Edmonton Country Club Ltd. v. Case, [1975] 1 SCR 534

Supreme Court of Canada

Edmonton Country Club Ltd. v. Case, [1975] 1 S.C.R. 534

Date: 1974-03-18

Edmonton Country Club Limited Appellant;

and

Carl Edwin Case Respondent.

1973: November 9, 13; 1974: March 18.

Present: Ritchie, Spence, Pigeon, Laskin and Dickson JJ.

ON APPEAL FROM THE SUPREME COURT OF ALBERTA, APPELLATE DIVISION

Corporations—Invalidity of resolutions altering articles of association—Resolutions offending principle that a shareholder who has paid for his shares is thereafter free of pecuniary obligation in respect of those shares—Share transfer fee—Right of directors to refuse consent to transfer of shares.

The appellant company was incorporated in 1945 pursuant to The Companies Act, R.S.A. 1942, c. 240, for the purposes and with the objects set out in the memorandum of association. These included inter alia the acquisition of the assets of Edmonton Golf and Country Club Ltd., an existing corporation; the promotion of the game of golf and other forms of sport; the provision of club houses; and the ownership and operation of a golf course.

In 1963 the articles of association were altered by the deletion of art. 14B and the substitution therefor of a new provision, the effect of which was to abrogate the assurance in the original art. 14B that there would be no assessment against shares of the company, to impose a minimum annual fee and to give a right of forfeiture or forced sale of the share in the event of default.

In 1969 further changes in the articles of association were approved by which the owner of a common or preferred share of the company was required to pay to the company an “annual minimum fee to be established by the Directors” unless he or his nominee exercised playing privileges and paid the playing fee, failing which his common and preferred shares became subject to a lien or charge in favour of the company enforceable by sale of the shares. Also in that year art. 17 was altered to permit the directors to set the amount of a transfer fee for the registration of share transfers.

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Finally, in 1970 a special resolution was passed stipulating that “each shareholder, whether playing or non-playing, shall be required to pay the annual club fees as levied by the Board for the then current year.”

A challenge to the validity of the 1963, 1969 and 1970 resolutions was brought by the respondent, who in 1966 inherited one common and one preferred share of the company from his father. The trial judge found that the resolutions were ultra vires the company and void ab initio. He also found that art. 20A, which gave the directors the right to refuse to register any transfer of shares, was intra vires and valid. An appeal and cross-appeal were dismissed by the Appellate Division. With leave, the company then appealed to this Court and the shareholder cross-appealed.

Held (Spence and Laskin JJ. dissenting in part): The appeal and cross-appeal should be dismissed.

Per Ritchie, Pigeon and Dickson JJ.: The resolutions in question were ultra vires because they offended the basic jural principle which has given limited liability companies their vitality, namely, that a shareholder who has paid for his shares is thereafter free of pecuniary obligation in respect of those shares. The doctrine of limited liability operated to protect the holders of fully paid shares not only from the claims of creditors of the company but also from obligations, financial or other, sought to be imposed by other shareholders of the company.

As to the right of the company to change the transfer fee of “not exceeding $25.00” for which provision was made in art. 17 to “such fee as may be established by the Directors”, a transfer fee, to the extent that it exceeded the reasonable and proper cost of the transfer, constituted an illegal levy upon a shareholder in respect of his shares and a violation of the principle of limited liability.

Article 20A was not ultra vires the company. The power to refuse to consent to a transfer of shares was reserved to the directors upon incorporation of the company, by the contract contained in the articles, and was not something now sought to be imposed upon unwilling shareholders. There was no evidence, nor was it alleged, that the directors had at any time

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in the almost 30-year history of the company acted in bad faith or arbitrarily or otherwise abused the power.

Per Spence and Laskin JJ., dissenting in part: Article 20A, by which the directors were given an arbitrary power, not related to any standard for the exercise of an unfettered discretion, to control shareholdings, was bad and should be struck out. What the company had in effect done was to turn itself into a private club, despite the fact of its incorporation as a public company. If the company was unwilling to establish criteria upon which to enable a measure of reasonable exercise of discretion to be considered in advance, it ought not to be permitted to have the cover of incorporation as a public company.

