No. 2]
The Canada Development Corporation:
A Comparative Appraisal
Robert Couzin *
Many nations have manifested their nationalism
through great public acts; Canada has asserted
it nationalism by looking for it.
Craig Brown, The Nationalism
of the National Policy.
Introduction
………………………………………………………………………………………………………..
406
CONTENTS
I. The Proposed CDC
…………………………………………………………………………………..
A . 1963-1971 ………………………………………………………………………………………………….
B . B ill C-219 ………………………………………………………………………………………………..
407
407
410
410
413
417
i. Corporate structure and capitalization ………………………………….
ii. Objects and purposes ……………………………………………………………………
iii. C ontrol …………………………………………………………………………………………..
II. CDC In Context: Public and Mixed Holdings ……………………………………..
A. Public Corporations …………………………………………………………………………….
B. Mixed Enterprises ……………………………………………………………………………….
i. Government representation ……………………………………………………….
ii. R egulation ………………………………………………………………………………………
iii. Courts of account ………………………………………………………………………..
iv. Disclosure rules …………………………………………………………………………….
……………………………………………………………………………………..
v. Conclusion
III. The Development Corporation ………………………………………………………………..
A . The Italian IR I ……………………………………………………………………………………
B. The British IRC ……………………………………………………………………………………
C. The Canadian CDC …………………………………………………………………………….
418
418
421
422
426
426
427
428
429
429
432
434
*Third year B.C.L. student, Faculty of Law, McGill University. The author
shared the Wainwright Essay Prize for this article.
McGILL LAW JOURNAL
[Vol. 17
INTRODUCTION
A glance at book-sellers’ shelves (in the “Canadiana” section)
indicates that some Canadians, for the most part academics, are
seriously disturbed by American domination of the national economy.
The present wave of economic nationalism is not the first 1 and is
unlikely to be the last. The process is not, however, strictly cyclical.
For upon each appearance, this nationalism of necessity situates
itself within the prevailing economic, political and social Zeitgeist.
Today, the “problem” of foreign ownership and control is inextri-
cably bound to that of national economic development generally.
Though structures may –
and perhaps should – be formed to deal
with situations peculiar to foreign ownership,2 the more productive
and profound institutional responses must surely occur at the level
of fundamental politico-economic choices. American capital has
attained its present position of control within the so-called “market”
laissez-faire cum oligopoly. For the purposes of this paper it is
–
unnecessary –
to question the basic validity of the
rather unfettered use of private capital accumulations which grounds
the contemporary system. The applicability of capitalist assumptions
to institutions of economic defence is, however, another matter.
That “foreign ownership and control” is indeed inseparable from
the broader development concept is evident even at the level of
definition. “Foreign ownership” must encompass both portfolio
and direct investment, and in the latter case everything from wholly
owned subsidiaries to joint ventures with Canadian companies.
Presumably, “Canadian ownership” means replacement of foreign
with Canadian owners
“Canadian control”, however, does not
necessarily increase linearly as Canadians replace foreigners
in
ownership positions. “Foreign control” results from the exportation
of “decision-making power”.4 If a wholly owned Canadian subsidiary
of an American firm is forced to release 80% of its equity onto
the Canadian market over ten years, control will remain with the
and unwise –
1One might go back to the early National Policy; see Craig Brown, “The
Nationalism of the National Policy”, Nationalism in Canada, Russel, P. (ed.),
(Toronto, 1966), p. 155.
2 E.g. an information agency concerned with Multi-national enterprises,
viz. Foreign Ownership and the Structure of Canadian Industry, Report of the
Task Force on the Structure of Canadian Industry, Queen’s Printer, (Ottawa,
1968) p. 393.
3Even this step is not trivial. “Foreigners” are probably non-residents,
but in the case of individuals considerations of nationality may equally arise.
4 Cf. Task Force Report, op. cit., p. 298.
No. 2]
CANADA DEVELOPMENT CORPORATION
parent through the effects of stock dispersal.5 But beyond the tech-
nicalities of control there lies the most fundamental definitional
ambiguity of all: who is the “Canadian” in “Canadian control”? If
the foreign ownership and control problem is one of national dom-
ination, the referent must be the collectivity, not the individual
Canadian capitalist.
The most obvious national response is public ownership. Canada
has, in the past, declared certain industries or sectors of the econo-
my to be the proper concern of the State. Public funds may equally
well, however, be utilized to establish an institution whose function
is not industrial, but that of economic development per se. “Develop-
ment institution”, as used in this paper, refers to a public or semi-
public structure which, through some combination of interventionist
policies and channelling of capital, attempts to guide the growth
of various sectors of the national economy. This genus is necessarily
as vague as are different the several institutions to which it shall
be applied in this study.
The proposed Canada Development Corporation is such a struc-
ture. The purpose of this paper is to reach an understanding of what
the CDC is, and to what extent it is an appropriate device for national
development.
I. THE PROPOSED CDC
A. 1963-1971
Bill C-219, An Act to establish the Canada Development Corpora-
tion, was introduced to the House for first reading on January 25,
1971, and passed third reading essentially unchanged on June 9,
1971. Though hotly debated for nearly eight years, it emerged in
the end surprisingly similar in substance to that which was presaged
The difficulty of approaching de facto control through direct limitation
of foreign equity participation is illustrated by a recent Australian scheme.
The Companies (Life Insurance Holding Companies) Ordinance 1968 set such
a limit, and further limited control with voting restrictions, with respect to
two specified insurance companies. Though containing a careful definition
of “foreign share” as including any share held by a “foreign corporation”,
the Ordinance illogically set 20% of voting shares as its criterion for
sufficient control for purposes of defining “foreign corporation”, while
allowing and individual foreigner to retain a holding of 21%
in either of
the two Australian companies. It is extremely difficult to choose a realistic
criterion of control for a given purpose. Cf. David Nochimson, The M.L.C.
Ordinance – A New Legal Approach to Foreign Investment, (1969), 43 Aust.
LJ. 101.
McGILL LAW JOURNAL
[Vol. 17
in 1963. Like Athena it had sprung fully clothed from the head
of its Zeus – Walter Gordon.
The notion of a development fund had received some attention
prior to 1963, but it was only in that year that the creation of such
an institution became a serious possibility, as the Canada Develop-
ment Corporation was mentioned, albeit rather casually, in the
Speech from the Throne of May 16.6 Needless to say, the business
and financial communities were not overjoyed. Clive Baxter 7 attrib-
uted a governmental retreat on CDC to opposition from these quar-
ters. He predicted there would be no mention of CDC in the 1964
budget. In fact, CDC appeared in neither the budget nor the Speech
from the Throne that year.
By 1965, however, rumour had it that Gordon had pulled CDC
back to the top of the Finance Department list. The Financial Post
ran an article headed: “Keep Canada Canadian money almost a
certain bet this year”.” And, indeed, the first official outline of the
proposed legislation appeared in the 1965 Budget Speech.9 Gordon
there described the CDC as:
… [a] new institutional channel through which Canadians can invest
their savings in a form that carries with it a share in the ownership and
direction of businesses operating in this country.10
The mechanics of the proposal involved the government interest
descending towards ten per cent, and a ceiling of three per cent on
individual (and institutional) holdings so as to ensure that the
shares would be widely held. CDC would be authorized to buy up
the equity interest “in Crown corporations that have become viable
commercial operations”.’
In keeping with its interest, the govern-
ment would retain the right to appoint a small proportion of the
Directors, the rest being elected in the usual way by the private
shareholders.
Gordon’s subsequent effort to sell the CDC to the business and
financial communities was only a qualified success. Careful to point
out that CDC investment would generally seek out projects which
have not heretofore lent themselves to Canadian financing,’2 he went
6 House of Commons Debates, 1963 vol. II, p. 7. A resolution was passed in
support of C.D.C. on June 20th, ibid., vol. II, p. 1371.
7Financial Post, January 25, 1964, p. 11.
8 Ibid., March 27, 1965, p. 1.
9 House of Commons Debates, 1965 vol. I, pp. 434-435.
10 Ibid., p. 434.
11 Ibid.
12 Financial Post, May 1, 1965, p. 1.
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CANADA DEVELOPMENT CORPORATION
so far as to suggest that the CDC would be a larger and more
effective Argus Corporation.13 Nevertheless, some of the stauncher
capitalists panicked. 4 It is interesting to see how an avowed social-
ist, Colin Cameron, reacted to a Globe and Mail suggestion that CDC
would bring in socialism “by the back door”. The CDC, he said, is
the opposite of socialist; it is but another means whereby the more
acquisitive members of society may acquire at the expense of others.
