7 January 2010 Internal T.I. 2009-0314351I7 - De jure control

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether an agreement entered into by all shareholders of a corporation that restricts the powers of the directors to manage the business and affairs of the corporation prevents the majority shareholder from having de jure control of that corporation.

Position: No.

Reasons: The only provisions of the unanimous agreement that are relevant in determining de jure control are the ones that restrict the exercise of the director's powers or that otherwise modify a rule applicable to the corporation under the relevant corporate act that is specifically made subject to a unanimous shareholder agreement. The nature and significance of the restriction to the powers of the directors included in the agreement does not prevent the majority shareholder from having effective control over the business and affairs of the corporation. The case of Duha Printers does not stand for the proposition that the provision of the agreement allowing the minority shareholders to designate nominees is relevant in determining de jure control and taking that provision into account in that determination appears to run against the principles stated by the Supreme Court of Canada in the reasons for that judgement.

Mr. Michael Kocher
Technical Advisor - Audit Division
Ottawa Tax Services Office						2009-031435
333 Laurier Avenue West							François Mathieu
Ottawa ON  K1A 0L9

December 7, 2009

Dear Mr. Kocher:

Re: Request for a Technical Interpretation
Character of the Shareholders' Agreement dated XXXXXXXXXX

We are writing in response to your request for a technical interpretation ("Technical Interpretation") dated March 18, 2009 in which you have asked us to review the submissions of XXXXXXXXXX dated March 10, 2009 to the effect that the shareholders' agreement dated XXXXXXXXXX ("Agreement") entered into by XXXXXXXXXX . (previously XXXXXXXXXX . and herein called "Opco"), XXXXXXXXXX ("Shareholder 1"), XXXXXXXXXX ("Shareholder 2") and XXXXXXXXXX ("Shareholder 3") qualifies as a "unanimous shareholder agreement" as defined in subsection 108(2) of the Business Corporations Act (Ontario) ("USA") and prevented Shareholder 1, a non-resident, from having de jure control of Opco.

For the reasons stated below, it is our view that only some provisions of the Agreement should be taken into account in making a de jure control determination. Those provisions are the ones that modify the rules otherwise applicable to Opco under the OBCA, including restrictions to the exercise of the directors' powers to manage the business and affairs of Opco. In our view, it is not reasonable to conclude that the nature and significance of such modification by the Agreement is such that there is no way for Shareholder 1 to exercise effective control over the affairs and fortunes of Opco in a way analogous or equivalent to the power to elect the majority of Opco's Board of Directors (the "Board"). Therefore, the relevant provisions of the Agreement do not deprive Shareholder 1 from its de jure control over Opco in respect of its XXXXXXXXXX and XXXXXXXXXX taxation years.

Facts

General

1. Opco was incorporated on XXXXXXXXXX under the laws of the province of Ontario to carry on the business of XXXXXXXXXX .

2. Upon incorporation, XXXXXXXXXX was the sole director and shareholder of Opco.

3. The articles of incorporation for Opco provide that it is authorized to issue an unlimited number of common shares. They also provide that the shareholders are not authorized to transfer any shares in Opco without the approval of the directors of the corporation or the holders of at least a majority of the voting shares in that corporation. They finally provide that Opco is prohibited from inviting the public to subscribe for securities in that corporation.

4. On XXXXXXXXXX resigned as sole director of Opco and was replaced by XXXXXXXXXX .

5. On XXXXXXXXXX transferred the 1 common share he held in Opco to XXXXXXXXXX .

6. On XXXXXXXXXX subscribed for an additional XXXXXXXXXX common shares in Opco.

7. On XXXXXXXXXX transferred the XXXXXXXXXX common shares it held in Opco to Shareholder 1, which has been a non-resident corporation at all times relevant hereto.

8. On XXXXXXXXXX , the authorized share capital of Opco was amended to add an unlimited number of Class A Special Shares, which do not have any voting rights for the election of directors and carry a right to receive a fixed non-cumulative preferential XXXXXXXXXX % dividend. Opco also has the option to redeem on demand the Class A Special Shares for an amount equal to their subscription price together with any unpaid dividends thereon. In the event of liquidation or wind-up of Opco, the holders of the Class A Special Shares are entitle to receive the redemption proceeds together with any unpaid dividends in priority to any distribution to the holders of common shares.