APPEAL and CROSS-APPEAL from a judgment of the Supreme Court of Alberta, Appellate Division[1], dismissing an appeal from a judgment of Bowen J. Appeal and cross‑appeal dismissed, Spence and Laskin JJ. dissenting in part.

J.E. Redmond, Q.C., for the appellant.

T. Mayson, Q.C., for the respondent.

The judgment of Ritchie, Pigeon and Dickson JJ. was delivered by

DICKSON J.—This case is a challenge to the principle of company law, normally regarded as fundamental and immutable, that there can be no pecuniary assessment in respect of fully paid shares in the capital stock of a company. The case concerns Edmonton Country Club Limited, a company incorporated on June 14, 1945, pursuant to The Companies Act of Alberta, R.S.A. 1942, c. 240, for the purposes and with the objects set out in the memorandum of association. These included inter alia the acquisition of the assets of Edmonton Golf and Country Club Ltd., an existing corporation; the promotion of the game of golf and other forms of sport; the provision of club houses; and the ownership and operation of a golf course. The authorized capital of the company at incorporation, later twice increased, was $25,250 divided into 250 pre-

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ferred shares with a nominal or par value of $100 each and 250 common shares without nominal or par value, to be issued at a price of $1 per share. The provisions of Table A in the First Schedule of The Companies Act were adopted as the articles of association but with additions, the following being pertinent:

6A. The company prohibits any invitation to the public to subscribe for any of its shares or debentures.

14A. The Directors may from time to time define various classes of members and may create special classes of memberships and fix membership fees, provided that a member shall be the registered owner of a common share in order to obtain the rate for a shareholder’s playing membership.

Provided, however, that a limited company or partnership holding a share, may nominate a business associate as a playing member who shall, subject to the approval of the Directors, be entitled to playing rights at the shareholder’s fee.

14B. There shall be no assessment against shares of the Company. The Directors may permit an associate member to have playing privileges on any share for the current year, unless the shareholder has elected by March 15th of each year to exercise playing privileges. Provided, however, that the total number of senior men players shall not exceed Two Hundred and Fifty (250) in any season.

14C. Every applicant for playing membership privileges, including a shareholder, shall submit an application at the beginning of each season for approval by the Directors, and the Directors may consider and may grant or refuse any application for playing membership, provided also that the Directors may cancel any playing membership at any time on such grounds as may be deemed advisable, by resolution passed by a majority of not less than three-quarters of the Directors.

The principal issue which arises is the right of the company to assess a non-playing shareholder of the company in respect of his shares. In this regard it is, I think, to be observed that

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those who caused the company to be incorporated envisaged two classes of persons, shareholders and members. A person could be both a member and a shareholder in which case he would obtain the rate for a shareholder’s playing membership, presumably a favourable rate, but it seems clear from the articles that a member need not be a shareholder and a shareholder need not be a member. The statement that “There shall be no assessment against shares of the Company” is also of importance.

The articles of association were altered in 1963 by the deletion of art. 14B and substitution of the following:

14b. The common and preferred shares of the club shall be assessed each year an annual minimum fee not to exceed in any year 20% of the senior shareholder men’s playing fee. Where a shareholder has failed to pay the annual minimum fee within six months of notice of the assessment the Directors may direct such shareholder to sell his shares. In the event the defaulting member fails to carry out this direction, the Directors may either:

(a) Forfeit such share or shares by a resolution of the Directors to that effect, or

(b) Sell the share or shares of the defaulting member upon such terms and for such price as the Directors shall fix.

The Directors may permit an associate member to have playing privileges on any share for the current year unless the shareholder has elected by March 15th of each year to exercise playing privileges.

