APRIL 13th, 1967
Mini Shareholders And Dummy Directors
AN ADDRESS BY
Allan F. Lawrence, Q.C., M.P.P.,
CHAIRMAN, SELECT COMMITTEE ON COMPANY REFORM OF THE ONTARIO LEGISLATURE
R. Bredin Stapells, Q.C.
Today we are concerned with reform. The history of all civilizations is an ebb and flow of change and retrenchment. In Canada's short history there have been times when we were content with the calm of laissez-faire government, but more often, we have been in the midst of ferment. One thinks of the turbulent days of Toronto's first mayor, William Lyon Mackenzie, the robust eras of Sir John A. and Sir Wilfrid Laurier, Mitch Hepburn and George Drew.
But while brandy may improve with age, institutions often do not. The law as an institution has been rebuked for being an ass. However, it has its creative side. And one of its most useful creatures is the fictitious person known as the corporation. Like the holy grail, the closest one comes to seeing a corporation is in writing. The writing is neutral enough in the affairs of this world, but the people who use the corporation are more complex.
It has been said that it takes a crook to catch a crook; so it takes a -lawyer to reform the law. Today, we are delighted to have with us Allan Lawrence, a lawyer, who has undertaken to scrape off fuzzy tradition to see what should be done to make our Ontario corporations more in tune with the business and ethical life of our Province.
Mr. Lawrence was elected to the Ontario Legislature in May of 1958, at 32 the youngest member ever elected to the Ontario House. (This was before the deluge of youth in public affairs.) He has had a long and loyal association with Toronto -since his birth in 1925. He received all of his education here except for a year's sojourn reading law in London, England. He has been a political animal from university days, including participating in the British election of 1955, in between the readings of law already mentioned.
It is the activities of Mr. Lawrence in the Provincial Legislature which has brought him to us today. The great essayist Emerson said:
"It is easy in the world to live after the world's opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude."
To his credit, Mr. Lawrence has been accused of that greatness.
On a less high plane, an earnest politician was heard to say:
"My handkerchief is very valuable to me. It is the only thing I can stick my nose into safely!"
It is my pleasure to introduce to you a man who has lost that comfortable handkerchief and who is a distinguished director of the Empire Club, Allan F. Lawrence, Q.c., M.P.P., Chairman of the Select Committee on Company Law.
Select Committees of the Legislature are set up on the motion of the Prime Minister and are composed of representatives of all parties of the Legislature. As a general rule they are given fairly re tricted Terms of Reference and there is usually an attempt t both geographical and occupational representation. The are frequently set up in answer to a clearly demonstrated need or demand of the day. Their job is to conduct hearings, usually when the Legislature is not sitting, and to report back to the next Session of the Legislature. If they are not then ready with a Report they ask to be reconstituted and they are usually reappointed. They thus keep going until they report or until the Legislature is dissolved for a general election.
A Select Committee is a Parliamentary Committee and, therefore, its life is strictly dependent upon that particular parliament not being dissolved.
On occasion, Select Committees have reported to the Legislature and absolutely nothing has been done with their Report, although, to be fair to the Robarts government, this has not happened of late. I have now been a member of three Select Committees since my election to the Legislature in 1958 and in the case of the first Committee almost all of the recommendations have been adopted over a period of years. In the case of the second Committee, that on Consumer Credit, the Robarts government has almost completely adopted the recommendations of that Committee as a package and, of course, the third Committee was the Committee I have had the honour of chairing, namely the Select Committee on Company Law, which just last week tabled what we call an Interim Report.
The Company Law Select Committee was composed of members of all three political parties, most of whom are lawyers, but as well had a Farmer, a Real Estate and Busi ness Broker, an Insurance Agent and a small businessman among the eleven members. The Committee was set up on the motion of Premier Robarts in the dying days of the 1965 Session and we got to work with the organizational nature of the Committee fairly early in that summer. In the 1966 Session we did not report to the Legislature, but the Committee was reconstituted and we have now brought in our Report. One of our difficulties is that as late as four or five years ago, the Legislature sat for only about 60 days and the Committee, therefore, had 10 months of each year to organize and work. Now the House sits from January to July and with no work possible in August or at Christmas, it really leaves only the Autumn months in which to hold meetings.
