McGILL LAW JOURNAL
No. 4
Vol 23
Montreal
1977
The Transfer of Shares: Part VI of The Canada Business
Corporations Act 1975
D. D. Prentice*
In advanced industrialized countries, wealth is characteristically
non-tangible and largely takes the form of “promises”.’ Nowhere
is this intangibility more clearly demonstrated than in corporate
securities which have become one of the major sources of wealth in
capitalist societiesO That most quintessential form of corporate
security, the share, has repeatedly been defined as a bundle or con-
gery of rights which a shareholder has against his company and,
to a lesser extent, his fellow shareholders.3 These rights are prim-
arily found in the corporate constitution and partly in the relevant
Corporations Act which, in some jurisdictions, clearly recognizes
a shareholder’s rights as contractual in nature.4 Even in those
jurisdictions which do not explicitly provide for this, the mechanisms
* Fellow, Pembroke College, Oxford.
1See Pound, An Introduction to the Philosophy of Law rev. ed. (1954), 133:
“Wealth, in a commercial age, is made up largely of promises”.
2 E.g., in 1973 the market value of company securities quoted on the
London Stock Exchange was 148,170,576 million: see The Stock Exchange
Fact Book (1973), 3. For a survey of the structure of wealth holding in the
form of corporate securities see Royal Commission on the Distribution of
Income and Wealth, Report No2, Income from Companies and its Distribu-
tion, Crnd. 6172 (1975)
(U.K.) and for Canada see “Canada’s Capital Market”
in Shaw and Archibald (eds.), The Management of Change in the Canadian
Securities Industry, Study One (1972).
3 Archibald Howie Pty Ltd v. Commissioner of Stamp Duties (1948) 77
C.L.R. 143, 157 (Austl.H.C.); Borland’s Trustee v. Steel Bros & Co. [19011
1 Ch.279, 288 (Ch.Div.).
4 See, e.g., Companies Act, 1948, 11-12 Geo.VI, c.38, s.20 (U.K.); Companies
Act, S.B.C. 1973, c.18, s.15.
McGILL LAW JOURNAL
[Vol. 23
available to a shareholder to enforce his rights have a contractual
flavour to them.3 Whatever the precise juridical nature of a share-
holder’s relationship’ with his company, it is clear that because of
his status, a shareholder has a collection of rights enforceable
against his company and fellow shareholders.
One of these rights, and unquestionably one of the most im-
portant, is the right to transfer shares. It is this liquidity of the
share –
the ability to realize the value of the share expeditiously
and without undue transaction costs –
that constitutes one of its
most attractive features as an item of property. 7 Commercial
practice, in the form of stock exchange rules, underlines this aspect
of share ownership by making it a condition of listing that such
share be free from any restriction on their transferability.8 Also,
where possible, the brokerage community has maximized this feature
of the shareY Nevertheless, while transferability may be the norm,
small private companies often impose restrictions of varying severi-
ty, primarily in order to obtain the benefits of a partnership
structure and, in particular, to vest in the merribers of the company
the right to control the admission of new members. The validity
and operation of these restrictions will be discussed later.
It is proposed in this article to discuss the various legal pro-
blems which arise on the transfer of company shares, with particular
attention being paid to Part VI of the Canada Business Corporations
Act9a (hereafter referred to as the C.B.C.A.) which introduces Article 8
of the United States Uniform Commercial Code (hereafter referred
to as the U.C.C.). A transfer of shares to be effective will give rise
to three distinct sets of legal problems: (i) those pertaining to the
relationship between the transferor and transferee; (ii) those relat-
Studies in Canadian Company Law (1967), vol.1, 545, 585-89.
See generally Beck, “An Analysis of Foss v. Harbottle” in Ziegel (ed.),
6As LaskinJ. pointed out in Edmonton Country Club Ltd v. Case [1975]
1 S.C.R. 534, 552, (1974) 44 D.L.R. (3d) 554, 556, the differences flowing from
the particular form of incorporation should not be exaggerated. Once a
memorandum of association company has been incorporated,
then “its
contractual aspect is submerged in a statutory regime subjecting the com-
pany to public regulation”.
Knight & Co. (1868) 4 Ch.App. 20, 27.
7An aspect which was recognized early by the courts: see In re Smith,
8 See, e.g., the requirements for listing in Rules of the London Stock
Exchange, App.34, Sch. VII A(2): “That fully-paid shares shall be free from any
restriction on the right of transfer and shall also be free from all liens.”
9See Select Committee on Company Law, Interim Report, Ont. (1972),
9a S.C. 1974-75-76, c.33.
ch.VI, dealing with “street form” certificates.
19771
THE TRANSFER OF SHARES
ing to the transferor and the company; and lastly, (iii) those affect-
ting the transferee and the company.’0 Hovering over this triptych
will be the rights of the true owner if the transfer is made without
his consent.” Although these problems will be examined in more
detail later, an overview of Part VI of the C.B.C.A. may prove useful
in order to appreciate more fully the legislative purpose underlying
this part of the Act.
PART VI OF THE CANADA BUSINESS CORPORATIONS
ACT 1975
Part VI introduces Article 8 of the U.C.C.12 whose basic purpose
is to render the securities 3 to which it applies negotiable; subsec-
tion 44(3) of the C.B.C.A. explicitly provides that a “security is a
negotiable instrument”. This constitutes a radical alteration in the
previous nature of a share. Although the commercial community
attempted, as far as was legally possible, to approximate shares to
the position of negotiability,’4 in general, legal opinion held that
they did not possess such features.’ 5 Even in the case where the
transferor endorsed the transfer in blank, quasi-negotiability was
only achieved under the old regime by use of the doctrine of estop-
10 See Gower, The Principles of Modern Company Law 3d ed. (1969), 394-98.
“There will also be contractual relationships between the transferor
and transferee and their respective brokers, and between
the brokers
inter se. These will not directly concern us here and will only be touched
upon in passing.
12A number of articles have been published on the operation of article
8 of the U.C.C., the most helpful being Folk, Article Eight: Investment
Securities (1966) 44 N.C.L.Rev. 654; Folk, Article Eight: A Premise and
Three Problems (1967) 65 Mich.L.Rev. 1379; Israels, Article 8 –
Investment
Securities (1951) 16 Law & Contemp.Prob. 249.
13The
types of security subsumed within the ambit of Part VI are
defined in subs.44(2) which is designed to cover those instruments which
the financial community treats as securities. As has been pointed out in the
American literature dealing with art.8 of the U.C.C., the definition in this
context is not as expansive as that under securities legislation: see, e.g.,
Re Western Ontario Credit Corp. and Ontario Securities Commission (1976)
9 O.R. (2d) 93 (H.C.) in that the latter is designed to prevent investors from
being defrauded: see Folk, Article Eight: A Premise And Three Problems,
supra, note 12, 1387-88.
14See supra, note 9.
15 Wegenast, The Law of Canadian Companies (1931), 560-63; Chartered
Trust & Executor Co. v. Pagon [1950] 4 D.L.R. 761, 767-68 (Ont.H.C.).
McGILL LAW JOURNAL
[Vol. 23
pel.’6 As Spence J. stated, the question was whether “the plaintiff
… acted so as to preclude [himself] from setting up a claim to the
certificates”.’1 This attribution of negotiability to investment se-
curities is designed to create a state of affairs where,
[a]s against a purchaser for value without notice of a defense, the issuer
must as far as possible be precluded from raising that defense; and one
whose title is defective must be able nonetheless to convey a better title
than he has, so that the purchaser for value without notice of a claim of
ownership will not be subject to it.’ s
In other words, negotiability deals with two separate and distinct
issues: (i) defences which an issuer’ 9 might raise against the holder
of its securities and (ii) claims of ownership rights or interests
which may be asserted against the transferee of a corporate security.
This last aspect is central to any transaction involving a transfer
of corporate securities and will be dealt with in more detail later.
Its central tenet, however, must be clearly grasped: in situations
of conflict between the interests of true owners and those of a
bona fide purchaser, the interests of the latter will, on the whole,
be preferred. The former issue, however, needs some elaboration
at this juncture for a better understanding of how Part VI of the
C.B.C.A. operates.
By reducing the scope of issuer defences, the issuer’s ability
to raise defences which go to the validity of the security against
a holder of its security is limited. The result of this will be to
enhance negotiability in that a holder will not run the risk of
having the validity of his security challenged successfully by the
company. Subsection 51(2) of the C.B.C.A. provides that a security
is “valid” in the “hands of a purchaser for value without notice of
any defect going to its validity”. “Validity” in turn is defined 20
in terms of compliance with “the applicable law and the articles of
the issuer”. Thus, by subsection 51(2), once a security has found
its way into the hands of a bona fide purchaser for value without
notice then the issuer is precluded from contesting its validity.
‘0 Wegenast, supra, note 15, 560-63. The position on this under English
law is less clear although the submission of Gower that the owner should
be estopped is both preferable in terms of principle and practical con-
venience: see Gower, supra, note 10, 406.
‘Aitken v. Gardiner & Watson (1956) 4 D.L.R. (2d) 119, 131 (Ont.H.C.).
‘8ssraels, supra, note 12, 249.
19,issuer, is’defined in subs. 44(2) of the C.B.C.A. In this article issuer
and company (and their various synonyms) will be used interchangeably.
20C.B.C.A., subs. 44(2).
1977]
THE TRANSFER OF SHARES
The liability of an issuer, however, is not absolute since subsection
51(3) provides a company with a “complete defence” where the
security is not “genuine”, that is, counterfeit or forged.2 ‘ But even
the scope of this defence is constricted by a full-blooded statutory
version of the principle formulated in Lloyd v. Grace Smith & Co.22
Section 53 of the C.B.C.A. provides that,
[a]n unauthorized signature on a security before or in the course of issue
is ineffective, except that the signature is effective in favour of a pur-
chaser for value and without notice of the lack of authority, if the signing
has been done by
(a) an authenticating trustee, registrar, transfer agent or other person
entrusted by the issuer with the signing of the security, or of similar
securities, or their immediate preparation for signing; or
(b) an employee of the issuer or of a person referred to in paragraph (a)
who in the ordinary course of his duties handles the security.
As “unauthorized” is defined so as to include not only its normal
agency meaning, excess of actual authority, but also forgery,2
it
means that a company will be liable for the forgeries of those who
might, in the normal course of events, come in contact with its
securities either at the time of initial allotment or at the time of
their subsequent transfer. It is important to note that the test is
not one of apparent authority, that is, did the issuer create the
appearance of authority in the agent to issue the securities, but
merely one of fact, that is, does the person entrusted with signing
fall within section 53.24 The operation of this aspect of issuer de-
fences can be illustrated by assessing its effect on three cases:
South London Greyhound Racecourses Ltd v. Wake,2 Ruben v. Great
Fingall Consolidated26 and Toronto-Dominion Bank v. Consolidated
Paper Corp.,-‘ all of which would have been decided differently had
Part VI been operative.
21C.B.C.A., subs. 44(2): “‘genuine’ means free of forgery or counter-
feiting”.
2 [1912] A.C. 716 (H.L.).
23C.B.C.A., subs. 44(2): “‘unauthorized’
in relation to a signature or an
endorsement means one made without actual, implied or apparent authority
and includes a forgery”.
24 Note, in particular, subs. 53(b) of the C.B.C.A. which makes a company
liable for the acts of one who “in the ordinary course of his duties handles
the security”.
25 [1931] 1 Ch.496 (H.L.).
26 [1906] A.C. 439 (H.L.).
27 (1962) 37 D.L.R. (2d) 424 (Que. CA.).