We find ourselves with just a vast mutual investment trust, in no
way differing from those which are already in existence except that
you and I and the other citizens of Canada will be asked to sponsor
it; … We shall also be asked to stand by with the buckets to bail this
Corporation out of trouble… But we are not going to control it. In
fact, the Minister says plainly that this Corporation will stand on its
own feet free from government control. If that is what the Globe and
Mail calls Socialism by the back door I think its editors have a lot to
learn.15
CDC reappeared in the Speech from the Throne of 1966,16 but the
succeeding Minister of Finance, Mitchell Sharp, moved it no closer
to realization. Though he might say, for the benefit of Parliament,
“[i]t is my intention to proceed with the Canada Development Cor-
poration legislation as soon as we can find a place for it on the
order paper”,17 it seems likely he gave the plan a low priority.’,
Finally, after a few false starts,19 Edgar Benson brought CDC to
Parliament as C-219. In 1969 the Financial Post had said:
When the CDC Bill is finally tabled, it is expected to show surprisingly
little basic change from the original Walter Gordon proposal of six years
ago.20
If we read “six” as “eight”, we have arrived at C-219.
13Remarks at the annual meeting of the Canadian Textiles Institute, Ste.
Addle, Quebec, June 3, 1965, quoted in E.P. Neufeld, The Canada Development
Corporation – An Assessment of the Proposal, (Montreal, 1966), p. 1.
14See Robin Schiele, Government’s big, big grab for investment capital,
Can. Bus., vol. 38, no. 9 (Sept. 1965) p. 66.
5 House of Commons Debates, 1965 vol. I, p. 703.
16House of Commons Debates, 1966 vol. I, p. 9.
17House of Commons Debates, 1967 vol. II, p. 1429.
18Financial Post, July 29, 1967, p. 1.
19 Pundits felt sure Benson would introduce a Bill by summer recess in
1970, Financial Post, February 14, 1970, p. 5. The Minister himself confidently
said in April of that year that the CDC “will be law by the end of this
year”, Financial Post, April 11, 1970, p. 1.
2 oFinancial Post, May 25, 1969, p. 1.
McGILL LAW JOURNAL
[Vol. 17
B. Bill C-219
During its eight-year period of gestation, the CDC concept was
elaborated in several directions by diverse interests. One private
enterprise spokesman suggested a dual project: sale of capital stock
in Polymer and other such “successful” Crown corporations on the
open market, and creation of a State-financed CDC for capital
intensive development projects.21 Two private members’ Bills during
the period proposed Crown corporations, in each case delineating
the objectives of the Corporation rather differently than was the
case in the original government proposal.22
In succeeding sections, the proposed CDC will be viewed in
context. It will be compared to systems of public ownership or
mixed holdings, and state development schemes. Prerequisite to
this synthesis is an analysis of C-219 itself. It is imperative that the
particular entity established by this Bill be understood in its own
terms. The following presentation is not, however, “objective”; it
does not purport to eliminate the observor. The CDC shall here be
viewed –
qua corporation, as to corporate
structure, objects, and de facto and legal control.
albeit critically –
(i) Corporate structure and capitalization. Though a creature
of statute, the CDC has been clothed –
so far as possible – with
the dignity of a “private corporation operating basically within the
provisions of the Canada Corporations Act”. 23 The Bill expressly
declares the Corporation not to be “an agent of Her Majesty or a
Crown corporation… “.4 Indeed the greater portion of Part I of
the Canada Corporations Act is incorporated by reference, mutatis
mutandis.25 Excluded from application are sections of that Act
dealing with inappropriate technical matters (e.g. letters patent)
as well as substantive provisions altered by the Bill.2 6
21 The proposal is that of N.S. Takacsy, director and economist of Green-
shields, quoted in the Financial Post, June 29, 1968, p. 5.
22 Bill C-260 (Mr. Otto), 1st session, 27th Parliament, received first reading
on December 21, 1966. It suggested a Crown Corporation whose prime function
would be to insure certain approved Canadian stocks, held by Canadian
citizens, at a prescribed fee, as a device to promote Canadian ownership.
Somewhat less eccentric is Bill C-204 (Mr. Saltsman), 3rd session, 28th
Parliament, introduced on December 3rd, 1970, an NDP project for a
State-owned corporation which would expand
the public sector where
necessary, and act generally as an instrument of government planning.
23 Department of Finance New Release, Canada Development Corporation,
243ll C-219, 3rd session, 28th Parliament, s. 31.
25 Ibid., s. 26.
26 Ibid., s. 27.
Jan. 25, 1971, p. 5.
No. 21
CANADA DEVELOPMENT CORPORATION
During its formative years, the CDC will be wholly government
owned. Of its authorized capital of $2 billion, 7 an amount not
exceeding $250 million will be subscribed over three years by the
federal government 28 which may receive additional shares in pay-
ment for the sale to the Corporation of the capital stock held by
the government in Polymer, Eldorado Nuclear, Panarctic Oils
(presently about 40% government owned) and Northern Trans-
portation.29 Section 39 is merely facultative; i.e. the CDC is not
committed in any way. The nation is, however, committed as the
section provides all necessary authority for the sale with the agree-
ment of the Governor in Council. Neufeld,30 among others, has
questioned the propriety of such sales. If the reasoning were based
upon administrative efficiency,31 such transfers might be defensible.
But this rationale has yet to be convincingly put, and in its absence
one must infer that the lucrative earnings of Polymer and the other
financially successful Crown endeavours will be used to bolster
sales of CDC securities and enhance its balance sheets. Thus, not
only does section 39 contain a hidden denationalization of these
enterprises (once CDC shares become widely held), but it also
insures a subsidization of the CDC by the public generally, through
the loss of these earnings.
Though the Crown in right of Her Majesty may hold more than
ten per cent of the total issued voting shares, the company, once
widely held, may “at its sole option” redeem these shares and
effectively keep the government participation to the level of ten
per cent0 2 So far as is in the public interest, the Minister shall main-
tain the ten per cent minimum government holding. 3 Shareholders
27Cf. Department of Finance, New Release, supra, n. 23, p. 3.
28Bill C-219, supra, n. 24, s. 36()(a).
291bid., s. 39. The government is authorized to loan another $100 million
to CDC; s. 37.
3 o Supra, n. 13, p. 7.
31 This argument was suggested in the 1965 Budget Speech by allusion to
the views of the Glassco Commission, House of Commons Debates, 1965
vol. I, p. 434. That industrial rationalization is not, however, the sole guiding
principle of the Bill is evidenced by the removal, on third reading, of any
reference to the Northern Canada Power Commission. Mr. Mahoney, Parlia-
mentary Secretary to the Minister of Finance, frankly explained that pending
legislation (C-193) would so alter the rate structure of the Commission as to
make it effectively non-profit, and thus inappropriate to the CDC portfolio.
House of Commons Debates, June 4, 1971, p. 6391.
32 Bill 219, supra, n. 24, s. 36(l)(b).
3 Ibid., s.’42(3).
McGILL LAW JOURNAL
[Vol. 17
other than the federal Crown may not hold in excess of three per
cent of the outstanding voting shares.34
Individual and corporate shareholders (of voting shares) must
be Canadian residents, with exception made for non-resident Cana-
dian citizens.35 A non-resident controlled corporation is deemed
non-resident for this purposeY6 To ensure Canadian ownership, the
Board may secure declarations concerning residence, citizenship,
associations, etc. of any shareholder 37 and, should shares be found
to be held in contravention of the Act, their voting rights will be
suspended and a system of redemption put into effect 38
Like the shareholders, members of the Board are subject to
special requirements. All must be Canadian citizens, and the major-
ity residents as well. 3 9 Provisional directors, naturally, will be
government appointees,40 but as the voting power spreads, the
Minister may opt between either voting the government shares in
elections, or simply appointing not more than four of the eighteen
to twenty-one directors. 4′ In addition, so long as the government
holding exceeds fifty per cent, the Deputy Ministers of Finance and
Industry, Trade and Commerce are members of the Board ex officio,
without voting rights. 42
Section 14 takes the place of sections 84 and 92 of the Canada
Corporations Act. It presents the function of the Board as including
roughly the same matters touched upon in section 92 of that Act,
adding some precision to the general management function (e.g.
investment and administration of company property).
The powers of the CDC, though similar for the most part to
those of a company incorporated under the Canada Corporations
Act, are peculiar in certain respects. The Corporation may not enter
into any amalgamation,4 3 though it may enter other arrangements
of a co-operative nature, such as joint ventures.44 Its power to incor.
34 Ibid., Schedule I, s. 2(1) (b). On the mechanics of the three per cent rule,
cf. infra, pp. 15ff.
35 Bill 219, supra, n. 24, s. 20; also Schedule I, s. 1.
36 Ibid., Schedule I, s. 4(1)(c)(iv).
37 Ibid., s. 16(2).
38 Ibid., s. 19, 21-25.
39 Ibid., s. 12.
40 Ibid., s. 5.
41 Ibid., s. 40, 11. The number of directors may be altered by the Board
if the by-law is ratified by a 2/3 vote of the shareholders at a special general
meeting; s. 11.
42 Ibid., s. 41.
43 Cf. Canada Corporations Act, R.S.C., 1970, c. C-32, s. 14(1) (d).
44 Bil C-219, supra, n. 24, s. 7(1) (d).
No. 2]
CANADA DEVELOPMENT CORPORATION
porate subsidiaries is phrased more broadly than is the case in the
general Act.4! 5 The ultra vires doctrine is not applicable as against any
person who purchases securities of or contracts with the Corpo-
ration.4 6
Certain exceptional acts of the company, however, require a
special procedure be followed. Sections 48 through 58 of the Canada
Corporations Act do not govern changes in its capital structure.
