Corporate Form: Organizational Matters PDF

The Corporate Form: Organizational Matters Canadian Business and the Law, EIGHTH EDITION Objectives After studying this chapter, you should have an understanding of a corporation as a legal person the distinction between federal and provincial incorporation the share structure of a co...

The Corporate Form: Organizational Matters Canadian Business and the Law, EIGHTH EDITION Objectives After studying this chapter, you should have an understanding of a corporation as a legal person the distinction between federal and provincial incorporation the share structure of a corporation the selection of a corporation’s name how a corporation is created how a corporation is financed how securities are regulated 2 The Corporation Defined The corporation is the predominant business vehicle in modern commerce. It is a separate legal entity and is treated as a legal person. The corporation alone is responsible for its own debts and other liabilities. The shareholders are not responsible for a corporation’s default on its liabilities. 3 Landmark Case 15.1 (1) Salomon v Salomon Ltd, AC 22 (HL) Salomon carried on a profitable shoe-manufacturing business and formed a corporation to run the business. He and his family were the only shareholders, with Salomon owning 20 001 shares and family members owning 6 shares. Salomon fully controlled the corporation and was also a secured creditor of the corporation. The business suffered financial problems and became insolvent. 4 Landmark Case 15.1 (2) Salomon v Salomon Ltd, AC 22 (HL) Creditors sought to collect their debts from Salomon personally, suggesting it was improper for an individual to conduct his business through a one-person corporation to secure limited liability. Resolution: o House of Lords confirmed that there is nothing wrong with a shareholder being a creditor of the corporation, even when that shareholder essentially controls the company in question. o Creditors knew they were dealing with a limited liability company on an unsecured basis. 5 Stakeholders in the Corporation (1) stakeholder: One who has an interest in a corporation. Internal stakeholders are individuals or groups who have a direct or indirect role in governing the corporation, and determining its mission and how that will be achieved, such as shareholders, directors, and officers. o officers: High-level management employees appointed by directors who manage day-to-day operations of the corporation.  Examples: president, secretary, treasurer 6 Stakeholders in the Corporation (2) External stakeholders are people who have dealings with the corporation but without a role in its governance. o Examples: customers, employees, creditors, government Corporation law seeks to regulate the relationships among the corporation’s internal stakeholders, whose interests may at times conflict with one another. 7 Pre-Incorporation Issues Decisions that must be made include the following: o whether to incorporate federally or provincially o what type of shares will be available and to whom o what to name the corporation 8 Provincial and Federal Incorporation Both levels of government have passed legislation that provides for the incorporation of companies. Federally incorporated corporations have a right to carry on business in each province. Provincially incorporated corporations have the right to carry on business only in the province in which they are incorporated but can be licensed to carry on businesses in other provinces. 9 Shares and Shareholders (1) The incorporators must decide on a share structure. A share represents an ownership interest in the issuing corporation. o Shareholders do not have the right to use the assets of the corporation or any right to directly control or manage the corporation. o Shareholders have those rights that specifically attach to their share. share structure: The class or classes of shares the corporation will issue, their rights and privileges, and the number issued. 10 Shares and Shareholders (2) A corporation may have one type or class of shares, which will have all the basic shareholder rights attached to it: o the right to vote for the election of directors o the right to receive dividends declared by the directors o a right to a share in the proceeds on dissolution of the corporation, after the creditors have been paid 11 Shares and Shareholders (3) Typically, the share structure will include different classes of shares which may include a combination of the following various rights and privileges: o voting rights o financial rights o preference rights o cumulative rights o redemption rights The number of shares can be limited to a particular number of shares or left open-ended (unlimited). 12 Availability of Shares (1) widely held corporation: A corporation whose shares are normally traded on a stock exchange. o Widely held corporations are subject to regulation pursuant to the relevant securities legislation. o Shares are normally available to the public. 13 Availability of Shares (2) closely held corporation: A corporation that does not sell its shares to the public. o This is the most common form of corporation and is commonly referred to as a “private corporation.” o They are not subject to securities legislation as long as they meet private corporation requirements, such as a limited number of shareholders. o They may be subject to a lower tax rate. o Examples: McCain Foods, Irving companies, Holt Renfrew 14 Who May Own Shares? A share is a piece of property and is freely transferable unless there is a restriction in place. In widely held corporations, shares are almost always freely transferable. In closely held corporations, it is common to have a provision in the incorporating documents that shares cannot be transferred without the agreement of the directors or a majority of the shareholders of the corporation. o “A right of first refusal” means that the shareholder wishing to sell must first offer their shares to the directors (or shareholders) at the same price they have negotiated with the outsider. o This gives the insiders one last chance to acquire the shares for themselves instead of having to welcome a new investor to the company. 15 Business Application of the Law 15.1 (1) Rogers Communications and Dual-Class Shares Rogers was founded by Ted Rogers in 1960, with a dual-class share structure which included voting shares and non-voting shares. After his death in 2008, Edward Rogers (chair of the Board of Directors) attempted to terminate the CEO, against the wishes of fellow board members, which included other family members. The board blocked the plan and voted to remove Edward as chair of the board. Edward then replaced 5 of the 14 directors, who reinstated Edward as chair. 16 Business Application of the Law 15.1 (2) Rogers Communications and Dual-Class Shares How was this possible? o Ted had left the voting shares to a trust for his family; Edward was the chair of the trust. o Rogers Control Trust held 97 percent of the outstanding Class A Voting shares and approximately 9 percent of the Class B Non-Voting Shares of RCI. o The Class B shares pay dividends but had no voting rights. o Although the trust owned less than 30 per cent of the company’s equity, it controlled more than 97 percent of the votes. 17 A Corporate Name (1) All jurisdictions require a company to be identified by a name or designated number. The corporation’s name must o be distinctive o not cause confusion with any existing name or trademark o include a legal element (Ltd, Corp, Inc, etc.) o not include any unacceptable terms 18 A Corporate Name (2) Care must be taken when selecting a name. o If the name that is confusingly similar to the name of another business, the entrepreneurs can be sued for trademark infringement and the tort of passing off. o They will be liable for any damages that the other business has suffered and perhaps be ordered to change the name of their corporation. Instead of a distinctive name, corporations can have a numbered name, followed by Canada, Ltd, Inc, etc. o shelf company: A company that does not engage in active business.  Often incorporated by law firms for future use by their clients. 19 Case 15.1 (1) Aquatera Utilities Inc v Aquaterra Water Management Inc, 2018 ABQB 962 Aquatera Utilities Inc was incorporated in Alberta and acquired its name in 2003. o Aquatera Utilities’s head office is in Grande Prairie and provides water, sewer, waste handling, and recycling services to Grande Prairie and the greater Peace River Country region. Aquaterra Water Management Inc (Aquaterra Water) changed its name to Aquaterra Water in 2014. o It operated in oilfield waste management and water disposal for the petroleum industry. Its head office is in Red Deer, and operates in Alberta, Saskatchewan, British Columbia, North Dakota, and Texas. 20 Case 15.1 (2) Aquatera Utilities Inc v Aquaterra Water Management Inc, 2018 ABQB 962 Aquatera Utilities requested that the Corporate Registrar direct Aquaterra Water to change its name. In 2016, the Registrar found the names were confusingly similar in contravention of the Business Corporations Act and associated regulations and directed Aquaterra Water to change its name. 21 Case 15.1 (3) Aquatera Utilities Inc v Aquaterra Water Management Inc, 2018 ABQB 962 Court: Upheld the registrar’s decision. o Identical names were not required; rather, the focus is whether it is reasonable to find that persons interested in dealing with one business would instead deal with the other similarly named business, having regard to the given factors. o In determining that the names were similar and caused confusion, the following factors were considered: distinctiveness of the name Aquatera, length of time used (2003 v 2014), similarity in nature of the business, degree of similarity in appearance and sound, and overlap of the geographic areas where the name is likely to be used. 22 The Process of Incorporation (1) The processes across Canada vary but are similar. incorporator: The person who sets the incorporation process in motion. articles of incorporation: The document that defines the basic characteristics of the corporations in Newfoundland and Labrador, New Brunswick, Alberta, Saskatchewan, Manitoba, Ontario, and federal jurisdiction. 