The amending article might have been expressed with more precision but the intention is clear, abrogation of the assurance in original art. 14B that there would be no assessment against shares of the company, imposition of a minimum annual fee not to exceed in any year 20 per cent of the senior shareholder men’s playing fee, and forfeiture or forced sale of the share in the event of default. The amendment of the articles was accompanied by the passage of this resolution:

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Payment of the said annual minimum fee shall entitle the assessed shareholder to a paid-up house membership in that year.

The next development took place at an extraordinary meeting of the company held on February 14, 1969, at which the following changes in the articles of association were approved:

(2) 14 (a) The Directors may from time to time define various classes of members and may create special classes of memberships and fix membership fees, provided that a member shall be the registered owner of a common share in order to obtain the rate for a shareholder’s playing membership. Provided however that a limited company or partnership owning a common share may nominate an employee as a playing member who shall, subject to the approval of the Directors, be entitled to exercise playing privileges upon payment of the shareholder’s annual playing fee.

14 (b) 1. Common and Preferred Shares of the company shall be assessed each year an annual minimum fee to be established by the Directors.

2. The owner of a Common or Preferred share of the company upon giving of the notice of annual minimum fee by the Directors shall—

(a) Notify the company not later than April 1st in each year of his intention to personally exercise playing privileges during the current year and upon payment of his playing fee shall not be liable to payment of the said annual minimum fee, or…

(b) Shall notify the company not later than April 1st in each year of his intention to nominate an adult person who shall be otherwise satisfactory to the Directors and who shall exercise the playing privileges of the shareholder during the current year. Upon payment of the nominee’s playing fee, which shall be determined by the Directors in each year, the shareholder shall not be liable to payment of the said annual minimum fee, or…

(c) Shall forthwith pay to the company the annual minimum fee.

3. Where a shareholder has failed to exercise his playing privileges either personally or through a nominee as aforesaid and also fails to pay the annual

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minimum fee as aforesaid within six months of the mailing of notice of annual minimum fee to him, the company shall thereupon have a lien or charge on his common and Preferred Share in the amount of any such annual minimum fee or fees.

4. For the purpose of enforcing such lien or charge the Directors may direct such shareholder to sell his shares and in the event the shareholder fails to forthwith carry out this direction, the Directors may sell such shares in such manner and at such price as the Directors deem fit and the net proceeds of any such sale shall be applied in or towards satisfaction of the amount due and the residue, if any, shall be paid to the shareholder by certified cheque mailed to such shareholder at his address as shown on the register of members. Upon such sale and accounting of the price as aforesaid, any right of the shareholder in such share is thereupon wholly extinguished.

By these amendments, the owner of a common or preferred share of the company was required to pay to the company an “annual minimum fee to be established by the Directors” unless he or his nominee exercised playing privileges and paid the playing fee, failing which his common and preferred shares became subject to a lien or charge in favour of the company enforceable by sale of the shares.

Any doubt which might have obscured the purpose underlying the changes was removed by the letter of the president of the company which accompanied the notice of the meeting and contained the following frank avowal:

3. Acceptance by all shareholders of the duty to either activate their shares by exercising playing privileges from year to year or to arrange a suitable nominee to do so, will result in higher revenue for the club to meet rising expenditures in coming years and will assure the club revenues to engage in proper financing and long term planning which will surely be required as the City moves closer to us. For many years the club has been essentially carried by the substantial support of a nucleus of about one-half the shareholders with whatever assistance was given by

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associate members. The proposed change in the Articles will result in a more even distribution of the revenue load as the club continues and could result in a lessening of the annual playing fees, which the Board feels are presently too high in view of the fact that the club enjoys only a seven month season.

Should the amendments be approved, the Board will consider a reduction of the present transfer fee of $200.00 to encourage the sale of shares held by those shareholders who do not wish either to play or to nominate another person on their behalves.

The final act on the part of the company in contention in these preceedings was the passage on December 9, 1970, of what was referred to as a “special resolution” in these terms:

That each shareholder, whether playing or non-playing, shall be required to pay the annual club fees as levied by the Board for the then current year.