Rather, such decisions, as well as modifications of the objects of
the company and any alteration of conditions concerning share-
holder qualifications, can only be accomplished by application for
supplementary letters patent, upon a two-thirds vote in general
meeting, which application requires affirmation by resolution of
both Houses of Parliament!
This last is surely the most significant derogation from the
general company law to be found in the Bill, and represents the
only serious legal control over the Corporation given Parliament.
For unlike the special shareholder requirements – both as to res-
idence and as to size of holdings –
this limitation upon the auton-
omy of the company is not immediately reconcilable with the com-
mon law conception of a company. Share qualification rules may
be imposed upon the company by its charter, but section 30 provides
for a continuing relationship between the Corporation and the
legislative body, or at least the potentiality of such a relationship.
(ii) Objects and purpose. In its formative years, the CDC was
vaunted as a significant weapon in the battle against foreign control
of the Canadian economy. In 1965 Walter Gordon put it thusly:
… The vast majority of Canadians want our country to remain free and
independent. But if we lose our economic freedom –
and an excessive
absentee ownership of our businesses and resources means some loss
of economic freedom –
then sooner or later we shall lose our political
freedom also. Many things must be done to prevent this. One of these
is to secure in Canadian hands a greater measure of control of future
economic developments. The Canada Development Corporation will help
us to do this… 48
Leaving aside the striking imagery of independence, the Watkins
Report of 1968 recommended “that the Canada Development Corpo-
ration be created so as to increase Canadian participation in Cana-
45Ibid., s. 7(1)(f); Canada Corporations Act, supra, n. 43, s. 14(1)(h).
46 Bill C-219, supra, n. 24, s. 8(l).
471 Ibid., s. 30.
48 Remarks at the annual meeting of the Canadian Textiles Institute, Ste.
Adele, Qudbec, June 3, 1965, quoted in E.P. Neufeld, supra, n. 13, p. 3.
McGILL LAW JOURNAL
[Vol. 17
dian economic activity”.49 More precisely, the Report suggested that
the CDC could reach to the centre of the foreign control –
as op-
posed to foreign ownership –
problem.
[The CDC’s] capacity to draw on the expertise of the financial com-
munity and to provide a focal point for the mobilization of entrepreneurial
capital would help to meet what is presently a major flaw in the Canadian
capital market, namely, that rising Canadian ownership of equity securities
does not appear to be matched by rising Canadian control5 0
When C-219 actually appeared, foreign domination rhetoric was
further tempered in favour of more subtle and vague promises of
“rationalization” of the Canadian economy.
The corporation will help shape and secure future Canadian develop-
ment. It will be a large-scale source of capital to create major new
enterprise. It will join others in acquiring and rationalizing existing
companies where competitiveness may be improved by merger, amalgam-
ation or other corporate arrangements. In helping to bring about these
changes it will reduce the risks of an undesirable degree of foreign
control of the enterprises concerned. 1
Ultimately, of course, the activities of the CDC will be governed
neither by eight years of salesmanship nor by Ministerial praises
but by C-219 itself. Section 2 of the Bill reads:
The purpose of this Act is to establish a corporation that will help
develop and maintain strong Canadian controlled and managed corpo-
rations in the private sector of the economy and will give Canadians
greater opportunities to invest and participate in the economic develop-
ment of Canada.
The section makes clear that this Bill’s answer to the question
asked at the outset – who is the Canadian in “Canadian control” –
is the private entrepreneur. In the long term, CDC wishes to re-
patriate decision-making power by fostering development of private
Canadian decision-makers within the present capitalist industrial
structure.
The CDC is, however, more than – or, more properly, something
other than –
a mere subsidy scheme. Subsidization is of its nature
a governmental endeavour. Yet the CDC is established as a “mixed
company”P The essence of the Corporation is to be found in its
objects which, though lengthy, merit reproduction.
49 Task Force Report, supra, n. 2, pp. 404-05.
50 Ibid., pp. 274-275.
51Department of Finance News Release, supra, n. 23, p. 1.
52The expression is common in Europe. It refers to companies structured
as private corporations but in which the State has equity participation.
See, infra, pp. 421 ff.
No. 2]
CANADA DEVELOPMENT CORPORATION
6.
(1) The objects of the company are:
(a) to assist in the creation or development of businesses, re-
sources, properties and industries of Canada;
(b) to expand, widen and develop opportunities for Canadians to
participate in the economic development of Canada through
the application of their skills and capital;
(c) to invest in the shares or securities of any corporation owning
property or carrying on business related to the economic
interests of Canada; and
(d) to invest in ventures or enterprises, including the acquisition
of property, likely to benefit Canada;
and shall be carried out in anticipation of profit and in the best interests
of the shareholders as a whole.
(2) In the furtherance of its objects and in carrying on its business
generally, the company shall, so far as it is practicable and profitable
to do so,
(a)
invest in the shares or securities or corporations in which
the company has or expects to have substantial holding of
shares carrying voting rights; and
(b) invest in the shares of corporations in each of which, in the
opinion of the Board of Directors of the company, the real
value of the shareholders’ equity after investment by the
company will be, or is likely to become, one million dollars
or more.
(3) Subsection (2)
is directory only and shall not be construed to
limit or qualify the objects of the company under subsection (1) or to
derogate from the powers of the company.53
The Department of Finance summarizes: “The CDC will act in the
broad area in which the national interest and the profit motive
are compatible.” 4
The suggestion is that of a company which, by means of relatively
large investments carrying with them significant control of other
companies – but not to be exercised as direct operating control 15
– will act to forward the national interest envisaged in terms of
Canadian participation, growth and economic development. All this
and more at a profit for the private investors. It
is fair to say that
the CDC must aim not merely at profit-making but at profit-
53 Bill C-219, supra, n. 24, s. 6, my emphasis.
54 Department of Finance News Release, supra, n. 23, p. 2.
55 “Generally, the CDC will not seek to exercise direct operating control of
the corporations in which it invests and they will therefore not normally
become CDC subsidiaries.” Department of Finance News Release, supra, n. 23,
p. 2. Later, however, the Minister pointed out that the CDC would, of course,
continually exert a “degree of influence on the basic policies and direction
of such corporations appropriate for a major shareholder”. House of Commons
Debates, February 22, 1971, p. 3637. The choice is left to the reader.
McGILL LAW JOURNAL
[Vol. 17
maximization. Such, indeed, has been the key to the government’s
sales campaign since the beginning. Speaking in 1965, Gordon said:
The over-riding objective of the CDC must be to satisfy the normal
interest of its shareholders. Regular commercial and financial criteria
must guide the investment policies of the CDC. Normal investment
criteria must guide the public in deciding to invest in CDC…56
The conclusion necessarily follows that the CDC will not operate
so as to supplement the market, but will work through it.P7
Perhaps the best statement of objects is that of Mr. Benson at
the close of his speech upon introduction of C-219 for second reading:
Its capitalization will allow it to become one of the largest Canadian
corporations. It will represent a new and significant partnership between
the public and private sectors in the dynamic development of our economy.
It will create a new centres [sic] of entrepreneurship and capital to help
build the kind of strong and enterprising Canadian corporations which
can compete successfully in an increasingly competitive world. It will
enable certain govermnent-owned enterprises to grow and develop as
full-fledged members of the business and financial community, and it
will help broaden the opportunities for both Canadian skills and Canadian
capital to participate in our own development. 58
and private –
Despite the paean to “partnership between the public and private
sectors”, the bias of the project seems clear enough. World com-
petitiveness is to be secured by building “strong and enterprising”
“Canadian corporations”. The collectivity appears
–
only at the financing stage. Perhaps most revealing is the uneasiness
evidenced by the Minister in the presence of State-owned enterprises,
a discomfiture often found in business circles. He sees denational-
ization as a process whereby Crown corporations may become “full-
fledged members of the business and financial community”. Such
a statement reflects a fundamental postulate of pure capitalism,
that public enterprise and collective economic activity generally are
prima facie anomalies within the economic system.
56 Remarks at the annual meeting of the Canadian Textiles Institute,
quoted in Neufeld, supra, n. 13, p. 5. Mr. Benson put it more bluntly.
Explaining the implications of the last clause in sec. 6(1) to a Parliamentary
committee he admitted: “This has implicit in it a maximization of profits
within reason.” Minutes of Proceedings and Evidence, Standing Committee
on Finance, Trade and Economic Affairs, May 4, 1971, p. 34. While profit-
making may be justified both as an index of efficiency and a means whereby
the development corporation may continuously service external endebtedness,
profit-maximization
is another matter. For a valuable discussion of the
r6le of profit in the development institution, see Petrilli, L’Etat entrepreneur,
(Paris, 1971).
57Neufeld, supra, n. 13, p. 5.
5 8House of Commons Debates, February 22, 1971, p. 3640.