9. On XXXXXXXXXX , Shareholder 1 subscribed for an additional XXXXXXXXXX common shares in Opco for a subscription price of $XXXXXXXXXX . On XXXXXXXXXX , Shareholder 2 and Shareholder 3 subscribed for XXXXXXXXXX and XXXXXXXXXX common shares in Opco, respectively, for an aggregate subscription price of $XXXXXXXXXX .

10. On XXXXXXXXXX , Opco issued XXXXXXXXXX Class A Special Shares to Shareholder 1 in consideration for a subscription price of $XXXXXXXXXX and XXXXXXXXXX Class A Special Shares to Shareholder 2 in consideration for a subscription price of $XXXXXXXXXX .

11. On XXXXXXXXXX , a resolution of the sole director of Opco increased the number of directors of the corporation to XXXXXXXXXX

12. On XXXXXXXXXX , a resolution of the shareholders of Opco provided that the following persons were elected as directors of the corporation: XXXXXXXXXX

13. As of XXXXXXXXXX , the individuals serving on the Board of Opco were XXXXXXXXXX

14. On XXXXXXXXXX , the Board resolved to amend the authorized share capital of Opco by adding an unlimited number of Class B Special Shares, which do not have any voting rights for the election of the directors, but otherwise have the same rights and privileges as the common shares in Opco. However, the amendments to Opco's articles of incorporation to amend its authorized share capital only became effective on XXXXXXXXXX .

15. On XXXXXXXXXX , Shareholder 2 subscribed for an additional XXXXXXXXXX common shares in Opco in consideration for a subscription price of $XXXXXXXXXX . Opco loaned an amount of $XXXXXXXXXX to Shareholder 2 to finance the payment of the subscription price, which was evidenced by a promissory note payable on XXXXXXXXXX and bearing interest at the rate of XXXXXXXXXX % per annum.

16. On XXXXXXXXXX tendered his resignation as a director of Opco and the shareholders of Opco approved a resolution pursuant to which the number of directors of the corporation was reduced to XXXXXXXXXX

17. On XXXXXXXXXX subscribed for XXXXXXXXXX Class B Special Shares in consideration for a subscription price of $XXXXXXXXXX .

18. On XXXXXXXXXX , all the shareholders of Opco resolved to increase the number of directors of the corporation to XXXXXXXXXX and to re-appoint XXXXXXXXXX as a director of Opco.

The Agreement

Preamble

19. The preamble to the Agreement states that:

(a) Shareholder 1, Shareholder 2 and Shareholder 3 wish to establish their respective rights and obligations with respect to: (i) the Opco shares owned by them, and (ii) the management and control of Opco;

(b) it is the intention of Shareholder 1, Shareholder 2 and Shareholder 3 that the Agreement constitutes a USA with respect to Opco; and

(c) Shareholder 1, Shareholder 2 and Shareholder 3 have entered into the Agreement to provide for the manner in which the management of the corporation shall be conducted.

Representations, warranties and covenants

20. Section XXXXXXXXXX of the Agreement states that Shareholder 1, Shareholder 2 and Shareholder 3, respectively, own the following number of common shares in Opco:

(a) Shareholder 1:		XXXXXXXXXX 

(b) Shareholder 2:		XXXXXXXXXX 

(c) Shareholder 3:		XXXXXXXXXX 

Management of Opco

Board

21. Section XXXXXXXXXX of the Agreement states that the business and affairs of Opco are managed by the Board, which shall at all times consist of XXXXXXXXXX directors.

22. Section XXXXXXXXXX states that Shareholder 1, Shareholder 2 and Shareholder 3 are entitled to appoint the following number of directors to the Board as long as they are shareholders of Opco:

(a) Shareholder 1: 		XXXXXXXXXX  directors

(b) Shareholder 2: 		XXXXXXXXXX  directors

(c) Shareholder 3:	 	XXXXXXXXXX  director

23. Section XXXXXXXXXX of the Agreement states that the following individuals act as initial directors as appointed to the Board:

(a) by Shareholder 1:		XXXXXXXXXX 

(b) by Shareholder 2:		XXXXXXXXXX 

(c) by Shareholder 3:		XXXXXXXXXX 

24. Section XXXXXXXXXX of the Agreement states that all decisions of the Board shall be decided by a majority of the votes except as may be otherwise provided in the Agreement.