This resolution was presumably intended to fix the assessment to which shareholders were to be subjected at the amount of the annual club fees, replacing the more indefinite “annual minimum fee to be established by the Directors” mentioned in the 1969 amendments to the articles of association, although the resolution did not purport to amend the articles.

A challenge to the validity of the 1963, 1969 and 1970 resolutions was brought by Mr. Case, who in 1966 inherited one common and one preferred share of the company from his father. I think the challenge must succeed as I share the opinion of Bowen J. in the Supreme Court of Alberta and of the Appellate Division of that Court that the resolutions are ultra vires the company and void ab initio. They are ultra vires because they offend the basic jural principle which has given limited liability companies their vitality, that a shareholder who has paid for his shares is thereafter free of pecuniary obligation in respect of those shares.

Edmonton Country Club Limited is a public company. In common with the Companies Acts

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of most jurisdictions The Companies Act of Alberta defines a private company (s. 2(26)) as a company that by its memorandum or articles, in the case of a company having a share capital (A) restricts or prohibits the right to transfer any of its shares; (B) limits the number of its members to fifty or less, and (C) prohibits any invitation to the public to subscribe for any shares or debentures of the company. Edmonton Country Club Limited has not limited the number of its members to fifty or less and therefore ranks as a public company, defined in s. 2(28) as a company that is not a private company. The shareholders of this public company are entitled to the same rights and privileges and subject to the same limitations as shareholders of any other public company. One can understand and perhaps sympathize with the desire of the playing shareholder members that those who own shares should also play golf and share the burden of the expenses but the corporate form of the organization is not such that a majority of the shareholders can impose on the minority of the shareholders a scheme for share assessments. Such a scheme runs directly counter to the authorities (see Ooregum Gold Mining Company of India, Ltd. v. Roper et al.[2]; Bisgood v. Henderson’s Transvaal Estates, Ltd.[3], and Shalfoon v. Cheddar Valley Co-operative Dairy Co. Ltd.[4]) and to the Act under which Edmonton Country Club Limited was incorporated. That Act does not in terms authorize any assessment of fully paid shares and such an assessment is inconsistent and incompatible with the following sections of the Act (references throughout are to R.S.A. 1970, c. 60):

15. (1) Any three or more persons (or in the case of a private company, any two or more persons) associated for any lawful purpose permitted by this Act may, by subscribing their names to a memorandum of association and otherwise complying with the requirements of this Act in respect of registration, form an incorporated company, with limited liability, that is to say,

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(a) a company limited by shares, or

(b) a company limited by guarantee, or

(c) a specially limited company.

Edmonton Country Club Limited is a company limited by shares.

2. (1) In this Act,

10. “company limited by shares” means a company having the liability of its members limited to the amount, if any, unpaid on the shares respectively held by them;

16. In the case of a company limited by shares, the memorandum shall, in the prescribed form, state

…

(c) that the liability of the members is limited…

The memorandum of association of the company so stated.

193. (1) In the event of a company being wound up, every present and past member is, subject to the provisions of this Act, liable to contribute to the assets of the company to an amount sufficient for payment of its debts and liabilities and the costs, charges, and expenses of the winding-up, and for the adjustment of the rights of the contributories among themselves, with the qualifications following, that is to say,

…

(d) in the case of a company limited by shares, or a company incorporated by special Act of the Legislature and having share capital, no contribution shall be required from any member exceeding the amount, if any, unpaid on the shares in respect of which he is liable as a present or past member.

The preferred share certificate which Mr. Case received certified that he was the owner of one “non-assessable” preferred share of the capital stock of Edmonton Country Club Limited. Section 68(4) of the Act governs with respect to his share without nominal or par value:

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68. (4) Any and all shares without nominal or par value and issued as authorized by this section shall be deemed fully paid and non-assessable and the holder of any such shares is not liable to the company or to its creditors in respect thereof.

