Supreme Court of Canada
Minister of National Revenue v. Dworkin Furs
(Pembroke) Ltd. et al.,  S.C.R. 223
The Minister of
National Revenue (Plaintiff) Appellant;
(Pembroke) Limited, Allied Business Supervisions Limited, Alpine Dry Wall &
Decorating Limited, M.F. Esson & Sons Limited, Aaron’s Ladies Apparel
Limited (Defendants) Respondents.
1966: November 15, 16, 17; 1967: January 24.
Present: Fauteux, Abbott, Judson, Hall and
ON APPEAL FROM THE EXCHEQUER COURT OF CANADA
corporations—What constitutes “control”—Casting vote—Validity of Articles of
Association requiring unanimous consent for motions before meetings of
shareholders or directors—Income Tax Act, R.S.C. 1952, c. 148, s. 39.
The five respondent companies were assessed
by the Minister on the basis that each was associated with one or more other
companies within the meaning of s. 39(2), (3) and (4) of the Income Tax
Act, R.S.C. 1952, c. 148, and was therefore not entitled to the benefit of
the lower rate of tax on part of its income. The issue in all five cases was
the meaning of “controlled” as found in s. 39(4) of the Act. The Exchequer
Court rejected the Minister’s assessment. The Minister appealed to this Court where
it was ordered that the 5 appeals be heard together.
In the Dworkin appeal, another company owned
48 per cent of the shares in its own name and 2 per cent in the names of Roy
and Helen Saipe as its nominees. The other 50 per cent were owned by a third
party. Roy Saipe was president of Dworkin but did not have a casting vote in
the event of an equality of votes.
In the Allied appeal, one Aaron owned 50 per
cent of the shares and, as president, had the right to exercise a second or
casting vote in the event of an equality of votes.
In the Alpine Drywall appeal, one Jager owned
50 per cent of the shares and the other 50 per cent were owned by one Wagenaar.
The latter attended the day-to-day operation of the business and Jager, as
president, was responsible for the financing, etc. and had a casting vote.
In the M.F. Esson appeal, that company was
controlled by the Esson family who also owned 50 per cent of the shares of
another company. The other 50 per cent were owned by an individual who had been
appointed general manager with exclusive authority and who had been given an
option, exercisable some 3 years later, to buy the Esson family’s shares. In
the meantime, the senior Esson was president of that other company and had a
casting vote in the event of an equality of votes.
In the Aaron appeal, a group held two-thirds
of the shares but a provision in the company’s Articles of Association required
all motions put before any meeting of shareholders or directors to have
unanimous consent. In the Minister’s view that provision was illegal and ultra
appeals by the Minister should be dismissed. None of the five respondent
companies was an associated corporation.
In the Dworkin appeal, it was clear, in the
light of Buckerfield’s Ltd. v. M.N.R.,  1 Ex. C.R. 299, which held
that “controlled” meant de jure control and not de facto control,
that the respondent was not controlled by the other company.
In the Allied appeal, as was held by the
trial judge, a casting vote was not the property of the holder but an adjunct
of an office. That right did not give control.
The Alpine Drywall and M.F. Esson appeals did
not differ from that of the Allied appeal.
In the Aaron appeal, the Article in question
was neither illegal nor ultra vires. It is beyond question that a
majority may bind the minority in a company. A contract between shareholders to
vote in a given or agreed way is not illegal. The Articles of Association are
in effect an agreement between the shareholders and are binding upon all
Revenu—Impôt sur le revenu—Corporations associées—Contrôle—Voix prépondérante—Validité
de règlements exigeant le consentement unanime pour les motions devant les
assemblées d’actionnaires ou de directeurs—Loi de l’Impôt sur le Revenu,
S.R.C. 1952, c. 148, art. 39.
Le Ministre a cotisé les 5 compagnies intimées
comme si chacune était associée avec une ou plusieurs autres compagnies dans le
sens de Fart.39(2), (3) et (4) de la Loi de l’Impôt sur le Revenu, S.R.C.
1952, c. 148,et n’avait pas alors droit au bénéfice du taux d’impôt moindre sur
une partie de son revenu. Il s’agit de déterminer dans ces 5 appels le sens
qu’il faut donner au mot «contrôle» tel qu’il se
trouve dans l’art. 39(4) de la Loi. La Cour de l’Échiquier a rejeté la
cotisation du Ministre. Ce dernier en appela devant cette Cour alors qu’il fut
ordonné que les 5 appels soient entendus ensemble.