25. Section XXXXXXXXXX of the Agreement states that the Chairman at any meeting of the Board, who must be one of the directors appointed by Shareholder 2, shall have a casting vote in the event of a tie vote at any such meeting.

Matters requiring Board approval

26. Section XXXXXXXXXX of the Agreement states that Opco is not entitled to undertake any of the following actions without first obtaining the approval of the majority of the directors of the Board:

(a) adopt its operational and financial business plan;

(b) incur capital expenditures in excess of the amounts approved in the current annual plan;

(c) incur indebtedness in excess of the amounts approved in the current annual plan;

(d) dispose of assets having a market or book value in excess of $XXXXXXXXXX ;

(e) employ or terminate any of its senior managers;

(f) increase the compensation packages of any of its senior managers;

(g) initiate any lawsuit;

(h) appoint or change its accounting firm, and materially change the accounting principles used to prepare its financial statements; and

(i) appoint or change its legal counsel.

27. Section XXXXXXXXXX of the Agreement requires that Opco obtain the written consent of all the directors of the Board in addition to any other approval required by the applicable corporate legislation, the articles of incorporation and by-laws of the corporation if it elects to:

(j) issue shares or rights to subscribe for its shares;

(k) convert, reclassify or exchange any of its issued and outstanding shares;

(l) redeem any of its issued and outstanding shares or rights to subscribe for its shares;

(m) make loans to, or guarantee the debts of any other corporation;

(n) undergo fundamental corporate changes, including any amalgamation, reorganization, dissolution or wind-up;

(o) materially change the nature of its business;

(p) amend its articles of incorporation;

(q) make loans to any of its directors;

(r) enter into a partnership or joint venture;

(s) employ any person at an annual remuneration in excess of $XXXXXXXXXX ;

(t) enter into any agreement with an affiliated company and/or non-arm's length party; or

(u) sell all or substantially all of its assets.

28. Paragraph XXXXXXXXXX of the Agreement requires that Opco obtain the written consent of Shareholder 3 or its nominee, in addition to the approval of all the directors of the Board, if it elects to employ any person who was previously employed by XXXXXXXXXX

29. Paragraph XXXXXXXXXX of the Agreement similarly requires that Opco obtain the written consent of Shareholder 3 or its nominee, in addition to the approval of all the directors of the Board, if it enters into any agreement with an affiliated company and/or non-arm's length party.

30. Paragraphs XXXXXXXXXX of the Agreement both provide that Shareholder 3's consent shall not be unreasonably withheld. (endnote 1)

Transfer and purchase of shares held by the Shareholders

31. Section XXXXXXXXXX of the Agreement states that Shareholder 1, Shareholder 2 and Shareholder 3, as the initial shareholders, as well as any person who subsequently holds shares in Opco, are not entitled to sell, donate, transfer or otherwise dispose of any of their shares except in accordance with the terms of the Agreement.

32. Section XXXXXXXXXX of the Agreement states that any shareholder of Opco has the right to dispose of all of its shares to a permitted transferee (endnote 2) to the extent that it satisfactorily establishes that the permitted transferee qualifies as such and agrees to be bound by all the terms of the Agreement.

33. Section XXXXXXXXXX of the Agreement states that a shareholder that is willing to accept an offer from an arm's length party to purchase all of the shares that it owns in Opco must notify Opco and the other Shareholders of the terms and conditions of the offer. Section XXXXXXXXXX of the Agreement gives to the other shareholders the right to purchase all the shares subject to the offer on the same terms and conditions within XXXXXXXXXX business days of the date they received notification of the offer.

Redemption of shares held by Shareholder 3

34. Section XXXXXXXXXX of the Agreement states that Shareholder 3 is entitled to demand retraction of all the shares that it holds in Opco ("Purchased Shares") at any time following XXXXXXXXXX (XXXXXXXXXX years after the date of the Agreement) if it notifies Opco in writing of its intention to have its shares redeemed.