This Committee was slightly different from the usual run of the mill Committee in that there was no clearly demonstrated demand or need for the setting up of the Committee. In June of 1965 the Atlantic Acceptance fiasco was certainly a cloud on the horizon, but British Mortgage and Trust had no public troubles and, of course, most members of the Committee had never even heard of Prudential Finance. In retrospect, I am convinced that the government was showing a great deal of foresight in setting up this Committee. At the time of the formation of the Committee I was asked why it was being set up. The impression left with me by several people who were more conversant than I in Corporation matters, was to the effect that most people were satisfied with our Corporate Laws and that there were perhaps other general topics requiring more urgent revision and work done on them.
This impression receded as the Committee got into its work and also as events transpired in the financial community which showed there was a real need, and that the government was correct in its estimation that work had to be done in this field.
The Committee was different in another way as well, it was given extremely wide Terms of Reference: the stated purpose was to review and report to the Ontario Legislature on the basic principles affecting corporate existence in this province and how improvements, if any, could be made respecting our laws, our administration of those laws, and general corporate procedure.
We began by drafting up a series of questions which we believed encompassed most of the problem areas in the province and as we proceeded these questionnaires were sent out to some of the more interested groups, organizations and professions within the province and served as a basis for our own Research programme.
We not only attempted to contact interested organizations and people in the province from whom we thought we could receive opinions, recommendations and guidance, but as well, we placed advertisements in the daily press and some specialized journals in the province and also sent out some 90,000 notices to every corporation doing business within the province of Ontario, in an attempt to advise the public of the existence and purpose of the Committee. In this way we hoped to stifle any complaint that we had not asked for the opinions of those who were interested. Apparently, this was a vain hope.
It soon became obvious that large segments of the financial and legal community either had a low opinion of parliamentary Committees such as ours, or had no opinion of them. In any event, in the initial year of our existence we received very little in the way of comprehensive memoranda or briefs from persons and groups who we thought would jump at the chance of making representations to us and it soon became obvious that we would have to embark on an extended research programme of our own if we were going to accomplish anything within the time limit given to us.
I'm suggesting to you that the current lack of communication between those who formulate the law and those who have to live and work within the law is mainly the fault of the latter group. It is one of the frustrating aspects of the politician today. A politician is fair game for attack from almost every quarter, but one of the most galling attacks which he receives is from well meaning groups who, after the formulation of new policies and the public enunciation of these policies, accuse the politician or governments or parliamentary Committees of doing some amateur tinkering in the economy, yet at the time of the formulation of some new policy those same persons are invariably the ones who do not make their voices heard. We feel that we went out of our way to advise the legal and financial community and the public of the existence of our Committee. The initial response from those who should have been concerned was not very great. Therefore, we felt we had to embark on an extensive research programme ourselves and this again, was a fairly new development for a Select Committee of this type.
We engaged a hard working and able Research staff and had the invaluable help of an extremely able counsel who was assisted by an associate counsel. Initially we had a part time secretary and later a full time secretary who also fulfilled many of the functions of a research assistant and to whom the Committee owes a great debt of gratitude.
I had long been aware that there was a vacuum of intellectual activity in the general field of commercial law in this province and in this country. By that I mean, of the three segments or classes of persons involved in corporate matters, each group was sometimes working away, not only oblivious to the actions and work and responsibilities and duties of the other two groups, but in some cases working even at cross purposes to the interests of the other groups. It seems to me that in our Law Schools and in our Universities in Ontario we had really not produced any scholars of note who were accepted as being knowledgeable in this field by those in governmental circles; nor did any single name come to mind when one talked about intellectual research in corporate law at the Law School or University level when one spoke to practitioners in the law.
It also seemed to me that most of those who practise Corporation Law in this province are too busy making money to pay much attention to the formulation of the laws or to pay much attention to basic fundamental theories of Corporate Law.
As well, governmental figures in this field were equally divorced from the other two groups.
