareholder
agreement, or where it is just and equitable that the corporation should be
liquidated and dissolved. Subsection (2) allows an alternative application to be
made under section 19.04.
103 See the rather brief discussion rejecting the slogan of corporate demo-
cracy in paragraph 10 of the Commentary. For an excellent analysis, see: Eisen-
berg, op. cit.
104 Commentary, para. 475.
10 5 Through sections 9.02 and 11.05.
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insignificant, but there could be cases in which such power would
be of great importance; moreover, the principle of greater share-
holder involvement and control is at issue.
In short, the preoccupation of the Draft Act is with shareholder
remedies, and many useful and effective remedies have been provided
by the draftsmen. This is unquestionably important, especially since
Canadian courts have not been as creative or progressive in pre-
scribing shareholder remedies as have U.S. courts. But it would seem
that the development of remedies should be concurrent with finding
better and more effective ways to give shareholders a greater voice
in the corporation consistent with allowing the directors to manage
on their behalf. Whatever one’s view, the importance of the question
warrants further elaboration than that given by the draftsmen of
the Draft Act.
Shareholder liability is given little treatment in the Draft Act.
It is well known from Salomon v. Salomon & Co.’O0 that a corpora-
tion is an entity in law separate and distinct from its shareholders,
and as such they are not liable for the obligations of their corpora-
tion. The limited liability principle remains the hallmark of company
law ‘0 7 notwithstanding the claims of many that the principle has
shown signs of age. Apparently the draftsmen of the Draft Act have
treated the matter as primarily involving a question of insolvency
to be dealt with in the bankruptcy statute. The recent bankruptcy
report makes some recommendations in this regard, but these would
involve orders in a bankruptcy proceeding only. 0 8 It would seem
that the corporate veil should be lifted by the courts in cases not
only of fraud or crime but also where there is some injustice as
determined by the courts. This rule has been judicially fashioned in
the U.S., but the prospects for such a development in Canada are
dim.
106 [1897] A.C. 22 (H.L.). See generally: Felthan, Lifting the Corporate Veil,
in [1968] Special Lectures of The Law Society of Upper Canada 305.
107 Section 5.17(1) of the Draft Act provides that shareholders as such are
not liable for any act or default of the corporation.
108 Report of the Study Committee on Bankruptcy and Insolvency Legislation
(1970) at pp. 108-09. One of the recommendations of the Report is that the
corporate veil should be disregarded to hold the controlling shareholder liable
where he has mingled his own property with that of the corporation, or has
dealt with the property of the corporation as if it were his own. For a recent
example of this type of situation, but where the court applied the Salomon
principle, see Clarkson Co. Ltd. v. Zhelka, (1967) 64 D.L.R. (2d) 457 (Ont. H. C.).
If the recommendations of the bankruptcy report are adopted, presumably
section 5.17(1) of the Draft Act should be qualified by an express reference
to the bankruptcy statute.
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SHAREHOLDERS UNDER THE DRAFT CANADA BCA
277
A discussion of the role of shareholders raises the question of the
type of corporation involved. The Draft Act abolishes the private-
public company distinction and substitutes a functional definition of
the corporation which changes depending on the matter concerned.
Considerable flexibility is afforded through the provisions allowing
a unanimous shareholder agreement and the insertion of provisions
in the articles and by-laws aimed at creating a closely-held corpora-
tion tantamount to an incorporated partnership. However, a better
approach might have been to emphasize even more the differences
between a closely-held corporation and a widely-held corporation by
retaining the old definition with added provisions similar to several
U.S. corporation statutes where the close corporation is given special
recognition.10 9
There is also not much discussion in the Draft Act about the
treatment of non-shareholders: creditors, consumers, employees
and, to a lesser extent, government officials; it is another popular
suggestion nowadays that corporation laws should be concerned with
the interests of such people. The Commentary points out the difficul-
ty of recognizing such interests through, for example, representation
on the board of directors, because of the practical problems in
establishing the electorate.”10 However, solutions to such problems
could probably be found; for example, the corporation statute as
enabling legislation could expressly provide that such non-share-
holder interests could be represented on the board of directors of
the corporation if desired, provided certain prescribed rules were
met, for example, that a majority of directors represented share-
holders. The actual method for determining such representation
then could be left to each corporation to work out.”‘ In this connec-
109 For a discussion of these statutes and the topic of the close corporation
generally, see: O’Neal, Close Corporations Law and Practice, (1971) vols. 1 and
2. It is interesting to note that section 342 of the Delaware General Cor-
poration Law has a definition of a close corporation similar to the definition
of private company in Canadian statutes, viz., a limitation on the number of
shareholders, a restriction on the transfer of stock, and a prohibition against
the corporation’s making a public offering of its stock within the meaning
of the U.S. Securities Act of 1933.
110 Commentary, para. 32.
M In the Commentary it is mentioned that the Draft Act does not prevent
a corporation from making arrangements with its creditors, employees or
others under which directors could be elected to represent these groups, pro-
vided they could exercise the necessary influence upon the shareholders, who
are the sole persons who can vote. It is also stated that employees could
perhaps bargain for directorate representation in a provision in the collective
agreement, which provision shareholders would in all likelihood honour since
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tion the Draft Act is to some extent inconsistent. In Part 19.00, as
already mentioned, some creditors are given, with no explanation,
the same fairly broad enforcement rights that are given to share-
holders. If creditors are given such enforcement rights, perhaps they
should also be given a right to participate in the control of the
corporation whenever it is deemed desirable.112
In summary, in the area of shareholder treatment the Draft Act
is basically a traditional statute but with some modem features
from the United States and United Kingdom, our principal benefac-
tors of corporate legislation. I do not mean the label of “traditional”
to be an indictment of the Draft Act, however, since if it is enacted
with basically no change, it will clearly become the best corporation
statute in Canada.
“otherwise, the collective agreement would be broken”. Commentary, paras.
33, 34. Some of the European corporation statutes, notably that of West
Germany, allow employee representation on the supervisory (as distinct from
the managerial) board of directors. See: Vagts, Reforming the “Modern”
Corporation: Perspectives From the German, (1966) 80 Harv. L. Rev. 23, at pp.
50-53. Professor Vagts concludes that such an approach may not be suitable
for the U.S. because, inter alia, the U.S. has a different scheme of industrial
relations in which trade unions have a considerable voice: Ibid., at pp. 76-78.
112 I am not arguing in this discussion in favour of non-shareholder interests
to be represented on the board as a matter of statutory requirement, since
this may be unrealistic and could lead to quite serious problems. See: Eisen-
berg, op. cit., at pp. 16-21. However, I would suggest that it might be worthwhile
investigating allowing a corporation to bestow on non-shareholder groups
the right to representation on the board of directors as a matter of choice.
This may be done under the Draft Act, but it is certainly not stated that clearly
in the Commentary.