Dans l’appel de la compagnie Dworkin, une autre
compagnie détenait 48 pour-cent des actions de Dworkin en son propre nom et 2
pour-cent au nom de Roy et Helen Saipe en qualité de personnes désignées.
L’autre 50 pour-cent était détenu par une tierce personne. Roy Saipe était
président de Dworkin mais n’avait pas une voix prépondérante en cas de partage
Dans l’appel de la compagnie Allied, un nommé
Aaron détenait 50 pour-cent des actions et, comme président, avait le droit
d’exercer une voix prépondérante en cas de partage des votes.
Dans l’appel de la compagnie Alpine Drywall, un
nommé Jager détenait 50 pour-cent des actions et l’autre 50 pour-cent était
détenu par un nommé Wagenaar. Ce dernier s’occupait des affaires journalières
et Jager, comme président, était responsable du financement, etc. et avait une
voix prépondérante en cas de partage des votes.
Dans l’appel de la compagnie M.F. Esson, cette
compagnie était contrôlée par la famille Esson qui détenait 50 pour-cent des
actions d’une autre, compagnie. L’autre 50 pour-cent était détenu par un
individu qui avait été nommé gérant général avec autorité exclusive et à qui on
avait donné une option, dont l’échéance était rapportée à quelque 3 ans plus
tard, d’acheter les actions de la famille Esson. Entre temps, Esson le père
était président de cette autre compagnie et avait une voix prépondérante en cas
de partage des votes.
Dans l’appel de la compagnie Aaron, les
deux-tiers des actions étaient détenus par un groupe mais, une clause dans les
règlements de la compagnie exigeait l’unanimité pour toute motion présentée à
une assemblée des actionnaires ou des directeurs. Le Ministre considéra cette
clause comme étant illégale et ultra vires.
Arrêt: Les appels du
Ministre doivent être rejetés. Aucune des 5 compagnies intimées était une
Dans l’appel de la compagnie Dworkin, il est
clair, vu la cause de Buckerfield’s Ltd. v. M.N.R.,  1 Ex. C.R.
299, qui a décidé quele mot «contrôle» signifiait un contrôle de jure et
non pas un contrôle de facto, que la compagnie intimée n’était pas
contrôlée par l’autre compagnie.
Dans l’appel de la compagnie Allied, tel que
décidé par le juge au procès, une vois prépondérante n’est pas la propriété de
son détenteur mais est un accessoire d’un office. Ce droit ne donne pas le
Les appels de la compagnie Alpine Drywall et de
la compagnie M. F. Esson ne diffèrent pas de l’appel de la compagnie Allied.
Dans l’appel de la compagnie Aaron, le règlement
en question n’était pas illégal ni ultra vires. Il n’y a aucun doute
qu’une majorité peut lier la minorité dans une compagnie. Un contrat entre les
actionnaires pour voter d’une certaine manière n’est pas illégal. Les
règlements d’une compagnie sont en réalité une entente entre les actionnaires
et lient tous les actionnaires.
APPELS de 5 jugements de la Cour de l’Échiquier
du Canada. Appels rejetés.
APPEALS from 5 judgments of the Exchequer
Court of Canada1. Appeals dismissed.
G.W. Ainslie and L.R. Olson, for the
C.S. Bergh, for the respondent, Dworkin
Furs (Pembroke) Ltd.
R.B. Slater and A. Anhang, for the
respondent, Allied Business Supervisions Ltd.
R.A.F. Montgomery, for the respondent,
Alpine Dry-wall & Decorating Ltd.
G.B. Cooper, for the respondent, M.F.
Esson & Sons Ltd.
R.B. Slater and A. Anhang, for the
respondent, Aaron’s Ladies Apparel Ltd.
The judgment of the Court was delivered by
HALL J.:—These are appeals by the Minister of
National Revenue from judgments of the Exchequer Court of Canada in the
Dworkin Furs (Pembroke) Limited v. M.N.R.;
Aaron’s Ladies Apparel Limited v. M.N.R.;
Allied Business Supervisions Limited v.
Alpine Drywall & Decorating Limited v.
M.F. Esson & Sons Limited v. M.N.R.