The Committee, in its small way, attempted to change this and we believe we were partly successful. We set up what we called a University Advisory Committee to our Select Committee. Each of the Law Schools in the province was represented on it. After discussion, we commissioned papers on given important topics to be prepared and presented to the Committee. These papers were prepared by persons recommended by the Deans of each Law School of the province and formed part of our working research papers.
That brings to mind another purpose of all Select Committees with which I did not deal before; the Report of a Select Committee really does not commit anyone to any thing. I have always felt, especially in such a field as covered by our Select Committee, that if the Committee's Report or its deliberations did nothing else but stimulate some much needed intellectual activity, then within reasonable bounds as to cost of the Committee, the price would be worth it.
As we travelled to other jurisdictions such as Britain or California, for instance, we were able to see what a close liaison there is between those who practise the law and those who formulate the law and those who do basic thinking about the law in a theoretical way.
In Britain we met and had discussions with Professor L. C. B. Gower who has written a text on Modem Company Law, which is a reference for legal practitioners wherever English is spoken. Professor Gower is not only a law professor, but he has taken a hand in the actual drafting of Company Law Statutes and was the author of the new Ghana Companies Code. He is looked upon by those who practise law and formulate the law in Britain as one whose counsel and advice can be relied upon not only in theory but in the practice of corporate law.
In California we visited Professor R. W. Jennings of the Berkeley Campus of the University of California and he was of tremendous assistance to us. I am told, and I can quite readily believe, that hardly a word or phrase used in the California Corporation Statutes has not first of all been vetted by Professor Jennings or other academics of his standing. As the Committee visited other jurisdictions, we could not help but contrast this picture with the picture here, of all three segments in this one field of corporate law working away with the same objective in mind, but with a great lack of communication between them.
We have attempted to rectify this with what we hope is a scholarly Report, with realistic and practical recommendations and as I have indicated, we hope that if we have done nothing else, we have stimulated a great many ripples of theoretical and practical activity in what was before a very placid pool. We certainly have some governmental administrators thinking along different lines and believe that a fresh approach is being taken by some in the Universities and Law Schools due to our start on the basic fundamentals of corporate law. The first printing of our Report is already almost out of print due to the demand of the Law Schools and practitioners in the Accountancy and Legal professions.
The Report of the Committee is not based on research papers alone of course. We felt that we had to visit other jurisdictions because for all the reading one can do of the statutes and regulations and administrative procedures of other jurisdictions, until we had the opportunity of actually speaking to those who have to interpret or administer those laws, or the people who have to work with the laws every day, then research into these comparative law fields would be meaningless. A working sub Committee, for instance, visited Britain where we were hospitably received by government officials, by the London Stock Exchange, by the Accountancy profession, and major figures in the field of practising corporate Solicitors. But I must tell you that one of the most enjoyable afternoons we spent was with Lord Justice Diplock and the three Judges of the Companies Court in the Royal Courts of Justice in the Strand in London. We were really thrilled to be able to sit down and drink tea with the people who have the responsibility of interpreting Britain's corporate statutes. It was also obvious that it was a very novel experience for the Justices as well to be asked their opinions of the administration and formulative processes of British corporate law, especially by politicians, and I gained the opinion that the type of questions we were asking had probably never before been asked and certainly not by any British parliamentary group. On our return to Canada we carried on a close liaison between some of the working members of our staff and the Ontario Judiciary.
I have been asked why we took the Committee to California and I am sure there is the impression in the minds of some members of the public that if the weather reports had been better for Florida that week, then perhaps we would have ended up in Florida rather than California. Let me assure you that these were working trips with a purpose. California has a most interesting history in this particular field of government regulation of the financial community. I am told that in the period immediately after the first World War, California was like a beacon in the night enticing every nut and crook in the country, with the idea firmly implanted in their minds, that an easy fortune was to be made out of the comparatively wealthy retired persons who were then beginning to settle in very large numbers in that Golden State. The state of California, therefore, moved quickly and firmly into the field of governmental regulation of financial affairs and imposed a very strict paternal type of legislation that was not in existence anywhere else in this hemisphere. Their experience in this field, therefore, even pre-dates the entry of the Federal government at Washington with the new deal legislation of Roosevelt of the 1930's. Some of us were quite astounded at the extent of the state's regulations and requirements, but there are signs that instead of imposing an even heavier hand of governmental intervention, the state of California is reversing the trend so apparent here and elsewhere and attempts are being made to move out of some of the fields the state now occupies. Their reason for vacating this jurisdiction is, of course, that the Federal government now covers some of the aspects of securities and corporate legislation which is duplicated at the California state level. We feel that our week long trip to California was extremely valuable to us and we had very lively and worthwhile contributions made to us by all three segments: the practising lawyers' point of view, the governmental administrators' point of view and the academics' point of view.