23 The Process of Incorporation (2) The process can differ across provinces, but generally the process is as follows: o Submit articles of incorporation.  defines basic characteristics of the corporation o Submit a Notice of Registered Office.  lists the address of the corporation o Submit a Notice of Directors.  names and addresses of the directors o Submit a NUANS report.  to search for similar names already in use o Pay a filing fee. 24 Organizing the Corporation Once incorporated, directors will meet to start things up, including doing the following: o make bylaws  bylaws: Rules about day-to-day operating procedures of the corporation. o adopt forms of share certificates o authorize the issue of shares and securities o appoint officers o make banking arrangements The first meeting of shareholders must happen within 18 months of incorporation to elect directors. 25 Financing the Corporation Two methods exist for financing the corporation so it can operate: o debt financing o equity financing securities: Shares and bonds issued by a corporation. 26 Debt Financing A corporation can raise money by borrowing from banks, family, shareholders, and government. Bonds and debentures give the lender a charge on assets of the corporation, if the debt is not repaid. o bond: A document evidencing a debt owed by the corporation, often used to refer to a secured debt. o debenture: A document evidencing a debt owed by the corporation, often used to refer to an unsecured debt. These do not result in an ownership interest in the corporation. On insolvency, holders are entitled to repayment before shareholders. 27 Equity Financing A corporation can raise money by selling shares. Equity financing results in an ownership position. o Shares are issued to investors in exchange for a purchase price. o This provides a flexible means of raising capital. o It provides investors an opportunity to benefit from the corporation’s growth. Corporations can combine shares and bonds to raise money, and some can be given conversion rights. o conversion rights: The right to turn one type of security into another type. On insolvency, shareholders are entitled to share in the proceeds after all creditors are paid. 28 Business and Legislation 15.1 (1) Crowdfunding Crowdfunding funds a venture through soliciting small amounts of money from a large amount of people. o This is usually done online, with a pitch from the entrepreneur. The three models of crowdfunding: o Donation model: The lender receives nothing in return. o Lending model: The lender will be repaid. o Investment/equity model: The lender receives equity in return for financing. 29 Business and Legislation 15.1 (2) Crowdfunding In 2021, the Canadian Securities Administrators (CSA) approved a harmonized national framework for start-up crowdfunding. o Eligible issuers can raise up to $1.5 million (up from $500 000 in some jurisdictions) in any 12-month period. o An individual can invest $2500 (up from $1500 in some jurisdictions) or $10 000 if a registered dealer has provided advice. 30 Securities Legislation (1) The aims of all securities legislation are the following: o It provides the mechanism for the transfer of securities. o It ensures investors can access information needed to make informed decisions. o It ensures the system is such that the public has confidence in the marketplace. o It regulates those engaged in the trading of securities. o It removes or punishes those participants not complying with established rules. 31 Business and Legislation 15.2 A Co-operative National Securities Regulator Canada has 13 provincial and territorial securities regulators. In 2013, the federal government launched the Cooperative Capital Markets Regulatory System to administer a single set of rules and regulations to regulate the Canadian market. In 2018, the Supreme Court of Canada unanimously ruled that the Cooperative System does not improperly fetter the provinces’ sovereignty and falls within Parliament’s general powers to regulate trade and commerce. The federal government was unable to get opposition support to budget the funding of the organization. 32 Securities Legislation (2) All Canadian securities regimes have three basic requirements: registration, disclosure, and insider-trading restrictions. o Registration: Any company intending to sell securities to the public in a given province must be registered to do so with the relevant provincial securities commission. o Disclosure: The company must comply with disclosure or prospectus provisions.  prospectus: The document a corporation must publish when offering securities to the public. The purpose of a prospectus is to ensure full, true, and plain disclosure of facts that are likely to affect the price of the securities. 33 Securities Legislation (3) An issuer of securities has an obligation to continue to keep the public informed of its activities and must notify the public of any material change in its affairs. Investors who suffer losses in connection with misrepresentations or omissions by a company have, in addition to common law causes of action, a statutory right of action. 34 Case 15.2 Wong v Pretium Resources Inc, 2022 ONCA 549 Investors sought leave to sue in a class action. They alleged losses on the secondary market because Pretium Resources Inc failed to disclose in a timely manner an unsolicited negative opinion about a gold mining project (which was later determined to be unreliable and erroneous). Court of Appeal: o There was no omission of a material fact. o The policy objectives of the continuous disclosure regime are not served by the flooding the market with unreliable information and leaving it up to investors to determine what is valid information. 35 Insider-Trading Restrictions insider trading: Transactions in securities of a corporation by or on behalf of an insider on the basis of relevant material information concerning the corporation that is not known to the general public. insider: A person who has access to relevant material about a corporation. o They must report any trading in which they are engaged. o They must not pass on information to a tipee.  tippee: A person who acquires material information about an issuer of securities from an insider. The Criminal Code also includes insider-trading and tipping offences. 36 Case 15.3 Finkelstein v Ontario (Securities Commission), 2018 ONCA 61 Prominent mergers and acquisitions lawyer and four investment advisors were convicted by the Ontario Securities Commission (OSC) of tipping and insider trading. OSC was able to prove tipping and insider trading on the basis of circumstantial evidence such as frequency and date of phone calls, the pattern of trades, and the dates of trades. The OSC imposed a total of $2.9 million in penalties, costs, and disgorgement orders against the parties. The lawyer received a 10-year trading ban, a lifetime ban on becoming an officer or director of a public corporation, a $450 000 administrative penalty, and $125 000 in costs. 37 The Corporate Form: Operational Matters Canadian Business and the Law, EIGHTH EDITION Objectives After studying this chapter, you should have an understanding of the liabilities of a corporation the duties and liabilities of corporate directors and officers the rights and liabilities of shareholders and creditors how the corporation is terminated 39 Corporate Liability: Liability in Tort (1) A corporation is a legal person in the eyes of the law. It is responsible for its own actions, acting through human agents. A corporation may have primary or vicarious tort liability. o Primary liability arises when the corporation is regarded as the entity that committed the tort. o Vicarious liability arises when a tort has been committed by an agent or employee who is not a directing mind of the corporation. 40 Corporate Liability: Liability in Tort (2) identification theory: A theory specifying that a corporation is liable when the person committing the wrong is the corporation’s directing mind. directing mind: An individual who exercises decision making authority in matters of corporate policy. o Generally, it is the highly placed corporate officers who are classified as “directing” minds, while low-level employees are not. o A corporation may have more than one directing mind. 41 Corporate Liability: Liability in Contract Agency law largely determines when a corporation is liable on a contract and when it is not. The corporation will be bound by the contract as long as the corporate agent had actual or apparent authority. To avoid personal liability, the person signing a document on behalf of a corporation should ensure that the contract clearly indicates the person is signing on behalf of the corporation and not in their personal capacity. o It is best to avoid “pre-incorporation” contracts and use shelf corporations instead. 42 Corporate Liability: Criminal and Regulatory Liability (1) Criminal liability problem: How can a corporation be punished or jailed?—it has no body. Identification theory has been adapted to criminal law: o A corporation has committed the crime if the person who committed the crime was a directing mind of the corporation and committed it in the course of their duties to the corporation. Criminal law expands the range of individuals whose actions can trigger liability of the corporation to include senior officers. 43 Corporate Liability: Criminal and Regulatory Liability (2) For intentional criminal offences: o The corporation will be liable if a senior officer, acting in the scope of their authority and intending at least in part to benefit the corporation, engages in unsafe conduct, directs representatives to do it, or knows about the unsafe conduct but does nothing, and death or injury results. For offences based on negligence: o The corporation can be convicted if any representative causes injury or death by unsafe conduct, and the senior officer or officers in charge of the activities of the representative depart markedly from the reasonable standard of care necessary to prevent the incident. 