In the Exchequer Court the appeals of Aaron’s
Ladies Apparel Limited and Allied Business Supervisions Limited were heard
together at Winnipeg by Thurlow J. along with appeals from eight other
companies. The appeal of Alpine Drywall & Decorating Limited was heard in
Calgary in conjunction with that of another company by Cattanach J. The appeal
of Dworkin Furs (Pembroke) Limited was heard in Ottawa by Jackett P. and the
appeal of M.F. Esson & Sons Limited was heard at Moncton by Thurlow J. The
present appeal concerns the five named respondents only.
By Order of this Court dated September 20, 1966,
the appeals of the Minister of National Revenue against the
five named respondents were ordered to be heard
together and the appellant was granted leave to file a joint factum applicable
to all five appeals. At the conclusion of the argument on behalf of the
appellant, the Court said:
For reasons which will be delivered later,
the appeal in each of the above cases, except in the case of Aaron’s Ladies
Apparel Limited, is dismised with costs; with respect to the appeal in the
latter case, the only points on which the Court needs to hear counsel for
respondent are related to Article 6 of the Articles of Association, the
Court desiring to have submissions of counsel as to the validity and effect of
The issue in all five appeals is the meaning of
“controlled” as found in subs. (4) of s. 39 of the Income Tax Act. Subsection (1)
of s. 39 of the Income Tax Act provides that the tax payable by a
corporation under Part 1 of the Income Tax Act is 18 per cent of the
first $35,000 taxable income and 47 per cent of the amount by which the income
subject to tax exceeds $35,000. However, subss. (2) and (3) of s. 39
provide that when two or more corporations are “associated” with each other,
the aggregate of the amount of their incomes taxable at 18 per cent is not to
exceed $35,000. Subsection (4) of s. 39 of the Income Tax Act then
defines the circumstances under which a corporation is associated with another
corporation. Subsection (4) of s. 39 provides in part:
For the purpose of this section, one
corporation is associated with another in a taxation year if at any time in the
(a) one of the corporations
controlled the other,
(b) both of the corporations were
controlled by the same person or group of persons,
The word controlled as used in this
subsection was held by Jackett P. to mean de jure control and not de
facto control and with this I agree. He said in Buckerfield’s Limited et
al v. Minister of National Revenue:
Many approaches might conceivably be
adopted in applying the word “control” in a statute such as the Income Tax
Act to a corporation. It might, for example, refer to control by
“management”, where management and the Board of Directors are separate, or it
might refer to control by the Board of Directors. The kind of control exercised
by management officials or the Board of Directors is, however, clearly not
intended by section 39 when it contemplates control of one corporation by
another as well as control of a corporation by individuals (see
subsection (6) of section 39). The word “control” might conceivably
refer to de facto control
by one or more shareholders whether or not
they hold a majority of shares. I am of the view, however, that, in
section 39 of the Income Tax Act, the word “controlled”
contemplates the right of control that rests in ownership of such a number of
shares as carries with it the right to a majority of the votes in the election
of the Board of Directors. See British American Tobacco Co. v. I.R.C. (1943)
1 A.E.R. 13 where Viscount Simon L.C., at p. 15, says:
“The owners of the majority of the voting
power in a company are the persons who are in effective control of its affairs
See also Minister of National Revenue v.
Wrights’ Canadian Ropes Ld. (1947) A.C. 109 per Lord Greene M.R. at page
118, where it was held that the mere fact that one corporation had less than 50
per cent of the shares of another was “conclusive” that the one corporation was
not “controlled” by the other within section 6 of the Income War Tax
This definition of controlled applies to
all five appeals.
In Dworkin Furs (Pembroke) Limited, Dworkin Furs
Ltd. owned 48 per cent of the issued shares in its own name and 2 per cent in
the names of Roy Saipe and Helen Saipe as its nominees. The other 50 per cent
were owned by one Sadie Harris. Roy Saipe was President of this respondent, but
the By-laws of the company provided that in the event of an equality of votes,
the Chairman did not have a casting vote.
It is clear in the light of Buckerfield that
in these circumstances Dworkin Furs (Pembroke) Limited was not controlled by
Dworkin Furs Ltd.
In the case of Allied Business Supervisions
Limited, Alexander Aaron was the owner of 50 per cent of the issued shares
while two other individuals, Joseph Tomney held 31 per cent and Roy N. Hall 19
per cent respectively. Aaron and Tomney were elected directors of the company
on December 17, 1959, for an indefinite period until their term of office
should be changed by the shareholders at a subsequent shareholders’ meeting. On
the same day Aaron was elected President of the company.