It was contended on behalf of the company that the moneys sought to be obtained as a result of the impugned resolutions were in the nature of a fee for services, to defray operating expenses, and not an assessment for capital purposes in respect of shares. Such a distinction is not supportable on the facts of the case and is not one recognized at law. According to the president’s letter, the revenues sought to be obtained were “to meet rising expenditures in coming years” and “to assure the Club revenues to engage in proper financing and long term planning”. The assessment was not an amount payable in return for services. It was payable whether or not the shareholder played golf or otherwise availed himself of the facilities of the club. The amount payable was not in proportion to the services, if any, rendered but in proportion to the number of shares held. Playing golf was an option open to a shareholder but not an obligation. In any event, in my view, the impropriety of the assessment is unaffected by the purpose for which the funds were sought.

Counsel for the company properly stressed the broad language of s. 42(1) of The Companies Act:

42. (1) Subject to the provisions of this Act and to the conditions contained in its memorandum, a company may by special resolution alter or add to its articles, and any alteration or addition so made is as valid as if it were originally contained in the articles, and is subject in like manner to alteration by special resolution.

but the language is not of such amplitude as to sanction every alteration of or addition to the articles. The validity of the amendments is conditioned upon and subject to the provisions of The Companies Act and the memorandum of association. An amendment of articles which

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seeks to impose upon shareholders of fully paid shares any financial burden whatsoever in respect of those shares in my opinion contravenes both the Act and the memorandum of association.

Counsel for the company cited a number of authorities such as McKewan’s Case[5]; Lion Mutual Marine Insurance Association, Ltd. v. Tucker[6], and Baird’s Case[7], but they do not assist us as in each the obligation sought to be enforced was not in respect of shares but in respect of a collateral contract, entered into by the person sought to be charged, embodied in the articles. Viscount Cave L.C. took this point in Biddulph and District Agricultural Society v. Agricultural Wholesale Society[8], at p. 85.

Much reliance was placed upon an observation by Lord Atkin in Hole v. Garnsey[9]. The Court in that case refused to allow a society registered under the Industrial and Provident Societies Act, 1893, to pass a resolution to force its shareholders to take up further shares in the society. There is, however, this statement by Atkin L.J. at p. 496:

Full effect is given to the rule by limiting its operation as against dissentients to matters which are within the scope of the administration of the venture as originally framed. I should regard as within this definition such matters as the annual subscription to a social club which may fairly be regarded as a matter of internal administration. But an increase in capital is something different. (Emphasis added.)

It is a mistake I think to tear a couple of sentences out of the context in which they originally found expression and expect them to be determinative in a different statutory and factu-

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al setting. I am in full agreement with what was said by Clement J.A. in the Appellate Division of the Supreme Court of Alberta:

Lord Atkin’s remark was made in the context of the wider scope attributed to the Industrial and Provident Societies Act, 1893, and the consequential wider range of obligations in invitum which may be validly created under that Act. In view of the authorities above discussed I do not think it is applicable here.

Finally on this point I would wish to make it clear that the doctrine of limited liability operates to protect the holders of fully paid shares not only from the claims of creditors of the company but also from obligations, financial or other, sought to be imposed by other shareholders of the company. It would be a strange thing and contrary to all jurisprudence, if the purchaser of shares in a public company could be required of a sudden and against his will, at the instance of the company or a majority of its shareholders, to contribute to the operating expenses or capital requirement needs of the company. The impropriety of such a demand would only be aggravated when coupled with the threat of a lien and forfeiture of shares for failure to comply.

A subsidiary issue in this appeal concerns the transferability of shares, and has two aspects: (i) the right of the company to change the transfer fee of “not exceeding $25.00” for which provision was made in art. 17 of the articles of association to “such fee as may be established by the Directors”; (ii) the right of the directors of the company in their “unfettered discretion” to refuse consent to the transfer of shares in the company.