44 Business Application of the Law 16.1 Death in the Workplace Four workers died, including the supervisor, when the scaffolding broke 13 storeys above ground. Five parties were found guilty of safety-related offences: o The supervisor had permitted the work without sufficient safety harnesses and permitted the use of marijuana. o A director was convicted of breach of the Occupational Health and Safety Act. o The project manager was sentenced to 3.5 years imprisonment for criminal negligence for allowing workers to board the scaffold when he was aware of insufficient fall protections. o Liability was also imposed on the scaffolding company and one of its 45 directors. Corporate Liability: Regulatory Offences regulatory offence: An offence contrary to the public interest. A corporation and sometimes its directors and officers face may penalties, including civil liability for damages. Corporations face liability in many areas, including the following: o taxation o human rights o pay equity o employment standards o consumer protection o unfair or anticompetitive business practices o occupational health and safety o environmental protection 46 Directors and Officers Directors are elected by shareholders, and manage or supervise the management of the business and the affairs of the corporation. o In addition to this general authority, directors have specific powers and obligations set out in legislation.  Examples: declare dividends, call shareholder meetings, adopt bylaws, and issue shares o Directors can appoint officers to carry out many of their duties and exercise most of their powers.  This does not relieve the directors of ultimate responsibility for the management of the corporation. 47 Business and Legislation 16.1 (1) Corporate Governance and Diversity Canada now requires some public corporations to disclose diversity information other than gender. The law applies to corporations incorporated under the CBCA and that have publicly traded securities. o The law requires disclosure of the number/percentage of the board of directors and senior management who are women, Aboriginal persons, members of visible minorities, and people with disabilities. 48 Business and Legislation 16.1 (2) Corporate Governance and Diversity o The amendments do not impose quotas or any specific diversity requirements but instead introduce a “comply or explain” regime. o Corporations are required to disclose if they have a diversity and inclusion policy, and if not, to provide an explanation why. 49 Duties of Directors and Officers Directors and officers owe two types of broad duties: fiduciary duties and competence. Fiduciary duties include the following: o Directors and officers must act honestly and in good faith. o They cannot favour one group of shareholders over another, as their obligation is to the corporation as a whole. o They must not allow personal interest to conflict with their duty to the corporation. o They cannot intercept a corporate opportunity—a business opportunity in which the corporation has an interest. 50 Duties of Directors and Officers: The Fiduciary Duty Self-dealing contract: A contract in which a fiduciary has a conflict of interest. o Example: A director has materials on hand that the corporation could purchase—the director has a duty to get a good price, but personally would want to sell for a high price. o There are provisions that allow self-dealing contracts, because some might be beneficial to the company. Corporate opportunity: A business opportunity in which the corporation has an interest. o These are opportunities that, if the directors and officers were permitted to take up for themselves, would present a conflict similar to a self-dealing contract. 51 Landmark Case 16.1 Canadian Aero Service Ltd v O’Malley, 1973 CanLII 23 (SCC) Two corporate officers had been negotiating to win an aerial mapping contract. Both officers left to set up their own company, which began to pursue the very same line of work as their former employer, and successfully bid on the contract. Court: o The executives were liable to account to former employer for the profits they made under the contract. o They had breached their fiduciary duties by taking something that belonged to the corporation. 52 Ethical Considerations 16.1 (1) Corporate Social Responsibility and the Evolution of Director’s Fiduciary Duty Voluntary actions by a corporation in an economic, social, and environmentally sustainable manner are becoming more common on agendas of corporations CSR is underpinned by the notion that business is accountable to a wide range of stakeholders, including employees, suppliers, customers, government, non-governmental organizations, and the community. Example of CSR: Maple Leaf Foods launching Maple Leaf Centre for Action on Food Security, to reduce food insecurity in Canada. 53 Ethical Considerations 16.1 (2) Corporate Social Responsibility and the Evolution of Director’s Fiduciary Duty In 2019, the Canada Business Corporation Act (CBCA) was amended to codify the permissive standard for fiduciary duty: o When acting with a view to the best interests of the corporation under paragraph (1) (a) the directors and officers of the corporation may consider, but are not limited to,  the interests of shareholders, employees, retirees and pensioners, creditors, and consumers, and governments; the environment; and the long-term interest of the corporation 54 The Duty of Competence Directors and officers must exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances. 55 Case 16.1 (1) Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68 Wise Stores Inc was a publicly traded company and operated 50 junior department stores in Québec with annual sales of $100 million. Majority shareholders were the Wise brothers. In 1992, Wise Inc acquired all of the shares of Peoples Department Stores, and the Wise brothers became its sole directors. The companies were doing poorly. The Wise brothers implemented a joint inventory purchasing policy on the recommendation of the companies’ vice-president of administration and finance. 56 Case 16.1 (2) Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68 Peoples purchased and paid for most of Wise Inc’s inventory, subject to reimbursement by Wise Inc. Peoples ended up extending large amounts of trade credit to Wise. Both companies went bankrupt. Trustee in bankruptcy, representing the interests of the unpaid creditors, sued the Wise brothers, alleging that in implementing the joint inventory procurement program, they breached their duties as directors of Peoples. 57 Case 16.1 (3) Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68 SCC: o Wise brothers did not owe a fiduciary duty to the creditors and owed their fiduciary duty only to the corporation. o Creditors can pursue an action based on breach of the duty of care. o The court endorsed the “business judgment rule” in assessing whether directors have fulfilled the duty of care. The rule holds that the court will not second-guess business judgments that are made honestly and on the basis of reasonable information. 58 Liabilities of Directors and Officers Generally, if a director commits a tort, it will be attributed to the corporation, by virtue of identification theory. Similarly, if a director (acting as agent of the corporation) breaches a contract, the actions will be attributed to the corporation. There are times when directors and officers have personal liability for a tort or contract. 59 Liabilities of Directors and Officers: Liability in Tort Courts do not agree on when the actions of a director, when carrying out their duties, can result in personal liability. But courts do agree that there can be personal liability. Directors and officers should take care not to commit torts. 60 Liabilities of Directors and Officers: Liability in Contract A director faces personal liability on a contract if the actions show that the director intended to assume personal liability: o The director contracts on their own behalf and on behalf of the company. o The director guarantees the contractual performance of the company. 61 Liabilities of Directors and Officers: Liability by Statute Statutes place obligations on directors, which, if not adhered to, can result in being personally liable. o Example: The Canadian Environmental Protection Act states that directors who participate in an offence may also be guilty of the offence. Other statutory breaches include the following: o failure to pay employee wages o failure to remit required taxes o insider trading o improperly transporting dangerous goods 62 Case 16.2 (1) Midwest Properties Ltd v Thordarson, 2015 ONCA 819, leave to appeal dismissed 2016 CanLII 30455 (SCC) Midwest purchased an industrially zoned property and building. Midwest became interested in acquiring the adjoining property owned by Thorco Contracting Limited, which was controlled by John Thordarson. Midwest’s environmental studies found PHC contamination on both properties caused by Thorco activities. 63 Case 16.2 (2) Midwest Properties Ltd v Thordarson, 2015 ONCA 819, leave to appeal dismissed 2016 CanLII 30455 (SCC) Thorco had breached orders related to the storage of the PHCs. Thorco and Thordarson had been convicted of environmental offences and had not complied with orders to clean up the property purchased by Midwest. Midwest was successful in suing Thordarson for damages, in his personal capacity, pursuant to the EPA, as the individual who controlled the pollutants. o Midwest sued for nuisance and negligence, pursuant to s 99 of the EPA (Ontario). 