The choice of a visit to New York state and Albany was, of course, quite obvious. New York state is not only close in a geographical sense, but in the corporate field as well, there is more interconnection of corporate activity between New York state and the province of Ontario than there is between Ontario and most of the other provinces of Canada. In 1964 New York state enacted a brand new "Business Corporations Law" which was the result of a mammoth study undertaken by the joint legislative Committee to study the revision of the Corporation Laws of the state of New York. A Committee, by the way, that sat continuously between 1958 and 1963 and which was roughly comparable to our own Select Committee, with the exception that on occasion it had over 200 lawyers working full time along with squadrons of accountants and consultants and Law School professors and expert professional advice from every quarter. These American Committees sometimes made us look like pikers. As well, many of the administrative problems which we face here in Ontario with our explosive expansion, have been faced in New York state and some solutions found, so we took along some Corporation Branch officials with us in the belief that this would be of assistance to the administrative side of our government as well.
I don't intend to say too much about the actual recommendations in our Report because copies of the Report are available to you through the Select Committee office, Box 234, Parliament Buildings. However, there are certain threads running through the whole fabric of the Report and nowhere in the Report do we actually give a summation of the underlying philosophy of the recommendations as a whole. Wherever we went, one of the first questions we tackled the local experts with, was whether they believed the continued encouragement of corporate life was beneficial as far as their own jurisdiction's economy and the public interest was concerned. This, to me, seemed an extremely simple but basic and relevant question and I was amused at how many corporate and financial experts were surprised at the question, indicating to me at least, that many of them had really not thought about the problem in these terms before. On reflection, most of them did agree that the economy and the public interest was well served by the continued encouragement of the corporate form and the Committee itself came to the same conclusion. The flexibility of the Company coupled with its continuity are its main attributes, and the fact that through corporate financing large sums may be gathered together which enables expansion to take place is one argument which I believe has been lost sight of in the recent recommendation of the Carter Commission.
Another underlying theme of the Report is the tendency for us, in our recommendations to follow the American experience rather than the British. Generalizations are always an extremely dangerous manner of speech, but on the whole, with the exception of the idea respecting the Companies Court, I think it is fair to say that the Committee decided to turn its back on the historical and traditional basis of Ontario's Corporate statutes which were British in origin and turn instead, to some of the American approaches. Perhaps in this day of fierce international and interprovincial Corporate competition and our proximity to the United States rather than to Britain, this was inevitable. But there are fundamental principles involved. In the main, the British approach since 1948 has been to depend upon the intervention of a governmental agency in corporate affairs, to expose unfair or near fraudulent practices. This general approach has been coupled with providing an opportunity of having direct intervention in the general affairs of a corporation by the courts themselves on the application of an injured shareholder. These approaches really were theoretical rather than practical in that no realistic guide lines were set down for the courts' intervention and we had many instances cited to us of the tardiness or reluctance of civil servants to move quickly into certain fields when required. We decided on the basis of the evidence that was presented to us that the approach of certain of the American states was more satisfactory and that a civil action of an aggrieved shareholder suing the directors or the company itself on a representative basis on behalf of other shareholders was a more sensible and realistic line to take. We have, therefore, recommended the sweeping away of some of our unbelievably ancient procedural court rules and the enactment of new statutory provisions which would enable minority groups to attack those who are in control of corporations.