No. 2]
CANADA DEVELOPMENT CORPORATION
(iii) Control. Statutory governmental control over the CDC is
minimal. Parliament must authorize certain fundamental changes
in the charter, 9 but the Corporation has full autonomy as to its
activities. It will not report to Parliament and will presumably dis-
close no more information than is required of corporations gener-
ally. The federal government is guaranteed a minimum of four
directors, few enough that any sort of by-law might be passed with-
out government support, including removal of a director, which
requires a four-fifths vote 6
Of course, government control de facto will remain for some
time to come. Indeed, will the government ever lose control? In
the 1965 Budget Speech Finance Minister Gordon said “the Corpo-
ration would stand on its own feet, free of government control”. 6s
It is unclear, however, what the Minister meant by “control”.
At this point we should look in somewhat more detail at Schedule
I of the Bill. The effect of the Schedule is to limit all potential voting
blocks except the federal government to three per cent of the
outstanding voting shares. To this end the formula groups any
provincial government with agents of that government,6 3 and gener-
ally any shareholder “associated” with any other shareholder.p
Such association exists, of course, in the usual situations of inter-
locking control. It also exists between corporations one of which
controls the other, a state of fact which obtains when in the opinion
of the Board of Directors the one is effectively controlled by the
other, by whatever means.6 5 Finally, shareholders are also associated
who,
… are parties to an agreement or arrangement, a purpose of which,
in the opinion of the Board of Directors, is to require the shareholders
to act in concert with respect to their interests in the company.66
Beyond the express cases of interlocking directorships and the
like, all association is thus a matter to be determined by the Board.
The Board will decide whether one corporation is in the effective
59 Bill, C-219, supra, n. 24, s. 30; also supra, p. 413.
0o The inadequacy of disclosure provisions in Canadian company law is
notorious. Task Force Report, supra, n. 2, pp. 166 ff.
61 Bill C-219, supra, n. 24, s. 12(7).
62 House of Commons Debates, 1965 vol. I, p. 455.
63Bill C-219, supra, n. 24, Schedule I, s. 2(3), s. 4(1) (a).
64 Ibid., Schedule I, s. 2(1).
65 Ibid., Schedule I, s. 4(4). The subsection specifies holding of shares and
holding of debts and concludes: “or by any other means whether of a like
or different nature”.
06Ibid., Schedule I, s. 4(2)(i).
McGILL LAW JOURNAL
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control of another, be this accomplished by straight-forward share-
holding, voting agreements, relations to a third company, etc. And
the Board will decide more generally whether two shareholders
have entered into an agreement creating a voting’block. The test
to be applied requires, simply, an agreement or arrangement a (not
“the main” as in the Income Tax Act 67) purpose of which is estab-
lishment of such a block.
If the individual, institutional and provincial
investors are
successfully isolated in this fashion, there of course remains the
possibility of de facto voting patterns flowing from the similar
interests of groups of investors. Nonetheless, a ten per cent interest
in a widely-held company might well be considered a controlling
interest in such a situation. 8
II. CDC IN CONTEXT: PUBLIC AND MIXED HOLDINGS
This, then, is the Canada Development Corporation. Though
perhaps unique unto itself, the CDC is not therefore incommen-
surable with other forms of State intervention. Much has been said
of unicorns, not to speak of white elephants. The CDC is not a public
corporation and is a species of mixed enterprise. Something may be
learned from each comparison.
A. Public Corporations
In general, public ownership of the means of production and
exchange must be linked with some “socialist” ideology. 0 R.-P.
Barbe claims that the Canadian experience, on the contrary, has
been that though socialist ideas may have favoured State inter-
ventionism, the true motives of Canadian public ownership lie
elsewhere.7″ The motives he offers – national unity, war and eco-
nomic planning, in historical sequence –
do not actually contradict
67 R.S.C. 1970, c. 1-5, s. 138.
68The phenomenon of a controlling interest well below 50% is hardly
novel, and the government position in CDC has not escaped the notice of
private enterprise critics. Neufeld noted the probability of control and
added that the government is, in fact, “duty-bound” to exercise some control
over the use of public money. Neufeld, supra, n. 13, p. 10.
60There exist notable exceptions
in certain provincial nationalization
schemes. M. L6vesque may have been motivated by considerations of collective
interest in the nationalization of hydro-electric power, but justifications of
his proposal were often made upon rather different grounds. P. Sauriol,
The Nationalization of Electric Power, trans. by K. Buchanan, (Montreal,
1962). The B.C. scheme is perhaps more blatantly non-socialist.
7OLes entreprises publiques au Canada, (1969), 29 R. du B. 2, 5.
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CANADA DEVELOPMENT CORPORATION
the general thesis so much as they indicate an overly narrow use
of the term “socialist”.
The European experience, being largely based upon national-
ization rather than sui generis State companies, is even less ambig-
uous in this respect. Katzarov, an eminent authority on national-
ization, certainly supports such a thesis.
Le climat social et politique dans lequel s’effectuent les nationalisations,
les motifs invoquds pour les justifier et les circonstances qui les pr6cedent
ou qui les accompagnent… nous montrent que cette intervention aussi
radicale de l’Etat dans la vie dconomique a pour cause profonde les
aspirations & une socialisation des conditions gdndrales de 1’existence.
[Emphasis in original.] 71
The flurry of nationalizations in France after the Second World
War were justified as a “retour h la nation” of property rightfully
that of the people.72
To the extent that public ownership rests upon a concern for
the collectivity, its structures have necessarily differed from those
of private enterprise joint stock companies. In the Anglo-Canadian
tradition, the prime vehicle of public ownership has been the Crown
corporation. Originally rather closely tied to the executive itself,73
this form has evolved towards progressively greater autonomy –
which autonomy was in fact a prime consideration in its develop-
all the while
ment as distinct from the government agency ” –
retaining certain basic lines of control and supervision.
The Canadian Crown corporation is governed by provisions of
1 This Act provides a ge-
the Financial Administration Act, 1951. 7
neric 7 6 definition of the form:
71Thdorie de la Nationalisation, (Neuch~tel, 1960), p. 123.
72J.-D. Bredin, L’Entreprise semi-publique et publique et le droit privi,
(Paris, 1957), pp. 45 ff.
73 The courts’ reluctance to attribute a significant degree of autonomy to
these corporations is illustrated by the tendancy to allow them to partake
of Crown immunity from tort liability. In effect, the courts were clinging
to an identification with governmental departments. A similar situation
obtained with respect to local taxation. Cf., e.g., Halifax v. Halifax Harbour
Commission, [1935] S.C.R. 215.
74See, J.E. Hodgetts, “The Public Corporation in Canada”, The Public
Corporation: A Comparative Symposium, Friedmann ed., (Toronto, 1954),
p. 51, at 61. Also JA. Corry, The Fusion of Government and Business, (1936),
2 Can. Jour. Econ. & Pol.-Sci. 301.
75 R.S.C. 1970, c. F-10. Subsequent amendments have not altered the sections
involved here.
76 Three classes of Crown Corporation are distinguished and to some extent
different r6gimes apply. “Agency Corporations” are agents of the Crown
and are semi-commercial in their operations, supra, n. 75, ss. 76(1)(a) and
McGILL LAW JOURNAL
[Vol. 17
Crown corporation means a corporation that is ultimately accountable,
through a Minister, to Parliament for the conduct of its affairs …. 77
Thus the very definition makes reference to perhaps the most basic,
if not always the most effective, line of control: Ministerial respon-
sibility. Among the more specific forms of supervision is the power
of the Auditor General to make examinations of all accounts relating
to public property,78 the results of which examinations are included
in his annual report to Parliament.79 All Crown corporations must
themselves issue annual reports containing that information the
Canada Corporations Act requires be given the shareholders, plus
any other information the appropriate Minister or the Minister of
Finance may desire. This report is tabled in Parliament. 0 Further-
more, each corporation must have an official auditor, designated
either by the statutory charter or by the Governor General in
Council.”- This auditor makes an annual report upon the financial
activities of the corporation, which report is included with that of
the corporation itself and submitted to Parliament.2 Beyond these
formal controls, the government through its appropriation ma-
chinery may retain power to approve contracts and by-laws. The
Board of the corporation is appointed by the Governor in Council.
All payments out of the Consolidated Revenue Fund must have the
authority of Parliament. 3
These structures of supervision are automatically incorporated
in Mr. Saltsman’s Bill C-204 84 which proposes a Crown corporation
CDC. Having pointed out elsewhere 8 5 the danger inherent in a
national development corporation forced to represent the interests
of institutional and corporate investors, Mr. Saltsman carefully
reiterates the basic line of control in his Bill, requiring that the CDC
… act always as an instrument of government planning and development
policy and be directly responsible to Parliament through the Minister … 80
76(3)(b). “Departmental Corporations” are also agents of the Crown, but
act in an administrative or governmental capacity, ss. 76(1)(d) and 76(3)(a):
“Proprietary Corporations” are commercial and ordinarily operate without
special appropriations, ss. 76(1)(e) and 76(3)(c).
77 Financial Administration Act, supra, n. 75, s. 76(l)(c).
78 Ibid., s. 67.
79 Ibid., s. 70.
80 Ibid., s. 85.
81 Ibid., s. 77.
82 Ibid., s. 87.
3 Ibid., s. 24.
84 First (and surely last) reading, December 3, 1970, 3rd session, 28th Parlia-
ment.