McGILL LAW JOURNAL
[Vol. 23
South London Greyhound Racecourses Ltd v. Wake
In this case D and G, the director and secretary of the plaintiff
company, without authority, 8 appended their signatures to a share
certificate of the plaintiff company and issued it to Wake to secure
the debt of another company of which they were also officers. When
the fraud of D and G was discovered the plaintiff company sought
both a declaration that Wake was not entitled to the shares and a
court order that the register should be rectified accordingly. The
court held against Wake. The seal had been affixed to the share certi-
ficate without the requisite authority of the directors and the matter
in question was not something which fell within the apparent authori-
ty of either D or G. This case has been strongly criticized,29 criticisms
that are now beside the point since under section 53 the company
would be considered bound by the acts of D and G who were manifest-
ly persons authorized to handle the share certificates of the company.
Ruben v. Great Fingall Consolidated
Here the secretary forged the names of the company’s directors
to a share certificate and attached the corporate seal without authori-
ty. The court held the certificate to be a nullity and not enforceable
against the company. Again the outcome of this decision would be
different under Part VI.30
Toronto-Dominion Bank v. Consolidated Paper Corp.31
In this case B, a junior employee in the defendant company’s
transfer department, obtained possession of blank share certificates
and completed them by forging the relevant details. They were then
lodged with the plaintiff bank as security for a loan. When the for-
gery was discovered the defendant company denied liability and
28Under the articles of association of the plaintiff company the corporate
seal could only be affixed pursuant to a resolution of the board of directors.
29 Gower, supra, note 10, 166-68.
30 Cf. the observations of Lord Macnaghten in Ruben v. Great Fingall
Consolidated, supra, note 26, 444, that a decision against the plaintiff com-
pany would oblige companies to “lock up their seal and guard it as a dan-
gerous beast”. This remark misses the point in issue, namely, that the
company is in the best position to guard against a misuse of the corporate
seal and to guarantee that trustworthy corporate officials and agents are
employed.
31 See Dickerson, Howard and Getz, Proposals for a New Business Cor-
porations Law for Canada, Information Canada (1971), vol.1, para.173 (here-
after referred to as Proposals).
1977]
THE TRANSFER OF SHARES
the plaintiff brought an action alleging that the defendants had
afforded B undue access to blank share certificates. For reasons
which need not detain us here the plaintiff was unsuccessful. Under
section 53 the situation would now be different, since B (although
a junior employee of the company) had been authorized to handle
the securities, the company would not be able to deny the validity
of the allotment. The result would have been the same under section
53 even had the fraud been perpetrated not by an employee of
the company but by an employee of its transfer agent.
Effectively, section 53 renders the issuer accountable for the
acts of its employees or others entrusted with the task of handling
its securities, accountability taking the form of validating the
security in the hands of all bona fide purchasers for value without
notice and not merely subsequent purchasers. As indicated pre-
viously, this will greatly enhance the negotiability of corporate
securities. There are also sound policy reasons for imposing on
the issuer the responsibility for guarding against defective issues.
All the issuer has to do is to ensure that the appropriate corporate
procedures are followed and that trustworthy employees or transfer
agents are employed. Purchasers are not in an adequate position
to do this, nor to protect themselves against the failure of the
issuer to-do so.
One last point on the curtailment of issuer defences requires
some comment. It may be that the inability of a company to challen-
ge the validity of a given share certificate will result in an “over-
issue”, that is, the company issuing more securities of a class than
it has authority under its constitution to issue 2 For example, the
validation of the shares, where the fraud of the corporate agent is
akin to that in Toronto-Dominion Bank v. Consolidated Paper Corp.,
could easily bring about this state of affairs. In this situation Part
VI leaves a number of options open to the issuer. It can alter its
constitution to authorize the issue (but cannot be compelled to do
so) and if it does so then the overissued securities are “valid from
If the company declines to adopt this
the date of their issue”.
course then the purchaser entitled to a valid certificate “may”3 4
32C.B.C.A., subs. 44(2): ” ‘overissue’ means the issue of securities in ex-
cess of any maximum number of securities that the issuer is authorized
by its articles or a trust indenture to issue”. And see Folk, Some Problems
Under Article 8 of The Uniform Commercial Code (1964) 5 Ariz.L.Rev. 193,
207-11.
33C.B.C.A., subs. 48(2).
S4The use of the verb “may” leaves it open as to whether the issuer has
the option of following this procedure. It would be preferable if it could be
McGILL LAW JOURNAL
[Vol. 23
compel the company to purchase a similar security if it is “reason-
ably available” 35 for purchase. Where this latter option is not avail-
able the purchaser is entitled to “damages” equal to the price the
last purchaser for value paid for the invalid security.36 However, this
aspect of Part VI, like Article 8 of the U.C.C.,3
7 has received some
merited criticism. Not only is the language of the overissue section
unclear in its purpose,3 but there appear to be no good reasons for
not validating the overissue. Fears for the dilution of existing hold-
ings, or of the manipulation of corporate capital, seem unrealistic
in this context.
The other aspect of negotiability dealt with by Part VI is the
expedition and simplification of the transfer process, the limitation
of the extent to which the owner of securities can impeach the title
of a bona fide purchaser for value without notice, 0 and the curtail-
ment of the extent to which defects in the title of a holder of a
security travel with the instrument. This aspect of Article 8 of the
U.C.C. has been summarized as having the following objective:
[T]o facilitate a transferee’s becoming a bona fide purchaser (which limits
the duty of the transferee to investigate the transferor’s title, and which
gives the transferee immunity from defects in the issue of the security or
in the title of previous holders); and … to expedite the transfer process
by limiting clearly the issuer’s duty of enquiry and stipulating the issuer’s
duty to register transfers. 40
It is this aspect of Part VI which will primarily concern us here.
In analyzing the effect of Part VI and of other relevant legal rules
on the transfer process, the discussion of the transfer transaction
will be divided into three parts: (i) the transferor-tranferee relation-
ship, (ii) the issuer-transferor, relationship, 41 (iii) the issuer-trans-
feree relationship.
compelled to do so at the option of the purchaser, and this would seem
to be the object of the subsection.
35 C.B.C.A., para.48(1) (a).
36.C.B.C.A., para.48(l) (b).
37For criticism of the U.C.C. provisions similar to Part VI see generally
Folk, supra, note 32.
38 See supra, note 34.
3 9 By subs. 44(2) of the C.B.C.A. “bona fide purchaser” is defined as a
“purchaser for value in good faith and without notice of any adverse claim
who takes delivery of a security in bearer form or of a security in registered
form issued to him or endorsed to him or endorsed in blank”. This defini-
tion will be the one followed in the remainder of this article.
4oProposals, supra, note 31, vol.1, para.173.
41 Unless otherwise stated this article will deal with shares in “registered
form”, a definition of which is to be found in subs. 44(4) of the C.B.C.A.
Bearer form securities are defined in subs. 44(5); the important aspect of
1977]
THE TRANSFER OF SHARES
TRANSFEROR-TRANSFEREE RELATIONSHIP
A contract for the sale of shares will give rise to certain obliga-
tions on the part of transferor. 2 The basic purpose of the trans-
action is to make the transferee the legal owner of the shares and
under the pre-Part VI regime the transferee had to be registered in
the books of the company in order to guarantee his legal title. 4
From this rather self-evident proposition concerning the purpose
the courts evolved a number of rules. The
of the contract
transferor was obliged to hand over the relevant share certificates,
to complete the appropriate form of transfer 4 and to do nothing
which would impede the registration of the transferee as the owner
of the shares 5 Although a transferor did not warrant that the
transferee would be registered as owner, the whole purpose of the
exercise was to achieve the registration necessary to guarantee the
title of the transferee. Without such registration, his title could
be defeated by a person with a prior equity46 or with a subsequent
equity who had been registered.41
While Part VI basically continues these obligations it deprives
the fact of registration in the books of the company of much of its
significance. The obligations assumed by a transferor are spelt out
in subsection 59(2): a transferor warrants that “the transfer is
effective and rightful”, that “the security is genuine and has not
been materially altered”, and that “he knows of nothing that might
impair the validity of the security”. The warranty of the transferor,
that the transfer is “effective and rightful”,48 entails, in all pro-
bability, an undertaking that the transferee “can obtain registration
of transfer”? 9 This then represents a departure from the previous
this definition being that they must be in bearer form according to the
terms of their issue and cannot be so converted by reason of any subse-
quent endorsement..
42 For the pre-Part VI position see Wegenast, supra, note 15, 587-88.
43 Socidtd Gdndrale de Paris v. Walker (1885)
11 App.Cas. 20, 30 (H.L.);
Smith v. Walkerville Malleable Iron Co. (1896) 23 O.A.R. 95; Longman v.
Bath Electric Tramways Ltd [1905] 1 Ch.646 (C.A.).
44 As Re Letheby and Christopher Ltd [1904] 1 Ch.815 (C.A.)
indicates,
the courts interpreted this obligation in a flexible manner.
45 Boultbee v. Wills & Co. (1908) 15 O.L.R. 227 (Div.Ct); Hooper v. Herts
[1906] 1 Ch.549 (C.A.).
46 Smith v. Walkervitle Malleable Iron Co., supra, note 43.
4
7 Socidtg Gdndrale de Paris v. Walker, supra, note 43.
48C.B.C.A., para.59(2) (a). Registration is only really of importance where
the endorsement is unauthorized: see C.B.C.A., subs.64(1).
49 Folk, Article Eight: A Premise And Three Problems, supra, note 12, 1401.
Although, as Folk points out (at 1401), it is doubtful if this will cause any
great difficulties in practice.
McGILL LAW JOURNAL
[Vol. 23
positions where the obligation on the transferor was not to hinder
or impede registration in the name of the transferee. To effect a
transfer under the Part VI regime a transferor of shares will be
obliged to deliver to the transferee the requisite share certificate,
to supply the necessary endorsements 5 “either on the security or
on a separate document” 51 and to provide “any other requisite that
is necessary to obtain registration of the transfer”.5 2 This will be
sufficient to vest title in the bona fide purchaser for value without
the further act of registration except in one situation, where the
endorsement has been forged. Registration is deprived of any subs-
tantial significance. Delivery becomes the focal point for determin-
ing the moment at which title passes once negotiability is estab-
lished. Thus, under Part VI there is an attempt to “fuse the property
interest in the shares so far as is possible with possession of the
certificate registered in the name of the holder, or endorsed to him,
or in blank”.5′
The impact of Part VI on the relationship between transferor and
transferee has made the concepts of endorsement and delivery
central to any transfer transaction. Part, VI spells out in some detail
how they fit into the transfer process and it is proposed to examine
them seriatim.
Endorsement
Where a security in registered form is delivered without the
the transferee by virtue of section 60 is
requisite endorsements5
given the right to compel the transferor to provide them. Although
the transfer is “complete upon delivery” (between the parties to
the transaction) endorsement is a critical step in the transfer pro-
cess since a purchaser becomes a bona fide purchaser “only as of the
time the endorsement is supplied”. 55 Thus, adverse claims will run
50 C.B.C.A.,
51 C.B.C.A., subs.61(3). This means that a cautious transferor can deliver
s.60.
the security and the endorsement separately.
52 C.B.C.A., subs.69(1). The obligation does not pertain where the transfer
is not for value “unless the purchaser pays the reasonable and necessary
costs of the proof and transfer”, subs.69(1).
53 Israels, Investment Securities As Negotiable Paper – Article 8 Of The
13 Bus.Law. 676, 682. This feature of
Uniform Commercial Code (1957-58)
negotiability is further highlighted by s.70 of the C.B.C.A. which provides
that no seizure of a security is effective until it has been actually reduced
into the possession of the person making the seizure.
54Endorsement may be either special or in blank: see C.B.C.A., subss.
61(4), (5), (6).
55 C.B.C.A., s.60.
19771
THE TRANSFER OF SHARES
against a transferee until the necessary endorsement is supplied,
whereupon he acquires the status of bona fide purchaser.