This company was incorporated under the
Saskatchewan Companies Act, R.S.S. 1953, c. 124. The company adopted as
its Articles of Association Table A of the Companies Act. Article 46
of Table A reads:
46. In the case of equality of votes
whether on a show of hands or on a poll, the chairman of the meeting at which
the show of hands takes place or at which the poll is demanded shall be
entitled to a second or casting vote.
It was urged on behalf of the appellant that the
fact that Aaron as President had at meetings of Shareholders and Directors a
second or casting vote gave him control of the company within the Buckerfield
definition of controlled. Thurlow J. held that the existence of the
right to exercise a second or casting vote did not give Aaron control. He said:
the casting vote, unlike the votes arising
from shareholding, which are exercisable without responsibility to the company
or to other shareholders is in my opinion not the property of the holder, but
is an adjunct of an office.
and with this I agree.
In the case of Alpine Drywall & Decorating
Limited, the shareholding situation was that one William Jager owned 50 per
cent of the issued shares and Clarence Wagenaar the other 50 per cent. The
appellant relied on evidence which established that at the time this company was
incorporated, Wagenaar and Jager had agreed:
(a) Wagenaar would attend to the running of
the day to day business of the Respondent; and
(b) Jager would attend to the
corporate end of the business and the arranging of the necessary financing to
carry on the business.
and Jager was elected President of the Company.
Articles 43 and 45 of the respondent provided:
43. The president, or in his absence the
vice-president (if any) shall be entitled to take the chair at every general
meeting, or if there be no president or vice-president, or if at any meeting he
shall not be present within fifteen (15) minutes after the time appointed for
holding such meeting, the members present shall choose another director as
chairman, and if no director be present, or if all the directors present
decline to take the chair then the members present shall choose one of their
numbers to be chairman. The chairman at any meeting of shareholders may appoint
one or more persons (who need not be shareholders) to act as scrutineers.
45. Every question submitted to a meeting
shall be decided in the first instance by a show of hands and in the case of an
equality of votes, the chairman shall, both on a show of hands and on a poll
have a casting vote in addition to the vote or votes to which he may be
entitled as a member.
The arrangement or agreement between Wagenaar
and Jager, while it might be said to give Wagenaar de facto control, did
not give him de jure control, which is the true test, and this
case does not differ from that of Allied Business Supervisions Limited.
The case of M.F. Esson and Sons Limited involved
determining whether the company was controlled by the same group of persons who
controlled Esson Motors Limited.
It is a fact that Miller F. Esson, Sr., Miller
F. Esson, Jr. and John F. Esson controlled the respondent. Prior to May 7,
1962, the shareholding of Esson Motors Limited was:
Miller F. Esson, Sr.................................
Miller F. Esson, Jr..................................
John F. Esson........................................
On May 7th, 1962, Miller F. Esson, Miller Esson, Jr., Jack
Esson, and Esson Motors Limited, entered into an agreement
with Edward Earle McKenna wherein it was agreed:
(a) McKenna was to be appointed
general manager of Esson Motors Limited for a term of three years, and was
given complete and exclusive authority to manage the business of Esson Motors
(b) The Essons were to transfer one
half of the issued capital stock (99 shares) to McKenna.
(c) The Essons granted to McKenna an
irrevocable option to purchase from them the remaining capital stock during the
period 29th May, 1965 until 26th May, 1966.
Pursuant to the terms of the Agreement, the
shares were transferred so that as of the 7th of May, 1962, the shareholders in
Esson Motors Limited were as follows:
Miller F. Esson, Sr..................................
Miller F. Esson, Jr...................................
John F. Esson.........................................
At all material times Miller F. Esson, Sr. was
President, Miller F. Esson, Jr. was Vice‑President and John F. Esson
Secretary-Treasurer of Esson Motors Limited.
By-law 4(6) of Esson Motors Limited read:
The president shall preside at meetings of
the board. He shall act as chairman of the shareholders’ meetings if present…
Paragraph (c) of Section 102 of the Companies
Act of New Brunswick, R.S.N.B. 1952, Chapter 33, under which Esson Motors
Limited was incorporated, provides:
“In the absence of other provisions in that
behalf in the letters patent or by-laws of the company,
(c) all questions proposed for the
consideration of the shareholders at such meetings shall be determined by the
majority of votes, and the chairman presiding at such meetings shall have the
casting vote in the case of an equality of the votes.