64 Business Application of the Law 16.2 (1) Avoiding the Risk of Personal Liability Directors can reduce their exposure to personal liability by exercising care, diligence, and skill in their duties. Directors can meet the statutory standard of care by being attentive, active, and informed. In this regard, directors should o regularly attend directors’ meetings o read all relevant materials o ask questions and speak up at meetings o keep personal notes of meetings and review minutes of meetings 65 Business Application of the Law 16.2 (2) Avoiding the Risk of Personal Liability Directors should (cont’d) o make all their decisions informed decisions o do what is necessary to learn about matters affecting the company o identify possible problems within the company o stay apprised of and alert to the corporation’s financial and other affairs o ensure that they receive reliable professional advice Directors should ensure an indemnification agreement with their company is in place. Directors should have D& O insurance. 66 Shareholder Liability (1) Shareholders have few responsibilities with respect to the corporation. Unlike directors and officers, the shareholder has no duty to act in the best interests of the corporation. A shareholder o can freely compete with the corporation o is not obligated to attend shareholder meetings, cast their vote, read the corporation’s financial reports, or take any interest whatsoever in the progress of the corporation o is not generally liable for the debts and obligations of the corporation because of the principle in Salomon 67 Shareholder Liability (2) lifting the corporate veil: Determining that the corporation is not a separate legal entity from its shareholders. This is rarely done by the courts, except when they are satisfied that a company is a “mere facade” concealing the true facts. It must be shown that there is complete domination and control by the shareholder, and that the corporate form must have been used as a shield for conduct akin to fraud. 68 Business Application of the Law 16.3 (1) Yaiguaje v Chevron and Piercing the Corporate Veil From 1964 to 1992 in Ecuador, Texaco dumped billions of litres of toxic oil- drilling waters into open-air pits. The contamination had devastating effects on the rain forest and rivers and caused long-term adverse health effects on residents. Chevron had acquired Texaco and was ordered by the Ecuadorian Court to pay US$9.5 billion in damages. Chevron refused to pay the award and as it no longer had assets in Ecuador. 69 Business Application of the Law 16.3 (2) Yaiguaje v Chevron and Piercing the Corporate Veil US courts refused to enforce the judgment in the United States. A claim against Chevron Canada (CC) was rejected on the basis that it was a different entity from Chevron. The Canadian court also refused to lift the corporate veil, holding there was insufficient evidence to suggest the CC was a mere puppet of Chevron. 70 Shareholder Rights There are three categories of shareholder rights: o right to vote o right to information o financial rights Different classes of shares allow for different rights associated with them, and different levels of shareholder participation in the corporation. 71 Classes of Shares common share: A share that generally has a right to vote, share in dividends, and share in proceeds on dissolution. preferred share: A share or stock that has a preference in the distribution of dividends and the proceeds on dissolution. 72 Shareholder Right to Vote The shareholder’s right to vote includes the following rights: o one shareholder general meeting each year o be given notice of the meeting o attend the meeting o ask questions o introduce motions o have a proxy  proxy: A person who is authorized to exercise a shareholder’s voting rights. 73 Shareholder Right to Information The right to information includes the following rights: o inspect the annual financial statements o apply to the court to have an inspector appointed if it can be shown there is serious concern about mismanagement o inspect certain records, including minute books o know whether directors have been purchasing shares of the corporation 74 Shareholder Financial Rights Financial rights include the following rights: o the right to receive any dividend declared by the corporation o share in the assets of a corporation on dissolution may include pre-emptive rights pre-emptive rights: A shareholder’s right to maintain a proportionate share of ownership by purchasing a proportionate share of any new stock issue. 75 Shareholder Remedies Shareholders have remedies available to them if they are dissatisfied with the corporation: o sell shares (easy in public corporations; may come with restrictions in private ones) o dissent and appraisal right: The right of shareholders who dissent from certain fundamental changes to the corporation to have their shares purchased at a fair price. o derivative action: A suit by a shareholder on behalf of the corporation to enforce a corporate cause of action. o oppression remedy: A statutory remedy available to shareholders and other stakeholders to protect their corporate interests.  It is used when the actions of the corporation have oppressed or prejudiced interests of shareholders. 76 Other Shareholder Remedies (Optional) Shareholders’ agreement: An agreement that defines the relationship among people who have an ownership interest in a corporation. Unanimous shareholders’ agreement (USA): An agreement among all shareholders that restricts the powers of the directors to manage the corporation. o This ensures control remains with the shareholders. 77 Case 16.3 (1) Mennillo v Intramodal Inc, 2016 SCC 51 Intramodal was owned by Menillo and Rosati. They conducted their affairs informally and did not often comply with the formal requirements of the CBCA. For example, when shares were issued, neither party paid for them and Mennillo’s share certificate was not signed. They rarely put anything in writing, among other things. As court noted, “this was a two-person, private company in which the dealings between the parties were marked by extreme informality.” Menillo wished to resign from the corporation as director and officer. 78 Case 16.3 (2) Mennillo v Intramodal Inc, 2016 SCC 51 Mennillo commenced an oppression action against Intramodal and Rosati, alleging that he had been wrongfully removed as a shareholder as proper CBCA procedures were not followed. Court: o Although Intramodal failed to comply with corporate law formalities in registering the transfer of shares, the SCC affirmed that oppression is judged by “business realities,” not “narrow legalities.” o The courts will consider the oppression remedy in context, assessing the parties’ reasonable expectations based on the nature of their relationship and how they conducted business. 79 Business Application of the Law 16.4 (1) Managing Risk Through Shareholders’ Agreements Agreements allow the shareholders to do the following: o define their relationship o provide mechanisms if the relationship encounters problems o provide means for undoing the relationship 80 Business Application of the Law 16.4 (2) Managing Risk Through Shareholders’ Agreements Agreements should address the following: o management of the company o protection for the minority shareholders o control over who the other shareholders are o provision of a market for shares o capital contribution o buy–sell arrangements in case of dispute 81 Creditor Protection (1) A corporation is responsible for its own liabilities, including debts. o But shareholders cannot strip a corporation of its assets in order to avoid paying creditors.  This is illegal, and creditors have a priority claim over shareholders to the assets on insolvency. 82 Creditor Protection (2) The Canada Business Corporation Act includes provisions that prevent abuses by shareholders, such as the following: o a corporation paying dividends to shareholders if doing so would jeopardize its ability to pay its own debts as they fall due o paying dividends if that would make the company insolvent Supreme Court has stated directors also owe duty of care to creditors. o Creditors can use the oppression remedy to protect from prejudicial conduct by directors. 83 Termination of the Corporation Corporations can be terminated in different ways: o winding up: The process of dissolving a corporation.  This is a complex process. o lapse: The corporation neglects to file an annual report or to follow other reporting requirements.  This is simple and results in company being struck from corporate register. o Courts can order a company terminated if it is the only way to do justice between the corporation and its shareholder(s). o Corporations can go bankrupt, resulting in termination. 84 Introduction to Property Law Canadian Business and the Law, EIGHTH EDITION Objectives After studying this chapter, you should have an understanding of the meaning of property the different forms of property how property can be acquired the types of legal rights and obligations associated with property 86 Categories of Property Personal Property Real Property land and whatever is permanently all property, other than land and attached to it what is attached to land 87 Real Property Real property consists of land and whatever is permanently attached to it and is also referred to as “immovables.” o real property: Land and whatever is permanently affixed to it or part of it, such as buildings, mines, and minerals and the legal rights associated with those things. o Examples:  land, buildings, mines, and minerals  Aboriginal title lands Each province operates a system for publicly registering title to land and legal interests related to land. 88 Business Application of the Law 17.1 (1) Aboriginal Title Aboriginal title: Title to land that belongs to Indigenous Peoples that is protected by section 35(1) of the Constitution Act, 1982, and which incorporates the right of enjoyment and occupancy, the right to possess the land, the right to economic benefits of the land, and the right to proactively use and manage the land. o It is established by asserting a claim over particular lands. o It is based on proof of sufficient pre-­sovereignty occupation that is continuous and exclusive. Aboriginal title rejects the terra nullius doctrine (that no one owned the lands prior to European assertion of sovereignty). At present, there are many ongoing court cases involving claims of Aboriginal 89 title. Business Application of the Law 17.1 (2) Aboriginal Title Aboriginal title is distinct from other interests such as fee simple. o It is a collective form of title held for present and future generations. o It cannot be sold. The rights of the Aboriginal title holder include the following: o the right to possess, enjoy, manage, and occupy o the right to the economic benefit of the land o uses of the land are not restricted to traditional uses 90 Business Application of the Law 17.1 (3) Aboriginal Title A duty to consult and accommodate is triggered when the Crown has knowledge of the potential existence of Aboriginal rights or title and that a proposed activity might adversely affect the Aboriginal right or title. The required level of consultation and accommodation required of the Crown matches the strength of the claim. Once title is established: o It confers the right of exclusive use. o Development of the land normally requires the consent of the title holder. 