85 “Towards a Responsive Development Corporation”, mimeo, 1969, p. 9.
86 Bill C-204, s. 4(l)(c).
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CANADA DEVELOPMENT CORPORATION
Unfortunately, his stated position upon the other fundamental
attribute of Crown corporations, autonomy, is less satisfactory. In
a 1967 position paper he suggested that the CDC,
87
… to be free of government intervention, justify its existence through
adequate returns on invested capital; survive by proving its efficiency
in the market ..
The government’s C-219 certainly fulfills the most stringent
requirement of autonomy, operation within the market. However,
those mechanisms of supervision associated with the Crown corpo-
ration are generally absent. The government retains a severely
limited right to appoint directors,8 8 and by-laws going to the essence
of the capital structure or objects of the Corporation must be laid
before Parliament. 9 Beyond this, the activities of the Corporation
remain its own affair, except to the extent that disclosure is provided
by the general company law. Even if it is true that the government
will retain control of the Corporation, 0 this de facto situation is no
substitute for public and Parliamentary scrutiny and supervision.
Surely, Crown corporations have themselves often been subject to
the criticism that only the government, and not Parliament or the
public, has been in a position to supervise.9 It is thus all the more
difficult to understand how the CDC, an institution supposedly
designed to promote economic development in the national interest,
is to escape even the minimal degree of scrutiny and supervision to
which Crown corporations are subject. 92
B. Mixed Enterprises
The combination of public and private capital and administra-
tion, though relatively rare in the common law world,93 is a widely
87 “Is there an Alternative to Continentalism?”, mimeo, 1967, p. 18. In fairness
to Mr. Saltsman, it should be pointed out that this requirement nowhere
appears in the 1969 paper. Cf. n. 56, supra.
88 Bill C-219, supra, n. 24, s. 40; cf. supra, p. 412.
89 Ibid., s. 30; cf. supra, pp. 412-413.
o0 Cf., supra, pp. 417 ff.
91 For such a view of the British experience, see R. Kelf-Cohen, Twenty
Years of Nationalization –
the British Experience, (London, 1969).
9
2 At this point the reader might well re-reflect upon the significance of the
sale of economically viable Crown corporations to a CDC constructed upon
the principles enunciated in Bill C-219. The denationalization accomplished
goes not only to economic benefit, but also to public control of these crucial
enterprises.
93 Cf. W.A. Robson, Nationalised Industry and Public Ownership, (London,
1960). Existing notable examples are British Petroleum (now just under
McGILL LAW JOURNAL
[Vol. 17
used economic form in Europe. The structure of such enterprises
is surely of interest in the context of an inquiry into the workings
of C-219. For the CDC is itself, in essence, of this genre.
A.-R. Brewer-Carias provides a comprehensive definition of
“mixed enterprise”:
En g6n~ral, le terme d’entreprise ou de soci6td d’ conomie mixte s’appli-
que aux soci6t6s dans lesquelles se trouvent associ6s des capitaux publics
et des capitaux priv6s, en vue d’une exploitation industrielle ou com-
merciale. 94
Cuban law is more precise, defining the form as including
… entreprises dans lesquelles 1’Etat apporte un capital, et k la gestion
desquelles l’Etat participe conjointement avec le capital priv6P.5
Here, a second criterion is added to that of the admixture of private
and public capital; namely, joint control. Upon this second criterion,
Brewer-Carias rejects as mixed enterprises those in which State
participation is less than fifty per cent, preferring to term such
holdings as “actionnariat de l’Etat”. More realistically, the criterion
of control may be separated from that of majority holding, as in
Italy where even a minority “controlling interest” is sufficient to
bring the enterprise in question within the purview of the law
relating to mixed companies. 96
Of interest in this study are the mechanisms of control devel-
oped by governments to insure an adequate influence upon these
companies. Such mechanisms may be grouped under four heads:
(i) government representation, (ii) regulation of company powers,
(iii) use of so-called ‘courts of accounts’ and (iv) disclosure rules.
A brief conclusion (v) is also proffered.
(i) Government representation. An almost universally applied
form of control is State representation upon the governing board
of the mixed company. In most countries, the proportion of such
State administrators is fixed in each individual case. Occasionally,
a general rule may be formulated, as in Germany where governments
other than the Federal Government are required to insure adequate
influence through representation,97 this superposed on a rule that
50% government owned) in the U.K. and Pan-Arctic Oil (40% government)
in Canada. The U.K. situation could change significantly with recently
introduced legislation. See, infra, pp. 432 ff.
94 Les entreprises publiques en droit compard, (Paris, 1968), p. 81.
95Ibid., p. 82.
96 Claude Ducouloux, Les Socidtds d’dconomie mixte en France et en Italie,
(Paris, 1963).
97W. Friedmann and H. Hufnagel, “The Public Corporation in Germany,”
in Friedmann, ed., supra, n. 74, p. 146.
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CANADA DEVELOPMENT CORPORATION
all such participations must exceed fifty per cent.98 In practice,
State representation has generally exceeded the proportion indicated
by the State holding. In France, for example, the State in most cases
“rompt le principe de proportionalit6 en s’octroyant dans les statuts
un droit de vote sup6rieur h sa part d’actions”. 99 Indeed, the French
government has been known to legislate representation on the board
when the government held no shares at all, but was merely a cred-
itor.100 In Italy, State nomination of company administrators is
provided for in the Civil Code,10 1 and includes the power to so
nominate even without share participation.1 2 Where more than
one administrator is so nominated, one must be chairman .
3
Wishing to retain as far as possible the “private image” of the
mixed enterprise, governments for some time attempted to reconcile
their special status in these enterprises with the common law of
companies. In France an early plan envisaged presentation to the
company of a government slate, from among whom shareholders
would have to elect one-third of the board. In case of conflict
between private shareholders and government, however, this system
was no different in effect from State nomination. A second com-
promise involved a scheme of ratification by the company in general
meeting of State appointed administrators. Such ratification was
largely formal, and when conflicts arose the State abandoned the
formula. Thus the inevitable solution was direct appointment of
government administrators.’0
Turning to C-219, it is difficult at first blush to compare govern-
ment representation in the CDC with the European situation, both
as to proportion of representation and method of nomination, due
to the sliding degree of Crown participation, expected to decrease
with time from one hundred per cent towards ten per cent. So long
as participation remains above fifty per cent, the government cannot
logically be prevented 105 from nominating all directors through the
9s Brewer-Carias, supra, n. 94, p. 182.
09 Roger Tagand, Le regime juridique de la socigtd d’ conomie mixte, (Paris,
1969), p. 80.
‘Oo Bredin, supra, n. 72, p. 82.
101 Italian Civil Code, art. 2458.
102 Ibid., art. 2459.
103 Ibid., art. 2460.
104 Bredin, supra, n. 72, p. 176.
’05 For purposes of public relations and even upon serious policy grounds –
favouring private initiative –
sentation voluntarily.
the government might well reduce its repre-
McGILL LAW JOURNAL
[Vol. 17
exercise of its voting power.10 6 The option to appoint four di-
rectors 107 is not, however, an adequate alternative means of insuring
sufficient governmental presence. For private shareholders with
two-thirds of the voting shares may raise the membership of the
Board above the maximum of twenty-one provided for by the Bill. 08
Indeed, the same two-thirds vote (or four-fifths of the Board) is
sufficient for removal of a director.0 9 One can only presume that
the government is depending upon the ceiling on holdings to prevent
the formation of such a private coalition.
Regardless of the extent of government representation and the
method by which it is achieved, the status of the government
administrator within an overtly common law company is at best
ambiguous. In France it is often the case that government “commis-
saires” are given by statute a certain veto power over the decisions
of the board, often used to delay the effect of such decisions until
the Minister can act. 10 Whether or not such special powers inhere
in the government representatives, their position is necessarily
rather different from that of the “private” board members. Speaking
from the Italian experience, Professor Ferri has described them as
… contr6leurs de la socidt6 dans l’int6r~t de l’Etat… [I]ls ont une
position particuli~re au sein de la socidt6, position diff6rente de celle
d’un v6ritable administrateur ou d’un vdritable syndic au sens du droit
commercial.”‘
As Ducouloux point out, the special status of the Italian government
administrators makes it impossible to say, as does art. 2458, al. 2
of the Italian Civil Code, that they have the “same rights and obli-
fations” as any other director. For, in fact, their rights are different
(e.g. they cannot be removed by the company) as are their obliga-
tions (e.g. they are bound to disclose to the State unlike private
directors who are bound to secrecy by art. 2407).1 Bredin asserts
that the very concept of a board of directors, as elaborated within
a capitalist system, has been undermined by the presence of govern-
ment representatives –
not to mention representatives of unions
and consumers, often required by statute in European mixed and
106A simple majority vote suffices for such nomination by s. 88 of the
Canada Corporations Act, incorporated by s. 16 of Bill 219.
107 S. 40 of the Bill, supra, n. 24.
08 That is to say, two-thirds ratification of a by-law passed by the Board,
ibid, s. 11.
109 Here the two possibilities are truly disjunctive, ibid., s. 12(7).
“Io Tagand, supra, n. 99, p. 218.