Upon incorporation, the following was adopted as art. 17:

The Directors may decline to recognize any instrument of transfer unless a fee not exceeding $25.00 is paid to the Company in respect thereof; and the

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instrument of transfer is accompanied by the certificate of the share to which it relates, and such other evidence as the Directors may reasonably require to show the right of the transferor to make the transfer.

The 1969 resolutions repealed art. 17 and substituted the following:

The Directors may decline to recognize an instrument of transfer unless such fee as may be established by the Directors is paid to the company in respect thereof, and the instrument of transfer is accompanied by the share certificate to which it relates and such other evidence as the Directors may reasonably require to show the right of the transferor to make the transfer.

The president’s letter to which I have earlier referred contained this paragraph:

2. Alteration of the Articles of Association to permit the Directors to vary from time to time the transfer fee on sale of shares will allow the Directors to either discourage or encourage trading in the company’s shares according to the current interests of the club.

A transfer fee is intended to reimburse a company for the reasonable and proper costs entailed in effecting a share transfer, including the cost of recording particulars of the transfer, providing a new share certificate, correspondence and mailing. I cannot but think that manipulation of the amount of the transfer fee for the purpose of discouraging or encouraging trading in the shares of a company or indeed for any purpose other than that of facilitating the transfer of shares, is entirely improper. To the extent that a transfer fee exceeds the reasonable and proper cost of the transfer, it constitutes an illegal levy upon a shareholder in respect of his shares and a violation of the principle of limited liability.

The other aspect of the transferability problem concerns the validity of art. 20A of the articles of association. This provision appeared in the articles as originally drafted and has remained unaltered:

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20A. No shares in the Company whether or not paid up shall be transferred to any person without the consent of a majority of the Directors, who may refuse such consent whether such shares are or are not paid up, in their unfettered discretion.

The effect is to vest in the directors a power, exercisable without stated criteria, to restrict or even veto the transfer of a fully paid share of the company. The question which must be answered is whether a company incorporated under The Companies Act of Alberta can give its directors such a power. The trial judge and the Court of Appeal answered this question in the affirmative and Mr. Case has cross-appealed.

A private company must, by its memorandum or articles, restrict or prohibit the right to transfer any of its shares, and a public company, other than one whose shares are listed for trading on a stock exchange, may include in its articles restrictions on the right of transfer. In Canada National Fire Insurance Co. v. Hutchings[10], the Privy Council held that a company incorporated by letters patent under the Companies Act, R.S.C. 1906, c. 79, could not validly make a by-law giving the directors an unrestricted power to disapprove transfers but Sir Walter Phillimore said in the course of the judgment, p. 456:

There is… for the present purpose no analogy between companies in the United Kingdom which are formed by contract, whether it be under deed of settlement or under memorandum and articles of association to which the Registrar of Joint-Stock Companies necessarily assents if the documents are regular in form, and Canadian companies which are formed under the Canadian Companies Act, either by letters patent or by special Act.

and at p. 459, referring to the power of veto given the directors, he said:

There are decided cases in the English Courts which show that such a power may be lawfully reserved on the occasion of the constitution of the company, and a sufficient number of such cases to

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show that the power has been found convenient in use.

Re Gresham Life Assur. Society; Ex p. Penney[11]; Re Bell Bros. Ltd.; Ex p. Hodgson[12]; Re Coalport China Company[13] and Re Smith and Fawcett, Limited[14] might be cited as examples.

The right of a shareholder to transfer his shares is undoubtedly one of the incidents of share ownership, assured by The Companies Act of Alberta, s. 61, “The shares or other interest of any member in a company are personal estate, transferable in the manner provided by the articles of the company…”, as it is by the Companies Act, 1948 (U.K.), s. 73, but the right is not absolute. We find in 6 Halsbury, 3rd ed., p. 252, the statement:

A restriction on the right to transfer shares is not repugnant to absolute ownership of the shares, but is one of the original incidents of the shares attached to them by the contract contained in the articles.

and:

There is apparently no limit to the restriction on transfer which may be so imposed…

The same thought is expressed, more positively, in Palmer’s Company Law, 21st ed., p. 340:

It is common for articles to provide that the directors shall have the power of declining to register a transfer without assigning any reason therefor; or in their absolute and uncontrolled discretion; or in some equally sweeping terms…

and in Gower’s Modern Company Law, 3rd ed., p.392:

These restrictions may take any form, but in practice they normally either give the existing members a right of pre-emption or first refusal, or confer a discretion on the directors to refuse to pass transfers.