To be effective the endorsement must be executed by an “ap-
propriate person ‘ 55 ” and section 61 defines in detail who is an ap-
propriate person for this purpose. The most obvious person falling
into this category is the person “specified by the security or by
special endorsement to be entitled to the security”. 6 The concept
of appropriate person is further elaborated in section 61 in order
to deal with the transfer of shares registered in the name of a
fiduciary, joint owners where one has died, persons who cannot sign
because of death, incompetency or incapacity and, the “authorized
agents” of all the above categories of person.
As was stated earlier, the transferee has a specifically enforceable
right to have any necessary endorsement supplied. However, if he
does not wish to pursue this remedy he can “reject or rescind”
the contract if the transferor fails within a reasonable period 58 of
time to comply’with his request for an endorsement.59 Thus, as
against a defaulting transferor, the transferee can adopt the remedy
(specific performance or rescission) which is most advantageous to
him, provided that he gives the transferor the option of repairing
his breach in failing to provide an endorsement.
Delivery
The second component to an effective transfer (to give the trans-
feree a bona fide purchaser status) under Part VI is delivery, which
has its accepted commercial meaning of a “voluntary transfer of
possession”!. Where delivery is actually made to the transferee or
his agent then few difficulties arise from the use of this concept.
Where, however, shares are traded on the exchange and, in particular,
s.60.
is a reasonable
art.1-204(2) as follows: “what
55a C.B.C.A., subs.61(3).
56 C.B.C.A., para.61(1) (a).
57 C.B.C.A.,
58 Part VI contains no definition of “reasonable time”. It is defined in
U.C.C.,
time for taking
any action depends on the nature, purpose and circumstances of such action”.
59 C.B.C.A., subs.69(2). This section gives a general right of rescission where
the transferor, after a request from the transferee, fails to supply any
“requisite that is necessary to obtain registration of the transfer of a
security”, subs.69(1). Accordingly, mere failure to supply an endorsement
without any request would appear not to be a repudiatory breach.
60 C.B.C.A., s.62. In order to be a bona fide purchaser the transferor must
take delivery: C.B.C.A., subs.44(2). For the definition of delivery see C.B.C.A.,
subs.44(2).
McGILL LAW JOURNAL
[Vol. 23
where a clearing house arrangement is used, it would be unduly
burdensome and unrealistic to require this type of delivery. It
would also be wholly unsuitable where a central depository system
was in operation.” Part VI attempts to deal with these various
problems.
As well as providing that delivery is effected where the re-
levant share certificate has been transferred to the transferee or
his agent, section 66 provides that delivery takes place where:12
(i) the purchaser’s broker obtains possession of a security spec-
ifically endorsed or issued in the name of the purchaser; (ii) the
purchaser’s broker confirms the purchase and identifies in his re-
cords a specific security as belonging to the purchaser and informs
him of this; and (iii) a third party in possession of “an identified
security” acknowledges that he holds it for the purchaser. The
seller satisfies thd obligations placed on him to make delivery, in
“a sale of a security … made on an exchange or otherwise through
brokers”, by making delivery to his own broker(3 who in turn
fulfils his obligations by making delivery to the buying broker or
by “effecting clearance of the sale in accordance with the rules
of the exchange on which the transaction took place”.” These
latter provisions highlight what is a characteristic of Part VI,
namely, the placing of responsibility on the members of the finan-
cial community to see that transfers are effectively carried out.65
Even where a transfer is formally correct, the transferee in any
contract for the sale of shares always runs the risk that the trans-
feror is unable to transfer title to the type of securities that he
has contracted to sell. The greater the extent to which the trans-
61 The Proposals made specific provision for this situation, (vol.I, para.173;
vol.11, para.6.29) but these were not adopted in Part VI. See also the A.B.A.
Committee on Stock Certificates of the Section of Corporation, Banking and
Business Law, Proposed Revision of Article 8 Of The Uniform Commercial
Code (1975); Aronstein, A Certificateless Article 8? We Can Have It Both
Ways (1976)
31 Bus.Law. 727; Stock Exchange (Completion of Bargains)
Act 1976, 1976, c.47 (U.K.) which makes provisions for the stock exchange to
introduce a new computerised settlement and stock transfer system. The
nature of this system is set out in Parliamentary Debates (H.C.), Standing
Committee G, 23 June, 1976.
62 See also C.B.C.A., subs.67(2).
63 C.B.C.A., para.67(1) (a).
64 C.B.C.A., para.67(1)(b).
65 On this aspect of Part VI see also subs.66(4) which provides that notice
of an adverse claim after a broker takes delivery shall not affect the broker
or his client, but that a purchaser can demand from his broker a certificate
“as to which no notice of an adverse claim has been received”.
19771
THE TRANSFER OF SHARES
feree’s title can be impeached due to defects in the title of the
transferor then to that extent the negotiability of the security is
curtailed. A primary characteristic of negotiability is that the
holder of a security can obtain a better title to it than the person
from whom he acquired it0
In addition, where the defects of title
of the transferor travel with the shares, then the more cumbersome
the transfer process will become since the transferee, as a neces-
sary and prudent precaution, will investigate in some detail the
title of the transferor. The major threat to the transferee’s title will
arise where (i) theltransfer is a forgery; (ii) the transfer is un-
there are adverse claims against the trans-
authorized; or (iii)
feror’s title.
Forgeries
The pre-Part VI law on this was quite clear; a forged transfer
was a nullity67 and the true owner could assert his title to the
shares and have his name restored to the share register 8 In this
situation the transferee’s name would be removed from the share
register and a company would not be estopped from doing so merely
because it had issued a fresh share certificate in his, name.0 9 The
primacy accorded to the true owner’s interest applied even where
he was neglectful in, for example, failing to reply to a communic-
ation from the company that a transfer of his shares had been
registered,70 a situation where his claim of ownership and the
protection of his interest were scarcely meritorious.
Part VI continues, in a slightly diluted form, this policy of
protecting the interests of a true owner of securities. By section
64 and subsection 68(2) the true owner can assert his title and
recover possession of his security against a bona fide purchaser in
06 McLoughlin, Introduction to Negotiable Instruments ‘(1975), 29; Pro-
posals, supra, note 31, vol.1, para.173.
DT In re Bahia and San Francisco Ry Co. (1868) L.R. 3 Q.B. 584; Stuart v.
Hamilton Jockey Club (1911) 18 O.W.R. 493.
18 Stuart v. Hamilton Jockey Club, ibid.
09 Simm v. Anglo-American Telegraph Co. (1879) 5 Q.B.D. 188. In certain
limited circumstances a company could be estopped from denying the title
to shares of a person to whom it had issued a share certificate on the
registration of a forged transfer: See Gower, supra, note 10, 383-84.
7o Barton v. L. & N.W. Ry (1889) 24 Q.B.D. 77; Welch v. Bank of England
[1955] Ch.508 (Ch.Div.). This flows from the fact that Anglo-Canadian law
has never developed a satisfactory doctrine with respect to damages caused
by a negligent failure of an owner of property to protect it: see Ingram
v. Little [1961] 1 Q.B. 31, 73-4. The reasoning underlying the cases on pro-
prietary estoppel has never been applied in this area.
McGILL LAW JOURNAL
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a situation where the endorsement is “ineffective” or “unauthoriz-
ed”71, provided the bona fide purchaser has not “received a new,
reissued or re-registered security on registration of transfer”. 2
Where a bona fide purchaser is registered on a forged transfer then
the true owner will have to rely on his rights against the company
for improperly registering the transfer.73 In other words, Part VI
shifts, to a limited extent, the risk of loss caused by forged trans-
fers onto the shoulders of the issuer to protect a transferee who
has received a new certificate on registration. The underlying
rationale for substituting the liability of thd issuer or transfer-
agent for that of the transferee in this situation has been stated to
be that (i) the issuer or transfer agent will be more likely to
detect forgeries if anyone can, and (ii) if the forgery can pass
muster with the transfer agent, the purchaser who receives a new
certificate should keep it.74 The latter reason is not particularly
convincing, but the former clearly underlines the responsibility of
the issuer and its transfer agent to prevent the circulation of forged
share certificates.
It would also appear that in transfers involving forgery the
rule, exemplified in cases such as Sheffield Corp. v. Barclay,75 has
been abrogated. Under this rule a person who submits a forged
transfer for registration is liable to indemnify the company for any
damage suffered as a result of its registration. Now, under subsec-
tion 59(1), where a bona fide purchaser is registered and receives
a share certificate evidencing this fact, he warrants “only that he
has no knowledge of any unauthorized signature in a necessary
endorsement”. The consequence of this was clearly spelt out in the
report which preceded the C.B.C.A.:
71 S.64 refers to the “ineffectiveness” of the endorsement, whereas subs.
68(2) refers to both an “unauthorized” and “ineffective” endorsement. Both
would appear to have the same meaning. The only apparent reason for
separating these sections in the way that Part VI does is because s.68 also
deals with “wrongful” transfers.
72 C.B.C.A., subss.64(1) and 68(2). By paras.64(1) (a) and (b) the true owner
cannot assert his rights if he has ratified, or is otherwise estopped, from
denying the unauthorized endorsement.
73 C.B.C.A., subs.64(2).
74 Folk, Article Eight: Investment Securities, supra, note 12, 693. As will
be seen later the issuer will have a remedy under the signature guarantees,
subs.65(1).
75 [1905] A.C. 392
(H.L.); Starkey v. Bank of England [1903] A.C. 114
(H.L.); Bank of England v. Cutler [1908] 2 K.B. 208; Guaranty Trust Co.
and Denison Mines Ltd v. James Richardson & Son [1963] 2 O.R. 347 (H.C.).
For a review of these cases see Atiyah, Misrepresentation, Warranty and
Estoppel (1971)
9 Alta L.Rev. 347, 358-66.
19771
THE TRANSFER OF SHARES
Forgery entitles the corporation to refuse to register a transfer, but if the
corporation does register the transfer of a certificate presented by a
purchaser for value without notice of an adverse claim, the corporation
cannot recover the security or seek indemnity from the transfereey30
This observation, and subsection 59(1), of course, only refer
to the liability of the bona fide purchaser who obtains registration
and, as Guaranty Trust Co. and Denison Mines Ltd v. James Ri-
chardson & Son77 illustrates, the obligation of indemnity is norm-
ally sought against the presenting broker. But by subsection 59(5)
a broker only gives to the issuer78 the warranties provided for in
section 59 which would appear to entail that he warrants only
that “he has no knowledge of any unauthorized signature in a ne-
cessary endorsement”. 79 Nor would it appear that the bona fide
purchaser is liable in conversion where he obtains registration
and a fresh certificate” on a forged transfer, for otherwise this
would vitiate the scheme of Part VI which is specifically designed
to give protection in this situation. 0 Where a transferee on a forged
transfer has not obtained registration then he will be liable to
the true owner and arguably the prima facie remedy of the true
owner is to call for the delivery of the certificate.8’
Oddly, no similar immunity against possible liability in con-
version is extended to a broker or agent who acts on behalf of the
transferee, a situation specifically dealt with in Article 8-318 of the
U.C.C. As the comment to this article states, it was inserted to
“negate the liability of agents, including brokers, and of bailees,
for innocent conversion .. .”.. The absence of any equivalent pro-
vision under Part VI means that an agent acting on a fraudulent
transfer could be liable in conversion where the principal is not,
TBProposals, supra, note 31, vol.I, 56.
77 Supra, note 75.
78 By C.B.C.A., para.76(1) (b) this would include any transfer agent since an
“authenticating trustee, registrar, transfer agent or other agent of an
issuer” is given the same “rights” as the issuer.
79 C.B.C.A., subs.59(1). This would result in a curtailment of the common
law liability: see, e.g., the dictum of Lord Davey in Sheffield Corp. v.
Barclay [1905] A.C. 392, 403, (appr. in Guaranty Trust Co. and Denison Mines
Ltd v. James Richardson & Son, supra, note 75) that a person who presents
a transfer to the registering authority “not only affirms
is genuine,
but warrants that it is so”.
it
80 C.B.C.A., subs.64(1).
81 C.B.C.A., subs.68(2).
82 U.C.C., Official Comment (1962). Cf. the Ontario Business Corporations
Act, R.S.O. 1970, c.53, s.89.