“13 Cited in Ducouloux, supra, n. 96, p. 129.
12 Ibid., pp. 129-130.
No. 2]
CANADA DEVELOPMENT CORPORATION
public corporations – who are responsible not to the shareholders
as such, but to the government.” 3
It would appear that the government-appointed directors of the
CDC stand somewhat closer than do those of the European mixed
enterprises to their homologues in the common law company. They
are subject to removal by the company in general meeting or by the
board itself, and are under no (express) special obligation towards
the government which appoints them. Nonetheless, they cannot truly
be assimilated to common law directors. For they may be imposed
upon the company contrary to the will of the majority of share-
holders, and are in fact present to represent the policies of the
government, not merely qua interested and able shareholders. Per-
haps most curious, the position of such directors evolves as does
the extent of government participation in the Corporation. Initially,
they stand as governmentally hired directors of an autonomous but
wholly State-owned company. As private participation grows, they
become elected board members, though owing their position to
government voting power exercised in their favour. Finally, if and
when the government avails itself of its statutory power to appoint
under section 40, these directors become, once again, appointees,
but now representative of a special minority interest on a board, the
remaining members of which are elected by the private shareholders.
The legal and administrative implications of this complex arrange-
ment are undoubtedly extensive and, in all likelihood, unantic-
ipated.1
4
13 Bredin, supra, n. 72, pp. 177, 193 ff. This analysis casts a certain shadow
of doubt upon the ‘representative Board’ proposal which has gained a degree
of popularity among North American reformers. It is not, of course, clear
how a board of directors institutionally formed to accomodate interest repre-
sentation might function, and European (particularly recent Yougoslavian)
experiments have not yet yielded sufficient data to form such a judgment.
The disparity of r6les exactly parallels the disparity of objectives in the
mixed company. It is not at all clear that mixed enterprise in France, for
example, has developed any differently than its private counterpart, except
perhaps in the utility and transport sectors.
14 So long as the position of the government directors’ is undefined, it is
impossible to even approach an adaptation of the existing law and adminis-
trative practice. As noted above, the government director has raised serious
problems in European mixed enterprise as to the standards by which his
functioning is to be assessed, both administratively and legally. In spite of
this, C-219 erects a r6le about which Canadian company experience teaches
us nothing, and complicates matters by allowing the form, if not the substance
of the r6le to change with the sliding scale of government participation in
the Corporation. Consider, by way of example, the difficulty of applying legal
McGILL LAW JOURNAL
[Vol. 17
(ii.) Regulation. Mixed enterprises are subject not only to
those regulatory boards and agencies which supervise companies
generally, but also to restrictions specifically designed to protect
the interests of the State as represented by the government hold-
ings. At one extreme are the French rules, probably the most
stringent. In that country, the government will often claim special
voting rights with respect to “mati~res privil6gides”, such as altera-
tion of capital structure. On these matters the particular statute
of the company will automatically increase the government vote to,
e.g., two-thirds.115 On occasion, the State will more simply arrogate
to itself a two-thirds voting power in all matters.”” Mixed compa-
nies may avail themselves of the usual rdgime concerning bank-
ruptcy and insolvency, but the State may intervene in these pro-
cedures in the public interest.117 Finally, a general decree of 1955 118
subjects virtually all mixed enterprises in which State participa-
tion exceeds fifty per cent to relatively direct economic and finan-
cial government control. 119
C-219 contains only minimal special regulatory control. The
resolution of both Houses of Parliament required for certain ex-
ceptional by-laws 120 and the Parliamentary approval required for
winding up 121 essentially exhaust this rubric, though one might
add, not as controls but surely as an additional form of regulation,
those peculiar rules concerning nationality and residence of share-
holders 122 and redemption of shares. 12 3
(iii.) Courts of account. The “cour des comptes” is a common
European institution which scrutinizes the financial activities of
public departments and corporations, judging ex post facto as to
the appropriateness of such activities and acting generally as a
intelligence. In many countries these
means of Parliamentary
“courts” have been given jurisdiction over mixed enterprises as
standards of directors’ duties to the government directors at each stage.
Surely, creation of a new office within the corporate form –
the representative
director –
requires new law to govern the exercise of that office.
115Tagand, supra, n. 99, p. 85.
“16Bredin, supra, n. 72, p. 221.
117Ddcret no 55-773, 26 mai 1955, 1.0. du ler juin 1955.
118Ducouloux, supra, n. 96. Unlike in Italy, where the common law applies
throughout in this area.
119 Ibid., pp. 200 ff.
120Bill 219, supra, n. 24, s. 30; cf. supra, pp. 412-413.
’21Ibid., s. 28.
122 Ibid., s. 16, 20, Schedule I.
123 Ibid., ss. 21-25, Schedule II.
No. 2]
CANADA DEVELOPMENT CORPORATION
well. 24 Where such jurisdiction exists, the device may be an effec-
tive mechanism of scrutiny. In France, for example, specialized
chambers have been formed, one of which, the “Commission de
V6rification des Comptes”, acts as a general economic chamber
whose investigations are not limited to “comptes” but extend to
broader questions of “gestion dconomique”. 125 Furthermore, recent
French law has added an individual “contr6leur d’Etat”, as yet
another auditing control upon the mixed enterprises.2 6
Needless to say, no such structures exist to provide information
to the Canadian Parliament on the activities of the CDC. The
Auditor General will not concern himself with this “private” cor-
poration even in the years during which all or most of its shares
will be owned by the Crown. Indeed, such controls seem incon-
sistent with the philosophical tenet of regular market functioning
which has been fundamental to the CDC plan from the beginning.
Surely Mr. Benson would expect the CDC itself to be a “full-
fledged member of the business and financial community”. 27
(iv.) Disclosure rules. Regardless of how secure may be a
govenment’s hold upon mixed companies, it seems clear that the
public interest demands disclosure of both government holdings
themselves and the use to which such holdings are being put.
Under the Italian structure, of which more will be said below,128
there exists a Minister responsible specifically for State holdings.
Other countries have been rather more casual about informing
Parliament and the public. Beyond an annual report concerning
all companies in which State participation exceeds thirty per cent,
French law leaves fact-finding to various parliamentary commis-
sions . 20 The Swedish ombudsman has no jurisdiction to investigate
the workings of mixed enterprises. 3 0
124 Such is the case in Austria, Israel, Spain (if participation exceeds 75%),
Italy (where the Corti dei Conti is constitutionally entrenched) and to some
extent France. Countries possessing the institution but not extending its juris-
diction to mixed companies include Brazil, Iran, the Netherlands and Sweden
(where subsidized but not mixed companies are included). Cf. Brewer-Carias,
supra, n. 94, pp. 108 ff.; Ducouloux, supra, n. 96, pp. 221 ff.; Stromberg “The
Public Corporation in Sweden,” in Friedmann (ed.), supra, n. 74, p. 324.
125 Ducouloux, supra, n. 96, pp. 230 ff.
12( D~crets du 6 novembre 1959, et du 10 juillet 1963.
127For context, v. passage cited supra, p. 416. Cf. generally the discussion
and extracts from speeches, supra, pp. 407 ff.
128See pp. 429 ff., infra.
129 Tagand, supra, n. 99, pp. 235 ff. Disclosure to the government is assured,
but not so for the public. Cf. Ducouloux, supra, n. 96, pp. 200 ff.
130 Stromberg, supra, n. 124.
McGILL LAW JOURNAL
[Vol. 17
By section 38(2) of C-219, the disclosure rules of sections 98
to 98F of the Canada Corporations Act are applied to the govern-
ment holding in the CDC. Thus the ordinary provisions of company
law regarding insider trading are the only
‘special’ disclosure
rules noted. The conclusion follows that the CDC is subject to only
those disclosure rules applicable to all companies under either
the Canada Corporations Act or other existing legislation. Pre-
sumably the government will be privy to Corporation activities,
but Parliament and the public will be forced to depend upon the
efforts of ad hoc committees to probe the use of public funds.
‘governmental’
(v.) Conclusion. As a mixed enterprise the CDC appears only
loosely
in comparison with similar institutions
abroad. Having consciously rejected the public corporate form,
the government has pushed the Corporation even farther in the
direction of ‘capitalist’ ideology than the stage of mixed capital
and mixed control, at least as these are practiced in States with
experience in this economic form. It might be argued that the CDC
as presently constructed does not quite reach to the status of
mixed enterprise but stops short at “‘actionnariat de l’Etat”.131
This is certainly the case if one ignores de facto control by the
federal government.
Is this mixed form to be brought into existence as a tool of
government development policy, or is it but an expression of the
State “as rentier”? 132 The answer should rest upon a serious policy
and Parliament – will maintain
decision that the government –
open lines of scrutiny and supervision as provided by a statute to this
effect. Given the clear wording and spirit of C-219, however, we
must trust to government ambitions of control which ambitions,
if they exist, run counter to eight years of hard salesmanship
toward the business and financial communities. 3
131Cf. Brewer-Carias, supra, n. 94, p. 82; Though we do not subscribe to
Brewer-Carias’ majority criterion (cf., supra, p. 422), the question of control
is nonetheless real. If government claims of non-interference are taken at
face value, the 10% Crown holding does indeed become nothing more than
a portfolio investment.