35. In addition, section XXXXXXXXXX of the Agreement states that the amount payable to redeem the shares that Shareholder 3 holds in Opco shall be determined by dividing, on XXXXXXXXXX in which Opco receives the written notice, the aggregate fair market value of all the then issued and outstanding shares of Opco by the number of such shares, and multiplying that amount by the number of Purchased Shares.

Arbitration

36. Section XXXXXXXXXX of the Agreement states that any dispute relating to the interpretation or implementation of the Agreement shall be resolved by arbitration.

Interpretation

37. Section XXXXXXXXXX of the Agreement states that the Agreement may not be amended or modified except by written instrument signed by the parties thereto.

38. Section XXXXXXXXXX of the Agreement states that the Agreement is governed by and construed in accordance with the laws of the province of Ontario and the federal laws applicable therein.

XXXXXXXXXX submissions

39. XXXXXXXXXX representations are to the effect that Opco qualifies as a CCPC because the Agreement was a USA that prevented Shareholder 1 from having de jure control of that corporation for the taxation years under dispute.

40. The reasons provided by XXXXXXXXXX in support of that view can be summarized as follows:

(a) the preamble of the Agreement reflects the intention of Opco's shareholders to assert some measure of control over the affairs and fortunes of the corporation;

(b) sections XXXXXXXXXX of the Agreement restrict Shareholder 1's ability to make decisions regarding the transfer of the shares in Opco;

(c) the rights granted to Shareholder 3 in respect of the actions described in paragraphs XXXXXXXXXX of the Agreement further illustrate the restrictions imposed on Opco's directors; and

(d) section XXXXXXXXXX of the Agreement prevents Shareholder 1 from having de jure control of Opco by removing its ability to elect a majority of the directors of the Board.

Legal Framework and Issues

Statutory law

The relevant provisions of the Business Corporations Act (Ontario) ("OBCA") are reproduced in Schedule A to this letter.

Income Tax Act

The provisions of the Income Tax Act ("ITA") dealing with the characterization of a corporation as a CCPC are contained in the statutory definition of that term found in subsection 125(7) and the description of de facto control is in subsection 256(5.1).

Case law

In Duha Printers (Western) Ltd. v. R. 98 DTC 6334 ("Duha"), the Supreme Court of Canada (the "Court") revisited the principles established in Buckerfield's Ltd. v. Minister of National Revenue 64 DTC 5301 (Ex. Ct.) regarding the meaning of de jure control in Canadian taxation law. The test in Buckerfield's reads as follows:

"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." (endnote 3)

The Court in Duha went on to say that the test is essentially an attempt to ascertain who is in effective control of the affairs and fortunes of the corporation:

"Although the directors generally have, by operation of the corporate law statute governing the corporation, the formal right to direct the management of the corporation, the majority shareholder enjoys the indirect exercise of this control through his or her ability to elect the board of directors. Thus, it is in reality the majority shareholder, not the directors per se, who is in effective control of the corporation (endnote 4) ."

However, the Court in Duha held that the majority shareholder might not have de jure control over a corporation if the shareholders of that corporation have entered into a USA (endnote 5) , which substantially limits the managerial powers of the Board (endnote 6) .

In determining who is in effective control of the affairs and fortunes of a corporation, the Court concluded that one must consider whether the constating documents of the corporation, including any USA, impose specific limitations on the majority shareholder's power to control the election of Board, or the Board's power to manage the business and affairs of the corporation (endnote 7) .

According to the Court, the majority shareholder will have lost de jure control over the corporation where the restrictions imposed by the relevant provisions of the USA do not leave any way for the majority shareholder to exercise effective control over the affairs and fortunes of the corporation in a way analogous or equivalent to the power to elect the majority of the Board (endnote 8) .

Issues

If regard is had only to the share registry of Opco, Shareholder 1 would have had the ability to elect the majority of Opco's Board because of its ownership of a majority of the corporation's voting shares.

In light of the applicable legal requirements, we have to determine:

(a) which provisions of the Agreement are relevant to determine whether Shareholder 1 has de jure control; and

(b) if those provisions leave any way for Shareholder 1 to exercise effective control over the affairs and fortunes of Opco in a way analogous or equivalent to the power to elect the majority of Opco's Board (endnote 9) .