McGILL LAW JOURNAL
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something which in principle appears feasible.8 3 Nor may this be
such an undesirable thing. The selling broker can insure against
liability and, what is more important, he will take steps to ensure
that a satisfactory transfer is being effected. Even in those juris-
dictions in the United States where article 8-318 of the U.C.C. is
applicable, this, to a certain extent, is already the case due to the
requirement that a broker to be protected must show that he has
some knowledge of the customer for whom he is acting.84 The
policy of Part VI appears to be a more robust version of this de-
velopment.
Unauthorized Transfers
To a certain extent this category of defective transfers overlaps
with the former category of forgeries, as forgeries are manifestly
unauthorized. But Part VI draws a distinction between “the transfer
that is wrongful because the endorsement is ‘unauthorized’ and the
tranfer that is wrongful for reasons other than an ‘unauthorized’
endorsement”8 5 and it is essential to keep this distinction in mind.
It is transfers that are wrongful in the latter sense (transfers by
agents who exceed their authority and transfers by fiduciaries in
breach of trust) with which we are presently concerned.
Where a transfer is for some reason “wrongful”, for example,
the owner endorses the security in blank for one purpose but the
agent uses it for another, then the owner can recover possession of
the security “against anyone except a bona fide purchaser”. 8
In
other words, in this situation the bona fide purchaser is protected
without the need, as in the situation of unauthorized endorsements,
to be registered. In this situation Part VI treats the lack of authority
to make delivery as being less serious than an unauthorized endor-
sement; it gives priority to “its policy of promoting free transfer
of securities over the interests of the true owner”‘s and relegates
83Cf. Broom v. Morgan [1953] 1 Q.B. 597; Bowstead, Agency 13th ed.
(1968), 330. It is clear that an agent can be liable in conversion where his
principal is also liable: see Service v. Advance Rumely Thresher Co. [1919]
2 W.W.R. 646.
84See The “Know Your Customer” Rule Of the NYSE: Liability Of
Broker-Dealers Under The UCC and Federal Securities Laws [1973] Duke L.J.
489, 514-25.
85 Folk, Article Eight: Investment Securities, supra, note 12, 684. On this
distinction compare subs.68(1) of the C.B.C.A. with subs.68(2). “Wrongful”,
is defined in subs.44(2).
86 C.B.C.A., subs.68(1).
8TFolk, Article Eight: Investment Securities, supra, note 12, 694.
19771
THE TRANSFER OF SHARES
the claims of the true owner to an action against the defaulting
trustee or agent.
A transfer can also be unauthorized in the sense that it involves
a fiduciary transferring shares held in trust in circumstances where
it is improper for him to do so. The general policy objective of
Part VI in this situation is also to protect the issuer and transferee
where a transfer in breach of trust has been effected. This again
enhances the negotiability of securities by relieving the issuer and
transferee of any obligation to verify that a fiduciary-transfer
is consonant with the trust instrument.8 8 As far as the transferee is
concerned, this policy is partly implemented by subsection 61(10)
which provides that the failure of a trustee to comply with the
relevant controlling instrument, or with the law of the jurisdiztion
governing the fiduciary relationship, does not result in the endorse-
ment being unauthorized. In other words, such a transfer will not
trigger off section 64 which requires the bona fide purchaser to be
registered in order to protect his title where the endorsement is
unauthorized.
Adverse Claims
The title of a transferee may be impeached when third parties
have adverse claims against the shares. Obviously, this overlaps
with the former category since improper transfers by a fiduciary
give rise to rights in the beneficiary to impeach the transfer. How-
ever, adverse claims will arise in situations other than improper
transfers by a trustee, for example, the shares may be mortgaged. 9
Again the negotiability of investment securities will be enhanced to
the extent that adverse claims against a transferee are restricted.
Part VI details the situations where this is so and limits the extent
to which adverse claims can be raised against a transferee. How-
ever, since we are dealing with the bona fide purchaser without
notice, this in itself will greatly limit the extent to which adverse
claims can be raised.
Of limited importance with respect to this matter is subsection
57(1) which provides that a transferee is deemed to have notice
of an adverse claim if the security is endorsed for “some … pur-
pose not involving transfer” (for example, surrender or collection)
or if the security is in bearer form and is stated to be the property
88 See also C.B.C.A., subss.68(1) and (2).
/
89 See, e.g., Fry v. Smellie [1912] 3 K.B. 282; France v. Clark (84)
/
Ch.D. 257.
26
McGILL LAW JOURNAL
(Vol. 23
of someone other than the transferor 0 Probably the most important
and common situation where adverse claims can arise is, as was point-
ed out above, where a fiduciary transfers shares in breach of trust.
In this situation the fact that a transferee knows that the beneficial
interest is vested in a third party does not impose on him a “duty
to inquire into the rightfulness of the transfer” 91 and such know-
ledge will not ipso facto constitute notice of an adverse claim.
However, a transferee will be deemed to have notice of an ad-
verse claim where he knows that the consideration is to be used
for, or that the transaction is for, the personal benefit of the fidu-
ciary or is otherwise in breach of trust 2 The effect of this is to
relieve transferees of any duty to protect a trust beneficiary’s in-
terest except where the self-dealing of the fiduciary is obvious. This
would entail that the more liberal view of the constructive trust
mechanism, in so far as it implicates third parties in a breach of
trust as constructive trustees, will not apply in this context.03 Now
before a third party is affected by a fiduciary’s breach of duty
on a transfer of shares he must have what is tantamount to actual
knowledge of the breach. A person who has an adverse claim against
a share can protect himself by filing notice of his claim with the
company.93a
TRANSFEROR AND COMPANY
When the requirements of an effective and proper transfer
have been completed it will be in the interests of the transferor to
register the transfer as expeditiously as possible. So long as the
transfer remains unregistered then, vis ii vis the company, the
transferor remains the owner and is subject to all the liabilities
oThe same rules apply to any broker acting for a transferee: C.B.C.A.,
subs.57(1).
91 C.B.C.A., subs.57(2). For the pre-Part VI position where there were
competing equities between trust beneficiaries and a transferee, see Shrop-
shire Union Railways and Canal Co. v. The Queen (1874) L.R. 7 H.L. 496;
Holden, The Law and Practice of Banking 5th ed. (1971), vol.2, 176-77.
92 C.B.C.A., subs.57(2).
93See generally, Nathan and Marshall, Cases and Commentary on The
Law of Trusts 6th ed. (1975), Hayton (ed.), 376-79; Competitive Insurance
Co. v. Davies Investments Ltd [1975] 1 W.L.R. 1240, [1975] 3 All E.R. 254
(Ch.Div.); Consul Development Pty Ltd v. D.P.C. Estates Pty Ltd (1975) 49
A.L.J.R. 74.
93a For a more detailed discussion of adverse claims see text, infra, p.586 .
19771
THE TRANSFER OF SHARES
attendant upon the ownership of the shares.H As between the trans-
feror and tranferee, once all the requirements of a valid transfer
have been completed the title to the shares vests in the transferee. 5
However, the company is not affected by this. It has been the policy
of Anglo-Canadian law to permit a company to rely exclusively on
the register of shareholders to indicate to whom the shares belong.
This policy is continued in section 47 which provides that before
“the presentment for registration of transfer of a security” the
company may treat the registered owner as absolute owner irres-
pective of “any knowledge or notice to the contrary”‘ ,, or of any
description in its register otherwise 7 Accordingly; it can be seen
that for different reasons both the transferor and transferee will
have an interest in having the transfer registered as promptly as
possible.
The registration of corporate securities, however, is something
within the jurisdiction of the company; both parties will; therefore,
be dependent on the company registering the transfer. As part of
the overall objective of expediting the transfer process, Part VI
spells out in some detail the obligations of an issuer when a trans-
fer is lodged for registration. In particular, it prescribes and cir-
cumscribes the range of enquiries to be made by the issuer in this
situation. Where a transfer is lodged for registration, section 71
requires an issuer to register the transfer if:
(a) the security is endorsed by the appropriate person…
(b) reasonable assurance is given that the endorsement is genuine and
(c) the issuer has no duty to enquire into adverse claims or has discharged
effective;
any such duty;
(e) the transfer is rightful or is to a bona fide purchaser …. 98
9 4 City of Glasgow Bank In Liquidation: Buchan’s Case (1879) 4 App.Cas.
547, 549 (H.L.). In re Westmorland Bank, ex.p. Allison (1869) 12 N.B.R. 514
(CA.).
’95 Gower, supra, note 10, 396; C.B.C.A., s.60.
9 C.B.C.A., para.47(1) (a). This is subject to the situation where a com-
pany is deemed to have constructive notice of adverse claims, subs.72(7).
This will be dealt with later.
97C.B.C.A., paraA7(1) (b). See also subs.47(4) which basically relieves
a company of having to see to the performance of any duty owed by the
registered owner to a third party.
98C.B.C.A., para.75(1) (e). For possible difficulties, which are probably
more theoretical than real, arising out of this subsection see Folk, Article
Eight: Investment Securities, supra, note 12, 706-8.
McGILL LAW JOURNAL
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Of the above requirements the two most important are those relating
to the assurances which the issuer may require as to the right-
fulness and effectiveness of the endorsement and notice of adverse
claims. The important concept of “appropriate person” has pre-
viously been discussed.9
1a
Assurance that endorsement effective 0
Subsection 72(1) sets out the assurance which an issuer can
demand before it registers a transfer of shares. These assurances
go both to the genuineness and to the effectiveness of the endor-
sement; in other words, that it is not a forgery and that the person
executing it is an appropriate person to do so. From the issuer’s
point of view the importance of these assurances is that they pro-
vide protection against a wrongful registration which results in
the issuer being liable to the true owner yet unable to expunge
the transferee from the register of members. This, for example, would
arise where the issuer registers a forged transfer to a bona fide
purchaser.100 The assurances which Part VI enables the issuer to
require on a transfer fall into two broad categories: 10 1 (i) signature
guarantees and (ii) evidence of an agent-transferor’s authority or
evidence of “appointment or incumbency” to a particular office where
this is appropriate.
Signature guarantee
By subsection 72(1), an issuer, on the presentment of a transfer
of securities for registration, can require “a guarantee of the sign-
ature of the person endorsing”. In the scheme of Part VI this is
a requirement of some importance. The significance of the equiva-
lent provision in the U.C.C. has been spelt out as follows:
Since Code rights and liabilities turn in large part upon the signature
guarantee, it is obviously of great importance, especially to transfer
agents but also to selling brokers, that the guarantee itself is genuine
and that the guarantor is sufficiently responsible financially to meet any
liabilities, which are potentially quite large, that might arise out of the
particular transaction. 02
Where such a guarantee is given, the guarantor warrants the
genuineness of the signature, that the signer was an appropriate
98a See text, supra, p-575.
99 This sub-heading is the margin note to C.B.C.A., subs.72(1).
100 See C.B.C.A., subss.64(1), 64(2) and 74(2).
301 C.B.C.A., s.72.
102 Folk, Article Eight: A Premise And Three Problems, supra, note 12,
1407.