132 That is to say, is the government employing the mixed enterprise form
as nothing more than a convenient means to enjoy the benefits of corporate
profits. The distinction is made by Robson, who seriously questions whether
the latter activity does not raise so many conflicts of interest within a cor-
porative economic system as to be wholly unacceptable. W. A. Robson, supra,
n. 93, p. 481.
133 Cf., supra, pp. 407 ff.
No. 2]
CANADA DEVELOPMENT CORPORATION
III. THE DEVELOPMENT CORPORATION
At best, the CDC, to paraphrase Pirandello, is a tool in search of
a policy. The fact that C-219 bears such striking resemblance to
the original Gordon concept makes it difficult to imagine what –
or whose –
policy it could possibly be a tool of. The suggestion
that it has been tailored to the as yet unreleased white paper on
foreign ownership being prepared by Mr. Grey, the Minister of
National Revenue, has been categorically denied by the Bill’s spon-
sor, Mr. Benson. 134 Mr. O’Connell, Parliamentary Secretary to the
Minister of Regional Economic Expansion, himself commented that
laudable as is the Gordon-Benson CDC, the country is nonetheless
in need of an over-riding industrial policy within which such a
scheme would meaningfully function.3 5
In the absence of policy, the CDC will remain a not-so-gratui-
tous curiosity. And assuming this lacuna in government thinking
is one day corrected, can such an institution be expected to fur-
ther those principles formulated? It is submitted that the CDC of
Bill C-219 is, simply, not amenable to any rational policy of na-
tional economic development and/or any policy designed to cope
with the problems raised by an undesirable degree of foreign own-
ership and control of Canadian industry. Indeed, this entity is
unsatisfactory in abstracto given the heavy investment of public
funds and the lack of scrutiny and supervision as to their use.
In this section, we shall look briefly at two wholly State owned
and operated development institutions which, it is suggested, may
more readily be adapted to an intelligent and comprehensive plan
of national development. Finally, we shall return for a last look at
the CDC in the light of these other structures.
A. The Italian IRI
In the wake of a banking crisis, the Instituto per la Ricostruzione
Industriale was established in 1933 136 to support a failing economy
by means of massive State intervention. With the fall of the Fascist
37
government, the IRI was not abolished but rather transformed 1
from a government organ into “un organisme financier de droit
134 House of Commons Debates, January 25, 1971, p. 2708.
135 House of Commons Debates, February 23, 1971, pp. 3673-74; see also the
statement of Mr. MacGuigen, another C.D.C. supporter, House of Commons
Debates, February 24, 1971, p. 3729.
130 Decree of Jan. 2, 1933, no. 5; Law of May 3, 1933, no. 512.
137 Law of Feb. 12, 1948, no. 51.
McGILL LAW JOURNAL
[Vol. 17
public”.’ 38 Despite attempts to ‘freeze’ the structure and liquidate
its holdings, the IRI in fact expanded throughout the economy’ 39
to the point that in 1956 it was deemed advisable to create a Ministry
of State Participation 140 to oversee the activities of this and the
other large development institutions. The final authority, above the
Minister, is an interministerial committee including the various
Ministers concerned with economic affairs.’4 ‘
The IRI, itself responsible to the Ministry, controls several sub-
sidiary financial holding companies, the societa finanziarie. These
societa in turn control operating companies, grouped into ‘sectors’.
It is the IRI 142 which assures articulation of the activities of the
mixed enterprises at the bottom of the pyramid with government
policy.
Elles 143 interviennent pour achever le choix des fondements de la politique
h suivre pour assurer hi 1ensemble de leur secteur une unit6 d’action.14″
The interest held by the societa in the operating companies is often
less than fifty per cent, control being then assured by the share
dispersal effect. Some of the operating companies are in fact joint
ventures in which the IRI either directly or indirectly participates
with private investors. 145
The enti autonomi di gestione (IRI and ENI) are wholly State
owned, but both lower tiers of the pyramid may issue equity shares
with the permission of the superordinate Institute. Such issues will
be bought by the Institute when the minimum control level is reach-
ed, and occur in such circumstances merely to keep down the gearing
38 Ducouloux, supra, n. 96, p. 14.
1
139 As of 1954 it could be said that “direct or indirect state participation
amounts to about 50 per cent of all Italian enterprise engaged in production”,
Francesco Muggia, “The Public Corporation in Italy,” in Friedmann (ed.),
supra, n. 74, p. 243. Note that though we shall concentrate upon the structure
and activities of the IRI, there exist other, slightly smaller but nonetheless im-
portant institutions of similar structure performing similar functions, e.g. the
Ente Nazionale dei Idrocarburi (ENI), basically limited to mining and petro-
lium industries.
140 Law of Dec. 22, 1956, no. 1589.
14mDucouloux, supra, n. 96, pp. 195-200.
4 2 Generically the “enti autonomi di gestione”, that is all the primary Insti-
‘
tutes, essentially the IRI and ENI.
143 That is, the IRI and ENI.
144 Sartori, Le partecipazioni economiche dello Stato, cited in Ducouloux,
supra, n. 96, pp. 206-207.
145 E.g. Selenia is held 45% by IRI, 45% by Raytheon and 10% by Fiat.
Alitalia is held 75% directly by IRI (this activity not falling within a sector
controlled by the societa) and 25% privately. See M. V. Posner & S. J. Woolf,
Italian Public Enterprise, (London, 1967), p. 44.
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CANADA DEVELOPMENT CORPORATION
ratio. The preferred method of financing at all levels has been
debentures. Yet a third source of funds is state endowment. Though
classical doctrine frowns upon such outright grants to nationalized
industry, the Italian system merely recognizes openly what is de facto
the situation elsewhere. For endowments are not easily distinguished
from written off government loans, investment allowances, incentive
grants, etc. In practice the use of this source has been rather lim-
ited. Finally, both long-term and short-term loans are available, the
latter only from public banks of “national interest”; i.e. banks them-
selves controlled by the IRI. It is to be noted that the Italian IRI
has actually paid the interest on its loans, rather than “passing”
such interest as is often the case elsewhere (e.g. the U.K.), where
the lender is the government. It can be argued that subjecting such
public structures to the stringency of the financial market has, in
fact, imposed an extra burden upon them. For, unable to issue
equity shares, they must continually divert profits to servicing
outstanding debt, all of which makes even more striking the im-
pressive economic and technological strides taken by the IRI.’ 4
Having sketched the structure and financing of the IRI, we may
now ask of its use, and of the lines of control which insure that it
act as an instrument of government policy. Of course, the basic
function of the Institutes is economic growth, and statistics indicate
they have served this function well. Though IRI has itself grown at
a rate slightly lower than that of Fiat, for example, it has done so
with considerably higher capital output ratio, due presumably to its
concentration upon capital intensive industries. It is probable that
the IRI is responsible for development of the industrial infra-
structure (steel, energy, etc.) which has supported the highly success-
ful growth efforts of the Italian economy since the War.1 47
The lines of control running down from the Ministry, through
the Institutes and societa to the operating companies, have been well
developed and appear to provide a reasonably efficient mechanism
whereby government policy may be translated into actual production
decisions. Through the Minister, Parliament has a source of infor-
mation and a point of scrutiny over the diverse activities of the
Institutes, and through them over the whole range of mixed enter-
prises. Indeed, at the end of their study, Posner and Woolf voice as
their most serious criticism of the Italian system not a flaw in the
mechanism, but rather a lack of policy. The structure is sufficiently
sophisticated to support a true plan, but instead it has been used
140 Financial analysis due to Posner & Woolf, supra, n. 145, pp. 71-94.
1471bid., pp. 69-70.
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[Vol. 17
merely to perpetuate the growth of the operating companies, which
are rapidly becoming indistinguishable from private industry. 148
B. The British IRC
Created by the Industrial Reorganization Corporation Act 1966,’14
the State owned IRC is given as its function to:
(a) promote or assist the reorganisation or development of any in-
dustry; or
(b) if requested so to do by the Secretary of State, establish or develop,
or promote or assist the establisment or development of, any in-
dustrial enterprise. 15 0
for which it is empowered, inter alia, to effect:
(a) the acquisition, holding and disposal of securities;
(b) the formation of bodies corporate;
(c) the making of loans and the giving.., of guarantees with respect
to loans made by others;
(d) the acquisition and placing at the disposal of others of premises
and plant, machinery and other equipment.151
The Corporation
is governed by a board appointed by the
Secretary of State 15 2 and is capitalized to a maximum –
from all
Crown sources –
of 150 million pounds.15 3 It is required to submit
annual reports to the Secretary concerning finances and activities
generally, and in addition must report to the House of Commons.5 4
The goal of the IRC at its inception was large-scale rationalization
of the allegedly chaotic British economy. Being a representative of
government policy, the IRC would be in a position to cajole private
companies into mergers and amalgamations in the interests of
overall industrial efficiency and other planning considerations. 15
By 1968, however, it had become clear that the IRC was not prepared
to act as boldly as some of its promoters had hoped.5 6
14s Ibid., p. 131. Which criticism does not, it must be emphasized, detract
from the amenability of the system to such a plan. But cf. Petrilli, supra, n. 56.