Thurlow J. disposed of the casting vote argument
as he had done in Allied Business Supervisions Limited v. Minister of
National Revenue. He
was right in so doing.
In the appeal respecting Aaron’s Ladies Apparel
Limited, a company incorporated under the Saskatchewan Companies Act (ibid),
the following question had been propounded:
1. Within the meaning of the Income Tax Act,
R.S.C. 1952, Chapter 148, as amended:
(c) during the period commencing on
February 1, 1960, and ending on July 14, 1961, did Isidore Aaron and Alexander
Aaron together control Aaron’s Ladies Apparel Limited?
(d) during the period
commencing on July 14, 1961, and ending on December 31, 1962, did Aaron’s
(Prince Albert) Limited control Aaron’s Ladies Apparel Limited?
The shareholding of the Respondent, Aaron’s
Ladies Apparel Limited was as follows:
1 February 1960—14 July 1961
14 July 1961—81 December 1961
Aaron’s (Prince Albert) Limited.............................
This case differs from the others in that there
could be no argument that but for Article 6 of the Articles of Association
Isidore Aaron and Alexander Aaron controlled the respondent company by reason
of holding 698 out of 1,008 shares in their own names prior to July 14, 1961,
and thereafter in the name of Aaron’s (Prince Albert) Limited which they also
controlled. Subsections (1) and (2) of s. 18 of The Companies Act read:
18. (1) There may be registered with the
memorandum articles of association prescribing regulations for the company, and
such articles may adopt all or any of the regulations contained in table A in
the first schedule.
(2) If the articles are not registered or,
if articles are registered, in so far as the articles do not exclude or modify
the regulations in that table, those regulations shall, so far as applicable,
be the regulations of
the company in the same manner and to the
same extent as if they were contained in duly registered articles.
The Articles of Association of the respondent’s
company provided in part as follows:
1. The provisions contained in Table A in
the First Schedule of the Companies Act as hereinafter modified shall
apply to this company.
4. A poll may be demanded by one member and
para. 44 of the said Table A shall be amended accordingly.
6. That all motions put before any meeting
of shareholders or directors of the company shall require the unanimous consent
of all its members, and paras. 46, 47 and 82 of the said Table A shall be
Paragraphs 46, 47 and 82 read:
46. In the case of an equality of votes,
whether on a show of hands or on a poll, the chairman of the meeting at which
the show of hands takes place or at which the poll is demanded, shall be
entitled to a second or casting vote.
47. A poll demanded on the election of a
chairman, or on a question of adjournment, shall be taken forthwith. A poll
demanded on any other question shall be taken at such time as the chairman of
the meeting directs.
82. A committee may meet and adjourn as it
thinks proper. Questions arising at a meeting shall be determined by a majority
of votes of the members present, and in case of an equality of votes the
chairman shall have a second or casting vote.
Paragraph 44 reads:
At any general meeting a resolution put to
the vote of the meeting shall be decided on a show of hands, unless a poll is
(before or on the declaration of the result of the show of hands) demanded by
at least two members, and, unless a poll is so demanded, a declaration by the
chairman that a resolution has on. a show of hands been carried, or carried
unanimously, or by a particular majority, or lost, and an entry to that effect
in the book of the proceedings of the company, shall be conclusive evidence of
the fact, without proof of the number or proportion of the votes recorded in
favour of, or against, that resolution.
The appellant contends that Article 6 above
is illegal and ultra vires as being (a) contrary to the
provisions of The Companies Act; (b) it constitutes an
unreasonable restriction on the rights of a member to have a reasonable
opportunity of bringing before the meeting any proposal or matter within the
scope of the business of the meeting; and (c) it is contrary to the
fiduciary relationship which the directors, at a directors’ meeting have
towards the company which require them to give their entire ability to the best
interests of the company and its shareholders.
All three points may be dealt with together as
they extent to which they bind the shareholders of a company.
That a majority may bind the minority in a
company is beyond question.
Section 14(b) of the Interpretation
Act of the Province of Saskatchewan, R.S.S. 1953, c. 1, provides:
14. In an Act words making a number of
persons a corporation shall:
(b) vest in a majority of the
members of the corporation the power to bind the others by their acts.