91 Personal Property (1) Personal property includes everything other than what is included as real property. o personal property: All property, other than land and what is attached to it. Personal property falls into two major categories—tangible and intangible. o tangible property: Personal property that is mobile, the value of which comes from its physical form.  Tangible property refers to property that is concrete or material, and is sometimes referred to as chattels or moveables.  Examples: delivery truck, inventory o Intangible property: Personal property, the value of which comes from legal rights.  Intangible property is sometimes referred to as “choses in action.” 92 Personal Property (2) There is no comprehensive system for publicly registering title to personal property as there is with real property. Some specialized registries exist for items such as motor vehicles, patents, and trademarks. Personal property can be mobile, so having a provincial registration system would not work. Personal property value may not justify the cost of administering a registration system. 93 Business Application of the Law 17.2 Should Everything Be Capable of Being Privately Owned? The Case of Fresh Water: Property or a Human Right? Should all things be capable of being owned privately by individuals or businesses? The United Nations General Assembly adopted a resolution recognizing the right to safe and clean drinking water as a human right. In Canada, ownership of most bodies of water is vested in the provincial Crown. Management of Canada’s fresh water is complicated because of the division of powers of the Constitution Act, 1867. 94 Acquiring Property Rights Land can be acquired through purchasing or leasing. Goods can be acquired by purchasing or manufacturing. Insurance coverage is bought by paying premiums. Accounts receivables are created by delivering goods or services for payment at a later date. Some intellectual property is owned as a result of being created, and some as a result of being used. In some cases, ownership is acquired by finding and taking possession of lost or abandoned personal property. 95 Business Application of the Law 17.3 (1) Is Sperm or Other Human Tissue “Property,” and If So, What Legal Rights and Obligations Should Attach to This Form of Property? Donors started a class action lawsuit against UBC after sperm they stored there was destroyed—cited violation of care and diligence when warehousing goods. o The court determined that stored sperm constituted “goods” for the purpose of warehousing legislation. In 2009, the courts found that liver tissue removed during a procedure became property of the hospital after being removed. 96 Business Application of the Law 17.3 (2) Is Sperm or Other Human Tissue “Property,” and If So, What Legal Rights and Obligations Should Attach to This Form of Property? Even as “property,” sperm and ova cannot be commercially traded. It is unclear whether sperm or ova of a deceased person are property and thus an inheritable part of their estate. In any event, legislation requires written consent to use or harvest sperm or ova of a deceased person. 97 Legal Rights Associated with Property Unlike the Constitution of the United States, Canada’s Charter of Rights and Freedoms does not provide for the constitutional protection of property. Property rights are protected through various statutes. o Example: The Bill of Rights says Canadians have the right to enjoy property and not be deprived of it except by due process of law. o Specialized legislation also exists to protect certain types of property.  Example: Patent Act Many property rights are protected by the common law. o Nuisance, trespass, and passing off are examples of torts that protect property rights. 98 The Bundle of Rights The bundle of rights refers to the collection of legal rights associated with the ownership of property. o bundle of rights: The set of legal rights associated with property, which usually includes the right to exclude, the right to possess and use, and the right to transfer to others or dispose of property. The bundle of rights of a property owner include the following: o right to exclude o right to use and possess o right to transfer or dispose These rights are subject to limitations. o For example, someone who rents property may not transfer or dispose of it. 99 Right to Exclude Property owners may exclude others from entering an owner’s land and have legal rights to prevent others from interfering with an owner’s use of their property. For example, the owner of a copyright has the right to prohibit others from copying or modifying a copyrighted work (such as a book). The tort of trespass allows a real property owner to exclude others from their property. 100 Case 17.1 (1) Tŝilhqot’in Nation v British Columbia, 2014 SCC 44 The Tŝilhqot’in Nation have lived for centuries in an area of land located in South Chilcotin, BC. The lands in question had never been surrendered in a treaty. In 1983, BC granted a commercial licence to a lumber company to log the land, which was opposed by members of the Tŝilhqot’in Nation. In 1998, members of the Tŝilhqot’in Nation brought a claim of Aboriginal title over the lands. 101 Case 17.1 (2) Tŝilhqot’in Nation v British Columbia, 2014 SCC 44 In 2014, the Supreme Court of Canada found that the evidence established that the lands were regularly used and continuously occupied by the Tŝilhqot’in Nation, who treated it exclusively as theirs, repelling other people from the land and requiring permission for outsiders to pass over it. Once Aboriginal title was established, a government may only infringe on the rights of the Aboriginal title holder for a compelling and substantial purpose. 102 Technology and the Law 17.1 (1) Drones, Airspace Rights, and the Right to Exclude Can a private property owner prohibit operation of a drone over their property? The common law does not establish a specific height at which such rights end. Cases suggest that ownership of airspace over one’s property is limited to “such height as is necessary for the ordinary use and enjoyment of [the] land.” Can a property owner sue for trespass? o The law is unclear, intrusion may be too transient. 103 Technology and the Law 17.1 (2) Drones, Airspace Rights, and the Right to Exclude Transport Canada regulations are silent regarding the right to operate over private property. o Drones must not be operated at altitudes higher than 400 feet, in controlled airspace, or closer than 30 metres to a person (or 5 metres for advanced operators). o Operators are prohibited from operating over a bystander. Operators are subject to privacy laws with respect to collecting and storing data. Municipal bylaws may place further restrictions on drone operation. 104 Right to Possess and Use Ownership of property and the right to possess it are normally held by the same person or entity, but these rights may be separated, such as in a lease. o lease: A contract that transfers possession of land or personal property in exchange for a fee. An inventor who patents their invention may grant a licence to permit someone else to manufacture and sell the product or use the process in exchange. o licence: Consent given by the owner of rights to someone to do something only the owner can do. A business may sue for passing off if someone attempts to use its name and goodwill. 105 Right to Transfer or Dispose Normally, the rights associated with the ownership of property also include the right to dispose of the property or transfer the property (such as by selling it) to someone else. However, there are exceptions, for example: o Aboriginal title lands may not be sold. o Property that is leased cannot be transferred or sold by the lessee. o Rights may be subject to a trust which limits the use of the property by the legal title holder, who holds it for the beneficiaries of the trust.  trust: A legal arrangement that is characterized by one party holding legal title of property for the benefit of someone else. 106 Legal Obligations Associated with Property Ownership Property ownership may entail legal obligations. For example: o Most municipalities impose a tax on the ownership of real property in order to fund municipal services such as police and fire protection and road maintenance. o Landowners may also have obligations under legislation to co-operate with intrusions on their land. o Landowners of environmentally sensitive property may have statutory obligations to protect the natural features of the property. o A municipality may impose land use rules in order to regulate development. 