FACULTY OF LAW. Business Organizations. Section 3. Jon Festinger, Q.C. TOTAL MARKS: 100

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1 FACULTY OF LAW THE UNIVERSITY OF BRITISH COLUMBIA Page 1 of 8 HAS 3 PARTS. SUPPORT YOUR ANSWERS WITH REFERENCE TO MIGHT BE. RELEVANT CASE LAW AND/OR STATUTORY AUTHORITY WHERE DEFINITIVE CONCLUSION, THEN PLEASE INDICATE WHAT THOSE FACTS APPROPRIATE. IF YOU NEED MORE FACTS TO REACH A MORE THIS EXAMINATION CONSISTS OF 2 QUESTIONS, THE FIRST OF WHICH 2. ANSWER ALL QUESTIONS. to any materials they have brought into the examination room. NOTE: 1. This is an open book examination, and candidates may refer ******************* 30 minutes INCLUDED in the 3.5 hours exam time TIME ALLOWED: 3.5 HOURS With a strongly suggested, but not mandatory, reading and planning time of TOTAL MARKS: 100 Jon Festinger, Q.C. Section 3 Business Organizations LAW / LAW 508D.003 FINAL EXAMINATION DECEMBER 2016 PLEASE ENSURE THAT YOU HAVE A COMPLETE PAPER THIS EXAMINATION CONSISTS OF 8 PAGES

2 QUESTION 1:70 MARKS You are a lawyer in a large law firm in Vancouver. Industri-oh Inc. ( lndustrioh ) is a major client. lndustrioh was incorporated under the laws of British Columbia in the 1 950s and is now governed by the British Columbia Business Corporations Act. It is one of the largest diversified conglomerates in Canada; has been highly profitable; and has built up significant cash reserves. Its interests include the manufacture and distribution of genetically modified foods and the development and operation of hotels and resorts. lndustrioh has both voting common shares and voting preferred shares outstanding. Both classes of shares are actively traded on the Toronto Stock Exchange and are widely held. Under the articles the preferred shares are entitled to a dividend as, if and when declared by the directors and in such amount as the directors may determine. The articles also provide that no dividend may be paid on any common shares unless a dividend of at least an equal amount per share is also declared and paid on the preferred shares. The company has consistently paid dividends on both classes of shares, though there is a consensus in the investment industry that lndustrioh s dividend policies have been somewhat, and perhaps unnecessarily, conservative. Earlier proposals to increase dividends had been rejected by the directors principally on the ground that they did not wish to impair the company s cash reserves so as to optimize its flexibility and particularly to expand production and distribution of one of its revolutionary products, the Tomat-oh, described below; and its highly successful Eastern European investment program, also described below. The Tomat-oh!, manufactured by Airloom Inc., a wholly owned subsidiary of lndustrioh and also incorporated in British Columbia, is a genetically modified tomato. GMO stands for. GMO ( Genetically Modified Organism ) foods, when first introduced, were touted as the answer to world hunger but a growing body of research connects these foods with serious health concerns and environmental damage. Tomat-oh! is not yet profitable. The best sense of lndustrioh management is that although it is making inroads into the GMO market it has a long way to go and ultimate profitability will depend upon, among other things, heavy capital investment. lndustrioh s board consists of 9 directors a majority of whom, as required under stock exchange rules, are independent. The company s President and Chief Page 2 of 8

3 LAW I LAW Executive Officer, James Bakunin, has occupied that position for the past 15 years and is generally considered the architect of a highly successful and profitable policy of investing in Eastern Europe. In 2013, in recognition of this, he was granted a five-year employment contract as President and Chief Executive Officer, providing for an annual salary, subject to annual review, of $750,000. The employment contract also provides for bonuses based on the company achieving certain financial targets. Among a number of projects developed under Bakunin s leadership was a hotel and resort complex on the Black Sea coast in Crimea, opened in 2012 and principally designed to attract tourists from Russia. For tax reasons the project was conducted through another private British Columbia company, Russian Resorts Corp ( RRC ). RRC has 100 common shares outstanding, held as follows: lndustrioh 45 NurtureCap, Inc. 15 George Nissan 5 David Kia 5 Alimzhan Tokhtakhunov 15 LevChernoy 15 NurtureCap is an independently operated private investment fund. Nissan and Kia are former senior employees of lndustrioh, now retired, who while employed, had played a significant role in the development of the Black Sea project. Alimzhan Tokhtakhunov, known to his friends as AT and Lev Chernoy are both Russian citizens. It seems that they were closely connected to the Crimean Ministry of Industrial Development and it was a condition of RRC obtaining the Ministry s permission to develop the Black Sea Project that AT and Chernoy be given shares in the company. Bakunin is one of three directors of RRC and is its President and Chief Executive Officer. The other two directors are inside directors of Industrioh and hold, respectively, the positions of Chief Financial Officer and Chief Operating Officer of RRC. When NurtureCap, Inc. invested in RRC it was assured that RRC planned, sooner rather than later, to undertake a public offering of its shares and to seek a listing on a stock exchange and that, at that time, NurtureCap would be able to realize on its investment. At the time, the Articles of RRC contained the following provision: Page 3 of 8