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This footnote follows:

The latter restriction is commonly found in conjunction with the former. In the U.S.A. it is generally held that restrictions, being restraints on the alienability of personal property, must be reasonable. In England it is clear that there is no such rule except, perhaps, when the restrictions are imposed after the shares have been issued.

I have concluded that art. 20A is not ultra vires the company and that the cross-appeal must fail. The power to refuse to consent to a transfer of shares was reserved to the directors upon incorporation of the company, by the contract contained in the articles, and is not something now sought to be imposed upon unwilling shareholders. Before we move to strike down such a power on the ground that it is unreasonable, we should, in my view, have some factual support for that conclusion. There is no evidence before us, nor is it alleged, that the directors have at any time in the almost 30-year history of the company acted in bad faith or arbitrarily or otherwise abused the power.

I would accordingly dismiss the appeal with costs and dismiss the cross-appeal without costs.

The judgment of Spence and Laskin JJ. was delivered by

LASKIN J. (dissenting in part)—I am in agreement with my brother Dickson that the appeal fails for the reasons that he has given. The cross-appeal respecting the validity of art. 20A of the articles of association gives me more pause, but, on balance, I am of the opinion that the article should be struck out.

My brother Dickson has fairly assessed it as vesting in the directors “a power exercisable, without stated criteria, to restrict or even veto the transfer of a fully paid share of the company”. The difference between us is whether this

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arbitrary power, not related to any standard for the exercise of an unfettered discretion, should be controlled only in the context of a particular case requiring its exercisè (as he would have it), or whether it should be struck out simply because it is on its face utterly arbitrary (as I would have it).

The considerations which move me to strike it out are easily stated. What the company has in effect done is to turn itself into a private club, despite the fact of its incorporation as a public company. I am not persuaded that persons, knowing of the arbitrary power of the directors to control shareholdings, would, or should be expected to submit themselves to whatever obloquy may be involved in the possible rejection of their application for a transfer of shares. If the company is unwilling to establish criteria upon which to enable a measure of reasonable exercise of discretion to be considered in advance, it ought not to be permitted to have the cover of incorporation as a public company.

The relevant Companies Act of Alberta, R.S.A. 1942, c. 240, does not confer any express power upon a public company to restrict the transfer of fully paid shares. Any such power must be drawn inferentially from s. 65 which provides that “the shares… of any member in a company shall be personal estate, transferable in the manner provided by the articles of the company…”. In so far as this may be thought to confer some authority to restrict transfer, I would read it, as I would read a similar power in a municipal Act or in legislation establishing a statutory agency, as requiring some standard which would be amenable to judicial control, if need be. The standard articles of association set out in Table A of the First Schedule to the Act include s. 17 which provides that “the directors may decline to register any transfer of shares, not being fully paid shares, to a person of whom they do not

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approve, and may also decline to register any transfer of shares on which the Company has a lien”. This is hardly a telling provision one way or another, but, so far as it is indicative of policy, it militates against a conclusion that an absolute restriction of the transfer of fully paid shares may be introduced into the articles of association of a public company. Restrictions on transfer are, of course, part of the very being of a private company, as is evident from s. 2(z) of the Act.

It is said, however, and certainly there is case law to support this view, that in memorandum and articles of association companies, albeit incorporated as public companies, the contractual aspect of the memorandum and articles supports the power to include drastic restrictions on transfer. This has been also referred to as part of the general law governing such companies.