107 Bailment of Personal Property (1) bailment: Temporary transfer of possession of personal property from one person to another. o Examples:  lending a friend your car  leaving goods with an online retailer to sell to the public  leaving your car at a garage for repairs  paying a storage company to store your car  lending a lawn mower to your neighbour bailor: The owner of property who transfers possession in a bailment. bailee: The person who receives possession in a bailment. 108 Bailment of Personal Property (2) A bailee may have a duty to care for the property, and may also have certain rights in the bailed property. A bailment requires the following: o Personal property is voluntarily delivered to the bailee. o The parties intend for the bailee to have custody and control of the property. o The parties intend the property to be returned. Arrangements constituting bailments can sometimes be confused with a mere licence to leave one’s property where it would not otherwise be permitted. If a bailment relationship exists, the bailee has a common law duty of care toward the property and also the onus of proving loss or damage was not caused by failure to fulfill its duty. 109 Bailment of Personal Property (3) The liability of a bailee for bailed property will be governed by the common law and contract terms. Statutory rules may be imposed on special types of bailees such as warehouses and innkeepers. Bailees may not escape their responsibilities by turning over a bailed chattel to employees. Bailees are liable for the intentional wrongdoing of their employees. 110 Common Law Liability of Bailees At common law, the degree of care expected depends on numerous factors: o Is payment involved? o For whose benefit is the bailment? o What is the nature and value of the bailed property? o Are there special circumstances of the transaction? o What is the expertise of the bailee? 111 The Contract of Bailment A bailment arrangement can exist independently and does not require a contractual relationship, but a contract is advisable. The parties are free to negotiate the details of their own agreement and may alter the common law duties of the bailee. A contract will normally include a description of these aspects: o the services to be provided by the bailee o the price to be paid by the bailor and payment terms o the extent to which the bailee is liable for damage or loss o the remedies of the parties for failure to perform 112 Specialized Bailments (1) Certain bailments are subject to special regulations or rules: o transportation bailments o storage bailments o repair bailments o lodging bailments 113 Specialized Bailments (2) Repairs Storage The bailee has a lien against the The bailee must treat customer property for the value of the property as they would their own repairs as long as the bailee has property. possession of the property. Standard of reasonableness and o lien: The right to retain presumed liability for damages or possession of personal loss. property until payment for Contracts usually limit their service is received. liability to a certain amount. The bailee has a right to sell the The bailee has a lien over the property to recover charges if not property for unpaid storage fees paid for. and can sell the property if 114 unpaid. Specialized Bailments (3) Transportation Bailment Lodging carrier: A bailee who transports innkeeper: Someone who offers personal property. lodging to the public. Common carriers have a very high At common law, they must take standard of care: presumed great care of guests’ property and liability for damages or loss. are responsible for loss or theft. Limited legal defences for the In some cases, innkeepers can carrier. limit their liability to a specific Carriers include provisions in their amount, but protection is lost if agreements limiting their liability the loss was due to negligence or to a certain amount. a deliberate act. 115 Case 17.2 Letwin v Camp Mart, 2021 ONSC 4175, aff’d 2022 ONCA 475 A recreational vehicle seller agreed to store a customer’s holiday trailer for free. The lot had a locked gate and cameras, and a security company conducted regular checks. The trailer was stolen by thieves who used bolt cutters shortly after security check. As a gratuitous bailee, it had to show it was not grossly negligent and that it had kept the goods “as a prudent owner might reasonably be expected to take of his own goods in similar circumstances.” The duty of care was met. The bailee’s measures were similar to other similar businesses and improvements would not have stopped a motivated thief. 116 Business Application of the Law 17.4 Defining Liability in Contracts of Bailment Limiting the bailee’s liability is the key aspect in a bailment contract. Clauses limiting liability are vulnerable and can be challenged in some situations. o The bailee fails to bring an onerous standard term to the attention of the customer when a reasonable person should have known that the customer was unaware of the term and not consenting to it. o The contract wording is ambiguous or unclear. o There is a defect of contract arising during formation. o There is a fundamental breach by bailee or unconscionability. 117 Intellectual Property Canadian Business and the Law, EIGHTH EDITION Objectives After studying this chapter, you should have an understanding of the nature of intellectual property the rights that attach to intellectual property how intellectual property is acquired how to protect the intellectual property assets of an organization 119 Intellectual Property (1) intellectual property: The results of the creative process, such as ideas, the expression of ideas, formulas, schemes, trademarks, and the like; also refers to the protection attached to ideas through patent, copyright, trademark, industrial design, and other similar laws. o Examples: written works, recipes, formulas for products, jingles, distinctive names, business and marketing plans It also refers to the bundle of right that people have on their ideas or how those ideas are expressed. 120 Patents patent: A monopoly to make, use, or sell an invention. Patents protect inventions and are essential to businesses in the pharmaceutical, electronic, chemical, and manufacturing industries. Patents may be used to exclude others from using new technology. They can include processes, such as pay-per-use billing systems and compositions such as compounds, machines and apparatuses as well as products or compositions of matter. 121 Case 18.1 (1) Monsanto v Schmeiser, 2004 SCC 34 Monsanto introduced Roundup Ready canola, a genetically modified canola resistant to Roundup, a Monsanto pesticide used for weed control. The canola plants could be sprayed with Roundup to kill weeds, without harming the crop. Monsanto licensed its Roundup Ready canola to farmers for a fee, provided the farmers purchased the canola seeds from an authorized Monsanto agent. 122 Case 18.1 (2) Monsanto v Schmeiser, 2004 SCC 34 Schmeiser did not purchase seeds from Monsanto, and instead he cultivated his own from Monsanto seeds that appear to have blown onto his property. Monsanto sued for patent infringement. Court: o The court confirmed the patentability of cells and genes, and held that the rights in patented genes and cells extend to plants containing them. 123 Exclusions from Patent Protection Exclusions include the following: things that receive protection under other areas of law o Example: software programs, as they receive protection under copyright law things that do not meet the definition of a patent o Example: scientific principles things that are, for policy reasons, not patentable o Example: illicit objects, methods of surgical treatment 124 Case 18.2 Canada (Attorney General) v Amazon.com Inc, 2011 FCA 328 In 1998, Amazon applied for a patent for a “one-click” system that reduced the steps for ordering over the internet. The Canadian Intellectual Property Office rejected Amazon’s patent application, on the basis it amounted to a business method or alternately, it did not fall within the meaning of “art” in the Patent Act. Amazon.com appealed to the Federal Court. Court: o A business method can be patentable if it fall within one of the categories of a process, machine, manufacture, composition of matter, or as in this case, “art.” 125 Requirements for Patentability A patent will be granted only for an invention that is new, useful, and unobvious. New: Any prior disclosure, public use, or sale prior to the filing renders it unpatentable. o One-year grace period if the inventor or someone who derived knowledge from the inventor makes a disclosure within the year preceding the filing of the application. Useful: There must be some ingenuity or inventive step, and it must have industrial value and a practical value. Unobvious: There must be some ingenuity or inventive step involved in the invention. Changes to something that would be obvious to someone skilled in the art are not patentable. 126 Patent Protection and Application (1) Patent protection, unlike some other intellectual property rights, does not arise automatically. A patent application is usually prepared by a patent agent. o They must apply to the Canadian Intellectual Property Office. o Timing of the application is critical because of the first-to-file system. patent agent: A professional trained in patent law and practice who can assist in the preparation of a patent application. 127 Patent Protection and Application (2) The inventor is generally the first owner of the invention and the person entitled to apply for a patent. Inventions by employees: Generally an employee will be the owner unless (1) the employee was specifically hired to produce the invention and makes the invention in the course of employment, or (2) there is an express or implied agreement that precludes the employee from claiming ownership of inventions developed during employment. 128 Patent Protection and Application (3) The preparation is complex and must include the following: o specifications: The description of the invention contained in the patent.  In other words, how it is made, or the best way to perform the process/method. o claims: The exclusive rights of the patent holder.  