Gibson, J:— This is an appeal from an assessment for estate tax in respect to nine class “A” voting common shares in the capital stock of T Winram Co Ltd which shares comprised a part of the property passing on the death of Theodore James Winram, deceased, and which were assessed at an aggregate amount of $177,972.30. The executors in the return of information filed pursuant to the Estate Tax Act, declared the value of these shares to be $1,627.06 (which it is agreed should have read $1,780.61).
T Winram Co Ltd is a company incorporated under the laws of the Province of British Columbia by memorandum and articles of association dated September 17, 1957.
At the date of the death of the deceased and at all material times the issued capital of the company consisted of 990 class “B” nonvoting shares, all of which were held and beneficially owned by Geraldine I Winram, the widow of the deceased, and 10 class “A” voting shares, one only of which was held and beneficially owned by Geraldine I Winram and the nine other of which shares were held and beneficially owned by the deceased.
It is the valuation for estate tax purposes of these latter nine shares which is the subject matter of this appeal.
No other shares of the company were issued and outstanding but the fact that the authorized capital of the company permitted the issuance of other shares is irrelevant to the determination of this appeal.
Until the death of the deceased and ait all material times thereto the deceased and Geraldine I Winram were the only directors of the company and the deceased was the president of the company and chairman of the board of directors, and Geraldine I Winram was the secretary of the company.
Until the date of death of the deceased and at all material times prior thereto, also, the articles of association of the company provided at Article 3 that no share might be transferred except with the consent of the board of directors “who (might ... in their absolute discretion refuse to register the transfer of any share”; at Article 6 that the holders of non-voting shares did not have the right to vote; at Article 17 as amended that in the case of an equality vote that the chairman had a second or casting vote; at Article 18 that ‘‘a director interested in any contract or arrangement under consideration may be counted to make up the quorum although he shall not vote thereon”; and at Article 20 that dividends might be declared by ordinary resolution and that “dividends so declared may be equal for each class of share or not equal and dividends may be declared on one class of share without dividends being declared on another class of share”.
By agreement of the parties, the questions for the opinion of the Court are the following:
(a) Could the deceased, at law, have transferred the 9 class “A” voting shares of which he was the registered owner without the consent of Geraldine Winram to the transfer?
(b) Could all of the surplus of the company have been paid immediately prior to the death of the deceased by way of dividend to the holders of the class “A” shares to the exclusion of the holders of the class “B” shares without the consent of Geraldine Winram to such payment?
If the anwer to both of these questions is in the affirmative, then the assessment of estate tax must be confirmed.
If, however, the answer to either of these questions is in the negative, then the appeal will succeed in part and the assessment will have to be referred back for reconsideration and reassessment on the basis that the aggregate value of the nine class “A” voting shares was $1,780.61.
At issue is what action the directors may legally and equitably take.
The duties and obligations in law and in equity of the directors of a company are therefore relevant.
Wegenast, The Law of Canadian Companies (1931) at pages 364-65 states that “The simplest accurate description of the relationship of director is to call it a fiduciary relationship, that is to say, a relationship requiring the exercise of fidelity, having in view the purposes for which directors are appointed, as well as the statutory provisions under which the appointment is made”; Snell’s Principles of Equity, 26th Edition by R E Megarry and P V Baker at pages 262-63 states that “although the directors stand in a fiduciary position to the company, they are not trustees for the individual shareholders, . . .”.
In Securities and Exchange Commission v Chenery Corporation, 318 US at 85-86; 63 S Ct at 458 (1943), Mr Justice Frankfurter observed that:
... to say that a man is a fiduciary only begins analysis; it gives direction for further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed to discharge these obligations?
The relevance of so characterizing the relationship of a director is that in cases arising out of a fiduciary relationship, a court of equity finds expression in holding that a constructive trust exists.
In the relationship between director and shareholder, however, their respective ownership of shares in a company must not be confused with obligation nor must the relationship of director and shareholder be converted into one of trustee and cestui que trust unless there are particular facts in a given case from which it is proper to make such an inference.
In the corporate context, suitable and conceptual adjustments must be made from the strictly fiduciary context of, for example, trustee and cestui que trust. This is so because the difference between the strict fiduciary (for example, the trustee in a cestui que trust relationship) and the director fiduciary is very real. A director shareholder, even a controlling shareholder is, by reason of his being a shareholder, a beneficiary as well as a trustee of the corporate trust, while a strict fiduciary is not typically a beneficiary of the trust estate which he administers. But more basically the relationship among corporate shareholders is essentially that of joint investors in a business enterprise. The nature of the relationship is arms length and profit orientated; it is free of the constructive trusts which characterize the relationship between the strict fiduciary and his beneficiary.
In the subject case, if a meeting of the board of directors were properly called, even though under the articles there were only two directors, both of whom are required for a quorum, one of whom being the deceased and the other being Geraldine I Winram, Geraldine I Winram could not by wilfully refusing to attend such a meeting prevent the deceased from transferring the nine class “A” voting shares of which he was the registered owner. (/n re Copal Varnish Co, [1917] 2 Ch 349, applied in Hofer v Hofer (1968), 65 DLR (2d) 607, CA Man, Freedman, J A as he then was.)
If Geraldine I Winram attended such a duly called meeting of the board of directors, then, because the deceased as chairman had a second or casting vote, he could obtain the approval of the legal transfer of such shares.* (Companies Act, RSBC 1960, c 67, section 170.) Article 3 of the articles of association gave the deceased the right to compel registry of the shares in the registry of the company.
in similar situations (that is in the case of Geraldine I Winram refusing to attend a duly called meeting of the board of directors or in case she did attend) the deceased could cause the board to declare a dividend whereby the company would pay out nine-tenths of all the surplus of the company to himself as owner of nine of the class “A” voting shares and one-tenth only to Geraldine I Winram, the owner of one class “A” voting share, to the exclusion of the holder (Geraldine I Winram) of the class “B” non-voting shares. Such action would not be an abuse of this power in respect to the rights of class “B” shareholders. The case authorities are not applicable which hold that the Court will interfere to protect the minority, where the majority of a company propose to benefit themselves at the expense of the minority. All such authorities are cases where the majority and minority held the same class of shares.
Article 20 (Table A, Clause 78 as amended by Article 20) of the articles of association as stated, specifically provides that:
The Company may by ordinary resolution, whether previous notice thereof has been given or not, declare dividends, but no dividend shall exceed the amount recommended by the directors. Dividends so declared may be equal for each class of share or not equal and dividends may be declared on one class of share without dividends being declared on another class of share.
The deceased as director of the company, in so acting, would not be in breach of his fiduciary duty as director. In doing so, he would be acting in his capacity as a shareholder, a beneficiary of the corporate trust and not as a trustee of the corporate trust and therefore he would be free of any constructive trust.
In addition, the rights of the class “B” shareholders are circumscribed by the provisions respecting such shares in the memorandum and articles of association of the company. Nowhere in such, or in equity or law (including the Companies Act, RSBC 1960, c 67) is there given to the class “B” shareholder an unalienable right to any part of any dividends declared.
Also, any dividends duly declared on class “A” voting shares only at a properly called directors’ meeting of the company would not be an abuse by the majority of the class “A” holders of the rights of the minority of class “A” holders. (Dimbula Valley (Ceylon) Tea Co Ltd v Laurie, [1961] 1 Ch 353.)
The appeal is dismissed with costs.
Email this Content