1977]
THE TRANSFER OF SHARES
person to make the endorsement, and that he had legal capacity
to do so. 10 3 It is important to note that the guarantor does not
warrant the “rightfulness of the transfer in all respects”.’0 Such
an endorsement guarantee can be given voluntarily by a person
seeking the registration of a transfer but the issuer may not require
such a guarantee as a condition to granting registration of, the
transfer.0 5 Obviously, a signature guarantee to be of any value
to the issuer will have to be made by a person in whose commer-
cial reputation the issuer can confidently place some trust. To
this effect, subsection 72(2) defines a “signature guarantee” as a
guarantee by a person “reasonably believed by the issuer to be
responsible” and the issuer may adopt “reasonable standards” to
determine who is and who is not a responsible person for this
purpose. 10
Evidence of appointment or incumbency
Where an endorsement is by an agent or some other fiduciary
then the issuer can require assurances regarding their capacity to
act. With respect to the agency situation, the issuer can require
“reasonable assurance of authority to sign”;0 7 in the case of a
transfer by a fiduciary, “evidence of appointment or incumben-
cy’ 1 8 for which the issuer can set up reasonable standards.10 9
Where an issuer solicits documents to enable it to carry out such
investigation it will not be affected by constructive notice of the
contents of any document solicited “except to the extent that the
contents relate directly to [the] appointment or incumbency”1 0 in
question. This is an important provision. It underscores what is
one of the major purposes of Part VI, the limiting of the extent
to which an issuer will be affected by notice of adverse claims
unless the statutory procedure for bringing them to the notice of the
issuer has been complied with.
103 C.B.C.A., subs.65(1).
104E.g., where shares are mortgaged but the owner-mortgagor retains
possession of them and subsequently sells them. See subs.65(2) of the C.B.C.A.:
“A person who guarantees a signature of an endorser does not otherwise
warrant the rightfulness of the particular transfer”.
’05 C.B.C.A., subs.65(3).
106 C.B.C.A., subs.72(3).
1o7 C.B.C.A., para.72(i) (a).
108 C.B.CA., para.72(1) (b). Joint fiduciaries are dealt with in para.72(1)
(c). See also C.B.C.A., subs.72(4) which defines what is “evidence of appoint-
ment or incumbency”.
109 C.B.C.A., subss.72(4) and (5).
110 C.B.C.A., subs.72(6).
McGILL LAW JOURNAL
[Vol. 23
By spelling out in detail the types of assurances that the issuer
can require it is hoped that the transfer process will be routinized
and expedited. This policy objective would be frustrated if the
issuer could require additional, or more rigorous, assurances than
those set out in Part VI. As a discouragement, the issuer is deemed
to have constructive notice of the contents of any documents which
it unreasonably requires as a condition of registering a transfer.
Subsection 72(7) provides:
… If an issuer demands assurance additional to that specified in this
section [evidence of appointment or incumbency or agent’s authority]
… and obtains a copy of a will, trust or partnership agreement, bylaw or
similar document, the issuer is deemed to have notice of all matters
contained therein affecting the transfer.
It is this use of the constructive notice doctrine which, it is hoped,
will deter an issuer from requiring documentation in excess of that to
which it is entitled.
Adverse Claims
The issuer must also be concerned with adverse claims against
the shares. The report preceding the introduction of the C.B.C.A.
asserted that one of the objectives underlying Part VI was to
expedite “the registration process by clarifying and limiting the
duty of the corporation and its agents to enquire into … possible
adverse claims of third parties”.”‘ As part of this policy Part VI
continues the tradition of Anglo-Canadian law in relieving the issuer
of any knowledge that its shares are held on trust. In commenting
on section 117112 of the English Companies Act, 1948112a (which
basically prevents the company from being attached with the know-
ledge that its shares are held on trust), Buckley states that it was
designed” 3 “(1)
to relieve the company from taking notice of
equitable interests in shares, and (2) to preclude persons claiming
under equitable titles from converting the company into a trustee
for them”. 114
claim” see C.B.C.A., subsA4(2).
111 Proposals, supra, note 31, vol.I para.166. For a definition of “adverse
112S.117 provides: “No notice of any trust, expressed, implied or cons-
tructive, shall be entered on the register, or be receivable by the registrar,
in the case of companies registered in England”.
112a 11-12 Geo.VI, c.38.
113 Lindon (ed.), Buckley on the Companies Acts 13th ed. (1957), 299.
114 There would appear to be an exception
to this where a company
deals for its own purposes with shares subject to trust: Rainford v. James
Keith and Blackman Ltd [1905] 1 Ch.296 (Ch.Div.); The Birbeck Loan Co.
v. Johnston (1902) 3 O.L.R. 497 (Div.Ct); var.6 O.L.R. 258 (C.A.).
19771
THE TRANSFER OF SHARES
A similar policy is adopted by section 47 which provides that
a corporation may treat as absolute owner (before the “present-
ment for registration of transfer” of any shares) the person in
whose name the shares are registered irrespective of any knowledge
to the contrary or notice of the fact that shares are held in some
fiduciary capacity.” Although the general purpose of Part VI is
to limit the extent to which companies can be affected by notice
of adverse claims, a regime which completely failed to provide the
owner of such an interest with the means of protecting it would
be less than satisfactory. It would greatly limit the utility and
value of shares as items of property since they are frequently used
as collateral. Of course, it is not unreasonable to expect a holder
of an interest in shares to protect such interest by obtaining pos-
session of the shares; immobilizing the share certificate is probably
his most effective form of protection. Accordingly, Part VI places
the onus squarely on the shoulders of the holder of an adverse
interest to take positive steps to protect it; an issuer is only under
a duty to inquire into adverse claims if (a) it receives written
notice of the claim, (b) it is given reasonable time to act on the
notice before any proposed transfer is effected and (c) details
relating to the security are given.”‘ The issuer can discharge its
duty of enquiry by any reasonable means which include informing
an “adverse claimant” that a security has been lodged for transfer
and that it will be transferred within thirty days unless the issuer
is served with a restraining order or is provided with an indemnity
bond sufficient to protect the issuer and all others from any loss
flowing from “complying with the adverse claim”.117
Where notice of an adverse claim has been given to the com-
pany but no court order or indemnity bond is forthcoming, then
the issuer, after a lapse of thirty days, would appear to be free to
register the transfer without threat of any liability. In this situation
the adverse claimant, which could include the true owner, would
be estopped from contesting the rightfulness of the transfer against
the company. This marks a significant alteration of the previous
legal position and departs from a number of unsatisfactory de-
cisions which had relieved a shareholder of any obligation to pro-
tect his interest even where he had been informed by the company
116 See also C.B.C.A., subs.72(3).
116 C.B.C.A., subs.73(1).
1’T C.B.C.A., subs.73(2).
McGILL LAW JOURNAL
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that a transfer of shares registered in his name had been lodged
for registration.118
The manner in which these adverse claim provisions operate
and the general policy of Part VI in promoting negotiability by
equating “possession of a duly endorsed security certificate …
with ownership”, 119 are illustrated by Dean Witter & Co. v. Educ-
ational Computer Corporation (Pa.).20 This case involved an action
by a broker to obtain registration and damages for the issuer’s
delay121 in registering a transfer. The defendant had refused to
register the transfer on the grounds that the customer for whom
the broker was acting had previously obtained a transfer of the
shares by representing that the certificate had been lost. 22 The
plaintiff, however, claimed to be entitled to be registered under
article 8-401 of the U.C.C.1 The court held for the defendant company
on the gounds that the plaintiff was not a bona fide purchaser for
value because a legend appended to the share certificate indicated
that the shares were not being held for the purpose of resale. 24
If, however, the plaintiff had been a bona fide purchaser he would
have been entitled to be registered since he possessed the share
certificate. In addition, the court observed that notice of an ad-
verse claim did not “exempt the issuer from the duty to transfer…
18 Barton v. London and N.W. Ry (1889) 24 Q.B.D. 77; Welch v. Bank of
England [1955] Ch.508
(Ch.Div.).
119Proposals, supra, note 31, vol.I, para.171(a).
120 369 F.Supp. 757 (E.D.Pa. 1974).
121Action can also be brought against the transfer agent where it has
been responsible for the failure to register. C.B.C.A., s.76 imposes obligations
with respect to the transfer of shares on transfer agents that are similar to
those imposed on the issuer, thus overcoming any difficulties, such as privity
or showing a duty of care, that a transferor might encounter in bringing
such an action. This remedy is useful where the issuer has become insolvent:
see Kenler v. Canal National Bank, 489 F.2d 482 (1973).
122Tiis is an abbreviated version of the facts.
12 3 See C.B.C.A., s.71.
124 Note that the definition of adverse claim in subs.44(2) includes a claim
that the “transfer was or would be wrongful”. In Dean Witter & Co. v.
Educational Computer Corp. (Pa.), supra, note 120, the defect in the transfer
was that the share certificate representing the securities had been previously
reported to be missing and a replacement had been issued. This, of course,
had little to do with the legend on the securities which deprived the plaintiff
of its bona fide purchaser status. Because of this, the point has been made
that “bona fide purchaser status can be defeated by notice of a claim which
was never litigated .. .”, Mann, Investment Securities (1974-75) 30 Bus.Law.
885, 889.
1977]
THE TRANSFER OF SHARES
shares”.’ 5 The issuer was obliged to notify the adverse claimant
of the proposed transfer so that corrective action could be taken.
What this appears to imply is that there is an onus on the issuer to
take some action to clarify the situation; it cannot adopt a passive
posture leaving the parties to sort out the problem. 2 ” If, of course,
the true owner does not reply within the thirty day period set out in
subsection 73(2) then the issuer is free to register the transfer.
Restrictions on the transfer of shares
Restrictions on the transferability of the issuer’s shares are a
matter of considerable importance to the transferor, the transferee
and the issuer. Many companies, mainly to obtain the supposed
advantages of a partnership structure, will have a provision in
their constitution restricting transferability. While it is clear that
companies can impose restrictions there is some uncertainty under
Canadian law concerning the permissible scope of such restric-
tions.
If any such limitation exists it is clear that it operates within
a very narrow compass since Anglo-Canadian courts have not seen
fit to fetter the autonomy of companies in this area. The courts
have tended to emphasize the contractual nature of the share-
holder’s interest as opposed to its proprietary aspect. M As Pro-
fessor Gower has pointed out, “English law has always regarded
shares of stock as creatures of the company’s constitution and
therefore as essentially contractual choses in action”.28 The most
common form of restriction is that which gives directors an un-
fettered discretion to refuse to register transfers of shares and “no
one has even argued that such a far reaching restriction …
is
invalid”.’29
In Canada, however, this quiescent attitude has not prevailed
and the validity of such restraints was challenged in Edmonton
125 Dean Witter & Co. v. Educational Computer Corp. (Pa.), supra, note
120, 761.
26 Kanton v. United States Plastics Inc., 248 F.Supp. 353 (1965).
127 See the well-known dictum of Holmes J. in Barrett v. King, 63 N.E.
935 (1902): “Stock in a corporation is not merely property. It also creates
a personal relation analogous otherwise than technically to a partnership.
Notwithstanding decisions under statutes … there seems to be no greater
objection to retaining the right of choosing one’s associates in a corporation
than in a firm.”
128 Gower, Some Contrasts Between British and American Corporation
Law (1956)
129 Ibid., 1378.
69 Harv.L.Rev. 1369, 1377.
McGILL LAW JOURNAL
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Country Club Ltd v. Case.130 Here the question before the court
was the validity of a provision in the articles of association con-
ferring on a majority of the directors power to refuse to register
a transfer of shares “in their absolute discretion”. DicksonJ.,
speaking for the majority, upheld the validity of the restriction on
the grounds of precedent, the Alberta Companies Act’ 31 which im-
pliedly condoned such restrictions, and on the facts: there was no
evidence that in the past the directors had made abusive use of
their discretion to refuse such registration. What is of interest is
not the orthodox majority opinion, but the dissent of Laskin J. who
considered absolute discretionary restrictions on the transfer of
shares to be invalid. To be valid such restrictions would have to
stipulate “some standard which would be amenable to judicial
control”.2 2 Laskin J. reached this conclusion on the grounds that
“shares in a public company are a species of property and as such
are entitled to the advantage of alienability free from unreasonable
restrictions …”.13 The general purport of Laskin J.’s dissent is to
emphasize the proprietary aspects of the share with the result
that a company’s freedom to restrict the transferability of its
shares is curtailed. Isolated dicta in cases dealing with letters
patent companies provided Laskin J. with some tentative support,
but only for the limited proposition that absolute restrictions on
transfer will be struck down;
the cases do not articulate any
standard of reasonableness for determining the permissible scope
of any given restriction.