These are numbered, single-sentence definitions of the invention, and defines the exclusive rights during the patent period. 129 Patent Protection and Application (4) The application is examined by the Canadian Intellectual Property Office to ensure that the invention hasn’t already been invented and the application complies with the Patent Act. If approved, the patent is issued, and “patented” can appear on all manufactured goods (not mandatory, but legally useful so others see it). 130 Patent Protection and Application (5) If approved, the patent owner owns the right to exclude others from making, selling, or using the invention to which the patent relates for a period of 20 years from the date of filing the application (so long as fees are paid). Patents are national; they exist only in the country in which the application was made and granted. o An owner of a Canadian patent cannot stop the use or sale of the invention in the United States, unless the owner also has a U.S. patent. 131 Industrial Designs industrial design: The visual features of shape, configuration, pattern, ornamentation, or any combination of these applied to a finished article of manufacture. o Examples:  the shape and ornamentations applied to toys, vehicles, furniture, and household utensils, and the patterns applied to wallpaper or fabric  computer keyboards, cell phones, computer interfaces, electronic or computer-generated icons, and computer-generated animated designs 132 Requirements for Registration, Registration Process and Protection The application normally consists of a written description and a graphic depiction, photograph, or drawing. If the application meets the requirements of the Act, a certificate of registration will be issued. The registration gives the owner the exclusive right to make, import, or sell any article in respect to which the design is registered. The owner can stop competitors from manufacturing and selling a design that looks confusingly similar. The industrial design term is the later of 10 years from the registration date and 15 years after the filing date. 133 Trademarks trademark: A sign or combination of signs used to distinguish a person’s products or services from those of others. distinguishing guise: A shaping of wares or their container, or a mode of wrapping or packaging wares. 134 Traditional and Non-traditional Trademarks (1) a word (e.g., Exxon, Xerox, Lego, Billabong) words (e.g., The Body Shop, The Pink Panther, Shake ’n Bake) a slogan (e.g., “Just do it,” “Mr. Christie, you make good cookies”) a design (e.g., McDonald’s golden arches, Disney’s cartoon characters) a series of letters (e.g., ABC for a laundry detergent, BMW for a car) numbers (e.g., 6/49 for lottery services, 900 service for telephone operations) 135 Traditional and Non-traditional Trademarks (2) a symbol (e.g., a series of Chinese characters, Nike’s “swoosh”) a three-dimensional shape (e.g., Coca-Cola bottle, Perrier bottle) a hologram (e.g., dove in flight) a moving image (e.g., book being opened) a mode of packaging (e.g., goods wrapped in green cellophane) a sound (e.g., lion’s roar) a scent (e.g., scent of strawberry) 136 Traditional and Non-traditional Trademarks (3) a taste (e.g., taste of black licorice) a colour (e.g., red and yellow for Mastercard logo, colour ochre for background of Interac’s logo) a positioning of a sign (e.g., v-shaped stitching applied to a pocket, fanciful horse applied to a three-dimensional bottle) any combination of the above (e.g., the words “London Fog” with a depiction of Big Ben for a brand of clothing) 137 Common Law Trademarks (1) Trademarks may be registered or unregistered. If unregistered, they are often referred to as common law trademarks. Whether registered or unregistered, trademarks receive protection under both the common law and the Trademarks Act. o At common law, a trademark comes into existence when a business simply adopts and uses it. 138 Common Law Trademarks (2) Infringement of the trademark by a competitor using the same or a similar trademark can be addressed through the tort of passing off. A common law trademark has rights only in the geographic areas in which it has been used and in areas into which the reputation of the owner has spread. A registered trademark enjoys protection throughout the country. Registration is also advantageous in that it creates a presumption of ownership and validity. 139 Trade Names trade name: The name under which a sole proprietorship, a partnership, or a corporation does business. o Trade names are protected under trademark law. o Example: Apple (for Apple Inc) The adoption of a trademark may prevent the use of an identical or similar trade name, and vice versa. 140 Trademarks and Domain Names domain name: The unique address of a website. cyber-squatting: The bad-faith practice of registering trademarks or trade names of others as domain names for the purpose of selling the domain name to the rightful owner or preventing the rightful owner from obtaining the domain name. The complainant may negotiate the purchase of the name, or initiate court proceedings for trademark infringement. Domain name providers may have their own resolution procedures set up for companies to use. 141 Requirements for Registration of Trademarks (1) The applicant must do the following: o Demonstrate title to the trademark.  This is shown by use, filing of an application, and making it known in Canada.  A trademark can be registered on the basis of proposed use.  Actual use need not commence prior to the grant of registration, but if after three years from the date of registration the trademark is not in use, it may be cancelled. o Show that the trademark is distinctive or could become distinctive.  It must actually distinguish the goods—for example, invented words like “Lego”. o Show that the trademark is registrable. 142 Requirements for Registration of Trademarks (2) A trademark is not registrable under these conditions: o It is primarily the name or surname of an individual who is living or has died within the preceding 30 years (e.g., “Smith” or “Joe White”). o It is descriptive of the character or quality of the wares or services, or their place of origin (e.g., Ontario Wine or Red Wine). o It is deceptively misdescriptive of the character or quality of the wares or services. o It is the name in any language of any ware or service in connection with which it is used or proposed to be used (e.g., “avion” for airplanes) o It is confusing with regard to another registered trademark (e.g., “Mego” ). o It is an official or prohibited mark. 143 Case 18.3 (1) Diageo Canada Inc v Heaven Hill Distilleries et al, 2017 FC 571 Diageo sells varieties of its rum under the brand, Captain Morgan, using a nautical theme and a fanciful depiction of the seventeenth century privateer, Sir Henry Morgan. Diageo owns 10 Canadian trademark registrations of various depictions of Sir Henry Morgan. Later, Heaven Hills, an American company, sold rum in Canada under the Admiral Nelson brand, used a nautical theme and featured a fanciful depiction of Lord Nelson. Diageo sued for passing off, infringement of registered trademarks, and the depreciation of goodwill. 144 Case 18.3 (2) Diageo Canada Inc v Heaven Hill Distilleries et al, 2017 FC 571 Court: o The three components of passing off were proven:  Diageo had significant goodwill in the Captain Morgan brand.  Heaven Hills deceived the public by directing attention to Admiral Nelson rum products in such a way as to cause or likely to cause confusion with the Captain Morgan brand.  As a result, Diageo could sustain damage. o Heavens Hills’s use of its Admiral Nelson’s trademarks in association with rum products infringed Diageo’s registered trademarks. o Use of Diageo trademarks would harm its goodwill due to Heaven Hills quality control issues. 145 Registration Process and Protection The first person who uses or makes a trademark known in Canada is entitled to trademark registration. The trademark agent does a search for other trademarks. Trademark registration gives the owner the exclusive right to use the trademark in association with the wares and services specified in the application for 10 years and can be renewed. 146 Business Application of the Law 18.1 The Tragically Hip Sues Mill Street Brewery over “100th Meridian” beer The Tragically Hip is one of Canada’s most well-known bands and “At the Hundredth Meridian” is one of its most well-known songs. The title refers to the line of longitude that marks the beginnings of the Great Plains. The Hip has sued Mill Street Brewery claiming that by naming its beer “100th Meridian” after one of The Hip’s most popular tracks and by marketing its beer with reference to the Tragically Hip, it has caused or is likely to cause confusion contrary to the Trademarks Act. Mill Street has claimed that its “100th Meridian” was successfully registered with the Canadian Intellectual Property Office and does not refer to the Tragically Hip’s song but that the name refers to the place of origin of the 147 beer’s ingredients. Copyright copyright: The right to prevent others from copying or modifying certain works. The Copyright Act: o provides a right of exploitation to authors of certain works o copyright does not protect an author’s underlying ideas or facts, names, slogans, short phrases and most titles It applies to every original literary, dramatic, musical, and artistic work. 148 Requirements for Protection Copyright protection arises automatically on the creation of a work. There is an optional registration process that has an evidentiary advantage in that registration provides a presumption of ownership. The work must meet the requirements of originality and fixation. o Originality: The work must “originate” from the author, not copied from another. o Fixation: The work must be expressed in some fixed form, such as paper or on a thumb drive. o For works created in the course of employment, the employer is the owner. Copyright protection is generally for the life of the author or composer plus 70 years. The typical form of a copyright notes: © year of publication; name of owner. 