Analysis

Provisions of the Agreement which are relevant to a de jure control determination

The Court indicates in Duha that "de jure refers to those legal sources that determine control: namely, the corporation's governing statute and its constating documents, including the articles of incorporation and by-laws". (endnote 10)

The Court adds USAs' to the legal sources that have to be considered: "it would defy logic to treat de jure control as remaining unaltered by an agreement which, by the very statute which governs the incorporation of the company and the governance thereof by its articles and by-laws, is given the same power as the articles to supersede the statutory provisions for corporate control" (endnote 11) .

The Court stated that a USA is a corporate law hybrid, which is part contractual and part constating in nature (endnote 12) . In its reasons, the Court only considered the components of the agreement interfering with the exercise of the directors' managerial powers, which could otherwise be included in the articles of incorporation of the corporation, in assessing de jure control of the appellant (endnote 13) .

Subsection 108(2) OBCA provides that a USA is a written agreement entered into by all the shareholders of a corporation that restricts, in whole or in part, the powers of the directors to manage or supervise the management of the business and affairs of the corporation. Such a provision clearly contemplates that a partial restriction to the directors' managerial powers would be sufficient to characterize an agreement as a USA.

Only the provisions of the Agreement that restrict or otherwise modify the provisions of the OBCA that are expressly made subject to a USA will be relevant in making a de jure control determination. The provisions of the OBCA that can be changed through a USA include the words "subject to any unanimous shareholder agreement...".

The representative's submission suggests that section XXXXXXXXXX of the Agreement, which provides the minority shareholders with the ability to designate nominees on the Board, might result in Shareholder 1 losing de jure control. In the case of Alteco Inc. v. R. 1993 2 CTC 2087 (TCC), the majority shareholder holding 51% of the voting shares was only entitled to appoint two of the five directors sitting on the Board, and could not alter the composition of the Board pursuant to the terms of the relevant agreement. The court concluded in that case that the majority shareholder did not have de jure control over that corporation because the minority shareholder was guaranteed a majority of seats on the Board. In our view, the court's decision in Alteco has limited precedential value in assessing de jure control.

On the one hand, given that the Court's de jure control determination in Duha did not rely on finding that certain nominees to the Board were representatives of certain shareholders (the Court refused to interfere with the trial judge's findings that the third director of the corporation could not be said to be a nominee of either Duha or Marr and did not comment on the impact that might have on Marr's de jure control), it would be incorrect to suggest that the Court endorsed Alteco (endnote 14) . On the other hand, concluding that section XXXXXXXXXX of the Agreement might have such determinative incidence on de jure control would be incompatible with the following statement of the Court in paragraph 54 of the reasons for the judgment in Duha: "the [de jure] test neither requires nor permits an inquiry into whether a given director is the nominee of any shareholder, or any relationship or allegiance between the directors and the shareholders".

Finally, section XXXXXXXXXX of the Agreement, which provides the minority shareholders with the ability to designate nominees on the Board, does not impose a restriction on the directors' managerial powers nor does it alter any rule provided by the OBCA which includes the words "subject to any unanimous shareholder agreement...". The OBCA requires a corporation to have a board of directors and those directors are elected by the shareholders, as specified in subsection 119(4) OBCA (reproduced in Schedule A). Unlike certain other provisions of the OBCA, subsection 119(4) does not provide that it is subject to the articles, by-laws or a unanimous shareholder agreement. Accordingly, it is not possible to override the statutory rule by an agreement. The Agreement provides that specific shareholders may designate nominees for election to the Board irrespective of the number of votes attached to their shares. In our view, the nomination rights merely constitute a private agreement between shareholders that does not override the requirement of section 119 OBCA that the shareholders elect the directors at the annual meeting of shareholders by exercising the votes attached to the shares owned by them (section 97 OBCA). It is those voting rights that continue to determine de jure control as defined by the Court in Duha.