Another theme running right through the Report is the general recommendation of the tightening up of "conflict of personal interest" rules. We have specific recommendations in this aspect relating not only to directors, but to auditors, to officers of companies, to trustees, to managers and to receivers as well.
We feel that we have made very major and sweeping recommendations which will result in a complete reformation of the role of directors, the rights of minority shareholders, the role of the auditors and the duties and obligations of trustees under Trust Indenture. However, I personally feel that these four fields have now been very thoroughly covered in the daily press and in some of the many discussions, which have been both publicly and privately held since the publishing and tabling of the Report.
There are a great many other recommendations worthy of note which have not been emphasized, but to which I would like to refer at least fleetingly, today. For instance, wherever possible we have attempted to obliterate many of the artificialities and legal fictions in our corporate law and in our corporate practice. We intend to remove the discretion of the Provincial Secretary to grant incorporation of comparties because we feel that this is unreal where over 8,500 applications are made to the Provincial Secretary every year for some form of letters patent or supplementary letters patent relating to corporations. We are attempting to put the onus for the correctness of the actual incorporation procedures on the shoulders of the applicants themselves.
We feel that most of the corporations in this province have only one principal and we are, therefore, saying that the "one-man shareholder" company and even the "one-man director" company should be permitted because in actual fact this is what takes place today, but that due to the unnecessary requirements of the statute, there are innumerable dummy directors and dummy shareholders.
We feel that the existing distinction between public and private companies in Ontario is an historical anachronism and that this should be abolished.
We can see no reason at all why professional groups such as large firms of lawyers, groups of doctors banded together in Medical Clinics, firms of architects, and others should not be permitted, under strict control, to be allowed to incorporate, if the professional licensing bodies themselves decide that the professional groups desire it.
To a knowledgeable group such as the members of the Empire Club, I do not have to emphasize the dangers inherent in the choosing of names of corporations. There may not be any one here from Prudential Finance Company, but I am sure that there are policy holders of Prudential Assurance. We believe that some of these obvious problems can be rectified by the setting up of a Central Registry for all Corporate and Business names used in the province and I should emphasize to you that this means all business names, and not merely corporate names, but names of partnerships and sole proprietorships as well.
We have recommended some very specific and sweeping reforms in both the law and the practice of the Transfer of Share certificates. I am sure that the last time you bought shares in a highly speculative fast trading mining company, you received a share certificate that was in street form, i.e., endorsed and registered in the name of a Broker. I'll bet that you believed that the possession of that share certificate was conclusive proof for all purposes of your ownership of the shares. You were 100% wrong. The reforms which we have advocated will have the effect of simplifying the administrative procedures of the transfer agents, the trust companies, the brokers and the Toronto Stock Exchange. The law would be up-dated to conform to many of the popularly-held misconceptions relating to the transfer of stock certificates and to improve the negotiability of those certificates.
My hope is that before the House is dissolved and the Election called we will see and know exactly what the intention of the government is in relation to at least the more important of the Committee's recommendations.
I must emphasize once more, regardless of the actual legislative changes we ask to be brought about, I feel that one of the basic purposes of our Committee was to get people thinking and to stimulate intellectual activity and I am convinced that if in nothing else, at least in this we have succeeded.
There is still much to be done and that is why we have labelled our Report only an Interim Report and we have suggested to the Legislature that we be reconstituted. This, of course, is meaningless if the House is dissolved and we head into a provincial Election, but I hope we have demonstrated to the present government and to any government that may succeed it that there is a need for continued research and work in this general field and in many of the specialized problem areas which I have not touched upon today.
From my own point of view, working with these able and varied men on our Select Committee has been an intriguing and adventuresome venture. Obviously, I am proud of the work of the Committee, proud of the work of the staff of the Committee and proud of the Report of the Committee. We have had many able contributions to our work from the public at large and from interested groups. Now that we have established this co-operation and this thinking upon fresh approaches, I am satisfied that whether or not the Committee is reconstituted that the Interim Report of the Ontario Legislature Select Committee on Company Law has made an indelible impression and constructive contribution to the well being of us all.
Thanks of the meeting were expressed by Mr. Robert I. Hendy.