In Canada National Fire Ins. Co. v. Hutchings,’-” the Privy
Council in dealing with a company incorporated under a special
Act of Parliament’34a held that a restriction in the company’s by-
laws, which gave the directors an absolute veto with respect to
the transfer of shares, was void. Other authorities support this
3oSupra, note 6.
1’3’R.S.A. 1942, c.240; now R.S.A. 1970, c.60.
132 Edmonton Country Club Ltd v. Case, supra, note 6, 551.
13 Ibid., 552.
134 [1918] A.C. 451 (P.C.). See also Re Good and Jacob Y Shantz Son
& Co. (1911) 23 O.L.R. 544 (C.A.); In re Imperial Starch Co. (1905) 10 O.L.R.
22 (H.C.); Montgomery v. Beardmore & Toronto Hunt Ltd (1929) 36 O.W.N.
99 (Ont.S.C.). The various problems raised by these cases were referred to
but not disposed of by the Privy Council in Ontario Jockey Club v. McBride
[1927] A.C. 916, 924 (P.C.). Under the C.B.C.A. the power of the directors
to pass by-laws (subs.98(1)) does not involve the right to pass by-laws
relating to restrictions on the transfer of shares (paras.6(1) (d), 167(1) (m)).
in-
134aPart II of the Dominion Companies Act, R.S.C. 1906, c.79 was
corporated into this Act.
19771
THE TRANSFER OF SHARES
approach with respect to provisions in the by-laws of letters patent
companies. 13 Although, on this point, it is hard not to agree with the
observations of Laskin J. that it is difficult to appreciate how
“the form of incorporation can have suoh a remarkable effect
upon the permissible scope of a power to regulate or prescribe
conditions for the transfer of stock in a public company”.136 How-
ever, the position of Laskin J. is a voice crying in the wilderness
and it is too late in the day to challenge the validity of restrictions,
even of the widest purport, on the transfer of shares. Also, what-
ever uncertainties exist with respect to the valid scope of restric-
tions on transfer in letters patent companies, it is doubtful if
they cause any undue inconvenience. Sufficient permissible and
adequate devices remain available to the corporate draftsman to
curtail substantially transferability and shareholders are always free,
via a valid shareholders’ voting agreement, to limit voluntarily
their right to transfer their shares.
In addition, as a matter of policy, it is doubtful that the position
of Laskin J. is the most satisfactory, although the arguments for
and against are finely balanced. In the United States, where
“unreasonable restraints” are prohibited, great difficulty has been
experienced in articulating the appropriate standards of reason-
ableness and, more recently, the courts have moved in favour of
allowing the corporate draftsman greater freedom to restrict the
transferability of shares.137 It is not to be gainsaid that restrictions
on transferability can operate to prejudice the interests of minority
shareholders, but this is merely one aspect of the minority op-
pression problem and is better remedied by a comprehensive sta-
tutory provision.
Another aspect of the validity of transferability restrictions is
whether or not a company can alter its constitution to curtail
this. Without elaborating in great detail the rules pertaining to the
propriety of corporate consitutional alterations, the answer would
appear to be in the affirmative. Prima facie, there can be no ob-
jection to an alteration which restricts the hitherto existing right
of a shareholder to transfer his shares. 3 8 In dealing with this issue
the courts adopt the rather stoical attitude that,
135 See Wegenast, supra, note 15, 536-42.
186 Edmonton Country Club Ltd v. Case, supra, note 6, 553.
1370’Neal, Close Corporations: Law and Practice 2d ed. (1971), ch.7.
138See Allen v, Gold Reefs of West Africa [19001 1 Ch.656 (C.A.); Shuttle-
worth v. Cox Bros. & Co. [1927] 2 K.B. 9.
McGILL LAW JOURNAL
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[t]his is one of the contractual contingencies upon which a shareholder
holds his shares, viz. that a majority may against his will, and, perchance,
his interest, place restrictions upon his right of transferring his shares. 30
Such an alteration would, of course, have to be bona fide in the
interests of the company, but, considering the subjective nature
of the test and the level of abstraction at which it is applied, few
alterations would run afoul of it.140 While an alteration to the
corporate constitution to restrict the transferability of shares would
not, prima facie, run afoul of the rules developed by the courts to
circumscribe the exercise of such majority power, it would trigger off
the appraisal remedy recently introduced by the C.B.C.A. Paragraph
184(1) (a) provides that where a shareholder dissents from an
amendment’ 4′ to a company’s articles “to add, change or remove
any provisions restricting or constraining
the transfer of
shares” then, provided the dissenting shareholder complies with
the stipulated procedure,’14 2 he can compel the company to purchase
his shares at a fair value.’ 4 This right is not, however, an absolute
.
.
.
139 Leiser v. Popham Bros. Ltd (1912) 6 D.L.R. 525, 527 per Clement J.
(B.C.S.C.). See also Tu-Vu Drive-In Corp. v. Ashkins, 391 P. 2d 828, 831
(1964)
to the effect that a shareholder “acquires his shares subject to the
power of the corporation to alter its contract with him pursuant
to
statutory authority”.
(C.A.), on what constitutes
140 See, e.g., the observations of Lord Evershed M.R. in Greenhalgh v.
Arderne Cinemas Ltd [1951] Ch.286, 291
the
“interests of the company”. It reaches such a level of abstraction as to be
almost meaningless. It may be that the courts are adopting a slightly
different attitude to majority shareholder power, see Clemens v. Clemens
Bros. [1976] 2 All E.R. 268 (Ch.Div.), but this decision is not free from
difficulties (see comment by Prentice (1976) 92 L.Q.R. 502). A more satis-
factory approach would be to ask the question whether or not the alteration
has prejudiced the economic interests of the petitioning shareholder and,
if so, then the onus should be on the majority to justify it.
41 The amendment will be effected under C.B.C.A., s.167 (see in particular
para.167(1) (m)) and the various classes of shares are protected by C.B.C.A.,
s.170 (see in particular para.170(1) (h)).
‘
(i)
(ii)
142 See C.B.C.A., subss.184(4)-(9). Basically the shareholder must:
signify his dissent before the resolution (subs.184(5));
inform the company within twenty days after he has been informed
of the resolution (or twenty days after he hears of it) that he wishes
to exercise his right to have his shares purchased and give details
of the shares held (subs.184(7));
(iii) within 30 days of giving such notice forward his share certificate
to the company for endorsement (subs.184(4)).
It is not possible for a dissenting shareholder to have the best of both
worlds and redeem only part of his holdings (subs.184(4)).
143 The fair value is to be computed as of the date immediately prior to
the adoption of the resolution effecting the alteration, and any change in
19771
THE TRANSFER OF SHARES
one in that a company cannot be compelled to acquire a dissenting
shareholder’s shares where there are reasonable grounds for believ-
ing that the corporation is, or would be after the purchase, in-
solvent.'” Nevertheless, in this situation the dissentient is put in
a preferential position upon liquidation, ranking after creditors
but before all other shareholders 45 He can also withdraw his
notice of dissent if he so wishes. 40
Although Part VI makes no alteration to the law relating to
the validity of the scope of transferability restrictions,
it does,
however, contain certain provisions relating to their enforceability.
Subsection 45(8) of the C.B.C.A. provides:
If a security certificate issued by a corporation or by a body corporate
before the body corporate was continued under this Act is or becomes sub-
ject to
(a) -a restriction on its transfer other than a restraint under section
168,147
(b) a lien in favour of the corporation,
(c) a unanimous shareholder agreement, or
(d) an endorsement under subsection 184(10), 148
value attributable to a prospective alteration is to be excluded (C.B.C.A.,
subs.184(3)). See Re Wall & Redekop Corp. (1974)
(3d) 733
(B.C.S.C.) where the court had to deal with the fair value concept in
subs.228(5) of the Companies Act, S.B.C. 1973, c.18. The court pointed out
that at least three methods of computation were available:
(i) market value of the shares on the stock exchange;
(ii)
the net asset value or the amount to be obtained on a hypothetical
liquidation;
the investment value of the shares on a capitalization of the earn-
ings of the company.
50 D.L.R.
The court held that it was not sufficient merely to regard the market value
of the shares, but that a shareholder was entitled to be paid for his pro-
portionate interest in the company as a going concern. See also Application
of Delaware Racing Assoc., 213 A.2d 203 (1965); Inflation Accounting, Ch.4
in Report of the Inflation Accounting Committee 1975, Cmnd 6225.
144C.B.C.A., subs.184(26) where insolvency is given both its bankruptcy
(iii)
and commercial meanings.
145 C.B.C.A., para.184(25) (b).
146C.B.C.A., para.184(25) (a). For a somewhat perverse, but highly in-
teresting article on the appraisal remedy, which demonstrates the old adage
that the best is the enemy of the better: see Manning, The Shareholder’s
Appraisal Remedy: An Essay for Frank Coker (1962) 72 YaleLJ. 223.
147 This basically enables a company to ensure that its control is Canadian:
see C.B.C.A., Regulations, ss.55-62.
148This subsection relates to the endorsement of securities held by a
shareholder who has determined to make use of the appraisal remedy under
s.184; see supra, note 142.
McGILL LAW JOURNAL
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Such restriction, lien, agreement or endorsement is ineffective against a
transferee of the security who has no actual knowledge of it, unless it or
a reference to it is noted conspicuously on the security certificate.
The purport of this section is clear and needs little comment;
unless the restriction on transfer (or the other stipulated impair-
ments of title) are noted or referred to conspicuously1 4 on the
share, certificate, then they will not be effective against a transferee
who has no actual knowledge1 50 of their existence.
Subsection 45(8) goes farther than the equivalent provision
in Article 8 of the U.C.C. in one important respect. It applies to
restrictions contained in a unanimous shareholders’ agreement.15′
Such an agreement is included by the C.B.C.A. because it is, for all
intents and purposes, given the status of a constitutional document,
thus recognizing that where such agreements exist it is unrealistic
to distinguish them from the corporate constitution proper. A trans-
feree of shares subject to a unanimous shareholders’ agreement of
which he has notice is deemed to be a party to that agreement 152
and in this way the doctrine of privity is circumvented. 15 3
The courts have not struck down restraints on transferability
because they fail to live up to some abstract standard of reason-
ableness. Rather, the courts’ unswerving hostility has normally
manifested itself in the restrictive manner in which they interpret
such restraints. The starting point for the courts is to treat all
transferable’54 and to require clear
shares as being inherently
evidence that the transferability of any given share has been
curtailed.155 The extent to which the courts are willing to enforce
this policy in favour of transferability is reflected in the cases
349 For a definition of conspicuous see U.C.C. 1-201(10).
150 On actual notice see Dean Witter & Co. v. Educational Computer Corp.
(Pa.), supra, note 120.
’51 Defined in C.B.C.A., s.2 and subs.140(2). It can restrict “in whole or
in part, the powers of the directors to manage the business and affairs of
the corporation”.
152 C.B.C.A., subs.140(3).
153 See Re Belleville Driving and Athletic Assoc. (1914) 31 O.L.R. 79 (A.D.).
It also has considerable ramifications for the enforceability of “buy and sell”
agreements and other such devices.
154 This was recognized from an early date: see Davis v. Bank of England
(1824) 2 Bing 393, 407-408. For more recent judicial statements of the rule
see Re Smith and Knight (1868) 4 Ch. App. 20; Re Panton and the Cramp
Steel Co. (1904) 9 O.L.R. 3; Delavenne v. Broadhurst [1931] 1 Ch.234 (Ch.Div.).
155The same restrictive interpretation has been placed on pre-emptive
rights provisions: see Delavenne v. Broadhurst, ibid.; Roberts v. Letter “T”
Estates Ltd [1961] A.C. 795 (P.C.).