Similar wording is also to be found in the Interpretation
Act of Canada, R.S.C. 1952, c. 158, s. 30.
The nature and effect of Articles of Association
were stated by Duff J. (as he then was) in Theatre Amusement Co. v. Stone as follows:
The articles of association are binding
upon the company, the directors and the shareholders, until changed in
accordance with the law. So long as they remain in force, any shareholder is
entitled, unless he is estopped from taking that position by some conduct of
his own, to insist upon the articles being observed by the company, and the
directors of the company. This right he cannot be deprived of by the action of
any majority. In truth, the articles of association constitute a contract
between the company and the shareholders which every shareholder is entitled to
insist upon being carried out.
A situation similar to the one here was dealt
with by this Court in Ringuet et al v. Bergeron. In that case certain shareholders,
Bergeron, Page and Ringuet, had contracted amongst themselves to vote
unanimously at all meetings of the company and to vote for each other as
directors. The contract provided for a penalty for breach of the contract in
the following terms:
11. Dans toutes assemblées de ladite
Compagnie, les parties aux présentes s’engagent et s’obligent à voter
unanimement sur tout objet qui nécessite un vote. Aucune des parties aux
présentes ne pourra différer d’opinion avec ses co-parties contractantes en ce
qui concerne le vote. Le vote prépondérant du Président devra toujours être en
faveur des deux parties contractantes.
12. Si l’une des parties ne se conforme à la
présente convention, ses actions seront cédées et transportées aux deux autres
parties contractantes en parts égales, et ce gratuitement.
Telle est la sanction de la non exécution
d’aucune des clauses de la présente convention par l’une des parties
For a period the contracting parties observed
the terms of the contract, but later two of the parties began to take
steps to oust Bergeron from the management of
the company. A shareholders’ meeting was called whereat Ringuet and Pagé voted
themselves in as a new board of directors. Bergeron was thus completely
excluded from the management of the company. He brought action alleging that
Ringuet and Page, in failing inter alia to vote for his election to the
board of directors, had violated the contract. The trial court rejected the
action, but in the Court of Queen’s Bench the Chief Justice and Owen J. found
for Bergeron, Pratte J. dissenting.
In this Court, upholding the Court of Queen’s
Bench, Judson J. for the majority said:
The Chief Justice found nothing illegal in
the agreement and decided that it should be given its full effect. The ratio of
the dissenting opinion is to be found in the distinction drawn between the
rights of a shareholder and the obligations assumed on becoming a director.
While majority shareholders may agree to vote their shares for certain
purposes, they cannot by this agreement tie the hands of directors and compel them
to exercise the power of management of the company in a particular way. This
appears in the following extract from the reasons of Pratte J.:
«Mais la situation des directeurs est bien
différente de celle des actionnaires. Le directeur est désigné par les
actionnaires, mais il n’est pas à proprement parler leur mandataire; il est un
administrateur chargé par la loi de gérer un patrimoine qui n’est ni le sien,
ni celui de ses co-directeurs, ni celui des actionnaires, mais celui de la
compagnie, une personne juridique absolument distincte à la fois de ceux qui la
dirigent et de ceux qui en possèdent le capital actions. En cette qualité, le
directeur doit agir en bonne conscience, dans le seul intérêt du patrimoine
confié à sa gestion. Cela suppose qu’il a la liberté de choisir, au moment
d’une décision à prendre, celle qui lui paraît la plus conforme aux intérêts
sur lesquels la loi lui impose le devoir de veiller.»
There can be no objection to the general
principle stated in this passage, but, in my view, it was not offended by this
agreement. However, the conclusion of Pratte J. was that a director who has
bound himself as this contract bound the parties has rendered himself incapable
of doing what the law requires of him and that clause 11 requiring unanimity at
all meetings had that effect. He also held that clause 11 was not severable and
that therefore the agreement was invalidated in its entirety.
Owen J. agreed that the undertaking of
unanimity at directors’ meetings which he considered was required by clause 11
might be contrary to public order but that it was not necessary to decide this
since the clause was severable from the other provisions of the agreement to
which he gave full effect. The defendants had failed to comply with other
clauses in the contract—the voting of Bergeron’s salary, the election of
Bergeron as a director of the company and his appointment as
secretary-treasurer and assistant general manager.