149 Statutes of the U.K. 1966, c. 50.
150Ibid., s. 2(1).
15’Ibid., s. 2(3).
152 More precisely, the chairman is so nominated and the remaining members
chosen by the Secretary in consultation with the chairman, ibid., s. 1(3).
153 Ibid., s. 7.
154 Ibid., s. 9.
155 “In practice this has meant promoting certain mergers and sweetening
others … which met its approval”, R. E. Caves, et al, Britain’s Economic
Prospects, (London, 1968), p. 319.
156 For example M. Posner, who was called to serve the Labour government
while working on his study of the IRI in Italy, supra, n. 145; Cf. M. Posner &
R. Pryke, New Public Enterprise, Fabian Research Series No. 254, (London,
1966).
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CANADA DEVELOPMENT CORPORATION
The IRC has disappointed those who saw it as the financial nucleus for
major public initiatives in industry… Instead it has only (1) offered
informal advice and (2) in its most significant moves, promoted mergers
between major electrical, computer and nuclear instrument companies.1 5 7
Presumably, this timidity was a significant motive for passage of
the Industrial Expansion Act 1968.158 By this Act the Secretary
of State, inter alios, may lay before Parliament for approval “an
industrial investment scheme” the purpose of which is a project
calculated:
(a) to improve the efficiency and profitability of an industry or section
of an industry;
(b) to create, expand or sustain productive capacity in an industry or
section of an industry; or
to promote or support technological improvements in the processes
or products of an industry or section of an industry,
(c)
but [which] would not be undertaken without such financial support
as is authorized by this section.159
The scheme may authorize virtually any sort of financial support
including loans, purchase of goods, purchase of undertakings, un-
derwriting of losses and subscription for or purchase by agreement
of shares. 60 The purchase of equity requires consent of the company,
but it has been pointed out that –
at least for a bid short of fifty
per cent –
such consent could be virtually extorted without great
difficulty.161
In effect, the Industrial Expansion Act 1968 complements the
IRC by providing the basis for a planned use of the mixed company
form in promoting the rationalization and development of the
British economy. Prior to the 1970 election, it might have been
expected that the IRC would grow along the lines of the Italian
IRI into a large holding company, though perhaps one engaged
more actively in rationalization and less oriented towards long-term
policy implementation. 6 2 Given its limited capital supply, the IRC
would presumably be less interested in amassing such large holdings
in mixed enterprises as required to effectively percolate govern-
157 Caves, et al, supra, n. 155, p. 388n.
158 Statutes of the U.K. 1968, c. 32.
159 Ibid., s. 2(2).
160 Ibid., s. 2(2).
161 Samuels, Alec, Government Participation in Private Industry, [1968] Jour.
Bus. Law 296, at p. 299.
162 Though the Italian IRI may not, in practice, be utilized to so effect long-
term policy goals, its structure (in particular its size) makes it more appro-
priate to such a function than the IRC.
McGILL LAW JOURNAL
[Vol. 17
ment policy through whole sectors of the nation’s industry.’0 3 Its
interventionism would more efficiently take the form of carefully
selected investments designed to exert control over pivotal industrial
decision-making processes, so as to effect self-sustaining private
sector growth and rationalization. At the same time, however, the
IRC could be in an excellent position to organize and effect industrial
reorganization schemes including sectoral nationalizations which,
if capitalization of the Corporation were not increased, would
require either new operating Crown corporations or an expansion
of the holdings and activities of existing ones.
C. The Canadian CDC
The proposed CDC differs fundamentally from both the IRI and
IRC. Structurally, this difference manifests itself as a preference
in the Canadian scheme for the private corporate model, with
derogations therefrom necessary to accomodate the reality of mixed
enterprise kept to a minimum. A serious evaluation of the CDC
must not, however, be based upon whether or not this structure is
consistent with either laissez-faire or “socialist” ideology, but rather
upon its capacity to function effectively. That is to say, are the
functional corollaries to this structure –
(a) operation within
the confines of profit-maximization and (b) remoteness from the
public scrutiny associated with governmental processes –
consistent
with and amenable to its role as agent of national economic develop-
ment?
The functional approach, whether from the “left” or the “right”,
denies any mystique to formal ownership. Swedish economic prac-
tice under the social democratic government, for example, has
generally shunned formal socialism – State ownership of the means
of production –
in favour of a “functional socialism” whereby
ownership is seen as divisible into property functions and these
latter, rather than the ownership en gros, are socialized in the
sense that the State arrogates to itself power to determine the
extent to which these property functions may or may not be freely
exercised by the nominal owner. 64
But functional economics does not thereby preclude State
ownership; rather, it simply suggests that socialization short of
this step may be preferable in most circumstances. There exist,
however, activities over which private control is generally thought
163 Though the indirect effects of the smaller structure should not be over-
looked.
164 Gunnar Adler-Karlsson, Functional Socialism, (Stockholm, 1968).
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CANADA DEVELOPMENT CORPORATION
impracticable due to the centrality of the functions to be socialized. 65
In other cases, external pressures may be such that effective control
is impossible short of total socialization. 66
It is suggested that
national economic development is an activity which should not,
even nominally, be
left to the private sector. For functional
socialization of such an activity, if carried out to the necessary
extent, would leave too few functions to form an efficient private
enterprise. That is to say, a structurally private CDC, if properly
socialized as to function, would no longer bear sufficient similarity
to a private corporation to make it credible as such.
In support of this conclusion, consider the following illustration.
In 1957, the Italian government passed the “Mezzogiorno
law”
requiring forty per cent of all investments by State concerns (sixty
per cent of that directed to new industrial plant) be placed in the
Southern regions. 67 In principle, nothing prevents the application
of such a policy outside the realm of publicly owned or controlled
enterprises; such application would constitute a socialization of
the property function of investment. However, Posner and Woolf
point out that the effects of the Mezzogiorno law will only be
significant if the Institutes carefully tailor their Southern invest-
ments to local conditions so as to favour self-sustaining growth,
organized and rationally interdependent developments, etc. Could
a private firm, i.e. one whose ultimate goal remains profit, effect
the purpose of the Mezzogiorno law? Is it practical to depend upon
rules being so carefully drafted as to insure not merely the desired
regional distribution of capital investment, but also certain complex
and indeed not yet even explicated patterns of investment?
More generally, if the development institution is to function at
the centre of a plan,’68 or at the centre of some other sort of over-
riding policy, can it do so while maintaining the functional minima
of capitalism? As presently constructed, the CDC would be unable
to perform the most elementary function required of such an
1605 Virtually all developed nations operate some socialized services, such as
education, health, etc. Presumably it is believed that the degree of State control
over the universality, quality and availability of such services which is desired
is so great as to preclude the possibility of meaningful operation within the
private sector.
166 Such may well be the case of natural resources in a country whose foreign
ownership and political pressure balance sheet reads as does Canada’s.
1sT Posner and Woolf, supra, n. 145, pp. 108-112.
106 Surely this must be the most logical utilization of these tools. If the
CDC is not intented to function within a govnernmental policy, it is difficult
to understand why it is even proposed.
McGILL LAW JOURNAL
[Vol. 17
institution, that of passing over diseconomies associated with indi-
vidual investment projects in favour of the extraneous social benefits
enunciated in the plan or policy. Such activities would be most
inconsistent with the “regular financial criteria” upon which the
CDC is to operate,1 9 and would surely be ultra vires the Corporation
given the imperative wording of section 6(1) of C-219.170 The IRC,
on the contrary, acts purely in furtherance of policy and the IRI,
thought it must produce sufficient revenue to service its permanent
debt, may do so within the industrial development policy perspective
it sets, thus including social costs and benefits within its decision
matrix.
The second basic functional decision inherent in the present
legislative proposal, 171 which goes somewhat less to the heart of
capitalist theory, is that the CDC operate with only that degree
of public and Parliamentary 172 scrutiny and supervision appropriate
to the privately incorporated company. Though, potentially, a partial
socialization by function could remedy this situation, without remov-
ing all semblance of capitalist ideology,173 nonetheless the incursion
would be a serious one and its effects must be seen as cumulative
with any restriction upon the more central function of investment.
The structural differences between the CDC and a private sector
corporation are explained not by any wish that the former be
sufficiently socialized as to function to operate effectively within
a governmental policy or plan, but rather by the mere presence
of governmental capital and the minimal alterations which this
entails. Even if C-219 were redrafted so as to retain only those
capitalist functions, basic to it, the CDC would nonetheless remain
crippled as a public instrument by the core function of profit-
maximization. And as it stands, the only thing public about the
CDC is its money. 74
169 Supra, pp. 413 ff.
170 Supra, p. 415.
171 The first being profit-maximization.
172 And, if we ignore de facto control, the same extends to the government.
173 In Sweden, for example, “all agreements concluded between private
producers must be registered with a special public control board”, Adler-
Karlsson, supra, n. 164, p. 36.
174 Up to: $250 million in capital + $100 million in loans + the assets and
future profits of several Crown corporations.