In our view, the only relevant provisions of the Agreement that restrict or otherwise interfere with the directors' managerial powers or otherwise modify the rules applicable to Opco under the OBCA which are subject to the application of a USA are the ones that:

(a) provide for Shareholder 3's right to prevent Opco from employing any person previously employed by XXXXXXXXXX or from entering into an agreement with an affiliated company (paragraphs XXXXXXXXXX of the Agreement); and

(b) give to Shareholder 3 the right to demand retraction of all the shares it holds in Opco XXXXXXXXXX years after the date the Agreement was entered into (section XXXXXXXXXX of the Agreement).

Did the USA leave any way for Shareholder 1 to exercise effective control over the affairs and fortunes of Opco in a way analogous or equivalent to the power to elect the majority of Opco's Board?

In Duha, the Court has clearly stated that the simple fact that the shareholders of a corporation have entered into a USA does not have the automatic effect of removing de jure control from a shareholder who enjoys the majority of the votes (endnote 15) . Furthermore, the Court held that the magnitude and the significance of the restrictions imposed by the relevant provisions of the USA will only alter de jure control where they do not leave any way for the majority shareholder to exercise effective control over the affairs and fortunes of the corporation in a way analogous or equivalent to the power to elect the majority of the Board (endnote 16) . The words "any way" appear to set a high threshold.

The nature and significance of the changes to the OBCA rules under the Agreement do not meet the threshold set up by the Court in Duha as it cannot be reasonably argued that such changes do not leave any way for Shareholder 1 to exercise effective control over the affairs and fortunes of Opco in a way analogous or equivalent to the power to elect the majority of Opco's Board. Therefore, it our view that the relevant provisions of the Agreement do not remove Shareholder 1's de jure control over Opco.

Conclusion

Opco does not qualify as a CCPC because none of the relevant provisions of the Agreement remove de jure control of Opco from Shareholder 1 in respect of its XXXXXXXXXX and XXXXXXXXXX taxation years

Yves Moreno
Manager
Reorganizations and Resources Division
Corporate Reorganizations Section I
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

Attachment - Schedule A

Schedule A - Relevant provisions of the OBCA (endnote 17)

1(1) In this Act, "Unanimous shareholder agreement" means an agreement described in subsection 108(2) or a declaration of a shareholder described in subsection 108(3).

5(4) Subject to subsection (5), if a greater number of votes of directors or shareholders are required by the articles or a unanimous shareholder agreement than are required by this Act to effect any action, the provisions of the articles or of the unanimous shareholder agreement prevail.

23(1) Subject to the articles, the by-laws, any unanimous shareholder agreement and section 26, shares may be issued at such time and to such persons and for such consideration as the directors may determine.

38(1) Subject to its articles and any unanimous shareholder agreement, the directors may declare and a corporation may pay a dividend by issuing fully paid shares of the corporation or options or rights to acquire fully paid shares of the corporation and, subject to subsection (3), a corporation may pay a dividend in money or property.

97 Subject to this Act or the articles or by-laws of a corporation or a unanimous shareholder agreement, all questions proposed for the consideration of the shareholders shall be determined by the majority of the votes cast and the chair presiding at the meeting shall not have a second or casting vote in case of an equality of votes.

108(2) A written agreement among all the shareholders of a corporation or among all the shareholders and one or more persons who are not shareholders may restrict in whole or in part the powers of the directors to manage or supervise the management of the business and affairs of the corporation.

108(3) Where a person who is the registered holder of all the issued shares of a corporation makes a written declaration that restricts in whole or in part the powers of the directors to manage or supervise the management of the business and affairs of a corporation, the declaration shall be deemed to be a unanimous shareholder agreement.

115(1) Subject to any unanimous shareholder agreement, the directors shall manage or supervise the management of the business and affairs of a corporation.

116(1) Unless the articles, the by-laws or a unanimous shareholder agreement otherwise provide, the directors may, by resolution, make, amend or repeal any by-laws that regulate the business or affairs of a corporation.

119(4) Subject to clause 120 (a), shareholders of a corporation shall elect, at the first meeting of shareholders and at each succeeding annual meeting at which an election of directors is required, directors to hold office for a term expiring not later than the close of the third annual meeting of shareholders following the election.