19771
THE TRANSFER OF SHARES
dealing with transfers to “men of straw”; in the absence of any
restriction a shareholder can transfer his shares to an impecunious
transferee, provided the transfer is unconditional. 156 Where the
corporate constitution does contain a restriction on the transfer
of shares then the scope of the restriction is solely a matter of
construction. In response to this there have evolved a number of
rules which exist in that twilight zone between rules of law and
mere interpretative guides. 15 7
(a) Wherever two interpretations on the scope of a restric-
tion are possible, the courts will select that one which limits the
scope of the restriction. Thus in Re Pool Shipping Co.’
the articles
of association contained a provision which vested an absolute dis-
cretion in the directors to refuse to register a transfer of shares.
During an issue of bonus shares which were renounceable,. a share-
holder to whom such shares were allotted renounced them. The
question was whether the shares were subject to the transferability
restriction contained in the articles of association. The court held
that they were not because the restrictive provisions only applied
to the transfer of shares belonging to a “registered holder” where-
as here the court was dealing with the “substitution of a nominee
in the place of the person to whom, in the first instance, the shares
were proposed to be allotted”. 59 The arid technicality of this reason-
ing speaks for itself, but it does exemplify the general judicial
hostility to transfer restrictions.
The merits of this policy are open to question since it can
frustrate the purpose for which such restrictions are introduced, 00
a purpose (the obtaining of the benefits of the partnership struc-
ture) which has been judicially approved.'” While there is much
to be said for promoting a policy of free transferability with re-
spect to publicly traded shares, similar arguments are hardly ap-
6 See, e.g., Re Discoverers Finance Corp., Lindlar’s Case [1910] 1 Ch312
’15
157 See, e.g., Laskin CJ.C.’s views on the “interpretation” of the effect of
exemption clauses in B.G. Linton Construction Ltd v. Canadian National Ry
[1975] 2 S.C.R. 678, (1974) 49 D.L.R. (3d) 548.
158 [1920] 1 Ch251 (Ch.Div.).
159Ibid., 256. See also Re Bentham Mills Spinning Co. (1879) 11 Ch.D. 900
(CA.).
(CA.).
160 See the decision of Scrutton LJ. in Re Bede Steam Shipping Co. [1917]
1 Ch.123 (CA.).
161 Moodie v. W. & J. Shepherd (Bookbinders) Ltd [1949] 2 All E.R. 1044,
1050 (H.L.); A.G. v. Jameson [1905] 2 I.R. 218 (CA.); aff. [1904] 2 I.R. 644
(K.B.).
McGILL LAW JOURNAL
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propriate in the case of private companies where shareholders
expect transferability restrictions. The preferable policy would be
to give effect to such restrictions and not to frustrate them.0 2
(b) Secondly, and somewhat similarly to the first point,
where directors are given the right to refuse to register a transfer
of shares on certain designated grounds then a refusal to register
on other grounds will be invalid. In such a situation directors
would be arrogating to themselves powers which they did not right-
fully possess. 13 Thus, where directors were given a power to refuse
registration to a transferee to whom they had personal objections,
it was held that they could not refuse where their objections were
that the transfer was merely a ploy to increase the voting power
of the transferor.16
(c) Thirdly, where the provision restricting the transfer of
shares requires a positive decision by the directors, a transfer will
be registrable if the directors fail or are unable to act. In this con-
text a “mere failure to pass a resolution is not a formal active
exercise of the right to decline”. 65 Thus where directors fail to
act, are deadlocked, or are unable to establish a quorum because
a director purposely absents himself from board meetings, a transfer
will have to be registered. 166
There is also authority for the proposition that the directors
must exercise their power to refuse registration within a reasonable
period of time after a request is lodged and failure to do so will
162 Gower, supra, note 10, 393 states that the “courts will not carry a literal
construction of the regulations so far as to defeat their obvious purpose”.
In some of the earlier cases, however, the courts came perilously close to
doing just this: see Re Pool Shipping Co., supra, note 158.
163 The same rule would apply where shareholders attempted to restrict
a transfer on grounds not stipulated in the corporate constitution. This is
not a case where any argument along the lines of an inherent power residing
in shareholders could be invoked: see, e.g., Re Bede Steam Shipping Co.,
supra, note 160.
164Moffat v. Farquhar (1878) 7 Ch.D. 591 (Ch.Div.); Re Stranton Iron and
Steel Co. (1873) L.R. 16 Eq. 559.
165 Moodie v. W. & J. Shepherd (Bookbinders) Ltd, supra, note 161, 1050.
166The powers of the directors in this situation pass to the shareholders
in general meeting in accordance with the principle in Barron v. Potter
[1914] 1 Ch.895 (Ch.Div.); Foster v. Foster [1916] 1 Ch.532 (Ch.Div.). The
reason for this is that the doctrine would probably violate the fundamental
right of a shareholder to transfer his shares and, in effect, would extend
the restriction. Also, reasoning based on the residual power of the share-
holders should have little application where the power of the board is vested
in it by statute: see, e.g., C.B.C.A., subs.97(1).
1977]
THE TRANSFER OF SHARES
result in their power of refusal falling into abeyance. In Re
Swaledale Cleaners Ltd167 the board of directors failed to act for
over four months and then declined to register the transfer. The
court held that this delay was unreasonable and also, more im-
portantly, that by this delay the directors (and ipso facto the
company) had lost their right of refusal.1 8 Where the directors’
delay is inadvertent or unavoidable then the ruling in Re Swaledale
Cleaners Ltd could be unduly harsh. Providing directors with an
incentive to act expeditiously where they can do so is one thing.
Providing them with such an incentive where they cannot
is
quite another. 16 9
Whether or not the reasoning in Re Swaledale Cleaners Ltd is
applicable to transfers under Part VI is problematic. Provision is
made for the situation where the issuer delays unreasonably in
registering a transfer and this merely gives the person presenting
the transfer a remedy in damagesY.7 0 Arguably this exhausts the
rights of a person injured by such an unreasonable delay, but this
cannot be completely accurate. Where the company has no right
to refuse to register, then, presumably, the person seeking re-
gistration has a right under the general law to a specific per-
formance order compelling the company to register the transfer.”‘
On this reasoning there remains the possibility that Re Swaledale
Cleaners Ltd could apply to transfers covered by Part VI. There
is nothing in Part VI which directly prevents it from doing so
and, in fact, subsection 71(1) speaks in terms of the issuer’s duty
167 [1968] 1 W.L.R. 1710 (C.A.), [1968J 3 All E.R. 619.
108 S.78 of the Companies Act, 1948 11-12 Geo.VI, c.38 (U.K.) requires the
board of directors to inform the transferee (but not the transferor) of any
refusal to register a transfer within two months from the time the transfer
was lodged for registration. This played a part in the court’s decision, but
only in the sense that the court considered it difficult to imagine a situation
where a delay of more than two months would be reasonable. Cf. Re Gairdner
Clarke & Doherty and Northern Life Assurance Co. (1923) 25 O.W.N. 278
(Kelly J. in chambers).
109 The same rule would appear to apply where the directors exercise their
discretion on an improper principle: see Re Bell Bros Ltd (1891) 65 L.T. 245,
249: “Having had an opportunity of exercising their power, and having attemp-
ted to exercise it upon a wrong principle, I think the power is gone, and that
the right to transfer remains absolute.”
170 C.B.C.A., subs.71(2).
171 Cf. the situation under C.B.C.A., subs.69(1), which gives the transferee
the right to compel the transferor to supply him with any “requisite” that
is necessary to obtain registration. But this relates only to matters with respect
to which the availability of a specific performance order might be doubtful
and has no direct bearing on the general availability of the remedy.
McGILL LAW JOURNAL
[Vol. 23
to register a transfer provided the formalities of a valid transfer
have been satisfied.
(d) The power of the directors to refuse to register a transfer
of shares, like all powers vested in the board, must be exercised
according to fiduciary principles. The directors must exercise their
power bona fide in the interests of the company and not for any
collateral purpose. The problem with this rule is the difficulty of
proving a want of good faith on the part of the directors. This is
not only because of the subjective natureula of the rule and the
imprecision of the “interests of the company” concept, 172 but also
because the courts (i) have placed the burden of showing a want of
good faith on the party alleging it’7 3 and (ii) will not oblige the
directors to give reasons for their refusal to register any given
transfer nor draw any adverse inferences if they fail to do so. As
an Irish judge rather laconically stated “the law allows the direc-
tors to hold their tongues”. 174 The rigour of this rule is somewhat
qualified by the caveat that if the corporate constitution permits
the directors to refuse to register a transfer on. limited grounds
then the directors will be obliged to stipulate the ground on which
‘na’It may be that the C.B.C.A. has imported objective standards into the
exercise of directors’ powers (C.B.C.A., para.117(1) (a)) a trend which would
be in keeping with recent judicial developments: see e.g., Clemens v. Clemens
Bros Ltd, supra, note 140; Howard Smith Ltd v. Ampol Petroleum Ltd [1974]
A.C. 821 (P.C.), Wollersteiner v. Moir [1975] 2 W.L.R. 389 (C.A.). Whether or
not the use of the phrase “interests of the company”, which is not com-
pelling, will operate to effect a change in judicial attitude to involvement in
corporate affairs, only time will tell. That such a development is to be com-
mended cannot be gainsaid. On this see generally Howard, Directors and
Officers in the Context of the Canada Business Corporations Act, Meredith
Memorial Lectures (1975), 143-44.
172See the observations of Lord Evershed M.R. in Greenhalgh v. Arderne
Cinemas Ltd, supra, note 140. To this should be added the comments of
Latham C..
in Peter’s American Delicacy Co. v. Heath (1939) 61 C.L.R. 457,
481-82 (Austl.H.C.) where he points out that it is meaningless to talk in terms
of the interests of the company where the company is split into factions. In
other words, what the courts have done with the “bona fide in the interests
of the company” formula is to create a rule which obscures the nature of the
underlying conflict with which the rule was designed to cope.
173 See, e.g., Australian Metropolitan Life Assurance Co. v. Ure (1923) 33
C.L.R. 199, 206 per Knox C.J. (Austl.H.C.): “[T]he onus is on the applicant
… to establish that the directors have not acted honestly or bona fide
in what they believe to be the interests of the Company in exercising their
power of rejection, and no inference unfavourable to the directors is to be
drawn from their refusal to give reasons for their decision”.
174 In re Dublin North City Milling Co. [1909] 1 I.R. 179, 184.
19773
THE TRANSFER OF SHARES
their power to refuse was based.”1 5 Normally, however, the cor-
porate constitution will exempt them from even this.
It is clear that the present position puts considerable power in
the hands of directors to abuse covertly their discretion in refus-
ing to register a transfer of shares, a power made all the greater
by the absence of any rules prescribing the scope of restrictions.
Futhermore, the courts have been reluctant to draw adverse in-
ferences even from the most suspicious of circumstances. In Re
Smith and Fawcett Ltd’76 two sole shareholder-directors each held
4001 shares in the company. One of the directors died and the de-
visees of his shares applied to have them registered in their names.
The director who received the application exercised his discre-
tionary power and refused to register all the 4001 shares, offering
to register only 2001 shares and to purchase the remainder himself.
On these facts the court refused to draw the inference that the
director was acting in bad faith in attempting either to purchase
the shares at an undervalue or to obtain overall majority control
of the company. It is submitted, however, that on the facts of Re
Smith and Fawcett Ltd there was some evidence that the director
was attempting to acquire the shares at an undervalue and this, at
least, should have shifted the onus onto the director to show that
he acted properly.