There are two comments that I would make on this submission. The first is that, although originating in contract, shares in a public company are a species of property and as such are entitled to the advantage of alienability free from unreasonable restrictions unless there is statutory warrant otherwise. The second comment concerns the so-called contractual aspect of memorandum of association companies. The memorandum of association is but a method of incorporation, under which its contractual aspect is submerged in a statutory regime subjecting the company to public regulation. I cannot, in such circumstances, and in the absence of express power in the memorandum, subscribe to the proposition that there is a contractual warrant for adopting an article of asso-

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ciation which confers an unlimited discretion to refuse a transfer of shares.

My brother Dickson has referred to the judgment of the Judicial Committee in Canada National Fire Insurance Co. v. Hutchings[15], where a distinction was drawn, in respect of the matter under consideration, between a letters patent company or one incorporated under a special Act and a memorandum of association company. I cannot be persuaded that the form of incorporation can have such a remarkable effect upon the permissible scope of a power to regulate or prescribe conditions for the transfer of stock in a public company.

I am not concerned here to examine how far restrictions on transfer may go in a public company before courting invalidity. In Ontario Jockey Club Ltd. v. McBride[16], the Judicial Committee, dealing with a letters patent company, said that it is permissible to give a right of pre-emption but that “a restriction which precludes a shareholder altogether from transferring may be invalid” (at p. 923). I would not be so equivocal and, certainly, the Judicial Committee was not equivocal on this very point in the Hutchings case.

The pre-emption or first option type of restriction is a common one in the United States and it has generally been held valid. But the position there is otherwise in respect of restrictions of the kind found in art. 20A, particularly where there is no limitation of time on the restriction. The law in the United States appears to have sought reconciliation of the contractual and property aspects of shares, so far as restrictions on transfers are concerned, by applying a

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test of reasonableness. Ballantine on Corporations, rev. ed., 1946, at p. 778, states the position as follows:

It has been held in numerous cases that restrictions which prohibit transfers except upon the approval and consent of the directors or other shareholders are invalid as contrary to public policy and as imposing undue restraints upon the alienation of property. But a requirement of consent by directors or shareholders has sometimes been upheld, especially when imposed by charter or by an agreement of the shareholders of a closed corporation.

I should note that the closed corporation is similar to the private company in Canadian law: see Gower; “Some Contrasts Between British and American Corporation Law” (1955), 69 Harv. L. Rev. 1369, at pp. 1375-6. Oleck, Modern Corporation Law, vol. 3, 1959, deals with the same point in a more modified way than Ballantine in two passages at pp. 286 and 300 respectively, as follows:

Take a restriction, not uncommon, which declares that a shareholder shall not transfer his shares unless he first obtains the consent of the directors, or of the shareholders, or of a certain proportion of the directors or the shareholders. Generally speaking, this type of restriction is considered an unreasonable one and is thought to contravene public policy, and it is held, on this ground, that a mere by-law restriction of this character is “void” and unenforceable. On the other hand, a restriction of this kind inserted in the original articles of incorporation has been sustained in two cases.

…

A less common restraint is the “consent” restriction, whereunder the consent of the board of directors or of the remaining shareholders is a prerequisite to the transfer of the stock. While these restrictions have been upheld they operate virtually to bar the alienation of the shares and are more likely to be considered unreasonable and therefore void.

A test of reasonableness commends itself to me, especially in view of the emphasis on the

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property aspect of shares indicated by s. 65 of the Alberta Companies Act already referred to. On this view, it is my opinion that art. 20A is bad. I am reinforced in this view by the fact that it would ex facie preclude even involuntary transfers, although it appears in the present case that the plaintiff who acquired the shares under his father’s will did get the approval of the directors for their effective transfer to him.

I would, accordingly, allow the cross-appeal with costs.

Appeal dismissed with costs and cross-appeal dismissed without costs, SPENCE and LASKIN JJ. dissenting in part.

Solicitors for the appellant: Bishop & McKenzie, Edmonton.

Solicitors for the respondent: Milner & Steer, Edmonton.