133 Subject to the articles, the by-laws or any unanimous shareholder agreement,

(a) the directors may designate the offices of the corporation, appoint officers, specify their duties and delegate to them powers to manage the business and affairs of the corporation, except, subject to section 184, powers to do anything referred to in subsection 127(3)

184 Unless the articles or by-laws of or a unanimous shareholder agreement otherwise provide, the articles of a corporation shall be deemed to state that the directors of a corporation may, without authorization of the shareholders,

(a) borrow money upon the credit of the corporation;

(b) issue, reissue, sell or pledge debt obligations of the corporation;

(c) give a guarantee on behalf of the corporation to secure performance of an obligation of any person; and

(d) mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the corporation, owned or subsequently acquired, to secure any obligation of the corporation.

ENDNOTES

1 Given that the preamble of section XXXXXXXXXX already provides that Opco must obtain the written consent of all the directors (including the nominee for XXXXXXXXXX ), it appears redundant to require that Opco obtain the specific approval of Shareholder 3 or its nominee in respect of the actions described in paragraphs XXXXXXXXXX of the Agreement. However, such a procedural safeguard may have been introduced to protect Shareholder 3's interests if, at any time, it ceases to be represented by an appointed nominee on the Board.

2 For Shareholder 1 and Shareholder 2, a "permitted transferee" is defined as a corporation of which it is the sole beneficial shareholder, or a trust of which it is the sole beneficiary. For Shareholder 3, a "permitted transferee" is defined as XXXXXXXXXX

3 The test set out by the Court in Buckerfield's was quoted with approval in Minister of National Revenue v. Dworkin Furs Limited & al., 67 DTC 5035 (SCC), at paragraphs 10 and 11, and referred to in Duha at par. 35.

4 Duha Printers (Western) Ltd. v. R. 98 DTC 6334 (SCC), at paragraph 36

5 The rationale for extending to a USA the constating status that was historically confined to the articles of incorporation and by-laws of a corporation follows the legislative enactment of statutory provisions pursuant to which the shareholders could enter into a unanimous shareholders' agreement in order to restrict the powers otherwise confined to the directors. Those provisions reversed the common-law rule that the board of directors cannot be prevented from exercising its statutory right and duty to manage the business and affairs of a corporation. That ultimately allowed the shareholders the power to effect a fundamental change in the management of the company. Having supplanted the long-standing principle of shareholder non-interference with the directors' power to manage the corporation, the USA had become at least as important as the traditional constating documents in assessing de jure control. Such principles were further discussed in Duha Printers (Western) Ltd. v. R. 98 DTC 6334 (SCC), at paragraphs 63-65.

6 Duha Printers (Western) Ltd. v. R. 98 DTC 6334 (SCC), at paragraph 65

7 Duha Printers (Western) Ltd. v. R. 98 DTC 6334 (SCC), at paragraph 85

8 Duha Printers (Western) Ltd. v. R. 98 DTC 6334 (SCC), at paragraph 82

9 Duha Printers (Western) Ltd. v. R. 98 DTC 6334 (SCC), at paragraph 83

10 Duha Printers (Western) Ltd. v. R. 98 DTC 6334 (SCC), at paragraph 58

11 Duha Printers (Western) Ltd. v. R. 98 DTC 6334 (SCC), at paragraph 69

12 Duha Printers (Western) Ltd. v. R. 98 DTC 6334 (SCC), at paragraph 66

13 Duha Printers (Western) Ltd. v. R. 98 DTC 6334 (SCC), at paragraphs 71 and 83

14 We are of the view that the directive dictated by the Court in Duha to consider specific or unique limitations on the majority shareholder's power to control the election of the board, as manifested in the constating documents or any USA (par. 85 of the case), refers to changes to the voting threshold described in paragraph 67 of that case and not to facts similar to the facts in Alteco.

15 Duha Printers (Western) Ltd. v. R. 98 DTC 6334 (SCC), at paragraph 81

16 Duha Printers (Western) Ltd. v. R. 98 DTC 6334 (SCC), at paragraph 82

17 See, similarly, section 2 and subsections 6(3), 25(1), 102(1), 103(1), 106(3), 121(a), 146(1)(2) and 189(1) of the Canada Business Corporations Act ("CBCA")