149 Rights Under Copyright (1) Reproduction—the right to reproduce the work or a substantial part of it in any material form. Public performance—the right to perform the work or a substantial part of it. Publication—the right, if the work is unpublished, to publish the work. Translation—the right to produce, reproduce, perform, or publish any translation of the work. Adaptation—the right to convert works into other formats (e.g., a book into a movie). Mechanical reproduction—the right to make sound recordings or cinematographic recordings. Cinematographic presentation—the right to reproduce, adapt, and publicly present the work by filming or videotaping. 150 Rights Under Copyright (2) Cinematographic presentation—the right to reproduce, adapt, and publicly present the work by filming or videotaping. Communication—the right to communicate the work to the public by telecommunication. Exhibition—the right to present in public, for purposes other than sale or hire, an artistic work. Rental—the right to rent out sound recordings and computer programs. Authorization—the right to “authorize” any of the other rights. 151 Copyright Infringement Copyright is infringed when anyone does, without consent of the owner, anything only the owner can do, such as make copies. This includes copying all or a substantial part of a work. “Substantial” is tricky; it usually means a key or distinctive part. Enforcement is difficult; the establishment of collectives that negotiate agreements with users has been helpful. 152 Case 18.4 (1) Cinar Corporation v Robinson, 2013 SCC 73 In 1982, Robinson prepared sketches, storyboards, scripts, synopses, and promotional material for a new children’s television show titled Robinson Curiosity (Curiosity). He obtained copyright registration for his work in 1985. In his search for producers, he contacted Cinar Corporation but was not successful. In 1995, a new television show titled Robinson Sucroë (Sucroë) and produced by Cinar aired in Quebec. Robinson brought an action for copyright infringement. 153 Case 18.4 (2) Cinar Corporation v Robinson, 2013 SCC 73 Curiosity and Sucroë were both inspired by the novel Robinson Crusoe. Both shows featured a protagonist who wore a beard, glasses, and a straw hat and lived on a tropical island interacting with characters who shared common personality traits. There were differences: the secondary characters in Curiosity were animals, whereas the secondary characters in Sucroë were mostly human and featured pirate villains. Also, the main personality trait of the protagonist in Curiosity was curiosity, whereas the protagonist in Sucroë was not particularly curious. 154 Case 18.4 (3) Cinar Corporation v Robinson, 2013 SCC 73 Court: o Robinson was awarded $4M. o Copying all or a substantial part of a work without the copyright owner’s permission is prima facie copyright infringement. o A substantial part of a work is a “flexible notion” and “a matter of degree” and that substantially is measured by the quality rather than the quantity of the original work and the cumulative effect was key. o Infringement included non-literal copying. 155 Case 18.4 (4) Cinar Corporation v Robinson, 2013 SCC 73 Court: o Cinar had “copied a number of features from Curiosity, including the visual appearance of the main protagonist, the personality traits of the main protagonist and the other characters, visual aspects of the setting, and recurring scenographic elements” and that “considered as a whole, the copied features constituted a substantial part of Robinson’s work.” 156 Moral Rights moral rights: The author’s rights to have work properly attributed and not prejudicially modified or associate with products. Moral rights exist independently of copyright. They give control over how authors’ works are used. Moral rights include the following: o paternity (can choose a pseudonym) o integrity (object to uses of work if prejudicial to the author’s reputation) o association (being used in association with another product, service, or cause) 157 Case 18.5 Snow v The Eaton Centre Ltd (1982), 70 CPR (2d) 105, OJ No 3645 (ONHC) Michael Snow created a sculpture of geese known as Flight Stop, which was sold to the owners of Eaton Centre in Toronto. As a Christmas display, the owner attached red ribbons to the necks of the geese. Snow claimed his moral rights had been infringed that his naturalistic composition had been made to look ridiculous by the addition. Court: o The ribbons distorted and modified Snow’s work and that Snow’s concern that this was prejudicial to his honour and reputation was reasonable in the circumstances. o The Eaton Centre was required to remove the ribbons. 158 Exemptions There are many specific exemptions: o for libraries, museums, archives, people with disabilities, and educational institutions o for copying for private purposes, combining or creating a “mash-up,” making a backup fair dealing: A defence to copyright infringement that permits the copying of works for the particular purposes. o Examples: private study, research, criticism, or review, education, parody, satire 159 Case 18.6 (1) Wiseau Studio, LLC et al v Harper et al, 2020 ONSC 2504 Wiseau made a film The Room, which was widely panned by critics yet became a cult classic. Harper, a fan, made a documentary which Wiseau initially encouraged but eventually stopped participating as he felt it was becoming critical of him. The 109-minute documentary used about 7 minutes of clips from the film. Wiseau sued for copyright infringement. Court: o The use of the clips fell within the fair dealing exemption in the Copyright Act for the purpose of criticism or review as well as the news reporting exemption. 160 Case 18.6 (2) Wiseau Studio, LLC et al v Harper et al, 2020 ONSC 2504 Court: o The six-factor test set out in CCH Canadian Ltd v Law Society of Upper Canada found that the use of the clips was fair.  The purpose of the dealing: to provide review, critique, and information are permitted purposes.  The character of the dealing: each of the clips was accompanied by commentary before or after. 161 Case 18.6 (3) Wiseau Studio, LLC et al v Harper et al, 2020 ONSC 2504 Court: o The amount of the dealing: seven minutes was not trivial, but it was not excessive as use was limited and linked to the objectives of the film. o There were no viable non-copyrighted alternatives to using the film. o The nature of the work: the work (The Room) is not confidential or unpublished. o The effect of the dealing: the documentary does not replicate or replace the original film. The Court also found Wiseau’s moral rights had not been infringed. 162 Confidential Business Information confidential business information: Information that provides a business advantage as a result of the fact that it is kept secret. o Examples: customer list, price book, recipe, databases, processes Misappropriation is protected by criminal law provisions and common law doctrines such as breach of confidence and breach of contract. Requirements for protection: o economic value as a result of not being generally known o subject to efforts to keep it secret o not generally known in the industry 163 Process and Scope of Protection Confidential business information may be protected forever so long as the information is not disclosed to the general public. o Example: recipes for well-known products such as Coca-Cola Classic have been “secret” for many years Criminal law makes it an offence to “knowingly obtain, communicate or make available a trade secret” by deceit, falsehood, or other fraudulent means. Common law actions for misappropriation include claims for breach of express or implied contractual terms, and breach of confidence, breach of non- disclosure agreements. An obligation of confidence may be implied IF o in a fiduciary relationship o information was conveyed in circumstances suggesting a relationship of confidence 164 Landmark Case 18.1 (1) LAC Minerals Ltd v International Corona Resources Ltd, 2 SCR 574 Corona, an owner of some small mineral claims, divulged its interest in purchasing a particular property while it was involved in efforts to entice LAC to invest. Negotiations fell through, and LAC purchased the property, which became the biggest gold field in Canada. Corona sued for breach of confidence and breach of fiduciary duty. 165 Landmark Case 18.1 (2) LAC Minerals Ltd v International Corona Resources Ltd, 2 SCR 574 Court: o LAC was liable for breach of confidence. o Three elements must be established to impose liability on this ground:  The information conveyed was confidential.  It was communicated in circumstances in which a duty of confidence arises.  It was misused by the party to whom it was communicated. 166 Landmark Case 18.1 (3) LAC Minerals Ltd v International Corona Resources Ltd, 2 SCR 574 Coutr: o Although some of the information conveyed by Corona was not confidential, clearly most of it was, and LAC used it to acquire the Williams property. o A reasonable person in the position of LAC would know that the information was being given in confidence. o No breach of fiduciary duty was found. 167 Limitations on Protection Protection is lost when the information is no longer secret, having been divulged or discovered by independent development using publicly available information, or by reverse engineering. Information is also no longer confidential when it becomes part of the ­- employee’s personal knowledge, skill, or expertise. 168 Acquisition and Protection of Intellectual Property Intellectual property rights can be extremely valuable and costly to develop. assignment: The transfer of a right by an assignor to an assignee. licence: Consent given by the owner of rights to someone to do something only the owner can do. Some intellectual rights are often subject to compulsory licensing. Intellectual property rights are subject to loss if they are not properly used and maintained. o Exam