There are straws in the wind which indicate that in a case like
Re Smith and Fawcett Ltd the courts might in the future adopt a
much less tolerant and acquiescent attitude to directors who refuse
to register a transfer of shares. This is partly due to the fact that
the courts have belatedly recognized that the phrase “bona fide
in the interests of the company” lacks precision, particularly where
the company is “Balkanized”. As Lord Wilberforce said, this phrase
may… become little more than an alibi for a refusal to consider the
merits of the case, and in a situation such as this [i.e. where the company
is factionalised] it seems to have little meaning other than “interests
of the majority”.17
In Re Swaledale Cleaners Ltd1 87 Danckwerts L.J. opined that a blank
refusal by the board to register a transfer of shares would con-
stitute prima facie grounds for winding up a company on the just
175See Duke of Sutherland v. British Dominions Land Settlement Corp.
[1926] Ch.746 (Ch.Div.); Berry & Stewart v. Tottenham Hotspur Football and
Athletic Co. [1935] Ch.718 (Ch.Div.).
176 [1942] Ch.304 (CA.).
177 Ebrahimi v. Westbourne Galleries Ltd [1973] A.C. 360, 381 (H.L.); see also
supra, note 172.
118 Supra, note 167, 1716.
McGILL LAW JOURNAL
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and equitable grounds. This view was endorsed by Lord Cross who
stated in Ebrahimi v. Westbourne Galleries Ltd that “if the direc-
tors did not wish to give evidence and submit to cross-examination
the company would have to be wound up”.110
The observations of Danckwerts L.J. and Lord Cross were made
with reference to Re Cuthbert Cooper and Sons Ltd8 0 where
Simonds J. considered that a refusal by directors to register a
transmission of shares, where such power of refusal was clearly
conferred by the articles of association, was something for which
there was no redress. Provided the directors acted in a legally
proper manner and used their power for a legally proper purpose,
shareholders (or aspirant shareholders) could not complain of a
harsh exercise of that power. While the excessively legalistic basis
on which Simonds J. premised the legal relationship between share-
holders can be criticized,’18
it is more difficult to criticize the
substantive outcome of the case. Can it not be postulated with a
high degree of confidence that one of the normal attributes of the
incorporated partnership is that the members should have a right
to select their co-adventurers and that this is what restrictions on
the transfer or transmission of shares are primarily designed to
achieve? There is no evidence that either Danckwerts L.. or Lord
Cross would cavil at this proposition; all that they required was
that directors give reasons for the exercise of their discretion. This,
however, leaves open the question of what is a proper reason for
refusing to register a transfer of shares. On this neither judge
gave much guidance and the cases are, in general, of little help
beyond the proposition that directors in exercising their power
must not be predominantly or solely motivated by considerations
of self-interest. The serviceability of this rule in a situation such
as that in Re Smith and Fawcett Ltd is problematic in light of the
dicta that directors can be guided by considerations of the suit-
ability of prospective members as co-adventurers 8 2 and, in the
case of a private company, it is hard to see why this should not
be so. This, of course, leaves the transferor and transferee some-
what up in the air, and in the case of transmissions the deceased’s
estate is left holding an asset of doubtful value since the rights of
ownership cannot be effectively utilized.
119 Supra, note 177, 385.
10 [1937] Ch.392 (Ch.Div.).
181 See Prentice, Winding Up on the Just and Equitable Ground: The Partner-
ship Analogy (1973) 89 L.Q.R. 107, 118-20.
182Boyle (ed.), Gore-Browne on Companies 42d ed. (1972), 357.
1977]
THE TRANSFER OF SHARES
The question is what, if any, remedy should be provided in
this situation. While it can be plausibly argued that we should not
be overly concerned with this plight of the transferor or transferee,
as all they are being made to do is comply with the corporate cons-
titution, the same stoical attitude is not appropriate in the case of
the transmission of shares. By failing to provide a remedy in this
situation the law is recognizing covertly a system of private com-
pulsory acquisition without compensation. If this seems an. ex-
cessively colourful characterization of the situation one has merely
to dwell on the petitioners’ position in Re Jermyn Street Turkish
Baths Ltd’8 to test its accuracy. Also, in the transferor-transferee
situation the lack of freedom to transfer the shares can facilitate
minority oppression. Accordingly, it is submitted that the courts
should at least have the means available to deal with a situation
where the refusal of the directors to register a transfer of shares is
unduly harsh. A number of solutions are possible.
The least draconic remedy from the point of view of the direc-
tors is that found in clause 20(2) of the English Companies Bill,
1973. This sub-clause provided that,
[w]here an application is made to a company for a person to be registered
as a member in respect of shares which have been transfered or trans-
mitted to him by act of parties or operation of law, the company shall
not refuse registration by virtue of any discretion in that behalf conferred
by the articles unless it has served on the applicant, within the period of
twenty-eight days beginning with the day on which the application was
made, a notice in writing stating the facts which are considered to justify
refusal in the exercise of that discretion.
The problem with this sub-clause is that it does not go far enough.
While it does remove the veil of secrecy that often surrounds the
decisions of directors it provides no real solution for the situation
where the directors starkly state that they will be unable to work
harmoniously with the proposed transferee.
A more robust, and on balance preferable, solution is that
provided by section 47 of the C.B.C.A. which introduces the novel
concept of “constructive registered owner”. Subsection 47(2) pro-
vides that,
… a corporation whose articles restrict the right to transfer its securities
shall, and any other corporation may, treat a person as a registered
183 [1971] 1 W.L.R. 1042, [1971] 3 All E.R. 184 (C.A.). While the merits in
that case were all in favour of Mrs Peskoff, the petitioners ended up being
locked into a company from which they received no return on their invest-
ment and with respect to which the only possible purchaser was Mrs Peskoff.
Having survived the action alleging oppression in the management of the
company there was little need for her to behave generously.
McGILL LAW JOURNAL
[Vol. 23
security holder entitled to exercise all the rights of the security holder he
represents, if that person furnishes evidence as described in subsection
72(4) to the corporation that he is
(a) the executor, administrator, heir or legal representative of the heirs,
of the estate of a deceased security holder;
(b) a guardian, committee, trustee, curator or tutor representing a re-
gistered security holder who is an infant, an incompetent person or
a missing person; or
(c) a liquidator of, or a trustee in bankruptcy for, a registered security
holder.
Thus in certain circumstances, trustees in bankruptcy, personal
representatives and other stipulated fiduciaries may participate
in corporate management even though not registered as such. The
limited reach of this section should be noted; it does not deal with
all situations where there has been an inter vivos transfer but
basically covers only those involving forced transfers and situa-
tions where shares are held for an incompetent or an infant.
The solution to the restriction on transfer problem embodied
in subsection 47(2) would have provided a solution to some cases
which have arisen where the courts have appeared unable or un-
willing to provide a remedy. For example, the trustee in Re K/9
Meat Supplies (Guildford) Ltd’8 would, under paragraph 47(2) (c)
of the C.B.C.A., have been able to exercise the rights vested in the
bankrupt in that case. But it is submitted that the solution in sec-
tion 47 is both too broad and too narrow. It is too narrow in that
it only covers a restricted category of situations and thus fails
to recognize fully the oppressive potential present in any transfer
situation where the transferability of shares is limited. It is too
broad in that it compels a company to recognize as members
persons whom it would prefer to exclude even where the grounds
for exclusion appear meritorious. However, the force of this ar-
gument is blunted by the fact that the C.B.C.A. accords constitu-
tional status to a unanimous shareholders’ agreement which could
provide for the compulsory purchase of a member’s shares in
situations falling within subsection 47(2). Accordingly, the share-
holders can arrange for an alternative to the forced statutory
marriage embodied in subsection 47(2). The justification for this
section, that it “prevents a gap in the continuity of legal adminis-
tration of the corporation’s business”,8 5 is unconvincing. Firstly,
this may not necessarily be true and this problem is more neatly
Westbourne Galleries Ltd, supra, note 177, 387 per Lord Cross.
184 [1966] 1 W.L.R. 1112 (Ch.Div.). This case was criticized in Ebrahimi v.
185Proposals, supra, note 31, vol.I, para.160.
19771
THE TRANSFER OF SHARES
solved by requiring a company to have a plurality of directors.’w
Secondly, this argument fails to recognize the legitimate interests
of a company in controlling the admission of new members.
The third and probably most satisfactory solution is to provide
the owner with the right to petition the court to have his shares
compulsorily acquired by the majority where the company refuses
to register a transfer. This could be achieved by extending the con-
cept of oppression embodied in any general oppression remedy’7
and this would certainly be an improvement on the present situa-
tion.1 8 8 The argument against such a remedy is that it might enable
a shareholder to extricate himself from a bargain which he has
freely entered into and also, that it might put unfair financial
pressures on the company or his fellow shareholders. While the
first of these arguments has some merit, 8 9 it is based on the rather
unrealistic belief that because the company is a thing of perpetual
duration then the relationship between shareholders should also be
perpetual. The financial hardship aspect of the matter could be
dealt with by an appropriate court order.1 90
ISSUER-TRANSFEREE RELATIONSHIP
Most of the aspects of the issuer-transferee relationship have
already been touched upon in the previous section. The obligation
of the issuer to register a transfer, and the circumstances in which
it is excused from doing so, affect both the transferor and trans-
feree equally. 191 The protection provided to the issuer against an
improper transfer has also already been dealt with. To recap, the
issuer is entitled to require a signature guarantee 9 2 but, as we have
seen, it cannot require an endorsement guarantee that warrants
not only the genuiness of the signature but also the rightfulness of
the transfer.’ 93 Also, the issuer can require assurances that the
186 See, e.g., Minutes of Evidence taken before the Company Law Com-
mittee (Lord Jenkins, Chairman), Cmnd 1749, 836, parasA059-62.
8 7 See C.B.C.A.,
1
s.234. Arguably, para234(2) (c) would cover a situation
where directors unreasonably refuse to register a transfer of shares.
188 The present solution seems
to be either compulsory liquidation or
registration of unwanted members; see, e.g., Ebrahimi v. Westbourne Galle-
ries Ltd, supra, note 177.
189 See, e.g., Re Suburban Hotel Co. (1867) 2 ChApp.737.
190 See, e.g., C.B.C.A., para234(3) (f).
191 C.B.C.A., subs.71(1) merely speaks in terms of the obligation to register
where “a security in registered form is presented for transfer”.
192 C.B.C.A., ss.72 and 65.
193 C.B.C.A., subs.65(3).
McGILL LAW JOURNAL
[Vol. 23
endorsement is effective 94 which is normally only a problem where
the transfer is made by an agent or a fiduciary. The basic result
of these rules is that an issuer will not be “liable to the owner
or any other person who incurs loss as a result of the registration
of a transfer of a security”195 if the necessary endorsements are
provided and the issuer was under no duty to enquire into adverse
claims. All these aspects of the transfer process have already been
noted, and, as we have seen, their general purpose is to restrict the
enquiries that the issuer must and can make in order to expedite
the transfer process. Lastly, the rule in Sheffield Corporation v.
Barclay 96 appears to have been abrogated, although a person who
presents a security for registration of transfer does make certain
warranties.1’9
CONCLUSION
If the experience of the United States with Article 8 of the U.C.C.
is any guide then Part VI of the C.B.C.A. should achieve its ob-
jective of making securities negotiable and fulfilling adequately
the needs of the commercial community. The minor departures
from Article 8 which Part VI introduces, in particular the consti-
tutional effect given to unanimous shareholder agreements, 19 can
only be seen as an improvement. There, of course, remains the
question of the constitutionality 9” of Part VI of the C.B.C.A., but
this is something beyond the purview of this article.*
194 C.B.C.A., subs.72(1).
195 C.B.C.A., subs.74(1).
196 Supra, note 79.
197 C.B.C.A., subs.59(1).
198 See C.B.C.A., subs.45(8).
199 See Proposals, supra, note 31, vol.I, paras.15, 16 & 169.
* Professor R. McLaren of the University of Western Ontario read an
early draft of this article and made a number of helpful suggestions for
improvements. For its blemishes I, of course, remain responsible.