4 No share or other transfer restricted security may be sold, transferred or othe,wise disposed of without the consent of the directors and the directors are not required to give any reason for refusing to consent to any such sale, transfer or other disposition. RRC accordingly agreed with NurtureCap that at the appropriate time it would delete that provision from its Articles. This has not been done, however, since there has been a consensus that the time for a public offering has not yet arrived. The November 2016 meeting of the board of directors of Industrioh: The regular quarterly meeting of the directors of lndustrioh was held in mid-november 2016, just after a key UN committee approved a resolution on Tuesday, November 15, 2016 condemning Russia s temporary occupation of Crimea and reaffirming the United Nations commitment to Ukraine s sovereignty over the Black Sea peninsula. Russia urged the General Assembly s Human Rights Committee to vote against the resolution, but it was approved by a vote of with 76 abstentions. At the board of directors meeting two of the independent directors, Richardson and Ames, expressed grave concern at what they considered the heightened (and in their view unacceptable) risk of continued operation of the Crimean resort and urged that serious consideration be given to the future of lndustrioh s involvement in the project and the possibilities for containing or limiting the risk. They urged this course particularly as the European Union, the United States and Canada were all continuing their programs of economic sanctions against the Russia initiated in the wake of the return of Crimea to the Russian federation on March 18, 2014, which the Ukraine considers to be in fact the annexation of Crimea by the Russian federation and a violation of international law. Richardson and Ames thought it would be inconsistent with the prevailing sentiments against Russia s actions for lndustrioh to continue to do business in Crimea. In particular they argued that the obligation of the directors was to maximize shareholder value and that, to that end, steps should be taken to find a buyer for the project. Bakunin forcefully dismissed their concerns saying that in his view any dangers or concerns were vastly overstated, that the future of the project continued to be bright and that the best interests of lndustrioh required that the project continue to be fully supported. The other 6 directors seemed to agree with Bakunin s view. Nonetheless there was a consensus that the matter should be examined and a special committee of the board was set up, consisting of Bakunin, Richardson, Ames and two other independents. The special committee met twice in one week and sought advice from the company s auditors, its investment bankers and a London-based firm of political risk consultants. The consensus among the advisors was that Richardson and Ames had greatly exaggerated the risk, that there was no immediate need to take any action and the board should be so Page 4 of 8

5 advised; this seemed as well to be the view of the other two independent the obligations of the directors. directors. Bakunin and Richardson and Ames maintained their earlier views as to campaigns to stop the development of GMO foods. and the Organic Agriculture Protection Fund. Both organizations are active in concerns regarding the impact of the decision of the Alberta Court of has been reliably informed that it will receive, several shareholder proposals (identified below) for inclusion on the agenda at the AGM First meeting with Mr. Bakunin: At your first meeting with Bakunin, as Chief Executive Officer, on December 2, 2016, he tells you: (i) About the discussions that took place at the November 2016 lndustrioh board meeting; (ii) That the next annual meeting of Industrioh is scheduled to be held in Vancouver in February 2017 and that lndustrioh either has received, or when it is called. (iii) That he has been advised by in-house counsel for lndustrioh that each of the proposals either does or, he is confident, will satisfy all of the technical requirements of sections 188 and 189 (1) to (4) of the British Columbia Business Corporations Act. (iv) That he has been advised by in-house counsel for lndustrioh of Appeal in Westfairv. Wyatt[1991JA.J. No The proposals are: A. That the company cease production of the Tomat-Oh or any other genetically engineered products and discontinue further research in the field. This proposal has been received from the National Farmers Union of Canada B. That the company adopt a policy of paying an annual dividend of not less than $0.50 on the outstanding preferred shares. C. The following four proposals, all put forward by Richardson and Ames: 1. Calling upon the board of directors to adopt a policy pursuant to which no director of the company shall be eligible to hold the position of Chief Executive Officer for so long as he-she continues to be a director; Page 5 of 8