The point of the appeal is therefore
whether an agreement among a group of shareholders providing for the direction
and control of a com-
pany in the circumstances of this case is
contrary to public order, and whether it is open to the parties to establish
whatever sanction they choose for a breach of such agreement.
Did the parties of this agreement tie their
hands in their capacity as directors of the company so as to contravene the
requirements of the Quebec Companies Act, which provides (s. 80) that
“the affairs of the company shall be managed by a board of not less than three
directors”? I agree with the reasons of the learned Chief Justice that this
agreement does not contravene this or any other section of the Quebec
Companies Act. It is no more than an agreement among shareholders owning or
proposing to own the majority of the issued shares of a company to unite upon a
course of policy or action and upon the officers whom they will elect. There is
nothing illegal or contrary to public order in an agreement for achieving these
purposes. Shareholders have the right to combine their interests and voting
powers to secure such control of a company and to ensure that the company will
be managed by certain persons in a certain manner. This is a well-known, normal
and legal contract and one which is frequently encountered in current practice
and it makes no difference whether the objects sought are to be achieved by
means of an agreement such as this or a voting trust. Such an arrangement is
not prohibited either by law, by good morals or public order.
It is important to distinguish the present
action, which is between contracting parties to an agreement for the voting of
shares, from one brought by a minority shareholder demanding a certain standard
of conduct from directors and majority shareholders. Nothing that can arise
from this litigation and nothing that can be said about it can touch on that
problem. The fact that this agreement may potentially involve detriment to the
minority does not render it illegal and contrary to public order. If there is
such injury, there is a remedy available to the minority shareholder who
alleges a departure from the standards required of the majority shareholders
and the directors. The possibility of such injurious effect on the minority is
not a ground for illegality.
I think that this litigation can be decided
on the simple ground that clause 11 has no reference to directors’ meetings.
Clause 11 refers to meetings of the company, that is, shareholders’ meetings,
and not to meetings of the board of directors. On this point I agree with the
Chief Justice, who stated his opinion in the following terms:
«Au surplus, y a-t-il quelque chose qui
répugne à la loi, à l’ordre public et aux bonnes mœurs qu’un groupe
d’actionnaires s’entendent pour contrôler et diriger une compagnie, pour
devenir ses administrateurs, ses principaux officiers? Il n’était sûrement pas
besoin d’un contrat écrit pour pareille entente qui intervient chaque jour dans
le monde des compagnies, étant notoire qu’un grand nombre d’entre elles sont
contrôlées par un groupe d’actionnaires qui souvent même ne représentent pas la
majorité des actions.
L’engagement des co-contractants à voter
unanimement leurs actions dans les assemblées de la compagnie ne saurait
lui-même, à mon avis, être invalide; après tout, chacun des comparants n’a pas
renoncé à la délibération, à la discussion, au droit de faire triompher son
opinion avant de se ranger à l’avis de la majorité qui en principe doit
I have the greatest difficulty in seeing
how any question of public order can arise in a private arrangement of this
kind. The possibility of injury to a minority interest cannot raise it. If this
were not so, every arrangement of this kind would involve judicial enquiry.
Minority rights have the protection of the law without the necessity of invoking
public order. This litigation is between shareholders of a closely held
company. The agreement which the plaintiff seeks to enforce damages nobody
except the unsuccessful party to the agreement. No public interest or
illegality is involved.
I am of opinion that the same reasoning applies
here. Control of a company within Buckerfield rests with the
shareholders as such and not as directors. A contract between shareholders to
vote in a given or agreed way is not illegal. The Articles of Association are
in effect an agreement between the shareholders and binding upon all
shareholders. Article 6 in question here was neither illegal nor ultra
The appeal in respect of Aaron’s Ladies Apparel
Limited will accordingly also be dismissed with costs.
Appeals dismissed with costs.
Solicitor for the appellant: E.A.
Solicitors for the respondent, Dworkin
Furs (Pembroke) Ltd.: Soloway, Wright & Company, Ottawa.
Solicitors for the respondents. Allied
Business Supervisions Ltd. and Aaron’s Ladies Apparel Ltd.: Pitblado, Hoskin
& Company, Winnipeg.
Solicitors for the respondent, Alpine
Drywall & Decorating Ltd.: MacLeod, Dixon & Company, Calgary.
Solicitors for the respondent, M.F. Esson & Sons
Ltd.: Friel & Cooper, Moncton.