6 company is eligible to be appointed Chief Executive Officer so long as heshe continues as a director; 2. That the articles of Industrioh be amended so that no director of the have been visited by someone claiming to act on behalf of AT and Chernoy and 2016 Bakunin phones and says he needs to meet with you as a matter of section 189 (5) (d), (e) or (h), of the Act, or otherwise, it can refuse to process the reasons for it. requested, please give that advice in respect each of the proposals anyway, and please explain briefly why you think this. there is a significant difference between his understanding, as expressed at the have lost their jobs and been forced to move to eastern Ukraine. speed, Industrioh s investments in Crimea; 3. That the directors instruct management to liquidate, with all deliberate 4. That the directors instruct management of the company to consider and make recommendations to the board for the establishment of a special fund to provide ex gratia payments to Ukrainian employees of the Crimean resort who, as a result of the Russification of the work force at the resort, QUESTION 1A -20 of 70 MARKS Bakunin asks you for a brief memorandum outlining your opinion on whether November 2016 meeting of directors, of the principles that should guide directors in exercising their powers, and the understanding of Messrs. Richardson and Ames, as expressed at the same meeting and which view is the better one. Provide the memorandum. QUESTION 1 B -30 of 70 MARKS Bakunin seeks your advice, as outside counsel to Industrioh, on whether under any of the shareholder proposals outlined above. (a) If you think that you should decline to advise on any of the proposals, (b) Even if you think that you should decline to give any of the advice Your second meeting with Bakunin: Early on the morning of December 12, urgency. When you meet, he tells you that he has been told by Nissan and Kia that they that the visitor told them that AT and Chernoy plan within the next few days to make an offer to each of them and to NurtureCap (but not to lndustrioh) to buy Page 6 of 8

7 their RRC shares at a price that would represent a significant premium (estimated at about 40 per cent) above fair value. Nissan and Kia have told him that they intended to accept this offer. Bakunin has confirmed with NurlureCap that it has received the same approach and is giving it serious consideration but has not yet made a decision. Bakunin tells you that there have been reports in the Russian press indicating that both AT and Chernoy have criminal records for forgery, theft and fraud in connection with other companies in which they have been involved and are not averse to the use of violence to achieve their ends. QUESTION 1 C -20 of 70 MARKS (a) Do the directors of RRC have an obligation to refuse to register any requested transfer of shares to AT and Chernoy? If so, to whom do they owe that obligation and why? BCBCA section 231 may, among other possibilities, be considered in this context. (b) If the directors do refuse to register a transfer of shares to AT and Chernoy, would there be any plausible grounds for any of the other shareholders of RRC (including lndustrioh) to initiate legal proceedings against them and if so, which shareholders and on what basis? (c) Explain briefly the nature of the proceedings that might be brought. QUESTION 2:30 MARKS Because of your encyclopedic knowledge of corporate law and your magnificent reputation as a clear thinker and writer, you are simultaneously approached by the Federal Minister of Justice and the Attorney General of BC who ask you to explore the possibility of an amendment to their respective corporate legislation to define when and how, and subject to what defenses, if any, the corporate veil may be pierced. Your valuable time, and the potential for conflict of interest, only permits you to pick one of the assignments. Your client then adds one caveat. You are told: In making these amendments, insofar as possible, please consider our international competitiveness as a jurisdiction that wishes to attract more head offices, not fewer. First choose which statute (CBCA or BCBCA) you are drafting for. Page 7 of 8

8 END OF EXAMINATION including any thoughts you have on the question of head office impact. Third, please include a first draft, primarily to illustrate how you would envision believe should be included in such a provision and explain your reasoning, Second, and most importantly, please list the substantive elements that you such a provision flowing logically. Page 8 of 8